[SPEAKER_01]: On radio, on YouTube, streaming live on investtalk.com and for our podcast subscribers, this is Invest Talk.
[SPEAKER_01]: Independent Thinking, shared success.
[SPEAKER_01]: Invest Talk is made possible by KPP Financial, a registered investment advisor firm serving clients throughout the United States.
[SPEAKER_01]: Here is KPP Financial Portfolio Manager, Luke Guerrero,
[SPEAKER_06]: Good afternoon, fellow investors, and welcome back to today's episode of Invest Talk.
[SPEAKER_06]: My name is Luke Guerrera, and it is March 17th, same Patrick's Day, 2026.
[SPEAKER_06]: We are well into the month of March, but it doesn't really matter what the day is on the calendar, what the date is of the year our mission remains the same, each and
[SPEAKER_06]: To that end, before we talk about today's market performance and run down those show topics, let's talk about this color question now.
[SPEAKER_05]: Regarding Canadian Imperial Bank of Commerce, Dickerson will see them like know if you think it's a good stock and like purchase it or like to use your opinion.
[SPEAKER_05]: Thank you very much.
[SPEAKER_06]: Canadian Imperial Bank of Commerce, TIGGERSCM, is Canada's fifth largest bank.
[SPEAKER_06]: They operate under four segments, the Canadian Personal and Business Banking, so think mortgages, card deposits, the commercial banking and wealth management, exactly as it sounds, US commercial banking and wealth management, so their CIBC Bank and the United States and their capital markets team.
[SPEAKER_06]: Over the past year, it's up 63.91% up 7.63% year to date outperforming the industry by just over half a percentage point.
[SPEAKER_06]: And with all that, it is now trading about 2.1 times price to book value near the high of the past five years.
[SPEAKER_06]: What has really been driving the performance that we've seen
[SPEAKER_06]: are a couple things.
[SPEAKER_06]: Well, they have a bit of a blowout in Q1226, 15% earnings beat.
[SPEAKER_06]: That is an enormous beat for a major bank.
[SPEAKER_06]: And it really wasn't a one time item story.
[SPEAKER_06]: It was driven by broad based revenue growth across all four of their segments.
[SPEAKER_06]: They are in a way doing a good job of executing the strategy they've been trying to execute over the past couple years that has led them to have excess capital, which gives them the ability to accelerate bybacks through 2026.
[SPEAKER_06]: And so with the return on equity above target and earnings growing, the capital returns story adds to your overall total return profile.
[SPEAKER_06]: They have also had quantifiable credible AI efficiency gains.
[SPEAKER_06]: I'm like many banks that discuss AI's being aspirational.
[SPEAKER_06]: This bank is reporting specific, measurable outcomes, hours saved per quarter conversion, lift, voice assistant, accuracy.
[SPEAKER_06]: And so in a time where a lot of companies are just touting their potential, AI improvements, they have it away been able to quantify this, and even with all this, it's still trading at a discount relative to its peers, 12 and a half times trailing earnings.
[SPEAKER_06]: 10 to 11 times.
[SPEAKER_06]: for earnings.
[SPEAKER_06]: Let's look at it relative to some of its peers right now.
[SPEAKER_06]: Return on equity, sits about where RBC the World Bank of Canada, National Bank of Canada, or sitting as well.
[SPEAKER_06]: But trading a full value lower in terms of price to forward looking earnings.
[SPEAKER_06]: In terms of its balance sheet, I mean, it's relatively clean here.
[SPEAKER_06]: Their tier one capital ratio is perfectly reasonable.
[SPEAKER_06]: Their total equity is fine.
[SPEAKER_06]: Their interest income is growing at a very solid clip.
[SPEAKER_06]: Going back to 2020.
[SPEAKER_06]: And so there are a lot of things that I like in this name.
[SPEAKER_06]: Now, there are some things that I maybe don't necessarily like.
[SPEAKER_06]: If you're trying to get your Canadian banking exposure here, we'll see IBC or CM is the most mortgage concentrated bank amongst the big five.
[SPEAKER_06]: And so they have this risk, this renewal wall.
[SPEAKER_06]: Because of these large cohorts of 2020, 2021, ultra low rate mortgages that are unlikely to be rolled over.
[SPEAKER_06]: There's also the U.S. Canada trade uncertainty.
[SPEAKER_06]: And so for any Canadian bank, that is an overhang.
[SPEAKER_06]: But given kind of this growth realization here, given the strength and it's still trading into a bit of the discount, if you're looking to get into the Canadian banking space, I think this is a good way to go about it.
[SPEAKER_06]: That is Canadian Imperial Bank of Commerce, digger C and thanks to the call.
[SPEAKER_06]: Well, folks, I hope you were telling your friends about our third annual invest talk market madness contest.
[SPEAKER_06]: As you know, instead of basketball matchups, we have corporate matchups, a daily game, where the winner advances based on price movements, and if you have the best bracket,
[SPEAKER_06]: You could be the grand prize winner $1,000, or if you're following us on YouTube, $1,500.
[SPEAKER_06]: Just a reminder, you only have just over 24 hours left to submit your bracket, so head over to Invest Talk, look for the Market Madness submission, fill out your brackets before the deadline, which is $11.59 PM on March 18th.
