The Compound and Friends
00:36:19 · Josh Brown, Daniel Clifton, Michael Batnick
[00:36:19] S2: So yesterday, that was that. [00:36:20] S1: Right. Number two is that the market was like, oh, the Democrats are going to restrict this spending on the war. The war's going to end. Oil goes down. Yep. So you had a lot of those factors. Today is the right way to think about it. Not saying that the stock [00:36:33] S2: me. Market No. No. No. [00:36:34] S0: No. No. I'm not [00:36:35] S1: saying the stock market is fine. The right way to think about it is [00:36:38] S0: Welcome to the new reality. [00:36:40] S1: You have to adjust your CapEx forecast. And if it's 10% down, you've to do that. When you adjust your CapEx forecast [00:36:47] S0: Earnings. [00:36:48] S1: You now got to go into the earnings. Yes. That's the way we've been communicating it with our clients for three, four months. And by the way, I would get destroyed by my long only mutual fund clients because they were all invested in a trade. And I'm like, I'm just trying to manage risk [00:37:00] S0: for you So the last two days were a sonic boom in the stock market. John, let's do chart 16. So this is the last two days. We're looking at a scatterplot of QQQ versus MTUM, the momentum trade, which is usually correlated, as well as QQQ versus SMH. So the Nasdaq versus semis also very correlated, obviously. Complete outlier. Next chart. 17, please. So, we have 20 semis that are down 10% or more over the last two days. There's only 25 stocks in the basket, and 20 of them are down over the last two days. [00:37:33] S1: Yep. Let me throw something [00:37:33] S0: else So, earnings are impaired.
00:37:33 · Michael Batnick, Daniel Clifton, Josh Brown
[00:37:33] S0: else So, earnings are impaired. [00:37:35] S1: Let me throw something else out to you. Somebody's probably blowing up. I don't want to start rumors or anything, but, like, July situational awareness blew up after we had that big [00:37:46] S2: You felt it in the market before. [00:37:47] S1: Found out [00:37:48] S2: who it was. [00:37:48] S1: And my sense is that people are still in that same trade, and all of a sudden, things are unwinding on them. Right? So just my experience, I've been doing this for twenty years. [00:37:55] S2: Hearing it's Nancy Pelosi. [00:37:56] S1: Well, could be You know what? Totally convey. Right? Because he won. And she won the election. [00:38:00] S0: It was Nancy Pelosi. Taiwan Semi is down 9%. That stock never ever ever moves like that. Right. Even after all the memory stocks were down 60, this stock was going sideways. [00:38:11] S1: Let me give you the [00:38:11] S0: And NVIDIA is down 10.
00:38:11 · Michael Batnick, Daniel Clifton, Josh Brown
[00:38:11] S0: And NVIDIA is down 10. [00:38:12] S1: Let me give you great news. We're just shooting first, asking questions later. Okay? When this was happening Bullish. Wait. Wait. Wait. What we have to do, the range of outcomes are so wide right now. We have to figure out what all the governors are going to do. We have... By the way, we have a whole another federal issue that hasn't been talked about yet, and that is that the Democrats are very clear that they have a mandate on data centers and they're going to use the debt ceiling as leverage to get Trump to take away 100% expensing of capital equipment for data centers. That's a whole another leg that's going to come on this. So the market just needs those range of outcomes to narrow. Once these governors start giving state of the state speeches in January, you're going know what they're all trying to do. [00:38:52] S2: We're a [00:38:52] S1: little away [00:38:52] S2: from that. [00:38:53] S1: But by the way, you know what this reminds me of? This reminds me of municipal bonds after the Obama midterm, where the Republicans had a very similar election. Oh, the Republicans are going to kill state aid. They're going to take away your ability to force you into bankruptcy. Everybody just sold the municipal bonds and said, wake me up. And then, you know what? It turned out to be the greatest trade ever, where you could buy California municipal bonds tax free for, you know, like 12%, 13%
00:38:53 · Daniel Clifton, Josh Brown
[00:38:53] S1: But by the way, you know what this reminds me of? This reminds me of municipal bonds after the Obama midterm, where the Republicans had a very similar election. Oh, the Republicans are going to kill state aid. They're going to take away your ability to force you into bankruptcy. Everybody just sold the municipal bonds and said, wake me up. And then, you know what? It turned out to be the greatest trade ever, where you could buy California municipal bonds tax free for, you know, like 12%, 13% [00:39:21] S2: So what you're saying to clients is that chaos is a ladder, and there are opportunities that are going to be created because we're shooting first and asking questions [00:39:30] S1: Exactly. For But you've got to wait it out. And I always... Again, seasonals are important, but this is my sixth midterm election in markets. And I've always said the S and P 500 has not declined in the twelve months following a midterm election since 1938. Most of my clients think that stuff's We do. [00:39:46] S2: Let's put this to this chart. This is chart one. This is this is Dan's chart. This is the S and P 500. In the twelve month period following midterm elections, the average return is plus 14.8%, and it's uniform. So they're not all great years, but a lot of them are. Yeah. I think this is super helpful. Yeah. Unless you think this is such an aberration that it's gonna break this pattern. It's always an aberration,
00:40:12 · Daniel Clifton, Michael Batnick
[00:40:12] S1: and Okay. It never breaks the So, this happens because you get these big equity market sell offs in the midterm year. The market assumes the worst, and then that doesn't happen. And why does it happen? These guys are going to get in there in January, they're already going be thinking about 20 And if you're doing a big thesis for our clients the morning after the election, seven a. M, I've 2,000 institutional investors on the phone, and I'm like, Kevin Warsh needs to pay attention to what's happening in this data center stuff. Because if you are going to have fewer data centers, then he shouldn't be raising rates as much. No. Right? And so you've got to have a monetary policy response. So you were talking before rates come down, rates start coming down, you start getting more clarity. Congress is starting to talk about, hey, let's do a budget deal. Let's hand out some stimmies ahead of the election. The market's going to be able to read through that. So, you've got to take your lumps. And it is crazy because we were sitting here right before the Iran war in February, like days before the Iran war. And if I told you that day, like, we're going to war and oil's going 100, you'd be like, the equity market decline probably would be greater than 9%. And we were 9%. We didn't get a big sell off. [00:41:22] S0: Well, but even right now, we're down 5%. [00:41:23] S1: 5%.
00:41:23 · Daniel Clifton, Michael Batnick, Josh Brown
[00:41:23] S1: 5%. [00:41:24] S0: The problem is so NVIDIA is in a... So NVIDIA's in a bear market. It's down 21%. Problem is everybody's like, oh, NVIDIA's 14 times earnings. Well, is it really? Yeah. Mike won us three times four earnings. [00:41:34] S2: Is it still? Michael it and I were just talking about that. We've witnessed over twelve months now of multiple compression for all of, not all, most of the large companies like the Broadcoms and the NVIDIAs of the world that are selling into this boom. The multiple compression has been severe. The only reason the stocks haven't really suffered is because they're growing earnings faster than the rate that we're compressing their multiple on the street. But like, I don't know. The market probably didn't see this election coming, but the market never believed that the pace of this level of earnings growth was gonna continue into '27 and '28. Interesting. It never believed it. [00:42:18] S0: I know [00:42:19] S1: it right. So that was right. [00:42:20] S0: If NVIDIA's earnings are 5% lower over the next twelve months than we expected them, the stock could fall 40%. Wow. Wow. I mean, I'm making that up, but it really can. Yeah. Yeah.