Consumer Debt Hits New High Ahead of Retail Earnings Reports 5/15/23

21:23But the issue is like the vertical nature of this merger. You essentially have Activision, which makes these games, and then Microsoft, which produces the consoles that they would be played on. So, you know, I just don't know if like the competitive landscape is, and I really think that's what's going to be the U.S. regulations kind of pushback. Is the competitive landscape adequate to justify all the other cloud distributors and gaming console providers that would be using these games? And that's still a very opaque, not so minor detail, in my opinion. And we have an FTC here, which is an activist FTC, if you will, in terms of being outspoken about deals.

22:00They don't want deals to happen. I mean, that's how we've been saying this whole time. Big tech is not going to make any major deals because they're too big. They don't want to see that. They are. They're not going to listen to this. That's what Bono was saying. They can think that they'll listen to it. It'll come in one ear. But I don't know if it's going to move it. I will say, though, I don't think this deal is something that really pushes out all competitors. I look at Microsoft's place in both hardware. I look at the multi-gamer and the console balance there and really their ability also to offset a lot of these services.

22:32So I think the deal gets done, and it just leaves you with who's next to go down. There aren't a lot of people left, and that may be the place to be looking for the trade. I mean, Microsoft, as a Microsoft shareholder, do you think that Microsoft needs this deal now? It's got this. It's got a I now it's got a I and a I is going to add to earnings in so many different ways, Courtney. Yeah, I don't think they need this deal. I think they have plenty in their pipeline, plenty in their cloud services that are going to be beneficial to them. I do think it would be helpful. I agree. I don't know if this is going to go through yet.

23:05I don't know if, you know, what's happening to the EU is going to trump the UK. The UK did even come out and there was a statement made somewhere along those lines of like, this isn't going to change our opinion. So I don't know if this is really going to make or break things. But, you know, Microsoft is a great company either way, with or without this. So, Guy. $70 billion deal for Microsoft, a$2.3 trillion company. It's not necessarily going to move the needle. But I like where Tim is going with this. And if you sort of read between the lines, what's next? I mean, Electronic Arts is lagged. You got to believe at some point they're on somebody's radar screens.

23:37There's another symbol out there whose market cap allows us to speak to it. G.D.E.V. Nexters. People will start talking about that. So there are names out there that could be in play on the back of this. This deal, whether it gets done or not, I'm not even sure if that's the story. The story is who's next in line to sort of make moves like this that potentially could get done. And to me, Electronic Arts has to have a huge bullseye on their back, which would be a good thing for shareholders. Who? In the environment where big tech is not going to do the deal or it's going to run up against all sorts of roadblocks.

24:09Who doesn't? Maybe in Netflix. Again, Netflix has been talking a little bit about their parlay into gaming. I realize Disney's balance sheet is a little strapped here. But again, we've often talked about the big media companies because the interactivity of gaming is where their business is going. All right. Coming up, we're focusing on financials as one money center bank lags the rest of the group. Why, our next guest says the problems could persist if rates continue to rise. RBC's Gerard Cassidy will join us next to talk big banks, regionals, and much more. Don't go anywhere. More Fast Money right after this.

24:40Get your trades to go with the Fast Money podcast. Catch us anytime, anywhere. Follow today on your favorite podcasting app. We're back right after this.

24:59Welcome back to Fast Money Stocks. kicking off the week in the green ahead of more debt ceiling negotiations tomorrow. The Dow climbing nearly 50 points. The S &P up three-tenths of a percent, and the Nasdaq leading the gains up more than a half a percent. Shares of drugmaker's surreptotherapeutic surging 30 percent after advisors at the FDA-backed accelerated approval of the latest gene therapy drug. The FDA expected to make a final decision by the end of the month. We don't know if they'll agree with this panel, but it is likely that they will, Guy. Yeah, likely that they will. The vote was 8-6.