[SPEAKER_06]: That being said, we got a lot of
[SPEAKER_06]: And the main focus point today is about how the K-shaped economy can still explain six-finger or an older struggles.
[SPEAKER_06]: Even households, earning six figures, are finding themselves on thin ice in today's K-shaped economy, where economic gains are unevenly distributed, rising costs, financial pressures, they are exposing these vulnerabilities, so we'll touch on that story as well as.
[SPEAKER_06]: really a deep dive and something we've been talking about a little bit, but we want to shed a little more light on why defense contractor stocks.
[SPEAKER_06]: Not really rallying in spite of rising tensions.
[SPEAKER_06]: It's all been about AI and the data center build out, but we'll talk about why insurance seems to be a nick in the chain of building out these data center products.
[SPEAKER_06]: Should we have time at the end of the show, we'll touch a little bit on China's economy and how it's off to a pretty
[SPEAKER_06]: You also have some voice bank calls ready to play, including one on MasterCard Incorporated Ticker and A.
[SPEAKER_06]: Another on Take 2 Interactive Software that's Ticker, T, T, W, O.
[SPEAKER_06]: And as always, some questions that came in from the comment section of the Investock YouTube channel and hopefully some live calls throughout the show.
[SPEAKER_06]: We're going into Quick Break.
[SPEAKER_06]: Please remember you can call me anytime and leave your questions on the Investock voice bank.
[SPEAKER_06]: If you're listening via our live streamer on AM1220 in the Bay Area, feel free to call now at 80899 chart.
[SPEAKER_06]: Up next, we'll talk about today's market activity.
[SPEAKER_00]: KPP Financial is excited to announce the third annual in Vestock Market Madness Contest.
[SPEAKER_00]: Instead of basketball brackets, Justin and Luke will be watching companies perform head-to-head in an epic showdown.
[SPEAKER_00]: In Vestock participants can compete for the $1,000 grand prize.
[SPEAKER_00]: and demonstrate their market prowess by locking in their stock victory predictions.
[SPEAKER_00]: And get this.
[SPEAKER_00]: If the contest winner is also following the Investog YouTube channel, Justin will bump up the prize to $1,500.
[SPEAKER_00]: So if you are ready to test your skills in this unique competition, do not wait.
[SPEAKER_00]: It's free to join the fun.
[SPEAKER_00]: Visit Investog.com and search market
[SPEAKER_00]: Then submit your bracket predictions to enter.
[SPEAKER_00]: You better hurry.
[SPEAKER_00]: Your last chance to enter the Market Madness Contest is tomorrow.
[SPEAKER_00]: Now, with 62 million downloads.
[SPEAKER_00]: Investor, 88899, chart.
[SPEAKER_06]: 88899 chart is the number of you want to get through to me live during this program.
[SPEAKER_06]: Before we move any further, we have to talk a little bit about the market because US stocks extended their rebound on Tuesday, posting back to back gains for the first time since late February.
[SPEAKER_06]: The Dow edged up a tenth of a percent of the S&P rose a quarter of a percent.
[SPEAKER_06]: Nasdaq added close to half a percent and the Russell 2000 led with a two-thirds of a percent gain.
[SPEAKER_06]: Stocks did fade a little bit into the close finishing just off of those session lows.
[SPEAKER_06]: It was a notably quieter session compared to the volatility we've seen in recent weeks.
[SPEAKER_06]: The Middle East conflict obviously continues Iran again targeting energy infrastructure in the Gulf
[SPEAKER_06]: But the market found reasons to look through it oil was higher, with crude WTI crude up nearly 3% though still well-off recent highs after Monday's 5.5% pullback.
[SPEAKER_06]: Reports that Iran is allowing select vessels to transit the straight of her moves, and the IEA hints about additional reserve releases if needed, kind of helped to keep a lid on the worst case pricing thus far.
[SPEAKER_06]: Positioning and hedging dynamics were also cited as supporting the equity bid with recent rate reprieve offering another source of comfort heading into tomorrow's FOMC decision.
[SPEAKER_06]: Sickle leadership.
[SPEAKER_06]: We saw that a broadening out today airlines caught a bit after positive macro read throughs from industry updates with Delta among the standouts.
[SPEAKER_06]: Banks invested in banks, private equity, credit cards, trucking, building materials, all some of the best performers on the day, memory software, semis were higher as well in the high beta most shorted retail favorite cohort continued to bounce.
[SPEAKER_06]: throughout the session.
[SPEAKER_06]: Amazon, alphabet, led the mag seven, but it wasn't all good on the downside, defenses and quality, lagged health care distributors, pharma hospitals, defense, electrical's all underperformed on the day.
[SPEAKER_06]: When the day to front pending home sale surprised to the upside with a 1.8% monthly gain versus expectation for a decline,
[SPEAKER_06]: Treasuries, $13 billion, 20 year auction, stopped through by seven tenths of a basis point of it, some strong demand.
[SPEAKER_06]: Treasuries little changed to slightly firmer yields down a couple of basis points at the long end.
