From Inflation, to Disinflation - What it Means for the Market. And the Risk Inherent in the Tech Rally 5/31/23

0:01Right now on Fast Crude, crumbling WTI down over 6 % so far this week and over 11 % this month. with the rest of the commodity complex sliding as well. What signal is this sending about the health of the economy and the markets? We'll break that down. Plus, time to shine. Is this beaten-down chip stock about to get its moment in the sun? The big reveal, the praise this company is getting from the competition and the move it's having this week. And later, the chartmaster all revved up about Tesla. We will hear what he says. This battleground EV stock is still a buy, even after a 60 % move higher this year.

0:34I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq MarketSite on the desk tonight. Tim Seymour, Karen Finerman, Steve Grasso in Carterworth of Worth Charting. And we start off with a crude awakening for the energy markets. Oil prices closing out the month with more losses. WTI down more than 11 percent since the start of May. That's its worst month since November 2021. And it hasn't just been energy under pressure from livestock to grains to metals. Prices were falling across the board last month. So what's the impact of these moves? Consumer prices grew at their slowest clip in two years in April.

1:05How will further decreases and potential disinflation filter into the economy and the markets? Ostensibly, it could be seen as a good thing. Glass half full, glass half empty. Right. Or a bad thing if it means disinflation. We just posted the lean hogs data. So, no, I think if you look at wheat, for example, we're at two and a half year lows. We're well through pre-Russia, Ukraine invasion. Obviously, the biggest wheat producers in the world right there. And if you look at lumber, if you look at all those things you said, very, very important for at least PPI, whether it's CPI. You know, we're going to get into that.

1:40You actually have some great CPI numbers out of Europe this morning, continues a pretty good run. France this morning, Germany earlier in the week. And those dynamics, I think, are important. In other words, the reopening trade has taken longer than anybody thought in a lot of different ways, including supply chain and including the commodity space. And as we say all the time, the best thing for higher commodity prices is higher commodity prices. And I think when you're talking about wheat and when you're talking about lumber and you're talking about base commodities, there's a lot you can do with it.

2:08When it comes to oil, and I'm excited for this conversation with Paul Sankey because I think you're trading a lot on China sentiment. I think you're trading a lot on the dynamics around where true demand is. Any manufacturing data we're getting from any part of the world, certainly China last night, but certainly the data here, regional PMIs. We had a terrible China PMI this morning, which tells you that, hey, we're in a manufacturing recession. That's not particularly good for energy, even though I think longer term and I think China's going to surprise in the second half of the year. But that that was today.

2:40It was all about weak data pushing down oil, which was already vulnerable technically. And if you look at where crude is now, it's very vulnerable. The overall picture is a picture of economy slowing, whether it be in the United States or around the world, which could mean good things in terms of a Fed pause, but it could also mean bad things in terms of how you interpret that as a signal for economies in general. Less demand is people doing things. So I've seen a lot of things floating around the web that really make sense. So Tim said a bunch of them. You had warmer weather. You have OPEC. Every time OPEC cuts, you should sell oil.

3:16They're always – no one adheres to the cuts. So it's counterintuitive. You think everyone always out pumps, out supplies. So they say they're going to cut, but none of the members ever cut. That's number two or three or four. Reduced demand as rates move higher, there's a reduced demand to hold inventories. So people have to flood the market. It incentivizes you to drill and pull it out and put it immediately on the market. As rates move higher, treasuries become more attractive. So if you think about people who are not people that are doing the business, but people that are investing in the commodity space now have competition.

3:54They don't buy the commodity anymore. They buy treasuries instead. So you're saying to sell oil and buy treasuries? I'm saying that there's a reason. Yeah, so I'm saying that there's a reason. There's a host of reasons. That might not be the best reason, but that's one of the major reasons. I thought we would be range bound, but it seems like we can't get our head above in WTI crude anymore. So there's a lot of sort of noisy things, right? In that economic data from today, we had some very, very different kind of noises, right? We had the job openings number, which was very, very high. I don't know if it's just a one-off, but I mean, that was a surprisingly big number, which doesn't bode well for trying to get wage inflation under control.

