A real reversal happening? 7/20/23

0:01Right now on Fast, from hot to not, semi slumping housing humbled and two of this year's it stocks, Tesla and Netflix coming back to Earth after earnings. So is this the beginning of a real reversal? We'll debate. Plus, winning time. The Dow now riding a nine-day winning streak, and the transport's trucking higher as well. We'll chart the next moves for these averages coming up. And later, the Barbie effect as the legendary doll gets set to hit the big screen. Could the movie give Mattel a lasting bottom line boost? We're going to go inside the numbers. I'm Courtney Reagan. In this evening for Melissa Lee, this is Fast Money.

0:33Live from the Nasdaq MarketSite. On the desk tonight, we have Karen Fireman, Dan Nathan, Guy Dami, and the chart master himself, Carter Worth of Worth Charting. So let's dig in. And as we start, we're going to talk about the setback in the AI trade. Shares of Taiwan Semi falling more than 5 % today. The world's largest chipmaker reporting its first profit drop in four years. Taiwan Semi putting pressure on the Nasdaq today. The tech heavy index dropping over 2%. CNBC's Christina Parts of Nevelis is here with the Semi Slump. Hi, Christina. Hi. Well, let's talk about what the message was the AI hype can only go so far.

1:06That's exactly what TSMC's management, paraphrasing, said on their earnings call really early tonight because AI only contributes 6 % of total TSMC revenue. Yes, that 6 % should grow to double digits in five years, according to the company, but it's still not growing fast enough to offset the weakness that we're seeing at smartphones as well as PCs, which is a much bigger percentage of industry revenue. TSMC, like you pointed out, fell 5%, but it also brought down the sector like the SMH, a good barometer. Other equipment names too that you're seeing on your screen got hit hard because TSMC reiterated its capital expenditure spend at the low end of the range.

1:42TSMC also plans to slow down production of its Arizona hub due to lack of skilled workers here in the U.S., highlighting another issue for equipment makers. So is now the time to buy the dip, especially when demand for electronics continues to be weak in the second half of this year, according to TSMC. Morgan Stanley, Mizuho both say buy since TSMC's long-term growth remains unchanged. JP Morgan thinks the stock will reset lower in the next few months, but gains over the next few years, aka a long-term hold. Bottom line, artificial intelligence compute demand exceeds supply. We've seen that with Nvidia's conversations, but the PC smartphone business continues to remain depressed, especially in the near term.

2:26Cort. Christina, thank you so much. Very comprehensive report here. Dan, you've been talking about this hype premium for all things AI for some time. What did you make today of some of those comments and the small percentage of the business that exists right now for artificial intelligence for TSMC? Yeah, and that's really the story, right? And again, I mean, I think Karen has been really articulate about this over the last couple of months. I mean, this is going to be a secular trend that's going to play out for a very long time. But in the market cycle that we're in right now, it's drawn a lot of enthusiasm.

2:53It's pushed valuations in this space to a place that you're not usually that familiar with when it comes to kind of chip companies. So hearing this from a company like that, I think is really important. You know, 6 % of their sales. And you think about who are some of their biggest customers. Apple is a 23 % customer. NVIDIA is a 6 % customer. Qualcomm, AMD are high single digits. I mean, these are things that should seep in, you know, and through the industry a little bit because I think we have gotten a little excited. Guy will tell you on the AMD, I'm just going to kick it over to you, what's happened in that stock in the last three months since they last reported.

3:28So to me, I think this is a lot of what we're going to hear during earnings season because a lot of these stocks have run into it. Valuations have gotten a little extended. What's going on in China is not supportive, specifically in this space, for the valuations and the price appreciation we've seen of late. From the CEO, I'm going to read for a second. This is of Taiwan Semi. While we have seen, observed an increase in AI-related demand, it's not enough to offset the overall cyclicality of our business. That's Taiwan Semi. We've said this. I believe it. I'm not suggesting I'm right. But I think it's one of the five most important companies in the world.

