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Transcript

PhilStockWorld's August 2025 Strategy Note · The PhilStockWorld Investing Podcast

• 0:00
  Penny: Welcome to the deep dive, your shortcut to being, truly well informed.
• 0:05
  Roy: We try to cut through the noise for you.
• 0:07
  Penny: We do. And today, we're digging into some really critical signals from, well, a unique source, Warren, the AI market analyst at philstockworld.com, his latest August strategy note.
• 0:20
  Roy: Right. And he kicks it off with his great analogy.
• 0:23
  Penny: Oh, yeah. The one about the market being like a teenager with a new sports car. It's brilliant, revving the engine, ignoring the warning lights.
• 0:30
  Roy: And convinced the road ahead is straight and smooth. Yeah, it really sets the stage.
• 0:35
  Penny: It does because it immediately tells you Warren thinks, maybe that road isn't so smooth. There are some serious warning lights flashing that, well, maybe too many people are overlooking.
• 0:44
  Roy: Exactly. From his perspective, crunching all that data, he sees these critical signals in the market seems to be maybe dismissing.
• 0:52
  Penny: So that's our mission today, right? To unpack these warning lights for you.
• 0:55
  Roy: Precisely. Understand what they are, and maybe more importantly, why they fundamentally matter for your financial picture.
• 1:02
  Penny: We want you equipped, basically. Ready for maybe a bumpier road than it seems right now.
• 1:06
  Roy: Let's do it.
• 1:07
  Penny: So let's dive into that first warning light. What's top of the list? What's this metaphorical teenager ignoring?
• 1:13
  Roy: Well, the first major reality worn flags is that tariffs are now policy, not just posture. This isn't just talk anymore, it's live. Active policy. When to effect August 1? We're talking pretty sweeping tariffs, you know, 10% up to 50% rates on specific things.
• 1:30
  Penny: So no more negotiating tactics or threats. This is actually on the books hitting companies now.
• 1:35
  Roy: Exactly. Like copper got hit with a 50% line. That's substantial. Wow. India's headline rate.
• 1:41
  Moved to 50% for big chunks of goods though, okay, there are some carve outs.
• 1:46
  Penny: So
• 1:46
  Roy: And Mexico, they're looking at 25% auto tariffs unless they fully USMCA compliant. So yeah, this is a direct tax on corporate cash flow. It's real.
• 1:56
  Penny: A direct tax. So companies importing stuff are gonna feel this.
• 1:58
  Roy: Absolutely. A margin squeeze. Warren fully expects this to start showing up pretty clearly in their Q3 earnings guidance.
• 2:04
  Penny: Okay 50% on copper, that's huge! This isn't just some small line item then this could be a major hit to the bottom line for some.
• 2:13
  Roy: It could be and if you look at the bigger picture some officials are talking numbers like north of $50,000,000,000 a month in potential revenue from these tariffs.
• 2:22
  Penny: 50,000,000,000 a month?
• 2:24
  Roy: Yeah. If that holds up, it's a big boost for government revenue, sure, but it's also a direct inflation impulse. Costs go up.
• 2:32
  Penny: Right. And consumers end up paying.
• 2:34
  Roy: Or businesses absorb it, hitting profits. Or both. Now there's also this sort of hidden risk he mentions. Oh. Yeah, a litigation tail risk.
• 2:43
  There's actually a live court challenge about the legal basis for these tariffs specifically using this IEPA Act.
• 2:50
  Penny: IEEPA, International Emergency Economic Powers Act.
• 2:53
  Roy: That's the one. If a court rules against how the government's using it, they might have to issue refunds that would completely scramble the picture.
• 3:00
  Penny: Okay, so probably not going to happen but it could?
• 3:02
  Roy: It's not the base case, no. But it's out there. Yeah. So what does this mean for you the listener? Warren expects more dispersion?
• 3:08
  Penny: Dispersion meaning?
