: Turmoil in the Bond Market Rocks Stocks, and When the Safety Trade Breaks Down 10/3/23

0:01Live from the Nasdaq market side in the heart of New York City's Times Square. This is Fast money. Here's what's on tap tonight. Bonds in turmoil. The 30-year yield roaring higher within a whisper of 5 percent. The two and 10-year rates surging higher, too. Could China and the Fed be to blame for what is happening with the bond market? Plus, sticker shock. Reports that Netflix is planning to hike prices once the Hollywood strikes are over. Could this set off a wave of price spikes across the streaming universe? And later, the breakdown on the safety trade. Weighty losses of late Lilly and a rocket headed in the wrong direction.

0:34I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinerman, Dan Nathan, and Mike Coe. We start off with breaking news out of D.C. on the vote to remove Kevin McCarthy as Speaker of the House. Emily Wilkins is in D.C. with the very latest. Emily. Well, yes, in a historic vote today, Kevin McCarthy was ousted as Speaker of the House. The House currently has no speaker. That chair is vacant. There is an acting speaker, but they're not someone who can actually move legislation, continue the work of the House, and continue the progress that Congress is trying to make on a number of different bills.

1:08Now, mind you, a lot of Republicans still support McCarthy. One of the congressmen came out and told us that he thought at least 190 of Republicans still back McCarthy for a speaker. But the fact of the matter is, is that Republicans had such a small majority that only eight Republicans voting to oust McCarthy. were able to do it. I just spoke with Congressman Matt Gaetz. He just left Congress. And he said that as far as who's next, he didn't really have a name. He mentioned Steve Scalise last night. I asked him about that. He said that Tom Emmer, McCarthy's number three, could potentially be good.

1:42So a lot of questions as to who, if anyone, Republicans are going to be solidifying behind. And a huge question to see how long this actually lasts, because until a new speaker is named, the House really cannot do its most important work of passing bills and actually legislating. So a lot of questions here on Capitol Hill, lots of concerns and lots of just unknowns about what the next day, what the next week, what the next month will actually look like. Congress rarely moves very quickly on anything, Emily. So what do you think the timeline will be for this process? Well, I know that a lot of members do want to get things moving and back on track as quickly as possible.

2:22I think the events of the last 48 hours came as a shock to many of them. I mean, Matt Gaetz had talked about going ahead and bringing forward with this motion to vacate, but I think there were real questions until last night whether he would actually do it. So I think at this point, Republicans are going to try and get together. They're going to try and chat. I wouldn't be surprised if you did see some votes on Speaker before the end of the week. But at this point, it's hard to see how McCarthy gets back to that 218 that he's going to need to become speaker. Emily Wilkins in D.C., thank you. Interesting kicker to the events of today, a potential breaking point for the markets here.

2:57Major indices dropping sharply today as rates continue their march higher. The Dow's seeing its worst day since March and falling back into negative territory for the year. The S &P dropping 59 points, ending the day just half a percent above its 200-day moving average, a level it has not crossed in six months. The Nasdaq saw even bigger losses, down nearly 2 percent. The sell-off coming as Treasury yields hit another milestone, 10-year rates touching 4.8 percent, the highest level in more than 16 years. The 30 are getting within five basis points of 5 percent. So will this bond turmoil continue to rock the markets into year-end, particularly with some of the uncertainty surrounding what's going on in Washington and the uncertainty about yet another shutdown looming, Tim?

3:39It was an extraordinary day by any measure. So the events in Washington, we haven't seen this done before, but Bank of Japan was intervening against the end this morning. The move in the Treasury markets is something that also I think people are somewhat shocked by. And if you think about it, we've talked about this. We've talked about the supply side. We've talked about some of the dynamics where the Fed is actually both issuing a record number of bonds, but also when they're stopped buying, but also when central banks around the world have stopped buying. You also have data that's coming out, Right.

4:07And the data is on some level. I think today's job openings data, which is much stronger than expected, a big increase over July. And this is the August data ahead of a payroll number on Friday. I think there's much to do about nothing. I don't there's no way the job market is tightening at this point. There's no way that this information I realize this is more concurrent and more coincident data than, say, looking at a payroll number, which is very much lagging. But I just think that the market is spooked that the economy is so strong, again, so strong that the Fed doesn't relent here. I think the biggest issue here is and you almost have to pat the Fed on the back.

