The Compound and Friends
00:53:55 · Josh Brown, Alex Altmann
[00:53:55] S0: codependency. The sun. Yeah. Yeah. It's like a Greek [00:53:58] S1: mythology analogy. And so the... I I don't wanna sort of speak and say, yes, there would definitely be a point where where where Jensen would do something like that. But it would be logical that he would... If there was a proper shakeout, that someone like him who's already got vested interest would would look to sort of of hoover up assets. But, also, you gotta remember that could come at the expense of his own share price too. Right? So everyone assumes that a hyperscaler is completely immune from this. And the way I think about it is... And it's not the right analogy, but it's the only one I can think of, is subprime and G SIBs. Right? Right? The... Just because you assume that these businesses have got fantastic operating cash flow that they're gonna be completely immune from any AI unwind, and I think that's a very unrealistic proposition. [00:54:46] S0: Well, immune now? They almost... They basically went to zero. You're talking about, like, Fannie, Freddie.
00:54:46 · Josh Brown, Alex Altmann
[00:54:46] S0: Well, immune now? They almost... They basically went to zero. You're talking about, like, Fannie, Freddie. [00:54:51] S1: Right. But, again, I don't wanna draw too too strong a parallel to the GFC. I just mean in terms of, you know, there were guys who, like, who really saw the subprime thing coming, and they're like, I'm gonna short the equity tranche. I'm gonna go along the triple a's, and they both went to zero. Right? I'm not saying that hyperscalers came to zero. What I am saying is is that to... That there is... The AI is touching everything. Like, we talked about factors in this in this in this conversation. There is no way to correctly map the AI factor from what I am aware. I've tried. My team has tried, and we can't do it. It keeps moving too quickly. The beaters keep changing. Right? So you're either long AI or you're short AI. Goes without saying the hyperscalers are long AI. So if there is a prolonged or protracted unwind of the AI trade or the AI factor [00:55:32] S0: Nothing is immune. [00:55:33] S1: Nothing's
00:55:33 · Alex Altmann, Michael Batnick, Josh Brown
[00:55:33] S1: Nothing's [00:55:34] S2: immune. But until until then I agree with that. But of course. But immune is very strong of a word, but they have shown to be resistant, resilient, whatever you wanna call it. Daniel, chart 14. So similar concept as what you were just showing. The spread between... This is from The Daily Chart book. The spread between B and triple C credit has reached nearly 8%. Something seen only four other times since 1996, and on every other occasion, the S and P 500 was already at least... Down at least 12% below its fifty two week high. And, of course, we're we're right near all time highs right now. It's just an an unusual environment, and they have proven to be resistant. [00:56:11] S1: Yeah. They really have because they've got this phenomenal earnings delivery, and you showed that Microsoft chart as an illustration of that. Helps. It it helps enormously, but what we have seen is the market derated spectacularly, including those hyperscalers themselves. Right? And and a lot of that is driven by memory stocks. [00:56:26] S2: When you say derated, do you mean on the forward multiple? Do you mean on the [00:56:29] S0: Yeah. [00:56:29] S1: On the forward multiple. [00:56:30] S2: So Nvidia is 15 times. Nobody wants it. [00:56:33] S1: I mean, I think there's also holding constraints. Isn't it? Represents... It's 8% or 9% of the S and P now. So, yeah, like, a lot of these mutual funds, they only have... They can only buy up to 5% of their portfolio in it. Right? [00:56:44] S2: And then a size problem.
00:56:44 · Michael Batnick, Alex Altmann, Josh Brown
[00:56:44] S2: And then a size problem. [00:56:46] S1: I think part of it's a size problem. Part of it is also that sort of co... Codependency in terms of the whole AI ecosystem. There's that problem [00:56:52] S2: Thank god they're not trading at 40 times forward earnings. It'd be $13,000,000,000,000. [00:56:56] S0: Well, the [00:56:58] S1: S and P would be at probably 12,000. So that that would be a high quality problem certainly from a American wealth effect perspective. [00:57:05] S0: I want... I wanna double I wanna double double click on the the net issuance because I really think that that is game changing just in terms of changing the mentality of the market. I really think that people just felt like no matter how bad a company's results, S and P 100 company, you know, they're buying back stock, and I can just ride it out. And now that's no longer the case. Chart 16, guys. You're showing us net US equity issuance. I guess you've got you've got four colors here. So give us, like, the story of the markets because this this is a lot of years. This is thirty years of data, and this is a really big change now [00:57:47] S1: Yeah. [00:57:47] S0: Versus the environment that most of us have grown up in. So tell us what you think is... What's going on here? What's the implications?
00:57:47 · Josh Brown, Alex Altmann
[00:57:47] S0: Versus the environment that most of us have grown up in. So tell us what you think is... What's going on here? What's the implications? [00:57:55] S1: So we we did... We produced this chart a few months ago, and and I'm I'm quite happy to say that it's... A lot of it was based upon predicted or estimated for 2026, and for the most part, we've been pretty accurate on this. So, and the easy bit is IG. We know really what gross issuance, Sorry. This is just an equity. So we know broadly what the m and a slice is gonna be because a lot of... Most announced m and a is sort of completing in the year, so that... That's sort of easy. [00:58:24] S0: So the deals that were announced in twenties... The deals that were announced in the first half of twenty six Yeah. You you have a reasonable amount of certainty, like most of them will go through, and they'll happen in the second half of twenty six. [00:58:35] S1: Exactly. So how much stock is getting issued, how much stock is being retired from the m and a. Okay. And then and then, obviously, from the actual... The issuance perspective, we also have at the money offerings from hyperscalers. We have converts. We have, you know, any other, additional equity raises that need to be done. And then, obviously, we have IPOs. Right? So IPOs is probably the bigger moving target, that and the At the Money offering. And, obviously, we had one large out... IPO this year. [00:59:03] S0: We'll have the two biggest of all time inside of six months. [00:59:06] S1: Well, I mean, who
00:59:06 · Alex Altmann, Josh Brown
[00:59:06] S1: Well, I mean, who [00:59:06] S0: knows what what and then Anthropic if it if it works. [00:59:09] S1: SpaceX and Anthropic, obviously, OpenAI got punted into into 2027, we think. So... But, obviously, this is just a '26 forecast. So the idea being... And the the one thing that we didn't solve for... We we solve for, what we guessed, is that the buybacks... You'll see that the the the red line or the red bar is basically flat year on year. So what we did was we... Executions in buybacks are always gonna be less than announcements. Everyone, like, loves to highlight, oh, $1,200,000,000,000 of announced buybacks. I'm like, yeah. But if you... [00:59:36] S0: What authorized but not completed? [00:59:38] S1: Correct. And and and the execution rate is typically somewhere between 6070% of the authorization. They never they never complete all of it. And so we we basically said, alright. We'll keep it static year on year, which I actually think is quite a generous number because of... You know, let's face it. All these businesses that are doing buybacks historically are now doing a massive CapEx program. So I don't even know if we're gonna reach that kind of buyback number. But given the benefit of the doubt to say, yes, they'll do approximately the same number as last year, You can clearly see that the gross issuance has exploded. A lot of that's because of IPOs. And, consequently, you've you've... You haven't increased your buyback.