The Federal Reserve's Jay Powell has finally said that the time
has come to cut rates. He's noticed that the labor
market is getting a little weak. It's cooling down a little bit.
Meanwhile, inflation is already quite low.
It's down below 3%. So according to Jay Powell, our
Fed chair, he is now saying that the calculation has shifted.
Things have changed. We're no longer focused solely
on bringing down inflation. Now the risk of the labor market
doing worse, even worse than inflation, has become greater.
So the time has come to cut rates.
But what does this mean exactly? What happens when we cut rates?
So far over the past couple of years, we've seen interest rates
go from nothing, from .08 federal funds rate all the way
up to 5.3. This is a record high increase,
a record fast pace of increasing interest rates, and now we have
the Fed chair announcing that they're going to go back down.
What does this mean for companies?
What does it mean for our portfolio?
What companies will do well because of this?
Which ones will do poorly? We're going to be breaking down
all of this and going over the impact that rate cuts will have
on the market. Now, we also have some other
news. Intuit reported earnings.
Apparently the market thinks that Intuit's earnings weren't
so great. Well, I disagree.
I really like the earnings and I bought $5000 more of Intuit this
morning. We'll be going over the
earnings, breaking it down with the data, looking at what
happened and what they're projecting, and we'll be going
over why I think the stock is a buy.
Now, we also have some other news to get to.
That's rather bizarre. This is the type of news that I
would not guess in a million years, I'd never be able to
predict it. It comes so far out of left it
just seems totally random. Chick-fil-A is reportedly
launching a streaming service for some reason.
That's what the actual news report says.
Now, I verified this because, again, when I first heard this,
I thought it was so weird. It's so bizarre that I I thought
it might be a joke. I thought it might be just fake
news or parody. This is real.
Chick-fil-A is starting a streaming service, so naturally
I got very intrigued. What is going to be on the
streaming service? What is the game plan here?
What does this mean for companies like Netflix and
Paramount Plus? What is Chick-fil-A doing?
We'll be addressing that in this episode.
Now, we start off by jumping into the main story today, which
is the Fed meeting in Jackson Hole.
This is a highly anticipated meeting that all financial
markets have been looking forward to for weeks now.
For the past couple of days, we've been talking about this
and seeing it on CNBC and the Wall Street Journal and the
Financial Times in Bloomberg. The highly anticipated Jackson
Hole meeting. Now, if you're wondering why
they actually meet in Jackson Hole, the meet in Jackson Hole
because in the early 1980s, the Kansas City Fed leaders learned
that the best way to ensure that the Fed Chairman Paul Volcker
would accept an invitation to meet was to locate the premise
in somewhere that had good fly fishing.
Now, after that initial meeting with Paul Volcker and the good
fly fishing, it's become tradition.
So the reason that the Fed goes all the way to Jackson Hole,
Wyoming is specifically for fly fishing.
And that's where we get some of the most important monetary
policy laid out for us. Now, in this meeting, the
Federal Reserve Chair, Jerome Powell gave his strongest signal
yet. The interest rate cuts are
coming soon, saying that the central bank intends to act to
stave off further weakness in the US labor market.
Quote, we do not seek to welcome further cooling in labor market
conditions. The time has come for policy to
adjust. Now, normally when you're
reading Fed statements, you have to read between the lines.
You have to figure out what they're really trying to say.
But that's not the case here. Jerome Powell is coming right
out and saying it clear as day. the Fed is ready to lower rates.
There needs to be a change in direction.
He goes on to say, quote, the direction of travel is clear and
the timing and pace of rate cuts will depend on incoming data,
the evolving outlook and the balance of risks.
He didn't say exactly when. He didn't lay out exactly what
quarter or what month they'll do it.
But we know that rate cuts are going to happen and they're
going to happen soon. Now, the reason that the Fed is
deciding to pivot today is because the Fed has dual
mandates, meaning they have two different things they're
focusing on. One part of their job is price
stability. Price stability means that you
don't have runaway inflation, that you don't have deflation.
It means that you have stable prices, that your dollar today
will be able to purchase around the same amount of stuff
tomorrow and next year and the year after.
The target range for the Fed in terms of inflation is what they
call a symmetric 2%, which means that year over year your
purchasing power can purchase about the same amount -2%.
So you have around 2% inflation, give or take year over year.
If one year it's 1%, one year it's 3%, you have a symmetric
2%. A little inflation is a good
thing. It's good for the national debt.
It's good for price stability. It's better than deflation.
So that's what they like to focus on, having 2% inflation.
