Making Sense of the Market’s Massive Pullback, and Digging in on Ford & Chipotle Earnings 7/24/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square this is fast money Here's what's on tap tonight. Tech gets rocked. The Nasdaq composite sinking more than three and a half percent today. It's worst day since October 2022. The S &P 500 breaking its longest streak without a two percent drop since before the great financial crisis. Both indices now down in the month of July. Where can you find safety in this sell off? We'll try to find you some answers. And French Fried shares a fast food supplier, Lamb Weston, posting its worst day ever, delivering a stark warning for the restaurant industry.

0:34Is there more heartburn to come for this trade? Plus, four shares hit the skids. Chipotle shares give up their after-hours gains. Still up, though, right now. And Viking Therapeutics jumping, as it says. It will move forward with its oral and injectable weight-loss drugs. We will debate that. I'm Melissa Lee. Come to you live from Studio B at the NASDAQ. On the desk tonight, Steve Grasso, Karen Feinerman, Guy Adami, and Tim Seymour. And we start off, of course, with the massive market sell-off today. The NASDAQ and S &P 500 both hosting their worst days since the end of 2022. The tech-heavy index plunging almost 4 percent.

1:05Its worst day since October of that year. It is now more than 7 percent off of its all-time high hit just last week. The S &P 500 snapping a streak of 356 sessions without a loss of more than 2 percent. And the Dow falling 504 points. The pullback comes as the first two MAG 7 earnings reports of the season failed to impress investors. Tesla shedding 12 percent today. Its worst day since 2020. It's now erased all its gains since that better-than-expected delivery report at the start of the month. Alphabet tumbling 5 % after its report. The pain felt throughout the mega-cap tech space. The MAG-7 losing nearly$760 billion in market cap during this session.

1:46That is almost as big as an entire Eli Lilly. So is this just the start of the great rotation out of big tech? How much more pain still could come? Guy. How many days did you say? 356? 2 % move? See, I thought that would happen 256 days ago. So, but here we are. Okay, let's sort of put it in. So you're only off by what? I'm only off by a little big thing. That's all good. So you look at a couple things. I mean, we traded down today. We closed right at the 50-day moving average in the S &P 500, which is encouraging. We also closed at an uptrend line that's been intact for probably the better part of a year.

2:23All those things are good. And a similar thing happened if you go back to April in terms of the 50-day. That's encouraging. Here's not what's entirely encouraging in terms of where we trade. The fact that 10-year yields actually went higher today, and it happened late in the day, I think it's something that the market should absolutely look at. 10-year yields closed north of 4.28 percent. One would think that on a risk-off day like this, you'd see a flight to quality in the form of the bond market. You did not. So there's something to look at. I think it's encouraging that we traded down to and held the 50-day moving average.

2:54I think the bond market might be trying to send a warning sign. What is that? What are you? Can you just spell that out? What does that mean? I will spell it out. The fact that, you know, people you talk about the twos, tens, the inversion. Well, I think late last year it got down to about 12 or so basis points and then obviously blew out again. I think today we and again, it's a moving target, but I think we close around 15 or 16 basis points. It's not the inversion that gets you. It's the re steepening. And go back and look over time and you'll see that when the bond market, when the twos, tends to start to re-steepening is when things typically get a little dicey in the equity market.

3:26I can't believe it was only that few days ago that we were at an all-time high. I know it seems a lot has happened since then. I mean, for me, you know, I look at Google, which we saw last night. I was surprised it was down this much. I thought it would be down some, I think, during the sort of either side of flat last night. And I guess the sort of read the way sort of, you know, the journal presented and others is advertising weak. I look at the magnitude of this move against what I thought was a very small miss in that category. And then YouTube and against the cloud, which I thought was probably better than those two things together.

4:00So, you know, it just had a nice run. But I think the valuation here is still very compelling. And I know for some of the real high flyer AI stocks, we think of NVIDIA, of course, valuation is much higher. And actually that CapEx spend number proves and Tesla talking about that as well, I think seems to be a positive for that story continuing. But sentiment changes, it changes. I think it could change back again just as much. To me, the move in meta, which is also not expensive, seemed very excessive today. Right. And that could have been more on the advertising. Yes, absolutely. Right. The magnitude of the meta move versus the magnitude of the Google being a tad light, I thought was very, very odd.

