The Compound and Friends - Return of the Meme Stocks, Big AI Announcements, Solving a Market Mystery With Nick Colas and Jessica Rabe

Episode Date: May 14, 2024

On this TCAF Tuesday, Josh Brown is joined by Nick Colas and Jessica Rabe, co-founders of DataTrek Research, to discuss the market making new highs, "sell in May and go away", the longest-running unsolved mystery on Wall Street, earnings, venture capital, and more! Then, at 37:49, hear an all-new episode of What Are Your Thoughts with Josh and Michael Batnick! Thanks to YCharts for sponsoring this episode! YCharts is always one step ahead of the game with free resources and this time is no different. Check out their election guide and get 20% off your initial YCharts Professional subscription when you start your free YCharts trial and tell them we sent you (new customers only). Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to the Compound and Friends. It is Tuesday night, May 14th. I want to tell you about our sponsor, YCharts. They are out with their latest election guide. If you are a financial advisor, this is a must have communication tool. You can use the link in the show notes, click on that and get all of the visuals, the stats, the data you need to help your clients make smart decisions, in some cases, less decisions rather than more decisions during this time of year coming up. People are going to be talking about it. Arm yourself accordingly.

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Listen, tonight's show is crazy packed with really helpful and important information. We work very hard to make sure that these shows have a high nutritional value when we put them out. We don't want you spending time with stuff that's not going to make you a better investor, a more informed market participant, etc. So this is what we think about when we're planning the episodes that we plan. And I think you're going to absolutely love what we have for you tonight. So Nick Colas and Jessica Rabe are back. We talk about one of the longest running mysteries on Wall Street having to do with earnings season and analyst forecasts. And I think Nick has helped us solve it. We're also going to talk about all sorts of other topics that are in the news right now. After that, it's an all new What Are

Your Thoughts with Michael Batnick and I. We go sort of deep on some of the biggest AI announcements that have come out this week from OpenAI, from Alphabet, Google, and a look ahead to what we think Apple might be coming with. We also talk about Michael making the case for a movie stock, believe it or not, the return of the meme stocks and all sorts of other good stuff. So please stick around, enjoy the show. And guys, if you like what we're doing, ratings, reviews, that is the single best way that you can tell other people about the show. And we really appreciate that. Okay, that's it for me, Duncan, John,

take us 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. is for informational purposes only and should not be relied upon for any investment decisions. Clients of RIDHOLT Wealth Management may maintain positions in the securities discussed in this podcast.

Hi, everyone. It's Josh. We are checking in with Nick and Jessica, the co-founders of Datatrek Research and the authors of Datatrek's morning briefing newsletter, which goes out every day to a thousand plus institutional and retail clients. Nick and Jessica also have their own YouTube channel, which you can find a link to in the description below. Hello, Jessica. Hello, Nick. How are we? Hey, good. Thanks. How are you?

I'm doing great. I look forward to I look forward to this every month. I wanted to talk about what you guys were writing in terms of new highs. I think that's a really great place to start. Improbably, we are seeing new 52-week highs in a lot of areas of the market, which even six months ago, most of us would have said that seems a little bit unlikely. And so I guess the best place to start for that kind of conversation would be Europe. Let me set the stage here with a couple of charts. I'm showing you MSCI Europe, which is the top pane, followed by MSCI European Financials,

EUFN. And the bottom pane is MSCI Small Cap Europe. And of course, these are all the ETFs that are based on those indices. Next chart I'm showing you, emerging markets, EEM on the top and MSCI, EEM, small caps on the bottom. And lastly, I'm going to show you five major banks, Goldman Sachs, American Express, Bank of America, Citigroup, Wells Fargo. What all of these have in common is they're making new 52-week highs.

And the question becomes, if that's the backdrop, it's pretty hard to find a reason to look past that and be bearish. Nick, I think that that was your conclusion in a recent piece. Do you want to talk more about that? Yes. I mean, this comes into the sort of what else do you need to know about the market kind of observation because when you have this level of two week highs across assets that are pretty different, Europe versus US financials versus EM, very broad based rally, all 52

week highs. It's like, what else do you need to know about equity market sentiment right now? It is overwhelmingly positive. And this flies in the face even of the dollar. The dollar has been stronger this year. You would expect, given all the charts you just showed, the dollar to be a little bit weaker. It's not, it's been stronger.

The best thing you can expect of the euro is that it's stabilizing. You want it stabilizing. Yeah, you talk about this being a classic kind of mid-cycle market. This is what mid-cycle markets look like. Can you get into a being a classic kind of mid cycle market. This is what mid cycle markets look like. Can you get into a little bit about some of these that you've seen before and why this feels like it's right on track?

Yes. So I started my Wall Street career in 1986 full time. I was a phone rep at the old Alliance Capital. So pre internet, pre everything, you need to call somebody at the mutual fund company to find out what was going on. So I had a lot of conversations with brokers and retail investors and the issues then were, hey, when's the Fed gonna move next

and how long can this go on? In 1986. In 1986, people forget the Fed had cut rates dramatically in 85 and 86, that's what led to the big bull market in 85 through 87. And so everybody was very aware that the Fed was driving a lot of these stock market gains and they wanted to know how long it was going to last. They wanted to know how long it could go on.

It was very similar conversations to today, which is kind of freaky considering it was 30 plus years ago. And that's what tells me is this is a mid cycle market. The 80s were a mid cycle market, even with the 87 crash, lasted all the way to 90. The mid 1990s, same thing, the mid 2000s, same thing, that long run from 2012 to 2019, all the same thing. These are the pushes and pulls that we get during mid cycle markets.

And the financial side that you showed with all those big brokers and big banks, financials are a leadership group during the middle part of a cycle. They crash at the end of a cycle, obviously, because loan losses go up dramatically, then begin to recover, and they kind of grind their way higher for years and years and years. And so that's the kind of market we have. What's so tough about this is nobody waves a flag and says, okay, congratulations, we're now in the mid cycle. And there's also, there's no calendar for how long it's supposed to go or when it's

going to end or what's going to end it. So a lot of investors spend the entirety of that time being in the mid cycle, thinking that they're late cycle. Because it's just it's human nature, This, especially when you're just making money and it's almost like, well, this, this is too easy or this feels too good. Surely someone's about to pull the rug out from under me. Yes, it's so true. When you look at the history of returns, you know, we've all looked at these long, you

know, annual return data sets and thought, oh, wow, you know, the 80s were easy. The 90s were easy. The mid 2000s were easy. All of the 2010s. Hey, you know, the 80s were easy, the 90s were easy, the mid 2000s were easy, all of the 2010s. Hey, you know, aside from the crash, things were great, must have been super easy to just print money and be a good investor. And it never is. It's always something.

It's always there's always things to worry about. It doesn't mean the cycles at an end, it just means that's the normal way the markets operate. Some things are good, some things are bad, some things are in between. But in general, corporate earnings go up and stocks go up. We are going to talk about earnings a little bit later, but one interesting factor buried within all of the transcripts of the conference calls that we heard from S&P 500 companies is that almost none of these CEOs or CFOs is talking about recession anymore. I think we are hitting a cycle low in people referencing recession in their comments to

analysts. So my question would be when you talk to investing clients, like are they on board with your idea that we're mid cycle? Or are you still getting as much pushback as maybe you would have Gotten a year ago with that kind of story There's always pushback and I was actually just speaking at a corp big corporate conference here in New York last week with a C-level executives of major US banks and other firms based around the New York area and I asked the group Okay, how many of your word of a? And half of them raised their hands.

So they're still, you know, they may not want to express it on calls because they don't want to seem like they're trying to ring the alarm bell or make excuses for earnings or for reductions in estimates. But there's still that underlying tenor of concern. They see the economy as OK, but not great. They look at their companies and they see a little bit of an excessive cost structure, which we'll get into in the next segment, but they're

not as confident as the market is. They don't, you know, they, when I show them, you know, high yield bond spreads, which are near record lows, same with investment grade, those things say no recession, absolutely not, not going to happen period. There's not that level of confidence either with our clients or with corporate America. I think we're making progress though, because if you would have asked that question One year ago in the spring of 2023 how many of you worried about recession? It probably would have been 75% Sure, I mean inverted yield curve and you know, I'm sorry banks get bank scare big bank scare

Yeah, right that that ripped spreads higher for a two, three months and they came right back down. So yes, you're right. I mean, general tenor is pretty constructive. But you know, we'll get a recession scare again. We always do. That's another hallmark of mid cycle markets. I want to show you two more charts. Okay.

Okay. All right. These are very simple. Industrial sector, Spider, which is the XLI is the purple line, up 23.61% over the last six months, leading the S&P 500 up 19%. So both are positive, but you can clearly see where the industrial started to pull away late January, early February, and they remain a leadership group, I guess, alongside financials. One more.

This is basically the same idea, S&P 1500 industrials, which is not an ETF, this is an index. And I'm showing that to you versus the S&P 1500. And you're seeing the same exact separation with industrials leading the way. This chart is showing us all market caps. So it's not just a handful of defense contractors in the S&P, for example. So it's very broad-based. And I would point out, this industrial leadership is taking place with a notable bomb being dropped on Boeing over the last couple of quarters. You're not even getting the benefit of some of the stocks that make up this group.

