Another Regional Rout, and #2 on This Year’s Disruptor 50 List 5/11/23

0:01Right now on Fast, a regional route. More troubles for PacWest and a potential partnership between regionals and Blackstone, what the latest headlines could mean for bank stocks and the broader markets. Plus, Google Glory, Alphabet adding$115 billion to its market cap in just the last two days, has the company behind Bard officially taking the lead in the AI race. And later, Tesla gets its CEO back. Twitter gets its CEO back. Oh, Tesla's new, too. Bonus for both of them. Disney's ripple effects and two crypto-related stocks moving in vastly different directions. We're diving into all those trades.

0:34I'm Melissa Lee. This is Fast Money. We're Live at the Nasdaq MarketSite in the heart of Times Square on the desk tonight, Bono and Eisen, Dan Nathan, Guy Dami, and Julie Beal. We start off with the latest developments on the debt ceiling. Kayla Towshey has confirmed that the meeting between principals scheduled for tomorrow has been postponed. Let's get to Kayla for all the details. Kayla? Well, Melissa, that news coming late this afternoon after the market closed that the principals had all agreed to postpone the meeting for sometime early next week, according to a White House official. It's expected to take place before the president departs for Asia on Wednesday.

1:07And it comes after top staff, including the White House head of legislative affairs, Louisa Terrell, who you're looking at here on the Capitol staircase, met with congressional staff for more than two hours today on Capitol Hill to try to hammer out exactly where some middle ground might be on spending cuts and permitting reform to reach a potential deal to avert a default at the end of this month. A source familiar with the matter says that the postponement should not be read as a negative development, but instead should be read as a positive, that staff will continue working again tomorrow. They'll continue these conversations through the weekend and that it just simply wasn't the right time for principals to get back into the room until there's more of a formative agreement that can be discussed.

1:50So that is the read on the postponement here. But of course, Melissa, it comes with less than three weeks before that June 1st date at which the Treasury Department says is the earliest that the U.S. could be unable to pay its bills. We will see what negotiators can come up with in the coming days and whether it's enough to stave that off. Melissa. Kayla, thank you. Kayla Tausche. When the news crossed in the green room, Bono and I were chatting and I immediately said it looked like a negative. but you said maybe it's a positive. Yeah. And I was hesitant to disagree with you because, you know, as we know, you know, there's not much upside in doing that.

2:26And the information you have is absolutely incredible. With that said, with that said, I mean, I was I was somewhat hopeful that, listen, I think what's been priced in, particularly if you look at the short term treasuries, what's priced in is that these people are going to continue to be at odds and they're going to take this to the brink. And what I was saying was that perhaps they're actually going to go back and come forth with something a bit more meaningful and actually move the ball forward, actually finding someone of a resolution. It's interesting. I thought the same thing the icebreaker thought, that it was actually on the margins of positive.

2:54And I'm one to always look at the negative. No, you're not. You're not. Because that is the logical thing. But just let me throw this in. Again, we're not a political show here. But if you watch some of the commentary out of former President Trump last night, they talked about the debt ceiling. And I'm paraphrasing now. I want to be careful. But he said, you know what? Default. Why not? Let's see what happens. Maybe it won't be as bad as everyone seems to think. And that could resonate with some of the fringe groups that are going to push back on McCarthy and see. So today's events, I think, were a positive.

3:28But some of the things I heard last night, not so much. Yeah, and I just think about it in terms of what's priced in. So you just mentioned the Treasury market. And again, we've seen yields come down a bit because I think that that is one place that people think is a safe haven. I know that seems kind of maybe counterintuitive if you think if we were to default. But when I think about the stock market, and we've talked about this VIX that is very near 52-week lows, it doesn't seem like there's anything priced in to the equity market. We see this S &P 500 that just literally looks flatlined in and around this 41-30 level.

3:58And I say, OK, if there was something that was incrementally positive that maybe came out and maybe gave us a sense that it wasn't going to go to the brink, where does the S &P go? You know what I mean? Does it gap up 1%, 2 %? Is it 3 %? Do we get back above those February highs? And then do you sell them there? Because literally, if you look under the hood of what's going on in the equity markets here, it's still that concentration of those big names. And even with Microsoft rocketing up and Apple rocketing up after their earnings and a handful of other big names, we're still below those February 2nd highs.

