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2026 Housing Market Outlook and Forecast · The Financial Exchange Show

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Speaker 1: and Mark Vandetti.
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Speaker 2: Chuck, Mark and Tucker with you, and uh, look, I gotta.
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Speaker 3: Tell you, normally year end is pretty quiet.
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Speaker 2: When we start getting these little wiggles heading into year end,
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Speaker 2: it makes my intenna perk up a little bit, only
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Speaker 2: because again just looking at recent history, and I'm not
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Speaker 2: doing anything other than that, but just as an example,
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Speaker 2: you take a look at, you know, the last several
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Speaker 2: years and the end of twenty twenty one, just as
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Speaker 2: an example, we saw a couple of wiggles in I
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Speaker 2: think it was late. We saw one in September, We
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Speaker 2: saw one in November and one in December, and each
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Speaker 2: of them were you know, like five to seven percent pullbacks.
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Speaker 2: And then twenty twenty two turned kind of ugly. And
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Speaker 2: you take a look at you know, twenty two and
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Speaker 2: the end of twenty two. Yeah, you had this rally
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Speaker 2: that started in October is where market's bottomed. There there
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Speaker 2: was a little bit of chop, but then ultimately it
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Speaker 2: was okay, we're on our way. In twenty twenty three
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Speaker 2: was all clear, no, no weird wiggles. At the end
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Speaker 2: of twenty three, at all twenty four, again a couple
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Speaker 2: of weird wiggles, one in late November one in late December.
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Speaker 3: Markets made new all time highs in January and February, but.
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Speaker 2: We're you know, wiggling the whole way, and then March
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Speaker 2: and April we're rather ugly. And so I just can't
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Speaker 2: help but think when you start to get weird stuff
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Speaker 2: happening at the end of a calendar year, and by weird,
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Speaker 2: I just mean, you know, volatility, because there are mechanical
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Speaker 2: reasons why the end of the year tends to be
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Speaker 2: less volatile, the biggest one simply being you have two
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Speaker 2: and a half fewer trading days for stuff to go wrong,
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Speaker 2: and that has all kinds of implications for volatility calculations,
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Speaker 2: you know, using the VIX, which you know focuses on
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Speaker 2: a thirty calendar day period, not trading day period. And
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Speaker 2: so when I start to see little wiggles happening at
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Speaker 2: the end of the year, it perks my intenta up
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Speaker 2: just a little bit. So today nothing big, but again
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Speaker 2: just a wiggle. You got the S ANDP off about
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Speaker 2: half percent, thirty nine points the Nasdaq again kind of
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Speaker 2: in in you know, dangerous territory down another one percent,
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Speaker 2: about two hundred and eighty points or so. And so
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Speaker 2: you've got you know, tech stocks not really able to
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Speaker 2: make new highs. And here's the problem for the last
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Speaker 2: couple of years when tech stocks have not been able
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Speaker 2: to lead, the stuff that tries to take the baton
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Speaker 2: has not been successful doing it. I know we all
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Speaker 2: want like a broad rally and everything, but today is
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Speaker 2: an example. There are one hundred and six more S
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Speaker 2: and P five hundred stocks up right now than down
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Speaker 2: right now, and the S ANDP is down thirty seven
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Speaker 2: points because gee, the big ones Oracle down five five percent,
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Speaker 2: Broadcom down five percent, and Video down three percent, Google
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Speaker 2: down two percent, Tesla down two percent. You can't rally
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Speaker 2: when you have like thirty percent of the index down
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Speaker 2: two plus percent. It's just mathematically really challenging for Chipotle
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Speaker 2: and you know, marry it to make it up like
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Speaker 2: they just they can't do it. So I think that
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Speaker 2: ultimately you've got a market right now that's chopping some wood.
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Speaker 2: And the big question is these AI data centers like
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Speaker 2: that is I don't want to say the only thing
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Speaker 2: that matters, but we've had lots of other questions the
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Speaker 2: last couple of years, and really like the AI piece.
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Speaker 2: Every time AI's gotten in trouble. We've had issues with markets.
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Speaker 4: There's a lot.
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Speaker 5: You've said this, You and Mike Armstrong have said there's
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Speaker 5: a lot hanging on AI. The economic story of the
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Speaker 5: stock market story I've never seen you know that sounds pretentious. Okay,
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Speaker 5: late nineties the bet was a little more diverse. It
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Speaker 5: was tech, but it seemed a little bit more diverse.
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Speaker 5: Everybody is hanging there, every and most ardent hope on
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Speaker 5: AI working out for economic growth, for stock returns, solving
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Speaker 5: all societies ills. I mean, you name it AI, whatever
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Speaker 5: that means to who's ever making the claim has got
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Speaker 5: a lot of heavy lifting to do.
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Speaker 2: So you've got again, stock indices off modestly today. You've
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Speaker 2: got the tenure treasury excuse me, tenure treasury is up
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Speaker 2: six basis point, no, sorry, six tensive basis point to
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Speaker 2: four point one five to five percent right now. So
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Speaker 2: you've got yields moving up again, very modestly, nothing big,
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Speaker 2: but they've been in a little bit of an up
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Speaker 2: trend for the last week or two. And so that's
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Speaker 2: also a reason why, quite honestly, I don't really buy
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Speaker 2: that like small caps and more cyclical sectors can lead
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Speaker 2: when yields are moving up because historically they just don't.
