Twelve Rules for Riding a Bubble With Jeff deGraaf, Micron and Sandisk (Finally) Pull Back, Housing Stocks Crash

I'm telling you right now there's greatness in the air. This is going to be one of those shows. How do you feel? I smell it. Reeks. The Knicks in four. The team is resting up. For the next round, whoever we're going to play. I'm starting to pick maybe Cleveland. What about you? Nope. I'm not thinking so. Nope. All right. Ladies and gentlemen, welcome to an all new edition of What Are Your Thoughts? If it's Tuesday night and it's 5 p.m. in the East, that means it's time to crush some tickers. And we have a lot to go over tonight. I'm super excited to have the live chat with us here. I want to say a couple of hellos. I see C. Paul Breezy in the chat. What up, Tuesday afternoon, Pounders? I like that. Georgie's here. Who else is here? Michaels 2502. Taking care of business. Loco is here. I mean, all the pounders. I'm just scrolling through. Everybody's here. Everybody's here pretty much. Everybody that we need for the live. Appreciate you guys. Random trends checking in from Portugal. That is flames. I appreciate that. Good to see you. Sam Smith says Cleveland in six against y'all. Yeah, I doubt it. I don't think so. All right. The whole gang is here. Guys, thank you so much for joining us in the live chat. We have a sponsor tonight. We're going to talk about Betterment. Michael, take it away. That's right, Josh. Every REA knows attention. You don't want to turn people away. You don't want to require higher minimums. And you want to help clients who are just getting started because that's where the long-term relationship begins. But here's the truth. Those simple accounts, not so simple. They take a lot of work, account opening, trading, rebalancing. And before long, Your staff and back office are underwater and trying to stay afloat. That's why established REAs are turning to Betterment Advisor Solutions. It's the platform built for segmenting your book and streamlining those smaller and simpler accounts. The onboarding experience is automated and paperless. 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Whether investors are seeking high-quality, AAA-rated CLOs for lower volatility exposure, higher income diversified across various securitized sectors, or perhaps agency MBS exposure as part of their core, Janice Henderson seeks to offer a variety of securitized solutions. Janice Henderson Investors, investing in a brighter future together. Learn more at JaniceHederson.com slash securitized markets. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principle and fluctuation of value. I think the market environment may have changed or maybe in the process of change. I do. What do you think? What do you think about it? Who could it be? Let's get the door. Neil deGrasse. Oh, my God. Gentlemen. Neil deGraph Tyson. Neil deGraph Dutta. Let's go. Ladies and gentlemen, the legendary, legendary technician, Jeff deGraph of Renaissance Macro, a.k.a. Ren Mac, in the house. I'm just watching the reaction in the live chat, Jeff. People are going wild for this. People are very excited. Had I not known better, I thought that was an introduction to Mr. Rogers. That sounded exactly like what I would expect. Mr. McFarlane at the door or whatever his name was. You want to laugh? We tested, Duncan and I, probably 10 different doorbells before we settled on that one. It's classic. It's a classic for sure. It's like a 1970s, almost like a sitcom doorbell. Anyway, thanks for stopping by. It's so funny that you stopped by because we were about to discuss your incredible call that you made over the weekend and do a couple of your charts. It's just this amazing, coincidental thing. I can't believe you're here. Yeah, but I love it. But I love it. All right. I thought what you said over the weekend was the right reminder for active traders, for investors, just to kind of set the table for what typically happens after these types of parabolic spikes, like what we're seeing with Korean stocks, U.S. semiconductors, specifically memory stocks. And I want to pop up your chart, have you explain it, because you say the Kospi has entered bubble zone. And of course, this is going up due to the insatiable demand for memory. And memory chip makers are a really big part of the Korean stock market. Yeah. I mean, they're between Samsung and SK Hynix, it's 43%, right? So if you compare that to where it was, say, in 2000, it was closer to 18% or 20%, so actually less than half of where it is today. We've got a very simple rule, Josh, and it's one that we developed. And I will just say for your listeners and for you guys, too, I've been in this business for 36 years. I've stolen math from communication science. I've stolen it from astrophysicists and escape velocity. There's a lot of different formulas that we've tried to use to measure when something is up so much that it's actually not good and you want to be a seller. And it's incredibly hard to find. Usually up is good, and you just kind of have to grin and bear it until it tells you differently. The one thing that we did find, though, particularly when it comes to indices, so it's something that's diversified. It doesn't apply to a single stock. But something that's diversified is if you double the value of that index over a two-year period or less, you're usually in a pretty good definition for a bubble. Now, let's be very careful on what that means. It doesn't mean that we identify a bubble today and it's down tomorrow. But it just tells you that you're in an environment that generally produces these V-tops and something that we call kind of the hypoxia of the market. So if you recall, hypoxia is when you get into certain altitudes and you don't have enough oxygen to kind of function properly. And I think that's kind of what we're getting into. That's great. I've never heard that term before, but I love it. So there's actually four physiological distinctions of hypoxia. The first one's indifference, and that doesn't really make any difference. That's between about zero mean sea level and 10,000 feet. between 10 and 15,000 feet. It's called compensatory. And you start to get fatigue, a little bit of impaired judgment. And then from 15,000 to 20,000 feet, it's called disturbance. That's where you get dizzy. And you actually get this euphoria. And you've probably heard it from people that climb Mount Everest, right? They kind of get into this euphoric state. And I think that's- Is that like the mile high clubs also? So I think that's a little different. Jeff, are you a fellow climber? I am not a