Stocks in Pre-Crisis Mode, Multiple Compression, the Citrini Crash, Halo Goes Viral

Summary

---

The Compound and Friends

Episode: Stocks in Pre-Crisis Mode, Multiple Compression, the Citrini Crash, Halo Goes Viral
Air Date: February 25, 2026
Hosts: Josh Brown ("Downtown Josh Brown"), Michael Batnick
Special Segments: Market analysis, Halo stocks, Private credit/BDC commentary, Listener chat

---

Episode Overview

This episode dives deeply into several pressing concerns in today’s markets: why stocks appear stuck despite robust earnings, the phenomenon of PE (price-to-earnings) multiple compression, the “Citrini Crash” and its viral doomsday scenario for white-collar AI disruption, and the runaway popularity of the “Halo” trade (heavy assets, low obsolescence risk). Hosts Josh and Michael bring their signature mix of expert analysis and candid banter, breaking down market narratives, emotionally charged responses to viral research, and how investors might navigate what they call "pre-crisis vibes".

---

Key Discussion Points & Insights

Market in "Pre-Crisis Mode": Valuations and PE Multiple Compression

• Multiples are compressing even as S&P 500 earnings and margins are strong, leading to stagnating or even declining stock prices despite good fundamentals.
• Investor sentiment is cautious: Increasing uncertainty about future cash flows suppresses willingness to pay high multiples (03:00–05:50).
  • Josh: "You have to train yourself mentally to endure it. You have to be okay with that. It's part of the deal that we all make..." ([06:00])
  • Michael: "Valuations are not a catalyst. They're not support..." ([04:43])
• Historical context: Even with earnings growth, 66% of the time since 1900, "really strong earnings" years saw PE multiple compression.
• S&P Equal Weight vs. S&P Market Cap Weight: Equal weights show lower (but still not "cheap") valuations.
• Sector rotation: Tech and growth stocks bearing the brunt of derating; value-oriented “Halo” sectors are in favor.

The Five Reasons for PE Multiple Compression (Reflecting Savita Subramanian's Research)

Josh and Michael summarize Merrill Lynch’s Savita Subramanian’s thesis for why multiples will compress in 2026, walking through each point:

1. Disruption Math – "Cheap tech lags rather than leads" in true disruption cycles; actual downcycles in old leaders take time to play out (10:45).
2. Equity Shrinkage Reverses – IPO and secondary issuance will flood supply. Scarcity-driven multiple expansion (from buybacks/private shrinkage) is ending.
3. Strong EPS = Lower PE – Historically, big earnings years often compress multiples (11:00–11:40).
4. Rising Asset Intensity – Tech giants are now pouring all operating cash flow into capex, making old software profitability models less relevant.
5. Index Risk from Private Market Hiccups – Institutional rebalancing from private equity pain could add public market selling pressure and volatility.
   • Josh: "She notes that pension funds have shifted from active public equity funds to a barbell of passive and private equity. Today's private capital woes could mean raising capital in more liquid investments." ([12:55])

Michael: "Everything was fine until ... if you start to get earnings warnings from not just one of them, but like 10 of them ... that selloff made perfect sense. And probably it shouldn't be over yet." ([22:13])

AI & Software: From "Software Eats the World" to "AI Eats Software"

• Bear market in software: High-multiple software stocks are getting hammered, facing existential threats from AI automation (24:47).
• Workday as case study: Even stocks with strong operational metrics are punished for any miss in guidance. Margin erosion plus high valuation is a lethal combination (21:32).
• Rest in Peace, old software model: The mega-run from 2011–2026 is over. Future multiples may be cut in half if software industry margins are halved by AI (23:40).

Josh: "Can we safely say rest in peace to software is eating the world, 2011-2026. RIP, great run." ([24:16])

The Citrini Crash: The Viral AI-Driven Doomsday Scenario

• Citrini research piece: A speculative, viral blog post modeled the dark side of rapid white-collar AI automation—mass layoffs, surging unemployment, credit shocks, and a domino effect across the economy (30:00–32:00).
• Emotional audience reaction: Michael is "really bummed out" by the personal and social consequences if this scenario plays out ([32:34]).
• Josh’s critique: These scenarios over-index on negative dominoes and ignore positive externalities or gradual adaptation (35:37).
  • Josh: "The general idea was like... domino effect... It never plays out that way. There are positive externalities even in a debt crisis." ([36:24])

Notable Quote

Michael: "The part that bummed me out, the human element... There are people whose lives are going to get blown up... There are people that are white collar workers that live around us who are going to lose a job, lose a spouse, lose a family." ([32:26])

Jobs, AI, and "The Halo Trade"

• Jobs at risk—fast or slow? Jamie Dimon's "truck driver thought experiment": Do technological shocks instantly wipe out jobs, or do professions fade away as new cohorts avoid them? (40:00–42:00)
• Are all “good jobs” worth saving? Josh questions whether well-paying but mindless/rote jobs should be preserved just because they pay well.
• "Halo" stocks viral moment: Josh’s "Heavy Assets, Low Obsolescence" thesis is spreading through Wall Street media (42:13–47:00). These are asset-heavy, non-tech companies with low AI disruption risk:
  • Outperforming sectors: Consumer staples, healthcare, energy, utilities, real estate, and materials; all green in last session vs. struggling tech/communications/growth.

Notable Quotes

Josh: "I am the smartest man alive." (in jest; on Halo's media coverage, [42:24])
Josh: "Heavy assets, low obsolescence risk is the theme of the year... All six [of these sectors] are the only sectors green." ([43:06])

• AI’s double-edged sword: Viral TikTok piece: If AI automates the “hard part” of a job (e.g., cabbies’ geographic expertise), wages drop. If it automates the “easy part” (e.g., accountants' data entry), the value of expertise rises ([47:16–49:15]).

Private Credit/BDC Shock – Pre-Crisis Parallels

• Jamie Dimon & Lloyd Blankfein warnings (52:51–56:38):
  • Private credit (esp. software loans) could be the “next shoe to drop”; "pre-crisis vibes" echoing 2005–07.
  • Retail exposure to risky loans via 401k/insurance could bring public anger and regulatory backlash if there’s a blowup.
  • Large asset managers (e.g., Blackstone, Apollo, KKR, Blue Owl) are in significant drawdowns (66:54–69:41).
  • Michael: "There can't be this many good loans available... We're going to find out about [sloppy underwriting], give it a couple of months." ([57:28])
• Market signals: Publicly traded BDCs down 60%; no defaults yet, but market is pricing in something bad before it’s visible ([58:07–58:58]).

Housing Market Weakness

• Pending home sales, pool construction, and home-improvement stocks are all dropping steeply, even as mortgage rates fall ([61:09–63:52]).
• Google searches for "can't sell house" are spiking to decade highs—a sign of seller-buyer disconnect ([64:03]).

International Performance and Diversification

• U.S. stocks lagging EM and international small cap value: Chart review reveals international small cap value outperformance by ~30% over five years; S&P lagging EM since Oct 2022 ([71:28–73:28]).

---

Notable Quotes & Memorable Moments

• Valuation nerves:
  • "Valuations are not a catalyst. They're not support. People want to sell, there's no floor."
    – Michael Batnick ([04:43])
• Mental resilience:
  • "You have to train yourself mentally to endure it... If the reason is uncertainty about the future because of innovation, like if that's our worst problem, that's really not that big of a problem."
    – Josh Brown ([06:00])
• On software derating:
  • "Can we safely say rest in peace to software is eating the world, 2011–2026. RIP, great run."
    – Josh Brown ([24:16])
• On viral doomsday research:
  • "This is not some perma bear guy you can safely discard... The part that bummed me out the most was the human element."
    – Michael Batnick ([31:34])
• Halo stocks:
  • "Heavy assets, low obsolescence risk is the theme of the year."
    – Josh Brown ([42:13])
• On private credit:
  • "There can't be this many good loans available. There just can't be."
    – Michael Batnick ([57:28])

---

Timestamps for Key Segments

• PE Multiple compression intro: [03:22] – [07:00]
• Savita Subramanian’s 5 points on PE compression: [08:06] – [13:46]
• AI disruption and software index discussion: [20:44] – [26:44]
• Citrini Crash discussion: [30:00] – [38:37]
• Jamie Dimon/Lloyd Blankfein on private credit: [52:51] – [56:38]
• Halo stocks viral coverage & sector performance: [42:13] – [47:00]
• AI’s impact on jobs (taxi drivers vs. accountants): [47:16] – [50:46]
• Housing market signals/pool and decor drawdown: [61:09] – [63:48]
• EM & International Small Cap Value charts: [71:28] – [73:28]

---

Conclusion

This episode captures the anxiety and nuance of a market in transition: investors sense risk but are still close to all-time highs. Josh and Michael frame critical questions: Are we headed for a true crisis, a grinding compression of multiples, or just a rotation from growth to value and from U.S. to international? The “Halo” thesis continues to resonate as investors seek AI-proof assets, while fears about private credit, housing, and jobs represent the other side of the innovation coin.

