China deals a blow to a semi giant, and a new combatant in the Battle of the Bulge Description 5/22/23

0:02Right now on fast, President Biden and House Speaker McCarthy meeting minutes from now on the debt ceiling. The speaker saying ahead of the sit-down, the talks are at a sensitive point. We'll get the very latest from Washington coming up. Plus, Jamie Dimon says the market should get ready for rates to keep climbing. He also said he can't do his job forever but feels great about the next generation of leadership. The details from the JPM Investor Day straight ahead. Later, Pfizer gets set to get into the obesity game. New results in a pill form of their weight loss drug that they say may be as effective as the shot from Ozempic will go inside the numbers.

0:35And Foot Locker getting kicked around again today. And look at all the retail names getting dragged down along with it. I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq MarketSite. On the desk tonight, Tim Seymour, Steve Grasso, Dan Nathan, and Mike Coe. We start off with the latest blow to an already strained U.S.-China relation. Beijing initiating a ban against Micron, listing the U.S. chipmaker as a risk because it failed a national security review. Micron slipping almost 3 percent on the news. It's the Nasdaq 100's worst performer today. The U.S. Commerce Department criticizing the China decision.

1:07A spokesperson stating, we firmly oppose restrictions that have no basis in fact. So what impact will these rising tensions have on the markets and the economy? And to some extent, we are girding for this. We are preparing for this. We thought this would happen. They were placed under review months ago with the tech ban on the U.S. We thought there would be some retaliation. Tim? Yeah, I think we've been bracing for this for a long time. And on the show, we've been talking about this. And I think we've posited that actually could exist not just within the tech sector. And I think as you get into consumer products, but it's been very easy for any government from the beginning of time to lean back on.

1:39I think the call here is critical infrastructure. Now, really, if this is a tit for tat, the first part of that expression started in May 15th, 2019, when when Trump then banned Huawei. and again talked about telecoms info and those companies that had exposure to critical U.S. infrastructure on the telecom side. So seemingly this has been going on. At least the intensity of this this battle has been going on for three years. Obviously, there are a lot of geopolitics here because you think about South Korea, you think about Samsung, you think about SK Hynix, and you think about that. Basically, there's three players that produce 95 percent of the world's DRAM.

2:18And so it's going to be an issue and it's going to require that the U.S. lean on their allies. And it's going to require that China push back. And it's going to require that we have these escalated tensions. And I think it's just the beginning. You know, it's interesting that they chose Micron here. And again, this has been under review for a couple of months. If you think about Micron, I think in 2021, 11 percent of their sales come from China. But Qualcomm has 65 percent of their sales from China. Broadcom has 35 percent. Intel has 27 percent. So they picked a very commoditized product, which is memory is DRAM.

2:47And, you know, so I think it's kind of interesting. It feels kind of benign. I thought the stock's reaction, surprisingly, it was down like 4 % or 5 % pre-market. And then it was at one point down about 2 % or so. And it's still highs. Yeah. Yeah. You know, so it's kind of interesting to me. And then here's a company that, again, pretty cyclical sort of stuff. They were dealing with shortages. Then they were dealing with gluts. And then, you know, if you look at their earnings and sales down 50 % year over year right now, they're kind of working through all of that here. So, again, I think the point is that this is not going to end anytime soon.

3:18I also thought it was weird as Biden's coming back from the G7, those headlines about, well, expect our relations to get better. I don't know where that comes from. Yeah, it's kind of odd. Something like that. Yeah, I mean, and the timing of it is not, I mean, think about the communique from the G7 talking about de-risking from China. That came out. And then just hours later, this ban comes out on Micron. So it really does seem like, oh, you do that to me, we'll do this to you. Right. So when Dan gave the breakdown of the revenue that's derived from China, Qualcomm is beaten up. The stock has been beaten up for a host of other reasons to begin with.

3:50But when you look at AMD, that stock hasn't been beaten up for a host of other reasons. Micron, which is interesting, what's been the pixie dust lately? AI. And what does AI need to run on? NAND. So this to me is all a buying opportunity because it's not so dependent on China to begin with. On Dan's scale, this was one of the lowest that were dependent on China. And I think it's actually worth a visit on the buy side. 11 percent of revenues from mainland China in the past fiscal year, Mike Ko. It did seem like a warning shot precisely for what Dan had mentioned. I mean, this is, you know, the chips that are needed for critical infrastructure.

