Magnificent 7 now the troubling 3, underscores market weakness

0:10Michael Kramer:Michael Kramer from Mott Capital Management. Welcome back to Investing Experts. Always great to talk to you on Seeking Alpha. Thanks for stopping by and coming back on. Thanks for having me. I always enjoy coming on with you. I think it's been a couple of months now. It's been a couple of months. And as this year unfolds, we're seeing that a couple of months means a lot in the world, in the markets, in our lives. So maybe catch us up. How would you articulate for listeners what the past couple of months have meant for you and how you're thinking about things in the present moment? July 1st, a brand new month, summer, almost July 4th.

0:48It's a new month and it's the first day of the second half of the year. And the first half of the year felt like two years. So, you know, the first half, I mean, the first half of the first half, I mean, it was like everything that I thought would happen at some point happened, but in warp speed. You know, obviously, the recovery in the market has been equally as surprising, I think, for a lot of people, just because we haven't really had any resolution to any of it. And yet we're back to where we were before it all started, and in some cases, a little bit more. But amazingly, I mean, the theme that took us higher at the end of last year and for most of last year has actually reasserted itself.

1:34And whether or not this is like a second attempt at it or the final go, I'm not really sure yet. But that is the, you know, NVIDIA trade sort of taking over again and, you know, really pushing the market to where it is. And again, I tend to think that, you know, where NVIDIA goes, you know, the S &P will follow because that's just what it seems to have been the last two years now.

2:02Michael Kramer:So what would you say about NVIDIA? What would you say about the Magnificent Seven? Some discussion on this podcast about the stocks in that designation, the seven stocks, whether they all deserve to be there. What else is happening in the tech sector? Are they taking up all the air and all the capital for that matter? What are your thoughts about that side of the market? Yeah, I wouldn't really, I don't really think of it anymore as the Magnificent Seven. I think that that's sort of faded away. I own Apple for my own accounts, and that certainly doesn't seem to fall into the Magnificent 7 anymore.

2:37It hasn't really done much of anything since, let's say, April. I mean, certainly Tesla is on again, off again, but I really wouldn't put it in there. I really think of it more as the troubling three, which is where the three-headed horsemen of Nvidia, Microsoft and Meta, I think are really the drivers here. And I own Microsoft. And I think Amazon and Alphabet are two stocks that I also own, have also kind of fallen out of that troubling three group. And I call it or you want to call it terrible threes or whatever, terrible twos, you know, as an investor in them is sort of like you look at it and it's like, well, I own Microsoft, what am I supposed to do with this thing?

3:21Because, you know, it's a$500 a share roughly. And I don't really know if it deserves to be there. And you're kind of back to this, you know, three stocks now instead of seven, three stocks sort of driving this equity market higher. And the theme that comes with it of AI, it really sort of underscores, I think, the weaknesses in the marketplace that if you don't have these three or four stocks leading the market higher, it looks very different. And you can really start seeing it when you look at correlations, when you look at the number of stocks that make up the top 10 weightings in the S &P 500 are at levels that we haven't seen in 40 or 50 years in terms of the concentration.

4:11Obviously, they're very key to the growth story of earnings growth and the margin expansion that everyone's looking for. But at the same time, I use multiple chat agents or whatever they're called these days, chat GTP, Gemini, I've used perplexity and I paid, I pay for all of them. I, you know, I pay for the highest tier. I don't use perplexity anymore, but for chat GTP, I have the four and a half model. So I'm paying like 200 bucks a month and Gemini I'm paying$130 a month right now on their three-month promo, but I can't really tell the difference between the two. You know, Chachi TP is a little bit better than Gemini and Gemini is okay, but at some point, is anyone going to really be able to tell the difference?

5:01And if they become sort of a commoditized product, does that create this race to zero? And do we start actually seeing the cost for these things actually coming down? So that's one of the biggest concerns I have about this group is that they're spending a lot of money on AI. And, you know, I don't doubt that AI will be a very powerful force in the future. But I also know that the market tends to overpay for things in the short term. And then in the long term, those that you make no return after a while. I lived that firsthand with Cisco in 2000. And, you know, Cisco went crazy. And the funny thing about Cisco is that it actually did grow into the business that everyone thought it was going to grow into in 1999.

