Digesting Powell’s every word: Stocks Drop, Rates Rip. 10/19/23

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. Powell on pause. The Fed chair saying he's proceeding carefully after the aggressive campaign to break the back of inflation. So why are stocks not cheering and why are rates still rising? We'll debate that. Plus, painful discovery. Discover Financial falling nearly 8 percent as credit loss provisions more than double for Q3. Is this a warning sign about the consumer? And later, electric slide. Tesla dropping over 9 percent today. A pessimistic Elon Musk calling out high production costs, rising interest rates, and the slowing economy on the conference call last night.

0:38Ring the bell. A noted Tesla bull and our own Tesla bear ready to drop the gloves on where the stock is headed next. I had no idea he was bearish on Tesla. I'm Melissa Lee coming to you live from Studio B at the NASDAQ Market Site. On the desk tonight, Steve Grasso, Dan Nathan, Guy Dami, and guest trader for tonight, Lori Calvacina of RBC Capital Markets. We start off with Jerome Powell's pivotal speech here At the New York Economic Club, the Fed chair hinted he's ready to pause rate hikes for now, saying the committee is proceeding carefully. But at the same time, Powell also kept the door open for a move in December and beyond.

1:16And he added that while recent inflation data has cooled, it's still too high. Stocks seem to mostly shrug off the chairman's comments, but they couldn't shake off the move in yields. The 10-year came within a hair, a whisper of 5 percent late in the day, and that triggered a slide into the close. The Dow falling 250 points, while the S &P 500 and Nasdaq dropped nearly 1 percent. So are investors turning away from the Fed's musings and now mostly worried about yields, Guy? Yields are driving everything. Rightly so. They should be. And I'll say this, and I'm not suggesting I'm right. The Fed could wake up tomorrow and say, you know, we're lowering rates.

1:51Ten-year yield's going higher. It's just what – that genie is out of the bottle. You know, they've done the damage they need to do. They're a sideshow now, and I'm sure Rick Santelli has some thoughts. Ten-year yield is telling the story. And if you think of what's transpired over the last three or so weeks, yields had every opportunity to go lower in this flight to quality, given all the geopolitical risk, and it did it for a day. We got down to 4, 5, 3, I think. And now here we are basically approaching 5%. That is extraordinarily problematic for the market. It's also extraordinarily problematic for a lot of these companies out there that haven't felt the pain yet.

2:25All right, so we talk about the market. Let's talk about stocks. I mean, there were four 1 % moves today. Think about that. in one day here. OK, and so to me, you have a VIX closing above 21 for the first time in a very long time here. So we've been wondering what would be the trigger, right, for stocks? What would be? And listen, they've been correcting, like no doubt about it. And we talk at Carter Braxton Worth gave us a stat. Russell 3000, half of the stocks in the Russell 3000 are below their October 2020 lows. OK, so we are clearly in a bear market for large parts of the stock market. We've been highlighting that.

2:56And again, concentration in some of these larger stocks. We get it. Every cycle, they always have them. What's different this time to me is just it's getting narrower. We might be losing some of these one by one. If you think about what Microsoft and Apple have done since their last quarterly earnings reports in July, what happened to Tesla today. Look at that chart, guys. 5.001 percent. It happened. There you go. All right. Guy Nostradami. He was calling it for a while. So I guess my point is we're seeing the volatility bans getting widened here. We're seeing a lot of stocks, a lot of sectors act very poorly.

3:24And all of a sudden now that 5 % thing is going to be on the front page of almost every newspaper tomorrow morning. What changes for equities with 5 %? So, look, I think 5 % on the 10-year yield is a big round psychological number that has an impact. My modeling actually says 6 % is a more problematic area. But we also have found in our testing over time that if you're looking at the effective interest rate for public companies, it tracks more to 10-year yields than the Fed funds. So it should be the 10-year that's actually spooking us here. All right. Steve? So when you look at the Russell, the Russell 2000, I think 40 percent is unprofitable.

3:57The Russell 3000, 60 percent is unprofitable. That's why you have seven stocks that run the market, because those are the stocks that are profitable and have a huge balance sheet. So no one has to worry about them raising money. If the market goes higher, those names will carry us higher. Guys started off the show with Powell. If you if you the Fed governors have said the 10 year has done the heavy lifting for the Fed. So he's played she loves me, she loves me not way too many times. He was bearish and bullish, dovish, hawkish on everything that he said today. So when you look at should he be raising rates right now, we can probably say unanimously no.

