Welcome back, everyone. Today on the Joseph Carlson show, inflation falls to 3%. This is more than expected. The stock market knows that and it's rallying today. Lots of companies are rocketing to the green and we have the major indices up 1% today despite the markets rally this year. So we're going to be going over this inflation report, what's going down in price, what's going up in price and overall what this means for our portfolios and the economy. But we also have some other news
to get to some other big news. We have Microsoft yesterday. Winning their battle against the FTC, this was a landmark victory where the judge ruled that they can close their deal of the Activision Blizzard deal. This isn't the only hurdle they have to get over, this is the US and they still have other countries to deal with, but this is a massive victory for Microsoft and a massive victory for holders of Activision Blizzard stock. This also has broader
implications. Lina Khan's FTC has not been successful. She has taken an ideological fight against big tech companies and judges are not agreeing with her. So we're going to see what this means not only for Microsoft, but for other bigger companies trying to do acquisitions. With Lina Khan leading the FTC now, we also have Terry Smith releasing an investor update. He has a letter where he goes over his performance, what he's sold, what he's bought, and the reasons why.
We'll be going over what Terry Smith is thinking today. It's also Prime Day. We have some data and stats on Prime Day that I think are very fascinating. Some of these stats are very unexpected. So we'll be looking at how obsessed people are with Amazon's Prime Day. Now let's go ahead and jump right in. Obviously, it's a very exciting day. Portfolios are in the green. People who remained bullish and long and steady in the market are having a very fun time. Right now, My Portfolio is at
all time highs. It's bouncing between 99,000 and 100,000 and gains. We finally, for a moment in time, broke the 100,000 mark just this morning. But who knows where we'll end up today. The news that we've received is objectively good. Inflation is coming down at a pretty brisk pace. In fact, when we plot this out on a chart, really look at how fast it's coming down. This is what it looks like. It was a very, very steep incline. This got people extremely worried a year ago and for good
reason. If inflation expectations get anchored, if people believe inflation is going to stay high forever, then they start to act as though inflation is going to be high forever and that is a self reinforcing concept. It becomes more difficult to break inflation, but the Fed have done a really good job of making it so inflation has not become anchored. It's actually fallen dramatically every single month. It continues to fall year over year. It falls at a very brisk pace.
This is a comparison this month against the same time last year, which was almost at the peak. Now they say that inflation fell to its lowest annual rate in more than two years. During June, the consumer price index, which measures inflation, increased just 3% from a year ago, which is the lowest since March of 2021. On a monthly basis, the index, which measures a broad swath of pieces of goods and services, rose only .2%. And then we have the two
different categories. We have all items in blue and then we have all items minus food and energy. When you strip away the more volatile stuff, food and energy, that fluctuates a lot more, then it looks even better. The picture is going in the right direction. That is the headline, 3% inflation. Now that's great. That inflation is coming down. I think that we can celebrate. That's good for the broader economy. But the question remains, why is
that so good for stocks? Why do investors love this news and why do they push up stock prices so much whenever we get a report where inflation falls more than expected? Well, the simple equation here is that inflation being higher means that the Fed has to raise rates higher to combat inflation. And the interest rates are described by Warren Buffett. As being gravity on all other investments pushing down the value of everything else.
This is what happens when interest rates go higher and the math simply works out this way. If we have a treasury yield a risk free rate of 1%, that is the equivalent of buying a company with APE of 100. But then if the treasury rate goes to 2.5%, that's like buying a company with APE of 40 when the treasury goes up to rates like it is right now, 4% or 5%. That's like buying a company with no risk and APE ratio of 20. You're paying 20 times next
year's earnings for that coupon. So as you can see, the dramatic rise in interest rates creates the dramatic rise in Treasury rates. The dramatic rise in Treasury rates makes it so that there's a reasonable alternative to stocks. The reasonable alternative to stocks means that stocks are not worth as much. When you can buy treasury rates that are yielding these percentages, you're getting a pretty good return without taking any real risk. And that's why it's gravity for
everything else. So if this is the logic going up, if stocks become worth relatively less while interest rates are going up, the same logic follows when they go down. So there we have it. Inflation is coming down. the Fed has some room to breathe. They don't have to raise interest rates as much. In fact, they may start looking at lowering interest rates if inflation keeps going this
direction. Investors are excited and they're celebrating because we're going back into an environment that's better for stocks and we should be seeing a lot of gains in our portfolio. When I look at My Portfolio now, I have some big gains even in newer companies. S&P Global's up $8700, Mastercard's now up 5500 into it, which is my most recent holding. I've just been adding to this one. Is now in the green by $3200. The ones that I've held longer
are big winners. Now Microsoft is up $11,000, Apple's up $25,000. Viji's having a good day today, and overall I'm up $10,000 on this one in the restaurant category. Texas Roadhouse, one of my favorite companies here, has had an incredibly Goodyear. I'm up $13,000 on this company as well. Costco, one of my core consumer holdings here, is up $9700 and the industrials have finally worked their way out of the red this year. To be up just a couple $100.
