 Hey, hello and welcome to episode 99 of the market maker podcast just one more to go peers We haven't come up with a what's gonna happen when we hit the hundred market yet. No in true fashion We'll think of an idea that like the morning of the recording and then now we need to do it better We need to do we need to put some time into Planning any ideas? Okay. Well, what we'll do is well if you sign up for the Shameless plug if you sign up for them find me market maker newsletter of which link you will find in the description of this video Yeah, we'll share a little teaser and a comp and then whoever wins gets a little shout out on episode 100 or in fact, do you remember that was it Barty who joined us on a guest? Yeah, 30 or something Yes speaker come on. I mean people are probably a bit bored of me and you so yeah getting a Third leg to the stool For the century Okay, yeah, so I'll drop I'll drop a little Something in the newsletter and then the winner of which can join us next next week. How's that? Okay? No shaving my head or anything like that this time For any of our regular listeners Who will remember but I'm three things on the agenda for today Earning season obviously picks up quite a bit the next well this week and next week is Over 50% of all the companies reporting And this week was the kickoff of big tech earnings Microsoft They were the really the only one the others so your meta Amazon Apples and So on they will come out next week And then we also had Tesla which we can talk about and I'll do my best to talk them down like I always do I'm looking forward to the Tesla Podcast yeah, I really try their share price. It's up up 45% this year. Did you know that? Wow, you know, it's easy. How do you feel? How do you feel about that? Anyway, I just want to talk about I'm gonna explore your feelings around Sharp upside on the Tesla stock. So yeah, I'm looking forward to that segment Okay, and then the the second part is going to be Citadel Who yes, yeah, they were crowned the new top hedge fund manager of last year knocking Will's kind of man crush Ray Dalio Off the top of the charts the first time I think seven years So yeah meaningful shift in the powers that be in the hedge fund community and then also going to explain What Morgan Stanley has to do with what's that? Yeah No more I'm gonna say about that yet. So you have to stay tuned So let's kick things off with with Microsoft and one of the things here when people talk about earnings is the first thing you hear is EPS this number revenue that number and I always have to sort of pinch myself and think okay It's fine. I've been looking at this stuff for like 16 odd years like I kind of just know what I'm looking at But very sure that not everyone does and revenue. I think it's quite straightforward Yeah, EPS very briefly What is that if you can explain it in simple terms? Well in very simple terms it's Net profit divided by the number of common shares. So whatever whatever profit So net profit is your your profit after costs and then Yeah before in you know before it says like e-bit So before interest and tax and all that kind of stuff taken into account and so Whatever money's left after all your costs is your profit divide that by the number of shares you've got equals Earnings per share, which is the kind of headline figure I mean the thing to be careful about here. So revenue is Sales right obviously now that figure you can't mess about with that like from an accountant's point of view You're whatever your sales is is your sales. You can't You can't really engineer Changes to your revenue that that's just solid, but when so that's the that's what we call the top line, right? Then we talk about the bottom line, which is your EPS your profit But as you work your way from the top line down to the bottom line Then your your clever accountants can start to do their work their little magic and there's something called Most of these EPS figures that are announced are actually adjusted, right off which Microsoft's were adjusted indeed So they're all adjusted This is then where you can really see Some interesting kind of tricks being done to make that Earnings put adjusted earnings per share figure higher So therefore make it better in the eyes of the investment community. So question then for the accountant I'm gonna slash 10,000 of my workforce. This is a one-time item That's not recurring. Can I adjust that out of the earnings per share? 100% correct and So that any so adjusted earnings per share so basically saying right Let's look at the costs then because you remember it's your revenue money your costs equals profit So what are those costs and basically you're going through them and saying what are There any one-off items in there that we had to pay this year that we wouldn't normally pay And basically all they want in those costs are the rear annually reoccurring costs Okay, so anything that's not anything one-off item get it out. So do you know how much they paid? to lay off the 10,000 employees well Funny you should ask me that Because I know some people who got laid off from sales force. I yeah, and that was Handsomely paid to leave. So I'm gonna guess it's a pretty chunky number to lay off that many people Well, so they laid off 10,000 people five percent of the workforce and that they they had a one-off charge of 1.2 billion dollars nice so That gets Taken out right up meaning their profit their EPS figure goes up by 1.2 billion Because they're essentially adding back on that one-off cost that's not going to be reoccurring So you got to be a bit careful with these profit numbers because yeah