25:32And if you listen, if you read the commentary, it wasn't like a resounding 8-6. I mean, there are clearly some people on the fence. But gene therapy is real. And if you have Duchenne muscular dystrophy, this is a big win, clearly. Question is, how do you trade the stock here? We're right back to the levels we saw in March before it traded down about 115. And here we are again around 158. Huge volume day, traded about 8 million shares. I will tell you, I would be inclined to stay with this because I think it's probably going to sneak past at the end of the month. But there's absolutely nothing wrong if you had this binary event on your bingo card taking some money off the table.

26:09I don't want to try to play both sides. I'm inclined to stay long, but the discipline thing is probably to take some money off the table here. All right, let's turn now to a battleground in the banks. The Bank of America surging 2 % today, but underperforming its money center peers over the last three months. The stock is down 22%, but Wells Fargo is down 19%. Citi is down 11%, and JPMorgan down 6%. So why have investors been turning their backs on BAC? Let's bring in Gerard Cassidy, managing director and head of U.S. Bank Equity Strategy at RBC Capital Markets. Gerard, great to have you with us.

26:40You say the answer lies in the difference between its bond portfolio and its peers' bond portfolio. Yes, Melissa, when you take a look at the underperformance of Bank America relative to its peers, I think the big hang up that investors have had is that they have a very large bond portfolio. And it has about the health and maturity portion of that portfolio as an average duration or average maturity, I should say, about eight years. And so that's weighing on the growth, the net interest income, since that portfolio is at lower rates than what you can get today. So does that material, I mean, versus the competitors, Gerard, are your expectations for Bank of America in terms of profitability, are they much different because of this difference in its bond portfolio?

27:27I wouldn't say it's much different, Melissa, but in view of what's going on in the banking sector with what we saw earlier in the year with the failures and the big issue of the unrealized losses in bond portfolios becoming a concern for investors, Bank America has those issues as well, the unrealized losses. But they'll manage through that. You know, the portfolio will burn down over the years to come. And they have plenty of core deposits. So we're not worried about that. But it's just that it may weigh on their profitability again on that net interest income line. And I think people have moved to the sidelines because of that.

28:07And it's Courtney here. Thanks again for having us. I completely understand your point here and why they're underperforming. And I'm curious to how much of this is you're starting to see consumers who are nervous about banks are heading to something like a J.P. Morgan, which is kind of tried and tested in a recessionary environment, considered a little bit more of a safety play. And so I'm wondering how much of that plays into the underperformance and how much that is already priced in. And should investors be looking at this as more of a buying opportunity considering how much is underperformed this year?

28:33According, I'm with you on the last point that it is definitely a buying opportunity because it has underperformed. And as Bank of America showed in the first quarter results, they saw an influx of deposits like JP Morgan. So nobody's avoiding Bank of America or JP Morgan for that matter. And the entire deposit flight problem, as we move away from those failures of March, I think that's going to die down further as we go forward. And the banks will start to regain some momentum as people understand that those banks that failed were really idiosyncratic problems, and it's not reflective of the industry at all.

29:12Do the banks regain momentum, Gerard, simply because it'll look like a bad situation that gets a little bit better, or are they real fundamental? I mean, if you think about what is ahead, we've got a debt ceiling debate which could drive bond yields higher, which would make it worse for the entire sector in general. We've got potential consumer under stress. We've got tightening credit. We've got banks that have to pay out much higher interest rates in order to maintain that deposit flight. I mean, I feel like there was a reason why banks stuck to 0.1 % on a savings deposit for as long as they could until they had to raise it to market rates.

29:49No, you bring up some very valid points, Melissa, and I would point out that, you know, the way that deposit baiters are working, which you just referenced, you know, raising those deposit rates, is very similar to past tightening cycles. And what's fascinating to us in the last four tightening cycles, once the Fed reaches the terminal rate in Fed funds rates, then you start to see the banks behave better because what's likely to happen is deposit rates stop going up one to two quarters after the terminal rate is reached. But the banks are still reinvesting cash flows from the securities portfolio at higher yields and the margins start to stabilize.