---

For full details, data visuals, and further disclosures, visit The Compound’s episode page.

Transcript

[A]

Yeah, we're back. All right. It's been a minute. I had, I had Ben Carlson on in Michael's place last week, so it's, it feels like it's been a while. I don't know. Does it feel like that for you?

[B]

I think I did four podcasts today, so no.

[A]

There's a lot to talk about. Hey, guys. Welcome to an all new edition of what are your thoughts? First time listeners, my name is downtown Josh Brown and with me as always, my co host, Mr. Michael Batnik. Michael, say hello.

[B]

Hello. Hello.

[A]

All right, we have a live chat that's going on on YouTube for those of you who are normally accustomed to listening to us. Every once in a while, pop onto the live. We tape this at 5pm Eastern. Want to say hello to some folks? Chris Hayes is here. Chris hit the like button eight times, he says. Appreciate that, sir. Media Mindy said y' all going to talk about Paramount and Netflix with the new bid for Warner Brothers.

[B]

Too busy.

[A]

You know what? That's like number nine on the list of things that we would do today normally. Mindy, we would love to. It's just too much happening. Cliff Peoples watched the Jessica and Nick Cola show here on the compound yesterday. Appreciate you, sir. They are so smart. I love, I love Nick and Jessica. Who else is here? Jerry's here. Giancarlo Charisma Spigot is back. Georgie's in the house. All the usual pounders are with us. And some new names and faces we appreciate you guys want to mention our sponsor. Tonight's show is brought to you by Fidelity Investments. When timing is everything, you need powerful tools and research that can meet you in the moment. Right, Michael?

[B]

That's right, Josh. With the allnew Fidelity Trader plus platform. Your charts and preferences show up consistently synced across all your devices. So you can act fast whenever and wherever you're trading. You can save an order on your desktop at home, get a mobile alert when you're at work and complete the trade in the Fidelity app without starting over.

[A]

And with the downloadable Fidelity Trader plus desktop platform, you have more control with multi monitor views, enhanced tools and customization options, and integrated screen sharing with Fidelity Trading Specialists. Try Fidelity's most powerful trading platform [e-mail] Trader Plus, Fidelity Investments and the compound are not affiliated. Views, opinions, products, services and strategies discussed are not endorsed or promoted by Fidelity Investments. Fidelity Brokerage Services LLC Member NYSE SI PC thank you, Fidelity. Today's show is sponsored by Janice Henderson Investors. Where we believe working together is the way to work better like combining your portfolio plans and our in depth strategy, your valued assets and and our valuable insights, your mission and our vision always working in perfect harmony. To find the right investment opportunities. Janice Henderson Investors investing in a brighter Future together visit Janice henderson.com All right, it's a crazy week. I want to start with PE multiple compression. And the reason why is because I really think that this is the key to the market this year. Earnings are coming in at record levels. Revenue to profit margins are rock solid. If somebody says why the hell is the S and P underperforming the international stock market by the widest degree almost of all time, especially in a bull market, the only answer I can give you is that investors are less confident in future cash flows and, and are therefore demonstrating a lack of willingness to pay current multiples. And that is a very fancy way of saying the multiples are too high for the level of confidence we have in the future. And it's a, what we call a classic PE compression. And this could end up being a year where earnings are good to great and stocks are flat to down. And the reason, I mean it's February so who the hell knows. But I'm just saying this could be one of those years where you get the earnings right but you don't make money in the, in the index. What are your, what are your thoughts before we get into some of the reasons behind this?

[B]

That is, that is the entire story. And valuations are not a catalyst. They're not support people want to sell. There's no, there's no floor does right. Like but what I take a little bit of comfort in, not a lot, but a little is the fact that we are already seeing this correction throw match chart up please. So Josh mentioned the S P is doing just fine. Price is right near an all time high. Multiples are contracting which is why you see the earnings growing but the index turning sideways. So we're at 21 times. All right. Tells you absolutely nothing, quite literally nothing. There's no information in there whatsoever. But if we were and all and all right if we were to look at the equal weight version also doesn't tell you a whole lot but it's closer to like 17 times. Trot off. And I feel better that can we go from 17 to 13 and be in a world of pain 100% we could. There's no reason why we can't. But I do, I do feel better than being at say 25 times at

[A]

the equal weight or worse being at a cheap valuation with earnings falling. I promise you. That doesn't.

[B]

That's worse. That's worse. Way worse. Way worse. Way worse.

[A]

So, look, we've had an incredible run. I don't mean like over the last 15 years. I'm just saying, like, the last two or three years have been really, really good. And part of, part of that sometimes is a period of give back. Now that could be for a quarter, it could be for six months, could be for a year. I can't tell you. But like, I, what I will, what I will stand on is that you have to train yourself mentally to endure it. You have to be okay with that. It's part of it. It's part of the deal that we all make. And if the reason is there's uncertainty about the future because of innovation, like, if that's our worst problem, that's really not that big of a problem.

[B]

So. Dude. And bro, I would say that if you were to tell somebody. Yeah. How much we're stocks up 23, 24 and 25, it's okay if we're not up again 20%.

[A]

Nobody wants to hear it.

[B]

I think everybody would say, yeah, true, fair. Good. You're right. But nobody's worried about a flat year. They're worried about a down 25% year.

[A]

Yeah. And nowhere near that. That's a little early.

[B]

Here's, here's another, here's another thing. Maybe I'm saying this to make myself feel better, and I am. Midterm election years, the June to June, they just are choppy. I don't know why. And I'm not suggesting that the AI route is any way related to the fact that there's a midterm election cycle coming up. I'm not, but, and also if you look at the November to November following a midterm election year, you could laugh. But it's, it's up 100% of the time and it's not a sample size of 3.

[A]

Are you going to watch the State of the Union tonight?

[B]

No, I don't think I've ever missed,

[A]

I will never miss a Trump State of the Union. They are, they are incredible. He is, listen, not political. I don't care about. You guys know, I'm not a political person. There, there is literally never been a more entertaining president in that setting where he just, he knows he has everyone's attention.

[B]

Not mine.

[A]

He go, he's like, he goes for it.

[B]

Okay, well, I will be watching the Knicks Cavs in my, in my entire existence. I've been on the planet for 40 years. I guess as an adult for 10 of them. I never once, I don't think I've ever spent more than 10 minutes watching a State of the Union address. And I won't. Not about to start now.

[A]

He's his own. Let me just say one thing. I'm not saying don't watch the Knicks. His own Supreme Court, which basically he put like five of the nine people on it, on it just smacked him in the face this week. They sit in the front row. People don't even understand what's coming. They sit. I almost shouldn't even be hyping it up because people should be watching this show later tonight. But like, they, they, they sit, the Supreme Court justices in the front like it's a rock concert and they're, they're VIPs. And this is going to be completely unhinged. I cannot wait. All right, let's, let's do this Savita thing. So one of our, one of our favorite analysts, Savita Subramanian, who leads the equity and quant strategy group at Merrill lynch or bank of America, I don't know what they call it now. This is actually her forecast. Stocks are going to get cheaper this year. Not stocks are going to get killed or just like they're going to get the pe. Multiple compression is going to be the story of the year. And she laid out five very easy to understand reasons why that will be the case in their opinion. And I want to go through all five of these at a very high level and then get your take when I'm done. Reason number one is disruption math. So basically she's saying relative price declines often precede earnings downgrades. Our quant back test says historically cheap tech lags rather than leads. Real disruption can be a long process. It was eight years from the Netflix IPO until Blockbuster went bankrupt. IT services swung from a 14% premium to a 23% discount. Post ChatGPT and we're not going to put the chart up, but you can take her word for it. IT Services is like the companies that come in and help Fortune 500 workday businesses like Implementation implement solutions. And that's like on the front lines of potential disruption. Reason 2 equities, equity shrinkage behind us. Glut of issuance ahead. Mike, we talked a lot about buybacks and how, ladies and gentlemen, the stock market is shrinking. Was a post I wrote years ago talking about the lack of publicly traded companies. And just like the dearth of IPOs, you don't have to worry about it anymore. Savita says scarcity drives Multiple expansion. So it's no surprise stocks rerated in the 2010s amid a 25% drop in stock supply. Accelerating buybacks helped too, but are now slowing from here. Potential for mega IPOs. The top three private companies are valued at 25 plus prior years of US IPO proceeds could represent a seismic supply shock. So when we get anthropic OpenAI, SpaceX, maybe Starlink as a standalone company Anduril's on the Runway. Maybe stripe. These are massive market caps coming to the NYSE into the nasdaq. They suck up supply from other stocks. Everybody understands reason three really strong earnings per share means really compressed multiples. Above average earnings saw PE multiple compression 66% of the time since the year 1900. 14% earnings per share growth. Growth years. That's their forecast for this year have seen an average of 10% PE compression. Really good fact to tuck away.

[B]

Wait, that's so interesting.

