Stocks Sink on a Warning From Waller, and the Next Big Deals in Biotech 1/16/24

0:03Live from the NASDAQ market site in the heart of New York City's Times Square. This is Fast Money, so here's what's on tap tonight. The Waller warning. The Fed governor suggesting the central bank will be modest in its rate cuts this year. His comments sending stocks dropping and yields and the dollar rising. So should investors brace for more hawkishness out of the Fed? And what will it mean for markets? Plus, grounded. Shares of Spirit Airlines closing at a record low as its merger with JetBlue gets called back to the gate. the impact it's having on other airlines and how to trade that industry.

0:38And then later on, gold stocks losing their luster as the miners see their worst day since February. A semi standout with AMD trading close to record highs. And then cannabis stocks get a green light. So is it time to get into some of these names? We'll debate all of those topics coming up. I'm Dominic Chu in tonight for Melissa Lee, coming to you live from Studio B at the NASDAQ market site. On the desk tonight, Tim Seymour, Dan Nathan, Guy Adami, and Rebecca Patterson, former chief strategist at Bridgewater Associates. We will start with that sea of red on Wall Street today. The Dow dropping nearly 400 points at its lows, though it closed, as you can see, well off those levels.

1:20The S &P 500 and Nasdaq also down with the tech-heavy index ending a six-day winning streak. The move's coming as the benchmark 10-year Treasury note yield jumped back above the 4 % mark. This after Fed Governor Christopher Waller sparked some uncertainty over where interest rates could be going. Waller saying cuts are likely to happen this year, but indicated the Fed should take its time in bringing those rates down. It counters the streets hopes for more aggressive rate cuts throughout the course of this year. So how seriously should investors take Waller's warning? Guy, let's start with you.

1:56Well, great to have you here, Tom. Thanks for filling in. And I'll say this. People should be actually happy, I think, that Fed rate cuts are not going to happen as soon as the market anticipates. Quite frankly, it's when you start cutting rates is when you have to start being worried about the market. But to answer your question, I think they should be worried. I think so much has been priced in on the rate cut front. And then you start seeing things that say, wait a second, maybe we're getting a bit ahead of ourselves. So there should be a concern. And the move in 10-year yields, I think, sort of backs that up, Dom.

2:23I mean, Dan, the whole idea that the rate cut picture, we've heard so many times now that people are saying, you know, investors, traders are over their skis with regard to forecasting for this. How over their skis are they right now? And did this do anything to really solve that? By the way, great metaphor on a snowy day in New York. Yes, exactly. I know what you're doing, Don. I think it's fair to say, if we just go back four months, that move from 4 % in the 10-year to 5 % and then back to the 4%, that investors have been turned around on both sides, right? And the fact of the matter is, here we are, the S &P 500 is basically unchanged on the year, right after having a pretty good year last year, closing very near all-time highs, given all the uncertainty about expected cuts.

3:03So when you look at just seeing the movement today in the Treasury market and yields up 10 basis points, I think, off of those lows, you say to yourself that investors are not prepared for a push out of that March cut, which I think the CME Fed Funds tracker is pricing still about a 65 % probability of that. happening. So if those cuts get pushed out, what does that mean for equities where they are right now? What does it mean for S &P 500 earnings if we have inflation start to pick back up a little bit, if we have supply chains disrupted by what's going on in the Red Sea and some other geopolitical hotspots around the world?

3:38Crude oil seems to be found a little bit of a bottom here in around 70, that sort of thing. So to me, I think the only thing mispriced right now are really equities and expectations for double-digit percent EPS growth this year? We were talking for the longest time, Rebecca, about this notion. Traders and investors all across Wall Street had metaphorically declared victory over inflation and that that was the reason why interest rates were moving the way that they were. Are there signs in the commodities market, signs elsewhere, that maybe inflation shouldn't be declared dead just yet? Well, I think to your point, if things worsen in the Red Sea or the Middle East generally and that affects perceptions around oil supply and freight prices, transportation prices.

