Closing Bell - Closing Bell: Mega Cap Moment of Truth 7/29/24

Episode Date: July 29, 2024

Is the tech trade really in trouble… or will this week’s critical earnings reports reverse the selling? Light Street Capital’s Glen Kacher breaks down what he is forecasting for the sector. Plus, Morgan Stanley’s Chris Toomey tells us how he is advising his high net worth clients right now. And, we drill down on the big moves in Tesla and McDonald’s stocks today. 

Welcome to Closing Bell. I'm Scott Wadner, live from Post 9 here at the New York Stock Exchange. This Make or Break hour begins with all that lies ahead this week, from big tech earnings to one of the most consequential Fed meetings ever. We will ask our experts what is really at stake this week, including noted tech investor Light Street's Glenn Kacher. He's going to join me momentarily in the midst of just an incredible year, given his holdings we'll discuss coming up. In the meantime, your scorecard with 60 minutes to go looks like this. A bounce back for tech today following last week's really rough ride. It's a bit modest now, certainly off the best levels of the day. Microsoft, Meta, Amazon, Apple

were all higher ahead of their results this week and they're trying to hold on to those gains now. How about the Russell down today after its recent run up? Three straight weeks, their rotation trade gaining some steam, and we're going to discuss that as well. It takes us to our talk of the tape, the state of mega cap tech, whether the trade is really in trouble, and if this week's critical earnings reports will reverse that selling. Let's ask Glenn Kacher. He joins me now in a CNBC exclusive. Welcome back. It's good to see you. Good to see you too, Scott. Man, I saw a report that your numbers are better than 50 percent through the first half of this year. You want to

confirm that for me? I mean, given your holdings, it's not surprising, but I saw that. Is that true? I can't confirm that officially, Scott, but we're having a nice year. And I think more importantly, I think things are setting up well for technology investors in the coming year. OK, well, that's a good place to start because some are wondering whether that really is the case after what's been an incredible first half of the year. If this trade is now in trouble, if the stocks are too expensive? How would you address that? Well, you know, we've all been doing this a long time, and it's very typical for summer to kind of people go away. They want to reduce their books a little bit. We've had a little bit of a sharp correction here in the last month

in the semiconductor universe and in some of the other large cap tech companies. So it's normal to see a little pullback. I think it's healthy. I think a little bit of skepticism around AI helps keep things in check, even though we think it's the biggest investment cycle that we've seen in our careers. So we're very excited about what's coming forward in the coming months. Is there a limit of sorts, though, to the investment that you are willing to accept? It seems as though that's one of the key questions, right, that's in the market here, especially after Alphabet. To what degree are these companies spending relative to what they're able to realize in the nearest of terms? Sure. I think you need to remember the biggest spenders in AI today, Microsoft, Google, Meta, Amazon, Oracle, Tesla, Apple.

These are some of the most profitable companies in the world. And they're also very disciplined, but they have the capital. They understand that they need to be at the leading edge of the next technology revolution, which I don't think you're going to find too many people in Silicon Valley that are going to say it's something other than AI. So these companies know they have to stay ahead of the curve. They have to stay ahead of their competitors. And we saw a year, year and a half ago, enterprise spending did slow down and was checked in the software universe, especially as people saw the opportunity in AI and realized that this generation's leaders in software hadn't yet built any AI

into their solutions. So it was normal there was going to be a pullback. I think it's interesting if you look at Morgan Stanley's numbers, for instance, software ownership is at like an eight-year low for hedge funds. And so I think there's a lot of people that are leaning back in the software investing and, you know, leaning somewhat forward in AI. But I think, as I said, it's I think there's there's a healthy amount of skepticism out there. And we think that's a good thing. Yeah. When you look at the price, you know, is one of the issues that people are raising, the forward P.E. of the tech sector in general is about 29 times. The historical average for 10 years is a touch less than 20.

So when people say, well, the stocks have done a lot, multiples have expanded an awful lot. How do you justify that move? And even if it expands further, what would you say? Yeah, I think the return on capital, I sort of walked you through those leaders, those that are spending the most on AI. I think if you looked at that group of companies, I don't think you're going to see the multiples be up as much as you're saying they are. And when we look at the multiples that we own, we own, you know, about a market multiple for the NASDAQ. And, you know, we see a lot of tailwinds coming on, coming in the next year. So, you know, we're pretty comfortable with where they are. I think the comparison that maybe we ought to be looking at is what are the multiples today versus when things