4:29That's a very small part of what Micron sells into China. It's mostly for consumer devices. And so this felt sort of like, you know what, this is the way it feels on the scale. But we can ratchet that up. Yeah, I think this is a much more symbolic type of a gesture for sure. I mean, consider WPG in Taiwan. They actually generate more revenues for Micron than basically all of mainland China does. And as you point out, the affected areas, that's not going to encompass all of that 10 percent. I think Dan's really getting to the heart of the issue, though, which is that, you know, we're seeing these big revenue declines for Micron.

5:03And that is because, you know, demand for the products that their chips support is just not there. It is trading already a little bit of discount to the market at about 17 and a half times. You know, people that over the last 10 years have averaged about 380 a share. Yes, that's the number I'm going with, you know, and it's a sector business. So it should trade at a discount, especially in the current environment. I think this is, as Carter often likes to say, a pair of twos. This isn't one that would be chasing on a mild decline like the one we saw today. I mean, the overall impact on the on the socks is pretty de minimis.

5:36I mean, the socks was up a fractionally, pretty much in line with the markets. I mean, is this a reason, Tim, you would sort of rethink an investment in a Qualcomm or a Broadcom or any of these other chip makers that sell into China because of this threat of escalating tensions? The answer is yeah. And I think we've just kind of begun to figure out what the discount rate is. But again, I think you think more about critical customers. And to the extent that Qualcomm's been an Apple story. it's been thinking about where people have their exposure. I guess I ultimately look at where we have been in terms of why Micron is more or less near kind of the top of a one-year range and why it's been working its way through what has been an oversupply and falling prices in DRAM and NAN that have stabilized.

6:24And we've had different cyclical reads on this. But I do think that, you know, it's the same kind of argument that I think we put I think we put a bit of a discount on Taiwan Semi at times when we were really talking about China, Taiwan and where conflict was critical there. And also where at some point the U.S. may say, hey, you know what, you're too close. And so I think there's going to be a reassessment of all of those firms that I've explored. And isn't it all about the CHIPS Act anyway? So this started a while ago. So if that whole fight started somewhat a distance ago for the overall market, you're going to see this play out a little bit.

6:59What you think what I think you need is more people to get on the U.S. side versus China side. And maybe it helps them to ratchet down the rhetoric versus to ratchet it up. And where we're at right now is the ratcheting up of rhetoric from China based on what we heard today. And I hear you. But who can join the U.S. side here? I mean, again, can South Korea, who's a major ally who just got back from the U.S. and sang American Pie or whatever, you know, I mean, but what can they really do? I'm just saying other countries, too. So just just just on a rhetoric basis, maybe Europe can start toning it down or ratcheting it up against China, because China really doesn't have a leg to stand on a lot of these human rights issues.

7:39And it's odd to me that we're always playing sort of defense when it comes to China, where the whole world is bringing up the human rights element. And China seems to be pushing that aside and powering forward on the business level, where I think we should be looking at where the puck is going, not where it is. Well, I just say one thing on that, which is very clear. If you're a CEO of a U.S. multinational, you think to yourself like, OK, we've been in a 2 percent growth environment GDP wise for a very long time. Two thirds of that GDP comes from our consumer. But over there, they have a rising middle class that is greater than the size of our entire population.

8:13And it really is all about this emerging consumer in a way. And I know that a lot of people now are very focused on India in the same way. But because we've had such a tight relationship from a supply chain situation, manufacturing, it has worked. And it's worked that we've actually disregarded some of these human rights sorts of issues. I mean, not me. I mean, we're all saying we all. But you hear what I'm saying. No, 100%. It's odd to me. And by the way, the consumer in China really hasn't come back the way that we thought the consumer would come back because China can throttle that growth whenever they want.

