The Compound and Friends - Stocks Are Overbought, so What? | WAYT

Episode Date: June 27, 2023

Join Downtown Josh Brown (CEO, Ritholtz Wealth Management) and Michael Batnick (Managing Partner, Ritholtz Wealth Management) for another episode of What Are Your Thoughts and see what they have to say about the biggest topics in investing and finance! On this episode they discuss: equity flows, Compound sentiment, options euphoria, the travel boom, the luxury market, the worst stock out there, and much more! Thanks to Future Proof for sponsoring this episode! Submit your Fintech Demo Drop application before July 7th here: https://9rcge6jsij8.typeform.com/to/HnyL5rOO and secure your ticket before August 15th: http://futureproof.advisorcircle.com/ Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to the compound and friends. I wanted to let you know about something that we're going to try this summer. A lot of people have been asking for this, and it just took us a while to figure out the format. But starting today, we are going to be featuring what are your thoughts as an audio podcast segment right here on the compound and friends michael and i have been doing a live show every tuesday night for i don't know three or four years now um the live version is pretty popular usually get 1500 2000 people catch it at 5 p.m and last week's show i think the total viewership is now over 40,000. So it's something that people enjoy on YouTube. But we want to give you more on the podcast. This particular podcast, The Compound and Friends, is on the verge of becoming the number one podcast for investing in the world. The number one investing podcast in the world. When we release, we are regularly in the top 10. And then if you look at the shows that are ahead of us, it's really

half the shows aren't really investing podcasts. And then a bunch of them are produced by people who are full-time media, don't work in the industry, don't manage money, and quite frankly, industry, don't manage money, and quite frankly, don't put on as good a show as we do. So it's inevitable. And what's cool about that is that you guys who are listening right now are part of our core day one audience, people who have been with us since the beginning. And you guys knew, you have excellent taste. And you hung with us. You rocked with us. You were here for the ups, the downs. And now we, all of us, Compound Nation are ascendant and you guys have a seat. You guys have a seat on the rocket ship. So listen, what's going to happen going forward. Tuesdays, we'll do the show. What are your thoughts on YouTube as always? And then shortly after, as quickly as Duncan and John can do it, the audio will go up right

here on this feed. You don't have to do anything. You just open up your podcast app whenever and the new show will be there. The other thing I wanted to give you the heads up on is from time to time, we've been doing Monday night streaming live interviews. And that show never really had a home. We just kind of dropped it whenever. Those interviews will also be a part of this Tuesday night upload for the Compound and Friends.

So you're getting us twice a week from now on. We'll see what the reception is. We'll see if you guys are feeling it. And if you are, the best way to tell us is by leaving a review on Spotify, on podcast platforms like Apple, wherever you listen, if you leave us a review, it goes a long way and it tells us that we're on the right track.

Everything that we do is for you. Every show that we put out, every interview that we arrange, all of the editing, all of the work that goes into the compound and friends is for your enjoyment, entertainment, education, et cetera. So thank you guys so much for rocking with us all this time. We love the compounders and we know you love us. And it's just an amazing community that we're so lucky to be at the center of. So thank you, guys. And without further ado, the latest episode of What Are Your Thoughts with Michael Batnick

and I. Take it away, guys. Thanks for listening to What Are Your Thoughts. All opinions expressed by Michael Batnick and Josh Brown are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. All right, gangsters.

Who's ready? Who's ready for the best show of the summer? I'm fired up today. We have so much cool stuff to get into. I want to start by reintroducing you. My name is Downtown Josh Brown. If you're watching this for the first time, my co-host as always,

Michael Batnick. Michael, say hello to the folks. Hello, hello. How about aloha with that shirt? There we go. Aloha. Alright, Michael is live from Los Angeles, California. Big shout out to our clients, Jim and Jane, long-time clients for providing

a little office space for Mike today. We really appreciate it. Let's do some quick shout-outs to the crowd. The Pounders are all here. Chris Hayes, Pam Hill, John Carlo, Roger, Cliff, everybody that you would want to see. Jay Luther is here. Geary is in the house. I know Roger's here.

Shore 51. Got Nicole in the chat. Rob's running around in the chat. John and Duncan are in the background controlling all of the elements of the show. Welcome to What Are Your Thoughts? Michael, who's our sponsor tonight? That looks familiar. It is Future Proof. Oh, wow. Great idea. Let's tell the folks about what Future Proof is in a nutshell. Future Proof is Coachella, which I've never been to, for wealth management. Is that a fair comp? Yeah. I don't know. I think it works.

Sure. It's a festival. It's a festival. I tell people South By just because I feel like- Yeah, that's better. That's better. It's a festival. I tell people South by just because I feel like. Yeah, that's better.

That's better. It's like South by is like a mix of like business and art and culture and music. I feel like that's what we do. It's probably a little more on the nose. I know you want to talk about the FinTech demo, but before we do that, did you know? So if you're in the financial services industry and you want to go to Future Proof, but you're not like, you don't really want to buy a ticket. It's a little bit pricey to get there and such.

