Out of AI and Into Industrials. How to Play the Market’s Great Rotation 6/7/23

0:01Right now on Fast, losing steam. Is the mojo from the AI boom starting to fade? And if so, where are investors moving their tech gains? will break down the market rotation and ask that today's move is more than a one-hit wonder. Plus, New York undercover, a wildfire-induced haze blanketing the Big Apple in much of the eastern United States, smoke from hundreds of Canadian wildfires, disrupting air travel, business, and air quality. We've got a live report coming up. And later, Tesla's electrified winning streak, Wall Street's growing love affair with Netflix and the streamers, and a big rebound for a couple of real estate titans.

0:33I'm Melissa Lee. This is Fast Money. We're live at the NASDAQ MarketSite on the desk tonight. Tim Seymour, Karen Feynman, Steve Grasso and Guy Adami. We start off with this.

0:45That is the sound of the air coming out of the AI balloon. Investors sling socks tied to the space today. Everything from Upstart and C3 AI to giants like Alphabet, Microsoft, Nvidia seeing shares drop. Where's the money going? Well, today at least, Energy, banks, utilities, industrials, those sectors outperforming the broader market today. Energy, the best performing group in June. Industrials now at their highest level in three months. So is this rotation a sign of a more permanent shift in market sentiment? Tim, what do you think? Well, I would argue before SVB, we were getting to a place where we were seeing more breadth in the markets.

1:22And so XLE up 8 % in four days, XLI up 6.3 % in five days. Also retail. I mean, look at the moves in Macy's and Children's Place and really beleaguered names. If you look at even Foot Locker, I'm sure Karen can talk about that. But things that seemed like the consumer was dead, actually. So this does feel a lot like rotation. It also feels a lot like the health that's coming back into the markets, at least on some sense, with if you believe that we're sure going to talk here about the regional banks and the move in the banks. But the banks, Fed funds back above SVB levels means that I think you're seeing some normalcy.

1:58And it means also that the Fed may be more aggressive. But right now, that breadth is encouraging when all we could do was say that the stock market rally was five stocks. I'm still going to say until I see a sustainable break in the outperformance of semis and Qs over the S &P that they won't continue to pull the market higher. But look, what happened in AI, we've said it many times on this desk. It was the type of move that we've seen before around buzzwords used in press conferences around blockchain and crypto. And a lot of it, AI has been in the game plan of a lot of these companies for a long time.

2:32Right. So you are a believer, one of the few on the desk here, in this AI spending boom potentially unfolding in front of us. But we did see a nice 4 % gain in URI. We saw a nice 4 % plus gain in Capri. Right. And so where do you stand on what we're seeing in the markets in terms of the rotation? I have both. I don't have I have not changed my portfolio except the tiniest tweaks. I sold some Netflix calls. I sold some medical. But I mean, I'm still very long. And I'm very I'm always very long in general. It's just nice to see and kind of ridiculous at the same time. Really is United Rentals is up.

3:09I don't know, 40, 50 dollars. Nothing has happened. Absolutely nothing. There's so it's just kind of ridiculous. And this I think it's sort of the beginning of the rotation. I mean, some of the things were just absolutely absurd. You know, retail, we were talking about Capri, another, you know, it's back to almost right where it was before that earnings. Foot Locker is a very far way to go, but it's up 8 percent in the last 48 hours. No news, absolutely nothing. So it's just clear it's just this rotation. Things go in and out of favor. I'm not really changing anything, although I did increase my bank exposure a little bit because I think that one has been out of favor longer and still has room to go.

3:47in order for the market to continue to move higher, you're going to need those names, the tech names to really sort of kick it, kick it off. But there has to be a reversion trade. When things are up over 100 percent for the year, you have to take a powder. You have to take a breath. This is all normal, natural, healthy for the markets. Having said that, it's going to flow back into these names again because the other names aren't going to be able to push it.

