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Magnificent Seven Lose Momentum as AI Spending Spreads · The Financial Exchange Show

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  Speaker 1: Lane and Mark Vandetti.
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  Speaker 2: Markets are in a bit of a selloff today, with
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  Speaker 2: the S and P five hundred down two thirds of
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  Speaker 2: a percent, the Nasdaq is off almost one and a
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  Speaker 2: half percent, and the Dow Jones is off over two
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  Speaker 2: hundred points. Paul Lane, Mark Fndetti, and Tucker Silva here
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  Speaker 2: with you on what is a relatively quiet week in
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  Speaker 2: terms of economic news. We will get the Federal Reserve
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  Speaker 2: meeting minutes on Wednesday at two o'clock, but other than that,
• 1:40
  Speaker 2: earning season will begin later this week with Delta and
• 1:45
  Speaker 2: PEPSI that are reporting their earnings. But we'll kick off
• 1:48
  Speaker 2: into high gear the following week when the banks start
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  Speaker 2: to report their earnings. In terms of inflation, the jobs report,
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  Speaker 2: all that stuff is in the rear view, but we
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  Speaker 2: will have some more commentary coming from the Federal Reserve
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  Speaker 2: and form of those meeting minutes that I mentioned before.
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  Speaker 2: Like I said, we are seeing a bit of a
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  Speaker 2: selloff on the Nasdaq, the kind of representative for the
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  Speaker 2: tech sector. And we begin this hour of the program
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  Speaker 2: by talking about the Magnificent seven, which was if you
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  Speaker 2: had not been following markets for the course of the
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  Speaker 2: last five or six years, and I wanted to give
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  Speaker 2: a boiled down summary as to what are some of
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  Speaker 2: the biggest reasons behind some of the stock market gains
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  Speaker 2: that we've seen over the last five or six years.
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  Speaker 2: To a person who just totally lay and doesn't like
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  Speaker 2: to follow this stuff, I would point to probably these
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  Speaker 2: seven companies here that have been a significant portion of
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  Speaker 2: the gains that we've seen in past years. If you
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  Speaker 2: look at the performance of these Magnificent seven, and just
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  Speaker 2: to rattle them off, it's Nvidia, Google, Apple, Microsoft, Amazon,
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  Speaker 2: Meta or Facebook and Tesla. Those make up the Magnificent seven.
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  Speaker 2: If you look at their performance year by year over
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  Speaker 2: the last five or six years or so, twenty twenty one,
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  Speaker 2: these collective group of names were up forty nine percent.
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  Speaker 2: Twenty twenty two was a bad year for the stock market.
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  Speaker 2: Market was off about eighteen percent. These Magnificent seven were
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  Speaker 2: off forty five percent.
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  Speaker 3: But if you look.
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  Speaker 2: At twenty three, twenty four, and twenty five one hundred
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  Speaker 2: and seven percent, in twenty twenty three, in twenty twenty
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  Speaker 2: four sixty four percent, and in twenty twenty five twenty
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  Speaker 2: five percent. This year though only up one percent, so
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  Speaker 2: they've been relatively flat and the market is actually up
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  Speaker 2: ten percent. So it is this strange phenomenon where you
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  Speaker 2: could point to the last four or five years, significant
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  Speaker 2: gains for the mag seven have led to positive performance.
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  Speaker 3: For the S and P five hundred.
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  Speaker 2: These Magnificent seven have the heaviest weighting within the S
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  Speaker 2: and P five hundred if you look under the hood,
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  Speaker 2: they make up close to thirty percent of the performance
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  Speaker 2: to the S and P five hundred is tied to
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  Speaker 2: these companies more or less less as a rough estimate.
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  Speaker 2: But this year the story has been different, where it
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  Speaker 2: has been some of these what were previously smaller names
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  Speaker 2: attributing a significant amount of the performance in the market. Micron,
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  Speaker 2: for example, is responsible for about one sixth of the
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  Speaker 2: S and P five hundreds gains your day. It's been
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  Speaker 2: the Semiconductor index as a whole, and some of these
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  Speaker 2: names that are not as well known as the mix
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  Speaker 2: of Magnificent seven that have been responsible for the performance
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  Speaker 2: that we've seen here today.
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  Speaker 4: Yeah, I think you made the point yesterday. Maybe it
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  Speaker 4: was that that's pretty characteristic. It's always a small group
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  Speaker 4: of stocks that drive market performance, and then the rich
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  Speaker 4: get richer because money piles into index funds, which in turn,
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  Speaker 4: give the most dollars to the stocks that are biggest
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  Speaker 4: in a market cap sense, that have the shares that
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  Speaker 4: are worth the most in plain English, and it's become
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  Speaker 4: self reinforcing. Until the business cycle turns, or sentiment turns.
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  Speaker 4: Stocks to flate, they companies deflate, or preferences change or something,
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  Speaker 4: and people move on to other uh, to future you
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  Speaker 4: know winners.
