The Compound and Friends - BlackRock Reduces Risk, Apple Reaction, the Case for eBay, Yield Curve Un-Inverts

Episode Date: September 10, 2024

On this TCAF Tuesday, hear Josh Brown and Michael Batnick discuss taking down risk, tech dilution, Apple reactions, and more on an all-new episode of What Are Your Thoughts! This episode is sponsored by YCharts! Subscribe to the YCharts blog to ensure you’re plugged into the latest insights, research, and market trends. Get 20% off your initial subscription when you start your free YCharts trial and tell them WAYT sent you (new customers only) : https://go.ycharts.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 so excited to have you here with us this evening Tonight's show was an absolute barn burner We talked about BlackRock announcing that they are taking down risk in their model portfolios We took a look at the yield curve inversion, which finally happened last week after 537 consecutive days of yield curve inversions. We have a yield curve on inversion. What are the ramifications? We're going to dive in.

We took a look at fund flows at Bank of America. It turns out their clients did buy the dip, a deep dive into European stocks and whether or not there's an opportunity there. So many more things. I don't want to spend even another second giving you the preview. I want to send you right to the show. Stick around. Duncan and John will put you right in the middle of everything. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for

informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. That's right. We're back. Tuesday night, 5pm Eastern. Welcome to an all new edition of What Are Your Thoughts? Put my music back on, make that louder.

Let me see, let me see who's in the chat. First of all, let me see the Duncan hive. I see Jay Luther is already dunking up the stream. Who else? We're the Duncan fans. Come on, let me see it. Alright, Roger's here. Magnus is here. Cliff is here.

Chris, Derek, John Carlo. Nicole is in the chat, guys. You all say hello to Nicole. Rachel, I see you. Roger, good to see you, my man. All right. We have so much to cover tonight. I'm so glad you all could be with us live.

It's been quite an eventful day and we're gonna chop it up. But before we do so, we have a sponsor we'd like to tell you about. Michael, fire away. You know what I rely on Y charts for? Everything, from what I can see. Yes, exactly. For example, later on this show, Josh and I are going to be talking

about the effect of stock based compensation. And I said, Zoom, it's not looking so good. A stock that I just bought today for the record. I wish I saw this beforehand. Zoom's not looking so good. Their shares outstanding going up and to the right. That's the wrong way. That's the wrong way.

We want to see share buybacks, not share dilution. I use white charts for everything. I've got my list, economic data, this, that, the other. Phenomenal. Can't live without it. You guys, if you're watching this show on YouTube, you will see that we are laden with charts from YCharts. This is like the most indispensable tool. And I want to tell you, if you go to ycharts.com slash

compound, you could find that a lot more. I also want to mention, if you're going to future proof and I just found out today we have crossed the 4,000 registration mark so 4,000 people are if you're one of them don't miss the Y charts booth you could see all the latest tools and free resources and uh just just go to Y charts.com slash compound tell Tell them we sent you and the rest is up to you. Um, I want to say thank you to everyone who registered for the compound insider, which is kind of our own little insidery, uh, subscription thing where we guys,

we give you guys a heads up on what's happening on the channel guests that are coming up, et cetera. Uh, we had a ton of new registrations and we said we'd be giving away six autographed copies of my new book, you weren't supposed to see that. And I wanna let you guys know that we have our winners. And here, let's do it. Brooke Honan, Nicola Sabota, UD Elston, Jason Davis, Biff Gribbles, and Anitya Sufi will all be getting, I haven't signed these yet.

I'm gonna sign them tomorrow, I'm gonna sign them Thursday and we're gonna ship them right out. So thank you guys so much for signing up for the Compound Insider. And thanks to everyone who has bought and reviewed the book. Really appreciate it.

Okay. Josh, wait, hold on. How's your pen hand? Oh, dude. Carpal Tunnel. I signed 120 books yesterday. Yeah, once you How's your pen hand? Oh, dude. Corporal Tunnel. I signed 120 books yesterday. Yeah. You've used your pen hand. I'm basically cooked. I'm done. But I'll sign some more on Thursday. All right. I want to talk about taking down risk. It was a piece about BlackRock,

the world's largest asset manager. Are they 11 trillion? How big is BlackRock? That's right, Josh. The world's largest asset manager, are they 11 trillion? How big is BlackRock? That's right. That's right, Josh. The world's biggest asset manager is taking some chips off the table as markets enter a new phase of turbulence ahead of a Federal Reserve interest rate cutting cycle and the US presidential election. While the backdrop is still bullish, BlackRock is reducing its tilt to US equities and growth-oriented shares in favor of value and fixed income, according to an investment outlook viewed by Bloomberg.

So I don't know if everyone knows this. BlackRock, of course, is known for its ETFs. The iShares franchise is absolutely massive, but they have all kinds of target allocations. They have ETF models. They have managed separately managed accounts. BlackRock has every format and flavor of active management or active asset allocation is probably a more apt way to put it. I thought it was interesting that they wanted this to be talked about. I don't think like it was accidentally leaked. I think they said, let's get out in front of what we think is going to be a rocky period of time and let people know that we are downshifting the amount of risk that we're taking in our

models. What are your thoughts? The model portfolio space for those outside of our industry is a burgeoning industry within the industry. I just said industry way too many times. That's four. So advisors use these model portfolios, whether it's a BlackRock, State Street,

or smaller companies to effectively outsource their management of the portfolios. And so they're doing this to market to their audience, like here's what they're doing. I think that taking down risk, well, is that, yeah, taking down risk, yeah, taking down risk, it always sounds smart, especially when the S&P is 2% off of an all-time high. So it sounds intelligent, it gets eyeballs, it's a big deal in the sense that, listen,

they control a lot of money, they're moving a lot of money around on behalf of their advisor clients and their egg clients. So yeah, it matters. I don't know. I don't have super strong thoughts here. So they have people internally that are making these decisions. I want to share a little bit more. BlackRock appears to be taking profits after leaning into growth stocks earlier this year.

