The Compound and Friends - The First Rate Cut, Dan Loeb Buys Apple, Previewing Nvidia’s Earnings

Episode Date: August 27, 2024

On this TCAF Tuesday, hear an all-new episode of What Are Your Thoughts with Josh Brown and Michael Batnick! They cover the upcoming Nvidia earnings report, the slowdown in leisure and hospitality spending, hedge fund manager Dan Loeb’s recent comments about Apple, an all-new make the case, mystery chart, and more! This episode is sponsored by Public. Make your savings work harder and earn an industry-leading 5.1% APY with a high-yield cash account on Public. Visit https://public.com/WAYT to learn more! 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/ Public Disclosure: Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. See https://public.com/#disclosures-main for more information. Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to the compound and friends tonight show is brought to you by public more on public in a moment Tonight Michael Batnick and I have an all-new edition of what are your thoughts? We take a look at what happens typically after the first interest rate cut of a cycle and We're gonna walk you through the data We're gonna walk you through some of the scenarios that you want to start thinking about We also preview the Nvidia earnings report. This is happening We're going to walk you through the data. We're going to walk you through some of the scenarios that you want to start thinking about. We also preview the Nvidia earnings report. This is happening Wednesday night of this week, one of the most anticipated events of

the year. We talked through some of the subplots, some of the data that people will be looking for, some of the storylines. And we also take a look at Dan Loeb buying $400 million worth of Apple stock and proclaiming Apple to be ultimately the winner of consumer AI, which is actually something that I agree with. We take a look at the blow up and icons, IEP vehicle, and there's just there's so much here.

I don't want to take up any more of your time. I do want to tell you we appreciate you so much. We love your reviews, we love your ratings. Please keep those coming. If you're enjoying the show, what better way than to tell the world by going on the podcast app of your choice and recommending us.

All right, that's it from me. I will send you over to the show right now. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick and their cast mates 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 RIDHOL's Wealth Management may maintain positions in the securities discussed in this podcast. Okay. Hey guys, it's Tuesday night, five o'clock. Time for what are your thoughts? Like we do every week. My name is Downtown Josh Brown. I'm here with my co-host, Michael Batnik. Cogino mio. Hey, how are you doing? Look at you.

I want to do a kiss on both cheeks. So Sandler's special comes out tonight on Netflix. Love you. That's what it's called? Is it just stand-up comedy? I don't think so. I think it's more than that. It's like a movie.

Does he have his guitar? Yeah. All right. Shout out to Adam Sandler. My daughter told out to, shout out to Adam Sandler. My daughter told me once that I dress like Adam Sandler and I obviously did. Well, I didn't take it as a compliment, but this weekend I'm seeing all these like social media things about Adam Sandler and how cool he dresses and that all the Gen Z's are like following in his footsteps with like the high socks,

the shorts that don't match the shirt. Like that's like a whole thing now. He like has like mesh shorts from Marshalls. He doesn't give a f***. But I don't dress like that. That's a weird thing. All right, let's say hello to some folks. Chris Hayes is here. George UD, Jeff Asola. Great to see you. Hey, Nicole's back from from Europe. Everybody say hi to Nicole. Grazie is in the chat. Magnus is in the chat. We crawl is here.

John Carlo stock market. Mike, what up? Who else? Everybody's here. Mark Cavallo. I see you. All right. Tonight's show is a very big show and we have a very big sponsor.

Tell us about Public, Mike. Public is where I keep some of my cash. I'm getting 5.1 APY, but not from long. So I'm enjoying it while I still got it. That's 5.1 APY. You can get it easily on Public. It's liquid. There's no minimums. There's no friction. Bing, bang, boom. You're in, you're out. Easy peasy, lemon squeezy. Make sure you go to public.com to learn more. This is a paid endorsement for public investing. 5.1% APY is as of June 17th, 2024 and is subject to change. Full disclosures in the podcast description.

All right. We should get right into this because there's a lot going on. The first thing that we're going to talk about is the fact that roughly a month from now, we will be staring down the barrel of the first rate cut. Last week at Jackson Hole, Jay Powell went out of his way to basically guarantee that it's coming. The man said the time is now. I can't think of anything that might happen between now and then that would derail it. And I think at this point, it's time to start thinking about

what happens typically, historically after the first rate cut. What are we in for? What is the range of possibilities? And what do we think is the most likely probability? Um, so with that being said, uh, I just want to remind everybody of a couple of things, put up this chart from, uh, Ren Mac. So this is from the gang over at, uh, Renaissance macro. This is every fed easing back to 1960. And I want you guys to keep in mind, in the 60s, in the 70s, in the 80s, there were no announcements of what the interest rate is.

Like you would find that in the newspaper a week later that the Fed had cut rates. It wasn't an event. It wasn't on TV. Nobody talked about it. Greenspan really started the theatrics with policy statements that were read aloud on TV, but he never spoke to the press, chart off for a second, never spoke to the press, never took questions about a particular move that he made.

And if he gave prepared remarks, it was to Congress, and it was literally indecipherable. Nobody understood what he meant, and it was literally indecipherable. Nobody understood what he meant and that was by design. So the cuts now are a little bit different. They get a lot more attention and they're explained as they're happening. However... And telegraphed. And telegraphed. But let's put this back up. This is back to the inception of the S&P 500 So according to red mac, there are a lot of charts floating around that start in 1989 which is not enough data and To their point mostly self likely self-serving the arrow colors denote the drawdowns

From that first cut over the next 12 months. So this is kind of their version and then we did our own version. But Michael, can I roll through some stats from Callie and then have you react to them as I do them? Please do. Is that cool? I beg you. So the first one I want to do, chart off. Callie says, Callie, for those of you guys paying attention, Callie Cox is our chief

market strategist. And she notes, right now, rates are restricting economic growth. The Fed merely wants to move to a neutral stance. She refers to these types of cuts as celebratory rate cuts. Not that we're throwing a party, but celebratory in that they're not emergency cuts. They're not fighting a recession. That's a different kind of interest rate cut. This is celebrating the fact that, hey, we don't have to be as restrictive as we were. Okay, since 1970, there have been 18 Fed rate cutting cycles.