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  Speaker 2: Yeah, what you mentioned, preferences have change. And so for
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  Speaker 2: an understanding of well, why what has happened? Why have
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  Speaker 2: we seen this shift where there's a d emphasis on
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  Speaker 2: that Magnificent seven. Really, what it comes down to is
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  Speaker 2: these Magnificent seven companies typically in years past were responsible
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  Speaker 2: for the most robust earnings growth amongst the companies within
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  Speaker 2: the S and P five hundred. Their earnings year over year,
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  Speaker 2: we're growing faster than some of their peers and other
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  Speaker 2: different sectors of business. But this year has marked a
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  Speaker 2: shift where instead of printing money in terms of cash
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  Speaker 2: flow for companies like Google and Microsoft or others, they
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  Speaker 2: are spending boatloads of money to develop out their AI capability,
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  Speaker 2: And all of a sudden you're seeing things that are
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  Speaker 2: rare from these big companies, such as raising debt issuing
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  Speaker 2: equity to fund their future endeavor, so all of a sudden,
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  Speaker 2: their cash flow generation doesn't look nearly as strong as
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  Speaker 2: it was previously, and investors have sort of started to
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  Speaker 2: cycle out of these big names and focus on the
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  Speaker 2: companies that are printing money like Micron or though not
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  Speaker 2: in the S and P five hundred, we talked about
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  Speaker 2: Samsung earlier in the show as well. These are companies
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  Speaker 2: that are seeing tremendous earnings and profit growth. And so
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  Speaker 2: that's really the rotation that we've seen this year, and
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  Speaker 2: it does speak to mark the point that you made
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  Speaker 2: that that is typically why it is best to be
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  Speaker 2: a diversified index investor for those people who don't want
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  Speaker 2: to spend time picking out the individual names, because you
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  Speaker 2: get exposure to Micron, you get exposure to the Magnificent seven,
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  Speaker 2: and if you know these other names do well, you're
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  Speaker 2: holding them within the basket of stocks.
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  Speaker 3: That you have.
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  Speaker 4: The diversification is the key. You might want to choose
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  Speaker 4: passive managers, managers that just attempt to replicate the performance
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  Speaker 4: of a so called index like the S and P
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  Speaker 4: five hundred, or more broadly, the Rustle one thousand, or
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  Speaker 4: you might choose active managers, or you might like most,
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  Speaker 4: say four to one K plans, which offer a mix
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  Speaker 4: of passive and most not all offer a mix of
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  Speaker 4: passive and active. You might choose to blend those two styles.
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  Speaker 4: It's both easy and hard. It's easy in the sense
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  Speaker 4: that all you have to do is spread your capital out.
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  Speaker 4: It's hard in the sense that, well, it's not clear
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  Speaker 4: how I should weight my different options balance. I'm sorry
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  Speaker 4: to turn this into a lesson an individual investing, but
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  Speaker 4: I'm trying to relate it to something most of us
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  Speaker 4: are familiar with, an employer sponsored plan of four oh
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  Speaker 4: one K. There are funds that do that for you.
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  Speaker 4: There target they're increasingly target date funds, formally balanced, or
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  Speaker 4: asset allocation funds. There are different names for these investments
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  Speaker 4: that try to do the same thing. Diversify, rebounce so
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  Speaker 4: automatically to keep things aligned despite in the face of
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  Speaker 4: market ships and change over time as you get older.
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  Speaker 4: They don't all work that way, but many do, and
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  Speaker 4: or you can try to do it yourself. But you know,
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  Speaker 4: I guess the point I wanted to make is be diversified.
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  Speaker 4: Whether you choose active or passive managers or farm it
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  Speaker 4: out let somebody do.
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  Speaker 1: It for you.
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  Speaker 2: Taking a look at markets, We've got the Nasdaq, like
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  Speaker 2: I mentioned, selling off. Sansung had come out with some
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  Speaker 2: earnings that while they are just incredible in terms of
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  Speaker 2: the profit growth that they've seen, just underwhelmed investors a
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  Speaker 2: little bit. So we are seeing the nasdak off about
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  Speaker 2: one in a third percent. We're going to take a
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  Speaker 2: quick break here on the Financial Exchange. When we come back,
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  Speaker 2: really want to focus on what is probably the biggest
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  Speaker 2: question for markets for the second half of this year
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  Speaker 2: as well as into twenty twenty seven. Will this AI
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  Speaker 2: spending continue? Who blinks first in this AI spending war?
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  Speaker 2: That's right after this break and trivia on the Financial Exchange.
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• 10:41
  Speaker 2: Will someone finally blink in the AI spending? More a
• 10:44
  Speaker 2: piece here from the Wall Street Journal We had talked
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  Speaker 2: about in the prior segment. The Magnificent Seven had really
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  Speaker 2: dominated markets over the course of the last five or
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  Speaker 2: six years ago in terms of their outperformance compared to
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  Speaker 2: their sm P five hundred peers. But there has been
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  Speaker 2: a shift where these companies, rather than just printing money
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  Speaker 2: and generating a substantial amount of free clash flow, are
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  Speaker 2: now spending a boatload of money and potentially risking going
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  Speaker 2: into negative cash flow generation. In the case of Meta,
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  Speaker 2: you have analysts out there that have estimated that Google, Meta, Amazon,
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  Speaker 2: and I believe Microsoft have increased their capital spending seventy
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  Speaker 2: four percent year over year to hit about one hundred
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  Speaker 2: and sixty eight billion in the June ending quarter. According
• 11:38
  Speaker 2: to estimates from Visible Alpha, these companies are spending a
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  Speaker 2: lot more money, and we're seeing some deals recently where
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  Speaker 2: they are perhaps trying to cover for some of their
• 11:51
  Speaker 2: excess spending with some short term offset of renting out
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  Speaker 2: computing capacity. You saw that Xai struck a deal with
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  Speaker 2: Anthropic to rent some of its computing capacity at one
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  Speaker 2: point twenty five billion a month. You now have Meta
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  Speaker 2: recently announcing that they are going to get into the
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  Speaker 2: cloud computing space of offering computing capacity to others out there,
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  Speaker 2: renting out the computing capacity that they have. That was
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  Speaker 2: a market previously that's been dominated by Google, Microsoft and Amazon.