These ones are still 2 laggards in the portfolio. They've been trailing along, mostly trading flat. And if we look at the performance year to date, we're up 18.8%, which is a very strong total return so far this year. So I'm thrilled about the way things are going, but this doesn't make me complacent. It doesn't make me feel like the job is done and I can just rest here. As investors, I believe we have to have a certain mentality to be able to outperform the market, to be able to have
continually strong performance. And while other investors become excited when the market goes up, they become sad and nervous when the market goes down, they become emotionally attached to stocks. We want to be the complete opposite. We don't have excitement when the market goes up. We don't become sad or nervous or depressed when the market goes down.
And we need to be cold, calculated and systematic and tracking the fundamentals of the company, not becoming overly attached to the story of the company or exciting news, but tracking the fundamental intrinsic value drivers. So when I look at My Portfolio, that's continually what I'm doing. I'm keeping a level head.
And although I think it's OK to become happy, you can enjoy your portfolio going up, it's incredibly important to remain rational, thoughtful and the valuations, the intrinsic value of the companies because investors time and time again tend to get lost in euphoria and optimism. So keep that in mind when you're looking at your portfolio.
We're all susceptible to human biases and human errors of having FOMO, the fear of missing out, trying to race in and buy companies that just recently rallied, don't get caught up in it. When I look at My Portfolio, I'm actually holding a bit of cash and I'm saving more cash as time goes on because we have earnings season coming up and in my next episode I'm going to be going over my strategy of how I plan on going through earnings season.
Now of course, whenever we have one of these big events, whenever we have inflation coming down big or a big CPI reading, we have the talking heads and pundits that go on to CNBC to give their take and their predictions of what's going to happen with inflation and. Typically, they they try to sound smart by being super negative all the time. This is one of them. His name's Mohammed El Erin. Here's what he said just this
morning. I worry a little bit that people are jumping to the conclusion that goods disinflation will immediately translate into service disinflation. That's not where we what we're seeing in the rest of the world. So we just got to keep a really close eye on that. So we need to keep an eye on service inflation. It's not going to come down quickly. Then he goes on to say that the Fed has made a lot of mistakes
over the past couple of years. You know, the Fed has made many mistakes on inflation in the last few years, and one of them has been not to look at enough scenarios. And we've got to keep our mindset open to various scenarios. There he is giving heed and caution, criticizing the Fed and saying that service inflation is not going to dissipate so quickly. Now the problem with these type of pundits that continually go on to CNBC whenever these type of big news events happen.
Is they've proven time and time again that they have no credible ability to predict the future on a consistent or accurate basis. Here is the same Mohammed El Erin six months ago and this is when inflation was a lot higher. We're going back six months with this interview. Inflation is not going to come down in an oddly fashion. We're going to get sticky inflation. When we get to 4%, there's going to be a major. Decision to be made by society
as to what to do next. He says completely confidently that inflation's not going to come down in an orderly fashion. And once we get to 4%, it's going to be sticky. And here we are with inflation at 3% and it went down past 4% with ease, almost a complete vertical drop.
So when you're trying to listen to people predict the future with macroeconomic events that have thousands, even millions of variables that cannot be fully accounted for, just keep in mind that they're giving their thoughts, they're giving. Their ideas. But they have no way of knowing for certainty, and they often, frequently give the wrong predictions. I would not base any of my buys or sells in My Portfolio off of pundits like this on CNBC.
Now moving on, we have some big news for both Microsoft and Activision Blizzard. We have big news for the entire gaming industry, for gamers themselves, and, I believe for people that just like courts to be accurate and give good judgments. The judge ruled that Microsoft can now close its $75 billion Activision Blizzard merger.
This is a defeat for the FTC. They say that Microsoft can close the deal, a federal judge ruled Tuesday, delivering a major set back to the Biden administration's attempt to rein in big mergers. The deal would combine Microsoft's Xbox video gaming business with the publisher of popular franchises such as Call of Duty, World of Warcraft and Candy Crush. The ruling means that there is no current US obstacle to the two companies merging. Now that last sentence is important.
