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The Compound and Friends
Steroid Era With Spencer Jakab, the F***’s Going on With Strategy?, Margin Debt
01:05:57
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- [00:00]
John
Foreign.
- [00:13]
Josh Brown
Michael, the chat is booming right now, I have to say.
- [00:16]
Michael Batnick
So it's the stock market.
- [00:18]
Josh Brown
Yeah. All the gangsters are here. There's a lot going. Oh, thanks for all the Nike updates, guys. I appreciate it. I know. I don't know what's going on.
- [00:26]
Michael Batnick
Oh, don't be salty. This is the life we chose.
- [00:29]
Josh Brown
Yeah. Imagine it was up 4%. I would be insufferable right now.
- [00:34]
Michael Batnick
That's true.
- [00:34]
Josh Brown
All right, we're gonna get to Nike later in the show. I want to say a quick couple of hellos to the chat. A lot of our. A lot of our OGs are here. Matt Stavik in the house. C. Paul Breezy. What up? Just Davis here. Have you seen Michael Jordan lately? He's gained a few pounds. I think he's earned that, Dave, to be honest. Georgie D says squawking friends. Okay, not sure where we're going with that. Shapiro full time pounder. We appreciate you, brother. Thanks for being here. All right, and everyone I don't get a chance to say hi to. I see you. I'm thrilled to have you here. All right, one more. Jackie, Jim Rat is back from the greatest city on earth, Philadelphia. Debatable, Jackie, but we love you. Thank you for being here. All right, tonight's show is brought to you by imgp. Wait, what is it? Dbmf. A market leading managed futures etf. The one constant today is change and investors everywhere are struggling to adapt. Managed futures access through DBMF seek to detect market trends early and capitalize on.
- [01:42]
Michael Batnick
That's right, Josh. When inflation increases and stocks and bonds move together, DBMF aims to provide a new generation of investors access to an alternative way to diversify through a single liquid active etf. According to Bloomberg, it's quote. How to beat hedge funds at their own game. Okay. To learn more about the alt solution for the model revolution, check out www.dbmf.com wat. The fund's investment objectives, risk changes, charges. Excuse me. And expenses must be considered carefully before investing. The statutory and summary prospectuses contain this and other important information about the investment company. It may be obtained by visiting www.imgp.com. the IMGP DBI Managed Future Strategy ETF is distributed by Distributors, Inc.
- [02:24]
Josh Brown
Thank you to the folks at imgp. We appreciate you. All right, so we're going to talk about earnings, which obviously is the main story in the market this year. Earnings growth is significantly better than economic growth. Earnings growth is the reason why we are where we are substantial in the market. We are not getting here. Thanks.
- [02:46]
Michael Batnick
Oh, who the. What the.
- [02:48]
Josh Brown
Who could that be?
- [02:49]
Michael Batnick
Dad?
- [02:49]
Josh Brown
Oh, my God. It's Spencer. Jacob from the Wall Street Journal, ladies and gentlemen. What. What brings you to the neighborhood tonight?
- [02:57]
Spencer Jakab
I thought I'd check in, talk about earnings growth. So I jumped into the discussion.
- [03:02]
Josh Brown
You overheard us talking about earnings growth and you decided to come by. Well, we appreciate it. It's, you know, it's such a coincidence that you're here because we were literally about to talk about your excellent piece in your newsletter for the Wall Street Journal this morning. It's just like one of those serendipitous things. It's hard to explain, even. All right, we're super happy on the call.
- [03:27]
Spencer Jakab
Thank you.
- [03:28]
Josh Brown
We're super happy to hear. Spencer, I want to quote you, and then I want you to react to it. You did this really, as I mentioned, really good piece about the earnings growth this year. And your title was Earnings Forecasts are on Steroids. And it's clever. It's a good way of thinking about it. I think it's exactly right. There are a lot of asterisks to what's happening to produce the sort of earnings growth that we're getting this year. And then this is exactly what you said. The first clue about how unusually profitable the quarter has been is that analysts raised their earnings per share forecast for the s and P500 by 3.4% since the end of March. And you note, analysts typically lower their earnings expectations during the quarter, which. That's how we get all these surprises in the next quarter. But the average reduction has been 2.7% over the last 40 quarters. Okay, so right off the bat, this is a very unusual situation where we're actually raising the ante in the, in the midst of, of the quarter itself. Tell us more.
- [04:32]
Spencer Jakab
Well, you got a couple of things going on. You know, one is that, you know, what's. What's holding up earnings is that you have these hyperscalers spending a lot of money, but it's only going through the P and L pretty slowly because they've extended the depreciation of all these chips and equipment and servers that they're buying. And its revenue, it's immediate revenue and profit for other people in the market. And so that's kind of turbocharging the earnings, but there's going to be hell to pay for that later on when it goes into reverse. Another thing, though, is very interesting is that the stakes in these still private AI companies, Anthropic OpenAI, but also other companies you haven't heard of a Lot of them are stakes held by companies like Nvidia, Alphabet. Those stakes have to be revalued according to accounting rules, according to GAAP accounting rules.
- [05:33]
Josh Brown
You're saying they get the stake in Anthropic, Public company that's got a stake in Anthropic, and there are many. But just hypothetically, the valuation of Anthropic during the course of the quarter has an event, meaning they raise a round of financing which raises the value of the company. A public company that's got that on their books has to then in their earnings statement, write up the value. And we know it's not actual earnings, but for the intents and purposes of what we calculate on the s and P500, it counts. And there's a lot of it happening.
- [06:06]
John
Yeah.
- [06:06]
Spencer Jakab
You know how you listen to, or you don't listen to, because they don't have earnings calls, but you see Berkshire Hathaway's quarterly statements, and they don't mean anything anymore because they have stakes in all these companies and they're going up, they're going down, and they tell you not to focus on that. And it's not like Alphabet's telling you to focus on it and Nvidia is telling you to focus on it. But those are such big companies, and these stakes are so big that it's moving the needle for the entire stock market. It's creating this illusion of more rapid earnings growth. This professor at the University of Florida, Bao Lan Wang, looked at it, and he said it was equivalent to, let's say, about 12% of the first quarter's net profit. And his preliminary numbers say it's going to be 2 or 3 times as large for the second quarter. So these are big numbers. And so it creates the impression. I mean, earnings growth already is rapid, but it creates the impression of even faster earnings growth. And these are not cash gains. These are not things that are being sold and cashed in on. They might be one day, but it's just an accounting thing that you have to do. And just perspective, the first quarter, the earnings growth was very rapid. The kind of thing that you see coming out of a crisis, not the thing you see year six of an expansion. Net margins were the highest they ever have been, 14.8% for the S&P 500. And that that actually does not include these gains. So that's on an operating basis, and it's likely to surpass that during the second quarter, which is great. I mean, you could look at that as glass half full or glass half empty. I'M a pessimist, so I find it a bit alarming because know you're valuing the market on these and your people are saying, well, stock market's not that expensive based on that. And there is literally. I don't want to air the Wall Street Journal's dirty laundry. It's not, it's just two interpretations of the same thing. But there was a news article that appeared the same day based on the same numbers. Not the, the extraordinary numbers on anthropic and things like that, but just that 14.8%. And I'll simply just read the headline to you. Why Wall Street Bulls aren't worried about sky high stock prices. So I am worried about sky high stock prices. I think that once you strip out all these abnormal things, the stock market's pretty expensive and margins are unlikely to stay this high for that long. But forecasts for the rest of this year and the next couple of years call for them to go even higher, which would be pretty unusual.
- [08:43]
Josh Brown
You talk about this as sort of a virtuous cycle where we write up the value of things and then that gives us cover to take stock prices even higher. And then you've got. All right, so if we're saying 12% in Q1 is coming from this write up issue of startup stakes and assuming the professor is right, that's going to go to 25 to 36% in the next quarter. And no one's going to look at that and say, now we're not giving these companies credit.