I think this fits well with the mid-cycle narrative when you see industrials leading the overall market. That's got to feel like it's a little bit of confirmation, right? Yeah, absolutely. The classic mid-cycle sectors are financials, like we talked about. Industrials, healthcare, which has not worked this year, is is often a mid cycle kind of market. I think it's kind of on the outs right now. But it should come back at some point. And then tech tech is usually a mid cycle, a good mid cycle

sector. So yeah, that all fits exactly. Want to ask you one more thing. So these rallies in small cap and Europe and emerging markets that we started out with, we haven't really seen a lot of follow through in these bull markets or these rallies. They tend to, and this is anecdotal, I haven't run any numbers, but I feel as though there are rotations or there are phases and they tend to take place over six weeks or eight weeks and people get excited about the small cap rally and then the rotation ends. And it, that doesn't necessarily mean it's a non confirmation and you

want to sell the S and P. So I guess like we like when they're rallying, we look at that as confirmation. Like, look, this is a real bull market. But then when they falter, it's not as though we, we cool off on the real bull market, we just, we look, we lost that confirmation, but we almost seem not to mind. We say like, oh, EM's not rallying anymore. Who cares? What do you think about that idea? Very, very fair. And I thought a lot about this in the context of Wednesday's CPI print, because obviously the whole world's just hyper focused on that. And will it confirm rate cuts

this year or not? Obviously, the world, all those charts you showed, all say that the CPI story is going to be passed us soon. We're going to get some rate cuts. Things are basically going to be as expected, not as good at the beginning of the year, but still some rate cuts this year. If we get a hot CPI number and these rallies kind of stall out and begin to fade, as they have done repeatedly, as you rightly point out over the last two years, you're right. I don't think we are at the end of the bull market. We're going to just, you know, that group, those groups have ended up looking overextended. I just find it's odd that we have these simultaneous rallies and big cap financials, small cap EM, European banks have been like the sickest sector in the world for the last five years,

10 years, even back to the financial crisis, and all they're making 52 week highs. That to me provides a level of confidence that I think feels pretty good right now. My theory on the European banks is it's all tourism from the US. That's not a bad one. The Greek economy and the Italian economy have never looked better.

And those are the two riskiest credits for banks in Europe to have to normally worry about. And like for right now, US tourists have bailed out those economies. So there's almost like very little normally worry about. And like for right now, US tourists have bailed out those economies. So there's almost like very little to worry about if you're a big European bank. So that's my side working theory. Jessica, we have two weeks to sell in May. So should I get a head start on that now? Or can we hold and see what happens? Yeah, so it's that time of year we often see people talking about the old saying of sell in May and go away.

So we put it to the test by looking at the S&P 500's returns from January through May, then June through October, and then November through December back to 1980. And as you can see in the table up on the screen, while it's true that the S&P's average performance has been meaningfully weaker from June through October versus January through May or November through December, it's still positive. So not being invested from June through October leaves money on the table. And you can see the differences in seasonal performance more clearly with the next chart that shows that. So this shows the S&P's compounded returns from January through May. That's the blue line on top,

June through October. That's the orange line at the bottom. And November to December, that's the green line in the middle each year from 1980 to 2023 index to 100. So basically this chart just shows you how much you would have made owning the S&P over just these months from 1980 to 100. So basically this chart just shows you how much you would have made owning the S&P over just these months from 1980 through last year. So for example, had you been invested in the S&P from just January through May of each year from 1980 through 2023, you'd be up 531% on a price return basis. Being invested just from June through October, you'd be up only 76%. From November through December, you'd be up 297%. However, by being invested all year from January through December, the S&P's total return is positive 4,300% since 1980.

We couldn't even put the line on this chart because it would skew the Y-axis so badly. It just blows the other strategies out of the water. So overall, the takeaway here is it's definitely better to stay invested all year rather than trying to play seasonal trends. Let's put that chart back up, John. So one thing that stands out to me is that every one of these time periods from 1980

through 2023, which I think most people would agree, that's a pretty healthy sample size. Every one of these monthly or these multi-month time periods features positive returns over time. We don't have any definitive periods where historically it's really made sense to be out of the market. But you do have a much better experience with, for example, January through May than you do June through October. That's also undeniable.

So my question to you, Jessica, would be, do you have a working theory as to why that's the case? Yeah, it just so happens that from June through October, that's when we've seen some large economic or oil shocks. It just happened to occur during that period. So some of the five worst years, which you'll you'll recognize all them for example were. I nineteen ninety nineteen eighty seven two thousand one and two and two thousand eight so the takeaway from that is if you expect a big exogenous shock in the next few months and sure sell this month how are you better be super sure that's happening because they're very unpredictable

and you're more likely to lose out on incremental returns. Nick, on the same topic, just thinking out loud, if there were such thing as some sort of a seasonal buy and sell that were even close to being statistically helpful, wouldn't it already be exploited into the Stone Age? You don't even need an algorithm for that. You need a calendar.

Yes. So like, how could something like that really persist? It is for answers, obviously it cannot. There's just some oddball things that happen and they end up being market lore and market superstition. Like crashes happen in October. Okay, yes, historically they have. But you know, it's like the old Mark Twain saying it's like the dangerous most dangerous,

you know, months to invest in the stock market are basically all of them. Yeah, you just have to sort of put up with that occasional exogenous risk. I think there was an agricultural reason for the frequency with which October was a dangerous time to be a speculator in commodities and stocks 100 years ago. The logic that the farmers would have to call back their money from New York and Chicago so that they could pay the farm hands to bring in the harvest. There was some rhyme or reason why the gold would have to leave the cities, therefore,

that would lead to forced selling of securities so that the banks could send the gold back home to the prairie. All right. But the gold would not have been that important. I have some old stock market newsletters from the 1920s, which are very cool to read. And they mentioned this exact topic right around May.

Yeah, this goes back a long, this is a hundred year old theory. And I think originally it did have some, it did have some, the Fed was very young in 19, you know, the 1920s, only been around since 1913. So it still was trying to figure out, you know, how to get money around the country. So it was probably true back then. So next time we could tackle

sell in July and wave goodbye, which is the new one. That's the new one that Jeff DeGraff shared that one with me last week. So maybe you guys can take a look at that. I want to talk about the longest running mystery on Wall Street or one of the longest running mysteries on Wall Street. And I'll frame it, Nick, and then you can explain it. Why are analysts overly optimistic on full year earnings projections,

but systematically too pessimistic on quarterly earnings projections? Why do they err to the downside in the short term, but to the upside in the long term? What is that about? Sure, I mean, I can tell you, I was a stock analyst for all the 1990s. I was at First Boston, I was the guy, you know,

doing buy, sell, hold on GM and Ford and Chrysler and doing these earnings models and talking to companies. And there's a couple of reasons why. As far as why analysts are always light on the quarter and why we get these, all these, you know, upside surprises in quotes, like Q1 we just saw reported reported 78% of companies beat their estimates by an average of seven and a half percent. If you go back and look at where

estimates were say over the last year and look at where they ended up, analysts usually have the right number pretty right at the beginning of the quarter like they're in two or three percent up or down then they always cut through the course of the quarter. And we end up with these beats of running roughly, you know, call it seven percent. And 75% of companies beating. And it's because the companies are talking to their analysts over the course of the quarter, nudging them down, pulling them down a little bit saying, hey, you know, sandbagging. Yeah. Are you sure your SG&A line is right? Or hey, we're having some issues with product mix this quarter.

We talked about it at the last conference. And let's get the hint. They cut their numbers. They mostly have buy ratings. They want to see their companies beat. And so the numbers ended up coming in too low. The companies outperform and they were able to go on the morning call and say, hey, my buy rated company beat earnings by 6%, maintain my buy.

And that's the whole story. Everybody wins. Everybody wins when the hurdle is low enough that the company can beat it and the analyst looks smart. They had the number right, but then they also had the call right. It feels like it's a virtuous circle. Why would we want to interrupt that with accuracy? Yeah, it's a real Lake Wobbock on the market.

All the children are above average. Right. Okay. So, and that's playing out now. And I think you have some really important points about this as far as like how that shakes out and what that means to investors trying to understand the impact of earnings on their portfolios. Yes. understand the impact of earnings on their portfolios? Yes, the bottom line is only a beat that is above 6.7%.

So call it 7%, which is the 10-year average of an earnings beat. Only above that number is it really a beat. Anything less than that, it's basically in line. It's not a beat. So there's a little bit of, OK, my company beat. Well, did they really? They only beat by 3%. That's not a beat. So there's a little bit of, you know, okay, my company beat. Well, did they really? You know, they only beat by 3%.

That's not very good. So if you beat by a penny, yes, on paper, it's above earnings expectations, but it's not meaningful because of the average beat is so much higher than that. Yes. And that's one thing every algo trading algo knows. They know these numbers, they know it down to the sector and subsector level They know it for the company's earnings history This is why stocks react so quickly to earnings, you know

Because the algos are looking at those numbers are running against the longer-term averages. Okay Why are the annual estimates always too high? Oh, this is like this is the greatest mystery on Wall Street And I think we have a chart that was actually from McKinsey published in 2010. And it shows that this is the streets numbers expressed in those little green squiggles for the S&P 500 earnings for the year. And then the blue-

Where they start and where they end. Right, the blue dot is where they end. The green line shows the trajectory. And you can see that these lines go down every year from 1985 Yeah through 2008 and this was published in 2010 and the date is exactly the same The phenomena is exactly the same for the last 10 years and it shows that analysts always start too high and end up lower with the exception of

2005 and 2006 over on the right hand side of the chart and those numbers go up because we had a really strong economy fueled by a housing bubble. So numbers went up. Other than that, numbers always go down. And the reasons are twofold. The easy reason is sometimes you get a recession. And obviously the recession has kind of hit mid-year and the numbers are too high. They have to come down. That's entirely understandable.