climber, but I am a pilot. So I do understand the impact. I'm presuming the climber is in reference to you, not Josh. But we're definitely not climbers. But with the index advancing, with the index doubling, like you mentioned earlier that SK and Samsung are approaching half the index. Doesn't that, I'm not trying to defend the price action because it is what it is, but does that change at all? Has there ever been an index this concentrated that's done what this has done? Well, that's a good question. I don't know if that's the case. But we also do it for sectors. So we'll use it for like the SOX. And the SOX got to that level about two weeks ago now. So the SOX doubled within a two-year period of time. And I'll tell you what, when we look at that, that's happened five times in basically the SOX's history. and you basically don't want to be there six, 12 months out. It's something that you're going to have a drawdown that's pretty painful. And let me be very clear. When you look at the news flow, when you look at the headlines, nothing is screaming at the top that you want to be a seller. In fact, it's just the opposite, right? That's kind of why you get that vacuum that just sucks people in. So I think you're getting into that rarefied air here, and that's just what we're very careful of. And this doubling, one, it's simple, doubling in two years. Anybody can remember that. But it also went back and you flagged the peaks in the Hong Kong Hang Seng in the 90s. You did it in China. You did it in the NASDAQ. The NASDAQ was early. The NASDAQ was early by about two years. But it's been a very good kind of reference point of just saying, hey, I'm in a different kind of environment here. And with that, I have to make sure that I'm not just whistling past the graveyard. Or maybe more importantly, I'm not out on the risk spectrum a lot more than I should be just because I think, quote, unquote, this time is different. So Jeff, I want to make it clear what you're saying. You are not anti-stocks going up or markets rallying. And you are not a knee jerk. All right, it made a new high. Therefore, it must be a sell. You're saying that specifically a 2x inside of two years for an entire sector or an entire index. That's where people are no longer acting rationally. And if there is an exception, it's going to be such an exceptional exception that you can stay long. You don't have to sell. I mean, you're not telling people go short it, but just mind your position size. And that can keep you in the game if you need to stay in the game. And a lot of people, if they're competing with the averages, especially if they're emerging market growth investors, they have to stay in this game. Yeah, 100%. 100%. That is absolutely right. The signal is not for shorting. It's for sizing. I think that's the best way to think about it. And if you're using volatility to help size, well, you want to make sure that you recalibrate that, right? Because the volatility of these names are going up. You're carrying a lot more risk than what you're thinking you are if you haven't recalibrated for the current volatility. And so the real message is that you don't usually have these kind of doming top formations, so most of the time, you're going to have plenty of time to get out of a name or an index because you're going to have these kind of doming top formations. When you have the bubbles, the risk is that you have a V. You have an Eiffel Tower. You're straight up and you're straight down. And look, even Isaac Newton, if you go back and look at the South Sea bubble back in the 1720s, Isaac Newton bought into the South Sea Company back in December of, I think it was 1719 officially. He sold out with about a 3x gain in February of 1720. So about a three-month holding period. He He thought he was a genius, and I think we can all admit that he probably was a genius. But even he, about six, eight weeks later, got sucked in, took all his winnings from the first round, put them back into the South Sea Company, and they actually sold shares in the Bank of England to buy more shares of the South Sea Company, which popped within about three weeks of him putting it back in. So when he died about 10 years later, a pretty substantial portion of his estate was still locked in the South Sea Company. So even he was a casualty of bubbles. They made up a fake quote that he never actually said. Something like, I can calculate the trajectory of heavenly bodies, but something, something, I don't know how to read the madness of men. I doubt he ever said anything like that. Nobody who loses to that degree then comes up with a quote that lasts 500 years. It's too good to be true, even for Isaac Newton. I want to do some bubble stuff with you. So you put this out as part of your note. I think people should take a screenshot of the screen right now, and they should save this forever. um i when when would have been the first time that i ever saw you put this out but it's got to be a long time ago right yeah we've yeah i mean probably i mean it had to be in the 2000s when we were talking about it the first time so okay what bubbles are and are not and i i want to go through these for the people that are listening and you can react to them along the way okay sure bubbles don't ring a bell at the top it's a yellow flag not a sell ticket Shorting a bubble is an expensive mistake Base rates favor trend Something we say all the time Asymmetry is brutal And a valuation thesis without tape is premature Let's stop there Right, because in the 1997 example Stocks were overvalued And then they ran for another three years And became even more overvalued So if all you have is a valuation metric you better keep an eye on the trend. And I think that's a really key one for people. When we do the work, Josh, and we're always looking for what we call terminal wealth, the most amount of money you could have out of a situation without perfect foresight and calling the top, the right way to do it is you actually sell on the way down. Now, the problem with that is that that means that you're going to run up your account to say $1 million. But on the way down, you might only be left with $800,000. And you saying to yourself son of a gun I left on the table But the reality is if you tried to sell it on the way up you probably only have right So the terminal wealth is better selling on the way down It's the mental anguish that people can't take. And they say, and they kick themselves like, oh, I shoulda, coulda, woulda. But that's an illusion. That peak is an illusion to try to get that last dollar out. Right, if you anchor