Deep Dive
Shownotes Transcript
Brian Stewart, welcome back to Wall Street Breakfast. Always great to talk to you on these weekend or nearly weekend editions. Yeah, great to be here. Thanks a lot. So you were just mentioning that you actually have some optimism in your purview of the markets this week, which is very exciting. Not so much optimism.
In the past few months since the start of the year, perhaps maybe longer, talk to us about where that optimism is coming from. Sure. As I was sifting through the earnings and other news items this week, I think things are less egregious than they've been sort of over the course of the year so far. I think there's reasons to have some rose-tinted glasses on.
on for this week. I think one of the standouts was Disney up 11% following its earnings report. That was earlier this week, but it's following up today with a 3% rise. So there's no give back from that large earnings pop.
Meanwhile, the company beat expectations. It showed pretty strong streaming efforts. That's important for Disney, especially because they're planning an ESPN-focused streamer to come out this fall. So to be able to monetize their streaming assets is important with that coming. Another headline that came out of that was plans to build a new park, this time in Abu Dhabi, and that's
you know, a long-term thing that's not going to be out. It's not gonna be built and open until the early 2030s, but it's still a sign of confidence in overall travel. And I don't think it's a coincidence that airlines are up significantly today. So United is up, UAL is up 6%, American is up 6%, Delta is up 7% today. And that's after already being up. So all those airlines were up in the previous five days.
as well. And I think that's just a general view that travel is pretty solid. The airlines are also being helped by the announcement that the Treasury Secretary is going to look into a major overhaul of the air traffic system. That's been a real stumbling block so far this year, a lot of kind of minor incidents and worrisome trends there that have caused air
airlines to cut back their schedules. And so if that can get taken care of, that opens up the possibilities for more flights and hopefully consumer demand holds up. And anything to point out? We saw a number of reports this week also from some internet players. How would you contextualize the news that you saw out of them? Yeah, that was certainly a major theme this week.
a lot of gains coming from companies that are tied into internet commerce. I think the headliner there is Applovin, ticker is APP. That was up 13% today following its earnings reports. It was already up going into the report, so people were already optimistic. It had strong results and provided upbeat advertising guidance. That's a volatile stock. It's still off its 52-week highs, so it moves around a lot. So you kind of have to take the move with a grain of salt. But
there is a sign of confidence from investors in the internet commerce space, and that's being supported by gains elsewhere. So for instance, HIMSS is up at
after its earnings as well. It surged in late April on a deal with Novo Nordisk related to its weight loss drug, but has continued gains in the past week on strong earnings. Similarly, Carvana, which is basically an online car dealership, it's up 11% after its earnings. It saw initial drop after earnings, which is kind of routine for Carvana. Its valuation is such that there's always kind of a note of skepticism immediately after the earnings are released. But
It turned around and is up now. It posted record income, record net margins, and a 46% retail unit growth, which is the best in the industry. So there's signs that...
that people are still buying, that are still turning to online sources to get their products. And as a just sort of aside to the Bumble is up 22% today on its earnings. So obviously they don't sell anything per se, but that's just more engagement. This kind of comes after a strong results from Meta earlier this month. So pointing to people are still kind of connected online, still engaged. So the worries about the economy haven't fully
disconnected people from commerce. Also, I think these companies are benefiting from the knock-on effects from AI as they get more efficient, as they get better at connecting people with the type of content they want, moving people towards the type of products that they might want to buy. I think that these are the types of companies that are going to benefit most from that.
Anything in terms of guidance or calls that had you surprised this week? So as people largely predicted, there was a trend towards giving more vague guidance, either polling 2025 guidance or just noting that.
whatever guidance they gave comes with a note of uncertainty because of the current economic situation. So in that context, I think that the guidance that we've been getting from companies is surprisingly good, even if it is less specific than we might have predicted before. Companies seem to be cautiously optimistic. So it's kind of optimistic with an asterisk. And then you kind of read the footnote and the problem is that the economy isn't as
There isn't much visibility about the economy as one would hope. But even in that context, companies are keeping their head up and moving forward. So as it relates to earnings, we're still having some trickle in next week. What would you say are the earnings you're most focused on and why? Yeah, the biggest names are kind of behind us. There's still some headliners yet to come. But the pace at which we're going to get blockbuster earnings is definitely slowing down, kind of hitting a wall.
I think next week, the main headliner is going to be Walmart. They report on Thursday. Obviously, a huge barometer of consumer sentiment. So you can kind of take them as a sign of retailers moving.
They're a little bit insulated from the tariff concerns, although I would definitely look into their earnings call for whatever commentary their leadership has about the tariff situation. But Walmart being a low cost play already works in a situation where things might be inflationary. Consumers tend to move down market in that situation and Walmart's already there to capture that.
added demand. Meanwhile, Walmart's so big that they can put a lot of pressure on their suppliers to keep prices low, even in a situation where tariffs might otherwise affect them.
Another issue that you might hear from Walmart is about supply chains. One of the effects of the tariffs isn't just that things would get more expensive, but that certain things might not be available with companies having to change the way they produce things. It's not just that you get final goods from
from China that end up on store shelves, but companies that produce things get their supplies, their raw materials from China. So you might end up in a situation where Walmart just doesn't have the types of things that it always has available. So it would be interesting to hear from them about that. And then Cisco is the biggest name in the technology field to look for next week. So I think
Given kind of a dearth of earnings in the technology space, I think Cisco is going to get a lot of focus. And then as we switch to a macro viewpoint, we had, as we discussed last week, the meeting from the Fed. They held rates again. Talk to us about what you're seeing between Powell and Trump and out of the Fed and how the markets reacted and how you see that going.
