COT 158 === [00:00:00] All right Good morning,  everybody. Welcome to another day of   The Cents of Things with Ron and Jeff. And  on today, yeah, we’ll start off, of course,  

with our usual what happened in history. Ron’s  got a really interesting thing about a Civil   War cannonball, so we’ll leave that. He’s  gonna cover stocks versus the CAPE ratio,   and margins versus the CAPE ratio,  which I’m interested in seeing.

He’ll also give us an update on the S&P 500  sectors and where they are for the year.  

I’m gonna cover really three interesting economic  reports that happened over the last week that  

I think are the, the quiet beneath the storm  that’s been happening with AI and everything   else. These are nice, quiet things that are  going on that I think we need to watch closer.

And last but not least, we will revisit what  I covered a couple weeks ago on the yen carry  

trade after we had seen the US and Japan go in  and try and prop up the yen. We’ll see where  

it is today. So stay tuned, [00:01:00]  we’ll be right back on in just a second.

Hey, everybody. Welcome to the  show. Ron, how are you, my friend?

Good morning. Doing well. Yeah, CPI information.  People love the economic data when the the  

earnings infor- the earnings data is starting  to slow down a little bit. Yeah. The next big   one that’ll come out is NVIDIA. I think that’s  next week or the week after, yeah. Actually,   next week’s a pretty busy week, ’cause you got  a lot more of the retailers and stuff like that.

So I think the retail sales number tomorrow is  gonna have some effect on the retailers and,   how people look at that. But other than that,  

that’s pretty much the end of anything  that’s of any importance for the,   this earning season. Yeah. I hear you. All right.  So- All right. Yeah … this week in history.

Got a lot to go through here.  It started out kinda slow,   and then it really picked up. Okay.  30 BC, just in case anybody cares,  

Cleopatra dies a suicide. Huh. Wow. I’m not sure  how they figured that out with this, this week,  

but that’s [00:02:00] okay. Yeah, I get it. I  know the calendar was similar, but all right.   1776, this week, London learns of  American independence- That’s right

where, of course, if they had the internet  back then, they would’ve found out about,   They would’ve known right  away … two minutes later,   right? Yeah. There would’ve been live streaming  in the, in the, the Constitutional Convention and   everything else. And they would’ve held  up to show everybody their signatures.

Yeah. 1793, the Paris Louvre Museum  opens. Huh. That was in- Wow, I didn’t  

realize it was that early … back that  far. Yeah. 1896, gold discovered in them  

hills up in- Up in them there hills, yeah  … Alaska, which would not be a another US   state for more than 50 years. Yep. 1914,  Panama Canal- Huh … opens for traffic.

This is a big week 1934, first federal prisoners-  Yeah … land on Alcatraz. And I had to look that  

up, ’cause I thought they were there earlier,  but it [00:03:00] wasn’t. It was just more of a,  

a military stronghold for quite some time. ‘Cause  if you think about it, there were only… Alcatraz  

was only a prison for 30 years, ’cause I think  it closed- in ’61 or ’62. Yeah, ’cause it was  

just falling apart at that point, yeah. So I just  found that to be interesting. 1939, Wizard of Oz  

opens. Hey, it’s in our colors, so that’s the  best part about it. I didn’t realize that. It   was a book from the late teens or the ’20s-  Yep … that they converted into a movie,  

and yeah, it was the first major motion picture  in color, and I think they surprised everybody.

Remember, the film starts out in black  and r- white during the, … tornado,   and then gets into color. And then clicks on.  So I am sure, this was one- I- … of those  

viral movies that people saw more than once.  I… after staying at the Hotel del Coronado,  

I have never been able to watch the movie  again, because they play it incessantly on   their internal TV station at at the Hotel  del [00:04:00] Coronado, which is where L.

Frank Baum- And Some Like It Hot? … wrote  it. Yeah you have Some Like It Hot. Yeah,   that’s the other channel.  They play Some Like It Hot,  

and they play The Wizard of Oz nonstop,  why The Wizard of Oz at C- Hotel Coronado?   Because L. Frank Baum wrote the he wrote  the first book at the Hotel del Coronado.

I did not know that. Yes. There you go,  folks. Just a little bit more useless   knowledge for your day. Gotcha. Absolutely.  That’s cool. One- 1940- One of my favorite  

hotels on the planet, 1945, Germa- Yeah …  Japan’s surrender made public on VJ Day. Yep.

