REGIONAL WRECKAGE 10/20/23

0:01Live from the Nasdaq market side in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. Regional rec shares of region's financial plunging and taking a good chunk of the sector along with it. Rising rates, mounting expenses, taking a toll. How much will bank weakness weigh down the broader markets? Plus, an Apple problem. Reports are parting ways with Jon Stewart over content concerns related to China and AI. Is this problem going to keep dogging tech companies that want to try their hand at edgy, creative content? And later, a solar power outage that took down the entire sector today.

0:34Oracle's Friday flush, the ripple effect on other software stocks, and the options action on Amazon ahead of the busiest week in earnings. I'm Melissa Lee, coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinerman, Dan Nathan, and Guy Adami. We start off with the regional bank tumble. Regions financial dropping more than 12 percent. Earnings falling short of estimates, rising yields, mounting expenses, pressuring results. Regions drop, rippling through the sector. Shares of Comerica, Western Alliance, Zions Bancorp, Fifth Third, also hit hard. The weakness coming as the 10-year continues to hover around 5 % for the first time since 2007.

1:10That historic jump in yields contributing to broader market volatility. The VIX closing above 21, up more than 12 % this week. Markets closed a week lower. The Dow falling nearly 290 points today. The S &P and Nasdaq down more than 1%. So as you get set up for the busiest week of earnings season, will rate fears continue to be the driver of the markets? Guy, what do you think? I believe so. We've talked about this. KRE, listen, had a huge bounce off those April lows. I think we got down to 34.5, traded up to 48-ish. It's giving a lot of it back, and I think it's going to give it all back by the time this is all said and done.

1:42And we go back to 34.5. Then the fun begins. Does it hold in there? Do we bounce again? Or is something more nefarious going on? And I guess the good news for the KRE, it's all of these companies are basically 3 % of the weighting. Bad news is all the companies are 3 % of the weighting. So nobody's been able to take the lead and sort of bail this thing out. They're all in the same bucket right now, and that's not a particularly good place to be. Yeah, so if we're thinking about, like, volatility readings, the VIX closed today above 21. The last time it had a consistent grouping of closes above 21 was back in March when we had regional banks falling.

2:12So the fact that we're leading off this show today talking about regional banks making new lows. I mean, region's bank is making new lows from its panic sort of March lows. I said to myself, OK, well, where was the 10-year back then? You remember the 10-year in the start of March was 4 percent? It was on its way to 3.5 percent. Guy's been talking a lot about flight to quality. We saw that, right? We saw folks going for treasuries back then. Back when you could. Well, back when you could. Now you can't leave, you know, if you think about it. So think about where we are right now in the 10-year, in and around 5%.

2:40The Fed funds is, you know, 5.5 % in the upper band. All of the stuff that we were worried about banks going under for back in March and April is only worse right now, you know. So that's why bringing it back to the stock market or the broader stock market, you know, VIX at 21, be prepared for a bunch of closes in this, you know, this 20 handle. Well, in the region's earnings call is very apparent, and this is the same problem for all the regional banks. Higher for longer means that it's going to be more costly because their customers are going to interest-bearing deposits. And so that's going to go for longer in terms of the cost for those deposits.

3:12And then also the normalization in terms of mix, because customers are still migrating to those interest-bearing deposits. And the longer rates stay higher, they're saying the longer the normalization process takes place. And so it's more troubling for them. Well, I thought there was a little other wrinkle to it, which was they had some interest rate hedges on that cost them and they're not finished with that cost yet. So I think that net interest income, that net interest margin was a big miss. Exactly for your point, non-interest bearing accounts became interest bearing accounts, which is obviously far less profitable.

3:45But remember, their short term rates are still high. They can make some spread. But that that so that little wrinkle was a little bit disappointing. They don't seem to have a held to maturity problem. And I mean, it wasn't great. Expenses were high. That wasn't great. They didn't have some great reasons why they were high. That also wasn't great. And everything else that happened in the market. There was not a lot to not like with, you know, the Middle East situation. You have the speaker thing falling apart again. You had bonds actually were OK. Right. But I think for like a Comerica, it was they didn't do terribly.

