Banks Gear Up To Kick Off Earnings Season… And The State Of Commercial Real Estate 10/10/24

0:05John and Morgan thank you very much and live 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. Q3 earnings kick into high gear tomorrow with JP Morgan, Wells Fargo and other banks all releasing their results. What can we expect from the financials and from the rest of the market? And rates are on the rise. Yields on the 10-year hitting their highest since the end of July after this morning's CPI report. The inflation and Fed implications coming up. Plus big action and the options on NVIDIA. The chart Master says it's time to buy Uber, the state of the commercial real estate market from the CEO of a$10 billion investment firm.

0:43All of that is coming up this hour. We're all ready. I'm Kelly Evans in for Melissa Lee, live from the Studio B at the NASDAQ. And on the desk tonight, Tim Seymour, Dan Nathan, Julie Field, Mike Cowell. Mike, did I already screw that up? What? Just Co? But he's really Coco. I'm so sorry. And Leslie's here as well. So let's kick that off with big banks reporting Q3 results in the morning. J.P. Morgan and Wells headline tomorrow's reports with Bank of New York and BlackRock also on the docket. It has been a strong year for many of these names. Double gains, JPMs of 25 percent. But can the good times, Tim.

1:22Good times. All good times here. Can they keep rolling? Leslie Picker here to discuss what are the expectations? I mean, it's been pretty strong going into it. By the way, great times with both you ladies here. Thank you for joining us, Kelly. So let's get that out of the way. Right? Yeah, really fun. Q3 earnings themselves, everyone is looking past those because they're expected to be a little bit weaker, a little choppier. But the number one question that analysts have is future performance. Beyond that, rate cuts can be a headwind for banks' profitability in the near term because floating rate loans tend to reprice downward more quickly than the rates paid out on deposits such as CDs.

1:57Now, that gap is expected for Q3, but most analysts are urging investors to focus on that medium-term trajectory. Morgan Stanley Research said specific commentary on deposit pricing is likely to drive, quote, outsized reactions during earnings, driving higher bank stock volatility. But on the flip side, a lower recession likelihood coupled with cheaper financing should bode well for the M &A pipeline. And with the election a few weeks away, corporates will also get more regulatory clarity that could potentially help C-suite confidence for doing bigger transactions. Even though estimates indicate little choppiness in those three Q reports, it appears that the markets are already looking past that.

2:39The financial sector hitting a record high yesterday, although slightly in the red today. We'll get this first read tomorrow when J.P. Morgan, Wells Fargo report before the bell. I mean, how important, Tim, is big bellwether this time? Not so much always a big bellwether. Big banks, the regionals. I mean, where's your brain at? Well, often with J.P. Morgan, we're trying to also get an economic read. And certainly Jamie Dimon is often delivering that. If you think about where banks have gone into earnings seasons in the past, it's usually been a period of banks have been sold into these numbers.

3:11and the question is really whether investors are actually seeing some change either in the regulatory environment or their ability to give back capital, et cetera. But banks are coming into this on a run. I mean, banks have outperformed. Look at the regional banks in the third quarter. I mean, they were up 18 percent in the third quarter. I mean, they've been one of the best performing subsectors in the S &P. So that's really the question. I think the bar is very high. I think the net interest margins, which probably peaked last year, are going to be under close watch. I think with a Wells Fargo, this is a bank that in the last three weeks or a month has had some of that cap lift off of them by the regulator.

3:46And that's part of why I think Wells has outperformed. I think it's why Wells can continue to outperform. Dan, what do you think? Yeah, so the money centers are not particularly interesting to me. They're all off of their highs from July or early August. And when I think about what's going on there, I think what Pick just said here, I mean, there's a lot of uncertainty as it relates to the rate environment. And it's like what I want to focus on, and I'll just tell you, I just spent two days with a bunch of bankers, a bunch of VCs, a bunch of private equities, a bunch of private tech people. They are all hoping that this IPO window opens up in 2025.

4:15They're actually pretty confident about it. Why isn't it open right now? Well, I mean, you would think, though, with a stock market at all-time highs, you know what I mean, that you had, you know, 25 % returns last year, 20-plus percent years. A lot of it's just not ready. Valuations, I think there's a whole host of things. But it being the startup companies? I think a lot of the focus just turned to generative AI. And so there's still a lot of these companies are raising billions and billions of dollars. And they're not going to go public for two, three years if many of them get there. So when I think about some of the stuff, the backlog of some of these things over the last few years, there's going to be strategic M &A.

