Stocks Drop as Market Eyes Regionals, Fed Hike, and Earnings from Ford, Starbucks, and More 5/2/23

0:01Right now in fast regional route one day after JP Morgan scooped up the carcass of first Republic. More banks are getting crushed. PacWest, Comerica, Western Alliance. Does this signal more pain and more failures are still to come? Plus, ahead of the Fed decision, oil sending a major slowdown signal. Crude dropping more than 5 percent today, dragging the energy sector and industrials sharply lower. A deep dive on the market slide straight ahead. And later, Uber bucking the trend and riding gains into the close. Chegg getting an education on the impact of AI and earnings pouring in after the bell from Starbucks, AMD, Ford and Caesars will go inside the numbers.

0:35I'm Melissa Lee. This is Fast Money. We're live with the NASDAQ Market Site. On the desk tonight, Karen Feinerman, Dan Nathan, Guy Adami, and Rebecca Patterson, the former chief investment strategist at Bridgewater Associates. Always good to have you, Rebecca. And we start off with a sea of red on Wall Street. Major indices all down over a percent ahead of tomorrow's Fed decision. Investors seeing a more than 80 percent chance. The central bank will raise rates another quarter percent. A big drag in the markets coming from the financials. Both the big bank and regional ETFs thinking more than 5%, hitting their lowest level since late 2020.

1:06PacWest, Western Alliance, and Comerica among the names down double digits. But it wasn't just the big banks. Check out the big move lower in the oil patch, the OIH, dropping 6%, its lowest close since October, as crude tumbled back toward the$70 mark. There were a few bright spots, though. Investors flocking to the safety of gold, both the precious metals and the miners offering some refuge amid the volatility. So it seems there is a trifecta of negativity hanging over this market. The bank crisis not solved. The Fed set to hike yet again and a new X state for the debt ceiling now just weeks away, not months.

1:41So there's a lot going on here. Guy, it feels like people just want to de-risk here. Not a trifecta you want to win. Yes, that's good. I mean, the KRE is at three years low. Bank of America was in whisper of its 52 week low, not trading well. And Dan mentions it all the time. I mean, the banks, the banks are so vitally important. It's interesting when When people dismiss what's been going on over the last month or so, we're the same people that would tell you the importance of banks when things were going really well. The banks are the lifeblood of this country, and regional and small banks are the lifeblood of small and mid-sized businesses, which, again, are the lifeblood of this economy.

2:12So things are clearly not working out that well. The fact that gold is rallying here should disturb a lot of people, and the fact that the bond market, once again, is showing the volatility that it's had recently is also disturbing. But you started to show by, is there more to come into banks? Absolutely, because it's not just banks now. It's insurers, pensions fund, mutual funds. All those things are on the table. And today is a disaster for whatever credibility you thought J.P. Morgan, the largest, best capitalized, best CEO, for what he said yesterday about this stage of the banking crisis.

2:45When you look at how it actually spread to money centers, at one point today, I looked down at my screens and I saw Wells Fargo, Citibank and Bank of America all down about 4 percent. Think about that on the back of what's going on in regionals. So if right now, if investors don't have confidence in what Jamie Dimon has to say and what JP Morgan are doing to stem this banking crisis that sounds contained, this smacks of what we heard in the spring of 08. I'm just telling you that. And it doesn't have to be that these banks are in a difficult situation. These are the major money. It's the perception of what investors think about it.

3:20And when you think about just the poor performance that we've seen in other parts of the kind of financially oriented parts of the market, it's just not good. The areas that Guy just said. And then we can kind of extrapolate it a little bit. We've been talking about Blackstone a little bit. We've been talking about this BREAP. We've been talking about the gates that they have up and the demands that they have for the capital back. This is six months in a row now that they've actually been over. Like, you know, so to me, I just don't know how any banker can go out and say that this is contained right now because it's clear.

3:51I mean, a down 4 % move in Wells Fargo, you know, moves like that aren't a big deal. But when you see a PacWest and you see a Western Alliance, you're trading down 20 plus percent. You're trading as if they're the next failures. They're the next shoes to drop. And that certainly doesn't feel like the banking crisis is over. And whether or not it's true, perception is everything in this kind of market, especially as the exit. You know, you have the debt ceiling stuff going on. You got the Fed raising rates, Rebecca. Right. So much. And the Fed today probably had an early look at the latest SLUES survey, which is not a Dr.

