Big Short Investor Bearish on Banks, and What LVMH Says About the Consumer 10/10/23

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. Stop, drop and rally as bond yields fall. Stocks head higher from builders to banks, from industrials to big parts of tech, a dovish bed and a treasury tumble, a powerful combo for the markets. Can investors trust this formula for a real rebound? Plus, soda pop, Pepsi climbing on the back of strong earnings, a hike to its full year forecast and continued pricing power. Will their move deliver the jolt that helps the struggling staples recover? And later, what's behind the two-day bounce at Bank of America?

0:34Why Rivian shares are all revved up today, and inside the results for LVMH, has a luxury spending slowdown arrived? I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Steve Grasso, Karen Feinerman, Dan Nathan, and Guy Adami. We start off with a sizable market move since Friday's lows. The S &P, which fell below 42.20 after the latest jobs report rallied another half a percent today, is now up more than 3 percent from the Friday bottom. The Dow is nearly 900 points higher. And take a look at Treasuries. The bond market was closed yesterday, but yields on the 10-year dropped 16 basis points today, its biggest pullback since March.

1:09The move's coming amid some more dovish talk out of the Fed today. Atlanta Fed President Rafael Bosick today adding to the chorus of officials like Dallas' Lori Logan and Vice Chair Philip Jefferson yesterday suggesting the central bank may be done raising rates. Rate-sensitive sectors getting a boost from those comments, from retail to builders to even the recently struggling utilities, all higher in today's trade. So does this set the stage for a market rally into year end? Guy. I pause because I know the answer. How do you know the answer? Because I know you and I'm in your head. You are in my head.

1:45But if rates do come down, I mean, that does seem to, in recent, you know, history. In recent past, lower rates are supportive of stocks. And the question then is, why are rates going lower? I mean, part of the reason could be what we're seeing now, obviously, geopolitically overseas, flight to quality in the form of bond yields. No, without question. I'll say this, and I was talking to Dan earlier today. We play the game. If you had told me, if you had told me last week what would have transpired over the weekend, I would have been horrified. But I would have said, you know what, Mel? Rates are going to be significantly lower in the back of that, not 4.65 % in a 10-year, closer to 4.45, and we're not.

2:22So the fact that rates move lower makes sense. The fact that they didn't meaningfully move lower is somewhat problematic, I think, especially when we have some inflation numbers coming out. Yeah, they don't make any sense in the context of the economic data that we've seen. So since Friday morning, when you look at that jobs report, if you look at the CPI that we're looking forward to, it's expected to be 3.6 percent. I know a lot of us were, you know, thought that we would see that 9 percent print for what was it, June or July of 2022 get cut in half at some point. That was going to be transitory.

2:49But I guess really, I guess the story of the data that we're having right now, Now, we spent a lot of time last night. We had that great conversation with Bill Simon on the consumer there, and he had actually some trepidation about the consumer. But a lot of the data suggests that those inflationary pressures are sticky. Guy, you were calling it, what, pesky and persistent? Pesky and persistent. Yes, that was you last year, and it has proven to be that way. So I just don't know how the Fed can be meaningfully dovish in face of some of the data that we are seeing. But they have been dovish. They've been dovish just yesterday.

3:20They were dovish today. Not all of the Fed. You're talking about Chair Powell. That's true. You're talking about Chair Powell. Well, as an institution, Steve. No, no, I get it. I'm helping you. I'm on the same side. It doesn't even sound like you're on the same side. Exactly. Yeah, when we agree, we disagree. So when you look at rates, though, rates are up 84 basis points from August 1st. That is screaming higher. Those are overdone. So we could say any reason why they're backing off, they're backing off. It's bullish. There's always, when you say recent past, there's always a inverse correlation to rates and the equity market.

3:56They've just been so low for so long that we never really realized the correlation was still on. So when you say what's at geopolitical, we're all nervous. Market, earnings, maybe financials are going to have a headwind on them. But I said it on Friday, the 10-year did the lifting for the Fed. They'll never, to your point or Dan's point, whichever I agreed with, they're never going to say they're done. Never. Doesn't behoove them to say they're done because then inflation creeps in again. If inflation creeps in again, inflation has been falling. What's been sticky? Wages have been sticky. Unemployment is low.

