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AI Chip Stocks Close Out a Historic Quarter · The Financial Exchange Show

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Speaker 1: and Paul Lane.
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Speaker 2: Good morning, Happy Tuesday, Welcome back to the Financial Exchange
1:15
Speaker 2: on the last day of the second quarter, where we've
1:17
Speaker 2: seen AI stocks just rip for the entire second quarter
1:22
Speaker 2: and some volatility in there, but pretty incredible numbers that
1:27
Speaker 2: were put up this morning. Six minutes ago. We received
1:31
Speaker 2: the job openings in Labor Turnover Survey. We'll get into
1:34
Speaker 2: that in the last segment, but the headline numbers here.
1:37
Speaker 2: The total job openings came in at seven point six
1:40
Speaker 2: million in the month of May, which is pretty much
1:43
Speaker 2: unchanged from the previous month. But they were actually expected
1:46
Speaker 2: to decline and they really didn't. It was pretty much unchanged.
1:50
Speaker 2: The rate of job openings likewise unchanged for the month.
1:55
Speaker 2: So we continue to show signs that seem to be
2:01
Speaker 2: stalling out, maybe in terms of the pace of increases,
2:05
Speaker 2: but we're stalling out at a really good level of employment,
2:09
Speaker 2: is the key message here. And while we might not
2:11
Speaker 2: be seeing the trends on new employment like we were
2:15
Speaker 2: three years ago, we don't need to be seeing those
2:18
Speaker 2: trends on new employment because quite frankly, there aren't just
2:21
Speaker 2: enough available bodies to fill those jobs. And so I
2:25
Speaker 2: expect when we get to the Unemployment report on Thursday
2:28
Speaker 2: of this week the Month of Jobs report, which will
2:30
Speaker 2: be covering the month of June. This survey covered the
2:32
Speaker 2: end of May. I suspect we are going to see
2:35
Speaker 2: an unemployment rate that stays where it is or even declines,
2:38
Speaker 2: and continued big gains on unemployment. So we will again
2:45
Speaker 2: revisit the Joltz report throughout the course of the show,
2:48
Speaker 2: just released seven minutes ago, and the key takeaway is
2:51
Speaker 2: slightly better than expected and really unchanged from the prior month. Here.
2:55
Speaker 2: We had a solid day in markets yesterday, a rebound
2:58
Speaker 2: from the sell off of last week all around markets,
3:03
Speaker 2: but particularly focused on the Nasdaq. This morning, we've got
3:06
Speaker 2: all three major indices in the green to start the show,
3:10
Speaker 2: at least the Dow Jones Industrial Average barely up after
3:15
Speaker 2: they hit their all time record yesterday. On the Dow
3:19
Speaker 2: basically flat now for the day, S and P five
3:22
Speaker 2: hundred up a third of a percent, and the Nasdaq
3:24
Speaker 2: up three quarters of a percent. There's gonna be a
3:27
Speaker 2: Dow component change going in, wasn't there. Google is getting
3:31
Speaker 2: entered four Verizon that's correct. Yeah, okay, so Alpha bats
3:35
Speaker 2: of the Google parent company will be swapped out in
3:38
Speaker 2: the meaningless dat five people who still follow what's what's
3:44
Speaker 2: not true? I do genuinely believe like when people come
3:48
Speaker 2: and tell me what the market's doing, they always tell
3:50
Speaker 2: me what the Dow is doing, even though I find
3:52
Speaker 2: it irrelevant.
3:52
Speaker 3: Absolutely, they love to quote the Dows over fifty thousand,
3:56
Speaker 3: But I like to say, it's like Famway Park's manual scoreboard.
3:59
Speaker 3: It's just like a artifact of yesteryear that is really
4:02
Speaker 3: not necessary but is nice to look at.
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Speaker 2: I guess we are also heading for the best quarter
4:10
Speaker 2: ever for semiconductor stocks. No big surprise here, but honestly,
4:14
Speaker 2: maybe it is. The Philadelphia Stock Exchange Semiconductor Index has
4:21
Speaker 2: bumped up eighty one percent in the second quarter as
4:24
Speaker 2: of yesterday. We will see where it ends today, but
4:26
Speaker 2: that would be the best quarter ever in history since
4:29
Speaker 2: this thing has existed. It's up ninety four percent in
4:32
Speaker 2: twenty twenty six. And you have several names in here
4:35
Speaker 2: that are beneficiaries of this AI boom that are up
4:41
Speaker 2: substantially more. Micron Technology jumped three hundred percent in six months,
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Speaker 2: moving their market cap over a trillion dollars. Sand Disc
4:50
Speaker 2: saw a seven hundred and sixty four percent gain during
4:53
Speaker 2: this period of time, Intel jumping two hundred and fifty
4:56
Speaker 2: seven percent, Seagate up there as well, and so you
5:01
Speaker 2: have these companies that are in terms of stock price,
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Speaker 2: just skyrocketing forward but justified in some ways due to
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Speaker 2: the AI spending craze and the deals that are being
5:15
Speaker 2: locked in here for the semiconductor, memory and everything else manufacturers.
