The Compound and Friends - Hottest Stocks of the Year, Nvidia Tops Out, Predicting Recessions With Nick and Jessica

Episode Date: June 25, 2024

On this TCAF Tuesday, Josh Brown is joined by Nick Colas and Jessica Rabe, co-founders of DataTrek Research, to discuss the biggest misconceptions in the market, Nvidia and tech overcrowding, energy and oil stocks, the Sahm Rule Recession Indicator, and more! Then, at 37:22, hear an all-new episode of What Are Your Thoughts with Josh and Michael Batnick! Thanks to Public for sponsoring this episode! Visit https://public.com/ to learn more!  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: LinkedIn: https://www.linkedin.com/company/the-compound-media/ Public Disclosure: A High-Yield Cash Account is a secondary brokerage account with Public Investing, member FINRA/SIPC. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. Learn more at public.com/disclosures/high-yield-account 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. I am your host, Downtown Josh Brown. Tonight's show is a lot of fun. I want to shout out our sponsor, Public, and the Public training app, public.com. They have an industry-leading 5.1% APY on cash. They're using UST bills in order to generate that yield. There are no fees. There's no subscription required. You can open an account and move money from your bank literally in like a minute, maybe even less. One of the highest rates of all the major providers on limited transfers and withdrawals,

this is a paid endorsement for public investing. 5.1% APY is as of March 26, 2024, subject to change. Full disclosures can be found in the podcast description. All right. We talked to Nick and Jessica and they had just gotten back from Switzerland and spent a week talking with institutional clients, very smart people, came back with a lot of interesting things to discuss. And we look at this thing called, I think it's the SOM indicator, the SOM rule. Anyway, it's a way that you can determine the start of a recession utilizing just public unemployment data. But basically we're looking at the momentum

of unemployment to get a better sense of where the headline number's going. That's a really fun discussion. Following that, another all new, what are your thoughts with Michael? We talked about Nvidia topping out. Looks like it's a top. I suppose we'll all find out together.

But we just talk about bearish engulfing candles in general, what they mean. We get into some of the money rotating out of tech into other areas of the market and so much more. I don't want to spoil it for you. So without any further ado, I'm going to send you over. John Duncan, if you please. 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 Gridhole's Wealth Management may maintain positions in the securities discussed in this podcast. Hey guys, it's Josh. We're checking in with Nick and Jessica, co-founders of Datatreq Research. They are the authors of Datatreq's morning briefing newsletter, which goes out to over a thousand institutional

and retail clients. Nick and Jessica also have their own YouTube channel, which we're linking to in the description below. Hey guys, good to see you. Good to see you. Hi Josh. Thanks for having us. So I want to hear about Switzerland.

I've never been there. Where exactly did you go and how long were you there for? I went to Geneva for the week, saw a bunch of clients, a very constructive set of meetings. It's a beautiful city, as I'm sure everybody knows, and very clean, very orderly, very Swiss. It's a real pleasure to be there. My understanding is Geneva is like the French part of Switzerland and Zurich is more German or is it not really that way?

It is that way. No, it's exactly right. It is. Geneva is like 30 minutes an way? It is that way. That's exactly right. It is. Geneva is like 30 minutes an hour driving from the French border. There's actually a border control between the two because Switzerland is still nominally neutral. But it's very close to France and they speak French. Okay.

All right. Very cool. I'm going to have to add that to my list. Jessica, I loved following your pictures. What was the coolest thing that you did while you were there? Honestly, we went over to France for a little bit. There's a drop zone there within an hour away so I did some skydiving. So I love that. Okay. You got to practice your sport while you were there.

Yeah, but I guess in Geneva, we went to the Patek Philippe Museum. So if you do go to Geneva, definitely go there. It's awesome. Okay. And I assume there was some chocolates involved as well. Oh yeah. Yeah, sounds like it. Okay. All right. I want to talk about, so we're like halfway through 2024.

And I think one of the biggest misconceptions that I hear from people about 2024 is that something is somehow off or there's something wrong with the way markets have behaved so far. And I just don't see it. What I see when I look at the big picture now is earnings growth, CapEx growth, healthy profit margins, revenue holding up.

I won't say revenue growth to the extent that we've had in prior quarters, but it's still up there. Labor market hanging in there. Consumer spending is solid. Wage growth is normalizing. So it's not blistering, but it's okay. None of this seems inconsistent with the rising stock market. Companies have gotten the message on rising prices. They're pivoting back toward value options.

But we shouldn't interpret that as companies are girding for recession. So I keep hearing that like something is strange or off. It felt textbook to me. And then you guys looked at the picture and concluded this is kind of a normal year in the market. So Nick, do you want to kind of set the stage for us? Sure. Yes, you're right. It is a freakishly textbook year so far,

so much so that I think we would look at it and say there's almost something wrong because it's running so true to form that it's almost strange in that respect. But- Is it running like a Swiss watch? It's running like a top Swiss watch. So just a couple of sound bites,

because we've talked about these topics on prior versions of this video. And for example, you know, we worried back in March that March was the peak, and Jessica had a discussion with some data that showed 80 plus percent of the time the market peaks in Q4. And sure enough, as kind of wrenching as the period after the March quarter end was, we're at new highs now, so March wasn't the peak. Large caps wrapped, performing small caps.

S&Ps up 15. Russell is up 1. That's the same as the 1, 3, 5, and 10-year track record for the relative performance of those two types of US stocks. The RSP... Let's pause there. People have this misconception that they're supposed to match each other. And it's just it's not that way, is what you're saying. It is not that way. It is not that way. Small caps have their place. They do well off the bottom. They do well when high yield spreads are coming in.

They don't do as well as large caps during the middle part of a cycle. And we've talked about mid cycle markets on past videos and this is still a mid cycle market. So large caps are performing. Same goes for the equal weight S&P. We talked about that on the last video. That's still underperforming only up 5% for the year.

Again, same as the 1, 3, 5, and 10-year track record versus the market cap weighted S&P. You've got US doing better than the rest of the world. The rest of the world is up 4% of the S&P's 15. Same as the last 1, 3, 5, and 10 years. Same as same story. The VIX has been running well below the 20 average level. Again, that happens during mid-cycle markets markets and it's still doing that now. It's not complacency.

People think a low VIX is complacency. It is not. It is how stocks trade during the middle of an economic cycle, during a part of a business cycle and that's where we are today. So you're saying this is not an anomalous VIX. VIX sitting on 12 doesn't mean something's wrong or something's off. No, it tells you that the market believes, and I think rightly, that we're in the middle of an economic cycle.

There's no recession imminent. It's a big concern. We heard that from a lot of Swiss investors, honestly, that a US recession is imminent because we've had five years of expansion or four and a half years. But it isn't. The market sees that. The Fed's getting ready to cut rates. So you have a low VIX. Gold's been working this year. Gold's up 13%.

Better than rest of world stocks. Better than small caps. Not an anomaly. That's happening because central banks around the world are buying gold because they see it as a dollar-based asset that can't be confiscated. So there's a good fundamental case for gold. And we did a whole video of that in our channel. And then lastly, maybe the most interesting thing and maybe the freakish thing is that valuations are higher now than in 2019, right? S&P's trading at 20 times earnings versus 18. 10-year yields, 4% now was 2% before.

And that tells you that maybe interest rates don't have the effect on valuations that we think ultimately stocks trade on innovation and growth, and we're getting that getting that so the PEs are higher regardless of higher rates. If you would have given me this list of things from the VIX to gold etc maybe the one that I would have had the most trouble believing if you would have told me in January we're going to see what rates have done on let's say the 10 year which is like this kind of universal, it's the sun in the solar system for how we discount all the other assets. So you're going to tell me the 10-year is going to go from 2% to 4% and the PE multiple

on large cap stocks is going to go higher. It would have been very tough for me to process, but that is one of the big stories of 2024, multiple expansion for the S&P. I wonder though, how sustainable is that? We're not going to get the next 20% out of the market from more multiple expansion, are we? The next 20% no, but the next say 5 to 10, entirely possible because ultimately, the role of rates, I mean, if you want to get really technical, the way you do valuation is you look at the discount rate, which is the treasuries plus the equity risk premium, but then you have to factor in a growth rate. People forget that part of the equation.

And the growth rate can be just as important. And a growth rate that goes from one or 2% growth to 4% to 5% growth, structural in an index like the S&P has a profound effect on valuations and it swamps 50 or 100 basis points on the 10 year. So when people ask you about the second half of 2024, what are you giving them in the way of guidance? We're telling them that obviously we've had huge gains for the first half of the year. We see further gains because the markets don't top out until October, November, December. So that's the way markets work.

