August 5, 2024 • 38 mins
Chuck Zodda and Mike Armstrong discuss today's jolt to markets across the world and why fear is rising. Understanding what happens when the S&P500 drops suddenly. Why equities are not for everyone. Not every data release is pointing towards a recession. 2024's most popular trades are unraveling. Wall Street's 'fear gauge' rises to its highest level since the early pandemic sell off.
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Episode Transcript
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Speaker 1 (00:00):
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by Veterans Development Corporation. This is the Financial Exchange with
Chuck Zada and Mike Armstrong.
Speaker 2 (01:13):
Chuck, Mike and Tucker. With the year kicking off what
looked like a pretty boring week on the old calendar,
there's just not much economic data coming out this week.
Not much in the way of earnings either. Last week
was the last of the heavy week. So you still
have some companies that report earnings because they.
Speaker 3 (01:30):
Disney, Uber, plenty of others that fundamentally matter, but not
matter for the drive the stock market.
Speaker 2 (01:35):
Let's be honest. Uber does not matter to the stock
market at all, you know, matter Suber investors. Yeah, it's
just it's not it's not gonna it's not gonna indicate anything. Instead,
what we have going on Overnight, the NICK the Japanese
stock market closed down twelve point four percent. It was
(01:55):
the single largest decline in the NIKE since the nineteen
eighty seven Black Monday crash, and so it was, you know,
fairly notable, to say the least. I woke up this
morning and S and P five hundred futures at the
time were off about three percent. They ended up being
off around four and a half by the time the
(02:17):
market opened, and then through early trading ended up rallying
a little bit to the point where they had rallied
a couple percentage points. But we're still in negative territory.
But the market is basically all read. There is not
much green on the dashboard. Last time I counted, out
of the S and P five hundred, there were twenty
stocks in positive territory. Okay, So things are not going
(02:39):
well inequities today anywhere anywhere in the world, in any index.
Speaker 3 (02:46):
Right, and it actually we'll get to this, but it
actually goes way beyond stocks too.
Speaker 2 (02:50):
So let's talk a little bit about what is going
on and whether there's anything that the Fed should do,
that the Treasury should do, that politicians should do, or
that you should do. I think this is a good
place to start in that order. Yeah, sure, why not?
(03:11):
What is going on? So Friday we got a job
support that was slow. It wasn't good. One hundred and
fourteen thousand jobs added, and the unemployment rate went up
to four point three percent from four point one. Two
different reasons why this is bad. The first is one
hundred and fourteen thousand jobs added is basically the stall
speed of the US economy. If you get below that
(03:32):
you're not adding enough jobs to keep up with population growth.
Speaker 3 (03:35):
Meaning unemployment's going up even without.
Speaker 2 (03:37):
Layoffs, So that's not good. The other piece that's bad
is the unemployment rate jumping to four point three leads
everyone to spill a bunch of ink over something called
the Psalm rule, named for Claudy as Sam who was
an economist, and the rule states that if the three
month moving average of the unemployment rate moves up more
than half a percent past its low from the last year,
(03:58):
you're in recession session's coming. Basically, you're in it right now, right,
And that rule triggered on Friday. Now it doesn't Actually,
no one actually looks at this and says, okay, like
timestamp the recession right.
Speaker 3 (04:09):
The conference board in Cambridge, Massa Chusetts does not say, oh, yeah,
we hit a Sam rule. As nber whosions, yeah, declaring
a recession because the Psalm rule was triggered. But what
she did as an economist was researched and looked for
da look data mind effectively, to go and look for, hey,
what sort of things indicated in the past that a
(04:30):
recession was here, and she found well after the recessions,
this was not something she created in nineteen forty and
then you followed along because she's still alive and doing
economics today. But it did find that, Hey, in all
the previous recessions, when this happened, it indicated looking back
that we were in a recession right there. And on
(04:50):
one hand, you might be willing to say, hey, a
lot of these triggers that we've used previously, like the
inverted yield curve, like ism manufacturing reports, like the employment
of temp workers, all of these have been flashing signals
for a recession of the last few years, and none
of them came true. Should we just throw this one out?
And the answer is no, you can't just throw it out.
You have to take it seriously. And markets are now
(05:12):
pricing in a more significant chance of recession.
Speaker 2 (05:15):
So you've got this happening. And again, who knows if
that recession is actually going to happen. It may it
may not. I'm not here to tell you that we're
definitely in recession or definitely not right now, because I
don't think we are. And the next month or so,
next two months, by the end of September, I think
you'll know if there's going to be a recession. Before
your end. That's because we're gonna have two more months
(05:36):
of data that is either gonna say, hey, things are
below towing and we're starting to rally, or hey, things
don't look so good and recessions coming. We'll know in
the next couple months. Here is why this is rattling
world markets. Aside from the general idea that recessions are bad.
The first just at home domestically, the S and P
(05:57):
five hundred, heading into the last couple of weeks, was
trading it over twenty one times forward earnings. Forward earnings
are what the S and P is projected to make
over the next twelve months. Historically, the S and P
five hundred trades in a range of seventeen to nineteen
times forward earnings. That's kind of where you'd say, okay,
that's that's a reasonable place to be. Twenty one times
(06:18):
forward earnings is like, hey, everything's got to hit on
all cylinders for these prices to be paid off, because
it's pricing in an awful lot of good news goldilocks
just right. So you had stocks priced very steeply to
begin with. So any little wiggle about, hey, is there
going to be a problem means that that has to
you know, that premium for equities. Gee, you gotta have
some of that given back because it's just not showing up.
Speaker 3 (06:41):
And I mean fundamentally, just think about the price to
earnings ratio. It is an equation. Right on the top,
you have the price of stocks. On the bottom, you
have the projected earnings there. And if you are worried
about recession, you're worried about both of those things coming down.
You're worried about the future earnings of those companies being impacted.
(07:01):
You're also probably saying, hey, I'm not willing to pay
quite as much for a company if I'm worried about
an overall economic recession, even if that company seems like
they're doing well.
Speaker 2 (07:11):
So this is you know, part one, Part two, and
this is gonna get a little bit technical. But there's
a reason why I mentioned Japan at the beginning of this.
Japanese stocks down twelve and a half percent almost Why
what what gives man? What's going on in Japan? Did
the Japanese economy suddenly worsen tremendously overnight? And the answer
(07:32):
is no, it didn't. But when we talk about some
of the things that hedge funds and other big investment
vehicles do. One of their favorite things to do is
what is known as a carry trade. Carry trade is
a fancy way of saying, hey, if you can borrow
(07:53):
cheaply in one currency and then buy something that's yielding
more in a different currency, you try to do it
because you can maybe make some money just doing that,
and if you do it in large enough numbers, and
if you leverage it to you know, hell and back,
you'll be able to make some money. Is the theory
behind it. So in reality, let's say that you are
(08:14):
a hedge fund and you say, hey, I can go
to Japan and I can borrow it like one percent
right now, because they haven't raised interest rates in like
forty eight years or something like that. They just raised
them a quarter percent, right well, hold on, hold on.
So the premise of this is that the Japanese economy
has just been very slow and sluggish for thirty years,
so it's been very cheap to borrow there, and so
you borrow cheaply. But remember, in order to borrow, you know, cheaply,
(08:38):
you have to have yen. So you go out and
you say, okay, I gotta buy a bunch of yen first,
then you know, or I gotta borrow them. But either way,
I'm hedging my cost back to dollars. It's this whole
complicated multi leg trade. And then what I'm gonna do
with that After I borrow, I gotta convert back to
dollars and I'm gonna buy a US treasury that's yielding
five percent, So I'm borrowing it on one, I'm buying
(09:01):
it five currency. I'm not gonna get that spread because
there's a cost that you pay in order to hedge it.
But that's the general premise of it. Why this matters
is that last week the Japanese Central Bank decided that
they were going to raise interest rates for basically to
a place that they haven't been in like fifteen years. Again,
it was just a small little hike. It was their
(09:23):
second interest rate hike since two thousand and seven. Okay, again,
they basically never hike rates, but they decided last week.
On Wednesday, the Bank of Japan said yes, we're going
to hike interest rates. Two days later, jobs report comes in,
week US rates go down. So do the math out.
You've borrowed in yen very cheaply, that cost went up.