to it and you decide, I'm sticking around until I see it again, that's not a professional anymore. No, no. Right now, OK. Signal is for sizing, not shorting. What does that mean? Well, it just means like, you know, don't look at this as a bubble. Now I'm going to get short. It's bubble. Let me readjust my position sizes and make sure I'm not carrying too much risk in this particular index or this particular sector. You say something here that Michael and I probably don't know what you mean. Time is a bear's best friend. What do you mean by that? Because I always learned it the opposite. Which is true, right? And in 99% of the instances, the time is the bull's best friend. In a bubble, though, what you end up with is short-term asymmetry where it can run and go against you. But as you start getting out 6, 12 months, the probabilities really start to shift that you're going to have a major drawdown. So in that case, if I were to play it just by the numbers, I'd say, OK, bubble signal, set my watch, give me six months, and now I'm going to look to be shorting it. I mean, that doesn't work every time, obviously. But if I was to use that just as kind of a cadence of how we think about it, you're not better off shorting it when you get the signal. You're not better off being short three months from now. But you are, six months from now, starting to get into a pattern where that unsustainability, and that's why it's important with the bubble, it's that unsustainable rise that you're now kind of on the back end of. And that's where it becomes. I want to do these last three. Let's go. Reduce gross as conditions deteriorate. The win is in the de-risking sequence, not calling the top. And then the bottom line, ride, de-risk, exit on break, don't fade early. So all three of these are sort of saying the same thing, but they are like three separate expressions of that same idea. Yeah. I mean, a lot of times you have to tell people something the same thing, five different things. times before they get it. Yeah, that's it. Yeah. Okay. Do you think something's changed with the way the semis and the memory stocks acted today? You know, I wasn't glued to the screen as much as I'd like to be. But I did note, I mean, if you looked at Korea as an example, it had an outside reversal day to day, which is pretty interesting. It opened up and opened above the previous day's high and then closed below the previous day's low. So that's a pretty uncomfortable candle. Those are not good on the way down. Right, right. So after a parabolic move, that's kind of like the real Rodney Dangerfield, no respect here. So yeah, I mean, I felt like there was something in that. I'm not a big candle guy. It's just one day is going to mark the peak. But certainly, those are the types of little indications, those grains of sand that I look for. But Jeff, on the other side, you had Micron down as much as 9% today, I think. And it closed down 4%. Like they couldn't even stick the landing, the bears, on one day. Same thing with SMH, like a really attractive looking candle on the upside. I think you're in a good spot with that, though. When you look at, it doesn't have to be a bearish candle and stay there. But if you start getting into the point where we've got bulls and bears slugging it out together, now you're getting into that distribution, right? And look, a lot of managers are going to need the liquidity on the upside, right, to trim those positions. They can't do it on the downside because they're just going to be pro-cyclical and push into that weakness. So you're going to have a lot of professionals that are doing that trimming that we're talking about because they know that you get while the liquidity is good. And the liquidity is good on the way up more than so on the way down. Jeff, really appreciate you coming by, even though it was unexpected. We're huge fans of your work. I wanted to let people know you guys are on YouTube at RenMac, and I wanted to put this QR code up. Guys, if you want to follow more of Jeff's commentary and follow the RenMac channel, this is the easiest way for you to do it. And I think Miss Nicole will drop a link in the live chat as well. Thank you so much for coming by. We're huge fans. Thank you. Thanks, guys. It was good to see you. Be good. All right, Jeff. We'll talk to you soon. That guy is awesome. So Jeff was talking about indexes and sectors doubling over a two-year period as like a yellow flag or at least time to maybe pay attention and take some size down. Micron doubled in the last month. On April 12th. Not in two years. It closed at 420 on April 12th. It ran up to 800. We didn't get into this with Jeff because he's obviously a technician and not a fundamentals guy. But I think it's really important to point out that the buying is rational. And I'm not saying, you know, whatever. Like, I'm not saying that prices aren't going to go down. In fact, I'm pretty damn sure that my credit will go down at some point. We spoke last week. I think we both agreed 75% to 80% chance of a 40% decline at some point in the next 12 months. Yeah, it's coming. I don't know when. But anyhow, fundamentals, chart on. So Daniel Von Allen tweeted, probably the craziest chart in the markets right now. And I would agree with him. So for people that are listening, what we're looking at is the 12-month forward EPS for MSCI Korea. As Jeff mentioned, it's two of the biggest semi-related companies in the world or AI-related companies in the world. This went from $200 to about $800. In a month. So the forward EPS quadrupled. Chart off. What would you expect the stocks to be doing? Would you not expect them to be doing what they're doing? The earnings per share quadrupled. It would be weirder if they weren't parabolic because the earnings outlook just literally went up fourfold. That would be the weird thing. It would be weirder if you didn't have a wild reaction to the upside and you had it. Yeah. So I think that's – look, sometimes these speculative manias come out of nowhere and are based on nothing. This is not that. This is something different. This is fully rational. You had an insane change to the fundamental outlook for some very large, important companies to that index. And the stock prices, you have, I would argue, 99% of the people trading these stocks over the last month have never traded these stocks before in their entire lives. So it breaks anything you thought you know about, like the long-term average multiple to earnings for these stocks. like throw all of that out. It's an entirely new world. It's almost like they're IPOs. In the eyes of