The Next Shoe To Drop In Office Space… And Insmed Surges On Drug Results 5/28/24

0:02Live from the NASDAQ market site in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. Breaking record. Shares of NVIDIA keep defying gravity and maybe even logic. The stock now up nearly 20 percent in just the last week, 32 percent this month, 130 percent since the start of the year. How long can this run continue? We'll debate that. Plus, commercial crunch, a new report painting a bleak picture about the beaten up office space area of the real estate market. We'll go inside the numbers coming up. And later, biotech boom, the details on why shares of InSmed more than doubled today.

0:33The CEO will join us on set. And shares of Kava falling after hours despite posting a big earnings feed. Investors have been gobbling up the stock all year. We'll find out if they're just full right now. I'm Melissa Lee coming to you live from Studio B at the Nasdaq on the desk tonight. Tim Seymour, Courtney Garcia, Dan Nathan and Guy Adami. Well, the Nasdaq closing today above 17 ,000 for the first time, ending the day near session highs. NVIDIA playing a leading role in the Nasdaq's milestone. The chipmaker up another 7 % today, now up 20 % in just the last week. We'll have much more in NVIDIA's record-breaking run in markets in just a minute.

1:06But we begin with the growing fear factor in commercial real estate. A new report suggesting the trouble in the office space market is getting worse. CNBC's Diana Olick has the exclusive details. Diana. Well, Melissa, as pain in commercial real estate drags on most acutely in the office space and the prospect for significantly lower interest rates is pushed further out, we are now seeing a big uptick in loan modifications. In the first quarter of this year, there were$1.42 billion in office loan modifications. That's a huge jump from the just $117 million in the same quarter last year. And all of this is according to new numbers from TREP.

1:43Analysts there say that is not a good sign for the market. It may put a band-aid on the current environment that we're in, but it really just transfers the risk down to future years where borrowers are hoping interest rates are lower, they're hoping occupancies are stronger. But the reality is in 12, 18, 24 months, which the typical extension has been, I don't see a lot of changes happening. Borrowers have to pay a lot for these modifications and the terms are short. Now, the incentive was lower interest rates, but that's now not happening as quickly as most thought. So looking forward, there's much less incentive for additional modifications.

2:21TREP expects office loan mods to increase through this year as there's about $30 billion worth of maturing CMBS office loans left in 2024. Melissa? That's a staggering number, Diana. So I guess the hope is just that rates will be lower, the economy will still be firm in 18 to 24 months. Where are these modifications being concentrated? Where is the most distress right now? Well, you're seeing it in loans that are held in what we call the B office, not the class A office space. The new buildings, they still have really good occupancy. That is in cities like New York City, Washington, D.C., Boston, that is the high end of the office market, is doing fine.

2:57It's those B buildings in suburban markets or in smaller cities that are seeing the most distress. And those are sort of at the midsize to small banks that we see that. But again, this kind of extend and pretend on the modifications, the thought was, yes, like you said, that they would get it to a point where we'd have lower interest rates and everything would work out. But even if you have that equation going down two, three years and the Fed is lowering much more slowly than thought, they have a long way to go to get back to where these loans were originally made in the 3 or 4 percent range from where we are now.

3:28Where are we now, Diana, just for reference, approximately? Well, I mean, commercial real estate is not the same as residential real estate. We're in the 7 percent range. Commercial, it depends on the building and the bond. But we're higher. Yes, in seven, higher than seven. Diana, thanks. Diana Oleks. Sure. I like that extend and pretend because that really captures what is going on in this market. In this pocket of the market, they're hoping, hoping that rates will come down by the time that loan comes due. Well, and that's been part of the dynamic here with Hire for Longer, which is that we really just haven't seen any test on commercial real estate.

4:06Guy's friend, Neil Kashkari, was out there today saying he was also concerned about, he said a lot of things today. One of them was also, he was concerned about commercial real estate. And I think when we look at where we were a year ago when we were just getting through Silicon Valley Bank, CRE and the impact on regional banks was such a big part of that story. The fact is that rates are now as high a year later. They don't seem, if you look at futures, we're not going to have a ton of relief. So extending, as Diana pointed out in terms of a very short-term loan and a relative basis to where they were, a lot of these loans were already come and due.

