Title: This Is When The Market Rally Ends And Stocks To Beat Downturn | Jay Singh Show: The David Lin Report (David Lin) Guest: Jay Singh (founder, Special Situations Report / Special Situations Research; ex-Goldman Sachs) Date: 2026-AUG-17 URL: https://youtu.be/CYQXUDQgKfo Length: 51:00 Note: Auto-transcript, timestamps mm:ss. Saved for personal study. Garbled names corrected: "Redwood"/"IRM management" = Redwood Trust (RWT) management (NOT Iron Mountain); "Peace Sky" = Paramount Skydance (PSKY); "NSC UNP" = the Norfolk Southern / Union Pacific merger arb; "Cor Weave" = CoreWeave (CRWV); "Nanya BS" = Nanya Technology (2408.TW); "DataDog" = Datadog (DDOG); "Snow" = Snowflake (SNOW); "Team Atlassian" = Atlassian (TEAM); "App, APP" = AppLovin (APP); "AGI" = Alamos Gold; "Sandis" = SanDisk (SNDK); "Enthropic" = Anthropic; "Aschenbrenner" = Leopold Aschenbrenner (Situational Awareness). Fillers (um/uh, tic-"you know", stutters, snorts) removed; wording otherwise verbatim.
00:00 You won't believe this number, it's actually 50% year to date. That's still an absolutely phenomenal number for earnings. The speed at which these companies are growing is just so tremendous. The models themselves will be commodities and I think everyone understands that now. [music] We've had a massive, massive re-rating and based on the earnings growth, the 12-month PE ratio for the S&P 500 is only 20 times.
00:20 >> [music] >> Now, with the S&P 500 all-time highs because a lot of that's driven by earnings growth. >> Jay Singh is back, he's a founder of Special Situations Report and we're going to get Jay's Special Situations update today. What are the special situations? Welcome back to the show, Jay.
00:35 Before we get into that, this broad market rebound right now, let's talk about the big picture here. Stocks, in particular tech stocks, had a dramatic sell-off in July with the semiconductors leading the charge downwards. V-shape recovery upwards now throughout August. Sentiment has improved dramatically and I've noticed that people are overall a little more bullish on my show as well.
00:59 Some people are more cautious going into this rally and some people are selling this rally, but overall the tone is more bullish. You're also bullish on the gold miners, which we'll talk about. Are you buying into this rally or do you think this is a dead cat bounce? Let's start there. >> Absolutely.
01:15 Well, thanks for having me as always, David. It's very nice to be able to share insights. >> Happy to be here. This has been a very volatile year. I know that while the S&P has been effectively in a 5% range bound market for the last couple months, the Nasdaq had an 11% drawdown last month, which was driven by a big sell-off in the semiconductors and the Korean stocks.
01:41 As you know, there's over speculation with leveraged ETFs in Korea, the government clamped down on them. We subsequently had a 45% drawdown in those names and we had a 50% drawdown in the momentum stocks, which is the biggest drawdown in several years. At the same time, you had firms like Citadel Securities arguing for a rate hike which I thought and I think I said, we have a weekly call every Sunday and we also do Twitter spaces on those calls.
02:07 I had publicly stated I do not expect a rate hike in July and frankly not even in September. And I think that there is an overreaction to rate hike fears given the risk around the Iran war extending. Now, I still think the geopolitical risks are there. However, I do think that real estate inflation has been something that's dragging down overall CPI.
02:35 So, we had CPI faithfully meet expectations this week. We also had PPI below expectations. Final demand at 0% versus 2% survey expectations month over month. Annualized PPI final demand came at 4.7 versus 4.9 and core came in about 4.2 which is a little bit hotter than the 4.1. But overall, PPI final demand was below expectations which is a positive.
03:03 So, I think we've hit a temporary peak in the 10-year yield. And the 10-year yield is inversely correlated with speculative names. It's also inversely correlated with tech stocks. And as a result, now the market tends to feel that the 10-year has peaked which has been my view for the last few weeks although we finally got it now.
03:29 I think that you will have a few weeks of a rally going into midterm elections given there isn't much really Trump can do given how close we are. As we know, midterm elections are in November. Trump definitely does not want to lose the house nor the Senate although I think the house is already lost.
03:48 And as a result, we're in this short-term type of Goldilocks environment. And there's several pockets that we've been buying into this rally. For example, in the gold miner space, we've been long AGI, which had a tremor at one of its smaller mines, but its flagship mine has actually done relatively well and it's set to ramp production up to over a million ounces.
04:18 So, that's AGI. We're also long Kinross Gold. We're also long Barrick, which reported. I think we timed AGI almost perfectly at the bottom. We're also long Barrick and we're also long Agnico Eagle, along with physical gold and silver, PHYS, etc. We've also been long the REITs during the index rebalancing from the small cap index when there was big selling in Redwood because of a fear of interest rates as well. We loaded up on Redwood.
04:47 It was paying like a 17% dividend at that point. We've spoken with Redwood Trust management. It's a well-run business. They do high-quality mortgage origination and securitization for individuals in the US that are non-W2. It's a dentist, doctors that want to buy a million-dollar home, need a jumbo loan.
