The Red Sea Risk Factor, and the Obesity Winners Cement Their Position 12/18/23

0:01Live 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. Red Sea Risk Factor, BP, the latest company to stop sailing through the highly trackish shipping channel as a result of attacks by militants from Yemen. Could this have a lasting impact on energy in the supply chain? We'll do a deep dive. Plus, bruised Apple, the tech titan pausing sales for two of its new watches over a dispute around the blood oxygen feature on the wearable devices. A look at the impact this will have on the tech giant coming up. And later, an obesity bummer, shares of Structure Therapeutics crushed as test results of their GLP-1 pill did not match the effectiveness of shots from Eli Lilly and Novo Nordis.

0:40Can anyone catch up to these fat-busting titans? I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Courtney Garcia, Dan Nathian, our guest trader for the hour, Savita Subramanian of Bank of America Securities. Welcome, Savita. Thanks. But first, we start off with the Red Sea attacks. BP, the latest company on a growing list to halt shipments through the area. NBC's Ali Arouzi is in Cairo, joins us now with more on the escalating situation. Ali. BP is now the latest company to suspend its vessels traveling through the Red Sea after a string of attacks by Iranian backed Houthi rebels.

1:15The oil giant has blamed the deteriorating security situation in the region. And look, Houthi attacks on vessels and shipping lines in the region have significantly increased in recent days with almost daily attacks being launched. The Houthis say that they firmly back the Palestinian cause and they won't let up on their attacks until medication and other essential goods can get into Gaza. They say they won't allow ships to reach Israeli ports until that happens. Now, at the moment, the U.S. seems reluctant to attack the Houthis for fear of widening the war and provoking Iran. What they may be planning is to launch an expanded maritime protection force to ensure vessels have safe passage.

1:59Ali, thank you, Ali Alruzi and Cairo for us. WTI meantime, popping a percent and a half in the U.S. The Red Sea attacks are in a key area for transporting the world's energy supply. CNBC's Pippa Stevens has got more on this threat and what it could do to the system. Hey, Melissa, oil rising today as tensions build in the Red Sea, given that it's a vital energy artery. About 12 percent of global seaborne crude passed through the Suez Canal, Sumed Pipeline, and Bab el-Mandab Strait during the first half of the year, according to the Energy Information Administration. At 9.2 million barrels per day, that's about 9 percent of daily global demand.

2:37Additionally, about 8 percent of worldwide LNG, or 4.1 billion cubic feet per day, pass through the waterway. Energy trade flows have shifted since Russia's invasion of Ukraine, meaning the canal has taken on greater importance. Crude traveling north through the canal is up 60 percent relative to 2020, in part because Europe is importing more oil from the Middle East. Meantime, Russian oil is now 74 percent of southbound crude traffic in the canal. That's compared to just 30 percent two years ago, as it sends more crude to India and China. Melissa. All right. Thank you, Pippa Stevens. As you mentioned at the top, oil is just off one and a half percent.

3:17Why such a shrug, Tim? You would think that this sort of headline would really be scary unless we've just got so much supply swooshing around. Well, we've heard about OPEC, OPEC Plus. There's a lot of supply. Saudi could also make up with any disruption very quickly. And I think they've been under a lot of pressure to eat a lot of the extra supply cuts that at least are out there already. You can make an argument that every time you have a supply disruption, it's not a reason to go buy oil. It's a one day trade. It's a two day trade. It's a two week trade. We can see right now Brent's at essentially two year lows and you're between the 70 to 75 dollar a barrel level, I think there's probably decent support.

3:52It's trading on economic weakness. There's no question about it. And if you look at oil energy equities, I think they're interesting. I think, you know, you're trading at two to three standard deviations, depending on which ones you're looking at. Cheap to the market. I understand energy is always cheap. It's always cheap. It's always a low P.E. But relative to the market, it's a very attractive time when I think these companies have significant operational leverage and they break even on their divs at, you know, European integrators break even at, you know, 40 bucks and they're paying big divs.

