The Compound and Friends - Is Nvidia the New Tesla?

Episode Date: August 22, 2023

On this TCAF Tuesday, join Michael Batnick and Downtown Josh Brown for an all-new episode of What Are Your Thoughts and see what they have to say about: tech stocks, Elon Musk's shadow rule, Jackson Hole preview, interest rates, ARM, and much more! But first, hear what Josh has to say about the recent news out of Schwab and Goldman! Thanks to Rocket Money for sponsoring this episode! Go to https://www.rocketmoney.com/compound for more info. Watch this episode on YouTube: https://youtube.com/live/ylK9_oNIl78 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. I'm downtown Josh Brown. We're going to get to what are your thoughts very shortly. Michael Batnick and I talking about a whole host of important stuff that's been going on this week. There's a couple of things that we're not going to get to, but they've been on my mind and they are industry related in the wealth management space. in the wealth management space. One was a little bit unsurprising to me. One was very surprising. And so let's start with the slightly less surprising news. Charles Schwab said late Monday, it's going to lower its headcount. I mean, this is a situation where after Labor Day, they will have completely closed the acquisition of one of their largest competitors, TD Ameritrade. This very much affects my firm. We were large custody clients of TD Ameritrade and of Schwab, and now both of those relationships will collapse into one. There were some really incredible people that we've worked with over the years at TD Ameritrade as we built our business. Most, I would say, most are no longer there, but the Schwab people are great as well. And this was a merger that was announced in 2019.

And it kind of came about just as Schwab was transitioning its own business model to really making most of their money from asset management and banking, less of their money from transactional brokerage. And in the midst of the negotiations with TD Ameritrade, they actually cut their commission per trade price to zero. And that, of course, was to bring it in line with what Robinhood was charging. And then it became kind of a revenue issue for the industry. Everybody had to get in line with this zero commission fee. And they had to find a way to offset the cost of doing that. So for most of the players in the industry, the solution has been some combination of stock loan,

which is where people are trying to sell stock short. They will borrow shares from someone's account. That's a business. Of course, money market sweep, where Schwab will not automatically put your cash that you leave in your account after a trade or money that you wire in. They will not automatically push it into whatever fund has the highest yield. They will keep it in a fund that's got a lower yield and they will collect on that difference. And that's a business.

lower yield and they will collect on that difference. And that's a business. Payment for order flow, where the brokerages will send the trade that you want to execute, but not just you, like millions of trades a day, they will send those to market makers who have a way of scalping a half a penny, a penny, two pennies in a way that really doesn't matter to you, the end user. But when these things are aggregated, they add up to billions of dollars in profits for firms like Virtu and Citadel. And you've heard some of the names, but these are firms that are sitting on the other side of millions and millions of retail orders. And that's a business because the profitability of that comes back to the brokerage firms. So payment for order flow is another way in which zero commission trades are able to be zero commission.

So there's a whole host of things that have happened in the brokerage industry. whole host of things that have happened in the brokerage industry. And it just made less sense for there to be as many large competitors as there were. And so I think, by and large, Schwab will benefit from taking on TD Ameritrade and becoming this just multi-trillion dollar behemoth in custody and trading and asset management and retail brokerage and institutional brokerage and everything in between. But we're kind of in this in-between moment where now that they've pulled this off and it's taken them years to complete the transaction, they have to right-size the headcount. They have to right-size all of the expenses. And that's the painful part. And so they put out some news on Monday night,

and they're talking about $500 million of incremental annual run rate cost savings. And they're going to reassess their real estate footprint. How many office leases do they have? How much retail space do they have for the investor centers? And again, it's not just them, it's the combination of TD Ameritrade and Schwab. So they've got call centers and they've got operation centers. They've got corporate home offices. So that's a process that's going to take place. They're also going to be doing a lot more layoffs. And part of this is probably the current environment. But part of this was already going to happen anyway.

And so, you know, the stock price is down about 4%. It's midday Tuesday as I'm recording this. This is a stock that is very close to 52-week lows. It has been a very rough year for investors in Charles Schwab stock. I think the company has largely done most of what they can do to weather the storm. They're talking about a $2.5 billion debt offering. They have done things on the balance sheet. billion debt offering. They have done things on the balance sheet. They have done things in the operational side of their business to try to distance themselves from the problems that

the regional banks had with high interest rates, people doing what's called cash sorting, meaning look at the rate they're getting on their money market and switching so that they can get a better rate, which means the provider is going to get a worse return. So there's so much happening, and Schwab is in the middle of all of it. So it has not been a fun year for regional banks. Schwab is not a regional bank. They're a brokerage firm that has a bank within it, and they're going through it. And they've been through tough market environments before, and I'm sure they'll get through this one. But this news on Monday night about more headcount reductions, more cost savings, more areas that they've got to make adjustments,

this is what's weighing on the company right now. The other news that is a little bit more surprising and probably just more surprising in terms of the timing than anything else is Goldman Sachs came out and admitted after the news broke at RIA Biz over the weekend, Goldman Sachs came out yesterday and said, yes, it's true. We are going to sell United Capital. I want to give you a little bit of background here on why this is meaningful.

United Capital was, I think, the first super successful aggregator of financial advisory practices. They basically went around the country and found dissatisfied entrepreneurs in our space who had their own firms, but they wanted the benefit of scale. Maybe they didn't want to work quite as hard handling every single aspect of their business. And they very convincingly made this pitch that, yes, you could still be independent,

but you're going to be part of this thing that we're building, and you're going to have some equity. And we are going to make the decisions and do the work that your clients don't care about you doing. Why are you choosing fintech and wealth tech solutions? Your clients, they're not impressed with that. Why are you acting as your own compliance officer? Why are you handling your own real estate leases and your own employee payroll? Let us do that. You just focus on giving high quality advice.

And that was a really great pitch and it worked. And they ended up bringing on 230 financial advisors and about 23,000 clients, $25 billion in assets under management. And the whole thing was built and managed and led by a very charismatic, super successful guy named Joe Duran. And I'll never forget this. It was the summer of 2019. We were a couple of months away from doing this big event we were doing in Arizona called Wealth Stack. And Joe Duran was like the keynote speaker. He was like the most well-known person we had coming. And his name was all, all the stuff because people want to hear, you know, what he has to say. It was like an event for RIAs and it's, it's Joe Duran. So the, the way that conference was going to like the, the crescendo of the event was me

on stage with Joe in a fireside chat. And then this news breaks that he's selling United Capital to Goldman Sachs for $750 million. First of all, the price tag, people's eyes popped out of their heads. It was just incredible. And the people who had nothing at stake, they just looked at this like, what a coup. Look what this guy just pulled off. He recruited 230 high quality financial advisors and then packaged the whole thing, sold it to Goldman Sachs. I think he became a partner in Goldman in the process. And it was just like nobody had ever thought to do anything like this before. Because remember, the whole ethos of the RIA industry prior to that was, we're the anti-bank. We hate Wall Street. We are fiduciaries to our

clients. Goldman, Bank of America, Morgan Stanley, it used to be Merrill Lynch, Morgan Stanley, all these firms are trying to do is sell product. And we're the opposite. We're fiduciaries. We only sell advice. So the ethos was, f**k Goldman. So as soon as this news comes out, I'm like, oh, shit. I got to find somebody else to interview because I don't think Joe Duran is coming to Wealthstack, which, by the way, was like a first year stupid event with a few hundred financial