(09:48):
You are buying in dollars that the earnings that you're
getting on that went down, the value of your trade
is completely off sides right now. And so you end
up with a a bunch of hedge fund managers or
risk managers at hedge funds pretty much tapping their traders
on the shoulder saying, hey, we're levered twenty to one
(10:09):
to this, run for the doors. You gotta get the
heck out of everything, sell everything yen that you can,
and batten down the hatches because we need to be
the first one out so that we don't get hit
by this. That is why Japan in this move here
is kind of ground zero, is because it's a very
popular trade amongst hedge funds. And so when they decide
(10:29):
we're gonna sell everything yen denominated, where previously, hey we
had to buy a bunch of yen or borrow a
bunch in order to facilitate this, that whole trade just
unwinds there.
Speaker 3 (10:40):
What the hell does that mean for the average person?
Speaker 2 (10:41):
Therefore, oh, one K, good question, and why don't we
take a quick break and then you'll assess, hey, why
does this affect global markets and not just Japan? And
then I think we'll also touch on hey, is there
anyone in anything that anyone should be doing as a
result of this, Because days like this, I know, make
everyone nervous. It's okay to be nervous. If you don't
(11:03):
get a little nervous when you see something like this,
you're not really human. But we say this a lot
emotional trading, emotional investing. It's bad trading and investing. So
except that you might be a little nervous, harness it
and then let's figure out what the heck to do
with it. We'll talk about that when we return.
Speaker 1 (11:22):
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Speaker 2 (12:34):
Couple stats that I want to give just because again
I know people get nervous when they see markets moving.
As of right now, the S and P five hundred,
let's see, we're at ninety one. The S and P
five hundred right now is about eight and a half
percent off. It's it's all time high, so.
Speaker 3 (12:52):
Not quite in correction. Territory which trick is at ten percent,
which also correction means nothing. It's just a label we
put on things.
Speaker 2 (12:58):
Just a little bit of data. This is from Calie Cox,
who works for Ridtholt's Wealth Management. And when you look
at the data in terms of you know, the number
of years that have different types of corrections in the
not the overall performance of the market, but how often
do these kinds of draw downs happen? From nineteen twenty
eight to twenty twenty three, in the S and P
(13:18):
five hundred, ninety four percent of those years had at
least a five percent draw down. Okay, so what we've
went there right now is in that ninety four percent,
sixty four percent of years have had a ten percent
draw down or more. We're not there yet. They didn't
close down ten percent. But again, over half the time
in the S and P five hundred, you have at
(13:39):
least a ten percent draw down.
Speaker 1 (13:40):
In a year.
Speaker 3 (13:40):
We got one of those in twenty twenty two, we
didn't in twenty twenty three, correct and we've not yet
had one here.
Speaker 2 (13:45):
No fifteen percent or bigger correction forty percent of the
time that happens, and a twenty percent or worse drop
happens twenty six percent of the time, about one in
four years.
Speaker 3 (13:55):
Bear market is what we use to describe that twenty
percent to.
Speaker 2 (13:58):
Drop correct and some times those custer and that happened
like three or four years in own other times, what
was it like nine years or something without having a
bear market from like twenty twelve I believe through twenty twenty.
Speaker 3 (14:09):
No, it was longer because twenty eleven didn't actually, oh
didn' actually because it was interesting zo point eight or
something like that. So I think we went like fifteen
years nine through twenty twenty.
Speaker 2 (14:19):
Yeah. So in any case, volatility, as I say quite often,
is a feature of markets, not a bug yep. If
you are having trouble sleeping because of this, it really
suggests that you need to spend some time thinking about
what your investment strategy should be given your risk tolerance.
Because I can tell you everyone gets nervous at some
(14:42):
level about markets. But if it's affecting your behavior and
how you sleep and stuff like that, you probably don't
have the right investment strategy for your temperament. And that's fine.
Not everyone's wired the same way.
Speaker 3 (14:54):
You know. It's helpful, I find, and also can really
ruin people, but to think about things instead of in
percentage terms, think about them in dollar terms. If I
ask yourself, like, what what would happen to my psychology
if I if I lost one hundred thousand dollars? Yeah,
And like you know, for somebody with one hundred thousand dollars,
that's terrifying, that's everything. But if you have two million dollars,
(15:17):
nothing that happens, like you said, that happens ninety four
percent of the time in equity markets. Yes, so I
think it's helpful to freeze in that way, like, Okay,
where is my real tolerance here? What is my threshold
where I don't feel comfortable? And that might mean that
you should never invest in equities again, it might like
genuinely there are people that should not ever invest in equities.
And so long as you actually, now, that's a really
(15:39):
stupid idea if you've not put together any sort of
financial plan to allow to make sure that you can
get by while doing that strategy.
Speaker 2 (15:46):
Because here's the problem is if you if you invest
in equities but then you sell every time there's weakness,
you make no money, then you're not really investing in equities.
Well you are, You're just you're you're you're not investing,
especially when you should be. Yeah, so volatility is a
feature of this Other things that I want to talk
about on this There are a lot of calls now
I on Bloomberg this morning and CNBC. I've now seen
(16:10):
three different calls for Hey, the FED needs to cut
interest rates this week. Let me tell you the myriad
reasons why this is stupid and there's no better way.
There's no better word. Like, I'm generally kind of cautious
with words, but this is stupid for a few reasons.
The first is, if you look at the history of
(16:31):
when the FED typically goes through emergency rate cuts, they're
during times where something really, really bad is happening.
Speaker 3 (16:40):
We're we're talking an economic event.
Speaker 2 (16:43):
We're talking like, hey, the entire financial plumbing is breaking
in two thousand and eight, and we're putting in emergency
rate cuts.
Speaker 3 (16:50):
Twenty twenty, we are seeing.
Speaker 2 (16:53):
The economy is shutting down, and so we're putting in
an intermeding rate cut because we need to.
Speaker 3 (16:59):
Companies literally couldn't borrow money at that point in time.
Speaker 2 (17:02):
Nineteen ninety eight, long term capital management blows up and
is just a huge, you know, potential problem and they
need to you know, reassure investors and give some liquidity. Okay,
you see it. Then the other thing that you typically
see about interra meeting cuts or inter meeting cuts not
intro is they don't really reassure markets because they tell people, hey,
(17:23):
there's something really wrong here. Like markets don't see a
cut and say, oh good, they cut rates between meetings.
Now everything's fine. It's like, well, what do they know
what's actually wrong right now? So it sends the exact
wrong message to the market. In my opinion, what.
Speaker 3 (17:36):
You're seeing right now is an orderly retreat from stocks
on a new assumption.
Speaker 2 (17:42):
Not orderly in some cases.
Speaker 3 (17:43):
Right there's some blow ups happening, but there are not
financial plumbing issues, and there are not economic emergency issues
that you can look at right now to say, oh,
if the FED doesn't act tomorrow, then these companies are
going to start laying people off. There's none of that,
And an acknowledgment from the FED that they need you
to cut on an emergency basis, as you pointed out,
(18:05):
would be an acknowledgment of an economic emergency that I
don't think exists.
Speaker 2 (18:09):
Also, if we're gonna be honest and talk just about
markets and where they are, the S and P. Five hundred,
even factoring in let's say that it falls three percent
over the course of trading today, is still up more
than eight percent for the year. Doesn't sound like an
agency you're back If if you're looking at your portfolio
(18:29):
right now and you're wondering, G, like where you know,
do I stand? Like what's going on here? You're basically
back to where you were in early May.
Speaker 3 (18:37):
That's what I guess. Yeah, May.
Speaker 2 (18:38):
So if you were looking at your portfolio in May
and you're like, oh, G like this is great, everything's
humming along. I'm not saying that like the path doesn't matter,
because the path does. But you're back to where you
were three months ago if you just have the S
and P five hundred as your investment or your proxy.
So I think it's important to put this stuff in
perspective and remember that just because things are scary doesn't
(19:02):
mean that you need to be calling for a seventy
five basis point rate cut this week. Jeremy Siegel from
Wharton because he was on CNBC this morning and talking
about how a seventy five basis point emergency cut was
needed this week, and that's just facts just are not
(19:26):
in evidence in my opinion. Let's take a quick break here.
When we come back, we got Wall Street. Watch after this.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street watch a complete look at what's moving market so
far today right here on the Financial Exchange Radio Network work.
Speaker 4 (20:00):
The market selloff is accelerating to begin the week, driven
by increasing worries about the US labor market and overall growth.