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  Speaker 2: So one could just say, well, Meta is spending a
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  Speaker 2: lot of money. This is just a way for them
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  Speaker 2: to generate some revenue from the computing that they have
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  Speaker 2: to offset some of their expenses. Another more pessimistic investor
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  Speaker 2: may say, is this Meta's acknowledgment and perhaps in the
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  Speaker 2: case of Xai two, that we are spending a lot
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  Speaker 2: of money. Wall Street and investors are going to start
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  Speaker 2: to get jittery because we're not showing the returns on
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  Speaker 2: that investment very readily. So now we're looking for ways
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  Speaker 2: to potentially get some of that glut off our books.
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  Speaker 4: Yeah. I didn't expect you to rent this infestry. Actually,
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  Speaker 4: I expected you to sell the computing power to companies
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  Speaker 4: who are going to pay an increasing amount of money
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  Speaker 4: for it. So I guess as long as this doesn't
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  Speaker 4: become like a habit, you're okay with it. Yeah, And
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  Speaker 4: maybe is this a one on how how prevalent is this?
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  Speaker 4: How why do you have in terms of other companies
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  Speaker 4: doing this as well? It seems like the the some
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  Speaker 4: of the bigger players are computing is in huge amound.
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  Speaker 4: We all know that are that's been widely covered.
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  Speaker 2: So it does seem like those who have excess computing capacity.
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  Speaker 2: Are looking at this as a way to potentially offset
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  Speaker 2: their some of their expenditures.
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  Speaker 4: That phrase that might worry me if I was a shareholder,
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  Speaker 4: might not? You know, I don't claim to have any
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  Speaker 4: expertise here. I would rely on the analysts who cover
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  Speaker 4: these companies for that excess computing power. So you spent
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  Speaker 4: too much? Is that a euphemism for we overinvested?
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  Speaker 3: Possibly? Yea, possibly being unfair?
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  Speaker 4: Like who knew?
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  Speaker 2: There's arguments that are made in this piece in the
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  Speaker 2: Wall Street Journal. Let's say that Meta still has a
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  Speaker 2: real significant plan to spend a whole lot of money
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  Speaker 2: to build out their AI capabilities, and that this just
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  Speaker 2: may be something that is a short term deal that
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  Speaker 2: is taking advantage of the excess that they have to
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  Speaker 2: sell to others at a premium. So it will be
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  Speaker 2: interesting to see. And that is really the big question
• 14:22
  Speaker 2: heading into the second half of this year and into
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  Speaker 2: twenty twenty seven is are these companies spending going to
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  Speaker 2: be justified with return on investment or could you see
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  Speaker 2: the parallels to the late nineties with the broadband build
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  Speaker 2: out of tremendous demand, over capacity gets built out too
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  Speaker 2: much supply and then see a correction from there. That's
• 14:48
  Speaker 2: really a big focus here. I want to shift gears
• 14:52
  Speaker 2: a little bit and discuss a recent survey that came
• 14:55
  Speaker 2: out from the New York Federal Reserve Bank where the
• 14:59
  Speaker 2: consumers expectations for inflation have risen pretty significantly. Now consumers
• 15:05
  Speaker 2: see inflation running at three point seven percent over the
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  Speaker 2: next year. That's up from three and a half percent
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  Speaker 2: in May. And the expectations for inflation in the next
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  Speaker 2: three years have also increased to three point three percent.
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  Speaker 2: That's the highest since June of twenty twenty two. And Mark,
• 15:24
  Speaker 2: we've talked about in the program before where there has
• 15:29
  Speaker 2: been a lot of scrutiny that Mike and I and
• 15:32
  Speaker 2: other hosts have put on just polling data in general
• 15:35
  Speaker 2: on consumer sentiment, about the miss University of Michigan survey
• 15:40
  Speaker 2: on consumer confidence and others. But when it comes to inflation,
• 15:44
  Speaker 2: it is different in a sense that if consumers do
• 15:47
  Speaker 2: feel that it's going to be omnipresent, it can become
• 15:51
  Speaker 2: a self fulfilling prophecy that you go to your employer
• 15:55
  Speaker 2: and say, in anticipation of prices going up for the
• 15:58
  Speaker 2: goods that you purchase, hey, I need a raise and
• 16:01
  Speaker 2: that creates kind of this cyclical effect here on inflation.
• 16:04
  Speaker 3: So yeah, that was the key that actually.
• 16:06
  Speaker 4: Been one of the key lessons from the nineteen seventies.
• 16:08
  Speaker 4: You can't just keep you can't push unemployment. We keep
• 16:13
  Speaker 4: in mind that there's this tension or short term trade off,
• 16:16
  Speaker 4: very very much a short term trade off between inflation
• 16:20
  Speaker 4: and unemployment. The central bank in our case, the FED,
• 16:24
  Speaker 4: but it could be the ECB, Bank of Japan, whatever.
• 16:26
  Speaker 4: It can stimulate demand and affect the real economy, but
• 16:31
  Speaker 4: it can only do that for so long because people's
• 16:34
  Speaker 4: expectations catch up. We catch on, oh you're you're printing money.
• 16:38
  Speaker 4: It's not a productivity boom or something like that. And
• 16:43
  Speaker 4: when that happens, wag, wage and price increases accelerate, and
• 16:51
  Speaker 4: it effectively neutralizes the Fed's efforts to stimulate the economy.