advisors. It was not that big of a deal that people would be like, oh, I have to be there. So my assumption was either he would be like, I don't need to do that anymore. I just sold my business for $750 million or Goldman won't let me. Like Goldman Sachs doesn't want me out there talking. Either one of those would have been like very conceivable. So I'm sitting there like, uh-oh, who do I invite now? Anyway, I get an email, unprompted. I get an email and it's Joe Duran. And he said, not only am I still coming to Wealthstack as promised, but I have lots of

information about the deal that I'll probably be sharing with you for the first time ever anywhere else. So it was a couple of months and he came in and Joe was awesome. Like, and, and by the way, he was great on stage and he told the, you know, the, the truth from his perspective, this is what I did. This is why I did it. People in the audience hated it. Like they hated what he was saying because the premise of what he was saying was that welcome to the future. And in the future, if you want to compete, you're going to have to have the backing

of a partner as powerful and resourceful as Goldman Sachs. So he was basically like, look, it's all the best parts of United Capital, the independence, the entrepreneurialism, the people, the fiduciary nature of how we serve clients. But the difference between us and the rest of you is that we're backed by a trillion dollar firm with investment banking deals and IPOs. And if your client wants to sell their business,

you know, Goldman is going to be there, like their banker representing them. And it's like, it's like, it's an RIA on steroids. Like that was the rationale behind why United Capital powered by Goldman was going to be like the future. It did not turn out that way. And I'm not internal. I don't know how much of that was Joe being wrong or Goldman fumbling or dropping the ball. I'm sure in the fullness of time, everyone will weigh in with why this didn't work out. But just on the surface, these things are very obvious. Number one, United Capital advisors, they are not Goldman Sachs material. And I don't mean that in a disparaging way because neither am I. The United Capital typical advisor is not in a three-piece suit, is not trying to get reservations at Dorsha, is not partying on the rooftop at the Park Lane Hotel,

is not doing bottle service, is not, you know, a member of the top country club in Westchester or Greenwich or the North Shore of Long Island. Like, it's just a very different vibe. If you meet United Capital advisors from all over the country, and I have, they do not come off as the type of people that would work at Goldman Sachs. I mean, you could not find a more square peg round hole situation if you tried. And so culturally, and by the way, that's going in both directions. So I don't think the United Capital people loved having their business cards turned into Goldman Sachs, which happened in 2021, I think. But then I also don't think the legacy Goldman people had any interest in this project from their perspective. Goldman already was doing ultra high net worth personal finance. They were already doing financial advice. Most of their focus was

on Fortune 500 executives and billionaires. They were not doing million dollar accounts. And that's what United Capital, not that they didn't have larger relationships, but that was the bread and butter. So to a Goldmanite who works at ACO, ACO is like a $28 billion business within Goldman where they service the clients of giant companies who are investment banking clients. And they handle like executive comp and all these things that are faced by the top 1% of the top 1%. So for those people, they're like, wait, let me get this straight. I do wealth management at Goldman Sachs and that schlep rock from Provo, Utah is also walking around like they're Goldman Sachs wealth management. I don't get it.

is also walking around like they're Goldman Sachs wealth management. I don't get it. And this sounds petty and this sounds like why would people act that way? You know what? Because they do. People are territorial. People get obsessed with the prestige involved with a firm and they don't like when people that they don't deem worthy are brought in through the side door and put on the same – put at the same level as they are. And so for a whole host of reasons, it just – culturally, it was probably never going to work.

It was probably never going to work. As part of the news that came out over the weekend about Goldman wanting to sell United Capital, it came out that the unit, which again, I told you had $25 billion when it was acquired, was down to $13 billion. So even in the most charitable interpretation of what that means, like even if some of that money was moved from United to other areas within Goldman, like ACO, for example, that's still really, really bad. We've just had a massive rally punctuated with a little bit of a pandemic on Wall Street in the three or so years since this deal was announced to go from $25 to $13

billion, no matter how or why, that is as disastrous as it gets. And I don't know that it's even possible for Goldman to sell this unit for anywhere near the $750 million they paid for it, let alone all of the other costs that they've incurred over the last few years trying to integrate it, which I'm sure is a huge, huge number. Maybe puts the cost of this thing to north of a billion for all I know. But so that's the story. That's what's going on. And funny enough, there is some possibility, maybe, and this is rumors, I don't know anything more than anyone else, that Joe Duran could come back and take back his baby and fix it and show up with private equity money and say, let me take this off your hands. I know what you did wrong. I'll fix it.

And maybe there's a way that we can both win here. You guys get out of this business that you were never suited to do. I get back my company. And that is one possible way this ends. Another less interesting way is LPL buys it. But look, there are no shortage of people lining up to try to do something here because $13 billion is still a lot of assets. There are definitely still very good advisors who, through no fault of their own, are now

stranded sitting there waiting for the next year to drop. There are still thousands of clients who would like to have a home. And that is one of the biggest things to have happened in the wealth management industry so far this year. All right. I wanted to make sure we covered those two things. Michael and I are going into all different areas tonight. We are having so much fun doing the show live. I wanted to say thank you for everybody who comes out for the YouTube taping, which is every Tuesday at 5 p.m. Eastern. We're going to talk about all of the stuff surrounding NVIDIA and their earnings,

Zoom, Snowflake. We've got some stuff in the doc about AI in general, NVIDIA options trading. We're doing some stuff on Arm Holdings, which is the new IPO. That's maybe going to be the biggest IPO of the year. We finally saw some information on that. We look at earnings and why beats are not being rewarded. We look at the S&P 500, technically, the recent spate of volatility we've been enjoying this August, and so much more. I wanted to just say thank you guys for coming out for the live. For those of you who can't, you're about to hear the audio version. And thank you guys for listening. All right,

without any further prelude, let's get right to what are your thoughts. Duncan, John, take it away. take it away. 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. All right, all right. Saying hello to all my gangsters and gangstarettes. Michael's doing weird things with his lips. I'm trying to keep a straight face over here.

It's almost too much. He won't do it. He won't do it again, I promise. All right. Welcome to What Are Your Thoughts? This is our weekly show every Tuesday at 5 p.m. where we go live and talk about the biggest issues facing investors, money managers, asset managers, traders, et cetera.

And we appreciate you guys so much for coming out to the live. I want to say a couple of quick hellos. Rachel is here. Michael Skyros is here. Cliff, Bob, Sean's here. Jay Luther, all the regulars. Jack is here. Nicole is running around in the chat being Nicole.

Shout out, Nicole. Who else? I don't know. Everyone's here, the whole gang. Thank you guys so much for joining us tonight. Michael, I hear we have a new sponsor. Who is it? A new sponsor that I'm super psyched about

because I'm a user of the product. I've spoken about the product. I actually used it this week for, well, what it's used for. Let me tell you who they are. Rocket Money is a personal finance app that finds and cancels your unwanted subscriptions, monitors your spending,

and helps you lower your bills all in one place. So I've got a bone to pick a little company called the New York times chart off, please. I'm going through my rocket money. Like, so it shows you your recurring subscriptions. How do they do that? Magic. I don't know. They pull through your email. They automatically pull from your credit cards. Oh shit. So instead of like hitting all transactions, export and sorting by name to find your recurring transactions, this just has it for you.

So anyway, it turns out I'm a schmohawk. I'm paying the New York Times twice. I have no idea why. Two different emails? I have no, I don't know. I can't get to the bottom of it. I meant to deal with it today, but I didn't have time. I'm paying my business account, my personal. It's mayhem.

And I wouldn't have known. And don't even ask about Sirius. It's a whole other thing. Anyway, rocketmoney.com. Sirius is the worst customer service ever. It's too much. Don't even try. Rocketmoney.com slash compound to learn more.

