← The Compound and Friends
The Compound and Friends
Nick and Jessica’s 3 Big Lessons From 2025, Sam Altman Orders a Code Red at OpenAI, Adam Parker on Broken Compounders, the Case for Adobe
01:46:59
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- [00:00]
A
Ladies and gentlemen, welcome to the Compound and friends. Today's show is sponsored by Eaton Vance. More on Eaton Vance in just a moment. I want to let you guys know this was a really big episode. We start out with Nick And Jessica of DataTrack Research, our our friends and they have been absolutely crushing it for us this year and it was really cool to check in with them because they wanted to talk about the three biggest investing lessons of 2025 and what they're taking with them into 2026, the big idea that they think is really going to matter for investors. And I want you to hear it for yourself Immediately following. It's an all new edition of what are your thoughts with Michael Batnik and I? And we got a surprise visit. Adam Parker of Trivariate Research and Trivector jumped in and explained to us this concept of whether or not you want to buy a broken compounder. So he thinks about compounders as stocks that have gone up at least 100% over the last couple of years on low volume and they become broken compounders when they all of a sudden crack and fall 30% in a month. This has been a big year for broken compounders and Adam shows us the the numbers themselves about, you know, whether or not you want to chase these things lower or catch a falling knife or even be involved in this end of the pool to begin with. So it's a really great discussion. We cover the code red at OpenAI, we take a look at Apple at new highs. We have a whole thing that we're doing about Adobe. It's a giant show, so stick around. I'll send you in right now. Welcome to the Compound and friends. All opinion expressed by Josh Brown, Michael Batnik and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Hello and welcome to an all new edition of what did we learn? As usual, I am here with my friends Nick Colas and Jessica Rabe, co founders of DataTrak Research and and the authors of DataTrack's Morning Briefing newsletter which goes out daily to more than 1500 institutional and retail clients. Nick and Jessica also have their own YouTube channel which you could find a link to in the show description below. Today is December 1st, one month to go before 2025 is officially in the books. Nick and Jessica are here to share the three biggest investing lessons of 2025 with the implications for 2026, how you will invest next year and beyond. Guys, it's so great to catch up with you again. How's everything? How are we doing?
- [03:05]
B
Very good, thank you.
- [03:06]
C
How are you?
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A
Not all at once. Hold back, hold back. Everything's great. So good to see you both. So you were saying 2025 is a master class in how markets work. I would really love to hear all about that.
- [03:21]
B
Sure.
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A
What was it about this year that was, that was such a great instructive year for everybody else?
- [03:26]
B
Yeah, we put together a slide just to kind of walk through because I think it's always easy to forget kind of what's in the recent past. And it's probably a good place to start with our discussion today about what we can learn from 2025. And we call it a masterclass because it literally had a lot of something in every direction. So we had a very calm Jan and Feb, beginning to be a fretful march because of worries about trade policy. And then things just blew up in early April. We literally had pandemic level volatility in April. The Vix was over 50, which it hadn't been since the pandemic era because of US trade policy uncertainty, obviously. Simultaneously we have this vicious rotation into non US assets, non US stocks, non US currencies, and a lot of people questioning the safety of the dollar, the safety of Treasuries. It was just a wild ride. It was discussions that honestly, I've been doing this almost 40 years. I haven't heard these discussions in this way ever before to this degree. And then just popping back up to the slide for a second to finish out the discussion. Then we had a very nice recovery in US stocks driven by the policy changes that we saw in April, but also massive investments in Gen AI. And you know, a new technology is always going to excite people. And then more recently we had the longest ever US government shutdown, which actually created a lapse in critical economic data. We're not going to get some data that we've gotten literally since 1948 on a monthly basis. So despite all of this, US large caps are trading at 22 times forward earnings. That's near a 25 year peak valuation high. And you would think given all of what I just went through, we'd be at 15, 16, 17 times earnings and the market would be down 10% and nobody would blame you for thinking that. But at the same time, that's not what's happened. S and P is up 15, 16% as we go into December. Multiples are huge and it's been a great year, all things considered.
- [05:13]
A
The most intuitive thing that a wise person would have said earlier in the year if I had laid out all of this stuff about the government shutdown and questions about the United States as a sovereign debt issuer and all the things that we were talking about, like the most intuitive thing that somebody would have been able to say is, okay, you probably have a lower multiple on stocks as a result of all that uncertainty. And it's the opposite, you don't have that at all. And I think that's one of the things that makes this game so difficult but also so, so much fun to play and requires so much humility on all of our parts because the most intuitive thing is rarely the thing that ends up coming to be.
- [05:56]
B
That's very true. And I think the thing people tend to miss, and I think this will segue nicely into Jessica's first section, is we used to have a saying at SAC for the oldest traders would say this and that is the, the game is rigged to the upside. And that was kind of a, a sharp way of saying it. I would say that the systems that we operate in are self correcting. When something goes wrong, it tends to get put right. It may take a month, it may take a year, but it does tend to get put right. And that's why there's another old saying on Wall Street. There are no bears living on Park Avenue. You know, there's no super rich bears for the most part. There's a few now, but not many in general. Long and strong is the way to be.
- [06:34]
A
Yeah, I think, I think that's an important point. Like if you feel like it's rigged to the upside, you're right, it is. That's how, that's by design. Sort of by design. That's why people invest long term. Doesn't mean that you're always going to get the short outcome that you want. I want to, I want to get into some of these three lessons for the year. And I guess let's start with this. Jessica, you have this idea that policymakers put protecting economic growth over dogma in the end and you say that's an important fact earlier this year and then again in December. So tell us what you mean by that and why that's such a big lesson from 25.
- [07:13]
C
Sure. Earlier this year with President Trump capitulating, getting a little more friendlier with respect to the trade shock and tariff policy and then most more recently now with, with Powell and cutting rates. So this leads into first lesson of 2025 is that it's taught us that policymakers really air on the side of caution with respect to economic stability. So we've been consistently bullish throughout this year that we'd rally through year end even over the last several weeks of volatility. And one of those reasons of late is because we always did expect a December rate cut and told clients that even when Fed funds futures were giving it less than a 50% chance as recently as two weeks ago when the market was uncer because of the lack of government economic data due to of course the shutdown. But our work using, our work on the US labor market using non traditional indicators like Google Trends showed it was continuing to weaken. So for example, US Google search volumes for find job and new job recently reached 20 year highs and sure enough, the unemployment rate does continue to edge higher.
- [08:27]
A
What are they, what are they searching for?
- [08:30]
C
Oh, fine job and new job. Those, those.
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A
So Americans literally that term find job, fine job.
- [08:37]
C
Yeah. And they were just reached recently, 20 year highs.
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A
Yeah.
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C
And, and so that shows people are obviously we're in a low, higher, low fire environment. People are struggling finding work. And like we just found out with the new new data on the jobs report, unemployment's now at 4.4% which is the highest since the pandemic era in October of 202011 or 2021. Sorry. And the day after the jobs report a week and a half ago, John Williams, which is a New York Fed president, so he always gets a vote and his words therefore carry extra weight. He reset expectations during his speech by saying he thinks monetary policy is, is restrictive and sees room for further adjustment in the near term to the target range. So Fed funds futures subsequently gave December a December rate cut a 71% chance, up from 44% at the end of the prior week. And now they give 87% odds. So markets have rallied since because they do expect what is essentially an insurance cut, allowing the Fed to, to stay on the rate cutting path if the labor market does continue to weaken. Another reason we've remained bullish through year end is because of our work on historic seasonal trends. And I think we, we have this chart again for you guys. This table, we've shown you this throughout the year and it has proven to be correct so far. So here's the table we've shown you.
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A
It shows this. Did this nail it again? Pretty much, yeah.
- [10:14]
C
Yep.
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A
Okay.
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C
All right, so this shows the, this shows the number of times the S P has reached its high for the year in each month back to 1980, along with the average annual returns for each of those 12 instances. So it shows that the S P has peaked for the year over half the time in December back to 1980. And the highs for the year tend to come this month because US equities usually post annual gains that have been rallying through the year. And while The S&P's current high for the year was on October 28, with just one month left, the odds for the S&P 500 topping out this month rather than October are 86 versus 14%. And the S&P closed Friday within 1% of making a new high. So these chances are looking solid. And when as for when the S and P. Usually as for when the S and P does peak in December, it does so over half or 58% of the time the last week of the month and a fifth or 21% of the time on the 31st, the very last day. It rarely peaks so during the first week. So we think this positive momentum, along with the catalyst of the Fed rate cut, should carry the S and P higher in the coming weeks.
- [11:25]
A
What's so exciting about that is then we'll get to, say, Santa Claus rally and we'll get to do all that stuff if, if that's how that turns out. What, what did you, Jessica, what did you think about the, what do you think about this time of year, this kind of post Thanksgiving, early December period? It's like it's usually somewhat favorable unless there's something major going on, even though maybe volumes or liquidity is a little bit lighter as people are traveling or preparing to travel. Is that kind of your sense of how things are shaping up this year?
- [12:00]
C
Yeah, I think again, we needed a catalyst. We really needed, we really need the Fed to cut rates. And now we do think that they, that they will. And Fed funds futures have come around on that. So we've seen that catalyst and we should rally into year end.
- [12:15]
A
Okay. So next year there will be all sorts of challenges and all sorts of things to worry about on the policy front. But this framework that you have, where policymakers will err on the side of supporting the economy, think it's really helpful. It doesn't mean every time, but it does mean if you're placing a bet in one direction or the other, that's probably where you should lean into.
- [12:40]
C
Yeah. And we're coming up on an election year, so I don't think so.
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A
Even more so.
- [12:45]
C
Yeah. Want to cause too Many ruffle, too many feathers.
- [12:48]
A
All right. I think it's an important point. Nick, you have lesson number two for us.
- [12:52]
B
Yes, I do. So we can flip over to this very long term chart of S&P 500 forward P multiples. And this is a dramatic chart, right? This shows forward 12 month pes back to the dot com era, back to 2000. And you can see they've taken a very long and winding trip. So they were at 20, 21 times earnings in 2000. Those were the dot com highs were around 22. Then they went all the way down to 9 during the financial crisis. That's the sort of first third of the chart. So 22 to 9, then they've crawled their way back. They got as high as 19 before the pandemic. And obviously the pandemic cranked them back down to 14. And then all the pandemic stimulus got us to 21. And the interesting thing is we're back at 21, 22, 23 right now against a 25 year average of 16. And the point I want to make on this chart is you can't take valuations in any given year as just the context, just around the context of the year. You got to put them into a historical context. So the reason valuations got crunched between 2000 and 2008 was we had a recession, we had a housing bubble burst, we had a financial crisis. And people slowly gave up on the idea that stocks would remember the 2000s were a lost decade for stocks. Stocks didn't go anywhere from 2000 to 2010. They kind of round tripped 700 to 1500 to 700 on the S and P. And then you had this very slow grinding improvement in valuations because we didn't get a recession in the 2010s, no recession all the way through. And then we had a very brief recession during the pandemic. But fiscal stimulus, monetary stimulus fixed that very quickly. And so we literally have had 15 years with only three months of recession. And the market's getting used to that stability in earnings, getting used to this idea that policymakers come in to fix things and fix them quickly. The pandemic was nothing like the financial crisis, the Great Recession. The stimulus was much heavier. Everybody learned their lesson and moved fast. And so markets have come to the conclusion again. This is sort of the big theme here in this call today is that policymakers move quickly now. They move aggressively. They don't sit around waiting for the economy to fall apart and then try to fix it, you know, as it breaks. They are more proactive. In addition to that, we've had very steady economic growth. So valuations are very high. But the message there is you got to put these numbers into a long term context. They're not just about last year or next year, they're about the last 15, 20 years. The last 20 years. It's a very long timeframe.
