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AI Debt Problems Grow as Another Tech IPO Crashes · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Mike Armstrong and Paul Lane.
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  Speaker 2: Good morning, happy Tuesday, and welcome back here to The
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  Speaker 2: Financial Exchange. As we mentioned yesterday, we are heading into
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  Speaker 2: the busy season of earnings. They're just starting a slow
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  Speaker 2: trickle as of last week, but this week we'll hear
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  Speaker 2: from SpaceX, Tesla, Netflix, Meta, amongst others. And in the backdrop,
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  Speaker 2: we've also got home sale data and energy concerns.
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  Speaker 3: So plenty to.
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  Speaker 2: Get through with the additional backdrop of renewed concerns about
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  Speaker 2: the AI trade. We'll be talking about an IPO in
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  Speaker 2: Korea that went off very poorly that has some investors
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  Speaker 2: concerned again. It's Mike Paul and Tucker here with you
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  Speaker 2: on a Tuesday afternoon. As I mentioned, I want to
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  Speaker 2: start the top story on energy markets because over the
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  Speaker 2: course of the last week, we've seen West Texas crude
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  Speaker 2: climb from a low of about $ 94 a barrel up
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  Speaker 2: to where we are now, which is about $ 105 per barrel.
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  Speaker 2: On the Brent side of things, it briefly touched a
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  Speaker 2: five-month high on these renewed strikes on ships trying to
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  Speaker 2: navigate through the Middle East. We're sitting at $ 109 on
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  Speaker 2: Brent crude, $ 105 on West Texas crude. And no real
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  Speaker 2: relief in sight from any action that anyone's trying to
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  Speaker 2: take here because when you have a bunch of ships
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  Speaker 2: getting struck in these different straits, it brings up the
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  Speaker 2: cost of anything happening here. At least 18 vessels were
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  Speaker 2: reportedly attacked over two weeks. That's keeping the risk premium
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  Speaker 2: quite high. On Monday, a Houthi attack on a training
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  Speaker 2: camp for government security forces in Yemen killed 58 people,
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  Speaker 2: injured more than 200.
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  Speaker 4: And.
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  Speaker 2: Yemen's Iran-lined Houthis also said on Monday they launched several attacks,
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  Speaker 2: including on Saudi energy facilities, airports and military targets. And
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  Speaker 2: so we have more of the same bad news here,
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  Speaker 2: I think, for anyone hoping to see lower energy prices
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  Speaker 2: as we head into the winter. No real movement on
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  Speaker 2: refined products either. No new spikes there, but no relief
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  Speaker 2: in sight. And, you know, the Margins to refine any
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  Speaker 2: of this crude into refined products are still quite high
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  Speaker 2: because there's just not enough capacity online right now.
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  Speaker 5: Yeah, we just continue to see a confluence of different
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  Speaker 5: factors that make the energy market really looking like it
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  Speaker 5: is at least... sort of hopeless in the near term
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  Speaker 5: for any type of price reprieve, whether you talk about
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  Speaker 5: Russia and some of the drops that they've seen in
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  Speaker 5: terms of their crude flows, whether you speak about Saudi
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  Speaker 5: Arabia and issues going on in the Middle East. This
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  Speaker 5: continues to be an issue, and I don't really see
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  Speaker 5: a reprieve coming anytime soon. There are just numerous factors
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  Speaker 5: that are going against the energy markets at these moments.
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  Speaker 2: The national average for a gallon of gasoline right now
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  Speaker 2: is sitting at $ 4. 28.
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  Speaker 3: It's down a bit from last month when we hit
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  Speaker 3: a high of $ 4.
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  Speaker 1: 48.
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  Speaker 2: And on the diesel side of things, which has obviously
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  Speaker 2: been all the focus, current average $ 6. 32, down from that
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  Speaker 2: all-time high of $ 6.
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  Speaker 4: 53.
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  Speaker 2: Russia, too, seeing the least oil in a month leaving
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  Speaker 2: their ports, as there's been all sorts of, you know,
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  Speaker 2: kind of unclear why at any point in time Russia's
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  Speaker 2: ports are closing down. This time it was blamed on
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  Speaker 2: some maintenance, but... who knows, between Ukrainian strikes on some
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  Speaker 2: of these facilities. So any of the hopes of Russian
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  Speaker 2: energy coming to the rescue, I think that was always
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  Speaker 2: a bit in question, but especially right now, no real
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  Speaker 2: relief in sight. So again, the story here, overnight Brent
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  Speaker 2: crude hitting five-month highs, just means, to Paul's point, no
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  Speaker 2: real certainty that you can bring down energy prices in
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  Speaker 2: any meaningful way in the near-term future.
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  Speaker 1: Right.
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  Speaker 2: Um, when we take a look elsewhere at data coming out, uh,
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  Speaker 2: we did receive a little bit of, um, housing data as,
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  Speaker 2: as we tend to, as we are planning on this week,
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  Speaker 2: this morning at eight 30, you did see the housing
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  Speaker 2: starts number come in, uh, forecasters for a 1.3 million.
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  Speaker 2: Instead we got 1.2 million, not the end of the
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  Speaker 2: world there, but pending home sales, uh, the last month
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  Speaker 2: they were up you know, three tenths of a percent.
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  Speaker 2: The forecast was for them to be down slightly in September,
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  Speaker 2: but only by like half a percent off of the previous.
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  Speaker 2: Pending home sales came in down 7.3%. There's a lot
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  Speaker 2: of reasons why this is happening, but that is a
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  Speaker 2: very substantial miss on the pending home sales data.
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  Speaker 3: And I guess just further proves, right? I mean, a
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  Speaker 3: few things.