1961, Berlin is divided east, west, and you  could pass from the West at the Brandenburg  

Gate. The Brandenburg Gate. Except when I  was there two years ago at Christmastime they   were working on the Brandenburg Gate,  and you couldn’t walk through it, ah.   1969, Woodstock Festival  opens in Bethel, New York.

Nice. One of my favorite documentaries. I  was born about 18 years too late. Yep. I   don’t know if I would’ve gone, being my Type  A personality, but who [00:05:00] knows? 1977,  

I remember this, Elvis Presley dying.  The King died on the throne. 1978,  

fatal Ford Pinto catches fire- … in  Indiana. Yeah. There was- One of many

making a left turn and the gas tank or something,  if they got hit in a certain spot. Yeah yeah,  

when you put the, when you put the gas  tank behind the, the structural member so  

that nothing is between the bumper and  the structural member but a gas tank,   it’s really not the best idea. And  if you haven’t seen the movie yet,  

you know I’m a movie guy, I don’t believe  this was 100% ba- based on Ford Pinto,   but there’s a movie called Class Action with  Gene Hackman and Mary Elizabeth Mastrantonio.

Good flick. And it’s about a class action suit  against a car company that when it makes a left  

turn and gets hit from behind, it catches on fire.  Good flick, and, Gene Hackman is pretty much great   in everything. Yep. [00:06:00] 1981, I had to put  this in here, being a tech weenie. The I- IBM…

Excuse me, I don’t know why I did that. IBM  PC Model 5150 hits stores- Oh, wow … with   a starting price of $1,565. I think  you needed a small bed pickup truck  

for this. Yeah, pretty much … launching a  new era of personal PCs. There we go. Had to   put this in here. 1982, back-to-back  years, Fast Times at Ridgemont High.

This was a coming of age film. What was  the first coming of age film in 1981? My  

dad actually let me see this. Was it Breakfast  Club, or- No, Breakfast Club was 1980 85. Your,  

the, Okay … 1981, Porky’s. Porky-  Oh, God. And I gotta tell you,   I watched that again. I hadn’t watched it  in so many years, about three years ago.

Ugh. Holy crap. I- It’s so funny … I cannot  sto- I don’t know if that movie- I cannot stop   laughing … could be made today, but there are  so many great scenes in that movie. Just the-  

Unfortunately, they prostituted it [00:07:00] two  more times with the sequels. With awful movies,   but yes, the first one- But Fast Times at  Ridgemont High, Cameron Crowe wrote this-  

and a little bit of his own life story, and great  soundtrack. It definitely- Tasty Waves … is a  

bit of a time warp. Tasty Waves, Cool Buzz,  and Hey Bud, Let’s Party. There you go,  

bud. 1985, Michael Jackson buys Beatles-  Oh, yeah, that’s right … publishing   rights for 251 compositions, paid just  under 50 million, sold to Sony in 2008.

Now, rather ironically do you know who told  Michael Jackson he should get involved in  

publishing? No clue … Paul McCartney. Of  course. In 1983, they worked on a song together,  

and Michael Jackson was looking for some  advice what to do with his money. Yeah.   After Michael Jackson bought the rights, Paul  McCartney never talked to Michael Jackson.

Yeah. It’s like wait a minute. Hold on here.  I actually didn’t have time. I wanted to see   what it was [00:08:00] sold for in 2008-  Yeah … because I think that was one  

hell of an investment. Oh, it was probably-  Who knows what that would be worth today. I   believe this was a lot of their earlier stuff.  I think it was pre-’65 or pre-’66- I believe,  

because there was some argument with  the original company that was recording,  

because they owned 50% of the right or something.  They were- it was some crazy legal thing. And,  

Paul and John basically didn’t have… I  don’t know if they didn’t have the money,   or they didn’t have the ability to buy it,  or they didn’t want to sell it to them.

Who knows? It was just cra-  it was a crazy legal crap.   Hey, Paul, you gave him the advice. Yep.  He just took it. I mixed up my year here.  

1984. Oh, God. Red Dawn was released. Another  coming of age movie. I put this in here not   because it was a great movie, although  it was a very interesting cast, right?

