A “Targeted” Problem, or a Bigger Concern? Plus What Treasury Yields’ Big Rise Mean For Markets 8/16/23

0:01Right now on Fast, the Fed still worried about inflation. The market falling for the ninth time in the last 12 trading days and rates keep on climbing. The tenure now with its highest yield since last October. Is a summer slump about to pick up steam? We'll debate that. Plus, full steam ahead, full stream ahead. While linear TV's numbers keep tumbling, the streamers are crushing it. So who besides Netflix is ready to turn those eyeballs into profits? We'll go inside the numbers. And later, the growing bidding war for U.S. steel, Tesla's awful August rolls on. And the casino stocks crapping out after a monster heater.

0:35I'm Melissa Lee. This is Fast Money live from the Nasdaq MarketSite on the desk tonight. Karen Feinerman, Guy Adami, Tim Seymour, and Steve Grasso. And we start off with a surprising reaction to a pretty disappointing earnings report. Shares of Target rising nearly 9 % immediately after posting Q2 results. The stock closing off those highs, but still up nearly 3 % on the day. The move, despite some big negatives in the numbers, the company reporting its biggest revenue drop in seven years. Its first same-store sales declined in six. It also slashed full-year revenue and profit guidance as it struggles to rebound from its pride product backlash and a drop in consumer demand.

1:09Still, even with today's gains, Target is far underperforming its retail peers, down over 13 percent this year versus double-digit gains for the likes of Walmart, which reports tomorrow morning. So does Target's warning raise a red flag for the entire consumer space, or is this a targeted issue? Karen, what did you make of these numbers? I was surprised at the reaction, actually. We talked about this in the green room. I mean, it wasn't terrible. The best thing that Target had going for it was the stock had really not performed well going into it. So that was that. The bar was low. Things seemed better.

1:44But, you know, the earnings were good. The guidance was not as good. It's not a crazy multiple. But the chasm between the Walmart multiple and the Target multiple is gigantic now. And so that's sort of when I first looked at several years ago that maybe that could close. They did seem optimistic. July was better. That last quarter wasn't great, but it wasn't terrible. Their inventories are improving. That was a gigantic issue last year. And so it wasn't terrible. They are hopeful for back to school all the way into September, they said. And I don't know if that's some Bed Bath & Beyond consumers that they could pick up.

2:22That would be good because those are a little bit better margin items. So it wasn't terrible. I guess the street was looking for terrible. And I was kind of surprised, to be honest, the way the stock traded. If you think, all right, let's say they can make the midpoint of their guidance. It is, I don't know, 16, 17 in their multiple, which isn't terrible, but it's not super, super cheap. I mean, it's 10 turns below. Yes. I mean, that's staggering. So is that why the stock was up? That it just simply was too cheap. Relief rally. I mean, I'm sure Steve and Tim have views on this. I was surprised when, you know, if you had told me we play this game, what the numbers would be.

3:04I'm like, this stock's an open lower for sure. It opened up$10, spent the rest of the day going lower. I think what the in my opinion, what the market took inventories were down 17 percent. So they're like, OK, finally, they're getting inventories in check, which is a fine thing, except their product mix is still lousy. Now, valuation. Yes, you can make a case and say I'm willing to wait it out and Target will figure it out. But you've been able to say that for a long time. So I don't necessarily know if it's a read on the consumer as much as it is target specific. Yeah, I mean, you know, I did Squawk Box this morning.

3:34And one of the privileges of being on Squawk Box is to be able to talk to a lot of different people, you know, on the back of the target earnings. And so, you know, to a couple of analysts, I said, let's say you put the pride issues to the side, you know, and that's completely over. I mean, what should target be worth? And they said, oh, you know, maybe 18 times. That's not far from where it is. I mean, it's three turns higher, Tim, because of the mix. The mix is still overwhelmingly a very negative issue for Target going into this sort of economy. What do you think? But the mix will get better.

4:10And so I agree. If you take it at face value with a market that doesn't price stuff in, then you say Target's a company I don't want to own. We've known this about their merchandise and their product mix for the last three quarters and the headlines. Softening sales trends, decelerating discretionary. So you take a company that is 16 times eight bucks a share for next year, which is somewhere around consensus, which came down, by the way, today after they kind of tightened things up. And so you have a very clean inventory position. You have margin, I think, tailwind because of where you have lapped those full year margin headwinds from the inventory.