And right now we're below 3%. So we're right close to that 2%
goal. And in terms of where Jerome
Powell sees things, he says clearly that we haven't
completed the task here. We still have a little bit to
go. It's going to take more time.
We're pretty close. Inflation is not a big deal
anymore. Prices are still high, but
inflation means that prices continue going up.
And from today, prices aren't going up that quickly.
They're only going up 3% year over year.
So that's one part of their mandate.
The next part is keeping stable employment, making it so that
people looking for jobs can find employment.
And this is where we're starting to see cracks in the data.
We're starting to see an increase in the amount of people
looking to be employed. Now, Jerome Powell was very
clear here as well when he went through employment.
He said that the problem with the jobs data is not because
companies are firing people. It's not like there's massive
layoffs across different companies.
There have been slight cutbacks, but nothing unusual.
The problem with the job market is not that people are being let
go, it's that there's a lot of new people looking for work,
people entering into the job market.
The unemployment rate is only including people actively
looking for work. So if you're not in the
employment market, if you're not seeking jobs, if you're not even
looking for one, then you're not considered unemployed.
Unemployed people are people looking for work that can't find
work. And the amount of people looking
for work is increasing rapidly. So we have an issue here where
now the mandate and the focus of it has shifted.
It's shifted from price stability to employment.
And that shift means that it's time to take interest rates down
because the primary tool the Fed has to help people find work is
interest rates. It's a blunt tool, but it does
help in this case. Lowering interest rates should
increase the amount of jobs. And Jay Powell is optimistic
here. He thinks that things aren't so
bad. He says quote with an
appropriate dialing back of policy restraint.
Policy restraint means high interest rates, high interest
rates 5.5%. There is a good reason to think
that the economy will get back to 2% inflation while
maintaining a strong labor market.
That would be the best of both worlds, having a strong labor
market and 2% inflation. That is the Goldilocks scenario.
That is the soft landing, and that's exactly what J Pal's
looking for. Now with these comments from J
Pal saying that he's lowering interest rates, that it's time
for change. We already have the markets
pricing this in today. And you'll see the markets
reacting and the bond market reacting in different ways.
For example, right now, most Fed officials and most investors
agree that there's going to be a cut in September.
They'll probably be a 25 basis point cut.
So 1/4 percent interest rate cut in September looks very likely.
I agree with this, and I think this is going to be the start of
the interest rate cuts. Now, if we give the interest
rate some context, this line here is the effective federal
funds rate, meaning it's basically what the federal funds
rate is at at the time. Now, if we go back to 2009,
you'll notice that it's near the X axis here.
It's so low, it's basically zero.
We have zero effective interest rates from 2009 to 2016 and this
is like investing in easy mode. It is like selecting the easiest
mode on a video game. It's really forgiving.
The reason that it's so easy is because interest rates directly
impact the relative value of stocks.
If interest rates are 5% and you can buy a risk free treasury for
5%, it makes the bar of buying a stock all the higher because now
you need to buy a stock that will outperform a 5% treasury.
So you're comparing and contrasting every investment to
that risk free rate. If interest rates go up to 8%,
well, that's even tougher. Try to find a stock that will
outperform an 8% risk free investment.
That's really tough to do. So you can see that the higher
and higher the federal funds rate goes from 3% to 5% to 7 to
10, the higher and higher the risk free treasury yield is.
Treasuries go up from 3% to 5% to 10%, and then every single
stock, relatively speaking, is less attractive because you have
this investment over here that's looking better and better risk
free. So everything with investing is
relative. The value of a stock is relative
to the federal funds rate. That's why Warren Buffett says
that interest rates are like gravity.
As interest rates go up, it pulls down the relative value of
all other assets. It's so important in everything
we do. It has a major impact in all of
the financial markets. It is the most powerful tool
that the Federal Reserve has now.
At the current time, we have interest rates of 5.3%.
Now. 5.3 percent is nothing insane.
It's not 10% returns risk free, but it's still enough to make it
so that it's relatively competitive against stocks.
Many investors have been buying Treasuries because they're
getting a nice yield and my savings account, I get a 5%
yield, that's pretty great. So a lot of my money might be in
savings accounts and a lot of investors money is in savings
accounts risk free instead of in the stock market.
So as this interest rate goes down and as saving yields go
down and as treasury yields go down, stocks become relatively
more attractive and more investors will be likely to take
on the risk of stocks. We can see that during this time
period from 2009 to 2016, this was with relatively no
competition for stocks. There is no alternative.
Buying Treasuries at that point was very expensive.
The cheapest thing in the financial market were stocks.
