J.D. DURKIN: Very good Friday morning, subscribers. AAP Team Member Stephen "Sarge" Guilfoyle joins me now for his perspective, as the big banks mark the start of yet another, ah yes, earnings season, which is somehow among us. Sarge, good morning.

STEPHEN GUILFOYLE: Good morning to you.

J.D. DURKIN: So we heard from JP Morgan. We heard from Wells Fargo. We also heard from Citi. What did we learn from the very first banks to report on this Friday morning, Sarge?

STEPHEN GUILFOYLE: Well, we learned that JP Morgan is still the class of the field. We learned that JP Morgan and Wells Fargo from a year ago enhanced their profitability, which we expected. We learned that Citigroup had a little bit of a tougher time. That was also expected.

Going into next week, I guess that bodes well for Bank of America, where we're expecting larger profits, and not so well for, let's say, Morgan Stanley or Goldman, where we expect them, like Citi, to have had a tougher role of it for the quarter, especially for Wells Fargo, which is the one I'm most focused on because I'm actually along the name.

We saw deposits and loan growth from a year ago, but sequentially, both kind of weakened a little bit. We did see net interest margin improve nicely, I guess about 29% year over year, which is really the name of the game with a stock like Wells Fargo, and also for, say, bank of America next week is their-- these two, although bank of America ventures more into the boutique-ish parts of banking, they're really a traditional banker. And Wells Fargo is really the traditional banker.

So if you are a little bit afraid of, let's say, investment banking, trading, all those types of things that are a little bit fancy, Wells Fargo is the way to go because that's a meat and potatoes banker.

J.D. DURKIN: Now AAP owns B of A, also has Morgan Stanley in the bullpen, Sarge. Any read through on those names? You mentioned some of them that we won't really more fully or officially hear from until early next week.

STEPHEN GUILFOYLE: Yeah I'm also along bank of America, just like B Portfolio is. And like I said, they're a little bit more of a traditional banker than the others. So probably won't be hurt as much by, let's say, investment banking or say Goldman Sachs was, or will be, I should say, because they haven't reported yet. So they will see some of the benefit that Wells Fargo saw.

So that's why I'm in those, although I there's been some lousy headlines around Bank of America, which really has me thinking of maybe cashing out just about now and maybe flipping over to JP Morgan because they are the, without a doubt, the class of the field in banking, as they have been for some time. But they just prove it every quarter, quarter over quarter.

So I agree with Chris on Bank of America. I'm not sure I agree with him on Morgan, although it's kind of-- it has seemed like it's been maybe better than Goldman because they're really parallel businesses in some ways. But like I said, I like traditional banking until we know for sure that the IPO business is coming back and investment banking is stronger and that trading, although trading was-- without a doubt, equities were able to push trading into the win column for some firms this quarter. It's still probably not where it should be based on-- or as large as it should be. Let's say that.

J.D. DURKIN: I wonder where you might get more interested in shares of Morgan, considering we heard from JP Morgan today. They noted investment banking fees do remain challenged, though it did gain market share year to date. Anything else there on JPMorgan Chase, the big name out of the batch, before we pivot on something else?

STEPHEN GUILFOYLE: It's definitely-- let me pop it into my machine here. It's definitely a name I'm interested in. It's definitely been in a base that goes back to last October or so. It's breaking out from a 144 pivot, I want to say. So you're only about 3%, 4% of the way into a move here. You probably could get another if this move holds. And I think it really might depend on how the rest of the quarter goes, how third quarter macro goes. But if this move holds, you probably could see, I don't know, high 160s to 170 for this stock within three months, in my technical opinion.

J.D. DURKIN: And if you don't mind me asking, for people that have seen the headlines and are kind of piecing two and two together, it seems as if in 2023 the too big to fails have only gotten bigger, including JP Morgan. Is that a fair assessment?

STEPHEN GUILFOYLE: It's a fair assessment that they are. While they said themselves they're going to remain challenged, they are a safer place to be if you need some financial sector exposure than let's say the regionals. Now, there is opportunity in the regionals. I think MNC Bank is not a bad bank to be. I think Key Bank, it's not in my stocks under 10 portfolio, and it's a $9 name. Maybe it should be.

But I think Key Bank is probably a name that looks interesting. But overall, if you're going to be in the financials, you definitely want to be overweight. You might not want to be overweight the financials. But in the sector, you want to be overweight the larger banks and have only token exposure to the regionals at this point.

J.D. DURKIN: Let me ask you about PepsiCo. It is a club holding. We got earnings from that name yesterday, Sarge. In a column over on Real Money, you wondered if the results could be too good to be true. What did you mean by that? And what are you thinking here?

STEPHEN GUILFOYLE: Yeah, it's pretty wild. I wrote a negative article on Pepsi, and Chris wrote a positive article, raised target price on Pepsi on this name day. Listen, Pepsi has had a great quarter. The earnings were good. They raised guidance. Pepsi, from an execution point standpoint on the consumer end, is doing a great job.

In terms of cash flow management and the way they run their balance sheet, I'm not that impressed. I haven't been impressed with them before. And the stock's gone higher, so maybe I'm wrong. But that would lead me to favor Coke over Pepsi because Pepsi manages their cash flows a little better. It definitely has a stronger balance sheet.

Pepsi, for a large company with a profitable business, really, I think they-- I know investors might not want to hear this, but I think they return too much cash to shareholders. I think they need to pay down some debt. They have a current ratio that no big company would ever envy. And for that reason, they have a quick ratio, which omits inventories from the current ratio that's also poor.