[SPEAKER_06]: Dollar essentially flat gold was unchanged.
[SPEAKER_06]: We're going to head all eyes on tomorrow February PPI lands in the morning followed by the March FOMC decision at 2 o'clock Eastern.
[SPEAKER_06]: The Fed is widely expected to hold rates at 3.5 to 3.3% and 3.4% but the state language around uncertainty and the updated SEP, remember that's the summary of economic projections.
[SPEAKER_06]: Well, that's going to be the main event.
[SPEAKER_06]: Previews, analysts suggesting the median dot likely still shows one cut each in 2026 and 2027 with inflation forecasts revised higher.
[SPEAKER_06]: As always, Powell's press conference will be a big focus and how he navigates the questions on both the oil shock in the stagnation risk.
[SPEAKER_06]: Well, that's going to set the tone heading into the back half of the week.
[SPEAKER_06]: If you've been checking out our YouTube channel, we're just recently started our deeper focus series, where we take one of our focus points from the week and do a 20 to 25 minute deep dive of charts exhibits and questions from you all.
[SPEAKER_06]: If you haven't checked that out, I think you should and while you're over there, if you wanna leave your question in the comment section, we'd like to get to those as quickly as possible.
[SPEAKER_06]: This one says I recently came across a strategy involving TQQQ.
[SPEAKER_06]: And wanted to get your thoughts on it.
[SPEAKER_06]: The idea is to use the trend of QQQ as a signal when QQ is trading above it's 161-day moving average.
[SPEAKER_06]: The strategy holds QQQ to take advantage of the leverage exposure than Azdec.
[SPEAKER_06]: If QQ falls below the moving average, the position is sold and the funds are moved into a safer asset like short-term treasury ETFs or cash until the trend turns positive again.
[SPEAKER_06]: There's also an additional rule, where if QQ moves more than about 5% of the moving average new contributions go into something like SPY instead of adding more leverage, I'm curious what you think about using a trend filter like this with a leverage DTF, and whether it's meaningfully helps manage the downside risk.
[SPEAKER_06]: Well,
[SPEAKER_06]: Here's a thing.
[SPEAKER_06]: There is no free lunch and investing, especially when you're talking about leveraged trading.
[SPEAKER_06]: Of course, TQQ being the pro shares Q's fund, it is a leveraged ETF, and effectively what you're trying to say is when there is this technical signal, you put on leverage, when there is an opposite signal you are taking off leverage.
[SPEAKER_06]: Now, what I am gathering from this question, and you all probably gathered it as well, is this isn't really a investment question, right?
[SPEAKER_06]: This is a trading question, and this is certainly a trading strategy.
[SPEAKER_06]: The reality is, trading strategies with hard, fast rules tend to over longer periods of time, either have their premia eroded away by cost of trading, or get arbitrage to away.
[SPEAKER_06]: That's what I mean when I say there is no free lunch in terms of investing.
[SPEAKER_06]: There isn't one signal that will tell you wind a buy something, one signal that will tell you wind to sell something.
[SPEAKER_06]: That being said, as far as trading rules go, I think you're headed in the right direction, right?
[SPEAKER_06]: You understand that TQQQ is a leverage in investment, that it is for trading, that it is not for a long-term hold.
[SPEAKER_06]: You're effectively taking advantage
[SPEAKER_06]: of momentum and technical signals, which can provide positive correlations, but tend to be a bit noisy over longer periods of time.
[SPEAKER_06]: I would just warn you if you're doing something like this for anybody doing something like this, understand the risks and the dangers of leverage, and don't find yourself in a position where you're too overexposed and can possibly get washed out.
[SPEAKER_06]: We're had to do break.
[SPEAKER_06]: Still to come, my main focus point about the K-shaped economy, and as always, more answers to your questions here on Invest Talk.
[SPEAKER_00]: There are a few things that make KPP financial special.
[SPEAKER_00]: One of them is parallel investing.
[SPEAKER_00]: This means they invest right alongside their clients.
[SPEAKER_00]: Here's how it works.
[SPEAKER_00]: When KPP financial makes a trade for their clients, just in client makes the same trade for himself and KPP.
[SPEAKER_00]: On the same day, at the same price, and same percentage.
[SPEAKER_00]: No front running, no special treatment.
[SPEAKER_00]: Learn more about Parallel Investing at InvestTalk.com.
[SPEAKER_06]: So today I want to talk about something that ties together, a lot of the stories we've been covering, the auto affordability crisis, the consumer spending divergence, the labor market, softening.
[SPEAKER_06]: And put them under one singular framework because there's a term that keeps showing up in analyst notes and earning calls.
[SPEAKER_06]: And if you don't understand it, you're going to misread the economy and misposition your portfolio.
[SPEAKER_06]: That term is the K-shaped economy.
[SPEAKER_06]: Here's what it means.
[SPEAKER_06]: Imagine the letter K. The top army is going up.
[SPEAKER_06]: That's higher income, asset rich households.
[SPEAKER_06]: Their stock portfolios have grown.
[SPEAKER_06]: Their home equity is solid.
[SPEAKER_06]: Their wages are rising.