- [09:15]
Spencer Jakab
Yeah, to be clear, the operating earnings that you see that S and P puts out, they then strip that back out. The numbers that you see when you look at the companies, you see it and people are getting optimistic about it. It's a virtuous circle because then people see these big profit numbers for the hyperscalers and Nvidia that own big stakes in these things and then they say, well anthropic must be worth even more.
- [09:42]
John
Right.
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Spencer Jakab
And then the next round of funding is even higher.
- [09:45]
Josh Brown
Right.
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Spencer Jakab
So where does it stop? I mean, how many trillion does it stop at? So obviously it does stop at some point, but just more broadly, I mean, it's an interesting quirk, but the fact that margins even without that are so high is really uneven.
- [10:03]
Josh Brown
Let's put up Spencer's chart. So you say for perspective, the first quarter's net profit margin of 14.8% was about twice the post war average. Some of that has to do with the types of companies that dominate the market. We've made that point you have made that point. Companies selling each other lots of AI gear. But depreciating it slowly is another temporary accounting boost. This chart is remarkable. So this is what you guys are looking at is the net profit margin of the S&P 500 since the release of ChatGPT, which I guess three, almost four years, three and a half years ago. Look, I'm not saying it's going to mean revert immediately and be back at 11, but this obviously seems unsustainable or unlikely to be sustained. Is that one of your bigger asterisks here?
- [10:51]
Spencer Jakab
Yeah, absolutely. Just do the math on that, right? I mean, let's say net margins are 15% just to make a nice round number this quarter. And then people are saying, look, the market's not that expensive. If you look at this incredible profitability and then it'll. Analysts actually expect that to get better, which is not. I mean it could for a quarter or two. But it's pretty unusual for the whole stock market to be that profitable. You can't compare it to the 1970s. Obviously you have different kinds of companies and different companies different profit margins. That's obvious. But this is high even for a tech heavy market. It's really unusual. And we know that some of it is artificial because you buy a chip from Nvidia, it's immediate profit to them, but the chip they sold you is depreciated over three, five, six years. That goes through the P L more slowly. Once this slows down, those margins are going to roll over and be a
- [11:53]
Josh Brown
little lower than Is that the hell to pay? What you meant by that when it goes into reverse?
- [12:00]
Spencer Jakab
Yeah, and not just that, but just do the math on 15% versus let's say 11% where you were just a few years ago. So you go, let's say let's not the end of the world. You're going from 15% net margin to 11% net margin. Well, that's a lot lower.
- [12:16]
Michael Batnick
That's 25% reduction. That's huge.
- [12:19]
Spencer Jakab
So if you say let's keep the market's PE ratio constant, let's say, well, we're comfortable paying 21 times forward earnings for the stock market, well then the flip side of that is stocks get that much more expensive. So if you hold the PE ratio constant and things aren't constant, they expect to go lower when profitability is declining. But let's say that people don't get skittish about that, then the market should be 25% lower. If you're justifying it based on Those earnings, it is of some concern. Things don't move in a line that way. But that's a useful way to think about it. Think about where we are.
- [12:55]
Josh Brown
Two potential get out of jail free cards tell me which or maybe neither of these are likely. One get out of jail free card is GPUs. Do not depreciate at the rate the bears say they will. And we turn around 10 years from now and there are still Grace Blackwell chips and Vera chips that were sold in 2026 operating in data centers in a decade. I don't know if that helps or not, but that's part of that depreciation debate. The other get out of jail free card, this is a little bit more ephemeral is profit margins remain closer to 15 than 11 because all the customers of all this AI are more efficient businesses now and have margins that appear to be abnormal. But maybe are the new normal and not subject to the 1970s, 1980s type of mean reversion in profit margins. We just sort of go into a new age of profitability. I know that maybe those are both reaches, but could either of those be true and bail us out of this paradigm that we're in?
- [14:03]
Spencer Jakab
Yeah, I mean, what's the famous last words? It's different this time. I mean there's always. Look anytime that you. And maybe this technology is just so amazing that the productivity gains in the economy will justify it. But we're talking about revenue growth. Revenue growth is pretty good this year, but it's supposed to slow down in the future. And obviously it's going to slow down because revenue growth is just nominal GDP growth. Right. It's the GDP number that you hear plus inflation and then a little bit on top of that as companies gain share and become more profitable. This doesn't grow at 11%, it's going to grow at 11% if you have very rapid inflation, which you really don't want. Every kind of boom, whether it was the late 20s or the tech boom, you always have someone saying, okay, but we're in a new era. I think Irving Fisher, like the famous quote is like permanently high plateau, permanently high plateau. I mean, this could be the time, like the last 25 times it didn't work out. And this could be the time. Obviously railroads, electricity, the Internet, manned flight, cars, all those things were really big. And maybe this is like all of those wrapped together. The amount of money being invested in it relative to the size of the economy is like a few of those wrapped together too. So, you know, if you, if AI Is. Is really just going to be so revolutionary that, you know, we're like being like in Star post scarcity, Star Trek world.
- [15:27]
Michael Batnick
Yeah.
- [15:28]
Spencer Jakab
Then it's great. Then we have stocks. Then you don't need to buy stocks though, because then you'll have like, you know, going to the holodeck and no
- [15:37]
Josh Brown
one will need stocks anymore. We only have one more question. Which company is. Which company is Barry Bonds? Which is Sammy Sosa? Which is Mark McGuire in the, in the earnings steroid era?
- [15:51]
Spencer Jakab
You know, I don't know what Mark McGuire came out like a lot later. He was very kind of trite and humble about it. Barry Bonds, not so much semisos. I don't remember like what he. I don't think he kind of talked about too much.
- [16:02]
Josh Brown
We won't make.
- [16:05]
Spencer Jakab
I don't want to sort of, you know, get sued by this guy. I had. It's funny like I had because, you know, I put out this Market Sam newsletter there and I put it out so early that it's editors in London who have a last look at it. And the nice editor who doesn't know spot sports at all looked at it and said, Spencer, like, you know that baseball player, look, I understand why you chose a baseball player because of the thing. But like, couldn't it imply that like he took steroids? Like, yeah, his name is Mark McGuire shows him getting his 70th already and he did take errors. He admitted to it.
- [16:35]
Josh Brown
So I think nobody needs to imply anything. All right, Spencer, thank you so much for joining us. Tell everybody what the name of your morning newsletter for the Journal is and we'll have everyone look for it.
- [16:47]
Spencer Jakab
Yeah. And it is free. You do not need to be a Journal subscriber yet to get it. It's called Markets Am. Just Google Markets Am or my name. And it's the first thing or the second thing that pops up. You can just put in your email and get it. And more readers. The Merrier has a lot of readers already.
- [17:04]
Josh Brown
Well, thank you so much for coincidentally stopping by. I guess we really appreciate it and keep up the great work. Thank you so much, Spencer.
- [17:11]
Spencer Jakab
Hey, thanks, guys.
- [17:13]
Josh Brown
All right, we'll talk to you soon. That was cool, right?
- [17:16]
Michael Batnick
I am his biggest fan. I open it up in the morning, whatever time it is. 6:15. He does sort of like a blog post.
- [17:24]
Josh Brown
Yeah.
- [17:24]
Michael Batnick
He links to the Journal and then there's four individual stock stories that are moving in pre market and it's like a census to an each. It's phenomenal.
- [17:31]
Josh Brown
Yeah, I think, I think he does a Great job. We got to. We're going to touch on Nike real quick. Michael.
- [17:36]
Michael Batnick
Okay. It's down 8%, you stupid idiot.
- [17:39]
Josh Brown
You dumb bastard.
- [17:40]
Spencer Jakab
All right.
- [17:41]
Michael Batnick
The report sucked predictably.