• 3:09
  Roy: Meaning winners, losers. Some sectors, maybe domestic miners, metals, US focused services, they might actually get a relative boost.
• 3:17
  Penny: Because they don't import as much or they benefit from domestic production.
• 3:21
  Roy: Exactly. But then you look at import heavy retailers, autos, hardware companies, they face some real net margin pressure. It's not gonna hit everyone the same way.
• 3:29
  Penny: Okay. That's a really important point. Tariffs acting as this direct tax. But let's shift gears. What about the foundations?
• 3:37
  The bond market? Warren seems concerned there too. Is it as solid as it looks?
• 3:41
  Roy: That's the second big reality he highlights. The bond market is not fine. Things might look calm, you know, on the surface, but the underlying plumbing, it's got some definite wobbles.
• 3:53
  Penny: Wobbles how?
• 3:54
  Roy: Recent treasury auctions, especially for the long term stuff like thirty year bonds. They've been weak.
• 3:59
  Penny: Weak meaning not enough buyers.
• 4:01
  Roy: Yeah, or buyers demanding higher yields than expected. The August thirty year auction, for example, it tailed.
• 4:08
  Penny: Tailed, sorry, what's that mean exactly?
• 4:09
  Roy: Oh right, It just means the final yield was higher than what dealers anticipated. It signals weaker demand at the expected price. They had to offer more yield to get the bonds sold, and the ten year auctions were soft too.
• 4:23
  Penny: Okay. So less demand for U. S. Debt at current prices. That sounds not great, especially with all the spending.
• 4:30
  Is the treasury doing anything about it?
• 4:32
  Roy: They are. It definitely pushes rates higher, puts pressure on stock valuations potentially. The treasury's playbook seems to be keep the size of new bonds steady, but they've doubled their buybacks, buying back old bonds to $38,000,000,000 a quarter.
• 4:46
  Penny: Trying to soak up supply, basically.
• 4:49
  Roy: Right. And they're leaning more heavily on short term t bills too, trying to help liquidity. Yeah. But behind the scenes, you've got the repo market.
• 4:55
  Penny: Ah, the plumbing.
• 4:56
  Roy: Exactly. The plumbing. It's huge. $12,000,000,000,000 and very sensitive. Shocks can move through there fast even with the Fed's backstop, their SRF facility, saw some increased usage.
• 5:06
  Penny: So even with the treasury managing things and the Fed back stop, Warren's point is
• 5:11
  Roy: Yeah.
• 5:11
  Penny: Be careful with bonds.
• 5:12
  Roy: His point is that duration, you know, exposure to long term bonds is tactically tricky right now. The foundation has these wiggles. It's not a time to just passively sit in long bonds maybe. Needs a more active approach.
• 5:26
  Penny: Okay, so tariffs hitting cash flow, bond market a bit shaky, but hey, earnings reports looked good, right? Q2 was pretty strong on the surface.
• 5:34
  Roy: You're right, on paper, definitely solid. And that brings us straight to the third reality Warren points out. Earnings beat, breadth did not.
• 5:44
  Penny: Ah, the breadth issue.
• 5:45
  Roy: Exactly. Q two earnings season, yeah, blended EPS growth looked good, maybe 12% year over year. BEAT rates were high, around 80%. Sounds great.
• 5:54
  Penny: Very strong. So what's the catch?
• 5:56
  Roy: The catch is who is driving those numbers? Mhmm. Warren says the rally is mega cap heavy.
• 6:01
  Penny: Meaning the big tech giants, the mag seven type name.
• 6:04
  Roy: Precisely. Those few are doing all the heavy lifting, the average stock, not performing nearly as well. If you look at equal weight indices
• 6:10
  Penny: Where every company counts the same.
• 6:12
  Roy: Right. They're still lagging way behind the normal cap weighted indices where the Apples and Microsofts have huge influence.
• 6:18
  Penny: So is the argument just that these are amazing companies winning out, or is there a risk there?
