Major indices open in the green, rallying for second day in a row

Mike Bailey, Director of Research at FBB Capital Partners, joins Yahoo Finance’s Editor-in-Chief Andy Serwer Alexis Christoforous, Brian Sozzi and Jared Blikre to discuss the latest market action.

Video Transcript

ALEXIS CHRISTOFOROUS: We're going to see if the market can pull off its first back-to-back gain in about two weeks. I want to welcome to the show Mike Bailey. He is Director of Research at FBB Capital. Mike, good to see you, and thanks for being here.

So we see the Dow up 900 points right out of the gate. Do you think that this rally we're seeing-- not only here, but globally, has some legs this time?

MIKE BAILEY: We could see a little bit of legs in the very short term. I would actually tend to agree with your prior guest from Wells Fargo. I do think there's room for another move downward. I think investors are really looking at the virus data. It's great to see that.

But we've got a lot of other things to get through. We've got a lot of other wood to chop. We've got the economy. We've got earnings. So a lot to go.

So I do see room for a little bit more downside here. Again, but in the very short term, it's nice to take a deep breath and see markets up a little bit for several days.

BRIAN SOZZI: And Mike, what would trigger that downside? We're seeing a pretty powerful move here. Look, I just saw Gannett stock up about 51% in the early going here. I mean, I love newspapers, but I don't know if that stock should be up 51%.

MIKE BAILEY: Absolutely. So something like that is incredibly cyclical. So you're going to have a massive kind of boom-bust type of reaction with a stock like that. Overall, in terms of catalysts, I do think it's going to be the economy, and it's going to be earnings.

So every Thursday, we get jobless claims. That's really been a big catalyst. I do see several more Thursdays in a row, we're going to see that look pretty ugly. And then the next point is earnings. So we're going to see companies sort of start to report results. And I think it's going to look ugly.

So those are a couple of catalysts where you could see investors maybe think twice. And even if the virus is getting a little bit better, earnings, the economy are going worse. And some stocks may follow the latter two themes.

ALEXIS CHRISTOFOROUS: You guys, I just want to bring your attention, I'm seeing Olive Garden here up about 10% in the early going. Olive Garden's parent company Darden saying it has $1 billion in cash on hand. Brian, I know you follow this industry pretty closely. Perhaps they will be one of the restaurant companies that can come out of this still relatively strong. We know so many restaurant companies, from mom and pops to the larger ones, are suffering and laying off many, many workers.

BRIAN SOZZI: Yeah, in this case, I think in the restaurant space, bigger is better. You look at the lot of the delivery companies. They are thriving right now.

We just had Shake Shack CEO on, Randy Garutti on yesterday, say that for the first time, they have debt on their balance sheet. They draw down 50-- they drew down $50 million from their credit revolver. So if you have the big chains, you have those relationships with suppliers, I think you're going to survive this, and perhaps if you're Darden, get even stronger.

ALEXIS CHRISTOFOROUS: Hey, Mike, the Dow is up about 2,500 points in just the past two days if you do the numbers. For investors who were sitting on the sidelines, perhaps maybe they have a little cash to put to work right now, and they're-- and they're feeling enticed here to get in, what do you tell that investor?

MIKE BAILEY: Yeah, great, great question. I think really take a deep breath. You know, you're seeing markets move around a ton. We had a huge move down. Things are moving back up very quickly.

The best advice we would give, and what we're telling clients, and what we're do-- acting for clients is just go very slowly. Go step by step. If you get really excited, you know, just put in something a little this week, a little more next week.

Even as markets go back down-- I think there's a good chance that they will-- just keep adding a little bit here and there. The worst thing you can do is just throw a ton of money in now. Or let's say two to three weeks, a month from now, markets take another big move down, you panic and you sell.

So really, especially if your sort of equity versus bond allocation is off, stocks are down, you really need to push a little bit more in stocks. And just do that very gradually. That's the best approach at this point.

ALEXIS CHRISTOFOROUS: Hey, Andy Serwer, Editor-in-Chief with us this morning. Andy, do you think that investors are getting a little bit ahead of themselves here? I mean, it looks like they're really betting that this pandemic, at least the peak, has already passed.

ANDY SERWER: Yeah, you know, it's tough to say, Alexis. It's interesting because I think that what we're going to have here ultimately is kind of an L-shaped curve. Which is to say the L, the first part is the economy and the markets just falling off a cliff, right? And then the L, the horizontal line, is going to be a slow, slow, long, steady recovery. I mean, I don't see a V-shaped recovery.

So in other words, if this recovery here in the equity markets is for real, it is pricing in what the economy and what companies are going to be doing say 12 months from now. In other words, it is getting ahead of itself. So that's why if these levels in the markets are to hold, I really see that the prices probably aren't going to go anywhere for a while, if in fact they don't go down. So that's point number one.

And point number two, just getting on what you guys were talking about with regard to restaurants, and Olive Garden and Shake Shack, what Brian was talking about, I mean, it really could be a situation where-- I agree with Brian. The strong get stronger. But what will that do to the mom and pops out there?

And will we only have chain restaurants left in this country? I mean, that's an exaggeration and an overstatement. But we really might lose so many local restaurants. And that would really be a shame for this country, I think.

