The Great Rate Shock, and What Other Companies Should Merge? 9/21/23

0:01Morgan, John, thank you very much and live from NASDAQ, the market site in the heart of New on Sanders. We're talking Amazon having a week to forget the stock down nearly 10 percent. Should the rest of tech fear that they will get whacked next and later will Cisco's twenty eight billion dollar deal for Splunk kick off a corporate wedding frenzy? Our traders set to play matchmaker from some deals about some deals they think might make sense. Welcome, everybody. I'm Studio B at NASDAQ. And on the desk tonight, Karen Feinerman, Dan Nathan, Guy Adami, and Michael Kantopoulos, Director of Fixed Income at Richard Bernstein Advisors.

0:57A lot to talk about there. But we start with that great rate rise. The 10-year yields climbing within one basis point of the key 4.5 % level, trading at their highest levels now since late 2007. The rally even more dramatic when you consider that yields were at 3.4 percent, a full percentage point lower just a couple of months ago in May. Two-year yields also marking a milestone, touching 5.2 percent for the first time since 2006 before they pulled back. Longer-term 30-year treasuries rose by 15 basis points, their biggest one-day jump since June of last year. Oh boy, the data It just keeps on coming.

1:40The latest move coming after lower than expected jobless claims, backed up by the belief that the Fed would raise its interest rate target at least one more time. Those fears also sent stocks down for a third straight day. Major indexes closing at their lows of the day. The S &P and Nasdaq at their worst closes since June. The Dow since July. So do these moves suggest that equities have put in their peaks for the year? I have just been talking for about three minutes. That's enough. Right, Karen? What do you think? Have we seen the highs of the year for the Dow? I'm going to guess yes, we have.

2:18But there's still room now, though, for the market to go up between where the highs were and where we are now. So I'm always optimistic. I'm always long. Day like today, that's really not a good place to be. I have some hedges in place. But we've talked a lot about rates driving everything, rates driving the market and how we've seen just, you know, a major shift in interest rates. And yesterday didn't help, obviously, with the Fed saying, nope, don't expect cuts. You're way off. You know, we're taking 50 basis points of cuts off the table. That obviously didn't go over well. But the economic data today, as you said, a little bit hot.

2:55Could have used something a little bit cooler. But I think this is sort of follow through from yesterday. Like, oh, my God, we got an enormous debt problem and we got an enormous interest rate. Dan, you had your eye on NASDAQ. What do you think is going to happen there? How does this play out? Are we at the beginning of a somewhat major decline here? I think it could be. I mean, I think about the leadership, right? And so we know that Microsoft, Apple, these two stocks make up 20-some percent of the NASDAQ 100. Tyler, that's an index of 100 stocks. That's 100. So two of them make up nearly a quarter of the weight.

3:30OK, and if I look at both of those and they're both down about 11 percent from their all time highs made in the summer, they've broken some technical support. They're above the trend lines that have been really methodical on a 45 degree basis since their lows early this year. And I think you've got to look towards the leadership a little bit. So that does exist in the Nasdaq 100. It's also where a lot of that positive sentiment in and around AI has lived in those mega cap tech stocks. So if that's kind of coming out of the market a little bit, then I start saying, OK, how is that equal weight S &P looking?

3:59Well, it's basically flat on the year. How is the Russell 2000, right, a bit more economically sensitive, more sensitive to tighter credit, that sort of thing? Well, that's flat on the year. So we're seeing some things under the hood across at least the stuff that I'm looking at that has been deteriorating. And it reminds me a bit of late 2021, where the major indices kept on making new highs, despite a lot of stuff under the hood not acting particularly well. And I think that's going on right here. So, again, I'd say look to the leadership. Some of these technical levels are being violated here.

4:28And then ultimately, I just think with valuations, they're too high relative to where rates are and where I think a lot of folks are going to be more comfortable about where rates are going to basically, I don't know if you want to call it plateau, but find some sort of baseline in this near term economic future. Guy? People watching the same way. So that's good news on the jobs from why is the market down? Because good news is bad news in today's world. That's just the way it is. And at a certain point, bad news is going to start to be bad news as well. So Karen's always optimistic. I love that about her.