4:21Both of those things are risks. And Waller even mentioned that in passing today. So certainly there is a risk that way. The market has been pricing in too many rate cuts, in my opinion, for quite some time. I think it's still mispriced. Maybe if inflation continues to trend down, we get 325 basis point cuts. But 150 basis points of cuts this year is egregious. And Waller and others have been trying to walk that back. It's so interesting to me that the derivatives market, the Fed funds futures, just refuses to shift on that. So that is a headwind. But the other piece of the puzzle we have to watch is the consumer.

4:56Last year, the Fed's tightening, but equities still did well broadly, not all of them broadly, because consumption was so strong. So there's two legs of the stool here to watch. Not a very sturdy stool, but you know what I'm saying? If the consumer can stay resilient, even if Fed funds doesn't come down that fast, it might not be a bad year for stocks. But you really do need the resilient, moderating consumer and inflation that continues to trend if we're going to see double-digit EPS growth. Tim, I mean, the fourth quarter, very much about mega cap technology, media and telecom. That so-called Magnificent Seven really taking off to end the year.

5:34And a lot of that was because interest rates were falling from their highs during that span. What do you make of this idea that mega cap tech, including Microsoft, which hit a record high today and Nvidia hit a record high today? Why are they outperforming still, given the rate uncertainty picture? I just think it's a comfortable place to have. Even if you believe a broader, equal weighted S &P is going to rally that industrials and value large cap is worth owning. You want to own the mega cap tech stocks. It's a question of do you own 27, 28 percent of it or do you own 20, do you own 23? Are you underweight?

6:07I mean, that that to me is the debate. It's not do I not own them this year? And you're talking about Microsoft. It's also the same day that Apple tested the 200 day to the downside on a day when, you know, it looks like there's not going to be a lot of support for them in the courts on some of these, at least antitrust dynamics around the Apple store. But, you know, back to the Waller comments and Rebecca brought it up on our call. And I just think he kind of highlighted that this time is different. And I know you hear that all the time. But but without an economic shock, you know, this is different.

6:36There's a there's a reason why the Fed has jumped in as aggressively as they have. And this moment in time in terms of inflation and fighting inflation is very different. Therefore, Dan pointed out we went from 80 to 65 on Fed funds on a March easing. We're not going to get five cuts. We're not going to get six cuts. And if we do, we're all running for the hills. So it does get back to earnings and it does get back to an earnings season that really is about to start taking off. And if we're going to get 11, 12 percent EPS growth in the S &P in 24, it's probably going to need the mega cap tech stocks to do something.

7:06And Microsoft, I think, is best positioned for that. Guy, we're at this early, early stage of the earnings season so far. Do you feel as though the market is ready for the expectations that have been set forth in terms of where we will see earnings growth, not just this quarter, but in the rest of 2024? forward to is, in other words, are fundamental factors going to help power this market? Are companies going to make more money? And will people buy more in stock because companies make more money? You better hope so. I don't think it's going to happen. I mean, so much, so many of the stocks we've seen make these moves all been predicated on multiple expansion, which is fine if these companies grow into it.

7:45But for example, we've said it 100 times on the show, Microsoft might be one of the three most important companies in the world without question. trades at 30 times next year's numbers on maybe 12 % EPS growth, the 12 % revenue growth. You tell me. That's gotten itself very expensive very quickly. They report at the end of the month. So even the Apple, with the downgrades you saw in terms of valuation, that's starting to come to fruition now. So the market better hope these earnings come in, because if they don't, there's a long way to go on the downside. So really interesting point you just made there, Guy.

8:16So Microsoft just overtook Apple as the largest market cap company. and it doesn't mean a whole heck of a lot other than the fact that we track that sort of stuff, think it's kind of interesting. Apple's down nearly 10 % from its recent all-time high. As Tim's point, it just hit a technical level. The sentiment couldn't be worse. You had all of those downgrades. You have a product announcement or this release that's coming that nobody's excited about. Can you remember the last time no one was excited about a product from Apple? So the sentiment is really poor. I mean, you have to ask Guy that because he's rarely excited.

8:42Well, you know, it's funny. The clock app came out recently. And I finally got to him on his iPhone 4. But my point is the sentiment couldn't be worse by both investors and the street. The flip side of that is Microsoft. It's making a new all time high. It's trading at valuations. He's talking about if they don't come through with some of these generative AI products or at least the monetization and the way people expect them to, you could have a big disappointment. So those are the things that I'm really keyed on, especially when you consider we're losing components of the Mag 7 one by one. We lost Tesla.

