The Compound and Friends - NVDA’s Mini-Crash, Dan Ives on AI, Josh’s New Book

Episode Date: September 3, 2024

On this TCAF Tuesday, Josh Brown is joined by Dan Ives of Wedbush Securities to discuss Nvidia's latest earnings report, what sets Jensen Huang apart, what it would take for anyone to catch the AI leader, and much more! Then, at 31:33, hear an all-new episode of What Are Your Thoughts with Josh and Michael Batnick! This episode is sponsored by Rocket Money! Cancel your unwanted subscriptions today by visiting http://rocketmoney.com/compound Josh's new book: You Weren't Supposed to See That Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to the compound and friends. Tonight's show is sponsored by Rocket Money. Rocket Money is a personal finance app that helps find and cancel your unwanted subscriptions, monitors your spending, and helps lower your bills so you can grow your savings. Five million people are using this thing and you could be the next customer on Rocket Money. Stop wasting money on things you don't use. Cancel your unwanted subscriptions by going to rocketmoney.com slash compound today.

All right guys, huge show on tap. We're gonna start things off with Dan Ives at Wedbush. He is the analyst who covers Apple and Nvidia and some of the most important technology stocks in the market. Dan thinks it's still early for the Nvidia story and he makes the case as far as like why we're only really scratching the surface of how transformative this company will be and how big the business can get.

So I really want you to hear that in case you haven't seen it yet. It was on our YouTube over Labor Day weekend. After that, it's Michael, it's me. It's an all new edition of What Are Your Thoughts? Michael and I get into the semiconductor mini crash that took place in the market today. We talk about my new book, You Weren't Supposed to See That, which is on shelves nationwide as of today. Berkshire hitting a trillion dollars. We did some hedge fund stuff. We took a look at market sentiment amongst investors, how much money Citadel and Jane Streeter

are making right now, Japanese stocks. There's just so much in here and I think you're gonna love it. So without any further delay, I'll send you over 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 Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any

investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. OK, hey, everyone. It's downtown Josh Brown. I am here with my friend, Dan Ives. Dan is the managing director and senior equity research analyst covering the technology sector at Wedbush Securities since 2018. Dan has been a tech analyst on Wall Street for over two decades, the technology sector at Wedbush Securities since 2018.

Dan has been a tech analyst on Wall Street for over two decades, covering the software and the broader technology sector. Dan, you have become highly synonymous with the AI revolution and the Nvidia story of all the people I could think of who have been bulls on Nvidia. You have probably been bullish

for the longest and the magnitude of your bullishness has probably been the closest to really capture what the opportunity has been and will be with this stock and just the general investing theme. Nothing I heard on the Nvidia call Wednesday night changes any of that. And I don't think it's changing anything of that for you either. But if you want to just start off, give me like the broad strokes on what we heard and then we can get into some of the individual takeaways. And thanks for those words, and something you need to find. I focus me and you've talked about a lot, like it's all about putting the data points

together and you come out of that call. I'm actually saying incrementally more bullish, not even just on Nvidia, but on the overall AI theme because of the black well delays, if there was going to be one, would I view headwind or black cloud? They put that to rest in terms of yields and any of the issues there. Demands have shipping supply anywhere from 10 to 15 to 1. So when I look at the underlying enterprise, not just in big tech, but even like when you look at sovereign and you look at what I think ultimately is going to be the rest of sort of enterprise, this is a story I still view called bottom of the

first hop of the second inning. I continue to view it. It's LeBron in high school and so you really do still believe it's that early. It's we're only only 3%, maybe 5% tops of enterprises globally have even gone down this path. Right. So it comes down to like, you know, sometimes I think it's very easy, like not too far to the trees, like in terms like, okay, October quarter, 32 and a half billion, whispers 33 billion. Okay, October quarter 32 and a half billion whispers 33 billion

But now the focus more this is a company ultimately going toward 50 75 billion eventually a hundred billion For quarter. Yeah, and I think that to me is really the trend not just for Nvidia But for what just means for the rest of the time so I want I want to quote you. This was the opening paragraph of your post earnings research note. Nvidia's earnings last night was front and center globally as the godfather of AI, Jensen, are the torchbearers of this AI revolution. The tech stalwart delivered massive, quote, drop the mic numbers yet again, that easily beat the street with a top line that grew 122% from a year ago quarter with 30

billion of revenue and a robust outlook for the October quarter of 32.5 billion, 80% growth. While some buy side whisper expectations were a tad higher for the October quarter, we believe Nvidia's surging AI chip demand, Blackwell delay concerns allayed, robust outlook, and a meteoric enterprise pipeline speaks to this AI revolution just starting to kick off its next phase of growth. I think a lot of people had that reaction, but the stock price didn't. What do you think is the main reason for why we saw Nvidia sell off almost 6 or 7% in the immediate aftermath of that report?

I just think it's like people expect Jokovic to win 60606 up. If it's 6-3, oh, lost three. So the point is, like, you're expecting like, okay, could they give a 34 billion number just another it was basically what I'd use call it, you know, half a billion higher than sort of base maybe a little blue whisper. I think it ends up probably being closer 34 billion number. So because I think now Nvidia recognizes when you're in this parabolic growth, especially with Blackwell, there's no reason for them to give a 34 billion, even though I think that's open where it goes. So you think we've gotten spoiled and it's still an incredible growth story, but maybe

the expectations were fully baked in at least for this particular quarter, not for the longterm. And I think when now it's gonna start to happen, Josh, at that point, the next month, and we'll be in Asia next week, anyone that's doing the Asia supply chain checks, it's actually increasing in terms of demand over supply.

All of a sudden what starts to happen is next drum roll starts, hold on a second, 32.5, probably a sandbag number. All of a sudden, stock starts to, what I believe, continue to creep back up. I believe we're looking 4 trillion Mark top for NVIDIA in the next six months. I just don't see what's stopping it, given all all the demand we're seeing from hyperscalers, from enterprise. The use cases now are exploding. That's why Palantir, people dismiss them as that. Look at them. Look at ServiceNow. Look what we're seeing with Oracle. That to me is the next phase, the use cases. And Jensen hit on that a bit.

I want to talk about demand. This is you. You said there will be a time that competition from AMD and others ramp up, but essentially a $1 trillion of AI CapEx over the next few years is coming its way. Last night's conference call further confirmed this demand outlook. The stage is set for tech stocks to move higher into year end and 2025 in our opinion, as the Fed and Powell kick off its rate cutting cycle, macro soft landing remains the path and tech spending on AI remains a generational spending cycle just starting to hit the shores of the tech sector. We continue to estimate for every $1 spent on an Nvidia GPU chip, there is an $8 to $10

multiplier across the tech sector, which speaks to our firmly bullish view of tech stocks over the next year. So you are very constructive on tech going into year end and heading into 2025 and that multiplier effect because of the GPU spend means a lot of opportunity for a lot of stocks, not just Nvidia. That's exactly what we really want and what we talked to investors about is the multiplier because everyone's, oh, it and video, it's Microsoft. No, this, this now kicks off a cycle. We basically have never seen before.

And anytime someone puts like the Cisco comparison to video show the chart, it looks like I covered tech back then, the difference is Cisco 90% of their customers were essentially leverage startups, Ather's and all the Sealex. Who's the customers of Nvidia? It's companies with 1.2 trillion on the balance sheet. And governments. And shit.

And government. So my whole point is that I get the comparison on screen and a chart. Apple, sorry. You cannot compare what we see here. It's essentially a fourth industrial revolution that's being built out. And I think now it's the next phase. It's the software acquires, it's the infrastructure, it's other parts of Semi. It's names like AMD. It's names like in cybersecurity. How are you going to protect the workloads? So that to me is really where I see everything.

That's why I'm so excited about second, third, fourth derivative. You've made this point and so has Jensen Wang about sovereign AI and every country for security and for cultural reasons, having its own AI that's almost like purpose built for the nation in which the people are going to use it. Is that opportunity being underestimated currently when you look at the valuation of AMD, Nvidia,

Dell, Hulu? Do people not fully appreciate the extent to which AI is like a must have as opposed to a nice to have. Yeah. And I think that's a great question. I think actually the biggest thing that's not being priced in the tech cap acts from the star works priced in what's not being priced in is the incremental spend. I think you're going to see from the incremental

spend we're seeing from enterprise and governments. I mean, if I look on typical enterprise and you think government 8, 10%, sometimes 12% overall spend, that's not numbers. So as this all plays out, in any company and the government, it all starts with the red phone. It's gents. There's only one. Where are you getting the chip? It's a new gold, new oil.