4:56I am not. I was born in the Wall Street with Karen. And I love that about you. And we love that about you. You know, but that's just the way markets work. But I'll say this on the optimistic side. Where we stopped today in the S &P is exactly where we topped out at in August of last year. So past resistance becomes support. That's a good thing. Here's the bad news. And we've been saying this for a while. At a certain point, higher interest rates are going to matter. and they're mattering today for whatever reason. Today was some line of demarcation that we went through. And rates aren't going to stop.

5:24And if rates start going back down, you have to ask yourself, why are they going down? And in my opinion, the only reason they will go down is because the stock market is selling off and there'll be some perverse flight to quality in the form of bonds. Let me ask you, and then I'm going to ask you, Michael, where you think the 10-year yield tops out for this cycle. Is it above 5 %? I know about 5%, but it's somewhere between 480 and 5%. I mean, we have broken out now. You mentioned it. These are levels we last saw 17 years ago. I mean, you can say what you want about the bond market. It's clearly telling a story.

5:55Karen talks about this all the time. It's not just about rates and where they're going in the Fed. It's about supply and demand. It's about the market is demanding a higher yield to buy our debt. Rightly so, by the way. The market is finally starting to call BS on an economy that has a debt GDP approaching 140%. By the way, if you don't know, that's the United States. That's the United States. Let's turn to you. I'll ask you, Michael, the same question. Where do you see the 10-year topping out for this cycle? And then we'll get into some more sort of substantive things. Yeah, absolutely, Todd.

6:25I mean, I think the 10-year could get to 5%. That wouldn't shock me one bit. But remember, you're earning 4.5 % on the 10-year today. Yeah. So if you get that for the next year and you get to 5%, I mean, it's a 0 % return. It's not the end of the world, right? But certainly I think you go higher from here. I mean, listen, it's funny. I was listening to Guy, to Dan and Karen. I don't know how I can agree with all three of you when you're all saying different things, but I actually agree with all three of you. I mean, at RBA, we're pretty constructive on equities, but not tech, right? I mean, you're at the bottom of an earnings cycle, which is different than Q4 2021 when you're topping out at the earnings cycle, right?

7:01And I think that actually could argue for a broadening of what we've seen on the MAG-7. And to Guy's point, I mean, listen, I'm a bond guy, so I was born and bred to be negative. You've got lots of downsides. You don't have a lot of upside. Kindred souls. So we're kindred souls, all of us. But listen, I certainly think the 10-year can go up. I think that's going to have meaningful ramifications for both equities and credit. And it's going to be about how you position, I think, from here out for the next 6, 12 months. It's really going to be important to be tactical. You're a bond guy. But from what you're saying, if interest rates are going to keep moving up like that, it's going to be a hard sled for equities.

7:38It certainly will be a hard sled for certain equities. Remember why bond yields go up is important. If they're going up because growth is accelerating, right, that should be good for your more traditional cyclical sectors, energy, materials, industrials, financials, for example. And listen, the yield curve is about as inverted that it's been in 40 some odd years. If that were to steepen a little bit, that could certainly be good for banks. Right. So I think it depends. It's not totally clear cut, but it certainly isn't good for high valuation growth. What was it? I mean, people were saying this was a hawkish pause or a pawkish haws or whatever it was yesterday.

8:14What was it in either the messaging or the action of the Fed? And Karen and I talked about it a little beforehand, and I'll see if you answer it the same way. What was it about what happened yesterday that caused the market reaction in equities today to be as violently down as it is? It was tonally different, I suppose, but there wasn't a huge fierceness there. I agree, Tyler. I mean, when we look at the press conference, the fact that they paused, et cetera, is very much in line with expectations. I think the big surprise was removing a couple cuts next year. Bang, that's what Karen's doing. And that ultimately, yeah, I mean, I think Karen's absolutely right then because that's ultimately what was the surprise to the market.

9:02And I would argue it shouldn't be a surprise. I mean, Chair Powell has been telling you higher for longer for 18 months. The market just didn't believe him. And I think the combination of the economic projections plus some of the stronger data we've seen more recently, whether that be in inflation or some of the other strength in manufacturing and other areas of the economy, finally got the market to wake up that maybe you aren't going to see 150 or 125 base points of cuts next year. Yeah, that was the thing you mentioned right off the top. It was this idea that two interest rate cuts are off the table, apparently.