So investors during this time period, it was like they're
investing in easy mode. They had it very easy.
You could buy almost anything and it would go up.
This time period that we're investing in has been much more
difficult. You have to buy the right
stocks. You have to buy companies really
growing their earnings. There's no easy mode here.
But as interest rates go further and further down, investing in
stocks becomes easier and easier and easier.
This also doesn't impact stocks equally.
Some companies get impacted much more than others when interest
rates go up and down, especially leverage companies or companies
that are reliant on consumer financing.
So we look at the type of companies that I think this will
have the largest impact on. It's ones like VICI.
Vici's a company that very much competes with treasury yields.
A primary reason that investors invest in REITs is to get that
juicy dividend yield right there, the dividend yield of
5.14%. Well, why would investors buy a
stock, a company that needs to be managed and run when instead
they could just buy a treasury bond or put their money in a
high yield savings account? See, it's relatively difficult
to argue for VICI when you have a high yield savings account and
that's why the stock so far year to date is only in the green by
.43%. But as interest rates go down,
this dividend yield stays the same, so it becomes relatively
more attractive and you can see this already being priced in in
the past month. VICI has way outperformed the
market over the past month because there's greater
anticipation of interest rates coming down.
My expectation is that as interest rates continue to come
down, VG stock will go back up to 3536, maybe even back up to
$37 per share depending on how much interest rates come down.
Other companies that are going to be impacted to a huge extent,
and you can already see them reacting today, are ones like
Tesla, because the great majority of Tesla customers rely
on financing. They have to go to a bank, they
have to ask for a loan, and then they get an interest rate on
that loan. Higher federal funds rate means
higher interest rate means the car is more expensive.
So the interest rates determined to a large extent how expensive
Tesla's product is. When interest rates went up
dramatically in a single year, Tesla had a combat that by
lowering prices on their cars over and over again the entire
year. Lowering prices has caused
Tesla's operating margins to drop dramatically.
Its first level thinking that if interest rates going up cost
Tesla to lower prices, then interest rates going down gives
Tesla a bit more pricing flexibility.
And this is the same for any company reliant on consumer
financing companies where the customer has to go out and get a
loan to buy the product the company sells.
So we can look at any of them today.
We can look at Home Depot. How's Home Depot doing today?
Well, it's beating the market dramatically.
It's up almost 2%, while everything else is up only half
a percent. We can look at Lowe's.
Why are Lowe's and Home Depot up so much today?
Because to do big home projects, to buy homes, to do anything
with homes, it requires a lot of financing.
Customers aren't paying out of pocket.
They're not paying with cash. We have Pool Corp Pools are
expensive. You want to get a pool, most
likely you'll need a loan. So Pool Corp is up above the
market because it's reliant on consumer financing.
We can look at examples like Sunrun.
I'm guessing, and this is, that's not right.
Is it RUN Sunrun? Yes, the solar company.
I'm guessing that every solar company bounced big today
because solar is a product that nobody is buying in cash.
They're financing it. So any of these stocks are going
to have a good day. It's up 6% today.
So as you're looking at different companies, the biggest
differentiator in performance today is going to be companies
that are reliant on consumer financing and ones that aren't.
Ones that aren't, aren't going to be affected by this news.
For example, we can look at Netflix.
Netflix is in the red today because Netflix doesn't care
about interest rates. It doesn't impact Netflix at
all. Interest rates going up didn't
hurt Netflix. Interest rates going down
doesn't help Netflix because nobody finances their Netflix
subscription by taking out a loan from the bank.
So companies like this are not going to be impacted.
Companies like VICI, Sun Run, Tesla, Home Depot, you name it,
ones that rely on big projects or consumer financing are going
to have a good day. Now moving on, we have a company
in My Portfolio, specifically in my passive income portfolio here
it's in the financial category, which is Intuit.
Intuit reported earnings yesterday and it was after
market close. Initially, the stock went up
around 2% after reporting earnings because they beat on
everything. They beat on their earnings per
share, they beat on their revenue, they even beat on their
full year guidance. But then something during the
call caused the stock to go down and that was because of their
fiscal Q1 forecast was lower than expected.
So as of right now, the stock is currently down at 7%.
It's flat. Year to date, it's up just 1.6%
and it pays a small dividend. Now when I look at this position
with the stock going down after this earnings, I decided to buy
$5000 more of Intuit. That buy went through this
morning. If we look at what's going on
with Intuit, the first thing I say every time I have a company
where the stock goes up seven to 10% after earnings or it goes
down 7 to 10%, is that that should not inform you of how the
company is fundamentally doing, what direction the company's
moving and what the future value is.
