Google Raises $85 Billion and the Market Finally Wakes Up | The Weekly Wrap

[00:00:00]Given the strong employment numbers and the inflation numbers as well, the probability that the Fed will cut rates this year is near zero. The probability that the Fed will raise rates this year is not zero. In private equity news, the decline in public software stocks continues to have an impact. The value of private equity technology deals plunged 70%. Last year, hyperscalers spent around 400 billion on AI capex.

[00:00:25]This year, they will spend close to 1 trillion. What are they getting for that spend? Participating in the LLM agentic AI game is now incredibly capital inensive. These hyperscalers are not going to stop and investors are starting to lose their taste for it.

[00:00:51]Hi, this is Steve Eisman and this is the weekly rap. This is for the week ending Friday, June 12th, but recorded Thursday night, June 11th. Before we get to the rap, let me address an issue. We record the weekly rap Thursday night and post it Friday after the close. Now, some viewers have asked us to record the rap Friday and post it Saturday. And we've thought a lot about that, but we feel it's more important to get the rap out after the close Friday. And to do that, we need to record it Thursday night because it takes time to edit. Of course, that means we miss what happens Friday. However, I think I can then deal with that the following week. On this week's rap, we will discuss one, current market correction. Two, AI capex is too thirsty for capital for markets to satiate comfortably and news from Google, Soft Bank, and Super Micro is transformative. Oracle's earnings also did not help. Three, inflation news is bad. Four, earnings expectations show problems under the hood. Five, the war in Iran, of course. Six, Open AI filed its S1 and Apple hosted its tech day.

[00:01:59]Seven, addiction business models seem to be spreading. Eight, private equity and private credit news, of course. Nine, thoughts on the Real Eyes playbook.

[00:02:10]Let's get started. Last Friday witnessed a correction that continued for part of this week. On Friday, the S&P 500 was down 2.64% and Nasdaq was down 4.18%.

[00:02:22]Big moves. What happened started Wednesday night when Broadcom reported AI related numbers that while strong were below expectations. As a result, on Thursday, the semiconductor group experienced a correction. On Friday, the big news was that the employment numbers were better than expected. Actually, they were quite strong, implying the Fed will not be raising rates and might even raise them. The 10-year Treasury yield climbed once again back over 4 12%. The combination of Broadcom and the 10-year caused the correction on Friday. If you will recall a few weeks ago on the May 15th Friday rap, I announced that I had lightened up in my personal portfolio because back then the 10year had climbed above 4 1/2% and that was my Rubicon.

[00:03:11]Admittedly, there is nothing magical about 4 1/2%. However, the 10-year has been in a range of 3.9 to 4 1/2% for several years. And as long as it has remained in that range, the bull market held. 4 1/2% seems to be the magical demarcation point. So, if rates continue to march higher, expect more of a correction. One additional point, given the strong employment numbers and the inflation numbers as well, which we'll talk about, the probability that the Fed will cut rates this year is near zero.

[00:03:43]The probability that the Fed will raise rates this year is not zero. Chances are though the Fed will do nothing. The other important news that I think contributed to the correction was the news from Google which might be the most important news of all. Google announced that it was raising $80 billion since upsized to 85 billion in new capital all from equity. Historically software has been a non- capitalintensive business.

[00:04:12]The last time Google raised equity for the company was when it went public in 2004. So why is it doing so? Because the table stakes of participating in AI keep increasing. In 2025, Google spent $80 billion on AI capex which it funded mostly from its enormous cash flow plus a bit of debt. In 2026, Google will spend 180 to 190 billion on AI capex and that is too much for its cash flow. There are also stories that Meta and Microsoft will be doing similar transactions soon. This all goes to show that certain non-c capital-intensive large software companies have now become capital-intensive hardware companies.

[00:04:58]And as I have discussed in the past, the current growth of GDP can be largely attributed to the massive investment in AI. What's changed is the equity markets are now being asked to fund a significant chunk of this annual investment. Up until now, private money and free cash flow carried the burden, and the stock market enjoyed the ride.

