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Michael Kramer from Mott Capital Management and Reading The Markets on the first half of the year - market recovery has mostly been surprising (0:35). Magnificent 7 now The Troubling 3 (2:05). Regrets from owning Amazon over Nvidia? (9:05). AI has more promise in healthcare (13:25). Painfully long Tesla (16:15). Poor liquidity in marketplace (18:50). US economy health most important, especially employment (24:00).
Transcript
Rena Sherbill: Michael Kramer from Mott Capital Management. Welcome back to Investing Experts. Always great to talk to you on Seeking Alpha. Thanks for stopping by and coming back on.
Michael Kramer: Thanks for having me. I always enjoy coming on with you. I think it's been a couple of months now.
RS: It's been a couple of months. And as this year unfolds, we're seeing that a couple of months means a lot in the world, in the markets, in our lives.
So maybe catch us up. How would you articulate for listeners what the past couple of months have meant for you and how you're thinking about things in the present moment? July 1, a brand new month, summer, almost July 4.
MK: It's a new month, and it's the first day of the second half of the year.
And the first half of the year felt like two years. So the first half of the first half, it was like everything that I thought would happen at some point happened, but in warp speed.
Obviously, the recovery in the market has been equally as surprising, I think for a lot of people just because we haven't really had any resolution to any of it. And yet we're back to where we were before it all started and in some cases, a little bit more.
But amazingly, the theme that took us higher at the end of last year and for most of last year has actually reasserted itself.
And whether or not this is a second attempt at it or the final go, I'm not really sure yet, but that is the NVIDIA (NASDAQ:NVDA) trade sort of taking over again and really pushing the market to where it is.
And, again, I tend to think that where NVIDIA goes, the S&P will follow because that's just what it seems to have been the last two years now.
RS: So what would you say about NVIDIA? What would you say about the magnificent seven? Some discussion on this podcast about the stocks in that designation, the seven stocks, whether they all deserve to be there.
What else is happening in the tech sector? Are they taking up all the air and all the capital for that matter? What are your thoughts about that side of the market?
MK: Yeah, I don't really think of it anymore as the magnificent seven. I think that that's sort of faded away. I own Apple (AAPL) for my own accounts and that certainly doesn't seem to fall into the magnificent seven anymore.
It hasn't really done much of anything since, let's say, April. I mean, certainly, Tesla (NASDAQ:TSLA) is on again, off again, but I really wouldn't put it in there.
I really think of it more as the troubling three, which is the three headed horsemen of NVIDIA, Microsoft (NASDAQ:MSFT) and Meta (META), I think are really the the drivers here.
And I own Microsoft. And I think Amazon (AMZN) and Alphabet (GOOG) (GOOGL) are two stocks that I also own that have also kind of fallen out of that troubling three group.
You can call it terrible threes or whatever, terrible twos. As an investor in them, you look at it and it's like, I own Microsoft. What am I supposed to do with this thing?
Because it's at $500 a share roughly, and I don't really know if it deserves to be there. And you're kinda back to this three stocks now instead of seven. Three stocks sort of driving this equity market higher.
And the theme that comes with it of AI, it really underscores, I think, the weaknesses in the marketplace that if you don't have these three or four stocks leading the market higher, it looks very different.
And you can really start seeing it when you look at correlations, when you look at the number of stocks that make up the top 10 weightings in the S&P 500 (SP500) are at levels that we haven't seen in in in forty or fifty years in terms of the concentration.
They're very key to the growth story of earnings growth and the margin expansion that everyone's looking for.
But at the same time, I use multiple chat agents or whatever they're called these days. ChatGPT, Gemini. I've used Perplexity, and I pay for all of them. I paid for the highest tier. I don't use Perplexity anymore. But for ChatGPT, I have the four and a half model, so I'm paying like $200 a month. And Gemini, I'm paying $130 a month right now on their three month promo.
But I can't really tell the difference between the two. ChatGPT is a little bit better than Gemini, and Gemini is okay. But at some point, is anyone gonna really be able to tell the difference?