4:21Seuss term. It's a senior bank officer survey to look at credit conditions and lending. We also got the European Central Bank version of that out for the first quarter today. I'm guessing we're getting the same message from both, which is credit conditions tightening, lending slowing. So the fact that we're getting higher rates, another hike likely tomorrow, plus that pulling back, the de-risking within the banks. To your point, you know, this is trickling through the economy and the small and medium sized businesses are going to get hit harder. Yeah. We haven't even felt it really yet. I mean, this is just through what the end of March.

4:52Right. The data. Yep. It doesn't take into account what's going on in April. Exactly. For sure. It's going to be tighter. That is mostly true, although we have seen housing slow. That's been months in the making. Right. As the Fed was hiking rates, we saw that mortgages became just too expensive for people to buy new homes. So that has started. But you're right. We haven't seen yet the full effect. And, you know, you can argue, well, the Fed should wait because let's see what's the harm. I don't think that's going to happen. I think, you know, they'll probably hike. And I don't know what the language will be.

5:25Maybe it'll be we're open to being ready to pause. I don't know that it'll be more than that. But I don't know. Today seemed really interesting. It's like they sort of rang the bell. Your point about perception, particularly for a bank, more than any other company. We always talk about if Bed Bath & Beyond, if their debt's trading really terribly, the customer doesn't know. They're still going to go buy their towels as long as the Bed Bath & Beyond exists. It won't exist shortly. So a bank is obviously a very different animal. I think we're going to see this bifurcation of money center banks and regionals just continue.

6:00And I still think that deal for J.P. Morgan was a fantastic deal, but it did really seem like they just sort of rang the bell today. But I don't understand why yields. I don't understand. Is it a slowdown that that was weighing on yields? I don't know. I'm not really sure. Why yields were lower. Right. Yeah. Is it the reception that they're going to turn and cut? I think it's the debt ceiling. I mean, debt ceiling, just moving in from short term to longer term to avoid that T bill issue. Right. It might be partly that. I think, you know, the gold move higher today. Even Bitcoin, if one wants to consider that a safe haven of sorts for certain people.

6:44But the move into alternative assets and into safer places to be defensive is the same, right? You saw Staples do well today, relatively speaking, I believe. So I think there is a story there in terms of where the capital is going and long term treasuries. I hear you on the Fed's not done raising rates. But if you get a decent yield, you're getting nervous about how much equity exposure you have. Maybe you have some cash getting that 5 % duration-free, risk-free, and then you have some longer-dated. Yeah, I'll just say this. I had this great conversation with Dan Niles. He comes on the network a bunch, said Tory Fund today.

7:16And he made a great point to me. This is not just about the cost of capital and access to credit. Financial services are about 11 % of tech spending. Okay, so think about that. What have we seen? We've seen lots of job cuts. We just saw Morgan Stanley with their second round. When you're done firing people, when you've cut to the bone, what do you do? And what did AWS tell us on Thursday from Amazon about spending for cloud services? This is probably when you start to see a pretty meaningful deceleration from one of the largest buyers of all sorts of tech services. And I'll just, you know, make the other point.

7:49It's like we've also seen a crowding in those names. What were we talking about last week? Microsoft up 10 percent. There's a two and a half trillion dollar market cap. So the more crowding away from some of these perceived problem areas of the market into, let's say, some of these big, what you think are safe sort of names, they become very dangerous. And we're going to get a look on this as far as Apple. They don't have the enterprise exposure, but we're going to get NVIDIA in a few weeks here. And so that's one of the things that's why we try to kind of put some of these things together a little bit, because I don't think Microsoft's guidance reflected that.

8:21Amazon's guidance did reflect that. And maybe they're just a month or two behind some of this. Apple held up pretty well today. Flight to quality. That's been the flight to perceived safety for quite some time. But why is Apple flight to quality, but not an Amazon just because they ran up last week? I think it's one of those great balance sheets. People can wrap their head around their valuation, although I happen to think it's expensive. And we've seen it before a number of times where the market shows weakness. Money finds its way into Apple. I'll effort to answer Karen's posit for a second.