While BlackRock's model makers still favor holding more stocks than bonds, the latest adjustment reduced the size of that overweight to 1% versus 4%. On the equity side, roughly $2.7 billion flooded into the $18 billion iShares MSCI EFA value ETF. So this is like developed markets outside of the US, Europe, et cetera, value stocks. That's the largest one-day sum since 2005, the inception of the US, Europe, et cetera, value stocks. That's the largest one day sum since 2005, the inception of the ETF.

Where is this from? This is a Bloomberg article. Okay, so to me, no offense with all due respect to everyone involved, who cares? BlackRock is not taking profits. BlackRock is not going to cash. They're shifting some of their model portfolios. Like this is not a story to me.

I'm gonna call Rick Reader and said, Michael said, who gives a shit? Yeah, sorry, no disrespect, but this is not a story to me It's a call Rick Reader and said who get and said Michael said who gives a shit. Yeah, sorry No, they don't disrespect, but this is like a who cares type of thing. That's cool. Uh I think it's notable. It's not why it's not because Black Rock is not known. I don't think to be like talking publicly about these types of tactical shifts unless they want to be and This seems like they wanted it. This is tactical shifts unless they want to be. And this seems like they wanted it.

This seems like they wanted it out there. It's marginal stuff. They're dialing up here, dialing it down there. They're not swinging the cash. They're making some changes in the model portfolio. Okay, of course. It's an investment firm. I'm saying taking down risk, BlackRock's taking profits.

No, they're not taking profits. BlackRock is shorting the S&P 500. That's a story. That's a story. That's a story. They say it's the un-inversion you need to watch out for. And last week, for the first time in what feels like a lifetime, the yield curve un-inverted. So I know there's a discrepancy.

Like I think a lot of people think about the inverted yield curve. I know there's a discrepancy. I think a lot of people think about the inverted yield curve. They're looking at the 10-year three-month. But the 10-year two-year is what most people pay attention to. And let's put this first chart up. So we had 537 consecutive days that the yield curve was inverted, meaning the two-year treasury had a higher yield than the 10-year, which is unnatural and unholy for a number of reasons. And that finally flipped last week. It's still barely un-inverted, but it's un-inverted nonetheless.

The history books will show that this past week was the week it finally happened. What do you think? Okay, what do I think? Is this a record number of days? I think it's got to be close, no? It's one of the, I think it's one of the longest stretches, if not the longest stretch. So I think, what do I think? It's 11, it's, it's how many months is 537 is 18 months. May was that I would just may 2022. No, it's over. It's two and a half years, dude. It's like 30 months almost.

So what do I think? I think you just said that this was a, an unnatural occurrence. It's weird. It's not supposed to be like it is unnatural. I think of Lord Palpatine when you say unnatural, but the, the uninverting or dis-inverting, this is natural. This is normal. The two-year is coming down because everybody knows

that the Fed is going to cut rates. This is next chart, actually. Let's talk about what happens around the un-inversions. Josh, talk to us. This is a history of un-inversion. So this is the S&P 500 is the blue line and the 12-month forward returns from the dates that the market has un-inverted. And so it's not that it always leads to ruin.

I think it's really important to point that out. You can see there have been lots of periods where the market has gained 12 months after the un-inversion. We have an example of that from recent history in 2019. The 12-month return from the last inversion was 25.6%. Now, of course, that took place during the pandemic with unprecedented stimulus. Maybe that's a bad example. These are all bad examples. We've got five of them. Next chart, dude, bro, dude.

So the thing that matters here is, do we get a terrible recession or do we not? And obviously, we did in 2000. We did in 2007. But look at 1982. That was the bottom. Look at 1990, not a bad time to put money to work. 2019.

So it doesn't have to be catastrophic. Michael, but I think what scares people is the two examples you didn't just mention. December 2000. I literally just mentioned them. Nice try. And June 2007. I did mention them. Yes.

If it uninverts because the Fed is panic cutting, turn, chart off. I want you to, I want to look at this guy. If it, if, if, if it unadverts because the Fed is panic cutting, then yeah, it matters a lot, but it doesn't have to be an emergency. And as far as I could tell, uh, maybe this age is very poorly. There's no emergency. There's no recession right now. And there's no recession on the horizon. Doesn't mean that there can't be one, but things are far and so I don't, I don't see this as anything to worry about just yet.

So I would have said things are fine a month ago. Right now, I would say things are fine, but less fine than they were. And it doesn't mean that things are falling apart. But from where I sit, the headlines seem to be rapidly deteriorating. The headline news. And it's a really weird time because for a decent sized chunk of the population, everything is still perfectly fine. But we are absolutely losing the bottom rung.

And the reason why that's so notable is we basically had a universal great economy across the board for a little while, and now it's not so universal. So I think, look, Ally Bank fell 17% today. That's the at-risk borrower. And that's auto. That's auto. Fine, but so what? It's a really big component of the economy.

It's not great. Ally Bank gave really lousy guidance and they have an uptick in delinquency. And this is now, I think, taking center stage and it's knocking those headlines of everything's fine off the front page and it's putting headlines like that. And I think there are more. I guess I would say everything is not always fine, but I'm saying generally speaking, yeah, are there risks? Certainly. Are there always risks? Of course, is the bottom 10% under pressure? You heard it from Ally today. Yeah, but generally speaking, right now, lumbered liquidators filed for chapter seven, two days ago, yesterday,

big lots filed for chapter 11. I'm not saying those are blue chip companies, but at a certain point, yeah, it's just an anecdote. It's one anecdote. It's one anecdote. At a certain point, all those anecdotes pile up and turn into data. Okay. Well, how about this? Walmart, the biggest retailer in the world, hit an all-time high today. What's more important? That's what you would expect to happen in a slowdown. One of the things about Walmart, in a good economy, people like a bargain. In a bad economy, people need a bargain. I wouldn't expect Walmart to reflect any kind of stress or strain.