And if they become a commoditized product, does that create this race to zero? And do we start actually seeing the cost for these things actually coming down?
So that's one of the biggest concerns I have about this group is that they're spending a lot of money on AI and I don't doubt that AI will be a very powerful force in the future.
But I also know that the market tends to overpay for things in the short term, and then in the long term, those that you make no return after a while. I lived that firsthand with Cisco (CSCO) in February, and Cisco went crazy.
And the funny thing about Cisco is that it actually did grow into the business that everyone thought it was going to grow into in 1999 and the same thing with Qualcomm (QCOM).
But the prices of the stocks in Cisco's case never got back to that high. And in Qualcomm's case, it took like twenty years or twenty five years for that to happen.
And so those are really good examples of these things can grow the way everyone expects them to grow, but that doesn't mean they'll be ever worth what they are today.
And so I kinda look at a lot of these things with some skepticism because they're spending a lot. I'm not really sure if these are gonna be products that are actually going to be able to generate the type of revenue the market's pricing in or if they really just become commoditized products.
And at some point, the value actually starts to diminish, and now they have these big expenses that they're not really gonna be able to recapture.
And with NVIDIA, I think it's just a matter of time before the competition is such that those start heading towards lower price points where the differences aren't enough.
And I think you're already starting to see that where people are gonna say, I'm not gonna spend $35,000 for a GPU from NVIDIA or for their Blackwell system and because I can rent a TPU from Google for a lot less, and you really don't get much of a performance difference.
And so that's what I would be sort of wary about right now.
I worry about them because they are spending so much right now and I worry that they're not going to be able to generate the type of profit and revenue that the market is pricing into them.
It goes back to the idea of what I was looking at when I bought Netflix (NFLX). I don't own it anymore.
But in 2016, I had bought Netflix with the idea of it being a platform and the idea of it being the one who owns all the content is really what the differentiator is.
And so everyone was talking about the streaming wars and how are all these different companies are gonna be able to come out on top. And it was very clear to me that whoever has the best content is going to win. And we're all gonna have multiple streaming platforms in our house and what we consume with.
But just like we all watch different TV channels, you watch channel two, channel four, channel seven, or whatever it is, same concept. Right now, the way I'm thinking about it is in a similar way. Whoever has the best AI agents, those are basically going to be the the winner.
RS: Who would you say that is? Is it Microsoft or you don't know?
MK: Right now, the one that I use the most and that I think is the best is ChatGPT. And I'm comparing that against some of the other ones I've tried it with. Now I know that Microsoft has a relationship. I know Copilot is ChatGPT.
So basically, I know Apple is thinking about signing with ChatGPT. They seem to be the ones right now in my experience that provides me the most insight and more importantly seems to get the information correct the most.
Because that's another problem is that a lot of these agents get a lot of data wrong. And if you don't know what you're looking for in the answer, you can get very confused very easily.
And the best part is when you get confused and you've also managed to confuse the AI agent as well, and now you're totally lost because I've done that too. Right now, it seems to me like they would be the winner.
Like, if they were a public company, I would probably wanna own them, but I already sort of do indirectly through Microsoft and possibly Apple if they decide to go with them.
RS: ChatGPT seems to have really cornered the market thus far. So you don't own NVIDIA right now, or you never have? You haven't at all?
MK: No.
RS: Do you regret that at all, or you feel like it just never spoke to you valuation wise?
MK: You know, it's funny because in October of 2022, when the market was doing its thing, I bought Amazon because I had watched Amazon for years. I think I had written for years about how it was dead money, and it really was from 2020 through 2022.
It was basically dead money. It did nothing. And even now, it's kinda back to where it was, but, if you bought it in October '22 like I did because valuations made sense, it worked out.
But I was looking at both NVIDIA and Amazon at the time, and I decided not to buy NVIDIA because of all the volatility that comes with that space.
And Amazon from a valuation perspective and the opportunities with cloud, really what what appealed to me. It's just like when I bought Microsoft in 2019 in that December 2018/January 2019 chaos that went on.
