WEBVTT - Why the Stock Market Might Be at Peak Concentration Risk 0:00:00.040 --> 0:00:03.720 Hey, they're Odd Lots listeners. We have a very special announcement. 0:00:04.080 --> 0:00:07.200 Joe and I are hosting our annual Front Lots Pub 0:00:07.320 --> 0:00:11.319 Quiz on Thursday, February thirteenth in New York City, and 0:00:11.440 --> 0:00:15.360 it's gonna feature some very special guests and prizes. So 0:00:15.440 --> 0:00:18.959 come test your wits in finance, markets and economics for 0:00:19.120 --> 0:00:23.159 a chance to win the ultimate Odd Lots glory and 0:00:23.280 --> 0:00:26.360 hang out with your fellow listeners. Tickets are on sale 0:00:26.440 --> 0:00:30.480 now at events dot Bloomberg Live dot com, slash Odlots 0:00:30.640 --> 0:00:33.600 Pub Trivia. You can also find links on our Twitter 0:00:33.640 --> 0:00:36.199 feeds or in the newsletter, and you can find the 0:00:36.240 --> 0:00:38.680 link also on our show notes. We hope to see 0:00:38.720 --> 0:00:39.080 you there. 0:00:42.320 --> 0:00:57.520 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:58.000 --> 0:01:01.360 Hello and welcome to another episode of the All Thoughts Podcast. 0:01:01.520 --> 0:01:02.920 I'm Tracy Alloway. 0:01:02.640 --> 0:01:03.840 And I'm Joe Wisenthal. 0:01:04.319 --> 0:01:06.759 Joe, do you remember when you first heard the term 0:01:07.160 --> 0:01:07.959 mag seven? 0:01:08.319 --> 0:01:11.319 You know, I don't if I'm being honest, but you 0:01:11.400 --> 0:01:15.240 know these achronyms that for big tech stocks, like they 0:01:15.319 --> 0:01:17.800 kind of you know, people used to talk about Fang, right. 0:01:17.920 --> 0:01:20.080 I know, I was just thinking that, like, when did 0:01:20.319 --> 0:01:24.560 the handoff from Fang to mag seven actually happen. 0:01:24.440 --> 0:01:26.560 We need to do one of those like Google trends 0:01:26.720 --> 0:01:29.840 and gram things. That's a good question because and then 0:01:29.880 --> 0:01:33.920 there was like fang plus and then fam and but 0:01:34.000 --> 0:01:35.600 they're all kind of the same thing. It's just big 0:01:35.640 --> 0:01:36.760 tech stocks, right. 0:01:37.160 --> 0:01:41.400 So the terminology the acronyms might change, but I think 0:01:42.040 --> 0:01:44.360 the subject is always kind of the same and the 0:01:44.440 --> 0:01:47.200 concern is always the same. It's this idea that there 0:01:47.319 --> 0:01:51.320 is like a handful of big companies, usually tech stocks, 0:01:51.640 --> 0:01:53.920 that are driving the entire market. 0:01:54.680 --> 0:01:58.000 Yeah, and it drives people crazy, right, they're so big, 0:01:58.600 --> 0:02:01.240 and they've grown so much, stocks have done so well 0:02:01.280 --> 0:02:04.240 over the years, and all these old strategies of like 0:02:04.360 --> 0:02:06.920 oh we're gonna like buy cheap or buy cheap low 0:02:06.920 --> 0:02:09.600 book value, you know, price to book and all these 0:02:09.960 --> 0:02:14.519 traditional investing patterns. It never mean reverts for years and 0:02:14.600 --> 0:02:17.239 years and years, except for like five minutes in twenty 0:02:17.280 --> 0:02:20.560 twenty two. They just go straight up. And the only 0:02:20.680 --> 0:02:22.600 test of whether you're a good investor or not is 0:02:22.639 --> 0:02:24.560 whether you're over whether you bought ten Yeah. 0:02:24.440 --> 0:02:25.040 That's it, is it? 0:02:25.480 --> 0:02:29.280 Really? That really is the alpha now is But you know, 0:02:29.360 --> 0:02:32.200 you see these numbers thrown around like I think Goldman 0:02:32.320 --> 0:02:36.000 Sachs said that the top ten stocks now account for 0:02:36.120 --> 0:02:38.720 something like thirty eight percent of the S and P 0:02:38.840 --> 0:02:41.919 five hundred, which is a record, yeah, and seems quite 0:02:41.919 --> 0:02:43.919 a lot on the face of it. And I saw 0:02:43.919 --> 0:02:47.600 another number out there saying twenty six stocks now account 0:02:47.639 --> 0:02:50.080 for half of the entire value of the S and 0:02:50.080 --> 0:02:53.080 P five hundred. So I think it brings up a 0:02:53.120 --> 0:02:58.520 bunch of interesting questions. How bad is the concentration? Is 0:02:58.560 --> 0:03:02.120 it intrinsically bad in and of itself? Is it actually 0:03:02.160 --> 0:03:02.840 that risky? 