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Speaker 3: Yeah, I mean what you're seeing from these companies is though,
5:23
Speaker 3: when you look at the Philadelphia Semiconductor Index and its performance,
5:27
Speaker 3: you haven't seen this strong of a year since nineteen
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Speaker 3: ninety nine, and I think people often shudder when they
5:32
Speaker 3: hear the comparisons to ninety nine. But you know, we
5:35
Speaker 3: always say, you know, this time is different, but this
5:37
Speaker 3: time it is different in the sense that these companies
5:39
Speaker 3: are earning significantly more money. I mean, if you look
5:42
Speaker 3: at Micron, for example, we cover their earning support last
5:45
Speaker 3: week where they saw a quadrupling of revenue year over year.
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Speaker 3: You've just seen all these dynamics in a market where
5:52
Speaker 3: the profit margins for anyone within the semiconductor space, particularly now,
5:57
Speaker 3: it's trickling down from the magnificence seven to some of
6:01
Speaker 3: these other component providers that are probably not as household names,
6:06
Speaker 3: but the margins that they're commanding the earnings that they're
6:09
Speaker 3: generating are really significant to me. What's most fascinating heading
6:13
Speaker 3: into the second half of twenty twenty six, and probably
6:16
Speaker 3: the biggest story heading into twenty twenty seven is can
6:19
Speaker 3: this momentum continue? You have a consolidation of significant spend
6:24
Speaker 3: from these hyperscalers, and we are on this kind of
6:28
Speaker 3: high wire act mic where we want to continue to
6:31
Speaker 3: see the enthusiasm regarding AI for from a market perspective,
6:35
Speaker 3: because that is what's driving all this earnings growth. But
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Speaker 3: it's sort of fickle. It can and that's what we've
6:41
Speaker 3: seen from the semiconductor index trading as well as you
6:44
Speaker 3: know the Nasdaq over the last week or two. Any
6:47
Speaker 3: dn to that sentiment really has a tremendous impact on
6:50
Speaker 3: what you're looking at from the ford earnings growth of
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Speaker 3: the S and P, which the tech sector is responsible
6:55
Speaker 3: for a lot of that.
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Speaker 2: Well, frankly, the market is just outrageously expensive. This is
6:58
Speaker 2: a semiconductor Indeck is trading at roughly twenty six times
7:02
Speaker 2: estimated future earnings. That's well above the ten year average
7:06
Speaker 2: of nineteen and not far it hit a record of
7:10
Speaker 2: thirty back in twenty twenty four because frankly, these earnings
7:14
Speaker 2: hadn't really been realized by these companies yet, and so
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Speaker 2: it was trading quite a bit higher. Now you've realized
7:19
Speaker 2: some of those earnings, the multiple is coming down a
7:22
Speaker 2: little bit, but still quite elevated. And that remains the
7:24
Speaker 2: case for the entire market as a whole. Is that
7:27
Speaker 2: multiples when you look at valuations are stretched no matter
7:32
Speaker 2: which way you cut it. And yeah, Paul, I mean,
7:35
Speaker 2: I think the question to me is that sentiment shift.
7:41
Speaker 2: And I don't think it's sentiment around Hey, you know,
7:44
Speaker 2: is the semiconductor and you know group of companies going
7:49
Speaker 2: to continue to sell chips. That's not the sentiment that
7:52
Speaker 2: changes if it comes from somewhere. I think it comes
7:54
Speaker 2: from business users of the technology as they continue to
7:58
Speaker 2: see their costs skyrocket. Is there a sentiment shift among
8:03
Speaker 2: executives to say, you know what, this just isn't worth
8:07
Speaker 2: what we thought it was. And I don't see any
8:10
Speaker 2: sign of that whatsoever. But as the reason that these
8:15
Speaker 2: companies have become so highly valued and are generating the
8:19
Speaker 2: most profit they have ever seen is because the message
8:22
Speaker 2: from executives across the tech and even non technology space.
8:27
Speaker 2: Right you know law firms, you know healthcare firms that
8:30
Speaker 2: are telling their employees to use as much AI as
8:34
Speaker 2: possible to do your job. And I don't see much
8:38
Speaker 2: of an indication that that directive is slowing down or
8:40
Speaker 2: changing in any meaningful way. We're going to cover story
8:43
Speaker 2: in the second hour of the show that talks about
8:45
Speaker 2: just that where you are seeing those signs, but they
8:47
Speaker 2: are few and far between, and until you see that
8:52
Speaker 2: cost discipline come into frankly, into the investor demand. It's
8:59
Speaker 2: not going to come from the executives themselves. It's going
9:01
Speaker 2: to come from investors who say, hold hold on, you're
9:04
Speaker 2: spending how much on capital expenditure is this year? You're
9:08
Speaker 2: bringing your profit margin down to what you're bringing your
9:10
Speaker 2: free cash flow down to. Here, you're cutting the dividend
9:13
Speaker 2: because you can't afford to pay it anymore because you're
9:15
Speaker 2: spending so much on this. Let's take a closer look
9:19
Speaker 2: at all that, and that's when you start to find
9:21
Speaker 2: the winners and losers. Once cost discipline comes into play,
9:24
Speaker 2: that's when you find out who can actually build this
9:26
Speaker 2: stuff efficiently, who can use it efficiently and get a
9:29
Speaker 2: good ROI, because one thing that I'm personally convinced of
9:33
Speaker 2: is not all of the companies doing this spend right
9:37
Speaker 2: now are getting a good ROI and are any good
9:41
Speaker 2: whatsoever at building this stuff efficiently right.