In fact, it's the opposite. People go there when they can't go elsewhere anymore. That's not true anymore. It's the biggest retailer in the United States. It is absolutely reflective of the consumer, more so than the dollar stores that are structurally challenged at big lots and odd lots and this lots and that lots. We agree. Walmart is a life raft, not just for consumers but for investors.

They'll be fine. I'm not really worried about Walmart. I'm making the point that the headlines are getting worse and From where I sit in the last two weeks It seems to be accelerating So I think it's I and look BlackRock taking down risk You know going from 4% overweight stocks to 1% of white stocks. That's not alarm bells I'm just pointing out the preponderance of news seems to be heading in the wrong direction.

I think that's a fair point. It's not a fair point? It is fair. Okay. That being said, according to Bank of America, people bought the dip last week. So last week was the worst week for the S&P 500 of the year. And it was actually it was down 4.2%. And it's actually the worst week since March of 2023, which was the bank panic. So it's the worst week for the S&P in 18 months.

That's crazy, right? It's been so long down 4%. It's having that day of the week. We're all very complacent. But I'm giving you that data. Bank of America Securities clients were net buyers of US equities. They bought $2.4 billion net. Clients bought single stocks, the largest inflows in nine weeks, but they sold ETFs,

a second straight week of outflows, with inflows solely in large caps. Retail and hedge fund clients were net buyers. Institutions were net sellers for the third week in a row. Now, this is where it gets interesting. Obviously, Bank of America and Merrill Lynch handle a lot of corporate clients doing buybacks. They say buybacks accelerated to their highest level since late June. Year to date, buybacks as a percentage of S&P 500 market cap are still on pace for a record year in our data history. Record year.

This is the four-week average, the dark blue line. And then the year-over-year change is the light blue. So you can see this is like a healthy year for buybacks relative to any year, quite frankly. And I guess it's a good thing that they came in last week with the stock market down 4% and change, the worst week in 18 months, and they bought back their stock. That's how it's supposed to work. it's supposed to work. Corporate buybacks accelerated to their highest. Oh, sorry. The biggest buybacks were in tech and communication services, which we know means Microsoft, Apple, Amazon, Google, right? Clients bought stocks across eight of the 11 sectors led by tech and comm services, which continues to have the longest buying streak, 23 weeks. So there's a lot more there, but I guess that's a silver lining to the worst week of the year.

The virus came out. It didn't help stock prices immediately, but I do think buybacks are cushioning the downside in individual names. What do you think? Yeah. Well, I mean, you saw the numbers. These are big, big numbers. People are buying stock. Companies are buying stock. I think we don't disagree. The headlines are deteriorating

to normalizing, but things by and large are okay. Can we put that second buyback chart up? So this is what happens basically when corporate balance sheets are as healthy as they are and companies decide that the environment is too uncertain to make really big investments or do a ton of hiring. Instead, they do this. And I don't think it's an accident that we're going to have a record year in buybacks. It's much safer for a corporate management team to just execute and shrink the float versus like what adventurous thing can we go out and do?

I think there's a lot of uncertainty because of the election and what it's going to mean for the corporate tax rate. That's on the table. And then I think the start of the rate cutting cycle and what does the Fed see and blah, blah, blah. So that's in that environment, that's when you get a ton of buybacks. And I think it will continue to serve as a cushion. These companies are gonna come in.

We just found out definitively last week, that's what they're gonna do. So I like being able to tell you guys that. Okay, moving on. Goldman Sachs just did a post, How Investible is Europe? And I want to share some of the things that I pulled out. All right, they make three points about Europe. One, European- European is great.

European, the ravioli is terrific. European companies are global with over half their sales coming out from outside of Europe. European firms have significantly raised their exposure to India in recent years and around a quarter of European companies' sales occurs in the US. This is the interesting part. Not through exports, but through the ownership of US-based businesses, which leaves them relatively less exposed to tannafris. The second point, European corporates are becoming more efficient in their use of capital,

buybacks have soared and dividends have grown in recent years. We're going to come back to thatannerfests. The second point, European corporates are becoming more efficient in their use of capital, buybacks have soared, and dividends have grown in recent years. We're going to come back to that in a second. And third, what we already know, positioning and valuation measures suggest that most investors are already cautious on Europe. So on the valuation part, they said, European companies used to eschew share buybacks

as they chose to focus on dividends or investments in M&A, the latter often providing only low returns with valuations in certain sectors low and profitability high. Share repurchases have risen sharply. 60% of European companies are now buying back shares compared to around 20% historically. This buyback bonanza is okay, whatever, whatever. All right, let's go through some charts. So they say that Europe trades had a significant disadvantage to the US and Japan as it should.

The US is currently at the 90th percentile at 21 times forward earnings. Europe as a whole is right around the last 20-year median at 13 times. But they say the UK currently trades at half the valuation of US compared to a 30-year average discount of 22%. They have a chart in here that I've never seen before. It looks like the ECB VIX basically, financial conditions. Next chart. Oh, here we go. So this is an indication of risk appetite or just risk in general or lack thereof at this point in time. Things are not a lot of strength in their financial sector, but people have no interest in Europe. We've known this for a while. They show cumulative

monthly flows into Europe, the US, EM, Asia Pacific. Oh my God. Look at this. And people are buying the snot out of Asia Pacific, the worsening inflows, EM, particularly India, but Europe. Just complete apathy. So the stocks are cheap. We know, is it a value trap? We'll find out. But it seems like the corporations are getting smarter about how they deploy their capital. I think it's going to work this time. I think, as long as the United States doesn't have a recession, I think European stocks are going to do well. I don't know that they'll beat the S&P 500, but I have this really big secular idea.

beat the S&P 500. But I have this like really big secular idea. And we talked about this last week where every year you make a new NBA All-Star team, it's more and more players from other places around the world. You look at the Olympics, you just see incredible competition for our US team, which of course always wins, but like they get scared and I've drawn the distinction between the way that we used to think about European companies and how we think about them now. Europe has some incredible success stories and they're going to have more and I just I don't think look it's 13 times earnings the US is 21 so humor me maybe the US should be 20 or 21, but should Europe be 13? I don't think so. I really don't think so. You know the granolas?