4:40But in terms of this whole, the sanctity of the MAG-7 trade and big cap technology and the AI sort of narrative in the market, it felt like Alphabet gave enough for you to believe that CapEx spending would continue, that there's no sort of pullback there, that CapEx spending would be at least where it is or higher. And Sunder Pichai actually said there's more risk of under-investing than over-investing in the AI cycle. So I would think that's a good thing, even though the other parts of the quarter were not fantastic. Yeah, I think that everyone wanted to sell the market, right? So when you have consensus be a little bit negative.

5:15And let's remember, historically, the seasonality of it, the first 15 days of July are overwhelmingly positive for the market. The second 15 days have a shoddy record. That's what we saw this time. When you get to August, it's a crapshoot. It's half-half. So what do we think we're going to get in August at this point? It's a 50-50 shot. But I tell you, it's not a 50-50 shot September. September is universally negative for the markets. So when Guy talks about the 50-day moving average, I'm looking for a test of the 200-day moving average. That's another 400 points lower from here. Is it something that the market can tolerate?

5:52I think the market hasn't tested the 200-day in a long enough time that we need to test it. So it's more about consensus. It's more about the way people feel about the market versus what are the innards really telling you. It might not be that bad, but the market is primed for a sell-off. So you're saying that the rotation out of technology will probably continue? I'm saying that it will continue, and the Russell's not enough to keep the market up. Okay. Tim, your thoughts? Innards. Wow, that conjures up a bad visual. I mean, I think, first of all, fortunately, we're a business network, and this is a business program, and it's not a political network or political program.

6:32And because I'm going to tell you that this move in mega cap tech and the markets happened on a CPI. It's all about the Fed. It's all about the dynamics around interest rates. And certainly it's about whether we're actually in a slowing growth environment and whether the Fed's overstaying their welcome. So the dynamics here, I know today's a day to talk about the biggest tech, you know, the biggest cap companies in the market. But I would just say, and we're going to talk about Chipotle. We'll see where that settles in. But I think we're legging the next leg lower in a bunch of consumer and discretionary names that tell you a lot more about the market on some level and the economy than where the mega cap tech companies are.

7:10So important day. Everyone's highlighting good or important dynamics around performance. Semiconductors have now underperformed the S &P by 11 % since that CPI number. And I'd call it less about rotation, the outperformance, though, of the S &P equal value or equal value or the S &P equal weight or even the small caps. I mean, small caps were down 2 % plus today, too, but they're outperforming on the way down. And so that is a dynamic that I think is probably going to continue. Guy's right to point out interest rates are higher, although we're in this mini downtrend from, you know, that 460 move.

7:46So let's watch what interest rates do. We also had some flash PMIs this morning that were horrible. Again, the macro data is not terribly good. Earnings are going to tell the story. We've been waiting for earnings and back to Google and the CapEx spend. And yeah, I'd rather overspend than underspend. That's exactly what the market is reacting to. The market knows 13 billion from 12 billion. What's the big deal for Google on a quarterly basis? But it is a case of we still can't totally measure what the result of that spending is. And that's why the market's pushing this stuff around. It is amazing that it's, you know, they expect the return on investment to show up so quickly when it comes to an investment in AI.

8:24There's not a lot of time here in terms of the time where they said we're going to spend this much on AI to win. They expect an ROI to be produced for an investor. That's not a very long time. Immediate, you mean? Yeah. Like quarter. Yes, I know. I think it seems unreasonable. And just look at the magnitude of, you know, the billion dollar additional spend. Let's say it's times four. Let's say that's an annualized rate. the magnitude of the move and the stock is far, far, many, I mean, you know, just ridiculously high. I think I thought for a long time we're still in early innings of A.I. and the stocks won't exactly track the productivity of A.I.

8:59They'll be well below, well above. But I still think the trajectory trajectory is higher. It's interesting. I think you're exactly right to bring it up. Goldman Sachs brought this up a week and a half ish ago, Sequoia Capital. And I think it was on the same day or day or so after Roger McNamee talking to David Faber about the same thing, about the ROI on this spend. And nobody's denying the spend. I mean, it's absolutely there. It's the return on investment that I think people are starting to realize maybe it's not going to come as quickly as the market thinks. So that's part of it. And technical is way into this as well.

