Semi Stocks Get Smacked, and Roche Ups the Ante in the Weight Loss Drug Battle 7/17/24

0:02Live 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. A chip wreck. ASML and Taiwan Semi leading the sector to its worst day in more than four years. Is this a sign of continued rotation or a reason for more concerns for the group? We'll debate that. And rocketing roach. Shares of the Swiss pharma giant touching highs not seen in over a year thanks to positive results for its weight loss pill. The impact it's having on the other big players in the space. Plus, copper miners lose their shine. United Airlines on the move after results.

0:33And we're counting down to Netflix earnings as a streamer tries to reclaim all-time highs. I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinerman, Dan Nathan, and Guy Adami. And we start off with the chip stocks getting hammered. The VanEck Semiconductor ETF plunging 7 % today, its worst day since the start of the pandemic. ASML, applied materials, and advanced microdevices all down double digits. Taiwan Semi also among the laggards down almost 8 percent. The latest moves coming as comments from both President Biden and former President Trump indicate that trade tensions with China will, in fact, ramp up going into the elections here.

1:11So this is coming from all sides in terms of political parties, and that is having the impact on the chip sector. Trump specifically questioning whether the U.S. would actually defend Taiwan in the event of a Chinese attack. So really throwing some concern on this trade. The chip sell-off driving the NASDAQ to its worst one-day loss in September, December, I should say, 2022. The tech-heavy index dropping almost 3%. So does today's action mark the end of the red-hot semi-trade, no matter what the outcome of this election? Guy, what do you say? The end. Well, last night CQ was here. You were on a shoot, as they say.

1:45You were on assignments. You were on assignments. That's your want to be. And it broke during our show. And, you know, a couple things struck me, the comments about Jerome Powell and about the Fed cutting rates this year. But the Taiwan comments really, to me, were market moving. And I was surprised the market didn't move in the aftermath when we were on the show. With that said, you know, as much as people want to say a Trump presidency is bullish for the market, maybe it is. It's bearish for technology. And I think you're starting to see it on the edges today. So I think the seeds were sown again on June 20th when we saw that reversal, not unlike what we saw in early March.

2:18And I think it's going to continue for the foreseeable future. I mean, there's a chance that a name like NVIDIA can trade down to sort of between 102 and 105, which is not ridiculous given this move we saw back in mid-April or so. I mean, chips at this point are really stuck between a rock and a hard place, so to speak, in terms of Biden saying, you know, our allies should tighten export controls in terms of what we export, what kinds of technology are exported. And then Trump saying about Taiwan, they took our chip business. I mean, either way, it's not good in terms of the rhetoric. Yeah, so you can focus on the fundamentals.

2:49So you can focus on the visibility that these companies have if we have tighter trade policy. Right. And so, again, nobody knows what's going to happen there. But I just say this, if you look at some of these companies that have massively outperformed, at least their stocks have. I mean, think about an ASML. They gave an outlook last night that wasn't as good as, let's say, some very optimistic people thought. That coupled with the geopolitical outlook, it makes for a difficult situation. Then you think about Taiwan Semiconductors. So ASML makes the machines that go into a fab that Taiwan Semiconductor has, and they have 85 % of the high-end GPUs.

3:25Then you can draw a line to NVIDIA. And then you can start thinking about what all these hyperscalers and all these companies that are basically building servers to go into data centers that are basically going to service all these companies. And to me, I think we're probably ready to have a little bit of slowdown as far as the demand is there. We've had tens of billions of dollars of spend over the last year and a half or so. Until these companies start seeing what the ROI might look like, you might see a little bit of a slowdown. So to me, I think there is fundamental reasons why the stock sold off.

3:58I think people were looking for an excuse to sell. And then obviously the visibility issue. Does the whole notion that everybody's going to spend on AI, that AI is the next coming of the Internet, does that change based on these headlines, though? I don't think so. So why should there be this sort of, I mean, as long as the hyperscalers are going to spend because they have to invest, NVIDIA should still have its business. So what's the issue? So the issue would be, I think, if the correlation exactly matched where we were and where we, I think, where we still are. But I think it's quite possible that it was ahead of where we are.

