JD Durkin: Let’s bring in our very first guest, and one of our favorite guests here on the show, the editor-in-chief of Investopedia, the great Caleb Silver. My man, thank you for being here on a very happy Friday. Semiconductors: what a story it had been in the first half of the year, maybe not so much now. Software has largely taken the lead. Quite the reversal. What has been driving it year to date?
Caleb Silver: I’m wondering, what was it that tipped the scales there? Was it the credit default swaps blowing out? Was it the fact that these big companies are now dipping into cash flow to fund AI? But something definitely changed, and the bid has swung the other way. We talk about sector rotation. This kind of happened on a dime, and it’s been prevalent for the last few weeks, even though pretty much all stocks, including software stocks, are getting hit pretty hard today, except for Microsoft.
JD Durkin: Yeah. Caleb Silver, what are we seeing with institutional investors, the smart money, going from extremely bullish to extremely bearish in just the last few weeks? What did you see here?
Caleb Silver: Their cash levels were at all-time lows just, like, six weeks ago. And now, all of a sudden, the bets that hedge funds are making against the market, the puts, are at an all-time high. And you see this bearishness sweeping over institutional investors. That happened quickly. Usually, October is a pretty good beginning of a nice six-month stretch. We do have a little election coming up in the next couple of weeks, maybe some of that. That said, you did see some bottom fishing today. Couldn’t believe it. I saw CrowdStrike catching an 8% bid today, and some other stocks that have been hit pretty hard catching it a little bit. So maybe people are searching for a bottom, but it seems like the bottom has fallen out on a lot of the big stocks.
JD Durkin: Yeah. Let’s stay with stocks: Apple, utilities, insurance names. What makes these particularly attractive areas of the market right now?
Caleb Silver: Yeah, three-year highs make them attractive right now, and that’s where the money’s been moving. Apple has been at 52-week or all-time highs for the last several weeks, several months, really. As investors start to doubt the AI trade, they’re wondering, well, what’s a stable company that’s printing cash that is going to be the platform for all this AI development? It’s Apple. It’s Apple, for now. And you’re also seeing utilities catching a bid in a scary market. As you would expect, people are looking for dividends right now. You’re also seeing them push into dividend ETFs.
JD Durkin: Yeah. Well, at least on the broader conversation of ETFs, we’re going to talk a lot more about XLE, which of course was the big winner on the day. One week from today, that’s October 30th, I believe, Chevron, ExxonMobil. What do you see, or what do you like, in some of those names as they continue to find new legs higher, all-time highs?
Caleb Silver: I mean, what don’t you like right now? As long as oil prices are this high, they’re printing profits. How long will it last? Nobody knows. But if you look out into the futures, the futures market is not telling us that oil prices are going to come crashing down anytime soon. So, you know, look at what trades in the future. There’s a lot of contango happening out there. Higher oil prices, higher profits, good for the energy sector.
JD Durkin: How about muni bonds, offering pretty attractive yields in this environment, all things considered? What do you see out of those?
Caleb Silver: Yeah. First it was people thinking about Treasuries, because the yields were popping. And then it was investment grade, because you had a nice little spread there. Muni bonds, with the tax-free return, they’re 6% or 7%. Those are catching a bid as well. The Wall Street Journal had a cover story on that today: why munis are suddenly sexy again. Who would have thought?
JD Durkin: Yeah, really? Who would have thought? Here we are in October, 11 days to go before the midterm elections, and munis are cool again.
Caleb Silver: Why not?
JD Durkin: Any evidence, overall, of what you’ve seen in terms of investors starting to question the overall AI spending boom, with an eye on a few of these big Mag Seven names? We get a lot of reports Wednesday and Thursday of next week.
Caleb Silver: Everything was cool until they started dipping into their free cash flow to do it. Once you start dipping into free cash flow, that’s our profits. That’s what we’re here for. You’re taking our profits to continue to invest in the AI buildout. Investors don’t like that too much. And then they’re wondering where all this money is going to continue to come from. When you think about this whole stew of private equity, private capital underwriting a lot of this debt, plus public companies, right, underwriting each other’s debt, it starts to get a little scary, especially when they start tapping the profit centers.
JD Durkin: I pulled up the Chipotle chart right before you and I came out. It was down about 2% today, now trading back to where it was in early January of 2023. That’s a lot of years of gains and momentum to wipe out. What is going on with CMG these days, Caleb?
Caleb Silver: That stock is down, I think, at a three-year low. But also, you look across the convenience food, the fast food space. Nobody’s doing that well, which is odd, because people feel terrible about the economy. You’d think that consumer staples, you’d think that some of the restaurants, the lower-price-point restaurants, would be doing better right now. They’re really not at this point. Everybody’s under pressure from higher prices and concerned about consumer spending. We got that sentiment number again today. It’s as bad as it’s ever been. It continues to be worse than it’s ever been. We continue to spend, but I think people are worried about a broader pullback towards the end of the year.
JD Durkin: I’ve been lucky enough to interview you many times over the last few years, and I always love to ask you a version of this question. People go to Investopedia to become, among other things, smarter investors. What are they going to Investopedia to learn more about these days, as they see the headlines and try to make sense of what all of this means for them and their portfolios?
Caleb Silver: The equity risk premium, and also portfolio protection, which I put out on Substack this week. People are wondering, how do I protect myself if I’m worried about a broader dip here? So they’re looking at all types of options for doing that, including stop-loss orders, including maybe shifting over to high-yield bonds, including sort of shifting within the portfolio in a tax-efficient way. So people are starting to look for protection. When that happens, you’re going to get more volatility, especially over the next couple of weeks.
JD Durkin: The great Caleb Silver, editor-in-chief of Investopedia. What do you have on tap, by the way, from Mag Seven earnings, and also Fed Day next week? Doing anything cool?
Caleb Silver: Yeah. Nothing going on next week at all. Just one of the busiest weeks of the year. A pretty critical week, and we want to watch that sentiment. We’ve seen a lot of volatility in just the last few weeks. The VIX was asleep for many years, it seems. It’s up right now. It’s wide awake, because there’s a lot of options activity in the market. I want to see what that looks like going into these big stocks as they report results. And they’d better be good, and the guidance had better be even better.
JD Durkin: Yeah. One week ago today, last Friday, the VIX reached a 22 handle, I believe. Elevated on the day to 19.71. We’ll continue to track [unclear: “for see”] volatility. Caleb, thanks for joining us, man.
Caleb Silver: Good to see you as well.