- [17:43]
Josh Brown
Yeah. We. Well, we knew it would be bad. But the question was is it is enough negativity with the stock down 73% going into it. Priced in. Apparently. The answer.
- [17:52]
Michael Batnick
You could. I said this last time you mentioned it. You could buy it tomorrow. Tomorrow will be the bottom.
- [17:57]
Josh Brown
So that, that, that'll be. I think that is. I think that is the opportunity to buy tomorrow.
- [18:00]
Michael Batnick
Tomorrow is the bottom. This is sort of neither here nor there. Not material to the stock. Converse sales fell 30%.
- [18:07]
Josh Brown
It's not in style.
- [18:08]
Michael Batnick
It's kind of wild.
- [18:09]
Josh Brown
It's not cool that something could fall
- [18:11]
Michael Batnick
30% in a year. But it's also like Converse is still doing $1.2 billion in sales. That's kind of not nothing. But the report from Nike wasn't good. We knew was good. Sales were flat. I think you know, China wasn't great. Like that.
- [18:23]
Josh Brown
Didn't come down 3%. Diluted earnings down 2%.
- [18:27]
Michael Batnick
We know. So.
- [18:29]
Josh Brown
Right.
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Michael Batnick
I cannot imagine sentiment getting worse from here. Stipulated that the stock will open down 8% tomorrow. Wherever it ends up opening. It's washed out. I think you could buy it.
- [18:38]
Josh Brown
So I own some and I left the door open for exactly this. And I'll have to take advantage of it or else. Or else what was the point of owning any in the first place?
- [18:48]
Michael Batnick
Right.
- [18:48]
Josh Brown
So I think I will. I don't know that. I don't know that I even want to listen to the call. I think I just want to read the transcript. I don't want to hear these. I don't want to hear these guys. I don't want to hear Elliot Hill talk about a turnover. That turnaround that never comes.
- [19:03]
John
Yeah.
- [19:04]
Josh Brown
There was not a good use of an hour.
- [19:05]
Michael Batnick
There was some hardcore corporate language in the press report. It was not very inspiring.
- [19:09]
Josh Brown
Bullshit. All right.
- [19:11]
Michael Batnick
Just two points on what Spencer spoke about. One get out of jail free card is. Yeah. All right. Margins come down to 11, but the multiple goes up to 40. Hello. Do I have to think of everything that that's a get out of jail free card. But in all seriousness, I do think that the point that he made. I'm not really concerned about the one time adjustments for the stocks. So it said like $69 billion worth of earnings are a mirage. The market's not dumb. Okay. It's not putting a multiple on top of that. The same way that companies don't get, don't get credit for currency moves one way or the other.
- [19:46]
Josh Brown
Yeah, I don't, I don't think these stocks are gaining as a result of that.
- [19:49]
Michael Batnick
No, no, they're market.
- [19:50]
Josh Brown
Maybe with one.
- [19:51]
Michael Batnick
What, Google?
- [19:53]
Josh Brown
No, Zoom.
- [19:54]
Michael Batnick
But, but Zoom came all the way back. Like Zoom had a pretty healthy correction.
- [19:57]
Josh Brown
Yes, but I think it rallies on good anthropic. More so. More so than, than the others.
- [20:01]
Michael Batnick
Zoom's not moving the market. To me, the bigger point that is extremely valid is what could make these earnings look temporarily goosed is the fact that for the last five years, and it's not like Amazon and Google were not investing, they were still spending shitloads of money on capex, but just not nearly to the extent that they're doing now. And if for whatever reason, and there's no signs of that, they are. But if for whatever reason they all decide together to pull back on spending, well, then that will pull back. That will, that's right out of Micron.
- [20:29]
Josh Brown
That'll crush everything in this space. Correct. You're right, it's. I mean that's. We could talk about accounting and we could talk about profit margins all we want.
- [20:37]
Michael Batnick
Yeah, that's not it.
- [20:38]
Josh Brown
That is the meta risk, pun intended, hanging over all of us at all times with this entire trade. But a lot of people thought that would have happened already and it hasn't. And it may not go the way that we think it could go wrong. You could have one company pull back on spending and another company say oh yeah, we're going even further. And then I don't even know if that's good or bad.
- [21:02]
Michael Batnick
Sea of losers. All right, I want to talk about the bull market rather that we' living through it is. Oh, great quarter, gentlemen. The last day of the quarter. The Equal Weight closed at an all time high yesterday. Looks like it didn't equal out today, but it's. There's highs everywhere you look basically, for the most part, you know, except for pockets of software and whatever. Whatever. If you were a market technician and you were paying very little attention to the stories, if you're jc, what are fundamentals? Who's the Fed? I don't care. If you're literally looking inside the market, those guys exist. You can come to no other conclusion than wow, this is bullish. So let's start with this chart from Grand Hockridge on the top. We're looking at the S&P 500 relative. Relative to the Russell 2000 rolling over. We've showed this the inverse way so small caps are outperforming the S and P in a pretty material way. You are also seeing a transition away from GRA growth to value. So this is what I think people are describing as a broadening out the. The rally is expanding.
- [22:03]
Josh Brown
Why wouldn't they? Why wouldn't. I don't, I don't know, Grant. Why wouldn't they show this chart upside down?
- [22:08]
Michael Batnick
It doesn't matter. Whatever. Tomato, tomato. Everything this year is outperforming the Mag 7. Yep, everything. So the blue line is just the Mag 7. The dark, you know, the, the bolder blue line. And then everything else is the worst
- [22:22]
Josh Brown
trade of the year.
- [22:23]
Michael Batnick
Yeah, everything else is divided by. So literally every quadrant of the market from small value to mid cap growth. Everything is outperforming the MAG7.
- [22:32]
Josh Brown
Including the NASDAQ.
- [22:33]
Michael Batnick
Including the NASDAQ, that's right. Moving on, airlines. Now part of this is oil, but part of this is just listen. The businesses are doing better. Their customers are on fire. You see airlines breaking out and I had chart kid, make me a group a table, a chart, my God. Of six areas of the market that are breaking out. That if I told you this, it's really hard to be bearish. It just is. So here's what we're looking at. Semiconductors, up and to the right. All right. We all know that that's not a surprise. Industrials, transports, small caps, micro caps, regional banks. These are all at all time highs. You cannot look at this charts, these charts and make a bearish case. Other than, other than whatever, we're due for a pullback or whatever bullshit like the market is sending you a very strong signal. It's not always right. Okay. Hedges aside, it's bullish. The market is breaking out in all areas where you'd love to see the breakouts occur.
- [23:35]
Josh Brown
I talked about this on TV today. If I just had regional banks and industrials. I don't need, I really don't even. I mean it's great. What you just showed is great because the transports tell a really big story, especially the strength in the airlines and the trucking companies. So that's great. Micro cap and small cap as sort of like ratifying this trade and then showing that these things are happening in concert with the semis. Dude, it's not a story where the semis are going up by themselves.
- [24:01]
Michael Batnick
It's triple stamping, a double stamp for literally. Since we've been working together in 2012, people have been complaining that the transports are not confirming the rally.
- [24:10]
Josh Brown
Well, here it is. Well, here it Is what else do you want?
- [24:13]
Michael Batnick
All the.
- [24:14]
Josh Brown
Is that good now?
- [24:15]
Michael Batnick
All the confirmation. Is this as good as it possibly gets? I don't know. We'll find out. But right now things are pretty damn good. It's hard to be embarrassed.
- [24:22]
Josh Brown
What, what charts? What, what six sectors and or asset class charts would the bears put up to counteract this? If you gave somebody six contras to this, tell me what they would put up.
- [24:36]
Michael Batnick
So these are related names. I would say software and alternative asset managers.
- [24:41]
Josh Brown
Look like I could explain those away so easily though.
- [24:44]
Michael Batnick
Okay, I'm just telling you.
- [24:45]
Josh Brown
Yeah, no, I know. I could fight that.
