The Compound and Friends - Lessons from Tesla Short Squeeze: What Are Your Thoughts? (with Josh and Michael)

Episode Date: February 4, 2020

In this edition of What Are Your Thoughts, Michael Batnick and Josh Brown discuss: * YouTube revenue growth is on fire, but who gets the money? * Netflix vs Cable Subs - crossover imminent! * The short squeeze in Tesla stock is probably the largest in the history of the stock market. * The stock market is recovering from its worst week in a while * What should investors make of the Coronavirus that seems to be roiling cross-border trade with China and the rest of the world? * Amazon earnings * Michael and Josh on the Super Bowl, did the right team win? 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Okay, what's up? I'm downtown Josh Brown. Welcome to an all-new What Are Your Thoughts? Michael doesn't know what I'm going to ask him about. I have some ideas. You might be able to guess this week, but I don't know what you're going to ask me. So stick around. Let's see what happens. Okay, can I go first? Go ahead. Okay, the first one I want to ask you about, we're going to start with Google Alphabet

reported earnings last night. For the first time ever, they broke out YouTube revenue, which I thought was interesting given how much time we've been spending on YouTube. So they did $11 billion in ad sales on YouTube in 2018. And they said last year it was like 15 billion. So a lot of growth, a lot of money being made apparently. But then they said that most of the money goes to the content creators. Were you surprised by that?

Well, they didn't, but they didn't break out what percentage it was. They didn't say, but they said most. So is most like 60% or 90%? Oh, I don't know. Or maybe it depends on the creator. I don't know. So 11 billion to 15 billion. Pretty good. It's pretty fast growth.

Yeah. They bought it for a billion dollars, YouTube, or 1.6 or something. So, it's pretty astonishing. Pretty good.

And then they get into the cloud revenue. They're on a 10 billion dollar run rate in cloud. I was surprised how far behind they still are versus Amazon is 40 and Microsoft is

50 billion in cloud. So it's weird to see Google so far back in anything, but like they are really far back in cloud services, whatever. Some people were saying Microsoft just throws in all this other stuff and pretends it's cloud, but whatever, it's still. Benedict Evans gave a presentation on, I guess, the state of current technology and what the future might hold. Oh, I downloaded that. Should I read it? It slides? It slides.

Okay. US pay TV subs down 20% and falling. So there's a chart of US pay TV subscriptions and you could- These are cable subscribers. It's going down and coming up is Netflix. And the two are about to cross paths. So when do you think this happens? So they're about to be more US Netflix subs than total cable subs?

No way. It looks like. But they're all the same people, right? Why do you say that? So in other words, people are... If you're paying for cable, you're giving Netflix $10 also. You think there's anyone that's like, no, I'm just cable. I won't

watch Netflix? Yeah. The whole reason to have cable is for the pipe, the broadband. And the whole reason you want the broadband is so Netflix. Can you do... Well, can't you have the broadband without – I'm saying not every Netflix sub also pays Charter or Fios. I agree with that.

But I feel like every cable sub is like, yeah, it's $120 to the cable company. Here's $10 for Netflix. I don't know. I mean I think it's Gen X boomer, but I think that's what it is. know i mean i think it's gen x boomer but i think that's what it is i don't could you imagine paying as much as you pay to a cable company for stars and all this shit and then like not buying netflix i don't pay for stars or cinemax why would you what are they gonna have that you can't see i have showtime in hbo like you might might miss two good shows a year. I know.

Life is short. Tesla short squeeze. We have to get into this. I think it's the biggest short squeeze of all time in the history of the markets. It's definitely in dollar terms. 30% of the float's been short. Now it's 26. Stock has gone.

It was just over 200 in October. So in four months, now it's, as I'm speaking, it's 930. Like I don't think anything like this has ever happened. The market cap is $140 billion. It's worth more than almost every company in the S&P. It's worth more than Caterpillar and the largest industrials. Did you ever think that we would ever see something like this in our life i don't think anybody did what's your like so what's like your it doesn't even have to be a hot take like what's your reaction when you're witnessing this in real time just it's just wild it's totally out of hand it's so profound well we'll get a great tweet so

what are the lessons okay a you're not as smart as you think you are. Repeat that to yourself every morning before you get out of bed. Tangible lessons. Like forget about all that sort of fluffy stuff. I think one, probably a good idea to not short the most heavily shorted names. I'm sure there's some research out there showing that. Yeah. I would imagine.

