The Compound and Friends - Did Bonds Just Bottom?

Episode Date: October 10, 2023

Join Downtown Josh Brown and Michael Batnick for an all-new episode of What Are Your Thoughts and see what they have to say about the biggest topics in investing and finance! Then, stay tuned for Josh's conversation with Jacob Sonenshine of Barron's. Thanks to Public for sponsoring this episode! Go to https://public.com/compound to lock in a historic 5.5% yield on your cash. Watch this episode on YouTube: https://youtube.com/live/N8uFmdPydFo 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 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's Tuesday night. We have a great show for you. First things first, Michael and I with another all new What Are Your Thoughts? We got into earnings. We got into treasury bonds. We got into investor behavior.

We did some sector stuff. We picked some FANG stocks for the ride into year end. All kinds of cool stuff. And then after that, I spoke with Jacob Sonnenschein. He's a great writer at Barron's. And Jacob covers a whole ton of stuff. But he wrote something about the crash in Pepsi shares recently. And we've seen all of the consumer staple stocks get hit, partially because of interest rates. Remember, they're all dividend payers and they're all competing for capital against risk-free treasuries.

But also, a lot of analysts notes about the effect of Ozempic and the GLP-1 inhibitors, all that we govey, all of the concern that all of a sudden everyone's going to be on these obesity drugs and they're going to stop eating fast food and they're going to stop buying bags of shit at Target and stuffing themselves. I don't think it's going to play out that way. I don't think you're going to

see the patient population for these drugs explode in the next 12 months. I concede that it's going to be a very big category of drug. I just think the selling in these companies is way overdone. And the other thing to keep in mind is that these companies adapt. So Jacob and I are going to talk about that after. Hope you love the show. And if you do, leave us a rating and review, and we'll see you soon. 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. That's my theme song. When you hear that, keep that. Keep that playing. When you hear that song, that's when you know we're coming. Right, Mike? Also, when you're watching, that's also how you know. Yeah, well, if you're watching this, of course you know. All right.

Welcome to the compound show. What is this? What are your thoughts? This is What Are Your Thoughts. Welcome to What Are Your Thoughts, everybody. Welcome to What Are Your Thoughts, everybody. My name is Josh Brown. I'm here with michael batnick as always michael say hello to the folks hello hello all right uh duncan is here john is here nicole is here the whole duncan hive is in effect in the chat i see jay luther's here chris hayes drew hickman john carlo is in the house ak Akbar Muhammad. What's up, man? Cliff, what's up? Are you watching The Golden Bachelor?

Is she right? Yeah, I think she is. I think she is. And you think you might be watching too? I think I might one day when I grow up become a Golden Bachelor is what I was going to say. Sean's in the house. Dr. Horton, Midwest Cannabis. Whole squad.

Cliff, what's up, man? Nick, who else? MK, Tom Whalen. All right. We have a lot to get into tonight. It has been quite a week, and it's only Tuesday. Emotions all over the place. Michael, let's do the sponsor real quick, and then we'll get on with the show.

One more question. Do you guys also watch Love is Blind? Because that one slaps. Does it? All right. Speaker 1 It's very good. Speaker 2 I got to fit one of those things into my schedule. I'm not watching any of it. Speaker 1 It's not. I mean, Robin watches it. I watch it in the background. I walk through the room and I might actually sit down for 30 minutes. Okay. Today's show is brought to you by our friends at Public. Did you know,

like I kind of forgot, but just- Speaker 1 I know everything. Speaker 2 It's right under the screen. The current rate on six month treasuries is 5.5%. Did you know, like I kind of forgot, but just- I know everything. It's right under the screen. The current rate on six month treasuries is 5.5%. It's like nothing. Still. No.

It's not nothing. So you could lock it in. It's super easy. It's built on modern rails, not like buying at US treasury, not whatever. Using the public app. Yeah. It's like buying treasuries direct it's like das remember ms das yeah it's like from the 90s 80s it's super it's super quick anytime you log into

the app you can visit with your income no man holds no man holds that's right and i'm holding periods cash but auto but the autumn i like the automatic uh the automatic re-up. Got to get that re-up on automatic. You can't be like putting calendar invites to yourself. So here's how I do it. Go to public.com slash compound and my account is set up. I should auto-deposit. I don't auto-deposit, but I should. I got to do that.

All right. All right. Josh. Thanks to public. Yes. You're up, Seth. I'm up first. Michael, have treasury bonds bottomed?

I don't know. Maybe. What do you think? If you had to guess? I'd say yes. I'd say like 58% yes. Yeah. I'm afraid you got too hard.

Well, just like geopolitically, is it rational for the Fed? Other than like a crazy oil spike, which of course hasn't happened yet, certainly could. Like if Iran gets drawn into this somehow, all bets are off. But the Fed can't do anything about that. So if they're hiking rates because of an oil price spike, they have like lost the plot. Or if there isn't one, if there isn't some sort of like commodity panic, can you think of any reasonable thing that would make them go again in November? I know the market odds are like 40% still, right? I'll go again. No, no, no, no. Even if they need to go again, just save it. Do it later, right? I think they're done. Let's throw this chart on, please. Let's start with a chart. So this is

the ag or BND, and these are 15-minute bars, what we're looking at. And that's Wednesday in W, and then Thursday, then we get that on Friday, but buyers every session, right? And then Monday, and then Tuesday. So Josh- So these aren't, wait, to be clear, this is the ETF that owns the bonds. It's not interest rates. Interest rates are doing the opposite of this. Yeah, exactly. It's AGG or BND. I think this is BND. Same thing. So this is what a bottoming process is like. Process. Yes. Just like the stock market bottoming process. It's very, very similar. Next chart, please. So when Josh said that the stock market was having a bottoming process, no such thing was processing. It was actually the first day of the process. Well, think about it.

In hindsight, that was last Tuesday. It was the first day of the bottom process. It's going okay so far. I'd say Wednesday was. I'd say Wednesday was. Listen, I'm telling you, I very much believe both of these two things have to bottom at the same time. Well. So if we fit, don't, I mean, right?

That's not so far off. So paradoxically. All part of the process. If we fit, I mean, right? That's not so far off. So paradoxically- All part of the process. Paradoxically, on Monday, it was a risk-off environment in bonds. People flock to treasuries as they always do, pushing yields lower, pushing stocks higher.

Very odd. Yeah, so what was interesting about Monday is- Right? Like risk-off led to risk-on. Yes, because the source of the risk is the treasury yield in this case. So when you get people flocking to treasury bonds because there's some shit going on,

paradoxically, it makes people in stocks feel a little bit calmer. Very interesting situation that we found ourselves in. I do think these two things do need to bottom concurrently, not on the same exact day, but within the same vicinity, because I think that most of the risk to stocks is the Fed going too far. I think that's a pretty well-established and not very controversial statement. So if you believe that we are seeing a stock market bottoming process, or maybe we just saw a bottom and there was no process, however you want to say it, it would be very important to get that same follow through in treasury bonds. And they

won't always mimic each other, of course, forever. But I think right now, and here's what's really paradoxical. I wanted to talk about treasury bonds on Friday, when we started the doc for tonight's show. And the original title of this segment I had planned was bond crash, but we missed it by a couple of days. So this morning I changed it to bonds bottoming. Josh, one more thing. That's how fast things can change. One more thing. By the way, yeah, my topics are a little bit stale too, because my topics were mostly filled in on Wednesday and Thursday of last week. But we'll make do. We're not stale. We had the pivot here because we might've seen

the end of that bond crash that I wanted to talk about. Let's roll some through maturities. Wait, hang on, hang on, hang on. Just before we get to the maturities, this is important. And this is- Maturities! This is the same, take it easy. This is the same chart, yields and the US dollar stop.

