The Compound and Friends - The Stock Market Votes Trump, Bank Earnings, AI Skeptics

Episode Date: July 16, 2024

On this TCAF Tuesday, join Josh Brown and Michael Batnick for an all-new episode of What Are Your Thoughts! They discuss bank earnings, AI skeptics, housing stocks, the presidential election, stock market news, and more! Thanks to Public for sponsoring this episode. Visit https://public.com/ to learn more about how you can earn 5.1% APY with a high-yield cash account. The Compound x Tropical Bros: https://tropicalbros.com/products/super-stretch-the-compound-hawaiian-shirt 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: https://www.linkedin.com/company/the-compound-media/ Public Disclosure: Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank.See public.com/#disclosures-main for more information 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. My name is Downtown Josh Brown. Tonight's show is brought to you by the folks at public.com and the public trading app. More on public in a moment. Tonight's show is an all new edition of What Are Your Thoughts with Michael Batnick and myself. We look at the aftermath in the markets of this weekend's events involving former president and current presidential

candidate Donald Trump. We also take a look at the reactions in the financial stocks, Bank of America, BlackRock, Goldman Sachs, Morgan Stanley, JP Morgan, etc. We have a Make the Case tonight. We have a mystery chart. We talk about AI skeptics and lots of other cool stuff. I won't keep you any longer. Hope you enjoy this evening's episode. I will send you there right away. Duncan, John, take care of business.

Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ridholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholtz Wealth Management may maintain positions in the securities discussed in this podcast. Ladies and gentlemen, and traders of all ages, welcome to an all new edition of What Are Your Thoughts? My name is Downtown Josh Brown with me as always,

my co-host, Mr. Michael Batnik. Michael, say hello to the folks. Hello, hello. Shout out to everyone joining us for the live. We are, well, I am, so you're home. I am coming to everyone live from Newport, Rhode Island, our nation's smallest, but in many ways, mightiest state. And I've eaten so much shellfish and seafood in the last 18 hours.

It's like incomprehensible. I just won't stop. What do you think? How was that? Do you enjoy it? I mean, it's so good. They're like pulling it right out of the water and like walking it over to the table. I'm eating a lot of shrimp, I would say, for the most part. But

lobster roll yesterday. There's one company that owns every restaurant in Newport. It's called the Newport Restaurant Group. Good name, right? They own like 25. They own bakeries, pizza places, fine dining, casual dining. They own every single restaurant here. And they're owned by KKR. Is that true? I don't know. Maybe, probably. Yeah, likely.

Anyway, it's dope. I was out with the Ritholz New England squad, shout to advisor Kevin and advisor Benny Markets. And of course our portfolio manager, Patrick Haley. And there are significant others. Everyone's good, man. Everyone's like, kids going to college, getting married. Like everyone's like having these really big milestones

and everyone looks happy and healthy. And it's awesome up here. We should shout out our sponsor and then get underway. Who's tonight's sponsor, Michael? It's Public. You know, I'm wearing this Public's shirt, Star Stripes and Yield. I have one of those.

I threw out a ton. Oh, I don't throw out clothes. I donate them, but I donated a ton of like swag T-shirts. Held onto this one. It's a good one. Still getting, I'm still getting, what are we getting on our cash? 5.1%?

5.1% APY with the public.com high yield cash account. Dude, I do it right on the app. I just move money from my bank whenever I feel like it. And it works like a charm. Well, you're not the only one. We're gonna talk about bank earnings. Yeah. Money's still coming out.

Yeah. The bottom line with, I don't have a Robinhood account for many reasons. Public is my like easiest way to just set up an allocation and leave it alone. And when I wanna move some cash from the bank, I can do it in like literally a second. I don't have to talk to anyone.

People should check out public.com to learn more about their high income cash account using US Treasuries and everything else that the folks at Public do. This is a paid endorsement for Public Investing 5.1% APY as of June 17th, 2024, subject to change full disclosures in the podcast description. The bank earnings are all out, almost all out, the big ones at least, and they're not bad but they're just not so hot.

Part of me feels like we just had too much of a run up in these stocks, and that's why they're not rallying on the results. And then part of me feels like some of these companies are still being really conservative with their guidance. What was your takeaway from what you've seen so far? Which companies aren't rallying? Some of them are, but Bank of America is up four and a half percent today. Yeah. Morgan Stanley flat. Goldman ran huge into the number two. And it's still going

vertical yesterday and today. It's still made a monster move. Didn't I call that, didn't I make that my, my make the case on this show like last week or something? No, I did. You did? Sure. Well, whatever. I probably would., two weeks ago. No, I did. You did? You sure? Well, whatever. I probably agree. You're fucking kidding me, you narcissistic bastard. That was literally me. I probably agree with you.

Goldman looks great. Goldman's going over 500. I listened to Goldman and JP Morgan. Solomon said, from what we're seeing, we are in the early innings of a capital markets and M&A recovery. So obviously that's positive there. We did talk about that, you and I last week. And the JP Morgan call seemed sort of uneventful.

Jamie Donovan was not on it. They kept talking about their over earning and they've been telegraphed that their over earnings and overly optimistic and when are they going to come back to normal? It was sort of a boring call, not much going on there. Well, let's start with the worst, Wells Fargo. I don't know. I feel like this is just a boring company anyway, if they're not paying fines or screwing something up, like people just aren't paying attention to the company either way. But this was not received well. I mean, the stock has gained back what it lost initially.

Guess what? The gap got filled. Yeah, it had a huge gap down, but it's gained it back. But I don't know if it's going anywhere. So it fell 6% the day it reported. And they said the money they make from lending, so that's net interest income, was fell 6% the day it reported and they said the money they make from lending, so that's net interest income, was down 9% year over year, so only $11.9 billion. And Charlie Scharf, the CEO, is sandbagging.

