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Midterm Elections Shake Up Wall Street as AI Investors Grow Nervous · The Financial Exchange Show

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Speaker 1: is The Financial Exchange with Mike Armstrong and Mark Vandetti.
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Speaker 2: It's election day here on The Financial Exchange. We're going
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Speaker 2: to spend the next two hours talking about what happens
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Speaker 2: to stocks in midterm election years. I'm Of course, there's
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Speaker 2: going to be a lot of time to dedicate to
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Speaker 2: that subject. But obviously, we're all heading to the polls today.
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Speaker 2: And hopefully, not too late tonight, we'll have an idea
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Speaker 2: of the makeup of Congress following the elections and a
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Speaker 2: whole number of ballot initiatives across the country. And I think,
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Speaker 2: quite honestly, this is more entertainment value than anything that
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Speaker 2: you should utilize for an investment strategy. But everyone's always
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Speaker 2: a little bit curious about what happens in markets following elections,
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Speaker 2: following control of one party versus another. And there's a
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Speaker 2: good nearly 100 years of post-World War II data out
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Speaker 2: there to tell you what's happened with markets following elections.
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Speaker 2: But as with anything else, the temptation is to read
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Speaker 2: this stuff and say, oh, wow, markets do quite well
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Speaker 2: after elections. And in some cases, some data that we
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Speaker 2: have actually supports that. But you have to keep in
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Speaker 2: context that most of the time markets go up. Most
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Speaker 2: of the time throughout modern history, markets have reached new
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Speaker 2: all-time highs under almost every single president. Market returns have
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Speaker 2: been positive for all modern presidents other than two. Remind me,
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Speaker 2: W and Nixon. So you have to keep that part
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Speaker 2: in mind that like, oh yeah, it's interesting that the
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Speaker 2: S & P 500 averaged a 13.7% one-year gain after
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Speaker 2: the 11 midterm election since 1980, as CNBC is writing
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Speaker 2: this morning. But is that actually statistically significant when most
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Speaker 2: one-year gains are probably averaging over 10% per year? So
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Speaker 2: I think that is the piece to keep in mind
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Speaker 2: with all of this, is you can't use it to
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Speaker 2: predict much of anything. But there is some statistical, I think,
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Speaker 2: evidence that Markets actually do fairly well after midterm elections,
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Speaker 2: at least in the short term. And I know you
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Speaker 2: looked at some of that data, Mark, just this morning.
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Speaker 2: So what do we find typically when it comes to
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Speaker 2: midterms and stock market performance?
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Speaker 3: Yeah, like you said, take it with a grain of salt.
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Speaker 3: But it is the case that the average return on
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Speaker 3: the day after midterms is a lot higher than the
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Speaker 3: daily average return, which is positive, but very, very small.
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Speaker 3: It's like 10 times higher, in fact. Mm-hmm. so much
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Speaker 3: higher that even though we don't have enough so-called observations,
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Speaker 3: enough instances to say this is statistically significant with, and
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Speaker 3: that just means different from zero, by the way. When
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Speaker 3: a research person says that, they just mean the effect
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Speaker 3: is probably different than the effect you might see due
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Speaker 3: to random chance. But the day after midterms, for whatever reason,
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Speaker 3: markets rally on average, and it's such a big difference
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Speaker 3: relative to the average gain, and it is a gain
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Speaker 3: because as you said, markets trend up over time, that
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Speaker 3: it is significant in a like statistical sense. It's such,
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Speaker 3: as I said, it's 10 times the difference. And if
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Speaker 3: you look out over longer horizons in midterm years, so
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Speaker 3: this is off presidential election years, it's odd years, but those,
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Speaker 3: even years, excuse me, excluding presidential election years, that phenomenon
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Speaker 3: of greater than average gains in midterm years is not
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Speaker 3: just the case in the next day, but the next
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Speaker 3: week and month as well. I don't have a great
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Speaker 3: explanation for that. You may have your own favorite.
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Speaker 2: I mean, I like the theory that markets are, I guess,
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Speaker 2: like deadlock, right? If you have a deadlock in Congress,
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Speaker 2: which is oftentimes the result of a midterm election, then
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Speaker 2: There's not dramatic shifts in policy.
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Speaker 3: Only in the modern era, though. I mean, in the 50s,
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Speaker 3: we had some Republican congresses, but 60s, 70s, 80s, consistent
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Speaker 3: Democrat right through 94. Democrat congresses. Democratic, I think, is
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Speaker 3: the right way to... I sound like Bob Dole. He
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Speaker 3: called them Democrat congresses. Anyway, Democratic, I think, is the
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Speaker 3: right adjective. Congresses. Only in the modern era has there
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Speaker 3: been this sort of flipping. It's quite unusual, actually. So
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Speaker 3: I don't know. Control for changes in control. But you
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Speaker 3: saw it either way. 82, the Dems built on their
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Speaker 3: lead in Congress. It was a bad year economically, not
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Speaker 3: Reagan's fault. Volcker was trying to kill inflation. Stocks went
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Speaker 3: up like three. Did I put that in my little? Yeah,
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Speaker 3: 82 was the high, nearly 4%. I'll be damned if
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Speaker 3: I can explain this. 11 to 82 is the day
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Speaker 3: after the midterms, I guess. And stocks went up 4%.