8:52You know, I think, again, bond volatility is back without question. So a huge move yesterday, Significant move today. Flight to quality and a market sell-off in the form of bonds. This debt ceiling, and this is not us fear-mongering, if I may. Steve Leisman was on Squawk Box this morning, and he said it was a White House correspondent, something over the weekend he was at. White House Correspondents Center. And he said somebody approached him, a senior member of something, and said, you are the network, are not making a big enough deal out of this debt ceiling. You should be a lot more, the market should be more worried about it than it is.

9:24And I think Steve actually agreed with that. Yeah. Our next guest is bracing for a really messy time in this market. Michael Schumacher, as well as Fargo's head of macro strategy. Michael, great to have you with us. We know it was really interesting because within it, there was sort of a debt ceiling playbook where you took a look at what happened, particularly with the bond market and past debt ceiling periods. And you did find that there was a bid for longer duration, correct? So is that part of what we're seeing today? I think it is, Melissa. And in our view, at least, at Wells Fargo, Janet Yellen's note yesterday that, hey, the debt ceiling could be a problem as soon as June 1st.

9:59It spooked a lot of people. So what do they do? They look at what happened in 2011, the really bad case, and say that was risk-off in a big way. S &P was down 15 percent in a couple weeks. Treasury yields, including the 10-year, went way down. Let's revisit that. Let's take risk off the table. Let's buy some bonds. I think that's a lot of what's been going on in the last 24 hours. It's Karen. Thanks for being on, Michael. Do you think that any of the economic data, which looked a little bit softer, do you think that we're getting some sense of a recession? In the last couple of weeks, it seems like maybe a soft landing is a possibility.

10:33What do you think is going to happen? Not there yet, Karen. When you look at the data, yeah, it's turned a little bit. But I suspect we'll get pretty strong data on Friday with respect to the labor market. Yes, things have weakened. Joel's weakened. I get that. But in terms of the things that policymakers really focus on and most reviewers look at inflation, unemployment, they're still pretty darn good. So no really visible sign of recession just yet. One thing that I've been struggling with is trying to compare the debt ceiling now with what's happened in 2011. 2011, we were also in the middle of a European sovereign debt crisis.

11:08And so when I think about the move in bond yields in 2011, how much of it was the problems we were facing here at home versus a flight to quality that maybe was global? Europeans wanting to get into U.S. treasuries. Have you been able to parse which is which, give attribution? And without that in Europe going on, how big a move do you think we could see in treasuries now? Do you have any thoughts on that? Yeah, it's really interesting. When you think about 2011, yes, Europe was blowing up. Italy, 10 years, traded at 7 percent for a while. But when you look at these historical periods, whether it's now versus 2011 or some other time, there's always something different.

11:45So today, what do we have? We've got regional banking problems. Didn't really have those back in 2011. So do those outweigh Europe for the U.S. investor? I'm not really sure. So it's tough to try to separate those effects as far as how much yields could move. Could the 10-year Treasury yield fall 25 to 50 basis points if things got really rough? Absolutely, we think it could. Is it super likely? Maybe not. But that could happen. So I think it's difficult to distill those effects. But thinking about that 80, 90 basis point move back in 2011, half of that, two thirds of that, could that happen again?

12:18Yes, we think so. When you think about what the Fed might do and the path it might take, so beyond tomorrow's decision, does any of this factor in in your mind, Michael, or is it just the data and what you think the Fed wants to do? The Fed's in a tough spot. So the Fed now has the debt ceiling, which cropped up. It's a political event, not something the Fed can really influence. And yet it does impact Fed policy. So that's one thing. As far as banking troubles, to what degree is the Fed maybe a little bit responsible, which is some of the talent that came out of the Silicon Valley assessment, and the huge increase in interest rates contributing to that, it's tough to say.

12:58So the Fed's not completely a bystander in that case. But I take the point. The Fed's got a lot of crosswinds to try to assess. So in a full-blown banking crisis with the Fed hike, no, That doesn't make a lot of sense. But if the debt ceiling is becoming a little bit more intense or perhaps a lot more intense with the Fed go one more time, I think it probably would. And then perhaps signal, hey, we've done a lot. Inflation is still out of control. It's coming down, though, but it's well above our bounds. We want to see it give a bit more time to the rate increases we already have in place. I think that's probably the messaging the Fed would like to get across tomorrow.

