Is the Consumer Stronger Than We Think? And Where Are Oil Prices Heading Into Summer’s End 8/14/23

0:01Right now on Fast Buying or Crying? What is the real read on consumers and retail stocks Fox 1 Wall Street heavyweight says negative headlines about the health of the consumer are overblown. The details from that report coming up. Plus, hot steel, U.S. steel rejecting a more than$7 billion offer from rival Cleveland Cliffs. But now another bidder putting an all-cash offer on the table. Will X sign off on a sale and will regulators allow a deal to get done? We will debate that. And later, Tesla's summer slump is picking up steam. NVIDIA's surge ahead of earnings. And Florida Governor Ron DeSantis not ready to bury the beef with Disney quite yet.

0:34I'm Melissa Lee. This is Fast Money. We're live from the Nasdaq market site on the desk tonight. Bono and Eisen, Dan Nathan, Guy Dami, and Julie Beal. And with retail earnings season about to kick off, we start off with some potential reasons to believe the death of the consumer has been greatly exaggerated. Bank of America today upgrading the discretionary sector to an overweight from an underweight. Laying out a host of reasons, they point to growing hopes for a soft landing. No recession means more consumption, they say. Plus, the majority of consumers' biggest debt burden, their mortgage, are in fixed low rates.

1:04So not subject to moves in bond yields. Analysts also highlighting rising real wages and earnings beats in the discretionary sector. Should this signal that we're in for some strong reports next week? Guy, maybe we're just too worried about the consumer when everything is just fine in consumer land. I wake up worried, Melms, as you know. Now, listen, I understand. I understand why there's reason for optimism without question. The U.S. consumer will always spend if nothing bad is going on. And I always view it through the lens of the stock market. When there's an event in the stock market to the downside, that's typically when consumer behavior stops on a dime.

1:39And 73 percent of our economy is driven by people buying things. Who's the winners? Well, it's pretty clear in terms of the stock. I think Stiefel had a report out. Seventy one percent of households in this country earning one hundred thousand dollars or more shopped at Walmart compared to like 50 percent at Target and 30 percent, I think, at Home Depot. Walmart wins. Target loses. Walmart's an all-time high. Target's$3 away from a 52-week low. TJX on that side wins as well. So it's obvious what's going on. Those retailers will do well in this environment. The health of the consumer, I don't know, trillion dollars in credit card.

2:14We're fighting inflation, adding more debt. That works until it doesn't. It's interesting. You mentioned Walmart, and again, a truly magnificent performance, especially relative to some of its peers like Target, which you mentioned can't get out of its own way. I think of that more as a consumer staple, right? They were benefiting when inflation was a big thing, and now they're benefiting now with maybe a moderating consumer, if you will. We've heard about the trade down and all that sort of stuff. But if you look at the XLY, the ETF that tracks the consumer discretionary space, sometimes it's a bit of a mirage here.

2:42If you look at the top holdings, Amazon's about 24 percent. Tesla is about 18 percent. Home Depot, McDonald's, Lowe's. Then you start getting into something that maybe feels a bit more discretionary. If you look at the XLY, it just made a new 52-week high last month or so. It's come back a little bit. That largely has to do probably with Tesla. So when I think about Amazon and the results that they just gave us, they did tell us the consumer is pretty good. That strength came in their retail business, but it also had to do with their margin on the retail business. And at some point, it might speak to their ability to pass forward certain costs at discount to a consumer.

3:15So that's why I think this week is really important because we're going to get a wide swath of a whole different retailers here. Yeah. And what is the incentive for a retailer at this point to be bullish? I mean, results could have come in OK for the past quarter. But what is there incentive to be bullish when there are so many things on the horizon, like the repayment of student loans, for instance, starting in October? Yeah, to your point, Mel, it's really all about like kind of managing for and managing what those expectations are going to be. And I don't really see a whole lot of a reason for them to come out and be too bullish and then run the risk of disappointing investors.

3:45I mean, that's literally the last thing that you want to do. We've had some conflicting data. We've had the CPI print and the PPI print, which seem to tell slightly two different stories. We've had Amazon that tells the situation with cloud, and we've had some of the other SMH components come out and not be as glowing as we would have expected. The other thing I'll say is, like, there seems to be somewhat of a K-shaped recovery when it comes to the consumer. We talked about the trade down. You have people that have the tailwinds of interest rates. They have debt that's fueling asset purchases, and those assets are, you know, are being accreted in this environment.