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Speaker 3: It's not how it really works.
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Speaker 2: Dollar Index up point one two percent to ninety seven
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Speaker 2: point nine one, Gold is up twenty nine forty uh
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Speaker 2: an ounce to forty three sixty one and seventy cents.
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Speaker 2: Crude oil West Texts Intermediate up eighty five cents of
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Speaker 2: barrel to fifty six twelve. The triple A national averageur
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Speaker 2: gas prices sliding another two tenths of ascent to two
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Speaker 2: ninety and five tenths at the moment. Uh, let's see.
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Speaker 2: Let's let's go right to talking about AI. Here, we've
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Speaker 2: got Micron reporting earnings after the bell today. When you
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Speaker 2: talk about Micron, they are primarily a memory the memory
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Speaker 2: chip producer, and they specialize in something called high bandwidth memory,
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Speaker 2: which is memory that is high in bandwidth.
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Speaker 3: Is it not?
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Speaker 2: That's That's what I gather tell you again, tells you
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Speaker 2: how much I know about you know the specifics of it.
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Speaker 1: Uh.
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Speaker 2: The interesting thing with Micron, memory prices have moved up
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Speaker 2: dramatically this year to the point where you're actually seeing
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Speaker 2: projections now for non AI computer sales falling next year
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Speaker 2: because memory costs have pushed the prices of PCs and
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Speaker 2: other you know, related equipment up as a result of
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Speaker 2: all this memory demand from AI. So the question for Micron,
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Speaker 2: I think is twofold, is look, what do you see,
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Speaker 2: you know, your AI business looking like? And then what
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Speaker 2: about everything else? Because that non AI computer business is
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Speaker 2: starting to come under threat because of how high memory
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Speaker 2: prices are being driven by AI spending.
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Speaker 3: So there's that.
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Speaker 5: Yeah, I'm sorry, I don't have a lot. I just
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Speaker 5: don't have anything to add here.
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Speaker 3: It's is this you big memory guy?
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Speaker 5: What do they make the RAM? I'm sorry for my ignorance.
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Speaker 5: Here do they make the RAM chips that I put
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Speaker 5: in my computer when I need to beef it up?
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Speaker 3: Is that? Basically?
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Speaker 4: Okay?
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Speaker 5: So that's the the the active memory as opposed to
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Speaker 5: the processors that do.
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Speaker 3: They are not do the tasks correct they are. They
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Speaker 3: are not a processor manufacturer.
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Speaker 5: When I tell my computer to do something, that goes
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Speaker 5: to my Intel chip or my amdcho that's the problem.
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Speaker 4: When you added add one plus one.
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Speaker 2: They are memories, hard drives, flash memory, solid state drives.
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Speaker 2: Like that's Micron's bread and butter soquating.
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Speaker 4: And I save it.
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Speaker 5: And this may not mean anything but you save an
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Speaker 5: object that gets saved in your in your RAM, your
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Speaker 5: sort of short term memory that the computer needs to
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Speaker 5: access quickly. It can't go digging around for it because
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Speaker 5: you're gonna draw on the object you just saved quickly.
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Speaker 2: And the same thing is needed in AI because obviously
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Speaker 2: you want to be able to pull out it.
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Speaker 5: So that's that's the relationship to the AI frenzy.
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Speaker 2: Yes, correct, there's a lot of memory that's needed because
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Speaker 2: you're moving an awful lot of data back and forth
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Speaker 2: in these neural networks that the AI processors use that
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Speaker 2: they make up.
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Speaker 3: Okay, uh so.
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Speaker 2: Micron actually a couple of weeks ago they have a
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Speaker 2: sub brand called Crucial, which is a horrible name, like
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Speaker 2: any like how can you just name any brand Crucial?
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Speaker 2: That just sounds like kind of pretentious. They actually announced
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Speaker 2: that their consumer facing brand they were halting sales of
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Speaker 2: that next year. They're closing the brand down because they
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Speaker 2: don't have enough stuff to sell anymore because AI is
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Speaker 2: taking all the volume.
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Speaker 3: Let's take a quick break.
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Speaker 2: Mike Simonson, chief economistic Compass, joins us right after this,
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Speaker 2: talking about the twenty twenty six housing market outlook.
9:19
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Speaker 2: As promised from now joined by Mike Simonson. He is
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Speaker 2: the chief economist at Compass, who recently published their twenty
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Speaker 2: twenty six housing market.
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Speaker 3: Outlook and Forecast. Mike, I appreciate you joining us today.
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Speaker 3: How you doing.
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Speaker 6: Jack's always great to be.
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Speaker 3: Here, absolutely, Mike, can you give our listeners a quick
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Speaker 3: summary of Let's talk home prices next year, What are
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Speaker 3: expectations for kind of the range that we could fall in.
