Big Banks Get A Bump… Plus Housing Sector Head Scratcher 7/9/24

0:01Live from the Nasdaq market side in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. A big bank breakout. Shares of the Money Center soaring as yields move higher. Can the strength continue when earnings seasons start rolling on this week? We'll break down the outlook for the sector. Plus, Tesla trucking higher. The EV maker extending its winning streak to 10 days. It is up nearly 90 % since its lows of late April. Can the stock keep up its rally? We'll debate that. And later, not loving it. Shares of Mickey D's at their lowest level in close to two years.

0:33One of our traders says there's still more room to fall before they hit the buy button. I'm Melissa Lee coming to you live from Studio B at the NASDAQ on the desk tonight. Tim Seymour, Karen Feinerman, Dan Nathan and Steve Grasso. We start off with a rally in bank stocks today. Citigroup jumping almost 3%, hitting its highest level in almost two and a half years. Bank of America at its best since March 2022, while Goldman Sachs hitting a record high. The move's coming on the back of higher treasury yields and ahead of the kickoff of Q2 earnings season. J.P. Morgan, Citi in Wells Fargo, reporting Friday morning.

1:04So what do you make of this positive price action ahead of the results? Not the best setup, Karen? I know you don't love this kind of run up into earnings. I don't. I don't because the bar just gets higher and higher, and then it's obviously harder to jump over the bar. If we look particularly at Citi, which has had the strongest run, I mean, it's already done one multiple turn higher, price to earnings turn higher. Still, though, if you just came to it today, it is not expensive. And I think of the money setter banks. And of course, I love JP Morgan position there. But Citi, I think, is actually more upside.

1:38It's still, even after this run, trading at this astounding discount of about 80 percent of tangible book value. And, you know, if you look at JP Morgan, it's trading at two and a little higher, maybe even of. Yeah. Around their tangible book value. So I feel like this one has the most upside. But I think they're all going to have pretty good capital markets and pretty good asset management numbers. We'll see on the net interest margin. Yeah. And there is a belief amongst a lot of analysts that net interest margin, net interest income will have troughed in Q2. So there will be an inflection point going into the back of the year in addition to a pickup in investment banking as the yield picture improves.

2:22We've had a couple of reports. J.P. Morgan was out there at a conference recently saying that their markets revenue and their investment banking revenue is better. net interest income in the first quarter was something that was a drag. And we heard about it from the banks. So I think it's an environment where it's really all working for the banks. I think it's all working for the analyst community and the investor community to say, I want to pay a higher multiple. And so it means J.P. Morgan, great, fantastic. But it certainly means, I think, in the case of Citi and Bank of America and Wells Fargo, maybe finally coming out of really the penalty box, justifiable penalty box, probably.

2:58But if you think about Citi's re-rating, it's coming from a dynamic of cost efficiency. It's coming from also looking very long and hard at certain businesses that they no longer want to be in. This is a bank that I think is behaving very differently than it did. It's all coming at a time when this bank still pays a 4 % dividend yield. Not a reason to buy a bank, but think about the big swath of investors that were moved out of this space because these banks were no longer paying divs. Pre-crisis, and I mean the great financial crisis, this was a reason for owning the banking sector. their stability, the ability to have income.

3:28So I think the regulatory pressure has come back. I also just think this is a lot to do with perception of credit and the lack thereof of a massive credit downfall, whether it's CRE or other places. That's part of why banks are people who feel a lot more comfortable. You know, I want to go back to the setup that you talked about into the print. OK, like, you know, these money centers have had a very big move. Right. And so when you think about that and you think about expectations, you know, I go back to Q1 results. I go back to some of the cautionary things that we heard out of like a J.P. Morgan CEO, Jamie Dimon.

3:57And I say to myself, OK, it is a hard setup. You know, the implied move in the options market is about two and a half percent in either direction. Just look at the move. It's up like 11 percent or so just in the last month or so. And when you think about, you know, that move out of J.P. Morgan, I think it was April 12th or so. The stock gapped lower and it was down six and a half percent. And, you know, so some of the commentary was maybe specific to how he has been positioning the bank. Right. And he's conservative. Yeah, he's very concerned. I get that. But, you know, the S &P sold off about five and a half, six percent from mid-April down to the lows of the month.