• 16:56
  Speaker 4: All that happens is you get price increases, is what
• 16:58
  Speaker 4: I'm saying. So the FED full some of the people
• 17:00
  Speaker 4: some of the time in the short term, but a
• 17:03
  Speaker 4: not in the long term, and the long term money
• 17:05
  Speaker 4: is neutral is economists like to say, So where does
• 17:09
  Speaker 4: that leave us today? Well, inflation expectations are going up,
• 17:12
  Speaker 4: and as you said, that can become a self fulfilling
• 17:14
  Speaker 4: thing because people start to ask for higher wage increases
• 17:17
  Speaker 4: and firms think they can pass higher price increases along
• 17:21
  Speaker 4: then previously, and that can itself push inflation up. So
• 17:24
  Speaker 4: the Feds, the Fed's main job is to calibrate the
• 17:27
  Speaker 4: money supply to the money supply growth to and thus
• 17:34
  Speaker 4: demand growth to the growth and potential GDP. It's to
• 17:37
  Speaker 4: keep overall supply and demand in balance. It's closely related
• 17:42
  Speaker 4: to that, though, is keeping inflation expectations in check.
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  Speaker 3: Right.
• 17:47
  Speaker 4: That's the reason for all the speeches by Fed officials.
• 17:51
  Speaker 4: They want to convince you that they can do that.
• 17:53
  Speaker 4: I think Warsh has taken the perfect tone with respect
• 17:55
  Speaker 4: to this. He seems like he's monomaniacally focused on price stability.
• 18:02
  Speaker 4: It's not just seems he keeps using the phrase, and
• 18:04
  Speaker 4: he's doing that for a reason. Part of his job
• 18:06
  Speaker 4: is to be like a psychologist and to manage our expectations.
• 18:11
  Speaker 4: So far, to me, he sounds credible. I believe he
• 18:13
  Speaker 4: would impose pain on the economy to get inflation down.
• 18:17
  Speaker 4: He seems credible to me, and that's why he's being
• 18:22
  Speaker 4: very deliberate.
• 18:24
  Speaker 2: Yeah, he has been quoted as saying that inflation is
• 18:27
  Speaker 2: too high, and we'll get I guess a little bit
• 18:30
  Speaker 2: of a glimpse as to what the Federal Reserve, broadly speaking,
• 18:33
  Speaker 2: thinks about inflation and the economy. When we will have
• 18:37
  Speaker 2: the Federal Reserve meeting minutes that will be released tomorrow
• 18:41
  Speaker 2: at two o'clock. The Federal Reserve will not get together
• 18:44
  Speaker 2: for another meeting until the end of July. Here by
• 18:49
  Speaker 2: all indications, according to the CME Group probability market that
• 18:53
  Speaker 2: tracks the futures on Federal Reserve interest rate decisions, there's
• 18:57
  Speaker 2: a seventy five percent chance at the moment that they
• 18:59
  Speaker 2: would hold rates where they are today at the meeting
• 19:04
  Speaker 2: at this end of this month. When we start to
• 19:06
  Speaker 2: go out into the fall in September and October, is
• 19:08
  Speaker 2: where we see that there is the potential for them
• 19:11
  Speaker 2: to increase interest rates by a quarter percent. But again,
• 19:16
  Speaker 2: all this information is fluid and rapidly changing. So those
• 19:19
  Speaker 2: are the probably today, but that doesn't mean that they
• 19:22
  Speaker 2: will be the same tomorrow. We're going to take a
• 19:25
  Speaker 2: quick break here on the financial exchange. When we come back,
• 19:28
  Speaker 2: we're going to have Wall Street watch it. We'll check
• 19:29
  Speaker 2: it on the markets and the answer to trivia right
• 19:31
  Speaker 2: after this break.
• 19:38
  Speaker 1: Bringing the latest financial news straight to your radio every day.
• 19:42
  Speaker 1: It's the Financial Exchange on the Financial Exchange Radio Network.
• 19:48
  Speaker 4: Tell you out.
• 19:49
  Speaker 1: Fom whoa street watch trecking the stocks, the data and
• 19:53
  Speaker 1: the headlines driving markets so far today right here on
• 19:56
  Speaker 1: the Financial Exchange Radio Network.
• 19:58
  Speaker 5: It's seeing another tech sell off today, despite blowout earnings
• 20:01
  Speaker 5: from Sandsung, leaving investors wanting more. Right now that Dow
• 20:05
  Speaker 5: is down four tenths of one percent, SMP five hundred
• 20:10
  Speaker 5: down about two thirds of a percent, Nasdaq selling off
• 20:13
  Speaker 5: one in a third percent, or three hundred and fifty
• 20:15
  Speaker 5: five points lower, Rush two thousand down about three quarters
• 20:19
  Speaker 5: of a percent, Tenure Tres reeled up three basis points
• 20:22
  Speaker 5: at four point five to one percent, and Oil up
• 20:25
  Speaker 5: over two and a half percent higher, trading at seventy
• 20:28
  Speaker 5: dollars a barrel. Samsong dropped more than ten percent and
• 20:31
  Speaker 5: sold despite the company's quarterly profits surging nineteen fold due
• 20:36
  Speaker 5: to increasing AI chip demand. Other chip makers today, including Micron, ASML, Broadcom,
• 20:42
  Speaker 5: and Marvel, are seeing declines as well. Meanwhile, SpaceX falling
• 20:47
  Speaker 5: over five percent after Elon Musk's rocket satellite and AI
• 20:52
  Speaker 5: company joined the Nasdaq one hundred. Elsewhere, Five Serve shares
• 20:56
  Speaker 5: are rising three percent after The Wall Street Journal reported
• 20:59
  Speaker 5: several arge banks, including JP, Morgan Chase and Bank of America,
• 21:03
  Speaker 5: held preliminary discussions to acquire a network from five Serve
• 21:07
  Speaker 5: that could allow them to bypass federal debit card fee caps.
