Twist. Walmart teaming up with microsoft in a bid for the popular social media app both stocks rallying to new alltime highs on this news. Julia boorstin has the details. The news keeps coming on this one. Reuters just reporting tiktok engineers were told to make contingency plans should it need to shut down u. S. Operations they are preparing for various scenarios including a forced shutdown telling us they are simultaneously developing plans to make sure u. S. Employees continue to get paid on the heels of any outcome. Walmart is teaming up with microsoft to buy tiktok. Walmart telling us, quote, we believe a potential relationship with tiktok u. S. In partnership with microsoft could add this key functionality and provide walmart with an important way for us to reach and serve omni channel customers as well as grow our Third Party Marketplace and advertising businesses dan ives tells us, quote, we believe microsoft buying ticktoticktok would be like Christmas Morning coming early for investors if navigated the right way, it could reach a valuation in the 200 billion area code a deal could be imminent a source tells me that one reason that he resigned now is he was excluded from the more senior deal talks. Sources tell me that mayer did not want to run a division at microsoft. Hed have preferred the Greater Authority hed have had if an Investor Group had bought out the company. So we look at this news and we think, what, tim . You thought rerating for walmart . Walmart has been on a path to some type of ecommerce or tech platform multiple probably since they went out and bought jet, flipcart, the discussion of walmart plus, going toe to toe in ecommerce with amazon. You throw this in there with the ability to meet a younger demographic and channel and generate advertising revenues. In a world where we are rerating Companies Based on hybrid multiples, why not walmart i think this is huge news and i think walmart is going higher. Theres not a lot of analysts notes out yet. But one analyst note caught my eye. That is the notion that if walmart is now trying to switch from a transaction based model with a subscription based model with its sort of prime competitive offering, then the value of a competitive audience like tiktok goes up for walmart. Thats perhaps why the deal makes a whole lot of sense thanch i think even without that subscription maybe thats a wealthier walmart customer either way, its good. I just went back and looks at some of the parts for amazon obviously we know aws much higher margins, growing rapidly. Taking that out of the equation and looking at the breadth of amazons business, they were giviing it a 3 1 2 ton sales multiple if they can narrow this gap in any way at all, i think we could see substantial upside for walmart. I have to give this Management Team credit. They have been slowly, methodically, changing the business its definitely not your fathers walmart anymore im long i like it. I think the only risk of buying on a day like today is what if microsoft doesnt end up getting it then the stock will be down tomorrow if they do, i think theres more upside in the shortterm and the longer term. After alex sherman broke this news on cnbc. Com walmart came out and confirmed it i thought that was maybe a good sign that this deal was progressing, it was moving along, that they are confident enough to say, instead of saying no comment on rumors, that we will comment on it, in fact. Yeah. It is encouraging. Good for karen and tim, by the way. A lot of people love this name i thought valuation has been a concern. To tims point about rerating, you think about it, walmart has gone down this avenue in terms of media before with varying degrees of success this makes a lot of sense in terms of shopable ads, interactive commercials, those types of things. Everything you saw in the New York Times article today makes a lot of sense you have to ask yourself whats the right multiple on the 6 of earnings theyre going to make next year. I think analysts are going to start to crunch the numbers and youre going to start seeing people with 180200 price targets on this name, i think to tims point. Kudos to the people who have been steadfast on this name. Kudos to walmart, which is absolutely pushing the envelope. Its no longer your grandfath grandfathers walmart. Do you feel comfortable enough surrounding what that could mean for walmart, to say, you know what, walmart is worth more now i get the Third Party Marketplace. I get the growing the ads business i think if youre looking for this to add the multiple or rerating, youre going to be waiting until youre blue in the face i agree with everything everyone has said i just dont think youre going to get that rerating at walmart. I would be not a seller of it, because its very hard to sell this name because they have so many levers to pull. But youre not going to get anywhere near close to multiple for aws. Id be a seller of it eventually a polite way of saying tims wrong. I didnt say that you said if youre waiting for a rerating of walmart, youre going to be waiting until youre blue in the face. Ive been wrong before. I hear what steve is saying. You know, my point is, first of all, youve actually seen walmart rerate almost 20 on just this news whether this happens or not and the walmart plus news. The walmart plus news came out in the beginning of july the stock rockets that day and has been digesting the whole ecommerce strategy and taking on amazon for the stuff that amazon has been taking everybodys lunch for. Theres no question that walmart is rerating. How much and in what timeline, i dont know but the partnership with microsoft is not an insignificant part of this theyve been Strategic Partners for a few years now. It makes a lot of sense theres a complimentary nature here with walmart using their cloud and azure et cetera. If you want to talk about ecommerce volumes, right now amazon is 39 of the ecommerce business in the United States and walmart is somewhere