Is Apple the Next IBM? (EP.325)

0:01Oh

0:05Duncan is redder than my strawberry jacu right now

0:13Duncan you're fired. You want it or you want me? What? What? No, the trick is not. We on? Let's do it. Duncan, how are we sounding? Good? Alright. You want some of mine? No, it's fine. No, you're going to spill that one too. Alright, so last year when we were here, it was super hot. I don't know if anybody remembers who was here. There was like a little tiny booth. The air conditioner was broken. I might have had COVID. I didn't test positive. But I was under the weather and I powered through. This is going to be a much better performance, I promise. It'll be a much more fun show. Ben, what time did you get here?

0:57When you go to a conference, the first thing you ask someone is, what time did you get in? That's the icebreaker. And trust me, you've all done it. I've seen it. All right. Ready to start? Ready to start. All right. I can't believe Duncan spilled the Miami Vice already. I'm taking half. All right. Start. Go ahead. So today's animals, welcome to Animal Spirits Live. Huntington Beach, California. Animal Spirits! Great. I see a lot of awesome shirts in the audience. I appreciate that. Oh, no. Oh, my God. I undacorried the, uh. All right. Yeah, it's a concentrated portfolio now. That's all right. All right, today's Animal Spirits is brought to you by our friends at YCharts.

1:43They're just 100 yards over there in the tent. I see everyone in the crowd, YCharts people with their Animal Spirits shirts on. I went there this morning. They gave me a little test run of their new proposals enhancement. It's nice. So if you basically do, here's your current portfolio for a client. If you're a financial advisor, here's where we are. Here's the differences. You can look through all these different performance numbers and attribution, and it's kind of like a here's where you are, here's where we want you to be. If you go over there and talk to the people at YCharts, I think they said for the whole month of September they're giving free access to this.

2:14And you'll notice they're wearing the Animal Spirits shirts if you can't find them. Oh, there's a lot of great-looking shirts in the audience. Thank you for everybody who bought them. Everyone listening will be having a link to that in the show notes as well. As usual, if you go to YCharts, tell them that these guys sent you 20 % off that initial subscription when you sign up. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management.

2:46This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

3:01All right, welcome to Animal Spirits with Michael and Ben. I was told that we got a comment in the YouTube section. I don't check too, too often because they're vicious out there. And I'm often on the bad side of that viscerum. So we got a question that said, or maybe there's a comment. It would be pretty interesting to hear them discuss the details of what they actually do for Red Holes Wealth Management. This question didn't bother me. I just noticed the actually. That's pretty tame for a YouTube comment. But the gist of it was people were arguing in the YouTube comments as they tend to do. And they said, you guys are always producing content.

3:38You're doing podcasts and YouTube videos and blog posts. It's like, what do you guys actually do for a firm that is a wealth management firm? And how do you actually work with clients and how you have time to do all this stuff? We get that question a lot. All right. So it's pretty simple. I am one of the four co-founding partners. Not to brag. We don't do that on the show. But at Reynolds Wealth Management, we have 30 financial advisors full-time. That's all they do is talk to clients. We have a couple of service advisors supporting them. We have four people on our tax team. We have three people that work on the 401k side.

4:11We have four traders, seven client service associates. We have a president. We have a chief operating officer, a chief of staff, a chief compliance officer, and a director of human resources. And I'm sure I'm missing a few. We also have a media team. We have a media team. How could I forget? We have the best media team in the game. We just lost one person from the production team this morning when Duncan spilled my advice. But the point is that we have time to produce a lot of content. Part of it is because we like it. We all did it before we even joined forces, really. Barry was blogging when I was like six.

4:42Josh is doing it forever. I was doing it before I met you guys. And so we enjoy doing it. We don't really have any other hobbies. I don't golf. I don't do fantasy football. Nothing like that. Part of this is just we enjoy doing it. Part of it is that we have a ton of people behind us, behind the scenes, that keep the ship running and keep everything operationally humming for us. So, yeah, how do we have time to do the content? That's why, because we have so many amazing people doing everything else on a day-to-day basis. But we do actually do stuff, actually. Yeah, we're both part of the investment committee at the firm.

5:12We talk with clients all the time. We have meetings. We're busy. So we actually do do stuff besides time. So, yeah, some of the doo-doo. So I do a lot on the business side, some of the stuff that is behind the scenes. And so, anyhow, thank you for the comment. We appreciate it. That was very nice of you. All right, we're going to start the show today by talking about actually, actually, let me actually myself. Before we get there, anybody ever hear the phrase, you get what you pay for? My wife butchers that she says you pay for what you get. I don't think that's how it works. That's literally true.