4:39Okay, so you get kicked out 18 months. As we just said, not a whole lot changes. Kashkari, guy's friend, said specifically about commercial real estate, that he expected losses, big losses to come in markets like London and New York. And in an interview on CNBC, he said that he wouldn't rule out a rate hike. It's a high bar, but he wouldn't take that option off the table at this point. Yeah, listen, I sort of agree, but I mean, this is something that's been way behind the curve in terms of when they wanted to start raising rates and now in terms of when we're theoretically starting to lower rates.

5:08Good for him. I'm sure he's a fan of the show. With all that said, it does come down to interest rates. And again, you know, you saw that five-year auction today, Not particularly good. Ten years rallying. Again, yields are going higher, I should say. Again, I don't think that augurs particularly well. Then you look at sort of the KRE, which has bounced, but not nearly as much as some of these larger money center banks. I think that might be vulnerable. And the one that really sticks out to me, look at Simon Property if we go back eight or nine years. We're basically in an eight-year downtrend from 2016.

5:36It's had a monumental bounce off the bottom. But, again, things haven't gotten that much better. Things have just gotten quiet. But nothing's been fixed, in my opinion. You know, it's interesting, Guy, you just mentioned the KRE, so the regional banking index. You know, we've seen yields go from, what, 435 to 455 just in the last week or so. The KRE is down 6.5%. So I think everything that we've just discussed, everything we heard from Diana, it really shows where the stress might be as things get worse. And I know we've been focused on this since, really, SVB and the regional banking crisis that we had in early 2023.

6:07But it's also important to note the BKX has come off a little bit here, about 4%, while we've seen rates increase again. And so one of the reasons why we keep tracking a lot of this economic data, if the inflationary data kind of firms up, maybe, guys, boy, Kashkari might be right. We might start to see rate hike chances increase a little bit. So that's kind of I think it's worth paying attention to Neil Kashkari guy. Yeah, I think it's too early to say that there's going to be hikes here. But I think when you're looking at the commercial real estate sector, there's really two ways to play this.

6:40So you can look at your regional banks, and that's likely where a lot of the stress is going to be because they're holding the loans for those. When it comes to the real estate side, I think what you're seeing is a lot of people are nervous about REITs and real estate in general. And I think office REIT is specifically the sector that is going to have the issues. There's plenty of other areas in real estate. You look at your industrials, things like cell towers, things like multifamily, or even seeing a lot of that private equity money is going in to buy additional REITs right now. So I think that's something you need to realize is not all REITs are created equal.

7:08And actually commercial and specifically office exposure is pretty small when you're looking at something like the Vanguard Real Estate Index. It's a very small exposure there. And I think that's just something that's important to keep in mind as an investor. It was a very difficult day for treasurers, too. We had a terrible auction. We had a terrible auction after a poor auction yesterday in two years. So we had 70 billion in five years. We've got a big chunk of sevens. You've got the Treasury out later in the week. Actually, I think it's tomorrow they're going to be buying back a lot of weird, funky, off-the-run securities that are hard to bid.

7:37And I just think the pressure on the Treasury market is another part of the story. JGB yields, which I continue to think are going to be a magnet higher as they go higher now that the Bank of Japan is also suddenly in the market saying, we'll just let markets decide. This is what markets do. This is a Bank of Japan that's manipulated the long end of the curve in their bond market forever. So I think this is all pressure on commercial real estate. Yields are going higher. The economy is doing just fine. And that's something that if you think about the U.S. government is a credit worthy buyer and where tax receipts have been coming in less than expected.

8:12It's kind of hard to believe with the job market where it is that tax receipts have been. All these are just small ingredients into a story that says with elections coming and deficits not going to get better with either administration, you have a dynamic that I think Treasury will stay higher. It's not good for commercial real estate. It is higher for longer. Let's say that commercial real estate is in trouble, that the class B office space is in terrible shape, but in 18 months, things really go pear-shaped, so to speak. What impact is that on the broader economy? Because we seem to just be okay with any particular, with this issue.