4:01Market cap probably backs that up to a point. So when they make comments like that, and Karen can speak to this, we're not discounting the fact that AI is here to stay or tremendous secular headwinds. I think what we've been trying to say is the valuations have gotten themselves off kilter. So NVIDIA traded off today. I'm surprised it didn't trade off more. But I think they're telling you it's going to happen. But the hype has just gotten way ahead of itself right now. So, Karen, that's a good point. I mean, is this not a trade? Is this a long term hold as some of these analysts were kind of looking at here today?

4:32For me, it is. Yeah, I'm not going to trade around it. I do believe in the AI as being transformative and NVIDIA being right in the heart of it. And so I don't think it's going to trade at fair value all the way along. It's going to go way above. It's going to go below. I wouldn't be surprised if we see some more weakness continue here. But I do think the fundamental thesis, nothing has changed at all. And if anything, I think there's more demand for AI. And, you know, everywhere wants to have an AI presence in some way. And I think that's just going to be more demand for NVIDIA and whoever else may come along to compete.

5:03But right now it's just them. So I'm staying with the trade. I absolutely could see it trading down further. That wouldn't surprise me at all. We have August 23rd, I think, is when they next report. And even though it's only a little over a month away in this world, that's that's a long, long time. Right. A lot of things can happen. But I don't think anything's going to happen enough to make me say I don't want to be in the A.I. trade anymore. So I'm just going to stick with the volatility. I wouldn't be surprised given the run the whole space has had. This is just a small pullback. If you pull back from where the charts have been, there's still a lot of downside.

5:36but I'm hanging in for the long term. Yeah, Carter, I was going to say, sort of speaking of the trend, the SMH is up something like, what, 53 % year to date, even if it was down today. It probably doesn't break out of the trend. Not at all, meaning just as Karen articulated, it's a small thing in the context of a very steep, uncorrected move. The question is, is this finished? Typically, one day doesn't solve. So we know sequencing is important. Independent of what one's long-term view is, if you're ever steep and uncorrected, just as if you're plunging, you get countertrend moves. Look at the banks.

6:05They were plunging. what do they do now? They're recovering. If you get too steep, you get a pullback. Pullbacks are not likely to stop after one day. One should just consider this. Since June 1st, the Russell 3000 has almost tripled the performance of the stocks. The Russell 2000, excuse me, small caps. So it's just a function of big names struggling here. Dan, earlier you mentioned Apple being such an important client to TSMC. I mean, what's the read through there? How should we think through that? Yeah, it has nothing to do with, I think, a lot of the AI stuff we're talking about really is about smartphones.

6:35It's probably about Chinese demand. But I'll just say this about the NVIDIA. You know, since it last reported, it's gained more than 400 billion dollars in market cap on a four billion dollar revenue beat in the quarter. This is the poster child. You can timestamp it right here for this bubble that we're in. And it is a bubble. I'm not telling you that the tech won't materialize and it won't transform a lot of businesses and we won't see higher rates of productivity. But the near term, think about this. Think about how much demand there is for these chips to go into these products because these massive big platform companies need to be competing.

7:06Look at the headline we heard from Apple. It was a Bloomberg story earlier in the week that they're rushing to catch up, right, to put something out there to compete with Microsoft and Google. So you have double, triple ordering. You have the Chinese who can't buy these chips, who are buying them at exorbitant prices in the gray market and stuff like that. There is a bubble right now in demand for these things. There's really no commercialization for these things right now. And if you think about it, when we finally do see top line revenues coming in for these products that are using these chips, the cost of compute, the cost of these chips, the margins might not be great on that sort of thing.

7:35This could be the thing that takes the whole NASDAQ down at some point in the next year or so. So if you want to buy these things, you know, you tell me how much of that Tesla move over the last month and a half, hundreds of billions of dollars was associated with this kind of AI pixie dust. I think a lot of it, too. So I just think that there's a lot of stocks that are massively inflated right now, and we're not going to see the benefit. I think it's going to be benefit over years. It's not going to be the benefit in quarters, in the next couple quarters or so. And obviously the Nasdaq well underperforming today compared to the other indices.

8:06Meantime, let's check out D.R. Horton reversing course today. Shares starting the day higher, actually hitting all-time highs before then dropping into the red and the reversal hitting the broader homebuilder space as well. The XHB and the ITB ETFs seeing the same turnaround. The moves come as June home sales drop to their slowest pace in 14 years as the housing market still struggles with short supply. Guy, you flagged this reversal. Interesting moves. D.R. Horton, I think, Pulte also hitting all-time highs here today before just selling off. Is this more about valuations, though, than anything else, than fundamentals?