0:03:03.080 --> 0:03:03.640 Yeah? 0:03:03.680 --> 0:03:08.359 And also how are financial professionals and the market itself 0:03:08.480 --> 0:03:11.720 actually reacting to this concentration risk? 0:03:12.040 --> 0:03:13.600 So I think we should talk about it totally. 0:03:13.600 --> 0:03:15.880 You know, I look at myself in the mirror, and 0:03:16.200 --> 0:03:17.960 I say to myself. 0:03:17.600 --> 0:03:19.600 Do you point at yourself like that meme? 0:03:19.919 --> 0:03:22.080 I And some days I point and say you're a 0:03:22.120 --> 0:03:24.640 good because you know, I'm just like a boring index 0:03:24.680 --> 0:03:27.480 fund investor for my retirement, you know, So I point say, oh, 0:03:27.520 --> 0:03:29.920 you're a good investor because you've been really long tech. 0:03:30.000 --> 0:03:32.240 And then I and then on other days they wake 0:03:32.320 --> 0:03:34.760 up and say, oh, you are really heavily exposed to 0:03:34.840 --> 0:03:37.840 twenty six stocks, And so you know, it's like to 0:03:38.080 --> 0:03:40.400 you know, glass half full. It's like good, but also 0:03:40.480 --> 0:03:41.520 makes me a little anxious. 0:03:41.560 --> 0:03:43.920 You shouldn't take credit. You should give that credit to 0:03:44.440 --> 0:03:47.320 SMP and thank you, and then when the market collapses 0:03:47.360 --> 0:03:48.200 you should blame them. 0:03:48.400 --> 0:03:48.720 I do. 0:03:48.880 --> 0:03:52.240 I say thank you to the wonderful fund managers at SMP. 0:03:52.920 --> 0:03:56.240 I only wish you hadn't. You know, every once in 0:03:56.280 --> 0:03:57.760 a while they have a dud. It's like why did 0:03:57.760 --> 0:03:58.800 you pick that one anyway? 0:03:58.880 --> 0:03:59.920 Or why didn't you include? 0:04:00.560 --> 0:04:00.760 Yeah? 0:04:00.960 --> 0:04:03.680 Kay, exactly, all right, Well, without further ado, we do, 0:04:03.760 --> 0:04:06.840 in fact have the perfect guest for this topic, someone 0:04:06.840 --> 0:04:09.120 that I've wanted to speak to for a long time 0:04:09.280 --> 0:04:11.240 and I can't believe we haven't had him on the 0:04:11.280 --> 0:04:15.200 podcast before major oversight on our part. We're going to 0:04:15.280 --> 0:04:17.800 be speaking with Kevin Muhror. He is, of course the 0:04:18.120 --> 0:04:22.799 Macro tourist and a long time voice on finn Twit 0:04:23.200 --> 0:04:26.320 and writing on his blog as well. So Kevin, thank 0:04:26.320 --> 0:04:28.159 you so much for coming on all thoughts. 0:04:28.080 --> 0:04:29.800 It's great to be here. Thanks Joe and Tracy. 0:04:30.520 --> 0:04:33.480 Maybe just to begin with, it's the first time you're 0:04:33.520 --> 0:04:36.200 on the show. I've always sort of known you as 0:04:36.320 --> 0:04:40.000 this voice that's hanging around in the finance BLOGI sphere. 0:04:40.360 --> 0:04:42.799 But what's your background? 0:04:42.880 --> 0:04:47.480 So I was the equity derivative institutional equity derivtive trader 0:04:47.520 --> 0:04:50.840 at RBC Dominion Securities in the nineties. I was kind 0:04:50.839 --> 0:04:55.039 of at the forefront of the technological boom and the 0:04:55.160 --> 0:04:58.120 automated trading and the index trading and the taking off 0:04:58.160 --> 0:05:01.680 of all these index products. And then in two thousand 0:05:01.800 --> 0:05:03.720 I actually went off on my own and I thought, maybe, 0:05:03.760 --> 0:05:05.200 you know, I'll go work for a hedge fund. And 0:05:05.520 --> 0:05:08.040 I thought, well, at the same time, I could go 0:05:08.080 --> 0:05:10.200 and trade for myself for a little bit and see 0:05:10.240 --> 0:05:12.839 how that goes. And that's kind of twenty five years 0:05:12.920 --> 0:05:14.320 later and I'm still doing it. 0:05:14.440 --> 0:05:16.640 You write the macro Tourist, what's your goal? What do 0:05:16.720 --> 0:05:20.640 you for those I we're both big fans of your writing, 0:05:20.760 --> 0:05:23.560 But what do you what do you like to write about? 