Rough Road Ahead for Stocks? And an Under-the-Radar Winner in the Weight Loss Boom 9/25/23

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. A warning from the bond market. Ten-year yields crossing the key 4.5 % mark today for the first time since 2007. But it's a relationship with shorter-term treasuries that has one of our traders setting up red flags. While he says the yield curve is flashing big warning signs. Plus, crude reality is oil prices up nearly 30 % this quarter. And one top exec says the rally has only just begun. What it means for your investment and how you should play the move. And later, an under-the-radar winner in the weight loss drug craze.

0:35We'll talk to the CEO of a manufacturing company with close ties to both Eli Lilly and Novo Nordisk. Jacob Solutions, Bob Pregata, is on set tonight to detail how the company is benefiting from the boom in demand. I'm Melissa Lee coming to you live from Studio B at the NASDAQ on the desk tonight. Tim Seymour, Dan Nath, and Guy Dami. And our guest trader tonight, Chris Verone of Strategas, a Baird company. And we start off with that steepening of the yield curve. The 10 years rapid rise to 4.5 % and beyond has come much faster at a much faster pace than the two years climb over the past few months.

1:07And that's narrowed the spread between the two treasuries sharply. Since hitting a four-decade-plus low earlier the year, the gap has come in by nearly 50 basis points since July. Someone here tonight says that could set up for a very rough period in the equities. Chris is that person. What do you see? You know, what's funny about this business is people get all worked up about an inverted curve. But it's really not the inverted curve that gets you in trouble. It's when the curve begins to come out of inversion, when the curve actually starts to steepen. And I think the big story of the last three, four months is the steepening of twos and tens.

1:38Now, it's steepened in an odd way. This has been a bear steepener. So 10-year yields have backed up, even if twos have kind of hovered around five. It's a little unusual. You've only saw that twice historically, 1969, 1970, and 1973, 74. It was the signal you were approaching the tough part of the business cycle. And I think what's interesting, when you look at these steepeners historically, that move going from inverted back to positive has typically been the worst part of the equity cycle. So I just want to be mindful of what the signal here is. It tends to be a risk-off signal, particularly for leadership.

2:10And I think the big story the last four, five, six weeks is how you've seen cyclicality really start to falter and defensive showing some life. So when you say the worst part, like how bad was that period in the equity markets for those two periods of time? Yeah, I mean, that was the lead up to the recession in 69 and then 73, 74. So you're at the point where markets actually tend to be topping. The best part of the curve is actually when it's very, very steep and flattening. So there's misconceptions about the curve. It's when it's steepening from an inverted position, trouble has typically followed.

2:40And there's an argument that this kind of bear steepening, which is the long end getting higher, is somewhat bullish because the economy is not falling out of bed and you're not seeing at least the market start to price in the short end of the curve. The part about this that just is different and feels different is that some of this steepening is all coming from supply. It's all coming from some dysfunction around our government, possibly, but certainly around refunding, certainly around the dynamic of where I think the global interest rate pattern is going higher. And look at the dollar, by the way, the dollar, which today went up to that kiss, that one oh six level on the on the Dixie.

3:15You're basically, I think, breaking out through that March resistance. And you probably will test that. As someone that thought that the dollar was going to go lower, and I'm not alone, I think it's a crowded trade of people that have been, frankly, wrong about this dollar weakening. I think it's a very crowded trade that probably still will see people holding in there. But the dollar is painful for markets here, and I think that's going toe-in-toe with the Treasury market. The warning signs are there. I mean, Chris is right. The reason why people get exercised about an inverted yield curve is because they know at some point it's going to re-steepen.

3:45And to your point, the re-steepening is when things get dicey. and this bear re-steepening, again, not to get too wonky, it's happening in a very dramatic way. I mean, 10-year yields now through 4.5%. This is the highest we've seen in 16 years. The TLT closing below 90, not a good thing either. And you have to wonder, how long can the market hold in there? The S &P has held last August high, 43.30-ish. We've bounced off there a couple times. That's a good sign. The question is for how much longer. Yeah, it's interesting that Chris mentioned what this means for this stage of the economic cycle.

