Quality in the Streets, Momentum in the Sheets

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Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Redholtz Wealth Management. Test one, two. Good? All right. Ladies and gentlemen, welcome to a live recording of the Compound and Friends. It's so nice to be here. What is this place exactly? Does anyone? Nobody actually knows, right? They shot Severance in here. Okay. Okay.

It's a Masonic Lodge, I'm told. Yes? Okay. All right. Guys, we are super excited to be here. And we're going to have an awesome episode of the show. I want to just let everybody know.

Everything that goes on in this room is going to make it on the air into the actual recording. I don't want anyone to be shy. I want to hear loud cheering when Joe says something that's cheerworthy. Or loud laughing when Michael says something hilarious, like what he just attempted, but better. And you guys will be part of the show that we do. Sound good? Yes? All right. All right. Welcome.

Where do we want to start today? Let's do an introduction. Let's start with where were you? Yeah. All right. All right. Ladies and gentlemen, Joe Terranova probably needs no introduction in this room, but for the audience, Joe is a senior. Managing Director and the Chief Market Strategist for Virtus Investment Partners. Round of applause for Virtus.

Joe was elevated to this position in 2009 after having started with the firm as a chief alternative strategist. Joe also developed the Terranova U.S. Quality Momentum Index, VTUSQM. which launched and began publicly pricing in August of 2020 and is tracked by the ETF, Joe T. Round of applause for Joe T. All right. All right.

Let's start here. I think the biggest thing that's changed in the market over the last, let's say, 10 days to two weeks is I wouldn't call it an unraveling, but I would absolutely say that. We are in a situation where there's a lot of doubt about some of the biggest winners of the bull market of the last three years. The AI CapEx story is now fully under the microscope.

I don't know a media outlet that's not writing stories around the clock about will these companies ever be profitable? Are they doing circular financing schemes? Is it 1999? No, it's more like 1998. and all of the related things that we're all hearing about. And I think the best way to phrase this is the market's getting weird and some of the big winners are being called into question. Is that the way that you see it?

I believe the first place you always have to look when you see that there is a turn in the market, believe it or not, is you call up your friends in the hedge fund community and you ask them. How are they feeling? How are they positioned? How have they been positioned and what are they seeing? So here's what's interesting. Momentum has literally been the dominant factor in the marketplace since the Federal Reserve.

began the first rate cut in September of 2024. It's outperformed quality over that period by a thousand basis points. So that creates this force. Think of it as a battleship, right? How do you turn the battleship? You turn the battleship slowly. And when you think about momentum in the market, we think about it with individual equities. The hedge fund community thinks about it in macro assets.

So what was the trade for all speculators and hedge funds going into Labor Day? You were short the dollar, you were long crypto, and you were long precious metals. And it was working great. And if you wanted to leverage... You are actually long the rare earth and minerals trade. September 17th, you can look at the chart. Dollar reverses, begins to move higher. It's gone higher ever since. October 6th, crypto finds its peak.

reverses. It's gone lower ever since. Middle of October, precious metals, gold, silver, find their peak, begin to turn. Rare earths and minerals turn thereafter. Eventually, that has to hit the equity market. Why? Because leverage is coming out of the market. And speculators are beginning to reduce positioning. And then Palantir presents itself. And it begins to hit equities. And that's the slow turn.

of the momentum battleship and it's unfolding right now in the marketplace and i saw you on halftime today you did a great job talking about it okay i usually do that's why except when i'm there that's why health care that's why health care is beginning to outperform. That's why some of the energy names are starting to work in the market. That's why you're seeing quality is beginning to outperform. Can you say more about Palantir presenting itself? So Palantir puts up an earnings report that...

had they done so over this past summer, for example, or last spring, would have been greeted with probably an instant 20% rally that then sticks. This time, they put out another blowout number, have a great conference call. CEO tells everybody to go to hell, who wants to short his stock, et cetera, et cetera, and the stock doesn't work. Is that what you mean by that? Yeah, absolutely. And it's a process of delevering. I also think he made a mistake. He should just sort of –

Just basically done a mic drop. Basically said, here's the earnings. They're fantastic. Good luck shorting our stock. He didn't need to go and defend it, rant, rave the way that he did. Okay. So you've told me this before. You do get more information from the reaction to a report than from the report itself. 100%. And this is a really great example of that. It's a classic example of what we call good news, bad price action. That tells you everything you need to know.

about the current personality of the market and speculators. It's indicative of an environment where speculators are looking to reduce risk, not add to risk. It's a heat check. It's a heat check. It's a sentiment check. So you've got another one coming up in six days when NVIDIA reports. Do you think that'll be as informative as this one?

I think it has the potential maybe to reverse the market back higher. I could see that. Okay. But I think we're desensitized to NVIDIA's earnings reports. It's the last thing to come. We heard from all its biggest customers. We know what they're going to say. Yeah. I mean, I think it's already priced in. We know it's going to be pretty good. But I think if NVIDIA...

blows it out and goes back above its all-time high and gets to 210, 215. That's positive for the market. But we've known about NVIDIA since chat GPT showed up in 2023. And we've been following their earnings reports. And there's been earnings reports for NVIDIA where the stock is reported and there hasn't been the concurrent reaction that you thought there would be either for the individual equity name or the overall market itself.

Yeah. One of the things that I retain from the late 90s, early 2000s period is that you have to remember that NVIDIA is at the caboose of the train. It's not driving the train. It's innovation. is responsible for why all of these AI spends make sense because the products actually work. But in the end, they'll be the last to know the companies that are actually doing the spending.

will be earlier to know whether or not they themselves want to keep spending. NVIDIA will get the call later. Their forward-looking guidance is not at the front of the train. They can only react to the orders coming in. Did either of you think Masayoshi Son selling his position in video was such a big deal? No. Not on the surface, no.

