More Bullish Than I’ve Been in a Decade”, FedEx’s Challenging Quarter, and the CEO of Exact Sciences 6/20/23

0:01Right now on Fast, while stocks take a breather from the recent rip-roaring rally, A new face to our desk tonight is all bowled up and thinks the next leg higher will be driven by old economy cyclical names. Plus, Beijing Blues, Chinese stocks getting hit hard as fears grow that the slowdown on the mainland is getting worse and the consumers there are tapped out. But we'll hear from one market watcher who sees potential green shoots on the horizon. And later, inside the crude crumble, the impact of an animated miss on Disney and a first look at Jim Cramer's one-on-one as he goes behind the wheel, literally, with Ford CEO Jim Farley.

0:32From fast cars to fast money, I'm Melissa Lee. Live from the Nasdaq MarketSite on the desk tonight, Tim Seymour, Courtney Garcia, Dan Nathan, and our special guest tonight, Savita Subramanian from B of A Securities. And we begin with a rough start to the week for the markets. The major indices all down for a second straight session, the Dow falling 245 points. Though closing off the lows of the day, the S &P and Nasdaq dipping less than a half a percent. The biggest sector lagger today, energy sliding more than 2 percent. materials and utilities also closing lower this after the major indices all hit multi-month highs last week.

1:03But even as the rally seems to be stalling, someone on this desk tonight is more bullish than they have been in at least a decade. And that person is our special guest tonight, Savita Supermanian. So why more bullish than you've been in a decade? Well, I mean, I think the market is more rational than it's been in a decade, which is great news because we're, you know, finally done with this sort of experiment of zero interest rates. We know what the Fed's going to do. We're off of a zero bound. We have five percentage points of latitude to ease our way out of the next recession. Real rates are no longer negative.

1:37I mean, I think that we're at a place where visibility and, you know, kind of transparency of corporates is better than it was over the last 10 plus years. Now, in terms of returns over the next 10 years, maybe they're a little bit lower than what we've enjoyed. But I think that they're driven by the right stuff, productivity, efficiency. Companies are doing all the right things right now. And I think it's kind of interesting to see corporate America adapt to this weird world that we've lived through. So that's why I think that we've got a lot more rational of a market set up today. Some might point to, though, the rally in AI-related stocks and say that is not That's not rational.

2:17That's sort of bubbly. And then we had Kava debut last week and doubled in its first day of trading. I mean, it's a Mediterranean bowl company. So parts of the market are still in a little bit of a bubble-like territory. But I think that where we are in terms of the broader economy is that, you know, the areas that have been starved of capital for the last 10 years are, you know, all the problem children of 2008 and 2009, like big banks, big banks, not small banks. When you look at energy companies, materials, industrials, these companies haven't done what they typically do in a booming economy, which is spend and create capacity.

2:57They have gotten very rational. Commodity companies have gotten supply discipline. I feel like we're at a place where old economy companies have learned how to survive without capital and actually look pretty interesting at these levels. So, Savita, by the way, welcome to the desk. And where we referenced the movie Stripes on the way in, by the way, Melissa, I'm sure. Oh, we did? Yeah, we did. Oh. Fast cars and fast money, of course. Oh, OK. So the markets are more rational or is it possibly that they're less irrational than they were? I mean, I would make an argument. Maybe that's the right way to say it.

3:29We were so irrational in terms of positioning, sentiment and whatnot at the end of last year. And some of that's just all that. It's just some of the technicals of the market, positioning, sentiment. And we talk about that. That's part of the rhetoric. Yeah. But then I also hear you saying, really, when it gets to fundamentals, a lot of the people that think the A.I. stuff is was irrational is is it because it's not going to usher in this massive tech spend? Sounds like you think that it might. And it sounds like that's you know, that's the real deal. I think A.I. is it's complicated and it's but it's not just a tech story, which is what's exciting about it.

4:04Right. I mean, it's the idea that companies have been clunky and haven't really fixed themselves in a long time, have the opportunity to get leaner and lighter. I mean, I think what's interesting is that labor productivity just stalled out for the last 10 years because companies didn't have to really think about where they were going to generate earnings from. They had free capital. They could just buy back their stocks. So they had this like kind of low hanging fruit of low quality earnings growth. And I think today what we're seeing is AI is just part of this whole efficiency automation, you know, doing more with less theme that I think is going to be really bullish for corporate margins.

