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Big Tech tests investors' patience · The Financial Exchange Show

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Speaker 2: Chuck, Mike and talker with you here, and we got
1:14
Speaker 2: a full show to get to, so no time for
1:17
Speaker 2: further introductions. We're gonna kick things off with a little
1:21
Speaker 2: bit of chatter about the big meeting between President Trump
1:25
Speaker 2: and President g and this happened kicked off a little
1:29
Speaker 2: after ten pm last night. And basically, Mike, when you
1:35
Speaker 2: look at the takeaways on this and you know kind
1:40
Speaker 2: of what we've what we've gotten from this meeting, I
1:44
Speaker 2: think it matches my expectations, which was that, hey, not
1:49
Speaker 2: anything game changing as far as you know, shifting the
1:54
Speaker 2: overall relationship between the two countries. But let's talk about
1:57
Speaker 2: I think there are five key areas that are identified
2:00
Speaker 2: in my book that were addressed here, as you know,
2:05
Speaker 2: small side issues that still don't deal with again those
2:08
Speaker 2: bigger ones. So number one, the US agreed to reduce
2:12
Speaker 2: tariffs on Chinese imports by ten percent, dropping the total
2:17
Speaker 2: rate from fifty seven percent down to forty seven percent. Agreed.
2:21
Speaker 3: And by the way, if I'm going to call any
2:23
Speaker 3: of the outcomes surprising to me, this was the only one.
2:27
Speaker 4: And it wasn't a huge surprise, but a slight decrease
2:29
Speaker 4: in tariff.
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Speaker 2: It was signaled in advance.
2:32
Speaker 4: Yeah, I guess you know.
2:34
Speaker 2: This was being talked about by the President over the weekend,
2:36
Speaker 2: so I'm not too surprised by this. The other side
2:39
Speaker 2: of this is the second item, which is China reportedly
2:43
Speaker 2: agreeing to help crack down on the export of fentanyl
2:49
Speaker 2: and fentanyl precursors to the United States.
2:52
Speaker 4: Pretty tough to measure, but Okay, whether they.
2:54
Speaker 2: Actually do or don't, I don't know that we're going
2:57
Speaker 2: to know. But again, like I think it's something we'd
2:59
Speaker 2: want to does it actually happen? Who knows? Number two,
3:03
Speaker 2: China agreed to suspend or ease their export controls of
3:09
Speaker 2: rare earth elements for a year. I don't believe this
3:13
Speaker 2: is worth the paper it's not printed on, because we've
3:17
Speaker 2: talked about, like, we have multiple instances this year of
3:20
Speaker 2: China saying, hey, we're gonna, you know, do this rare
3:22
Speaker 2: earth thing, and then they come and have a meeting
3:23
Speaker 2: with the US and they're like, Okay, we're not going
3:25
Speaker 2: to I have no conviction that we're not going to
3:29
Speaker 2: be right back here in January or February.
3:31
Speaker 3: Let's be clear, we will be if anything sets them
3:34
Speaker 3: off it. This will be the first lever that is
3:37
Speaker 3: pulled if there's some other disagreement, and they might pull
3:40
Speaker 3: the lever either way just to get what they want
3:43
Speaker 3: out of it, which you know, in this case was
3:46
Speaker 3: a meeting with the president where some progress was made
3:49
Speaker 3: on some other issues.
3:50
Speaker 4: So yeah, I'm with you.
3:51
Speaker 3: I think that any promise on this front, you know,
3:56
Speaker 3: we're back to where we were I guess two months
3:58
Speaker 3: ago when it comes to rare earths, which is I'm
4:00
Speaker 3: still concerned about the export controls and they're not going
4:04
Speaker 3: to completely shut them off for the time being.
4:06
Speaker 2: Other things, China reportedly agreeing to resume larger purchases of
4:11
Speaker 2: US soybeans. Again, this is kind of one where I'll
4:15
Speaker 2: believe it when I see it. And part of the
4:17
Speaker 2: reason on this is we've been talking soybeans for like
4:20
Speaker 2: a decade. I went back, actually and pulled the references
4:23
Speaker 2: from President Trump's first term, and I can't tell you
4:25
Speaker 2: how many times China pledged to buy more US soybeans
4:28
Speaker 2: and then didn't do it. Now the difference is right
4:32
Speaker 2: now they've been buying basically none for the last several months. Yeah,
4:36
Speaker 2: So yes, I guess technically anything can be an increase
4:39
Speaker 2: over that, and earlier this week we did see a
4:41
Speaker 2: one hundred and eighty thousand ton order, which is again,
4:44
Speaker 2: I know, one hundred and eighty thousand tons seems like
4:46
Speaker 2: a lot, but when you're trying to buy soybeans for
4:49
Speaker 2: one point three billion people, it's really not much. So
4:53
Speaker 2: it's a drop in the bucket. Was that a goodwill
4:56
Speaker 2: gesture before this meeting or is that something that's going
4:58
Speaker 2: to have further follow through. We're going to see, we
5:00
Speaker 2: will get data on this over the coming months, and
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Speaker 2: so we're going to see what ends up happening here.
5:06
Speaker 3: Do we need the government to be open to get
5:08
Speaker 3: that data?
5:10
Speaker 2: Maybe? I don't know. I don't know who produces it,
5:13
Speaker 2: quite honestly. Yeah, fair, it's a hard maybe. Other things
5:17
Speaker 2: just takeaways. I like this quote today reporters asked President
5:22
Speaker 2: Trump about the meeting. He says, overall, on the scale
5:24
Speaker 2: from zero to ten, with ten being the best, I would.
5:26
Speaker 4: Say it was a twelve. He did say that, yep.
