Banks Sit Out the Market’s Rally, and Amazon Ups Its AI Game 6/22/23

0:01Right now on Fast Financial Fade. While the major averages have been rocking the banks, both big and small, have it come along for the ride. Is the sector still being stung by the SVB hangover or is it something else? We'll debate. Plus, AWS going all in on AI. Shares of Amazon surging as the cloud and e-commerce giant says they will invest big money in generative AI as it races to keep up with the competition. We'll hear from the man leading this effort that's coming up and later. Crude's latest reversal of fortune. The options action on that. A major buzzkill for one of Boeing's big time suppliers.

0:34And cold pizza. Why the slice sector is struggling while so many restaurant stocks are red hot. I'm Courtney Reagan. In this evening, for Melissa Lee, this is Fast Money Live from the NASDAQ Market Sites. On the desk tonight, we have Karen Fireman, Dan Nathan, Guy Dami, and our special guest trader, Lori Calvesina. She's head of U.S. Equity Strategy at RBC Capital Markets. We're going to start with an attempted rebound on Wall Street, at least after three straight days of losses for the major averages. Big tech and AI stocks helping the NASDAQ rise nearly a percent today. Its first gain in a week, the S &P also managing to end in the green with Palo Alto Networks, Amazon and FedEx leading the way.

1:10The Dow is the only index that was down today, just barely, though. It's still marked its fourth day of losses in a row. Let's take a look at the banks, lagging the broader market in a big way today. Both the major bank index and the KRE regional ETF down around 3%. Lori, I want to start with you. You've been on the road a lot talking to investors about regional banks. What are they saying? So it's interesting. When I've talked to small cap managers, value PMs, people who know that regional bank space pretty well, I've actually been surprised that they haven't, I wouldn't say they haven't been concerned, but they've been pretty calm.

1:41Calm is probably the right word. I have a lot of people saying, look, we know there's opportunity unfolding here. We have to be patient. They've got their lists. In some cases, they already bought certain names. They're not impatient. I've been surprised that the tone, I wouldn't quite call it constructive, but just that it's been as calm as it's been. And I think there's a recognition that, you know, over time you have these big dislocations in certain industries, certain stocks. They usually end up proving to be buying opportunities. The question is always timing. And I think a lot of seasoned investors have come to that conclusion that you just have to be patient.

2:11That's an interesting take. What do you make of that, Karen? Is it time to look at some of these banks? Has the damage been done? Is the dust settling? Well, all banks are not created equally. Right. And we saw after SVB what was a disaster for some was actually mana from heaven for others. So to me, I've always been invested in the big money center banks. J.P. Morgan is my biggest bank position. I added to that today. You know, their quarter was fantastic because they are very sensitive to higher near-term rates, which have only gone higher since the SVB blowup. So they have a lot more deposits.

2:47I think they're going to have a decent quarter. I think the only thing that will be bad is M &A is going to be lower. Trading may be lower. But those things are lumpy and, you know, they don't get a high multiple when they're great. They shouldn't get a high multiple when they're down. So I kind of like this setup going into earnings. I'd much rather have the banks be down than up. As to the regional, I just feel like it's too hard. We don't know what potential regulations are down the road. And also, you know, we all talk about the office space and commercial real estate being such a potential issue.

3:22much more for the regional banks than the other banks, than the big money center banks. So that's how I'm positioned. Dan, I think your last night call was short regionals, short big banks. Yeah, the regionals just, again, I think you've said it, and you've been very clear about who you think the beneficiaries of all of this commotion have been, and it has been large money centers, specifically, obviously, J.P. Morgan. I mean, you just see the acquisition that they ended up making and how the stock has reacted. The rest of the banks don't act particularly well. And then if you look at the KRE, I mean, like, if you just think about what's going on here, OK, the fact that we had deposits backstopped, you know, back in March, you would have thought that some of the other regionals, some of the stronger regionals, the USP or something, would have acted better.

4:04They haven't. Right. And so your point about rates is like when you do a lot of the analysis and some of the stuff that I'm reading is like they still have a scenario where their liabilities are higher than their assets right here. And so with rates as high as they are, the competing for deposits, if they lose deposits, we could find ourselves in the not so distant future in a very similar environment as we were in March. And then what do the regulators do? What are the regulatory costs? What are the expenses? I mean, all of this is going to be borne on the valuations of these regional banks. So, again, I would probably much rather be in some of the large money center banks than some of the regionals.

