Nick and Jessica’s 3 Big Lessons From 2025, Sam Altman Orders a Code Red at OpenAI, Adam Parker on Broken Compounders, the Case for Adobe

20:45Nick Colas:Yeah, you wouldn't do it on a company, right? If I said, hey, I got a company trading at 10 times earnings, your first question should be, okay, what's net margins? Right, right.

20:54Jessica Rabe:Right. Is it an oil company or a software company? I need to know.

20:59Nick Colas:Yeah. It's just a number. The next chart kind of feeds on this discussion, so let's just flip to that. This shows S &P 500 estimated earnings from Wall Street analysts, kind of the aggregate of all their estimates bubbled up to the S &P, and how they've progressed for 2025 estimates and 2026 estimates over the last year. And what you see is something extremely unusual, because I can tell you, I've been doing this since, I've been an analyst literally since 1991. And so I can tell you the game is usually you start with a high number for the year, and then you kind of whittle it down as the company kind of guides you down so they can beat every quarter.

21:36Nick Colas:And so by the end of the year, your estimate is much lower than it was at the beginning of the year. And that's just the way the game is played. What's really unusual about what's happened this year is that for the first half of the year, estimates for 25 and 26 went down. But now since about May to July, they've started to rise. Because companies have beat by so much every single quarter that the estimates are going up. So it's not just that you have high margins. It's also that you have earnings revisions to the upside. It's like every quarter has been way above average in terms of beat rates and beat amounts.

22:09Nick Colas:And finally, the street is saying, okay, screw it. I've got to start raising my numbers. I don't usually do this, but I have to. Otherwise, I look stupid. Because my company just beat by 10 % every quarter for three quarters. And that's what's happening this year. And it's extremely unusual. Literally, nine years out of 10, whatever the number is for the S &P at the start of the year, take 5%. And that's what the actual number is at the end of the year. You never get this kind of slow V-shape that we're just seeing now.

22:34Jessica Rabe:What do you think that's about? Is that like the practical effect of AI already manifesting itself at Fortune 500 companies? Or is it too soon for that to be the driver of these enormous speeds?

22:48Nick Colas:You know, I looked at it versus like a bisector. Because my first thought was, oh, it's just tech, right? And it's not just tech. Six or seven out of the 11 S &P sectors are showing higher average margins, higher margins now than their five-year averages. So it's across a bunch of companies, a bunch of sectors. No, I think what it is is that companies saw the shock in Q1 and said, we've got to get our act together. We've got to really lean up and get smart about how we're doing business because we have no idea what's coming down the road. And so they didn't go so far as to cut headcount because it was so painful to get that headcount over the last three years.

23:20Nick Colas:But they did start focusing a lot more on efficiency because they thought, okay, we don't know what's going to happen with the labor market, with trade policy, with whatever else DC might do. So let's get smart and just focus on profitability. And it has been very consistent all through the year. And it really started with Q1. Q4 last year was not an awesome quarter. Q1 started off with a lot of strong beats and it's continued all the way through the year. So I think it's a lot of corporate focus on a very uncertain environment.

23:46Jessica Rabe:It sounds like what you guys are saying is that when negative things happen, that can often serve as a positive catalyst in the investment markets because there's a response to that negative thing. And in this case, the response was companies just waking up and becoming more alert. And that ended up having a salutary effect on their profitability later in the year.

24:13Nick Colas:Yeah, that feels right. You know, everything in moderation. You want enough concern to create good decisions, not so much that you create a recession. Let me just finish up with one last chart because I think we haven't touched on rates, and that's just a good quick thing to mention. So this chart shows real 10-year Treasury yields. And by real, we mean when you take out the amount of yield in nominal rates that's caused by inflation expectations, and you're just left with how much of a risk premium Treasuries give you on top of just a zero return. And so what it shows is how much stress and concern there is in the treasury market, whether it be term premium or just risk.

24:50Nick Colas:What are you getting in terms of real return? And what's interesting is we've had these conversations now for most of the year about how, quote, safe treasuries are and whether international investors think treasuries are safe. And this is the place where you'd expect to see it if the market was slowly saying, you know what, treasuries aren't quite as safe as we thought they were because of deficits or because of uncertain trade policy or uncertain policy generally. And yet you don't see it in this chart. Real interest rates averaged 2%, two percentage points from 2003 to 2007. They're at 2 % now.

25:21Nick Colas:We had a long period from 2010 to 2023 of Fed bond buying and negative real rates, and we all know that period of history. but real rates now are no higher than 2003 to 2007, even though debt to GDP now is running about 125%. It was running 70 % back in 2003 to 2007. So debt to GDP has doubled, and yet real rates are absolutely the same. So my takeaway from this is the market is not saying that treasuries have any problem whatsoever. And this whole conversation about the risk-free nature of the dollar or treasuries, it may happen at some point in the future. It's just not happening now at all.

25:59Jessica Rabe:On a real basis, if that were an actual concern that people were expressing in terms of buying and selling, you would see that premium significantly higher than 2 % above the inflation rate for rates. You would see – I don't know. I'm looking at a spike. I guess that's during the financial crisis. It got up to 3%. Yep. So you would see bonds printing 3 % above the rate of inflation or higher.

26:29Nick Colas:basically it's not there let's say inflation is two percent structurally which it kind of is that's what it runs um you would expect to see 10-year yields at five percent or higher which is why the market gets really wonky at five percent by the way because it imputes a three percent real um by the way that spike in the in the financial crisis the three is exactly why the fed started buying bonds that's why qe started because of that spike in november of 20 2008 so we just don't we just

26:53Jessica Rabe:don't have we just don't have that today doesn't mean it can't arrive but that anyone who's got a narrative where there's like this massive concern in the treasury market, this is a great chart for them. Show it to me. Yeah. Because it looks like we're selling in the same place we were in the 2003 to 2007 period. Right.

27:14Nick Colas:And that was lower levels of debt and pre-QE. So the whole idea the Fed would buy massive amounts of long-term bonds to manage the real rate wasn't even in the conversation in 2003 to 2007. It had never happened before.

27:27Jessica Rabe:Jessica, lesson number three, what do you got for us? Sure, I think Nick's going to kick that off first and then go cue me in.

27:35Nick Colas:Yeah, so this is sort of like the old versus new. So our final presentation slide is coming up here. And it shows, this is kind of the theme we're working on now for clients quite heavily. And the theme is corporate strategy, what's old is new again. And I'll give you my side and then Jessica's got the more modern interpretation. So when I was in business school at Chicago, the standard textbook for understanding corporate strategy had just come out was Alfred Chandler's Scale and Scope, published in 1990 and based on a lot of corporate histories from 1880 to 1930. And it gave away three basic lessons.

28:11Nick Colas:And that is economies of scale drive cost and competitive advantage. Economies of scope drive long-term growth because you use your competitive advantage for more things. And organizational structure and management ability determines success. That's it. That was the message. That is what every big company studied deeply. So it is Ford in the 1920s. It's GM and Alfred Sloan in the 1950s. It's DuPont for the entire 20th century. It's GE under Jack Welch. Those were the lessons. And that's what every corporate manager lived and breathed by. And then Jessica will describe what happened next. Sure.

28:45Then you have Clayton Christensen who upended Chandler with an entirely new paradigm, one that literally created much of the world that we live in today. So his paradigm and a few examples are that the most important thing to remember here is that successful disruptive business models almost always start at the low end of a market. So Amazon's a classic example here, starting out by selling books online, a low margin product, but with an edge over brick and mortar, thanks to a wider selection and low cost delivery. Incumbents always ignore the upstarts because the new company's business model specifically targets a less profitable niche of the overall market.

29:27And instead of competing, the incumbent seeds that part of the market to the new competition to focus on higher market segments. But over time, the disruptors move up the value chain and slowly take share in more profitable parts of the market by using the same competitive advantage they used to get their edge at the low end. So Amazon, again, for example, went from selling books to climbing the value chain with more and more products. And then eventually the upstarts become the incumbents and the process begins once again. So again, for example, Sears, their Sears robot catalog disrupts small local stores in the early 20th century by leveraging the nationwide rail system, the disruptive technology of that of the age.

30:12And fast forward by decades later and Amazon used the internet to disrupt Sears and other retailers. And I'll just give two more quick examples. You had first Japanese car companies like Honda and Toyota. They disrupted U.S. auto companies in the 70s and 80s. And they did this by first focusing on small cars, then using the same low-cost production process to build larger passenger cars and light trucks and eventually came out by launching their own luxury brands like Acura and Lexus. And then second, as much as smartphones have never really qualified as low-end offerings, over time, their utility disrupted personal computers because they're cheaper than PCs and have given users in developing economies access to basic internet-enabled computing at an affordable price.