4:20So, you know, I kind of like this. Isn't it interesting that you just said that crude's trading near two-year lows on perceived economic weakness? There are very few other risk assets that we look at every day that you could say that. And that has been my take. I mean, you know, two months ago when it was trading above$90 or whatever, you know, was it trading on perceived strength? It was trading on some odd, you know, economic strength on supply-demand dynamics. So down here, I just wonder what catches up to it. And I look at the way the Shanghai Composites trading. I look at Chinese stocks. I look at the data that's coming out of there.

4:51So it's just kind of interesting that we've spent a lot of time over the last couple weeks just talking about what the race cut pull forward means for risk assets and all that sort of stuff. And I'm saying to myself, you know, I look at what Fed Chair Powell did last week, and I say, I think he's looking out beyond normalizing. I think he's, like, worried about some other things. I mean, I'm just saying that. Yeah, you're in the conspiracy camp. But we said that Jeffrey Gundlach said that. What's the conspiracy? Well, no, but that. I mean, not a conspiracy, but right, that there's something actually worse out on the horizon, and that's why the Fed is going out and pivoting now.

5:23Yeah. I mean, that was my take. That was Jeffrey Gundlach's take immediately after the Fed presser on Wednesday. Would you agree with that? No. Sorry. We tend to disagree. But, I mean, I think the Fed's pausing because we've got inflation under control. We're starting to see things kind of normalize. Supply chain disruption seems to be normalized. So I don't know if I see any sort of black cloud out there. Yeah, but normalized with a 1.4 percent GDP expected for next year, which is below the 10-year. I mean, like, you know, so to me— Which would be great, by the way, but that would be probably good for equities, wouldn't it?

5:55I mean, if we get 1.5 percent GDP, I think, you know, it's a lot better than what people expected. Well, I think it seems optimistic. I mean, like, so if crude is telling us something, if China is telling us something, Like the idea of like coming off of these aberration prints that we've seen in GDP over the last couple of quarters. I mean, we could swing to the other side or negative really quickly. I think crude is telling us that we're in a balance, a supply demand balance. I mean, a lot of what we've seen over the last few years is energy companies in the U.S. at least getting supply discipline, kind of moderating the band of where oil trades.

6:27So maybe it's not a bad thing. Maybe it's just oil is actually less volatile than it's been in the past. I think that's the positive take on this. Yeah, I agree with that, actually. I think what you're seeing right now is there's all these headlines that's coming out of that area of the world right now. Realistically, even with where oil prices are today, yes, there was a jump. They're still about 7 percent lower than they were when these conflicts started. They're not seeing this as a problem. It's really what they're looking at for next year, which you bring up. There's likely going to be oversupply.

6:55And also, as was mentioned, I believe it was yesterday, Russia said that they were actually going to increase output. But even with that, that's not affecting this. It's all supply and demand for next year. That's exactly what energy is telling us today. Are we just being a little too complacent, though? I mean, they're going to try and form a Red Sea task force to try and enforce security in the area. There are a lot of shipping companies that are halting shipments through this area. I mean, a lot of other things besides oil travel through this area. We just sort of, you know what? This is no big deal.

7:24Well, speaking to maybe broader inflationary supply disruption, supply chain, And boy, we've gone through that over the last few years. And back to at least what it means for oil. I think there are structural reasons to own oil. I mean, I think geopolitics are a hedge for your portfolio. And oil is definitely that. And again, the operational improvements in these companies is something that I think is one of the most powerful things. But we're having this conversation really in the context of what does it mean for the market? What's it saying? Dan's bringing up some decent points. I think we've heard for two days, we've heard since Friday afternoon, a chorus of Fed officials trying to backtrack off of Powell.

8:00And so the sense is, you know, first of all, is Powell trying to, and I feel like if Guy was here, no one hates this expression probably more than Guy other than maybe me, but thread the needle, like is the Fed threading the needle in terms of is Powell trying to avoid recession yet kill inflation? And I think it's probably impossible. And it's pretty clear, though, that in the last four or five days, a lot of people, including ex-New York Fed Bill Dudley, who I listen to, who says it would be a huge mistake for the Fed to start to really get off the inflation fighting. So I'm not sure that the Fed is.