5:28
Speaker 2: So I thought that was just, you know, a fun
5:30
Speaker 2: little quote there. But again, I think take this for
5:34
Speaker 2: what it is, which is, by and large, most of
5:37
Speaker 2: the things that were agreed to here were things that
5:40
Speaker 2: had like that both sides had put in place as
5:42
Speaker 2: potential negotiating items over the last month or two. None
5:47
Speaker 2: of the longer term stuff was addressed here. We didn't
5:50
Speaker 2: do anything on technology transfers, anything on intellectual property, anything
5:56
Speaker 2: on Taiwan, or anything on semiconductors. The President specifically said
5:59
Speaker 2: that they did not discuss the Blackwell chips from Nvidia.
6:04
Speaker 2: So I think that when we look at this ultimately,
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Speaker 2: like for me at least, it feels like we're kind
6:13
Speaker 2: of just back to where we were. Maybe June July.
6:16
Speaker 2: Is that fair?
6:17
Speaker 3: I was going to say two months ago, so I
6:19
Speaker 3: was even less far back, But yeah, right around then.
6:22
Speaker 3: I mean, the only thing that this has done for
6:24
Speaker 3: me is erased the escalations that we saw in totally
6:30
Speaker 3: early October.
6:31
Speaker 2: Yes, it takes that short term downside risk of things
6:36
Speaker 2: going sideways off the table.
6:39
Speaker 3: I guess the one piece that is actually measurable and
6:43
Speaker 3: real out of all of this is tariff rates coming
6:45
Speaker 3: down by ten percent.
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Speaker 2: Yep.
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Speaker 3: That should be immediate and it probably will be in
6:50
Speaker 3: place for a while, you know, absent and explosion on
6:54
Speaker 3: another issue. Everything else you kind of have to wait
6:57
Speaker 3: and see. And again, none of the things that we're
6:59
Speaker 3: now really signify any any meaningful progress. We didn't even
7:04
Speaker 3: get a TikTok deal, which I thought might be part
7:06
Speaker 3: of this.
7:06
Speaker 2: So it is.
7:09
Speaker 4: I mean, I'm glad the meeting happened.
7:11
Speaker 3: I'm glad we are in this place rather than where
7:12
Speaker 3: we thought we could be a couple of weeks ago.
7:15
Speaker 3: But when we said this earlier, we said, look, this
7:18
Speaker 3: all just looks like posturing ahead of the meeting. And
7:21
Speaker 3: it's precisely what we got out of all this, which
7:24
Speaker 3: was posturing ahead of a meeting, both sides, you know,
7:28
Speaker 3: playing up the banter to be able to go to
7:30
Speaker 3: that meeting and walk something away. And they succeeded on
7:35
Speaker 3: that front, I guess.
7:37
Speaker 2: And that's fine. Likes, that's fine if you accept it
7:39
Speaker 2: for what it is. If you were hoping for, you know,
7:42
Speaker 2: some grand bargain to change all these different things, it's
7:46
Speaker 2: not there. It's it's not. And that's because this stuff
7:49
Speaker 2: takes a while, especially when you're dealing with China. And
7:52
Speaker 2: this is the thing I come back to over and over.
7:54
Speaker 2: China loves to just run out the clock. Oh we're talking,
7:57
Speaker 2: we're talking, we're talking. We're still doing the stuff that
7:59
Speaker 2: you don't like. Talking. We're talking. We're talking, still doing
8:02
Speaker 2: the stuff you don't like, talking, talking, talking, still doing
8:04
Speaker 2: the stuff that you don't like. Oh, you're you know,
8:07
Speaker 2: presidential term ended. Great, we're still talking doing the stuff
8:10
Speaker 2: that you don't like.
8:12
Speaker 3: It is pretty stark the comparisons that you can draw
8:16
Speaker 3: now between the other piece of this trip that was
8:20
Speaker 3: inked was the deal with South Korea and a you know,
8:23
Speaker 3: negotiated tariff rate on that stuff. It has become clear
8:27
Speaker 3: that China is really one of the only countries really
8:31
Speaker 3: posing a challenge to the president's tariff policy. You could
8:35
Speaker 3: argue Canada to some extent, but not really. I mean,
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Speaker 3: I mean really, the only country that's able to stand
8:41
Speaker 3: up and fight back a little bit has been China,
8:44
Speaker 3: and quite frankly, they've been pretty successful in doing so.
8:49
Speaker 4: Yeah, well, what do.
8:51
Speaker 3: You say, pretty successful in doing so when the threat
8:55
Speaker 3: of what the President has wanted from China has been
9:02
Speaker 3: a more open market and you know, investments in the
9:06
Speaker 3: United States, They have not made those like other countries have.
9:10
Speaker 3: And any time that the teriff rates have climbed to
9:13
Speaker 3: a place that would completely be ruinous to China, they
9:17
Speaker 3: have been able.
9:17
Speaker 4: To combat that with rare earth restrictions.
9:21
Speaker 3: So there has not been any Yes, they're you know,
9:24
Speaker 3: much higher tarifrates on China than where we were a
9:27
Speaker 3: year ago. Sure, but it's not as though we have
9:29
Speaker 3: convinced Europe to join in on that, Mexico or any
9:33
Speaker 3: other country to join in on it. And any time
9:35
Speaker 3: that we've come close to any sort of real concentrate
9:40
Speaker 3: pushed there, they have been successful in pushing back on
9:43
Speaker 3: the rare earths.
