Kristen: Let's turn now to Bilal Little, global ETF strategist at Direxion. I feel like I teed up our conversation really well.
Bilal Little: Oh, really good.
Kristen: You know, I'm just tooting my own horn. I'm just tooting my own horn. Good morning, Bilal.
Bilal Little: Good morning. Happy Tuesday.
Kristen: Happy Tuesday. OK, so let's start with what I was just mentioning. Stocks essentially near record highs, elevated Treasury yields up over 5%. Stronger dollar, oil still feeding inflation right now. We're still getting that energy shock. Where do you see the economy going right now? Which of those signals is giving us the strongest picture about where the economy is headed?
Bilal Little: Look, Kristen, we're in a very important point in time right now, right? You've got two stories going on right now. You have a consumer story which we're going to get from the banks. We'll see how the consumer is doing. And then on the other end you still have an AI story, right, and it's continuously fueling other parts of the tech tech story, and I think right now the market is in a wait and see sort of phase how the Fed reacts to the data that they've received, but more importantly, how does the market continue to invest from here? And I think right now you're going to see a few different things pop up. One, it's going to be a traders. The second thing is you're obviously going to want some income given where rates are right now. And then more importantly, what are the structural headwinds that we ought to continue to look for?
Kristen: OK, so let's dive into all of that just a little bit. So as you're talking about income with yields, so we have a nice chart of the yield curve. What is the shape of the curve telling you right now? Like we've been talking about a repricing of risk. I mean that's the story. I don't think we need to run away from that story. The market is extremely narrow. We've been covering the same sort of stocks and names for a handful of weeks, but right now with the banks telling you a different story today and actually you see some bifurcation and really some divergence in the banks, right? So JPMorgan and Goldman, perfect example. You've got two different stories.
Bilal Little: Reported this morning, yes, and also Wells Fargo later today as well.
Kristen: Yes.
Bilal Little: So they're telling you a lot of different stories and they're telling you that tighter credit cycle is actually going to mean we have more challenges structurally ahead. Yes, so I think that's what the yield curve is telling us.
Kristen: OK, I'm going to talk to you about financials after the break. I want to get through the whole macro picture. First question for you about inflation in the market right now because again we have record highs in the markets now. I heard what you were saying. AI is fueling a lot of that trade, but do you think that in some ways the market is less sensitive to inflation right now because we continue to see these record high numbers on the board?
Bilal Little: I don't think it's less sensitive. I think it has a pretty clear indication of where the inflation is coming from. What's going on in the Middle East is a clear headwind structural problem and that's continuously driving obviously headline inflation which seeps through and permeates through other parts of the economy. Obviously we continue to talk about diesel prices, but more importantly, when we start to look at what the cost is to the consumer. And when those costs start getting passed off, we're in a very important time of year again we talked about the holiday season, travel, groceries, what are people spending money on story consumer story absolutely. I think they're much weaker and that's the story that's going to be told and the labor market actually isn't as tight, right? So the Fed's mandate of labor and then obviously inflation. They're only tackling one problem right now and they're focused obviously on inflation.
Kristen: OK. What about earnings beyond the banks, which again, as you're mentioning, we already got two banks, two big banks reporting out before the bell. We have some more reporting after the bell, but we're in the middle of earnings season. Do you think that strong earnings can continue to override, at least in the short term? Perhaps let's talk about the midterm. Some of those macro concerns that you're mentioning right now, particularly around the consumer story which obviously fuels 70% of the US economy.
Bilal Little: Yes, so I think if we reflect over the last couple of weeks we actually received some earnings data from some of the consumer names obviously we picked up Delta, we had McCormick, and some of these others. Those costs are being passed down. They're not seeing increased volumes, right, so they're not growing to the same degree into their multiple. I think on the tech side, however, we've been in two years of an AI spend around chips, and last week we actually saw with OpenAI, obviously on Thursday when they reported 20+ billion dollars less in revenue, the chip story actually saw a bit of weakness, right? And now we're looking at the other parts of the AI story, the data, the infrastructure, power, right, the grid, all that stuff is really relevant. I think October is an important month because not only do we get CPI and PPI, but we also get a bunch of earnings from a bunch of the Mag 7 at the end of the month. So that story is going to continue to materialize hopefully, especially since the AI story impacts the defensive end of the spectrum, which is things like utilities and infrastructure long thought to be a defensive play and now it's actually more of a growth play thanks to the AI buildout.
Kristen: We were chatting before about the macro picture again. You were talking about some of the headwinds that is facing the market right now, but also some of the tailwinds. But I want to talk to you a little bit about financials because this is where almost consumers. Consumer plus the Fed plus yields all sort of collide into one story. So we have a chart. It's XLF, so that's going to be the Financial Select Sector SPDR Fund. KRE, this is actually going to be a regional bank ETF. What is the chart telling you about the difference between what's happening with the big banks? And what's happening in the regional banks because they are impacted differently for sure by what we're seeing with the Fed and with the yield curve for sure.