He's saying loan demand from businesses is tepid. He really didn't have anything that anyone wanted to hear to say, which is why you got that gap down. Well, aren't they pretty leveraged to the housing market? Don't they get a ton of their revenue from mortgage activity? Yeah, and just traditional banking. They do have capital markets franchised. They do have equities and wealth management, but it's basically one of the biggest commercial banks,

and they're going to be leveraged to the whole market like every other big bank. Account balances fell at Wells Fargo, and they had more chargeoffs for borrowers having trouble paying their loans. Net chargeoffs increased more than 70% from a year ago, albeit off of a ridiculously low base. That's 1.3 billion in charge-offs, which is not terrible. But they actually dropped their reserves for credit losses. That's good. Yeah.

Citi had the same issue. Citi is blaming inflation and higher interest rates. Citi is saying that as they monitor their less well-off clients, they're absolutely seeing signs of strength. Here, Citi CFO Mark Mason told reporters, quote, we're watching very closely the impact of inflation and the impact of interest rates on lower income customers. So we haven't heard a ton of that before. That's like the cracks are starting to appear there.

And not a huge surprise. I don't know, is there anything else to say on Citi or Wells? I didn't listen to Citi or Wells. It's Tuesday morning. We're still first getting a lot of these. So I have it at a time to... I listened to JP Morgan because I said it was a pretty boring call. One thing about JP Morgan, Jamie, you're right, Jamie skipped the conference call.

They said he was traveling, but he put his own personal note into the press release. Can I read it? It's the same shit he's been saying. Go ahead. While market valuations and credit spread seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks, the same ones we have mentioned before, to your point, geopolitical situation remains complex, potentially the most dangerous since World War II, though its outcome and effect on global economy remain unknown. There has been some progress in bringing inflation down, but there are still multiple inflationary

forces in front of us, large fiscal deficits, infrastructure needs, restructuring of trade, and remilitarization of the world. Therefore, inflation and interest rates may stay higher than the market expects. Finally, we don't know the full effects of quantitative tightening on this scale. I guess, Mike, the point is that he still felt the need to throw that in, even though he's been saying those things for two or three years now. As he's been saying those things for two or three years, they continue to hit record earnings per share at the bank.

But listen, he's one of the biggest risk managers in the world. What would you expect him to say? Everything's great while balls to the wall. You know what I mean? This is what you want a bank CEO to be talking about. Right. In other words, imagine he was like, we won the war on inflation and there's nothing to worry about.

He's never going to say that. But I don't think there's anything for us to really interpret or take away from what he's saying. This is his job. His job is to worry about risks. OK, fair. Do you want to do Goldman and Morgan? I didn't listen to the entire Goldman one. So what do they have to say?

So what's happening with Goldman, in my opinion, is not so much what they said, although things are going well. It's really the comparison with last year. Last year was, I think, maybe one of the worst years in the history of Goldman Sachs outside of the great financial crisis, of course. I think I ordered a one-year technical chart. Can we throw this up? Ordered. There we go.

Thank you, Sean and John. This is Goldman Sachs. This is just technicals. What you can see here is this stock bounced off that rising 50-day moving average like just textbook, like a trampoline, and now vaulting up to new highs just shy of $500 a share. You see in the bottom pane, RSI, which is relative strength on a 14-day basis confirming that new high in price. I don't think that this breakout, which occurred, let's say, around 470, 472, I don't think

this breakout is over. I don't think we've seen everything. And Goldman's going to go into, I think, the best part of the cycle for a company that's capital markets forward. They're going to go into now this period where if you get a Trump administration, we're going to take the brakes off a lot of mergers and acquisitions and LBOs and things that have been held back by LinaCon and the FTC and the Justice Department. We're going to take some of the pressure off our largest companies, definitely going to take the pressure off the oil companies. You're going to take some of the pressure off our largest companies. Definitely

going to take the pressure off the oil companies. And you're going to get an IPO is again, regardless of who wins the presidency, because you just have a thousand companies sitting on the runway that have not been able to raise money in three years. And you can't hold that back forever. So this is where Goldman should make a lot of money. And I think that's what the stock price is not going to be surprised by that. It's running up into that. Yeah, it's going bananas. All right. Let me read this really quickly. So all right. So basically, Goldman reported its second quarter profits soared 150% from a year ago

as investment banking surged. Okay. But again, the comps were really, really bad. But again, the comps were really, really bad. So of course, plus 150% is only possible after you're coming off of a really bad period. Net income $3 billion, beat analyst expectations, total revenue $12.73 billion. That's a 17% top line growth number versus last year. CEO David Solomon says, quote, we are in the early innings of capital markets and M&A recovery. While certain transaction volumes are still well below their 10-year averages, we remain well positioned to benefit from a continued resurgence of activity.

Yeah. So this is like Goldman's moment. If you're going to own the stock, this is when you want to own it. Thoughts? Yeah. Stock is, stock looks amazing. I have no further thoughts. It's going vertical. Morgan Stanley's interesting.

Wealth management was a disappointment. Not that it was bad. They only grew wealth management, I think revenue by 2%. And that was below expectations. It's not great. I think part of this has to be the composition of assets. Do you remember like a year ago, do you remember like a year ago we were talking about somebody inside of Morgan Stanley was talking about how much money the clients had in cash and

it was a crazy high number? It was like half. It was like a crazy, there was a number that we were like, wait, could that be right? Yes. So if they had a higher allocation to stocks, I mean, that was no doubt a big drag. Company reported $1.82 versus $1.65 expected. Revenue was 15 spot 02 versus 14 spot 3. Bank profit surged 41% from the year earlier.