Did you think it was? No. No, he needs the cash to plow it into another AI company. It's a liquidity play. It's a liquidity play. He's not rotating into healthcare. I think we all agree he's not buying defensive stocks. AI healthcare. Joe, I know this is not how you manage money at Virtus or you manage money inside of the Joe T ETF, which we're going to talk about later, obviously. Is this...

Is this a top or the top? Do investors, do people in the room and people that are listening need to be worried that, uh-oh, what core we've said, the market's reaction, the blowout that Palantir delivered and the market's reaction, are we going to look back at all of this?

OpenAI raising at a trillion, $13 billion in revenue, $1.4 trillion in commitments. How could we have been so dumb? Or is this going to blow over? And investors are like, all right, we're up 15% through November, December, and the chase will be on for new all-time highs. So...

Are you asking if this is an inflection point somewhat comparable to what we experienced in years prior? Yeah. Well, will we look back on this as just one of the other blips, or is this the one? Okay. So I think the first thing... that's beneficial for all of us, and the reason why I don't think it is, is because market structure has changed so dramatically. I don't think people realize it. So let's go back over the last five years. The S&P is up.

nearly 100 plus percent. Somewhere in the slides, I think we have this. S&P is up plus 100 plus percent, right? You had embedded in that two periods where the market fell greater than 20%. And what's interesting about it, think about in the first quarter, we went down 20%. Market structure now has created an environment where things happen so much faster.

So when the market needs liquidity and it needs to reduce leverage and it needs to correct itself, because right now the dominant factor in the market is a quantitative strategy. all these algorithms, they're all doing the same thing, right? They're all looking at the same thing. They're all saying, okay, let's run for that exit door at the same time. So I think what happens is the corrections are more violent, much more violent.

The snapback is even more violent. And it's interesting. Everyone said, well, retail did well with the sell-off in April. They didn't have a chance to think about getting out. because it happened so quickly. So I don't think it's a long- Wait, wait, wait. I haven't panicked yet. Right. I don't think it's a long punitive period. If you think about what happened in 2022, okay, that was a nine and a half month process, but the Federal Reserve-

was raising rates at a historic pace, 75 basis points over a five and a half month period. So yeah, you had to wait for the Federal Reserve to say, okay, we're done. But I think what happens now is we move forward. Markets have changed so dramatically. Market structures have changed. You're going to see violent corrections.

violent snapbacks. And I think that's beneficial to us because I don't think you get the prolonged sell-off. There's a lot of financial advisors listening in that are in this room. And I think over the last couple of weeks, there was this weird dynamic where a lot of prospective clients were feeling themselves a little bit, right? Because the trade has been so obvious.

It's an anomaly that the only thing that you needed to do in this market was buy the hyperscalers and the people that are spending a ton of money. So we've got this chart from our friend Kai Wu at Sparkline Capital. Typically, high CapEx stocks. are shitty investments. They underperformed on average 6.7% a year from 1996 to today. Is that a technical term? Yes, technically they're shitty. This year, John, we've got...

Yeah, there we go. So Chark and Matt on our team broke down the median S&P 500 tech stock into quintiles from low capex spend to high capex spend. And the ones that are all in on the AI trade. are up on average of 45% versus the ones that aren't spending anything, are up 2.2%. Now, the question is, all right, are they high on their own supply? Are they overdoing it? Is this the top? Core Weave is down 41%.

Is OpenAI going to be fulfilled the obligations? And I think the reemergence of doubt, a wall of worry, you have to have it. Going straight up every week, pound through up another, that is not healthy. Like that is what leads to a bubble that pops. Do you think it's interesting that we've had a market where the opposite of what's been historically true has taken effect, where companies would announce a massive capex spend?

and the stock price would go up as though they just announced a massive earnings beat? So the companies that are announcing the large increases in CapEx, they're supporting those announcements. with ridiculous earnings growth. So that's where it's supported. I would say that Oracle really was the moment where we reminded ourselves how sensitive we are to the usage of debt.

funding innovation because if you think about the last two years everyone I mean everyone in our universe came on the network and said don't worry about it They're using cash from operations. Right out of cash flow. It's cash from operations. This isn't 99. Well, here goes Oracle. Their debt to equity ratio is somewhere above 500%. And it's like, whoa, wait a second.

Not that it's going to go south, but we're just sensitive. We have that bias of what happened in 99. I think it's that, but it's also they signed a five-year potential for up to $300 billion contract from OpenAI. That goes into effect in 2027. Oracle was up 25% on the day that it announced that partnership. It gave back all of it and then some. The gap has completely been filled. It's flat today. I think it's actually...

It's down. Today below the level that it was at when that announcement happened. We don't buy it. I don't think that OpenAI is good for that $60 billion a year. The market doesn't believe that OpenAI will actually follow through with that amount of spending with Oracle.

Because all the ties that OpenAI has with all the other companies, Microsoft is an investor, owns 10% or whatever percent. All of these other companies that are intertwined, if they're not going to pay anybody, it's probably going to be Oracle first.

2.45 up to 3.45 went parabolic September 9th to September 10th. The day of the announcement is the high. To your point, I think it's down to 2.25. And I think the larger question... We have to remind people, by the way, before you finish that sentence... Palantir is a $500 billion market cap at its high. And what was Oracle at its high? Was it a trillion? No, it was a little bit. $800 billion? Yeah, it was close to a trillion. The point is, these are not penny stocks. No.

There's a lot of money coming in and then very quickly rinsing out. And this is not something that we see outside of bubbles, which is what makes people nervous. The sheer dollar amounts. I think the hardest thing for all of us to... digest and to think about is the effect that open ai is going to have as we move through the course of time and ultimately they go public because we can't see anything from open ai right it's almost a blind trust

We're relying on the fact that there's this. Thank God. Yeah, there's this. So here's what we have on OpenAI. Microsoft consolidates a portion of OpenAI's losses into their own earnings report. And if you extrapolate Microsoft's stake and the amount of dollars that they are saying has been lost, some journalists have – some analysts have come to the conclusion that –

Like, this is a company that's willing to lose $70 billion a year. Like, if you think about their ramp, now their revenue is growing just as fast.

