Stocks on Edge Ahead of Debt Limit Meeting, and Why Be Bullish on Schwab? 5/8/23

0:02Right now and fast Treasury Secretary Janet Yellen right here on CNBC saying that as early as June 1st, the U.S. will run out of money to pay its bills. This is the president gets set for a debt limit showdown with congressional leaders tomorrow. How worried should the market be as the debt clock keeps ticking? Plus, checking Chuck shares of Charles Schwab down nearly 40 % in the last two months as a discount broker has been swept up in the wave of regional banks selling. So why are analysts and fund managers still recommending it? We'll hear from one. And later, one of our traders is ready to take a fresh look at shares of Airbnb and DoorDash, Find out why he is pinning his constructive tone on the post-sturning surge of Uber.

0:40I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq MarketSite on the desk tonight. Steve Grasso, Karen Feinerman, Dan Nathan, and Guy Adami. We start off with markets on edge ahead of a big week for stocks. The Nasdaq and S &P managing to close just in the green, while the Dow ended the day down about 55 points. The latest senior loan officer survey showing banks are still worried about a slowing economy and deposit outflows, and there are more potential catalysts for the markets in the coming days. from tomorrow's debt ceiling showdown between President Biden and Speaker McCarthy to a slate of inflation data this week, CPI Wednesday, PPI on Thursday, and of course, the next big read on the consumer when retail earnings kick off next week.

1:16So is today just the calm before the storm? Kind of feels that way, Dan. Yeah, so you see a VIX at 17. It was at 20 late last week. You see the move index that tracks the volatility in the Treasury bond market. Yeah, and that's picking up a little bit here. But, you know, I guess the thing, and I mentioned this a couple times here, So what you're just saying about the senior loan officer survey, if there really is concern about credit, right, I think you want to take a look at the small caps. We've mentioned this on a few occasions. So the Russell 2000, it's unchanged on the year. It's down 27.5 percent from its November 2021 highs.

1:49And, you know, it did top out two months before the S &P 500 here. And the lack of direction, I think, in the small caps might be more indicative of what's going on in the broader economy here in the U.S. than what's gone on in the major indices. because, again, we know, I think David Rosenberg had a tweet out this morning talking about the equal weight S &P versus the market cap weight. And that ratio is at levels that it has not seen. So it's just basically highlighting how much these 10 stocks are doing, at least to the overall market. And that's why I bring it back to the small caps, because you can say to me, OK, Apple's market cap is equal to the entire Russell 2000.

2:23That's fine. But there are 2 ,000 stocks in the Russell 2000, OK, that are saying something very different than what the S &P is saying. OK, so I'm going to say something potentially stupid, but I don't care how I look. It's never stopped me before. I would never see it. It has not. It's amazing. If you're out there and you're investing in the top 10 stocks, what do you care what the rest of 2000 is doing? You're in the top 10 stocks. You're OK, because this is the head scratcher. It is amazing, right, how durable this market has been in the face of a bank crisis, a debt ceiling showdown. And still, we're just, I don't know, motoring along, Karen.

2:56I guess it's been on the expectation that the Fed is done, right? I guess. I mean, and also this, you know, we've been afraid talking about a recession for, I don't know, seven months now, eight months. Yeah. It has yet to arise. So and the data has been OK. Right. And so maybe all of that is, is it possible? We're at a soft landing where the Fed inflation is coming down. The Fed can ease off. And yet the economy hasn't really been hurt. certainly the labor market still seems to be in great shape. So that would make sense to me, why this is as it is. I think we have shook off everything, as you just said.

3:36Year after year, things that would have knocked this market down. And I don't know whether it's a testament to how electronic the market has gotten, how small the average lot size has gotten. But things that normally would knock the market don't anymore. And I think it's about rates. I think that's the holy grail of the market right now. So if rates continue to do what they're doing, which is basically fall in the near term, I would guess that people think it's already done. But let's say something provocative. What happens if we've already had the recession? What happens if it's over already?

4:11Because I think you're going to hear that chant that we've already been through it already. Right. I mean, there's always a delay between when the NBER declares a recession and when the recession actually happened, Guy. You have been, you know, firmly in the bear camp in terms of the markets and what's going to happen to the economy and how that will impact the markets. At what point do you say, you know, maybe things are not looking so bad? The data is OK. And maybe, yes, credit conditions are tightening. And maybe there's one more hike on the part of the Fed. And maybe we go through this debt ceiling showdown, which always seems to get worked out at the last minute anyway.

