Is the Market Telling Us the Fed Has Peaked? And Digging in on the Latest Congressional Trades Around the Bank Crisis 4/11/23

0:01Right now in fast are housing stocks and home improvement names sending the markets a message about where race and inflation are going ahead of earnings season and the Fed's next meeting. Plus, one Wall Street firm's blue outlook for Microsoft's cloud business. Is this a warning sign for the rest of the sector about a spending slowdown ahead? Then a new round of stock trading troubles in Washington. A look at the lawmakers who made moves in bank stocks around the time of the Silicon Valley bank collapse. And later, Bitcoin's new milestone to look at what's behind the cryptos climbed back above 30K.

0:32I'm Melissa Lee. This is Fast Money. We're live at the NASDAQ MarketSite. On the desk tonight, Steve Grasso, Karen Feinerman, Guy Adami, and Tim Seymour. But we start off with some signs of strength in one of the most interest rate sensitive areas of the market. The Philadelphia Housing Index jumping two and a half percent today for its biggest gain since February. Every component rising with the biggest gains coming from mortgage companies, Radian and PennyMac, as well as builders like D.R. Horton and LGI Homes. Housing adjacent names also getting bumped today. Mohawk Industries and Whirlpool both soaring on the back of two separate upgrades.

1:04So as we await tomorrow's all-important CPI print, is the market telling us that the Fed has already done what it's going to do, Guy? That's the hope, clearly, right? And I would probably agree with that. The Fed's probably within 25 basis points of being done, which is fine. And I think a lot of people would acknowledge that's probably the right course of action. My contention, so far incorrectly, is this lag effect will take place at a certain point. and the market, the economy will start feeling the effect, the impact of 500 basis points of hikes over the last nine months or so. But the names you mentioned, that's one thing we have been bullish.

1:37You look at Pulte Homes, for example, comes out PHM. That's within 30 cents or so of an all-time high. Look at that name, DHI, another name. Mohawk, which you mentioned, that's fine. Stocks trading 100. It's still down over 50-something percent from its recent high, but you have a nice little double bottom. So I think in some aspects, people are looking at opportunities to trade. In terms of the home builders that we talk about, supply, demand, it's really got nothing to do with the economics. It literally comes down to supply, demand, and they're trading that way. Well, you've got two kickers, supply, demand.

2:07And then also, if you know where the terminal rate is likely to be, that's a very good thing. You know what you're dealing with. Yes. I think it's more that. I mean, if you're out looking for a home now, I think you would feel differently than you did three or four months ago about, well, prices may have moved down in your favor. So I think that's part of it. I don't know if the Fed's done or done-ish. And I don't know that it really matters so much because I think we've seen the peak-ish for rates and for mortgages. But I think the overbuilding, or lack thereof rather, has been so important. There is nothing remotely close to the overbuilding, the supply-demand dynamic that we saw in 2008.

2:47So that's probably what it is. It's more of a supply-demand issue, which is keeping these stocks afloat versus the rates issue. But to Guy's point, if there's going to be a recession, who's buying a home? So that's the effect I believe that you were referring to, correct? Yes, I think that's probably true. I think there's still some tailwinds to these homebuilders because, again, it is a supply-demand thing, and that takes a long time to wash through. Karen's right. I mean, we didn't have the 08-09 excess in any way, shape, or form, and people are still trying to figure this out. So I still think the stocks are ownable.

3:20At a certain point, you're going to run into Steve's problem, I think. But that's in terms of the stocks. That's probably at the back half of this year, early next year. Well, I will tell you the only one more little added thing is a tailwind. And this could be the early cycle of it. There's a lot of people that are buying homes for cash. That's still an element now. And that could run its course. And then you could see weakness. Right. Tim, how do you sort of navigate this? Especially, you know, you also have a tailwind of input costs coming down. But for right now, right here, right now, we are seeing employment pretty strong still.

3:56So people are still employed. And so they can still buy a house. So even if a recession is coming, we might be in sort of a sweet spot, at least for now. Well, perversely, the housing stocks and housing sector have gone up as rates have kind of gone off that SVB bottom on where we bottomed out two years back over 2 % today. But I wouldn't be doing cartwheels about this snapback. I mean, the housing stocks traded down as if they were regional banks. And if you look at the XHB, it's still down, I think, 4 percent on a five day. If you look at Masco, if you look at some of the buildings materials, they're down seven or eight.