4:17And I'm just like two of my favorite bears on the street. Mike Wilson at Morgan Stanley. He's talking about just consumer and some of the data that they're tracking and what that means. And then Marco Kalanovic over at J.P. Morgan this morning, also in a no doubt, you know, just talking about corporate's ability to pass through this same kind of concept, pass through, you know, higher input costs and the like. And you just say to yourself, as it relates to the economy, you know, we have businesses that probably hit peak margins and, you know, really pass through as much as they can. And a consumer, from a credit standpoint, that just tapped at a point where rates have gone up so fast.

4:50And if you are like a lower wage earner and wages have, you know, at least the pace in which they're going up has decelerated a little bit. I just, you know, I'm just hard pressed to see all of this together is conducive for equities going much higher in the near term until there's a proper, you know, correction or so. And if you look at that equal weight S &P 500, it was about down 9 percent or so. So I think seeing down 10 % would be an interesting alarm bell with the VIX above 20 or something. We haven't gotten there yet, but it might get there, especially if we have a continuation of this move where the 10-year keeps going higher and we have that re-steepening.

5:24So we've always had this conversation about the steepening of the 10-year yield in the context of it makes tech, it makes biotech, all those sort of more speculative trades, longer duration trades, less attractive. So this is just happening in conjunction with what is going on with the yield curve? Yeah, I think so. And when you look at this last leg higher in yields, what's really been hit are the very marginal parts of the equity market. I mean, ARK is under 40. We've seen even what was hailed as good IPOs a week ago, ARM and Instacart, are back on their lows here. So the marginal parts of the market are quite weak.

6:00I do think it's interesting, Dan, on the margin point, right, margins under pressure, The things every company needs, people, money and energy have all gone up. The cost of all of those have all gone up. You know, we've done a lot of work looking at energy versus discretionary in this part of the cycle. Energy's dominance over consumer discretionary is a late cycle signal, not an early cycle one. Yeah. And if you look at the XLE, to me, we're possibly breaking out again. This is an area where if you look at it on the charts and there's there's it's not just about a linearity to the oil price. It really is the kind of guidance we're getting from these companies.

6:33I mean, Guy referenced the Chevron CEO last week. And the dynamics, I think, around their balance sheet are things that are going to continue to support that defensiveness. Defensiveness, staples, health care, which typically go along with energy here. I think they're getting interesting. I don't think it's time just yet. And again, I look at staples, which have drastically underperformed the S &P over the last six months, 16, 17, 18 percent. And back to that pricing power Dan was talking about and what companies can pass through. I think the best days of that, I think we've seen their best days on a two-year basis for a long time.

7:05Discretionary stocks, that's horrible. I mean, I'm looking at like Disney and Nike are down 30 % from this year's highs, okay? And then you look at a Starbucks down 20%. We've talked about these names. I mean, they're telling you something to both of those things I think we've talked about. A consumer that's a bit tapped at a time where all of those inputs are really weighing on margins. Again, I think the most vaunted parts of the market all year, discretionary and semis or tech, internally are actually the weakest. Only 40 % of discretionary above the 200 moving average. That's not a bull market reading there.

7:35We beat up on Target all the time, but it's a pretty decent indicator. Now, a lot of their problems are self-inflicted. 110 and change today. Lowest we've seen in many years in Target. Bounce late still. Not a particularly good day. The outperformance of Walmart vis-a-vis these dollar stores is not good. Massive double top in the SMH. We brought that up. And the XLE, I think we test the levels we saw, I think, in the summer of 2014, 100-ish dollars. And I think we break through. Energy still works in this environment. So when is the time to go short? If we're going to hit the hardest part, if we're going to, you know, if some of the leaders of the markets look weakest, when do you go short?