4:28We're still in this really tight range. So I think if there was any incrementally positive news and we did gap, I'm not sure that sets the stage for a sustainable rally. So any pop would just be that. I think it gets sold. Yeah. Remember what happened around 2011 in the last set ceiling? The S &P 500 lost 16 percent in a span of 10 days, 10 trading days, Julie. I mean, we're as Dan had mentioned, we're just not priced for that when it comes to the VIX. Not at all. It sort of feels like when you talk to investors about what's going on in Washington, it's sort of like they're watching a Little League game.

4:58They don't take it super seriously. And I think it has really critical implications. And I don't think it's actually binary in terms of the long term implications. I think further dragging it out diminishes how people view the strength of the U.S. dollar as a safe haven. And I think that has ripple implications longer term. Meantime, let's move on here. A report from the FT says Blackstone is in talks to potentially partner with regional banks to help with loan originations for more on what that could look like in the health of the industry. We're joined by David Conrad. He's a large cap and super regionals banking analyst at KBW, which is a Stiefel company.

5:32Great to have you with us, David. But first, I wanted to ask you about what the FDIC came out with in terms of the fees that we charge to banks to cover the insurance fund there and where would have the most negative impact. So imagine the large banks, not much of an impact, but there's probably a middle ground which would see an actual impact on earnings. Yeah, I think it's pretty manageable. We just kind of did the math recently. you know, actually my coverage, I think, is paying about 75 percent of the total fees. But it looks to be around four percent dilutive to EPS each of the next in 24 and 2025.

6:11Embedded in our estimates, we kind of estimated it would be three percent. So relative to our expectations, it was pretty close and pretty manageable. I wanted to ask you what your thoughts were also when it comes to where we are in this crisis. I mean, it feels like it's stabilizing according to I mean, if you take the word of a lot of officials out there, it's contained. But if you take a look at how the regional banks are trading, it is not. And when you take a look at what PacWest said just a few days ago, on 5-4, March 4th, it said the bank has not experienced any out-of-the-ordinary deposit flows following the sale of First Republic.

6:45Then today it says deposits declined by 9.5%. This is a matter of a few days here. And that's how quickly the situation can change. So how do you sort of assess where we are right now, David? Well, a couple of things here. I mean, unfortunately, social media has had a big influence on some of the deposit flows here. And that kind of happened. PacWest also announced that they were exploring strategic alternatives, perhaps a sell of a company, sell of assets. And all that really created another kind of contagion in the stock. You know, with the stock down, you know, at a$4 handle, things are very fluid there.

7:24But I think today was really, really important in the sense that Western Alliance was actually flat for the day. And those two stocks have really moved in tandem with kind of this contagion. And the fact that Western Alliance came out and said, actually, our deposits are growing. And that stock was flat while PacWest was down 25 percent. To me, that tells me we're kind of getting a little bit more firm footing in the group. David, it seems to me that this is a stock thing. It doesn't seem systemic in so much it's going to derail the economy. It's not a leverage thing. But if credit is more difficult to attain for small and medium-sized businesses, whose lifeblood are these small and regional banks, that's going to have a huge effect on the economy at some point.

8:11It's not tomorrow, but it's in the weeks and the months to come, I would think, because as these banks sort of fall by the wayside, and listen, I don't think we're anywhere near being over, the bigger banks will get the deposits. The bigger banks don't necessarily have all that interest in servicing these things, and it's going to be more expensive for people to do business. Thoughts on that? No, I think that's right. I think, you know, kind of a segue into the Blackstone article, you know, looking at, you know, we did a report that said banks around$80 billion to around$200 billion are really kind of in no man's land.

8:45They have most of the new regulations hitting them. When you think about the higher capital standards that are facing some of these banks and wells, and more importantly, the increased liquidity coverage, we do think there is going to be somewhat of a credit crunch. We've taken out buybacks and loan growth across the majority of the super regional banks. So which banks could you see Blackstone wanting to partner with? What kind of bank? I mean, ultimately, is it going to be Blackstone to the rescue here for some of them? Well, listen, I mean, the shadow banking and the alt managers have been around for a while.

