Are Rates and Stocks Really Disconnected? And Cathie Wood’s Latest Investments 9/18/23

0:01Live from the Nasdaq market site in the heart of New York City's Times Square this is fast money Here's what's on tap tonight. Up and up. Rates keep climbing. The 10-year hitting its highest intraday level in more than 15 years. One top market watcher is now saying this rate surge makes the market rally completely unsustainable. Plus, Apple's golden delicious day. The stock popping as iPhone pre-orders seem strong, and a host of analysts paint a bullish picture for the tech giant. We'll go inside the numbers coming up. And later, ARK Investments CEO Kathy Wood will join us. She is weighing in on her recent sale of Tesla shares.

0:34The innovation funds 2023 rebound AI, the cloud and much more. I'm Melissa Lee coming to you live from Studio B at the Nasdaq on the desk tonight. Tim Seymour, Dan Nathan, Guy Dami and Steve Grosso. And we begin with the milestone move in interest rates. The yield on 10-year treasuries briefly touching their highest level in nearly 16 years this morning before pulling back just a touch the two-year trading where it was just before the collapse of SVB. But the move higher hasn't seemed to stop the stock market. While the three major indices are basically flat today, today. They're all still well in positive territory for the year.

1:07It's a phenomenon that has at least one Wall Street veteran scratching his head. JPMorgan's Marko Kalonovich saying the move higher in both stocks and rates is unsustainable. So will this disconnect be corrected? And does that mean a reckoning is coming for equities? Now, we play this game often. If you showed me the chart. If I told you something. You jumped the gun. How would you get? You jumped the gun. Is that what you're going to say? No, I was waiting for you to ask the question. If I said the 10-year yield was going to get to a 15-year high, what would you say stocks would do? I would say the S &P 500 is 3 ,800, on its way the October low, that equities are not trading well, that Russell small-cap stocks are probably underperforming the broader market, which is getting whacked, and the VIX is probably approaching 20.

1:53And what happened today? None of those things are happening, which is really interesting. So how does it reconcile yourself with the second part of the answer? Well, it's one of two ways, obviously. Yields start to back up and equities continue to go higher, or yields continue to go higher and equities figure it out. By the way, I think there's a scenario where yields go lower and equities go lower because if the equity market leads and starts to sell off precipitously, you might see a flight to quality in the form of the bond market, Melissa Lee. And that's what's interesting about where rates are, because if you told me, you mentioned SVB, if you told me that rates are back up to where they were pre-SVB, I'd say, banks probably have been rallying.

2:28And for the most part, you know, banks have been the biggest underperformer of the major sector groups. Look, I love Marco's work. And in fact, when he says stuff like this, I listen. You know, pointing out divergences in this market is easy. And we've been doing it. Marco's been doing it. A lot of people have been doing it, which whether it's the, you know, leading indicators versus a forward P of the S &P. I mean, talk about a divergence. I mean, there's all kinds of things going on. But clearly, as it relates to today, and this is a big week, This is a week where we have policy decisions in the U.S., in Japan, in the BOE.

2:58And, you know, it was a day when actually Japanese stocks went to a 33-year high on the topics. But it was a day when equities this morning, we looked at the screens in the first hour of trading, even the first half an hour, semis, which are the leadership group, were down big. So the correlation, equities, I think, have been trading in sympathy with bond yields for the last month. There's a big disconnect to close at some point on valuations. But I think the stock market for the last month and a half has been paying attention. Yeah, I'm glad you brought up small caps. I mean, you know, the underperformance there, I think, is interesting.

3:26And we also know, again, there's a whole host of like financially oriented sort of names. If you look at the KRE, the Regional Bank Index, does not act particularly well. Looks like it's breaking down technically. And, you know, I think, again, you know, I think what Tim says, it's been very easy to point out divergences. It hasn't been easy to make money on those divergences. And right now, when you think about where yields, where they are relative to where they were a year ago and where the S &P is, it's really astounding. We're basically 4 ,600 versus 3 ,600. If you look at crude oil, it was also last at these kind of levels, you know, about nine, 10 months or so ago.