4:15So you We're in another bull market that it's going to be led by the same ones that have led this bull market, which is tech. Forty percent of the Russell 2000 is unprofitable. You're not going to want to buy stocks that are unprofitable. So I agree with Tim. You're starting to see a little bit of an expanding breath healthy. But if you want profits, you have nothing to look forward to on earnings day when you have an unprofitable Russell 2000. So I do believe you're going to see some expansion in breadth, but people are going to come back to those other names again. All right. Well, in the meantime, though, there could be a very good trade in the Russell 2000.

4:49I mean, the chart looks like it's breaking out. It's up. What today was up one point eight percent. KRE was up three point three percent. I mean, strength in small banks means strength in in in Russell guy. That's what we talked about last night. Tim talked about it. You know, we thought in the absence of bad news, KRE is just going to do this grind higher as people try to find value someplace. And they're going to find it in the regional banks. That said, I don't think it's over in terms of the headline risk. But for now, each passing day, those will grind higher, which is going to drag the Russell up.

5:20But for me, obviously rotation today. But Halima Croft was just on closing bell right before they came to us. And she made some very cogent points about the energy market that I think people are not really taking into full consideration. There's a demand situation going on that I think people want to dismiss because of this global slowdown. There's also a supply problem as well. And you look at the move in OIH, Schlumberger, Halliburton, all getting off the mat in a meaningful way. I think energy stocks can surprise people over the next couple of weeks into the next few months to the upside. I mean, there have been some comments to the effect of OPEC will do everything it can to get that oil price to 80 and stay there, Tim.

6:01Well, Saudi's taking real barrels out of the market. Like when they when they say something, they actually have the position to pull the barrels out. Some of these other companies are just going back on quotas. And I think it's notable that Saudi right now is willing to fight what might be some friction between OPEC plus. But, no, I think energy moves higher. And I would look at a Schlumberger chart and I would say actually has held the bottom end of an uptrend that goes all the way back into last year. So, you know, to me, I think some of these sectors also like the reflation that's going on in the market.

6:32Rates are moving higher. Now, there's different reasons why rates are moving higher. Some of this is people pricing in some of the technical dynamics of a trillion dollars of Treasury issuance that have to come now that we've settled the debt ceiling. But but I think that the yields moving higher is also a bit of a normalization that just comes in a world. We're going to have banking crises. We are going to have more banks fail. But, you know, SVB and the cascade from there was something that really took yields down to a place where they, I don't think, belong. And frankly, I think we go sideways for the most part on yields.

7:03But two months ago, people were calling for 3 % on the 10-year and then 2 % very quickly. And I don't think we're going to do that barring some kind of a black swan. Yeah. Karen, it's interesting. You said you sold calls on Meta and Alphabet. How about NVIDIA? No, not NVIDIA. It's not a giant position. Alphabet and Meta are very big positions, right? So I don't have a huge position in NVIDIA. I'm going to let it play out. I know the bubble and all of that, but I don't believe this is anything remotely close to 1999. And, you know, there's a lot of data to support that. I think that this story is not played out yet.

7:41We've seen one quarter. We haven't even yet seen the quarter. We've seen the expectation of the quarter, right? And so I think we've got to let it play out more because, as I said then, I think he's sandbagging. I think we're even going to see more. And I think – so I'm not going to trade around that. These other ones I will trade around because, first of all, when they go up so much, you get too big. What about Meta? Sold some calls against Meta. Okay. But to me, of those – and I'm long Meta, and I bought it probably before the second-to-last whoosh down, but it's been a good trade. And I actually think it goes higher.

8:16I think it goes higher relative to – Also, they're the ones that have a real AI business. They're the ones that get 20 to 25 percent right now of their content from AI. They're ones that have an expanding TAM based upon how they could actually be more into e-commerce. Reels is a five billion dollar business in a couple of years. And I look at also just the technicals of those companies that have, first of all, gone through their relative kind of ceiling against the S &P and pushed through that. And that usually has taken them. That's Microsoft and Apple to fresh all time highs. Now, Meta's still further away, although it's not terribly far away on a relative basis to the S &P because it was even underperforming.