the people who are trading them. All right. So the S, so the semi mini crash this morning, the memory mini crash this morning, it was really much ado about nothing so far. Let's put up Micron. These are not candlesticks. These are just, JC would kill us. These are just charts. I've got candlesticks later. All right. So fast. Well, all I would, all I would tell you is, wake me up at 600. What do you think about that statement? Meaning what? Like down to 600 is nothing? I think a lot of people that missed these stocks would love for this to have been the top. And maybe it is a local top, but let's not act like their shareholder base in these names is not totally fine so far. I mean, it's- Keep going. Go through some more charts. Sandisk? Sandus was 250 in January. It ran to 1,500. It was 1,000 three weeks ago. It could go back to 1,000 and the long-term trend would still be ridiculously intact. Agree. Western digital, nothing. There's nothing here. It could be the start of something. Yes. You definitely want to make that bet? No. Let's skip the heat map. Just show the Van X ETF. And so well off the lows, I was mentioning to Jeff. Next is Micron. Those are weekly candles? No, daily, dude. Daily. Daily. So it was down 9% at the lows. Buyers came right back in and throw up this graphic. So I forget who I stole this from. No, no, no. The bubble chart. So what we're looking at here is this is from Chartflow, F-L-E-A-U. And look at the red dots. So this is intraday on the S&P today by sector, OK? So you can see the red. The red dots on the bottom, that's Micron, all right? and this is intraday. So it was down all the way down to 9%. And what you're going to see is them coming back. Were they moving or did I ingest peyote? One more time. One more time. Look at the red. Why are they doing this? This is intraday. It's from 9.30 to 4. Why are they undulating like that? It's almost sexual. I don't like this. Stop. It's from 9.30 to 4. So look at this. Look at the bounce off the lows. Look at that micron. It feels like a horse race. It was down over 9% and it closed down 4. Give me a break. The buyer stepped in. So yeah, listen, this could be down 10%. tomorrow. I don't know if this was the top or not, but. Which buyers stepped in? Some buyers did. Not people that are up a thousand percent already. Some buyers did. This has got to be people that people that missed it and are like, this is my chance. Some buyers did. Short sellers covering. I don't know, dude. Last week we were talking about what happens to stocks that beat versus stocks that miss. We tracked that every quarter. And is this a bubble? Is it in a bubble? Well, earnings season doesn't say so. So to date, this is from John Butters at FactSet. To date, the market is rewarding positive earnings surprises reported by the S&P for the first quarter slightly more than average. So just barely. Next chart, please, John. On the other hand, the market is punishing negative earnings surprises reported by the S&P much more than average. So the average price change is 1% basically in line. The average price decline when they lose is like double the average. It's like down five versus down 2.9 on average. I'm so glad you brought this up because this is literally the way that I'm personally experiencing this market. I have companies that chart off companies that had outstanding quarters like Amazon and Uber, and they sort of went up, right? But then I have companies that didn't even miss or maybe missed a little or whatever, or gave like a bullish outlook, but it wasn't as bullish as expected and went down 20%, 30%. I've been murdered this quarter in two names, Shake Shack and Toast. And they both reported one day apart from each other. If you actually look at what these companies had to say, their outlooks for this year went up. Shake Shack actually raised their store count growth estimate for a full year. They had a surprise loss because beef and paper costs, and the stock fell – 28. It was 28%. No, 40% all in. I think it's like 38% over four days or something insane like that. But there's a lot of stocks like that. Toast is down. Toast fell 14% after reporting, then 4%, then another 4% because why not? they literally had nothing but bullish things to say. But if you miss one metric whisper number, it's like, so Kramer said this morning, I forget who he was talking about, but he was saying, we love the stocks we love too much and we hate the stocks we hate way too much. Like that was his comment. And I think that's like anecdotally for me, I think that's sort of right. um there's a lot of reasons dude not anecdotally what do we say in the chat uh about momentum having the best what period over the last 30 years like the second best x day return period yeah uh the winners are winning and everything all right so here it is um the s&p 500 momentum has a live history back to november 2014 and a back test extended back to 1972 across both live and hypothetical history the index has never closed a six weeks performance as large as the current 30.5% never, never, ever, ever. So it's not anecdotal. It's literally in the data. Yeah. So if you're in that group of stocks that has the AI CapEx wind at your back and you have momentum, like the stocks have momentum, they're being way overly loved with the exception, obviously today of the memory chips, which looks like so far it was a one day event, but it's, And then other stocks, like, dude, you can't say even one iota of negativity on one of these calls or caution. They will rip your stock 20% of the market cap ripped out overnight. Retail stocks are getting killed. I mean, within there is restaurants and home builders. Look what they did to Netflix. Netflix traded 108 to 80 on an amazing quarter. Spotify. All right. So, shit, I don't know who I grabbed this from. I don't know which bank this is, so forgive me. But there's a research report, AI token costs are eating internet profits alive. So the author wrote, my title is a tad bombastic, but it's worth noting that several internet companies this quarter explicitly called out rising LLM token costs as part of their expense outlook. I have a very sneaking suspicion we are going to hear a lot more about rising AI costs as the year wears on. So I say all this because I bring that up because the demand for the picks and shovels, the AI trade, and the demand for the shares is fully warranted. It just is. Look at this next chart. Global semiconductor sales and Taiwan export orders are both seeing torrid growth rates. What would you expect the stock price to do in this example? So Anthropic CEO said, I