How to Pick Stocks Like Morgan Stanley | TCAF 258

So, this is gonna be fun. How are you How long have you been at, um at Morgan? >> 21 years out of college. Only feels like 20. >> Wow. >> So, uh I'm >> What office do you work in? >> Uh at the moment, 757th A, but on my way back to 1585 Broadway. >> They move you guys around. >> They move us around. They keep the real estate moving. >> Okay. >> Um but as you probably well know, 1585's gone through like a 5year construction. Yeah. So, some of us were kind of off uh grid, as I call it. Yeah. or this will be my third time going back to 1585 in 21 years. >> Wow. >> And I always say everyone loves a trilogy. So that's my mantra. >> So Morgan Stanley is so big that whenever I meet a financial adviser from there, >> I ask them about other financial adviserss that I know. >> Sure. >> In New York and they never know each other. >> That's wild. >> But that's the size of the firm. I'm saying >> 100%. >> Right. because there's so many different offices and it's just I mean I I've said this you don't have to agree or disagree but I have said um Gorman was incredible as a CEO as a visionary >> and that's why is it 20 trillion now the do you know >> just just under that yeah between wealth and MSIM >> yeah it's something like 16 17 trillion >> so basically stealing Smith Barney brilliant move yes during the during the height of phases like really well executed >> joint venture then we'll take a third we'll take another third fine we'll take the whole thing >> buying Erade >> the Morgan Stanley at work platform as a lead generator >> my opinion I think that's the key yeah that's like that was incredible >> yeah so I mean it's it's and you were there you were there you watched the whole thing happen >> watch the whole thing when I started Josh in ' 05 wealth as a percent of overall revenues was 8% of the firm and pro- fora for all the different deals you just alluded too. It's like 60% of the firm's revenues now. I'm Dan. >> Oh, absolutely. Good to see you. >> So, uh, >> right. So, I I think what was the guy before? Uh, Mac. John. >> John Mac. >> John Mac. >> So, I think John Mack understood the value of Let's Let's go heavily more heavily into advice, but Gorman actually executed it. >> Absolutely. And John was the one who went out and found James, who was at Mel at the time, and had really revamped Merryill's wealth business. And James, prior to that, as you probably also know, was a McKenzie consultant. So he brought he brought this strategic consulting background as well >> and you said it like t sometimes timing is everything. So he had the strategy, the timing, the pricing. >> Yeah. >> And you know the multiple and the rerating has come together since that point. >> Yeah. I wonder if there are still Smith Barney guys walking around saying I was Smith Bar. I was legacy Smith Barney. >> You're looking at one. So quick story quick story for you. In college sophomore year I interned at a financial advisor's office at Smith Barney. Okay. My junior year, I had an like one of these official analyst programs at MSIM. Actually, hired into wealth in '05 full-time. So, after the merger, depending on what office legacy branch I would go into, I was either a Smith Vney guy or a Morgan Stanley guy. Very strategic, >> right? And then there were also Morgan Stanley Dean Witter guys >> 100% >> predating this from 97. Yeah. Yeah. All right. Well, >> so it's been quite a evolution. >> Yeah. It's a it's a cool front row seat that you've seen. Thank you, Josh. I appreciate >> to to see that all develop. Um, how are we looking, guys? >> Headones on everybody. Headphones on. >> All right. >> Mute your devices. >> Okay. To have my devices on my person. Okay. >> Thank you. >> All righty. >> Yeah. Let me let me do Let me do not disturb. >> Do not disturb. Competent friends. >> I think I'm doing that right. >> Today's show is brought to you by Vanguard. To all the financial adviserss listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw some flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality is our standard. The same discipline the world's largest investors demand at Vanguard cost. It defines our approach to active fixed income across 40 funds, built on three pillars. Consistent performance across market cycles, a lowcost advantage that compounds into better outcomes for your clients, and intentional risk management. That isn't a great quarter, it's a great decade. That's the Vanguard difference. Check it out at vanguard.comaudio. That's vanguard.comaudio. All investing is subject to risk. Vanguard Marketing Corporation, distributor. >> All right. Thanks, John. Oh, boy. What a treat. This is going to be this is going to be a very I'm feeling like this is gonna be a very special episode. Nicole's nodding her head yes. John's John's saying thumbs up. All right, guys. We uh we are coming to you live from Bryant Park in New York City. This is America's favorite investing podcast. It's called The Compound and Friends. First time listeners, we appreciate you coming by. Longtime listeners, thank you guys so much. We have a a very special guest today. first time, first appearance here on the compound. His name is Dan Skellyy. Dan is a portfolio manager of equity. Wait, what is equity maps that portfolios? We have a lot of acronyms at Morgan Stanley. So, it's an SMA portfolio. >> Portfolio manager of the equity maps at Morgan Stanley Wealth Management where he oversees the equity model portfolio team and thematic research project products including alpha currents. They love that. US Policy Pulse. He is lead portfolio manager for the US model and dividend equity strategies, part of a suite of eight long only SMAs. He has spent his entire career at Morgan Stanley starting in 2005 as his associate in the research division. He's a regular on CNBC's Squawkbox and Closing Bell Overtime. Ladies and gentlemen, please say hello to Mr. Dankelly. Thank you. Thank you. The crowd almost cannot be contained. All right. Um, tell me about tell me about the squawk appearances. I I watched two of yours um recently. You do a pretty good job there. Do you like do you like doing television? Do you like getting the firm's views out to the public? >> I I love it. And look, I think it's become in this kind of media technology um intersection. It's become table stakes for kind of what we do, right? And so remember my first appearance on CNBC was a 6 a.m. slot in the summer of 2015 and it was with Becky, Joe and Andrew. >> And you know it was I would say it was touchandgo to begin and you know as you know from having done this world for so long you >> over time you get your feel for it. You get your your groove and it's been really fun to do it over the years. I spent a year doing the 5 a.m. Oh, >> and uh I asked I asked I asked theo the host like who who are we talking to and she said basically Singapore. >> Yeah, Asia Markets. >> I said, "All right, let's do it." >> All right. Thank you. Thank you so much for coming here. >> Thanks for having me, Josh. I'm excited. >> So, you as we mentioned prior to uh officially starting the show, you sit in a really interesting seat at one of the largest firms on Wall Street, one of the largest asset managers in the world, quite frankly. Um, I wanted to get your take just overall on the current environment. There's a little bit of a push pull right now. Um, I think a lot of the investing public, professionals and retail investors have arrived at this point where they almost have learned that they can't afford to pay attention to the news anymore because it's almost all negative. And every time they get carried away with one of these negative narratives, they miss the next 20% in the S&P. Um, how do you how do you uh help people with that kind of like, you know, all right, I know the news is bad, but the stocks keep going up any either way. Like, how do you help people with that those two opposing ideas? >> Yeah, absolutely, Josh. And candidly, aside from this podcast, of course, we we often uh advise and counsel a lot of um, you know, normal retail investors to turn it off, like just stop paying attention every moment of the day. And what's interesting is >> except when you're on then then keep it on. No doubt. Got it. Or you >> I say the same thing. >> Exactly. So look, I mean I think a lot of and the other additional biography piece I would just add to is I'm a member of the firm's asset allocation committee which is called the global investment committee. And in that effort right away from my day job picking stocks were really focused on long-term compounding uh diversification. And as you well know better than anyone, the last decade plus, maybe prior to even the last few months, has been all about concentration. And now the market of course is broadening. And we're all talking about broadening as per the last several months. Um but at the end of the day we've tried to counsel our clients to stay focused on their goals, stay focused on their risk tolerance, which at times you know a lot of people who've made wealth as you also know in a concentrated fashion via entrepreneurship entrepreneurship or starting a uh coming up with a innovation technology or something really you know kind of uh innovative. They're used to taking risk in a concentrated fashion. It may not be the most preferred way to stay wealthy over time. And so having that diversified bent is always top of mind for us. >> Okay. Do you think more people are worried about the next correction or more people are worried about missing out on S&P 8000 Dow 60,000? Like where where do you think the bigger fear is at the moment? >> It's f it's interesting timing of that question. If you had asked me that back in May or June, it was definitely FOMO, definitely missing out. Um, I think the rotation and some of the implosion and some of that first half momentum leadership that we've that we've experienced definitely has rebalance that feeling, that sentiment. And so today, I I think it's more balanced. I don't think it's really one way or another, but earlier in the year, it was absolutely fear of missing out. >> I think if you asked people took a poll, next 10% move, I think it'd be close to 50/50. >> Yeah, I think you're right. I think you're right. >> And in May, it would have been like 7030 >> 100%. Absolutely. And and what I would say is, you know, look, we've kind of ph we've coined this phrase that the markets and certainly the econom >> that was you or or um Ko Kramer I think dovetailed off you but >> he's welcome to do that. >> All right. >> So what I would say is we've come up with this observation, this realization as of the last year really that the economy continues to be super resilient. Everyone's been talking about it and it really continues to look through these policy shocks, these inflationary pressures. >> Is it the economy that's resilient or S&P earnings that are resilient or both? I think it's the economy mostly and I'll I'll circle back to earnings no doubt which is a great um comment but earnings have been really astronomical and I'll come back to my theory on that in a second but the economy I think what isn't as realized today and it certainly wasn't four years ago Josh was this idea of how much the economy has paradigm shifted away from cyclicals away from a normalized income distribution and add on top of that the AI spending super cycle and you've got I think a very non