The US dollar has been a wrecking ball and it's the same thing. It's following yields. Yes. Do we have that? No, I'm just saying. It looks exactly like US dollar is, looks like that peaked as well.

We'll see. It's a one month treasury rate, five spot, five, seven. It looks blow offy. You know, we won't know until we know for sure. This is the proxy of whether or not we're going to see a hike in November, right? The one month? I thought it was the two year, but same thing.

Fine. Well, I mean, this is closer. Let's do the one year. Five spot, three, nine. No real give back in this one. Doesn't need to be. This is the higher for longer, like the one year higher for longer outlook, I guess. Illustrated.

Here's the two year. Same thing. So 5%, hanging in there. Well, Josh, here's my opinion. You asked if treasury bonds have bottomed, slid differently, have yields peaked. I would guess that if that statement is correct, it doesn't mean that you're going to get

a rip-roaring bond bull market. No. Right? Rates might have stopped going up, but they could just settle in, which would be, which would be my preference. Well, let's, let's distinguish what rates we're talking about. Are we talking about the long end or the short end of the curve? I could picture the short end of the curve settling in and the long end being not as volatile as it's been all year, but not exactly sitting still either.

Well, I think the- So much uncertainty there. The short end will just be a function of what they say at the next press conference. That's right. Let's do the five-year. Four spots, 6.8%. Not much give back here either.

That's a little bit surprising. Let's get to the 10. Four spots, 7.2%. And then let's do the 30. You're saying spot like you're a banker or something. This is what we say on Wall Street. Four spot, 8.9% on the 30-year. How is Chris calling me?

He does it every week. What does he want? Pick it up. Take it on speaker. Put it by the microphone. Christopher Venn. Hold on. He can't hear me dude what's wrong with you do you do you read lips literally every tuesday we record the show at the same exact time fired all right it would be a mistake for people to to look at

um i'm still i'm still echoing there we go sorry it would be a mistake for people to look at. I'm still echoing. There we go. Sorry. It would be a mistake for people to look at the action in the bond market this week and conclude that it's solely because of whatever's gone on overseas. Why do you say that? Because while that's been happening, there's been a concerted effort among Fed speakers to mention that they are aware of how much tightening the long bond is doing for them. So Lisa Bromowitz wrote, I thought, a pretty good rundown of this. And we don't have to get into all the detail. But the Fed vice chair, his name is Philip Jefferson, spoke at a conference on Monday.

He said, we remain cognizant of the tightening in financial conditions through higher bond yield. I forget who else. Maybe Lori Logan mentioned the same thing. So the Fed has its speakers out in force. And they are, it almost looks like they've been given explicit instructions to mention the market tightening, which may be doing some of their job for them. If they're saying hire for longer, well, that's exactly what that means when

you see the long end tightening. Just credit availability is going to be tighter. And that's part of the market function. If the Fed is successful in its words, eventually the market catches up. And that's what I think we've seen. So it's not fully a function of geopolitical risk and people or really, I think it's not fully a function of what's going to happen in November. I just think the market is catching up with what the Fed's been saying for a while. It's not fully a function of anything. There's a lot of different inputs into what makes up a yield curve. Sure. And if you have lack of demand to buy those bonds,

and you have a lot of supply coming, which are two other factors. Ponds of supply. Right. CPI is tomorrow. So the Cleveland Fed has this thing now casting. They currently see inflation for September of 2023, which is the number we'll get tomorrow, Wednesday morning, coming in at 0.39% for the month. And that's month over month headline CPI, 0.36% for core, which strips out food and energy, which are more volatile. And that would translate to a 3.7% annual rate for headline CPI and a 4.2% rate for core CPI. If that holds, that would continue the recent trend of headline inflation accelerating while core inflation cools, which is kind of a weird- Hey, let me ask you a question. Did we already have a soft landing,

but we could also still be heading into a recession? Like in other words, the jobs report that we had in September was 330,000 jobs added, and the monthly wage gain was like pretty modest. It was like 0.2%. So you still have a pretty robust economy with wage growth cooling off and prices cooling off. You got a Goldilocks report is the way to phrase that. Yeah. so i'm not saying that we're going to be in this forever that they were like oh we're in the clear it's all good like we still might be heading towards a recession but is it also possible that we got this off landing i mean if tomorrow is a red hot if

tomorrow is a red hot number everything we just said about bonds might be up in the air it's so difficult because we by the way, the market can overreact and then reverse itself. We saw that after the last jobs report. So that could happen too. One thing I want to mention here, and I'm curious if you would agree with this, I want people to stop telling me how smart the bond market is. No one and nothing on earth has been more wrong over the last 18 months than the 30-year treasury. It's taken the 30-year treasury 18 full months to catch up to the reality.

It has been so far behind the Fed's rhetoric, the Fed's actual rate hikes, the two-year treasury. This crash in long-dated treasuries, not just since the pandemic, but even in the last two or three months, is really breathtaking. There was a piece in Bloomberg talking about it's one of the most destructive financial crashes ever. So let me share this with you. Since March of 2020, treasury bonds with maturities of 10 years or more have plummeted 46%. That's just under the losses seen in the stock market when the dot-com bubble burst. The bond route is worse than the one seen in 1981, back when the 10-year yielded 16%. So we're talking about just a mega, mega

crash. Don't tell me that's the smart money. The long end of the curve has just been either incomplete denial or fast asleep or some combination of the two. What are your thoughts? I have two thoughts. One, I think it could just be structural. The Fed stepping away from buying all those bonds and the treasury continuing to issue them. I saw a chart that showed the first nine months of the year, we had more issuance than any year in the last two decades outside of 2020 for obvious reasons. There's a ton of supply coming on. Japan is not buying to the degree that they did. So I don't know if the bond market is stupid. I don't know how you explained the- They said they were going to stop buying.

I don't know how you explained the reverse crash. I don't know why it's spiking all of a sudden. That part is odd to me. When I think about people say the explain the reverse crash. Like, I don't know why it's spiking all of a sudden. That part is odd to me. When I think about people say the bond market is a smart money, what that means to me is that if you're talking about the health of a business, don't worry about the price of the stock. The bond traders, the bond investors, they really know what's going on because they're balance sheet guys. They're looking at covenants and all sorts of shit.

Stock guys are kind of like the stock jockey idiots. Like, That's what it means to me. Am I right about that? Well, no. Yes. Initially, that's what we're taught. And actually, even the stock guys would say, to your point, would say, if you don't like the bond, you can't like the equity. Meaning you could like the bond and not like the equity. Verizon would be a great example of that, right? Bonds are ironclad. Look how much debt they're able to sell. One of the most indebted companies in the world. Yeah, in other words, if you want to talk about Verizon, I'd rather talk to the bond guy than the stock guy. That's right. That's right. So if you don't like the bond, you can't like the stock if you're an investor. So yes, to your point, that is what we're taught initially. But over the years, that rhetoric about the bond market being the smart money has changed to mean like the macro guys know better than the equity stock jockey guys.

And it's wrong. We're all guessing. It's wrong. Let's do the Bianco tweet. This is interesting to me. How much money has been incinerated in bond ETFs? So this is showing – where is this tweet? Okay.

As the price has collapsed 46%, again, since 2020. This is wild. This is TLT, by the way. $34.36 billion of money has flowed in. Cumulative? Cumulative. So this is like the opposite. I wrote about this a couple of weeks ago that people are like running into the fire, which makes sense because they've got their fire suit. They've got their hazmat suits on, right? Like they know that this is just math,

right? It's not like you're averaging down into a stock that could be a company that could be going out of business. The United States treasury is not going out of business. Now, it might take you years to get your money back if you were early, but I think this is rational behavior. Let me say something. This does not happen in stocks. Would never. Would never happen. What we're looking at is cumulative inflows of $34 billion into an ETF that's gotten cut in half since the summer of 2020. It did happen with ARK, not to this extent, but it actually did happen with ARK. For like two months. That's it.