8:53But you could say the same exact things about Google, right? And because they've upped so much this year, Meta well over 100 percent, and Google up, I don't know, 45 as of yesterday, down today. It's just too big a position now. And I do think this sort of rotation makes sense to me that that should have some more legs. Most likely, it'll be bad trades. Hopefully. So Meta could close that gap where it gapped down from about$322. So I could see it closing that. And just think about it. The regulators are quite busy these days. What used to be the biggest headwind for Meta? Regulators. AI, big play, as Tim said.

9:33I don't know if they could close the gap to$322. But if the market gets back on the horse and we start talking about bull markets again, yes. Just where you started out, though, with Saudis and oil. Every time OPEC, and I know we're talking about one country, not all the OPEC members, every time they cut, price of oil goes down. That's happened habitually over the last couple of years. It's an indicator. Whenever they cut production, they want to— When they announce a cut or when the cuts are supposed to be— Well, they never keep the cuts anyway. They overproduce. So we've had Sankey on here saying that they overproduce.

10:03So they all overproduce. Maybe to Tim's point, Saudis will definitively cut. But the problem is all the OPEC other countries are overproducing. So it's going to negate whatever the Saudis are doing anyway. It's a signal for me to sell oil. All right. Well, for more on the AI momentum and what it means for the big tech and the digital ad space, let's bring in Yusuf Scully. He is the head of Internet and Media Equity Research at Truist Global. Yusuf, you just put out a note earlier this week breaking down the tech names you see as early winners in the AI race as well as the companies most at risk.

10:34First, I just want to get your take on this sort of notion that's driving this entire trade, and that is that there is a massive spend that we're just on the precipice of. Can you walk us through how valid you think that is? Because in theory, all these companies have been spending on AI in one shape or another for years and years and years. And it seems like now there's a narrative that that spend will be step function higher than what we've seen in the past. What's your take? Right. So I think you hit on a really important point. So as several of your guests have said, you know, the large caps or the mega caps have all done really well this year.

11:10And that was an anticipation that they, you know, they're the key players, the hyperscalers, the infrastructure builders for AI. And that's completely true. What I think the street is yet to or trying to wrestle with is OPEX and CAPEX from 2022 to 2023 has actually have been going down. And the assumption, if you look at consensus for 23 and 24 and 25, the assumption is that we basically kind of stay relatively flat to maybe go up a little bit. I don't think that's necessarily going to be the case because of all of these investments that now need to be reflected with all these guys building again the infrastructure.

11:54I think they've all cut down on real estate. They've all cut down on kind of pet projects. But AI is really the area where they need to spend. And, you know, and I don't think it's necessarily baked into street estimates. And I think that's the disconnect at this point. How do you how do you put into your model the benefit from AI? And I'm wondering because different companies, Microsoft was very specific, I thought, on its earnings call in terms of outlining what they were projecting. would be the added benefit when it came to cloud services, et cetera. Very specific in terms of how they thought about the benefit.

12:30Alphabet, though, seemed a little bit more amorphous. And we know that Alphabet has a lot of AI in it. But how do you think about that in terms of your model and financials? Well, so I think for the cloud guys, it's probably the easiest because we know that as these workflows start, you know, materializing and everybody tries to train their own AI on their own proprietary data, there's just going to be a lot of compute power that's going to be required. And there are only three players there, right, which you know. But then there is a second derivative there, and that's companies that should or that are going to be leveraging AI for revenue acceleration.

13:12And those are, in my mind, companies like Uber, companies like Wayfair, Trade Desk, DoorDash, et cetera. And that will probably start happening in 2024. It's not going to happen this year. And then, and this is probably true of virtually the entire coverage of our coverage universe, and that's companies that are going to leverage AI for cost reduction, right? And those are companies that are going to be either leveraging AI to try to lower customer support or engineering and kind of programming, et cetera. And it's really hard to put numbers around these because we've ran a number of surveys with clients or with companies we cover.

14:00And the feedback is we're still in the early stages of trying to figure it out. So we don't really know. And that's why the street hasn't really put pen to paper to try to change their numbers, at least on the revenue acceleration and on the cost reduction yet. But the easiest really should be the hyperscalers and infrastructure builders as they benefit from just the increase in workflow. Last quick question, Youssef. When you talk about a company like Wayfair, how is AI going? It feels almost like back when people are using the Internet for e-commerce and saying it's an e-commerce company now because it uses e-commerce.