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  Speaker 2: One, higher interest rates are clearly having an effect on
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  Speaker 2: all of this. It is not a terribly hot housing
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  Speaker 2: season anyway, but once you get past now, there's pretty
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  Speaker 2: much no homes being sold once we get, especially to
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  Speaker 2: the Thanksgiving holidays, so very slow housing season coming. And
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  Speaker 2: between high interest rates, high construction costs, which we're going
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  Speaker 2: to be talking about a little bit later in the
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  Speaker 2: program for building costs, it is not a scenario where
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  Speaker 2: housing right now is contributing anything meaningful to economic growth
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  Speaker 2: or economic activity?
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  Speaker 5: No, you continue to have the takeaway that this market
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  Speaker 5: is a one-trick pony in a way. It is all
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  Speaker 5: AI in terms of economic growth. You're not going to
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  Speaker 5: get it from the housing market. There's quotes in here
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  Speaker 5: on some of this housing data that Mike mentioned, the
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  Speaker 5: sales data, which was really weak for the month of
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  Speaker 5: August and September, but also on the home construction side,
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  Speaker 5: any optimism regarding New single-family homes being built, that has
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  Speaker 5: plummeted to a quote here from Ben Ayers, who is
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  Speaker 5: a senior economist at Nationwide Financial. We expect home construction
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  Speaker 5: activity to remain morbid during the 2027 year. So it
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  Speaker 5: is certainly not looking good for the housing market when
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  Speaker 5: you have mortgages sitting at, what did we crest, 7.5%, 7.6%.
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  Speaker 5: At the end of the month, there is just no
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  Speaker 5: bump that you're going to get from an economic standpoint
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  Speaker 5: from the housing market heading into 2027 with prices where
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  Speaker 5: they are and rates where they are.
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  Speaker 3: That is pretty wild.
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  Speaker 2: So the September data I mentioned, it was down 7.3%
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  Speaker 2: from August, which is a massive month-over-month drop. you know,
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  Speaker 2: month to month can be volatile. Uh, 11.3% drop year
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  Speaker 2: over year.
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  Speaker 5: And last year wasn't good. So I mean, like you're
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  Speaker 5: not even coming off a real high either.
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  Speaker 1: Yeah.
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  Speaker 2: Uh, so yeah, like you said, I don't think that
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  Speaker 2: there's just enough buyers out there when you've got mortgages
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  Speaker 2: cresting 7.6%. Uh, regionally sales, uh, were, were particularly bad
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  Speaker 2: in the South where it was down 8.2%, uh, the
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  Speaker 2: West 9.2%. And so, um, We are seeing this play
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  Speaker 2: out everywhere, but I think some of the biggest price
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  Speaker 2: drops have been in those high-performing areas, such as the South,
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  Speaker 2: where home building was actually done, you know, not now,
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  Speaker 2: but over the last.
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  Speaker 3: Few years, and more inventory came to market. That's where
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  Speaker 3: we're seeing some of the most pressure on prices. Let's
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  Speaker 3: take a quick break.
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  Speaker 2: Paul mentioned that one-trick pony that is this market right now.
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  Speaker 2: And the last two weeks have been all about questioning
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  Speaker 2: that one-trick pony of artificial intelligence build-out globally. We're going
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  Speaker 2: to talk about the debut of a little-known Korean company
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  Speaker 2: next here on the Financial Exchange.
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  Speaker 2: Paul, a few different AI stories that we're going to
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  Speaker 2: be covering here, and I think you need some general
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  Speaker 2: context in case you missed the show yesterday. But CoreWeave
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  Speaker 2: last week, which is referred to as a neocloud company,
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  Speaker 2: you can think of them as the... We compared them
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  Speaker 2: to the WeWork for AI data centers the other day.
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  Speaker 6: Oh, interesting.
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  Speaker 3: Okay.
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  Speaker 2: They build out a data center and you need space
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  Speaker 2: to run your high-end, really resource-intensive model. You call up
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  Speaker 2: a neocloud like CoreWeave and you buy the racks.
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  Speaker 5: I would argue they have a little more specialization than
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  Speaker 5: just building offices.
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  Speaker 3: Nope, same thing.
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  Speaker 4: Yes.
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  Speaker 5: And WeWork was already, they were just taking existing office
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  Speaker 5: space and then leasing it out to someone else.
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  Speaker 3: Correct.
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  Speaker 1: Yes.
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  Speaker 2: So there is a fair bit more specialization that goes
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  Speaker 2: into this. They also have much longer lease terms than
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  Speaker 2: the month-to-month model for a lot of customers of WeWork.
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  Speaker 2: A lot of these deals are 15-year deals. But nonetheless,
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  Speaker 2: CoreWeave came under some pretty immense pressure. over the last
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  Speaker 2: few weeks. I haven't taken a look at their stock.
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  Speaker 2: On Friday, they were down quite a bit.
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  Speaker 6: On Monday, they were back up. 25 plus percent drop.
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  Speaker 2: But yeah, I mean, this company has been defined by volatility.
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  Speaker 2: I feel like they are kind of front and center
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  Speaker 2: of both excitement about the AI trade as well as
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  Speaker 2: concerns about the AI trade.
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  Speaker 3: They only went public back in March of last year.
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  Speaker 2: They've been, you know, stocks traded as high as $ 183
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  Speaker 2: a share and as low as, well, since IPO, as
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  Speaker 2: low as about where we are now, $ 61 per share.
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  Speaker 3: So massive up and down.
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  Speaker 2: And even this year, there's been like 15 different instances
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  Speaker 2: of 10% pullbacks. The latest concern here was not so
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  Speaker 2: much about whether or not CoreWeave has a business model,
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  Speaker 2: but rather how much it's going to cost to run
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  Speaker 2: that business model, grow that business model, and have financial
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  Speaker 2: success because they need to borrow a whole lot of
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  Speaker 2: money to do all this. And while their revenue is growing,
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  Speaker 2: so are their losses. And so concerns have mounted about
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  Speaker 2: any company that is operating in this space with a
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  Speaker 2: lot of expenses and a lot of debt. I think Corweave,
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  Speaker 2: Oracle have been tossed in that boat there of, hey,
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  Speaker 2: this is heck of a lot of debt you're taking on.
