Prof G Markets: Goldman’s Earnings Slump, an ETF for Options Trading, and Fractional Jet Ownership

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1:17Welcome to Prop G Markets. Today, we're discussing bank earnings and ETF or options trading and fractional jet ownership. here with the news is Prop G media analyst and recent visitor to London that blew me off. Too cool for school. Doesn't want to hang out with his boss. Just signs the backs of the checks that I signed the front of, which is Latin for you're supposed to be nice to me, Ed. Ed, Elson. Ed, what's the good word? Well, you're coming to New York this weekend. I just checked your calendar. So you want to hang out in my hometown now? I'm busy. I'm busy. Oh, okay. I'm there for a day.

1:56I'm actually breaking up the trip. I'm going out to the West Coast. And at my age, if you cross too many time zones, midair, you can slip and break a hip. And so I break up the trip. I go into New York, go to my pad. I'm going to see actually my sister, maybe hook up with my posse, which is Netflix and edibles on my couch. And then the next day, I fly out to, I'm going to a conference in Napa Valley and then from Napa Valley, I am in a conference for two days. And then I go meet some college buddies in Las Vegas at The Sphere to see you too, which I'm very excited about. And then I'm in Vegas for two days.

2:34And then I go to LA for Halloween weekend where I am going as Deadpool. But Deadpool after the fire, I have someone who's gonna come put scars on me because I've been told I look like... Ryan Reynolds, right? No, but it's never just you look like Ryan Reynolds. It's like you look like Ryan Reynolds after the fire or you look like Ryan Reynolds' uncle. But anyway. Diseased, yeah. That's my lab. How much do those Sphere tickets cost, by the way? I've had varying reports. The tickets I got, I think they're like 400, 600 bucks a pop. It's actually not as much as I think. I mean, I've heard nothing but rave reviews.

3:09And I heard some people actually take, not that I would know, I hear some people take hallucinogens or mushroom chocolates before seeing it. You know, per day they make half a million on ads. You just sign an ad sponsorship, put that thing on the dome. That's half a million right there. Such a good idea. It's really innovative. I think it's arguably going to win, I don't know, most innovative circular venue. The Webby Award for best building. Yeah. By the way, what the fuck is with the Webby Award? We were 90-10 and then we end up with the silver and I don't understand what that means. Daddy wants his award.

3:48Like, where do I accept? Where do, I mean, I don't get it. Yeah, no, the whole thing's broken because we got a silver award, apparently. And then I look at our competitors and they also got a silver award. For the fraction of the votes. The day before they announced the award, we were at 90 and they were at five and five. So... I'm going on strike. But thanks to everyone who voted for us anyway. Yeah. It means a lot. Yeah, we're very excited. Anyways, what's in the news? What's going on? Let's start with our weekly review of Market Vitals.

4:24The S &P 500 declined, the dollar was stable, Bitcoin rose, and the yield on 10-year treasuries climbed back to a 16-year high. Shifting to the headlines. Health insurance premiums for families in the US rose 7 % this year to an average of roughly$24 ,000. That increase has accelerated from last year when costs rose about 1%. NVIDIA shares fell nearly 5 % after the US government announced it would restrict AI chip exports to China. Still, the company is up about 200 % this year. OpenAI CEO Sam Altman said the company is generating revenue at a rate of$1.3 billion per year. For context, OpenAI's total revenue last year was$28 million.

5:08Tesla reported third quarter results that missed on both revenue and earnings. That hasn't happened since 2019. The stock dropped 7%. Meanwhile, Netflix beat expectations on revenue and earnings and reported a surge in third quarter subscribers. The company also announced price hikes for its basic and premium plans and lifted its free cash flow forecast for the year. The stock rose more than 15 % after that news. Scott, reactions? So in the UK, they spent about$6 ,500 per person for healthcare. In the US, we spend almost double that. I think it's about$12.5k. And despite that, people live longer in the UK are less obese and less depressed.

5:48So in some, U.S. health care could best be described as one might describe San Francisco, expensive but bad. U.S. health care is just such a shit show. And I do think it comes back to the fact that the insurance industry is in the middle. 45 cents on the dollar that goes to insurance ends up with profits and administration. And And even if you have an inefficient government, they're not going to get a 45 % bogey. It's all going to ideally end up back in patient delivery. So it's just health insurance and the health lobby, it just continues to soak people. I mean, I think I told you I don't have health insurance or I didn't have it for a while because if you can afford not to have it, you shouldn't have it.

6:32It's also another transfer of wealth from the young to the old because old people, insurance companies actually, I believe, lose money on. And young people, people like you, you need to go to the doctor about once every 10 years. You know, you don't need a colonoscopy. You're not going to have a baby. Not that there's anything wrong with that if you decide to have one. Your health care costs are nil. Occasionally, you want someone to give you an IV after drinking too much, but that's not really health care. And, you know, you go in and get tested for STIs every once in a while. But other than that, health care means nothing for young people and or most young people.