4:43So the question is, what's worse, getting off of globalization, which we seem to be doing, paying a higher cost of capital, but also kind of writing our business models and really thinking about permanent productivity growth. And what we found in our quant work is that the market assigns a higher multiple to companies that are focused on efficiency and productivity rather than just cost cutting and kind of financial engineering. So I think that's exciting. That's why I'm bullish. Again, you know, I think there are parts of the market that are irrational, but I'm no tech analyst and our tech analyst believes this AI theme is strong.

5:23It's a long tailed theme. Companies are going to have to spend on AI just to stay alive. Tech companies are going to spend on AI. Old economy companies are going to spend on AI. Everybody is. So it's not just, you know, a one theme market. But I think the productivity gains are really what I'm more excited about. You just mentioned some of these old economy stocks that have learned actually how to maybe manage their businesses better. But I look at one chart. I look at the Fed's balance sheet over the last four years and I look at it going from four trillion to$9 trillion. Now it's back at$8.4 trillion.

5:55And I wonder how well they actually had to manage when you consider just how much accommodation, both fiscal and monetary, that has existed over the last few years. And I feel like some of this could be a mirage. And this AI story might have come at the perfect sort of time, if you think about it, when we were seeing data that is slowing for the broader economy. We're clearly seeing it across the globe, Europe right now, and obviously in China? Yeah. So data is slowing. And I think we are in a credit cycle. I totally agree with you. I worry about the companies that have been inflated by Fed balance sheets.

6:30But what's interesting is when you look at the companies that have seen the largest multiple expansion from just the Fed buying everything, those are growth stocks. Those are tech. Those are, you know, smaller, growthier companies with longer duration that need capital to survive. But most of the S &P 500 is actually generating free cash flow. I mean, what I worry about are maybe the zombie companies that have been kept afloat by just free money. But I don't think those are as acute within the S &P 500. And then when you look at the real long duration companies like, you know, communication services, new media, they're actually doing the right things.

7:06They're cutting costs. They're returning cash to shareholders through big buybacks. They're basically shortening their duration risk. Like if you think about this as a bond investor, what these companies that had great growth way out in the future are doing is they're giving you a coupon right now. But my point is more that we've alchemied out a recession, right? So everyone was convinced at 3 ,600 in the S &P last October that we were going to have a recession in 2023. But all of this liquidity has put that off. And it's given a lot of companies that might not be trading at the valuations where they are at not, you know, I mean, they're doing just fine, I guess, as part of the point.

7:42Potentially. I mean, here's my view. And it's I mean, nobody agrees with me on this, but we'll see. Hold on. Well, I think that real rates are actually going to move higher from where they are now. And what's interesting is that when real rates move higher, the equity risk premium almost always moves lower. So you actually want to be in stocks and you want to be in high beta stocks in an environment where real rates are moving higher. Can you explain that? Because on some level, you know, when I think higher real rates, I think it on some level makes the value of equity investing and reaching out the risk curve less valuable.

8:17Right. Right. But when you look at actually the cost of capital for equities over time, what's really remarkable and what I was surprised by is that the cost of equity stays relatively stable and there's this tradeoff between real rates and the equity risk premium. So what happened last year, right? It felt like a horrible market, but actually high beta stocks did really well. And the low beta or the growthier areas of the market derated. So that's why I think it gets interesting is that we're all ascribing this value to defensives and quality because we're going into a recession. But meanwhile, what's actually really cheap and disciplined and it has a potential to return capital are cyclicals that have basically gotten very lean and have supply discipline.

9:03It's a very weird argument, but what we found, I think this is where the quant work helps, because we've really found this very strong relationship between equity risk premia and real rates. And I think the reason real rates move higher is actually bullish, which is productivity. And we've seen this time and time again. Whenever we get productivity gains in the economy, we see real rates move higher. So it's kind of a good story. It's not all bad out there. So you're the most bullish you've been in 10 years. Well, targets forty three hundred. Well, so I think there have been better points at which to enter the market.