The ruling means that there is no current US, US obstacle to closing the merger. The companies are still seeking the UK merger approval and it's not immediately clear whether or not the hold up there would delay closing. So right now the UK is really the only standout. They're the odd man out. With the US giving approval. This even puts more pressure on the UK to let this be approved and. They highlight the faults in the
court case here. The FTC had not shown that Microsoft's ownership of Activision Blizzard games would hurt competition in the console or cloud gaming markets. To the contrary, the record evidence points to more consumers having access to Call of Duty and other Activision content. So the judge literally wrote that not only does this not hurt competition, but she agrees with Microsoft this helps competition. Now the FTC can appeal the ruling, but they're likely not
going to do that. So this case as of right now is dead within the US. So what does this mean for investors in Microsoft and Activision Blizzard, and for us generally speaking in the case of Microsoft? As an investor in Microsoft and having this as one of my largest holdings in My Portfolio, I believe this is good news. Microsoft is struggling with their gaming division to have it be relevant, to have it stay as a major competitive threat.
And they're struggling in that capacity because they so far have not done really well with mobile games. So Microsoft has been looking at bolstering their IP, buying more titles so that they can make the content more ubiquitous on different platforms. And they're especially looking for ways to get into mobile gaming, which is something that Activision Blizzard has access to. They do own mobile games, so this is a case of Microsoft rounding out their portfolio, building up an IP library of
games. They can bolster their gaming division for years into the future. I view this very positively for Microsoft, even though they're paying $70 billion for the acquisition. We use Qualtrum here, which this website's available to all Patron members. We can take a look at what this really means for Microsoft's financials. First of all, right now Microsoft has cash of $56 billion. That's a lot of money that's doing nothing, earning maybe 4 or 5%.
Microsoft wants to look for ways to put that cash to work. Now if we do some quick math there and we minus the 70 from the 56 we get, let's take a look here, we get 14, I believe that's correct. So we have $14 billion left over. If they used all of their cash balance, now of course they're not going to use 100% of their cash balance. They'll probably take out some debt as well. But let's just assume that this simple math work, they have $14 billion that they have to make
up for this. Assuming Microsoft has to take out some debt to make up for this acquisition, look at how fast they would be able to pay back that debt. Microsoft last year made cash flows free cash flows of $65 billion, meaning that in 12 months they can almost pay for the entire company, Activision Blizzard. With just their free cash flow from that one year of cash flows, they bought a company that increases their cash flows significantly. Activision Blizzard has its
problems. The company has internal problems. They have management problems. They have some culture problems as well, but those are things that are fixable. Microsoft will fix those issues. When we look at the cash flows that Activision Blizzard generates, they're very significant. They generated $2 billion in free cash flow last year, so Microsoft is paying $70 billion to bump up their free cash flows
by $2 billion per year. But beyond just merging the financial economies of these companies, there's also significant strategic benefits to Microsoft in their cloud gaming and in their vast product offering. So I think this is both good news for Activision Blizzard investors and Microsoft investors if this deal goes
through. Now, it's not a certainty yet, but it's looking very close now in terms of the arbitrage play for investors that are in Activision Blizzard right now, one of the most notable ones being Warren Buffett. In his portfolio, Activision Blizzard is one of the largest holdings at 1.3%. He bought a lot of the company because if you study Buffett's history, he has a very long.
Good record of arbitrage play. That's something that he's done throughout his entire investing career, seeing little differences in prices of two companies being acquired, buying the one that's being acquired and making the difference. He really likes arbitrage plays, so he has a lot of experience doing this now. In my case, I've never done an arbitrage play before. I've looked at this one and I was incredibly close to buying into Activision Blizzard.
I even came out with an episode saying. That I'm buying $15,000 of this company. I changed my mind. I went against it. And the reasons why is because one of the things I'm focusing on the most with My Portfolio is predictability. Judges are unpredictable. I never know what a judge is going to rule. Are they going to rule with logic and reason and the facts of the case? Or is a judge politically motivated or ideologically
biased? For that reason, I stayed out of it. I missed out on maybe a 5 to 10% rally from hair, so there's some missed gains. But that comes with sticking to your plan, and I don't have any regrets by sticking to my plan. So what does this ruling mean for companies outside of Microsoft and Activision Blizzard? Well, the first thing I'll say here is I think this is a win for everyone because it's a good thing whenever a judge gives a ruling that's based on logic,
the facts of the case. And the law, not a ruling based off of ideological motivation. And the problem with the FTC is having right now, the reason that they're losing cases like this and so many other cases is because of ideological motivation. It's become very clear over Lena Khan's history and her appointment to a position that she has something against big tech. She does not like Amazon. She does not like these companies being as big, as powerful as they are.
