Energy Stocks Look to Rebound, and Could M&A Be Coming For Biotech 1/3/24

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. New Year's hangover, the Dow falling nearly 300 points today. The Dow, the Nasdaq now off close to 3 percent in two sessions and small caps getting hit hard, too. Is this the start of the sell off? So many have been predicting. We'll debate that. Plus, drama at Disney, a couple new players joining the boardroom battle, and they're backing Bob Iger against Triumph Nelson Peltz. Should investors cheer or jeer this move? And later, could fattened up pharma stocks fuel a biotech buying spree, A buzzkill on SoFi after a strong finish to 2023 and T-Mobile's hitting new highs again.

0:38How are they dialing up these gains? I'm Melissa Lee coming to you live from Studio B at the Nasdaq on the desk tonight. Tim Seymour, Steve Grasso, Courtney Garcia and Guy Adami. We start off with a crude awakening in the energy sector. WTI jumping more than 3 percent for their best day since mid-November. The move coming after the U.S. warned Houthi militants against further attacks in the Red Sea. OPEC also pledging to maintain its support of oil prices. The rise in crude helping the energy stocks rally the sector the best performer today, accounting for nine of the top 11 stocks in the S &P 500.

1:11So is this sector, which lagged in the broader markets in 2023, about to get its moment in the sun? Guy, what do you think? What do you think when you put letters together? Acronyms. Thank you, Tim. Words. Words. Acronyms. Start your right. It's a great place to start. And we're going to do that again this year. Yes, I can't wait. What was their name? What was their name? Who? Dawn. Dawn. That was years ago, Tim. I mean, we went from hope to dawn. Last year was mojo. Energy is a sign. Listen, last year, ups and downs. I'm convinced, again, this year it's going to have its day in the sun. And look at XLE, for example.

1:44It has sold off, but not nearly to the magnitude that one would have thought, given the fact that all these high-growth tech stocks have done so well at the end of last year. XLE hangs in there. There are energy names making all-time highs. Marathon Petroleum, we've talked about that many times. PSX, for example, as well. Devin's getting off the mat here. And even Valero or Refiner is at a decent couple weeks. So yes is the answer to the question. I think energy stocks are going to be fine this year. You had a prediction for WTI, which I think was sort of not shocking, but surprising to the downside, right?

2:16Yeah, when it was trading above 120. I said 65. Then I thought it would trade back up. It would be sort of limited to cap on a par, which is 100. The issue I have with energy stocks is that even if you look at ExxonMobil or if you look at Chevron, the companies that they took out, their company and the acquiree's stock haven't really been performing. But I get Guy's point. If you look at it on a chart, they all do seem as if they want to bounce and go higher. The problem I also have is that geopolitical tension, you would have seen crude up a lot more dramatically in the past had we ever had any of these events.

2:52And they seem to be muted within the market. And because there's a supply Demand dynamic also going on. There's weakness in China that people are concerned about, Tim. But you're on board energy stocks. I'm on board. I also think that we've already seen in the first two days of 2024. By the way, happy New Year, Guy. Yeah, it's nice. Again? Why not? It's what we do for Guy, especially. When are you allowed to say it till? It's February. February. Is that it? Please continue to wish Guy a happy New Year every single day. But going into 24, there were a handful of sectors that I think were seen as favorites in terms of where you're going to see allocation and you're going to see actually health care, pharma and energy.

3:33And why? Because the companies, I think, on valuation and be clear, energy companies always trade cheap to the S &P, but they're trading at a two standard deviation relative to themselves to the S &P cheap to the S &P at a time when I do think OPEC and OPEC plus have enough coordination that they're they are concerned about global macro. And I think that's the bigger issue here. And it's right to point out that energy and oil stocks will underperform in an environment where people are fearful of recession. But I do think you've got a very strong valuation support floor. And I think you've got companies that are paying big dividends.

4:05And I think that's interesting. Yeah, I absolutely agree. I'm also on board with energy. And I think what you're starting to see or we started actually see in October is this rotation, the broadening out in the markets. I think that's only continued so far into 2024. Today, you're seeing the markets sell off. The things that are doing the best are those things that are the largest in the value sector. So you're looking at pharmaceuticals, energy. You're starting to see that rotation into those things. So when you look at the largest eight companies in the S &P 500, they're still very expensive.