4:19It was just and they're trying to, I think, be cautious, but it didn't matter. They were all going to be swept up in this. Oh, is there a problem again? Right. And it felt like today there was a problem again. And if you think about so if Guy pointed out that range in the KRE, if we're going anywhere near 34 in the near term, stock market's going a lot lower. We were at thirty nine hundred on the S &P back then. But but what were the reasons why these banks had these excessive sell offs? One is the net interest income for three. Q was down six and a half percent. They forecasted down five. I guess bad checks are a thing again.

4:51Wasn't that interesting? 50 to 60 days? You still have a couple paper checks sitting in the drawer. I'm not saying you're right. I'm not saying you're right. Unless there's something wrong with it. I thought that was really interesting because it was mentioned probably in the first 10 minutes of the call. The first thing out of the game was this increase in check fraud activity, which was a continuation from the second quarter. Right. That wasn't great. I don't know. I mean, ultimately, I think it really is about the profitability of their core business. And I think the fact is, you know, we said forever, Tina, there is no alternative.

5:23What's what's is it? Now, what do we have? There is an alternative. It's a good. So there's there's a lot. There are a lot of alternatives. The stock market this week, unfortunately, if you think about it, the last three days of the week closed on the lows, closed below the 200 for really the first time in this run. And is now down eight and a half percent off of those highs we set on on August 1st. So going into a week, it puts more pressure on Microsoft than ever. when we've all pointed out that these guys have been carrying the day and it's just a matter of when. Is this a tell, though, is to something bigger that's going to break or that needs to break in terms of the decline in regional banks?

6:00Or is this a regional bank problem? The Huntington Bank shares CEO was interviewed today on CNBC and was asked specifically about why the stocks have been just battered. And he said, well, higher rates, the impact on the economy, that's going to be a concern of potentially weakening labor market and also regulatory. So he made it really seem sort of a little bit more specific. And all things we have been discussing here for a while, at some point, all the things you mentioned are going to have an impact on the stocks. It took a lot longer than I thought. Here we are. But is it something worse?

6:30I think so. I mean, you listen to what American Express said. Discovery Financial said. Capital One. I mean, you start creating a bit of a narrative here. Well, maybe the consumer is not in as good a shape as we think or the market seems to think they are. We've talked about that for a while. So this move in the bond market has not been good for anybody. And if rates start going down in this flight to quality, it's because something really bad is happening in the stock market, not because the bond market just fixed itself magically overnight. Yeah, we were talking about, you know, small caps for a while now.

6:59Small caps closed at a new 52-week low today. They're down 5 percent-ish on the year. And they look technically they look horrible. So when we talk about access to capital and the cost of capital, these are things we've been talking about now for months. And so it's manifesting itself right now in small cap stocks. I know Carter's coming on in a second, but he was talking about the Russell 3000. We quoted it last night. Half those stocks in that index of 3000 stocks are below the October 2022 lows. Right. So the equal weight S &P now is down 12 percent and it's very near its year to date lows, that sort of thing.

7:30So, you know, the price action on many, many sectors and hundreds of stocks in the stock market actually feels like we're in a bit of a bear market. And so when Tim just says it puts all this pressure on Microsoft, remember how Microsoft acted after it was coming off an all time high into their calendar Q2 report this summer. That really was the top in the Nasdaq. I mean, that was it. So, again, I said this last night. If there are any disasters lurking in any of these big, large names or just a meaningful deceleration or not just evidence of all the excitement that caused those stocks to go up the way that they have, I think the stock market is on its way to being unchanged on the year.

8:03That's the S &P. Well, and the equal weighted stock market is it's down on the year. And so it gets back to there is a bear market. There's a bear market in a lot of stuff. There's a lot of industrials. I mean, look at the airlines. The airlines are down 30 to 40 percent. And as someone that believes that their fundamental business outside of oil prices is actually pretty healthy, there's been a lot of pain. And the retail space where I think you've had the real understanding of where the consumer may be or where the consumer is not yet, but discretionary and apparel that I think are going to be the first and the market has sold them.