9:44
Speaker 2: No, I mean, look that part of it. Look, there's
9:46
Speaker 2: a chance that like Europe might be beyond hope on
9:49
Speaker 2: this issue, just because I think that the the the
9:55
Speaker 2: the effect of you know capture of you know, the
9:58
Speaker 2: European Commission by Chinese you know, political pressure, I think
10:03
Speaker 2: is pretty significant. And I just wonder if Europe actually
10:07
Speaker 2: has the wherewithal to want to push back against that, right,
10:11
Speaker 2: I just don't know that it's there. I mean again,
10:14
Speaker 2: your Europe's economic engine is German manufacturing, and they've basically said, hey, China,
10:18
Speaker 2: come on in, like do whatever you want for you know,
10:20
Speaker 2: cars and heavy machinery and this and that. I mean
10:22
Speaker 2: that they're basically like kind of killing their own you know,
10:26
Speaker 2: economic engine and doing so, and they don't seem to care.
10:30
Speaker 2: So Europe doesn't really seem to care too much about it. Canada,
10:33
Speaker 2: I'm not sure they care too much either. Canada just
10:36
Speaker 2: in the last week has talked about trying to deepen
10:38
Speaker 2: ties with China as part of this. Quite honestly, there's
10:41
Speaker 2: part of me that, in retrospect, looking at the last
10:44
Speaker 2: week thinks that that is more why the Trump administration
10:49
Speaker 2: wanted to, you know, raise additional tariffs on Canada as
10:53
Speaker 2: a post I know that, you know, the ad that
10:54
Speaker 2: was going around was talked about, but I do kind
10:58
Speaker 2: of wonder, Hey, is it actually because Canada is talking
11:01
Speaker 2: about building closer ties with China? And so, you know,
11:05
Speaker 2: these are things that I think do matter in the
11:08
Speaker 2: context of all these broader negotiations. Here anything else to
11:12
Speaker 2: add before we wrap up with this, I don't think
11:15
Speaker 2: there's too much more that I have to say on it.
11:18
Speaker 3: Now, let's move along from the Asia visit and uh,
11:21
Speaker 3: let's talk FED.
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Speaker 2: We we got Yeah, this is this is a fun one.
11:25
Speaker 2: This is a meaty one. Let's talk FED when we return.
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11:57
Speaker 2: All right, let's talk a little bit about yesterday's FED
12:00
Speaker 2: meeting because quite honestly, like I thought, this was going
12:03
Speaker 2: to be a pretty boring one. You know, we haven't
12:06
Speaker 2: really been hyping this up, we haven't really been getting
12:08
Speaker 2: all excited about it. But gollye g. Willikers, we got
12:13
Speaker 2: a little bit of excitement from mister purple tie himself. Yeah,
12:17
Speaker 2: that's surprise a little bit so even before Jay started talking.
12:20
Speaker 2: So two pm we get the release of what the
12:22
Speaker 2: Fed's doing, and no surprise in what they actually did.
12:25
Speaker 2: They cut interest rates, the FED funds rate by a
12:27
Speaker 2: quarter percent, as expected. They also halted their runoff of
12:33
Speaker 2: the FED balance sheet, basically saying we've you know, done
12:36
Speaker 2: enough trimming on the balance sheet and it's down now
12:38
Speaker 2: down to the level that we think is appropriate. This
12:41
Speaker 2: is also widely expected based on you know, overall levels
12:44
Speaker 2: of reserves that are out there when you look at
12:49
Speaker 2: the you know a lot of people who follow this.
12:52
Speaker 2: They basically said Yeah, the Fed's got into an appropriate place,
12:54
Speaker 2: and you know, going too much further could potentially start
12:57
Speaker 2: to create some stress in the banking system. So that
13:00
Speaker 2: was expected. The other part that I personally expected Stephen Moron,
13:05
Speaker 2: who was nominated to the FED Board of Governors and
13:09
Speaker 2: is on the FED Board of Governors for the last
13:10
Speaker 2: two meetings now. He dissented to the downside, saying he
13:14
Speaker 2: wanted the FED to cut by half a percent in
13:16
Speaker 2: this meeting, just as he did in the prior meeting.
13:18
Speaker 2: So I think that was expected for me as well.
13:22
Speaker 2: I didn't find that to be surprising, agreed. The piece
13:26
Speaker 2: that was surprising Jeffrey Schmid, who we.
13:30
Speaker 3: Talk about all the time on this program, right we are.
13:34
Speaker 3: We definitely could pick him out of a lineup.
13:36
Speaker 2: Gotta be honest, first time I've ever said or heard
13:40
Speaker 2: the name Jeffrey Schmid in my life. Like, if I'm
13:42
Speaker 2: being one hundred percent honest, Mike and I follow this
13:44
Speaker 2: stuff pretty closely, I don't think I've ever heard a
13:48
Speaker 2: single thing from Schmid previously, Like he did.
13:52
Speaker 4: Not know how to spell his name until it was printed.
13:54
Speaker 2: He is as nondescript as you can get while being
13:56
Speaker 2: on this board. I mean, like the other names we
13:58
Speaker 2: talk about, John Williams, Michelle Bowman, Michael Barr, Lisa Cook,
14:03
Speaker 2: Austin Goolsby, Philip Jefferson, ALBERTA. Musalem, Christopher Waller, Like, these
14:07
Speaker 2: are names that were familiar with I see the name
14:11
Speaker 2: Jeffrey spin and I'm like who, which, again, like relative
14:16
Speaker 2: anonymity on the FED board is is kind of unique.
14:19
Speaker 2: He dissented to the opposite side and said, no, I
14:22
Speaker 2: prefer no change to the federal funds rates. So we
14:26
Speaker 2: get the sense in each direction, which it's not the
14:28
Speaker 2: first time this has ever happened. You guys, time to
14:30
Speaker 2: look at six years, it is, but there's if you
14:33
Speaker 2: will get the last fifty years or so, there's about
14:35
Speaker 2: ten or eleven instances. So this is something that does
14:37
Speaker 2: happen generally every like five to six years. It's it's
14:41
Speaker 2: not it's I saw someone yesterally being like, oh, this
14:44
Speaker 2: means like Powell's lost control of you know, his his committee. No,
14:49
Speaker 2: like this has happened, you know, FED meetings on a
14:51
Speaker 2: regular basis. Again, not every year, but usually every five
14:55
Speaker 2: or six you get something like this that that pops up.