Yeah. But those are the names that attract the most amateur shorts. Two, do not get involved in cult stocks. Oh, yeah. Well, that goes without saying. Or don't get involved betting against them.

There was a great tweet yesterday, and this is sort of tangentially related, showing 4,000 Robinhood traders just bought Tesla for the first time above $700. Yesterday. That was yesterday. So obviously the knee-jerk reaction is like, oh, these noobs, oh well.

They're up 20% a day. What does that annualize to? But so here's a point that I made that I still think is valid. And actually this makes it even more valid. It's only a scam or a fraud if the person doesn't get away with it. So like you could look at the accounting that they were doing and saying this is bullshit accounting.

You could look at the way they did that SolarCity acquisition as like a backdoor bailout because Musk had personal shares in SolarCity that he was borrowing against. Like you could point to each of those things but he didn't get in trouble for it so it doesn't matter that's one and two um like he faked it until he made it in other words like in a very real sense uh and now he claims that they can be self-funding but number two we were saying like short it when it breaks below 100 because then you know it's fucked like well but the crazy thing is it did break it had it crashed 50 last year right like it did i just that's the craziest part it did break i feel like if you're saying something is a zero then the lower the price you short it from the less risk you're taking you You still make 100%. Well, okay, talking about risk, when you go into things like this,

you have to size your position responsibly. Yeah, but what if it's like a high conviction short? How do you do both? What's responsible? What if it's the biggest winner of your career, it goes from 300 to zero, and you only had it as a 5% position because you were being responsible. All right. Well, what if, what if it's hard? Yeah. What if

it went to a thousand? Yeah, it is. It is hard. Obviously. Okay. Let's move on. I mean, I just, I don't know if we'll ever see anything like this again, but I probably shouldn't say that because who knows? So, um, when, so today is Tuesday. Okay. So on Friday we had that big down day, relatively big markets fell 1.7%. It was we had that big down day. Relatively big. Markets fell 1.7%. It was the first down 1% day. 600 Dow points. That gets my attention. Yeah, it was a big down day.

Right. And it's two sessions later, and we took it all back. Yeah. Well, and there were no rate cuts even. It's amazing. Well, I think the Tina phenomenon has been in play for a long time. And people sell something on Friday and then Monday goes by and the world doesn't end. And they look around and they say, oh, I have cash.

And they say, what's going up today? Oh, Tesla's going up. Apple's rebounding. Google by the dip. Like, you know, there's a new day. There's a new opportunity set. So I don't think when you see 600 Dow points and a high volume sell off that it means everyone got out. The selling is so marginal compared to the overall size of the stock market. U.S. stocks are $26 trillion.

Global stock market's like $50 trillion. So when you see like a day like Friday of selling, your impression shouldn't be that everyone just swung to cash. Most people did nothing. So what you're seeing are people that are very active at the margins coming out. Things feel a little bit better two days later. All right, I'll put some more back to work. That's rinse and repeat. We've been watching that go on for 11 years.

Yeah, and it's been happening for years and I'm still surprised every time it happens. Coronavirus. Yeah, and it's been happening for years, and I'm still surprised every time it happens. Coronavirus. Like, I don't have any expertise, but I was doing some reading about prior pandemics, just so I wouldn't be a total space cadet as people talked about this topic. You probably knew all about this because you read like a thousand books a year. The Spanish flu, a hundred years ago, 1918. Wait, is it like 500,

50 million? What was the number? 5 million? All right. Here's the number. 50 million people globally infected, 5 million dead, 675,000 dead in the US. So did the Spanish flu lead to 1918? Did it lead to the roaring twenties? Well, that's my point. Two years later, you're in like a nirvana stock market. So I'm not saying that there's a correlation. I just thought it was interesting that those two things could have happened so close together. I know. And I get that, obviously. The knee-jerk reaction is to look at like, oh, the Ebola and previous iterations of this.

Well, the shoe fits. I don't know what that means. It's hard to say because obviously we don't know anything. What if, God forbid, this really does start to spread? And I'm not suggesting you position yourself accordingly either way, but I don't know. I don't really have anything. Well, here's a couple things.

The death rate is probably overstated. How do you know? Because, well, it's not my opinion. This is what the CDC said, is because the reported cases are probably the most severe. And so more of the reported cases have death involved.