[A]

Yeah, we should look. We should have chart kit do something on that. Asset intensity and financial leverage is worsening. Asset intensive financially levered index of the 1980s morphed into an asset light cash rich index of the 2010s. But software, media and Internet companies have recently jumped in asset intensity. That's what we talked about with Nick and Jessica last night. Did you know Ford is now more profitable than Amazon Meta and Alphabet? Wow. Literally. Yeah. Did you know Nick and Jessica calculated that those three stocks are putting over 100% of their operating cash flow back into capex this year? All of it. That's. He goes, people are wondering like where do these capex budgets come from? Nick's like dummies. It's the entire operating cash flow. That's where it comes from. It's literally the number that means somebody high up at Amazon goes to the treasurer and says what's our operating cash flow? Oh, it's 200 million. 200 billion. Great. Right into capex. That's what's going on. And then number five, Savita's list index risk from private hiccups as the VIX is set to rise. She notes that pension funds have shifted from active public equity funds to a barbell of passive and and private equity. Today's private capital woes mean could mean raising capital in more liquid investments. This is so interesting. Equity index funds and the relationship between the vix. The yield curve suggests a big increase in the Vix in 2026 also accompanied by lower PE. So in other words, asset managers who have made these illiquid investments that they're worried about and they need to raise capital. That's selling pressure in the traditional stock market. Not something that was on a lot of people's bingo cards earlier this year. But this is a real risk to multiples. And so you add those five things up. Why would you expect PE multiple expansion this year? It seems like it'd be really hard for us to get it. What do you think?

[B]

I don't think anybody coming into the air was arguing for multiple expansion.

[A]

Well, you ain't going to get it so tough.

[B]

It is weird that the Vix is under 20, don't you think?

[A]

Don't say that out loud.

[B]

Well, it just is.

[A]

I know.

[B]

I think it's going to stay there tomorrow, but it is. It is weird. I would. I would think in this environment to be a little bit more elevated than that. So, yes. Everything that she said, I don't really. I think that index and private hiccups is sort of. Whatever. I don't think that's that.

[A]

Which is the one of those five that has. That lands on you the hardest. Take out. This take out. Disruption math. Because we all understand that already.

[B]

Well, okay, but that's the first one. Equity shrinkage. I don't. I don't know. Are we going to get those three IPOs this year? I. I don't think so. I mean, Anthropic just had a monster raise.

[A]

I think you're going to get. I think you're going to get three out of the five largest private companies in the world in the next 12 months.

[B]

I don't think so. I. I think the public market will have zero appetite for open AI who just shared with the world that they expect to burn 200. What?

[A]

It doesn't matter what the appetite is. They're in a race with Anthropic. One of them. The both of them want to beat the other. It doesn't matter what the appetite.

[B]

No, it's. I said this to Ben today. Nobody was scared when OpenAI was in the lead. We were laughing like, ha, ha, ha, ha ha. And then all of a sudden, Anthropic comes over the top. We're like, oh, like this shit's real.

[A]

Who do you hate more?

[B]

Sam Altman?

[A]

I'm not sure now. I. I thought. I thought I. I said, I don't like this creepy little doll from a horror movie. He looks like Brahms from the Boy. I don't like this guy. But then he has, like, dead eyes when he talks. He doesn't seem to.

[B]

Which one are we talking about? Dario?

[A]

No, Altman. But then this Guy Dario is really pissing me off. Just shut. Stop doing podcasts for five minutes. We've all heard enough. Everything out of this guy's mouth is another pronouncement of the futility of humanity. A, it's bullshit. He's going to be wrong, but B, it's, like, annoying. Why. Why do you have to say all this out loud every day? It's. It's kind of strange. Could you just, like, you have a private market valuation of 380 billion. Could you just be in a. Like, a good dude? Does. Does every public. Does every public statement out of. You have to scare the shit out of, like, normal, regular people that are just, like, thinking about their family? Like, who is that in your contract? You have to show up on all these podcasts and be a dick about it?

[B]

I don't. I don't think he's being a dick. He's not that scary. He's actually the. He's actually the one saying that we need some sort of regulations and guardrails.

[A]

Well, there's a. There's a. There's a conspiracy theory about why he's the one saying that. And a lot of people are saying what he's really trying to do is entrench himself. See, one of the interesting things about what happens with big tech and regulation, the more regulation you have, the harder it is for new entrants to come along, because the cost of complying with that regulation is insurmountable. Great example of that would be the banks after the financial crisis. They made the rules so impossible that only five banks had the ability to grow. You could also look at meta, Alphabet, etc. They're entrenched further by regulation. They may be hemmed in about what they can do, but the silver lining is there is no other meta. Nobody could afford it.

[B]

Anthropic just raised $30 billion. There's not a lot of companies on the planet that could do that. They already have it. Not.

[A]

I'm just saying, like, Claude is. Claude is cool. The products are great. I use OpenAI all day long. ChatGPT all day long. It's fine. But like, guys, can you shut up for a few minutes?

[B]

All right, Getting back. That's getting.

[A]

That's all I'm saying.

[B]

Getting back to the multiple compression. The thing. The real thing that worries me that's not on here is what if multiples are peaking and so stocks might look reasonably priced on a forward basis? What if the earnings aren't 290? And what if they're actually 270 in two years.

[A]

Like what. What happens to price?

[B]

No, well, we know what happens. It comes way down.

[A]

Yeah.

[B]

I mean, the thing that I also take comfort in is look at the global market. Look at the global stock markets. They're all red hot on fire. I think a lot of the earnings benefits are accruing to other places of the market. And on the one hand there's only. So. So I love the broadening. I think everybody does. But there's only so much selling pressure that the market can take before the 493 come down with it. So right now the max 7 are in a 12% drawdown. The market could swallow that. But Nvidia reports tomorrow and bombs and the max 7 is down 15, 18, 19. The rest of the market's going to follow suit, unfortunately.

[A]

Yeah. So I don't. I actually think that's unavoidable.

[B]

And which part?

[A]

Sentiment. There's the sentiment hit from. From an event like that.

[B]

Oh, yeah.

[A]

I don't know that anyone's really spared from that. It doesn't have to last long, but that'll definitely be the story of the next day.

[B]

All right, so here's a weird thing. This is from Bespoke 2026 has seen the narrowest spread between the year to date high and year to date low through 220 since 1966. So if you look at a chart of the S and P, it's going nowhere fast. It's very bizarre.

[A]

Yeah. Because I just think it reflects like the extreme uncertainty right now and some of the biggest stocks that matter the most to the index are caught in that uncertainty.

[B]

Yeah, it.

[A]

It's hard to be bearish on these companies. They're going to have 29 earnings growth this year.

[B]

Okay, glad you said that.

[A]

So how do you. How do you like. How do you get, like completely out? You can't.

[B]

So as I'm wearing this T shirt for the first time. Markets of turmoil as all that.

[A]

We're such a great. That's such a great shirt by the way.

[B]

Thank you. Well, or you're welcome.

[A]

You know this now [e-mail] in the compound store.

[B]

By the way, all that the market is talking about right now is risk, rightfully so. And everybody's talking about it. You and I know how fast sentiment can turn. One earnings report, one piece of regulation, 1. Whatever. It doesn't matter. It doesn't matter. So what do you think is more likely in December that. Lol. The chase is back on. We are. We actually are going to get some sort of AI melt up or. Man, we could have gotten out so easily in February. Markets were within 2% of an all time high. All the warning signs were there and we end up having it down 25% year.

[A]

Do you know how hard that is? I mean, do you know how much we have to get through between now and year end?

[B]

I'm just asking. No, I do it. This is impossible. Rhetorical question.

[A]

I think it's going to be a bifurcated market. I'm on record. We talk about Halo in a second. But I really think that like half the stocks in the market, and they're not gigantic, but there are enough of them are going to have a good year.

[B]

But don't. I don't think this is a bad thing. I feel like everybody is extrapolating the last four weeks until the rest of the year. Everybody is saying the same thing, that this is going to last. Avoid, avoid the, the junk. Buy the Halo stocks. And not just because you coined it, but like everybody seems to be guilty of extreme recency bias, which we all are. I mean, myself too, but it really feels pronounced now.

[A]

Yeah. The more interesting question is like, is it realistic if there's a serious problem in tech, like if there's a serious problem with these software companies now actually coming out? And one by one, I know we got a, we got a warning from workday. It seemed like a pretty mild guidance miss.

[B]

It wasn't that big. It wasn't that bad. Let's actually go to work day next chart. So here's part of the problem. So work. So these stocks, like, these weren't cheap stocks to begin with. All right?

[A]

That's the problem.

[B]

So look at, look at the non GAAP operating margin. Okay, great, it's accelerating. But look at, look at the blue line. Like, are you freaking kidding me? With these software multiples. Like your actual cash on cash margin is like 6%.

[A]

Yeah.

[B]

What are you doing?

[A]

So AI, they're building, building their own agentic AI they said they should. What else are they going to do?