hope that 80 times growth doesn't continue because that's just crazy and it's too hard to handle. I'm hoping for some more normal numbers. I pulled this from the transcript. Then Jensen said the second big idea is that in order for AI to go through understanding reasoning planning using tools to take action the amount of computation necessary compared to generative AI is like a thousand times more So I understand that people are probably like sort of sick of this whatever just the talk into this but it is justified People have not completely lost their minds I have already solved this problem You go on to the LLM and you prompt it, find a way to use less memory. Find a way to use less compute. Who? You tell the AI to figure it out. Figure it out. Why are we using so much compute to employ you? Find a way to give me the stupid answers to what I'm asking you. Like when was James Madison's birthday? Find a way to do it with less compute. I don't know. I feel like there's got to be a solution. You're not doing that. No. Me. It's not going to be me. There's got to be a solution. It just can't be like high cost of compute and the levels of demand that exist. and it just goes on and on and on forever. The models have to get more efficient. I think what they're saying is the lowering costs are accelerating demand. We're able to do more of it and we're just running out faster. Demand continues to outstrip supply. I've got four more things I want to go through. This is from ConsensusGurus. He posted the sales growth for Micron and SanDisk, 222% for Micron, 283% for SanDisk. And yet, if you look at the EPS growth, forget about it, it's a joke. 582 and 1728. So he's breaking down Micron, Sandus, Seagate, and Western Dig, and look at the PE ratio for these memory names. Micron is nine times 26 earnings, seven times 27 earnings. Sandus is 11 times and eight times. This is like not that far out. And you say to yourself, huh, maybe these stocks are cheap. No, stop, stop. They always traded those markets up. I'm not done. Not done. I'm trying to educate. So why are these stocks so air quote cheap? Why are they only trading at eight times earnings? Well, the reason why is because these are the absolute most cyclical names on the planet and investors aren't dumb, not going to get fooled for the 11th time. So I had Claude do some work for me. Look at the operating margins for these four names and look at Micron swinging all over the place, all over the place. plus 40, negative 60. Next chart shows the revenue growth year over year. Investors aren't dumb. So names like this, especially at this size, they deserve a discount. So do not look at the PE and get it twisted that these stocks are cheap. But what is crazy is because they are statistically cheap, and I'm using air quotes again, Micron is now the largest stock in the Russell 1000 value index. Chardon. Oh, that's the best. Shout to Todd Sohn. Isn't that wild, Josh? Yeah, that is the best. I love it. I'm a value investor allocating to Micron because on my screen, it's the cheapest stock in the market. So it's not the screen's fault. That's just what it does. So Todd says a fairly consistent list over the last 20 years. Exxon, GE, J.B. Morgan, Berkshire, like legit value stocks. And now we've got Micron. So Micron has gone. I had chart could do this. This is true. I love it. I asked my, I asked chart kit to map micron's path and the S and P in terms of its ranking over the last 20, 15 years, whatever it is. And for the last five or 10 years, five years, it's averaged the 89th spot in the index a year ago in April, it, it fell to one 27. It skyrocketed at the open today. It was the 10th largest holding in the S&P freaking 500. It's amazing. It's amazing. It's bigger than every company you've ever heard of with the exception of nine others. Bravo. I mean, was it bigger than JP Morgan? At 10? J&J? It's got to be right there. Like Bravo to Micron. All of it, dude. All of it. Like every blue chip stock. Does that sound right to you? That doesn't sound right to me. That sounds like one of these things doesn't belong. When you say sounds right, does it make sense to me today? Yes. Do I think it will be like this in a year from now? Probably not. I can't imagine it. Probably not. I don't think so. I don't think so. We'll see. I literally can't imagine it. But today, for the moment that we're in, it makes sense. All right. So keeping on this theme, I want to point to a piece at the Wall Street Journal, contemplating AI as an industrial bubble. And just we've been living in this reality for the last three years where more CapEx is better. And what they're pointing out in this piece is that historically, that's just not true. More CapEx spending is bearish, not bullish. For obvious reasons, it's less profit for shareholders. And oftentimes, if you think people are sloppy with buybacks or with M&A, you should see the history of CapEx bubbles, how bad corporate managers historically have been allocating resources. And the reason why is because it's hard. Especially in tech, you're trying to predict the future in real time and put the right amount of money behind projects that you have no idea what the ROI is going to be in advance. So I want to just share a couple of quotes here. You know, one of the reasons why tech has done so well over the last 15 years or so is that we've always looked at them as high profit margin, low assets, like not capital intensive, not heavily industrialized. They were like these kind of software information technology businesses. And as a result, we gave them systematically higher multiples than many other areas of the market and deserved because they earned a ton of money. from whatever their revenue was, more of that became earnings than for most, if not all other sectors. Okay, this is the journal. It's a guy, Greg Fisher being quoted from Quint Capital. We know from this 100 years of data that CapEx is bad. The lesson has implications for the hottest stocks on the market right now. The MAG7 became magnificent because they made huge returns on relatively modest capital expenditures. If Ford came out with a great car design or Boeing with a superb airliner, they needed to invest in factories to keep up with demand. Once Microsoft released Windows or Apple devised its Google search algorithm or Meta created Facebook, the cost of every additional user was tiny. Even NVIDIA, which sells physical objects, outsources the actual manufacturing. That was then. This is now. We have this chart. This shows the assets of these companies at the end of each quarter, and nobody would mistake