[SPEAKER_06]: And they're spending freely on premium products on business class flights.
[SPEAKER_06]: On $47,000 new cars.
[SPEAKER_06]: The bottom arm of the K, it's going down.
[SPEAKER_06]: These are lower-income households facing higher prices for essentials, stagnant real wages, rising the liquid seas and shrinking access to credit.
[SPEAKER_06]: And here's the part that's new in 2026, the middle, it's starting to crack.
[SPEAKER_06]: One economist at Navy Federal Credit Union is now calling it an E-shaped economy.
[SPEAKER_06]: Three tiers, instead of two, because middle income households are separating from the top, and starting to show real signs of strength.
[SPEAKER_06]: Maybe the clearest illustration of all of this is actually the auto industry.
[SPEAKER_06]: Average transaction prices for new vehicles have it $47,000, up 40% since 2018.
[SPEAKER_06]: In 2010, there were 25 models priced at the equivalent of $20,000 or less.
[SPEAKER_06]: Today, there's only 20 models under $30,000, meaning models priced at $40,000 and above have exploded from 96 to 156 automakers have filled short rooms with trucks SUVs and loaded up trims because that's where the margins are.
[SPEAKER_06]: 20% are more on big SUVs versus low single digits on compact cars.
[SPEAKER_06]: The result, the carbine public has become dramatically more affluent.
[SPEAKER_06]: Household, earning $100,000 or less used to account for 50 to 60% of new vehicle purchases.
[SPEAKER_06]: Last year, the number dropped to 36%.
[SPEAKER_06]: Everyone else has been pushed to the used car lock.
[SPEAKER_06]: One car dealer in St. Louis put it simply, it's truly a
[SPEAKER_06]: And this matters beyond cars.
[SPEAKER_06]: It's showing up everywhere.
[SPEAKER_06]: Delta's premium seat revenue was up 9% last quarter while basic economy revenue fell 7%.
[SPEAKER_06]: McDonald's cited a two-tier economy to explain declining traffic from lower income customers.
[SPEAKER_06]: Dollar General Dollar Tree are seeing an influx of shoppers earning over $100,000.
[SPEAKER_06]: People who never would have set foot in a dollar store five years ago.
[SPEAKER_06]: Airlines are adding luxury offerings at the same time fast food chains are leaning on value menus.
[SPEAKER_06]: It's the same economy but two completely different experiences depending on where you sit on the income ladder.
[SPEAKER_06]: Now why should high earners people making six figures feel stressed in this environment?
[SPEAKER_06]: That's the question a lot of people are asking you'd think 100,000 or 150,000 a year would be comfortable, but the data says otherwise.
[SPEAKER_06]: Bank of America's latest research shows that spending growth gap between high-income and middle-income households hit its widest point since early 2022.
[SPEAKER_06]: Middle-income consumers are spending a growing share of their budget on essentials like food, fuel, insurance, housing, leaving less room for discretionary purchases.
[SPEAKER_06]: The National Foundation for Credit Counseling Projects Financial Stress will hit an all-time high and Q1 of this year.
[SPEAKER_06]: A middle-class household's age is 45 to 60, they're hidden a wall on credit, they've borrowed to maintain their lifestyle and they have reached capacity.
[SPEAKER_06]: So which expenses are hitting the middle and upper middle-class hardest?
[SPEAKER_06]: Well, housing is number one, mortgage rates are back above 6%, home prices haven't come down meaningfully and insurance costs have surged, especially in disaster-prone areas.
[SPEAKER_06]: Number two is healthcare, premiums, deductibles, out-of-pocket costs they keep rising faster than wages.
[SPEAKER_06]: Child care and education come in at number three, particularly for families in the $100 to $200,000 in Cam Range, who earned too much for to qualify for subsidies, but not enough to absorb the costs comfortably.
[SPEAKER_06]: And now you add gas prices up 65 cents, groceries up 29 percent since 2020, and car payments averaging 700 a month.
[SPEAKER_06]: Even a six-figure income doesn't stretch as far as it used to.
[SPEAKER_06]: So how should different income levels adjust your financial strategies?
[SPEAKER_06]: Well, this is a
[SPEAKER_06]: If you're in the lower income bracket, the priority is protecting cashflow, build whatever emergency cushion you can, even if it's small.
[SPEAKER_06]: Avoid taking on new debt at current rates, even if you're carrying credit card balances, focus on paying down the highest rate card first, be very selective about discretionary spending.
[SPEAKER_06]: If you're in the middle, say 75 to 150,000, the biggest risk right now is lifestyle creep financed by debt.
[SPEAKER_06]: The data shows middle income households are increasingly relying on credit to maintain spending.
[SPEAKER_06]: That works until rate stay high and credit limits get tapped.
[SPEAKER_06]: Stress test your budget, if one income source dropped or another major expense spike, could you absorb it?
[SPEAKER_06]: If not, you're more exposed than you think.
[SPEAKER_06]: If you're in the upper bracket, the risk is different.
[SPEAKER_06]: You're spending it may be fine, but your portfolio is probably concentrated in an asset that have driven the K, mega-capped tech stocks and U.S. equities.