9:44
Speaker 3: And the timing on that ORI is going to be
9:48
Speaker 3: difficult from a market perspective, where the market's going to
9:50
Speaker 3: want to see it early and often. And what can
9:53
Speaker 3: happen these cycles is it's not a perfect linear trajectory
9:57
Speaker 3: of growth in terms of the return on all the
10:00
Speaker 3: big spend. Maybe you get it, but if it's prolonged
10:03
Speaker 3: at all, I mean, these chip makers, the earnings expectations
10:07
Speaker 3: for twenty twenty seven is forty nine percent growth. That's
10:10
Speaker 3: up thirty five percent from where it was in April.
10:12
Speaker 3: So the market is pricing in tremendous amount of earnings growth,
10:16
Speaker 3: and any dent to that can have a quick impact
10:20
Speaker 3: on the way that investors will recalibrate valuations in the market.
10:25
Speaker 2: But to be clear, I mean the first AI model
10:28
Speaker 2: did not get released until November twenty twenty two. Nobody
10:33
Speaker 2: was using this technology until three years ago, and so
10:38
Speaker 2: I don't know how long I mean, when did we
10:40
Speaker 2: all start using the internet ninety two, ninety three, ninety five,
10:44
Speaker 2: ninety ninety five, and early adopters ninety three. It took
10:50
Speaker 2: eight years for it to pop. I don't I have
10:52
Speaker 2: no idea when this is going to become a problem.
10:54
Speaker 2: But you know, that's just the easiest comparison to make.
10:58
Speaker 2: But I really do believe there's only one way this
11:01
Speaker 2: can go, which is a new technology comes out, it
11:04
Speaker 2: gets over invested in, some of the companies turn out
11:06
Speaker 2: to be pretty bad at it, and you'll have the
11:09
Speaker 2: cycle turn around at some point. But we know, we
11:11
Speaker 2: don't know when that's going to happen, and I don't
11:13
Speaker 2: see a lot of indications that it's about to happen. Now,
11:15
Speaker 2: quick break. When we return, we're going to take a
11:18
Speaker 2: look at that job openings that Jolts report from this
11:21
Speaker 2: morning at ten am. Quick right, we'll be right back.
11:24
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12:08
Speaker 2: So again this morning at ten am, we got to
12:10
Speaker 2: this week's first jobs report from the BLS, which was
12:13
Speaker 2: the Job Opening's Labor Turnover Survey. So we cover this
12:17
Speaker 2: one every month, but just a refresher course on this guy.
12:21
Speaker 2: It measures things from the end of the month of
12:24
Speaker 2: the previous month, so we're looking now at data from
12:26
Speaker 2: the month of May on the labor market, and rather
12:30
Speaker 2: than telling you the unemployment rate, it's really giving you
12:34
Speaker 2: a survey of businesses to try and find out how
12:36
Speaker 2: many job postings did you open up, how many people
12:39
Speaker 2: did you hire, how many did you fire, how many
12:41
Speaker 2: people quit during the previous month, and to that end,
12:45
Speaker 2: it's kind of it's referred to as the churn survey.
12:51
Speaker 2: If you're trying to determine how much looseness or tightness
12:55
Speaker 2: is in the labor market, this is the survey you
12:57
Speaker 2: want to look at and a lot of economists looked
13:00
Speaker 2: at this one in particular back in twenty twenty one
13:04
Speaker 2: as a good predictor of the inflation that we were
13:06
Speaker 2: going to get in twenty twenty two. It indicated that
13:09
Speaker 2: at its peak, there were two jobs open for every
13:13
Speaker 2: unemployed person looking for work, and lo and behold wages
13:16
Speaker 2: went up, inflation went up. We are no lower near
13:19
Speaker 2: that anymore. We still do have basically an equal measure
13:25
Speaker 2: of the unemployed to those job openings. But what was
13:30
Speaker 2: a bit surprising, I think to most was the reversal
13:34
Speaker 2: we saw in the labor market this year. So it
13:36
Speaker 2: was running pretty week last year we saw a total
13:40
Speaker 2: pace of job creation that averaged less than fewer than
13:43
Speaker 2: ten thousand jobs a month. This year we've been on
13:45
Speaker 2: the pace of over one hundred thousand jobs created, and
13:48
Speaker 2: those job openings have continued to tick up. They saw
13:50
Speaker 2: a big surge back in April and they haven't really
13:54
Speaker 2: dipped down, so the total job listings are still sitting
13:57
Speaker 2: at seven point six million. It was a bit of
14:00
Speaker 2: prizing that it didn't come back down in the month
14:02
Speaker 2: of May, but everything else was pretty consistent, right. The
14:06
Speaker 2: rate of hires didn't change much. The quits rate didn't
14:11
Speaker 2: really change at all, and there was importantly no significant
14:16
Speaker 2: uptick in layoffs and discharges. I know a lot of
14:19
Speaker 2: folks have been focused on that one area. I was
14:21
Speaker 2: meeting with somebody and their son who works in the
14:24
Speaker 2: tech sector out in California yesterday, and yeah, it's like,
14:29
Speaker 2: you know, are you seeing that? And he is seeing
14:31
Speaker 2: a lot of people in his industry not finding work.