4:31But strip those out, and the rest of the markets are trading about a 4P of 17, which isn't cheap but is still attractive. And I think that's what people are doing is looking into the other areas of the markets right now, energy being one of those big ones. I guess the question is, you know, what we're seeing, at least for the first couple of days and part of last year, is a mean reversion. And is energy just swept up in this mean reversion? And will this mean reversion last or do we still go back to the old? Yeah, I agree with that. I think that's exactly it's a reallocation in energy stocks for the first couple of days.

4:59Take it with a grain of salt. With that said, I'm not sure that the price of crude makes all that much difference within reason. If we go down to$50, we'll have a much different conversation. I don't think it's going there. If we go to 110, different conversation. We stay between 70 and 80 like we have for quite some time. I think these stocks, given their balance sheets, Tim talked about this forever, given the leverage that they have and given just they run things better. Then on top of which, think about the M &A Steve just talked about. Then you think about a Warren Buffett that's been buying Occidental up to 27 percent, understanding that stock specific.

5:32But he sees something in the space. So I think energy is underappreciated here and I think can go higher in this environment. I guess the only other thing that would go on supply demand as a headwind is that we've never produced more barrels per oil per day in the U.S. as we're producing now. So we're over 13 million barrels per day, which is good for security of the country and it's good for the country. So maybe that would put a lid on the price per barrel of oil. I'm not sure how it's going to react with the price of the equities. But in terms of the market backdrop for energy to work, do you also have to believe that the other sectors that were, you know, badly beaten last year, let's say health care, you like health care, for instance, that that's all part of this trade.

6:14It's not just an energy specific bullish. I realize it's easy to say two days into the year with Apple down almost 8 percent, at least from whatever high it hit somewhere towards the end of December. But I do think that the days of 30 percent of the mag seven are behind us. It's not going to happen overnight. But I think the broadening of the real economy and the investment across value and clearly for the market to work, you need some kind of a barbell where you have the high growth companies and you have these names. But you also have the inclusion of health care and pharma and utilities and even REITs.

6:46So places where I don't love real estate, but I love how cheap REITs are here. And I think they were badly beaten up last year as were utilities. So that's part of the energy story. That's part of the market story. Yeah, and I think seeing some sort of a pullback here, we've all said is probably normal to see at some point. And you've looked at investor sentiment surveys, and they've been overly optimistic now for a couple of weeks. So I think some sort of pullback, I think, is normal. It's nothing I'm overly concerned about. But I think, to your point, it is a lot of a rotation. I think it's going to continue.

7:13I don't think this is going to be the end of that story. What did Steve Eisman say yesterday? Steve Eisman of Newburger Burbank. Well-dressed. Well-dressed. He said, think Yiddish. Think Yiddish and dress British. But beside that, which is a great quote. Guy thinks skittish and doesn't dress British. Well, you know, I mean, yes. Give it back to the markets. Sorry. I was going to say he said people are too friggin' bullish. That's what he said. That was his quote. Yeah. Too optimistic coming in this year the same way probably last year people were too optimistic going into the year. And Steve, he simplifies it to a point where I think people understand.

7:46He also is not overly concerned about some of the things that have concerned me. But his point was going into the year, people might have been over their skis a bit. In the meantime, we've been talking about this, but it has been another tough day for the markets. The Nasdaq dropping more than 1 percent a day after seeing its worst daily performance in almost three months. The Dow falling over 280 points. The S &P closing lower as well. This is the Fed minutes from the last meeting failed to create market optimism over the timing of likely rate hikes. Cuts, excuse me. CNBC senior economics reporter Steve Leisman's got more.

8:17Steve, it seemed more hawkish than I think a lot of people expected. Yeah, that's my take, Melissa. at the minutes to the meeting. Remember, they were closely watched for what they might say about how quickly and how deeply the Fed would cut rates this year. Well, they didn't provide much information on either. As a result, they did lean, I think, somewhat hawkish as they failed to back up the market's aggressive view on rate cuts this year. The committee saw inflation risk as more balanced. That was good. Also, on the double side, the minutes said policy was at or near the peak, and the projections showed most agreed a lower target range would be appropriate in 2024.