11 of these 18 rate cutting cycles were desperation rate cuts. The Fed had to cut because the economy was in or within 12 months of a recession. And she notes that the S&P rose an average of 7% over the following 12 months. But the average is deceiving. In most instances, the recession caused a steep sell off at first and then a bounce back. So the range of 12-month returns is negative 36 to positive 34.

In the 12 months after the rate cuts started, the S&P was in or fell into a bear market 10 of 11 times. So that is most rate cuts, and I think that's what most people are afraid of. Would you agree that that's the concern here is, oh no, if they're cutting, it's probably because there's a recession? Yes. But that's not the case here. This is an unusual cycle in which the thing happened, the soft landing happened.

And there's still data to be had between now and September 18th when the next meeting is. But everything, for the most part, is saying the economy meeting is, but everything for the most part is saying the economy is slowing, normalizing. It's not an emergency. Prices continue to go down to their 2% target, which he said he's confident that they're on track to do, and they're doing the thing. So this is, I don't know that they get the credit for this, but it's a wonderful outcome. they get the credit for this, but it's a wonderful outcome. So out of these 18 rate cutting cycles, seven of them were exactly what this is today, a celebratory rate cut cycle. That's higher than what we guessed. Right. So seven out of 18 is not quite half, but not that far away. When the Fed,

so this is just really the Fed adjusting policy, not responding or trying to prevent a recession, at least not yet. If you just look at the S&P reaction during the celebratory rate cut period, the S&P rose an average of 11% over the following 12 months. The range of returns is tighter. It's minus 5% to plus 18%. In the 12 months after the celebratory rate cut cycle started, the S&P was in or fell into a bear market only one out of seven times, and that was 1987. So out of the seven instances of these types of interest rate cuts, only in

one of those cases was there like a stock market crash. And it was a notable one, but it didn't really last that long, certainly didn't leak over and affect the economy. And by the end of 1987, the stock market was actually positive on the year, which most people are not aware of. So I think the distinction between celebratory rate cuts and emergency rate cuts or desperation rate cuts, I think cuts or desperation rate cuts. I think it's a worthwhile distinction.

You and I sometimes laugh when people try to parse the data, but this is a pretty big distinction. Is there a recession or isn't there? And that's really the main point that I think we should be getting across to people. What are your thoughts? I love, before I give you my thoughts, let's just show this chart.

Chart out please, the history of Fed cuts cuts because I want to talk about this for a sec. So Josh explain what Matt and Callie did here. Shout to chart kid Matt. So we wanted a visual so this this concept that I described what we wanted to be able to show was okay show me the S&P 500's forward 12 month returns when there is no recession and those are the blue bars. And this goes back to 1957. Show me the S&P 500's forward 12-month return when there is a recession. Guys, you'll notice there are some red bars that are higher, not lower.

That's real. We've had recessions where stocks rally. And then the question is, what is the worst of the, what is the max drawdown from the start of these rate cut cycles? How low has the market gone? And those are the red diamonds below. And as you can see, we have a really extreme one from 1973, negative 44%. But then we have a lot of these that are contained to like 15% or less,

actually most of them. So what we're basically saying is the magnitude of the, and this is shout to chart kid Matt on our research team, the magnitude of the drawdown is dependent on whether or not there's a recession or a non-recession. According to Matt's work, the rate hike cycles that coincide with the start of a recession, the average drawdown for the S&P 500 within a year is negative 16%. That's on the right side, guys. The average drawdown when there isn't a recession associated with the Fed cut cycle is only

negative 4%, which effectively is meaningless. Like that's the average drawdown for all the time. So rate cuts in and of themselves are not proof that recession is on the way. There have been seven out of 18 instances where the Fed cut just because it could and not because it was forced to. And so far, this looks like it's one of those.

And of course, things can change. But I wanted people to understand that this is not a black and white thing. Uh-oh, rate cuts, therefore recession. It's not that simple. So I agree with that takeaway. The other takeaway that I have, and I love that chart and I love all the data,

but there really is no historical analog for the situation that we're living through. You have the Fed aggressively hiking after the highest bout of inflation in four decades. You have the job market still fairly healthy. You have the stock market within 1% of its all-time high, and they're about to cut. Those dynamics are something that we've never seen before. So there's not a lot of data here. We just don't know.

I wish we had five centuries where we could say, OK, over the course of 500 years, instead of 18 weight hiking cycles, I'm going to show you 80 weight hiking cycles. I would much prefer that. Yeah, of course. But we kind of have to let what we have have to let, what we have to work with is what we have to work with. And what I said on my blog tonight, downtownjoshbrown.com,

I show another chart that literally shows the forward course of S&P 500 versus every other instance. And I basically say this chart doesn't predict anything. What it does is provide a range of outcomes from history so that you don't have to automatically make the assumption that this is going to be a worst case scenario or that there's only one way this thing can go. That's really important in long-term investing is to think probabilistically, not deterministically.

And so that was the main point that I really wanted to bring out here before anybody throws themselves off a roof. So the market celebrated Powell's speech. Ryan Dietrich tweeted that Friday was a 1990 day at the NYSE. What that means is that 90% of stocks and 90% of volume were higher. The first time since the end of the bear market in 2022,

which is pretty remarkable, again, considering that we're in the end of the bear market in 2022, which is pretty remarkable, again, considering that we're in the opposite of a bear market. This is the raging bull market. That's what this is. And so to have that sort of extreme buying, extreme buying is remarkable given the circumstances. Why do you think there was such an extreme buy program or why were there by programs like that all over the market after a speech that was widely telegraphed in advance. Nobody thought he was coming out to pour cold water on rate cuts.