9:29And I hammer this home all the time. But if you want to play a game tonight, go back and look at what happened on March 8th in NVIDIA in that engulfing pattern. And then by the middle of April, look how much that stock fell. It fell 24 percent, I think, peak to trough. I think the broader market was off 5 percent-ish. June 20th, same exact price action. You mentioned Broadcom. NVIDIA has never recovered from that. Look at where it closed today. Look at what the high was. So there's more pain in this just on a technical basis as well. And you also have to think about what AI people are going to demand, what consumers, what AI they're going to consume.

10:05So we could have those high bandwidth memory chips, but no one needs the high bandwidth memory chips. It could just be regular chat. It could just be what Google has to offer versus what Nvidia has to offer. So there's going to be a differentiation from the tech companies that are actually producing. There's going to be winners and losers. But I agree to Karen's point, too early to figure this story is not over. It's got a lot of innings left. We could separate the winners and losers years to come. OK, so how, Tim, do you think about this rotation? How then do you think about positioning right now, let's say, for the next couple of months?

10:42I mean, do you start, I don't know, reexamining some of your tech trades? You start looking more. I mean, I know you've been in utilities. Do you look more at these so-called safety trades? Yeah, I mean, I think especially and as I think about it for my clients, allocating across the market really means making some some sector calls where you want to be overweight or underweight. But ultimately, you're trying to own the market. I think utilities have given a backdrop, even some earnings that we've seen recently. But whether it's renewables business and some of the niche parts of the utility space, those that have exposure to data center, or maybe it's just a dynamic that we think that the interest rate dynamic is ultimately playing in favor of utilities again.

11:22Those are all reasons to own utilities, also valuations. And I think even still what has been some relative underperformance going all the way back to the peak in rates. So I love utilities here. I like energy here. Banks, it's interesting because as good as the story has been around banks, there's been a couple of worrying things. I mean, Deutsche Bank today, our old friend, guy loves to talk about it. You know, you have to be a bit concerned about some of the price action there, even though some of this was related to just a loan loss provision that they put in there. Excuse me, even a lawsuit provision that was in there.

11:51But they they reference U.S. commercial real estate. Blackstone reference U.S. real estate in their mortgage trust. There have been mentions here of dynamics. So I think as much as I still like banks, I still like the money center banks. They've had a heroic move. I think you can own banks through this. But these are the conditions that we're watching. It's also nice to have exposure to things like gold. It's nice to also feel that maybe you can push out a little bit on the yield curve. We talked about the two year note and how well received that auction was yesterday. I think investors are finding some comfort.

12:21And I think that they should in kind of the short to the belly part of the curve, where I think they're also interested in locking in some yield. So there's been some sense here that this market could go lower. I kind of believe that it can as well. I think the dynamic around earnings season, when there's been so much good news priced into a handful of these stocks, I think it sets the bar extremely high into this earnings season. So I don't think you have to overreact. OK, for more on today's tech sell off, let's bring in longtime tech investor Dan Niles of Niles Investment Management. Dan, always great to get your take.

12:53You were worried going into this reporting season just about what we are talking about. and that is sort of the investor expectations around an AI spend. So in your view, what did we get from Google? And do you impute that on all the rest? Yeah, so we've written over the last month, we thought earning season investors would start to focus on return on investment. And that was the problem with Google, is that when you look at what was happening with their margins, which is the one thing that people seem to be glossing over, their margins go down. The top line estimates in the future go down. The margins go down.

13:31And the EPS go down. Not a lot, but a little. And so I think what you heard from Google today is what you're going to hear from a lot of these other companies going forward, which is we're spending a lot on AI, but we're not sure when the revenue is going to show up. What was a little scary about yesterday was the fact that Google said on their call, look, we'd rather over-invest than under-invest, which to me implies, well, they know they're overinvesting. So, and by the way, Meta said that as well, their CEO, not that long ago as well. And so then the question becomes, okay, if you know you're overinvesting and you're doing it because everybody else has to, then what happens if you're not getting the returns and when do you cut back?