There's a lot of engineering to make things look as best as they possibly can without obviously, you know You can't commit fraud you can't break Accounting laws. I mean obviously people have done down the years and it's all kind of come out and there's been scandals and whatever but yeah within the rules of accounting you're kind of Massaging these numbers to look as best as they can. So it's just some on the right page here We are talking about Microsoft not Tesla yet You mentioned financial engineering for a second there. Yeah, you know Tesla have got all that ace card. They've always used is their revenue from their tax credits But they've always used to mask the underlying fact that They couldn't make cars profitably Do you know? Just a change now, by the way, they are making profit just to jump to quickly to mask I know we'll get there, but I can't help myself. You know what he's gonna do He's gonna do like what Apple and all the rest do he's gonna stop reporting how many cars he's producing He's just gonna wing it and then and investors are gonna buy it. They're just gonna be like, yeah, that's fine He's just gonna say demand is double what we're producing and the market will go Where's the figures and he'll go? We're not producing figures anymore because we don't have to Guarantee that's where he's gonna head Okay, we'll see he's not heading there yet. That's a key measure. I don't think yeah You're not gonna see him remove that kind of stat So anytime soon, I wouldn't think yeah, but he is the guy that could engineer engineer that type of ridiculous scenario But back back to back to Microsoft then so when one of the other things is when you look at these companies Is looking at the different divisions? Yeah, and within Microsoft. There's a few There's ones that are tied more to say personal computing Productivity business processes that sort of thing So if you think about subscriptions to windows and and so forth, but yeah Demand for that flagging the macro environment so on but then the most in focus because this will be a recurring theme for next week With Amazon and obviously AWS which is their cloud computing division so Yeah first what is cloud computing and why are these big tech firms so Focused on that as a business division Well, I mean yeah cloud computing is the jewel in their crane, right? It's that I mean I was gonna say I was gonna use the word modern. It's the modern way of Operating a business, but it almost feels like it's too old to call it modern anymore. It's just It's just the way that the world has shifted in the last actually. I don't actually know how old is AWS How old is the Azure? Cloud it's like it's probably I'm gonna guess at 20 years, right? And it was probably in its infancy 20 years ago But over that 20 year period over that two decade period. What's happened is Almost the entire planet shifted to the cloud. I think the stat is And it's a very rough broad stat that 90% of businesses Now hang on now that I say this And not I don't believe it as it's coming out of my mouth, but anyway, I'm gonna say anyway 90% of businesses now Have their computing in the cloud I'm wondering whether that is true thinking about emerging market economies, but anyway, maybe they're talking about the US Perhaps let's just stick with that that feels more comfortable 90% of US companies Compute in the cloud. It just means that like in the olden days you'd if you wanted a computer network For your business you'd have to buy a load of servers, right the physical Units and then you'd need you need a whole room where you've put all these servers in and then you're kind of physically wiring All of your computers in the office to these servers that are in this room at the back and this room It's really hot on these air conditioning and I mean it feels so archaic now and in fact most people listening to this are probably thinking what the hell is he talking about but We used to be that way, right? But of course now it's all in the cloud, which just makes it hugely cheaper for a business Because all of that just now is virtual, right? So it saves a huge amount of money. You don't need this room with a load of servers in it. It's way Safer and more reliable And You know, it's easier. It's more flexible easier to collaborate and especially in the post COVID world COVID during COVID of course where everyone's working from home It's fine, right? You can just tap into your Your businesses computer network anywhere anytime on any device So obviously, you know, it's the modern. No, it's not modern. It's the way that the world works so Yeah, go on the definition then of how you've explained it and Kind of an adoption it's had then is that what makes it less prone to The economic conditions changing compared to say buying a computer and it's loaded with software So right for Microsoft The reason why it's so good well a because it's The fastest growing part of their business and has been for a long time B. It's got much higher profit margins Because it's it's it's it's virtual, right? It's not like making Computers where you've got to actually have a you got to have a manufacturing plant You've got production lines. You got people you got materials you got shipping you got all the rest of it Right. So profit margins are way higher in their cloud divisions and as you alluded to there It's much As a revenue stream, it's much more stable. I mean businesses like Microsoft historically had a quite cyclical revenue Where their revenue would be up and down in line with the economic cycle think about it You know when you're heading into a recession businesses cut