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.