4:41It's as if the market is saying the Fed won't blink and that the Fed is actually going to hold the line. And this is the same Fed that people were so critical of not holding the line on. That was a message the Fed really needed to get across. Right. Starting with Jackson Hole. And that was the last time. Right. The last additional vector of not just how high, but for how long. And finally, it seems like the market has just snapped into, yes, they are going to be high for a long time. Yes, and that 50 basis points off the table of next year's that they thought would be cuts are gone. So that was a very strong statement.

5:11So I don't know right now if we're in the we need some bad news about the economy to help this market or if that would just be seen as bad news. So next week, I think we're going to get threes, tens and 30-year auctions. We'll see how those go. I don't know if it was the jolts. I don't know if the market was sort of on pins and needles today because of the threat of the House Speaker turmoil, because that did happen last night. I'm a little bit surprised it actually happened, to be honest. Doesn't seem like there's a great plan in place, but we'll see. I don't know. It was a volatile market for sure.

5:49If you're like me and you get, you know, long equities, it's a difficult day. Only thing that works is hedges, but I'm always, always net long. So net net losing money for sure. But I don't know. I'm sticking it out. I do think that I want to see earnings. I like when we can look at the economy and earnings and how companies do. That's sort of the kind of tangible data that I like to look at. And that's probably not a bad setup. Consider the weakness that we have. And we're going to go right into bank earnings at the end of next week. And they're going to be very depressed if you think about it.

6:18You know, Bank of America, Citigroup making what new multi-year lows here today. They're below the levels that were at their lows during March during the regional banking crisis. So obviously not the beneficiary of those big regionals that went under and some of the stuff that we've heard from, let's say, J.P. Morgan benefiting from the deposits they've gotten. But if the stock market is a discounting mechanism, right, and we've had this recession that, again, was a near certainty when the stock market was at its lows last October, has been pushed out here. If I'm just looking at my screens right now, OK, I see the XRT, which is retail, is down in the year.

6:48I see banks that are down in the year. I see industrials that are basically flat. I see materials that are down in the year. I see, I mean, the list goes on and on. I mean, health care is down in the year. Equal weighted S &P is down on the year. Equal weight is down in the year. The Russell 2000 small caps are down in the year. So all I'm kind of trying to say here, and I've been saying this for a little bit now, it's not that healthy of a stock market, in my opinion. Now, it was OK when we still had that concentration, right, when we were at the highs, and now we're almost down 10 % in the S &P market cap weighted because there was all this talk about broadening out.

7:19It really wasn't broadening out. Under the hood, we did see some weakening. So I guess my point is, is like the lower we go here as we get towards some technical levels. I know the S &P is very near that 200-day moving average, that uptrend that's been in place since last October. I mean, these are the things that you want to keep an eye on because if some of the bigger names in the market that really like have to do with most of the gains in the broad indices, if they join the party. And just so you know, I mean, the Microsoft and the Apple, we've been talking about this, they already have broken down.

7:46I mean, technically they are broken, but they're still up a lot because they were up so much to start up the year. Apple traded well again. Yeah, no, it did. You're right, by the way. But where else are you going to go right now? I mean, other than T-bills. You know what I mean? Like, you're going to Apple. You're going to Microsoft right now. So they're finding a little bit of support right now as money is moving out of these other sectors. Yeah. I mean, the hurdle is going to be very high for that investor to decide, Mike, to put that incremental dollar into stocks versus bonds at this point.

8:14And the hurdle gets higher and higher each day with rates going higher and higher at this point. Yeah, well, there are some stocks that might behave a little bit more like bonds do or will. You know, we own Constellation, which is going to be reporting soon. We own Johnson & Johnson. You know, these are the kinds of stocks. They're low beta, which I think is going to be helpful in a market like this. Look, if rising rates are bad for companies that don't generate cash flow now, that basically have high duration and high beta, then you sort of have to look for the opposite if you're going to be long stocks.