8:47I mean, this report came out today. No big deal when it came to the markets. We've been saying no big deal for a very long time. Even when it comes to the regional banks, we're willing to look past it to some extent. I would have said, again, a year ago, I would have said, well, it's got to have an impact on the economy if you think about it. I mean, fewer people in office buildings. It means all the small businesses in the area are going to sort of not do particularly well. this economy is basically driven by the consumer and small business. That can't be a good recipe. But yet here we are sort of making our way through it.

9:15And it's this slow drip. I think at some point, though, that slow drip is not going to be slow anymore. It's going to start to accelerate. HYG is something I think you should look at as well in terms of credit. And Tim is right in bringing up Japan and the Bank of Japan. Not only are 10-year yields now north of 1 % in a somewhat meaningful way, their currency continues to weaken, which is somewhat counterintuitive, but actually makes sense. and you say, OK, I don't care about Japan. That's fine. But I do think it has huge ramifications for our bond market here. Let's take a step back for a minute.

9:43The rise in yields over in Japan is a push higher to yields here. Correct. I mean, that's that's how we need to think about the poor auction that we saw today for the five year note that had an impact on the tenure. That push yields higher. All these things that we don't want to necessarily pay attention to have an impact on this and therefore on rates for mortgages in general. They do. And I guess, you know, I look at Japan, who has been one of the largest buyers of treasuries, and I think they've got issues to think about. I think, you know, we've got a PCE number out on Friday. The market's looking for more signs on inflation.

10:14Inflation is kind of stuck sideways here with services side of inflation. But just, you know, back to commercial real estate. We talk about it like, could this be the next commercial mortgage back, you know, dynamic. Yeah. The size of this market makes CNBS look like a pimple. OK, you know, if you think about commercial real estate and if you think about who suffers, I mean, think about the risk that so many pension funds and endowments and municipalities have been forced to reach out to in terms of commercial real estate. You know, and we talk private credit, private credit. I mean, a lot of that also is packaged around commercial real estate.

10:47So the size of this market is is so seismic that I think it's something that you have to pay attention to, even if you have a small bit of a default ratio change. All right, let's dig deeper into this and the state of the U.S. economy and markets around the world with Rosenberg Research founder and president David Rosenberg. David, I know you've been listening into our conversation intently and with interest, and I'm wondering how you assess sort of the exposure the economy could have if this is, in fact, the next so-called shoe to drop. Right. Well, look, we saw shoes dropping last year, you know, with Silicon Valley Bank and some others.

11:20Of course, that was more being upside down on their treasury securities. And it created a ripple. But, you know, the Fed and the authorities intervened and prevented it from becoming a crisis. You know, what's interesting is that a couple of months ago, after one of the FOMC meetings at the podium, Powell, when asked, actually said that he expects that there's going to be regional bank failures this year. So he knows that this game is not over. The question is, you know, how can they smooth the transition, you know, when these regional banks start to fail? And of course, we'll see more consolidation, so on and so forth.

11:59Hey, David, it's Dan. Thanks for joining us. You've been on the lower inflation train for a very long time here. And I'm just curious where you think you see inflation in the U.S. bottoming out a little bit. And what do you think some of the ramifications might be for that? Because obviously, some of the data that we've seen of late has been a bit firmer, and inflation expectations haven't come down that much from this 3.1 % in the CPI. Well, the market-based inflation expectations have been basically stable for three years. I mean, I think the five-year and 10-year dips break evens have been stuck around 2.3%.

12:36That's nothing to be concerned about. But, you know, when you talk about U.S. inflation, I mean, firstly, it's a lagging indicator. I'm very concerned that the Fed is busy chasing lagging and contemporaneous indicators. And what's holding up the U.S. inflation rate, over and beyond the fact that we had this bump up in insurance rates, whether it was autos or whether it was home or health insurance this year, which is nothing the Fed can really control, what's holding it up for the most part is owner's equivalent rent. And, you know, what's interesting is that when you look at the U.S. inflation numbers and you put it consistently with how they do it in Europe, because Europe does not have OER, the underlying inflation rate in the United States is 1.9%.