got really off track in 1999 or 2000. That was a whole different story. So there's a talk track that some technology investors and generalists looking at technology say, gosh, this is overdone. We're in bubble territory. And if you look back at the history of where the where stock, you know, where we were when things broke down in tech, they were way higher than where we are today. So I think, you know, we're we're having a little a little correct midsummer correction. Totally normal. a little correct midsummer correction totally normal well when you say that do you are you inferring that you don't think that the rotation has legs that it's it's only happening because well it's just the summer and you know things move around the way they are that it doesn't

have the staying power that some would like to believe i'm not betting on it. Really? Yeah. Even in the face of expected rate cuts, I mean, we very well might get this week the table being fully set by the Fed share for cuts coming in September. You don't think that, along with if I showed you a chart of the 10-year yield below 420 and perhaps expectations that it's going to continue to come down as well, that those are two catalysts in and of itself that would lend to the rotation trade having some more legs. Well, what I'd say is, as a tech investor, I'm trying to invest in the companies that I think are leading the next generation of great solutions and market leadership. And those companies are amongst some of the largest market cap companies in the world. You know, we still are very favorable on TSMC, for instance. We've taken some profits in our NVIDIA position, but it's still amongst the largest positions

that we have. And when I look at, you know, your average Russell 2000 stock, especially the lower part, half of those stocks, I just don't see companies that are going to be leading in the next generation of technology. They're not the companies out there that are driving new solutions, that are bringing software that actually helps customers make decisions and run their business a lot better. We don't see that. So why do I want to invest in those companies? I want to invest in the leaders in technology. That's where I see the returns coming from. What I suggested might come

this week from the Fed chair, is that sort of along the lines of what you're thinking about, that Fed chair Powell is going to set the table this week for cuts in September. Do you expect that to happen? We do, yeah. I mean, I think there's enough signs that the consumer spending is softening. And, you know, customers are getting or consumers are getting pickier at retail and looking for more deals. And so I think that sets us up for rate cuts.

But I think that's going to benefit large cap tech as well. I don't think it leaves large cap tech in some sort of difficult position. How many cuts do you expect we get this year? That's not my cup of tea. I'm a fundamental investor in technology. That's that's what I spend my time working on. But does it make you if you think that we're going to get more than one on. But does it make you, if you think that we're going to get more than one in September, does that make you even more bullish on growth as a sector? What makes me bullish is when I see the demand for NVIDIA's chips and AMD's chips and Avago's chips. And when I'm talking to people that are in the know around what Google's doing on CapEx,

Meta, Amazon, Oracle, and Tesla, and how reliant they are on GPUs going forward, and they're pushing forward on building the largest supercomputers ever built in our history. And that's what makes me bullish. Of the Amazon, Meta and Microsoft, those are those are the holdings that you have that are reporting this week. Who are you most optimistic about out of the three without suggesting you like them all? Obviously, you do because you hold all of them. But which one do you think knocks it out of the park if any of those do this week? You know, I'm not sure I've got a strong view on this quarter's earnings for those companies. I think Meta has been on a heck of a good run. And, you know, so I expect them to do well. Amazon, I think, is still underappreciated the power of AWS and the earnings power. I mean, this is a massive company,

just the hosting side of Amazon. It's got high 20s operating margins. And I think there were some that were a little investors that were skeptical of their positioning in AI, and I think that's been proven to be wrong. And so I think they're going to be a big beneficiary in AI. So I'd say those companies is great. I'd say the companies that I want to avoid the value traps are probably not in that grouping, but I'd say Intel and Global Foundries, I think those are companies that we think are maybe, there's been

a bit of a push to, okay, if we're going to, you know, onshore more of the semi-industry and somehow that's good for Intel and Global Foundries. I don't agree with that point of view. Are you showing your hand at all? I mean, you have a long short fund, obviously. Are you short those names? I can't comment on that, short fund, obviously. Are you short those names? I can't comment on that, but they're ones that I would definitely avoid. Okay. I'll leave it there. It's good catching up with you, Glenn.

I appreciate your time. We'll see you soon. Yeah, absolutely. Great to see you. All right. Be well. That's Glenn Cates, your Light Street, joining us. Dan Greenhouse is here, Solus Alternative Asset Management, as well. It's good to see you.