05:06 They buy those, have 750 FICO scores above and they securitize those. So, because of the index rebalancing, we were able to buy that at a three handle and now it's rallied almost to $5 a share. So, very healthy return for a few weeks and even today at the close at about four spot 77, it's a 15% dividend yield, which we think is sustainable.
05:30 And then we're long the Warner Brothers WBD spread, which is one of the big merger arb spreads in the market. So, that's Warner Brothers / Paramount Skydance. So, that's a cash deal. It was about a $5 spread, so 19%. And we think that it's going to go through antitrust; the deal probably will close next year.
05:52 We've also been long NSC UNP, which is a 12 and 1/2% spread on the merger arb side. And then on the earnings front there've been a number of companies reporting that we bought for a trade, right? So, in the big AI sell-off, we saw GPU lease rates go up and you can track them on Bloomberg for the H100s, which is one of the things that Jensen has been touting, and in the B300s and as a result we bought Nebius and CoreWeave.
06:22 Both had earnings; both of them crushed. I think Nebius reported Q2 26 revenue of 582 million, which beat estimates of 573. It was up 454% year-over-year. Adjusted EBITDA came in at 236 versus 175, compared to negative 20 million of EBITDA last year and AI cloud revenue was up 514% to 575 million and operating cash flow actually reached positive 2.
06:46 2 billion with cash at 8 billion. So, this one doesn't have a lot of debt like CoreWeave. They have customer prepayments of about 9 billion to help them construct in 2026 and they raised their contracted capacity to about 5 gigawatts from their prior guidance of 4 gigawatts.
07:03 So, management has basically said that it could sell its entire 2027 capacity today, but it's still deliberately holding some back for higher value immediate customer demand and stock was up 34% on the day that it reported and we trimmed. We also were long CoreWeave, which also had some strong results. So, I won't go into a lot of details.
07:23 It's a well-followed name. We're selling some of the names that rallied. On the software side, one of the big shorts for hedge funds were the software names because, as we know, we'll talk about situational awareness in a minute, but a lot of these tech names had to short software as a hedge to their long AI stocks.
07:50 So, what we had was because AI stocks are so much bigger than the individual software stocks, we had very high short interest and systematic selling with software names and we bought a lot of the software names like Datadog, which has done very well. And even cybersecurity was our biggest overweight.
08:08 And some of the other names that we bought were names like Wix from the lows, which have also rallied given the subscription price is so low. It doesn't make sense for people to replace their web subscriptions with AI. We also bought ServiceNow and Snowflake and some companies that we think have some moats.
08:27 Even Palantir, although we don't own it, rallied about 40% on earnings. And for those of you who don't know what happened, in late July of 2026, Ken Griffin acquired the public equity portfolio of Situational Awareness, which was the AI focused hedge fund run by the former OpenAI researcher Leopold Aschenbrenner after he suffered heavy losses.
08:51 I think he had given back all his gains on the years of like 400 plus percent on the public book and he was up 80% net just on Anthropic on the private book and then I think he's going to focus on privates now. Basically this guy was a former OpenAI super alignment researcher and back in 2024, he published this 165-page paper titled Situational Awareness: The Decade Ahead and he predicted a lot of the AGI and a lot of the rallies we've seen in memory and
09:23 optical stocks and in the whole ecosystem. And the problem was he was using leverage and this is why I always caution people on using leverage. He was using about four times leverage and had 45 billion of exposure. He was long AI infrastructure like CoreWeave, SK Hynix, SanDisk, and he was shorting software companies like Adobe.
09:42 So, what we did was we started to buy software companies back in March. There are some trading at like 10 times cash flow as a contrarian bet and almost all of those names have paid off since we bought them and then in the latest sell-off in July, some of these names like the memory names were trading at four times earnings.
09:58 So, we bought SK Hynix, we bought the DRAM ETF. We bought CoreWeave, we bought Nanya, and just for a trade, not for long-term. And so this end of July and August has been a really good backdrop for us, but I think we'll get cautious again going into November into the midterm elections because we feel after November that our president is not really going to hold back and we might see a re-escalation in Iran, we might see new tariffs announced because at that point
10:32 he'll have really nothing to lose. So, we're going to be cautious again in about a couple months, but I think for now, I'll take a pause here and if you have any questions, happy to go into another direction. Before we continue with the video, let's talk about a problem that comes with owning gold.
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11:40 >> A lot of people are actually just sidetracking a bit and going back to the markets later. A lot of people wondering how a 24 year old at the time was able to raise 45 billion dollars. You've worked on the institutional side before. Just tell us how that process happens. And how one is able to accumulate so much capital at such a young age.
12:01 I'm not singling out Leopold here, but it's just very curious for a lot of people how that happened and whether or not there was any risk officers at the fund for such a large fund why that was even allowed to be forex levered. >> Yeah, that's a really good question. So, after he wrote this viral manifesto, the reason why there will always be a need for humans in the markets is because fear and greed.
