Cracks In Homebuilder Foundation Grow… And De-Dollarization Drama 10/9/25

0:02Live 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. A builder bummer. The housing sector has been coming under steep pressure for the past month and is facing its worst week of the year. Is there anything that can turn this group around now? We'll debate that. And the de-dollarization drama. Global central banks reducing their holdings of greenback-denominated debt. What signal does that send and what could it mean for the markets? Plus, Delta shares take off after earnings, another round of deal-making in the health care space, and Lululemon loses ground among a cohort in the latest Piper Sandler survey.

0:37Can anything save the struggling athleisure brand? I'm Melissa Lee. Come to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Dan Nathan, Guy Adami, and Mike Wilson, CIO and Chief U.S. Equity Strategist at Morgan Stanley. Welcome to you, Mike. Thank you. And we start off with the latest headache for the housing sector, The XHB Home Builder ETF dropping another 2 % today, hitting its lowest level in over two months. The ITB Construction ETF on pace for its worst week of the year. And some of the biggest names in the space down 10 % or more since Monday. And while mortgage rates are down from their highs of the year, they remain stubbornly stuck above 6%.

1:12So is there anything other than a major move lower in rates that could get builders climbing again? Guy, what do you say? I think it's a washout into space. And you're starting to see it now. We've talked about this. All these names, D.H.I., Pulte, Holmes, Toll Brothers, they all topped out either October or November of last year. They all sold off into April like everything else did. But the bounces they all enjoyed were nowhere close to the prior all-time highs. Now they're starting to roll. And there are a couple reasons, I think. Trump administration seemingly has a bullseye on their back.

1:41That's not helpful. But I think it's an employment thing as well. It's also an inventory thing. I mean, listen, real estate is regional. I get it. But if you look across the country, you're starting to see inventory builds in some really interesting places. And I think that's going to put pressure on pricing, which subsequently puts pressure on these stocks. Remember, Diana Olick was at a housing conference maybe three weeks ago or so. One thing that really stuck out in her reporting was that builders are buying down an average 100 basis points in mortgage rate. So by that math at that time, you know, that's you're getting down sub five and a half percent.

2:13So if we have to wait for rates to clear that mark, that's a long ways from here. Well, and it's margin destructive. And it's nice having Mike here because I know he's got some theories about corporate margins in general. In the big picture, what may be happening in the housing market, especially because of the stuff the guy is referring to from the White House, if they're talking about supply side and they're throwing margins out the window, then you have a dynamic here of buying out mortgages. I would also just add that haven't we already seen the housing market get this rally on lower rates?

2:39I mean, that to me is what it was on the second spike of this double top that I think you're selling and continue to sell here. So I don't think you need to chase it. The one thing that's kind of interesting, we had our conversation about data center last week. And it's kind of cool that in the XHB, you have some of these data center plays that are the HVAC plays that have traditional been in residential housing. So a train, a carrier, some of those names that are actually some of that data center infrastructure build out. And they're kind of interesting. So take a look at those. But I'm not sure you want the housing part.

3:08Yeah, the cooling names that have exposure to the data center are very interesting. Is it the consumer here that we're looking at? I mean, what's happening? This is a structural problem in the housing industry. And this, by the way, may be the first sign that we're going to see some tariff implications on earnings. So the tariff, I mean, the higher cost is what's killing the home builders. Don't forget the home builders took a lot of share from the existing home market because there was no supply. What was that? You said it took a lot of share, and it sounded like hell. But you would never do that on cable TV.

3:38But at the end of the day, I mean, they've been discounting, and now new home prices are actually cheaper than existing homes. That's the first time we've seen that. So there's a structural profitability problem in this industry because of costs. And so lower rates is not going to help their profitability. I like the housing space, but the home improvement sector on activity picking up if rates come down. Yeah, labor is probably somewhat of an issue there, too, when you think about that. So you have the double whammy of just increased input costs and then labor. You know, it's worth noting 30 year fix, as you said, Mel, is that, you know, one year low.