Welcome to Post 9. So you just heard Glenn of the rotation trade. I'm not betting on it when I asked him if he thinks it has legs. Do you agree? Well, full disclosure for the audience, I'm biased because as I've said repeatedly on air, Solus as a fund is not a particularly large tech investor. So it would be beneficial for us if this were to happen and to be sustained. We invest in a lot of smaller companies that are way outside of the MAG7. But that said, with that caveat, yeah, I think there's a little bit of something here. And again, it's not dissimilar to the argument that a lot of people, myself included, were making coming into the year, that you had just a valuation gap, earnings rotation, and ultimately Fed rate cuts were all going to play into the idea that you wouldn't have so much concentration, even though those

companies remain the best and the brightest, so to speak, in the market. So when you say, I think there's something here, why do you think the here is here? What is it based on? Listen, I look no further than what happened on the 11th with the CPI. Now, there's a lot going on here in tech. We don't need to go through it, but it's the overinvestment and the concern about the return.

But since the CPI and the idea that rates would be coming down as soon as, let's say, September, what's done best since then? It's been builders. It's been managed care. It's been a whole bunch of industries and sectors in the economy that are not tech.

It's been energy names, et cetera, et cetera. And so you've seen this rotation, the proximate cause of which appears to me clearly to have been the rate adjustment that occurred following the CPI report. So you think that has staying power? I mean, do you expect that the chair on Wednesday does what people think he might do and basically lead the market to believe that, yeah, we're cutting and we're probably doing it in September. Powell, Chair Powell in this Fed has repeatedly decided to err on the side of retaining what we'll call maximum flexibility. So is he going to endorse one as soon as the next meeting in September? Probably not.

But do I think that he will lean strongly in that direction? I think he does, yes. What does that mean, though? You don't think he'll endorse it, but he will lean strongly in that in that direction. I think he does. What does that mean, though? You don't think he'll endorse it, but he'll lean strongly. I mean, he's not going to come out and say, hey, everybody, just to let you know, we're cutting in September. Sure. But you know what? I'm sort of suggesting that he's going to make it very clear that the variables are in place for him to do that. You mentioned CPI. So inflation has been coming down. Labor market has softened. Now the

bias has shifted from where it was before. Like we don't want to move too soon. Now it's we don't want to move too late. Yeah. The return of the dual mandate. And again, I don't mean to say that any Fed official ever comes out and says, yes, we're cutting in the next meeting. But for those of us that follow this language, there are degrees to this. And sometimes you can strongly signal and sometimes you can strongly signal and sometimes you can partially signal. I think they'll come pretty close to strongly signaling that a rate cut will be happening in the fall. I mean, Kacher suggests that, look, this is where the trend is. It is one of the biggest technological advancements of our time. Agreed. You mentioned spending from

these companies, which obviously is of some concern to the market. He suggests completely justified. How can you not spend if you need to ramp up for this ever-changing technology? So how do you address that? Well, listen, you know, again, with the caveat that we're not large tech investors, it seems pretty clear to me that there are two overriding narratives here. One is that there is overinvestment, and both Mark Zuckerberg and Sundar Pichai in different instances sort of corroborated the idea that we're probably going to have to overbuild here in order to avoid falling behind. I don't think that's particularly new information, but it is something of a shock to the market

to have heard it. And then there's this concern about whether or not you're getting any sort of return on your investment. And on that front, I brought this quote with me. I must be missing something because on the call, Sundar Pichai said, quote, year to date for our AI infrastructure and generative AI solutions for cloud customers, we have already generated billions in revenue and it's being used by more than 2 million developers. My eyes have gone. I apologize.

So on the call, Google told me that they're already doing billions in revenue. And now, again, is that sufficient to justify the level of CapEx expenditures that have already happened and is happening? I don't know. I'll leave that to large CapTech investors. But it seems to me like you're starting to get some payback, at least already, according to Sundar Pichai. So then why should people move away from that trade into the areas that you suggest have staying power? Listen, again, I don't mean to suggest, and again, we're not large-tech investors. Those names are not bad names. But the question of relativity comes into play here. Do I find

if I don't have to be, listen, if my benchmark is the S&P 500 and I have to be cross-invested across sectors and industries, et cetera, et cetera, you have no choice. This is the Adam Parker argument. You have to be invested in those names. But are you suggesting that you're going to get relative outperformance from these other areas of the market over the final months of the year versus tech? Here's what I will say. think the names that we're looking at, which again are smaller, mid, large, but smaller names, are already generating meaningfully above market returns. And none of them, again, are large cap tech names. But do you think you can, do you feel comfortable that you can rely or count on the

earnings from those companies to live up to what they need to do to justify the fact that the rotation could actually have less? Absolutely. to justify the fact that the rotation could actually have less. Absolutely. Some of the names that we're invested in are particularly consumer-focused names, which I've mentioned a couple of times. I can't talk about what we own. Would you feel good about that? Because there are questions about the consumer. Yeah, I do. Well, hold on. So, yes, there's questions about the lower-income consumer. And that has gotten worse this quarter. And I say this every quarter. My favorite thing to do is read the Visa transcript or listen to the call. Visa, for the first time last quarter, said no problems at all across income cohorts.