- [15:16]
A
I was going to say that chart if we could put that back up. This is my career basically. So I start, I get Series 7 license at the end of the 90s, like 97 and this whole arc. Not to sound nihilistic, like a nihilist about it, but my observation would be anything anyone's ever said about the market's overall valuation has not really mattered to what's happened in the subsequent one year period because of how all over the map these numbers are. You said it's a dramatic chart. I mean it couldn't be more dramatic. To have this range from 22 down to 9 really tells you it doesn't mean you want a higher starting valuation. Think the real message is like within reason. There's almost no reason to discern between buying 9 times or 15 times. The outcome probabilistically could be either way. Am I thinking about that wrong or is there some validity to that over the short term?
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B
One to three years? Statistically you're correct. There is no message, there is no signal. There is a lot of work on things like Shiller pes and forward multiples that is quite valid if you're starting from a high Shiller pe. Granted there's not enough observations to call it statistically durable, but generally speaking, if you're starting with a very low Shiller pe, you've got a much higher probability of making a good 10 year return on a CAGR basis. And if you're starting at a high Schlor pe, you have less of a chance. But you don't. You can't use it for stock market timing. It just doesn't work. You will be underinvested for way too long. When things are good, you will catch things going bad. But you might not have the courage to buy with a 10 pe because apparently nobody does. That's why it's a 10 p. E.
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A
The obvious thing that somebody glancing at one more time with that chart, the obvious thing that somebody would say would be okay, the last two times in 25 years that we've gotten above 20 times on a forward earnings multiple, bad things have happened relatively quickly. Subsequently after, what do you say to that person who is using that as A decision point for whether or not they want to be overweight, underweight or out of the market.
- [17:30]
B
Yeah, it's a very fair point and it is mathematically absolutely correct. And it actually is a pretty good segue to the next couple of slides that we have. But I'll just make the overarching comment that looking at that line assumes that the S and P is the same at every point, meaning it's the same companies, it's the same dynamics, it's the same fundamentals. And that chart lies badly when it comes to that point because the S and P is not the same. The companies are not the same, the fiscal and monetary policies are not the same. Along this line, they're dramatically different. And so you can't think of the S and P as this fixed nature animal. It is variable. And that's probably a good place to sort of launch off into the next slide because this shows it quite well. This is s and P500 net margins by quarter over the last five years. So basically, how many pennies for every dollar of sales the S and P and aggregate makes? Net margin is super important to valuations because it's half of return on capital and return on capital drives long term valuations. A simple example. If you have a company with a 20% ROE and a company with a 10% ROE, everything else equal, you'd expect the 20% ROE company to have a higher valuation. It generates more cash flow, it's better used, it better uses shareholder capital. That's why margins are important. And if you see the chart here, the Most recent quarter Q3, 25 had net margins of 13.1%. That is on par with or slightly higher than the very peak quarter Q2 of 21. With all that fiscal and monetary policy stimulus helping companies generate a lot of earnings. We're not getting into that now. Policy has been restrictive, there's been no fiscal stimulus. And yet we have net margins that are higher than the highest quarter during the pandemic. That is a powerful thing because it means higher ROEs and therefore, therefore should be higher valuations. So if you look back at that first chart, not to flip it, we don't need to flip it on again. But okay, we can, we can look at it. The S and p chart shows PEs of 23 back in 21 when net margins were 13%. It should be no surprise that S and P valuations are back to those highs, because margins are back to those highs and they're doing it without any kind of artificial stimulus, which to my mind is super impressive and argues for a better valuation. That's why we're at 22 times. It's not just market froth, it's fundamentals.
- [19:45]
A
Yeah. So talking about valuation of the market without mentioning what profit margins are like, just looking at the multiple and not the cause behind the earnings is a big mistake. That's one. And the way I think about that is like, your kid comes home from school and tells you what they got on a test, and you don't know what the. You don't know what the scale of that is.
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B
Yes.
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A
So a kid comes home and says, I got a three. Well, three out of 100. Or three out of four.
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B
Right. Or three out of three.
- [20:16]
A
Or three out of three. Amazing. I got a. I got a 1400 on my SAT. Well, what is that? Out of 1600. Congratulations. That's great. If you tell me it's out of 20,000, it's a different conversation. So people looking at the PE in the absence of the profit mar. The profitability of the thing itself. How could you possibly decide what's a good P E ratio? What's too high, what's too low? So I think that's a really important point that you. That you bring into the conversation.
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B
Yeah. You wouldn't do it on a company. Right. If you. If I said, hey, I got a company trading at 10 times earnings, your first question should be, okay, what's net margins?
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A
Right.
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B
Because if.
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A
Right, right. Is it oil? Is it an oil company or. Or a software company? I need to know.
- [20:59]
B
Yeah, it's just. It's just a number. The next chart kind of feeds on this discussion, so let's just flip to that. This shows s and P500 estimated earnings from Wall street analysts. Kind of the aggregate of all their estimates bubbled up to the S and P and how They've progressed for 2025 estimates and 2026 estimates over the last year. And what you see is something extremely unusual because I can tell you I've been doing this since I've been an analyst, literally since 1991. And so I can tell you the game is usually you start with a high number for the year, and then you kind of whittle it. Company kind of guides you down so they can beat every quarter. And so by the end of the year, your estimate is much lower than it was at the beginning of the year. And that's just the way the game is played. What's really unusual about what's happened this year is that for the first half of the year, estimates for 25 and 26 went down, but now since about May to July, they've started to rise because companies have beat by so much every single quarter that the estimates are going up. So it's not just that you have high margins, it's also that you have earnings revisions to the upside. It's like every quarter has been way above average in terms of beat rates and beat amounts. And finally the street is saying, okay, screw it, I've got to start raising my numbers. I don't usually do this, but I have to, otherwise I look stupid because my company just beat by 10% every quarter for three quarters. And that's what's happening this year. And it's extremely unusual. Literally nine years out of ten, whatever the number is for the S and P at the start of the year, take 5% and that's what the actual numbers at the end of the year. You never get this kind of slow V shape that we're just seeing now.
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A
What do you think that's about? Is that like the practical effect of AI already manifesting itself at Fortune 500 companies, or is it too soon for that to be the driver of these enormous beats?
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B
You know, I looked at it versus like it by sector because my first thought was, oh, it's just tech, right? And it's not just tech. Six or seven out of the 11s and P sectors are showing higher average margins, that higher margins now than their five year averages. So it's across a bunch of, of a bunch of companies, a bunch of sectors. No, I think what it is is that companies saw the shock in Q1 and said, we got to get our act together. We've got to really lean up and get smart about how we're doing business because we have no idea what's coming down the road. And so they didn't go so far as to cut headcount because it was so painful to get that headcount over the last three years. But they did start focusing a lot more on efficiency because they thought, okay, we don't know what's going to happen with the labor market, with trade policy, with whatever else DC might do. So let's get smart and just focus on profitability. And it has been very concern consistent all through the year. And it really started with Q1. Q4 last year was not an awesome quarter. Q1 started off with a lot of strong beats and it's continued all the way through the year. So I think it's a lot of corporate focus on a very uncertain environment.
- [23:47]
A
It sounds like what you guys are saying is that when negative things happen, that can often serve as a positive catalyst in the investment markets because there's a response to that negative thing. And in this case, the response was companies just waking up and becoming more alert and that ended up having a salutary effect on their profitability later in the year.
- [24:13]
B
Yeah, that feels right. You know, everything in moderation. You want enough concern to create good decisions, not so much that you create a recession. Let me just finish up with one last chart because I think we haven't touched on rates. And that's just a good quick thing to mention. So this chart shows real 10 year treasury yields. And by real we mean when you take out the amount of yield that nominal rates that's caused by inflation expectations and you're just left with how much of a risk premium Treasuries give you on top of just a zero return. And so what it shows is how much stress and concern there is in the treasury market. You know, whether it be term premium or just risk, what are you getting in terms of real return? And what's interesting is we've had these conversations now for most of the year about how, quote, safe Treasuries are and whether international investors think Treasuries are safe. And this is the place where you would expect to see it if the market was slowly saying, you know what, Treasuries aren't quite as safe as we thought they were because of deficits or because of uncertain trade policy or uncertain policy generally. And yet you don't see it in this chart. Real interest rates average 2%, 2 percentage points from 2003 to 2007. There are 2% now. We had a long period from 2010 to 2023 of Fed bond buying and negative real rates. And we all know, you know, that period of history. But real rates now are no higher than 2003-2007, even though debt to GDP now is running about 125%. It was running 70% back in 2003-2007. So debt to GDP has doubled and yet real rates are absolutely the same. So my takeaway from this is the market is not saying that Treasuries have any problem whatsoever. And this whole conversation about the risk free nature of the dollar or of Treasuries, it may happen at some point in the future, it's just not happening.
- [25:58]
A
Now at all on a real basis. If that were an actual concern that people were expressing in terms of buying and selling, you would see that. You would see that premium significantly higher than 2% above the inflation rate. For rates you would see, I don't know, I'm looking at a spike, I guess that's during the financial crisis. It got up to 3.
- [26:23]
B
Yep.
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A
So you, so you would see bonds printing 3% above the rate of inflation.
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B
Yeah. So higher, basically. Yeah.
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A
It's not there.
- [26:31]
B
Let's say inflation's 2% structurally, which it kind of is. That's what it runs. You would expect to see 10 year yields at 5% or higher, which is why the market gets really wonky at 5% by the way, because it imputes a 3% real. By the way, that spike in the, in the financial crisis, the three is exactly why the Fed started buying bonds. That's why QE started because of that spike in November of 20 2008.
- [26:52]
A
So we just don't, we just don't have, we just don't have that today. Doesn't mean it can't arrive, but that anyone who's got a narrative where there's like this massive concern in the treasury market, this is a great chart for them. Show it to me. Because it looks like we're selling in the same place we were in the 2003 to 2007 period.
- [27:14]
B
Right. That was lower levels of debt and pre qe. So the whole idea the Fed would buy massive amounts of long term bonds to manage the real rate wasn't in the, in the conversation in 2003-2007. It had never happened before.
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A
Jessica, lesson number three, what do you got for us?