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Speaker 3: That's the biggest post-midterm jump.
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Speaker 2: We covered it yesterday. As of yesterday, betting markets at
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Speaker 2: least had the outcome of the election, predicting pretty heavily
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Speaker 2: towards a Democrat sweep, a 75% chance of a Democrat sweep,
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Speaker 2: a 20% chance of Dem House and Republican Senate meetings.
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Speaker 2: the chance of a Republican sweep is now sitting at
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Speaker 2: 5% in betting markets effectively. There seems to be that
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Speaker 2: likely outcome at least being priced into both polling numbers
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Speaker 2: as well as betting markets at the moment. So if
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Speaker 2: we run that forward, I suppose you can, in Barron's
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Speaker 2: attempts to today, run through likely policy outcomes in that
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Speaker 2: type of event where you have a Democrat-controlled So Congress
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Speaker 2: and President Trump in the White House, what precisely gets done?
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Speaker 2: And the answer is probably not a whole lot. The
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Speaker 2: president would likely then focus on the powers that he
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Speaker 2: has through the executives, such as his tariff regime. He
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Speaker 2: could intensify there. There's likely to be more debt ceiling brinkmanship,
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Speaker 2: I would imagine, in the event of a Democrat-controlled Congress
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Speaker 2: and President Trump in the White House. And frankly, I
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Speaker 2: just have a tough time honing in on any single
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Speaker 2: policy that actually becomes law that is of significance over
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Speaker 2: the course of the next two years, if that is
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Speaker 2: the direction we go. I mean, there's not been a
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Speaker 2: whole lot under the Republican-controlled Congress that became law either,
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Speaker 2: but that would be my biggest takeaway.
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Speaker 3: Yeah, you think of the mixed... arrangements of the past, say,
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Speaker 3: 30 years, the Congresses of the mid to late 90s
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Speaker 3: were unique. They started out on very poor terms, Gingrich
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Speaker 3: and Clinton. But they eventually, and then his successor, I
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Speaker 3: think it was Livingston, Gingrich's successor, They eventually arrived at
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Speaker 3: a meeting of the minds with Clinton on cutting pairing spending,
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Speaker 3: cutting the rate of increase in spending, resulting in those surpluses.
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Speaker 3: So they didn't cooperate on lots of things, but they
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Speaker 3: cooperated on fiscal responsibility.
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Speaker 1: Yeah.
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Speaker 2: It's pretty tough to imagine this Congress or whatever the
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Speaker 2: next Congress or the next president is.
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Speaker 3: Because both parties are fiscally reckless, but indifferent. I showed
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Speaker 3: you the data on debt to GDP this morning by President,
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Speaker 3: and Reagan and Trump are a couple of the.
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Speaker 1: Worst.
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Speaker 3: Very different circumstances, of course.
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Speaker 2: Sure.
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Speaker 3: But they were among the worst. So both parties fiscally
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Speaker 3: reckless in their own way. Neither talks about cutting the debt.
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Speaker 3: It doesn't even— Besson is the only guy that mentions it.
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Speaker 3: And it seems inadvertent when he does.
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Speaker 2: Well, his main theory is we can grow our way
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Speaker 2: out of it.
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Speaker 3: That, that again is like the fat person said, forgive me,
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Speaker 3: the overweight person saying, I'm going to, I'm going to
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Speaker 3: get taller and this and, and, and improve my body
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Speaker 3: mass index.
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Speaker 2: I mean, come on.
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Speaker 1: Yeah.
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Speaker 2: Unlikely. Um, so, you know, likely outcomes, uh, of policy,
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Speaker 2: depending on the election, I think is difficult to predict
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Speaker 2: at this point. Elections have consequences. I think everyone, uh,
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Speaker 2: I hate seeing the print like, oh, the stock market
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Speaker 2: doesn't care about elections. Investors care about elections. They are
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Speaker 2: interested in what the policy is going to look like
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Speaker 2: and the outcome of the election.
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Speaker 3: Who said that?
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Speaker 2: I see it printed in Bloomberg and CNBC all the time.
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Speaker 3: Oh, that's not true at all. Investors don't care about elections.
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Speaker 3: I mean, empirically, there's a jump. Are they asserting that
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Speaker 3: policy and therefore institutions don't matter for economic growth? What
9:36
Speaker 3: if we elected communists or fascists? That wouldn't matter? What
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Speaker 3: an idiotic thing to write, excuse me, but that's really stupid.
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Speaker 2: I think the reality is that, of course, investors care
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Speaker 2: about elections. They care about who the elected officials are
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Speaker 2: and what the policies are going to look like, but
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Speaker 2: they don't really have any better of idea of what
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Speaker 2: the outcome is going to be or... what the policy
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Speaker 2: is going to look like and what actually gets agreed
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Speaker 2: upon or disagreed upon than you or I do. There's
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Speaker 2: very few out there who are investing today who have
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Speaker 2: some degree of certainty as to what the outcome of
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Speaker 2: the election is going to be and then what the
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Speaker 2: focus of this Congress is going to be over the
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Speaker 2: next two years. And so that is the more, I think,
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Speaker 2: honest acknowledging piece here is they're as much in the
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Speaker 2: dark as the rest of us are. I think we
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Speaker 2: can pretty easily point to the types of policies that
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Speaker 2: Democrats would like to enact in the case that they win.