14:58
Speaker 2: So I thought that was interesting, and then It was
15:01
Speaker 2: topped off with Powell coming out in a no uncertain
15:04
Speaker 2: word saying, hey, don't think that the December cut is
15:08
Speaker 2: a foregone conclusion. And he really tried to push on this.
15:13
Speaker 2: And so what you've had since yesterday is the bond
15:18
Speaker 2: market has gotten the message loud and clear. The ten
15:20
Speaker 2: year treasury up about ten bases points during that time.
15:23
Speaker 2: Mortgage rates have gotten the message. The average thirty year
15:27
Speaker 2: fixed rate mortgage, according to Mortgage News Daily yesterday went
15:30
Speaker 2: from six point one to three percent to six point
15:32
Speaker 2: two seven, so pretty substantial move on that side. And
15:38
Speaker 2: so I think that when you look at this, the
15:40
Speaker 2: bond market is hearing loud and clear. Okay, you're doing
15:44
Speaker 2: these couple of cuts because you think it's important to
15:47
Speaker 2: do so, but you're not convinced that there's further weakness
15:52
Speaker 2: that warrants additional cuts. And this was made clear in
15:55
Speaker 2: the FED statement as well. One of the thing that
15:59
Speaker 2: was interesting here is again you always look at little
16:04
Speaker 2: changes that get made in the FED press release. Yep,
16:08
Speaker 2: the last sentence of the second paragraph. And I know
16:11
Speaker 2: people listening are like, Chuck, like why do you care
16:13
Speaker 2: about this? And I care because it helps to inform
16:16
Speaker 2: the thinking about what they're doing. Like we parse each
16:18
Speaker 2: of these words when they make changes, because they make
16:21
Speaker 2: changes for a reason. The Committee is attentive to the
16:25
Speaker 2: risks on both sides of its dual mandate and judges
16:28
Speaker 2: that the downside risks to employment rose in recent months.
16:32
Speaker 2: Rose is the piece that stands out. The previous statement
16:35
Speaker 2: says have risen, have risen is kind of you know, present.
16:40
Speaker 2: It's a combination of present tense and past. Yeah, these
16:43
Speaker 2: risks have risen. Rose is that happened in the past.
16:48
Speaker 2: We don't know if it's still happening, correct, And that's
16:50
Speaker 2: a notable change because it helps to inform how they
16:53
Speaker 2: may adjust policy in the future. So just that change
16:57
Speaker 2: from have risen to rose, that to me is indicative
17:02
Speaker 2: of their thinking as well, even beyond you know what
17:05
Speaker 2: we saw with that dissent and what Powell said.
17:08
Speaker 3: All right, so a few things just contextualize this all
17:11
Speaker 3: for the adverage person. We already did the context of
17:13
Speaker 3: the mortgage rates. Mortgage rates moved higher on this news.
17:16
Speaker 3: The chance of a rate cut in December moved lower
17:19
Speaker 3: on this press conference. Stocks moved slightly lower during the
17:22
Speaker 3: press conference from what I saw Chuck, I was trying
17:24
Speaker 3: to measure it maybe four tens percent downside on the
17:26
Speaker 3: S and P five hundred during the press conference in
17:29
Speaker 3: Q and a other things. I'll be surprised if the
17:33
Speaker 3: President does not have a statement to be made about J.
17:37
Speaker 3: Powell and his failure at the FED and the fact
17:40
Speaker 3: that he needs to see interest rates coming lower and
17:42
Speaker 3: that they're missing the point here. I'll be very surprised
17:45
Speaker 3: if we don't have commentary from the President on that subject.
17:49
Speaker 3: And you know, he was asked a bunch of other things,
17:52
Speaker 3: but I think the only other real interesting piece to me.
17:56
Speaker 3: You know, they are clearly well, they're clearly lacking data
18:01
Speaker 3: on jobs and so have a lot of questions there.
18:04
Speaker 3: They're also asked some stuff about artificial intelligence, and so
18:07
Speaker 3: I think one that speaks to the fact that reporters
18:10
Speaker 3: and probably the FED are interested in the you know,
18:14
Speaker 3: the the level of the stock market, the increase in
18:16
Speaker 3: the stock market, the spending coming from AI.
18:19
Speaker 4: But the quote on AI that he had was I.
18:21
Speaker 3: Don't think interest rates are an important part of the
18:23
Speaker 3: AI of the data center story. It's not really about
18:26
Speaker 3: about twenty five basis points here or there. I think
18:29
Speaker 3: he's right about that companies are going to spend money
18:32
Speaker 3: on artificial intelligence regardless of whether interest rates are where
18:36
Speaker 3: they are now or twenty five basis points higher or lower.
18:40
Speaker 3: And I think they're cognizant of the fact that there
18:43
Speaker 3: is some pretty rapid spending and some pretty wild lending
18:48
Speaker 3: going on out there, and they could be just missing,
18:52
Speaker 3: you know, missing the point here on the labor market
18:54
Speaker 3: that you know, the weakness might not be that important
18:56
Speaker 3: to the overall state of the economy.
18:58
Speaker 2: Yeah, I think that is Those are all I think
19:02
Speaker 2: takeaways from you know what Powell said. I was interested
19:05
Speaker 2: that he actually engaged on the topic of AI. Yeah,
19:08
Speaker 2: I didn't think he wanted to get that granular, And
19:11
Speaker 2: quite honestly, on a few topics he got more granular
19:13
Speaker 2: than he has in the past, which I thought was interesting.