- [27:31]
C
Sure, I think Nick's going to kick that off first and then cue me in.
- [27:35]
B
Yeah, yeah, so yeah, this is, this is sort of like the, the, the, the old versus new. So we got our final, our final presentation slide is coming up here and it shows, this is kind of the theme we're working on now for clients quite, quite heavily. And the theme is corporate strategy. What's old is new again. And I'll give you my side. And then Jessica's got the more modern interpretation. So when I was in business school at Chicago, the standard textbook for understanding corporate strategy had just come out was Alfred Chandler's Scale and scope, published in 1990 and based on a lot of corporate histories from 1880 to 1930. And it gave away three basic lessons. And that is economies of scale drive cost and competitive advantage. Economies of scope drive long term growth because you use your competitive advantage for more things and organizational structure and management ability determines success. That's it. That was the message. That is what every big company Studied deeply. So it is ford in the 1920s, it's GM and Alfred Sloan in the 1950s, it's Dupont for the entire 20th century, it's you know, GE under Jack Welch. Those were the lessons and that's what every corporate manager lived and breathed by. And then Jessica will describe what happened next.
- [28:46]
C
Sure. Then you have Clayton Christensen who appended Chandler with an entirely new paradigm, one that literally created much of the world that we live in today. So his, his paradigm and a few examples are that the most important thing to remember here is that successful disruptive business models almost always start at the low end of a market. So Amazon's a classic example here. Starting out by selling books online, a low margin product, but with an edge over brick and mortar thanks to a wider selection and low cost delivery. Incumbents always ignore the upstarts because the new company's business model specifically targets a less profitable niche of the overall market. And instead of competing, the incumbent seeds that part of the market to to the new competition to focus on higher market segments. But over time, the disruptors move up the value chain and slowly take share more profitable parts of the market using the same competitive advantage they used to get their edge at the low end. So Amazon again for example, went from selling books to climbing the value chain with more and more products. And then eventually the upstarts become the incumbents and the process begins once again. So again, for example Sears, their Sears Roebuck catalog disrupted small local stores in the early 20th century by leveraging the nationwide rail system, the disruptive technology of that of the age and fast forward by decades later. And Amazon used the Internet to disrupt Sears and other retailers. And I'll just give two more quick examples. You had first Japanese car companies like Honda and Toyota, they disrupted US auto companies in the 70s and 80s and they did this by first focusing on small cars to then using the same low cost production process to build larger passenger cars and light trucks and eventually came out with by launching their own luxury brands like Acura and Lexus. And then second, as much as smartphones have never really qualified as low end offerings, over time their utility disrupted personal computers because they're cheaper than PCs and have given users in developing economies access to basic Internet Internet enabled computing at affordable and at an affordable price.
- [31:07]
A
So in this new paradigm, I guess we're still living in the innovator's dilemma world, the Clayton Christensen world as you're talking. I can think of so many examples just in my industry where you've got companies out there looking at businesses that nobody else wants to do. And they're figuring out ways to do that business using technology so that it's at least marginally profitable and picking up a lot of clients who are sitting out there waiting to be taken because nobody else is talking to those clients. And that's how it always begins.
- [31:42]
B
It does. But I think you raised this in your email, the one that you put out, I think yesterday about Google and Alphabet and there was a riff on this theme all the way through what you wrote, which is Genai is so capital intensive that we're going to be shifting back to somewhat of a Chandler model. And really it tells you that that well structured companies, well managed companies will have a structural advantage again because the capital outlays are so large. One of the sort of emblematic parts of Christensen, it doesn't require a lot of capital necessarily to disrupt an industry because you're coming with a low on your low end offering. You don't need a lot of capital. Gen AI requires so much capital. And so you're going to see successful companies that have been successful for the last 20 years like Alphabet, potentially win a large chunk of gen AI in terms of the picks and shovels of it, because they can dedicate the capital and they have the management expertise. There'll be a disruptive element with the people who develop AI models or AI tools for different segments to use. Disruption will live there. But we're living in a hybrid world now. It's no longer just Christensen, it's shifting back probably 50, 50 to Chandler.
- [32:48]
A
So the companies of today who are going to be competing in this AI landscape are going to have to relearn some of the things that were first put into words back in 1990, talking about this period from the 1890s.
- [33:05]
B
Yes.
- [33:06]
A
And who were the, who were the companies? So Google presenting itself as a almost fully self reliant vertical stack, utilizing everything from its own data centers, its own silicon, its own software, its own marketing, its own management over all of these things. That being advantageous relative to like an OpenAI where I don't want to say reliant on the kindness of strangers, but certainly not in control of the manufacturing process around chips, for example, not in control of its own data centers, like very much reliant on third parties, vendors, partnerships and that, that seems to be important to investors now. It wasn't as recently as a month ago, but now it seems so that. So to you that represents this shift from the Christensen model back to the Chandler model?
- [33:58]
B
Yes. And actually as I was reading your Email. I was thinking about my years at General Motors by Alfred Sloan, which was one of the definitive works about how corporate structure creates competitive advantage. And GM under Sloan, it's the same Sloan as Sloan Kettering, by the way. Alfred Sloan, he created a very vertically integrated model where GM made 80 to 90% of everything that went into a car. And for a long time it worked extremely well, but only because GM had profoundly strong financial management and the ability to measure the return on capital at every stage of that process. Google has that kind of talent. A lot of startups do not.
- [34:35]
A
So now you're going to go make me read this book? I guess. How long is scale and scope? 200 pages.
- [34:43]
B
I'm hoping triple it it is it.
- [34:46]
A
Okay, Is it worth a read or is it worth a. A Gemini Rundown of the most important points from the, from the book. What do you think?
- [34:55]
B
It is absolutely worth an A.I. you know, tell A.I. to give you a 2,000 word summary and, and, and you'll get it. But it is, it is literally that the was the textbook in 1990 to teach corporate managers how to manage.
- [35:09]
A
Well, Nick and Jessica, I just want to say thank you guys so much for being a part of the compound all year and some of the episodes that we've done this year have just done incredible amounts of views and downloads and people, my audience, they just, they absolutely love you guys. So hopefully you'll keep coming back next year and we'll keep doing what did we learn and we'll keep learning together. Does that sound good to you guys?
- [35:34]
B
That's great.
- [35:35]
C
Definitely. Thank you for having us and thank you to all your viewers.
- [35:39]
A
Of course. Let's tell people where they can find your video channels channel. It's YouTube.com nickcolis and Jessica Rabe and that's all spelled out and of course there's a link in the description as well. So if you love seeing Nick and Jessica on our channel, by all means follow them over to their channel. And of course visit datatrackresearch.com to become a daily subscriber to Nick and Jessica's insights. Guys, merry, Merry Christmas, Happy Hanukkah, Happy Thanksgiving, happy New Year and I know we'll be seeing you again in 2026. All right, gangsters, we're back. It's Tuesday, 5:00 Eastern and you know what that means. It's an all new edition of what are your thoughts? Starring me and my co host, Mr. Michael Batnik. Michael, say hello.
- [36:54]
D
What's up everybody? How we doing?
- [36:55]
A
The chat is lit Mike.
- [36:57]
D
Okay.
- [36:58]
A
Like lit. Lit. Everybody's here. Do some quick shout outs. Purple Haze 33 is here. Great, great handle. Jay Minter. Josh was all rage pumping Mag seven today on Sandy State. Rage pumping.
- [37:14]
D
You were rage pumping Mega seven.
- [37:16]
A
I don't know what I was doing. All right. Kps. Fred. What's up, man? Akbar. Greg Olson. Who else? Cam Rackham. Adamtronics. Giving us like a thumbs up thing. Good. See you. Ryan Edwards. All right, all the gangsters are here. We have a sponsor tonight. Quick shout out to our sponsor. The show is brought to you by Eaton Vance. Michael, what should we say about Eaton Vance?
- [37:43]
D
That's right, Josh. I'll tell you what. When investing in today's market, passive isn't always enough. Highly rated Eden Vance Short Duration Income ETF EVSD offers investors the active flexibility they need right now and over time. Unlike index tracking ETFs, EVSD leverages Eden Vance's expertise to actively select short term bonds, aiming for better risk adjusted returns. In a shift in rate environment, active management can make the difference between standing still and moving ahead. EVSD also invests across a broad range of fixed income sectors, including U.S. government securities and corporate bonds, as well as mortgage and asset backed securities, providing diversification that goes beyond traditional short term strategies. Get active with EVSD.
- [38:24]
A
See how@edenvance.com before investing, consider the fund's objectives, risk, charges and expenses. The prospectus or summary prospectus contains this and other information and is available@eatonvance.com Read it carefully before investing. Not FDIC. Insured offer. No bank guarantee. May lose value. Not insured by the federal government. Government agency. Not a deposit distributed by Foreside Fund Services llc. All right, shout out to Eaton Vance. We have a lot to do tonight. I'm actually pretty excited to to be catching up with you. I feel like we haven't spoken in a minute. How do you feel?
- [39:00]
D
I feel that way too. You left me. You're in sunny Florida and I'm in freezing. You know the. The office heat is not working. Goddamn freezing here.
- [39:10]
A
Wait, what happened?
- [39:11]
D
I don't know. The building is just not working again.
- [39:16]
A
We have a surprise. Ed.
- [39:17]
D
Gardening. Oh, no.
- [39:18]
A
It's Adam Parker. Oh, my goodness. What are you doing here?
- [39:22]
E
Hey, guys. How are you?
- [39:25]
A
Adam, we're so. We're so happy to see you. You know, it's such a coincidence that you dropped by because we were about to discuss a piece of research that you put out last week that both of us had a pretty outsized reaction to. I was really into what you wrote and I Think the topic is so good and so evergreen. So it's so great that you're just randomly in the neighborhood and. And now we can get it right from the horse's mouth. Guys, Adam Parker from Trivector Research is here. Can you tell everyone the difference between Trivector Research and Trivarius it? Because a lot of people know you as Trivariate Research and I know this is a different effort of yours.
- [40:09]
E
Yeah, Trivia. We sell our, you know, research and bespoke services and events to institutional investors, asset managers, hedge funds, allocators, corporations, law firms, boards, management teams, etc. Trifecta is just a. For individual investors and financial advisors. We sell, you know, insights what to do when you get new money as an, you know, ETF analysis and you know, kind of a, we hope a quirky, interesting newsletter that kind of piggybacks off all the stuff we do at Trivarion.
- [40:40]
A
Okay, well, you came to the right place. We have plenty of financial advisors and individual investors here tonight, so really glad you stopped by. Can you tell us about this piece that you did about broken compounders? Sure. It's nothing to do with us at the compound, but come from you guys are.
- [41:00]
E
You guys aren't broken, right?
- [41:02]
A
Not yet. It's one of my favorite topics. Like when do you buy the dip in some of the most popular stocks once they stumble? I think it's like this is such an evergreen topic and I've never really seen somebody go that deep on it. Specifically like, all right, you've got all these stocks now that used to be compounders and some of them have had a really rough go of it. Like, how do you know if they're going to get back on the horse or not? And what are you looking at? So I, I loved what you did and why don't you set the table for us and tell us why you tackled this and, and what it's all about.