Right now, the Dow is down by over one thousand
points now or just under three percent. SMP five hundred
is down by three percent or one hundred and sixty
five points, and the Nasdaq down nearly four percent lower
(20:21):
or six hundred and forty three points. Rustle two thousand
is off by over four percent. Ten youre treasureeled down
by two basis points at three point seven seven percent,
and crude oil off about three quarters of a percent,
trading just below seventy three dollars a barrel. More major
tech stocks are taking a beating today. Meta, Amazon, Microsoft,
(20:42):
Tesla are all down anywhere between three and five percent.
Several chip makers, including Nvidia, Broadcom, Super Microcomputer, and Armholdings
are all seeing losses of over or between four and
seven percent lower. Apple shares down by five percent with
the tech selloff, and also we're in reaction to the
news from over the weekend that Warren Buffett's Berkshire Hathaway
(21:04):
reduced its steak in the tech giant in half. Outside
of Apple, Berkshire had unloaded more than seventy five billion
dollars in equities in the second quarter, bringing their cash
total to a record of two hundred and seventy seven
billion dollars. Crypto stocks, including Coinbase and micro Strategy are
down eight and fourteen percent, respectively, with the recent tumble
(21:26):
of Bitcoin now below fifty thousand dollars for the first
time since February. Outside of tech, the Wall Street Journal
is reporting that candy giant Mars is in advanced discussions
to acquire snack maker Kelenova, and a deal could come
together imminently, assuming that talks don't fall apart. The report
notes that the deal could value Kelenova at around thirty
(21:46):
billion dollars, in rank among the biggest transactions so far
this year. Kellanova sells brands including Pringles Cheese, Its Pop Tarts,
and Eggo Waffles. That stock, by the way, is up
thirteen percent. To making a look at the earnings calendar
for this week, AMGM, Caterpillar Air, ANDBBAN uber R. Tomorrow Wednesday,
we'll see Novo, Nordis, CVS Health, Shopify, and Disney report.
(22:10):
And Thursday we'll see second quarter results from Eli Lilly
in Ali Baba. I'm Tucker Silvan.
Speaker 1 (22:16):
That's Waltree.
Speaker 2 (22:17):
Watch a couple other things too.
Speaker 3 (22:20):
The heck was the sucks out here breaking his hardware?
Speaker 2 (22:22):
It's fine. A couple other things to talk about here.
Last Thursday, I believe it was we got data for
the ISM Manufacturing Index and we said it was horrible,
which it was. It was the lowest non COVID reading
that we had seen since two thousand and eight. The
ISM Manufacturing Index. To give you an idea of what
it is, it's a survey of purchasing managers at companies
(22:46):
and asked them a bunch of questions, Hey, how's your business?
Are you hiring? Do you have orders that are growing?
What do your inventories look like? Your supplier delivery times?
How much are you paying for stuff? YadA, YadA, YadA.
Speaker 3 (22:56):
And as you can imagine, a survey like that that
polls may manufacturers historically has been pretty good at forecasting
recession because it's an early warning sent.
Speaker 2 (23:05):
It's been generally awful at predicting anything in the last
three to four years because it has not been a
normal business cycle. But we noted on Thursday, we said, look,
the economy's normalized a little bit more. Maybe this is
more predictive, and if so, this is something that's really concerning.
It was one of the things that we talked about
last week and we said, this is you know, kind
of a pretty bright you know, if not red light.
Speaker 3 (23:27):
At least a loudly flashing yellow, which was a day
before the abysmal job report. And then the market sell Wow,
I think there's a slight market sell off on Thursday,
but there was, Yeah, not what we say, have not
been great in market since July eleventh, Yeah.
Speaker 2 (23:38):
Which I gotta say. We did say it would be interesting.
Do you remember we were talking then, Mike. You probably
don't because.
Speaker 3 (23:45):
I don't pay attention to most of what you say.
Speaker 2 (23:46):
I know we were talking then and I said, gee,
you know, back in October of twenty two, the bottom
of the market in that year was marked by the
really hot CPI that we got knocked over of twenty two,
and after that things just rallied from there. And I said,
wouldn't it be interesting we got a CPI on July tenth.
(24:08):
That was very cool, like very chill, like cool as
a cucumber, smooth as a cucumber too.
Speaker 3 (24:13):
Tucker says, yes, but it was just two years later,
still making fun of him for that one night.
Speaker 4 (24:18):
It was like six years ago.
Speaker 2 (24:20):
It was just like a really cool CPI and I said,
wouldn't it be interesting if the peak of this market,
you know, ended up being on something like that, And
to this point it's played out that way. Yeah, it
who knows, but you know that's kind of when things peaked.
So we get I some services data this morning came
out at ten am. The previous reading was forty eight
(24:41):
point eight, which was again kind of danger. You're heading
into recessionary territory. Anything under fifty indicates contraction printed fifty
one to four.
Speaker 3 (24:50):
So let's think about who they're actually talking to in
this time. Let me give it a little bit more data.
They break it into different places. New orders went from
forty seven to three to fifty two to four, so
are increasing amongst services companies. Employment went from forty six
one to fifty one to one. More companies trying to hire.
This is not recessionary data, and this is why again,
(25:12):
who knows exactly what it means, because it's a survey.
It's not hard data, YadA YadA. But it's not like
everything out there right now is saying recession, recession, recession, recession.
There are thing rarely does it. I mean, like sometimes
it does, but there are times when it does. Like yeah,
March twenty twenty, everything was saying recession. Late oh eight,
(25:33):
everything was saying recession. But oftentimes it's a mixed bag.
Speaker 2 (25:38):
And so for anyone to declare definitively, hey, there's you know,
a recession coming in. It's gonna be awful, and blah blah,
it's too early. I think we'll know in the next
two months. Again, by the end of September, I think
it will become clear whether we're heading that way or not,
because either the data is going to have to level off,
and if it levels off and then you know, rallies
(25:59):
from there like you're fine, like you're not having a recession,
or if it doesn't, there's something coming.
Speaker 3 (26:04):
Probably anybody that's listened to this program consistently over the
last year or several years can probably detect a significant
difference between how we're describing the economy today versus a
year ago, there were some concerns. At the end of
twenty twenty three, those did not materialize. But one thing
we were consistently saying was, look, there might be some problems.
(26:27):
We might have inflation again, but we're not in a recession.
Like that's really really clear last year.
Speaker 2 (26:32):
This is a more serious potential problem.
Speaker 3 (26:34):
Here I am. I said this a few weeks ago
when there's a CNBC survey that they published where six
and ten Americans said that we're in a recession. And
my comment at that point was, this is the first
time in like two years where I think those people
might actually be right to this time, and we will
(26:54):
see how this plays out. To your point, if we
have an economy that's hanging out at four point three
percent on employment with CPI and inflation coming in around
two to three, not a recession, really healthy economy, that's fine.
The historical trend has been when unemployment rises as much
as it has recently, that it continues to rise.
Speaker 2 (27:13):
Here's the deal, though, if you're listening and you're saying, look,
I don't know what to do. I'm really nervous right now.
I'm struggling to put it all together and figure out
you know what I should be doing. I'm making bad
decisions financially. I don't know what to do. If that's
where you are, Mike and I are. Our day job,
we work for a company called the Armstrong Advisory Group.
(27:33):
We advise families and individuals on how to manage their
portfolio and build financial plans.
Speaker 3 (27:41):
And specifically it's around times like this where I think
most people find that type of thing helpful.
Speaker 2 (27:49):
If you're in a situation where you're there saying I
don't know what to do, the number to call to
book an appointment with the Armstrong Advisory Group is eight
hundred three nine three fours zero zero one. We've got
all kinds of people on our team that can help out.
And again it's it's about figuring out what's right for you.
There's no one size fits all approach where hey, you
(28:11):
have to have this much in stocks or bonds. It's
built based on what your approach is and what you're
going to be comfortable with.
Speaker 3 (28:18):
The only one size fits all approach is that sticking
your head in the sand and not acknowledging when there's
a problem.
Speaker 2 (28:26):
Doesn't work, doesn't work, doesn't work. Again, that number is
eight hundred three nine three for zero zero one. We
have advisors all throughout the New England region that are
available to meet with you and address any potential concerns
that you have. That number again is eight hundred three
nine three for zero zero one to book an appointment
at one of our offices throughout New England again eight
(28:48):
hundred three nine three four zero zero one.