8:44Like Karen, we have to be long stocks. So those are the ones we're going to own. And we have picked up a few financials actually going into earnings simply because, you know, maybe there's a lot of bad news priced in. We swapped Goldman for Morgan simply because I think this additional volatility is probably going to benefit on the trading side more than the asset management side is asset prices decline. That can't be good for Morgan Stanley. But I think that's kind of the choices you're going to make. You're looking for the best house on a bad block right now. The stock market's a bad block. The bond market's a bad block, too.

9:15So what's really interesting, everybody's talking about, hey, isn't it a great time to own bonds? It's not been a great time to own a lot of bonds. So anyone that extended duration in the last three weeks and was told by someone that this is the time you've got reinvestment risk, you've got to get out there, I think it's fascinating. By the way, my Haribo bear index here, which is now at four gummies on the desk here, is, look, we're at a place here where I think sentiment really is awful. And you have a place here, too. Dan's talking about the positioning of the S &P. If you remove the SVB chaos of March, this is if we go through it, you know, we're 20.

9:50We're actually 10 bips away from the 200 day. If you traded through the downside on the 200 day tomorrow or sometime next week, it would be the first time through to the downside. If you remove SVB going all the way back to January, February of 22. And this is back when the Fed was obviously stepping up. We were getting 75 basis point cuts on the horizon. And it was I'm just telling you that this is a place where if the stock market is breaking down through the 200, we haven't seen that in a year and a half. You could talk about SVB. I would make an argument that was isolated. It doesn't mean that there weren't tensions that are similar to the ones we're seeing today.

10:21But the market itself, the S &P is measured by the 200 day holding, not trading through. This is a year and a half. We haven't seen this. And again, that gets back to the beginning of this cycle where we didn't know how aggressive the Fed was going to be. And it's kind of what people feel like right now. Yeah. But in terms of in terms of the bond volatility that we've seen, because it has been extraordinary. TLT saw a record day on volume in terms of shares traded, which is extraordinary to think about. And take a look at our chart of the day, because think about the positioning here in the bond market in terms of the wall of issuance that we are expecting.

10:51Who is going to be that buyer? It's definitely not the Fed. And it's not China. And this is a chart that has been going, that had been making the rounds today. It's from Apollo's Torsen Slock. And he basically said$300 billion in bonds have been sold since 2021. $4 billion just since April of this year by China, and they don't have additional dollars to recycle back into the bond market. And maybe politically, if they did, maybe they wouldn't want to. Well, a couple things to that. I have been short the TLT. I did cover another third. I only have a third left, which feels painful to do. But to that, who's going to buy them, whoever's shorting maybe into this?

11:29We know when they say when they're going to issue debt. So, Mel, are you saying they're uninvestable? Am I saying bonds are uninvestable? No, I'm saying the Treasury. Yeah, because, I mean, like, listen, every time we get to that, who's the buyer? Like, you know what I mean? Like, we did that once. Didn't we do that once maybe in China? We did that on China. We did that on the Chinese equity market versus the U.S. Treasury market. I think you're right. You've had such a great trade-on now for a couple months. It feels like you're getting piggish, right? Yes. And so, like, sooner or later, and you mentioned the volume on a very liquid ETF today.

12:00That was my final trade of Alaska. I'm kind of picking at calls in this space right here because I actually think vol is relatively cheap. When you have that vol, the way it's been moving relative to the way the S &P has been moving, and everybody's on one side of the trade, it could set up like a coil spring, in my opinion. So I think you're probably— Very bearish out there. All right. The latest jitters over surging yields come a day after Rick Santelli. Right here on this set, Warren, about how high he thinks rates could go from here. We have a lot of potential room to run to the upside. So if somebody asked me and held a gun to my head and said, listen, the worst case scenario, where Treasury rate's going to go 10 year, I'd say in the next seven years, you should be able to see 13 and a half, 14 percent.