- [24:47]
Michael Batnick
Those are the top. I would say. Oh no, here's a big one. No, no, no, no. The big one is very, very obvious. If the market loses the Mag 7 and you could argue they have because free cash flow is going to zero because we are exiting the asset light world, you. If the market loses the MAG7, which is 40% of the index, then it's going to be hard for the index to sustain a rally. I think that's valid.
- [25:11]
Josh Brown
No, what I would put up here if I were. If I were trying to make the opposite case, I just. It would just all be housing related.
- [25:18]
Michael Batnick
But housing stocks look fine. Like Home Depot. Home Depot has bounced pretty bigly.
- [25:22]
Josh Brown
Yeah, I'm thinking more like the builders, they.
- [25:25]
Michael Batnick
They bounced. I mean they bounced to. Dr. Horton reported last week, had a huge day. So I would say the biggest bear case is probably the Mag 7. I don't know what else you would point to. Cause credit spreads are tight. Like what?
- [25:35]
Josh Brown
I don't know. I like it. I think. You know what, that's a great chart. We should use that for clients. Whenever the next time we do a presentation for clients, we are, I assume. All right. I had hoped to avoid this and I thought maybe we would run out the clock and not have to talk about it, but at this point I just. We have to. You can't ignore it. We've ignored it for a long time. But we gotta talk about strategy and you know more about this stuff than I do. I just wanna give you my take and you could tell me if I'm completely crazy. This is just wall to wall financial shenanigans. I'm not accusing anyone of crimes. I don't use the P word Ponzi lightly. I don't talk that way. I'm not one of these people that just knee jerk. Like as soon as someone's making money in something like I, I have like an aversion to seeing that, that's not me. You know, I've never been that way. I have an open mind about things that I'm not involved in working out. It's perfectly fine. But this is shenanigans. An ordinary person, and I would wager 80% of the shareholder base of strategy is ordinary people. I don't think this is a very heavily institutionally owned situation. So ordinary people cannot possibly keep up with all the technicalities and the mechanisms that are now involved with this investment. It seems to me like it's this Bermuda Triangle where there's three levers that Michael Saylor can pull in order to keep it going. One lever is he can sell stock in MicroStrategy, which was the proposed. That was the trade. It's like we're going to trade at a premium to our M. Navy, which was made up. But basically like if we have $1 million in Bitcoin and we trade at 1.2 million, we're going to take advantage of that premium and sell stock, take the money and buy even more bitcoin. All right, that part, it's not, it's new, it's novel. A lot of people hated it. It didn't bother me. And we actually said some positive things about it.
- [27:49]
Michael Batnick
It was working.
- [27:50]
Josh Brown
It was working.
- [27:51]
Michael Batnick
John, throw up that chart about the shares outstanding. It was working. So he was, he was, look at, look at that share. Look at the share count.
- [27:58]
Josh Brown
He was able to grow the share count. Buy more bitcoin. He now owns 850,000 bitcoin. Okay, so take this off though. I want to finish the point. So the three sides, the Bermuda Triangle. So that's one lever he can pull. And that's what he was doing. And even if people didn't like it, it was explicable. The second lever he could pull was the one he maybe never said outright, but he sort of very strenuously implied it. And that is sell bitcoin to raise capital. The bet was, I am Diamond Hands. I'm the guy that not only never sells, I will continue to buy forever.
- [28:33]
Michael Batnick
Sell your kidney if you have to sell your kidney.
- [28:36]
Josh Brown
Okay, so that's not my words. I'm not paraphrasing. He literally tweeted that. I think like every, like he would tweet shit like every day you don't buy bitcoin, you should kill yourself or like whatever. Like it was like the most one way trade of all time is the way that he spoke about bitcoin. Okay, so that's lever two. And a lot of people thought he would never in a million years pull that lever if he didn't have to. He just did. Which we're gonna get into. And then lever three are these preferreds. So he sold these preferred shares to the market that purportedly were supposed to be stable. Ish. They were supposed to bring in income, supposed to pay out income to the buyers and trade near par. And the income that he was paying would be such that if the price dropped and he raised the income, people would almost have to buy it. The yield would be too high to be ignored and that would bring the price back to par. And so that was another lever that he had was that he would raise money via these preferreds. And that would give him even more money to buy more bitcoin. The whole thing is now coming apart at the seams. It's backwards. The idea behind selling stretch and the other preferreds was this is a cheaper source of funding than the dilution of selling stock and strategy. And so I'll use that cheaper source of funding to buy bitcoin. Now he's selling bitcoin to pay the dividend yield on the preferreds.
- [30:07]
Michael Batnick
It's.
- [30:08]
Josh Brown
It's like backward.
- [30:09]
Spencer Jakab
Wait.
- [30:09]
Josh Brown
The whole point of this was so you can use the money. But now you're going to sell bitcoin and you're going to stabilize the balance sheet and use the proceeds of the sold bitcoin which you said you weren't going to do. And you're going to buy and you're going to. What is he doing? Retiring shares in the preferred or using it to pay the higher yield. All right, so. So that's where I am with this. That's why I use the term shenanigans. It's not. I'm not looking to go to war over it. I'm not angry about it. I don't get caught up in nonsense like this. You don't have to worry about me. But this is a really big thing now because there's a lot of money not just in strategy but in these preferreds. And I almost don't even understand the point of it anymore. You have the floor. Defend it. I'm just kidding.
- [30:56]
Michael Batnick
Let's go to the source. I had. I had John pull three quotes. John, quote number one.
- [31:01]
John
What we're doing here is we're building out a yield curve for BTC credit.
- [31:04]
Josh Brown
We are.
- [31:05]
John
You can see here is that stretch looks like a one month instrument. It's way pegged to the left. It's like a one month T. Bill stride is.
- [31:13]
Michael Batnick
It has a McCall all right, that's enough. That's enough.
- [31:15]
Josh Brown
You can't do. That's illegal. You can't say that.
- [31:17]
Michael Batnick
All right, John, throw the chart on.
- [31:19]
Josh Brown
It's like a one month T bill. In what way?
- [31:21]
Michael Batnick
So this is the, this is the, the. The yield curve for BTC Credit. We've got the duration and the yield. And he's claiming that Stretch had no duration. His words, not mine. He said it was like a one month T bill.
- [31:35]
Josh Brown
Sure, just like it. But it's at a 25 discount to its par. All right, but in every other way, it's just like a one month.
- [31:42]
Michael Batnick
We've got two more quotes. I don't remember which, which one is which, but let's just. Let's just let it rip. Go ahead.
- [31:46]
John
For the classic retail investor, the retail investor just kind of wants pure synthetic yield. They don't want duration and delta and volatility. They want all that to go away. And so STRC is, is the flagship for that reason.
- [32:02]
Michael Batnick
One more.
- [32:03]
John
We are a structured finance company and you can see here, we're taking raw Capital, Digital Capital, 40 Vol. 40 ARR. $1.6 trillion Market Cap of Bitcoin. We, we are stripping. We are stripping the currency risk, we are reducing the credit risk, we are reducing. We are compressing the duration risk, we are distilling a yield, we are damping a volatility in order to create various instruments. And our greatest product and biggest success right now is Stretch. As you can see, it's, you know, it's taking a 71 volume down to a 3 Vol. You know, we're targeting a 1 volt.
- [32:39]
Josh Brown
I have no idea what any of that means. I'm so stupid.
- [32:44]
Michael Batnick
I'm sorry.
- [32:45]
Josh Brown
I don't have a degree in business. I don't. I guess I'm. I'm not a quant. I. I'm not a. I don't even know what this is. This is like alchemy. I don't even know. This is not even a discipline that they teach in business school. What is. This is the dampening of volatility in the room with us right now.
- [33:07]
Michael Batnick
Give me.
- [33:08]
Josh Brown
All right, let's go do some charts and then I'll like.