costs, right? Which means yeah, you lay people off as we've just been talking about but also, you know, you don't You you stop investing in new hardware or new software. It's not like, you know, I'm upgrading the company's computer systems You know, I'm not buying everyone in the business a new laptop when we're right in the middle of a recession So you help you hold back on these purchases as a business And so if you're in the business or supplying this type of equipment and software because obviously every laptop purchase comes with then a Windows operating system Comes with a Microsoft office, let's say and this is then software revenue, right? But if there's less computers being bought then there's less software Subscriptions being purchased and so your revenue is much more cyclical with this cloud stuff. You can't operate as a business without it Yeah, you can't so it's not a cost that you immediately go to and try and reduce As a business in a recession So it's much more stable. It's less volatile and as an as a revenue stream They're all way more attractive and more valuable actually in terms of when you're valuing a business So, yeah, these cloud divisions are phenomenal and the same goes for Amazon, right? So Amazon are the chief rival so Microsoft have the Azure cloud and Amazon have their AWS And of course, of course for Amazon, you know, again, it perfectly offsets that much more cyclical sort of retail side of the business. So, yeah It's the jewel in their crane. Yeah, one thing I did see was that What as soon as the numbers hit the shares spiked up Think about six percent. However in the conference call a notable Comment specifically on cloud was that they said demand for cloud services fell noticeably during December So just coming into the back end they started a drop and actually The company projected revenue would hit and they basically downgraded by one and a half billion their current quarter revenue outlook And then the shares actually came off a fair bit. Yeah It's the perfect example of an earnings Result and and how markets behaves, right? So you get that first top line those numbers revenue EPS, right? And so you'll you'll get an initial price reaction off that and okay with Microsoft their cloud figures beat expectations But that's backwards looking because this is about quarter four 2022 Then you so that you get initial reaction off that and actually I think Microsoft was up I can't remember the percentage now, but Amazon shot how Amazon share price went up 3% of the back of this immediate reaction to the Microsoft numbers because Microsoft cloud figures were better than expected. So you're thinking right well Amazon's cloud figures are going to be better than expected then so look let's buy Amazon in advance of their earnings Which aren't until next week But then as you say it's more, you know in the end these share prices It's more about expectations in the future But really underpins the value of these shares today So whilst what happened in the end of last year is insightful in the end It's what we really want to hear about in these earnings reports as their guidance About how they think they're going to perform in quarter one of this year and indeed in the full year 2023 And as you're saying this is where they've downgraded expectations and it's quite insightful. I think Well, well, hang on. Let me change that. It's not surprising That I you know that in December These cloud figures started to get eroded a little bit because I just said to you that Your cloud services as a business isn't really something you're going to look at Trying to save costs on to start with but unless your shrinking your workforce Because then you need so if you've got now less employees, well, then you've got less Yeah, demand that you need to buy for your your cloud services, right? So it's kind of at the very end point of this tip into recession where you start to get the job losses that then It starts to show up in these cloud figures as well So yeah, it's it's it's all you know, it's kind of not surprising and I guess in on the macro Side, it's really insightful because whilst the GDP figures from the US that were released on Thursday yesterday were better than expected right quarter for growth better than expected but It's a slowing trend So as we went through quarter for it got progressively worse and in December was the worst month of the quarter And so you extrapolate that into January and February and so yeah We're getting the slowdown and these figures from the likes of Microsoft really confirmed that Yeah, and the reaction function you explained with Microsoft. We had the mirror Opposite in terms of when the GDP came out it dipped and then rallied Yeah, and so like exactly like you said, I think you get the top level number higher than expected Oh high interest rates that kind of initial sell-off in stocks, but then it's like well hang about The the direction of travel is the same and the outcome with rates is the same hasn't changed for the Fed And we just went exactly back to where we were pretty much scratch Yeah, I'm flat from where we were prior to where we are now, but The other thing this week was they Microsoft to finish off with them they announced ten billion dollar investment in open AI and They plan to integrate GPT the language model that underlines basically chat GPT into teams and office software one of the things That I was reading was about it's quite notorious Bank analysts put out a piece and he was talking about the firm Basically missed out on the social media Yeah Period like a decade ago, and they really are conscious that