8:33It is giving you opportunities. It is interesting. You've seen utilities actually kind of find a bottom. You've seen staples find a bit of a bottom. You've seen health care find a bit of a bottom. This is what you do. This is the playbook during times like this. And I think those are some places after big sell-offs in all those spaces. Yeah. If you read the calls and you hear what the CEOs are saying about the consumer, you see all sorts of indications. I don't care what the earnings were, but in terms of how they're talking about the consumer, You know, AXP today was saying that card member credit has continued to deteriorate.

9:06Basically, the quality of the credit has continued to deteriorate. DFS yesterday, very cautioned the consumer, some stress, especially in the lower and the mid-band of the FICO score stack, Karen. And then today with Regents Financial, I mean, you don't get a good picture of how the U.S. consumer is doing. Right. It doesn't feel good. Is that what you mean? It doesn't feel good. I mean, the only the only positive to say about it is this this credit cycle is just getting into it. They're very, very well reserved. Right. So many of these institutions are really well reserved. It doesn't matter, though, in the short term, if those numbers tick up, if those non-performing loans tick up, even if they're covered, I think it's going to be hard.

9:48You know who's not well reserved? U.S. government, as it turns out. And that's one of and that's one of the many reasons that rates are going higher. So, yeah, banks, in terms of their balance sheets, they're fine. I'm not worried about the banks necessarily. I mean, in terms of the stocks, they can go lower. It's something more afoot here, and it finds itself in the way of the Federal Reserve and the balance sheet of the United States and the fact that the market is demanding a higher yield to buy our debt. Rightly so, by the way. And all the things we talked about, how the consumer, again, the consumer's fine right now with a 3.7 unemployment.

10:18What if that employment rate starts ticking higher in a meaningful way? It's a much different conversation when all these things start to kick in. The conversation we're going to have with Jens a little later on in the show about the currency markets and what's going on. I mean, to me, the whole Japan story, so I'll save most of that headline for that block, is part of what's going on. And if you think about where a lot of the consumer has been through all this, jobless claims this week got better. We've talked about this. The reality is that the job market is tighter now than it was when the Fed started.

10:48And if you increase the participation rate the way you have over the last couple of months, that's why the unemployment rate isn't down closer to three percent. So, in other words, we would be at record unemployment right now if more people hadn't come back into the labor force. So it just means the other things we heard all week, which is that the Fed is not going anywhere. And that not going anywhere and staying here for an extended period is something. And you have to you have to factor that in. Gold, meantime, continue to surge briefly, crossing the two thousand dollar market's highest level since July 31st.

11:17But can rates and the bullion keep charging higher? Let's ask Carter Worth of Worth Charting. Carter, good Friday to you. What are you seeing in the charts here for gold? Sure. Before we get to it, I mean, to your conversation about the market, it really is characterized the bullish year that wasn't. I mean, the Russell 3000, right, which represents 98 percent of the investable capital in the U.S., is up 8.9 percent, the index. But the median stock is down almost 7. 60 percent of the stocks are down. It has not been a bullish year. Hard stop. But anyway, let's go to gold and let's look at some of the charts and rates and so forth.

11:52So obviously, we're right now on the one year anniversary. It was a Friday. It was October 21st, 2022. And rates hit a high of 4.34 percent before dropping all the way back down to three. And then here we are now one year later at 4.9. Look at this chart. Look at the channel and look at the second, which picks up the chart going back from the prior high. So again, one year anniversary, Friday, October 21st. Here we are Friday, October 20, 4.34. And here we are 4.91. The question is, is this sort of where it gets over it on? I think so. But of course, I've been making that case and it's continued higher.

12:31I'm a buyer of bonds, plain and simple. But gold, look, these relationships, there is this notion that, of course, well, if the dollar is so strong, why is oil going up? Oil went up when the dollar was strong. Or now the dollar stays strong and here's these relationships are not always inverse. Sometimes they're direct. Either way, the moonshot that we've just seen and we've moved up$186 an ounce, up 10 percent in 10 sessions. On a short term basis, you fade that by all accounts. And if you look at all rolling 10-session moves like this, it usually gets a checkback, a dip, a correction. The longer-term structural issue, when you see it on the screen, is this.