This quarter, Visa said we're starting to see something in the lower-income consumer. You hear that from Tractor Supply. You hear it from any number of companies. McDonald's, I mean, I know the stock is up, but their commentary about the consumer wasn't all that great. It wasn't great at all. Now, but again, the names were invested in are not particularly weighted solely to the low-income consumer. But the companies and the industries in which we are playing in the consumer space have been doing fine. And based on our checks and company commentary, et cetera, we've seen no indication in those industries that the consumer is slowing at all. The three-week-in-a-row run that the Russell has had, you feel like that's legit? Is it the beginning of something more legitimate?

Legit, beginning, sustainable. Three separate questions. Legit, absolutely. The beginning of something probably sustainable, not in the short term. Even with rate cuts? Well, listen, just in the degree of outperformance in the short term. I think when you even with rate cuts. Well, listen, just in the degree of outperformance in the short term here among small cap stocks relative to the like you've erased, as I think Stephanie was talking about on the halftime show, you basically erased the entire performance gap between the Q's and the IWM, let's say. The Russell's up 9% in a

month. Sure. OK, I get your point on that. So when you look historically, if I'm going to data mine over the next call at 30, 60, 90 days even, that's probably going to balance out somewhat. But again, do I think as an investor in not large cap tech, other names, that I'm going to have better performance, better flows, better positioning over the next 6, 9, 12 months? Yes, I do. That's not to suggest that the large cap names are bad or going to go down. Look, you don't have to put out 45 disclaimers. I get it. You're not a big investor in large cap tech. You don't think they're bad companies. I'm trying not to get my the large cap names are bad or going to go down. Look, you don't have to put out 45 disclaimers. I get it. You're not a big investor in large cap tech.

You don't think they're bad companies. I'm trying not to get my compliance department to fire me. No, if they fire you after three disclaimers, then we've got a problem. We'll talk about it next time. Okay, thank you. Dan Greenhouse, Solis, joining us here at Post 9. Breaking news out of the Treasury. Megan Casella has the story.

What do we know? Hey, Scott, the Treasury Department is out with its latest borrowing forecast, estimating it will need to borrow $740 billion in the third quarter. That's $106 billion lower than the earlier forecast, largely due to the Federal Reserve's move last month to begin slowing the pace of quantitative tightening. They also had higher cash on hand to begin the quarter. Officials say they expect to end the quarter now with a cash balance of $850 billion.

Looking ahead, Treasury expects to borrow $565 billion in the fourth quarter of this year. That's roughly in line with previous fourth quarters, but some forecasters have noted how difficult it is to make fourth quarter projections with any degree of confidence because of the uncertainty surrounding tax receipts. But even still, for both Q3 and Q4, today's estimates are below expectations.

That should come as a relief to the Treasury market, which in recent months had been overwhelmed by supply. Now, we do have to wait until Wednesday to hear the breakdown in tenors for the debt, but we do know Treasury has said it anticipates being able to hold auction sizes steady from previous quarters. Scott. Megan, appreciate it very much with that update. Interested to see what yields do on the back of that. It's certainly been one of the pressure points in past months and the reads on that. So we'll follow it. Megan Casella joining us from D.C. to Pippa Stevens now for a look at the biggest names moving into the close. Pippa. Hey, Scott. Well, shares of Alibaba are in the green following a Bloomberg report that the e-commerce company plans to boost service fees for merchants. Alibaba will reportedly start

charging a basic software service fee of 0.6% on transactions instead of the fixed amount it currently charges. And to beg with box office debut for Deadpool and Wolverine boosting Disney shares today. The new Marvel movie topped 200 million at the domestic box office, outpacing analysts estimates for 160 to 180 million. And it saw a record opening weekend for an R-rated film. Those shares up 2.6 percent. Scott? All right, Pippa, appreciate it. That's Pippa Stevens. We're just getting started. Up next, we're tracking the big money. Morgan Stanley's Chris Toomey is back with us, ranked among the top three private wealth management teams by Barron's. We'll find out what