4:34Wages going up. People have jobs. The market's OK. They also have a lot of savings. There are a number of banks reacting to revised government data, which shows that there's actually more savings at households than previously anticipated. City now saying more than a trillion in savings still that consumers have, which would be good for a soft landing. It would. There seems to be a lot of noise then around where the consumer's balance sheet really is. They're employed, which is good. We are seeing a number of, you know, in the auto space, the auto workers, they're going to have decent whatever they settle on.

5:09Ultimately, it will be decent price hikes. But I still think I've been surprised at how much the markets moved, how quickly. I do think it could all go away with a bad number tomorrow and particularly Thursday CPI that will just reverse what we've seen. Because I think some of it was we were down so much in such a short amount of time that a bounce back. I don't know if this fits into your Fibonacci or 50 percent retracement from that down. Fibonacci. It was a great man. We studied together. Yes. Galileo is in the other class. Yeah. Advanced class. It's interesting. We had mentioned I thought 41.90 was a logical place.

5:49Stephen mentioned that as well in terms of levels would find support. We got down to 42.35. To your point, markets rallied almost 4 percent since those lows we made, I think, sometime last week. What is it rallied on? Certainly not fundamentals. An oversold condition. A lot of people have talked about that. We've worked that off to a certain degree. Fundamentals aren't getting better. And again, yes, rates have backed off a little bit. Rates are still higher. And this re-steeping of the yield curve historically is not really a good thing. We're seeing that all happen right before our eyes. And if Karen's right, if you get a hot number, which, you know, the calendar suggests we will, last month's inflation numbers started to trend higher.

6:25I think that will continue. Fed's in a bit of a box here. So these guys just said the bounce wasn't really fundamental. It was based on technicals. We had that uptrend coming from the October low in the S &P 500 with that breakout level, The horizontal line, if you just can picture it in your head at 4 ,200 or so, you had the rising 200-day moving average. They all converged last week at that spot where they bounced now 3.5%, 4 % or so. I can draw another line, though. And if you look at that chart right there that the team put up there, you can draw a line from the recent highs. And you can see that it's actually connecting a series of lower highs there.

6:57So we're reaching a technical level in the not-so-distant future here where it's going to be a sort of moment of truth. We're either going to break out to the upside and go back towards those prior highs. This is how you started the conversation. How do we close the year? And really, ultimately, though, it will come down to fundamentals. We're going to be in the throes of Q3 earnings. We're going to see what sort of visibility a lot of companies have right here. I suspect a lot of the things that we've heard from financials and from consumer-related companies over the last month or a half is not going to actually speak to a lot of visibility.

7:28Can I ask a question here? Of course, it's your show. And that's a rhetorical question because I can ask whatever I want. If I told you that the year, that the Treasury yields will end at 4.25 percent, where will equities be? That's a great question. I mean, just in that vacuum alone, you would think it would be higher. Why are rates going to 4.25 percent? What broke to get tenure yields down to 4.25 percent? Right, but look at how we all started this conversation, and we've been revolving around this conversation. We thought on Friday that rate cuts were off the calendar for 2024. Now they're pulled forward.

8:03A third of the respondents think that you're going to have a rate cut in March. So to Guy's point, why would they be cutting because things are so bad? The market doesn't care. It's agnostic. Which rates are you saying? Ten-year yield. Ten-year yield. Okay. I mean, you could count a few scenarios that aren't terrible, which is oil does trade down. It's already backed off a lot. Inflation does moderate. and maybe the unemployment rate ticks up a little, not a disastrous amount, but just a little bit to cool things down. Is that a scenario that you see happening or is that an unlikely scenario? Because that's basically threading the needle.

8:40I'm always optimistic because I'm always long, so you have to be. Otherwise, it's a miserable life. But I think I could see that happening. That wouldn't surprise me. I don't know if it's the most likely outcome, but I think it's a reasonable shot. CTA data that this is the most short people have been. It's in the 96th percentile. Short equities. Short equities. When was the last time 96 % of the market was right? Was right. Right? They're always the wrong side of the boat. So everyone, it's very easy to be short the market. It's very easy to be negative the market. There's a host of reasons why we should be negative.