Trading is on fire. Investment banking is back. It's a hair away from an all-time high at the stock price. The stock initially got lower pre-market 3.5%, but regained that. But basically, the reason why is wealth management. Michael, most of Morgan Stanley's wealth management momentum comes from capital markets. Basically, a company goes public, Morgan Stanley is the lead underwriter or they're in the syndicate.

You get 1,000 people who have just made millions of dollars as a result of the IPO, and guess what happens? They shuffle those people over to the wealth management side, and that's 1,000 new leads for their financial advisors to reap that wealth and bring it in house. It's a really brilliant business model that James Gorman pioneered and Ted Pick is now continuing to run with. We just don't have a lot of that activity yet.

But when that comes back, I think it'll be an engine for wealth management once again. That's how they're growing the wealth side is by growing the capital markets biz. It's really smart, but it's not there yet. Wealth management revenue rose 2% to $6.79 billion. Keep in mind, Morgan Stanley is the largest wealth management firm in the world, having acquired Smith Barney during the last financial crisis. But interest income fell 17% from a year earlier. And Morgan Stanley said it's because rich clients were continuing to shift cash into high yielding assets because of the rate environment. So that'll reverse when rates fall and that'll be another tailwind.

I don't know about that. I know you think the money's going to be stickier than people think. I guess we'll see. Well, how about this? Money market fund assets just hit an all-time high again. Okay, because the rate is at an all-time high. Talk to me after the third rate cut. Let's see.

You might be right. I will. You might be right. Well, calm down. Calm than you are. Calm down. If we see 75 basis points lower than where overnight weights are today, I have a hard time seeing money market assets continue to grow. Now, if they're 150 basis

points lower, I would tell you there'll be an outright reverse, I'll tell you. That's what I'll say. Okay. Anything else on banks? BlackRock. Got anything? Altium Hy and Assets. Is it? Yeah. They said something like 10.6 trillion.

What was the reaction here though? Positive. Yeah. $831 a share back at the spring highs. This looks like a breakout in progress if you ask me. Do you see this? Yeah, I'm looking. back at the spring highs. This looks like a breakout in progress, if you ask me. Do you see this? Yeah, I'm looking.

I'm looking and I'm a liking. Uh, they said they generated 3% annualized organic base fee growth. That doesn't sound like great. The numbers are so gigantic that it's going to be hard to grow that double digits, but they're going into their look. They're going aggressively into crypto. Larry Fink went on TV to talk about Bitcoin yesterday after reporting earnings, like not like that's like literally specifically Bitcoin.

And they're going aggressively into private markets, which is where all specifically Bitcoin and they're going aggressively into private markets, which is where all these companies think they're going to make a lot more money. BlackRock is 10.64 trillion of assets up 13% from last year. I don't know how much that is organic growth versus like the stock market rallied and the bond market rallied. Like do we even know? I just told you, 3%.

That's it? All right. Long-term net fund flows were 51 billion, missing expectations of 88.8 billion from analysts surveyed by Faxset. Overall net flows of 82 billion for Q2 also fell short of estimates. Analysts expected 114.6 billion. What's the, with the exception of Wells Fargo, look really good. No, dude, Wells Fargo is ripping too. I mean, they're not going to be in the stock.

They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock.

They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in the stock. They're going to be in these stocks. These stocks, all of them with the exception of Wells Fargo look really good. No, dude, Wells Fargo is ripping too. It doesn't look great, but it looks not bad.

The market, you said it best, the market is voting and the market is not just reacting to positive earnings backwards. What are they saying about- Outlooks. What are the outlooks? Yeah. And you could say it's not impressive, but the market disagrees. It's funny. The outlooks are like, capital markets are coming back, says Morgan, says Goldman, says, and then JP Morgan's like, yeah, but also maybe World War III. Right. Well, guess what? Like other companies that are just lever-toothed consumer, Discover Financials, DFS, all-time high. Capital One, not quite an all-time high, but the stock looks good.

Ally, remember Ally is the proxy for auto loans. It's the biggest auto lender in banks, and the stock is at a 52-week high on fire. That's the old General Motors credit. So it's hard to look at banks and say anything negative. It really is fine. There's some cracks at the lower end. Okay. But generally, banks look good. Economy looks fine. Okay, let's keep going. Chart kid and Cali put together this great cut, what happens to the S&P 500 one year after the first Fed cut. And they break it down into, okay, no recession in the next 12 months, or yes, a recession in the next 12 months. And Josh, what jumps out to me at this chart is out to me at this chart is the top red lines. That's the Fed cutting into a recession and the stock market's still ripping. Yeah. It's pretty interesting. Yeah. So this is one of

the best charts we've done all year. And that's the thing that jumped out to me as well. So because I wrote about this and the first thing I wanted to say is look at all these blue lines meaning. All right. So like, let me set this up a little bit. There's this idea in the markets where the first Fed cut is a precursor to a recession because why else would the Fed be cutting? Or they panic cut. Right. Something's going wrong either slowly or quickly, but either way, the first cut in the cycle,

it's like turn over the hourglass and the recession is on its way. What this chart is showing, thanks to Callie and Matt, is that no, not actually. The blue lines are instances where there was a first cut and then still 12 months later, the economy was not in recession. What the red lines are showing on the right y-axis scale is that, yes, a lot of times there is a recession within 12 months of the first rate cut, but that doesn't necessarily mean the stock market has to go down. As you can see here, in about half of these instances, we have a recession within 12 months

of that first rate cut, but we don't have a concomitant bear market for stocks because what the X axis is showing, rebased to 100, is the performance of the S&P 500. And so my takeaway, and I wrote about this at downtownjoshbrown.com, is that the results of the first rate cut are all over the map. There's nothing definitive that you can say a first rate cut means about either the economy over the next 12 months or the forward one year outlook for the S&P. There is no, I wish it wouldn't it be so much easier if we could say up first rate cut,