atypical economic cycle. And so we've seen this resilience. And on top of that, coming back to your question on earnings, look, earnings at the index level did 28% year-over-year growth in the second quarter. Um, if I look at the median company, it was 14% growth, which I don't think gets talked about enough. So why is the median the average company experiencing that much growth? It's not just AI, and I know we're going to talk about AI uh at Nauseium today, which I look forward to. My my presumption I'm trying to prove this with data and I know our mutual friend Adam Parker is a friend of the show and we have been talking about this a lot recently personally I presuppose that we had a synthetic tariff trade related earnings or economic cloud or hangover in the first half of last year. Emerging out of that right now 12 months later is a equally or proportionate synthetic operating leverage earnings boost for the average company who had more pricing than I think most people would have perceived >> and then didn't have to give it back. >> Correct. We passed through on on the tariff front which remember tariff was the headline for like six or nine months ago. >> Trump really is a genius. Some people would say that. >> So every company had to take price >> most companies the average company >> just to muddle through >> to muddle through but they passed on 60 to 70% of it. >> Right. and and the prices don't go back down when the tariff emergency is over. >> Dan, you think that's that's tariff related? These this margin expansion. So, this is the 493. >> I think part of it is tariff related on the pricing perspective, which I do want to come back to as a new relatively new suburban homeowner in Long Island. My wife is Long Island. I'm New York City, but I'm an adopted Long Island uh child now. Son, uh I learned you're going to love it. >> Uh it's it's been a wild ride so far. >> I never left. >> How about that LIE? Um what I learned from my landscaper after co is when he had to take up price 15 to 20% because of cost because of all these things he he never took it back >> and so it's just an it's a small anecdote which speaks to this broader uh thread. So I think part of this part of your great question is no doubt pricing surprising to the upside. Secondly, I think coming through on this uh and it's hard to obviously prove dollar for dollar, but we hear it a lot in terms of surveys and we're seeing it in the transcripts is AI productivity on top of existing workforce. What your margin math at the moment on the chart doesn't yet show is a labor lever being pulled. >> So, this go higher. >> Absolutely. >> Wait, wait, say more. What's the labor labor lever? >> We're in this, if you zoom out, we're in this no hiring, no firing zone. And we've been there for a long period of time, couple years it feels like. >> And what I would argue is if you think about what people were talking about in terms of all the different AI boogeymen in January, SAS SAS apocalypse software going away, that's been thus far disproven with some dispersion. We could talk about it. Labor apocalypse also disproven. What is happening at the Fortune 500 level visav our data and our surveys, it's productivity on top of existing labor force, right? Right. And so I think that is coming through in the margin line. To to my earlier point, I don't think what's coming through just yet and I think it's a 12 to 24 month time horizon is labor actually being pulled in terms of additional margin and earnings and that's going to be largely AI driven. >> Seriously, earnings are going up with without additional headcount. >> That's what it looks like at the moment. So nor right so normally in order to produce the revenue so I think the revenue increase for Q2 year-over-year was also an incredible number 15% >> on 6% nominal GDP. >> So historically in a more cyclical analog economy that's more goodsh heavy. >> You're not doing 15% revenue growth with no headcount growth. No way. >> Well said. >> You need people on an assembly line literally welding things together and packing them in boxes. You're saying now the next tailwind might be companies continue to grow revenue which translates into earnings without the conccommittent addition of another 10% you know labor force. I'm not saying this is great society however we're in the business of earnings and it should be good for the audience. I think you summarized it perfectly, Josh. And I think this I think to your to your embedded in your statement was this longer term debate around socioeconomic effect and >> just have less babies, it'll be fine. >> I mean, honestly, we can't solve that on this show >> that we talked about Asia markets coming on like that is a phenomenon going on across Asia, across Europe, and no doubt across the US. Yeah. >> And so, you know, we'll see. the the joke I've been saying is in terms of GLPs and longevity on top of a housing stuck in the house locked in housing market on top of AI and robotics is we're all going to live longer but we're going to have nothing to do and nowhere to live. So that's like our future >> and and uh a shortage of 18-year-olds apparently. I was reading about Syracuse University this this week. They're not going to hit their admissions uh targets yet again. And obviously there are some Syracuse specific issues like the weather, but the bigger picture is there just aren't going to be as many young people prospectively. Um, >> and the nature of work is going to change too. Back to AI, what is the entrylevel legal audit? What does that all look like? Syracuse is very near and dear to my heart. I was fortunate enough to marry a former Syracuse laxer who played for Gary Gate in her day. And um so it's uh the article it's definitely batted around >> threw that one factor in amongst many but um to your point Europe, China, the Koreans are not reproducing anymore. So it's a so I think I've always been glass half full about robotics, automation, AI likewise >> in that we're sort of going to need it. >> Like we're going to have a nursing shortage here pretty soon. We're going to have shortages of specific careers and it'll only get exacerbated by a slower population growth. Well said. And oh, by the way, let's talk about there's been so much myopic focus on AI and there should be a lot of that is justified. But let's focus for a minute on some of the other massive initiatives impacting the earnings picture, the economic picture, etc. reshoring, which I don't think gets enough press and enough ink. But we're going to have according to a lot of the work Morgan Stelly's industrials team has done. We're going to have a lot more factories. We're already seeing evidence of that. Will all of those factories be filled by the next 18 to 35 year olds? No. a lot of it's going to be automated and so there's a an effect and an initiative under reshoring and production that also questions that demographic risk. But I think the robotics is no doubt the part of the answer. So it sounds like you're fairly sanguin on where we sit today. Not not that you don't think a correction is possible, but uh you you sound as though the earnings growth um looks to be sustainable based on these tailwinds that you're talking about. My presumption is the we have the midterms coming up right around the corner. It's going to be Labor Day this weekend that that flew by. And the phrasing I'll go back to the outset of this conversation that I've come up with over the last year is policy shocks, inflation pressures, all of these factors and dynamics that used to matter more to markets are like pop-up ads today. They kind of come and go and the main narrative keeps coming back to earnings and AI. And so, like, being intellectually honest, knowing that Liberation Day mattered for a minute for the market, knowing that Iran has mattered in March and April and other points in time, can I can I intellectually say that the midterms aren't going to matter? No. But to your point, Josh, because the earnings backdrop is so strong, I think whatever uh draw downs or corrective uh uh experience we get is super moderate. >> Well, how about this? I think one of the reasons why all of these things that we've dealt with over the years that would have at a minimum derailed the economy if not thrown it right into a recession. I think part of the reason is there's so much money in the system. Absolutely. >> And I think it's underappreciated how much that is distorting not in a bad way what otherwise could have happened in a different generation. Now the assets could shrink in a bare market and fear can return obviously but think about like all the the secondaries that we're seeing. Anytime something goes bad, it's bought up immediately. And that is >> Google's issuance ahead of the big SpaceX deal bought up immediately. >> Really impacting the economy and the market in an underappreciated way. >> No, I think that's absolutely right. And that's like the residual benefit of a 15-year bull market. Started out as fang, then went to Mag 7, then went to AI Capex, and now I agree with you. The most healthy thing I would argue in terms of the duration of this cycle is the rotation we just saw. It's as if you really needed the semis in June and some of the other first order AI capex winners to roll over >> here healthare take it >> to get the health care sector to get mathematically get the mag seven working and we saw that in you know selectives finance financial stocks working all year and all year last year for the most part um healthcare this year small caps coming out of nowhere industrial had a run I know they've pulled back but they had a big >> and kudos to Mike Wilson our other friend and partner um you know many years whom it used to be my direct boss uh 10 years ago who had a small caps call uh earlier this year late last year. So yeah, I think that's been one of the surprises as well. >> Okay. Um are we going to see the dramatic earnings growth gains that have now spread from the S&P into the midcaps and the small caps? Is that sustainable? >> So I feel like that space is a lot trickier. Yeah. Because on the one hand you would argue like the sectors that are disproportionately overweighted to small and mid industrials financials have a lot of as I've mentioned so far a lot of idiosyncratic positives like capital market cycle uh rates uh building production no doubt Josh FOMO for sure that risktaking liquidity you mentioned great >> all the M&A leads leads to more M&A >> and it should and look at how the biotech sector is acting of late as an example so here all of that can be true on the one hand and then on the other hand I think it can be true that rates backing up particularly for that lower quality cohort of small caps should be an issue right and we've talked about this phenomena as of the last 15 years we went through this massive monetization cycle in privates and something like 80% of the companies in the US today that generate 100 million plus revenue are private so basically your small cap allocation as a private in as a retail investor could have just been in the private market and not in Russell >> it's an alt now Totally. And so that you've had like almost this negative selection bias in the public in the Russell 2000 which is like whatever the stat is 40% of that index isn't profitable. And so like I think on the one hand you have >> positive drivers but on the other hand beware rates number