They acted like they were shocked. Mike. He finally acknowledged that there is softening in the labor market and the risks there are to the downside and outweigh the risks of inflation reigniting. And so I think this was the, okay, we are going, we're going. He actually said something about the balance of risks or something about we will do whatever we have to, or we will do whatever we can to support the labor market. That was a big one. I think while he was saying that was probably the biggest jump in the market. I think that was the one that

really made the Algos horny. I don't really know how else to phrase it. But he hasn't been worried so much about the labor market up until now. It's that and we're in a bull market. There's no need to overthink it. Stocks fall up in a bull market. People wanted the reason to buy, not sell, and he gave it to us. Yeah, exactly. Gave us no reason to sell that at speech. That's all right. Okay. On the other side of the coin or complete other side of the spectrum is Carl Icahn, who I think we both have a lot of respect for, but it's unfortunate. He is not, he is in the twilight of his life. He's- Oh, I hate this so much.

I feel so bad. He's got to be close to 90. And for all impenetrable purposes, he blew up. So what's the story here was IEP is his holding company and he owns 85%. It's publicly traded. He owns 85% of it. And the net asset value is estimated at $5 to $6 billion. The market cap of the company was $18 billion. And the reason for the giant disconnect was investors were willing to pay a premium because of the juicy

dividend yield, which was like 17% of something outrageous. What got him into trouble is a few things. He wasn't disclosing some of the loans that he was taking out against the company. Matt Levine wrote a post and he's like, well, I understand why retail investors are paying the premium. I understand people are attracted to the dividend yield. Why are bankers loaning him $5 billion against $5 billion? Who does that? The SEC charged him and his public

traded company. Just to back up, so last May is when the short seller Hindenburg just unloaded a barrage of information about how this whole thing worked, how they were borrowing money against his holdings in the company and they were using that somehow to what were they doing with the loans money? Were they paying back the higher than normal dividend? He was investing it, I think. It was just leverage. So they said $2 per quarter cash dividend, an annualized yield of about 15.8%.

The highest dividend yield of any large cap company over $10 billion by far, the next closest being 9.9%. And so that blew up the stock, I mean, really destroyed it. And there's been no recovery. And it's traded sideways to down. And then the SEC- Oh my God, look at this. Yeah, just really bad. So the SEC charged it for failing to disclose information relating to ICON's pledges of

IEP securities collateral to secure Personal margin loans worth billions of dollars under agreements with various lenders They agreed to pay 1.5 million dollars, but it's really this is pretty ugly so the fine itself is a slap on the wrist maybe because his whole net worth was wiped out anyway by the stock, but they find him 1.5 million and 500,000 in civil penalties. But basically, I guess he has a responsibility to let the public know that a lot of the shares are collateralized for loans.

Well, hey, if things go bad, there's going to be a lot of margin calls against the stock. Right. So why would the banks be lending to him on this basis? And why wouldn't his general counsel tell him, hey, you might want to disclose this? Well, it seems very reckless. This was like the thing that I took away from Matt's article is like, why were the banks doing this? Okay, this is from Matt, Matt Levine. Icon Enterprises LP had about 353.6 million shares outstanding. Carl Icon owns 85% of them, to your point, Michael, or 300 million shares. The stock closed the year at $50.65 per share, which is a market cap of $18 billion, which means Icahn's stake was $15 billion. That's him personally.

Icahn pledged $181.4 million of his shares or 60% of his own stake and roughly 51% of the total market cap of this thing as collateral to secure margin loans with seven banks. Those pledged shares were worth $9.2 billion at then current market prices. Against that $9.2 billion, the banks loaned ICON $5 billion of cash. This seems like real high flying shit. I guess his assumption was the stock can never go down. But Matt was saying that that $9.2 billion of collateral was marked up. The real NAV

was half of that. Again, I don't know which banks were doing this or why, but this just is a sad story. Did not end well for Carl Icahn. The conclusion from that is if you thought of IEP as not as a publicly traded company with a market cap of 18 billion but rather as an investment fund with about 5.6 billion of assets, that's the actual NAV of the underlying, then it is really really weird that the banks would lend Icahn five billion against half of that fund. Those loans were pretty under secured. I don't fully understand what I guess people on Wall Street banks that try to assess like

who's a good risk. They're like, dude, it's Carl Icon. He's been here since the Jurassic era. Like what could possibly happen that he wouldn't pay the loan back? I'm guessing they thought, listen, to your point, he was money good. And furthermore, I'm sure he was trading through whoever made him these loans and they were getting a piece of the debt. He's definitely using prime brokerages all over town. So they were getting a piece of the business and all was well until it wasn't. It reminds me of all of the banks that are on the hook, debt creditors of Elon Musk's

Twitter take private. They all want to be in on the SpaceX IPO. So they could lose, they lose a billion dollars financing the acquisition of Twitter, it's going to hurt no matter what. But if they're involved in SpaceX, they have their clients in there as shareholders. They're getting underwriting fees, syndicate fees. It might have strategically been worth it.

Let's say a billion dollars worth of debt is like $0.70 on the dollar or something. They have to refinance it. It might be worth it. I don't know. And XII too. So it's not just, yeah, the loans to Twitter or something, they have to refinance it. It might be worth it. I don't know. And XAI too. So it's not just, yeah, the loans to Twitter or X whatever was obviously horrendous financially, but they still might make out okay if they can get his other lines of business. What happens to this IEP stock now? Do they have to do anything or is it just like the

premium is gone, the loans have been disclosed and it just sits there in trades until Icon liquidates it or like what's the... I mean lower. I would assume that- I've never seen anything like this. I assume that there's just going to be more selling pressure, right? I actually would bet that this is probably part of the reason why there wasn't a lot of enthusiasm for people to buy the Persian Square closed end IPO.