[B]

Anyway, so we're like, oh, these stocks are risky. Oh, wow, that's so insightful. Workday's in a 60 drawdown at the open tomorrow. It's not to say that it can't fall 80%. I don't know what, why you can't. But these stocks are so bombed out.

[A]

Yes, but the problem is everything was fine until. And now you're starting to get, if you start to get earnings warnings from not just one of them, but like 10 of them. If that's. If that's what we're going to start getting, then people are going to say, oh, that sell off made perfect sense. And probably it shouldn't be over yet.

[B]

So Salesforce. Salesforce reports tomorrow night, and that's going

[A]

to be a big one. Obviously they're reporting the same time as Nvidia. Tomorrow night's going to be low key, like fireworks.

[B]

I bought it. I should probably just sell it at the open. I'm down. I'm down 3%. I'm down 3%. Who cares? I should just sell it at the open.

[A]

Let's do a thought exercise. What could they possibly say that would have the stock go higher rate, beat raise?

[B]

No, their AI product was at a $500 million run rate. Like not nothing.

[A]

Yeah.

[B]

And it doesn't matter what they say. I don't care what they say. I care. No, I care how the stock reacts.

[A]

Right. But I'm saying what would be the thing that gives you the reaction in the stock?

[B]

Dude, I don't know what they're gonna say, but stocks do bottom on bad news. It's not like I'm right. Like, it just does. So I'm not saying that tomorrow is the bottom for Salesforce. It probably is. It probably go down 15% for all I know. All right, so on software, so Warren Pies said software has been a high margin, high multiple, cornerstone of the S and P. Yeah, Very important trades. It trades at roughly three times the index's price to sales multiple and has margins that are more than twice the index. If AI disrupts software, then the overall market will have to derate. Using this model. Try it on, please. A 50% reduction in software margins suggest that the group must trade down from a 10 times price to sales multiple to 5 times.

[A]

Oh, my God.

[B]

Yeah. Not great. So what we're looking at here on the horizontal axis are softer margins. And of course, the higher the margin, the higher the multiple. But Warren's saying that software has gone from overvalued to fair value. But that's assuming that the margins don't deteriorate, which maybe they will, maybe they won't. It's hard to see how they don't.

[A]

Can we safely say rest in peace to software is eating the world, 2011-2026. RIP, great run. Great run, though. I mean, one of the all time greatest runs. And I don't know what the next thing's gonna be. I think AI is eating software is like a little too cutesy. But it's a new era there's no, there's no way around that at this point. So it's a full blown bear market.

[B]

So the, the unknowable question is, I mean is. So software is having an IGV, it's having the worst month since 2008.

[A]

Yeah.

[B]

So investors are acting like there is a systemic risk in software stocks. And yeah, they're probably right.

[A]

Right. So I think the way to people, when people. So just to wrap up this multiple compression slash software segment of the show and then we'll, we'll move on.

[B]

Oh no, we won't. I've got one more piece to something even worse.

[A]

All right. But I think the thing to say is like when you're paying 30 times EBITDA for a software stock, that's like annual cash flow, you're paying 30 times. That means give or take. Like you feel pretty comfortable that that cash flow is coming in for at least the next 30 years.

[B]

Nobody? Nobody.

[A]

You think it's going to get bigger?

[B]

Nobody.

[A]

No, I know, I know, but I'm just, I'm going through a theoretical exercise because I think it's important. So like you're saying like for the next 30 years I'm not worried about this company's cash flow coming in. And of course I think the number's gonna go up. If you're like, now I know people don't invest for 30 years, but I'm just, I'm conversations.

[B]

Conversations that happen when software companies are a 60% crash.

[A]

Right. But if you're now taking that multiple down from 30 to 15, which is effectively what's happening in some cases worse. It's not that you're saying, oh, I'm only comfortable with the next 15 years worth of cash flow. It's just a demonstration of a change in confidence. And, and that's like the best way to explain what's happening here. I wish I could tell you it's because these companies earnings suck, but it's not. It'd be easier that way.

[B]

So when, when, when softer was eating the world in the pre Covid era. Okay, so forget about 2021. Salesforce was trading at 9 to 10 times earnings. 8 to 10 times earnings. It's now on its way to 4. And is that the right number? Who knows? I guess there's nothing profound to say about these names.

[A]

Revenue multiple of revenue. Sales, 4 times sales.

[B]

All right, so Adam Parker weighed in. Really good stuff here. He said, we looked at the last several times the software industry EV to SaaS multiple have contracted sharply over a rolling six month period. All right, so there's nine periods since, since 2000, he said. We then observed after these periods how valuation worked for picking software stocks following these sell offs. I thought this was really well done. For the last 20 years, buying the most expensive software companies outperformed buying the cheap for the six months following these valuation corrections. So Adam's saying, if you want to add a software name, add a fast growing, expansive one like Palo Alto, not Salesforce because it's cheap. So next, chart this. These are the numbers. The most expensive quintile, that's the blue highlight. And he's looking at the spread between the most expensive and the least expensive. And interesting thought exercise here.

[A]

Oh, so you got paid better in forward looking returns if you bought the more expensive software stocks. Yeah, okay. I, I bet you that would hold this time because you go through the mental, you go through the mental exercise of saying, well, why is it expensive? And when you do that, you end up with the stocks that have the best growth outlooks. The market's not stupid. They have those high valuations in some cases relative to their peers for a good reason.

[B]

So here's what I'm struggling with. I take the stock market very seriously. It's not perfect all the time, obviously, but I genuinely believe, and I think you do too, that there is a lot of information in stock prices and you would be foolish to ignore them. You agree?

[A]

Well, I never ignore stock prices.

[B]

I don't know.

[A]

I don't, I don't have to agree with what the market's doing. I might have a different perception.

[B]

So then. And also, sometimes the market is drunk. And I think the market is drunk right now. So I bought, I bought Crowd strike yesterday. A stock that you've been a longtime proponent of. Just bombed out. I don't know anything about their business and, and cybersecurity and privacy. I know nothing about it. But this idea that, like Claude is just going to disrupt this monster of a business because they put it on an agent like I just. Come on.

[A]

No, nobody actually thinks that. They just think other people are going to think that and they're selling. If you understand what CrowdStrike does versus what Claude put. Claude put out a bug finder. It's a, it's a, it's a, it's a, it's a product that allows you to detect bugs in a security network. That's, that has nothing to do with CrowdStrike. CrowdStrike is literally incident response.

[B]

I'm sniffing the risk.

[A]

I know it's, it's it's like protecting companies. It's not searching for bugs. It's so far beyond that. And it doesn't matter. They took, I don't know, $15 billion out of the market cap or whatever. Like, it's. It's bonkers.

[B]

Well, Schwab, too. I mean, we. You and I know that's wrong. Yeah, but it doesn't matter that you can make money on it on the long side.

[A]

That's right. All right, we have to get to this. I know a million things have been said about it already, but this is the thing that everyone's been talking about for 48 hours. The Citrini research. I don't even know what people call it a report. It's not. It's a very well done creative writing exercise where these two guys put their heads together and tried to picture a worst case scenario two years from now and then write a history of today to then, I don't know, prospectively, like, act as though it's 20, 28 and they can go back two years and they paint this sort of stair, step down downward into hell. All of the various things that blow up along the way. And this piece has everything. It has a white collar unemployment surge. It has mortgages blowing up. It has the credit market seizing. It's got, like, every neck, every possible domino falling because the lifeblood of the economy is. That is people doing knowledge work the uppercut, right At a. At a. At a. At a white collar salary. And just having those jobs vanish. And what are all the. All the knock on effects? I wanted to get your tape. We haven't spoken about this, but I know you. I know you had a pretty strong response to it. I think you didn't. You probably didn't sleep well last night if what I heard is true.

[B]

So it really bummed me out.

[A]

Chris said you were crying a little.

[B]

No, it really. It really bummed me out to the point that Robin said, what's wrong? Like, it really bummed me out. Number one, it was a great piece, and it was really well done. And this is not.

[A]

Why don't you just call me and.

[B]

Because. Well, because we. I want to save it for the show, okay? And this is not some perma bear guy who's just. You could safely discard. He was very clear that this was like people call. I don't know if he called it science fiction, but the part that bunged me out the most, not like the market lens. And I was shocked at the market's reaction. Like American Express and capital1 fell 8% because of this report. Like legitimately. Those stocks would not have done that absent support. That blew my face off. Here's the part that bummed me out, the human element of it. There are factually, unfortunately, people in my life and in your life and in everybody who's listening. There are people whose lives are going to get blown up and they're going up, blown up. There are people that are white collar workers that live around us who are going to lose a job, lose a spouse, lose a family.

[A]

Like, and I'm not saying you think that happens anyway.

[B]

What do you mean? In general?

[A]

Say constant. This is not a constant.

[B]

Stop, stop, stop. Yes, that happens. That is always a part of life. And it, but it's going to. I'm not, I'm not like, I'm not hyperbolic. Like we're gonna have 10 unemployment overnight. Because I reject it. I, I genuinely don't think that, that it's gonna be mass unemployment, mass hysteria. But dude, like, I could think of people that are expendable and it really bumps, it really bums me the out.