13:30It's going to be a really tough job, though. We know the Fed has said in the past that it doesn't care what the stock market does. I get that point. But at the same time, when you see how some banks have traded today, I don't know if there is a full blown banking crisis in reality. But the perception is that there could be one brewing right now. Which do you think the Fed looks at? The perception? Because perception in the, you know, a month ago was everything when it came to that deposit flight. Right. Yeah, the perception can lead to reality. Right. So I think the Fed has to be aware of both and it can look at regional banks down a fair bit today and say that's kind of a worrying signal.

14:05Should we be super concerned about that or is that normal volatility? Perhaps it's a bit more than normal. So I think the Fed takes it into consideration. Does it really count as an enormous crisis right now? Tough to say. Probably not with the rescues that have been done to date. But I think the Fed is weighing those things pretty carefully. Michael, thank you. Thanks for your time. Michael Schumacher, Wells Fargo. down 28 % for a regional bank in one day. It seems way out of the bounds of normal volatility. It's a crisis for shareholders, but it should not. Again, I don't think that should be in the purview of the Federal Reserve.

14:39If stocks go down, that's just what happens. When stocks go up, nobody seems to bat an eye. So that's number one. Number two, yeah, the Fed is in a difficult position that they put themselves in. It's unfortunate, but here they are. And the Bank of Canada tried to do what they call a hard pause. I don't even know what that means, but didn't work out particularly well. So what does that mean? Well, they're going to try to navigate this. The gold market, though, if you pay attention and you sort of led with it, is telling you, you know what, there are things going on. And I'll say this. People might be bullish of gold, an homage to Dennis Garman.

15:09They're not long of it yet. Look at the commitment of traders. And when those machines get triggered, that's going to be the next leg to this gold move higher. Yeah, given everything we know, and look at, you know, it's not just banks here. Look at those proxies for growth in general. Look at crude oil. It was trading at 81 like a week ago. It's 71 right now. Look at what happened to the equities there. I don't think the Fed really cares about the stock market right here. I think they care about the effects of the economy here. So the S &P is up 7 percent of the year. Actually, I think they'd be happy to have it down a few percent or something like that.

15:39I totally agree with that. I totally agree with that. The Fed is trying to get financial conditions to tighten. Year to date, they haven't done that. So while they might not like the speed of this move, the volatility of it and the cause of it, overall, are they going to be concerned the stock market's falling right now? Not at all. It just seems like one of the last pockets of enthusiasm of this period that we had in the post-pandemic period. I'll just say this. If you go out and you buy stocks because you think that it was a dovish hike tomorrow, you were just doing this wrong. And guys said this about 50 times over the last two months or so.

16:09The only reason the Fed is going to lower interest rates right now or any time between now and the end of the year is if we really do have a crisis. And that's not when you want to be buying risk assets. If you look at the S &P, trade at 19 times earnings in this environment with the Fed funds. It's about to be 5 % with inflation where we are. And we also know that if they are to lower interest rates for any reason, then you've been saying this again. Then the inflationary stuff that we're trying to battle, like this whole thing is about taking out all these regionals unintended. OK, it's just lost.

16:38It's all for naught. And then you have a confidence in an institution that doesn't have a whole heck of a lot of credibility over the last few years. I'm sorry. Say the last part again. You're saying you have confidence and you don't have confidence in the Fed. They cut interest rates. Oh, if they cut. I understand. Right. Something bad will have happened. For sure. I think they're going to be slow to cut. If whatever the bad thing happens, they're not going to be out there cutting right away. No, they're trying to bifurcate. Yes. Right. They have the financial stability tools and the monetary tools.

17:06So if something bad happens, the first order is going to be what can we do with regulation? What can we do with special provisions to try to shore things up, provide liquidity, even temporary QE? A Fed cut is going to be the last resort, especially with inflation here. Well, that makes sense. What we see, maybe stagflation, that'll be a terrible situation for the Fed. Hopefully we don't get there. I mean, if you talk about, you know, oil coming down, some of the other commodities are coming down as well. I think on our call, you talked about gasoline today coming down a lot. All those are good things.