one. And beware AI. Look face it. I think AI we we've talked about it earlier in terms of the big caps and when does that show up in earnings but I think AI could be really tricky for small caps in the sense that number one in some of these industries AI is going to dis disintermediate certain industries completely and they may be more small cap in nature number two I would argue that the the AI adoption wave we're going to experience which is going to be a decade experience may not also be felt in terms of the right tail from the small caps because in many of cases those less profitable small caps don't have the capital to invest in AI. So they might have a left tail risk disintermediation they may have a right tail risk in terms of not participating in the AI adoption. >> So small caps will do what small caps do which is periodic uh moments of inspiration followed by disappointment and then when you're so disappointed all of a sudden they start to rally again. Very different return profile than large caps. >> I think that's well said. I think it's like catching a Friday morning flight to Tampa. You're going to have a lot of periods of calm and you're going to have second a couple seconds of turbulence. >> I like I like that. I like the popup ad metaphor even better though. That's a good one. >> Thank you. >> Where Yeah, we see it. It's peripheral. Can't wait to close that window and not think about it. So, I'm that way with the midterms. I have I have no opinion of what's going to happen because I'm paying as little attention as possible. >> I think that's wise. So maybe the House turns over, the Senate doesn't, and nobody really does anything differently. The one big thing that might change is all these uh astroturfed data center protests might very quickly go away because there's no longer a political opportunity to say how much you hate Microsoft. Like all of a sudden, we were talking about it, talking about it, then the election comes and goes and nobody's talking about it anymore. I could picture that. >> I think that's spot on. I was at a client dinner earlier this week out on the island with Brian Noak who's our leader thought leadership uh thought leading um industryleading internet analysis as you well know and we were talking about really the midterms but also 28 and this idea that the midterms like you just said are going to come and go and then people are going to focus on 28 and what you might feel right is just a very fast pull forward >> in terms of yes we may have a presidential election in 28 >> yeah they every four years or so they seem they seem to come back Okay, go on. >> What I was just saying is Brian's view and it makes it's intuitive to me is past the midterms, right? And keep in mind that AI capex and momentum implosion in June, which has struggled technically to come back to the 50-day if you're like memory stocks or I think it's very interesting when you get past the midterms that you have maybe almost a pull forward ahead of 28 in terms of the data center trying to get as much done ahead of that. >> So that would be a negative catalyst. Um >> eventually it means to feel great in the moment. >> The hangover. >> Well, so the the last capex cycle that became a pull forward was Y2K >> and the hangover from that started to be felt in the second quarter of 2000. So wait, wait, wait. People are not going to buy this many Intel chips every quarter. >> Oh, that's not good. So that's the thing that I most worry about. the amount of the earnings growth that's expected to come from the hyperscalers the large the 50 largest semis and memory companies and then the Dell computers of the world it's a large it's not all of the earnings growth >> it's a large amount of it >> and if it goes into reverse um I don't know that the market's going to treat that well from 21 times earnings >> and also Broadcom today what do they 90% growth whatever it was and the stock fell fell 5% >> it wasn't 91% Same with Nvidia recently which you know blew out the guidance and even said guidance amid capacity constrained backdrop and the stock worked well on the day and then really hasn't followed through. >> So what does this what does this tell you about where the stock market is today? Now the environment could change but people are simultaneously worried that the earnings are too high, the earnings estimates are too high and even when companies destroy earnings to the tune that we've never seen before, the stocks still aren't working. Is that bullish? It doesn't really sound it. >> I think it's in my opinion it's it's good for the duration again. Like it comes back to this idea of I think we're in a longer cycle and like secular here's the good news. The way of the capitalism works the secular bulls last a very long time. Like they last 20 25 years on average and the good news is also that the secular bears tend to be half that duration. So we had a nasty bare market as you well know coming out of o out of the 2000 internet bust and really since 09 010 it depends if you adjust it for inflation and S&P price in gold terms or not which I know which is one popular way to look at it but we think we bottomed in 10 or 11 in real terms and so you know whatever we're 15 years into that cycle I think the the factors that are going to matter right to Josh's point a minute ago 60% of 2Q earnings 28% headline came from AI infrastru structure. So I think we're money good on that particular contribution 27 20 I think we're money good 2728 talked to Brian who I saw two nights ago his numbers for AI capex in 27 are 1.5 trillion the street is at like 1.2 too. So, the street is still low and that's been there's been a catch- up. We all know for the last 18 months or so. On our team, we call it the quarterly tradition like every quarter. You can bank on the numbers going higher. Why? Because it's a generational competitive uh risk among the US players zooming out among China as well. We can talk about it. Secondly, on a more technical basis, the scaling laws continue to work. Meaning every time we train new levels or new models of AI, new AI AI models on higher levels of compute, the outputs and the results continue to get better. So what is the technical incentive for drawing down the capex at this moment? So I agree that >> one other thing to add to that that I've been talking about that I think is maybe underappreciated. It's not as sexy as new data centers and it's not as sexy as new GPU sales to new customers. But when you build these data centers, you are embedding guaranteed purchases of servers and chips. As far as the I can see the we could argue about the depreciation schedule, and is a GPU produced in 2026 a 5year asset, a three-year asset. I don't know the answer. I'll be I'll be the last person that will know that answer. But the point is, it's not a 20-year asset. >> Correct. It's not the same as uh Toyota building a plant that's going to make Rav 4s for for the next 20 years. Like you're going to need new chips all the time. >> And there's there's a story there for Nvidia, >> story there for Dell, which just had a blowout earnings report this week. >> Like that's a big part of the story that I think people underappreciate. like now that you built these data centers, even if that slows down the pace of new construction, we still have to feed all of this existing infrastructure with tons of technology. >> So, I I think that's the most important point that anyone's made so far on the pot. And the reason I say that this >> is that tennis clap. >> Yes. >> The reason I say that is because of the following. We wrote a note back on June 1st and I love writing. I wish I had more time to write but I write you know fairly infrequently but I wrote a note on June 1st which I'll share with you cautioning the semis momentum and our takeaway was you hear all about demand constraints to your good point I think in under the hood in reality it's more about deployment constraints you are ordering servers and chips and all these electrical components and industrial components ahead of 40 gawatts 50 gawatts of projected data center construction production in the next 2 to 3 years. Are all of those buildings going to get built? Unless you're Elon, are all those buildings going to get built on time? And do you have a risk of double ordering in the supply chain of of semis of service? Absolutely. Is it a risk today? No. But is a risk from year for now? Could be. >> This is one of the most bearish charts that I've seen. I accidentally look at this. I'll hold it up because it's not in the dock. This is a chart of Sienna. And as you know, Sienna was around during the com bubble for the fiber optic buildout. Straight up, straight down. and it looks eerily similar. Doesn't look great. >> Yeah. And that's so that's a a perfectly reasonable analog. I think a couple things I would argue, right? So one is when we look at our prime brokerage book and we're the biggest wealth manager in the industry and I like to I'll say the best we're the biggest prime broker in the industry on the institutional side. All right. So if you look at the net and gross exposures of our hedge fund book and our hedge fund clients, a lot of our hedge fund clients have not reged in memory and a lot of the first half winners in AI capex. They've been waiting and I we we are paying very close. >> So the stocks came down and they didn't they didn't get back into them or at least not of the same size. >> Correct. Not even close. And um where have they rotated? They've rotated a tad to Mag 7. Some somewhat of software picking the bottom in some of those uh areas, but it's been healthcare. It's been some of these other parts of the market. So, the reason I mention that number one is number number one, I think that's healthy. Like I think the idea that everyone didn't jump back on the train is a positive. They're kind of waiting to see how things go in terms of pricing, in terms of midterm political football and data center. But again, I think the healthiest thing that has happened in terms of this cycle, Visa V 2000 is the rotation that's happening. And lastly, let's not also forget, as Brian and I spoke about uh on Tuesday night, that all the major hyperscalers are in the early innings still of a cloud transition. And yes, the cloud business is being in effect supercharged by the AI intersection today. But how many big Fortune 500 and beyond companies have fully transitioned to the cloud? You're not in the ninth inning. You're not in the sixth inning. You're probably in the fourth or fifth inning. So here's the key takeaway. The way this kind of differs from 2000 is when you laid all this fiber, you had no alternative for the fiber. It just went dark. And it was dark for 10 years until Amazon became Amazon. So did it eventually matter for creating US exceptional exceptionalism? Yes. But not We had to live through a 90% NASDAQ decline on the on the way to somebody inventing YouTube. Like we had to wait we had to wait from first quarter of 2000 to 2013 >> uh I think for the NASDAQ >> for the NASDAQ to fully make a new high. Very great. Very good point. And um so where I'll just put a fine point just to end that comment is keep in mind that taking both of our I think I think we're on the same page wellfounded risk factors around data center deployment and double ordering a lot of those chips can be reverted back to cloud and so do we have dark GPUs the way we had