7:09and old people need a shit ton of it. The other question that I was asking after seeing this news is, why is this happening now? You know, why didn't insurance costs rise 7 % last year when everything else was rising 7 %? And then the answer that I learned was that basically in some areas of the economy, it takes a long time for inflation to take effect. And what happened here was the hospitals and the insurers only negotiate their fees every few years. So you had all these hospital providers like HCA and McKesson and all these guys who saw their costs rising in 2021 and 2022, but they couldn't immediately pass on those costs to the consumer until they negotiated their contracts with the insurance companies.

7:48And that happened in 2023. So only now are healthcare consumers feeling that pain. And it feels like the next question you have to ask is, are there any other sectors that are susceptible to this sort of inflation lag? And if there are, there probably are. it's entirely possible that the effects of inflation haven't fully come due yet, and that there's potentially more pain ahead. And if that's true, it would ultimately lend itself to your prediction, which is that, you know, you have a suspicion that a recession's on its way. Yeah, it definitely feels mostly because every economist says we're going to have a soft landing.

8:23I mean, if there has ever been an ignorance of crowds, it's with economists. But it continues to be U.S. healthcare continues to be a perfect example of how lobbyists figure out a way to get in between the consumer and the provider and weaponize government, create all sorts of regulations such that insurance companies and hospital systems can get in the middle and charge unfair rents. One of the really negative things about healthcare is that when you're not paying directly for services, there's no watchdog. And that is you might decide, you might go in, you know, you check your bill at the restaurant.

8:58Most people check when they get a bill, they check it. You check your bill at the restaurant? I don't believe that. Well, I don't. But most people do, right? That's not true. Did I check my, yeah, anyways, it doesn't matter. So, but no one, there's no one, consumer scrutiny, consumer vigilance is a key to keeping prices down. And there's very little consumer vigilance because people assume it'll be insurance or they don't understand their billing. So I'm actually really, I think the U.S., the U.K. healthcare system, I believe, is actually far superior. uh nvidia you know aswath the motor kind of summarized it he said unless nvidia finds another category as big as ai and owns it the way they own ai it's overvalued so i think this is beginning to rationalize the valuation is beginning to rationalize tesla this is a pretty serious slowdown the revenue growth slowed to nine percent from 64 percent last year gross margins declined to 18 % from 25%.

9:58So what is that? Like a 25 % reduction in margins. And Musk said about the, or cautioned about the Cybertruck or optimism around the Cybertruck. Yeah, I mean, we dug our own grave with Cybertruck, you know. Nobody digs our grave better than themselves. And so. I don't know what he means by that. I don't, I think the Cybertruck is so strange looking, but I don't entirely get it. The multiple is coming down, but still enterprise value to EBITDA on Tesla is 43X versus Ford and GM at 7 and 5X and BMW at 4X. So we'll see, but the road is littered with people who underestimated Tesla. The other thing he said is that Cybertruck reservations are off the charts.

10:43He said that there are more than a million Cybertruck reservations. The thing that's weird is you look at Tesla's customer deposit numbers, and it's actually down nearly 20 % from a year ago. So the thing that I'm thinking is like, how could deposits for the most hyped car in the entire fleet be off the charts while deposits overall are down? And I think it's just down to this fundamental lack of professionalism that comes with these earnings every time. It's just, you can't fully believe anything that this company tells you at this point. Yeah, I would say when you say company, I mean Elon Musk.

11:15And that is, you can't trust anything he says. and he doesn't feel any fidelity or any sort of, I mean, when we used to prep for owning skulls and the companies I've been involved in, we literally fact-checked the shit out of everything. Can we say this? And he doesn't seem to be bound by those same standards. But I think the story of the week is Netflix adding 9 million subscribers in Q3 above, that's in contrast to the 6 million expected. So, I mean, that's an enormous beat. It's the biggest quarterly net ad total for the company since it added 10 million subscribers in Q2 of 2020 as we were all stuck at home.

11:52Shares increased 18 % Thursday morning after the firm announced it would also raise prices for basic and premium subscribers in the US, UK, and France, effective immediately. In the US, prices for the basic service will rise by$2 to$11.99, while premium subscription will rise$3 to$22.99. So basically make a 20 % and 15 % increase in prices, which really should help their margins, assuming that they don't inspire additional churn. Executives noted that the cancel reaction to their crackdown on password sharing was smaller than expected. This company just has so much strength, and I'm convinced that the head of the WGA actually works for Netflix because by forcing everyone to stop spending, it just became, they all flocked to the place with the deepest content pool, which was Netflix.

