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Big week for financial earnings (0:20). Dearth of economic data given government shutdown (3:20). AI dealmaking (6:50). CAT’s valuation (10:40). Gold hitting new highs (13:30). Bitcoin and crypto liquidations (15:20). Bond update (17:15).
Transcript
Rena Sherbill: Brian Stewart, our Director of news at Seeking Alpha, we’ve been away for a couple weeks. Welcome back.
Brian Stewart: Great to be back.
RS: We’ve got trade war considerations. We’ve got some bank earnings. We’ve got a prolonged government shutdown. Where are we starting this week?
BS: I think financial stocks is the best place to start. As you point out, it was a big week for financial earnings. That’s usually the leading edge of the earning season is the financial stocks release their results. So that was the theme this week.
And we actually saw a lot of love for the big financial names when they released earnings earlier this week. So Wells Fargo (WFC) was one of the biggest upside results from that. It jumped 7% in the day after its results.
Meanwhile, you saw Morgan Stanley (MS) up 5%, Citi (C) up 4%, Bank of America (BAC) up 4%. You saw strength in deal making and investment banking, which tracks with the overall anecdotal evidence that we have.
IPO market has been opening up. You see a lot of deals being announced. So I think that that fits with the general themes that we’ve been seeing lately.
Also on the economic front, you didn’t see a huge dent in consumer credit that the big banks were announcing. So it’s a sign that the consumer is holding up. Their loan delinquencies are not going up dramatically.
That was a positive view. But then later in the week, we got hit by some concerning news from series of regional banks. So you saw Zion Bancorp (ZION) dropping 13% on Thursday after a 50,000,000 loan write down.
You saw Jefferies (JEF) drop 11% after it revealed exposure to a bankrupt auto parts maker, and then Western Alliance (WAL) was down 11% after it announced it had to sue a significant borrower for alleged fraud.
You saw these losses carry over to other regional banks. So there seems to be a little bit of a split.
There seems to be an advantage in the financial world being large, diversified, tied to the Wall Street aspect of things, whereas the private credit sector is beginning to see a few concerning situations, companies failing and rolling over into the financial sector.
And then to top it all off or at least to summarize the situation, you had Jamie Dimon give kind of a now famous quote where he said, when you see one cockroach – I’m paraphrasing, when you see one cockroach, you tend to see more.
He was talking about these higher profile failures that have been cropping up lately in the private credit market. So that is a concerning sign as we roll into a time of economic uncertainty.
RS: Speaking of that economic uncertainty, what would you say about the dearth of economic data releases given the government shutdown? What would you say about or are there parallels? Are there things that we may learn once the shutdown ends?
BS: I think that’s the biggest result so far of the government shutdown.
The market has been pretty resilient. The shutdown’s been going on for seventeen days so far. It started in October. So basically, the entire month so far, it’s been shut down.
This is now the third longest shutdown in US history. The longest one took place in Trump’s first term, and then there was a a twenty one day one during the 1995/1996 time frame.
Now we’re into the seventeenth day that’ll almost certainly pass the twenty one days of that nineties Clinton era shutdown. There’s not gonna be any movement till at least Monday. The Senate is shut down until then. So there’s not even a glimmer of a hope that it would happen over the weekend.
So the next stage in terms of becoming the longest shutdown in history is another thirty five days is the one in the Trump era. So I think that’s in play. It doesn’t seem like there’s a lot of movement in terms of deal making.
So it seems like congress and the president are happy to let this ride out, kind of just sending snipes at each other. And the market seems to have mostly shrugged it out.
But as you’re pointing out, I think the dearth of data is the biggest consequence so far.
We’re gonna get some CPI data next week. It was supposed to come this week, but it was delayed because of the shutdown. Also, we didn’t get the last monthly jobs report because the shutdown. So in a lot of ways, investors are flying blind on that front.
I think the inflation data will be interesting. I don’t know how much it’ll change the outlook unless it’s a dramatic either spike or disinflationary, data. I think most people kind of figure it’ll be in line with what we’ve been seeing, in the 3% range, 2.8, 2.9, 3% range in terms of annual inflation rate.