4:29You look at Otis, you look at some of the train, you look at some of the HVAC equipment. And I think, you know, if you look at that that Whirlpool upgrade today, that was interesting to me because Whirlpool, I think, is a world class company who, you know, largely is called defensive when 50 percent of demand is just replacement. Supply chain issues hit them as hard as anybody and nothing like a crisis to make a company more efficient. So after trading down 45 percent, I love the call on Whirlpool. I don't get carried away with housing. Guy's been right about this move in housing. So part of it for me is also that I don't want to buy the home builders that are so far off of those lows that I think you've priced in a lot of good news.

5:09Yeah. So we're in within the housing sector because you can be in the builders, You can be in the suppliers. You can be in the retailers. Whirlpool is interesting, Tim points it out. Listen, homebuilders, I would understand if people say, you know, you've got to pull the ripcord. I'd rather be early than miss the entire move down because it happens very quickly. But a name like Whirlpool, for example, which I think reports at the end of the month, which is fast approaching. To Tim's point, it's a$260 stock. It got basically, not cut in half, but I think it went from$250 down to$160 or so. But in valuation now, you can make a pretty compelling case.

5:40and people will start to, I think, layer into some of these names in earnings. So in terms of trades, they set up pretty well. You know, if housing was truly strong on its own, I think you would start to see Home Depot or Lowe's sort of confirm the moves. When you look at the charts, it is definitely not as powerful as the housing stocks, which mean it's probably a little overdone in the builder world. What do you need to see, though, from them to confirm the move? Do you need to see commensurate rises in a Home Depot? Yeah, I think I think people would get ahead of it and say, OK, if building stocks are going to be OK, they're going to be using a lot more building materials to put into those houses going forward.

6:22Yeah. Karen, what's your thoughts on Lowe's? I own Lowe's. I own some Home Depot. I actually own some Whirlpool, which I've owned for up and down. So that was, you know, I could have sold it 50 points ago. I like it, though. I like the supply chain issues being helping their margins. So that's good. I also like Zillow because Zillow is asset light and it's not great when there's not a ton of transactions. But I think that we are going to start to see more transactions. And I love the light model. I love how they're changing the business model to actually share some of the agents fees. And I don't know, I think they've done it.

7:05You know, that turnabout that they did, the about face of we're in the home buying business and we're out. Right. Was it embarrassing disaster? But I think a really incredible moment for a for a management team to just say we blew it and we're getting out as quickly as we can. And they really did a great job getting out. They top ticked the market. Yeah. So they do have this red fin. I guess it's a sort of they'll send over a referral and share some fees there. But it's not super cheap here, but I love the asset light part of the business. Yeah. Should we be looking for indicators such as, you know, private equity firms, Tim, getting in or getting out of housing in order to confirm or dispel the moves that we're seeing?

7:49Well, the use of the smart money, they certainly were very smart in post kind of tarp land after the crisis and buying up a lot of distressed properties. And Blackstone was at the top of the list. So, you know, give them credit for being there. I don't think you're seeing that. And I think also some of it is partly on the basis of where capital is a little bit different. I think the housing market is in a very different place than where it was after 2008, 2009. However, I think there is still very significant regional strength. And I think there are buyers out there. But I think it's apples and oranges.

8:24And I just get back to, you know, Home Depot. There are stocks that people want to buy when you have those moments, when you have washouts. Home Depot is one of those for me. And if and if at 250, it was a stock that, boy, I can't wait to forget to 250 again. I think you're supposed to be nibbling on it here. And I think this is one of those stocks, especially as you've seen them get through and cut back also on some places where they can be a leaner company. The margins in their pro business continue to be very strong. And I think their digital business is part of why their margins and their multiple deserve to be higher.

8:54It's interesting, you know, and you can't do this, I understand. But if you were to back out the move we saw in December of 21, November, December, the stock was$400 because everybody was flocking to Home Depot. I mean, you sort of back that out and you look at this over a 10-year period. It's been a very orderly move to the upside. We're skewed, obviously, because it cascaded lower over the last year. But to Tim's point, even at the current level, it's$295 or so. So it's trading at a market multiple, which in Home Depot world is actually very reasonable. And you have until May 16th, I think, in terms of earnings.