[SPEAKER_06]: As we've discussed extensively, the S&P 500 is a causative tech fund and the trade is unwinding.
[SPEAKER_06]: Deversification across sectors, geographies, asset classes.
[SPEAKER_06]: That is what you need to focus on.
[SPEAKER_06]: Bottom line here, the K-shaped economy means the headline GDP number in headline indices, they don't tell the full story.
[SPEAKER_06]: The economy is perched on a few pulls, one gets knocked out, the whole thing starts to wobble.
[SPEAKER_06]: But we still got a lot more for you here on Invest Talk, but I'm hoping to talk to some of you live, so pick up that phone and dial 888-99 chart.
[SPEAKER_00]: KPP Financial is excited to announce the third annual Invest Talk Market Madness Contest.
[SPEAKER_00]: Invest Talk Participants can compete for the $1,000 grand prize.
[SPEAKER_00]: So if you are ready to test your skills in this unique competition, do not wait.
[SPEAKER_00]: It's free to join the fund.
[SPEAKER_00]: Visit InvestTalk.com and search Market Madness.
[SPEAKER_00]: Then submit your bracket predictions to enter.
[SPEAKER_00]: You better hurry.
[SPEAKER_00]: Your last chance to enter the Market Madness contest is tomorrow.
[SPEAKER_06]: On the next invest talk, we will look into this question.
[SPEAKER_06]: Will mortgage rates kill the spring housing market?
[SPEAKER_06]: Mortgage rates have jumped to their highest level since September dealing another blow to an already struggling spring housing market.
[SPEAKER_06]: The combination of elevated rates and economic uncertainty is forcing potential buyers to reconsider their plans.
[SPEAKER_02]: That's tomorrow, but for now we got more questions to answer, so let's drop another one now.
[SPEAKER_02]: Is it a good time to depend on it and buy a little more or wait for the good, please check and let me know.
[SPEAKER_02]: Thank you.
[SPEAKER_06]: MasterCard, ticker MA is the global payments technology network.
[SPEAKER_06]: Operates the MasterCard network connecting 3 billion plus card holders, millions of merchants, and thousands of financial institutions.
[SPEAKER_06]: issuer's choirs in 200 plus companies.
[SPEAKER_06]: It has a pretty simple revenue model.
[SPEAKER_06]: You have assessment fees on the gross dollar volume that is transacted, plus you get switch transacted fees and cross border fees and value added services as well.
[SPEAKER_06]: So for your businesses you're working with, you get cybersecurity, for your customers, you get fraud identification, really a solid business model.
[SPEAKER_06]: year today they're down 11.26% of the past three months down 10.41% down 4.78% over the past 52 weeks.
[SPEAKER_06]: And that's in spite of having very solid revenue growth.
[SPEAKER_06]: I mean, over the past five years, revenue growth was 16.5% on an annualized basis from 2025 into 2026 revenue is projected to grow at about 15, 14% as well.
[SPEAKER_06]: In terms of debt, they have about $18 billion worth of debt on a $453 billion market cap business.
[SPEAKER_06]: Their margins still solid.
[SPEAKER_06]: Return on equity 210% last year.
[SPEAKER_06]: Net margins, still ranging, where they have been in the 40s, meet to 40s, projected to grow from 45.6246.9.
[SPEAKER_06]: So what's really going on here?
[SPEAKER_06]: Well,
[SPEAKER_06]: MasterCard does take a small fee on every dollar that flows through its network, so there's no credit risk, there's no balance sheet risk, there's minimal capex, they have those value added services which have seen solid year over year growth, there has been a bit of a cross border transaction fee recovery, essentially post COVID, but that's largely complete, so their structural growth has been coming from their e-commerce business.
[SPEAKER_06]: They have a partnership with various companies, Capital One, attempted its discover acquisition.
[SPEAKER_06]: They retained and extended the Capital One credit relationship regardless.
[SPEAKER_06]: I think one issue that you've seen isn't actually a structural issue here.
[SPEAKER_06]: Now, there have been concerns about stable coins and all these things and trying to transact
[SPEAKER_06]: off of network from Visa, from MasterCard, American Express.
[SPEAKER_06]: My contention has always been, and will continue to be, that in order for you to move people away from these networks, away from these cards, these financial institutions, onto
[SPEAKER_06]: the permissionless networks of stablecoins.
[SPEAKER_06]: You've to give them something.
[SPEAKER_06]: Of course, businesses who are getting payments from customers, they would do that in heartbeat.
[SPEAKER_06]: Why they save on all these fees that I mentioned.
[SPEAKER_06]: But as a consumer who uses credit cards, I give rewards points.
[SPEAKER_06]: And so I think the threat towards these networks, I think less than some people otherwise might.
[SPEAKER_06]: Think.
[SPEAKER_06]: Now, what I think is going on here is a return to reality in terms of multiple compression.
[SPEAKER_06]: It was trading at 45.4 times price to four looking earnings.
[SPEAKER_06]: It's still trading at 25 times, which is a little bit above Visa at 22.7.
[SPEAKER_06]: So I still think there might be a little more room for some downward run here, but margins look fine, growth looks fine, revenue looks
[SPEAKER_06]: But the trend is still clearly negative here, and probably still way to bit to add more.
