The Compound and Friends - Technicals Say Everything Rally Is Now Underway, Bill Smead Says Large Cap Tech Is a Ticket to Purgatory, Buffett Gets Cautious

Episode Date: May 21, 2024

On this TCAF Tuesday, Josh Brown is joined by Bill Smead, founder and chief investment officer at Smead Capital to discuss Bill's market outlook, why he thinks Warren Buffett is bearish, what history tells us about the AI boom, and much more! Then, at 38:34, hear an all-new episode of What Are Your Thoughts with Josh and Michael Batnick! Thanks to Rocket Money for sponsoring this episode! Cancel your unwanted subscriptions by going to https://rocketmoney.com/compound 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. Tonight's show is brought to you by Rocket Money. Rocket Money is a personal finance app that finds and cancels unwanted subscriptions, monitors your spending, and helps lower your bills so you can grow your savings. Rocket Money has over 5 million users, has saved a total of 500 million in cancelled subscriptions, saving members up to $740 a year when they use all of the app's features. Stop wasting money on things you don't use.

Cancel your unwanted subscriptions by going to rocketmoney.com slash compound. That's rocketmoney.com slash compound. I am fired up tonight. We have an unbelievable show for you. I talked to Bill Smeed of Smeed Capital. Bill has been on Wall Street since 1980. He is out with a series of provocative statements. One of them is something to the effect of we're probably in for 10 to 15 years of no

progress in the stock market. He is pointing the blame squarely at investor obsession with indexing and the magnificent seven and their dominance over the indices. He's blowing the whistle on the AI boom. He's talking about how bearish Buffett seemed to be at the annual meeting in Berkshire, which I think was last week or the week before. He points out Buffett has significantly raised his cash hoard to about $200 billion, started selling Apple and made comments like everything in the market has been picked over, we can't find anything to do. And Bill is taking that as the mother of all sell signals.

So worth listening to. I wanted to bring them on the show. We have a lot of bulls on the show too, of course, but I wanted you to hear the other side. Bill's a normal guy. He's not a raving lunatic, so I think you'll enjoy that. And then it's the latest edition of What Are Your Thoughts? It's Michael Batnick.

It's me. Duncan screwed up with the music at the beginning. You'll enjoy that. But we did get into some really important stuff. We did an Nvidia earnings preview. This is going to be the talk of the town for probably the remainder of the week. We took a look at analysts starting to capitulate. The bearish analysts are now flipping bullish.

What else can you do? And we got into a whole bunch of other stuff about, uh, reets and private investments and there's just so much here. I think you'll love it. So without any further ado, I'll have John and Duncan take you away. Hope you love the show. And if you do make sure to leave us a rating and review. All right, here we go. Welcome to the compoundound 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. Okay. Ladies and gentlemen, we are here with Bill Smead. Bill is the founder, chairman and CIO of Smead Capital Management.

43 years of experience in the investment industry, starting with Drexel Burnham Lambert in 1980, Bill manages money utilizing a differentiated value discipline and And Bill, you work with advisors, you work with family offices, but you also work directly with individual investors, institutions. It looks like you've got SMAs, you've got mutual funds, and you've been doing this a long time. So you are a decorated veteran of the investment industry. And I just wanted to start by saying thank you so much for joining us today. Thanks for having me.

Okay. That's the easiest part of what we're going to do today. Let's just get it. You have been writing some of the most barbed critiques of the current market structure and the dominance of the magnificent seven stocks, large cap tech, really being the center of everything that's happening. And you're not happy about it. And I've been reading your stuff and I really just wanted to get your take.

And I think the audience would love to hear what you have to say on this topic as well. Yeah, it's kind of a common sense thing, if you think about it. Are people really supposed to live their whole life where everything works out great in the stock market? Yes. Basically, from 1980, when I came in the business, and in 81 I sold somebody a 90 day T-bill at 18%.

From that point at 18% on T-bills, we went to almost nothing on T-bills. Just from a rational standpoint, if you look at all recorded history of all the major civilizations, there are huge cycles that go on. And no society deserves to live happily ever after and always do well in the stock market. So what you have to be conscious of is history. And it's really hit me a lot lately. The conclusion I've come to is this is the fourth major peak of the last 100 years, 29, 69, 99, and now. And a lot of that got triggered by Charlie Munger saying back in November of 21

that this was the biggest financial euphoria event of his career, which is 75 years. And he said, he's a Harvard trained lawyer, said, because the totality of it. And boy, unpacking that word is really what led me down this path. OK, so in 2021, as Charlie was making that remark, the market was in the process of washing out a ton of excess. The IPO market ended up completely locked up. We went a year and a half without any deals.

All of the SPACs went to zero pretty much with a few notable exceptions. And I think we had a true bear market pretty much in every sector, but tech especially. NASDAQ fell 35% peak to trough, albeit it took place in the course of a single year rather than over three years. But you would say that that bear market was not enough to wash out all of the excess that both you and Charlie Munger observed in that time. Yes, and that's kind of what led me to these four different points in time. So the other day I read a book that Cole recommended

that we're gonna podcast called T. Rowe Price by Cornelius Bond. And so think about it, let's go back in time. T. Rowe Price was an investment counselor like you and like I was for many years, 27 years. And then he started his own company and then he started his own company, and then he started his own funds, and by 1968, he was the glam growth stock guy

among money managers. He was the Ron Barron slash Chuck Aker, you know, small G growth stock guy. So in 68, he got troubled about all the monetized federal government debt and then pivoted in the growth fund to oil and gas and started the T. Rowe Price New Era Fund which still exists today. It was started in 68, 69 to own oil and gas,

commodities and gold, which he pivoted to. Ironically, simultaneous to that, the greatest value investor at that point in time, Warren Buffett, who had been just smoking it in his partnership, gave the cash back to his owners. He sent all the money back and just asked them to keep the Berkshire Hathaway shares, because he said 10 years ago, the market was governed by lethargy, and now it's acute hypertension, he said. So think about that. The number one growth guy and the number one value guy

came to the same conclusion at the same time. We then had a bear market almost identical to 22 in 69.70. had a bear market almost identical to 22 in 6970. Yep. About a 35% or 40% decline that hit the go-go 60% stuff really hard. Jerry Tsai had the Manhattan Fund, the equivalent of Cathie Wood's ARK Fund, and it got slaughtered. Buffett was making fun of that, by the way.

His 69 partner letter, he was making fun of the Manhattan Fund. He doesn't make fun of stuff anymore. He's too nice of a guy. Anyway, so 69.70 was 2022. Okay. In effect. Now, what happened was in 71 and 72, an extension of the bull market took place on the back of a narrow group of growth stocks, which there were actually 24 stocks that were in both the Kidder Peabody and the Morgan Guarantee Nifty 50 list. And those 24 stocks powered a two-year bull market in the index to higher highs, which is exactly what we're doing right now.

Okay. So these are powerful analogs because without a doubt, you could interchangeably talk about Magnificent Seven and Nifty Fifty. They're both being talked about in the same way, which is, yes, these stocks are selling at an above market multiple. Yes, they're selling at PE ratios that far exceed their earnings growth, Apple being a prime example, but these are the best companies in the world and eventually you will be rewarded

regardless of the current valuation. So I agree with you there in so far as that analog being almost perfect, but one area where maybe I would wanna, I don't wanna challenge you, one area where I would wanna ask a follow-up question would be, it's also true that 70% of S&P 500 components right now are above their own 200-day moving averages. So if we were just talking about 50 stocks or 70 stocks, I might be more sympathetic to that analog. But right now, I can come up with a whole

list of industries where not only are stock prices in their own bull markets, but the fundamentals of the underlying companies are also pretty darn good. Let me add to your point. Our portfolio has gone up about 25% since the first in November of last year. I'm going to get to that. Yeah, yeah. So that's your point. So let me explain.

And again, this is where we dug deeper to understand this better. So in 1923, 1% of American households had a radio and by 1937, 75 percent of households had a radio. And in 1941, the most listened to as a percentage of population radio address in U.S. history was Franklin Delano Roosevelt declaring war on Germany and Japan by saying that December 7, 1941 is a day that will live in infamy. By the way, everyone should visit the World War II Museum in New Orleans. It's spectacular. Spielberg and Tom Hanks have their hands all over that sucker.