0:05:23.839 --> 0:05:25.880 What's your sort of goal with your writing? 0:05:26.040 --> 0:05:29.160 Well, Joe, it originally started off as a diary, and 0:05:29.600 --> 0:05:31.440 I just kind of good traders, you're supposed to keep 0:05:31.440 --> 0:05:33.480 a diary, and and I would start writing things and 0:05:33.520 --> 0:05:35.120 then people would pull me up and ask me what 0:05:35.160 --> 0:05:37.120 I thought of the market, and I would send it 0:05:37.160 --> 0:05:39.240 off into the mot just so well, here's what I 0:05:39.240 --> 0:05:42.159 wrote my diary. Eventually they started to ask often enough 0:05:42.160 --> 0:05:44.280 that we just started to put it up on the net, 0:05:44.360 --> 0:05:47.839 and then it took off from there, and from there 0:05:48.040 --> 0:05:50.640 I ended up going and actually started my podcast and 0:05:50.680 --> 0:05:53.560 meeting all sorts of people. And one of the kind 0:05:53.600 --> 0:05:57.760 of just great parts about being on the podcast is 0:05:57.760 --> 0:05:59.880 the fabulous people I got to meet along the way. 0:05:59.880 --> 0:06:02.200 I meet people like Jim Lightner and I've had Mike 0:06:02.279 --> 0:06:05.640 Masters on the podcast, and those people are market wizards. 0:06:05.680 --> 0:06:07.760 They're terrific, and I get to share ideas with them, 0:06:07.800 --> 0:06:09.880 and it's just that considers myself one of the luckiest 0:06:09.880 --> 0:06:10.599 guys in the world. 0:06:10.720 --> 0:06:14.039 So let's get to the topic at hand. Then give 0:06:14.120 --> 0:06:18.760 us some context around concentration risk in something like the 0:06:18.800 --> 0:06:20.680 S and P five hundred right now. I threw out 0:06:20.720 --> 0:06:26.800 some numbers earlier, But how extensive is this concentration and 0:06:27.000 --> 0:06:28.360 should we be worried about it? 0:06:29.480 --> 0:06:32.200 Well, Tracy, one of the things that people will kind 0:06:32.200 --> 0:06:34.120 of push back on when you say that the US 0:06:34.200 --> 0:06:37.159 has become more concentrated is they'll say things like, oh, 0:06:37.200 --> 0:06:39.919 but if you go look at other indexes around the world, 0:06:39.920 --> 0:06:43.680 they're also very concentrated. And that's absolutely correct, There's no 0:06:43.720 --> 0:06:47.920 doubt about it. This is something that is experienced in Canada. 0:06:48.640 --> 0:06:50.920 As I mentioned, I'm a Canadian and I was on 0:06:50.960 --> 0:06:54.280 the index desk at a time when Noortel was actually 0:06:54.400 --> 0:06:56.920 thirty five percent of the entire index. 0:06:57.000 --> 0:06:57.279 Wow. 0:06:57.680 --> 0:06:59.320 So if you think that you guys are we're having 0:06:59.400 --> 0:07:02.599 troubled dealer with this, now, just imagine having thirty five 0:07:02.640 --> 0:07:05.680 percent of the index being one stock. It was actually 0:07:05.680 --> 0:07:07.680 even worse than that because we had kind of a 0:07:07.760 --> 0:07:11.920 palm at triple M situation where Bell Canada was one 0:07:11.960 --> 0:07:14.600 of our next biggest stocks and it main holding with 0:07:14.680 --> 0:07:17.480 all of its Nortel holding. So it ended up being 0:07:17.480 --> 0:07:20.840 that the index managers were stuck because if you think 0:07:20.880 --> 0:07:23.760 about it from a fiduciary point of view, it doesn't 0:07:23.800 --> 0:07:28.000 make sense to have fifty percent of your portfolio, you know, 0:07:28.200 --> 0:07:31.680 exposed to one stock. It's risky. And so one of 0:07:31.680 --> 0:07:33.600 the things that I well that I'm hearing now when 0:07:33.640 --> 0:07:36.680 you bring up the problems about concentration risk in the 0:07:36.760 --> 0:07:39.200 US is they'll say, oh, no, but don't worry. It's 0:07:39.240 --> 0:07:41.360 actually much better than the rest of the world. And 0:07:41.400 --> 0:07:43.920 I won't deny that for a second. But isn't that 0:07:44.040 --> 0:07:47.880 kind of like saying, you know, my Mercedes is now 0:07:47.960 --> 0:07:51.520 using plastic knobs, but don't worry, the Honda uses plastic 0:07:51.600 --> 0:07:54.560 knobs too. Part of the reason that we've been that 0:07:54.600 --> 0:07:57.400 investors have been attracted to the US is that it 0:07:57.480 --> 0:08:02.480 is a diversified basket of many stocks. And just think 0:08:02.520 --> 0:08:05.480 about you know, Warren Buffett, Warren Buffett tells you can 0:08:05.480 --> 0:08:07.160 buy the S and P five hundred, you can sleep 0:08:07.200 --> 0:08:09.600 at night. But if you go and talk to investment 0:08:09.600 --> 0:08:12.880 advisors around the world and you ask them, do you 0:08:12.880 --> 0:08:17.200 think your clients really truly know what's underlying that basket? 0:08:17.520 --> 0:08:19.280 I think they most of them would say they would 0:08:19.320 --> 0:08:22.640 assume that it's it's roughly equal weight, and they would 0:08:22.680 --> 0:08:25.320 be shocked to learn that, you know, Microsoft and Navidia 0:08:25.400 --> 0:08:28.400 Apple are each almost seven percent of their basket for 0:08:28.440 --> 0:08:31.280 a total of twenty one percent. And so it's ends 0:08:31.360 --> 0:08:35.040 up being it's a worrisome kind of new development in 0:08:35.080 --> 0:08:38.080 the US. And I don't buy the argument that just 0:08:38.120 --> 0:08:41.480 because other countries are more, you know, it's concentrated, that 0:08:41.520 --> 0:08:42.600 we shouldn't worry about. 0:08:42.440 --> 0:08:44.840 It in the US. And all you have to do 0:08:44.920 --> 0:08:45.760 is look you, Teresa. 0:08:45.800 --> 0:08:49.240 You mentioned that Goldman Sachs stat and they have another 0:08:49.320 --> 0:08:51.400 one that they published and they went back, they looked 0:08:51.400 --> 0:08:56.000 at concentration risk throughout the last century, and if you 0:08:56.080 --> 0:08:59.000 look at it, we are now just as concentrated as 0:08:59.000 --> 0:09:01.560 we were right in front of the Great Depression in 0:09:01.640 --> 0:09:05.280 nineteen twenty nine, in the nifty to fifty in the 0:09:05.320 --> 0:09:09.520 early seventies, and the dot com bubble in the late nineties. Well, 0:09:09.559 --> 0:09:12.160 all those times were not good times to buy stocks 0:09:12.200 --> 0:09:16.679 for forward returns. So increasingly I think that we need 0:09:16.720 --> 0:09:19.880 to be aware that this is a risk, and there's 0:09:19.960 --> 0:09:22.160 more and more conversation happening around that. 0:09:37.720 --> 0:09:41.840 I'm happy that in Nvidia has been seven percent or 0:09:41.880 --> 0:09:45.240 somewhere south of that. In my portfolio, I didn't even 0:09:45.280 --> 0:09:47.880 have to do anything, and I made a big allocation 0:09:48.160 --> 0:09:51.440 to one of the best performing stocks in the world. 0:09:51.600 --> 0:09:54.360 And not only that, I mean, I take your point 0:09:54.360 --> 0:10:00.200 about concentration and et cetera, and obviously very alarming. These 0:10:00.200 --> 0:10:03.160 are also account for a huge share of the actual 0:10:03.400 --> 0:10:05.880 earnings too, So I mean, you know, there was a 0:10:05.880 --> 0:10:09.880 lot of concentration in ninety nine, two thousandth tech, but 0:10:09.960 --> 0:10:12.440 a lot of those companies weren't really making that much money. 0:10:12.960 --> 0:10:14.800 These companies are earnings juggernauts. 