they can't miss out again Hence they've gone quite aggressive in this AI race To get ahead of their rivals Yeah, Google Google bought YouTube You know Facebook bought what's that my Instagram, you know, they nailed it with the social side and Mike Coral dinosaur Microsoft weren't active enough didn't see that social media trends. They were left with LinkedIn. Yeah The cot they own LinkedIn don't they yeah, all right. Yeah, but one thing that he also went on to say was that The thing here though for Microsoft to be conscious of is I thought I was reading a story and it was about way back when The internet was first in its infancy Microsoft got Penalized by the US government for a monopoly because they would have their systems where you'd have to force onto one browser And yeah within their software package and that's what created an opportunity in the market for a Google Yeah, and now what they're saying is is it's now of Microsoft's in the other is In the sendency in the driving seat on the AI issue, but now they've also initiated the arms race in AI Yeah, and that's almost going to act as a motivated act motivating actor To accelerate now investment through all other competitors So yeah, the race is on The race is on and yeah, it's gonna be really interesting to see what Google and deep mind, you know what where are they on this and Are they anywhere near a Direct competitor to Chachi PT this year because they kind of need to be in the longer It takes of course the more this kind of first mover advantage that open AI and therefore Microsoft have so Yeah, the article I read another one was talking about Google being very hesitant with the AI Technology that apparently is quite advanced because of because of its sentinel capability And its ability then therefore the risks associated with what the repercussions of that might be Given how it's advanced it is, but I think that's talking your book to just keep pay here Make sure you're not falling too far behind because of the the viral Outbreak of chat Gpt. Yeah, but one of the things here though is that open up open AI obviously what drives AI is a phenomenal amount of computing power Yeah, and what more do you need than cloud computing to absolutely Act as the main engine To to get that thing working. So yeah, yeah, well those of you that have been Using the chat gpt. I mean, yeah, there's been real issues. It's it's improved It's improving but there's been real issues like trying to get on to the thing because You know often you're trying to get on it and it's like actually can't there's so getting the queue you know our server capacity is maxed out and So some people have been having a lot of trouble getting on to it because there's too many users So, yeah teaming up with the azure cloud. Yeah, that would be a perfect marriage Yeah Cool. Well, let's um one more thing on Microsoft. Sorry go for it. Which is an interesting angle Which we haven't mentioned yet just from their earnings. So Their cloud services, right? They they increased by 38% Okay In quarter four so their services that's the growth rate now that has declined From 42 growth rate from the quarter before right, but that that's what beat expectations though because analysts were expecting a 37% increase but it was 38 But that's a slight slowdown from the quarter before but When you I just wanted to point out the dollar and the dollar's value and just how big of an impact It has on these giant multinational businesses because all those figures. I've just said 38 growth. That's before You include that's an adjusted figure Before you include The effects of the strong dollar once you take in the dollar's appreciation um That growth rate goes from 38 down to just 31 1% Yeah, that's a this dollar appreciation in 2022 has had a monster negative impact on You know these big multinational these big us multinational Yeah, I was just trying to find the tesla impact tesla had a negative effects impact on revenues of 1.4 billion Yeah, um And I hit their profit by 300 million Yeah Not a small amount And on that note tesla then yes, I want to keep tesla down to at least just two minutes, please No, no, no, no, I think the other topics are far more interesting like no, no, no idea. I disagree. I think we should really delve in here So let's look at let's talk about that share price again So did I say 45% up on the year? well, you know things like Ponzi schemes and and all these other Financial engineering enterprises always appear very charming on the surface, but I'm loving it. So hit me. What what what out of the earnings? Stood out their shares then on the day popped a good 10% 10% up. Yeah So when I say 45% right their share price bottomed at 106 106 dollars Right at the start of january, right? It's now 160 So actually that's more than 45. Um, so a hundred dollars to 160 dollars. That sounds awesome and amazing but um, that only puts it back at levels that were seen in mid december And of course their all-time high was about 400 dollars. So even though you've in percentage terms, it sounds remarkable What up up 60 percent in like four weeks, but yeah, when you look back over the last 12 months, they're still down Whatever it is 60 percent actually so, um Anyway, that's one thing to say but look what stood out. Well, obviously musk You know, he just loves it. He loves these to be the center of attention He came out like he basically came out fighting because in december Which is when the share price of tesla dropped from 200 dollars down to 100 basically um, a lot of that was due to the kind of information about the demand for teslas Dropping and that we hit