Speaker 1 (28:52):
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registered investment advisor. Nothing in the ad or in any
Armstrong guide a specific financial, legal or tax consult your
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Speaker 2 (29:08):
Mike, I want to talk a little bit about tech stocks,
just because as I look at my screen right now,
tech and consumer discretionary, which consumer discretionary is largely at
this point made up of Amazon and Tesla, so kind
of magnificent seven tech adjacent. Those are the two sectors
that are getting hit hardest today, which is consistent with
(29:29):
the last month or so, but also a stark reversal
from the last couple of years where tech has been
you know, this this dominant force and everything else is
kind of lagged behind it. Your thoughts on what we're
seeing from tech right now and where things go tell
me exactly how the tech stocks are going to do
(29:50):
in the future.
Speaker 3 (29:50):
Michael, Yeah, Well, look, this sector as a whole, right,
we've been talking about the SMP and its price earnings ratio.
When we talk about consumer discretionary companies and magnet that
Magnificent seven stocks in particular, we're talking about valuations that
are far loftier. And so it's not that technology is
necessarily the most cyclical industry in the event of a recession.
(30:13):
Right In many cases you could see how spending on
semiconductors because of national security interests, for instance, might continue
at a pretty rapid pace. It's really that lofty valuation,
that lofty number that you put on growth companies in general,
that can take a hit in a recession. And so,
like anybody else, I have no idea where this goes
(30:34):
in the future. But it's a important reminder of something
that we have consistently reminded people, which is, if you
place all your bets in one area at any point
in history, you've gotten really, really, really damaged. And I
don't know if this will be another reminder of that.
But dotcom bubble was and oh wait was another one
(30:56):
in two different areas of the market. And this could
be an.
Speaker 2 (31:00):
The promise of diversification is not that you will make
the most in any one given year. Sure, the promise
of diversification, you're not gonna do as bad as the
bad years. You're not gonna do as good as the
good years. It's a it's a more stable path in
the long run, even if you don't have the highest
highs in the lowest lows. Because again, more boring is
(31:23):
good when it comes to you know the path to
get there. It makes it more likely that you are
going to stay on that path instead of hopping off
when things get a little bit dodgy. That's how That's
how I think I can explain, you know, the promise
of diversification and what it should be to people. Just
take a quick break. When we come back, we're gonna
do some math on the radio. Get out your calculators.
(31:47):
Warm up the pocket protectors if you warm them up,
because I don't know what they really do, and we're
gonna do some right in the name, do you need
to warm up a pocket protector? Can you use them cold.
We're gonna use them cold right after this on the
Financial Exchange.
Speaker 1 (32:02):
This is your home for the most comprehensive coverage of
the economy and the trends on Wall Street. Face is
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The Financial Exchange Show podcast is available on Apple, Spotify,
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Speaker 2 (32:34):
All right, Mike, we're gonna do a little bit of
math on the radio, which I'm told we'll make everyone
turn us off, but don't turn us off. We're gonna
do it in a cool way. We're gonna talk about
what's called the VIX and this is gonna make you
sound smarter when you talk to your friends tonight. But
you have to suffer through a couple minutes of this.
That's the deal.
Speaker 3 (32:54):
I know what story I want to cover after this
because of this presentation. Go ahead, Okay.
Speaker 2 (32:58):
The VIX is often referred to who has the fear
gauge of Wall Street? But what is it actually like?
What does it mean when the VIX is at forty
one like it's today? So the VIX is a fancy
way of saying what is the implied volatility on the
next thirty days of S and P five hundred options.
A stock option, if you remember, is the option to
(33:20):
either buy or sell a stock at a certain price
by a date in the future. So implied volatility is
pretty much pricing in how much do we expect that
stock to move during that time or in this case,
that index to move. Now, VIX of forty one does
not mean that the S and P five hundred is
expected to move forty one points over the next thirty days.
(33:42):
That's not what it means because it's a measure of volatility,
not actually how much it's going to move. So if
you want to figure out how much this is pricing
in in terms of, you know, what does it expect
the S and P five hundred to move? What do
you actually have to do? And I'm not going to
get into all the reasons why you do this. Is
you take the VIX and you divide by sixteen to
(34:02):
make the math easy. And yes, I know that forty
one divided by sixteen is not the easiest math, but
we're gonna do it here. And it comes at to
two point five six Okay, two point five to six.
The reason that you do this long story short, there
are two hundred and fifty two trading days in the year.
Approximately sixteen is the square root of it, and volatility
is the square root of variants, which is proportional to time.
(34:24):
I know, I just you know, said a bunch of words. Hey, Albert,
here's why this matters. Two point five six percent. What
this means based on the VIX is that sixty eight
percent of days over the next month are projected to
have a move somewhere within two point five six percent
up or down. So two thirds of the days. The
(34:46):
additional almost thirty percent of the days up to a
ninety five percent confidence interval, there's gonna be two times that,
so ninety five percent of trading days in the next
month will fall between plus five percent and minus. The
VIX is pretty much telling you here's how much we
expect stocks to move on a daily basis over the
next month. When you have a very high VIX, in
(35:08):
order to maintain it, you actually need to generate what's
called realized volatility, which is how much your stock's actually moving.
If that doesn't materialize, the VIX gradually burns off because
people don't pay up for protection on the S and
P five hundred, and you end up in a situation.
It's the classic climbing a wall of worry. The VIX,
in my opinion, is the wall of worry that markets climb.
(35:30):
It's a it's a numeric definition of, Hey, how much
fear is out there that could lead to people changing
their positions and moving, you know, into markets in the future. Now,
it doesn't correlate one to one as far as like, oh,
this means stocks go up or down this much or
that much.
Speaker 3 (35:46):
I was gonna say, because the other outcome is that
the VIX stays elevated and is accurate in its volatility.
Speaker 2 (35:52):
It very very well could. So ultimately, when you're trying
to explain what the VIX is and why it matters,
a higher VIX means that more people we're paying up
for protection against moves, large moves on the S and
P five hundred. A lower one means there's generally less
protection out there and markets could potentially be a little
bit more susceptible to problems. See, you know, a month
(36:14):
ago when the VIX was at like twelve and a half,
which is very low in projecting, Hey, minimal volatility. When
you see realize volatility, people start buying protection. The vix
goes up. So thus concludes Math on the radio, and
if you're still listening.
Speaker 3 (36:29):
We appreciate it. Wall Street Journal has a part has
a story kind of akin to this one today, where
the subject here is nothing says party to gen z
quite like a fifty deck PowerPoint and a remote clicker.
I am. I don't know enough twenty one year olds
to be able to verify this story, but the trend
that they are describing here is apparently throwing a party
(36:51):
where each guest is asked to prepare a PowerPoint slideshow
and walk the rest of the party through that PowerPoint
slides show, one of.
Speaker 2 (37:01):
Which I drink every time you hear the word synergy
or something.
Speaker 3 (37:04):
One of which was described as what type of cookie
each attendee was, which sounds quite dull, but I mean,
I feel like you could build a pretty entertaining PowerPoint
presentation combined with a drinking game. But you know what,
at first I was hyper critical of this story, and
then I thought, this is such a better party idea
(37:25):
than drinking tide pods. That sure it's true. Absolutely you
can go build PowerPoint presentation.
Speaker 2 (37:31):
It's true, you can't drink a PowerPoint presentation and get
sick from it.
Speaker 3 (37:36):
I did far dumber things as a twenty two year old.
Then show up to a party that requires you to
build a PowerPoint presentation. Is it my nightmare? Yeah? This
does not sound terribly enjoyable to me. But who might
have criticized a bunch of twenty two year olds that
want to build a PowerPoint deck?
Speaker 2 (37:55):
I guess the question is why PowerPoint? Why can't you
give the presentation of your choice in the format of
your choice? You know, why are we constraining people to
Microsoft only?
Speaker 3 (38:06):
I feel like this is just a bunch of investment
bankers showing off their power. What if you're a Linux guy, Yeah,
you know, it's probably not as popular amongst coders.
Speaker 2 (38:14):
What do you do then? A GitHub party?
Speaker 3 (38:16):
I don't know.
