Rates Hit New Milestone and Utilities Sink 10/2/23

0:00Live in the Nasdaq market set in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. Power outage. Utility stocks getting rocked as a surge in rates and a dividend cut at a major player hammers the sector. Our very own Chicago bond king Rick Santelli is in the house. Look at him go. Yeah. Charting the ripple effects on the markets. Plus, off target, another brutal day for the retail giant in what has already been a soul-crushing year. Target shares down almost 30 percent in 2023. Can anything stop the slide? And later, what's in a name? Why our traders are all sour about one iconic American brand's new name for its spinoff, Belcorn Popoff.

0:40I don't know what the folks at Kellogg's did today. That sounds like a curse or something. I'm Melissa Lee coming to you live from Studio B at the NASDAQ. I'm the Destinite. Tim Seymour, Karen Feinerman, Dan Nathan, and Guy Adami. And we start off with the unstoppable rise in rates, the 10-year Treasury yield touching the 4.7 percent mark. For the first time in 16 years, it hasn't closed above that level since August 2007. Longer-term bonds also rallying with a 30-year hitting its highest since 2010. The move taking an outsized hit on rate-sensitive stocks today. Take a look at the utility sector seeing its biggest drop in over three years, falling to levels last seen in June 2020.

1:17Next era, AES, nice source, leading the losses. But can rates keep going higher from here? What impact can they have on the markets? Today was sort of meh guy. Is that Metsch? Some would say Metsch. It's actually, I would say it was actually impressive from the markets. I mean, again, given the fact that the S &P rallied back, effectively closed unchanged, you got to give it credit without question. To answer your questions, I think rates can continue to grind higher. I think what could take rates lower is a precipitous sell-off in the stock market. As a matter of fact, I think one of the only reasons rates can go a lot lower is if, in fact, the market sells off and there's some flight to quality.

1:53But, you know, 4-7 in the 10-year is not good, and it feels like it wants to go higher. And, by the way, kudos to Bill Ackman. I can't believe I even said that, but good for him. Because in early August, you know, he said short bonds. You know, he looked like he rang the bell for about a week, and now here they are at 4-7. Good for him. They go higher from here. So, two's 10s, now 44 inverted. So, we continue to see this steeping in the yield curve. There are many people. I remember Chris Verone was sitting on the desk. But, you know, a lot of people have pointed that this is actually a really bearish sign and kind of the next leg of where it could go.

2:21You know, you can make an argument that this is the kind of bearish steepening that actually is what you might see when the economy is doing better. When you see the short end coming in and creating that kind of steepening, it means the economy and I think people pricing in lower rates. We had some information from the BOJ or at least got some rhetoric. I think, again, international bond yields have something to do with what's going on here. I also just think that our Federal Reserve, in addition to not buying, is actually selling more. And I think there's a lot of different issues here. It's interesting.

2:50I don't know. I would have thought that last week going into the weekend and the government shut down, that the bond market was playing some games a little bit with that. If anything, it says no, unless you believe that bond yields moving higher, as people really believing that there's more of a fiscal deficit on the horizon and ratings agencies. I'll say the equal weighted S &P is now down 1 % on the year. It's significantly underperformed the S &P, and it's significantly underperforming. In fact, it's at an SVB low right now if you look at where it's kind of moved back to. And I think we talk about this all the time.

3:22However, the leadership that this market has gotten from those big mega caps is something that I think will continue to be that which determines an Apple traded great today. Yeah, I thought the market traded horribly today. I mean, yeah, the S &P closed, you know, flat on the day. And if you think about where the futures were last night based on the reaction to the news about the averted shutdown, that sort of thing. But then they gave it all back very quickly. Yeah, they came back at the end of the day. They came back because of the flight to quality. You're talking about flight to quality. It's into the magnificent seven.

3:47And this is what we've seen really since the regional banking crisis, you know, back in March or so. So that trade continues to stay very concentrated. We are seeing some deceleration in the fundamentals of those companies. That was what was evident to me in the Q2 reports and the Q3 guidance. That's one of the reasons why many of those stocks sold off at least 10 percent from their highs pre-earnings-ish or so, broke uptrends that have been in place since late last year or early this year. So to me, again, I can't put too fine a point on this. This is holding up the whole market. I just want to make one other point.