Yeah. So Goldman coined this term the granolas, which is their mag seven, which is 25% of their overall market. It's GSK, Roche, ASML, Nestle, Novartis, Nova Nordis, L'Oreal, AstraZeneca, SAP and Sanofi. And those companies have compounded tremendously over the past couple of years with less volatility than the Mag-7. They're growing and they're carrying the European market. So we'll see. Maybe this is the time, maybe not. I want to share something with you that Mario Draghi put out yesterday. This is the future of European competitiveness. I read the whole thing. It was really good. He diagnoses the problem with Europe. And remember, we talked about this, about the

United States capital markets. So what Draghi wrote was like, what do we do about this situation? The ECB and the EU, these are two centralized, these are two centralized institutions that don't have the same authority that the federal government in the United States has or that the one-party system in China has. How do we marshal our resources and fix the situation? So I just want to share this with you. This is Mario Draghi, and anybody can find this PDF. It's out there.

Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines. In fact, there is no EU company with a market capitalization over 100 billion euros that has been set up from scratch in the last 50 years. All six companies with a valuation above a trillion euros in the United 50 years. All six companies with evaluation above a trillion euros in the United States have been created in this period. As EU companies are specialized in mature technologies where the potential for breakthroughs is limited,

they spend less on research and innovation. Europe spent $270 billion less than its US counterparts in 2021. So there's a huge gap in innovation. We understand that. We know that. It's a really big problem. And I thought that this was a good chart showing this. This is venture capital investment by development stage, seed, early stage, later stage. Look at the Europe versus the United States. How could you possibly produce trillion dollar companies if this is what you're doing in the early stages?

Literally, late stage venture capital is 82% smaller than the United States in dollar terms. So this is back to Draghi. As a result, many European entrepreneurs prefer to seek financing from US venture capitalists and scale up in the US market. Between 2008 and 2021, close to 30% of the unicorns founded in Europe relocated their headquarters abroad, the vast majority moving to the US. I spoke about this today with Ben, and the thing that I said is, he's like, well, what is this?

How does this get fixed? How did this happen? It's just a matter of our culture of risk taking and innovation compounding over years and decades. All of the talent wants to be here because our economy is so dynamic and so supportive of these entrepreneurs. Yeah. So, Draghi talks about all the research

and innovation money is being spent by automakers. That's like their cutting-edge tech is like whatever Volvo is doing. And one of the issues when they survey business people, like what's the problem? It's regulation. So there you know, there are a lot of positive things that people living in the European Union feel about their way of life, like a very strong social safety net, et cetera. They get to spend, I think, half of all business days protesting, which is fun.

But what comes along with that hyper regulation is people that wanna try something new, it's just easier to go somewhere else and do it. And that is at the heart of what Draghi is saying. So I don't know that European tech is going to be like a theme. I just think you're going to have more Novo Nordics. You're going to have more exciting growth companies in Europe than you have today. And it sounds like they get it.

So maybe that's the first step is they're like, well, what is America doing that we're not doing? It's been a long time since you've heard anyone with a high ranking in Europe even thinking that way. Macron is thinking that way. Several people in Eastern Europe are thinking that way. I feel like they're going to eventually get it more right than they have. They need to start microdosing to catch up. I would agree. Definitely more mushrooms.

I want to talk about... So this gets to the heart of something that we have been saying on this show for over a year. we've been dead right about this idea. Peter Brookfarr wrote this today about the Federal Reserve rate cuts. Federal Reserve rate cuts will certainly ease the pressure off anything or anyone reliant on debt. Let's do some very easy math on the flip side of that. He's talking about the tradeoff. So there's this assumption that cutting rates is stimulus.

I'm not so sure I agree. The beneficiaries of interest income, particularly the lenders to the US government, that's you if you own a treasury bond ETF or a money market. In the 10 years leading into the first Fed rate increase in March 2022, the average one year T-bill rate was 0.74% on a million dollars, that's $7,400 in pre-tax income on average. A rate around 5%, which is what it is today, is $50,000 in income. So $7,400 then versus $50,000 today. That's quite a difference with the balance paying for many things including vacations and trips and restaurants

So as the Fed cuts rates those relying on savings for spending Particularly baby boomers for cruises and other things that income will be reduced In fact that fifty thousand dollars in annual income becomes possibly $40,000 by year end and maybe $30,000 by next summer if the Fed funds futures are accurate. Hang on, hang on, hang on. We're talking about the income of somebody that has a million dollars sitting in cash. That person is rich and is going to spend regardless of what interest rates are.

On the flip side, what about people that are burdened by debt that are being crushed by high interest rates are. On the flip side, what about people that are burdened by debt that are being crushed by high interest rates? Michael, there are $6.3 trillion in money market funds earning 5% right now. And I promise you after three interest rate cuts, you know what's going to happen? People are going to go on Facebook and Twitter and say, the Fed is stealing my income. I'm telling you that that's coming. Hold on, I said that a year ago, that interest rate cuts are going to be like people are going to feel like the Fed is robbing them.

Interest rates are going to feel restrictive to some people. The Fed is punishing savers. Yes. 100% this is happening. Put the chart up. Counterpoint, when housing comes back, how stable of a stock is that going to be? Mira, mira.

This is the pile sitting in money market funds. These people are going to scream when that goes from 5% to 4%. Not people buying a house. Put that aside. We get it. Everyone else is going to be like, the Fed is stealing my income. It's so funny that everyone is so sure that a hundred basis points worth of rate cuts is going to be some sort of stimulus.