Okay, but for two months. I'm talking about this is three years, almost three full. It's more than three years of, I would say, almost uninterrupted drawdowns for the ETF. And the inflows are going parabolically higher. But the flow started really in March of 22. So it's been a year and a half of people stampeding in. I'm just making the point.

You will not see any active manager, any sector index ETF, nothing. manager, any sector index ETF, nothing. And I think there's a lot of portfolio rebalancing and asset allocation to explain that chart. If there's somebody who's using TLT as their disaster hedge in a portfolio and it's supposed to be 5%, they're never giving it up. They're using it as insurance. And actually, if you're in a 30% drawdown in TLT and you don't keep buying, you're admitting to the client that you're a moron. So that persistence of flows, I think it can as easily be explained by allocation as it can by like the principal agent problem. There's two more things. Number one, it's a stair step. It's a grind lower. It's not like where the stock market eventually goes down 20, and then it just crashes

or the bottom falls out. That has not happened with bonds. It's been painful, no doubt. But the other part is nobody's retirement is riding on TLT, right? People have legitimately 70, 80% of their money in the stock market, and so it's too much risk and they get scared. Realistically, what is TLT in somebody's portfolio? 5%, maybe 10%. Yeah, no, nobody goes, I mean, nobody seriously goes crazy with that. That is your, that is like literally your crash hedge. And also unlike stocks, as interest rates go higher, price goes lower, it becomes more attractive, not less attractive, like mathematically. So I think it's- Is it bad if I want to buy the snot out of it right now?

No, I mean, I tried, I bought TMF and I sold it bad if I want to buy the snot out of it right now? No, I mean, I tried. I bought TMF and I sold it quickly because that was leverage. But no, not at all. I think you could buy it here. You ain't really built for this. I think you could buy it here with the understanding that this might not be the bottom.

If you can't stand a little bit more drawdown, then don't buy it. But I think you will look good if you could buy this and hold this for a couple of years. All right, let's talk about, we've spent a long time talking about so many reasons why higher interest rates haven't filtered through to the economy. And we've said ad nauseum that these companies were just gorging on debt during the pandemic as they had to. And so there's a great chart. I don't know where this is from.

I saw it on, somebody tweeted it, The Daily Shot. Okay. So look at investment grade corporate issuance on the top pane, and on the bottom, high yield. Now, as rates rocketed higher, not that high yield issuance went to zero, it didn't, but it definitely- It's been cut by two thirds. It's been cut by two thirds. Yeah. It went down a lot. So what's another like thing that- Can we give people the numbers here? So it looks like the peak of issuance was early 2020, which makes sense to counteract the pandemic. Companies that could raise cash did.

Investment grade companies raised, it looks like $300 billion in a month. Yeah. And then 280 billion the next month. Yeah. And then $280 billion the next month. High yield issuers, so companies with bonds that are priced at junk, we're selling, in that same period of time, we're selling about $50, $60 billion worth of bonds. So that is now cooled off to about $50 billion for the investment grade.

And it looks like $10 billion for junk issuers. So almost nobody is selling corporate bonds right now. So think about this, the top chart. Let's just say Microsoft. I remember very clearly that when Microsoft raised, they sold debt. It was like 10 years, and it was like, I really think it was under 3%. I think it was like 2.6% or something like that. It's kind of like a reverse arbitrage. I'm probably not using that properly, but they borrowed at 2.6, and now they can get like 5.6 on their cash. Wait, what do you mean reverse arbitrage?

Explain what you mean by that. They borrowed at 2.6, and they can now put that money to work at 5.6. Okay, not a reverse arbitrage, an arbitrage. So their net interest cost, and we shared this chart a couple months ago from SockGen, the net interest expense for a lot of these companies has come down as rates have gone up. By the way, I heard you try to push back on the ETF guy,

MUSQ, the music ETF guy. Yeah. He's saying it's an acronym. What does it stand for? He's like, nothing. Not an acronym. I mean, no disrespect. No disrespect, but you were right.

He was great, but thank you. You should have stuck to your guns a little bit. I don't have guns. You should have said, sir, the M has to stand for a different word. That's what makes it an acronym. He had me second guessing the meaning of acronym. It's a ticker symbol.

It's not an acronym. So, right. So we spoke uh we spoke like 2022 was so weird that the the one of the worst bond bear markets of all time and yet junk bonds actually destroy treasuries that shouldn't happen well put the shit up this is crazy so this is oh this is this is triple c oh This is triple C corporates are positive. What's the time? This is year to date?

This is year to date, yeah. Positive 4.5% is total return. This is the index price. Yeah, because again, we spoke- And then AAA bonds negative eight? Get the fuck out of here. It's only duration. It's only duration.

So it's three years for the junk, 10 years for the A's. Fair enough. And there's still no stress the junk, 10 years for the A's. Fair enough. And there's still no stress in the credit market. This should not be. Should not be. Chart back on. 550 basis points of tightening in a year and a half. And this is junk versus AAA?

Come on. Come on. This is like Willy Wonka times we're living in. I don't even know how to explain this. Chart off. How do you explain this? Is it deletion? Well, that's it.

I mean, I can explain it. It's very simple, but I can't wrap my arms around it. It's crazy. Duncan's telling me to back up from the mic. I think I'm going to get closer. All right. Which of the Magnificent Seven stocks, if you had to pick just one to ride into the sunset when the year comes to an end, and we're starting from right now, I want to give you what these stocks have done so far year to

date. Apple up 38%. Microsoft, same. Alphabet up 57%. Amazon up 53%. NVIDIA up 210. Wow, 210. Tesla up 110. I didn't even realize that. Tesla's up 110% this year. Meta up 164%. You could pick one, and we're going to scroll through all seven of these charts. Do you want a little bit of time to think about it? Or are you ready to give me your answer immediately? I have an answer, but how about, can we do process of elimination? Can we start backwards and say what we don't want to invest in and then let's leave a winner? Absolutely. However you're, I just think you have such a beautiful mind, like however it works, however the gears turn, that's what we're all here for. You know, you know, I'm not going to say anything. Look at you. You're blushing. You do have a beautiful mind. Go ahead. What's your- Ticker on. Walk us through.

Ticker on. Ticker's on? All right. Is Apple. Wait, John, go back to the chart, please. Just with the names. Just with the names. All right. So I'm going to cross off with the red line Tesla. Uh, not because I'm bearish. I just feel like out of all the companies, probably this and NVIDIA have the most idiosyncratic risk where it's just really beholden to whatever is in like the headlines for these individual names. So I'm going to, I'm going to whack Tesla first. I want no part of Tesla. Are you whacking NVIDIA? Uh? No. Did you see it today? I did. The thing is on its horse. So, all right. So Tesla has a red marker through it. The next stock that I'm going to red marker

is Microsoft. Hold on a sec. Hold on. I got to interrupt you. James Sykes in the chat. Josh might actually be Batnick's dad. Can we do the math? I'll do the math for you. He's eight years younger than me. Relax. All right, continue. Okay, next. So listen, these are all great companies. I mean, needless to say, the next one I'm going to go with Microsoft and why?

I listen to the market and Microsoft has the weakest looking chart out of all these names. Actually, Microsoft and then Amazon. Amazon also doesn't look great. So Microsoft, red line, Amazon, red line. So you're going on technicals also. For the next two. And then Apple, I just, Apple looks like junk too. I'm going to red line Apple.