Speaker 2 (38:18):
I don't know either. We're gonna take a quick break
to think about all that, and when we come back,
we have more financial exchange
The Financial Exchanges produced by Money Matters Radio and is
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(00:21):
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(01:04):
by Veterans Development Corporation. This is the Financial Exchange with
Chuck Zada and Mike Armstrong.
Speaker 2 (01:13):
Chuck, Mike and Tucker. With the year kicking off what
looked like a pretty boring week on the old calendar,
there's just not much economic data coming out this week.
Not much in the way of earnings either. Last week
was the last of the heavy week. So you still
have some companies that report earnings because they.
Speaker 3 (01:30):
Disney, Uber, plenty of others that fundamentally matter, but not
matter for the drive the stock market.
Speaker 2 (01:35):
Let's be honest. Uber does not matter to the stock
market at all, you know, matter Suber investors. Yeah, it's
just it's not it's not gonna it's not gonna indicate anything. Instead,
what we have going on Overnight, the NICK the Japanese
stock market closed down twelve point four percent. It was
(01:55):
the single largest decline in the NIKE since the nineteen
eighty seven Black Monday crash, and so it was, you know,
fairly notable, to say the least. I woke up this
morning and S and P five hundred futures at the
time were off about three percent. They ended up being
off around four and a half by the time the
(02:17):
market opened, and then through early trading ended up rallying
a little bit to the point where they had rallied
a couple percentage points. But we're still in negative territory.
But the market is basically all read. There is not
much green on the dashboard. Last time I counted, out
of the S and P five hundred, there were twenty
stocks in positive territory. Okay, So things are not going
(02:39):
well inequities today anywhere anywhere in the world, in any index.
Speaker 3 (02:46):
Right, and it actually we'll get to this, but it
actually goes way beyond stocks too.
Speaker 2 (02:50):
So let's talk a little bit about what is going
on and whether there's anything that the Fed should do,
that the Treasury should do, that politicians should do, or
that you should do. I think this is a good
place to start in that order. Yeah, sure, why not?
(03:11):
What is going on? So Friday we got a job
support that was slow. It wasn't good. One hundred and
fourteen thousand jobs added, and the unemployment rate went up
to four point three percent from four point one. Two
different reasons why this is bad. The first is one
hundred and fourteen thousand jobs added is basically the stall
speed of the US economy. If you get below that
(03:32):
you're not adding enough jobs to keep up with population growth.
Speaker 3 (03:35):
Meaning unemployment's going up even without.
Speaker 2 (03:37):
Layoffs, So that's not good. The other piece that's bad
is the unemployment rate jumping to four point three leads
everyone to spill a bunch of ink over something called
the Psalm rule, named for Claudy as Sam who was
an economist, and the rule states that if the three
month moving average of the unemployment rate moves up more
than half a percent past its low from the last year,
(03:58):
you're in recession session's coming. Basically, you're in it right now, right,
And that rule triggered on Friday. Now it doesn't Actually,
no one actually looks at this and says, okay, like
timestamp the recession right.
Speaker 3 (04:09):
The conference board in Cambridge, Massa Chusetts does not say, oh, yeah,
we hit a Sam rule. As nber whosions, yeah, declaring
a recession because the Psalm rule was triggered. But what
she did as an economist was researched and looked for
da look data mind effectively, to go and look for, hey,
what sort of things indicated in the past that a
(04:30):
recession was here, and she found well after the recessions,
this was not something she created in nineteen forty and
then you followed along because she's still alive and doing
economics today. But it did find that, Hey, in all
the previous recessions, when this happened, it indicated looking back
that we were in a recession right there. And on
(04:50):
one hand, you might be willing to say, hey, a
lot of these triggers that we've used previously, like the
inverted yield curve, like ism manufacturing reports, like the employment
of temp workers, all of these have been flashing signals
for a recession of the last few years, and none
of them came true. Should we just throw this one out?
And the answer is no, you can't just throw it out.
You have to take it seriously. And markets are now
(05:12):
pricing in a more significant chance of recession.
Speaker 2 (05:15):
So you've got this happening. And again, who knows if
that recession is actually going to happen. It may it
may not. I'm not here to tell you that we're
definitely in recession or definitely not right now, because I
don't think we are. And the next month or so,
next two months, by the end of September, I think
you'll know if there's going to be a recession. Before
your end. That's because we're gonna have two more months
(05:36):
of data that is either gonna say, hey, things are
below towing and we're starting to rally, or hey, things
don't look so good and recessions coming. We'll know in
the next couple months. Here is why this is rattling
world markets. Aside from the general idea that recessions are bad.
The first just at home domestically, the S and P
(05:57):
five hundred, heading into the last couple of weeks, was
trading it over twenty one times forward earnings. Forward earnings
are what the S and P is projected to make
over the next twelve months. Historically, the S and P
five hundred trades in a range of seventeen to nineteen
times forward earnings. That's kind of where you'd say, okay,
that's that's a reasonable place to be. Twenty one times
(06:18):
forward earnings is like, hey, everything's got to hit on
all cylinders for these prices to be paid off, because
it's pricing in an awful lot of good news goldilocks
just right. So you had stocks priced very steeply to
begin with. So any little wiggle about, hey, is there
going to be a problem means that that has to
you know, that premium for equities. Gee, you gotta have
some of that given back because it's just not showing up.
Speaker 3 (06:41):
And I mean fundamentally, just think about the price to
earnings ratio. It is an equation. Right on the top,
you have the price of stocks. On the bottom, you
have the projected earnings there. And if you are worried
about recession, you're worried about both of those things coming down.
You're worried about the future earnings of those companies being impacted.
(07:01):
You're also probably saying, hey, I'm not willing to pay
quite as much for a company if I'm worried about
an overall economic recession, even if that company seems like
they're doing well.
Speaker 2 (07:11):
So this is you know, part one, Part two, and
this is gonna get a little bit technical. But there's
a reason why I mentioned Japan at the beginning of this.
Japanese stocks down twelve and a half percent almost Why
what what gives man? What's going on in Japan? Did
the Japanese economy suddenly worsen tremendously overnight? And the answer
(07:32):
is no, it didn't. But when we talk about some
of the things that hedge funds and other big investment
vehicles do. One of their favorite things to do is
what is known as a carry trade. Carry trade is
a fancy way of saying, hey, if you can borrow
(07:53):
cheaply in one currency and then buy something that's yielding
more in a different currency, you try to do it
because you can maybe make some money just doing that,
and if you do it in large enough numbers, and
if you leverage it to you know, hell and back,
you'll be able to make some money. Is the theory
behind it. So in reality, let's say that you are
(08:14):
a hedge fund and you say, hey, I can go
to Japan and I can borrow it like one percent
right now, because they haven't raised interest rates in like
forty eight years or something like that. They just raised
them a quarter percent, right well, hold on, hold on.
So the premise of this is that the Japanese economy
has just been very slow and sluggish for thirty years,
so it's been very cheap to borrow there, and so
you borrow cheaply. But remember, in order to borrow, you know, cheaply,
(08:38):
you have to have yen. So you go out and
you say, okay, I gotta buy a bunch of yen first,
then you know, or I gotta borrow them. But either way,
I'm hedging my cost back to dollars. It's this whole
complicated multi leg trade. And then what I'm gonna do
with that After I borrow, I gotta convert back to
dollars and I'm gonna buy a US treasury that's yielding
five percent, So I'm borrowing it on one, I'm buying
(09:01):
it five currency. I'm not gonna get that spread because
there's a cost that you pay in order to hedge it.
But that's the general premise of it. Why this matters
is that last week the Japanese Central Bank decided that
they were going to raise interest rates for basically to
a place that they haven't been in like fifteen years. Again,
it was just a small little hike. It was their
(09:23):
second interest rate hike since two thousand and seven. Okay, again,
they basically never hike rates, but they decided last week.
On Wednesday, the Bank of Japan said yes, we're going
to hike interest rates. Two days later, jobs report comes in,
week US rates go down. So do the math out.
You've borrowed in yen very cheaply, that cost went up.
(09:48):
You are buying in dollars that the earnings that you're
getting on that went down, the value of your trade
is completely off sides right now. And so you end
up with a a bunch of hedge fund managers or
risk managers at hedge funds pretty much tapping their traders
on the shoulder saying, hey, we're levered twenty to one
(10:09):
to this, run for the doors. You gotta get the
heck out of everything, sell everything yen that you can,
and batten down the hatches because we need to be
the first one out so that we don't get hit
by this. That is why Japan in this move here
is kind of ground zero, is because it's a very
popular trade amongst hedge funds. And so when they decide
(10:29):
we're gonna sell everything yen denominated, where previously, hey we
had to buy a bunch of yen or borrow a
bunch in order to facilitate this, that whole trade just
unwinds there.