he's expecting from stocks in the months ahead, how he's advising his clients right now. It's just after the break, live from from New York Stock Exchange. You're watching Closing Bell on CNBC. We are gearing up for a very busy week of corporate earnings. Got a Fed meeting and all of that. My next guest says expectations for mega cap tech has gotten, quote, out of hand. Could lead to more downward pressure on that sector. Joining me here at Post 9 is Morgan Stanley's Chris Toomey. Welcome back. Why is it out of hand? Well, I don't know that it's necessarily

out of hand. I think it's probably gotten too far ahead of itself. We saw a situation where about 73 percent of return is coming from these mega cap companies. I think it was time for a breezer. If you look at the kind of three different things we were concerned about the last time, we saw a fair amount of complacency with the market. It was just kind of grinding higher expectations going into earnings right now. Typically, you start to see those earnings come back about 4%, and now they were actually being raised about 1%. And now we've got that seasonality period where markets typically, particularly risk markets, don't do very well. So what do you take from the fact that you had this, I don't know, NASDAQ's down like 7%, whatever, from the high? Over the last month, I've got the Russell, which has ripped,

and the Dow's up near 4% over the last month. What is more representative, do you think, about where stocks are going to go from here? What's happened with the NASDAQ, or what's happened with everything else? I think it's probably both, to be honest with you. I think what we saw was kind of those mega tech companies were way overbought and you saw a lot of names that way oversold. And typically what that means is you've got an offsides where people are really long one names, really short other names.

And what you can see is that pullback in those names that have done so well and those names that haven't done well shooting up. So if you look at the dynamics now, some of those names are actually oversold and some of those names that have been up are now overbought. And you can particularly see that if you look at kind of short sale reports, names that are overly shorted, those are the names that are doing particularly well right now. How would you characterize your sort of overall view of the markets as we sit here today? I think they're probably extended. I think expectations for earnings are probably a little bit too rich. PE multiples are too rich. I think seeing these tech companies come down to earth is healthy. And I think it's presenting an opportunity within that 493 going into earnings where expectations aren't as high to actually start outperforming.

So in our view, you're in a situation where you've got a lot of names that have done really well. Markets probably overcompensated for that growth. Expectations are too high. So you can even see that last week with some of those mega tap names that actually beat earnings actually trading off because expectations were so high. Some of these names that have been ignored where earnings haven't been great, those expectations are pretty low. Those are some opportunities to see the market actually kind of spread out and start doing better. So what does that mean? What word would you use to describe yourself? Are you cautious? I'm definitely cautious. So I think in this situation, you know, earnings are going to be a key part to this. We expect kind of the monetary policy

is basically kind of treading along as we'd expect in this Goldilocks world of kind of better growth, kind of less inflation, unemployment kind of normalizing. It's really about kind of PE multiples coming in and kind of stock selection right now. really about kind of PE multiples coming in and kind of stock selection right now. How can you use Goldilocks and cautious in the same sentence? Well, I mean, look, remember Goldilocks came about during the tech boom and tech wreck, right? So the concern is that people continue to follow this trend

in perpetuity until it gets overextended and then we see a crash. We're having a rotation, though. You know, look, I don't necessarily see this as completely following through. I think particularly with regards to small caps, the trade there is, oh, look, it's starting to do well. We're going to get rate cuts. But that doesn't necessarily mean that that's going to be great for all small cap companies.

In my mind, broadly speaking, small caps aren't necessarily the place to be. But there are specific areas within small cap and specific areas within 493 that we think are some real opportunities that are going to present themselves through earnings. So we're not necessarily adding a lot of equity exposure. We're taking advantage of some of these pullbacks and opportunities to invest selectively in these different markets. If rates continue to come in, okay, and the Fed signals that they're gonna cut in September, you don't think that money's gonna come out of cash equivalents and come into the equity market? Look, I think what you'll probably start to see

is a situation where, looking at these earnings, it's not gonna be a solve everything, right? You've got a situation where it's almost 40% of the Russell 2000 is unprofitable and dependent on the debt markets, right? And you're in a situation where they're also very dependent on the consumer. So going just 25 basis points in September,

that's like your credit card company saying, we're gonna take your rates from 25% to 20%. Yeah, that's great. But that's not necessarily going to solve your problem. You're still paying 20% on that debt. No, but what about other cyclical areas of the market that have done well? It's not like it's not the Russell's the only thing that's done well. That's obviously not the case. Absolutely. So I think to my point, I think selective areas in the cyclical area of the market, particularly in industrials, look attractive to us right now. They're underappreciated, undervalued, and there's an expectation that are lower that we think they can benefit from, as well as the fact that we are changing our regime. We're in an environment where the Fed is singling and they are cutting rates, which should benefit them. And what I think is misunderstood is that I think when the Fed starts cutting, the expectation is that benefits small caps better than large caps. And in reality,

