TDI Podcast: Don’t Rock the Boat (#985)

29:57And after a while, you're like, I'm not doing that again. I'm not touching that hot stove again. But you got to stay with it, right? Well, I can tell you as a technology trader and a$5 billion hedge fund, there were a lot of times where we would short something, cover it, short something, cover it, and then short it again and win big. And sometimes you just have to, you know, inch it out there and see what you can do. And if it doesn't work right away, but if you have the conviction and you know, the signs of overvaluation or crowding or whatever, earnings that are going to decline, those are the things that you do.

30:41So it's not a, you know, this is something, something, somebody just sent me something about showing me the NAS or the NASDAQ in 2000 peaked around, you know, so it's about actually it was not NASDAQ 100, close to 5 ,000. And it went down 40 % in less than two months. Yep. Now, we haven't really seen that type of volatility. Right. And, you know, so I, you know, and some people are like, oh my God, the volatility is so bad. No, we haven't really seen that yet. Well, the VIX can't get above 20. Let's be honest. That's amazing. One thing I don't, I don't really watch the VIX that much. Well, it's kind of a broken instrument.

31:26Let's be honest about that. Yeah. I watch CDX credit spreads to see if they're widening. And if you see investment grade and high yield credit spreads starting to widen, and they have started to widen a bit. that's really the big tell. Look at Meta's CDS. Look at Oracle. I mean, they're peaking out pretty hard. And this all deals, last week we had on Chris Whalen. You know Chris, right? Great discussion about some of these factors that are going on. We saw the 30-year bond hit a high since 2007 last week. These are all happy. Now, here's my question to you. We see market leadership is starting to change beneath the surface, right?

32:09We saw things like healthcare doing really well. Staples starting to come up. A variety of utilities holding on really well as all this is happening. It tells me a story. I think I talked about this last week that there is a desire for investors to be invested. What I mean by that is it's not like, okay, I'm investing. I don't like things. I'm coming out. No, they're investing in like packs. It's like a wolf pack into the semiconductors. Then when the semiconductors come back, They don't really go to cash. They don't go to bonds. They go to other places. Like they're going to all of a sudden hit to the consumer staples.

32:42They're going to all of a sudden go into healthcare, right? And if they use it as a holding place, what's going on then? Is this a normal rotation right now? No, this is something that's been going on, I think, around since COVID. We're like nomads of traders will go from one green thing to another. And I think there's a lot of the people that have no idea even what these companies do. It gets into this crazy speculative moments where stocks that you've never heard of go up 200 % or they change their business profile to blockchain or AI or something, and they go nuts. And people just jump into these.

33:30That is just gambling. And, you know, I'll tell you this, when you're saying that people don't get out, that's a very good point. I think it's sort of that people need a dopamine fix and they're using this or gambling on sports or prediction markets or other things for that. You know, that's a real risky behavior. And I think that's just where we are as a society. One thing, though, this is important for longer term investors. You know, I'm friends with lots of smart hedge fund managers, a lot smarter than me. And Paul Tudor Jones said on a podcast with another friend of mine, he said the U.S.

34:25has never been more dependent on the stock market. And he said that, and there's a lot of ways to interpret it and the way to think about that. But I think it's really important because he's right. You have so many people are in passive funds with their retirement accounts. the stock market wasn't designed as a retirement account proxy. It wasn't designed for that at all. I mean, retirement accounts should have a mix of stocks, bonds, commodities, a lot of different things you can put in there. But it's become the de facto place where people have gone to invest. Now, the US is dependent on it because you need high stock market.

35:16It helps unemployment stay low. Uh, it, it's, it brings in money from foreign countries. Uh, but I think the dependence is really risky right now. Uh, well, I mean, it used to be, it used to be tough. We don't fall down again. If we went down 40 % in two months, like we did in 2000 and then rallied back 43 % within another two months in July, and then ultimately failed, you know, I think you'd lose a lot of people in the market. like you did back in 2000. But that was temporary. It was a different person. Right now, I think people are looking a little bit behind it, ahead of this. But one of the things they're not doing is people don't want bonds.

35:58I mean, there was a time when you could say reasonably that, you know, bond yields go up. And still to a point, we haven't been there. We haven't seen this peak out. You know, if we get, I don't know, pick a number, 10-year at 6%, I'm just saying, some people may be like, you know what? Cashing out a few things over here. The other problem you have is people are unable to leave their positions. I can't tell you how many clients we have with enormous unrealized gains inside their portfolio. That's a great thing, right? So I'm happy about that. We're able to do that. We're able to get to that point.