Which is the good news. Yeah, but the counterpoint, look who's funded the bubble. The hyperscale is great. It's Microsoft. It's Amazon. They have their back. They're all in. And it's funded from cash flows. For now. Yeah, for now. Of course. Do you think they want to go public? I think...

The backers that have been sitting in the stock and watching it appreciate on paper would love to see some liquidity. And ultimately, you're going to have to do what the backers want you to do. But the other point, there's a lot of liquidity in the secondary market for these shares. Tons of it. Yeah. Tons of it.

We asked the question, how is it possible that a company could have this many shareholders and not be public? Right. And I think they are going to have to come public sooner rather than later. Because I think at a certain point, we're going to see an exhaustion in the trust that we have that everything is fine with all these relationships and all this spending. Does part of this, though, remind you of like when Facebook was on the runway to go public?

And they hadn't yet built a mobile app. There was so much doubt about the valuation, which now today seems quaint. But I think it was a $40 billion valuation. People were fainting. And so some of this is reminiscent of that for me. And it's 12, 13 years later. But I do like, I do hear some of the skepticism as almost like schadenfreude or jealousy. Like it's not all legitimate skepticism, at least from where I sit.

You agree with that at all? I agree with that. And I think we have to learn more about Sam Altman. Is he an Elon Musk type figure? What is his contribution ultimately going to be? How is he going to deliver? Is he going to be able to achieve AGI?

which is what this is really all about at this point, which I'm not necessarily sure I'm excited about him achieving. Artificial general intelligence, because it basically means anything that I can do, okay, they could do with the technology. I'm not so sure that's good for us. But I think it's more we need to learn more and more about him. I wish they were public. It would be easier for us to have this conversation if they were public.

And I think the longer they are not public, I think that has a little bit of a negative effect because I think we're exhausted at this point. I mean, how many more deals can you hear from OpenAI? I think the market's exhausted with that. If a company comes public at a trillion-dollar valuation,

The dollars to invest in that company do have to come from somewhere. Does that come from the market caps of the MAG7 stocks as people rebalance and the indexes have to reconstitute? Yes. So it's not necessarily a positive. catalyst for the nasdaq or large cap tech when this trillion dollar meteor does finally make contact with earth

No, it's probably the greatest example of sell the news. Joe, you're right. I think the market is... There was an announcement earlier before we got here. OpenAI did a deal with Lububu. Thank God. Wait, hold on. I saw a take today that I think you'll like.

thinking about being humble in the face of all of these unknowns, that these market caps are swinging around hundreds of billions of dollars over the course of a couple of sessions. Obviously, as it relates to our clients and how we're thinking about it, a little humility is appropriate. No, absolutely. And listen, on the other side of it, the bullish premise, which I maintain over the long term, is you haven't even really seen the ability of AI.

to improve the environment in the healthcare industry. Think about it. Have you seen technology?

artificial intelligence being used in healthcare to the degree it's been used in other industries. No, you have not. And I think that's going to be a very powerful force, a very powerful tailwind for markets. Some of the commentary about the healthcare rally, which is pretty... which has gotten a lot of attention over the last day or two, is that these are companies where the highest cost that they have is paying really fancy people with advanced degrees.

to do years and years and years worth of research only to discover that a compound that they're looking at is actually not going to lead to a commercial drug. And it's almost like lighting money on fire. If these companies start coming out and saying, We're cutting down the time to something as simple as investigating a compound or drug discovery from three years to one year. The ramifications for earnings expectations is pretty obvious. And that's just like one very small example.

Yeah. What do you say that, or maybe you wouldn't, it's hard to get too bearish when there is such healthy rotation under the surface. As much as the speculative stocks, all the quantum computer names are getting absolutely smushed. Money coming into healthcare, money coming into energy, money coming into financials, rotating out of tech, does that scare you? No, you're in a secular bull market that is at a moment.

And you're stepping into a midterm election. We're going to talk about that a little bit later. But you say to yourself, all right, how do you identify the foundation of what the secular bull market is, right? You look at global... It's interesting because everyone looks at the Federal Reserve. It's global central banks. Right now, over 80% of global central banks, their last policy action was a rate cut. Why is that important?

Because as long as that figure sustains above 50%, if you look through the course of history, you have positive return. That's first of all. Second of all, one year ago, everyone said inflation was a global problem. No, it isn't. It's a US problem. Go look at the inflation readings in Europe. You've got two handles on it. India is 1.5%. China is negative 3 tenths of a percent. Asia, you have one handles on it. Inflation is a problem here. And now you're coming off of...

Four consecutive quarters of double-digit earnings growth. That's something we haven't done in several years. And the expectation looking forward into 26, and you could say, OK, maybe the estimates are a little bit too optimistic is for further. double-digit earnings growth. So you have this confluence of factors that have been really positive. And then you have the fiscal policy. It's interesting because everyone likes to play an economist. OK, you want to be an economist?

Tell me what statistically you could model about the regulatory relief. How do you think about that? The regulatory. Deregulation. So it's more of a vibe than it is a data series. It's more of a few. It's a fuel thing. It's sentiment in the C-suite. It improves the sentiment in the C-suite. But think about this one second. In President Trump's first administration, there was something called a two-for-one order. Does everyone know what that is? It basically says...

If you want to eliminate, if you want to introduce one existing, you want to introduce a regulation, you have to repeal two existing regulations. Okay, President Trump comes in. What does President Trump do? What he normally does. He says, let's make it 10 to 1. Where does he come up with that number? Who knows? Okay, but now you have to repeal 10 regulations, right? Based on just introducing one.

Then you have all these things that are contributing, whether it's qualified business deductions, right? The SALT cap being raised to $40,000. It's just hard to statistically measure the effect on that. To Josh's point, It really is just a reflection of confidence. I think it's a sentiment and a confidence thing. And one of the interesting things we were talking about on the air today, the Dow is now outperforming the S&P 500 on a very short-term basis.