9:21They've seen extraordinary growth in private credit. It's actually worked. It's not a zero sum game. They've actually worked together with the banks. And I think with these increased capital and liquidity, banks have to readjust their capital allocation. And so I think it's going to be more and more difficult. Historically, the insurance companies have bought a lot of commercial real estate. That's a little bit of a tougher proposition right now. I think they're probably near their limits there. Where I think there could be an opportunity is on the consumer side. We've seen a lot of super regional banks, you know, fifth, third regions, citizens financial, are starting to shed the auto book with given the risk adjusted returns.

10:02And so I think they're looking to unwind some auto. They're also growing point of sale finance home improvement businesses. But that growth is so rapid, it's really challenging for them to portfolio it all. So I could look to some of those asset classes being partially moved with Blackstone and into the insurance business. I mean, they also have accounting issues with those businesses. The Cecil accounting makes it very dilutive to grow those businesses up front. Tying that together with Goldman's announcement that they might look for a sale for Green Sky, all that kind of fits together to those home improvement loans.

10:36Yeah, I mean, taking a longer term look at this whole thing, David, I mean, do you think one of the lasting impacts of this all of this credit crunch that is on us that's about to come and get tighter is is this move into private private credit becoming even bigger? And so that will take on more of the risk in the system as opposed to the banks doing it. I think that's right. And I think that makes us feel better about the banks in terms of their credit quality near term. But that is a systemic risk in itself. And I don't think banks will be immune if there is a downturn in the private shadow banking market in terms of credit.

11:16I think it'll all be kind of tied together a little bit. But the direct exposure for banks is actually pretty modest. I mean, the shadow banking market has about 85 percent of the leveraged lending market there. So that's an idea of kind of the risk that's off the bank's balance sheet. Wow. David, thanks so much for joining us. Appreciate it. David Conrad, KBW, a Stiefel company. Julie Beal, how do you feel about that? It seems like the risk is still out there. It's just not born on the bank's balance sheet. It's somewhere else in the economy. And the biggest problem is we have absolutely no visibility into it.

11:50It's really hard to have any kind of guess what 11 years of zero percent interest rates are. My gut says you can't have a kind of sugar rush like that and not expect there to be a real gummy egg. And I'm really concerned because I don't think it just gets isolated to these shadow banks, these hedge funds that have been, you know, not just doing these credit loans, but also putting leverage on top of them. But they have counterparty risk with the bank. So I don't think it gets isolated. And so that's the real concern is what the contagion looks like when some of that commercial real estate really starts to come blue.

12:25Yeah, I think this makes a lot of sense from Blackstone's point of view. For one, it allows them to like kind of source incremental fee revenue, right? They've had a bit of a tough time. They also have had a bit of a bit of a struggle when it comes to their commercial real estate portfolio. But keep in mind that they are also the largest institutional player on the residential single family rental space. So for them to essentially be able to reinject capital into a regional banking situation that has come under pressure and also affects some of the assets that they hold, I think it makes a lot of a lot of sense, particularly when they're going to be able to pick up increments or fee yield along the way.

12:57It's interesting, Julie, just to use the term visibility. When you think about it, it's just not the regionals. We've spent a lot of time talking about some of these regionals that have seen their equity decline 97 % and then basically go to zero. But there's some other ones that act really poorly. USB is a$44 billion market cap that's down 44 % just in the last few months or so. And then I think about what this means. We have a slowing economy. I think that's very clear. I think all the credit issues that we're talking about are only going to slow that further. When you think about increased regulation, that's happening.

13:27We heard Jamie Dimon speaking to that today. It just doesn't seem like a great place where there's a lot of visibility in and around any of these very financialized companies or so. So to me, I just still don't think they look compelling. And a lot of them just act really poorly for no good reason. And not just the regionals. If you look at Wells Fargo, if you look at Bank America, you look at Schwab, and I know that's not a money center bank, But they're trading very near the lows of this whole period. And they don't feel like they're about to get resolved right now. And they are not supposed to be at the eye of this storm either.