And that's fine. But it also happens in every other year. And the simple reason why is that companies start the year with a certain set of expectations they tell the street. And the street puts it into a model. Okay, revenue growth is X, fixed costs are Y, earnings are Z, I'm done with my model. What happens, and this happened to me over and over again in the 1990s with all the car companies, all the suppliers,

was all these companies add incremental costs through the course of a cycle. So if they start with a very lean cost structure after a recession, they start adding costs. And I can't tell you how many conversations I have with companies of all kinds, all over the world, say, okay, your numbers are okay, but why weren't margins better? And invariably the answer was, well, we had to invest for future growth. We had to hire new people.

We're looking at new product lines. And it's that kind of cost creep that creates that negative incremental margin pressure. So you have to lower your numbers. Growth costs money. Growth costs money, whether it be investment money or cost money. You know, it appears on the balance sheet, it appears in the cash flows, and it appears in the income statement.

But since we're focused on earnings, it's that EPS effect that's most dramatic. And so numbers have to come down. The only time this cycle reverses is going into a recession and during a recession. Then all those incremental costs go away and you start with a new baseline of margin structures and the whole cycle repeats itself. But the end effect is you have this constant process of bringing your numbers down. And so like it's the biggest rookie mistake to think that the analysts are expecting whatever 270 a share for the S&P next year, that's going to happen. It's not, those numbers always come down.

So this is an interesting question. The analysts know this and yet it still persists. So one idea might be if you run a corporation, one of the things that you're doing internally is setting targets. This is, you're telling your employees, this is what I want you to, this is what we think is doable and this is what I want you to hit or exceed for your bonus, for example, or for a promotion. So targets are normal for companies to have an internal. The problem, I guess, comes when a target transmogrifies into an expectation.

So now it's like the CEO just set this guidance internally for what they want their employees to do. And all of a sudden enough people hear it like telephone and it goes from being this is the target to this is what we forecast. And companies don't always hit their targets, of course, but if the target becomes a forecast, then you could understand why the sell side gets infected with a certain number. And that number then becomes like,

oh, here's our expectation. Yes, and look, I mean, there's some offsetting factors as well. Like product mix improves during economic expansion, units sold tend to be better than expected. So companies feel they have some leeway on the cost structure side. But that'll come to bite them at various points in a year when demand doesn't come through them, when mix deteriorates. And so again, you get these numbers coming down.

So I want to quote you to you, because I think what you've written in this section is a perfect explanation for the experience of 2023 and so far 2024, especially when we're talking about the largest companies in the S&P, the tech giants. This sounds exactly like what we've just experienced. You write, during periods of stable economic growth, it's hard to model incremental earnings. And here's why. Let's say you're modeling a company with a billion in revenue with 10% operating margins, and you expect them to grow sales by 10%, which would be another 100 million in revenue.

That 100 million in revenue doesn't come just on top of the existing revenue with no additional expenditure to the point that you just made. You're going to be hiring people, you're going to be buying equipment, you're going to be doing the types of things that you need to to support that you just made, you're gonna be hiring people, you're gonna be buying equipment, you're gonna be doing the types of things that you need to to support that growth. But then all of a sudden, when you get into a recession, or what feels like a recession,

and then you have companies reporting these incredible margins and earnings, you point out that's because they're not making those same investments that they were making on the way up, or they're cutting them out of the picture entirely, which leads to the types of upside surprises we got at Metta, we got at Netflix, as they started to rationalize from the go-go growth era of let's say 2021 to the almost austerity of 2023. So I think that's like almost a perfect explanation for why, and the bears hate this,

but you have earnings beats at Apple, at Microsoft, that even if there's no revenue growth, you're still getting these upside earnings reports. Do you think that's kind of like a good explanation for what we've just lived through? Yes, absolutely. And it's not just tech. If you look at Q1 results for the S&P as a whole, earnings beats above average, amount of beat above average, revenue growth way below average,

number of companies beating on revenue growth way below average, like 59% beat on revenue growth versus usually 65 to 70%. So we've had a very bad revenue quarter relative to expectations. We've had a very good earnings quarter and that shows you like every company is doing this. They spent the last two years hiring anybody with a pulse that could possibly help them grow revenues. And now with revenue growth slowing, they're saying, okay, we gotta cut back,

we gotta cut back. And that's what's happening and it's margin management. That's totally fine. It's also why analysts expect earnings to improve so much in Q2 and Q3. Expectations of like 7% incremental sequential growth for the next two quarters. We usually get two.

So the market's saying, okay, if it's cost structure led earnings beats, I'm fine with that, just give me the numbers. Yeah, and even if they're not doing layoffs or announcing them publicly, when they stop hiring, that will eventually be a positive earnings impact in the next quarter, where they would have normally hired X number of people. So even a hiring freeze ends up helping on the earnings side, has nothing to do with

the revenue side. Yes. And it could be hiring, it could be consultants, it could be T&E. They have so many levers that they jammed forward over the last two years that can pull back on it and hit their numbers. So did we sort of solve the lingering mystery on Wall Street? Yes, the lingering mystery is incremental margins are extremely hard to predict. And anybody who's done a model knows that.

But if you haven't, just take our word for it. It's ferociously hard. And that's why the numbers are always too high. Okay. Jessica, on venture capital, you've observed that we're really not seeing an increase in the investments that are being made. But Big Tech also is eating up an increasing share of the amount of money going toward venture capital deals.

I suppose they have the money and they certainly have the strategic desire to be early to these things. What do you see happening here right now? We have a great chart of this, by the way. Yeah, so we looked at Big Tech's R&D spending versus venture capital outlays because Big Tech as the incumbent can be potentially disrupted by hot new startups getting funded by VCs. So to set the stage here, let's first just look at, as you can see on the screen, that shows big tech's R&D spend over the last three years. I just want to know real quick, the only big tech name we excluded is Amazon because it

doesn't break out its R&D spend. But two points here. First, that's important to point out is that these six companies make up a quarter of the S&P 500. So their R&D spend is an important driver of not just the individual business's long-term growth, but the US equity market as a whole. And second, these six big tech companies increase their R&D spending by an average of 44% from 2021 to 2023, despite 2022's bear market. So for us, the biggest takeaway from this table is, while big techs higher profits enable them to spend more, not even the Fed's latest tightening cycle slowed any of these companies down in terms of investing for the future.

What percentage of the R&D budget is venture investments in third parties or other companies, would you guess or would you say? Yeah, so it's broken out, it's separate. So we have another chart to show you that'll help answer that is this shows big tech aggregate R&D spend in comparison to global venture capital funding over the last three years. And the numbers here are in billions of dollars. So what this shows, just three points on this is the first is that VCs pulled back on funding startups worldwide, even as big tech companies increase their spending on R&D from 2021 through last year.

So VCs pulled back funding by 59%, whereas big techs R&D spend were up 44%. We're up 44%. I think what you're referring to that leads to my second point is that Big Tech's annual R&D spending as a percentage of global VC funding has risen from just 15% in 2021 to over half last year. And third, Big Tech has also dominated much of AI-related VC investing over the last year. And third, Big Tech has also dominated much of AI related VC investing over the last year. And those rounds aren't in these R&D numbers that I showed you. So think like Nvidia, Microsoft, Amazon, Google, they were all involved in the largest AI rounds worth billions of dollars. So think like ChatGPT owner OpenAI and its rivals Anthropic and Inflection AI.

So it just goes to show that big tech R&D spending is a structural growth story, but global VC funding is much less reliable. And this just gives big tech incumbents an edge over newer VC funded businesses, especially as big tech increasingly invests directly in AI startups themselves. I was also gonna say that there's a component to this that looks a little bit like vendor financing. Of course, they don't look at it that way,

but ask yourself the question, when Microsoft and Alphabet and Nvidia are spending all this money on R&D, a lot of that money ends up going back to each other in the form of cloud compute or equipment or chips. So there's kind of a virtuous cycle there. Of course, we know that at some point that does end. It's not infinite.

What are your thoughts about what that tells us about these ecosystems? Can they stay healthy for a long enough period of time where the earnings continue to be fueled by the R&D itself? Well, I would look at it this way too. One of the reasons why they are investing in AI startups is because they're getting so much government scrutiny. So it gives them a window into still being at the table because they can't make as many acquisitions. So they're able to also just keep investing in AI startups and get exposure that way.

Yeah. And I think if they invest in an AI startup who then takes a portion of that invested capital and buys back cloud computing services, everybody looks good in that scenario. And we've seen that before. What's your takeaway to somebody that says that there's some negative or positive having less venture capital investments being made and more investments being made by the six largest companies in America? Do you view it as either positive or negative or it's just a fact of the current environment and shouldn't matter terribly for investing in the long term?