In other words, people have this thing and they're not necessarily reporting it. We're talking about rural China. It's not like they're using a database in a cloud computing. How many deaths are there? Did I say, did I read 450? They think that,

they think the reported death rate sounds like it's 3% and they think it's probably way lower. So I just, the Spanish flu I just gave you was 10%. So like it's way less severe. But again,

to your point, that doesn't mean anything. It could mutate. It could, you know, it could jump from China to Japan. It could jump to Africa where they don't have the medical supplies to keep things as sterile as they can in a more developed continent. So 100% it could get worse.

I'm just making the point it was crazy to read about another pandemic about 100 years ago and how little of an impact that made on the market. And it seemed way worse. Both takes are silly. Like where people are like... Oh yeah, anyone doing that is also a schmuck. Yeah. Anyone just like, whatever. Yeah, so that's a bad take

and also the hysteria is a bad take. I guess, right? Like we just, we don't know. Wiesenthal tweeted that there was a lot of overlap in coronavirus hysteria and people who were constantly tweeting about the Fed's balance sheet. Oh, totally.

So these people, it's so right for the wrong reason. Like, listen, Corona wasn't in my bear case. Yeah, but I'll take it. We'll take it. Yeah. Anything we can get. Okay. Last week we did an emergency video about Amazon.

Yeah. That was like a little embarrassing. That was silly. It was silly. It was fun though. Uh, okay. I got some numbers. Uh, AWS, their revenue increased 34% Amazon web services revenue up 34% up to 10 billion. Okay. So it's a big percentage off a big base. Okay. And these numbers are quarter. That's a quarterly number. 10 billion. They're a $40 billion run rate.

Crazy. Yeah, it's crazy. How is this possible? You would think that anybody that would have joined Prime already did. Amazon said more customers joined Prime in the fourth quarter than ever before. That's wild. How are they driving that? How?

Pushing worldwide membership to 150 million households. Unbelievable. All right. Sales, 87 billion, up 21%. Less impressive because our sales really sales. Like a lot of it is third party merchandise. I mean, it's huge. But 21% growth on 87 billion?

Yeah. Or whatever that number was previously. Okay, finally. All this talk about Amazon not paying taxes and blah, blah, blah. Well, they signed up 48,000 new employees, 798,000 total. All of whom will have payroll taxes,

social security taxes that the company is paying. Minor detail. Minor detail. I mean, point taken with the corporate tax stuff. However- Well, they're also like report, like they're also reporting like 10 plus billion in earnings now each year like they're

not like they're not like barely profitable and winking like they're actually reporting profits now um they don't break out like whole foods or any of that that's no no no they do they do it's just not it's not a big number i don't it wasn't because i'm thinking like how are they driving more prime subs at this point? Well, that to me – Isn't everyone already there? That to me was crazy. Well, wait.

If you're at a Whole Foods, there's two lines. There's the regular line for the proletariat who are buying $9 carrots. I say proletariat jokingly. And then there's the line that's really, really fast that's just for prime members. Is that true? Like, yeah, they're doing that kind of stuff in New York City. Prime checkout. Okay, I didn't know that.

So you look at that and you're like, why aren't I Prime again? They just keep giving you a reminder. If you have the Prime card, you get 5% off at Whole Foods. Yeah, so they just keep giving you a reminder. Hey, this is a thing that everyone's doing. Why aren't you doing it? Like, oh, it's so smart. All right, that's all I got. You. All right. That's all I got.

You got anything else? That's all I got. We're not doing Super Bowl stuff, right? Anything? Groundhog Day commercial? I bet on the Mahomes over rushing yards and all those needles at the end of the game killed me and a lot of other people. They were able to stop him for three quarters.

No, no, no, no. I bet on the over rushing yards. I bet the over. It was like 36 and he had 45 or whatever Okay And then literally On the last series He kept running backwards

Oh and they subtract for that? Yeah yeah If he just took a knee There was that big sack What did that do to you? It wasn't the sack It was literally When he was running backwards

To kill the clock Those are all negative rushing yards Oh that sucks I didn't realize That counts against you Yeah But you were happy to see him win. You were happy to see the Chiefs win.

Oh, yeah. Happy for him to win. So was I. It was a fun Super Bowl. The only thing I didn't love about it is that Barry Redholz won two out of the four boxes. Terrible. Two out of the four quarters. That was just the ugliest thing.

You hate to say it. All of our employees on there with boxes and Barry wins twice. Hate to say it. Just disgusting. He better buy us a cappuccino maker. Alright, that's it from us. Let us know what your thoughts are. We always love your feedback. Go ahead and leave us a like or a comment.

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