The Compound and Friends - No Top in Sight, Chinese Stocks Explode, Nick Colas and Jessica Rabe on the Fed Cut

Episode Date: September 24, 2024

On this TCAF Tuesday, Josh Brown is joined by Nick Colas and Jessica Rabe, co-founders of DataTrek Research, to discuss the Fed cut, recession indicators, the outlook for tech, and more! Then, at 44:54, hear an all-new episode of What Are Your Thoughts with Josh and Michael Batnick! This episode is sponsored by Rocket Money and Public. . Visit: http://public.com/compound and discover how you can lock in a 6+% yield until 2028. . Cancel your unwanted subscriptions today by visiting: http://rocketmoney.com/compound Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: LinkedIn: https://www.linkedin.com/company/the-compound-media/ Public Disclosure: A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. The 6.9% yield is the average annualized yield to maturity (YTM) across all ten bonds in the Bond Account, before fees, as of 8/28/2024. A bond’s yield is a function of its market price, which can fluctuate; therefore a bond’s YTM is “locked in” when the bond is purchased. Your yield at time of purchase may be different from the yield shown here. The “locked in” YTM is not guaranteed; you may receive less than the YTM of the bonds in the Bond Account if you sell any of the bonds before maturity, or if the issuer calls or defaults on the bond. Public Investing charges a markup on each bond trade. See public.com/disclosures/fee-schedule   Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. You should evaluate each bond before investing in a Bond Account. The bonds in your Bond Account will not be rebalanced and allocations will not be updated, except for Corporate Actions. Fractional Bonds also carry additional risks including that they are only available on Public and cannot be transferred to other brokerages. Read more about the risks associated here: public.com/disclosures/fixed-income-disclosure and here: public.com/disclosures/apex-fractional-bond-disclosure. See public.com/disclosures/bond-account to learn more. Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to The Compound and Friends. Tonight's show is brought to you by the good folks at Public. Public is rolling out a bond account that is meant to help investors preserve the high rates of interest they had previously been earning in money market funds and short term treasuries. Now that the Fed is cutting rates, Public has unveiled a new solution. Of course, there are different risk factors and different drivers of performance. So to learn more, go to public.com.

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Tonight's show is a really good one. We had Nick and Jessica come by. So Nick Koulis and Jessica Rabe are friends of mine. They are two of the smartest people I know on Wall Street. We get amazing feedback from you guys every time we link up. And I love to hear that because I personally learn a lot from talking to Nick and Jessica. So the fact that the audience is into it too

is like a double bonus and super excited to bring you the latest conversation that we had. Then we're doing, What are your thoughts? It's Michael Batnick. It's me. It's a whole lot of stuff happening. We had this upside explosion in China stocks today. China is something that we really haven't talked about in a while.

But I think this certainly bears watching. We've had a really big catalyst in that market. And I want you guys to understand what's going on there. We also took a look at the popularity of alternatives. Michael makes a pretty bold claim about alternatives becoming the biggest topic in wealth management for the next few years. He might be right. We have a mystery chart.

Michael makes the case for a stock and so much more. So without any further introduction, I send you to the show right now. 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 Redholtz 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. Wait, is this a new way to invest in a diversified portfolio of bonds and receive monthly interest payments? You're darn right it is. What's the best part? If you act now, you can potentially lock in a 6% plus yield until 2028.

So in other words, I don't have to worry about the Fed's upcoming rate cuts. Well, you can worry about other things, but you won't have to worry about that. How long does it take to get started? Minutes, seconds, depending on how fast you type. But you have to act fast if you want to take advantage of some of the highest bond yields in years. It's the new bond account only at public.com forward slash compound. All right. All right. Hey, everybody. It's Josh Brown. I'm here with my friends Nick Colas and Jessica Rabe.

They are the co-founders of Datatreq Research and authors of Datatreq's morning briefing newsletter, which goes out daily to 1000 plus institutional and retail clients. They're also two of the smartest people I know. I love that I get to check in with them every month just to see what's happening in the markets, in the economy, in technology and elsewhere. Nick, Jessica, thank you so much for being here.

How's everything going? Going well. Well, thank you. All right. We just caught up on each other's weekends, so we for being here. How's everything going? Going well. Well, thank you. All right. We just caught up on each other's weekends, so we're good there. Nick, you are talking a little bit about obviously the big question on everyone's mind. Did the Fed blow it? Are they too late?

I wanted to just set the stage a little bit. The people that I talked to were mostly surprised that they went 50 and not 25, even though the betting odds in the bond market were basically an even split. I think people are just not accustomed to seeing the Fed start a rate hiking cycle with 50, especially if there's nothing going wrong in the economy, which so far seems like it's the case. I remember before the meeting, there was an open question about would a 50 basis point cut to more harm than good?

Would it spook the markets? And obviously, that is not what happened. Thursday's delayed reaction, we had a huge rally in the stock market. I felt like that was in keeping with some of the delayed reactions we've been seeing all year. It's weird. It seems like the algos act on Wednesday, and then the people speak on Thursday. And I want to get your take on whether or not I'm the only person seeing that phenomenon. But my take is like people sleep on it, and then the next day they wake up and buy something.

There was also talk that the Fed wouldn't do 50 because it would implicitly be thought of as an admission that they should have done 25 last time. The fact that they went 50, maybe the positive thing to say is that Powell cares less about that kind of optics thing and cares more about getting the policy right itself. So that's kind of my take, but I'd love to hear where you stand. Yeah, you're right. The day after a Fed meeting have been some of the best days

of this year, and that was even the case in some parts of last year. So it does continue that pattern. I thought we'd just kick off the conversation with a couple of baselining exhibits and charts to kind of give everybody a sense of what the Fed decided, what its outlook is, and kind of where we stand. So let's flip up the, yes, exactly, the new SEP, the New Summary of Economic Projections. And it basically portrays what the Fed is thinking in terms of rate policy going forward based on certain economic expectations. And from what you can see in the table,

they're expecting good economic growth for the next couple of years, some uptick in unemployment, which is entirely fair given what's just happened, declines in inflation, which again is fair given what's been happening. And the most important number to my mind to think about is that 2.9% number towards the lower right part of the box,

which is the Fed's estimate of the neutral rate of interest where they want to land eventually that keeps the economy growing and inflation in check and nothing bad happening. And that 2.9%, we're so far away from that. Their track of future Fed policy is looking for rate cuts of another 50 basis points this year, another 100 basis points next year, and getting to that 2.9% sometime in 26 or thereafter. The market is saying something else. The market is saying they're going to get there very fast. Fed funds futures are saying they're going to get there by the end of next year.

This is the tale when equity- I'm sorry. They're going to get to 3% Fed funds rate by the end of next year? That is the modal estimate in Fed funds futures today. That's what the market's looking for. Much more aggressive than the Fed, obviously, but the market is saying, look, if all these things are basically okay

and the labor market's kind of wobbling a little bit, the Fed's gonna go faster, which that's the predicate for the equity market rally that we saw on Thursday and that we're gonna, we're seeing today and I think we'll continue to see for the coming weeks. The thing that jumps out at me, and maybe this is just a standard thing and they're always

this way. I don't pay as close attention to it as you do. They're projecting 4.4% unemployment next year and then they drop down to 4.3 in 26 and then 4.2 in 27. Now of course, literally anything in the world can and will happen between now and then 4.2 and 27. Now, of course, literally anything in the world can and will happen between now and then. Is this what they normally do going into a cutting cycle? Do they normally have unemployment that stable

and then actually falling? No, they usually expect it. Let's say you're cutting because you're in a recession. So you're gonna have a high unemployment number in year one and it kind of trailing lower in year two and three, getting back to kind of like that four, four and a half percent range thereafter, which is the normal unemployment rate in an expanding economy. This time around is somewhat different, and Pal went through this in the press conference, mostly because we're seeing basically the job market is relatively saturated. There's not more

jobs left to have, so job growth is slowing, and that's not a lot more jobs left to have. So job growth is slowing and has been kind of ill reported over the past couple of months. So he's a little bit worried that unemployment is gonna keep going up. So I think your point is very well taken. Unemployment is gonna be higher than that 4.4% at some point in the next six months.

So almost know that about it. It will go up. Does it mean a recession? Not necessarily. And Jessica's got some data on that in a second we can look through. But the bottom line on that SEP, on that summary of economic projections, is the Fed sees a stable economy and the ability to lower rates back to neutral. The market just thinks it'll happen faster. Okay. Let's keep moving.

This is the Atlanta Fed's GDP Now model, which is a very good real-time model of where economic growth is tracking over the course of a quarter. This is Q3. And as you can see, we're tracking between 2% and 3% for better than the economist estimates, which is the blue line and blue band. And it has not been trailing off this quarter, which means that as the data has been coming in, this model keeps banging around between 2% and 3% Q3 growth, which is very solid given where we are in the cycle.

And I think one more reason, Palace feel comfortable cutting by 50, but then talking about 25 thereafter, because we're not turning down this line, that green line of estimates is not trending lower. It's very flat, very nicely flat over the course of the third quarter based on all the economic data. It looks like it's accelerating guys. Yeah, it hit a 3% number last week, that little tip of 3% has come back down a little bit. I don't try not to like look at it too carefully,

I just wanna make sure that it's stable through a quarter and it is. That was a blip probably related to, I'm just making this up, but maybe I have something. That was related to I think a much stronger than expected retail sales number. You think that's what that explains that blip? Well done.

That's exactly what it was. Good job. Yes, you got it. That's exactly the number. All right. We don't need these other two boxes. Just focus in on me now. All right.

What's the gasoline demand situation? Gas demand. This is something we look for clients every single week when it comes out because it's a weekly number. And it shows daily gas demand. The US uses roughly nine and a half million gallons of gasoline every single day. And if you track that year over year, you get a sense of the growth in the economy because in order to spend in many places, you have to drive somewhere.

So this shows aggregate consumer discretionary driving and therefore demand. It was soft. That blue line is this year. The brown line is last year. We were comping negative in April, May, June, July. But as gas prices came down, the comps turned positive. The blue line went above the brown line.

