The Consumer in Turmoil, and the Ultimate Would You Rather 10/5/23

0:01Live from the Nasdaq market side in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. Consumer crunch from Target to Best Buy to Dollar Genta. You name the home furnishing stock. The damage to these names is sending an ominous warning about the consumer. Is the market too worried or not worried enough? Plus, the ultimate game of would you rather will grill the traders in weather over the next six months. They'd prefer to hold treasuries or some of the best to breed big caps. And later, we'll go inside the major move lower in stocks in Mexico. My footlocker's recent rebound could be for real.

0:32and how the rising 10-year is going to strip many millions from the next mega-millions winner. I'm hopefully coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinerman, Bono and Eisen, and Guy Dami. We start off with the market slide that left no part of the consumer untouched. Since hitting its highs of the year in late July, the S &P has dropped about 7 percent. But some retail-focused names have been hit even harder, whether you're looking at grocery goods, General Mills, Coke, Pepsi, all down 10 percent or more. Are retailers from dollar stores to big box sellers check out the moves lower in names like Dollar General, Target, Best Buy.

1:06Even higher end brands from Restoration Hardware to Tapestry to Nike all seeing outsized losses. One big culprit, higher interest rates, persistent inflation weighing on the consumer. And tomorrow's jobs report, the first to capture the impact of the UAW strikes, could show even more pressure being put on people's wallets. So do all these moves prove the consumer is facing a perfect storm of problems? We didn't even mention repayment of student loans in here. Guy. Why? Yeah, just throw that in on top. Toss that in on top. Great movie, by the way, with George Clooney. I think yes is the answer, and you're finding it in these stocks.

1:37And we've talked about this for a while. But, you know, the fact that Target's multi-year low, dollar gen, five below, dollar tree, when juxtaposing to Costco, within earshot of an all-time high, and Walmart, same thing. That, I think, is somewhat problematic. XRT, which you sort of prefaced as well, critical levels here. This 57.5, 58 level has been support a number of times over the last couple of years. Needs to hold that below that. Then I thought it takes the next leg lower. So is a consumer in a good spot? I would say absolutely not, given where interest rates are. It's a combination of these stocks were too expensive in many cases.

2:12And I would get at least into the staple space. You start talking about General Mills. These companies were not worth what they were worth. And when you think about a world where interest rates were zero, where they were offering yield, They were they were essentially bid up the valuation of stocks that were utility like in terms of the return. We'll probably talk about utilities later have also been destroyed. But I'm talking about staples. We've talked about that underperformance to the S &P about 16 percent since May. But if you look at that staples move, it's down 12 and a half percent since August 1st.

2:39That's essentially correlated exactly with when you had this move higher in rates, at least when we really started to rock it higher. It's also, you know, we're having this conversation. Everybody's having this conversation about what GLP-1 means for snacks and carbonated soft drinks. And we'll talk Coke and Pepsi. You know, we can talk them here. I don't care. But if you look at the Lilly report and the numbers that came out in early August almost coincide with all of this. It's more than just a coincidence. In other words, when we started reassessing the total addressable market for weight loss drugs, we started reassessing what units were going to be in terms of sales.

3:12And we're hearing about that from people like Walmart. Walmart U.S. CEO saying today, less units. That's a direct quote, by the way. Less units. How do you like that? Less calories. Obviously, it's fewer. But we get the sentiment. People are buying less because they're on these weight loss drugs. They're also spending more. So discretionary spending is being reallocated from whatever they were buying before to these drugs, which can cost, if not on insurance,$1 ,300 a month, which is a lot out of people's pockets. Yeah. Well, I wonder, though, about the shopper at Walmart. We know there's high-end shoppers and low-end shoppers at Walmart, and I've got to think the mix would be on the lower end, which would not be where that drug is, because I don't know how fully insured that drug is.

3:58If it's for diabetes and if it's for weight loss specifically, it could, in fact, be insured. Right, okay. Because they are also saying how they were selling more of these GLP-1s, so that's showing up in their revenue on that side of things. So if they're able to know exactly who the shoppers are and see the basket of what's in there, because I was sort of wondering, well, how do they know? Is it just the consumers cutting back and the consumers trying to eat better? But one thing that I do think is a little bit backward looking is our bomb, which is a gas, has moved very dramatically in a very short time that I don't think is really reflected.