So the Fed took a very strange course in communicating with the market. It left rates unchanged, which everybody expected. So no big thing there. But when they released their statement, they changed the wording to say that they judged the risks of higher unemployment and higher inflation have risen. So
Just backing up a little bit, the Fed has a dual mandate basically to support employment and to fight inflation. And typically these are viewed as in competition with each other. So as you lower rates, you make inflation more likely, but you give a boost to the economy, which makes sure that there's enough jobs. And if you raise rates, you pinch the economy, which can make unemployment go up, but
you cut off the conditions that create inflation. So basically, in broad terms, the Fed can
either fight inflation or support unemployment and can't really do both at the same time because its main lever is interest rates and it kind of affects them in opposite directions. So saying that the risks of both have risen is a little disturbing for market watchers just because A, that points to a stagflationary environment, which is sort of worst case scenario. Secondly, it implies that there's really nothing the Fed can do because you're kind of
Damned if you do, damned if you don't in that situation. And you can kind of see this playing out in the expectations for the next quarter.
Fed mood move. So the June meeting is now an 83% chance of a no cut. People were expecting the Fed to start cutting rates in June. That chance was 42% a week ago. So that jumped from 42 to 83. And then it was around 25% at the end of March. So generally people thought that June was a good time for the Fed to start cutting rates. And now it looks like the Fed is in perpetual
wait and see mode, or at least wait and see for another meeting. In July, things start to change. There's only a 38% chance of no cut by the end of that meeting and only a 10% chance of no cut by the end of September meeting. So basically the sort of June, July timeframe has been moved to July, September. Meanwhile, if we look to the end of the year, there's a 20% chance that rates will be a full percentage
point lower at the end of 2025. That was 38% a week ago. So the expectation that we'd have rate cuts starting June and July, we'd have multiple rate cuts by the end of the year is starting to diminish. And now it's shifted
later in the year and the chances of multiple rate cuts are a little lower than they used to be. So the Fed is signaling that it's getting stuck, that it doesn't quite know what to do. Meanwhile, it's getting a lot of pressure politically. Trump especially just called Chairman Powell a fool for not cutting rates this time around.
So I honestly think the Fed is in a bit of a bind. I'm not sure how they're going to get out of it. Obviously, the market is seeing rate cuts as the next move. So eventually, I think the Fed's going to have to give up a little bit on inflation.
admit that there's nothing they can do about tariffs and worry about the underlying economy. Have you ever seen a media dance such as the tango that's happening between Trump and Powell? Have you ever seen any kind of dialogue like this between a Fed chairman and a president? So there's always a little bit of pressure from presidents. It's a lot more coded historically. I'm doing this off the top of my head, but I know that there was a pretty rancorous
give and take between Nixon and his Fed chairman at the time. That was sort of peak stagflation. So you're talking about kind of the worst possible economic situation. In recent memory in the 21st century, no, but honestly, that's just Trump being Trump, not to sort of excuse it. I personally think that there should be a division between the political aspects of
fiscal policy and the monetary policy. That's no fun. Where's the fun in that? I mean, all I'm saying is it's not unexpected from Trump that he would be outspoken in this. And as I've stated before, Powell has shown an ability, like a real backbone to stand up to both market pressure and political pressure in the past. So I don't expect Powell to
to respond. I don't think he's going to change his path based on anything Trump is saying. Now, the other side of the coin is I think Powell's also shown a certain amount of stubbornness. I think he waited way too long after COVID to fight inflation. You kind of take the good with the bad in that case. So I think it's an open question whether the Fed's waiting has any value whatsoever if the underlying economy is showing signs of weakness and the main inflationary pressure is tariffs, which is outside the
the Fed's purview anyway, then maybe fighting inflation goes to the wayside. You know, stagflation is the worst case scenario. And so I think Powell's doing everything that he can, everything he can kind of envision to sort of avoid that scenario. And in closing, let's spend a minute or two on the bond market. What are you seeing out of treasuries? How are investors relating to the macro side of things? What are you seeing from the bond market?
Yeah, just looking at the 10-year, the 10-year rates are up today. The yield on 10-year is up. It's been pretty volatile the last few weeks. There's not been much
move in either direction. There's been a slight move down in the 10-year rate over, say, since February. But overall, I think that uncertainty is the main watchword. The bond market is much more plugged into the macro world than the stock market. The stock market is looking at things like earnings and other aspects. Also, it tends to be more
more fear and greed driven, whereas the bond market, I think, is much more based on the fundamentals. The evidence of the last, say, few weeks seems to be that the bond market doesn't know which way things are going. You'll see sharp drops in yields and then sharp
rebalance the other way. So I think like the Fed, they're in a wait and see. I'm talking about bond traders here. They're in a wait and see kind of mode, kind of waiting to see which shakes first, inflation or the economy.
So I said that would be in closing, but let's end with a bit of tariff talk. We saw the deal between the UK and the US take shape this week. What else are you seeing from the tariff side of things? Speaking of waiting and seeing, we're waiting and seeing on the China side of things. What are you seeing from investors, from the marketplace and from your news sources? Yeah, so stocks are up today. Trump just announced
a little bit before we started recording that they had signed a trade deal with the UK and during his remarks related to that he
gave pretty upbeat discussion about the prospects of a deal with China, saying he was willing to work with China and saying that if talks were going well, he'd be willing to reduce tariffs sort of in the interim. I think that's what the market wants to hear is that tariffs are going away at some point or at least falling to a modest level. So I think anything that points in that direction is going to be bullish for stocks.
And the question remains just to what extent was the draconian tariffs that Trump announced a bargaining chip and how much was it real position? These episodes will be up with transcriptions at SeekingAlpha.com slash WSB. And join the highest level discussion of any stock or ETF with our community of serious investors like you. Find us at SeekingAlpha.com slash subscriptions.