4:46And things are fine. That's what I struggle with, clearly. when can you be wrong and when are you pushing towards instead of trying to stay fluid, you fall into the dogma camp. And maybe I'm there and I don't even realize it. But I'll say this. Earnings weren't as bad as expected. That gave the market some somewhat firm footing. But is it just a matter of time before we start to see it? Is that lag effect taking longer than I thought it would? I think so. I mean, I think there's an inevitability to some of the things that we've been talking about. We're going to talk about Tyson Foods later, so I won't jump the gun here, but they said some pretty negative things.

5:23And it's across a series of sectors and across a series of stocks. Now, why does the market continue to grind higher? Passive investing is alive and well, and they do not look at headlines. No fears are necessarily associated with passive investing. There's a money flow situation going on, but the headwinds are out there. The market is expensive. The debt ceiling is a thing. I do think they're going to push the envelope here just given the climate that we find ourselves in and I don't think the market's taking that into consideration. Yeah, let's be clear. The S &P is up 8 % of the year. It's not even above those February 2 levels that we were all pretty much focused on.

6:01So it's been grinding a whole heck of a lot at a time where we've all just said this, that the earnings were clearly better than a lot of people expected. And I think if you were just to kind of look in a vacuum and say, OK, maybe we're coming out of something to kind of Steve's point in a way. But I guess, Put it all together with what we're seeing in tighter credit conditions. I mean, the stock market started selling off in late 2021 because the Fed said they're going to battle inflation by raising interest rates. Here we are, OK, about a year and a half later, and we have interest rates at 5 percent.

6:28We have the Fed funds here. We have the 10-year back at 4 percent, or excuse me, the 2-year at 4 percent, the 10-year at 3.5 percent. These are levels that are actually not really conducive to valuations that we've become accustomed to over the last 10 years. And I think that's really important. If you look at just where the S &P is trading at 18 and a half times, I mean, we're above the five-year average, above the 10-year average. That doesn't make a whole heck of a lot of sense. And I'll just take you back to what's going on with the financials here. By no means are we kind of out of the woods yet for what's going on here.

6:56When you think about the costs that are going to come onto the big banks for regulatory purposes of all of this, extraordinary measures to kind of backstop this or kind of help contain this sort of regional banking crisis, to me it just doesn't feel like it's over. So I guess what I'm saying is up 8 % on the year. We're still down from that 4 ,800 level in the S &P 500. And I just think that we could be unchanged to down like that over the next few weeks. I agree with everything you said. But getting back to rates, if rates start to come in or we get to the end of the tightening cycle, you're going to start to see margin expansion.

7:29So you're talking about 18 and a half times. You probably could squeeze out 20, 21 times on the S &P. And that's going to fool everybody yet again. And people are just going to dive into those 10 names where you started the show. All right. Meantime, Treasury Secretary Janet Yellen just telling our own Sarah Eisen that it's essential that Congress raise the debt ceiling and that failing to do so would be an economic catastrophe. Sarah joins us now with the breaking headlines from her interview. Sarah. Hi, Melissa. Secretary Yellen went farther than ever before a warning of the catastrophic impact of a debt default, which would happen if Congress doesn't raise the debt limit by early June.

8:06She warned it would have, quote, tremendously adverse effects on the financial markets and the economy. And as for status updates, she says there is still a big gap between where the president and the Republicans are on the issue ahead of this key meeting tomorrow between President Biden and House Speaker Kevin McCarthy. She said that the president will talk spending cuts with regard to the budget, but not going around the debt ceiling to do that with a, quote, gun to America's head. That's her way of putting it and the president. And for the first time, when I asked her about the dollar, she said that it risks the reserve currency status, this whole issue.

8:41Listen. If we were to compromise the credit rating of the United States and even worse, to default on the debt, I think that would have an adverse impact on the dollar's use. Quite a statement from a Treasury secretary threatening the reserve currency status. Now, as for the regional banks, of course, we had to talk about that, too. She noted the share pressure that we've seen in the market, the earnings pressure that these banks are still facing, said she would be prepared to act again if we see another bank failure. Listen. Regulators stand ready to use the same tools we have in the past if there are further pressures that arise that could create contagion.