dark fiber maybe not as likely. >> I like what you said about the duration of the bull. So not having a bubble. So, when Michael brings up like Nvidia blowout numbers, a week later Broadcom blowout numbers, why are these stocks flat down? It makes no sense. Um, I agree with what he's saying, but I also like what you said. If we don't rocket those two stocks up 70% right after earnings, it gives it gives you more potential upside over time. And so those stocks can rally, >> but we don't have to have the rise and fall all take place inside of two weeks. >> 100%. And I sort of like I like that it's in slow motion. >> Well, the glass half full version is we're building the wall of worry. And you need that. You need this. >> You need the wall of worry. Thank you, Michael. And by the way, the wall of worry was like the Empire State Building in 22 and 23. Remember when everyone predicted, and I'll give kudos to Ellen Zner, our colleague who at the time had the um economics call. Remember that in 2022, 2023, we've just gone through through the most aggressive Fed cycle in 40 years. And the consensus was predicting this big bad recession that never arrived. Why? Back to our earlier conversation, we have paradigm shifted away from goods to services, away from a normalized income scale to a hyper K-shaped income scale where the 10% is driving 40% and is less elastic to monthly changes in gas and food prices. And and last but not least, of course, post23, the AI super cycle. And so so my point being is I agree with you, Josh. I like the fact that you have and Michael, I like the fact that you have these clouds hanging over the kind of Uber euphoria from happening. Number one. But number two, I just want to come back to I know I'm doing a little bit of a weave, so I apologize. I just want to come back to your comment about the earnings growth risk because here's where the onus on the baton being handed off from AI infrastructure to AI adopters is really crucial in the next two years. Does the margin of productivity boost from the AI adopters more than offset what could be a deceleration in the AI infrastructure spending? That is the key handoff that way. >> It better. And by the way, let me just say this because a lot of our retail clients often everyone thinks and talks and invests at unfortunately at times with their generational bias and their memory and a lot of our average retail clients are still stung with the memory of08 with 2000 etc. you know for not uh good re for good reason and a lot of people are talking about is this 99 over and over again and one of the things I would just argue is in terms of how it's different is number one the quality of the spenders today is so much different from back then >> that's such a great point >> and yes we are talking about leverage now but don't forget these were all mag 7 formerly fang the industry group formerly known as fang was was once upon a time netcash balance sheets and so if I'm an as an investor When I see a generational technology investment, I want to see more capex. I don't want to see just buybacks for buyback's sake, which is what they had done for 10 years. Fang was capital light. They generated excess cash. They bought back stock. They did that to the tune of a trillion. >> People who hated the buybacks though now hate the capex too. I don't know if you'd be surprised by that for the duration. So, I want to I want to um double click on what you just said because in 1999 in order for Cisco to hit its growth targets and Lucent and Dell and Sun Micro Systemystems and Sienna and Juniper and I can go on and on. In order for those companies to hold up, >> they were reliant upon selling to a customer that had gone public a week prior. Like literally like our enterprise customers are Pets.com, etoys, cd now, dj direct, and all these things that didn't exist a year later. >> The customers today are Amazon buying on behalf of its 30 million cloud customers who represent every sector of the economy hospitals >> uh insurance companies, manufacturers, government. So it's it is not the same as I hope we get the next 100 IPOs so we can sell these people some some Sun Micro products or some servers. Uh EMC needs to sell uh you know some some stuff. So let's hope we get another 500 IPOs next year. That is not now the asterisk is the two biggest players in the ecosystem on the buy side are not public yet. >> Correct. >> Not profitable. not particularly transparent yet because they don't have to be and not proven through any sort of economic cycle. That's the wild card that takes everything I just said and invalidates it a little bit. >> 100 I think it's really well said and I think I'm somewhat limited as you know on what I can say on the privates or not. >> Understood. >> But what I would say in terms of what we've publicly written about and talked about is like the growth rates when you track what they're doing. Some of these companies on the privates were printing $10 billion ARRS end of last year. Now they're last month 60 70 billion. So the growth rates are still astronomical and that's what ultimately what you need is the demand versus supply dynamic to still be in our at our favor and we think it is. Let me just say two things quickly because I want to get them in. So one is the quality of the spenders is different. Secondly, I don't think what gets discussed enough is the credibility of the spenders. And this is also in vast contrast to the Pets.com analog. Look at I'm not I'm a fundamental investor, but look at the technicals of tech relative to the S&P over 30 years. It always makes higher highs. I think that is incredibly profound technical signal. Why do I say that? We go through our warts, whether it was internet bust, whether it was '08, whether it was COVID, whether it was 22 duration selloff, etc., etc., etc., But we always recover to new highs. What does that remind me of? The US, despite some of our political pitfalls and despite some of our issues, of which there are several, is still the single best allocator of capital to new innovative technologies and enterprises anywhere in the world. American exceptionalism lives. The historical analog, however, is that while we always figure out the next big thing and allocate to it appropriately, we almost always boom bust on the capex. So that was true of internet fiber. It was true of shale 2000 2015 rails going even back to my blowing off my history books going back to rails. No doubt here's where this could be different. Once again it goes back to our comment about Nvidia and Broadcom are not screaming after phenomenal earnings. I also like that. I like the fact that the market is signaling one that they're treating those companies with rationality and frankly a lot of its law of large numbers and lastly there's other games in town. They're new there are private companies out there that are going to be coming. >> I like that argument that it's not that they're not impressed by Nvidia. It's that they know they're not going to do 100% earnings growth next year but in the meanwhile there are snowflakes out there. like there are other companies that do have that sort of potential that the world is waking up to >> that don't trade at a 5 trillion market cap >> and the money is shifting from one to the next. All right. I >> I would buy that as a as a great reason for the rotation and for why it's so healthy. >> By the way, last point is 40x mutual funds. Think about the mechanical ceiling or the issue with a lot of those funds have on being relatively in absolute overweight Nvidia, right? right? Like they get kept out at a certain level. >> They can't go to 10%. They can't go >> overweight. So, who's the incremental buyer? A lot of our wealth clients and and frankly to their great um uh intuition have bought the dip. When you look at the trading uh patterns and the statistics in the last year, 5 years, 15 years, they've been better buyers on the dip and a lot of them have gone back to Nvidia. But a certain point, if you're a retail in investor, how much of your overall wealth can be in Nvidia? So all of this hinges on the hyperscaler's ability to make an ROI on all these investments. Symbolist a former guest uh guest of the show uh >> I watched the program was excellent. Yeah, Michael Michael's great. >> Uh hypers scalers and Nvidia new investment grade debt and SPVS. It's 200 200 uh $320 billion in 2026. >> This is from his note. >> So he he argues that perhaps there's so much money. >> I mean this is dramatic. >> There's so much money here that this is help pushing up >> government bond yields. Um, is this going to work? >> So, at the moment, the demand we're seeing and even the terms and the spreads we're seeing for a lot of this issuance is still relatively benign. And again, it goes back to my point that these the names you all cite on this chart were all net cash balance sheets. And is there dispersion between the oracles of the world and the Microsofts? Absolutely. Microsoft and J&J are the only two triple rated uh AAA rated names in the market left. Oracle CDS spreads trade at you know very wide levels. So is the market in my opinion visav that example pricing in some of the risk in a dispersed manner as it should? Yes. So the market is fully aware of this but Michael you made the point earlier in terms of just how much liquidity is out there and what types I'll also add what types of new buyers are out there including the insurance community which I think has been another source of major demand for this paper. >> That's such a good point getting back to the point I made earlier. God forbid the the price on these come down, the yields the yields go up. Uh title wave of money waiting to buy these. >> Agreed. Agreed. >> The world wants this paper, otherwise it wouldn't be issued. >> Absolutely. >> And it's not being issued out of desperation. They're calling up Alphabet and saying, "Hey guys, like there's an opportunity here, you know, given your credit rating and your cash flows, there's an opportunity to do something that's potentially better than equity financing if you don't want to just keep doing they're going to spend anyway." Yeah. So, okay. Um, how do you handle people asking about the circular financing question? Because that's I would say five days a week on CNBC that that's being debated. It's not going away. >> Um, there are some great answers for it. I'd love to hear your answer for it. So if you listen to Jensen's comment on the October call of 25 on that same um risk or that same feedback, it was, hey, we have a really unique line of sight in terms of some of our supply chains and some of our partners' future growth. And he's talking about the private labs. And he said, "Given that line of sight, given our net cash balance sheet, as an investor, wouldn't you want me to take some type of uh leverage or take some type of skin in the game in terms of some of our partners?" And frankly, I thought it was a really convincing statement. >> Wouldn't who want him? His own shareholders, >> his own balance sheet >> because I know the shareholders of these other things love him doing that. >> No doubt. No doubt. And and look, to your earlier point, does it create a risk factor? Absolutely. Um, and so you know what I would say is I think it goes back to you it's a it's a more of a qualitative answer but it goes back to my comment about 2000 to 2026. Look at how all these companies