You Can't Buy an Index and Go to Sleep Anymore

Are the markets at all-time highs built on solid ground or heading for a cliff?

Wall Street is playing a brutal game of show me. Blind faith in a broad index carries risk right now. Michelle Connell of Portia Capital Management, Andrew Tang of Turner Financial Group, and I rip the lid off the forces driving today's markets right now on Wealth Transparency.

We exposed the brutal reality: AI is absorbing massive capital expenditures while Wall Street demands revenue now, margin compression sent Mercado Libre down 7% on otherwise strong earnings, high gas prices are pressuring everyday consumer budgets, and stubborn mortgage rates are keeping the real estate market constrained.

You cannot afford to blindly trust an index right now. Stop flying blind while the market becomes more selective. Hit subscribe, smash that like button to join our inner circle, and drop this episode to a friend before the next market shift happens.

Chapwood Investments, LLC, is a partner of Ethos Financial Group, LLC, a Securities and Exchange Commission registered investment advisor. No mention, opinion, or omission of a particular security, index, derivative, or other instrument in this webcast or video constitutes an opinion on suitability of any security. The information and data in this video were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. At any given time, principals at Chapwood Investments, LLC may or may not have a financial interest in any or all of the securities or instruments discussed in this webcast or video. The guests appearing on videos do not receive compensation or provide endorsements or testimonials. Past performance is not indicative of any future results.

All investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results. 
No mention, opinion, or omission of a particular security, index, derivative, or other instrument in this webcast or video constitutes an opinion on suitability of any security. The information and data in this video were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. The guests appearing on videos do not receive compensation or provide endorsements or testimonials. 
Securities are offered through Innovation Partners, LLC (member FINRA/SIPC). Ed Butowsky is a Registered Representative with Innovation Partners LLC. Ed Butowsky is licensed to business in: CA, FL, LA, TN, TX. 
Innovation Partners LLC and Chapwood Investments are not affiliated.

Transcript

SPEAKER_01 0:25

Hello and welcome to another edition of Wealth Transparency. I'm your host, Ed Buchowski, with Chapwood Investments in Plano, Texas. And I'm joined today by Michelle Connell, who is the CEO of Porsche Capital Management in Fort Worth, Texas, and Andrew Tang, who's the Chief Investment Officer at uh Turner Financial Group in New Jersey. Each week we take headlines that are not really front page stories, but talk about what those storylines mean to you and your investment portfolio, and we try to direct you on what to do as a result of them. So thank you very much for joining us today, Andrew and Michelle. Thanks for having you. So as we do every week, you know, I just kind of start and get right into it. Markets are sitting at all times highs right now, and earnings are carrying the rally, meaning that earnings are coming out from the second quarter, and we're starting to see that those earnings are being beat, or in some cases being, you know, really beat. And uh, you know, so that's a little different than the expectation of earnings, but earnings are absolutely leading the way. Um, Michelle, why don't you take us through how you see the market right now and the valuation on the market?

SPEAKER_02 1:40

Well, even though we're at all-time highs, we've had a rotation away from a lot of the technology and AI names, and you've seen a broadening out with uh the equally weighted SP as well as uh the Dow Jones index in the last month or so. And the markets are getting really selective in terms of what they're going to reward. Yes, we've had some great earnings, but at the same time, for those that have disappointed, it's tough. So if you're like a Tesla or you're an Apple and it's not quite good enough, you're going to get hit. So you need to be careful not to just own an index blindly because if they're have these huge weightings and one of those names gets taken down for disappointing, it's gonna hurt you. It's gonna hurt the index.

SPEAKER_01 2:27

And Andrew, you know, it used to be and you're very tech oriented, but used to have just buy tech and you're gonna be fine. But as Michelle said, the indexes in the investing world is starting to broaden out, which is a good thing because it shows more support for the overall market.