- [41:39]
E
I mean, I tacked it because there were names that were like, I would say beloved stocks. United Health for years, massive outperformer Fiserv. I know guys who owned it for 20 years. Like stocks that people just felt like were steady compounding businesses. You look back, they're up 20% a year on average over five years. You hold them. Classic financial advisor. Like you'd want to own those kind of stocks and hold them and then they have like these periods where they, they get decimated. And I think mostly at least long only portfolio managers owned UnitedHealth. And it really hurt them before they figured out that they should get rid of it earlier in the year. And then like you say, some of them come back this summer and say, well, wait a minute, it, maybe I should buy it or should I? And so we, when we do things, we try to do it systematically. You and I could probably cherry pick names that we think are compounders, but when you come up with a set of rules, you kind of have to do it more systematically. So we decided it's got to be up 100% at least in five years. It's got to have done that with somewhat low volatility to kind of qualify as a compounder. Then it has to go down by a certain amount that it hurts. So we studied what we thought makes sense and it was 30 in a month. It was something like, you know, so.
- [42:50]
A
Like a, like a stock getting just murdered after earnings, something bad happens.
- [42:56]
E
Yeah, exactly. United Health is a perfect example from earlier this year where it just, you know, went in half in sort of a three month period. And you know, if you're a index to S P guy, like you owned it. It was big. And you know, I know I probably have, I think I, I know I complained about it on Compounded Friends because, because when I did it, I had about 10 of your listeners be like, Adam, do you need help with your healthcare plan? You know, so I remember, remember saying to myself, don't complain about UNH's pricing power over trivariate. On the next, on the next.
- [43:28]
A
Okay, now you exclude biotech.
- [43:31]
E
Yeah. And that's because, you know, they're down 30% a lot because something's unsafe or you know, drugs ineffective or whatever. So I didn't want to get rung out by those guys. And then, and you know, when you do it, you do pick up names that maybe classic PMs wouldn't call compounders because you're starting to pick up something that might be up a ton. But it was up, you know, you might, you might pick up a MSTR or something in there because it was up so much that, you know, it fits. And maybe people wouldn't call it a compounder. So you have to kind of deal with when you do systematic things, what comes out of it. But we have, you know, we have a list and then we sort of studied. Okay, once they're down 30 in that first month, what happens after that. And I think that's what you.
- [44:17]
A
Well, so, so let's, but let's, let's explain to people the timeliness of this research that you've done. Because you note we in in the year 2025, we have seen the third most broken compounders after the financial crisis. And Covid. So it's like in this, like this is the right market to be looking at broken. Com. All right, so tell, tell us what's in this chart.
- [44:43]
E
Yeah, so this is just how many kind of stocks fit that bill of down 30 in one month after being up 100 or more with somewhat low volatility in the previous five years. So yeah, exactly. The timing. I didn't, you know, full disclosure, I didn't know it was going to show that. I was more just thinking like, man, this, unh, do I want to buy it? And this, this, this fiserv. And you know, and there's, you know, so I just started the study and then when that came up, I was like, huh, that is, that's a pretty big population. So the answer is we studied about 520 stocks that fit the bill over a 20 year period. Which, you know, gives us enough to play with in terms of studying distributions of outcomes and, and, and you know, returns and trying to slice and dice it to say, okay, maybe there are some attributes I want to at least avoid. Because one thing I've learned, and you know, I learned this when I was on the buy side is generally, and we show it in our work, this is not a good asset class. Like once they're down 30 in a month, the basket of them on average is still bad. So there may be some things you could skew your odds a little. And I think Michael has some ideas of stocks in the broker pounders he likes. But the asset class itself is an inferior asset class.
- [45:53]
D
Yeah. So before we get to what happens next and what are some of the similar characteristics of these names? Throw that chart up one more time.
- [46:00]
C
Time.
- [46:00]
D
What's fascinating to me about this is look at the previous spikes that are comparable to I guess, October. You had, of course, the gfc, no explanation necessary. And then you had the rate hiking cycle that looks like late 21.
- [46:17]
B
Yeah.
- [46:18]
D
And then you had like. I wouldn't say. Well, I guess. What would you say? What would you say October was? Because that was before Sam Altman. Or does this was. Yeah, that was before Sam Altman. So is this just general AI disruption?
- [46:31]
E
Yeah, I mean, I, I think, well.
- [46:34]
A
Oracle is, Oracle's in there. That's an obvious one.
- [46:37]
E
Right.
- [46:38]
A
30% a month.
- [46:40]
D
But that's through that, that's through the end of October. So I don't know if Oracle did that through October through November. It did.
- [46:45]
A
I don't Know, I think, I think notably, I think notably Oracle was one of the mega caps that literally fell 30% a month.
- [46:53]
E
Yeah, I mean the issue I guess is that we had so many stocks that were up 100% or more in the previous six months.
- [47:03]
A
Fiserv is probably on the list this.
- [47:05]
E
Year is on the list. F5 is on the list.
- [47:09]
D
So Oracle is not on the list because Oracle was.
- [47:12]
E
Oracle is on the list. It is, it is on the list.
- [47:15]
D
Wait, hold on Adam, not to. Through the end of October Oracle was only down 20%. So whatever, it doesn't matter.
- [47:24]
E
We look at it from October 16th to November. Okay then you know, it's just, it has, it isn't in a calendar month, it's in a rolling one month period.
- [47:32]
D
But the broader point is also that of course we understand what's causing this but this normally happens in shitty market environments. This is not necessarily November was rough, but like run up.
- [47:43]
E
It's a big run up followed by something shitty. And so, so you know, if you think about 07 it was A and 03 to 07 were monster years for the equities before the financial crisis. Kind of same thing with 2019. I mean you had crazy moves in markets before the rate and then the COVID and all the PPP and stuff. So you had some big recoveries from what, March 20 till end of 21. So it's not that surprising. It's a combination of lots of stocks ripping and then I think a little bit of fear working its way into the market. So, so most of these companies been huge.
- [48:18]
D
You know, most of these companies you break them down into different quartiles of quality and not surprisingly for the most part these broken compounders are junky expensive stocks that tend to be in and around technology and consumer discretionary. I'm guessing that is what you thought you would find.
- [48:37]
E
Yeah, I mean there's more compounders in those areas, there's going to be more broken ones. I would say. I'm looking eyeballing and I don't have my piece of research in front of me but, but it looks to me like 255 of the 520 were top half quality. So yeah, it's a little bit more junk than high quality but maybe a little less than I would have thought. I had a couple institutional investors come back to me, Michael, and say I don't care about any of this. I only want to look at the high quality ones because I didn't own any MSTR ever. That's I Made your quant definition, but I never called that quality. And even when we studied just that smaller population, the results were pretty much still the same at a high level, which is, you know, and I guess we're going to get to that. But the basket underperforms even after the one month it's down 30 or more.
- [49:19]
A
Well, let's, let's get to that. So what is like, what, what is like the. So the, the first takeaway is this is not a great pond deficient generally.
- [49:27]
E
Right.
- [49:27]
A
Okay, but what's the, what's the bigger takeaway here? Like, what does happen after they fall 30%? What's the average?
- [49:35]
E
On average, they continue to Underperform by another 10% versus the industry they're in over the next year.
- [49:42]
D
So once that breaks their peers, you gotta.
- [49:45]
E
And I, and I always look at it versus the peers because I don't want you to be like, hey, Adam, no semis are better than staples or whatever. Like, you gotta adjust for what sector it's in because otherwise you might be, you know, creating an inherent bias. And so all the returns we show were relative to the industry group, though, like s P25 industry group. Just to make sure, we're kind of comparing semis to semis and household products to household products or whatever, whatever.
- [50:11]
A
This does tend to happen more to the most expensive stocks, which makes sense. They have the highest expectations built in. Put that next chart up. Count of broken compounders by industry relative. So this is a phenomenon that it's not only the most expensive, but like this is where the potential for those kind of mini crashes resides.
- [50:32]
E
What I think is the single most interesting thing here, and my guess is you have that coming next. And we didn't, you know, I just popped by, I didn't schedule this, but the, the exhibit that shows the, the, the attributes of the worst ones are highest forecasted earnings growth. And, and obviously those are correlated to most expensive. Right. And so when you get really high forecasted earnings growth and you disappoint, that's when you know there's a longer tail to the underperformance. And I think that's capturing a lot of these. It's like, like Oracle or, you know, a company misses and it just resets expectations. And they had really high number expectations and really high multiples. And then all of a sudden, you know, they can be down 30, 40, 50. And you saw that with UNH, where the numbers came down a lot. It wasn't just the first down revision.
- [51:22]
A
See, I was really surprised that the evidence didn't show that there was like a snapback because just like, like, and this is anecdotal, I don't have different data than you. I'm just like, I think of some of these things as being opportunities, but I guess like as a group they're not. Although there might be some specific one off examples where they, where they are opportunities. And I, I think that's maybe why people tend to like get really excited when they see a company they know get slaughtered. Their inclination is like this is going to bounce.
- [51:56]
E
So there, there is a bit of like when you slice and dice it and you just look at the high quality, you just look at the mega cap, which there weren't too many examples. There is like a one week to one month bounce on average and but that by six or 12 months out it fades. So I think that's like the old dead cat bounce phrase of like, you know, I, I mean my, my conclusion was if you're short one of these things in advance, like there's no reason to cover like you, you probably stay short. I mean, you guys know momentum is pretty powerful. You don't want to short a stock at highs, that's for damn sure. Right. So you know, I think it's a little bit, the compliment or whatever of that of like, you know, they're likely to, what's, what's called like cereal serially disappoint and just because they, they just went down once, like on average they're bad. I think if it's a mega cap, it's higher quality, maybe you cover the short. But if it's anything else, like you probably have more, more, more room to run.
- [52:50]
A
We have a table of, of this is, so these are, this is your chart of the latest 15 broken compounders as of November 17th.
- [53:00]
E
Yeah, Oracle's on it. Look, Michael.
- [53:02]
A
Yeah, so let's read because for people listening, let's, let's just give people an idea of what we're talking about. Synopsis.
- [53:11]
E
I would have called synopsis a, a true high quality compounder. I mean they got the Nvidia thing this week and maybe that creates a little bit of a cap, but that's.
- [53:19]
A
One that I barely went up.
- [53:20]
E
I would have been tempted to buy that one as an example personally.
- [53:23]
A
Yeah, him and hers is on here. I feel like that stock is always up or down 30% depending on what day you're looking at it.
- [53:31]
E
Up 582% in the previous five years and then down 30.
- [53:35]
B
Yeah.
- [53:35]
A
Elf Beauty, Super Micro. What's also interesting, Riot and Mara are on here. They're bitcoin related, just like strategy. What's interesting is like some of these names are, I don't want to say meme stocks, but like whenever the ticker is scrolling across and it's showing the highest volume or the, the most actives, like these are in that group of like retail stocks that people love to trade.