8:35No, see, I don't necessarily think it's a valuation thing. You know, and Carter can speak to the reversals, what they mean for technicians and chartists, but pretty significant reversal. When Pulte Homes makes an all-time high, reverses, closes down four bucks. DHI, to a certain extent, same type of move on decent amount of volume, two, three times normal volume. That's what you've been waiting for. And, you know, I'm wrong all the time about a lot of different things. But one thing we've collectively gotten right is this home builder move. And it's been extraordinary. But you've been waiting for something like this because when it turns, the turn is going to be extraordinarily precipitous and fast.

9:10Now, I don't want to make too much out of one day, but if you've been waiting for that type of move, today has it in spades, Courtney. And so what do you do with this kind of move, Karen? Well, so I own something like Whirlpool, which is down$4 or$5 today on really nothing, just sentiment changing in the space. And to me, the multiple is very low. Clearly, it's had a nice run, but I still think that there's more to the story. So it's going to be a little bit bumpy. I'm just going to stay with it. I tend not to trade around too much because I'll never be able to get out at the right time, get back in at the right time, and hopefully have gains and be able to make enough spread to pay taxes.

9:48So I get why it's cooled, but still the fundamental supply-demand dynamic being very out of whack, we don't have enough houses, is still there. The fundamental story, I think, is still there. What are the charts telling you, Carter? Right here again. So if you consider Whirlpool, this is a bombed-out name that's basing and bottoming, exhibiting impressive relative strength to the market, whereas homeowners in general are steeped and uncorrected. Consider this. We know they're making all-time highs, right? The S &P 500 homebuilder sub-industry group, whether you use ITB. But from their peak in 06, the housing bubble peak from which we were treated to the financial crisis low, they're almost half the performance S &P.

10:25The problem with buying when you're extended is you often don't ever recoup those relative losses. The semiconductor industry we started this conversation is still below its dot-com peak on a relative basis. Good points. Well, for more on housing and AI trade troubles, let's go ahead and bring in our next guest. It's Peter Bookbar. He's CIO of Bleakly Financial. Peter is also a CNBC contributor. Peter, thanks so much for joining us. I know you've probably been listening to some of this conversation. What do you make of what you heard today from TSMC when it comes to what's going on in the chip space?

10:53The broader situation and hype about AI. We're all excited about it, but it's still such a small part of the business, albeit there's a lot of room for innovation and growth down the pike. Well, that's one thing that the hype of AI and excitement of it did in Q2. It would make people forget about what was going on in Q1. And that's what was a slowdown in chip sales to PCs and to smartphones. And even if you look at these big cap tech companies, they all grew single digits. But again, the AI craze, the hope that the Fed has done raising interest rates sort of whitewashed Q1 and allowed these hopes and dreams to develop in Q2.

11:33And earnings now is sort of a reality slash gut check for what's going on on the ground. Most semis go into PCs and smartphones, and those end markets are still contracting. AI is very exciting. NVIDIA is obviously a huge beneficiary of that. But there's a huge chunk of the semi business that is not selling into AI. With respect to D.H. Horton, one of the old rules of thumb when it comes to trading home builders is you buy them on one times book or less, and you sell them at two times book. Well, D.H. Horton happens to be trading at two times book. And you just have to wonder how sustainable is the housing strength when mortgage rates are at 7 percent.

12:13It's been good so far, but I think investors just wondering for how much longer. Yeah. And to that point, I understand that when you're looking at the housing market, you just look at it and think it's a little bizarre, the fundamentals that we have going on here right now. For sure, when you have existing home sales that outside of COVID are near the lowest level since 2011. So it's a rather bizarre housing market. But affordability is still the overriding issue, both in terms of the price of a home rising 40 percent over the past couple of years and a doubling of mortgage rates. Now, homebuilders have been able to take advantage by buying down mortgage rates, by creating teaser rates.