Yeah, I just think that ultimately it proves that big tech can hold its competitive advantage, even with VC spending hundreds of billions of dollars over the last few years. Big tech may not spend as much, but they're consistent and they grow their investments every year. Guys, I want to thank you so much for joining me today. It's always a pleasure. I want everyone watching and listening to follow Nick and Jessica's video channel on YouTube. There's a link in the show notes. And of course, you can go to youtube.com slash at Nick Colas and Jessica Rabe if you want to get a jump on that. And of course you can go to youtube.com slash at Nick Colas and Jessica Rabe if you want to get a jump on that. And of course you could subscribe to data track

research at datatreckresearch.com. Nick, Jessica, thank you guys so much and we'll check in with you soon. Thank you. Thank you. Okay, it's that time again. It's your favorite time of the week, everybody. It's time for another all new edition of What Are Your Thoughts? My name is Downtown Josh Brown with me as always, my co-host Michael Batnik. Michael, say hello to the folks. Hello, folks. Excited to be here. We have a nice group of folks here in live chat.

Michael Skyrose, Dr. Horton. Cliff is back. Bob Sacamano. Debbie Dantes is here, Rachel's here, who else? Liam Pearlstein, Benjamin, Jack, everybody's here. So good to see everybody tonight. Really appreciate those of you who make it to the live chat. I wanted to make a very, very quick announcement. I'm announcing this everywhere that I ever say anything just

to cover all my bases. If you come across an advertisement on Facebook and it looks like I am involved in it in any way Instagram too or anywhere for that matter I am NOT involved. I do not buy ads. I do not have a WhatsApp account. I don't chat with people about crypto. I don't have a trading group. I don't have a secret thing where we're going to text each other about crypto. It's all a scam. I urge you, if you come across this, it's very simple. Report it to Metta.

Tell them it's a fraud. Tell them it's an impersonation. It takes five seconds and then nobody else will fall into one of those traps. I have no idea what's going on. Me, Tom Lee, Muhammad Alarian, for some reason inexplicably. Who's the guy from Fidelity that retired 30 years ago? Peter Lynch. Peter Lynch. Thank God. Peter Lynch. Like they're just imitating us and they're getting people to join these private groups and they are doing pump and dumps and pig butchering and all kinds of scams.

So please, it's never me. I promise you it's not me. It's not Lizanne Saunders. None of these people are doing this. So just trust me, it's fake. Okay. That's all I wanted to say. Do we have a sponsor tonight, Mike? We have my favorite sponsor tonight. It's YCharts, a service that I use every single day. YCharts!

Probably five days a week. I was going to say seven, but let's be honest. I'm probably not using them on Saturday or Sunday. They've got everything from economic data to market data. We rely on them for everything to help us construct charts and client communication tools. They've got this one thing. Every four years, Josh, people seem to get nervous about the election as far as it relates to the market. And it's every time, and it doesn't matter how much content

you put out to educate the people, they need to be reminded. And so YCharts has a guide to the presidential elections. And you can grab your copies in the link in the show notes. So check it out it out also our very own Nick Medjuli will be on Y charts for a webinar on May 22nd so get that as well. All right Josh let's get the show started. Shout to Y charts. So this morning I guess I got a little bit of a late start.

I opened my eyes and the first thing people were panicking about was the April PPI, which by day's end didn't seem to be terribly important. What time did you wake up? Usually in early Tibet. You're usually an early riser. You okay? I think I did like an 8.15 wake up today. You okay?

No, but that... Never. That should affect this. I'm also not okay when I wake up at five. Anyway, I woke up and they were talking about a scorching hot April PPI, which of course I'm joking. But it was not what you're looking for. It was certainly hotter than expected.

So I'm just going to go through the numbers, Mike, and then I would love for you to react. And it looks like Chart Kid made us something dope. All right. So April PPI was up 0.5% month over month. We were expecting to see 0.3%. It's a 2.2% year over year gain, which was in line with expectations. Pulling out food and energy, which gives you core PPI, was still up 0.5% month over month versus 0.2% expected. Energy was up 2% month over month, goods up 0.6,

food down 0.7. And just for those who don't pay much attention to this, when we say PPI, this is the producer price index and we're talking about wholesale prices that businesses pay. Mike, you want to introduce this graphic? Mike Govind Yeah, but before we do, before we do, the 2.2% year over year, I know the month over month came in harder than expected, but 2.2%

year over year sounds not bad, right? Josh Worsley No, it's not bad. But then I don't know how noisy that is because I don't really follow it that closely. Mike Gov. All right, so You're right Josh the headlines and the tweets were not alarmist, but listen Let's go again. No, but the numbers the numbers were hotter than they were but the great thing about waiting a beat is That the market is the ultimate arbiter of like was it really was it really hot? So let's get into this So chart kid made this Is it really hot? So let's get into this.

So ChartKid made this PPI. This kid is on fire. Look at this. The month over month versus, so the estimates versus the actual. And the difference, and Josh, to your point, the difference on the bottom, by the way, the point is that the estimates versus the actual,

it's all over the place. The estimates are nowhere near accurate, like nowhere near. So this is a noisy series. President, president, oh nowhere near. So this is a noisy series. President, oh my god, Jerome Powell had a chance to come- I'm sorry, just for the audience that's looking at the chart. So the top line, the dark blue line is showing what the estimate is and the light blue is the actual, but then below we're breaking out what the delta is, which is the actual subtracting the estimate.

And to your point, you have as many quote unquote misses to the downside as you have misses to the upside. And it's easy to understand why. Think about what you have to get right to consistently nail this number as an econometrist or a statistics person, it's almost absurd to think that anyone can really do this. So it's a plus or minus over the prior month and it's noisy because of all the different components

that are in there. John, can we skip this quote and go to the PPI, the blue and orange chart please? So you've got USPPI, the blue is services and services almost never goes down, right? And then you've got you've got goods in orange That's interesting. Yeah, and the goods goods inflation has or disinflation actually has gone lower And so just I guess the point is this is noisy. This is a very very noisy chart

Sometimes higher sometimes lower. Would you say like there's almost never a one month reading in PPI services or goods that would ever like materially change your mind about what's going on with the economy or inflation? Well the good news is my mind doesn't need to be changed. It's Jerome Powell and here's what he had to say on today's release. He said, so we had a producer price index reading this from the transcript just a couple of hours ago.

And I would say it's actually quite mixed. The headline numbers were higher, but they were backward revisions. Powell also said, I don't think it's likely based on the data that we have that the next move that we make would be a rate hike. I think it's more likely that we'll be at a place where we hold the policy rate where it is. So the 10 year and the two year interest rates spiked on the release and they fell

and fell throughout the day. We've got a chart on that, John? So the knee jerk reaction was higher. People, the market had a chance to come through the data, So the knee jerk reaction was higher. People, the market had a chance to come through the data, reassess, and the market was not worried about today's release. We'll see tomorrow. We've got CPI tomorrow.

We'll talk about that in a minute. But the market was not super concerned with today's reading. Yeah. I mean, for like five seconds, the algorithms were concerned, but the people weren't terribly concerned. I think that's probably my big takeaway. We're going to get these knee jerks because there are programs written to make moves. And then, to your point, wait a beat and watch what happens when human beings process the

same news. So here's a more important piece of data that we got today. This is a chart from Ed Yardenny. So this's a more important piece of data that we got today. This is a chart from Ed Yardeni. So this data point came out today. There's a survey for small businesses. Are they planning to raise prices over the next, I don't know, I don't know if it's over the next year or what, but over some determined period of time. And that is coming down dramatically. And that matters a lot more than the individual number that we got on PPI today This is interesting. Yeah, and and the reason why is because inflation expectations

They talk about them being like well anchored You know, this is like the thing that becomes a precursor at least in the minds of the Fed Like like the expectations actually have some, I don't wanna even say predictive power, but like causative power. If business owners en masse think that there's gonna be a reason why they need to change their behavior, eventually that will show up in the actual data.

So I think that's really interesting. Let's take a look at the next chart. So the question is, does tomorrow's CPI report, like is that the new thing that we all need to be super worried about? What is this? John, the one that says CPI reported tomorrow. Oh, I'm sorry.

There we go. So, I guess the main thing to keep in mind here is that we have survived hotter than expected reports before and out of the last seven, five of them were above, that's actually remarkable. The last time we had a below expectation CPI or consumer price index report was in October. And the market's up what, 30% since then? Something crazy? So we've been tolerating.

So the narrative has shifted. The narrative shifted. The market is no longer concerned about CPI, at least looking backwards. Now if tomorrow's like super hot, you know all bets are off, we'll see. But the market has digested higher CPI. That's just what it's done.

That's not my opinion, that's what's happened. Right, so we can survive another hot CPI report. That's just what it's done. That's not my opinion. That's what's happened. Right. So we can survive another hot CPI report and hot in context because let's talk about the expectations. Tomorrow, we're expecting to hear that CPI came in at 0.4%, which was the same exact reading for the prior month, March. So let's say it's a 10th higher and it's 0.5, in other words.

If it were to be an inline upside surprise, I feel like we could survive it. If it does hit the number, that reading would actually lower the year over year rate, because the 0.4% is month to month, to 3.4% for April, which would be slightly lower than 3.5% in April, which would be slightly lower than 3.5% in March.