[A]

Like, seriously, did you text any of them?

[B]

No, but seriously, there's a lot of people who just don't know what's happening. And we. And it's inevitable.

[A]

And that part of it, that part is true.

[B]

That part of it, like, really, really made me sad.

[A]

So this is like, all right, let me just react to that really, really quickly. I think that that happens every day in America in different industries, in different now. You and I live in an upper middle class suburb in a place probably one of the most expensive places to live in America. And the reason it got that way is because there are huge employment opportunities in this area and that's why so many people want to be here. And the employment opportunities pay very high salaries. That's like part of the territory. Living in places like Westchester, northern New Jersey, Nassau County, Long Island. We happen to live in a place where it costs a lot to live. And I think as a result of that, we very acutely feel these like, tremors because it's almost impossible if you're like on a $600,000 salary and you're at the top of the range for what you do because you're in New York and then they tell you like a machine that's plugged in somewhere in Cincinnati is faster than you at what you do and you're out, you're probably not going to get that level of income back. You will get another job, probably doing something else, maybe in the same field. Maybe you have to reinvent yourself. It's very hard to replace a $600,000 annual income. So I'm with you there. I just.

[B]

I mean, that. That. That's. That's very high. I'm. I'm just talking about, like, regular people in our town. Like, that is.

[A]

Right.

[B]

Dude, that's. What are you talking about? That's up.

[A]

I don't know. Okay, you're on. Why? Hundred thousand?

[B]

Yes. For a family household.

[A]

Fine. Everything I said is still true.

[B]

Yes.

[A]

It's hard. It's really hard once.

[B]

That you can't replace that with one.

[A]

I'm agreeing with you, though, but we're saying the same thing. Like, somebody making $120,000, it sucks. They get laid off. It's an easier income to find a place that will replace that. Even within the same sector, you get to the point where it's much, much, much harder. And I don't know where that threshold is, but I'm making the same point that you are. I just think it happens every day anyway. Does this accelerate it?

[C]

Does it?

[B]

Yes.

[A]

Put more people in the line of fire?

[B]

Yes. Yes, of course it does.

[A]

All right, so that.

[B]

So that to me. And there's a lot of. A lot in there that, like, again, is probably above what I could understand, but I just. That. That really hit.

[A]

All right, I get it. There's a rhetorical trick being played here which is piling up every possible negative, stacking them one on top of another with no positives and no offsets and absolutely no beneficial. Bends in the story. And I remember 2011, watching people do this with the European debt crisis where. And it was not guys on substack. It was guys working at soc gen. But it's the same bullshit. And the general idea was like, substack

[B]

is the new soc gen. Basically, it

[A]

can't be worse than soc gen. So they would have these British guys do these, like, purposely do these, like, thought exercises where they would extrapolate out first. Greeks, defaults.

[B]

I saw that with you live in 2011.

[A]

Well, these guys doing this professional. They were doing this shit professionally.

[B]

Scared the bejesus out of me, but

[A]

that's what they were doing. Like, they, like. They were coming up with, like, the dominoes.

[B]

Yeah.

[A]

And it was every single day. And they were having op EDS published at the Financial Times. The financial Times, like, was almost rooting for this. So they, like, wanted. They wanted literal economic implosion. I don't know why to this day, but it was. Maybe it was just about the clicks or The FT Alphaville subs But for whatever reason, it was like this cabal of the economist FT Alphaville, British strategists working at French investment banks and they would just hit publish and publish and publish.

[B]

And.

[A]

And it was just like the Citrini piece. It was like this domino, then that domino, then civil war in Germany, then the Italians ally with the Chinese and it was like one after. It never plays out that way. There are positive externalities even in a debt crisis. I know it's hard to believe, but it's actually true. So things got really bad in Southern Europe and I know people went through a lot of hardship, but the world didn't come to an end. And so I don't like this sort of like domino effect. Think pieces where the only externalities are possibly negative. And so that was the first thing that jumped out of me. The second thing was they had Discover card blowing up. Does anyone know that Discover doesn't even trade publicly anymore?

[B]

Whatever, whatever.

[A]

I'm just saying, like there's a lot. All right, it doesn't matter. It was really well written and I think that's why it got the reaction that it did. The stock Market fell like 1.8%, dude.

[B]

American Express fell 8%. Capital One, which is like I've been pointing this entire run up when people are saying one thing, but the data shows another thing. I'm like, I understand people are bummed out, but don't tell me that consumers are under pressure when Capital One Financial, the most credit exposed company maybe in the country, is at a 52 week high. It fell 8% yesterday.

[A]

Sorry, I got to address this in the chat. Asaro 631. Josh, could you please give a take on toast?

[B]

What are you.

[A]

Are you listening? No offense. Do your ears work? Do you understand what's going on? You're asking me about a small cap software company in the midst of the biggest software crash in history. What would you like to know, sir? Do they still make software? Yeah.

[B]

Stop, stop, stop. Don't talk to the crowd.

[A]

So, J.P. morgan.

[B]

All right, so Jamie Dimon.

[A]

What is this about? Is Brian Sazi eavesdropping at cocktail parties?

[B]

Apparently.

[A]

What is this?

[B]

Here's what Jamie said.

[A]

What is he doing?

[B]

What if I think there are 2 million commercial truckers in the United States and there are lots of other examples you can give as a thought exercise. You could push a button, eliminate all of them, and they make $120,000 on average. Save fuel, save lives, time, blah, blah. Would you do it if you put 2 million people on the street where even if there are jobs available, that next job is $25,000 a year stocking shelves. I was saying that's kind of really bad civilly. Should we as a society agree to that? I don't think so. I was talking about the business and government and they should start thinking today, not when it happens, what to deal with the issue. It's got to be the business and government. All right. I don't think anybody has faith in the government dependent. Doesn't matter what side of the aisle you're on. But I do, I do have faith in humanity. So for as much as I'm scared of the individual level and I nothing will change that because I think that there's an inevitability to that. I believe strongly in humanity that yes, we will solve this. There will be all sorts of amazing, amazing things that come out of AI medicine and a million things that we can't predict. But I'm worried about between now and then. I really am.

[A]

What's more likely to you 2 million commercial truckers lose their job in the next five years? Or we have a missing generation of new truckers who just never go into that job because there are less opportunities over the next five to 10 years and it just sort of fades away as a job option. Because I'm going to tell you for most of these things that's actually how it works. It's very rare that a new innovation comes along and everyone gets displaced at once. It's more likely it just becomes an industry that shrinks and we have less people go into that, but they don't do nothing. They leave. They go do something else. It's not pleasant. Okay, I'm not going to say it's been pleasant for coal miners over the last 30 years, but when was that a good job? When was when was climbing down into a coal mine ever pleasant?

[B]

Yeah.

[A]

So I think this is more gradual and it does not displace 2 million people.

[B]

But the good jobs are going to be under assault too.

[A]

And says, says you and are all these email bullshit jobs that we're saying are good jobs good just because they pay a six figure salary? Are they definitely good? Is it a good job to sit there and spam people's emails all day? Is that we think that's a good job because it's air conditioned? I don't even know that I agree with the premise that all of the jobs being disrupted like that we're not doing certain people a favor.

[B]

Well, what's good A good job is a job that puts food on the table and security for your family. A good job.

[A]

Oh, all right. Well, if that's the only baseline, then yes, a lot of good jobs are going to go away. But I just don't. I don't know that I agree with. That's the ba. That's the baseline.

[B]

Let's talk about halo.

[A]

Are you ready to jump out that window behind you yet?

[B]

Yeah, I'm. I don't like this. Let's. Let's.

[A]

All right, let's move. Well, here's the good news. I, Josh, went viral. I am the smartest man alive.

[B]

Yeah,

[A]

good luck disrupting the genius that is me, because this week I went viral. All right, so I'm not going to do this whole discussion of what HALO is. We did that already. We've done it a few times. Heavy assets, low obsolescence risk is the theme of the year. I said at the beginning of February. Still believe it. Everything that's happened since has only confirmed how brilliant I think I am. I want to put this table up real quick. This is yesterday. This is what the stock market looks like this year. But this was just yesterday. This is a perfect Halo day. Look, the leadership. Consumer Staples, 1. Health Care, 2. Utilities, 3. Energy, 4. Real Estate, 5. Materials, 6. All six are the only sectors. Green. What was red? Communication services. Industrials. That one. You can go either way with technology. Consumer discretionary financials.

[B]

John, throw up my chart from later.

[A]

This is what the end of the year. Wait. I just want to say this is what the end of the year is going to look like, just so you understand that.

[B]

Okay, well, I don't. I don't know that.

[A]

I know. Nobody knows that. I know that.

[B]

So I made the same chart. The same table. I made it to a chart. John, just throw that up. Where's the leadership coming from? Just so we could look at this one more time. This is so nuts. Look at where the s and P500Is. It's up 80 basis points. Yeah, and look at everything to the left.