31:06Jessica Rabe:So in this new paradigm, I guess we're still living in the innovators dilemma world, the Clayton Christensen world. As you're talking, I can think of so many examples just in my industry where you've got companies out there looking at businesses that nobody else wants to do. And they're figuring out ways to do that business using technology so that it's at least marginally profitable. and picking up a lot of clients who are sitting out there waiting to be taken because nobody else is talking to those clients. And that's how it always begins.

31:41Nick Colas:It does. But I think you raised this in your email, the one that you put out, I think, yesterday about Google and Alphabet.

31:48Jessica Rabe:Yeah.

31:48Nick Colas:And there was a riff on this theme all the way through what you wrote, which is Gen.AI is so capital intensive that we're going to be shifting back to somewhat of a Chandler model. and really it tells you that well-structured companies, well-managed companies will have a structural advantage again because the capital outlays are so large. One of the sort of emblematic parts of Christensen is it doesn't require a lot of capital necessarily to disrupt an industry because you're coming with a low-end offering. You don't need a lot of capital. Gen AI requires so much capital. And so you're going to see successful companies that have been successful over the last 20 years, like Alphabet, potentially win a large chunk of Gen AI in terms of the picks and shovels of it because they can dedicate the capital and they have the management expertise.

32:33Nick Colas:There'll be a disruptive element with the people who develop AI models or AI tools for different segments to use. Disruption will live there, but we're living in a hybrid world now. It's no longer just Christensen. It's shifting back probably 50-50 to Chandler.

32:47Jessica Rabe:So the companies of today who are going to be competing in this AI landscape are going to have to relearn some of the things that were first put into words back in 1990, talking about this period from the 1890s. Yes. And who were the companies? So Google presenting itself as a almost fully self-reliant vertical stack, utilizing everything from its own data centers, its own silicon, its own software, its own marketing, its own management over all of these things. that being advantageous relative to like an open AI. Exactly. I don't want to say reliant on the kindness of strangers, but certainly not in control of the manufacturing process around chips, for example.

33:36Jessica Rabe:Not in control of its own data centers. Like very much reliant on third parties, vendors, partnerships. And that seems to be important to investors now. It wasn't as recently as a month ago, but now it seems. So to you, that represents the shift from the Christensen model back to the Chandler model.

33:58Nick Colas:Yes. And actually, as I was reading your email, I was thinking about my years at General Motors by Alfred Sloan, which was one of the definitive works about how corporate structure creates competitive advantage. And GM under Sloan, it's the same Sloan as Sloan Kettering, by the way, Alfred Sloan. He created a very vertically integrated model where GM made 80 to 90 percent of everything that went into a car. And for a long time, it worked extremely well, but only because GM had profoundly strong financial management and the ability to measure the return on capital at every stage of that process.

34:30Nick Colas:Google has that kind of talent. A lot of startups do not.

34:34Jessica Rabe:So now you're going to go make me read this book, I guess. How long is scale and scope? 200 pages, I'm hoping? Triple it. Okay. Is it worth a read or is it worth a Gemini rundown of the most important points from the book? What do you think?

34:54Nick Colas:It is absolutely worth an AI. Tell AI that gave you a 2 ,000-word summary and you'll get it. But it is literally that it was the textbook in 1990 to teach corporate managers how to manage.

35:08Jessica Rabe:Well, Nick and Jessica, I just want to say thank you guys so much for being a part of the compound all year. and some of the episodes that we've done this year have just done incredible amounts of views and downloads and people, my audience, they just, they absolutely love you guys. So hopefully you'll keep coming back next year and we'll keep doing what did we learn and we'll keep learning together. Does that sound good to you guys? That's great. Definitely. Thank you for having us and thank you to all your viewers. Of course. Let's tell people where they can find your video channel. it's youtube.com slash at Nick Colas and Jessica Rabe.

35:48Jessica Rabe:And that's all spelled out. And of course, there's a link in the description as well. So if you love seeing Nick and Jessica on our channel, by all means, follow them over to their channel. And of course, visit datatrackresearch.com to become a daily subscriber to Nick and Jessica's Insights. Guys, Merry Christmas, Happy Hanukkah, Happy Thanksgiving. Happy New Year. And I know we'll be seeing you again in 2026.

36:36Jessica Rabe:All right, gangsters. We're back. It's Tuesday 5 o 'clock Eastern And you know what that means It's an all new edition of What are your thoughts Starring me and my co-host Mr. Michael Batnick Michael say hello What's up everybody, how we doing? The chat is lit Mike Like lit lit, everybody's here Do some quick shout outs PurpleHaze33 is here Great handle Jay Minter Josh was all rage pumping Mag 7 today on CNBC Rage pumping You were rage pumping Maga 7? I don't know what I was doing Alright KPS Fred What's up man? Akbar Greg Olson Who else? Cam Rackham Adam Tronix Giving us like a thumbs up thing Good to see you Ryan Edwards Alright All the gangsters are here We have a sponsor tonight Quick shout out to our sponsor The show is brought to you by Eaton Vance.

37:40Jessica Rabe:Michael, what should we say about Eaton Vance? That's right, Josh.

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39:00Michael Batnick:I feel that way too. You left me. You're in sunny Florida and I'm in freezing. and you know, the office heat is not working.

39:07Jessica Rabe:It's goddamn freezing in here.

39:09Michael Batnick:Wait, what happened? I don't know. The building is just not working.

39:14Jessica Rabe:We have a surprise. Ed Gardani. Oh, no. It's Adam Parker. Oh, my goodness. What are you doing here? Hey, guys. How are you? Adam, we're so happy to see you. You know, it's such a coincidence that you dropped by because we were about to discuss a piece of research that you put out last week that both of us had a pretty outsized reaction to. I was really into what you wrote. And I think the topic is so good and so evergreen. So it's so great that you're just randomly in the neighborhood. And now we can get it right from the horse's mouth. Guys, Adam Parker from Trivector Research is here. Can you tell everyone the difference between TriVector Research and TriVariate?

40:03Jessica Rabe:Because a lot of people know you as TriVariate Research, and I know this is a different effort of yours. Yeah, TriVariate, we sell our research and bespoke services and events to institutional investors, asset managers, hedge funds, allocators, corporations, law firms, boards, management, et cetera. TriVector is just for individual investors and financial advisors. We sell insights, what to do when you get new money, ETF analysis, and we hope a quirky, interesting newsletter that kind of piggybacks off all the stuff we do at Trivarian. Okay. Well, you came to the right place. We have plenty of financial advisors and individual investors here tonight.

40:46Jessica Rabe:So really glad you stopped by. Can you tell us about this piece that you did about broken compounders. Sure. And it's nothing to do with us at the compound. Where did that come from?

40:59Michael Batnick:You guys aren't broken.

41:01Jessica Rabe:Not yet. It's one of my favorite topics. Like, when do you buy the dip in some of the most popular stocks once they stumble? I think it's like, this is such an evergreen topic. And I've never really seen somebody go that deep on it specifically. like, all right, you've got all these stocks now that used to be compounders and some of them have had a really rough go of it. Like, how do you know if they're going to get back on the horse or not? And what are you looking at? So I loved what you did. And why don't you set the table for us and tell us why you tackled this and what it's all about? I mean, I tackled it because there were names that were like, I would say, beloved stocks, United Health for years, Massive Outperformer, Fiserv.

41:46I know guys who owned it for 20 years, like stocks that people just felt like were steady, compounding businesses. You look back, they're up 20 percent a year on average over five years. You hold them. Classic financial advisor like you'd want to own those kind of stocks and hold them. And then they have like these periods where they they get decimated. And I think mostly at least long only portfolio managers own United Health. And it really hurt them before they figured out that they should get rid of it earlier in the year. And then, like you say, some of them come back this summer and say, well, wait a minute, maybe I should buy it or should I?

42:20And so when we do things, we try to do it systematically. You and I could probably cherry pick names that we think are compounders. But when you come up with a set of rules, you kind of have to do it more systematically. So we decided it's got to be up 100 percent at least in five years. It's got to have done that with somewhat low volatility to kind of qualify as a compounder. and then it has to go down by a certain amount that it hurts. So we studied what we thought makes sense and it was 30 % in a month. It was something like –

42:49Jessica Rabe:So like a stock getting just murdered after earnings or something bad happens. Yeah, exactly. UnitedHealth is a perfect example from earlier this year where it just went in half in sort of a three-month period. And if you're an index to S &P guy, like you owned it. It was big and I know I probably – I think I know I complained about it on Compounded Friends because when I did it, I had about 10 of your listeners be like, Adam, do you need help with your healthcare plan? So I remember saying to myself, don't complain about UNH's pricing power over Trivaried on the next – Okay. Now you exclude biotech.