Like if Carl Icahn lost the premium in his stock, why would you bet that Bill Ackman will keep his premium to the IPO price of whatever they take public. It seems like we're at a crossroads in terms of believing in people's premiums over NAV. People are like, interest rates are five and a quarter percent. I'll buy it at NAV. I'm not buying it 50, 100% above NAV. I feel like this is not the season for something like that. No.

There was a movie on HBO about Carl Icahn's life and career. Loved it. That was the top. I loved it. But right, right? That was probably in 2022 or something. And that was it. Like, that's as good as it got.

Some of these guys, I mean, I hate saying this because I really respected Carl Icahn. Some of these guys just need to know when to stop. And I told you, I'll be, dude, I'll be out. My number is nowhere near as high as Carl Icahn's, and I'm not a hedge fund manager, but I am not going to have a problem with this. I will be running around Boca Raton with a fistful of Bluetooth and you won't even be able to find me. A fistful of what? Nothing.

I will disconnect my phone. Like, it will be very, when it's my time to walk away. Maybe I'm 72. Are those the horny pills? Maybe I'm 52 even. I don't know. But I ain't going to be launching closed end funds, I'll tell you that.

I ain't going to be borrowing money against closed end funds when I'm in my 90s. That's not going to be my situation. I'll just tell you right now, I'm going to know when to go. You won't make it to your 90s, don't worry. Well, that's true too. All right, we're going to talk about, speaking of hedge funds, we're going to talk about,

I thought what Dan Loeb wrote about Apple at the end of last week was really good. It aligns exactly with the way I'm thinking about Apple. So I'm going to read some sections of it, but the TLDR is if anyone's going to get consumer AI right, it's going to happen in the iOS ecosystem, of course. And not only is Apple not an AI laggard, they are set up from a distribution standpoint to be the outright winner. I very much agree with this idea and wanted to hear what you, before we get into it, let's throw this chart of Apple up. I want to, guys, I want you to focus on this period of time from like late January into May.

It was like big time. It was getting destroyed. Yeah. And this is when Dan Loeb was buying it. So he started to buy it in April and Berkshire Hathaway was already in the process of trimming it. We recently learned and now we've learned that third point, which is Dan Loeb's hedge fund, made it their seventh largest stock holding so far. They own about 4.37%, which sounds like they're actually underweight Apple relative to the S&P 500, but they're definitely overweight relative to most hedge funds. Yeah, why are they so bearish? Yeah, yeah. So he's got 1.95 million shares according to the first 13G or 13F.

And that's like, it's not nothing. He's got $400 million in Apple stock recently purchased. And maybe he could even be buying more. But he kind of nailed the bottom. And I want to hear what your thoughts are about this. In April, we took a position in Apple. This is from the third point shareholder letter. The world's leading consumer technology franchise with an ecosystem of 2.2 billion devices,

blah, blah, blah, blah, blah. Apple excels in most of these device categories with revenue share of 50% to 60% in several key markets. Despite Apple's dominance as a business, its stock had become increasingly under-owned by institutions and its relative multiple had compressed toward a multi-year low. We believe this was due to several years of stagnant earnings growth exacerbated by more recent fears that Apple may turn out to be an AI loser, our research led us to a different conclusion.

We believe AI-related demand could drive a step change improvement in Apple's revenue and earnings over the next few years. So there's a lot more there about how the App Store, etc., etc., this will drive like a lot, you know, the installed base are going to go crazy for these phones, people are going to upgrade. I sort of think that that's exactly right. And I think that's why the stock is the best of the Mag 7 right now. Apple and Meta, I think, are the closest to their highs. And it looks pretty good technically.

What do you think about what he had to say on this? Um, so, well, the, so the iPhone has been stagnated for a long time, right? It has not been helping the company. It's still 46% of their total revenue and shrinking, but it's still the, the lion's share of their revenue. This is a, uh, this is a 13 pro max. That's like already two generations ago, and I feel no compulsion to get a new one. John, chart on.

So of the last six quarters, it's shrank. Next chart, please. Of the last six quarters, the iPhone revenue has shrank three out of the last six. So it's just not growing. So the question is, are they going to, chart off, please, are they going to demonstrate enough with this new AI that people are like, holy shit, I need this.

And there is an event on September 9th. They put out the ad yesterday. They said, we're glowing with excitement. I don't know if this is nothing or something, but according to the information, all of their events have been on Tuesday and this is a Monday, could be nothing, could be something. They have to show us. There has to be such a massive, holy f***ing s***, how did they do this?

I need to have this. Well Michael, it's conversational Siri. So this is really important. Multimodal is really important in the next generation of AI. So speaking to something, but then having that be translated into some other format, whether it's texts or whatever, but then conversational AI with Siri. So it has to be like, Hey Siri, get me an Uber to my address. If they don't do that, if that does not happen,

and not with Uber, but whatever, then I think it's going to be a flop. It really has to kick ass. It has to be, hey, Siri, let's go back to my friend's house. Which friend? Anna. Anna with the long hair from your your pictures or Anna from college. No, Anna from college.

No, Anna from the DMs. Right. Or like, Oh, Hey Siri, let's go to my, uh, call my favorite Italian restaurant. Make a reservation. Yeah. Opening open table. They have a table for 7 PM or 7 30, which would you like? I'll take 7 30.