this pivotal moment where in december Apparently tesla produced more vehicles Than there was demand for their vehicles. So supply outstripped demand and it was like what hang on This is supposed to be a revolutionary vehicle that's going to be winning market share year over year over year and yet Here we are and there's more supply than demand So musk came out fighting And what he said on the earnings call was the most common question we've been getting from investors is about demand So I want to put that concern to rest He said in january so far We've seen the strongest orders year to date than ever in our history And we're currently seeing orders at almost twice the rate of production Now the first part of that sentence Strongest orders year to date than ever in history. Well, I should bloody well hope so you're supposed to be a company that's growing You're supposed to be a company that's got a strong growth rate So if you don't have more orders now than 12 months ago, I mean, wow, I mean, it really would be a disaster, right? The second part though Orders twice the rate of production, but there is one word in there almost Twice the rate of production. So I don't know what that means But I find it hard to believe that in december production was greater than demand and now just a few weeks later Demand suddenly double production. I mean, obviously they've had a massive price cut Um, and maybe I don't know This is why I have to tip my hat that he is the master tactician because he's just lying And he's created enough of a buffer And I won't name politicians names Because I'll get in trouble, but it's it's a it's a classic framing Um strategy and he's an absolute king of it And so it's got to the point where he can say stuff like that And people just swallow it and it's just like, okay um, but for me, that's uh That's a road that will end at some point. I mean the the best one I saw was the automotive gross margins Yeah, so they were the lowest figure in the last five quarters. You know what he said about that Tom he said our average selling prices have generally been on a downward trajectory for many years In a pursuit of improving affordability Yeah Improving affordability. Well, look Let's talk about now you brought it up Gross margins. Yeah Let's let us test your knowledge. So basically gross margin Um, well, hang on so automotive gross margin. This is a really key metric for um the automotive industry when you're thinking about profitability because it's basically What what profits do you have after you take out the costs of Um costs of sale, right? So in a in if you're a manufacturing business your your cost of goods sold is very high And and that's clearly especially if you think about cars, right? It takes a huge amount of manpower robotic power raw materials, you know Fancy production lines and production facilities and all the rest of it, right? So a huge portion of your cost as a manufacturer is the cost of goods sold It's the cost of building the thing that you're then selling. Okay So gross automotive gross margin is revenue minus the cost of goods sold Okay, so what are you left with is your gross margin? So teslas gross margin has been going down and down and down At the start of 2022 their gross margin was 30 Okay in quarter one in quarter two of 2022 it dropped to 26.2 percent in quarter three It was 26.9 So it went up a little bit, but then in quarter four it was just 24.3 So in that year it went from 30 percent gross margin down to 24.3 percent gross margin Okay, and that mostly is because they've been reducing the price of the vehicles So Now I've got two angles here though Oh, you know, I know where you're going to take this you're going to say well The average gross margins for other automotive companies is like much smaller and so they've got more buffer So what yeah, well, what do you know what the average gross margins are? I knew this was coming See I've got I've got three other big kind of us Well, Toyota in here as well, which is obviously not us But I've got I've got Ford Toyota and General Motors. I'm gonna I reckon they're all single digits They're actually not they're all double digits. Okay, um So you remember that teslas at 20 Or well, actually these figures I've got I just realized now a quarter three. So at that point tesla was 26.6 Right 26.6 um Toyota's the next best at 17 Then it's forward at 15 and General Motors are below 13 So actually tesla has more than double the gross margin than General Motors and credit to them You know, they have like positioned themselves as a not premium, which they are but technology I think that's the secret source to I'll your product. I was reading an uber bull long-term uber bull tesla analysts Thoughts on this and he was like, yeah, you know gross margins going down Because we've had to cut prices to try and shift some of this stock but he's basically saying that As the economies of scale come through due to the ongoing ramping up of production So on that front they made 1.3 million cars in 2022 They're forecasting 1.8 million in 2023 Although musk on the call goes. Yeah, could it could easily be 2 million Anyway, whatever so but they're ramping up production with that comes more economies of scale So what this analyst is saying is cutting price brings in a larger potential Market on the demand side. So people who want teslas but couldn't afford one Maybe they now will be able to afford one So it's positive for demand and then he's saying because of the economies of scale that will come through Despite a hit to the gross margin in 2022 We actually expect the gross margin to be able