Rocketmoney.com slash compound. There you go. All right. I'm going to try this myself. Very cool. Thanks for sponsoring Rocket Money. Okay. This is not like a whole thing. I'm going to try this myself. Very cool. Thanks for sponsoring Rocket Money. Okay. This is not like a whole thing that we're going to do, but just a little bit of housekeeping.

We had an existing home sales number that caught my eye. Can we spend like five seconds on this? It's called a print. It's called a print. Sounds sophisticated. What? What's a print? We got a print, not a number.

We got a print. Oh, a print. Oh, for God's sake. All right. We got a print. We got to print, not a number. We got to print. Or print. Oh, for God's sake. All right. We got to print. We got to print. Existing home sales are down, I think, 20%-ish on the year. This is the number of homes, guys.

When we say existing home sales, we're not referring to the average price. We're just saying like the transaction volume. No, no, no, no, no, no. These are literally what it says they are. Existing home sales, not new home sales. These are home sales. No, no, no, no, no, no. These are, these are not, these are literally what it says. They are existing home sales, not new home sales. These are, no, I know, but that's not the point I'm making. That's not the point I'm making. Just clearing it up. I'm saying, we're not saying the home prices are, are down by as much as this is the transactions and you understand why a mortgage lock-in, but it's getting like, it's getting worse.

You're a prisoner. You can't move. I was at a wedding this weekend in Jersey with a friend of mine. He's like a very successful mortgage, like a mortgage brokerage firm. And he's like, are they going to go to eight? He's like, sometimes I think I'm dreaming. Like, can this be real? Can they really put mortgage rates at eight?

And I'm like, I know that you know know, once upon a time they were like 16, he goes, dude, that was 40 years ago. And for 10 seconds, they were not 16 for a year. Not only are rates where they are, what is it now? Seven, three, seven, four, something like that. The spread above the 10 year for a multitude of reasons is widening. I think probably the biggest reason is because the Fed's not buying bonds anymore. Fed's stepped out. So it's not great. If you're in the market for a home, you're a first-time home buyer, you're fueling the pay massively. Ben and I were talking today, Michael McDonald from Bloomberg has a chart showing the median monthly mortgage payment, assuming you put 20% down. It was like was like a thousand dollars pre-pandemic. Yeah. It's $2,300 now. That's right. I read 2,600, but same thing. Unbelievable.

Yeah. So now people are like, oh, well, wage gains. Not like that. Handsome. Wage gains. Oh, and guess what else? Now all of your monthly payments for the most part, it's like, oh, it's all interest. Yeah. We've been talking about this miraculous soft landing. What if it's not? What if it's like six months of soft landing, six months of hard landing? What if we get both?

This is just – it strikes me as bad. Okay. I want to talk about the last round of earnings here as we come out of the season. This has not been a good earnings season. It's been statistically okay. And we're going to talk more about companies that have beaten and it didn't matter or it didn't help. I'm not going to do any of that now. But suffice to say, we sold off on earnings the entire month of August.

Good earnings, bad earnings, mid earnings. It almost didn't matter. Can I just say, Josh, before we get into the meat, of August. Good earnings, bad earnings, mid earnings. It almost didn't matter. Can I just say, Josh, before we get into the meat, two things. Number one, yes, this is happening to coincide with interest rates spiking, which is an obvious factor. We'll get into that later in the show. But also, stocks had a hell of a run. They could have cooled off for any number of reasons. It just happened to be interest rates. Interest rates, but also digesting a rally. And if a stock went up- Normal shit.

If a stock went up 20% from May to the end of July and then reported better than expected earnings, guess what? You already got the benefit of that. Exactly. Plus the 10-year blowing out. So both things can be true. Let's talk about Zoom. We're fascinated with this stock. I don't about Zoom. We're fascinated with this stock. I don't know why. We're users of the product. It's not a great product. I know why. I know why. When we look back on the craziness of the pandemic, this is the poster child. This is the ultimate stay-at-home stock. Remember that term?

This stock had a market cap larger than ExxonMobil for a few minutes. And much larger than MetLife. Yeah, unforgettable moment, really. Anyway, Zoom, which every time I go to use it, especially when I'm a minute late to a meeting, for some reason needs to do an update, it's always the same exact product on the other side of that update. It's not like, oh, wow, cool, they updated it like when you do an iOS update. I really don't understand what's going on and why it's such a needy app. Listen, I don't have, I don't, I don't have those issues. I believe you. It's still,

it's still in my opinion. I mean, teams is unusable and it's better than, it's better than Google for multiple. If you're having a meeting with a firm wide meeting, like we do, you got to use them. Fine. For anything less than a hundred people, I prefer Google Meet. Anything. Or FaceTime. And Microsoft Teams is effectively malware. So, okay. Zoom beat on their top and bottom line. Earnings came in at $1.34. The expectation was $1.05. They had $1.14 billion in revenue expected, excuse me, in revenue, which was slightly better than the expectation. Let's pop these charts.

Like they're doing what they're supposed to be doing. If you're a shareholder, you hate what's happening with the price, which by the way, quickly- Stop coming down. No, it crashed yesterday into today. It's recovering a little bit. It hasn't made new lows. It hasn't made new lows

since May. Mike, it gave up eight points after earnings. People are not happy here. Points. 70 something to 60 something. But they're doing what they're supposed to be doing. This is operating cash flow, free cash flow. One is up 31%. One is up 26%. If you're

a shareholder, you can't be mad at management because you overpaid. Yes, you can. Yes, you can. But you overpaid. It's your fault. That's true. However, the company's not growing anymore. Next chart, please. So it grew 6% in revenue in America. Is that good? That's horrible. That's horrible. And look at the rest of the world. It's priced as a growth company. Guess what? Oh, whoops. It's not growing. The other thing is management is not doing what they're supposed to be doing. Chart off, please. The stock-based comp is outrageous still. It's accelerating.

It's like $250 million or something like that projected. It's lunacy. They're doing a billion dollars a year in dilution to the existing shareholders. What are you, nuts? All right. So then you can be mad about that. I was going to say, I think on the execution side, they like, if, if this stock didn't start from the valuation it started from, uh, some of this stuff would be looked at almost as if it's good news.

It's not growing. And the sales and marketing expenses, they're spending 32% of the 33% of the revenue on that. How they're spending $350 million on that? Well, I'll tell you how. And they're still not growing. It's over. Jack. Okay, wait a minute. Okay, wait a minute. The market might not bear more growth

than what they've already... Like, in other words, everyone has settled on a solution at this point. I agree. They went from zero to one really quickly. Right. So what they're spending money on now is creating ancillary services for business and enterprise

customers. And to some extent, they're having some success. It's not black and white like they're failing at everything. They're trying to sell telephony to businesses, including ours, by the way. What is that? Like we use RingCentral, like for phone calls and texts. Well, they want to replace RingCentral. I think they're actually pitching us right now.

Okay. So like they're trying to do that. Like in other words, all right, we have enterprise customers that have standardized their video calling on Zoom. What else can we get these people to buy? It's not easy. It's an uphill battle. You're fighting with Slack, which is Salesforce. You're fighting Microsoft Teams. I mean it's not It's not easy. It's an uphill battle. You're fighting with Slack, which is Salesforce. You're fighting Microsoft Teams. I mean, it's not going to be easy.

I don't envy their situation. It's just not a total disaster either. It's a weird stock. You just get no love back from being an investor in the stock. It never works. There's no time frame on which this helps having it in your portfolio. I think it's still big in ARK. Do you know if it is or not? I think so. Hold on. I'll look at it right now.