At the same time, we've had this huge run in tech. It's entirely logical to think we get some kind of pullback in tech. And we're seeing some of that now, especially with Nvidia, which we'll talk about. But you're going to see some rotation back in some of the laggard sectors. The other sectors that work mid-cycle are financials and industrials and sometimes healthcare. But financials and industrials tend to be the plays during the mid-cycle on top of tech. Still large cap over small cap, still market cap over equal weight.

So some mirror of the first half, but perhaps with some catch up trades and some of the less loved groups as tech gets cycled out of the call the next two or three months. If somebody believes in that story, they have to do something other than SPY because you could end up with a scenario

where tech bleeds market cap to industrials or financials or healthcare in line with where we are in the cycle. The index doesn't gain much ground, but a lot of people make money in the beneficiaries of that rotation. That's entirely possible. And again, that was a big conversation with the Swiss clients that we met because all of them are looking for that either value rotation or sector rotation.

They're looking at it from a number of different perspectives, and not just in the US, but around the world as well, because the dynamic that we're talking about is kind of universal. But at the same time, we're always reluctant to say, okay, you've got to be long financials for the second half, because even though we like the group, at some point, tech after its rest has one morality in it, and that's what takes us to new highs in the fourth quarter. So it's really tricky to judge that rotation. We're seeing it now. We're seeing it this week. We'll probably see it the rest of the week as we wrap up Q2, but it's very hard to say, okay, that's the trade for the rest of the year. So you gotta be really nimble in these calls.

We're gonna have the first of two presidential debates this week. Thursday night on CNN. What do you think is the, not the message for the market, but how do you think markets will process the fact that we've got this US election coming up? And basically, it looks like a coin to us right now, based depending on whose polls you look at. What's the effect on markets as a result of having this hanging over our heads?

This was probably the number one issue that our clients in Geneva wanted to talk about because obviously we're coming from the US. Can't believe it. Yeah, this was a good third of every discussion, and usually the top third, because they viewed in the context of what's happened in France, what's happened in the UK, what happened in Mexico, what happened in India. They've seen political turmoil. These are very global investors, so they're very sensitive to this. The general consensus, which I think we share, is that it's not going to have the same effect

on capital markets that it did perhaps in the UK or France, particularly with French bonds and French stocks, because the underpinnings of the American economy are just stronger. There's a real respect for what America has created in terms of entrepreneurial culture, in terms of a business culture, that almost overwhelms the effect of politics on markets and on economic behavior over the medium term. So if you see some kind of disruption, who knows?

It's gonna be very unpredictable next couple of months in US politics. But you've seen the kind of disruption, that's a buying point, because that uncertainty is temporary and what's permanent is American entrepreneurship, growth, technology, the kind of things that have lifted the market all year. I want to throw up an oil chart here. This is actually energy stocks. John on screen. Energy has been underperforming by 6.8% year to date. Nick, you and I have talked about this idea that you never want to get rid of your energy stocks because those are your only true hedge against an oil price shock. And obviously, the history backs that

up. But there are periods of time where that energy equity exposure does feel like it's very expensive. But I thought this was interesting in that if we get some sort of a reversion here, that could be one of the better tactical opportunities so far in 2024 to do something that looks different than the market. Chadov, what do you think about that? Yeah, it's a very fair point. And you're right. I mean, there's not a lot of ways to ensure for an oil shock recession.

Energy stocks are basically the only way. It worked in 1990, for example, and it works really fast when it works. Because when everything else is going down 10%, energy is up 10%. And it's the only buttress. And if you're undue exposed to energy, you're going to get hurt more than most. The one thing I'd say is that you now see energy prices heading back up, oil prices heading back up. There's increasing disturbances in the Russian oil production system from Ukrainian attacks.

There's also the lingering threat of a Middle East conflict that kind of spills over into something else. So as unpleasant as it is to own an underperforming group, you can't be underweight energy for the reasons we discussed. The other thing I'd say, energy is the second best performing stock since the end of 2019. When you reinvest dividends, it's only beaten by tech. And if there's one sector where you just hit reinvest on the option on your brokerage account or as an RIA or an advisor, it's energy. You need to reinvest those coupons because it pays a pretty high dividend, roughly 3% right now, so more than double the S&P.

And that reinvestment really helps returns dramatically. So energy is one of those groups where you have to reinvest dividends. It's probably the only one I'd say you have to, but that's the one where you have to because it means that. Even more, yeah, even more important when they're in a bear market. Absolutely.

That's when you really want to make sure that you're doing that. Yes, because I mean, energy just price base is up like 20, I think 22% since 2019. When you reinvest mean, energy just price base is up like 20, I think 22% since the end of 2019. When you reinvest dividends, it's up 80%. Second best performing group. I just want to hear from you guys on treasury yields in the second half. So your view is that I'm just going to quote you rising real meaning X yields, explain 90% of the increase in 10-year yields since the end of 2020.

They are up because the Fed has stopped buying bonds and because economic growth has been decent. Not much chance either will change dramatically in the second half of 2024. For the people that don't focus so much on fixed income, you want to give people a little bit of an idea of what you mean when you talk about the explanatory power of real yields. Yes. So when you look at the yield on a screen and you see 4.2% for the 10 year, that's decomposed into two factors.

One is expected future inflation over the next 10 years. And that runs at a very constant 2.1, 2.2%. And very constant over the last 20 odd years, because that's the next 10 years. And that runs at a very constant 2, 2.1, 2.2 percent, very constant over the last 20 odd years because that's the Fed's target. The bottom market takes that as kind of gospel, 2.2. The balance of that when you subtract is what we call real yields. How much is getting, how much are you getting paid above inflation expectations? That's currently running exactly 2 percent. We haven't had 2% prior to the last year or two since the 2004, 25, 2006 range, so pre-financial prices.

Real yields have topped out at one in the 2010s. So now we're back to two because the Fed is not buying bonds because the Fed has decided that real rates have to be high because they're not buying bonds and the market's saying 2% is probably the long-term real rate of interest in the U.S. economy. In a recession, real rates will decline. So you'll get a better return on your Treasury holdings. But in the interim, you're kind of stuck with coupon-like returns. So you'll make 4% over a year on Treasuries because we're probably not going a lot higher in real yield, most probably not going a lot higher on inflation expectations.

But if you're long a lot of treasuries, it's because you believe that the recession is coming and real rates will decline and you'll get paid because yields will go down and bond prices will go up. Prices will go up. Okay, but you don't see much change in treasury markets between now and the end of this year. No, because again, as you said, most of this move, most of this terrific, horrible bear market in

long term treasuries, the last two and a half years have been because of real yields. It's not because inflation has moved around. It's because real yields have gone from negative one to positive two. And that's what's created the bear market. That's not going to, it's not going to end, meaning you're not going to start to get a big rally until there's a recession. It's not going to end, meaning you're not going to start to get a big rally until there's a recession. So if the number one topic everyone in Switzerland wanted to hear from you guys on was politics, I'm guessing number two was Nvidia, tech overcrowding, et cetera. Jess, what's happening here with Nvidia versus the S&P 500?

Yeah, so one thing, now that Nvidia is such a large part of the S&P 500, one thing we wondered about was Nvidia's price-return relationship to the broader market. So we sent you guys over a chart. Please just throw that up. Here it is. Perfect. So, awesome. So this shows the trailing 30-day price return correlation between Nvidia and the S&P since

the start of 2018. And what it shows is that Nvidia's average correlation to the index is 0.65, but its most recent 30-day correlation is only 0.14. That's basically zero. So there's now no statistical relationship. Nvidia has totally broken away from the US stock market. I said to myself last week, Nvidia has basically become its own asset class. It's $3.5 trillion.