14:34
Speaker 2: But we haven't seen that permeate through the whole labor
14:37
Speaker 2: market and show up in the data in any significant way. Here. Interestingly,
14:42
Speaker 2: the one big area from a sector perspective where you
14:46
Speaker 2: saw a notable bump in terms of the job openings
14:49
Speaker 2: was in the wholesale trade area. And you know, wholesale
14:52
Speaker 2: trade can include a lot of different things. You know,
14:55
Speaker 2: you can think of this as like wholesale sales representatives,
14:58
Speaker 2: or account managers, logistics and supply chain managers, even down
15:03
Speaker 2: to like forklift operators at warehouses. The one thing that
15:07
Speaker 2: stood out to me is if we are actually seeing
15:11
Speaker 2: a big bump in data center construction and management, then
15:15
Speaker 2: you would expect this area to increase in volume. Right,
15:18
Speaker 2: you need all the supplies that go into it. You've
15:21
Speaker 2: got all sorts of manufacturer reps and all those things
15:24
Speaker 2: that come you know, fall into that group who are
15:26
Speaker 2: suddenly maybe in high demand due to the construction boom
15:32
Speaker 2: that we're talking about right now.
15:33
Speaker 3: Yeah, it's amazing the resiliency that you've seen in the
15:36
Speaker 3: labor market in general. It feels like now for the
15:39
Speaker 3: past two years, sort of heading into the beginning of
15:42
Speaker 3: the county year, from both in twenty six and twenty five,
15:46
Speaker 3: that the labor market was a concern that loomed over
15:49
Speaker 3: the economy. But again we've continued to see whether it's
15:52
Speaker 3: because of the shortage on the supply side that there
15:56
Speaker 3: continues to be demand even though amidst some of these
15:59
Speaker 3: head lines that you often get yourself caught up into
16:02
Speaker 3: reading about the tech sector or AI coming for jobs.
16:06
Speaker 3: From a data perspective, we just really haven't seen it
16:08
Speaker 3: yet to your point. And one area that you would
16:10
Speaker 3: think would be strong, like you mentioned, is on the
16:13
Speaker 3: data center side, the wholesale trade. Healthcare has also been
16:16
Speaker 3: an area that has been really robust over the course
16:18
Speaker 3: of the last year or so when it comes to.
16:20
Speaker 2: Nurses and healthcare age all across the board, Social assistance
16:25
Speaker 2: and healthcare a big area of hiring. As we head
16:28
Speaker 2: into Thursday's jobs report, expectations are for what was it,
16:32
Speaker 2: one hundred and eighteen thousand jobs to be created for
16:35
Speaker 2: the month of June. I do believe the last five
16:38
Speaker 2: months we've averaged one hundred and fourteen thousand. Am I
16:41
Speaker 2: off on that, Tucker.
16:42
Speaker 4: And I'm sorry for the month of June.
16:46
Speaker 2: Yeah, the jobs report that we're gonna get on Thursdays
16:48
Speaker 2: for the month of June, Yeah.
16:49
Speaker 3: One o seven to one twenty three.
16:50
Speaker 2: Okay here, yes, right in that range. In terms of expectations,
16:54
Speaker 2: the unemployment rate expected to hold steady at four point
16:57
Speaker 2: three percent. Though what I will say is most economists
17:01
Speaker 2: look at the pace of job creation that we've seen
17:03
Speaker 2: one hundred and fourteen thousand again for the first five
17:05
Speaker 2: months of the year, and say, you know what, pretty
17:10
Speaker 2: tough to see that continue with the unemployment rates staying
17:15
Speaker 2: at four point three percent. Yeah, we're basically assuming that
17:18
Speaker 2: this pace of job creation is above the trend line
17:22
Speaker 2: for stabilizing the labor market. There are not a bunch
17:25
Speaker 2: of immigrants coming into the country right now. There are
17:27
Speaker 2: not a bunch of eight kids turning eighteen right now
17:30
Speaker 2: to replace the retiring baby boomers, and so should this
17:34
Speaker 2: pace continue for the full year, I would expect the
17:37
Speaker 2: unemployment rate to come down, which you know, just increases
17:41
Speaker 2: the pressure on the FED to do something when it
17:44
Speaker 2: comes to interest rates and moving them upwards.
17:47
Speaker 3: Clearly, inflation now is you know, the is the major focus,
17:50
Speaker 3: and that's where the FED is looking at this point.
17:52
Speaker 2: Yeah, I mean, look, the inflation rate has not been
17:56
Speaker 2: anywhere near the fed's two percent target for five years
17:59
Speaker 2: in a row. Now that is a long time. And
18:04
Speaker 2: you know, I know we talk about the technicals in
18:06
Speaker 2: this a lot, but the concern for the FED and
18:09
Speaker 2: the concern for people that watch the FED is if
18:12
Speaker 2: those if that inflation becomes so ingrained in the American
18:17
Speaker 2: psyche that we begin to anticipate more inflation, then that
18:21
Speaker 2: begets more inflation self fulfilling prophecy. If you get to
18:26
Speaker 2: the point where you know prices are going to go
18:28
Speaker 2: up another four percent next year, then you ask for
18:30
Speaker 2: a bigger raise. You buy your car and computer and
18:34
Speaker 2: TV earlier than you otherwise would because you're worried about
18:37
Speaker 2: prices going up, and when that happens, the FED only
18:41
Speaker 2: has one solution to that problem. The solution to that
18:45
Speaker 2: problem is to sync the whole economy into a really
18:48
Speaker 2: bad recession, drive up the unemployment rate, and crush that
18:52
Speaker 2: inflation expectation by increasing interest rates by the mechanism they
18:56
Speaker 2: were able to do it last time around, agreed, But
18:59
Speaker 2: that wasn't a prolonged, ingrained inflation situation, right like, we
19:04
Speaker 2: were pretty pressed to that inflation. What I'm talking about
19:09
Speaker 2: is in nineteen seventies like period where people really expect
19:12
Speaker 2: higher rates of inflation for a longer period of time.