4:31I think the train has left the station. The AI spend will come. It just does. I don't know exactly when all of it will come. But, you know, it's so whenever things sort of get overheated, like, you know, this sector does. And I'm long. I am. You know, today was just not a great day at all. But you know that this could come right. This sort of reversal when you have something that goes up like this. So I think, you know, we can point to things. I think the comments about Taiwan, it wouldn't be shocking three days later to see a different comment about Taiwan. Right. That could absolutely happen.

5:04But I think, you know, the Tinder was kind of there just ready for the match. And so, you know, we saw ASML, as you said, it was a thousand euros two days, three days ago. I don't know. Or last week. So I think this story is still intact. I'd really like to get, though, we're starting we're going to start to get earnings and we'll see. We'll see what Microsoft Cloud looks like. We'll see what by the end of July. We'll see Amazon. We'll see Google. We won't see NVIDIA. as we talked the other night until end of August. But I think if we could get back to what are they actually earning and away from what's all the macro, then we'll have a little more clarity.

5:42I don't think it's about the semi trade being dead. I think it's about the world that we've had in the last week. And so it goes all the way back to that CPI, which was a week ago. Since that point, we've seen extraordinary outperformance by small caps, equal weighted S &P value. I mean, pick your places that are the real economy. The Dow Jones was up for the sixth straight day and another straight record on a day. I mean, it outperformed the S &P substantially. Equal weighted outperforms by 2 percent today. So so those are the things that I would be more focused on. I would be focused on macro and positioning.

6:12And obviously, we've had a whole lot of macro and we've had a whole lot of positioning building up to this point. I don't think the fundamentals really change. I think the fundamentals were always to be challenged in terms of what do I want to pay for these companies? But the fact that the VIX is now, you know, starting to make a move, we probably thought we were going to walk in on Monday and see a VIX significantly higher than we did. I think the dynamics Dan brings up around ASML, I mean, their orders actually thought they were quite strong. But this is a name that also very, very crowded. Remember, this is like Europe's chip play.

6:41So if you're investing in Europe and I've got an international ETF, we've loved ASML because, in fact, it's a way to get that kind of exposure. I think this is a case of where, hey, look, there's no question Biden or Trump is going to say, don't circumvent our restrictions on China and China technology. And this goes all the way back to Huawei. So this is stuff that I think the market's now paying attention to. I felt like today was a healthy day in the markets. I mean, it was a day where we've kind of put an exclamation point on a broadening of the market. And there was stuff the banks enjoyed today.

7:13I mean, we're getting good earnings out of certain parts of the sector. That was my focus. ASML, I didn't realize, is Europe's largest tech company. It's that big. But going back to the CPI print, it also coincided with the timing approximately of when Trump's odds in the betting markets went up. And I ask this question not because I want to say it's because of President Trump that we're having this rally, but to understand what the foundation of this rally is. Because if the Trump trade, so to speak, is driven by political wins, then what we're seeing in terms of the advances that we've seen over the past week could just as easily go the other way.

7:47So what is it? Is it that we know that the Fed, with 100 percent certainty, according to Fed Funds Futures, is going to raise, cut interest rates by 25 basis points in September? Or is it the Trump trade? Yeah, I think that, you know, and you know the answer to those questions are typically some, you know, some sort of mixture of the two. But yet to answer it, I think, specifically, the Fed is, to me, still the most important thing. But I think the catalyst for it is now on the back of the odds of another Trump presidency. I think that's sort of taken over for the Fed, which all makes sense. But I'll say this as well.

8:21You know, there are a lot of things happening. You would think that a president, new President Trump, would be bullish for energy. You know, I talked to Liz Ann Saunders earlier today. She's going to be on the show. Somewhat counterintuitive is actually the Biden administration that was best for the energy sector. But in terms of banks, and I think all three of us would agree, and Mel, you would as well, You know, the point, the potential for deregulation and less restrictive policy under a different administration would be extraordinarily healthy. And I think to a large extent, that's what the banks are rallying on.