It has to be that. Yeah. Has to be so gangster. They might not be there. I don't know. I mean, we're all going to find out together. If it disappoints, the stocks are dropped 10% in like a week. This is Dan Loeb.

Oh, so Apple intelligence features will not be backwards compatible. This is key. I think past the 15. Oh, so Apple intelligence features will not be backwards compatible. This is key. I think past the 15. So if you have a 13 or a 14 like I have, you won't be able to use these features without getting a new phone. This is important. This is Dan Loeb. Second, Apple's App Store is likely to become the primary distribution platform for most new consumer-focused apps such as OpenAI's chat GPT with which Apple just recently announced the partnership. We expect Apple's claim on the future economics of these apps to be substantial as it exploits its distribution advantage.

So that's more compelling to me. Okay. Here's how that meeting goes with Sam Altman and Tim Cook. Tim Cook says to Sam Altman, how would you like to get to scale tomorrow? Sam Altman says, tell me more, say more. Tim Cook says, okay, we will build you into the App Store as basically Apple intelligence powered by chat GPT. You will instantly have an installed user base potentially of like 500 million people who buy the next two

or three versions of the phone. And ultimately you guys will be woven into everything we're doing on Mac, on iPad, on iPhone, on whatever. If you're Sam Altman, regardless of your tie-up with Microsoft, you have to say yes. You have an obligation to say yes.

And Tim Cook says what, and for that privilege, I'll take 30%. And for that privilege, you will pay me 30% of the revenue that you derive. And Sam Altman says, instant scale amongst the best demographic of any tech user based on the planet we're in. What if he says, all right, I'll give you 30% of the first 10 billion. No, but what is he going to say?

Oh, let me see what Google's offering for like a Pixel phone deal. It's not happening. This is it. This is it. So I think Dan Loeb will be right. And I'm not saying the stock price is not already discounting, but there is no consumer AI without Apple and the iOS ecosystem sitting at the center of it. It's just never going to happen otherwise. So I think that's the

way to think about it. Well, Monday, September 9th, we'll find out. Yeah, put that chart up one more time. Which chart? Apple chart, just price chart. You want to be long or short that's going into September 9th? Well, it's 6% of my index fund, so I'm long. I don't think you want to be shorted.

That's all I'm saying. Okay, GMO put out a paper. Not shockingly, deep value is their highest conviction long on the investment idea. But I thought this was interesting. They said, for the avoidance of any doubt, when we talk about deep value, we simply mean stocks that are cheap, often screamingly so relative to our appraisal of their value. We don't care about growth or value, the quote label that has been assigned, sometimes seemingly

arbitrarily by one index provider or another. While Alphabet and Meta, for example, are considered to be growth stocks by the MSCI index compilers, they are exactly the kind of bargains that we are looking to include in our deep value cohort. And indeed they made a tremendous positive impact over the last month. So their top holdings, this is kind of interesting. JP Morgan, Alton Maher by the way, ExxonMobil, Metta, Johnson & Johnson, and Alphabet. That doesn't really look like anything that I've seen.

I'm sorry. What makes Metta and Alphabet deep value? Is it their discount relative to the rest of their peer group? They wrote something about it, but I don't know exactly what goes into their calculation. So they have a chart showing the different cohorts of extreme growth. So they call this the most expensive 20%, then the next most expensive 30%,

shallow value they call the next 30%, and then the deep value is the cheapest 20%. And in this, they say stock valuations are calculated on a blend of price of sales, price of gross profit, price of book, and price of economic book. So a bunch of adjustments in here. But the point that I want to make that they're making is that deep value is trading at the 10th percentile, meaning it's only been cheaper 10% of the time relative to itself than it is today. Can we put this table up? What are these holdings of?

Like they have their flagship value fund? This is their fund. Okay, so basically these are Dow components. I think it's called like the US Opportunistic Value Fund or something like that. or Dow components. I think it's called like the US Opportunistic Value Fund or something like that. I guess I wonder how like what metrics they're using to classify these stocks as deep value. Like JP Morgan is not a value stock relative to any other large bank. I think it's the highest on price to book. I mean, with good reason. It's just interesting. G.I.J.P. Morgan, Alphabet, Cisco, and Pfizer.

Well, no, I understand why Pfizer's in there. It's like 12 times earnings. I'm trying to understand how some of these other holdings are being considered deep value. The only thing I could think of is it's a PEG kind of thing. And they're doing like a price to earnings growth, just to like say, all right, it's not a cheap stock in absolute terms, it's a cheap stock relative to earnings growth. They said, I don't think there's a growth component in here.

They said, maybe it is. They said both Alphabet and Meta are highly profitable companies that score strongly on our quality metrics, and yet trade at a significantly lower forward PE ratio than the broad market. That is why our strategy will continue to focus on evaluation and fundamentals. I thought this was interesting. Just again, chart back on for a second. But the bigger point is that the extreme growth is truly at the 89th percentile and deep value, these are mirror images, deep value

has almost never been cheaper than it is today. Other than post-COVID and 1999, when these stocks, you couldn't even bring up a value stock in a room full of investors without being laughed at. Yeah, listen, this is interesting to me, but I feel like these extremes go on for a really long time. And I don't know. I listened to Michael Malbasan on with Meb Faber. I think it was like a week ago they recorded it. And Michael said, and one of the

things they were talking about, maybe Meb brought this up, you could be armed with 65 years worth of research showing the persistence of small cap and value premium for owning those factors. And then the last 10 or 15 years would have ended your career because the last 10 years defied the prior six and a half decades. So it's almost like you showed up with nothing. You just didn't know it. Well, Gavin Baker, Gavin was talking to Patrick, which was an incredible podcast, by the way,

I understood 20% of it. Gavin was talking about the premiums that existed back in the day. And the value premium was derived from the fact that people are embarrassed to own these names. That's how bad they were. Nobody would buy them because they were just so, so, so shitty. And then quantitative investing came along and said, we're using screens. We're not embarrassed. We're going to buy the talk. Right. Stigma. So the embarrassment premium went away. It's not saying that the value factor cannot perform, but it's just the longer premium disappeared. I never even thought about that.