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  Speaker 2: It's getting sold off in markets. People are worried about
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  Speaker 2: your ability to pay it back. And your shares and
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  Speaker 2: bonds have been under pressure over the course of the
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  Speaker 2: last couple of years.
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  Speaker 5: Yeah, they're a fascinating study into what is really, there
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  Speaker 5: was one of the pieces for the stack this morning
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  Speaker 5: that said they're the tip of the credit sphere. They
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  Speaker 5: really are the company to focus on. But there are
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  Speaker 5: others that play And so they are sort of the
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  Speaker 5: definition of putting the cart before the horse. So basically
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  Speaker 5: what they're doing is they're building these data centers with
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  Speaker 5: the hopes that they will get the revenue from them.
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  Speaker 5: And the problem that they encounter is just there is
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  Speaker 5: a tremendous amount of execution risk when you're borrowing billions
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  Speaker 5: and billions of dollars. And I believe they have.
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  Speaker 6: About $ 40.
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  Speaker 5: Billion of debt that they'll need to repay within the
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  Speaker 5: course of the next three or four years. Their revenue
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  Speaker 5: is doubling. I think they're going to close this past
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  Speaker 5: year at around $ 13 billion, according.
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  Speaker 6: To analyst estimates.
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  Speaker 5: And then it's expected to double the year after that.
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  Speaker 5: But when you're doing this and you're borrowing every single
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  Speaker 5: dollar that you can to build out your infrastructure, there's
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  Speaker 5: a lot of risk. Think about it on a real
• 12:54
  Speaker 5: simplistic level. Anyone who's ever done a renovation or building
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  Speaker 5: a home, that's a very small scale size project, but
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  Speaker 5: there are delays. There are issues that you run into
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  Speaker 5: on material costs, on building, on construction. Think about that
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  Speaker 5: with data centers and GPUs and all the chip infrastructure
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  Speaker 5: that goes into building this. And then, oh, by the way,
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  Speaker 5: after you've built it to Mike's earlier joke, like they
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  Speaker 5: have to come, they have to deliver.
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  Speaker 6: You have this tremendous.
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  Speaker 5: Backlog, but just because you have a backlog of customers,
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  Speaker 5: those are just commitments. And ultimately you have to get
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  Speaker 5: to executing on the commitments in a timely fashion because
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  Speaker 5: you're borrowing at such high rates of interest. Not to
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  Speaker 5: mention there's customer concentration risk that there's not Armstrong or
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  Speaker 5: local businesses are not the people that are utilizing these
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  Speaker 5: chips from CoreWeave. There are big players in this space.
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  Speaker 5: You lose one of them, all of a sudden your
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  Speaker 5: business gets on unshaky ground. And then lastly, Technology evolves
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  Speaker 5: really quickly in this space, and usually chips are a
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  Speaker 5: commodity or a depreciating asset in this world. So you
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  Speaker 5: put those three risks together, there's a lot that needs
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  Speaker 5: to go right to make this work. If the demand
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  Speaker 5: for AI keeps coming in droves, then they're going to
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  Speaker 5: have the corner on the market and should be able
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  Speaker 5: to execute profitably. But it's getting there that is the challenge.
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  Speaker 2: And look, I mean, obviously, Corweave is not the only
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  Speaker 2: company building out data centers, right?
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  Speaker 6: Yeah, we just keep using them as a U.S. example,
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  Speaker 6: but there are others.
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  Speaker 2: What's different about Corweave is that most of those other
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  Speaker 2: companies that are building out data centers have other business
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  Speaker 2: models to support them.
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  Speaker 1: Exactly.
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  Speaker 3: Good point.
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  Speaker 2: So Meta, if they build a data center that does
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  Speaker 2: not execute all that well, It's a problem, but they
• 14:35
  Speaker 2: also sell social media ads.
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  Speaker 5: But guess what? They'll find a use case for it.
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  Speaker 5: They're not leasing it out to all these other customers.
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  Speaker 5: They will find something to do with the computing.
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  Speaker 2: CoreWeave is pure play, and that's beneficial in some ways,
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  Speaker 2: and it can be a pressure on your shares. It's
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  Speaker 2: about a $ 33, $ 34.
• 14:53
  Speaker 3: Billion company, depending on the day, obviously, you know.
• 14:56
  Speaker 6: I think they hit $ 90 billion at peak.
• 14:58
  Speaker 3: Yeah, nearly $ 100.
• 14:59
  Speaker 2: On a much smaller scale, we had the IPO of
• 15:03
  Speaker 2: a company that, let's be honest, I had never heard
• 15:06
  Speaker 2: of it.
• 15:06
  Speaker 3: I'm guessing you had never.
• 15:07
  Speaker 6: Heard of it. No, we stayed pretty locked in, but
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  Speaker 6: I had not heard of it.
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  Speaker 2: There's a company in Korea called Elise. And by and large,
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  Speaker 2: they have a lot of similarities to CoreWeave. They build
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  Speaker 2: data centers. They are a neocloud company. They also offer
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  Speaker 2: some other services to Korean businesses.
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  Speaker 3: They do.
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  Speaker 2: Do some digital coding and AI learning platforms for their customers.
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  Speaker 2: But by and large, they're doing the same thing on
• 15:29
  Speaker 2: a much smaller scale. They're only like a $ 750 million company.
• 15:33
  Speaker 3: In any case, they went public. Stock tanked 32% in
• 15:37
  Speaker 3: the first day of trading. Not what you're going for
• 15:42
  Speaker 3: when you offer an IPO, right?
• 15:45
  Speaker 2: That's not exactly... outcome you are looking for on your IPO.