8:32Maybe we've misinterpreted Mr. Powell. But the point is that if the Fed is not as aggressive in terms of easing next year as the market is already pricing in, what's it mean for equities? Because equities are expecting this. I mean, just in the past couple of business days, we had Austin Goolsbee this morning. We had Mester non-voting, but Mester earlier today. We had Williams last week. Williams on Friday. Yeah, everybody's walking it back. Everybody's trying to walk this back. Right, right. What's the purpose of that? Was it a mistake that he was way too dovish? Dovish, yeah. I mean, I think that, you know, obviously maybe certain parts of the market have gotten ahead of themselves.

9:07And what's priced in right now is, I think, like 140 basis points of cuts next year, which is probably not achievable. I mean, our economists are looking for maybe 100. I do think that the reason to own equities is not because of what the Fed is going to do next year. The reason to own equities is because of what the Fed has already done. I mean, think about it. We're in a normal market environment now. We have real rates that are at kind of reasonable levels. We've got five percentage points of latitude to ease our way out of the next recession. I kind of don't care as much how many times the Fed cuts interest rates.

9:46And I know that sounds like heresy because we're all watching the Fed with bated breath. But it sort of is because, I mean, we've seen such a huge move after this pivot, this major pivot that Powell gave to us. We saw a move, but yeah, you're right. He could have been wearing a Santa Claus hat that day. I mean, basically, he is going to be the reason for the rally into your end. Well, but there was already a pretty strong rally into your end before that. So I think that, you know, maybe he just threw a little gas on the flames. But my sense is, you know, we're not necessarily betting on a super accommodative Fed next year.

10:19I think you can still own equities even if the economy is continuing to grind higher, even if we get a little bit of a resurgence in inflation. I think goods inflation would actually be a positive for, you know, the S &P. So, Savita, since I've been in the market since 1997, there's been three instances where the Fed has cut interest rates. And never has it been something of just a casual effect. OK, I'm just telling you. So when they have cut. Yeah, they have cut aggressively because of something going wrong. Yes, yes. So we should never want the Fed to cut interest rates. Right. But yeah. But but they just told us there's a good chance of it.

10:54They just told us Fed funds is pricing it in. They're pricing 140 basis points of cuts. I mean, what do they see? Well, the dots back to what I'm talking about. Tell you the dots. Tell you what they're thinking. So what I'm saying is, it would be very different this time, that when they start to cut, they don't have to use a good part of that 5 % or 5.25 that they've been raising over the last two years or so. So to me, I just think if you're here and you're YOLOing equities because everything sounds great. Have at it? Have at it, maybe? One could have at it, Tim. But but or you might take a step back and start to think a little bit critically, because as much as the recession was priced in this time last year, right, where the market was trading, it's priced the other way right now.

11:36And to your point, you use the term complacency. So I just think we can see how things kind of shape up in the new year before we kind of get all geeked up about. Well, maybe this time is different, though. Aren't a lot of things different about this time? I mean, but there are a lot of things that are different today than there, you know, than there have been historically. I mean, if you think about the easing and tightening channels for credit, it hasn't been banks. It's been shadow lending. If you think about the Fed balance sheet, we're at unprecedented levels. In the shadow banking system?

12:05I mean, I think that there are risks, but they're not necessarily in public equities. I'm just saying there's a lot that's different this cycle. Like, look at the Fed balance sheet. It's very different from all of the prior, you know, cycles that we've looked at. Much bigger. Much bigger. It sounds like you're thinking that it's much different in a worse way. Yeah. Yeah. Well, I mean, I think it's worse than the Fed balance. You know, private credit is going to be a problem. Right. Obviously. So the transmission mechanisms are different. I mean, look at what kind of worked its way into it this time, right?

12:35The Fed was still involved in quantitative tightening when we had the regional banking crisis, and they pulled off, you know, something of Triple India or something like that. You know, and just think about it. We need to do a PSA on what the Triple India is, by the way. Straight out of old school. I mean, this is. Rodney Dangerfield, et cetera, et cetera. But but we're at a place where, Savita, one of your I think your your strong arguments is that old economy stocks are poised for an earnings renaissance based upon productivity gains. And that's part of the dynamic. We've had an earnings recession.