13:17And yet nobody talks about it, I guess, except for me. Certainly the Fed doesn't. So a lot of it's going to depend, and Powell talked about this, is how painstakingly slow it's been for the rental numbers, especially OER, which is 27 % of the index, to start to soften up. But that's really, I mean, your inflation story for this year has been insurance, and it's been the rental numbers. Outside of that, there was no inflation. and the data. Hey, David, it's Courtney here, and thanks for joining. When it comes to the commercial banking space here, you saw the Fed was actually willing to come out, and they were bailing out the regional banks.

13:54And I think that somewhat did put a floor on the issue that we're seeing in the commercial space right now. And so my question to you is, how much does that going forward create a floor there? Are people not worried about what's happening in the real estate market because the Fed is willing to step in? Well, look, I mean, regional banks did fail last year. They didn't prevent that. What they prevented was a contagion. And that's what they will do again. I mean, how they end up doing it, your guess is as good as mine. Do we create a bad bank, an RTC-like situation like we have with the commercial real estate debacle of the late 1980s?

14:27The concern for, you know, the central bank is not so much about banks failing. The concern would be, does it engineer systemic risks through the financial system? And that's really what they're going to be focused on. Are you not worried because you think the Fed is going to step in? Well, I wouldn't exactly be an investor in regional banks. And I do have a more defensive bent towards the stock market. So it really depends on how you position. No, I'm not concerned this is going to turn into an unmitigated disaster. We all know the story and we know that it's going to be a suppressant on growth.

15:03You know, the conversation before about interest rates, it's not about interest rates staying stable. If we're going to actually prevent this from becoming something worse, the Fed is ultimately going to have to cut rates. They'll wait, I guess, for inflation to come down more quickly than it has. But we're not talking about just interest rates stabilizing. And when you're taking a look in the broad business sector, where these loans were originated were between 200 and 300 basis points above the level of rates right now. I mean, rates are going to have to come down a lot to stave this off alongside some of the other more direct measures that the Fed and the Treasury are going to have to make.

15:44David, it's always great to get your take. Thanks for your time. David Rosenberg, Rosenberg Research. All right. So do you think the Fed will do they have a motivation, extra motivation to get on the cutting train faster? No, no, they don't have any. They don't. In fact, they probably see their greater risk is moving too quickly to the downside, even though David's right to talk about the lag effect and essentially chasing numbers that are meaningless. If you if you think about what's going on in the past. But that's and what I heard David saying is he's more concerned about. I think I heard him saying it's more concerned about deflation rather than inflation, Because, in fact, a credit bubble, and if you think about where Japan came from after two or three decades, and even where we were coming out of the financial crisis, it's a cancer that actually erodes at growth.

16:28It's something that actually means you're fighting deflation. So there are still people that believe that that's where we are. That's the big debate. And in terms of allocators out there, a lot of people are trying to lock in higher yields now because they're not convinced yields stay higher. It's interesting. You know, we talk about the yield curve forever last year. It's forgotten. What was it? Was it a journal article, a Barron's article? Basically talking about, you know, the forgotten indicator. Nobody wants to talk about it. You should talk about it because, you know, the Fed wants to cut rates.

16:54They find they'll control the front end of the curve and maybe they'll knock 10 year, excuse me, two year yields down to four and a half percent. The problem, of course, is I think 10 year yields are going higher and that's going to be the steepening. And that's the time historically when things get dicey, when the re-steepening of the yield curve. Yeah, I mean, the other thing I would just say is that if they cut too quickly, it just might restoke inflation fears, right? And you've seen this, you know, crude oil closed above 80 for the first time in a little bit here. I do think it's interesting that the dollar has been lower, hasn't kind of rallied with yields right now.

17:25But who knows what would happen there? Obviously, if they were to cut, you would see a weaker dollar. So maybe the weaker dollar is suggesting that to us. I just don't know. I mean, at the end of the day, I think that the point you guys made about what the Fed might do, yes, they let some banks, regional banks fail last year. They're not going to let a contagion happen. I think that is the lesson over the last five years, and it goes back 15 years. All right, we've got a news alert on United Airlines right now. This follows a warning last hour from American. Let's get to Philip O. with the details.