- [53:58]
E
And look at the junk, like the junker quality that we show. Like a lot of those are the junkier ones that are like the high beta ways to play, you know, like, you know, acts same thing, right? So, so that I don't, that's why I had some institutional clients say I don't want, just show me the high quality ones only because Oracle is low quality.
- [54:17]
D
Yeah, why? So I bought Oracle last week and it got rejected pretty disgustingly today at the 200 day, if it rolls tomorrow, which is looking like I'm probably gonna bail. So when you're talking about quality, that's what you're looking for. What do you. What, what.
- [54:31]
E
Yeah, we have a quantitative tag, high mid, high mid, low quality or junk or the four buckets. We tag stocks monthly, top 3,000 US equities. We're looking at attributes like level and stability of return on equity, free cash flow generation. We then penalize some things like if you have a lot of leverage or if you have ever cut your dividend or you know, if you turn over your share base, if you have a lot of short interest, like there's a whole bunch of calculations that go into it depends if you're a financial or not if you're financial. We use Tier 1 capital ratio and other things they give you for free that are quality gauges. So it's, it's a quantitative tag. We do monthly and you know, Oracle is an interesting one. They have a decent amount of leverage now. They have negative free cash flow. And so it could have been higher quality six or 12 months ago, but you know, getting a little bit lower quality. And I think that trade, that one's really interesting because I feel like most hedge fund guys I talk to in the pod space, it's just been the easiest AI short because they've got to run neutral to a lot of these factors. And for them it's just big and liquid and easy to short. And it's more confusing to figure out when and why to short Broadcom or Nvidia, you know, so it's, it's more a function of the debt, I think and the perception of their position.
- [55:42]
A
All right, so to sum Up. The first thing is when you see a stock that had previously been a compounder stock that had doubled over the last couple of years, low volatility, everybody loved it. When you see it break, like really break 30% or worse, that is not in and of itself a quote unquote opportunity. Really important point.
- [56:04]
E
Yeah. It's probably more likely to be continue to be bad than good. And the thing to most avoid is if it has really high earnings expectations.
- [56:12]
A
Right now, if you still are undeterred and you must buy it, understand Adam's research shows pretty convincingly that it's more likely that that stock is going to underperform its peers. And maybe what you're better off doing is picking a different name in the group would be another takeaway.
- [56:31]
E
If you have a one week horizon, maybe you'll catch anything. But if you're six or 12 months, the distribution is pretty negative. That's right. Yeah.
- [56:38]
A
Okay. Now if you're betting against one of these names and it breaks, that may not be the entirety of the gain. There may be more to come if you're, if you're inclined to be short or stay short. Short. I think a lot of people would be very happy to just take a gain like that on the short side, just like you would on the long side. But you're showing hedge funds, hey, maybe that's not the signal.
- [57:04]
E
I know guys who shorted UnitedHealth after they were long. It, I mean, you know, they were long, it went down 30 and they were like, I don't know what this thing's gonna earn and I'm gonna short it. And they picked up, you know, some of the money they lost on the short side, you know, so I, I do think that the data show you want to, on average, continue to short it. Now, there may be individual names that you've done fundamental work. You think it's overblown. You know, I don't know if it's, you know, Adobe or whatever, you know, people want to look at, but you're fighting in choppy waters when you do that, Adam.
- [57:36]
A
You do awesome research. I want to just thank you so much for completely serendipitously stopping by this evening. Yeah.
- [57:44]
E
Can we get some wine next time or something when I stop by? You know?
- [57:49]
A
Absolutely. I'm gonna bring it. I'm gonna break out the entamins the next time we have company.
- [57:54]
E
Raspberry Danish. All right, I'm in.
- [57:55]
A
Yeah. I want to tell people where they can get more research like this directly into their inbox. We want to send people.
- [58:03]
D
Yeah.
- [58:03]
E
Trifectoresearch.com trivector research.com w.triptor research.com okay, it's a hundred dollars a month. You get a one free month because you, you listen to YouTube. Okay. And we'd love, you know, I love, I love hanging out with you guys. Happy holidays. Happy New Year.
- [58:22]
A
Awesome, thanks. Thanks for all your great work this year. Happy holidays. We'll see you soon. All right. Wasn't that cool?
- [58:29]
D
So, Josh, I wonder if I were to ask you the question, what do you think generally happens. Now I know we know the answer, but what do you think generally happens after a stock has doubled within a 5 year window and then loses 30 of the month?
- [58:41]
A
Month.
- [58:42]
D
I think you and I would both say probably best to avoid like when that sort of reset happens, there's something really gnarly going on. And forget about the short term dead cat balance. That is probably not a stock you want to buy and hold for the next six to 12 months.
- [58:54]
A
You're right. I would have guessed it. But it's so nice to actually have the data and to like see all these like real examples of it. And I have to tell you, like, I spent the first 10 years of my career data free and just my instinct was always like, oh, like you would see like a pharmaceutical, not a biotech, but like you would see like Merck blow up because there's a product recall or you would see and anything like that. You just be like, oh, that's a big giant name brand company. I've made money and it's the long side, now it's getting killed. This is a perfect time to start a position because you don't know. Yeah, like you just, you're acting on instinct and you're acting like a child and you, you so like having that data. Maybe, maybe that, maybe that's the thing that protects you from like that instinct. And I don't have that instinct anymore. But I, for 10 years I ran myself ragged and banged my head against the wall trying to do stuff like that. And it's nice to know that it doesn't work for anyone.
- [59:56]
D
Josh, did you guys talk about Apple on the show today?
- [59:59]
A
Yeah, like they cleared, it was very, apparently in the tech press what Apple did today was very widely expected. They cleared the decks of all the failure people from the Siri relaunch, which didn't work. The Apple Intelligence launch, which didn't work. Like they got rid of a whole bunch of people and they brought some new people in. It's a All these AI people are like in the same orbit. Like they're ex Microsoft or X Alphabet or in some cases both growth and they're kind of like cycling through. But apparently the tech reporters were all like, yeah, this is a long time coming. So that's, that's the extent of what we talked about with Apple. But the stock hit a, hit a new all time high today. Yeah.
- [60:43]
D
Yeah. So the stock is 14.5% year to date, market cap all time high of $4.2 trillion. And I was just.
- [60:51]
A
No AI in sight before we jumped on.
- [60:54]
D
So Apple hasn't fallen. I have to fact check this by just eyeballing it. Apple has not been outside of the top three market cap for the last decade. Is that nuts?
- [61:05]
A
I mean it's like, it's like it's nobody. Here's the bottom line with Apple. I can't tell you that it'll ever grow the way it was growing in the, in the 2000 teens. But like people will not stop using its products. The lock in is just immense. And that's. It doesn't have the multiple it has because we're overestimating. Its future growth has a multiple it has because people know in the end they're going to deliver. It's like the earnings will be there because the ecosystem lock in is like airtight.
- [61:44]
D
How about this? No. What else? Know what else? Apple, I guess never say never. But let's just call within the next couple of years Apple will not be a broken compounder. What in the world would have to happen for Apple to fall 30% in a month?
- [62:00]
A
I mean, like, honestly, something we like. I, I would, I'm trying to think like what could make. Because the way I would tackle that question is what could make people all of a sudden reject their Apple products absent.
- [62:11]
D
Absent a market asteroid. Right? Like, absolutely. A Covid type of.
- [62:14]
A
The only thing is like a massive security issue and Apple is like the gold standard for electronic device security and, and network security. Like so if, if there was some massive hack where a billion devices all of a sudden started feeding information about their users that would hurt. That would be maybe, maybe that would be the thing I do want to address in the chat. A lot of people are asking what happened to Scott Wapner today? Scott's fine, guys. He needed a sip of water. He's a little dehydrated, but he's perfectly fine. And not no story there, no conspiracy. He's. He's all good. Spoke to him after.
- [62:57]
D
I want to talk about the balance that we've experienced. So two weeks ago when we were in Texas, we spoke with Warren and we're like, oh man, this is not gonna age well. And then a week later it's like, holy. We closed it. A new all time weekly high. Like last Friday. The S and P had never in the history of Fridays closed higher than it did. Blew my face right off my torso and then follow through like it's, it's, it's, it's, it keeps going. So Duality Research, a company whose respect, whose work I respect tremendously, made an incredible chart showing the S and P overlaid with a very short term five day moving average of the S&P 500 advanced decline line. And we just got the highest five day advancer count in more than 10 months. Like yeah, what a freaking bounce, dude.
- [63:46]
A
Yeah. And I actually called for the RSP chart on the air today because it's really important for people to understand that what's taken place since, I guess the AI swoon of late November, like right before Thanksgiving, people little things got a little shaky. What's taken place since then isn't like another bread thrust. Right. And the rsp, I don't know if it ended up hitting a new high today, but whatever it got, damn it got damn close. Yeah. It's back at its previous highs from the rest of this year. So the, the equal weight S P is confirming looks, looks amazing right now.
- [64:27]
D
Yeah. What was a lot of notable things to discuss about November and we did all of it with all of the tech trade and all that sort of stuff. But it was an unusual month for many different reasons. But the leading sector and by the way, the, the market was actually up. Hard as it is to believe, in November what drove returns was healthcare. Like tech took 1.5% away or like away from the market. And even still health care, comm services, that's Google obviously, financial staples coming up the rear and bringing the market positive.
- [65:05]
A
It's really hard to get bearish when the leadership in the market falters. And all of a sudden you have a health care company become a trillion dollars and, and you have all that, all that money that wants to be invested, find other games to play. And they buy JP Morgan over $300 a share and they take Morgan Stanley to a new year high and they. Right. It's like these are also big market cap stocks. They're not in video, but in the aggregate like Berkshire, jpm, Citi, they're big stocks. And the money was flowing. And then you look over at health care, you Got the app Vs of the world and those stocks are making new highs. So, like, how do you, how do you get bearish when you look at your fellow investors shifting their bets from one stock to another rather than from stocks to cash? Because that's what they did. He said, oh, this AI shit is, is not playing out nicely. Okay, what else could I buy? That's the environment. Like what you, you shouldn't need me and Michael to tell you guys were that that's what a bull market is. That's what should happen. And it did. It's really fortunate that it did. I also don't think healthcare is being bought because it's, quote, defensive. It's not. That's not my read of the situation. I don't think they're buying the GLP1 stocks because they're looking for. For defense. They're looking for growth. You know, I don't think that's like a rotation to safety. I'm sorry, I just don't think that's what's going on at all.
- [66:42]
D
When you and I were speaking with Joe, we were talking about, like, it's just the market feels weird. Like there's a lot of just weird things happening within the stock market itself. Looking at the band aid of the RSP spy stretching and then snapping, just completely falling through the basement. And we saw a nice rebound subsequently. But I saw this data point this last year.