• 15:50
  Speaker 2: There are a whole bunch of shareholders then who got
• 15:55
  Speaker 2: washed by buying the shares on the first day. There
• 15:57
  Speaker 2: are a whole bunch of executives and private shareholders who
• 16:01
  Speaker 2: are locked in and are now seeing the value of
• 16:03
  Speaker 2: their shares down a third from what they thought they
• 16:06
  Speaker 2: might be worth. And it does fall in line with
• 16:09
  Speaker 2: just a number of these fresh concerns over the course
• 16:12
  Speaker 2: of the last month or so. I mean, you had
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  Speaker 2: Australia's Firmus and Airtrunk that have delayed public offerings. Britain,
• 16:19
  Speaker 2: some of these, like, we're pretty familiar, but others, honestly, like,
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  Speaker 2: I don't follow these that closely.
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  Speaker 3: I don't think most people do.
• 16:27
  Speaker 2: Britain's Nscale and then U.S. SB Energy are facing all
• 16:32
  Speaker 2: sorts of investor pushback. And then, of course, the story
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  Speaker 2: that we just talked about, the concerns over bond defaults
• 16:38
  Speaker 2: in all sorts of offerings that these companies are pushing are, again,
• 16:43
  Speaker 2: you know, growing. I don't think you can look at
• 16:46
  Speaker 2: the bonds of Corweave and say, oh, definitively, like this company's,
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  Speaker 2: it's not trading at pennies.
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  Speaker 3: On the dollar, but it's effectively saying, hey, if you
• 16:53
  Speaker 3: want to.
• 16:54
  Speaker 2: Borrow more money, you're going to need to pay us
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  Speaker 2: 15% interest because we have some concerns about your model
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  Speaker 2: going forward.
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  Speaker 5: Yeah, some of their bonds specific to Corweave that had
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  Speaker 5: a maturity date of in the early 2030s were trading at,
• 17:05
  Speaker 5: you know, 100 cents on the dollar back a couple
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  Speaker 5: months ago, now at 78 cents on the dollar. So
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  Speaker 5: reflecting just sort of what we've seen in terms of
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  Speaker 5: the deterioration on the credit side.
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  Speaker 2: I think where all of this goes to me is
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  Speaker 2: this market, it's not just AI companies that are worried
• 17:27
  Speaker 2: about public debuts. Aura, the smart ring maker based in, Tucker?
• 17:34
  Speaker 2: Not Boston. San Francisco. I've done that wrong twice now,
• 17:39
  Speaker 2: so I finally got it figured out. They are based
• 17:41
  Speaker 2: in San Francisco, not Boston. But they pulled their public
• 17:45
  Speaker 2: debut out of concerns for public markets. SpaceX's debut, I
• 17:49
  Speaker 2: don't think you can look at that as a massive
• 17:51
  Speaker 2: success based on the way that went. And I don't
• 17:56
  Speaker 2: think it was a failure by any stretch, but you
• 17:58
  Speaker 2: take a look at it.
• 17:59
  Speaker 5: It's 142 a share, and I think it came out
• 18:03
  Speaker 5: around 135. So yeah, I get what you're saying on
• 18:05
  Speaker 5: that front.
• 18:06
  Speaker 2: The The market driving question to me is, does Anthropic
• 18:12
  Speaker 2: pull off this IPO?
• 18:14
  Speaker 6: I've wondered that too.
• 18:15
  Speaker 3: And how does it go?
• 18:17
  Speaker 2: Chuck and I both actually do think that it is
• 18:19
  Speaker 2: going to happen, mainly because if it doesn't happen, that
• 18:23
  Speaker 2: spells some pretty serious concerns for markets and this AI trade.
• 18:27
  Speaker 2: But just because it happens, I don't think that necessarily
• 18:31
  Speaker 2: means it goes well. And every day we are seeing
• 18:35
  Speaker 2: more and more of these stories published that make me
• 18:38
  Speaker 2: call into question just, hey, are they going to shelve
• 18:40
  Speaker 2: this thing? There were pieces yesterday about this special trust
• 18:45
  Speaker 2: that's set up to own shares, about these charitable donations
• 18:48
  Speaker 2: that they're doing, who controls the controlling interest in the company.
• 18:52
  Speaker 2: A lot of open questions that I know are being
• 18:55
  Speaker 2: floated for a reason here because everybody's learning more about
• 18:58
  Speaker 2: how this company operates as they.
• 18:59
  Speaker 3: Get closer to IPO.
• 19:01
  Speaker 2: But I think that could reverse all this sentiment that
• 19:06
  Speaker 2: we've been seeing. And don't get me wrong, we saw
• 19:08
  Speaker 2: some reversal yesterday in markets, and we're seeing some today too.
• 19:12
  Speaker 2: But if it doesn't happen, it could really be, I'm
• 19:17
  Speaker 2: not going to say nail in the coffin, but another
• 19:18
  Speaker 2: thorn in the side of this AI sentiment.
• 19:20
  Speaker 5: Yeah, June or July probably would have been a better
• 19:22
  Speaker 5: time for that IPO to go down.
• 19:24
  Speaker 2: Let's take a quick break. When we return, I mentioned
• 19:27
  Speaker 2: markets staging a bit of a rebound today. Tucker will
• 19:29
  Speaker 2: cover all that and more with Wall Street Watch next.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:47
  Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch,
• 19:52
  Speaker 1: tracking the stocks, the data, and the headlines driving markets
• 19:56
  Speaker 1: so far today right here on the Financial Exchange Radio Network.
• 19:59
  Speaker 4: Markets now in positive territory as AI concerns swirl after
• 20:03
  Speaker 4: data center startup Elise plunged 30% on their trading debut
• 20:08
  Speaker 4: in Seoul. Energy markets also in focus after Brent hit
• 20:11
  Speaker 4: a five-month high as a result of more vessel attacks.
• 20:14
  Speaker 4: Right now, the Dow is up over 1% or 595
• 20:17
  Speaker 4: points up. S & P 500 is up about two-thirds
• 20:21
  Speaker 4: of a percent or 45 points higher. NASDAQ up over
• 20:24
  Speaker 4: four-tenths of a percent or 113 points higher.