43:30Yeah. And that's because they're down 30 % a lot because something is unsafe or drugs ineffective or whatever. So I didn't want to get wrung out by those guys. And then, you know, when you do it, you do pick up names that maybe classic PMs wouldn't call compounders because you're starting to pick up something that might be up a ton. But it was up, you know, you might pick up a MSTR or something in there because it was up so much that, you know, it fits and maybe people wouldn't call it a compounder. So you have to kind of deal with when you do systematic things, what comes out of it. But we have a list and then we sort of studied, okay, once they're down 30 % in that first month, what happens after that?

44:14And I think that's what you –

44:16Jessica Rabe:Well, so let's – but let's explain to people the timeliness of this research that you've done because you note we – in the year 2025, we have seen the third most broken compounders after the financial crisis and COVID. Right. So it's like this is the right market to be looking at broken – all right. So tell us what's in this chart. Yeah. So this is just how many kind of stocks fit that bill of down 30 % in one month after being up 100 % or more with somewhat low volatility in the previous five years. So yeah, exactly the timing. I didn't – full disclosure, I didn't know it was going to show that.

44:59I was more just thinking like, man, this UNH, do I want to buy it at this FISERV? And, you know, and there's, you know, so I just started to study it. And then when that came up, I was like, huh, that is, that's a pretty big population. So the answer is we studied about 520 stocks that fit the bill over a 20 year period, which, you know, gives us enough to play with in terms of studying distributions of outcomes and, you know, returns and trying to slice and dice it to say, okay, maybe there are some attributes I want to at least avoid. Because one thing I've learned, I learned this when I was on the buy side is generally, and we show it in our work, this is not a good asset class.

45:35Once they're down 30 in a month, the basket of them on average is still bad. So there may be some things you could skew your odds a little. And I think Michael has some ideas of stocks in the broker-pounders he likes, but the asset class itself is an inferior asset class. Yeah.

45:53Michael Batnick:So before we get to like what happens next and what are some of the similar characteristics of these names, throw that chart up one more time. What's fascinating to me about this is look at the previous spikes that are comparable to, I guess, October. You had, of course, the GFC, no explanation necessary. And then you had the rate hiking cycle that looks like late 21. Yeah. And then you had like, I wouldn't say, well, I guess, what would you say? What would you say October was? Cause that was before Sam Altman or does this? Yeah. That was before Sam Altman. So is this just general AI disruption?

46:31Yeah.

46:31Jessica Rabe:I mean, I think Oracle's in there. That's an obvious one. Right. But Oracle fell 30 % a month, but that's through the end of October.

46:41Michael Batnick:So I don't know if Oracle did that through October, through November it did. I don't know

46:45Jessica Rabe:No, I think notably Oracle was one of the mega caps that literally fell 30 % a month. Yeah. I mean, the issue, I guess, is that we had so many stocks that were up 100 % or more in the previous six months. Fiserv is probably on the list. Fiserv is on the list. F5 is on the list. So Oracle is not on the list because Oracle was – Oracle is on the list. It is. It is on my - Hold on, Adam.

47:16Michael Batnick:Not to - Through the end of October, Oracle was only down 20%. So - Whatever, it doesn't matter. We look at it from October 16th to November 14th. And it's just, it isn't in a calendar month. It's in a rolling one month period. But the broader point is also that, of course, we understand what's causing this, but this normally happens in shitty market environments. This is not necessarily - That's a good point. November was rough, but like - Run up. It's a big run up followed by something shitty. And so, so, you know, if you think about 07, it was a 03 to 07 were monster years for the equities before the financial crisis.

47:53Kind of same thing with 2019. I mean, you had crazy moves in markets before the rate and then the COVID and all the PPP and stuff. So you had some big recoveries from what, March 20 till end of 21. So it's not that surprising. It's a combination of lots of stocks ripping. And then I think a little bit of fear working its way into the market. And the penalties for missing has been huge.

48:18Michael Batnick:Most of these companies, you break them down into different quartiles of quality. And not surprisingly, for the most part, these broken compounders are junky, expensive stocks that tend to be in and around technology and consumer discretionary. I'm guessing that is what you thought you would find? Yeah, I mean, there's more compounders in those areas. So there's going to be more broken ones. I would say I'm looking eyeballing and I don't have my piece of research in front of me, but it looks to me like 255 of the 520 were top half quality. So yeah, it's a little bit more junk than high quality, but maybe a little less than I would have thought.

48:54I had a couple of institutional investors come back to me, Michael, and say, I don't care about any of this. I only want to look at the high quality ones because I didn't own any MSTR ever. That's, that's, That made your quant definition, but I never called that quality. And even when we studied just that smaller population, the results were pretty much still the same at a high level, which is – and I guess we're going to get to that. But the basket underperforms even after the one month it's down 30 or more.

49:18Jessica Rabe:Well, let's get to that. So what is like the – so the first takeaway is this is not a great pond to fish in generally. Right. Okay. But what's the bigger takeaway here? Like what does happen after they fall 30 %? What's the typical path? On average, they continue to underperform by another 10 % versus the industry they're in over the next year.

49:42Michael Batnick:So once they break, you got to bail. And I always look at it versus the peers because I don't want you to be like, hey, Adam, no shit. Semis are better than staples or whatever. Like you got to adjust for what sector it's in because otherwise you might be creating an inherent bias. And so all the returns we show were relative to the industry group, the S &P 25 industry group, just to make sure we're kind of comparing semis to semis and household products to household products or whatever.

50:10Jessica Rabe:This does tend to happen more to the most expensive stocks, which makes sense. They have the highest expectations built in. Put that next chart up, count of broken compounders by industry relative. So this is a phenomenon that it's not only the most expensive, but like this is where the potential for those kind of mini crashes resides. What I think is the single most interesting thing here, and my guess is you have that coming next and we didn't – I just popped by and we didn't schedule this. But the exhibit that shows the attributes of the worst ones are highest forecasted earnings growth. And obviously those are correlated to most expensive.

50:52Right. And so when you get really high forecasted earnings growth and you disappoint, that's when, you know, there's a longer tail to the underperformance. And I think that's capturing a lot of these. It's like Oracle or, you know, a company misses and it just resets expectations. And they had really high expectations and really high multiples. And then all of a sudden, you know, it can be down 30, 40, 50 percent. And you saw that with UNH where the numbers came down a lot. It wasn't just the first downward revision.

51:21Jessica Rabe:See, I was really surprised that the evidence didn't show that there was like a snapback because just like, and this is anecdotal. I don't have different data than you. I'm just like, I think of some of these things as being opportunities, but I guess like as a group, they're not, although there might be some specific one-off examples where they are opportunities. opportunities. And I think that's maybe why people tend to like get really excited when they see a company they know gets slaughtered. Their inclination is like, this is going to bounce. So there is a bit of like, when you slice and dice it and you just look at the high quality, you're just looking at the mega cap, which there weren't too many examples.

52:03There is like a one week to one month bounce on average, but then by six or 12 months out, it fades. So I think that's like the old dead cat bounce phrase of like, you know, I mean, my, my conclusion was if you're short one of these things in advance, like there's no reason to cover, like you, you probably stay short. I mean, you guys know momentum is pretty powerful. You don't want to short a stock at highs. That's for damn sure. Right. So, you know, I think it's a little bit the compliment or whatever of that, of like, you know, they're likely to what's, what's like serial, serially disappointed.

52:40And just because they just went down once, on average, they're bad. I think if it's a mega cap, it's hard quality. Maybe you cover the short. But if it's anything else, you probably have more room to run.

52:49Jessica Rabe:We have a table of – so this is your chart of the latest 15 broken compounders as of November 17th. Yeah, Oracle's on it. Look, Michael. So let's read – because for people listening, let's just give people an idea of what we're talking about synopsis um by the way i would have called synopsis a true high quality compounder i mean they got the nvidia thing this week and maybe that creates a little bit of a cat but that's one that i barely went up i would have been tempted to buy that one as an example personally yeah kind of hims and hers is on here um i feel like that stock is always up or down 30 percent depending on what day you're looking at it up 582 percent in the previous five years and then down 30.