19:15
Speaker 2: There is only one solution to that problem, which is
19:18
Speaker 2: a pretty ugly recession. And what everyone's hoping we don't
19:21
Speaker 2: need to get to quick break Wall Street Watch coming
19:24
Speaker 2: up next.
19:39
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20:00
Speaker 4: Markets are in positive territory is the first half of
20:03
Speaker 4: twenty twenty six comes to a close right now.
20:06
Speaker 1: The Dow is up.
20:07
Speaker 4: About a quarter percent, SMP five hundred up about half
20:10
Speaker 4: a percent, NASDAK up one percent, higher nice little rally there.
20:14
Speaker 4: The rust of two thousand is up about a quarter percent,
20:17
Speaker 4: a ten year treasure reeled is up two basis points
20:20
Speaker 4: at four point four zero percent, and oil is flat
20:23
Speaker 4: today at seventy dollars a barrel. Ahead of today's open,
20:26
Speaker 4: the SMP five hundred jump fourteen percent this quarter, it's
20:29
Speaker 4: best in its best three months since the second quarter
20:32
Speaker 4: of twenty twenty, while the Nasdaq jumped twenty percent for
20:36
Speaker 4: the quarter and the Dow climbed thirteen percent. Meanwhile, shares
20:40
Speaker 4: and drummaker AeroVironment surging twenty two percent after the company
20:43
Speaker 4: blue pass Street forecast for its fiscal fourth quarter after
20:47
Speaker 4: benefiting from US plans to modernize the military and secure space.
20:51
Speaker 4: The company CEO is said during an earnings call that
20:54
Speaker 4: the company's growth opportunity has never been stronger. Meanwhile, after
20:58
Speaker 4: leaping thirteen percent yesterday's in crypto hoarding company strategy retreating
21:02
Speaker 4: five percent today, the company said it plans to buy
21:05
Speaker 4: back stock and sell bitcoin, among many moves in a
21:09
Speaker 4: bid to shore rep confidence in the company. And after
21:12
Speaker 4: today's closing bell, we'll see earnings from retailer Nike. I'm
21:17
Speaker 4: Tucker Silva and that is Wall Street Watch.
21:20
Speaker 2: We talk a lot about how markets have surged so much,
21:22
Speaker 2: especially semiconductor stocks. I think it's important to point out
21:26
Speaker 2: that this has not been a pure play. Every company
21:30
Speaker 2: benefits type of market, at least over the course of
21:33
Speaker 2: the last month. The mag seven, for example, Microsoft and Vidia, Alphabet,
21:38
Speaker 2: Google's parent company, Apple, Meta, which is Facebook's parent company, Tesla,
21:42
Speaker 2: and Amazon I have actually lost some two point three
21:45
Speaker 2: trillion dollars in market capitalization over the last month. I
21:49
Speaker 2: find that to be rather irrelevant given how much they
21:52
Speaker 2: have gained over the last year. But you know, they
21:56
Speaker 2: have lost out over the course of the last thirty
21:58
Speaker 2: days as investors have turned cash to other places SpaceX
22:04
Speaker 2: as well as companies that are in my mind kind
22:07
Speaker 2: of further down on the AI demand supply chain. Right,
22:12
Speaker 2: You've gone from hey, these are the big builders and users,
22:15
Speaker 2: to hey, what's the big supplier in this overall area.
22:19
Speaker 2: I really consider these companies by and large, other than Nvidia,
22:23
Speaker 2: to be the spenders of artificial intelligence. While some of
22:27
Speaker 2: them also do some building, like Microsoft, they are massive
22:31
Speaker 2: spenders in the space rather than the huge chip producing
22:35
Speaker 2: beneficiaries of the space. And that's not been the big
22:39
Speaker 2: beneficiary this most recent few days.
22:42
Speaker 3: Yeah, they're the ones with the biggest CAPEC budgets that
22:45
Speaker 3: are going out to building out these these data centers
22:47
Speaker 3: and spending, like you said, so much on AI and
22:51
Speaker 3: the bigger focus has become on the juicy you know,
22:54
Speaker 3: profit margins that the microns and sandis are commanding that,
22:58
Speaker 3: like you said, are provide of memory components of the
23:01
Speaker 3: semiconductor stack rather than the chip design or in this
23:05
Speaker 3: case just some of these other data center build out pieces.
23:09
Speaker 3: But again these articles love to use you know, dollar values.
23:13
Speaker 3: Two point three trillion sounds like a lot. It is
23:15
Speaker 3: a lot, don't get me wrong. But these companies have
23:17
Speaker 3: significant valuations. They're off, like you said, ten percent over
23:21
Speaker 3: the month of June. Typically, the way these businesses have
23:25
Speaker 3: been run and what is taking investors perhaps some time
23:29
Speaker 3: to process is asset light and they drove a tremendous
23:33
Speaker 3: amount of cash flow. You know, Google having the most
23:36
Speaker 3: profitable desirable business out there really in history and now
23:40
Speaker 3: is pivoting away from having to raise debt and to
23:42
Speaker 3: spend a lot of money. And so as a result
23:44
Speaker 3: of that, it does seem like the marketing the market
23:47
Speaker 3: is going through kind of a recalibration of what these
23:50
Speaker 3: valuations to look like for these companies, or they're not
23:52
Speaker 3: getting as much capital as some of these other sexier names.