- [33:11]
Michael Batnick
I can't. I'm laughing because I'm like sort of nervous. I feel bad laughing because people lost, like, people lost real money. There's a lot of money here.
- [33:18]
Josh Brown
I'm not, I'm not laughing at all.
- [33:20]
Michael Batnick
No, I'm laughing because you're laughing.
- [33:21]
Josh Brown
You're laughing. You're laughing at me. You're not laughing at the people.
- [33:24]
Michael Batnick
No, it sucks. It's. It's just some charts.
- [33:28]
Josh Brown
All right, so this is bitcoin. Perfectly first chart, guys. Perfectly normal. It's 52% below all time highs. This has happened over and over and over again since the launch of bitcoin. We've seen it get cut in half from $20 to $10. Like this.
- [33:48]
Michael Batnick
Not new. Not new.
- [33:49]
Josh Brown
This is not this. All right, so it's 32% down year to date. It's probably the worst performing asset class on earth. And it's in a 52% drawdown, which again, we have seen that before. It is not a bug. It is a feature. It is part of what it means to be involved in crypto. Okay, I just wanted to set the table. Here's MicroStrategy, one year performance. Okay, this is obviously problematic. It was $450 a share last summer. It's. What is it now? 82. So to Michael's point about laughing, it's not funny. I'm gonna yell at him after the show. You guys, don't worry. I'm gonna take care of Michael. But it's not funny. It's like substantial. I read somewhere that he might have destroyed $14 billion in capital this year. It might be the worst trade of all time, if you like, just on a dollar basis. Nobody, it's possible that nobody's ever lost more. Now I understand he hasn't sold all his bitcoin, so the loss has not been enshrined. It could reverse when bitcoin goes up, but that's a pretty big drawdown in dollar terms.
- [34:51]
Michael Batnick
The part, the part that really, really pisses me off is the comments that he made about Stretch. Let's throw up this, this chart, John. We've got ETF market comparisons and universe of comparable assets.
- [35:02]
Josh Brown
Well, wait, wait, can we, can we go through the rest of these real quick?
- [35:05]
Michael Batnick
No, no, no, no, no, no, no. We cannot. We cannot. John, chart on. All right, this is the part that upsets me. So he's looking at the ETF market comparisons for the, for the publicly traded preferred equity. And these are the big boys. Pf.
- [35:19]
Josh Brown
Nobody can see this. Summarize it for us.
- [35:21]
Michael Batnick
Yeah, I am. And high yield bonds. We're looking at JNK and HYG, and he's looking at the net assets. You've got $17 billion in J in HYG. You've got 8 in J and K. And he's comparing the yield and the volatility. And with Stretch in particular. There's a column for volatility and he's being transparent that, that Strike and Strife, I don't know, I'm, I'm calling it strife, whatever. These other instruments are going to be extremely volatile. If you want a 12% yield, you have to swallow 23% volatility. With Stretch, he's showing a 10% yield with no volatility. Literally, it's blank. There's nothing there. Because he called it like a one month T bill. And he's the universe of comparable assets. He's comparing these things with. And I'm not even kidding. U.S. treasuries, agency, mortgage backed securities.
- [36:09]
Josh Brown
You can't. Like what, how I took the series 65 a very long time ago, but I don't think that you're allowed to do, do things like that.
- [36:19]
Michael Batnick
How are those comparable assets? A US Treasury. I've never seen a US treasury go from $100 part down to 78 or whatever it went.
- [36:29]
Josh Brown
Right. And I don't understand all of those things with like, I'm Sorry, I took a 21 volume to a three volume.
- [36:35]
Michael Batnick
What is a one, a one month T bill. Forget about Treasury. Because a one month T bill, I've never seen that.
- [36:40]
Josh Brown
Nobody's ever seen that. Because that's not what a T bill does. A T bill is like cash and this obviously. But my earlier point about the purpose of launching Stretch was it's a cheaper funding source than diluting the common shareholders. If you want to buy more Bitcoin. Now he's been selling some bitcoin, I guess here and there. He's not dumping his whole. I don't want to imply something that he's not doing, but he's telling us he's selling his Bitcoin very little amounts in order to shore up Stretch so that it can make its dividend payments. So it's not, it's like backwards, right? That's not why. Don Stein in the chat. Josh, buy the dip. All right, I am going back to these charts because I want to give people a little bit more context. Is five people say you don't understand the strategy. You didn't read the white paper. You're right. I don't know anything. Let me show you something. This is five years. So still up 29% or 5% annualized, but pretty bad for people that first quote, unquote, read the white paper circa December of 2024. You probably, probably would have been better off reading a Judy Blume novel. Here's the ten year. Just to give you like Real, real deep context. Okay. Up 395% over 10 years or 17% annualized. So I guess if you bought this stock before COVID Nobody bought it before COVID No shit. But let me just.
- [38:13]
Spencer Jakab
Right.
- [38:15]
Josh Brown
If you happen to have. You still love this guy. All right, I totally get it. Now we're going to look at market value versus price because this is where we get into, like the nitty gritty of the whole point of this. The people who are buying MicroStrategy, Michael, if you ask them in one sentence, why are you buying this? What would their answer have been as levered bitcoin. Levered bitcoin, in other words, actually, people were bought.
- [38:40]
Michael Batnick
Yes, it's levered bitcoin. But people were buying it in their brokerage accounts because they didn't want to buy gbtc. That's why people originally bought this, which
- [38:47]
Josh Brown
made a lot of sense at the time. It did, because GBTC had a huge internal expense and. Right. And you buying it at a premium. And the argument was like, well, if you're bullish on bitcoin, nobody's more bullish than MicroStrategy. Buy that stock they're going to like by every bitcoin. It's not nailed down.
- [39:08]
Michael Batnick
It worked.
- [39:09]
Josh Brown
He did do that. All right, this is the cost basis of the coins versus price. And as you can see, we're right there. The cost basis is 64,000. Bitcoin. I know it never closes. Bitcoin closed quote, unquote, yesterday at 59, 7.
- [39:25]
Michael Batnick
So they're underwater.
- [39:26]
Josh Brown
So they're now, they're now in a loss on their average cost in bitcoin. They bought a ton of bitcoin, I guess, at 80,000, 90,000, 100,000, which is what they said they would do. Again, to his credit, he said he was gonna do it and he did it. Last thing. This is the premium or discount to nav. And as you. As you guys can see, this started out especially around late 2024, as Donald Trump was elected and he became the crypto president. It started out trading at three to four times the value of bitcoin. It held. And now it is below one.
- [40:07]
Michael Batnick
But wait, one of the. One of the important. Not asterisks to the story. Chart off, please. You knew that at some point GBTC's premium would collapse to zero when it became an ETF. When it became an ETF. And so you can't say, well, strategy was trading a premium. Different instruments, totally different story. So strategy as an micro strategy as a thesis, as an investment in 2021, whatever, it made sense and it worked. And it's not 2021 anymore.
- [40:35]
Josh Brown
If Bitcoin were to go back to 100,000, this thing would get its. Get back on its horse and go. Because it owns, it still owns. They say, forget 21 million Bitcoin. It's really only 16 or 17 million that will ever exist because of loss. People mined early bitcoins and forgot about them. Or there are wallets where people lost the password. So it's not really 21, it's like 16. And if you think about it that way, he basically already owns 5% of all the bitcoin that will ever exist.
- [41:05]
Michael Batnick
So not knowing anything, let me ask you this, is this like a death spiral to zero?
- [41:09]
Josh Brown
No, because he still owns so much bitcoin. Like, that's the, that's the problem. If you're. It's not going to be a death spiral because he can liquidate bitcoin at will. Unless you think he's the only buyer. And I don't, and I don't think anyone else does. I just think the problem now is this is no longer going to be a levered bet on bitcoin. It can't be because he's not going to be able to have enough capital to buy at the rate that he's been buying.