it actually benefits large caps. The issue is, is when the Fed really starts cutting rates, typically it's too late and something bad has happened. And that's why- But maybe that's not the case this time. Right. That's what they want to prevent that from happening. A hundred percent. But remember, we're in a situation where we're kind of pressing the gash with regards to fiscal policy and pressing the brakes with regards to monetary policy. It's tough to drive the car when you do that. And the expectation is that we're going to easily land this is being priced in the market. And in our view, that is something that you need to account for and actually be cautious of. I mean, there's still a fair amount of

skepticism in the market overall. I know that the market's gone up a lot, but I don't feel like everybody is on the bullish train. You take issue with that? Yeah. I mean, I think if you look at chief strategists around Wall Street, they're all raising their numbers high. Well, they're chasing it. They're chasing it, right? And so are the long-only managers and the hedge fund managers. They're all chasing this. But in reality, when you look at it, earnings for the top 10 tech companies have been great, but PE multiples have been much greater. And if you look at earnings at the 493, the reason why they're only up about 5% year to date is because earnings aren't very exciting. So in our minds, we want to see the market come back a little bit to more reasonable levels and selectively start buying in some of those areas that we like.

This is the last question. When do you sit back and say, you know what, the goalposts have moved in a very significant way, and this market's just going up? This market's going up. Fed's cutting. Why fight it? Fed overarches everything. When the Fed said that they were hiking, the market couldn't get out of its own way. Why wouldn't it be the complete opposite now? I think it's not necessarily a situation with regards to whether or not we think the economic environment is OK. I just don't think the earnings profile justifies the price that we're paying. So if we got a situation where prices came back, which we're seeing right now,

we would be a lot more excited to put money to work with the names that we use. Are you being specific to the mega cap stocks where you don't think the earnings justify the price we're paying? Because I mean, that's just one small but large part of the market. Yeah. But we're talking about a small number of stocks with a especially large weighting to the overall performance. So let me put it this way. We think those names are probably expensive right now. We think they could come back 10% to 15%.

We're already seeing in some of those names them coming back 10% to 15%. That being said, excellent businesses, excellent growth profile, and what we also like is tons of cash and cash generation. If you look at those companies, they own 40% of the market cap of the equity market, but only 6% of the investment grade debt market, which means they're not dependent on debt. So if we see a situation where rates are higher for longer,

they will continue to benefit. We just want to buy them at a better price. Okay. Chris Toomey, good to see you again. Good to see you. All right. Up next, Sycamore Tree Capital's Marco Cata is back. He's going to tell us why he's taking what he calls a rare stance on the market.

He'll tell us what it is, what it means for your money. He'll join us at Post 9 after the break. We are back. The Federal Reserve's two-day policy meeting kicking off tomorrow. The central bank set to release its rate decision Wednesday. My next guest turning bullish on the market thanks to what he is calling Fed Chair Powell's pivot party. Joining me now, Post 9, Mark Okada, Sycamore Tree Capital Partners. Welcome back. It's good to see you.

Good to see you, Scott. So the Fed has been everything to you in your view of the market and how it's changed. Yeah, sure. I mean, the move that they announced in December was massive because if they're going to stop leaning on the market and then think about when they're going to cut next, that's the price of money. And the price of money determines everything that we do. Don't fight the Fed. Yeah, that's pretty simple. I mean, I'm a credit guy, so we got to do simple things, right? It can't be too complicated. Just the big picture, when the Fed's not in your face, that's a good thing. Let's go get some risk.

And it's been a good call, a great call. No, for sure. Do you think he goes a step further on Wednesday, Chair Powell, and sets the table? I've been using that sort of phrase, sets the table for cuts in September? I hope so. It gets priced in. It's all priced in. It's all priced in now. Yeah. I mean,. It gets priced in. It's all priced in. It's all priced in now.

Yeah. I mean, that's already priced in the market. All these valuations we see are betting on a September rate cut. If it doesn't happen, it's kind of upsetting. Or even if they did it this week, which we won't, that would be upsetting too, because that means they see something that we don't see. Well, there's no reason to see anything that we don't see, right? I mean, inflation has been coming down. Labor market's been softening. Kind of getting everything that they really needed to have happen, no? Sure.

Yeah. Yeah. So when you say it's a good time for risk, where? Well, you know, I'm a credit guy, so credit's been good. The call was based on fundamentals. It was based on yields. It was based on fundamentals. It was based on yields. It was based on liquidity. So this would surprise you, but the amount of distressed debt outstanding today is less than pre-COVID.