Bilal Little: So if you go back and you look at the chart and you look back at September 14th or so early September, basically the 10 year hit 5%. You saw the financial sell off pretty sharply. Impacting regional banks significantly greater than you actually see the larger banks. And then if you see more recently you see somewhat of a recovery in the larger banks because their businesses are a little more diversified. One, they have a capital market system with some of the bigger banks, so the IPO market was pretty hot in the first half of the year. Some really good names coming through. They have diversified revenue streams at the regional level. This is important to know their business is really dependent on lending. As rates go up, that makes it tighter for them to lend. More importantly, they don't have the broad diversification of these other revenue streams that the larger banks have and that's why you actually see the divergence in price, right? And more importantly, I think that's why you see more volatility. But why is that important? Because this week you have the banks reporting, so that's telling you a deeper consumer story. But at the same time it's also telling you a capital market story because many of these larger banks have said what they don't plan to see increased revenue coming from the capital markets. So you actually have a stronger pipeline, but you don't have as much issuance, and I think that's another story to be watching for the back half of the year.
Kristen: I feel like big banks always say that every time the yields go up. What you just said I've heard before several times before, and yet at least when it comes to JPMorgan revenues can still continue to massively increase. But let's talk about this, OK, because as you're mentioning that divergence happening as those regional banks, those smaller banks get more and more impacted by the loaning situation as less and less consumers are interested in borrowing because those interest rates are incredibly elevated. Now for the bigger banks it is a revenue driver. In the intermediate term, when do you see that story changing for them for the larger banks?
Bilal Little: Yes, well, one, I think they're going to start to telegraph and tell you some of that story right now we're just a quarter removed from that pipeline being pretty hot, right? So it takes some time to materialize. But to your point, a larger bank like JPMorgan, because of its size and scale, they're going to have net interest margin or net interest income of a billion dollars more than projected last year because of where rates. So they actually benefit from higher rates in many cases. Again, it's the smaller banks that the small businesses in these regional parts of the world or country, they don't have the ability to have those same lending capabilities with their larger counterparties. So that's why I think that story will take time, but I think sometime probably in Q1 of next year.
Kristen: OK, so let's go to fixed income before we go to your call for the week. Where are you seeing the money going into because it is pouring into fixing income the fixed income is obviously a very broad spectrum. We've got many bonds we've got aggregates where are you seeing what sectors specifically excuse me in the fixed income space really attracting the most flows?
Bilal Little: I think of the situation of what does the picture look like right now, right? So over the last couple of weeks I've been tracking the top categories of ETF flows. 4 out of the 5 categories over the last 3 weeks have been in fixed income. A couple of weeks ago it was money markets. Now it's actually municipal bonds. We talked about munis more recently. You also see a bunch of money going into the aggregate bond or the middle part of the curve for that conservative complementary component into the portfolio. You think broad diversification. You think prices have probably sort of peaked as far as how low they're going to go in many cases, but where I continue to see money is still on the sidelines. $8 trillion sitting in money markets. The risk isn't there, so that is a story in its own right as you have so much equity volatility that really hasn't permeated through the rest of the market.
Kristen: I was actually really quickly going to ask you about risk if you see a risk rushing into fixed income, especially around the path of rates, because we don't actually know what the path of rates is going to be, especially with inflation as sticky as it is.
Bilal Little: Credit. Right, it's credit because at some point you have a material breakdown. It's usually a crack in credit that would materially impact where fixed income confidence is actually just uh eroded. So I would be watching credit. I would stay away from some of the equity linked uh volatility asset classes like maybe high yield and or private credit right now. I think you can take on less risk and sit out that part of the investment pieces.
Kristen: I have a gift for you.
Bilal Little: What do you have?
Kristen: Because we're going into something called Little by Little. I think we have a graphic for it. I think we have a graphic for it now. OK, so let's do Little by Little, your calls of the week. Hit us with it.
Bilal Little: All right, so the first call is I think investors should consider income right now. That's two ways I've been talking about this for a long time now get paid at the front part of the curve and or look for supplemental equity income rather that is option premium and or that's high quality dividends. The second point is I think investors should be thinking about trading around the banks if they are traders, thinking about what that looks like given the volatility in that space. So you can do so in a lot of different ways. You can do so with leverage and or you can do so with just broad indices. The last thing is I think right now and last week was indicative of this. Now you should be considering hedging some of these tech names because it's no longer just about chips.
Kristen: What is it about?
Bilal Little: It's about the other parts of the AI infrastructure stack and then how that actually seeps into some of these uh SaaS platforms and businesses as well, right? So you see those growing, they're up 50%. They actually outperformed energy over the last 6 months.
Kristen: I'm so glad we have that Little by Little. All right. That was Bilal Little, global ETF strategist with Direxion. Thank you so much as always. We'll see you next week.