4:34On the other hand, you had the PMI number also. I don't know if it's a one off sort of the other direction. That's sort of a counter argument. And so this sort of makes me think, all right, should the Fed pause? Not not not pivot, but pause, because, you know, I've been thinking a lot about if they're still not where they need to go, then they should keep going. However, I don't know that there is harm to pausing now. I don't think that they will lose credibility as being hawkish, being concerned about inflation. Cutting would lose credibility. Yes, totally agree with that. Cutting would lose credibility, pausing and saying, let's look.

5:14Because there is sort of noisy data out there. Yeah, well, two Fed officials came out today arguing for a pause, Harker and Jefferson. Carter, you brought along, of course, some charts. So what do you see for crude? I did. Yes. Hello, team. So, well, you know, my hunch is there's not a lot of downside. Just before we get to it, it would be worth stating that adjusted for inflation, a barrel of crude is the same level it was in 1985. But let's look at the chart and just figure out how much downside, perspective downside there might be. We're at very well-defined levels. And even as we were to breach this sort of 66, 65 way right now, the downside really isn't much more than 63 to my eye.

5:58And so I'm thinking, actually, you want to be contrarian here. We are now down 50 percent. Everyone loved it after the invasion of Ukraine, 130 a barrel. We're down some 50 percent and everyone hates it now. I think, as is quite often the case, take the road less traveled. OK, you heard it from the chart master. Our next guest was a long term oil bull who's now gone bearish on the commodity. He made the switch about six weeks ago when crude was near its 2023 high. Let's bring in Paul Sankey. He's the president and lead analyst of Sankey Research. So you're bearish now. You still see trading opportunities among oil equities.

6:34So we'll get to that in a minute. But where do you see oil going at this point? Well, at the moment, it's really all about the Sunday OPEC meeting. And I think we're concerned about that because we feel there's some kind of tension between Russia and Saudi, who are the two key mega players, really around Asia and the fact that Russia is now taking Saudi market share quite aggressively in Asia with heavily discounted barrels. So I'm not sure, based on two previous meetings that you referenced, where they really didn't cut, they said they would and they didn't, that they can bring out much from the hat at this meeting.

7:06And as I've said, there's a tail risk that we could go to a worst case scenario, which would be a March 2020 market share war, you know, where at the worst possible moment in the market, Saudi actually cranked up to its all time high production levels to make the point to Russia that they needed to cut as much as Saudi did. So, you know, I think people aren't talking about a tail risk of a potential blow up at this meeting. So let me ask you something about the U.S. SPR, right? So they had stopped. They had said they would buy below 70, I believe. And then I think they technically maybe ran out of money.

7:38Possibly next week they'll have some money. Do you expect them to be in there? Will that make a difference in the market? Is that enough to change the dynamic at all? Right. So there was last year there was an active selling program that It was driven by the administration, and it was big. It was a million barrels a day at peak. It was a massive dampener on prices, direct downward pressure on prices. And as you know, controversially, a lot of it ended up being exported to China, which drove people nuts. This year, there was a congressionally mandated sale for budget reasons that we've completed.

8:09And they were powerless to do anything about that, essentially, but they managed to reduce its overall scale. and now we're in theory we should be buying, but they announced 3 million barrels. So if you remember at one time they were saying 60 million barrel releases, you know, big numbers. This rebuild, which is in the second half, is just 3 million. And it won't make much difference, quite frankly. They would have to step it up a lot to really make a difference. I want to get to your oil equity picks. You upgraded Valero. So you like Valero? I like Valero. I'm not sure we upgraded it. But I was just with the outgoing CEO, Joe Gordo, who's retiring.

8:43He's done an absolutely fantastic job. He's got a fantastic management team behind him. Long term, I love Valero. It's got a great partnership with Darling in the biodiesel area, renewable diesel area. It leads in that area for getting the feedstocks, which is the most important thing with Darling. And as a result, it's a great company. Right here, nobody wants to buy refining into a recession. And I think that the toughest thing is this recession isn't coming. People have been calling for it now for a year and a half, and it doesn't seem to show up. What we see in oil is the industrial economy in China here.