30:27And that could all we could see that by the end of the year. But you're right. You know, there is a lot of cross currents out there in the economy, and that is certainly affecting the bank stocks. But if we really have seen the last of the Fed fund rate increases, that's going to be, I think, a real positive catalyst for the banks on the next six to 12 months. Hi, Gerard Bonoan here. So if you listen to a lot of these investor calls, you hear a lot of discussion around loan growth, portfolio growth. As we enter a more challenging loan growth environment, would you mind speaking to how we should be thinking about the large money center banks versus the regionals and who might be more challenged in that type of environment?

31:06It's a really good question because as we've seen, loan growth on a year-over-year basis is still high single digits for the banks. But sequentially, since the beginning of the first quarter, it has certainly slowed down much more dramatically. And this is not uncommon during this part of the cycle. You know, the loan growth in the U.S. banking industry typically grows at the nominal rate of GDP. So if we see nominal GDP growth this year of 4 % or 5%, then we should expect 3 % to 4 % total loan growth this year. But in terms of money centers versus regionals, the money centers are driven much more by consumer lending than the regional banks.

31:46The regional banks are driven more by commercial and industrial and commercial real estate lending. And what we saw in the most recent senior loan officer survey on lending, the demand for loans from commercial and commercial real estate customers have really fallen off. So it's a long way of saying the money centers could be the better play on the loan growth aspect of owning a bank right now. Gerard, great to see you. Thanks. Thank you. to the RBC. Multiple choice. Pay attention. Get a pet out. J.P. Morgan, Bank of America, or none of the above? Tim. Boy, having underperformed J.P. Morgan for the last six months by 30 percent, I'm going to take A, Bank of America.

32:34Was that A? Was that B? I think it was B, but that's okay. I'll take that. You played well. At least I played the game, But I did that in school all the time. I got the answer right, but I wrote in the wrong letter. I mean, it explains a lot. That was your excuse? I just did it right there, verbally. Guy, what would you say? First of all, that's not true. He got it wrong. I mean, when you're wrong, you're wrong. That's fair. But I'll play your reindeer game. I'm with Tim on this one. I don't know what letter Bank of America is in that three-pronged multiple choice. But I'll take Bank of America just in terms of the mean reversion trade.

33:12All right. We want to get back to Leslie Picker with an update on the Berkshire Hathaway 13F filing. Leslie. Hey, Melissa, I wanted to make a correction for some of our reporting on Berkshire Hathaway's 13F filing. Earlier, we told you that the firm added to positions in Bank of America and Citigroup during the quarter. But in a separate press release, Berkshire Hathaway clarified that those bank shares actually stem from holdings owned by a subsidiary of Gen. Re, which Berkshire had acquired in 1998. And beginning with today's 13F filing, the holdings of Gen. Re will be included in Berkshire's 13F filing.

33:49So just to clarify, Berkshire did not buy any additional Bank of America or Citi shares during the quarter. those were inherited through this affiliated subsidiary. Melissa. Leslie, thanks. Leslie Picker. Coming up, a check on the Chinese consumer, the post-COVID recovery and the impact on Chinese stocks. Are Yunus Yun set to bring us the latest from Beijing? Plus, Tesla gearing up for their annual shareholder meeting tomorrow. Is this a buying opportunity? We'll hit the options pits for that trade ahead. Stick around. More Fast Money in two.

34:24Welcome back to Fast Money. Chinese internet stock JD.com rallying more than 6 % today. Tencent, Baidu and Alibaba following the move ahead of earnings and key retail sales data set to be released. So what is going on in the minds of Chinese consumers? CNBC's Eunice Yun gives us an inside look. For Beijing used car salesman Han Xu, business has never been this good. He sells nine cars a month. Before the COVID controls, he would sell four. In the past, people wouldn't even consider buying a used car. He says today, it's all about price. While sales of new cars dropped 7 % in the first quarter from last year, sales of used ones rose 10 % to 4.3 million.