It does not obey any of the rules, seemingly, of the rest of the market. It could be green when it wants to be green. The market could be red or green, and it's almost irrelevant. It almost seemed like it had its own gravitational pull. That strikes me, of course, as being unsustainable, but that was what it looked like last week. So you're pointing out of the correlation basically falling to zero is kind of what I saw with my own eyes without having run the numbers. Yeah. And exactly to your point, we wondered how did Nvidia end up performing after these instances because it's very unusual for it to have this LOVA correlation. So if you throw up the chart

one more time, so it's super unusual. It's only happened three other times since 2018 that Nvidia's 30-day price return correlation to the S&P has been this low So and we looked at the weeks and months after these instances and found that the picture is really mixed So for example after it happened in September 2018 After it happened in September 2018, Nvidia did go on to decline, but that's because it kind of got caught up with the bear market in Q4 2018 when, you probably remember when Chair Powell had the Fed policy mistake of overestimating the neutral rate of interest. The other time was in December 2020. Nvidia was basically flat in the five days, 30 days and 60 days after. And then the last instance that happened was in July of 2021,

where it lagged the S&P by a few points over the next five days, but then outperformed by a few points over the next 30 and 60 days. So it's definitely a small sample size and the results were mixed here. But our overall takeaway is that history says as long as the broader US equity market holds in okay, Nvidia is not necessarily going to fall apart even though its price return correlation to the S&P has been so low.

Now, of course it could fall apart for many other reasons, but this is not one of them. One thing about Nvidia that makes it really difficult to go by history is that it's a very different company today than it was in those prior instances. In 2018, if you were to ask the analysts covering Nvidia what the big variables were for its outlook, they would all be related to the video game console business.

Consoles were either in an up cycle or a down cycle. Then if you were to ask people in 2021 what they're trading Nvidia on, you would hear people say Bitcoin mining. Now arguably the company is selling into much bigger, much better markets, much better customers, much more, maybe not customer diversity, but maybe wealthier, deeper-pocketed customers. And so I think that's one of the things that makes it so tough to look at historically. But like we have nothing else to, you know, that's all we have is the history. So it's a pretty tough stock these days.

I wanted to ask you guys about something that you put out a couple of weeks ago, the SOM rule recession indicator. I won't quote this whole thing, but just what is the gist of the SOM rule, guys, and why did you write about it? Okay. So the SOM rule was named after Claudia S Psalm, who at the time when she came up with this rule was a Fed economist. And she was looking for a way to understand when the economy was tipping over into a recession. And it's sort of the holy grail of economists is how to predict a recession.

And she used unemployment rates, which are kind of a backward looking indicator and, you know, people think of it as such. But she used it in a very clever way. They say unemployment is a lagging indicator. Exactly. Okay. So but she used it in a very clever way. They say unemployment is a lagging indicator. Exactly. Okay. So she looked at it in a very clever way. She looked at momentum in unemployment. So she basically said, and she back tested the idea back to the 1940s,

and it seems to work pretty well and not give a lot of false positives. Where basically, if your three month trailing unemployment rate is 0.5 points higher than the 12 month lows, prior 12 month lows, then you're entering a recession. And it's clever because it's easy to use, it's very intuitive, and it respects the idea that economies like stocks have momentum, either upside or downside. And when momentum in employment and hiring begins to slow, it doesn't just kind of stop, it just goes higher and unemployment rises. And so the SOM rule has become one of the sort of more interesting ways to think about

how the Fed is thinking about unemployment because we've heard Powell for the last two press conferences talk a lot about how the labor market could change the FOMC's perspective on rate cuts. If the labor market slows down pretty quickly, he'd be more inclined to cut rates. And the SOM rule is one way to back into how much unemployment has to go up for the Fed to start taking it seriously.

So let me jump in here and make sure that everyone understands what you're saying. So your example, if unemployment was 5% at some point over the last year, and that's the lowest it ever gets, and then at some point it hits 5.5%, which is that 50 basis point rise in the level of unemployment. If it stays at 5.5% for three months in a row. That means the recession, excuse me, the momentum is now to the upside,

which for unemployment is bad. And therefore a recession has likely started. Yep, that's exactly right. That's the SOM rule. That's the SOM rule. Okay, what was the unemployment low for this cycle? Did we hit 3.6? Yes.

We did, when was that? I think the trailing 12 month is 3.8. Okay. So then that was, I want to see. That's the average. Yeah, that's the average. That's the one that's the starting point for the Psalm rule, which is that it's called 3.8 level to say, okay, now we've got to be 0.5 points above.

So we've got to get to a running average of 4.2 in order to trigger the Psalm rule and say, yes, we're going into a recession. What's the expectation for the first week of July? Oh, God. June unemployment? I don't know either. I call it 4041. I think it's something like that.

So we're not there yet. But I think we have a graph of the SOM rule going back. And here is the results. So as you can see, we've gone from negative, which is no recession, to now climbing kind of closer, I think it's 0.37 in the last two months. So we're kind of inching our way up to that 0.5 reading. And that's, I think, in one part why Powell is talking about unemployment, because by this sort of very simple metric, but effective metric, we are kind of edging our way into

a flashing yellow light. Guys, is this going to be one of those things though where once a lot of people are paying attention to it because of the fact that it's being observed, it no longer works or everyone starts front running it and thereby weakening its effect or is this the kind of thing where even if everyone's watching it, it still could be meaningful? What are your thoughts on that? I think the SOM rule is kind of understood in economists nerd circles, but not in probably people who write about the Fed.

Probably not in corporate America. So until you see it on the cover of the Wall Street Journal, you're probably not going to see a lot of a feedback loop between this rule and corporate America saying, oh my God, we've triggered the SOM rule. We have to start cutting people because of recession coming. Okay. So if you're a believer in the Psalm rule and that kind of like momentum on the unemployment side, you're not, we're not where we would be to say, Hey, we really need to start paying attention closely here.

Yes. Another great thing about the Psalm rule, if you want to put the chart back up again, is we were all so worried about a recession in 2022, right? Look at the middle of that. That's it. Look at it. You're like, okay, fine. We got to, what is that, 0.5. So nothing, nothing signaling.

And that was absolutely, everybody was convinced there's a recession coming in 2022 or 23 and the SOM rule said, forget it, it's not happening. And it didn't. So score one for the team. I love that because I hate the fact that people completely discount the unemployment reports. They say, ah, that's backward looking. I don't know.

I've always seen it as concurrent. I've always seen it as a fairly up-to-date indicator. Not that I expected to predict anything, but like I feel like it's a better indicator than most others. If we think we're in a consumer driven economy, don't we want to know what the labor market is doing? Yeah, we absolutely do. And look, I mean, there's a lot of controversy about the unemployment report, right?

We got the two surveys and people argue about which one's more accurate than not. We just look at the totality of the data and see if it fits with the general economic picture and it does seem to fit, you know, and it does seem like the economy is slowing unemployment rising. So that all fits together. Okay. And we actually have a link, which we'll include in the description that people can click on and see this thing as it moves each month.

that people can click on and see this thing as it moves each month. There's a, there's a, there's a, a, a Fred chart that people can go to. It's, you know, hosted by the St. Louis Fed. So we'll make sure that people have that access to that link. Jessica, I wanted to ask you about, wanted to ask you about just what's happening between growth and large, small.

These cross currents, I think we gloss over them. We talk about the fact that large is outperforming small or growth is outperforming value or S&P versus Russell. But I think there's a lot of potential opportunity embedded in these divergences. But talk a little bit about this next chart because I found this to be really interesting. Sure, yeah. So there's been a major paradigm shift since 2020 in the types of public tech companies or just other growth companies that investors favor.

So this chart shows the two-year trailing relative price returns between S&P 500 growth and Russell 2000 growth back to 2003. And we used a two-year holding period just to help smooth out shorter-term volatility, which has obviously been particularly acute since 2020. So as you can see from going from left to right, for most of the chart, like three quarters of the chart, pre-pandemic from 2003 to 2019, small cap growth outperformed large cap growth by an average of four percentage points over any given two years. And its two year returns outperformed 57% of the time over this period. However, since 2020, it's two-year returns outperformed 57% of the time over this period. However, since 2020, it's been large cap growth that's beaten small cap growth, actually by

even more, by an average of 15 percentage points over any given two years. And what's even more remarkable is that it's outperformed by kind of an incredible 93% of the time over that timeframe. The only time that since 2020 that small cap growths outperformed over the prior two years was in early 2021 at the height of the spec tech bubble. So over the last two years, as you can see in the chart all the way to the right, obviously large cap growth has outperformed by a lot. It's outperformed by a lot.