53:34Yeah.

53:35Jessica Rabe:Elf beauty, uh, super micro. What's also interesting. Um, riot and Mara are on here. They're Bitcoin related, just like strategy. What's interesting is like some of these names are, I don't want to say meme stocks, but like whenever the ticker is scrolling across and it's showing the highest volume or the most actives, like these are in that group of like retail stocks that people love to trade. And look at the junk, like the junker quality that we show. Like a lot of those are the junkier ones that are like the high beta ways to play, you know, like, you know, ACTS, same thing, right? So that's why I had some institutional clients say, I don't want, just show me the high quality ones only.

54:14Because the Oracle is low quality. Yeah.

54:17Michael Batnick:So I bought Oracle last week and it got rejected pretty disgustingly today at the 200A. If it rolls tomorrow, which is looking like I'm probably going to bail. So when you're talking about quality, that's what you're looking for? What do you, what, what, yeah, we have a quantitative tag, high, mid, low quality or junk are the four buckets. We tag stocks monthly, the top 3000 US equities. We're looking at attributes like level and stability of return on equity, free cashflow generation. We then penalize some things like if you have a lot of leverage or if you have ever cut your dividend or, you know, if you turn over your share base, if you have a lot of short interest.

54:57Like there's a whole bunch of calculations that go into it. It depends if you're a financial or not. If you're a financial, we use tier one capital ratio and other things they give you for free that are quality gauges. So it's a quantitative tag we do monthly. And, you know, Oracle is an interesting one. They have a decent amount of leverage now. They have negative free cash flow. And so it could have been higher quality six or 12 months ago, but getting a little bit lower quality. And I think that trade, that was really interesting because I feel like most hedge fund guys I talk to in the pod space, it's just been the easiest AI short because they've got to run neutral to a lot of these factors.

55:29And then for them, it's just big and liquid and easy to short. And it's more confusing to figure out when and why to short Broadcom or NVIDIA. So it's more a function of the debt, I think, and the perception of their position. All right.

55:42Jessica Rabe:So to sum up, the first thing is when you see a stock that had previously been a compounder, stock that had doubled over the last couple of years, low volatility, everybody loved it. when you see it break, like really break 30 % or worse, that is not in and of itself a quote-unquote opportunity. Really important point. Yeah, it's probably more likely to continue to be bad than good. And the thing to most avoid is if it has really high earnings expectations. Right. Now, if you still are undeterred and you must buy it, understand Adam's research shows pretty convincingly that it's more likely that that stock is going to underperform its peers.

56:25Jessica Rabe:And maybe what you're better off doing is picking a different name in the group. Would be another takeaway. If you have a one-week horizon, maybe you'll catch that. But if you're six or 12 months, the distribution is pretty negative. That's right. Okay. Now, if you're betting against one of these names and it breaks, that may not be the entirety of the gain. There may be more to come if you're inclined to be short or stay short. I think a lot of people would be very happy to just take a game like that on the short side, just like you would on the long side. But you're showing hedge funds, hey, maybe that's not the signal.

57:04I know guys who shorted UnitedHealth after they were long it. I mean they were long – went down 30 and they were like, I don't know what this thing is going to earn. I'm going to short it. And they picked up some of the money they lost on the short side. You know, so I do think that the data show you want to, on average, continue to short it. Now, there may be individual names that you've done fundamental work. You think it's overblown. You know, I don't know if it's, you know, Adobe or whatever, you know, people want to look at.

57:31Jessica Rabe:But you're fighting in choppy waters when you do that. Adam, you do awesome research. I want to just thank you so much for completely serendipitously stopping by this evening. Yeah. I mean, can we get some wine next time or something when I come by? Absolutely. I'm going to break out the Entenmanns the next time we have company. A little raspberry Danish? All right, I'm in. I want to tell people where they can get more research like this directly into their inbox. We want to send people. Yeah, trivectorresearch.com. Trivectorresearch.com. www.trivectorresearch.com. Okay. It's$100 a month. You get a one free month because you listen to YouTube.

58:16Okay. And I love hanging out with you guys. Happy holidays. Happy New Year. Awesome. Thanks, Adam.

58:22Jessica Rabe:Thanks for all your great work this year. Happy holidays. We'll see you soon. See you.

58:27Michael Batnick:All right. Wasn't that cool? So, Josh, I wonder if I were to ask you the question, what do you think generally happens? Now, I know we know the answer, but what do you think generally happens after a stock has doubled within a five-year window and then loses 30 % of the month, I think you and I would both say probably best to avoid. Like when that sort of reset happens, there's something really gnarly going on and forget about the short-term dead cat balance. That is probably not a stock you want to buy and hold for the next six to 12 months.

58:53Jessica Rabe:You're right. I would have guessed it, but it's so nice to actually have the data and to like see all these like real examples of it. And I have to tell you, like I spent the first 10 years of my career data free and just my instinct was always like, oh, like you would see like a pharmaceutical company, not a biotech, but like you would see like Merck blow up because there's a product recall or you would see anything like that. You just be like, oh, that's a big giant name brand company. I've made money in it to the long side. Now it's getting killed. This is a perfect time to start a position because you don't know.

59:31Michael Batnick:Yeah.

59:32Jessica Rabe:Like you just, you're acting on instinct and you're acting like a child. And so like having that data, maybe that's the thing that protects you from like that instinct. And I don't have that instinct anymore. But for 10 years, I ran myself ragged and banged my head against the wall trying to do stuff like that. And it's nice to know that it doesn't work for anyone.

59:56Michael Batnick:Josh, did you guys talk about Apple on the show today?

59:59Jessica Rabe:Yeah. Like they cleared. But it was apparently in the tech press, what Apple did today was very widely expected. They cleared the decks of all the failure people from the Siri relaunch, which didn't work. The Apple intelligence launch, which didn't work. Like they got rid of a whole bunch of people and they brought some new people in. All these AI people are like in the same orbit, like they're ex-Microsoft or ex-Alphabet, or in some cases both. and they're kind of like cycling through. But apparently the tech reporters were all like, yeah, this is a long time coming. So that's the extent of what we talked about with Apple.

1:00:40Jessica Rabe:But the stock hit a new all-time high today, yeah? Yeah, so the stock is 14.5 % year to date.

1:00:48Michael Batnick:Market cap all-time high of$4.2 trillion. And I was just - No AI in sight. Before we jumped on. So Apple hasn't fallen. I have to fact check this by just eyeballing it. Apple has not been outside of the top three market cap for the last decade. Is that nuts? I mean, it's like, it's like, it's nobody.

1:01:11Jessica Rabe:Here's the bottom line with Apple. I can't tell you that it'll ever grow the way it was growing in the, in the 20 teens. But like people will not stop using its products. The lock-in is just immense. And it doesn't have the multiple it has because we're overestimating its future growth. It has a multiple it has because people know in the end they're going to deliver. The earnings will be there because the ecosystem lock-in is airtight. How about this?

1:01:45Michael Batnick:Know what else? Know what else? Apple, I guess never say never, but let's just call it within the next couple of years. Apple will not be a broken compounder. What in the world would have to happen for Apple to fall 30 % in a month?

1:01:58Jessica Rabe:I mean, like honestly, something like I would I'm trying to think like what could make because the way I would tackle that question is what could make people all of a sudden reject their Apple products?

1:02:10Michael Batnick:Apps in a market asteroid, right? Like apps are like a COVID type.

1:02:14Jessica Rabe:The only thing is like a massive security issue. And Apple is like the gold standard for electronic device security and and network security. So if there was some massive hack where a billion devices all of a sudden started feeding information about their users. Yeah, that would hurt. That would be – maybe that would be the thing. I do want to address in the chat, a lot of people are asking what happened to Scott Wapner today. Scott's fine, guys. He needed a sip of water. He's a little dehydrated. But he's perfectly fine and no story there. No conspiracy. He's all good.

1:02:54Michael Batnick:spoke to him after i want to talk about the balance that we've experienced um so two weeks ago when we were in texas we spoke with warren and we're like oh man this is not gonna age well and then a week later it's like holy shit we closed at a new all-time weekly high like last friday the s &p had never in the history of fridays closed higher than it did blew my face right off my torso and then follow through like it's it's it's it keeps going so duality research a company whose work I respect tremendously, made an incredible chart showing the S &P overlaid with a very short-term five-day moving average of the S &P 500 advance decline line.

