All Eyes on Meta Earnings and the Fed, Plus CME CEO Terry Duffy on the Markets 7/26/23

0:01Right now on Fast, a mega quarter for Meta. The stock popping after hours on a double digit jump in revenue and optimistic guidance will go inside the numbers straight ahead. Plus, the Fed raises rates to its highest level in 22 years. And Chair Powell says decisions will now be made on a meeting-by-meeting basis. The Dow eking out a gain, bringing its winning streak to lucky 13. And has Netflix reached a breakpoint? One of our traders feels like the stock is now too hot to handle for his portfolio. He will explain why. Then later, we're riding the rails with Union Pacific, taking flight with Boeing, and cracking open the results at Coke.

0:32I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq Market site on the desk tonight. Tim Seymour, Steve Grasso, Guy Adami, and with us for the hour, Michael Cantopoulos from Richard Bernstein Advisors. Welcome, Michael. We start off with Meta's huge revenue beat, the social media giant reporting double-digit growth for the first time since late 2021. The conference call just getting started. CNBC's Julia Borson is listening in, has all the details. Julia. Well, Melissa, MetaShare is up about 5 % after beating expectations across the board, reporting 11 % revenue growth. That number is key because analysts expected 8 % revenue growth.

1:05And last quarter, the revenue growth was just 3%. Now, furthering this growth story, the company guided to better than expected accelerating revenue growth in the third quarter. I just spoke to CFO Susan Lee, who told me that these results reflect solid execution across Meta's family of apps, also better monetization of reels. Now, the company did raise its 2023 expense guidance due in part to a legal charge. But Lee telling me that in this, quote, year of efficiency, they have made very good progress on the company's cost structure. But there are a number of factors that will drive expenses higher in 2024, including higher infrastructure costs, growth and payroll expenses as they hire more higher cost technical roles.

1:50and, of course, the metaverse. They're forecasting operating losses at reality labs will increase meaningfully year over year due to ongoing product development efforts in augmented reality and virtual reality. We will be listening for more on this from CEO Mark Zuckerberg on the call, which is kicking off now. And I'll be talking about all of this and more with Meta's CFO, Susan Lee. That's coming up in a first on CNBC interview. Actually, her first interview since taking on that CFO role. That's tomorrow in the 11 a.m. Eastern hour. Melissa? Julia, in all that time, you did not mention AI. So where does that factor in in terms of the accelerating revenue?

2:29Well, what Mark Zuckerberg, I bet, will say is that they've been investing in AI for a very long time. AI costs, actually, AI costs are one of the factors that are going to be driving their infrastructure costs higher. So they're investing in all that computing power that it takes to have AI. They've also talked about how deploying AI is going to make their ads better for their brands. And so AI is going to effectively make ads more efficient, better able to target and send the right messages to the right people, and then also make it easier to measure the impact of those ads. So AI is one of these things that they're going to have this chat bot that I think Mark Zuckerberg is going to be talking about on the call, but also ultimately just more tools for advertisers to make the platform more efficient.

3:13All right, Julia, thanks. Julia Borson. We sat here on this desk 24 hours ago. We got alphabet earnings. There was cautious optimism surrounding what Meta would report. Here we have it, Guy. Yeah, and their core business continues to crush without question. It's interesting. All the things that Julia just talked about, the cost, reality labs, two years ago when the stock was making all-time high, July of 2021, that's what got the stock cascading from$380-something down to$88. Now, seemingly a bit more palatable. I think they've gotten their core business back in line. The quarter's fine. And there's really nothing not to like.

3:45The question is, are you getting concerned again that there seems to be this spend coming? I'll say this. Typically, when a stock goes from 90 to 310, wherever it is now, 250 % move, you'd say too much, too fast. I think in Meta and Facebook's case, it's a little bit different because you could argue that that was a complete, you know, just some anomaly down there. Yeah. And now here we are now. So valuation at 21 times next year's numbers is still actually pretty compelling. Yeah, it's up 43 percent or so in the last three months, 153 percent year to date. This is so I don't want to say that I'll take the other side, but I think you are hitting a wall.