A lot of this type of trading immediately after earnings is
driven by big institutions. It's driven by bots, it's driven
by options and leverage. There's a lot of other factors
that drive very short term trading results.
So I don't use this as an indication to say that Intuit's
doing poorly. Intuit's gaining in market
share. It's in an increasingly strong
position. If we look at the breakdown of
their revenue by segment, which this is updated as of last
quarter, we can take a look here and see that it's steadily
growing. We have 13% growth across all
segments. That's the total revenue of the
company. That's fast top line growth for
a company of this size. Now, if we look at the different
segments, we can see that Credit Karma is struggling.
This is one where they had explosive growth in 2022.
It slowed down a bit and now they're starting to regrow this
section. Credit Karma is a valuable asset
that's being plugged into different parts of the business.
So even though this is flat, I still like this segment of
business. The pro tax section is also slow
growing. We have the consumer category,
which is growing a little bit faster, but still below the
average of the company, 7.5%. So all of these three segments
are not growing as fast as I would like, but the main thing
they're focusing on is this segment right here, small
business and self-employed. This is the QuickBooks section
of their company. It's the biggest segment and by
far the one with the most growth opportunity.
This is the one where they're putting the most effort in
developing a fully fledged CRM, very similar to Salesforce, but
for smaller businesses. You can see the rapid growth
year over year, 18.6% in this segment, and they're
incorporating AI into all different aspects of this
business. A lot of people still
incorrectly view Intuit as a tax company, but that's becoming an
increasingly smaller portion of their revenue.
The greater portion that's growing the fastest is their CRM
for small businesses. They're becoming a fully fledged
management tool for small businesses, and they're
integrating AI into everything they're doing.
On the earnings transcript of this most recent call, the CEO
of the company emphasizes how much they're focusing on AI.
It's the first thing he brings up.
Intuit is a global AI driven expert platform that is powering
prosperity for consumers, small and mid market businesses.
Our strategy and five big bets position into it as a mission
critical platform to deliver end to end solutions driving
sustainable growth. They say that we've made an
early bet on AI. We have significant advantage
with our scale of our data, investments in AI capabilities
such as knowledge engineering, machine learning and Gen.
AI and our large network of AI powered virtual experts.
This is enabling us to disrupt the categories in which which we
operate. And this isn't just fluff.
They have entire investor presentations 30 pages long
where they detail all the effort they're doing in AI.
The CEO continues on explaining their five big bets and they're
basically different ways that they're implementing AI into
different aspects of the company and the products to further
create a Moat from Intuit and different would be competitors.
When I look at what Intuit's doing, I like the fact that the
company's still in heavy reinvestment mode.
They're growing quickly. When we look at the numbers of
this company, the thing that impresses me the most out of
every other metric is if we look at the free cash flow per share
growth, Intuit is one of the fastest free cash flow per share
growers in the market. Of all the different companies I
look at, I'm constantly trying to do analysis on which ones can
grow free cash flow per share the fastest.
Intuit continually comes up as one of the top ones.
They've grown their free cash flow per share at a rate of
around 20% for the past 10 years.
That is incredibly fast. That's much faster than my
hurdle rate of 15%. So they are growing free cash
flow explosively fast and into it.
Even raised their guidance on the full year for revenue and
earnings. Now Intuit is one of the higher
multiple companies in My Portfolio when I'm doing
analysis on different stocks I own.
This one also shows up as a more highly rated company.
It trades at a 34 Ford PE if you use non GAAP analysis.
If you're looking at it from gap and factoring in stock based
comp, it trades more in line at A50 PE ratio.
They are getting stock based comp under control.
They're doing some layoffs. They're also cutting costs.
But either way, this company is higher priced, so it's going to
trade with more volatility than the other earnings.
But as far as I'm concerned, looking at these earnings,
looking at the progress of the business, I see no red flags
here. I see a company that's well on
track to continue generating growing free cash flow per
share. Now, moving on, we get to a
report here that at first glance, I really thought it
might be parity or fake news. I, I didn't know what to think
of it. I had to verify it.
But through multiple sources, it has been verified.
Chick-fil-A is hatching a plan for streaming services as
reality TV comes home to roost. It's a pretty good headline.
I I like it. A couple puns in there.
Good job Deadline. Now that headline is correct.