I think they are growing. Like they're enterprise customers that are paying over a million dollars a year. I think that's growing decently. I'm trying to find it. No, there are other things that they're parlaying the ubiquity of the video product into. And some of it will work. But it's just really frustrating being a shareholder of this. I want to talk about- Zoom is, yeah, it's the fourth biggest holding. It's 7.5% behind Tesla, Roku, and Coinbase. So

yeah. Okay. So this is not helping- Here's what I'll say about the stock. It's gone sideways for the last eight, nine months. I mean, it's not, it's, it stopped going down. It's a huge pain in the ass. It's volatile, but it hasn't made new lows. So maybe all of the bad news that we're suggesting is priced in. We'll see.

I was looking at this versus DocuSign as like the two pandemic champs that had been crushed as a, as a buy. I ended up buying DocuSign. I didn't buy Zoom. I I've since sold it. I made impossibly, I made a little bit of money in

docusign. Um, but I just couldn't bring myself to buy zoom. You know, it's the one, look at Teladoc. Do you have a chart open? If you can tell a doc, if it, if it breaks $22 or whatever this support is recently, it's, it's hanging on. It looks like it's going straight to negative 40. Dude, I would rather hang it on by a thread. I would rather bite the tip of my own tongue off and swallow it right now live on YouTube than buy this stuff. It's a little much. That's, well, maybe not enough.

Maybe not enough. All right, where are we going next? See, I'll see, I'll tell it. Hey, tell her, Doc. See you in the teens. All right, we're going to talk about Snowflake. Do you follow this thing anymore? Do you remember how big of a deal this was

when it came public? You know why? Because I think Buffett was involved and it was trading at like 250 times sales. No, seriously. It was one of the most outrageously priced IPOs in 21. Here's what you get for buying one of the most outrageously priced IPOs. You get a whole lot of annoyance and aggravation. Looks awful. But at least they're growing. At least they're growing. Analysts are expecting, so we have, oh, where'd this go? We have Snowflake coming up when?

Tomorrow? When does that report? Tomorrow. That's why I'm talking about it. So analysts are expecting- It reports with NVIDIA after the close. They're expecting 33% top line growth. 497 million.

They're expected to do 660. So if they come in and we're, hold on, hold on. I got to address the comments. Couple years ago, you were bullish on TV on T doc. Yeah.

Couple years ago. Does nothing ever change? I don't know. Like I don't know. With like a laughing face emoji. Gotcha. Gotcha. Hey,

listen, how are you supposed to, how are you supposed to do the show and be in the comments? What's wrong with you? Focus. Dude, you should see the other things that I was bullish on a couple years ago. You just wiped the comment off your face.

It's enough. Pay attention. It's so fucking childish. All right, Snowflake. So they are expected to report 10 cents in earnings on 662 million in revenue. They've beat on earnings for the last seven quarters out of eight. And they beat on revenue every quarter since coming public, which is, you know, it's not like this company has had

low expectations. And so they are executing even relative to high hopes. Margins have been, so margins actually have grown. This is gross margins, unfortunately. 58% in October, 2020, which was their first quarter as public company to 66% last time they reported. The problem here is SG&A is high. R&D is high. I mean, this is as high tech as high tech gets.

This is cutting edge software, and they are spending tons of money to get new customers. I don't know how much you know about what they do. Basically, they live and die based on this partnership with Amazon and the other cloud providers. Amazon loves Snowflake because the customers in their enterprise cloud that use it are like the stickiest, best customers. And what Snowflake's platform, its software, the platform is allowing those customers to get more out of being in the cloud. So it's very much reliant on its hardware partners. But it's a great growth business. It just came public way too expensive. And look, last year, the stock got cut in half like most other tech stocks.

Unfortunately, this year, the Nasdaq's had a huge run. The stock's up only 5%. And that is the problem with buying very expensive, very overhyped stocks. Yeah. I mean, best thing you could say about the stock, not the business is it stopped going down, but it's just, it's trades in a gigantically wide range and it's sloppy and it gaps all over the place. And I don't know, we'll see more, I guess. Oh, it's crazy. Hey, put up a- Wait, no, no, no. Throw up this chart from quarter. Look how freaking awesome this is. Oh, wait, what I want to say was this, the growth opportunity. So I can't really see that chart, even though I made it.

But it's showing the average trailing 12-month product revenue for its largest customers. And on the right is the largest customers. And then you've got other tiers paying over a million dollars. But there's substantial growth there. Yeah, it's a great company. There's a reason why it had the valuation it had when it came public. It's not out of the blue sky. This was a company that had incredible growth rates.

It was growing 100% on the top line when it was already doing hundreds of millions of dollars in business. Yeah. So it was like, I'm not saying the valuation was justified. I'm saying it was understandable given the fundamentals. Can we put up the stock price? John, total return? Yeah.

So this is the experience of Snowflake year to date. This sucks, especially if you look at most other cloud-related software stocks. They don't look like this. Next chart. And this is since the IPO. I mean, it's horrible. I don't know what a down 40% is horrible. No, dude, this is since the IPO. I mean, it's horrible. I don't know what a down 40% is horrible. Now, this is bad. You know what horrible is. This is just bad. It's just bad. Put up quarterly year over year revenue growth. Here's why. When they came public in the fall of 20,

it was like over a hundred percent revenue growth, maybe close to 150%. And now quarter of a quarter, it's 47%. Now most, a chart off, most normal people would say, holy cow, 47% quarter over quarter growth is amazing. Okay. But not if it was 100% two years ago and people were expecting something more like that. So that's the, this is the reason why you don't want to own the most expensive stock in the market, which we're now about to talk about. And I do own it. No, you got to know when to break your own rules.

Yeah. Somebody could come in the chat two years ago and laugh at me for owning this. Okay. Nvidia, this is it. This is now the Superbowl. This is not because it affects the market so much. It's just the thing that everyone's paying the most attention to. Do we agree?

I have two, I have two things on this. On the one hand, I feel like the NVIDIA, let's just, I'm using air quotes bubble. I don't need to use air quotes. Well, I guess we do. We could caveat that because who knows if it's trading at 25 times next year's earnings, that's not too, too, too bad. Or is it south? No, that's a lot. Okay. So on the one hand, I feel like it's way too early for this bubble to burst. Like we're not done with NVIDIA. On the other hand, the stock's up 200% year to date. Would I be surprised to see it down 17% tomorrow? No, but it could also be up 17% after earnings. Not tomorrow. It's Tuesday night. Thursday, Thursday. We're taping. It's going to come out on Wednesday night. Yeah. All right. AI is really the last pillar of growth

and everyone is depending on it. If NVIDIA shows weakness, we could be in for quite a substantial correction in the market. That's a semiconductor analyst. Why haven't we sourced who that is? Who said that? I think Duncan said that. Okay, that makes sense.

Wall Street expects $2.07 in earnings from NVIDIA. That's up from 51 cents last quarter. No big deal. That represents 305% quarter over quarter earnings growth, which is supernatural for a company this size. That's 11 billion in revenue expected. And again, up from 6.7 billion last quarter. But remember, hold on, hold on.

Last quarter, when they reported earnings, the stock was already up a lot year to date.7 billion last quarter. But remember, hold on, hold on. Last quarter, when they reported earnings, the stock was already up a lot year to date. They were expecting six. They got it to 11. And rightfully so, the stock went up like, what, 30% or something since then? I mean, that day? It added 250 billion in market cap in a day or something.