4:25This was because of efficiencies, layoffs, pulling back from metaverse. No one knew what metaverse was. Now everyone's excited about it because they think it's A.I. You don't know whether it's A.I., whether it's metaverse or it's all the above. But at this point, I think you've got to step back, see where the smoke clears and see where the investment goes. But it wasn't all just efficiencies. And we are seeing an inflection when it comes to ads. And we heard that from Alphabet. What got what got them going, the tip of the iceberg was let's let's lay off a little. We're going to back off that 10 billion dollar number on the metaverse spend.

5:04And people started to say, oh, OK, that's where we're going here. And then, of course, you had the iOS privacy concerns that subsided a little bit. It was a host of everything. OK, I get that the gains were jumpstarted by this year of efficiency theme, Tim. But all the companies are in a year of efficiency. I mean, if you take a look at Alphabet, Alphabet was also cutting costs. They were laying, I mean, they're doing their own job cuts. They're sort of rationalizing their real estate footprint. I don't mean to do a side by side comparison, but we're talking about companies with similar PEs at this point.

5:37And so what do you think of the meta story? Yeah, I like the meta story. I'm long the meta story. And so we went from the year of efficiency to at 18 and a half percent EPS growth. It's it's the year of growth. And I don't know that it's going to be the year of growth. And I think we we have to ask a lot of questions about how excited should we really be about threads? You know, I don't know about that, but but reels, very real. And in terms of the AI implications and the addressable market growth for reels and what it means for Facebook, I actually think that the growthier side of the multiple, and there really isn't one in Facebook meta.

6:14Sorry, I don't know what we're I just almost Facebook them. And there was a time I said I would never meta them. But meta has the best peg ratio of any major company in the world. I mean, this is basically at least based upon these numbers. It's growing it, you know, with a peg of one time. So EPS growth around 18 times, a multiple around 18 times. And the question is, how sustainable is this? I will say I think I've pointed out that I think the media and ad kind of spend companies were were assaulted first and questions were asked later as we came out of the the early rounds of the Fed and fears on cyclicality.

6:51What we've seen with everyone other than, you know, Disney, which has got different issues, but certainly with Netflix, certainly with Meta, certainly with Google, is that these companies are actually seeing positive cyclicality in terms of their core businesses. So I think the comps were very easy here. I don't think you get carried away, but I think you stay here. No question. Yeah. And I don't want to change that. I'm not changing the subject. Microsoft, on its earnings, was down almost 4 % in today's session, Guy. And so there is not this sort of just fervor into big tech, look past the blemishes of the earnings season.

7:28There is sort of a, this is what we have. And, you know, within that framework, we do have this gain in meta after hours. Which makes sense. I mean, that's encouraging, actually. You want to see that, right? There's just not this people just blindly buying everything on the back of dot com type of thing like we've seen historically. And I get it. Microsoft should have been down. I think it could continue to go down. But in terms of Facebook and, you know, you talk about efficiencies. We'll talk about our poos real quick. Does Tim want to chime in? Because that's typically when it's his turn to Tim.

7:57Just to sort of. Remember in the Adams family when every time Morticia spoke French. So every time we bring up our poo, it's a thing for Tim. But listen, if you look at the U.S. and Canada, which is their biggest region by far,$53.50. I mean, that's a year ago was$50.25. But it's across a swath. Europe was better. Asia Pacific was better. The rest of the world was better. It means they're running their business more efficiently. The caveat being, if they're going to start doing the spend again, if this reality labs is going to cut into things, it might concern people. Right now they're getting a pass.

8:29All right. Let's get to the other big story of the day as MediShares approach after our session highs here. The Fed raising rates by another quarter point to its highest level since 2001. Stocks initially rallied after Chair Powell suggested there may not be another hike in September, but closed well off the highs. The Dow, though, did eke out 13 straight days of gains, its longest winning streak since 1987. Let's get to Steve Leesman, who's got all the details out of the central bank. Steve. Hey, Melissa. Yeah, the Federal Reserve, after that one meeting pause, was back at it again, raising rates in July, increasing the funds rate by 25 bps to a new range of five and a quarter to five and a half percent is the highest level in 22 years as expected and Fed Chair Jay Powell in his press conference did not provide very much guidance at all as to whether the Fed has done or whether it has more work to do.