8:13I'm going to look at Dan because you have been known to short various areas of the market. Some have been paying trades. But is now the time? Well, I think we're losing some of the leadership. I mean, Tesla, did you see the way Tesla closed on Friday? And it was trading pretty weak today. You know, NVIDIA is down, you know, 16, 17 percent from those post earnings highs. And again, until they make new relative highs, like until they take out the ones I think you can I think you short the Nasdaq. I mean, like, so I hadn't done that in a while. I did it last week. The timing was OK this time. But, you know, I think those are going to be under pressure because I think if you look at the S &P 500, which, you know, those top 10 names make up a little more than 25 percent or so.

8:53I mean, they're still hanging in there. OK. You know what I mean? They definitely are. And Microsoft and Apple, you could consider heroic in terms of how they overcame that elevator trip down. But it's about risk reward. And to me, Apple's 150 before it's 200. And that risk reward is a dynamic doesn't mean Apple can't do a great job in buying back shares and actually growing earnings just through some of their capital markets dynamics. But I don't think that the mega cap tech stocks are going to hurt you here, even in a defensive market. But I get back to discretion. Look, I'm short Nike. I'm short Lulu.

9:25I think a lot of these names are going to continue to weaken up. Nike's had a big move lower. I think it can look this week is very interesting. I'm contemplating tactically. You know, how good does it get in this name? If you think about it, it's about 24 times on a forward. It's come in 20 percent off of that multiple on a forward basis. I think it can go lower. Yeah. What would you short here, Chris? I'm with Dan on this. I think what we've seen is the year to date tops for Apple, Microsoft, NVIDIA. They are oversold in the short term. I recognize that seasonality improves the next couple of weeks.

9:58I want to be a seller of those bounces. The 50-day moving averages on all those stocks are now, I think, very important resistance, not just for the remainder of the year, but into first quarter of next year. I'll answer that as well. Regional banks, I don't think they trade particularly. Megacap banks don't trade well. Bank of America, Citibank, Wells Fargo to a certain extent. But regional banks and the KRE not traded particularly well. I think they roll over, especially, look, you look at the Russell, the IWM. We topped out. Seemingly 175, 180 has been a top. Can't get through it. I think regional banks go lower from here.

10:28You know, it's interesting. Chris just mentioned seasonality gets a little bit better over the next few weeks. Think about this. When we got back from Labor Day, I think the consensus by most strategists, most investors, everyone we talked to was that September, you know, normally pretty bad, was going to be bad. And then every once in a while, you get one of those folks who pick their head up and say, well, I'm going the other way. I think it's going to be a rip-roaring. It's going to rip your face off. That's the pain trade higher. And look where we are on a month-to-day basis. I mean, the S &P is down nearly 4%.

10:51I mean, so it would take a miracle for it to close up, I think, on this month at this point. So I think sometimes it's interesting when we focus on being a little bit like going with the flow here. I really do think that, like, you know, I think that the highs are in. I think you sell rallies. And I think, Dan, to Guy's point, if we said 11 months and two weeks ago when the S &P bottomed on October 12th of last year, that one year later, Bank of America and Citigroup would be on the lows. I think we'd all be surprised by that. But we're nearly a year off the market bottom and the banks have simply not been involved.

11:23What does it mean? Well, it means that the market does not believe credit dynamics right now. And the banks are going to be in the epicenter. We know their balance sheets are fine. We know that some of the dynamic and the corporate balance sheets are largely fine. To some extent, we are worried about commercial property. We are worried about where the retail is. We have seen the cracks. But I agree. I mean, the fact that Citibank is through an SVB low here, I mean, that's tough. For more on rates, let's bring in New Edge Wealth Head of Fixed Income, Ben Emmons. Ben, great to have you with us. Hey, Melissa, it's great to be back.

11:57Hey, are we going to look back on this level of the 10 year yield and think this is pretty much the highs for this cycle? Well, I think we still have some to go here. You know, like if I was looking at technical levels today, if you take from, say, the 2007 peak to the bottom in 2021 and then back up, if you think of the retracement levels, so we've really broken through all of them. So technically speaking, you should actually make all the way back to the top. Now, there is some, I think, some tactical opportunity here. I was looking at TLT and VGLT. They're quite oversold now on short-term indicators.