9:23So you've got some runway, I think, to be long the stock as well. All right. Well, barring a surprise jump in inflation tomorrow, our next guest believes the street is mostly wrong about the Fed's next move. Paul McCauley is PIMCO's former chief economist. He now teaches at Georgetown's Madonna School of Business. Paul, great to have you with us. Wrong in predicting 25 basis points at the next meeting? I think the Fed's going to be on hold at the next meeting. So I disagree with where the front Fed funds futures are priced. And I don't think that the street at large, my old economic community, is convinced there's 70 percent odds.

10:01That's where the marketplace is. I think we're having a very lively debate in the community. And I think we're having a very lively debate at the Fed. And I think that President Gouleswitz's speech this afternoon was absolutely marvelous and framed where the debate will be going into May 3rd. So if they pause at this next meeting in May, does that pull forward a pivot, a pivot meaning a cut? Yes, it does. We pause and then a pivot. I think the last hike back on the 22nd of last month will prove to be the last hike, but they certainly would not be declaring that at this stage of the game. They will be declaring essentially, I think, that they're going to pause and they're going to look at the data coming in, recognizing that what's going on with the stress in the banking system is going to work in tandem with what they've already done with 500 basis points worth of tightening almost.

10:59So I don't think there will be a table pounding declaration that this thing is over at the next meeting. But unambiguously, I think there should be a pause. And I think that as we move out in the next week or two, that the street will move in that direction from the standpoint of pricing the odds. Paul, it's Karen. Thanks for being on. So if you're right, let's say they pause and they have this somewhat dovish and we'll look at the data kind of take on where we stand right now. Where do you think things need to be in terms of the CPI or or unemployment for them to actually pivot and cut? I think you need to have continued disinflation in order to get the pivot.

11:48And I think you're going to get that. I think you're going to get that. And I think also that need to see some more softening in the labor market. We've already seen a slowdown from where we were. We're seeing deceleration in the wage side. So I basically say more of the same, both on the disinflation that's in train and also the deceleration in the labor market. Just more of the same for another three to six months, I think, is the raw material of them pivoting. Because remember, we're starting from a standpoint of an inverted yield curve, a deeply inverted yield curve. And that in itself has profound negative pressure on the banking system.

12:36So essentially, all of the parts are coming together in a pause and then a pivot. So you don't need to have a recession or another run, which I don't think that we will get. You just need to have more of what's in train and the train move down the line another three to six months. So the backdrop in your view, Paul, for an actual cut is not necessarily a recession. That would seem to me that that would just light the fire once again for assets to become inflated again. And if the markets aren't actually going to get a recession to see that cut, we're not retraining the markets in terms of how to think about monetary policy.

13:19Well, you're basically setting up a construct conceptually so that you can't get a cut without a recession. So by definition, that takes a soft landing off of the table. So I think that getting all of the variables moving in the right direction is a prerequisite. But also, I cannot overestimate the importance of the starting point being a severe inverted yield curve, which is going to give you a continual bleed of deposits out of the banking system. Not a run, but as Jim Bianco calls it, a walk. And I think that's going to put pressure on net interest margin or NIMS and will reinforce the pullback and risk appetite by the banking system.

14:12So those are all of the ingredients, I think, for a pivot. And that issue of the inverted yield curve is hugely important because its sheer existence magnifies, if you will, the stress and pressure in the banking system. So this is a question I probably would have never asked you, Paul, but I'll ask it to you this time. I mean, if they do actually cut this year and there's not necessarily this hard recession that happens along with it that that prompts that cut, what do you think happens to the stock market? I would guess that you would say it rallies. And is that what the Fed wants? The stock market wants to go up.

14:53It's wanted to go up this year because you've had long-term interest rates come down or put differently. Long-duration bond prices go up. And the stock market is a long-duration asset. It's a perpetual. So I think the stock market wants to go up. We saw the leadership in the longest-duration stocks logically over the last month. And I think as we move out in time and as this scenario unfolds, that you will see a shift in the leadership in the marketplace for the simple reason that the long duration growth stocks have already had a serious party with the long end coming down. When the short end of the yield curve comes down and we re-slope the yield curve, then I think your more garden variety, main street stocks will catch a bid.