Speaker 3 (10:40):
What the hell does that mean for the average person?
Speaker 2 (10:41):
Therefore, oh, one K, good question, and why don't we
take a quick break and then you'll assess, hey, why
does this affect global markets and not just Japan? And
then I think we'll also touch on hey, is there
anyone in anything that anyone should be doing as a
result of this, Because days like this, I know, make
everyone nervous. It's okay to be nervous. If you don't
(11:03):
get a little nervous when you see something like this,
you're not really human. But we say this a lot
emotional trading, emotional investing. It's bad trading and investing. So
except that you might be a little nervous, harness it
and then let's figure out what the heck to do
with it. We'll talk about that when we return.
Speaker 1 (11:22):
Breaking business news as it happens only here on the
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Speaker 2 (12:34):
Couple stats that I want to give just because again
I know people get nervous when they see markets moving.
As of right now, the S and P five hundred,
let's see, we're at ninety one. The S and P
five hundred right now is about eight and a half
percent off. It's it's all time high, so.
Speaker 3 (12:52):
Not quite in correction. Territory which trick is at ten percent,
which also correction means nothing. It's just a label we
put on things.
Speaker 2 (12:58):
Just a little bit of data. This is from Calie Cox,
who works for Ridtholt's Wealth Management. And when you look
at the data in terms of you know, the number
of years that have different types of corrections in the
not the overall performance of the market, but how often
do these kinds of draw downs happen? From nineteen twenty
eight to twenty twenty three, in the S and P
(13:18):
five hundred, ninety four percent of those years had at
least a five percent draw down. Okay, so what we've
went there right now is in that ninety four percent,
sixty four percent of years have had a ten percent
draw down or more. We're not there yet. They didn't
close down ten percent. But again, over half the time
in the S and P five hundred, you have at
(13:39):
least a ten percent draw down.
Speaker 1 (13:40):
In a year.
Speaker 3 (13:40):
We got one of those in twenty twenty two, we
didn't in twenty twenty three, correct and we've not yet
had one here.
Speaker 2 (13:45):
No fifteen percent or bigger correction forty percent of the
time that happens, and a twenty percent or worse drop
happens twenty six percent of the time, about one in
four years.
Speaker 3 (13:55):
Bear market is what we use to describe that twenty
percent to.
Speaker 2 (13:58):
Drop correct and some times those custer and that happened
like three or four years in own other times, what
was it like nine years or something without having a
bear market from like twenty twelve I believe through twenty twenty.
Speaker 3 (14:09):
No, it was longer because twenty eleven didn't actually, oh
didn' actually because it was interesting zo point eight or
something like that. So I think we went like fifteen
years nine through twenty twenty.
Speaker 2 (14:19):
Yeah. So in any case, volatility, as I say quite often,
is a feature of markets, not a bug yep. If
you are having trouble sleeping because of this, it really
suggests that you need to spend some time thinking about
what your investment strategy should be given your risk tolerance.
Because I can tell you everyone gets nervous at some
(14:42):
level about markets. But if it's affecting your behavior and
how you sleep and stuff like that, you probably don't
have the right investment strategy for your temperament. And that's fine.
Not everyone's wired the same way.
Speaker 3 (14:54):
You know. It's helpful, I find, and also can really
ruin people, but to think about things instead of in
percentage terms, think about them in dollar terms. If I
ask yourself, like, what what would happen to my psychology
if I if I lost one hundred thousand dollars? Yeah,
And like you know, for somebody with one hundred thousand dollars,
that's terrifying, that's everything. But if you have two million dollars,
(15:17):
nothing that happens, like you said, that happens ninety four
percent of the time in equity markets. Yes, so I
think it's helpful to freeze in that way, like, Okay,
where is my real tolerance here? What is my threshold
where I don't feel comfortable? And that might mean that
you should never invest in equities again, it might like
genuinely there are people that should not ever invest in equities.
And so long as you actually, now, that's a really
(15:39):
stupid idea if you've not put together any sort of
financial plan to allow to make sure that you can
get by while doing that strategy.
Speaker 2 (15:46):
Because here's the problem is if you if you invest
in equities but then you sell every time there's weakness,
you make no money, then you're not really investing in equities.
Well you are, You're just you're you're you're not investing,
especially when you should be. Yeah, so volatility is a
feature of this Other things that I want to talk
about on this There are a lot of calls now
I on Bloomberg this morning and CNBC. I've now seen
(16:10):
three different calls for Hey, the FED needs to cut
interest rates this week. Let me tell you the myriad
reasons why this is stupid and there's no better way.
There's no better word. Like, I'm generally kind of cautious
with words, but this is stupid for a few reasons.
The first is, if you look at the history of
(16:31):
when the FED typically goes through emergency rate cuts, they're
during times where something really, really bad is happening.
Speaker 3 (16:40):
We're we're talking an economic event.
Speaker 2 (16:43):
We're talking like, hey, the entire financial plumbing is breaking
in two thousand and eight, and we're putting in emergency
rate cuts.
Speaker 3 (16:50):
Twenty twenty, we are seeing.
Speaker 2 (16:53):
The economy is shutting down, and so we're putting in
an intermeding rate cut because we need to.
Speaker 3 (16:59):
Companies literally couldn't borrow money at that point in time.
Speaker 2 (17:02):
Nineteen ninety eight, long term capital management blows up and
is just a huge, you know, potential problem and they
need to you know, reassure investors and give some liquidity. Okay,
you see it. Then the other thing that you typically
see about interra meeting cuts or inter meeting cuts not
intro is they don't really reassure markets because they tell people, hey,
(17:23):
there's something really wrong here. Like markets don't see a
cut and say, oh good, they cut rates between meetings.
Now everything's fine. It's like, well, what do they know
what's actually wrong right now? So it sends the exact
wrong message to the market. In my opinion, what.
Speaker 3 (17:36):
You're seeing right now is an orderly retreat from stocks
on a new assumption.
Speaker 2 (17:42):
Not orderly in some cases.
Speaker 3 (17:43):
Right there's some blow ups happening, but there are not
financial plumbing issues, and there are not economic emergency issues
that you can look at right now to say, oh,
if the FED doesn't act tomorrow, then these companies are
going to start laying people off. There's none of that,
And an acknowledgment from the FED that they need you
to cut on an emergency basis, as you pointed out,
(18:05):
would be an acknowledgment of an economic emergency that I
don't think exists.
Speaker 2 (18:09):
Also, if we're gonna be honest and talk just about
markets and where they are, the S and P. Five hundred,
even factoring in let's say that it falls three percent
over the course of trading today, is still up more
than eight percent for the year. Doesn't sound like an
agency you're back If if you're looking at your portfolio
(18:29):
right now and you're wondering, G, like where you know,
do I stand? Like what's going on here? You're basically
back to where you were in early May.
Speaker 3 (18:37):
That's what I guess. Yeah, May.
Speaker 2 (18:38):
So if you were looking at your portfolio in May
and you're like, oh, G like this is great, everything's
humming along. I'm not saying that like the path doesn't matter,
because the path does. But you're back to where you
were three months ago if you just have the S
and P five hundred as your investment or your proxy.
So I think it's important to put this stuff in
perspective and remember that just because things are scary doesn't
(19:02):
mean that you need to be calling for a seventy
five basis point rate cut this week. Jeremy Siegel from
Wharton because he was on CNBC this morning and talking
about how a seventy five basis point emergency cut was
needed this week, and that's just facts just are not
(19:26):
in evidence in my opinion. Let's take a quick break here.
When we come back, we got Wall Street. Watch after this.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street watch a complete look at what's moving market so
far today right here on the Financial Exchange Radio Network work.
Speaker 4 (20:00):
The market selloff is accelerating to begin the week, driven
by increasing worries about the US labor market and overall growth.