8:54But there was a high level of uncertainty around those projections to the point where officials said further rate hikes could be needed or the Fed might have to hold on to the current rate path longer than expected. Krishna Guhav, Evercore ISI, writes, Our impression is the committee wanted to clarify it does not see rate cuts as imminent and lean against a March cut specifically while retaining wide policy optionality. None of this says the market is wrong to predict six rate cuts beginning in March. Just the committee isn't there at this time. And as of the December meeting, the average official, of course, only saw three cuts, Melissa.

9:30I thought it was interesting also the commentary, basically a nod to what has happened to financial conditions up to that meeting, that they had eased significantly and that they would, in fact, change their view if circumstances warranted. And those circumstances could be that financial conditions got easier and so assets would go higher. And we've seen that. I think that's right. That was one of the things that they mentioned when they talked about upside risk to inflation is that financial conditions had ease. And that created the possibility that you could have upside inflation risk. I think the Fed was very measured in pushing back against the market here.

10:08I think the message that I get is if you all want to trade six rate cuts this year, go ahead and do it. But do it on your own recognizance. Don't come back to either the Fed statement or the Fed minutes here and say, oh, we did it because the Fed told us that's the case. That's not what they're saying. And so if you do it, you trade it, you own it. Hey, Steve. So back to financial conditions, though, one of the things that's fascinating to me is that despite all of the cuts over the last year and a half, and even if we paused, that reserve balances held at the Fed rose 450 billion last year. And if you look at the correlation to that and the S &P, they're totally in lockstep.

10:49In other words, liquidity is alive and well. And for banks especially, it's a phenomenon that's hard to explain in this environment. And if anyone was set up to do that well, it's you. Well, I mean, reserve balances, the Fed has been indeed reducing its balance sheet. Reserve balances are down, I think, about a trillion two from the peak. The trouble, Tim, is there's this notion, and I don't know how much time we have. I hope it doesn't take very long. But this idea of a binding level of reserves, and this is that, that there was a lot of froth at the top of the reserves on the Fed's balance sheet to the point where eliminating it did not create much of a liquidity squeeze at all.

11:31There is some sense that sometime this year, Tim, we get to that point, perhaps when the whole overnight repo facility is liquidated. that may be a point where you start cutting into actual bank reserves and creating something of a liquidity drain out there that could be difficult or more challenging for markets. It is worth noting that the minutes today did talk about, I guess the best way to put it is, the Fed possibly thinking about the possibility of thinking about how they might communicate ending quantitative tightening maybe this year. All right, Steve, we've got to leave it there. Thank you, Steve Leisman.

12:08We've got a news alert we want to get to on AbbVie. Shares are dropping after hours. Bertha Coon's got the details. Bertha. Melissa, CVS is taking AbbVie's Humira off of its approved drug lists on commercial health plants. CVS Caremark, which is the nation's second largest pharmacy benefits manager, will favor biosimilars instead, including Cordavis, its own version of the arthritis and psoriasis treatment, which it launched a few months ago with Sandoz. With the introduction of biosimilars in the U.S. this year, Humira maker Abve saw sales of that treatment fall about 36 percent year over year in its most recent quarter, which was actually less of a fall than expected.

12:47A CVS spokesman says people on its commercial plans could see savings of 50 percent over brand name Humira. This will start on April 1st this year. Bertha, just a quick question. Biosimilars is different from generic. Is that correct? It is sort of the idea of a generic version of these more complicated drugs, in this case to treat autoimmune diseases. They've had the biosimilars in Europe for a few years, got put off here in this country until this year. So we've seen a number of the PBMs adopt the biosimilars, but apparently Humira and AbbVie, AbbVie has really negotiated to keep its drug on formulary.

13:31so that they haven't caught on and really dented its share just yet, this could be the beginning. So maybe not a patent cliff quite, but a patent drop here. Bertha, thank you. Bertha Coombs with that news on AbbVie. Let's get back to the Fed here. For more on these minutes and where yields are going, let's bring in Wall Street forecaster Jim Bianco. He runs Bianco Research. Jim, last time we talked, you think rates are going higher, 5.5%. You still stand by that. Was there anything out of the minutes that you thought was interesting, especially considering we had a lot of Fed speak after that Fed meeting, which led the markets to really believe that six rate cuts were happening next year?