Yeah. C. Thomas Howell. You had- … charlie  Sheen, Yep … patrick Swayze. Patrick Swayze,   yep. Oh my God, who’s… Ray Dawn Chong was in.  You had- Yep … some interesting, good cast. The  

reason why I put [00:09:00] it in there, I didn’t  realize this, but 1984, of course the Reagan era,  

the ultra religious right- wanted to put  more dir- ratings on movies, and this was  

the first movie that was rated – PG-13, wow …  PG-13. I think that’s why I was allowed to go   to Porky’s in ’81. They didn’t have all those  extra ratings. Yeah. I don’t know. W- which  

that would- But I- I was 13 in ’81. I don’t think  you’d let a 13-year-old go see that movie today.

No, I don’t think so. No. All right, here we  go. I’m amazed that it was PG. No, no crap.  

That would probably be an NC-17 or whatever  the hell they have on it today. Easily. So   I thought this was interesting. I  don’t know who the hell would do this,  

but TSA finds stolen Civil War era cannonball  in a passenger suitcase at an Alabama airport.

Okay. Now, number one, why would you bring a  cannonball tr- through TSA? And number two,  

why would you put it in a suitcase? Ship  it for cryin’ out. Obviously it was pretty   heavy. And the [00:10:00] other thing I didn’t  see was, where the hell was this thing stolen  

from? Yeah. Yeah. It’s funny, I u- I had  a, an old client at my old firm that was…

he had gone to work after after 9/11, he went  to work for TSA as one of the the guys that  

basically tests TSA. So they basically, they try  and get through TSA with stuff in their suitcases  

and stuff like that, and he’s like, “You would  be shocked at the stuff people try and bring   through.” So I’m not necessarily shocked that  somebody would try and bring a cannonball through.

I hear you. All right. You know what? This  would have been a good Florida man story,   but it happened in Alabama. Unfortunately,  yeah. It’s an Alabama man story, all right.  

Being the tech weenie that I am and the  analytical weenie you gotta look at some   things every now and then, and I don’t  wanna hear about this time is different.

So- The CAPE ratio, from Robert Shiller,  and on the right side you can see what it’s  

based on. It’s the cyclically [00:11:00] adjusted  price-to-earnings ratio, or the PE ratio. So- …  

I think it’s very interesting kind of looking  at what is normalized versus what is high. So   what you- … what you wanna do, on the right side  of this chart, this is showing you the deviation.

So the average is 21.9, right? So that, that  would be right here. Then you’re looking at  

one standard deviation, two standard  de- oh, sorry this is the line here.   So this is one standard deviation above,  one below, and we’re all the way up here,   and there was only one time it was  higher than this, and that was in 2000.

Now- … we have done this many times  on the show where we’ve said this   time is different than- … the late  ’90s, and it 100% is. Euphoria money  

being pushed towards tech stocks, that’s  the only sim- major similarities. But I   think this is something to look at  when you are looking at valuations.

And when I hear- … talking heads and  analysts coming on [00:12:00] TV going,   “No, you know what? We’re s- we’re still at  fair value,” and many… we’re… There’s  

a lot… I think we’re still undervalued  in many areas. … Show me where they are   that’s not tech. Yeah. Then you  could probably point out a few.

But I think this is very interesting,  ’cause as we know, if those top 20, 30,  

50 stocks all of a sudden decided to  pull back on their CapEx 10, 20, 30%,  

doesn’t mean they’re not still making  money. But now are they showing, oh,   wait a minute, you’re not still investing  in the future in the short or medium term.

I think this would pull back into the low  30s, high 20s. I don’t know. What are your   thoughts? Yeah, I totally agree with you. Once  again the momentum… I m- and I’ll talk about  

this in my little piece, but, we’re seeing the  AI trade. I- there’s this kind of disbelief.

It doesn’t matter what the companies say. It’s  this disbelief, and the market just has these   kind of weird animal spirits about it where, it’s  a very crowded trade right now in [00:13:00] AI  

and it’s moving around all over the fence. So  I totally agree with you. I think, we’re there.

It the interesting thing is, it’s that top,  let’s call it 10 to 15 stocks- That are mostly AI  

related and things like that, that are really off  the charts up here. But if you look at the general   market, if you peel those guys off, they’re really  not. If you were to peel those off, you’re…

the rest of it’s down around 2120 at this  point. More reasonable and average levels. Yeah,  

it’s more in, in an average. What I could see,  and I mean we’ve seen this throughout the summer,  

was a massive pullback in the AI trade. And then,  of course you had huge numbers come out of Google  

and Meta and all these players, and they’re  still spending money, so it spilled back in.