Yeah. So I want to ask you about the difference between selling a chip versus selling an ecosystem and services. So I think a lot of people who are not experts in semiconductors, but they vaguely understand like Intel sells a chip, great, they sell a chip. In the case of something like this, there is a continued spend after you sell the GPUs on system maintenance and on services revenue and the software platform. Can you explain for the viewers who aren't really

like on the ground here, how this works? It's not just as simple as, oh, how many chips will they sell? It actually ends up looking more like Apple. Yes, they sell a lot of iPhones, but then what else happens on the revenue side after that sale? Yeah, and I think Apple is a great comparison because I think the biggest, and let's just

compare it to Nvidia. Many of you is, oh, it's iPhone. That's ultimately what this company does. The biggest part of the valuation change in Apple has been service. That's where I believe that's worth 1.7 trillion. When you look at Nvidia, it's not just chips. When you look at the overall platform and architecture, this is essentially companies that like, okay, we're going to buy a drink, we're going to buy the

meal here, but now we're going to have to pay them an incremental 30, 35% every year, essentially in perpetuity on services, as well as on infrastructure and on software. That's the difference. Yeah. So when you think about it, Intel, the reason Intel, if you looked up disaster in the dictionary, you'd see their ticker is because they never understood whether it's the bureaucracy, they've lost the talent, you know, whatever it may be. Jensen always understood the prize was not just about coming up with the chips and the GPUs. It was about

the overall architecture. And that's why when you look at what they've done, they've essentially, they've essentially courted it. In other words, this should almost be like, go into a baseball and any meal you buy, any drink you buy, goes to the same vendor, eventually. That's kind of what they've done from an AI perspective. But now who builds on top of it? It gets built on a hyperscaler, Microsoft Amazon Google, the apps, ServiceNow, Salesforce, Wordcrating, Palantir. That speaks to the second, third, fourth derivative of all being built on top of what GenZ. There's a switching cost too. If you have built your AI services on Nvidia architecture, it's not as simple as AMD has a 20% cheaper chip, we'll just start

swapping them in. I don't think it works that way. Am I right? It could cost potentially two, three X to switch. Right. The switching costs are just, they're just almost impossible. It will be not so different than Oracle, Microsoft, SAP, Dell. I mean, you go down the width. You standardize. That's what you standardize. And not just that, your, your go down the width. You standardize. That's what you standardize.

And not just that, your IT professionals are standardized. Your users are standardized. The apps are standardized. Right. I want to roll through some charts because the fundamental story here, like getting away from the technology edge, which I think everyone understands, NVIDIA is miles ahead. But just the execution as a public company is really breathtaking.

The first chart that we have up here, I think you can see this, Dan. This is 62.1% operating margin for NVIDIA's Q2 2025 fiscal. So that's what they recorded. The blue bar, you can see that they are making huge investments, but their operating margins are staying in the low to mid-60s. They're not falling off at all, and they are significantly higher than where they were four and five quarters ago in the 50s. I don't think we've ever seen a company be able to do this. And guess what? If they weren't investing just massively, they'd be like major senior citizens living in Belgrade. Like eighties and nineties. Yeah, exactly. They'd be seventies, eighties. I

mean, the point is, is that that's the thing that's underscored is that essentially the margin profile that's doubled. And now once this massive spending even starts to abate, and they've invested, this is a margin. It's a free cash or rent. It's a store. And that's what I continue to view it is like, you start to look at your five, six, seven dollars earning, tell me it's expensive. I it's just hard to see that just given the scale. It's like, you start to look at year five, six, $7 are earning. Tell me it's expensive. It's just hard to see that just given the scale.

Okay. Let's look at the revenue. So this next chart is quarterly revenue hit $30 billion in Q2 2025. That it looks as though based on estimates, it's going to 32.8 next quarter, 36.2 in two quarters from now. And again, it's really almost inconceivable to have a company continue to ratchet up the revenue to this degree long after it's become the largest company in the world. They're doing it. These are quarterly numbers. We're looking at a company that's already above a $100 billion annual run rate, and it's not stopping.

Stig Brodersen Well, no. Based on all the math, 2,250 type of annual is where it's at. I know it's like, I don't see how it almost doesn't go there, just given you overall demand because all these capex dollars, they're all coming into the doors of Jensen and Nvidia. Now you could be like, okay, AMD, they get 10% share, but that's not changing the story because of where the spending is going. And now, and this is very important, what Jensen talked about in terms on the call, changing the story because of where the spending is going. This is very important.

What Jensen taught about in terms of the call, we've seen it from customers, the use case, as the use cases explode, that's the trend. Nothing stops the trend. I don't have this chart with me today, but we used it on the channel a couple of days ago on What Are Your Thoughts? But we have a chart that shows the top five customers of Nvidia and on one axis it's showing the dollar amount and the percentage of their own CapEx and then on the other axis it's

showing what percentage of Nvidia's revenue is. So in other words, I think Microsoft, it's something like 45% of their CapEx dollars are going to Nvidia, which comprises 19% of Nvidia's revenue. That's the part that the bears would say is the shakiest foundation, like is the least sustainable. But you don't agree with that. Make us feel better about that level of concentration. Maybe it's an end user story and the hyperscalers are just in the middle. It's an end, in other words,

the hyperscalers where Microsoft is, that's 95% enterprise. In other words, if you're a Microsoft shop and you're going down this path, it's going through Microsoft. There's no one else that you're going to go through. You're going to go through other hyperscalers, whether it's Google or Amazon. So when you talk about concentration today, that actually is more, I think that's actually more like perception because it's not like it's Microsoft

itself as a customer. You have to then go down to the thousands of enterprises. So that doesn't really tell the story. In my opinion, it's really about the end user and this is all plays out. Hyperscalers are really almost like a middle man. They're passing through the compute that they are purchasing from Nvidia. And it's all right. If Josh Brown then puts an order through Microsoft, Microsoft puts it through Nvidia, the order comes to Microsoft, but the actual order came through me and you.

That's one of the things that will be in the age of next few weeks. Everything we see demand from a component perspective is increasing. came through me and you. That's why Josh, I want to think that it will be an age of next few weeks. Everything we see demand from a component perspective is increasing. And when I talk about bears, and we talk, I always say like, the bears can find the AI revolution and 10 for their New York City, obviously, the Metro North Jersey trends are the spreadsheets. And I think that's where many have missed it, especially now as Apple. What's been missing?

The consumer piece. Now you have iPhone 16, you have the consumer revolution, you have three-inch million iPhones having been up in four years. That all now comes to Apple, eventually OpenAI, and then eventually obviously Nvidia is going to be in benefit. So we're going to go back to Apple in a second. I want to ask you about Blackwell. You mentioned it at the top of the show.

So Blackwell, for people that aren't aware, just correct me if I'm wrong about this. The current cutting edge standard system that Nvidia is selling is Hopper. And the next iteration, which Jensen Weing referred to as a step function change above is Blackwell. And one of the concerns going into the call is that Blackwell was not going to come out during the quarter where people originally anticipated it. And he went out of his way during the call to make it clearer to the sell side. Blackwell is not delayed because we're making changes to its functionality. It's delayed because a new mask.

What does that mean for the investor who's not an engineer? I mean, essentially, they've increased the yield from a technology perspective. It actually become that much more efficient in terms of how to produce it. So the concern was like, oh, this is a delay. This could spoil the party. And the reality is you only come out a few months and they've actually through this process made it better. They may have more efficient. It's going to be more profitable from a margin perspective as they produce it.

Now they talked about like, okay, billions in the midst. I mean, Jack, this is in our opinion, tens of billions. And this is just really the start of the next leg of that story. So pushing the shipments of Blackwell into Q4 does not alter the demand side, doesn't alter the earnings expectations materially. It's just something that happens when you're launching a new wave of technology. It doesn't necessarily hit a certain date on the calendar every time. And also the last thing that they could ever do is come out with something too early, bugs or whatever and they dig.