The reason behind why those stocks worked, they were systematically under owned because they were pieces of shit. They were systematically under owned because they were pieces of shit and professional money managers didn't want to report to their shareholders or to their board, this is why we own this. And algorithms don't get embarrassed. With the advent of systematic strategies that are software driven, nobody has to explain a position. I own Pfizer, I'm embarrassed of it.

I mean, it's I'm embarrassed of it. I mean, it's literally a piece of shit. So it's like, credit to me. I dumped it again. I was in, I was out, I was in, I was out. I've dealt with this garbage. I got to tell you though. I got to tell you though, one day there's going to be some news about their weight loss pill and it's going to gap up 12%. You won't be able to get back in. That's fine. I don't know when that is. I don't know when. Just lower. The more times you sell it, the more likely it is that it's coming.

That's probably true. That's probably true. Nvidia, let's talk it. All right, so this is the big thing. I had a little mini debate on Halftime today. Oh, a mini debate? No, like Rob said something. I'm not there in person. I'm here on Long Island, but

Rob was at the exchange and he basically said the whole market is waiting for Nvidia and when they shoot the generals. Basically saying the leadership has to hold up. I just don't agree. We just put up an Apple chart, which was bigger than Nvidia. I showed you how much that stock sucked this spring. The rest of the market was rallying. No close to an all-time high today, equal weight. The Dow Jones Industrial Average made an all-time high yesterday. Dow doesn't care about Nvidia.

Listen, I can envision a scenario where Nvidia disappoints or gives guidance that spooks the NASDAQ, and we get like a down 400 point open for the queues. I think like within hours that money will get redistributed and you'll start seeing healthcare rally. It depends on what they say. It depends on what they say. No shit.

But I don't agree with this idea that the generals have to hold. I think it's the opposite. It's three trillion in market cap, and when it leaks out of Amazon and Nvidia and Apple, it goes elsewhere. Can I tell you that? That's my opinion. From June through August, this is a long time ago,

just kidding, from June through August, earlier in the summer, Nvidia lost 20, fell 28%. I know. 28%. You know what happened? The home builders rallied. Right. The utilities rallied.

Over that time, the equal weight was in a 6% drawdown and the cap weight was a little bit worse, was off 8%. So his counter to me, Rob's not here to defend his point. So I'll just say what he said. He said he pointed at 2022 when they beat the shit out of these NASDAQ generals, the only thing that worked was oil. Every other sector also sold off. My argument is that's not a correction.

That's a full blown bear market. I think the large cap tech trade could take a breather if it needs to without doing material damage to the S&P 500 once the capital leaking out of these names goes elsewhere. Like Walmart is up 45% on the year. Is Walmart gonna lose 10% tomorrow because of Nvidia? I just I don't think it works that way. So I mean we're all gonna find out together is the good news and hopefully we don't need to find out the negative side. But I don't know. Let's just quickly do the setup and then we'll move on because there'll be more to say about Nvidia at the end of the week.

This is funny. Martin Pierce at The Information says Nvidia's growth rate is slowing. Let's see, a 265% increase in the fourth quarter last year to the first quarter this year. Revenue growth is expected to slow to 113%, lifting the top line to $28.7 billion. This time next year, analysts are projecting revenues of $40 billion, which would only be an increase of 40%. So this is like the guidance and the numbers. One thing I want to point out, and I talked about this on TV today as well, 40% of Nvidia's

revenue comes from five customers. All of their customers reported already, and they all said it's full speed ahead on their own CapEx spend. Yes. Hold on. Hold on. Put a pin on this for one sec. Just throw this chart up the consensus chart, John.

So the gray line is consensus estimates for Nvidia for- That's good. That's good. That we're going to find out tomorrow. The light blue line is a previous quarter and the dark blue line is a year ago. So year over year forget about it It's still it's still pretty lousy Quarter over quarter. We're looking at What is this what's my calculator whatever don't worry about my calculator

Tempers 10% 10% revenue growth, quarter over quarter. Oh, you are a gem. I press the button 10% quarter over quarter. Yeah. Well, that's not going to be good enough, but um, here's the point I wanted to make. Put my next chart up. This is a Yahoo finance slash Bloomberg production. I've never seen a chart like this of you. This is, uh, it's really good, right? Yahoo Finance slash Bloomberg Production. It's really good, right?

So the y-axis going up is the percentage that the customer spends on Nvidia. So Microsoft spends 45% of its own CapEx on Nvidia GPUs. Did you know that? That is very good. I've never seen this before. That's a great chart, right? And then along the bottom, it's what percentage of Nvidia's revenue. So Microsoft is 19% of Nvidia's revenue. The next biggest spender is Meta. Meta spends 40% of its CapEx budget on Nvidia chips.

And it looks like it's about a, is that 9% of Met meta spend is on GPUs? This Tesla part, this Tesla slice is weird. Somebody come on, do better. Tesla slices weird, Alphabet, Amazon. But my, so this is my point though. All of these companies reported already weeks ago. And what they all said, the guy from Alphabet said, it's a bigger risk to underspend and overspend. Famous last words, but he said it, I didn't say it. Zuckerberg The guy from Alphabet said, a word about like budging from their path. So we kind of know and Tesla, whatever is doing, whatever Tesla does, but we kind of know that at least for right now, nobody's pulled back yet, which is why the stock is going into the earnings as strong as it is.