So as much as- It was a world record. We've never seen anything like it. As much as I'm interested to see if they hit that bogey. And I'm guessing they're not going to fall that short given that it was guidance for 90 days later. You know what I mean? It's not like they're going to say 11 and hit like seven.

That'd be ludicrous. I'm excited to see what they say, what their next guidance is. Well, here's the thing. And we were talking to Dan, Nathan, and Guy, and they're not bullish. And Dan was like, okay, they did it. They did the biggest guidance raise in history.

You do it again. And like as flippant as that is, it's a really good point. It's a really good point. But what if they got to 14 billion next quarter? I'm not saying they can't do it. So, all right. I submit this on TV today. The main constraint here is not demand.

There's demand for years. Like the Saudis are buying AI chips. They have unlimited money. It's just all demand. The constraint here is how many chips can they make in a year? It's very similar to Tesla when it was having its breakout in 2021, when it was like they just could not make enough cars no matter what.

This is a very similar situation. And that's why we called the show tonight is NVIDIA, the next Tesla. This is just like the stock to watch now. Everything they do, everything they say is under a magnifying glass. I spoke to regular people, non-investment professionals is what I mean,

over the weekend. And what do you think, what stock do you think they asked about? NVIDIA. There's a full page. I mean, this is a huge story in the New York Times. I think it's 821. Is that today?

Yesterday. Not in the business section. This is like a story about NVIDIA for civilians to read. And the title of the story is how N how Nvidia built a competitive mode around AI chips. It's the story of how this company that nobody had ever heard of until a couple of years ago, all of a sudden dominates the most important technology of our era.

People are first finding out about this. So your comment where you said it's like too early for this to end, I kind of am leaning, I'm kind of leaning that way. Now, guess what? If this stock falls 20, 17%, I'm buying it. Because it's too early. It's too early for the hype to die.

It's too early. So this is one of the aspects I don't. All right. There are 10 brokerage firms covering the stock that raised their price targets last week. And the median price target is now over 500. It's a 400-some-odd-dollar stock. Yeah, it was an orgy last week to raise targets. Put this chart up, data center revenue.

I mean, this is data center revenue in the first quarter of fiscal year 2021 was a billion dollars. 2021 was a billion dollars. It's expected to be 9.45 billion based on these analysts we're talking about by the third quarter of next year. That is something. That is pretty spectacular. Let's put up a price real quick. But you know what else is something? Their trillion dollar market cap. That's something too. Yeah. So here's the price. I mean, you're welcome to short it, I guess. Many people have. Maybe today's the day you get lucky. Who knows? This is the best performing stock in the S&P 500 this year.

And by far, it's up 220%. The closest to that is Meta, the runner up, which is up 140%. So this is really in a class of its own. Gunjan Banerjee at the Wall Street Journal, who we like a lot as a reporter, she's done a really good job covering stories like this. And she's looking at the options market for NVIDIA. And I thought this was a little bit outrageous. This is where it's becoming the new Tesla. She's saying that according to CBOE global markets, the most actively traded contracts on Monday of this week are contracts that would make money if Nvidia keeps going up, if it gets to 500. Traders are betting on a swing of about 11%

for the stock, up or down. The average move for the stock is 7%. So traders are actually betting in the aggregate that this is going to be more volatile at a trillion-dollar market cap rather than less, which I found interesting. Theoretically, it should not be more volatile as a bigger, more established company. I mean, the most hilarious outcome is the most likely, and that's it going up 20% in the after hours. Is that the most likely outcome to you? No, no. I mean, of course, I'm being facetious. If I had to handicap this, and of course, I'm making this up, I'd say, I don't know, 58% chance that it goes higher, 42% lower. I don't know. This is what makes it hard to stay bullish. Quote, interest in one day options

bets has exploded this year with trading volumes hitting a record this month, according to Nomura. Quote, it reminds me of what people were doing in Tesla, said Danny Kirsch, head of options at Piper Sandler. You can make 10 times your money in a day, end quote. Talking about people trading. Let's put these up real quick, NVIDIA options. So just take a look at what this is. This is the dark green. I don't know why they're using two shades of green. Call options outstanding versus put.

Two calls for every put. Two calls for every put. Next. Yeah, go ahead. Sorry. Tesla options premium spent in 2023. Man, people love gambling on Tesla's close to $400 billion. Nvidia is about a hundred billion in, let's call it what it is, gambling.

Listen, I'm not like three years bullish on Nvidia, but that doesn't matter, right? We're talking about short term. We were talking with Jeremy Schwartz on TCAF about just to get some sort of historical data on what happens to companies that are trading for 40 times sales and 25 times next year's earnings. And it's not great. I think there's like a one in 10 chance historically that that stock was higher. And Cisco's supposed to child delivered 20% top line growth and still got crushed. So maybe NVIDIA is the one that is the outlier. It could be, but that's not what you want. Which of these outcomes is the worst case scenario for the most amount of people? Outcome one, they crush, the stock goes up 10%. How mad does that make

so many people who are rooting for this thing to die, either because they missed it or whatever. Outcome two, they crush on earnings and the stock drops 15%. Like which of those pisses off more people, do you think? Well, the second one, because that's probably people with money on the line. The second one is worse for more people. How many bears are actually short in video? No, they just wanted to die because it violates their valuation or whatever.

Right, they just, yeah. So, okay. Well, that's a good segue. Do you have anything else? We've done 25 minutes, 27 minutes on one topic. I wanted to bring up that we finally got some information on the Arm Holdings IPO. This is going to be the biggest IPO of the year. I think most people are not aware of anything that

has to do with it. And there's a good reason. It's not standalone publicly traded and hasn't been for a long time. SoftBank bought this company. Arm Holdings, similar to Qualcomm, had all these really important patents that were CPU or were involved with mobile phones. This is going to come public now. SoftBank is going to sell it back to the market. But what's interesting about Arm is that NVIDIA tried to buy it from SoftBank and the regulators said no. The anti-competitive regulators in Europe. I'm not sure how it was handled in the United States, but they basically rejected the deal. And so Corey Weinberg at the Information was saying, if that deal had gone through, ARM is supposed to come public with a valuation of $60 billion, by the way. It's going to be a really big deal. SoftBank

paid $35 billion for it seven years ago. So they're going to make money. But if that deal had gone through and SoftBank ended up with Nvidia stock, it would have been worth about 93 billion at Nvidia's current valuation. Anyway, I suggest you familiarize yourself, not you, but the viewers, listeners, familiarize yourself with Arm because this is going to be a very big deal when it comes out. And people are going to be talking about it for weeks. And I think it's going to be interesting to get this thing publicly traded. It is a very big

semiconductor stock. All right, let's continue. All right. So if NVIDIA were to beat and trade down, that would be in line with what we've experienced to date in this quarter. Stocks that are beating earnings, the reward for that stock is basically right near a 10-year low. So they're not getting anything forward. And there's a couple of reasons. Zero percent on average? Yeah, the reasons are twofold. Again, it's a tough interest rate environment.

But probably more important is the stocks already anticipated the good news, right? Like the stocks were rallying hard into Q2. So to give some back should surprise nobody. Stocks that are missing are also getting punished. So here we are. Wait a minute. Put that back up. Is this saying that stocks that are missing on earnings are falling an average of 3%?