So anyway, if you bought RCA in 1941, you enjoyed the greatest 27 years almost in growth stock history. They were the largest maker of radios. They were one of the two largest national broadcasters of radio. And they were one of the two largest programming providers to radio. So when they went from $10 a share in 1926, 27 to 110 at the top in 1929,

the market was correctly predicting the success of that business. So the legitimate business development in 1929 was the radio business. The legitimate business development in 1969 was all the technologies that were spawned by the space race getting to the moon and the excitement about the go-go

60s. The development in 99 was the internet was going to change our life. It did change our life. Cisco is 15 times bigger corporation than it was at the top March 27th of 2000. So I don't disagree with anything you said. And by the way, because of what you said, the one thing we can't do, and we don't even try to do, is people want it. Well, Bill, when's this call going to play out? Right? That's the thing. So it's pretty relevant. It's a pretty relevant question, though.

Yeah. Oh, well, for you in the position as a financial advisor to people, it's an asset allocator. It is incredibly relevant. To us as stock pickers, we got it kind of easy, right? We just have this narrow lane that we play in and people are gonna measure us against the other people in that narrow lane. We don't have to shoot the lights out every year. The problem isn't that the AI

is not going to change the world. It is. The problem is the first three or four years of it, most of the gains come, and then you go in a long desert period for about 10 years where you wish you had never heard the word AI. Bill, in February, you put out a letter to your clients talking about a ticket to Purgatory. And I want to share some of your words with you and then have you react. You said the Sherman Antitrust Act was created to stop our democratic republic from being ruined by the concentration of capital in vast combinations. Oh, that's a direct quote.

The fear was that if too much of the success of industry went to too few people, our system would get disrupted. That's exactly the way you see the Fang stocks and the Magnificent 7. You say the good news is that the stock market has a history of solving problems on its own, what has happened over time to the largest and most popular stocks as measured by market cap. And then you show a chart that buying companies at the moment where they are the largest in the world is actually a terrible investment strategy.

I would agree with the concept other than the lived experience of the last eight years. If you bought the largest technology companies in 2016 and completely ignored the concept of large companies being competed or disrupted out of business, you've outperformed everyone everywhere as the big got bigger, the profitable got more profitable, the large got larger, and no one has really disrupted any of the largest tech companies of eight years ago to this day. I wouldn't say they're undisruptible, but I would say that that has not been a great investment thesis.

What are your thoughts? Well, a couple of things first. You're absolutely right. That information comes from a book from Peter Doran called Breaking Rockefeller. By the way, I highly recommend it as a read for everyone. We podcasted it. It's a history of Standard Oil. It's a history of Standard Oil, it's a history of Shell, and it's the history of BP,

as well as the history of the Sherman Antitrust Act. So let me unpack that real quickly. John Sherman was one of the 50 Whig Party guys that split from the Whig Party with Abe Lincoln to oppose slavery in 1850. So then in the aftermath of the Civil War, they spent a lot of time thinking about, okay, we almost tried to destroy the Union

over the slavery issue. What could ruin the United States of America? What could ruin this experiment in democratic capitalism? And they concluded that the concentration of capital in vast combinations, too much success going to too few people, but also they realized that it would pit society against each other, right? Look at the populism on both sides of the aisle right now

and the animosity. I've, look, Democrats have never liked Republicans ever, but the level of animosity is just through the roof. So the reality is the government has been asleep at the wheel. These have been monopolies that are as big and successful a monopolies that have ever existed and the government hasn't stepped in the way at all, despite a few attempts. And the reason they do that, here's the humorous thing.

John D. Rockefeller practiced cut to kill. Jeff Bezos practiced cut to kill in perfection, right? He delivered stuff at your door at a loss for 15 years, never made a nickel doing it and put everybody else out of business. Exactly what John D. Rockefeller would have done in the oil business if the government hadn't gotten his way and split it up and made the nine companies compete against each other. So that's just one example, but here's the problem, Josh, and this is a personal opinion, not a Smead capital investment opinion. Every business has got a soul.

And wherever that soul is taking you, you got to be careful of. So I have grandchildren and I know my kids are trying to defend their kids against, you know, TikTok and YouTube and Facebook. And I mean, I watched adults how Facebook is just poisoned people's attitudes toward each other. Well, I don't talk to them anymore after I start. Anyway, you get the idea. So you're framing this in terms of societal purgatory, like potential damage for America,

not just people's portfolios, but you also think that there is danger coming for people's portfolios as a result of the concentration that we currently have in the indices. John D. Rockefeller, I think, was like in his 80s by the time they finally broke him up. And that breakup, similar to the telecom breakup in the 1980s, both of those things became two of the biggest wealth creating events for shareholders in

the history of the stock market. So neither of those were negative for investors. In fact, they created a great deal of gains in the breaking up of those companies. So hypothetically, if Alphabet or Amazon were to lose an antitrust battle and be forced to spin off, I don't know, Waymo or Amazon Web Services or YouTube or something. Is that necessarily bad for the stock market? Well, if you split AWS away from the Amazon retail, you'd find out the most profitable thing at the center of AWS is web hosting the porn industry for all those ESG

people out there. Okay. Okay. It's a hundred billion dollar run rate business. You think a huge amount of that hundred billion is pornography? I think it was built on the back of web hosting the porn industry. It was the most profitable thing they did six or seven years ago. They would never have gotten to where they got to if they hadn't have been coining it

like crazy and poisoning society in the process. But that's just a personal opinion. That's not an investment opinion. But the answer to your question is when it comes to technology, T. Rowe Price, the greatest growth stock guy of all time said in 1937 wrote a piece called Change the Stock Markets Only Certainty. There will be a completely different set of technologies in 10 or 15 years that will usurp whatever is going on in technology.

But like Buffett would say, the people like to taste a Coke are still going to like to taste a Coke. Yeah. But that leads me to another problem is Buffett pivoted to qualitative investing in 69 on Munger's recommendation and the problem is everybody wants to own the same quality companies with the same characteristics. Buffett included. Buffett included and that is a ticket to problems.

The worst thing that could possibly happen is have everybody decide your theory is the right theory and duplicate it. Any good investment discipline gets violated by being adopted by everyone. And Bogle said that two years before he died, he was afraid that he'd created a monster in the S&P 500. And if you if you throw the the the the Amazon, Netflix, Tesla, Alphabet, and Facebook back into the S&P tech sector, it's now 45% of the index. I've heard you make this point. The Black Rocks and the Vanguard's

and the passive giants of the world are masking the concentration in tech by changing the goal posts, by moving things into categories that never existed before, like the distinction between communication services and tech is one example. Having Amazon as a consumer discretionary, which is not new, it's been there for a while since they were selling books, but your point is well taken. If you add back the giants that are not characterized as tech into tech, tech becomes even more grossly concentrated. 46% of the S&P, the old all-time high was 30 in the dot-com bubble and it's now 46.

So by the way, I'll go back to a point you made earlier, which is a great point. If in 2016 you sat down and said, I'm gonna buy buy, I'm going to redo my portfolio at the end of each year, I'm going to buy the five best performing stocks the prior year, every year since 16, you'd outperformed everybody. 22 might have been tough, but your point is well taken. Right? 22. So go back and look at history of any times like that, and you'd get the tulip mania 1636, you'd get the South Seas bubble

of 1720, you'd get the go-go 60s, you'd get 20, the roaring 20s. It's just not the way the system was ever built. What would you say to somebody that tells you there was a long stretch of time in the 1950s where AT&T and Exxon were as concentrated as Apple and Microsoft are today, if not more. I think two stocks were 30% of the market or something like that. We have seen it before. I wouldn't argue it's healthy, but I would argue it hasn't always automatically led to a crash. Yeah, when we did our study, so what happened, Josh, was I have a crack analyst team, a senior and two junior analysts.

And the neat thing about it is I get all these kooky ideas and I don't have a Bloomberg and I don't run a Bloomberg thing, so I get these kooky ideas. I said, guys, I said, let's do this. Let's put the 10 largest cap companies in the world at the end of each decade. Let's equally weight those 10 stocks and ask how they did against the S&P,

and then let's see what happened. So what you learn from that is, first of all, they underperformed the S&P every single time, equally weighted. All four times in the last 50 years, the top 10 market cap stocks underperformed the S&P. And then the other thing you find out is the list changes almost completely every 10 years.