4:19and you have a completely different cohort that has debt that is fueling purchasing. And I think that's the pocket that we really need to focus on. And if there are cracks, it'll likely be that cohort that starts to show them initially. Yeah, Julie, what's your take here? Because I feel like this desk overall has been fairly cautious slash negative when it comes to the U.S. consumer, including yourself. So what do you say to all these arguments put out by Bank of America today? I think, you know, Savita actually used to be a colleague of mine at Maryland. And so I'm loathe to really ever disagree with her.

4:52But there are some, I think there are some concerns that I have. And I think it's a little bit to Bono's point on it depends who you're asking, right? So if you look at real liquid assets, if you're in the bottom 99%, they have grown 2 % to 3 % since the beginning of COVID. If you're in the top 1%, they've grown 23%. So that's a pretty big differential just in terms of liquid assets. And the other thing to think about is what is consumer discretionary doing relative to income? And right now it is at a high that it hasn't seen in 30 years. And in order for it to kind of return to normalization, it would have to drop 10 percent.

5:28So I think, you know, there's the issue of the stocks, which I think is more what this stock call is really about. And then there's the issue of the fundamentals. And I think we should be concerned about some of these consumers because we're really clearly racking up a lot of debt. And at some point that has to come due. I mean, part of the argument also is that fund managers are extremely underweight consumer discretionary. So it's the positioning that plays into this whole thing, too, in terms of this sort of expected snap in the stocks. Yeah, and, you know, the stocks are interesting because I think that what we learned in Q2 earnings season, there was a lot of dispersion, right?

6:02A lot of names you want to kind of put together here. A lot of stocks act in different ways. And we just mentioned Walmart and Target. At some point, does it? And, Guy, this is a name. Maybe it's a question for you. Sorry. Maybe it's a question for a guy. At some point, maybe it's target so bad that it's good. If they come in line, let's just say they don't even raise guidance and the margins are OK. Stock trading at 13 and a half times next year's earnings seems reasonable relative to a Walmart that trades above a market multiple. You know, many turns versus a target or something like that. It almost seems like you want this stock in a kind of messy market to sell off and buy it rather than buying Walmart at an all time high.

6:38But the merchandise mix may not, I mean, it's definitely not as conducive as a Walmart guy. I'll pose the question to you. Thank you, Dan. Is this a would you rather? When it comes to valuation, yeah, in this environment, do you think that the sacrifices that you make in terms of sacrificing the more beneficial, you know, merchandise mix that Walmart has for the valuation that Target has? Yeah, I'll stick with Walmart, though. If you were playing the game, I'll play it correctly. They fired up the graphic on this Monday, would you rather? The answer is Walmart, and the reasons are exactly that.

7:07the product mix and i'll say you know people are shopping at walmart it is clear when you have a hundred thousand dollars and more 71 of those people are shopping at walmart they will win add to it back to school which walmart will win as well over target because they have groceries and they have the people in their stores so targets problems are partially the consumer a lot of it's self-inflicted wounds and i think the stocks are telling a story right here i mean Consumers might be spending the same amount, but they have to make it stretch because they're getting less. You know, when you're paying 20 percent more for a bag of Doritos year on year, whatever the number is, it's astronomical for snack food.

7:48You're going to look for the lowest price, and that could be a Walmart bottom end. So it's not necessarily the amount, but it's how the consumer is making that stretch. And it's the offering of the private labels. We've kind of spoke about this as well in the trade down. You know, one thing worth mentioning in this report is the valuation of some of these staple names. And that, to me, really is the catalyst for the trade. Essentially, you're looking at some of these names that are trading at 24, 25, 26 times. And yes, there is some margin of safety there. But I think the question that this trade idea really poses is, at one point, is there some relative value?

8:23you. And I think that if we get through this earning season, if we get through this earning season and we don't see the deterioration of the consumer, that might be what is at least a short-term tailwind for that Paris trade to actually work out. What do you think of that Paris? I mean, staples are expensive. No question about it. Listen, I think at a certain point, maybe that makes sense. But I think the differentiation is going to continue in this environment. People are, you know, I understand the health consumer, money on the sidelines, balance sheet and all that stuff. The reality is consumer debt has never been higher in this country.