14:17My assumption before yesterday had been, you know, we're going to see a slowdown in spending on AI, but NVIDIA won't see a down sequential quarter for many years, much like Cisco didn't see one for many years during the tech buildup. Now I'm actually wondering if we do get a down sequential quarter at some point next year, because these big, massive tech companies are admitting that they're probably overbuilding right now. Well, the comps for NVIDIA are going to be insane next year. So that's working against it as well. Dan, I mean, that sort of underscores this notion that there is, to some degree at least, a pull forward in terms of the ordering of chips, etc., and or a bubble.

14:56Which do you think it is? Well, it depends on how you define bubble. If you're saying, is there a bubble because China is over-ordering everything under the planet before potentially we have a change in administration, absolutely 100%. That's the rational thing for China to do. And if you look at some of the cap equipment companies that reporting, China's close to 50 % of revenues. So you're going to have a fall off sometime next year in cap equipment that's going to be horrific because of that. Now, when you just talk about AI in total, the thing you have to ask yourself is, don't forget, you're spending money expecting a return.

15:33So if you go back, and I wrote about this earlier, but if you look at Salesforce, Workday, Snowflake, MongoDB, which reported about a month ago, all of the Ford estimates came down. Now, these are all names that talk big about how AI is going to help their business. But at the end of the day, the estimates go lower. So you look at Google's estimates edging down, Tesla's estimates edging down. And at a certain point, your investors want to see some kind of return on this. And that's the problem. So you have two separate things going on at the same time. You have China, which is obviously politically driven.

16:11And then you have the spend on AI, which is a different issue. But again, if you're saying, hey, we'd rather overspend than underspend, then you know that we're probably going to have a bigger problem when this eventually does end. So is the downside that you're sort of forecasting at this point for these AI names, and particularly in NVIDIA, for instance, is that compelling enough for you to be short? How are you sort of positioning for this continued rotation out of technology? Yeah. So if you look back at history and you look at the Internet build out, you can look at Cisco. Didn't have a down quarter in six years.

16:47Sequentially, I'm talking about. The stock went down 26 percent late 95. It went down 38 percent. And these are entry year moves lower. It was always up every year. But it was down 38 percent in 1997 and then was down 37 percent at one point in 1998 entry year. And that's without a down sequential quarter. So if you look at the moves lower in these AI names right now, they're nowhere near those levels. So the downside is a lot more in the short term. If you're talking longer term, I still believe, and I said this as well when I warned about this quarter, I think we've got multiple more years before this hits a sustained peak or whatever you want to call it.

17:30And so you just have to live through this period of time, much like you had to live through three horrific drawdowns in Cisco on the way to the stock being up 4000 percent. But each one of those drawdowns you had people say, you know, we knew the Internet wasn't real. I remember one Nobel Prize winning economist in 98 saying when this is all done five years from now, we'll find out the Internet had no more impact than the fax machine. Right. So you're going to always have that going on. And when stocks are falling, everybody panics. And that's when I think for us, we're going to get interested in buying stuff.

18:05To answer your question on the short side, you know, we covered one of our Mag 7 shorts today, which got crushed. But in general, we're still looking more on the short side. We own Apple's our favorite. It's not as big as it was before, partly because they haven't spent a lot in AI. And so there's not a lot they have to cut. Their revenue growth has been horrible for three years. So, you know, an upgrade cycle really helped them. For the other names, we're looking more on the short side than we are on the long side because of what we just talked about. And, you know, the way the market reacted to Google tells me that people are finally starting to wake up to the reality of, yeah, at some point we'd like to see revenues for all this spent.

18:45Dan, thank you for your time. Appreciate it. Dan Niles. Thank you. So we were just talking about Apple. We were just showing the chart. And Apple got that nice lift recently on the notion that it is an AI play. It is the undervalued AI play. It is one that has not participated, even though AI is going to be a major force behind the next upgrade cycle. And here we are questioning AI. How much should Apple give back then? Is it the most vulnerable, perhaps, at this point? It's the most vulnerable? No. I would still submit, in terms of stock, NVIDIA is the most vulnerable. And I'm not saying I'm right.