13:06Forget the economy. We've had an earnings recession. And your peers around the street, whether they be strategists, whether they be quants, are saying we see. In fact, the streets got 10 and a half percent earnings growth in 24. Absolutely. And is that where it's coming from? Is it coming from these old economy stocks? Because I own a few and it hasn't been a good run. I think it's coming from a little bit of everything. And you're right. It has been miserable to own old economy stocks this year. But if you think about it, those are the companies that can benefit from a lot of these new tools, these productivity enhancements, AI.

13:38I mean, AI isn't just about semiconductors and software. It's also about old, clunky companies becoming lighter, labor lighter, and, you know, getting a little bit leaner and getting some margins. So I think that this is the time to own old economy, and we've already seen that broadening out of performance. I think since the beginning of November, the equal-weighted S &P has outperformed, the cap-weighted S &P, not by a huge amount. So I think that next year you start to see more of that broadening trend. By the way, that was the worst definition of triple Indy ever. I'm sorry. It was from Rodney Dangerfield.

14:18Yeah, old school. Back to school. Back to school. Back to school. All right, old school is a different movie. And, of course, that's Will Ferrell. Anyway. Also a great movie, by the way. And I think we need to have more references to that on this show as well. Back to school, Rodney. Yes. All right. Back to the topic, though. Thank you. Yes. I'm still thinking about what you said about what the Fed does next year. It doesn't matter. Do you agree? If we knew, if we could look into Crystal Ball and say the Fed is not going to cut rates at all next year, at all, not one single cut, would you be as long equities as you are now for the next year?

14:49Or would you be as bullish as you are today? So I think some of the run-up that's already happened is assuming that they're going to be cutting rates. And I think they're probably overshooting it, right? I mean, they're expecting, what, six rate cuts next year, which is in all likelihood not going to happen. So I think a certain aspect of that will pull back. I don't think all of that will pull back because I think as much as the Fed interest rates are going to matter, what's more important is the company's earnings. If this earnings recession is coming to an end and we see earnings increase in next year, that's far more important than what the Fed is doing.

15:18I think that's what people need to focus on. I feel like the markets just, they do not want to hear what these Fed officials are saying. These Fed officials are saying no cuts are imminent. It's too early to be talking about this. And that tells me that it's really pricing. It doesn't happen. No recession is now consensus, too. So, I mean, this was it was the opposite. And this is for an S &P that's up 15 and a half percent since the turn in the markets on October 26th. It's for a market that, you know, at the other side of that, though, and I'm going to say it like until big companies stop really outperforming, to be to mention, I mean, the equal weight, it's not really had that great of a run.

15:54It's up three and a half percent since that CPI number in mid-November. That's nice. But I think, look, semis have outperformed the S &P of making relative highs after relative highs day after day. They're up 11 percent of the S &P from their highs back two years ago. So why aren't semis going to continue to go higher here? I mean, there's a lot of reasons why they couldn't. But until they don't, they go higher. All right. Let's get back to oil here. Bring in CIBC private wealth's Rebecca Babin. She's the firm's senior equity trader and managing director. Rebecca, welcome to Fast Money. Thanks for being with us.

16:25So we are trying to figure out what oil's message is. If you look at the price action, I mean, up one and a half percent is not a whole lot. What do you think it's telling us? Yes, I think oil is telling you two things. First, it's telling you it's not going to rally on supply driven events. And you touched on a couple of reasons why. The first, obviously, we have a ton of spare capacity sitting on the sideline from Saudi Arabia and the UAE. They are literally chomping at the bit to bring back more production. So any supply event has a buffer to it because you have spare capacity. The second thing I think that the market is telling you is, again, you mentioned it, we're looking at 2024 and we're concerned that the market is actually going to end up being oversupplied.

17:09And the reason the market's so worried about this isn't that demand is going to get cratered. We're looking at demand growth next year of around one and a half million barrels a day. It's not a terrible number. But what we saw in 2023, which was the surprise of the crude market, was incredible production out of the United States, well above our estimates. We're estimating coming into this year that U.S. production is going to grow at 700 ,000 barrels a day. We're at 1.1, right? So if we get another year where U.S. production vastly outperforms estimates, which estimates are looking for 500 ,000 barrels a day of growth out of the U.S.

