Transcription
The market bottomed at the end of the first quarter and has staged a very powerful rally. The S&P was up 15% and NASDAQ was up 23%. However, this week the market started to correct. Micron reported and their numbers were incredibly powerful. Accenture reported last week and it was quite disastrous. It looks like SpaceX is going to be a very volatile stock. But the new capital intensity of the hyperscalers combined with a lack of moes has destroyed the momentum in these stocks. It looks like this week the market started to really worry about these arguments. So much for the rally.
Hi, this is Steve Eisman and welcome to another edition of the weekly rap. This is for the week ending Friday, June 26, but recorded on Thursday night, June 25. Before we start, we want to let everyone know we will not not be dropping a wrap for July 3rd, as we will be traveling. We want to wish everyone a wonderful holiday weekend in advance.
One more note before we start the wrap. If you're a premium subscriber or you've been thinking about joining, we have some important news. We're moving your subscriptions to the Real Eyesman Playbook Premium over to Substack. Same subscription, same price, and same great content. The bonus episodes, the deep dives, just plain more, just on a better platform that makes it easier for you to access everything in one place. If you're already a premium subscriber, you'll be hearing from us directly with everything you need to make the transition seamlessly and at no additional costs. If you are a paid subscriber, you keep your membership and we are giving you a bonus month for making the transition with us. And if you've been on the fence about joining, now is a great time. Head to our Substack at realismanplaybook.substack.com to sign up. More details coming soon.
Also, I want to flag this past Wednesday, June 24 on Premium. We dropped an interview with the head of investor relations at Glass House Brands, a cannabis company whose stock I own. We moved this episode up because a lot has changed in the world of cannabis over the past few months. All for the better, and we explore it all. Also, the company just announced it will be listed on the New York Stock Exchange because of the rescheduling of medical cannabis to class 3. The ticker GLAS will begin trading June 30th. As I said, I own this stock and this is not meant as a recommendation.
Now, we are releasing my personal portfolio lecture this coming Wednesday, July 1. I will disclose my personal portfolio, why I own what I own, and how I think about investing. This deep dive is forformational and educational purposes only. I'm also flagging the July 8th premium episode which will be a deep dive with Kathleen Kelly and Nancy Flynn of Queen Anne's Gate Capital about the impact of the war on oil and commodities. They think oil prices will be dropping due to over supply. Hope you tune in.
Now let's get into this week's rap. On this week's rap, we explore the following. One, the war in Iran. Two, Accentra's disastrous quarter, what it means. Three, good news for GE Vernova. Four, volatility in Space X's stock price. Five, bad news at Google. Six, good news for Micron. Seven, bad news for Nike. Eight, the tech leadership rollover which we discussed in the June 12th weekly rap and review of the second quarter. And nine, some thoughts about Alan Greenspan. And 10, one mailbag. Let's get started.
The US and Iran signed anou last Friday. This week, Vice President Vance led a team of negotiators to iron out the details. I'm sure the markets will trade every headline for weeks.
Next up, Accenture reported last week and it was quite disastrous. Now, Accenture is a large management consulting company. Originally, it was called Arthur Anderson Consulting. They spun off in 2001, narrowly avoiding the collapse of its parent company during the Enron scandal. The fear about this sector is that AI will reduce the need for consulting services. Essential's results did absolutely nothing to alleviate those fears. Revenue was up a poultry 3%. Bookings declined declined 3% as several contracts have shifted to fiscal '27 or so. management says what seems to be happening is that companies are spending more on AI and they are somewhat hiring Accenture to help them but they are cutting back on everything else so that netnet overall results for Accenture remain weak simultaneously the company announced three acquisitions in one day that looks like buying stuff to hide weakness the stock was down 18% on Friday and is down over 50% this year ugly.
G Vernova received some good news on Monday. Chevron announced that it has signed a 20-year power purchase agreement with Microsoft to develop a power facility in West Texas that will supply electricity to a Microsoft data center. A majority of the facility's power generation will come from GEV's turbines and electrical infrastructure. This deal is another example of GEV's bundled offering of turbines and electrification equipment. GEV remains, in my view, one of the better AI power stories.
Moving on, it looks like SpaceX is going to be a very volatile stock. On its opening day, Friday, June 12th, it climbed 19% from the IPO price. On Monday of last week, it increased another 20% and on Tuesday of last week, another 5%. Since then, it has basically gone straight down. On Wednesday of last week, it was down 5%. On Thursday of last week, it was down 4%. And on Monday of this week, it was down 16%. Tuesday and Wednesday, stock did almost nothing. After all this movement, the stock is now only 14.5% higher than its IPO price. By the way, the stock was down 16% on Monday because the company announced a 20 billion bond sale, which supports our thesis that SpaceX has become a very capitalintensive business. The bond issue in size was increased to 25 billion.