8:50Yeah. So going back to the fundamentals and the chip trade, I just want to make one point. I saw something strange today, Guy, and it was an article in the information. That's why I stopped for a second. So you see what he just did there? He tried to do it very. He rushed it a little bit, but he was doing a little godfather, too. He was doing a little Michael Corleone sitting out on the terrace in Cuba. And he said, I saw something strange today. But I thought he just saw something strange. I know what he was trying to feel like because he's not a tiny can't really even deliver. I do. I actually.

9:17Yes. And you're right to sense that. But please. But you just did an Ocean's Eleven. You rushed it. I said you did there. All right. Really quickly. OK. There was an article in the information. Maybe it wasn't that strange. But bringing it back to use cases, they had an interview with Chevron. That's one of your big oil companies last summer with the CIO, the chief investment officer. Last summer, they created an enterprise AI group, okay, tasked with creating some large language models that will make their employees, make certain processes within their busy business more productive, make some of the employees more productive.

9:50And what he said in the interview was that the jury's still out here. They've gone through some of these applications. They've done a spend. They're training some other stuff on Microsoft's CoPilot, but he's not convinced yet. That sort of commentary will take air out of this trade. I think we're going to be anniversary-ing on two years this fall of the release of ChatGPT, okay? And I just think that if we can't find the use cases in the enterprise, I think you're going to see some of the spend slow down. I think there's a lot of people who say they are finding use cases. If you hear like Jamie Dimon talk about banks and all of the opportunities that they see, I think that there is that use case.

10:27I don't think that the reason is that. I think they were just kind of overdone. And I don't think that we're going. Well, let's say actually, let's wait. Let's see what Meta has to say, because we did see them both do a lot of spend and also improve their business a lot. Right. Because of it. Because of it. So that was really important. So I'd like to see the continuation of that. And that would allow people to say, all right, well, OK, we're with you on the spend. All right. For more on today's market action and where we could be headed next, let's bring in Lizanne Saunders of Charles Schwab.

11:00Lizanne, welcome to FAST. Nice to be here and nice to see you guys. Where are we in this rotation? Is this for real? I think to some degree it's for real, assuming the expectations around the shift in Fed policy at the September meeting come to fruition. That's it. I think the extreme outperformance that we've seen by smaller cap stocks by the Russell 2000 is not likely to persist at that same pace. I see it more as we're likely to get bouts of this type of action where you get some profit taking up the cap spectrum. And there is money looking for opportunities down the cap spectrum. But I wouldn't I wouldn't expect it to persist to the degree it has in the past week, week and a half.

11:39Is it not wise at this point? I mean, a 10 percent run or so over the past week in small caps. I mean, we have to also think that the small cap index is not made up of the most vibrant companies. Some of them are fallen angels that just have declined in value. so much. They've gotten into the small cap index. How should we approach thinking about small caps at this point? Well, don't approach it monolithically, because I think that's a real danger. Small caps is a big category. Even the Russell 2000 index has, even though it doesn't have 2 ,000 stocks, it's got 1 ,800 and change. And if you go to just pre the CPI report, which of course was the point at which small caps inflected relative to large caps, just as a for instance, within that index, if you simply broke the index into two categories or two cohorts, profitable Russell 2000 stocks and non-profitable stocks, there was an 18 percentage point spread between those with the profitable stocks handily outperforming that index itself and the non-profitable stocks not only underperforming but in negative territory.

12:42So that dividing line, you could do the same things with zombies versus non-zombies, with high interest coverage versus low interest coverage. And I think on a looking forward basis, maybe in part because of this rally that we've seen, I think you want to lean into the quality side of what's working, but maybe fade the lower quality side of what's working within those smaller cap indexes. Hey, Lizanne, it's Sam. So that sounds to me like you continue to lean into equal weighted. And again, an index, if you look at that, that's done half of what the S &P has. But the fact is, we're in the middle of bank earnings.