1:03:38Michael Batnick:And we just got the highest five-day advance account in more than 10 months. Like, what a freaking bounce,

1:03:44Jessica Rabe:dude. Yeah. And I actually called for the RSP chart on the air today because it's really important for people to understand that what's taken place since uh i guess the ai swoon of late november like right before thanksgiving people things got a little shaky what's taken place since then isn't like another bread thrust right and the rsp i don't know if it ended up hitting a new high today but whatever it got damn it got damn close yeah um it's back at its previous highs from the rest of this year. So the equal weight S &P is confirming, looks amazing right now. Yeah.

1:04:28Michael Batnick:What was a lot of notable things to discuss about November? And we did all of it with all of the tech trade and all that sort of stuff. But it was an unusual month for many different reasons. But the leading sector, and by the way, the market was actually up, hard as it is to believe in November, what drove returns was healthcare. Like tech took 1.5 % away or like away from the market. And even still healthcare, comm services, that's Google, obviously financial staples coming up the rear and bringing the market positive.

1:05:04Jessica Rabe:It's really hard to get bearish when the leadership in the market falters. And all of a sudden you have a healthcare company become a trillion dollars. And you have all that money that wants to be invested, find other games to play. And they buy JP Morgan over$300 a share. And they take Morgan Stanley to a new year high. And they, right? It's like these are also big market cap stocks. They're not Nvidia. But in the aggregate, like Berkshire, JPM, Citi, they're big stocks. And the money was flowing. and then you look over at healthcare, you got the app Vs of the world and those stocks are making new highs.

1:05:48Jessica Rabe:So like, how do you get bearish when you look at your fellow investors shifting their bets from one stock to another rather than from stocks to cash? Because that's what they did. They said, oh, this AI shit is not playing out nicely. Okay, what else could I buy? That's the environment. Like what, you shouldn't need me and Michael to tell you guys that that's what a bull market is. That's what should happen, and it did. It's really fortunate that it did. I also don't think healthcare is being bought because it's, quote, defensive. That's not my read of the situation. I don't think they're buying the GLP-1 stocks because they're looking for defense.

1:06:31Jessica Rabe:They're looking for growth. I don't think that's like a rotation to safety. I'm sorry. I just don't think that's what's going on at all.

1:06:41Michael Batnick:When you and I were speaking with Joe, we were talking about like it's just the market feels weird. Like there's a lot of just weird things happening within the stock market itself. Looking at the band-aid of the RSP, SPY stretching and then snapping, just completely falling through the basement. And we saw a nice rebound subsequently. But I saw this data point this last week. Well, wait a minute. Before you move on from that point you're making, what's the benchmark of a normal year?

1:07:08Jessica Rabe:Market feels weird. versus what? Like 2019?

1:07:14Michael Batnick:No, not – I mean, listen, I understand that every year is a little bit different in its own right, but this just felt particularly unusual. I'll give you an example. I think this chart is from Grant Hawkridge. Sam Gatlin tweeted – maybe Sam created it. I don't know, but it's a wonderful chart. And it's showing the number of 1 % up days per year versus the number of 1 % down days per year. And Sam tweeted that 2025 has been a weird year. There have been more big down days than big up days. And of course, this is not a bear market, right? The market is up 15 % year to day, whatever it is. Sam writes, the last two times this happened, the market was in a nasty bear market, obviously, as you expect it to be.

1:07:55Michael Batnick:08 in 2022. It's just been an unusual year.

1:07:59Jessica Rabe:So I guess my take on this would be, it's interesting to know, but my take on this would be like the hallmark of like a true bull market year is not big up days or bigger up days or more big up days than big down days. The hallmark is the grind higher, the relentless four out of five days every week. And that's what at least the fall has felt like. I know it hasn't been like that the whole year. But for the most part, that's what bull markets make me think of. They make me think of like, oh, market's up and it's green. Market's open and it's green. Market's open again. Oh, hey, look, it's up. That's really what I expect from bull markets.

1:08:47Jessica Rabe:I don't expect those explosive up days. Those to me feel like you should be looking for those in bear markets. You know what I'm saying? I do know what you're saying. So the poster child of what you're describing, throw that chart out, please, is 2017.

1:09:03Michael Batnick:And I didn't notice this until you just mentioned it. Throw that chart back out, please, John. So 2017, if my eyeballs are correct, yeah, is that little tiny divot in there. You see that one in the middle where there's no up days and no down days that are over 1 %?

1:09:20Jessica Rabe:Yep.

1:09:20Michael Batnick:That was 2017, which was in itself a weird bull market. It was just a slow – that was truly a slow grind higher. The S &P was up like 20-something percent that year. And it was literally – it was this. It was very slow and deliberate. There was no big up days. But anyway, the point is that you're right. A ton of up days does not necessarily define a bull market. It's just unusual. And it's unusual because what happened in April, right? A lot of the big 1 % down days came in April.

1:09:49Jessica Rabe:Do you know what the headlines were in the financial media in 2017? They were, there's not enough volatility. Wall Street is not making any money because there's not enough volatility. I want people to understand, and I don't have time to go back and Google this and find all these articles, but I'm telling you, this was in the Wall Street Journal. This was in The Economist. Anyone that wrote about markets in that year, they were writing about the dangerous lack of volatility in the market. Here's from New York Times. This is what you're talking about. Read it.

1:10:28Michael Batnick:So by Neil Irwin, the stock market is weirdly calm. Here's a theory of why. And that was in the middle that was in may now josh but it was a prop but the it was problematic was the point but the juxtaposition of political volatility not filtering it to stock market volatility

1:10:46Jessica Rabe:that had people like this is weird all right like so i was doing tv shows with active traders throughout the course of that year and people were like angry like like oh this is so boring it tells you that the financial media needs for there to be drama and if there isn't any and you have a year like 2017 with no big up days or big down days i think the market went up 30 that year ish people still found the reason to be upset because there wasn't enough trading volume there wasn't enough volatility uh for certain strategies to make money or certain trading desks to benefit. So I guess my point is that every year is weird.

1:11:32Jessica Rabe:And they're weird in different ways. Because I wouldn't say that 2017 was a normal year. I would say that's completely aberrant. Yeah. To have that little volatility.

1:11:44Michael Batnick:So as I'm looking through the Google machine into like headlines from 2017, I found one of your posts on LinkedIn. My big takeaway from 2017. Oh, God.

1:11:56Jessica Rabe:How dumb is it?

1:11:58Michael Batnick:How poorly did it age? I'm sure it aged perfectly fine. All right, let's talk about Adobe.

1:12:03Jessica Rabe:You're making the case tonight, so I'm not going to make the case per se. I'm going to present the case. Can I tell you something else? Is that semantic?

1:12:11Michael Batnick:Can I not bury the lead? I didn't tell you this, but I'll tell you now. I bought Adobe today.

1:12:16Jessica Rabe:Oh, shit. All right, so let's go. Maybe I'll make you feel better about it. Is this a generational bottom? I don't know. or could it bounce from here, but it's a company still in a long-term secular decline? I don't know shit about Adobe.

1:12:35Michael Batnick:I listened to the conference call today to get a little bit educated because Adobe as - Tell us more about your process. As the CEO said, oh, fuck off, this is my own money. They said, simply put, Adobe is the operating system for creative work. And of course, creative work is the epicenter of the AI disruption. My hashtag, quote, thesis, and I'll sell if I'm wrong, I'm not like married to the stock, is that Adobe is understandably being punished, but to extreme levels, and analysts are not backing down. It was a great call. It was a beat and a raise. And I think that they are going to be a massive beneficiary of the AI transformation.

1:13:18Michael Batnick:I don't think that all of a sudden, all of their enterprise and Fortune 500 customers are going to dump Adobe and start using Banana Hammock or whatever it is and the chatbots and just cut them out. I don't buy it.

1:13:29Jessica Rabe:Okay. I don't either. I just don't know if that will matter right now. Oh, totally great. Yeah. So I actually think that there is a world in which Adobe sits on top of the entire silo of AI tools and the user interface that they provide, whether it's Creative Cloud or Firefly or any of the tools that they've been selling to creative people for, I don't know, 35, 40 years, I think that people like their workflows in those Adobe products. And as Adobe amplifies the power of those products with AI, they will keep those customers. I just, I don't see everybody cutting their licenses and just being like, you know what?

1:14:16Jessica Rabe:I'm gonna have the AI create all this stuff for me. Professionals especially.