And with all the people coming on, they're talking up their distressed debt funds. It's a little disingenuous because we have less distressed now than we had pre-COVID. So that's fun. And interest coverage is actually fine. It came down a little bit, but it's kind of normalizing. So that's fundamental. You can't get in trouble with those things happening that way. So these are obvious things, right? We're talking about a credit guy. Second thing would be yield. Spreads are tight across the board. Leveraged loan spreads are kind of in the 50% mark, but when you look at yield,

just the earnings yield on IT is better than the S&P earnings yield. So that doesn't happen very often. And also the yield on a lot of the stuff we do is in the 80th, 90th percentile for all time. I've been doing this a long time, and if I can make six or seven percent, I'm like having to take a lot of risk to do that, Scott. Right now we can make eight and we're not

taking that much risk. So you're not thinking that we're going to have a recession, that things are going to get bad to the point where it spreads wide and all that stuff? No, we don't see it. The GDP numbers, the PCE, even the labor stuff and the consumer stuff looks like it's weakening, but it's weakening from a pretty strong place. I don't see the recession anytime soon. People come in and talk about it, but I don't see it. And so we don't see that. And then liquidity is the last piece. It's been good. A lot of flows into a lot of things we're doing when flows are coming in. That's always good. How many cuts do you think we're going to get? That's a great question. I think that they do, once they start this,

they need to be measured, because the reason they're doing this, right, is they see maybe some cracks in the labor market and they've done their job on inflation. So one and done wouldn't seem to work that way. I think at some point we'll get two or three of these. And if we get 75, 100 basis points of cuts, that wouldn't surprise me, per se.

What would surprise me is if they went beyond that. I think we would be in a recessionary environment if they went beyond something like that. Oh, they'd do it because they have to, right? Right. The economy and the labor market would be forced in their hands. How does, I mean, you've called yourself a credit guy with good reason, but how does a credit guy view the stock market today,

given all that you just said about what looks best to you in your own sort of genre? So this latest correction has been getting some attention from where we sit. So the move has been pretty amazing. I'm trying to figure out where that's coming from. People come on here, they talk about earnings, they talk about rotations. The one place that I think that seems to make sense to me is what's happened with the yen.

So on July 10th, 11th, the Bank of Japan probably intervened. We don't know, they won't tell us, but the yen has moved 5% from that date. That's the only big sort of macro move that I've seen that would explain any of this, because short yen, long tech has been a really popular trade because the one outlier globally in the whole world is the Bank of Japan with their rates and Brock said he said

Borrowing in yen to invest in anything risk has been working great and it's a lever trade But you move 5% in the end in a three-week week period you're gonna take out a lot of those yen carry trades that seemed to be kind of Interesting to me. It seems early too because the amount of short still in yen is pretty big. So that liquidity drain, that forced selling out of the yen carry trade could keep going. I pay attention to that. So you think that could have a little more pressure on performance of tech? Feels like it to me.

I don't know. I'm not a stock guy. No, but you see all things in all markets. So, you know, you can see something in one market which has a cause and effect, as you're suggesting it does to another. Exactly. And the other thing is, is the the sort of volatility we have across a lot of things that we thought were set. We thought the election was set. Election's not set. We thought we would know what policy would be between these two candidates. That doesn't seem to be set. So there's a lot of political volatility that the market has to deal with right now.

And I don't feel great about that. And then we could talk about the whole debt debacle and the Liz Trust moment and the potential for that. But that seems to be getting worse and worse. And the bond market seems to not care and i hope it never cares but at some point if it starts to care scott that's going to be quite something that that everybody's going to need i know we do get a respite today i mean the treasury says you know a short time ago they're going to borrow less yields take a little bit of a move lower from where they already were all right

it means we need to talk to you more often we We'll see you soon. Thanks for having me, Scott. Yeah, thanks for being here. Mark Okada of Sycamore Tree joining us right here. Up next, we're tracking the biggest movers into the close. Pippa Stevens is back with that. Pippa. Hey, Scott. Well, two companies, including a chip stock, making big moves post-earnings.

All the details coming up next. We're less than 15 from the closing bell. Back to Pippa Stevens now for a look at the key stocks that she is watching. Pippa. On Semiconductor is jumping 12 percent, tracking for its best day since November 2022, after the chip company beat expectations on the top and bottom line during Q2. It's the top performer in the S&P today, and the second best performer is Revity, with those shares up 9%. The life sciences company hitting a new 52-week high after a stronger-than-expected Q2 earnings report and updated full-year guidance. Scott?