4:38The market has done that for him. The long end has done that for him. For now. For now. Well, what do you mean by that? Do you think? I mean, if inflation, if there's data that comes in further that shows inflation is still hot, I do not put it past the Fed that they will raise again. It may be off the table for November. Maybe that's what the markets are pricing in right now. But for December, for beyond, I don't know. And that's what I classify as a misstep because I think they are too late to act and they stay too long acting. So I think what we're all looking for is for the Fed to back off now.

5:10The long and variable lags. Is something broke? I think you would say, yes, things have broken right now. The 10-year is probably significantly broken at this point. He did talk about the long and variable lag, saying that now markets are much more efficient. And so those long and variable lags may not be as long because the markets factor that in almost right away. He also, I thought, was very interesting to address the notion that there may not be buyers. The Fed has stepped away. The question posed to him about other countries stepping away in addition to the Fed, just before a huge wall of issuance is going to hit the market.

5:50And he said, I don't think it's been that bad. I don't know what he's watching. That's fine. I mean, if this isn't bad, then what does bad look like? And again, he has the data in front of him. Good for him. Clearly, he's been watching this show. The buyers have stepped away. As a matter of fact, there's probably a very good chance that some of the historical buyers have probably been sellers. The Japanese, the largest owner of our treasuries, Clearly, they have issues. We've talked about it for a while. Every day, dollar-yen goes higher. The yen weakens. It's another day they have to try to defend their currency by raising dollars.

6:23How do they do that? By selling their treasuries. The Fed's not buying it, so who's buying it? You think retail's going to change? Historically, though, Japan. No, no, no. Forget about historically. This is not about historically. I mean, the Japanese are out of the game. They are not buying our stuff anymore. The Japanese and Chinese are not. Japan and China are historically in the low single digits buying our debt. The problem is QT. QT has been running off at an excessive rate on a monthly basis forever. August 2022, QT doubled on a monthly basis. Rates went from 2.64 in the 10-year to 3.8 in 30 days because that doubled.

7:04Powell never speaks about QT. No one talks about QT. QT is the elephant in the room that no one wants to deal with at this point. I don't want to deal with it. If I just look at the market, I mean, I'm just looking at the stock market. And again, I go back to all these sectors that act horribly. You know what I mean? Like they just act horribly. If I look at some of the data that we saw today about these existing home sales, they're back to levels from 2010. If you look at, again, I think the stock market acts really badly, people. I mean, I'm just telling you. And so if you guys own ETFs and they're heavily, you know, and they are.

7:37They're geared towards Microsoft and Apple and all these sorts of things. So we get that. But I guess the thing that we're trying to have you pay attention to a little bit is, like, as we lose one by one, I'm just going to call them the MAG-7. That's a little thing. I know you don't like the full name or anything like that. But we might have just lost one today. Okay? And I know we're going to spend some time talking about Tesla today. But if you think about how poorly, again, how Microsoft and Apple have outperformed to the downside from the highs in July, I think they're kind of telling you something.

8:00We're going to know a lot more in the next couple of weeks. I think there's a couple of disasters lurking out there. If you think you want to take Tesla, OK, and you want to extrapolate it to Apple and you want to do it from a consumer standpoint, the next shoe to drop will be a decrease in enterprise spending. And we already saw this week over the last week we saw Alphabet. We saw Microsoft and LinkedIn. Some of these guys were really quick to start cutting jobs in 2002 or 22 in the beginning of the year. They're starting to cut again. OK, so if enterprise spending starts to slow a little bit and we're already seeing some deceleration in the excitement in and around these AI and this then the market's going down.

8:34I mean, we could be unchanged on the year in the not-so-distant future as we get towards, like, out of Q3 earnings season, especially if those guys join the party to the downside. Are you worried about spending being cut, or have corporations really tighten the belts in terms of hiring and, you know, on the labor side of things? They've been tightening the belt for a while. I mean, we read a lot of transcripts, and I feel like we've been reading about, you know, tightening on labor, restructuring, keeping costs down. We've been reading about that forever, and the restructuring commentary feels like it's picking up a little bit.