9:38And, you know, back in 2011, we were really bullish because the market was so dirt cheap. Today, it's not as cheap. But I think that there are parts of the S &P 500 that look incredibly attractive. And the the underlying like the thing that's obscured by mega caps is if you take out the 50 biggest stocks, The P.E. of the S &P 500 X50 is 15 times trailing earnings, which is actually relatively low. So I think that there are value opportunities, but they're right now being obscured by this sort of A.I. So the real call here, because we're above your year at price. We are. It's hard to keep up with this.

10:15When you raise it, I think you're above your price target at that point in time, which had been four thousand. We raised it before it cleared our target, but we had like a week. Exactly. It's hard to catch up with this market. But the real call here seems to be going to, if you had to choose between, say, S &P versus RSP, equal weight S &P, that the choice would be equal weight S &P. Equal weight. Absolutely. I think the market just broadens out from here. I think what we're seeing right now is, you know, I mean, it's not necessarily a bubble in tech. Some tech companies are going to do great.

10:48Other tech companies aren't. But I think where we are now is actually a pretty good setup for the overall economy. I mean, think about it. We've been waiting for this recession for six quarters now, ever since the beginning of last year. Clients have been getting more and more bearish and more and more positioned for this impending recession. Our economists are forecasting a recession two quarters out with a peak to trough decline of 0.8 % GDP. No biggie. That's no biggie. That's like kind of a nothing recession. It's like a soft, shallow recession. You know, we're seeing negative earnings growth, but I think this year we could see maybe minus 5 % earnings growth.

11:27As long as demand holds up, consumers and corporates have a ton of money that the government and the Fed gave us. So, you know, I feel like things aren't as bad as one might paint it. And I could not agree with this more. This is really what we've been saying really all year. That's so nice to hear. She even said no one's going to agree with me. So here we go. But we do find that with a lot of our clients, why they come to us and they're overweight, the S &P, they're overweight, these tech companies. But I think what a lot of people don't realize is how, yes, the markets have been doing fantastic this year.

12:00Yes, they're into new bull market territory, excuse me. But yeah, take out just those top couple of stocks and the rest of the S &P is really just getting started right now. I think that's what people have to realize. Really, you haven't missed out on the rally. It's just now broadening. And I think to your point, there's a lot of areas right now that are really great value. And I think you say this perfectly. So when you say you want to be in high beta stocks, when typically you think of high beta stocks, you think of technology. Here you're really talking about beta that will exist in other sectors.

12:30Is that what the message is? Right, right, absolutely. So, you know, what's interesting is that tech used to be high beta and now it has dropped in beta. It's now considered kind of defensive, like software companies are defensive. I don't know about that. Maybe they're not. Maybe, you know, software companies are going to have to spend a bunch of money on chips and AI in order to remain competitive and remain alive. I think what might be more high beta today are energy materials. I actually think today morning that the housing starts number was a sign that we could be in for a pretty good period for commodities, lumber, metals, etc.

13:09It's not just about China. It's also about what's happening here in the U.S. And we've underbuilt single family homes. We've underspent on, you know, manufacturing capacity. And those are themes that we're starting to see companies really break ground on. Here's a question I really want to ask. And that is, as a strategist, you start out and you have to put out this year end forecast, you know, 14 months before the next year ends, which is really hard. And so, you know, when you put that initial target out, you thought there was going to be a recession. I'm just wondering, at what point do you say, you know what, it's time for me to completely rethink the thesis?

13:42And what was that sort of light bulb moment? Was it just that the markets were shooting higher and you're like, I can't miss out on this? I mean, it wasn't just momentum. I think it was the idea, even at the beginning of the year, we were looking at sentiment measures and positioning. And it was like the most consensus call was, you know, be out of stocks in the first half and then buy them in the second half. And that was what everybody was saying. And, you know, so we looked at this and we thought, OK, the risk is that it does the exact opposite. And here we are at the beginning of the second half.