12:40They essentially ceded advantage to the one player that could cut their costs and develop a huge cash pile while adding subscribers because they could continue to produce content overseas. And what do you know, they massively beat on subscribers. Meanwhile, all of the other competitors who hire writers and actors have come out of this thing a shadow themselves. So they have succeeded in literally turning the industry into a near monopoly. And that monopoly power is Netflix. And Netflix could not have orchestrated if they'd said, how can we massively increase our leverage, our profit, our growth, and our strategic advantage relative to our competitors?

13:26I know, get the riders to go on strike for 140 days such that we can have a unilateral pause in spending for domestic production. We have international production. And then as an industry, you're seeing what basic economics would tell you. that we have an industry that's spending way too much money and is unsustainable economically, there's going to be consolidation, there's going to be cost cutting, and there's going to be price increases. What do you see? You see an activist at News Corp. You see an activist at Disney. I think you're probably going to see an activist at Warner Brothers Discovery.

13:59And meanwhile, Netflix is just kind of running away with it. We'll be right back after a quick break with a look at bank earnings.

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15:17We're back with Prof G Markets. The big banks kicked off earnings season last week, and overall the results were positive. JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America all reported strong earnings that beat expectations. This was mostly due to the positive impact of rising interest rates. As rates have risen, banks have been able to charge more for mortgages and loans, translating to higher net interest income. There were, however, two odd ones out. Morgan Stanley's profits fell 9%. The company cited a significant drop-off in investment banking activity. Meanwhile, at Goldman Sachs, profits fell 33%.

15:54Now, most of that decline is a reflection of Goldman unwinding its consumer banking efforts, which we've discussed on this program before. Nevertheless, that is the company's eighth consecutive profit decline. Morgan Stanley and Goldman Sachs' shares fell 6.5 % and 2%, respectively. Scott, two very different pictures here. What is happening in the banking industry? It's pretty simple. If your business is largely skewed towards investment banking and M &A, you did poorly. M &A volume is at multi-decade lows. No one's going public because we talked about this. the IPO market has become less appealing.

16:32And while there's been a bit of a thaw, I mean, Goldman was the lead book runner for Instacart and Klaviyo and was one of four banks heading up the arm IPO. Whenever there's a deal, Goldman is still the premier of the aspirational investment banking firm. But the market hates bipolar companies. And that is, if you had a company, if you had a company that was doing$1 billion,$1.2 billion, and then$1.5 billion in profits, So what is that? That's one, 2.2, 3.7 billion in total profits, right? Over three years. And then you had a company that did one, four, and two, a total of seven. The first company would be worth a lot more because investors don't like surprises.

17:15They like stability. They like consistent cash flows. And the reason why they love subscription businesses is they can kind of model out churn and what's gonna happen with that business. And other transactional businesses are much harder to predict. Does Lululemon have the right merchandise in this season? Does Goldman Sachs get a big, huge M &A transactions this quarter? So Goldman and Morgan Stanley are trying to move more into the wealth management business because AUM and managing the wealth of high net worth people is much more consistent. People generally don't leave. Their AUM and their market performance goes up and down, but generally speaking, I think they get between 50 bips and 1 % of AUM under management.

17:56It's a nice, steady-growing business. And that business gets a much greater multiple. The guys who killed it, it's very simple. They're in the business of taking money into Chase Bank or Wells Fargo or into Citi or into B of A. You're depositing your check, and they take it and they lend it out overnight. Or if you want a six-month certificate of deposit, they give you, I don't know, 3%, and then they loan the money off for a mortgage at 7%. Actually, they're probably giving you closer to 5%. But where is that spread between what they had to pay savers versus what they could earn lending that money out?

18:33That spread was, you know, kind of call it, they pay you 1 % two years ago and loan it out at 2.5. So that spread was 1.5 or 1.25, has expanded to somewhere between 2 and 3, the delta, which means their margins are up 50 to 100%. So it's just good to be Jamie Dimon or whoever runs Wells Fargo, I have no idea, and then if M &A volume comes back like crazy and there's a ton of IPOs, then boom, Morgan Stanley and Goldman are going to outperform the other guys. So let me back up. Let's talk about some revenues here. Investment banking revenue was less than half of what it was two years ago and accounted for only 13 % of revenues this quarter.

19:11This is talking about Goldman Sachs, compared to 27 % of revenues in Q3 2021. In contrast, J.P. Morgan, Wells Fargo, and Citibank all have much more robust consumer divisions. For example, J.P. Morgan Consumer Banking Division accounted for 46 % of its revenues and nearly 45 % of its net income this quarter. Morgan Stanley and Goldman, both reliant on investment banking, as we said, have declined more than 10 % a year today, and J.P. Morgan has increased more than 11%. So first off, I mean, you mentioned the investment banking. The CFO of Bank of America had a great quote. He said, quote, investment banking can come back very, very quickly.