4:19Marco Kalonovic, one of my favorite bears over at J.P. Morgan, he's highlighting in his note this morning saying that a lot of the talk about soft landing, which is consensus right now, it is built into the S &P up 12 percent in the year, the Nasdaq up 30 percent in the year, whatever you're looking at. But the same things that were being talked about in 07, it was a resilient consumer. It was a good job set up. It was a whole host of things that really mirror what we're talking about right now, which feed into the consensus. And I just kind of feel like what we're seeing under the hood of the stock market points to something that's very different.

4:50There's one thing that the markets have done this year reliably. That is go against consensus. Marco's going to be with us on Thursday, by the way. We do want to take a break here. Breaking news, more layoffs at Ford. Phil Lebeau's got the details on that. Phil. Melissa, we are looking at 330 employees at Ford who will be laid off either starting on September 30th. they were laid off or on October 2nd, which would be tomorrow. These are employees who are at the Chicago stamping plant or at the Lima, Ohio engine facility. The reason why? Parts are not needed since the Chicago final assembly plant is on strike.

5:29And that's the plant where they build the Explorer as well as the Lincoln Aviator. So when you look at those two facilities, It doesn't sound like a huge amount of jobs, 330, but this is now 930 altogether that Ford has had to lay off between these two facilities, as well as the Wayne final assembly plant after the strike was called there two weeks ago. And this is a case where Ford is saying we have to lay these employees off because the parts that they would normally make that would go into production in a particular facility, they're not needed because that facility is on strike right now. So another 330 jobs where the employees are laid off at Ford.

6:06Melissa, back to you. Phil, thanks. Phil LeBeau. And, of course, there are ripple effects. You don't need parts. You don't need the stuff that make the parts, like steel and other metals. So it goes on and on and on. Well, this just seems very political, trying to foment dissent among the rank and file of, well, you know, we're getting hit because of this. Is this really what we want? I mean, it doesn't bode for a quick resolution, I don't think. It just ratchets up the pressure. I don't know. That's disappointing. But back to the question about the markets, I thought the markets actually did do pretty well, considering.

6:39And I think that this move has obviously been enormous. But they've told us this for a really, really long time. And it's just taken a while to sort of funnel through the markets. It's not a crazy historic rate. So I think we just have to get used to it. That's painful. But I'm sticking. You know, I'm always long. I'm staying long days like today, any day staying long. I just again, I get back to the market we have here. And so if leadership comes from the mega caps and from the semiconductors, I mean, and I look at the semiconductors that are up four point nine percent in the last seven trading days relative to the S &P.

7:14And I look at the queues that are up three percent from those mid-August lows relative to the S &P. And by the way, queues are not far away from making a relative all time high from the S &P. So until that really breaks down, market's not going to break down. And I realize that the equal weighted S &P is something that's very meaningful for market breadth. And all the things that we talk about, we don't see it. So, I mean, you're right, Dan, in that I think that it goes back to the mega cap tax. But they are holding their ground. Is Tesla in the MAG-7? You can put it in if you want. Yeah. Yeah.

7:44OK. So today they just released their Q3 deliveries. They're not good. I mean, their fundamentals are deteriorating in front of our stock was up. I understand. But those sorts of relationships only last for so long. I'm just telling you. They were down because of retooling and the capacity utilization. No, we expect a downturn. But they reaffirmed their full year. Look, I don't want to die in the hill of Tesla. Just to be clear, I feel strange to me to be out here defending them. What was evident from Microsoft and Apple's earnings? You know what I mean? Like, it was evident that some of the pull forward, some of the enthusiasm about those stocks trading at the levels in which they were trading are not commensurate with their fundamentals, at least as they lined up.

8:19And so those stocks have sold off. But what I'm saying is at some point in the not so distant future, you are going to see correlations go to this number, to one. And then those stocks join the party. And that's when the whole market turns. So all that relative stuff. Dude, that SMH is a joke. NVIDIA up 200%. It's been leading the market. It's been leading the market all year. Because of one stock that has gone to 300. No, not because of one stock. Look at a lot of the semis. It's 23 % of the SMH. Well, I'm just saying, like, I mean, some of them are just not keeping up with the pace. It's one of the biggest companies in the world.