13:58Bank of America. I'm sorry. Go ahead. No, no. I was going to say, how about JP Morgan? Well, they're going to win to this without question. No, I mean, you're seeing it, whether they acknowledge it or not. I mean, this is a great deposits are flooding in. But does that mean the stock is going to go well? No, I don't necessarily think. And, you know, Dan mentions Bank of America is a quarter of a trillion dollar company, which is within earshot of its not only 52-week low, but multi-year low. That's telling you something as well. So to think this is over, just hat in hand and say, you know what, we're through it.

14:28We're not through it. The stocks are telling a story. All right. Well, speaking of shares of J.P. Morgan, they are breaking even on the year, far outpacing the broader group. But our next guest says the good times may not last. Let's go off the charts with Chris Verona, Strategas of Baird Company. Chris, what are you looking at? Hey, Melissa. Well, I think the big question that we're dealing with is, can you have a directional bull market in stocks when the banks are just simply not on the playing field here at all? And, you know, we keep hearing that, well, the deposits will go to the big banks, the big banks will be all right.

15:01But the big bank charts aren't particularly good. And if you look at the broader sector, asset managers are weak. Investment banks are weak. Brokers are weak. So I think this is getting, in some respects, worse, not better. Let's start with the biggest one, J.P. Morgan. And the question we have is, is it naive to think that J.P. Morgan can get through this entire crisis unscathed? It's been bouncing between this 130 to 140 level for the better part of the last month or two. It's flat on the year, I think up 1%. I'm a little bit reminded in 2008, if you remember, J.P. Morgan was the last bank chart to break.

15:40It actually was up on the year through about October, and it went last. So they tend to get to the best ones last. I think it's naive to think that J.P. Morgan gets through this unscathed when all of its friends, as Dan and Guy say, and I agree, are on or near their 52-week lows. Let's go look at Bank of America, sitting right on this 27 level. It actually made new relative price lows versus the S &P today, so there's been no relative improvement there. This 26-27 zone is major, major support. I do not think we want to see what happens underneath that. You go to some of the brokers. Morgan Stanley and Goldman Sachs are right on their lows here as well.

16:22Goldman down something like 8%, 9 % this year. So I think the picture is more than just regional banks week. And when I see Goldman soft, when I see Bank of America soft, and then lastly here, I'll show you BlackRock in the asset management space. And the reason we pay so much attention to BlackRock of every stock in the S &P 500, it has the highest correlation to the S &P itself. BlackRock should look like the index. It is the index. It's a top three holder in 99 percent of U.S. listed names. It should look like the index. It doesn't here. Right back on the lows here. So I think there's something else going on.

16:59We did some work today looking at the last hundred years. We are seven months off the October S &P low. Banks right now are down 20 over that seven-month stretch. It's the first time in 100 years being seven months off the low where the bank stocks are actually down. So I think you've got to be careful here. Chris Bono here. Thanks so much for your work. Always appreciate it. A quick question. Do you think that there's anywhere within the financial services complex where one can find relative safety or outperformance, or would you just avoid that sector altogether? I mean, I think that's a hard question.

17:36You know, something that we always preach in our work is you want to have the wind at your back. You want to be swimming downstream. I just think it's too hard to pick the one or two or three names in the sector that might work here. I mean, I guess you could say stuff like insurance brokers are generally one of the better parts of the group. But even just insurance at large is deteriorating here. Look at some of these life insurers. I mean, MET has broken. Prudential has weakened here as well. So, you know, what I think is framed as an issue with just community or regional banks, I think misses the point that the entire sector seems infected with whatever disease is out there.

18:16So, Chris, I mean, going back to that BlackRock S &P chart, is it safe to assume that it looks like the S &P will go lower then? that would be our bet i don't know if it's from here or if it's from a higher level but i'm not convinced that we're through uh all of the drama here i don't know if we have to go back to the october lows what was that 34 90 3500 but there does seem to be stress under the surface i i just don't think the index is telling the whole story here um you have s &p you know roughly at the year-to-date highs you have nasdaq roughly at the year-to-date highs um the number of stocks making new highs is abysmal, right?