19:18Apple, what can it give back? Well, it started at 193, I think, the day of that announcement. Trade it up. You saw where it traded up to. I think it got up to 237. I mean, 193 makes sense. You made a great point, though. The comps are going to be difficult. The question is, at what point does the market start to sniff that out? Like, how forward-looking is the market going to be? And that's one thing you have to take into consideration. Again, it's not about the spend. It's about the ROI. And if companies start pulling back, and if the double ordering that's been going on, like I think it has, the margin contraction, I think, will surprise people.

19:47I think it is going to be a massive upgrade cycle for Apple. But when you ask where's it's the obvious, it's the two hundred dollar price level in the stock on a technical basis. Big, fat, round number. And it should get there if the market starts to sustain some hits and some bearishness going forward for the next couple of weeks, slash a month of in and out. Then you should test that 200. Maybe we get back to where it all started. But if we think the market's coming in like I do, eventually you're going to have that test at 200-day. You could see below the 193 level. So when you ask which one has the most downside, I've got to go.

20:23I've got to agree with you. NVIDIA, just that which rose the most. Right. And it has the most sort of demanding but not crazy PE multiple. And I think when they all start to go down or when this one goes down, others will. But I think of a Google very differently. Can I ask you, though, when it comes to NVIDIA, Google's already said that the risk is an underspending. They're going to keep spending. So they're still going to write those checks to NVIDIA. So how much danger is there? I mean, that danger doesn't happen immediately because these companies are committed, or it seems like they're committed, to spending now and through the end of the year.

20:58One little whiff of a second derivative that isn't as robust as the street thinks. Look, and I'm long NVIDIA. I sold a little bit. I have some puts, but I am long. Days like today or this past week are very painful. But I think that one is, to me, where the most downside is. Not a Google, not a Meta. Quick programming note. It's a big, short week. We'll continue here on Fast Money. Steve Eisman, one of the traders who spotted the 2008 financial crisis before it happened, will join us tomorrow with his take on the market sell-off and positioning in the second half. You won't want to miss that one.

21:31Meantime, we've got an earnings alert for you on Ford. Shares of the automaker dropping after it reported a big miss on earnings per share. Revenues did come in, though, above expectations. Ford's conference call kicking off at the top of the hour. Phil Lebeau has got some more details in the quarter here. Phil. Melissa, we are listening to Jim Farley. He's talking about the quarter and where he believes Ford is going, saying this is a much different company than three years ago. That doesn't matter right now because the stock is getting hammered as the company once again shows it has problems when it comes to warranty costs.

22:01Let's go over the numbers again. They missed on the bottom line. 47 cents a share. The street was expecting 68 cents a share. We'll explain why with the warranty cost in a bit, with revenue coming in just a little better than expectation at 44.8 billion. Look at the three divisions here. Commercial vehicles. This is the key to Ford having profits right now. They continue to kill it when it comes to commercial. 2.56 billion in profit, 1.17 billion in profit from the internal combustion engine vehicle division. EVs, a loss of$1.14 billion. And we should point out, a lot of people said after the first quarter, hey, they're losing$135 ,000 per EV sold in the first quarter.

22:39In the second quarter, they cut that. It's now a loss of just under$44 ,000 per EV sold in the second quarter. Now, let's talk about the guidance. In Ford's cutting its 2024 profit forecast for the internal combustion engine vehicle business to$6 to$6.5 billion, that's being cut by a billion dollars because of the growing cost of warranties. They said on a call earlier that it was because of pre-engineered vehicles engineered before 2021. That may be the case, but it's coming back to bite them right now. They are raising their 2024 commercial vehicle profit guide to$9 to$10 billion. That's a billion dollar increase.

23:18Free cash flow is going to go up by a billion dollars in terms of their guidance to$7.5 and$8.5 billion. Ford affirming its 2024 EBIT guidance of earning between$10 and$12 billion. Melissa, I'm going to jump back on the call. I can guarantee you that when they get to the analyst questions, there's going to be questions about warranty costs. We have heard this time and time and time and time again from Ford over the last several years that it will do better. It will get its arms around these warranty problems. And yet here it is. And I know they're going to say it's pre-2021 engineered vehicles.