Big Short Investor Steve Eisman on the Market Rally, and What’s Next for Disney 7/13/23

0:01Right now on fast rate shock last week the two year topped five percent its highest level in more than 15 years and today it's more than 60 basis points lower. Should investors cheer or fear this rate whipsaw? We'll ask Steve Eisenman of Big Short fame to give us his take. Plus, Iger unleashed. Disney's CEO Bob Iger telling her own David Faber everything is on the table to right-size and reorganize. The company is streaming and is completely disrupting the entertainment business. We'll break down Disney's next move straight ahead. And later, a pop for Pepsi, but our share is being artificially sweetened.

0:32Ripple's explosive move higher, the reasons why. And Progressive just lost a bundle today. Sorry, Flo. I'm Melissa Lee. This is Fast Money. We're live from the NASDAQ Market Side on the desk tonight. Karen Feinerman, Guy Adami, Tim Seymour, and Lori Calvacina, RBC Capital Markets Head of U.S. Equity Strategy. Welcome, Lori. And we start off with another strong day for stocks as investors cheer yet one more cooler than expected inflation report. Producer prices growing at their slowest pace in nearly three years. The major indices all up for the fourth day in a row. Meantime, the greenback going red in a big way.

1:03The dollar dipping to its lowest level since last April. Rates also taking a massive leg lower, as we mentioned. The 10-year yield sliding to its lowest level of the month. The two-year, which was just at 5.15 last week, now trading with just over 4.6%. So what are the moves and rates in FX telling us about the markets we have right now, Guy? Well, it's the bond markets as confused as I am, clearly. And I don't think the bond market knows where it should be going in terms of where the economy is at, where it's demand at. PPI, to me, you can look at it as a very positive thing, a very negative thing.

1:35I mean, maybe there's going to be demand destruction on the back end. Maybe that's why we're seeing this. But in terms of the bond market, I'll let Tim talk about the dollar for sure. Again, the volatility in the bond market to me has been a warning sign. Now, it hasn't manifested itself in equities. I thought it would for a long time. But the fact that you've seen 15, 20 basis points moves, the yield curve going to 105 points inversion, back to 85 points over the course of a couple of weeks, that's not a normal market under any circumstances, not least of which the largest economy in the history of mankind.

2:03Yeah. Lori, what's your take? And of course, you know, with the 10-year yield where it is now moving lower, that's a great thing for tech stocks. We definitely saw that in the NASDAQ. Right. And it's a great thing for equity valuations as well. And, you know, we actually just updated our valuation model today. This move we've had in the 10-year and some of the shifts in the forecast have nudged that multiple assumption up just a little bit. But I like to watch the move index anytime we talk about the bond market. And I think it's showing you we had a little bit of peak fear, not extreme fear, but a little bit of fear percolating that's come back down.

2:30It's coming at a great time. Erin. I don't know what to make of it, to be honest. I actually bought some two six-month treasuries today just at 5 and 5.43 yield, I think it was. I mean, this inversion, which we've had for quite some time, I find, I mean, you can see why with where Fed funds rates are, why the front end is where it is. But I don't know what to make of it. And I would we'll have Tim talk about the dollar, but the combination of bonds catching a bid, but the you would think if money would come into the U.S. by dollars, buy bonds. That, I guess, not happening. I'm not sure. I don't know what to make of it, to be honest.

3:06Yeah. Tim? Well, I don't think bond markets are broken, but I do think that there's a lot of questions about really where the Fed is going to be out, not in the next three to six months, but really six to 12 months. And you can see that in the Fed fund futures. If you look at June 24 futures, 1.6 or seven days ago, and you've highlighted the move in the two-year, though, So that future said we were unchanged out one year effectively. Now that said, we're somewhere around 60 basis points. So there's 40 bips priced in out one year. To the dollar, I think you've got a dynamic where between the Fed commentary and at least what we've seen from the market, and we do mean both inflation data, jobs data, is that the dollar trades on central bank differentials and amongst other things, but probably most notably the differentials.