Like you look under the hood, why is that happening? The second best Dow stock this year is Goldman Sachs. I forget how much it's up, but it's up way more than the overall market. And then the best performing S&P 500 name is Robinhood. I don't know what the quantified effect, to your point, is of deregulation on Goldman. I'm sure it's a lot. I certainly don't know what it is on Robinhood. Robinhood never acted as if there were regulations to begin with. But that's...

These two stocks to me are very emblematic of this moment. If you want to do something, you pretty much do it in financial services. You want to get into a line of business you've never been in, go for it. You want to do M&A, you could do that too. You want to bring things public? No problem. Plenty of appetite. These companies are making a lot of money and multiples are expanding in financial stocks as a result of that vibe that we can't quite capture with a number.

In addition to that, you also have the positive effect, which we don't really talk about. But when President Trump was preparing to take the oath of office, the price of oil was above $80. $60? 58. 58. 58, 60, somewhere around there. 6-7. 6-7. Don't you dare. And embedded in that is in the month of June, we had a military conflict.

between Israel, the US, and Iran. So think about that for a second. You've got lower energy. And then the last thing, which is incredible, which a lot of people tend to ignore unless you talk to the fixed income traders. is how calm the volatility is in the bond market. What do you think the range is so far? Tight. In 10-year treasury? 20 basis points. OK. So in 2022, it was 285 basis points was the range.

All right, what is it? What is it now? 95 basis points. That's an incredible environment, okay, if you think about transacting. and be able to have the availability of credit to be able to plan in the C-suite again. So there's these conditions that are in place that are really good. I love the conditions right now. I think the conversation that we're having is so consensus.

On any show, it's a lot of doubt. It's a lot of disbelief. It's a lot of negativity around private credit and valuations and the sustainability of the bull market. It's year three of this. I love all that. There's so much doubt, and yet the Fed is easing. Listen to Satya or any of the other major CEOs. They're all, all the way in. All the way in. Earnings are at an all-time high. So are expectations, obviously. Margins are at an all-time high. Investors are dying.

dying to buy any dip, a 3% dip, they run face first in. And yet, like people like us, there's just a lot of doubt out there. And I think it sets us up very nicely. There's not euphoria. Yeah, that's a good point. But what are the reasons for that doubt? Keep shifting is the other interesting thing. People that were skeptical six months ago were skeptical for reason A. Reason A turned out not to matter that much. So then they shift to reason B, but they remain skeptical.

And I ask myself, like, what is the reason why they always have to find a reason to be worried? And I think there's just something about human nature where things are good for a really long time. The mind gets really busy.

inventing ways that it's going to end badly. 100%. People have been waiting for the shoe to drop for 10 years. Yeah. You know what's interesting? Why do you think the most successful people are the ones as they grow older that get the most bearish? Because they have the most to lose by that point.

And life is better when you're young. I mean, you're just, obviously. And also, but the older people, the older people have seen. I feel like he's talking shit about us. Have seen how. My life is better now than it was when I was your age. How damaging drawdowns are. Yeah. Psychologically, financially. In dollar terms, if you tell a 27-year-old, danger ahead, Michael Burry just posted a selfie. All right. You're talking to a 27-year-old who maybe has like...

$38,000 in their 401k and then another 20 grand bar mitzvah money that they're trading on an app. It's like, all right, what do you want me to do? Like, what do you mean danger ahead? 20% correction. Barry says definitely. Dr. Berry, excuse me. The 27-year-old's like, all right, so what will be will be. You say that somebody with $5 million in equities, all they can picture is I'm about to lose a million dollars. Expenses, kids, grandkids. Right.

and more responsibilities, not only more dollars at risk, but more responsibilities. I think it's more than that, though. I think it's the voices in our industry for what we do, whether it's on CNBC. business platform. It's just us. There's no recording equipment here. But you'll see the billionaire crowd come on air and say, oh, this looks...

This looks heavy to us. This looks like the market needs to roll over. I think it's a little bit more than that. What's interesting is if you talk- You know what I call that crowd? The family office crowd. You're right. Sir, you have a family office. Are you here as a public service announcement to warn all the welders and fishermen about these visions that plague you in the evening? Like, what is this?

What is the motivation to be worth $2 billion and feel the need to come on TV once a month to scare the shit out of everyone? I'll never understand it. You will never hear from me. I don't get it. And the other side of it is... The engagement has never been higher. People are interested in the market and they're engaged in the market. And you talk to the younger generation. So I have three children. One is 20. One is 19.

And then my daughter's about to be 17 years old. These kids are interested in the market in a way when I was that age. I wasn't thinking about it the way they are. The younger generation, the younger generation, they're bullish. Maybe it's because markets have gone up during their lifetime. I don't know. But it's good to be bullish because I will tell you this, okay? Short-term pessimism will fail all the time against long-term optimism. Long-term optimism always wins.

If your kids are too bullish, have them hang out with Jeremy Grantham for an afternoon. See if they want to take Jeremy Grantham to the zoo. All right. Are we doing any of these charts or am I just holding this as a paperweight? You can do whatever you want. Where do you want to go? One interesting dynamic that occurred last week. The market cap weighted index has been outperforming the equal cap weighted index.

like literally a decade. Every day, the ratio, depending on what's on top on bottom, it goes lower and lower and lower and lower. And last week, the bandaid was stretched and it snapped. There was a four-day period. where the cap-weighted index outperformed the equal weight by 3.6%, which over a four-day period, that's only happened two other times. It happened in October 2008, and it happened in June 2020.

And the other two times, I know it's a sample size of three, but bear with me. I'll get to the point in a second. The other two times, both of the baskets were moving in lockstep. This time, the S&P had been outperforming by so much. And then it just broke. It crashed from an already stretched position. And not maybe, that was a short-term top in the all-in on the AI trade that we're seeing unwind over the past couple of sessions. Do you think that...