12:29They've drawn down almost like 13%, 14 % from the peak in July. So that may be your tactical opportunity. But I think we have to reckon that a yield of 4.25 % was not really reflective of the economy. It may be a yield of 5.25%. And echoing to Tim and Chris's points, this is a supply-driven rally, but it's also about liquidity. We have quantitative tightening. So last week, for example, the Bank of England increased in quantitative tightening. So there's also a global story behind rates. So I think we may have a tactical short-term bounce here in VGLT or TLT, but it's really the upside of five and a quarter on the 10-year I think that we'll have to look at.

13:08So, I mean, not to play bond market too much, but the opportunity is there for yields to go slightly lower. But then that would, in theory, be the point where you would bet that yields would go much higher because you're actually seeing key resistance four and three quarters. Yeah, I think. So, Melissa, I think that this four and a half that was mentioned the other day was just not really holding here. There's too much pressure, you know, just simply by supply. They are very simplistic today with T-bill auctions. They don't actually never matter to markets, but they were not that well received.

13:39And I think that added to the pressure in yields this morning, we're getting a lot more supply this week. So I think it's more about 475 as a key resistance for this short-term technical buy opportunity. But then from there, we have to see how much it pulls back. You know, it depends on data and depends on inflation. if we don't pull back much, then it's really going to be a move towards five and a quarter. That does look like it. Hey, Ben, it's Tim. So how much of this, if at all, could be related to government shutdown dynamics? I've read your notes. They were fascinating. In fact, it's complex.

14:12You say maybe there's a short term even funding dynamic for the Treasury because they want to get through a difficult period. They want to have liquidity. T-bill market also. Look, in the short run, maybe they're trying to overfund in the T-bill market. as rates go higher, becomes a lot more expensive for them to finance a deficit that's getting bigger and bigger. And ultimately, they're going to have to lock in some higher rates out the curve. Attack this any way you want, because it's fascinating stuff. Yeah, for sure, Tim. And I think that, you know, how did this all start at this sell off in rates?

14:42If you go back to July when the Treasury met with this advisory committee, they said, OK, you know, you may go above that threshold of 20 percent debil issuance for a period of time. but then you should consider to move more issues out the curve because if you issue too much short-term, that deficit becomes very unstable. And so I think this is the dynamic that plays out today. Short-term funding for the government to keep open and just finance it with T-bills may not be enough. You have to actually push out issuance out the yield curve, and I think that's troubling the Treasury market currently.

15:15So you could expect to see more in the next quarter, the next refunding to see increased issuance for 10 and 30 year bonds. I think that's being priced in today, which we're seeing right now. That's interesting. But then you also throw in the possible dynamic that a government shutdown could lead buyers to buy sort of the safety of treasuries or the U.S. dollar, which is bizarre kind of thinking. But in the past, we have seen that happen. Yeah, it could be. Melissa, like I said, you know, Most of these shutdowns that have happened are short-term effects on the economy, almost like a weather effect, if you will.

15:53But it is an uncertainty moment, so it leads then to some level of flight to safety, if you will. And I think if you coincide with very short-term technical indicators and you're getting very oversold on ETFs like TTLT with a shutdown overhanging the markets, And that gives you, I guess, scope for this very short term technical rally that may be in the works. But I think the bigger picture is more about what Tim and I was just discussing. You're dealing with a deficit that's substantial and you're issuing it with too much short term paper. So if you have to get away from that, you've got to go out the U-curve in terms of issuance.

16:28That will continue, I think, be the pressure point for the Treasury market. Ben, good to see you. Thank you. Thank you, Melissa. Yeah, they're doing short term paper because they're clearly concerned, scared, I would say, what would happen if they tried to do a longer duration without question. So they're just trying to hopefully the bond market settles down and allows them to do something longer term. It's not happening. It's actually working against them, number one. And we talk about this without getting too much in the weeds, but don't discount what's going on in Japan. Dollar yen approaching 150 is a huge technical level.