14:38I mean, is Wayfair going to sell that many more rugs and sofas because of AI? I mean, how does that actually work? Because it seems like every company will be able to benefit from AI. And so how do you differentiate Wayfair as opposed to some other company? Well, so the way I look at it is any company that relies on search to try to, you know, kind of deliver the right product to the right person at the right time is going to be, you know, leveraging, you know, the tremendous amount of data they already have on their customers or the third-party data they're buying and they're trying to create lookalike audiences.

15:16So the reason Wayfair and Etsy and DoorDash and Uber are going to benefit is because they're going to, one, improve their kind of marketing to drive higher customer acquisition. And those customers should, one, come in at a cheaper Coca or customer acquisition and stick around for longer. All right. Yusuf, thank you. Always great to speak with you. Yusuf Scully. That seems like every company under the sun, but I get what he's saying. Guy, I don't know, maybe they would sell a lot more Guy Domi stock puppets on Etsy if AI were leveraged. I mean, but, you know, these these things, these gizmos have been telling me supposedly what I'm supposed to buy for years.

16:04So I don't know what's necessarily forever, but I don't know what's really different other than the fact that instead of calling it data harvesting, we're calling it AI now. I guess it's sort of cool. And there will be winners. But Trade Desk is the name that came up. So why don't we talk about it quickly? I mean, here's another stock that's probably trading close to 20 times revenue, 50 times earnings, does not have the commensurate EPS growth. If you pull up a chart, if you do a longer term chart, we're right at the level that we broke down from last August, sort of the 75 level. So you're in the deep end of the pool with a lot of these names.

16:38A lot of them had tremendous runs. And, you know, if this happens in 24, 25, that's great. It ain't happening tomorrow, Mel. Let's turn out to a developing story. Smoke from wildfires across Canada blanking New York, blanketing New York and much of the Northeast with a thick haze. New York City right now experiencing the worst air quality in the world. That is according to IQ Air. And take a look at some of the scenes from around the city and other parts of the Northeast. The current conditions causing a ground stop at New York area airports and shutting down all sorts of activities in the area.

17:08So the question now is how long will the situation stick around? Could it get worse? Let's ask NBC News meteorologist Bill Karens. Bill, what's the latest? Well, today's the day that people in the greater New York City area and, you know, Pennsylvania, central New York, southern New England, Philadelphia won't ever forget soon. I mean, it's the worst air quality any of us have ever seen. I mean, that's how bad it was. You could literally see it. The streetlights went on 6th Avenue outside our building here at 2.30 this afternoon when the really the densest fog and smoke moved through the region.

17:39So here's the big hazardous plume. It started in central New York. Now it's over in New York City, just made it into Philadelphia. We've had smoke reports as far south as Charlotte, North Carolina, all the way through Michigan, Ohio. But the really nasty stuff is in this area from central New York into New York. It's actually in the hazardous range. That's why they canceled the Yankee game tonight. That's one of the reasons why a lot of schools are already canceling for tomorrow in this region. That's not only for the elderly or the young or people with respiratory problems. It's hazardous air for anyone to breathe without a mask.

18:10And that includes the New York City area. Earlier today, Syracuse was over 400. You know, these microparticles, that's what they measure in these monitoring stations. Typically, it's bad if you're over like 150. Right now, New York City is at 392. This would be the most unhealthy measured air in New York City's history when we averaged it all out by the end of the day, beating yesterday, by the way, which smashed the previous record from like 20 years ago. So two days in a row of this. And tonight and tomorrow, we'll see the air quality getting worse in Philly and New York. So here's the future cast.