This is a story about strength in the other sectors where the equal weight would pick that up? Or is it a story about just sudden weakness in that mega cap basket? Or is it really truly a combination of both things at the same time? I think it's a confluence of all factors, but I think we're in a room full of financial advisors. What does that mean to you? What's a benchmark? Yeah. Benchmarks are gone.

Tell me, what's the benchmark in the last couple of years? Right. Is there anything legitimate about the S&P 500 benchmark at this point? knowing that it's 40% five stocks? I mean, clients are benchmarking you to Apple and NVIDIA and Amazon. Okay, but you're managing a portfolio. Is that fair? No, of course not. It's not meant to be fair, would be my comment. You can't tell somebody what not to compare you to.

You can strongly... So therefore, you're supposed to concentrate. No. That's not the takeaway. But you can tell... You know, our friend Stephen Weiss told me on air, I love Stephen. Okay, you know what he told me? Do you love him, though? I do. All right. He's lovable. He told me that diversification is the enemy of performance. Come on. Sort of right if you're trying to become a billionaire. Sort of right. No, if you want a family office. Yeah. Okay.

I guess I would say the takeaway is not therefore try to race the S&P 500 with like 15% Apple and 30% NVIDIA positions. I would say the takeaway is as a financial advisor, not as an investor. as an advisor, you can strongly suggest to people, no, actually the benchmark is 60-40, or no, it's actually MSCI, All Country World Index, and then ACWI and all these things.

They don't look at that. It's not in their Yahoo Finance page and it's not on their Apple stocks app. So they're going to default to like the big five stocks that they know really well and probably own. And they're going to default to the S&P. So the greater task that we have in front of us as people who are responsible for the money that other people give us is to just say, I'm willing to take the abuse. You call me up right now and complain, how come I don't have more NVIDIA?

I can't talk you out of looking at NVIDIA and judging whatever stocks I bought for you, right? Including NVIDIA. I can't stop you. But what I can tell you is give it to me as hard as you can. I'm going to give it back to you though.

So we had people ask us, why on earth would I ever own international stocks? Every year for 10 years. Nobody's asking that this year. International stocks doing better than US. This is just the nature of the business that we've chosen. And there's not really a great answer.

Other than, go ahead, say whatever you want to say to me. I know I'll be right in the long term. In the short term, I'm willing to take the shit that you want to give me. What's comical about 2025 is actually you can diversify in. much better mannerism than you could in the last several years. You just said international stocks are working. Look at taxable fixed income. Investment grade, high yield, both up 7%. Gold. Korea.

Just go to the traditional places. Emerging market debt's up 7%. Municipal bonds have snapped back. They're up 4%. You have various different places that you can go that the last several years you could not have. And even if you look at the sectors, the 11 sectors of the S&P, as long as you stayed high up in the equity size class, mid caps and large caps, you could find opportunities. The FIN 5, they just keep making all-time highs.

What is that? JP Morgan, Bank of America. Keep going. Morgan Stanley. Morgan Stanley, Goldman Sachs, Citi. There you go. Fin 5. So outside of the MAG-7, which is what we spend all our time talking about, so we're wrapping up Q3 earnings season. And we've got in the 493, this is from Wisdom Tree, 11.8% earnings growth. 11.8%. It's pretty damn good. It's pretty good. And it also supports the premise, which people have.

The Bears have said, well, this is all multiple expansion. It's not. Not true. Not true at all. So Tony Pasquarello, good friend of ours who is over at Goldman Sachs, he puts a note out and he says going back. to the great financial crisis, the NASDAQ is up like 2,200%. How much of that is attributable to multiple expansion? What would be your guess? A fifth.

A fifth? What would you say? A fourth? 16%. 16%. So was that closer than Michael? No, you were wrong. You can't do math. It's earnings growth, it's earnings growth, and it's dividends. So it supports. It supports the price appreciation. And that's what's going on right now when you read the 493s up 11%. It's not multiple expansion. All right. So, Joe, two times ago, you were on our show. You were in the studio.

it was i guess however many years ago we were talking about midterm elections and how strong the results are so since world war ii began there have been 21 midterm election years in the united states we've got 21 consecutive positive performances. 21 for 21. We've got 14 double-digit positive performances. Only two occurrences with positive performance less than 5%.

Why do you think that is? Wait, positive performance like how long after the midterm or just in that calendar year? In the following year. June to June. No, no, no. No. Wrong. November 3rd, 2026 is the next midterm election date. If you buy the market on the date of the midterm election, November 3rd, 2026, you sell it out June 30th of the following year, you're undefeated. You're 21 to 21. So it's a nine-month stretch immediately following.

election day, inclusive of election day. 21, that's pretty good. Is this your new ETF? So what do you do? No, but I'll tell you something in 2022. So what do you do with that information? So it's interesting. Leverage. I'm going to tell you, I really don't care if they're watching. It's fine. So in 2022, I was doing a lot of advisor events.

And in the various wire houses. And I did something at Morgan Stanley. And at that time, Mike Wilson, who doesn't come on our shows anymore, but goes on CNBC. First of all, I don't understand why people have price targets. You can't tell me you know where the market's going. It's for the content. That's it. 12 months from now, you have no idea where the market's going. All you could do is set an expectation and define the environment.

So in 2022, everyone's got all these real bearish, you know, we're going back to the COVID low. We're going 3,400, all these different price targets. And really what you should be doing. is just setting the expectation and telling the client, all right, this is going to be a little bit more of a prolonged process because the Federal Reserve is aggressively raising rates. And you just understand time is the enemy and you want to use patience.

as your ally. Why did I say that in 2022? Because I'm looking at these midterm election statistics and I'm saying to myself, well, guess what? November's coming. And I know I'm at that point 20 for 20. So I'm going to rely on these statistics. And the market's down 19% at this point. I'm willing to take that shot, OK? And that shot actually worked. And I think this helps you understand in 26.