- [41:37]
Michael Batnick
Well, not right now.
- [41:38]
Josh Brown
Now he's got to play this game where it's like, oh, the preferred is in a deep drawdown versus par and the yield is too high. I will use some of my bitcoin to shore that up and then maybe bitcoin rallies and he could do the reverse.
- [41:53]
Michael Batnick
But I'm very.
- [41:53]
Josh Brown
It's a different story now.
- [41:55]
Michael Batnick
I'm very curious to see if stretch, forget about par, gets even. Like if it gets back above 99.
- [42:00]
Josh Brown
How big stretches is it?
- [42:02]
Michael Batnick
10 billion.
- [42:03]
Josh Brown
So eight and a half billion is the largest. The largest preferred, ongoing preferred with no maturity in the world.
- [42:12]
Michael Batnick
Yeah, I mean, obviously I hope it works. I hope it goes back to par.
- [42:16]
Josh Brown
I would really like that very much. I would just say Matt Levine was. I'm not gonna quote all the Levine stuff. Matt was talking about this as sort of like a slow motion bank run, but not really because strategy's got the mechanism that you and I just talked about where effectively they can get out of it. But is this now still a levered play on bitcoin or is it more like a financial engineering thing where unless you're running the company, you have no idea which lever they're going to pull next? To me, that sort of sounds like the problem with it.
- [42:50]
Michael Batnick
I would think if bitcoin goes back to 100,000, what is that a double from here or thereabouts? I would assume that strategy would do better than that, but I don't know. I also do wonder if there's Sailor getting out of the way and getting. Getting some of the spotlight off him is probably for the best.
- [43:07]
Josh Brown
What do you mean getting all the way? Did he run already?
- [43:11]
Michael Batnick
No, no, that's not what I mean. I just mean that I think that a lot of the bitcoiners probably are not too thrilled that he is part of this story. Anytime you mention bitcoin.
- [43:21]
John
Fair.
- [43:22]
Josh Brown
Oh, oh. The non strategy cultists who own bitcoin are probably sick of hearing about this whale that's pushing the price around. Okay, Yeah, I. I would, I would guess. I don't know. I don't speak to no to enough of those people, but I would guess they're probably sick of hearing about it.
- [43:40]
Michael Batnick
Anything else?
- [43:41]
Josh Brown
Now we're good. We got it.
- [43:43]
Michael Batnick
All right, let's talk. Oh, maybe let's end with this and then this will be a nice segue into the next conversation. So Jeffrey Patak tweeted as if it's not bad enough. Sorry, guys. To pylon. The T Rex 2x long strategy has been one of the biggest cash furnaces I've ever seen.
- [43:59]
Josh Brown
Good.
- [44:00]
Michael Batnick
From not from 9, 1724 through 6. 24 26. I estimate it got $2.3 billion in cumulative net inflows over that period. I estimate it lost $2 billion. Doesn't include the past two days during which it lost 26%. I think I saw Jake tweet that.
- [44:16]
Josh Brown
Like, I'm totally fine with that. And I don't feel bad for anyone.
- [44:19]
Michael Batnick
That's different. That's.
- [44:20]
Josh Brown
You know, what you do when you're pulling the trigger on a 2x microstrategy or crackhead. You know that.
- [44:25]
Michael Batnick
So what a J this side, you
- [44:27]
Josh Brown
know what that's like. Is there going to be a hearing in Congress for the people who lost money on Melania coin? I don't think so.
- [44:33]
John
Right.
- [44:35]
Michael Batnick
The 2x version, both, both. Both inverse and levered long I think are both down like 95% or something.
- [44:42]
Josh Brown
That's a shame. What, what, What a horrible thing.
- [44:45]
Michael Batnick
So let's, let's talk about, let's talk about speculation and leverage because there is, there is a lot of it. Josh, you wrote a couple of weeks ago about like, people have nostalgia going back to the way things were. This is it, folks. There's no going back. There might be periods of time in which people that are speculating, you know, burn their hand and they step away from the stove, they'll be new people with new hands to burn. It's never going back to 2017.
- [45:11]
Josh Brown
Like this is, this is part of a new world.
- [45:14]
Michael Batnick
In a new world. Interestingly, the old way of measuring how much leverage is in the system was fin. Was margin debt. Fin margin debt. And this is literally like reg Team margin, where, okay, I will give you, I will have $100 in my account. I will take 50 more. And that is boomer leverage because the leveraged ETFs, which we're going to get into in a second, options, swaps, all of it not reported. So but even, even just isolating the FINRA stuff, the FINRA margin debt, it's up 54% year over year. And of course this moves with the market. Like, duh, the market is up year over year, a lot. So, you know, margin debt is up a lot year over year. There's been three other periods over the last 20, I don't know, eight years where we've seen margin debt rise at a faster pace. And they're not good dates. So not to scare anybody, but this is just true.
- [46:07]
Josh Brown
March 20th is the question I have for you about this chart. Is it causal or is it, or is it coincident, which not like, well, let me say it differently. Not coincident, like, oh, these two things have nothing to do with each other.
- [46:24]
Michael Batnick
That's not a coincidence.
- [46:24]
Josh Brown
No, no, no, no, no, no, no, no, no. Is it causal, meaning the margin debt is what pushes us to the point where the market has to crash because there's so much speculation? Or does the market crash and then we see that margin unwind happen just because that's what happens when stock prices go down or at least stop going up.
- [46:43]
Michael Batnick
So when we're both, when we're talking about the distance above a 200 day moving average and we're getting a little bit uncomfortable discussing it, the higher these things go into space, into outer space, the less stable they become. This is physics. This is how markets function. And so this is why you're seeing micron go up 10% and down 9%. It is becoming less stable the higher it goes.
- [47:05]
Josh Brown
So can I say one other thing about margin?
- [47:07]
Michael Batnick
Go ahead.
- [47:08]
Josh Brown
This is the thing that people don't understand from the outside. The risk is all yours. This is not like, oh, the banks are being reckless with their lending and they're doing like all These mortgage bonds and blah, blah, blah. This, that's not how this is going to go. You are going to eat shit when this thing. Not you, the colloquial, the proverbial you, this is the brokerage firm. Robinhood is going to be fine. They are not going to be left holding the bag. They will liquidate securities.
- [47:36]
Michael Batnick
Yeah, we're good. Margin call.
- [47:37]
Josh Brown
They will liquidate securities until you go neg. I've been on the phone with grown men with negative equity. I had this sort of margin clerk in my role as a co branch manager a million years ago. I had to talk to people who went negative equity. Know what that is? It's like I had 50 grand in my account and now my account's worth negative 8,000. And I'm on the phone like, yo, you gotta send an 8,000. Well, what happens if I don't? Nothing. Really. We lose 8,000. We're the introducing broker dealer. So we gotta whack it up with Pershing or Fidelity. But nothing's gonna happen to you. Guess what the person with negative equity says. Oh, okay, great. Have a nice day off. Like, Robinhood will be fine. They will not have a problem with this. This is going to be your problem.
- [48:23]
Michael Batnick
Okay, so. So Callie wrote a research report for Compound Insights with Marco Iachini. He's the senior vice president of research at Vander Track. So they brought the data and direction sponsor the paper. So we, I think we did this in November. And the paper was called Leverage Funds in the Active Trading Boom. Inside the mind of the Active Trader. And one of the things that they found in the report was that leveraged volumes have grown at 29 annual pace since 2020. Faster than options and stock market volumes over the same period.
- [48:56]
Josh Brown
Way faster.
- [48:58]
Michael Batnick
Way, way, way faster. So the current leverage fund universe at the time, look at the. The single stocks, they've definitely since blown past broad equity. Broad equity for losers. Single stocks. And Josh, a couple of weeks ago you were saying like, like who's doing this? 90. I'll tell you, 90 of the turnover comes from active retail traders. So nobody's crying for these people. They know exactly what they're doing. I love to gamble too. And that's exactly what this is.