And the core number, again, stripping out food and energy, which are more volatile, is expected to come in at 0.3%, again, month over month. So, you know, if we can do that number, I guess it's sort of meaningful, but if we can't, it's not so meaningful that there's huge risk to equities. That was my takeaway.

The S&P is at an all-time high, so I could see either scenario where it comes in line and we rip through the all-time highs. I could also see a scenario where we come in a little bit hot, the VIX is at 13, and we're just looking for an excuse to take profits. We double-top. Yeah, I mean, that's possible too in the short term.

What's interesting though is after today's release, John, let's go to that CME FedWatch tool. Go back one chart, thank you. So I can't read this exactly, no? Yes I can. So yesterday, the probability of a 25 basis point rate cut for the June meeting was 3%. That went up somehow to 9% after today.

The probability went higher. So the probability of a rate cut went up somehow to 9%. The probability went higher. So the probability of a rate cut went up after today's air quote hot reading. Next chart please. So again, this is the same thing. This chart is showing the expectations of basis points cuts, total Fed cuts for 2024. Again, after today's reading, that number ticked higher.

Whereas, had you seen just the headline, you would have expected this to go lower. So ultimately the market decides what matters and the market decided that today's hot reading actually wasn't so hot at all. So from the chat, I have some people saying the new focus is not on CPI it's on jobs sort of believe that I sort of when you looked at claims the other day you know

I'm good here this is interesting I quote kind of believe this to Bob Rice inflation is close enough so I know it's the last mile and we would love for it to be too it's not for I sort of think that that you know what I mean know it's the last mile and we would love for it to be two. It's not four. I sort of think that that you know what I mean? Like it's not headed back to four percent. So I think that's that's what I'm saying. The market the market has moved on Right. So let's do this 10 year chart This is today. We did this already. We're done. We're out of charts. Oh We went through that already. Oh, I missed that. Okay. Well you were probably in the chat when I told you to be listening to me. I'm always listening to you.

I'm a professional. All right. I'm the captain now. Let's move. Let's move. Okay. We've been talking the everyone way. Everyone who is a market commentator has been talking about when are consumers going to

change their behavior and when are consumers going to change their behavior and when are companies going to respond to that behavior? And we got both of those things happening right now. Starbucks was an abomination. We spoke about that. I actually bought the stock. I saw something, I saw a push notification come through the Starbucks app that I don't remember seeing.

So this is a screenshot from my phone. Starbucks swing by today from 12 to six, you got 50% off a drink. A day later, I saw another one inside my app. $3 for a grande, whatever the heck this is. I'm a hot coffee guy, so I don't know about this. Yeah, they're letting people know, hey, we have deals. But they're responding. They're responding.

Also, McDonald's. Walter Bloomberg tweeted, McDonald's readies $5 meal deal to lure customers back. Companies did a lot to fight off inflation. I'm talking about not companies facing the consumer. I'm just talking about inside of companies, whether it's getting or addressing some some levers that they can pull to get the stocks Acting better and maybe this is another one that companies that retail companies have lever that they have to pull is addressing that they squeeze all the juice out of out of raising prices and Their margins going higher and they hit their limit and listen from a bit capital's point of view

I understand you don't know where your limit is until you hit it, right? So they're going to take advantage of that as long as they can. They hit it, customers responded, and now they're responding in kind. I think that's such a key point right now. And did you have a chance yet to watch the thing I did

with Nicholas and Jessica? No. Okay, so we did this whole thing about the weirdness of where companies actually beat earnings to a great degree coming out of recessions. And the reason why is because they have all those levers to pull and no one's expecting it. And you know, one of the interesting things about this current earnings season that's

just wrapping up, I guess we're like 95% through or something, we have no problem beating earnings. We have no problem with guidance. You know where the problem is? It's on revenue. No, it's on revenue. Margin's great. Margin's are near record highs. The problem we have is on revenue. And that speaks to exactly what you were saying. It's like, okay, Starbucks pulled all these levers, they leaned on their suppliers to get, you know, to focus more on lower prices, they cut staff, they cut white collar workers, they did all that stuff, maybe pulled back on marketing, you know, like one lever after another, utilized more technology to get leaner, etc., etc. And then it's like, okay, we did all this stuff.

Oh, and by the way, we raised prices 18 times in in 18 months Alright, we did all this stuff, but now the customers not coming in so now the last lever is give something back to the customer and Ocean is can their revenue whatever revenue they get back from this will that outpace any sort of margin compression and guess what? We'll find out sorry Sorry, lever or lever? Either way. Either way. I'm a lever guy. Now that I'm hearing myself say it out loud, I don't know that I've chosen one. You know why? It's very simple. I say leverage. As does everyone. Leverage is not a word.

Leverage is English. Leverage is not a word. So why would I say lever? In Britain, that's how they say leverage. Oh, okay. Okay. I think I might be making a, if you ever want to be cheered up, like if you're ever not in a great mood, ask an English person to say Twitter. Just say like, say the word.

They go Twitter and it's just, it's, it's amazing. All right. Home Depot. So here's another company. It didn't really hurt the stock today, but saying like the persistent inflation and I guess a little bit of consumer fatigue starting to hit the stock, starting to hit the business, not the stock so much. Quote, on Tuesday morning, the home improvement retailer posted revenue of $36.42 billion

compared to $36.66 billion expected by Wall Street. That's a revenue miss. That's down 2.3% over a year, a year over a year. Adjusted earnings were higher than expected because again, lots of leavers. Lower foot traffic and smaller ticket sizes, down 1% and down 1.3% respectively, contributed to a fall in same store sales, which were down 2.8%. So Home Depot is going to have to find more leavers to keep people coming into the stores

or just accept the down same store sales numbers. It looks like the market was not surprised by this. Stock was flat on the day. Yeah. But again, it's another example of a giant company. Probably every consumer in America visits a Home Depot at least, let's say, once a year or twice a year. And they're telling you foot traffic is down, ticket sizes are down, and that means they

probably have to look at all of the price hikes they've taken. Actually 340 has been strong, strong, strong, uh, resistance in the past. So if this turns into support could be potentially a good entry spot. I don't know. We'll see. But here's what I would say. What have, what have we learned over the last couple of years? Like do not underestimate corporate America's ability. Oh, him too. Do not underestimate corporate America's ability to find the way and navigate through these cycles. They're really good Yes, but what what might we learn in the second half of 2024? We might learn there are limits

mmm Wow in flat flat revenue numbers at S&P 500 companies is not great. Okay, I want to spend some time on this So let's let's jump to it right now Companies is not great. Okay, I want to spend some time on this, so let's jump to it right now. I don't even know where to, I guess we'll begin with the rumors that OpenAI could be building something for Apple

or building something in collaboration with Apple. A lot of really smart people who know more about these companies than we do jumped all over it and seemed to confirm it. Like Dan Ives is like, yeah, this is probably going to happen. All right, let me just read this to you. And then we'll talk about the rest of the open AI stuff. And the guys, the reason this is important is these are the biggest companies in the world with the largest market caps. And arguably, these are the most important growth stories. So it's really important to understand where they think their own growth will be

coming from in the next few years. We can all agree Apple's engineers know how problematic Siri is relative to the shit that's starting to come out now. You're the only person I know that uses Siri. Yeah, it's bad. It's severely out of step with where things are going. And we'll talk about that in a minute. An AI deal between Apple, Inc. and OpenAI could bring quote, myriad revenue opportunities

to the tech giant by bringing chat GPT to the iPhone. Quote, based on Bloomberg and other media reports, it appears the Apple and OpenAI partnership is now close to a done deal. Wed Bush analyst Dan Ives wrote in a note Monday. I want to read it as him. Is that okay? Can I try?

Can I? The rest of his quote? What? While Apple has been in discussions with Google AI partnership for Gemini, okay, the golden goose, okay, for Cook and Cupertino. That's your Dan Ives? I'm doing my dad it's no good let's know it's not good all right I'll run it by him we'll see what he thinks

anyway long story short iOS 18 he thinks that they're gonna have chat GPT powered by open AI in in that in that system which will benefit the iPhone 16 launch this September so what does that mean though? What does it what does an integration mean exactly? It means being able to talk to your phone like a true personal assistant and not struggle with how stupid Syria is but really have your phone do things for you and not just talk to it but be getting consistent like results as you use different workflows that are in the iOS ecosystem. So let me ask you to be a pipe dream, but I think that's good for Apple $200 a share if it's true. My opinion. Why? Because no, because one of the things plaguing Apple

right now is that there's a fear that they're falling behind. So, I mean, there were other things, but that's one of the big ones. But what would this do for, how does this sway those views? Well, clearly consumer and business behavior is changing and becoming more accustomed to utilizing AI tools. And if you don't have any, it makes it really difficult to sell more devices. Do you think that this is going to happen within the next 12 months? You go Siri powered by open AI or whatever, whatever it's called. Siri make me a reservation at Keen steakhouse June 22nd at six o'clock. And then Siri says

back to you, you already have something on your calendar at six o'clock. Do you want me to make it for eight o'clock or something like that? Is that coming? Yeah. So that's, I think that's by early next year. I mean, what do I know? But just based on demos that I watch and the people that I listen to speak, I think this is the interoperability is one of the biggest things holding the consumer back from truly unleashing practical AI in their own lives. It's frustrating.