35:09Popular chains like Chinese tea brand Heiti put out reduced-price versions of their standard menu. Its signature drinks sell for$4. Its new simpler options,$2.80. But some people hurt so badly, they're looking to get things as cheap as they can. A hot trend is selling nearly expired food at bargain basement prices, like at discount retailer Hotmax or grocery outlets backed by Alibaba. Food here is discounted by at least half, and often up to 90 percent, depending on the expiration date. The pandemic has changed people's mindset. People are panicked about the economic outlook, job security and falling income, the shopper says.

35:52So we want to save more. April retail sales are out tomorrow. The forecast is for double digit growth, but that's compared to last year when the economy was tied up in pandemic restrictions. Melissa. Eunice Yun, thank you. Eunice is live in Beijing for us. Tim, what's your take? I mean, The Chinese stock market tells us that there's doubts about this recovery. There's doubts about the recovery, but on a relative basis, there's no question about where we're going here. And we're hearing this out of Macau. We're hearing certainly where they are in terms of at least over the last six months, the improvement.

36:26I look at companies like Alibaba and Tencent, though, really not necessarily about the Chinese consumer. They're really about the Chinese government. And so Bob is going to announce they're going to for the March quarter. They're expected their GMV to be down about two points from where they were about a year ago. None of this is a major surprise. I do think that the second half of the macro story in China is going to be a lot better than expected. It's not going to be nine percent growth, but it's not going to be five percent. I think it's going to be on the higher end of expectations. And that's really what we need.

36:57But I still don't think Chinese stocks are trading on that sentiment. I look at BABA. I think BABA on valuation is very interesting. Again, they announced all these spinoffs of the various business units. Those will be catalysts when they happen, but we're still waiting. It's interesting that Eunice is talking so much about price sensitivity to the point of consumers buying nearly expired food for massive discounts. And at the same time, we heard from all of the luxury retailers from LVMH to Keurig that reported very good sales. And yeah, they're doing really well, thanks to the China reopening, Courtney.

37:29Yeah, actually, that's exactly what I was going to bring up, is a lot of this is like what's happening here in the U.S., where, unfortunately, inflation is kicking in after COVID reopened. You are having the lower income consumer is hurting more, and so they're having to trade down, they're having to look for discounts, but it's the higher end consumer has not been hurt as much, and that's exactly what you're seeing in China. So your luxury brands, like in France, are doing fantastic, but yes, people are having to buy nearly expired food, and so, you know, that obviously is a horrible discrepancy, but that's exactly what's happening there.

37:56And I think that is exactly what you want to look at going forward is there's actually an interesting article in the Wall Street Journal today about how investors are much more worried about the Chinese government, to your point, and what that's going to mean for Chinese stock. So people actually are looking to like luxury brands in Europe and the U.S. as a way to invest in the Chinese consumer without investing in China, which is kind of an interesting idea. And not just the Chinese government in terms of putting its foot on the throats of investors, but the relationship between the U.S. and China guy, which is something that you've been talking about for a long time.

38:25I mean, anything with Taiwan and, you know, I don't know, it could be very unpleasant for U.S. businesses over there. Yeah, I think so. And we don't say that to create panic in any way. I mean, you're just sort of reading the tea leaves and the rhetoric continues. It doesn't go away. And I don't think one day you're going to magically have some detente between the two countries. If anything, I think the rhetoric is going to get ratcheted up as the year progresses. So I think there will be a couple of these U.S. companies to find themselves in the crosshairs. I thought it would be Starbucks. It hasn't happened.

38:58Clearly, Apple's probably the poster child for that. It hasn't happened. The question you have to ask yourself, is it a matter of time or are they going to sort of skate through? I think it's a matter of time. Yeah. Bonoan? Yeah. I mean, listen, on a valuation basis, there's definitely a compelling story to look at across pretty much all of the names that you laid out there. What you really have to ask yourself is why they continue to trade at these suppressed levels, even after we've kind of had this reopening. One, I think it just shows, you know, I don't want to be rude, but the whimsical nature, I mean, for lack of a better term, of some of the geopolitics that are going on in that region.