17:55Phil. It's another 8K, Melissa, and this one from United is unlike Americans. United is reaffirming its guidance for the second quarter. We're sort of entering that period where we're going to start to get guidance in terms of how the quarter was shaping up. And despite United reaffirming its guidance, the stock is under pressure. Why? Because American Airlines has issued a warning, which has some people saying, are we going to see softness with the airline stock? So that's why it's also bringing shares of United down. Although American's warning is strictly about American, they have lowered their EPS guide.

18:28It was$1.15 to$1.45 for the second quarter. Now it's down to$1.15. with revenue now expected to fall 5 % to 6%. It was expected to fall 1 % to 3%. And the company announcing that the chief commercial officer, Vazu Raja, is leaving the company. We will hear more from Robert Isom, CEO of American Airlines, tomorrow morning at the Bernstein Conference in New York. I'm sure he'll be spelling out in greater detail exactly why it is issued this warning for the second quarter. Melissa, back to you. Phil, did I see that the guidance range for United looked like a buck wide on adjusted EPS? or 475? I have not seen that guidance yet.

19:07I have not seen that yet. And if that's the case, that probably explains some of the pressure that's there. 375. I see it here. 375 to 425 on adjusted EPS guidance. All right. Phil, thank you. Phil, a bow. So it's 50 cents wide. What do you think, Tim? I think that airlines are great trading stocks. And I think after a 70 percent move in United and Delta, which I love and I like the fundamentals of Delta, I think you've got a trend here to fight to the downside. I think if you look at United, it's traded in a range for the last almost since really since COVID. It's traded in a range from kind of 30 to 35 up to 55 to 60.

19:41And it's done that back and forth for two years. I think you I think you don't chase this one on a buy tomorrow. Coming up, some after hours action shares Akava on the move after reporting results, the details out of that quarter and how the whole fast food space is faring. That's next. And can't stop, won't stop. The Nvidia search continues with no end in sight. how our traders are handling the move ahead of the stock split when Fast Money returns.

20:10Welcome back to Fast Money. We've got an earnings alert on Kava, the company reporting a beat on the top and bottom lines, but shares stumbling on this news. Kate Rogers joins us to dig in on why. Hey, Kate. Hey, Melissa. You said it, a beat on the top and bottom lines for Kava today. EPS a really big beat, 12 cents per share. Revenue is$259 million. That includes both restaurants and consumer packaged goods at the company. Same store sales also better than expected for the quarter, up 2.3 percent. The company also raised its full year outlook for restaurant sales to a range of four and a half to six and a half percent.

20:41That's up from a range of three to five percent. It opened 14 restaurants in the quarter, bringing its total to just over 320. As for why it's down, the stock has rallied about 90 percent so far this year to date, but lower, as you mentioned, on this earnings report after that run-up. The company's CEO saying in an interview with Reuters that it has no price hikes planned for the remainder of the year and that it's really seen resiliency across income cohorts. That's something we also heard from Chipotle and Sweetgreen. Those are similar concepts and a bit more expensive names for consumers in terms of dining out in an environment where fast food itself has gotten really expensive.

21:14Melissa, back over to you. Kate, thanks. Kate Rogers down two and a half percent off a fresh record high is really not bad at all. The relief. You're right. Totally. No. And Tim, we were talking about it on the call before, and Tim can wax poetic, but it's expensive. Whatever metric you want. And I think what I think is going on here, and I think people are trying to find the next CMG, and maybe they're finding it in the form of Kava. And maybe it will wind up being that, but it's gotten itself really expensive really quickly. Good news, though, margins are really good. I mean, they beat profit margins by 210 basis points.

21:45So they're operating well. It's not an indictment of the company. I think it's an indictment of the valuation. Yeah, and I think a lot of the excitement is people are looking for another Chipotle. And I think they do have a lot of catalysts that could bring them higher. They're starting to obviously open a lot more restaurants. But a lot of those, they're starting to have drive-thrus, which have higher margins for them. They actually put a lot of money into technology, right? They're actually automating, like making pita and cutting onions. Automating and making pita. That's what I'm hearing, yes.