So I think we’re pricing in that to continue. I think the lack of jobs data is a bigger deal just because that was showing signs of weakening as we went into it. We had not only soft jobs growth in the months that are being announced, but there were a lot of revisions in the data, famously, leading to the head of the statistical agency getting fired by Trump.
So we could come out of it like you’re pointing out. We could come out of it with jobs data where we catch up for a few months and find out that things have been bad for a while. Or I suppose we could come out of it and find out that things have jumped back.
Like I like I said, the data coming from things like earnings reports and other economic indicators, the private sector economic indicators have been pretty mixed.
You see positive signs. And so I think the market generally is cautiously optimistic. And in terms of the the stock market letting the AI enthusiasm churn the market higher, broadly speaking.
RS: Speaking of that AI enthusiasm, what would you say investors are the most enthusiastic about these days and any highlights to point out?
BS: I still think we’re living in a situation where the deal making economy is what’s driving the market.
You’ve seen a lot of situations where stocks get a lot of love after announcing a big deal with a major AI player or you have, like in the case like Intel (INTC), you have a deal where they are receiving investment from a company like Nvidia (NVDA).
And so that theme has continued. So for instance, in the past week, we saw OpenAI announce three different deals. They announced a deal with Broadcom (AVGO). They announced a deal with Salesforce (CRM). And and a really interesting one with Walmart (WMT).
Walmart ticked up 5% on Tuesday and reached a 52 week high after announcing that it partnered with OpenAI to use ChatGPT to build out an enhanced AI fueled shopping and checkout system.
This also plugs into a theme you and I have been talking about for a while where we’re seeing the spread of – I’m trying to think of a positive way to say this – but the AI contagion, whatever the positive way to frame that would be, the way it’s been spreading out to from the very AI centric stocks, the ones involved in the infrastructure build out and things like that.
And now it’s moving into other parts of the economy.
So you see Walmart starting to get a significant pop. 5% is nothing to sneeze at for a company the size of Walmart. You see you get a significant pop for just integrating AI into it.
And so you can view that two ways. The people who are arguing that we’re in an AI bubble could point back to the dotcom era when companies would add dotcom to the name just to get a pop in the stock price.
So I think the bears would would argue this is just a sign more sign of froth where companies are getting significant movements in their market cap from what are relatively small tweaks of their business.
But the bulls could then argue that you’re seeing the AI economy spread out of the collection of the central five to 10 stocks that we’ve all been talking about for the last couple years and seeing it touch the broader economy and more stocks.
So if you’re a bull, you’re seeing this concentration the market has seen, you’re seeing this spread out a little bit.
I think on that front, it’s worth checking on a stock that we talked about a month ago, Caterpillar (CAT).
So when we talked about a month ago, Caterpillar was up 28% year to date. It had gotten a boost as a stock that would benefit from the physical build out of the AI infrastructure.
So actually building the data centers. Caterpillar provides the heavy machinery for those kind of building products. And we’ve seen a lot of deals related to those AI build out.
I mean, one of the high profile ones was NVIDIA and OpenAI getting together to build out OpenAI’s AI infrastructure. And so in the past month, you’ve seen Caterpillar rise another 20%, so it’s now up 48 year to date.
So it’s a good example of of a stock that you wouldn’t immediately jump to mind as an AI stock, but it’s been getting sustained benefit from this AI build out over the past year to date so far, but even in the last month, so dramatically.
RS: It’s interesting. Something we’ve been talking about here and also on the Investing Experts Podcast is this overlapping nature of sectors these days. Tech is everywhere. You know, everything is overlapping.
And to your point, even if the companies aren’t necessarily overlapping in their focus and their sector, but they can have different things can affect them, like the economy and the tariffs can affect Caterpillar in a certain way that might not have been true a few years ago.
It’s interesting to see markets evolve and develop, and investors have to take note of these new developments, I would say.
BS: I think underlying that with Caterpillar is interesting too because Caterpillar’s valuation obviously has changed dramatically as the stock has risen and especially for the type of stock it is.