have managed through every technology wave whether it was internet yes social um e-commerce online ads streaming entertainment cloud now AI and oh by the way the next round which doesn't get talked about enough Adam Jonas talks about it quite a bit robotics space quantum and autonomous and by the way the MAG7's going to dominate in a lot of those sectors as well right and so my opinion is >> he's saying we have a really unique line of sight in terms of how all these businesses are um being allocated, how they're being in allocated in the enterprise, I meant to say, and we have the net cash balance sheet. So, wouldn't as an uh shareholder of our stock, wouldn't you want us to take that opportunity? >> So, vendor financing was a big issue during the boom bust and >> people remember like this is one uhoh when the equipment suppliers are giving money to the buyer who's then going to buy their equipment. that's usually closer to an end than a beginning or that's what that's the thing that people are worried about. >> So watch the spreads, right? So the debt market just like in 98.99 when you had the Fed raising and you started to see the bond spreads on the tech name starting to widen out. We're watching that too, right? And so look, I mean that was go back to the fall of 25. Oracle CDS really was the uh predictor of Oracle stock in the coming year. >> Dan, this is weird. So we're looking at in red is the high yield corporate bond spread. Okay. >> Mhm. >> And in black or gray is the triple C. So really junky junk. And they go in the same direction almost all the time. And there's been a very very notable divergence where high yield corporate spreads haven't budged. Good. But the shittier stuff is ticking up in a pretty meaningful way. >> What's in trip? What's in >> I was just gonna say is that like private private equity private equity backed companies >> even even worse rated stuff. >> So take well take it with a grain of salt from the equity guy but my extrapolation of this data series is when I look at the underlyings of high yield I look at energy I look at materials I look at chemicals I look at um industrials. One a lot of those industries are benefiting fundamentally from the geopolitical issue in the Middle East right now. Second, if you just stick with energy for a minute, right, pre the 2015 shale bust, capex bust, uh, a lot of executive compensation frameworks were incentivized towards production growth. So, commodity prices would scream higher. What would all the EMPS do? They put out extra production growth. What changed dramatically post the 15 implosion? A lot of the executive compensation structures today are more balanced in terms of capital return. And so, what have a lot of energy names become today? They've become higher dividend payers. they become higher buybacks. Secondly, let's go downstream to materials and some of the industrials components. Okay. Well, we just talked about the AI data center buildout. They're fundamentally build benefiting from that buildout. So maybe there's more of an idiosyncratic >> steel copper like you name. >> I feel like this series is diverging because in part because of AI and because of some of the compositional and fundamental changes in the energy sector. >> I think that's right. Especially on the energy side. We were talking earlier about the wall of worry and how there does seem to be a persistent level of disbelief which in the short term is maybe something to pay attention to but longer term that's healthy for the continued secular bull market. John chart six please. So this is from Goldman leverage funds versus the NASDAQ 100. >> Never heard of them. >> Bears are piling into NASDAQ 100 futures. Short positions have surged 35% since midJune and are now near record levels. So, I want to share another chart that we made, John, chart 7. So, chart kid Matt made this and we're looking at the median S&P 500 stock short interest as a percentage of market cap going up and to the right in a pretty steep way. >> Uh, and on the right side, you have the bottom desile. So, these are the ones that are least shorted and even the ones that are the least shorted are going up in a material way. Is there anything going on in here? Like my first reaction was well maybe dismiss this because there's a lot of other different hedging >> charts are 30-year charts. There's something going on >> but they're moving. >> Wait, did you just get bearish now? >> I just got very pensive. >> So let me let me let me So I've got >> I have to take this all in. >> This is a lot. So while you're thinking I've got the stocks that are >> This is not a squawk box exercise. Hold on. >> You could you could think. So the stocks that are in the B. So the least shorted stocks make sense. >> That this 99th percentile. Yes. So, what's in that basket is Google >> probably Apple. >> Google and Bergkshire because who the hell is short Birkshshire? Morgan Stanley number three. Let's hear it. Morgan Stanley number three, General Dynamics Dan Skelly, >> Walmart, Amazon, Wells Fargo, Eli Lilly, Apple, AET, and Chevron. >> So, these are stocks that nobody wants to short. And even them, it's at the highest it's been since >> this be mechanical people hedging even bigger long positions. So the only the only way this is fascinating and I I'll come back to you with a fuller answer because I want to study this. Well well well Chris Metley is our leader on the quantitative derivative strategies desk in ID Boston's been around forever. Phenomenal >> do you say this is my quant >> this is my quant. >> All right >> um from Boston um >> here's the only thing I could say because I'm just still focused on this left hand side chart on the median stock. Remember that as of late second half 25 until June 22nd when the semis locally topped is we had this really hyperconentrated market in AI capex. So let's year to date through June we had 90% of S&P's attribution come from three industry subgroups semis IT hardware and power all tethered to data centers and so if I think about like what's going on the lefth hand side of the chart simply put is I think you have people rotating out of those names and also at and also shorting the median stock as a counter to that >> there's interesting happening it's hard to so all right the top desk so the most shorted By the way, look at the y- axis. Obviously, the bottom decile, nobody's short. Okay, it's it's at an all-time high, but it's 1.2%. If you look at the top decile, so the most shorted, it's 9 9.8%, which is in the 70th percentile. And these are the names, the most shorted stocks. >> Reddit, 13%. I don't even know a lot of these names. KMBB, I >> helpful to see this. >> Okay. Charter, SMCI, I don't know. I don't know all these names. Uh, Trade Desk, I know. So I know this feels like this feels like a rates move. So like the curve we were priced for three rate cuts from Jan till Iran March April and now that's completely flipped and I don't I I can't I didn't see what happened this morning but I think we're now 50/50 price for this month in terms of rate. So if I look at this cohort on the left hand side it's super low quality less balance sheet strength. On the right hand side it's much higher quality. So to me it feels like the short interest in the lower quality things rerated as rates have rerated the debt to equity ratio feels like profit margins cash flow >> there's idiosyncratic stories in here that like the trade desk has been an abomination in a very good tech sector not representative of anything else um SMCI is accounting scandals uh charter is cable like >> Reddit has the Google algorithm change Right. Reddit has to contend with the source of all its traffic changing how it sends people. Like you can uh Echko is competing with SpaceX. Have fun with that. >> Like you can go through this and come up with uh a reason why this is not a market story. It's an idiosyncratic story. >> So Dan, you'll like this. The only the only not to interrupt, Michael, the only uh outlier on the right hand side, Charles, I'm not sure why Microsoft wouldn't be there >> because I think what was really crucial to their narrative in the last month was how they tempered the capex comments on the earnings call a month ago and the stock reacted so positively towards that and it feels like people are now siphoning out within the group maybe Microsoft, Amazon, a Apple's in a different category, but they are in a different group at the moment than Meta. Oracle. >> It's funny that you say that. I don't think that's at all behind the rally in Microsoft. I think what people really liked was the public divorce with Sam Alman >> and the end of exclusivity with Open AI. >> I think people felt that Microsoft was not getting the best end of that deal >> and that they might be better off using cheaper openweight models to fulfill those AI software product commitments to their users. >> And I think that that's probably where Microsoft gets its mojo back. Some combination. >> Absolutely. No, that's a great point. I I think they went 180 from being tip of the spear investing in front to now being more rational. I think that's a great point. >> I want to introduce two charts to uh present evidence that the stock market is functioning pretty well. I think fundamentally I think it's responding appropriately to stocks that are doing well and stocks that are doing less well. John, let's start with chart four. So, this is uh this is a CNBC chart. threemonth intra stock correlations is that is at basically as low as it's been in almost 40 years. Like each stock is marching to the beat of its own drum. >> But Michael, I thought index funds were ruining the market. Is that not true? So, Adam Parker, your friend, our friend, uh, John, let's jump to chart nine, has an awesome, awesome, awesome chart that shows the mean 12-month industry group relative return of companies with year-over-year growth margin contractions of more than 1%. Okay? And these stocks are getting the kicked out of them relative to the index. And what he's saying is basically if your gross margins are missing, you are in big big big trouble. M >> and we're seeing that over and over and over again with these earnings reports. >> Oh, Broadcom today, by the way, their gross margins fell 200 200 basis points. Blowout numbers, yeah, their margins weren't great and the stock was down 25% going to the print. >> Crucial crucial point, Michael. So, let me jump in on two things. I think the reason why this particular vector is compounded at the moment. One goes back to what I said earlier in terms of this synthetic tariff related cloud in first half of of last year being now synthetically boosted by pricing. So if you're not getting the gross margin benefit from that pricing right now, you're in this camp. And secondly, maybe a little bit of this on the gross margin line even is on the AI productivity as well. And so like if your peer group is experiencing some modicum of AI adoption, productivity and you're not, I think that's why you're getting triple dinged on this particular data series. >> Okay, you know what's in this in this the stocks that are missing on gross margins? It's a lot of food service. >> Okay, >> it's a lot of QSR restaurants. It's your Shake Shacks, your Chipotles, >> the K working in reverse, which is a thing now. >> It it's just right. It's just not a It's not a lot of fun to be in that business right now. Like I Shake