- [49:26]
Josh Brown
But chart back up. That's single stock options. No Single stock leveraged ETFs.
- [49:32]
Michael Batnick
Yeah.
- [49:33]
Josh Brown
So dumb.
- [49:34]
Michael Batnick
So, okay, so. So this is where it gets dicey. Total assets and leverage ETFs. It's now. It's now approaching $200 billion. The Journal wrote about this over the weekend. And here's a great quote. I'm fearful that we're building unintended leverage that isn't fully understood, said Mark Hackett, chief market strategist for Nationwide's Investment Management Group. You've got people with a lottery mentality using margin to buy options on levered ETFs. That's three or four layers. That's what we were talking about on TCAF.
- [50:00]
Josh Brown
Like, there's options, margin, margin trades on triple long ETFs, options on RAM, which
- [50:07]
Michael Batnick
is a double DRAM. So look at this amazing chart of the cumulative notional volume. And we'll get to. We'll. We'll describe this in a second. This is a great chart show, if you're listening. It shows like, 2021 looks quaint by comparison. Even 2025, look how far off trend we are, Josh. It's obviously being driven by SK Hynix and, and semis and all, you know, all that sort of stuff. So Todd has a chart showing the notional value. So, all right, fine, I have a dollar. There's $10 billion in Fund XYZ, but it could own $20 billion of a stock, and it's moving the market. I mean, obviously it is. So, Todd. So Todd Stone shows that there is upwards of $500 billion in notional value for levered ETFs. And this is only 200 of the 600. Now, I'm guessing this is most of the. Most of the assets, but we're talking about half a trillion dollars. This is absolutely moving these names.
- [51:03]
Josh Brown
So your point is. So you. Okay, so you made the. That's a really big point. When somebody shows you a chart of FINRA margin debt, it's like the blind man with an elephant. You're feeling the tail. You have no idea. You have no idea what else is going on. Yeah, I'm with you on that. That's a really important point. Now, not to say that margin debt isn't elevated.
- [51:24]
Michael Batnick
No, it is. It definitely is very elevated.
- [51:26]
Josh Brown
But then you have people who explain it away, like, nah, you see, you don't understand how margin debt works. It grows as a function of the size of the stock. Like, oh, yeah, mother, I have $500 billion in. In levered stock fund betting. In addition, or maybe combined with that stupid federal margin debt chart, some of
- [51:48]
Michael Batnick
these, some of these levered funds aren't even allowed to use swaps anymore. The funding is getting too expensive. They're going to the options market. There is so much hidden leverage in the system between swaps and futures and whatever that we're not seeing. Yeah, people are speculating the rest of it and it's not going away.
- [52:01]
Josh Brown
Are these like 25 year old young men? Who the hell is this? No profile of the person?
- [52:07]
Michael Batnick
Dude, everyone.
- [52:09]
Josh Brown
No, because time out. You quoted somebody who said something to the effect of like, I'm concerned. We're building up leverage that people don't understand.
- [52:17]
Michael Batnick
They understand.
- [52:18]
Josh Brown
What are they, chimpanzees? They know what they're, they're doing it deliberately. They didn't accident, they didn't type the wrong ticker in. What are you talking about? Not only do they not understand, they're doing it deliberately because they do understand.
- [52:31]
Michael Batnick
Of course. I think he's talking about market participants don't understand what's happening.
- [52:34]
Josh Brown
Me trade good. Yeah, dude, it's, it's bananas. All right, you know what though?
- [52:40]
Michael Batnick
It's never going to stop. There will be wipeouts. It'll come down and then it'll go back.
- [52:45]
Josh Brown
We, we, we don't have time for this today, but we are in this nihilistic period of American style capitalism. We're kind of in this moment where people are like, so let me get this straight. There's like two ways to be able to pay my bills in this economy. Like get in early on a crypto scam or, or take off my clothes for onlyfans like that. Like the only people my generation that have any money are either naked or aggressively speculating. Like that's, those are my choices if I don't work at Goldman Sachs. Like that really is the mentality, I think that's driving this and it's super nihilistic. And I hope, I hope this period doesn't go on for much longer because I don't think we can as a society. I don't think we can carry on this way. It's deeply disturbing. But I get. But I understand, but I understand it, but I understand that I don't see how you can earn $20 an hour and live the, the more charitable version
- [53:44]
Michael Batnick
of what you're saying is people just love to gamble too. Like that is disappointed. Yeah, yeah, dude, it's fun. It's fun.
- [53:50]
Josh Brown
All right.
- [53:51]
Michael Batnick
It's definitely fun in a bull market. So.
- [53:54]
Josh Brown
All right, before everyone kills themselves, we have one more thing we want to close with. This is a really great quote from Adam Parker. You want to do it?
- [54:00]
Michael Batnick
It's so good.
- [54:02]
Josh Brown
So.
- [54:03]
Michael Batnick
All right. So Adam wrote, what bothers me about investors that espouse the it is never different mantra is that they project an air of intellectual Superiority and laugh at those of us who say it is different this time. Man, I. Yes, Tattoo that on my face. We are not saying that human cycles of fear and greed don't rhyme. We are not saying that hubris and debt aren't always present at tops. We are not saying that behavioral science in finance isn't critical. But when it comes to AI semiconductors, my response is it is already factually very different this time. Sure, when there is eventually a large downturn in profits in the stocks, these people will feel intellectually vindicated. But that doesn't matter if they think AI is a joke and the hyperscaler capital spending is all stupid and the memory stocks are quote, the biggest bubble they've ever seen. They are already brutally wrong as it has already been massively different. Waiting for the cycle to turn lower. To justify that, you were right. To miss a large portion of. Of the biggest upcycle ever doesn't make sense.
- [55:11]
Josh Brown
Right? You can't ever be right. It's too late. Even, even if there's a downside, you. You can't be right.
- [55:16]
Michael Batnick
The goal is to have more upside capture of the cycle than downside capture. The goal is not. All right, I'm gonna repeat this. I'm gonna say this slowly. The goal is not to miss 90% of the upside and make fun of those what captured a lot of it. Calling them crypto Bros. Or retail idiots or morons levered to single stock ETFs. This is not just the greatest profit cycle in DRAM history, but it might be the greatest in the history of all cyclicals. Micron went from being perceived as a low quality commodity producer with a questionable reputation 25 years ago to a company that is guiding that they will do $50 billion in quarterly revenue at 86% gross margins this next quarter. Is that different?
- [56:00]
Josh Brown
Yeah. Right.
- [56:01]
Michael Batnick
Well, Amazing, Adam. Well done.
- [56:03]
Josh Brown
That's. That's, that's hitting hard. And yeah, it's real different.
- [56:07]
Michael Batnick
Very different.
- [56:07]
Josh Brown
And that's not. And saying something is different is not the same as saying it'll never go into reverse or, or it won't stop. Nobody is suggesting this just goes on for the rest of our lives. Everybody understands there's still going to be an ebb and flow. But to say that this has to rhyme with something you read about at. It's lazy in an article, I mean, or in a book somewhere. Come on. This is total, completely different. The result. The result is not going to justify having missed the whole thing.
- [56:38]
Michael Batnick
That's it.
- [56:39]
Josh Brown
So you have a stock up a thousand percent and then fall 30%.
- [56:43]
Michael Batnick
Congrats.
- [56:43]
Josh Brown
And you're going to pop, and you're going to pop in after it falls 30% and say, I told you it was a bubble. Get the fuck out of here. All right, make the case. Well, if you're riding with me on Nike, you're probably wondering what else I'm bullish on. All right, I'm in Toast and the Stock hit like 21 or 22 and it's since bounced back. I didn't see where to close today.