9:13Tesla is a disaster right now. The fundamentals are bad. It's down 20 percent. Apple, the jury's still out. We don't know right now. But China's a problem. And I saw a report over the weekend that Apple is discounting their phones in China. That never happens. So we just lost two. So now we've got the MAG-5. We're going to have to come up with something different. All right. So first of all, for the China story and Apple, you know, it's been pointed out that it wasn't an across-the-board price cut overall, that this is a promotional thing for the Chinese Lunar New Year that's happening, and that they go back up.

9:41It's kind of like, you know, Black Friday or whatever else. So that's one thing to watch. I'd like to go to the other end of the spectrum, though, from Apple, which is why small cap stocks, Tim, took a beating way more than the rest of the market did. And what does that say about the expectation for not just economic growth, but the rate picture as well? Because small cap stocks are as interest rate sensitive as anybody. And to me, they are a sign of growth. In fact, historically, when I've tried to hedge things like emerging markets and growthier things with that also get concerned by rate shocks, I often use the IWM.

10:11So it's hard for me to get excited about small caps in 24, especially in a world where I think the economy, no matter what it does, whatever economic term we're going to apply to it, I don't think it's going to do the numbers it did in 23. And therefore, I don't think small caps are going to outperform except for the fact that people want them to outperform, that we saw a month and a half of outperformance, which was very important for the market. But, you know, back to what's going to work. I still think what worked last year for the for the most part is going to be critical in 24. And today, with all this bad stuff going on and I realize you can highlight it and say, well, Nvidia and AMD and, you know, had there's some specific reasons, a couple of upgrades and whatnot.

10:53But semiconductors made all time highs and new relative highs against the S &P. And this is after a ferocious run of the last part of the year. So to start the year with rates at one month highs and have the S &P effectively flat on the year after a ferocious two month rally, unlike any we've seen. I think that's not a bad show for equities here. All right. Speaking of rates, let's take it down to the bank stocks now, because broadly speaking, they were lower today. Morgan Stanley losing more than four percent after its fourth quarter results came in. Goldman Sachs remained a relative bright spot, up about a half a percent or so to end the trading day as well.

11:27Today also marked the deadline for public comments on the Fed's proposed changes to bank regulations in the wake of that Silicon Valley bank collapse last spring. The proposal would raise capital requirements for banks with at least 100 billion dollars in assets. But, Rebecca, you see cause for concern if those changes take effect, because maybe or not, it's not just about the massive banks out there. No, not at all. I mean, what these regulations do is they get a much bigger swath of banks that are going to have to increase the capital they hold. And so the risk is that you get, as Michelle Bowman, Governor Bowman of the Fed put it, a possible cliff effect, that you get banks that are just under this hundred billion in assets mark who either have to shrink their business.

12:13So that's not good for the small businesses borrowing or there's going to be mergers. They're going to need to get bigger so they can get economies of scale that helps spread out all these compliance costs, regulatory costs that they're encouraging. So I think that, you know, the regulatory environment for banks right now is difficult. It's particularly difficult for the regional and smaller and community banks because they just don't have the staff or the funds to pay to make sure they can stay on top of these regulations. And it's going to it's going to hamper their businesses. I'm not saying we shouldn't be safe.

12:44Of course we should. But it feels like these regulations aren't as tailored as they could be or should be. The small banks, Rebecca, they've been talked about by some folks as a catch up trade. There's been a lot of focus on the JP Morgan's, the Bank of America's, the cities, the money center banks out there, the massive ones. And maybe some undercover banks have been left behind. That was a potential source of alpha for some. Do you think it's still the case where Smith banks? No, I am. I was cautious last year on them. I'm still cautious. We had a big run-up in the fourth quarter, basically on the Fed pivot hopes, lower interest costs, reducing liabilities for these banks.

13:22But what we're hearing from Waller is that that's not going to happen as quickly as people want. And then at the same time, we have this additional regulatory burden that's coming on. The smaller banks, I think, are going to continue to struggle until we truly get in that easing cycle. And please, Lord, let us have a consumer that's resilient. That's what the small banks need. And until the small banks really stabilize, the small businesses get hurt because most of the small businesses are borrowing from smaller banks. They're all tied together. Dan, there's been a tailwind over the last few months, maybe even several months now.