around 5 or 6 . Walmart closing that gap is enormous theres no question walmart has taken the Technology Transfer from jet we laugh when they paid 3 billion for it but it actually got them going in the right direction. Flipcart to me, im not sure what the right multiple is for that they paid 16 billion but that also gives them a huge marketplace. Karen, you obviously think youre not going to be waiting until youre blue in the face on this one if youre holding it. Walmarts color is blue no, i dont think well be waiting until were blue in the face it has been rerating already i think one other potential side effect that i dont know how to think about it if this happens and if walmart is able to generate the sales as they hope, i was thinking that target is probably a little bit hurt by that, not that theres not room for target there is i like target too. Im long target. But i could see some of the target customers sort of being picked off to become walmart customers. Lets switch gears the fed announcing historic change with Monetary Policy today adopting an average inflation target that would allow inflation to run higher than normal for some time. Take a look at the Market Reaction stocks moving higher today with the s p 500 closing at another record high, the dow briefly going positive for the year. The tenyear yield going well above. 7 . Jo jim, great to have you with us. Thanks for having me. The rally continues this is a green light for the markets, right yeah. Well, it isnt a red light for the markets, lets put it that way. The fed said out loud what weve always known that is specifically that Employment Matters more than inflation in their dual mandate. If they dont believe were at full employment, theyll let inflation run a little bit hotter than they would normally. Thats where that inflation number comes in, because employment takes the rule. And they added a third mandate which is Financial Stability but we always knew that was the case as well too finally the other big thing the fed did was they kind of took away a lot of the mechanical rules. Out is the taylor rule, out is the phillips curve in is more human judgment at the fed as to where they should be moving rates bottom line is theyre not going to be moving rates for any time for the next couple of years it should be supportive of the market, but we kind of new that yesterday too. They just said out loud what we already knew. Jim, its clear that obviously chairman powell doesnt buy two by fours at home depot or go Grocery Shopping we talk about lumber prices now for the last couple months if youve gone to the supermarket recently, youve seen it. There is inflation out there they just choose not to acknowledge it is this them probably seeing inflation is right around the corner and once again moving the goal post . And to that end, is this market just on Cruise Control yeah. I mean, youreright about the inflation argument i think were going to see inflation return, probably not until next year because theres a little bit too much slack in the economy right now. They seem to be more focused on employment yeah, if they let the Inflation Numbers run too much, then youll see it in Interest Rates. Interest rates will start to shoot up a lot then well be into a situation like we were in the Fourth Quarter of 2018. Remember the fed put the Balance Sheet on automatic pilot was the word they used and they were going to reduce the Balance Sheet. The market didnt like it and two weeks later they dumped the whole thing and said, no, well be patient and flexible. They run that risk now too if theyre going to ignore inflation too much, if lumber prices keep moving up and we get inflation, then the fed might be forced to say, okay, forget that, well now respond to inflation because the markets dont like it. Thats the immediate risk they could have with this policy should inflation return. Jim, its karen i was just looking yesterday at the real tenyear which is negative, versus the nominal price. So we have inflation there its been moving up steadily since march to about 174 we know its over two that the fed will let inflation run but how far over two do you think they would let it go before they felt they had to do something . Thats an interesting question lets say they let it go to 2 1 2. The last time was 28 years ago if they let it run to 2 3 8, we havent seen those numbers in 14 years. So probably around 2 3 8 to 2 1 2 is the upper end of where they would go. But thats a 14 to 28year high in the market. The market could see, were at a 14year high in inflation and if we continue to move higher from there, theyll start to really worry that things can get out of hand n hand thats why its risky for them to let inflation run that hot. Where the markets are right now and expecting inflation to rise sooner rather than later in terms of the market expectation, which is almost never at this point, which sectors do you think do the best under this sort of scenario as we see Interest Rates creep higher, it may not be technology that should be necessarily the beneficiary of this next phase of the fed yeah. If inflation is going to return and thats going to be manifesting itself in higher Interest Rates, then basic materials, the cyclicals, things that would do better in a stronger nominal growth economy, nominal meaning real growth and inflation together, those would probably be the sectors that would benefit from it. Youre right that technology is more about real growth financials could maybe benefit from a steeper yield curve, but higher Interest Rates would be kind of a drag on that theyve got a whole host of other problems as well id look at basic materials and cyclicals and things you would expect to do better with higher levels of growth in the economy. Jim, great to see you thank you. Steve grasso, youve sort of been in jims camp for a while in terms of which sectors to be in yeah. I think jim hits it on the head here like today when you heard powell speak, the things