If there's a moment where markets are down, okay. Based on the environment we've described in the tailwinds, I think it's an opportunity. Surely you can't be serious. Can you think of anything else that's 20 for 20, though? 21 for 21. Like in other words, the only other thing that I could have thought of and now it's invalidated is when they were looking at like inverse credit spreads, like guaranteed recession. We have 13 occurrences.

Well, now we have 14 occurrences and it didn't work. Like there were so few things that- But that at least had an economic rationale. What is the rationale for this? Why does it work? Astrology. Listen, there's- The most recent table is on Virtus Investment Partners' website. I put it out on my social media. And you can see we put who gained control of Senate, who maintained the majority in Congress.

I'll let all of you figure out the reasoning. I have no idea. That's not what I do. I don't get involved in the feelings behind things. I just look at the facts. But I'm going to say this to you. So you say, where else does this stuff work? Everywhere. That's why Jane Street.

makes $20 billion in a year. That's why Citadel makes the money that they make, because they identify, whether it's a small period of time. They don't ask why. No, they don't ask why. They identify these factors in the market that they know they have an edge in. And they exist. They exist. And I think through the course of time with artificial intelligence, they're going to be traditionalized and available to all of you and the retail community where for the last several years.

they've been kind of behind the wall and only the jane streets and the citadels and the virtue financials can actually profit from it so funny because if you go on chat gpt now and say what's the best day of the year to buy stocks it'll actually say that I can't give financial advice. So you say, or I did this, just out of curiosity, will not use as financial advice. And it says, is there anything else you'd like to ask?

So now I described myself to ChatGPT as a financial advisor already. So maybe it won't work for me, but it will work for someone else. You told me to introduce myself to the computer. It was very weird. You must introduce yourself to the LLM. Well, you have to tell it who you are so it gives you contextual answers.

So I did that and now it won't give me any of the answers I need. Are you nice? Are you kind of somebody who used them for financial advice? Are you like rude to the computer? I say thank you when it gets things right and I tell it how I feel when it makes mistakes. And I think it appreciates the feedback. Look, the last point on it is I think there's intuitive observations that we all have. I certainly, growing up in the business in my prior life when I worked with Mark Fisher,

at 75 traders underneath me. And I would study their performance and try to understand, well, in what circumstances. Did they have the ability to profit? In what circumstances did they put themselves in a position where they were going to lose money? Those are intuitive observations.

Because of technology over the coming years, we're going to be able to better understand the circumstances in which you're able to profit and which you need to play defense. Let's see how the market closed. Oh, my God. Oh, my God. Nobody look. I'm just kidding. Not so bad. All right. John, let's talk about Jotay. So you've been running this ETF for how many years now? So the rules, the rules have been affected in the ETF for the last five years. And the rules are the most important thing.

I think rules-based strategies are really critical for all of you over the next several years. I think that discretionary strategies in the equity world boy they're gonna have a really really tough time can i ask you about the taxonomy before you tell us why that's the case

When people, are you distracted by something? No, I'm just, I want to show. Josh, I'm going to close. What's the thing? I don't know if you know, like doing a podcast. No, this is my Bloomberg, because what Michael said, where's the market? What's the first thing I'm looking at? Where's the VIX, Michael? You worried? You troubled? Where's the VIX? 20? No. 20. 20. 20. All right. Okay. Are you active? If somebody says- Like physically? Your rules-based-

You're non-discretionary. But that doesn't mean you make no decisions during the course of the year because things do happen. But you're also not on a daily basis waking up and saying, what should I buy today? Let me check Motley Fool. Dude, this isn't NAMM. There are rules. There are rules. But how do you describe, if somebody asks you point blank, are you an actively managed ETF? The answer is no.

The answer is no. I think we're active in the sense of we're rebalancing and reconstituting more frequently. So there's movement in the portfolio throughout the course of the year based on the rules. Yes. But you're not active in the sense that.

You're not listening to conference calls and searching for alpha. Wait, hang on. If he's not active, then what is? He's not hyperactive. No, I don't know. It's an interesting question because he, so most of the biggest active ETFs are personality driven. We can agree on that. Dan Ives, Tom Lee, Kathy Wood, Katie Stockton. You have the, I wouldn't call yours personality driven, but you are a big personality. You're famous. People know you, but you're rules-based.

sets you apart from what the others that I just listed are doing and I find that interesting. So ultimately what I'm trying to deliver in the product is different than what they are. Right. So I'm a believer in I want to give all of you a core equity holding for your portfolio. So over the course of time, what does that mean? That means that you should look at the product and see how it's performed.

And it should be middle of the fairway. So in a market that's a risk-on, go-go market, OK. Maybe we're not performing as well. But when markets go through periods of turmoil, and we've been tested by four of those periods. Over the last five years, we should be, because of the confluence of factors, quality, momentum, equal weighting, and using growth to define quality, we should be acting as a shock absorber in those environments.

And if you look at the returns, I'll let you guys do the homework. But I'm satisfied that we've delivered in that regard. So I look at it as a core equity holding. And I also look at it as our ability to rebalance and reconstitute on a quarterly basis is critically important to us. Do you like the rinse? You would like. I feel like if you were running a rules-based strategy.

And the market went through like a moment of turmoil and all these like high beta stocks that you were looking at every day. And you were saying like, there's a lot of risk here. If they all got rinsed out on a reconstitution. you would probably look at it like, this is healthy. This is the whole point of being rules-based. Big rinse guy. Absolutely. You like the rinse. I think I sort of do also. How do you feel about the rinse?