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Speaker 6: So we're expecting home prices nationally to be pretty close
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Speaker 6: to flat next year, up maybe just half a percent
10:43
Speaker 6: across the country on average. That's down from recent pace
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Speaker 6: of four percent or five percent or even much more
10:53
Speaker 6: a few years ago. So the price expectations are really
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Speaker 6: flat for the coming year.
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Speaker 2: Is this a continuation of the inventory growth story that
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Speaker 2: we've seen this year or is there something else afoot?
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Speaker 6: No, that's really it. We've had inventory growth for three
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Speaker 6: almost four straight years now, and there's a lot more
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Speaker 6: homes available on the country as a whole. That varies locally,
11:22
Speaker 6: but because there are more homes available across the country,
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Speaker 6: the price implications are starting to be more national. So
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Speaker 6: even though inventory is tight in the Northeast and prices
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Speaker 6: are holding up better in the Northeast than say Florida
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Speaker 6: across the Sunbelt, the inventory is ample sufficiently big that
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Speaker 6: there are no upward pressures on prices really across the country.
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Speaker 3: The inventory growth that we've seen throughout the Southeast now
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Speaker 3: over to the south Northwest and the West Coast, is
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Speaker 3: that inventory growth expected to come to the Midwest and
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Speaker 3: Northeast over the next year or two, or are there
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Speaker 3: other factors that will prevent it from happening.
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Speaker 6: There is a little bit of inventory growth finally happening. So,
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Speaker 6: for example, in the New York Tri state area is
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Speaker 6: about ten percent more homes on the market now than
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Speaker 6: a year ago, So a little bit of that growth
12:24
Speaker 6: is happening. It is in general, we're still very very
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Speaker 6: restricted mobility. In other words, we're still not doing much
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Speaker 6: of the north to south move where because hiring is
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Speaker 6: really slow. We are not, for example, quitting our job
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Speaker 6: in Connecticut to move to Orlando to buy a home
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Speaker 6: and get a new job in Orlanta. We're not doing
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Speaker 6: that move nearly as much. And therefore inventory stays tight
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Speaker 6: in the Northeast and Midwest and is still growing in
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Speaker 6: the South. So that trend is still basic underway. If
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Speaker 6: we're lucky this year and maybe lower interest rates help
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Speaker 6: spur corporate hiring, maybe that starts that mobility starts to
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Speaker 6: move up. We've been delaying those moves for four years now,
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Speaker 6: so maybe that starts to loosen up a little bit.
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Speaker 1: Mike.
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Speaker 2: When we look at the southeast and southwest, this is
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Speaker 2: the area of the country that's seen, you know, pretty
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Speaker 2: robust inventory growth. It's also the area of the country
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Speaker 2: that tends to have the most construction. Is it a
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Speaker 2: fair read through that if that if builders are now
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Speaker 2: forced to compete with more inventory, they're going to be
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Speaker 2: coming under more pressure.
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Speaker 6: Yeah, I think that's that's true. Builders have had a
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Speaker 6: real advantage for several years in terms of pricing and
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Speaker 6: in terms of interest rates buydowns, and that appears to
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Speaker 6: be softening a little bit because there is enough existing
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Speaker 6: supply on the market that price competition can go back
13:57
Speaker 6: and forth. You have the the trade off. So in
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Speaker 6: the across the Sun Belt, we have ample inventory all
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Speaker 6: the way across any of those those markets like Phoenix
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Speaker 6: or Denver, or the Texas markets across Florida and Georgia,
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Speaker 6: like the ample inventory across the Sun Belt, such that
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Speaker 6: the that you can see those pressures happening to across
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Speaker 6: all Now, there's nothing in the data that says massive
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Speaker 6: price declines, but the flat and slightly down in in
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Speaker 6: some markets down pretty notably.
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Speaker 3: Is common.
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Speaker 2: When we look at sales volume. Historically, I've always been
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Speaker 2: told inventory leads to sales, and that's kind of what
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Speaker 2: we've seen in general, the last couple of years, despite
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Speaker 2: higher inventory, sales has kind of been stuck at this
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Speaker 2: you know, four million annual unit pace for existing home sales.
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Speaker 2: Is twenty six of the year that we finally start
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Speaker 2: to see a little bit of a tick up in
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Speaker 2: sales volume.
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Speaker 3: Yeah, we think.
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Speaker 1: So.
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Speaker 6: We look at twenty twenty six as really the start
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Speaker 6: of the next phase of the housing market. So the
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Speaker 6: last phase, the last era, has been the last four years,
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Speaker 6: home sales have been very slow, stuck around four million
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Speaker 6: deep freeze, and home prices have pushed relentlessly higher, so
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Speaker 6: affordability has been getting worse, sort of intractably worse. What
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Speaker 6: we're seeing for twenty twenty six is that inventory is
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Speaker 6: now ample enough that sales can increase. So, for example,
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Speaker 6: if inventory increases by ten percent in the New York
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Speaker 6: metro area, that means sales can increase in that area.
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Speaker 6: And inventory is already higher in Florida, and the weekly
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Speaker 6: pending sales numbers of watching the homes going into contract
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Speaker 6: each week in Florida are up about ten or fifteen
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Speaker 6: percent each week now over twenty twenty four. So that's
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Speaker 6: partly a function of having more homes on the market.