1:14:20Michael Batnick:So if you listen to the call, you would never guess that the stock is down 55%. John, throw this chart up, please, that I had chart go to make the earnings one. So we've got a chart. Josh, this is unbelievable. I know. I'm sure there are other charts that look like this. But for the listener, the earnings per share are literally at an all-time high. It was a record quarter. And yet the market is saying, I don't believe that your earnings are sustainable. I believe that you are absolutely effed because the forward PE is at a decade low. This is very, very unusual. And the market's either very wrong or very right.

1:15:03Jessica Rabe:I want to get to some of the comments in the chat because people have really strong opinions about this. And I sort of agree with some of these points. Figma is in a partnership. Adobe is in a partnership with Google. long-term, they always have been, but Figma is too. And Figma came public earlier this year, raised a ton of money, and they're not competing with Adobe in every part of their business, but they're a mainstream player. I think it's worth bringing up that that might account for some of that PE multiple decline. Let's see. Big Bob's Barnyard points out, Adobe has ripped off professionals forever, and they have been wanting competition.

1:15:44Jessica Rabe:And now they have options. The professionals won't come back. All right. So I think that's probably an overgeneralization. I'm sure people do like that there's competition that'll be a lower price. I don't know that everybody leaves just because there's a lower price competitor. Last one. Brian McKeon says, or two more, Adobe missed the boat. Could have been the new Hollywood production with direct-to-consumer platform. Hope they catch that wind. They are. So it's not Sora. they're not trying to be first and the truth is their direct consumer business is not as important as their professional business Kimball the Nimble says Adobe logins at its website are designed by someone who is trying to make you confused interface has sucked for years all right look there are very legitimate problems with Adobe I think that's reflected in the stock it's a massive massive drawdown

1:16:40Michael Batnick:55 % everyone all the problems are very much well known nobody's surprised

1:16:44Jessica Rabe:Look, I remember Apple in 2013 selling at a 12 multiple. And Carl Icahn came in, took a huge position. And they asked him, like, aren't you worried about competition from China and Android? And his comment was, OK, it's 12 times earnings, though. Like it's eight times earnings backing out the cash. I don't know if Adobe is 12 times. We'll get to that in a second. Put up the chart. Here's one year. disgusting yeah disgusting but everyone knows yeah it's not like i'm not we're not revealing anything right every everybody gets it everybody gets it here's a 10-year chart erased all of it i don't know half a decade's worth of performance like it's this is very very very well understood so wait josh this is this company might be in trouble yeah this is very much not a compounder

1:17:38Michael Batnick:right if somebody's like no hey dumbass didn't you just hear what adam said that's that's not

1:17:42Jessica Rabe:this no no no no and this didn't collapse 30 percent a month um it's not and it didn't get and it was not up 100 in the past five years at all let me show you adobe three-year chart versus um i want to give you some perspective salesforce which is in blue this is three years is up 60 and that's an underperformer the iShares expanded tech software sector etf IGV is up 89 % in the same period. This is just back to December 22 when ChatGPT came out. That's why I'm showing you this chart, guys. The start of the AI age. Adobe is now negative 6 % for the start of the AI age. Now, are they going to lose seats?

1:18:30Jessica Rabe:Probably. Are they going to have to cut some of their pricing on some of their products? Maybe. Because I don't think this AI stuff is going to be free. No offense. Are they going to be the company that figures out how to successfully commercialize AI tools and get professionals to pay for it? I'd say absolutely.

1:18:52Michael Batnick:Yeah.

1:18:53Jessica Rabe:Here's – oh, I did an Adobe versus P ratio too. I did it in two panes. Put it up. You know what I'm saying? Yeah. Like if you think you're the first genius to be like, oh, Adobe is threatened by AI, dude, everybody understands that not just the stock price but the valuation it's crazy one other thing I want to say about this oh Adobe is buying back stock 2.5 billion a new agreement from Q3 they have 8.4 billion of the of the 25 billion dollar prior authorization still left to do so this is a company that could conceivably be buying like 11 12 billion dollars worth of stock in the very near future into a multi-year low.

1:19:42Jessica Rabe:And I want to show you the shrinking of the share count. Put this chart up. This is shares outstanding. You know, a lot of these software companies, the share count is growing because they're issuing stock options like crazy. And with Adobe, they are like, this is like the classic kind of stock that like a Berkshire would have bought back in the day. Look how they're shrinking the float. It looks like it's down. I'm eyeballing. What is that? 25 %?

1:20:09Michael Batnick:Yeah. It went from 500 million to 420. Well, guess what? They report earnings next week or in two weeks. So we're going to hear from them soon.

1:20:15Jessica Rabe:Well, I have more on this. Is this like buying Alphabet last summer? Or is that a bad comparison? Because people are saying a lot of the same things that Google is existentially endangered by AI. Is that a bad comparison?

1:20:34Michael Batnick:Well, it's not bad in the sense that they're under the same threat. The difference is Google addressed the threat and neutralized it and leapfrogged it. I don't know what Adobe could do or say that would lift those concerns. So I don't see Adobe doubling and retaking its all-time high. I just think that there's so much pessimism in the name, and I think that it's too much. But listen, it could easily fall 15 % after earnings. Like, I don't know.

1:21:02Jessica Rabe:Okay, because I made that mistake with Alphabet. I believed in that story more than I should have, that they had this existential threat from OpenAI and others. But here's the thing.

1:21:17Michael Batnick:It didn't play out that way. So last time they reported, it was 11 % growth, a beat and raise, and the stock bounced for like a minute. Like nobody believes it. So I don't know what they would have to say. that would all of a sudden lift those concerns. But we'll find out on our record.

1:21:35Jessica Rabe:No, only product, like only launching things that catch on. Like launching, but the problem is they're not an AI company. They can use other people's tools and they can provide ports so that these new things that are invented can be used in the Adobe environment. But unlike Google, I don't think that they can invent their way out of this. I don't think they could partner their way out of this. So that's why - They're partnered with everyone. They're there. Already. Wall Street has not given up on this story. No. It's a$320 stock. Pull this graphic up. The high target on the street is$605. Can you imagine?

1:22:21Jessica Rabe:The average target is$452. It's$318 or whatever it is. 24 buys, four overweights, 11 holds, two sells. For a stock that's down this big, it's pretty remarkable. I want to give you some commentary here. Barclays just raised its target after the last earnings report from 460 to 465. Firm pointing to outperforming to net new annual recurring revenue, key progress in AI, noting that AI first, ARR, more than doubled over two quarters. I don't know. I got a whole bunch of price targets, some raised, some reduced. It's a battleground name. The one thing I want to say is that in Harvard, when you go to Harvard, one of the case studies they teach you in business school about disruption is from 2014 when Adobe went fully subscription.

1:23:25Jessica Rabe:That's 11 years ago. Adobe was the first company to successfully take its entire business model of selling people software and change that to getting people to subscribe to their services. And when they did it, the stock became a compounder. It became one of the best performing stocks in the market. So this is a company that's got a heritage of completely remaking itself when the gun was to its head. And Adobe did that. So the question is, can they reinvent vertical AI, what they're calling, and have this user interface on top of the LLMs that customers will pay them for? And we don't know. But I do think technically, I like an entry here.

1:24:12Jessica Rabe:I like 275 as a stop. That has been the line in the sand before. I think it's a relatively low-risk entry, and we get to find out together. Yeah.

1:24:24Michael Batnick:I mean, listen, we know that surprises usually happen in the prevailing trend, right? So maybe I'm an idiot, but I'm taking a shot. And if I lose money, it won't be the first time.

1:24:33Jessica Rabe:Is that where your stop is? You want to reveal where your stop is for everyone who's watching?

1:24:37Michael Batnick:No, I'm not telling the robots where my stop is. I'm not telling them. Come on.

1:24:42Jessica Rabe:All right. Let's keep moving. All right, we'll do this quickly. Surprise, chart on. This is an ad from 1966. TIAA Cref designed this ad to scare people into saving for retirement. This is going viral now as sort of an inflation meme. Look how accurate these price predictions were. so the ad said and when this ran at the time people were probably like oh why are you trying to scare people this is like a magazine ad they say in 30 years a burger and fries could cost$16 a vacation$12 ,500 and a basic car$65 ,000 I think that's the average purchase price of a car in this country this year is 60 something thousand dollars I think that's the number like on the nose um burger and fries 16 maybe maybe without the fries i don't know how much is how much is like not mcdonald's but like if you sit down in a restaurant order a burger it's probably 16 bucks yeah easy right um i know you're a moneta tavern guy and that's probably 30 but vacation 12 ,500.

1:26:05Jessica Rabe:I wish I wish your Disney, your Disney trip is not going to cost you 12 ,000. I'm going to predict upside from there. What do you think? I don't think it's that much more to be honest. How many days are you going?