9:29As for this idea of temporarily banning short selling on the banks, which is an SEC decision, she did say there's a high bar for that and it had more negative impacts in the financial crisis. Didn't sound like she was really on board with that idea. She did say that there's a conversation happening with the FDIC, the bank regulator, on the benefits of raising deposit insurance. But again, through that statement, really more of the implicit guarantee of deposit insurance. And then, Melissa, of course, I asked her about the tightening impact of credit conditions on the economy after that report we got that showed that that's happening this afternoon.

10:05She said, look, it's part of the process of the Fed raising rates and pointed to the strength in the labor market with another good jobs report on Friday as evidence that the economy is still holding up relatively well, despite that headwind. And she's still sticking with the view that it's going to be a soft landing because she doesn't see unemployment spiking or layoffs mounting. So far, it has been right. We'll see if that can continue. Sarah, thanks. Great interview. Sarah Eisen with the Treasury Secretary. All right. So tomorrow's the big meeting. The stakes are high, but the expectations are very low in terms of what will actually happen.

10:37And if anything will get resolved. Mitch McConnell's all but saying, I'm not going to step in here. I'm not going to help the process along. It is up to President Biden. It is up to Kevin McCarthy. And I'm staying out of it. And they haven't met in a very long time. So, Karen. Yeah, I think you're right about the bar being low. I think the most surprising outcome would be some sort of deal. That would be shocking, I think. I don't think it's going to happen, but I guess we'll get a sense of how far apart they are and maybe some sense of if there's a willingness to compromise. I don't know. My expectations are low.

11:07I think everyone should just jot down September 30th on their calendar because I think that's the most likely outcome. They're just going to kick it another couple of months and we'll redo it at that point. So I think they will avert the crisis, but I think we're still going to be dealing with this in a handful of months from now. So I'm not expecting anything tomorrow, least of which the trillion dollar coin being housed at the Federal Reserve or the enactment of the 14th Amendment. So either of those things are not not happening, which we've heard about in the last couple of years. For more on the debt ceiling in the market, let's bring in Julian Emanuel, Evercore ISI, Senior Managing Director.

11:41Julian, great to have you with us for all what's going on. The markets you walked into our green room today. You said the invincible market. Here we are. It is. It seems that way. It is. Look, so at the S &P 500 level, you have been literally motionless for seven months now. Now, of course, the concern is that the year-to-date returns are, call it, almost two-thirds driven by those top five names, all of which have AI in their remit somehow or another. And that is a concern, particularly when you see the Russell 2000 really approaching its lows of last year. So it seems like it's OK. And frankly, from our point of view, we don't understand why the VIX is as low as it is, given the fact that the T-bill markets a week ago, one month T-bill yields were 100 basis points lower than they are now, because that one month is now over the X date.

12:36Same concern in the credit default swap markets. We think there's a little bit of a disconnect that's likely to get resolved with a little bit more volatility in the coming weeks. All right. So, Julian, you mentioned AI. It does seem to be something that investors are pretty excited about this year. And it's not just one of these sort of mini bubbles that we have seen. You know, when we talk about what we saw in SPACs, if you talk about what we saw in crypto and all these other tech things, we're talking about maybe it's one or two trillion dollars, you know what I mean, like in totality. But when you think about what's moved the entire stock market, mega cap stock, It seems like all of the risk has been transferred into a handful of names.

13:12Is that the sort of thing as a strategist with volatility readings where they are right now? Doesn't that make you nervous that we could have some sort of snowballing effect if there was something to cause, I don't know, some concern about this bubble where a lot of investors have placed all of their hopes? It definitely does. And look, to us, the A.I. revolution is likely quite real, quite significant. But as we all know, whether it's the Internet or what have you, these things unfold in waves and you get a little bit too much enthusiasm and the stocks sell off. If the rest of the market was participating, that would be another thing.

13:47But that's not the case. And I have to tell you, we've had some very odd conversations the last several days with people who actually think there is an amount of money. It's probably not large that actually look at T-bills and wonder whether they're safe. Look at bank deposits over 250K and wonder whether they're safe and are putting money into the top five large cap tech names. They're really perception in the markets. It's extraordinary here. When you say too much concentration in the top five names, that implies that there will be a run for the exits. That is sort of the danger of that. I mean, what, you know, if you're investing in the top five names, which is probably most of America through passive investing, right, what's going to make me sell?