12:26 And institutional LPs, they tend to chase momentum. And they always tend to do the wrong thing at the wrong time. You should be a contrarian, but you should buy managers when they're down and what they do is they buy managers when they're up. So, after he wrote this viral manifesto, he had some seed investors.
12:43 So, here, he's a very smart guy. He was a Columbia valedictorian at age 19. So basically his seeds were like Patrick and John Collison. You might know them, the co-founders of Stripe, Nat Friedman, the former GitHub CEO, and Daniel Gross, and then Graham Duncan, who's the founder of East Rock Capital.
13:01 So, they actually only gave him about 225 million of initial capital to start. And so, then he got other investors as his return started to be good last year. And he didn't probably get into payout of his carry last year, but the 45 billion was really probably like 10 billion dollars of equity that was levered four times.
13:21 And compounded because of 400% return. So, I think he only raised like probably single digit billions. I mean, it's still very impressive for someone at that age, but again, this is momentum chasing. There are follow-on LP capital raises in 2025 and early 2026. And I think that it's the heavy leverage that killed him.
13:41 Honestly, I think he would have still been around if instead of leveraging up four times, even if he only leveraged 50%. If he wanted to play the cards a little bit, I think he would have still been around and he would have still been running billions today if it wasn't for that mistake. >> I think he had good risk management to be frank.
13:57 >> How much leverage is too much leverage? Is there a rule that you follow? >> I personally have a rule that we use at Special Situations Research. And that follows Seth Klarman's margin of safety, which I read a couple decades ago. And that's actually that we almost never use leverage.
14:17 We have about 20% cash at all times and we take trades. We can trade amplify trades through call spreads. But in terms of taking margin leverage, I'll just give you the Japan flash crash, the VIX blow up a few years ago, COVID. People don't understand: if you're leveraged even one times, you can get taken out to the woodshed.
14:41 So we prefer not to use margin because it puts all the power in the broker's hands. They can sell whatever they want. I don't think there's really any healthy way to use leverage. Through COVID, I think we were up like 3-400% over those couple years. I mean, you didn't need to use leverage.
14:54 We were short SPACs using puts. We were long very cheap companies. And then you could have bought Meta back in 2022 after that big sell-off and made multiples. I mean, there's so many ways to make money. You don't really need to use leverage. I think young people often get taken for, they look at the whole greed and fear; fear is amplified when you're young.
15:19 And with experience, you realize that it's never really a good idea to use leverage. >> Okay. I'd like to talk to you about now and that's good advice by the way. People should pay attention to that. Jot down some notes. Yeah, too many people over leverage themselves. Just ask the good folks in South Korea. 1.
15:40 2 million accounts margin called but that's a discussion for another time. Going back to earnings, Q2 was strong like you said. A lot of examples, several examples of equity issuances, Google Alphabet being one of them. I think Google raised $85 billion in Q2. Probably the biggest equity raise in American history. But at the same time they reported revenue growth.
16:05 I'm looking at the numbers right now. 24% year-over-year. They've had a pretty good 2026 so far. I just wonder how much CapEx is too much CapEx now for investors. At some point people are going to ask themselves why are you issuing equity and diluting shares to fund the AI compute build out at such a large scale.
16:29 Is all of it going to be productive? What is the ROI? People are going to start asking questions. Are you asking questions? >> Yeah, absolutely. So Google reported Q2 2026 results on July 22nd so a couple weeks ago. I remember that their consolidated revenue was pretty strong. It was up 24%.
16:50 The reason why the stock didn't rally was it was before the Leopold liquidation and the subsequent rally. But I believe revenue was up 24%. Their cloud business is doing relatively well like Amazon's. Operating income was $41 billion. Net income was $112 billion and diluted EPS was $9 a share.
17:10 Now that EPS was a little bit skewed by their stakes in Anthropic, etc. But, overall, the company did well ex the one time. And Google Search was up 17% buoyed by user engagement and the use of AI overviews. I mean, Gemini itself is now one of their biggest products.
17:34 So, that was quite positive. The reason why the stock didn't rally a ton, despite even YouTube ads being up 11.1 billion up 13% and subscriptions up 15% was that they did 45 billion capex for the quarter, bringing quarterly non-GAAP cash flow to -5.85 billion. And so, because of that, what we have seen is that the market is penalizing tech companies for effectively overspending on capex.
18:14 So, I think Microsoft is the only company, so Microsoft was up 13% after earnings, because they said capex would be roughly flat, they weren't increasing it. But, outside of Microsoft, I think all of the hyperscalers are now burning cash flow. And so, even though earnings look strong, you have to be really careful with these companies, because they're not the capital-light free money generating businesses they were in the past.
18:38 They're now becoming capex-heavy. And I think over the next year there will be a trillion raised. That's a trillion with a T for new AI projects. In fact, Nvidia is raising 500 billion alone to finance its own GPU purchases. And that was a deal announced a couple days ago. So, I still like Google.
18:54 I still like Microsoft. I still like Amazon. I'm just saying that the businesses are not the capital-light businesses they were before. >> Take a look at this article from the FT yesterday. Goldman Sachs analysts have scoured through the footnotes of the hyperscalers' regulatory filings, counted 1.