[SPEAKER_06]: That is, MasterCord and Corporate it, ticker MA.
[SPEAKER_06]: It's like we got our first live call, Will from San Diego.
[SPEAKER_06]: You got a question about meta?
[SPEAKER_03]: Absolutely, I'm considering selling meta.
[SPEAKER_03]: I know there's spending billions on whatever it is, AI, whatever, and they're announced that there's
[SPEAKER_03]: housing people would seem like a lot to me.
[SPEAKER_03]: So I'm wondering just how well is this company managed and what I'm not I should sell.
[SPEAKER_06]: Yeah, it's a great question.
[SPEAKER_06]: So meta, of course, is the company that used to be named Facebook before they did a bunch of ill-advised investment and trying to create this metaverse that didn't work out and they changed the company name, but it still called meta platform.
[SPEAKER_06]: So they are the owner of Facebook, WhatsApp, Instagram, and more recently, one of the largest hybrid scalars.
[SPEAKER_06]: They have spent hundreds of billions of dollars in the war for AI.
[SPEAKER_06]: Now, what meta is, and what meta always has been?
[SPEAKER_06]: And this is something to keep in mind in spite of the 30,000 layouts, which I'll get to in a second.
[SPEAKER_06]: In the amount of money they've spent on AI, is they're an advertising engine.
[SPEAKER_06]: And they are the most efficient cash machine in history.
[SPEAKER_06]: 97% of the revenues are Mance.
[SPEAKER_06]: 41% operating margins, even with the CapX ramp up.
[SPEAKER_06]: I know that's crazy, even with all the money they've spent.
[SPEAKER_06]: They're even margin is still sitting at 41.4% now it's projected to dip down to 34.
[SPEAKER_06]: But they are, like I said, an incredibly, incredibly efficient cash machine.
[SPEAKER_06]: They have other things going for them.
[SPEAKER_06]: They're bread, sorry, Ray Van Metaglosses.
[SPEAKER_06]: It's a bit of a hardware sleeper.
[SPEAKER_06]: They've tripled sales year over year.
[SPEAKER_06]: They had their case in front of U.S. courts for anti-trust dismissed.
[SPEAKER_06]: Certainly, they still have some issues with Europe.
[SPEAKER_06]: But typically, when you see workforce reductions, they could happen for various reasons.
[SPEAKER_06]: One reason could be, well, the company's not being run well.
[SPEAKER_06]: It could be that revenue is falling, mayors just too much overhead.
[SPEAKER_06]: Another could be for legitimate reasons of increasing efficiency.
[SPEAKER_06]: People have claimed that some of their layoffs are because AI has allowed them to do what they've been doing with fewer people, and that is a completely reasonable thing.
[SPEAKER_06]: In Meta's case in a lot of tech companies cases, frankly, I just think they overhired coming out of the pandemic.
[SPEAKER_06]: I think money was cheap, their head counts surged, and that's why you've seen a lot of layoffs at Microsoft, at Amazon, at now Meta.
[SPEAKER_06]: They are claiming that AI's replacing head count, it's probably a little bit of both.
[SPEAKER_06]: I don't see their workforce reduction.
[SPEAKER_06]: as a reason to sell out of them.
[SPEAKER_06]: I think your point about how much money they're spending on AI and really being nowhere to speak of being the leader is a bigger concern.
[SPEAKER_06]: They've been ranging for quite some time.
[SPEAKER_06]: I don't know if I'd fully sell out of my position, but they've come down to a bit more reasonable valuation.
[SPEAKER_06]: I would put this at mostly fairly valued here.
[SPEAKER_06]: If you're overexposed to meta, I think it's perfectly reasonable to want to sell out a little bit of a diversify because it's certainly run up since 2022.
[SPEAKER_06]: But I don't think it's in crisis mode or need to sell everything right now today.
[SPEAKER_06]: That is a meta platform, Sticker META, thanks for the call.
[SPEAKER_06]: So here's something that should puzzle you.
[SPEAKER_06]: We are in the middle of the most significant military conflict.
[SPEAKER_06]: The US has been involved in since Iraq.
[SPEAKER_06]: The Pentagon is burning through billions of dollars in missiles and interceptors.
[SPEAKER_06]: In fact, I checked a cost of war tracker.
[SPEAKER_06]: We're at about 23 billion now, the past 17 days.
[SPEAKER_06]: They're burning through these missiles.
[SPEAKER_06]: And the big five defense primes, lucky Northrop General Dynamics Boeing RTX, they are down about 1% on average.
[SPEAKER_06]: Since the war started, how is that possible?
[SPEAKER_06]: Well, a few reasons.
[SPEAKER_06]: First, these stocks already priced in a lot of growth.
[SPEAKER_06]: They're up about 50% on average since the Trump Biden debate in June 2024.
[SPEAKER_06]: Four of the five are trading it roughly 26 times for looking earnings near historic highs.
[SPEAKER_06]: The bullish case record Pentagon budgets NATO spending at 5% of GDP multi year replenishment orders.
[SPEAKER_06]: That was already in the stock price before the first bombs ever dropped in Iran.