17:45next year, but we get that incremental efficiency, productivity like we saw this year, you get a market that's even more oversupplied. So I think it's more of a supply story going into 2024. There's a lot of fear that no matter what OPEC does, no matter how much they cut, there are producers, non-OPEC producers, that are just going to fill that hole. They keep digging. So ultimately, I think that's what the market's telling you. As it relates to the Suez Canal, one important thing, you noted it in the lead up. The biggest increase of flows through the Suez Canal has been by Russia. They're shipping their barrels to India and China.

18:22it's very unlikely the Houthis are going to target Russian crude. The Iran-Russian relationship has been getting stronger and continues to be strong. So although that headline number, 8 % of demands at risk, it's much smaller because they're not going to target a Russian ship. Lastly, the task force is in place. I think that gives a little bit of confidence. I agree you got to question the ability of that to act. But I think all of those things, all in all, crude's looking at it and saying, you know, I don't chase supply driven rallies. I chase inventory drawdowns and I chase exponential demand growth.

18:57So we saw a real surge in European natural gas prices on the back of this, Rebecca. And I'm wondering if you think that keeps up. And, you know, I'm thinking about this as a piece of the puzzle of the European Central Bank, what it needs to do and how it's trying to fight inflation. That's a great point. So although crude isn't reacting to this, you're right, NatGas is. And the problem there is they don't have a lot of alternatives for their NatGas flows. So that is actually where you will see probably continued impact if this isn't resolved and if we have to reroute the extra two and a half weeks around the Cape of Good Hope, right?

19:32So that is a real impact. The other place the market is assigning real risk to it is in diesel and in products, again, into Europe. We saw crack spreads up 8 % today, And they're going to hold because Europe can't just look to Russia to backfill those products. It's not like crude oil where it's as fungible and it's easy to access. So you probably will see longer lasting impacts in gas and in products where there isn't that massive spare capacity or readily available alternatives. All right, Rebecca, thanks for joining us. Rebecca Babin, CIBC. All right. So now knowing and understanding that the real risk is to the European energy markets, Tim, I'm wondering if that changes your outlook for Europe at all.

20:14Again, I don't know how long this risk lives on. You had a very weak EFO number in Germany, which is their kind of state of the economy. After four really solid months, we've seen the DAX at all time highs. I think relative value, it gets back to, again, relative to itself, the DAX is actually kind of attractive here. Do I think Europe's running away? No, I think their economy is going to be weaker than ours in the coming 12 months. But I don't think this is a headline. Remember what Europe had to endure with Russia and what was going on there in terms of gas prices and the inflationary impact.

20:43Yeah. Do you like energy here? I love energy. I think energy is a long term core holding. I mean, I look at companies like the majors. I mean, you're getting a great dividend yield. You're getting inflation protection just in case we're not out of the woods on inflation. I feel like it's, you know, it's basically tips on steroids. It's got, you know, kind of everything that you want in your portfolio as a ballast. And then I think that on top of that, these companies have finally gotten religion around supply discipline, around cash return and capital allocation. They're no longer paid on production targets.

21:18So I think these are all really positive themes for the energy sector. And it's very under-owned at this point in the year because it's done pretty poorly all year. So I think there's upside just based on ownership as well. Coming up, looks like Apple will have some time on their hands. The tech giant holding sales of some of its smartwatches with just one week left before Christmas. The patent dispute that's keeping the gear out of shoppers' hands, well, wrists. We're on that ahead. But first, the metal merger. Shares of U.S. steel surging after being bought up by a Japanese rival. The price tag and what it'll mean for the industrial space next.

21:54Don't go anywhere. Fast Money's back in two. This is Fast Money with Melissa Lee right here on CNBC.

22:09Welcome back to Fast Money. Shares of U.S. Steel topping the tape today. The stock surging over 26 % after agreeing to be acquired by Japan's Nippon Steel. The price tag,$55 a share, valuing U.S. Steel at$14.9 billion. That's a nearly 40 % premium to Friday's close, almost double the rejected offer made by Cleveland Cliffs this summer. The deal giving the rest of the steel space specifically, a boost with the SLX steel ETF hitting its highest level since May 2011. We're saying, what is oil telling us? What does this deal tell us in terms of demand for steel? Well, I don't think we should believe that this is a time for a feeding frenzy in the space.