Does that not seem like a lot to you? Just eyeballing. It looks a little bit higher than average, but not, you know. Okay. I think you have to pair this with an understanding of how overbought stocks were heading into earnings season. I think a lot of this is about like where things came from, even though theoretically that shouldn't matter, it does matter. And you know, this, this kind of reaction to reports

doesn't happen in a vacuum. I want to show you the technical setup here, um, which is a direct consequence of this kind of lackluster response to earnings. This is where we are, John Chardon. So this is overbought conditions meeting overhead resistance. This is Adam Turnquist, who is the chief market technician at LPL Research. This is Adam. Where do stocks go from here? Now that we know the primary reasons for the

recent selling pressures in stocks, where do they go? S&P has pulled back from overhead resistance near 4,600, violated a shorter-term uptrend. Overbought conditions are beginning to dissipate. He thinks that we should be okay. We were working off this 13% premium to the 200-day moving average. So that's like another way of thinking about overbought, the distance you are from a major moving average like that. In hindsight, in July, things were so crazy that we just got way ahead of maybe where we should have been, even with decent earnings. All right. So listen, so let me put some meat on those bones. Through the peak, so this is July 18th,

so just over a month ago, the Qs were up 45% year to date. Okay, that's a magnificent seven. No, the equal weighted Qs at the peak were up 27% on the year. That's the equal weighted cues. Even the RSP, which is the equal weight S&P 500, it was all tech. No, it wasn't. The equal weighted cues were up 11% with half the year done. So there should be not a huge surprise that we're getting back. And most of that happened since May. It's not like stocks were rallying January,

February, March. Stocks had a sick Q2. And we have seasonal weakness in August. So again, to me, this is like garden variety shit. This is nothing to light your hair and fire about. So Adam is saying, we suspect this could be a logical spot for a rebound, 4,200 to 4,300, given the confluence of support in this area, record high cash sitting in money market assets, and the fact that many investors missed the first half rally, we view the 200-day moving average as a worst case scenario for a drawdown. One more from Adam is the VIX. Still doing nothing. There are people who hate this stuff, but I don't. This is like the VIX pretty much every year. This is sort of the pattern that it ends up following.

And this is the VIX back to 1990. And what you can see is that we have just come through the most tranquil part of the year seasonally, which is June, July. Yeah, the market dies in the summer. Right. End of summer is when the bullshit starts. It's almost every year you could set your watch by it. There are some reasons for that that date back hundreds of years that we're not going

to talk about today. But Adam's pointing out, don't be so shocked. End of August, uptick in volatility started right on cue. The VIX has historically bottomed in July before ramping up into the fall. And that explains part of what we're living through right now. Nobody should be that surprised by it. Okay. Can we talk about Elon Musk?

I read that entire thing that you sent to me. Congratulations. Is that the longest article you've read this year? Wasn't that long, was it? No, I'm asking. Wasn't that long, was it? No, I'm asking. Wasn't that long, was it? Yeah, probably was the longest article I read all year. It was very long.

Might have been the longest article I read all year. Yeah. It's okay. Don't be so defensive. Listen, this guy Ronan Farrow, who writes for The New Yorker, did this piece on Elon Musk. It took him a year. He spoke to 30 of Elon Musk's current and former colleagues in various industries.

A dozen individuals in his personal life spoke to him. He talked with people like Sam Altman. And then he talked with all these government officials. And the picture that he paints is basically a little bit scary. It's like a kind of out of control personality who is extremely powerful, even with respect to like world events and geopolitical stuff in the United States and Russia and elsewhere and China. And I don't know, it wasn't a hit piece. No, it wasn't a hit piece.

Ronan Farrow is like a real reporter and and he has taken down Harvey Weinstein and some very prominent figures who are horrible people. This was not that. This was just like how powerful is this guy and how crazy. I had two main takeaways. One thing that stuck with me, I think this is a Sam Altman quote, but correct me if I'm wrong. Elon really does want to save the world as long as he's the one to save it. Yeah. That was the quote that everyone used.

Oh, that was it? Yeah. I mean, he's an egomaniac. And a lot of that, I think, can be traced back to his childhood. He had a really, really horrible childhood situation. Yeah, his father was a psycho. With his father, just verbally and physically abusive. But he loved his mother and his dad was terrible to him.

And so you get somebody who is incredibly intelligent, incredibly driven, and here we are. This is the outcome. So my takeaways were the US government, and by extension, the fate of the world is now very heavily reliant upon the caprices of Elon Musk, who doesn't seem to have any impulse control whatsoever. This is like one of the most unpredictable and volatile super billionaires the world

has ever known. By the way, all last year we were saying this guy just, he says whatever he wants. Like, there's no ramifications. Yeah, there weren't. He's controlling. He does have deep, deep ties into the government. Yeah.

So, I mean, not. What are they going to do? Right. So, like, the SEC is going to go after him. Like, the IRS. He's like. I think so. I think he's, like, laughing.

Like, what are you going to do? Yeah. And so, Ronan farrow i think is the first reporter to really go deep into this and he's talking to people in in like the defense department military and nasa and the military and these guys do not talk shit about elon they're not giving him any negative quotes about anything because space was basically spacex was powering like the internet of data in eastern europe for the government to do whatever they had to do starlink so starling right so so the the ukrainian the ukrainian uh counter revolutionaries are

reliant on elon musk's technology and the u.s government is powerless to do anything about it uh other than like support it yeah so the sec is gonna is powerless to do anything about it. Uh, other than like support it. Yeah. So the sec is going to, is going to go after him about tweets about Dogecoin. Never. Okay.

Um, anyway, I thought that was a really here. Just the government is now relying on him, but struggles to respond to his risk-taking brinkmanship and caprice current and former officials from NASA, the department of defense, the department of defense, the department of transportation, the federal aviation administration, and the occupational

safety and health administration told me that Musk's influence had become inescapable in their work. And several of them said that they now treat him like a sort of unelected official. Okay. That's, uh, that's interesting. The second thing is that he's miserable. Dude, he's above the law, like Steven Seagal. But here's the scary part. So combine everything that we just said with the fact that he's not that happy or potentially miserable, according to the article.

And I don't know anything more than what I read. Some of Musk's associates connected to his erratic behavior to efforts to self-medicate. They're talking about he sits in a little house in South Texas near where the rockets launch. And he said in an interview last year, quote, I feel quite lonely. He said his career consists of great highs, terrible lows, and unrelenting stress. One of his friends told the reporter, quote, his life just sucks. It's so stressful. Blah, blah, blah, emails.

And then there's some stuff about the New York Times thinks he's like abusing Ambien to get himself to sleep and possibly hallucinating. The Wall Street Journal reported this year that he's a big ketamine guy uh you know about ketamine special k you know anything about that oh yeah a lot about that you know a little i know all right it really like detaches you from your own consciousness like you feel like you're looking at yourself from somewhere else. It's a, it's hard to explain, but this is like scary. Um, that, that this person with this much clout, uh, potentially is involved with this stuff. Uh, I don't know. There's a lot here. I think it's, what's interesting about this is it's the world's richest man, but it's very rare that the world's richest person is this big of a personality and this

volatile and unpredictable. And maybe that's the thing that's unsettling. It's not like, oh, look at this crazy rich guy. This is the guy. And it's not like Jay Pierpont Morgan or John Rockefeller. This is a whole different thing. And I think that that's what's got people. So, I mean, there's stuff in here about him negotiating with Putin. We don't know if it's true. We just know that other people think it's true. So I thought it was a pretty eye-opening. Okay. You're up. All right. We're going to, where are we going next? Oh, shrinkage. Okay. This is like a big, this is a big story with retailers. We're hearing from all of them. They're all saying the same thing. Chart on. Look what you're able to do in quarter.