I bought Microsoft because I thought it was a pure play on cloud where Amazon came with all the garbage that AWS isn't the low cost, the low margin business of online retail.
But when Amazon came down in 2022, I think it was around $100 when I got it. It made more sense from a valuation standpoint. And I looked at NVIDIA at the time, and, obviously, there were no prospects for AI at that point.
It was sort of just the cloud, and I passed on it. And I chose to go with Amazon over NVIDIA because I thought Amazon would be the better play from that standpoint.
So I missed it. But at the same time, I don't know if I would have held it all the way to where it is today either because the valuations make no sense.
I know there's a lot of hype in it. The growth rate has obviously been incredible, but, you know, the law of large numbers typically dictates and suggests that these growth rates slow.
And when you're paying really high multiples and valuations, the returns tend to not be so great.
And so I don't really regret it. I have learned that usually the first movers in these changes aren't the ones that necessarily come out on top. Think about Yahoo or AOL in the late nineties.
They're not even around anymore. But what came from it later was Meta and Alphabet and then Amazon's second rebirth, but that's only because they changed their model.
So my feeling is that when the dust settles with this, we could very well be looking at a company that eclipses NVIDIA in that race.
And so I'm just keeping my eyes open right now for the next opportunity and how AI will evolve into our daily lives.
And I personally have been planting seeds in my head and in my portfolio with how AI is going to be used in healthcare and drug discovery.
And that to me seems much more promising and a much bigger deal than how an AI chatbot is gonna be able to answer a phone call or replace a programmer.
I think AI has a lot more promise in things like MRI imaging. I bought Illumina (ILMN) for myself in my portfolio in June of 2024 because of AI.
If you think about AI, imagine being able to get a blood test and having this machine be able to, from a detection of blood or a detection of an image, be able to determine very quickly whether or not you have a risk of getting cancer because it's able to process and go through this information so quickly.
I mean, that's obviously years away, but that's the way that I'm already thinking about it.
RS: Late last year, Kirk Spano was on talking about how Pfizer's (PFE) his favorite AI stock. And I think that left a lot of investors curious. But to your point, it seems more and more evident as the days and months pass on.
MK: Yeah. I mean, especially when you start thinking about drug discovery. We might be able to do things in in months that used to take years.
And so I'm trying to think about things in those terms. I bought Illumina like I said, but I've also been looking at things like GE Healthcare (GEHC). It's not really an exciting company.
It's not really exciting that it used to be sort of the crown jewel of (GE), but that's broken away. And now everyone cares about this GE Verona, which is, I think, that old Alstom unit that they couldn't get rid of.
And I think that GE Healthcare, you go get an MRI, it's like you're going back forty years in technology in some ways. I know theire machines have advanced, but imagine what they could do in the future.
RS: Yeah. I just hope nobody's doing at home surgeries, consulting, ChatGPT for instruction.
MK: And that's the funny thing. I bought Intuitive Surgical (ISRGO years ago, in 2022. The same concept of robotics and surgeries.
At the time, I was getting a back surgery. I realized this is something that is going to be super important, and obviously, Intuitive Surgical has been ahead of their time.
But, imagine what a company like that will be able to do with AI someday down the road. These are things that I think will matter much more. And those are the types of things I'm trying to be patient for and wait to see them develop.
RS: So speaking of patience, you mentioned Tesla (TSLA) as part of the Magnificent Seven conversation. We saw a pretty big drop for them today, Tuesday, July 1. Anything to share about Tesla? Anything you would share with investors there?
MK: So I was really early. I used to own Tesla, and I had bought it in February. And I painfully held it until December of '21.
I say painfully. Obviously, I made a lot of money over the seven years, but it was not a fun experience to own it. Many many 50% declines during that time. A lot of nervousness even when it was going parabolic to the upside.
I think the thing that a lot of people have always gotten wrong about Tesla is that everyone thought that EV was going to be their competitors when really the competitors were already on the road, and that was traditional ICE engines.