• 21:13
  Speaker 5: And evmaker Rivian Automotive warned lower average selling prices for
• 21:17
  Speaker 5: its cars would dent its second quarter revenue, sending the
• 21:21
  Speaker 5: stock down by fourteen percent. Today, I'm Tucker Silva. That
• 21:26
  Speaker 5: is Wall Street Watch, and in the previous segment we
• 21:28
  Speaker 5: asked you the trivia question who is the first female
• 21:32
  Speaker 5: member of the Supreme Court? That would be Sandra Day O'Connor.
• 21:36
  Speaker 5: And Steve from Wareham, Mass is our winner today, taking
• 21:39
  Speaker 5: home a Financial Exchange Show t shirt Congress to Steve
• 21:43
  Speaker 5: and we play trivia every day here on the Financial Exchange.
• 21:47
  Speaker 5: See complete contest rules at Financial Exchange Show dot com.
• 21:52
  Speaker 2: Investors must be wary of the earnings bubble. A piece
• 21:56
  Speaker 2: here from the Financial Times that talks about just the
• 22:02
  Speaker 2: robust earnings growth that we've seen of the S and
• 22:05
  Speaker 2: P five hundred, but also it dives into the difference
• 22:08
  Speaker 2: between today's market boom and what we saw in the
• 22:13
  Speaker 2: late nineties. The quick backdrop is that with the companies
• 22:17
  Speaker 2: that are spending really significantly this time around, they are
• 22:22
  Speaker 2: extremely cashful positive.
• 22:23
  Speaker 3: That is one plus.
• 22:25
  Speaker 2: But we also have reached a point where the earnings
• 22:29
  Speaker 2: growth and the the CAPE, the sickly adjusted price to
• 22:34
  Speaker 2: earnings ratio measure for the long term prospect growth of
• 22:37
  Speaker 2: the S and P five hundred, remain very elevated.
• 22:40
  Speaker 3: And I know this is right up their alley.
• 22:41
  Speaker 4: In two points that they bring up, who cares that
• 22:45
  Speaker 4: they've been cash free cash flow positive to this point.
• 22:48
  Speaker 4: So I've shareholder. I'm worried about next year five years
• 22:51
  Speaker 4: from now? What am I missing?
• 22:55
  Speaker 3: Good? Good?
• 22:56
  Speaker 2: Oh? The argument is that no, no, I'm not refuting.
• 22:58
  Speaker 2: The argument is that the comes in the late nineties.
• 23:01
  Speaker 4: That I know that, but like, I'm sorry, Paul, that
• 23:04
  Speaker 4: was rude. It was fun, it was fun, but I
• 23:07
  Speaker 4: cut you off.
• 23:09
  Speaker 3: Yeah.
• 23:10
  Speaker 2: Point you know this again, you know the story that yeah,
• 23:14
  Speaker 2: I was around. Yes, So so that is what the
• 23:16
  Speaker 2: argument is being made here. Intisize, but tell tell us
• 23:19
  Speaker 2: why you disagree instead of taking out on me.
• 23:22
  Speaker 3: I'm just summarizing the story. I'm the host.
• 23:25
  Speaker 4: You've got a thick skin. I could do this with you. Okay.
• 23:30
  Speaker 4: So either whether it was casually positive yesterday is not
• 23:34
  Speaker 4: really of concern. It's as of today, these companies are
• 23:37
  Speaker 4: quickly going cash flow zero or negative. Casual zero is
• 23:41
  Speaker 4: not a term, but you know what I mean, which
• 23:43
  Speaker 4: means which puts them in an equivalent position to those
• 23:46
  Speaker 4: companies in the late nineties. Either way, they have nothing
• 23:49
  Speaker 4: to return to investors. But now that may be a
• 23:52
  Speaker 4: good Now what they the unstated premise there might be
• 23:59
  Speaker 4: what they're doing doing with what they otherwise would have
• 24:01
  Speaker 4: distributed today will pay off sooner. Yeah, that's really the key.
• 24:07
  Speaker 4: It's really a key point that should be Maybe it
• 24:09
  Speaker 4: was stated explicitly and I missed it when I disinterestedly
• 24:13
  Speaker 4: or uninterestedly skim that article, because there have been so
• 24:17
  Speaker 4: many with the same along the same lines in the
• 24:19
  Speaker 4: past couple of weeks. So that's point number one. It
• 24:21
  Speaker 4: doesn't matter that they've been free cash flow positive to
• 24:24
  Speaker 4: this point. I'm worried about getting my capital back in
• 24:27
  Speaker 4: the future. And if they're free cash flow is zero today, like,
• 24:32
  Speaker 4: tell me how that's going to turn around. I don't
• 24:35
  Speaker 4: care they like, it's almost forgive me. But it's almost
• 24:38
  Speaker 4: dumb to say that, like, oh, I don't Oh oh,
• 24:41
  Speaker 4: I made a lot of money five years ago. I
• 24:42
  Speaker 4: can afford to buy this car from you today. Well
• 24:45
  Speaker 4: I'm sorry, no, no, I care about what you're making today,
• 24:47
  Speaker 4: what you're going to make in the future. I can't
• 24:49
  Speaker 4: think of a better analogy on the flying Sorry.
• 24:51
  Speaker 3: No, I think that.