5:56And the same thing with Qualcomm. You know, but the prices of the stocks in Cisco's case never got back to that high. And in Qualcomm's case, it took like 20 years or 25 years for that to happen. And so those are really good examples of, you know, these things can grow the way everyone expects them to grow, but that doesn't mean they'll be ever worth what they are today. And so I kind of look at a lot of these things with some skepticism because they're spending a lot. I'm not really sure if these are going to be products that are actually going to be able to generate the type of revenue the market's pricing in, or if they really just become commoditized products.

6:39And at some point, the value actually starts to diminish. And now they have these big expenses that they're not really going to be able to recapture. And with NVIDIA, I think it's just a matter of time before the competition is such that those are also going to start heading towards lower price points where the differences aren't enough. And I think you're already starting to see that where people are going to say, I'm not going to spend$35 ,000 for a GPU from NVIDIA or for their Blackwell system. And because I can get a TP, I can rent a TPU from Google for a lot less and you really don't get much of a performance difference.

7:22And so that's what I would be sort of wary about right now. I worry about them because they are spending so much right now and that I worry that they're not going to be able to generate the type of profit and revenue that the market is pricing into them. I mean, it goes kind of back to the idea, it goes back to sort of what I was looking at when I bought Netflix. I don't own it anymore. But in 2016, I had bought Netflix with the idea of it being a platform and the idea of it being the person who owns all the content is really what the differentiator is. And so if you looked at, you know, everyone was talking about the streaming wars and how are all these different companies going to be able to come out on top.

8:09And it was very clear to me that whoever has the best content is going to win. And we're all going to have multiple streaming platforms in our house and what we consume with. But, you know, just like we all watched different TV channels, you know, you watch channel two, channel four, channel seven, or whatever it is, same concept. And so basically right now, the way I'm thinking about it is in a similar way. Whoever has the best AI agents, those are basically going to be the winner.

8:40Michael Kramer:Who would you say that is? Who looks, is it, is it Microsoft or you don't know? Right now, the one that I use the most and that I think is the best is ChatGTP. And I'm comparing that against some of the other ones I've tried it with. Now, I know that Microsoft has a relationship. I know Copilot is ChatGTP. So basically, I know Apple is thinking about signing with ChatGTP. They seem to be the ones right now in my experience that provides me the most insight and more importantly, seems to get the information correct the most, right? Because that's another problem is that a lot of these agents get a lot of data wrong.

9:17And if you don't know what you're looking for in the answer, you can get very confused very easily. And the best part is when you get confused and you've also managed to confuse the AI agent as well, and now you're totally lost because I've done that too. Right now, it seems to me like they would be the winner. If they were a public company, I would probably want to own them. But I already sort of do indirectly through Microsoft and possibly Apple if they decide to go with them.

9:47Michael Kramer:Yeah, ChatGPT seems to have really cornered the market thus far. So you don't own NVIDIA right now, did you? Never have. You haven't? You haven't at all? No. Do you regret that at all or you feel like it just never spoke to you valuation-wise? You know, it's funny because in October of 2022, when the market was doing its thing, I bought Amazon, right? And because I had watched Amazon for years, I think I had written for years about how it was dead money. And it really was from 2020 through 2022. It was basically dead money. It did nothing. And even now, it's kind of back to where it was. But, you know, if you bought it in October of 22, like I did, because the valuations made sense, it worked out.