0:10:15.800 --> 0:10:18.320 Well, no doubt, you're absolutely correct, Joe. And that's kind 0:10:18.360 --> 0:10:21.679 of the pushback to this argument that we're concentrated world. 0:10:21.679 --> 0:10:24.959 They'll say, oh, it's bang seven. It's a wide variety 0:10:25.000 --> 0:10:28.480 of different companies that do with different things. It's not 0:10:28.520 --> 0:10:31.240 like it's all one industry. And not only that, the 0:10:31.320 --> 0:10:35.200 valuations aren't as crazy as they might seem, no doubt 0:10:35.240 --> 0:10:38.040 about it. You can make that argument. But let's just 0:10:38.160 --> 0:10:41.920 imagine tomorrow that the AI bubble doesn't live up to 0:10:42.000 --> 0:10:44.680 its hype. Let's imagine that all of a sudden we 0:10:44.800 --> 0:10:49.839 have some sort of earning surprise and these stocks get had. 0:10:50.240 --> 0:10:51.920 It's not that hard to imagine. We went through it 0:10:51.920 --> 0:10:56.160 in twenty twenty two. So if that occurs, I think 0:10:56.160 --> 0:10:59.920 that people will be quite shocked at how they're supposedly 0:11:00.120 --> 0:11:06.560 diversified basket of stocks performs. And more importantly than that 0:11:07.000 --> 0:11:09.120 is that we can sit around and we can debate 0:11:09.320 --> 0:11:13.079 whether you should own this or whether this is prudent. 0:11:13.679 --> 0:11:17.800 But more and more fiduciaries, more and more risk managers, 0:11:17.840 --> 0:11:20.920 more and more institutional portfolio managers are looking at it. 0:11:20.920 --> 0:11:24.079 And saying this is dangerous and they're looking for ways 0:11:24.120 --> 0:11:27.240 around it. And one of the things that many of 0:11:27.240 --> 0:11:30.840 these managers are bumping up against is that although the 0:11:31.000 --> 0:11:34.840 S and P five hundred is actually in line with 0:11:34.920 --> 0:11:37.680 this following rule of this thing called the twenty five 0:11:38.040 --> 0:11:41.160 five point fifty, which means that no one stock can 0:11:41.200 --> 0:11:44.680 have more than twenty five percent and the five stock 0:11:44.840 --> 0:11:47.559 the biggest stocks that are over five percent can't add 0:11:47.640 --> 0:11:50.840 up to more than fifty percent of your portfolio. That's 0:11:50.880 --> 0:11:53.560 an IRS rule that is called the twenty five five 0:11:53.600 --> 0:11:56.600 to fifty rule. There's no problem with the SMP five 0:11:56.720 --> 0:12:00.120 hundred currently with that rule, but there is some thing 0:12:00.200 --> 0:12:04.800 called the Russell one thousand growth index, and increasingly more 0:12:04.840 --> 0:12:10.000 and more institutional managers are benched to that index. And 0:12:10.040 --> 0:12:13.800 what we're seeing is within that index, we're bumping up 0:12:13.800 --> 0:12:18.319 against that. And what's happened now is that Russell's realized 0:12:18.360 --> 0:12:21.280 that this isn't just kind of a fiduciary point of view, 0:12:21.320 --> 0:12:24.240 this is actually an IRS issue in terms of that 0:12:24.280 --> 0:12:27.040 they cannot go over those things. So what we're seeing 0:12:27.120 --> 0:12:30.959 is there's changes in the rules coming to make sure 0:12:31.000 --> 0:12:32.959 that these indexes capped. 0:12:34.400 --> 0:12:39.720 By the way Tracy Kevin mentioning how exposed everyone is 0:12:39.760 --> 0:12:42.760 to AI beta, so to speak, And I just want 0:12:42.800 --> 0:12:45.880 to give a plug. We had a really good contribution 0:12:45.960 --> 0:12:49.400 in the odd Lot's Newsletter from a Skanda recently on 0:12:49.640 --> 0:12:52.679 this whole thing. There's just both in stocks and the 0:12:52.800 --> 0:12:56.600 economy and the real economy. There's just this like we 0:12:56.679 --> 0:12:58.679 get they better get this AI thing right. 