36:31But the problem is where to next? How many people have Apple in their portfolio, Microsoft to a degree, Meta, NVIDIA, you name it. Even with the drawdown that we saw recently, low cost basis, what do you do about that, right? Isn't that a big problem in the market? I get it. It's a problem. And you have a lot of these, you know, the corporate insiders that have huge gains as well. And they're just using leverage to live comfortably and not having to ever sell. That, you know, creates some issues as far as tax revenues. but are people going to, this is my thought, are people going to be able to live through a 50 % drawdown in the market?

37:16That's a good question. As much as that sounds like that will never happen, it always happens. At some point in time, it's going to happen. I'm not one of those, you know, doomers that's going to say, oh, you know, next week it's coming, look out, get out. But I wonder if some people are going to be able to hold on because you're starting to see some real pullbacks. I mean, the Micron and SanDisk, I mean, down 50 % from its peak high, still up huge. But if you go down even more, look out. I mean, everybody, I always love the people that Amazon reports and they say, well, if you bought Amazon on the day of the IPO, you would have X amount.

38:02And I like to remind people that you went up 6 ,300%, down 90%, and then up another 5 ,000%, and then ultimately down 93 % to the ultimate low. That's a hard thing to hold comfortably and say, I'm feeling good about this. It's really difficult. I mean, that's, of course, you know, splits and stuff like that, but you know, it's, it's, you know, the buy and hold, it's great, but it's, I think it's going to test some people, um, that are holding just because they don't want to pay tax. Right. I think that's a valid point, but it will test people. I do wonder, I mean, by the time we air this episode, we've probably been through most of the big, uh, technology earnings.

38:52We saw the first meeting, big flop for Kevin Walsh. I mean, it was interesting. I'm sure you watched it, read it, et cetera. His press conference, he said he's not going to have any press conferences unless he has something to say. They had nothing to say. And in his press conference, it was like, you know what? We're going to let the markets decide? It's like, what? Are you going to put that out there that you're going to allow the markets to decide? Therefore, they're going to test the hell out of you? And they did so, right? with the 30-year spiking, 210s got a little wonky. There was a lot of weird bond movement.

39:26We're seeing that and not follow through necessarily by the dollar. But those kind of conversations, if he continues with this nonsense, I am not a big fan of the communication strategy of the former couple of Fed chiefs. Not at all. But this idea of letting the markets tell us and lead the situation, like a free market for rates. Kind of weird, isn't it? Well, I think there are a lot of things that are weird this last couple of years, but I will say, I think the Fed is boxed. I don't think they have really much they can do right now. You know, I think you're going to see inflation remain sticky.

40:11It could go up a little bit more. You still have hostilities in the Mideast, and crude seems to want to hold elevated levels. It could go higher. You have crack spreads at unbelievably high levels. So it costs more money for diesel and gasoline out there. And that, I think, is hurtful for the economy. It's inflationary, obviously. But I think that if they raised rates, let's just say the Fed raised rates at the meeting, what was the purpose of that? Was that to control inflation, slow down spending? I think the only thing that I would have argued for raising 25 basis points would be simply to establish some credibility with the markets.

41:09I agree. He didn't do that. And I keep thinking, what's Trump's nickname going to be for him? I think it's going to be wishy-worshy. You know, wishy-worshy. Because I think he doesn't really have anything he can do. And I don't know what the Fed cutting rates would do. It didn't work for Powell because treasury rates are higher. And even they were higher even without the war and the latest bout of inflation that's coming in. And the second round of inflation is tough because people are still dealing with higher prices. So it's higher prices on higher prices is the problem, right? We got higher prices on a higher price base.

41:55So therefore, even a touch of inflation is that much more difficult. We saw the GDP deflator come out last week. PCI came out 3.3 % on a year of, PCE came out 3.3 % year over year on an annualized basis last week. And then we saw also the GDP deflator, 6.3%, I think it was. But what that was showing was a lot more underlying pricing pressure to the upside than we expected. And, you know, you look at some of the other numbers, really big question. So now when you look at all of this, you look at things and your process that I know of you, because you and I have been talking for a long time. You include sentiment indicators, you're in positioning, market breadth, and you use DeMarc, these exhaustion signals, the 13s, the 9s.

42:44Which indicators right now are giving you your strongest either warning or your strongest green light to do something? You know, I just did a deep look at market internals, and I really have not seen anything get oversold. And that's something I think is really important. That could be the percentage of stocks in the S &P above the 20-day or the 50-day. That hasn't gotten oversold. Those are really pretty simple stuff to watch. The DeMarq sequential had upside exhaustion signals in the S &P. The last one was 6-1 on June 1st. And you had one day where it went one higher tick. And then the market's gone sideways to down.