And that's her motivation behind these type of rulings, to curtail and to prevent Big Tech from becoming more powerful. Although that might be a noble goal, there is nothing illegal about a company being big and powerful. What's not being presented here is how these companies are actually breaking the law with these antitrust cases. I believe one of the biggest winners from this court case are the companies that are constantly being targeted by
Lena Khan and the FTC. Specifically, companies like Amazon. Amazon has been on her radar for years, ever since even college. She hasn't liked Amazon. This sets the president that the FTC is beatable, and I think it makes it unlikely for the FTC to keep pushing with these cases as they're getting knocked down. So my assessment when I look at this between this victory and Microsoft, I also consider it. A victory for other big tech companies like Amazon.
Now we also have some exciting news here. We have a little update from Terry Smith. He's one of my favorite investors. I think that he's he's an interesting person to follow and to look at his investment philosophy. He's all about the three-step simplistic strategy of buying good companies, not overpaying for them and then holding them longterm. That's the goal. So he tries to accomplish those three simple steps.
The strategy gets a lot more in depth, but that's the basis of it. And Terry Smith has outperformed the market for a great deal of time, but he's recently run into some issues. He's he's actually not doing too great this year. So I want to give an update on his performance and some of the trades that he's made.
Now he provides a table here of performance that shows the first six months of performance from the Terry Smith portfolio and it's 8.5% which is underperforming the S&P 500 this year. Even the MSCI World Index, which is also not doing as well as the S&P 500, is only up 8.9%. So that's what he uses as a comparator. I use the S&P 500. I think the S&P 500 is more difficult to beat than the MSCI World Index, so I'm using a more
difficult comparator. But either way, the returns here this year so far are not great. 8.5% is sizable under performance, but we can't judge Terry Smith just by a short period of time. Over a longer stretch of time, he has very strong performance, beating out most hedge funds, most super investors with an annualized return of 15.6% since inception of his fund. That is very strong performance. Performing over 15% for that long of a period of time is difficult for most investors to do.
So we have to give credit where credit is due. He's been doing great so far, but he's running into a little bit of trouble this year. Now he goes over the companies that have helped the gains the most over the past six months, Meta platforms being the first one. This one has added 3% to its portfolio gains over that time period. Now he says, at this stage last year Meta was one of our largest detractors and we wrote that Meta stock now trades at a free cash flow yield of 8.7%.
At this level, it's either cheap or a socalled value trap. We will let you know when we find out, but we are inclined to believe it is the former. We have now had at least a partial answer to that question with the stock up 70% over the past year, although we are too paranoid to ever declare victory. So he's pointing out that he held on to meta, which I think is it's important to point that out. He invested in meta, it went down a lot and then the company recovered.
Microsoft has also performed really well over the past six months, so he points that out as well. L'Oreal continues to impress them. We have other companies in their portfolio that aren't doing so well. Waters, Estee Lauder, ADP Mettler, Toledo, Phillip Morris. All these companies have been detractors from the portfolio. Now, one of the areas where I believe that Terry Smith messed up, this was something that I think was a mistake was he sold out of Amazon at nearly the
bottom of the Amazon dip. So Amazon went down like crazy and he held on to meta, but he sold out of Amazon. He says the most noteworthy item of turnover was probably our sale of Amazon, which had begun purchasing only in July of 2021. The immediate cause for the sale was our concern over the potential capital misallocation. The relatively new CEO Andy Jassy enunciated some principles of investments.
So these were the things that Andy Jassy points out of where they like to invest in as Amazon. He says that our view was that there's a lot to like about this statement. And it gave us common comfort in purchasing the stock we had SHIELD away from before. However, it always is easier to talk the talk than it is to walk the walk and the CEO's pronouncement that he wanted Amazon to seek routes a bigger investment in grocery retail
round. Counter to all these principles, in our view, grocery retail has none of these characteristics, and Amazon has already stubbed its toe in the sector with the Whole Foods acquisition. So that's the first argument Terry Smith gives against Amazon. And I just want to comment on a few things here. Obviously, there's the indication it was a mistake because Amazon is up 51% year to date. This company has been a massive winner.