Not junk. It just doesn't look great. So that leaves me with NVIDIA, Google, and Facebook. I think NVIDIA traded fairly poorly after its earnings release last quarter, where they smashed expectations. We're going to get to that later. So they opened up like 10% and closed at the low of the day. But ever since then, it's traded beautifully. It's consolidated the gains. It's holding.

It's not even getting anywhere near the second quarter gap, not even getting anywhere near it. That being said, NVIDIA, cross off. So that leaves two, Google and Meta, which are the two best looking of the bunch. I'm going to redline Meta and I'm going to stick with Google, the king. It just looks the best. So on a technical basis, you like the alphabet does have the best chart right now. To conclude, it's Google, Facebook, Nvidia, Apple, Amazon, Microsoft, Tesla. I don't mind you calling it Google when it's really alphabet. Did I do both? That's the ticker, but you can't do Facebook and meta interchangeably

three times. I don't say meta. Do I say meta? Maybe I do. You just did. Who knows? Maybe I do. You got to pick one. Maybe I do. All right. Okay. That was't say meta. Do I say meta? Maybe I do. You just did. Who knows? Like maybe I do. You got to pick. You got to pick one. Maybe I do. All right. Okay. Those are my final answer. Google, Facebook, Nvidia, Apple, Amazon, Microsoft, Tesla.

That's bold. I don't think I could do that. What's your one? I could probably pick my bottom, my top. Let's get through these charts really quickly. Apple, please. Okay. This looks dead money-ish.

That could change on a dime. By the way, we've got earnings coming up. We've got earnings. So that will change it. 100%. These stocks are going to move. Apple's actually supposed to have an earnings increase. And remember, they are going to get, I think, two weeks of the new phone in this quarter that they're about to report, right?

It came out mid-September. Well, that would definitely give us visibility into how it went. All right, next. Microsoft and Apple have almost the same chart. And nothing wrong with it. These stocks have been incredible this year. I just don't see anything here particularly exciting. Next chart.

Now, this is what I'm about. Yeah, it's a one. I hang with winners. Like, this is – why is this making a new high? We'll find out 10% or 15% from now. You know what I mean? But I really think that alphabet between now and the end of the year, I can't think of any negative catalyst that's hanging over its head. YouTube is just absolutely on fire.

And I just – the Waymo news that's coming out of the other bet segment, Waymo is eating Cruises lunch in San Francisco. There's a wait list to use their robo-taxis in the city. waitlist to use their robo taxis in the city. They just, they seem to have like a lot of momentum on the AI front too, based on everything that I, not an expert, but based on everything I read. Yeah, that's, so that for me, that's the one. Let's go through the other ones real quick. Here's Amazon. I own this too. I'm not looking for anything great from it. I think one possible reason why Amazon's going to surprise the upside when they report is that AWS will not be as slow as what people are expecting. I think the consensus is for like 12 or 13% growth. And I think they can beat that, but not by much, but it might just be

good enough. I wonder, is the cloud recession over? Because AWS last time it reported, it was definitely an overhang. It lasts two times, actually. Yeah, so everyone is hoping for a reacceleration into 24. The other thing I would say on Amazon is that they have now recognized, and I think said publicly, that they see what everyone else sees, which is diminishing returns

on getting the thing faster to people. That is just massive costs. And I think they're going to slow down with that. And I think that could produce an upside surprise here. Dude, I ordered. Like, I don't need it two seconds after I order it. Like, I ordered. Calm down.

I ordered Bob and a pair of AirPods because I guess there's a sale. It was like 90 bucks. They come 15 minutes later. I ordered at 11 o'clock and it said it'll be here by five. Like, I don't even need it by five, but I'll take it. So they have talked about there being a diminishing return on pushing that even further. And if in fact they've throttled back,

that could produce a potential upside surprise. But I'm not crazy bullish on that by the end of the year. Next chart, what else do we have left? Here's Nvidia. I mean, you just know this thing is going to end the year at 550, right? Just because nobody thinks it can. Well, Josh, who's selling Nvidia? That's the thing. You know what I mean? Like, unless they really fail to deliver- Yeah, they have to have a horrendous Q3. Which I feel like is unlikely given all of the momentum.

Think about it. It's back. Yeah. I mean, listen, it's very hard for me to picture. That being said, I did sell some earlier this summer just because the gain was stupid and I had to take something off the table. But I didn't sell much. I sold a quarter of my position. And for better or for worse, I'm still here. Next chart.

Tesla. You know. no comment. Next chart. By the way, never listen to me on Tesla in either direction. This is meta. Stock is 321. It looks incredible. It's not going to mean anything back.

It's unbelievable. No, it's going to challenge the July high faster than any of the other names in this group other than Alphabet. It trades more closely with Alphabet than the other names, which makes sense. They're both advertising businesses. If Alphabet works, I think Meta works. The new narrative on Meta, obviously, the wearables, but also, allegedly, they are kicking the shit out of everyone with Reels. That's correct.

Reels has become an absolute juggernaut. Nobody is talking about TikTok anymore. So that stock is just – and I've been wrong on that too. That stock is just working. So to conclude, I think the risk to Meta and Facebook – I'm sorry, to Meta and Google is advertisers we haven't spoken about, which is the business. Here's my top three. Wait, here's my top three. I want to say Alphabet One, that's the one I want. It's 20 times next year's earnings. You're really not asking a lot for that stock to go higher. But we're talking about the next 50 days, right?

I understand, but I'm just saying, I feel like you're not asking a lot. I would say Meta 2, NVIDIA 3. All right. So we agree. We're 1, 2, and 3. We're perfect, right? Yeah. Oh, we're so wrong. We're going to be so wrong. If you asked me for the next year, I probably would have a different list. But for the next 50 days, I'm going with Momentum. If you and I agree, are we both consensus?

Probably. Right? We're a consensus of two? Yeah. We're picking the best stocks. We are so consensus. All right, take it away. All right, where are we going next? We're going to, oh, okay. So this is an example of something that has aged, interestingly, considering that this topic is six days old and things have changed.

All right. Try it on, please. The level of excessive pessimism is now below what was registered at the December 22 and March 23 lows based on Ned Davis research daily trading sentiment composite. Kind of interesting, huh? Who said this? With sentiment indicators, we go with the flow until it reaches an extreme and reverses. Yeah, I don't know. So you wait for it after that?

I don't know what the inputs are here, but interesting that this was, again, this tweet, hold on, what day was this? This was, I saw this on October 4th. So today's October 10th. So a week ago was, whatever, who cares? I can't do the math. It was one of the days last week. We also saw one of the reasons perhaps why there was such a crazy

rally yesterday is because stocks didn't go the way that you might've thought. Now, I don't know how much- Rachel's in the chat asking, how do you define excessive pessimism? Mathematically, there's a level at which it's historically extreme. I think that's what we're saying. This is definitely not historically extreme. Not even close. I would just say- Right.

Well, we have some other charts coming up that are historically extreme. Well, so this is interesting. So CTA positioning is- I think I put this in the doc also somewhere else. Okay. This was wow. So this is bearish. So these, again, I don't know how much this money is responsible for moving the markets around.

I just don't. It's not that big. I just don't. It could be a drop in the bucket. But nevertheless, I think this is- Can you explain what CTA positioning is? This is in the S&P futures contract. Yes?