10:32But I actually looked at both. I was looking at both NVIDIA and Amazon at the time, and I decided not to buy NVIDIA because of all the volatility that comes with that space. and Amazon from a valuation perspective and the opportunities with cloud really what would appeal to me. It's just like when I bought Microsoft in 2019 in that December, 2018, January, 2019 chaos that went on. I bought Microsoft because I thought it was a pure play on cloud where Amazon came with all the garbage that AWS isn't, the low cost, the low margin business of online retail. well and so but when amazon came down in 2022 i think it was around 100 bucks when i got it it made more sense from a valuation standpoint and i looked at nvidia at the time and obviously there was no prospects for ai at that point it was sort of just the cloud and i passed on it and i chose to go with amazon over nvidia because i thought amazon would be the better the better play from that standpoint.

11:40So, I mean, I missed it, but at the same time, I don't know if I would have held it all the way to where it is today either, because the valuations make no sense. I know there's a lot of hype in it. The growth rate has obviously been incredible, but the law of large numbers typically dictates and suggests that these growth rates slow. And when you're paying really high multiples and valuations the returns tend to not be so great. And so I don't really regret it. I kind of always learned that usually the first movers in these changes aren't the ones that necessarily come out on top. Think about Yahoo or AOL in the late 90s, you know, they're not even around anymore.

12:27And so, you know, but what came from it later was Meta and Alphabet and then Amazon second, you know, rebirth, but that's only because they changed their model. So my feeling is, is that when the dust settles with this, we could very well be looking at a company that eclipses NVIDIA in that race. And so I'm kind of just keeping my eyes open right now for the next opportunity and how AI will evolve into our daily lives. And I personally have been planting seeds in my head and in my portfolio with how AI is going to be used in healthcare and drug discovery. And that to me seems much more promising and a much bigger deal than, you know, how an AI chatbot is going to be able to answer a phone call or replace a programmer.

13:24I think, you know, AI has a lot more promise in things like, you know, MRI imaging, you know, like I bought alumina for myself in my portfolio in June of 2024, because of AI, right? I mean, if you think about AI, imagine being able to get a blood test and having this, you know, machine be able to basically, from a detection of blood or a detection of an image, be able to determine, you know, very quickly whether or not you have a risk of getting cancer because it's able to process and go through this information so quickly. I mean, that's obviously years away, but that's the way that I'm already thinking about it.

14:07Michael Kramer:Late last year, Kirk Spano was on talking about how Pfizer's his favorite AI stock. And I think that left a lot of investors curious. But to your point, it seems more and more evident as the days and months pass on. Yeah. I mean, especially when you start thinking about, you know, drug discovery, you know we might be able to do things in in months that used to take years and so you know i'm trying to think about things like in those terms like i bought alumina from you know like i said but i've also been looking at things like ge healthcare it's not really an exciting company it's not really exciting that it used to be sort of the crown jewel of ge but that's kind of you know broken away and now everyone cares about this ge verona which is i think that old alstom unit that they couldn't get rid of.

14:57And I think that, you know, GE Healthcare, I mean, you go to get an MRI, it's like you're going back 40 years in technology in some ways. I know the machines have advanced, but imagine what they could do in the future.

15:11Michael Kramer:Yeah, I just hope nobody's doing at-home surgeries, consulting, chat, UBT for instruction. No, I mean, and that's the funny thing. I bought Intuitive Surgical years ago, not years ago, but also, in 2022, the same concept of, you know, robotics and surgeries. And I, at the time I was getting a back surgery, I realized there must, this is something that obviously is going to be super important. And obviously intuitive surgical has been ahead of their time, but I mean, imagine what a company like that will be able to do with AI someday down the road. I mean, you know, these are things that I think will matter much more.

15:50And those are the types of things I'm trying to be patient for and wait to see them sort of develop.

15:57Michael Kramer:So speaking of patience, you mentioned Tesla as part of the Magnificent Seven conversation. We saw a pretty big drop for them today, Tuesday, July 1st. Anything to share about Tesla? Anything you would share with investors there? So I was really early. I used to own Tesla and I had bought it in the summer of 2014. and I painfully held it until like December of 21. So I say painfully, obviously I made a lot of money over the seven years, but it was not a fun experience to own it. Many 50 % declines during that time. A lot of nervousness, even when it was going parabolic to the upside. I think the thing that a lot of people always gotten wrong about Tesla is that everyone thought that EV was going to be their competitors when really the competitors were already on the road.