14:12Yeah, no, I thought that Steve did a good job that the minutes came in a little bit more hawkish or we might say a little bit more balanced than people had expected, that it wasn't the type of minutes you would have heard if the Fed was getting ready to cut six times this year. And so I think on balance, it was suggesting that the Fed might be a little, if I could use the word, stickier in cutting rates. It doesn't mean they won't cut rates. It's just it might not be as aggressive as everybody says. To your first question, yeah, I've been arguing for many, many months that I think that the 10-year yield could go to 5.5%.

14:47That has not been working for the last few months. But I also see an economy that's doing OK. And I see inflation that might, to use the word again, sticky, around 3%. And so I'm going to stick with that, that I think that, you know, before 2024 is out and probably towards the middle of the year, we might see new highs in yields and maybe closer to five and a half percent. Jim, what is it on the back of inflation reemerging or the economy suddenly surging and reaccelerating to the upside? What does that move higher in yields look like? No soft landing. I don't think we're having a soft landing.

15:22And if I was to stick with the metaphor, I think we're having a no landing. I think that the economy is doing what it does 90 % of the time. It is continuing to expand at trend, which about 2.5 % growth, or maybe a little bit better, so 2.5 % growth. If inflation is bottoming at around 3%, which is roughly where we are now because demand is going to hold in, you add the two together, you get 5.5%. And that's where I come up with 5.5 % for the yield, that that's nominal GDP, that the 10-year yields should approximate where nominal GDP is. So where I'm differing from Wall Street's consensus is I don't think we're going to see a slowdown.

16:00I don't think we're going to see a soft landing. I think we're just going to continue to see trend growth or maybe a little bit better than trend growth. And that's basically what we saw in 2023. So, Jim, I think your five and a half was close enough for a win. I don't think we're getting back up there, but I do see some moving averages that can get me. The 100-day moving average in 10 years, 439. The 200-day is a little bit over 4%. But the question I have to ask is where you started there with CPI. We went from 9 % down to 3%, PCE running with a two-handle on it. Isn't this good enough when you see inflation drop so fast?

16:36That could be the reason why they're cutting, not because the economy is in any danger? Well, first of all, that PCE at 2 % is only on a six-month annualized basis for core PCE. So There's many measures, and that's the lowest measure you can get. The Fed has made it very clear that there is no close enough. We are going to get it back to 2%. There is 65 % of the country that lives paycheck to paycheck, that prices are 20 % higher than they were four years ago, and that we have to slow dramatically this rise in inflation. And 3 % is not, this is not horseshoes or hand grenades. This is 3 % is not close enough that they have to continue to lean on the economy to get it all the way down to 2.

17:23Now, they're hoping they've done enough that it's on its way. But if it turns out to be sticky, you know, they might be a little bit more hesitant to cut rates as much as people think. So I do think that the inflation rate is key to this forecast. But I also think that we have not yet seen the numbers that suggest that we're really on our on that so-called last mile. Remember, your over your core inflation is four percent right now and your over your headline inflation is three percent and largely because of oil being depressed. What's the timing of your forecast, Jim? In other words, you see rates, the 10 year yield going to five and a half percent, but you still see three rate cuts.

18:03cuts. So do we hit five and a half percent and then we see cuts kick in? And so then we see the yields back off? Or I'm just trying to figure out what you're foreseeing in terms of trying to extrapolate this into how the markets trade this year. So remember, the yield curve is inverted, and it's been inverted now for about 15 months. And that is an extraordinarily long time for the yield curve to be inverted, meaning short rates are higher than long rates. So if the Fed wants to cut once or twice, maybe three times, and bring the funds rate down into high fours, and the 10-year yield goes to 5.5, that's a positive 75 basis point yield curve.

18:44So really what we're talking about is a normalization of the yield curve during the year. That in and of itself to say, well, the yield curve will normalize is not an unusual thing. What might be a little bit unusual about it is it would normalize in an environment of rising rates. It usually normalizes with rates falling. This one might be, you know, where I'm talking about the long end of the yield curve, where rates are going up that might normalize the curve. So keep in mind that what that is implying is that the yield curve goes positive again. Oh, OK. I would think that's a good thing, especially for banks, Jim.