to recover Even if we keep prices at their lower levels Because the costs of production per unit will reduce. What about the market share? Being eroded over time as competitors bring out Better you said before and you're definitely right better more advanced models when you're positioning yourself as a technology company That's in an EV space But you don't have the best technology Well, you can't charge a premium and you don't have demand I agree Now i'm on the fence here. I'm not a tesla bull by any means and I was certainly very very Skeptical of the tesla share price like in 2021 and into 2022 and we have many conversations about it But now the price has dropped by 70 I actually think the value of this business is now possibly about fair Hence why it's gone up the share price has rocketed. You're always picking bottoms. You're picking google's bottom Tesla's bottom Like there's like the shark in the water picking them up. I don't I unfortunately. I don't own any tesla shares I wish I had bought them at the start of this month obviously Uh, but I missed that one unfortunately Yeah, well look we've got we've got two more topics to go and uh, just conscious of time. So let's crack on and get on to citadel Yes, and Yeah, big big really big news actually in the hedge fund space However, I do wonder sometimes to do people even know who citadel are it's kind of like I always think that hedge funds are always like the secret people in the background Certainly, that's how it's positioned on on a lot of threads online So who are citadel? Maybe we just let's start there before we talk about their overall How do they generate money? What are their strategies and how do they compare to other firms? Well ken griffis. He's that's who citadel is Ken yeah, he's the founder and look they go back decades, you know in the 1980s he kind of founded citadel the hedge fund And yeah, I don't know they've kept they've been under the radar compared to some of the more sort of Ray Dalio bridgewater types A guy who sells books. Yeah, well exactly. So ken griffis doesn't he's not a You know, he's not a pr junkie. He's not, you know Doesn't want to put himself out there in the spotlight like Ray Dalio does and so maybe that's one reason why citadel isn't as well known um But they were quite famous in the financial crisis because Just before the financial crisis. I mean genius in hindsight they Managed because of their success. They've managed to agree a new set of rules with their investors and and basically they set in place a new legal Framework which meant the investors had much less ability to Take out their money right then The crisis hit and citadel got nailed. I mean they got they did really badly in the crisis, but They're their clients couldn't pull their money out So at least that saved them Um, because you know, if you're a hedge fund and suddenly you're getting a load of redemptions and withdrawals And it's just a nightmare. So at least they were saved from that problem which meant they had time to kind of sit tight ride The wave back up after the financial crisis and they got super leveraged Took some big bets down around the lows and anyway, they came out of the crisis just rocketing And ever since then they've been on the climb on this relentless march higher to now the top of the table and now the biggest Hedge fund in terms of profit and actually they made 16 billion profit for their investors last year Which not only makes them now the biggest overtaking bridge water who had been top for many years Not only are they the biggest that was actually the single biggest dollar profit year for any hedge fund in history And that was overtaking, uh, john polson's record Which was 15.6 billion dollars in one year, which was in 2007 Because john polson took a massive bet against us subprime And got it amazingly right and smashed it. Well citadel. I've just broken that record. That's 20. That's 15 years old Anyway, the thing about citadel all these stats like 16 billion profit In one year best ever biggest hedge fund the thing is They're not just a hedge fund They've got a whole other business that that isn't included in these numbers, by the way So that 16 billion profit is just from their hedge fund side That's citadel. Okay, there's then this thing called citadel securities Which is a whole different business which is about market making and facilitating trade flow basically and that business is just phenomenal as well and last year they were just a money printing machine Now Just the one quicker side before we delve into Their strategies and so on there's a correlation between citadel's rise to the top And there's a correlation with that and the The simulation training provider That they use because they swapped provider back in 2020 You might have heard of them. Well, so presumably they must get the best the very best equipped trained candidates in the world I mean to work. Well, yeah, I mean, they're the best the biggest hedge fund on the planet. So who do they call? Amplify Yeah, we run all their we run all their internship programs us, europe, asia, australia We also run there. We go. Well, we're off to Miami in february to run something for their hedge fund side on for Engineers that have been there for one or two years. So yeah, basically basically this amplify simulations. That's the main reason Why they're the best hedge fund on the planet formula of kenny g But yeah, like in terms of hedge funds, right? Because there were a lot of hedge funds that got absolutely killed last year Worst year for years and year on average Was the worst year for returns for many a year