And we're comping plus 1%, plus 2% now versus year-ago levels, which means that we were at some risk, frankly, of a slowdown in the economy in late Q2, start of Q3, and things have really picked up since then because gas prices have come down. And the big takeaway here is it's very hard to have a recession when gas prices are declining. History just shows that very clearly.

Again, Jessica's got a point on that in a second, so I'm not gonna steal her thunder, but this is a good chart. This is a strong chart that shows economic growth is decent. I love this because it's such a simple concept and some of the worst recessions in history have coincided with gasoline prices that curb demand because they were so high. So what we're saying here is that demand for gasoline is running ahead of where it was this time last year. And we know the prices are fairly low.

And so in that environment, you're not going to have the commodity price related recession that maybe you might worry about, or you're not seeing demand fall off, which would indicate people being under a lot of pressure. Is that like the big takeaway? That's the big takeaway, yeah. And the last chart is the VIX. So this is the VIX back in 1990. It was invented in the late 80s after the 87th stock market crash. It launched in Jan 1990.

This is every monthly VIX reading since 1990. And it shows where you end up with mid cycle markets, what we call mid cycle markets, where the economy is expanding, earnings are improving, stock prices are rallying, and they occur like clockwork. So early to mid 1990s, VIX below 19.5, which is the average, mid 2000s, once again, the VIX below that average for a long period of time, the 2010s, a very long period of low volatility, rising stock prices, and we enter the same regime at the beginning of 23 and who knows how long it lasts but this is entirely consistent with every past mid cycle

market back to 1990 so 30 plus years. If you look at that mid-2000 teens period of just ultra low volatility for a prolonged stretch the only two spikes above that 19 and a half average are related to elections. You can see the late 20, right? Late 2015 and then late 2019. Do I have that right? Ogg 2015 was the flash crash in ETFs. Okay, all right.

Which was, it was actually- Mechanical. The catalyst was the surprise evaluation of the yuan in August 2015. That kind of jacked volatility for a while and it kind of lingered longer than you thought it would. But that was that. Otherwise, yeah, I mean, Jessica and I used to work at a firm with a huge options trading

desk and we would hang out with the options traders every day and they were just miserable through this period. There was just no vol to buy, no vol to sell, and the vol of vol went nowhere. Right. Well, they got their wish, but it never lasts long, those high vol periods. Jessica, before we go to you, I just want to interject a couple of things in terms of – so this is how the Fed is thinking about what it just did. We got a blog post from Neil Kashkari at the Minneapolis Fed. And the takeaway for me is he said, basically, the data is still a little bit confusing,

but it's clear that we're tight enough. So this is Neel in his own words. The FOMC targets 12-month headline inflation of 2%. It now appears that while it remains too soon to declare victory in our inflation fight, we have made substantial progress and the disinflationary process appears to be on track. So he doesn't think cutting rates by 50 basis points will take it off track. Obviously, he wouldn't have supported it. He also said other measures of the labor market show sign of easing.

For example, nominal wage growth has fallen from a peak of well above 5% in the spring of 2022 to a touch under 4% today, and vacancies and quits have fallen to pre-pandemic levels. Rafael Bostic of the Atlanta Fed gave a speech this morning, quote, inflation has fallen faster than I had expected. And the most recent data solidify my conviction that the US economy is indeed sustainably on the path back to price stability. He also said, on the employment side of the ledger, clearly, the red hot job growth coming out of the pandemic is cooling.

That said, the labor market is weakening, but it is not weak. It's slowing, but not slow. I think we could all broadly agree that those are common sense observations. That is what we should hear out of the Fed. Is there anything you guys have to add to that or any reaction to that? I mean, the vibe from both those comments feels like the market hasn't more right than the SEP in terms of cutting rates more than just quarterly cuts of 25 basis points next year. Those vibes are, yeah, we got to stay on top of this

and we'd like to get back to the neutral rate kind of as soon as possible. Yeah, okay, let's keep moving. Yeah, so I was just going to take the other side of the trade here. Recessions have two causes, an economic or a geopolitical shock. So we have two charts that show what to look for

that would indicate things are really rolling over. So this first chart shows the cadence of US job growth at the start of recessions. It shows the monthly job gains and losses from 1990 to 2019. So it includes three economic downturns, 1990, 2001, and 2008 to 2009. So you can see the start of each recession saw three straight months of consecutive job losses and in each case, one of those months showed job losses of at least 200,000 workers. So you can see in the chart, every expansion here had some instances of job losses, but recessions only start when businesses begin aggressively laying off workers, which is not currently the case. Another important point is it usually requires a specific catalyst.

So in 1990, it was Gold 401. In the early 2000s, it was the dot com bubble bursting. And then of course came the 2008 financial crisis. As for a geopolitical shock, if we could just flip it please to the next chart, they cause recessions because oil prices spike. So, Josh, you were getting at that earlier. So this chart shows the year-over-year percentage change in WTI prices from 1987 through 2019, which just like in the last chart captures three recessions.

The dotted black line marks the level where oil prices fell 20% year over year, and we also noted the years when that happened in green. And then the years noted in red are oil price spikes that happened just before or during a recession. So what this chart shows is that lower oil prices tend to extend economic cycles and higher prices tend to end them. So you can see in the chart from 87 through 2019, there were eight times when crude fell

by at least 20% over the prior year. In five of those, 88, 91, 94, 98, and 2015, no recession followed over the next year. And in two of those, 2001 and 2009, the US economy was already contracting. And the last example in 2019, there was a recession, but that was because of the 2020 pandemic crisis. By contrast, all three recessions from 1987 to 2019 came after oil prices rose by at least 80% over the course of the year. You can see that in 1990, 2000, and 2008.

So in other words, a double is trouble. But like you guys touched on earlier, oil prices have been coming down, not up. So obviously, that's a tailwind for American consumer spending. There's an interesting question here that is not answerable yet, but maybe will be. It's possible because the supply dynamics have changed so much that that information might not be as predictive as it used to be. Because there's a scenario where there's an oil price spike and that actually leads to a lot more economic activity in the United States. We're a net exporter of crude when we want to be. And that was not the case, obviously, in the 80s and the 90s.

Do you think at all about the fact that we're producing so much more to satisfy our own demand than we used to and whether or not an oil price spike, a temporary oil price spike might not necessarily be as disastrous for employers to want to lay off people this time around? I think Nick just wrote about that if you want to focus on that. Yeah, so having lived through the 73 and 79 oil shocks, Yeah, so having lived through the 73 and 79 oil shocks, the bottom line is an oil price spike would certainly help Texas. It would probably hurt the rest of the country is sort of the way to think about it. And it won't offset. Yeah.

Yeah. At the end of the day, the prices are the prices. So it's very hard for American budgets to incorporate a spike in oil prices quickly. I guess the question is how quickly can we react? I know you can't produce new oil the next day just because the price went up the day before. No, and look, there was a supply issue in 79 and 80 because Iran shut off the spigots after the revolution and there were literally odds and even days.

Like in New York, you had to wait for your license plate to be an odd day to fill up on an odd day and an even day to fill up on an even day. That was incredibly damaging to consumer confidence and the stability of the US economy. It's not going to be that way this time because like you said, we're producing a lot more, but price is double, you're going to get a recession. It won't be a recession in Texas, but a recession in every other state. So if the Fed missed it, so I want to make the case for maybe why it wouldn't even matter whether they missed it or not, because the nature of doing a 50 basis point cut is in the minds of people who follow history, oh, something is probably really wrong. So may not be the case, but I wanted to share this chart with you.

I thought it was really interesting. This comes from Jim Colquitt from Weekly Chart Review, and these are Jim's words. Let's start with the facts. The Fed has initiated or extended nine rate cutting campaigns over the last 30 years. Three began with a 25 basis point cut. Six began with a 50 basis point cut. The following chart shows with yellow circles the 25 basis point cut easing cycles. The red circle are the ones that start with a 50 basis point cut. And you can see the S&P 500 is the magenta line and the green vertical bars are US recessions. So Jim says, note the performance of the S&P 500 when associated with the red circles, which again are the 50

basis point cuts versus when associated with the yellow circles, which are 25. History would suggest 50 basis point rate cuts tend to be associated with recessionary periods and an S&P 500 that is about to fall or already has. Here do you, here's the question. Is 30 years and nine cutting cycles enough to say anything definitive about cycles that start with 50 basis points versus 25 basis points? Short answer, no. It just doesn't. Not enough.

That is correlation, best correlation and not causation. In our view. I mean, we did exactly this chart, like six different ways for her clients in the two weeks before this decision. Totally understand where it's coming from, but you gotta kind of take the situation as it stands right now.

And as Jessica's laid out very clearly, all those prior instances had a lot else going on besides the Fed. And you have to put it all into context. So totally respect the analysis. It's just never say it's different this time because it's different every time. Yeah.

And there needs to be a specific, like I said earlier, there needs to be a specific catalyst. It doesn't just happen. There are so many things about this cycle that make it really difficult to look at anything historical and draw a conclusion, especially from a single variable. And it's been that way for three years and it's confounded everyone to some degree or another.

So I think this is another example of that. Mid cycle markets are, we talked about this on every, I think we talked about this on every single one of these What Did We Learn? podcasts. And the bottom line is mid cycle markets are just as hard as calling a bottom or calling a top or figuring out where it's going at any other part of the cycle because you always have things to worry about.

Okay, let's keep moving. Jessica asked the question, can tech outperform again? This is the question on everyone's mind because people need to know whether or not to be over or underway tech given how important tech is to the overall market and the S&P's performance. So I'd love to hear what your thoughts are on this topic. Yes. So earlier this month, we wanted to see if tech could actually outperform anytime soon.

So I think you have a chart of the relative returns between the Qs and the S&P. If you could just... thank you. Yeah, so that shows the 100-day trailing relative price returns between the NASDAQ 100 using the Qs and S&P 500 over the last 20 years. We use 100 trading days because it's just under five calendar months, so we think that's a reasonable timeframe to consider sector rotations. This shows when the blue line is above the x-axis, that means the Qs outperform the S&P over the prior 100 trading days. So what this chart shows is that the Qs underperform the S&P by a statistically unusual amount

over the prior 100 trading days through September 9th. The Qs usually outperformed the S&P by 2.1 points over any given 100 trading days, but it lagged the S&P by 3.2 points earlier this month, which is one standard deviation below average. When that happens though, when the Qs trailing 100 day returns have underperformed the S&P by at least one standard deviation in the past like it just did, it's gone on to outperform two thirds of the time over the next hundred trading days and also by almost four points or more than the long run average of two points.