4:38But I think there's probably further shoes to drop. You started out the show by saying the Nasdaq, you can't keep a good thing down or whatever. Look how poorly the regionals and the XLF traded today. Look how poorly the energy sectors. There's still stuff that doesn't trade particularly well. And the stuff that trades well is keeping the entire market up right now. So it sounds like you're taking a bit of the opposite position of what Lori has seen from some of her clients with the regionals. You're thinking short that it's not a buying opportunity. I think the clients that she's talking to are taking longer term time rises.

5:06They're thinking about valuations. They're thinking about the government backstops and all this sort of stuff. So, like, you know, I get what she said. And I'm actually more in Dan's camp than the investors I've been talking to. We've actually been neutral on the financials and the banks. And I like small caps, but I've told people there's plenty of other stuff to buy in small cap besides the banks. I think the struggle is, you know, if you look at earnings, the sentiment indicator we watch, the rate of upward revisions, it's down around financial crisis and pandemic lows. That is typically a hold your nose and buy signal.

5:31But I struggle with the lack of catalysts. I hear valuation, valuation, valuation. These are good quality companies, yada, yada, yada. but I struggle to understand what the catalysts are. And I worry, like you guys, I worry about the regulation, especially heading into an election year where I think the Democrats are going to be pounding that table. I was just going to pick up on that regulation note, Guy, with Powell saying, look, maybe we do need to look at some more regulatory actions with these banks that have$100 billion or more in assets. What do you think about that? What could more regulations look like and how would that impact these companies?

6:02I mean, it's just going to be harder for these. Regulation is coming, whether they like it or not. And a lot of ways they brought it upon themselves. I mean, the Silicon Valley Bank thing was all of their own doing, clearly. And there are going to be ramifications for that. Regulations coming. Capital requirements are going to go up as well. And is this really an environment where banks are going to thrive? I'm not necessarily sure that's the case. So you put all those things together. Valuation, yeah, compelling. But look at Bank of America, for example. Delinquencies, and Karen can speak far more intelligent than I.

6:30I mean, I mean, a year ago, delinquencies were like 0.84 percent. Now they're north of 1 percent, not markedly north, but north, trending the wrong way is my point. So I think you're going to see more delinquencies, more write-offs probably are coming down the pike. Regulation is coming. Capital requirements are more stringent. And can they pass those costs on? Probably not, which means historic valuations are probably not as favorable as one would think in this environment. And the KRE, quickly to Dan's point, it traded up to 44. In the course of a week, it's given back about 10 percent or so.

7:02Doesn't trade particularly well. And Bank of America, which is not a small bank, I think it's a quarter of a trillion dollar bank. I mean, that's within a whisper of a multi-year low. So although J.P. Morgan wins this, I get it. There are other banks that are not really in a favorable spot. Obviously, interest rates have everything to do with how banks trade. What are you looking at when you're looking at the bond market and watching this yield inversion? Bond market is telling a story that we've talked about on the show for a while. I mean, think about the twos, tens, for example. And we had a conversation with Steve Leisman last night, not necessarily as important as other spreads.

7:32But since we're talking about it, you know, here's an inversion that went from flat to 1.1 percent back to 40 basis points in Tuesdays. And now we're either side of 1 percent. Over a year now, we've been inverted. Historically, that's not a particularly good sign. And one has to ask themselves, how does this resolve itself? itself, it won't be pretty when it does. So to me, it's a tremendous headwind that the market's not taking into consideration. It is. But before we get to our guest, Laurie, I want to ask you about the VIX. And the VIX is trading at a very low level. We're sort of complacent as a whole in the market, besides what we're seeing, perhaps in the bond market and besides what we're seeing in some of the financial stocks.

8:12So I think that's a great point. And the VIX, you know, it was interesting to me when the VIX was above 25. That's typically a great buy signal. But when you get this low, you start worrying about complacency coming in and has the rally gone too far. I have other sentiment indicators that I look at as well. AAII in particular, the net bulls have been at 20 percent, over 20 percent for the last two weeks. Once that starts to hit a four week average of 30 percent, you can see that reasonably happening within the next month or two. That typically gives you a pretty good sell signal for the broader market.