[SPEAKER_06]: Second is the war's highlighting an uncomfortable cost dynamic.
[SPEAKER_06]: The first four days, four days of strikes reportedly cost nearly $11 billion with a beat, including $5.7 billion in interceptors to shoot down Iranian drones.
[SPEAKER_06]: U.S. and its allies are using multi-million dollar patriots and fat missiles to take out should he drowns the cost tens of thousands of dollars.
[SPEAKER_06]: That asymmetry is drawing scrutiny and pushing the Pentagon towards cheaper, more innovative solutions.
[SPEAKER_06]: And that's where it gets interesting for investors.
[SPEAKER_06]: Within the expanded 2026 military budget, spending on legacy programs is essentially flat.
[SPEAKER_06]: The growth over 20% is going to newer technologies to space to AI to drones to autonomous systems.
[SPEAKER_06]: Defense tech companies are outperforming those traditional names.
[SPEAKER_06]: Vehicle weight, spider S&P aerospace and defense ETF, which has more exposure to smaller defense tech names.
[SPEAKER_06]: Sub 67% of the past 12 months versus 54% for the eye shares ETF that's weighted heavier towards those primes.
[SPEAKER_06]: They're also additional risks.
[SPEAKER_06]: The President's Executive Order banning by Vax and dividends in major contractors until they produce on time and on budget is pressuring per share earnings.
[SPEAKER_06]: The war becomes unpopular enough to flip Congress.
[SPEAKER_06]: Defense budgets could face political headwinds and the Defense Production Act has already been floated as a tool to compel production which would further squeeze margins.
[SPEAKER_06]: We talked about this.
[SPEAKER_06]: You want the Goldilocks scenario of an amount of spending such that it's enough to boost earnings, but not enough to get the government to compel companies to take less money for those products.
[SPEAKER_06]: The takeaway, the defense trade in 2026 is about defense tech, not the legacy companies.
[SPEAKER_06]: If you're looking for upside from the conflict, the smaller, more innovative companies building drones, autonomous systems, AI-powered battlefield tools, are where the incremental spending is flowing.
[SPEAKER_06]: The big primes will benefit from replenishment orders, but it current valuations, a lot of that.
[SPEAKER_06]: It's already priced in.
[SPEAKER_06]: So no reason to stop now, let's play another listener question from 888-99 chart.
[SPEAKER_04]: Hi, 20 year take on take two interactive I bought him a little about six months ago, and I'm wondering if this is now good time to add a little bit more of my portfolio, so I'm wondering what your thoughts aren't this is a good a good place to add more.
[SPEAKER_04]: Thanks.
[SPEAKER_06]: Take to interactive is a video game publisher behind the industry's most valuable franchise portfolio.
[SPEAKER_06]: a billion dollar game in an of its own right now they are down 14.0% over the past three months down 19.26% year to date in terms of revenue growth about 12.8% on an annualized basis going back to 2021 and a lot of that is pretty straight lined.
[SPEAKER_06]: They are projected to have a big explosion in revenue from 5.6 billion in 2025 to 6.6 billion this year to 9.13 billion next year because of the release of the latest in their grand death.0 series.
[SPEAKER_06]: At the same time, margins are kind of all over the place.
[SPEAKER_06]: EBITDA margin falling coming out of the pandemic from 25.5 down to 15.7 is where it was in March of 2025.
[SPEAKER_06]: same time return on equity, which was once 10.7% is negative.
[SPEAKER_06]: Those projected to climb back to 13.3% again by 2027.
[SPEAKER_06]: Now GTA 6, as I mentioned, is the most anticipated entertainment product in a decade after Grand Theft Auto 5, which was released in 2013,
[SPEAKER_06]: As an example, over 20, over those 13 years since its last release, Grand Theft Auto 5 is sold 210 million copies, but their big revenue boost isn't even from the game itself but that recurring consumer spending, not their real business model.
[SPEAKER_06]: 76% of Q3 net bookings came from the recurring consumer spending in the virtual currency, the battle passes the add-ons, essentially the premium model for all of these video games.
[SPEAKER_06]: One of the reasons why they lose money in this cycle is because during periods of development, they're spending a lot of money, nine billion in development losses absorbed over the past couple years.
[SPEAKER_06]: Now they're operating leverage, they're cost structures largely fixed, but the real risk here is delay, right?
[SPEAKER_06]: It's the perennial bear case.
[SPEAKER_06]: They'd previously delayed GTA 6 from a 2025 target to November 2026 and delays are common within this area.
[SPEAKER_06]: And that's why given that delay risk is it worth it to buy a company that's trading at 57.5 times price cash for a 26.6 times price to earnings?
[SPEAKER_06]: They've had a recent drop off.
[SPEAKER_06]: There is no signal that the game is coming at any time soon.
[SPEAKER_06]: So for now, I'd be a bit hesitant.
[SPEAKER_06]: You get it to take two, or at least to open up a large position given the downside risk that is TTWO.
[SPEAKER_06]: Take two interactive software ink.
[SPEAKER_06]: Thanks for the call.
[SPEAKER_06]: This is Invest Talk.