15:50And this will not be a stock market that is so led by such a few mega growth stocks. So I think the leadership will change over time, but the general direction should be up if you get a pivot and also you don't get a recession. You should ask about stocks more often, Paul. Thank you. Paul McCulley, adjunct professor at Georgetown, formerly of PIMCO, of course. Let's play this out. The market rallies regardless of what the leadership is. The market goes higher. Is that what the Fed wants? Do they want to reinflate that asset? I don't believe so. I don't believe so. And they've actually stated that.

16:33If you go back over the last year or so, I mean, Jerome Powell's been asked about it. I mean, he made a comment maybe nine months or so ago as he was walking off one of the things he was talking at. Oh, by the way, if you're a millennial and thinking about buying a home, think again. That's paraphrasing, but that's effectively what he said. He's talked about the want for asset prices to come down. So I don't think they want that. A cut in the back half of the year might lead to that. But I tell you, if that does happen, you know what's going to rally? Commodities are going to rally again. The inflation genie, which is still not back in the bottle, will remain out of the bottle.

17:02And gold, which is going higher, will continue to go higher in the back of a dollar that's going to get zapped. Tim? Well, a couple of things. Professor McCulley was in session and he said two things. He said Wall Street over Main Street this year. And when Main Street's having a tough time, Wall Street tends to rally. It often does. And think about the sentiment, think about the positioning, and it sets up. And look at a market that's traded between 38 and 41.50 for a long time. And we've been consolidating right at the top of that range. I think it sets it up. And I'd quickly then go to banks and just say, yes, he's talking about NIMS, and we've talked about net interest income.

17:43But ultimately, banks didn't get the credit and the tailwind from NIMS and net interest income for this Fed move. They've only been thought of as the downside and the flight of deposits. Let's not punish banks for NIMS and margins that they never really had in this run. I think we're worried about banks. And if he says the run of banks are over, and I'm not saying he's got some crystal ball, but then the banks are cheap and Wall Street does outperform Main Street. And it's just something to think about ahead of these big bank earnings. I would not get so hung up on net interest income. It's about balance sheets.

18:16It's about credit for banks. And it's about the discount based upon the world they now operate in, not net interest income. All right. Coming up, a cloudy forecast for Microsoft. One analyst cutting estimates for a big segment of the tech titan. Does the weakness suggest dark clouds for the rest of the market, too? That's next. And a big boost for a number of discretionary stocks today. But is the consumer as strong as they seem? We'll debate that when Fast Money returns.

18:51Welcome back to Fast Money. Microsoft dropping more than a percent today, two percent today, making it the Dow's worst performer. The stock struggling after UBS warned of weakness for its cloud segment. Analysts lowering growth estimates for the company's Azure business over the next several quarters, citing spending cuts and slower migration to the platform. The analyst, though, did say Microsoft's investment in open AI could be a positive catalyst for the stock. Just wanted to underscore one point, that is he said that street estimates for Azure are too high. And that's where the disconnect could mean downside for this.

19:23That's been the tailwind for these stocks. But just remember what we were all talking about on this desk. When SVB collapsed, these stocks got a bid. So that was around March 10th. Someone could correct me on Twitter. All of them got a bid. They all faded or rolled about a week ago. So does it mean that this is going, And they all faded right about resistance. So it doesn't mean now the fundamentals will start pushing these names down when before it was all technical. January 24th, they reported second quarter. Stock closed at 240. Operating margins came in at 38.7%, down from 43 % a year prior.

20:03And if you look at Azure growth, I mean, they said it was going to decelerate. They gave third quarter guidance. Stock went down to 223, traded up to 290 on the back of this chat, GBT, AI stuff that everybody's talking. That entire move, all that was was multiple expansion. There was nothing good going on with the underlying. That's all it was. Why is that happening? Because people are getting excited about something that may happen. Now you're hearing analysts say, wait a second, you might want to go back and look at that quarter and look at the guidance because we're coming into earnings. You're probably not going to be happy.