19:09 5 trillion dollars of lease commitments, of which 1 trillion hadn't started yet. Those analysts noted, "From a credit perspective, this treatment can understate leverage and finance liquidity needs as these obligations are eventually recognized and contractual payments come due." Okay, the headline of this article, "Hyperscalers exploding purchase commitments reach $1.
19:25 5 trillion." Kind of alluding to what you were talking about earlier. I'll leave this chart up. Hyperscaler shopping spree purchase commitments in billions of dollars Q2 2026 dramatically up from Q1. And now we have apparently reports that not all of this is from equity raises, they have lease commitments as well.
19:45 So walk us through what you're thinking when you read something like this. >> Yeah, absolutely. So, my view is that what we have right now is we have an AI race. And everyone is trying to buy as much compute as possible. According to Morgan Stanley, they're looking at AI CapEx as being 1.
20:09 2 trillion next year, which is double the estimate they had last year. So, the question is like why is AI compute spend so vociferous? And the reason why is that there's just a lack of supply, right? Nvidia and AMD are the biggest producers. I know Amazon has its TPUs and Google has its TPUs, but in terms of GPUs, there's a limited amount of supply and the AI sector is growing so quickly.
20:40 I mean, just look at, I think we're going to see Anthropic, which owns Claude, IPO in September-October now. And I think they're looking at 50 billion run rate revenue, and they were on the single-digit billions last year. So, the speed at which these companies are growing is just so tremendous that everyone wants to capture that pie.
21:03 And the only way to capture that pie is to be a first-mover. The models themselves will be commodities and I think everyone understands that now. So as a result, I think that there's just this mad dash for compute. And as a result, I think that is what's resulting in this AI hardware frenzy.
21:23 And I don't think it's going away. I think that you're going to see continued really high demand for high bandwidth memory, HBM memory. I think you're going to see energy and grid connection demand. You're going to see liquid cooling demand. You're going to see premiums for advanced GPUs continuing for ASICs like Google's TPU or custom silicon.
21:46 You're going to see demand for Broadcom products and eventually there's going to be a symmetric risk of the cost of overbuilding. So you're going to have a lot of unused GPUs because these data centers are going to take a long time to be completed. I mean they're running one to two-year delays. But for now, I think the hyperscalers are just focused on building as much compute as possible so that they can be the biggest cloud provider.
22:12 And you can see that in the numbers, right? You can see that Microsoft, Amazon, all these companies have doubled their backlogs, their cloud backlogs and the risky part is a lot of it's circular financing and that a lot of the backlogs are OpenAI and Anthropic and that's money that's being raised in the public markets and from VCs.
22:32 So it's important not to let the hype get out of control, but for now, there's so much money being raised. Like I mean if Jensen can raise 500 billion from eight large asset managers in such a short period of time. I mean Nvidia's going to be beating earnings for the next couple quarters with that much; that circular financing works in the short term.
22:57 Eventually, people will question it. >> People will question it, but in the meantime, it looks like it's firing on all cylinders. >> The numbers will continue to beat for the next couple quarters. At some point next year, the market will say, "Okay, how long is this sustainable?" >> I mean, people will start questioning it, but in the meantime, it looks like it's firing on all cylinders and does it surprise you that the tech boom over the last year or a couple years, but especially the
23:27 last year has been relatively insulated from the Iran war? In other words, it didn't really have much impact on the growth of the Nasdaq. This probably I wouldn't have made this statement 20 years ago. But it seems like things are moving in a different direction now. >> It's a really good question.
23:47 What we've had, starting several years ago, big tech eventually became a flight to quality. This is several years ago and it became more pronounced during COVID, right? Instead of buying bonds, investors would buy the Mag 7. And what we have today is we have a hyper concentration in the socks names.
24:09 And we've become a trend following nation, a momentum following nation, and people who bought these names have done quite well, so we can't say they're wrong. But there's a very small percentage of the names, like 5 names in the S&P 500 did like 20% earnings growth, right? Like Micron and SanDisk, for example.
24:27 So, it's becoming hyper concentrated. And that will eventually lead to over investment. That's what happens. And Meta's done this a couple times, they've invested in several projects that have failed miserably, like virtual reality labs.
24:47 But then they recover, they cut costs, and they invest in the next big thing. I think AI's a lot more real than virtual reality. And if we look at overall earnings as a side note, for the second quarter of 2026, 88% of S&P 500 companies have reported actual results. There's been a concentration of good performance.
25:12 86% of S&P 500 companies have reported positive EPS and 76% of S&P 500 companies have actually reported positive revenue surprise. So, it's been very broad, but it's been a few companies that have done extremely well. Now, in terms of earnings growth, because of the tech names, earnings growth for the S&P 500 — you won't believe this number — is actually 50% year-to-date.