3:53And the expectation is here that the Fed is the least aggressive of the major central banks at this point. And I think that's probably appropriate because they certainly were so much so over the last whatever. And I would argue you can make an argument that the dollar has been in a 13 year bull market. I don't think the dollar is going straight down, but a three and a half percent move down from that same point we're all targeting last week after that 80 ADP print is as big and as sudden of a move as we've seen. The dynamics for both commodity investors, the dynamics for emerging markets and even international investors is enormous.

4:26And we started to see a lot of those markets and asset classes turn on a dime or double bottom on relative performance against the S &P. So I do think the dollar does not hurt you on the upside. It doesn't mean it has to go aggressively lower from here, but I think it will go lower. And I think that's part of the trade. Yeah, I mean, not only is a lower, you know, lower yields good for valuations, as Lori pointed out, but a lower dollar, a weaker dollar is great for earnings. And we could hear that starting in earnings season when they start tomorrow, basically. Talk about all the time creates tailwinds for multinationals without questions.

4:57I mean, the stronger dollar didn't seem to be that much of a, I don't know, headwind, but it clearly should be a tailwind. But in terms of what it could help, and again, this dollar move has been precipitous, but look at the move conversely like a GDX, for example, with 10 % move over the course of a week. I mean, Tim can speak to this as well. That's pretty big. You don't see it. And I think it really is going to lend itself to the commodity trade, which we've talked about for a while. Gold getting off the mat again. Silver starting to bounce. People not paying attention. And I'll tell you something.

5:25Although crude oil is going slightly higher, gasoline is off to the races again. And it's pretty significantly backwardated, which, again, theoretically makes the Fed's job that much more difficult in the back half. Yeah. Tim, commodities start looking good now? Well, first of all, we've seen a lot of the commodity based stocks, not just energy companies versus oil, but even a free port against the price of copper that they'd start. They kind of started to diverge. And that was good news. But I do think that we've gotten some sense that there are places where there is pockets of growth. Yes, the labor market's decelerating, but the other big acronym that we seem to be throwing out there for equity investors, if there was TINA, which is there is no alternative, there's RINO, which is recession in name only.

6:09And if it's recession in name only, and the dollar is falling and the central bank's on pause, it's very good for commodities. Now, I'm not saying you run out and buy them, but as someone that's been trading in and out of Freeport and Rio Tinto and BHP Billiton, I think this is a pretty decent backdrop to own them. You updated your model today, Lori, as you said. And so what did your model spit out as the sectors that we're in now? Did anything fundamentally change? So we've liked energy for a while. We've been patient with it. We've said we thought the style trade would chop around a little bit.

6:39But look, energy is cheap. It's got compelling dividend yields, nice buybacks, nice balance sheets. And now you're getting a lift to oil prices. So that should help earnings in here. So we think it's, you know, frankly, we've seen curiosity here for a while. That's translating into real interest over the last week on our desk. Does your view of the economy change? No. Based on anything? The market's done. The market's done. CPI, PPI, jobs. The market's done really well. No, look, the job market is strong without question. I mean, the economy is slowing. I mean, think about the decisions they're making in Europe.

7:09I mean, their economy is a disaster, but inflation is even worse. Again, I'm interested to see what Steve says. I'm teasing something, as you probably can see what I'm doing. But I will tell you, I've been wrong on the lag effect of the Fed, but it doesn't mean it's not happening. And I think it's going to be pretty interesting over the next few months. All right, let's get to Steve Eisenman. And he is known, of course, for predicting the 08 housing market crash. And now Big Short investor Steve Eisman is questioning the market's rally stamina just as earning season is about to get started. He joins us now.

7:35Steve is now the senior portfolio manager at Neuberger Bourbon. Steve, it's always good to see you. Thank you for having me. What do you make of the markets? We're sort of all, you know, scratching our heads a little bit. The volatility in the bond market, the rally we've seen in tech. I think everybody, including me, has underestimated how much institutional investors were underinvested at the beginning of the year. Everybody was, as one of my partners likes to say, this is the most anticipated recession that so far has never happened. And so people are chasing. It's starting to feel a little manic, but it could go on quite a bit longer, because as long as the economic data is okay, I don't see why people are going to sell their stocks.