So this is the number of mentions of shrink on earnings calls all across the globe. Would you buy that trend? Unfortunately, it's a bad trend, but it's breaking out hard. Wait, they're using the term shrink to describe why they're missing earnings. Yes. Or to complain about, like Dick's Sporting Goods blew up today. I think it's down like 30% today. I think they blamed like 100 basis points of margin pressure on theft. Yeah, I believe it. So Dick's, yeah, stock got wrecked today. All right, let me share some quotes. From Walmart, shrink has increased a bit. The CR had increased last year.

It's uneven across the country. It's not in every market. Some markets are higher than others. Target, we've experienced more than a percentage point of cumulative profit pressure from higher shrink since 2019. In addition to these more recent challenges, our team continues to face an unacceptable amount

of retail theft and organized crime. Walmart said the common thread or the consistency in the end of the barbell is that these stores tend to be located in cities where they're not prosecuting this type of crime. And so people are going in and they know that I can steal X amount of dollars. And as long as I steal that amount and not anything more, I'm not going to get prosecuted. This is a big deal. It's almost like there's a cause and effect. We don't, we don't prosecute theft in certain areas and there's more theft there. I, I almost can't believe it. Um, why do you think they call it shrink and not theft or shoplift or something. Like what? What do you think?

You think that's how the consultant came up with that and sold it to- Don't say theft. Don't say theft. There's a reason though. Cause it's like, it could scare people from going to the stores maybe. Yeah.

If you're talking about theft, if all of those 520 mentions are theft, yeah, you're gonna scare people. Okay. I bet you that's gonna become an issue. Like companies that use the term theft. Yeah, you're going to scare people. Okay. I bet you that's going to become an issue. Like companies that use the term theft or woke and companies that say, companies that use the term shrink are like being like a PC about it. And then companies that come right out and say theft or like doing the right thing,

like calling it what it is. I could see that becoming another culture war touchpoint. I want to mention that this is not just department stores. A lot of the stuff that you see on Twitter is big box stores, whether it's drug stores or department stores. But I do think that this is more big company stores and not as much like small business owners being robbed from. I have no data to back that up, but I do think the thieves are like-

7-Eleven. Who gives a shit? It's CVS. Yeah. By the way, I just put theft- Part of me thinks that, but I don't know if that's true. I just put theft into the quarter search capability function. Same thing.

It's the same chart. Okay. So some people are saying theft. You're saying. Okay. Colesbrook, The Children's Place, Target. Target said it. They said theft and organized retail crime.

Put this picture up. This is a Walgreens in Manhattan. Grindr mentioned theft. This is toothpaste. These tubes are $3, as you can see. Okay? So there are videos, chart off. There are videos going viral on the internet for the last few years. Fox News loves this.

But a lot of this stuff is happening in California. Not all of it, of course. Um, but a lot of this stuff is happening in California. Not all of it. Of course, California passed this thing in 2014 called proposition 47, which basically changed the criminal code thefts in the amount up to $950. We're no longer going to be treated as felonies and prosecutable. They were going to be treated like misdemeanors, which implies like a fine and maybe some sort of counseling or some sort of court mandated program.

But that's playing a really big role in this. And I understand why they wanted to do it. They didn't want to ruin someone's life over like a teenage shoplift. And that kind of makes sense to me. And also they have like these ridiculously overcrowded prisons and you have to prioritize uh but so that so that's like the rationale the problem is this is what it turns into so it's not helping anything or anyone and what will end up happening is these stores will leave like they it's not they're going to report they're not going to come on quarterly conference calls and talk about shrink for

six years. At a certain point, they're going to say, this is no longer a place that we can like stay open. Do business, yeah. We have the safety of our employees. It's not about shrink. It's about lawlessness. Like we can't have it, obviously.

So I don't have solutions to this but it is a problem yeah um let me give you a quote though from somebody that is joseph stein he's the director of asset protection solutions for walgreen uh and walgreens bought dwayne reed which is why they have so many stores in manhattan now uh he spoke at the anti-crime Summit, which is Manhattan Chamber of Commerce this week. He says, quote, security guards are not there to protect the product. They are there to deescalate a situation and protect the customer and the employees.

I don't think anybody feels protected who witnesses this. When you have five thieves in your store on a mission, it's five on one. And that's not the responsible thing to do, meaning trying to stop the thieves. Then he goes on to say, if drugstore chains didn't lock up toothpaste, razor blades, and other popular items, there wouldn't be anything left on the shelves for shoppers to buy. So this is where we are. It's either lock it up or there's no store. shoppers to buy. So this is where we are. It's either lock it up or there's no store.

So I don't know. Is the solution just Amazon and we use these stores as like a pickup location and you can't even go inside? They hand you stuff through a slit? Is that where big box retailing is going? I don't really know. What are your thoughts? It's bad. I mean, I don't know. I don't have any solutions. What, you want me to do public policy now? Sorry, it's a little bit outside my comfort zone. Yeah, I don't have any solutions either. But yeah, no, it's bad.

It sucks. Who wants to live like that? No. It's sad. Well, when they start closing all the stores, maybe they'll start prosecuting retail theft again. Like maybe there's a tipping point. Maybe we're there.

Maybe it's already tipping. I don't know. I don't know the answer, but it's bad. Let's talk Fed. What do you think is going to happen? So Powell speaks Friday morning at 10 a.m. What does he try to do? Does he try to scare the stock market down?

Or does he try to like, um, take credit and say, we, we pretty much did it. Here's what I'm going to, here's, here's what I think they're not going to do. He's not going to move the goalposts. He's not going to say, you know what? Our new target is 3%. That's what a lot of people are suggesting. He's been pretty adamant. So that I think is off the table.

I think he's going to be like, I don't know, right down the middle. Can he open the door to it though? Well, he's been adamant that that's not going to happen. I don't know if he said that's never going to happen.

But he was adamant that like, but he changes his mind. Okay. We've seen it. I don't know. I'm not so sure. Here's what he's going to say uh we're we're happy that inflation is coming down but there's still a lot of work to be done

the full effects of our tightening have yet to be felt that sort of thing okay if he says that then it's just repeating what he's been saying for a year well yeah that's what i think he's gonna say he has used this meeting in the past to make course corrections. I know historically this has been a big one. Not always. For market participants and market observers. We have this thing from Sean. These are, so he took over in 2018 as the Fed chair.

Well, this is not from Sean, but what this chart that we're looking at is- I have something else, but okay, go ahead. Well, this is not from Sean, but what this chart that we're looking at is- I have something else, but okay, go ahead. This is the cumulative change in the Fed funds rate since they first started launching. So zero months, six months, et cetera. And we've really never experienced anything like that in modern times. So this 2022 rate hiking cycle, which we're still in, is the fastest. First of all, the steepest, but the fastest also, like both things at the same time, relative to all these other hiking cycles in 88, 94, 99, 2004, 2015. This is like one for the record books from both dimensions.

The market is expecting a pause in September, Both dimensions. The market is expecting a pause in September, like 84% chance or 84% implied probability for a pause. And then in November, it's not quite 50-50. In fact, it's 56% implied probability of them staying and then a 39% chance of them going another 25. Okay. For what it's worth. That seems reasonable to me. That seems to be what I think is consensus. Well, here's what he's not going to me. Like that's, that seems to be like what I think is consensus.

Well, here's what he's not going to do. He's not going to spike the football, right? He's not like, he's not going to say mission accomplished. I don't think so either. But he could, but he could hint, he could hint that he's closer to being done. I mean, we know he is. So there's no, yeah, of course. Yeah.