14:38So then where is the instability in the markets? Like, let's say the economy does hit the skids. Where is the instability in the market? So the instability is, again, as you said, the public continues to be disproportionately exposed to those type of names. But the fact is, and we've been talking about this for months now, and I think it's part of the frustration, we almost want the recession to come to get the clearing event, and we've been talking about it for a year. But the fact is, until the labor market does what the Fed would like it to do in terms of its projections, there isn't going to be any real urgency to sell stocks.

15:15So for you, what do you tell clients? Because that's a tough sell to just sort of wait. It's going to come. It's going to come. The labor markets are going to crack. You just wait. You just wait. You just wait. And in the meantime, the markets are sort of mordering along, and your clients are probably like, Julian, you told me to hang on here. What's going on? So our view is that you want to stay in the more defensive sectors. Interestingly enough, with all this AI talk, health care and consumer staples have outperformed since April 1st. We think they're going to continue outperforming. It's a good place.

15:50Biotech also among health care. There's M &A activity going on. And that's a sector that does well when the Fed pauses. And we think they are pausing here. Julian, thank you. Great to see you. Julian Emanuel, Evercore. What do you think, Karen? Well, it's a little counter. It's sort of a circular thing. If it cracks because the labor, you know, finally moves, does that really give the Fed the green light to set to pause or to, you know. Right. Right. And so that has been bearish last year. And the other side is, well, maybe we've, you know, by the rumor of the Fed pausing, sell the news. I don't know which.

16:24Yeah. Yeah. I mean, I feel as if we've all been sitting around this table talking about the same, the only six stocks that matter forever now. And I think it's always people are just starting to pay attention that it's concentrated in just a handful of names, maybe 10 names instead of six names before. But when you tell your clients cash, everyone starts to scratch their head and they get bored with that. People want a certain amount of risk. And that's what keeps people guys said it before. Passive investing. That's what's keeping this market right here. And by the way, seven percent, eight percent year to date performance in the S &P 500 guy.

16:59If we stop today and we said this was the year, this was to 2020, that that's not bad, considering all that we've digested in the first four months of the year. In this environment, it's extraordinary, I would submit. And listen, and Steve said it's about interest rates. I agree to a point, but I actually think the Fed's a bit of a sideshow now. And I think, quite frankly, it doesn't matter where interest rates go within reason, because regulation is coming. Credit conditions are tightening. whether or not rates go up or down, I think credit conditions are tightening. And again, what I've been wrong about, other than the direction of the market, is how long this lag effect is taking.

17:37But it's going to have an impact. And if you read, again, some of these earnings releases over the last couple weeks, outside of the big names we talk about all the time, companies are absolutely feeling it. So what was that saying, Guy, that it was, I think, your friend Keens from college, the market can stay irrational longer than you can stay solvent or so? We seem to be in that phase. And I just think it's really important, again, going back to where the S &P is. It's not making a lot of progress at a time where I think a lot of the headwinds are starting to mount. So to me, the narrower and narrower this rally gets, the more danger you have to a sharp sell-off.

18:10Coming up, we're all over some after hours action. PayPal, Lucid, and Palantir. The details from the quarter is coming up. Plus, a big revenue warning out of Catalan. What it could mean for supply of one key weight loss drug. The forecast cut that sent shares tumbling. Don't go anywhere. Fast money is back in two.

18:33Welcome back to Fast Funding Earnings Alert on PayPal. Shares lower despite a top and a bottom line beat and the company boosting its profit guidance for 2023. The conference call is underway. Christina Parts Nevelis also cut off with PayPal's CEO. Christina. Yeah, I just got off the phone with him maybe about 20 minutes ago. CEO Dan Schulman, who attributed the earnings beat and increased in full year EPS to two main factors. Firstly, their branded business is growing not only across the United States, but across the UK, Australia and Europe. Secondly, he said e-commerce is coming in stronger than they expected, saying, quote, we thought it could be low, as in flat, and now it could grow low single digits, maybe even mid single digits.