But you've hit on a few of the outliers. Microsoft, Exxon have popped into the list numerous times, which is very unusual to have that kind of staying power. Now part of that is because the most popular trade of 1980 was oil and gas, and then the most popular trade of 2010 was the brick trade. And so it was easy for Exxon to pop back into the system in the brick trade. But you're right, Exxon has had unbelievable durability since it produces an addictive legal drug. And you know, that's what happened. Your point is well taken. There were moments in time where IBM and GE looked as though

they could not be dislodged. And both of them had astonishing falls from grace. GE had one of the worst drawdowns for a Dow Jones company ever seen outside of the ones that went bankrupt. And IBM was a serial underperformer for something like 15 or 18 years. So your point is well taken. And I don't think most people who are allocated toward the 10 biggest stocks in the world believe that they are completely invincible. But I think that a lot of people would say the 1970s nifty 50 comparison is not apt because these companies are significantly more profitable than supermarkets and steel stocks in the

70s. These are companies that should not be as profitable as they are 20 25% margins and growing earnings 10 to 20% a year. It's it's like unheard of. But I think that speaks to your earlier point about antitrust. It just we allowed these companies to do something that we haven't allowed previous generations of giants to do. That's right.

The other point that I would raise is they don't respect your boundaries, my boundaries. They're horizontally expanding. They're going into new areas. You never thought Amazon, when they were selling books, would become a tech provider, and yet here they are. You never really thought that, you know. Yeah, that was kind of a wonderful accident.

You know, I worked in Seattle for 40 years and what happened was they had to do all this technology to sell stuff at a loss to you and they ended up with a whole bunch of extra capacity and they started offering that capacity out to other companies. That's exactly how it happened. They turned the business inside out and offered infrastructure as a service. Yeah. By the way, think about this. Nobody ever talks about this,

but that was the best decision Bezos ever made. The worst decision he ever made was going in the grocery store business. Whole Foods is the same size as it was the day they bought it. Mackie, Mackie was sitting around playing poker one day and Bezos was in the poker game. And he thought, hey, wait a second,

this guy might be a sucker. Cause he tried to turn it around for about four years before he sold it to Bezos was in the poker game and he thought, hey, wait a second, this guy might be a sucker. Because he tried to turn it around for about four years before he sold it to Bezos. Their revenue is the same today as it was then. And what he did is he woke Walmart and Target up, who are now just totally profitable, very good at e-commerce. 80% of their orders are picked up at the store

because they have 1,700 locations within 75% of the US population in 20 minutes drive, something that he didn't have. So if he wouldn't have bought into the grocery business, he'd probably be even stronger than he is now. But Bill, you would concede these businesses are far superior to anything that was in the nifty 50. These are superior businesses to Eastman Kodak

and Coke and Avon and that generation's large cap growth darlings. Well, that's a little bit of chronological snobbery. I mean, RCA's market share at that point that there's 75% of households in radio, I mean, that'll probably never be touched. OK. Chronological snobbery is pretty cool.

As it is a term, I like it. Well, no. We read a wonderful piece. It's a paper. It's called From Horsepower to Horsepower. In 1900, 4,000 automobiles were sold in the United States. New automobiles. And in 1925, 3.5 million were sold in the United States, new automobiles. And in 1925, 3.5 million were sold.

Now, they shut Rockefeller and broke him up before there was 3.5 million automobiles sold. And just imagine what his power would have been in the United States if they had not broken that up before that. So, now, the answer is it's easy. We don't get to know what the next 10 to 20 years look like, but here's what I would say.

As an observer, I'm a baby boomer, right? So I'm a young boomer. My age group has enjoyed more benefit from this society than any age group in history. We started with high rates, we got low rates, we started with a low stock market, we got a high stock market. We're flush. Now that we're in retirement, a lot of us, now we're given 5% interest on our money in a treasury money market. It's a pretty nice sequence. By the way, did you see the guy the other day talking about part of

the strength in our economy right now is boomers are flushed with that was me. It started saying that in November and people were throwing tomatoes at me You're right. Yeah, you're right It's crazy I I stuck some money away in a Treasury money market fund because my wife wanted to build a vacation home in our hometown And I looked up at the end of the year. I thought man. I earned I earned a lot of interest What is this? I've never had this before. The Fed has to cut rates before the economy overheats. That's right. That's right. In the time we have left, I want to ask you about what you said about the Berkshire meeting.

Are you an annual Berkshire attendee? Yeah, I've been there 14 of the last 16 times and the one time nobody went. So I've only missed one in person. You said at the Berkshire Hathaway annual meeting, we marked what we believe is the end of an era both for Berkshire and the S&P 500 index. Quote, he is as bearish as he gets, referring to Warren. I read right between the lines, right from the beginning at the meeting, huge cash position, cut his Apple position. He's nibbling on something below the surface they haven't announced yet.

It was Chubb Insurance. Basically, he is waiting for the next 40% decline in the stock market to apply massive amounts of capital at bargain prices and things that are large enough to be meaningful to this company at the size it is now. Berkshire is bearish on the stock market. He shows this by growing his massive cash position to $200 billion, selling Apple and saying he doesn't see bargains. Berkshire's cash position, this is me now, as a percentage of market cap, is about average.

So, if you go back and look, he at the end of 68, he said the kind of things we want to do have been combed and re-combed. And a year ago, he said endlessly picked over. Endlessly picked over was the choice of words. Almost exactly. Now, by the way, value stocks, he felt, were combed and re-combed, quantitative ideas. And he said in 69, I'm going to go to more qualitative ideas, but they come along a lot less often, and then I'll have to put a lot more into them, which is what Charlie convinced him to do. So now, I just think, I know it sounds bad,

but I think Charlie dying is the end of an era for qualitative that that everybody wants to do We started with eight criteria a number of qualitative aspects Balance sheet long history of profitability wide moat We've been operating off those so if you and I were talking in 08, 09, 010, Josh, I'd be making the argument for buying broken growth stocks, effectively buying Starbucks and Home Depot and Disney and people like that, that were trading at 11 times earnings because of what happened in 07, 09. None of them are 11 times earnings right now. No, that's right. But in late 21, we sold our Disney, we sold the last of our Starbucks, we sold Accenture.

We should have sold our Home Depot and we should have sold our Target and then bottom back. But the point was anything growthy in our portfolio, we decided to get away from. Just because, again, like you said, it's been such a good run. You don't get to know what's going to go wrong. Or as I told people, if we were on this podcast five or six years ago, I was making the argument

that interest rates are going to normalize at some point. And they'd say, Bill, when's that going to happen? And I'd say, well, you can't hold your breath till then. And it ended up taking two or three years longer than anybody would have thought of. But then when it did happen, it happened in a year. I mean, it just literally just boom. Real fast. Same thing here.

Same thing here. This wonderful growth stock era will go on right until it doesn't. The problem is, the history of it is, if you're still in it during the next bear market that centers on it, it's 10 to 15 years of purgatory. Okay. And that's what we were referring to. So I want to get to, I want to get to what do you do about it?

And this is where we'll close out. I want to give you your flowers. A lot of people who are prophesying bear markets tend to be people with nothing at stake, no skin in the game, other than their reputation. So they're newsletter people or they're TV personalities or they're like Twitter people and when they put out their newsletter, there's always something that says, hey, this is for entertainment or we're not giving you advice. You are one of the few people that are of this view who actually has skin in the game

Both for yourself and for clients and you are someone that manages money professionally You're not just a professional opinion spouter, which is why I found what you were saying So compelling I want to point out you have been outperforming The S&P 500 it looks like on an annualized basis over the last five years. That's in the Smead Value Fund in particular. I know there are some other funds and share classes, but I did want to point out you are a skilled practitioner and an actual investor. So you are going out on a limb saying that to your investors. What are you telling them is the antidote to this purgatory that you see coming?

Yeah, between the electricity that AI will use and the literally shaming of the fossil fuel industry the last five or six years, we're gonna be in a bull market and commodities that is as good as any 10 or 15 year as ever looked. And that was all created at the bottom in April of 2020 when the Saudis took oil negative. Yeah. So we've got a 220-year chart that shows that that was the lowest commodities ever got relative to stocks.

And even to this day now, commodities are hellaciously cheap in relation to stocks. So we're very overweighted oil and gas. I think natural gas is going to just 41% of electricity in the United States is made with natural gas. I mean, let's face it, AI is going to suck in electricity. People are buying utility stocks right now, regulated monopolies to get at the AI thing, but the best place to go is to own these oil and gas stocks that are depressed by the fact that they haven't made

any money selling gas for many years. I was gonna say, oil is buoyant, natural gas is like hovering around one or two bucks. If they get a simultaneous bull market in both oil and gas, those names should do really well, at least historically, but it hasn't happened yet. Yeah, if the price of natural gas goes to five or $10 like we think, Jerry Jones might win a Super Bowl someday.

Okay. Okay. So you are overweighting energy commodity related stocks is one answer. And then we own the mall REITs because we like land, but we don't like office buildings because the shopping has moved away from the downtown major cities into the suburbs.