You tell your device to do something and it tells you why it can't. And I'm not trying to hear that shit. I got enough people in my life telling me why they can't do what I need them to do. So that's the thing. That's like the moment that like the wall breaks down. And we're definitely not there. I don't know. I feel like that's a really big powerful catalyst if it there. I don't know.

I feel like that's a really big powerful catalyst if it happens. You don't think so? No, I just don't know what the monetization mechanism is. I'm sure there is one, obviously. You would pay more for Apple services if they were AI energized. 100% you would. Because what ends up happening is you become really reliant on the features. You mean the hardware hardware more for the hardware

Well, you might have definitely well, you're gonna have to upgrade your phone They they can't they can't do AI stuff and make it backward compatible Where new software will run on the old phones if we're doing AI workloads We need faster Apple silicon or Nvidia like in in the phones Well, guess what? The question that I'm asking is how does that find its way to its bottom line is not even relevant. If they're even in the AI game, that's good enough for $200 billion in market cap overnight.

Speaking of $200 billion in market cap, I don't know what the last valuation was for OpenAI but they just released GPT-4O, and this is important. It's not 4.0, and it's not 40, although it looks like that. The O is not a zero, it's the letter O, which stands for, I think, Omni. Octagon, okay. Well, my guess would have been octopus.

Yeah. All right. OpenAI may have finally cracked the code on voice interactions with AI. The company unveiled an upgrade for ChatGPT that includes an impressively human-like voice feature made possible by its new flagship model GPT-40. During a live presentation, OpenAI's latest product helped with breathing exercises, walked a user through a math equation, and served as a translator.

The average response to audio inputs is 320 milliseconds, which is on par with a typical human to human conversation. John, roll that tape. Hey, how's it going? Hey there. It's going great. How about you? I see you're rocking an open AI hoodie. Nice choice. What's up with that ceiling though? Are you in a cool industry style

office or something? Well, can you take a guess of what I might be doing based on what I'm showing you here? Hmm, from what I can see, it looks like you're in some kind of recording or production setup. With those lights, tripods, and possibly a mic, it seems like you might be gearing up to shoot a video, or maybe even a live stream. Yeah. In fact, we've got a new announcement to make. That's exciting. Announcements are always a big deal. Judging by the setup, it looks like it's going to be quite the professional production. Is this announcement related to OpenAI perhaps? It is.

And in fact, what if I were to say that you're related to the announcement. It's like, I didn't want to say half the things that I was thinking. All right. My first reaction was, is this misogynist? She talks too much. I feel like I would have had the same reaction if it was a male voice. She sounds like she sounds like sprinkles a little bit. It's my God. No, it's like too much. I feel like it's too much forced banter.

It was like, it wouldn't matter who was doing that much talking. It's like, I am allergic to small talk. I don't need a robot. Give me small talk. It's all right. So you and I had this, you and I had the same reaction. Please stop lady. Announcements are exciting enough. Who cares? What she's talking about is clothing. What is the story? Yeah. She's like, are you cold? Whatever. But some of, but some of the other videos like the translator, like it's, it's, it is wildly. I agree.

So there's a couple of things here that I was impressed by. But I want to hear what you were most impressed by. You watched all the, I guess they were tweeting out. I didn't watch everyone. I saw the Tudor and I saw the translator. And yeah, this is big. The Tudor was crazy. So my kid is actually struggling with geometry right now.

So the tutor sitting like sitting on the phone, somebody's holding the phone, I guess it's a parent. And then the tutor is like the AI, helping the kid figure out a problem. Um, and the tutor should have that. The tutor is not the tutor is not a hundred bucks an hour. The tutor doesn't get sick or anything like that, right? Like, what are you laughing at? Can you pay attention?

I'm not laughing at you. The tutor doesn't get sick. If the tutor gets sick, it's not coming to my house. That's what I'm saying. I get what you're saying. That's what I'm saying. No, it's wonderful. And tutors are expensive.

Now everybody will be able to have one. Yes. Okay. So I agree. This is so beyond, when you watch the videos of the AI, you remember I told you about Soundhound? And basically like, when you pull into a White Castle drive-through, you're interacting with Soundhound's

AI chatbot, it's the voice mode. So this is so far beyond that because the humanity humanity in the voice I think is a big leap forward They're just calling this a product update or upgrade. It feels like a bigger leap than just a regular upgrade Did you see? Did you see the thing where it sings a lullaby or tell or tells a bedtime story? And then you could like tell it more dramatic, more dramatic. And then it like darker. But I'm saying like that this is this feels like way far advanced

versus like ordering from a drive through machine. So for those people that are listening and not watching, Josh's name today is extra large language model. I just noticed that. I'm very clever. All right, there's a couple of things with this that I was also impressed by. The first is they're giving it away for free.

People don't even understand. Oh, so all the tech writers, they don't even mention that because they're probably the type of people who are already paying for the pro version. So that's not relevant to them. But you think about most people who are not going to pay for something AI

and just take the risk of adding another subscription to something that they don't even know how to use, just giving this to them for free seems like a very aggressive move by Sam Altman to get this being used by as many people as possible. Do we know what the ultimate monetization strategy is? Is this going to be like ads? They're not worried about that.

So Sam Altman's comment is, we're going to be a really big company and have a lot of products. We'll figure out how to make money. Yeah, that works. Which maybe sounds a little terrifying, but okay. Last thing, this is multimodal. The multimodality of this is, I think, what makes it more impressive than anything I've seen before from any of these AI chatbots. So by multimodality, this is text, its voice, and its image all in one product.

So in other words, it can look at a picture of something and tell you what it's looking at and it's doing this in milliseconds. It doesn't require it to translate image to text back to the it just it's seamless You can have a conversation with this thing about geometry and talk about a hypotenuse and it is looking at the object It is putting text on the screen to help and it is speaking to you all at the same time It's why me that feels like a really big leap and maybe is underappreciated today But we might look back and say wait they're doing multimodality they're not taking a text token and turning it into an image token so I thought that was really exciting as well so I would as little as I know about AI I would still keep this a very high mark and not be nervous about assigning

at that. Did you watch the Google thing at all? No, I didn't. What's the Google thing? So my guess, why did OpenAI just randomly drop this today? I think they wanted to blunt the stuff coming from Google at their I.O. conference, which is this afternoon, and then Apple the first week of June

or whatever at WWDC. I think they just wanted this out first. So Google did the IO event launch of Gemini 1.5 Pro and Gemini 1.5 Flash. And Flash is like a lighter weight version that I guess moves faster. But the upshot is the longest context window of any foundational model currently available.

I just wanna break that down for people. The context window is the amount of tokens that you can have before or after the target token. The target token, the way to think about it is the word or phrase in the prompt that's the most important. The context is more words and phrases either before or after, and those would be the contextual tokens.

And that's what your context window is. They're talking about a million-token context window here, meaning you can add a lot of detail to the prompt that you're telling Gemini what you wanted to do and they are allowing you to give it that much detail. I think that that's probably what will set this announcement apart, my guess. People will be impressed with Google Gemini for the first time in a while. It's interesting to see these companies now going head to head with announcements literally on a weekly basis. And I think the intensity is all leading up to a crescendo when Apple does its developer

conference in a couple of weeks. So everyone seems to want to have something out ahead of that. And I have a pretty good idea why. All right. Let's move on to the next topic, which is the meme stocks are back. I guess my first question, all right, let me just set this up for the audience. Yesterday morning, roaring kitty, what's that guy's name in real life? I can't remember his name. Doesn't matter.

He had been dormant. I feel like he looks like a Kenny. Like a Kenneth. I think his name is Kenny yeah I feel he looks like a Kenny all right let's go with it well call from now on he's Kenny I don't know you are you are you down with the shit that he's doing right now I feel like he's like gone full villain so wait so yesterday his account had been dormant for years. And yesterday, he tweets.

Keith Gill were being told. That's right. That's right. That's right. He tweets this. And this was good enough to send GameStop to the absolute moon. So we're going to get into some charts and everything like that. But I guess my first question to you is, when you see this,

is your knee-jerk reaction like, oh, the Fed isn't tight enough, or this only happens at this sort of a market, or is this just like, this is small potatoes, it's its own thing, it's idiosyncratic, it has nothing to do with anything. What do you think generally about what this means for where we are in the market? They asked me to talk about this on CNBC.

Like, do I have a hot take on it for CNBC today? I said, no, I don't really want to talk about it. So I'll talk about it with you, but I don't really think that it's meaningful. I understand people point to it as evidence that financial conditions are too loose. Okay. I'm with you. Probably some truth to that.

Is this all on Twitter or is he also on Reddit again? Do you know? I don't. But what I would say is, would this happen if there was no liquidity, if we were in a nasty bear market recession? Of course not. No, it wouldn't be possible. But just because that's not the case, it doesn't... the Fed doesn't give a shit about this. They're not looking at this and making any decisions. How much was GameStop up prior to him sending this tweet? Like, did it look like it was under accumulation for a couple of days without anyone noticing? I don't, oh, that's a good question.

That's a good question. Let me go to the charts. I don't believe so. Oh, oh, nevermind, nevermind, nevermind. Yeah, yeah, it was. It was, it was, it was. I think he's sending that tweet in response to the stock finally moving.