SPEAKER_00 2:43

Yeah, absolutely. I echo what Michelle is saying, and not surprisingly, as expected, 75 to 80 percent of the SP companies have beaten earnings. And companies within the index is growing anywhere from nine to ten percent. So it is the low side of the double-digit growth. And at the same time, when prices catch up and you'll see that when prices catch up, you will see that uh the market becomes more unforgiving, right? And so you'll see, I think it especially for a memory maker in Korea, uh South Korea, SK Hinex, when their earnings did not meet the streets expectations, then it sold off tremendously. Add to it that the investors have uh you know added leverage to it. So the speculation nature of it, uh, so that's why there's so much uh market volatility. But uh I agree with uh what Michelle is saying is that uh as the market broadens out, I think it's gonna be more of a stock picker's market. You can't just blindly buy into an index and then hope for the best, so to speak. So it's really uh an opportunity for money managers, allocators, and you and I alike to really go out there and find the better companies out there.

SPEAKER_01 4:00

I think all three of us can remember there was a time where anything that had the word nano attached to it was a great buy when nanotechnology was taking uh hold of the market. And nowadays it's AI. Anything that's AI is good. But now we're starting to see the spending from AI, and now people are looking for results as a consequence of that AI spending. So, Michelle, um, you know, are you starting to see companies, you know, stock prices not do as well because they're not capitalizing on the AI spending?

SPEAKER_02 4:36

Yeah, um, and on the other side of that, you're starting to see companies that weren't getting rewarded are getting rewarded because their spending's starting to pay off. Like Amazon really came through, they have their Amazon Web Services doing very well. They're making their own chips or they're partnering with us for their own semiconductors, and they've done very well this year. And then you have Microsoft, which was getting punished in the last three months. They seem to be turning things around and the stocks up 23% in the last three months or so because their heavy investments are paying off. So you just can't stay in the lane of, okay, I'm gonna buy memory and it's gonna be great and they're gonna continue to do well. The sales may do well, but you have to look at the spending, the infrastructure spending, and the margins. Are these margins gonna be short term or are they gonna be long term? And so you really have to know what part the company is gonna play in AI and whether it's short or long term. And if all this spending and investment and debt issuance is gonna pay.

SPEAKER_01 5:43

Yeah, I don't remember a time where margin compression was killed as badly as I saw with Micardo Libre yesterday.

SPEAKER_02 5:53

Yeah.

SPEAKER_01 5:53

They announced fantastic earnings, but they had margin compression and the stock went down seven percent. You know, so having said that, Andrew, are you seeing the benefits of AI uh capital expenditures yet in earnings of companies? Or is it still something we're waiting for?

SPEAKER_00 6:13

It's still something that we're waiting for because you know, Wall Street is ever so short-sighted and short-term viewed because traditional investment bank and analysts, they're still looking at the cash flow model, right? The cash-free cash flow model. And therefore, it is very difficult to evaluate a company if they don't see uh the revenue or the expected revenue come in the you know in the near-term future. And so it is also very easy to counter the uh estimated forecast for the revenue growth when you're just simply not seeing it, you know, with the AI spent, you know, so much that's going in. And I'll take the extreme in this particular case scenario, for example, SpaceX, okay? SpaceX AI is the new entity's name. They reported $2.56 billion in a single quarter, okay? And the Wall Street is estimated, Goldman Sachs is estimated that the AI revenue will hit about 15.6 billion. So think about two and a half, it's gonna grow to 15. And then by 2030, it's expected to grow to 322, somewhere around there. So you see this huge leap there. You know, it's great, but guess what? The street doesn't trust it. You know, the street say, trust, uh, you know, show me, you know, before we can uh be comfortable with this type of valuation. And I think uh, you know, the market rally broadening, it also has to relate to uh the spending and the capital expenditure broadening as well. So it's not just going all into the chipmakers, it is broadening out as it spreads because as the infrastructure grows, it goes into power, it goes into construction, it goes into supporting systems, right? And then it trickles all the way down to consumer spending and the food service, you know, uh vendors and the businesses that feed the people, right? So uh, and also the financing portion of it, as spending requires so much capital, then the financial institutions are also have their hand in the you know in the revenue as well. So I think in the long run, you know, this whole AI spending doubt, it's going to, you know, start to disappear or level off. But in the meantime, it just sounds very legitimate that, hey, you know, you're spending all this money and then we're not gonna see the revenue down the road. So I think it's just gonna take a little more time for this whole AI spending and and turn into revenue to un unravel.