12:51But again, the housing market needs that first time buyer. And that first-time buyer right now is very strained from an affordability standpoint, raising those sustainability questions with new bills. It's Karen. Let me ask you, do you think then, how do we see an equilibrium? I mean, I understand, obviously, prices of homes are higher and there's this odd existing home versus new homes. But it's been a while now that rates have been higher for mortgages. How do you think this stabilizes or plays out? I think you need a decline in mortgage rates. Or you need a decline in home prices. You need one or the other to make home buying more affordable.

13:30Within the existing home sale number, first-time buyers made up 27 % of purchases. The record low is 26%. Unless you get that first-time buyer, you sort of clog up the housing industry. And I think you need to see some alleviation on the affordability side, whether on the rate side or the price side. And right now, we're not seeing really any give on either. Hey, Pete. So we're probably, what, 20 percent through S &P 500 earnings right here. We saw some big reactions today, both, you know, up and down. And, you know, I'm just curious to get a sense of what you thought of the move in TSM and Netflix and Netflix that ran into their quarters.

14:09But then there's a Johnson & Johnson on the other side that's been pretty weak that had a great day after, you know, having a better than expected quarter. I'm just curious, early readings as far as what you're thinking as far as earnings season and how it's shaping up. Well, I think positioning is huge here. And we know we've created a very high bar for a lot of companies to leap over when it comes to earnings. But I think, again, we're getting a reminder that overall, it's still a challenging macroeconomic environment. And that's not coming from me. It's coming from the companies. I heard that throughout Q1 earnings calls, and I'm hearing it in many Q2 earnings calls.

14:46And when you have a run in the stock market that is solely based on PE multiples, well, eventually you need the E part to substantiate the P part. And we're just not seeing that yet as earnings continue to decelerate. I mean, coming out of the first quarter, earnings estimate for the S &P were closer to 220. Now they're under 217. Interest rates are remaining very sticky at high levels. And you have obviously a move higher in the multiple. So I think that the challenges here for the next couple of weeks, as we digest more earnings, it's going to be tough to exceed these expectations. I mean, you get bizarre behavior.

15:24Look at Taiwan Semi opened up down 5 percent and Apple, one of their biggest customers, opened up in the morning. Obviously closed down. But I think there's some issues that need to be reconciled, let's say, over the next couple of weeks when we get earnings. is, again, that's the reality check for the market that has been somewhat forgotten over the past three months since Q1 earnings were reported. Peter Bokvar, thank you very much for joining us here tonight on Fast Money. Let's go ahead and trade this guy. I want to go to you and what we learned today from TSMC, maybe from what we learned at Netflix.

15:55What can we apply to big tech chip names, semiconductor names when we're looking next week at Alphabet, Microsoft, Meta, Intel, and XP6? Right. Well, in terms of Taiwan Semi specifically, I think they told us, which we should have known, they're still highly cyclical businesses and they're up to uptrends and downtrends. And they're suggesting that things have been slowing down on some of their core businesses, which I think we all knew. And again, the AI phenomenon is not enough to offset the slowdown we've seen. Now, AI notwithstanding, that shouldn't affect names like AMD Qualcomm and to Peter's point and Apple as well.

16:30So valuations do matter. And Apple at this point trading probably north of 30 times next year's numbers with mid-single-digit earnings, big single digits, revenue growth. I don't know. I mean, that sounds a tad expensive in this environment, especially when you have a China slowdown as precipitous as it is. We've got a news alert we want to get to quickly on Digital World Acquisition Corp. Let's get over to Eamon Javers. He's got the details on this. Eamon, what do you know? Courtney, that's right. The SEC is announcing now settlement of fraud charges against that entity. The entity, again, is Digital World Acquisition Corporation.

17:05That's a SPAC that was involved in a Donald Trump linked transaction. It was proposing to purchase an entity called Trump Media and Technology Group Corp, which in turn owns Donald Trump's media organization Truth Social, his social media platform that he uses today. Now, the SEC is saying that that entity, Digital World, has agreed to pay a potential$18 million penalty here for misrepresenting itself to investors. They're saying that these charges now are settled and that penalty will be paid in the event that that SPAC goes through with a merger transaction in the future, Courtney. That's the latest from the SEC.