• 20:26
  Speaker 5: Russell 2000 up.
• 20:29
  Speaker 4: Over 1% 10-year treasury yield is down 5 basis points
• 20:33
  Speaker 4: at 5.085%. Crude is edging higher, trading at $ 104 a barrel,
• 20:39
  Speaker 4: while Brent is off 2%, trading at $ 107 a barrel.
• 20:45
  Speaker 4: General Motors is down 5% despite beating third quarter expectations,
• 20:49
  Speaker 4: with the Detroit automaker raised its free cash flow expectations today.
• 20:53
  Speaker 4: It narrowed its 2026 full-year guidance. GM's board also approved
• 20:57
  Speaker 4: a $ 20 billion stock buyback program. Meanwhile, shares in GE
• 21:01
  Speaker 4: Aerospace down 4% after the company's free cash flow came
• 21:05
  Speaker 4: in lower than estimates. The company also upped its full-year
• 21:09
  Speaker 4: 2026 guidance. Elsewhere, Salesforce announced an agreement to buy customer
• 21:13
  Speaker 4: engagement platform Braze for $ 5. 6 billion. Braze surging 50% on
• 21:16
  Speaker 4: that news. Steel Dynamics posted mixed third quarter results, beating
• 21:23
  Speaker 4: on revenue and earnings per share, but fell short of
• 21:26
  Speaker 4: profit margin expectations. Stock is down over half a percent.
• 21:31
  Speaker 4: And after today's closing bell, we'll see earnings from Netflix
• 21:34
  Speaker 4: and SpaceX. I'm Tucker Silva, and that is Wall Street Watch.
• 21:38
  Speaker 2: A piece from Jonathan Levine in Bloomberg, who writes a
• 21:42
  Speaker 2: lot of good pieces.
• 21:44
  Speaker 3: Corwin's bond route should make the Fed better.
• 21:47
  Speaker 2: Cautious, and I really disagree here, but I'm excited to
• 21:51
  Speaker 2: dive in. So as we talked about during the last segment,
• 21:53
  Speaker 2: Coral Weave's bonds have sold off pretty substantially to the
• 21:57
  Speaker 2: point where now debt that's maturing in the early 2030s
• 22:03
  Speaker 2: is trading with a yield to maturity of about 15%.
• 22:07
  Speaker 2: That term yield to maturity is probably confusing to a
• 22:11
  Speaker 2: lot of folks, but effectively, if you buy the bond
• 22:13
  Speaker 2: at today's prices, it's as though you're getting paid 15%
• 22:15
  Speaker 2: annualized interest because you're going to get the discount in
• 22:19
  Speaker 2: the bond price plus the interest rate. And when the
• 22:22
  Speaker 2: bond matures, if they're able to pay you back, you
• 22:24
  Speaker 2: get 100 cents on the dollar, whereas you can buy
• 22:27
  Speaker 2: it for, I don't know what price it is, but
• 22:29
  Speaker 2: something less than 100 cents on the dollar. The point
• 22:33
  Speaker 2: that Jonathan makes here is a lot of companies weren't
• 22:37
  Speaker 2: terribly impacted early on during 2022 when the Fed started
• 22:41
  Speaker 2: raising rates because like us, they had locked in low interest.
• 22:45
  Speaker 3: Rates during COVID or before for a lot of their debt.
• 22:48
  Speaker 2: But as they restart rate hikes now, they should move
• 22:53
  Speaker 2: slowly to avoid creating a quote negative spiral. And I
• 22:58
  Speaker 2: guess my point here would be if the AI bubble
• 23:01
  Speaker 2: pops resulting in a real economic slow period, it won't
• 23:06
  Speaker 2: be because of a quarter point Fed rate hike. No.
• 23:10
  Speaker 6: No.
• 23:12
  Speaker 2: That's not what drove the most recent concerns about Corweave,
• 23:15
  Speaker 2: I don't think. He seems to conclude something different. I
• 23:18
  Speaker 2: don't see a lot of evidence that, oh, yeah, because
• 23:20
  Speaker 2: the Fed hiked rates in September, suddenly everybody's worried about
• 23:24
  Speaker 2: AI business models. I think instead, people are generally concerned
• 23:28
  Speaker 2: about the AI business model, especially for neocloud data center companies.
• 23:35
  Speaker 2: And- The Fed needs to remain focused on combating inflation
• 23:39
  Speaker 2: regardless of what it does to these buildings.
• 23:40
  Speaker 5: Yeah, two different things to cover here. First, on the
• 23:43
  Speaker 5: AI side of things, there was a great piece here
• 23:47
  Speaker 5: that was done by Bloomberg, but it cited some Gartner
• 23:50
  Speaker 5: market research where basically data center owners are going to
• 23:54
  Speaker 5: need to be able to generate $ 8. 5 trillion in revenue
• 23:58
  Speaker 5: through 2030. that's on the backs of $ 3. 5 trillion being
• 24:03
  Speaker 5: spent on infrastructure to build out these data centers over
• 24:07
  Speaker 5: the next three, four, five years or so.
• 24:09
  Speaker 6: So there's this.
• 24:10
  Speaker 5: Figure out there, return on invested capital. You need to
• 24:12
  Speaker 5: make about 12% in order to get that 8.5% trillion
• 24:16
  Speaker 5: revenue versus that $ 3. 5 trillion in expense investment.
• 24:18
  Speaker 1: And so.
• 24:22
  Speaker 5: That's one side of the coin here is the AI trade.
• 24:25
  Speaker 5: It needs to execute on its own to Mike's point,
• 24:27
  Speaker 5: this idea that a quarter percent hike or a half
• 24:31
  Speaker 5: percent hike is going to impact the execution of eight
• 24:35
  Speaker 5: and a half trillion dollars of revenue or whatever number
• 24:37
  Speaker 5: you want to throw on it. Cause again, that's an
• 24:38
  Speaker 5: estimate by Gartner. That's not the story here. And secondly,
• 24:43
  Speaker 5: that's not the Fed's job to put on my Mark
• 24:45
  Speaker 5: Venditti hat here. It's two jobs of the Fed is
• 24:49
  Speaker 5: to keep inflation under control and and to ensure that
• 24:53
  Speaker 5: you have stability in the labor market.