4:47There's going to be private equity. So I think that's the focus. Morgan Stanley, Goldman Sachs. Morgan Stanley is about to break out of a four-year consolidation. Goldman Sachs looks like it's about to break out. So that's where you're going. And those are what? I think that's really interesting. I think you buy them on any pullback. I find the money centers. Yeah, Tuesday, Wednesday. I think you find the money centers less interesting. And so you like them even though we don't have a big IPO activity right now. Well, I think that you would buy them. I mean, the credit markets have been crazy strong.

5:10I think you'd buy them in anticipation of that. Of that coming. Julie, what about you? Yeah, I mean, Dan stole my thunder. That's exactly how I feel. I'm much more interested to hear what's going on with the investment banks. You know, I'm not really interested in banks, broadly speaking, because there's just not a lot of differentiation. but you know at Kane we've been doing a lot more testing the waters meetings with private companies that are getting ready to go public it's like their little training wheels meeting was they get ready to talk to mean nasty investors like me and what I'm seeing that's encouraging is actually the quality of these companies is better and they have a little bit more religion around profitability but if they're touching anything with AI they've really been given a blank checkbook in order to spend and so I think it's a little bit of a mixed outlook for IPOs but what is really there is that most PE portfolios are very long in the tooth as far as being able and needing to trade them.

6:01And so I actually think that will lead most of the investment banking activity in the near term. And Mike, just to point out something that Michael Kantrowitz himself at Piper noted the other day, those shares are up 60 % year to date. And there is this expectation that investment banking is back and that deals are going to be made because rates are coming down and maybe the IPO activity helps at the margin. Are you seeing any activity around some of these publicly traded investment banks or advisory firms? Well, I mean, I would probably draw a distinction between Morgan and Goldman. Morgan has focused more in recent years on asset management.

6:36I think that's a business essentially that James Gorman really gotten them into and it has served them very well. Consequently, their revenues are going to be hinged pretty closely to asset prices generally. And where are we with asset prices? They're elevated. We're very close to all-time highs in many places. So when you have these kind of record levels for the equity markets, then our expectation should be that Morgan Stanley's revenues are going to continue to do well. Goldman Sachs, obviously, is going to focus more on the issuance side, on investment banking, sales and trading, that sort of thing.

7:07So those are the kind of things that you would look forward to for Goldman Sachs in the year to come more so, I think, than you would in Morgan Stanley's case. And just looking back at the money center banks, you know, one of the things I would just quickly point out is that all money center banks aren't equal. I mean, we have seen that Bank of America, for example, hasn't done an exceptional job at managing their treasury portfolio. You know, their HTM book has a lot more duration. And so when you start to see if, you know, if you're going to use TLT, for example, just as a proxy for long-term rates, then you can see that, you know, that HTM book hasn't been doing well, but it's going to look OK when they report because, of course, those rates have been falling.

7:50But as we look ahead, you have to sort of keep an eye on those long-term rates. And whether or not you actually mark that to market, people still care. I think it's something to tuck away when you see the 10, you're going back up to 411, and you start hearing Fed officials talk about how maybe they're on hold in November. And Leslie, just to bring this back around to what Tim said a moment ago, the KRE outperforming in the third quarter, still lagging year to date. So maybe KB up 14 percent, KRE up seven, and we will hear from them into next week, is what's the word on the street around people looking to the big banks versus the regionals kind of into year end?

8:23Well, I think a lot of that has to do with a catching up because KRE was under pressure for a long time after the regional banking mini crisis, shall we call it, from the spring of 2023. And there was all this concern in a higher for longer interest rate environment that we would, number one, go into some sort of recession, and number two, that credit quality would deteriorate as a result of higher interest rates. And by and large, there's some examples, some kind of anomalies there. But by and large, credit quality has held up much better than most people expected. I mean, you can make an argument credit spreads are as tight as they've been in years.

8:55And so, again, even when equity markets were at all-time highs, but bond markets, rates markets were selling off, commodity markets were telling you that the world was worried about growth. If you're worried about growth, you should be worried about credit. That's not what credit's been doing. Exactly. Right. And that's been a positive sign for the stock market, too, despite a lot of these recent hiccups. Well, the 10-year yield is hitting its highest level today since the end of July after this morning's hotter-than-expected CPI print. But our next guest still believes yields are coming down, so good news for Mike's B of A trade there, potentially.