23:55
Speaker 2: Important point you just made. The combined market cap of
23:57
Speaker 2: these seven companies is over twenty one trillion dollars. Yeah,
24:00
Speaker 2: so not the two point three trillion is irrelevant, but
24:03
Speaker 2: it's about ten percent. So yeah, let's you know, let's
24:06
Speaker 2: let's not go running for the hills here. A big
24:11
Speaker 2: driver of all of this, though, Paul, has been the
24:14
Speaker 2: surge in profits of companies right like, this is not.
24:19
Speaker 2: One key way that I think people have pointed to
24:21
Speaker 2: as being different than the dot com days is that
24:25
Speaker 2: it is not purely, at least a surge in stocks
24:31
Speaker 2: that have very little in the way of earnings. And
24:34
Speaker 2: you see that when you go and look at the
24:36
Speaker 2: current priced earnings ratio on the S and P five hundred,
24:39
Speaker 2: for instance, compared to that period of time in the
24:42
Speaker 2: two thousands where it was substantially higher than where it
24:45
Speaker 2: is now. It's not to say that companies that don't
24:49
Speaker 2: have any earnings aren't also benefiting. Go take a look
24:51
Speaker 2: at SpaceX, right massive IPO on a company that's losing
24:55
Speaker 2: a boatload of money. But profits are sitting fourteen point
25:01
Speaker 2: eight percent in the first quarter according to facts That.
25:04
Speaker 2: We will get a new read on profits for the
25:07
Speaker 2: second quarter starting a couple of weeks from now, and
25:12
Speaker 2: that is the highest that they have ever been recorded
25:15
Speaker 2: since Factset began looking at it back in two thousand
25:18
Speaker 2: and nine. It's also expected to grow further as the
25:21
Speaker 2: year goes on. I think if there's one piece of
25:24
Speaker 2: this that could be mispriced or misunderstood, it's the idea
25:35
Speaker 2: of these profits and where they are going to go
25:37
Speaker 2: over the next few years as the continued costs of
25:41
Speaker 2: building this stuff begin to mount. So we've talked about
25:45
Speaker 2: this a lot, but free cash flow versus profit margin
25:49
Speaker 2: it largely comes down to just accounting differences of what
25:52
Speaker 2: counts and what doesn't. But companies that are buying a
25:56
Speaker 2: boatload of semiconductors and building data warehouses, for example, right now,
26:02
Speaker 2: are spending their free cash flow on those endeavors. They
26:06
Speaker 2: are not booking all that expense as an expense on
26:10
Speaker 2: their P and L, meaning it may not in all
26:12
Speaker 2: cases be showing up on their profit margin. Why because
26:16
Speaker 2: it's an asset that they are purchasing. If you took
26:19
Speaker 2: an accounting course, what you know is that you get
26:21
Speaker 2: to depreciate an asset over time, and so therefore you
26:24
Speaker 2: don't get to realize that entirety of that expense right
26:27
Speaker 2: up front, right away. And so the question that has
26:30
Speaker 2: been brought up by folks that are a lot more
26:33
Speaker 2: in tune and better at this and actually took accounting
26:36
Speaker 2: courses and analyze stocks have raised the question of, hey,
26:42
Speaker 2: when this depreciation starts to hit the balance sheets and
26:46
Speaker 2: starts to hit those profit lines, are you going to
26:49
Speaker 2: see these margins maintained or is all of this spending
26:53
Speaker 2: that's been done just going to result in a whole
26:56
Speaker 2: bunch of realized expense without corresponding revenue to match it.
26:59
Speaker 3: Right, you could have happened, like you mentioned, is these
27:02
Speaker 3: expenses being applied to the balance sheet year over year.
27:05
Speaker 3: But at the same time, demand could evolve to a
27:09
Speaker 3: point where it's not as robust as where it is today.
27:12
Speaker 3: Like we were talking about in an earlier segment, there
27:14
Speaker 3: is just insatiable demand for everything in the AI stack,
27:19
Speaker 3: and on a you should basis, companies are looking for
27:22
Speaker 3: ways to increase productivity and are throwing off sort of
27:26
Speaker 3: all the guardrails on spending and use for its employees
27:30
Speaker 3: to try and get a best understanding of how can
27:32
Speaker 3: this make this technology make our business better? Like we
27:36
Speaker 3: talked about before, eventually there is some constraint that needs
27:40
Speaker 3: to be applied when you're running a business on the
27:41
Speaker 3: cost side, and some scrutiny on what are we really
27:44
Speaker 3: getting from this. There was a quote in one of
27:46
Speaker 3: these pieces that I really like that, you know, to
27:49
Speaker 3: have Albert Einstein tutor your daughter in algebra would be fantastic,
27:54
Speaker 3: but there's other ways that you can do it a
27:56
Speaker 3: little more cheaply from a local math tutor. And that
27:59
Speaker 3: is kind of has been applied to this idea of
28:02
Speaker 3: this AI usage where they found in some cases that
28:05
Speaker 3: employees are using it to answer even the most basic
28:08
Speaker 3: questions and it's driving up a lot of cost. You know,
28:10
Speaker 3: does that get rained in at some point.