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Speaker 6: So we can see twenty twenty six as maybe a
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Speaker 6: four or five percent growth from say four point one
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Speaker 6: million pace to four point two five million pace. Not
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Speaker 6: not a massive growth, but growth across the country, and
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Speaker 6: that's encouraging for the industry.
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Speaker 3: Mike.
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Speaker 2: When we go through different publications out there, inevitably I
16:24
Speaker 2: come across something that says, oh, foreclosures are going up,
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Speaker 2: and you know, this is a problem. And I tell
16:30
Speaker 2: our listeners, look, it's it's off a very low baseline rate,
16:34
Speaker 2: and this isn't something that's going to be the proximate
16:36
Speaker 2: cause of any real problem for you, someone who's actually
16:39
Speaker 2: in this industry and understands way better than I do.
16:42
Speaker 2: Is that a fair view to have? Or are there
16:45
Speaker 2: actually problems building on the foreclosure side of things?
16:49
Speaker 6: You're going to hear in twenty twenty six. I think
16:52
Speaker 6: a lot of headlines about foreclosures increasing in in new
16:57
Speaker 6: highs or more and foreclosures, and and you're going to
17:01
Speaker 6: hear those headlines, and I think your perspective is exactly Redick.
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Speaker 6: It's like those we still have very few people who
17:09
Speaker 6: are of any amount of distress on their mortgage.
17:12
Speaker 3: We still have.
17:15
Speaker 6: Most of the country has ultra cheap mortgages. But as
17:19
Speaker 6: we go on, there are now ten million people who
17:23
Speaker 6: have mortgages over six percent, and those people, when you
17:28
Speaker 6: lose your job, are much more likely to go into
17:31
Speaker 6: a distressed scenario than if you have a rate under
17:35
Speaker 6: three percent, and so there are more people so that
17:39
Speaker 6: you can imagine that as for example, the employment rate
17:44
Speaker 6: deteriorates and we get a weakening jobs market, which is
17:48
Speaker 6: currently seems to be underway, that that would result in
17:52
Speaker 6: some of those folks having more more foreclosure process, more delinquency,
17:58
Speaker 6: and those metrics we should expect them to climb. For
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Speaker 6: the most part, it's it is isolated parts of the market.
18:06
Speaker 6: FHA loans where you have very low down payments for
18:09
Speaker 6: ex ad lower income qualifications, those have elevated levels like
18:15
Speaker 6: ten percent of of those borrowers are in some sort
18:19
Speaker 6: of distress, but that's fifteen percent of the market, So
18:22
Speaker 6: it's like one percent of borrowers are in that in
18:27
Speaker 6: that any any form of distress. It's rising, but it's
18:31
Speaker 6: not that much.
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Speaker 2: Very good Mike, appreciate you joining us as always great
18:37
Speaker 2: information for our listeners. Hope you have a great finish
18:40
Speaker 2: to the year and look forward to chatting with you
18:42
Speaker 2: in twenty twenty six.
18:44
Speaker 6: Thanks check look forward to it.
18:45
Speaker 2: That is Mike Simonson, the chief economist at Compass, talking
18:49
Speaker 2: about their twenty twenty six housing market outlook and forecast.
18:53
Speaker 2: As we head to the bottom of the hour, Dow
18:55
Speaker 2: Jones Industrial Average is off forty points. The S and
18:58
Speaker 2: P also off forty points. But hey, the S Andp's
19:01
Speaker 2: off half percent. The Dow is off a tenth of
19:02
Speaker 2: a percent. NASDAK is off north of two hundred and
19:06
Speaker 2: twenty points right now, about one percent, and so you've
19:09
Speaker 2: got a slide in markets today.
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Speaker 3: This would be four down days in a row, but
19:14
Speaker 3: still only.
19:15
Speaker 2: A couple percentage points off all time highs from last
19:19
Speaker 2: week's Thursday close.
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Speaker 3: So that's where we stand right now. Quick break. When
19:24
Speaker 3: we come back, we've got trivia after this.
19:32
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Speaker 1: look at what's moving markets so far today right here
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Speaker 1: on the Financial Exchange Radio Network.
19:58
Speaker 3: The markets are now selling off with yet another pullback
20:01
Speaker 3: in the tech sector, leaving the SMP five hundred on pace.