• 6:24
  Roy: Well, risk warranties is fragility. The overall market's health becomes overly dependent on just a few stocks continuing to soar. The index can kind of levitate, float higher, even while the median stock is just chopping sideways or even falling.
• 6:39
  Penny: And that means single name dispersion is high, big gaps between winners and losers.
• 6:44
  Roy: Very high, means if one or two of those giants stumble the whole index could take a serious hit. The market's foundation isn't as broad as the headline numbers suggest.
• 6:54
  Penny: Okay, so underlying wobbles from tariffs, bonds, and this narrow market strength, given all that, what about the Fed? The market seems dead set on a rate cut in September.
• 7:03
  Roy: Yeah. That's the fourth reality. Yeah. The Fed is boxed in. Yeah.
• 7:06
  Until it isn't.
• 7:07
  Penny: Boxed in.
• 7:08
  Roy: Well, after that weak July jobs report and the jobless rate ticking up a bit, the market went all in. Pricing something like a 90% chance of a September cut seems like a sure thing to many.
• 7:18
  Penny: 90% is high conviction. But Warren sees a conflict, doesn't he?
• 7:22
  Roy: He does. It's a real dilemma. Weak jobs, sure, that argues for a cut to support growth. But these new tariffs we talked about, they could push inflation higher.
• 7:33
  Penny: Ah, right. Cutting rates when inflation might be going up, that's not usually the playbook.
• 7:38
  Roy: Exactly. It conflicts with their inflation mandate, so they're really walking a tightrope. We need more data. Key things coming up CPI, the inflation report on August 12, and then the big Jackson Hole meeting later in August.
• 7:50
  Penny: So those could tip the scales.
• 7:52
  Roy: They could give us and the Fed more clarity, but the key takeaway for you, the listener, is this. The market has already paid you for that 25 basis point cut in September. It's priced in.
• 8:03
  Penny: So don't bet the farm on just that.
• 8:05
  Roy: Right. The real question, the real trade is about the path of rates after September into year end. Don't get overexposed expecting some big 50 basis point shot cut. The market isn't there and the Fed has reasons to be cautious.
• 8:17
  Penny: Okay. And finally with all this potential turbulence, tariffs, bonds, Fed tightrope, how's this showing up in volatility? Is the market nervous or still relaxed?
• 8:26
  Roy: That's the fifth reality. Vol is cheap enough given the calendar. The VIX, you know, the volatility index, it's hanging around 15.
• 8:35
  Penny: Which is pretty calm.
• 8:36
  Roy: Warren describes it as calm but not complacent. It's low but maybe not dangerously low.
• 8:43
  Penny: Okay. So if vol is cheap, what does that actually mean for an investor? Does it mean protection is affordable?
• 8:49
  Roy: Pretty much. Yeah. That's the key insight. Why does it matter? Because there's enough event risk coming up.
• 8:54
  Those auctions we mentioned CPI, Jackson Hole, tariff news always bubbling.
• 8:59
  Penny: Lots of potential triggers.
• 9:00
  Roy: Exactly. So puts options that pay off if the market falls are still reasonably priced according to Warren. The math for buying some insurance, some targeted hedges looks pretty good right now.
• 9:11
  Penny: Like buying homeowners insurance before the hurricane watch is issued.
• 9:14
  Roy: That's a great way to put it. It's a window perhaps to add some downside protection without paying panic prices.
• 9:20
  Penny: Okay. So putting it all together, tariffs as a tax, wobbly bonds, narrow rally, boxed and fed, but cheap vol, what does Warren say to do about all this? He doesn't just point out risks. Right? He offers scenarios, a playbook.
• 9:34
  Roy: He does. He lays out three potential scenarios for the next, say, eight weeks or so. The most likely 50% probability is chop and drift. Market turns near highs, stuff rotates underneath.
• 9:47
  Penny: Okay. Sideways grind.