you know, here's what's likely to happen. I'm showing you spaghetti. It's all the range is enormous. Almost no matter what happens to the economy. I don't know. To me, it's not discouraging to see data like that. It's encouraging. It tells you that the die is not cast, as Shakespeare said. There are other outcomes beside, okay, we're on recession watch. Yeah. Since last week, the biggest move in the market is small caps and anything rate sensitive, just going bananas. So the Fed might not be cutting in July, but they're

going to in September. This Russell 2000 move, it's either the biggest fake out ever or the market has decided no recession in 25. What do you think about that? No recession in 25. Dietrich tweeted the Russell 2000 is up 1% for four consecutive days. Since the index started trading in 1979, it's happened 13 times. So 13 times where you're up 1% for four consecutive days. it was higher a year later 11 out of 13 times on average 25% So it's not it's not a head. It's not it's probably not a head fake

Historically, it's probably yeah, you can't say anything definitively, but the the odds look pretty good Yeah, we're gonna talk a little bit We're gonna talk a little bit about the sentiment shift over the last week toward the end of this. I don't want to do any more here. I think we've seen the rock bottom in the fund business and what they're able to charge investors. And now, it's almost like reversing off the bottom.

And I think a lot of that has to do with assets being allocated to alternatives and private vehicles but like the the rock the race to zero led by Vanguard aided and abetted by Schwab and you know so many other companies fidelity that I think that race to zero is over and now it's going back the other way. And when you say it, what do you mean by it? You just mean like average weighted fees across everything? Oh, you know what? We missed this thing about from Ari Wald. Should we do this really quickly, Mike? I think it's really good. Okay. Can we throw this out? I'm sorry. Go ahead. Back to the small cap point. The re-broadening of the bull was the big story of the last week, and that's why I don't

want to miss this. The Russell rallied 6%. RE says, we view this as a bullish resolution of the index's year to date range. The market is tapping into internal firepower, meaning more stocks now coming off their lows and working. Since 1979, weekly small cap rallies of at least 5% have been followed by above average returns for both the S&P 500 and Russell 2000 over the next 1, 3, 6, and 12-month periods. While small cap returns have been marginally higher following this signal, the S&P 500 currently exhibits a stronger relative trend and higher weighting toward this cycle's

leadership. The point is that last week's small cap breakout marks a re-broadening of the bull that should carry bullish implications for all capitalizations. So he's not making a call like, oh, chase the crowd into small caps. He's saying historically when this happens, it's good for everybody, including large cap. The catch up trade. And this is the ultimate catch up trade for asset managers, right, for stock pickers. There's so much beta here.

And maybe that's why you saw a large growth sell off as maybe they rotate into this. Did we put this chart up the cap weighted NASDAQ 100 versus equal weighted? This is Kevin Gordon tweeted this. He said this is interesting. The equal weighted NASDAQ 100 has managed to make a new all time high before the cap weighted NASDAQ 100. So you don't see that shit every day. No, not them. We'll take it. All right. I'm sorry. All right. So back to fund business. Look, asset, this is Sean Aloka writing for Daily Upside and he's quoting data just released by Morningstar. I thought this was really interesting. Asset managers may have finally realized that giving away funds at bargain basement prices aren't paying the bills.

He said, ain't paying the bills. It took more than a decade, but fund expenses may have finally hit their lowest possible levels according to the fund business. So, I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry.

I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry.

I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry. basement prices aren't paying the bills. It took more than a decade, but fund expenses may have finally hit their lowest possible levels, according to the latest Morningstar Research released this week. Investors paid the least in fees for mutual funds and ETFs for any year on record in 2023 with an average expense ratio of just 36 basis points. While it's a potentially lucrative drop of 3.4% from 2022, the pace slowed from a 7.8% decline over the previous year. So the idea here is that yes, average fees that investors are paying are still falling, but they're falling more slowly. He concludes by saying the bad news, not bad news for the asset managers, but bad news for maybe the investors, is that asset managers may be finally raising the white flag after

years of slashing fees in a brutally competitive price battle. Evans and his fellow researchers expect fund expenses to hold steady or continue to flatten moving forward. Fees have gotten so low that asset managers have even been quietly raising fees. Fees are quickly approaching the lowest possible price point, with many already charging less than five basis points. The launch of active and alternative ETFs were behind some of the increases last year.

So that's it. They're not making any more of these free funds. Vanguard and BlackRock are not going to raise their fees ever because Vanguard is never going to do it. And so iShares can't do it. But to the point that you just mentioned, some of the products hitting the market that are hugely popular, like Jeppy and the covered call strategies, like the buffered ones, those are, those are higher, those have higher fees

and they're massively popular. There's no, these fees can't possibly go lower on an average weighted basis. No, but they can get 70 basis points for somebody like Cathie Wood. There'll be another hot active manager behind a fund. It'll be backward looking, but so what? You can make money there. Thematic, you can make money there.

If you have the right fund at the right time, like a hack or more recently an AI fund or whatever, there will be money to be made there. And those are not five basis points. Next week, we'll highlight some of Todd's work. I actually took it out of the dock because it was too busy, but Todd's own had some great stuff on thematic ETF. So we'll get to that next week. That's a honeypot for the asset management industry.

They're not going to be, listen, they're not going to be $300 billion AUM funds. It doesn't matter. They don't have to be. They don't have to be to be successful. So I agree with this point, and I agree with your point. We now have established the baseline for S&P 500 index exposure. It's zero. Effectively. But that's not going to be we have hit bottom. Are you up? So it's kind of amazing how fast things change in the market. This whole idea of like waiting for a catalyst.