Right now, the Dow is down by over one thousand
points now or just under three percent. SMP five hundred
is down by three percent or one hundred and sixty
five points, and the Nasdaq down nearly four percent lower
(20:21):
or six hundred and forty three points. Rustle two thousand
is off by over four percent. Ten youre treasureeled down
by two basis points at three point seven seven percent,
and crude oil off about three quarters of a percent,
trading just below seventy three dollars a barrel. More major
tech stocks are taking a beating today. Meta, Amazon, Microsoft,
(20:42):
Tesla are all down anywhere between three and five percent.
Several chip makers, including Nvidia, Broadcom, Super Microcomputer, and Armholdings
are all seeing losses of over or between four and
seven percent lower. Apple shares down by five percent with
the tech selloff, and also we're in reaction to the
news from over the weekend that Warren Buffett's Berkshire Hathaway
(21:04):
reduced its steak in the tech giant in half. Outside
of Apple, Berkshire had unloaded more than seventy five billion
dollars in equities in the second quarter, bringing their cash
total to a record of two hundred and seventy seven
billion dollars. Crypto stocks, including Coinbase and micro Strategy are
down eight and fourteen percent, respectively, with the recent tumble
(21:26):
of Bitcoin now below fifty thousand dollars for the first
time since February. Outside of tech, the Wall Street Journal
is reporting that candy giant Mars is in advanced discussions
to acquire snack maker Kelenova, and a deal could come
together imminently, assuming that talks don't fall apart. The report
notes that the deal could value Kelenova at around thirty
(21:46):
billion dollars, in rank among the biggest transactions so far
this year. Kellanova sells brands including Pringles Cheese, Its Pop Tarts,
and Eggo Waffles. That stock, by the way, is up
thirteen percent. To making a look at the earnings calendar
for this week, AMGM, Caterpillar Air, ANDBBAN uber R. Tomorrow Wednesday,
we'll see Novo, Nordis, CVS Health, Shopify, and Disney report.
(22:10):
And Thursday we'll see second quarter results from Eli Lilly
in Ali Baba. I'm Tucker Silvan.
Speaker 1 (22:16):
That's Waltree.
Speaker 2 (22:17):
Watch a couple other things too.
Speaker 3 (22:20):
The heck was the sucks out here breaking his hardware?
Speaker 2 (22:22):
It's fine. A couple other things to talk about here.
Last Thursday, I believe it was we got data for
the ISM Manufacturing Index and we said it was horrible,
which it was. It was the lowest non COVID reading
that we had seen since two thousand and eight. The
ISM Manufacturing Index. To give you an idea of what
it is, it's a survey of purchasing managers at companies
(22:46):
and asked them a bunch of questions, Hey, how's your business?
Are you hiring? Do you have orders that are growing?
What do your inventories look like? Your supplier delivery times?
How much are you paying for stuff? YadA, YadA, YadA.
Speaker 3 (22:56):
And as you can imagine, a survey like that that
polls may manufacturers historically has been pretty good at forecasting
recession because it's an early warning sent.
Speaker 2 (23:05):
It's been generally awful at predicting anything in the last
three to four years because it has not been a
normal business cycle. But we noted on Thursday, we said, look,
the economy's normalized a little bit more. Maybe this is
more predictive, and if so, this is something that's really concerning.
It was one of the things that we talked about
last week and we said, this is you know, kind
of a pretty bright you know, if not red light.
Speaker 3 (23:27):
At least a loudly flashing yellow, which was a day
before the abysmal job report. And then the market sell Wow,
I think there's a slight market sell off on Thursday,
but there was, Yeah, not what we say, have not
been great in market since July eleventh, Yeah.
Speaker 2 (23:38):
Which I gotta say. We did say it would be interesting.
Do you remember we were talking then, Mike. You probably
don't because.
Speaker 3 (23:45):
I don't pay attention to most of what you say.
Speaker 2 (23:46):
I know we were talking then and I said, gee,
you know, back in October of twenty two, the bottom
of the market in that year was marked by the
really hot CPI that we got knocked over of twenty two,
and after that things just rallied from there. And I said,
wouldn't it be interesting we got a CPI on July tenth.
(24:08):
That was very cool, like very chill, like cool as
a cucumber, smooth as a cucumber too.
Speaker 3 (24:13):
Tucker says, yes, but it was just two years later,
still making fun of him for that one night.
Speaker 4 (24:18):
It was like six years ago.
Speaker 2 (24:20):
It was just like a really cool CPI and I said,
wouldn't it be interesting if the peak of this market,
you know, ended up being on something like that, And
to this point it's played out that way. Yeah, it
who knows, but you know that's kind of when things peaked.
So we get I some services data this morning came
out at ten am. The previous reading was forty eight
(24:41):
point eight, which was again kind of danger. You're heading
into recessionary territory. Anything under fifty indicates contraction printed fifty
one to four.
Speaker 3 (24:50):
So let's think about who they're actually talking to in
this time. Let me give it a little bit more data.
They break it into different places. New orders went from
forty seven to three to fifty two to four, so
are increasing amongst services companies. Employment went from forty six
one to fifty one to one. More companies trying to hire.
This is not recessionary data, and this is why again,
(25:12):
who knows exactly what it means, because it's a survey.
It's not hard data, YadA YadA. But it's not like
everything out there right now is saying recession, recession, recession, recession.
There are thing rarely does it. I mean, like sometimes
it does, but there are times when it does. Like yeah,
March twenty twenty, everything was saying recession. Late oh eight,
(25:33):
everything was saying recession. But oftentimes it's a mixed bag.
Speaker 2 (25:38):
And so for anyone to declare definitively, hey, there's you know,
a recession coming in. It's gonna be awful, and blah blah,
it's too early. I think we'll know in the next
two months. Again, by the end of September, I think
it will become clear whether we're heading that way or not,
because either the data is going to have to level off,
and if it levels off and then you know, rallies
(25:59):
from there like you're fine, like you're not having a recession,
or if it doesn't, there's something coming.
Speaker 3 (26:04):
Probably anybody that's listened to this program consistently over the
last year or several years can probably detect a significant
difference between how we're describing the economy today versus a
year ago, there were some concerns. At the end of
twenty twenty three, those did not materialize. But one thing
we were consistently saying was, look, there might be some problems.
(26:27):
We might have inflation again, but we're not in a recession.
Like that's really really clear last year.
Speaker 2 (26:32):
This is a more serious potential problem.
Speaker 3 (26:34):
Here I am. I said this a few weeks ago
when there's a CNBC survey that they published where six
and ten Americans said that we're in a recession. And
my comment at that point was, this is the first
time in like two years where I think those people
might actually be right to this time, and we will
(26:54):
see how this plays out. To your point, if we
have an economy that's hanging out at four point three
percent on employment with CPI and inflation coming in around
two to three, not a recession, really healthy economy, that's fine.
The historical trend has been when unemployment rises as much
as it has recently, that it continues to rise.
Speaker 2 (27:13):
Here's the deal, though, if you're listening and you're saying, look,
I don't know what to do. I'm really nervous right now.
I'm struggling to put it all together and figure out
you know what I should be doing. I'm making bad
decisions financially. I don't know what to do. If that's
where you are, Mike and I are. Our day job,
we work for a company called the Armstrong Advisory Group.
(27:33):
We advise families and individuals on how to manage their
portfolio and build financial plans.
Speaker 3 (27:41):
And specifically it's around times like this where I think
most people find that type of thing helpful.
Speaker 2 (27:49):
If you're in a situation where you're there saying I
don't know what to do, the number to call to
book an appointment with the Armstrong Advisory Group is eight
hundred three nine three fours zero zero one. We've got
all kinds of people on our team that can help out.
And again it's it's about figuring out what's right for you.
There's no one size fits all approach where hey, you
(28:11):
have to have this much in stocks or bonds. It's
built based on what your approach is and what you're
going to be comfortable with.
Speaker 3 (28:18):
The only one size fits all approach is that sticking
your head in the sand and not acknowledging when there's
a problem.
Speaker 2 (28:26):
Doesn't work, doesn't work, doesn't work. Again, that number is
eight hundred three nine three for zero zero one. We
have advisors all throughout the New England region that are
available to meet with you and address any potential concerns
that you have. That number again is eight hundred three
nine three for zero zero one to book an appointment
at one of our offices throughout New England again eight
(28:48):
hundred three nine three four zero zero one.
Speaker 1 (28:52):
The proceeding was paid for by Armstrong Advisory Group, a
registered investment advisor. Nothing in the ad or in any
Armstrong guide a specific financial, legal or tax consult your
own financial tax into state planning advisors before making any
investment decisions. Armstrong make contact you to offer investment advisory services.