As you can see in the chart, there's been many times when the Q's 100 day returns have lagged the S&P by an unusual amount during mid-cycle markets like we're now, as Nick just talked about, but it tends to mean revert over the following five calendar months. So the upshot here is that history suggests the Nasdaq 100 will most likely outperform the S&P over the next few months. Another question that you could ask is, if you are bullish on tech like we are,

do you have enough exposure? Because the S&P 500 has more tech exposure than most investment styles, market caps, and even geographic regions. The index is more bullish on tech than most styles right now. Yeah, we actually have a table that if you want to throw it up. Thank you.

So this table shows the information technology sectors weightings across those categories. And remember, there are some big tech that's not an information technology like Google, Meta, Amazon. But this shows that a U S mid and small caps are very underweight tech versus the S and P with the latter having over two to three times the exposure. But then you have at the other end of the expect of the spectrum arch cap growth is significantly overweight tech. It's like half, half tech. So investors here need to have

an aggressively bullish outlook for tech and be okay with its volatility. In our opinion, probably the S&P offers plenty of tech exposure, but that's something to be careful about. It's also important to point out the, you can see under investment styles, it's important to point out the extreme difference in tech weightings

between the MSCI Minvol ETF and the S&P low volatility ETF. So both ETFs aim to have lower volatility than the S&P, but tech, which is typically higher beta stocks, makes up a quarter of one and less than 5% of the others. So it just highlights the importance of checking and comparing products exposures to holdings and sectors. Let's go back to that table, Jessica. This is a really important point. So you might have a financial advisor who's saying, I'm going to have a low volatility sleeve in my portfolio. But you're showing if you invest in the MSCI minimum volatility ETF, you're still 25% tech.

If you buy the SPLV, which is the S&P low volatility, you're only 4% tech. That's like two different, completely two different asset classes that's so far apart from each other. And this is the importance of looking under the hood and understanding, yes, it might have the word low volatility in the product, but you should really understand how they're getting that low vol, like how that portfolio is being constructed because it could have a radically different outcome for the end investor. Yeah, that's right. So like, for example, the MSCI Minval ETF, that tries to track pretty

closely to the S&P 500 sector exposures. So that's why you still have a quarter of it in tech. So it will select for the lowest volatility technology stocks to get to the right technology weighting relative to the index. And the other one is just pure what are the lowest volatility stocks. We don't care what sector they're in. Exactly. Okay.

I wanted to show you guys something that we put together just to illustrate this point because your point about oscillation is important here about it almost it feels like a slingshot when tech underperforms to this degree somebody lets go of the rubber band and it snaps all the way back and it outpaces the market that's like the main point that you're making right? Correct. Okay. So this is the degree to which the sectors are out or underperforming each other.

I don't have the S&P on here. I just have the 11 sectors. This is January 24th through September 2024. You've got 28.5% returns for the XLU, which is the utilities. XLC, which is communications, which some of these tech stocks live in, plus 23%. It's not until the sixth sector where you get the XLK tech, which is up 16% on the year. So tech is kind of middle of the pack and it's really interesting to see it underperform to this degree.

Do we know, Chardof, do we know anything about the timing? When do these snapbacks, how long do you have to wait for these snapbacks typically to take place? So the chart we use was 100 days, so basically five calendar months just under it. So it would take us through January. So we think over the next few months it should outperform and that'll incorporate the meltup that usually happens at the end of the year when volatility drops in November and December. And then hopefully that, that positive momentum just carries into, into the, the start of next year. Guys, I wanted to throw buybacks into the conversation because for me, any talk about tech outperformance is going to involve buybacks.

They are doing the biggest buybacks in the market, like record-shattering buybacks. I think they're an important reason for why large cap tech looks so stable, especially in volatile markets, more so than you would have historically thought. I wanted to mention one of the easiest things for a board of directors to approve right now is an authorized share repurchase or to enlarge an existing authorized share. It's almost riskless, especially if you think Kamala Harris regime is going to be taxing buybacks at a higher rate next year. Why not do them now?

The week before last week, the S&P 500 had its best week of the year, which is back to November 23, really. And corporations were buyers during that week. Again, the best week of the year. It was a new record for buybacks. Trailing 52-week buybacks as a percentage of the S&P 500 market cap also hit a record high above 2019 levels. We have a chart from Bank of America.

This is not in absolute dollar terms. This is a percentage of the S&P 500 market cap. You can see we took out that 2019 high. The next thing I would say about this is the week before that week was the worst week of the year for the S&P and corporate stepped up and bought them as well. So they are stepping in and up markets and down markets to buy back their own stock. And again, I think it's a really easy decision to get made within a corporation, which is why we're probably facing a record buyback year by the time we get to

the end of the year. Let me show you two more charts. This is buybacks by corporate clients, still off the historical highs in June, but pretty high. And the next one I wanted to show you, this is four week average buybacks versus total quarterly buybacks. And you can see obviously the four week average tends to lead a little bit. So we're probably in for a lot more of that activity. And just to put a bow on it, last week Microsoft announced they had bought back 17 billion worth of stock in the year in of June and a new authorization,

raise its dividend 10% and buy back another $60 billion worth of stock. And obviously it rallied on that news. They do that very slowly, Microsoft, and they continue to add new programs as the old program is winding down. But I think you're going to get a lot more of this in tech. And I think that'll be part of the reason for why tech can outperform into year end, why it could snap back. I think people feel pretty confident that even in down weeks, those stocks will have a bid beneath them, those stocks will have a buyer. What do you guys think

about the importance of buybacks between now and year end? Our perspective is that companies don't buy back stocks because they think their stock is cheap. They do it because they don't have other uses for the cash. So the reason why buybacks are so important, are so helpful is because it signals capital discipline and that's especially evident in tech. Big tech, for example, is hugely profitable and buybacks show as much as they invest a ton in R&D, they have cash left over to return to shareholders. So it shows that they

respect shareholder capital. One of the items on the table that you just showed, Jessica, is how low the tech exposure is in the dividend aristocrats ETF. I was going to ask you guys, there's no way it's going to look like that in five years. Or maybe it'll take 10 years, but that tech exposure in the noble ETF is only going in one direction. Maybe, but at the same time, tech strongly prefers stock buybacks to dividends. So they'll spend X on a dividend and 5X on a buyback. Right. So there they'll be the buyback aristocrats for sure. Yeah. It'll be the share reduction, you know, the repo, the repo ETF. Okay. We're going to finish on, uh, uh, we're going to talk corporate profits. Uh, this is like the other big question mark other than the election. It's, it's really hard to get a handle

on why the stock market would keep rising in the absence of enough economic growth to help corporations grow profits. But we've seen from corporations in the last year and a half, they don't necessarily need strong GDP to keep the profit machine running. So I'd love to hear just like the broader view of what you guys see for corporate profits going forward. Okay. The first chart on this topic,

which we can just flash up, it's the sectors. This is the fact set chart that shows sector level earnings growth for 2025. Those are the dark blue bars. And what we've done is note whether the group is seeing accelerating earnings growth for 2025. Those are the dark blue bars. And what we've done is note whether the group is seeing accelerating earnings growth from this year or decelerating in the green and red numbers at the bottom of each bar. And it's just a visual reminder that there's earnings growth going on, accelerating earnings growth going on across the S&P. Now, even if all these numbers are high,

which endless numbers always are, so we can assume that, we're still seeing better earnings growth and real earnings growth in almost every sector. There's very few exceptions. Comm services, financials, and utilities are the only ones that are able to see decelerating earnings growth. Everything else expects to show

accelerating earnings growth. Even if you have to cut these numbers back, the earnings growth in the S&P is a lot more than just tech and AI and AI spending. It's going on almost across the board. Nick, the biggest swing here looks like it's energy. Am I reading this right? It's going from negative 11% earnings growth.

This is at this year to plus 22.3% next year. I mean, one assumes that is purely because of a bounce back to plus 22.3% next year. I mean, one assumes that is purely because of a bounce back in commodity prices, which we may or may not get. So even in Xing that out, I mean, look at industrials, for example, industrial is expected to show accelerating earnings growth. So that's to me more of a tell that says the industrial economy is gonna be okay,

earnings growth is gonna be okay. Look, I don't think the S&P is gonna grow earnings 15% a year, but frankly, another 10 after the last 10. That's good enough. That's good enough for markets. That's the long run average and expansion. That's a good number. That's enough to support stock prices. Can we put that up one more time? Healthcare is the leader. It's expected to go from 5.9% profit growth this year to 15.4% next year, or up 15.4 percentage points higher next year. Like if you had to guess how much of that

is GLP-1 weight loss drugs, is it like half of that or three quarters of that? It's a big, big number. Yes. But let's, you know, healthcare also had a number of other challenges this year, which, you know, this is the classic thing, like when you have a bad year, all of a sudden you become bullish because the comps are so easy for next year. Okay. All right. Got it. Okay. So the second chart shows you another market. And this is something that we look at every single week for clients. We write this up literally every Sunday night. These are corporate bond spreads over treasuries.

And that needs a bit of explanation. Corporate bonds have to yield more than treasuries, but the amount they have to yield more than the spread varies across time. When this market is worried about a recession, the corporates have to pay a lot more because the risk is high. And then as they worry less about recession, the spreads decline.

The black line is investment grade spreads, that's the left axis. The red line are high yield spreads, and that's the right axis, high yield obviously being riskier. And this literally reads like a seismograph of investor worries about the US economy and corporate earnings. Remember, bond investors don't get upside, the equity investors do. If the company pays them back on time, they're happy.