9:02At the same time, companies realize their pricing power is starting to erode a bit. So I think that's nudging them just a bit. And the other thing we've noticed, frankly, is I'm seeing a lot more allusions to uncertainty about monetary policy, the Fed, inflation, geopolitics now a bit, just impacting spending decisions, just having an impact on the overall psyche. Yeah, 5%. We lost it pretty quickly. And I wonder if there was like a, you know, positioning involved. Below it now? Yeah, 499. Green lights for equities. No, I'm being. You joke, but. But you know what? It's not funny because, I mean, I don't think people fully comprehend really.

9:37And Rick, we'll talk about this really what's going on here. Yields can go a lot higher than where we are right now for supply demand reasons. If you were out there, you'd be demanding bigger yield to buy our debt. It's just that simple. And given everything we talk about, I mean, there's still no speaker of the House. Last I looked, I mean, that's not particularly bullish either. So be prepared because I don't think people understand really what's happening. And Biden tonight is going to be asking for a lot more funding for Ukraine plus Israel. Exactly. All right. So you just said something really important, Laurie.

10:06You talked about, again, you know, if the ability for companies to push through, OK, costs is waning. OK, so think about what are built into S &P 500 earnings estimates. This per fact set expected 12 percent year over year earnings growth for 2024 net profit margins. This is in their earnings insight blog here expected to be up in Q1 and Q2 of next year, 12 percent or so. It's just too rosy. Like, just think about it, because crude oil is trading 90 right now. OK, like just think about all this. So if we saw what happened to the consumer staple stock because there's worries about pricing power, this is going to work its way to other parts of the economy.

10:43And tech is likely to be next. You raise your earnings estimates, correct? Yeah, we took them up by a couple of bucks. I will say for next year, I'm still at 232, and the consensus is about 247. And to Dan's point, the big difference between my numbers and consensus is I've got margins coming in just a little bit versus 23, but going back to 2022 numbers. Whereas if you dissect the consensus, it's got enormous margin expansion. And actually, it's not just one sector driving it. It's across a lot of different sectors. So I think the street has really got to sit down and look at this pricing power issue and realize the margins are just not going to come in.

11:15All right. For more on the raging rates, let's bring in Rick Santelli. Rick, based on what you heard from Powell and the steep climb and yield, do you still think that we could be heading north of 13 percent on the 10-year? We crossed five in the after hours here. Well, I think over the next seven to 10 years, I would not be shocked to see double-digit rates on long maturities. It's not my base case, but it's highly probable. And just look at what's happening this week. If you look at a chart that starts on the 13th of October, every session this week for 10-year note yields has staircase, meaning it's traded higher than a previous session's highs.

11:52That's extremely aggressive if you're a technician. Now, let's contrast that with what happened today in two-year. So the two-year definitely traded above yesterday's highs you see on the intraday chart. But the issue is it also traded below yesterday's lows. Open it to a two-day chart. It's an outside session. So many ask, why did you get so much volatility right after Powell started or stopped speaking in the equity markets? And I think that's it. Outside days usually mean trend change. But I think in the short maturities, what it means is it's going to be lagging the aggressive tendencies of the more mature, longer maturities down on the yield curve.

12:28And when you consider that the 2's 10 spread today closed at minus 16 and change, that is the least inverted it's been since September of 22. Now, that isn't a long time, but it's significant. And if you look at the reverse repo market, it is now a significant drop from its December highs of the end of last year when it was 2.6 trillion. 2.6 trillion on Tuesday. It was barely 1.1 trillion. So that really augurs for two dynamics. The first dynamic is, is that a lot of those issues are hitting the secondary market. And a lot of the, the investors and institutions that were filling that parking lot have taken those proceeds and they're buying T-bills, which is good because the T-bill supply is so bloated, But your discussion about who is going to be there when the debt continues to grow and the issuance continues to be strong.

13:26If I was Chairman Powell, that's what I'd be pondering more than anything else. This steepening, Rick, the optimists would say it's a great sign. Normalization. The pessimists would say, well, it's steepening. It's a bare steepener at levels we really haven't seen as long as I've been doing this. Thoughts on that? You know, my opinion is it is not good news. Yes, steepeners can be good news, but I think it's always compared to what's going on with the economy, what's going on with equities, what's going on with earnings, what are the undercurrents. The undercurrents I see are, you could look at the Atlanta Fed, you could look at what we're going to get next week with regard to third quarter GDP.