[00:05:21]No longer. It's one thing to own AI stocks when the AI companies are footing the bill for the capex. It's another story to own these stocks when companies are raising capital for public shareholders. The other transformative news came from SoftBank. Now, SoftBank is a Japanese company that mostly invests in tech companies. SoftBank has a large position in OpenAI that given the most recent valuation is valued at $60 billion. SoftBank tried to get a loan for 10 billion and was pledging its OpenAI position as collateral. It could not get a $10 billion loan, so it reduced its ask to 6 billion and it can't get that amount either for reasons that are unknown. However, one possible interpretation is that while the banks are perfectly willing to take OpenAI public at an insane valuation, they are not willing to put their own balance sheets on the line for that exact same valuation. The valuation is fine for investors, just not the banks that will take OpenAI public. Oracle added to the capital intensity story when it reported this week. Now on the positive side, the company reported earnings per share of 211 which was up 24% versus last year and a beat and revenue beat as well.

[00:06:39]Also, the company's remaining performance obligations which is a form of backlog reached a pretty incredible $638 billion which is up 363% versus last year and up 85 billion in just 3 months. So all that's good. What is not good is the need for capital.

[00:07:00]Oracle's capex for the quarter reached 15.9 billion, bringing the annual total for the fiscal year that just ended on May 31st to 55.7 billion, which is higher than Oracle's projection of 50 billion. Perhaps more importantly, the company added 20 billion to its capital raising plans. Now, its fiscal 2027 capital plan is for 40 billion in equity and debt. Like I said before, the tech industry is being transformed from a capital light model to a model of insatiable need for capital and investors are starting to lose their taste for it. After hours Wednesday night, Oracle was down 10%. And in more capital intensity news, Super Micro, which is admittedly not a software company, but a tech hardware company that largely sells servers, announced plans to raise $7 billion through a combination of equity and equity linked financing. Super Micro, like Dell, is an AI derivative story. However, 7 billion off of a market cap of roughly 20 billion is no small thing. And the stock was down 28%.

[00:08:07]28% on this news on Wednesday. Wow. One more thought. Traditionally, investors look out anywhere from 6 months to several years when valuing stocks and making investments. The current crop of IPOs and the stock being issued requires much longer time horizons to justify valuations. Equity is finally being asked both to carry the burden and give the companies longer runways. It's a lot to ask and this is a major change.

[00:08:35]However, I would not take this new capital intensity as a sign that the AI investment story is over. At least not yet. Anyway, Oracle's numbers were powerful, especially the backlog. And the news from Google and Oracle is that participating in the LLM agentic AI game is now incredibly capital intensive.

[00:08:57]These hyperscalers are not going to stop. So I think investors are rethinking their commitments to companies that might have to raise capital like Meta and perhaps even Microsoft. My guess is that investors will shift to companies that benefit from AI but don't need capital. sectors like alternative energy, semiconductors, and networking equipment. As I mentioned, I lightened up a few weeks ago, and I have kept my cash while considering next moves. It's now perhaps time to carefully pick stocks with less headwinds. In a few weeks, I will discuss my personal portfolio on premium. Join Premium by looking in the description for audio and video and pressing the link, which is also on the screen. Two more points on AI. Lots to say about AI this week. Last year, hyperscalers spent around 400 billion on AI capex. This year, they will spend close to 1 trillion. What are they getting for that spend? Let's assume for the sake of argument that AI and AI agents are completely transformative technologies and yet there seems to be little difference between them. One week Gemini is on top and the next it's anthropic. Despite the money being spent, there seems to be little differentiation, no moes. Trillions are being spent for what looks increasingly like a commodity. China is highly competitive as well. Something for equity holders to think about while being asked to fund future growth. And speaking of the commoditization of AI, on Thursday, an article appeared in the Wall Street Journal stating that OpenAI is considering lowering the prices it charges customers. The company is considering cutting what it charges for tokens. This is pretty astonishing news.

[00:10:44]Trillions are being spent for a product with no moes and prices already being cut. Final point, midterm elections are coming up. Nimism regarding data centers will be a big subject. Candidates from both sides will likely lean into fears of costs and burdens being forced on areas where data centers are being located. The potential good news like the property tax relief because data centers will be required to pay more than their share will likely be buried.

[00:11:13]Politicians often weaponize potential bad news to show the savior role they can play. Before I get to the rest of the rap, I would also like to mention that this past Wednesday, June 10th, on Premium, I did a deep dive into Croup and the remarkable turnaround executed by CEO Jane Frasier. It's a relief to think about a successful banking story after the constant drum beat of AI, energy shocks, and the impact of inflation. Careful stock selection feels timely. For our audio listeners and video as well, see the premium link at the top of the description. Moving on from AI, two pieces of economic news.