They got to make sure that this thing is golden. And that's why it is all the infrastructure built on it. And then the fact that they actually are going to see some in the October quarter that put that to rest. And that's it. Look, I just think we sit here, like we sit here over the coming weeks, over the coming month and the stocks all time highs because It's like I think as more start to do their checks. They realize like well the man's not just bag seven

It's it's actually other enterprises and sovereign. I remember you haven't even tapped into Europe Globally, we're really talking essentially right now. It's much more of a US centric story with some China outside the sanction. I wanna ask you about the financials. They announced a new $50 billion buyback on top of a preexisting authorized seven and a half billion dollar buyback. I would ask you, would it make sense for them

to actually act on this authorization or just keep it in their back pocket in case there's some sort of market-wide sell-off or something? Then the second part of that question is, are these true buybacks or to shrink the float or are they just being used to sterilize stock-based compensation and new share issuance? Well, look, I mean, I don't think that press release five acts like in terms of just like, you know, sending a signal type thing. Right. I do think that they've recognized some of the volatility that they could see. I think that, you know, the Black Monday, Tokyo scare, you know, a little sort of, you know, clearly got

in front of their radar, in my opinion. So it's a true buyback. But the reality is that when you get AI engineers in the world, the best right now, it's really Nvidia, open AI Microsoft. So as much as people could fret about like options, whatever it may be, like new stock, what they have compensation, they have to keep the AI engineers because that's that's ultimately key. But there is actually it's actually an incremental buyback. I think they're going to go right off the page of Cook and Apple. They're going to actually implement it. And then eventually, in a year or two, we're not talking about 50 billion. We'll be talking about

$7,500 billion. There's just too much cash flow. They have to do something with it. You can't just plug it all back into CapEx. Okay. Let's put up this earnings chart. So this is the quarterly earnings hit 68 cents in Q2 2025. This is consensus estimates, not your estimates, Dan, but we're at 74 cents for next quarter, 80 cents for the following quarter. Are you above this? Are you below this? Where are you versus consensus?

I mean, look, we ultimately believe above where dollar, dollar 25 is really going to be the run rate per quarter. So in other words, like you're going to now start to look it out here when you look at 25 and 26, five, five 50 per share. In other words, like that's, that's really like, if you're buying this stock, you're basically the number that you're focused on is $5 of earnings power. Like that's how I think that, and if you look historically- Like on an annual run rate, $5 a share.

On an annual basis. Yeah. Because also you're looking, most investors that are in this name and broader, you're looking like, when does Blackwell ran? What does true numbers look like when this is actually at scale? And $5 is really the number, the out year that I think from a buy side or whisper. So that's why when you look at some of these, it's really focused on where this is going next 12, 18 months. That's why it's we talked about like Apple WWDC, air has come out stocks, one 90, there's nothing here about, and it's two 30 today, right? Two, two and a half months later.

So my, my, my whole point is like the initial knee jerk on like some of these things, sometimes like the story is, I think lost in terms of what's actually happening, not just for Nvidia, but for broader tech in terms of that multiplier, the $1 to the $8 to $10 multiplier, which I think is the most important thing for the broads. So on a $5 annual run rate in terms of earnings power. 25, 25 times. 25 times. Where does that put the stock?

I didn't major in math. And then you look, you start to look at like 125 and then ultimately you're like, look, you start to actually 525 earnings because you get to 150, 175. And I think the bull case getting to 150, 175, it's really like, okay, I'm looking at this next two, three years. This is a company that could have five, they have $6 earnings power as this all plays out. That sort of if you're longer term, that's the bull case. As this all starts to play out.

I want to hit you with one more. This is via the Wall Street Journal but widely reported. The world's biggest tech companies, including Apple and Nvidia, have been in discussions about investing in OpenAI. The maker of ChatGPT is looking to raise several billion dollars in a new funding round that values it at more than 100 billion. OpenAI is in an arms race with heavyweights such as Google and Meta seeking capital to maintain its lead in the competitive artificial intelligence space. Apple and OpenAI recently announced a partnership and NVIDIA is the biggest supplier of AI accelerators powering chat GPT.

OpenAI said the number of chat GPT users has doubled in the last year to over 200 million weekly active users. More than 90% of Fortune 500 companies are currently using OpenAI products. Okay, so if Nvidia makes an equity investment into OpenAI, effectively, OpenAI is just taking that money and buying more chips from Nvidia. It's almost like a no-brainer for them to be involved in a funding round. What do you think about it?

I think it's the golden child. When Nadella did and Microsoft did the round, everyone realized right away how basically they strategically massively missed this. No one's going to miss it again. Especially with Apple, when you think of OpenAI, just how important they are strategically, not just in iPhone 16, but the broader AI strategy. Anything we missed in this conversation before I let you run? Josh, I think the biggest thing is for anyone watching, it's about multiplier. It's not just about Nvidia.

It's not just about Godfather of AI gents and the Black Weather jacket. It's about the dollar creating the 8 to 10. That's how you get the NASDAQ 20 sound. That's how, like, that's how this bull market where all of a sudden some mid cap name you're like, oh my God, they just beat earnings by 20%. Then on the call, like, well, AI spending was stuck. That's how this starts to play out. Dan, I really appreciate it. I know my audience absolutely loves hearing from you, especially in the wake of such a big momentous earnings report. I want to wish you all the best on your trip to Asia

this week. And we will definitely check in with you again this year. Great. Thank you so much. All right. Dan, I was from Wedbush, ladies and gentlemen, follow him, of course, everywhere. Thanks so much for watching. Thanks so much for listening. We'll talk to you soon. Just checking the scoreboard today. Dow down 626, Nasdaq down 577. Welcome to September, bitch. That's the vibe.

That's the vibe today. The summer, the summer is over. And here we are. Hey everybody, welcome to a new edition of What Are Your Thoughts? My name is Downtown Josh Brown, here with my co-host as always, Mr. Michael Batnick. Michael, say hello. Hello, hello folks.

See, I can make him do that. It's like a ventriloquist almost. It's like, yeah, it's wild. Yeah. Michael is wearing the appropriate head covering today for the high holidays, which will also take place in September. Who else do we have in the chat today? Jeff Asola is here. Cliff and Drew and Benjamin Lupu is here. Georgie's here. Who else?

The regulars. Magnus is in the house. John Luca. Jerry's here. Thanks guys. Thanks so much for turning out. We really appreciate you coming for the live. And as always, you are an intrinsic part of the show. Somebody's saying Josh is so tan. That's right. That's right. That's a swimming pool tan. All right.

We kind of added something into the show tonight given market activity. I think we have to address it and we will. But first, I want to tell you guys about tonight's sponsor, which is Rocket Money. This is my favorite personal finance app. Every week I get a report. Here's how much money you spent last week. Sometimes a little higher, sometimes a little lower.

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when using all the app's features. Stop wasting money on things you don't use. Cancel unwanted subscriptions by going to rocketmoney.com slash compound. All right, first things first, let's put this first chart up, John. This is the semiconductors having what looks like one of their worst all-time days. This is a 7.57% drubbing for the semiconductor stocks. And obviously, we know the culprit. NVIDIA is an extremely high weighting in this index.

Some would say it's the general. And as a result, bad day for NVIDIA means bad day for semis. Let's take a look at this. What are we seeing here, Mike? Oh, they're blaming Nick Medjuli. I was about to say Nick's getting shrapnel, but actually actually he's getting credit for this. What do you think caused this? I think the video we posted with Dan Ives, honestly, on Monday, it's only the first inning for Nvidia. I think that might have, I don't know.

You think it was like the market gods with the Jordan and I took that personally? It's almost like we posted, it's the ninth inning for Nvidia. Seriously. What did Nick say and read his piece today? Nick wrote a post that I didn't get to read either yet, but it's basically like, how could this be sustainable, something trading at these valuations? Yeah. Well, I think that's like a common sentiment.

So there are people that have good reasons for how it could be sustainable, but that doesn't mean sustainable every day. So today, by the way, stock's still up 100% plus on the year. I think it's worth pointing out. And let's go back to that second chart real quick. So this chart starts on August 26th. No, the second one. This chart starts on August 26th of, hold on, what are we looking at?

Yeah, this is just the last, I'm trying to count how many days. How many days is this? Six, seven, eight, nine, 30th. No, these aren't all individual days. It's six days. It's six days. Yeah, so it's a rough six days for Nvidia. I think we should just mention what came out after the close.

There was a subpoena of the company for documents related to an antitrust investigation. That train's never late. This is obviously a very dominant company, and I guess nobody should be surprised that they're being looked at. The US Justice Department sent subpoenas to NVIDIA and other companies as it seeks evidence that the chip maker violated antitrust laws, an escalation of its investigation into the dominant provider of AI processors. So the question is, is NVIDIA doing things that are anti-competitive in how it sells

its chips, how it markets its products to customers, and you could expect that to drag on three to five years. Settlers are getting whacked, as you mentioned earlier. Micron is in a 43% drawdown. AMD down 35% and Nvidia back in bear market territory down 20%. S&P 500 down 2.2% from its highs. Not so bad. So listen, man.