19:15
Speaker 2: Like a lot of times he's like, well, you know,
19:17
Speaker 2: we're not gonna get into you know, the nuance and
19:19
Speaker 2: this and that and this, this Q and A. He
19:22
Speaker 2: was kind of like digging into a lot of different topics,
19:25
Speaker 2: which I thought was kind of interesting. It was kind
19:27
Speaker 2: of a different approach from him. Senior writis quick break
19:30
Speaker 2: here when we return, we got Wall Street watch and
19:33
Speaker 2: then we're gonna get into those tech earnings.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at
19:43
Speaker 1: TFE show. Breaking business news is always first right here
19:47
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall Street.
19:53
Speaker 1: Watch a complete look at what's moving market so far
19:56
Speaker 1: today right here on the Financial Exchange Radio Network.
20:00
Speaker 5: Well on one of Wall Street's busiest days of the year,
20:03
Speaker 5: markets are mixed. Territory is investors react to the year
20:06
Speaker 5: long trade truce between the US and China, comments from
20:09
Speaker 5: FED Chairman Jerome Powell about future rate cuts, and of course,
20:13
Speaker 5: big tech earnings from Alphabet, Microsoft and Meta. Right now,
20:17
Speaker 5: the Dow is up by just over half a percent,
20:20
Speaker 5: or two hundred and sixty points higher. SMP five hundred
20:24
Speaker 5: is down three tenths of one percent or twenty five
20:27
Speaker 5: points lower. Nasdaq is selling off nearly one percent or
20:31
Speaker 5: two hundred and twenty two points. RUSSED two thousand is
20:34
Speaker 5: edging higher, up about a tenth of a percent. Tenyure
20:37
Speaker 5: Treasure realed up three basis points at four point zero
20:40
Speaker 5: eight nine percent, and crude oil down about six tenths
20:44
Speaker 5: of one percent, trading right around sixty dollars a barrel.
20:48
Speaker 5: Alphabet shares up over five percent after the search giant
20:51
Speaker 5: posted strong third quarter results, driven by revenue from Google
20:54
Speaker 5: Cloud and YouTube advertising. Microsoft b quarterly expectations, where revenue
20:59
Speaker 5: from it's a Zeri cloud business jumped forty percent. The
21:03
Speaker 5: company's finance chief did note that capital spending will accelerate
21:07
Speaker 5: this fiscal year. Microsoft is down by two percent. Meta
21:11
Speaker 5: shares plunging eleven percent after the Facebook parent reported stronger
21:16
Speaker 5: than expected third quarter earnings in revenue. However, Meta raised
21:19
Speaker 5: its capital expenditures outlook to invest more in a I.
21:24
Speaker 5: Apple and Amazon are on deck to report their results
21:27
Speaker 5: after the close today. Outside of big tech, Eli Lilly
21:30
Speaker 5: shares are up modestly after the drug maker b quarterly
21:33
Speaker 5: earnings in revenue forecasts and hiked its full year revenue
21:36
Speaker 5: outlook due to strong demand for its weight loss drugs. Meanwhile,
21:40
Speaker 5: Starbucks posted weaker than expected earnings, but posted same store
21:44
Speaker 5: sales growth for the first time in nearly two years.
21:47
Speaker 5: That stock is up over one percent. Chipotle sinking seventeen
21:52
Speaker 5: percent after the brito chain posted a drop in net
21:54
Speaker 5: income while it's quarterly revenue missed estimates. The restaurant group
21:58
Speaker 5: cited economic strains We're turning customers away from its stores,
22:03
Speaker 5: and Carvanastock is falling nine percent after the online used
22:07
Speaker 5: car retailer beat quarterly revenue expectations. However, its net income
22:12
Speaker 5: fell well short of Street forecast. I'm Tucker Silvan. That
22:15
Speaker 5: is Wall Street. Watch in the Financial Exchange streams every
22:19
Speaker 5: day live on YouTube. Subscribe to our page, hit that bell,
22:23
Speaker 5: and follow market activity all morning long, only here on
22:27
Speaker 5: the Financial Exchange Radio Network.
22:29
Speaker 2: All right, so yesterday we did get the quarterly earnings
22:33
Speaker 2: for as Tucker mentioned, we had Meta, we had Microsoft,
22:36
Speaker 2: we had Alphabets. Only one of these companies uses its
22:40
Speaker 2: original name anymore. And I don't know what that means,
22:43
Speaker 2: but it means something. Where do you want to start, Mike?
22:47
Speaker 2: Which one?
22:49
Speaker 3: I'm trying to think if there's anything with that, What
22:52
Speaker 3: if there's anything we could generalize about all three of them,
22:54
Speaker 3: all three of them dramatically Alphabet both revenue and.
22:59
Speaker 4: Alphabet profits other than taxes. Let's start with Alphabet.
23:02
Speaker 2: We would you like to start on, Tucker? What about Alphabet?
23:05
Speaker 5: It starts with the letter A.
23:07
Speaker 2: Okay, wonderful. So here's the big thing. So Alphabet, if
23:10
Speaker 2: you look at their core search business, the concern this
23:13
Speaker 2: year was, hey, more people are using large language models
23:19
Speaker 2: like chat GPT in order to you know, get information.
23:23
Speaker 2: One of the biggest use cases that these these large
23:25
Speaker 2: language models have is looking for information supposed to go
23:29
Speaker 2: into Google and saying, hey, how do I make a burrito?
23:32
Speaker 2: You type it into chat GPT and it gives you,
23:36
Speaker 2: you know, the step by step instructions. That way, what
23:39
Speaker 2: we saw was actually an acceleration on Google's core search business.
23:44
Speaker 2: And so the idea that Googles this dinosaur whose business
23:48
Speaker 2: is dying not in evidence right now.