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Speaker 2: Healthcare policy, regulation of AI, regulation of crypto, right? I
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Speaker 2: think we can all dream up the types of policies
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Speaker 2: Democrats would like to put into play, but the reality
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Speaker 2: is very few of them would actually become law under
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Speaker 2: a President Trump. And so my guess, no matter what
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Speaker 2: the outcome is, Fair bit of deadlock. No serious conversation
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Speaker 2: about the deficits or our growing problems on Social Security
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Speaker 2: and Medicare front. And if Democrats win, they're likely to
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Speaker 2: be testing out some of the policies that they think
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Speaker 2: will pull well with voters when it comes to the
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Speaker 2: next presidential election and trying to get Republicans on record
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Speaker 2: as voting against some popular policies.
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Speaker 3: I don't know what they stand for or intend to do.
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Speaker 3: To tell you the truth, I don't really know what
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Speaker 3: Republicans stand for or intend to do. I mean, Trump's
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Speaker 3: policies are clear, but you've got Republicans running against tariffs
11:27
Speaker 3: and against the war in Iran. Do you seriously expect
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Speaker 3: them to buck the president on those issues? Probably not.
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Speaker 3: It's a little bit confusing.
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Speaker 2: Let's take a quick break. When we return, we had
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Speaker 2: a jobs report out this morning at 10 a.m. Want
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Speaker 2: to dig in there for the data for September. That's
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Speaker 2: next here on the Financial Exchange.
11:43
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12:36
Speaker 2: This morning at 10 a.m., the Bureau of Labor Statistics
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Speaker 2: released their JOLTS report, the Job Openings Labor Turnover Survey
12:42
Speaker 2: that we cover once a month here. Friday of this week,
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Speaker 2: we'll get the full monthly jobs report. That's covering data
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Speaker 2: from October. And then we've got earnings rolling in this
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Speaker 2: week as well. Apple reported last night. We'll be covering
12:54
Speaker 2: that later in the program. Advanced Micro Devices, AMD reporting
12:58
Speaker 2: after the bell today. Shopify, Pfizer, among others, reporting this morning. Wednesday,
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Speaker 2: we'll hear from no one terribly exciting, McDonald's. But McDonald's
13:11
Speaker 2: and Uber both going. And as Chuck pointed out yesterday,
13:14
Speaker 2: Uber now produces more revenue than McDonald's on an annualized basis. Thursday, ConocoPhillips.
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Speaker 2: And we're really, other than NVIDIA, kind of wound down
13:24
Speaker 2: on the earnings season by the end of this week
13:27
Speaker 2: in terms of the volume of reports. And I don't know.
13:31
Speaker 2: I think the culmination of the big earnings reports from
13:36
Speaker 2: the hyperscalers, I'm trying to think of the conclusion that
13:39
Speaker 2: investors drew from that. Clearly, it's not slowing down in
13:45
Speaker 2: terms of the capital expenditures. And I think the other
13:49
Speaker 2: conclusion would have to be that there's more concern about
13:51
Speaker 2: their ability to spend that money.
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Speaker 3: That might sum it up.
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Speaker 2: I don't know if you can call it a man screaming.
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Speaker 3: Okay, woman. Shrieking?
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Speaker 2: It's not as though the stocks have cratered since the
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Speaker 2: earnings reports.
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Speaker 3: Oh, no, hardly.
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Speaker 2: But there is a new expression of concern about the
14:13
Speaker 2: borrowing costs and just the extent to which these companies
14:17
Speaker 2: are going to need to spend in order to build
14:19
Speaker 2: this out.
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Speaker 3: If you think about it, it's like the realization that
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Speaker 3: this actually has to make money at some point. And
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Speaker 3: the next several years dawned on millions of investors. There
14:28
Speaker 3: was some collective dawning.
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Speaker 2: Yeah.
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Speaker 3: And a lot of people have been talking about it
14:32
Speaker 3: for a long time. It is funny how these things
14:36
Speaker 3: tend to gel quickly. Yeah. They've been floating around in
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Speaker 3: the ether, but very indistinct for a while.
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Speaker 1: Yeah.
14:42
Speaker 3: And it's suddenly becoming like concrete. Like, oh, it's like as.
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Speaker 2: Like you're getting.
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Speaker 3: Closer and closer to a big deadline.
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Speaker 2: And I wonder how much of it is investors actually
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Speaker 2: caring about monetizing in the short term versus starting to
14:55
Speaker 2: see the results of AI wiping out lines of their businesses, right?
14:59
Speaker 2: Like Alphabet had to report that their revenue from advertising
15:02
Speaker 2: was down. Amazon had to report the same. And so
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Speaker 2: you kind of kick this stuff around. Like, okay, how
15:10
Speaker 2: much do investors care that you're actually going to profit
15:12
Speaker 2: on these data centers one day? Versus how concerned are
15:15
Speaker 2: they that this is just going to eat your lunch?
15:17
Speaker 2: Because Microsoft hardly had the same effects that Alphabet and
15:22
Speaker 2: Amazon did. Also foreseeable.
15:25
Speaker 3: They invented something that is going to destroy their core businesses.