4:52Inventory shrink continues to be a problem. But really, what have you priced in with Target? I own Walmart. I don't own Target. Walmart's been a great stock to own and it's not cheap. And but I think you stay there. I think you can start to own Target here. Just one thing I want to add, TJX HomeGoods was a surprise beat. You would hope that you would see some of that same home goods kind of, you know, higher margin stuff sell in Target. So it was a little disappointing that it wasn't more better, a little bit better mix. Yeah. Steve, what's your take? And at this point, does it show, does this stock reaction show that maybe Target just got too cheap and it's time to take a look?

5:26Maybe the worst is behind it. Yeah. Yeah. I mean, let's not forget we had woke wars with Target. I think that will probably not be as long lasting as many would have thought that would have been. And then when you compare it to Walmart, Walmart's revenues, 60 % or over 60 % come from groceries. Target, it's around 20%. So you really can't compare the two. I would still stay with Walmart, but it does really reflect a kitchen sink type element to it. Karen touched on it. You have back to school, then you have Christmas. So there's reasons to be bullish on Target where it is right now. Now, the stock has not been above its 50-day in quite some time.

6:11Popped above it, now back below. But I think you could probably buy Target here. It's interesting because product placement is such an important factor for these companies. You have these things called impulse buy. And I'm glad that Steve brought up back to school because it's pretty clear that Tim is preparing for back to school as he has his thermos and lunchbox behind him. So good for you, Tim, getting ahead of this curve. That's a nice job. Well done. I don't know how you folks are bringing your lunch to work, but, I mean, if it's not in your Ms. Pac-Man lunchbox and thermos, I don't know what you're doing.

6:45So, of course, it's back to school. And, Guy, I assume you're going with the Charlie Brown possibly lunchbox? Well, you know, that was – what are you doing? I'm going strong Brady Bunch this year. I was hoping to find a Partridge family. I was not able to, unfortunately. Mel, back to you. I think they don't make those anymore, and it's scary, but you probably can't find one either. Back to school, that's interesting because, Karen, another analyst said that back to school is a very, very good indicator with how the rest of the year would go. Target specifically mentioned the resumption also of student loan payments as being a headwind for the consumer, which I thought was – we all know that, but it's different when a CEO actually cites it.

7:25Right. I think they want to be cautious, as they should be. They've had a bit of a rough go there. I was surprised at the back-to-school comment, even lasting through September. And that would be good for them, though. They need to get their mojo back a little bit. I mean, getting the inventories in order was part of that. But it's been a tough slog here. Yeah. How much is there a read-through, Tim, do you think, to Walmart, to other retailers? Or do you think that Target is sandbagging a little bit on its guidance and a lot of the other issues are Target-specific? Target tends to be very conservative.

8:03I think some of these issues are target specific. And I think it just gets back to where you've seen Walmart win. First of all, Walmart wins on price. They push everyone around. They dictate price. And they will continue to do that in a softening environment. The trends for the consumer, again, to be clear, are not great here. And this plays into Walmart. Should Walmart be trading at a premium? I think so, because I think that multiple comes down. I think they're going to be more profitable. I think their margins are going higher. They've made major investments in their stores. They've made major investments in digital.

8:34They've made major investments in technology. So I think Walmart's customer is a similar customer, but not quite the same. And therefore, they're not going to necessarily see the world through the same set of eyes. And let's talk about the consumer quickly. I saw something on bank rate today, and this actually was somewhat astonishing. Second quarter last year, serious delinquencies for credit cards were 3.35 percent. In the same quarter this year, the second quarter, up to a little over almost 5.1 percent. That's a market jump. And, you know, we're looking for cracks in the consumer armor. Well, that's the beginning of it for sure when you see that.

9:11All right. In the meantime, we are watching the 10-year yield. It popped on the back of the Fed minutes this afternoon, then gave back some of the increase. The benchmark rate climbing as high as 4.28 percent. That's a level last seen in October for more on what drove that move and what the Fed minutes mean going into Jackson Hole next week. Let's get to CNBC's Steve Leesmith. Steve, you know, we've had the pleasure of hearing a lot of different Fed officials since that last meeting. Is anything really different from the FOMC minutes versus what we've heard recently? Well, I think we've got a little bit more disagreement among Fed officials.