9:18I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted and I would also say it's possible that we would choose to hold steady at that meeting. We're going to be making careful assessments, as I said, meeting by meeting. The Fed's statement did hint at more hikes to come, saying the Federal Mark Committee, which sets rates, is, quote, determining the extent of additional policy firming that may be appropriate. So kind of leaning that way after the statement and the presser. The futures market traded with a 22 percent probability of a hike in September and 38 percent of a probability of a hike in November.

9:50A sign the market believes if the Fed is going to hike, it's likely to skip a meeting again. On the plus side, Powell spoke pretty confidently about the chance of a soft landing for the U.S. economy. Consistent with having a soft landing, you would have some softening in labor market conditions. And that's still likely as we go forward with this process. But it's a good thing to date that we haven't really seen it. All right, the next critical steps now, as Powell said, two inflation reports, two jobs reports before the Fed has to make up its mind again about what it's going to do next. And of course, guys, there's that speech next month by the chair in Jackson Hole, which we'll all be listening to.

10:29Very, very closely. Steve, thank you. Steve Leisman in Washington for us. Michael Cantopoulos, every meeting is live. You know, it's funny because I feel like Chair Powell, I could totally identify with him today. When you talk to a small child, like a three-year-old child, just for instance, and you say, you're not watching TV today, and the child says, oh, maybe I'll watch in five minutes. No, you're not watching TV today. Every meeting is live. They're going to look at every single data point at every single meeting. He said that over and over and over again. Yeah. Did we finally absorb that?

11:01I'm not sure, Melissa. I mean, my three-year-old doesn't start with five minutes. Usually he starts with, like, maybe one minute. But, listen, I think Steve said it very, very well, right, in terms of offering little guidance. I mean, he kind of told us a lot without telling us anything. You know, what do we know? We know they might hike. They might skip. They might pause. But we also know they're not going to cut. And I think that's a big message because I think when you think about a pivot and what does a pivot actually mean, a pivot means cutting. It doesn't mean holding rates at five and a half percent for the next three, six, nine, 12 months.

11:32But that's also a good thing. You know, I think Guy said this earlier with regards to Microsoft and Meta and the difference between the reactions in the last two days. We can now focus on fundamentals a little bit more. You know, we know that the Fed is not going to rush to put us into a recession. That might ultimately be the end goal, but that could be a year from now. It could be two years from now. Who knows? But I think actually this is a pretty healthy development for the markets. Is the market, is the S &P 500 at 4 ,500 and change? Is that reflective of this notion of higher for longer, that there are no cuts on the horizon here?

12:09And what sort of sectors do you go to in that environment? So in a rising rate environment, we're always told that you don't invest in tech. But our tech is large cap tech who doesn't who they do not need to borrow money. So they have cash rich balance sheets. So that's where fooled the whole market. Everyone got out of tech and then we had to run right back into tech. The market went from peak to trough and then the retracement is that 76 percent. We've never had a retracement of 76 percent from peak to trough and not made a new high. So the market looks like it's going to take out the old highs that we've had in the S &P.

12:50Really? So everyone gets a little off balance on this because you're right to be off balance. We should have sold off. Didn't. Now we retrace. Now what do you do? So to Michael's point, I don't think the market, the market is not going to worry about fundamentals just yet. The market's going to worry about momentum. Momentum is still on the bull side. You're going to keep trading this market higher until it hits a wall. And, yes, there's going to be down 2 % days. It's going to be down 3 % days. But what happens on those days? You keep buying the market. And what gets bought? Tech gets bought.

13:26But now value is actually starting to get bought as well. I mean, another interesting part of this whole thing is Bank of America just pointed out yesterday that the cost to protect is its lowest since they've been keeping records. 2008, I mean, it's so cheap. Volatility is sub-14, Tim. So that's another factor in this whole thing. It is. And if you think about this 13 days in a row for the Dow, it's really about industrials and companies that I think actually have been de-risked. Look at the banks, look at the KRE. By the way, cue the bearish comment that we know that that was 1987. We know what happened in 87.