[A]

Energy is 1% of the S&P. It's up 24%. Materials is. I could even be smaller. It's up 17.5%. Staples plus 15. Industrials plus 14. And when Sean and I are doing our best stocks in the market research, these are the stocks.

[B]

Okay, chart back on. Chart back on. The thing that scares me or worries me about the stock market itself. And listen, I'm not overly concerned. I know this isn't a popular thing to say out loud. Stock market falls 10 this year. Who cares, right? Like we're in a massive, massive bull market. It's fine. Nobody's gonna die. But the, the red bars, com services, tech discretionary financials. You need these to participate for a sustainable market. You just do. Now maybe, maybe you don't.

[A]

But historically reversion within a bull market and it's sectors that had lagged for three years catching up, getting re rated.

[B]

Well, that is what's happening. Fine. How about this?

[A]

I like it.

[B]

Why?

[A]

Do we not like it?

[B]

No, dude, I love it. It's great. If those three, if those four bars stay where they are, we could, we could, we could still rock. But if the Mag 7 like implodes, then everything else is coming down with it. That's all I'm saying.

[A]

Okay, let's hope not. I don't think it will. All right. I just want to show off the recognition that my brilliance has received. John, can we roll through some websites and some media outlets? Here's the Wall Street Journal. Wall Street's latest bet is on halo companies with AI.

[B]

You spoke to the journalists now?

[A]

Yeah, I talked to. Her name is Hannah Lang, great reporter at the Journal. Here's the next one. Financial Post. I think this is like the WSJ of Canada. If I'm not mistaken. Halo stocks. AI may be a threat to some stocks, but investors should be watching for this halo effect. Bang. Next one. CNBC.com. all right, that's the home team. Josh Brown's halo stocks. They can't be disrupted by AI and will get more profitable because of it. That's February 9th. Look at the date on that. Here's Goldman Sachs research today. Strategy matters. This is like, this is some like high end luxury shit from Goldman.

[B]

They might have put you in the footnote, but come on.

[A]

Like I know they know. Literally, they're spelling it out. Focus on halo. Heavy assets, low obsolescence. Literally nobody could give me attribution. Should I email Tony Pascarella?

[B]

Yeah.

[A]

And break his balls about that? Right.

[B]

I said one more thing about the current stock market. So I also. I don't think, I think you agree with this. Nobody likes the fact that discretionary is underperforming staples in a serious, serious way. Even the equal weight looks disgusted. That is not a risk on appetite. But, but look at small caps. Look at the Russell 2000 hanging right near 52 week highs.

[A]

Small caps are most. Small caps set by industry designation are mostly halo. Don't interrupt my ticker tape parade. Barons put this up. Want stocks with AI, immunity Think Halo. Next. Market watch. Go Fire. Market watch. Why the halo trade? Boosting hard assets is no fluke, according to Morgan Stanley. Also, no attribution.

[B]

That's all right, dude, show the COVID of Good Housekeeping. He's on.

[A]

Here's Axios. Anything but AI is giving rise to the halo trade. Michael, I am famous. I don't know. All right, let's. Let's play this video real quick.

[C]

Taxi drivers and accountants both got automated. One group got poorer, the other got richer. And the reason why is probably the most important idea for understanding what AI is about to do to your job. Before Uber, London cabbie spent years memorizing 25,000 streets. It's called the knowledge that expertise was the entire job. You were paying for what they knew. Then GPS automated the expert part, the hard part, the thing that took years to learn. Suddenly anyone with a car and a phone could do the job. Employment and ride services went up 250% wages because the hard part was gone and anyone could do what was left. Now look at accountants. Computers automated the routine part, the data entry, the bookkeeping, the repetitive calculations, the easy part, what was left? The complex analytical work, the judgment calls that required more expertise, not less. So wages went up, the job got more specialized and more valuable. Same story. Technology automates part of a job. Completely opposite outcomes. The difference is whether the technology took the hard parts or the easy parts. If the technology takes the hard parts, the things that took years to learn, the expertise that made you worth paying for, you're heading towards more competition and lower wages because the barrier to entry just disappeared. Machines can come in. If the technology takes the easy parts, the routine, the repetitive, the stuff that you didn't need much training for, you're heading towards more specialization and higher wages because now you spend all your time on the work that actually requires you. This is the question you need to be asking right now. Not, will AI take my job? That's the wrong question. The right question is in my job, is AI taking the hard parts or the easy parts? Think about what you did last week. The tasks that AI could already handle. Were those the tasks that took you years to learn, or were they the parts that could have taught. You could have taught one new hire on day one? Because.

[A]

All right, that's a. I mean, that's a really great point. That juxtaposition between taxi drivers and accountants. The technology with taxis took the hard part. The. The drivers knew where everything was, and then once the machines did, there was nothing for them to do. What are they just like on the steering wheel. The thing with accountants, though, it's the opposite. All the rote, annoying task stuff, the calculations. A machine could do that. That's not the thing that makes an accountant an accountant. The thing that makes the accountant the accountant is that specialized knowledge and that ability to communicate options with, with customers and, and, and lifelong clients. So. And that's why accountants get paid more since TurboTax came along, but taxi drivers get paid less or nothing since the advent of Uber. And I think it's a really, I think it's a really important way of understanding what's about to happen. You don't seem convinced.

[B]

I'm not.

[A]

Is that because she's from Middle Earth? Talks like a hobbit? What is the reason? Where is that accent from? We need to.

[B]

That's Australia or maybe New Zealand.

[A]

We need to find out what's going on.

[B]

That was classic. Oh, no, you know what? That could have been South Africa.

[A]

All right, well, I thought she, I thought she made a really important distinction between does the AI do the hard part or the easy part? Now there's people in the chat saying, what if it does both? I don't know what to tell you. Move to New Zealand. Ask her. All right, next.

[B]

All right. Hard to believe, hard to believe that the cumulative advanced decline line for New York Stock Exchange listed stocks hit a new all time high the other day.

[A]

Nobody would know this.

[B]

Like what?

[A]

These are halo stocks. That's what else you want me to tell you. It's, it's, it's anything but software and information technology.

[B]

All right, so this makes me feel a little bit better about the state of affairs. Next. Chart, please. Look at chart goat Matt doing his thing. Expensive stocks are underperforming. So Matt is looking at median price of sales based on 10. 10 equally weighted buckets of stocks. And it's very clear, this picture picks a very clear story. The stocks that are getting smoked are the stocks that were expensive to begin with.

[A]

So how do you not look at this and say it's just mean reversion? And it's just like, it's just like the counter trend answer to correcting what's going on for the last three years? It's sort of how it seems to me. Right? Yeah, it's like, all right, we had this one group of stocks, they were expensive at the start, they got even more expensive and that ran its course. And now there's concern about their future earnings. Cash flows, let's sell those and buy these cheap ones. And now the cheap ones are Getting expensive. I did a thing on the air today at CNBC about the oil stocks. The huge RE rating in those multiples, people don't even understand. Like, you got stocks now. Oxy is trading 32 times, trailing 12 month earnings.

[B]

Yeah, that makes sense.

[A]

ExxonMobil's gone from 14 to 22. Chevron has gone from, I think, 16 to 28.

[B]

What. What's the expected earnings growth for these companies? It's got to be the 5%. Really?

[A]

No, no. In most cases, not even close. Well, why would it be? WTI crude is like 60. It's gone. Nowhere is this rating.

[B]

Looks like it's a funny thing about valuations. Like, does this make sense? Oh, you're paying for the next 24 years worth of like, give me a break. Nobody cares.

[A]

I'm sorry for doing that, but I'm just saying, like, that's, that's, that's what it looks like.

[B]

All right, let's move out to better news.

[A]

Yeah, pre crisis parallels. All right, we did a whole thing with, with Dimon, but I did want to take one more quote of his. John, give me this screen grab. This is Bloomberg. Dimon sees pre crisis parallels as rivals do dumb things. So now we come to the private equity, private credit portion of this, which is its own story somewhat connected to the software crash. This is Jamie. Unfortunately, we did see this in 05, 06 and 07. Almost the same thing. The rising tide was lifting all boats. Everyone was making a lot of money. I see a couple people doing some dumb things. They're just doing dumb things to create nii. That's net interest income. And then they do all this like 2008 stuff.

[B]

Did he name names?