There was some bad news from Google on Monday that drives home some negative aspects to the hyperscaler story which I'll discuss in a few minutes. These negative changes to the hyperscaler story were partially driven home on Monday when it was reported that two Google senior officers left to go to open AI and anthropic. Google's co-head of its Gemini AI models left to go to open AI and a senior engineer in Google's deep mind left to go to anthropic.
Good news from Micro. Micron reported and their numbers were incredibly powerful. Because of the growth in AI data centers, there is a shortage of every kind of semiconductor. Prices have soared. Micron beat on both revenue and earnings. But that statement does not even begin to capture what is happening here. The company reported EPS for the quarter of $2.51, which was a get this, 1,215% year-over-year increase. The company posted revenue of $41.5 billion, a get this, 345% year-over-year increase. Prior to the earnings report, Micron was up 267%. The 2027 PE, however, is only 8.7 times as the increase in earnings has more than kept up with the stock price. One more point on the conference call, management stated that they believe that chip supply will remain constrained past 2027.
Moving on, there was some news on Nike this week. Nike has been a turnaround story for 2 years that has not turned around. On Monday, June 22nd, we hosted three consumer analysts from Evercore. one of whom, Michael Benetti, covers Nike. And on Tuesday, Michael downgraded Nike from buy to hold because there is just no evidence that the turnaround is taking hold. Quite the opposite, actually.
Now, let's discuss the second quarter. Normally, I would discuss the results of the second quarter in early July, but because I will be traveling, by the time I get back, that will be stale. So, I'm going to do it now. I'm putting on the screen a table that shows the second quarter and year-to-ate performance of the S&P 500, NASDAQ, and all 11 sectors of the S&P. The data is as of Wednesday, June 24th. For you audio listeners who cannot see the screen, let me give you a few key stats for the second quarter. The market bottomed at the end of the first quarter and has staged a very powerful rally. As of last Friday, the S&P was up 15% and NASDAQ was up 23% for the second quarter alone. However, this week, the market, especially NASDAQ, started to correct. The result is that by the end of this Wednesday, the S&P was up 13% and NASDAQ was up 18% for the quarter.
Let me just point out that Micron's results reported Wednesday night did trigger something of a tech rally on Thursday. Well, not exactly a rally. Micron was up over 15% on Thursday. However, and perhaps more importantly, the rally on Thursday was confined largely to chips and power related companies like GE for Nova. The hyperscalers, Amazon, Meta, Oracle, Google, and Microsoft were all down on Thursday. Apple also was down as it raised prices on its MacBook and iPad because of higher memory chip prices. Net neck NASDAQ was down on Thursday, so much for the rally. This supports our thesis that investors are willing to play scarcity, but the new capital intensity of the hyperscalers combined with the lack of moes has destroyed the momentum in these stocks.
One more point, the capital intensity would not be so bad if they were large moes. Then investors could feel comfortable handing over capital for the sake of protected franchises. But combination of capital intensity with no moes is potentially a race to the bottom. It implies future price wars. It implies low returns on capital. Given the trillions being spent, capital intensity with no moes is just plain scary.
Now, we have been discussing AI and tech for months now. And the story, as I just pointed out, has really begun to change. I reviewed the arguments at length in last week's rap and just now a bit too. But I think the two central points of a contention are the following. First, AI hyperscalers have become very very capital inensive businesses and there is no end in sight for how much capital they will need. Second, and perhaps more importantly, as I said before, there don't seem to be any moes for AI creators. Users seem to migrate from one to the other at will. Trillions are being spent for LLM models and agentic AI apps that have no moes and in some cases no non-competes for senior engineers. If engineers can switch companies at will, product differentiation becomes almost impossible. It looks like this week the market started to really worry about these arguments.
Turning to the second quarter. For the second quarter, the sector leaders were the same leaders over the past few years. Infoch led up 28%. Industrials were up 11%. Consumer discretionary and communication services were both up 6 to 7% and financials were up 9%. The energy sector declined 13% thereby giving back some of its war gains. The defensive sectors all trailed badly. Consumer staples was up only 2%, healthcare was up 5% and utilities were down 1%.
Now let's dig a bit deeper into the sectors. So once again, tech leads and pretty much everything else trails. It's been the same story for quite some time. First up, Infoch. This year and this quarter, we have witnessed a sea change in tech market leadership. The hyperscalers have transformed their businesses into capital intensive models with insatiable needs for capital. And this has turned investors off for many, but not all hyperscalers. Since the hyperscalers have shown no indication of pulling back on capex, investors have sought out beneficiaries of this capex spend. Generally, they have chased scarcity. And where is their scarcity? In semiconductors of all kinds. That is why, for example, SanDisk and Micron are both up over 200% in the second quarter alone. By contrast, fears about AI continue to haunt poor software stocks and consulting companies. In software, Salesforce, Adobe, and Intuitit were down 18%, 19% and 39% respectively. In consulting, Gartner and Accenture were down 18% and 35% respectively.