4:01And then when you look at the dollar, the U.S. dollar, the way that's moving, all that to me should not be supportive of equity valuations. It's taking note, I think, within small caps and financials, like I just said, but it's yet to do that in the broad market. And I'll just make one last point. In late 2021, there were no shortage of signs that we were about to go into an equity bear market, despite the fact the S &P made a new high in January of 2022. There were lots of things under the hood. That was a big narrative that we talked about on the show. I think similar things are playing out right now in the equity markets.

4:33And if you're just looking at other risk assets away from equity markets, it should signal, at least it does to me, that we could be in for a period of downward volatility in the not so distant future. Are you worried about stocks, Grasso? Yeah, I'm always worried about stocks. But for your mark, I'll raise you a Mike Goldstein at Empirical Research where he points out that interest rate sensitivity for the U.S. economy is really less dependent on those where it used to be more dependent. I'm paraphrasing, obviously. The path of interest rates doesn't dictate the market, as you all have just said.

5:12When you look at the market now, look at last week. I think the most important things that happened last week were the UAW, it was Apple, it was China. It was spilling out to the rest of tech. It was oil moving higher. I don't think necessarily, oh, and then throw in there CPI and PPI. You had some positive news there that made the market react with higher interest rates, which doesn't necessarily mean that the market's going down. And then if you look at FACSAT, the analytics through them, September, this week in September is historically the worst week or five straight losing days in the market for the last 73 years.

5:54That's pretty important because you have mutual funds that wrap up their fiscal year in September and in October. What does that mean? They mark up and they mark down. But October is historically the month that everything rallies back because we're going into fourth quarter. People are looking towards November and December and that seasonality. So I think this September has the outsized propensity to suck in a lot of bears. I'm not as worried as I think I should be on the market. I think that the historical pattern that you pointed out, I mean, that sort of brings up the old saying, sell Rosh Hashanah, buy Yom Kippur, because it's approximately the right timing.

6:34But what's different about this market is that, you know, if you're worried about higher rates and rates going higher, breaking the markets, there was a flight seemingly to big cap technology, which then props the markets up. We saw Meta, Alphabet, Apple, semiconductors all do relatively better than the broader markets. Interesting, without question. And, you know, I go back to the Carrie dance right to point it out. bottomed right after Silicon Valley Bank, went from 34.5 to 49. Here we are at 42. I think that's telling a story, number one. And some very quietly, a name like AMB, now I'm cherry picking for sure, that stock topped out about 138, either side of$100 now.

7:12So you have some semis that are starting to give back. NVIDIA had a decent day today, bounced off the lows, but that stock very quietly is off about 15 % from the post-market gains it saw after they reported. So I think valuations matter in a higher interest rate environment. I think rates are going higher. I don't know how equities can continue to be supported in a higher rate environment. The stocks that should do best in that environment, though, are the stocks like a Microsoft, who basically has got zero debt on their balance sheet when you consider with the cash they have in their balance sheet and actually the differential on what they paid to lock in their debt versus what they're earning on their cash.

7:46I mean, they're going to actually be earnings accretive in a higher rate environment. And so, you know, what does this mean? We always yearn for that moment where we see the breadth in the market and we cannot have to fall back on mega cap tech. And I've said many times, I'm going to continue to say it, I think we've seen their best days in terms of their aggregate S &P weighting. But everything we're talking about probably continues to support big cap tech. And it's not good for industrials and the value stocks and the places that have a lot of cyclicality. And they've definitely underperformed.

8:15This also means that we could have a scenario where rates go higher and we're sort of at a standstill in the markets. Yeah. Because you've got big cap tech propping everything higher. Well, I mean, listen, that's how the market's trading right now. But I think it's important. Under the hood, again, some of the technical stuff is breaking down. I mean, Apple is the largest equity in the land, and it's breaking down. Microsoft's about to do that. If you look at, like, a Netflix, which, again, is not on market cap terms as significant as the others, it was just a sentiment leader, the same way Meta was.