• 24:52
  Speaker 5: Uh.
• 24:52
  Speaker 2: The reason it from a shareholder perspective, You're right, it
• 24:56
  Speaker 2: is what are you going to do for me in
• 24:58
  Speaker 2: the future. The distinction between the two is perhaps that
• 25:03
  Speaker 2: this doesn't mean it will be positive for shareholder returns.
• 25:07
  Speaker 3: They could still crash.
• 25:08
  Speaker 2: Is that they have a stronger financial backstop than other
• 25:11
  Speaker 2: companies that.
• 25:12
  Speaker 4: Do you that they're blowing it all if.
• 25:15
  Speaker 3: You looked at the balance sheets, they can.
• 25:17
  Speaker 4: Start selling stuff, but that would be like bad.
• 25:20
  Speaker 3: But that's what that's I guess.
• 25:21
  Speaker 2: The point is that valuations will take significant corrections, but
• 25:24
  Speaker 2: it's not the and we don't mean they.
• 25:26
  Speaker 4: Can always lean back on their core businesses and exactly whoops, sorry,
• 25:30
  Speaker 4: we blew. That's where like like with the metaverse or
• 25:32
  Speaker 4: something like that. Yeah, like sorry, that was fifty billion
• 25:35
  Speaker 4: that you know.
• 25:35
  Speaker 2: They just went down the toilet. Yeah, they that is
• 25:38
  Speaker 2: the difference. That and I'm not saying one way or another.
• 25:42
  Speaker 2: That's the I think the point that they're leaning on.
• 25:44
  Speaker 2: But that doesn't mean and here's where I agree with you,
• 25:47
  Speaker 2: that doesn't matter. That still means that the stock could
• 25:50
  Speaker 2: correct significantly. This doesn't mean they don't go out of business.
• 25:52
  Speaker 2: That just means that they would have shareholder I.
• 25:56
  Speaker 4: Don't feel too strongly, but this isn't my area. So
• 25:58
  Speaker 4: I'm pushing you like I would push an analyst for
• 26:00
  Speaker 4: a manager who that's my sort of day job. Push
• 26:03
  Speaker 4: managers on their thesis, try to pick holes in it.
• 26:06
  Speaker 4: It's fun because it's low risk. I don't have to
• 26:09
  Speaker 4: know what I'm talking about, and at the end of
• 26:11
  Speaker 4: the day, I learned something. So that's where I'm coming from.
• 26:13
  Speaker 4: I don't have a well formed view on this, but
• 26:17
  Speaker 4: I think these are the types of questions that we
• 26:19
  Speaker 4: as investors should be asking. How are you going to
• 26:22
  Speaker 4: turn the free cash flow situation around? Oh, don't worry
• 26:24
  Speaker 4: about an AI is awesome, that's all just gonna happen. Okay.
• 26:27
  Speaker 4: I need a little more convincing, need a little more substance.
• 26:31
  Speaker 4: The other point is the cyclically adjusted p TOE. So
• 26:35
  Speaker 4: p toe could be defined in a number of ways.
• 26:37
  Speaker 4: So I know we talk about this a lot. It's
• 26:39
  Speaker 4: now nearly as high the cyclically adjusted, which removes business
• 26:44
  Speaker 4: cycle fluctuation. That's why you take a ten year inflation
• 26:46
  Speaker 4: adjusted average and not the twelve month look back or
• 26:49
  Speaker 4: twelve month look ahead that we were talking about earlier,
• 26:52
  Speaker 4: because that could be misleading. You could be taking the
• 26:54
  Speaker 4: twelve month snapshot at a peak, you know, and things
• 26:58
  Speaker 4: would look artificially good at a trough, and things would
• 27:01
  Speaker 4: look bad, but you know that's going to be smoothed out.
• 27:04
  Speaker 4: So the fact that cyclically justed PE is nearly where
• 27:07
  Speaker 4: it was in the early twenty in early two thousand
• 27:12
  Speaker 4: and we all know the rest of the story is
• 27:15
  Speaker 4: Paul Harvey used to say, some of our listeners will
• 27:17
  Speaker 4: remember that. We all know the rest of the story,
• 27:20
  Speaker 4: and it wasn't pleasant. As it turns out, that's actually
• 27:22
  Speaker 4: a pretty reliable phenomenon, very high PDE being followed by
• 27:29
  Speaker 4: lower than average not necessarily negative, but lower than average returns.
• 27:32
  Speaker 4: And the reason is simple. To higher the price you
• 27:34
  Speaker 4: pay for something, the lower the yield you're going to get.
• 27:37
  Speaker 4: If you overpaid. If you pay one hundred and five
• 27:39
  Speaker 4: for a bond it's pars one hundred, you know your
• 27:42
  Speaker 4: yield's going to be lower than the coupon the state
• 27:44
  Speaker 4: of coupon, right, It's just the way the fraction works.
• 27:47
  Speaker 4: It's similar with stocks. I'm not taking into account potential
• 27:51
  Speaker 4: growth here, but the principle's the same.
• 27:53
  Speaker 3: That's what's at stake here.
• 27:54
  Speaker 5: Many people assume that if an asset is revocable, it's
• 27:58
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• 29:01
  Speaker 1: The proceeding was paid for and the views expressed are
• 29:03
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
• 29:05
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• 29:08
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• 29:11
  Speaker 3: One of the.