14:13I think there could be some downside risk in the overall index. But I think what you want to do is stay long the equal weighted index. Well, lucky for us, Savita's sticking around, so we'll have much more of this conversation coming up. Meantime, let's get to an earnings alert on FedEx. Those shares are dropping after hours, although off their lows after the company missed revenue estimates for the quarter and said it's still facing a challenging demand environment. That conference call is underway right now. Frank Holland's got the details. Frank. Melissa, just listening to the call now, CEO Raj Shubhamanian saying soft volumes weighed on the quarter and also really tried to detail how FedEx uses tech logistics, including machine learning and robotics.

14:51But overall, it was really mixed guidance that weighed on this quarter. Revenue slightly above estimates, four-year EPS guidance with a very wide range with the midpoint falling well short of estimates. Also, a departure in the C-suite. CFO Mike Lenz announcing his retirement. Each FedEx segment missed revenue estimates. In the report, they pointed to weaker volumes overseas and inflation offsetting cost-cutting efforts, including the drive initiative that aims to cut$4 billion in costs by fiscal year 2025 and also Network 2.0, a really broad plan to consolidate all express ground and freight units into one company that management also hopes a move they hope will reduce costs.

15:27Now, in the release, Canada, in FedEx's unit in Canada, has already has ground shipments being delivered by Express. FedEx says they're undergoing a similar process in 20 markets total. Margin also a major metric for FedEx. Only ground beat expectations. Ground also seeing its pricing increase by 5%, Melissa. All right, Frank, thanks. Keep us posted on the conference call. Frank Holland with details on FedEx. FedEx has had quite a run, Tim, since September. What happened here? So, look, if the stock hadn't rallied 57 percent into these numbers and we were dealing with a company also that seemed like a broken company three quarters ago, the world's very different after 60 percent over the last eight months.

16:04And I think with FedEx, there's a lot of moving pieces in between the macro, you know, industry specific issues, especially around unions and whatnot, and then getting into truly some of the demand issues. And then, of course, there's the FedEx specific on costs and whatnot. There's nothing I heard in here that sounded like FedEx, the broken company. In fact, if you look at UPS, it's trading down almost in sympathy. You know, I think the demand outlook is not great, right? I mean, this is something that would be pushing back on whether you're a theorist or people that are talking to this could be early cycle stuff.

16:37FedEx tends to usually be well ahead of all the other companies and, in fact, had a big move. But I wouldn't get too worked up one way or the other. I'm happy to hear that the company specific stuff sounds OK. Yeah. FedEx problem or overall macro problem? I think this is more FedEx specific. I think really what people want to see with FedEx is they were very excited about the cost cutting measures that they were that they're talking about, which you actually brought up a good point earlier. We need to see them become more efficient, not just simply cutting costs. And if yes, they can cut costs, but also if their demand isn't going down, they aren't increasing the efficiency.

17:08It's not going to help them. So I think there's some positives here. But, yeah, they need to get that demand, which people are moving towards services, less towards goods, which isn't a good thing towards FedEx. Yeah, and we were using that term rational or irrational. And this seems irrational, right? Trading at 12 times expected earnings growth at 20 % for the next two years. Why does the stock trade at such a discount to like a market multiple in this environment? Yeah, I mean, like to me, I think there's like I, you know, and I agree with everything, Courtney, you know, the props to the way you laid that out.

17:39And it's a hard environment, I think, right now to kind of lay out that sort of bullish outlook that you're doing. And again, we recognize we're not saying go all in right here with, you know, the Nasdaq up 35 percent of the year and everything like that. But there's plenty of pockets of the stock market that are telling a very different picture other than about 10 stocks that make up 25 percent of this S &P 500 and 50 percent of the Nasdaq 100. And FedEx is kind of one of them. Energy is another area. Small caps are another area. Materials are another. The extrapolation of that, though, is that there is something more sinister going on or a bad picture of the economy versus there are pockets of hope in those undervalued parts of the market.

18:18It's not as much of the economy. Like when I think about it and I know we're going to talk about China, but like, you know, the stuff around China just doesn't feel good. And one of the things that got the stock market going in January and February was that that switch from zero covid in China and this expectation that it was just going to turn the global economy back on. But bad news is good news, right, China? I feel like people are expecting now more stimulus to be chucked at the problem. Right. Even today, how Chinese stocks traded wasn't enough today. Yeah. They wanted more. I guess my only point is, is like, you know, on Q, this A.I.