8:45And they seem to be tamping it down to spike themselves. And I don't get that either. I think it's a tailwind, by the way. I think China growth in the second half of 23 is something that people are underestimating. And I would just get back to a lot of the big themes that we thought about why Intel is spending tens of billions of dollars and why they are going to be partnering with another number of infrastructure firms. All this nearshoring, all of this new strategic relationships is very inflationary. It's very time consuming. It's not going to happen overnight. And I just think that that's the world we live in.

9:15I think so back to a question is what's the discount you put on some of these companies that have to rely on China? I think you have to think about it. I get back to a market where Apple's smartphone share in China is 22.3 percent last time I looked. And that's major. And we, you know, Tim Cook has done a phenomenal job of kind of navigating below the radar screen. But at some point, Apple has the biggest target on their back. The authority issue, though, or the conundrum is that you put a discount on the companies that rely on China, that operate out of China. And you and you also put it sounds like a discount on companies that are going to be nearshoring because it's inflationary.

9:48And I mean, it's sort of like in this transition period, it's going to be very difficult. But listen, Elon said it last week to David Faber. I mean, like he took all focus back on Apple, to your point. And, you know, when you think about their exposure there, just obviously from a sales standpoint, from a manufacturing standpoint and all the investment that they have made on that, I do think it's kind of interesting here. And I look at that Apple chart, man. That looks like the mother of all double tops. And to your point, Mel, there is no discount placed on an Apple trading where it is at 27 or 28 times or anything like that.

10:19So there's no discount anywhere in the market that I can find for any of these things, these headwinds that we detail, whether it's the debt ceiling, whether it's slowing growth, whether it's a deep recession. There is no discount anywhere. And I think we're just back to a YOLO market here. And last thing, just just to make it a trading thing, because obviously Dan sees a double top. I see a breakout in Apple and that's what makes markets. Yeah, there you go. For more on all this, let's bring in Yale University senior fellow Stephen Roach on the fast line. He's a former chairman of Morgan Stanley Asia.

10:49Stephen is also the author of Accidental Conflict, America, China and the Clash of False Narratives. Stephen, great to have you with us. What did this ban on micron feel like to you? Was it symbolic? Do you think that this is just the first step in many that China will take? Well, thanks, Melissa. I'm surprised it took this long. Actually, they telegraphed this, as you said, at the beginning of the show in early April. And I think we just have to step back and take a deep breath. The U.S. took major action against China's technology in early October with these draconian export sanctions on China's access to advanced semiconductors.

11:38They need those chips for their key innovations in AI and quantum computing. The U.S. also corralled a couple of allies, Japan and the Netherlands, to join in these sanctions, in this case, squeezing out China's access to the semiconductor production technology. So these are major, major actions that we took, we initiated. Our justification is we've lost patience with China's failure to distinguish between civilian and military applications of technology. So we're going to squeeze them in the entire space. the retaliation against micron technology is peanuts compared to what we have done to China.

12:37So I think your gang sitting there is right to think that there is more to come. I have no idea who will be next. Somebody just talked about Apple is having the biggest target on its back. That's, you know, certainly correct. But we have no idea if they would dare to do that, given the commitment that Apple has made to offshoring in China, even though they're starting to move a little bit away. But this is just the beginning of what I think is going to be a series of major battles in the tech war. Stephen, you mentioned that our actions versus China were draconian back in the fall. And so let me ask you this.

13:19When you're thinking about something that is so important, you just mentioned it to a whole host of industries in China, access to these advanced chips. Does this sort of ban force them to come up to speed and actually make them more competitive in doing it this way? Does that become more of a risk for maybe U.S. manufacturers here? Absolutely. I mean, that's precisely their response. But as you guys alluded to earlier, China's been talking the talk about bringing their domestic semiconductor industry up to world standards now for years and years. It's a difficult thing to do. And so they are redoubling their efforts right now.

14:00There's no question about it. And I'm confident they will get there. But it's not going to be this year or next year. It's going to be several years out. And in the meantime, they are very vulnerable to the restrictions that we're imposing on their access to the chips they need to drive their indigenous innovation. In the China playbook, Stephen, is it your view that the retaliation for the CHIPS Act will remain within the tech sector, or could it go another route and hit another industry? Look, there are no rules that require a tit-for-tat to be exactly in the same industry that the initial actions were taken.