15:29
Speaker 3: And that's not really an exaggeration.
15:31
Speaker 2: No.
15:31
Speaker 3: We knew this was coming. And every time they announced
15:35
Speaker 3: these dramatic advances in AI capability, that timetable got moved up. Yeah.
15:42
Speaker 3: So all kind of foreseeable.
15:44
Speaker 2: So, sorry, I got sidetracked, but we did get a
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Speaker 2: jobs report this morning. The JOLTS report gives us a
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Speaker 2: few statistics, but one of which is the number of
15:53
Speaker 2: companies that are, sorry, not the number of companies, the
15:55
Speaker 2: number of job openings that companies have that they have
15:58
Speaker 2: not yet filled. And this statistic is looked at pretty,
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Speaker 2: it was looked at heavily back in the earlier part
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Speaker 2: of this decade. when we were talking about the extremely
16:09
Speaker 2: tight labor market with signing bonuses and all sorts of
16:13
Speaker 2: different features that didn't typically occupy certain areas of the
16:16
Speaker 2: labor market defining it. In September, the total job openings
16:21
Speaker 2: did tick up to a 7.52 million number. That's up
16:25
Speaker 2: from 7.2. The quits rate also bumped, not the rate,
16:29
Speaker 2: but the number of quits also bumped up a little bit.
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Speaker 2: And this remains very much a low hire, low fire
16:37
Speaker 2: job market. Nothing about this report contradicts that. I do
16:40
Speaker 2: think if you're looking for some green shoots, you did
16:44
Speaker 2: have the job openings number climb a fair bit here.
16:49
Speaker 2: And the quits numbers do indicate that people might be
16:53
Speaker 2: a little bit more confident about the labor market than
16:55
Speaker 2: they were the previous month, but not substantially. These shifts
16:58
Speaker 2: are pretty small. Where that leaves us now, if we
17:02
Speaker 2: have 7.52 million jobs open and an unemployment rate around 4.2%,
17:08
Speaker 2: that means that the number of unemployed people is approximately
17:13
Speaker 2: in line with the number of job openings that are
17:16
Speaker 2: out there.
17:16
Speaker 3: And that's been the case for like two years.
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Speaker 2: It has. This was the statistic that you heard us
17:21
Speaker 2: talking about. Statistic. I did not say that word very well.
17:25
Speaker 2: that we talked about back in 2022, when there were
17:28
Speaker 2: two jobs open for every person looking for work. Today,
17:32
Speaker 2: it's relatively aligned. I think if you talk to hiring
17:35
Speaker 2: managers out there, they might tell you that while there's
17:38
Speaker 2: plenty of unemployed people, they're not the ones that we
17:40
Speaker 2: are looking for. They don't have the right skills. They
17:43
Speaker 2: might not know how to frame a house. They might
17:46
Speaker 2: not know how to use AI in the workforce in
17:48
Speaker 2: the way that they're looking for. They just might not
17:50
Speaker 2: have the same skill set that They might not think
17:54
Speaker 2: that they can climb a ladder to get up the
17:56
Speaker 2: gutters and clean those out this time of year. I'm
17:59
Speaker 2: trying to think of the industries that are heavily impacted
18:01
Speaker 2: by deportations and immigrant labor is what I was going
18:06
Speaker 2: for there. But nonetheless, this is just... We've talked about
18:12
Speaker 2: the issues that are on voters' minds quite a bit
18:15
Speaker 2: and the issues that are on investors' minds. And I
18:18
Speaker 2: have to say that the employment situation... has to be
18:22
Speaker 2: towards the bottom of the list for probably both groups.
18:27
Speaker 2: If you're unemployed, it's not terribly easy to find a
18:30
Speaker 2: new job, but a relatively small portion of the population
18:33
Speaker 2: is unemployed today. In terms of the ability to find
18:39
Speaker 2: that job Yeah, it might be tough if you are
18:42
Speaker 2: working in a specific industry. That's tough to hire for
18:44
Speaker 2: right now. But in the aggregate, it's not immensely difficult
18:47
Speaker 2: to find some degree of work, even if you would
18:49
Speaker 2: find yourself underpaid and underemployed.
18:50
Speaker 3: This is one of those statistics that it's very difficult
18:53
Speaker 3: to interpret out of context. It would be like saying
18:56
Speaker 3: your LDL is 150. Okay. Some of us have a
19:01
Speaker 3: sense that that's– is that a good– I don't even know.
19:04
Speaker 3: I just mean when you get a statistic back on
19:08
Speaker 3: blood work, You can tell this is like middle-aged man
19:12
Speaker 3: metaphor here. Without context, it's useless. Like this number in
19:17
Speaker 3: and of itself, without a model to use it to
19:19
Speaker 3: make predictions about inflation, in my view, isn't that helpful.
19:22
Speaker 1: Right.
19:22
Speaker 2: That's why you need some historical context and some good ratios, too.
19:27
Speaker 2: We've got to take a quick break. Wall Street Watch
19:28
Speaker 2: coming up next.