If you agree to do something called breakthrough, which you will have to commit to eight 15-minute sessions with an asset manager, a fintech provider, eight 15-minute sessions. Meetings. Meetings. Meetings. Meetings. meetings, meetings, meetings, meetings, your ticket will be comped and, and you will get a $750 stipend to your travel. I mean, that's a hell of a deal. It's a hell of a deal. You know why that's so important for like young financial advisors or young people working in

asset management or FinTech, maybe the firm they work for isn't willing to pay, but they want to go. This is a great way for us to ensure that we're getting young people early in their careers and putting them in a position. We're supposed to just say something about the FinTech demo. Do you want me to do it quickly? It's seven by seven. Take it. All right. FinTech demo drop.

So here's what this is. We're looking for FinTech innovators to show off the newest and most innovative technology platforms and tools. We're going to select seven FinTech companies. They will get seven minutes each to be in the spotlight in front of the crowd, show off what they've built, and they'll be talking to the fastest growing financial advisory firms in America. It doesn't matter if you're early stage or a late stage growth company, this is your opportunity. There's a link in the description to apply. Seven minute abs.

Seven minutes in heaven. And futureproof.advisorcircle.com is where you go for general information. Okay. That's enough with the plugs. I want to talk about something that we probably haven't gotten into in a while, which is fund flows. And I think this is probably the biggest news of the last week is that we are now seeing substantial money flow into the stock market. It's not that surprising given what performance has been. And that's just how it always works.

But let's just go through this. Ari Wald, one of my favorite technicians in America, he did a piece about fund flows. And he sees fund flows from here forward as fueling the next leg of the rally. A lot of people look at fund flows and they think it's a contrarian signal, but that's not actually how it works. So let me get into this. In their latest weekly release, ICI reported 22 billion estimated net inflow into domestic equity mutual funds and ETFs for the week ending June 16th. That is the highest week since February 2022. On the surface, this can be viewed as a contrarian concern. Digging deeper, this surge in allocated capital was preceded

by the most net redemptions since November 2020, based on a rolling quarterly total. This was the sixth time since 2013 that at least $19 billion inflows developed following net redemptions over the prior 13 weeks. Those other episodes were all the start of a bull market and not the end. November 2016, June 2017, March 2018, November 2020, February 2021. Well, that time it didn't work out so well. But I think just this idea that, oh, retail is buying ETFs. All of a sudden, that's like something that you want to bet against. The history does not bear that out.

It's not that great of an idea to fade. What are your thoughts? We were talking about this with Mark Noonan last week. People are using the AAII survey for investors getting bullish after being bearish forever as a topping signal don't know how this works. It's not that simple. You have to think of a time. So chart back on, please. This is, thank you, John. Look at all the outflows. Investors are capitulating to the upside. Instead of throwing in the towel, like, get me out, it's, all right, fine, I guess I got

to chase. So when you see flows that are positive, positive, positive, and then there's like a blow off top, fine. Then you can get cautious. We're in the early stages of people getting, like, chasing, not the end. So it doesn't mean that you can't see a pullback or that stocks have to go up 20% from here. But people are just getting bullish. We have data later in the show. After a first six months, it's super positive coming off a negative year. History says that

stocks are going to be okay. Stay with it. In other words, you don't see a week of inflows like that. And then a week later, everybody says, ah, forget it. That's just not how the mindset of the investor works. It's too soon to try to, quote unquote, fade retail. This is arguably even more important, what I'm about to get into. The word on the street over the last week or so is overbought. This is like what you always hear after a rally has gotten going and you see a lot of stocks that are very far above their 200 day or having a high relative strength. All of a sudden, it's like, oh, the market's a little overbought. And I think people say that for two reasons. One, they believe it.

But two, they kind of missed out and they want to buy. They just don't want to be the ones that buy the top. And they want to buy. They just don't want to be the ones that buy the top. So it's almost like wishful thinking saying it's overbought implies there's going to be a sell off and that's going to let them in. This is back to Ari. John, let's do this first chart while I'm talking. Legendary.

What do I want to say? No, I'm not going to start there. All right. This is Ari Wald. The best returns have surprisingly occurred when the index is deeply oversold. This is S&P 500 returns greater than down 10% below the 200-day moving average. However, the index has also posted above average returns when trading greater than 10% above its 200-day moving average, as is currently the case.

This reflects the trend-following tendencies of large-cap stocks. The S&P has posted its poorest returns when the trend is down below its 200-day moving average and not yet deeply oversold. Overall, we reiterate S&P 500 upside into 4,600. We'll be watching the index's ability to uphold 4,300, which was the August 22 peak during this initial pause. We believe tactical conditions become increasingly attractive towards 4,200. So what they were showing in that chart, real quick, throw that back up. So you're looking at the S&P 500 as of the end of last week, more than 10% above the 200-day

moving average. That's in the bottom pane. And what Ari is showing you here in this table is what forward returns are when we get to what some would say is overbought. But an S&P that's above its 200-day moving average by 10% or greater, actually, the 12-month average forward returns are 11.1%, which are the second best on this whole table. So I think it's really important not just to think in terms of overbought as an automatic sell signal. Michael, you have any thoughts on that? This is not unusual or a rare occurrence.