ALEXIS CHRISTOFOROUS: Yeah, actually, Andy, a little later on, we're going to talk to Danny Meyer of Union Square Hospitality Group-- they own a bunch of restaurants in Manhattan-- about that very thing. But Brian, I want to get back to you. Sticking with the restaurants, we just talked a couple of minutes ago about Darden Restaurants saying it has $1 billion on hand in cash, and it's going to be OK. Stock is rallying as a result. You have more news about this?

BRIAN SOZZI: Yeah, Andy, I would just say, I love my Olive Garden pasta. But the pizza from my local shop is best in class. I hope they come back.

But yes, digging through this release, Alexis, you're seeing some stunning, stunning declines in restaurant sales for Darden. Olive Garden, for the week ended April 5, sales down 59.7%. Longhorn Steakhouse-- they make some great steaks there-- sales down 71.9%. Fine dining, sales down close to 90%.

Quarter to date for Olive Garden, sales are down almost 35%. That's despite a lot of these businesses doing delivery service. Those are stunning declines. And those sales declines will not-- they will not come back overnight once these restaurants reopen.

ALEXIS CHRISTOFOROUS: Mike, do you think that investors have priced in the fact that we may lose 30% of our restaurants when we come out of this thing?

MIKE BAILEY: Yeah, that seems like a bit of an overreaction. One of the data points that we look at is the amount of time that this recession may last. There's a bit of a cutoff at the six-month window.

So if you think that this recession, this kind of people staying at home, avoiding restaurants, if that's going to happen for more than six months, I would say look out below. I think all the weaker restaurant chains are in big trouble. You can look at cash burn rates. They're pretty ugly.

If you think we're going to get a little bit of transition back to some type of leaving the home, going out and eating, et cetera, if that happens in less than six months, I think there's a pretty decent chance-- especially the stronger chains will be in better shape, even medium-sized ones. Hopefully the mom and pops will stick around. But I do think that six-month time frame is pretty critical here.

ALEXIS CHRISTOFOROUS: Hey Andy, what do you make of what we're seeing in the bond market right now? So I'm looking at this. This rally is holding on here, at least in the early going, for equities. And we're seeing yields starting to rise in the bond market. Does that show that there is risk for a little more-- an appetite for a little more risk at this point from investors?

ANDY SERWER: No, absolutely. I mean, that is a great indicator. Of course, it's a risk-on environment right now. And it is risky.

But you can see people moving out of treasuries and getting into equities. That's definitely what's been going on in the past couple sessions. And some people are going to make a fortune here. And they're going to be the ones with a lot of fortitude.

But I think, you know, when we talk about this, when we talk about the restaurants, it really is a culling of the herd, right, Alexis? I mean, that's what's going on. And it will happen in restaurants. It will happen certainly in the oil and gas business. It'll happen in the media business.

All across America, all across the world, and the weak companies will not survive. And that's not necessarily a fair thing. But it is kind of a fact. And for people who want to get in and try to figure out-- you know, playing right at the razor's edge there, because there's companies that are just barely going to make it, and then turn around and make people a lot of money.

So there are places to play like that. But it is a risky, risky business. And you remember that movie, right?

ALEXIS CHRISTOFOROUS: I remember it well-- Tom Cruise action, yes. We've got Luckin Coffee halted here, Brian Sozzi. Any idea why?

BRIAN SOZZI: No idea just yet, Alexis. Seeing that stock halted probably for about the past 10 minutes. Keep in mind, last week, this company, the stock got absolutely slaughtered regarding-- due to improper behavior by the company's COO.

| yesterday, "Barron's" reporting that Lone Pine Capital completely exited stake inside the company. They were the company's largest shareholder. So the bad news likely to continue at Luckin. We're just waiting for that news to cross the wires.

ALEXIS CHRISTOFOROUS: All right, also, guys, Mondelez, the giant food company, expecting higher sales in the US and in Europe because of high demand for essentials during this pandemic, but actually expecting lower revenue in the emerging markets. Mike, I'd love your take on emerging markets right now, and any opportunities you see there for investors.

MIKE BAILEY: Absolutely. So for the moment, we are basically out in terms of emerging markets. We do see some challenges there, whether it's in Asia, the countries that have done well as far as the virus impact, or other areas that are just starting to get hit. So we are a bit cautious there. So as far as opportunities, you know, companies like a Mondelez, like a Pepsi, or something where it's a US-based or European-base that has exposure to emerging markets, that's probably the better way that we would play it.

Really, I think there's some caution there. Massive, massive populations-- India, Indonesia, Brazil. What's going to happen there? What's the story with the virus? At the moment, it looks OK there. But things can really kind of turn on a dime. So we're a bit cautious there.

Frankly, you know, emerging markets, when you look at them, compared to what? We would compare them to the US. We do think the US, as challenging as it is now, we do think we're in better shape. And so we'd rather be putting our investments there domestically.

ALEXIS CHRISTOFOROUS: Mike Bailey, Director of Research at FBB Capital, great to see you, as always. Thank you.

MIKE BAILEY: Thank you.