9:18Trucking, real heavy parts of the economy are all slowing big time. And that's pulling down diesel and distillate prices, which is concerning. But the service part of the Chinese economy, jet travel, individual consumption, the U.S. economy is whatever it is, 70 to 80 percent consumption. All of that service stuff keeps running. And that's why, you know, economically we kind of remain on track. but you can't help but think that the primary economy is going to bleed through eventually to the consumer. One of the things that was doing the rounds on Twitter was Las Vegas gaming revenues. I don't know if you saw them for May, but they're down pretty hard.

9:53They had a huge march and they're coming down quite a lot, which I think is a great indicator of where we're struggling to really call it, which is the consumer and when the consumer slows down big time. We always ask you for a pair trade and you like to short what's hot. And so obviously AI and AI related things are hot. Well, if you recall, last time I came on, I said short NVIDIA, long oxy, which was the worst trade I've made on this program. And in fact, the first losing trade I've made. You meant buy NVIDIA. I meant buy. I would say that we got out of the way pretty quickly because I had hedge fund guys telling me, you're insane.

10:24You're going to get run over. This is a bubble. You know, don't go near the NVIDIA call. So we backed right off. In terms of what we saw in the debt ceiling negotiation, you saw Joe Manchin managed to get through a permitting agreement, which is a big deal, particularly for the Mountain Valley Park pipeline, which takes gas out of the Marcellus, the Saudi Arabia of natural gas and releases it into the entire U.S. eastern seaboard. We think that's great for range, amongst others. We're a little bit worried about another big play, which would be EQT, but we're worried that this Biden administration, FTC, might put a block on a deal that they're doing.

11:00So we're worried about being long EQT. So the long side is long range. And then on the short side, we're picking gassy Permian names that will struggle once this pipeline comes on because it's going to further pressure gas prices in the Permian. A little bit involved after this making. Yeah, after years of the literally since 2020, every trade. I think we led you down that that scary path in the past. But yeah, you remember it all started with long long X on short Apple in August 2020. Some outstanding calls. Well, not the Apple side. I should have I should have realized the Apple side was wrong.

11:32Yeah, exactly. Don't worry about it. It's all good. So the trade is long, Marcella, short Permian. Okay. Paul, great. An oily one. A gassy one. And gassy. Paul, thank you. Thanks, Chris. Tim. Speaking of gassy, no, I think if you look at kind of midstream and the gas area, EQT, which had numbers. I know Paul likes this name, too. It's a free cash flow story. And part of my view that you want to be investing more in the companies, not necessarily the commodity and why there's a lot of cyclicality in the commodity. But, you know, they beat on significantly tighter cash flow, excuse me, higher cash flow on less CapEx spend.

12:09And you're going to make two billion alone in free cash flow. The yield on that is north of eight percent. And it's very well insulated. In other words, I think you can own a lot of these high yielders and I think they're going to continue to pay you. I think there's a lot of interesting dynamics in the macro of oil. But the reality is it's about supply. When you've really seen the market fall out of bed, I recognize what these headlines are all about. There's been such a lack of investment in the space. So that's my secular view and why I think there's support here. All right. Meantime, the Fed releasing its latest Beige Book earlier this afternoon.

12:39This is some Fed officials hinted pausing rate hikes at the central bank's next meeting. Steve Leisman's got all the details. And the odds have gone down, right? Steve? Yes, sharply, Melissa. The odds of that June rate hike after those two Fed officials, Fed officials, suggested they favored skipping a rate hike at the upcoming meeting. Let's start with them. Fed Governor Philip Jefferson, important to listen to because he's President Biden's nominee to be the vice chairman, said skipping a rate hike at a coming meeting would allow the committee to see more data. But he cautioned the skip is not a pause and said it was possible the Fed would come back at another meeting and hike again after the skip.

13:15He noted the effects of you got bank credit tightening on the way and the 500 basis points of Fed rate hikes. They didn't know what they were yet and may not yet have been fully felt in the economy. Then comes Philly Fed President Patrick Harker. He echoed Jefferson's comments, but it was actually a bit more direct, saying, I'm in the camp increasingly coming into this meeting thinking that we really should skip. But Harker said the jobs data on Friday could change his mind. Well, guess what? The futures market changed its mind after the two spoke. What was a 70 % probability of a rate hike in June flipped on a dime, became a roughly 64 % probability for no change at all.