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19:56
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20:00
Speaker 4: Markets are mixed after yesterday's early tech rebound fizzled out,
20:03
Speaker 4: leading to another sell-off. Oil also continues to dip slightly
20:07
Speaker 4: around hopes of a potential deal with Iran. Right now,
20:11
Speaker 4: the Dow is down just over half a percent or
20:13
Speaker 4: 280 points off. S & P 500 is up about
20:16
Speaker 4: a third of a percent. NASDAQ up two-thirds of a
20:19
Speaker 4: percent or 167 points higher. Russell 2000 is up three-quarters
20:23
Speaker 4: of a percent. Ten-year Treasury yield up five basis points
20:27
Speaker 4: at 4.952%. Crude oil is mostly flat at $ 96 a barrel,
20:28
Speaker 4: while Brent pulling back. about two-thirds of a percent, trading
20:36
Speaker 4: at $ 104 a barrel. Apple reported 12% revenue growth in
20:40
Speaker 4: the previous quarter, just above Wall Street expectations due to
20:43
Speaker 4: price increases. However, on the tech giant's earnings call, CEO
20:47
Speaker 4: John Turner is warned of weakening profit margins due to
20:50
Speaker 4: high memory costs. Apple down by 2%. Meanwhile, Palantir reported
20:55
Speaker 4: soaring quarterly profit and raised its full-year revenue guidance. However,
20:58
Speaker 4: shares are dropping nearly 5%. over worries of its ability
21:02
Speaker 4: to sustain its growth. Elsewhere, Pfizer reported results that beat
21:07
Speaker 4: estimates and raised its full-year outlook as demand for its
21:10
Speaker 4: newly launched and acquired products grow. Shares are down modestly.
21:14
Speaker 1: Yum!
21:14
Speaker 4: Brands edging higher after the Taco Bell parent company beat
21:18
Speaker 4: earnings expectations and its revenue came in line with forecasts. However,
21:21
Speaker 4: Taco Bell's same-store sales declined due to the cyclospora outbreak
21:27
Speaker 4: and Chipmaker AMD will report earnings after today's closing bell.
21:32
Speaker 4: Shares are up 5% ahead of that call. I'm Tucker
21:35
Speaker 4: Sullivan and that is Wall Street Watch.
21:38
Speaker 2: Greg Ip from the Wall Street Journal is talking about
21:40
Speaker 2: health insurance as the sleeper inflation issue. Mark, I have
21:43
Speaker 2: a question for you. I actually don't even know how
21:46
Speaker 2: inflation factors in health insurance stocks. Don't go looking it
21:53
Speaker 2: up because you'll never find the answer in the 30
21:54
Speaker 2: seconds that I need the answer. But I doubt it's directly.
21:59
Speaker 2: You already got the answer.
22:00
Speaker 3: You gave me a very confident look. I know there
22:04
Speaker 3: is a subcategory for health. What you knew that you're
22:10
Speaker 3: asking is.
22:12
Speaker 2: How does it weight it? How is it weighted and
22:15
Speaker 2: how much of the actual pass-through health insurance costs versus
22:18
Speaker 2: These other estimated costs that they put in there for
22:21
Speaker 2: health care costs actually get weighted in there. I think
22:24
Speaker 2: Greg's bigger point holds, though, which is clearly health insurance
22:28
Speaker 2: costs generally are up substantially. Medicare premiums for the standard
22:33
Speaker 2: Part B policy were up nearly 10 percent year over year.
22:38
Speaker 2: Our own company has seen our employer health insurance premium
22:42
Speaker 2: costs increase by double digit percentages for two years in
22:46
Speaker 2: a row. And so I think Greg's larger point would
22:49
Speaker 2: likely hold here, which is whether or not health insurance
22:53
Speaker 2: costs are being fully captured by the CPI measure of
22:56
Speaker 2: inflation might be irrelevant because it's factoring into people's lives
23:00
Speaker 2: in different ways. One, they are seeing their Medicare premiums rise.
23:04
Speaker 2: They're seeing their Social Security. Therefore, the COLAs get, you know,
23:08
Speaker 2: I guess, blunted because of the increase in Medicare costs.
23:12
Speaker 2: Most people have their Medicare premiums coming right out of
23:14
Speaker 2: their Social Security. So it means that your Social Security
23:17
Speaker 2: is otherwise smaller. And on the employee side of things,
23:21
Speaker 2: it would appear that employers are a little bit more
23:24
Speaker 2: hesitant to give wage increases when they are seeing the
23:28
Speaker 2: health insurance side of their cost structure increase, like I said, 9%, 10%,
23:33
Speaker 2: 11% year over year. I know with my wife's own
23:37
Speaker 2: health insurance, the provider rolled out a new, I think
23:40
Speaker 2: what they called like a super high deductible health insurance
23:45
Speaker 2: plan in order to try and keep costs aligned in
23:48
Speaker 2: that way, shape, or form. And so whether or not
23:50
Speaker 2: it's showing up in CPI, I think people are feeling
23:54
Speaker 2: the effects of these health insurance increases, but maybe not
23:58
Speaker 2: in a terribly direct fashion.
23:59
Speaker 3: So Ip seems to be asking, why is there a
24:01
Speaker 3: divergence between the CPI expenditure category of health, which is
24:05
Speaker 3: quite broad, 3% year over year as of the latest count,
24:09
Speaker 3: and what we pay for premiums up high single digits,
24:13
Speaker 3: low double digits. Where is that going? Is it going
24:16
Speaker 3: to health insurer profits? Doesn't appear to be the case.