4:30We're much higher right now. I just think in general, I think the earnings guidance that we get across the board is not going to be the thing that makes you go in and buy the market over the next few weeks. Brasso, how are you feeling about the banks, which are up, you know, 20 percent or so from the start of the year? Yeah, the same way. The way you started off, I don't I don't like the entry point. I don't like them being up this high as the entry point. Citi is trading like a turnaround stock for, you know, justifiably trading like a turnaround stock. They're all up anywhere between 21 % and 25 % year to date.

5:04Where you see the most value are the ones that you have the turnaround story. I don't know if Citi has more in the tank to go higher. I think they're going to be a direct reflection of the economy. Economy fades, then these bank stocks will fade too. Obviously, we're dealing with positive seasonality. We have a ton of money coming into the overall market in July. July seasonally is one of the best months to be into the market. And these bank stocks are trading with the overall market. So as long as the rates backdrop is conducive to a bull market, they'll continue to outperform. But I think rates are coming in, and I think these stocks will too.

5:44I think there's an interesting point. I mean, we had a discussion yesterday about our concerns about the consumer showing. And so how can you be concerned about the consumer and sort of divorce that from your takeaway on the banks or a bullish thesis on the banks? Is it because the banks are these particular banks are so good at insulating themselves from the kind of consumer that will have the delinquencies? They're part of the reason. They are better reserved than others. And so there is some sort of, you know, island effect with these banks. They're part of the reason why the consumer is under pressure.

6:13I mean, they're paying higher rates for everything, and these banks are making more money. But my feeling about the consumer, where I'm really concerned, is not necessarily right here and now on credit, because the job market's their friend, and they have jobs. Although, you know, let's start to watch these jobless claims numbers. We have a number out on Thursday in addition to a big CPI number. But I think it's all about consumer spending and discretionary. I think that, you know, when I talk about the consumer, I'm not worried that they're going to be able to pay their credit card bill right now, even though we have the data on delinquencies.

6:39I worry that they're just not buying stuff. They're not buying the same stuff. And so when I'm hearing from companies, we're going to talk about McDonald's, we're going to talk about whatever you want. I'm going to continue to feel that discretionary spend is significantly under pressure, not a little bit. And that's all because the delta from where we were when they had nothing to spend it on and we're getting mailed 25 percent of GDP by the government. This is this is about as good as it gets for the consumer. And that was three years ago. So that's my issue. That's why banks trade and outperform.

7:07And who would have thought in a market that you would have defined as AI and semiconductors in 2024? And you'd be right that Citibank would be outperforming AMD. It's outperforming AMD for different reasons. And they're obviously specific to each company. But, no, I think this move in banks can go. I don't like the trade into into earnings. But but there's nothing here that tells me that this rally in banks doesn't continue. I do think to the credit issue, I mean, we saw absolutely pristine credit, and it wouldn't surprise me at all if that starts to tick the other way. But I do think they're well-reserved.

7:38And I think, you know, let's take J.P. Morgan, for example. I think their exposure to the lower end of the credit spectrum is really not that high. So that's not going to be the thing, I think, that moves the needle for them or a city or a Bank of America. Right. So there is a distinct I mean, there is a clear distinction between what they are seeing versus what we might see. from a Capital One financial sort of lender or discover. Yeah, I saw a stat recently, though, that auto delinquencies are tipping up right now, probably to the highest levels in 13 years or something. So I think it kind of speaks to that is not a discretionary sort of thing.

8:13That is a must-pay sort of situation. Everything I'll just mention about capital markets, Karen, that you did, you know, IPOs last year were fairly anemic. I think there was 107, you know, close to$20 billion. You know, they've already picked up dramatically. I think they're about$17.5 billion right now. So, like, that has to be good for some of these that are more positioned towards, you know, investment banking. J.P. Morgan is certainly one of them. Yeah. The other thing is that the regulatory pressure in terms of capital required to be held on the balance sheet should be abating. On all fronts, it looks like regulators are reevaluating.