But they worry from time to time that the companies can't do that, so it spreads increase. And on this chart, which goes back to 2015, we've got three recession scares, one in 2016, one in 2018, and then one in 2022, and spreads all blew out. And then we have one real recession in March of 2020. 2016, one in 2018, and then one in 2022, and spreads all blew out. And then we have one real recession in March of 2020. And in all those cases, spreads increased

because this market is very twitchy about worries about corporate earnings. And right now we're nowhere near those levels. We're nowhere near the average from 2015 to 2019. We're nowhere near the recession levels of 2022 or the other recession scares. And so this market is saying very, very clearly corporate earnings are going to be fine. Cash flows are going to be good.

If this market had any worries, those spreads would blow out in a heartbeat. That's a really, that's a really great way to think about that. If people are worried about earnings, they're definitely worried about whether or not companies can pay back their debt and they would definitely be worried about holding that paper. So it's like a, it's a nice, what would you call that? Like a confirmation or an affirmation that earnings should hold up? It is, it does two things in my mind.

The first is it confirms the current valuations on stocks because let's face it, we've got some high P multiples out there right now. And secondly, it's a cross check to say, here's a market that is not brave. Equity investors are brave. They are optimistic people. They look for the future.

They look for growth. Bond investors do not care. They just want their money back. And when they get worried, they get worried first and they get worried large. And that's just not happening now. So on the overall earnings growth picture, Adam Parker wrote a piece over the weekend

just level setting expectations. I'm going to quote Adam and then I'd love to get your reaction on the data track take on earnings growth, broadly speaking. Adam says the current bottom up at earnings expectations for 2024 embed 8.2% growth over 2023. expectations for 2024 embed 8.2% growth over 2023, while the economy is currently slowing the bottom up numbers nonetheless are embedding 15% growth for 2025 to $279 in earnings for the S&P 500, which is the point we made earlier. We think the economy is decelerating, but we think earnings are accelerating.

Okay, it seems like one side has to win. We'll see what happens. He notes that earnings expectations for 26 are not available yet. So putting in a 10% growth expectation conservatively, which would be $307 in the out year, if those numbers are correct, and earnings grow 10% or more in 26, the market is already trading at 18.6 times those numbers. What do you think about that as kind of a level set and just like where things stand? Is that the way that you would think about the earnings outlook and what we're pricing

in? Yes. And all that math is absolutely correct, obviously. And it can make you worried, right? Because I think the 10-year average multiple in the S&P is about 18. So how are we trading for basically skipping a whole year and looking at 27 earnings?

And that's a fair observation. I would sort of say two other points, though. The first is rates are coming down. And there have been periods of time, like in the mid 2010s, when earnings went nowhere, rates came down and the stock market went up because the worries about recession were less because rates were coming down. And the second is these averages that we all talk about for the S&P, they're all based on an index that's changed a lot over the last 20 or 30 years.

So if you do a 20 or 30 year average of PE ratios, you're including a time when ExxonMobil was the highest valued stock in the country. You're including a time when there was a recession. And if you think about why the market was trading for a 10 PE in 1982, it was because Paul Volcker had to crush the economy in order to get inflation down. Now we're in an instance where, knock on wood, the Powell Fed has been able to get inflation down. Now we're in an instance where, you know, knock on wood,

the Powell Fed has been able to bring inflation down without crashing the economy. And that creates a lot of confidence in future economic growth and the future of the American economy generally. So yeah, it's a high multiple, but it's high for a reason. And as long as investors can continue to hold on faith that earnings will grow by some point

and we don't get a recession, there's no reason for multiples to contract. I was going to say in 82, you look at the makeup of the S&P and the largest weightings and these are companies that if they're lucky, 5% to 8% profitability. Nothing like a company like Apple or Nvidia or Microsoft that seemingly are able to preserve 20% plus margins for us as far as the eye can see. So it's just a very different S&P than it was during other periods of time that helped to form that long-term average multiple. Exactly. Like energy within 22% of the S&P in 1980. Right. You guys are incredible. As always, I learned so much

and I know the viewers and the listeners appreciate all of your insights as well. I wanna let people know how they can learn more. Of course, the easiest thing to do is to go to the Datatrek homepage and subscribe to Nick and Jessica and you can get their insights five days a week. What's the URL?

Datatrekresearch.com? Yep. Okay, guys, check out datatrechresearch.com if you wanna learn more about what subscribers are getting from Nick and Jessica each day when they open their inboxes. And guys, what's next? I guess we'll see you again a month from now.

Anything that we should be keeping in mind or we'll, we'll, we'll save that for another day. Oh, you know, I think it's the old saying sit tight, be right markets. Okay. All right. You guys are awesome. Thank you so much for joining me today. Uh, and thanks to you.

Yeah. Please, uh, please, uh, make sure you leave a like here and there, maybe a positive review and we'll talk to you soon. Oye, como va? Look at our dude. You can't see this, Mike. The chat is going nuts right now. Everybody's here. People are so excited.

Ladies and gentlemen, welcome to an all new edition of what are your your I wasn't gonna go that slowly brought to you by the compound network. My name is Downtown Josh Brown. For those of you who are listening or watching for the first time with me, as always, my co-host, Mr. Michael Batnick. Michael, say hello to the folks. Hello, audience and everyone else. Look at you.

The whole, the whole, everyone. Guys, we have a lot, we have a lot to get to as the market rockets toward all time highs. And I want to make sure we don't do anything short shrift. So let's let's mention the sponsor and then we'll get rolling. Oh, actually, you know what? There is one thing I have to do to do this sponsor and then I'll do the thing that I have to do. Today's show is brought to you by Rocket Money. Josh, do you... Listen to me. Do you have

on your Gmail, do you have like a primary tab and then promotion and updates? I have four. I have four different ones. Okay. What's the social one? Nothing comes in there. So my updates tab, that's where shit goes to the primary updates and my updates, it's mostly things that I just ignore, ignore, ignore. Social is like so and so liked your post on Twitter or something. So the one thing that I check every update is rocket money. You know why? For example, I got one today.

Refund detected. Oh, amazing. Thank you, my wife, for returning something at Bloomingdale's. Rocket Money is an app that I use to help me track all of my personal financial stuff, my subscriptions, what is gonna be paid this week, next week, what's an auto-pay. If you lose a credit card, oh no, everything's linked. Boom, right there, it's got you covered. I can cancel unwanted subscriptions,

of which I have many, and which I have done, directly through the app. Go ahead, Josh. Is that a Malik Neighbors shirt? They have those out already? What do we, we won two games this year? It's my only chance. We might not win another.

Michael, did you know Rocket Money has over 5 million users and has saved a total of $500 million in canceled subscriptions, saving members up to $740 a year when using all of the apps features. Did you know that? I did, but now I do.

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We have this incredible chart pack of what happens when interest rates are cut. A lot of great detail about what you could expect in this interest rate cutting cycle, stuff that really only goes to clients or has gone to our clients first. We wanted to make this available to anyone who subscribes to the compound insider. We wanted to make this available to anyone who subscribes to the Compound Insider. So that's you guys. The Compound Insider is a really cool thing we do. We put out a lot of behind the scenes stuff about what goes into the shows, what

guests are coming on next, etc. So it's free subscription. Please subscribe to the Compound Insider. There's a link in the notes below the show. And if you do that, we're gonna send you a free copy of Cali and Chart Kid Matt's incredible interest rate down cycle chart pack. Is that the way to explain what it is? It's phenomenal. It's so good, right? Yeah, it's so good.

I mean, it's really good. All right, so if you wanna copy that, that's how you get it. Okay, I wanna show you something Ari Wald put out. As I think, as usual, Ari gets right to the heart of the matter. The S&P 500 rallied above the July peak last week to a new cycle high. This is Ari. We continue to balance seasonal headwinds against our view that evidence of a major top is not compelling. We stress that market breadth remains constructive. Defensive leadership may represent a catch-up into previous underperformers, meaning it's

not really leadership, it's just catching up. I think this is the main thing here. Ari is looking at the quality of new cycle highs. And he's saying we're therefore encouraged 200 day participation on the NYSE is again above 60%. So two thirds of stocks are above their 200 day moving average. That's the sweet spot. You don't want to see that at 90,

because that's the top. But you don't want to see that at 30, because that tells you you're in a really hollowed out market. This really looks I don't use the term Goldilocks But if you're making a new high this is what you want market breadth to look like which It doesn't mean it can't be a top It just means that's not historically a sign of a major top. Last thing on this topic. Basically, the idea is that even the laggard stocks and sectors are now rallying. That historically has not been a negative sign for markets overall. There's one more chart, Mike, I want to get to and then I want to hear your thoughts on this. So, this is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point.

This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point.

This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point.

This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. This is a very important point. It's notable that this change in leadership was catalyzed by a breakout in low vol rather than a damaging breakdown in high beta. We'll be watching if high beta can reclaim a leadership role over the coming weeks. Overall the rollover in leadership is a yellow light balanced by positives elsewhere. So basically he's saying it's not that all of a sudden high beta is

rolling over and getting killed. It's just that the low vol trade, which has been asleep, is starting to come alive again. So again, this is really like its participation is the important thing. And you have a lot of stocks working for a lot of different reasons. You have the stocks that work because of earnings growth. You have the stocks that work because of international strength. Now you have the stocks that work because rates are coming down. There's just a cornucopia of positive drivers for lots of areas of the market. And I think Ari put that really well. Michael, what are your thoughts? Now, Chinese stocks as well are not providing a tailwind to certain areas of the market. A lot of the cyclicals were on fire today. Yeah, I bet you didn't have that on your bingo card. I did not. Here's what I have to say

about the low vol worries in particular. Assuming he's using Invesco's low vol ETF or that index, let me give you the breakdown of the sectors, lest anyone think that these are like super defensive names. 23% financials. I would argue that you want financials leading into the bull market. We haven't had that in a long time. And those are not defensive. Those are not defensive. 15% consumer staples. So, okay, I'll grant you Coca-Cola, Procter & Gamble. Yeah, staples get. But then 15% are industrials. What else do you want to see participating in a bull market if not industrials? And then 12 and 1 half percent are utilities. But guess what? This is not your grandfather's utilities or your grandmother's

for that matter. These are utilities that are being driven by the build out of the AI data centers and all of the electricity they need. So yeah, these are bubble utilities. So this is not that. And Josh, I brought some charts of my own via ChartKit. I'll be the judge of that. OK.