And I think that they're gonna find some people loading up in options. And these people basically baited him to take notice, but he didn't have to send a tweet. Now it feels like he's leaning into this villain persona, and I don't really love it. In the six days prior to yesterday, there was a definite volume spike,

and the stock had got, the stock was going nowhere. The stock had gone from 11 to 17 pretty quickly. So yeah, you could say there was some unusual activity. All right, so the deal is this. This was, is, remains even after the short squeeze. It's still heavily shorted. Try to run these, John. So with YChart, buzz is remains even after the short squeeze, it's still heavily shorted. Try to run these, John.

So with YChart, you're able to show the percentage of shares outstanding that are short, and it's still 21%. Yeah, they're going to find options trades that are out of the ordinary. I mean, everything with this is out of the ordinary. This is my guess. They're gonna deconstruct what was going on in the options market over the weeks prior to this.

I mean, they do this all the time. When there's a merger or a company gets an unsolicited takeover offer, the first thing the SEC looks at, and probably the exchanges too, is like, well, what was happening prior and they always catch, they almost always catch somebody. So I'm not saying he's involved, but I do think that that initial resurgence in the

stock is what got his attention. But other people, it appears, were setting up for this in some way. So there's somebody on Twitter who's an expert on short books. He said, Ehor, I don't want to put your name, so forgive me. He said, after being down $862 million in mark to market losses yesterday, GME shorts are down another $1.36 billion in mark to market losses today. Short interest is $1.92 billion. Oh my God.

So just a relentless squeeze. And Balchun has tweeted, I mean, these are real numbers. Balchunas tweeted, GME has traded $4 billion in the first 30 minutes of trading. And for context, that's more than Tesla and Apple. It and AMC, so GameStop and AMC led all stocks in pre-market volume as well. Okay, so I guess I just don't understand like literally.

I understand that like there's market makers sit it out making a killing here. Where is all of the volume coming from? I mean, it's all algos, right? These are, this is serious money. It's such a sweet thing. It's volume, there's volume because there's volume. I think it just, it feeds on itself and it blows itself out eventually and by the way this had been a pretty good short since 2021

Like like since the since the quote-unquote GameStop moment. This has been a pretty a pretty easy short to ride down and That's the problem. You know, you don't want to be short of dull market and something like this now I I don't know how, so he's doing a lot though, this kid. Like he's doing shit, he's doing multiple posts. But he's not, it almost seems like he's like deliberately going out of his way to not do something that runs afoul

of market manipulation rules. So he's, they're posting like videos and pictures, but no words. Like there's no messaging. But I don't even think he's posted what his position is, which he used to do all the time. That was like one of the hallmarks of why he built such a big fan base, because he was fully transparent.

He told people, this is how much I own, this is what price I paid for it Like he did that which I gave him a lot of credit for I thought that was great I don't know what he I don't know what he's doing now. This doesn't seem like the same guy. I Mean, I'm sure it is but I'm just saying all right, so so Kevin Gordon over at Schwab tweeted so far. This is the largest two-day gain For more for most short stories Pete Davidson right now. This is what this is the largest two-day gain for most shorted stocks.

Where is Pete Davidson right now? This is what I mainly want to know. All right, but they're doing this with all of the old meme stocks. They're doing this with AMC. So it's the largest two-day move for the most shorted stocks since last December. John, I don't know if we have it. Look at this move. This is the most, this is Goldman Sachs list of

the most shorted stocks. Yeah so if you have been short a lot of these names. This is um I don't know what's in here. Blackberry. I'm guessing AMC is in here. So all the junkie and forgive me if you have a position in these stocks. I'm not talking about the stocks. I'm talking about the companies. These are these are not great companies. There's a reason why people are short these names. That is not because the underlying strength in the company is anything to write home about. Today, AMC completed its previously disclosed

at the market equity offering. Good. How much should they sell? That's exactly what they should do. Yeah, $72 and half million dollars a share, 250 million dollars in new equity, and how did the market respond? Let's see, soaked it all up.

The stock was up 32% today. Right, it probably would have been up 80% if they didn't dump a quarter of a billion dollars worth of stock on the market. So, good for them. That's their job. Now they should take the 250 million dollars, sell the movie theaters to somebody else and just

like create a new company. I don't know what, like what do you even do? Do you take that money and reinvest into more IMAX conversions? I have no idea. So I think, I think we're aligned that this is more or less a distraction. Sorry, put up my VIX chart. Can't be coincidental that these things get sparked after prolonged periods of relative calm in the markets.

So you could see this April spike in the VIX. Once that subsided, they got the VIX back down to 12. I'm not saying the lower VIX causes it. I'm saying it's like a necessary precondition, in my opinion. Well, yeah. Well, yeah. What do you think about that? Yeah. I mean, this is not yeah. This is this. Yeah.

I mean, this is not going to happen in a bear market. So in a bear market, people have bigger things to worry about. So again, it's interesting. It's it's I get the notion that the Fed that feds not tight enough. But come on, does this does it bother you? Does it piss you off that this is going on? Or can you like compartmentalize it and not get so emotionally worked up? No, I mean, okay, with it. I don't like it. Can you like compartmentalize it and not get so emotionally worked up?

No, I'm not. I mean, okay with it. I don't like it. Like if I wish that this didn't, this nonsense didn't exist, but. It does. Do you, do you feel like, do you feel like it, uh, it sucks in people who don't want to have fun? Like this. So I don't, I think the people that are involved in this, they fucking love it. They want to do this. Let them do it. It's America.

Well, so I was going to say that I think that by and large, is there a lot of people that are being reckless and probably gambling too much? Sure. But I think that a lot of people are, I could use the word responsible gamblers. I don't think people are losing their houses on GameStop again There are obviously people that are getting dragged out that are being irresponsible, but by and large

I think people view this as a game and let people play the game I agree with that and I don't think they're being defrauded Even if you even if you believe that I like I do that there's some manipulation happening here No matter on whose part, long shorts, hedge funds, market makers. Even if you believe that, I still don't believe that anyone who doesn't want to gamble is involved in this. No, these people know what they're doing. They're not dumbasses.

Right. These are not like grandma and grandpa putting their pension rollover into this. It's just not what's going on. By the way, this could be regulated by like the gambling commission. This doesn't even require securities regulation because there's nothing even remotely connected to security selection or investing. This is lottery. It's closer to, I shouldn't say lottery, it's closer to sports betting and guess like greater fool, like guessing who's dumb enough to buy this after me.

It's closer to that than it is to anything else. Dude, if the CEO, Adam, whatever his name is from AMC, came out tomorrow and said, listen, I appreciate the capital, things are not great, I think we'll probably be out of business in 24 months, the stock could go up another 300%. Right, so I don't genuinely believe that there are victims involved in this situation right now.

I think everyone is having a great time. Yeah, I'm with you. And it's their money, and what are you going to do about it? I'm going to do this in crypto if they don't do this here. Now guess what? The first time around, you could have made some of those arguments

that people are being burned and don't know better. Now they know. Everyone knows. So if they want to gamble,'t know better. Now they know, everyone knows. So if they want to gamble, let them gamble. Now you know what this is, so true. And let me say one last thing. Like in the movies, the sequel is never as good as the original.

So when you're looking at charts at two in the morning, cause you can't sleep and you're so excited about AMC, remember the sequel is never as great as the original. All right, let's do this thing about perma bears. I thought this was like a little snarky for Bloomberg, but I kind of liked it. Thank you local perma bear for the continued climb up the wall of worry. That's my words.

Here's the article. A doomsday recession mentality is keeping the S&P 500 strong. That's the headline. I'd rather not say that. Here's the subhead. Companies are ready for a recession that never seems to come. Earnings surprises are on pace for their best level since 2022. Earlier in the show, we talked about how revenues are only coming in on target while profits

are exceeding expectations. Chart on. Here I'm showing you S&P 500 companies beating expectations. The black line is earnings and the yellow line is sales and guess what? The sales surprises are running roughly 1% ahead. The earnings surprises are running, that looks 8ish to me. There's no no levers with there's very few levers with sales You know what I mean? Like not a lot you can read on leavers or did we know no The 459 companies the S&P 500 that have reported this quarter have posted profits on average eight point four percent higher than expected about seventy nine percent have beaten

profit expectations compared to 76 percent last quarter. Companies have been trying to do more with less, yes we know. Prudent managements are going to remain prudent. There's no reason to think that corporate America won't continue to err on the side of caution because frankly, it has worked. What are your thoughts? Aaron, the side of the caution with respect to what exactly?