24:18
Speaker 3: There's no evidence for that. Is it attributable to something?
24:22
Speaker 3: I mean, this is a highly specialized area. I don't
24:25
Speaker 3: really want to speculate. I'm already uncomfortable. And I've probably
24:28
Speaker 3: said several things that are incorrect.
24:30
Speaker 2: Health insurance costs are really expensive. I think they're feeding
24:32
Speaker 2: into your wallet somewhere. And trying to figure out where
24:35
Speaker 2: it feeds into the government data is tricky.
24:37
Speaker 3: Did you read his article differently than I did?
24:38
Speaker 1: No.
24:39
Speaker 3: And it's a good question to ask.
24:40
Speaker 2: It's a reasonable question.
24:42
Speaker 3: Ideally, a journalist would also answer the question, which is
24:45
Speaker 3: why we read the article. You shouldn't be more ignorant
24:48
Speaker 3: coming out of it than.
24:50
Speaker 2: Going into it. I now know that health insurance costs
24:54
Speaker 2: are really expensive and not fully captured by the government data.
24:57
Speaker 3: Yeah, but he gave us homework. And I was more expecting,
25:00
Speaker 3: given that I paid for the newspaper, to get... An answer,
25:04
Speaker 3: or at least a strong clue.
25:06
Speaker 2: Well, too bad.
25:09
Speaker 3: Okay, so what, I'm sorry, what did we come out
25:11
Speaker 3: of this having read this with?
25:13
Speaker 2: Like I just said, discontent about the cost of health
25:16
Speaker 2: care costs.
25:18
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26:15
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26:17
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26:26
Speaker 2: There's a new CEO of one of the world's largest companies,
26:29
Speaker 2: and he just went through his first earnings call last night. Seemingly,
26:34
Speaker 2: investors didn't love what he had to say. I think
26:38
Speaker 2: I finally got his name down. Is it Ton Jernis?
26:41
Speaker 1: What?
26:42
Speaker 2: It's John Ternis. I'm making a stupid joke because I
26:44
Speaker 2: can never remember the guy's name. Yeah, you can do
26:46
Speaker 2: the car crash thing. There you go. Stock is down
26:53
Speaker 2: about 2.5% so far in early trading. Again, investors that
26:58
Speaker 2: are longer term probably not devastated given that it's still
27:01
Speaker 2: up 21% for the year. But cited a few things. One,
27:04
Speaker 2: the earnings report itself, pretty solid. Revenue and earnings were
27:09
Speaker 2: just fine. What seemingly spooked investors a little bit was
27:14
Speaker 2: the outlook on profit margin and the outlook on revenue
27:17
Speaker 2: for the rest of this year. And I think really
27:19
Speaker 2: what it's coming down to is them... admitting that all
27:22
Speaker 2: of their input costs are substantially higher, and you are
27:25
Speaker 2: doubting all of it, Mark.
27:26
Speaker 3: What do you got for me? It upsets me a little,
27:30
Speaker 3: or disappoints me maybe, when the real world departs from
27:32
Speaker 3: finance theory, because I get uncomfortable, because.
27:36
Speaker 2: I don't know what to do. I can see that
27:39
Speaker 2: sending you into a panic.
27:39
Speaker 3: Stock prices are the present value.
27:42
Speaker 2: Yeah, you're right.
27:45
Speaker 3: Are the present value.
27:46
Speaker 2: Does not compute.
27:51
Speaker 3: Pretty much. Yeah, my circuits are getting failure. Right, all
27:55
Speaker 3: these people, this humanity, these emotions of what use is it?
28:00
Speaker 3: I mean, we're not buying Apple for the next 12 months.
28:03
Speaker 3: We're buying Apple for the next, say, 12 years or
28:06
Speaker 3: longer in theory. And I think most investors, most people
28:09
Speaker 3: listening to this show think of it that way. We're
28:12
Speaker 3: not looking to flip it. So I'm really, if revenues
28:15
Speaker 3: are growing at a solid clip, and is that an
28:19
Speaker 3: accurate statement?
28:20
Speaker 2: Yes.
28:21
Speaker 3: I asked a question. It was a statement. But anyway, thanks. Okay,
28:24
Speaker 3: so revenues are growing at a solid clip, period. That
28:27
Speaker 3: is more indicative probably of long-term prospects than some, I'll
28:32
Speaker 3: call it blip in input prices. Now, you could say, well,
28:35
Speaker 3: that's a naive assumption. This is the new normal. Snarled
28:40
Speaker 3: supply chains. Go ahead.
28:42
Speaker 2: I actually put a note here on that because I'm... So, one,
28:47
Speaker 2: I think concerns about a CEO and their delivery and
28:50
Speaker 2: their confidence, I think that alone might be enough to
28:53
Speaker 2: send a stock a little bit down for the day. So, whatever, right?