4:32And we certainly know the pain that the consumer feels at the pump. And so if that's abating a little bit, I think that's that's a good thing. But, I mean, I own a bunch of consumer-related stocks. Not fun, for sure. Yeah, there's really just no place to hide. You know, and a couple other economic data points that we haven't gotten to is, like, the credit card balances and the tick-up and delinquencies. I think those are up about 140 basis points. So you are starting to see those cracks that we had avoided for the longest period of time. And we've gone from hard landing to no landing to now soft landing to— Hard landing again.

5:04Yeah, exactly. And I think all of that ebb and flow is kind of burying itself out in the stock market. What really concerns me isn't necessarily the moves in staples. And we've said for a while that those have been somewhat overpriced. It's really the moves and the high-end names that are showing that there really isn't. We talked about the K-shaped recovery a couple of years ago, right? So, like, is there no pocket that is safe within the consumer complex? And I think the movement that we're seeing and volatility that we're seeing in that particular subspace is really what is somewhat of a cause of concern.

5:33because even that more insulated consumer is really in a situation where they have to make decisions about what are they going to spend on and whether or not they're going to spend that incremental dollar. Yeah, we were talking about restoration hardware. That is case in point of the higher end consumer sort of reevaluating what they are going to spend on. And the companies themselves reevaluating how promotional they want to be and how much they want to hold on to margins. I've talked about, I'm short, Lulu. It's down from 400 down to 360. But, you know, those numbers they just reported three weeks ago were very good.

6:03And all the reasons why people wanted to own Lulu, I think, are very much intact. International, men, the kind of growth, the innovation. However, what are you going to pay for these stocks in this environment? And that's really what I think it comes down to. In the case of RH, I don't think it's terribly expensive relative to itself. And I think it's starting to get interesting. I think a lot of these staples look very interesting because, to be clear, no matter what's happening with the economy, people are still going to go out and drink Coke. And it may not be, you know, it's a demographic thing.

6:30They are going to continue to buy General Mills cereals. And so it's what you're willing to pay for these stocks. And if you also look at the charts, they've traded in very predictable ranges. And I think if you look at the valuations, you get to a place where when you have stocks that are effectively utilities and commodities, that's when valuation really matters. And that's when you get to a place where you say, oh, wow, I didn't think I could own it at 12 times. And I think we're we're getting closer. You're talking about defensive then. I'm talking about defensive. That hasn't been defensive, by the way, for all the reasons we just talked about, but will be defensive.

7:00And so to say something like I can't buy Coke. No, I want to. I actually, you know, it's not time to sell Coke. It's time to figure out when you want to buy Coca-Cola after the kind of move it's had and it's oversold. Oh, I think that's a question. When do you get defensive? Because you could have thought for a long time this year that a recession was coming, that the stock market is going to crack. It's going to happen. It's going to happen. It's going to happen. It hasn't happened. And the defensive names in the meantime have not acted well. And so how do you how do you decide when is when is the time?

7:25Think about how utilities are historically very defensive. Think about how horribly they've traded. So it's been a really strange few months without question. Quickly, Karen's right to point out gasoline down 80-something cents, which is significant over the last couple of weeks. Problem, of course, is you go to your local gas station, you're not going to see an 80-cent decline. Like, it just doesn't happen that way, and I don't think you're suggesting that. And the move in crude oil and all these really strange things going around on the surface. But to answer your question, when you get these capitulation moves, For example, I don't know if our crack staff in EC can put up a Clorox chart.

7:57I mean, they blamed getting cyber, which is cyber attack. Sounds a bit fugazi to me. But I mean, look at this. I believe it, though. Yeah, whatever. Go longer term in Clorox. I mean, this trajectory has been in place for quite some. I've been getting hacked for the last six months. So my point is, like, what historically has been defensive has not been working in an environment where it should. Yeah. Where do you go for where would you go for defense? Man, I'm going to repeat myself and say I still think it's probably that mega cap complex. What? No, no, but hear me out. We just sat here and said, not only have you had the opportunity cost of not being in those names for the better part of this year, you've also gotten absolutely shedded by being in those shedded.

