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00:00Eric, I want to start with you and just the different signals that we're seeing in oil versus in equity
00:07markets.
00:07And I'm talking, let's focus on U.S. equity markets for now, and then we can sort of broaden this
00:12out a little later.
00:13In U.S. equity markets, it seemed like traders have looked past this conflict for months.
00:19The oil market, not so much.
00:21Yes, we're seeing some signs of easing today, but oil is still very elevated.
00:25How do you explain sort of the different reactions?
00:27The stock market is moving on growth expectations and the idea that whatever inflation is, it's not showing up in
00:38earnings.
00:39So right now, you have this incredibly strong economy, remarkably resilient.
00:46And although we can see the risks out there, you can see that oil is high.
00:50I mean, look, if oil is above 90, that's just not good.
00:54You can hear the sounds of, you know, people talking about inflation and you can see the consumer sentiment, but
01:02it's not showing up in earnings.
01:03So how do you price these things?
01:05And if AI, if the belief is that we will get past this conflict and that things will get back
01:13to us just discussing, you know, can OpenAI make all of its payments, then we're actually on solid footing and
01:19the market can keep going.
01:21And if you think about it, it hasn't been as strong as it has, as it was in the two
01:25prior years.
01:26So there is actually room to pick up, although this second quarter has been pretty wild.
01:32But Sarah, is this optimism, is it realistic or is it delusional?
01:35It's feeling a little bit like Lucy in the football with this Iran deal.
01:38It's like, it's going to be there.
01:39It's going to be there.
01:40It's going to be there.
01:40It's not going to be there.
01:41Like I was saying earlier at the top of the show, I need them to phone a friend and have
01:45them talk to the policy wonks who are saying, you know, you heard Kendall talk about just those few six
01:49or seven or eight or nine outlying issues that have yet to be resolved.
01:53Even if it does get resolved, it's not like this is a tap they're turning on tomorrow.
01:57I am new to the market side of this, but I am consistently confounded by what we're seeing in the
02:02markets versus what I'm seeing on the reporting end of this.
02:04Well, and I think we also have the unfortunate experience of having recently gone through this big problem with rates
02:11are going up too fast or going down too fast.
02:12It's going to have this big effect.
02:13It's not going to have an effect.
02:14Oil is different, but it's not acting differently right now because it is impacted by a lot of the discussions
02:19and the fact that there were cushions in both storage and there were cushions.
02:23So there was room there.
02:24It's molecules, though, and it's not as much sentiment change.
02:28And so I do think that there is a wall at which we do get to we get to a
02:31point where this becomes much more impactful.
02:33And to your point, then, it starts to impact earnings.
02:35And right now, it hasn't been.
02:37And the concern is that when it does start impacting earnings, what does that do for the whole earnings trajectory?
02:42Right now, the growth of earnings is on the back of the tech stocks.
02:45The oil price isn't the biggest problem for them.
02:47The memory price is a bigger problem for them.
02:49The discussion about token prices and about are you using these efficiently, that's a much bigger problem.
02:53I love that conversation.
02:54But I think that's what's happening right now, and I think it's part of the problem today.
02:57The memory part of this and memory prices are a problem for some tech companies,
03:01but for other companies like Micron and SK Hynix, it's actually a great news.
03:05I mean, both of those companies now surpassing a trillion dollars in market cap.
03:09Eric, we're going to get to you in a second because you're shaking your head here.
03:11But, Sarah, I'm wondering just about signs of exuberance with a couple new entrants in the trillion market cap range.
03:19Well, I think that's an issue.
03:20I think that's either going to be one of those things that fuels it further or that makes people scared,
03:24and we don't know which way that's going to go yet.
03:25I would also say that memory has been treated as a commodity.
03:29Now the discussion is it's not a commodity because there's no way you can make enough of it.
03:32I'm skeptical that something that was a commodity is now decommoditized.
03:36So I think that's a little bit of a question for me.
03:38Eric, jump in on SK Hynix and Micron.
03:40Well, it's the whole SOX.
03:42It's the whole chip complex.
03:43SOX is up 80% this year.
03:45The SOX is up 66% in the second quarter.
03:48It's on pace for its best quarter since the first quarter of 2020.
03:51I mean, you're looking at the market leaders, and it's Intel, Micron, SanDisk, AMD.
03:56I mean, these are one of them would normally pop up, but that all of them are doing this.
04:02There's definitely a shortage in memory.
04:04There's definitely a shortage in chips, and the AI money is flowing toward them.
04:09The idea that this is sustainable, I mean, we're looking at Micron's valuation,
04:15and it's really actually really cheap.
04:17It's below 10 bucks.
04:19Well, it's below 10 times projected earnings over the next 12 months.
04:25That is incredibly cheap.
04:27Like, NVIDIA is like a 22, and yet there is concern that this means that we're actually
04:35at the peak of the earnings cycle for them.
04:38So you don't know where this is going to go, but there's a Chuck Prince kind of dance while
04:44the music's playing vibe going on in the market right now, and it's really hard to get in front
04:49of this kind of momentum.
04:50It just is.
04:51I want to ask you guys about something we made reference to, and that's whether or not
04:56the markets are being more particular about AI and software companies and who they're choosing
05:01as to be efficient and who they're choosing to be maybe, you know, less efficient, whose
05:05earnings have not met markets.
