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Strategist: Why commodity exposure can be ‘a significant expense’ for some companies

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TD Ameritrade Director of Derivative Strategy Shawn Cruz sits down with Yahoo Finance Live to discuss which sectors have been faring the best amid inflation and geopolitical disruptions, earnings season forecasts, and domestically traded Chinese companies.

Video Transcript

RACHELLE AKUFFO: Welcome back to Yahoo Finance Live, everyone. As we're just about 42 minutes away from the closing bell, we're going to check in on what's been moving markets today. For that, let's bring in our guest, Shawn Cruz, TD Ameritrades director of derivative strategy. So, first of all, welcome to the show. And I want to talk about some of the buying and selling trends that you're seeing amongst your clients. What are they mostly rotating into and out of in this current climate? SHAWN CRUZ: Yeah, it was interesting what we saw from our clients last month, and it's no wonder that the IMX, that measure actually ticked lower. That really reflects that there was a little bit more of a retrenchment into some of the less volatile names that they could get into out there. And so what we mean by that, what we mean is, if you look at what they were selling, it is anything really tied to a commodity, be that energy companies or material companies who actually had a pretty good start to the month with commodity prices rising. They actually used that as an opportunity to take some profits in those names as they were, in many cases, significantly outperforming the market as a whole. And so what they chose to rotate into was some of the-- we saw it in more of the financials and the consumer discretionary tied names, but also in some of those blue chip tech type names, where you're looking at, say, a Google, Facebook, Microsoft, Amazon, the consumer discretionary space, Tesla as well. And even JPMorgan, to some extent, was a name that drew a lot of interest. So it looked like it was more of just finding some of those quality companies and using that pullback as an opportunity to purchase and get some exposure there. But the way they funded those trades or those purchases was by selling some of the names that had a pretty strong run. DAVE BRIGGS: Broadly speaking, Shawn, April has been the best performer for the S&P. Do you expect another strong month? SHAWN CRUZ: I'm going to be watching. I'll break it up into really two, two-week period. So the two weeks leading into what I consider the real kickoff for earnings season when we hear from the big banks and big month, I'm actually going to be watching what a lot of the analysts are doing just in terms of adjustments of price targets, revenue, and earnings estimates, just to see what they do leading into that. Then we're going to take a look at what we hear from the companies, and more importantly, how they forecast. I wouldn't be too surprised to see some of these companies that have significant commodity exposure. You can look at some of those staples, even some of those discretionary companies, looking at those companies and seeing what they do with their guidance. Because with the commodity marketplace right now just so volatile, look at what we saw with not just crude and gold, but also a lot of the agricultural products that usually, you don't really pay much mind to. But when you see those in flight and in flux in the way they were, it can be a little bit difficult for companies that that is a significant expense for them to give any sort of confidence in terms of a guidance moving forward. So I am going to be interested to see what we hear from management teams when they start reporting in the second half of the month and how that stacks up to what we see from analysts' adjustments leading into that. BRAD SMITH: For any investor that follows the adage of buy the rumor, sell the news, is anybody going to stick around to see what that news is on the adjustment of some of those forecasts that you were mentioning, given all of the factors that companies are wading through right now? SHAWN CRUZ: I think what you will see is, one, maybe a little bit of a lower exposure number, and that's consistent with what we're seeing out of the IMX. And I think you're looking at those companies, like I just mentioned, that have a significant exposure almost directly to some of those commodities as direct inputs to their business. I think investors might take a little bit more of a wait and see approach to that. And I think that's consistent with what we saw over the month of March. But I think in many cases, those fundamentally sound companies that you're really not concerned if they're going to go anywhere-- I don't think anyone is expecting Microsoft or Amazon, Google, any of those names to go the way the dinosaur because of these rising costs. I think those are the companies that they're going to be more comfortable holding. And then you take a little bit more of a wait and see approach from the companies where there is a lot of uncertainty in how this inflationary environment is going to impact their results. RACHELLE AKUFFO: And speaking of wait and see, obviously, this is happening amid the backdrop of the Russia-Ukraine crisis. As you look overseas and also what we're seeing in terms of the delisting now perhaps not happening as we look at what's happening with the Chinese companies, what are some of the overseas markets and some of the factors that you're watching there? SHAWN CRUZ: Yeah, I think as far as a lot of those Chinese companies that are available to investors here in the US as ADRs, it's been a priority that I think the SEC has discussed and said there's a lot of things they want to do just in terms of investor protection that they need to meet, or they're going to have, I think, a lot more difficult time here in the US market. So I think that'll be interesting to see how that develops. We're already getting some headlines going into the week, where China is maybe looking to come and meet somewhere in the middle on that. But that's really going to be something we're just going to have to watch play out and see where both sides land, and ultimately, what US regulators are comfortable with. As far as what is going on in Europe, I think that is really going to be tied to how things escalate or potentially de-escalate between the European countries and Russia because right now, there's a little bit of uncertainty over, are we going to escalate some of those sanctions? Are they going to go into outright embargoes of Russian energy across the board? Some German officials came out and said if that was the case, we would probably see the likelihood of those costs skyrocket to the point where it would kick in a recession out of Europe. That's certainly not going to be good for a lot of those European markets or companies with exposure there. So I think that one is going to be a lot more tied to the situation with Russia. And I think it's going to be tied to how things progress in the next week or two in terms of where things go with sanctions. DAVE BRIGGS: Quick question, just 20 seconds, Shawn, what is Elon Musk up to with Twitter? SHAWN CRUZ: I think he put out a tweet a few weeks back asking everyone if they thought he should maybe get a little bit more involved actively with Twitter. And I guess, he took the results as saying he should, and he went out there and took a pretty big stake. But I don't think we've seen the last headline in this story, so certainly going to be something to keep an eye on.