16:57And that was traditional ICE engines because Tesla was sort of a luxury brand. They weren't competing with a Chevy Bolt or whatever it was called that's no longer around. They were competing with a Mercedes S-Class. And I think that people just missed that point that whole time. But I sold it in 22 because I realized that the handwriting was on the wall, like it could only grow at a 50 % kegger, like they promised for so many years until they were actually selling more cars than were being produced in the whole world. And so I realized that they had to cut that growth rate at some point in time.

17:35And once they did, that was going to be sort of the end of the growth story. And I also realized that Teslas became a fad. It was basically another COVID fad, right? That everyone ran out and got Teslas because they were cool. Now we're sort of on the other side of that. It's been around for a while. The cars really haven't changed very much. I used to think that it wasn't just a car company. It was a battery storage company and all this other stuff. And all that stuff kind of came and went and nothing ever happened with it. I was an investor in it long enough to remember when we were supposed to have robo taxis in 2020 and that never happened.

18:17Here we are 2025. We're still trying to get them. I mean, full self-driving was supposed to be around many years ago already. We're still really waiting for that. So I found that it was always a company that over-promised, under-delivered. And I think for the most part, the auto industry has kind of moved on in some degree.

18:37Michael Kramer:And what would you say about the markets in general? We've hit some record highs. We've gone back after the record highs. What would you say about the S &P, NASDAQ, broadly speaking, right now? Like we were talking about in the beginning, I think they're more so a reflection of the troubling three, because I think without NVIDIA going back to an all-time high, I don't think the S &P is at an all-time high. I think they're also a function of really poor liquidity in the marketplace, meaning that there's just not a lot of buyers and sellers in the market. Well, I should really say there aren't a lot of sellers in the market.

19:18And so what you're seeing is a lot of the gains, the big gains we've had have really kind of come on those overnight trading sessions. And they're not really coming during the day. And it's not to say that that's not normal because it does happen quite a bit. But if you also look at volume levels, they've been rather depressed. So I think there's two parts going on right here. I think you have a lot of speculation, again, in NVIDIA and that class of stocks. And I think there's also just very bad liquidity conditions in the market that are over sort of overstating the moves we're seeing. because when you look at a lot of other factors, like forget about valuations from a perspective of timing, you can't use them from that perspective.

20:05But if you use valuations as a measure of complacency, the market today is more expensive than it was in February because earnings have come down and the price has gone beyond where it was. And so in my view, the market is actually more complacent right now than where it was three or four months ago. And when you look at measures of volatility, those have also come down really sharply as well, despite the fact that next week, we could be back to a mini liberation type of time. I say that because, and I always try to, when I read the news, I don't read it. I don't read US news. I read foreign news because I wanna know what they're saying about the US.

20:53And when you read those periodicals, like I read Nikkei Asia, I read Digitimes, I read the Financial Times, I read all this stuff outside of the US. And if you actually read those, they're like, there is no Japan trade deal coming because they want tariffs completely removed. If you read about the EU, it doesn't really sound like there's going to be an EU trade deal anytime soon. It doesn't sound to me like there's going to, you know, Taiwan certainly doesn't sound like there's a trade deal brewing. And then on top of it, if you look at the currencies, the Taiwan dollar has strengthened materially, like huge moves in the Taiwan dollar in a very short period of time.

21:36The Korean won is strengthened materially. The British pound is strengthened materially. They're ever, you know, the yen, the euro, they're all strengthening materially. it's like the currency market is preparing for more tariff pain while the equity market is sort of living in the usual bubble like fantasy land. And again, you know, you listen to, you know, the guy, you listen to Bess and you listen to Hassett, you listen to Lutnick, trade deals are coming imminently every week, but yet we haven't really had one. And so, and when you read again, the other side of the equation, there are no trade deals coming because they want the tariffs completely removed.