14:02Apples and oranges here. I look at the Fed today. You can't say it was a non-event. And Michael's right to point out what we know and what they didn't say. But I think the dynamic here is you did see the dollar weakened. So the S &P traded up 25 handles, down 35. Basically, it was a non-event. The dollar traded down. And I think that also is supportive to credit. If we were concerned, you know, the Fed was going to be overly aggressive and one day does not a view and a structural call make. But I think you watch the dollar here. I think the dollar is going to continue to weaken. It's not going to happen overnight.

14:40And it already has weakened somewhat. But I think the message for markets here is that you are getting the kind of breadth that is telling you something. And it's telling you that at least from a credit perspective, you've de-risked this market a bit. For more on the Fed's decisions, impacts, let's bring in Terry Duffy, the CME Group's chairman and CEO. His company reported earnings before the bell this morning, beating estimates for both revenues and earnings. Terry, it's always great to see you. Thank you, Melissa. Appreciate you having me. We appreciate you watching us every night. Terry, you know, I want to get your reaction to what the Fed is on.

15:14We know you do because you email us constantly to what the Fed has done in the context of this market. I mean, does this all make sense in your mind? The levels we are at the markets, evaluations we are at, the huge gains in technology with a backdrop that rates will stay higher for longer and could even go higher from here. Yeah, here, I, Melissa, I think it's clear as mud. and everybody that I've known over the last several years that talked about interest rates has been absolutely wrong. Everybody said the Fed would raise 25 basis points, 50 basis points, 100 basis points, and stop. And if you managed your risk, and that's what I do.

15:51I manage risk here at CME Group. And if you would have managed your risk based on what you thought the Fed was going to do or not be doing, you would be out of business like we've seen a lot of the smaller banks. And we saw another one today with PacWest going to be sold. So people need to manage risk. It's really hard to predict what the Fed is ultimately going to do. I think it's one of the reoccurring themes that I keep hearing, you know, from some of the pundits, not just on your show, but others, is that, you know, the verdict is still out on what is going to happen, whether inflation is going to be under control, whether it's not going to be under control.

16:24And I think those three words, verdict is still out or four words, I should say, is critically important. And people need to manage that risk because margins are thin. And so I don't know ultimately what it means other than everybody that I've talked to over the last year has been dead wrong when it comes to what the Fed was going to do. And whether there's going to be a soft landing or not, I think the Fed's done a pretty good job of threading the needle to where we're at today when he was bold enough to make a comment that he doesn't see a recession. Because I think a lot of us, you know, in the business, we're going to see a recession over the last 12 to 18 months for sure.

17:02And he still has not materialized. So I think he's done a lot of good at the same time. But boy, if you're going to try to sit around and try to make a prediction, sometimes it's better instead of talking to markets, you should listen to the market. So they'll tell you what they want to do. So what are you hearing in terms of the activity and the various products that you offer? You know, we're reading constantly about zero-day expiration options, the popularity, how the number of those exceed the number of S &P 500 options on any single day. I mean, it's just staggering. So how does your market view get reflected in your business?

17:37Well here, zero data options, you know, we all list these short-term options and they trade on, like so at SIBO they trade and they expire into cash at CME Group, they trade and they expire into a futures contract and you have to take delivery. So that's the only difference. So some of the retail will go more focusing on the trade over at SIBO as it relates to deliver it into cash. But listen, our options portfolio in our business goes out multiple quarters into multiple years. And the beauty of CME Group is that's a small percent of the bigger part of our business, which is futures trading. And nobody else has that, Melissa, as you know.

18:20So we're the largest futures exchange in the world, and we have a growing options business on top of it. For me, it's a win-win for CME Group. We continue to manage it. Others don't have what we do as it relates to some of the product mixes we have. Terry, typically in our world, when you're early, you're wrong. But you've been ahead of so many different things. And in October, I think it was Halloween of 2021, you announced that deal with Google, 10-year deal, cloud infrastructure. I think a lot of people said, what does Terry Duffy see that we don't? And now here in July of 23, AI, all those things, markets.