8:58And as long as the stock market continues to grind higher, everything will be fine. But if something were to happen, like we saw in the fall of 2018, consumer spending stops on a dime. All right, here's a prediction. Next Monday, if you'll have me back next Monday, I'll bet you a pair short Walmart, Lauren Target right here is going to make money week over week. short Walmart. Yeah, short Walmart. Long target. Parish trade. All right. We'll see. Our next guest suggests affluent consumers are the key reason why overall spending looks strong. Stuart Soff is CEO of Current, a fintech company. Stuart, great to have you with us.

9:32You're seeing firsthand what consumers are doing. That's right. What are they doing? Yeah. So at Current, we deal with the consumer, the average everyday American, and they're spending on staple goods, like you've just mentioned in Walmart, Amazon, Target, Home Depot, places like that, that spending is rock solid. It really hasn't moved that much. And so what they are doing is getting less for their money. And so for staple goods, that's obviously something that's new for Americans. That's just happened. And you're seeing that roll into retail sales coming lower, retail confidence. So the confidence numbers are coming down on the indices.

10:10And so from from a consumer point of view, they're saying, OK, I'm not getting as much money as I'm not getting as many goods for my money. And then I'm having to spend more money through credit card debt. We hit a trillion dollars on that for the same goods. And so for the average consumer, they are not exactly struggling, but they're also struggling to make that money go as far as they traditionally would. So, Stuart, you guys obviously have this debit card, and now you just introduced a credit product here. So it's interesting when you think about the average consumer and you think about the places in which they're spending, are you starting to see some data that shows, you just mentioned a trillion dollars in consumer credit, are you starting to see any sort of shift that would lead you to believe that we're going to start getting to territory that feels uncomfortable for a consumer, that maybe many in your demographic are going to start to repay student loans, that sort of thing?

11:03And so I'm just curious, do you track that? We do track that. We're not seeing any. We're seeing mixed signs is probably the TLDR for us. From an affluent standpoint, which you guys have just mentioned, 22 percent of credit card debt has been pulled down just now. So you've still got 78 percent. If you want to take a bullish view for the consumer, 78 percent. So for more affluent people with big credit lines, the average household has$8 ,000 on their credit card from 6 ,900 in 2019, 2020. So there's still some way to go for the more affluent households. 90 % of all mortgage rates are locked in below 6%.

11:37And so for many people, they're not going to move house, they're not going to move jobs. And so if you want to take a bullish look from a more affluent point of view, there is some dry powder there to go. Now, for the average consumer, the average American who's trying to make those staples go as far as they can, I don't think there's that much breathing room for them. And so credit building is such an important part of and your credit score is such an important part of your APY of how much money you spend on your debt. We've never needed to look at that over the last 10 years. Right. So you've got debt and it's just been like whatever it is now because you're sensitive to that interest rate.

12:13You now going to look at the inputs to that, which is like your credit score. And so we've got this protocol build, which helps people, everyday Americans build their credit with their bank again. What's your take on how consumers view that dry powder, that remaining credit line that they can still use if the interest rate is 26 % or whatever horrifying rate it is these days. Yeah, I think this is what's coming into the psyche of whether you pull down or not. And so definitely when it comes to mortgages and auto loans and things like that, you're probably not going to look at them too often. But when it comes to revolving credit, I do think if it comes to staples, which is starting to happen now, you are going to pull down on that line.

12:51You're going to feed your children, you'll feed your family over 22, 24 % on that APY. And again, that's why I think that credit building and maintaining a good credit score in this time for people on 25 to 55K, somewhere around there, 75K household income. It's a really, really important thing to do for this year. In a former life, Stuart was a trader at Morgan Stanley. So it's great to have him on here from his view. What do you make of the bond market moves and some of the currency moves that we're seeing? Obviously, it's no impact on the stock market, but is it just sort of inevitability with that?

13:22Yeah, good question. So I think when it comes to the retail stocks that you're seeing right now, you're going to I think you will see earnings beats and revenue misses. But overarchingly, what we're going to see is liquidity draining. So the bond market is going to drain the liquidity. It looks like it's happening already. And so we'll see this sort of volatile to sideways move. We're all going to make bets. I heard you make a pairs bet just now. So we're all going to be making these bets. and I'm sure they're smart, but I think over the next two or three months, the overarching theme will be liquidity drain.