16:59The Bank of Japan will jawbone. They won't be able to stop it. They've probably been selling treasuries. That's leading to this as well. Yeah, I think JCP yields have used this term. I think they could slingshot higher. I really do. I think there's dynamics also with the BOJ that at some point they're either going to lose more credibility or they're going to have to give in to the dynamics here. A lot of this, by the way, is also relatively good for commodities. What we're seeing here is that you almost have like this PPI dynamic, which is actually good for certain parts of the market. And it's actually not bad overall for the economy.

17:28I know it sounds crazy, not easy for the Fed, but we're seeing copper prices hold in. We're seeing iron ore. We're seeing dynamics around China. I think the resource names you continue to own. It's funny. You know, last week we heard from the Fed and there seems to be a massive disconnect between the voting members of the Fed and the voting public of the United States. If you think about higher for longer, it was really to deal with what they think is an economy that's staying afloat. And then if you look at these ABC polls as it relates to Biden's approval or therefore really disapproval rating, it's massive.

17:56And on the economy, it's really bad. And when the voting public is, you know, again, it's a poll. Who knows? But they are probably telling you how they feel about the economy right now. There seems to be a massive disconnect right now. And that's the thing that, I mean, I would probably go with the consumer. I'd probably go with the voters, how they're feeling. I think in the very short term on yields, look for classic signs of a blowoff. Volume, for example, we've been doing 40, 50 million shares a day on TLT. I'd say it's something in the blowoff categories, 80 or 90 million. We saw that near the 2020 lows there.

18:27So keep that in mind. It sounds silly to say, but what do we know historically? Bond yields go up until they don't, right? They go up until gravity hits them. I know we've got to go, but I mean, equities trade great on some level. If you consider the move we've had, I just want to say this. I want to say it from the seasonal aspect, and I think it's giving you a great opportunity on the setup here. Because we're not going up to five and a quarter on the 10-year in the short run. In other words, we've had a massive move, and I think equities have traded very resilient. Coming up, Apple's next move, the tech giant getting sliced over the last few months.

18:55And a few of our traders think the pain could continue. Why they are so sour on this name next. And talk about some home improvements. Williams-Sonoma surging as some big money flows into the retailer. So could this be the stock to really tie your portfolio together? We'll debate that when Fast Money returns.

19:15Welcome back to Fast Money. It's been a rough couple of months for Apple since hitting one all-time high after another. In June and July, the stock has pulled back more than 10 percent from its record. It's down more than 6 percent just in September alone, on pace for its worst month of the year. And a couple of our traders think this chart is getting worse before it gets better. Tim, you flagged this on the call today. Yeah, and I brought it up last block. So at the risk of being repetitive, I do think that the upside to Apple is capped here. It is about risk reward. And I look at the chart and I look at where that 150 level, that may be a little more aggressive.

19:45Remember, we traded to 176. It looked like it was going straight to 160. It bounced off that 50, held the 100, I should say. And I think that price action is impressive. I just think that when you consider some of the good news that's behind Apple and that the stock really is meandering at best, the dynamics around where I think the equal weighted and some of the technical aspects of the ETF world and how people are investing in the market, I actually think there's a lot more people focusing away from the mega cap stocks. So that is really my argument. The valuation is something that I think is easy to have a difficult time with at this point.

20:22And it just gets back to not getting away from you. You know, Tim, I think when you look at the chart, that 50-day moving average is resistance now. And I think it will be for the remainder of the year. 182, 183 is that level here. If you cut the rally in half that we've had this year, it gets you 160 on the chart. I think a 50 % retracement makes some sense there. But remember, when you look at this whole group of stocks, Apple, Google, Meta, Amazon, etc., there's about 350 analysts who cover all of them. There's only four cells on that whole complex of stocks. Isn't a lot of good news already in these things?

20:52Yeah, but in the context of a market that's expected to go lower, in the context of a consumer that is going to be weak, I mean, hasn't this stock really held up pretty well? Well, 170, so here we are. The prior all-time high was December of 2021, right around where we are now. So the good news is we're holding that level. The bad news is there's been no meaningful bounce since that China announcement a couple weeks ago. And if you said it a week or so ago, shadow ban in China, and this stock goes from 176 to 160 in a heartbeat. But here's, I mean, so defensive. Would you rather be, ooh. You did it.