I'll wait for a catalyst to emerge. Why would I buy small stocks now? Wait for the catalyst. And then I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go.

And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. And I think that's the way to go. bottom. So it's kind of amazing how fast things change in the market. This whole idea of like

waiting for a catalyst, I'll wait for a catalyst to emerge. Why would I buy small stocks now for the catalyst? By the time something shows its head or its hand, it's gone. Markets don't let you in. Look at the catalyst for small cap stocks. Okay. If you weren't allocated small cap stocks, you want to buy them today? Yeah. Up 6%, 7% a week. Up 10% in the last couple of days. 10%. OK, so now you want to buy them? Yeah, well, now I have my catalyst, so yes. OK.

So anyhow, last week I put this in the doc, and it's a tweet from Consensus Gurus saying, showing credit card spending from Bank of America. Furniture and home improvement are the weakest card spending categories for retail. What is the number one driver of furnitureiture and home improvement are the weakest card spending categories for retail. What is the number one driver of furniture sales and home improvement projects? It's housing turnover and housing construction. So this is showing furniture down 11% month over month, I'm sorry, year over year, just not great. By far the lowest spending. Again,

this is very, very hobbyist stuff given the absolute ice age in housing. So I put this in the doc last week and since then, home builders are going bananas. Specifically with this chart, what I was talking about is the stock that I made the case for a couple of weeks ago that I bought. I was thinking of Home Depot and Lowe's, like those type of companies. So the narrative can change so, so, so fast. Yeah. And I would guess a lot of people thought the damage here would be more substantial

from 7% sustained, 7% mortgage rates and higher for longer, inflation hurting the consumer and blah, blah, blah. All time highs. Yeah, these stocks are at all time highs. And that speaks to your point. These things don't react to the news linearly and they sniff out positive catalysts months before anyone else is even thinking that way. Dude, I put this in the doc a week ago and XHB was at 98 bucks and now it's 113.

That could be a whole year's worth of performance. And it happened in a week. Right. So we talk about like, is the market efficient, blah, blah, blah. No, but it's always on its way to efficiency. And this idea that like the potential for a cooler than expected CPI to ignite an equity rally in rate-sensitive stocks like home builders, people have been thinking about that for months and positioning for it. And then it happens.

You can't wait to get the CPI print and then say, oh, you know, it would be great if mortgage rates come down, housing prices. You have to be a child to think that you're going to walk into my marketplace and that's how you're going to be able to get away with implementing trades. You're going to trade this morning based on this morning's news and think there's opportunity? What are we doing? There's one stock- Are you new to Earth?

All right. There's one stock I'm stalking. This hit the hit the inbox twice last week in the animal spirits inbox. What is going to benefit from housing activity? Title insurance. There's a publicly traded one. The ticker is FIS. It's Fidelity National Information Services. Yeah, I know it. Chart looks really good. I know it. It's on my watchlist. There's actually two publicly traded title insurance companies and they've been rolling up the title insurance space nationally.

And look, I think there are a lot of second and third derivative effects of a housing cycle that are really exciting. And when I say housing cycle, new home sales, like building new homes, has been on fire this entire time. It never faded away. What needs to come back is mortgage refinancings and existing home sales. And I think we get an existing home sales print on Thursday. So we'll watch for that. Maybe we'll talk about it on the Compound of Friends.

Should we keep moving? Keep going. Oh, so I think this is the biggest, I think this is the most important debate in the market right now. If you ask, can the bull market continue, one of the most important questions you have to answer one of the most important questions you have to answer is, is the AI stock boom going to be proven justified by fundamentals? Or are we going to need a massive correction here because we're just extrapolating way too far and no one's making any money there yet? So there are some notable firms and people who are coming out of the woodwork as AI skeptics. It's not that they don't believe in the technology.

What they're skeptical about is the money being spent in 2024. Will there be any return on invested capital? Will there be a payoff sufficient to justify this level of spending? I have to tell you, and I'm a shareholder in Nvidia, so I don't necessarily want this skeptics case to be true. It's more compelling than the bull case at this point. It's more compelling, just this idea that we're gonna need to retrench a little bit.

This has gotten out of control. And I wanna read you some stuff here. Goldman Sachs, Barclays, and Sequoia have all come out skeptically on AI-related infrastructure and how much revenue companies will need to make based on all the spending they've already done. So, forget about next year's spending. This is Jim Cavello at Goldman, head of global equity research, quote, overbuilding things the world doesn't have use for or is not ready for typically ends badly.

Goldman projects that companies and utilities will spend $1 trillion on AI capex in the coming years. Nvidia data centers will be sold at a pace of $150 billion per year on an annualized basis by the final quarter of 2024. That's an estimate by someone else, David Kahn and Sequoia. Kahn is even more skeptical. He says, open AI is still generating the bulk of AI-related revenue right now, but its annualized revenue is only $3.4 billion. Even his generous predictions of $5 to $10 billion in annual revenue from Google and

Metta, Tencent, Tesla still leaves a gigantic hole of $500 billion in revenue just to make up for 2024's infrastructure investment. And then the last one, Barclays estimates AI capex by 2026 will be sufficient to support 12,000 AI products of the scale of chat GPT. Quote, we do expect lots of new services that will bring in some of this bulk case to light, but probably not 12,000 of them. So the skeptics are getting louder and they're not saying the technology is not good or anything or important, but just like this is going to be a show me situation very soon and very few companies are going to have the revenue to explain all this money that they've already expended. What are your thoughts? are going to have the revenue to explain all this money that they've already expended.