14:04But in the end, I read those Beige Book comments yesterday, as I'm sure everybody around the table did. It certainly didn't read like an economy that's producing at 3%, 3.5%, 4%. I'm a firm believer that the fumes that we've been running on are fiscal stimulus, and that fiscal stimulus is going to take us so far. Granted, it's taken us farther than many thought, but I think ultimately that is going to be the linchpin that changes everything. So we crossed the milestone today, Rick, the big round number, 5%, the first time since July of 2007. What's our next stop here? Well, when it's staircases like this and we're guns hot, what I will tell you the next stop is doesn't mean it's going to be a significant top or even a significant temporary top.

14:52But I would think right around 533 to 537 will be the next area I would expect consolidation. And think Pac-Man when you're looking at this 5 % level. Every time we take a bite out of it, it's important. But to me, the most important issue about big levels is whether you close above them, not whether you trade intraday through them. And tomorrow is going to be tricky because if we don't really get some horsepower through 5 % early in the session, geopolitics will work against us later in the session. All right. Rick, always great to get your take. Thank you. Rick Santelli joining us from Chicago this evening.

15:315-3, 5-3, 5%. Steve? Problematic for equities. There's the inverse correlation. Now there's no bigger inverse correlation to the 10-year. So that's the most important thing, the 10-year yield. Fed's balance sheet pre-pandemic,$4 trillion. Fed's balance sheet post-pandemic,$9 trillion. They're probably around$8 trillion now. They are not going to stop QT. That is the real problem that rates have, and that's why rates will continue to move higher. Lori, if Rick is right and we do hit 5.35 % fairly quickly, maybe in the next two, three weeks, what sells off? What is the most vulnerable in your view?

16:08So I think it's essentially the things that have been propping up the market, right? It's the growth trade, which is already overvalued, crowded, in need of a correction. And this just gives you the catalyst to get there. Here's the good news. I mean, like we've been talking about it. There's so many stocks that have acted so poorly. So many have fallen off the bottom right of their charts. They're down 20, 25 % from their highs, that sort of thing. There's going to be a lot of really good opportunities. I don't think we're going to crash. I don't think that, you know, you can go back and say the last time the 10 year was up here is 07.

16:34Last time before that it was 00. And the S &P did get cut in half, but there's a whole host of other things. I guess the one thing in Mel, you hit on this is like the visibility just got a lot worse over the last few weeks about from a geopolitical standpoint. And to Lori's point is if corporates are already having some issues as it relates to their costs and possibly they're just waiting for demand to fall off. That's the sort of thing that could get those names going much lower. But again, if Microsoft's down 25 percent from its highs and Apple's down 25 percent from its highs, there's going to be a lot of good values.

17:05You know what I mean? You're going to start seeing some relative strength. Maybe it's in financials or something like that that have acted so poorly all year long. And the only thing that's going to happen, though, is you're going to get pushed. It's a self-fulfilling prophecy that you'll get pushed back into those names like Microsoft. So, yes, I agree with you. You're going to wind up buying those. But it's just going to widen the gap between those value plays again, which has never been wider value. And that's my part is just put a little fear into them because it doesn't feel like there's a lot of fear in those names just yet, does it?

17:31Well, I mean, it's funny. NVIDIA post earnings that night was trading 516, it's trading 416, I'm rounding down$100 later. I mean, Microsoft's starting to give it up a little bit. Apple's hanging in there for reasons that I can't understand. To answer your question, no, there's no perceiver. I can't. There's no perceptible fear right now. So one thing I'll say that makes me sleep a little bit better at night on this issue, I don't sleep great, but a little bit better, is if you go back over time, whenever we've had these big surges in 10-year Treasury yields, and I'm going back decades, it tends to be big, chunky increases of 275 basis points or more in which stocks really get hurt to the downside.

18:09And we saw one of those happen that culminated last fall. And when we put that low in the market in October last fall, shortly after that, yields took a bit of a breather, stopped going up at least for a little bit. That's one of the things that really helped power markets at the beginning of this year. I think there is still time to get out of this if the other macro issues cooperate, because we won't really hit that 275 basis point gap this time until we get to about 6 percent. So I think there's still time to get out of this with too much damage, but it's certainly not fun. You know, the fun thing that we haven't mentioned at all is this.

