Stocks rise as investors eye economic data

Yahoo Finance’s Brian Sozzi and Alexis Christoforous speak with Sevens Report Research Founder Tom Essaye about the current market action.

Video Transcript

ALEXIS CHRISTOFOROUS: We have some positive momentum heading into this trading day on this Tuesday, May 12. Here's the opening bell on Wall Street.

[BELL RINGING]

All right, and we are off to the races here on Wall Street. I don't know about off to the races, but stocks are opening higher here to start the new trading day as investors remain optimistic. Even though we're getting atrocious economic data, many people saying that this has already been baked into the pie. I want to welcome to the show Tom Essaye, Sevens Report Research Founder. We've also, of course, got Brian Sozzi and Jared Blikre with me.

Good morning, everyone. I want to begin with a tweet that our president just came out with just about a minute ago. I want to read this to you and get your reaction. It's on oil.

Donald Trump says crude oil prices going up as Saudi Arabia cuts production levels. Our great energy companies with millions of jobs are starting to look very good again. At the same time, gasoline prices at record lows, like a big tax cut-- the best of all worlds, President Trump tweeting this morning.

Tom Essaye, I'm going to start with you. Is it the best of all worlds?

TOM ESSAYE: I don't think anything is the best of all worlds right now, to be honest. Yeah, it is certainly good that oil is rallied off of the low teens and negative prices. That's certainly a positive.

But, you know, really for everybody looking at the oil situation, never mind the supply. The supply is not the problem. They can cut supply all they want. It's not going to materially impact prices.

The issue is demand. When will global demand for oil return? And we should all hope the sooner the better, because that means the global economy is working again.

And with regard to gas prices, it's great that they're cheap. Does anybody need a lot of gas right now? No, because we're not driving anywhere. That's the reason it's cheap.

So once we start-- we'd much rather be driving to work and driving to stores and driving to that and paying more for gas, right? So is it positive? Is oil getting a bit more positive? Sure, but let's not get too excited. There's still a long way to go towards an economic recovery.

BRIAN SOZZI: Tom, I know there will be people that see the president's tweet and go out-- they go out there and they buy some oil stocks this morning. But could you break down specifically what you're seeing in the trading action in the oil patch? You know, fundamentally, the dividends have gone completely away. Bankruptcies in the space are rising.

Earnings season has stalled for this space. But what are you seeing in the trading action?

TOM ESSAYE: Yeah, so from a trading standpoint, interestingly, energy stocks have traded very well over the past month. In fact--

BRIAN SOZZI: Go figure.

TOM ESSAYE: --I believe they're still the best performing sector, S&P 500 sector over the past couple weeks. Now that said, they were completely obliterated before that. So let's not get too excited. They're still down big year-to-date.

If you're looking to dip your toe in the energy space, we think you should stick to the majors, the really large, integrated energy companies. And that's where the long-term value is, because it's going to be too hard to pick winners and losers in the exploration and production patch. You're going to have to really be an energy insider to do that.

For the vast majority of us, stick to the Exxon Mobils. Stick to Chevrons. Stick to the large, integrated energy companies. They have the staying power.

ALEXIS CHRISTOFOROUS: All right. Talked about energy. What about airline stocks? We'd love to get your take on that, Tom.

We know Warren Buffett has dumped all his airline holdings. Boeing CEO coming out and warning some of these airlines, even some of the big names may not be able to survive. Are you exposed to the airline industry right now? What would you say to investors who are, and wondering what to do with those holdings?

TOM ESSAYE: You know, no, I am not. But as a-- I haven't been in a long time either. I don't know the airline business that well from an analyst standpoint. I tend to stick to things I have experience in.

So the airlines are sort of an interesting case. Are they a long-term value? And I mean long, long term.

Certain ones are, yes. Because will air travel return to pre-coronavirus levels at some point? Yes. Do I expect there to be as many airlines pre-coronavirus as there are post? No.

Personally, I think it's still too early to get into this space. We have no idea how soon the general public will feel comfortable flying again. We have no idea the regulations that will be placed upon the airlines to ensure, you know, as sanitary as possible environment.

So for me, are they something to keep an eye on? Yes. And I would again say stick to the large airlines. They are going to have the cash. They're going to have the government help to stay in business.

BRIAN SOZZI: Tom, I caught your note this morning, and you highlight some cracks starting to emerge in the markets. Where are you seeing those cracks?

TOM ESSAYE: Yeah, I think one of the biggest issues we have is that the sector trading is not agreeing with the overall market narrative, that we are going to have an economic revival sooner than later. If stocks believe that, then this market would be being led higher by cyclical sectors, things like financials, industrials, materials. Instead, we're being led higher by a very small group of very large tech stocks.

So for instance, if you look at the S&P 500 and then the Equal Weight S&P 500, they diverged substantially over the past say week or two weeks. And that's because the rally is really being driven by-- remember, everybody remembers the Nifty 50? It's like the Nifty Five now. It's Apple, it's Microsoft, it's Amazon, and a couple other large cap tech stocks.