It's happened 18% of the time that you're more than 10% above the 200-day moving average. And we keep saying this. How can an overwhelming demand for stocks be bearish? Because people say overbought as if it's a bad thing. Yeah, yeah, yeah. Stocks consolidate. But the best markets don't wait for you. They don't let you in. Just because you say it's overbought doesn't mean you're going to get a better entry. And I'm not saying go nuts and throw caution to the wind and start chasing. I'm just saying the best markets usually don't let you in.

So I've got a few charts for you, Josh. Wait, I got one more on this before we move on. I'm sorry. Last one from Ari. The momentum effect is even stronger in the NASDAQ 100. So everything I just told you about the S&P, you can double that. This is back to Ari. Market bears have specifically pointed to the Q's current 23% deviation above the 200 day as an indication of froth.

However – That's froth an indication of froth. However- Yeah, that's froth. That's froth. But wait, since 1986, the NASDAQ has posted its best six to 12-month returns when already trading at least 20% above its 200-day moving average. That's an indication that price momentum has been especially effective in the benchmark. Recent action also marked only the fourth time in the index's 200-day deviation swung from negative 20 to plus 20% within a year. You know what else that happened? March 91, bottom. September 03, bottom.

July 09, bottom. Rather than an indication of froth, we believe this study supports our view that the NASDAQ's long-term advance is resuming. Chart back on real quick. I want to do this table. So look at this. NASDAQ 200-day over 20% or 20% above its 200-day.

The average 12- month return back to 1986 has been almost 25%, which I never would have guessed that. So if you think the momentum in the S&P is strong, the NASDAQ is even more so. All right, so to my point about stocks not letting you in, this is from Deutsche Bank. We're now in the 85th percentile of period

since World War II without a 3% drawdown in the S&P 500. It's been 73 trading days in over three months in real life, which is kind of mind-blowing when you think, John, chart off, please. I saw a great staff in Bespoke that today was, or yesterday was the fifth day in a row that the S&P 500 opened negative with a gap down. So even despite that, they're like tiny gaps. And guess what? They're getting bought, right? So it's been a long time. The market doesn't let you win. And the next chart shows the NASDAQ's overbought conditions. It's been 34 straight days with one standard deviation or more above the 50-day moving average. This is from Bespoke. Again, not to say that we can't get a pullback.

Is this overbought since February? Yeah. I can't reiterate this strongly enough. As a general rule, the strongest markets don't let you in. It's so crazy, though, how hard this is if you're paying any attention to anything other than price, I feel like, I feel like everything away from price, um, is telling you maybe not that stocks need to go down, but like is telling you there's absolutely no fundamental basis for them going higher. Like you are hearing some great news from individual companies, but I'm talking about the economy at large. It's just such a stark difference between, or maybe that's getting better too, at least as of a month ago. It's tough. All right, let's keep it moving.

Sticking with the stock market, we asked our audience, where will the market end this year? And this was a week ago, higher or lower? And there you go. It's kind of dead even, actually. Not kind of, dead even. 50 week ago, higher or lower. And there you go. It's kind of dead even actually, not kind of dead even. Oh, this is update. Oh, look at this. That's so interesting. So it was 51% up, 49% down. And this is exactly what we're talking about. Now it's 56, 44. Human behavior, we chase. We chase. I chase. I'm guilty. Reminds me of the up from here when

from 51% to 56% over the course of a week, it reminds me of like the line with, uh, with like, uh, the Kansas city chiefs about to play Monday night football and everyone comes to their senses. They're like, wait a minute, it's my homes. Like what? And then you see like the, the bet shift, like, of course, of course they're going to, Of course they're going to cover. Of course they're going to win. So that's interesting how it's moved that way. But I think it's just following price. There's no news that you would point to that would tell you why all of a sudden people feel better three or four days later. Right. No, it's price. All right. This is from Dietrich. You're looking at, there's about eight times when the S&P 500 is up more than 10% through

June. And when the S&P was negative in the previous year, the forward returns have been remarkably strong. And all that we're saying is, again, you have a down year. And then in the previous year, the forward returns have been remarkably strong. And all that we're saying is, again, you have a down year. And then in the next year, those years on the left are all years where the market finished lower. Is that what we're saying? Or the next year?

These are the years later. So 1953, for example, the market was down six points. Okay. So if the market is down one year and then the next year it's up 10% through June, the forward returns have been phenomenally well. Phenomenally well. Ryan Dietrich, among the most requested guests for the Compound and Friends. That's the name that keeps coming up.

Why don't you guys have Ryan Dietrich on? He's coming. He's coming. And then, yeah, I spoke to Ryan. He'll get a chance to come to New York. And then just if you take out the negative the year before, if you just say, okay, for all years, no other caveats. When the S&P is up 10% through the end of June, what is the average return for the next six months and the next 12 months?

It's 8% average six months later, 12% on average higher 12 months later with a higher return 82 and 77% of the time, respectively. I'm focused on strength, but get strength. I'm focused on the six month column. So, cause basically what we're saying is like, uh, the first half of the year and the second half. So, right. So the next six months would represent how the year finishes. And it looks like only once in 1975, did you actually have a decline by year end over a year plus 10% through June? That 5.3% is not a decline through a year end. It's how did it do for the next six months? Yeah, but that would be technically year end because the first six months ends in June. My point is it doesn't mean that the market was down 5.3% for the year. That's all I'm saying.