So what we're looking at here is the first half versus what the second half, S&P 500 constituent returns. And what you would see is that the first half of the year, on average, the average stock was up 5.4% against the index was up 14%. Okay, so again, through the first half of the year, the average stock was up 5% while the index was up 14%. So the average stock lagged dramatically, which we'll get to in a second. For the second half of the year, the average stock is up 8.4% against the index,

which is up 5%. So it's a complete reversal of what we saw throughout the first half of the year. One more chart showing this story. So chart kid broke down again, the first half versus the second half return. And only 7% of stocks were negative in the first half and are negative on the back half. 32% of stocks were negative in the first half and are playing catch up are now positive in the second half of the year.

Yeah, look at that. That's a lot. So the broadening out of the market, what more could one man ask for? Yeah, I think that's a really important point. And if you're a portfolio manager and you're underweight the market, you're underweight US stocks or any stocks, and you're reporting for... So we got October coming up. So you're going to report to whatever committee or board that you report to about what you're

doing, what your allocation is, what your performance is. You could totally go to that body of people and say, look, I'm sticking to my guns. The election's coming up. We're underweight stocks, and the main thing I want... Hold on. The main thing I want you to know is we're underweight stocks because this whole rally is being driven by Apple, Microsoft, Google, NVIDIA, and I'm not chasing those stocks. That was what people said last year.

You can't say that this year. There's too much strength in too many places. So you have a much harder time convincing the people you're managing money for to sit out and to stand by. It's really hard to do it right now in a way that it was much easier to do it last year. You have a very legitimate case to make. It's like, look, what do you want me to do it right now in a way that it was much easier to do it last year. You have a very legitimate case to make. It's like, look, what do you want me to do here? You want me to chase Nvidia with your money?

Is that really what you want me to do? That is not, now Nvidia is still the best performing stock this year, I think, in the S&P, but still there are too many other stocks that are up 30%, 40%, 50% that have nothing to do with AI. And it makes it harder to not get involved here. The only thing that you could say to your clients if you're underway, because if you're bearish in the bull market, you're fired eventually. The only thing you could say is, listen, you really want to get all bulled up during the

election? It's the only thing you could say. It's the only thing you could say because the burning out of the market, the burning out of the rally is looking really good. Speaking of, I'm not a victory lap lap pat myself on the back type of guy. However, we have been pretty consistently saying, especially during the first half of the year, when the market concentration was very narrow, the line that we were saying was, listen, it would be one thing if the market were rolling over and it were only six stocks that were holding

everything up, but that wasn't happening. Yeah, the rest of the market was going sideways, but it wasn't rolling over. We would have called it out if it were. We said what's more likely to happen is the rest of the market catches up. And here we go. So more charts and- We did say that many times. More charts from Chartkin Maths. So this is the first half of the year through the end of June, okay? And what you saw was the index was up 14.5%, 4.4% of that was coming from NVIDIA,

and the other 4.95 were only up 5.7%. Very unusual, very, very, very unusual. And very narrow, and a very good reason to say, the rally is fake, it's all Nvidia. And a lot of people did say that. Yeah, it was fair. Okay, can't say that anymore. Next chart, please.

Now look at the other 495 MF'er. Now look at them. What are you gonna say now, tough guy? Yeah, 11.5%, and the contribution from Nvidia has shrunk from every other stock it's shrunk, and the other 495 are playing catch up. One last chart, we've got the distribution of year-to-date returns bucketed out. And yeah, there's a lot of negative stocks, sure. But look how many, there's 121 stocks that are up between 20 and 40%. There's 39 stocks that are up between 40% and 60%.

It's not just the AI trade. It's a big component of it, sure, but there's a lot of things that are working, a lot of things. I think if people were to see the ticker symbols, not that we need to do that now. Put the chart back on, please. So the bars were showing you the numbers. So if Michael says 121 stocks are up 20% to 40%, which is greater than the S&P's return of 19 and change, right?

Yeah. So, and then another 39 or 40 to 60%. So like 160 S&P components are up somewhere between 20% and 60%. That's one thing. But dude, if I start telling you the ticker symbols, if I just go down the list Sean Russo and I keep and I tell you the tickers that are on the all-time highs list, it's undeniable that this is as good of a bear market as any bear market we've ever been in. Bear market? Oh, excuse me, bull market. As any bull market we've ever been in. Oh, excuse me. Bull market as any bull market we've ever been in.

Like it's not, there's not like a better bull market than this. You might not like how it started. You might not like that started as, you know, GPUs or, or nothing, but like, that's just not what's happening right now. What's, what's in your screen? People get it. What's in your screen with Sean? All good, all good Sean? All good stocks.

All good stocks. I just wanted you to say it's proprietary. Well, it is. I'm just looking at the year-to-date returns. And there's a lot of names in here. There's a lot of names that are up a lot, a lot, a lot. So I just look, I think when you look at not just the companies of stocks that look really good right now, but just like the sector groupings of those that those companies belong

to, it's really hard to concoct the narrative that there's something artificial or unwholesome. So think about it. Corning, Extra Space Storage, Ingersoll Rand, Kroger, General Mills, Nasdaq, Cummins. None of these companies have anything to do with each other. Dr. Pepper, none of these companies have anything to do with each other. I'm giving you property. I'm giving Simon Property Group, Hilton, DoorDash, Fortinet, DR Horton, Newmont. I'm giving you gold miners, supermarkets, tech, soda. You know what I mean? There's nothing narrow about it. You've just got companies with different drivers all rallying at the same time for different reasons. What's wild, Josh, is I'm looking at the S&P. I'm on white charts sorting by year to day return.

The best performing stock is Vistra. It's a utility company. Of the top 10 stocks year to date, the only two that are in tech are Nvidia and Palantir. Then you've got industrials, utilities. There's an energy stock in here and real estate. And then he's got financials. Well, that's the thing is involved in the AI is involved in AI build out for utilities. Yeah.

So there's a lot. Listen, it's like some kind of an energy thing. We said no signs of a top. It's not to say that stocks won't go down eventually, but come on, man. What are we fighting? Everything's working. Won't always, but for now it is. And now we've got Chinese stocks. And that's the message that I wanted to bring out. Let's talk about Chinese stocks. When was

the last time we did? Could be over a year. It's been nothing to say. It's been a relentless bear market for Chinese stocks for three years. Yeah. So, here's what happened today. This is the lead paragraph from a Bloomberg piece. First he took a sip of tea to gather his composure. Then Chinese central banker Pan Dongsheng unleashed one of the country's most daring policy campaigns in decades. In what amounts to a massive adrenaline shot for an economy on the cusp of a deflationary spiral, the governor of the People's Bank of China and other top financial officials unveiled a series of easing measures that market watches had wanted for weeks at a rare,

high-level press conference in Beijing. They include interest rate cuts, more cash for banks, bigger incentives to buy homes, and plans to consider a stock stabilization fund. So Brendan Hearn at Crane Shares in his China Last Night newsletter that we talk about all the time said monetary policy bazooka unleashed, which got me really excited. And dude, I got really excited. When you look at each of these things on its own is no big deal.

It's the combination and the coordination. Not only is China's central bank doing this, but the financial regulators were part of this press conference. So it reminds me of what happened in the wake of the pandemic or during the height of the pandemic when Treasury and Fed came out of the joint conference with masks on, probably on Zoom, I forgot. But it's like, look, we're not playing games here. We're throwing the kitchen sink at this problem. So I don't know if this is enough to put a bottom

into the Chinese stock market, but if it did, it would certainly make sense. So you got a huge reaction overnight. The Hang Seng, which is Hong Kong's market, and the Shanghai Composite, which is the mainland's market, both gapped up and closed 4% higher and change. The KWeb ETF went bonkers. I think it was up 8% or 9% all day today in New York.

And I wanted to just maybe go through a couple of these items because if you were trying to put an end to a deflationary spiral, this is pretty much how you do it. Number one, the Fed cutting rates gives China the ability to cut rates. Remember, there's a currency peg here. So China can't really act as unilaterally as they might like to. So the RRR, which is their equivalent of the Fed funds,

will be reduced by 50 basis points with another cut of 25 to 50 basis points at an appropriate time, probably right after we do our next cut. This gives banks another trillion renminbi to lend. Seven-day reverse repo rate was cut by 20 basis points to 1.5%. This rate determines the medium-term lending facility and bank deposit rate. This is basically the cost of money amongst the banks. Existing mortgages were reduced by 50 basis points, which will benefit 50 million households or 150 million people.

The total annual interest rate expense per household will be reduced by 150 billion yuan. They cut the minimum down payment ratio for first and second mortgages by 15%. What else do they do? To support affordable housing. They are providing 500 billion to brokerage firms, mutual funds, and insurance companies to buy mainland listed stocks and ETFs. This is nuts. Here, go buy the stocks of the market. They're telling commercial banks to provide loans to

listed companies and major shareholders for the express purpose of doing buybacks and increasing holdings of listed company stocks at a rate of 1.75% interest. So effectively giving them like an interest-free loan to go fund buybacks. Last one, they're increasing tier one capital for the six largest banks. So they're basically like giving the banks more money to hold on to. If you were trying, and then there's a whole lot of other stuff here, loans for small businesses, blah, blah, blah, encouraging venture capital, encouraging private equity, they're basically saying, wake the f*** up, stop selling stocks, and let's put a bottom in this thing.

So it could fizzle out. I don't think it will because this is a command economy. And when she wants something done, it gets done. May not always work out in the end, but like I feel like if you were trying to change the story in the narrative, this is the way you would do it. And they did it. And we watched the Japanese do this already and we know it works.

So what do you think? The bazooka this is a lot more than just monetary policy, right? To all the things that you just read and if this doesn't work, I would say that China's going to zero So let's hope that it does work. There's there's there's no China bulls. I don't maybe there. I don't know any The Chinese stocks are trading at nine times earnings, about as low as they've been ever. As well, they should. They deserve all the discount that they've been getting. The property market is in shambles.