20:04
Speaker 3: For its fourth straight losing session. Right now, the Dow
20:10
Speaker 3: is off two tenths of one percent or one hundred
20:12
Speaker 3: and one points lower, SMP five hundred down over three
20:15
Speaker 3: quarters of a percent or fifty three points lower, Nasdaq
20:19
Speaker 3: selling off one point two percent or two hundred and
20:22
Speaker 3: eighty seven points. RUSSA two thousand is down four tenths
20:25
Speaker 3: of a percent. Ten Your Treasreel is flat at four
20:28
Speaker 3: point one five to seven percent, and crude oil up
20:31
Speaker 3: nearly two percent higher, trading a fifty six dollars and
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Speaker 3: twenty six cents a barrel. Warner Brothers Discovery Board unanimously
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Speaker 3: and Paramount shairs falling nearly five percent. Meanwhile, according to
20:59
Speaker 3: several outland It's Open AI is in discussions with Amazon
21:02
Speaker 3: about a potential ten billion dollar investment in agreement to
21:06
Speaker 3: use its AI chips. Amazon stock is up over half
21:09
Speaker 3: or percent, Oracles stock is sliding almost five percent falling
21:14
Speaker 3: report from the Financial Times that Blue Owl Capital won't
21:18
Speaker 3: back Oracles ten billion dollar data center for Open AI. Elsewhere,
21:22
Speaker 3: home builder Lenar reported lower than expected earnings as the
21:26
Speaker 3: housing market remained stagnant. Lenarstock is down six percent, and
21:31
Speaker 3: after today's closing bell, we'll see more tech earnings from
21:34
Speaker 3: Micron Technology. I'm Tucker Silva and that is Wall Street
21:38
Speaker 3: Watch and we get to do trivia. So let's get
21:40
Speaker 3: to it. And we're going to continue our Christmas movie
21:44
Speaker 3: trivia theme here up up to the holiday. So here
21:47
Speaker 3: we go. In nineteen sixty four's Rudolph the Red Nose reindeer,
21:51
Speaker 3: Hermie stood out from his fellow elves because he did
21:55
Speaker 3: not like making toys. He had another profession in mind.
22:00
Speaker 3: Trivia question today, what profession did hermit the elf wish
22:03
Speaker 3: he had? Once again, what profession did Hermit the elf
22:07
Speaker 3: wish he had? Be the seventh person today text us
22:11
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22:14
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22:17
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22:20
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22:27
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22:31
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22:35
Speaker 2: The latest in UH what is going to be a
22:37
Speaker 2: fascinating media story to follow in twenty twenty six UH
22:43
Speaker 2: is Warner Brothers rejecting or recommending that shareholders reject Paramount's
22:48
Speaker 2: unsolicited bid for the company, saying that they believe the
22:52
Speaker 2: Netflix proposal is superior. In their recommendation, they basically say
22:59
Speaker 2: that the Paramount offer relies on an awful lot of debt,
23:03
Speaker 2: a lot of different parties, and basically has a whole
23:07
Speaker 2: bunch of things that may prevent it from closing in
23:09
Speaker 2: a rapid fashion to satisfaction of shareholders, and that Netflix
23:14
Speaker 2: comes with a stronger balance sheet, a larger market cap,
23:19
Speaker 2: and a bunch of other features that would make it
23:21
Speaker 2: a preferred buyer for the company. So now we're in,
23:25
Speaker 2: we'll get into, you know, kind of the next leg,
23:27
Speaker 2: which is does Paramount come back and say, oh, in fact,
23:31
Speaker 2: you know, instead of doing thirty dollars a share, we'll
23:33
Speaker 2: do thirty two, and do we see you know, Netflix
23:36
Speaker 2: then try to counter with the higher offer, or you know,
23:40
Speaker 2: do these problems still persist. But this is, you know,
23:43
Speaker 2: something that I don't think is just going to go
23:44
Speaker 2: quietly over the next week or two.
23:47
Speaker 5: So who's really interested in this? Netflix subscribers because of
23:50
Speaker 5: the new content if they simply combine it with their
23:54
Speaker 5: existing content.
23:56
Speaker 3: Or like, who cares? Do you mean? Like from a
23:58
Speaker 3: content perspective.
23:59
Speaker 4: Well, who care? Like the story?
24:01
Speaker 5: If you follow business news, I guess this is you know,
24:03
Speaker 5: they're not big companies And is it an interesting industry? Well,
24:07
Speaker 5: I guess we all watch, we all consume this stuff.
24:10
Speaker 5: But who's you know, like whose life will change depending
24:13
Speaker 5: on who what suitor is successful? Other than the principles involved.
24:19
Speaker 2: So there's an interesting question to ask on this, which
24:22
Speaker 2: is is the company that loses the bidding for this
24:26
Speaker 2: actually going to be in a better spot? And the
24:30
Speaker 2: only reason that I ask that is and I think
24:34
Speaker 2: I have the answer, but I'm going to get there
24:36
Speaker 2: kind of round about fashion the weave. Warner Brothers has
24:40
Speaker 2: been sold a.
24:41
Speaker 3: Couple times in the last decade.
24:42
Speaker 2: Now has it worked out well for either of the
24:47
Speaker 2: companies that bought them? The answer is no, there's a
24:49
Speaker 2: reason why they're on the market again. Now, granted we
24:53
Speaker 2: can look at AT and T and at the time. Again,
24:57
Speaker 2: Tucker can pull the beta max or whatever it is
24:59
Speaker 2: the we store the shows on and we can pull that,
25:04
Speaker 2: and you'll hear us saying, yeah, this seems like a
25:07
Speaker 2: bad fit. A bunch of basically utility operators trying to
25:12
Speaker 2: buy you know, HBO is like this crown creative jewel
25:16
Speaker 2: doesn't seem like a good fit. And sure enough, like
25:18
Speaker 2: it ended up having to be unwound a couple of
25:21
Speaker 2: years later, same thing happens. Okay, Like you go through
25:24
Speaker 2: this again. I guess where I come to on this,
25:29
Speaker 2: to a certain extent is look, if this company were
25:33
Speaker 2: so valuable, how come it can't generate enough cash flow
25:38
Speaker 2: and profit to cover the deal and to keep its
25:41
Speaker 2: acquirer wanting to.