Because Tesla was sort of a luxury brand, they weren't competing with a Chevy Bolt or whatever it was called that's no longer around. They were competing with a Mercedes S class. And I think that people just missed that point that whole time. But I sold it in '22 because I realized that the handwriting was on the wall.
It could only grow at a 50% CAGR like they promised for so many years until they were actually selling more cars than were being produced in the whole world.
And so I realized that they had to cut that growth rate at some point in time.
And once they did, that was going to be the end of the growth story. And I also realized that Tesla has became a fad. It was basically another COVID fad that everyone ran out and got Teslas because they were cool.
Now we're on the other side of that. It's been around for a while. The cars really haven't changed very much. I used to think that it wasn't just a car company. It was a battery storage company and all this other stuff.
And all that stuff kinda came and went and nothing ever happened with it. I was an investor in it long enough to remember when we were supposed to have robotaxis in 2020 and that never happened.
Here we are 2025. We're still trying to get them. I mean, full self driving was supposed to be around many years ago already. We're still really waiting for that.
So I found that it was always a company that overpromised, underdelivered. And I think for the most part, the auto industry has moved on in some degree.
RS: And what would you say about the markets in general? We've hit some record highs. We've gone back after the record highs. What would you say about the S&P, Nasdaq (NASDAQ:NDAQ) broadly speaking right now?
MK: Like we were talking about in the beginning, I think they're more so a reflection of the troubling three because I think without NVIDIA going back to an all time high, I don't think the S&P is at an all time high.
I think they're also a function of really poor liquidity, in the marketplace, meaning that there's just not a lot of buyers and sellers in the market. Well, I should really say there aren't a lot of sellers in the market.
And so what you're seeing is a lot of the the gains or the big gains we've had have really come on those overnight trading sessions, and they're not really coming during the day.
And it's not to say that that's not normal because it does happen quite a bit. But if you also look at volume levels, they've been rather depressed. So I think there's two parts going on right here.
I think you have a lot of speculation again in NVIDIA and that class of stocks. And I think there's also just very bad liquidity conditions in the market that are overstating the moves we're seeing.
Because when you look at a lot of other factors, like, forget about valuations from a perspective of timing. You can't use them from that perspective. But if you use valuations as a measure of complacency, the market today is more expensive than it was in February because earnings have come down, and the price has gone beyond where it was.
And so in my view, the market is actually more complacent right now than where it was three or four months ago.
And when you look at measures of volatility, those have also come down really sharply as well despite the fact that next week, we could be back to a mini liberation type of time.
I say that because I always try to, when I read the news, I don't read US news. I read foreign news because I wanna know what they're saying about the US. And when you read those periodicals, like, I read Nikkei Asia, I read Digitimes, I read the Financial Times. I read all this stuff outside of the US.
And if you actually read those, they're like, there is no Japan trade deal coming because they want tariffs completely removed. If you read about the EU, it doesn't really sound like there's gonna be an EU trade deal any time soon.
It doesn't sound to me that in Taiwan, it certainly doesn't sound like there's a trade deal brewing. And then on top of it, if you look at the currencies, the Taiwan dollar has strengthened materially.
Like, huge moves in the Taiwan dollar in a very short period of time. The Korean won has strengthened materially. The British pound has strengthened materially.
There are the yen, the euro, they're all strengthening materially. It's like the currency market is preparing for more tariff pain while the equity market is sort of living in usual bubble-like fantasy land.
The guy that you listen to Bessent and you listen to Hassett, you listen to Lutnick. Trade deals are coming imminently every week, but, yeah, we haven't really had one. And once you read again the other side of the equation, there are no trade deals coming because they don't they want the tariffs completely removed.
I sit here and watch the news cycle. President Trump will say, oh, we're gonna be nice to China in an interview. And the next thing you know, the S&P 500 gaps up 1% on 30,000 contracts of S&P 500 futures volumes at 6 at night.
And it's like, you gotta be joking me. And then the news the next day, everyone's so happy because President Trump in the meantime, he was saying it sarcastically. He didn't really mean what he was saying. In a good sense, he was saying, like, yeah, we're gonna be nice to China.