Shit is going on, so they deserve the discount. This is bigger than just the Chinese economy or the Chinese market. This is obviously a global superpower. I did say early in the year, just as a not serious comment, what if China isn't going to zero? What if there's any whiff of a positive catalyst out of China? What would that do? So today was a big time outlier for emerging market stocks relative to the S&P. Chartkin-Matt stepped up. Emerging market stocks were up like 3% or so, the S&P was up 20 base points chart on please, John. So this is the chart of the one day return of the S&P versus EEM. This is a bit hard

to see given that there is, I don't know, thousands of data points in here. So why don't we zoom in a little bit closer? Why don't we zoom in a little bit closer? We zoom in. Okay. There it is. So why would we make a chart like this? Why would we do a shotgun Hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey,

hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, hey, There's a highly positive correlation, obviously. Most of the time, they move in the same- I lost, uh... What? My audio? You lost your audio, Mike. You lost, uh... Guys, chart off. You lost my audio. My audio?

Now I have you. Oh, back up. Now I have you. Chart back up. So this is the one day plot, and again, most of the time they move pretty tightly. But what this is showing, Josh, is the S&P was flat today.

OK? You see that? The Y-axis S&P was flat. Look at EEM. Yes. It looks like the largest outperformance day for emerging markets when the S&P was flat. So this is a big, big deal.

You guys, Mike is cutting in and out. Mike is cutting in and out for me. I don't know what to do. For you? Is it just for you? I don't know. I can't tell. Let's go to the Slack.

Duncan, somebody Slack me. Tell me what's going on here. All right. You're buffering a little. Well, OK. Duncan's saying that we can hear both of you that whole time. So it might be me. Close your shut.

OK. You're right. I think I have everything closed. You could always close more. Anyhow, today was a big day. Today was a big, big day for stocks. Next chart. I wanted to ask you about the Queen shares chart. Is we put that? Is that where we're going next? Go ahead, next chart. Cause all right, cool. All right. I mean, this is like, this is an incredible single day for one sector.

It's a move. Of the Chinese economy. This is a move. It's a move dude. Yeah. So in my opinion, this is not the kind of thing that fizzles out. I see it as the starting gun.

And it doesn't mean they'll fix the Chinese economy in one day. But sometimes you have to fire a gun to change the narrative and to wake people up. And I want people to understand the backdrop of something like this. So the backdrop is the Chinese stock market has seen $6 trillion wiped out since the highs in 2021. It is the worst major stock market in the world coming out of the pandemic. They had their own 2008, two years ago. They blew up their property sector, which was a huge speculative

bubble in commercial property. That has led to disinflation and outright deflation all over the economy. Their economic ministers are now panicking. Remember, I said it's a command economy. You know how the Chinese economy works? They ask President Xi, what's the economic growth rate going to be this year? And he says, 5%.

And they say, wow, you're right, it probably will be 5%. And then miraculously, it's 5%. They're like falling short of that 5% GDP goal. And nobody wants to fall short of anything that the Communist Party tells you is supposed to happen. So they are pulling out all the stops These they still have a lot of constraints that they could loosen up They have this thing there where a debt can't go above 3% of GDP

Like they have like a lot of like these these old rules in place that maybe were more useful at a different time I don't think they're out of levers. And I also think culturally, nothing pisses them off more than seeing what Japan is doing and being left out. So there's a lot of factors behind the scenes here that probably led to this decision to do this. Let's go through some of these stocks. And again, I feel like it's been forever. Baba did 12% today. Alibaba is 11% of K-Web. Tencent did 6%. It's 11% of K-Web. JD.com went up 37% today. What? Did you hear me? 37? Pinduoduo did 11% today and that's 6% of K-Web. So we're looking at something fairly notable. And even

in the United States, Freeport MacMoran was the top performing stock. This is the company basically mining all the copper for whatever China is going to build next. It was the best stock in the market today. It went nuts. Metals and mining, XMA up 4%. Industrial's all-time high, materials all-time high, Caterpillar all-time high. This is bigger than just China. So if you needed another reason to get constructive on the market, I don't know what you're waiting for, but there's the backdrop is favorable. Vix is at 15. It's all happening. All right. Anything else to say here? No, I just think it should be on people's radar that this is a big surprise, potential positive catalyst not priced in anything.

Nobody was thinking about. In fact, the opposite of priced in. It was priced out. Yeah, it was a negative. And now it might not be a positive, but at best it maybe is a neutral. And that changes the equation a little bit. OK, so Josh, I want to talk about private markets. I read an article,

the opening was when the facts change, I change my mind, what do you do, sir? That probably fake quote is attributed to John Maynard Keynes and that this article, the title is When You Should Invest More in Alternatives, written by Larry Swedrow, who invest more in alternatives written by Larry Svedro, who is, in my estimation, one of the more important people in terms of pushing asset allocation, proper asset allocation, in the wealth management industry forward. I don't know if pioneer is probably too strong of a word, but he was very much an asset allocation guy, traditional asset allocation. Private investments were not necessarily something that he was synonymous with.

So to see him put this out there got my attention. So let me read you Larry's words. Larry wrote, 16 years ago, when my book, The Only Guide to Alternative Investments You'll Ever Need, The Good, The Flaw, The Bad, and The Ugly was published, my own portfolio included no private investments and it held only one investment commodities that would traditionally be considered as an alternative. He then goes to say, today my portfolio has an allocation to alternatives that is in excess of 50%, including exposure to life settlements, reinsurance, private credit, private real estate, drug royalties, litigation, finance, long short factor funds, and private equity.

What led to such a dramatic change in my personal allocation? Financial innovations in the form of interval funds and increasing competition have dramatically improved the opportunity set for retail investors. This in my estimation is going to be one of the biggest stories in wealth management for the next 10 years is the deliverance of less expensive, truly diversified, less pain in the ass, better tech, better wrappers to individual investors. And I'm certainly not saying it's all going to go right or every client is going to benefit

from this, but it is coming. I have no doubt about that. The good news is all of these alternative funds will only disappoint at roughly the same rate as actively managed funds have disappointed. It won't be worse. I don't know about that. No, because, Mike, you'll have a category return. And then you'll have the same amount of funds

underperform the category, just as though we're talking about small cap value or large cap growth. It won't be any different. You'll have a peer group. Oh, it won't be different. One or two will look great. Because investors can't own an index of private investments. No, you're missing it.

It's not an index. It's a peer group. So, all right. If I tell you I'm a large cap stock fund manager, you could judge me against two different things. You could judge me against the S&P 500, which is the benchmark index, or you could judge me against all of the other large cap stock managers. In private credit, there's no index, but there's a peer group. So my point is, you'll have a few standout performers in the peer group, and everyone

else will suck, and there's no index, but there's still a benchmark. The benchmark is all of the other private credit funds. That's all I'm saying. And the disappointment will be no better, no worse than it is in stock market land. It's just a different benchmark that you'll judge it against. Yeah, okay. In 2020? No.

I don't know. It depends what's going on in the market. That's a blanket statement. You can't make that statement. It's not a blanket statement. This is how the hedge fund world works. Who said anything about hedge funds? That's what this is though.

It's hedge funds for retail. These are not all hedge funds. Absolutely not. Private equity fund for retail. That's what it is. Interval Fund is a retail private equity fund. Yeah, this is not hedge funds though. These are not-

But my point is, not listening. Nobody judges private equity, real private equity against an index because index doesn't exist. It's peers. So when they're saying like who did better this year KKR or Bain, it's a peer versus a peer. Okay. That's how these funds will be judged because there is no index. They'll be judged versus the other options in the same category, peer group. That's how these funds will be judged, because there is no index. They'll be judged versus the other options in the same category, peer group. That's my point. So when you said, I don't know if this will work out forever. No, of course it won't.

But I also don't think it'll be materially more disappointing than selecting a large cap value fund might be. Just as disappointing. Some big winners, lots of mediocre, and then a couple of big losers. Okay. BlackRock. I can make that blanket statement. Well, it feels like a little bit of non-sec winner and also a little bit of goal post mover.

I stand on that. I guarantee it. Here's from the journal. BlackRock plans to offer wealthy investors a way to access areas such as private equity and credit. They're joining a partner's group to create a so-called model portfolio that wealth advisors could use to help clients invest in a variety of private market offerings. The head of global client business at BlackRock said, there's currently a zoo of documents

for financial advisors who know they should be doing more in private markets but don't know enough and frankly are a little worried about using individual products. So BlackRock is making a push here. My point is, disappointment aside or not, this is coming. This is going to be one of the most discussed trends in wealth management for the next decade because they are going all in. Yeah, I totally agree with you.

I totally agree with you. And of course, the seeds of that future disappointment are being planted today. When you create a model portfolio, you're creating funds that are about to get gigantic. And what will end up happening is none of their historic returns will be valid ways to think about the funds anymore because of course an alternative fund managing $500 million is going to be doing things very differently than when it has $5 billion in it or $50 billion

in it. For sure. So you'll have, look, the banks all did this. Like Highbridge was bought by JP Morgan. Highbridge was like a really high quality alternative asset manager. I'm sure they still exist. I'm sure it's great. But my point is, once you allow something to get on a platform like that and the money

floods in, it's just impossible to perform the way that you used to because you're too big. So you need gigantic opportunities. You can't do the smaller trades that were super profitable at smaller AUM levels. So this is not very dissimilar if BlackRock or any other giant asset manager anoints a group of eight alternatives like the best one for each category, they might be right on the historic data. The problem is those funds are going to start behaving differently. They're going to have more investors to deal with, more money to put to work, and they

won't look at anything like their former selves. This is the blessing and the curse of success in the alternative markets. You can't remain what you once were once you've been discovered and everyone knows who you are. Well, returns will be lower than they were historically. How could they not be with so much money coming in? But guess what? The marks will remain unmarked. And that is a big selling point for these things. What do you mean the marks will remain unmarked and that is a big selling point for these things. What do you mean the marks will remain unmarked? The illiquidity of these things is going to remain. Now there's somehow stuffing some of these things into ETFs.

That will not probably end well. But these things, whether there's a billion or a trillion, they still don't trade. These loans don't trade. They don't trade. They're loans, for example. Yeah, they example. Yeah. They trade by appointment. You literally need to find somebody to transact with you.