25:43
Speaker 3: Own it longer term?
25:45
Speaker 2: Because even if you make the argument that AT and
25:47
Speaker 2: T paid too much for it, if the company is
25:51
Speaker 2: that good, they'd be able to figure out, okay, like,
25:55
Speaker 2: we can make this work because we still want to
25:57
Speaker 2: own this long term, Like we don't want to sell
25:59
Speaker 2: that asset off.
26:01
Speaker 3: So why have they been sold off twice? Now? Isn't
26:05
Speaker 3: that an interesting question?
26:07
Speaker 4: It's it's alluring.
26:08
Speaker 5: Like you said, maybe content isn't king Well, it depends
26:13
Speaker 5: on the opportunity cost, what did what was? What else
26:16
Speaker 5: could AT and T have done with their cap I
26:18
Speaker 5: guess my point is nothing.
26:19
Speaker 3: This is not a cheap deal that is being taught.
26:21
Speaker 2: I mean, we're talking about an eighty to one hundred
26:23
Speaker 2: billion dollar deal, and how do you make that money back?
26:29
Speaker 2: You know that you look at the deals that have
26:30
Speaker 2: worked out in the media space. It's Disney buying Star
26:34
Speaker 2: Wars for four billion dollars just because George Lucas was like,
26:38
Speaker 2: I've had.
26:38
Speaker 3: It, I'm out.
26:40
Speaker 2: No one liked my prequels, even though in hindsight a
26:42
Speaker 2: couple of them fare better upon you know, reviewed watching
26:45
Speaker 2: twenty years later.
26:47
Speaker 4: Not as easy as it looks.
26:48
Speaker 3: But like you know, this is.
26:50
Speaker 2: Something where when you're paying eighty to one hundred billion
26:56
Speaker 2: dollars for a media company, how do you make that
27:01
Speaker 2: money back? Like it's it's that's a lot of coin
27:08
Speaker 2: to put out there. I mean to put this in perspective.
27:11
Speaker 2: If we look at Netflix, bless you. If we look
27:15
Speaker 2: at Netflix and their financials right now, and you say, okay,
27:22
Speaker 2: their revenue for the last year was forty three billion dollars,
27:28
Speaker 2: Warner Brothers Discovery. You pull up their financials. Their revenue
27:32
Speaker 2: for the last year was thirty eight billion dollars. How
27:37
Speaker 2: am I going to make my money back on this
27:41
Speaker 2: if their revenue is half of what I'm spending.
27:47
Speaker 3: Not their their earnings their their earnings were three hundred
27:50
Speaker 3: and fifty six.
27:50
Speaker 2: Million dollars was their net income for the last twelve months.
27:55
Speaker 2: And I'm going to pay seventy to one hundred billion
27:59
Speaker 2: dollars for this? How do I make that back?
28:04
Speaker 1: Well?
28:04
Speaker 4: Over, how long does it take to make it back?
28:06
Speaker 2: Well, I liked to in my lifetime, but the math
28:10
Speaker 2: doesn't work out if we're still you know, so it's okay,
28:12
Speaker 2: how much can I slim this down? And how much
28:14
Speaker 2: can I you know, repackage these assets is what you
28:16
Speaker 2: get into. But I don't know that's It's a tough
28:21
Speaker 2: one in that media space that is evolving rapidly, and
28:25
Speaker 2: as Netflix's own Read Hastings has said, multiple times, the
28:29
Speaker 2: biggest competition that we face isn't from other movie studios
28:32
Speaker 2: or other TV studios. It's from gaming, It's from TikTok,
28:37
Speaker 2: it's from all these other things pulling at your eyeballs
28:41
Speaker 2: and is buying Warner Brothers Discovery actually in the best
28:47
Speaker 2: interest of either of these companies at this price, I
28:51
Speaker 2: gotta be honest. That's the question that I'll ask, Like,
28:53
Speaker 2: is the loser going to actually make out better? Is
28:56
Speaker 2: this an example of the winner's curse?
28:57
Speaker 4: What are they intended for this deal? Yeah?
28:59
Speaker 5: What are they intended to do with it? And how
29:02
Speaker 5: does that strike you guys as customers? Are they just
29:04
Speaker 5: going to add the content and leave the fee the
29:07
Speaker 5: same for the monthly service?
29:09
Speaker 3: I mean, if I were a media exec.
29:13
Speaker 2: I'm not, and I don't really know anything about it,
29:16
Speaker 2: but I like to pretend I do. Tucker, let me
29:19
Speaker 2: run this by you. Sure, let's say that I'm Netflix. Okay,
29:23
Speaker 2: I'm going to absorb most of the Warner Brothers Discovery
29:27
Speaker 2: content right into Netflix, but I'm going to keep HBO
29:32
Speaker 2: as a separate outlet from my premium content, and I'm
29:36
Speaker 2: going to put it on that because then I can
29:40
Speaker 2: charge you once for Netflix and for the people that
29:43
Speaker 2: want that highbrow stuff you'll pay for HBO.