Yeah. So these are- These are commodity traders. So these are commodity traders. So these are professional traders. These are trend followers, CTAs, people that are trading the futures. And what this is showing is their, I guess, bullish positioning in SPX. They are extremely negatively positioned in S&P futures. And the closest you get looks like it's this year, looks like it's right around March during

the Silicon Valley bank debacle. Yeah. So I don't know, again, if they need to cover and get long, I don't know how much that can feed a rally. I get it. Could be bulls using futures to hedge. You want to be really careful with reading too much into this. I agree with you. But there was some interesting stuff that came out last week. So you saw the number of 52-week lows in the S&P was at the highest level since

the fall of last year, which is, in and of itself, it's not a bad thing at all. It's just like, you know, it's normal. It's a normal way to sell. If you're an investor, you look at that and say, great, I'm buying stocks way off, many, many stocks off of their highs. This is interesting. Bespoke tweeted, the S&P 500 has made a lower low on 33 of the last 50 trading days. That's tied for the most in the ETF's history. Remember the other week I was talking about how there was like, this is from Sentiment Trader, nine consecutive lower lows.

So this is just zooming out. 33 of the last 50 trading days, the most in the ETF's history. Very interesting. And this is just, I don't know, maybe it's just seasonality. I don't know. Well, there have been a lot of the afternoon give ups in the S&P too. Like that's been like a ubiquitous feature of trading this fall is no matter how the market opens, there've been a lot of those late day, like three to four

o'clock sell-offs. And, you know, it's just, it's just been that kind of environment. There really hasn't been much to look forward to because we were out of earnings season And, you know, we were facing the specter of yet another rate hike. And the data was coming in lukewarm to hot. And bonds were bonds were going crazy. So that's, that's the environment we've been in. Did you see that? I didn't I didn't take this chart. Do you see the Savita chart? Which one? You know, she follows the, she follows the portfolio recommendations of wall street and then quantifies it. And she uses it as a, she uses it as like a, as a reverse indicator. So, so when allocations, you know, north of 60% equities become more popular on wall street, she wants to go the other way and fade that and vice versa.

So she put something out this morning. We're back down to very pessimistic territory amongst Wall Street strategists in terms of how much they're saying to allocate to equities versus bonds. And she says that's a 95% hit rate that you'll have gains 12 months out when we get to these levels of pessimism. So I thought that was interesting. 90% hit rate, that's good. 12 months out when we get to these levels of pessimism. So I thought that was interesting. 90% hit rate, that's good. I should have grabbed the chart, I forgot.

So Josh, we started the year talking about positioning. Positioning. That's how I want to end the year. So did you know the NASDAQ is up 39% of the year? The S&P is up 15%. Absent bad market-related news, such as we get a really weak earning season, we get some hot inflation prints, sure, could happen. People are going to chase. That's what they do. So we're going to talk about an earning season now.

Do you agree with that? Yeah. No, of course. I think there's still career risk in the active crowd. Listen, we just, like five seconds ago, ran through the gains of's still career risk in the active crowd. Listen, we just like five seconds ago ran through the gains of the seven biggest stocks in the market. They're ludicrous. They're up 100%, 200%. That mentality stays with you when the biggest stocks force you to chase them. If they have to chase, what are they chasing? I think they're going to chase these. Honestly, I mean, is there another seven stocks that can catch these seven? Honestly, like, I guess.

There are some software names. Catch, no. Are there another group of names that could have an outcome in the next 60 days? Absolutely. There's a second layer. There's Salesforce. There's Adobe. You need like a $300, $400 billion stock if you're going to chase a $2 trillion stock but not own it.

You know what I mean? And they exist. By the way, I don't know if you've looked at the security stocks lately. They look amazing. CrowdStrike made a 50-week high today. There's a whole layer of tech stocks. Palo Alto Networks looks mean. Yep. There's a whole layer of not mid caps, just not mega caps, large cap technology stocks

beneath this layer of magnificent seven. And I think you have other choices, quite frankly. All right, let's do earnings. So we'll start with tech. Analysts actually have increased their earnings forecasts for the reports we're about to get. We're about to get Q3 earnings. And it started, technically started today with Pepsi. So out of 38 companies in the S&P tech sector, seven have had increased earnings outlooks. And those include Applied Materials and Apple. Tech as a sector saw the third highest increase in earnings appraisal since the start of the quarter, according to Investment Business Daily. Communication sector had the fourth highest.

And so that's meta and that's alphabet. Those are the two stocks that account for most of it. And when I say a 4.1% hike in predictions, that's since June 30th, so since the end of last quarter, just for people following along. Where are estimates lower since June 30th? Materials, industrials, and healthcare, all down since the start of the quarter. Consumer discretionary, 22 percent earnings growth expected, up from 12.5% on June 30th. That's wild. That's a big jump.

And that's Tesla. What else is large in consumer discretionary? Amazon. I think they're like 40% of the company. Probably Home Depot, Lowe's. Yep. Okay. That was the sector with the highest increase in analyst expectations.

Energy stocks were the best stocks in Q3, by the way. Estimates for the energy sector are actually supposed to drop 37.7%. But that's better than the 41% drop that analysts had been looking for at the start of the quarter. What the hell is going on there? Is it just like impossible comps? I don't get it. Yeah. It's just commodity volatility.

I mean, that's really all it is. Banks are going to come first. We'll get some banks this Friday. Analysts are looking for a 12% earnings growth number this quarter, which is weird because those stocks look like shit. All of them have been looking pretty crashy, save for JP Morgan in recent weeks. They look awful. Awful. One looks worse than the next.

We're going to get on Friday. You ready for this? JP Morgan, Wells Fargo, Citi, BlackRock, and PNC in three days. These look so bad. I'm just going with the Bank of America, Wells Fargo, Citi, BlackRock, and PNC in three days. These look so bad. I'm just going with the Bank of America, Wells Fargo, Citi. I mean, Goldman looks trashy. All right, but again, we're supposed to see earnings growth. You know why?

The absolute level of interest rates. That's all that really matters, honestly, to earnings, not to stock prices. That's really all that matters. The absolute level of interest rates is pretty much like what ends up contributing to earnings for these companies at this point, absent there being any real strength in capital markets. I know we had a couple of big IPOs, and I know money was made on the selling of those IPOs. They're all trash, by the way, if you take a look at Instacart since it went public. But it's just not been a great environment for capital markets.

So it's going to come down to the absolute level of interest rates. And from that perspective, that's why JP Morgan is hanging in there better than the others. The regional banks are expected to see their earnings fall 15%. That is such an open sewer, that segment of the market. I can't even punch those tickers up. They look so bad. Yep. I don't want to spend a ton of time on this.

State Street Global Advisors was talking about earnings expectations were too low in the first half, which is why quarter after quarter, you're seeing 73%, 75% of companies beating. And the revisions were worse than the reality. But now they're saying it might have gone the other way. The expectations are high and getting higher. So according to FactSet, calendar year 2023 earnings, based on the consensus right now, are expected to grow by 1.1%. And that includes a drop of 2% in the books for Q1, and then a drop of 4.1% in Q2, again, in the books, which means you're going to need a lot out of third and fourth quarter to counteract that. Analysts are forecasting that Q4 will be 8.3% growth. And then they think 2024 forecasts currently are at 12.1% growth.

So that's a lot. And I don't really know what the source of that optimism is. And so to State Street's point, we might be asking a lot of the future if those are the expectations. I want to throw this forward PE ratio up. John, thank you. And this comes from State Street Global Advisors. They're just looking at the forward PE. And what you could see here, we're about 20. I think it's 19 in real life right now. We're kind of in a no man's land. It's not crazy high, certainly not 2021,

but it's also not necessarily cheap. And that's a pretty tough place to be. Earnings are down this year, so all of the market gains that we've experienced have come from multiple expansion. The good news is that what usually happens after double-digit multiple expansion, what typically happens after multiple expansion is you do get double-digit earnings growth eventually. So maybe that's the thing that the market has right. And most, and then those 20, 24 estimates make sense. What do you think? Well, margins are the thing.