• 29:12
  Speaker 2: Really popular phrases that have has gone along with the
• 29:15
  Speaker 2: economy over the course of the last year or two,
• 29:17
  Speaker 2: it feels like has been this idea that we are
• 29:20
  Speaker 2: living in a K shaped economy. To many listeners out
• 29:24
  Speaker 2: there who follow any financial programs Ares included We've spoken
• 29:28
  Speaker 2: about before, this has been an area of focus for
• 29:32
  Speaker 2: a lot of investors and economists. There is another piece
• 29:36
  Speaker 2: here from MarketWatch that hits on this phenomenon where the
• 29:40
  Speaker 2: top ten percent are spending nearly as much excluding essentials
• 29:45
  Speaker 2: as the bottom seventy percent combine. And this is a
• 29:48
  Speaker 2: subject mark that I've tried to dive in on and
• 29:53
  Speaker 2: get a better understanding of and when you dive into
• 29:56
  Speaker 2: it and try and examine it from both sides. To me,
• 29:59
  Speaker 2: you can read some pieces like this that really point
• 30:02
  Speaker 2: to this idea that there is a very big divergence
• 30:06
  Speaker 2: between those in the top income bracket and what they're
• 30:10
  Speaker 2: spending the top ten percent versus the bottom tier. But
• 30:13
  Speaker 2: I've also read some other articles out there that and
• 30:17
  Speaker 2: research that has indicated that it's not as clear that distinction.
• 30:22
  Speaker 4: It's disputed. The I think the researcher who's done the
• 30:27
  Speaker 4: most work on this and certainly publicizes his results the
• 30:31
  Speaker 4: most is Mark Zandy of.
• 30:32
  Speaker 3: The Moody's Analyst. Right, Yeah, he's all he's in a compliment.
• 30:35
  Speaker 4: I mean, he's just He's Zany's fantastic. He should be
• 30:39
  Speaker 4: read at every opportunity. But there are so he sort
• 30:43
  Speaker 4: of pie popularized, maybe pioneered this notion that hey, the
• 30:47
  Speaker 4: top ten or twenty percent is driving overwhelming majority of spend.
• 30:52
  Speaker 3: Yeah, that was the big stat that I would go
• 30:54
  Speaker 3: right with consumer spending.
• 30:56
  Speaker 4: Yeah, if you if if you look at other data sets,
• 30:59
  Speaker 4: that conclusion becomes less clear. I don't think it's disputable
• 31:04
  Speaker 4: that the wealthier doing but I should put it this way,
• 31:09
  Speaker 4: it's not disputed that an increasing share of spending is
• 31:12
  Speaker 4: accounted for by wealthier people. It's just a question of
• 31:14
  Speaker 4: how extreme, yes it is. Is this an economic problem,
• 31:19
  Speaker 4: I'm not sure it might be. In the sensitive stocks fell.
• 31:22
  Speaker 4: The wealth effect, which refers to how much out of
• 31:26
  Speaker 4: every dollar your portfolio increases you spend. Maybe it's three
• 31:30
  Speaker 4: maybe it's six percent, Probably not much more. That could
• 31:34
  Speaker 4: obviously lead to a larger if stocks fell. The wealth effect,
• 31:39
  Speaker 4: which affects wealthy people more because they own more stocks,
• 31:44
  Speaker 4: could have adverse effects for the overall economy. That's one
• 31:49
  Speaker 4: potential economic implication. But I view this is mostly like
• 31:51
  Speaker 4: a political problem, not an economic one.
• 31:54
  Speaker 2: I certainly worry about it from the economic side. It
• 31:58
  Speaker 2: just you have a heavier percentage of baby boomers who
• 32:01
  Speaker 2: have retired that are living off their portfolio. So that
• 32:03
  Speaker 2: wealth effect thing is something that I just am curious
• 32:05
  Speaker 2: the impact of it. We've obviously seen that it's been
• 32:08
  Speaker 2: a very strong market of the course of the last
• 32:10
  Speaker 2: few years, and consumer spending has been resilient. Because that
• 32:12
  Speaker 2: that's not a one to one correlation necessarily, but it
• 32:16
  Speaker 2: is something that you just want to keep an eye
• 32:18
  Speaker 2: on going forward. We're going to take a quick break
• 32:21
  Speaker 2: here on the Financial Exchange. But when we come back
• 32:24
  Speaker 2: a little bit of stack Roulette right after this.
• 32:27
  Speaker 1: Remember you can watch the show live every day on
• 32:30
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• 32:34
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• 32:37
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• 32:43
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• 33:31
  Speaker 3: All right, time for a little bit of stack roulette.
• 33:34
  Speaker 3: Mark lead us off.
• 33:35
  Speaker 4: There's an article in the Wall Street Journal that makes
• 33:37
  Speaker 4: me rethink a bit some of the tentative conclusions I
• 33:41
  Speaker 4: came to earlier, but we just talked out loud heer,
• 33:44
  Speaker 4: so no one's gonna hold us to any of this.
• 33:46
  Speaker 4: I'm talking about Meta renting out some of its data
• 33:50
  Speaker 4: center out to say computer curiosity. Sure, yeah, yeah, compute,
• 33:53
  Speaker 4: thank you. The author of this piece in the Wall
• 33:57
  Speaker 4: Street Journal, Dan Alleger, points out that this should be
• 34:03
  Speaker 4: thought of as cloud computing. The business Meta has not
• 34:06
  Speaker 4: been in to this point, but plenty of other big
• 34:08
  Speaker 4: providers do, and Gallagher phrases, I think the key question perfectly.
• 34:13
  Speaker 4: The big question, Gallagher says, would be weather running out
• 34:16
  Speaker 4: access capacity is a short term offset to continued mega
• 34:20
  Speaker 4: spending like you talked about, or a sign that such
• 34:22
  Speaker 4: spending is about to recede, a signal that they've overinvested.