Shack is not supplying French fries to data centers. You know what I mean? Like they have less to look forward to. They had an earnings blow up a couple of months back. They blamed >> paper goods, the price of beef, and it was all Iran war oil related, whatever. >> But they don't have that offsetting. Yeah, but look how much money we're making from AI. like they don't >> there's probably a thousand stocks like that in in you know in the US market of 3,800 stocks >> they're small >> they don't actually matter to the return to the index >> it's 100% and there it's helpful Josh to your point to see it through the lens of which business models because like let's just drill down for a minute on um food staples which are going through two massive uh headwinds at the moment cyclically you've got the backup in rates and the volatility mostly to the higher um side of the chart on oil. So the K shape which has been incredibly resilient on the lower rung. I mean we talk about everyone focus on the upper run. Let's talk about the lower rung for a minute which I mean I could argue and I think there's been this debate around does the official data capture all of the gig economy and all of the ways people are making money off balance sheets >> because the data come from comes from the 1950s. We didn't have that >> right. We could use an update there. Yeah. So I think on the one hand the data is skewed but on the other hand let's face it like the middle lower income cohort has been I think more resilient than most has most have perceived or anticipated until now. I think now you are seeing some degradation on the middle income worker maybe visavi in the beginning stages but just the macro factors and then just drilling down into food staples because I as a generalist I can um talk to all of these sector experts. I think the GLP thing is real. I think when you look at Pepsi going back five ten years uh five years ago, I think they were incredibly convicted that they were going to sail through the issue. And when you look at Fredo Lelay and some of the food businesses missing their organic revenue growth targets for like 2 to 3 years running, I think it's a very So the mistake very is to look the mistake is to look at McDonald's earnings and try to extrapolate something about the economy cuz it's just not the way. >> Look at the stock of Hershey. Horrible. That's years. Now Dan, I am a salt of the earth person and I am equally likely to be shopping at Americana Manhattan >> as I am to be at Roosevelt Field and Michael and I have been harping on this for like 3 years. Every time the banks report earnings, um, less so Morgan Stanley, the banks that issue credit cards, it's almost like the audience is clamoring for them to say the bottom desile, the bottom quintile is breaking. And now they don't even wait for the question anymore. Like JP Morgan, they lead with it. They're like before anyone asks us, >> everyone's paying their bills. Delinquencies are well within norms and at historic lows and car loans are being paid off. And just anecdotally, like who is filling up all these flights? The movie theaters are packed again. >> Like you walk through the mall, it doesn't matter which mall, there are people in it. So, even if you don't know the data, if you're a normal person and you talk to the people in your life and you look around and see what they're doing, they're leasing new cars, they're going to work, they're paying their bills, >> and then for some reason there's like this internet component that is insisting that it's all fake and nobody is paying their bills and it's about to collapse. And that's the hardest part for me cuz the arguments are so seductive >> that we're at some sort of peak something and it's being hollowed out from the bottom and you up there on Wall Street, you don't see it yet. Have fun with your Micron earnings, but you'll see it soon. All when >> I keep waiting. Do Do you feel that that maybe we get to a point where we're ignoring that risk too much or am I ignoring it just about the right amount? It's really an important comment and I think super well said and I'll say a couple things. First is number one I think it goes back to my statement which is unproven at the moment a minute ago about the gig economy. It goes back to co which you know a crisis doesn't usually create new trends but it certainly can accelerate things that were already in place and I think the whatever you want to call it social media influencer economy visav covid got supercharged and it's still going forward. starting businesses, >> new business, I was going there next. >> The entrepreneurial sphere. >> Absolutely. I was going there right next so we're on the same page. So new business formations that are two decade high is part of that visav AI. I absolutely think so. AI in many ways is lower lowering the barriers to entry to being an entrepreneur if you have a good idea. Now does everyone have a good idea? No. But do I have more scale in advertising and marketing and process and technology if I have AI? Yes. And so what are those new businesses doing, Josh? They're hiring people. And maybe it's not all counted on the official monthly payrolls, but they're hiring people. And and so my point is I I know your comment about the big bank's earnings transcript so well because we we see the same thing. And it's true like the data is too diverse and too rich and too widespread to try to poke holes in it, right? It's it's travel, it's eating out, it's all these different parts of the economy. Yeah. And so in my opinion, it's not a >> kind of one-off phenomena. There's something underpinning it. And I think these these comments are underpinning it. >> Don't you think one day there will be a Bank of America or a Capital One financial conference call where they actually do say, "Okay, we're seeing an uptick in delinquencies or bills passed due like 30 days past due, whatever." But by the time they do that, we will all be like, "Yeah, no duh." >> I was just going to say, "Look at the earning." Won't it be obvious to all of us, >> right? How unlikely would it be that earnings prior to that moment hold up >> how unlikely would it be that earnings continue to trend quarter over quarter not year-over-year in the short term how unlikely would it be that they continue to to accelerate very unlikely so so we've talked a lot about idiosyncratic nuances which I think today this cycle is unlike any other cycle it's been a uh underlying thread of all of our comments but to be fair economics 101 just goes back to earnings and and job growth and it's very unlikely in this earnings picture to have that future BFA moment. >> The lower shape of the K. I was looking at a firm's delinquency rate. Which customer do they serve? >> A firm. >> It's not AMX, right? Buy now pay later. >> Yeah. So lower FICO 20. Yeah. >> The delinquency rate is nowhere. It's nowhere. It's 2.3%. Whatever it is, >> because that's the pay later part. You don't understand. You just don't understand economics. >> I'll add to that. I don't know if it's >> They say pay later. You don't know how much later. I don't know if it's GLPS at the um 25year-old cohort level, but what I do understand from a lot of our clients and our partners anecdotal comments about their children and the next generation is that people aren't going out as much maybe to bars, maybe drinking, but they are gambling, they are making wages, uh wages, and maybe on average they're doing better than we would have anticipated. So maybe they have this excess capital from this proliferation in the gamification of betting and gambling, all these other things going on. >> So instead of overeing, they're betting. >> They're over betting. >> So it's so funny like the next generation, they're just going to do the GLP1 right into the right into the womb. Like in vitro g I'm going to be the last person left in this world. >> Yeah. Less of a copay. >> Okay. Uh all right. I want to I want to make sure we get to a couple more things. stock selection. You're managing money. You're also advising other people who manage money. You're on the committee. You're in all these conversations. What are you telling people about the end of year run? Hopefully, it's a run >> and into 27. >> Like I don't know if it's your opinion, the house opinion. I don't know where one ends where, but talk about our our audience are investors, >> right? They love they love the stock market. people listen to compounded friends love the stock market. So talk about stock selection, what you guys are excited about, what you're looking at, and maybe what you're uh leaving behind from the first half of 26. >> Yeah, all the above. So let me bifurcate it between my asset allocation hat and my day-to-day PM equity hat. So on the asset allocation front, uh Josh, we've been overweight US equities for well over a year. And I would say while that has certainly served us well, we've also no doubt experienced this AI spending AI highly correlated concentrated phenomenas as well. And so at the asset allocation level, we've also told people allocate towards real assets, allocate towards long short hedge funds, >> counterbalance, >> no doubt. And um and you know in some instances allocate towards EM and we saw what happened when AI caught a cold this summer. We saw what happened in the US. Rotation was the outcome. Peak to trough draw down. The S&P was 3%. Because of that concept I alluded to earlier. Semis went to MAG 7. And mathematically MAG 7 might be 3540% of the market. Semis are much bigger, but they're 18%. If I add in healthc care at 10% and financials at 15%. That's what really offset that um cold metastasizing for the US. Not so for the Cosby. So the Cosby had truly concentrated to stock. So we've told people to be selective in EM. So what I'm trying to outline Josh at the broad level is asset allocation. We've been overweight US and are sticking to that for a lot of the reasons we've talked about resilient economy um accelerating earnings growth, but we've also tried to plug and play through diversified asset classes. On the stock level, again, the healthiest thing I would say because I'm most focused on long-term investing, you know, my team originated in 1995 under Byron Ween uh in the equity research department. and and Byron who is truly a visionary thought of investing in a concentrated portfolio along a continuum. And we run 40 to 50 stock portfolios. And the idea being in a 50 stock portfolio, you want to have the majority of your names, 40 names, 45 names be core holding, plus or minus the market in any given year. >> They're going to be two-ish percent. >> Two-ish percent. Correct. So, not super uh big absolute sized, but I also want to build in maybe five, six positions that are big ideas. And this was truly Byron's philosophy. If I can get big ideas right over a cycle, be it Nvidia 10 years ago, Visa, Mastercard and Processing, be it thermoffisher and the proliferation of life science. If I can get a lot of the big ideas right over a cycle, they can now offset the average over a longer period of time. So what we're telling clients today through our portfolio >> I like that approach. >> What we're telling clients today through our portfolio process to to conclude is yes you wanted to be cautious AI and semis in June. I think there's a lot more uh interesting ideas there today, but coming back to our overall thesis, this adoption wave is