25:35 Now, some of that is due to the mark-to-market of the ownership of Anthropic by Google etc. So, the real number is closer to 30%, but that's still an absolutely phenomenal number for earnings. In terms of earnings revisions, going back to June 30th, the earnings growth rate for the S&P 500 was expected to be only 23%. So, we've had a massive massive re-rating and based on the earnings growth, the 12-month PE ratio for the S&P 500 is only 20 times.
26:00 Now, with the S&P 500 all-time highs because a lot of that's driven by earnings growth. Last year, we were looking at S&P multiple of 23 on a forward basis. So, the earnings has actually lowered the multiple and so, if you believe the earnings are not going to fall from here and they're not peak earnings, then S&P is actually not even that expensive.
26:19 Believe it or not. If you believe these metrics are sustainable. All 11 sectors have been reporting year-over-year revenue growth through the S&P. It's not like that in other parts of the world, but it's definitely like that here and energy because of the Saudi war has reported revenue growth of 42.5%.
26:36 IT, second highest growth year-over-year versus last year, IT is growing at 36%. Communication services, 15%. So, we're hitting it on all cylinders. S&P revenue growth is basically 15%. That's the highest revenue growth we've had since the second quarter of 2022, which is 13%, and the fourth quarter of 2021, which is 16%.
27:01 But, those are less impressive because those are coming from weak COVID quarter year-over-year. This is a lot more impressive because it's actually coming from a relatively high growth last year, and we're still growing revenues at 15% year-over-year this year. >> I wonder if the fact that the US is relatively insulated from the Iran war, meaning the US imports oil from Canada mostly, and so it doesn't rely on the Strait of Hormuz.
27:28 I wonder if that puts the S&P 500, a global index, in a relatively competitive position relative to its peers abroad. >> That is a great point. So, I want to emphasize that of the 120 trillion of global market cap, 60 to 70 trillion is in the US, right? So, the US is just an extremely wealthy nation.
27:53 It has its own natural resources, right? Canada does, and Canada helps us with energy. But we have two oceans separating us, right? The Atlantic and the Pacific. So, Iran doesn't pose a conventional threat to the US because it doesn't have the long-range power projection capabilities or intercontinental ballistic missiles capable of launching a strike to the US mainland.
28:17 So, European stocks and Middle Eastern stocks, Asian stocks are more sensitive. I would say even LatAm is protected, especially because Brazil is a big commodity producer. Argentina is a big oil producer. I think the risks that we face are like the cyber attacks, the water infrastructure that was hit by, I'm assuming, Iranian IRGC terrorists.
28:39 And I mean, the Iranian people are not the ones to blame. It's the IRGC. And while our overseas US troops personnel are at high risk. It's a very small percentage of our troops and a small percentage of our bases. I mean, the Strait of Hormuz disruption does affect our allies. So, that's why we're sensitive. But, you're absolutely right.
29:00 The US, we produce like 13 million barrels of oil a day. We also import a couple million from Canada and we're also now importing a little bit from Venezuela. So, we're relatively insulated from what's going on overseas. >> Yeah, Nvidia hasn't reported earnings yet. It's reporting on August 26th.
29:20 That's going to be a very important report to watch. What are the key metrics you're looking out for? What Nvidia reports could be a huge indicator for how the semiconductor industry sector overall is performing and that is, some say, a leading indicator for how the AI compute story is playing out. >> Yeah, absolutely.
29:40 I would look to see how the compute business does for Nvidia. They call it a data center revenue and product architecture ramp coming up as well. The data center revenue accounts for like 85 to 90% of Nvidia's top line. Because it's been growing so much faster.
29:58 So, the sequential quarterly growth rate and the next gen architecture shipments are going to be important to look at like the Blackwell rollout and the transition towards Vera Rubin is going to be very important. Visibility in the future quarters because people are worried about this AI demand peaking for the next two to four quarters; if they give guidance that will be very important.
30:17 Other things that I looked at for like Micron as well and SanDisk and SK Hynix like gross margin resilience is something people focus on on Wall Street. So, the target range again analysts probably expect GAAP gross margins for Nvidia around the 73 and 75% range. Like Micron they're worried about it peaking out and the memory guys are 85% gross margins which is insane.
30:38 So, things that could hurt gross margins for Nvidia could be like cost pressures, TSMC raising chips on wafer substrate packaging costs, high bandwidth memory costs, which is what hurt Apple. People are going to look at this earnings and look at hyperscaler CapEx read-throughs. A significant portion of Nvidia's revenues, right, comes from big cloud providers like Microsoft, Alphabet, Meta, Amazon.
31:04 So, analysts are going to cross-reference Nvidia's reported sales with the CapEx guidance provided by these tech giants and see if it makes sense. Nvidia is also being investigated for its shipments to Singapore. Obviously, Singapore doesn't have that many data centers, so where are those GPUs actually going? So, that might be a topic.
31:21 There's Spectrum-X and Quantum InfiniBand. Those will be like small things that the market will be looking at; CPU attach growth, software and services, CUDA ecosystem licensing might be something that's brought up on the call. But overall, it's just going to be their forward guidance, their margins that's going to be the most important in the data center business.