13:52We have too much issuance. The Japanese market is in turmoil, although the BIJ are doing a good job, I think. And I think that would be the dominating factor over the summer until everyone's back from Labor Day. All right. Stuart, it's always great to see you. Thanks for putting your trader cap on. Putting it on. Stuart Soff of Current. Bonner, what's your take on where the consumer is based on what Stuart said? I think it brings up some very interesting points. If you are tapping credit to source purchase of consumer staples, to me, I don't know. You can't trade down. You don't have an alternative.

14:29We can talk about fixed rates on mortgages. But how costly is it for you to tap into that equity to use that to propel purchasing power anyway? So for me, that definitely raised the hairs on the back of my neck. I think that is a telltale sign coming from a company that specializes in actually parsing that data. Yeah. And, you know, Julie, remember last quarter we heard from I think it was Dollar General who said that a lot of the customers are trading down to food banks. And you've got to wonder if that's still happening at this point. I mean, it's probably is. Yeah, I would imagine that it's still happening.

15:02You know, I think some of the good news is that if you look at the where the wage growth is really happening, it's more so in the lower income. but you still are seeing a lot of divergence among the retailers. And I think, generally speaking, kind of going back to our previous point, it really pays to pay attention to who is executing well and who isn't, right? Target versus Walmart. But Dollar General, Dollar Tree, you're seeing a huge divergence between those two names, and it's about their execution and their ability to deliver something. So it's not even like a wage effect. I think you can find names in retail that are pretty oversold, but that are showing the ability to execute well, and I think they'll do okay.

15:39You know, it's interesting. Stuart also mentioned that, you know, the percentage of homeowners who have these low mortgage rates. And then also when you think about where unemployment is, and he used this term a couple of times, if you want to make the bullish argument. And I see it. And I think that's kind of what Savita is also saying. She was here with us a few weeks ago and was kind of making that argument. I get it. It doesn't mean that it has to translate back into the stock market. It could be this is that soft landing scenario. And I'll just say as far as the stock market is concerned and the guy's point about, you know, investors in the stock market not caring about where interest rates are.

16:10You know, we are pricing soft landing. We are there right now. And so if you think about the stock market as a forward looking discounting mechanism, it's discounting a lot of good news at the moment. So if retailers come in and they have terrible forecasts, is soft landing sort of less likely or does it not change? What retailers say is separate from what the economists see. So I think that's a fascinating question. I don't think it's going to change the narrative necessarily at all. Which is fascinating, right? Yes, I agree with that 100%. So I don't necessarily think it matters what they say.

16:43You made the point earlier, why wouldn't they sort of sandbag in this environment? Because you can. The reality is, to me at least, I understand the soft landing through the lens of the stock market. But the soft landing through the lens of a lot of other things, to me, gets more and more difficult each day. All right. We've got a news alert here on some 13F filings. Leslie Pickers got all the details left. Hey, Mel, some managers here appear to be doubling down on big tech during the run-up in the second quarter. Others crystallized their gains. Tiger Global in the latter camp here. Pairing back exposure to the sector, stakes in Alphabet and Amazon were cut in half.

17:19Microsoft was trimmed. The firm dissolved Apple. But Tiger did boost its stake in Meta by about 15 percent to hold two and a half billion dollars worth of that company at quarter end. And it bought a lot more NVIDIA as well. Other managers actually buying into the rally. Third Point's Dan Loeb telling investors in a letter at the end of July that its exposure to Microsoft, AMD, Amazon and Google were, quote, undersized. And the profits from those positions were offset by losses elsewhere during the quarter. We can see from today's filings that Third Point boosted its stake in AMD and Microsoft took a new position in Amazon worth about half a billion dollars at quarter end and actually sold more than half of its stake in Alphabet, which is Google's parent company.