28:56
Speaker 2: Like a single-day stock move, I don't think any of
28:58
Speaker 2: us should make too big a deal of. What Apple's
29:00
Speaker 2: dealing with right now is an input cost problem. They're
29:04
Speaker 2: dealing with higher costs from their hardware... and they don't
29:08
Speaker 2: feel as though they can pass all of that along
29:10
Speaker 2: to the consumer, and therefore they're talking about a profit
29:13
Speaker 2: margin hit. It's not because there's not enough demand for
29:14
Speaker 2: their products. It's not because there's any sort of mistake
29:18
Speaker 2: that they made. They are making a judgment call of, hey,
29:21
Speaker 2: we don't think we want to pass along all this
29:23
Speaker 2: increased cost to the consumer. And honestly, I think that's
29:26
Speaker 2: a good decision. Let's just assume for a moment that
29:30
Speaker 2: what we've been talking about, our concerns about the AI
29:34
Speaker 2: build-out end up being true. Our concerns about the AI
29:36
Speaker 2: build-out is that they're going to follow every big technological
29:42
Speaker 2: boom that we have seen throughout history where you start
29:45
Speaker 2: in a place of, oh, we don't have enough of
29:47
Speaker 2: this stuff, and then you way overbuild the hell out
29:50
Speaker 2: of it. You build too many data centers. You build
29:52
Speaker 2: too many fabs for semiconductors. You build out all sorts
29:55
Speaker 2: of new companies across Southeast Asia that can manufacture all
29:58
Speaker 2: the components that go into this stuff And then lo
30:01
Speaker 2: and behold, however many years later, you look back and say, oh, wow,
30:05
Speaker 2: we have way too much stuff, too much of this stuff.
30:09
Speaker 2: Where is that going to lead a company like Apple?
30:11
Speaker 2: Probably to a place where they have even better control
30:13
Speaker 2: of their supply chain and their cost structure for their
30:16
Speaker 2: components is better than it has ever been if they
30:20
Speaker 2: can hold on to their customers and continue the revenue.
30:23
Speaker 3: I shouldn't overreact to today's market reaction. I just find
30:26
Speaker 3: it puzzling given that they seem to be executing– Yeah.
30:30
Speaker 2: Yeah. your stock's going to take a hit.
30:50
Speaker 3: I think it's always been. Markets are quite unforgiving in
30:53
Speaker 3: the short term, but if you're bullish on the general
30:59
Speaker 3: idea and on the sales story, then you shouldn't change
31:03
Speaker 3: your view.
31:04
Speaker 2: I don't think so. Especially if you're of the opinion
31:07
Speaker 2: that the price structure we're seeing for all the components
31:10
Speaker 2: that Apple's paying for is temporary instead of permanent, which
31:13
Speaker 2: that is my viewpoint. I think we are in this
31:16
Speaker 2: moment right now where demand for hardware is dramatically outstripping supply,
31:22
Speaker 2: and I can't imagine that's going to last for long,
31:24
Speaker 2: in which case Apple remains in the driver's seat for
31:28
Speaker 2: all that stuff down the road. Quick break, a lot
31:30
Speaker 2: more to cover here on The Financial Exchange. We will
31:32
Speaker 2: be right back.
31:33
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32:32
Speaker 2: Wall Street Journal is reporting that anthropic investors are pushing
32:36
Speaker 2: for A lower valuation. We've been talking about this upcoming IPO.
32:41
Speaker 2: In my opinion, it's kind of the main item before
32:44
Speaker 2: year end that could steer, I guess, investor sentiment either
32:49
Speaker 2: positively or negatively. We're in this, I think, cautious moment
32:54
Speaker 2: right now. Investors are expressing renewed concern about the AI
32:58
Speaker 2: build out, the cost of it, the cost of financing
33:01
Speaker 2: all the debt associated with it. And If Anthropic manages
33:05
Speaker 2: to go public and then they see their stock price
33:09
Speaker 2: go through the roof in the month following, I think
33:11
Speaker 2: that does a lot to alleviate the concerns that investors have,
33:16
Speaker 2: whereas if the thing just doesn't get off the ground
33:18
Speaker 2: at all, that's a very different outcome. Frankly, if it
33:23
Speaker 2: doesn't get off the ground at all, then it speaks
33:26
Speaker 2: directly to all these concerns that our investors are expressing
33:29
Speaker 2: right now. And the news from the Journal this morning
33:32
Speaker 2: about looking at a lower valuation, a $ 1. 5 trillion deal here,
33:38
Speaker 2: I guess makes it less likely that it gets off
33:40
Speaker 2: the ground, right? I mean, if you are the company,
33:43
Speaker 2: the CEO, the controlling shareholders today, and you are targeting
33:47
Speaker 2: a $ 2 trillion valuation, there's likely a break point there
33:51
Speaker 2: where you say, if I can't get it for X,
33:55
Speaker 2: then I'm not going to do it at all. I'm
33:56
Speaker 2: going to go back to private fundraising or private private
34:00
Speaker 2: ways of managing this stock and hold off on the
34:04
Speaker 2: IPO until I think sentiment has improved. I have no
34:07
Speaker 2: idea where that price point is. It could be $ 1. 2
34:10
Speaker 2: trillion for all I know.
34:11
Speaker 3: But they need the capital. They do their expenditure planning
34:14
Speaker 3: based on it, don't they? They can't just flip a
34:17
Speaker 3: switch and say, all right, we'll go to private markets.