8:40So I don't think the VIX at 13 or this AAII gauge, they're not necessarily telling you have to sell today, but they are starting to tell you that this thing is getting late innings. You need to be a little more careful. Good indicators to watch. Well, our next guest calls higher rates, a chronic issue for banks. Paul McCauley is PIMCO's former chief economist. Paul now teaches Fed watching at Georgetown. Paul, it's great to have you here with us. Obviously, we heard from Powell the last couple of days here on Capitol Hill in Washington, D.C. He talked about a lot of things, though, I guess not a lot that we learned was new.

9:10Let's get your take on where we are right now in Fed policy with this pause. How long should we be in a pause scenario for rates? Well, that's the key question everyone wants to know. I think that Fed policy is actually in a pretty good place right now, even though the marketplace seems to be wrapped around the axle about the fact there are going to be a couple more hikes in the dot plot. The Fed's restricting. That is hugely important. They've gone from uber easy, I mean, zero and all that sort of thing, to 500 basis points inside of 15 months. They're in restrictive. The yield curve is very much inverted.

9:51And inflation is coming down. So I think the Fed is in a good place. But they don't want to declare victory early. They want to declare victory late. So the price tag of the pause, last week was two more hikes in the dot plot. That's not a policy that's voted upon, but essentially, Powell said, you know, that's a pretty good guess. So essentially, the marketplace has to grip with the notion that the Fed's not finished. They're almost finished, but not finished. The Fed's not ready to declare they are sufficiently restrictive. Paul, it's Karen. Thanks for being on. I know you've been in the camp sort of they're much closer to done or should be done.

10:42But inflation is still not remotely close, right? They are two integers away from the right first number. So how do you how do you square those two thoughts? Well, the two percent inflation target is a long term target. It is not necessarily a real-time target. They have it out there as a low star, and we've come down dramatically on the headline. We haven't done nearly as much on core, in part because the housing market is lagging in the data, and in part because the labor market is still strong, feeding through to services prices. But inflation is very much going the right direction. They will declare sufficiently restrictive with a three handle.

11:40They don't need to get all the way to two. So it's out there as a lodestar, but it is not a binding constraint on the Fed declaring victory later in this year after it has one or two more hikes, possibly. It's we got another employment report, obviously another CPI report before the next FOMC meeting. So essentially, the Fed wanted to push the market out in time for finished and a pivot. And I think it's successfully done that. I was kind of just going to ask that question. I mean, in some ways, it feels like we're in the upside down. Everything is like a little wacky, right? Inflation is coming down, but it's still pretty high.

12:22Unemployment is still really low, but the yield curve has been inverted for over a year. I mean, has the Fed successfully helped us avoid a recession or are we not there yet? Are we waiting for it to happen or have we pivoted away? I think we're primed for a soft landing. I don't think that we have to have a recession. I really don't. It's usually important that the Fed not over tighten, but I think they're in a good place to get a soft landing. And the inverted yield curve can be taken as a sign that there's a recession coming, or it can be taken as a sign and an endorsement that the Fed is going to be successful in bringing down inflation.

13:09And when it's successful, then you can have the front end of the yield curve come down. But essentially, Chair Powell was saying, yes, that's possible, but don't discount it now. We still have a bit more work to do. We're not to the holy grail. And I think that's where we are now. But I would not look at the yield curve as a sign that a recession is baked in the cake, but rather a sign that the market believes the Fed will be successful in getting inflation down toward that 2 percent, not to 2 percent. Paul, if I had your head of hair, I would never wear a hat. But you've worn a few in your career.

13:53So put your equity hat on for a second at 4 ,400 in the S &P. Are you surprised by how strong stocks have been? And given what you just said, can this resilience continue? Can we continue to sort of grind higher? I have become a bit more agnostic, not optimistic, but agnostic from where we are right now. I've observed, just like everybody else, the leadership issue, the growth stocks, you know, soaring and so forth. And that made fundamental sense from the standpoint that long rates came down, even as the Fed was taking up short rates and growth stocks are valued off the long end of the curve.

