KG on AI Concerns in TSM Earnings, CRWV Financing; PPI & Retail Sales Adding Fed Pressure

Sam (0:00)

So, let's get out to Kevin Green, who joins me now for a look at what is driving the market action today. And it's interesting because even with a strong earnings report out of TSMC this morning, tech continues to sell off. It seems to be concerns not over the fundamentals because the numbers look great. It seems to be about the cost of capital now, KG. Just walk us through what we learnt from TSM.

Kevin Green (0:23)

Yeah, it does appear that it's the cost of capital. Not only when you're looking at this company and the capex spend that they're going to have to, obviously, endure over the next couple of years, but also when you're looking at some of these other companies that have AI exposure like CoreWeave, which has been kind of the topic of conversation over the last couple of days. But when you're looking at TSMC, we did see the company record a net profit of around $23.6 billion in the US equivalent. That's a 69% increase on a year-over-year basis, and it did beat the street's expectations. And they are actually adjusting their revenue guidance higher to up to 44% revenue growth on a US dollar basis. And that's slightly above the 40% that we kind of saw as far as their guidance previously. In their capex, they actually did not adjust their capex spend, even though we've already heard some announcements about building out infrastructure, not only here in the United States, but also with deals with ASML and some of these other companies. Their fiscal year, 2026, capex guidance is still between $60 to $64 billion.

And management did say that it's too early to provide a capex figure beyond. Now, the only issue that you would see within this report is their commentary around tool supply. They do say that it's still tight and tool price inflation is real. And there is also some shortages at the back end of packaging as well. So that is something that may provide a little bit more of a concern about the capex spending when it comes to Taiwan semiconductor. But I think this is an industry issue that you are seeing with memory names selling off to the downside. Also, maybe some of these neo-clouds that are out there that might have excessive debt interest payments compared to the revenue that they are generating, as well as the negative free cash flow for a company like CoreWeave. So that's really what's putting pressure down. But I will say, Sam, we did see a little bit of a balance in the broader equity market over the last five minutes or so. We actually did see a balance of around 25 points. There may be some news hitting the tape here that may be trying to readjust some of these sectors that have been lagging to start off today's session.

Sam (2:21)

All right, we'll keep an eye on things certainly as far as that move is concerned. But for now, as you say, I mean, tech is getting absolutely punished once again. I mean, the CoreWeaves of the world, an extension of the 15% decline we saw yesterday, 7% down right now. As you say, memory, obviously taking cues from South Korea, ugly session there. I mean, you can have as much visibility as you'd like, like ASML and TSM are telling us. But I mean, if it's going to cost more to get your hands on that capital, if it's about the access to that money, then does it matter? I mean, I think that's the question in the market right now. Speaking of heat and prices, let's talk about the PPI. I mean, that's the highest level in four years, which kind of matches the heat and the Chinese numbers we were talking about yesterday.

This obviously feeds into PCE. So how significant is this increase?

Kevin Green (3:14)

I think it's actually relatively significant. And it's not so much the final demand number, which we'll kind of talk about, but it's the intermediate goods segment that we kind of highlighted yesterday, our market on close, that actually could be a little bit of a concern on the services inflation front. We did see headline final demand inflation coming in at 1.3% on a month over month basis. That's the largest gain that we have seen since March of 2022 And we did see obviously Core, which is X goods, food, as well as X trade and energy increase by 0.5% on a month over month basis. That's higher than what we saw in August at 0.3%. And the goods inflation obviously is being hit by energy prices. The energy component for final demand rose by 10.8%.

And we are seeing gasoline actually driving a lot of this growth up over 20.3% if you're kind of looking at the year over year comps, which is making it difficult. Now, the problem that you are now seeing, Sam, is actually the services inflation, which came in at 0.8% of an increase on a month over month basis. The trade margins actually rose by 1.4% and transportation and warehousing rose 3.4%. What does that mean? That means that you are starting to see these companies actually pass on these prices to those that are actually buying the intermediate goods as well as the final goods. And that's where you get a little bit concerned that services inflation could actually peak its head up here over the next couple of weeks and months. So unfortunately, not a really great print. The market was kind of bracing for it. You are seeing a situation with these higher inflation readings that treasuries are getting bid, yields are moving to the downside. So maybe risk off in the equity market, especially when it comes in some of the higher beta sectors. And maybe that risk off tone is being translated back into the treasury market, which is actually a normal occurrence and something that we probably should welcome as the market kind of readjust itself and prepares for the Fed meeting in the next week and a half.