8:43No, taken to the back shed and beaten. Shedded. Shredded, shedded. I just didn't know what happened. I wasn't sure. Shedded, yeah. Shedded, yeah. Woodshed, you mean? Absolutely. Chopped up. Spit out. So my point is, like, being in those names has not worked for you. So at least you have some beta to the upside in that complex, even if there's probably more downside now. I think that's, I mean, I think that's... First, fast money first. What? Shedded. Shedded. 100%. Woodshed we have used many. By the way, I was going to say, when... But not shedded as a verb. 100%. It gets into terminology, too, when you...

9:16You know what? I'm going to say that. No, no. You can't do that. That's not fair. You start your thought. You've got to complete it. Finish your thought and we'll move on. Well, when you're not liking what somebody's doing, maybe they're being irritating to you, you refer to them as a tool. Right. And sometimes, actually, someone could be the whole shed. The entire tool shed. They could be the whole shed. Or maybe even a home depot. If they're really bad, they're the whole shed. Or they could be Home Depot. A home depot. That's like, no, we've talked about those people. Can I just come to Bono's defense?

9:41He doesn't need my defense, but I'll just tell you this. If you look at the triple Qs, even through a period where higher rates, all the things that should be pushing the market around, They're this close to making a new relative high against the S &P. Now, the S &P is going down. But if you look at the place that's been defensive and the place that has led markets, right now you can't get too far away from these names. I think I'm not very bullish on the market here, although I think we've got to rally to year end. I mean, this is the argument that most investors are making in terms of still being in these names, right?

10:09Yes. Despite, you know, we had that note yesterday, the downgrade of Apple from KeyBank, I think it was, right, to basically a market weight saying the valuation doesn't reflect growth. It's a mature growth company. It doesn't deserve this multiple. And yet it does maybe because of the execution aspect in this sort of volatile time. Not for me, Apple, but I have a very big meta position. It started the year much smaller and I didn't buy any. Right. But I still think it's cheap. So is Google. I feel more comfortable with those. I have Amazon as well, which is not cheap. But I do believe in the AI story.

10:44So I'm in that seven, most of them. Don't own Tesla. Is that in? Tesla's not in. It's in. I don't know. For the big? Yeah. Yeah, I think so. OK. I don't own that. But it's been a good place to be. I think that it's been the balance sheets are great, right? The business models for some are so great. The margins are so great. Also, they've been in a position where they can become a lot more efficient. That hasn't been. They've been spending money. Spend, spend, spend, particularly Meta, obviously, we know that. And to turn that on a dime, that's a very profitable change. Well, the Institutional Investor Hall of Famer, known to move markets, is bracing for a sharp market pullback.

11:24Marco Kalanovic is J.P. Morgan's chief market strategist and co-head of global research. Welcome back, Marco. Hall of Fame. Thank you. Nice. Hall of Famer, yeah. Beautiful. Perhaps multiple times, in fact. He deserves it. Marco, you, like so many people, started the year very bearish on stocks. You stuck with it pretty much. It's been not an easy ride, but at this point in time, you do see the pain coming. No, so we had the price target 4 ,200. And sort of, in fairness, we thought that this is going to be a more volatile year, that we'll see more sort of chop. Instead, we got that summer rally, primarily driven by tech, you know, which was sort of very painful.

12:01And that market came down sort of to our price target. And we remain somewhat negative still, you know. So not necessarily calling for immediate sharp pullback, but we do think that recession will eventually happen. So sort of upside versus downside stocks is not that great. But this gets at the conversation we were just having in terms of timing. You can be an investor who believes that recession will hit, that there will be some sort of a landing, some sort of recession, and that the pullback will come. But it's hard to position yourself at this point in time because we just, I don't know, the job market's still strong.

12:35Job markets is strong, but you are starting to see the stress in consumer if you look at the delinquencies in the cards, in the auto loans, and basically inflation is there and rates are higher for longer. So this thing will eventually come. So then we look at upside versus downside. Could there be another 5%, 6%, 7 % upside in equities? Of course. But if there is a downside, it could be 20 % downside. And now you compare that to the cash, 5.5%. So now how much equity upside above 5.5 %? So maybe 3%, 4%, but then downside 20%. So timing is very hard. And this year particularly, and we didn't get timing good, that said, we still stick to that.