5:43What's that? That is true. So I got a pair of sunglasses. a couple of weeks ago I was talking about how I got two pair of Maui Gym sunglasses they're quality they're quality shades and Ben's giving me shit why would you spend $200 on sunglasses they're all the same they're all made in the same factory it's all the same if you're going to lose alright not true so for those who didn't listen to that episode I bought two pair of Maui Gym a black one and a brown one and I said I'm going to keep one and I'm going to return one well I lost the black one the next day my point was not so hold on it turns out that I like the brown one So I caved.

6:17I caved and I got this pair of, not to name names, but I got these Gooders. And I wore them today. And I got two people come up to me. What is that? I've got, I know nobody can see it, but I've got these, what is this? I've got like this shit on my rims. It's like a crop circle. It rained. It rained. And now these glasses are broken. So you have anything to say about that? Gooder has a one-year warranty. They'll send you brand new. My point was not the quality. My point was... You said they're all the same. This is not a car wash. But my point was you're going to lose them. Someone actually wrote us in and said, actually, these sunglasses make the world look like HD.

6:53I'm like, the world looks like HD through my eyes. I don't need sunglasses to help with that. All right. All right. I just want to make one more personal point here. This morning, Michael said, I'm sick of stuff wiggling around in my pockets. I need a fanny pack. Now, when we talk about consumer sentiment, I always say watch what they do, not what they say. because people say I'm so bearish and the world's falling off a cliff and all this stuff, but I'm also 95 % invested in stocks. That's Michael with middle age because you say I'm not middle age, I'm fighting it, but your transition is just you want to drive a convertible, you wear dad hats, Hawaiian shirt, and you have a fanny, a literal fanny pack.

7:32These are fair points. That's a middle-aged guy in that great looking shirt. Am I middle-aged? No. No. See?

7:41Thank you. Thank you, sir. I'm getting there, but take it easy. All right. Torsten Slok, who's at Apollo, says there are more downside risks than upside risks to the market. He gives 10 downside risks to the U.S. economic outlook. People are running out of savings. Student loan payments are coming back. Defaults are rising. Oil prices are rising. China, Japan, Europe, all this stuff that everyone talks about. You never see the contra to this. You never see here's 10 upside risks to the U.S. economic outlook. That's like what no one was saying 18 months ago. Well, here's things that could actually go right.

8:15I guess this is just what we do in this industry. I wrote a post six years ago called Gradual improvements go unnoticed and the point was that it's that chart that I do the reasons to sell chart There are always to Ben's point and to Torsten Slough's point. There's a million things that you can identify Risks to the economy risk market. It's easy. You could probably come up with 30 off the top of your head it's impossible or very difficult to think about upside risks, like what can go right. Obviously, AI, right? Like open AI was on nobody's radar. Although last year at this conference, if you're here, raise your hand.

8:51There was somebody who came up to me last year. No, no, no, no, no, no. There's an individual I'm looking for. And this guy was like, just no offense if you're listening, chewing my ear off. And I wasn't like trying to get away, but he was talking about chat GBT. And I guess, is he here? He's not here. So anyway, the point being, that was like a huge upside risk to the economy, to the market. If that didn't happen, who knows where the S &P 500 would be today. But I remember last year during this show, we talked, we were arguing about a soft landing. This is 12 months ago. And we're still arguing about it today.

9:20Like, I don't think anyone thought that that period could last this long. Like, oh, we're still going to be figuring out whether it's a hard landing or a soft landing or no landing. Shame on me. I should have re-listened to our podcast from last year because I don't remember what we spoke about. I was sick and... I just have a good memory. advice up. But even so I tried to recreate the reasons to sell chart with like reasons to buy, like what drove the market higher over the last 10 years. And I'm sure you could write a blog post about some of the things that transpired. Profit margins, probably the thing that come to my mind first.

9:51But even with the benefit of hindsight, it's hard to explain the upside. And so I agree actually with the list of downside risks. But that's how it always is. It's like it's always that way. It's easier to come up with those things, too. All right. This is a trope that people keep going back to. Is this the next that? Is Apple the next IBM? Is something that Bernstein, Cronkton, he tweeted this. Bernstein wrote a piece, Apple looking like the old IBM question mark. Now, I'm guilty of this. I wrote a post last week as NVIDIA the next Cisco. So But in my defense, it's very lazy to say, like, is this the next that, right?

10:32It's like we have blueprints of, oh, we saw how this movie is. No, you don't. No, you do not. I got a question for you. So when I – what's that? So your life is on the line. Could you explain what IBM still does? Because I had an IBM computer in, like, 1996. Of course I can. Mainframes. Okay. I just have no idea. But anyway, when I write about that, like, is this the next that, it's usually to point out, like, there's so many more differences than there are similarities. Yeah, tech stocks were in a bubble and now tech stocks are carrying the market. I don't know. I think it's lazy. But anyway, I didn't want to talk about IBM for a second.