9:47So at the July meeting, remember, they hiked by a quarter point, right? And they thought more hikes would be needed. A minority emerged here suggesting the case was not so clear. And even two participants, we learned in the minutes today, Melissa, thought the Fed should not have hiked at all. The minutes said, here's a sort of a juxtaposition of two very different ideas. A number judged that risk to the achievement of the committee's goals have become more two-sided, more balanced. But they went on to say also most participants see significant upside risk to inflation, which could require further tightening of monetary policy.

10:21I think that was the operative phrase that essentially moved the markets this afternoon. So the minutes were somewhat more balanced than they've been recently, but I think it's too early to sound the all-clear signal on rate hikes. Here's some of the stuff going on now. You have CPI, of course, came in below expectations after the meeting. Payroll growth did cool again. That was after the meeting, though remaining, of course, above trend. It was retail sales and industrial production today above expectations. And these GDP forecasts, as you know, Melissa, have been raised sharply for the third quarter.

10:50So the outlook for GDP, I think, is really important to the rate outlook here, because the minute said many think that you need below trend growth to bring supply and demand into balance. The economy is not definitely below trend at this point. It may be quite a bit above trend. And, you know, I'm guessing, Melissa, I'm hoping we get some clarity on the Fed's next move next week. It could come at the Jackson Hole meeting, get a speech by likely speech by Fed Chair Powell. And then we'll have some hopefully some interviews with several Fed officials there. Steve, you know, for so long, the focus had been on whether or not the Fed is going to hike again, how many hikes.

11:28And to some degree, we're still focused on that. But it seems like the next dimension that the Fed would address, maybe at a opportunity like Jackson Hole, would be how long monetary policy remains restrictive. Do you think the Fed, Jerome Powell, tackles that sort of policy dimension in this speech to really hammer that home? Because the Fed doesn't necessarily need to raise rates again. But if it does keep rates elevated, it will still be restrictive. I think that's a smart way to think about it, Melissa, because what he doesn't want to talk about is cuts. And I think he's sort of done talking about hikes.

12:06So although I think he wants to keep those on the table. So I think the next sort of macro question is, how long do you stay on hold? And there is this question out there that the Fed, in order to not become more restrictive as inflation falls, is to reduce rates. So if it's going to stay there for a while, when you look at the way the market is structured, about a 37 % probability of a rate hike in November. So, you know, 40%, call it whatever, a little bit elevated today, all day, especially in of the higher economic forecast we've had. But then look into next year, and now you have cuts built in, and the market and the Fed are a little bit off sides on that, a little bit different there.

12:44But the market starts to see rate cuts coming in May, and then more as the year goes by with about three rate cuts built in for next year. All right. Steve, thanks. Go catch your plane. Steve Leeson. I love that shot from the airport. It's a beautiful shot in Washington. What do you think? Last year was an eight-minute speech out of Jackson Hole from Jerome Powell. Similar. But, you know, I think they have some runway. Well, no pun intended, but some runway to sort of, you know, I think they can start to put some test balloons out there just to see, especially given what's going on with the Bank of Japan, their bond market, yield curve control, seemingly losing a little bit of control, and obviously what's going on in China.

13:25That might give them some air cover to actually talk a little bit more dovish than they've been. So we'll see. But they could go either way. I will tell you, though, in my opinion, closing above four and a quarter in the 10 year yield is a big deal. These are levels we saw in October. And if you recall where the equity market was in October, it wasn't particularly good. I mean, I think, you know, to think about this in the context of yesterday, the intraday high was four to six four. And so for us to go and close practically at that level is kind of psychologically important. Well, I sort of think, you know, if they do hike, then it'll be a little more dovish rhetoric.

13:58If they don't hike, then it'll be a little more hawkish rhetoric. just trying to, you know, keep people sort of from getting too worked up or too excited over the idea that they'll start cutting. I don't think they want, I don't think they want that out there. No, I think they want to put the cuts, you know, like, yes, right. But now it sounds like there's some dissent. I had thought, I'm a little surprised there was some, I don't know, we'll see, we'll see where the next meeting goes. But I think that the higher for longer, how could they not be? until something dramatically changes. We keep expecting labor to change.