43:51The same thing happened with the NASDAQ. So at the beginning of June was when we hit highs, and we haven't been able to establish anything higher. Now, we've just been on the potential for a 13-week closing low for the NASDAQ. We had 12 weeks, so we'll see what happens. But that, I think, is important. People don't realize that there's been a lot of weakness out there, but sort of sideways. You know, there's been rotation, you know, the equal weight indexes hit new highs. So that's sort of positive. But I'm not really convinced that's what you want. You want the real market leadership to broaden.

44:43Wait, wait. Doesn't the equal weighted index reaching new highs talk about market? leaders broadening? Isn't that the actual definition? It does, but what you'd like to see is you'd also like to see the, you know, the MAG-7 and the semis and everybody else, you know, working together, not necessarily in any outside, outsized move, but just sort of together. It's either one or the other. Yeah, that's true. And that's been sort of this year. This year is the LAG-7, by the way. We call it the LAG-7. Yeah. I mean, on my screen, I'm showing the MAG7 is down on the year. And you can weigh that with heavy Tesla down 30 plus percent.

45:28That has weighed on it. Meta's down almost 20 % for the year. But you have, I mean, some others that are doing pretty well. But again, I think we're coming into a tough seasonal period. I think there's still a lot of risk. Well, we got to be talking about midterms, presidential cycles. Yeah, I mean, midterms, you always have seasonal periods with August, September, October. Those can be a little tricky. So far, I think things are holding in there okay. Again, this is on a delay, so things could be a little dicier. But I think it'll take time for really a bigger decline to occur. Now, the indicators you said, like, what am I watching?

46:17We're on the cusp right now of seeing some DeMarc indicators on the downside start counting down. So you're kind of at these, like, sort of holding place right now. But if we have any continuation lower, then those are going to start to come into play. And I'm watching those. But those are inverse indicators. Is that correct? So when you hit that DeMarc low, that becomes a point where the exhaustion signal, because there are exhaustion signals. Exactly. I don't think a lot of, listen, first of all, most people that are listening don't even know what the hell a DeMarc indicator is. Yeah, I question it at times too for me, but no, they're complex indicators.

46:56Very complex. And you have to know how to look at them. You have to look at them backwards sometimes. And he's a brilliant guy. Tom DeMarc, brilliant guy. I spent some time talking to him a number of years ago, but he's got a lot of different indicators. But the 913, the exhaustion signals, reversals. Oh, yeah. Uncanny how they work. It's weird. But I've used the indicators for over 25 years. I know when they work. I know when they're less effective. I know when to press. I know when to, you know, really get in, you know, get long. back in other periods like Liberation Day, we had downside exhaustion signals when everybody was saying everything was going down.

47:37And we got long at S &P 4 ,800. Of course, we sold out a little too early, but that's - Well, because you'd get the exhaustion signals on the other side because that made you move up. That's a natural process, but the point is at least you didn't get out. Yeah, I mean, I think that those, And that's kind of what I'm watching right now. If we break certain levels and start to decline and you can't get the president to taco his way out of it, I think that's the risk. I think the inflation number for July is probably going to be OK. I worry more about the August number because some people don't get this, but the data is surveyed on the 12th of each month.

48:25So let's say, let's thinking of the July data, it's surveyed on the 12th. So gasoline prices were almost at the low down from June 12th to June or July 12th, down about 8%. Since then, they're up about 8%. So next month could see inflation sort of pick back up. But I don't think - But they'll say it's just the food and energy, food and energy. We Nobody eats drinks or actually uses fuel. So it's fuel and energy that's not it. And we don't think about the fact that truckers use it. Or pay for houses or rent or, yeah, I'm waiting for the inflation number. Oh, they're going to reconstitute it. They're going to change it.

49:06They're going to change it. I'm telling you, they're going to change the, Warsh is going to go in and he's going to change. Mark my word, okay, the inflation calculation, because they want to get rid of that whole rental deal, you know, the housing equivalent costs. Yeah, that's not a big expense for people. That's nothing, right? Yeah. I think that there's a lot of ways you can just think about inflation. If you go to a restaurant and you're the one picking up the tab for your family, how does that feel after? I mean, it's sort of, I want to regurgitate sometimes what I just ate when I get the tab going out to dinner.