14:41We've done that a lot. We started out with a trade war that was very narrow and then accelerated into a tech war. And now we're talking the talk of a Cold War. But in doing that, the issues have moved from trade to human rights to economic coercion. I mean, we're not at a loss of rationales to come up with, and they keep morphing from one to another. So I wouldn't be surprised if China were to follow the same script in its own retaliation. Stephen, as you think about it, and certainly in your role in Morgan Stanley back in the day, you've been a pioneer for capital markets in that part of the world, and you understand those markets, and you see how under-invested EM is, and you know that China's 40 percent of EM.

15:31Do you see a world where we can decouple this kind of story? Because, you know, to the extent that China has also been a very difficult place to invest for people, We're talking about American firms and the exposure over there. But just investing in China, you know, can you give us just your couple of thoughts here on whether the fundamentals of the economic growth that I think is going to maybe surprise people in the second half of the year relative to where everything's priced? You know, can you make a call on that? Yeah, I can. It's an uncomfortable call. I've been a congenital bull on China for 25 years.

16:03I do buy the point that you're making about stronger than expected growth in the second half of this year. But I'm worried about 2024 through the end of this decade because China's got some structural problems that they're finding very difficult to address. Demographies are given their working age population is going to be shrinking for years and years to come. And so they need more productivity growth to offset that. And by focusing on state-owned enterprises as a source of growth where productivity is the weakest, they're not going to get it there. And by putting pressure on the private sector, especially the Internet platform companies, as they have unfortunately done over the last couple of years, they're not going to get it there.

16:52So I'm sort of stuck in a much more challenging and difficult medium to longer term growth call than I've ever had on China. in the period that I've been covering them. All right, Stephen, great to get your thoughts. Thank you so much. Thank you, Melissa. Stephen Roach of Yale. The other twist, I mean, if the U.S. goes into a recession, then the manufacturing sector in China doesn't catch a break, Tim, right? And so that's another area of pressure on the economy. I think companies that have a lot to gain by China are European companies. And I think of some of the big exporters from Europe into that region.

17:28And I think that's another one of the reasons why international looks a little bit more interesting, especially with the currency implications. I would just say I do think they're different. And I do think that we've talked about Baba and where it's still a trade. It's not an investment. And I look at, you know, a year of consolidation and a lot of these names, all things being equal to the environment we have today. I think Baba is going higher. I think there's a trade here. And again, the sum of the parts and the spinoff of their cloud company is is a catalyst. a lot of these, whether it's the FXI or the K-Web or even the EEM, all ways to play China, are kind of right up against some levels.

18:00And if the dollar weakens, I think they all go higher. Think about the other, the EV industry that's staring us in the face. You heard Farley, the CEO of Ford, mention it today. You could buy up all the lithium and copper and cobalt that you want, but 80 % of the processing is done in China. That's the next one that could, they could really tighten the noose around America's next as we start to segue into more EVs. Coming up, all the headlines out of J.P. Morgan's Investor Day, what CEO Jamie Dimon had to say about growth, the economy and much more. We've got the details next. Plus, two sneaker stocks getting kicked.

18:33Shares of Nike and Footloaf are dropping again as analysts turn sour on the names. How the inventory overhang is impacting this space. Don't go anywhere. Fast Money is back in two.

18:50Welcome back to Fast Money. J.P. Morgan CEO Jamie Dimon warning of higher rates in a tighter credit market while speaking at the company's Investor Day today. The bank also upping its net interest income outlook for the year by$3 billion thanks to its takeover of First Republic. Leslie Pickers has been following the event today. She joins us now. Leslie. Hey, Melissa. Shares of J.P. Morgan closing in the red today despite that higher net interest income guide at the firm's Investor Day. Diamond spoke about the overall fallout from the bank turmoil we've seen this year and predicting there will be a credit cycle pointing to real estate as the offsides as the Fed continues to tighten.

19:28You're already seeing credit tightening up because, you know, the easiest way for a bank to retain capital is not to make the next loan. So I think you are going to see that. And I think everyone should be prepared for rates going higher from here. You know, if that five percent is not enough in Fed funds, if I and I've been advising this to clients and banks, you should be prepared for six, seven.