34:18
Speaker 2: I think they want their capital. But I do think
34:22
Speaker 2: they build contingency plans here, don't you? I mean, OpenAI
34:25
Speaker 2: was talking about going public and ended up pulling it
34:29
Speaker 2: and postponing it. I don't think it's seamless, though.
34:31
Speaker 3: I don't know. I've never been involved in this particular
34:33
Speaker 3: part of the industry.
34:34
Speaker 2: No, it would be difficult to pull it at this stage.
34:36
Speaker 3: And presumably more expensive. Otherwise, they would have gone with
34:39
Speaker 3: the lowest cost option to begin with.
34:40
Speaker 2: Agreed.
34:41
Speaker 1: I'm sorry.
34:42
Speaker 3: I don't mean to be argumentative.
34:43
Speaker 2: No, no. But I am certain, right, if you're a
34:46
Speaker 2: company like this, I cannot imagine that you say, hey,
34:50
Speaker 2: we want to go public. and there is any price
34:54
Speaker 2: that we are willing to accept for those shares. Because, again,
34:57
Speaker 2: remember the way this works. They are going to sell
34:59
Speaker 2: these shares to participants in the initial public offering, and
35:04
Speaker 2: then months later they'll be able to sell their shares
35:07
Speaker 2: on the public market. I agree, they probably need the capital,
35:10
Speaker 2: they want the capital, but at a certain price point
35:13
Speaker 2: you just say, at a certain price point you probably say, no,
35:16
Speaker 2: forget this, we'll go to the borrowing markets or we'll
35:18
Speaker 2: try and raise the money privately again.
35:21
Speaker 3: Yeah, if it becomes cheaper. Whatever's cheaper.
35:25
Speaker 2: Yeah, precisely. And they judged the public markets to be
35:28
Speaker 2: the cheapest option for their shareholders. I'm sure there are
35:32
Speaker 2: other reasons too, right? You have all sorts of early
35:34
Speaker 2: investors and employees with stock positions that maybe they want
35:38
Speaker 2: to be publicly traded so that they can cash in
35:42
Speaker 2: at some point. I think that's quite appealing as a
35:45
Speaker 2: CEO and as one of those early investors. But yeah,
35:49
Speaker 2: I think... I'm quite certain that a $ 1. 5 trillion valuation,
35:58
Speaker 2: or 1.5 to 1.6, is less appealing for the leadership
36:02
Speaker 2: of Anthropic than a $ 2 trillion IPO price, and would
36:06
Speaker 2: make you, on the margins, more likely to pull the thing.
36:09
Speaker 2: I'm not saying that you will. I still think that
36:12
Speaker 2: this is very likely to go off.
36:13
Speaker 3: Well, I know there's a cutoff. I don't know what
36:14
Speaker 3: that cutoff is. They know at what Price per share,
36:21
Speaker 3: it becomes cheaper to finance. If you're right, if they
36:24
Speaker 3: have a contingency plan and there's an offer on the table,
36:27
Speaker 3: there's something they can tap to the cent when it
36:31
Speaker 3: becomes cheaper, and presumably they will. But as you mentioned,
36:34
Speaker 3: there are other considerations there too, which is interesting.
36:37
Speaker 2: Lots of other ones.
36:37
Speaker 1: Yeah.
36:38
Speaker 2: I mean, certainly for your early investors to shelve this
36:40
Speaker 2: thing would be disappointing. For the market as a whole,
36:43
Speaker 2: it would be disappointing. I think there are plenty of
36:46
Speaker 2: actors out there, OpenAI chiefly, that would love to see
36:49
Speaker 2: this thing get shelved and delayed because they are looking
36:52
Speaker 2: like the unprepared group in this playground right now. And
36:57
Speaker 2: so that is, again, on the margins, I think this
37:01
Speaker 2: thing goes off. It probably has to be out into markets. Again,
37:07
Speaker 2: just this isn't a rule. It's just a preference on
37:10
Speaker 2: the behalf of shareholders here. I think you got to
37:12
Speaker 2: do it in the next two weeks. I don't believe
37:15
Speaker 2: you can really realistically wait until the week of the
37:18
Speaker 2: 23rd because you have no trading on that Thursday, very
37:23
Speaker 2: limited trading on that Friday. And so the idea of
37:26
Speaker 2: going public into one of the least traded weeks of
37:28
Speaker 2: the year is probably not appealing. So I really think
37:31
Speaker 2: you have a little bit over two weeks to get
37:34
Speaker 2: this thing off the ground and confidently do so. And
37:38
Speaker 2: like I said, I happen to think that the way,
37:42
Speaker 2: whether this IPO goes off and how well it goes
37:44
Speaker 2: off is probably the biggest determinant of AI sentiment for
37:49
Speaker 2: the rest of this calendar year. It holds a lot
37:52
Speaker 2: of significance, at least in my mind, so we will
37:54
Speaker 2: see what happens next. Markets remain in mixed territory here
37:58
Speaker 2: as we close in on the 11 o'clock hour. Dow
38:01
Speaker 2: is being dragged down a bit by those Apple shares,
38:04
Speaker 2: off one-fifth of a percent. S & P up half
38:07
Speaker 2: a percent, and the Nasdaq leading the way up nine-tenths
38:10
Speaker 2: of a percent. We'll be right back. A lot more
38:13
Speaker 2: to cover on the next hour of the Financial Exchange.