28:12
Speaker 2: In time cost discipline? Like That's that's what I am
28:16
Speaker 2: looking for when I'm trying to detect signs that this
28:19
Speaker 2: is all something that's going to come crumbling down. Is
28:21
Speaker 2: when do we see cost discipline on behalf of Frankly,
28:26
Speaker 2: those in the mag seven right, that's all you need
28:29
Speaker 2: is one of them to say, this isn't looking like
28:32
Speaker 2: it's going to pay off the way that we thought
28:34
Speaker 2: it would. And that's the point where it starts to turn.
28:36
Speaker 2: And I hesitate to say that I see much in
28:39
Speaker 2: the way of cost discipline right now, which is why
28:43
Speaker 2: we are seemingly in AI mania at the moment. Let's say,
28:46
Speaker 2: quick break when we return, another conversation about the Social
28:50
Speaker 2: Security program, the urgency to fix it, and how it
28:54
Speaker 2: probably won't get done anytime soon. That's next here on
28:57
Speaker 2: the Financial Exchange Mister Show.
29:00
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29:13
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29:20
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29:22
Speaker 1: Face is the Financial Exchange.
29:33
Speaker 2: Well, if you haven't heard, the Social Security Trust Fund
29:36
Speaker 2: is going to run out of money in approximately five
29:39
Speaker 2: to six years end of twenty thirty two, I believe,
29:43
Speaker 2: is the most recent estimate from the Social Security Administration,
29:46
Speaker 2: and a lot of conjecture, and I know this isn't useful,
29:53
Speaker 2: but everybody likes to commiserate about all the bad policy
29:57
Speaker 2: decisions that were made that led to this, when reality
30:02
Speaker 2: is that the biggest change and the reason that this
30:05
Speaker 2: is kind of going belly up, is not due to
30:08
Speaker 2: a bunch of lawmakers robbing the trust fund. They do
30:11
Speaker 2: have the capability to borrow against it, but every borrowing
30:14
Speaker 2: that's been done was ultimately repaid into the trust Fund. Largely,
30:18
Speaker 2: it's a demographics problem. We don't have enough children, and
30:21
Speaker 2: so therefore the pool of people who are receiving benefits
30:25
Speaker 2: has increased dramatically, while as those that are putting money
30:28
Speaker 2: into it has not grown. And so it's mostly that,
30:32
Speaker 2: but there have been other contributing factors. I mean one,
30:36
Speaker 2: back when Congress started taxing and reforming things back in
30:43
Speaker 2: the eighties, the wage cap was structured at that time
30:46
Speaker 2: to capture ninety percent of all wages across the US economy.
30:50
Speaker 2: So right now, as I think most people know, your
30:54
Speaker 2: earnings are taxed on Social Security up to one hundred
30:57
Speaker 2: and eighty four thousand, five hundred. When that was start,
31:00
Speaker 2: that captured ninety percent of all wages. Today it's like
31:03
Speaker 2: eighty three percent why, because that top income demo has
31:07
Speaker 2: grown quite a bit over the course of the last
31:09
Speaker 2: forty years. There have been some policy decisions over the
31:14
Speaker 2: last few years that have also reduced how much taxes
31:17
Speaker 2: are going into the trust fund. The One Big Beautiful
31:20
Speaker 2: Bill Act just past July of last year. What did
31:22
Speaker 2: that do? It provided a tax credit to tax deduction
31:26
Speaker 2: rather to seniors over the age of sixty five. Well,
31:30
Speaker 2: if that happens, then less of your Social Security benefits
31:32
Speaker 2: are taxed and less money is going into the trust fund,
31:35
Speaker 2: further causing it to deplete sooner. You know, there's just
31:41
Speaker 2: been no action obviously on changing any of the tax rates.
31:44
Speaker 2: It would have been a lot easier to change if
31:45
Speaker 2: you had done something in two thousand than where you
31:47
Speaker 2: are now. There's been all sorts of benefit expansion over
31:51
Speaker 2: the last decades, right, you know, in terms of disability,
31:55
Speaker 2: in terms of changing you know, who can draw benefits,
31:58
Speaker 2: the social security fairness, a government pension offset, yeah, government
32:02
Speaker 2: pension offset and WEBB wasn't a huge impact, but it
32:05
Speaker 2: was an impact. And then there have even been, you know,
32:08
Speaker 2: periods of time where we stopped collecting or reduced the
32:11
Speaker 2: payroll tax. Right back in twenty eleven, the Obama administration
32:16
Speaker 2: cut the payroll tax by two percent to stimulate the
32:19
Speaker 2: economy post Great Recession, and you know, these are all
32:23
Speaker 2: policy decisions that happened. And then you add on top
32:27
Speaker 2: of that severe demographic issues, and we have a serious
32:31
Speaker 2: problem here that nobody wants to deal with because nobody
32:34
Speaker 2: feel likes there to blame for causing it. But that's again,
32:37
Speaker 2: in my opinion, interesting history, irrelevant. This is the reality
32:42
Speaker 2: we now face, and somebody's got to be brave enough
32:46
Speaker 2: to actually deal with it. And I see none of
32:50
Speaker 2: that real bravery out there in terms of people running
32:53
Speaker 2: for Congress.