9:17And unfortunately, the market keeps rallying for the bears. Yeah. If I'm just looking at the tea leaves, though, I'm looking at it through the lens of the stock market underneath, let's say, the major indices, which we know are driven by, you know, 10 stocks or so, 10 stocks that make up 25 percent of the S &P 500, 10 stocks that make up 50 percent of the NASDAQ 100. Aside from that, if you look at retailers, you look at banks, you look at transport, you look at I mean, the list industrials, the list goes on and on. They were all in correction territory. They're all telling you something or at least investors were voting with their feet.

9:47So when I hear data about CTAs and the like here, you know, the markets are so much more complex. Steve, you know this as well as anybody. A lot of that data could be, you know, they could be hedges. You know what I mean? Against long positions, that sort of thing. So I don't think of it as a 96 percentile saying that they're all voting. I'll leave it with this. The equal weight S &P actually outperformed the market. Yeah, but the equal weight S &P went down on the year last week. You know what happens, right? We've all been around the markets for 30 years. What happened? Maybe a little longer for Guy, a little less for you.

10:19So when either one or two things happen, seven stocks lift the rest and everything catches up or everything goes down. Well, there are also going to be the seven stocks that leave the market lower when we actually go down 20%. 100%. It's good news that the equal weight is catching up, although it would be a very small data point. Let's get to our guest now. He is known for predicting the 2008 housing market crash and now big short investor Steve Eisman is homing in on the banks. The group kicks off earnings season this Friday. Steve joins us now. He's a senior portfolio manager at Neuberger Berman.

10:49Steve, always great to see you. Thanks for having me. You've said before, not too long ago, like two weeks ago, banks are completely uninvestable. I think you came on our show, too, the last time and said the same thing. Do you still see that? And what are you looking specifically for in earnings at this point? What makes them uninvestable at this point? Well, let's start with the conclusion. They're still uninvestable. We could go to the next topic if you like, but we'll stick with this topic. The problems are net interest margins are still under pressure. There are about$2 trillion in excess deposits in the system that are going to continue to gradually lead.

11:27So estimates are still probably too high. You've got the regulators fighting, as I like to say, the generals fighting the last war. They're increasing the capital requirements of the banks when really what they need to do is just improve the liquidity of the mid-cap and small-cap banks. And so that will hurt returns next year. And I mean, I have no prediction about there being a recession at all. As of now, there's no data. But let's assume there is one. You haven't had a credit cycle yet. So what would the only reason to invest in banks is that they're they're cheap. But there's one thing I've learned in all in my career.

12:04And I've only had to learn this the hard way multiple times is investing in something just because it's cheap is a value trap. And shorting something just because it's expensive is a death wish. So I'll be on the calls and then thankfully the weekend will start so people won't be all that depressed about it. You're also not optimistic, if I can put it that way, about the consumer. Oh, that's not fair. That's not true at all. Oh, it's not? Okay. You've got wrong information. Okay. You like the consumer where they stay? It's not that I like the consumer. I mean, in terms of the overall health of the economy, the consumer is fine.

12:41The consumer has savings. The consumer is employed. The consumer has income. So it's not a data point in terms of there being a recession. Where I think you could be negative is just that, you know, rates are a lot higher. It's more expensive to buy a house. It's more expensive to buy a car. It's more expensive. People finance something. It's more expensive to put a solar panel on your house. So any part of the economy that requires that's involved with the consumer buying something that also requires it to be financed has problems. That's not an indictment of the consumer. That's just a mathematical fact.

13:15So are you positioned to reflect that? In other words, are you short any of the... Well, I don't short for clients anymore. But, you know, I wouldn't own home builders right now. I mean, they've had a great run. But the home builders have been subsidizing their customers with lower rates. But even that's going to bite. I wouldn't be involved with building products to any significant degree. On the residential side, I don't think you should buy somebody who finances new cars or used cars, etc. Anything in that universe, I think, is just going to have trouble just because of simple math. I mean, I did this calculation when mortgage rates were 7 percent.