Speaker 2 (29:08):
Mike, I want to talk a little bit about tech stocks,
just because as I look at my screen right now,
tech and consumer discretionary, which consumer discretionary is largely at
this point made up of Amazon and Tesla, so kind
of magnificent seven tech adjacent. Those are the two sectors
that are getting hit hardest today, which is consistent with
(29:29):
the last month or so, but also a stark reversal
from the last couple of years where tech has been
you know, this this dominant force and everything else is
kind of lagged behind it. Your thoughts on what we're
seeing from tech right now and where things go tell
me exactly how the tech stocks are going to do
(29:50):
in the future.
Speaker 3 (29:50):
Michael, Yeah, Well, look, this sector as a whole, right,
we've been talking about the SMP and its price earnings ratio.
When we talk about consumer discretionary companies and magnet that
Magnificent seven stocks in particular, we're talking about valuations that
are far loftier. And so it's not that technology is
necessarily the most cyclical industry in the event of a recession.
(30:13):
Right In many cases you could see how spending on
semiconductors because of national security interests, for instance, might continue
at a pretty rapid pace. It's really that lofty valuation,
that lofty number that you put on growth companies in general,
that can take a hit in a recession. And so,
like anybody else, I have no idea where this goes
(30:34):
in the future. But it's a important reminder of something
that we have consistently reminded people, which is, if you
place all your bets in one area at any point
in history, you've gotten really, really, really damaged. And I
don't know if this will be another reminder of that.
But dotcom bubble was and oh wait was another one
(30:56):
in two different areas of the market. And this could
be an.
Speaker 2 (31:00):
The promise of diversification is not that you will make
the most in any one given year. Sure, the promise
of diversification, you're not gonna do as bad as the
bad years. You're not gonna do as good as the
good years. It's a it's a more stable path in
the long run, even if you don't have the highest
highs in the lowest lows. Because again, more boring is
(31:23):
good when it comes to you know the path to
get there. It makes it more likely that you are
going to stay on that path instead of hopping off
when things get a little bit dodgy. That's how That's
how I think I can explain, you know, the promise
of diversification and what it should be to people. Just
take a quick break. When we come back, we're gonna
do some math on the radio. Get out your calculators.
(31:47):
Warm up the pocket protectors if you warm them up,
because I don't know what they really do, and we're
gonna do some right in the name, do you need
to warm up a pocket protector? Can you use them cold.
We're gonna use them cold right after this on the
Financial Exchange.
Speaker 1 (32:02):
This is your home for the most comprehensive coverage of
the economy and the trends on Wall Street. Face is
the Financial Exchange Radio Network. Miss any of the show.
The Financial Exchange Show podcast is available on Apple, Spotify,
and iHeartRadio. Hit the subscribe button and leave us a
five star review. This is the Financial Exchange Radio Network.
Speaker 2 (32:34):
All right, Mike, we're gonna do a little bit of
math on the radio, which I'm told we'll make everyone
turn us off, but don't turn us off. We're gonna
do it in a cool way. We're gonna talk about
what's called the VIX and this is gonna make you
sound smarter when you talk to your friends tonight. But
you have to suffer through a couple minutes of this.
That's the deal.
Speaker 3 (32:54):
I know what story I want to cover after this
because of this presentation. Go ahead, Okay.
Speaker 2 (32:58):
The VIX is often referred to who has the fear
gauge of Wall Street? But what is it actually like?
What does it mean when the VIX is at forty
one like it's today? So the VIX is a fancy
way of saying what is the implied volatility on the
next thirty days of S and P five hundred options.
A stock option, if you remember, is the option to
(33:20):
either buy or sell a stock at a certain price
by a date in the future. So implied volatility is
pretty much pricing in how much do we expect that
stock to move during that time or in this case,
that index to move. Now, VIX of forty one does
not mean that the S and P five hundred is
expected to move forty one points over the next thirty days.
(33:42):
That's not what it means because it's a measure of volatility,
not actually how much it's going to move. So if
you want to figure out how much this is pricing
in in terms of, you know, what does it expect
the S and P five hundred to move? What do
you actually have to do? And I'm not going to
get into all the reasons why you do this. Is
you take the VIX and you divide by sixteen to
(34:02):
make the math easy. And yes, I know that forty
one divided by sixteen is not the easiest math, but
we're gonna do it here. And it comes at to
two point five six Okay, two point five to six.
The reason that you do this long story short, there
are two hundred and fifty two trading days in the year.
Approximately sixteen is the square root of it, and volatility
is the square root of variants, which is proportional to time.
(34:24):
I know, I just you know, said a bunch of words. Hey, Albert,
here's why this matters. Two point five six percent. What
this means based on the VIX is that sixty eight
percent of days over the next month are projected to
have a move somewhere within two point five six percent
up or down. So two thirds of the days. The
(34:46):
additional almost thirty percent of the days up to a
ninety five percent confidence interval, there's gonna be two times that,
so ninety five percent of trading days in the next
month will fall between plus five percent and minus. The
VIX is pretty much telling you here's how much we
expect stocks to move on a daily basis over the
next month. When you have a very high VIX, in
(35:08):
order to maintain it, you actually need to generate what's
called realized volatility, which is how much your stock's actually moving.
If that doesn't materialize, the VIX gradually burns off because
people don't pay up for protection on the S and
P five hundred, and you end up in a situation.
It's the classic climbing a wall of worry. The VIX,
in my opinion, is the wall of worry that markets climb.
(35:30):
It's a it's a numeric definition of, Hey, how much
fear is out there that could lead to people changing
their positions and moving, you know, into markets in the future. Now,
it doesn't correlate one to one as far as like, oh,
this means stocks go up or down this much or
that much.
Speaker 3 (35:46):
I was gonna say, because the other outcome is that
the VIX stays elevated and is accurate in its volatility.
Speaker 2 (35:52):
It very very well could. So ultimately, when you're trying
to explain what the VIX is and why it matters,
a higher VIX means that more people we're paying up
for protection against moves, large moves on the S and
P five hundred. A lower one means there's generally less
protection out there and markets could potentially be a little
bit more susceptible to problems. See, you know, a month
(36:14):
ago when the VIX was at like twelve and a half,
which is very low in projecting, Hey, minimal volatility. When
you see realize volatility, people start buying protection. The vix
goes up. So thus concludes Math on the radio, and
if you're still listening.
Speaker 3 (36:29):
We appreciate it. Wall Street Journal has a part has
a story kind of akin to this one today, where
the subject here is nothing says party to gen z
quite like a fifty deck PowerPoint and a remote clicker.
I am. I don't know enough twenty one year olds
to be able to verify this story, but the trend
that they are describing here is apparently throwing a party
(36:51):
where each guest is asked to prepare a PowerPoint slideshow
and walk the rest of the party through that PowerPoint
slides show, one of.
Speaker 2 (37:01):
Which I drink every time you hear the word synergy
or something.
Speaker 3 (37:04):
One of which was described as what type of cookie
each attendee was, which sounds quite dull, but I mean,
I feel like you could build a pretty entertaining PowerPoint
presentation combined with a drinking game. But you know what,
at first I was hyper critical of this story, and
then I thought, this is such a better party idea
(37:25):
than drinking tide pods. That sure it's true. Absolutely you
can go build PowerPoint presentation.
Speaker 2 (37:31):
It's true, you can't drink a PowerPoint presentation and get
sick from it.
Speaker 3 (37:36):
I did far dumber things as a twenty two year old.
Then show up to a party that requires you to
build a PowerPoint presentation. Is it my nightmare? Yeah? This
does not sound terribly enjoyable to me. But who might
have criticized a bunch of twenty two year olds that
want to build a PowerPoint deck?
Speaker 2 (37:55):
I guess the question is why PowerPoint? Why can't you
give the presentation of your choice in the format of
your choice? You know, why are we constraining people to
Microsoft only?
Speaker 3 (38:06):
I feel like this is just a bunch of investment
bankers showing off their power. What if you're a Linux guy, Yeah,
you know, it's probably not as popular amongst coders.
Speaker 2 (38:14):
What do you do then? A GitHub party?
Speaker 3 (38:16):
I don't know.
Speaker 2 (38:18):
I don't know either. We're gonna take a quick break
to think about all that, and when we come back,
we have more financial exchange
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