[00:11:50]First, inflation. The numbers are not good. On Wednesday, the CPI came in at 4.2%, highest in 3 years. Core CPI X food and energy came in at 2.9%.

[00:12:01]Both figures were within expectations.

[00:12:03]So as a result, the tenure barely moved but remained above 4 and a.5%. Producer price numbers came in on Thursday and they were high as well. Second, the second quarter is almost over. Let's take a bit of a preview of earnings expectations because they really show a K-shaped economy. Current earnings growth expectations for the second quarter are very, very strong. 22.6%.

[00:12:28]However, under the hood, there are issues. A significant portion of that 22.6% is from the energy sector, which is expected to grow by more than 100%.

[00:12:39]Technology is expected to grow an amazing 60% and materials and energy derivative is expected to grow 30%.

[00:12:48]After that, every other sector is expected to grow by single digits with healthcare posting negative growth.

[00:12:54]Moving on. Over the weekend, Iran bombed Israel and Israel retaliated and bombed Iran. President Trump then demanded that both sides stop. They did. On Tuesday, President Trump announced that a deal was closed and then Iran shot down a US helicopter and the US retaliated by bombing Iran. In response, Iran said they were delaying the negotiations. On Thursday morning, President Trump promised more attacks and said the US will take Car Island. But later the same day, Thursday, he canled the bombing and stated that a deal is close at hand. We shall see. But the market rallied on that news. Moving on. Last week, Enthropic filed an confidential S1 for an IPO. I'm guessing the size of that offering will be around hundred billion.

[00:13:36]This week, Open AAI filed its own confidential S1. I'm assuming the size of that offering will be similar. Add the 75 billion to be raised by SpaceX, and we're talking about 275 billion of capital to be raised. Then add the 85 billion that Google raised and we are at 360 billion. That's a lot of capital for equity markets to absorb. Now why am I confident in the potential size of these offerings? Let's take open AAI. In its recent round of funding, OpenAI raised 122 billion from investors at an 852 billion valuation. So an IPO where OpenAI raises a h 100red billion is certainly a strong possibility. This week, Apple hosted its annual worldwide developers conference. Apple has been having issues with its AI strategy. On the one hand, Apple long ago abandoned participating in the LLM race, and given how much AI capex keeps going up, that's starting to look like a great decision.

[00:14:31]Apple won't be raising capital. On the other hand, Apple does need an AI strategy. Apple is teaming up with Google for its AI. Apple unveiled the new Siri and it is much better than before, but the bar was pretty low.

[00:14:44]Apple is only catching up to what's available elsewhere. The new AI features will help phone upgrade cycle probably.

[00:14:51]The new Siri features require at least an iPhone 15 Pro, but for some of the more advanced features, an iPhone 17 or iPhone Air will be required. I want to spend some time on addiction business models that seem to be spreading throughout the economy. Social media has been accused and in some cases found guilty of intentionally creating algorithms that foster addiction. And last week, the state of Florida sued OpenAI, alleging that chat GPT also fosters addiction, implying that AI uses addiction to keep customers engaged.

[00:15:26]Technology induced addiction is a very important topic. And on this coming Wednesday, June 17th, on our premium service, we will post an interview with Ben Zaperski, tort professor at Forom Law School, who has become an expert on these social media addiction cases. We discuss the legal theories behind these cases and which cases he thinks have real potential. For our audio and video listeners, see the premium link at the top of the description. If addiction were confined to just social media, that would be bad enough, but it has spread.

[00:15:59]For example, Khi is a company that I believe uses an addiction model to increase the level of customer betting.

[00:16:06]The story is their modeling of human psychology to realize that people mistake a near miss as an almost opportunity. Every time a gambler nearly misses on winning instead of being disappointed and walking away from gambling, that same person is actually motivated by the almost win and driven to bet again and more often. I'd also point out that I have learned anecdotally that kids are using Koshi in school by tapping into their parents' accounts or hiding their age behind VPNs. And by the way, everything I just said about Koshi applies to its customers as well. On the subject of kids minds being exposed to addiction elsewhere, I'll mention that Hasbro, whose business model used to be making and selling toys, has shifted its business model. The underbelly of this shift can be seen in the card games Magic the Gathering and Dungeons and Dragons. These games have existed for years in a relatively benign state. Not anymore. Hasbro has reinvented these games using an addiction model and that is fueling most of its profitability.