13:51Jefferson Harker's remarks pretty much in line with recent comments for Fed Chair Jay Powell, who was more neutral about the June meeting. But several other Fed officials, they've been more hawkish, said they're inclined to continue hiking. So all this sets up a lot of uncertainty for investors about the June decision. And I think the best way to think about it's going to be determined by the latest data of getting up to that meeting and probably some considerable debate around the Fed table, Melissa. Yeah, I mean, it's uncertainty around June, but it's uncertainty after June, too, which the market certainly doesn't like.

14:22It's almost better off, I think, if they just hiked in June and said, OK, that's it now, as opposed to saying we're going to pause and maybe out there we're going to see another one. I'm curious, though, in terms of the JOLTS data, how do you think that's interpreted versus the JOBS data? Yeah, so the JOLTS data is a little bit older. It did go the wrong way on the Fed. It did suggest that job openings were back on the way up. By the way, it was commensurate with a decline of the unemployment rate. So at least that made some sense. You had some job tightening or a better job market in the month of April.

14:53We'll get the May data. And I think the May data will basically supersede the April data. So we're looking, though. The thing is, Melissa, if the consensus is right, it's 188 ,000, that's still pretty strong for an economy that produces or a country that produces, say, 100 ,000, 90 ,000 new workers every month. And the unemployment rate is still 3.5%. So the Fed is still going to want some more loosening of the job market before it's satisfied inflation is under control. And just to give you a number, Melissa, it's about it. You're right. It's about a 65%, 66 % probability of a hike in July. So all they've done is said, skip, not pause.

15:33Right. Steve, thank you. Steve Leisman. It's amazing that we just spent 14 minutes talking about the disinflation of the commodities complex, which touches consumers and businesses. And yet it's all about the jobs market and how tight that is still for the Fed. Yeah, I think the Fed. Well, everything that the Fed looks at is always in the rearview mirror anyway. So I think they would I do believe a skip is a pause. Right. It's not a pivot. So I don't know why we're arguing over that language. But they should. A skip is a pause, but a pause, I see. Yeah. So they should. We're not pivoting. No one's saying we're pivoting anymore at this point.

16:09They should skip. But Karen has always pointed this out. The Fed, if the market's going to give you that extra raise, then maybe you want to just take it. But I think everything that we've been arguing about, the top is just six to ten different stocks that have kept the market up. The Fed should not be confused that the market is overwhelmingly bullish right now. It's a handful of names. And I think sometimes they won't admit it, but they get jaded by the overall market being up versus a handful of tech stocks. And they should skip or pause or however you want to say it. The most important ingredient, though, in inflation is the job market.

16:45And if you look at where the unemployment, excuse me, the job openings to unemployment rate is, we're about 1.79. It was 1.67. So that's jobs for people looking. The natural rate is 0.8. So we're two times higher than where the Fed should see comfort. And I just think they have to keep moving. And I see 20 bips between now and July, and I think that's right. We've got a news alert on J.P. Morgan CEO Jamie Dimon's deposition. Eamon Javers has got the details. Eamon. Melissa, that's right. CNBC has obtained a copy of that deposition. Remember, Jamie Dimon went in to be deposed by lawyers back on Friday.

17:21We have now learned what he said in that deposition. in this case involving allegations that J.P. Morgan contributed to Jeffrey Epstein's sex crimes by not kicking him out of the bank and doing more to alert law enforcement at the time. Broadly here, Melissa, this is a 418-page document. We're going through it in real time, so we're doing some real-time reporting here. But broadly, what Jamie Dimon says in this deposition is that he was unaware of debates inside the bank as early as 2006 about whether or not it was appropriate to keep Jeffrey Epstein as a client, says he wasn't involved in any of the decisions around keeping Jeffrey Epstein or not keeping him in the bank.

18:00One of the issues here is ultimately who was in charge of that decision. And I want to show you a graphic here, our first graphic, in which he points to the former general counsel, Stephen Cutler. Jamie Dimon says Mr. Cutler had the ultimate authority to kick him out if he thought it had gone that far. He was delegating reputational decisions to somebody else. So we have Jamie Dimon saying that the general counsel was the guy in charge of kicking someone out of the bank. But we also now learn in this deposition, there was an email from Stephen Cutler, the general counsel back in 2011, in which Cutler suggests he doesn't think that Jeffrey Epstein should remain in the bank.