8:14It's funny when an institutional investor says that the thing that you got wrong was underestimating how much institutional investors have been invested in the market. Were you also underinvested? I mean, were you sort of bracing for something really terrible to happen? Do you still believe that it will happen? Or are you saying, you know, things actually look much better? Well, I think we came into the year fully invested. You know, we did better last year than the market because we were somewhat defensive. We're not quite as defensive as we were. But, like, I would admit that I'm surprised about how much the market has gone up this year.

8:48I really am. Are there shorts in the tech sector, then, if things look manic? I don't talk about individual stocks. But thanks for asking. Well, in the sector itself. I think it's too hard. It's too hard. I mean, even stocks where I think the companies are not even going to last, the correlations between all these companies that have very high revenue growth and negative earnings is almost one. So it's not really stock picking. It's like group picking. You know, last year those stocks were all down 75 % to 90%. This year they're up like 40 % to 50%. But, you know, when you go from 160 % to 10 % and now you're 14%, It looks good on a percentage basis, but it's not so good if you've owned it long term.

9:26Yeah. So what kind of economy are you investing in? What's the backdrop to your investment when it comes to what you expect the economy to give you? Is it a recession? Is it a soft landing? I mean, at this point, I'm agnostic about it. I mean, the data is still very, very strong. The Fed keeps raising rates. It hasn't had an impact. You know, until it has an impact, I'll just say we'll keep chugging along. So what are you chugging along with? I mean, it's a combination of some tech, very little financials. A lot of it would be focusing on doing a lot of work on infrastructure because the amount of money that the government is pouring into it is almost unimaginable.

10:06And it's going to last for at least 10 years. Tomorrow kicks off bank earnings. We're not going to play individual names, but banks are interesting here. And no, they're not. Well, that's not that's my point. The regulation is coming. Capital requirements are going higher. the environment suggests they're not going to be, the earnings are not going to be nearly as robust as the valuation suggests. So I'm not saying short, long, but are banks important here? Because I don't think they're particularly interesting either. I don't think they're interesting and I don't think they're important. I mean, people own J.P.

10:36Morgan because they're hiding in it. It's by far the best bank. The regionals are problematic because they keep losing their deposits and have to keep reducing their balance sheet. So for the regionals, I don't think earnings have bottomed, and I wouldn't even think about buying them until I thought that they had. You know, you could traffic a little bit in the larger banks, but the problem is that Michael Barr, who's vice chair of financial supervision, just said that he's going to raise capital requirements for the large banks by 20%, which would take ROEs down by 100 to 200 basis points. There's an irony in this, by the way.

11:10All the problems that happened in the banks were in the mid-cap banks. The large banks, because of all the regulatory changes, were fine. So what do the regulators do? They go fight the last war and they're raising capital requirements of the large banks. Why? I mean, there's absolutely no reason for it, but that's what they're doing. So if you look at something like a JP Morgan trading at 10 times, 10 times earnings, I mean, to me, it seems like it's discounting a lot of things like additional capital requirements and, you know, some maybe some other bank problem down the road and maybe the economy not doing so well.

11:45So it seems to me, I actually think it's attractive here. It is attractive, but it may be the only stock in the entire group that's attractive. I mean, if I had to pick one stock where I would say the earnings estimates could probably go up, it would be J.P. Morgan. But I think every other bank, probably in the country, the estimates are going to go down. So, you know, it's hard to play a group where nobody wants to own it, but you want to own the best stock. And I wouldn't argue with anyone who wants to own J.P. Morgan, but I just think the entire group is problematic right now. I think the last time you were on this show was shortly after the bank crisis.

12:19And so I'm wondering now, with a little bit of hindsight and a little bit of perspective, do you see the impacts of that crisis in March still playing out? Do you think it's yet to come? And do you think another one is on its way? I mean, the only thing we know for sure is that most of the banks have tightened their underwriting standards, so loan volume is down. It hasn't had an impact on the economy yet, maybe because there's so many other places to get a loan than it used to be in the past. I just don't see any impact at this point. So you said your focus is on infrastructure. Correct. And is that like industrials and aggregates?