49:47It's expensive. Beef prices are higher. You know, wine, alcohol prices are more expensive. Everything has gone up. Everything has gone up. I know this also because I'm very involved with a club and we look at the pricing. The pricing of things, while the excitement has been that beef pricing has stabilized, that's stabilized at a ridiculously high level. When you go from tomatoes at$20 a case to$80 a case, and they suck, by the way. Horrible quality tomatoes. Avocados due to the taxes and tariffs. A lot of stuff getting crazy. But let me kind of switch gears here because we can talk about inflation because it's just one of those things that people think people just don't believe anymore.

50:30Or people, I feel that a lot of people have been turned off to a lot of the economic things. They're just numb to it. It's like, whatever, stocks go up, I don't care. The idea that making money heals all things, like we don't really care about what else is happening. But away from major technology, where are you finding the most attractive opportunities over the next, I don't know, maybe six months to 12 months? and, you know, where would you be comfortable with maybe taking the side of consensus? Or the other side of consensus. A couple of questions in there. I think banks are a little stretched.

51:10I bought energy pretty well, and I tended to buy just, you know, the big majors because I saw it was actually when things were pretty calm in Iran. And but I bought Exxon and Chevron and they're up, you know, nicely, like 20. Huge, huge. Those are good. You know, one like I'm starting to look for brands like this is sort of going back into the my view with, you know, old school type stock picking, looking for brands that have easier comps. So, you know, earnings comps get easier after they've been hard. and certain things that have been beat down pretty bad. You're talking about like the Nikes, the Chipoltes, those kind of names.

51:57I mean, Starbucks is a good example. They just reported earnings. Their numbers were great. Comps are good. They have a new CEO who was a Chipotle CEO and did phenomenal there. People really like him. And the stock's done well. I'm starting to look at, I'm in Nike as much as everybody just wants to go, oh, no. No, it's down 75 % from its high. They have a new CEO, new CEO. They're getting a new CFO who's a turnaround specialist who turned around Levi's. That's positive. The comps get easier. They've worn down the high inventories globally. They still have issues with China. But I think things are worth taking a look with it down 75%.

52:51The CEO bought stock twice. So did Tim Cook, a little higher than where it is right now. And this is in the mid 40s. And so I'm here at this price. I bought some Lululemon, similar story. Interesting. Pumps get easier later in the year. They've got new management starting in August, September. it's down again one of those that's down 75 % off the highs uh which by the way both of those two both those two are great examples of the changing preferences of the consumer and if you don't think that you look at chipotle as well which was the darling for years and you look at various brands that we don't even like remember claire's boutique remember that one oh yeah where's that nowhere gone.

53:39But you look at those kinds of things and there is, because of a lot of reasons, whether it's fashion, whether it's diet, whether it's the GLP ones, right? What's going on in the liquor industry, for example. And there is a changing habit of the consumer that is a very difficult thing to peg sometimes. But when you get it right on the long of the short, it could be glorious. Yeah, I'll tell you one other area that I've been buying, and I started buying in June, is China internet. And that's another one that people will roll their eyes and say, you know, God, but I think that the China internet stocks, Alibaba, JD, Baidu, and I'm looking at, I bought, you know, very simple, I recommended KWeb, FXI, those are up 15 % to 20 % off the lows when nobody wanted them.

54:35I mean, I had people say, are you kidding me? Why would I want to buy Alibaba at 95? Well, they came out and said their earnings are going to be better. It's also been, and I wrote about this and I put a very special report out on our big picture note that basically said Alibaba and Tencent and the biggest China tech names own pieces of all the open source LLMs, the AI models, moonshot AI. Nobody heard about that. And boom, it comes out. And guess what? Guess what? Nobody else here knows about Alibaba owns 35 % of this company and they just did a valuation of$35 billion. I think they probably put maybe, you know, 500 million or a billion dollars into it.

55:25That's a good return. So I'm kind of looking at stuff like that. And there's risk. You're going to have the US models complain, and they're going to say they're ripping us off. And they all look at each other's models. There's no doubt. The US models look at each other. They've already discussed it. They've talked about it. But the token costs are less in China. And I think that that's going to be the main driver, that if you can have something that works really well for less cost, with less expense for hardware, and upkeep and build out, sign me up. That's where I want to be. And Alibaba also has their Quen model, which is their AI model, that is going to be in all the iPhones in China.

56:14They beat out Baidu, which I thought was the company that was going to get that. That's another big one. So Alibaba is in the, it's not that far off of 100. I think this is a$200 stock. And I've traded this one along for many times on the long side. I actually got into this, into Alibaba, and I helped some friends get into Alibaba when it was a private company, when Yahoo had to divest. I remember that. It was$10 a share in the private market. And I helped some hedge funds place$50 million into it, which turned out to be pretty good after the IPO. But the thing is, this is a really good, diverse company.