• 24:56
  Speaker 3: They don't need to.
• 24:58
  Speaker 5: Give a crap about whether CoreWeave is going to be
• 25:01
  Speaker 5: able to pay back its debt holders. That is not
• 25:05
  Speaker 5: the focus of the Fed. they need to do what
• 25:09
  Speaker 5: they see is best for getting inflation to its long-term
• 25:13
  Speaker 5: target of 2%, which we haven't hit for a long time.
• 25:15
  Speaker 3: Now, I mean, don't get me wrong.
• 25:17
  Speaker 2: If the Fed starts to detect signs through their data
• 25:20
  Speaker 2: and their modeling that the economy is on the cusp
• 25:22
  Speaker 2: of a slowdown because of something from their interest rate policy,
• 25:27
  Speaker 2: then it's very reasonable to take a pause on your
• 25:30
  Speaker 2: rate hikes and say, yeah, we're going to wait and
• 25:32
  Speaker 2: see if this current trend plays out.
• 25:34
  Speaker 3: And you know what?
• 25:35
  Speaker 2: We just saw a month-over-month pending home sales.
• 25:39
  Speaker 3: Drop of 7.3%.
• 25:40
  Speaker 2: They might very well look at that and say, OK, yeah,
• 25:43
  Speaker 2: our policy is clearly having an effect here, and we
• 25:45
  Speaker 2: want to slow things down. But if it's not accompanied
• 25:48
  Speaker 2: by a slowdown in data center construction, which is driving
• 25:51
  Speaker 2: a lot of these higher inflation concerns, if it's not
• 25:54
  Speaker 2: paired with a slowdown in energy price climbs, which again,
• 25:59
  Speaker 2: this morning we're sitting at $ 105 a barrel nearly on
• 26:03
  Speaker 2: West Texas crude, then yeah, I think they should probably
• 26:06
  Speaker 2: ignore any of the bond routes going on in companies
• 26:09
  Speaker 2: like Corweave because it's not likely to be a problem
• 26:13
  Speaker 2: because of their own policy. And even if it were,
• 26:18
  Speaker 2: it's not going to justify a lower interest rate, I
• 26:21
  Speaker 2: don't think.
• 26:22
  Speaker 6: No, the Fed has to do what it sees best.
• 26:25
  Speaker 5: And this is why back in the post-2022 era that
• 26:30
  Speaker 5: typically when you look back at previous rate hike cycles
• 26:34
  Speaker 5: since 1965, there's.
• 26:35
  Speaker 3: Been 12 of them.
• 26:41
  Speaker 5: Eight of them have resulted in recessions. We were able
• 26:44
  Speaker 5: to dodge one back in 23.
• 26:46
  Speaker 6: Where rates went up.
• 26:47
  Speaker 5: But because of that lock in effect that Mike was
• 26:50
  Speaker 5: mentioning before, perhaps businesses were not caught in a situation
• 26:55
  Speaker 5: where they were. highly leveraged at high rates of interest.
• 26:59
  Speaker 5: But now to the point of that piece, we do
• 27:02
  Speaker 5: have corporate borrowers in a different position. But usually when
• 27:06
  Speaker 5: you have driving up borrowing costs, it slows down economic activity.
• 27:10
  Speaker 5: But again, just because that could be a byproduct of
• 27:13
  Speaker 5: rate hikes, that doesn't mean you should slow down if
• 27:17
  Speaker 5: you don't think that is the right way to go.
• 27:19
  Speaker 4: Giving assets to your children can be part of an
• 27:22
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• 27:27
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• 28:08
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• 28:20
  Speaker 1: The proceeding was paid for and the views expressed are
• 28:22
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
• 28:24
  Speaker 1: or Armstrong Advisory may contact you offering legal or investment services.
• 28:28
  Speaker 1: Cushing and Armstrong do not endorse each other and are
• 28:30
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• 28:31
  Speaker 2: Stock pickers burned by the AI boom think their moment
• 28:34
  Speaker 2: has finally arrived. That's the piece from the Wall Street Journal. Maybe,
• 28:39
  Speaker 2: but I'll tell you, the last two decades has not
• 28:41
  Speaker 2: been terribly kind to these types of stock pickers.
• 28:44
  Speaker 3: In particular, they're interviewing....
• 28:47
  Speaker 2: What you might call dividend or value investing portfolio managers
• 28:51
  Speaker 2: of different sorts. For one, a Casaletto, a portfolio manager
• 28:57
  Speaker 2: at Wellington, who has been running the Vanguard Dividend Growth Fund,
• 29:02
  Speaker 2: has been struggling with this a bit. And here's the
• 29:05
  Speaker 2: plain old answer. For the last three years, the only
• 29:07
  Speaker 2: thing that's mattered has been growth tech stocks. With brief interruptions.
• 29:14
  Speaker 6: That's right.
• 29:14
  Speaker 5: What's ironic is that Micron is in the value index,
• 29:17
  Speaker 5: so value performance on the large cap side looks really
• 29:20
  Speaker 5: awesome this year, even though Micron you wouldn't really now
• 29:25
  Speaker 5: classify as value. But bottom line, I don't think, while
• 29:28
  Speaker 5: the gist of the piece I totally understand, it has
• 29:31
  Speaker 5: been something that all of us in the investing world
• 29:34
  Speaker 5: constantly try and track. How do managers perform against.
• 29:38
  Speaker 6: The S & P 500?
• 29:38
  Speaker 1: The reason.