13:56We had talked for a long time about the inversion of the yield curve, but to specifically between two year and 10 years, a percent or more to the inverted to the downside. It's not even close to that today. It's been uninverting pretty quickly. It's been steepening, so to speak. Is that, though, a good tailwind for that bank trade? Do you think it could work if we see interest rates start to behave more normally? Well, I think this speaks to what Rebecca was saying earlier, is that the two-year got more in line with what the Fed funds' expectations were, right? And that's why we're seeing that re-steepening.

14:28But if you look at the 10-year, which is probably more receptive or, I mean, sensitive to what growth expectations are, it's kind of stuck here in and around 4%. And so, like, to me, you know, Guy has been kind of detailing this for a while now. I think you're kind of damned if you do, damned if you don't. If the 10-year started to fall that much lower than it got to, what, 3.8 % or something like that a few weeks ago, what is that saying about growth? But if we were to see the two-year kind of rise again, that means that we're kind of pushing out rate cut expectations. What does that say about inflation?

15:00So I just think we're in a period where we're going to probably not see that thing back on the other side of the inversion. And Guy's been tracking this. It's going to be the longest inversion in how long? If we make it to February, it'll be the longest since we started recording the data in terms of the inversion. The inversion is the warning sign. It's the re-steepening is when you have to start to worry. And that's where we are now. I mean, historically, if you go back and look, that's when markets actually sort of take it on the chin. And in terms of the banks, I'm with Rebecca on this one.

15:26If small and regional banks are the lifeblood for small businesses, and if small businesses are slowing down, We were talking about that New York Fed manufacturing number, which was a disaster of the magnitude of nine times worse than what the street was expecting. That's a problem. And if that's a problem, that means the consumer is going to be in trouble. And if the consumer is in trouble, that by definition means the economy is in trouble. Yes. Real quick on positioning in banks, by the way. I don't think it's very helpful either. I mean, I was looking at the Bank of America fund manager survey, which is very useful to track both positioning sentiment and whatnot.

15:57And banks are now an overweight. And so you went from this period where everybody hated banks to look an environment that should have given banks a chance to catch up and and may still again a a Fed that's not overly aggressive and maybe gets somewhere in between what Fed funds are doing and what really will happen should be good for banks. And again, normalizing the rate environment, I think everything from mortgages to consumer credit. That's interesting. But again, back to positioning. Positioning right now in banks is not your friend in that I actually think people are overweight. All right.

16:29Speaking of consumer and health, they do spend money on travel and leisure. We know that much. So let's talk a little bit about Spirit Airlines. Those shares plummeted today with shares nearly slashed in half because a federal judge is blocking JetBlue's acquisition of the budget airline, arguing the deal is anti-competitive and would hurt who else? Consumers. So CNBC's Phil LeBeau has the latest here. Phil, this was one that was going to get a lot of scrutiny to begin with. Why even go through with this and what happens now? Those are all the questions that were asked of JetBlue and Spirit when they agreed to this in July of 2022.

17:06Well, here we are. And the judge has said, look, I'm looking out for those Spirit customers who like the low-cost model. So as you take a look at this deal, and basically the judge is saying this is not good for cost-conscious flyers. Both JetBlue and Spirit are now assessing, what's our next step? Do we want to go through with an appeal? That's another four to five months with no guarantee that you may have a different outcome. But it does also raise the question, what happens with the airlines away from the big four? And by the big four, I'm talking about Delta, American, Southwest, and United.

17:39They've got two-thirds of the market in the U.S. And then you have Alaska at 6.4%. If JetBlue and Spirit had merged and it went through, they would have had 10.5 % of the market. As it is now, you have two companies that are looking at what their next options are. By the way, JetBlue's breakup fee,$70 million. If we take a look at the stocks, going back to the proposed merger date back in July of 2022, The reason spirit is off so much, Tom, is because now there's talk about, hey, is it possible that these guys might ultimately file for bankruptcy and then liquidate? Helene Becker from Cowan brought up that possibility.