going to be a decade long. And so we want to own a lot of those Fortune 100 companies that are quality oriented. And I know it's a off-sighted cliche to be quality oriented. Quality has not worked this year. It has not worked in several years. But when I think about the rotation as of the last three months, what's working again? Again, kudos to Mike Wilson. quality has been coming back in vogue. Rates are higher. The onus on whether or not you can make money and out compete your peer set on AI adoption is higher. And I think this really augers for a quality diversified equity portfolio across healthcare. No doubt AI in many instances is taking a six to sevenyear timeline in terms of phase one drug discovery to like less than 12 months. One of the things I'm most excited about um is seeing that play out and seeing drugs come safer drugs come to market faster I think is a phenomenal out outgrowth of all this spend >> and and and the downstream winners beyond that the life science tools the consumables the lab uh and clinical trial managers keep in mind healthcare couldn't comp the COVID comp then it had to deal with the 22 rate cycle then it had to deal with everyone who had growth equity capital going to tech so healthare used to have a growth equity capital. So that's one sector we like on the AI adoption theme, capital markets. But are you top down on this 50 stock portfolio? You saying we're really bullish on healthcare, so let's find healthcare stocks that fit our thesis or are you arriving at that top down because from the bottom up, these are the best earnings growers. How are you doing that? >> It's more of the latter. For 30 years in a 50 stock context, we've been bottom up focused. So do we make sector calls? Yes. But our sector calls are are modest in nature, two to four points over underweight any given sector as a way of controlling tracking error and risk. So to your good question Josh, if we like a stock from the bottomup thesis, we might overwrite the sector call. But at the same time, as our old strategist and our friend Henry McVey has always said, who started out as a financials analyst now at KKR, great friend of Morgan Stanley, uh you got to have a view. And so we think you you no doubt have to marry the bottomup selection effect with the sector calls. Are there scenarios where you did get you got the sector right? You got the you thought you got the stock right, but then there's an execution misfire on the part of management and you say we're still bullish on this theme. We're riding the wrong horse. You must have to do that all the time. >> Let's talk about software. >> How hard is that? >> Oh, that's the hardest part. That's kind of the hardest part. Hardest part. hardest part because in a you know going back to the process >> right horse wrong jockey or right race wrong horse or whatever >> no doubt I was supposed to get on a flight to the derby and I ended up at Belmont yeah >> um so what I would argue is in a 50 stock portfolio with a 2 to 3% tracking error which is our process um you live and die by concentration and so we try to temper the sector bets as a function of controlling that risk factor but the stock selection effect drives really everything at the end of the day and So you asked the right question which was got the sector call right or wrong. What happened to the stock selection? No doubt software has been I think the the most acute realization of that question in the last seven or eight months. So I told you earlier I don't write often but when I do I've actually been fairly um you know directionally correct this year. I cautioned on semi semi June 1st. I said software is oversold in midFebruary. And my conclusion in software literally >> my conclusion in software it was at the time if you look at IGV >> the CL the new claw plugin had just come out in midFeb and the whole sector was being priced for obsolescence freaked everybody out. My statement was >> I think it's very unlikely that as private entities the business plan for these labs pitching Wall Street future investors is our our plan over the long term is to put a lot of corporate America out of business. I think that would be a very uh futile business plan to the street. More likely in my opinion back in February was forget about obsolescence. You're going to see chronic interdependence between AI and software. What's going to be most likely is dispersion of outcomes across the spectrum. And so I'd like to say across the holdings we had, we had 100% hit rate across that outcome. We were right on the concept, but there's been so much variation in terms of the >> like if you take the bet on Adobe based on what you just said versus take the bet on Crowd Strike, it's like, okay, we were right. Software was oversold, but we didn't get the full benefit. And that's got to be when you're doing 50 stocks, that's got to be the thing that's like, oh man, I hope this is the right one. >> 100%. And look, we had >> it's it's hard for everybody. >> We had puts and takes for us. Microsoft's rebound, Service Now's rebound. Uh we were out of Adobe over a year ago. We were in PaloAlto as of the last two years, but it got to 70 times. And in the last two or three months, we said it's the top end of the PE range. The market has correctly discounted. It's an AI winner, but we run a 50 stock portfolio at 70 times. It was a high tracking error winner, so let's take it out. >> What's the stock in that portfolio that you are most convinced the market misunderstands >> in the software space or just overall? >> Just period. Like what? I have mine in my own portfolio. I think the market Uber I think the market is Uber wrong personally. Um you look like you're short. >> You look like you're bearish. >> I'm long only. So So I've been in and out of Uber over the years. So let me let me put this. >> What's What's your version of that where I'm saying to people I give you two names? >> Yeah. No, give me as many as you want. >> I'll give you two names. So >> back in go back to February. So it seemed like every other week a big liquid part of the market was being priced for absolescent. We talked about software at one point. It was insurance brokerage. at one point wealth management CB >> Michael we're also on the same page >> spgi so >> morning star >> that's where I was going to go the idea that data forget about software at the moment the idea that datacentric businesses were also being priced for obsolescence and in many instances have not rebounded >> so S&P as an example in one of our full disclosure one of our holdings does multiple things it has the issuance business but it has the data business what they just started talking about potential alternatives But I don't think the issuance business is frankly getting enough bid in a world of going back to your debt charts in a world of massive financing. >> Yes, bond investors need ratings. They don't they're not going to take Claude's word for it. >> Thank you. >> Regulated. It's regulated. They have to be rated. >> Regulated. Go back to healthcare. I'm with you. So So it's highly regulated dataentric businesses. And last one is NASDAQ because when I think about that business, I have these future franchise IPOs on the horizon. >> It's at highs. >> NASDAQ for the year, it might be at highs, but for the year pointtooint is flattish. The last time I looked at it, you should be at more. The earnings continue to grow mid- teens to high teens. The multiple has stayed rarely flattish. And to me, again, it was caught up in that February March selloff of datas going out of business. So NASDAQ is three businesses. They have a small fintech business. >> They have a data business, which is the crown jewel. And then they have the exchange business, which it is what it is. >> All three of those things feed each other. So they're not really three distinct businesses, but that's how they report, >> right? >> I remember thinking NASDAQ is the bet because all of this IPO activity, listings, great for the exchange. Then you think about the data business, which is >> and AI optimization on the data. And the market said, Josh, you I got stopped out of NASDAQ. I think I made money on it, but I had been in it for a while. >> And it's been a great name for a long time. >> Yes. The market told me this spring, to your point, that I was wrong, and I couldn't proc Wait, we're saying there's this whole wave of AI disruptors coming along and NASDAQ's not going to capture its share of that upside. It makes no sense. >> Doesn't make sense. Highly regulated uh industry data, the cyclical tailwind from the capital market cycle. And look, our analyst Mike Cypress, who's a a great partner and friend of our business, has been positive on the stock. And as the last two to three quarters of evidence shows they continue to generate AI uh strong evidence of AI utilization in their business and the market is just not roaring. So those that was the example >> around here, we don't believe in trouble. That's going to go, right, Josh? >> That's going to go. Um, >> everybody loves a trilogy. >> When do you know when do you know when you know you're wrong on a stock and it's time to take action? >> When it's too late. I know it's always different, but what are like the big picture things that you think about? >> So before I answer that, just to also reference having a hard and fast stop-loss in a context of 50 stocks where we try to generate 30 to 40% turnover a year with a tax-sensitive retail type client, I think is too rigid. And so to your question, we've adopted quantitative and quantal to use Adam's phrasing, quantimental inputs, but it's also just at the end of the day a decision tree usually binary. >> Did you see Adam's piece on stop losses this week? >> Absolutely. We just we had a call the other day on it. >> Yeah. Yeah. Okay. Go on. >> And so look, I would argue that um there's the good news and the bad news. I told you Palo Alto earlier when I have something in the in the high tracking error bucket that we've taken a idiosyncratic risk on and it rerates and we've owned it for our time horizon one and a half two years and it's everything that's worked out. It becomes my 40th idea isn't as good as my 41st potential idea. It's friction and opportunity cost in the portfolio. >> You have because if that's still in the portfolio, it doesn't matter that it just doubled. >> You're allocating fresh cash to the portfolio. Do you really want to buy that stock now? >> Opportunity cost So that's the good scenario. Let's talk about the much more difficult conversation which is when something goes against you and it goes back to in our world the original thesis. >> So we build out a every time we write up a new idea. It's a 20page proprietary note that my team uh builds. I have a sevenperson PM team. Yes, we use Morgan Stanley's Research and have used them for 25 years and we really benefit from that relationship. We use street research and since I took over the team 12 years ago, I realized, hey, we have all these asset managers on our platform trying to talk to our wealth management audience. Why don't we talk to their PMs? So, we talked to a lot of the buy side as of the last 12 years and have established great relationships there. >> My my >> That's a great filter because those people are putting risk on in those stocks or taking >> Absolutely. And in some cases, they look like me in terms of process. In some cases, they