9:36At the moment. At the moment. Right. They could go back on. Ironically, we would need some really weaker economic data. So I guess bad is good. Although when you get into a certain tape, bad's bad, like Guy said. You know, that's Guy's view of the world. Bad's bad. Good's bad. It's all bad. But I think, you know, I do think a little bit. And that's the good news. Yeah, there we go. A little cooler data would be good. I also think that it's the rate of change. This move in the bond market has been so fierce, such a big move. Guy always talks about it all the time. We didn't used to see these moves like this.

10:11Something's broken here. And I think if we were to get to a level and stabilize it, even if it's five, but if we sat there for a while, I think the market would get used to that. But here we're like, wow, we could blow through that in three days the rate we go. Something's broken, you just said. What is it? Well, Guy's the master of something's broken. So this United we mentioned before is the United States. Yeah. The last I look, still the largest economy in the history of mankind. I think that's fair, right? When you see a 13 basis point move. And by the way, this is not just today. I mean, over the last 18 months, two years, you see typically 10, 15 basis point move in things that shouldn't trade that way.

10:47And I've said this, I'll say it again for new viewers. Hopefully you're watching and enjoying the show in the first 10 minutes. The U.S. Treasury market trades like a hundred million dollar biotech stock with one drug in the pipeline. It shouldn't be that volatile. It should not be that volatile. Bond market is broken and the Fed thinks they can control it. And Rick, I can't wait for him to come on because he's going to sort of be so on board. They think they have zero control the same way they thought they could control inflation. Guess what? They couldn't. And the same way they think they can control the unemployment rate, which, by the way, is going higher.

11:16California, I think, is north of four and a half percent. They typically leave the United States by a couple of months. They think they can somehow stop it when they want to. They won't be able to. So they basically, they created the problem they're trying to fix, and they're just going to create another problem on the back end. Yeah, I'd just say this, and where I'd push back is, like, it's going okay right now. You know what I'm saying? Like, if you think about, I'm just saying where the economy is, where unemployment is, the fact that savers, we've heard a lot of people yell and scream for a long time about your inability to kind of earn interest on your savings.

11:46Like, there are alternatives, I guess, to high-priced tech stocks or SPACs or crypto or whatever other crap you want to buy. You know what I mean? You could buy a nice treasury. So to me, I actually think that the whole idea about what sort of landing, they are landing a plane unless something else breaks back to – and I want to make one point about all this negativity about Guy. We all spend a lot of time on it. He's like the cheeriest guy. It's really just about the markets and the Fed. I don't want to be really clear. That is the face of cheeriness right there. You know why I'm cheering? Because I love everybody.

12:20I don't want anybody to put you just in a box. So there's a giant game tonight, right? Yeah, there is. Why don't I mention that? Thank you for asking. Because the Giants are one of the few franchises that don't have chair leaders. I think they're one of three NFTs. And you shouldn't really have chair leaders in the stock market. I'm not suggesting any of us are. But we're not here to tell you everything's okay when things are not okay. Things are not okay, and the bond market is telling you that. Well, I think it highlights the illiquidity in the bond market. You know, everybody assumes treasuries are illiquid.

12:46And with QE, you removed a lot of the float, right? And you basically have created an illiquid bond market. And that is a problem, I think. But now you've got a lot of new supply, which will be better maybe for the future-ish. I don't know. And there's a really good point, though. If you were one of these folks who are saying that we are in the biggest bubble, financial bubble we've ever seen, it's not in stocks, it's in the bond market. People have been saying that for years and years. Well, it's coming undone right now. And so we don't know what's on the other side of that. We've seen what's on the other side of asset bubbles, whether it be in housing or whether it be in tech stocks 20-some years ago, and we might be in another one now.

13:18And I just think that's really important. And back to Guy's point is like, okay, you know, we hear this. I think it's one of the dumbest expressions I've ever heard. Trade the market that you have. No, no, no. And Wall Street, I grew up in it. Let's trade some different markets. Let's have some different scenarios. Let's have some downside scenarios that we solve towards in worst case scenarios and better scenarios when things are going right. So to me, I look at what's going on right here. And what are we trying to do? This, to me, feels very similar to late 2021. And that was a time where interest rates hadn't gone up yet.