When it rains, it pours. Today it rained. And I think when you look at the stocks that were down the most, many of them are stocks that have been up the most, at least over the last couple of years and maybe even year to date. This was for the most part all AI winners. So we mentioned Nvidia and all the semis, Google down 4%. But there was a lot of green on the screen. Healthcare, Great Day, Telecom, the defensive

names of Verizon's and AT&T's of the world, consumer staples, Ripping, Coca-Cola, Product and Gamble, all the borrowing names, Pepsi. So it wasn't a total bloodbath. Although Nvidia, I forget who tweeted this, lost $270 billion worth of market cap. It's the worst decline ever for any stock in market cap terms of all time. So it was a good old fashioned drubbing. Yeah. What I'm seeing on my screen is a continuation of what's been happening, Sub Rosa, for a

few weeks now. Sub Rosa? What, you flexing on me? What does that mean? Beneath the surface. Okay. It's Latin. So what I'm seeing though is like Pepsi was up almost 3% on the day.

Monster beverages up. Ulta Beauty. You're seeing a lot of these staples kind of situations quietly creeping up. Ulta is definitely not staples. No offense. Makeup. You sure? No, look at the stock chart. It's at this crash. Not even close.

Coca Cola looks like Nvidia. We flagged the stock a few weeks ago. Listen, Kraft Heinz was up by half a percent. So I'm just saying like there was some healthcare names that were up. Campbell's soup. Yeah. I own a few that were up. Campbell's Soup. Yeah. I own a few that were green today. Invitation Homes, which is a wheat.

You own that? That's obvious. Yeah. That's working because they're buying these wheats as the 10-year yield falls. I think the 10-year is now three spots, six, eight. Do I have that right? It's not in front of me. No.

Three eight. What is it? Three eight. All right. But falling. And they're buying up the bond proxy equities and real estate utilities. And some of the staples could certainly be considered to be in that group. So I had like I had some green stuff and it's just like when you look at it, it's like, oh, yeah, I get that.

I understand. Like Berkshire Hathaway rallied, which maybe we'll talk about later. Every stock I own was down today, not to brag. Every single one. Most stocks. Breath was not good. Again, welcome to September. This is where we're at. All right. Topic one tonight, I launched a book today.

And Michael, thank you so much for your kind words on the irrelevant investor, your awesome blog. Do we have like an image of the book or okay. All right. So guys, here's what we're going to do because you guys are my day ones. We are going to do a giveaway. We're going to give away six stocks. So we're going to give away five stocks.

So we're going to give away five stocks. So we're going to give away five stocks. So we're going to give away five stocks. So we're going to give away five stocks. So we're going to give away five stocks. So we're going to give away five stocks. So we're going to give away five stocks. So we're going to give away five stocks.

So we're going to give away five stocks. So we're going to give away five stocks. So we're going to give away five stocks. So we're going to give away five stocks. So we here's what we're gonna do because you guys are my day ones We are going to do a giveaway We're going to give away six signed books and we're gonna randomize this three for current subscribers To the compound insider. There's a link Below this video so that you can subscribe to the compound insider, which is free It's just where we tell you stuff ahead of time and let you take a peek behind the curtain at all things Compound. And then three new subs.

So if you're watching the show for the first time, within the first 24 hours, we will take all the brand new subs, we'll randomize it, we'll pick three people. I will personally sign a book to you. So if you're not yet subscribed to the compound insider, you go to the compound news.com slash subscribe. And if you're already subscribed, don't worry.

You're already in the running. Michael, do you want to talk about how this is maybe the best book you've ever read? Can I say a few words? I'd love to, yes. So I forgot the title, the namesake of the book. I forgot that that was the title of one of your best posts ever. And you might, this might jog your memory.

If you've been following along with Josh, he wrote about what happened during the pandemic when money was sent to everybody. Let me just read Josh. Let me quote you. Look at me while I quote you widespread prosperity. It turns out is incompatible with the American dream. The only way our economy works is when there are winners and losers. If everyone's a winner, the whole thing fails. That's what we learned at the conclusion of our experiment.

You weren't supposed to see that. Yeah. So that was like this kind of epiphany that I had in 2022, I think, when we were fighting inflation, and the jobs market was as tight as it's ever been. And the idea behind that particular chapter is just like, look, this is the problem. Everyone is good. Like, everybody has money. Nobody has to do anything they don't want to do.

And I hate saying it out loud, but that's the truth behind the way American style capitalism works. There have to be people who are willing to work and do things that they wouldn't otherwise do if their bank accounts were flush. We need winners and losers, unfortunately. You need people that have done really well already, continue to do well in our spending, and then you need people who are on their way there. And they haven't, I thought you were giving me a round of applause.

And then you need people that are still on their way toward prosperity and willing to work for it. When everyone is prosperous all at once, it's very problematic for the economy, for companies, for business owners, for the stock market. That's one example, but the idea behind the book is these are all the things that nobody really has a vested interest in sharing with you. I wanted to do a book that just kind of took you there. I said this on my blog today.

I've done four books. I love everything that I've done, but this is really the best thing from my own perspective. If somebody says, what's one example of you writing, this is the only thing that I would give them at this point. I think so too. As I was reading this, to me, it really was a trip down memory lane because I read every single one of these blog posts, obviously, and a lot of them feel like yesterday, and there's a weird time dilation going on reading some of these. It was odd. I felt a lot of them feel like yesterday and there's like a weird time dilation going on reading some of these it was it was

Odd I felt a lot of feelings reading this Yeah, so the idea behind the book is let's take the most important or most interesting Insights that I've had over the last 15 years as somebody who's been writing about the markets almost daily what were the big ones and then I update them and bring it all up to the present. And I've changed my mind about some stuff that I used to think. And some things that I wrote in the moment, we didn't really know what was going on. And then later we figured it out. And so that was a really fun exercise for me to go back and do all that.

So I would agree with you. This is the best book you've ever written. I read it very quickly. It's very incredibly readable. I would say that most of the topics that you wrote about, more is the same than has changed. Would you agree with that? Yeah, because I think people don't change. And we talk about this a lot in an investing context. The same things that drove people 1, thousand years ago drive people today. Most things boil down to people doing things because they get paid to do them, people reacting to scary things because fear is part of the permanent human condition, and then the greed

aspect, which it's like a pendulum. We all swing between fear and greed, some people more extreme than others that stuff doesn't change And so as a result a lot of the stuff that I had written is is universal and it was fun to see that In in hindsight, did you let and it did shire read this before you published it? Yes. Okay She you know, she was like, yeah, it's not every every page of this sounds sounds like you I don't even know what half the shit means, but it sounds, it sounds like you. You, you shared some personal stuff in here that I was, uh, Oh, you like the sex scenes?

Well, I thought, I thought this was the one thing that I really haven't given my audience yet, so I wanted to- They were waiting for it. No, listen, truthfully, the book was amazing. I kind of forgot how good of a writer you were because you just don't, we don't have time for it. No, listen, truthfully, the book was amazing. I kind of forgot how good of a writer you were because you just don't, we don't have time for it like we like you used to. Noun blushing. But it was so amazing. You are the only person in the world that could have taken their previous

collections of writing and updated it and make it just like it was day one. So amazing. Thank you. Thank you so much, Michael. Guys, there's a link. I think there is, or there will be Nicole will place a link. If anybody wants to order the book, it's for sale everywhere. Amazon, Barnes and Noble. People are taking pictures of it in the airport. It's really exciting. Like last thing I was like, I thought I would cut it like, yeah, I read this already. I read the entire, I read every word.

It was awesome. So everybody by the way, I insisted with the editor that we keep it under 200 pages. And we did it. Well, I hit every word. It was awesome. So everybody bought it. And by the way, I insisted with the editor that we keep it under 200 pages and we did it. Well, I hit the spot. I think that's the new length of a book. No, because you pick up the book, you're like, yeah, I'll read this. I have books that I want to read, but I'm not reading 400 pages. I can't do it either.

I can't start it because I know I'll never finish it. Yeah. So all right. Amazing, Josh. Really amazing. All right, Berkshire Hathaway, speaking of amazing, hit a trillion dollars. So I don't know why we can only find data for this going back to 1987 or 88, but whatever. Since then, it's compounded at nearly 17% a year.