18:39Oh, actually, there's one for there's many things that we have not mentioned. We've only been on for 18 plus minutes so far tonight. But I was going to mention the possibility of a credit rating downgrade again in the face of what's going on in Washington. We can't elect a speaker. We're going to be spending a lot more money on international affairs. of well the bond market the bond market is trading as if that's we're on the precipice of that happening would it be surprising if that happened quite frankly if any of those people were actually doing their job properly it would have happened already so the old saying best time the plan to treat 20 years ago the next best time is today they should start to look themselves in the mirrors because it it makes no sense not to happen coming up is a bottom in for the chip trade shares of Taiwan semi-jumping despite a big profit loss.

19:29And it's what the chipmaker is saying about the whole semi-space that's got investors surging in. The details and some of the other tech swings next. And some fast movers on deck. AT &T jumping on earnings. Netflix streaming up after its results. The subscribers and price hikes boosting these names when fast money returns.

19:50We've got a news alert on cryptocurrency Ripple. Kate Rooney's got the details. Kate. Hi, Melissa. So the SEC is dropping its lawsuit against two high-profile crypto executives, the founders of Ripple, Brad Garlinghouse and Chris Larson. This was a civil suit. It had to do with what the SEC said were illegal sales of the cryptocurrency XRP. The SEC sued Ripple back in 2020. In December 2020, XRP at the time was the third largest cryptocurrency by market cap. It's fallen significantly since then. This has been a landmark case in the SEC's enforcement campaign against some other crypto companies.

20:24It's also has high profile lawsuits against Coinbase, Binance as well. Garlinghouse has called these allegations baseless. He put out a statement in the last 20 minutes or so. He says, quote, instead of looking for the criminals stealing customer funds on offshore exchanges that were courting political favor. So a nod there to Sam Bankman-Fried. He says the SEC went after the good guys, he said, who are building a regulated business in the U.S. Earlier this year, Ripple also got another win in this suit. A judge agreed with their argument that roughly half of its XRP sales did not violate investor protection laws.

20:56The other half were institutional sales, which still could be on the hook, but a win here for at least the executives in that case. Melissa, back to you. Kate, thanks. Kate Rooney. Taiwan Semiconductor telling investors that the chip industry could be close to a bottom. The chip giant beat on the top and the bottom line, but posted the biggest profit drop in nearly five years. Still, TSMC issuing upbeat revenue guidance for the current quarter and is expecting stronger PC and smartphone demand, their biggest business, as well as a tailwind from AI to help with the recovery in 2024. Shares finishing the day up more than three and a half percent.

21:29Dan, you flagged this. Yeah, I mean, listen, and they also said that China's still weak. OK, so, you know, this comes in a week where we know that the Biden administration just kind of tightened restrictions against advanced trip sales to China. So, again, this is interesting. Apple is a 20 some percent customer, AMD, Qualcomm. OK, so there's the smartphone and there's some of the PC stuff or whatever. They're about 8%, you know, so that's doing a little better. You know, NVIDIA, 5.5%. So that's the one area we all knew was going to be strong here. It's kind of interesting, though, on a day that, again, this is a half a trillion dollar market cap company.

21:59So we saw Netflix that was up 16 % or something. That was$160 billion market cap company. So this thing was up 3 % in market cap terms, kind of similarly or whatever. But again, you want to see early signs of stabilization. It's a very cyclical sort of industry. And if you can kind of get The PC, obviously, and the smartphone, those are the big ones, right? And the NVIDIA and the GPU stuff, that's like the special sauce right now. You know what I mean? So that's keeping things afloat. I mean, the CEO is pretty confident-sounding, confident of better growth in 2024. You don't use those words unless that is what you are seeing for sure.

22:32No, especially in this environment. And if you have that kind of clarity, good for him, I guess. Goldman Sachs today added at their conviction buy list, I think$115 price target. All good things. The SMH, if we have a chart going back to sort of November of 2021, textbook double top at 160, rolling over. NVIDIA, I think, is 19 percent. Taiwan, semi-12. Throw Broadcom in, you got close to 35 percent of the ETF. Two out of the three might be on Dicey. I mean, Broadcom's holding in there, but by a thread. And obviously, NVIDIA's been rolling over. So if the SMH rolls over, the broader market has to follow.