that led were financials, real estate, staples. Those led. If you look at the year to date performance, the xlk up 34 . The xlf is down 18 . So i dont think, to jims point, youre going to get long lasting rotation into where we all think its going i do feel like the market is a little toppy here. Ive been a bull when you look at the overused saying trees dont grow to the sky, i think were due for that 1520 pullback in the overall market so i think the market has bit off a little more than it can chew following powell into this hole of never ending upside. Guy, i know you flagged a move in the vix yesterday, which followed the s p 500 higher. That continued today its interesting. Yesterday was a bday. I dont have a letter for you today. I thought it was interesting yesterday that the vix sort of held that 21 level that tim had flagged. Today the reversal on the vix today i thought was really something to keep an eye on. I think, to steves point, this move in the vix, we might look back a couple weeks from now and say this was that thursday at the end of august when the vox sort of showed its hand. I do think the vix rallies from here and i dont think its coincidental as we get through both conventions now and now we have some highway until the election it makes sense in terms of that calendar, the situation that steve just pointed out in terms of a meaningful correction to the downside. Coming up, gap shares pulling back from after hours highs. Well bring you all the headlines from the quarter straight ahead. Later, the 5 test that turned into a 15 billion gain for abbott labs. At cdw we get youre always looking to modernize. Yeah. Im just not sure Office Drones were the way to do it. [ laughing ] drone voice lol. Our market share looks good, but. Drone voice where are the bagels . Well, cdw can help you modernize your company the right way, with a scalable infrastructure from hpe, making you more efficient and secure. Great. Oh. [ drones buzz angrily ] lets find a different room. For transformation that works, you need Hewlett Packard enterprise and it orchestration by cdw. People who get it. What happens when switch to Xfinity Mobile . Well, the good news gets shared. And it gets rated 1 for customer satisfaction. But dont just take our word for it. Take theirs. Its your wireless. Your rules. Only with Xfinity Mobile. Call, click or visit a store today. We have an earnings alert on gap, the stock pulling back from its after hours session highs, still up 3 , though. Its all about online total net sales were down 18 year over year, but ecommerce sales nearly doubled old navy, the standout as usual, with more Standalone Stores net sales were down 5 , but online sales surged 136 they were able to better do that cu curbside pickup. Comps rose 12 also getting a bump from online banana republic, thats the lagger consumers turning away from fashion and work wear and toward athleisure athleta saw net sales up 24 of sales between athleta and old navy were in that athleta gear area. The strength of the performance was due to being able to meet the market they nearly doubled ecommerce because they were able to pivot to this digitally led culture. She said back to school is going to be a lot longer than usual because of all of the different situations between some areas going back in person, some areas going back online. But she said she continues to see this momentum in the back half of the year melissa. Tim, you were excited about this welltimed citi call. They upgraded gap shares to buy on monday ahead of this quarter. That was 20 ago in the stock. Same store sales comps up 13 . Overall the fact that 290 mall stores or stores that were unprofitable, the rationa rationalization is it closed the reason Digital Sales are better is because of what weve gone through people are not going to malls. Guess who losings . Its the mall operators. Its not the gap stores who have already suffered through the pain theyre going for capital life partnerships whatever theyre going to do with kanye will certainly add some value guy adami alone is probably keeping athleta in business. Old navy is a stalwart thats always been strong. His love of yoga pants can not be denied. We are getting some more headlines from the Conference Call saying second half Sales Performance fuelled by athleta and old navy not a surprise. No fiscal full year outlook on sales and earnings because of the uncertainty. What does gap still need to do to complete this turnaround . I would say looking toward the future, continue to strengthen ecommerce, like the numbers we saw top and bottom lines. Also we really want to see what athleta is doing i think as mentioned, the partnership with kanye in 2021, i want to see how consumers react to that. Is there still the possibility of a breakup of the company in some shape or form . I think possibly. Youre looking at the different brands that they have and obviously some spinoff value there. I like what they did this quarter. If we continue to see this, maybe we keep all the brands together and house them under the same roof, but there is a possibility of that. How much do you think kanye could actually add thats a great question this is one of those big, big kind of options that it took it was a thing thats a risk, but i think theres high upside. We look at somebody thats really a genius in the fashion space. I think he can bring that over to gap, not only on the ecommerce but the consumers and eyeballs he draws. Fashion is a very fickle area. When you hit, you hit big. That could happen here. They continue to not pay rent this quarter how do you think that plays out with the landlords i think its really interesting to watch what theyre doing as they make that shift. Im watching that closely as well thanks for your time. Thank you all guy, are you on board gap i have a pair of those yeezys. Do you really of course i dont of course i dont. The only reason i even know what a yeezy is is because my daughter had a pair on i said what are