In communication services, the sector was up 7% for the quarter, but much of that performance was just from Google being up 20%. There were quite a few losers. Netflix seems to have completely lost its mojo, down 25%. I suppose Netflix's growth story no longer seems that powerful. All the cable stocks were down double digits.
Consumer discretionary was a mixed bag. Yes, it was up 6%, but there was tremendous dispersion. Ralph Lauren was up 20%. Royal Caribbean was up 17% as it rebounded from its war correction. By contrast, Domino's continues to suffer from the low-end consumer pulling back. The stock was down 20%. Nike and Lululemon are two turnaround stories that are just not turning. Nike was down 21% and Lulu was down 26%.
Financials were up 9%. Large investment banks are bellweather stocks and how investors feel about the economy. As recession fears faded, they rallied with Morgan Stanley up 34%, Goldman up 27% and City also up 27%. The payment space remains a place to avoid. Fiserve was down 14%. As its CEO resigned to become the CEO of Truist, PayPal was down 6%. Just about every payment stock was down for the second quarter. Also, as Bitcoin and other digital currencies have corrected, financial companies devoted to the space suffered. Coinbase, for example, was down 14% for the quarter.
Monday morning, it was announced that Alan Greenspan died at age 100. He was the second longest serving Fed chair, serving 18 1/2 years. He was appointed by four presidents and stepped down at the end of 2005. During his tenure, he was viewed as a god of finance. His every utterance was treated like Moses coming down from Sinai with the tablets. Business news tracked how thick his briefcase appeared, as if that would provide clues to the Fed's next interest rate move. In my view, his reputation has suffered terribly since he left the Fed, and deservedly so. The Fed has two major roles. It controls short-term interest rates as a tool to regulate the economy and inflation. It also regulates the financial system and the banks. I don't have any major problems with how Greenspan dealt with interest rates. But when it came to regulating the financial system and the banks, I think he failed miserably. Greenspan stepped down before the great financial crisis. He stepped down in 2005. But his policies set it all up. He was a true free markets acolyte and he viewed everything through that lens. During his tenure, leverage in the large banks at least tripled. But as he himself admitted, that did not bother him because he believed that the banks knew how to manage their own risks. He could not have been more wrong, something that he himself later admitted. Also, he turned a blind eye to what was going on in subprime mortgages. He was told by multiple parties that the subprime mortgage was an ethically horrible financial product that put consumers on a treadmill where they could never ever be able to pay off their mortgages. He did not care. As far as I can tell, he thought that since those mortgages were legal, there was nothing he could do or should do. And that attitude allowed the subprime mortgage sector to explode in size where it then almost took down the global economy. My view is that history will not be kind to Alan Greenspan.
One thought about our new Fed share, Kevin Walsh. I don't think he will be signaling Fed moves with a briefcase or any other mechanism. He seems to be adopting a very different style of communication close to the vest.
And now for the mailback. We have one mailback from John who asks, quote, "Really enjoy your videos, Steve. I have to comment on something you said. Europe is too regulated. In what sense is this? The only way you could argue it's too regulated is purely financially. But here we think our government should work for us, not business. GDP is not a good metric for the quality of life or happiness of inhabitants. After all, many of us, most of us look at how the US operates with some horror. The USA has the highest infant mortality rate in the developed world. What parent would put GDP over their health of their newborn? From healthcare to employment rights to market regulation to gun control, the USA puts business first. From what little I know of you, you seem a very principled man. And so, I'm sure you'd agree there's more to life than money and greed. Apologies if I missed your point."
Let me just say this is a very, very fair question. And there is no question that Europe has a larger safety net for its citizens than does the US. Healthcare is generally free and the cost of drugs is far lower, for example. But there is a cost to this more benevolent system. Government regulation is far more pervasive and intrusive. The result is that European economic growth has become sclerotic. For example, Germany, the largest economic country in Europe, has had flat GDP growth for the past 3 years. As I said last week, tech is only 18% of the Euro stock index versus almost 40% for the S&P 500. It is just a plain fact that the US economy is more dynamic than Europe. Now, when I said last week that I would not invest in Europe, I was not making a moral judgment. Someone might prefer to live in a more benevolent Europe. However, markets are amoral. Markets don't care if there is a social safety net. Markets only care about making money. My argument about the US versus Europe is simply that the US is a much more dynamic economy. So, you will make a lot more money if you invest in the US. Maybe it's nicer to live in Europe. Maybe. But we are talking about investing.
This past Monday, June 22nd, we hosted an interview with three consumer analysts at Evercore. They cover the full gamut of the consumer from restaurants to food to soft lines to hard lines and big box retailers. We explore the health of the consumer from every angle and examine which companies are doing well and which are not. So, check it out.
This coming Monday, June 29th, we will post an interview with Todd Zone, chief chartist at Strategus. Given the tumultuous events of the past few months, the big rally in the stock market, I thought this would be a good time to see what the charts are revealing. Hope you tune in. Be sure to check out our website, realismanplaybook.com. Thank you for joining. And that's the wrap.
This podcast is forformational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.