13:20It's been a very strong re-rating period for banks. There's an argument they could continue to re-rate. Energy, health care, you're starting to see some laggards across the energy space. J &J had good numbers out today, and at least some of these stocks are moving. You think about asset allocation every day. Can people follow this? Yes, but I think even within something like equal weight, it's not all created equal in terms of the stocks. I think this is an environment where you can't make monolithic decisions. whether it's at the index level, whether it's at the style box level, whether it's at the cap level, even at the sector level.

13:53I think factor based analysis and screening continues to be appropriate because both where leadership has resided and where it hasn't at the factor level has been much more consistent relative to leadership trends at the sector level or at the index level. So even within equal weight, I think you want to have that factor-oriented approach and stay up in quality. And that may seem like the ultimate duh statement. Why wouldn't investors always want to be in high-quality stocks? But, of course, there are times where it makes sense to go down the quality spectrum. That's where leverage to an upturn in the economy is or a major move on the part of the Fed to go from tightening to easing policy.

14:36I'm just not sure we're at that point in the cycle. So that's why I say I think you want to fade the lower quality, lean into the higher quality. And that's within small caps, even within the context of equal weight. Lizanne, it's Karen. Thanks so much for being on today. Question. I love the it's not a monolith. I sort of live by that. So when you talk about the Russell, I understand you don't want to make this sort of capital allocation to the monolith. But when you think about the quality there, are there particular industries that you favor now over others? I wouldn't say that's at the industry level.

15:13I'd say, again, it's at the factor level. So even though we're looking at a Fed that possibly is going to start easing policy in September, they're probably not inclined to do it aggressively. So to some degree, even in an easing cycle, we're in a higher for longer backdrop. And that is still, I think, suggestive of focusing on factors like high interest coverage. I already mentioned the profitability spread within small caps, the non-zombie type companies, strong return on equity, ample free cash flow, you know, those profitability metrics. I think that's the way to approach the market in this environment.

15:51And that can be applied across sectors, across industries. Within leadership sectors, there are great stocks and there are crappy stocks. And I think in this environment of lower correlations and wider dispersion, having gotten the return of the risk-free rate, ostensibly connecting fundamentals to stock prices again, leveling the playing field to some degree between active and passive, I think this is an environment where you continue to want to be more factor focused than sector or industry focused. Lizanne, great to see you. Hope to see you again soon. Lizanne Saunders of Schwab. Good points.

16:32Yeah, great points. I mean, listen, if one was worried about the crowding into these mega caps, right, and we can all agree big secular shift that's gone on in the last year and a half or so, if that's coming a little bit unwound right now, some of the air is coming out of that. And you've seen this crowding now into the small cap index. The Russell 2000 basically has the market cap of NVIDIA, right? So this thing has gone up 10 % in a straight line over the last week. It was unchanged a week and a half ago on the year, right? Look at the KRE, the small bank ETF. That's up 20 % in about two weeks or so.

17:03So if those trades come unwound, if, like, for instance, they start cutting because the economy starts slowing, don't you think regional banks are going to have a hard time? Don't you think the Russell 2000, which was punished in a higher for longer environment because their access to capital was harder, their cost of capital was higher, the whole thing, it just doesn't seem like chasing it here makes a lot of sense. And so money goes back into tech, which ultimately will at some point. I think these things could have a hard time, especially in a weakening economy. I read Lizanne's stuff voraciously.

17:33And one of the things she said, and we've talked about this, be careful what you wish for in the form of rate cuts because it may not be for the reasons you want. and actually maybe because Fed's trying to put out some fire. So, you know, I've said for a long time, if they can just sort of continue around this and just sort of slow and steady wins the race, that's probably the best case scenario. A Fed rate cut, somewhat counterintuitively, actually might be a negative thing for the market. And I just, I think the market also displayed some growth fears today. I mean, if you look across the resources space, if you look at also the places, we know Japan's got their own issues and what they need to do with the yen, but there's no disputing that there's an element of the yen trade, which is a carry trade.

18:09So you're starting to see some unwind there. You're starting to see some pain in places like copper that I think is Dr. Copper, has had a lot of speculation around it. But that was also part of today. Today expressed some fear of growth. And I think, you know, that's something to watch out for. Coming up, some after hours action in United Airlines and Discover Financial. We're diving into the numbers from those earnings next, plus the copper and a number of commodity trades lower today. The resource name is getting hit, too. Is this red hot trade now done? We will break it down.