13:10Is this ultimately this great backing and filling at those prior highs before we break out? Yes. Look at the longer-term chart, the next one, going back to the lows. It's a great setup for gold. So it's what your time frame is. If you're very short-term, it's not going to just keep going at this rate. It's excessive. If you structurally believe in gold, I do. You always want to have some. And this chart tells the tale. But Apple, big earnings coming up. And I think maybe we should look at that one, too, when we might have a chart. I'm a seller. Wow. That's straightforward. Sell Apple. Carter, I want to go back to gold for just a moment, because if you're concerned about if you are a believer in gold in long term, but believe your call that in the short term, it will pull back.

13:53What is that support level that it bounces down to. Right. And that sounds like someone who doesn't have a clue. And I think it's going down then up or up and down. But structurally, nothing's changed. Gold has been consolidating for three years, trying to ultimately break out despite all the movement. But again, 10 percent in 10 sessions is a bit much. I would think you dip. We closed at what, 197 an ounce on the high. I think you get down to 180, 1800, excuse me, and then you'll get your bounce. All right. Carter, good to see you. Thanks. Carter Braxton Worth of Worth Charting. Guy, quickly, on gold.

14:28Sounds like he's got a bit of a frog in a stroke. He's playing hurt. Poor guy. You know what? I mean, that's what Carter does. He plays hurt. Mel does. Listen, I think it powers through. I like gold. I mean, do we check back? Maybe. But every sell-off has been less and less. The magnitudes have been smaller and smaller. I think it's going higher for a myriad of reasons. And when this institutional money kicks in, which it will, then people are going to start talking about it. I'm telling you now, on a daily basis, CNBC will be leading with, OMG, did you see what happened in gold? We should put a gold ticker in the lower right.

14:56Exactly. No, no, no, no, no. Then we're going to sell it off. All right, sorry. I wanted to go higher. Our next guest says he hasn't seen a yield move like this in his two-decade career. Jens Nordvig runs Exante Data and is Nomura's former head of fixed income research. Jens, always great to see you. So, you know, let's think about this. You're sitting in front of your computer. In 20 years, you haven't seen this sort of move. So in your head, what do you think about in terms of what breaks when you see this moving yield so quickly? Well, like you always keep an eye on credit, right, is the high yield starting to really impact the corporate bond market.

15:31And we've seen some of that. You look at what's going on with the global credit conditions. And we've started to see some some weakness, a lot of different credit markets. So it's been an accumulation of forces. And we've had some incredible moves even after the rally we've had today. Right. We have an almost free sigma move on the week even after the rally. Right. So that just shows how incredible big these moves have been. And it also is something that the Fed clearly has started to take into account. We've had five, six Fed speakers now make reference to the bond yields as something that actually means that they have less work to do themselves.

16:11They are taking it into account in financial conditions as well. When Powell was speaking the other day at the New York Economic Club, Jens, he was asked specifically about foreign buyers stepping away. And he sort of dismissed that notion, even though on Wall Street charts have been going around with China stepping away. I want to read the quote from Fed Chair Jerome Powell. Buying by overseas entities has actually been pretty robust this year. So there have been some small changes. But I think by and large, by and large, they've been buying robustly, which seems to go in the face of what many people think on Wall Street, that, you know, China is just not in the position to buy anymore.

16:47They don't have those excess reserves. Maybe politically they don't want to do it either. And Japan is also stepping away. What do you think? So when you analyze China, right, the big change is that they used to be huge buyers, and they're definitely not huge buyers now. Like, we can talk about exactly how much they're selling, but the big change is that they're not big buyers anymore, right? So we track Chinese intervention all the time, and we've had more intervention in August, more intervention in September, right? So the pace of reserve loss is maybe$30 billion a month now, and some of that's going to be funded out of Treasuries.

17:21So there's probably some selling there. But I think really the big picture is that supply is going up, right? We need demand to go up somewhere as well. And it's not China for sure. It's probably not Japan either, right? So really, if you look at the big picture, it's actually the domestic US investors have had to come in and fill the gap. And so far, up until very recently, the T-bills yielded way more than the bonds, right? So it's much easier to park your cash in the very short end rather than go out and take duration risk. Now that's kind of corrected. But essentially, US investors, households even, have been helping to fill that gap.