It’s being treated as a tech company, but it’s this old line heavy machinery company, it creates a debate within the investor.
And you can see it in our investors as well. If you go to look at some of the recent analysis that we’ve published on Caterpillar, you see some sells in there based on valuation just based on the idea that this has gone too far.
And Caterpillar is still sensitive to tariffs. It’s still sensitive to a cyclical economy. Like I said, there’s kind of mixed to cautious economic indicators recently, and a company like Caterpillar traditionally sees a downturn during times like that.
RS: A lot to keep in mind for sure as as we watch these things unfold. Also, that notion of valuation also has been a big theme that we’ve been discussing this year. Certainly, still being discussed. It seems like these valuation concerns are going to continue for the time being.
I also have a question as we’re talking about AI and tech, and I mentioned at the start these trade war concerns with China. How is that playing into things? What would you say about tech players in China, outside of China? How are you assessing that?
BS: So the broader market dipped last Friday as the words between the US and China kinda hit a peak, but has largely ignored it since. The markets are are basically flat this week.
I think that from the April time frame when the stocks fell dramatically in the initial rollout of the tariffs and then rebounded relatively quickly as Trump softens the tariff message. There was a series of delays and then negotiations and things like that.
I think there’s a sense that this is all part of the process, that the sniping back and forth between China and the US and whatever other hotspots in the trade landscape that might pop up.
I think there’s a feeling that it’ll eventually settle into an acceptable conclusion. I think that’s what’s happening here.
And you already saw Trump kind of walk back some of the statements. He said something like 100% tariffs on China is unsustainable.
So suggesting that even if it went into place, this would be a temporary situation. So it feels like leverage. It feels like part of the deal making process, and I think that’s how the markets are treating it.
RS: And what would you say about gold (XAUUSD:CUR)? It’s hitting record highs. It feels like a natural part of all this economic conversation we’ve been having. It feels like a natural result of that. What would you say about gold right now or gold and silver if you’d care to talk about precious metals in general?
BS: I think gold is is interesting just kind of the dichotomy of the things that have been performing well this year are those AI stocks that we’ve been talking about and gold.
So you have kind of the new new thing, in AI related stuff, but you also have basically the world’s oldest market in gold hitting.
RS: That’s such an interesting take. I have not heard that. That’s interesting.
BS: The movement in gold is is eye popping, you know? It’s hard to fathom.
So gold is up 62% year to date. It peaked recently just below $4,380 an ounce. A lot of it’s being there’s inflation concerns built into it. There’s a rush to safety amid economic uncertainty.
So you have this small pocket of the stock market that’s been doing well in the AI stocks. Then you have a mixed result through the rest of the market, and then you’d have money for gold. So if you just take the stock market as a single investment portfolio and there seems to be sort of a barbell philosophy going on where we have what’s traditionally seen as the safest investment, a place to to just park your money and wait out rough economic times.
And then you have these bets on these high growth stocks going on. And then in the middle of the market, there’s a stock picker situation.
RS: In terms of crypto, we’ve also seen these liquidations this morning and broader market sell offs. Anything to say about the crypto market and Bitcoin (BTC-USD) specifically?
BS: I think, comparing it to gold is instructive. The promise of Bitcoin always related to its inflation hedge that here’s something that the central banks can’t fiddle with.
There’s a certain amount of of Bitcoin, and there’s only gonna be a certain amount of Bitcoin. So that’s sort of part of the underlying investment argument for Bitcoin. But since its inception, Bitcoin has not traded as an inflation hedge, just traded more like a tech stock.
And we see that playing out in the most recent trading as well as gold has continued to push forward and reach continual new highs, recently, Bitcoin has been much more volatile.
Bitcoin reached $125,000. I think it peaked a little bit above to $126,000. But now it’s back to $106,000. So you’re seeing these more dramatic swings in Bitcoin. I think it’s a sign that the crypto market still isn’t a fully mature market.
I think you’re seeing a lot of trading going on. I think there’s a lot of market related especially if things start to get tough and you need cash to run your business and you’ve had some money parked in crypto, I mean, crypto might be the first place that you liquidate to raise cash for your business.