8:48You can't call that a joke, and you can't call a joke the flows. Are we split screen? It was just like that. We haven't done this in a while. So we're split it up. Well, I know. And I'd also say this about Tesla, who I don't want to defend. I don't want to go buy the stock. But the auto strike and everything we just heard from Ford and everything we're hearing about these companies that can't make money in EV. And Tesla, who wasn't making money for a long time and telling us that they were, I think, I don't know, maybe. But the bottom line here is the market that we have is one where we were expecting triple Q's to fall apart.

9:19And the Nasdaq 100 right now is close to making a relative. Are you putting new money to work in the market that we have right now? We're not asking me. No, no, but that's what we're talking about here. But he has money in the market. Yeah, absolutely. It is new money. He went home and he bought it. That's a bunch of crap. No, it is not. That isn't because we all have it in the market. What I'm saying is right here, right now, at 4 ,300, the S &P 500. McDonald's is getting interesting. Starbucks is getting interesting. But you're talking about stuff that have absolutely acted horribly over the last few months.

9:46There's always something to do. Do we always want to buy weakness? No, but the Qs have acted amazingly for the last nine months. So what are we talking about? I feel like Justin Fields in the second half of that game yesterday here. Well, I actually want to take issue with what you said about second quarter earnings for Google, for a Meta. Those are outstanding. So Google and Meta are two very different companies. And Google was underperforming. Then each other or then the rest of the world? Well, I'm just saying if you want to throw them in, this is the post. They are very much in the magnificent.

10:12But they were trading very different for different reasons. I mean, like to me, you know, Google, if we have this AI virus that infected like a bunch of the trillion dollar names, Google was on the backside of that. They were actually underperforming those other peers. And so to me, Meta was down 78 percent or something like that in 2022. So up 100 percent is just a reset of some of the overshoot to the downside. Third quarter. What happened when they announced the second quarter earnings? You said they didn't do well in the second quarter. I didn't say those names. We've got a very special guest here that we want to get to.

10:40But before we go, because you asked him the question, are you putting new money to work? Are you shorting the markets here, Dan? Yeah, but, you know, I made a mistake. Last week you asked me if I was short, and I said I'm long puts in the QQQ, and I made a mistake again. I do this again and again because I do make a lot of mistakes. Like, the S &P was the trade. It wasn't the QQQ. Because if you want to focus on what the last battle is going to be fought, it is going to be in that magnificent seven. So I continue to do that like a month. Do you want to be short the market when the Qs are going higher?

11:04It depends for the reasons. You know what I mean? Like, to me, this goes back to 2007, okay? At that time, the same thing that Marco was saying, the last time the 10-year was right here, the consensus was soft landing and everything was going up. And what I'm looking at under the hood, what I'm looking at banks, what I'm looking at industrials, what I'm looking at transports, what I'm looking at even energy in the last week or so, it does not speak for an economy that's about to inflect higher, in my opinion. If you look at some of the consumer data, it looks kind of – But if the market is a discounting mechanism, I'm telling you that the whole thing is being rocked by seven stocks right now.

11:37Well, and what I'm saying is I'm not telling you that I think the market is going to go a lot higher, although there's some key levels. I can't wait to hear Mary Ann Bartels later on in the show. But I do think I'm not going to fight a market where the semis and the queues, until they really break down, they've led this market. There's a really good-looking guy with an easel and like a pen. Oh, yeah. We should probably go to him. Oh, yeah. There he is. Let's get him while we're going this year. All the way from the Windy City, the one and only Rick Santelli joins us here. Clap him in. Clap him in.

12:06There we go. And he joins us with his world-famous easel, by the way. Well, I do apologize. I don't have all my equipment, and I couldn't do a really pretty chart. But before we get to that, I'd like to say a few things. I personally always find anniversary dates very key. And I can't help thinking about September of 81, when we had the all-time high closing yield just shy of 16%. So what I'm talking about here might be dancing between the raindrops. You never want to go against a market that is burning to the upside. But you might want to give it a pause if it looks like it's going to back away a bit.