22:20I sit here and you watch the news cycle. Oh, President Trump will say, oh, we're going to be nice to China in an interview. And the next thing you know, the S &P 500 gaps up 1 % on 30 ,000 contracts of S &P 500 futures volumes at six o 'clock at night. And it's like, you got to be joking me. And then the news the next day, it's like everyone's so happy because president Trump in the meantime, he was saying it sarcastically. He didn't really mean what he was saying in a good sense. He was saying like, yeah, we're going to be nice to China, you know, as if to say like, what do you want to say? The whole thing is just, I need a vacation.

22:57Michael Kramer:It's hard to follow along. Yeah, yeah, yeah. It's hard to follow along a lot of the days. Hard to keep your sanity for sure. A lot, a lot going on allowed to, a lot to parse through. Which, by the way, for those wanting to get more insight from Michael, Michael runs an investing group called Reading the Markets on Seeking Alpha. And for those who don't know, should, that we're having a site-wide sale 20 % off, including Michael's investing group. So I would encourage listeners to take advantage of that. As I mentioned at the top, the free articles that you write on Seeking Alpha is under Mott Capital Management, Mott with two Ts.

23:39Michael Kramer:You recently wrote about the bond market. You just talked about currencies a little bit. I'm curious, I know you also cover options on reading the markets. I'm curious, what would you say is the most important thing you think for investors to keep in mind right now as they try and capture alpha as best they can? It's really complicated, I think, because when you look at everything, it's so intertwined. But I think right now that the most important thing is really the health of the U.S. economy. Because if the economy really begins to slip here and you really start seeing the unemployment rate rise, I think there's a real risk that that the yield curve, that bond yields will fall dramatically.

24:31And if bond yields fall dramatically, that's going to lead to further dollar depreciation. And that's going to potentially really weigh on US equities. Because if you look at some of the interest rate differentials, specifically the US 10-year and the Japanese 10-year, it's like sitting on a ledge. And And it's tested it two or three times already. And it could continue to kind of like just hang around. The data can just stay in a place where we don't really get a breakdown in rates. But if for some reason you start seeing unemployment rates are creeping up 4.3, 4.4, 4.5 on its and the market gets a sense that it could be heading to like a 5%.

25:17I think that that's going to really lead to some serious yield curve steepening. that's going to lead to these interest rate differentials really moving lower. And I think that's going to lead to a much more significant unwind of dollar positioning. That is a big concern of mine, especially when it comes to tech. Once interest rate differentials start to break down, I think you can see a really meaningful depreciation of the U.S. dollar. If the U.S. dollar begins to go, I think more specifically, you could really start seeing carry trades, the yen carry trade really begin to unwind. And that yen carry trade, I think, is very much tied to technology type names, NVIDIA, Microsoft, XLK.

26:01If you overlay the yen, dollar yen to any of those stocks, the similarities in the charts are really startling. And so, you know, a lot of times when I'm writing these stories that I provide for the premium side of the website, people will say, oh, he's just being bearish. What I'm really doing, right, is providing an opportunity for people to understand what the risk in the marketplace is, which is something that people really don't write about. The thing that is, obviously, is that they can either happen or it may not happen. But the fact is, again, we are at the same point in time where that is a real risk.

26:50I don't know how many times it happens before it actually before that risk becomes a reality. And that's why I think the unemployment rate right now is probably the key to that, because I think that's the one thing that the market is banking on, that as long as the unemployment rate stays low, the U.S. consumer can continue to spend. But if the unemployment rate starts creeping up, that spending is going to start slowing significantly. And that's going to really have a major impact on the health of the economy.

27:21Michael Kramer:So that's the data you're most paying attention to in these coming months. Well, yeah, this week. And really, every week is the continuing claims number. Right. I mean, that leads, that will lead the unemployment rate higher. So if that continuing claims number goes 2 million, 2.2 million, you know, continues to go up, that's going to steepen the yield curve. And that's going to also be your signal that the unemployment rate is going to start to rise and the market's going to respond to that, I would think. Exactly. There's no certainty here. It's just speculation. Educated, educated speculation.