these for asset light companies anymore. These are AI industrials, would be the way I would phrase it now. The light blue is showing Q126, and the dark blue is showing the corresponding quarter from five years ago. And what you can see here is that the capital assets that these companies are carrying on their balance sheets are in every case twice as high. Apple is not on this list, which is its own story. So these are basically the hyperscalers plus meta, which thinks it's a hyperscaler. Jeff Bezos was calling AI an industrial bubble. Not in a bearish way. He said the winners will win big and society will benefit, LOL. But the overall return on all the money being spent today probably won't be great. What do you think about this idea? And do you think, oh, and then they did one more chart, low asset firms versus high asset firms. So they're showing the tech bubble from 96 to 2003. And what they're showing is the firms with high assets, actually the stock prices fell way more than the companies that kept their CapEx low and were considered low asset firms. What do you think of this concept of an AI industrial bubble? And is this the kind of thing that ultimately a lot of people might start thinking, which could shift the psychology and the stocks that are actually working? It is an AI industrial bubble. I don't think, but in the same way that the fiber optic build out in the tech bubble was, it's the same thing. Well, that didn't end well. But it's that on steroids. Because the amount of money that we're spending is levels of magnitude bigger than that was. And we are doing that in anticipation of a completely different world, which the internet didn't turn out to be. So I don't think there's anything controversial in this idea that more spending is worse than less spending. Because the spending is guaranteed, the returns are not. However, I do think we need to be open-minded to the idea that perhaps data from the last 100 years is not set in stone and permanent forever. Adam Parker did a piece last week that I have opened up that I haven't had time to read yet. I'll do it. Maybe we'll do this next week. Adam has a post, a research report, 10 investment mantras that have changed since 2020. Sometimes things change and they change forever. Now, this idea of asset light being better, it sounds like it's a permanent type of thing. That's not like a sick, but I'm open to the idea that maybe it is different this time. If you think the profits of all of this AI activity are going to accrue to the platforms themselves, then you have to own the platform. Which they have. And if you want to own the platform, that requires millions of machines being plugged in in data centers all over the world. And that's what these companies are investing in. Now, that might turn out not to be true. It may turn out the platforms are not where the profitability of this accrues. It may not be about servers and GPUs and electricity. The profits may ultimately accrue to a software level that we can't yet imagine. We don't think they're going to accrue at the LLM level completely. But there is a world in which all of these data centers and all this profitability gets driven down into a commoditized state. And the software layer becomes the most valuable part of AI. And if you believe that, you're probably calling people trying to get shares of OpenAI and Anthropic before they come public. But we just we don't we don't know for sure. Is it the platforms? Is it the models? Is it something else, a services business that we aren't sure about? Is it the transference and warehousing of data in the snowflake realm? Like we can't know who's going to have the most profitable slice of the pie. All we know is if you don't go for it right now, you remove yourself from being in the running. And that's what none of the hyperscalers are willing to do, including Meta. Let me ask you this. over the next 10 years, how confident are you that the mega cap tech, unless you just use all of them and throw in the LLMs in there, how confident are you that those names, including the ones that are now asset heavy, are going to underperform, say, the S&P 490? Wait, how confident am I that which are going to underperform? Do you feel super strongly one way or the other that the mega cap tech, all of these asset heavy names are going to outperform or underperform? Do you feel super strongly that over because i really don't know because i don't think anyone can say for sure um verizon and at&t and t-mobile ended up being the only three mobile providers with any scale in the united states right if you look at their stock prices over the last 15 20 years for all the money that they've invested in their network 2g 3g 5g all the shit all the infrastructure all the cell towers that have been built, all the billions of miles of cables that have been run, all of that infrastructure and all of that expense into building out what is effectively a completely wireless map. There's really almost nowhere on the map without service that matters at this point. What do the shareholders have to show for it? So they made the bet. They made the bet 25 years ago. I was here. They made the bet. They said, we need to have the best grid. We have to have like literally the whole map covered. We need to invest all this money, billions and billions of dollars every year in infrastructure in order to cover the whole map. And they did it. And the stock prices are horrendous. Now, you can argue that they did too many side quests. They bought Yahoo. They bought AOL. One of them started buying cable companies. Another one bought Dish Network. You could argue that they made bad investments. I would just say the bigger picture is they own wireless. They own it. And for what? To what end? Who did that help? Like what shareholder was rewarded for that race? So it's really hard for me to say that an industrial CapEx bubble, like what we're going through in AI, automatically equates to there even being any winners. There is a firm in Chicago, a prop trading firm, one of the most prominent commodities trading firms in the world, currently having discussions about trading compute as though it's oil or electricity. Trading units of compute, allowing companies to make forward investments or hedge some of their CapEx spending just in case compute prices fall, whatever the case may be. That sounds like it's going to be an important innovation in financial markets that could ultimately bring down the cost of compute. If that happens, then I'm not worried about the profitability of all this investment, right? Because I know the