18:51I mean, you're sort of at the forefront. Maybe speak to that integration and now what that means to markets, because I think you're really positioned well for this. Well, Guy, I appreciate that. And we did see a lot of things with Google and the cloud. And I'm extremely pleased to say that we've moved many applications from market data applications to clearing applications into the cloud, and we're progressing right along. But one of the things you touched on, and I know everybody's touching on AI, but we're learning so much about AI and machine learning with our partners at Google. And that is doing wonders for us to see how the market's going to look in the future.

19:26I don't know how much artificial intelligence is going to take place into the market. So how much of these inputs are going to go into people's algorithms today? And how much are they going to go into tomorrow? Is it going to be good or is it going to be bad? How is market structure going to be affected by this? I will say one thing. We'll be at the forefront of any change that's happening. I do think it's going to change. I hope for the better. I believe it's going to be for the better. But this is an interesting time. And I know you guys talk about AI a lot. and you're probably sick of talking about it.

19:58But in the markets themselves, in the market structure, we have not talked about AI. And I think there's going to be a lot of conversation in the next couple of years as it relates to that part of the business. So when we talk about AI, we're mostly talking, Terry, about the spending ramp associated with AI that needs to happen. Do you see that just underway in the financial services industry? Is it just underway at CME Group? Well, yes, I think it is just underway, and I don't think we've scratched the surface in the financial services yet. As Guy said, we came up with this transaction with Google a little over a couple years ago on Halloween, and we are just putting our applications in there.

20:40We have not even gotten our markets into the cloud yet, Melissa. We're hoping to have that done in the next year or two. And once we do that, we're going to see how the different artificial intelligence, along with the machine learning, feeding these artificial intelligence, how the markets react to them. And I think it's going to be a fascinating time. Change is always difficult, but hopefully change brings efficiencies to the marketplace and lets more and more people participate in a way that makes sense for them to mitigate and manage their risk. So really exciting times as it relates to the markets with AI.

21:13Terry, always great to see you. Thanks, Melissa. Appreciate it very much to you and your team. Thank you. Thank you. Terry Duffy, CME. Tim? Well, Terry says listen to the markets because, you know, everything else is maybe wrong or it's impossible or it's clear as mud, I think, is this quote. And I agree with that. And also, you know, Terry and the futures markets have also had a front row seat on positioning. We're at a place now where positioning for markets is very different than it was at the start of the year. Sentiment is very different. And I think that's what we need to be listening to.

21:46I think markets have come an extraordinarily long way. And I think we're at a place here where, you know, maybe the argument that people, the risk was to the upside because this was the pain trade. This is something we should be thinking about maybe the other way. I think we're getting to a place here where markets need to pause. We really are waiting to see the impact of the Fed. You know, Tim, I think from my perspective, I'd maybe take a little bit of a different view. You know, I would say listen to the profit story. Listen to profits growth. I mean, to go back to the earlier conversation of the companies we discussed in the first part of the segment, this was about earnings growth.

22:22Right. That's what you buy when you buy a company. You're buying earnings growth. And so, you know, you can play momentum, of course, and that's a strategy. But I think for, you know, longer term returns and growing wealth over time, you've got to follow the profit story, not necessarily the markets, because the markets do get things wrong. You know, and if you follow the markets, you know, instead of fundamentals, you know, that's that could be a slippery slope. Coming up, a burrito bummer. Major move lower in Chipotle after ours will bring you the very latest behind this drop. And is the red carpet rally officially over for Netflix?

23:00One of our traders thinks so. He'll tell us why he sees a blockbuster breakdown coming. More Fast Money in tune.

23:12Welcome back to Fast Money. An earnings alert on Chipotle. Shares tumbling after posting a Q2 revenue miss. The company also posted a slight miss on same-store sales. Kate Rogers is here to take us inside the numbers. Kate. Hi, Melissa. A mixed quarter for Chipotle. As you mentioned, beat on EPS, slight miss on revenues in the quarter. Same-store sales, also a slight miss at 7.4 % versus the 7.5 % estimated by analysts. Restaurant-level operating margin, 27.5%. This actually expanded 2.3 percentage points over the last year. Also a slight beat. Food and packaging costs as of percentage of revenues down year on year.