9:23Michael Schumacher is the head of macro strategy at Wells Fargo Securities. So I was talking to Brian Weinstein, a colleague of yours earlier in the week, who thinks the upper end of the 10-year range could be 5.5 % in the next year or so. That's out of consensus for sure. Katie Stockton is one who thinks that, you know, maybe we're going back into the high threes on the 10 year. Where do you fall? I'd say probably low to mid threes, Kelly. So by the end of this year, call a 375 next year, three and a quarter ish. But it all hinges on the Fed. If the Fed signals, hey, we're likely to cut fairly aggressively.

9:56None of this nonsense about skipping a meeting. That's pretty silly. Yields are going to come down a fair bit. So I think it's been a lot of this talk from the Fed. It's actually pushed up rates both on the front end, also the back end. Dan. Yeah. How restrictive do you think the policy is right now? So again, we have GDP that's tracking ahead of trend in 2024. We have unemployment that, you know, I guess the Fed indicated 4.4 percent by the end of the year. That might not happen here. So when you think about where yields are, where you think they're going to go, is it partially because of the rate and where it is as being restrictive and they're worried about obviously sending the unemployment rate higher and the economy lower?

10:33Policy is restrictive. Think about what the market's telling us regarding the end of the Fed cycle, the terminal rates, 335, 340. That's a big number. The Fed itself would tell you neutrals about 290, 285, something like that. This is quite high in the beginning stages of an easing cycle. Things are not that great, frankly. That's why the Fed's cutting. And for the market to sit there at 335, 340, simply too high, policy's too tight. Julie, you want to get in here? Yeah, what I'm curious about is, you know, a little bit piggybacking off of what Dan said, But what should our expectations for economic growth really be if we assume that higher rates really didn't hamstring the economy the way I think people expect it?

11:13Should we really expect it to reflate dramatically on the downside? We shouldn't really expect a recession necessarily, but things could tip that way. So if you think about the probability, let's say, of hard landing, soft landing, maybe hard landing is 25 percent, 30 percent, something like that. So it's not a given that we're going to get a soft landing. The Fed's looking pretty good right now, but there still is not quite the buffer the Fed officials will like you to hear and think about. So they want to see a bit more room before they get too excited and take that victory lap. Michael, how do you balance the volatility, though?

11:45VIX is elevated, and that can be for a lot of different – there can be distortions there. I know you at least throw out the possibility of tail risk around the election and certainly a result that's not clear. Help us understand whether you think markets overall are positioned for that, and is the VIX telling us something that maybe we don't see? Yeah, markets are not ready for that. The rate market is telling you, look, vol is going to be high for a fair amount of time around the election. And people like to try and home in on one day, but we don't all vote on one day anymore. It's not the way things work.

12:14So what's the chance we'll actually know who the next president is going to be the night of November 5th? Probably pretty low. And who controls the Senate? Also low. So I think you've got to prep for a period of extended volatility. If it's just a day or two where we're left hanging, not such a huge deal. But if that stretches out to be a week, I think that's a pretty major risk off of it. S &P's down, who knows, 2%, 3%, 4%. Bond yields go down a lot. That's what my call is looking better, frankly, Kelly. So I wouldn't mind seeing some of that, but maybe for the wrong reason. So you'd be a buyer of treasuries here across the curve, really?

12:47I would not take a ton of risk, but I'd want to be long at least a bit. So and preferably more toward the short end of the curve. Keep that duration relatively low. And if it all hinges on the Fed, why not focus on the part of the curve that's most impacted by the Fed? The very short year, three year front end. That's right. But then you'd have to then you think they are going to be cutting pretty significantly. I do. I think this talk about skipping a meeting makes no sense. You can't go 50 basis points on September 18th and say, well, we kind of misread the data. The data are puzzling. We're not sure what to do.