17:49Got it. Thank you very much, Eamon Jabris from Washington, D.C. Well, coming up, a shot in the arm for J &J. Shares jumping after a big earnings beat this morning. So is the pharma stock the right prescription for your portfolio? We'll debate it next. And speaking of earnings, Tesla tanking nearly 10%, making it the biggest drag on the Nasdaq 100. So is the electric run finally coming to an end? More on the stalled-out EV stock ahead. Don't go anywhere. Fast Money is back in two.

18:21Welcome back to Fast Money. Johnson & Johnson topping the tape. The stock jumping over 6 % on better-than-expected earnings and a hike to its full-year forecast. Stronger sales in the company's MedTech business, boosting the balance sheet as demand for non-urgent surgeries rebounded during the quarter. Karen, what do you make of this one? I guess it's a good thing people are getting back into getting the health care that they need, certainly helping Johnson & Johnson. Yes. I mean, it was a lot to like. You know, interestingly, though, Elevance had a big day the other day because they said their medical loss ratio was down.

18:50There wasn't as much spending. So I guess. All right. Good for them. They also have the Kenview swap coming up. And, you know, people are excited about that. I don't know what to make of the talc story here, how how much to penalize it or if it's already baked in. I'm not sure. So I don't own it. It's been a good run, but not for me. Yeah, there's a lot of settlements going on there potentially or some litigation that's still in process. What do you see in the charts for J &J? Well, one of the things we know is that when you have a mature growth company, you don't generate a lot of alpha. And that's what this is.

19:20This is one of the high flyers, the greatest commercial enterprises, brand names in America. But it has been underperforming the sector, forget about the market, its peers, since 08. It's just been, it's really been in a dud. Here you can see on the screen, this is a relative performance chart of J &J to its peers, Merck, Lilly, Pfizer. It's straight down. Today doesn't change much. I have a day-to-day chart we can look at. Okay, that looks like the EKG chart. That's when I went to the doctor. Up, down, up, down. It's nothing. That's really interesting. And what about the Kenview spinout? I mean, obviously, Johnson & Johnson still owns 90 % of it.

19:58How should we be evaluating that going forward, Karen? Well, I think it's a chance for them to basically do a buyback, which I think would be good for them. But I don't know that changes the overall story that much. All right. Now to a major buzzkill. Check out shares of Discover Financial Nosediving. You know, it's 16 % after missing second quarter estimates on the top and the bottom line. It's the biggest single day drop in more than three years for the company, which also paused share buybacks, speaking of buybacks, and disclosed it's undergoing a federal probe over the misclassification of certain card products.

20:32Guy, this jumped out at you. And obviously, this is a big fall for this name, about 16%. But is this just about an accounting issue? Is there a fundamental problem here? Is this going to be an overhang for some time? What's going on? Well, you hear accounting issues. I mean, it's self-first, ask questions later without questions. So that's clearly a big part of this. But the other part is you hear Capital One a few months ago talk about credit reserves for credit qualities. Then you start to sort of connect the dots and say, you know, Discover Financial is sort of on the precipice of that as well.

21:01Now, again, a lot of this move is predicated on the accounting, but there are other things that work here. So I look at this and I say, you know what? What does it mean for American Express that we're going to hear from? And obviously that's a completely different customer. But as credit becomes a concern, it manifested in moves like this. And this is not a small company. I mean, it's a twenty five billion dollar company. So when you see a move like that of that magnitude, I think it's got to give you pause at least for what's going on potentially for the consumer and the credit markets. What would you do, though, if you were a holder of Discover on this move?

21:33Is it going to fall further? You hang on to it? One of the great early fast money participants, Jeff Mackey, they asked him a similar question. What position would you have? And he said the fetal position. That's one of the great lines in the history. And I think to a certain extent, that's what you're looking at right here. You know, this stock probably still has significant room to the downside. So to answer your question, I'd be selling the stock still despite the move. OK, well, after the break, what charges up must come down? Tesla's big run hitting a wall as investors mull over those results.

22:03Details on the slimming margins, the Cybertruck concerns, and all of that has traders grabbing for their seatbelts today. Plus, we're watching some transport stocks after hours, too. CSX and Knight Swift on the move after posting results. We'll dive into that trade next. You're watching Fast Money live from the Nasdaq market site in Times Square. We're back right after this.