All right, Pippa, appreciate that. Pippa Stevens still ahead. McDonald's surprising pop today. Fast food chain jumping despite some ugly global sales data. We're going to drill down on that. What's at stake for that stock coming up, which is having a really good day today, up near 4%. Back right after this. We are in the closing bell market zone. Kate Rogers joins us. Bill LeBeau on what's sparking today's rally in Tesla shares. And T. Rose Sebastian Page here to

break down these crucial moments of the trading day. Kate, we begin with you. Not such a great earnings report, though the stock doesn't reflect that. What's happening? Yes, Scott, I think a lot of this was forecasted by executives previously, so it was a tough quarter for the fast food giant, missing estimates across the board. Its second straight EPS miss. As for same store sales, those also missed the mark in every segment. In the U.S., its key market down 0.7 percent for the quarter. As CEO Chris Kempchinsky said its value leadership gap in the category had shrunk, adding that the consumer slowdown was most pronounced with low-income consumers. That $5 value deal began on June 25th, not really reflected in this quarter,

which ended on the 30th. And while 93 percent of restaurants will extend the offer into August, management seems keen on continuing that further. In fact, we obtained a memo today to U.S. owners from President Joe Erlinger that said, quote, value and affordability have been part of our DNA since we first opened our doors, but we have an affordability gap to close and we must continue to take actions that show our customers we are listening. That clearly speaking to upcoming decisions regarding value that franchisees will have to make. Scott? All right, Kate Rogers, thank you for that. To Phil LeBeau and Adam Jonas Talks,ors apparently listen, Phil. When you change your top pick, they listen. It used to be Ford. Now it is Tesla. Why? Well, he says there's about a 40 percent upside to the 310

price target that he has out there. He gives a whole bunch of reasons. We're not going to go through all of them, but three primary reasons. First of all, the cost cutting that have been put in place, the restructuring of the auto business and or the EV business at Tesla, that limits downside risk. They are doing way more with zero emission vehicle credits than anybody else had. Eight hundred ninety million dollars worth in the last quarter. That's going to help them. And they're also managing their China exposure. One change in terms of how the street looks at Tesla in terms of annual deliveries, it used to be the street was expecting them to hit one point eight two million. No longer. The estimate, the consensus is one point seven nine million, which would be a year over year decline in deliveries if that ends up

being the actual number. Finally, to take a look at Tesla, Adam Jonas points out that the robo-taxi event October 10th dialed dial back the expectations. It's probably the prudent thing to do, according to Adam Jonas. Doesn't mean that he's given up on it. He just thinks that people might have gotten a little bit too worked up, Scott. All right. Good stuff, Bill. Thank you. That's Phil LeBeau covering Tesla for us. Who's the bastion page now? T-Row, it's good to see you. What about this rotation? Staying power or not? That seems to be a good point of debate on today's program. Yes, I think there is staying power for the rotation. If I look at about 12 months, Scott, I would rather play it in value than in small.

And it's interesting because, yeah, I've been following on halftime and closing bell. Small is, you know, the star of the show for the rotation. But I like value better. Value has a return on equity of 13 percent. Small has a return on equity of 2 percent. So we're long value, but neutral between small and large. Where are you on the market overall? I mean, I find it hard to believe that you could be long value and then negative on the market. Look, Scott, we've never had, I would say, this intensity of debate in our asset allocation committee between the bulls and the bear. We're at our neutral weights, which means fully invested in stocks and bonds at our strategic asset allocation. To oversimplify,

Scott, this is what the bears are saying. They're saying the economy is slowing down and we have high market valuations. This is what the bears are saying for a year. The bears have been saying that for a year. I know. And here's what the bulls are saying. The bulls are saying, well, earnings are coming up and rates are coming down. So, you know, you end up in this push and pull debate. And that's how we're kind of, you know, we're comfortable being neutral. You're comfortable being neutral, even though and you've been neutral for a while. I'm trying to figure out when you move off the comfort level. I would love to see a bigger market pullback.

Right now, we're playing the rotation, as I said, with long value. I would love to see the VIX go into 25, 30 range and the market pullback. We haven't had a big pullback. Look, in terms of valuations, 21 is elevated by historical standards. The NASDAQ 100 is up 50% in two years. The S&P is up 36% in two years. So, you know, I think we're due for a pullback. And these are the types of times where we like to actually go long-stop.

We'll leave it there. To Bell, Drigg and Sebastian, thank you. I'll see you tomorrow. Big week underway.