No, I, right. Okay. You're right. That's, that's, I was just, I was thinking about the full year. Okay. So that's just what happened six months later. So it's not necessarily the full year return. Now, all of the, all of the, all of these data points you have to take with a grain

of salt because past performance is obviously no guarantee. However, I take shit like this seriously because... What's so funny? Who's laughing? You have a voice in your head? I take shit like this seriously. Why? Because these... Well, now you're making it funny. These data points are behavioral data points, okay? Yeah. Because what you're saying is what happens when the market was really bad

and then it did really well, and then what happened to the rest of the year? So economics, data points, all that shit aside, human behavior is consistent. It really is. Yeah. And as we say all the time on this show and elsewhere, that's really what you're buying. Like in the end, the stock price that you receive at some point in the future is a result of what all the buyers and sellers think about it. Like that's it. That's what you're investing in other people's perception

of your investments. Like there's no way around that. You can't, there's nothing else determining price. So that's a really good point that you make. When I see things like this, I take it seriously. It's not informing. I'm not making binary decisions or going all in or out, but I respect the data. There. I respect data. Next topic. So here's the gray lining to the silver cloud. The chimpanzees are back. Options market euphoria. Trading activity has more than doubled since the start of the year

according to the CBOE global markets Wall Street Journal did a story called I just I picked out the title because this is one of those things that you look back at and you say oh shit I should have seen this the bull market is just getting started

traders bet sub header euphoria sweeps the market for stock options. Chart back on. Like, that's not great. Nah, I don't love this. We're outdoing the mania from 2020 and 2021. Let me read this. Bullish bets on artificial intelligence. Chart off, please. Bullish bets on artificial intelligence. Chart off, please. Bullish bets on artificial intelligence have boomed. More than 1.3 million call contracts on chip makers, NVIDIA, and advanced micro devices.

Next chart back on. Changed hands on an average day in June. On track for the highest monthly total on record. Those volumes surpassed the exuberance seen in November 2021 when the Nasdaq composite reached its peak. Trading activity has more than doubled since the start of the year. So this is we're looking at chip stocks, NVIDIA, AMD, Intel, et cetera. This is what's going on in the call options for those stocks. I don't love it. I don't know.

What are your thoughts? Yeah, no, I don't love seeing euphoria in individual names. That usually doesn't end well, right? We've seen this movie before. I think it's extraordinarily difficult to time it. A friend of mine two or three weeks ago bought NVIDIA put options. And I'm like, dude, you're way too early. And they were expiring in July. I'm like, if you want to buy put options, which I totally respect and I understand that inclination at this, give it like six months.

You think that you're going to nail the top just because people are bullish? Okay, I have the opposite friend as you. So this is a true story. I lived in the Upper East Side a million years ago. I knew a guy and I stopped being friends with him because one time we went to walk our babies in the strollers and he was pushing a stroller with an infant. I had my infant. He was pushing his own with a blunt, like a lit blunt, like pushing a baby stroller through like city streets, not in a park, literally hitting a blunt like a lit blunt like pushing a baby stroller through like city streets not in a park

literally hitting a blunt and like i'm not i'm not a prude like i'm okay i'm okay you get arrested for that back then you could but it was just like the idea that somebody would want to do those two things simultaneously and i'm a new first-time father so i'm like overprotective i just i don't want this guy blowing a a blunt smoke within five feet of my kid sitting in a stroller. So I never hung out with him again. And I kid you not. It's probably two or three weeks ago. I got a text.

It was like, yo, cuz – this guy is a lawyer, by the way. Yo, cuz, I don't really buy individual stocks, but you think it's too late on NVIDIA? And I'm just like, so you don't buy stocks, but the first thing that you want to do is step into the market and buy a stock that just went up 3,000%. Yeah. So I wrote to him, I wrote to him, I don't know, LOL,

with like a crazy face emoji. What I really wanted to say is, why don't you just go back to taking care of your kids with a blunt in your hand, like the f***ing animal you are, and leave NVIDIA to the professionals. You don't need to be involved. We don't judge.

We don't judge. No, I literally judge. I literally judge. This is a good point. People underestimate like how crazy s*** is. Like, oh, this has to end badly. And yeah, maybe, probably, probably, but not yet. Like there are so many donkeys like that guy that are buying Nvidia every single day.

Yeah. I don't know if it'll fade in. I wrote this. I just, I feel like where does momentum come from? It's not a force of nature per se. It's, it's to your point, it's behavior. I think momentum is fueled by the recency bias. I think the more a stock rises, for the most part, the more confident the market becomes that it will continue to rise. I think like perceived safety in the eyes of the other investors and the people that are in it starts to go up. And I was thinking about this in terms of like biology or evolution. You think about like, if you're a penguin

and you see all the penguins swimming in one specific area, like you come along and you're like, all right, all the penguins are there. There's probably a lot of fish. There's probably not a shark or a seal eating them. Like that's probably what I should be doing. Yeah, I mean, obviously with exceptions, when something does like what GameStop did,

I think most people know that's not more safety. But chip stocks, I think is an example where people are just like, yeah, that's where the money's being made right now. But wait, Josh, it's one more thing. It's when you combine the price action with the story of AI and a new paradigm, that's when things get really stupid.