What are your thoughts? I think that it's, I hesitate to say likely, certainly possible that Nvidia has pulled forward a lot of growth and it's going to be very hard for them to ultimately justify these valuations, whether that's in 2024 or 2027. That's number one. But number two, to the skeptic's point, how could they know? How could we possibly know? We're still in the top of the first inning with this thing.

So while the amount of dollar spend is astronomical, to start to look at what open AI is generating in revenue today, this is like Facebook can't monetize mobile. Like it's so early to be having these conversations. It's too early to be that skeptical. Yeah, I get it. I get it. I'm skeptical too. But they're saying like, look, you're going to spend a trillion dollars

for the largest player in the space to do three and a half billion. That's problematic. The three and a half billion, that's problematic. The three and a half billion dollars is not meaningful. It doesn't matter. Talk to me in three years. It doesn't matter three years from now. Agreed.

But that's the payoff today. That's their point. The skeptics point, this thing better turn into something gigantic. I guess that's the point. Yeah. Or, and hear me out, there's an extra $3 trillion baked into the valuation of the seven largest public companies that needs to come out

and get redistributed into other stocks. Beautiful. So that's, yeah, but it won't feel beautiful as it's happening. All right, but hold on, just on this point, I know Meta and Amazon and Microsoft are responsible for like 50% of the spend at these companies. Are they not, are they going to stop? Like have they gotten, have they spent enough?

If the demand fails to materialize and there's no payout and there's no payback, they will stop. But there's already payback. What Meta is getting out of Reels and all that stuff. They're already seeing a huge ROI on it. Yeah. Look, I think that in the bold case for 2025 will be we start hearing from real companies that are not AI companies about making money as a result of AI or saving money, and that will prolong the cycle.

But if we don't get that, these companies aren't just going to keep going at this pace, and there's too much market cap and too few companies. Here's a contrarian bullish take from inside Goldman. So this is the genius of Goldman. So they have this guy, what was his name, Jim Cavello or whatever. So they have him being the skeptic, and then they have two guys that are covering equities at Goldman say, no, you're wrong and still bullish and here's why. Cash Rangan and Eric Sheridan, both senior equity research analysts at Goldman Sachs,

these are the contrarians saying that AI investments are taking longer than expected, but they should eventually pay off. librarians saying that AI investments are taking longer than expected, but they should eventually pay off. Quote, every computing cycle follows a progression known as IPA. It's not related to the beer. Infrastructure first, platforms next, applications last. The AI cycle is still in the infrastructure build out phase. So finding the killer app will take more time, but I believe we'll get there.

Oh, this is a really important point, Mike. Quote, this capex cycle seems more promising than even previous capex cycles because incumbents rather than upstarts are leading it, which lowers the risk that technology doesn't become mainstream. Incumbents like Microsoft and Google have access to deep pools of capital and extremely low cost of capital and massive distribution networks and customer bases, which allows them to experiment with how the capital dollars could eventually earn a return. Meaning, AI is actually a safer bet than previous tech cycles given who's leading it.

These companies already have a billion customers and tons of money. That's what I was saying. They're not venture backed startups. It's not like companies were lying on going public to keep spending. Yeah. So all right. That argument does not resonate with me. Do you agree with my premise that this is the most important debate in the market right

now? Of course. No, this is the biggest story in the market for the next... If I can know anything about the stock market looking at two to three years, it's did this work? That's all you need to know. More so than like where are interest rates? I want to know, did CapEx for AI hold up throughout the decade? Trillions of dollars came into these stocks.

Did they or did they not deliver? OK. All right. So we have framed, without answering it, we have framed the most important debate in the market. Is this CapEx cycle bullshit or sustainable? There's not even a number two. I don't care about anything else. Yeah, I feel you. Okay.

Okay. Warren Pies put out his second half research report, and there's some great stuff in here that I wanted to share. He says, going back to 1950, there have been 23 years where the S&P 500 was up 10% or more in the first half of the year, which is what happened in this first half of this year. Only four of them, so only four out of 23 produced negative second half returns. Ten led to a 10% or greater second half return. John, if you'd please chart on. So the purple line is showing the second half performance when the first half was under 10%. And the green line is showing the second half performance when the first half is over 10%.

And the point is, as I just mentioned, a strong first half, most 60% of the time, it works every time, leads to a good performance in the back half. Why do you think that is? I know this is true, but what's your, what do you think? The, I mean, the biggest reason is professionals chasing career risk.

They gotta catch up. Okay, what else? Don't be a jerk, just tell me. I don't wanna be quizzed by you. No, that's it? Go ahead. No, I don't, not saying I know the answer. I'm asking your opinion.

You think it's as simple as career risk? The market was up in the first half, I better chase it in the second half, therefore, I buy more, I take bigger positions, I buy the leaders. I think it's two things. It's that, that's one of the reasons, but the main main reason is stocks are up 10% in the first half, generally speaking, because things are going pretty well. And things that are going pretty well continue to go pretty well, absent some sort of thing knocking them off course. So that's where I wanted to get you to, because that's where I've come around to. I used to think I was so much more clever than the rest of the market, and I would talk about this chase effect, which is real, of course.

It's a part of it. But then the bigger realization is if you ask Warren Paes, do a follow up of this, show me the earnings growth in those years where a strong second half followed a strong first half. They're probably great years for earnings or they see earnings growth in the following year. However, maybe you would do that on a lag and you would say, what's Q1 of the next year's earnings growth year over year? you would maybe you would do that on a lag and you would say what's Q1 of the next year's earnings growth year over year? I promise you it's higher in those years. So it's almost like yes, people are

chasing but they're chasing stocks that went up for a reason. It's simple. It's pretty simple. Right. So there's a snarky smart ass answer about career risk and blah, blah, blah. But like there's a bigger picture, which is that stocks aren't randomly rallying in the first half and then following through in the second half. They're doing so because the fundamental outlook is improving. For sure. Okay. So he gives a couple more reasons why to support the backdrop of a strong second half.