And for comparison purposes, the S&P total return over the same time did a not so shabby 11%. But this 16.7% CAGR for Berkshire Hathaway that every time you have a long line on this, every up and down, it looks like a blip. But this includes a period, more than one period, but a period of massive, massive underperformance. John, throw the dotcom bubble up. So from June 1998 through the bottom or the top, I guess, in March 2000, the S&P 500 did 31% over an 18-month period. No, more than that. Whatever, 22-month period. And Berkshire Hathaway was down 41% and there was articles written, he was on the cover, what's wrong Warren? And that 16% includes that horrendous

period of time. And so I was there and I didn't really know who Warren Buffett was, but I distinctly remember all the talk about how his style of investing is never going to work again in the internet age. And for like two years, it looked that way. That looked like a like because he was not going to buy internet stocks. And one of the formative things that I've ever read was Warren Buffett's own op-ed, which I think predated the top of the bubble by a year or two. But he wrote something for Fortune.

And it was long, but I think it's one of the most foundational important investor letters. And it was apropos of nothing, this wasn't his annual letter to shareholders. He just felt compelled to say, here's why I'm not buying tech. I think enough people were breaking his balls that he was finally just like, okay, this is why I'm not running off to join the circus like the rest of you. And reading it now, there's a lot in it that's just outmoded and not true, but a lot of it's really true.

They were saying that he was done. And then in the wake of the crash, everybody jumped back on the Warren Buffett bandwagon. And he was not just sitting in cash. He was making other investments that would pay off years later. By the way, he was 70 years old at the top of the tech bubble. He was 70. Put up the first chart, Berkshire hits a trillion. So let's just talk about what this chart encompasses. It looks like it begins somewhere around the crash of 87, let's say. Within two years of this chart, Warren Buffett is testifying in front of Congress, effectively

apologizing for the conduct of Solomon Brothers, which he had acquired. And Solomon Brothers was found to have been rigging the Treasury auction. The US sells its bonds via auction, and Solomon, I think, was a primary dealer. I don't know all the details as well as I should, but like, that's the start of this chart, is Warren Buffett basically being interrogated by Congress. There are moments in this chart where he is one of the largest holder of financial assets, and we have the financial crisis. There's the airline blow up after COVID, and he is one of the largest holder of financial assets and we have the financial crisis. There's the airline blow up after COVID and he is the largest shareholder of all five

major airlines. So there's a lot of moments in here where it's like, ah, the old man lost his touch. He turned 94 years old this past week and he is the first non-tech company to hit a trillion dollars in market cap. And as a matter of fact, I think the stock went up today. Did it? Yeah. Stock was up a quarter of a percentage point today.

So it's just this miraculous thing that continues, I think, to instruct all of us on the right way to invest, the right way to run a business. So there had been a long period of time recently where Berkshire was underperforming over a 5, a 10, a 15-year period. Well guess what? It's almost hard to believe, but he's outperformed over the last 1, 3, and 5. So over the last three years, Berkshire's up 66%. The S&P's up 27%.

So kick the shit out of it over the last five years. And again, this is a time where nobody's been in the market. It's only MegaCap Tech. And now granted, he's a big beneficiary because of Apple. But still, over the last five years, the market's up 105%. He's up 135%. So the old man still got it. Credit to him. And congratulations on a trillion. Charlie Munger died this winter. And I think this company added like $200 billion in market cap since.

He was an overhang. Yeah, he was the problem. One of the big open questions about being an investor in Berkshire Hathaway is what happens when the inevitable, and God forbid, knock on wood, but Warren's probably not going to make it to 120, I'm just going to guess. So I've been hearing this though since he was in his 70s, that this can't go on forever. I've been hearing this though since he was in his 70s, that this can't go on forever. I've been hearing this personally for almost 30 years. But that is a thing and it'll be like a huge moment in the history of investing if and

when the worst should happen. And of course, what happens in the aftermath of that is a big question for shareholders because it's reality. I think they've spent the last couple of annual meetings going out of their way. Especially this one. Especially this one to really give investors a sense of what's going to happen after. And I think they, by pushing Greg up front and really like making it clear, like Greg is the guy and he's been schooled and he knows exactly what to do, like all that stuff I think is going to end up becoming really important.

I hope Warren lives to 130, but I don't think it's going to be a market event. The day he passes, I don't think they're selling. I don't think it's going to be down 7%. I just don't. There's a school of thought that says it goes up because there are probably a lot of assets here that maybe should eventually be spun off to create shareholder value. But I don't believe in that school of thought because I don't think the people who are entrusted

with running this business after Warren are so anxious to undo all of his work. I don't think it's going to be a situation where we start spinning things off and selling off assets. I highly doubt it. I agree. It'll be business as usual. I think so. I think to the best of their ability, that's what will happen. Anyway, congratulations to shareholders of Berkshire Hathaway.

Happy birthday, Warren. Okay, I want to talk about hedge funds since 2022. There was a piece by Michel Solarié working with some Goldman Sachs report that looked at the state of the industry. It looks like about a third of hedge funds have not been able to get back to where they were in 2021, 2022, which seems like a lot of funds. It's about thousands of funds that are below their high watermark. The reason why that's important is if they're below, they can't pay themselves

performance fees, for the most part. I'm sure there were some exceptions. So let me just quote this and then I want to hear what you think. We know Tiger Global is the poster child. They lost 50% in 2022. To make investors whole and to be able to charge its full performance fees again. A hedge fund down of 50% needs to post gains of 100%. I think it's actually more than that.

Goldman found that one third of long short equity funds have still not reached their high watermarks, although that number is down since the end of 2023 when 45% of them were still underwater. A prominent outlier is Dan Loeb, who was once called the hottest hand in investing. The third point lost 21.8% in 2022 and gained only 4.1% last year. This year it's up 10.9%. Has a long way to go. So that's long short.

Macro funds are the worst. Goldman says 45% of discretionary macro funds are below their high watermarks by the end of the first half of this year. 47% of CTAs and systemic macro funds. CTAs are commodity trading advisors. So, from my perspective, sort of a form of a macro. Are you surprised that macro category has the most funds that are still below their high water mark? I think I'm not surprised.

Not at all, no. It's the most chint scratching wizardy of all wizard bullshit, no offense. It's impossible. Discretionary macro is, you're trying to predict 37 variables. I just think it's, I just don't believe it. Can't be done. I jotted this down.

I'm not surprised at all. I think obviously there are amazing global macro managers, but I also think that category tends to attract the biggest bullshit artists and a lot of crackpot philosophers, more so than any other category of hedge fund. This idea that I'm going to predict weather, politics, war outcomes, economic developments all over the world, and I'm going to not only predict what's going to happen, I'm also going

to tell you how it will affect securities, bonds, stocks, commodities, currencies. It seems like a Twitter joke basically at this point that there are people sitting in a room attempting to do that. I do believe that some of the brightest people do macro, but also to give your money to that type of person, you have to believe in a lot of things. You have to believe in almost sorcery. Yeah. Multistrategy funds are doing the best comparably. Only 13% are below their high water marks. On average, multistrats need only a 4% return to hit their marks. Multistrats are like what Izzy Englander runs at Millennium and basically the pods. So this is like the hottest type of hedge fund now where it's one big fund, but all

these little individual pods doing their own types of trades, different categories, different asset classes, and then funneling those returns up to the mothership. I think the investor community loves these because those funds have been able to hoover up all the top talent. They have the most money they can pay the most. Oh, Millennium and Citadel. Yeah. So, and they've, but they're, but look, they're coming out of 2022.

Here we are two years later. 13% are below their high watermarks. But that's nothing, But that's nothing. That's my point. That means 87% are doing better than where they were two years ago, which I think is proving the whole point of that category. What do you think? Correct.

Facts. I also think that you said earlier that one third of long-short equity funds have still not reached their high watermark. All right, but two thirds have. And long short equity has been really difficult because generalizing, they short expensive crappy stocks and they buy, there's relative value there. And that just hasn't worked for a long time.