12:39But in the grand scheme of things, I think rates are going higher. So let's go to the charts. Like I said, not my best work, but high, low, perpendicular, midpoint. We always pay attention to those, especially when one of those points is the all-time low closing yield at a half of 1%. So you take the high, you take the low, you connect it, you find that midpoint, you draw a perpendicular line. And what you find is it just keeps you on the straight and narrow. Those are very key. The more important the spike levels are, whether it's a key high or key bottom, those make it work that much better.

13:10Now, this chart is really off scale. Remember, when you're doing these charts, you've got to use logarithmic paper. This is just a rough gauge, but there's your near 16%, 781 for your anniversary date. And the whole point of this chart is that we have a lot of potential room to run to the upside. So if somebody asked me and held a gun to my head and said, listen, the worst case scenario, where Treasury rate's going to go 10 year, I'd say in the next seven years you should be able to see 13 and a half, 14 percent. Yes. Now, I'm not saying we get there, but I really want to stress you do not want to jump in front of this right now.

13:46But if this week closes under 4.75 and the high yield close remains in the 4.60s, you buy the market looking for a bit of retracement to potentially get back down to 4.25 to 4.32. Or if it gets to 4.75 on a closing basis first, you liquidate the trade. So you buy TLT below those levels. In other words, bad in yields are going to go down in the short term. Otherwise, we're looking for it. Why are rates going higher? Is it because the economy is gangbusters? Tyler. Tyler Mattson. And everybody clap for who loves Tyler. I love Tyler. And what did he bring up today? A great Chicagoan, Milton Friedman.

14:21And when he did, one of my 50-year veterans from the trading floor called me and said, boy, he's spot on. I had many meetings with Milton. That if you want to know where inflation is taking the markets and why, just look at government spending. The vigilantes have new horses and they're riding. And I really do think that is the answer. We are spending too much. We are not learning to cut back. As a matter of fact, I think we're out of control as we approach a$2 trillion deficit. And this is the market's way to get Washington's attention. That's always been the case, though, hasn't it, to some degree, Rick?

14:55So why? No, QE. QE changed everything. Right. So do you think that the Fed, whoever the Fed may be within the next 10 years, is actually going to allow a rate that is above 13 percent? You can squeeze a water balloon nine ways from Sunday, but eventually it pops out somewhere. they are running out of little tricks to pull out of their bag. And in my opinion, the quantitative easing removed many signals in the market that now it's trying to put back in place. And they could do as they wish. If they keep tinkering with this, the problem is we have too many large economies that are going to be in the same boat.

15:29And who's going to end up buying this paper? Right. So the presumption here is you think the Fed put is done and it requires the discipline for the Fed to state the course. And I agree. And I'm a student of history, probably less so than you. But I think all the way back to the first shenanigans, I think a long term capital and I think of the Asian financial crisis. And I think that's where monetary accommodation went out of control. And I think it wasn't 2007, 8. I think it was 1997, 98. BOJ, I think they're the biggest wild card here. And I heard over the weekend stuff that told me YCC is done.

16:02And I think that's a slingshot to U.S. yields higher. Oh, absolutely. And the Bank of Japan could actually pull the plug that drains the water on everybody's bathtub. And that's the real fear I have, is they have no idea how they could be the catalyst. They could be that one ping pong ball you throw in a room with a bunch of mousetraps with other ping pong balls. And then all of a sudden things start flying. Mousetraps, mousetraps and ping pong balls. So, Rick, let me ask you. So let's say rates just keep going up so much that they crush the economy. Right. And so then do we start to see rates really come back or do you see stagflation?

16:37and everything's terrible. I think Guy hit part of it. In 1987, when we were in the pits, what we learned was that when equities get really ugly, you see the Treasury complex start to do better. I think the signals being distorted has changed that to some extent, and it's going to have to get much uglier to get the attention of the bond market, but I think that dynamic will come to the rescue, but it's going to come to the rescue late in the game. Karen mentioned that we've had rates at these levels before, which I totally agree with. It's a rate of change thing, though. And think about 15 years of being conditioned liquidity, zero interest rates.