8:44That could be huge. For investors, that's great news in terms of capital return. And I'm being cynical, but I'm not being cynical. Regulators get smarter as time goes by. When you think about stress tests as far as bank goes and capital adequacy, we also never thought about they never thought about capital flight. Right. Some of the issues that we saw a year ago with SVB were things that they never really factored into their tests. So I think regulators at this point absolutely are taking pressure off the banks. That bullseye, I think, is very different than it was 15 years ago. We saw a lot of payouts as a result of passing the last the latest stress tests.

9:18And you were anticipating that that could continue and or increase? Yes, I think, though, that this expectation of a better regulatory regime, regardless, having nothing to do with the election, is already getting priced in a lot. So if it comes out worse, we see a worse endgame. That would be bad. But I really don't think we're going to see that. All right. New data from Golub Capital showing middle market private companies grew their earnings by double digits in the second quarter, giving investors a potential glimpse of what is to come for public companies this earnings season. Golub Capital CEO Lawrence Golub joins us here on set for more.

9:54Full disclosure, he is married to one of our traders. Hi. It's not me. Sorry, Lawrence. Lawrence, welcome. I like to call you Mr. Feinerman, but we'll cut to the chase here. So we want to see what you're seeing because this is a good indicator for what we are to expect from earnings season from the public companies. This is a reflection of actual results. of our portfolio companies, anonymized median, for the first two months of the quarter. So it's not a forecast. It's not a projection. It's actual. It's what's happening. It's what's happening. And it's very reflective of the U.S. economy, particularly outside the real estate sector.

10:36We are talking about the consumer. What are you seeing about the consumer? Because it looks like you were not expecting much. It came in a little bit better, but you're expecting some weakness still ahead. I think Tim was spot on with his earlier comments. at a 4 % growth rate are actually better than I expected, but they're clearly weaker than other sectors. We're at a fork in the road in the economy. The excess savings, the stimulus money is mostly gone. And at the same time, we have a very high rate of job growth, over 200 ,000 jobs a month. And, yeah, the unemployment rate's ticked up from a very low base, but you've got wage growth, 3.5 % or so, 4%, 200 ,000 jobs.

11:15That's$150 billion a year of growth in consumer income just by itself. But you have the offset of the reduced savings. And I think you're seeing a lot more strength and a lot more growth in private equity-backed companies outside the consumer sector than inside. All right, Mr. Feinemann, I know you watch the show most days here. So we've been talking a lot about the underperformance on a relative basis of enterprise software versus semis this year. And we know what's going on, right? It's those semis that are exposed to generative AI and the like. And I know that you guys, you know, in your portfolio, you have a lot of exposure there in the enterprise software space.

11:50What are you seeing as far as growth rates? Because this is one of the things I think a lot of us have had our finger on, that it might be the first sort of shoe to drop as it relates to enterprise spending in the tech space. Well, I think growth rates have come down some. And in the private markets, in the feedback area, less than in the public markets. I mean, the public markets, enterprise software is down almost 50 % of the growth rate, but not in terms of revenue. we're seeing it down maybe a couple points but still growing at 10 % a year and I think what we have is customers are very sticky but the number of seats, the cost per user or the number excuse me, the cost per user keeps going up but the number of users has flattened out and many customers are cutting a few seats here to add a few seats there and so for the strongest players they still have pricing power and you see margins going up for someone who's a player where there are three or four alternatives the competition is getting a little nastier.

12:43Lawrence, talk about interest expense and the burden of that, because one of the things you've noted in your letter is that these are decent times. Let's not get too carried away because there is some building pressure. And this is something we talk about all the time. Hire for longer has a price to be paid. I'm curious from the credit perspective, how you're analyzing these companies? Well, we're a big fan of interest expense. I mean, we coming right to you. So outside of the burden you're putting on those companies, But are you seeing pain or is this something that, again, we've been expecting this and we've seen very little?

13:15So there is some pain. The aggregates are great. The U.S. economy is doing really nicely. Private equity backed companies adapt faster, make more changes, do add on acquisitions. But those companies that have been weaker start to run out of liquidity eventually. And some of the laggards, some of them were laggards before covid. Some of them are companies that didn't recover fully from covid. A few of them are companies where the sponsor just paid too much. In 2021, there's some EBITDA adjustment indigestion. Maybe the adjustments didn't all convert into EBITDA. The margins of safety from the borrower's point of view are a little tougher.