As if to say, what do you want from us? The whole thing is just, I need a vacation.
RS: It's hard to follow along. It's hard to follow along a lot of the days. Hard to keep your sanity for sure. A lot a lot going on, a lot to a lot to parse through, which, by the way, for those wanting to get more insight from Michael, Michael runs an Investing Group called Reading the Markets on Seeking Alpha.
And for those who don't know, should, that we're having a site wide sale 20% off, including Michael's Investing Group. So I would encourage listeners to take advantage of that.
As I mentioned at the top, the free articles that you write on Seeking Alpha is under Mott Capital Management, and you recently wrote about the bond market. You just talked about currencies a little bit.
I'm curious. I know you also cover options on Reading the Markets. What would you say is the most important thing you think for investors to keep in mind right now as they as they try and capture alpha as best they can?
MK: It's really complicated, I think, because when you look at everything, it's so intertwined.
But I think right now, the most important thing is really the the health of the US economy, Because if the economy really begins to slip here and you really start seeing the unemployment rate rise, I think there's a real risk that the yield curve, that bond yields will fall dramatically.
And if bond yields fall dramatically, that's going to lead to further dollar depreciation, and that's gonna potentially really weigh on US equities.
Because if you look at some of the interest rate differentials, specifically the US 10 and the Japanese ten year, it's like sitting on a ledge.
And it's tested at two or three times already, and it could continue to just hang around.
The data can just stay in a place where we don't really get a breakdown in rates. But if for some reason you start seeing the unemployment rates are creeping up, 4.3, 4.4, 4.5 and the market gets a sense that it could be heading to 5%, I think that that's gonna really lead to some serious yield curve steepening.
That's gonna lead to these interest rate differentials really moving lower, and I think that's gonna lead to a much more significant unwind of dollar positioning.
That is a big concern of mine, especially when it comes to tech. Once interest rate differentials start to break down, I think you can see a really meaningful depreciation of the US dollar.
If the US dollar begins to go, I think more specifically, you could really start seeing carry trades. The yen carry trade really begin to unwind.
And that yen carry trade, I think, is very much tied to technology type names, NVIDIA, Microsoft, (XLK). If you overlay the yen/dollar to any of those stocks, the similarities in the charts are are really startling.
A lot of times when I'm writing these stories that I provide for the premium side of the website, people will say, oh, he's just being bearish. What I'm really doing is providing an opportunity for people to understand what the risk in the marketplace is, which is something that people really don't write about.
The thing is that they can either happen or it may not happen. But the fact is, again, we are at the same point in time where that is a real risk. I don't know how many times it happens before that risk becomes a reality.
And that's why I think the unemployment rate right now is probably the key to that because I think that's the one thing that the market is banking on that as long as the unemployment rate stays low, The US consumer can continue to spend.
But if the unemployment rate starts creeping up, that spending is gonna start slowing significantly, and that's gonna really had a major impact on the health of the economy.
RS: So that's the data you're most paying attention to in these coming months?
MK: Well, yeah, this week. And, really, every every week is the continuing claims number. That will lead the unemployment rate higher.
So if that continuing claims number goes 2,000,000, 2,200,000, continues to go up, that's going to steepen the yield curve, and that's gonna also be your signal that the unemployment rate's gonna start to rise, and the market's gonna respond to that, I would think.
RS: Exactly. There's no certainty here. It's just speculation. Educated speculation.
MK: I always tell my subscribers it's about the odds. I'm not gonna be 100% right, but if I can shift those odds to 60 or 70%, I'm gonna do a lot better than at 40 than at 50/50.
And so if I can find a relationship in the market that can shift those odds just a little bit more in my favor, that's better than before.
That's all I'm trying to do is find the odds knowing that they're not gonna work all the time. But when they do work, the reward can be rather meaningful or the protection of avoiding the situation.
Trying to present those details, I think are more valuable than whether or not they actually happen because at least you know what to look for.