SPEAKER_01 8:44

Yeah, so I think a lot of what we're saying here is that you know these are you know finite decisions, you know, company by company. But from a macro perspective, oil remains the main driver of the stock market right now. And Michelle, when do like I guess you know, if you could predict when the end of the Iranian war is gonna happen, then you know, then that would be magnificent. But nobody knows for sure when oil is gonna turn around. But you can, without question, know how impactful oil prices are to stocks.

SPEAKER_02 9:20

If I could predict the end of the war, I'd be making some large wagers in the prediction markets. And I don't even know where those stand right now. Andy probably does. Maybe he could weigh in on that. That could give us an idea of how close we are to the end of the world war. That being said, oil does and gasoline prices has a huge impact, maybe not on the upper 5% or 2% or whatever. But I was doing some reading, and you know, right now for the average middle class or lower middle class and below consumer, they're spending more than 10% of their monthly budget on gas, you know, to get to and from their jobs. That's a lot. I mean, we're not hit by that, but if you're somebody that's making close to minimum wage and trying to make your rent and you have to spend that much more on gasoline, it's really tough. So where that starts to funnel through is that those individuals have less to spend on discretionary items that they usually have room in their budgets for, most especially entertainment and restaurants, and you were starting to see some of that uh actually come through in the earnings announcements of the restaurants recently. Some of them have been hit really hard because even if it's like a McDonald's meal and it's gone up from like $6 to $8, a lot of people are having second thoughts on that.

SPEAKER_01 10:44

And so, along with second thoughts, a lot of people are having second thoughts on when they're gonna buy their next home. Um, mortgage rates are starting to ease a little bit, but houses are still very expensive. And housing is a huge portion of the CPI when that's announced. So, how do you square, Andrew, both the uh easing of mortgage rates but the expenses of houses? Uh, do you see that changing anytime soon where you're starting where you'll start to see more home purchases?

SPEAKER_00 11:16

Yeah, I think there's really no letting up uh in this situation because the 30-year fixed, you know, mortgage rate, jumbo mortgage rate is 6.77%, where Freddie Max is 6.69. Again, that's if you have perfect credit. And so you know, we've seen the medium homes uh priced at roughly about $435,000, you know, near a record high. It's crazy. You know, it used to be $100,000, then it jumped up to two. You know, that wasn't even too long ago. I'm talking only just you know 10, 20 years ago. And in this situation, you're gonna see uh continue to see homeowners, they don't want to uh transact. They don't want to transact because they don't want to give up their mortgage, you know, there are still somewhere around three to five percent. And so from that point of view, you're not gonna get enough inventory. And then with the higher prices of materials and labor, you're gonna see less home builders are willing to build the homes first, unless they have the demand. And even homes that are on the market right now is taking longer to close because access to capital is still quite limited, it's still quite restrictive. And so with the the Fed indicated that rates are most likely gonna stay at these levels without any dramatic increase or decreases, I think uh, you know, the situation is not going to improve, but it will convince the buyers uh to start to, you know, start making purchases instead of waiting for rates to come down. So I think, you know, overall the situation is bad, but the first-time home buyers and the buyers to be, I think they will start to transact. But it all depends on the amount of inventory out there. So supply is still an issue.

SPEAKER_02 13:02

Before we go to the next topic, I just want to make a side point on terms of uh what Andrew just said. I thought it was interesting because I thought that one was correlated to the other. You've got birth rates for women between 30 and 35. 40% of those women are childless. Now, 10 years ago, it was only 29%. And I think there's some correlation there because housing is so expensive and people are delaying having, you know, getting married and then delaying having children. But 40% of younger women not having children by the age of 35, that is not good for our economy. So we have to do something about this affordability so that people can have hope that they can have a house one day.