That's right. So, you know, we own Merck and Amgen because they're very cheap relative to the rest of the highly thought of quality companies, even though like Apple, they have to come out with a new product every four or five years. Well, guess what? They've only proven that for 165 years on Amgen.

And then we own the banks are pretty cheap. We got a chance to buy some, a regional position last year. And I wish Jamie would keep his mouth shut. I don't like him knocking my portfolio down like he did. Well, that's been spectacular. We bought that stock on the whale trade in June of 2012 at 3450. Just imagine that.

It's hard to think back to how scared everybody was of the banks, you know, Occupy Wall Street and all that. So your value fund, according to our data, has annualized at 16.3% over the last five years. The S&P has been about 12.96% over that same period of time. So whoever is saying value is dead clearly hasn't hasn't run into Bill Smead. So I want to congratulate you on what you've been able to do in an environment where value stocks have been sort of out of favor, at least in the headlines in the media. But

you're proving that that's not necessarily true down on on the ground. Well, thanks. That's nice of you to say. This is a hard game, and no one should expect short run. We never advertise short run performance. Long run performance is what we concern our with. And so, yeah, I'd like to think that value will have its day in the sun, but that probably means we'll make way lower returns the next 10 years than we used to, but it'll

look a little better relative to the index because the index will be way, way lower than where it's been. Well, I'm going to hope that you're wrong, but you could be right. You do have some very compelling points here, Bill. I think most of the audience will hope that you're wrong, but I love the way that you deliver the message and I love the fact that you're delivering it as someone who's actually got something at stake. I think it's way more meaningful that way. I want to mention to the listeners that you have your own podcast and it's called A Book with Legs and that of course is what Charlie Munger's grandchildren

used to refer to him as. Do I have that right? Yeah, he always had his face in a book. So his family called him a book with legs. All right, so that's the name of the show. I have not subscribed to that. So I'm gonna make sure I go ahead and do that. And I would love to have you the next time you're in New York. I'd love to have you up to the studio. So we'll figure that out off the air.

Guys, Bill Smead, everybody. Thank you so much for listening and we'll talk to you soon. Where's the music? I don't know what just happened. Duncan Duncan. Are you okay? Did someone break into your lab and take you hostage? Ah, let's bring the, let's bring the heat. That was a low energy intro. My goodness. Wait, I'm sort of worried. He's not even responding.

Wait, can you hear me? Don't know. We could hear you. There he is. Huh? I heard the music. I'll talk into it. No problem. Check your email for. I'll talk into it.

No problem. Check your email for a pink slip. Hey guys, welcome to an all new edition of What Are Your Thoughts? As always, my co-host Michael Batnik and I will be bringing you our takes on the most important topics in the markets this week. We really love all of you who come here for the live. Want to say a couple of quick shout outs before we get rockin'. Chris Hayes, what's happening?

John Carlo, Rachel, Doctor, J Luther is here. Someone's saying something about Josh Brown and where is this? I guess this is like a request for a guest. What is happening? It's saying Cameron Dawson and Josh Brown, Beauty and the Beast. You will not call her that, sir. You will not. We will not do that on this channel. Uh, who else is here? Cliff is in the house. Matthew's here. Jerry Gold. All right. Welcome to the show,

guys. Such a pleasure to have you. Uh, tonight's show is sponsored by our friends at rocket money. Michael, what do we want to say about rocket Money? So I love Rocket Money. It is a great personal finance app that does a few things. It helps you find and cancel some of your unwanted subscriptions. You're like, wait, I'm still paying for that. I thought I canceled it. Wrong. Rocket Money, you could cancel right from the app. One of my favorite features, large transaction detected. I get emails, large refund detected. Oh, what's this? What's this? I didn't charge yet. Cancel. Boom. Done. I love it. Rock and money has over 5 million users has saved a total of $500 million worth of canceled subscriptions. They've saved members up to $740 a year when they use all of the apps

features. This is like real money. Listen, Listen to what else? Listen to what else? Big deal. So you know how every week, chart off, you know how every week you get a notification from Apple, screen time you spent six hours on your screen? You know what I get from Rocket Money? Here's how much you spent last week.

This is higher normal than average. Oh, like Apple screen time. It'll tell you like spending by week. I love it. I sleep right now. 20% above your normal spending. Great. They do. Go to rock and money.com slash compound to try it out. Michael loves it. What more do you need to hear this week? We're going to start with the everything rally. So one of my favorite technicians are a wall that Oppenheimer says basically, it's time to position for the everything rally and it's sort of already here.

So we have a let's throw up the first chart while I talk. The S&P 500 has reached a new cycle high last week. This is Ari, supported by 68% of New York Stock Exchange stocks above their 200 day moving average. This argues against the major top. While a broad-based breakaway hasn't developed in this bull cycle, constructive price action in the Russell 2 leads us to believe this breakaway should finally develop over the coming months.

As a market signal, we remind investors that it's more important for small caps to participate in price terms than to lead relatively. So, Ari's basically saying look at the major S&P peaks in 1999, 2007, 2015, 2018, and 2022. They were all undermined by a falling 200-day participation reading below 60%. In this case, we're sort of approaching 70% participation. So that's why in Ari's estimation, this market is not at all reminiscent of those prior market tops. And you can see on the bottom pane, we're showing you the percentage of New York Stock Exchange stocks that are above the 200 day. So I like that confirmation. I know you don't have to have it, but what are your thoughts? You think that's sort of important in your mind? The market looks really good,

but not overextended. If you look at the percentage above or below the 200 day moving average, it's not like we're super stretched at all. In fact, put that chart back up. Look at the percentage of stocks above the 200 relative to the last cycle peak. They're well below. So not overheated, at least based on this chart. I want to show you something about small caps, which I already alluded to. So he's saying, next chart, guys.

There's a difference between leadership and participation. And I think this distinction is important. Ari is saying as a market signal, it's more important that small caps participate than be in front. Small caps don't have to lead. In terms of price action, this is Ari, we're encouraged by the Russell 2000. It's upheld its 200-day moving average while it attempts to break through two-year resistance. We see this as a bullish change in character versus corrective periods in 2023. Relative to the S&P, we're unsure of small caps or more than a short-lived beta trade without an earlier-staged economy.

Here's one more thing on this. Large caps lead in real bull markets. So in January, Oppenheimer had published something showing that from 83 to 90, from 94 to 99, it's large cap outperformance. So do you need the Russell 2000 to confirm? Not really. Is it nice that it is? I think Ari's making the point. Yeah. That's like good enough. What do you think about that idea? Yeah, I don't think that like anything's set in stone here in terms of what small caps need to do. So there's been a tremendous rally for the last, I don't know, 10 plus years and small caps have underperformed almost the entire time.

Yeah. In fact, they get like at the- They get like six weeks. So I'm looking at the IWM divided by SPY. And there's stretches where it rips, where the ratio rips. But if you look at it right now, it is at the lowest level since 2001. So IWM came out in 2000. And the chart went all the way up, in other words, from 2000 to call it 2011, small caps outperformed large caps a lot.

So they went all the way up for that decade, that ratio, and it's rolled all the way back over. So it's been 12 years of the Russell trailing. Hasn't slowed down the market overall. There are a lot of structural reasons for that, which we've gone into in the past. We don't have to rehash. Do you feel that the market is now getting close to overheating? It's not a top, but is it getting close to overheating where we might be due for a meaningful pause? What are your thoughts?

We just had one. Is that meaningful? April down 4%? The 5% pullback? Listen, are we stretched? Can we pull back? Yeah, sure. Maybe. I don't know. Why not? But I think that the topic that we're going to cover later about analysts

or sell side shops ratcheting their year on target hire accompanied with this might send some signals that we need to pump the brakes and relax and we might be getting ahead of ourselves. Mike, are you sub tweeting Mike Wilson? Yeah. What did he just do today? Why is everyone talking about this guy? Don't act like you don't know.

We have a whole topic on that. I heard he raised his target, but I don't know why it's notable. We have a whole topic on that. So I saw a chart from Todd Sonnash Strategis that we stole and recreated and put a little bit of our flavor on it that I want to- Take that Todd. Yeah, take it. So chart on, look at this. So what I want you to look at is the chart on the left shows the one year roll and return for the S&P 500. We are in the top decile of rolling 252 day periods. Right? You see that on the right? Yeah. What's the performance between 22% and 29% is the reason why we're in that. That's the min and that's, don't worry about that. The important thing though is what are the forward six month returns?