It's outperformed small cap growth by as much as 28 percentage points recently, which from a statistical standpoint is almost two standard deviations above the long run average. It's only really beaten small caps by more than now two other other times. So the first was in September of 2020 as US equities rebounded from the short pandemic related bear market earlier that year. And the second was in December, 2021 after small cap growth briefly outperformed in early 2021, but then lagged as a spec tech bubble popped. but then lagged as the spec tech bubble popped. But even with both periods of these outsize out performances

by large cap growth, small cap growth only went on to outperform after the first instance and really not for long. So I know it's a lot of data to throw at you, but our overall takeaway from this chart is that large cap gross outperformance over small cap growth may be in statistically significant territory, but history shows that doesn't mean that this relationship is necessarily due for an imminent reversion to the mean. Investors clearly now favor large cap growth over small cap growth and we really don't see that changing until a new catalyst develops. We think investors will keep paying up

for large cap gross superior earnings potential as well as more recently, their better ability to capitalize on on gen AI. I think it's really hard to come up with a reason for why this should switch and stay switched. I could picture a mean reversion rally in small growth. I just can't picture like a lengthy market regime where we continue to favor small growth. And one of the reasons for that structurally is that the best small cap growth stories will graduate and they'll go from junior high up to high school. They'll become large caps.

They'll be unavailable to the small cap growth universe. So that makes it really, really tough. The second problem is I think structurally the IPO market has made it so that the best companies are doing their early stage fast-paced growth away from the public market. So if they're not publicly traded, when they're doing that blistering pace of growth, bringing on their first million users, whatever the product is, it's really hard to figure out where will the Russell 2000 get its growth stories from. They're coming public as mid-caps, growing up into large caps, and they're almost skipping

this part of the cycle. And then the third thing I came up with is some of this is probably industry related. I don't know what dominates small cap growth, but I'm guessing it's microchips and biotech. You think that's part of the reason here? Yeah, I mean, that's certainly something we discussed with our Swiss clients. Just there's kind of a structural headwind to small caps for the very reasons you just outlined that they graduate into the larger indices. I will say that the one risk though to S&P 500 growth is it's very concentrated.

Actually Big Tech plus Broadcom makes up almost 60% of large cap growth. So any hit to one of these names and then investors may start looking at small cap growth, that's not our base case. We don't see that happening anytime soon. But just bear in mind, large cap growth is super concentrated, even more so, way more than the S&P 500. That's probably for some investors who are worried about that risk, the S&P 500 is probably a better alternative in that it still has plenty of exposure to growth, but it's not

so concentrated. Yeah. If you buy the large cap growth index ETF right now, you are taking the concentration of the S&P and maybe doubling it. Something on the order, right? Exactly. So, all right. I guess I would just ask you as a follow-up, if there is that kind of mean reversion, it

probably doesn't become a new regime. It's probably more of a tactical opportunity. Is that the way that you would see it? Like you wouldn't, if you saw that start to happen, you wouldn't extrapolate that further into, hey, this is going to be a great era for small cap growth all of a sudden. Well, I think what's interesting is

if you think back to the 2010s, I think many people would view that as a time where large cap growth was leadership, but it's actually small cap growth that did better. Now we see large cap growth continuing to do better because there's been a new catalyst in Gen AI that favors large cap growth. So we think that lends itself to it catching.

The fact that it is catching up now, playing some catch up and some reversion to the mean after small cap growth outperformed in the 2010s, it does make sense, again, because of the new catalyst of GEN.ai. All right. Love it. Thank you so much. And guys, I wanna let everyone know where they can follow you for more. First of all, I want everyone to check out

Nick and Jessica's video channel on YouTube. There's a link in the show notes. If you're listening, it's youtube.com slash at Nick Colas and Jessica Rabe. And of course, you could subscribe to datatrechresearch.com for all of the research Nick and Jessica Rabe. And of course, you could subscribe to datatrechresearch.com for all of the research Nick and Jessica are putting out. And you guys are going five days a week? Always five days a week. Five days a week. Always. You will never lack for insight if you are subscribed to Datatrech Research. Guys, thank you so much. So glad you had a great

trip in Europe. Appreciate you coming on the show again and we'll talk to you soon. Thank you. Thank you. Alright, alright. What are your thoughts here live from the compound? My name is Downtown Josh Brown here with my co-host as always, Michael Batnik. Michael, say hello to the folks. Hello, hello. Alright, guys, if it's Tuesday night, that means it's time for an all new edition of What Are Your Thoughts? For those of you who are new to the show, welcome. We're going to talk about some of the most important topics happening right now in the markets, the economy, the business world, technology, etc. And we're going to have a little bit of fun along the way, hopefully. But before we get started, we do have a sponsor tonight. Michael, tell us about tonight's sponsor.

I saw a stat, the sponsor is public. I saw a stat recently about how much money is still sitting in checking accounts, earning half a percent. How much? Like more than you would have expected? Like literally trillions. I don't remember if it's like 12 or 20. That's a bit much, but it's a stupid number. What are you doing? What are you doing? It's so easily. I'm part of it. I have some money sitting at like a giant bank that I just... Yeah, so do I to pay my bills. Pay my bills. Yeah. Yeah, of course. I got to pay my bills. No, but probably more than I need. I mean... mean, that's on you. I use the public app. I have sent a bunch of money there. I should have, in hindsight, for the last six months, I've been, should have been sending more than I have been.

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Okay. So check out the public app, public.com. This is a paid endorsement for public investing. 5.1% APY is as of March 26th, 2024, subject to change. Full disclosures can be found in the podcast description. All right, so this is the biggest question, the price action in Nvidia. And I wanna specify price action

because nothing really fundamentally has changed. So just pure price action in Nvidia, and I want to specify price action because nothing really fundamentally has changed. So just pure price action in Nvidia stock from last week to this week, did we just top out like at least for the time being or are we right back into the uptrend with today's bounce? I think that's like probably the biggest question most market observers are trying to figure out right now. What do you think? Kong tops is notoriously tricky. Not this one.

Yeah. What do you mean? This one looked and felt like a top as it was topping. Not just in hindsight. You could probably find the many examples of this one, but what I would say is you have to give the bulls a benefit of the doubt. As crazy as this has become, it's innocent until proven guilty. There will be debt buyers. Do we take out the recent highs? I don't know, but I would say is the scale of Nvidia, it's just incredible.

In three days, it lost $430 billion in market cap. That's the size of MasterCard. Only 14 companies in the S&P 500 have a market cap more than that. So to recap, this is a stock that basically became the largest market cap in the world. Only the 13th company to do so, ever. It surpassed Microsoft by over $100 billion.

And then within three days, it was down 13% from the high. If you don't call that a top, what is a top? Because that, I mean, man, that is going out with a bang. Well, NVIDIA had a similar three-day decline just a couple of months ago. The stock lost 20% and then it gained 90% in a couple of weeks. Was that February? I'm looking right now. I think it was, no, I think it was April 16th to the 19th. I'm going to check as we talk, but listen, I don't know.

Is this the top? I would say plus. Listen. I would say plus, you got to give a plus odds. Like when you say a top or the top or two very different things. Yeah. I don't, I don't want to say it's the top for the year. I want to say that it's the end of that unbelievable miraculous run. And I think we'll probably see it in bear market territory at some point. All right. So if you recall, if you recall way back in the month of April,

this thing, as I just mentioned, I was right. It fell 13% in three days. It was in a 20% drawdown from its high. This is two months ago. And then it stopped going down. And it ran from 76 at the April 19th. Pre-split. Listen. Yeah. Right. It ran from 76 to $ April 19th. Listen, it ran from 76 to a buck 40.

But it was never at those prices. It was 760 and it ran to a thousand 40. Well, it's important for people to remember. So that was pre-split. This is though a textbook bearish engulfing candle. So this is a chart formation that actually Jeff DeGraaff called this at the end of last week. So he nailed it. Absolutely nailed it. He says short-term yes this is the top and I want to just give you a definition, textbook definition of a bearish engulfing and then we'll get into Jeff's research. A bearish engulfing candle is a technical analysis pattern that signals a potential reversal in an upward trend.

It consists of two candles. The first is a smaller green or white candle, indicating a continuation of the current uptrend. This is followed by a larger red or black, like fully colored in. I think I could do a better job. I think I could do a better job than Vesipedia. Completely engulfs the body of the first candle.

So it's higher and it's lower and it's filled in because the price went down. This pattern suggests that selling pressure has overtaken buying pressure, indicating a shift toward a bearish sentiment in the market. So let's put up Jeff's chart Mike. This is what it looks like. You see that last dark black candlestick? Oh I see it. So the important thing is, it doesn't matter if it's white, red, or black because people use green. I use green and red. Correct. Just it's full. It's not if it's white, red, or black, because people use green, I use green and red.