But you keep getting this back and forth,  where it’s a super crowded trade right now.   Yeah. Yep. So the next chart is going  through margins and valuations compared  

to [00:14:00] a five-year CAPE ratio trend.  So just I know it looks a little busy here,   but if we’re looking at this  this is the trend, right?

The, the… this is the S&P 500. The dot plot here  essentially are mar- are the, is the CAPE ratio,  

and the blue mountain part of the the chart is  the operating margin. Okay. We can just see that   margins, I mean by far, are the highest above  the trend. That’s because they’re making money.

They’re printing it- Yeah … for crying out  loud. But if you’re just looking at the normal   trend here, obviously we are well extended, and  you always get a mean reversion at some point.  

Is that today? Next week? Next month? Next  year? Next… who knows? But at some point  

there is a mean reversion. It has just been  proven along the way, and you can see any time   we’ve gotten above the the average trend line  here, there has been a significant pullback.

You can see we… here there’s a little bit of  an aberration but that [00:15:00] was going into  

COVID. And then here we got real high coming  out of COVID with, insane valuations. In 2022,  

we were down 22% for the year. We were down 30%  at one point. What are your thoughts on this?

I think this is a really  good chart if you’re- Yeah,   I think it- … tracking it. Yeah. Once again  I would say that it’s not the general stock,  

but it is a very s- a very small subset of  stocks and their derivations from there.  

I think more than anything, you gotta  be very careful about choosing the   right companies within the, within those areas,  specifically anything related to the AI trade.

Because once again, the CapEx guys stop spending  money, if we see any of those guys pull back,  

it’s gonna affect everybody across the board at  that point. Yeah. All right quickly I got this   slide here, which, typically we do at the end  of each quarter, the- Yeah … or the halftime.

And I f- we didn’t do it halfway  through [00:16:00] the year,   but I thought this was just interesting that  year to date the Dow is outperforming. And  

there’s another reason why I never look at  the Dow. They changed it again this year,   right? Yeah. 30 stocks. They swapped out  two. I think last year they swapped out one.

Yeah. The year before they… So there’s no  commonality here to it. The S&P, is up 10%,  

and if you just look back here we could  potentially have a fourth straight year of  

double-digit gains. And again, the financials,  which I don’t care for that sector at all,   is lagging behind significantly. And  you would think they would do better  

with higher interest rates because they get  good net interest margin on their deposits,   and they’re still suffering. Yeah. What  are your thoughts on this? Because for the   most part I think it’s interesting. Real  estate’s doing pretty good for some guys.

Yeah, so that’s exactly what I just was focusing  on. You can go another 30 years above six. Yeah,   I was just focusing on real estate.  Yeah, it’s interesting because,  

you will see [00:17:00] it do well  when we see interest rates dropping,   which we really hadn’t seen interest rates  dropping. They’ve just been steady steady eddy.

And like I said, real estate’s really done well.  Now, look back over the last five to 10 years here  

and, it’s largely been in the bottom. So it’s  about time for it to be up again. But yeah,  

I think that’s very interesting. I think it’s  very interesting that we’re just a little over   halfway through the year and the S&P’s up over  10%, well above its average at that point.

Now you got a- So it’s amazing … few  people raising their price targets to   over 8,000 now. I mean- Yeah … please.  Yeah. JP Morgan just did that this week,  

so yeah, I think it’s- And your daddy, I think  he’s 8,300. He moved it up. Unbelievable. Keep   pumping, baby. Keep pumping. Keep it, keep  pumping, yeah, until it do- until it doesn’t.

All right, let me quickly- What do  you got here? … share my screen   here. All right, so let me grab this. Okay,  can you see that? Give me a sec here. There  

we go Yeah. [00:18:00] Got it. All right,  cool. All right, so this is actually from   a presentation I gave earlier this week,  and, I think it’s it’s really telling.

This is the quiet stuff behind the scenes that’s  going on versus the, the yelling loudly AI trade  

all over the fence and everything else. Really  three reports, but they all had one message. Jobs,  

CPI s- and PPI. So when we look at that  last Friday jobs absolutely shocked the  

world by being down negative 23,000  versus a positive 88,000 expectation.

Unemployment’s at 4.1%, so that’s a big slowdown,  and we saw them go back and adjust numbers three  

to four months back as well, adjust them downward.  But this is the first negative print we’ve seen  

all year. Then, the next big number was Wednesday,  CPI. Came in 3.4%, exactly where it was expected,  

up [00:19:00] .1%, which was less actually  than what was expected, so kind of flat number.