4:11It's at 6.3 percent. Well, that's where it was last October. Right. Like the same level here. And the fact that the ITB is down 20 percent from those all time highs, it tells you that there's something else going on here. Yeah. I just really quickly. It's interesting because Mike's talking about the home improvement and that. Home Depot has been pasted, too, with the group. I'm not and I actually like Home Depot. I think these are levels both on the stock somewhere. Certainly 350 is a good level of support. But I think the valuations and the numbers we've gotten from Home Depot tell you they are a margin story that's helpful.

4:43You could have said spackled. Oh, that's a good one. You could have done spackled. Because the people may not know what pasted means. Pasted. Have you ever spackled? $4.25 down to$3.77. That's pasted. Have you spackled before? You know what? You say that thinking that I have not spackled before. Who hasn't spackled before? If you can't spackle, you're in trouble. My people don't spackle. Your people meaning what? What are your people? Be careful. The tribe. Real quick, I mean, name like Mohawk Industries, for example. I mean, take a look at MHK, which made its all-time high in 2017 and set some bounces along the way.

5:16And these are the names I think Mike is talking about, some of these names that get bombed out. And then if rates were to go lower, you look at some of these names. But I don't think we're there yet. So basically everybody here is bearish. Well, it depends what happens to existing supply. So if you can get existing home supply out. Now, they have talked about any housing. But rates would have to come down. Well, or maybe mortgage portability, or they could do something structurally. You know, don't rule anything out with this administration. If they say something about housing affordability, there's probably something coming.

5:45Make your mortgage with you. Yeah, something like that. And then you actually get supply, prices down. Activity then leads to more activity in the home improvement space. Have you guys seen Whirlpool? Maybe they can pull that up. It's now 70 % from 2021 highs. It's about to make new multi, like five, seven-year lows or something like that. I mean, where does that come in? Washed out. I like it. I like it. Washed out. See what you did there? I do a lot. Guy, you do a lot of laundry. Can I tell you something? I get in trouble. No, I mean, we have time because I try to do a load of laundry. Sure, it's 5.06.

6:16We've got the whole hour. Go ahead. Say what you want to say. Because then you don't let it pile up until the weekend. I give you 30 seconds. And by the way, you want to wash with cold water. And don't use as much detergent as you think. Less is more in the detergent. I'm sorry. Mike comes in here. once a quarter. Morgan Stanley is appalled by the company's key. I'm an excellent folder just to be careful. Anyway, okay, let's move on. Our next guest downgraded six homebuilder stocks earlier this week. Evercore ISI's Stephen Kim joins us now. He is a firm's head of housing research. Stephen, great to have you with us.

6:49So is it more than just a rates problem for the homebuilders at this point? Oh, yes. So a big part of our downgrade on Tuesday morning was our understanding that the administration was going to aggressively pursue supply side solutions to affordability, which is really the worst possible thing that the builders could hear. And I think that FHFA Director Pulte has been very clear and increasingly clear in his tweets and interviews about what it is that he's looking for. And the administration seems to believe that we have a national housing deficit because we didn't build enough homes. The deficit is why home prices are so high and that housing has become unaffordable.

7:34Higher home prices are also contributing to inflation because the shelter component of CPI is high. And then they look at the builders and they say these builders are deliberately building fewer homes than they could. They're posting strong profitability and cash flow and buying shares back. And they say, well, look, if the builders could produce more homes at lower prices, homebuyer affordability gets better, inflation gets better, employment will improve. And they believe that new home prices can decline even without dragging down existing home prices, which, by the way, has kind of been happening as well.

8:03So there's a lot of truth in what they say. At the same time, it misses something critically important, which I think the builders are really hoping that they recognize, which is that we have a demand problem right now. I think you all have been talking about that. We don't actually have a supply problem right now. If they could have gotten builders to build a lot more maybe three or four years ago, that would have been different. But today, you're now slamming the gate shut when the horse has already left the barn. We don't have enough demand. And so I think that having the administration focus on supply side as opposed to mortgage spreads, I think that's a problem.