Okay, and yet citadel delivered a 38.1% return on investment So how is it that that's possible when everyone else got killed? Well, most of the people that had a bad time of it were Running one strategy Which is like equities and perhaps long only And like they're maybe taking big bets on the tech stocks, which was amazing in 2021 But then it was the opposite to amazing in 2022 The thing about citadel is they run a whole range of different strategies much more diverse In terms of the strategies they employ One we're running a sim for them as I said in Miami What we're teaching their engineers to do is to run an equity long short strategy around The earnings season So what they'll do and this is like a hedged The word hedge fund Is born out of that original hedge fund That was back in the 60s I can't remember the name of the guy now, but anyway, the whole idea is just supposed to be hedged It's supposed to be a lower risk strategy But the term hedge funds has just become this generic term for a part of the industry these days and a lot of hedge funds Definitely not hedged when they're taking actually massive leveraged risk But this equity long short strategy is hedged. This is where you're basically buying one stock and you're going short another It's normally stocks in the same sector. So if you're running into an earnings season and you think that Amazon's earnings are going to be much better than microsoft's earnings Okay, then what you'll do is you'll go long amazon and you'll go short microsoft Now that is a hedged position. It's what's called market neutral Because now you're immune to macro ups and downs Because if there's macro news, well Microsoft and amazon will move in tandem and they'll be in sync And so if you're a long one and short the other Well, you're making a profit on one and you're losing money on the other and they basically net off So you're you're zero, right? So any macro moves up or down you're making nothing and you're losing nothing you're hedged So all the strategy is you're predicting a divergence between the two stocks based on Micro news about their individual companies Okay, so you're putting in place these big positions And then if you're right and obviously you've got to be right, but if then amazon's shares go up Buy more than microsoft's because their earnings are relatively better Or then you're banking that that kind of spread in the divergence. So that's just one Example of the type of more hedged strategies that are Aren't correlated to the macro cycle And so they're able to generate big big profits doesn't matter if we're in a recession or in a boomy economy That strategy still holds and is is applicable. So that's just one example But you know, they do many other types of strategies across asset classes. So it's very diverse And yeah, they're just amazing at it basically Well, I think you should say that exact phrase when you see Kenny G in Miami and I'm sure you two will have a very good night on the town so Absolutely, I would say is keep any of your conversations off whatsapp Yes because Morgan Stanley is a case in point You could get fined up to one million dollars For just having a conversation on whatsapp with a with your client So explain to me like How does that how does that work because I think a lot of particularly young individuals looking to pursue these careers at a investment bank, perhaps they Don't always think about the legal side of compliance and how that is incorporated and very much embedded Into your activities day today. I know from a trading perspective A big job of automating trading systems is to satisfy regulation, right? It's like Now because of various different rules and checks You actually have to but initiate one trade you have to do like 10 different checks The thing is that that can be done almost instantaneously with automated mechanisms, but This is this very prevalent in certain things and things that I was reading was like commodity traders Always seem to be getting in trouble And investment bankers Typically, yeah, we're also culprits that often get stuck in tricky spots having inappropriate conversations So just explain to me what's what's the premise here of why this is it's yeah, it's basically Going back over the year. It's basically to prevent insider dealing You can't be having a conversation with your client That is not fully that that's not recorded and Fully transparent and that is a conversation the entirety of which Is stored by compliance and is readily made available to the regulator I'm at the drop of a hat. Okay. It all has to be It's gone so crazily over the top that this is a great example So Morgan Stanley and I well hang on not just Morgan Stanley. So last year Wall Street Paid up one billion dollars in fines to the regulator because of Inappropriate use of personal phones and approved apps in communication between bankers and their clients, okay Now with Morgan Stanley's case, particularly they were the worst of the lot. They got the biggest fine. They paid up 200 million Last this is just last year. Okay, and because it's such a big fine I haven't heard of this before and maybe other banks are doing it as well But Morgan Stanley are now passing that cost On to their employees Um, and I haven't heard of that anywhere else But maybe it is happening and their point is and not reading about it It's kind of fair enough from Morgan Stanley's point of view because basically Morgan Stanley operate with this points system. Okay and basically You get Points like negative points for the number of messages you've sent to a client on an unapproved app Like what's that for