Not hiring too many people, not jacking up their own internal costs, like they're gonna keep focusing on that earnings line because it's working. Don't short corporate America, they're very good at their jobs. Do you believe in the premise? Costting has made the permabares look dumber than the otherwise would have this time I do It's the one thing they could imagine. There's a million. There's a million things in this. It's not just I mean, there's a lot Yes cost-cutting is one of them. Okay, you know Now I'm not gonna say that let's just keep going

No need to poke the bears. All right You know, nah, I'm not going to say that. Let's just keep going. No need to poke the bears. All right. OK, so the streamers are now turning back into cable, right? Like what's new is old again or something like that. Last week, there was a headline, an announcement I should say, Disney and Warner Brothers discovery to launch

Disney plus and Hulu and a max streaming bundle. The economics of the bundle, who gets what, what does the consumer pay, we'll find out. And then today, the Hollywood Reporter, Comcast unveils a Peacock Netflix Apple TV streaming bundle. And the reason why this is so timely and so important for this company to do this is because there's just too much the competition is fierce John what who's in the Comcast bundle it's Peacock Netflix and Apple TV

Peacock Netflix and Apple TV but wait a minute Comcast is the cable company and this looks almost more more defensive than anything else. Like they're going to have this exclusive bundle available from Comcast. Just saying, in the case of the other one, which was HBO and Max teaming up with Hulu and Disney, none of those companies are a cable provider. So I think that, because it's distribution,

not just content in the case of the second bundle. You know who's conspicuous the absent John Chardon please. So Paramount, Paramount's got nothing. Macs has little, Disney's got a little bit more. So there's just too many slices. The pie has been divided too much. It's time to reform and like you know do some like Transformers assemble type shit.

So I was going to say that I was going to chart off. So if Warner Brothers does not secure the third slot with the NBA, which I think we're going to find out any minute now. Bill Simmons says it's a done deal, NBC has it? Okay, I'd buy that. But you know, who knows? I feel like the market is now pricing Warner Brothers as though they're not going to get it and the stock's going higher. And some signaling, Warner Brothers today upsized their tender offer for their own bonds from 1.75 billion to 2.5 billion. Like I think that's signaling, like guys, we don't need to spend money on that shit,

we're de-leveraging instead. But here's my question to you, if TNT is not going to have the NBA, why would they be in the sports bundle? Remember the three-way sports bundle? It was Disney. Oh, yeah, yeah. It's ESPN.

Yeah. Well, what does TNT have in sports? Yeah, and Fox. They have baseball? They have baseball? So, one of the things people are saying is that Bob Iger just like needed something to announce during the during the activist campaign to show that progress is being made on the ESPN front. But if if Warner Brothers doesn't have the NBA, I don't know that they need to be in

that bundle. What what what good are they to the TNT doesn't have the NBA? Why do they need to exist? Well that's going to be the next thing is how are you going to get the cable carriers? How are you going to convince them that they have to pay for TNT? You can't. I'm talking out of my ass.

I don't know the space. But why is TBS and TNT separate stations? It's an anachronism from the way that cable developed. This is Ted Turner stuff from 45 years ago. You wouldn't start either of them today, but basically like TBS exists to show, say by the Bell reruns, maybe a little Gilligan's Island at four in the morning. And TNT without the NBA is what exactly? Burn notice?

That's long order. Fine. So 20 hours of long order. Alright. So yes, that's going to be... Well, that's the problem with the companies that have this big exposure to linear TV like CBS,

CNN, all of the things that Warner owns in linear like TBS and TNT. This is the issue. How are you going to convince cable companies to pick these things up? We did an incredible great quarter show with Julia Alexander.

She's so knowledgeable on this. So if you missed that and you wanna check it out, please do so. One last chart before I make the case. Look at this. This is new to me. So we're looking at, this is from Nielsen, the aggregated view of total TV usage by media companies.

So this is not by streaming platform per se, this is media company and through this prism Netflix dips down from you know Number two versus YouTube or number one wherever they're at down to number six and number one. Yeah number one is Disney Disney and then YouTube and this is Aggregated view of total TV usage. Alright, so ABC combined with the Disney Channel Combined with Disney Junior, combined with 150 million subs on Disney Plus app, combined with Hulu. That makes perfect sense to me. I probably would have, if I thought about it, I probably would have guessed. Props

to NBC Universal at number three. They have tons of channels. And listen, man, if they get the NBA, the last time they aired an NBA game was the finals in 2002 But I I remember but I remember it and everyone loves the theme song and maybe they'll grab Shaq and and somebody else and we'll We'll figure it out. We'll all float on Again as modest mouse one said so I don't okay. I do like I do like that song All right. I am making the case for a stock that I bought I guess two weeks ago The stock is IMAX a stock that has been pounded into the toilet It's less than a billion dollars in market cap has a lot of exposure to China

Is that the epicenter of an industry that is not doing so great? Which is movies and to what to what I would say exactly All right, let's go through some charts. So this is from their most recent which is movies and to what I would say exactly. All right, let's go through some charts. So this is from their most recent earnings report. What I want you to focus on, so it's IMAX box office market share. Look at that massive breakout in domestic market share

in the first quarter of 2024. Massive breakout, chart off. Josh, you and I went to see Dune II in IMAX, and I said to you, why are we seeing it two weeks after it came out? We couldn't get tickets. Sold out. So, you've probably noticed if you're a movie fan

that indie movies are effectively dead and buried. Movies, it's a blockbuster event. They are events, and people want the premium service service and that's where IMAX comes in to play. Next chart, some proof of this. This is the top 10 grossing IMAX titles, the domestic opening weekend market share. So in 2023, that was at 12% versus pre-pandemic, it looks like it was at like 8%. So not only are they getting people in the seat,

but it's for the biggest movies. I think for Dune, too, they had less than 1% of all screens and like a 20% share on tickets. Financials look OK. Next chart, please. The revenues, the margins all go in the right direction. What price is this stock? The stock is, I mean, the market cap is under a billion dollars.

The price is, it's 17, ooh, 1769. Very nice. On 94 cents in earnings last year, 17 bucks, that sounds pretty reasonable. It's 17 times forward earnings. It's not an expensive stock. Arguably, it shouldn't be. Okay, management is pretty aggressive in returning cash to shareholders. They've repurchased 19% of outstanding shares since 2020.

And finally, actually I'm almost done, if you look at the insider ownership percentage, which you could do on Y charts, they're going the right direction. You want to see this conviction. And guess what? Chart looks okay. Chart looks pretty good in fact fact today was the highest close since

November so for all of those reasons IMAX is the brand. It's the experience. I am bullish and I own the stock So a few things on this the IMAX theater that you and I went to does not exist anywhere else There might be two or three others versions. There's one other. Yeah. So we saw Dune 2 on a 10-story screen on the Upper West Side of Manhattan, just north of Times Square. Those are not the IMAXs that most people have access to when they say they're going to IMAX. There are two other types of IMAX theaters. There's the more traditional IMAX which is definitely a large format. Probably it's standalone somewhere,

somewhere with a very heavy tourist footprint. And then there's the third kind, which is converted traditional movie theater screens that, yeah, it's IMAX-ish. It's got the upgraded sound. Maybe it's stadium seating, taller screen, but it's not like what you and I experienced. And so to me, that's like one of the challenges is that the experience is not differentiated

enough for most of the units that they have. I don't know if they call them units, locations. So that's one thing. The second thing here is it's not proven that IMAX is meaningful to open a big movie absent IP. So there have been huge IMAX hits over the last few years, notably... Opel Armor. Well, let's back up. Top Gun 2, IMAX was so important that Tom Cruise begged IMAX for more screens when the new Mission Impossible franchise was, when the new Mission Impossible was coming

and they didn't get them because Chris Nolan had a pre-existing relationship with IMAX and secured a lot of them for Oppenheimer. So it is important, but take Oppenheimer out, Top Gun is IP, Avatar is IP, the Marvel movies, IP, I feel as though it's really important for movies that are based on some pre-established intellectual property with its own existing fan base. It's not clear. Planet of the Apes. Furiosa, there's all these ones coming. property with its own existing fan base. Planet of the Apes. It's not clear. Planet of the Apes.

Furiosa. There's all these ones coming. Yes, but it's not clear that outside of those, IMAX can change the course of an otherwise normal movie. No, hell no. Hell no. But I'm saying they have an outsized percentage of the revenue for these movies, and that's the movies that people are actually seeing.

So that's why. Yeah, all right. Listen, I like it, and I pitched this stock to people in 2004, I think. I showed you. I showed you my script. So I was pitching this stock at the same price 20 years ago. It's not been a fun ride for long-term investors,

that's for sure. Thank god it stopped. All right. Mystery chart. Let's, all right. Thank god it stopped. All right. Mystery chart. All right, this is a Google trend search. So it's a search term. And I'm not going to make it that hard for you. We talked about it during today's show. Meme stock related?

Yeah. What's the term? GameStop. Close. AMCC GME roaring kitty this is 12 months of GME searches show me the next chart this is five years if I would have shown you this you would have been like oh yeah all right reveal oh you already did the reveal not well now I'm doing the reveal visually. And the point that I want to make to you is, remember when I said the sequel is never

as good as the original? I have a hard time believing that dotted blue line, which represents this week, is going to reach the heights of April 11, 2021? Oh, well, that's not relevant. Or February. Whatever that date is. No, I'm Oh, well that's not relevant. Or February, whatever that date is. No, I'm just so, that's my point. That's my point.

So don't get so carried away. It might be fun. It's not going to be as fun as last time. That's what I'm trying to say. So, all right, let's end on that note. Hey everybody, tomorrow is Wednesday, which means when you wake up, all new episode of my favorite podcast,

Animal Spirits with Michael and Ben, brand new Ask the Compound on Thursday, all new Compound and Friends on Friday, Jill on Monday, Saturday. Keep it locked. We love you. Ratings and reviews. We'll talk to you soon. Whether you're just getting started as an investor or you're managing a multi-million

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