0:12:59.200 --> 0:13:03.840 Yeah, seems kind of important. Kevin. You mentioned finance professionals 0:13:04.000 --> 0:13:08.280 reacting to this concentration risk. So okay, maybe your average 0:13:08.480 --> 0:13:11.680 mom and pop retail investor doesn't realize that the S 0:13:11.720 --> 0:13:14.760 and P five hundred is not you know, five hundred 0:13:14.840 --> 0:13:18.680 equal weighted stocks, but certainly finance professionals do, and they're 0:13:18.880 --> 0:13:23.439 aware of both the risk involved in having a large 0:13:23.440 --> 0:13:26.960 concentration in just a handful of stocks and also some 0:13:27.080 --> 0:13:31.320 of the requirements around diversification, so legal requirements that you 0:13:31.400 --> 0:13:34.840 just mentioned. Before we get into some of those changes, 0:13:34.960 --> 0:13:37.160 can you maybe just give us a little bit of 0:13:37.240 --> 0:13:43.560 background on the importance of the index providers to the 0:13:43.600 --> 0:13:46.840 finance industry itself. This is sort of a pet topic 0:13:46.880 --> 0:13:50.560 of mine that I've written about occasionally, But how big 0:13:50.600 --> 0:13:52.440 a deal are the index providers now? 0:13:53.600 --> 0:13:57.000 Well, You're absolutely right to highlight that, Tracy, and I'm 0:13:57.000 --> 0:14:00.440 glad to see you have such a an enthusiastic come 0:14:00.760 --> 0:14:03.079 attraction to index providers. 0:14:03.760 --> 0:14:06.439 One of the you're the only one that gets excited 0:14:06.440 --> 0:14:08.480 about it. But it is a big story. 0:14:08.720 --> 0:14:11.959 And one of the issues is that as indexing has 0:14:12.000 --> 0:14:15.439 become more popular, some of the kind of traditional the 0:14:16.000 --> 0:14:19.560 first of the indexers have started charging more, which has 0:14:19.720 --> 0:14:23.760 created an opportunity for other index providers to jump into 0:14:23.800 --> 0:14:26.440 the loop. So obviously we all know the S and 0:14:26.480 --> 0:14:29.080 P five hundred, but then there's the foot seat, which 0:14:29.120 --> 0:14:33.280 is rustle, but there's also things like morning Star and 0:14:33.400 --> 0:14:35.800 even you guys at Bloomberg have a lot of great 0:14:35.800 --> 0:14:38.280 indexes and you're competing on a lot of these things 0:14:38.320 --> 0:14:43.000 as well. So what's driving that is kind of two factors. 0:14:43.120 --> 0:14:46.600 One of them is that there is the cost associated 0:14:46.640 --> 0:14:49.440 with the big ones, so they're just trying to clients 0:14:49.440 --> 0:14:52.600 that have to pay tens and hundreds of thousand dollars 0:14:52.640 --> 0:14:55.880 for this index data. Is our changing the providers trying 0:14:55.880 --> 0:14:58.240 to get something cheaper. And then the other thing is 0:14:58.360 --> 0:15:01.960 is a little more kind of nefair. There's some indexes 0:15:02.040 --> 0:15:04.720 that are easier to beat, so if you have an 0:15:04.760 --> 0:15:08.080 index that you know the rules, you can actually front 0:15:08.120 --> 0:15:11.520 run them. The When I was researching this and learning 0:15:11.520 --> 0:15:14.320 about this, someone told me that it's important that you 0:15:14.480 --> 0:15:18.800 buy the products of the index of the indexes that 0:15:18.800 --> 0:15:21.560 are difficult to beat, and then from a kind of 0:15:21.680 --> 0:15:25.480 client perspective, you choose. If you are a portfolio manager, 0:15:25.520 --> 0:15:29.360 you choose the indexes that are easier to beat, because 0:15:29.360 --> 0:15:32.480 if you're using, you know, for example, the S and 0:15:32.520 --> 0:15:35.040 P five hundred as your benchmark, that's a lot more 0:15:35.040 --> 0:15:38.160 difficult than to beat than another index that might have 0:15:38.440 --> 0:15:42.760 one annual revision that is easy to kind of forecast 0:15:42.880 --> 0:15:43.560 and run ahead of. 0:15:45.080 --> 0:15:45.400 Joe. 0:15:45.480 --> 0:15:49.120 I should just mention Kevin was kind enough just then, 0:15:49.240 --> 0:15:53.160 because he's a very polite Canadian, to basically do our 0:15:53.280 --> 0:15:57.520 disclaim for us, which is that Bloomberg LP, the parent 0:15:57.560 --> 0:16:01.560 company of Bloomberg News, does own a bunch of different indices, 0:16:01.600 --> 0:16:06.520 but probably most prominent among them are the Bloomberg bond indices, 0:16:06.800 --> 0:16:09.840 and those were the Barclays indices before. So I should 0:16:09.920 --> 0:16:10.520 just mention. 