• 9:48
  Roy: Then there's tariff plus auction. Shock, 30% probability. If CPI runs hot and another bond auction goes poorly, maybe a quick 58% pullback in stocks.
• 9:57
  Penny: So a sharp drop is definitely possible.
• 9:59
  Roy: It's on the table. And finally, Goldilocks, only 20%. Everything goes right. Data softens just enough, rally continues.
• 10:07
  Penny: So, chop and drift, most likely, but a real risk of a shock. What's the playbook then? How do you navigate that uncertainty?
• 10:13
  Roy: It's about prudence, not panic. First, carry the umbrella.
• 10:17
  Penny: Name.
• 10:18
  Roy: Meaning consider some index protection. He suggests things like put spreads option strategies to hedge downside risk without costing too much. Use this friendly VIX, this cheap vault to buy that insurance ahead of CPI in Jackson Hole.
• 10:29
  Penny: Makes sense. Buy protection when it's on sale. What about rates? The wobbly bonds.
• 10:33
  Roy: There he suggests you barbell your rates risk. Yeah. Meaning don't go all in long or short. Baby parks in cash, 20% in ultra short T bills. They still yield well and are safe.
• 10:45
  And for any longer duration bets, maybe use options like debit spreads for more defined risk rather than just buying the bonds outright, especially with those auction wobbles.
• 10:54
  Penny: Okay. Control your risk on rates. And with tariffs hitting, how do you adjust stock exposure?
• 11:00
  Roy: Lean domestic where tariffs bite. That's the advice. Potentially overweight US services? Companies benefiting from building stuff domestically? Onshoring?
• 11:08
  Penny: Stuff less exposed to import costs.
• 11:10
  Roy: Exactly, and maybe underweight the import heavy sector's retail, consumer durables, especially as we wait for that Q3 guidance on how much they're passing costs through. He mentions the NRF import slump data as an early warning sign there.
• 11:23
  Penny: Okay, And what about the narrow market? The MAG seven dominance?
• 11:27
  Roy: Respect concentration risk. Simple but important. If you're overweight, those big cap weighted indices maybe trim a bit. Consider adding exposure to equal weight funds or mid caps, especially if they weaken.
• 11:37
  Penny: Spread the risk beyond just the giants. Diversify.
• 11:40
  Roy: Precisely. Don't rely solely on those few names carrying everything.
• 11:44
  Penny: Got it. And finally, any traditional hedges? Things that zig when others zag.
• 11:49
  Roy: Yeah. He includes real assets as shock absorbers. Specific specifically, he suggests maybe a small starter sleeve of gold, like three, five percent.
• 11:59
  Penny: Gold is a hedge.
• 12:00
  Roy: As a hedge against tariff anxiety, deficit worries, maybe a fed that ends up being softer than expected. It's a classic diversification play for uncertain times, something that behaves differently.
• 12:10
  Penny: Wow. This has been a fantastic deep dive, really getting under the hood. So to recap Warren's view, tariffs are real tax now, the bond market's not perfect, The rally's narrow. The Fed's got a tricky path, but Vol is maybe giving you a chance to prepare. Definitely not that street smooth road.
• 12:26
  Roy: Not at all. It reminds me of that Doors song he linked, Riders on the Storm. And his final analogy really drives it home. The risks we've mapped out aren't there to scare you. They're there to remind you that the current rally is skating on a thinner sheet of ice than most folks realize.
• 12:41
  Penny: Thinner ice.
• 12:42
  Roy: Manage the risk and you can enjoy the view. And if the ice cracks, you'll be the one with a dry pair of socks and the cash to buy what everyone else is dumping.
• 12:50
  Penny: Powerful. It's about prudence, preparation, not panic having those dry socks ready. Thanks for joining us for this deep dive into what's really shaping August.
• 13:00
  Roy: Hope these insights help you navigate the road ahead.
• 13:02
  Penny: We certainly hope so. See you next time on the deep dive.