Chick-fil-A is planning a streaming service and this has
been verified. Now why would Chick-fil-A do
such a thing? Well, we can take a look at the
report here. Yes, Chick-fil-A is looking to
launch a streaming platform. The fast food chain has been
working with Hollywood production companies and studios
to create family friendly, mostly unscripted original
shows. The Chicken House is also in
talks to license and acquire content, according to the source
that pitched the project. One of such programs is the game
show from Glassman Media, NBCS The Wall and Sugar 23.
Netflix's 13 Reasons Why, which has been given a ten episode
order. Now this is a little confusing.
I don't think that Chick-fil-A is licensing from Netflix, and I
definitely don't think they're licensing 13 Reasons Why.
That doesn't seem like the most family appropriate fun
unscripted show. And also Netflix doesn't license
to other people. I've never seen a Netflix TV
series on a different streaming service or different service
altogether. Netflix keeps all of the content
they own and make to themselves, and they license shows from
other people back onto their platform, not the other way
around. I'd actually be really shocked
if Netflix starts licensing anything to anyone else.
That would be a shocking change in direct and I don't think they
need to do that. But anyways, not to get
sidetracked here. The budgets for unscripted are
around $400,000 per hour. Sources indicate Chick-fil-A is
also considering scripted projects as well.
It seems like a lot of money for unscripted shows.
We always look at unscripted shows as being cheap, but
there's still almost half, $1,000,000 per hour, which I
guess is lower than the average cost of like a drama.
Let's be honest here, this is Chick-fil-A.
When I go to a Chick-fil-A, it seems like one single location.
The one that I'm at is making $400,000 per hour.
Chick-fil-A is printing money at every location.
They're going to have no trouble affording this now.
They also are are dabbling in scripted projects as well as
animation stuff like Top Gear and The X Factor.
But we don't really know. These are all inside reports,
things that they might be doing now.
Even though Chick-fil-A can easily afford this, it's still
unclear why they're doing it. Streaming is a brutal industry
to be in. The first thing required to be
profitable in streaming is to have massive scale.
Massive scale requires massive investments.
You have to invest so much to build an audience to get
millions and millions of subscribers that don't turn off
the second you stop producing content.
And only a couple companies, in fact, I think two or three have
achieved that scale or will ever achieve that scale.
Companies like Disney, Amazon with Amazon Prime Video, and of
course Netflix. And I think the biggest rewards
by far will go to the very top companies.
So obviously with Chick-fil-A, they're smart enough to know
that they're never going to reach scale of Netflix or
Disney. They don't have Amazon with
Amazon Prime, they're never going to have hundreds of
millions of subscribers. So what is the play here?
What is the goal? Obviously, they have a different
intention. Chick-fil-A itself has yet to
announce or publicly comment on the programming initiative, but
a pivot into entertainment companies could be part of a
bigger advertisement or customer data play.
Disney does it with Disney Plus, and it drove Walmart's interest
in streaming, which ultimately led to partnering with Paramount
Plus. So obviously there's a bit of
skepticism here. What is Chick-fil-A trying to
get out of the streaming service?
What are they trying to accomplish?
The Verge suggests that it may be because of data.
Chick-fil-A simply wants to accumulate data and extract it
out of their customers and monetize it.
That could be the play. Maybe they're willing to do
that, but I don't think so. I think a company with the
reputation of Chick-fil-A, the good standing they have with
their customers and the relationship that they've worked
decades to build, I don't think they're willing to forfeit that
by doing a cheap data extraction program.
That is short term thinking. That's the type of thinking that
would destroy a business like Chick-fil-A.
I think it's much more likely that the goal of Chick-fil-A is
to simply create a service centered around families.
Family friendly entertainment, Light hearted entertainment.
Nothing highbrow, No huge drama series that are violent and
riddled with sex scenes. None of that stuff.
Just family friendly entertainment.
Unscripted comedies, light hearted comedies.
Things that parents can switch the TV to and not worry about
what their kids are watching. Chick-fil-A is a company
centered around Christian values.
Right on their website. Our purpose in bold riding, they
say, is to glorify God by being a faithful steward to all that
is entrusted to us, to have a positive influence on all who
come in contact with Chick-fil-A.
Now obviously these companies can put whatever they want on
their websites, whatever sounds good.
But when you go to Chick-fil-A and you get treated the way you
do, it has a different feeling than most fast food companies.
It feels different because of the way that it's ran.
When I look at Chick-fil-A, I don't think this is going to be
a data play. I don't think it's going to be a
growth plan for the future. I think it's something to just
enhance the brand and offer people a different entertainment
that's more family focused. So again, I would have never
guessed that Chick-fil-A would be building a streaming service,
but this is 2024. Anything can happen.
That's all for now. See you in the next one.