Correct. It's full. It's not hollow. What matters is the open is higher than the previous day high. And the close is lower than the previous day low. It engulfs the entirety of the prior day. The entire thing. So Jeff is pointing out there was an outside reversal in March. That was the peak for almost three months.

And you got a 20% correction from that high, which I think is what you were describing. That's exactly right. Okay. Let me just read what Jeff had to say. Leave this chart up. Nvidia is clearly the king of the AI trade, but parabolic charts don't last and eventually succumb to much needed consolidation or corrections. Given the sentiment extremes and the outside reversal, we expect that there will be further

profit taking in Nvidia. A similar 20% correction would put Nvidia just back to where it traded at the beginning of the month at around $110. So chart off, not catastrophic, like not the end of the world. If a stock just went from 70 to 130, you can live with it going to 110. Like let's all take a beat. But I think that's likely. I think another 20% correction is likely.

You tell me a stock that's up 190% on the year, and it's not like it did nothing last year. Let me show you some examples of previous bearish engulfing chart time. Before we do that, can I say one thing? Before we get to the previous ones? I think that, I don't know if I think this will, I'm going to say give me like plus 400 on this call. Long shot.

Yeah, it's a long shot. It could actually maybe not that high. It could fill the gap all the way down at $96 and remove the entire recent blow off top. That is, and guess what? It still wouldn't touch the 200 day moving average. That's how overbought this thing is. So that would be a significant decline, but it wouldn't be anything in the context of what this thing has done. That would be a 28 decline, but it wouldn't be anything in the context of what this thing has done. That would be a 28% decline and it wouldn't even register on the long-term chart. Yeah. Pre-split, it would still be $960.

And it wouldn't necessarily mark the death of this thing if it fell 30%. You know point guys are always talking about pre-split because I'm thinking about like the muscle memory that people have from watching the stock. And you know, if it never split and it fell from $1.30 to $9.50, $10.30 to $9.50, you probably wouldn't feel like it went down as much, even though percentage wise, it's the same thing. So that's the negative of a stock split. Here's the S&P 500, January of 2018. You've got this. Yeah, this is not a great representation. Let's do the next one. These aren't, these aren't like big, these aren't big.

Throw it out. It doesn't matter. It's a, these are, these are, these are chart patterns that people pay attention to you don't have to yourself. Um, but, but I respect this. I respect this. Like on, on that we were actually recording it was, it was Thursday, right? It was Thursday.

This thing gapped up and the open was basically the high of the day and it was nothing but selling pressure for the rest of the day. So it opened up 3%, closed down 6%. That's a massive swing. And after a gigantic run, you have to respect the selling pressure. Doesn't mean that it's the top, but certainly it was a top. Yeah. I don't think there's meaning in every tick, but I think when you get an open that's a

gap higher, it's just like the maximum amount of demand hitting the stock. And then if within the same day, or if you're looking at this weekly, within the same week, you go out at a lower low than the prior day. The meaning there is that everyone who wanted to buy has now bought and prior buyers are now turning into sellers. That's it. That's what that means. It's not tea leaves. It's looking at actual activity. Yeah.

And Josh, even better, this bearish engulfing happened at an all-time high. An all-time high. And with the stock having become the largest stock in the world, which as you pointed out, this is not an event like every four years like you get a new president. We really just do not have a lot of these stocks throughout history. Very few stocks have been the largest stock in the world. So it's notable. We'll keep an eye on it.

I don't think the correction's over would be my takeaway. You're up. Meanwhile, what's Nvidia up today? Right now it's notable, we'll keep an eye on it. I don't think the corrections over is, would be my takeaway. You're up. Yeah. Meanwhile, what's Nvidia up today? Right now it's up 6%. So yeah, these things, doesn't mean that a new high is going to be taken out. It's tricky. Who knows? We'll find out. Okay. Anything else to say on that, Josh? No. I wanted to show people some examples of prior bearish engulfing, but we just, we couldn't get our shit together. That's okay. We'll do that some other time.

That's okay. All right. So what I found particularly fascinating about the overall market within the context of the king getting dethroned, albeit momentarily, is the market didn't budge. And it would be kind of hilarious if the Nvidia trade cools off and money just rotates into everything else. So even with Nvidia in a 13% drawdown, the S&P is less than 1% from its all-time high. Even the equal weight, which has been shit, is just 3% from its all-time high.

The Dow is 2% from its all-time high. So money is rotating. I want to run through some charts and then get your thoughts. So remember Jim Paul's from the Loot Hole Group? Yeah, I like that guy. So he put out some really, really killer stuff over the years, and now he's got a substack. So he made a good point. He said, in the contemporary bull market, concentration has been so intense, most stocks

have not participated excessively, making the bear's job much more difficult. Without broad economic or stock market vulnerabilities, an imminent recession or bear market may remain elusive. And I think what he's saying is that people might have it backwards. You're saying that if the Nvidia, I'm using air quotes, bubble or whatever, maybe it's a bubble, who knows? If the AI trade loses its steam and that what had been propping up the market falls apart, well, what do you have left? Well, guess what? The rest of the market might take the baton.

The rest of the market hasn't done shit. So try it on please, John. The charts that we're about to show, he's looking at the prior bull markets and what happens over the next 20 months. So he's looking at the bottom in 2009, the bottom in 2002, and the bottom in March 2020 versus the current bull market. What is this measure? Cumulative advance decline is not just today snapshot, but it's adding up from the low, the winners versus the losers. That's exactly right. How many stocks had advanced on a given day versus how many declined,

and then you add them all up. And to the point that I was just making, versus how many declined and then you add them all up. And to the point that I was just making, this rally has not been that broad based. Supporting the fact that maybe, it's like, I think Mark Dow said, you can't break a leg jumping out of the first floor of a building. Next chart please.

This is interesting. This looks nothing like the prior bull market. So in the previous bull market- Dude, this looks like a bear market. Right? So we're looking at the equal weight nothing like the prior bull market. So in the previous bull market. This looks like a bear market. Right? So we're looking at the equal weight divided by the S&P. And SMID caps led off the bottom in 2009 dramatically. Same thing in 02.

Same thing in 1990 to a lesser extent in 2020. And this one just looks, this is a Frankenstein bull market. Small cap stocks, next chart, please. Looks exactly the same. Small cap stocks have gotten the shit kicked out of it, which is very unusual coming out of the bottom. They tend to lead the rally. And then super interesting, when you look at the cyclical names, materials, industrials, discretionary and financials, they all look like junk. So John, we could just scroll through these pretty quickly. Materials here you go, discretionary same thing, industrials woof.

Is there one more? And financials. Okay. So Josh, what do you think about this idea that the mega cap stocks or Nvidia specifically may stall and perhaps money flows into some of the things that have lagged this market. Well, I love what he's saying because his point is that if you lose the leadership, it doesn't mean the money comes out of the stock market. It means the money goes into other areas of the stock market. And in point of fact,

while Nvidia was getting the shit kicked out of it in an alley yesterday, the oil stocks were catching a bid. I'm not saying that's one for one every dollar out of Nvidia, but think about it. If 200 or $400 billion are coming out of one stock, it's not all going into money markets. That's just- The people that own Nvidia, up up 500% are not money market people. They're going into more risk. So like definitionally, we should stop thinking about leadership getting taken out and shot as a negative catalyst for the overall stock market. Now. Percent percentage wise, mathematically, yeah, it's not great for the S&P 500 when the biggest

components are all bleeding market cap because that means their prices are down and the index is down. But if you have a diversified portfolio, it's probably not as terrible as you would suppose it is. And look, man, I got healthcare stocks, I got biotech stocks going up, I got shit cooking right now. And it didn't matter that Nvidia had an almost 15%

drawdown in three days. Like it did not negatively affect the market. I don't care. I know that's what people thought would happen. Oh, just wait till Nvidia comes down. That's curtains closed. No, that's literally not what happened. So if, if Nvidia falls 20, 30% of the market doesn't really do much, like what are you going to say now? Tough guy, nothing, nothing.

And I have Apple hovering above 200. So is Apple not a counterbalance to Nvidia? So you're going to say no. I mean, they're gonna say something. Holy shit, look at Google. Is this an all time high? Oh yeah. What is it, HOD? Just bursting.

Right, so I have Google, so what are you gonna tell me now? Right, Microsoft. I never believed in that bullshit where the leadership stocks, what are you talking about? You know what I'm saying? Some, and sometimes, stocks that are not leadership get what's called a battlefield promotion. Know what a battlefield promotion is? No, tell me.