So that's the question. Like everybody knows, right? Like, so what exactly is in the price? So again, back to Gavin Baker speaking with Patrick, I thought this was fascinating. He said, in the price. So again, back to Gavin Baker speaking with Patrick, I thought this was fascinating. He said, quote, it's such a general technology that they're all of a sudden in the same swim lane and they all feel like it's existential. Mark Zuckerberg, Sadiya and Sundar just told you in different ways, we are not even thinking about ROI. And the reason they said that is because the people who actually control these companies,

the founders, there's either super voting stock or significant influence in the case of Microsoft, believe they're in a race to create a digital god and if you create that first digital god, we could debate whether it's tens of trillions or hundreds of trillions of value and we could debate whether or not that's ridiculous but that is what they believe and they believe that if they lose that race, losing the race is an existential threat to the company. So Larry Page reportedly internally at Google said, quote, I am willing to go bankrupt rather than lose this race. So these companies that are spending all the money are all the way in.

Now, again, everything I just said is public knowledge. So theoretically it's in the price of the stock, but we'll find out tomorrow afternoon. You know, a lot of these guys have been around for a long time. Jassy at Amazon basically watched. He was like employee number 10 or something. His job was to go with Jeff Bezos into meetings and then tell Jeff Bezos what he thought. So he didn't say anything. He would just sit there, observe.

He watched every one of Jeff Bezos' competitors underspend on e-commerce. That was his formative experience. He watched everybody say, yeah, yeah, yeah, the internet. None of them spent enough. Only Amazon was willing to spend until there was nothing left quarter after quarter. And that's, from my perspective, that's why AWS ain't going to pull back. Okay, that's him. Zuckerberg, under spent on devices and as a result, he has to kick up 30% of everything Instagram makes on iPhones to Tim Cook. It eats at him at night and they just throttled back on the mixed reality goggles because that's not going well.

The video game equipment's not going well. They missed the phone. There needed to be a Facebook device for communicating and it just didn't, he didn't spend enough. I know it eats him up at night. He hates it so much that he's a slave to Apple's ecosystem. He ain't gonna miss this AI thing. So that's why he's not pulling back on spending.

So you look at these companies and their formative experiences, they know about the companies who underspent on the internet. They know about Sun Microsystems. They know about the first incarnation of Dell and all of the Compaq and Hewlett Packard and all these box makers who didn't spend enough on internet and they stayed box makers until they went extinct. These guys have been around, they've seen this shit and they're not going to let it happen to them. So I think it's an important part of the story.

There is a 100% chance, nothing's 100%, I'll say 95% chance that at some point, over the next, call it 10 years, Nvidia will disappoint the market and the stock will gap down a lot. But for right now, I think the funniest outcome is the most likely. So this thing will be up 20% in the after hours. It'll add $600 billion in market cap

and it'll retake the crown as the number one biggest market cap in the world. I wanna leave you with the outlook from Joe Moore who is the analyst at Morgan Stanley covering Nvidia. Joe Moore expects initial Blackwell volumes in the October quarter as the initial product is functional but with somewhat lower yields and he still expects a volume ramp of the next revision of silicon through January all of which is still within the guidance. Blackwell is like the Jesus chip that they announced earlier this year that really set the stock on fire during a previous earnings call. And the recent concern in Nvidia was that Blackwell was

delayed. So this is going to be one of the subplots that people are watching for what Nvidia has to say. The other thing that we're going to hear about is the H200 and the H20, and whether or not they're able to sell a chip in China. So there's a lot of like little interesting mini subplots that maybe won't be part of the prepared remarks, but this will be where the analyst Q&A heads. So either way, this to me feels like it's one of the most anticipated earnings reports ever. Would you agree with that? Except for the last one.

Well, just in general though, is there any other company you could think of, including Tesla, including Apple, that this many people are going to be tuning into? Most of the people listening won't even know what they're talking about, quite frankly. Yeah. No, I, yeah, it's a big one. It's a big one. I don't want to minimize it. It's definitely a big one.

Okay. Let's talk about how to predict a recession. John Reckenthaler over at Morningstar wrote about, I didn't even know this was a thing. Since 1968, the Federal Reserve Bank of Philadelphia has conducted a regular survey of professional forecasters. Oh yeah, the Philly survey. Yeah, yeah. Yeah, the Philly.

There's a cheese on that. So they ask whether the nation's real GDP will decline during the next quarter. So on 10 of those occasions, the forecasters assigned an average probability of more than 30% that there would be a decline in the next quarter. So only 10 times, going back to 1968. So fairly rare. Oh, they're good. Eight times their recessions corresponded

with the actual events. Only in 1988 and 2020-22 were they wrong. But, but, but, but, but, by the time the economists rang their bells, By the time the economists rang their bells, the stocks were already in a negative 7.3% drawdown, and their timing was way off. So they asked them, are we going to a recession when we already were in a recession? So John, chart on please, timing of economic forecast. So these negative numbers, this means that the economy had been in a recession for two months in the first bar, three months in the second. Now the NBDR didn't officially declare it, but looking backwards, we were already in

a recession by the time they thought a recession was coming. And again, to the fact that stocks had already gotten killed, next chart please. So these are the 10 occasions in which economists expected a recession to come. Again, most of the time we were already in a recession when they expected one and stocks were already well, well, well off their highs by the time we got one. So economists have a dog shit track record, just like all of us do in predicting recessions. They're just very, very difficult. Put the second to last chart back up for a second.