14:35And it hasn't. It hasn't. Retail sales are good. All these things are good. Right. Industrial. Right. Production. All right. For more on the Fed and Jackson Hole, let's bring in former Fed Governor Randall Crosner. He's currently a University of Chicago professor of economics. Randy, great to have you with us. What do you think Jerome Powell's job number one is at Jackson Hole next week? Well, it's interesting because remember last year he ripped up the script and he gave a much shorter speech and said the same thing eight times. Inflation is our priority. And so in some sense, he's not going to take a victory lap, but they've made a lot of progress.

15:07Inflation has come down a lot. They've raised interest rates quite a bit. And I think he's going to talk about how inflation is starting to come down, but that the Fed needs to continue to remain vigilant, exactly as you guys were just describing. They don't want to give any signal that they're going to be cutting anytime soon, and they're not going to be cutting anytime soon. Randy, it's Tim. Thanks for joining us. how is the Fed viewing the rest of the world right now? And some of the issues we're starting to see may make their job easier, may make their job more difficult. There's a bit of a flight to quality going on to the dollar.

15:39There is certainly a dynamic with the Chinese economy and even other central banks that are making the Fed, even on a relative basis, look more hawkish than they might. Is that good or bad? They're going to take that into account. And certainly, we're getting a lot of negative news out of China. So China is slipping into deflation, they're cutting rates. Other central banks are either holding or raising rates. And so very, very different in different parts of the world. I think they would like to see a little bit less excitement and activity globally. Not that they want to see recession, but as the minutes made really clear, and their statements have made really clear, if the economy continues to be kind of steaming forward with near record low unemployment levels, increasing GDP growth, it's really hard to see how that's going to be consistent with inflation continuing to come down and staying sustainably close to their 2 % goal.

16:39So I think a little bit of slowness in the rest of the world will be welcome, but certainly they don't want a global recession. Randy, when you look at it, you just touched on it. Does the Fed have to wait until the jobs market cracks? That's number one. And what do you think about long and variable lags? Because there's a lot of stuff that could still be coming down the pike, so to speak. For sure. So I'm at University of Chicago and Milton Friedman, a great University of Chicago economist, and 50 years ago talked about long and variable lags of monetary policy. And boy, are we still seeing that today because the feds been been at it for a year year and a half and the labor market is still near record low unemployment rate so I think exactly you said they're going to wait to see some of the heat coming out of the the labor market and say people won't be satisfied until they actually see the unemployment rate start to move up others will say well as long as the the growth rate of wages comes down a little bit.

17:42So I think that's kind of where some people around the table will disagree. But I really don't see how they can feel comfortable to say, OK, we're not going to be raising anymore if the labor market is as strong as it is now. Right now, I'm just curious. You know, we got earnings this morning from Target. We're getting earnings tomorrow from Walmart. And so many people are expecting the consumer to endure more stress as the year goes on because they're taking on more debt. They're paying higher rates. They've got student loans that they have to start repaying in October. What's your take? Do you think the Fed preemptively takes that into consideration when thinking about these hikes?

18:19Or do they wait to see that impact on the consumer? I think they're still waiting to see the impact because the consumer has been quite resilient. Consumer confidence has been strong. It's really quite impressive how, whether it's COVID or whether all these or interest rates moving up to levels they haven't been in many, many years, the super has been pretty resilient. And that's great, but it also makes the Fed's job a little bit harder. So I think they're going to want to see a little bit less strength there, a little bit more moderation before they're going to be able to feel comfortable to say, OK, no more hikes.

19:00But as I said, they can be talking about cuts for a very long time. Yeah. Randy, thanks. Randy Krosner. All right. So what's the market reaction to that message? If that message is loud and clear next week, Guy, in terms of no rate cuts in the near future, like get that out of your mind, markets. We're not even talking about that yet. Markets not going to like that. I mean, if that's because I do think my sense is until obviously the last week or so, the run up in the rally has been predicated on exactly that. some hope, in my words, misguided belief that in the beginning of next year, January, February, there are going to be rate cuts.

19:36I don't see that happening. So if they were to completely take that off the table, despite the fact that we've sold off pretty significantly, I think you'll see a further sell off in the market. Coming up, we've got some after hours action in Cisco. Shares on the move after reporting results, the latest numbers out of that quarter ahead. But first, all eyes glued to the likes of Suits and Bluey, Guy's favorite show, obviously, And streamers logged billions of viewing minutes in July. What it means for the billions of dollars up for grabs in the streaming wars. Don't go anywhere. Fast Money is back in two.