18:48narrative came into the market at a time where the Fed was doing QT. Right. Like I mean, it feels like we again, this is a guy, Adami term, but he said we alchemy out the sessions, which are normal sorts, of course. And we were just missing that. And I fear that the more concentration that we have in a small group of stocks that everybody's talking about, out. Kroger last week talked about AI. Lennar is talking about it. These guys are going to talk about it. It's a fugazi. I'm just telling you, this is what tech is. This is why companies invest in tech. This is why they have, you know, CapEx and R &D and this and that.

19:23Way back when people were like, oh, we're going to use the Internet. So we're an Internet company. Well, isn't this one of your points? I guess one of your points is that corporate margins go back. Well, no, your point was that companies that are not tech companies are everybody's getting more productive on the back of AI and that, in fact, the multiples get better because the margins get better and that everybody benefits. Yeah, exactly. And it's not just AI. It's also automation and spend on just efficiency. We've seen this in play for the last couple of years. In fact, our industrials team has been writing about how these automation companies have just been minting money from CapEx on efficiency spend.

20:01So I think this is like clockwork. Every time you've seen labor inflation, companies tend to spend on automation, and then two years later, bingo, productivity. So I think that's the bull case, not just, you know, a few stocks that benefit from AI. I agree with you. Some of this is getting crazy, but I think underneath the surface, there are, we are sowing the seeds for a longer term productivity cycle, which is something we haven't really seen in a long time. Like, I've forgotten what it looks like. You know, I've forgotten what it looks like to see companies actually think about, you know, know, efficiency, doing more, you know, replacing people.

20:36We haven't had to worry about that for a very long time. Coming up, out of energy, crude getting crushed and bringing oil stocks down along with it. So how should you navigate this energy trade? The traders will break it down ahead. Plus, our own Jim Cramer running shotgun with Ford CEO Jim Farley today. What he had to say about the automaker's EV plans. Sneak peek of that interview in the auto trade when Fast Money rolls on.

21:06Welcome back to Fast Money 4. Chairs falling today after their recent rally, CEO Jim Farley telling our Jim Cramer that the area in which the company will really dominate may be not where you think. I saw the company struggle with trying to do everything every day. and that focus and, frankly, accountability of the financial markets to turn our EV business into a profitable business, we thought as a leadership team, the key thing. It's not easy, but the secret at Ford is something that people don't talk about, which is our pro business. I mean, we are the dominant player globally in commercial vehicles.

21:47Catch the full interview tonight on Mad Money right here on CNBC at 6 p.m. Eastern Time. It really got a boost when it agreed to adapt the NACS technology from Tesla. It did, as did GM. And I think the whole sector got a boost and Tesla got a boost, too. So, I mean, the fact that we're working towards common standards should get everybody more excited about and the speed and the pace of EV. The issue with Ford, though, is Ford is a company that's guiding at 10 percent margins by 2026. And no one believes them. The streets got them at 6 percent. And I think that's what both Jim's interview, which sounds fascinating, is getting to the core.

22:23And, you know, I'm not sure what they're saying there. I'll tell you that getting to the core of efficiency at Ford and breaking down the reporting units into those three lines and then identifying where pro really could be a game changer, but where you can value it as such. That's the key to Ford, because it's GM and Ford are both ridiculously cheap, even as auto companies, I believe. And the demand metrics both in the U.S. and Europe right now are a lot better than anybody expected. So you can't really talk about their end markets right now. You can you can. I'm sure Dan believes the auto market probably not going to be so great out of here.

22:53You may be right, guys, but I mean, I follow this guy on Patreon, Troy Tesla. Like, OK, he tracks Tesla's backlog, OK, and their inventory and their days waiting in the U.S. right now. The backlog is for 18 ,000 cars. This stock just gained two percent in the last hour of the day. I'm switching gears here, bro. Okay, go. In an area where there are no gears, I'm switching gears here, okay? In China, the backlog right now is for 13 ,000 cars. So Tesla has appreciated the way it has over the last month during all these announcements. Because they have recurring revenue now. Right. Because they're changing the business model.