18:03Appaloosa broadly bullish on big tech, though, boosting stakes in Alphabet, Amazon, Meta, Microsoft and NVIDIA and adding to Chinese tech names as well, whereas we've seen a lot of other managers really kind of exit that exposure. amount. All right. Leslie, thanks. Leslie Picker. And of course, the caveat is who knows if they're still in these things at this point in time. But we'll still talk about it. Julie, what stood out to you? Yeah. You know, I think it's interesting noting where people are positioning themselves in big tech. And, you know, to me, there's just so much more opportunity in names that are maybe a little bit less heavily traded and, you know, hotly followed.

18:41You know, I think there's obviously opportunities that are very specific to NVIDIA. But, you know, the rest of the names, it's still a real challenge to understand exactly how AI plays out. And they won't really tell us how they think it's going to really trickle through their business model other than to say it makes it better. So, you know, I think overall it's pretty expensive place to be and the expectations are extremely high. And that always makes me a little bit uneasy. All right. Coming up, sought after steel, a new all cash offer for U.S. Steel after the company rejected Cleveland Cliffs.

19:11More on the potential deal and how it's impacting the options markets next. Plus, Some fast movers in the financial services space. PayPal naming a new chief as Schwab gives back its gains. How you should trade these names when Fast Money returns.

19:34Welcome back to Fast Money. U.S. Steel shares soaring nearly 37 % today. Their best single day gain ever. The company getting a second take over its bid in as many days. late in this session with privately held Pennsylvania-based Esmark offering$7.8 billion in cash. That bid came after U.S. Steel rejected a$7.3 billion offer from Cleveland Cliffs on Sunday. Cliffs CEO Lorenzo Goncalves spoke about the offer on Squawk on the Street earlier today. My offer is more than reasonable. It's a rich offer. So I believe that the company is worth what I offered. I am not doing any favors to them, but this is a deal for people that understand M &A, not people that hide behind consultants, not people that talk about the regulators, and they don't have a clue how to deal with the regulators.

20:27Cleveland Cliffs shares were up by double digits for most of the day, but dipped after news of Esmark's offer. Goncalves also says that he's got the support of a key union, and so you're going to need that if you go through any deal, Guy. He's not one of mint words either. I mean, these stocks, no, exactly. These stocks, outside of a brief period of time where they all exploded to the upside, have done nothing for 15 or 20 years. Let's just establish that. And it's got nothing to do necessarily management. It's the environment. It's the industry. It's very difficult. That said, there's a reason why he's trying to move forward with this.

20:59They clearly see something in terms of the landscape. And it's that resource trade that Tim Seymour talks about all the time. So we can talk about deflation out of China. We can talk about all those things. The reality is these companies are entirely too cheap in this environment. So I don't necessarily know if this deal is going to get done. But I look at that and I continue to connect dots. And we talked about the EWZ, the Brazil ETF, I think. That's correct, right? EWZ? About two or three weeks ago. That's breaking out of a 15-year downtrend. And it's all about resources. So if you want to be in the space, that's the best place to be, in my opinion.

21:33Yeah, I mean, they moved to these mini mills in which they melt down and they recycle metal instead of making steel from iron ore. So they moved to this new process and sort of a transition that's been going on. But, you know, this helps because it feeds into sectors like autos, Julie. I mean, if you believe that we are on the cusp of sort of, you know, the soft landing and things are going to open up and there's going to be more, you know, work for industrials, you need all this metal for that. Yeah, I think there's definitely a case to be made. But with all of these types of industries, the real key is that you need scale.

22:06And so consolidation, to the extent that the FTC will allow it, makes a lot of sense for these businesses because, frankly, they're extremely capital intensive and they're very challenging to run. I think this second bid is interesting, but the first bid has the vote of the unions on both sides. And I think that's actually going to be more material to winning it in this environment very specifically. It's funny, when you look at this sort of activity in M &A and like a Cliffs, like this is a stock deal, right? So they're not taking a bunch of debt. They're not paying a lot of cash. It actually, you don't have that much downside.

22:38If this is something you could be committed to at a proper valuation at a Julie's point and you get the sort of scale that kind of makes you better compete on a global scale, it makes sense. And you basically put a floor under your own valuation, too. So to me, I don't think Cliffs had much to lose. The fact that the stock didn't trade down meaningfully on that sort of bid tells you that. Yeah, they didn't have much to lose at all. I mean, the Esmark deal tells you exactly that they priced this thing in line. And I can understand what he's saying in terms of an M &A specialized deal. And you're looking at MPV and things of that nature.