29:47
Speaker 3: You will, And that's a great brand from a money perspective. Yeah,
29:53
Speaker 3: that's probably the way they'll go. But if I want
29:56
Speaker 3: to please the consumer, I praising the consumer. That's so
29:59
Speaker 3: nineteen that's so nineteen fifty seven. I would just have
30:02
Speaker 3: a completely separate section on Netflix for HBO, kind of
30:07
Speaker 3: similar to what Disney Plus does. If you go into
30:11
Speaker 3: Disney Plus, they have a separate section for nat Geo
30:14
Speaker 3: or Pixar or go down the list. I mean, that's
30:19
Speaker 3: that's what I would love as a consumer. But you're
30:21
Speaker 3: probably right, it's not gonna go that way because they'll
30:24
Speaker 3: just get more money if they leave HBO as is.
30:27
Speaker 2: And Plus then you can also say, hey, Netflix is
30:31
Speaker 2: what what's Netflix now? Like fifteen dollars seventeen dollars.
30:33
Speaker 3: For I think it's like fifteen ninety nine a month,
30:37
Speaker 3: So you got fifteen ninety nine there, but you've got
30:40
Speaker 3: seventeen ninety nine on HBO. But if you bundle, we'll
30:44
Speaker 3: do it for twenty five. And that's more attractive for
30:48
Speaker 3: a steeper discount for the consumer. If it's twenty ninety
30:51
Speaker 3: nine for HBO and Netflix, but they're still getting next
30:54
Speaker 3: to eight dollars and more subscribers. Like that's that's where
30:57
Speaker 3: I think we're going.
30:58
Speaker 2: Yeah, in any case, this is gonna be an exciting
31:03
Speaker 2: one again, As Mark said, like these are not huge companies.
31:06
Speaker 3: They're they're big, but they're not huge.
31:09
Speaker 2: But it's stuff that we see every day, you know,
31:12
Speaker 2: in our in our lives, and so we understand more
31:15
Speaker 2: about this than like a merger of you know, to
31:18
Speaker 2: copper producers.
31:19
Speaker 5: And the Ellisons have come upon the scene and ai
31:24
Speaker 5: and dramatic fact like in the past year a couple
31:28
Speaker 5: of months. Yeah, year, all of a sudden, the Ellisons
31:30
Speaker 5: are taking over the world. So it's an interesting, I
31:33
Speaker 5: guess story from that point of view. Of course, they're
31:35
Speaker 5: getting overextended. There's a story this morning about a private
31:39
Speaker 5: credit manager pulling funding for an Oracle data center. It's
31:43
Speaker 5: becoming the whole thing dramatic.
31:46
Speaker 3: I did then see that Elison?
31:47
Speaker 2: Larry Ellison said, yeah, actually we decided we didn't want
31:50
Speaker 2: to work with them, so it's you can't fire me.
31:52
Speaker 3: I quit.
31:54
Speaker 2: Okay, fine, you know, in any case, let's take a
31:58
Speaker 2: quick break and when we come back, let's do a
32:01
Speaker 2: little bit of stack roulettes.
32:02
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33:15
Speaker 3: Trivia question today was what profession did hermity elf wish
33:18
Speaker 3: he had In Rudolph the red nose reindeer that would
33:21
Speaker 3: of course be a dentist. We all know that Mark
33:24
Speaker 3: from Manchester, New Hampshire is our winner today taking on
33:26
Speaker 3: the Financial Exchange Show t shirt. Congrats to Mark and
33:29
Speaker 3: we play trivia every day here on the Financial Exchange.
33:32
Speaker 3: See complete contest rules at Financial Exchange Show dot com. Mark,
33:36
Speaker 3: What do you got for stack Roulex?
33:37
Speaker 5: I thought I should elaborate on what we closed out with.
33:40
Speaker 5: In the last segment I mentioned the story first reported
33:42
Speaker 5: by the Financial Times about Blue Owl Capital, which is
33:45
Speaker 5: providing a lot of funding for data centers to Oracles.
33:49
Speaker 5: Specifically in this context, the story as as follows. I'll
33:52
Speaker 5: just read briefly from the Financial Times, Oracle's largest data
33:56
Speaker 5: center partner, that's Blue Owl Capital will not back the
33:59
Speaker 5: ft pointed this morning. Since all the media outlets have
34:02
Speaker 5: picked this up, you may have heard it already not
34:04
Speaker 5: back to will not back a ten billion dollar deal
34:07
Speaker 5: for its next facility. But hard to read into this?
34:10
Speaker 5: Are they just getting better terms from somebody else? There
34:13
Speaker 5: is Blue Owl realizing that some of this might be
34:17
Speaker 5: overhyped and they don't want to get overextended. Hard to
34:20
Speaker 5: know what, if anything to conclude from this.