31:40 >> Okay. Overall, I think the bigger picture here is that earnings have been spectacular for Q2, in fact, record earnings for a lot of companies. For example, Goldman Sachs reporting record profits surging 78% on a year-to-year basis to 20.98 EPS. Analysts returns common equity of 23.5%. The company itself reports record profits.
32:09 I think the point I'm trying to make is that it's kind of a stark comparison to how consumers are feeling overall. If you take a look at my screen right now, the consumer sentiment index of the University of Michigan is still near record lows, historic lows. Now, this is worse than 2008, this is worse than the dot-com bubble burst, this is worse than COVID.
32:30 And I just wonder whether or not, first of all, the overall sentiment is actually reflecting the reality of the economy. Perhaps the economy is stronger than what people feel. And I wonder if a lot of the consumers' fears about where the economy is headed, and ultimately where markets are headed, are a little bit overblown given how the Iran crisis has spooked people.
32:50 Or do you think that corporate profits are just not reflecting economic reality? Either way, there's a disconnect. How would you describe it? >> Yeah, I mean, that's a great question. Consumer confidence has been very low. It's been affected by politics. It's been affected by fear of rising oil prices.
33:08 It's been affected by price levels, not actual inflation, because inflation is not extremely high, but the price levels have been high the last three or four years. The cost of living has been going up and the poor have been affected by that. If you look at GDP growth, half of GDP growth has been because of AI and data centers.
33:29 And you have people like me that are smart enough to pick up trends. I bought Babcock and Wilcox, the prefs which basically doubled. The stock was up 40%. And people who follow the market, we can make money on these types of things, but the average person is not trading the market or benefiting from AI.
33:48 They're not benefiting from the water usage and the power usage. And there's a huge backlash. Again, it's AI because it's seen as a job stealer. And the reason why people are not happy is the cumulative price level versus the inflation rate gap. So, versus pre-pandemic baselines, the average American when you factor in the prices of essentials, groceries, rent, healthcare, utilities, those costs are roughly 20 to 25% higher than pre-pandemic baselines.
34:18 So, that results in an erosion of purchasing power because wages in many sectors have not kept pace. They have in certain service sectors, like in tech and in finance, but those jobs are also very AI sensitive. Minimum wages have also gone up. In certain parts of the US like New York, you can earn $20 an hour.
34:40 But, the issue is that rents are going up much faster. The cost of food, the cost of healthcare. And the administration hasn't done a really good job of controlling healthcare costs like they said they would. Gasoline prices are something that we see as a daily billboard for the economy.
34:57 And while oil prices have come down, the crack spreads of refiners have not come down. And that's resulted in gas prices remaining stubbornly high, which I'm sure is very frustrating for people in the US and frankly around the world. Then you have financing pressure with mortgage rates being very high, rates on credit cards are near all-time highs, auto loans, and personal loans.
35:17 I frankly think that mortgage rates are near a near-term peak because they're correlated with the 10-year yield. So, that's why I'm buying mortgage rates right now. That's also why I'm buying gold because I think real rates have temporarily peaked. But, one of the other reasons why people are unhappy is cooling job mobility.
35:33 So, we had this time during COVID of the great resignation, of very easy job switching when people were getting raises and they're very happy. And now with AI, that confidence that people had is gone away. And so, this emerging tech anxiety, surging corporate investment in automation instead of people — Meta is firing people to invest in these data centers.
35:55 That's particularly amongst the creative white-collar administrative workers that results in this K-shaped reality. Invest in, can deny it and call it C-shaped or however much he wants. I understand that minimum wages have gone up. But, overall, I think the average worker is not doing as well
36:14 on an inflation-adjusted basis as they thought they were going to do. >> Mhm. And that's the exact economy right. I'm sorry. Go ahead. >> Please. Go ahead. >> I was saying in this economy right now, are we looking for the consumer to continue lifting earnings or are we looking at B2B sales? Because it doesn't sound like consumers are very confident in their job prospects.
36:35 And if I'm not confident in my job prospects, I'm not spending money on discretionary goods even in the tech space. So, I don't know how we can count on the consumer to carry this forward unless you think I'm wrong here. >> No, 100%. I think half of the GDP growth as you mentioned has been really just B2B.
36:53 It's been AI infrastructure and that can continue maybe for a few quarters, but you need the consumer to come back. So, what's happening in the US is the top 10% of consumers do about 60% of overall consumer spending now versus 30% a couple decades ago. And so, there's been a concentration of the ultra-wealthy, they're buying the nice cars, the nice vacations, the nice homes.
37:14 And you're seeing that the luxury stocks have been outperforming. The middle-income catering stocks and a lot of the middle-income middle-class people are now shopping at places more like Walmart and Target, to save money. So, obviously Walmart's doing well, but a lot of the brick-and-mortar stores are suffering and the tariffs certainly haven't helped as well.
37:40 So the Iran war and the tariffs have actually created inflation, which is something that this administration said, they said inflation would be going down. And the reason why their approval ratings are so low almost basically at Biden approval ratings is just the series of lying.