18:42This is Fast Money with Melissa Lee right here on CNBC.

18:57Welcome back to Fast Money. We've got some after-hours earnings action. We start off with United Airlines. That stock turning positive in the last few minutes after posting an earnings beat and a revenue miss. CNBC's Contessa Brewer joins us now at the very latest. Hey, Contessa. Hi there, Melissa. Yeah, United's guidance for the third quarter disappointing. The street expected$3.44 in earnings per share for the third quarter, and instead United guided from$2.75 to$3.25 at the high end. Though the company says it's confident it will hit its full year guidance of$9 to$11 per share. The airline says August really is an inflection point, that the industry is seeing capacity growth decline by three points.

19:34It says it's going to see an acceleration of three factors that could give it an advantage. First, premium revenue in the quarter grew 8.5 percent over last year's second quarter. The second, basic economy revenue grew, are you ready for this, 38 percent year over year during the quarter. Third, market share among, and this is United's term for it, domestic road warriors increased during the quarter year over year. I don't know if it makes business travelers feel better to be called domestic road warriors. But anyhow, United says it will reduce its own capacity by an additional three points in the fourth quarter.

20:09You lose fewer seats. Maybe you can charge more for them. We'll see what happens. Melissa. Contessa, thank you. Contessa Brewer. Tim. Well, this is a bit of a relief on capacity, and this is what we've thought about for the entire airlines. To some extent, United priced in a better guide here. First of all, those numbers were fine. If you look across, they definitely beat across the board. They reaffirmed nine to 11 bucks a share. I think the guide was a little bit lower on the midpoint of EPS. But this this this capacity, this efficiency dynamics is very important. Remember, airlines have had a very big pullback after a very big run.

20:44So not a huge surprise. United bounced right off that 200 day. I think you've given a lot back. I mean, Delta and a difficult tape over the last couple of days has traded reasonably well after a 20 percent pullback. So I think you can follow this good news and believe in what they're telling you. You're smack in the middle of the range. It's been like$33.54 for the last two and a half, three years, number one. But, you know, Tim, if you're giving guidance full year of$9 to$11, you're not giving any guidance at all. I mean, you could drive a Boeing plane through that guidance. Oh, it's that far.

21:13No, I mean, that's a personal pet peeve. So if that's how wide your guidance is, you know what, you should say, you know what, folks, we don't have any clarity either. This is what we see for the next quarter. We don't really have a clue on full year. With that said, I mean, I think Delta, as Tim has said a number of times, is still best in breed. I think there might be some mojo in JetBlue off this sort of rounding bottom, as we discussed last night. All right. Meantime, Discover Financial higher after its earnings report. Steve Kovach joins us with the numbers. Hey, Steve. Hey, Mel. Yeah, shares of Discover Financial are up about 4 percent after hours after beats on both the top and bottom lines.

21:45Earnings per share coming in at$6.06, nearly double the$3.07 analysts were expecting. Revenue was$4.5 billion versus the$4.17 billion estimate. And the company reporting total loans ended the second quarter at$127.6 billion. That's up 8 % year over year. And just this morning, Carlisle and KKR agreed to acquire a more than$10 billion private student loan portfolio from Discover, which the company describes as a critical initiative. The conference call doesn't kick off until tomorrow at 8 a.m. Eastern, where investors will be listening for any commentary on the state of the American consumer. Again, shares moving higher on these results, Mel.

22:27All right, Steve, thank you. Steve Kovach. Karen, what did you make of this report? So a little bit noisy. That's why you had that huge earnings number, which was they were undoing the reserve release against those student loans. So taking that out, it was really about net interest margin and net interest income, both which were a beat. It was charge-offs, which were slightly lower. So those are two really good things, particularly for a company that is sort of right in the crosshairs of the consumer we're concerned about. Right. Right. So that was a bit of a surprise. So good for them. Then there is also will they do the merger?