13:16We'll just wait. That's just not a good message to send. All right. Michael, thanks. Michael Schumacher. Julie, you want to trade it? Yeah, no, I think looking at the 10-year, it's really hard to have a lot of confidence where direction of rates are going. My biggest concern is just that there is so much enthusiasm. And I see this particularly in small cap that's like, oh, my God, the minute rates go down, earnings are just going to go way higher. And the thing is, it's like they weren't that negatively impacted by the higher rates. And so I think there's a little bit of a disconnect there. And I'm worried that the enthusiasm isn't going to get met.

13:50All right. Mike Coe, you want to add anything on the way out here? Well, I think, first of all, that inflation can be more persistent than one would expect. And, you know, we have other drivers. I think Julie was asking the question a little bit earlier, you know, about the economy. And the fact is that we are running a two trillion dollar deficit official, two point two trillion real, probably that's seven and a half percent of GDP. So if you're wondering why the GDP numbers look the way they do, even if the multiplier is low, which it typically is when unemployment rates are low, it's still material, right?

14:23So that's where some of that is coming from. And that can also be inflationary. So I don't know how much lower than 4 % I would expect the 10-year to go in the short term, unless we're really looking at something fairly grim on the growth side. Yeah, I think people who see it that way would certainly say, well, yeah, maybe the short end's a little safer place to be right now with all of that going on. We're going to take a quick break. But coming up, AMD is unveiling its latest, greatest hope in the AI race. CEO Lisa Su speaking with CNBC just in the past hour. We have all the headlines from that interview next with AMD shares under pressure.

14:53Plus the state of corporate real estate. Can this beaten down industry expect a turnaround in the near future? We'll dig in. You're watching Fast Money here on CNBC. We'll be right back.

15:16Welcome back to Fast Money. AMD CEO Lisa Su speaking with our own Christina Parts Nevelis in the last hour discussing the AI chip her company hopes will compete with NVIDIA's Blackwell. The share is under pressure going into the close today. Christina, what did she say? Well, AMD really has come a long way from, you know, not making GPUs, barely making any money in 2023, to an estimated about$5 billion in AI chip sales this year alone. So Lisa Su did launch AMD's latest AI chip, the MI325X, available this year, set to compete directly with NVIDIA's H200 chip. But that particular NVIDIA chip has actually been on the market for three years already.

15:58So I asked Lisa Su if it's just a constant game of catch up. Listen. First of all, the market is moving very, very quickly. You know, if I just say, you know, our MI300, which has been in the market now just a little bit less than a year, was competing against the H100, which was the previous generation. It's done phenomenally well. Su wouldn't talk exact price. I asked her about that, but said the total cost of ownership, TCO, for their current chips would undercut NVIDIA. AMD also announcing a fifth-generation CPU chip, so think of that for doing just the general tasks on a computer, claiming they now own over a third of the CPU market, which was once dominated solely by Intel, gone are those days, a new AI PC chip, and an increase in their total addressable chip, AI chip market, I should say, to$500 billion by 2028.

16:51Much of this news, though, was largely expected, especially from all of the analysts out there. There was no new customer announcement. And then yet some of them were criticizing the fact that AMD's latest AI chip, the MI325X, compares to an older NVIDIA chip with Blackwell coming to market. That's NVIDIA's latest chip. So the CEO, Lisa Su, did insist the AI market is still nascent and that demand momentum will and should continue. That seems to be the trend from all of these chip CEOs and AI leaders. Christina, with this kind of out of the way, what would be next on the horizon for AMD investors who might be hoping that there's some more positive catalyst into year end?

17:33It's just a constant, the next iteration of their chips. Also, the software, Rockamem, that they mentioned, because like NVIDIA, AMD wants to provide the entire rack. You've got your CPUs, your GPUs, the software that goes with it. designing it with their new acquisition of ZT Systems is another example of how AMD really wants to provide a turnkey solution. The problem is almost every company wants to do that, even hyperscalers, right? AWS is working on this. Google's working on this. Meta's working on this. So I think that in the next four to five years, those are going to be major threats to these chip companies that are leading the pack right now.

18:10True. Christina, thanks so much. Christina Parts and Evelis out West. And, Tim, to me the biggest surprise was looking at the charts and seeing that AMD shares are now up only 11 % year to date. 11 % for the company that's supposed to be the second in the race next to NVIDIA, which is a multi-trillion dollar company whose shares have more than doubled. Yeah, look, I think there have been some questions, some structural questions about where AMD is and where they can compete. But you're absolutely right. In fact, a month ago, AMD was down on the year, which is crazy when you think about what's been going on in the space.