1:26:22Michael Batnick:No, it'd be like around there probably five, six.

1:26:24Jessica Rabe:All right. Yeah. Anyway, the wake-up call from 1996, it's 30 years later. That's what ended up happening. If you made this ad today, what would you have to put in for these things? What would you have to put in? What do you think a burger and fries will cost 30 years from now? 100 bucks?

1:26:45Michael Batnick:That's a weird thing to think about. I know, but...

1:26:48Jessica Rabe:Don't think about 100. Let's say like legitimately in 20 years. 30 years. 30 years, not 100 years. Okay. This was from 1996. So 30 years ago. So 30 years from today, what would you guess a burger and fries will cost? I'm looking right now. You're f***ing calculating it? Yeah. You're such a nerd. I'm telling the machine. I'm saying$100.

1:27:15Michael Batnick:It can't be. Why can't it be? Dude, are you making the case of Bitcoin? All right. No, no, no. All right. Thank God it can't be. So I just did 20 bucks compounding at 2 % a year, right? Is that reasonable for a burger? Why would it compound at more than 2 %? I don't know. What do you get? That's$37-ish.

1:27:36Jessica Rabe:$100, Mineta Tavern. Stop.

1:27:42Michael Batnick:$100.

1:27:42Jessica Rabe:All right. How about this Pulp Fiction? It was a$5 shake. Don't you feel like there are$37 burgers now in Manhattan? Yeah. It's just like accepted.

1:27:52Michael Batnick:Yeah, you could find a 30-some dollar burger. Absolutely.

1:27:56Jessica Rabe:Like everywhere almost. How much is the O'Shavel burger? Worth it. No, I agree. But how much is it? How much is like that cheeseburger with the egg on it?

1:28:09Michael Batnick:It is the, yeah. O'Shavel.

1:28:14Jessica Rabe:Oh, 18. 18, I'm tripping. 18 with steel. No, stop. The cost of an O'Shaval cheeseburger is around$30. $26. Yeah, when ordered with the popular additions of a fried egg and bacon.

1:28:28Michael Batnick:You're not going to take that anymore.

1:28:29Jessica Rabe:And I don't know why you would order it any other way. Are we – did we lose a war? We're not animal. All right. All right, that was that. And then last thing. will it piss you off because this is coming when open AI starts to run ads inside of chat GPT sponsored results in your in your in your AI will that bother you

1:28:56Michael Batnick:you know it's coming and it's a business they're gonna try well we have to talk about

1:29:00Jessica Rabe:this code red thing like did you order the code red Sam Altman ordered the code red this is the Wall Street Journal I think it's a really big deal and I know I know we don't want to like every time the media gets worked up over something, we don't want to just jump. But in this case, I think it's sort of a big deal that this stuff is like getting out there. Open AI chief executive Sam Altman told employees Monday that the company was declaring a code red effort to improve the quality of chat GPT and delaying other products as a result. According to an internal memo, Altman said AI had more work to do on the day-to-day experience of a chat bot including improving personalization features for users, increasing speed and reliability, allowing it to answer a wider range of questions.

1:29:50Jessica Rabe:So they're really spooked by Gemini. As they should be. And honestly, a gentic my ass, none of this shit actually works. I have to like tell it the same thing every time I use it for the same function. It's supposed to like remember things.

1:30:05Michael Batnick:Was it down for you?

1:30:06Jessica Rabe:It was down for me like all day. I was using Gemini. I don't know, maybe we're all better off that it was down. It's starting to piss me off, honestly. But Josh, you're right.

1:30:13Michael Batnick:I had to do an image for me yesterday for a thumbnail. And I said, no, take this out. I don't need that. And I just stopped. It wasn't working. But I don't want to complain. It is magical. So I don't want to complain.

1:30:28Jessica Rabe:It's magic adjacent. It's magic adjacent.

1:30:30Michael Batnick:No, no. How about this? It's not getting worse. We'll never be worse than this.

1:30:35Jessica Rabe:I don't know if it's getting worse or not. But the promise of this was that it would remember the way you want things and be able to repeat that. Yeah, but you're very difficult. You're very difficult. I'm not difficult. You're extremely difficult. You know what I said to it? You know what I typed into it? I said, why can't you just do this the way you did it for me on Friday, asshole? I did it. like because I do like I do like research stuff in there and I just want it the same way every time I don't want to reteach it why do I have to reteach it things that I taught it twice three times four times why does it keep changing things up and I think that's part of this code red thing like I think they're hearing that complaint from a lot of people like why is this thing freelancing I already told it what I want.

1:31:29Jessica Rabe:So are we being spoiled?

1:31:31Michael Batnick:Oh, absolutely. Remember Louie did a bit, I think it was with Letterman or Conan, where people, this was years ago, but when Wi-Fi came to airplanes and people were like getting really upset that the Wi-Fi wasn't working when it just came into the sky. Like, yeah, dude, we're spoiled because this luxury isn't now a necessity. And when it doesn't work, I get pissed off. Right.

1:31:54Jessica Rabe:He's saying like the guy next to him or something, like the Wi-Fi didn't work. It was like the first time they ever had it. Ah, this is bullshit. Yeah. Right. Well, it's true. AI Secrets is saying developers have uncovered ad modules buried in ChatGPT's Android beta, including search ad, carousel, and bizarre content.

1:32:18Michael Batnick:Yeah, obviously.

1:32:20Jessica Rabe:The timing is – wait, but it's the timing. The timing is no accident. OpenAI's compute bill now runs into billions per quarter. HSBC projects that its much touted 2029 profitability target will not only fail, but sink into more than$100 billion in cumulative losses. After months of denial, the company seems ready to trade purity for revenue. The leak shows a fully formed ad system waiting for the green light. Okay, one day you're going to open this thing up. You're going to put in a query, a prompt, sorry, and you're going to get right above where you get your answer, you're going to get sponsored results.

1:33:07Jessica Rabe:Are you acting like this is like breaking news?

1:33:10Michael Batnick:Of course it's coming.

1:33:11Jessica Rabe:But you're paying$20. It's like when they started airing commercials while you were watching cable. You're like, wait, I don't understand. I'm paying for cable and they're advertising to me? I'm telling you that this is not going to be popular Okay, then you could switch to Gemini

1:33:24Michael Batnick:Or you could switch to the other one

1:33:25Jessica Rabe:Well, they can't afford for more people to switch to Gemini Gemini reported 650 million users In November Up from 480 million the month before I don't think OpenAI Can afford for more people To be turned off But they also can't afford the cost of this build out Without more revenue Than they're taking in today this is a really i think it's a really big deal i do not think they're launching an ad network from a position of strength so i don't i just i i feel like they probably would prefer not to have to do this but they might have to do it if open ai were public how bad is it getting pummeled i know we've asked this before but i think it's in a 30 i think it's in a 30 drawdown easy i think it made a high in September.

1:34:14Jessica Rabe:And I think it's in a 30 % drawdown, just mentally. Because I think September is the last time they raised money, right? Was that the SoftBank? Whatever, the$500 billion splash. So yeah, I think if this is a publicly traded stock, it is probably in a drawdown similar to whatever Met is in.

1:34:35Michael Batnick:Let's say it's down $40. Let's say it's worse. Because I think it's down more than Oracle for sure. Would you buy it? I wouldn't.

1:34:44Jessica Rabe:I'd probably be afraid to. Yeah. Until it started going up and then I would load the boat. All right. All right. We're up to make the case. This is you. Take it away.

1:34:57Michael Batnick:Okay. Take us home. All right. So I'm going to make the case for energy stocks. I have not pulled the trigger yet. I don't own any of them. So I'm going to be piggybacking off some of the things that Josh said. I saw a chart this week that really caught my eye and it said, you know what? It's time to make the case. Look at this chart from Turning Point Market Research. The three-year rate of change, the S &P energy versus the S &P. Honestly, I don't even care what the story is. Honestly and literally, it is so far underperforming. It's the worst sector over the last five and 10 years. I think it's neck and neck with real estate.

1:35:30Michael Batnick:The S &P is up 230%. I'm sorry, 280 % the S &P over the last 10 years. Energy, this total return is up 97. just massive, massive, massive laggard. But I'm going to make the case that if I were to buy it, I just buy the index. And here's why. This chart is from S &P Global. I've never seen this before. This is chef's kiss. Let me explain what we're looking at because it could be a bit confusing. On the x-axis, we're looking at the average dispersion. And what you'll notice all the way on the right is the sectors that have the most dispersion within them. In other words, the widest range between winners and losers is comm services, not surprising, and technology also very much not surprising.