Like there's no harm in saying it out loud. Like just a nod to the fact that you know our policy is succeeding um but maybe that might be too it might be too dovish here uh put this table up this is 2018 through 2022 this is what the s&p 500 has done a week after the last five Jackson Hole speeches that Jay Powell has delivered. And then next to it is what the 10-year yield change has been. Last year was the biggest reaction. It was negative 6%. And as we all know, things went on to get way worse from there into October. And the 10-year yield was up 25 basis points. And again, this is just a one-week change.

But a 6% loss in the S&P and a spike in the 10-year yield was the result last year. I don't think it means anything for this year, but that's as bad as it's gotten. And as you could see in all those other years, it was fairly tame. The market is also pricing in a 72% likelihood of a rate cut by this time next year, by June of next year. Put this chart up one month after the meeting.

This is the S&P 500 a month after the meeting. What, last year? Less. Yeah, 2022. Yeah, so rates went wild rates went crazy from three percent to 3.7 percent in a month um on the 10-year treasury and the s&p fell 12 so like last year i was one of these people downplaying the importance of jackson hole because it really never had mattered that much but last year was one of those years where he really wanted to make himself heard.

And I don't know that that means anything for this year, but it's just important to go back and remember it could be that way. Like it's, it's, it's very possible. We don't have to read any of these quotes. You want to, you want to do this weights up stocks down thing.

Let's let's get moving. Okay. Okay. This chart that I'm about to share surprised me quite a bit. I'm going to discuss what we're looking at before we throw the chart on is the change in the 10-year over a 30-day period. So if it goes from 2% to 3%, that's a 1% increase. I'm not doing like the 3 divided by 2.

It's a 1% increase or 100 basis point increase. Then I also looked at what it stocks to over that same time period. Now, I only went back to 2021 because if you take this all the way back, there's no signal here whatsoever. But there is a very strong negative relationship statistically with stocks and interest rates going back to the beginning of 2021. So try it on, please. All right. So on the bottom is the 30-day change in the 10-year rate. And on the Y-axis is the stock market. So the interest rates were higher over a 30-day period, 64% of the time. These are rolling 30-day periods starting from January 21? Right. Okay. So interest rates were higher 64% of the time. And when they were higher,

the average return for the S&P 500 was minus 0.15%. The average return when interest rates were lower a year later was almost 3%. So quite meaningful, quite, quite meaningful indeed. Yeah. So people spend all this time talking about valuation or earnings and all these things. And it turns out like since the beginning of 2021, the inflation era, the only thing that really mattered, like the most, the most explanatory variable for what stocks would do over any 30 day period was what did the 10-year treasury rate do? Interest rates and inflation. Now, this should be fairly obvious. Everybody knows valuations. We talk about how important valuations are over the long, long term. But over the short term,

it's known. It's baked in, right? This variable, you can't predict. Wait a minute. So this started in January 21, where interest rates were inversely correlated to stocks, or 10-year yield was inversely. But prior to 21, wasn't it the opposite? Didn't stocks move with rates to some extent, like for long stretches of time? So the point I'm trying to make is, is yeah we just gave you the key to the lock the they're going to change the locks at some point this is not going to be this is not permanent for sure you can't set and forget this this correlation uh this inverse correlation it's not going to last

forever all right we're up to make the case you're going to pitch me i am oh this is a i could tell already this is a dog with fleas you I was actually excited because in the second quarter, I don't like pitch. They're all up. Every stock that we pitched was up. It's like, this stock's up 30%. I think it's up 40%. So there was a lot to choose from. Here's what I landed on. And I bought this. I bought utilities. I bought them last week. All right, we're going to go through the case. It was put on my radar from Bespoke. They tweeted, the utility sector is underperforming S&P by roughly 20 percentage points over the last 12 months. Note the back and forth swings we've seen historically. So it's not that this can't underperform by more than 20 points. It's happened before,

but this tends to train in this sort of a range relative to the S&P 500. Josh, I spoke to you, chart off please. We just spoke a second ago about how correlated stocks were to interest rates. This is basically like a chicken way to buy bonds. I am expressing the view because utilities are very close. It's like a bond proxy. So next chart. So I made the same chart with utilities. Oh, look at this. And it looks the same. The only difference is the negative impact is way worse. So when interest rates were up on average, the S&P was down 15 basis points. Utes were down 100. So they are much more sensitive to interest rates. Because they're seen as bond replacements. Yeah, the bond replacements. So the yield is 3.5%. So yeah, they're seen as bond replacements in the portfolio. Yeah, the bond replacements. Yeah, yeah.

So the yield is 3.5%. So yeah, they're highly impacted by where interest rates are. All right, technically, you got a lot of support down here. It got oversold at a higher price last time in June. Did not get oversold this time. So we'll see, obviously, short term.

And then next chart, please. This thing has a buttload of support. This is a weekly chart going back a few years. And this is the range where buyers have stepped in. So this is not a trade for me, unless it shoots back to 70, then I'll dump it. If you think interest rates have peaked or are about to peak, and there's going to be some sort of reversal, rather than trade fixed income, the utilities are going to go up. Reits too, maybe to a lesser extent because they're more economically sensitive. Utilities are not economically sensitive.

This is just a plan. I'm just calling bullshit on interest rates. So could be wrong. We'll see. I think it'll work. There's a lot of people thinking about different ways to express this view that we've gone too far in rates and now there's going to be some sort of a reversal. One thing I was saying with you and Ben on Slack before, it's just too automatic and too easy. People just rolling

treasuries all day, very, very short-term treasuries. It just seems like it's become a little bit too easy for people to make money that way. And whenever that happens, we're probably closer to the end of something than the beginning. Yeah. So I, I, I would like to buy just all the duration, but I don't feel like calling a top there in rates. So this is an easier way to do it and not get run over. So if it doesn't work, I'm willing to hold this. All right. Let me give you my mystery chart. Prepare to lose. Why do you do this? It's not fun. Fine. You know what? I'm just teasing. Are you going to dude? I've had enough shenanigans. Let me show you go ahead before you get mad at me i mean you say sorry sorry for being sensitive to your bullshit charts for the last three months you're gonna get you're gonna get

this one all right go ahead it's i believe in you it's not apple uh okay okay okay let me explain to you what we're looking at and then i'm gonna give give you hints. Okay. On the top is the stock price. It's an individual stock. Okay. It's a popular stock that people talk about all the time. It's not some obscure shit. Okay. Um, on the bottom is a volume spike each time they report earnings. And what I'm showing here is how perfect this pattern is. Like this is when people say that stock's under accumulation. This is textbook. Vol spike, price spike, beats earnings every time, great things to say.

And then for the next month or so, it's this low vol pullback where the hot money, you know, gradually sells out of it. And then before you know it, they're back to their next quarter crushing and another vol spike. And it's like this stair step that when you're looking at longer term charts of stocks, like this is uptrends. This is the kind of uptrend that you're looking for.

Do we agree with this? Do you concur? Yes, I do. Can you give me some sort, can I get a sector? Yes. I'm going to give you the best hint of all time. Okay.

I own the stock and I never shut the fuck up about it. Uber. See? I'm so proud of you. I knew you could do it. I knew you could do it and it was your first guess.

It was your third guess. It would be less, there we go. Good chart. Look at this. Good chart. Good chart. All right.

Hey, everybody. This goes to zero. Hey, everybody. Did you know that tomorrow is Wednesday? That means an all-new episode of my favorite financial podcast, Animal Spirits, starring Michael Batnick and Ben Carlson. We're doing Ask the Compound on Thursday, live at YouTube in the afternoon. And then Friday, another all new Compound and Friends.

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