Watch and learn. Well, it's going to stimulate the housing market for sure. We don't know that. I know. I know that. I know that. Did you eat Cali Cox today? I know that. Did you eat Cali Cox today? I know that. The mortgage rate has already fallen and we are not seeing pending applications. You know why? Because people know it's gonna fall even more. Could be. And it's going to. Could be. I still think a 5% risk-free rate is stimulative for the economy

overall. I know it is. I know it is. Just because you say that, that doesn't mean make it so. It's everywhere you look. Who do you think are all these people? We did a thing on Compound and Friends about Europe being overrun with tourists. That's the people that feel richer.

There's a wealth effect when your cash is spitting out cash at a higher rate than it has in 15 years. You feel like the Don. You feel like a boss. I know people do. I talk to people. I'm a man of the people. You're no such thing. Yes, I am. Yes, I am. I am. And I'm telling you right now, I really feel like people are going to be like the Fed stealing my income. That's what I think is coming. I am. I'm telling you right now, I really feel like people are going to be like, the Fed stealing my income. That's what I think is coming. I am active in the community. Well, I am very excited. I am very excited to see the reaction. Not just like right away, but like just the mood over the course of time when the Fed cuts because it's cutting

and you might be right. We'll see, all right, let's talk about tech. Get out and talk to people more like I do. Yeah. Touch the public. You and Ben are like living on another planet. Excuse me. I spoke to my watching us Earthlings. I spoke to my housekeeper all day today. I don't know what you're talking about. You speak to tons of people.

OK, go ahead. All right. Here's a great chart on the ramp of stock based comp. This is from Medfaber via Michael Mobison. Stock-based comp as a percentage of sales for the Russell 3000. Back in the day, stock was not currency. Stock was not a way to incentivize people to come to the company the way that it is today in lieu of cash compensation. So chart off.

This, the impact of issuing shares and not buying back shares has a real impact on things like earnings per share. It really matters. So Tom Reiner from Altimeter, I believe we did an update on this last year, but we're going back to the sources, there's some really good stuff in here. So he starts by saying, we've seen a reversion to pre-COVID levels of dilution for software and internet companies, trot on please, and even MegaCap Tech has been slowly trending towards half a percent dilution. So you saw what happened in 2021, 2022, it just got out of hand. These companies got

crushed. The market was not having it. We're talking about profitability and these guys are just like, I don't know, they're out to lunch or something, but just issuing, issuing, issuing to employees. So there's a great- Michael, so with stock-based compensation, it's this thing where they're not paying cash for this portion of their employees' compensation, so the cost ends up being borne by shareholders in the form of dilution. Yes. Okay. So he has a great chart showing that companies are growing

slowly and diluting excessively. These are the classic value traps, where they look super cheap. But if you roll in the 5% to 6% dilution, they're just a melting ice cube from a shareholder's return perspective. So if you're Box, or Twilio, or Zoom, these are the top left companies.

And you can't really accelerate growth. You need to do an aggressive slash or get in line so you're not just treading water. So he breaks this down. On the top left, you've got the death zone. And on the bottom, you've got the trailing, I'm sorry, the next 12 months consensus revenue growth. And on the y-axis, you've got the run rate dilution. The top left is not where you want to be.

It means you're not growing. What companies are these? And you're diluting your shareholders. So that's, what did I say? That's Zoom, that's Box, that's Twilio. And then you've got the dilution issues today that might be okay, depending on the companies and where they go and then potential problems. So the dilution issues today is Snap, Lyft, Expedia, Etsy, UiPath.

So these are companies where their growth is either slowing or moderating and they're not pulling back on stock-based comp. Next chart, he's got... Oh, these snap maniacs are notorious. They've never made money a single year since being public and they've issued more stock than anyone, I think. John, show this chart of Zoom of the average shares outstanding that I've been telling you guys about.

This is bullshit. So, it seems to have potentially peaked, but boy, oh boy, this company better get the memo real quick. Where are the activists? This company has gone from 2019, they had looks like 255 million shares outstanding. They're up to 307 million shares outstanding. And the stock is in an 80% drawdown. What the hell is this? Wild. So I actually, I bought the stock today, just a little bit. It's spinning out gobs of

free cash flow. It's trading at 12 times forward earnings. And for good reason, though. The market, rightfully so, has no confidence in A, these earnings, and B, management. Look how they're treating shareholders. So we'll see. We'll see how that goes. But one more chart, technology company dilution first, market cap. He shows way over to the right. What a surprise.

It's the best companies on earth are all the way to the right. You've got Microsoft and Apple. Interestingly, though, he notes, Meta and Google are diluting at two to three times the rate that Apple and Microsoft are. But these are companies that have their shit together. They're growing like wild and they're not just giving out stock like it's going out of business. But look at the ones at the top. So he color-codes it.

Again, these are the ones that we showed earlier. All right. So Twilio, for example, let's illustrate this. Twilio is diluting at a rate of 6% per year, which is almost off the charts compared to everyone else. And then on the bottom, it's showing it has a $10 billion market. It's showing it's also one of the smaller companies on here. So it's a standout.

Snap, Roblox, and Snow are really out of control. These are giant companies north of $50 billion. Well, I don't know if it snaps 50 billion. In fact, I know it's not. But these are just massive companies that are just treating their investors like crap. So I'm really excited for Make The Case in a few topics because I'm going to show you the opposite of what you're describing. Lastly, he says, one that I think is interesting to call out, and we spoke about this a lot

over the last couple years, is Robinhood. This was one of the poster children for excessive dilution and run rate in 2022 was north of 10%. But they got the Business More Fit gold medal there. Oh, and they canceled the $35 million share grant to the founders. So credit to Vlad and the other founder. I forget his name. And no surprise, the stock is now working.

I think it's 19 or 20 bucks now. So it's $6. bucks now. So, yeah. Six dollars. Credit to them. Yeah. So, it's an amazing thing what happens when you start to treat your existing shareholders with respect. They respond by not selling your stock. It's like this incredible thing. Somebody should write a book about this. Reaction to Apple, we don't have to spend a ton of time on this. What was your reaction to what they announced don't have to spend a ton of time on this.