13:57Now they're 8. But when they were 7, for you to buy somebody out out of a house where they have a 3 percent mortgage, for you to have the same monthly payment, the house price had to be down 40 percent. So now it's 50. Wow. That's just math. Now, no one's going to sell their house down at all if they have a job. They just won't move. So the housing market is locked. People can't buy and they can't sell. Now, you know, the housing market is not nearly as important a part of the economy as it was in 2008. It doesn't help the economy. But, you know, I'm surprised as everybody else that the economy is as strong as it is.

14:34You have to respect it. So you're talking about the consumer. You think the consumer is in okay shape. but isn't able to do the things that they've been doing in the last couple of years, buy cars, buy houses. Less of it. Right, less of it. So ultimately, how do you think that stalemate resolves? Do they continue to not buy those things? I think they continue to not buy those things. And rebuild their sort of savings and then ultimately spend again? Yeah, I think that's probably what happens. I mean, like I said, you would have thought, given what's gone on with rates at this point, that the economy would be in a recession.

15:06And not only are we not in a recession, we're not even close to a recession, So look, I'm not an economist. I think everybody should have a little humility at this point about predicting recessions You know, I watch your show. I watch other people's shows. I read other people You know, there were people who were negative going into the air that became positive that people became positive or negative They've all been wrong So everybody should just take a step back take a breath and just say the data currently says there's no recession We'll see what happens. So Steve you mentioned that the banks are uninvestable You've said that routinely now for the last few months that they've acted horribly as a group We would all agree that they're not all created equal.

15:43You know, there was an article yesterday in Bloomberg that really caught my eye and a lot of other people. Let me guess. Bank of America. You got it. BMA's wrong way, rate blunder. By the way, in my world, that's old news. Right. No, well, that's the thing. We've been talking. You watch our show. We've been talking about the relative underperformance. Karen has a bank that she likes an awful lot. And this one acts. Which one is that? JP Morgan. So you don't watch that much. No, but I mean, my whole I have a joke. If I was still a sell-side analyst covering just banks, I would write the same thing every single day.

16:13Banks are uninvestable, but if you have to buy a bank, buy J.P. Morgan, call me in a year. Yeah. So going back to your discussion about value traps and death wishes to the short side, when you think about Bank of America, can they work their way out of this blunder? Does it become investable at some point? It's getting really cheap, and if you think about what they did, if they can hold on, if they don't have a draw on deposit. They will. Let's not get people crazy. This is not Silicon Valley. The only reason why Silicon Valley happened is because they had a much bigger problem in terms of the math than Bank of America.

16:46And their depositors were all venture capitalists pulled their money so they had to sell their bonds. Bank of America. I don't lose any sleep worrying about Bank of America. Believe me. Would I buy Bank of America today? I wouldn't because it has an earnings problem. It's an earnings problem. It's not a capital problem. It's not a solvency problem. problem. It's a question of what do you want to pay for a bank that has net interest margins problems? And it's going to happen for quite a while. I mean, you know, when you have a$700 billion portfolio that's underwater, it's a problem. It's not a disaster.

17:17Small business hires, I think, almost 65, 70 percent of the people in this country. Basically, the lifeblood of small business are small and regional banks. If credit conditions tighten, regulation, a myriad of different things. How important is that whole set of circumstances to the economy? Well, they're already tightening because they're losing deposits. I had a small, small thesis earlier in the year that when Silicon Valley happened, this would really slow the economy. It hasn't. I'm not exactly sure why, but there's a lot of fiscal stimulus. It seems like people who are in business can still get loans.

17:53So yeah, on the margin, it's restrictive, but it doesn't, at least at this point, doesn't seem to be having an impact. And I'll be the first one to say I'm surprised by that. Steve, you had mentioned before that, you know, shorting stocks just because they're expensive is a death wish. And I'm wondering, you know, your comments on recession, I think, are really spot on because there have been so many people who have been dogmatic in their view that a recession was going to happen this year. And that has caused them to miss, move higher in equities. So, I mean, is there sort of a parallel, you know, trying to call a recession, trying to basically short the economy is also like a death wish?