18:40This actually shows you where the smoke is from these fires. So this is as we go through 10 a.m. Thursday, still from New York, just south of Boston. But look, right over Washington, D.C., and then a really thick plume coming into Buffalo. So these fires are going to send kind of bands of smoke at us, depending on which way the wind is blowing. By 7 p.m. Thursday, still smoky from D.C. to New York. That dense plume then rotating down towards Pittsburgh as we go through Friday morning. It won't be probably until about Saturday that we get rid of this complete mess. So in all, about 111 million people dealing with this poor air quality.

19:11But, Melissa, by far, the worst of it is in and around New York City. It's just not safe. I was outside even with an N95 mask for three hours doing live shots today, and I still can feel it in my lungs. And I like to say I'm in shape. I do marathons, but I wouldn't want to run right now. Wow, I'm staying inside, that's for sure. Bill, thank you. Bill Cairns at the very latest on this and obviously want people to stay safe. And that's a primary concern. But you got to think that, you know, you shut people up inside and that's a loss of economic activity. It's not just the airlines, et cetera. But I feel like next shopping season, next quarterly reports, we're going to hear the retailers say, oh, we had the air quality issue.

19:48And so in the northeast sales were down. Less shrink, though. I mean, they're looking for the silver lining. It's only a couple of days. It's only a couple of days, so let's see how long. I believe he said by the weekend it should be clearing up. I actually bought Delta on the dip today, but obviously you don't want it to extend longer than a week. Yeah. Guy, we know that you're safe in your basement. You should stay at home. He looks safe. I got all the different air purifiers on. And to Karen's point about the less shrink, how would you know? You can't see anything. I thought Guy was going to comment that it's probably good news for Mets fans that maybe they won't play tonight.

20:23But in fact, we play in Atlanta, so we'll probably have a game tonight and hopefully we'll win. We will have much more on the wildfire smoke effect on the airlines later on. Meantime, coming up, Tesla's electric run continues. A stock on a winning streak not seen in more than three years. We're charging into that trade next. Let's talk about appreciation. One of our traders eyeing the moves in some real estate trusts. And you know what they say, location, location, location, where you should be in the trade when Fast Money returns.

20:56Welcome back to Fast Money. Tesla charging higher, the EV maker on pace for its longest winning streak since early 2021. The stock has gained more than 23 % in the past nine days, a surge 82 % year to date. It is the fourth best performer in the S &P 500 this year. I think this was in somebody's acronym. Somebody. Steve. So obviously this one's been an extremely volatile stock. The stock is up tremendously year to date. it's about autos, it's about energy, it's about services. And today was about the federal subsidies coming in for the Model 3. So it's made the Model 3 very affordable, probably low 20s in price.

21:35That gets a lot of people into the EV atmosphere or ecosystem of atmosphere on the mind. So I think the more they can do this, the more they can sort of be the electric vehicle of, I'm looking to see if I see any Teslas. I don't, but the electric vehicle of this country and of other countries, I think they're the name to be. They're actually making money. No one else is. Guy, you like the chart here? 225 is where we traded down to. I think it was last June and bounce. So past support becomes resistance. The upside is also sort of where we broke down from when we had that first one up to 225. So I guess, you know, it looks good in the short term on a longer term chart.

22:16I thought if you go back a few years, it's still in a pretty significant downtrend. So this is actually a level where it should slow down, I would imagine. Your Ford and GM did even better today, Tim, as part of this rotation. Well, you know, they have had some of the benefit of the industrial move higher. They have had some of the benefit of, I think, the broadening of the market. Ford had its little Tesla announcement in terms of marrying on the charging station. So I think in a world where recession truly is coming in, I mean, the autos, again, they have not cut prices either. In fact, you can make an argument that Tesla's been cutting prices more than Ford and GM.

22:50But I'm not going to tell you auto demand is going higher from here. I mean, as much as I think there was supply chain disruptions, I think you have to be cautious. All right. There's a lot more Fast Money to come. Here's what's coming up next. A real estate revival. A couple of property managers on the rise today. But what's behind the turnaround? The deets on REITs next. Plus, the streaming wars rage on. Amazon getting in on ads. as analysts turn up the volume on Netflix, where you should place your binging bets ahead. You're watching Fast Money, live from the Nasdaq market site in Times Square.