Would you be surprised if NVIDIA is up 60% in the next six months? I wouldn't. When you think it's dumb, it gets dumber. I would be surprised, but it probably will. I don't know. I have no opinions anymore about that. All right. Let's keep moving. You got something? We're going to talk about the Fed and what their next move is. All right. Today's show is brought to you by Bespoke. Thank you for this data from Bespoke. All right. For those expecting the Fed to go on an extended pause, here's how long prior pauses after tightening cycles have lasted since 1994. 15 months was the longest. But what's interesting is, and I don't know what the data

says going back prior to this, but they've never, at least since 94, they've never paused and then resumed hikes. That's interesting. Well, they've reversed though. Well, every time. Every time. When they pause, they've taken rates down. Okay. But that's just in the very recent history.

I'm sure there are examples where they have. But I guess it's like 30 years worth of data. How much more do you really want? It's rare. I guess the point is it's very rare for them to pause and then say, we haven't done enough. Is that, is that what we're saying? It hasn't happened. So you don't know. No, yes.

They have not reversed. Now they reverse course from 93. They cut, they paused, they cut, they paused, and they started raising rates into the dot-com bubble. But when they pause, generally, they cut. So do you think I would say the next move is another hike. No, I don't have to, but that's what I would bet on. I think the market is pricing that in as a 79% chance as of today, the last data I saw, that the next move is a hike. So I don't know. The market seems to think that's pretty likely,

but that could change. Let me ask you one follow-up question to this. How impactful for the market is the next Fed move? So I don't mean the next pause. How impactful or are they more likely, are they going to be behind the curve where they're going to be panic cutting or raising rates because the economy keeps going higher? You know, that was a very popular view that by year end they would be forced to cut. And I might have entertained that, you know, at some point earlier this year. That was in the data. That was in the data.

And that was a very popular view. And, you know, even I remember saying like, you know, all right, do another two hikes if you feel you need to. But those are the first two you're giving back. Maybe not this year, though, is at least what the market is now seeming to price in. Yeah, maybe they will have to cut, but not an emergency, not right this second. I don't know. The biggest train wreck in the economy right now is commercial real estate. But it's a very slow- The biggest train wreck in the economy right now is commercial real estate, but it's very slow moving train wreck. It doesn't feel like it's the kind of thing

that's just one day going to explode into like a VIX spike and everyone panicking. It's a very slow motion crash. That is true. And what's also true, I would ask you, do you think that the commercial real estate market can take on the global economy? Yeah, I know it can, but it probably won't because everyone's expecting it to. No, you don't. You don't know anything. I know for a fact that it could. You don't know anything.

I know for a fact that it could. I know if the residential real estate market could in 2008, the commercial guys are more over-levered than a typical homeowner and their links into the banks are even scarier than like a regular mortgage bond. So yeah, I know it could. I don't think it will. And I think there's so much- What a bullshit answer.

What a nonsensical answer. You know it can. Of course it could. You know it can, but it's not going to. Give me a break. I don't think it will because I think a lot of attention is already focused there. And people are already talking about it like a buying opportunity. So I just don't think it's going to rise to that level, but could it? Yeah, of course it could. Why couldn't it? Riddle me that. Why couldn't it take down the global economy if left unchecked?

No, there's a big difference. I'm not saying it can't. But you- What are we fighting about? But you are saying I know it can. And I'll tell you one thing, sir. I do know it can. You don't know a shit about f**k.

How about that? I do know it can, though. No, you don't. Yes, I do. Let's move on. Agree that I'm right. All right. Wait, what's this other

fight chart that you had? It's the same thing. Okay, great. Here's why it won't. People have too much money. I want to play this view. John? Oh, audio.

I think the second quarter is going to be our highest Q2 earnings in our history, coming just three years after the start of the pandemic, which is pretty incredible. And the other data point that we'll be sharing today is that we're putting a new marker out there to generate $10 billion of free cash between now and 25 as a result of the continued strength, because we think we're in a multi-year recovery. You think this continues for some period of time? There's no signs of any let up. And I'll give you a couple of data points. In our industry, 75% of the revenues, we all talk about the consumer and the health of the consumer and wondering about cracks in

the consumer. And we get that. 75% of our revenues come from consumers that are in the top 40% of earnings. Households making $100,000 or more make up 75% of our revenue base. As an industry, Delta arguably is even higher than that. The wealth that that cohort has accumulated just since 2019 is over $25 trillion. They have the wealth. And we talk about excess savings in terms of incremental cash savings. That number is still well over a trillion dollars for that cohort. So that's very strong. All right. Thanks, John. So that was the CEO of Delta. They came out this morning. They said $2 billion in profit. How about $3 billion? They raised guidance for Q2. They raised $24. They raised $25. Here's some notes from Sean. All five S&P 500 airlines are now above their 50 and 200-day moving average.

Two airlines made 52-week highs today, Delta and United. The median forward PE for the five airlines is six times earnings. Median earnings per share growth for next year is 16%. Delta had their investor day. They said they expect earnings per share to come in at two and a quarter to 250 a share. Previously expected $2 to25 to $2.50 a share, previously expected $2 to $2.25. They think this quarter will be the highest in company history, $3 billion in free cash flow, which is 50% above the previous estimate. And, of course, these companies not only have insatiable demand and rationalized cost structures, no unprofitable flights, et cetera.