[00:17:05]Why is a child's game that's been around forever suddenly fueling the profits of a 12 billion market cap toy manufacturer? Because Hasbro has mastered the concept of creating the illusion of scarcity to create FOMOdriven purchases. How are they doing this? Magic has always been a card game where getting a special card in a deck with certain highlevel points drives sales. Hasbro has used this as their starting point to turn these games into massive money makers. New sets are released and promotion is now directed at adults and kids in some cases with Tik Tok videos of women reaching inside their open shirts to reveal winning cards. Prices have exploded for newly released and scarcely available Magic sets with highly promoted winning cards.

[00:17:51]Hasbro has shortened the release cycle and increased promotions. Why develop new toys that engage children's creativity when you can manipulate kids and adults by building hype and sales with an addictive business model? In private equity news, the decline in public software stocks continues to have an impact. The value of private equity technology deals plunged 70% in the first quarter to only 20 billion.

[00:18:16]Overall, private equity continues to have problems selling its assets. During its heyday, private equity sold its companies 3 to four years from date of purchase. Holding periods are now stretching to seven years and more, which is upsetting investors, all of whom want their money back. There are apparently four trillion four trillion in private equity investments that have yet to be monetized. That is not a small number. The attraction of private equity was partially that as indices increasingly commoditized the role of money managers, high- netw worth investors increasingly sought illlquid investments, private equity that promised outsized gains. The lack of liquidity was in many ways perceived as a positive attribute. Investments were no longer measured against a volatile daily benchmark. In venture capital and private equity, the lack of liquidity has always been accompanied by a lack of transparency. Lack of transparency in exchange for the expectation of outsized returns. The underlining motivators were the assumptions that these were unique investment opportunities. Now investments are being revealed as increasingly locked and perhaps perhaps homogeneous as well. In private credit, Bloomberg reported that one of Blue Owl's funds, the OCIC fund, raised 500 million in a bond sale. Was this done to help meet future redemptions? Unclear.

[00:19:38]Coincidentally, this week I was asked a question from someone I bumped into who asked if the market decline last Friday was caused by index funds selling stocks to make room to buy SpaceX. Although SpaceX is not yet required to be included into the indices, it's only a matter of time. The question got me thinking that active managers feel obligated to restructure their portfolios to reflect the eventual need to include SpaceX and soon entropic and open AI regardless of the underlying merits of the investment decisions. Like it or not, active managers are measured against the daily performance of an index. Differentiation in investments is very risky. That's why active managers hug the indices because not doing so is too dangerous. We live in an age where people crave authenticity and decry sameness and commoditization. Yet every fund manager is measured against the same benchmark, their relevant index.

[00:20:32]This means passively managed assets and actively managed accounts run by supposed stock jockeyies are all suffering from massive sameness because no one can risk underperforming the benchmarks. This is way past FOMO. This is required uniformity in order to stay in business. I don't know if part of the decline on Friday was stock selling to make room. It's possible. What I do know is that sameness increases risk of everyone underperforming at the same time. This is the herd mentality argument played over and over again. I personally don't like illquid investments with gated exits. I like the stock market's liquidity. If the choice is buy an index versus pay for a fund with an active manager who's probably hugging an index, I would just say buy the index. If like me, you like to pick stocks, go for it. But park your FOMO at the door and have a long-term horizon.

[00:21:29]Increasingly, my goal for the playbook is to define the themes of the times we live in and invest and to highlight individual investment stock opportunities that can thrive within the constraints of external pressures. In a few weeks, on Monday, June 22nd, I will have three senior consumer sales site analysts from Evercor sharing their deep industry knowledge and their stock picks. Last Monday, June 8th, we posted an interview with Stacy Razan, the semiconductor analyst at Bernstein, we discussed the impact of AI on the entire semiconductor area and what might derail the momentum. So, check it out. This coming Monday, June 15th, we will post an interview with Tom Gallagher, the life insurance analyst at Evercore. We discussed the impact of private equity and private credit on the life insurance sector. These are illquid and opaque investments and we looked at the real risks and the size of those risks. So tune in. Be sure to check out our website realismanplaybook.com.

[00:22:28]Thank you for joining. And that's the rack.

[00:22:32]This podcast is forformational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.