Pretty good. Five and a half percent on average with a 76% win rate. So the 76% looks like it's in line with historical averages. It's in line. Can I just say this out loud to make sure that I'm grasping this? So if you take all of the trailing 12 month S&P returns and you divide them into 10 deciles, we are in the second highest decile, like the second best decile. And what you're saying is going forward for the next six months, 76% of the time, you're

still going higher in the market. And it's a return of about 5.5% on average. Yeah. So, but also, most people think the opposite. There's a big difference. Well, we wouldn't think that because we know better. There's a big difference between the second to best decile and the actual top.

You know what I mean? Look at that run. I guess that's probably off the March 2020 lows. Just totally out of control. And it sustained that run for a while. Wait, look how wide that barn door is. The best decile of 12 month returns is minimum 29%, maximum 71%. Do you know how bad the market has to be to go up like?

71% or more in any given year. Yeah, it almost it has to come out of a bear market It has to crash like 30% in two weeks. That's what happened in March, right? 20-20, right? Okay. So in other words the message here is yes. We've had an amazing trailing 12-month return up to this point We're firmly in the second best decile you could possibly be in, but that does not necessarily mean the next six months have to be some sort of a give back. I think that's a good message.

If your position or if your personality, and this is probably most people, because most people get fearful when everything looks so good, it feels like it's too good to be true. But if that's been your posture for the last 15 years, you got destroyed. If you think that I'm bearish because everything

looks so good, that's not how you make money. Things look really good right now, they're not always going to look as good as they do today, of course, but I wouldn't fight it. That is not a winning mentality. There's a personality type that feels as though, it's almost like a religious, like if you're sexually promiscuous,

like the God's about to punish you, or it's almost like if you're having too much fun or things are going too well, there has to be some sort of a comeuppance. Like there has to be like, you have to pay for it in some way. Like that's like a, that's a mentality. And I find it more frequent than with older people rather than younger people.

But I, I understand it because the market really has been good and it almost feels like we don't have to pay for this. Like we just get this. Well, guess what dude? I get that. So do I. But from October all the way up to the prior peak in March, it was basically straight up. It was one of the best three month rallies that we've ever seen. If you fought it the whole way up, you know what you were aware

with? Yeah, we got a 5% pullback. So this is interesting in the chat, I'm being told by Benjamin Lupu, yes Josh, it comes from Protestant work ethic. Like, yeah, like in other words, you don't deserve a 100% rally in the NASDAQ over the last couple of years. Like, no, like nobody deserves that. You didn't work for it. You didn't earn it. It just happened. Therefore, you're probably going to have to pay for it somehow.

You know how many AirPods I bought? I earned it. Well, time out. So Thurman is saying that's Jewish guilt. I was going to comment back to Benjamin. Dude, not time out. I'm sorry. is saying that's Jewish guilt. I was going to comment back to Benjamin. Dude, not time out. I'm sorry. I'm sorry. I love the listeners, but they don't get to talk over me. I talk over you.

So, as far as- Just pointing out, people get that instinct. That's all I'm saying. Yeah. No, it's intuitive. All right. So one more chart directly from Todd. By the way, you get really triggered by referencing the viewers. Maybe we won't do this live anymore. No, you know what? No, next week, I will be reading the comments instead of listening to you.

And we'll see how you like it. I'm sure you would love that, knowing you. I don't think you could multitask at the level that I do. But we could try it. I definitely cannot. OK. Todd's sewn on. So it's not the everything rally. So this is the Goldman Sachs liquid most short index.

And in fact, that's not true. I take it back. It is rallying. So the most shorted stocks have been rallying, but not nearly to the extent of what they did when things were out of control. Yeah. Yeah. Wow. That was. Look at that. That was nuts. to the extent of what they did when things were out of control. Yeah, yeah, yeah.

You know? Oh, wow. That was, look at that. That was nuts. That's 2020 into 2021. I wonder what's in this piece of shit basket. It's got to be just wall to wall garbage. Like Roku is acting like trash.

Zoom hasn't gone anywhere. PayPal's still a dog. You know, there's still the most, are those still the most shorted stocks though? Or are they new? Peloton still looks like it's going to zero. There's still a lot of crappy stocks out there. Yeah, no doubt about it. All right.

So here's what I wanted to say. Here's what I wanted to say. Let's run through some chief strategists. Morgan Stanley and this is Mike Wilson. It doesn't matter what we think, but what the market thinks. It's clear that last week's data has given the markets more confidence in the soft landing gold deluxe outcome. Now, a too clever person would say, uh-oh, the most bearish guy in Wall Street capitulated.

I understand that. I do. I get it. I also get it because it's not just him. Here's another one. Deutsche Bank's Binky Chadha boosted his year-end S&P 500 target from 5100 to 5500. You got another one from our boy Belsky. He lifted his target to 5600. That's the highest on Wall Street. We believe the market is behaving in a similar fashion to 2021 and 2023. Years where we did not

give enough credit to the strength of the market market momentum, something we are trying to avoid this time around. The analysts, the price targets are being rationed higher. I hate to use the G word because we know that markets don't stay stable and good things don't last forever. That being said, things look good. Earnings are good. The consumer is good. The VIX is low.

Spreads are tight. Inflation is low, spreads are tight, inflation is cooling, people are making more money. Like I don't know what the bear case is. The bear case is that there is no bear case. Okay, fine, if that's like your modus operandi, then good luck. Yeah, look, you know, this is not like a personal thing against Wilson,

although I don't like the guy generally, but it's a really hard job. I don't like the guy generally, but it's a really hard job. I don't think I could do it better than he could. But like at a certain point, you just stop. Like just like that's his job. No, but stop with the targets maybe. Or I don't know.

I mean, it's he's not good at this. And it's not just because he's bearish because he's been bearish and right before. But like this is if you were saying in late 2022 after a really bad bear market, both for stocks and bonds, if you were saying like there's going to be another drop to 3,900 and then doubling down on it, lowering your target to 3,200, or having that be your extreme bear case. Like the people that listen to you, 3,200, and then the market rallies to 5,600 is crazy. That's not being off by a little bit.

That's like being very, very wrong for an appreciable length of time. So I just feel like, just stop doing that. I don't know, is it nuts to suggest that? Well, did they not, was he not removed from that role? But he's still doing this shit. I thought he was done. Why are we still here?

Again, I'm stipulating, this is hard. I don't think I could come up with a price target either. Okay, I just don't, the reality is that the S&P 500 is flat over the last 11 weeks and exactly in line with where we took off our tactical bullish call on December 5th. The main difference is that stocks are now significantly more expensive. This is February of 2023. He referred to the rally as pure FOMO. This is his words, not mine. This is pure FOMO at its best in our view, and we find all the hoopla and excitement about the year to date rally to be misplaced.

Dude, earnings growth, not FOMO. And I found that at the time to be insulting. Like, oh yeah, everyone that's buying is an idiot except for you. Okay. So I don't, I look, I, it's not personal. I don't like, I don't love targets anyway. I don't really talk about them or focus on them that much. But like at a certain point, like this is not your thing, dude.

And he did cancel on us. Well that's why I don't like him. But I mean, it doesn't matter. He is the most notable capitulating bear. He put himself in that position, not me. Well, if this were to be a top, certainly, you know, it would probably be noted that Mike Wilson top. He's going to regret canceling me.

I don't want it to be that way. I just feel like that's where this is going. All right. What are we doing after this? Cause it's not a lot of signaling. Did we talk about the Deutsch guys target? I just mentioned, I didn't read it. 5,500.

Did you want to mention? They all seem to be clustering now between 55 and 5,600. That seems to be where the bulls are. I mean, it's, look, it's hard, even for the balls, it's hard because you still have six months and change left in the year. And I guess the safest thing to do is to cluster around where everyone else is. I would be tactically neutral right now, given the upcoming election and the summer. I'm on record I think the most obvious thing to predict this this late summer into the election is

Chaos and a lot of people would say yeah, that's how you know, it's not gonna happen. Nah, I'm pretty sure it's gonna happen Like I'm I'm pretty sure there's gonna be some chaos. Well, guess what? You know what happened today? The VIX closed at its lowest level since To holy shit since 29 since early 2020. Wow. Lowest close in the VIX since pre-pandemic. Under 12. That's wild. S1 C1 All right. Speaking of chaos, tomorrow, Nvidia's earnings, it'll be after the bell. Are they a late reporter or an early reporter? S2 L1 Late. S1 C1 It's a late reporter. All right. Let me give you the estimates.