18:55So under the surface, this is a very different market than I think the indexes lead on. Yep. Chris, thanks. Good to see you. Chris Verone. Thank you. Of Strategas. Dan. Well, yeah, I mean, I like Chris's work, too, and I think he really kind of lays it out. I mean, I think there are a handful of stocks that are in a bubble. I don't mean they're like bubble. This AI thing. It's a moment in time. We've been in this business for a long time. We can remember these sorts of periods. I can't remember it, though, when it's been concentrated in so many big names, and that's what it's doing to the indexes right now.

19:25Okay? You just said this in the lead up to the show. Google just gained$100 billion in two trading days for no good reason. Now, you could have said in January when it lost$150 billion. It shouldn't have lost it either. But right now, that's all sort of working together. And the piling in the big names on a day like today, when under the surface, energy is bad, materials bad, financials are bad, the Russell 2000 small caps are bad, they're really masking, I think a lot of really poor behavior that's probably more reflective of what's going on in the economy than what's going on in 10 stocks, mega cap tech stocks in a bubble right now.

19:59All right. Coming up, Disney losing its magic and the media giants woes sending ripples throughout the industry. The earnings hangover that had investors letting it go. But first, a new chief tweeter, Elon Musk, teasing a new CEO for the social media company, what the C-suite changes will mean for Twitter and for Tesla. Don't go anywhere. Fast Money's back in two.

20:20Welcome back to Fast Money. Elon Musk has found a new CEO for Twitter. The billionaire didn't give a name, but tweeted just about an hour ago that she would start in about six weeks and that he would transition to the role of executive chairman and chief technology officer. Shares of Tesla jumping on this news as investors hope that Musk will be able to turn his attention back to the EV maker. Guy, should we be happy? Should Tesla shareholders be happy? In the short term, I think yes, because I think the negative case for Tesla is he's taking his eye off the ball. Twitter's been too much. He's not focused enough on Tesla.

20:54The stock is traded in kind. So the knee-jerk reaction is higher. It makes sense. And we're a level where it should bounce. Who's the person coming in, though, for Twitter? I mean, and I have people tweeting at me. Does it matter? Sheryl Sandberg, that's a name. Marissa Meyer, maybe that's a name. I don't necessarily know if it matters. The Twitter problem seemed to be pretty substantial. If Twitter were a publicly traded company, we would care. Unless you think that the person is incompetent, in which case Elon Musk will be sucked back into Twitter. And so then you again lose the CEO of Tesla.

21:25Look at you. Look at you. But I don't know. Do you have any hot takes, Dan, on who she might be? Not really. Cheryl's not taking that job. I mean, like, first of all, that person's a puppet. OK, that person is not a real CEO. Remember, he wholly owns this company and he's on the hook for, you know, probably still$12 billion in debt for it. So that person's going to be doing exactly what he wants to be doing. And I do think the knee-jerk reaction in Tesla makes some sense. It's a huge overhang that he is spending his nights on a cot in the Twitter headquarters and trying to retool something that, frankly, is over.

21:58It's done. Twitter's dead. Put a fork in it. Julie? I mean, I think it's interesting if we think about Twitter overall, right? It's not just that it has to work. It's these major debt payments, they are connected to Tesla stock, right? The value of Twitter is actually connected to the value of Tesla stock. So if Twitter starts to really flail as it has, or I should say continues to flail as it has, it actually has an impact for Tesla shareholders because he's going to have to sell more of the stock in order to make the debt payments. So I actually think they're still very much interlinked. Again, I totally agree this is going to be a puppet.

22:36But I just think that it's naive to think, oh, like, it's all clear, like, he's going to be focusing on Tesla, and we have nothing to worry about. He's still focused on Tesla. He changes the price, like, every other day. Like, he's definitely still working out there. Yeah, I mean, I think on the surface, right, I think a lot of times Tesla, particularly when you see news, it's like a headline-driven, I think Dan mentioned, like a mania type of driven or profit type of driven. You called it a cult, if I remember correctly, on perhaps one of our shows. No, no, no. I just, hold on, let me get around.