Yeah, unless they're growth oriented and they've been writing these AI names, the internet names, it's obviously going to be an uphill battle because it's hard for every asset manager who's not overweight, the big winners. Long short equity is still the largest category, but the commentary in the piece is that nobody is adding money there. It's $759 billion invested in long short equity. So long short equity is a true hedge and who wants a hedge in a rip-worn bull market? Yeah. The second largest category of hedge fund is multi-strat. That's 704 billion. Um, let me put this chart up. So this is,

this is from May. So it's like two months out of date, but I'm sure directionally this is hedge fund flows, the entire industry. This is from pensions and investments. Uh, the hedge fund industry ended the first industry, this is from pensions and investments, the hedge fund industry ended the first quarter of 2024 with net outflows totaling $25.6 billion. That's the 22nd consecutive month investors have pulled cash from hedge funds. Long short equity managers led the quarter with $8 billion in net outflows, macro $7.4 billion in outflows. So I don't know if that's reversed. By now, I doubt it.

Really rough. Yeah. So you know where that money is going? It's going to another group of people who are making big promises that will probably disappoint. Yeah, it's going to private credit, private equity. You're seeing some traditional hedge funds now getting into more private equity, more private credit, because that's what their customers are telling them they want.

But the last thing I would say on this, these are brilliant people. They're hard workers. They're the smartest people in the world. And I think the point is not that they suck at investing. I think the point is that the competition amongst all these brilliant people makes it so that returns are really inconsistent for any one fund. And people yank money fast these days.

There's no cult of personalities left in that business. MOBISON says when the degree of skill is so high, luck has a disproportionate impact on the outcome. It's like if there's five LeBrons playing five LeBrons. It's just the smartest and the best in the world all battling each other all day, every day. Now, of course, there's a lot of retail that they're scalping off and we'll talk about Jane Street and Citadel later. But for the most part, it's not because they're dumb, it's literally the opposite.

All right, let's talk about Gunja's article today. That was a headline, Americans are giddy or Americans are super bullish, whatever it was. The one chart that they put in in terms of the household's allocation to stocks as a share of their financial assets, to me, this is more about what you should expect to see in a 15-year bull market, but also, this is structural. I don't think that this is necessarily, this is less reflective of the market and more reflective of the structural nature of the relentless bid that you talk about, Josh, but the auto enrollment in 401Ks, the auto enrollment to target date funds, which are

for younger investors anyway, predominantly stocks. So to me, there's less signal in that particular chart. Before I get off it, I wanted to get your thought on that. Well, shout out to Gunjian, by the way. She was amazing on the Compound and Friends this week. I love the article. If we just go back to that chart, Michael, this is the stock market. So yeah, of course, household allocations to stocks go up when stocks outpace every other place that people could put money, including cash, including houses, including small businesses.

So I guess small business in a house aren't financial assets. But yes, of course, the allocation of stocks goes up when the stock market goes up. She was making the point that the stock allocations have inched up. It's about 42% of household financial assets, which is the most on record in data going back to 1952. Again, stocks are doing like 12% to 14% a year on average. Of course, the percentage of assets goes higher. Cash is not growing to that extent.

It physically can. 401k stuff is interesting that she talked about too. What did you think about that? How many millionaires there are? What was the number? Is it 497,000? Was that it? Let me say funds.

I don't have it right in front of me, but she's just making the point that everyone's bullish and retail is pretty bullish. I guess my only comment would be like, well, what do you expect? Why wouldn't people be bullish? Look how much money they're making. If they were bearish, wouldn't that be so much weirder? That would be very weird. So zooming in.

Oh, I'm sorry. Let me answer your question. The number of 401k retirement accounts at Fidelity worth at least a million reached 497,000. That's up from 31% a year ago and obviously a record high. So, net worths are higher. 401k balances are a big part of why. and you now have 500,000 people with a million bucks or more in a 401. That's why people are bullish. They're contributing to these accounts every two weeks and they're buying stocks. To me, that's structural, but zooming into the now, AAII bullish sentiment, which to

me, this is retail. It's elevated for sure. The average is 38%. Right now we're at 51%, which is it doesn't really get a whole lot higher than this. And as a corollary, I didn't include this, you saw bears disappear. The two week change in bears is like the largest two week decline in a couple of years. So again, it's just people have responded to the market. What would you expect them to be? Why would they be bearish? Yeah, we saw some extreme

bearishness after the first week of August. Temporarily, it faded really quick. Then we had two consecutive weeks of peak bullishness. Wait till you see the readout after what we saw today. Well, also, I think before today, through the first eight months of the year, it was like the second best first eight months over the last 30 years. So the fact that everybody's bullish, it doesn't take much to get people off sides and sell off and who knows where it goes tomorrow, the next day. But yeah, people build up and they need a reminder that risk is real. and who knows where it goes tomorrow or the next day, but yeah, people bolt up and they need a reminder that risk is real. Here's what I wanna tell the viewers and the listeners.

All of this bullishness is contributing to a new casino-like atmosphere. We talked on the compound and friends this week about how leveraged and inverse ETFs have taken in over $100 billion year to date, which of course is a record. $100 billion year to date, which of course is a record. One of the two of the primary beneficiaries of all of this activity and gambling amongst retail, and we know it's a very high number, Citadel and Jane Street.

So I would like to say to you, if you're placing a trade every hour, if you are constantly putting yourself into zero data exploration options, and I'm sure some of these trades are working, you are continuously feeding the machines that are Citadel and Jane Street. This is a Bloomberg piece that just came out. They have both released data on how much money they're making because they had to. They sold bonds to the public. And when you do that, you have to make some disclosures. And we don't really normally get data like this.

But the primary beneficiaries of retail- I'm surprised that they did that, by the way. Why would a K Griffiths just be like, yeah, I'll spot us a bill? Well, because they're raising a lot of money from the public. And I guess he's at a point where it's like, we're one of the most profitable firms in the world. Look how much money we're making. All right. Citadel and Jane Street, two of the largest market making firms in the US are on track

for record annual revenue. First half net trading revenue rose 81% to 4.9 billion. 81%. Citadel. And rose 78% to 8.4 billion at Jane Street. So Jane Street in the first half of this year did 8.4 billion in trading revenue. Not trading activity, just their own revenue. And these guys are trading for a penny.

Yeah. You understand? Okay. Jane Street sold a $1.4 billion high-yield bond deal earlier in the year, which is why they're reporting this publicly. Ken Griffith and Citadel Securities generated 2.7 billion of earnings in the first half of this year. That's up from 1.1 billion a year earlier. It's almost a triple. Second quarter contributed 2.6 billion of net trading revenue and 1.4 billion of earnings. That's in a quarter. This is a market maker. So all of your trades, this is who's on the other side of those trades or facilitating

those trades, and they are making money. In the first half, Jane Street's earnings, earnings, 6.1 billion. That's double the 3.1 billion of a year earlier. So this is really just an incredible period of time for people who are on the other side of not all retail but a lot of retail. Jane Street makes most of its money in ETFs. I don't know if you knew that, I didn't really know that. I didn't know that.

And Citadel is making money all over the place, payment for order flow, options market making, corporate bonds, but these are just two of the most wildly profitable businesses in the world. So you said six billion in the first half? For who? For one of them, doesn't matter. You said six billion.

So just for context, over the last 12 months, Morgan Stanley has done $10.5 billion. So these companies are making as much as Morgan and Goldman too, Goldman $11 billion. Yeah. And over the last 12 months. Oh no, if you're, so if you're coming out, if you're coming out of like, If you're coming out of an Ivy and you've got a computer science degree or something,

you're not going to Morgan Stanley. You're going to James Street. This is the home of SBF. If you're the hardcore, hardcore quant, you're going to Citadel. That's the place that you want to be right now. And that's a testament to obviously how profitable these companies are and how successful they've been in the current retail environment. So I think it's just worth people understanding every time they place a trade.

That's kind of who you're trading with. In case you didn't know, you're not trading with me and Michael. People just don't give a shit. It's like, all right, they'll whatever. That's fine. It's the rake. It's the rake. All right. Japanese stocks. I'm not going to spend a ton of time on this, but this was a fantastic piece of research. One of the things that we've talked about on the show, Michael, is this idea that the success of America in the post-financial crisis period and in the post-COVID period is largely due to the breadth and depth of our capital markets.

In Japan, the Tokyo Stock Exchange issued a directive asking all companies with price to book ratios below one times for a plan to get to one times book. So this is the exchange in Tokyo, told all the companies you're trading at a discount to your book value, figure out how you're going to change that and post it to our website. You ready for this? At the time of the announcement, 50% of the companies in the prime section were trading at a discount to a book and 60% of companies in the standard section.