13:53It's a different story from our point of view because that margin of safety has gone from the borrower to us. And I think anybody should expect some uptick in default rates over time in an environment like this. We haven't seen it yet, but it wouldn't surprise me if it comes. that margin of safety shifting from the borrower to the lender is not a bad thing. Steve? Lawrence, thank you. Lawrence, when you look at these stocks, everyone's worried about the six stocks that are moving the market as an overall basis. But those six stocks are responsible for the bulk of the earnings. So if you look at earnings going forward, they're projected to be up 30 % year over year, while the other 494 will be up 5 % year over year.

14:39Is that concerning to you? Well, I can't speak to valuation. You folks here are the valuation experts. I think the U.S. economy is doing very nicely. I think that inflation will come in a little above expectations or below expectations. But the key to the long term is productivity growth in real companies. And in our universe, where we're lending to resilient companies backed by smart owners, that's really not a concern. At the same time, if you ask me what the stock price is going to do on those six names, I have no idea. I would ask Karen. All right. Well, sweetie, thanks for being on the show.

15:19Private credit. Let's sort of switch gears a little bit. You've obviously followed your career closely for a long time. You've been in private credit for a long time. Are we at peak private credit? you have even someone like Jamie Dimon saying, you know, private credit is too crowded. How do you feel about the arc of the business? I knew you were going to bring him up. Yeah, yeah, this is great. It's uncomfortable for me to sit here. I mean, I can tell you. How do you think it feels for me?

15:49There's no golden age and there's no bubble. It's a good time for private credit. And it's up to the lenders, the investment managers who make these loans, to be selective, to be smart about picking resilient borrowers, to be smart about picking companies that have smart owners. And even Jamie Dimon says there are some really excellent players in private credit. And since JPMorgan agents or lends us four or five billion dollars, I think we fall in his excellent category. Hope so. Lawrence, great to see you. Thanks for coming by. you, Melissa. Thank you. Lawrence Golub. All right. So that sounds like good news overall.

16:31I think it is. And I think, again, the layers of the economy that are particularly strong for lenders are the parts that we probably knew were there. Again, think about industrials, think about technology and health care on some level, and that the consumer discretionary headwinds are not necessarily born out of a straight credit is the view. But I do think, you know to the asset class to you know private credit it's become such a massive massive uh i i think not only it's a conversation but it really is an allocation that's changed dramatically for for retail for high net worth and and that's something that's actually really very exciting especially when you consider that the the the vehicles to invest through uh in many cases are a lot easier to access and in some cases have even better liquidity than ever even though that's not really what you're investing in in private credit.

17:22Yeah, I mean, listen, this is an area that we've seen blow up in the last few years. And there's some dynamics, I guess, that going on in the traditional banking system since obviously definitely since last year, as it relates to SVB in March and the like here. And so, again, a lot of people are having a hard time putting their finger on where some of the bad credits are, that sort of thing and where there's going to be problems next. So, again, we're going to keep talking about it. You know, we've been talking about where's the risk in the commercial real estate market and the like here. And a lot of this stuff is kind of attached to themselves.

17:50So the more volatility we have in rates, I mean, at some point, I think that there's some chickens that are going to come home to research. I mean, I don't want to open up an argument between you two. No, no. But do you agree with Lawrence? I mean, I feel like there's so many new players in this space that not everybody can be that smart lender with the experience that he perhaps has had at Golub Capital. Well, I think, you know, as I said, following his career for a long time, if there is pain to be had, they will participate in that pain. But I think a very high likelihood they will be around to pick up the pieces of that pain.

18:22And that's where you have outstanding alpha. The one thing I'd say about private credit, just like I'd say about any asset class, I mean, with risk comes reward. I mean, you can't suddenly expect to get 10, 11 percent returns on something when Treasury is in the risk free rate. We know where that is without taking on some incremental risk. And I think, you know, there's no question that there's a difference between managers and how they manage that portfolio. And again, it's sometimes a portfolio dynamic as much as it is the underlying just asset class. Coming up, French fries and fitness. Two things that usually don't go together, but shares of Lululemon and McDonald's are both at 52-week lows.