37:57 The four billion dollars of crypto grift. You just can't deny it. It's just factual. And it is what it is. People are just not happy that the president's getting rich while they're not. And if everyone is getting rich, no one would care to be honest. And it's just a concentrated group of asset owners and people exposed to tech and who know what to do and people like in our community that have saved and they know how to trade and allocate properly, but the average American is not doing well. And
38:27 now Trump wants to cut capital gains taxes. This is not a main street mainstream economic boom. It's really not. >> Jay, what kills this spree? >> I think there are three things that can kill this spree. One of them is temporarily alleviated, which would have been a spike in the 10-year.
38:48 And I think that's temporarily behind us because this Oman Iran side deal, US saying that the street's not going to be that important, which means we're not going to be striking them that much before midterms, at least I hope not. And inflation, the CPI PPI, we're not hot. So expectations for a Fed rate hike, which were above 60% for September, are now below 40%.
39:14 So if we don't get a hike in September, I think we'll see a relief rally in risk; we've already seen a relief rally in risk assets. We've seen precious metals rally. And I think we might even see crypto rally if we can see the 10-year just stay in a range or go a little bit lower between now and November, and then we would have to rethink everything ahead of the midterms, but we actually bought TLT, which is a long-term bond ETF as well, for the first time in years.
39:40 Last week. >> You're expecting rates to go down. >> I expect long-term rates to stay flat, to go down a little bit. I don't expect a big 10-year spike unless we see a resurgence, a big — not a small escalation, a very big escalation of the war. >> Tell us about one call you got wrong this year.
40:04 And why? >> I think one call that we got wrong was we were very early to, and we started to buy the software names in March, and it was very — if you look at the IGV ETF, you can kind of see what I'm saying. We saw huge valuation resets in the software space. And for a long period, from March, you saw a drawdown of about 15% into April, and then we saw a massive rally into June, we sold, and then we rebought in July, but it was very difficult to trade that. From December
40:37 to Feb, you basically saw a 35% drawdown in software. So, that's some of the best companies in the world. Then you saw a dead cat bounce into March. We bought in Feb, we kept buying in March, and then we saw a drawdown in April, and then eventually it paid off, but even after June, you saw another 25% drawdown into July.
40:56 This is very very difficult to trade this market. And luckily we held on to some of those names, and we risk managed, and we shorted some QQQ, but it was a roller coaster, I'll tell you. I was not very comfortable for most of this year, and I do plan to take some chips off the table ahead of November.
41:15 I mean, we did time some things really well, like we covered a very large percentage of our hedges after the bad jobs report on August 7th. And what that told me is that there'll be less pressure on the Fed to hike. So the market did give us a lot of clues, even though the Fed doesn't really give you a lot of guidance.
41:34 And there's some names we recently bought, which are longer term, where I'm not sure they're going to rally anytime soon. Like I bought Uber, and I bought a little bit of Netflix and Uber. Uber, I bought at 68, it's 75, so it didn't rally with the rest of the market, but I thought Uber was very cheap, it trades at 12 times forward.
41:51 It's down from $100 a share, it was down to 68, and it's down over 30%. And if you would own Uber last year, you would have lost a lot of money. I mean, we bought it this year. We think it'll be choppy, it'll be a difficult one to trade, because of all these risks around Waymo, is autonomous going to be profitable? We think that Uber is going to contract with these companies, and they have this big ecosystem.
42:15 And if you look, for a company like this to trade at 12 times forward, it's never traded like that. And this is a company that was burning billions of dollars a year. Now it's going to do 10 billion of free cash flow this year on a $150 billion market cap, and it should do 13 billion of cash flow by 2027 and 15 billion of cash flow by 2028.
42:33 If those numbers are right, this is a very cheap company. So, again, this is a very very hard year. One of the other names that we got a little bit wrong is App, APP. It's a wonderful company. We think that it still has about 50% upside, but B of A was a little bit concerned about a deceleration from 30% revenue growth down to kind of mid-20% revenue growth, which is still, by the way, phenomenal.
42:58 But App, after the re-rating, I mean, there are a lot of top-tier hedge funds in this name, and our average cost for App is like kind of the low 300s. It's currently at 312. We're underwater a little bit by about probably about $20 a share, $25 a share. And I think that this stock could be easily back at 500 over the next 2 years, but it's very tough to trade some of these names that are growing like Shopify, which was a name that we added to recently. It had blowout
43:30 earnings the last couple quarters. It didn't even rally last quarter. Had great earnings, it didn't rally. And then this quarter, they finally rallied after good earnings. But this is choppy. We own this from March; it fell, we owned this at 120. It fell all the way to 97, and now it's at 158.
43:47 But we kind of ate for a while. In May, we were eating on Shopify, and it rallied. Another one was Atlassian. This was a more speculative software name that we added. We were actually at a loss >> what's it called, sorry? >> Atlassian. So for those of you who don't know, ticker TEAM as in Mary.
44:09 This is a software company that designs enterprise software platforms for project management, collaboration, issue tracking. It was private equity owned at one point. And this is one of the names where we were actually about to sell it at a loss. We bought this in March, and into April it fell all the way to like in the high 50s from our position in the 70s.