Yep. Margins are the thing. So Goldman just, I saw this today. They think that margins for most sectors will remain near their 10 year highs. Really remarkable that margins are the thing. So Goldman just, I saw this today. They think that margins for most sectors will remain near their 10 year highs. Really remarkable that margins are still doing what they're doing. They're down a little, but not a ton. So chart on please. So you've got tech communication services right at their highs, S&P too. Materials is at the average, energy a little bit below. The only thing that's actually, that has not seen, uh, margins accelerate is healthcare for reasons that are not clear to me, but. Regular, uh, why, why aren't healthcare margins up?

Yeah. They have like huge government issues with coverage of drugs. It's a, it's a massive issue. Like, have you looked at Bristol Myers and Pfizer? They're just crashing. Yeah. Well, so what happened with the IRA, what happened with the Inflation Reduction Act, one of the things in the Inflation Reduction Act makes it so drug companies have a shorter window

in which to make money before their drugs can be copied by the generics. And that's a tough situation. And we think that's consumer-friendly until you realize, wait a minute, all they're going to do is jack up their prices in the first four years or five years. Like if they used to have eight years and now they have five, what do you think their price is going to look like in the first five? So it's a tough sector from that perspective. And it's been tough for a while.

No, it's not crashing. UnitedHealthcare. Well, obviously. UnitedHealthcare is the devil. You know that, right? OK, next chart, please. So this is from the Great Warren Pies. This is an amazing chart.

So the blue line on top is 2023 margin estimates throughout 2022. So go back last year. That's what they expected margin to be across the year. Interestingly, in 2023, projections for 2024 margins, which is the purple line, actually analysts are starting to boost estimates again. I think it's worth pointing out how incredible margins have been. And profit margin mean reversion has been on the tongue of every bear for the last, I don't know, 12 years straight. It's always the thing that's about to happen. It never seems to happen. And just to give people a little bit of perspective, corporate profit margins in the year 2000 were 7%. What are they now, 14? They were 13% in 2021 when they peaked.

2021 was like the most profitable year ever because nobody had to actually show up to work. And it was business as usual for most of the country. The estimates for a third quarter net profit margin for the S&P 500 is supposed to come in at 11.7%. So- That's as bad as it gets. It's pretty damn good. It's above last quarter

and it's above the five-year average. Hey, Josh, last quarter when we were doing their earning stuff, I remember saying, I'm really excited to see how this earning season is going to go, particularly with the stocks that have done really well. In Q2, stocks were on fire, right? Going into- I feel like that's the thing you say every quarter and it's the right thing to say. What? I'm excited to see what stocks do? No. After you see what stocks do, it's like, all right, are the earnings going to back this up? I'm excited to see what stocks do? No. Like after you see what stocks do, it's like, all right, are the earnings going to back

this up? It's like, well, I agree with that. So we know what happened. Next chart, please, from Warren Pies. So stocks that missed estimates, these are more the junkie stocks. They did incredibly well, incredibly well going into earnings season. Stocks that beat did a little bit less well. And then both of them, both the ones that beat and missed sold off after earnings, because again,

market had a great run. That's not the setup for this time. So actually stocks that beat, I'm expecting them to do really well. Leave this chart up. This is so good. Are you with me? Yeah. This is such a great chart. So this is Warren. Okay. So you think about the first half of the summer, like into the end of July, companies just got so much credit ahead of time, right? And then the number is reported and it doesn't matter what the number was. Everything went down because of how big of a rally was staged in May, June, and July. It was like a three-month free-for-all. And then we paid for that on the back of the actual reports coming out. This is an awesome chart. So going into day zero, which is when all these companies reported. So when the market peaked in July of 2018, the NASDAQ was up 45% of the year, the NASDAQ 100, and the S&P was up 20% of the year.

That was like the best first seven months to a year, I don't know, in a long, long time, maybe ever. And so, okay. But think about what we've done since those earnings. It's just, we've gone sideways. The market has done really, really nicely. Yeah. No, it's true.

All right. What do you got last? All right. Last chart. Oh, I want to talk about relative strength. We could skip this. All right. So again, last week, as the market was selling off before the bottoming process, before the

bottoming process, I was thinking, hey, you know what? There are still some stocks that are working. Google was one of those stocks. There are still a lot of stocks that are showing phenomenal relative strength. And if and when the market does finally stop going down, these stocks are going to lead us out. So before we show this chart on, Josh, what do you think, what do you think, what stocks do you think are showing the best relative strength in terms of sectors? I don't know if you're looking at the chart or not, but assuming you're not. I'm looking at it, but I would have guessed the first sector, not the second. Okay. So try it on, please.

So now this is probably skewed because there's more tech stocks in the S&P than there are, say, utility stocks. But nevertheless, financials really surprised me. That's not banks. It's not. It's MasterCard and Visa. It's insurance companies or credit cards, I was going to guess. Yeah. So there was 57 stocks. So 10%, just over 10% of the S&P 500 is within 5% of a 52-week high. And again, it's technology, which is probably not surprising. That is the VIP list. That is like the best stocks. So here we go. So Arch Capital Group and Arthur Gallagher,

which are both insurance companies. Then you've got Akamai and Arista Networks. You've got Activision. I sold the rest of the networks too early. I got panicked out of it. That thing's going higher. Interestingly,

Costco and Walmart. Yeah. Apparently, they're kicking the shit out of Target. So let's, we're going to, we're going to talk about that in a second, but let's, let's go to mystery chart. No, you go first. Oh, my turn. I'm sorry. Okay. So many choices, so many things to make the case for. This is, as I mentioned last time, it's not, it's not exciting making the case for anything when the NASDAQ's up 45% through July. I was trying to make the case to chill out, but here we are. So defensive names have gotten rightfully, but too much annihilation. So this is from Sentiment Trader.

Internal destruction among the most defensive stocks. This was a combination of these stocks are highly sensitive to interest rates, both in terms of debt loads and the way that investors position these stocks versus bonds. And they pay dividends. And then the other part of it that I think is completely overdone and is giving a huge gift to debt buyers is the Ozempic thing. I just don't buy it. It'sic thing i just i just don't buy it i think it's a great story i just don't buy that that the country's gonna not be fat and that we're gonna this ozempic reason to knock 30 billion dollars off the market cap it's crazy of a consumer

packaged foods company that's been around for eight decades is horse hockey. Actually, if you listen to the podcast version of the show, I talked with the Barron's reporter, Jacob Sonnenschein, about Pepsi specifically, which reported earnings today. Great earnings. Great earnings. Ozempic kissed my ass. That stock crashed going into the earnings. And then they had great earnings, had a really nice move in the stock. But anyway, I still think there's an opportunity in some of these names. So if you do listen to the podcast version,

which we'll post tonight, you'll hear me and Jacob talking about it. Wait, wait, wait, I'm not done. I've only just begun. Okay, go ahead. So I could have picked anything. Coca-Cola, I mean, there's a million. Campbell's Soup, I mean, there's a million. All right, so make the case. I picked Harshali. I picked Harshali. Coca-Cola. I mean, there's a million. Campbell's soup. I mean, there's a million.