And then today, PPI came in absolutely flat for  the month, 4.7% year over year. The expectation  

had been 4.9%. So what does that mean to us in the  long run? It’s because bad news became good news.  

Weak jobs, inflation cooling, that gives the Fed  room to not do anything. And the rate cut bets,  

which I was watching the futures market, the rate  cut bets going into last Friday’s job number was   that there was a 57% chance that we would see  an interest rate raise from the Federal Reserve.

That has cratered down now to less than  2%. And there’s actually, they’re betting  

up that it, there will be a drop, which I don’t  think there’s gonna be anything. I think the Fed’s   gonna sit there and say, “Okay, we’re gonna just  take a look at this now.” But no matter what’s  

going [00:20:00] on, a big adjustment to this  was the fact that oil came down and gas prices   finally came down because it’s they’ve worked  themselves through the system a little bit.

But, int- or oil’s up a little bit again,  so we could see that pop up again from the  

gasoline supplies and things like that going  forward if oil stays up to where it’s at. Yeah,  

good new- good news, bad news. No matter  what, they’re trading it both ways.   But- Yeah … always with interest rates  it has always gone the other way, right?

If they’re, if, if they’re not gonna raise market  goes up. If they think- Every, every- … they’re   gonna lower it you know what? They already traded  ahead of that trade, they’re gonna sell it. Yep,  

yep. And, if they think it’s gonna go  up, everybody panics for months and,   wrings their hands like we were  seeing, and, once again, it’s there.

So cooling economy, cooling inflation-  It just means there’s more room down  

the road for lowering interest  rates, and I think [00:21:00] the,   you still have some real hawkish crowd that’s in  that Federal Reserve room that still feels like,  

stupidly, we need to raise interest  rates when it’s not necessarily   that the economy’s overheating, it’s just  parts of the economy that are overheating.

And one of the biggest of it was the  cost of memory and things like that,   so it’s raised the cost of  even personal computers,  

like 3.5% for the month. You know- Yeah  … of course, going into new school and   kids going to college and all that, a 3% rise  in the cost of computers at that time period.

All right, so let me share with you my last  little screen here, which is our good old friend,  

the yen carry trade. As I talk about ni- And  if people missed your presentation last week,  

it was really good. You should put  the link to that in the show notes.   I will do that so that it, …  And it’ll be right above here.

I’ll actually put it into the,  the, on the YouTube channel,   I’ll put it above here. It’ll [00:22:00]  be in the notes as well. But yeah,  

just click on that and it’ll take you in. It  explains the yen carry trade. Just a couple   weeks ago over the weekend, the US and the  J- the Japanese went in to prop up the yen.

So if you look at this chart, that was right  here, and we saw the yen pop back up. We were  

at a 40-year low on the yen, and of course it  popped up, and look what it’s done. It just keeps  

wandering its way down again. So y- all these …  A- and I always love these little machinations   that, “Oh we’re gonna go in and we’re gonna  buy up the yen, and this is gonna prop it up.”

Yeah, the market doesn’t care. And the  problem is, people are borrowing money   super cheap in Japan ’cause they’ve kept  their interest rates virtually zero for,  

the last 12 years. So people borrow money  there, and then they take it here and   they buy AI stocks and everything else,  and that can come unwound very quickly.

Watch this [00:23:00] very carefully. We will keep  kinda our eye on it because this is something that  

could affect the markets, because we have  our Fed that is looking at interest rates,   but we also have the Bank of Japan that’ll  also be looking at interest rates sometime  

in the middle of September. And if you see that  unwind, you could see a snapback in the market,   not necessarily meaning anything’s bad  about the stock market or our economy,  

but it does mean that those trades can  come unwound because they’re leveraged   And we just need to keep our eye  out on it and be prepared for it.

So that’s all I had for today it  was August two, it was August two   years ago that this happened. Yeah, in  2024. And the market pulled back, what,  

10% in a month? Yep. Yeah. And it was  about literally like a week and a half.   It’s one of those things we just have to be  prepared for, and, it’s not a time to panic.

But it’s a time to realize when that happens,   don’t freak out and make big changes and  things like that at that time period,  

because it’s likely to pull itself back together.  But it is something that can [00:24:00] happen,   and you just need to be prepared for it.  Yeah. Thanks, folks. We appreciate you.

As always we are here for you, so make  sure you subscribe to the channel,  

make sure you give us a, an up vote whenever you  can, and we’ll see you guys back here next week