Nvidia is supposed to quintuple their earnings versus the same quarter last year. So from that perspective, you kind of can understand why the stock has done what it's done. Not pure FOMO, it turns out. $5.58 in earnings, which would be a 412% year over year increase. This is unheard of for a company of this size. $24.6 billion is what's expected. That's only a 242% year over year increase. EBIT is expected to come in at $16.4 billion. Last quarter it was $3 billion. The same quarter last year, rather.

So that's a 437% jump in cash flow. $3 billion, the same quarter last year, rather. That's a 437% jump in cash flow. The last time they reported was February. Earnings were $5.16 versus $4.64 expected. They beat on revenue also. The stock went up 16.4% in response to earnings, added $276 billion in market cap that day. So we have seen Michael Jordan-esque moves around the earnings from this company several times in the last couple of years.

Not every time, but there is a universe where this thing prints $1,100 after the earnings. Nobody should act like that's impossible. And if you think it's impossible, I want you to close your eyes and think about this as a $95 stock, not a $950 stock. And you know damn well any $95 stock can go to $110 at any time. So, you know, there is a universe where that happens. Not my prediction.

I'll be happy if it does. And if it does, it's going to be really tough to have price target of $4,400 on the S&P or whatever. Josh, do you remember all the way back 30 days ago when Taiwan sent me, I think, a warrant that Nvidia fell 20% in like three weeks? When was that? Three weeks?

It was at the end of April. Guess what happened today? Nvidia closed at an all-time high. We got some charts. You know how hard it is to be an active growth manager and fight against this thing? Being significantly underweight, this stock. What do you tell people? I'm protecting you.

What are you protecting me from? You know what I mean? Dude, this is so hard Tell me what's in the chart This is the cumulative 12 month forward earnings revisions And if you ask me to explain what that means, honestly, not sure I could do it But be that as it may cumulative 12 month forward earnings revisions. It's showing what the analysts are doing Is it showing how far behind they were?

showing what the analysts are doing. Is it showing how far behind they were? No, it's, well, yeah, de facto it is, but the purpose of the exercise is to show that as the stock has gone up, it's happened in concert. It's not FOMO, it's earnings estimates going up in concert with the share price, and Chart Kid Matt's take is that means the increase in the share price has been fundamentally driven.

Well, we know it's not multiple expansion. No, it's the opposite. It's contraction. I mean, it's super impressive. I don't know. I don't know that you could say we didn't do this research, but I don't know that you could say any of the mega cap tech have that same, have such a perfect matchup between the cumulative analyst expectations going higher in concert with their share price. I'm thinking Amazon does.

I don't think you're going to see that with Microsoft or Apple. I mean, it's, this is like pretty pristine. So well, all in video has to do is quintuple their earnings every quarter and it'll, this is like pretty pristine. So, well we got all in video has to do is quintuple their earnings every quarter and it'll be fun. Yeah, I agree. We got, we got three more good charts. What is this? This is yours now. Uh, yeah. So Nvidia has doubled the performance over the last, what are we looking at here? Nvidia is up. So this is going back to the end of 23.

So Nvidia is up 90% and the Vanex Semiconductor ETF, SMH is up 43%. So it's a full double over its peer group of companies, which I guess should not be that surprising because most of the companies in that index are not growing anywhere near where Nvidia is growing. So this is what it should look like. So year to date, we're about halfway through the year. Nvidia's up 92% for the year.

What's this tweet? Two more. All right. Nvidia, this is from Mike Zuccardi. He tweeted from Bank of America, NVIDIA drove 37% of S&P earnings growth over the last 12 months and 11% of the return, but is expected to drive just 90% over the next 12 months. So what does that mean? I think that this is a combination of Nvidia's growth,

perhaps slowing, but the rest of the market picking up the pace. Yeah. Well, we've said it before, and this is one of my core beliefs about 23, is that the number one thing the bears got wrong had nothing to do with macro. Yeah, that's a good point. They got the earnings wrong. And if they were dismissing chat GPT and GPUs and the AI revolution, then they missed 37% of the S&Ps earnings growth coming from one company that ended up becoming a gigantic index weight. Wild. I wonder if that's ever happened.

37% of the earnings growth over a 12-month period come from one stock. That sounds insane. I have to guess the answer is no. The only thing I can think of is potentially Cisco became the biggest market cap in the world because it's not just enough to have a fast growing company. It has to be so big, the company, in order to be that heavily weighted in the earnings growth equation. And it also happened in a time where I think that earnings year over year for the SP were probably flattish.

So this like stood out even that much more. So yeah, what's the chat saying? Nothing. I'm looking at the next chart. This is great. So another one from chartKid showing that the... There's a lot going on in this. I got it. The earnings report from Nvidia has marked implications, or at least it has, over the last few years.

So what this is showing is that the average five-day return, now it's short-term, of course, the average five-day return for the S&P 500 after Nvidia misses is down a tiny bit down nine basis points and be day But yeah, the average five day return for the S&P 500 after Nvidia beats is 0.6 percent. It's a massive massive spread. So in the short term, it's it's been important Yeah, so this answers the question like does the market need Nvidia's earnings to be good? Like the report itself. Well, how about this? How about this? Need is a strong word, but it definitely helps.

How about this? If Nvidia bombs, which it hasn't done yet, and the stock, not the company, because we know the company is going to beat. We just don't know the magnitude of the beat. If the stock falls 30%, risk appetite will change pretty quickly. I think that's right. Because I think it's a bellwether not that there are so many other companies that do what they do. It's not a bellwether in that sense where you would say like Walmart is a bellwether for consumer retail. It's not a bellwether in that sense.

It's the narrative. It's the narrative and the transformation of the economy into an AI economy. NVIDIA is the shock caller from that respect. Speaking of narratives, I want to read a tweet from Chris Cidiel that I thought was not provocative, but just common sense and interesting. And Chris is a volatile derivatives trader, really smart kid.

He said, this is going to be a controversial take, and I'm sure it's going to upset some folks. However, the more equity shrug off hot inflation data, and excuse me, this is a week old, the more equity shrug off hot inflation data, the more affirmation there is towards the dying narrative. If you've been trading for a while, you've seen narratives get cycled out of the market and lose their impact year after year. Simultaneously, traders will latch onto the narrative late in the game and lose money as equities are no longer trading based on that view.

We are now entering the third year of, quote, hot inflation means stocks go lower, yet equities continue to reflect something different. Don't strain your brain trying to make sense of it all. As a trader, asset prices are all that matter. Sometimes it's as simple as, quote, folks want to buy stocks. Stocks may go up, they may go down. I really don't care. I'm just calling it how it is. I think that's right. I think that's right. It's too obvious to think that every time there's an inflation number that's sort of on the warm side, we're going to be down 400

points in the Dow. I think the market has outsmarted that. It's too easy. Well, it actually ended in January. Remember the chart that we showed of implied Fed funds future versus the S&P 500 and one of them was inverted and they tracked dead even in 2023 and that relationship broke in 2024 because the expectations for rate hikes, meaning like cooler inflation, that just kept getting pushed out and the market seemed not to care. So that narrative died in January. And listen, at the time, you can't know it.

It only happens after like after a period of time, but narratives change and people that latch onto a dead narrative have a really hard time making money. What's the thing? What's the that saying that we both love? Just when you think you figured out the key to the market, they change the locks. Great. Right. Anything that works so consistently that you could explain it to other people and then they can make money doing it like that can't last long, which is I think in part why the Magnificent 7 dominance is so frustrating for people who have a long market history because it's unprecedented for it to have gone on this long and still

work. Well, the easy trade that's been working for 12 years has to piss off market professionals. Big time. And actually, sneak preview of tonight. I spoke to one today. So I spoke to Bill Smead of Smead Capital and he thinks that the S&P is in for a 10 to 15 year period of flat performance and he thinks that the Magnificent 7 will be the reason why so I don't want to step too much on that, but we're going to drop that tonight on the compound and friends feed. Guess what? Not a crazy take.

Look at the returns over the last 15 years. And dude, this guy's not a economist or a Twitter asshole. This guy manages real money and he's been doing this since 1980. So it's a really interesting take. So you guys can listen to that on the podcast feed later. I want to take a little bit of a victory lap. I said this shit and everyone laughed at me. And now it's becoming conventional accepted wisdom. And Michael, I would like you to genuflect.

I really would. What does that mean? I would like you to Google the term genuflect and then I would like you to actually. Oh, okay. Because you don't know what that word means. You're throwing around words. You don't even know what it means. No, it means like bow down before your superior.

I will fuck you. I'm not Jenuflecting anything. I will not Jenuflect. All right, just give me some credit. I'm just kidding. No, no, no. Black rocks, Rick Reader. Hold on, hold on.