8:36And I think it's unfortunate for the builders. Stephen, yeah, it's certainly a problem for margins. It sounds to me, and to think one or two steps down the road at a time when we have heard the White House aggressively, you know, target certain parts of certain industries. If we can look past this. What I was reading between the lines on your notes is that you actually think that the multiple for the sector should go higher based upon the prudence and the approach they've had towards capital allocation, especially after a difficult period of demand. Is that fair? 100%. So we've actually had a multi-year call here where we say that, you know, I should say over the next few years, we believe the builders deserve and will get a revaluation to higher multiples than they have historically received.

9:19And the basis for that is that if you look at how much the builders have improved their operations, if you look at how they have become more asset light, they have more competitive advantages relative to their smaller peers. And so we look at all of what they've done and they've delivered significantly that these are companies that, frankly, if you compare them on cost, almost any metric that matters relative to their S &P peers, I mean, they outperformed them, but they traded a fraction of what the other peers trade. So we think that that's going to change. And we'd say, by the way, there's a builder out there in the wild called NVR that's already done this.

9:55And the other builders are sort of following the footsteps. So we actually think that the builders are looking really good from a multi-year perspective. But unfortunately, you cannot disregard what the government and the administration is seeking to do here. And in the near term, it's going to be, we think, a depressant on the builder stocks. So along those lines, you downgraded, I think, D.H.I., Pulte, Holmes, Toll Brothers, if I'm not mistaken, to inline from outperform. But the price targets you have, although cut, are still higher than these stocks are trading. My question is, what's the next leg lower in terms of price on your horizon if, in fact, you have to go from inline to underperform or whatever the next one down is?

10:36I think it's fair to say that the basis for our downgrade, and we moved everything we cover from that was a buy to a neutral. We have no buys in the space, and we basically, earlier this year, had all the builders buy. We were probably the biggest bull on the space. The basis for our downgrade was the risks that were becoming very clear, these exogenous risks coming from the administration. We don't fully know how those are going to play out. We're just getting a taste of it now. And so therefore, depending on how severe these changes that they're seeking to make with the builders actually are, that could change the outlook for the earnings and the price targets as well.

11:18But we took a first swag at it based on limited information. What we knew is that it was going to be big, it was going to be important, and then investors were not ready for it. That we knew. And so we acted on that. And long term, I still like the group, like I said. But certainly we'll be watching this situation as we go forward and we'll adjust our price targets as we need to. So Mike Wilson here just a few minutes ago suggested, you know, maybe if mortgage portability were an option, that could be a different story and he could be more bullish on the sector. How would that impact the sector in your view?

11:49Well, there's a number of things that the administration could theoretically go after that would be helpful from a demand perspective, because I do think that's the core of the problem. And so something like, like I said, tightening the mortgage spread would be something that would be helpful. The FHFA director also has the power to lower fees that Fannie Mae and Freddie Mac charge. And so that could actually lower borrowing costs as well. Mortgage rate portability would be great. I will remind you that actually FHA loans are already portable. The problem is that the people who have those low-rate mortgages have seen the home prices rise.

12:28And so the mortgage doesn't cover enough of the home price. And the people who use FHA mortgages don't tend to have a ton of money lying around. And so the reason why you haven't heard about this portability is the fact that you can't actually get too many people to cough up that much of a down payment so that they can actually take on that mortgage. So it gets a little complicated, obviously, but profitability is an interesting idea. It's complicated. I'm not hanging my hat. I'm not waiting around for that, unfortunately. All right. Stephen, great to speak with you. Thanks so much. Yeah, likewise.

12:59Thanks. So you've got a bunch of bears on housing, basically. That's the bottom line. What's bullish? Go ahead. No, I'm just going to throw it out to you, Guy. What's the bullish argument right now? I think the bullish argument is the unemployment rate stays where it is and the economy is okay. where the economy is okay, that rates actually moderate and maybe start to sink lower for the right reasons, not the wrong reasons. And, you know, again, people start to feel empowered where they can buy a new home for the first time in a while and pricing comes. But that's, I don't think we're close to that.