05:06Because we're seeing some of these big corporations start to scale back where they're using these
05:10AI tokens, right?
05:11Microsoft is saying we're not doing this anymore.
05:13Uber has said they're, like, looking at the value of it.
05:16And then there are these, you know, stories from several companies saying they're hiring
05:19actual humans to do basic coding because it's cheaper than using the AI token.
05:23Where does that start to meet the rubber and the road when you look at these huge valuations
05:27that we're just talking about?
05:28Sarah, you want to take it?
05:29I think that that is one of the biggest questions that the market's going to have.
05:33And I think that anything that starts to make it look like maybe we're backing off on
05:37this is not great because the idea is it's going to keep growing and we don't know yet.
05:40But if all of a sudden people are starting to question already whether or not they're
05:44getting a return on that and whether or not it's better off to use people, then this slows
05:49that down.
05:49Now, ultimately, that might be better for everything as a whole.
05:52But where the market sits right now, it makes it quite vulnerable, I would say, in the tech
05:55side.
05:56What we're hearing from strategists is that a lot of the sell-off, well, maybe justified,
06:02was really broad-based and went a bit too far on a bunch of different names.
06:07So the idea, like, say, you were saying Microsoft.
06:09The idea that Microsoft is going to be put out of business by AI or anything like that,
06:13it's more likely that it's going to be, you know, Microsoft powered by Anthropic or whatever.
06:19There are spots.
06:20Or they're a huge investment in open-air.
06:21Yeah, yeah.
06:22I mean, one way or another, they're coming into the fold.
06:26There are going to be aspects of the software industry that are going to be disrupted, no
06:30doubt.
06:31But the idea that, like, you just sell...
06:33Because at one point, we were looking at it as a broad trade of, you know, short software
06:39go long chips.
06:40That is really simplistic thinking.
06:43It works when everything is moving in the right direction, but it can blow up fast.
06:47And it's not really based on what the fundamentals are showing.
06:50And that's really where eventually this will all shake out.
06:54Not now, but eventually.
06:56On the software side, we'll get an update after the bell today.
06:58Salesforce is set to report.
06:59They've been getting just beat up this year.
07:01Snowflake also set to report just after the bell.
07:03So we'll bring those numbers to you guys as we do get them.
07:07On this question about sort of when this party ends, what does that look like?
07:12And are we...
07:13You know, there's some people out there right now who are drawing parallels to, like,
07:15the late 1990s, not just because the Knicks are winning, but...
07:19It's been a long time, too.
07:21It has.
07:21It has.
07:21But also about what tech stocks are doing right now.
07:24Well, I think that part of the problem with that parallel is just that there is a bigger
07:28earnings push behind this because right now you don't...
07:31I mean, you can have the argument about some of the circular financing in the hardware and
07:35who's buying chips and who's putting money into the AI guys, but it's not as bad as it
07:39was in 2000 when you had a lot of vendor financing and you had a lot of things that just
07:43didn't
07:43make sense on their face.
07:45And in retrospect, that's much easier to see.
07:47And in retrospect, there might be places here.
07:49But I think that there really is a sea change here and a major change in both technology and
07:53the way we're using it.
07:54And for the folks on the software side that are going to have more problems, those are
07:57the companies that had a lot of growth in seats.
07:59And you don't necessarily need as many seats if you're using some of this.
08:02But I think it's...
08:03You're saying because they sell by the seat.
08:04Because they sell by the seat, right?
08:05So this is an and and not an or.
08:07And the question is going to be who does the best at that.
08:10But the people who had straight up growth that were just piling in more people, more people,
08:13that's a little trickier right now.
08:14Eric, is Zscaler a good example of that?
08:16I mean, we were looking at them earlier down when I looked this morning at 28% Wednesday after
08:20this fourth quarter not meeting expectations.
08:22What did they do wrong and what can other people learn from?
08:25Well, as far as Zscaler is concerned, they're in a position...
08:30They are actually in a position where they could be disrupted by AI.
08:34And they're starting to show signs of weakness towards it.
08:38What you referred to Salesforce.
08:40So a company like Salesforce is deeply embedded in your system.
08:45It's really hard to get them out.
08:47You're also relying upon their data, their proprietary stuff.
08:53If you're just sort of a node that gets attached or you sell something that is a product that
09:00can be copied or redone in-house, yeah.
09:04So that's where they talk about...
09:06All the strategists that we're talking to are like, you need to thin slice this.
09:10You need to look within the group at which companies are actually positioned to survive
09:15this and which are sort of free riding.
09:17And Zscaler kind of got caught up.
09:19There will be others like that.
09:20But there are a bunch that are deeply embedded in their customer ecosystems.
09:27And getting that out of there is probably going to be harder to do than just sort of
09:32augmenting along with them.
09:33Sarah, I want to just give you the last word here.
09:3520 seconds.
09:37What sectors do you want to avoid right now?
09:40I think you need to look at valuation because I think that there's some places where if you
09:43want to play that momentum trade and you're really good at that, then you can chase some
09:46of that.
09:47But some of the valuations have gotten really out of whack.
09:50I also think that you want to look on the plus side at companies where you've got decent
09:54cash flow and you can understand what's happening there and some good capital return.
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