So I don't see how any fundamental analyst could like what they see in Pepsi. And Chris is usually a fundamental analyst. So he's just looking at the earnings, I guess. But it has strong technicals. It's got almost a three-year positive trend here on the equity price. So yeah, it's moving higher.

But I'm thinking that this, sooner or later, it has to matter. And the third quarter is supposed to be maybe the weakest quarter of the year from a macroeconomic perspective, which could force people into the staples. But it also could hurt firms with weak balance sheets who haven't managed their cash flows all that properly. For that reason, I wrote a negative article on Pepsi. And I am short the name.

J.D. DURKIN: Let's look ahead now to a longtime favorite of yours. That's Lockheed Martin, that company is set to report results on Tuesday of next week. You recently noted over on Real Money also, Sarge, the stock has been rangebound, at least for quite some time. What kind of setup are we looking for as we head into that report Tuesday?

STEPHEN GUILFOYLE: Yeah, Lockheed, I like Lockheed Martin a lot. It's certainly a cash flow beast. It was one of my huge winners for 2022. In fact, all the defense names kind of pulled me out of the fire. I had a positive year in 2022, when a lot of other guys didn't, because I was so heavily invested in the defense names.

However, the sector has not performed as well as the broader market this year. Lockheed itself is down small for the year. I don't recommend getting out at war in ahead of the earnings. But I do think-- I did recently reduce my target price from 573 to 541. I still have a 499 pivot on the stock. I add only on a drop below 445 down to 430. And I break if 430 support breaks itself. That's where I'll actually panic and sell some Lockheed Martin. So for me, at this point being it's gone sideways to slightly lower really since November, for me, this is really a technical name right now.

J.D. DURKIN: Let's zoom out a little bit. This week, of course, some fresh inflation data, CPI PPI paired with a series of Fed speakers that we heard from the last few days. Sarge, how are things looking to you now that we are finally about to close out our first full week of trading in the month of July?

STEPHEN GUILFOYLE: Yeah, is inflation beaten? I don't think it is. But to admit being wrong in front of your audience, I was on team transitory. And I was on team recession. So although I'm able to trade the markets and make a living, could I reduce price more than economic data? As far as those two predictions go, I guess the Fed was 0 and 2 and so was I.

So am I going to throw another economic projection at you and try to strikeout 0 and 3? I don't know. But I do think that inflation is certainly gone the right way. It does set up increased probabilities for a softer landing. The third quarter is going to be the tell as far as how we get out of this year and whether in contraction or not.

Second quarter earnings, this earnings season we just entered, is supposed to be the trial of the year for earnings and maybe negative 7% growth, which could hurt the wealth factor, the wealth perception of many individuals, many households. So we are going to see some slowing of velocity in the third and fourth quarters, probably more so in the third.

I think the weaker doctor-- weaker doctor. What am I saying? The weaker dollar, the weaker dollar is the key here, as that actually has a shot at rekindling inflation just a little bit. But it also will improve the prospects for the multinational corporates, for commodities, for materials type stocks. It's probably a net positive unless you're in the small caps, which will not benefit from a weaker dollar, not most of them, anyway, because most of them are domestic-based as far as their clientele goes, but still have to import materials from abroad.

So overall, while the dollar index, let's say, is below 100 or if it heads lower than that even, you probably want to reduce your exposure to the small and medium caps, mid caps, and stay with the larger, more international type stocks.

J.D. DURKIN: Let's talk tech here. Finally, in a tweet this week, our friend Dan Ives predicted a 1995 moment for big tech, at least in the second half of 2023, chip and software stocks driving the tech sector up another 12% to 15%, at least from current gains. First of all here, Sarge, do you agree? And if you do, how are you playing that?

STEPHEN GUILFOYLE: Yeah, I agree. And I'm still loaded for bear, just like Dan laid out. I follow Dan pretty closely. I like him a lot, as far as analysts go. My number two holding in terms of waiting is still Advanced Micro Devices. I've taken Nvidia out of my top 10 twice, making sales to finance my lifestyle and all that garbage. And it's already back into top 10. So Nvidia, no matter how many shares I sell, it seems to climb back into my top 10 as far as weightings go. And Microsoft, which isn't a semi name, but it is a high tech name, that's my top exposure, top weighted name.

So I'm still heavily loaded for tech, although today we're going to get some information out of the NASDAQ, on the NASDAQ 100, see how they're going to run their special rebalancing. So that should have been a net negative for these magnificent seven or the big six out of the magnificent seven stocks because I'm not sure Meta is included in the rebalancing. But it really didn't. It hurt when a headline came out. But the rest of the week, these stocks resumed their leadership positions.

So I'd be a little careful going into this afternoon if you're an active trader in those names because those names, when the headlines come out about what they're going to sell and what they're going to buy or what they're going to reduce and increase in terms of weighting and the funds that track the NASDAQ 100 will have to react to that, that probably will put some weight on the magnificent seven or so.

But other than that, I don't know why you would want to cut back on investing in places where money has to go. And money has to go into the cloud data center. Money has to go into cyber security. And money has to go-- now, it has to go into generative artificial intelligence because if you're not in it, you're going to be left behind. It's probably going to be an expense for a lot of firms that will pressure margin, not improve margin right away. But if you're not in it, I think it will be looked upon as surrender by your investors.

J.D. DURKIN: Sarge, thank you for taking the time. Happy Friday to you, and enjoy your weekend.

STEPHEN GUILFOYLE: Happy Friday.

J.D. DURKIN: And a final programming note to all of you members watching at home, our next members call will be live on Wednesday the 19th of July. Chris and Sarah will be diving deep into earnings season. And you do not want to miss it. Until then, Chris and I will be back on Monday morning to get ready for a busy week ahead. Have a great weekend, and we'll see you then.