13:24It's not attractive. It's not exciting. There is an alternative. And recession, I'm not sure how we're going to avoid it if we stay at these levels of interest rates. Mel, what do they call it when a video goes viral? A viral video. Viral. It's crazy. Well, I mentioned that because Rick Santelli was here the other day. Yes. And his call. 13 percent. Went viral. I mean, a million and a half views now. You probably saw that. I don't think you think rates are going there. But what are your thoughts on rates? Here we are at 4.7 percent at 10 years. So it's pretty high, right? And then when you compare the multiple of these top seven, right, you know, or in general, multiple of Nasdaq or S &P, It just doesn't add up, right?

14:03Historically, this level of rates doesn't add up with the multiple PE. Where in the cycle we are, right? The other thing is what's going to happen, right? So rates could actually go a little bit higher. You know, I think the 13 % might be, you know, things would probably break a lot sooner than that happens. So I don't think it goes that high, you know, but could go up a little bit more, which is already, I think, problematic for a multiple. So, Marco, there's been two markets. There's the NASDAQ and, you know, the Magnificent Seven, whatever you want to call them. And then there's the rest, which have been flat or down.

14:36Right. Do you think that it is possible to just have a recovery out of those into others? So that's a very good point, right? Like, so Russell is down 2 % for the year, right? The cash is up 5.5%, right? Like, so S &P equal weight is down, right? The top Magnificent Seven up a lot, right? So, two course of action. If you don't believe that there is a recession, I guess buy those. Buy the ones which are lagging. Recession doesn't happen, they will lead. But don't buy these magnificent. If there is a recession, I think magnificent ones catch up or catch down to where the rest is. So, whether you want to take a view on recession, there is also relative value component.

15:19So, some things got beaten up already. And, you know, Tim mentioned sort of staples, utilities and those type of things. Some of the cyclicals. So, Marco, part of what I think has got you into the Hall of Fame in the strategist world is also you have a quant kind of approach and a quant background. And a lot of it, you know, I just feel like the market we've had is something to do with positioning and has had something to do where sentiment is. And it just seems to me that that's been part of the story. In hindsight, that's always easy to say. But where are we now on that stuff? because I remember your call in March of 2020, excuse me, with COVID, and you were just like, this is crazy.

15:55This is a screaming buy. Sentiment feels awful when just six weeks ago, people were, I think, over their skis. Yeah. No, that's a very good point. So positioning does matter a lot, and it did matter this year as well. So we started November, December with very low positioning, you know, tech, pretty much everything. Volatility was still high. And then volatility was coming down pretty consistently this year. As volatility comes down, many of these technical investors like volt targeters, CTEs, they all little by little sort of increase, increase, increase. So that was a tailwind, right? So you had that big tailwind, I think, underestimated by the market.

16:31And then you had the sort of tech AI thesis. So that sort of got us to the highs early this summer. But now volatility is picking up. VIX is not anymore 12, 13. Now it's like 18, 19. And sort of data are also becoming a little bit more shaky. So we are now, where are we now? Like, we are now around, we call it around 50th, 60th percentile. So it's not very high positioning. It's much higher than it was in December. In December, it was maybe 10. 10 out of 100. Now it's like 50 out of 100. That doesn't sound very bullish. It sounds to me like, in other words, all this sentiment hasn't really done much to positioning.

17:04And actually, people aren't that long. No, it's a sort of middle, like about average, you know, I would say. It means can go up or down positioning-wise, you know. But we do think that sort of this cycle part is going to get tougher and tougher, you know, as the consumer erodes savings and cash. Marco, thanks so much for your time. So I remember the quant report that you used to put out, being that Tim just brought it up. You used to put it out with Scott and Amin and a few other people. How should investors be thinking about volatility as an asset class right now? I know we're always talking about should we overlay or buy outright optionality.

17:40But in terms of actual allocation, can you touch on that a little bit? So, you know, it's hard to own just volatility because there's always negative carry to it. Volatility is a protection, so you need to pay for it. You know, it was also tough this year, you know, but it got this summer when it got, when it goes to 12, you know, in July, it did look really much you need to own some of the downside protection. Investors are also selling short-term options, one, two, three-day options. They're overriding some of the ETFs, you know, like so it's been used also to generate as an asset class to generate yield, generate carry, you know.