8:40And, you know, that thing is down more than 20 percent from its recent high. So there's some technical damage being done by some of the sentiment leaders. I'll also take you, and I know we've talked about, you know, these airline stocks. And maybe this has to do with oil. But look at the transports. When you look at what's in the transports, we have obviously FedEx is going to report later on the week. We see how poorly UPS is acting. There's a bunch of the freighters, the truckers, you know, all this sort of stuff. You know, that's not about nine percent or so just in the last few weeks. So there are some things that you would normally tie to the performance of the economy in the stock market that are not trading particularly well.

9:12And I think we've been very complacent for a very long time. And I think some of us have been on obviously me included on the wrong side of this for the better part of this year. But the longer we go and we don't have that recession that the market was pricing in a near certainty of late last year, it's the closer we are to one, and then the market has to start pricing it in again. And I just think that going back to the start of this conversation, when you think about where the dollar is, you think of the way crude is moving, you think of where yields are and where people like Guy think yields could go, that's just not supportive of equity markets.

9:40And I hear you on everything. I'll just say, though, that we've done all this with equities, with the dollar rallying through the roof. We've done this with yields testing higher. We're going into the best two months of seasonality in the year. Everybody thinks September is going to be awful. Tells me we're probably going to go higher. And the fundamentals don't warrant the equities trading here. And this is what Marco said. This is what we've all said. But I do look at how the market has performed during a period where you've thrown a lot at it. And we're starting to see the cracks in the consumer.

10:07I think we're going to get a lot more news on this. But to me, as much as I've also pointed at the relative either lack of making a new high on the triple Qs or the SMH to the S &P, they're not folding and they're not caving. And that's strong. I'm sorry, the Chevron, quickly, I mean, he's talking his book clearly, but Mike Wirth was talking about the potential for crude oil to trade north of$100. I understand he's the CEO of Chevron. I get it. But the point is, his thesis is right in terms of supply-demand imbalances we've talked about for a while. That doesn't help the equation either. All right, our next guest warns investors are in a distorted environment.

10:42Joe Livornia was the chief economist at the National Economic Council under former President Trump. He's now chief economist at SMBC, NICO Securities America. Joe, great to see you. Same here. Great to see you guys. What's distorted about this environment? The fact that usual relationships aren't really working out this time around? Part of it, Melissa, and that probably explains why the recession hasn't happened yet. I mean, we had COVID. We shut down what effectively was a$40 trillion economy, if we include the business-to-business part, not just GDP. And it seems like we finally now have worked through those dislocations.

11:15If you look at the global supply chains, for the most part, they seem to be normal. What's interesting to me, though, Melissa, is the yield curve. It's continued an ongoing inversion. The fact the leading indicators continue to remain deeply negative with most of those series contributing to the downside. And yet it seems that the narrative has developed that now we've hit a soft landing. And the point that I've been making to clients and investors is that given the lags, we're still within that window, that time frame whereby these indicators still could be very useful. And one of the reasons we haven't had a recession probably is the fact that the government is spending a tremendous amount of money.

11:52But that won't persist indefinitely because I'd argue interest rates are very high. And eventually, as Dan was saying, there will be cracks in the consumer. So you think that 2024, we're going to start to see it. We're going to start to see the economy get hit. Yes, I wouldn't be surprised, Melissa, if we're actually seeing it now. I mean, I think back to 08, which was different in some ways, but also similar in the sense that when we went into 08, many economists had thought there was going to be a recession. When Bayer got bought by J.P. Morgan, there was stimulative tax policy. The Fed had created this new program called the Term Securities Lending Facility.

12:28Risk was, you know, was a really in a risk on mode back in the spring of 08. And we're actually in recession and didn't know until basically Lehman hit. So there are some parallels that could be happening now. Watch the unemployment rate. When that unemployment rate, every time since the Second World War, when it's risen half a basis point, or rather 50 basis points, half a percent from its low, you've been in recession. Joe, handicap for us, the economy then. And if you were a trader, we'd ask you for levels on a stock. But give me levels on the economy. How deep? Because if we're talking about a shallow recession, you can make an argument that equities have at times plumbed down to that level, tested it.