Like the corporal gets shot in the head, the guy running behind him. Hey, congratulations, you're the new corporal. Next man up. Take these guys over the ridge and you're running the company now know, you're, you're running the company now. You're right. So, so Eli Lilly, uh, took the baton from Tesla, Tesla go itself. Eli Lilly got a battlefield promotion. Yeah. Look at it.

Holy cow. Magnificent. That's how it works. It doesn't work the way it doesn't work. The way people like to scare people and say, uh-oh, once Apple and Microsoft fall, game's over. Not necessarily, not always. Look at 22.

Look at 2022. They beat the crap out of the Mag-7 names, but ExxonMobil had an amazing year. Chevron, Conical Phillips, There was money to be made. There was money to be made. The indexes did get killed though. Killed, fine. Yeah.

Fine. But still. All right. I like to add it on a but still. Can we talk about the Boomer Candy ETF article? Yeah. Do you know this writer, Jack Pitcher? Is he new?

I don't know Jack Pitcher. This is a hot article. That I looked at the author and I didn't recognize the face or the name I should say. Yeah, this is a hot take. So this came out June 23rd. Was that Sunday? Anyway, here's the gist of the story. These hot new funds are boomer candy for retirees. Okay, so basically, he's looking at the ETFs that use derivative strategies to not give

people direct market exposure, which ETFs have historically done, but give them some version of protection or some feature like higher income. But what they all have in common is they're asking you to forego some of the upside of the stock market indices, which by the way, this is perfectly fine. There are some people who would just prefer, I'll take less upside, but in exchange, either I want downside protection up to the first 15% drop, or I want like self-covered calls and pay me the premiums in the form of like an income dividend. I'll take that. So this is very old school. There's nothing really new about it other than A, the ETF wrapper and B, how popular

they've become. Am I getting the story right? Okay. What were your thoughts when you edit? Yeah, I want to be careful what I say, but generally speaking, I am a big fan of these vehicles. They're not all created equal, but Josh, do you remember, God, this is a long time ago, maybe 2012, you and I were in a meeting with a wholesaler and he was pitching junk bonds.

And he called it, or maybe you called it, somebody called it chicken equity. And this is still really from the GFC. And you're like, all right, so this is a way for people to get like beta to the market, but not own the whole thing, right? Remember that? Yeah. Okay, so that's a shitty way to get stock market exposure, in my opinion.

Yeah. If you are able to define, or not define your outcome, let's start in practice, Ken. If you're able to invest in the market and put guardrails on how much downside you could take, I think from a behavioral point of view, now are these like portfolios like the Opel? Shut up. Doesn't matter, dork. It matters if people can get what they want to get and have an experience that they weren't able

to previously get inside of a liquid wrapper. So yeah, I'm a fan and I'm not surprised at all that these things are boomer candy. Matter of fact, the best call that, one of the best calls that I made in my career was when we first spoke to Bruce Bond at Innovator ETFs about what they were doing in 2018, I said to Ben, or one of us said, like this is gonna be a huge category. And it is, it's $120 billion category.

And this is a secular bull market. As long as, as long as rates remain where-ish. So this is really interesting. What you just said, it's a secular bull market because it is. Typically, you see these types of buffer ETFs or covered call ETFs get really, really hot right after the stock market has cratered. So 2022, these were hugely popular. All right.

So, but right, but they took in 31 billion over the last 12 months and the stock market has been going straight up. Yeah, people love them. So it's not just the bear market phenomenon anymore. There are two main categories here. Let's define these really quickly. Equity premium income. So basically the fund buys large cap stocks and sells covered calls against those positions. They bring in options premium and that way

they could pay out the dividends of the stocks plus the options premium and they're like targeting 8 to 10%. And the negative there, and again, negative people are aware of it, they're capping your upside and they're charging you a decent fee in order to carry this operation out. And again, that's a great trade off for certain people. Well, some of them are pretty reasonable.

Like the biggest ones, like Jeppy is like 35 basis points. So Jeppy, is Jeppy the category killed? It's JP Morgan's version. Yeah, it's 35. It's huge. It's huge. It's like a quarter of the assets. Now I would say this is for a very particular investor.

This is for an investor who doesn't want and would good know myself, who doesn't want all the smoke. And yeah, if in the bull market, you're going to lag. That is what is going to happen. But I think that you know that going in. It's not a surprise. Right, there's anything, this is one of the main things

I learned from Nick Murray, anything you do to reduce potential volatility, if you do it reliably, like all the time, the net effect is gonna be that you minimize your upside by some degree. Yeah, definitely. But know it. All right, the other effect is going to be that you minimize your upside by some degree. Yeah, definitely. But you know it. All right. The other type is a buffer fund.

And this is what you were talking about with the innovator funds. So buffer funds use derivatives. They are trying to guard against losses up to a point. And again, the trade off is you're limiting your potential gains. So there are funds where they'll say, we are gonna eat the first 20% of your downside. Great, what do I give up in exchange? Well, you can only get 2% of the S&P 500 a month

or you only get the first 15% of the S&Ps upside for the course of the year. But what I like is people can decide. You could say, okay, you could take 10% losses. We'll calculate 10% losses, but you only get 7% upside. And somebody could say, no, that's not for me. I don't like that trade. OK, fine.

You could take 20% of the downside and get 18%. But the point is, you can decide, which is. You can calibrate. And I think what some hardcore quants might say is, well, you could do this in a more efficient fashion. Well, what about a 60-40 portfolio that accomplishes the same thing? People don't always look at their portfolio as a whole.

We know this very well. People look at the line items for better or for worse, for worse, obviously. They look at the individual holdings. They look at the individual holdings. That's just what we do. Well, if they do that, let's pull up this chart. So this is Jeppy, which is up since inception in 2020, 63. I don't know if that's inception. Maybe I just asked for a five-year chart.

This is up 63% and the S&P is up 96%. It's a really big difference. But again, you can see that the ride was somewhat smoother. Way smoother. Look at that drawdown starting in 2022. Right. And so that's what you're paying for. And that's where you have to set your expectations. And I think if you were an advisor allocating to this,

you're going overboard in setting those expectations correctly. Well, look at the next one. But Jeb Q didn't like by nearly as much. And these are both at. Jeb Q is based on the NASDAQ instead of the S&P? Yeah. So previous chart please. So JEPP is an active- So JEPP is active. So the stock selection is active and they really don't look like the S&P 500. So it's not really the greatest. They look more like the Dow. It's like a more quality-

Is it active quant or there's a PM? Yeah, yeah. Well, which? It's a PM. Yeah. Yeah. Well, which it's active quant. Okay. Put up, now this one is just purely based on the triple Q's. Jeff Q. Yes. Okay. So this is, I mean, this is not terrible. 36 versus 47. Obviously the Q's beat it, but it's a runaway bull market. Yeah. And it won't always be. And I don't know what the income is on this. I don't know what the they declare it every quarter, right? Because they don't, they can't like declare it for the year. I think it's like seven to nine percent, something like that. But what I would say is as long as people know what they're signing up for, I love the idea of being able to narrow your,

your band of outcomes. Because what the S&P 500, your outcomes is a mile wide. You don't know what the market's gonna do. All right, so I think I heard Bob Elliott talking about this stuff a while back, and he was saying, just wait until there's a volatility spike. Why is that the risk for these products? Is it because of the type of options

that they're trading in? That would make that a- I can't speak to that. It depends on the particular fund. But what I would say is one of the most important things is these are not, again, there's a lot of them, but the Jeppy is like, that's not a hedge. It's not a downside hedge. It's income. That's why you buy that product. It's income and it's- It's capped upside coupled with income.

It's not capped upside. You're selling covered calls. So it's not technically, it's not capped. No, of course it's capped. That's the capping that you sell a covered call. You get called out of a stock. No, but I'm saying it's not capped. Like it's not like you know that the most you can make in a given year is 8%. That's what I mean. Agree. But definitionally selling covered calls is capping your upside. You will get, if you have a stock that runs up 30%, but you sold calls that are 10% above today's price, you will get called away. You're not getting all the upside.