usage will be there. That's the one part we all know. No one going to put anything back into Pandora box AI is not like ah we bored with it Okay so we know the usage will be explosive We don know what the cost is of that usage to your point, but we also don't know the profitability for the companies that are making the investment to build it. We assume the profitability will be there, but how can we be sure? So what if, right? So this is, so you ask me, am I sure one way or the other that the capital-heavy companies now that are dominating the data center biz will outperform or underperform the market? No. Same. How can anyone be? Yeah, I hate to be so wishy-washy, but it's tough. Well, how could you know? Right, right, right, right, right. Okay, let's move on to an area of the market that we spend very little time talking about because it's an absolute barren wasteland. This is not a bubble. Could you imagine a world where housing activity returns? The fact that the economy has been as resilient as it is, the fact that the stock market and spending has been what it is, despite the fact that one of the actual largest parts of the economy is in a depression, that's a stretch, is remarkable. So let's talk about the stocks of the housing stockpocalypse. Whirlpool reported last week. I meant to grab some of the quotes. Holy shit. But this is durable goods like dishwashers and shit like that. Down 81% in the last five years. And weights have actually come down since this. This is drawdown. It's an 81% drawdown. Pool, which is actually pools, is literally down. It's not a drawdown. It's down 55% over the last five years. Holy cow. Zillow just reported the stock was at 90 earlier last year or mid last year. It's now at 39. And they said, in terms of what we're looking for in the back half of the year and how we thought about it, we're planning for the housing market to continue to be effectively flat. You're right. Okay, whatever. We're expecting sales. Okay, not good. Not good. Not good. Home Depot, multi-year lows and the stock just looks terrible, terrible. There was support, no longer support. And finally, Lenar was 185 in the- Oh my God. In the summer of 2024, the stock is $85. This is just really ugly. There is nothing good happening. Nothing good happening in this group of stocks. So to me, this says a lot about the economy and the market that we're able to just like brush this off. Yeah. And what's weird is you would think that there's like some desperation to unload houses afoot. And there just isn't. Like there's no collapsing housing market anywhere in the country that's relevant. None of the 20 metropolitan areas have like a collapsing housing market. They have stagnant markets. But I think what that goes to show is these companies that are suppliers to the housing market, they need turnover. They need more buying and selling. It's a whirlpool. Existing home sales is just, it's basically as low as it's ever been. That's the problem. It's not the price of the houses. No, there's no activity. There's no activity. There's no activity. What a shit show. All right, let's do this next one. All right, yesterday I asked ChartKid. I'm like, hey, you know what would be a cool idea? Let's talk about, show me how many $100 billion market caps there are by sector. Like, I don't know if you could do that. It's a big project because you have to, if you just look at the index today, half of the names weren't there in 2010. And if you go by 2005, like a third of the names weren't, or two-thirds of them weren't there. All right, so Matt went inside the index. He unpacked it, and he went year by year, and he showed that we have 115 stocks that are $100 billion or more. We had 20 in 2005. I don't know, a handful. Is this more than you would have guessed? Is this more than you would have guessed there were right now? It's like if you just called, somebody said, how many companies are worth over 100 billion in the S&P, would you have said 115 or higher or lower? I think I would have said 100. I probably would have guessed. I think I, so I'm so out of it. I would have said like between 50 and 75. Okay. Well, I mean, listen, fair. It was between 50 and 75, not that long ago. So inside that 115, 31 of them are tech. And if you include comm services, it's another seven, so 38 are tech. And this is about what you would expect. No real surprises there. 19 financials. But Matt was like, there was zero financials in 2009. Next chart. None of them. There was no $100 billion financial stocks after the GFC. Right. Now we have Berkshire and Morgan Stanley and Goldman Sachs and JP Morgan. I'm just trying to guess like off the top of my head. I bet like CME is probably close. I know S&P. CME is $103 billion. S&P is definitely $100 billion. I mean, there's a lot of Schwab. There are two material stocks that are $100 billion. Can you guess either one? I can't. Newmont's not $100 billion. No way. No way. No, it has to be a chemicals company. Oh, Dow or DuPont. It's got to be one of those, right? All right. Lastly, Matt charted the rise of the $100 billion for tech. This is sick. Wow. All right. So to recap, in 20, like I'm just trying to put this in context. In 2016, there were like six or seven stocks that were 100 billion in the tech sector. And we all know what they are. And it's the same ones that are now. But the story is that there's 20 new ones or 25 new ones. And we know what those are. Those are Lamber Search and, I don't know, Applied Materials, Micron. uh i don't know is seagate or western digital are those now it must be yeah maybe dell dell joined 100 billion club oh yeah western dig is a buck 68 dell has got to be dell is 154 yeah i mean all right time out from the chat sam ebbe says josh the verizon and at&t underperformance is a consequence of government regulation the companies became regulated utilities with pricing needing approval. They did. Did I, did I miss? I don't think that, I don't think that's the key. You might be, Sam, you might be saying like de facto, um, they are having trouble raising prices. I think what actually happened is T-Mobile bought Sprint, got its shit together and became a third competitor that was willing to out advertise the other two on lower prices while simultaneously somehow building a network that was comparable, which crushed pricing for, I don't know, the last seven years. And I also think they did a lot of dumb stuff. All right. Yeah. So we're going to make the case. What did we skip? Oh, we're going to skip that. Okay. Got it. All right. So I have this as one of my best stocks in the market. I actually