So that makes me a little bit nervous that the market is ahead of itself here in the near-term.

ALEXIS CHRISTOFOROUS: Also, what do you make of Tesla? We've talked about Tesla many times before on the show. Elon Musk has been very vocal about not agreeing with the severe lockdowns in California. He's now saying he's going to reopen his Fremont, California facility, defying state orders to remain closed.

Is that a good thing for investors that he's been so vocal about all of this?

TOM ESSAYE: From an equity shareholder, yeah, absolutely, because you know they need to make cars, right? So the sooner they do that, the better. So you want your CEO pushing the envelope responsibly. And I think that's kind of where we get into a little bit of a gray area here. What is responsible?

But you definitely want your CEO saying, hey, let's reopen safely as fast as we can. Come on, come on, come on. What you don't want is a CEO saying well, you know, we're just going to sit here and be closed for quite a long time until we-- until some such time as we start producing cars again.

Now from a sort of societal standpoint, is Elon Musk pushing the envelope and potentially taking risks with his workers? You know, that's-- that's for somebody at a much, much, much higher pay grade than me to decide. But certainly from an equity shareholder standpoint, you want your CEO out there, pushing the envelope responsibly.

BRIAN SOZZI: But Tom, aren't you also taking risk-- not to get too out there, but if he does go-- if he does get put in jail, and he has suggested that he's willing to go on the lines, out front, and be risk of putting in jail. Is that a risk to the stock?

TOM ESSAYE: Oh, sure. Yeah, I mean, definitely a headline risk. But for me, this is all sort of short-term noise, right? Tesla will begin producing cars again. They will begin putting-- putting cars out there, and they will begin doing all those important things.

But what they need to really do is they need to decide what's the demand level for this, for electric cars going forward. You know, what is-- what do low gas prices do for Tesla demand? What does the high price point do for Tesla demand? That, to me, is the much bigger issue on this stock than anything to do with Elon Musk fighting with Alameda County right now.

ALEXIS CHRISTOFOROUS: All right, Jared, it looks like the market just turned mixed. I have the NASDAQ down just slightly. What do you see moving us this morning?

JARED BLIKRE: Yeah, that's right, Alexis. Energy, materials, and staples are the leaders today, along with financials actually, so kind of a strange leadership mix. Tech really underperforming. I'm looking at XLK. That's under water, along with real estate and communication services.

Just looking at the Dow heat map here, you can see kind of a little bit of a mixed picture. We've got Microsoft down about 3/4 of a percent. And, by the way, Microsoft and Apple have been the absolute engines of this rally.

Something like $500 billion in market cap has been recovered because of these two companies. You take them out of the Dow, you take them out of the NASDAQ 100, you really don't have much performance to speak about. Although the NASDAQ itself, the composite is positive for the year, as is the NASDAQ 100.

But just looking today, JPMorgan is up half a percent. But that stock has been really depressed. I mean, just look at this price action here, barely recovered off of the lows.

And I went back about 40 years, 50 years, just looking at when financials tend to bottom in a cycle such as ours, in the business cycle, and really, it's when the Fed is done pulling all of its measures out. And they tend to bottom with the market itself. So the fact that they really haven't been able to get off the dime, to Tom's earlier point, this tells me that there is still some things to be done before we can actually recover here. What that remains to be seen, I don't exactly know. But we're still just kind of slogging through this day-by-day.

We'll just take a quick look at the NASDAQ here. And it's a mixed picture in terms of the big tech mega cap names here. We can see Microsoft down, as we just went over. Amazon, Facebook, Alphabet down. So we'll have to see what happens here.

I did note in the premarket that we did have the potential to get another leg up here, but that's probably going to be capped at 3,000 in the S&P.

ALEXIS CHRISTOFOROUS: All right, thanks, Jared. Tom, before we let you go, what are your thoughts on the Fed starting its program today to buy corporate debt exchange traded funds? What are the implications for investors?

TOM ESSAYE: Shorter term, I think that it-- that it really was a needed positive. We talked a lot about in March that the Fed needed to come out and essentially backstop corporate debt. Because given the economic realities, some of these companies getting funding is going to be extremely difficult for them. And that's not really fair, because it's a short-term hiccup.

I think that in the near-term, sort of-- people have asked me this, said oh gee, the Fed's buying LQD. Should I buy LQD? I think that's a little too simplistic. They're not buying that much of it. They're buying very specific parts of it.

And so I think that to me, it's more macro-positive. It gives us a more firm floor in the market. But I don't think it's going to lead to an explosion higher in corporate debt ETFs.

ALEXIS CHRISTOFOROUS: All right, Tom Essaye of Sevens Report. Thanks, as always. We'll catch up with you soon.

TOM ESSAYE: Thank you guys.