And similarly, if you have an investment portfolio, maybe your first stop in terms of raising cash is to go to that crypto. And I’m just speculating now and why there might be increased liquidations there.
But it’s possible that’s become for some people the first place they go to when it comes to cash.
RS: Also, if you would give a brief update on the bond market, what we’re looking at there.
BS: Using the ten year as sort of a proxy for the market in general, have been declining recently.
So if we look back into to June, we were at the the 4.5 level in late May, June area, now we’re down to the 4% mark in bonds.
You do see this buying in the bond market, which I think dovetails with the situation in the gold market where you see this flight to safety, as we look to the worrisome economic situation.
It’s hard to characterize the economic situation because I feel like there’s a lot of fear that there’s an AI bubble, that the smallest little bit could could trigger a decline there.
Meanwhile, the stock market has been pretty resilient, even as those worries have come up.
Like we said before, we’re flying blind in terms of the economic data, at least over the last couple of weeks, just because of the government shutdown.
There have been signs of weakening, but there’s also continuing signs of resilience there too. So I think traders just in general are having trouble characterizing the situation.
I just there’s a lot of balls in the air. There’s arrows pointing in multiple directions. And so as we talk about with the financial stocks, the general mood coming out of those large bank earnings was pretty solid.
The stocks did pretty well after earnings were announced. The commentary of around them was pretty solid, at least cautiously optimistic.
But then we had in the last couple days, we’ve had this worry about the regional bank sector. And so there’s just sort of this idea that maybe there’s something lurking in the corners.
There’s something that we’re not pricing in that’s going to jump out. I mean, this is a good Halloween metaphor, I think.
And the bond market might be a great place to keep an eye on for those kind of fears, because as we’ve talked about before, there’s sort of the reputation on Wall Street that if you want to take in the general mood about the economy, the general mood about the overall situation, the bond market is usually the place that has that priced in, most directly.
RS: I appreciate the Halloween metaphor. Definitely a lot of fear and excitement depending on your perspective, depending on where you are looking, depending on your history and experience, and all of those things matter and play a part into how much fear I bet you’re feeling right now as an investor.
Curious what we have to look forward to next week?
BS: So earning season continues. Tesla (TSLA) obviously is going to be the biggest name reporting next week.
I feel like we haven’t talked about Tesla a little bit. I mean, part of that is we we haven’t talked in a couple weeks, but I feel like it’s kind of pulled back from the spotlight a little bit since Elon Musk went back to his full time job.
I feel like Tesla’s been a little bit off the radar, with the the focus recently being more on the nexus of AI deal making surrounded NVIDIA and OpenAI and some of the other companies making noise there.
And so it’ll be interesting to get a check-in with Tesla, to sort of see how that’s going.
And then some other names next week, Netflix (NFLX) is coming out. So that could be an interesting consumer name. Just, how are people spending their money?
We’re also gonna get a couple of big automakers. (GM) and Ford (F) are both announcing. So along with Tesla, we’re gonna get a pretty good idea of the automaking sector in general and EVs in particular.
And then, Texas Instruments (TXN) and Intel on the earnings front. And Amazon (AMZN), obviously, is going to be another giant name along with Tesla to look at.
RS: Texas Instruments and Intel feel like the gold/AI conversations, like what’s old and new.
BS: Yeah. I mean, Intel’s gonna be an interesting one just because of the wave of investment that it’s received. It received money from the US government and then it received money in the deal with NVIDIA.
So it’ll just be interesting to hear the commentary coming out of those deals where Intel leadership sees where the company is and what the plans are going forward.
And then, Amazon is always interesting in terms of the commentary because you obviously have the retailing giant part of it, which is plugged in, central to the economy in a way that a lot of companies aren’t.
So I think we’re getting a lot of information, economic information from Amazon, which is useful in a situation where we’re not getting all the government information we usually do.
But also Amazon with the AWS segment, that’s plugged in, central to technology broadly. So seeing how that business is doing is also gonna be very interesting, just for the segment that we’ve been talking about, that leading edge tech segment.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