23:50
Speaker 3: Michael, Yeah, they are spending dramatically, but you know, compared
23:54
Speaker 3: to Meta and Microsoft, Alphabet, Google, whatever you want to
23:58
Speaker 3: call them, they more than covered their capact expanse with
24:01
Speaker 3: their free cash flow. And so yes, they're spending a
24:04
Speaker 3: boatload of money. They are, you know, trying to capitalize
24:09
Speaker 3: on AI. They but but the pace of their revenue
24:12
Speaker 3: growth is so strong that it's at least covering all
24:16
Speaker 3: this increasing expanse and by no means turning into a dinosaur.
24:19
Speaker 4: I think no.
24:21
Speaker 2: And so like, if if you look at the the
24:25
Speaker 2: the numbers here and again just like pulling them up
24:28
Speaker 2: and saying, okay, like what did we actually see. I
24:32
Speaker 2: want to talk about that free cash flow piece just
24:34
Speaker 2: for a moment, yep, okay, because this is something that
24:39
Speaker 2: does matter, and I think it's gonna be you know,
24:43
Speaker 2: important to watch how it develops because for the last
24:47
Speaker 2: the previous two quarters, what we did see was declining
24:51
Speaker 2: free cash flow. Okay Q four of twenty twenty four. Again,
24:55
Speaker 2: like I don't like to dig into earnings reports a ton,
24:57
Speaker 2: but we're getting to the point now where some of
24:58
Speaker 2: these numbers are big enough that it warrants some discussion.
25:02
Speaker 2: From Q four of last year through Q two of
25:04
Speaker 2: this year, free cash flow on a quarterly basis went
25:08
Speaker 2: from twenty four billion down to five billion. So you
25:10
Speaker 2: look at that and you're like, okay, like that's not
25:12
Speaker 2: really a friendly trend that you want to see, Like
25:18
Speaker 2: that's that's not really ideal on that front. So you
25:24
Speaker 2: kind of dig in and you say, okay, like what's
25:26
Speaker 2: the reason why that was happening? And you know, is
25:29
Speaker 2: there anything there that changed during this quarter? You know
25:36
Speaker 2: that that might have been you know, fundamentally different from
25:39
Speaker 2: the trend that we were seeing previously, Like, is there
25:42
Speaker 2: any reason why they saw this big jump in you know,
25:47
Speaker 2: overall like operating income before you even get to the
25:49
Speaker 2: free cash flow piece, and you know, you kind of
25:52
Speaker 2: go through and you're like, okay, Like, as you're looking
25:55
Speaker 2: through the numbers, there's nothing huge that you know, necessarily
26:00
Speaker 2: out until you start looking at hey like where you
26:06
Speaker 2: look at their cash flow statement and you're like, okay,
26:09
Speaker 2: where is the difference there? And there's some shift one
26:13
Speaker 2: of the things. And again I don't want to get
26:14
Speaker 2: too technical on it, but you did see a fairly
26:17
Speaker 2: notable shift in terms of accrude expenses and liabilities. So
26:20
Speaker 2: basically it was like, Okay, they paid off a bunch
26:22
Speaker 2: of stuff that they hadn't. But ultimately, I think that
26:26
Speaker 2: when you look at this, it does seem to be
26:30
Speaker 2: something that at least for now, is sustainable because their
26:34
Speaker 2: core business is growing at the rate that it's growing at.
26:37
Speaker 3: Yeah, I mean the revenue is up sixteen percent year
26:40
Speaker 3: over year and that was the weakest of the three.
26:43
Speaker 2: If that changes, then you get into the situation that
26:46
Speaker 2: Meta is in, which is and look, Meta kind of
26:50
Speaker 2: ended up with they kind of had a double whammy.
26:52
Speaker 2: Even before this quarter, they were seeing a decline in
26:56
Speaker 2: their cash on hand. So if you look at where
26:59
Speaker 2: Meta was at the end of last next year. They
27:00
Speaker 2: had seventy eight billion dollars in cash on hand. Before
27:04
Speaker 2: this quarter, that was down to forty seven billion. After
27:07
Speaker 2: this quarter, they're down to about eleven billion in cash
27:09
Speaker 2: on hand. So they've been spending like from their cash
27:13
Speaker 2: pile in order to fund this. Now, part of this
27:16
Speaker 2: this quarter was they had a big, like eighteen billion
27:19
Speaker 2: dollar tax expense that they ended up getting hit with
27:22
Speaker 2: right that they said, well, help their tax situation going forward, Okay,
27:25
Speaker 2: like that's not going to repeat itself. But then they
27:28
Speaker 2: came out today and said, hey, we're going to do
27:30
Speaker 2: a twenty five billion dollar debt raise in order to
27:32
Speaker 2: help finance some of this construction. And I think that's
27:35
Speaker 2: part of the reason why the market's a little spooked here,
27:38
Speaker 2: is they're like, well, if you guys can cover this
27:40
Speaker 2: out of free cash flow, that's all well and good.
27:42
Speaker 2: But if you start having to raise debt in order
27:45
Speaker 2: to pay for data centers that were unclear if they're
27:47
Speaker 2: going to be profitable or not, I don't really know
27:50
Speaker 2: about that. And so that's why Google, when you look
27:53
Speaker 2: at them, or Alphabet rather, their stock's still up five
27:56
Speaker 2: percent today, met is down twelve. I think that is
27:59
Speaker 2: the key difference, and Microsoft's kind of fluttering in the middle.
28:02
Speaker 2: They're down about two just because their quarter was good
28:05
Speaker 2: but not great, you know it was, it was just fine.
28:07
Speaker 4: I wonder what it costs metat to borrow.