example? It's based on your seniority It's based on how many prior warnings you've received and it's fair enough, right? If Morgan Stanley are over the top telling their staff, you can't do this. You can't do that. You can't do this Every conversation you have ever has to be recorded and submitted to compliance So if they've given them the guidance and then the number of staff just goes ahead and Just ignores it Then and then they get fined for it by the regulator. Well, I don't know. Maybe it is fair That's one angle. You there's an opposite Because some of the stuff they've been fined for One example of one of these ridiculous fines. So this was Bank of America Yeah, and The suggestions word it was kind of leads That if you're a bank of american you you were to text a client to say With you in five minutes. I'm running late You would fall foul of compliance and the bank's policy Uh What say if I have a phone call am I supposed to record the phone call and then submit the mp4 file to the compliance team I guess I am right. Yeah to say Five seconds. I'm going to be late by two minutes. See you there So I look I think this is the media Just grabbing something and putting that example alongside the one million dollar fine There's no way you get fined a million bucks for saying I'm running five minutes late Exactly, but you'll get fined. Maybe I don't know what the lowest fine. Well, apparently Morgan Stanley the fines ranged from a few thousand dollars Okay, up to one million dollars um, so Yeah, I mean it's got crazy And it's just something to be aware of if you want to go into banking if you want to go and work for these big financial institutions Be prepared to have to kind of comply With this crazy oversight and you know for a lot of people it's the worst part of the job And it's incredibly annoying and frustrating. Um, so you just got to be prepared For the compliance regulatory burden That you're putting on yourself when you enter into these institutions Yeah, and just hearing some of these quotes it reminded me of the libor scandal in 2008 Yeah, it came to light all of the conversations about manipulating Um, basically the the lending rate that gets set in london every every day And I've just gonna gonna finish with a couple of quotes From what some of these people were saying at the time. So here's a couple Could we please have a low six months fixed today old bean? That's just another one fixing as usual moncier Or this one just straight out. I'll coordinate the overnight in the same way we did last week, right? All right, and then I think there's one Um, uh, just be careful dude. There's another one Mate you're getting bloody good at this libor game. It's another one Yeah, and then uh the last one boys well done top work This is what you get put in jail for right And actually on this now I got one final thing Something I read in the well actually my one of my besties. I'll give a shout out to uh Kim right one of my besties. He sent me a he sent me a whatsapp With a little news story that I found highly amusing That's very appropriate to the conversation. We've just been having about insider dealing that happens to involve A lady called Nancy Pelosi Yeah, oh, yeah, she loves it so she She was the Speaker of the house, okay very very prominent kind of u.s Democrat, okay, she's retired now last year but she She was her and her husband while she was in office Pulled off some incredibly dodgy well timed Wow Well timed trades for example. I got two two examples In march 2021 the Pelosi's scored a 1.65 million dollar profit on some Microsoft call options Which they bought? Okay, and two weeks later The tech giant secured a 22 billion dollar contract from the u.s government To supply army combat troops with augmented reality headsets Hmm So obviously they got heavily criticized because basically Pelosi is government She is involved with awarding These contracts and just before it gets announced Just buy a few of those call options, please banking almost two billion two million dollar profit That's that was one example. Another one was your favorite company of all time tesla Because she made a one million dollar profit on tesla call options Which she bought? immediately prior to biden announcing the big tax cuts and incentives to drive the electric vehicle Sector So yeah, anyway, she got heavily heavily criticized and there's a whole bunch of other trades And there was the republicans were trying to get new legislation put through To block her from just blatantly taking the piss and she would block it and block it being the democrat side She would say no delaying it not allowing it to be debated Just a disgusting example Of insider dealing. Okay now this week Senator josh Hawley has just introduced some new legislation Okay To prevent this happening And do you know what the legislation's called? No, this is It's gonna have it's going to be something with her name involved. It's it's genius This is what it's called. And by the way, I'll give you the long name And you've got to think about the acronym that this is now being shortened to the name is preventing elected leaders Owning securities and investments Oh It's the Pelosi act It's it's absolutely genius. The funniest thing I've seen all week. Oh That is it's classic. Love it. Josh Hawley respect But we'll wrap it up there Um, as ever if you enjoyed the episode, please do leave us a rating review if you haven't already done So feel free to subscribe and turn on notifications to get the alerts when the latest episode goes out every week Otherwise take care. Enjoy your weekend and thanks peers. See you later