18:37Cutler says, I would like to put it and him behind us, not a person we should do business with, period, is the email from Stephen Cutler to Mary Erdos, a powerful executive inside the bank, back in 2011. So the question is, if that's how Cutler felt in 2011, how come Epstein remained a client of the bank for several years? We don't get a clear answer to that in this deposition. I also want to bring you, we're getting texts and emails now from a lot of the participants in this case in real time, Melissa, and I want to give you one additional statement that we just got seconds ago from JP Morgan about all this.

19:11They say, and just reading now, Had the firm believed he was engaged in an ongoing sex trafficking operation, Epstein would not have been retained as a client. In hindsight, we regret he was ever a client. So that's the statement now from J.P. Morgan in the wake of this deposition being released to us. Melissa, back over to you. It seems, Eamon, that since Cutler sent that email to Mary Erdos, that there is an implication that Mary Erdos ultimately had the power to kick Jeffrey Epstein out of the bank. Right. There's a lot of wrangling in this deposition about who had the ultimate authority. Was it Cutler?

19:46Was it Erdos? Was it Jess Staley, who was a close personal friend of Epstein and spent time at Epstein's private island? Who was it who ultimately had the authority? Or was it Jamie Dimon himself? Dimon says it was Cutler. But we see in the email that Cutler at least had the opinion that Epstein shouldn't be in the bank. Now, did he officially recommend or officially ban Epstein from the bank. That seems to be the nuance here. Erdos has testified that she didn't believe it was her authority to kick anybody out of the bank or to report this to anybody. So the question here is, you know, we got all sides sort of pointing fingers at all sides in terms of who had the responsibility to do this.

20:21Clearly, J.P. Morgan now feels like they should have done it at the time. Eamon, thank you. Eamon Javers, this would be a perfect use case for AI to go through that 400-plus-page deposition. It's not the same thing. Karen, at what point is this a blowback onto J.P. Morgan, the stock? Well, to the stock? I don't know. Obviously, it's not great. You don't want to be involved in this in any way. But there's a lot of unanswered questions here. So we see that email from Cutler to Erdos. We don't know Erdos' response. We don't know where Jess Staley was at that time. I'm not sure the timeline of when he left and when that actually happened.

20:56I do think it's quite clear. if this has been apparent to them, why would they need this as a client? Right. Right. And I also I don't know. It sort of feels like extortion. They're trying. I don't understand how it is J.P. Morgan's fault, if that's what they're if that's what they're, I guess, implying that Jeffrey Epstein committed the acts that he committed. So I don't know. I think it should. I'm surprised, actually, they haven't settled in the past. They've settled things that they really believe they had the upper hand or were right. but ultimately it just wasn't worth it, this obviously isn't great for them.

21:32Coming up, we've got some after hours action in Salesforce and C3 AI. Shares are on the move as the results filter in the details on the quarters next. And speaking of earnings, Capri sinking after results this morning, hitting levels not seen in more than two years. The news that had investors checking out. Don't go anywhere. Fast Money is back in two.

21:54Welcome back to Fast Money. We've got an earnings alert on C3. AI shares sharply lower in the after hours despite a beat on the top and the bottom lines. A conference call is happening right now. Steve Kovac is standing by with the number. Steve. Hey there, Melissa. Yeah, this is one of the year's AI darling. Shares have tripled, more than tripled so far this year, but falling significantly after hours, down about 18 % now despite those beats in the top and bottom lines. Stock was down even before the results crossed, just four minutes before the conference call started at 5 p.m. A quick look at the results here.

22:24loss per share coming in at 13 cents versus the 17 cents adjusted. That's a beat. Revenue also a beat,$72.4 million versus$71.3 million expected. Now, one thing that could be pressuring shares, the lighter than expected full year guidance with a range of$295 million to$320 million. Also, this is coming just a couple weeks after C3I raised its guidance for this fiscal fourth quarter. Shares were down more than 8 % today ahead of the report, down now about 18%. Conference call underway now, and we'll get back to you with any more headlines, Melissa. Steve, thanks. Steve Kovach, C3 AI with one of the best tickers on Wall Street these days.