They also have jet fuel prices that are down 30% year over year. So it's a trade that I definitely missed. These stocks look incredible. I think Delta's up 40% a month. And if you look at any of the other charts, they look pretty good. Uh, what happened? The cops bust in. No, I'm hot. Just put on the air. Keep going. Oh, all right. Now I'm done.

What are your thoughts? So I, uh, I'm mad that I missed Delta. Although I'm not mad. The chart didn't let me in. Like it was not looking good. I've been stalking Delta stalking. Oh, you have? Yeah, I've been wanting to buy.

You fly Delta. You actually like Delta. I stalking Delta. Stalking. Oh, you have? Yeah, I've been wanting to buy. You fly Delta. You actually like Delta. I exclusively fly Delta. And I've been looking. And just the chart looked like junk. And then all of a sudden, it broke out. And it doesn't let you in. It's up like 14 of the last 16 days.

I'm making that up. That's directionally right. So it didn't let you in. Fine. That's how it works. The audience thinks you're hitting a blunt. I just want to point. I know you're not.

But like, there's a lot of chat about what you're what you're busy doing with windows and whatnot why would i be hitting a blunt i'm just look at the live chat the audience thinks there are blunts involved this blunt activity all right listen i've been known to but not not right now okay so uh i can't believe how busy the airports still are. I really thought the travel boom was going to be short-lived. Like probably like- Same, I got this wrong. Coming out of the pandemic,

I was extremely wrong. I said, listen, yeah, I get it. I'm pent up too. I'm going to do a trip. But I didn't think that people would do like another trip and another trip and four more trips. They keep tripping.

So the airport was crowded as hell. I tried to upgrade my flight. Couldn't do it. So the airport was crowded as hell. I tried to upgrade my flight, couldn't do it. Not an empty seat in the house. Please, tell me what's going on. What's going on in the chat? On the money said, he's definitely hitting a blunt. That's what a blunt smoker would say. Michael's not hitting blunts. Guys, the big thing here is that I was saying in 2022, all right, everyone will get it out of their system. This is a phenomenon that is not stopping. That was very wrong.

And what the guy from Delta is basically telling you is that it's just endless demand for business travel, vacation travel, any kind of travel. As far as the eye could see, the people who travel are the people who have all the excess savings and they still have it. Guess what? There's no incentive for this dude to raise guidance. Like that's not the game that CEOs are used to playing. And also the stock is, I think still like 37% off if it's high, it's not going to let you in. You're not getting a pullback. I'm not going to chase airline stocks. I'm not buying it either. I missed it. It's going to happen. There's not a blunts in the world for me to buy an airplane rally. It's just, no,

I just can't do it. By the way, I said this, this is a nice segue into luxury. Although I said this last week on the show and I said it again to Ben today, because I've been on fire lately catching bottoms with stocks. However, no, listen, this is not a brag. It's the opposite. It only works in bull markets. What are you laughing at? Nothing.

It only works in bull markets. It only works in bull markets. Yeah, no shit. Yeah, no shit, I know. Of course, because if it's not a bull market, then they roll right over as soon as you buy them. Yes, yes. So that's what I'm saying. I'm not saying I'm a genius.

This shit only works because the stock market is going up. Yes. Duh. I agree. Okay. The type of behavior that you're exhibiting is not the type of behavior that benefits you in any other type of environment than right now. Correct.

I totally agree with you. Yeah. But there's a huge catch-up trade underway. agree with you. But there's a huge catch-up trade underway. And the airlines are just the latest example of a broader phenomenon, which begs the question, what's the next catch-up trade? I'll tell you. It's Dollar General. I'll get to that in a minute. All right. I think energy, but OK. OK. But this is the opposite of the dollar. How can we talk into that?

This is the opposite of Dollar General. Let's talk about luxury. Josh, last week I made the case for Dollar General and you understandably not hating said, I'd rather buy luxury. You're a snob and I totally respect that. So these charts are from quarter. Look at this chart. Luxury is a very large and resilient industry. This is personal luxury goods market in billions.

It's online and offline is the gray and black. Yeah. I mean, listen, you think this is slowing down or is there going to be a pullback here? There's no pullback coming. There's no pullback. Not only is it not slowing down, it's international. It's all over the world on a synchronized basis. It's just everywhere. So look at the next chart, global premium market for handbags. Why is footwear on here? That's weird. Are there bags for your feet?

No, most of the, let me solve that mystery, Scooby. Most of the premier designers of luxury handbags, they're in the leather business, so they also make shoes. Okay. I mean, look at this chart. Would you sell this chart? I wouldn't. No.

No. And actually, the one that really got away from me is not Delta or whatever. It's LVMH. I should have been buying this thing in the middle of the pandemic, just understanding human nature and watching my wife and her friends.