20:09Welcome back to Fast Money. You've heard of binging, but 23 billion minutes of it. New data pointing to a pivotal moment in the streaming wars. Julia Borson's got all the details. Julia. Melissa, this summer marks a key tipping point for the entertainment industry. For the very first time, linear TV viewership fell below half of all TV usage in July. That's according to a new report from Nielsen. So that 23 billion viewing minutes number you referenced, that was viewing of Suits on Netflix and Peacock and Bluey on Disney+. Now, those two shows were July's most-watched streaming programs. The success of decade-old Suits speaks to Netflix's ability to mine old content and turn it into a big new hit.

20:53Guggenheim writing, quote, we see the unique strength of YouTube, 9.2 percent viewing share and Netflix, 8.5 percent, as particularly noteworthy given the ubiquity of competing streaming services. These two industry leaders combined for nearly as much viewing as total broadcast television. They also accounted for 70 percent of streaming industry growth in the month. So now the strength of streaming growth will be threatened by rising prices. It's what I'm calling streamflation. The top six streaming services without ads will cost$87 this fall. That's up from$73 a year ago. So we'll have to see if consumers opt for lower cost ad-supported options or if they start to drop some of these subscriptions.

21:36So, Melissa, the cost of that bundle of all of those streamers this fall, that's actually more than basic cable TV. Wow. And I like streamflation. That is catchy. Julie Borson, good job on that. Thank you. Why are you laughing? Some people invent terms and they're not catchy and they're not funny. They're not. They make no sense. Story of my life. All the things I do. But streamflation is perfect. It's perfect. How do you trade this? What do you call it? Streamflation. Streamflation. Well, quickly, Nancy's been with us for years. You don't see Nancy, but she's a... We could see her if the jib turns around.

22:13If the jib turns around. But in the break, she's like, you're the father on this bluey thing. I don't know this bluey. Which one can stream? But apparently it's a cartoon. So I want to either thank her or not thank her. I'm not sure. Netflix, though, if you go back to last April, it took a pause around$3.90. And Steve has pointed this out. Doesn't mean it's broken. Netflix is still the best in show. But I think if you're looking for an entry point, you've got to wait to that level. We're probably about$20 or so from it. I think it's going to get there, Milms. Yeah. Grasso? Oh, by the way, Nancy, this might have been her debut, maybe the second or third time.

22:47But we saw her in that shot. Oh, did we? Oh, it's outstanding. Yeah. Oh, yeah. Where? She's hiding. We saw her. In the shadows. Excellent. Everybody loves Nancy. So when you look at Netflix, I do agree with Guy's level. I'd even go a little bit lower than that. There's been a couple of tailwinds for Netflix. Obviously, it was the password sharing crackdown. Then it was the writer's strike because they just already have so much more content than everybody else. It's their share to lose. But to Guy's point, when you look at the chart, it has been roaring above its 50-day and above the rest of its moving averages for quite some time.

23:26It's dipped below now. So if you look at this chart, it looks like it wants to go lower. There's not a whole heck of a lot of other streamers to play. But all the air has come out of like a Comcast because Comcast is associated with that linear side of the television business. But I think people are overlooking some of the other players in this space, in streaming, because Netflix has definitely sucked up all the air in the room. Yeah. Or is this a story of people pay up for for for, you know, these packages? They will accept streamflation because they will cut back on other areas of entertainment because it's a lot cheaper to pay eighty three dollars a month or whatever the ultimate cost is for a bundle of these streamers versus actually go someplace or go to the movies.

24:11but there's also the issue of you have so many competitors and some of them are just not going to be able to hang on anymore right now so well i don't know we'll see if they combine or what one thing i just want to point out though that youtube number and that's something gene munster talks a lot about is not the streamers but the youtube the tiktoks you know wherever that's where eyeballs are going so um it's netflix to lose i dip my toe in disney and now my toe is So they're not very partially. OK, coming up, the earnings season just keeps rolling on. Cisco on the move in the after hours. All the numbers from that quarter next.

24:48Plus reports of another offer on the table for U.S. Steel, the company that might be throwing its hat in the ring and why everyone seems to want a piece of steel. You're watching Fast Money Live from the Nasdaq markets in Times Square. Back right after this.