12:55It's industrials, it's aggregates, it's some greenification, it's some grid improvement. I mean, I'll just give you one statistics that's mind-blowing. When the bill was passed, you know, part of the bill in terms of the Inflation Reduction Act, which, by the way, has absolutely nothing to do with inflation, The biggest part of it was an energy tax credit, which was estimated to be$270 billion. Now, that's an open-ended system where anybody basically can show up, and if they fulfill the requirements, they can get a tax credit. The Congressional Budget Office estimated that that would be$270 billion.

13:31The estimate today is close to$500 billion. That's in four months. So, like I said, the amount of money that's being thrown at it is, I mean, you could use whatever adjective you want, but it's a lot of money. So I'm wondering how you think about valuations for the infrastructure related names. Do they just not matter anymore because of all? Well, it depends on the name. You know, some names have had their multiples double in the last couple of years. Some names, which are a little bit off the radar, are still selling at the low double digits. You know, I think there's a whole group of stocks which we're doing research on that could have a real revaluation.

14:07You know, the money hasn't hit yet. So whatever revenue growth you're going to see accelerate is probably not going to hit till next year. So you have your time to do some work. Is there any stall in greenification because of interest rates moving higher, because commodity costs are higher, because metals may be harder to come by? Well, I think there's a stall in terms of installation of solar panels because people finance it. You know, the multiples in that group have been cut in half. It's really quite astonishing. So maybe it's time to start to circle as things sort of level out. But there's other things of greenification other than just solar panels.

14:44What's your number one sort of subsector within the greenification theme? That's a good question. Combination of grid improvement and industrials that are very focused on this. I mean, part of the theme here is that we were already beginning to onshore because of how bad the supply chain was. Now you've got, I don't know, 300 billion being thrown at it. So it's an accelerant. Steve, we've got to let you go. We hope you come back. Thank you. Steve Eisman. Tim Seymour, there's a lot to trade there. There is. And industrials have been part of our conversation for a couple of weeks. We've talked about the relative outperformance to the S &P of the transports and the industrials.

15:26When you think about the greenification, you also, it takes me back to the energy sector, ironically, because these companies have not invested in infrastructure and CapEx has been pulled back. So again, it's supportive of a lot of these energy companies who are growing their payout ratios. Uranium, very much in part of this trade, again, building out infrastructure. And there's only a handful of folks really well positioned for this at this point. So I continue to think that the dynamics that he's talking about, first of all, less concerned about banks, more focused on companies that could possibly re-rate and are going to be beneficiaries of margin accretion are exactly what the market has been giving you over the last three weeks to a month.

16:07So on a day when the Qs and the semis went back to a leadership position, I think they're going to struggle there. And at some point, that means the market struggles. The amount of money in terms of tax credits, That's just wild, what Steve was saying. Yeah, and I think he hit on something important, a re-rating in the sector because of these tremendous growth drivers that are out there. I will say I think his view, even though everyone's sort of talking about this theme, is somewhat contrarian, because I talk to a lot of institutional PMs who say, no, I can't touch it because it's too expensive.

16:39I know, but if we're this early on, maybe it isn't. Money hasn't hit. Money hasn't hit, although the first thing when he said that number is so big, like, oh, that's kind of a deficit bust. more you know yeah that's going to be trouble down the road but i mean i hadn't looked at a name like vulcan materials until just now that's had a huge run and they make aggregate like gravel and you know so but if it's this early on i you know i'm very happy sticking with a name like united rentals what was my what do they call those acronym things they call them acronyms yes it's a lot right but my what was mine you know i mean you always talk about tim's Mojo.

17:16Yes, this year it was Mojo. Two O's, again, interchangeable. But the J in Mojo was Johnson Controls. And it's interesting because when Steve's talking, I'm thinking, you know what, JCI sort of falls under that category in a tangential way. So I'm on the Steve Eisenkamp with this one for sure. All right. Coming up, a soda surge. Shares of Pepsi popping after reporting results this morning. What the company had to say about pricing and demand next. Plus a huge move in crypto. Ripple surging after notching a landmark win in its case against the SEC. see how this decision could ripple through the rest of the crypto landscape when Fast Money returns.