[A]

Yeah. When auto lender Tricolor holdings and car parts supplier First Brands Group imploded last year, he said seeing one cockroach meant more would likely crop up. And then he said, quote, there's always a surprise in a credit cycle. This time around, it might be software because of AI. Hold that thought. Lloyd Blankfein off the top rope, coming in to trash whoever's running Goldman Sachs and whoever's running all of these private credit firms. Look at this guy. Blankfein has a book coming out on March 3rd. That's why he's talking. Just in case you were wondering. Yeah, whatever happened to that guy? What happened was he crushed it and he sort of retired. And now he's in that mode where, hey, I got something to say. So here's what he said. Is a crisis brewing in private credit. Quote, the people who run These firms have had great lives and made a lot of money. These firms are very successful, very lucrative, not content with the market that they have. And as big companies they have, they want to make them bigger. How are they making them bigger? By finding new outlets of capital. What are they going to? Retail consumers, 401ks, insurance companies. If something blows up and big institutional investors lose money, does the public sector care that much? Not really. If a bunch of individuals start losing their 401k plans and their money, does the public sector care? Does the government care? Yes, a lot. I think it's crazy to put those assets there, and I think it's crazy from their point of view. They have nice lives, they make a fortune, their companies are huge. They already own their yachts and whatever it is they want. Why are you going into this dangerous territory just to make your business a little bit bigger when that represents such a big potential problem? All right, team, blank line on this.

[B]

I mean, I wish he just would have answered the question. Seriously.

[A]

The answer.

[B]

No, it's not. He didn't answer. Is a crisis brewing in private credit? Yeah, he answered a different question.

[A]

Well, the, the answer the question. Well, I think that's what he sees as the crisis.

[B]

I think, I think he speaks for all of us. And I think this is actually a good thing, that this is happening before, not after. These things are.

[A]

In 401ks, he said, in a financial crisis, a trader would say, I think an investment is worth X and I'd say, go out and sell it. And they couldn't. These private credit investments are illiquid. So how do they find out what the true value is? We don't know what something's worth for sure. Unless you try to sell it and somebody buys it, I think something will occur and we'll say, I can't believe there's gambling in the casino. I can't believe my predecessors let this happen. And then I'll have to get fixed and, and it will be more conservative than it. And he's almost like, what, is he lobbying to come back and run an investment bank?

[B]

No, he's, he's right. He's public. He's writing a book. So the, the story with private credit is that in the spring, fall, these, these BDCs and these stocks started to get low, started to go lower as interest rates are coming down. And these are floating rate loans. And so the investors were going to own. We're going to earn less interest income. And, and therefore, all things equal, these were less, relatively less attractive than they were in 2022 when interest rates were killing bonds and these things were floating higher, no duration. Like it was, it was kumbaya. It was a perfect storm for greatness. So first it was the, it was the rates coming down that said investors and you know, I don't think we'd like these things anymore. And then it was the Tricolor and First brands, which by the way were syndicated loans. Those weren't even private credit things. And then there's like, maybe these are more.

[A]

Those weren't poorly underwritten. Those were frauds.

[B]

Frauds. Again, not private credit frauds, just frauds.

[A]

Right.

[B]

And so you were. I was able to hand wave a lot of that away. What I wasn't able to hand wave away was the, the tidal wave of money coming into the space. Like there can't be this many good loans available. There just can't be so sloppy underwriting which we're going to find out about. And give it, I don't know, give it a couple of months.

[A]

Give it now.

[B]

Now. And the, the, the thing that for me just is like makes this really hard is the software part of it. So B. Cred, for example, 26% of their book is in software loans of

[A]

middle market software equities.

[C]

Right.

[A]

And that doesn't mean they were bad loans or anything anyone did anything wrong.

[B]

The world changed.

[A]

It's a private illiquid investment. And the world changed.

[B]

The world changed. So if the, if the equity and yeah like these could have been made a proper loan to values and there's plenty of equity cushion. Or there was. Well, guess what? The publicly traded stocks down 60%. What do you think the privately traded businesses are worth as a percentage of what they were worth. Way less. Okay, yeah. So, so what? So I don't know what the portfolios look like. Who the hell knows? But investors aren't waiting. These names are getting murdered. Blue Owl is in a 60% drawdown. The, the, the publicly listed BDC is getting murdered. And again putting a P listing last thing. The worst part of it is, Josh, we haven't even seen the cycle turn. There's no distress. Like everything is fine again.

[A]

It's multiple compression, but in a different arena. The same concept. Yeah, we know these companies are worth less. None of them have. There's no, literally no problems. None of them are filing chapter seven.

[B]

Chapter 11 makes it more scary.

[A]

Well that. But it's the same concept. We're just, we're just not willing to agree that they're worth what they were last year. Put a pin in that though, because we're going to revisit that at the end 10 year treasury rate. Neil Dutta quote, in the last couple of weeks we have seen stronger than expected employment and firm core PCE inflation. We might even get a politically pliant Fed chair. There's also quite a bit of enthusiasm out there as financial market conditions have eased and the tax refund season expected to be stronger relative to last year is in full swing. Despite all this, 10 year yields have actually been sliding. I am not sure what the right level of the 10 year should be, but there's every reason for longer term yields to be rising right now. It's notable that they haven't been 10 year hit 4% today. Do we need to read more into this?

[B]

I don't know. This is such a weird market, dude. If you hear like the way that we're talking, just our tone and what we're saying, you would just assume the markets at a 15, 20% drawdown and we're right near all time highs. Now. I don't know. That makes me more, I don't know if that makes me more or less confident. I'm honest.

[A]

That's why I call this episode pre crisis vibes because that's what it, that's what it feels like. Like it feels like everybody sees a crisis about to unfold, but it hasn't started yet.

[B]

Okay, So I love that you said that because going into 2023 and 2022 during the rate hiking cycle, everybody had the ability to brace for impact. Everybody got religion and had and did what they had to do with their balance sheet and then this or their that and they braced for an impact that didn't come. Now I'm not saying that because it didn't happen the last time, it won't happen this time, but I think what the trinity did in service to society for everybody, focusing, like everybody is bracing for impact and I think that changes the nature of risk. Now I'm not saying that we're going to eliminate it, of course, but I like that everybody's sort of feeling anxious about the future.

[A]

That's not a bad take. Like in other words, he told everybody, he told everybody, like, put your pads on. And if enough people do that, some of the recklessness that maybe we were worried about last year is not going to manifest itself.

[B]

Done.

[A]

All right. It's not a bad take.

[B]

All right, let's talk about an area of the halo trade that's not working us pending home sales. Holy mouth a cliff.

[A]

Okay, that's part of that 10 year though, hitting 4, falling to 4%. Like people are not bullish on the economy right now.

[B]

Let's look at pending home sales. The. Yeah, not great like this. This is a very seasonal chart. Like it goes for the last three years. The lines all move together and the red line for 2026, it's. It's diverging big. Looking at four week rolling average of weekly pending sales and it does not look like the others. And then the four week rolling average on the bottom chart of median days on the market. Like this is bad dude. Houses are just not selling. So Pool corporation reported the stock is getting murdered. Swimming pool builds are down 50% I believe since the pandemic. Now obviously a lot of this pull forward, but still in 2025 we estimate that just under 60,000 new pools were built in the US a mid single digit decline. This is about half of what we saw at the height of the pandemic and 40% lower than 2022. Holy shit. One other floor and decor murdered. Murdered.

[A]

Oh, what is this? Like carpets and wood. Wood.

[B]

I'm guessing it's like floor and probably some decorations just destroyed.

[A]

Chat. Would you have guessed you would see floor and decor and pool in drawdowns of this size? Is that anecdotally what you. I think I would have. I. I feel like everybody shot their shot from 2020 till 2024. 25ish. And then like if you were going to do something, you're going to redo your house or dig a pool. Like you already did that.

[B]

But we were.

[A]

Now it's a retrenchment.

[B]

We were bullish on rates coming down. And the housing market, well, they have

[A]

to come down, but they have come down.

[B]

The 30 years below 6%. Home like rocket. Like these stocks are not working.

[A]

Sean Whalish in the chat is saying the sellers have to bring their prices down. Yeah, we know, but they're not going to.

[B]

It's a buyer's market where nobody's buying or nobody's selling. It's. It's not good.

[A]

I grabbed this. I wanted to share with you. Home Depot reported this morning adjusted earnings 272 versus consensus 253 topping estimates. Despite year over year pressure, revenue actually beat same store sales were up 0.4% in the US 0.3% which reversed prior declines and it beat the forecasts which were for a drop. So somehow. And Lowe's is tomorrow.

[B]

Oh yeah. And the stock still could have barely bounced it close on the lows of the day.

[A]

Or. No, Lowe's is tomorrow before the open, so we'll see. Any confirmation there? One more thing. Here's a skeet from Sean Broderick.

[B]

A skeet?

[A]

A blue sky tweet. I don't know. What are we calling it? We don't call them skeets. All right, Google search. This is a chart of Google searches for quote, can't sell house, Absolutely skyrocket to the highest level in over a decade. Isn't this a great chart? What is going on? You can't sell your house because it's not worth what you think it is. Like, do you need somebody to hit you over the head with a baseball bat? You can't sell it because the price is wrong. Isn't that it? There's more than that.

[B]

That's it. If you were able to afford a house, you probably already bought a house.

[A]

Well, I think that's the same thing as the put in the pool, we do the floors. I agree with you. I totally agree with you. Right. The people that wanted to did it. All right, let's do make the case. Then you're going to do a mystery chart, and then we're going to let everybody out of here. You call yourself a contrarian, you son of a bitch. Well, let's see. Chart on now.