0:16:10.360 --> 0:16:13.000 That there you go, Thank you, Kevin, and thank you. 0:16:13.120 --> 0:16:16.120 Can I jump in with you a little since a 0:16:16.120 --> 0:16:18.080 lot of people are getting Bloomberg users. One of the 0:16:18.120 --> 0:16:19.920 things is if you go when you want to see, 0:16:19.960 --> 0:16:22.080 for example, the index move and the S and P 0:16:22.200 --> 0:16:26.680 five hundred, and you to type in hmov, you'll see 0:16:26.680 --> 0:16:29.240 that they actually unless you pay for that data, you 0:16:29.320 --> 0:16:33.560 don't get the index point changes. But Bloomberg has the 0:16:33.600 --> 0:16:37.040 B five hundred, which is very similar, and you can 0:16:37.040 --> 0:16:39.880 plot it in and then all that functionality that you 0:16:39.880 --> 0:16:41.880 have to pay for on the other things, it actually 0:16:41.880 --> 0:16:44.280 works quite well on the Bloomberg indyssees. 0:16:44.560 --> 0:16:47.400 There you go. So if you have a Bloomberg terminal 0:16:47.480 --> 0:16:49.680 but don't feel like paying for the S and P 0:16:50.360 --> 0:16:53.280 data specifically, Kevin just gave you a little bit of 0:16:53.320 --> 0:16:55.040 a little bit of alpha there. 0:16:55.520 --> 0:16:56.120 But you know it. 0:16:56.160 --> 0:17:00.320 Actually you talked about foot running index changes. Why said 0:17:00.320 --> 0:17:00.920 it easier? 0:17:01.080 --> 0:17:01.240 Right? 0:17:01.360 --> 0:17:04.560 Like S and P they announced, oh, some new company 0:17:04.680 --> 0:17:08.639 is joining an index. How can you make money from 0:17:08.680 --> 0:17:09.480 those announcements? 0:17:10.240 --> 0:17:11.240 Well, you used to be able to. 0:17:11.400 --> 0:17:14.400 There's a huge opportunities before, and there was hedge funds 0:17:14.440 --> 0:17:17.359 that devoted themselves to doing it. But now everyone knows 0:17:17.400 --> 0:17:19.840 the ones that are due to go in. And then 0:17:19.880 --> 0:17:22.000 there's hedge funds who actually have portfolios of all the 0:17:22.000 --> 0:17:23.880 stocks that are due to go in and even not 0:17:23.960 --> 0:17:26.600 just hedge funds, even pension funds will quote and front 0:17:26.640 --> 0:17:28.880 run them because they realize that there's some malfa there. 0:17:29.000 --> 0:17:31.080 So at the end of the day, Joe, the problem 0:17:31.280 --> 0:17:33.320 is that the more people look at it, the less 0:17:33.359 --> 0:17:35.320 money there is to be made. Yeah, and kind of 0:17:35.800 --> 0:17:37.320 trying to guess those things. 0:17:37.160 --> 0:17:40.159 All right, So let's get into how not just the 0:17:40.160 --> 0:17:44.879 benchmark index providers are reacting to increased concentration, but also 0:17:44.880 --> 0:17:49.240 how finance professionals are. You mentioned the Russell one thousand, 0:17:49.920 --> 0:17:52.399 so give us a little bit more detail on what's 0:17:52.600 --> 0:17:56.920 happening there. So Russell one thousand is aware that there's 0:17:57.119 --> 0:17:59.040 intense concentration risk. 0:17:59.240 --> 0:18:02.879 Right, so they're jumping so they are actually getting ahead 0:18:02.920 --> 0:18:06.520 of their problems of potentially going and bumping up against 0:18:06.560 --> 0:18:08.880 this twenty five to five fifty rule. And for those 0:18:08.880 --> 0:18:12.080 who don't aren't aware of it, this isn't a new phenomenon. 