11:03Ben, try it on. Oh, we're on? Okay. So over the last 10 years, IBM's stock is up 28%. I think the NASDAQ is up, I don't know, 10x that? It's a lot. Their revenue is down 34 % in the last 10 years. And their net income, holy moly, is down 88%. So is, oh, there we go. Is Apple the next IBM, strictly speaking on this? I mean, no, I hope not. I hope not for all of our sake who are investing in the market. You know what IBM's market cap is, right? 180? It's 135 billion. But here's the thing. Apple becomes the next IBM and it goes to underperform. It comes to the next GE. Something else will take its place.

11:41For Apple to become the next IBM, OpenAI will become the next Apple or something like that. There was a story last week about like the Chinese government getting rid of the phones and maybe cracking down and doing like a whole consumer thing. Who knows? So China accounts for roughly 40 to 50 million iPhone units, which is not nothing. I feel like you've been secretly bearish in your paper account with Apple for like the last month or two. Is that fair? No. I feel like you've been talking about Apple sales and iPhone sales a lot lately. Apple's revenue is down three consecutive quarters year over year.

12:12I think that's right, which is, now listen, there's a new iPhone. There's an upgrade cycle. Matter of fact, they had their meeting today. I didn't see it because we're here. but what they're trying to do is raise their prices by$100 on the most expensive iPhones. So the journal had an article, Apple test limits for most expensive iPhones. And this is an important piece of information, at least I think it is, in terms of where Apple is in their life cycle. For the first time since 2017, the average selling price of iPhones in the U.S. declined to$948. That's meaningful. For the first time since 2017, the average price declined.

12:46iPhone sales fell 2.4 % in the last quarter. Again, that's probably because they haven't had an upgrade cycle. But their CFO said the smartphone market has been in a decline for the last couple of quarters in the United States. So we'll say, obviously, a very important company to the market. One of the things that they were talking about releasing at their event today, which I think is finally good news, every time Apple comes up with something new, it's either you need to, like, get new cords or new this or new that. It's all Apple all the time. One major change is in store for both the iPhone 15 base and Pro models will be the transition to a new connector point with the USB-C standard.

13:20Thank God Apple is moving away from their proprietary Lightning connector. Good? Do you really care about that? Yeah, of course we care about that. It's annoying. It's going to be something else in five years. I work out at a Planet Fitness, not to brag. Wait, what? Oh, you work out. The treadmills they have have those old connectors that are this big that were useful for, what, 18 months? it's always going to be something else. 10 years, what's Apple's annual average return? 21. 28 % with dividends. Wow. So if we're going out 10 years, you have to say at the very least, Apple's should, should underperform like the NASDAQ 100.

13:57Is that fair? Could. 28%, almost 30 % per year for a decade. Yeah. Yeah. It's a lot. I would rather take that stance than I'm bearish on one of the best companies we've ever seen, ever. In America, half of every dollar spent on brand medicines goes to entities who don't make them. While middlemen like PBMs and 340B hospitals drive up costs, Biopharma is investing$500 billion in new infrastructure and manufacturing here at home and helping patients buy medicines directly at lower prices. Tell Washington to end middlemen markups and put American patients first. Visit phrma.org slash middlemen.

15:05Why shop anywhere else? Burlington Deals Brands, wow. All right, sticking with the big companies. So this is from man.com. How do you think they got that website? This is an investment. Is it two Ns? No, it's one N. It's an investment company. And they literally have man.com. I guess maybe they have a lot of money. They talked about the biggest companies in the stock market. And typically, the way things work with a recession, as far as my research goes, the leaders going into a recession are rarely the leaders coming out of it. And it kind of worked like that this time. We went from low rates, low inflation, pandemic hit, rates go up, inflation goes up.

15:39Last year, value stocks did much better. Growth stocks got crushed. Like, okay, this is following the historical script. Now it's already reversed. And their whole point is that, like, this is kind of what's been happening for over a decade. So they have this chart here that shows the top 100 companies in the S &P 500 at the end of each decade of the 1960s. And they show the sum of the weights and then how it performed, where those weights go the next decade. You can see every other decade since the 60s, it's dropped. Wow, that's a great chart. But in 2010s, it stayed exactly the same. Right. So is big tech the next big tech?

16:12Like, is big tech the next thing? Well, look at the other one. So this also shows a survival rate of the leaders of 100 stocks the next decade. 99 % of the companies that started in the top 100 were still there by the end of the decade. Wow. So usually it is like the competitive destruction, all this stuff. That's not happening anymore. I think this is one of the biggest debates inside the market is, are these tech giants irreplaceable? Have their moats grown too large, et cetera, et cetera? They've basically broken the stock market in terms of historical patterns. The tech stocks so far have broken the mold.