They didn't slow down for a second. Like, you know, they took a beat like everyone else. And then when a nuclear Holocaust didn't envelop the earth, everyone else they went back and said all right what will make me feel better what can i buy today that's how humans are like that's how people are so uh lvmh owns every major luxury brand other than gucci and a couple of others which are owned by a company called caring well you know that that chart doesn't look as good as lvmh but the guy running LVMH is now the richest man

in the world. I think him and Elon seesaw every few months. It's not an accident. It's the best business there is. John, please skip the next chart and go to the one after it. Perfect. Thank you. So beauty is resilient to economic uncertainty. The only time this chart went down was when we were all stuck at home. And that's the only time it chart went down was when we were all stuck at home. And that's the only time it will go down. This, what you're looking at as a chart, it says L'Oreal beauty market estimates based on manufacturers, net prices, excluding soap, toothpaste, razors, and blades. So this is like actual stuff that people, you know, make up and all that sort of shit. It's going up. It's Estee Lauder. It's Ulta. It's Sephora.

It's Estee Lauder. It's Ulta. It's Sephora. It's just an endless. And look, it snapped after that down 8% year. Then they had the best year in history right afterward. It snapped back with a vengeance. And yeah, I mean, it's not going to stop ever.

So I respect your stance on buying growth, not value. However, shout out to this book one more time. It's not growth versus value. What it is is margins versus a knife fight at the bottom of the barrel. Dollar General versus Dollar Tree versus a flea market is a shitty business even if you win. LVMH is like 40%, 50% margins. It's unbelievable. There's almost no other business that good on earth other than maybe Apple and Microsoft.

And they never discount. If they discount, they're dumping stuff on TJ Maxx. They're doing so in such small amounts because if they did it a lot, they would do what Coach did a generation ago and crush the cachet of the brand. So they make a limited number of pieces. They sell every one of them at a huge markup at retail. They get a full margin. And the demand just never goes away. It's an amazing business.

If there's excess luxury goods, they put it in a vault like in Blood Diamond. So you're right. The margins are strong. But next chart, please. So this one bespoke. Of the 25 worst performers in the Russell 1000 year to date through June 15th, 24 of them. So of the 25 worst performers, 24 of them are down since June 15th. Dollar General is the only name in the green. I rest my case. Two things. Dollar General figured out that they can't actually charge a dollar for anything anymore.

So they're reclaiming some price, which is long overdue. A dollar is not a dollar these days. The second thing is, I happen to believe that a bigger driver of dollar generals fundamentals is inflation and not necessarily like, quote unquote, the consumer. And with inflation costs easing and supply chains cooling off and shipping costs easing and like that whole thing, maybe not decelerate, maybe not decelerating, but at least plateauinging that gives them room to start making money again. And I think that's why that stock is starting to perform.

I still don't want it. I still don't want it. All right. We're going to do a, all right. So you don't like my stock. You're going to make the case for the shittiest stock in the world. Go ahead. I think I found it. Ladies and gentlemen of the compound, I'm pretty sure I found the worst stock on earth. And Michael, you like catching bottoms, handsome? Not this one. That's your game? Not this one. Catch this bottom.

Nope. This is Hudson Pacific Properties. You know, I have this down 85% since the middle of 2018. Chart off, please. I have this recurring nightmare. I don't really talk about it publicly a lot. I'm falling through the sky, not from space, but like just through clouds. And I never land.

I'm just screaming and screaming and screaming. And it never ends. And I don't ever hit the ground there is no ground the earth is not even rushing up at me and getting larger i'm just falling that's chart back on chart back on that's what that's that's what this that's what this reminds me of um i don't know where the bottom is but let me talk a little bit about you know you know there are doctors for this not for the stock chart, but for your dream nightmare. Go on. Yeah, make the case, please. The doctors, they said they weren't interested.

Total cash and equivalents here through Q1, $163 million left. Let me just stop you right there. You're starting off with cash? Well, yeah, because it's about survival. When you're a sub $5 real estate investment trust, it's a game of survival. You're starting off with cash on the balance sheet. Wow. Okay, keep going. 163, which is down from 255 million during the previous quarter. So they're getting toward the low end of cash, 4.5 billion long-term debt,

5.3 billion in total liabilities. Last quarter, just to give you some sense of the income here, it's $252 million in revenue, $32 million operating income, $54 million in interest expense. This is a $683 million market cap. Sir, are you making it the short case for the stock? I'm making the case that it's the worst stock on earth. And I'm going to tell you why now. Let me give you the fundamentals. You just did. Go ahead. Now, Hudson Pacific, recent news flow, sorry.

Hudson Pacific Properties, which as you could probably guess, is office buildings. But they actually found a way to make it worse. They diversified into sound stages just in time for the writer's strike. So they own 90 soundstages. They bought, they bought Quixote studios for $360 million, which owns 23 sound stations and a fleet of film production trucks and cash trailers. Even their side hustle sucks. and cash trailers. Even their side hustle sucks. This is real estate office portfolio primarily in Los Angeles, San Francisco,

Silicon Valley, and Seattle. Did you come up with four worse? No. Did you say, is their interest expense larger than their operating income? I think that's what I said, yeah. I forgot already. So this company's dead.

Hold on. The office vacancy rate in those four markets, LA, San Fran, Silicon Valley, and Seattle, the office vacancy rate is between 23% and 33%. First of all, which direction are you going? It's going higher. Higher. All right. Last thing. The company has lost money since 2020. All right. It's going. It's going higher. Higher. All right. Last thing.