19:48It's just that we've grown tired of predicting when that might be, which I think is a great summation of the bipolar point. But the other point I wanted to make is this theme of net interest income, which is the boon for all of these companies this quarter. What is net interest income? It's the interest you make from lending minus the interest you pay out on customer deposits, as you mentioned. Now, the average annual percentage yield on a U.S. bank savings account is currently 0.46%. That is 12 times lower than the Fed Fund's overnight rate. And, you know, you'll say, okay, well, it's downstream of the Fed rate, interest rates aren't one-to-one, there are a lot of factors.

20:32Okay. My response, rewind three years ago to 2020, when interest rates were near zero. The average APY on a US bank savings account, 0.46%. 100%. APYs have not changed on savings accounts. In other words, these banks have collected all of the upside on the interest that they're receiving from the loans that they put out there, but on the interest paid out to customers and customer deposits, nothing is changing. How is that possible? It's an outrage. So, Ed, welcome to capitalism where you have concentrated markets when you have very few players, look at the oil industry or look at gas stations.

21:15When oil prices are up 10%, you can bet almost immediately you're going to see an increase at the pump. But when they plummet, they come down much more slowly. They're much stickier. And that's what's happening here. Eventually, they'll have to increase CD deposit rates. But right now, it's Lollapalooza. It's like consumers, you know, I don't want to say they haven't noticed, But consumers were used to such low rates that if you go from, you know, 46 bps to 1.46, they think, wow, that's amazing, despite the fact that interest rates have gone up 500 percent and they're now charging you 8 percent on a mortgage.

21:49So this is a great time to be in the business of consumer lending. You might find this interesting. First Republic, which J.P. Morgan acquired over the summer, when J.P. Morgan broke out its earnings, it gave revenue and profit numbers, including the gains from First Republic and excluding them. And in this quarter alone, the revenues from First Republic were$2 billion. How much did they pay for First Republic? $10 billion. So, you know, they're going to make back what they paid for this thing in 18 months. And it feels like, at least from my perspective, this was maybe the best acquisition of the year.

22:30This is like adopting a problem child and the government pays you$100 ,000 a month to look after this thing. You knew the bank that, you know, there was only a few that had the capital to take this thing over, that they were going to get it at a sweetheart deal with all sorts of guarantees and backstops on the downside. Yeah, this was going to be, you knew whoever got these things. When Janet Yellen called Jamie Dimon or whoever and said, can you take this? They said, well, okay, I will and I'll do it fast. but you're gonna give me a deal that is so bulletproof because he's still taking Advil from the hangover of when they foisted Bear Stearns on them.

23:05So they made it such a look, we need to give the markets certainty here and we need to get these deals done and we will basically give you a free option on these banks. I think the deal was if they lose money, we'll pay for the losses, but you'll keep the upside. And the run stopped. All the people left their assets in these banks, specifically when they were now owned by a company with a much bigger balance sheet. And it goes back to a theme that we've had here, and that is there's a lot of money to be made running into the fire. That when things are really ugly, when SVB implodes, that's when you want to think about running into the banking sector.

23:54last month the first etf to trade zero day options launched in the u.s what are zero day options well they're like any other option except the contract has a maturity date of 24 hours or less in other words it's a bet on how much the price of a stock will rise or fall within a day now in the past few years, these types of options have exploded. Zero-day trading volume now accounts for 43 % of total S &P 500 options volume. That's up from 21 % just two years ago. And this new ETF, known as the Defiance Nasdaq Enhanced Option Income ETF, is capitalizing on that. How is it doing it? By writing and selling zero-day put options on the Nasdaq 100.

24:37Put another way, each time someone bets that the Nasdaq will go down within 24 hours, the Defiance ETF takes the other side of that trade. And so far, it's working. The Defiance ETF has returned 1.5 % since it launched a month ago. Whether that will last, however, is another question. Zero-day options trading was popularized by retail traders in 2021. And although it's attracted some institutional attention, it is still associated with significant risks. Scott, you've adopted a similar strategy, writing covered calls, and we discussed that on our February 13th episode. What do you make of this zero-day options ETF?

25:16Well, the broader trend around same-day options is a little bit scary, and I think there's some systemic risks that I don't entirely understand. But it's tapping into this need for DOPA that people want to play options, and the majority of the people who buy these options are retail investors, and the majority of the people who write them are institutional. And it taps into a flaw in our species around a need for DOPA, thinking that time will go slower than it does. The majority of the time, stocks don't move a lot during the day. They have to pay a premium for these things. So I think it's a really interesting product.