- [57:07]
Michael Batnick
2780. It looks much better.
- [57:09]
Josh Brown
All right, it got got up to 28 and change pulled back 2780. But it is joining the mid cap 400 effective tomorrow. So it has just taken out its 50 day moving average on good volume. You've now got an RSI confirming a potential break of a downtrend. This downtrend has been in force for as long as all of the other software stocks have been selling off, which is July, August of last year. This has been a one year of software stocks going down, down, down, down. But the premise here for me on Toast is this. And I've added to it when it was lower and I'm doing the right thing here as an investor. Eventually, Michael, the market figures out that not every software company is as disruptible as AI as other software companies. And some of these things are actually going to turn out to have been AI beneficiaries. And I want to show you what that looks like when that market realization happens. Chart, please.
- [58:10]
Michael Batnick
You promise? Do you promise?
- [58:12]
Josh Brown
No. This is an example. This is not what I think is gonna happen to Toast. This is CrowdStrike. And this stock, as you can see, started selling off last fall and was locked in this downtrend until sometime around April, probably coinciding with earnings. There are a little. And basically the downtrend ended and then obviously a new bull market took hold as the story around Crouch, the results were always good. Chart off quarter after quarter, even on the way down, they were crushing it. Okay? The results were never the issue. The issue is the sentiment. And one day, inexplicably, the sentiment changed. George Kurtz, friend of the Show I'm a longtime shareholder here, so I am talking my book. But this stock is now almost $800 a share, up from three something. It had just been absolutely atrocious. And then one day it wasn't. And nobody can look back and say this is the exact news. Just the market figures out, okay? CrowdStrike, more AI means more cybersecurity threats. Actually, this is now an AI play. Toast has Toast IQ, which is their AI product. And the premise for me, what is the more likely outcome that restaurant owners use Claude to code their own solutions for things like payment and giving healthcare to employees and restocking the kitchen with ingredients and managing reservations.
- [59:42]
Podcast Disclaimer Voice
Or.
- [59:43]
Josh Brown
Or Toast is going to be the company that helps them use AI to improve their businesses. The machine is already in the building. It's sitting on the counter. It's in the waiter's hands. If. If anyone is going to be in pole position to bring AI to the hospitality industry, my argument is it would be Toast. It would not be a thousand entrepreneurs working in the restaurant industry coming up with their own solutions.
- [60:10]
Michael Batnick
We've heard. We've heard the pitch before. And you remain resolute to me.
- [60:15]
Josh Brown
I'm not backing down out of this thing.
- [60:16]
Michael Batnick
The more important point that you made, because I agree with you.
- [60:18]
Josh Brown
Yeah.
- [60:18]
Michael Batnick
I mean, what do I know about the restaurant industry? But what you said about CrowdStrike is so important for people to understand.
- [60:24]
Josh Brown
There was no news.
- [60:27]
Michael Batnick
There was news on the way down or narrative news.
- [60:30]
Josh Brown
And there was sentiment. Sentiment changed.
- [60:33]
Michael Batnick
The veil of uncertainty, the sentiment, it changed. And it's really hard to predict when and where. And even if you look on the chart and you say you can't point to when it happened, it just. It just changed. So I like it. The stock looks way, way, way better. I will say it better not roll over again.
- [60:46]
Josh Brown
Oh, God, I'll kill myself. All right. You have a mystery chart.
- [60:49]
Michael Batnick
I do. All right. If I was a bear. And I'm not. But if I was.
- [60:53]
Josh Brown
If I did it, if I did
- [60:55]
Michael Batnick
it, if I was a bear. If I were a bear. This is the chart that I would show you. Chart on, please. We're looking at. At. At one stock compared to a semiconductor. And the semiconductor is the modern dot com bubble. And this happened in the.
- [61:13]
Josh Brown
Hold on, hold on.
- [61:14]
Michael Batnick
Let me finish.
- [61:15]
Josh Brown
Which is which, though? There's a mystery chart, but I see it says semiconductor etf.
- [61:19]
Michael Batnick
Right. I'm not done.
- [61:20]
Josh Brown
Okay, go.
- [61:22]
Michael Batnick
This looks exactly like what happened in the dot com bubble. Replace the semiconductor ETF with the nasdaq. And the purple line was a purple line. So what's the purple line?
- [61:36]
Josh Brown
Okay, the purple line is the purple line a index or a sector or a stock.
- [61:43]
Michael Batnick
A stock.
- [61:44]
Josh Brown
It's an individual stock.
- [61:46]
Michael Batnick
Correct. And I shouldn't have to give you any more clues.
- [61:49]
Josh Brown
You shouldn't have to give me any more clues.
- [61:51]
Michael Batnick
That in and of itself is a clue.
- [61:54]
John
Okay.
- [61:55]
Josh Brown
The purple stock is Berkshire Hathaway.
- [61:57]
Michael Batnick
Correct.
- [61:58]
Josh Brown
Look at me. I did that with no help. I did that with no help. I literally did that. I did that.
- [62:05]
Michael Batnick
So this is, you know, this is not nothing. We saw this in 99, 2000 or 98 to 2000.
- [62:13]
Josh Brown
So Berkshire flatlining while the semiconductor ETF goes up is. What are you saying? What are we saying?
- [62:20]
Michael Batnick
I'm saying exactly what I just said. And from 98 to 2000, I believe Berkshire was actually down 30% when the index was up like 150%. Yeah, it's happening again.
- [62:33]
Josh Brown
Well, oh, the stock's not participating with the S and P rallying. That's the thing. That's the thing.
- [62:39]
Michael Batnick
Don't be obtuse. You know exactly what's happening.
- [62:41]
Josh Brown
No, I got. I got it. I got it. I agree with. I agree with you. I agree with you. It does own tech.
- [62:47]
Michael Batnick
Josh. Josh did not get a degree in economics from Queens College like I did.
- [62:52]
Josh Brown
Certainly did not.
- [62:53]
Spencer Jakab
All right.
- [62:54]
Josh Brown
Hey, guys, thank you so much for watching. Thank you for listening. I want to let you know a couple of things. First of all, new merch in the compound store. It's idontshop.com idontshop.com I really don't. We did. We did new. We did new hats for summer. We have the beach. We have the beach towels. We got some stuff in there. Go check it out. Also want to let you know, tomorrow is Wednesday, which means Animal Spirits is back. It's Michael and Ben. My favorite podcast. You're going to love it. Duncan and Ben will return with an all new episode of Ask the Compound. And that is a show where you get to submit questions for the boys to answer and whoever their special guest is from one week to the next. So if you want to send a question into Ask the Compound, the easiest way to do it is ask the computer. Ask the compound. Showmail.com. that inbox is constantly monitored and if you ask something interesting and they use it, you will be getting some merch. Because we love you. We're going to do the Compound and Friends at the end of the week. One of our favorite return guests. Returning champions coming back. Keep it locked on the Compound. Keep rocking with us. We'll talk soon.
- [64:11]
Podcast Disclaimer Voice
Ritholtz Wealth Management is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Ritholtz Wealth Management and its representatives are properly licensed or exempt from licensure. Nothing on this podcast should be construed as and may not be used in connection with an offer to sell or solicitation of an offer to buy or hold an interest in any security or investment product. Past performance is no guarantee of future results. Investing involves risk and possible loss of principal capital. No advice may be rendered by Ritholtz Wealth Management unless a client service agreement is in place.
- [64:43]
Michael Batnick
Queen Carvania stood, haloed by the morning sun.
- [64:48]
Josh Brown
An army hung on her every word.
- [64:50]
Michael Batnick
My champions, I have sold my chariot on Carvana. Twas a lovely suv, an inexplicably queenly offered. They're even coming to the castle to collect it.
- [65:03]
Spencer Jakab
Tonight we feast.
- [65:07]
Michael Batnick
An offer you can feast on.
- [65:09]
Spencer Jakab
Sell your car today on Carvana.
- [65:11]
Josh Brown
Pick up. Fees may apply.