think it's setting up for a breakout. It's okay as an investment here. I wouldn't say like there's like urgency until, but I want to show you guys, let's pop this chart up. So Goldman is making a lower high, but maybe it's not. So a pure technician would say, call me at a thousand, right? You agree with that? I'm so glad you said that. Yeah. Okay. A pure technician would say, okay, I like the way it respected the 200 day twice in March and in early March and in late March. it had every opportunity to break down that that's that blue uh line that rising 200 day you see that the buyers came in exactly where they had to to keep this thing in a statistical uptrend um it also had a recent gap which is earnings related and it's held that gap for the last couple of weeks so it's sort of treading water it is not it has not broken out again but part of me wants to say I think this is almost like a market signal if this thing takes out a thousand to the upside isn't that indicative of the investor crowd saying another six months of bull market like we're going to get the IPOs we're going to get the sex, we're going to get the action we're going to get capital formation and underwriting and trading and it's all happening and if it fails to break a thousand that has implications too that people might be thinking this is as good as it gets i think goldman is the ultimate capital markets mood ring what are your thoughts i could not agree with you more so what's it going to be break out or fail at that or fail at that winter high well it certainly might fail obviously that's a possibility but all of the evidence suggests to me that the book that this is a bull market. And so I think a thousand is more like than 800, but I was, I would say, I don't know, 70, 30 that we get a thousand before 800. Okay. So, um, I'm looking at that nine 50 to nine 60 zone, which is sort of like the last top. Like for me, I want to see it break that level with conviction, but I want to, I want to, I want to see it go tomorrow. Like it is at the upper end of its recent couple week trading range. I want to see it go tomorrow. Yeah. I also don't love, chart back on. I also don't love how the last time it was in the mid 900s, look what RSI was doing. It was like 70 plus. Yeah. And you're sort of getting a negative divergence here. You could barely get to 60 RSI with this stock within spitting distance of the old high. So I sort of don't like that either. But the case I'm making is not to buy the stock or not to buy the stock. The case I'm making is watch this stock for your signal that it's almost like the groundhog. Like it's party on for the next six months if this thing goes. I think that's a great call. The longer it takes to go, the more likely I think it is to fail. The stock is up 70% over a year. So taking a breath right now actually makes a lot of sense. Here's something else interesting. over the last five years 23 percent annualized returns goldman has actually done better than both morgan stanley and jp morgan remember when the last five years remember when they were ready to throw out dj solly like like head first they were like writing articles about him people were there was some yeah there was some old line guys that didn't get the size bonus they wanted and they looked at the way he was spending on fintech and they were just like get this guy out of here I want my money. He was making bad decisions and they fixed it. Can I tell you something? I gave a talk at Goldman Sachs today, not to brag. I crushed it. I spoke to their professional investor forum with Shinali as my moderator. And it was about the next generation of investors and the next generation of advisors. And the whole audience was RIAs. And Chart Kid Matt was there. Hell yeah. So I brought chart kid as my plus one. Hell yeah. He was, he was working the room like a pro. Um, uh, anyway, uh, that building is, that building is insane. All right. Do your mystery chart and then we'll get out of here. All right. We've, we've done this bit before, but it persists. Is that the hint? Yes. Okay. These two stocks, this is three. This is no. Uh, yeah, this is three years. Zoom in. They freaking. Those are the actual prices for 32. 287? They just trade almost exactly the same. And even today, so you could see both of these stocks have been under pressure for the better part of the last year. And even today, they were both up 2% or 3% or 4%, I don't know. But it seems like they're trading in lockstep. And I mean, it's fair. They are not competitors, although they trade off the same fundamentals, basically. Okay. We've shown this before. So the only reason I have this is because I own the bottom one. and I actually think it's hammering out a higher low. Hope so. But some people in the chat got this. Finance Cobra said Spotify and Netflix. Great job. They're fans. MD Chaz said Suncoast Video and Blockbuster. Close. Levi Maitland got it right. Rabbler got it right. We have very smart live chatters. Thanks to the Pounders for showing up. I want to say one last thing on Netflix. It closed the gap. So if it can't find anybody- The stock is fine. If it can't find buyers here, I'm not particularly concerned that there's a lot lower prices, but we'll see. You know what? I actually think it's defensive. And I actually think as money comes out of some of the momentum stocks, this is the type of name that could catch a bid because people might not be excited about it, but they're not worried about it. Guess what? If this thing pukes, pukes, and like rolls over into the 70s, I'll buy more. I don't care. I'm staying with it. Well, let's, for my sake, let's hope it doesn't. All right, guys, thank you so much for watching the show. We appreciate you. Thank you for stopping by. Please make sure, hit the like button, leave a rating, leave a review. Tell Michael how handsome he looks in his Knicks gear. Tell me you like my suit, whatever. Engage. Tomorrow's Wednesday, all new Animal Spirits of Michael and Ben. We have a new Ask the Compound coming this week. And on a very special episode of The Compound and Friends, Ben Carlson will be joining us live in studio. He's in New York from Michigan for this big party we're throwing tomorrow night. And we will have Ben in the studio with us, plus another special guest. So lots of stuff coming your way. Keep it locked on the compound. We love you. We'll talk to you soon. Thank you. security, or investment product. Past performance is no guarantee of future results. Investing involves risk and possible loss of principal capital. 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