So he says, not only do professionals need to chase, we know that they're not keeping up with the market, right? So they're going to need to chase, but retail is still skeptical, at least according to this chart, which is eye candy to me. John Charnon, please. So he says when inverse ETF volume hits around 60% it marks a pessimistic extreme. I'll tell you what that percent represents in a second. He said alternatively, 20% of ETF volume marks a euphoric market top. And what he's talking about, he's looking at inverse ETF volume, so bearish ETFs as a percent of inverse- What is that? Like the SDS? Like the ETFs that short the market. Yeah. So he's saying speculative short position versus the S&P 500.

It's not extreme. Like people have not thrown in the towel where they say, oh, I just can't fight it anymore. So that's on the retail side. Also, Wall Street targets. Next chart, please. He said, despite higher targets. So targets got ratcheted up, as you could see,

in that stair step higher. So despite higher targets, the S&P 500 is still above the median Wall Street forecast, and that's bullish. He points out that June was one of the largest target increases ever. Pretty interesting. So people came into the year, like, what was the,

people came into the year- Can what was the people? Can I tell you something pretty neutral? If you, if you were to make a list of the most obviously lagging indicators on earth, this would be my number one. Price targets on Wall Street follow the market. You never lead the market en masse. You'll always have somebody who's above. You'll always have somebody who's below. You'll always have an outlier bull, outlier bear. But for the most part, the average price target is going to trail and follow whichever direction the market is already headed. It'll always be that way. And strategists wouldn't even argue with that. They'll tell you that's their job,

is to stay in the game. So what's notable though is in the last month the two biggest bearers on Wall Street got fired. Mike Wilson and what's the guy? Kalanovic. Yeah. So in the last two months basically threw out the last two guys with negative price targets on the S&P basically threw out the last two guys with negative price targets on the SMT. And now you see these guys all raising their targets. How much of that is career risk? Yeah. And then lastly, just technically, there's been 12 unique cases of a 19% return over 63 days, which is what we've just experienced. And on average, and I can't remember out of the 12 times how

many times it was higher a year later, it was either 10 or 11. On average, this continues rolling. You know that shit where people are like, oh, we need a washout, we need a consolidation, we need a correction. We haven't. Cali has a stat in our Slack right now about, or I think it's from Ryan Dietrich, it's like the longest period without a 3% pullback in 500 years or something. We haven't had a 2% drop,

the longest streak without a 2% drop since 2007. Right, so this idea like, oh, the market's not healthy until we get the pullback. That's just, it's old wives' tales. It's just that it has no bearing on reality. Just been through a substantial period of time without that pullback and there's no reason to say the market is more or less healthy than it's ever been historically. You agree with that? That's a pretty general statement. Do I agree with what part of it? Like that we need a pullback?

Well, no. I'm telling you, we definitely did not need a pullback to get here. The whole way here, the whole way here, we haven't had one. Well, we did have a pullback. It just wasn't a daily drop of 2%. From April to May, we had a 5% pullback. We just did it. We haven't had one of those scary washout days though. There's been nothing has happened. Not true. Not true. What has happened?

The market hasn't reacted. What has happened that would cause financial markets to sell off by 2%? I don't know. We've had some big scary drops in stocks like Tesla and these are important stocks. People care about. They just haven't, it hasn't been enough. Hasn't been enough. I don't know.

Stocks don't fall 2% for no reason. All right. How about a presidential assassination attempt? Is that scary enough? Market is rallying. And thank God, like I know nothing happened, but it's not true that we haven't had anything. It is true. If there was, it would have fallen 2% or more. There hasn't been anything.

If the market had fallen 2%, we would have been able to find something in the news to justify why. No, the stocks don't really know. Stocks don't just fall 2% for no reason. They just don't. There has to be a reason. We have anything to say on I think this is like the last thing I want to say on the first and last thing I want to say about what happened over the weekend.

Stocks started rallying immediately following the debate, in my view. They've been rallying, but in my view, markets are voting for Trump. Markets are both betting on Trump and voting for Trump. The obviously terrifying incident over the weekend, which thank God, there were not mass casualties or it wasn't much worse. Of course, thoughts and prayers to the people that actually were affected. Just the message of the markets on the heels of that, they really want to see another Trump presidency and every time, quote unquote, something good has happened for the Trump

campaign, you've seen markets rally and then on CNBC, they'll come on and they'll say, quote unquote, something good has happened for the Trump campaign. You've seen like markets rally and then on CNBC, they'll come on and they'll say, oh, looks like the markets are voting with their wallets. Well, Luke Howard tweeted, this was yesterday, best day of the year. So on Monday, best day of the year for stocks that benefit from Republicans' electoral success. Worst day of the year for stocks that stand to gain from Democrats winning. This is a Bloomberg metric. I don't know what's in the baskets of Republican stocks versus Democratic stocks, but that's

quantitative. And yesterday was the best day, as I said, for Republican stocks. So one of the things that Barry did in 2016, there were obviously a lot of people, wealth management clients who were not Republican, they're Democrat, and they were obviously very disappointed by the outcome. And Barry's comment was like, well, markets seem to like the outcome. So here's one obvious thing you can do. You can take the extra wealth that's been created by the market embracing the certainty

of someone having one, and you can use that to contribute to races that you care about going forward. So if you are an anti-Trump person in the wealth management industry or you're an individual investor or you're a family office or whatever, and you're not happy that increasingly it's looking likely that he's going to win, you're making a lot of money as a result of it in the markets. Take some of that money and contribute it to it to a local candidate. That's meaningful to you You don't have to like why the markets rallied

But I don't think a reasonable person would look at recent market activity and say it's completely divorced from the political Certainty crystallizing around the next Trump presidency I think like we would all have to admit that there's an element of that. And if you hate it, well, it's a piece of it because the rate, the rate, the rate, uh, the CPI story last week was a big part of it. This is just further fuel on the fire. A hundred percent. And it's not even that the markets necessarily love Trump.