17:12People are not prepared, in my opinion, for what we've just seen over the last 18 months. Speak to that. Oh, yeah. Not only are they not prepared, I think that when many look at the markets and they scratch their heads, they just don't understand that the Fed held the beach ball underwater for so long, basically a decade of zero that shouldn't have been at zero, that ultimately the force that this thing's popping out, I think, is justified. If it pops to 13, let's pop. If the trajectory is very steep, does that imply that the bounce back is going to be steep as well? Absolutely. Absolutely. The one-third or two-thirds retracement on some of those GAN numbers should be every bit as aggressive.

17:52That's why I do think we're going to get a pause, and I think we're going to consolidate here. But I urge people not to try to pick tops and yield. Let the market tell you you can dance between the raindrops a bit. OK, but again, your big call tonight sounds like north of 13 percent in the next 10. And that's the grand scheme of things. Yes. When I take a look at the long term monthly charts, that's what I see. Rick, it's always great to have you. And you're easy. Anytime. Thank you. Thank you for being so nice. He should sign these. Yeah. And we also I'm not even kidding around. Time capsule.

18:23Do you think I'm messing around? And we'll donate the money for. He made a point. I was in his office in the CME in September, and he has a treasure trove of these things. And I know you're trying to say that this is not your best stuff. There's some good stuff in there. There's different colors. It's all scaled. It was really beautiful. I have logarithmic paper, and I overlay it on cellophane when I do the charts, so they're really accurate. We're big fans of Rick Sands. I mean, this is going to – we are lucky to have Rick Sands. His expertise – I mean, he's a Drexel guy like I was back in the day, But he's forgotten more about the bond market than they talk about.

18:59Who's this bond king person? What's his name? Rick Santelli. That's the bond king right there. And the bond markets are always right. So the bond markets are always right. And they're always ahead of the equity markets. And it's this kind of a lag effect. We talk about the economy. But equities sometimes really do whistle past that graveyard. Absolutely. But I think those days are going to be behind us. Rick, thank you. Rick Santelli. Thirteen and a half. I mean, this is a long-term call. But, I mean, that would be mind-blowing for a whole generation who's never seen rates much higher from here.

19:28One of the things Rick is saying is don't get in the way of trade. And if you look at, you know, we had four decades of downward pressure and yield compression. There's a lot of different reasons for it. It was China. It was globalization. It was technology. But if you look, I would make your argument, look at the chart of the two year going back 10 years. We started moving higher in rates. If you take out COVID, which I think you can do for this exercise, we can't do it for every other exercise. But rates have been moving higher at the short end for 10 years. Coming up, Target slashed. The retail is dropping to three-year lows on one big analyst call.

19:59And with stores closing ahead of the holidays, will the company miss the bullseye with investors? The details next. Plus, a financial fork in the road, one big name at one-year lows. But can a rebound? And what will rising rates mean for the sector? The names are traders are watching straight ahead. Don't go anywhere. Fast Money is back in two.

20:20Welcome back to Fast Money. Expect more, pay less. Yes, that's exactly what investors are doing today. Shares of Target sink to a three-year low. Bank of America cutting the retailer's price target to 120 from 135 after the company said last week it was closing nine stores in major cities due to violence and organized theft. The stock underperforming Walmart by 40 percentage points so far this year. Karen, what's wrong with Target? Well, a lot apparently, but I think, you know, we've seen that. We talk a lot about the consumer being somewhat stretched. And when they do spend, as we see at Walmart and Costco, something like that, it's on groceries and it's on gasoline.

20:57And what Target really does is they have a much better margin in things like home goods, apparel, things like that. So that mix has really been not good. Then we talked about the shrinkage issue. There's closing the nine stores. It's really it's sad for a lot of reasons, not just to target to those communities. It's really sad. I don't think that will really make a difference to Target. But I think they're just kind of at the wrong space. They haven't gotten their mojo back. The multiple reflects that. So I'm long target, which has been the wrong thing. I'm long Walmart, which has worked. But I also have this target Walmart trade, which just continues to get wider.