17:39It's what they this was. This was sort of the collateral damage they were willing to accept and needed to accept. Right. They couldn't say, well, we're fine with inflation. We'll just let it go. I want to keep the party going. Yeah. All right. Up next, a huge slate of earnings actions still to come. Starbucks, AMD, Caesars and Ford all on the move after reporting results. The details from the quarter straight ahead. Plus, Chegg getting sliced in half. Shares nearly down 50 percent just today. How the AI boom is already taking a big bite out of this company. Don't go anywhere. More Fast Money in two.

18:16Welcome back to Fast Money. Earnings alert on Starbucks. Shares in the red despite a beat on the top and bottom lines, fueled by stronger same-store sales in China. The earnings call just kicked off at the top of the hour. Kate Rogers has been listening in. Kate, what's the latest? Hey, Melissa, you said at Starbucks, beating on the top and bottom lines, big same-store sales numbers here. Growth up 11 percent overall, 12 percent in North America, and China in particular, as you mentioned, showing comp growth of 3 percent. That's key because it's the first positive comp for China since Q1 of 2021.

18:45China was a challenge last last quarter due to ongoing COVID lockdowns. Store traffic also has surpassed pre-pandemic levels in the company's busiest day parts in the United States, which is also key. This is the first quarter we're hearing from new CEO Loxman Narasimhan as Howard Schultz stepped down on March 20th, although important to note, Schultz was still leading the business this quarter. On the call, Narasimhan said there are more opportunities to do better with in-store efficiencies on things like supply chain. He was positive on meeting customers where they are, whether it's in stores, drive-thru and more.

19:15He was also touting the reinvention plan put in place by Schultz, saying that the company's really only just scratched the surface. They're just getting started. Starbucks CFO Rachel Rogeri will be on Squawk Box tomorrow morning. So tune in for much more there. Back over to you. All right, Kate, thanks. Kate Rogers. Karen, what do you make of Starbucks? Those aren't terrible numbers at all, right? We were just talking to you in the break about, I mean, very similar to McDonald's. Excellent comp store sale numbers. But when you're priced as they are and as Starbucks is, that's not it's hard to believe up 12, not good enough.

19:47Right. It's so at almost twice the market multiple, I just think it's too expensive. What were you saying? A tall latte cost you today? Five dollars and 39 cents. So I did a little reconnaissance before the show. I live on a block in New York City with six coffee places on a block. Starbucks has a little premium. There were 15 people in the store this afternoon. What what it tells me not on the should I buy or sell this stock, but on the economy level, what the Fed is dealing with, what we're thinking about macro, is that consumers are still willing to have their little luxuries. The prices have gone up and they're still buying the coffee.

20:25That's what the sales are telling us. And I think as long as that's the case, it's hard for us to really flip over into that recession dynamic. North America is, I think, two thirds of the revenue. So So operating margins, 19.1 percent. It's a staggering number. Overall, 14.3 is still much better than I think the 10 the street was looking for. To your point, the margins are there. Problem is the valuation's there as well. I think it's close to 30 times next year's numbers. Now, this time last year,$70 stock. It's rallied a lot that that means anything. But we failed to take out the all-time high.

20:57So one has to question if you can still own in this environment. And we talked about it, I think, last week. This is when you probably wanted to pare down in earnings to prove to be correct. It's funny. I did a little reconnaissance before the show, too. I went to the bar around the corner. Johnny Walker Black is still$20 of four, and I did two. No, you didn't. That's it? Two doubles. Two doubles. Yeah, okay. Okay, sorry. On the rocks, I hope. You don't do Johnny Black neat. McAllen neat. I know that's your thing. Yeah, sorry. And please continue. It was her. Anyway, well, yeah. We've got another earnings alert.

21:26This one on AMD. Shares of the chipmaker sinking after hours in spite of both EPS and revenues, topping expectations, data center revenue, which makes up more than half of the company's overall revenue. Coming in slightly below estimates, Christina Parks Nebulas joins us to break down the numbers. Christina. Yeah, it's true. They did beat on the top and bottom line, but revenue overall fell 9 % year-over-year, driven by weak client revenues as well as some of that weakness in data centers. The chipmaker actually expects that weakness to persist next quarter. So let's talk about client segments.