28:10
Speaker 2: I'm guessing it's probably I mean, I could probably pull
28:13
Speaker 2: up some bonds if we wanted to look at it,
28:15
Speaker 2: but my guess would be, I mean, just looking at
28:18
Speaker 2: spreads and where Meta's credit rating is. Let's see, I'm
28:22
Speaker 2: just pulling up where where these spreads are right now,
28:26
Speaker 2: I'm guessing. And part of this, like MEDDA, is they're
28:28
Speaker 2: doing it's a six tranch issuance. Yeah, anywhere from five
28:32
Speaker 2: to forty years, I believe it is. I'm guessing metas
28:36
Speaker 2: if you look into that forty year bond, it's probably
28:40
Speaker 2: five percent dish and the short term ones are probably
28:44
Speaker 2: somewhere in the range of four I reckon probably like
28:47
Speaker 2: an average interest payment of like four and a half
28:49
Speaker 2: on that.
28:50
Speaker 3: Well, I fully recognize that none of us had any
28:52
Speaker 3: idea how much money we would be spending on our
28:54
Speaker 3: companies would be spending on artificial intelligence.
28:56
Speaker 4: Development four years ago.
28:58
Speaker 3: You really sit back and wonder, man, how much money
29:01
Speaker 3: could they have saved if they just went on a
29:02
Speaker 3: borrowing spree kind of like didn't Apple do that in
29:05
Speaker 3: twenty twenty and twenty twenty one, just borrow a ton
29:07
Speaker 3: of money even though they didn't really have any need
29:09
Speaker 3: for it.
29:11
Speaker 2: Yeah, the piece that is going to matter on this,
29:14
Speaker 2: and you're starting to see it like I was looking
29:16
Speaker 2: at Meta's financial statements, which again, like I don't do
29:20
Speaker 2: this often, but when a big stock like this moves
29:22
Speaker 2: in this way, I'm kind of like, Okay, like, what's
29:24
Speaker 2: what's going on here? The piece that you're going to
29:27
Speaker 2: have to watch on this is the depreciation line item
29:31
Speaker 2: of these assets because effectively, like that is going to
29:36
Speaker 2: end up impacting cash flows, like it goes right onto
29:40
Speaker 2: the cash flow statement. And so the problem that you're
29:44
Speaker 2: going to potentially run into is you're doing seventy billion
29:48
Speaker 2: dollars in CAPEX this year. If you say, okay, there's
29:52
Speaker 2: you know, a ten year useful life of that asset
29:55
Speaker 2: that we just built, you start depreciating it at a
29:59
Speaker 2: you know, seven billion dollar a year clip, and then
30:02
Speaker 2: you're doing that next year again, Remember you're adding another
30:05
Speaker 2: like seventy eighty billion dollars on top of that, all
30:08
Speaker 2: of a sudden you start getting into that free cash
30:10
Speaker 2: flow at a pretty good rate. And this is the
30:13
Speaker 2: concern because remember, just because you build the data center
30:17
Speaker 2: doesn't mean the cost is gone. That's why you have depreciation.
30:20
Speaker 2: It's the realization of, hey, we're going to have to
30:24
Speaker 2: buy new chips in a few years for that data center.
30:27
Speaker 2: We're going to have to buy new cooling systems in
30:30
Speaker 2: five years for that data center, and so that is
30:33
Speaker 2: a cost that is going to end up coming through. Again,
30:37
Speaker 2: it's not just a one time expense. It's why depreciation
30:40
Speaker 2: exists here. And ultimately the question then is Okay, if
30:44
Speaker 2: you're going to have these expenses that come up on
30:47
Speaker 2: a regular basis and have this depreciation, are you going
30:50
Speaker 2: to be able to generate the revenue to cover it?
30:53
Speaker 2: That is the question that's going to start to matter
30:55
Speaker 2: in the next year or two. One was the scale
30:56
Speaker 2: of it.
30:57
Speaker 3: One more point on this before we're going to break
30:58
Speaker 3: what was Meta's predicted capex now on this on all
31:01
Speaker 3: of this over the next year.
31:03
Speaker 2: Uh seventy billion. It was seventy billion this year and
31:08
Speaker 2: their guidance next year. I can't find offhand right now.
31:13
Speaker 3: I just I would want to give this some scale
31:15
Speaker 3: comparison for a moment here. The last few years, all
31:18
Speaker 3: we've been talking about with meta was the metaverse, right
31:21
Speaker 3: YEA pouring money into the metaverse that saw no real
31:24
Speaker 3: return on it and a fair bit of criticism. The
31:27
Speaker 3: total amount invested into the metaverse between twenty nineteen and
31:31
Speaker 3: early twenty twenty four was around forty five billion dollars.
31:35
Speaker 4: The scale of this stuff is ridiculous.
31:38
Speaker 3: It is massive, and clearly they're doing it because they
31:42
Speaker 3: see the promise of something in the future. But it's
31:44
Speaker 3: important to just understand they're talking about annual spending that
31:48
Speaker 3: has well eclipsed anything that they've poured into anything.
31:51
Speaker 2: Before well, and the incentives on this make sense. Like
31:54
Speaker 2: if you think about it this way, if you are
31:58
Speaker 2: meta and you say, look, we can spend over a
32:02
Speaker 2: three to five year period, you know, two hundred and
32:04
Speaker 2: two hundred and fifty billion dollars, and the upside is
32:08
Speaker 2: that we achieve everything we wanted there and we unlock
32:12
Speaker 2: you know, a trillion dollars an annual revenue as a
32:15
Speaker 2: result of it. I get it, Like the like you're
32:19
Speaker 2: totally incentivized to do so. Ye, the downside from it is, hey,
32:22
Speaker 2: if it goes badly, Mike, is Medic gonna go out
32:25
Speaker 2: of business because of this?