All right. So make the case. I picked Hershey. Look at you. So this is the rolling 90 day returns of Hershey minus the S&P 500. And the only time that it had a worst time relative to the market was in the run up to the dot com bubble. And that's just because the S&P probably went up 50% and left this boring

chocolate company in its dust. The company, all it does is raise dividends. Next chart, please. This is not a high dividend paying company. I think it yields just over two. No, they consistently grow the dividend though. Yeah. Next chart. I think it's one of the best companies in the history of America. It's just Hershey. Hershey's Hershey. You got the revenue. Yeah, listen, this is not a high flyer. This is not a growth company, but it's steady Eddie. You got, you got the revenue grown. You've got the free cashflow grown. You've got steady margins and the stock had absolutely bushwhacked

because Mr. Beast is going to put it out of business with, along with, with Ozepic. I just don't buy it. This is a gift. Stop. Ridiculous. Right. Let's see what else. That being said, I don't own the stock, but just saying. Yeah, I don't own any of these consumer staples, but I'm going to probably buy one. And I don't believe any of this narrative that there's going to be 100 million people on Ozempic next year and these companies will all miss their earnings. It's just not reality. All right. Let's do the mystery chart chart and then we'll send everyone

on their way i'm rooting for you tonight big guy john if you please son of a bitch all right what do we got i see a chart this isn't okay stop this is an index etf and i left the dates up and we don't have all night. So say something. Well, I thought you were, okay. It's an index ETF. Yeah. Okay. It's an index.

Look at you. Look at you. I told you you have a beautiful mind. Look at this beautiful son of a bitch. Put the, put the ticker on there. Drum roll. Give it to me. All right.

Look at you. All right. Here's what I want to. Yeah. Right on. Right on time. Here's what I want to say Go ahead. Right on time. Here's what I want to say about this. It is unbelievable how bad this segment of the market has been since January 1st, 2021.

It is hugely negative in absolute terms. I think it started January of 2021 a little bit under – this is the IWM ETF – a little bit under 200, and now it's at 175. And that is in the context of, look, we've had some rocky markets, but the S&P just looks so much better. It has just been horrible having a small cap tilt, having a small cap overweight or whatever the case may be. It's just been like torture. You get all the volatility and none of the upside. It's really amazing. I don't know what changes that dynamic, but that's the reality right now.

Yeah? Yeah, it's been tough. Been tough. All right. Great job, Michael. Michael got the mystery chart on the first guest. First guest, very proud. Hey, everyone.

Hey. I love when you do that. Speaking of guests, we're running out of guest spots for Charlotte, are we not? Oh, yeah, we should say something. What did she say? How many left? 10? 13. It was not a lot.

All right. There are 13 tickets left for the live Compound and Friends episode we're taping in Charlotte. It's going to be an unbelievable night. Food and drinks on the house. And all the proceeds go to charity. I think Nicole is going to drop the link into the chat or we put it in the description or something. Anyway, snag one of those last few seats if you're going to be in the Charlotte area. Link in description, Nicole says.

Great. Okay. Tomorrow is Wednesday, so you know what that means. Brand new episode of My Favorite Podcast. Michael and Ben starring in Animal Spirits. And we'll do Ask the Compound on Thursday. Get your questions in. Ask the Compound show at gmail.com.

And then at the end of the week, another all-new Compound and Friends. You got it all? You waving? All right. Good night, everybody. Okay. I'm here with Jacob Sonnenschein. Jacob writes for Barron's. You contribute to the trader column at Barron's. Do I have that right? Correct. Okay. I read all your bylines. You do really great stuff. And I wanted to talk to you about something you wrote, I guess, last week about the sell-off in shares of Pepsi and the bigger story, which is that there seems to be this weird

thing going on with a lot of the consumer packaged goods companies, a lot of the food companies where management is talking about Ozempic and WeGvy and all of the weight loss drugs. And I can't tell if they're just like blaming that phenomenon for missing earnings or if maybe there's even more to the story. So I want to start with Pepsi. And just to give the listeners a little bit of context of what's been going on here, this stock has been an absolute freefall. It made a high back in May of this year. The stock hit about 196. It is now 159. Had a huge drop last week. It's about a $219 billion market cap down from, oh, I don't know, let's say $270 billion back in May. And the stock is about 19% off of that level. What do you think is going on here? Yeah, I think it's a few things. So one thing that I find really interesting is that if you

start by looking at what consumer staples have done for the year. You know, you got Staples down about eight, Staples are down low double digits since a peak in May, and then Pepsi down just a little bit more than that, obviously reflecting some of the Ozempic issue. But if we start, like I start with the fact that Staples have been sold this year because the economy is held in fine and people want other stocks. So what does that mean? It means that Pepsi has only underperformed consumer staples by a few percentage points. So first of all, I think the market can see the issue is not that bad, but you can see that little nosedive in Pepsi in the last few weeks. So why is it underperforming a little bit? Why is there

this little nosedive in the last few weeks? And I think it's because obviously with Ozempic, you have the potential for maybe that and other weight loss solutions that are growing globally reduces the appetite for addictive foods. People are going to be concerned about a Coke or a Pepsi, even Domino's, even McDonald's. I think this is more of an opportunity to lean into Pepsi or Coke as an investor, because I'm going to give a couple of key things that I really would want to start with when I look at these two companies. Ozempic, you're looking at just over $15 billion of Ozempic sales next year. That's facts at consensus for Novo Nordisk. If I look at the price that those are sold at, forgetting about reimbursement for a second, it's a little under $1,000.

It obviously changes a little bit. You're talking about probably less than 20 million people that are taking Ozempic, and it's growing, but you're not even getting close to 100 million human beings taking this in the next few years. And when I look at Pepsi sales, Coke sales at like roughly $100 billion in total for next year, they have billions of people every year buying their stuff. And you're talking about a few million people throughout the globe taking this. And so before we even, you and I will get into the business and the consumer packaged goods business, but right now we're talking about really small beans in terms of the number of

people that would reduce the reliance on eating Pepsi and Coke snacks and beverages. Yes. I think the impact currently is probably very small and maybe doesn't exist at all to your point. But maybe what's really going on here is a re-rating of all of these companies, quite frankly, because of what the potential risk is. There's a survey, they surveyed 300 people who are currently taking these semaglutide weight loss drugs. And they found that the caloric intake was reduced by between 20 and 30%. They surveyed people and they found like across the board, the first thing that happens is that they're going to fast food restaurants less and they're dropping the amount of snacking that they're doing. And that hits a

company like Pepsi, like literally right on the top line, which ultimately filters through to the bottom line. And I think about one in five American adults is obese. So if you get these drugs approved as not just a diabetes treatment, but an obesity treatment, which is very likely in the fourth quarter of this year, that could potentially be a game changer for all of these companies. And I think maybe that's what we're really seeing is it's just people preparing for that. And so, by the way, I think like you and I are focusing on Pepsi because. Well, it's food and food and soda. Exactly. It's like everything addictive. And of course we can talk about how they bought

bear fruit and they have all this other stuff that they're buying that's healthier. That I'm talking about acquisitions that the company has made, but I mean, I'm sure you've noticed, um, Domino's pizza got hit way harder than Pepsi. And we can talk about Coke and Pepsi. We'll see, you know, whatever you want to talk about, but like Domino's, I think the issue with, with the whole space, fast food plus consumer packaged goods. I think the issue is probably worse for McDonald's, maybe McDonald's, but Domino's, Yum! Brands, McDonald's did get hit. QSR says Restaurant Brands International. I think the issue is probably a little bit worse for them. QSR is Burger King, right? Yeah, Burger King

and Hortons, D.R. Hortons. Tim Hortons, right. Donuts. Oh, exactly. Yeah. The home builder. Yeah. I think the issue is probably worse for those guys because, I mean, if I'm Domino's, the majority of what they sell is like pizza and fried chicken and like stuff that, I don't know, stuff that I like, but some people will reduce their buying of all that. But I think you just mentioned a re, okay, you just mentioned a valuation re-rating for fast food and CPG.