13:29Wasn't the economy okay last year? We had 100 basis points of Fed funds cuts. We do see, though, whenever there's a tick lower in mortgage rate, you do see activity go up. You see mortgage apps go up. You see, you know, refinancings go up. Everything goes up a little bit. People jump on that. I mean, look, you said something earlier, which is true, which is that the stocks kind of traded the rate cuts in advance twice, first last fall and this year. So that was a little bit of a trade. It got payback. But, you know, to the core question, like why would you get bullish here? I don't think the economy was strong last year.

14:00That's been my view for two years. We've been in a private economy recession. And if I'm right that we had the end of that rolling recession was in April, we're now into an early cycle economy. and all we're waiting for is the Fed to figure it out and start slashing rates. If that happens, these stocks are going to work whether or not the fundamentals justified. They're going to get way in advance of it. That's the bullish view. I think that's going to happen maybe later this year, probably early next year. And that would be my argument for, I guess, you know, we talked about, let me be a Whirlpool bull for a second because I'm not going to necessarily die on this hill.

14:31But we've priced in three and a half years of Whirlpool and we've priced in COVID pull forward. We've pulled forward the lack of brand loyalty. This is a company with a 5 % dividend yield. They have a great small appliance business in the U.S. I think it's been largely grounded. There has been innovation there. So they've actually delevered a bit, and they're selling off pieces around the world like an India stake that I think are going to help that balance sheet and support that dividend. So I think there are places you can play in here. And, again, train, carrier, parts of the housing space that are not necessarily the home builders, I think they look great.

15:06In terms of delevering, though, I thought it was interesting what Stephen was saying, how these homebuilders have really gotten lean and mean during this downturn. They were forced to take a look at their businesses, right, and delever and improve their balance sheet. And that's a theme that we're seeing everywhere. You think about it, there's been a three-year recession in a lot of parts of the economy, housing just being one example. And these companies, these American companies, are really good at cutting costs, and they've been doing that. So if you get any kind of volume increase, don't forget, total home sales are where they were post-GFC, post-GFC.

15:33So don't tell me there's not pent-up demand. There is. They just can't afford it. So once that starts to get unleashed, whether it's in this area or in consumer goods where companies have gotten leaner and meaner, and by the way, AI is now going to allow them to do more with fewer employees, you can see some pretty good operating leverage in these areas that are beat up. That's the bold case for these laggard areas. Listen, real quick, that is the bold case. And as Mike and Tim said, they'll sniff this out long before. I just don't think we're there yet. I think there's another leg lower in these names.

15:59Meantime, Delta flying higher today after beating profit estimates and giving a better than expected forecast for the rest of the year. The company is citing rising airfares and resilient luxury traveler. CEO Ed Bastian also joined our Philabeau earlier today with his thoughts on the government shutdown impact. Today, there's no cause for concern. I would say that if this doesn't get resolved, say, beyond another 10 days or so, you probably will start to see some impact. Is this the kind of thing that investors look through? Tim, I'll go to you because you always trade the airlines. I think for airlines, you do.

16:33I think airlines get quick headline dynamics around storms and disruptions and holiday things. But ultimately, the most important thing for airlines, for the investor community, the analyst community, for sure, is what's going on with the margin profile. Are they being efficient? Are they putting out too much capacity at the wrong time at the top of the cycle? And what you hear from Delta, Ed Bastian has done an amazing job. This is the one that I think is actually going to re-rate and I think should re-rate. And I think it takes every quarter, it seems like the last five quarters they've reported, they've reaffirmed, they've given it.