I'll give you credit. When you said this on the air with Jeff Gommack, it was a Fed Day and I do remember, and we love Jeff, but he gave you a, like, that's cute. Like, I think he might've chuckled. And at the time you said it, it was a pretty crazy thing to say. Yeah, but look, I said that there is now so much money in the top 10 or 20% of the wealth distribution. And what ends up happening is that those are the people who are driving the rest of the economy with their spending.

Those are the people that continue to spend money to redo their house, upgrade their car, have personal trainers, on and on and on and on. And that spending is everyone else in the economy's income. And so the argument against it was, yeah, but that's not big enough to offset whatever they were saying is the thing to be bearish about. Yeah, no, it turns out that it really was. And who do you think is buying all these airline tickets and booking up all these hotels?

It's the investor class. To me, it's as plain as day. We talk to millionaire households. Their cash is making them more money than their stocks were making them two years ago before all these rate hikes. It's this weird thing. This was the joke when I was like, hey, maybe the Fed needs to cut rates to calm the economy down. I wouldn't go that far. But I would say, like, you have now made it so that the 69 million baby boomers who are still alive are now making more money than ever with no risk. And you think the

economy is going to slow because of that? What are you nuts? So that's that's the very real situation we're in and it's crazy when you think about it. So I feel like I was early to this. I was saying this in November dude. Do you remember? Yeah I just I don't I don't I just I don't really agree. I did that. No but but the Evan, let me can I read what Rick Reader said? Sure. Black Rock's Rick Reader has some advice that bucks conventional wisdom. The best way for the Federal Reserve to temper inflation will be to lower rates, not hold them higher.

That's because well-heeled Americans are earning more than they have in years from fixed income investments given that benchmark rates remain on hold at their highest level in a generation, according to Reader. So, yeah, I mean, he sees it and now a lot of people are talking about. Many people are saying this. I just, I don't really buy it. I think that the economy is really strong and I think that this is like a cute argument, but I think that if you have $10 million in the bank, your spending is not changing based

on how much money you're earning on your cash. And you're wrong about that. And you earning on your cash. It's just not. And you're wrong about that. And you're wrong about that. And you're wrong. And you don't have to have 10 million in the bank. One to five million and whatever money you have in the bank, let's say it's 20% of that, 50% of that, the wealth effect is real on high yielding cash balances.

It's no different than the wealth effect from stocks. And by the way, we're getting them both at the same time. I don't buy the wealth effect. I think the economy is strong and that's why people are spending money. And the reason why people are spending money is it's the marginal spender of money. People with money are going to spend regardless. As long as there's not like a GFC, they're going to spend their money. That's what they do. They spend. The lower end consumer is making way more money than they ever have. And they're going to spend their money. That's what they do. They spend. The lower end consumer is making way more money than they ever have. And they're spending a lot more as a group.

And I think that's moving the needle more so than people that are earning 5% in their money market. That's two different categories of spending. I don't disagree with you, but it's two different categories of spending. I would just point out we had 0% interest rates in the wake of the GFC for a really long time and We had disinflation Now we have high interest rates and it's prolonging inflation. I just can't believe I can't believe that that's complete coincidence there was so much financial anxiety surrounding the Almost end of the financial world that of course people aren't gonna spend their asses off in 2011 So I don't get that Dave Wilson said mud rooms for everyone there had almost ended the financial world. That of course people aren't gonna spend their asses off in 2011.

Sorry, don't get mad. Dave Wilson said mud rooms for everyone. There have been, I mean, in fairness, there has been a lot of mud room construction and that is definitely driving. So do you think that I spent money in my mud room because I'm earning 5% in my checking in my money market account?

That's absurd. I think it made it easier for you to make the decision to pull the trigger. What? I think, honestly, I think your mudroom, your mudroom is gonna happen no matter what in fairness. I think that was just destiny. Dude my mudroom is inevitable. Anyway no in all seriousness credit to you because it was a crazy call at the time. But you don't believe in it. No I don don't agree. It's fine. So why am I getting credit?

Because you have the chutzpah to say it. And now luminaries like this guy are coming. Luminaries like this guy? Do you understand Rick Reader oversees the largest pool of fixed income on the planet? It's literally the fixed income chief at Black Rock. Hold on. Do I not know what that word means?

No, you do. But let's not downgrade him to like, oh, he's just a luminary. Here's his title. I'm giving credit, he's a f***ing monster. Chief Investment Officer of Global Fixed Income at motherf***ing BlackRock. Dude.

Now agrees with me. A person who inspires or influence others, a guiding light, an inspirational role model, a heroine, a leader, a legend. That's what a luminary is. I know. So like, I want you to agree that I'm right. I don't- It's me and Rick Reader against you. And Jeff Gunn looks on my side. Maybe, maybe not still. We don't know. I'll take my chances. I'm very confident in my assertions, Josh. All right. Let's talk about private redemptions.

Did you see this article? No, tell me that. So, BeRete got all, that's Blackstone's real estate fund. So, BeRete got all the press. There was a lot of redemptions. They couldn't give all their money back because there's like a gate, right? You could only allow whatever it is, 5% of the money to be withdrawn according because this is money that's invested in real

estate. These are not liquid assets. So you can't just get your money back. That's not the way this works. So it seems like things have stabilized at B rate. But the $10 billion fund S rate from Starwood Capital is not doing so great. So here's the story from the journal. In the first quarter, the fund was hit with $1.3 billion in withdrawal requests, but satisfied less than 500 million of them. Wait, stop. It's a $10 billion fund, and in one quarter,

they got hit with $1.3 billion. That's a lot. So how are you going to do that? So the journal is saying they have three options. None of them are good. They could take on more debt. And they've already got a decent amount of debt. Not like crazy, but they could sell properties

into a tough market. That's not a great solution. Or it could halt completely or limit further redemptions, a move that would greatly impair the fund's ability to raise new money. If they do that, if they say sorry, nobody's getting their money back, they're never getting another dollar back. You don't want to do that.

Chart on, please. Look at these redemptions. That's a lot of money. That is a lot of money. Again, it's only a $10 billion fund. And worse, look at the fundraising by month. Now, this is where cash yields are very, very impactful. Next chart, please. It's not people spending, it's where they're allocating their money to. So in 2022, when rates were still sub 1% or whatever it was, one and a half, 2% maybe, these real estate investments looked really attractive. Oh, I can get 11%, 12%, whatever it is. Hell yeah, that sounds awesome. Look at this. Well, guess what?

Fundraising is at zero right now. Guess what? When you could get 5% on your cash risk-free, that sounds a lot better, does it not? I'm sorry. This is saying that in 2022, it looks like at least the first half of that year, there was like six to $700 million

a month coming into this vehicle. So what is that? Like Merrill Lynch brokers selling it to their high net worth? Where is that money coming from? Yeah, it's probably mostly wire houses. Now, it's not only a function of people preferring cash to things like this. It's real estate's getting crushed. They own hundreds of properties, mostly warehouses and rental apartments in the Sunbelt.

Yeah, but what's weird about that fundraising is that everyone knew that rates were going up then. It's not like 21 when people thought it would be disinflation forever like by that time inflation was inflation was 8% and People were selling hundreds of millions worth of private REITs This it almost seems to like defy law. It's a very weird sequence of it's a very weird weird Anachronism that while rates were going up brokers were piling into private REITs for their clients weird, weird, weird, weird, weird, weird, weird, weird, weird, anachronism that while rates were going up, brokers were piling into private

reads for their clients. That's shit to me. I don't know. Well, if you pulled this chart back, I'm sure it didn't just start in 2022. Yeah, no, that's probably true. So I don't even been more. Yeah. So people really like high income products. Let's back up. So what are the three options that Starwood could pull here? Option one is take on more debt. What does that do? It allows them to pay money out without selling assets?

Yes. So they could take on more debt. So I think their debt levels right now are sort of in line. It's not crazy. They can sell existing properties, but the market's depressed. So that's not a great option either. And then the third option is non-starter where you basically say to everybody, sorry, you're not getting your money back. What about the fourth option where they find

someone that actually knows commercial real estate and comes in as equity and they might have to market lower to get somebody to want to do that. Oh, these are smart people. They know what they're doing. They know better than we do. Apparently that maybe they don't. what they're doing. They know better than we do. Apparently that maybe they don't. This guy's been around forever. Yeah. Uh, he's a, he's a CNBC regular. The starwood guy. What's his name? Barry Stern. Yeah. He's been around for, uh, he'll figure it out. All right. Uh, but still I, uh, I never really understood the allure of these things. I know they're interested. They're interest rates that they pay. There's no potential.