And any technician will tell you, you see a nosedive like this and you see underperformance like this, you have to respect it. It means something. But I do think, so I think that maybe there will be a valuation overhang for CPG, Domino's, McDonald's, Yum! Brands, a whole host of stocks that will remain. The question is, if you want to buy something as an investor, do you think you're getting a reasonable price

for a good business that can grow? I think with Pepsi, when I look at Pepsi specifically, and I think Coca-Cola is very similar, I think that as you and I covered a second ago, the issue is very small beans compared to the size of these companies and the number of people that are taking these things. And I think the second thing is there's a layer of defense because even if this becomes problematic for

Fritos or for some of the Gatorade that Pepsi sells that isn't zero sugar, that has 100 calories or whatever it is, Pepsi has a bunch of assets working to its advantage. First of all, the fact that they generate so much cash flow every year and even though they have to have some debt, they still have a pretty clean balance sheet. They have a lot of cash. They can always make acquisitions that they need to make. They've historically done that. They're just portfolio builders. Of course, a company can get too big sometimes. I don't think that's a risk in a simple business like CPG. They bought Bare Fruit. They're able to do all those things.

I think the other thing is when they want to tweak their products to make them less addictive, taking caffeine out of some serum mist tricks, doing zero sugar, building out the right products within water that aren't even soda or chips to start with. So you think they could pivot away from just sugar and chips and the stuff that they've, I mean, it's going to be hard to replace if there's a significant fall off in the stuff that they're good at, it's going to be hard to replace with more natural foods or waters. And I hope I'm not getting too bullish or naive, but I think that these management teams, Coke and Pepsi, they're pretty good. I think they're pretty good at navigating the right products and they're going to start the process early. And if you want to take a

bear case for the addictive sugar or salt stuff and put those sales into secular decline, you're just going to bring the healthier stuff into secular growth. And the total sales growth is going to be good. And they have longstanding distribution deals. And they sell in a million different channels throughout the world. And they'll figure out how to market products to get people that are buying unhealthy stuff today to buy the healthier stuff tomorrow. By the time this comes out, Pepsi will have already reported earnings. They'll report Tuesday morning. And one of the issues here is that they've done a very good job with price and making sure that throughout this inflationary period, they're keeping pace with how much they

can charge. But one of the issues is volume growth, and they have to balance both of those things into 2024. You mentioned analysts are looking for sales growth about 6% to 23.4 billion in Q3. Operating margins should rise by about a tenth of a percent to 16.4%. That should help earnings per share rise about 9%. So assuming they can do that, and you've gotten this huge sell-off in the stock going into it, it's kind of a good, even if the earnings end up slightly disappointing, and there is a little bit more of a sell-off, you kind of have taken a lot of the risk out of

the name going into this number. Yeah. So I think a few things. So first of all, I'll start with the valuation and then the earnings, but Pepsi is now at about 20 times forward price earnings. I don't know how technical our listeners like to get. But, you know, we're talking about roughly 20 times forward PE and the S&P is roughly 18 times. So that's a premium over the S&P that is slimmer than Pepsi usually trades. And Coke has traded the same way the last few weeks. And so, you know, if you're really if you're really bearish, then at some point you'll expect that there are going to be moments where these stocks traded at discount. But I think that they're trading at a pretty slim premium.

And if you are confident that you're talking about 3% to 4% to 5% top line growth over the years, you know, I think this year there's a lot of pricing and not a lot of volume because of inflation. I think Pepsi will be pretty good at taking down the pricing as the inflationary environment settles down a little bit over the next few years. I think that that will naturally support volumes. And I'm not even that worried about volumes because there's a lot of shipment data that you get from analysts, the Goldman analysts, showing that shipments for some of the geographic segments have been up a little bit year over year, even with prices up. So I think that there's still pretty good demand for these products specifically from Pepsi. So if Pepsi wants to relax a little bit on pricing next year, they're going to get some volume. I was a little bit surprised to see that they wouldn't get a lot of operating leverage out

of that and not a lot of margin expansion. But over time, when they have years where they can grow 5%, 6% top line, maybe a little bit more, they'll get a little bit of operating leverage. You got to see what happens to gross margins and cost inflation and then the macro environment. And then they're going to buy back stock because they're so free cash flow generative and they don't have that much debt relative to their profits. And I think like I think that you can bank on high single digits, give or take EPS growth sustained over the years. over the years. And if you want to pay 20 times for that, for a very high quality company, and historically, Pepsi can trade at a big premium to the S&P, I think that's a pretty good idea for somebody that wants a defensive stock. Yeah, I think that's an important point. Pepsi historically does trade at a premium to the market, and with good reason. It's one of the best operators.

It's an enduring franchise. The company has weathered all sorts of economic environments and, uh, they've always found a way to grow. And I think they've earned that premium, but that premium is now lower than what it's been historically. And you're not paying up as much for such a dominant franchise. And I think that's maybe the opportunity here. Here's the question I have for you, because I always think about if you're going to get significant downside on the broader market, on the S&P 500 for, I don't know. I mean, I don't know if that's a next few months thing or the next few years that, you know, you're not going to get a great market with the S&P at 18 times when usually when you

have a 10-year yield close to 5%, the S&P is not at 18 times. It can be 13, 14, 15 times. You know, even if Pepsi and Coke traded a sizable discount to where the S&P quote unquote should be, that could destroy your stock returns a little bit. But I think I'm OK with Pepsi at 20 times, not a huge premium to the current 18 times for the S&P. And again, with my confidence in earnings and cashflow, my dividend payment grows. My total return is definitely double digits in this scenario that we lay out. I'm okay buying Pepsi at 20 times, even when the market's at 18 times. But I want to know, like, is Josh, when you're looking at defensive stocks,

looking at the S&P at 18 times, is Josh worried about any stock that's expensive relative to the market? Yeah, well, so I mean, I think you pointed out, it's a 9% valuation premium to the S&P right now. But then you think about its typical premium, it looks more like 40%. So this is not a stock that you should be waiting for to get at a big discount to the S&P. If you get it even close to where the overall market's valuation is, A, there's probably a reason. We know what the reason is. The market is killing these stocks since the spring because recession has looked unlikely increasingly and nobody wants defense. Okay. I buy that story. The question becomes like if the economy slips next year, does the consumer radically deviate from what they've historically done, which is continue to go to the supermarket

and buy Pepsi and Frito-Lay products. Probably not. So I feel like I, I feel like I agree with you and the stock probably holds up. So it's definitely on my radar. I just want to say, thank you for dropping in, letting us know what's going on with it. Where could people read more of your stuff? Jacob Sonnenschein on Barron's. You're, you're, you're on social. What are you doing? uh, on Barron's you, you're, uh, you're on social. What are you doing? Yeah, absolutely. So, um, last name is S O N E N S H I N E. Those are all ends as in New York. I say that cause I don't know, I guess I'm from, I got a lot of ends in your name. True. Exactly. Um, so that's the, the byline I'm on LinkedIn a lot. I'm very, um, active on LinkedIn.

Okay. I know that I should do X slash slash twitter more people tell me that i should no you shouldn't do it as little as possible okay because it's i don't like i don't like the zoo vibe on the platform i like yeah dude preserve the sanctity of your of your day stay out of there all right so we're gonna have everyone follow you on linkedin and of course subscribe to barons to read jake how how often? Two, three times a week? I'm probably doing a piece on average, five pieces a week. Wow. Okay. Thank you so much, Jacob. We really appreciate it. Thank you, Josh. Yeah. Thanks for having me. It was fun. Whether you're just getting started as an investor or you're managing a multi-million dollar portfolio, Ritholtz Wealth Management has the solution for you.

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