That's more than half. Once they started posting their plans, so the plans are like, we're going to do a stock buyback, we're going to raise our dividend, we're going to sell off non-core assets, we're going to do a merger, put this chart up. This is what happened to raise our dividend. We're going to sell off non-core assets. We're going to do a merger. Put this chart up. This is what happened to the stock prices. This is incredible. This is activism at a country scale. This is literally the exchange in Tokyo conducting a mass shareholder activism campaign, and

it f**ing worked. So for those listening, companies that did not make a disclosure of what they're going to do about it, they only had a 21% rise in their stock price. Companies that said they would consider doing something had a 28% rise. Companies that took a vague action, 31%, the companies that did a dividend are up 41%. The companies that said, well, buy back stock are up 46%. And the companies that did something related to cross share holdings, which is like getting rid of things that they don't need or joint ventures or whatever, were up 56%.

We have never seen anything like this on earth. And the question becomes, does this become a model that other countries with severely depressed stock prices can follow? I have to believe that, by the way, this research comes from our friends at Verdag Capital, and it was really well done. I have to believe that countries in Europe could do this. Am I crazy? When did you write American Gods, which was in your book?

I don't know. Remember what the other was? I mean, the last five, six years maybe. Okay. So Josh wrote a post about one of the reasons why our capitalist society works is because of the companies and the leaders that are running them. And so Japan did the same thing. Well, not the same thing. Japan is doing something to try and get their share prices up, and it's working. And credit to Verdad for doing that.

That was like a hardcore, hardcore machine learning. It was a heavy lift. Yeah, it was a real analysis. It wasn't just like on the terminal or anything like that. So is the eurozone going to be able to follow suit? I have no idea how their political system works. It seems unlikely, but it seems like it makes sense, so it's not going to work. I sent you a podcast this morning with Jimmy Pataro from ESPN talking about a lot of things,

but one of the things they got into was the NBA. The interviewer asked him, are you worried that as the LeBrons and the Steph Currys and the Kevin Durants age out of the league, that they're being replaced by international players. And those international players may be less marketable to fans in the US, which number one I don't think is true. But whatever, let's take the premise at face value. I was thinking about international companies. And we've put a spotlight on Mercado Libre, Melly, which is now the largest

market cap in Latin America. We've talked about ASML and arm holdings and gigantic tech companies that are publicly traded in the United States, but are based elsewhere, and they're being opportunities. I think about like the coming dominance of international players in the NBA. I think about some of these companies in the same way. They take getting used to, but they're all reporting earnings to the standards of the New York Stock Exchange and the NASDAQ. We should be talking more about these companies because I really do think that countries around

the world are paying attention to what's happened here. They want that shit at home. They want massive job creators like Amazon in their own countries. I think that we, like all of us, are going to get more excited about international companies in the future versus how we've been over the last 10 years? We'll see. Well, that that's like a bridge too far. I mean, it seems like we're getting keep going up. It seems like like borders are closing, not not getting wider, like not getting

now or, um, I don't know. In some, in some parts of the world. It's also, it's called, it's cultural. You can't just flip a switch and make stocks go up. The guy in Argentina flipped the switch. I don't, I mean, you could look at the stock market for yourself. I think ARGT is the ticker for Argentina's ETF. He flipped the switch. He got into office and said, I'm going to basically cut every single government agency and I'm going to cut taxes and I'm going to cut regulations and I'm going to fire all these bureaucrats.

Stock market reacted like f**king immediately. It's a wild beast. It's a wild beast. And I don't think that stock market is doing that in a vacuum. I think there's an attitude shift away from socialism that's underway in that country. And you're telling me if you live in Brazil or Venezuela or all these places with all of the corruption scandals, et cetera. You're not looking at Argentina and saying, why not us? By the way, I learned the origin story of wildebeest.

I never knew about that. Shout to Paul from your book. Oh, yeah. No, that's me. That's me. They stole that from me. It's okay. All right.

So we're going to talk more about the single stock ETFs because Bloomberg, Josh mentioned we spoke about it last week with Gunjan and Paul, but Bloomberg had a great article. So, US listed single stock funds, which sounded like the dumbest idea in the world, right? At the time, we were definitely laughing. Now has $13.4 billion after just two years. It's just two years. So this is really a face blower, whatever you want to call it.

This blew your face. Right off my body. So the Europe listed, it's only $11 million, probably soon to be $75 billion. Granite shares has a 3X long micro strategy. So micro strategy is up more than 100% this year. This thing is down 82%. Again, I repeat, the underlying, unlevered is up more than 100% this year,

and this piece of shit is down 82%. It's unbelievable. Is this that guy Will Ryan that looks like? I like Will, I like Will. Yeah, I like him too. This is his, he's Gran uh, he's granted shares, right? Yeah. But this is, this is just one. Doesn't he look like, doesn't he look like Hugh Grant? He's very, he's very handsome, but he's dashing, but here's the good news. If there is a silver lining here, I said last week that I think most people know what's up and most people are using it properly and they are because

they said in the article, Napkin Math suggests that traders are following instructions, meaning don't buy and hold. For example, the $1.5 billion Direction Daily Testable Fund has an average trading volume of nearly $303 million. If you divide that by the average market cap of the fund, it produces a turnover rate of 28%. So, meaning it takes only three and a half days to completely flip its portfolio in terms of shareholders, which is good.

That means that people are trading this, they're not buying and holding. That compares that same statistic for VLO, the Vanguard S&P 500 ETF, it's 185 days. So three and a half days, John, we got a table for this. So a single stock ETF, see entirety of their shares flip in a few days. So again, NVDL, which is one we talk about all the time, only less than three days for the entire thing to turn over. So for the most part, for the most part,

people are using these properly. Ben Johnson, however, said, and this is true, obviously it's not everybody. Inevitably, they're going to be unsuspecting victims of these products for whatever reason, there aren't adequate guardrails in place to prevent them from using without adequate knowledge of how to, let me throw a proposal at you. What if the custodians sent a notification, if somebody holds this for say 14 days, wherever the line is, and just sent out a notification, hey, these products are not meant to be bought and held? Why can't we do that?

I love that idea. When I was a branch manager at a retail brokerage, we had to get letters signed about 3X ETFs. It was TNA and TZA. The TZA. The TZA and the TINA, which JC was trading. But the clients wanted to do these products and the brokers obviously wanted to do them because you have to sell it in the same day. So you're charging a commission on the buy, commission on the sell, and if you hold it

overnight it's almost irresponsible. So needless to say, these became red hot at the old boiler room and we used to have clients sign letters in advance stating that they are aware of the negative compounding of these ETFs. The thing is, it didn't stop anybody. I know. Like honestly, I don't can tell you definitively, but like, I don't remember anyone not trading them after putting that letter in front of them. We were just almost like stamping a ticket like, all right, you're next on the ride.

But trading them is dumb, but it's fine. It's the whole thing. So I spoke with you about this. I said, the volatility is a tax on these returns. So we made two charts to visualize this. So this is one year of decay visualize the top line that grows from a dollar to 99 cents. That's when you alternate between up 1% down 1% up 1% down 1%. If you alternate between up 10% down 10%, this thing falls 72% and a lot of these products are

doing that. MicroStrategy is volatile enough when you add leverage on it and then if you got three years, Josh, up 10% down 10%, you're down to two pennies. It just destroys you. Maybe I'm an idiot, but why wouldn't somebody just buy MicroStrategy common stock using margin and get two times. Like, like if you want to be in, if you want to be in it long term, because you think it's like a way to leverage the upside of Bitcoin, and certainly it has been just buy it on margin and make your margin

calls periodically. What, why would you own this? I, unless you're going to trade intraday, I can't imagine what the, what, what the reason is. So I like what you showed me, how high the turnover is, because maybe that does mean people know how to use these. For the most part. Okay. So what are people buying and selling it five times in one day? Can there really be that many people who are engaging in this?

Well, I think a lot of it is smart money. I really do think a lot of hedge funds are trading these things. So they're arbing something out by trading this and so on? I think if they have a strong directional view overnight, they trade this. Baotunas tweeted, some new style 2X ETFs launching today. These rebalance weekly and monthly instead of daily to try and limit the volatility drag. So we'll see if these take off. Just what the world needed.