- [67:02]
A
Wait a minute. Before you move on from that point you're making, what's the benchmark of a normal year? Market feels weird versus what, like 2019?
- [67:15]
E
No, not.
- [67:16]
D
I mean, listen, I understand that every year is a little bit different in its own right, but this just felt particularly unusual. I'll give you an example. I think this chart is from Grant Hockridge. Sam Gatlin tweeted it. Maybe Sam created. I don't know. But it's a wonderful chart and it's showing the number of 1% up days per year versus the number of 1% down days per year.
- [67:36]
A
Year.
- [67:37]
D
And Sam tweeted that 2025 has been a weird year. There have been more big down days than big updates. And of course, this is not a bear market. Right. The market is up 15 year to day. Whatever it is. Sam writes the last two times this happened, the market was in a nasty bear market. Obviously, as you expected to be.08 in 2022. It's just been an unusual year.
- [68:00]
A
So I guess my take on this would be. It's interesting to know, but my take on this would be like the Hallmark of like a true bull market year is not big up days or bigger updates. That or more big up days than big down days. Like it's a. The hallmark is the grind higher, the relentless, like four out of five days every week. And that's what at least the fall has felt like. I know it hasn't been like that the whole year, but for the most part, like that's what bull market. That's what bull markets make me think of. They make me think of like up markets up. And it's green markets open. And it's green markets open again. Oh, hey, look, it's up. Like that's really what I expect from bull markets. I don't expect those explosive updates. Those to me feel like you should be looking for those in bear markets. You know what I'm saying?
- [68:55]
D
I do know. You were saying. So the poster child of what you're describing. Throw that chart up please, is 2017. And I didn't notice this until you just mentioned it. Throw the chart back out, please, John. So 2017, if my eyeballs are correct. Yeah. Is that little tiny like divot in there? You see that one in the middle where there's like no updates and no down days that are over 1%?
- [69:20]
A
Yep.
- [69:21]
D
That was 2017, which was a, which was in itself a weird bull market. It was just a slow, that was truly a slow grind higher. The S and P was up like 20 something percent that year. And there was, it was literally, it was this. It was very slow and deliberate. There was no big updates. But anyway, the point is that you're right, a ton of updates is not, does not necessarily define a bear bull market. It's just unusual. And it's unusual because what if what happened in April, right? A lot of the big 1% down days came in April.
- [69:50]
A
Do you know what the headlines were in the financial media in 2017? They were, there's not enough volatility. Wall street is not making any money because there's not enough volatility. Like I want, I want people to understand and I don't have time to like go back and Google this and find all these articles. But I'm telling you, this was in the Wall Street Journal. This was like in the Economist. Like anyone that wrote about markets in that year, they were writing about the quote, unquote dangerous lack of volatility in the market.
- [70:25]
D
Here's what happens. This is what you're talking about.
- [70:28]
A
Read it.
- [70:29]
D
So by, by Neil Irwin. The stock market is weirdly calm. Here's a theory of why and that was in the middle. That was in May now, Josh.
- [70:37]
A
But it was a prop. But the. It was problematic was the point.
- [70:41]
D
But the juxtaposition of political volatility, not filtering it to stock market volatility, that had people like, this is weird.
- [70:50]
A
All right. Like I was doing TV shows with active traders throughout the course of that year and people were like angry, like, like, oh, this is so boring. It tells you that the financial media needs for there to be drama. And if there isn't any and you have a year like 2017 with no big up days or big down days. I think the market went up 30% that year. Ish. People still found the reason to be upset because there wasn't enough trading volume, there wasn't enough volatility for certain strategies to make money or certain trading desks to benefit. So I guess my point is that every year is weird and they're weird and they're weird in different ways. Because I wouldn't say that 2017 was a normal year. I would say that's completely aberrant.
- [71:42]
D
Yeah.
- [71:42]
A
To, you know, to have that little volatility.
- [71:45]
D
So I pull as I'm looking through the Google machine into like headlines from 2017. I found one of your posts on LinkedIn. My big takeaway from 2017.
- [71:55]
A
Oh God, how dumb is it? I'm surely. Did it age?
- [72:00]
D
I'm sure it aged perfectly fine. All right, let's talk about Adobe.
- [72:03]
A
You are making the case tonight. So I'm not going to make the case per se. I'm going to present the case. Can I tell you, is that semantic?
- [72:12]
D
Can I not bury the lead? I didn't tell you this, but I'll tell you now. I bought Adobe today.
- [72:17]
A
Oh, shit.
- [72:17]
D
All right, let's go.
- [72:18]
A
Maybe I'll make you feel better about it. Is this a generational bottom or. Or could it bounce from here? But it's a company still in a long term secular decline.
- [72:32]
D
I don't know about, I don't know about Adobe. I listened to the conference call today to get a little bit educated because Adobe as.
- [72:41]
A
Tell us more about your process.
- [72:42]
D
As the CEO said, off is my own money. They said, simply put, Adobe is the operating system for creative work. And of course creative work is the epicenter of the AI disruption. My hashtag quote, thesis and I'll sell if I'm wrong. I'm not like married to the stock is that Adobe is understandably being punished but to extreme levels and analysts are not backing down. It was a great call. It was a beat and A raise. And I think that they are going to be a massive beneficiary of the AI transformation. I don't think that all of a sudden all of their Enterprise and Fortune 500 customers are going to dump Adobe and start using Banana Hammock or whatever it is and the chat bots and just cut them out. I don't buy it.
- [73:29]
A
Okay? I don't either. I just don't know if that will matter right now.
- [73:34]
D
But I totally agree.
- [73:36]
A
Yeah. So I actually think that there is a world in which Adobe sits on top of the entire silo of AI tools and the user interface that they provide, whether it's Creative Cloud or Firefly or any of the tools that they been selling to creative people for, I don't know, 35, 40 years. I think that people like their workflows in those Adobe products. And as Adobe amplifies the power of those products with AI, they will keep those customers. I just, I don't see everybody cutting their licenses and, and just being like, you know what? I'm gonna have the AI create all this stuff for me now, professional especially.
- [74:21]
D
So if you listen to the call, you would never guess that the Stock is down 55%. John, throw this chart up please. That I had Chart Goat make the, the earnings one. So, so we've got a chart. Josh, this is unbelievable.
- [74:35]
A
I know.
- [74:36]
D
I'm sure there are other charts that look like this, but for the listener, the earnings per share are literally at an all time high. It was a record quarter and yet the market is saying, I don't believe your, that your earnings are sustainable. I believe that you are absolutely effed because the forward PE is at a decade low. I don't. This is very, very unusual and the market's either very wrong or very right.
- [75:04]
A
I want to get to some of the comments in the chat because people have really strong opinions about this and I sort of agree with some of these points. Figma's in a partnership. Adobe's in a partnership with Google. Long term, they always have been, but Figma is too. And Figma came public earlier this year, raised a ton of money. And they're not competing with Adobe in every part of their business, but they're a mainstream player. I think it's worth bringing up that that might account for some of that pe. Multiple decline. Let's see. Big Bob's barnyard points out Adobe has ripped off professionals forever and they have been won in competition and now they have options. The professionals won't come back. All right, so I think that's probably an overgeneralization. I'm. I'm sure people do like that there's competition that'll be a lower price. I don't know that everybody leaves just because there's a lower price competitor last one Brian McKeon says or two more. Adobe missed the boat. Could have been the new Hollywood production with direct to consumer platform. Hope they catch that wind. They are. So it's not Sora. They're not trying to be first. And the truth is their direct consumer business is not as important as their professional business. Kimball the Nimble says Adobe logins at its website are designed by someone who is trying to make you confused. Interface has sucked for years. All right, look, there are very legitimate problems with Adobe. I think that's reflected in the stock. It's at a massive, massive drawdown.
- [76:40]
D
5%. Everyone. All the problems are very much well known. Nobody.
- [76:44]
A
Okay, look, I remember Apple in 2013 selling at a 12 multiple. And Carl Icahn came in, took a huge position and they asked him like, aren't you worried about competition from China and Android? And, and his comment was okay, it's 12 times earnings though. Like, like it's 8 times earnings. Backing out the cash. I don't know if Adobe is 12. We'll get to that in a second. Put up the chart. Here's one year. Disgusting. Yeah, disgusting. But everyone knows it's not like I'm not, we're not revealing anything, right? Every, everybody gets it. Everybody gets it. Here's a 10 year chart. Erased all of it. I don't know. Half a decade's worth of performance. Like, it's, this is very, very, very well understood.
- [77:32]
D
So wait, Josh, this is something you.
- [77:34]
A
Might be in trouble.
- [77:36]
D
Yeah. This is very much not a compounder, right? If somebody's like, no, hey dumbass, didn't you just hear what Adam said? That's, that's not. This.
- [77:43]
A
No, no, no, no, no. This didn't collapse. 30amonth.
- [77:48]
D
And it was not up 100 in the past five years. Years at all.
- [77:52]
A
Let me show you Adobe three year chart versus I want to give you some perspective. Salesforce, which is in Blue, this is three years is up 60% and that's an underperformer. The iShares expanded tech software sector ETF IGV is up 89% in the same period. This is just back to J. December 22nd when ChatGPT came out. That's why I'm showing you this chart, guys. The, the start of the AI age. Adobe's now negative 6% for the start of the AI age. Now, are they going to lose seats? Probably. Are they going to have to cut some of their pricing on some of their products? Maybe. Because I don't think this AI stuff is going to be free, no offense. Are they going to be, are they going to be the company that figures out how to successfully commercialize AI tools and get professionals to pay for it? I'd say absolutely. Fucking lutely.
- [78:53]
D
Yeah.
- [78:54]
A
Here's. Oh, I did, I did an Adobe versus P ratio too. I did it in two panes.
- [79:00]
D
Yeah.
- [79:01]
A
You know what I'm saying?
- [79:02]
D
Yeah.
- [79:03]
A
Like if you think you're the first genius to be like, oh, Adobe's threatened by AI, dude. Everybody understands that. Not just the stock price, but the valuation. It's crazy. One other thing I want to say about this. Oh, Adobe is buying back stock 2.2.5 billion, a new agreement from Q3. They have 8.4 billion of the, of the $25 billion prior authorization still left to do so. This is a company that could conceivably be buying like 11 $12 billion worth of stock in the very near future into a multi year low. And I want to show you the shrinking of the share count. Put this chart up. This is shares outstanding. You know, a lot of these software companies, the share count is growing because they're issuing stock options like crazy. And with Adobe, they are like, this is like the classic kind of stock that like a Berkshire would have bought back in the day. Look how they're shrinking the float. It looks like it's down. I'm eyeballing. What is that, 25%?
- [80:09]
D
Yeah, it went from 500 million to 420. Well, guess what, they report earnings next week or in two weeks. So we're gonna, we're gonna hear from them soon.
- [80:15]
A
Well, I have more on this. Is this like buying Alphabet last summer or is that a bad comparison? Because people are saying a lot of the same things that Google is existentially endangered by AI. Is that, is that a bad comparison?