13:46They were going to go up. That's what the Fed was signaling to battle inflation. Well, we have inflation and it is sticking around. And the Fed is going to have to actually readjust. In my opinion, we've been saying this for a while, that 2 percent, that's a joke. That's never coming back. You know what I mean? So I think we just have to be somewhat ready to see the goalposts move a little bit. And we don't know what's going to happen. So when we pick out some of this stuff, we're not just trying to be negative for the sake of it. I just think there's some things. The ground's moving below the market's feet here a little bit.

14:14I think you want to pay attention. Let's take a pause because the rise in rates is putting pressure on the real estate sector, not surprisingly. Office property and warehouse stocks make up three of the four worst performers on the S &P today. Alexandria Real Estate, Boston Properties, Prologis, all down more than 5%. And Karen, you've been active in this sector. No surprise, I suppose, that REITs are getting hit here. Right. Obviously, very, very rate sensitive. That's the whole underpinning of REIT valuation. So Boston Properties, talked about it a couple months ago when things were really terrible.

14:48bought some of that and got a little lucky, sold some upside calls that on Friday expired. These were the 65s. The stock was 6680. It's only Thursday now. And the stock, I think, is a 60 handle. Maybe it went out. So I feel a little lucky with that. But I do still own the rest of the position. I'm not quite sure what to do with it. I picked this one because it is the bluest chip of the space. And they were able to issue debt. They own the premier properties. So I'm sticking with it. It's definitely a day like today or yesterday or the day before that, all combined. Not delightful, but staying with it.

15:25You've got to live with your discomfort. Tyler, what do they call when you give a shout-out to somebody who got something right? They call it giving a shout-out. Give a shout-out. Well, Jonathan Litt is watching right now, and he was on the show a week or so ago, and he's been talking about ARE. Alexandra Realty is one of his biggest short positions. That stock today was down significantly, making now, I believe, a six-year low. So I think one of the reasons you watch the show is to listen to Karen Wax poetic about a lot of things. Obviously, the humor of Dan Nathan, never anything that I do, but people like Jonathan coming on and making calls like that.

15:57Making a call like that and nailing it just like that. You mentioned Rick Santelli, and guess what? We have Rick Santelli in Chicago. Rick, good evening. I have a feeling that after the conversation we've just had here, I don't even have to ask you a question. You'll just go. Take it away. What do you think? Absolutely. And I'm sure we're going to run the charts. But, you know, whether you look at an intraday chart, look at how we close towards the highs. You run a two-day chart, we stacked. Five-year, seven-year, ten-year, they all stacked, meaning today's lows of the range are on top of yesterday's highs of the range.

16:35These are momentum indices. If you look at the fall 10-year, once we took out those fall highs, the biggest retracement we had was from 434 to 411, which means the next stop is in the 460s. And if I look at my macro monthly charts, the next big one is in the 660s. Now, I'm not saying we go there. A lot depends on the speed of the current move because it's guns hot and where the corrections come in before we make the next big prediction. But I think 460s are in the cards. You know, I think what's broken is so obvious. Let's look around. Whether it's education and test scores, whether it's go visiting relatives in Seattle and finding more tents than houses, there's a lot wrong in the country.

17:20But the biggest thing that's wrong that the bond market is finally paying attention to after they put all the vigilantes on a whole new bunch of horses is the fact that the U.S. government is spending ambitiously. And that's not a good thing. Whether you look at the deficits, whether you look at supply. And our guest is right. But the Fed could have interest rates anywhere they want. Normalization? Guy, what is normal anymore? When you have$1.4 trillion in the reverse repo market, you're paying interest there. They stopped paying interest on some of those reserves in the ECB as of the 20th, actually.

17:59Well, if you want to get rates up, just put that parking lot back in the marketplace or even the balance sheet. Yes, QT. You could speed it up. You could put rates anywhere you want. In the end, we all talk about the Fed and their influence on rates. And of course, you can't really fight the Fed, although I don't know how you can not try to push back a little. The Fed has no crystal ball. Today's data is easy. You look at initial continuing claims, the lowest level since January. I personally don't believe some of these numbers. But until these models and the seasonality gets addressed, which could be years down the road, we could be building a case on many indicators and inputs in these econometric models that are only guesses at best and not very good ones.