57:01And Alibaba, here's the other thing. They're making chips. They're doing AI models themselves. They're doing cloud. They've got their retail. They've got banking. They've got so much across the board, and they're not taking one lane. They're doing it all. And I think China, their government, has the ability to do stimulus. I think that'll help certain areas that they have. Their economy is pretty depressed. Yeah, and if this becomes a war with AI versus, you know, U.S. versus China versus China, I think China is a pretty formidable opponent here. I'm going to be involved in those. So I hear you.

57:42I hear you. You know, somebody will say, Oh, it's so anti U S and all that. Hey, you know what? Capitalism. It's, it's, it is, it is U S right there. It's looking for where the best opportunity is and go grabbing it and making money. I just want to say, you know, I had somebody, you know, I was on another video at the end of June and I was saying similar stuff. I liked energy. I liked China internet and, you know, Tom's a terrible investor. And, you know, I'm short semis. You know, he's, he seems really depressed and all that. You know, you can't win at times, but because, you know, you can watch this a year from now, my position could change.

58:27You can watch this three days from now and your position changes. That's the whole point of being an active investor. But the point is sometimes you got to buy things that are out of favor. You know, if you, I don't watch CNBC, but I would imagine if you did, you probably have watched nonstop semiconductor coverage for the last three months. Well, thank God, because they're not talking about the Fed anymore. Thank God. I mean, they still got to sneak that in there. Or SpaceX. What a rug pull that was. We could save this for another time. I want to ask you one final question in closing, and that is, listen, you've been around a long time.

59:00You've traded crashes and bubbles and failures of major hedge funds you've been involved in. What is the clearest, because I know you have some negativity going on right now, but what's the clearest warning from market history that investors you think that right now are maybe ignoring? I think that is probably.

59:26I'm going to say this, and it might seem pretty obvious. But I think the market cap concentration in the S &P, especially with the AI optimism and the whole circular financing, it's different from the tech bubble. And I traded through the tech bubble at a hedge fund, and that was difficult, but we came through pretty well. But the thing is, there's another comma as far as how much they're going to spend and how much their market caps are. It's a lot bigger. So the risk is that when things go down, and let's say, I was just looking at a chart somebody sent me that in March to May in 2000, the NASDAQ went down 39%, 40%.

1:00:23percent. If that happens, that's a, that's a lot of market cap. And that's a lot of money that people will lose. So again, not to mention all of the borrowing they've done to build out these data centers that are based on all this. Speculation, short-term options, you know, inverse ETFs with$200 billion. And it's, there's all these things in there that you're going to say, where were the signs, you know, but that's really it. I think just, we're talking a lot about big market cap, big promises, big expectations of what companies are going to be able to raise. And I think that's really, that doesn't come through and that starts to deflate.

1:01:07It's going to deflate like pop in a bubble. Yep, I hear you. Thomas Thornton from Hedge Fund Telemetry will have all the information on the website, on the Disciplined Investor Show Notes for episode number 985. you want to tell people where they can get in touch with you and how to get in touch with you and what you got to offering. Yeah. I'd like to talk to you about that. I am in the process right now of rebuilding our website. And I will tell you, yes, I'm excited about that. That's my entire project tomorrow to work with my programmers. It's going to be quite good. It's going to have a lot of, you know, trade ideas, short, intermediate term core ideas.

1:01:46but you can reach me at info at hedge fund telemetry for a trial and you can either sign up as well and I'll give you 50 % off. If you use 50 off as the coupon, 50 off. I like it. 50, 50 off. Yeah. The coupon code. You get 50 % off. Awesome. Great. We'll make sure that people get that. All right. We'll talk soon. Thanks. Thomas Thornton, always a great guest on always a load of information. I love that guy. Just check out all the stuff that he has on hedge fund telemetry. I think you'll really enjoy it. By the way, quick update on my knee. Got it all taped up with this KT tape stuff, which looks kind of imposing, like I'm a volleyball player ready to go.

1:02:28But things are going good. Walking without crutches and getting along pretty well. Not too much pain, a little bit of swelling, but everything is good. So that's pretty good. Anyway, I want to make sure that you are there next week. We have some great guests coming up, And I want to talk about this NUA net unrealized appreciation and explain it to you, especially if you have a 401k withholdings of company stock. That's it for now. Thanks so much. I'll see you again next week.

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1:04:29We'll be right back.