- [80:35]
D
Well, it's not bad in the sense that they're under the same threat. The difference is Google addressed the threat and neutralized it and leapfrogged it. I don't know what Adobe could do or say that would, that would lift those concerns. So I don't see Adobe like doubling and taking it, retaking its all time high. I just think that there's so much pessimism in the name and I think that it's, it's too much. And, but listen, it could, it could easily fall 15 after earnings like I don't know.
- [81:03]
A
Okay. Because I made that mistake with, with Alphabet. I, I believed in that story more than I should have that they were had this existential threat from, from OpenAI and, and, and others. So but here's the thing out that way.
- [81:19]
D
So last time they reported it was 11% growth a beat and raise and the stock balanced for like a minute like nobody believes it. So I don't know what they would have to say that would all of a sudden lift those concerns but we'll find out.
- [81:36]
A
Only, only, only product like only launching things that, that catch on like launching. But the problem is they are, they're not an AI company. They can use other people's tools and they can provide ports so that these new things that are invented can be used in the Adobe environment. But they, unlike Google they, I don't think that they can invent their way out of this. They can, I don't think they could partner their way out of this. So that, that's why partner with everyone already. Wall street is not giving up on this story. No $300, $20 stock. Pull this, pull this graphic up. The high target on the street is 605. You imagine the average targets 452. It's $318 or whatever it is 24 buys four overweights. 11 holds two cells. For a stock that's down this big, it's pretty remarkable. I want to give you some commentary here. Barclays just raised its target after the last earnings report from 460 to 465 firm pointing to outperformance in net new annual recurring revenue. Key progress in AI noting that AI 1st ARR more than doubled over 2/4. I don't know. I got a whole bunch of, I got a whole bunch of price targets. Some raise, some reduce. Just, it's just, it's a battleground name. The one thing I want to say is that in Harvard, when you go to Harvard, one of the case studies they teach you in business school about disruption is from 2004, 2014 when Adobe went fully subscription. That's 11 years ago. Adobe was the first company to successfully subscribe. Take its entire business model of selling people software and change that to getting people to subscribe to their services. And when they did it, the stock became a compounder. It became one of the best performing stocks in the market. So this is a company that's got a heritage of completely remaking itself when, when the gun was to its head and Adobe did that so the question is, can they reinvent vertical AI what they're calling and have this user interface on top of the LLMs that customers will pay them for? And we don't know. But I do think technically I like an entry here. I like 275 as a stop. That has been the line in the sand before. I think it's a relatively low risk entry and we get to find out together.
- [84:24]
D
Yeah, I mean, listen, listen. We know that surprises usually happen in the prevailing trend, right? So maybe I'm an idiot, but taking a shot and if I lose money, won't be the first time.
- [84:34]
A
Is that where your stop is? You want to reveal where your stop is for everyone who's watching?
- [84:38]
D
No, I'm not telling the robots where my stop is. I'm not telling them. Come on. All right, let's keep moving.
- [84:45]
A
All right, we'll do this quickly. Surprise chart on. This is a. This is an ad from 1966. TIAA CREF designed this ad to scare people into saving for retirement. This is going viral now as sort of a, an inflation meme. Look how accurate these price predictions were. So the ad set and, and when this ran at the time, people were probably like, oh, why are you trying to scare people? This is like a magazine ad. They say in 30 years a burger and fries could cost $16, a vacation $12,500 and a basic car, $65,000. I think that's the average purchase price of a car in this country this year is sixty something thousand dollars. I think that's the number like on the nose. Burger and fries, 16, maybe, maybe without the fries. I don't know. How much is it? How much is like not McDonald's but like if you sit down in a restaurant, order a burger, it's probably 16 bucks.
- [85:54]
D
Yeah, easy, right?
- [85:57]
A
I know you're a Minetta Tavern guy and that's probably 30, but vacation, 12,500. I wish, I wish. Your Disney, your Disney trip is not going to cost you 12,000, thousand. I'm gonna predict upside from there. What do you think?
- [86:18]
D
I don't think it's that much more, to be honest.
- [86:21]
A
How many days are you going?
- [86:22]
D
No, it'll be like around there. Probably five, six.
- [86:25]
E
All right.
- [86:26]
A
Yeah. Anyway, the wake up call from, from, from 1996, 30 years later, that's what ended up happening. If you made this ad today, what would you have to put in for these things? What would you have to put in? What do you think a burger and fries will cost 30 years from now? 100 bucks.
- [86:46]
D
That's a hundred things to think about.
- [86:48]
A
I know, but don't think about 100.
- [86:49]
D
Let's say, like, legitimately, in 20 years.
- [86:52]
A
30 years. 30 years, not 100 years. Okay, this was from 1996. So 30 years ago. So 30 years from today, what would you guess a burger and fries will cost? Cost. I'm looking right now, calculating it.
- [87:07]
D
Yeah.
- [87:08]
A
You're such a nerd.
- [87:10]
D
I'm telling the machine. I'm saying bucks.
- [87:12]
A
$100. It can't be. Why can't it be?
- [87:18]
D
Dude, are you making. Are you making the case of bitcoin? All right. No, no, no. All right. Thank God. It can't be. So I just did 20 bucks. Compounding at 2% a year. Right. Is that reasonable for a burger? Why would it compound at more than 2%?
- [87:30]
A
I don't know. What do you. What do you get?
- [87:32]
D
That's. That. That's $37 is $100.
- [87:37]
A
Manetta Tavern stop.
- [87:42]
D
$100.
- [87:43]
A
All right, how about this?
- [87:44]
D
Pulp Fiction. It was a $5. It was a $5 shake.
- [87:47]
A
Don't you feel like there are $37 burgers now in Manhattan and it's just, like, accepted?
- [87:53]
D
Yeah, you could find it.
- [87:54]
A
You could find Vegas and absolutely, like, everywhere, almost. How much is the Oshava burger worth? Right? Like. No, I agree, but how much is it. How much is, like, that cheeseburger with the egg on it is the.
- [88:11]
D
Yeah. Oisheval.
- [88:15]
A
18. 18. I'm. I'm. I'm tripping.
- [88:18]
D
Deal.
- [88:19]
A
No, stop. The cost of an Oshaval cheeseburger In New York, $30.
- [88:24]
D
26.
- [88:25]
A
Yeah. When ordered with additions of a fried egg and bacon.
- [88:29]
D
You're not going to take that.
- [88:30]
A
And I don't know what. And I don't know why you would order it any other way or. We are. We did. We lose a war.
- [88:36]
D
We're not animal.
- [88:37]
A
All right, all right. That was that. And then last thing. Will it piss you off? Because this is coming when OpenAI starts to run ads inside of chat GPT sponsored results in your. In your. In your AI. Will that bother you?
- [88:57]
D
You know it's coming, and it's a business they're going to try.
- [89:00]
A
Well, we have to talk about this Code Red thing.
- [89:02]
D
Like, did you order the Code Red?
- [89:06]
A
Sam Altman ordered the Code Red. This is the Wall Street Journal. I think it's a really big deal. And I know, I know we don't want to, like, every time the media gets worked up over something, we don't want to just jump, but in this case, Ticket's sort of a big deal that this stuff is, like, getting out there. OpenAI chief executive Sam Altman told employees Monday that the company was declaring a code red effort to improve the quality of chat GPT and delaying other products as a result, According to an internal memo. Altman said I had more work to do on the day to day experience of its chat bot, including improving personalization features for users, increasing speed and reliability, allowing it to answer a wider range of questions. So they're really spooked by Gemini, as they should be. And honestly, agentic my ass. None of this shit actually works. I have to, like, tell it the same thing every time I use it for the same function. It's supposed to, like, remember things.
- [90:06]
D
Didn't. Was it down for you? It was down for me, like all day. I was using Gemini.
- [90:08]
A
I don't know. Maybe. Maybe we're all better off that it was down. It's starting to piss me off, honestly.
- [90:12]
D
But Josh, you're right. Right, I was. I had it. I had to do a. An image for me yesterday for a thumbnail, and I said, no, take this out. I don't need that. And I just. I just stopped. It wasn't working.
- [90:24]
A
But I don't want to complain.
- [90:25]
D
It's. It is magical. So I don't. I don't want to complain.
- [90:28]
A
It's magical adjacent. It's magic.
- [90:31]
D
No, no. How about this? It's not getting worse than it is.
- [90:35]
A
I don't know if it's getting worse or not, but the, the promise of this was that it would remember the way you want things and be able to repeat that.
- [90:45]
D
Yeah, but you're very difficult. You're very difficult.
- [90:47]
A
I'm not difficult.
- [90:48]
D
You're very. You're extremely difficult.
- [90:50]
A
Not. I said to it, you know what I typed into it? I said, why can't you just do this the way you did it for me on Friday, asshole. Like, because I do like, like, I do, like, research stuff in there and I just want it the same way every time. I don't want to reteach it. Like, why do I have to reteach it? Things that I taught it twice, three times, four times. Why does it keep changing things up? And I think that's part of this code Red thing. Like, I think they're hearing that complaint from a lot of people. Like, why is this thing freelancing? I already told it what I want. So are we being spoiled?
- [91:31]
D
Oh, absolutely.
- [91:32]
A
Am I?
- [91:33]
D
Remember, Remember? Louis did a bit. I think it was a Letterman. I can't Or Conan, where people. This was years ago, but when WI fi came to airplanes and people were like getting really upset that the WI fi wasn't working when it just came into the sky, like, yeah, dude, we're spoiled because this luxury is now a necessity. And when it doesn't work, I get pissed off.
- [91:54]
A
Right. He's saying like, like the guy next to him or something, like the WI fi didn't work. It was like the first time they ever had it.
- [92:01]
D
Ah, this is bullshit.
- [92:03]
A
Yeah, right. Well, it's true. AI Secrets is saying developers have uncovered ad modules buried in ChatGPT's Android beta, including search, ad carousel and bizarre content. Yeah, obviously the timing is. Wait, but it's the timing. The timing is no accident. OpenAI's compute build now runs into billions per quarter. HSBC projects that it's much touted 29, 2029 profitability target will not only fail, but sink into more than $100 billion in cumulative losses. After months of denial, the company seems ready to trade purity for revenue. The leak shows a fully formed ad system waiting for the green light. Okay, one day you're going to open this thing up, you're going to put in a query, a prompt, sorry, and you're going to get right above where you get your answer. You're going to get sponsored results, something.
- [93:09]
D
Are you acting like this is like breaking news? Of course it's coming.
- [93:11]
A
But you're paying $20. It's like when they started airing commercials while you were watching cable. You're like, wait, I understand. I'm paying for cable and they're advertising to me. I'm telling you that this is not going to be popular.
- [93:23]
D
Okay, then you could switch to Gemini or you could switch to the other one that's.