18:01And they've been doing it mainly through T-bills. And that's a part of the big reason why the long end of the curve, they had to kind of come up at a better yield point to suck in demand. And it will be very interesting to see what happens when the yield curve has a positive slope. Is the demand dynamic going to start to shift? I don't think we've seen it yet, but that's one of the indicators we're watching right here. Yeah. And I mean, to me, it's all about supply. It's also about a Treasury, U.S. Treasury, that I think was trying to hang into the short end of the curve. The T-bill issuance versus the 10-year.

18:31And we said this. I mean, this is a Fed or essentially a government that's actually borrowing at really low rates and having to pay back and lock in at much higher rates. But that let's go back. Let's go to your namesake and go to the currency markets. Yen kiss is 150 today. I would make an argument that part of the move in Treasury yields could be even less Japanese participation. But it almost perversely, this carry trade is almost more attractive than ever when you look at the yield spread between the U.S. and Japan. But where are you on Japan, I guess, is where I'm rambling here. It just seems to me this is the next train wreck.

19:08I think Japanese yields are the trigger to take U.S. yields up significantly higher. Yes. So all the markets are connected, right? So what happens in Europe matters to U.S. yields. What happens in Japan happens to U.S. yields and Japanese investors have been massive buyers of treasuries over the years. Right. The fact that the JGB yield is now edging pretty close to one percent in the 10 year and above one percent further out the curve is something that means that Japanese investors don't have to come. So it's definitely going to have an impact. Right. And we can certainly worry that we're going to have another relaxation in their yield curve control.

19:46right so we don't have any anchor anymore and that could be a factor for the u.s treasury market for sure the one point i want to make though is that the u.s bond market is not like its own thing like what is going on with long end yield is intricately connected to what's going on in the short end of the yield curve you can just see it today right the whole curve resets lower in tandem it's not just the bond market doing something on its own it's the whole curve right if the market could get comfortable that the Fed is done, then it's going to impact short yields and long yields. And that will be the most important force.

20:24And I'm not saying it will totally mean that the supply dynamics are not important, but it's going to be the most important driving variable. And we shouldn't lose sight of that. If the economy is weaker, if inflation is under control, the short end is going to dictate and be the most important force for the long end as well. Jens, thank you. Jens Norvig of Exante. Have a great weekend. So there is hope that yields won't move higher, Karen. But what do you think? It certainly feels like they're going to move higher, right? I didn't just and also we talked to you the night about this vicious cycle of higher rates are the higher the government has to pay to issue the more debt they need to issue.

21:03Yeah. If yields move, ask yourself, what would be the causation for yields to move lower right now? because probably, again, the marketplace is going to U.S. Treasuries because something broke flight to quality, which means in our world it's not good. Equity, almost by definition, if yields are lower, the equity market is lower. The yields going lower. And credit spreads blown out. And HYG goes down. When you say yields go lower, you mean like significantly lower, because right now we see a little breather in yields and equities find relief as well. Well, a breather in yields. I'm talking about a move to four.

21:37If we went down to four and a half percent in three trading days, let's get something broke in the equity market. Trust me, people say that's a great it's not a good thing. In my opinion, it's not a good thing. Coming up, a major data breach sending Okta shares tumbling late in the day. The details in the ripple effect on cloud and software stocks right after the break. Plus, a solar stock smack down. SolarEdge plunging nearly 30 percent after giving investors stormy guidance. We'll dive into the numbers that have the sun powered name stuck in the shade. Fast Money's back right after this.

22:11Welcome back to Fast Money. A news alert now on Okta. Shares dropping sharply late in the day after the cybersecurity firm said unidentified hackers accessed files within its customer support system. The company noting, though, that its customer production offerings were not impacted by this breach. The stock closing near the lows of the day, down by nearly more than 11.5 percent. From cloud to software, Oracle also under pressure today, dropping just shy of 6%. It's worth staying in more than a month. It was the biggest laggard in the IGV software ETF, which also slid 2.5%. Karen, you're still short this one?