18:56How should you navigate the big Mac smackdown and the Lulul? Plus, not all bad news. Tesla tearing higher again, and shares are up big over the last 10 days. Is there any more charge left in this trade? We'll find out. Don't go anywhere. Fast Money's back in two. This is Fast Money with Melissa Lee right here on CNBC.

19:25Welcome back to Fast Money. McDonald's shares dropping almost a percent today, hitting their lowest level since October 2022. As consumers continue to feel the pain of inflation, the fast food giants recently introduced$5 meal, so far failing to make a dent in the stock's loss, is now down more than 17 percent this year, heading into earnings at the end of the month. We just talked about this. The pain continues here, Tim. I think there's a huge opportunity. I think it is across not only some of the hospitality, whether it's quick serve, fast casual, fast food, fast serve, quick. Anyway, I think you also have it in the case of a Nike and a Lulu.

20:01But Lulu worries me on some level different than a Nike, because I think there's a little Under Armour in Lulu in that I think the ubiquity and I think the saturation and the competitive landscape for an upstart brand that seems so innovative and new, which is what Under Armour was. They had some missteps internally. They are apples and oranges, and yet they're not. So that's one thing. With McDonald's, I think this gets to a place where at some point it becomes interesting enough where it is cheap enough. And I think that's probably not here, but I think if you look at it on a trailing basis, again, this is trading almost sub-20 times now.

20:34Again, it's trailing. So what are they going to do going forward? I think there's margin pressure. But I think you're getting setups here. I just don't think that the news flow gets better. And back to Lulu. The problem is Lulu is doing this at peak margin. That's something that I think has to get weaker. I know the markets price this in. It's just not the time. But as someone that's looking for long term opportunities to own stocks for investors, this is something that I'm watching closely. I think we're going to get great companies cheaper. Truist had a call this morning and we were speaking at credit card data before, But they're signing their own credit card data, which indicates meaningful pressure on a lot of these fast food stocks, especially McDonald's.

21:10They cut their price target by 20 bucks to 300 because they think that the setup is terrible going into Q2. But longer term, it's going to be a value. That may be. But if I think about I like to think about Lulu versus McDonald's. So McDonald's in this very competitive space. Right. And Lulu, to me, is in a very different setup. They are the leader in the industry. they are at the high end of the industry. So they're going to a different consumer, one that I'm not as worried about as the McDonald's consumer. And I think Lulu just, you know, they face competition that they haven't faced before.

21:44And that's thrown them a little bit. But I think they're just an extraordinary company at 20 times earnings, a little under the market multiple. To me, that seems compelling. Lulu, by the way, hitting its lowest level since March of 2023. That's what we're talking about here in terms of the decline that we've seen. I mean, the consumer is there in terms of the spending strength, but the challenges are, I mean, it's still facing a lot of competition, right? It's still facing a consumer that doesn't necessarily want to pay$100 for another pair of leggings that they or she may not need. Yeah, no doubt.

22:15I want to go back to Chipotle because this is one relative to McDonald's we've spent some time over the last month or two talking about. And really interesting to me, like there was no shortage of analysts, investors justifying the valuation. And it just made new all time highs on a daily basis. Well, look at how the stock traded today. Look how it closed down about 17 percent or so from those recent highs just last month. And I'll just take you back. Maybe they can pull a chart up on April 24th. The company reported their Q1 results, had a huge gap higher, kept on going. And then it just seemed to be, you know, off to the races.

22:45It's retraced that entire move. So to me, you know, here's a company that's growing earnings 20 plus percent. OK, and maybe that's something that's a moving target, but trading about 51 times this year and 43 times next. So to me, you were talking about McDonald's, how cheap it is and how cheap it could become. I just think that investors are going to start getting a bit more discerning on some of these names, especially as some of the consumer data starts to weaken. Yeah, I mean, that peak in the Chipotle chart, that was June 18th. That was the day of a key reversal that we saw. We saw a lot of stocks with key reversals that day, Grasso.