17:59Welcome back to Fast Money. PepsiCo out with results before the bell today. The beverage giant beating on the top and the bottom lines, also raising its full year earnings outlook by 20 cents a share. The company does see lower volumes as higher food and beverage cost curve demand for its products. Still the stock gaining more than 2 % today. It was snacks. People love snacks. It's the affordable luxury. That's what the CFO said. I know. They're not going to deprive themselves of a bag of Doritos even if it costs$7 a bag. The affordable, I was kind of surprised at that. But they talked about organic growth.

18:29That was part of the reason people liked that. But they also said that they raised prices 15 % and their commodity costs were up 15%, which makes it sound like that's why they raise the price is 15 percent. However, commodity costs aren't all of their costs. So the rest or some of the rest is just profit. I mean, good for them. But at this price, you know, I don't know, 25 times it's not so crazy, but it's not for me here. One other thing, though, this is a multinational. Almost half their business, I think, is outside of the United States. So this dollar move could be beneficial to them. Yeah.

19:03Tim, we did see volumes let up a bit. So maybe consumers are starting to think twice. How many bags are you going to buy? You know, maybe buy one and not two. Yeah. Yeah. I mean, and Frito breath is not something anybody wants. But I do think you have a dynamic with Pepsi where, first of all, this is one of the great five year charts anywhere. They under promise and over deliver perpetually. So when they raise guidance here, I believe them. And in fact, it's kind of when we've talked about other companies that they didn't need to say this. So things might even be a little bit better. I don't like the volume contraction.

19:37I don't think that they have the ability to raise prices. Hugh Johnston said on the network this morning that he doesn't think the commodity. First of all, he thinks inflation is not necessarily going down as fast as people might want to believe in that their commodity basket won't go negative. Let's see about that. I think they've had a unique window over the last two and a half years to raise prices in a way that they will not be able to. and I'll say it, get away with it anymore. And I just, you know, the valuation doesn't scare me. This is the kind of a stock that I think you could be short.

20:10I certainly would ponder this because I think the valuation is not cheap. And I think they priced in extraordinary dynamics and they had volume volumes that were falling. And I don't think they can raise prices like they have. I would agree with Tim. I mean, I can't speak about an individual company, but on this whole pricing theme in general, one of the things we see at S &P level is that when inflation moderates, revenues come down and it doesn't necessarily flow through the margins. So I think we're getting to the end of this period in the market when everyone can just say, hey, we're passing it on, we're passing it on.

20:40You are starting to see some erosion in certain companies. So I feel like, you know, I'm in the skeptical camp here. We're hearing about trade down constantly. We heard it from Amazon. We heard Dollar General saying it's customers trading down to food stamps. Remember And that speaks to, you know, probably 15, 18 percent of the population. I mean, that's a terrible thing to think about. But that's what's happening. So who wins to that? And listen, Pepsi has been a great stock. I think the all time high was last week. Not that it matters. 196 or so. Karen's right. At 25 times, it's probably a little long in the tooth.

21:12But at a certain point, to Lori's point, margins start to contract. So as inflation comes down, as much as you think it's a positive for some of these companies, it will wind up being pretty significant negative. Right. There's a lot more Fast Money to come. Here's what's coming up next. Ripple rips higher. The crypto at 18-month highs. The big win it scored against regulators and what it could mean for the broader space. Plus, Iger's intentions. Disney could look a whole lot different pretty soon. What the CEO had to say about the future of TV, streaming, and more. You're watching Fast Money, live from the NASDAQ market site in Times Square.

21:53We're back right after this.

22:01Welcome back to Fast Money Ripple. Ripping higher today after a New York judge handed the cryptocurrency a major win in an ongoing legal battle with the SEC. The coin hitting its highest level since December 2021. Other coins coming along for the ride. Kate Rooney's got the very latest. Kate. Hey, Melissa. So the court's decision today could have implications for the future of the crypto industry to set the stage a bit here. The cryptocurrency XRP that you mentioned was created by a major company in this space called Ripple. The SEC had sued Ripple a few years ago on grounds that it sold an unregistered security.