18:27It's not a death wish. It's like it's, you know, in our business, being early or too early is the equivalent of being wrong. The question is how early? So if you're a year too early, you're wrong. If you're six months too early, you're wrong. If you're a month too early, you're a genius. So it's a question of timing. You know, what I would say to anybody who's trying to predict a recession is, okay, I get your thesis, but now why don't we just wait for a data point that indicates that it's happening before anybody starts to make such a major call about it. So last time we heard, you were pretty positive on infrastructure.

19:05I still am. Do you think, okay, I want to know if you still are, do you think the move in rates has dampened the infrastructure demand? Do you think it'll happen anyway? Oh, I think it happens anyway. I mean, it's$1.2 trillion that the United States government's going to spend. It's not going to really matter what interest rates are. So that doesn't mean that there aren't parts of the infrastructure or greenification story that aren't impacted. Like residential solar is definitely impacted because, yes, you could get a tax break. But if you're going to be paying triple monthly what you were going to pay two years ago, you may not put a solar panel on your house.

19:37So, you know, solar was considered a growth industry and now volumes are negative, which I think is shocked the hell out of everybody who invests in residential solar. I think there'll be a time where that'll come back. That's not uninvestable. It's investable. It's just a question of when. I think it's a little early right now. So, Steve, we talked about it at the top of the show. Wages are actually sticky. Wages have gone up. So can we make the connection that consumer stocks that you don't need to finance for are probably going to be stronger going forward? Sort of counterintuitive. Oh, I understand.

20:11You mean reallocation of money? Exactly. Possible. Yeah. That's definitely about it. I mean, look, when you buy stuff on Amazon, you generally don't finance it. Right. You finance it on your credit card, and that's fine because you tend to pay it off pretty quickly. But anything that has any financing duration is a problem. How are you feeling about the big cap tech stocks, the so-called Magnificent Seven? Are you along any of them? Like everybody else, I am. I don't know if I have any more insight into them than anybody else. I'd probably be humble enough to say I don't have any more insight into them than anybody else.

20:43You own them when you have to? It's not that I don't own them because I have to. Only because I want to. If you're a benchmark. It isn't so much the benchmark. It's where all the dynamism is going to be in the economy for a long time. You know, Neuberger, we had the CEO of NVIDIA in last week. I don't think I've ever seen a CEO so, let me put it in the right terms, calmly confident in my entire life. I've never seen anyone so completely relaxed and so confident about their prospects in my entire career. Convincing then. Yeah. Steve, we hope you'll come back soon. Thank you. Before we let Steve go, he mentioned genius.

21:22I don't know who your stylist is, but he or she is a genius because that jacket with the brown, fantastic. You can thank my wife. She forced me to buy it. Well, thank you. Thank you, Valerie. You're a lucky man. Steve, thank you. Valerie, thank you as well for the good pick. What do you think? Well, it's interesting. You know, we haven't even mentioned enterprise spending. OK, so if Paul Tudor Jones is correct and at some point early next year we are in a recession, that's the next shoe to drop. And when you talk about this so-called, I like how you do that, Magnificent Seven, they're going to be the ones that actually lead to the downside because they've done all the cuts.

21:59Right. They've made their business really efficient. They refinance their debt. They're getting paid five percent on all that cash. They don't have debt. Well, on a net basis. But but but understand, like they refinance debt. You know what I mean? My biggest takeaway was the guy with the big, short claim to fame told you you're probably too negative. Yeah. But I guess my point is that I think they lead to the downside because markets and investors are going to sniff it out. Like, we haven't talked about a decrease in enterprise spending, and that will be one of the things that gets hit when it becomes very clear that we are seeing weakening economic data.

22:33Well, that could happen. But I just want to say if it's a balance sheet thing, that is where you want to hide. I'm saying that's why the money is going there right now, Because I think a lot of folks feel that when it was a drag on these companies' valuation because they had$50,$100 billion in cash earning nothing, right, in treasuries, right, that Brian Moynihan was buying lots of, okay, these folks were refinancing and then they're still earning billions of dollars a quarter, you know what I mean? And now they're earning an interest on that. I agree with you on one thing, though, if I could just add, that the math of the buybacks no longer works.