13:03And it really depends on some of the severity. The cracks in the credit markets are things that are very tough to read. And I agree that they're there. But tell me what you're staring at, because you're the economist. But, Tim, I don't think. Look, to me, there's a recession because the indicators that have worked over many cycles are telling me there's going to be a recession. How deep it will be, I don't know. Nobody knows. It depends on what the policy response is when it happens. Had the authorities had Ben Bernanke and Paulson done a bit better job in figuring out how to deal with Lehman, we would not have had a deep recession back in 08.

13:38That's my view. It would have been very mild. It may have been more mild than where it was back in 2001. So it depends when you get there what happens. Because recessions typically are nonlinear, you get these psychological breaks if certain things happen that people don't expect. What the response is from the Fed and the response from the government, the fiscal authorities is key. And as you know, next year, you've got a political election. And I think it's pretty safe to say it's going to be divisive. So, Joe, when you look at recessions, they're only told in hindsight. That's how you that's how you you locate it.

14:11So I'm of the belief or I'm of the premise that we could have actually been in recession in December of 2022. But pull that forward. Is there a shot we're in recession right now and we've already troughed in earnings and we're bouncing from here? The problem? No. And it's possible. We did have an inflationary recession in the first half of 22 when GDP was negative for two quarters. What's interesting in the Biden administration said the gross domestic income numbers are better. And there's some validity to that. The problem is the income numbers now have been negative. So it's possible we're in recession.

14:47But Steve, we've never had a period where the equity market would have discounted the recession that's maybe be just hitting now a year in advance, meaning the equity market bottom last October, and now we're maybe entering one. I mean, it's possible. History would say it's highly, highly unlikely. Joe, always great to get your thoughts. Thank you. Thanks, everybody. Great being with you. Joe LaVornia. Steve, I want to ask that same question. Do you think that we're in a recession now? I think that we've already seen an earnings trough. I think we've seen inflation peak. so that would be a less of a headwind for corporations.

15:25So I think earnings are actually going to get better. I think you can make the case that we've already been in recession but the consumer cannot crack until the jobs numbers crack. And I'm not a buyer or I should say a seller of student loan repayment becoming this magnificent headwind because the administration still said they're not giving up on this. So I don't think everyone's gonna go back to actually paying their student loans, nor do I think it's going to be enforced if they don't. Well, I just, I think the keys to the household dynamics and the debt interest coverage expenses, et cetera, that we've seen is that you really don't know when the consumer is going to break.

16:07What we are seeing is there's a lot of places that were very defensive, and I would go right to Staples, which have massively underperformed. They've underperformed the S &P by 16%. I think some of this is a consumer that's just not paying 10 to 20 % more for a can of Coke, Are you paying a 10 to 20 %? I don't drink soda, Tim. As you notice by what's on R, we all drink water. And, you know, this is the more you know type of thing. Sugary drinks are not cool anymore. What if they're a diet? No, even worse. As a matter of fact, if you listen to, like, who's that person, like the surgeon general or somebody?

16:34I mean, they will tell you that if you're going to drink soda, you might as well drink the real stuff because the stuff with the saccharin. Remember Tab? Tab? You still drink Tab. I know you do. Of course I do. Of course he does. I mean, I keep squirreling away cases. We know how this we got into this conversation. Oh, I like Fresca. Yeah. How about a Fresca? Anyway, we digress. Coming up, yeah, we're just going to go to Fresca. Keep an eye on Apple. Shares gaining as analysts bite into the latest iPhone offerings. So after a rough couple of months, are things finally starting to turn up for the tech giant?

17:04We'll debate that next. Plus, make sure to stretch for this next one. Lulu and Nike also catching some analysts' attention. So which one is the best fit for your portfolio? The one they're leaning into when Fast Money returns. Back in two.