14:33So that made sense. And then you had the AI, which logically should lead to a move in that direction. and everything in that space will be overvalued because we don't know who the winners are. So people just buy everything. So I've understood it. But we've reached the point right now where I'm kind of agnostic on whether or not we can move forward from here, basically because the Fed is putting out in time declaring victory. And I think it's going to be hard for the broad market to get a firm bull trend until we can credibly forecast the Fed is finished and that a pivot is on a visible horizon.

15:18And I really don't think you can do that right now, maybe in a few months, maybe after Powell speaks at Jackson Hole. But right now, I'm a little bit edgy about the upside for the market, for the stock market. Got it. Thank you very much, Paul McCauley, for joining us with your take. Lori, where do you think the Fed is right now? Do you think it's in the right place? Do you think we should hold this pause for longer or go back to hike sooner rather than later? You know, I think they should have paused previously. I do think they have a lot of work to do on inflation, but I think they've done a good job of leaving the door open for further hikes.

15:49They could have done that before. I honestly feel like what they're doing right now and, you know, just consulting with my rate strategist is really trying to rein in risk assets a bit. Not quite sure I entirely believe the dots. I think Powell had some comments last week suggesting, you know, this is a guess. You know, we shouldn't bank too much on it. But personally, I feel like what they're trying to do is push the expectations for cuts out. And I don't think that that is too detrimental to equity markets. A lot of the investors I've been talking to for a while have been looking for more of a pause as opposed to cuts in the near term, still talking about cuts next year.

16:21But that's what I feel like the Fed is. I feel like they're engaged in more of a communication strategy at this point. Well, let's move on to our call of the day. Long-time Tesla bull Adam Jonas and Morgan Stanley downgrading the EV maker stock to equal weight from overweight, but increasing his price target to 250 from 200. That's lower than where it closed the day. Jonas calling Tesla, quote, a must-own stock, but saying high expectations for how much AI will boost the company have brought it down to a fair valuation. Dan, we talk about this name all the time. To me, this seems like more of a valuation call than anything else, looking at it more of as an automaker than anything else.

16:56Do you agree with what Jonas is saying? Sure. I mean, it's interesting, though, that, you know, he's raising his price target. I mean, listen, all these analysts, they lowered their price target. This stock sold off 75 percent from its all time highs. OK, 75 percent. It was a trillion dollar market cap. OK, so as wrong as people like me have been of late, everybody has been very wrong on the stock either direction in the last year or two. And so I just think it's interesting that, you know, you can take a victory lap. You can say, OK, the stock is up 200 percent off the lows and you can take off your buy rating.

17:28But you are also lowering your price target and your estimates the whole way down. And what I'm not convinced about right now is that the fundamentals have actually improved since they reported their Q1 in late April. And some of the data that I'm looking at says that that's not the case and that the automotive margins are going to be under pressure. And I know there was a lot of excitement about two things, about the just adoption of their charging model by many of the OEMs here in the U.S., but then also this AI stuff, which is not. I think it was in the David Faber interview last month where he said that we might be able to have an AI moment.

18:01That seems very Elon Musk to suggest that in the middle of, you know, a frenzy that we have in the stock market. So, you know, to me, again, you know, some of the biggest bulls on the stock were selling it in April, too. So, you know, like, have at it, people. Guy, what do you make of$250 as a price target? Reasonable. I mean, I see what he's doing here. He's getting in line with where the stock is. A lot of people, I've been dead wrong since, I want to say,$165,$170. But that's the way the stock, that's what it does to people. But it's a margin story at its core, I think, understanding all the other things going around.

18:32And legacy automakers, I think margins may be 16 % historically. Tesla's probably sub-20 now headed that way. And I think at a certain point, people will question valuation if margins continue to contract. And I understand the bull case. He also, Adam Jonas, I think his bear case is like a$90 handle for this stock. Bull case,$450, bear case,$90. So think about that for a second. And to Dan's point, I mean, when the stock was$110, you couldn't give it away. And there was a cascade of people saying, you know, Tesla's in a lot of trouble here. So as quickly as people get negative on the stock, that's how quickly people get euphoric.