32:54
Speaker 3: Yeah, it was interesting. We talked about this on another show,
32:57
Speaker 3: and what echoed in my head is a comment that
32:59
Speaker 3: you had made to the effect of that the both
33:02
Speaker 3: sides of the aisle, Republican or Democrats, haven't raised taxes
33:05
Speaker 3: in what feels like a very long time. And it's
33:08
Speaker 3: hard not to look at this problem and not see
33:11
Speaker 3: that that would be one of the means that you
33:13
Speaker 3: would try to address this. And it's already been now
33:16
Speaker 3: sort of, you know, mentioned as a potential fix of
33:20
Speaker 3: you know, just getting rid of that income cap, the
33:23
Speaker 3: one hundred and eighty four thousand, five hundred on payroll
33:26
Speaker 3: tax and just saying that you continue to pay upwards
33:29
Speaker 3: on any income that you earn.
33:31
Speaker 2: All of these.
33:32
Speaker 3: Fixes that are talked about, it's pretty simple in terms
33:35
Speaker 3: of what leveraging to pull you increase taxes.
33:37
Speaker 2: You cut man simple the action.
33:39
Speaker 3: Yeah, that's the hard part, right is having to be
33:43
Speaker 3: the bad guy in effect, because none of these solutions
33:46
Speaker 3: anyone's going to be thrilled with. No one's thrilled on
33:49
Speaker 3: the idea of paying more payroll tax into the Social
33:52
Speaker 3: Security system that is running low on money. Raising the
33:56
Speaker 3: retirement age just delays access to those people who are
33:59
Speaker 3: eager to collect and having you know, higher taxes or
34:04
Speaker 3: taxing benefits in a different way.
34:05
Speaker 2: That's been mentioned too.
34:06
Speaker 3: Right now, eighty five percent of most people's Social Security benefits.
34:09
Speaker 2: Are are taxable.
34:11
Speaker 3: Changing that in any way or fifty percent for some
34:14
Speaker 3: others that would be frustrating as well.
34:16
Speaker 2: What do you want to do? Piss off the masses,
34:18
Speaker 2: piss off your largest donors, choose pick your poison. Yeah,
34:23
Speaker 2: there's no good answers here. But the longer we wait,
34:27
Speaker 2: the more severe the changes are going to need to be.
34:29
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34:32
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35:55
Speaker 2: Well, Paul, you just attended your first World Cup game.
35:59
Speaker 2: If I'm not mistaken last night, pretty fun take down
36:02
Speaker 2: at Boston Stadium.
36:03
Speaker 3: Fantastic experience. I would rank it very high up there
36:07
Speaker 3: in terms of the best sporting experiences that I've had
36:09
Speaker 3: over my lifetime. Just a really fun time.
36:11
Speaker 2: Well, I don't know if this is news about the
36:17
Speaker 2: Scots being crazy beer drinkers or all other Bostonians being
36:23
Speaker 2: whims and not drinking much beer, But in terms of
36:26
Speaker 2: alcohol sales and beer sales in particular, Massachusetts bars and
36:31
Speaker 2: restaurants saw a twenty seven and a half percent increase
36:35
Speaker 2: year over year, which is nine percentage points greater than
36:40
Speaker 2: the next largest market increase of New York and New Jersey,
36:43
Speaker 2: who also saw there. Thank you. Total beer sales across
36:47
Speaker 2: Massachusetts grew twelve percent compared to last year, which is
36:51
Speaker 2: four times greater than the US host markets. On average,
36:56
Speaker 2: And I was trying to think through this, and I
36:59
Speaker 2: do think it's probably just the Scots were having a
37:03
Speaker 2: really good time in Boston, is my only real I
37:07
Speaker 2: can understand why we didn't grow beer sales as much
37:09
Speaker 2: as New York and New Jersey. That's a much larger
37:11
Speaker 2: metro area and so, you know, percentage wise, but there
37:15
Speaker 2: are plenty other small markets that are hosting World Cup
37:18
Speaker 2: games that did not see their beer sales take off
37:20
Speaker 2: in the same way that they did here in Massachusetts.
37:23
Speaker 2: And yeah, big beneficiaries here from what has been kind
37:28
Speaker 2: of a languishing industry quite frankly over the last several decades,
37:32
Speaker 2: as more and more people turned to both beer and alcohol,
37:36
Speaker 2: generally alternatives from the traditional beer and one.
37:40
Speaker 3: Yeah, beer has really struggled tremendously. You look at our local,
37:43
Speaker 3: you know, Sam Adams, in terms of where they've tried
37:45
Speaker 3: to shift their business and focus more on Seltzer's. The
37:48
Speaker 3: beer industry in general has really languished. There's a bunch
37:51
Speaker 3: of different competitors out there, and it just hasn't been
37:53
Speaker 3: as much demand. Chuck and I made a mistake in
37:57
Speaker 3: thinking that the change on the bars from staying open
38:00
Speaker 3: to two am to three am wouldn't have an impact
38:02
Speaker 3: because clearly it has sure did.
38:05
Speaker 2: The weather is a contributing factor to It's been pretty
38:07
Speaker 2: nice quick break, a lot more to cover. In the
38:10
Speaker 2: second hour of the financial exchange, markets remained in positive territory.
38:14
Speaker 2: We will be right back