- [93:26]
A
Well, they can't afford for more people to switch to Gemini. Gemini reported 650 million users in November, up from 480 million the month before. I don't think OpenAI can afford for more people to be turned off, but they also can't afford the cost of this build out without more revenue than they're taking in today. This is a really. I think it's a really big deal. I do not think they're launching an ad network from a position of strength. So I don't. I just, I feel like they probably would prefer not to have to do this, but they might have to do.
- [94:03]
D
It if Open AI were public. How bad is it, getting pummeled? I know we've asked this before, but.
- [94:08]
A
I think it's in a 30. I think it's in a 30% drawdown easy. I think it made a high in September and I think it's in a 30 drawdown. Just mentally because I think September is the last time they raised money. Right. Was that the softbank, the whatever, the, the 500 billion dollar splash? So yeah, I think, I think this is a publicly traded stock. It is, it is, it is probably in a drawdown similar to what whatever Met is in.
- [94:36]
D
Let's say it's down 40. Let's say it's worth worse because I think it's down more than Oracle for sure. Would you buy it?
- [94:42]
A
I wouldn't, I'd probably be afraid to, yeah. Until it started going up and then I would. And then I would load the boat. All right, all right. We're up to, we're up to make the case. This is you.
- [94:56]
D
So take it away. Okay.
- [94:58]
A
Take us home.
- [94:59]
D
All right, so I'm gonna make the case for energy stocks. I have not pulled the trigger yet. I don't own any of them. So I'm going to be piggybacking off some of the things that Josh said. I saw a chart this week that really caught my eye and I said, you know what, it's time to make the case. Look at this chart from Turning Point market research. The three year rate of change, the S&P energy versus the S& P. Honestly, I don't even care what the story is like. Honestly. And literally it is so far underperforming. It's the worst sector over the last five and 10 years. I think it's neck and neck with real estate. The S and P is up 230%. The, the. I'm sorry, 280% the S&P over the last 10 years. Energy, this is total return is up 97. Just massive, massive, massive laggard. But I'm going to make the case that if, if I were to buy it, I just buy the, the index and here's why. This chart is from S and P Global. I never seen this before. This is chef's kiss. Let me explain what we're looking at because it could be a bit confusing. On the X axis we're looking at the average dispersion and what you'll notice all the way on the right is these sectors that have the most dispersion within them. In other words, the widest range between winners and losers is comm services. Not surprising. And technology also very much not surprising.
- [96:16]
A
I would have guessed that.
- [96:17]
D
Sure you would have. And then on the other end of the spectrum is energy stocks which also you would have guessed because if you were to fire, if you were to compare like a shotgun blast, the technology and comm services, if these were like total returns for the year, it would be a very wide radius. Energy stocks on the other hand is a tight radius because they all move directionally the same because of the price of oil. So it also has, it also has, so it has low average dispersion, meaning not a lot of opportunity for stock pickers. And the average correlation is by far, by far the highest of any sector. And the number in the parentheses was a bit confusing. That's just a 12 month volatility, so you could ignore that. But energy, no dispersion, high correlation. So yeah, you could pick winners if you want. Josh, I know you like to, but if I'm going to, if I'm going to wait here, I'm just buying the index.
- [97:03]
A
I pitched Baker Hughes today on the air. It's on the best stocks in the market list. Oil has not rallied at all. This stock is at a 52 week high. It is its third attempt to break through 50 or fourth attempt to break through 50. Stock looks incredible. You know what's, you know what's not in this stock price? Anything positive, but one of two things. The first is the rig count. Baker Hughes actually has been publishing the weekly rig count since 1944. It's almost 100 years of data that the rig counts are just dropping and dropping and dropping and that sounds negative but it actually, it's super positive because when that turns, Baker Hughes itself is one of the first beneficiaries because then everyone's earnings estimates have to start being raised higher. The more rigs obviously in production, the more work there is for oilfield services companies like BKR to do. So that precipitous decline in rig count is super bullish when you look at the stock already at its all time at its 52 week high, that's 1, 2. I have no idea. If you get oil moving back to the upper end of its range which is 80, 85, I have no guess even. But in any given year like the price of oil does not just sit at its low. So if and when that happens, this will be one of the first names they buy. So I'm blessing your make the case. I'm ratifying it and I like it.
- [98:36]
D
Do you own Baker Hughes?
- [98:37]
A
I'm about to. I own psx. I own the IEO which is all of the producers I probably should take a second look at. I've Been talking positively about Exxon. Just haven't pulled the trigger yet.
- [98:51]
D
You know what else I like about energy? It does sort of. Not sort of. It is unlike the rest of the index in terms of the way that it moves. It truly is its own thing.
- [99:02]
A
It's. It's that and then something that Nicolas told me a while ago and stuck with me. It is your only true hedge against an oil price spike emergency. It is like there is no other real way for an equity portfolio to hedge that risk. Like you could have, I guess, I mean, I guess you could have like stop losses and trades on with your other holdings, or you could just keep a sleeve of energy stocks at all times. And that's like the perfect hedge for that particular type of risk. So anyway, a lot of these names are on my list and we have some charts. So here's Baker Hughes. Like, like, I, I don't know the story for why this breaks 50. I just know it's going to happen next.
- [99:49]
D
10 points are higher.
- [99:50]
A
Yeah. I don't know why it will. Here's marathon. This stock's been working all year. This is a refiner. It's a little bit different. This doesn't trade on higher crude. It trades on a widening crack spread, which is the dis. The difference between the feedstock, which is the oil itself and the price they can sell gasoline at. Like, just broadly speaking, that's what this trades on. This is the best stock in the market. This one I do own. Phillips66PSX. I don't know why this is going to go through 140. I just know it's about to. I don't know the story. I'll know it after, like everybody else. Here's Exxon. This one is not ready to go yet. It's, it's. But it's sort of like a pennant and it's getting to a decision point and it's closer to the upper end of its range than the lower. Say, what do they call this, Mike? An asymmetric triangle. I think it's an ascending ascending triangle. Whatever. It's gonna, it's gonna go this one, this one's gonna take a while. The other ones look closer. So these are all, These are all on my, on my list. All right, mystery chart. We'll get out of here. I don't even know. All right. Okay. These are two very closely related things. One is a stock, one is not a stock. What are we looking at?
- [101:09]
D
One is a stock. Okay, is, is the light blue line an interest rate?
- [101:15]
A
It is not it is another asset that is not a stock.
- [101:21]
D
Is it an index?
- [101:23]
A
The. The dark blue line? No. An index can't be an asset. It's okay. It's an asset and a stock.
- [101:30]
D
Okay, I hear you. An asset and a stock. Can you tell me which one is which? The light blue is an asset.
- [101:39]
A
You want to glance at the live chat? Because they're kicking your ass right now.
- [101:42]
D
No. All right. I don't know. Just tell me.
- [101:48]
A
That's it? That's all you got?
- [101:52]
B
Mmm.
- [101:54]
D
Good one.
- [101:55]
A
Not bad.
- [101:56]
D
Good one.
- [101:57]
A
Why aren't these things correlated anymore? Ah, Interesting, right?
- [102:05]
D
You have any theories?
- [102:07]
A
So for those listening, we're looking at the triple Q's versus Bitcoin. They were tree. I like, like, not perfectly in lockstep, but as close as you as two things can be for the entirety of the year over the last year, and then something just happened. And I don't know what it is, but the cues are recovering faster than bitcoin. Bitcoin's actually getting worse. I mean, today I know it bounced a little bit, but, like, this is not the same trade anymore.
- [102:39]
D
No.
- [102:39]
A
And I'm wondering.
- [102:40]
D
I don't know why I think it.
- [102:42]
A
I think they are inextricably linked to each other. I. I just. I think there's a liquidity story going on with Bitcoin itself and some of the instruments that people use in the stock market to do bitcoin, like trading. I don't know. We're gonna. We're gonna see how this develops and maybe. Maybe we're over complicating things and Bitcoin will go up $10,000 over the next week and be right back. Back up there with the Q's, but I just found that interesting. We have. Do we have another chart? One or two more. So this is the actual correlation between Bitcoin and the triple cues. And as you can see, this is the lowest correlation since the end of 2023. So they have been much more tightly correlated for most of the last, I don't know, two years. And you have to really go back to the pandemic to find a prior episode with less correlation between these two things. Is there one more or no? What else we. Oh. MicroStrategy versus Bitcoin. Light bluish strategy.
- [103:48]
D
I think the strategy story is over. I think the bottom is in. They. They just raised $1.45 billion. Like in USD reserves, lol. I think at some point there is a level where the M nav becomes so much less than the value of a bitcoin holdings that just somebody steps in, not. Not one person, but buyer step in and say, if I'm bullish Bitcoin, this is my leverage.
- [104:08]
A
Can I tell you something ironical? The thing that say, the thing that saved bitcoin today is that Vanguard came out and surprised everybody and. Right. And announced that, okay, our brokerage customers are now able to buy. Yeah, Crypto. Crypto things on our platform. Why is that bullish for strategy?
- [104:34]
D
I'm not saying that. I think.
- [104:36]
A
Right. Bullish for bitcoin.
- [104:38]
D
It's bullish for bitcoin.
- [104:39]
A
Right. Strat. Like, in other words, they don't need strategy then. Because if you had a brokerage account at Vanguard, the way to get crypto exposure was strategy. And now Vanguard just said, you don't need to do that. You can buy ibit.
- [104:55]
D
I would venture a guess that a lot of Vanguard investors are probably not buying short strategy anyway.
- [105:00]
A
Okay, great point. See, Paul Breezy in the chat says Bogle is rolling in his grave. I agree. Vanguard has historically said that they want to invest on. In things that produce a cash flow that can be valued.
- [105:17]
D
You know, this is just not.
- [105:18]
A
This is just not that.
- [105:19]
D
They're obviously listening. They're obviously listening to their clients. Their clients are asking. Otherwise they wouldn't be doing this.
- [105:24]
A
But you just said you don't think a lot of Vanguard clients would. So which is it?
- [105:28]
D
I don't think. Don't gotcha me. I don't think. I don't think Vanguard investors are buying strategy.
- [105:33]
A
I think they know what I would say. If you're the type of person who has all your money at Vanguard, you don't care about bitcoin. So I now I think they're not listening to their customers. I think that's what they're trying to change. I think they're worried about getting the next wave of customers. So I don't think this is about listening to their customers at all because I don't think their customers care. And if they did, they'd buy it off platform. I think this is more about we are losing out on the next generation because we're not allowing this.
- [106:02]
D
So untrue.
- [106:03]
A
All right, that's a wrap from us, guys. I want to remind everybody. Well, first of all, thank you all for joining us live. We really appreciate it. I want to remind you, if you haven't subscribed to the channel, now would be an amazing time to do that before you log off. We also could use a like from you. So be. Be super liberal with the. With the like button. Just hit it as many times as you feel you need to. Listen to the koala at the bottom of the screen and subscribe. Tomorrow is Wednesday, all new Animal Spirits with Michael and Ben. And we'll be back at the end of the week with a new edition of the Compound. And friends, thank you so much for watching and listening. We'll talk to you soon. Sam.