have a shorter horizon or a riskier horizon. But I love the mosaic of all the input there and we have great relationships there and I can recommend some friends for the for the pod. Um but what I would just say is when I look at that second scenario, it comes back to the original thesis. Did something unforeseen happen in terms of competition regulation management governance and is the earnings power temporarily impaired or permanently impaired? is the competitive moat temporarily in question or permanently impaired and you have to make that trade-off. So, two things I will tell you, one on the stop-loss front and one on just my 20 years um deducing kind of qualitative signals on the stop-loss. Cut your cyclical losers faster. Give your secular >> faster than the growth >> faster because because correct because the cyclical momentum almost always begets more cyclical downside momentum. almost always whether it was oil rigs in 2014 2015 whether it was banks in 0708 and like when the earnings drop out on the cyclicals you're not talking about an earnings haircut of 10% or 20% >> less likely for a V-shaped recovery in a material stock for example >> 1,00% and so and let me give you the counter to that >> that's a good Are you writing these down >> okay >> the counter to that is on the secular names and I'm going to bring in my second comment in in a segue here on the secular names, maybe manage them down, maybe risk manage them as they beget negative momentum. But if they're really those Byron, big idea secular winners, you know, Mike Durban, Durban amendment 2010, Visa and Mastercard, they were down 30% in a six-month period. They're at 10 baggers since then. Um, you know, Apple were worried about um advertising, worried about Samsung, you know, 10 and 20. So, if they're really the secular winners, >> they it can almost always come back. Whereas the cyclicals different story >> and you're treating different types of stocks differently in the risk management. >> There's no there's I wish there was there's no formula but it's one of those experience judgment things we've learned over 20 years. And the second comment I'll come back really quickly to end two types of risk factors >> to end you're not getting out of here >> on this on this topic on the risk factors competitive risk versus government and regulatory risk. Here's where I've also extrapolated a lot of uh signal over time on the government regulatory front. It's almost always temporary and over overkill in nature. And there's exceptions to that, but Durban amendment 2010 as a case in point I just mentioned. It's almost always more fear and more quickly discounted incorrectly by the market than not. >> I learned that lesson every six months. I'm a shareholder in Live Nation, so I I I know this. Oh, great. new high soon as soon as people start freaking out about the next attorney general is suing them. >> And we've talked about this a little bit in terms of the macro, but often times you need a wall of worry for a stock fat call to work too. Last comment on this topic. >> By contrast, the competitive risk is so vastly different. And this is where it's more nebulous by nature and just harder to discern. When companies are losing market share, when a brand is starting to fade in terms of its relevance, that is almost always the death nail of many businesses. And and here's the hardest part for me because we only fish in the ascendant and highquality cohorts. It happens to everyone. It even happens to high quality >> Nike which I >> Lululemon was a quality stock at one point, >> right? And then and then they go things go in and out of favor. >> But Abbercrombie is back. Interestingly, that stock is on fire. >> The com the competitive dynamic in terms of e uh brand and market share, brand equity and really just governance, management change over time. One of my first managers when I started on the team 18 years ago, first exercise he had me do as a first year associate, fresh out of, you know, the analyst program and I was a liberal arts major. Dan, do a study of executive compensation across all of our 50 holdings and tell me about the correlation between compensation and pay and shareholder return and try to find outliers. And he had me do that exercise probably 11 or 12 different times. Um, and so I mentioned governance earlier before. Changes in governance, lack of credibility, lack of capital allocation, consistency, those are some of the qualitative things that we pay attention to. You know, it's so funny because the way that you do things lines up so much better with my actual lived experience in the stock market, >> but when I started, and maybe you experienced some version of this, this was not the way things were done. It was much more about metrics >> and it was much more about math and it was much more about well, this PE ratio is lower than that PE ratio. >> Remember when valuation mattered, >> right? But so so but that's that was like everybody coming out of Wharton. That's what they were taught. And so they would look at like the steel sector and they would say Bethlehem steel is the lowest PE ratio. Yes, it's got the highest debt but you know we're buying a dollar for50 rather than IshPat steel which is you know a dollar for 80ent. And that was just the way people thought about the I don't think anyone thinks about the market. I think more people now think about it the way you and I do, which is that um the price is behaving in whatever way it's behaving relative to valuation because the market is smart. >> The market has figured out >> the market has figured out that this stock should be an elevated valuation. That's not a negative. I'm not saying it's a positive and we only want to buy expensive stocks, but oh my god, are we saying it's expensive by accident? >> We can't be saying that. No, I >> it's amazing how many people were trained thinking that expensive stocks relative to their peers were accidentally they call it a mispricing. >> What do you mean a mispricing? No, it's not mispriced. They want to own Dell cuz Dell's better than Compact. What part of that don't you understand? >> Right. >> So, I think people have come along to that. >> Well said. And I think the two things I would just add to that Josh are number one is the access to information, the speed of information and the proliferation of information has helped that efficiency in nature. And secondly, it's the it's the um micro structure of who's invested in the markets. Think about the proliferation of CTAs and quant funds on the institutional side. Think about all the liquidity on the retail side. You know, I didn't mention it earlier, but I meant to. I made a mental note of it, but something like 40% of homes in the US are owned outright, no mortgage. So, think about an aging population with excess capital on hand. And maybe from the other part of the spectrum, the younger uh um cohort who has more access to investing, gambling tools, and just think about the momentum and trend followers in the market versus classically trained Wharton MBAs doing valuation work. The micro structure has changed. The technology and the speed of information has changed making momentum one of the single most important factors in markets this year through June 22 and the last 5 years. And so what we say is look, it can be true on the one hand that we're quality oriented. We're diversified. We're long-term investors. We have one client in mind who's wealth management and we manage the tales. That can be true on the one hand, but on the other hand, uh don't pay attention to the technicals and the momentum at your own risk. That's right. It's nice to be able to punch into Google what is the PE ratio in this stock, but everybody knows that already. So, the momentum is the actual story. The stock is under accumulation or it's not. And watch for when momentum changes. We are at a crucial inflection right now. Whereas the affformentioned semis hardware and power names have either traded sideways since June, failed to recover the 50-day, not had the PB hedge fund guys regrow back up. That's going on on the one hand, and we've talked about it. Healthcare is working. Soft parts of software is working. Financials are working. Energy is working. You know, one of our very simple tools this year has been every time we've had a ceasefire is to buy more energy in the book because every every ceasefire deal has been pretty shortlasting. And so, yes, you have to pay attention to the momentum. You have to also try to exploit some of the anomalies out there, too. Last thing, um, you think the year- end setup is favorable given the earnings growth and all these tailwinds we talked about? You're feeling pretty good about like I mean most years we go out close to the highs, so it wouldn't be surprising. >> Yeah, it's been tough to bet against seasonality the last several years. So I would say per our pop-up ad exchange earlier, I think at best we trade sideways into the midterm. As you stated Josh earlier, I don't think there's any real profound outcome from the midterm. But then I think it's all about, you know, in terms of October earning season, I think all the trends and data we're seeing suggest and the conference season this September should also u predict pretty solid acceleration there. And then it becomes what happens in 27. So, let me leave you with my 27 thought, which is in my mind 27 could look a lot like 23 where it's a return of more monolithic mag 7 outperformance. I think the average company is going to have trouble comping that synthetic tariff operating leverage. So, if I were to make a a more of a thematic call for next year, it could be one of these ideas where it's >> bigger is better again. >> Bigger is better, quality is back and it could be a broad it could be a broader market, but you definitely want to be in kind of the 23 kind of AI enabler mag 7 names and maybe some of the healthcare adopters and maybe it's not as good a year for small caps or the average stock. >> I love it. Good stuff. Did >> you have fun on the show today? It >> was really fun. Thank you. >> Okay. Uh we're h you're happy on your end. >> Okay. Hey, we're going to take we're going to take a brief recess and then we're going to do some Israel Palestine stuff. Is that okay? Is that good? All right. You You were awesome on the show today. Put the headphones back on. We're going to give you your flowers. >> I want to tell people where they can learn more and get more of your insights. So, you're going to do squawk from time to time. Um do you guys publish anything anywhere? Are you on LinkedIn? Tell us where >> we do and thanks for that um that heads up. So, Josh, we I'm on LinkedIn and the firm Morning Stanley's on LinkedIn. We are available through those channels channels and then yes we publish through the global investment committee I publish a quarterly letter which I'll share with you both in terms of my fund the SMA and then at times as per the software and semi comments we'll write more tactical ad hoc client facing material so we'll share all those with you >> that's great and I know the audience definitely uh is going to want to hear from more from you thank you so much for joining us for a lot of fun really appreciate it guys great job this week >> John Duncan Nicole the whole team appreciate it. Thank you so much for watching. Thank you for listening. We'll see you next week. Thanks again.