0:18:12.119 --> 0:18:15.119 We actually had this in the summer of twenty twenty 0:18:15.160 --> 0:18:19.800 three when Microsoft became too large of a position within 0:18:19.880 --> 0:18:24.160 the QQQS and there needed to be an emergency rebalance 0:18:24.480 --> 0:18:28.159 where they reduced the size of Microsoft. And then we 0:18:28.240 --> 0:18:34.159 also saw this in the sector select XLK spider where 0:18:34.600 --> 0:18:38.119 Navidia ran up and it actually ended up again we 0:18:38.160 --> 0:18:40.080 bumped up against that twenty five to five to fifty 0:18:40.160 --> 0:18:43.679 rule and they needed to be an emergency rebalancing there. 0:18:44.000 --> 0:18:46.760 And that was the situation where there was the way 0:18:46.840 --> 0:18:49.680 that their capping worked. It was this kind of very 0:18:49.800 --> 0:18:53.840 violent shift from selling Apple and buying Navidia, and then 0:18:53.920 --> 0:18:56.199 kind of the next quarter it flipped the other way 0:18:56.280 --> 0:18:58.440 because of the way that the stock price has moved 0:18:58.600 --> 0:19:01.600 and they had to do this rebalance again the other way. 0:19:02.040 --> 0:19:04.720 And so this is the problem with that many of 0:19:04.760 --> 0:19:07.480 these index providers are are kind of bumping up against 0:19:07.480 --> 0:19:10.080 it in terms of they don't want to be too 0:19:11.240 --> 0:19:14.239 violent with their shifts. They don't want to go and 0:19:14.920 --> 0:19:18.520 get into situations where they're rebalancing all the time, trying 0:19:18.520 --> 0:19:21.320 to keep within this limits. And that is why the 0:19:21.520 --> 0:19:24.360 Russell in this R one thousand growth which is one 0:19:24.359 --> 0:19:27.840 of the most popular growth indexes out there, they chose 0:19:27.880 --> 0:19:31.280 instead of using the five and the fifty rule, they 0:19:31.400 --> 0:19:34.560 used four and a half and forty five, meaning that 0:19:34.680 --> 0:19:37.440 any stock above four and a half, if all those 0:19:37.480 --> 0:19:40.000 stocks add up to forty five percent, then they do 0:19:40.080 --> 0:19:43.760 this rebalance. So they've kind of given themselves a little 0:19:43.760 --> 0:19:47.200 bit of extra, you know, room there in terms of 0:19:47.240 --> 0:19:50.720 the rebounce. What's interesting is that they had announced this 0:19:51.400 --> 0:19:53.440 I don't know what's a year ago because they saw 0:19:53.480 --> 0:19:56.600 this problem coming. Nobody was talking about it. 0:19:56.720 --> 0:19:59.200 Oh yeah. I actually went back to try to find 0:19:59.280 --> 0:20:01.600 articles on this. I couldn't find any. 0:20:01.800 --> 0:20:02.159 Yeah. 0:20:02.240 --> 0:20:05.280 The way that I came upon this idea and this 0:20:05.800 --> 0:20:08.520 kind of revelation about that this is coming up was 0:20:08.560 --> 0:20:10.840 actually one of my subscribers and a buddy sent me 0:20:10.920 --> 0:20:15.520 something from Kevin Ja from Discipline Alpha, and he'd written 0:20:15.520 --> 0:20:18.080 this whole piece about it and just highlighting it. One 0:20:18.080 --> 0:20:21.560 of the reasons that he highlighted is he was a 0:20:21.760 --> 0:20:25.600 mid cap manager during the two thousands and he distinctly 0:20:25.640 --> 0:20:30.199 remembers Sebel Systems and another one. I can't remember the 0:20:30.200 --> 0:20:32.159 other one, but there was two big stocks in the 0:20:32.200 --> 0:20:35.600 S and P four hundred that were due to go 0:20:35.640 --> 0:20:38.720 into the S and P five hundred, and when they 0:20:38.720 --> 0:20:42.160 did it, the trouble was that the guys that all 0:20:42.240 --> 0:20:44.879 bought it for the S and P five hundred, and 0:20:44.920 --> 0:20:47.600 then when the SNB four hundred guys went to sell it, 0:20:48.119 --> 0:20:51.280 there was no bids. And then coincided with the top 0:20:51.359 --> 0:20:54.879 of the Nasdaq market, and he's very kind of adamant 0:20:54.920 --> 0:20:58.879