17:21Welcome back to Fast Money. It's Apple picking season, and Wall Street is feeling festive. A handful of firms out with bullish notes saying demand is strong for the tech company's newest iPhone 15S. Shares seeing green today climbing nearly 1.7%. So should you bite into this name now? Everybody is so geeked up, Dan, as you would say. For the USB-C port? Apparently. Everybody wants one of these things. The wait times are long. The demand is good. But the only question is why. Listen, we've been doing this a long time, okay? Literally, the show started right around the iPhone introduction. It did.

17:54Okay. And we talk about the announcements, and we talk about the lead up to it. There's no such thing as super cycles. They don't exist. Upgrade super cycles, okay? Think about that. How many times have we talked about this in the narrative? So because there's a website that shows the lead times and they get pushed out, the fact that this stock has gained$100 billion, whatever the heck it did today, makes absolutely no sense. Now, granted, it's down, and it's been down over the last couple months for two big fundamental reasons, if you think about it, right? Their guidance wasn't particularly great.

18:22And so I just look at a stock trading 27 times, expected earnings growth of high single digits, sales growth of mid single digits. And I see massive headwinds with China and massive headwinds towards manufacturing and access to demand in China. And I just don't see a stock that makes a lot of sense at those levels. I mean, the other thing we don't know is the supply level. You know, how many phones is Apple supplying, manufacturing? And so, therefore, are these lead times true lead times or are they manufactured lead times? Grasso, I know you got into Apple. You're still in it, I assume. Are you disappointed with the performance?

19:00No, I'm not disappointed with the performance. I think, to Dan's point, markets overshoot in both directions. So they might overshoot to the upside based on little data or little fundamentals. But they definitively overshot to the downside last week. We're talking about a million phones maybe in China, not the 45 million phones. And they factored in 45 million. So you can't say that it overshoots just in one direction. It overshot to the downside. And that's why I picked up shares. I think that that's dissipating. I think the headwinds will probably dissipate. I think that the China negativity will fall short.

19:38And I think the stock will rally much further than where it is now. Look at the price targets on the street. They're all or mostly above$200. And I think I could ride this thing up to either mid-190s or 200. Both cases that we held the prior all-time high from December of 21. And that the stock actually is traded okay given the sell-off. The bear case is China spent 24 hours sending 103 warplanes not into Taiwan airspace, but close enough where it made it to meet the press. I mean, they're not just practicing there. This China-Taiwan situation continues to seemingly escalate. The more people we send over to negotiate with China, the worse things seem to get.

20:19And ask yourself this. God forbid something will happen between China and Taiwan. It forces Apple's hand, which won't be good for the stock. It forces our hand. Mm-hmm. Yeah. There's a lot more fast money to come. Here's what's coming up next. Warrior Pose engaged. Analysts stretching into Lululemon, saying this brand could go all upward dog. So should you namaste in this name? Plus, Tesla on a tear this year. And money manager Kathy Wood is making some moves in the name. She'll join us next to break down her latest investments and where she sees stocks heading next. You're watching Fast Money, live from the NASDAQ market site in Times Square.

21:04We're back right after this.

21:13Welcome back to Fast Money. Time for our call of the day. HSBC taking position in Lululemon. Initiating the stock is a buy with a$500 price target. That's almost 60 bucks above the street average, according to Faxet. Even with shares basically flat over the last three years, HSBC seeing growth ahead for the retailer, saying it could hit its long-term targets as much as a year ahead of schedule. Still, shares finished the day down almost 2%. Interesting. Basically, they said that they liked every other sports apparel retailer better than Nike because they preferred Adidas and Puma over Nike, and then they ended up initiating Lulu with a buy.

21:49Yeah, and there's a lot of people that are concerned about sports apparel overall. But Lulu, you know, it's hard to push back on Lulu in terms of the company with the leadership they have in the segment. To me, I'm pushing back on the valuation. I'm pushing out a new catalyst. We know about international. We know China was up there at 61 percent year over year. Those numbers that they just reported to you were fantastic numbers. By the way, look at the stock. It's come all the way back to where it was going into that fantastic report and the upgrades that followed. To me, this is truly a stock that trailing 49 times, going forward around 33, 34 times with an earnings profile that if you look at it from 22 to 24, almost doubles.