16:47So people love to show the top 10 companies from each year. And there used to be like a decent amount of turnover. We remember what happened with IBM, General Electric, Exxon, et cetera. and if Apple, Amazon, Google, Microsoft are still here for the next 10 years, are we going to be having the same discussion? It would be shocking. It would be more shocking if we were, but it wouldn't surprise me either. Yeah, this is like the tricky thing about history. I think sometimes if you study history, you over-index for what used to happen. There's no precedent for the big stocks having these margins and just keeping to perform year after year after year.

17:29And if you've been in that camp of any day now, you've been in a world of pain. The Templeton thing is the four most dangerous words are, this time it's different. Templeton himself said in an interview one time, 20 % of the time it actually is different. Let me quote myself quoting John Templeton. The 12 most dangerous words in investing are it's different this time. Or the 12 most dangerous words, I'm sorry. I butchered my own quote. It happens. All right. So you and Josh had Nick Colas on the Compound and Friends last week, who's just a whip smart guy. There we go. He's an old automotive industry analyst, and I don't have nearly the experience as an automotive industry analyst with him, but I do live in Michigan.

18:07So I think that kind of counts. And he basically said Tesla and Toyota are the ones that are going to survive. Wait, time out, time out. He said the market is saying. Yes. It's important. He said the market is saying that only Tesla and Toyota will be around in 20 years. So these are the PE ratios for Ford, GM, and Tesla. And obviously, there's a little bit of it. General Motors is trading for a sub-five PE ratio. And he's basically saying, listen, the evolution to self-driving and EVs, it's going to be Tesla and Toyota. I don't know why the Toyota thing was. I guess I could see that. But my whole thinking on this from purely living in Michigan my whole life is Ford and GM are two of the most important companies in the Midwest by far as far as, you know, politically.

18:49And I just don't see how any government official would ever let them be swallowed up or go under. And so I would take the under on that. I think these companies, whatever, call them zombie companies going forward if they are, I don't see how in a political battleground state like Michigan, anyone would ever let these companies go under. So Morgan Stanley just gave Tesla a huge upgrade today. I think they're the highest price target at$400 a share. Stock was up 10 % today. Here's a contraindicator, though, because we talked to a car dealership guy last week, and you talked to Nick Colas, and they both said glowing things about Tesla being the winner going forward.

19:23They're like actually them lowering the prices is a good thing. Duncan said he was going to go buy Tesla right after he heard those two things. Duncan, did you buy it? Today. At the close? So if you want like the contraindicator to Tesla, Duncan bought it. So I think there's like a lot of nuance in what Nicola said, because he said like the market is saying this. And then Josh said, do you think the market's right? He said, I think the market is more right than wrong. Yeah, I tend to agree with you. All right, Ben, where are we going next? Okay, anybody, has anybody heard of the zero days to expiration for the options thing?

20:05Show of hands, you got one or two? Yeah, all right, there we go, there we go. All right. So there's a chart from Bank of America showing the breakdown of options to expiration. And in 2016, zero days was 5 % of all the total volume. It's effectively zero. And it's gotten up to 43%. Now, I'm sure there are things that I don't understand about this. Like who's doing it? Is it hedging? Is it short-term traders? Is it market makers? I have no idea who the buyers and sellers are for this. But I saw somebody, the Daily Chart book had this in their notes, that it says CBOE concludes, so there's like talk, this has to be impacting market structure, right?

20:47There just has to be. Actually, no, there doesn't have to be. CBOE concludes that there is basically no market impacts noted from zero days to expiration, option trading, S &P 500 index, intraday, volatility, and price patterns. So does that just mean that people are using these and just rolling them over and doing again the next day like to keep their same exposure? I honestly don't know but it seems to not be impacting the market. But I was thinking about this. Remember Gamma Squeezes? That was like a huge topic in the meme stock mania which I guess is more or less behind us. How'd that work out for AMC?

21:18Not great. I was looking at that the other day. It's down 99 % from the highs. We got a weird GameStop email. I don't remember. Over the weekend it was the worst email that we've ever gotten. He actually said he wanted us to talk more about options. No, and he wanted more GameStop. Like, why don't you guys cover GameStop? Okay, so, but the takeaway here from the option thing is simply that we don't understand this market enough, or I don't... It's just to say that, like, oh, this has... People are saying that this is going to impact the market. It's going to do whatever impact volatility. It just hasn't.

21:48Okay. It hasn't. Oh. Is this yours? That's you. All right, skip it. See how we do that? Skip it. All right, this is interesting. From Lisa Bromowitz. I think this is from Apollo, 31 % of all US government debt outstanding or$7.6 trillion will mature over the next year. I don't know if you've noticed, but interest rates are significantly higher than they were 18 months ago. How does this not impact certain things? This was my whole take for the reason I didn't think rates could go as high as they have. I would have assumed it would have been a political issue. Obviously, inflation trumps the worry about the deficit or spending.