18:12But so now at 18, I think it's it's probably still good to own some of it, but not as attractive when it was down to 12 or 13. So, Marco, thank you. Thank you. Hope you come by soon again. Marco Kalanovic, JP Morgan. So what do we think here? Well, mid 3000s, the S &P sort of mirrors a lot of things that Mike Wilson's been talking about. And Marco, you got to listen to him. You don't have to agree with him. You got to listen to him. And how many people are in the he's still working. He's in the Hall of Fame. He's like Eric Clapton of the stock market. Good for Marco. Well, I think that as we set up for some seasonal dynamics, I look at what rates have done, what oil have done.

18:54And I just think a lot's been thrown at the consumer. I think a lot's been thrown at the market. I don't really like the setup for next year, but I kind of feel like we have some room here. I also think tomorrow's a payroll number. Whenever we get that next payroll number that really shows that the labor market is weakening, I think the market's going to love it. And I think they're going to believe that we still have that Fed back. This has all been about the Fed put that people actually like people thinking, hey, you know what, after that last meeting, they're serious. Like they're not messing around.

19:22And that was the difference in the rates markets on top of a few other things. So I think the short term to medium term move to the year end, it favors the bulls. Coming up, Rivian's terrible, no good, awful, very bad day. The headlines taking all the charge out of the EV maker shares. We'll drive down that bumpy road ahead. Plus, our chart of the day is a dangerous triple top brewing for this industrial giant. We'll break that down. More Fast Money right after this.

19:52We have a news alert on the criminal trial. FTX founder Sam Bankman-Fried. Kate Rooney's got the latest. Kate. Hey, Melissa. So we just wrapped inside Sam Bankman-Fried's criminal trial here in Lower Manhattan. We had three witnesses today taking the stand. FTX co-founder Gary Wong has already pleaded guilty to fraud. The prosecution jumped right into it today asking, did you commit financial frauds while working at FTX? He said yes. And then prosecutors went on to ask, do you see any of the people you committed fraud with in the courtroom? He stood up. He spotted Sam Bankman-Fried and said yes.

20:25He was wearing this oversized suit, was Bankman-Fried's college roommate at MIT. And he also lived with him in that infamous Bahamas penthouse. He said when customers deposited money on FTX, it was directly funneled straight into an Alameda bank account. All of this, he says, was at the direction of Sam Bankman-Friedi. He also said Alameda, the hedge fund that's also connected in this, had special privileges and unlimited access to FTX accounts. Also, the ability to withdraw endless money, as he put it, also have a negative balance and a$65 billion line of credit. Also said Alameda did take roughly$8 billion of customer money from FTX.

21:01Wong also got a$1 million personal loan from Alameda And then a$200 to$300 million loan, he says, was taken out in his name. He says that borrowed money was used instead to make investments on behalf of the company. He said he never saw it. He owned about 10 % of Alameda Research, that hedge fund. Bankman-Fried, meanwhile, owned about 90%. We also heard from Adam Yadidia. He was another FTX executive and an MIT friend as well, also Bahamas roommate. His testimony ended on a fiery note, guys. It was later struck from the record. But when asked why he eventually lost faith in FTX, he said FTX defrauded all of its customers.

21:36And then we had Matt Huang. He is a venture capitalist at Paradigm. Took the stand. He said that they lost, had invested and then lost$278 million in that company. They wrote it down to zero. He pushed back on Banquet Freed. He said wanted a board seat, but Banquet Freed pushed back. They never had a board of directors or a CFO. So a couple key testimonies there, guys. Back to you. Crazy stuff for a trial. Kate, thank you. Kate Rooney. Racy. Wow. We are kicking the tires on two auto stocks making headlines today. First up, GM shares dropping after the Wall Street Journal reported at least 20 million of the automakers' vehicles were built with potentially dangerous airbag parts.

22:15Auto regulators recommending a recall of more than 50 million vehicles using the same airbags, which are made by ARC Automotive. The recall would affect not just GM, but 12 other automakers, including Ford, Tesla, Toyota, and more. GM stock hitting a three-year low on the back of this. And shares of Rivian plummeting and notching its worst day ever going back to its IPO in November 2021. The EV maker announcing a$1.5 billion convertible bond sale after the bell last night. It also provided Q3 revenue estimates that were in line with estimates. Obviously, it's the raise that has the stock down this much.