18:40and they are, even if a distant number two, they've underperformed the SMH by 31 % year to date. Wow. And it kind of tells you. I think there's an opportunity. I'm long AMD. I do think also just in kind of core data center, they've been taking market share, and the margin story there is impressive. It's not cheap, and it never has been cheap. And I think the question really is if there's a whole lot of hype around AI that is priced in, you know, AMD probably trading where it should right now. Julie, what about you? Yeah, no, I agree with Tim. I think it's a function of being able to balance the fundamentals where NVIDIA is clearly, clearly dominant.

19:14And you have to keep in mind that when you're building a lot of this AI software, you're using their language in order to do that. And that's created this huge moat around their business that it's really hard for AMD to really be able to replicate that enthusiasm and just that language. It's a real switching cost. But there's no company that's so glorious, so good that valuation doesn't matter. And I think at these levels, it has to be a concern. And AMD as a fast follower potentially has the ability to kind of continue to broaden out the offering of what AI infrastructure looks like. All right.

19:4637 forward PE 39 for NVIDIA. Do you want to get in on that? Yeah. I mean, listen, NVIDIA's customers would love a second source. And so Lisa Su has been talking about this$4 to$5 billion in revenue from their GPU that should compete, but they just don't have it yet. And so they're still expecting to kind of guide to that. They keep talking about a TAM that's keep, you know, continues to grow. And that's why you can't announce some new customers. And I think Tim's right on the CPU front. They've obviously done really well in the data center. I think that AI PCs are going to be a thing and they're well positioned there, but that's just not going to do it.

20:22It's not going to justify the multiple. The other thing is, you know, you'd say with the stock down as much as it is, and it's only up 11 % in the year, that there's high expectations, you know. But, you know, right now, if you look at the out year, 2025, there's expectations for 60 % EPS growth and about 30 % sales growth. And that just doesn't look particularly likely. That's why I think you had the underperformance today. So you wouldn't take this as a... No, at some point it's going to be, I mean, like, you know, at some point it's going to be de-risk. At some point they're going to say we're not going to hit that$5 billion number.

20:52I think it was, look, I think some of it was de-risked, you know, over the summer. And if you think about the sentiment year over year at this AI event, Last year, they're announcing the MI300, and no one even cared really what it was. They just heard the name, and they heard it was probably a 350, TAM, last year. It's now 400. But that's totally fair. Dan's right. I mean, what we haven't seen is the entire semi-space been properly de-risked. And so that will come with a growth scare but with a market scare. Right now, the growth companies that trade at big multiples are the ones that actually, if you look, semis have been outperforming the general market over the last month.

21:26Even at a time when you've seen it's kind of that barbell, right? You've not seen the mega cap tax. You've seen stuff that's a little bit more value-oriented banks and some of the traditional economy, but then the high end. Semis have picked up the pace again and are outperforming the S &P for the first time in three weeks. Oh, NVIDIA almost made a new high. Yeah, fresh highs. Yesterday or today, options traders are betting that it could then have that breakout as early as next week. Mike Coe looking at that. And what do you see, Mike? Well, I mean, NVIDIA is always the busiest single stock option and by a very chunky margin.

21:56And actually, on its own, it represented about 9.5 % of the total U.S. options volume, and that includes ETF and indices. The call volume was up about 20%. That's an increase of about 500 ,000 contracts over the 20-day average. The busiest contracts that expire next week, so ignoring the ones that expire tomorrow, were the 135 and 140 strike calls. The 135 calls traded about 80 ,000 contracts. There were a lot of block prints in there. The one we're highlighting was a purchase of just under 700 contracts for about$3 a contract. So risking a relatively small percentage of the current stock price to bet, since it is bumping up against those all-time highs, that it could actually break through sometime between now and a week from tomorrow.

22:37And maybe widen that gap with AMD. Dan, what are you watching? Well, listen, with the stock up 170 percent of the year, like you just said, it's very close to those all-time highs. Some of the call buying on a short-dated basis but also looking out to November suggests that there's a lot of folks levering up that they think this is going to make a year-end run. And, you know, if you look at the chart of this thing over the last year, it's had these breakouts, consolidations, breakouts. And I think that's what it's held. It's held that uptrend. Yeah. At times it looked like it was going to. Excuse me.