Like meaning you have this portfolio. How many names? Stop suck. Get rid of them. 125 names. 125 names. From a universe of 500. Okay. 10% correction. The highest beta names that you have getting hit the hardest. Based on the rules, they're all getting removed. You're a trader, so I know you like that process. Of course I like that process. Now, if you were doing it outside of an ETF, that's really uncomfortable. One of the reasons the ETF wrapper...

for these types of rules-based strategies is so helpful. If you're having people do this with tickers, you're basically telling people like, yeah, you're down 28% in this since you bought it and you're selling it anyway. That's really hard to do. especially if they have some familiarity with the actual names. You can't do it, you're fired. You can't do it, right?

Okay, so here's the way I think about that. I said before, I think benchmarks have been obliterated. I think what's more important is that you capture the personality of the market. The market always has a personality. Sometimes the market's happy. Sometimes the market's angry. Bashful. However you want it. But there's a personality to it. So here's a great example of this. So in 2022, as we get towards the end of the year, all the 13F filings come out. And it's hard to even remember this.

But what does everyone do with the Max 7? They're selling out of them. The fourth quarter of 22, everyone's getting out of the Max 7. So the strategy has its first opportunity rebalance in January of 2023. Where's Bill Smalley? There he is. Okay. Seth, Matt Brown, right? So we do shout outs at the end usually. So these are all my partners on what we're doing, Vertis ETFs. And we all see the same thing. January of 23, what's going to happen? Let's pick one name. We're selling NVIDIA.

In January of 23. And it's already down how much? Oh, my God. So at that point, it's trading like 50%. No, it's trading like 24, 25. Okay. $24 or $25 after the split. After the split. Okay, so we sell it. All right. We're going to rebalance again when? When's our next chance to do something in NVIDIA? April. Okay, where's the stock? Higher. 27, 28.

If I'm sitting there and I have my trader hat on from when I was back with Mark Fisher. I can't buy this thing back at 27. I just sold it at 24. No way. I'm not buying it back. What do the rules do? Goes in and buys NVIDIA. That's the benefit of a rules-based strategy. Removes the human emotion. But rules-based in a wrapper where the outside observer isn't staring at the ticker symbol with a buy or a sell decision. Back in.

Right. Back in because you have to. And I'm sure we were back in ahead of the hedge funds who got out in December and been in ever since. One of the hardest things in the world.

is to sell out of a stock with a loss and then rebuy it higher. But if you have rules that force you to do it and you could do it in a wrapper so that the individual person on the other end... doesn't even notice when you're doing it you don't have to answer questions no okay let me let me give you one more example if i could let me ask michael michael palantir how many times have you have sold it in the last

18 months. I can't ride a 10-bagger. If I get a double, I'm out. I need rules. So we scan a universe of the 500 largest U.S. companies by market cap. And in January of 24, Palantir qualified. Wasn't in the S&P at this point because we're not scanning the S&P. So the strategy takes a position in Palantir. At $16, and I believe it was 76 cents. We know where Palantir is today. Even after the sell-off, it's what, $175? It was up to $200? I am telling you, 100%.

I would have sold the stock if I had discretion six times over. I would have found six different times to sell that stock. The strategy, the discipline. Not even based on anything. You'd be like, 16, it's at 50. Bring the register.

Because it's like the quote-unquote responsible thing to do. And then it 3Xs from there. Sell it again. We already sold it. There's three words. We used to laugh about this. There's three words that my traders would all say the same thing. And I lived through, as you did, 99. So the best thing in 99, here's a great story. So we have the currency crisis in August of 98. Price oil gets obliterated. Mark comes running out of his office, right?

calls me in, we're going to start trading equities. We're not commodities traders. So now everyone's trading equities and we're doing really well. We're trading equities, right? But everyone's just sitting there staring at the screen. And there's three words that I always would hear as markets would go up to an extreme level or go down. This is ridiculous. And that was the reason.

You're selling it six times over because this is ridiculous. And that's just an observation. Nothing else, but it's pure feelings. So I know it's not easy for everyone in the room to see the screens. I can't.

Okay, Joe can't see them. Do you want to just walk through a couple of these concepts? It's his stuff. All right. So, Joe, I want to have you explain just briefly on each one so we can get through a few why these things are important. not just to you or to Joe T, but just as investing concepts.

John, are you in control of this? So, John, this is your chart. We're looking at the rolling batting averages over various time periods, 1, 3, 5, and 10 for quality, low volume, momentum. And you mentioned earlier, quality has gotten the shit kicked out of it.

over the past 12 months relative to anything. But there are other factors. It's not just one thing. So talk about diversification of factors and why that's important to your strategy. So I believe this chart has seven different factors and the strength in those seven. different factors is clearly reflected in quality. And I think quality over the course of time wins out. What's interesting is if you think about markets over a long period of time that may be correcting.

generally what you will find is that a lot of the stocks that you could define as momentum ultimately become quality. So I'm pretty sure that if we see a significant correction, you're going to call Apple and NVIDIA. and stocks like that quality. So quality is always the leading factor that, to me, you don't want to turn away from. I think the trick is, how do you define quality? And when the rules were being written for

the investment strategy. We looked at quality and we had an intensive conversation. I still remember it being in a conference room with Bill and Seth and Matt. And we said, okay, the street looks at quality a certain way, but you know what? That leads to some value traps, the way they look at quality. The street is looking at balance sheet strength and I guess the consistency of earnings. It's return on equity traditionally. So what we said, okay, we agree with.

is return on equity and debt to equity. What are those two critical metrics, right, that are, to your point, Josh, a reflection of the balance sheet? But we wanted to include growth in there. Because it's just my view that the markets are more and more growth, and they continue to move in that direction. So what we did with the third crisis- Sorry, obvious to everyone now, not as obvious five years ago. Correct. But that's how things have played out. So-

We said, okay, we're going to have three critical components to define our quality, return on equity, debt to equity, and let's look at revenue growth. But let's look at revenue growth over a three-year period to make sure. that you're reliable and your revenue growth is sustainable. Not like Zoom or Peloton. Well, I believe Zoom is actually in right now.