17:04They gave a guy in September that told you they were going to do this and they're doing it. And they're doing this out of four main hubs, which means they're doing it a lot more efficiently than they've ever done before. So I am a Delta bull. I stay long. I think it hasn't taken back what it lost for the stock from that April period in Liberation Day. Airline stocks got killed and Delta hasn't really it's nibbled back at the 60 level. I think it goes through. Yeah, I'm with Tim. I mean, 60, where do you get this? Like 65 or so? I mean, that's not unreasonable to think just on valuation and just on momentum.

17:36And, you know, they said it today. They're focused on the premium seat. And in that space, they're beating everybody else. So this stock should trade higher. This is probably the poster child of the company that has remade itself in difficult times over and over and over again. I mean, airlines are known for that, right? And this is an early cycle area. So I think it is a tradable stock. I mean, these are rentals. I mean, just me, they're always trading stocks. in the market. 100%. And you have to understand that. So I'm not sure I'm ready to dive in here because I do think that the consumer services area, travel, is one of the three areas that is going through the recession now.

18:07And you see it in some of the data, like Vegas is pretty slow. Yeah, hospitality's been tough. Government's in a recession. Okay, AI CapEx just came out of there, mini recessions. So it's like this is one of the later ones to kind of recover, I think. It's worth noting, and we talk about this a lot, I mean, this stock gapped up nearly 10%. The high tick on the day was basically the opening tick, and the low of the day was the closing tick. So So it's interesting that investors sold into this move, especially when you consider the fact into the print over the last month, the stock was down about 12 percent.

18:34Coming up, dealmaking in the pharma space. Novo's new CEO is making a splash with the company's latest acquisition. Is there more merger mania coming for the space? Plus, Jeffries feeling the pressure after an auto parts company collapsed into bankruptcy last month. What the bank's debt exposure could mean for the stock. Don't go anywhere. Fast Money is back in two.

18:56This is Fast Money with Melissa Lee right here on CNBC.

19:08Welcome back to Fast Money. Shares of liver disease drug maker Acara Therapeutics surging today. Novo Nordisk agreed to buy the company for up to$5.2 billion as the Danish company's new CEO looks to spur growth. It's just the latest in a flurry of dealmaking in the pharma space. Pfizer, Roche, Merck all announcing deals in the last few months. And Mike has recently turned bullish on the health care space the first time in many months. Quite a while, yes. And not for just defensive reasons, for a change. Usually when you go health care, it's just like pure defense. I mean, look, the stock got absolutely walloped.

19:39Everybody was so concerned about RFK coming in, what was going to happen. So I think that, you know, we looked ahead. We said, OK, two things. Rates are coming down. It's usually good for M &A activity as well as the biotechs in general. And we're seeing some of that now. And also, the announcements that were made, the most favored nation pricing in the deal with Pfizer, it's just not as onerous as people were fearing. So these stocks literally are as cheap as they've ever been on a relative basis. We had a 7 % move last week in the group. I think it continues. XBI has outperformed SPX year-to-date.

20:08I mean, that's a major milestone for this group. I think that potentially could continue because there's some M &A chatter around that. I mean, look at a name like Innsmed, by the way. We've had the CEO on twice. Look where that stock closed today. So I think we've done a good job sort of bringing some of these to light. I'll say this, though. Just on a valuation basis, if you want to play a little stock market, Bristol-Myers has earned$6 a share. You put a 10, 11 multiple on it. You're talking about a$65 to$72 stock. Merck,$10 a share, 12 multiple,$120 stock. And that's still a discount to an Eli Lilly, and it's still a significant discount to the broader market.

20:42And that's with the patent cliff factored in. So I like the space as well. And, of course, that's a great segue for Tim's. From my Pfizer. So one from one value trap to another. I mean, you know, maybe. But but as we're all saying about the health care space, there's been the macro, the White House dynamics, but also the M &A dynamics that is also just this perpetual. We've got to continue to think about tomorrow's pipeline. XLV was basing around the 200 day is now breaking higher. J &J, which I'm along and I really like. And there was some news around litigation that didn't knock the stock down at all because it focuses on the fact.