19:08He also said the drop in inflation here in the United States is helping consumers spend more on goods, specifically within fashion as well as electronics. And yet what we saw is the stock is selling off down, what, over five percent. There could be two reasons that stand out to me. First, Q2 EPS guidance. The range came in at$1.15 to$1.17. So that means that the midpoint is one cent less than the estimated$1.17. That's a small thing. But the other big flag could be that the company expects less operating margin growth for the second half of the year. That comes after months of cost cutting. So it can only go so far.

19:41Shulman just saying, though, on the analyst call that's under array that the board has formed a subcommittee and we're working with a leading search firm. They plan to announce his replacement by year end because he is retiring at the end of this year. But still, they haven't announced it. Christina, thank you. Thanks. Christina Parts Nevelis, what did you make of this quarter? Just buy it. I mean, like, if you're looking for things to buy after some of these quarters that we've seen where stocks have gone up. Yes. You know, this thing is expected to have what high single digits EPS growth, made single digit or like 15 percent sort of sales growth here.

20:15It's 48 percent gross margins. Stock's down. It's down 75 % from its all-time highs. It's trading at well below a market multiple. Good balance. I mean, like, they're going to have a new CEO that'll be exciting or whatever. I mean, if you buy this thing near 70, you'll probably be selling it. You know how Guy often says, if stocks trade up on bad news, that's a good thing. Where we have, if you read this report, you would have thought the stock would be up after hours. Really? I thought the stock would have been down. Guidance. Guidance was lower than the beat. Yeah. Guidance was lower. But if you look back on a chart on this stock and go back to when they were thinking about buying Pinterest, the stock was a two hundred and seventy dollar stock or thereabouts.

20:53And the thought was they were worried about being out of growth. Look at Pinterest where that was. So for me, I don't I don't think you could buy it just yet. It is stabilizing, but I still don't think it's a buy. All right. Let's get to Lucid here. Also out with the results, shares dropping as the EV maker reported a loss of 43 cents a share and a wide revenue miss. The company maintaining delivery estimates at the lower end of guidance issued earlier this year. The conference call just getting underway. Actually, we'll get underway just minutes from now. Phil LeBeau's got more on this. Phil.

21:22Listen, not a lot to like in the first quarter for Lucid. As you mentioned, they missed on the top and the bottom line, losing 43 cents a share. The street was expecting a loss of 41 cents a share. As you mentioned, revenue well short of expectations. And it raises the question, really, what happened in the first quarter? I had a conversation with Peter Rawlinson, CEO of Lucid, and he said, look, there were a couple of main factors that caused them to have lower production and lower deliveries in the first quarter relative to the fourth quarter, a slow January. And he said, you know, January is typically slow in the auto business.

21:55I said, yes, but I've not often heard that as the main reason for a miss in terms of quarterly production and so forth. And then he said there was the EV tax credit ending. Remember, it used to be prior to the IRA tax rules going into effect that you would get a$7 ,500 federal tax credit. Now the Lucid models are too expensive for that to apply. He said those two combined to have an impact in terms of production and deliveries in the first quarter. And now it brings up the question of guidance. They are planning to build at least 10 ,000 vehicles for 2023. Remember, the guidance at the end of the fourth quarter was for production of between 10 ,000 and 14 ,000 vehicles this year.

22:35They're no longer giving that higher end of saying they could hit 14 ,000. So that's a slight tweak in terms of their guidance. And they now say their liquidity is enough to last into the second quarter of 2024. Previously, they said they had enough to get into the first quarter of 2024. Now they've pushed it into the second quarter of 2024. By the way, they're sitting on$4.1 billion in liquidity. I asked the CFO if they have the option in terms of are they looking at the prospect of raising more capital. They said, oh, there will probably be more capital that will be needed in the future. No plans to announce as of right now.

23:13But the bottom line is this, Melissa. There is nothing really to hang your hat on in this first quarter with production and deliveries coming in lower than in the fourth quarter. Wow. Phil, keep us posted. Phil LeBeau, conference call again, gets underway in just a few minutes for Lucid. That's a terrible excuse. seasonality for the car industry. I never heard that before. Especially while you're trying to ramp up and it's not about. Right. Yeah, it's that should be like an excitement factor. People are waiting for this car to come out. It's slow. January is slow. Production and delivery is where Phil left left off for a company that's in the phase that Lucid is in right now.