[SPEAKER_06]: I'm Lou Guerrero.
[SPEAKER_06]: We have one goal here, and that is to help you achieve your financial freedom.
[SPEAKER_06]: Our work continues after this break.
[SPEAKER_06]: So get your questions in now at 888-99 chart.
[SPEAKER_00]: In the early days, in Vestock was Jerry Klein and Steve Peasley.
[SPEAKER_00]: Now the torch has been passed and a new generation of hosts is on the job.
[SPEAKER_00]: Justin Klein and Luke Guerrero.
[SPEAKER_00]: So when you've got finance and investment questions, don't forget to call in Vestock.
[SPEAKER_00]: 888-99-Chark.
[SPEAKER_06]: So this one is a story that almost nobody's talking about, but it has real implications for the baseline AI investment thesis.
[SPEAKER_06]: And that is about how lenders they're starting to walk away from data center deals because they can't get sufficient insurance coverage.
[SPEAKER_06]: KKR, Blackstone, two big names among the firms
[SPEAKER_06]: So here's what's happening.
[SPEAKER_06]: The MAKED data centers being built for AI development are enormous facilities.
[SPEAKER_06]: consuming a gigawatt or more of electricity, which is roughly what a million homes use.
[SPEAKER_06]: They cost tens of billions of dollars to build.
[SPEAKER_06]: Met is Hyperion Campus, and Louisiana is a $30 billion project.
[SPEAKER_06]: And that scale, full replacement cost insurance is either isn't available, or it's understandably prohibitively expensive.
[SPEAKER_06]: Many projects are only covered against maximum foreseeable losses, which is a much lower bar than total replacement value.
[SPEAKER_06]: And this problem has several layers.
[SPEAKER_06]: The biggest tech companies, your Microsoft, your medis, a typically hold risk on their own balance sheets or use captive insurance vehicles.
[SPEAKER_06]: They haven't demanded full commercial coverage, which means the insurance market never developed the capacity to provide it.
[SPEAKER_06]: Now that new lenders, private credit funds reach are entering the space they need that ground up coverage.
[SPEAKER_06]: And it doesn't exist at the required scale.
[SPEAKER_06]: In Shurs are also limiting exposure per site because of concerns about power, about water supply disruptions.
[SPEAKER_06]: If a data center has a power outage for 45 minutes, it can wipe out half a year of revenue due to strict penalties in leasing contracts.
[SPEAKER_06]: Three years ago insurance for non-physical damage like power or water interruption, and even exist.
[SPEAKER_06]: Now it does, but it costs about 1.5% of the data centers annual income, which can total hundreds of millions of dollars.
[SPEAKER_06]: This matters because data centers are being financed with construction loans that eventually get refinanced in the ABS market where credit rating agencies require high levels of insurance.
[SPEAKER_06]: There is so much that does not operate without insurance.
[SPEAKER_06]: We can relate it to what's going on in the middle of least right now.
[SPEAKER_06]: We started escorting ships through the straight-of-armus, no company that is spending millions and millions, billions on its fleet of ships is going to move an inch unless insurance companies are willing to provide coverage.
[SPEAKER_06]: In this case, if the insurance gap persists,
[SPEAKER_06]: It could create a bottleneck in the financing chain that slows the pace of the AI infrastructure, buildup.
[SPEAKER_06]: So if you are exposed to the AI theme, this is definitely something that is worth monitor.
[SPEAKER_06]: The bulk case for all of this AI capex assumes that the buildup proceeds at the same pace that tech companies have announced.
[SPEAKER_06]: But if financing gets constrained,
[SPEAKER_06]: And if it's because the lenders can't get comfortable with the insurance, it's easy to see how some of these massive, massive projects that have been announced could face delays.
[SPEAKER_06]: Now, that sounds like a lot of doom and gloom.
[SPEAKER_06]: I don't mean for it to sound that way.
[SPEAKER_06]: It's not a crisis yet, but it's certainly a structural friction that could moderate the pace of this physical AI bill that we've been talking about, which, for many, has been a major.
[SPEAKER_06]: major investment fee.
[SPEAKER_06]: Well, that does it for yet another episode of Invest Talk Justin and I.
[SPEAKER_06]: We thank you for listening and encourage you to tell your friends and family members about our free podcast downloads.
[SPEAKER_06]: As always, they're available on iTunes and Spotify and while you're over there, we'd really appreciate it if you left us a rate and review.
[SPEAKER_06]: Don't forget to sign up for the latest edition, the third edition of our annual competition at Vestock Market Madness.
[SPEAKER_06]: This is the second to last time we will remind you because the competition submission window closes March 18th at 1159 p.m.
[SPEAKER_06]: One other thing I want to highlight is our practice at KPP Financial of Parallel Investing where when we make a trade for our clients, we make the same trade for ourselves.
[SPEAKER_06]: On the same day, the same price, the same percentage, no front running, no special treatment.
[SPEAKER_06]: We invest alongside our clients.
[SPEAKER_06]: That's unsendier.
[SPEAKER_06]: Click on the portfolio review button over on invest.com.
[SPEAKER_06]: Justin and I look forward to speaking with you.
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