20:35Microsoft at 30 times next year's numbers is an expensive stock in this environment. We were talking about Apple just yesterday with the IDC data coming out, saying that Apple lost share, basically. And then we have Microsoft. And so you put these two together. These are linchpins of the S &P 500, Karen. Should we be worried going into earnings season? We lose these two, and that's a huge headwind. Well, we lose these two. But also, if you think about it, Alphabet has a big cloud business as well. That's an important driver for them. So if there's something here in Microsoft and also for Amazon as well, big cloud, biggest cloud business, Oracle as well.

21:12So it's interesting. The piece, it wasn't a draconian cut at all. Right. So they're really on the high wire. I am long Microsoft at this multiple. I kind of have a bit of a hard time really sticking by it because I agree 30 times on what's been, you know, great numbers. But should it be this much of a premium? Yeah, but forget about, my point was forget about multiples. This, all of this balance was a synthetic bounce because people wanted to take their money out of the regional banks and out of the financial system and put it into large cap tech. All of the charts look identical. Do you think, though, that part of that shift was, if it was really a fear of where your money is, you would put it in treasuries, which are pretty good.

21:55I'm sure. And people do that as well. But also, it's, wow, rates, they've got to, you know, they can't keep raising rates. And so, who's a beneficiary of that tech? I'm sure it could be all of the above. The problem is when you look at all of large cap tech stocks, all of them have the identical chart. They all bounce from March 10th, and they all top at around April 4th, April 6th. All of them. But one quick question, Karen. Why do you hold on to Microsoft then? You're a valuation person. You said it's a hard thing to hold on to. I know. It's a long-term giant tax gain, right? There's that. And every time I've thought this, ultimately, it does eventually trade higher if you're patient.

22:38But at this point, it's indefensible. All right. There's a lot more Fast Money to come. Here's what's coming up next. The consumer is showing some muscle as retail and discretionary stocks head north. But can the rally continue? The traders weigh in next. Plus, congressional question marks. Lawmakers trading bank stocks amid last month's turmoil. And it's raising a few eyebrows. The moves they made during the recent financial fracas. You're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.

23:23Really? Welcome back to Fast Money. Another check on markets today. Stocks fairly muted ahead of tomorrow's CPI print. The Dow climbing nearly 100 points. Its eighth positive session in nine. The Nasdaq dropping nearly half a percent. The S &P down by less than a hundredth of a percent, basically unchanged. Our friend Carter Braxton worth pointing out in a note a short time ago that the S &P today is literally his favorite term, a pair of twos. And he adds that going back to 1970 in the more than 12 ,800 trading sessions, the S &P has finished unchanged just 29 times. That's less than one quarter of one percent.

24:01Meantime, some discretionary and retail stocks, gaming, steam, Ralph Lauren, Newell Brands, Pool Corp, all up big and CarMax leading the group up nearly 10 percent after reporting earnings this morning. Tim, less than a quarter of a percent of the time the S &P finishes unchanged. Maybe that tells you just how, I don't know, on the wire it is in terms of the CPI and the PPI reports coming out. Yeah, well, and retail sales also on Friday. So there's a lot of important data this week on top of bank earnings. And I can understand the pair of twos, especially because nobody thought it was going to be here.

24:38But I just feel like that this market has given you a lot of opportunities to trade. So, you know, if your blackjack's a higher kind of velocity game than poker, I mean, you know, sometimes you throw your hands, you know, the cards back down and you wait for the next round to be dealt. I, you know, pardon the Willie, was it Kenny Rogers, I guess was the gambler? I don't know. Sorry for all the poker metaphors here. I just feel like, but you started it. I think you have a case here where this is a market that that's probably why it's interesting, because people have continued to think that the market can't go higher.

25:10Meanwhile, back to this breadth conversation. And everyone's been right about the reasons for mega cap tech outperforming. It's been a safety trade. Guy pointed out the absurdity of Microsoft and chat GPT and what that means right here and now. But before all this happened in SVB, the breadth of the market was outstanding. You saw industrials outperforming, transports outperforming, even emerging markets outperforming, resources, certainly energy. That got derailed by SVB. If we're starting to put some of that in the rearview mirror, I think we can have the kind of breadth that we actually had before.