34:22
Speaker 2: For me, I think what's interesting is that they had
34:25
Speaker 2: previously committed to it and now are no longer committed
34:29
Speaker 2: to it. And to me that comes off as, hey,
34:35
Speaker 2: we've got a lot of balls in this court already,
34:38
Speaker 2: let's maybe not throw another one in and.
34:41
Speaker 3: See how things go for a little bit.
34:43
Speaker 2: And this is one of the like un I think
34:48
Speaker 2: untalked about undiscussed risks for next year is Look, when
34:51
Speaker 2: we talk about all this capex, the money has to
34:53
Speaker 2: come from somewhere, and a lot of it's been borrowing,
34:56
Speaker 2: where like you need to keep wrangling up increasing f
35:00
Speaker 2: in order to make this work because the money just
35:03
Speaker 2: isn't there from operations, especially when you're talking open Ai
35:06
Speaker 2: and Oracle, they don't have cash flow from operations to
35:10
Speaker 2: fund this. Oracle's cash flow was what negative ten billion
35:14
Speaker 2: dollars for I want to make sure I get this right.
35:17
Speaker 2: If it's the last year or last quarter, so let
35:21
Speaker 2: me just get this right free cash fo Yeah, negative
35:23
Speaker 2: thirteen billion dollars for the last year. Oracle cannot pay
35:29
Speaker 2: for this exponential increase in capex with their own money.
35:35
Speaker 2: They have to borrow it, which means that you need
35:38
Speaker 2: an exponentially increasing source of funds for them to borrow
35:42
Speaker 2: from in order to do so, that's a real risk
35:45
Speaker 2: that's out there because there's not just this limitless source
35:48
Speaker 2: of funds.
35:49
Speaker 3: It's I'm a big track and field.
35:52
Speaker 2: Guy, just because my my, my dad was a big
35:54
Speaker 2: track guy, like all through you know, his life and everything,
35:58
Speaker 2: and like we would have you know, track and field
36:00
Speaker 2: news would be what's sitting on the back of our
36:01
Speaker 2: toilet and you know, the bathrooms in our house, and
36:03
Speaker 2: I'm reading through like world record times for you know,
36:05
Speaker 2: the five thousand meters. So the analogy I make is, look,
36:10
Speaker 2: if you start off running, it's pretty easy for you
36:14
Speaker 2: to say, hey, I'm going to improve my mile time
36:17
Speaker 2: from fifteen minutes to fourteen minutes. It's a little harder
36:20
Speaker 2: to go from fourteen to thirteen, and a little harder
36:23
Speaker 2: to go from thirteen to twelve. By the time you're
36:25
Speaker 2: trying to go from seven to six, it's pretty hard.
36:28
Speaker 2: By the time you're trying to go from six to five,
36:30
Speaker 2: it's almost impossible, and basically no one can improve from
36:33
Speaker 2: five to four.
36:34
Speaker 3: It gets exponentially harder.
36:36
Speaker 2: All this capex that these companies have been doing, they've
36:40
Speaker 2: basically gone from running ten minute miles to seven minute miles,
36:44
Speaker 2: and now they're trying to get from seven down to four.
36:48
Speaker 2: Do you have like the Actually in this case, it's
36:50
Speaker 2: do you have the literal energy to be able to
36:54
Speaker 2: do that, cause you've got to build you know, your
36:58
Speaker 2: power plants and your energy supply addition to actually the facilities.
37:02
Speaker 2: So that's that's kind of where we're where we are
37:05
Speaker 2: right now on this stuff. And I don't know the
37:07
Speaker 2: answer to it, but I know that it gets harder
37:09
Speaker 2: and harder to run faster the faster you've already run.
37:13
Speaker 2: It's just, uh, it's physics in that case, or physiology
37:16
Speaker 2: in that case, but in this case, it's just basic math.
37:20
Speaker 2: There's only so much money out there. There's a reason
37:23
Speaker 2: why we're not called the United States of General Electric
37:28
Speaker 2: It's because Jack Welts tried this over a twenty year
37:31
Speaker 2: period and it didn't work. Like, there's only so much
37:33
Speaker 2: money and so many people who need you know, what
37:37
Speaker 2: GE was selling at the time.
37:38
Speaker 5: It's a much more concentrated gambit though it is gam it,
37:41
Speaker 5: maybe it.
37:42
Speaker 3: Is, but it's it's got shades of like the GE
37:45
Speaker 3: stuff in it. Now with the financial machinations and everything
37:49
Speaker 3: we do have like four or five different bubbles combined
37:52
Speaker 3: into one. But the best way I've seen this described recently,
37:55
Speaker 3: it's a turduccan of risk.
37:58
Speaker 4: I'm not familiar with the word tur ducan.
38:00
Speaker 3: You take a chicken, a turkey, and a duck mix
38:03
Speaker 3: them together to make like.
38:04
Speaker 4: Now, I'm not a shame that it's a.
38:06
Speaker 2: Turd ducan of risk is kind of how I've heard
38:09
Speaker 2: it explained. Let's take a quick break for the rest
38:12
Speaker 2: of the day, but.
38:13
Speaker 3: We're gonna be back tomorrow.
38:14
Speaker 2: We'll see you that on the Financial Exchange