No, yeah. You really had to be almost clairvoyant to see that 2020 recession coming. Oh, wait. They laid off 22 million people in a week. I think there's going to be a recession. Who are these quote unquote professional forecasters? Is this like Larry McDonald? Like who are they calling for recession calls? Because they might be getting some false positives if they're talking

to professional forecasters who love forecasting things. Yeah, I think it's economists, but I don't know. I don't know. Either way, we know what we know. Predicting recession is difficult. All right, Josh, make the case. What do you got? I'm going to pitch you NASDAQ. So this is, I think we brought, yeah, well, it's working now. So I told you it was going to break out. I plucked this stock right off the Russo list. Sean and I keep this list of the best stocks in the market.

And we're tracking large cap companies, the minimum size is 25 billion. We don't want no scrubs. And we're looking for literally the best stocks right now. Statistically, these are the best stocks in the market. Looking at both fundamentals and technicals. And when NASDAQ first hit the screen, I bought it immediately. So I know it's a really high quality company.

And I also know it's hyper cyclical and not based on the economic cycle, based on the capital market cycle. And we have been in the doldrums for IPOs and capital formation since the bubble blew up at the end of 2021. And it's starting to come back around. And so this stock has remained on the list pretty much. I would say almost every week since it's been on there and now finally we got the follow-through we got the breakaway to

To all-time highs, so let's let's throw up that first chart John So this is five years and you can clearly see the 2021 bubble and then you can see that the stock has spent the last three years consolidating and has now broken above those levels, which you can't see on this chart, but I'm going to show you another chart. It's slightly here we go. So this is 71 and change where it closed today. You can see that you could see that that 200 days positively sloping after a really long time falling or

consolidating. You can see that the stock is a little bit overbought. RSI on the bottom 72, but not wildly so. I would be using that 50-day moving average, not exactly or precisely like it's surgery, but just as kind of a guideline as to whether or not this breakout remains intact. I think that's giving yourself enough room. And I think most people would risk eight or 9% to belong a name that potentially could

trade from 70 to 100. So I really like Nasdaq here. And if we see a material pick up toward the end of the year in IPO's new listings, that's really Nasdaq's bread and butter. This is, I think, a stock that we already talked about for Make the Case, but now it's finally technically broken out. Well done. I think I'm going to stay long this time.

Well done. Credit to you. I am with you on capital markets. As I mentioned last week, I own S&P or SPGI and Intercontinental Exchange, which by the way, Dan Loeb added to his exposure. That was another stock in his letter. I think they should all work together. I think all of those stocks look good. They're all ATHing.

I think S&P Global is on the Russo list, if I'm not mistaken. And there's a couple of stocks that are all similarly positioned for exactly what we're describing. So we are. Okay, well done. All right. I am going to point to you to a chart that looks similar in the sense that it's at an all time high.

And before we show the chart, Josh, are all time highs a good time to buy or are they a great time to buy? Ooh, I would say they're not the best possible time to buy, but they're also not a bad time to buy. OK, chart on. This is a one year chart. Zoom out. This is a five year chart.

And what we're looking at here is the total return of a big giant index. It's a big giant index that really nobody talks about or wants to own. Hold on, hold on. So this is an index, not a sector. That's like a whole stock market or like a big segment of the stock market.

Yep. Okay. Is this the equal weight S&P 500? Good guess, but wrong. Is this the value? Nope. Is this the S&P value? Nope. It's not. OK. Can I get one more? It is a geography. So it's not the United States?

It's not the United States. Ooh, IFA? Close. Europe. The Vanguard, FTSE, Europe, ETF. This is VGK? It's VGK. It's at an all-time high.

That's all-time high, as in the US. It's VGK. It's VG ETF. This is VGK? It's VGK. It's at an all-time high. That's all-time high, as in the highest it's ever been. And nobody seems to care. Yeah, you know, very gradually in Europe, they're doing, I've taught the best in the show, so I'm not going to rehash everything, but they are becoming more pro stock market. You know, like French citizens own like 3% of their stock market or something, like directly, like they're just not involved.

And they want to change that in France. In Germany, they instituted these retirement savings accounts that are ETFs. Each country is enacting specific things to get people more involved in their own stock market because I think they recognize the power of capital formation and having deep and wide markets. I'm not surprised to see a little bit of a lift. I don't think we're going to see them outperform the S&P, but who knows? Well, not as I say, Vanguard's Europe FTSE ETF is also resting on waiting to see what

Nvidia does. So we'll see. Yeah. All right. We're on pins and needles for Nvidia, which is happening tomorrow night. I want to let you guys know that an all new animal spirits drops in the morning. That's Michael Bannock and Ben Carlson. They ride again.

This week's show is great, by the way. Loved it. Thank you. What do you think about my nipple comment? Last week's. Well, listen, I don't love everything you say. I love the vibes. Are we going to be talking Nvidia's earnings?

We are. Oh, we have a special guest. We're going to be talking to Dan Ives as a reaction to Nvidia, but not like that night. We're going to let it breathe. We're going to wait to see what the stock market reaction is. We're going to wait to see what all the other analysts have to say. We're going to give it like a minute to breathe and then we're going to bring Dan Ives back. And I know you guys love Dan as much as we do so that'll be a fun way to recap what? What what goes on tomorrow night also want to let you know new Jill on money this Saturday in case you missed it

Jill had Blair Duke and a on works at Red Holes Wealth Management the queen of Red Holes Wealth Management Blair and Jill were awesome together that is on YouTube right. If you're looking for your next thing to watch and we'll see you on Friday right here on YouTube with another all new edition of the Compound and Friends with two special guests. Super excited. You can subscribe at the link below to the Compound Insider. Find out who those guests are going to be before everyone else. And we'll see you then.

Thanks so much for watching. Talk to you soon. Whether you're just getting started as an investor or you're managing a multi-million dollar portfolio, Ritholtz 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 ritholzwealth.com. for you. Love investing podcasts. Check out Michael and Ben every Wednesday morning on Animal Spirits. Thanks for listening.