12:4113 percent. And yes, I did say. Our next guest also believes interest rates can go a lot higher. Jim Bianco runs Bianco Research. He joins us here on set. Welcome to New York, Jim. Thanks for having me to have you with us. You think we see 13 percent? You know, I don't know about 13 percent, but the larger issue that Rick was saying, we're in a secular bear market. It started in August of 2020. There's several more years to go. Now, you can have a year or two rally within in the middle of a secular bear market and bonds. I'm in that camp. I still think that maybe seven years from today, we're at least four and a half or five percent where we are right now.

13:19So there's no real drop in rates and there'll probably be higher rates from there. 13 percent that would take something bad to happen a lot worse than I anticipate. But I don't I don't think we're near the end of this move in the bond market. OK, so in the immediate term, how high can we go before we settle into that four and a half percent range or so that which sounds like you're you're saying will be the new normal for the 10 year yield? Yeah, because I think four and a half percent is kind of like fair value and we're just a little bit above fair value right now. Now, I think what you've seen in the bond market is a capitulation, a good old fashioned, I'd like to say Old Testament capitulation right now, where basically most of the year bond investors, bond managers have been long, been trying to argue why we're going to have a recession, why there's going to be a rally and have been getting their brains beat in and they can't take it anymore.

14:12And I think what really kicked this one off was September 20th, the Fed meeting. What would help a bond rally, if you want the bonds to rally, Fed come out hawkish. They're going to raise rates a lot more. They're going to be more vigilant about inflation. If they're done and the market senses that there's still some inflation left, they don't want to touch bonds. And that's what I think has been killing the bond market. So the more the Fed talks about being done, waiting, assessing all the rate hikes they've done, the more I think that they're making it worse. And you could possibly see an overshoot through five in the next couple of weeks.

14:44But then I think we might set up a high that could last for a little bit of time and a counter trend rally. Do you think that the Fed is watching the volatility in the bond market? And do you think the Fed cares? I don't think they care yet because, yes, of course, they're watching the volatility in the bond market. But they're asking the question, is it retarding the economy? Now, they're getting it from a lot of homebuilders. Jay Powell got it yesterday from some small business owners about inflation. So they're hearing it from that end, but not necessarily enough that they're probably considering changing policy.

15:20Jim, how about energy prices? I saw in your notes that you think this is playing into it. It's a bit ironic because we strip out food and energy from our inflation measures or the Fed seems to. But that does seem to be part of the calculus here. And I'm of the view we're in a super cycle. I'm of the view that there are structural reasons why energy prices stay higher. Therefore, I don't think you get relief anytime soon from that. Exactly. I am in that similar type of view that energy prices are going to go higher. Does that mean what that means is we'll have more year over year in CPI inflation?

15:49Does that mean the Fed's going to raise rates because of higher energy prices? No. But let's go back to yesterday when Jay Powell heard it about inflation. If higher gasoline prices, higher energy prices, say, push inflation back to four percent, they can't talk about easing next year in the face of four percent. So what higher energy prices do is they kill the potential for rate cuts next year. Maybe they don't add rate hikes this year or later in the winter. So why is there talk from Bostock today about a cut at the end of 2024, do you think? I think in the face of what the Fed wants to telegraph.

16:24Right. I think that that's a mistake on their part because they're operating under this assumption that 2 percent inflation is still attainable. and coming. And I think the market is really starting to question that. The market is maybe more towards 3 % or 4 % inflation. Now, that doesn't sound like much, but it gets back to what is fair value on interest rates. And we might not be that far above fair value. I think what they'd be better off arguing is, don't just say, well, we're very close to 2%. Explain to us why you think we're going to go back to that pre-COVID or pre-pandemic level of 2 % inflation.

17:03Because I think a lot of people in the market are really starting to question whether that's going to happen. So, Jim, if if they do settle at a higher inflationary and they don't have to settle it, it just has to exist for all the reasons that Tim just mentioned. Maybe it's energy prices. But sooner or later, the economy will weaken. Right. And if we do have this stagflationary environment, we're looking at S &P 500 at forty two hundred trading at about 18 times, which is the 10 year average versus a period where interest rates were far lower throughout that sort of thing. don't you think equities are a little mispriced?