1:36:16Michael Batnick:I would have guessed that. Sure you would have. And then on the other end of the spectrum is energy stocks, which also you would have guessed because if you were to fire, if you were to compare like a shotgun blast, the technology and comm services, if these were like total returns for the year, it would be a very wide radius. Energy stocks, on the other hand, is a tight radius because they all move directionally the same because of the price of oil. So it also has low average dispersion, meaning not a lot of opportunity for stock pickers. And the average correlation is by far, by far the highest of any sector.

1:36:49Michael Batnick:And the number in the parentheses was a bit confusing. That's just a 12-month volatility, so you could ignore that. But energy, no dispersion, high correlation. So yeah, you could pick winners if you want, Josh. I know you like to. But if I'm going to the weight here. I'm just buying the index.

1:37:03Jessica Rabe:I pitched Baker Hughes today on the air. It's on the best stocks in the market list. Oil has not rallied at all. This stock is at a 52-week high. It is its third attempt to break through 50 or fourth attempt to break through 50. Stock looks incredible. You know what's not in this stock price? Anything positive. But one of two things. The first is the rig count. Baker Hughes actually has been publishing the weekly rig count. since 1944. It's almost 100 years of data. The rig counts are just dropping and dropping and dropping. And that sounds negative, but it actually, it's super positive because when that turns, Baker Hughes itself is one of the first beneficiaries because then everyone's earnings estimates have to start being raised higher.

1:37:53Jessica Rabe:The more rigs obviously in production, the more work there is for oil field services companies like BKR to do. So that precipitous decline in rig count is super bullish when you look at the stock already at its 52-week high. That's one. Two, I have no idea if you get oil moving back to the upper end of its range, which is 80, 85. I have no guess even. But in any given year, the price of oil does not just sit at its low. So if and when that happens, this will be one of the first names they buy. So I'm blessing your make the case. I'm ratifying it. And I like it. Do you own Baker Hughes? I'm about to.

1:38:38Jessica Rabe:I own PSX. I own the IEO, which is all of the producers. I probably should take a second look at. I've been talking positively about Exxon. Just haven't pulled the trigger yet. You know what else I like about energy?

1:38:51Michael Batnick:It does sort of, not sort of. It is unlike the rest of the index in terms of the way that it moves. It truly is its own thing.

1:39:01Jessica Rabe:It's that. And then something that Nick Colas told me a while ago and stuck with me, it is your only true hedge against an oil price spike emergency. There is no other real way for an equity portfolio to hedge that risk. like you could have I mean I guess you could have like stop losses and trades on with your other holdings or you could just keep a sleeve of energy stocks at all times and that's like the perfect hedge for that particular type of risk so anyway a lot of these names are on my list and oh we have some charts so here's Baker Hughes like I don't know the story for why this breaks 50 I just know it's going to happen next 10 points are higher Yeah, I don't know why it will.

1:39:52Jessica Rabe:Here's Marathon. This stock's been working all year. This is a refiner. It's a little bit different. This doesn't trade on higher crude. It trades on a widening crack spread, which is the difference between the feedstock, which is the oil itself, and the price they can sell gasoline at. Just broadly speaking, that's what this trades on. This is the best stock in the market. This one I do own, Phillips 66 PSX. I don't know why this is going to go through 140. I just know it's about to. I don't know the story. I'll know it after like everybody else. Here's Exxon. This one is not ready to go yet, but it's sort of like a pennant and it's getting to a decision point and it's closer to the upper end of its range than the lower.

1:40:37Jessica Rabe:What do they call this, Mike? An asymmetric triangle? I think it's an ascending. Ascending triangle? Whatever. It's going to go. So this one's going to take a while. The other ones look closer. So these are all on my list. All right, mystery chart. We'll get out of here. I don't even know. All right. Okay. These are two very closely related things. One is a stock. One is not a stock. What are we looking at?

1:41:09Michael Batnick:One is a stock. Okay. Is the light blue line an interest rate?

1:41:15Jessica Rabe:It is not. It is another asset that is not a stock. Is it an index? The dark blue line. No, an index can't be an asset. It's an asset and a stock.

1:41:29Michael Batnick:Okay, I hear you. An asset and a stock. Can you tell me which one is which? The light blue is an asset.

1:41:39Jessica Rabe:You want to glance at the live chat because they're kicking your ass right now.

1:41:42Michael Batnick:No. All right. I don't know. Just tell me. That's it?

1:41:48Jessica Rabe:That's all you got?

1:41:53Jessica Rabe:Good one. Not bad. Good one. Why aren't these things correlated anymore?

1:42:04Jessica Rabe:Interesting, right? You have any theories? So for those listening, we're looking at the triple Qs versus Bitcoin. they were like not perfectly in lockstep but as close as two things can be for the entirety of the year over the last year and then something just happened and I don't know what it is but the queues are recovering faster than Bitcoin Bitcoin is actually getting worse I mean today I know it bounced a little bit but like this is not the same trade anymore

1:42:38Michael Batnick:no it's very interesting

1:42:39Jessica Rabe:I don't know why. I think they are inextricably linked to each other. I think there's a liquidity story going on with Bitcoin itself and some of the instruments that people use in the stock market to do Bitcoin-like trading. I don't know. We're going to see how this develops. And maybe we're overcomplicating things and Bitcoin will go up$10 ,000 over the next week and be right back up there with the Qs. but I just found that interesting. Do we have another chart? One or two more? So this is the actual correlation between Bitcoin and the triple Qs. And as you can see, this is the lowest correlation since the end of 2023.

1:43:25Jessica Rabe:So they have been much more tightly correlated for most of the last, I don't know, two years. And you have to really go back to the pandemic to find a prior episode with less correlation between these two things. Is there one more or no? What else? Oh, micro strategy versus Bitcoin. Light blue is strategy.

1:43:47Michael Batnick:I think the strategy story is over. I think the bottom is in. They just raised$1.45 billion like in USD reserves, LOL. I think at some point there is a level where the MNAP becomes so much less than the value of a Bitcoin holdings that just somebody steps in, not one person, but buyers step in and say, if I'm bullish Bitcoin, this is my leverage.

1:44:08Jessica Rabe:Can I tell you something ironical? The thing that saved Bitcoin today is that Vanguard came out and surprised everybody and announced - Bank of America too. Right, and announced that, okay, our brokerage customers are now able to buy

1:44:27Jessica Rabe:crypto things on our platform. Why is that bullish for strategy? I'm not saying that's bullish for strategy. Right, it's bullish for Bitcoin. It's bullish for Bitcoin. Right. In other words, they don't need strategy then. Because if you had a brokerage account at Vanguard, the way to get crypto exposure was strategy. And now Vanguard just said, you don't need to do that. You can buy Ibit.

1:44:54Michael Batnick:I would venture a guess that a lot of Vanguard investors are probably not buying strategy anyway.

1:45:00Jessica Rabe:Okay, great point. See Paul Breezy in the chat says, Bogle is rolling in his grave. I agree. Vanguard has historically said that they want to invest in things that produce a cash flow that can be valued. And this is just not that.

1:45:19Michael Batnick:They're obviously listening to their clients. Their clients are asking, otherwise, they wouldn't be doing this.

1:45:24Jessica Rabe:But you just said you don't think a lot of Vanguard clients would. So which is it?

1:45:28Michael Batnick:I don't think. Don't gotcha me. I don't think Vanguard investors are buying strategy. You know what I would say?

1:45:34Jessica Rabe:If you're the type of person who has all your money at Vanguard, you don't care about Bitcoin. So now I think they're not listening to their customers. I think that's what they're trying to change. I think they're worried about getting the next wave of customers. So I don't think this is about listening to their customers at all because I don't think their customers care. And if they did, they'd buy it off platform. I think this is more about we are losing out on the next generation because we're not allowing this. Not untrue. All right. That's a wrap. from us. Guys, I want to remind everybody.

1:46:06Jessica Rabe:First of all, thank you all for joining us live. We really appreciate it. I want to remind you, if you haven't subscribed to the channel, now would be an amazing time to do that before you log off. We also could use a like from you. So be the super liberal with the like button. Just hit it as many times as you feel you need to. Listen to the koala at the bottom of the screen and subscribe. Tomorrow is Wednesday. All new Animal Spirits with Michael and Ben. And And we'll be back at the end of the week with a new edition of The Compound and Friends. Thank you so much for watching and listening. We'll talk to you soon.

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