The potential for capital appreciation, the lack of data, there is volatility. It's just not- I should have used air quotes. You know what I mean. Right. It looks like it's less volatile than it is because there's no quote every day and there's a higher than average yield. But this was always going to be the risk that in a down market, you're kind of stuck.

Like, so if you understood that, then you can ride this out. You're not, you're not as good. Good news is as far as I know, they haven't cut their distributions. So, yeah, next year drop. All right. What's that in my body? I'm going to make the case. I'm going to pitch you Corning.

Michael, did you know that Corning? GLW? Is yeah, one of the oldest companies in America? Corning has been around since before the Civil War. It's actually an upstate New York company, which makes sense. Rochester? Like in that vicinity. Part of me, I'm guessing part of me feels like it could be in Corning, New York.

I don't know. Anyway, this company was like making the shoe buckles for Paul Revere. It's 170 years they've been around. This is one of our oldest, longest running industrial companies. There are a lot of verticals. They're in life sciences. They make all the displays on cell phones and computers and flat screen TVs. They're environmental sciences, specialty materials, but the real driver of the

stock is optical fiber demand for optical fiber. So it's an industrial with a very heavy technology and market. And that's what moves the stock. Now during the initial, right? Don't they make this screen for the iPhone? Gorilla Glass. Gorilla Glass. During the initial, but that's a commodity business.

That's not exciting. Optical fiber is exciting. During the initial dot com build out, which I was around for. This was one of the hottest stocks in the market. When I tell you, because not only was there a dot com bubble, there was a telecom bubble and a telephony bubble and there were these things called competitive local exchange carriers or CLEX and everybody was loaded with cash ready to buy more and more and more and more fiber.

And it turned out we really didn't need it until YouTube came along five years later. It was dormant or dark fiber, but this was global and Corning was like the supplier. So this stock used to f**k. It's done basically nothing for a really long time, but now technically I'm seeing a little bit of an inflection point. And I think that's because the hyperscalers, if they're really going to do this $2 trillion overhaul of all of their facilities to be AI capable, you need optical fiber in order for every one of these components to talk to each other. So this is going to be, it's not just broadband, it's more than broadband. Okay. So that's the story at least.

The company kind of confirmed that story during their last earnings call, which I listened to on the quarter app, by the way, Shout to Quarter. Here's what they basically said. The carriers, which are their biggest customers, the telecom carriers, have been chock full of inventory. And as a result, this has been a depressed stock because there hasn't been that much ordering of new optical fiber, new broadband cable, et cetera. They have now worked down that inventory and the CEO said, or might have been the CFO said,

Q1 will be the low point of revenue growth. And they're talking about growing revenue by $3 billion now a year. It's a revenue base of like 12, 13 billions. That's meaningful. And I think when you look at that gap, that was April 30th, you look at that gap, that's probably your pivot point where you want to manage risk. So this stock hit the Russo list. Sean and I are keeping this list of the best stocks in the market. What's in that ingredient? Is it proprietary? It's proprietary. We don't share. But I want to show you the technicals. Chart on. I'm

showing you this with RSI because this is admittedly an overbought stock right now. It's an 82 RSI. This is a hot stove. I'm in this stock from a slightly lower price. I probably won't be adding with it this overbought. I will be looking for it to set up again once it cools off. But everyone's hearing that same story I just told you. It's ricocheting around Wall Street. That's why it's under accumulation like this. It's ricocheting around Wall Street. That's why it's under accumulation. Wow. It's ricocheting around Wall Street. That is good.

I used to do this for a living. By the way, hold on. The reason why you need a candlestick chart as opposed to that for Cocta line chart that you just threw up there, on the line chart, I don't see the gap. I don't see that post earnings gap. And guess what? You know that gap's getting filled. Yeah, I think it's important that you realize that chart came from your research group. So let's look at a 10-year Corning chart, 3620 where it's trading right now. It seems like it's up a lot off of its 2023 low, but it's really just first starting to inflect because again, it's an industry, it's a heavy industrial and when inventories at its customers are high, it's going to be under pressure and it's not going to be delivering growth.

So the fact that it looks like it wants to break out, just keep in mind, it might be short term overbought, but it really hasn't done shit. Yeah. Right? Okay. 13 years of consecutive dividend increases. Current yield is about 3%. You could see this stair step pattern consecutive dividend increases. Current yield is about 3%. You could see this stair step pattern of dividend increases.

It's not an aristocrat, it's an achiever. 15 years makes it an achiever. It's almost a dividend achiever. It's a little bit achiever. 1.8 billion in cash, one of the longest termed debt situations in the entire S&P, 500. Average maturity is like 23 years on this company's debt, so they are fine. Last thing I want to bring out here, what's going to make it, what's going to turn the fundamentals higher?

$42.5 billion coming from a government program called BED, Broadband Equity Access and Deployment. This is a 50 state program, $42.5 billion on high speed internet access all over the country and Corning is going to get a pretty big share of that money. The second thing I mentioned is AI. Right now optical fiber sales are below trend. Management is indicating they will be at trend or above, which would add 40% to their revenue run rate for the optical communications unit within the company. That's their focus right now. That's where the growth will come from. AI and broadband spend will be very involved in this AI build out.

So if they're right and Q1 is the low point for revenue for the year, and you have a 3% cushion here, it's not a particularly cheap stock, but it's also not crazy expensive, I think this thing could get to 50. I really like this technical setup. You got a 50 day above, it's 200. And so that's how I feel about it. What are your thoughts? I like it. I think that it's overbought, which is a good thing, by the way. How many shares can I put you down for? I like overbought. I like overbought stocks after they pull back. So it's also a prior resistance at like the 36 levels. So I would

expect this thing to come in and give you a better entry unless it doesn't. Michael, I can appreciate you feel that there might be a better opportunity to buy the stock, but let me ask you this. Hypothetically speaking, if you're wrong and you have nothing on the books, wouldn't you agree regret will be much more powerful? And wouldn't you much prefer a situation where you have the ability to buy more later rather than miss out on it entirely? Can I just talk to my wife before we agree to this purchase? Look I could appreciate that you want to speak with your wife That's a very common reaction. I hear that all the time However, what I also tend to hear right afterward is that it's much easier to beg for forgiveness than to ask permission

What? We could do this all day. Hey guys, thank you so much for watching the show tonight. We're going to finish with a mystery chart from Michael. Uh, Mike, hit me, hit me. Actually. No, wait, no, no, no, wait, no, wait, nothing. Let's on with the show. Okay.

This is a sector. This is a sector chart and the sector, uh, let's just say that over the last couple of years, there's been, there's been headlines, Josh, there's been some really bad headlines, outright dire, excuse me, asking is this the next Lehman and of the like? Yeah, it's been that bad. Wait, this is a stock that they were asking, is this the next Lehman? It's a sector. And maybe I just gave it away. Oh, it's a stock that they were asking, is this the next Lehman? It's a sector. And maybe I just gave it away.

How about this? In fairness, in fairness, it's not even a US sector. Oh, oh my. Wait, it's not a US. Stop, stop. It's not a US. Wait, what is it? Stop, stop. It's not a US sector. What does that even mean? Are you saying it's a country?

No, it is a sector that's outside of the United States. What? So I have to get the country and the sector? If you want to get a chart, right? Yeah. All right. Chinese technology. Close.

Chinese Internet. That's the other one we talked about. European financial. Chinese technology. Close Chinese. The other one we talked about European financials. Okay. I knew it was one or the other. There you go. All right. Member credit, Swiss, Deutsche bank going to zero. Would you like me to tell you what happened here? Sure. The entirety of, of, of the Renaissance and European financials is due to US tourists going to Greece and Italy and spending trillions of dollars.

Those were the biggest problem of the financial system on the continent, was what do we do with these banks, Greece, Italy, blah, blah, blah. No problem anymore. Those countries are flush. They are enjoying some of the best economic recovery environments that they have ever, ever seen centuries of recorded history. And that is thanks to tourists like me flying over, spending with abandon, booking the Four Seasons, booking private transportation,

going to museums, renting boats. That's the whole story. That's the whole story. You can't, you still can't go on a European vacation right now. And I think that we should get a high five for saving the European. We found a way to bail them out that wasn't an actual bailout. American tourists bailed out the European economy. So you're all very welcome.

All right. Hey guys. Hey everybody. Did you know tomorrow is Wednesday, which means first thing in the morning. Oh, here's the music. Well done, Duncan. Brand new episode of Animal Spirits,

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