44:32 I mean now it's at 165, but again, we were down like 20% on this name. And it was at 40% on the print. And I think a lot of that was because the AI guys who were long AI semis were shorting software names. But I've sold my TEAM and I'm happy to take the gain on it.
44:51 I just don't have the confidence to own software in the same size I did before. But I will tell you man, this is a very very difficult year to trade. I did not expect this situational awareness thing to happen. And launch all these names higher. I was expecting to hold on to them for like one or two years. And maybe keep the cybersecurity names, and trim Team and trim some of the other ones, but it's worked out well.
45:17 And by the way, I was underwater on gold for a while. It was kind of a single digit loss, but when the ten-year was ripping every day and people were worried about war. We were up versus last year on our gold, but just on this year some of our recent gold buys were underwater.
45:31 Now the gold miners are up healthily and I think they'll continue to run. >> So, final point then that's a great segue. Let me just show you this. This is gold versus the S&P 500. A lot of people were waiting on this rebound that's happening right now. And a lot of people, this year is difficult like you said because last year everything went up.
45:51 You could have >> Yeah. >> thrown a dart, everything went up. And this year not everything's breaking new all time highs except maybe the S&P and Nasdaq and Dow Jones. And so my point is look, gold is ripping higher, the S&P's ripping higher. Everything started ripping higher around the same time, which is end of July, early August.
46:08 Something triggered that pop, and people are wondering if whatever that trigger is, if that's sustainable going into the end of the year. Are there any major themes that you think will be different for the second half of 2026 versus the first half of 2026? >> You're saying are any themes going to be the same or different? >> Yeah, different.
46:29 Let's say basically how is the second half of 2026 going to be different from the first half thematic-wise? >> Yeah, that's a great question. I think that one of the main themes that has been clouding the market over the last year has been tariffs and the war. I think that we're going to take a break from tariffs and the war for the next 4 months, and I think that will be a welcome reprieve, and I think even Citadel published a note — I'm not sure that they bought Leopold's
46:59 portfolio — that they think that retail should get back into the market. It's just funny. But anyway, I think that the AI pivot from chip hype to power and ROI is something I'm focused on. I think the energy and the grid bottleneck, companies that provide battery infrastructure, power, we're looking at some co-location companies that are quite interesting, some power companies like VST and others that we think will do quite well, because if you think of a power company when it comes to AI, right? That demand will sustain because
47:30 the data center is going to need power every year. They may not need to buy chips every single year, but they will need to buy power every year. So, we think that power is one of the areas that you can continue to own and buy. So that's quite interesting to me personally. I think in terms of monetary policy, rather than anticipating a couple of hikes, which everyone expected because of sticky inflation.
47:59 I think we might just see one more hike or no hikes. I think the market's going to get more comfortable with that. And I think you're going to see a rebound in M&A and private capital deployment. Because people are waiting due to interest rates, they're waiting because of the war. And then I think we're going to see a defense — one theme that will stay the same is like a defense super cycle and geopolitical realignment.
48:20 I think countries all around the world realize that they need to invest more in defense. So I think that we're going to see that theme extend across Europe, North America, and Germany and because specifically we're asking NATO to spend more as a percentage of GDP.
48:40 And I think that you're going to see sovereign supply chains, governments subsidizing domestic production in critical sectors like critical materials like rare earths, energy storage, semiconductors. So you're going to see countries subsidizing these critical sectors. >> Okay. Excellent. Thanks so much, Jay.
48:56 Wonderful recap of special situations. Where can we follow you? >> So we provide a lot of content for free, Special Situations News on Twitter, and then Special Situations Research. I want to share that we're coming out with something really exciting. We've developed a scraping tool that scrapes all of the large databases around the world including SEC Edgar for those of you in the US and effectively highlights and finds within several thousand ISINs and CUSIPs all of the special situations and all their filings daily. Right? So
49:28 form 10s for spin-offs, 13Ds for activism, etc. And we're going to aggregate those and provide those to our members with a login. So you can do your own research and see in real time when a new special situation is announced. We have a developer team that's been building this obviously with the help of Claude.
49:46 It's really fast-tracked this process. So that's going to be available for members. But right now, we just released our August asset allocation report with several names across preferred where you can earn 8 to 10% dividends, across gold miners, across merger arb, spin-offs, value and growth.
50:07 Along with our fixed income and our safe cash allocation and we publish that on our Discord. So, you can access through Special Situations News, through the Twitter, through our Discord and through our website and our website's now going to include this new scraping resource for professional traders. >> That's a great tool. >> Thank you.
50:24 >> That's a great service. Okay, that sounds really interesting. When is this launching? >> This is launching in September. >> Okay, yeah. Keep us updated. Let's have you back on in September to talk more about that. We can actually use that tool and >> Absolutely. I'm happy to share with you guys.
50:38 >> and see how it works. That's really cool. All right, thank you Jay. We'll put the link down below to special situations. So, make sure you follow Jay there and we'll see you again soon in the fall. Take care for now. Have a great rest of your summer, Jay. >> You too, David. Take care. >> Thank you for watching.
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