• 29:40
  Speaker 5: why Warren Buffett will tell you to buy an index
• 29:42
  Speaker 5: fund is it's really hard to do. But at the
• 29:45
  Speaker 5: same point in time, it's not a fair comparison to
• 29:48
  Speaker 5: compare a large cap value dividend growth manager to the
• 29:52
  Speaker 5: S & P 500. You need to compare them against
• 29:54
  Speaker 5: their counterparts. I get that some people can always have
• 29:57
  Speaker 5: the answer, well, the S & P did better. what
• 30:01
  Speaker 5: do you want out of your portfolio? What do you
• 30:03
  Speaker 5: want out of your investment strategy? If you are buying
• 30:05
  Speaker 5: dividend growth, you are buying that for cashflow purposes, for
• 30:09
  Speaker 5: generation of cashflow. The S & P 500, the yield
• 30:12
  Speaker 5: on it has shrunk significantly where I think it's sub
• 30:15
  Speaker 5: 2% now. So you just don't get the cashflow on
• 30:18
  Speaker 5: that front. So I get the general gist of it,
• 30:21
  Speaker 5: but not totally fair to do that comparison. It absolutely
• 30:25
  Speaker 5: rings true that it's really tough to beat the S
• 30:27
  Speaker 5: & P 500 if you're not overweight in tech. But
• 30:32
  Speaker 5: give the dividend guys a bit of a break.
• 30:34
  Speaker 2: Well, I mean, the reality here is, Paul, I mean,
• 30:36
  Speaker 2: you know this as well as I do. The last
• 30:38
  Speaker 2: 20 or so years has been defined by one of
• 30:41
  Speaker 2: the most dramatic differential performances in growth.
• 30:45
  Speaker 3: Versus value stocks.
• 30:46
  Speaker 6: Oh, yeah.
• 30:47
  Speaker 2: There's been almost nothing that we've ever seen like this before.
• 30:51
  Speaker 2: you go look at the 100-year history and value kept
• 30:55
  Speaker 2: up or even trounced growth in a lot of different
• 30:58
  Speaker 2: time periods. But yeah, the last decade and two decades
• 31:03
  Speaker 2: have not been defined by that type of performance.
• 31:05
  Speaker 5: No, I kind of came up with the portfolio construction
• 31:07
  Speaker 5: idea of you go large cap, mid cap, small cap,
• 31:10
  Speaker 5: and you do value and growth. And those strategies have
• 31:14
  Speaker 5: not paid off for you as well as just the
• 31:17
  Speaker 5: S & P 500 strategy. That's not to say that
• 31:19
  Speaker 5: the next 20 years looks like that, but you're definitely right.
• 31:22
  Speaker 5: The last 20, it's not been great.
• 31:24
  Speaker 3: Let's take a quick break. A lot more Financial Exchange next.
• 31:44
  Speaker 1: Your daily dose of the Financial Exchange is on Instagram.
• 31:48
  Speaker 1: Follow us for show highlights, video clips, and quick takes
• 31:51
  Speaker 1: on the day's big business stories. This is the Financial
• 31:54
  Speaker 1: Exchange Media Network.
• 32:12
  Speaker 2: General Motors has authorized a $ 20 billion.
• 32:16
  Speaker 3: Stock buyback program.
• 32:17
  Speaker 2: Their shares are down about 5% today in early trading,
• 32:21
  Speaker 2: and it's not been a stellar year for the company overall.
• 32:26
  Speaker 3: They face a few headwinds, as far as I can tell.
• 32:29
  Speaker 3: I mean, one, they, among... along with every other U.S.
• 32:33
  Speaker 2: Automaker, poured a bunch of money into battery tech for EVs,
• 32:36
  Speaker 2: and the demand just didn't show up for the products
• 32:39
  Speaker 2: that they put out during the last five years, so
• 32:41
  Speaker 2: they've needed to spend the last couple years course-correcting on that.
• 32:45
  Speaker 2: The other big piece is the competition from China, though,
• 32:48
  Speaker 2: and I want to talk more about this because I
• 32:51
  Speaker 2: think this is the real relevant story to every Western
• 32:55
  Speaker 2: automaker right now is.
• 32:59
  Speaker 2: Say what you will about, you know, the U.S. bailouts
• 33:02
  Speaker 2: of the U.S. auto manufacturers back in 08, it does
• 33:06
  Speaker 2: not even compare to the degree of subsidization that the
• 33:10
  Speaker 2: Chinese government does of Chinese automakers.
• 33:13
  Speaker 3: It's on a completely different scale.
• 33:15
  Speaker 2: And they are exporting those vehicles, which, by the way,
• 33:18
  Speaker 2: look pretty darn nice and seem like they are well-built
• 33:23
  Speaker 2: and quality vehicles by all accounts, including by the account
• 33:26
  Speaker 2: of Ford CEO Jim Farley. So they are building these
• 33:32
  Speaker 2: nice cars. We don't allow them to be sold in
• 33:34
  Speaker 2: the United States, but large swaths of Europe, Latin America,
• 33:37
  Speaker 2: Africa do.
• 33:39
  Speaker 3: And that's put U.S.
• 33:41
  Speaker 2: Automakers as well as European automakers in a place where
• 33:45
  Speaker 2: the only major market that they can actually compete to
• 33:48
  Speaker 2: a large degree is the United States.
• 33:51
  Speaker 3: Right. You go and try and sell a Nissan.
• 33:56
  Speaker 2: In Europe right now, and you're competing against these heavily
• 33:59
  Speaker 2: subsidized Chinese vehicles. And so the thing that GM faces
• 34:03
  Speaker 2: now is not only are they facing the competition that
• 34:07
  Speaker 2: they usually do, but every European automaker, every Korean automaker,
• 34:11
  Speaker 2: every Japanese automaker is saying, okay, we need to pour
• 34:13
  Speaker 2: all of our efforts into competing in the United States
• 34:16
  Speaker 2: because we know we can't compete with these Chinese subsidized
• 34:19
  Speaker 2: vehicles in places like Europe and South America. And so
• 34:22
  Speaker 2: You've now kneecapped GM and Ford's foreign businesses pretty substantially.