39:28The risk between us escalating U.S.-Cino relations, as well as the decisions that they make that seem to happen essentially on a whim. So you have a profitable company like Baba, like Tim mentioned, that essentially was stripped down to bare bones. Are you willing to deploy capital in a meaningful way in a situation where the rules can change overnight? And I think that's ultimately the challenge that these companies are facing. Coming up, one option traders making a bullish bet on Tesla speeding higher here. Should you drive into this trade, we'll bring that call to you and much more ahead on Fast Money.

40:05Do not miss CNBC's special presentation. David Faber sitting down live with Elon Musk tomorrow, right after Tesla's annual shareholder meeting in Austin, Texas, talking Tesla, Twitter, AI, SpaceX, and much more. That's at 6 p.m. Eastern Time right here on CNBC. Well, Tesla's options seeing a huge amount of action today. Mike Coe's got all the details. Mike. Yeah, Tesla, as usual, the busiest single stock option today. Right now, the options market implying a move of more than 4 percent by the end of the week after that annual meeting. The busiest options were the 170 strike calls, the ones that expire at the end of this week.

40:39But the biggest single trade was a purchase of nearly 9 ,500 of the May 26th weekly 170 calls. The buyer of those paying$4.75 a contract, that works out to about$4.5 million in premium, betting on an upside move of about 5 % by the end of next week. Thanks for that, Mike. Guy, if you were able to sit down with Elon Musk yourself, what would be the first question you would ask him? Oh, my goodness. What is the financial, what are your requirements to continue with your bankers and your debt holders in terms of this Twitter deal? Like, what are you on the hook for? I don't know how I would phrase it, but it would revolve something around the debt load around the Twitter deal.

41:20So the implication of that is the debt load around the Twitter deal. Does he have to sell shares in order to cover that? Sell more Tesla stock. Yep. Right. Right. Tim? Correct. I would be interested in where he really cares on margin to be aggressive against the competition. And really, you know, I think I know what he would say when I would say, can you continue to push prices lower? And I think he'd say yes. Except that he's been raising prices, which is sort of a strange pricing dynamic about these price cuts. And then slowly they creep higher, Court. And we heard from the earnings call that he looks at these prices every week.

41:56Yeah, which is amazing. He can do that with everything he has going on right now. But I do think that is something that they have the ability of over their competitors, is they are able to reduce prices to get demand where they need it or raise it when it's going up. And I think they have that benefit. I do think it's good, actually, that he's finally getting a CEO into Twitter because maybe that will put more of his focus on to a Tesla. So hopefully that will help their stocks as we go forward. I think it's still pretty overvalued here. So, yeah, it's nothing I'm touching, but we'll see how tomorrow goes.

42:24Yeah, I mean, my question would be pretty simple. What is your target market share? So you're looking at these prices every week and you're changing them, seemingly trying to take market share away from competitors. But what's the trigger point? Where's the threshold that you're trying to get to so that we as investors might understand when you may be raising prices or what the strategy is ultimately behind the price fluctuations? All right. We'll find out tomorrow. Again, 6 o 'clock is when Faber sits down with Elon Musk. For more options and action, be sure to tune into the full show. That's Friday, 530 p.m.

42:52Eastern Time. Up next, Final Trades.

43:09Final trade time, Guy. Alcoa off a multi-year deal they just signed. Tim Seymour. I think this is the first time we ever got blue-eister called into Fast Money. Really? Yeah, well, yeah, I think so. I hope so. But anyway, don't fear the dollar. Don't fear the dollar, EEM. Courtney. At Home Depot, earnings have really been lowered before earnings came out this week. I think it's something to play. Bonoan. Three-year treasuries. Three-month treasuries. Sorry. Thanks for watching Fast. Mad Money starts right now.

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