If Terry Smith had kept it within his portfolio, it would be one of the top five contributions to his gains this year. So that stings a little when you sell a company like that before a huge rally in the stock. He also mentions that. The CEO of the company is relatively new and that's true. He is a relatively new CEO, but he leaves out that Andy Jassy has been with the company for over 20 years. Andy Jassy was the one running
AWS. He was the one that built that business into what it is today, the most profitable portion and most important portion of Amazon. So I think just describing him as a relatively new CEO, it's true that he's a new CEO, but there's a lot more context behind that. And it is true that Amazon has stubbed its toe in grocery retail. That's a phrase that he uses there. But this phrase could be applied to the entire history of Amazon. When is Amazon not stubbed their toe doing something?
That's something that you have to get used to. With Amazon, they will go into different bets that won't workout because they're always trying new things. But when they do work out, they work out big, where companies choose to invest outside of a powerful core franchise in which they already have expertise. We believe they are likely to destroy value, and especially so when they're entering A sector
which already has poor returns. A similar thought process has led us to exit Adobe. Adobe's another one where I believe that Terry Smith made a huge mistake exiting this company. He missed out on another company that's rose up 50% in just the past couple of months. Because he exited this position off of concerns about capital allocation. So Terry Smith missed out on both the gains in Adobe and Amazon, two of the biggest winners that would have been in his portfolio because he sold
out of them this year. And my criticism for Terry Smith would be the rule #3 that do nothing. It seems like he's trying to analyze these companies a lot. He's making quick changes on them based on minor disagreements and capital allocation, and he's selling core businesses at attractive valuations. That have incredibly good fundamentals because of these minor disagreements and in so he's missing out on 50% plus
gains. Now finally the last bit where I disagree with Terry Smith here is he says where these companies choose to invest outside of their powerful franchise in which they have already expertise in, we believe they are likely to destroy value. That is a phrase that I do not believe applies to Big Tech. They've all invested outside of their core franchises into various products and still have had high returns. Now, I don't want to be overly
critical. It's always easy to judge in hindsight, but if I give what I believe is an honest critique of Terry Smith's investments in performance this year. I think he's he's done a couple things right for the most part. He also has had a couple notable fumbles. He really sold Adobe and Amazon at the worst time possible. Now moving on, we have news about Amazon's Prime Day event, and the numbers here are just crazy. US consumers spent 6.4 billion on the first day of Amazon's
Prime Day event. 6.4 billion in a single day. Let's go ahead and just do some fun comparisons here. Palenter's revenue for all of 20/22 was 1.9 billion. Amazon made more revenue than three times all of the revenue that Palenter made in 2022. We can look at it compared against Texas Roadhouse. Texas Roadhouse in 2022 did 4 billion of revenue, meaning that Amazon just yesterday did 50% more revenue than Texas Roadhouse.
All of their restaurants, every location for the entire year of 2022. We can even compare to something more comparable like Target which is. Financial retailer competing in the same category as Amazon Target in 2022 did around $100 billion of revenue. That means that Amazon yesterday did around the same amount of revenue as what Target normally does in three weeks, so three weeks of revenue in a single day.
So the numbers are remarkable. A lot of people spending money on a lot of items on Amazon during the prime day. But some of the research study here I think is even more remarkable. We have a report here, this indepth research. That goes over some basic statistics and some of these are just are really, really crazy. The average American spends $91.75 on Amazon purchases every
month, almost $100 per month. And that's the average American Prime members spend $110.00 on Amazon each month versus non members who only spend 38. Tennessee residents spend more than any other state, 124 dollars. I've looked at the map of which states have spent money on Amazon. And I can't find any rhyme or reason behind. It has nothing to do with political ideology. It doesn't seem to be connected
to income levels. So I'm not sure why the states break down the way that they do Now they say that 1/4 of Americans shop on Amazon once a week or more. Americans spend $117.00 on Prime day on average. 1/3 of Americans think the dollar amount they spend on Amazon this year is higher than what is currently in their savings account. Which is incredible. And then the most ridiculous stat of all of these. And I'm not sure how they even got around to asking this question in this survey, but
they say right here, I'm not making this up. 34% of women would rather give up sex for a year than Amazon for a year. That is a real stat. The obsession with Amazon is real. So I'm sure we'll get more data and analytics after the second day of Prime day today. That's what we know so far. The big question for Amazon is if this company can actually make some money with that obsession. That's all for this episode I hope you enjoyed and I'll see you in the next one.