It's that they that they dislike uncertainty. And I think if Trump pulled out of the race and Biden pulled ahead by 15 points, ahead of a hypothetical Republican candidate, maybe markets would not have rallied as much as they're rallying on the Trump victory, seemingly likely, but they'd still be higher. Because I think markets just like for these events to be over with. And of course, there's different people with different attitudes about these things. Well, stocks rally and stocks are well in election years. Yes. And stocks like when it's over. And they anticipate it being over. And then when it's over, you get a big sigh of relief. So, all right, that's what's happening now. I'm going to make the case for Amazon.

I think I've pitched the stock here before from lower prices. This is my favorite large cap tech name for it was my favorite for the first half of the year. And I think I don't know where this stands, but I think it's one of the better performing. And it's my pick for the second half of the year too. And did you know that today is Prime Day? Prime Day is two days now. It's July 16th and 17th. They have Megan Thee Stallion doing commercials

for Prime Day all over television. And go buy yourself, I don't know, a set of golf clubs or something. You know what? I'm going to buy an extra pair of AirPods before I lose my next pair. Only $69. Nice for the second generation. Why don't you let me make the case that the best thing you can buy for prime day

this year is shares of Amazon. Are you ready? I'm already on them, but go ahead. Wolf Research initiated coverage this morning, $250 price target. Wolf Research has an outperform. What percentage 250 away from where we are today? 20-ish percent or so? Okay. I think the stock's going to 250 also. It's a $2 trillion market cap now, which sounds large, but is not as large as some of the others. The firm's positive stance is based on expectations of accelerating year-over-year growth at AWS, which is the cloud business, and an expansion in retail margins.

In terms of near to midterm fundamentals, we like the 2024 setup. I want to give you the fundamentals quickly, valuation, because this is a Prime Day discount. Amazon shares are trading at 13.9 times projected 2025 EBITDA and 49.4 times earnings. So on a cash flow and price per earnings basis, this is one of the cheapest historical buying opportunities for Amazon stock. So before spending money on things made in China and whatever else they're going to sell over the next couple of days, I would be considering maybe owning more. Stock's still under 200, inexplicably.

I can't believe it. So I might actually add to my position here. I bought more, I think, well, I spoke about it two weeks ago, maybe. The stock is up 7% over the last three years. It's really done nothing, including getting cutting half. I think people forget about that. It got cut in half. Google is up 47%, Microsoft's up 60%. So it's done nothing, really. Right. And I really like the technicals here. That's great. 200 clearly has brought some sellers out,

stopped back in the low 190s. Like Jeff Bezos. Like Jeff Bezos, people who know absolutely nothing about this story. I think 200 looks like it's an important psychological area. Just eyeballing the chart. Maybe it takes some time to get through there, but I think once it does definitively, you're going to wish you along. That's my barring any kind of major market wide event. That's my opinion.

Well, I hope you're right. I'm checking. I think it's my biggest position in my, uh, my IRA. Uh, so yeah. Okay. Let's see. Amazon is my biggest position. So I hope you're right. Okay. All right. Mystery chart time. John chart on. So, oh yeah, here we go. Okay. So this is, first of all, does this look good or bad? This looks amazing. Okay. You want to be long or short?

I think I want to be long. Okay. The, okay. So this is the, this is the, just the price chart, just the absolute price chart. Next chart, please. And this is the relative price chart. So relative to what? Is this an individual stock? It's relative to the S&P 500. So it's an individual stock or is it a sector? So the previous chart shows this sector at an all time high and the next chart shows it relative to the S&P. It's been trailing the market for a long time.

Monster underperformer. Huge underperformer. Can I? to the S&P. It's been trailing the market for a long time. Monster under performer. Huge under performer. Can I? We spoke about it a lot today. And it matters a lot. Okay. It's XLF? Yes. XLF is the second biggest sector in the market and it's, is it ready to take the baton and power markets higher? If the curve continues to steepen and on invert, ultimately, you're going to want to be in these stocks. No, it's a capital markets.

If you get a capital market cycle in the second half of this year into 25, you're going to want to be in these stocks. Blackstone, Apollo, Carlyle, all the private equity names are going vertical. I own Carlyle, it's the worst performer of the group, but it's the smallest by market cap and the only one not in the S&P 500, I think. So hilariously, hilariously, I own two financials

and one of them is getting smoked today and the other's also red. I own the only two red financials today, one of them is Schwab and Mastercard. I should be in the other names, but hey, never said I was a good stock picker. All right. Hey everybody. Thanks so much for joining us.

We appreciate all of the ratings and reviews. Please keep those coming. Wanted to remind you tomorrow is Wednesday, which means an all new edition of my favorite podcast, Animal Spirits with Michael and Ben. We're back with an all new Compound and Friends at the end of the week. You know, Ben and Duncan are doing Ask the Compound live on Thursday on YouTube.

And Jill on Monday to Saturday. Thank you so much for joining us. Thanks for tuning in. Thanks for all that you do and we'll talk to you soon. To speak with a certified financial planner today, visit riddholtzwealth.com. Don't forget to check us out at youtube.com slash the compound RWM. Make sure to leave a rating and review on your favorite podcasting app. If you love investing podcasts, check out Michael and Ben every Wednesday morning on Animal Spirits.

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