Yeah, exactly. I love your idea. I've never heard that idea before. It would not have been feasible in the days of snail mail. But I don't think it's asking a lot, so that when somebody opens up the app and they've been sitting in this thing for 10 days, it could be like, OK, you've now been in this thing for 10 days, here's how they work,

please click that you have read this and understand it. So the sports betting apps do that. If you're on it for too long, it says like, hey, you've been on this for 51 minutes or something like that. It may be chill out. There's no reason why the custodians can't do something similar, all right, I wanna highlight something

that I thought was actually- Dude, by the way, that's a great idea. Bartenders are trained, and not at Harvard, to tell a patron after three drinks, how about a glass of water? After six drinks, I think it's time for you to go home. This is very, very big. Is it a law?

Maybe it's not a law. Maybe it's just brokerage firms growing up a little bit. Custodians could implement this if they wanted to. I saw an ETF strategy that I actually think is kind of interesting. It's the opposite of this stuff. So Eric tweeted, new filing for the research, Rafi, for the research affiliates deletions ETF, which will hold stocks recently deleted from big indexes. One that's about to get deleted, I think, from the Dow is Intel.

This thing is down to one third of 1%. It deleted, I think from the Dow is Intel. This thing is down to one third of 1%. It's the smallest weight in the Dow by far. I mean, I'm pretty sure that Intel is getting booted imminently. And Valchunas also tweeted, interesting timing on the RAFI thing, as Tom Saraphagus had this chart in a note today showing that deleted stocks, this is the S&P 500, deleted stocks in SPX tend to outperform. So three more. Except when they go bankrupt. The ones that don't.

No, of course. The ones that don't, there's a thing here. But if you buy a basket of them, I like this idea. I'm for it. I think it's neat. I like Rob Arnott. I think he's really creative and very clever. And I think we should have him on to talk about this thing.

Yeah, I like it. I like it. I think it's clever. Okay, I'm going to make the case, Josh. I'm following your footsteps. I'm going to recommend, first of all, the recommendation is to like maybe chill out a little bit, right? Like extremely bullish. We just got our first sell off. We're down 2%. Everybody relax, calm down. All right, with that said, I made the case for IMAX on May 4th. And since then, John Chardon, it's done well. It's up 20%.

S&P's up 6%. Wow. Look at this. It's good. I'm not following it. It looks like it's about to break out, though. It is. So technically, it looks great.

But I want to talk about the fundamentals real quick, because I think there's an actual story here. So we know that people's preferences for events and blockbuster stuff and really going after it changed dramatically from pre-COVID. So I think this chart is a great example of that. On the left-hand side, you've got the historical global box office and it's in a steep drawdown from its 29 peak. And who knows if and when it surpasses that. IMAX, on the other hand, the premium of experience, so the 2024, the dark blitz all projected, but 2023, it's not far from the peak and it's going to demolish it.

So why? It's because it's getting a stronger percentage of movies. It's less than 1% of total screens. I think it was like 70% of Dune tickets. Alien Romulus was 20% or something like that. So in 2018, it was 3% of the domestic market. I'm looking at the dark blue lines, 3.2%. Forget about 2020, COVID, everything was shut down. 2021, 4.4%, 4.8%, 4.4%. And hopefully, they're looking at 5.2% in the first quarter of next year. 4%, and hopefully, they're looking at 5.2% in the first quarter of next year. This next chart shows the top 10 grossing IMAX titles for the market share of the domestic

weekend. Again, it's less than 1% of all screens. So if you're going to see, if you're seeing Furioso, whatever, if you're going to see a big action movie, you're going to IMAX. And then lastly, they are extremely shareholder friendly. They've purchased 19% of all the shares outstanding since 2020 at a favorable price. And lastly, Josh, you mentioned technically, this thing had a reversal today as the market fell apart, but it's breaking out. The only concern is that there has been a lot of overhead resistance going back the

past couple of years. Next chart, please. So this is on a weekly basis, so who knows if it gets turned around again. But I like the setup. It's my biggest position now, and that's the case. I'm going to tell you, I think this is a great idea. I think the stock is going to work. I've been involved in it off and on for 18 years.

And one of the things I would say about IMAX now that's different than ever before is it has become strategic to every studio with a $200 million movie. There was a huge debacle two summers ago when Oppenheimer came along and made it so that the new Mission Impossible couldn't stay in the IMAX theater. So they didn't make that mistake again. And no one's going to make that mistake in the future. Securing IMAX screens has become strategically necessary. Mission critical.

You're going to see Marvel, I predict. You're going to see Marvel. You're going to see the new Superman film. You're going to see the highest grossing films break out how much they're making in IMAX. And you're going to see IMAX continue to benefit. They're also huge in China. They've opened tons of IMAXs all over the world. China is probably their second biggest market. So if a US slate bombs over the course of a summer, it's not like they're not making money on something. So I think it's an interesting idea. And they're re-releasing Interstellar. They're going to start doing that. Interstellar is going to do $100 million. Don't you think?

Maybe that's high, but. I've always said the path back to large format screens, to getting people into the movies as though it's an event, is the nostalgia factor. I know it's hard to get people to come out for something they've already seen. Not really. Did Terminator 2?

But if marketed correctly. Terminator 2? Yeah. In IMAX, I'm in. Yeah, no, I agree. I think there's a few movies that you could bring back on 10th and 20th anniversaries every year that could supplement the period of time

between new blockbusters. We just have to, I know this is not an IMAX movie, but the 30th anniversary of Pulp Fiction, like people would come out for that shit. I agree. All right, you ready to play mystery chart and then we'll get out of here? Yep. Okay.

John, if you please. Okay. All right. The bottom chart in orange is a S&P sector, one of the 11. The top chart is a sub sector of that sector. And the hint that I'm going to give you, which I'm guessing the purple, okay? Yeah, I think I know it. Go ahead.

And the hint that I'm going to give you is it's one of the top performing sectors of 2024 so far. Okay, so the orange line is financials and the purple line is capital markets. Very close, not very close. You got half. Okay. So I got the financials.

Yeah. As a top one insurance. Bang, got the financials. Yeah. It's the top one insurance. Bank. Second guess. Look at you. Reveal. Oh, shit. Thank you.

Thank you. So this is actually an ETF. This is the IAK, which is the iShares US Select Insurance ETF. Not familiar with that one. I was not terribly familiar with it either, but you want to hear something crazy? Berkshire Hathaway is not in it. What? What are they in? I asked Chart Kid Matt to try to figure out why isn't it in there. I think as of press

time we don't have an answer, but I have some more charts from this. Let me show you really quickly. What's the next one? Okay. The purple is the iShares US Insurance. This goes back three years, okay? It's up 66%. The XLF is up 26%. The S&P is up 30%. This has done double the stock market over the last three years. And I think a very big part of that is insurance companies have price and power like almost no other industry. What are you going to do when the rates go up? You're going to not insure your house, your business?

Great inflation hedge, it turns out. That's an incredible inflation hedge. If you were worried about inflation, gold wasn't the trade. This was the trade. Now, I'm just showing you the two next to each other side by side. Did I have one more? What else did I? Oh, these are the holdings.

It's market cap weighted. Progressive is 16%. Chubb is 12%. Travelers is 5%. AIG is 5%. Affleck is 4%. And change. Most of these stocks, I'm showing you the change on a daily basis, but on a year to

day basis, most of these stocks have done well. Let's put that performance chart up. Yeah, these stocks, I'm showing you the change on a daily basis, but on a year-to-date basis, most of these stocks have done well. Let's put that performance chart up. Yeah, these stocks are ripping. Dude, look at this. Top 15 year-to-date returns within the Dow Jones Select Insurance Index. Oscar Health has doubled. Palomar, Mercury General, Progressive, Arch Capital, all up 50% or more. And then there's 10 others that are up 30% or more. It's really been an unbelievable place to be in addition to Berkshire Hathaway. Here are the top five holdings and how they've done this year. If you owned any of these, you're up double the stock market.

Nobody owns these names. Nobody? I don't know anybody. I own Berkshire. I don't know anyone that owns those other five. Who's long progressive in the chat? Raise your head. You know who's long that? Like value mutual fund managers. And they absolutely smashed it. So great job second guess. Hey everybody, please remember if you subscribe to the Compound

Insider today, you're in the running for a signed copy. Best book of the year. You weren't supposed to see that. Michael Batnick says it's the best book of the year. Let me also say tomorrow is Wednesday, which means an all new Animal Spirits with Michael and Ben. Thursday, we'll have Ask the Compound with Ben and Duncan. And then on Friday, The Compound and Friends returns with two special guests. Jill on money on Saturday. Thanks so much for watching.

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