• 34:27
  Speaker 2: And you've added a whole lot of new competition into
• 34:29
  Speaker 2: the U.S. market from, again, not Chinese competitors, but other
• 34:34
  Speaker 2: companies that are based elsewhere that are concerned about the
• 34:37
  Speaker 2: Chinese competition and are looking to the U.S.
• 34:39
  Speaker 3: As the last remaining, I guess, competitor. insulated holdout major market.
• 34:44
  Speaker 2: I'm sure, by the way, someone can text in, I'm
• 34:46
  Speaker 2: sure there are plenty of other markets that don't allow
• 34:48
  Speaker 2: Chinese-made vehicles, but they are not of the size and
• 34:50
  Speaker 2: scale of the U.S.
• 34:51
  Speaker 3: Market.
• 34:52
  Speaker 1: Yeah.
• 34:52
  Speaker 5: The reason this piece goes into basically General Motors attributing
• 34:57
  Speaker 5: or questioning the valuation that Wall Street's putting on their stock,
• 35:00
  Speaker 5: but Mike, to your points that you just made there,
• 35:03
  Speaker 5: the competition from the Chinese markets or the Chinese vehicles
• 35:07
  Speaker 5: being infiltrated into other markets, these are some of the
• 35:10
  Speaker 5: reasons why the share prices are not doing tremendously well.
• 35:15
  Speaker 5: The other one is that you mentioned before, they took
• 35:18
  Speaker 5: a huge write-down on their EV business. I was just
• 35:20
  Speaker 5: looking back at an article from 2021, which is so
• 35:23
  Speaker 5: great to have, where they were dedicating $ 35 billion to
• 35:27
  Speaker 5: electric and self-driving vehicles through 2025. They won't sell any
• 35:32
  Speaker 5: gas-powered SUVs or light pickups after 2035. Just crazy how
• 35:37
  Speaker 5: five years can change things so much in terms of
• 35:41
  Speaker 5: the business. So there's the failed execution there. And then
• 35:43
  Speaker 5: the last reason is they're selling less cars, but just
• 35:46
  Speaker 5: selling the ones that they sell are more profitable. That's
• 35:49
  Speaker 5: not a mix that really inspires a lot of confidence
• 35:53
  Speaker 5: from your shareholders if you're leaning heavily on higher profit margins,
• 35:57
  Speaker 5: but selling less vehicles, not to mention the competition that
• 36:01
  Speaker 5: you have in other markets.
• 36:02
  Speaker 2: Well, the final piece I'll put on this, American car
• 36:04
  Speaker 2: buying habits are very short-sighted. And GM and Ford in
• 36:09
  Speaker 2: particular have spent the last few decades catering to what
• 36:15
  Speaker 2: Americans wanted, which is giant SUVs that consume quite a
• 36:20
  Speaker 2: bit of fuel. And they've made massive profits on things
• 36:25
  Speaker 2: like the F-Series trucks and the Silverados.
• 36:29
  Speaker 3: And all of these giant vehicles.
• 36:31
  Speaker 2: We're seeing now very quickly with higher gas prices how
• 36:35
  Speaker 2: quickly Americans are responding in their car buying habits. And
• 36:38
  Speaker 2: these companies don't really have much of a solution for that.
• 36:42
  Speaker 1: Right.
• 36:43
  Speaker 3: They are not building sedans to any large degree.
• 36:45
  Speaker 2: They don't have strong hybrid vehicles out there, and they've
• 36:50
  Speaker 2: given up.
• 36:51
  Speaker 3: On their EV plans.
• 36:52
  Speaker 2: So, yeah, again, maybe gas prices come tumbling in 2027,
• 36:56
  Speaker 2: and that's not a real concern. But if it does
• 36:59
  Speaker 2: stick around, you know, and we're sitting at $ 4 to
• 37:02
  Speaker 2: $ 5 gasoline for two years, I have some pretty serious
• 37:06
  Speaker 2: concerns about these business models for these two vehicles.
• 37:09
  Speaker 1: Certainly.
• 37:10
  Speaker 2: Starbucks pulled out of Boston pretty significantly, or at least
• 37:14
  Speaker 2: shuttered a number of stores in Boston.
• 37:16
  Speaker 3: They're not out of Boston.
• 37:18
  Speaker 2: It sounds like there's some swanky Boston office workers who
• 37:21
  Speaker 2: are not terribly happy about this.
• 37:23
  Speaker 5: No, because they have closed about 20 shops in the
• 37:27
  Speaker 5: greater Boston area through last year.
• 37:30
  Speaker 6: Starbucks, that was as part.
• 37:31
  Speaker 5: Of their $ 1 billion restructuring effort that the firm has
• 37:35
  Speaker 5: been trying to undergo under their new CEO to turn
• 37:39
  Speaker 5: around Starbucks. They just find themselves in an interesting position.
• 37:42
  Speaker 5: We've covered it on the show before, this idea that
• 37:44
  Speaker 5: that it was built as this sort of third place
• 37:47
  Speaker 5: between work and home. That's how Starbucks built its reputation
• 37:50
  Speaker 5: and brand over the years. I feel, and I feel
• 37:53
  Speaker 5: like many consumers feel, that it has migrated much closer
• 37:57
  Speaker 5: to a Dunkin' Donuts of kind of a high volume,
• 38:00
  Speaker 5: sort of churn out your coffee through mobile order.
• 38:03
  Speaker 6: So it'll be.
• 38:04
  Speaker 5: Interesting to see how they can potentially turn this thing around.
• 38:08
  Speaker 5: But it hasn't been so great so far.
• 38:11
  Speaker 2: Let's take a quick break. Markets are staging a rebound.
• 38:14
  Speaker 2: We got the Dow up over one and a third percent.
• 38:16
  Speaker 2: We've got a lot more to cover and a full
• 38:18
  Speaker 2: market update next year on the Financial Exchange.