What Worked on Wall Street (EP.40)

Episode Summary

Executive Summary: The episode centers on a fast-moving debate about whether sharp stock selloffs in Facebook and Twitter were buying opportunities or warning signs, using them to explore momentum vs. value, market overreaction, and the difficulty of timing crashes. The hosts also discuss generational financial pressures, trend-following hedge funds losing edge, ETF fee competition, housing and GDP data, contrarian indicators, and listener questions on student loans, 401(k) borrowing, and mean reversion.

Main Topics: Facebook and Twitter earnings selloffs (Priority: 5/5): The hosts react to Facebook's historic one-day drop and Twitter's user decline, debating whether steep declines after earnings are attractive entry points or signs that growth stories have broken down. Momentum vs. value and falling knives (Priority: 5/5): They contrast instinctive bargain-hunting after crashes with the discipline of waiting for confirmation, concluding that short-term trading based on fundamentals is risky and that growth-stock corrections can be deceptive. Generational finances and the cost of adulthood (Priority: 4/5): Using a chart comparing 1977 and 2016, they discuss how education, debt, marriage, housing, and single-income households have made life harder for 30-year-olds today, while noting technology creates new opportunities. Trend-following hedge funds and competition (Priority: 4/5): They discuss Winton Capital founder David Harding's view that trend following has become less effective as more capital chases the same signals, especially in crowded short-term strategies. ETF fee compression and State Street's position (Priority: 4/5): The conversation covers the race to zero in ETF expenses, Schwab and Vanguard's competitive advantage, and State Street's loss of market share despite owning SPY. Contrarian indicators and media narratives (Priority: 3/5): They argue that celebrity-driven market headlines and 'top' signals are often overread, though some industry-specific signals and product launches may still offer useful context. Housing, GDP, and corporate earnings (Priority: 3/5): They weigh mixed macro data: strong Q2 GDP and corporate earnings versus signs of softening in housing, especially at the high end, while noting the recovery's unusual, skepticism-filled tone.

Key Arguments: A 20%+ one-day drop in a mega-cap stock is not automatically a buying opportunity; growth deceleration and changed expectations can justify caution. Market crashes often reflect how much a stock has already risen, not just a sudden change in fundamentals. Twitter's weak user growth mattered more to investors than its improving profitability because stock prices are driven by expectations. Being 30 is structurally harder today due to higher tuition, more debt, weaker household formation, and higher living costs, though tech lowers barriers to entrepreneurship. Trend-following can lose edge when too many sophisticated players compete on similar signals and shorter time horizons. ETF investors are behaving more rationally on fees, but basis-point competition matters most when money is shifting from expensive active products. State Street's SPY has lost share because cheaper nearly identical funds from rivals are winning on cost, and the firm needs a stronger distribution/advisor strategy. Contrarian media headlines can be entertaining but are unreliable as timing tools because the information fire hose is too noisy. Mean reversion should be understood directionally, not as a precise forecast to some fixed historical average. Listener financial planning should balance multiple goals—debt payoff, emergency savings, retirement, and college funding—instead of all-or-nothing prioritization.

Data Points: Facebook one-day market value decline: Largest dollar decline in single-stock history; stock fell about 19-20% in one day - Reaction to Facebook's earnings disappointment Facebook five-year annualized return: 38.75% - Despite the drop, long-term performance remained exceptional Facebook three-year annualized return: 23% per year - Compared with about 13% for the S&P 500 Facebook year-to-date performance: Down about 1-2% YTD - Showed how recent the decline was relative to prior gains Twitter monthly active users: 335 million - Reported a decline of 1 million from three months earlier Twitter quarterly revenue growth: 24% - Revenue climbed to about $700 million Twitter quarterly profits: Third consecutive quarter of profits - A notable improvement after years of losses People living with spouse in 1975: 57% of ages 18-34 - Used to illustrate household formation changes People living with partner in 1990: 50% - Continuation of family-structure trend People living in parents' basement in 2016: Almost one-third - Used as shorthand for delayed independence Median net worth for millennials in 2016: $12,300 - Pew generational wealth comparison Survey respondents claiming above-average intelligence: 65% - Grand Rapids Federal Reserve survey referenced by the hosts Men claiming above-average intelligence: 70% - Part of the same survey Women claiming above-average intelligence: 60% - Part of the same survey Perfect days per year: 15 - U.S. Highbush Blueberry Council survey on happiness and ideal days Ideal wake-up time in survey: 8:15 AM - Part of the 'perfect day' description Ideal temperature in survey: 74 degrees - Part of the 'perfect day' description Vanguard ETF expense ratio: 0.07% asset-weighted - Referenced in the ETF.com fee-compression discussion Schwab flow share: 13% of flows with 3% of assets - Illustrates how lower fees attract new money State Street ETF market share in 1999: 75% - Early ETF dominance State Street ETF market share today: 17% - Shows erosion of first-mover advantage SPY assets: $269 billion - Large flagship ETF still generating significant assets SPY withdrawals in past year: $4.2 billion - Despite being nearly identical to cheaper competing funds Comparable funds' inflows: $26 billion combined - BlackRock and Vanguard funds gained assets while SPY lost them Q2 GDP annualized growth: 4.1% - Highest since 2014 Existing home sales change: Fell for a third straight month in June - One sign of housing slowdown Home price increase in May: 0.4% YoY - Smallest annual gain since early 2017 S&P 500 total return index: Hit a new all-time high - Despite macro concerns and housing softness S&P 500 earnings beat rate: 76% beat EPS; 67% beat sales; 58% beat both - Bank of America summary of Q2 earnings season Corporate EPS growth estimate: 24% YoY - Driving continued strength in corporate America Student loan interest rate: About 5-6% for current borrowers - Used in listener Q&A about debt repayment vs. saving

Pivotal Quotes: "It's time to get in and catch this falling knife." — Michael Batnick: His initial instinct after Facebook's after-hours collapse "worked." — David Harding (via quoted article): The shift from saying trend following 'works' to 'worked' in Winton's reevaluation "people are arguing over, and it was more the political angle of trying to ascribe certain growth rates to presidents" — Ben Carlson: Commenting on how GDP data gets overinterpreted and politicized

Implications: Listeners should treat sharp market declines, contrarian headlines, and simple narratives with caution. The episode argues for process over instinct: diversify goals, be skeptical of easy indicators, and recognize that competition and fee pressure are reshaping investing.