18:43But in the end, what counters all that is there is a slowing coming. There's a slowing coming. And I'm not sure exactly how it's going to affect all markets. But in the end, as much as I think the bond market is definitely having a fit right now, the equity markets aren't going to get as hurt as I think some at the table believe. Because ultimately, Guy, you mentioned it, there's this self-adjusting mechanism between the treasury market and the equity markets. And right now, we're recalibrating that. You want to worry? Your name was in vote. I mean, it's funny. Rick and I, we both worked at Drexel.

19:21Maybe just people from Drexel Burnham are just prone to be angry. I don't know. But we share a similar mind with this stuff. I mean, and again, we don't bring up the bond market for the sake of bringing it up. I mean, I'll take you to this Bank of Japan meeting. I don't know what time it is now. But and you're going to start hearing things from them. Guess what? The largest holders of U.S. treasuries are the Japanese. Guess who's probably been selling treasuries to try to support their currency? The Japanese. It ain't working out all that well. So their experiment is failing. Well, I shouldn't say that, but it's starting to unravel right before our eyes.

19:51And people say, who cares about Japan? That's fine. But guess what? It does have ramifications here. All right. We're going to take a pause. Thanks, Rick, by the way. Meantime, corporate defaults are picking up this year with the S &P Global recording 459 bankruptcy filings in the U.S. as of August 31st. that is higher than the number of filings in the same period in all but two of the past 13 years. So, Michael, you see you seem to expect more deterioration here, not less. You can go there. You can unpack what Rick said if you'd like to try that. But but let's talk about those delinquencies and defaults and bankruptcy.

20:27Yeah, absolutely. I mean, listen, something has to give when rates go up as far as they have. Right. Since reaching their low, I think was on August 4th, my dad's birthday of 2020. And so one of the things that is clearly breaking where we had SVB, First Republic, and now we're having corporate credit. The problem is, and Karen and I spoke about this several months ago, it hasn't really permeated to the large cap companies yet. So it tends to be smaller or weaker companies, the Bed Bath & Beyonds, the David Bridles and smaller companies from there. But listen, you have about three trillion of floating rate debt out there.

21:02You know, 13 years ago, that number was$500 billion,$400 billion. It was meaningless. Floating rate debt means as rates go higher, you're resetting your coupon higher. And I'll tell you this much, coupon's gone up about three times. Have earnings gone up three times since 2021? No, they have not. And that is a terrible recipe for much of the corporate bond market, private credit, as well as leveraged loans. And if you have companies that need to roll over debt, debt that's coming due in 2024, 2025, it's going to cost them a lot more to do that financing now than it would have. Absolutely. And that will permeate from the leveraged loan space to the high-yield bond space, which is where you tend to see those bigger capital structures.

21:43And you do have a lot of issuance coming due in 2025 in particular and then subsequent years. So if we really are in this higher for longer environment, that's going to sting. All right. We've talked for 21 minutes. We're going to take a break. Wake these names up when September ends. What was the song? Green Day. Green Day. That was a great song. American Idiot. Yeah, that was a great song. Amazon and NVIDIA having a rough go of it this month. So will the tech troubles follow them into October? We will debate that next. Plus some gig stocks also in the red. Uber, Lyft, DoorDash, all lower. And the move has options traders piling into one of these names, how they're playing it when Fast Money returns.

22:24We're back in two. It's still on.

22:32All right. Welcome back to Fast Money. Oh, how the mighty tech titans have fallen. September, proving to be a rough month for two of the biggest players in the market tech-wise. NVIDIA, almost 17 % lower since the start of the month. And Amazon, which started out strong in September, down more than 11 % from its 2023 high, hit just last. week. Two of our traders flagging these moves. Dan, let's start with you. What are you seeing and why? Yeah, I just think the speed in which Amazon sold off, if I look at the Q2 earning cycle and the mega cap tech stocks, they clearly had one of the best results and really in an area that a lot of people were not looking for great results.