• 34:28
  Speaker 4: That is the h five hundred billion dollar question.
• 34:34
  Speaker 3: Yeah. Absolutely. It is.
• 34:37
  Speaker 2: Probably the biggest focus that you would have for for
• 34:40
  Speaker 2: markets going for so much of the cap ax investment
• 34:44
  Speaker 2: from these big companies has now trickled down into other
• 34:48
  Speaker 2: players within the infrastructure chain. We talked earlier in the
• 34:51
  Speaker 2: program about Micron and Sandiskin others who are memory chip producers.
• 34:56
  Speaker 2: Those commodities what were once commodities are in tremendously high demand.
• 35:00
  Speaker 2: The profit margins that they are obtaining have skyrocketed. Does
• 35:05
  Speaker 2: that continue? That really is the question going forward. And
• 35:09
  Speaker 2: for that to continue, these big companies are going to
• 35:12
  Speaker 2: have to justify the spend with return on investment at
• 35:17
  Speaker 2: some point in time to satisfy investors.
• 35:20
  Speaker 4: The scary thing is, even if they do the proven
• 35:22
  Speaker 4: thing and curtail spending a little bit, people are going
• 35:24
  Speaker 4: to start to run for the excess because they think
• 35:26
  Speaker 4: the party's over.
• 35:27
  Speaker 2: Yeah, exactly, it is going to be. Even any type
• 35:31
  Speaker 2: of pullback from the rapid pace that they're on will
• 35:34
  Speaker 2: be met with a great deal of investor skepticism.
• 35:37
  Speaker 3: You're absolutely right.
• 35:38
  Speaker 2: I think that we would see some pretty large selfs
• 35:41
  Speaker 2: in these big names if that were to occur.
• 35:44
  Speaker 3: On the robotaxi.
• 35:46
  Speaker 2: Front, there is a great piece here that was done
• 35:50
  Speaker 2: out of Bloomberg where they discuss robotaxis are here, So
• 35:54
  Speaker 2: why aren't they taking over and curious your guys' thoughts
• 35:57
  Speaker 2: on robotaxis Because when I've brought them up to my
• 36:00
  Speaker 2: wife and mother in law, they had what probably is
• 36:03
  Speaker 2: the more typical reaction concerns of safety fears. I guess
• 36:11
  Speaker 2: more so about robotaxis taking over the idea of, you know,
• 36:15
  Speaker 2: autonomous driving, where I sit a little bit on the
• 36:18
  Speaker 2: side of just curious and something that I would would
• 36:21
  Speaker 2: be interested in just trying to see what it's like
• 36:24
  Speaker 2: and perhaps have a more optimistic view on them than
• 36:29
  Speaker 2: where my family members sit.
• 36:31
  Speaker 3: Yeah, ride in one, Try.
• 36:33
  Speaker 4: My dog in front of one.
• 36:34
  Speaker 3: No way.
• 36:35
  Speaker 2: Yeah, that's at the debate is that, you know, Waimo
• 36:39
  Speaker 2: is Google's sub company that is at the forefront of
• 36:44
  Speaker 2: autonomous driving, and they probably have the most robotaxi presence
• 36:49
  Speaker 2: out there domestically in the US, and they take this
• 36:53
  Speaker 2: with a grain of salt, claim that the robotaxis are
• 36:58
  Speaker 2: thirteen times safer than than regular drivers. Again, that hasn't
• 37:02
  Speaker 2: been verified by an independent agency that these self driving
• 37:06
  Speaker 2: vehicles are more safe than the regular vehicle on the road.
• 37:10
  Speaker 2: You could kind of make the argument both ways. They
• 37:12
  Speaker 2: have sensors in their vehicles that might be far more
• 37:15
  Speaker 2: responsive than the individual human. They also don't have the
• 37:18
  Speaker 2: distractions of texting on their phone or not paying attention
• 37:22
  Speaker 2: to the road that a lot of human drivers are
• 37:23
  Speaker 2: sure are guilty of doing.
• 37:25
  Speaker 4: I'm sure it's a simple statistical one like accident per miles.
• 37:28
  Speaker 2: Yeah, driven, there's not a lot of miles driven by
• 37:31
  Speaker 2: these by these way Mo taxis compared to the amount
• 37:37
  Speaker 2: of miles that are people are driving average.
• 37:39
  Speaker 4: Sure, they're better drivers, they have to. It's a computer.
• 37:41
  Speaker 4: Of course, it's going to be a better driver than
• 37:42
  Speaker 4: I am, right, I mean, come on, but.
• 37:44
  Speaker 2: Well, where the argument falls apart is those one off
• 37:46
  Speaker 2: situations that you and I know to pull to the
• 37:49
  Speaker 2: side of the road when a fire truck is coming
• 37:51
  Speaker 2: screaming down the highway or a police vehicle is because
• 37:55
  Speaker 2: that is something that was ingrained into teaching us. Not
• 37:57
  Speaker 2: to say that they are not taught that, but not
• 37:59
  Speaker 2: as quick to adapt to those situations. So, anyway, a
• 38:03
  Speaker 2: fascinating subject that will continue to debate. That's all the
• 38:07
  Speaker 2: time that we have to debate that subject and to
• 38:09
  Speaker 2: cover the markets today, But we'll be right back at
• 38:11
  Speaker 2: it tomorrow
• 38:12
  Speaker 3: Morning at tenny and thanks so much for joining us.