17:34I know I'm leading the witness here a little bit, but it is not a place that we've been in a very long time. And so I just feel like the equity market has not really woken up to what a new reality might be. Well, it's waking up to it. I mean, the drawdown in the stock market now is the largest we've seen since we hit the bottom in October of last year. But I do think you're right. There is an alternative. The alternative, Let's start with a five and a half percent money market rate. University of Chicago has done a long term study, says long term, the stock market will give you nine percent. Have up, years, down years, nine percent.

18:06I give you two thirds of that with almost no risk. That is an option. So now we're going to have to see the stock market compete with it. And you mentioned it earlier in the show. Everything but the Magnificent Seven is essentially flat or down on the year. And everybody's looking at five and a half percent money market rates and they think that's been the best call all year. That's what the stock market is going to have to contend with. Does that mean the stock market collapses? No. But it just means that that marginal dollar that's sitting in cash, this is not 2019 when it was sitting in cash at zero.

18:39It's sitting in cash of five and a half. We'll just sit there. And it's going to be harder to drag that money out. And that's what we're seeing in the returns in the market, except for seven big mega stocks. Jim, great to have you with us. Come by anytime. Nice to have you in New York. Thank you. Nice to see you. So if the stock market needs to compete with T-bills and money markets, there's got to be a drawdown. Andy Constance says$3 ,900 would be that drawdown in order to adjust to where rates are right now. Right. Well, I saw that. I think that's a big way down, right? Six plus, seven percent.

19:13That would be if it mathematically worked out that, you know, they had the exact drawdown. I don't want to go against Andy. He's really smart, particularly on the bond side. So that would be a bigger drawdown than I'm expecting. I can take a little bit of pain. Like, we're in a little bit of pain. I can take a little more pain and really feel OK. But that would be very bad pain and time to buy. Mike? Yeah, I mean, let's just say that the word that Dan just brought up a few minutes ago actually came to pass. If we really got into a stagflationary environment, then I think that's actually conservative in terms of the potential downside.

19:53I mean, that's a really toxic situation for risk assets. It's a toxic situation for fiscal budgets as well. You need economic growth and you need reasonable rates for basically governments to borrow. And that would be a disaster. So I think we could be sharply lower. So that's really the reason why inflation has to be crushed here, however painful it is. And I think that as long as the Fed sort of stays the course, then we probably are going to sort of stabilize down around 4000, probably higher. I mean, I hope so because we're long. But if they don't, then I think we could go sharply lower. Take a look what happened in the 1970s.

20:29That was a 48 percent peak to trough dry down. coming up a binging blow to your wallet how the writer's strike could impact the streaming landscape and what you should expect for your next netflix bill more on that next plus so far so low how options traders are positioning themselves in the fintech name and a slide that story when fast money returns back in two

20:57Welcome back to Fast Money. Our price hikes ahead for Netflix. The Wall Street Journal reporting the streaming platform plans to raise prices within months after the actor's strike ends. No details yet on how much prices will go up. Shares popping in early morning trade, but ending the day lower has not been confirmed by any other outlet or by Netflix. Karen, what do you make of this? Yeah. So when it did pop, I think people I was thinking briefly that it was Netflix that was saying Netflix was going to raise prices, which is different than someone else saying that Netflix is going to raise prices.

21:27But I am wrong. I think it's a good thing. You know, obviously, when you raise prices and your costs don't really move, that's a great thing for the bottom line. So the stock is down a lot. They had that great last quarter. It's certainly not cheap, but it's a premium multiple for sure. But I think it deserves it. I think what's kind of more interesting is, is this a bad thing or a good thing for the other streamers? You know, Mike Coe brought up on our call, well, maybe you're taking more wallet share away and there's left for the other streamers. Or maybe it's an umbrella. Prices are higher.

21:59Everyone else can move prices higher without being sort of penalized. Well, we have Mike Coe here. So Mike Coe, what are your thoughts? How lucky is that? Yeah. Well, I mean, actually, you know, it's funny. I mean, Netflix is not unreasonably priced when you take a look at their EPS and free cash growth. I mean, I think we've always thought of this as a very expensive company. It isn't really now. I also think they have a very sticky customer base. I can certainly say that's true in our house. And I'm not trying to encourage them to raise our subscriber fees, but there's a good chance that they will.