The company has lost money since 2020. All right. It's enough. It's enough. Seriously. All right. Anyway. But I do see 30% upside before 100% downside.

I do see that. All right. Here's what I would say to you. Here's what I would say to you. If this stock's going to work, then it's a double off the bottom like yeah like it's yeah it's a double i think though the odds of where is it right now 480 is that what did i say where is it put the chart back up real quick yeah so when they break five i gotta be honest with you i've never seen them come back. Like financial companies

breaking five because a new thing starts to happen, which is that banks and lenders and partners don't want to do business with you. It almost takes on a lot. It takes on a, it's like a vicious cycle. Like we can't fix the company if we don't get loans or blah, blah, blah, under $5 a share. It's really hard. Maybe they'll do a reverse split. I don't know what the answer is. And I don't mean to laugh at anyone's misfortune. It's just this is like an impossible company in an impossible sector. So this is how you know, despite what we said earlier, this is how you know things are a

little bit frothy when you're making the case for the worst stock in the world. You're being facetious? I don't know. All right. I don't know. You want to for the worst stock in the world. You're being facetious? I don't know. All right. I don't know. You want to be the best stock in the world? I mean, this is how I feel. All right.

You're up. Mystery chart. We got two today. One is, I'm just going to give it away. Chart on, please. So as you can see, this chart is flat since a major world event. This chart is flat since a major world event. This chart is flat since a major world event. I'm going to go ahead and-

And you could see it broke out. Oil. Close. Broader. Natural gas? Commodities. Commodities in general. Okay, so mostly oil?

How wild is this? So since the invasion, all round tripped. This is the Invesco DB commodity tracking ETF, or DBC is the ticker, and it is flat with what is that? That's like February of 22, right before the war. Yep. Yeah, listen, a lot of the stuff that goes into this literally grows on trees. I don't know what to tell you. Like the whole thing with like lumber prices, I'm trying to tell people literally it grows

pretty well. I mean, this is why the cannabis stocks were never going to work. It, you could literally grow more. All right. Here, but here's now that was just, that was just the appetizer. Now we're onto the entree. We're going to start with a 10-year look. The purple line is the S&P 500. So I guess you could say that this has been an underperformer. It's down 8% over- Is this my portfolio?

Over the last 10 years. This is total return. This is a storied stock. Here's the problem with me, Josh. My clues are too good. This is a storied stock that was removed from the Dow Jones Industrial Average in 2018. Next chart, please. That has been on a tear lately. This is the last three years. I know it. Okay. Well, let me just finish. This is the last three years. It's up 162%. The S&P is up 51%. And then year to date, this monster of a stock is up 60%. The S&P is up 14%. And this stock is? General Electric. Boom shakalaka. Wow. You gave me too much, dude. I know. I'm too good at this. You gave me too much. You're very good at this. You're very good at giving clues that you know i'm gonna guess at but look it's a good

mystery chart that was good chart of general electric can we put that back up it's vertical this is ge's in purple year to date up 60 versus the s&p up 14 but what's the what's the longer term go back one chart what's the longer term this is 10 years the. What's the longer term? This is 10 years. The S&P is up 225% in 10 years. GE is down 7%. Wow. That's amazing. And Josh, are you looking at it? Like industrials are on fire.

Yeah. Industrials are on fire. Yeah. And this is like, you know what? It's a storied stock. It's had a few incarnations. It's had huge challenges. But in the end-

Do you know why it's going up? It's an industrial. Do you know any, is there any reason? I honestly have no idea. Well, they have a really big energy business, which was like an anchor around their neck for a few years. And maybe last year that improved. They're in aerospace.

They're in healthcare. And maybe some of those end markets are returning to normal. And they're getting the benefit of that. GE's involved. Look, they're selling. There's a record backlog of planes right now, any kind of plane you can think of. All the airlines all over the world are ordering planes. Like Boeing's backlog is bigger than it's ever been.

And GE plays a role in that market. You know, the propellant of, they're the, the propel, the propel, the propellant of, of a jet plane is what GE does. So, uh, I, I think it's a pretty simple story. Actually, they're not doing any of the financial engineering, any of the shenanigans with the media company. They're not doing like, uh, any of the earnings manipulation. At least we don't think like that day and age is over.

Now it's an industrial subject to the vicissitudes of demand for their products. That's what it trades on, and demand is coming back. Josh, before we get out of here, are we off next week? Are we taking off? Yeah, next week's July 4th, everybody. So we wanted to tell you in advance, we will not be here Tuesday, but you guys will be having fun and enjoying the celebration. So you won't miss us too much.

The other thing I wanted to say before we go, we're trying something new. This, the audio from today's show, in case you join late or you want to experience it again, is going to be part of the compound and friends podcast. So we're going to start putting that up Tuesday night on the compound and friends feed.

Same old Michael and I, you'll get us now twice a week rather than once, and we'll see if you guys are into it. We'll see what the reception is, but you can look for that on the Compound and Friends feed later tonight. Tomorrow, all new Animal Spirits with Michael and Ben. New Ask the Compound with Ben on Thursday,

and we end the week with an all-new episode of Compound and Friends. Thank you guys so much for watching. Thank you so much for liking and favoriting and doing all the things we'll see you soon.