[B]

Dude, I bought Blackstone on Friday and then it fell 8% the next day. LOL.

[A]

I said a real contrarian.

[B]

No, you know what? I just.

[A]

Blue Owl.

[B]

I just. Go ahead. I have five things to say. Go ahead.

[A]

I listened to your episode of Talking wealth today and I thought it was great. And you got into. Who is the guest again?

[B]

Brian Moriarty from Morningstar.

[A]

Guys, if you're a financial advisor or interested in wealth management topics, we have a weekly podcast called Talking wealth, and the latest episode is about the Blue Owl and the OBDC saga. I thought that was really good, Mike. What's your takeaway from that? Is even at $10 a share, this Blue Owl is not yet safe to buy.

[B]

Okay.

[A]

Or maybe more dangerous than even when it was at 20.

[B]

It probably is.

[A]

It probably is what?

[B]

It probably is. Okay to buy this? Not investment advice. I don't want to. I don't want to invest in this company. I don't trust management. I was on the call yesterday talking to their investors about what happened, and I just. I don't like what they're saying. They're acting like it's all fake news. It's like Mark Lipschultz is saying that he sees green flags, not red flags. Like, bro your stock's down 60%. Now, maybe the FT is. Is inaccurately reporting some of the things, but don't act that there's no smoke, okay? You just voluntarily gave your investors back 30% of their money, like, and, oh, we sold it for 99.7 cents on the dollar. Nothing to see here. People aren't dumb. And the fact that they were blindsided by the stock market's reaction tells me all I need to know. I have no faith in them. No faith in them. I don't think nobody else does either.

[A]

All right, I 100% agree with you. So this is. Make the case. And normally we talk about something I'm bullish on, but I really wanted to show, like, the sentiment on these names could not be worse. And if you're really one of these people who thinks you're Warren Buffett and you run into a burning building with your wallet open and blah, blah, blah, here you go.

[B]

Wait, dude, I bought Blackstone on Friday, and yesterday it was down 8%.

[A]

All right, this one I actually own. I own Carlyle Group. It's in a 26% drawdown, which makes it one of the better. One of the stocks holding up best in the space. I really do trust management of this one, and I am not selling it. I wouldn't say I'm adding to it. I'm still Long Carlyle. For those who are wondering, let's do the next one. This is Apollo 36 drawdown. I trust, like, you trust this company

[B]

to the extent that you could trust, like, any of these companies. I think that Mark Rowan tells it like it is. You hear him?

[A]

I like that. I like that. I like that guy.

[B]

He tells the truth.

[A]

All right, this is going to come back to bite us in the ass if he's hiding some cockroaches and. But I trust that guy. Listen, is that always like, we trust the guy or we don't trust the guy? That's it.

[B]

Everybody knows that there's risk. Okay. What do you think of stock? Unfortunately, 40% is telling you that everything's great. Oh, that's risky. No shit.

[A]

Stephen Harmon in the chat is pointing out Blue Owl was bailed out by their own insurers last week.

[B]

Like, so that's. That's a whole other story.

[A]

That's a whole. We're not going to get into that. All right, Aries, 41% drawdown. I don't know anything about this company at all.

[B]

So Aries has the biggest BDC. I think it's like. I mean, it was $14 billion, forget it.

[A]

Next. Blackstone. This one you bought.

[B]

I bought it.

[A]

This is a 42% drawdown.

[B]

This is the.

[A]

I think you're, I think you're going to make money in this.

[B]

This is the BlackRock of private equity. And I know the story is not pretty right now and yeah, it could definitely, definitely get a lot worse. Could it get cut in half? Yeah, sure, maybe. Fine. Why not?

[A]

I remember the IPO of black Blackstone and I'm going to tell you, it fell 70%. They went public in like 06. Horrible timing for new investors. But this one was the first to come back and it came back the biggest. And I think they've, they've been through credit cycles. They've been through moments where investors don't trust private assets. I think they're gonna, they're gonna live.

[B]

Yeah. Everybody knows that flows are gonna slow down. Like that's not. It's not gonna surprise anybody. It's not gonna surprise anybody. It's in the price. Okay. And these are for the most part illiquid vehicles. We know the fee related earnings like. All right. Yeah.

[A]

Here's KKR. Disgusting. 43 drawdown. This one is in every way, shape and form as illustrious.

[B]

Yeah.

[A]

Of a. Of a. Of a history as Blackstone as Ares Apollo.

[B]

Like these they invented the lbox.

[A]

Have great reputations. I don't know. What do we. What the. I don't know what to do.

[B]

You don't have to. You don't have to buy these stocks. In fact, you probably shouldn't.

[A]

I'm not going to.

[B]

But if you. But if you're selling these, if you're panic selling today, you know, never allowed to quote Warren Buffett ever again. Okay. Ever. Those are the rules.

[A]

Does. But does Berkshire step in and look at the loans and say 50% discount. Yeah, I'll buy 10% of this piece of.

[B]

So Boaz Weinstein's yesterday said that he's long Blue Owl and he's trying to buy. I think that's what he tweeted. And he's looking at the, he's looking at.

[A]

Is he buying the BDC or is he buying the equity of the corporation?

[B]

The equity.

[A]

Two very different things.

[B]

The equity.

[A]

So he's invested in the stock of Blue Owl.

[B]

Yeah. Let me, let me not miss.

[A]

He knows. He knows more about this stuff than we do.

[B]

He said the way the wheels are coming off the car and the equities of private credit managers and the investors who hold them. Look at lnc. Today, public credit looks absurdly rich. This Might surprise, but Saba Capital is long stock in bx, Aries, Apollo and also owl. We sold. We sold out a lot of CDX high yield at the same time.

[A]

Okay, so he's hedging out the credit risk and buying the equity. What? He's like his. His claim to fame and he's really good at this. Maybe the best in the world at. This is closed end funds.

[B]

Well, that's what these are.

[A]

Selling at a discount to the na. That's effectively what these are. Yeah, closed end funds selling at such a huge discount that he buys them. And in some cases, I think he is an activist and he makes the things shut itself down so that he gets par on the underlying.

[B]

Or it's like, listen, this portfolio is trading at a 23% to your bullshit nav. Maybe it's only trading at a, I don't know, a 14% discount or whatever it is. And I can make money that way.

[A]

Okay, well, better. Better him than me because I don't know what I'm doing in that space. I really. This is not. Nobody should listen to me on. On whether or not it's time to buy them. I just wanted to get your take. All right. You have a mystery chart.

[B]

I do. Let's do the first one, please. I forgot even what I shared. What is this? Okay, this is five years. And this shouldn't be that. That hard. You and Ben were speaking about this last week.

[A]

But what, like what is it? It's stocks.

[B]

Well, you should know, you should know what the purple line is. The purple line is. It's American index. But look at, look at the spread. So five years, 9, 89 versus 59.

[A]

What's up 89%. What's up 59%. Okay, um, let's say that emerging markets is yellow, close, China close. You're China.

[B]

The purple is the S and P, obviously. Okay, but look at this spread, dude. This is not insubstantial. In fact, you could say. You could say it's quite substantial. This is international small cap value stocks.

[A]

Oh, international small cap value. Tip of my tongue. Why didn't I get that?

[B]

Is that why wild.

[A]

Yeah.

[B]

40 points.

[A]

But can I tell you.

[B]

Not 40, not 40. My bad. That was really. Wait.

[A]

Tell you one thing about international small cap value. Do you want to know? It's all Halo. The whole thing, all of it.

[B]

Oh, I got one more for you.

[A]

There's no, there's no disruption in international small cap.

[B]

There's no mystery here. I'll just tell you. This is. This is emerging, John. Reveal it, please. This is going back to October 2022.

[A]

Em versus Spy Wild.

[B]

Going back to October 2022. The S& P has lagged emerging markets. How?

[A]

Just what's gone on in the last month.

[B]

Chart back on it. Really. It's from the Liberation Day. Bottom. Smoking them. Unreal.

[A]

Yeah. Look. And it's. And you know, you don't know when you're in an outperformance or an underperformance regime in any asset class versus another until enough time goes by that you can look back.

[B]

Yeah. Holy. Yeah.

[A]

Like right now we could be in a regime where people are gonna be blown away by thing X is outperforming thing Y. But like, you need enough time to go by in order. It's all hindsight. Like all of it. Correct. So very difficult gameplay. All right, guys, I want to mention, first of all, thank you guys so much for joining us for the live. We appreciate it. Make sure you hit that like on your way out. It means a lot. Helps us for the algorithm. I want to mention tomorrow's Wednesday. All new Animal Spirits with Michael and Ben. We'll do an ask the Compound later this week. I always forget what day, but it's always good. I think it's Wednesday. I could be wrong. And then it's an all new edition of the Compound and Friends on Friday. Two friends. Two friends. Both new guests coming by to hang with us. Maybe just one. We're about to find out for sure. Either way, you're going to love the show. Thank you. Thank you again. See you soon.

[D]

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.