19:07And I think we've hit that euphoria level. Well, coming up, down arrow. Shares of Spirit Aero Systems dropping to its lowest level of the month. What's behind the move and the ripple effects on airplane makers? Plus, a good prognosis for health care. Shares of Lilly hitting new all-time highs. So is this stock just what the doctor ordered? The traders debate when Fast Money returns. We're back in two.

19:33Welcome back to Fast Money. We've got some breaking news on 3M. Let's get over to Seema Modi on the Fast Line. She's got the story. Sima, what's going on here? Hey, Court. 3M announcing a$10.3 billion PFAS settlement with public water suppliers in the U.S. that have sued the company on PFAS contamination. The company says it expects to record a pre-tax charge of roughly that amount in the second quarter. And in this release, CEO Mike Roman says, quote, this is an important step forward for 3M. One thing I would point out, this$10.3 billion does not cover the growing list of states that are suing the chemical manufacturer over toxic forever chemicals that are linked to illnesses.

20:13So we still need clarity on those specific legal setbacks. But this news of a settlement tied to water utilities does suggest the company is making progress in addressing this PFAS legal setback that has weight on the stock. You'll see shares of 3M are popping here in after hours. Court? Thank you very much, Sima. Yeah, shares of 3M up by almost 5 percent in response. Well, A buzzkill now on Spirit Aerosystems. Shares dropping more than 9 % for the stock's worst day since the start of May. The company, which supplies parts to Boeing, halting production at its Wichita, Kansas factory, following an announcement that employees will strike starting Saturday.

20:51Our Phil LeBeau is here with the latest. Hi, Phil. Courtney, you gave the headlines there, which is essentially that Spirit Aerosystems has halted production ahead of the contract with the International Association of Machinists. Their contract expiring at the end of Friday night. A strike is expected on Saturday, and that's why the stock was down more than 9 % today. This is critical to Boeing, and I want to take a look at shares of Boeing. It wasn't down more, I think, 3.5 % today. The reason why is people are going to say, well, if Spirit holds 737 max fuselage production, as well as production of other fuselages, what kind of an impact does this have on Boeing?

21:30At this point, Boeing is not changing its production schedule. It has some inventory when it comes to the 737 MAX, but this comes at a crucial time if there is an extended strike at Spirit Aerosystem. Currently building 31 a month, they're expected relatively soon to go up to 38 a month. The goal is to eventually build it up to 50 a month by 2025. And also keep in mind that when you look at not just Boeing and Airbus, and by the way, Airbus also gets parts fuselages from Spirit Aerosystems. When you look at others within the aviation supplier complex, whether it's GE, whether it's Haumet, they've all had a heck of a run over the last year.

22:10But if we see an extended strike in Wichita at Spirit Aerosystems, and by extended, I'm talking about more than a couple of days. You know, it would have to be something that goes several weeks, if not a month or so. And nobody knows if that's going to happen. Then you would see some real pressure on Boeing as well as Airbus and by extension, the rest of the aviation suppliers. Got it. That's one to follow, especially with those ripple effects that you mentioned there. While we have you, though, Phil, can we ask you what's going on with Ford and possible job cuts? Right. Well, there's headlines that have just crossed that Ford may be considering cuts, job cuts, white collar job cuts.

22:47Now, we don't know how extensive these may be. We do know that Ford has said for some time, and remember, they last year initiated 3 ,000 white-collar job cuts as part of their effort to really cut into the costs at Ford. And we know for some time Ford has a cost issue. It has to become a leaner company, a less complex company. So the question becomes, how extensive are these job cuts going to be? And if it's a case where they're going to be in one area, most likely on the internal combustion engine side of the business, how much does it help them not only short term, but longer term? Don't be surprised if you see more of this, not just with Ford, but we saw this at General Motors last year.

23:30These types of buyouts or job cuts, it's all part of them trying to become much leaner. They need to be much leaner. Got it. Thank you very much, Phil. Appreciate that. Guy, you were saying that the Spirit halt is a big deal. It kind of ran through some of the ripple effects and it gets worse the longer it goes on. It is a big deal because I think Spirit thought they had this nailed down. They thought they had a four year agreement in place. And it's because this seemingly came out of the blue in terms of the strike. But 79 percent of their workers rejected the contract and 85 percent went forward with a strike.