SPEAKER_00 13:48

And the first-time home buyer, the age of a first-time home buyer has been pushed up to 40.

SPEAKER_02 13:53

So there you go. Okay, so it does have some effect, and that is going to affect our economy if we don't have a decent birth rate, right?

SPEAKER_01 14:02

Yeah, absolutely.

SPEAKER_02 14:03

Yeah.

SPEAKER_01 14:03

Yeah, we're down to 1.3 children per family, I think.

SPEAKER_00 14:08

Yeah. Yeah. And two is the target, right? Yeah. We're not replacing ourselves. You know, so yeah, we're heading towards, you know.

SPEAKER_01 14:18

Well, we all three live in a room where we're forecasting or hoping that reports and economic data will come out to support a strong economy and therefore a strong market. Uh, the jobs numbers are coming out uh tomorrow, Friday. What do you look for in those jobs numbers, Michelle?

SPEAKER_02 14:37

They seem to be still somewhat strong. So that gives me encouragement in the short run. But when you look at larger corporations, they're not creating a lot of jobs. And therefore, the individuals that are unemployed are looking at a much longer period of being unemployed. And so I think it's something that we just can't, you know, keep looking from Friday to Friday. We need to look at the long-term trend, especially as AI becomes more uh prevalent throughout the economy, and AI, whether it's being used or not, it's slowing down the employment process, from what I've read. You know, getting through, you know, the quagmire of resumes out there, it's really hard. And you've got the AI, you know, guard out there trying, and you're trying to get your resume through if you don't know somebody, it's really making it difficult. So I think we need to keep watching that, but look at it in the long term.

SPEAKER_01 15:40

So another place to be looking at that we don't often talk about investing. You know, we talk about the United States, Europe, Japan, China, but we often avoid talking about Africa. And Africa, the only thing I know about Africa is that there's 59 different languages spoken on our continent of Africa. It's one of those weird little facts. But we don't know a lot about Africa, but we do know that there's a lot of rare earth minerals there. Andrew, can you tell us a little bit about why that's so important and how you might invest to take advantage of that?

SPEAKER_00 16:13

Well, I'll tell you, not a whole lot of opportunities for the US investor to take advantage of that. And one country in specific that it's well aware of that decades ago, and that's China. And China knows that uh Africa has very rich in rare earth materials. And right now, you know, China processes about 90% of Earth's rare refinering capacity right now. And it makes sense for China to help these African nations to build out the infrastructure, and we've seen it. And China very often provides these loans and hoping that you know they will in return, you know, be able to pay back, or if they can pay back, then the country will make compromising terms and agreements with China, like controlling the ports or access to major arteries and et cetera, et cetera. So in this particular strategy, we can see how China is playing the long game of trying to position themselves to be a predominant player and to be the continuous winner in this particular space. To offset that, I think I've said it before, is that the US, we are in the process of creating new plans, new refining. Again, it's not so much about accessing the raw material, it's more about refinering, you know, refining the rare earth elements. And uh and another good offset to that is through tech and innovation, the manufacturers are able to use materials that are more broadly available versus the need of using rare earth material. A perfect example is cobalt. Cobalt used to be the crucial ingredient to make lithium-ion batteries, right? But not anymore. Now, through tech and innovation, the manufacturers are able to use more commonly available elements to make these uh batteries and still have the same amount of capacity. So this is uh one of the good things that we're seeing that are happening to offset this desperate situation.

SPEAKER_01 18:17

Well, another good thing uh that we have are the two of you sharing your thoughts every week with us. And there's a lot of work that goes into preparing for this. And I hope everyone watching, you know, takes the time to reach out to Michelle Connell with Portia Capital Management in Fort Worth or with Andrew Tang with Turner Financial Group. I really appreciate everybody watching, and please share this with others. We're trying to build up our following and any help you can give us, we'd appreciate. So thank you very much to both of you.

SPEAKER_00 18:50

Thanks for asking.

SPEAKER_02 18:51

Thank you, Edwards.