19:53Speaking of being prepared, succession was the key topic at the end of the Q &A in light of future movements within the C-suites of Morgan Stanley and Lazard. Diamond says he still has the grit to do the job. I can't do this forever. I know that. But my intensity is the same. I think when I don't have that kind of intensity, I should leave. I don't think CEOs should retire in place and just cut back and take it easy for a while. I think that erodes the whole company over time. now when asked how much longer he plans to be ceo he chuckled three and a half more years likely a nod to that stock option bonus he got in 2021 all right leslie thanks leslie picker from the jp morgan investment day meeting it's interesting to hear to hear him say prepare for rates that are higher than five percent six seven eight and also in terms of credit reserves they're preparing for peak unemployment of 5.8 % in 2024.

20:51Is this all just being extremely conservative because that is the safer thing to do? Or do you think that there is a belief that rates could go to 6%, 7 % and 5.8 % unemployment? I don't think he would have said that if he doesn't think about it. And then you think about all this Fed speak that we've seen really that got started with Lori Logan last week and Kashkari. And I mean, these folks seem really determined to break the back of inflation without acknowledging the fact that inflation is likely to stay more elevated than they had hoped prior to the pandemic. And the likelihood now is that whatever you think normal rates are, they're going to be much higher for longer, and whether it tops out at 6 % or 7 % for Fed funds.

21:31I don't know how the stock market closed unchanged. There was a world that we used to live in in the stock market where if someone told you that the CEO of the largest bank with the most credibility on the planet said, be prepared for much higher rates, that means for longer, and equities could just stay bid here, That seems very odd to me. Yeah. Mike. Yeah, I agree with Dan wholeheartedly here. I mean, we've got a lot of things sort of working in concert in tandem that I think are going to pressure this. First of all, there is just the supply and demand for money issue. I mean, I do believe that, you know, the inflation genie is a tough one to stuff back in the bottle.

22:07So for those that are expecting some kind of rate cuts in the near term future, I just don't see that happening. And of course, that's the short end of the curve on the long end. Basically, if you start to see some credit tightening within the banks and there's still demand for it, that's obviously going to create a problem. And there's something else, too, which is that when we think about what a normalized rate condition should be, most people are only looking back with a lens that goes back to the GFC, which is not a realistic lens to use. I mean, if we just go back a little bit further than that, the rate environment in which we currently find ourselves is not so extraordinary.

22:42And I think that's really what people should focus on. We We got away with very cheap and plentiful money for a decade plus, and that just can't go on forever. And I don't think we should expect it to return anytime soon. And that's going to create a lot of pressure in a lot of areas. All right. There's a lot more Fast Monday to come. Here's what's coming up next. The other shoe has dropped. Analysts tripped up on Foot Locker results, and they think Nike could follow. It's time to lace up. More on the footwear flop next. Plus, the latest on debt ceiling negotiations. So can lawmakers strike a deal?

23:20The economic impact as the deadline draws near. You're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.

23:39Welcome back to Fast Money, a double shot of buzzkills in the athletic workspace. FIT LOCKER SHEDDING ANOTHER 8.5 % TODAY. THAT IS ON TOP OF ITS 27 % POST-EARNINGS DROP FROM FRIDAY. CITI DOWNGRADING THE STOCK TO A NEUTRAL, SLASHING ITS PRICE ARGET TO$30 FROM$48. THE BANK ALSO PUT NIKE ON NEGATIVE CATALYST WATCH, CITING HIGHER INVENTORY LEVELS AND A MORE CAUTIOUS CONSUMER AS REASONS FOR CONCERNS AHEAD. THOSE SHARES DOWN ABOUT 4 % TODAY'S SESSION. WE TALKED ABOUT THAT. WE REALLY SURROUNDED THE TRADE ON FRIDAY. Who knew how much pressure the stocks would continue to feel today, Tim? Well, you know, we talked about where Nike is what percent of sales of Dix, excuse me, of Foot Locker and where they've got a read through to not only people like Dix, but, you know, Deckers, all kinds of.