19:19Would you agree? Yeah. I mean, it can be a good thing for banks and it can be a good thing for, you know, for lenders because their cost of loans would go up. And it may not necessarily be a bad thing for the economy, because more long-term interest rates are what lending is tied to. And really, what I'm also implying in this forecast is, I don't think the economy's hurt by 5 % interest rates. I don't think the economy's really hurt by seven or maybe high sevens mortgages. It's certainly not helped by it. But it's not the old line that the Fed raised rates till something broke. I don't think something is broken because of these rates.

20:01And I think that's the assumption a lot of people are using. We broke something. We went too high in interest rates. That's why we're going to have to come down and we have to worry about a recession. I don't think we did. And that's why I think we could go back and revisit those levels. All right, Jim. Thank you. Jim Bianco, Bianco Research. And I think that's sort of what you would think you would assume if you see the headline five and a half percent is what Jim Bianco sees 10-year yields going to this year, that something will break. That means the stocks won't rise. It's extraordinary based upon history, and it's extraordinary based upon Fed rate hike processes that something doesn't break, especially after a move from zero to five, you know, five and a quarter.

20:39And if you think about the moves in Volcker's, the Volcker Fed back in the 80s, rates started at 12 and a half, and they went from there. So I just think, you know, the other part of today's macro, though, was that you had this jolt status. So this job openings and it gave you a sense that if you want to take a moment in time and one data point does not do it on jobs, but the Fed's really executing on their mandate here. You basically have job openings back to where they were in March of 2017. You have the quit rate coming down. People are less confident in their ability to go secure a higher paying job.

21:10And this is all what the market wants. Yeah. And I think the whole conversation is how many cuts we're having. Right. Is it going to be six cuts? Is it going to be three cuts? I think most of the consensus here is we are going to have some sort of cuts. The jolts and the manufacturing data, I do think, supports that. And I think as you're looking into your 2024 playbook, that is what you want to look at, is likely rates are going to come down. How quickly they come down or how fast they come down is the argument. But then coming down, I would say, is generally the consensus. And that's, I think, what you want to focus on is the overall theme here.

21:37Coming up, the latest from Disney's board battle. The media giant getting some activist support as the board seed brawl continues. What the backing means for Nelson Peltz in his proxy battle, the details next. Plus, cannabis cruising higher today. Potsox getting a bump after reports that marijuana classification may be under review. What it could mean for the budding industry. Wow. So much. So funny. This is Fast Money with Melissa Lee right here on CNBC.

22:13Welcome back to Fast Money. Disney shares slightly higher today after the company won the support of activist hedge funds Value Act and Blackwell's capital to back its board nominees. Value Act will support Disney's picks at the upcoming shareholder meeting and has agreed to share information and consult with the firm on strategic matters. This comes as the entertainment giant faces a challenge from activist investor Nelson Peltz. I thought what was interesting was that Blackwell's also sort of criticized Disney and Bob Iger for getting the support of Value Act and saying, you know, locking in that support because they nominated an alternative sort of slate.

22:48How do you feel as a shareholder? Look, a little shakeup in the comfort zone on Disney is not a bad thing. I mean, having Bob Iger back is really important for the company. He's the right man for the job. But I think there's been some sense of, OK, then, you know, I'm going to do this my way. And Disney, my way, as it's been for the last five years, has been the stock doing zero outside of some excitement around streaming, which has been less than profitable. I'm a Disney shareholder. I'm frustrated. But I like the stock. I mean, I have to say I I like the valuation. I think the core business is is enough to give me almost streaming for free.

23:22Depends how you want to look at it. But I like Disney here. It almost feels value trap ish at this point. I mean, it's up two percent or so over the past 12 months. It's been a tough ride here. Yeah, but there's a huge caveat here. There's a very good chance that that last quarter was sort of the trough quarter for the foreseeable future. We thought from that quarter it could trade to 98. I think it got 95 and change. Has pulled back. The report, I want to say the first week of February. You know, I am with Tim on this one. I haven't loved it in a while, but I think that last quarter might have been sort of the kitchen sink quarter where people come back a year from now and say that was your opportunity to buy Disney.