Correct. Okay. Anyway, this thing is a massive category and it's only going to get better. You know what? I'm surprised it took this long because these would have made sense 10 years ago, as much sense as they make today. I don't think there was the mechanism in place legally for the ETF structure to hold these. I think that's right. But these strategies are as old as dirt. We were selling reverse convertibles with creating buffers for clients on individual stocks. We would have

clients rather than trade a shipping stock, we would use the contract 90 days and you will basically say, we will not knock you in until the price falls to this level, which of course they were illiquid and horrible and the commission sucked worse than illiquid. You had the counterparty risk, not of the stock counterparty risk was of the issuer of the note because he's traded as QCIPs. Guess who was the number one, two and three underwriters. Lehman. They're all gone.

Sturns Lehman, LaSalle street bank and ABN Amro. Bye. Yeah. So, so in my, in my opinion, these are a little better. Okay. I, I would, I, I wanted to dislike them when they launched, but I totally get why they're useful. I am not using them personally, but I understand the use cases. No, it's not for us,

but I knew that these were gonna be big. That's right. All right, you're up. All right, what else is there? Oh, okay. Let's, okay. You're seeing a lot of headlines that look like this. New York City landlord to sell office building

at roughly 67% discount. So here's a story on this one. There's a 10 story building on 44th street between eighth and ninth. And let's be honest, that's not exactly- That's our old street. We were on 44th and fifth. Right, right. But this is between eighth and ninth. So not like who the hell is getting office space there? Nobody. No, right. Exactly. So the details of the story are juicy. So this like who the hell is getting office space there? Nobody. Crackheads. Nobody. Right.

Exactly. So the details of the story are juicy. So this company owns, oh, is more than $100 million in the mortgage. And they sold it for less than $50 million. That's literally port authority. It is the worst area other than the Lower East Side. It is the most unlivable, unworkable neighborhood in all of Manhattan. You insulted them a little bit.

Deliberately. I don't understand why they're not literally removing the crime and drugs from those corners every day. It should be the Army reserves there right now. My point is, all we see are headlines like this, okay? Yes. And I'm not saying that the real estate situation, the office real estate situation is good. Right now. My point is, all we see are headlines like this, okay? Yes. And I'm not saying that the real estate situation, the office real estate situation is good.

It's definitely not good. However, I'm just asking questions or things not quite as bad as the headlines make it out to be. So we stole this chart from Torsten Slak, commercial property indices year over year. This is great. And industrials are rocking ass. But look at the pink one, look at office. It's getting a little bit less catastrophic.

Office is rocking less ass. Office is definitely not rocking ass. But I had a chart kid make a chart of there are seven, I have that I am throwing SLG. There's seven office reads in the Russell 1000. And it's like, it's a mixed bag. The ones on top are not, or actually some of them are doing terrible. Kilroy Realty is doing terrible. Alexandria Real Estate, whatever. But on the bottom, you've got some ones that are like doing okay. They're hanging in there. SLG looks pretty good. Can you put up the prior chart? So here's the thing. Whenever you hear a commercial real estate in your mind, you have to say, well, wait a minute, these are not all the same exact thing. There's national, meaning they're in every

city, which includes some of the worst. There's office, which is specific. And some of them have overlap, but like apartment is not office. Industrial is not office, but they're both commercial. Retail, that's its own world. That's got like its own drivers and its own positives and negatives. So, so next chart. So, uh, the headlines are, are bloody, but look at the average of all these eight reads. Does that look like a terrible chart to you? It actually is kind of viable. So what's really interesting in places like New York, there's crowding into the A buildings. So it's not universal that, quote unquote, office real estate is weak.

No, actually, one Vanderbilt built is full. Like one Madison is full. These are marquee properties on my prices. Correct. $250 a square foot and they're full. And the reason why is because there's been a flight to quality now B and C buildings like midtown south, like thirties. Of course that's going to look and act like shit. And you're going to see headlines about 60% discount liquidation sales because that shit was always worthless. But now people are actually booking the loss and trying to move on and fix their portfolio. That's what's different.

Yes, I guess what's happening, the equity is getting wiped out or the equity is getting crushed. Okay, good. It already did. We know. Yeah, that's right. So it's not as black and white as a lot of people think. I still don't want to buy any of these, including industrial, including retail, because these are, they're highly cyclical. And in the next downturn, they're going to get destroyed. Like everything else gets destroyed. They are extraordinarily

pro cyclical for the most part, maybe pulling out hospital reits or old folks homes. These are not the types of things that I want to personally put money into. What's the Amazon reit, the one that houses all their prologist? But again, PLD, but again, super pro cyclical. Let's face it, let's stop bullshitting each other. Yeah, and these things are super volatile. Of course they are. So there's other things you could do for income. And,

you know, this is not the only game in town. So I'm not, I'm not like really hot and heavy about these stocks. All right. Hottest trade of the year. Almost every one of these is related to the AI data center build out theme, which is crazy. Four of these names related to the AI data center build out theme, which is crazy. Um, four of these names are power providers and three are utilities. Let's put this table up. These are the hottest stocks of 2024, circa end of June.

So first half of the year, let's say super micro up 190% Nvidia up 138% this is as of this morning Vistra Corp this is a utility plus 130% constellation energy utility plus 85% Micron related to AI all right so now I'm through the first five they're all AI. Number six, NRG Energy, utility up 60%. This is AI. All right, GE Aerospace, this is kind of like a turnaround story, not AI. Fine. Eli Lilly, this is bull market and fat people. Okay, not AI.

Fat people AI. Fat people AI. All right, first Solar, up 51%, AI. How? All right, first solar up 51% AI. How? Because it's the most cost effective way to build these data centers and power them. Oh, they don't know that. Yes.

The chart went vertical this year when they started getting contracts for all these build outs. Target resources. This is energy. It's like oil, gas, whatever. But like, it's amazing. This one theme cuts across so many sectors and pretty much the hottest trades in the market are all in some way related to the AI

theme. And that's really it. Like it's not that there aren't other things worth investing in, but AI and GLP one drugs drugs and everything else might as well not even exist. And that's a really interesting feature of the bull market. Let's put up this chart. So here are the three utilities plus first solar. I mean, these stocks look like AI stocks, but they're some of the most boring companies

ever until this year. It's really interesting. This thing up 130% of Vistra is really something to say. And there's been a little bit of a dip recently, but still, these are some hot-ass stocks. Okay. Counterpoint. I just punched up Y charts, Comp Tables, S&P, year-to-day total returns. There's an ass ton of stocks that are up over 20% of the year, like tons.

Yeah, I just showed you the top 10. Yeah. So the biggest ones or the biggest winners surely are AOA, but like Wells Fargo, I'm just, Wells Fargo is up 20%. Citi Group's up 20%. Yeah. I mean, there's a lot. A lot of stocks are working.

So yes, Nvidia is carrying the market, a lot, a lot of stocks are working. So yes, Nvidia is carrying the market, but man, a lot of stocks. I'm just giving you, what I'm saying is my pizza, my Domino's pizza is up 30% on the year. I think there are years where you pull up the market and the 10 best stocks, you don't have as much concentration in terms of like what theme is driving this. This year, it's pretty much one thing. True, true, true. Pulling out Lily. So, okay. Um, is driving this? This year it's pretty much one thing. True, true, true. Pulling out Lily.

So. Okay. Who is this? Is this Peter? Yeah, Peter Kafka tweeted, it's boring to keep saying cable TV is collapsing, but boy, oh boy, is cable TV collapsing. Pay TV, including digital substitutes like YouTube TV, which we're going to talk about in a sec, and Hulu Live lost a record.

2.37 million subscribers in Q1. That's a drop of 6.9%. Not nice. Wow. Well, why am I still paying? My last asshole in town? I just saw my bill is like $280 a month. That's it? Yeah. What am I doing though? I actually just saw mine bill is like $280 a month. That's it. Yeah. I just, I just, I actually

just saw mine today. It's funny you mentioned that 315. I said, this sounds high. Why are we spending $315 on cable plus everything else we're spending. I got to call files. I think I'm paying. I think I'm paying for like nine cable boxes. What is the cable box even by the way, house of the dragon episode two. Oh my God. Do you know that, um, there's that one scene in the house of the dragon. That's why it's worth paying the entire year's worth of HBO from my perspective. It's a Risa fans who plays high tower, like the older guy, the, his daughter is the queen. Good.