32:27
Speaker 3: Probably not no, likely not probably not, but a very
32:31
Speaker 3: long hit to profitability to pay those loans back.
32:35
Speaker 2: But like if you are the manager of that company,
32:38
Speaker 2: if you are the CEO of that company, the financial
32:42
Speaker 2: incentives are, yeah, we're gonna do this because the upside
32:46
Speaker 2: is so great. And like this is how CEOs make
32:51
Speaker 2: decisions all the time. Like, no, no one in the
32:53
Speaker 2: CEO chair ever knows for certain that something is going
32:56
Speaker 2: to pan out. It's what's the upside and what's my downside,
33:01
Speaker 2: whether it's an acquisition and new product development, whatever it
33:04
Speaker 2: might be. So if Medic says, yeah, we're gonna spend
33:07
Speaker 2: you know, a quarter trillion dollars in the next five years,
33:11
Speaker 2: and the upside for us is it might unlock a
33:15
Speaker 2: trillion dollar annual revenue stream that can cover that in more. Okay, sure,
33:20
Speaker 2: what's the downside? Well, your stock price could be cut
33:23
Speaker 2: by like fifty to seventy five percent if it doesn't work. Okay,
33:28
Speaker 2: like Zuck's gonna take Mark Zuckerberg is not a a
33:33
Speaker 2: stranger to long shot bets. Facebook's a long shot bet, right, Yeah,
33:39
Speaker 2: like the this is this is what he's built to
33:41
Speaker 2: do is try to make these bets. They're larger than
33:43
Speaker 2: when he was, you know, in his dorm room starting
33:46
Speaker 2: the thing up. But ultimately it was yeah, I think
33:49
Speaker 2: I can make something here, and I don't know if
33:52
Speaker 2: he's going to be able to or not, but I
33:55
Speaker 2: understand the financial incentives and why they're doing this. It
33:59
Speaker 2: just the nature of risks. Sometimes it doesn't work and
34:02
Speaker 2: we don't know yet if it's going to work or not.
34:05
Speaker 2: Let's take a quick break here. When we come back,
34:08
Speaker 2: I want to talk a little bit more on the
34:10
Speaker 2: tech earning side, and then we'll get into what's going
34:13
Speaker 2: on in Massachusetts with families trying to raise children. How
34:17
Speaker 2: much income do you actually need to do so in
34:19
Speaker 2: the most expensive state in the nation to raise kids.
34:24
Speaker 1: Find daily interviews and full shows of The Financial Exchange
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34:54
Speaker 2: Just putting a bow on the tech stuff based on
34:59
Speaker 2: the continued to increase and capex and when this is
35:01
Speaker 2: going to start really showing up on the company's financial statements.
35:05
Speaker 2: Twenty six and twenty seven I think are key years
35:08
Speaker 2: for these companies to prove not just that artificial intelligence works,
35:13
Speaker 2: but that they can actually monetize it and generate revenue. Otherwise,
35:17
Speaker 2: that additional capex, when it starts coming back in the
35:20
Speaker 2: form of depreciation, it's going to become a problem for
35:25
Speaker 2: cash flows and earnings. It's just not going to be
35:27
Speaker 2: something that's sustainable if they don't have the revenues there.
35:31
Speaker 2: And the next two years, in my opinion, are the
35:34
Speaker 2: years where it's going to be make or break for
35:36
Speaker 2: yes we can make this work or no we can't.
35:38
Speaker 3: Yeah, And my concern there is not that they will
35:41
Speaker 3: all be failures on that front, but then they probably
35:44
Speaker 3: all won't be winners.
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36:44
Speaker 2: Piece of the Boston Globe headline is one hundred thousand
36:47
Speaker 2: dollars salary enough to raise a family in Massachusetts. For
36:50
Speaker 2: some local parents, it isn't and Massachusets. According to this
36:56
Speaker 2: study that was done by smart Asset has the highest
37:00
Speaker 2: annual cost of raising a child in the nation, at
37:02
Speaker 2: thirty five eight hundred and forty one. This compares to
37:06
Speaker 2: Mississippi the lowest, at about sixteen thousand. Nationally, most states
37:10
Speaker 2: fall somewhere around twenty thousand dollars a year. That's looking
37:13
Speaker 2: at you know, cost of childcare, clothing, food, you know,
37:16
Speaker 2: all the stuff that you typically need. And obviously this
37:20
Speaker 2: is exacerbated by the fact that prices have continued to
37:23
Speaker 2: move up on a number of key items related to
37:26
Speaker 2: raising a child this year.
37:27
Speaker 3: Childcare though, I mean childcare masters the biggest one at yeah,
37:30
Speaker 3: twenty two grand a year last year, and that's the
37:34
Speaker 3: median annual cost. Right, if you live anywhere around one
37:37
Speaker 3: twenty eight the greater Boston region, you're looking at quite
37:40
Speaker 3: a bit more than that. And that's probably again median
37:43
Speaker 3: annual that's not full time daycare. And so yeah, I
37:46
Speaker 3: have had conversations with families where it's like, yeah, unless
37:50
Speaker 3: you are making over one hundred thousand dollars, it doesn't
37:53
Speaker 3: even make sense to put your kid in childcare, given
37:56
Speaker 3: how daycare, given how much it costs these days.
37:58
Speaker 2: Yeah, and so part of the story it covers, you know,
38:01
Speaker 2: lots of people that left good paying jobs because they said, hey, ultimately,
38:06
Speaker 2: if i'm paying for childcare, I'm still gonna be at
38:08
Speaker 2: a net loss there. It's cheaper for me to stay
38:11
Speaker 2: home and raise the kids that way. Let's take a
38:14
Speaker 2: quick break here. When we come back, we had our
38:16
Speaker 2: two coming up on the financial exchange.