What was your reaction to what they announced? And do you think any of this is, it wasn't really market moving? No, because it wasn't really, it was nothing. They've got some new colors. They've got a new camera button. Looks kind of interesting. They spoke about the AI stuff. What is it?

Apple intelligence, which they spoke about previously. There was not a whole lot here. But they said not ready. No, they're not ready because no, the phone's not ready and the AI integration isn't ready. So what was the point? I almost think they would have been better off not doing this. It was weird.

It was a nothing burger. I think people wanted to see a fully formed vision of how the new iPhone will incorporate all these AI tools, and they kind of just danced around it. I did think that the button on the side of the phone was cool. Where like you could slide your finger and that will zoom the camera lens in and out. I mean that's cool.

Okay, but what do I do with this stupid Otterbox? It's probably not going to work. All the new colors for the AirPod over ear, what are those called? AirPod Max? The Beats? Yeah. Well, they look, but they're AirPod branded, but they look like the headphones you have. That looked cool.

Some of the new watch colors, the new metallic watches, those look cool. Yeah, the new phones look cool. There's like a dark blue one. They're like, yeah, it looks neat, but was it an event worthy? It seems sort of underwhelming. It was very underwhelming. I'm surprised the stock didn't give back more. I wanna give you a couple of Wall Street

analyst reactions though anyway, even though it didn't really do much. First of all, let's set the scene. Could you believe this guy? It's like every Tuesday. Pick it up, I want to tell Chris. Hold on. You're in trouble.

Hey, Chris. How are you? We're live on the air. Is there an emergency? Are you recording right now, aren't you? Dude, do me a favor. Do me a favor. Throw that phone out the window.

Here, the iPhone 16 range is hugely important for Apple at a time when consumer demand for new smartphones is slowing, said Ben Wood from CCS Insight. The range is the first to support Apple and tell it, okay, fine. Dan Ives chimed in. Our friend Dan, he seemed the most excited out of everyone, which I guess would not be a surprise. Dan Ives said, the new era of personalization and how consumers interact with their phones has now begun. And we believe this will cause a renaissance of iPhone growth, high single digit growth

upside for Apple over the next 12 to 18 months and drive the shares higher with a $4 trillion market cap in 2025. We estimate roughly 300 million iPhones globally have not upgraded in four years. They better. The stock is discounting some of this at least. The stock has a great run. He has them selling 240 million iPhone units in fiscal year 25 because of the AI driven upgrade cycle.

Do you know what they normally sell in a year? That sounds like a hell of a lot of phones. I don't really have a baseline for that. It sounds like a lot though, right? 240 million? Here's Gene Munster. I mean it's 760 million away from a billion. The functionality that people are going to use,

the paradigm shift that I'm talking about is going to be available in October and November for US users and that will be free if you upgrade your phone, your hardware, your Mac or your iPad. So Mike, that's like kind of like a, that's kind of a big deal that it's, that all of this AI stuff is free, at least to start. They're like underwriting the cost of chat GPT and all that stuff. I think that might be enough to get people excited.

I guess I could picture it. Last thing here from Munster. He says, quote, the timing and pricing of Apple's new products is noise. What matters is we are entering into an AI paradigm shift in which only Apple can provide a unique consumer experience. I think that's true. Yeah. I think that's true. I think they're not first.

They don't even own their own technology here. They're using someone else's. I just think they'll do it best. So moving on, I had some people over on Sunday, my dad texted me, what's that email about with four question marks? I said, I don't know what you're talking about. So he sends me a printout and I scroll, I zoom in and it says, I suggest you read this message carefully. Take a minute to relax and breathe and really dig into it. Because we're about to discuss a deal between you and me

and I am playing games. You've been a bit careless at least scrolling through those filthy videos and clicking on links, stumbling on some not, how does this person know? Anyway, it was, it was, it had my address on it. It said, dear Michael and Robin,

and it got sent out, got sent to my dad. So my dad freaked out, called me twice, said, call me immediately. And I said, dad, it's a scam. And I said, is that crypto on it? He goes, yeah, it said that to send the Bitcoin to this QR code. I said, it's a scam. How do you know? I know.

I've got this message multiple times. It's a scam. Relax. Breathe. This scam plosion that we're witnessing is really out of control. It does seem like, I don't know how they slow it down. Crypto fraud increased 45% last year to $5.6 billion, according to the FBI. There was a big piece in the Wall Street Journal about pig butchering and what to know.

The interviewer said, are you seeing more pig butchering because of the rise of crypto? The person said, absolutely. The rise since 2019 for victimization is almost 2000%. Why does it work? The social engineering aspect is very powerful. I have stories that are very sad. Folks have been warned that they're getting scammed and yet because they've been socially engineered, they actually continue to invest.

They prefer people with titles like doctors and dentists and IT professional. It's really, really gross stuff. A lot of these scammers are trafficked human beings. These are people that are enslaved that are scamming you. When a human being is subjected to that kind of circumstance, their will to succeed is intense because their life or their family's life depends on it. So they said, does the FBI know who's running these scams? And they said, yes, absolutely. Can you get them? And he said, there are treaties between those specific countries and the US. We've

taken steps. We work with multiple organizations, including the Secret Service, Department of Homeland Security, and we're applying pressure on these countries to start to take action. I got an email today from Swan, a Bitcoin company, said, don't withdraw the Coinbase Department of Homeland Security, and we're applying pressure on these countries to start to take action. I got an email today from Swann of a Bitcoin company. He said, don't withdraw the Coinbase wallet. It is relentless. And you and I sort of take for granted that, of course, these are scams. But people just don't know.

You've been targeted or you've been, people are faking Josh Brown and targeting people. And you and I know, well, why would people listen to us and people listen to it? It's it's really horrific shit people listen to it. And I how does this how do we control this? We're not controlling it We're doing a terrible job and it all boils down to whether or not the ten largest internet companies in America Want to get serious about protecting their users. And so far, they do not. And I got to tell you, I'm furious about this. There have been people impersonating me, Tom Lee, Bill Lackman, Jamie Dimon.