And so you can go a very long time without knowing what the value of it is. So you have to rely on the committee that's setting the marks and the price. You have to really believe in the company that's offering the product., you know, easier said than done and easy in a bull market. So in a bear market for credit, I don't know, like are people going to be thrilled that they ran into alts at the very top of the interest rate cycle? Look it's, uh, you know what, I wouldn't, I wouldn't be surprised if in a bear market more money comes in because you're going to see all the marks of your liquid.

You know what's the best? Yeah. Yeah. You know, it's a great alt, like a vending machine route. You know what I'm saying? Great alt. I agree. Like no, no outside capital.

Throw that throw that underneath. Yeah. A few hundred vending machines. Yeah. So So all right. I do with you. Can we put the pie chart up so people understand what we're talking about? These are all the different categories that fall under this private credit. So when you hear people say private credit, it's not monolithic.

There's lots of different flavors of this marketplace. Do you think like wealth managers are going to go deep in the weeds and have different solutions for each one of these? No, there's going to be model portfolios like what BlackRock is doing. Yeah. So you could say like, all right, this is the private credit sleeve. We'll put a million dollars of a $10 million portfolio into it. And then inside of that sleeve, all of these slices will be represented by like a model

portfolio. So I am mega bullish on this trend. Don't misunderstand me. I'm not saying that this is going to work out for every investor, but this is where the puck is going. I think that the way to play this is not to buy private credit funds. I think you want to buy the six or seven publicly traded private equity companies if you believe if you're bullish.

Well, I don't think. Okay. So what are they? KKR, Blackstone, Carlisle Group, Fortress, Apollo. Apollo is I own Blackstone and Blue Owl for what it's worth. Yeah. I would rather build a portfolio of those and almost act like a GP taking in the fees from all the people that are trying to figure out which private credit fund to buy because I'm smarter than the average. The problem with that is the stocks trade every day, but that's what I'm doing.

Let's talk about Zuckerberg. Right. If you really think the most valuable piece of this thing is the illiquidity and the fact that it forces you to not move your money around, I don't believe that that's the most valuable part of this. Is that what you really believe? That's the real benefit? I genuinely do. Yeah. The fact that you're not allowed to panic sell, I think is a huge benefit. I don't think it's a negative, I just don't think that's the source of the returns for the asset class. No, no, no, no, no.

I think there could be an illiquidity discount, how about that? You pay them to not show you the marks. I don't believe in the premium of it. So then why can't I just invent a mid cap growth fund where you sign a document saying that you're locked out of it for five years. I bet you I beat the shit out of your fund of alt funds.

I agree. I don't know if Meb tried to do that, but people have tried to look into the structure of forcing you to buy and hold. And I don't think legally you could do it. We have more to say on that and we can We could talk about it another time. I asked you to listen to the acquired podcast with Mark Zuckerberg Did you have a chance to do it? I supposed to do that? Yes, I did. I did. I did. Okay, I loved it. I loved it I like him more and more the more I hear him these days, you know member the never is up guy

Well, cuz he was a dork. He was dressed in the same shirt every day so he didn't have to make decisions. Now this mother is a designer. He's designing his own clothes, clothes or hideous. But I like I like that he's like, I'm not going to apologize anymore. He's coming across as a human. He's talking. Yeah. And I just ranted about Metta two weeks ago about how they're not protecting users from crypto scams. Like, I don't like Facebook and I don't actually think it's a force for good in the world. ranted about meta two weeks ago about how they're not protecting users from crypto scams.

I don't like Facebook and I don't actually think it's a force for good in the world. I actually think the whole conceit is fairly toxic. But I like the kid because the kid is like, I think we got scapegoated for a lot of things that weren't really our fault and I just was trained to keep saying, I'm sorry, I'm sorry, I'm sorry. I like sorry, I'm sorry. And he's going to stop doing that and I sort of respect that. So the acquired guys had him on stage at the Chase Center and a couple of takeaways for me, but let's maybe play this first.

Phone before replaced it with a smartphone and then a lot of more people got smartphones. If all we get is all the people in the world where you have glasses upgrading to glasses that have AI in them, then like this is already going to be one of the most successful products in the history of the world. So, and I think it's going to go a lot further than that. So another is that there is the thing about controlling our own destiny. It's strategically valuable. You know, we did this calculation or estimate at some point where it's like, how much money controlling our own destiny. when they tell us we can't ship certain products so that way like people use the things less or like them less and um I it's hard to exactly estimate it but I think we might be like twice

as profitable if we own the platform or something so I think from that perspective that's worth a lot. Good Paul so from yeah so for me that was really the the most important part he thinks that was really the most important part. He thinks that meta would be twice as profitable if they owned the ecosystem rather than rented a space on it. Meaning, if Apple, iPhone, and Google's Android weren't siphoning out a huge chunk of the profit. Remember, the iOS store extracts 30% of the revenue from all the apps on it. Dude, every time I buy a t-shirt on Instagram, like this one, Apple's getting paid.

And then they also dictate the terms and what your apps can do. So if you own the hardware and the platform, you don't have to follow what Tim Cook says. So the big takeaway for me is that this Apple iOS dominance drives Zuckerberg up a wall. I think it's the thing he's most animated by. He thinks he would be twice as profitable

if Tim Cook didn't have him in Checkmate via the operating system. And he might be right. So throughout the course of this conversation, I think it was an hour and a half or so, you can hear Zuckerberg repeatedly denigrate the iPhone and talk about how unlikely it is that we're going to be experiencing the internet on tiny screen. He keeps saying small screen, tiny screen. He hates the iPhone more than than anything in the world.

He said, you're all suffering from a lot of recency bias in terms of people thinking Apple is forever and Apple just is automatically going to dominate the next wave of computing and the next wave. He's like, you just think that because that's what just happened with phones, but that is not what's going to happen. And this is why he could justify spending $50 billion on reality labs and Oculus and Ray-Ban glasses because he is that desperate to own the hardware that's going to contain the next wave of computing.

So let's say it's AR or virtual reality, augmented reality. He just he has to sell the hardware. He can't watch Apple run another lap around him. It's making him absolutely nuts. So that was my big kind of read between the lines takeaway. And then the other thing I thought was cool, just about podcasting in general, this is a major coup for the acquired guys. And I really liked them.

They had 6,000 people come to the Chase Center to watch this live. And Jamie Diamond did the video intro because JP Morgan Chase's payments business is a big sponsor of acquired. So I thought that was kind of baller too. I was shocked. What did you think? I was shocked when I saw Jamie come on screen. First of all, I watched it on my phone on the podcast, on the Spotify podcast app, which I just, I love that you can watch it now live in the app.

Yeah. We don't know how to do that with our shows. I thought it was great. They crushed it. I thought Mark was very likable. The biggest takeaway for me was this quote that I pulled. He said, I think there are a lot of conversations that we have internally. We're almost at the line of being embarrassed about what you put out because you want to

put stuff out early enough so you can get good feedback. You obviously want to test things that are reasonable hypotheses. So if it's ineffective, then you're not testing a good hypothesis. That doesn't work. But I do think a lot of the conversations that we have are like, OK, we can get this to be a lot better if we work enough for another couple of months or whatever. I do think that what you really want

to have is a culture that values shipping, getting things out, and getting feedback more than needing always to get great positive accolades from people when you put stuff out. If you want to wait until you get praised all the time, you're missing a bunch of the time when you could have learned a bunch of useful stuff and then incorporated that into the next version that you're going to ship." Now I think for this, it's a fine line of, yes, you want to always be shipping, like move fast and break things was there, was there't move, you can't put out shit.

We've seen that a lot with some of the wild tech companies that we use. It's like, come on, you're not even close to ready. Don't do this. And there's a line where you have to find between being perfect and all right, this is good, get it out and we'll iterate from there. And I think they nailed it. Well, yeah, I also think it's what are you doing? So if you're doing something where like cyber security is a big component of it,

you can't move fast and break things because you could bankrupt your own company. But like iterations of llama, which is Meta's AI code and language, like getting 1.2 out and then 1.4 out a week later, I feel like you can do that because people are giving more leeway to things that we all understand are experimental. So I think it's like a function of like, what are we talking about?

Totally. It's like if they're putting out something new on Reels, just, it's not that serious. Just put it out and if we get bad feedback, we'll fix it. Well, right, because you have the ability to do an update over the air that night, you cat, you cat, you catch something. And most people at this point, I think are set to automatically update apps. Most people will never even know there was something wrong with it because by

the time they would notice someone else has noticed and fixed it. So, uh, look, I, I, uh, I use Instagram. I don't use WhatsApp. I don't use Facebook. I'm not particularly a Zuck guy, but I thought that this conversation with the founders guys was super humanizing. Really good. Um, Daniel Eck popped out from Spotify at the event. Jensen Wang showed up from the video It's 6,000 people. Yeah, it's pretty, it's, I think it's a pretty cool moment for finance, business, podcasts in general. So shout to the acquired guys, I'm really a big fan. All right, let's talk about Intel.

Has Intel, Intel got kicked out of the doubt, no? Yeah, no, not yet, or maybe it did, I don't know. Okay. I mean, whatever, it's a shell of its former self. So chart on please. This is just Ashanda. Intel was a top three company in the world in 2000 at $450 billion market cap. More than that. If inflation adjusted, it's probably closer to a trillion and it's now south of $100 billion. And if you look at the fundamentals, it deserves it.

Next chart, please. Revenue peaked years ago. Free cash flow is just hemorrhaging. It's just disgusting. Look at this. Is this quarterly or? I think this trend is 12 months. It's really gnarly.

Negative 12 billion cash flow on 12 billion in revenue? It's not great. How does this thing still have a $90 billion in revenue. It's, it's, it's not, how does this thing still have a 90 billion dollar market cap? It's not great. Um, so there was talks yesterday that Apollo might come in for $5 billion in equity. Uh, the enterprise five of these companies, like I think $130 billion. So I don't know what happens here. It seems, I don't know the story. I don't know shit about semis or anything, but it just seems like a melting ice cube. Well, let me tell you one thing that you do know.