It's in the strategy. Also in my SEP IRA, so let's all be nice. I meant like COVID Zoom, where you get this big spike and it's a fair amount. Unsustainable revenue growth. Excellent point. Let's see what you've done over a three-year period. That's really important. So that combination is how we define quality. And if you look on that chart, you'll see what growth has done. Growth, quality.

Momentum. These are all the strongest factors of the seven factors that we're looking at over a period of time. So I think it benefits from having each of these factors because, look, I look at it. as the formulation of a team. What do I mean by that? That means that at certain times, if you

are following a sports team, you can expect that continually the strength of performance is going to come from one or two individuals. If you're going to build a championship team, one or two individuals are going to... contribute. And then every so often when they step back, someone else is going to step forward. That's how you win a championship, right? And it's the equivalency to a core equity holding. Sometimes momentum isn't going to be there for you. What quality is.

Or sometimes quality is not going to be there, but growth is going to be there. Or being equally weighted is going to be there. So that's how I kind of think about it. And what you sacrifice is in certain market environments.

Somebody that doesn't know anything would just look at the highest bar and say, why aren't you just 100% momentum? Right. Because they don't understand that give and take and what it's like to go through a six-month period where the factor you're most heavily weighted toward is the worst factor.

which can happen to anyone, any strategy. What's interesting, too, is I think people look at it, and because I'm on CNBC, people always say, well, you're underperforming the S&P. Okay, we're equally weighted, and we went to 2023. Like, how did you do in 2023? If you own four stocks, you did really well. But for the rest of us, no, we didn't. So, Joe, one of the most impressive things that you've done, and this is real live performance, momentum, which has been an incredible factor.

It is prone to crashes. When it unwinds, it goes hard and fast. You have a track record of live performance where in the bear market of 2022, two slides forward, please, John. In the bear market of 2022, which is really painful, a lot of whipsaws. You significantly helped on the drawdown, which is really difficult. There we go. Perfect. I mean, this is impressive. This is real performance. So in 22, it was equal weighting and quality that lent itself.

while momentum and growth took a backseat what's interesting is as this decline begins you're sort of neck and neck with the markets which is normal because you're fully invested in your equities at in the end of the day it's not until that downturn lengthens and goes on a little bit longer, that all of a sudden that quality tilt, if you will, starts to shine. But like it takes a minute.

But think if you could. But then ultimately, that's what that's what wins out. And that's how you survive till the next ball run is not not taking the knockout punch. Not taking the knockout punch, but also what I said earlier, I really believe. And it's, okay, you're on CNBC. Your benchmark is the CNBC, is the S&P. No, it's, if you look at that. Do you think that the strategy properly captured the personality of the market through the course of time?

Your personality, absolutely. I think it absolutely captured the personality of the market in each one of those instances. And that's what we're trying to do. Because if you capture the personality of the market, in the most recent rebalance, increase the weight into healthcare. Okay, one month later, you're seeing that's actually strategically the right move to be making. You're Sidney Sweeney right now. I am? Yeah, that's your personality, your portfolio. Impossible. Impossible.

That's a good place to end. What? Guys, round of applause for Joe Terranova, please. How about Michael Batnick? Let's hear it. I would really love a round of applause for our hosts, the folks at Virtus. Please give them a round of applause. Last but definitely not least, the people who make what we do possible each day. Nicole, John, Duncan, and Daniel are here. They do an incredible job making sure this all goes smoothly. Please, guys, round of applause for my crew. Almost done.

Are you leaving? You have to go to the bathroom. We always end the show asking people to let us know something that they're looking forward to. And I have a feeling I know what Michael's looking forward to. What are we looking forward to, Michael? I don't know. You're going to look antsy. Should we all stand? All right. More prediction markets. What are you looking forward to? I'm looking forward to taking my kids to Disney again in December. Florida? Florida.

All right. Very cool. Very cool. Round of applause for Disney. Yes. Do we have any Disney adults in the room? Okay. We will identify you later. Wait a second. Hold on. How old are the... Six and eight. Six and eight. Okay. I think it's my last time with them, right? Before it gets weird. Then you do Universal Islands of Adventure after. And that's pretty dope. I think I took the kids five times to Disney before they were 12.

I asked them recently their memories and they looked at me with a blank stare. Never did anything for me, daddy. All right, Joe, what are you looking forward to? Ooh, there's so many different things. What am I looking forward to? First of all, the kids, just to see where they go, right? Where they go. So Tucker, who... Worked with all of you, right, Nicole? Shout out for Tucker Terranova. Round of applause for Tucker. He was our media intern one summer. So out of nowhere.

Bridgeport Sound Tigers minor league hockey team for the New York Islanders. And he says to me, I need you to turn on the radio broadcast. I turn on the radio broadcast. I'm like, that's Tucker. What's he doing on there? He's doing the color commentary.

for the Bridgeport Sound Tigers hockey games. Doing phenomenal. Then we have Tanner playing junior hockey up in Danbury. And then, you know, the boss of the family is just, you know, trying to get reservations at the corner, wherever Taylor Swift goes to eat. She wants to go. So it's the corner store. It's all those different places. So I want to see where the kids go. That's important. Myself, professionally, I'm not stopping. I'll just keep going forever.

And then next year, you got to join us. I'm looking forward to hanging with him on the golf course. We have a ton of fun. We're going to have a lot of fun. That's my looking forward to. I learned to play golf this summer, partially from watching Joe and partially.

from watching the things that Joe doesn't do but should on the course. I'm terrible on the golf course. But that's my looking forward to is getting back out at the club with you next spring. We're going to have fun. You guys should bring the show there.

That'd be fun to do the show from the golf course. I have to actually learn how to play decently first, but I don't hate the idea. He hits the ball well. All right, guys. Thank you so much for watching. Thank you for listening. Really appreciate it. Sorry my back was turned to you the whole time. I didn't set the chairs up. thank you guys for all the kind things you've said about the show all your ratings all your reviews goes very far we love you back thanks again thank you