A lot of those people I'm naming are like billionaires and they'll be fine. I'm like just a regular person. And every Monday, there's a new set of ads that pops up. I get a new wave of text messages from my friends, is this really you? This looks fake. It's like clockwork, it's every week. We now have a direct conduit into Metta,

where we're sending these fake accounts and they're closing them down, but the new ones keep popping up. It's whack-a-mole. And the reason why, by the way, $5.6 billion lost to crypto related crime in 2023, the numbers are now too big. I am telling you, if you're a Facebook, a meta shareholder, I genuinely think the risk

is the feds are going to kick down their fucking doors and demand records on what they're doing to stop this. I hope so. I am telling you that that risk is going unappreciated by meta shareholders. The feds have rated other companies for significantly less than the absolute international crime wave that the unholy trinity of Facebook, Instagram, and WhatsApp are now facilitating.

I can think of zero good reasons why Facebook allows somebody in Eastern Europe to create an account and start running ads in front of US users. What good could that possibly do other than Meta making a couple of dollars? In what way could that possibly be positive? All I can think about is how that could be negative. other than Metta making a couple of dollars. In what way could that possibly be positive? All I can think about is how that could be negative. Why does somebody sitting in Illinois need to be served ads coming from an account that was created yesterday in Nigeria? What's the good outcome? Explain it to me. Nobody can. It's absolutely disgusting and it's going on every single day

and real people are being hurt. We're directing people to submit tips to the FBI. I don't know if there's any response. The FBI probably overwhelmed with the amount of people complaining. Well, Metta has no incentive to shut it down because they're being paid. Well, here's the incentive.

I am telling you, I genuinely believe before the end of this year, there's gonna be a huge issue for them. Meta is over-investing in GPUs and under-investing in security for their users. It's like they don't give a shit at all. And they're saying, oh, we can't do anything about, really, all this AI, you can't do anything about this?

You can't stop foreign people from starting an account and dropping ads in the stream of old people the next day. You have no way to stop posts with links to WhatsApp. Are you fucking kidding me? You can't have an automatic filter on any ad that has a WhatsApp link coming from overseas. Of course you can. So either you're too stupid

or you don't want to. They don't want to. But don't say you can't. Let me give you the last four quarters of profitability at Metta. 11 points, profits, not revenue. 11.6 billion, 14 billion, 12.4 billion, 13.5 billion. Add that up. That's profit. So they are not protecting their users and that's across all platforms. These scams are happening on Facebook, on WhatsApp, on Instagram and very often utilizing all three to lure people into these webs.

And it's incredible how long they could allow this to go on for. I can't understand it. Away from the internet companies, I got a text message today from one of the scams, guess who I am? Smiley face, smiley face. And of course, it's somebody that's going to want to form a fake relationship and get crypto from me. But this is how it happens.

These farms- Meta laid off 21,000 people since 2022. Headcount is down 22% since 2022. That's where those profits are coming from. What if they laid off 20,000 and they kept 2,000 people to protect the users of the platform? Would that be the end of the world? Would Wall Street scream and yell and sell their stock? I don't think so. I think Wall Street wants this company to be run well. So I agree with that, but it's also an issue away from Facebook.

So these people that are texting me, they know everything about you, and they develop relationships with people. There's a lot of lonely single people that genuinely feel like it's a real person, and they just send money or send crypto. Chat, if you think I'm overreacting, allow me to read something to you.

Jordan Dimae was a typical and outgoing 17-year-old who his friends and family say made everyone's life brighter. But last year, after the Upper Peninsula of Michigan High School homecoming king received a message from an Instagram account that appeared to be a teenage girl, he wound up going down a dark road that within only six hours would end with him taking his own life. Nigerian men started sending him pictures of a girl, it was not them obviously, got him to send naked pictures back to her and then threatened him that if he didn't pay a certain amount of money they were gonna blast it to everyone he knew, and he killed himself. This is on Instagram.

They're doing this on dating apps. It's not just meta. They're doing this on data apps. They're doing dating apps. They're doing it on Twitter. They're doing it across all Facebook platforms. I cannot understand why these companies haven't figured out that they need to make an investment and figure out a way to stop it It's it's it's it's literally we're talking about death at this point. We're not talking about crypto scams Yeah, it's it's at a certain point somebody has to realize hey

This is gonna cost us more money if we don't in invest in safety and again I'm sure they would try out all these stats, how much they spend on blah, blah, blah. Well, it ain't working. It's not worth it. Whatever the number is, up the number. I don't think you need to profit 13 and a half billion dollars in a quarter

and allow a 17 year old kid to want to commit suicide. I think we could do better. So that's, all right. I'm so tired of talking about this, but it's the FBI put this data out today. I was just floored. It's a 45% jump over 2022. What's the 2024 data going to be when it comes out at the end of this year? I'm betting higher. Doesn't seem like there's any insight. Anyway, I know our audience knows better, but just in case you don't, if anybody ever contacts you about getting rich or this or that, it's always fake, every single time.

One of the things from the FBI's data is that people over 60 lost 10 times the amount of money than people between the age of 20 and 30. So older people are significantly more susceptible to that. My dad freaked out. My dad freaked out. He's like, how do they know your address? Right. This is just incredible how moment has been going on for. All right. I want to make the case. So you were talking about stock based compensation and you were talking about companies that are issuing shares. I want to show you the other side of the coin.

Put my chart up, John. Thank you, sir. This is eBay. As you can see, eBay is performing incredibly well throughout the course of this year. It's a new 52 week high. It's I think it's approaching multi-year highs. This just popped up on the list, Sean and I keep of the best stocks in the market. Remind me, what's the criteria? We don't share, but there are fundamentals and technicals.