If Apollo is looking at you, you are in bad, bad shape. That is like down and dirty. And if you take their money, you need it. Like that is- Well, they got started as distressed debt investors, no? This is distressed AF if you're talking to Apollo. The more interesting rumor was the one over the weekend that Qualcomm was kicking the tires.

There's an element to Intel where the United States government needs them to survive and thrive. They are our best hope at doing fabrication of chips by a US company on US soil. So there are other fabs that could build facilities here and talk about doing it. Taiwan Semi is sort of doing it, but then they cancel plans very quietly. They make big announcements, but then they don't do it. Or maybe that's Foxconn. There's a lot of Asian companies that would like to find

a way to profitably do what they do here for obvious reasons. Intel is kind of like a welfare queen. They're cutting ribbons all over the country in different states like Ohio, getting taxpayer dollars to fund the building of these facilities, but nothing ever really seems to come of it. And I know these are long-term projects, but nobody seems to be benefiting. And the stock price is just in a tailspin. I don't know. Is it better if Qualcomm just takes this thing over and turns it around?

I feel like it might be. And Qualcomm is another US company. It's irony. Andy Grove, one of the founders of Intel, wrote a book, Only the Paranoid Survive, and it's like an iconic management book. I don't know what he wrote it, but it's timeless. One of the other things is that Qualcomm is sort of the anti-Intel. It's a patent company masquerading as a semiconductor manufacturer. They're not like doing manufacturing. They design chips and they have incredible patents that are hugely valuable. Intel went the other way. They were like, oh, actually, we're going to make our own and we're going to be a foundry

for other chip makers that want us to make their chips. That was the big bet that they made like two CEOs ago. And obviously that hasn't played out. So I think it's interesting if Apollo does some sort of a big stake here. So like, I don't know what that would look like. Or if- But they were talking only 5% of the company.

So where does the rest of the money come from? That's a lot of money. It's too big. It's 96 billion equity market cap. I don't know what it is, enterprise value. If you add back the debt, I'm sure it's enormous. I don't think anybody could do this deal. I think there could be a big investment. I don't literally think that anybody could buy Intel. I could be wrong. I don't even think it's worth discussing. All right. I'm going to make the's worth discussing it. So. All right.

I'm going to make the case for a company that I made the case for a couple of months ago. But before I go there, I want to make this important case. Do not bottom feed in a strong market like this. If your stock or- I totally agree with this take. If there's a stock that you're looking at that's at a 52 week low, run. There's no, listen, there's a time for bottom fishing. This ain't it.

Everything is working and if your stock isn't, there's probably a really good reason for that. Okay? Yeah. Okay. Okay. All right. Let's talk about Sherman Williams, the number one paint company in the world.

This stock has had just incredible runs since the 1990s chart on, please. It's returned 23,000 some odd percent, just a monster winner. Why, you ask? Well, it happens to be a really good business. Funny how that works. Next chart, please. On top, we're looking at the quarterly revenue up and to the right. Underneath that, you're looking at free cash flow per share up and to the right underneath that you're looking at shares outstanding down to the right which is exactly what you want to see. I bought this stock when I recommended it at $3.45 next chart and I was saying, listen, it's coming to an all-time high.

The yellow is when I initially bought it. Probably, I don't know if it's the best time to buy it. You could buy it on the pullback. I didn't buy it on the pullback. I bought higher. I added at $3.61. So, I don't know if now is the best time to buy it, but that's the thing about good stocks. They don't give you a chance to get in. Next chart, again, similar to the last one,

this just zoomed out a little bit. Stock is at an all-time high. The reason why I'm re-recommending it today is because I listened to a brilliant conversation with Matt Russell, CEO of Colossus, Patrick O'Shaughnessy's podcast platform, and Todd Bassnight is a director of equity research at Aureus Asset Management. And it was an incredible conversation. Very enlightening for me as a shareholder. I learned a lot because listen, I'm not a fundamental analyst guy. I'm looking at the charts. I'm looking at broader picture of, yeah, I believe in the secular story of housing, way more buyers and sellers is not I don't need to overcomplicate it.

But here's what I learned. Sherwin operates over 4,700 dedicated paint stores in North America. That's more than all the Home Depot and Lowe's combined. It's more than half of the dedicated paint stores in the country. Sherwin has 3,300 delivery vehicles with 3,000 drivers. So this is a quote he said, so it is almost like the Amazon of paint. You can buy online, pick up in a store, call it in, pick it up, call from the job site.

They can deliver it to you. Sherwin estimates that they save their painters one day per month by delivering paint to the job site. So any time the painter does not have to drive them to the store, that saves them money. In 2023, the paint stores group, paint is like 65% of their revenue. The other 35% is coding.

Paint stores group generated nearly $13 billion in sales. Over the last 10 years, they compounded sales growth at 8% per year. That's 6% same store sales growth and 2% annual store growth. Those 4,700 stores generate $2.7 million per store. That's kind of nuts, $2.7 million per store. That's like better than a McDonald's franchise. Higher than Chipotle.

Higher than Chipotle. And they spoke about the competition between this and Benjamin Moore, which is a Berkshire Hathaway company. When you think about the differences between paint, if you talk to a professional painter, some like Sherman Williams a little better for this, some like Benjamin Moore a little bit better for that. When you think about them preferring-

Is Benjamin Moore owned by Home Depot, right? It's Berkshire. It's Berkshire. Oh, it's Berkshire. When you think about them preferring Sherman Williams by a margin of five to one, five to one, it's not because the paint is that much different. It's because the service is that much different. So I am long.

This is such a great point that you're making. And like, what was the last time you walked into a Home Depot? I think that's the worst retail experience on earth right now. I think it's worse than Sears was. I own Home Depot too. Okay, nobody can help you in that store. What they can do is point to the right aisle.

Yes. They're too busy. Yeah, yeah. There's too few of them and they're always on a fucking ladder. No matter what, they're always on a ladder and they're not subject matter experts like they were 20 years ago.

Excuse me, where can I? No, dude, they don't know anything. They could be working at a Target. It's almost interchangeable. I'm sure there's. Excuse me, where can I? They have no, dude, they don't know anything. They could be working at a Target. It's almost interchangeable. I'm sure there's a few people in each store that like really know stuff, but for the most part, they're just restocking shelves and they can't be bothered. This stuff matters because if you paint

the rooms of your home, you're stuck with it. If you don't like it, you know what I mean? Like it's worth going to a Sherwin, one of these 4,700 Sherwin-Williams stores if you're doing it yourself or with an interior decorator and really getting what you want. It's not a frequent purchase, but it's a purchase that matters so much that you're not looking... You're not like, how could I save 50 cents a gallon of paint? No.

That's not the thought process. So another thing that they said that was like, oh yeah, yeah, yeah, that makes sense. It's certainly not recession proof. Nothing is. But it's maybe a little bit recession resistant because painting your wall, it's not like a luxury renovation, right? And during the GFC, Home Depot revenue went down 30%.

Sherwin-Williams only went down 15%. Because again, you could afford paint. Yeah, you might not be able to renovate your home, but you'll definitely feel better if you could afford paint. It's not a little. Yeah. You might not, you might not be able to renovate your home, but you'll definitely feel better if you put a fresh coat of paint in the kitchen. And that's, that's exactly right. All right. This is a strong pitch.

I loved it. I have a mystery chart for you, Michael. And it's actually a throwback to a make the case that I did back in April. I'm guessing it's going well. It's going really well. So well, because I didn't buy it. I know what it is. No, you don't. So I made the case on April 9th on the show. I didn't like go over the top like with all these details about it. I was just like, look at this stuff making a new

high. Let's go under the hood. Why is it working? Of course, I then completely didn't do anything about it and I've been watching it ever since and last week it just went bananas. Is that the actual price? This is the stock price, dude. The red line was the all-time high that I was pointing out to you on Make The Case. It hit the Russo list. I wanted you to know about the company. We talked a little bit about the company and then that's it.

And the rest is history. Before I guess, before I guess, start off please. I want to look at you. Did you ever buy, did you ever buy Arista Networks or eBay? No, that's why they weren't. This is my new stock service that I'm offering free of charge to viewers or listeners of what are your thoughts? Okay.

I will tell you the best stock market setups and I will give you my word that I am not going to buy them. It's a guarantee. That's good. It's as close as you get to. All right. I see some guesses and some people in the chat. You want to give me a sector? You want to give me a sector?

Tech. Mega cap? Oh. No. Oh, not mega cap. I guess it's in some people in the chat. You want to give me a sector? You want to give me a sector? Tech. Mega cap? Oh. No. Oh, not mega cap. All right. Michael, the stock has doubled.

OK. OK. It's not mega cap. Any other clues? What do they do? Who do they compete against? What's the stock? It's software.

It's software. Software that doubled. I thought software wasn't working. Uh, is this Salesforce? App lovin. Oh, that's a self-services. And my cat, my bad app lovin. The fuck is this? I pitch it to you.

They like, they like do like app stuff. It doesn't matter. What matters is the stock went from 60 to 130 because 70% because I chose to not do anything with it. Look at that total return. Very nice. Sick. Sick. That's in four months. It's very nice. So I'll give you the next stock I'm not going to buy on an all new Make the Case next week. Okay, I can't wait. For those who want to tune in.

Hey guys, thank you so much for tuning into the live and thanks to everyone out there in Podcast Land listening. We absolutely love it. We appreciate it. Make sure to leave us a like. And hey, everybody, you know, tomorrow is Wednesday, which means an all new edition of my favorite podcast, Animal Spirits, starring Michael Batnick and Ben Carlson. We're going to have an all new Ask the Compound at its new time. I think we taped those on Wednesday now. We go live to YouTube, right?

Do you know about that? No, we do the live YouTube. Nope. Ben and Duncan. Yeah. Live to YouTube. I think it's on Wednesdays now. I'll double check that with Duncan.

We're going to do Compound and Friends at the end of the week. Very special guest. If you wanna know our guests in advance, sign up for the Compound Insider. And again, you'll be getting Cali's new interest rate chart pack for free. All right, that's it from us. We'll talk to you soon.

["Multi-Million Dollar Man"] 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. is a good time.