18:14Quickly also take a look at shares of Alaska and Hawaiian. This is a proposed$1.9 billion merger. Alaska and Hawaiian both say, look, our merger is different. Different dynamics involved here. A different market. We still feel good that this deal will go through. And I also want to switch gears and talk a little bit about Boeing. Here's the latest. We're getting a lot of questions today about this. The MAX 9 inspections. Remember, there are 40 of the grounded planes that the FAA said, look, we want to do further inspections here. We believe most of those inspections have been done. The question now is when do we get some kind of results, if you will, from the FAA.

18:49An independent advisor was named by Boeing to do a quality control check on the company. He'll report directly to CEO Dave Calhoun. And this is in addition to the FAA planning its own audit of Boeing's manufacturing processes. That prompted Wells Fargo to downgrade shares of Boeing. It said in its note today, Matthew Akers, the analyst, saying, given BA's track record and great incentive for the FAA to find problems, we think the odds of a clean audit are low. And remember, as you take a look at shares of Boeing, forget about a lot of the noise that's out there about whether or not there are some quality control issues.

19:26And that's not just noise, but for investors, what you care about is the process of manufacturing maxes. You're at$38 a month right now. Boeing's target is to get up to$50 a month. That drives cash flow, and that's the key to shares moving higher. That's why the stock is now hovering at about$200. Also, quickly take a look at shares of Spirit. Continues to be under pressure. Spirit Aero Systems builds the Max 9 door plug, another rough day today, down more than 4%. Dom? All right. That's a lot to digest. Phil LeBeau is tracking all of it. Thank you very much. We'll see you soon. Dan Nathan, where do you want to start?

20:04There's too much to go over here. I really like Tim's take on Boeing here because this is a name that you know so well, and you've seen these cycles, right, over the last five years now. You know what I mean? So this one, are you surprised, like, on a day like today, off the news like today, we really thought that 220 level would be something from a valuation standpoint would make some sense? Well, I think on sentiment and certainly on consumer sentiment, even though they're not the ones buying these these planes. And I think the story here is in the journal had a really interesting article today about how it's not a new concept that that Boeing's been outsourcing for years now.

20:37Key components and then rebuilding these planes. And that was an attempt to save money. And that ultimately the sum of the parts really don't change in that this is one of the biggest problems. So back to the max 37, whether it's the nine, whether it's the eight, that was the horrific problems of a few years back. This is a story where there's no question that the FAA does have. I mean, the Wells Fargo downgrade makes some sense to me in terms of probabilities. I still think this is a free cash flow story. My inclination as an investor is to wait this one out. I actually believe this company is actually moving in the right direction in terms of free cash flow.

21:10And what was going to be 1250 a share in free cash flow by 25, maybe that's 26. But you've been given a significant discount before this event. This stock was on the move. And I realized this is a big moment. This is a very significant change. And the dynamics, again, around manufacturing may have to change for Boeing at a cost, at a cost of free cash flow. You probably don't need to chase it here. But at a time where people are looking for for interesting stories that I think are in companies that aren't going anywhere in the long term, this is one. All right, Guy, I'm going to stick with this Boeing because we've opened it up here for one one conversation.

21:43Aerospace and defense is what Boeing does. Aerospace is the focus of what's happening with the FAA in this. The defense side of things is, perhaps you could argue, in a very good macro tailwind, given what we're seeing around the world right now. Is there going to be an emphasis at some point for investors on that defense side of the business? And if so, could it ever come close to overcoming the PR of this side? I know what he did. I mean, he's clearly the Washington Post's money, tailwinds. We had a very similar conversation when this first happened in terms of their defense. Their defense revenues are probably, Tim knows this exactly, but I'll say 38 percent now of overall revenue, fast approaching probably 50-50 with that aerospace portion, which is a good thing, by the way.

22:25And this 200 level that we got to today, we did it on seven times normal volume. They were poor at the end of the month. We also filled a gap to the downside that we created back in November. So a lot of reasons to start to get interested in this stock, I think. I understand all the headwinds and all the headline risk you have. But at some point, valuation matters. I think we're getting close. All right. I'm going to bring up one more topic here, which is the Spirit JetBlue deal. I'm sure you guys around the table have flown JetBlue before. It has really shed its reputation as a budget airline.