So this popped up a few weeks back and we had a huge tech sell-off and this thing didn't budge as you can see by the chart. So here's the story. It sells at between 10 and 11 times earnings, which is an insane discount to not only tech, but the rest of the S&P 500. The problem is they can't grow. They do 2.5 billion in quarterly revenue every quarter for the last four years. Like clockwork, it's 2.4, 2.6. So they literally

just, there's just no growth happening here. It's a $29 billion market cap. There's a 1.8% dividend yield, but it's becoming a buyback king. They are shrinking the float like crazy, which is exactly what a mature company with good cash flows and no growth should be doing. What I'm showing you here is stock buybacks on a trailing 12-month basis in purple. It's about $2.3 billion over the last 12 months. They are now buying back $975 million as of the latest quarter. So you're just seeing this steady flow of buyback activity. They keep shrinking the float.

And that's why despite having no growth, the stock continues to climb. Last quarter, they bought back a billion dollars worth of shares at an average price of 52 bucks. They have another 1.9 billion remaining on the current buyback authorization. They raised their 2024 share repurchase target to at least $2.5 billion. Since the beginning of 2002, eBay has returned $7.3 billion through dividends and repurchases, which represents 150% of its cumulative free cash flow over this period. Let me show you this last chart.

It's a great looking stock chart. Let me show you this last chart. It's a great looking stock chart. This is average diluted shares outstanding. As you can see, plunging from 1.25 billion to 507 million. They are gobbling up as much stock as they can. And this is why the stock is working. And when you look at the 13F holders, you got Bill Smed, you got GMO, you got Dimensional, all the famous value shops are buying the snot out of this thing.

So let's put up that first chart. Here's the trade. And I don't have this trade on, which is how you know it's going to work. The 50 day is an orange. What I would do, but I don't want to jinx it for anyone else. What you would do. What I would do. But will not.

If I trusted my own instincts, here's what I would do. I would ride this thing and I would use the 50 day moving average. I would use it as a trailing stop. I would not look at it daily. I would just reevaluate every Friday. On a closing weekly basis, is eBay above or below? It's trailing 50-day rising, 50-day moving average. That's how I would risk manage the position. You can see that this stock has respected that 50-day all summer long. Now it's breaking out to new highs.

Nobody's down on this stock. So it really looks good to me. We'll see what happens. But I like this kind of story of share buybacks better than I like dilution from stock based compensation. I love this chart so much. I'm not going to buy it and just watch it. Can you go higher and higher and higher?

Just at 70, we'll revisit. I love this setup. It looks great. As a reminder, we don't do investment advice on this show. Trade at your own risk. What I would do is just continue to watch it go higher and not take my advice. That's classic.

What I will do. That's classic. What I will do. OK. All right. I've got a mystery chart for you, Josh. I forget which is the first chart, so let's turn it on and jog my memory if you will. Okay, I remember now. This is a cherry pick starting point to show you that the end results

over this period of time from February of 2021 to today are even. And I got to tell you, February 2021, that's quite a long time ago. Again, we're talking three and a half years. Three and a half years, the orange line, as you can see, is the S&P 500, and the purple line is one of the best companies in the world. It's an individual company. Yeah, it's one of the best companies in the world. You would think that over the last three and a half years,

it has kicked the snot out of the S&P 500, when in fact, it hasn't. Hey Pat, I'd like to solve the puzzle. Yes. Alphabet. Correctamundo. Look at me. Look at me go.

I've got two more. Are you impressed? I am. I've got companion charts. I actually bought Google today. By the way, we had a lot of correct guessers in the chat. A lot of Googles. I pulled the trigger on Google today. Maybe I'll make the case for it next week.

Next chart, please. In fact, I'll make the case right now. Go ahead. All right. So it's been 905 days, going back to February 3, 2021. It's been 905 days. So I had Chartkin met. Look at all of the 905 rolling day periods going back to 2010.

And it's underperformed by 5%, which is a rarity. So then I said, hey, you know what, Chart Kid Matt? Do me a favor. Make me a scatterplot of this with forward six month relative returns to the S&P. And let's see what we see. So this shows the rolling 905-day change. Again, I know it's cherry-picked. And what happens six months later?

So Matt shows the average six-month relative forward performance, meaning Google net of the S&P is 3.1%. That's when Google outperforms. Okay? So six months after that performs on average, when Google underperforms over a 905 day rolling period, the average six month relative forward performance, again, net of the S&P 500 is 14 and a half percent. That's over a six month period.

That's not a whole lot of time. So that's what's going on with Google. The stock is stuck in the mud. It's acting like complete crud and I bought the dip. I own it. So I am in the crud with all the shareholders in alphabet. It's weird. This is a streaky.

This is a very streaky stock. It doesn't at all resemble Meta or Apple. This is like in favor for six months, out of favor for six months. It's much more similar to Amazon. It's got like these periods of time where everyone's in. When it goes, it goes. When it goes, it goes. And I don't know when the next time it will go.

So yeah, I'm comfy. If it goes lower, I'll buy more. I just think that I'm not, forget about the AI stuff, just the YouTube, just the YouTube thing alone. It's just what a monster world of beast that is. Yeah, worth pointing out, probably there's a lot of the struggle in the share price recently is a result of all the antitrust stuff. Yeah, regulatory stuff. It seems to be a magnet for

this type of thing and that ain't going to stop. Martin Pierce at the Information wrote a post last night in his daily briefing about the regulatory overhang at Google, which I read. So I think that, I mean, I don't know if that's what's causing the agitation, but yeah, not great right now. Hey, everybody. Did you know tomorrow is Wednesday, which means an all new edition of Animal Spirits with Michael and Ben is on the way. You can listen to Animal Spirits on all podcast platforms and of course, watch it right here on YouTube later on Wednesday afternoon. Wanted to let you guys know we have an all new compound and friends coming up

at the end of this week, Jill on money will be back. Duncan and Ben will be back. It's all, everything's happening. So thank you guys so much for watching. Thank you for listening. We appreciate you. Have an amazing night. Whether you're just getting started as an investor or you're managing a multi-million dollar portfolio, Ridholtz Wealth Management has the solution for you. It all starts with building the right financial plan. To speak with a certified financial planner today, visit ridholtzwealth.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. Thanks for listening.