Who is that guy? He was in nodding hill. He had like a spaghetti strainer on his head. He was like the idiot roommate in nodding hill. Yes. Yes. He was all, oh, I'll say he looks like he was a Robin at Prince of thieves too. Nope. He's Hugh. What's his name? Hugh. Just all Hugh Grant. He's Hugh Grant's idiot roommate from Wales. Anyway, 30 years went by and he's like a f**king Shakespearean actor. That scene with him and the young king and the knight, they're like, they're like, dude, it's almost like they're on stage doing a play. So good. Just unbelievable. Okay. I don't know why I'm paying this much, but you know what, for my new apartment,

I don't know why I'm paying this much, but you know what, for my new apartment, we're not getting any cable. None. We'll have broadband and we'll have Netflix and HBO Max and all our apps and zero cable box, like zero everything. I'm not paying anybody. I'm just finished. That's it. I'm done. And if I could live that way while I'm there, I'm going to come back to New York and rip all that shit out of the wall because it's too much money. It's not clear that I can't live without it. I just never tried to. Lucas Shaw was writing at Bloomberg. He said TV ratings for the NBA finals fell from last year.

I mean, that's not surprising. It was pretty bad finals. But it was one of the least watched finals on record. Even ratings for House of the Dragon premiere was down 20%. And YouTube TV, which is a much smaller number, but still throw this chart on. This thing had never seen subscriber ad flows. This lost subscribers for the first time. So I think there's also a ton of options for free TV now.

Like free free is huge. And yeah. TV now, like free free is huge. And, uh, yeah, they're all, listen, they're all competing with Tik TOK and Instagram reels and free YouTube. Like that is what has the attention of people under the age of 30. Like, guess what else? Definitely. 75% of prime video watchers use the free option. But no, so they'll watch the commercials. Okay. That's me. I don't care.

I'm over. I'm full circle. I would have paid anything to get rid of commercials 10 years ago. I'm an Amazon prime subscriber. Now they threw commercials in my face. You know what? What am I going to die? It's fine.

Just look, it's not the, the $3 a month. I care about. I don't feel like making the phone call or going on the internet and finding the right box to click. Show me the commercial. I'm not that busy. I do hate them. Okay. Speaking of that, I'm going to make the case for Amazon, a stock that I own that I added to this week. Okay, pitch me. I own it, but maybe I'll buy more. So I'm not going to spend a lot of time on the fundamentals because honestly, this is like a technical call more than anything, but I do think it's notable. What do they do? What does Amazon do? They do a few things. Wait, what was the question? All right, chart on please. So again, in that Lucas article,

he was showing that when it comes to video ad sales, the point was that Netflix is really nowhere, but look where Amazon is. And Amazon is just ramping up, but I think this could be a monster, monster money machine for them as they ramp up. Oh, wow. Look at this. They're nowhere. They're nowhere. They're nowhere. And they're just getting started. Yeah. Well now it's, and now it's default. They're not, they're not saying, Oh, here's an ad tier ad supported tier for less. It's not opt in. You have to opt out. That's right. Now it's default. That number's good.

That number's going to double. Nobody's opting out. Well, 21 out of four opting out. We just explained it. Right. Okay. All right. So, so Amazon has really, I don't know if a lot of people are aware of this, Amazon has really lagged bigly over the last couple of years. Yeah. So this is, I'm cherry picking. This is the top or the bottom, I should say, whichever one you want to look at it in terms of like performance versus the queues. So since July, 2020, John, next chart, please. And then we could scroll back. So this, since this chart peaked, it's the ratio of Amazon divided by the queues.

So the outperformance, which lasted a hell of a long time versus the queues, this peaked in July in the summer of 2020, previous chart, John. So since that peak, the queues have gained 96%. Amazon has gained only 30% over the same time. Next chart. This is showing Amazon's market cap compared to Microsoft, Apple, Nvidia, and Alphabet. Next chart, I'm sorry. It's by far the smallest of the bunch. Does it deserve to be? Yeah, I don't think it's that crazy. I don't think it should be $3 trillion, but it's lagged its peers big time. And on a technical basis, it looks clean. It looks clean. This is the daily chart. It's failed here a few times at 190. I think it's going to 250. I went

on TV and said this is my lock of the week. I was joking, obviously. If I could only own one stock from now to the end of the year of the mag seven. This is the one I would buy. Okay. I think the last chart on a weekly basis, longer term. Because of the combination of the size and their positioning for AI. And we talked about this with Cantra. It's all upside from here because they haven't gotten any of the benefits. It's not in the stock at all.

No, it's not. Yeah. So that's it. So, all right, I like it. Put me down for another 12 shares. No, I own this thing. I probably wanna own more of it though, to tell you the truth,

because I didn't really buy enough that it'll matter if I end up being right. Guess what, markets open tomorrow. That's right, that's what I love about the markets. All right, I have a mystery chart for you on screen. All right. So this is a, I don't know if it's a, it's consumer discretion. It's like entertainment. All right. And what I want to tell you is that it is just trying to think of like what the best hint that I could give you. All right.

Let me ask you, maybe this will help. All right. The stock gets very, all right. The stock's biggest product cycle is every fall when football comes back. Okay. Okay. That's a good hint, dude. That crash in 2019, Is there a story there?

I mean, it's the story of humanity. You got to give a little to get a little. Okay. I don't know what that means. It's a football related stock. That's like the biggest driver every year of its annual sales is when football comes back around. What could it be? Football. Give me one more clue. Okay. It's not under armor, right? Okay.

Last clue. No, it's not. That's not a terrible guess, but it's not under armor. Am I in the right universe? It's not apparel. Okay. So it's not Nike. It's not under armor.

Okay. So what else is related to football, but not apparel? Oh, oh, beers, beers. You went the wrong way with it. Okay. You want one more guys? One more clue. One more one more. Okay. It's got two letters as its ticker symbol. All right, what's the stock? Oh, that's good. That's good. Right. That's good. We haven't talked about this in a while. Would you buy this chart site on site? Like knowing if you didn't know it was electronic arts, just looking at it, you would buy this setup, right? There's, I don't, there's too much resistance. I think I would wait for the breakout. The resistance only goes back to 2020. It's not a decades worth of

resistance. That level is one 50 dude. Would you buy this thing at one 51? You would hold that. Hold on. I'm just looking at this. Okay. Um, what I buy this, I would just wait for the breakout. There's no reason to be early here. Okay. Next shot. I got some more shit for you. Put up the next one. This is the setup right here. So now you got a 50 day back above the 200. You've got an RSI climbing. We'll probably get into the low 60s pretty soon.

So on the breakout, you're getting that relative strength confirmation, which I always love and I know you do too. Next chart. I'd rather buy it at all you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you.

I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you.

I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. I'm going to send it to you. have a video I want to show you. John, can we can we.

Holy shit. Oh. Wow, that looks so real. Pacheco running. Wow. Sick. That looks sick, right? That's your catalyst. That's what's going to pop it above 150. It's got some new technology in there that does not exist right now.

This is the opposite of the iPhone where every new iPhone is just incremental. I just don't buy that Madden as a catalyst. The investors don't know. Can I share with you who made the cover for Madden 25, which is the, they're up to 25 this year. CMC motherf*****. Let's go. Dude, question McCaffrey. By the way, that's a great pairs trade. Long EA, short McCaffrey stats this year because they put them on the cover. Right. Yeah. It usually works like that. It usually works like that.

It usually works that way. Anyway, shout to Electronic Arts. This is a setup that I am watching and stalking, stalking, and if and when it pops up through 150, people can be told to stock again. And it's been consolidating for years. So Mike, an interesting. All right. That's it from us tonight.

Don't forget tomorrow is Wednesday, which means an all new edition of Animal Spirits with Michael and Ben. That'll be followed by Ask the Compound with Ben on Thursday and a very special edition. I won't say any more. So special. So special of the Compound and Friends. Might be the show of the year, not disrespect to any guess. It definitely could be.

That'll be Friday, Jill on Monday, Saturday. Keep it locked with the compound. We'll talk to you soon. Whether you're just getting started as an investor or you're managing a multimillion dollar portfolio, RIDHOLT's 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 RIDHOLT's Wealth.com. Don't forget to check us out at youtube.com slash the compound RWM.

Make sure to leave a rating and review on your favorite podcasting app. If you love investing podcasts, check out Michael and Ben every Wednesday morning on Animal Spirits. Thanks for listening. representatives are properly licensed or exempt from licensure. Nothing on this podcast should be construed as and may not be used in connection with an offer to sell or solicitation of an offer to buy or hold an interest in any security or investment product. Past performance is no guarantee of future results. Investing involves risk and possible loss of principal capital. No advice may be rendered by Ritholtz Wealth Management unless a client service agreement is in place.