Two Opposing Market Moves, and What China’s Slowdown Means for Markets 8/21/23

0:00It does indeed. John, thank you very much. Right now on fast mortgage rates hit their highest level since 2000. and the tenure keeps climbing. But at the same time, growthy tech names like NVIDIA and Palo Alto keep rocketing higher. So why the mixed messages from this market? Plus, Beijing, bummer, China cuts a key interest rate again as their slowdown and troubled real estate sector get worse. And will the pain on the mainland come crashing to our shores somehow? And later, inside Bitcoin's summer slump, a Monday turnaround at Tesla and the not-so-beautiful options action in Cody. Good evening, everyone.

0:39I'm Tyler Matheson. In for Melissa Lee, this is Fast Money, live from the NASDAQ market site. And on the desk tonight, Mano and Eisen, Dan Nathan, Guy Adami, and Julie Beal. Excuse me. Julie is remote tonight, but she's with us nevertheless. And we start with two market moves you sort of wouldn't think should happen at the same time. Let's start in the bond market. The 10-year Treasury yield rising again today, hitting its highest level in almost 16 years. The 30-year yield touching highs not seen since 2011. And that is sending mortgage rates to their highest level since November of 2000. The average 30-year fixed hitting 7.48 percent.

1:20It was just 3 percent at the start of last year. Yet tech stocks, which typically struggle when rates are rising, high-rate environment, they're jumping. They jumped today, the Nasdaq rising for the first time in five sessions, rallying almost 2%, 1.56. High growth, high multiple names like Palo Alto, NVIDIA, CrowdStrike led the charge today. So how are these two seemingly opposing forces both finding life in this market? Let's talk about it a little bit. And for more on the spike in rates, let's bring in Jim Bianco. He is the Bianco Research President. All righty. Welcome to Jim as well. Let's talk a little bit about these rising rates and, so far, a rising market, at least today in the NASDAQ.

2:05Yeah, it's interesting. I think you spelled it out pretty well there, Tyler. At the end of 2021, when the Fed basically said they were going to battle inflation by raising interest rates, what got hit first? And even in anticipation of their acknowledgement that they kind of let things run too easy for too long, we saw high-valuation tech stocks. We saw SPACs. We saw crypto. We saw a whole host of things start to sell off. And that's the thing that I think we all grew up with in this business with higher rates. And that should be applied to investment returns going forward and the valuations that are being applied to such.

2:35So the reflation that we've seen as rates have gone higher in 2023, at some point something does have to give here. So to me, I think that there's really a small shortage of names that are benefiting from an excitement around a new technology. We've talked about that a lot here. And I think that as we get to Wednesday's earnings with NVIDIA, we might start to see it's as good as it gets for the next couple of quarters. And that's when investors might start to readjust. You mentioned Palo Alto screaming today after they reported results. A lot of their peers had difficult or disappointing results, a high valuation name, you know, and it rallied a lot.

3:08But it's still well off its highs. So I guess my point is, is like we've got to take some stock where some of these stocks, you know, have been and where they're trading now. Tesla's another example. To make the move like it did today after it sold off from 300 to 215 on Friday's close, it's not that impressive to me. Julie, I don't mean to put words in Dan's mouth, but what the hell, I do mean to put words in your mouth. So he makes the point here that maybe this, when we hear from NVIDIA, that there's a possibility that that may be a kind of high watermark for the AI stocks, I guess you'd call them.

3:42I think that makes sense, right? Because NVIDIA is really ground zero for one of the very few companies that's actually able to see and recognize revenue from AI today. Most of the software names that are kind of incorporating AI into their businesses, they don't even really have a very clear business model around it. So I think that makes sense that it's as the kind of the Pied Piper that's led this rally that this would be the business that could mark the end of it. it's really hard to say. What I do think is important is kind of keeping in mind the balance of power between the U.S. and China, because NVIDIA is also at the center of that battle.

4:20So, you know, I'm really looking forward to see how those results turn out. It's also going to be a great indication of just how high investor expectations are, because a lot is baked into this stock at this valuation. Bono, you know, I don't mean to suggest a crash is coming, But it was back in 1987 when interest rates were rising and the market was rising. And at some point, something happened and bam, you had I'm not saying, you know, I'm not saying, you know, I'm not saying. But rising rates and a rising market do not usually go together. Yeah, I mean, this market is kind of defied logic. I mean, to put it quite simply, the thing is, if you really look at risk at risk assets, and I'm not just talking stocks.

5:06I'm talking about everything. We're talking about stocks. We're talking about mortgage rates. We're talking about real estate. We're talking about private equity. You go across the board. We have been in such a low rate environment for so long that the valuations that you're seeing are fueled by the point that Dan made valuations being DCF back to two, three percent mortgage rates now at seven percent. Right. Yeah. You can't help but expect to see default rates. But until we see credit really start to turn, until we start to see liquidity really get siphoned out, I will say one thing that I think is significantly different between 87 and now.

5:40I've got to go back quite a bit of time. I was, well, I'm not going to. You're eight. More like five. Yeah. Is that the liquidity on balance sheet. Companies make so much more cash now. The free cash flow generation, whether it's a company setting itself up to be taken to be taken private or vice versa. I think that is a slight difference here. And then you have all the passive investing, all of that liquidity that's in the market. Now, I think that's a slightly different dynamic from from now and then. But I tend to agree, generally speaking, like something has got to give being that being that low rates have fueled asset valuations for the better part of the less.

6:22Before I go to Guy, did I put words in your mouth appropriately there? Yeah, of course. It was all right? I mean, someone like you putting words in my mouth, it only makes me smarter. So thank you, sir. So what do you think, Guy? You mentioned 87. I mentioned that. By the way, hi, Tyler. Hi. How are you? I'll give you an 07 because in 07, this was the last time tenure yields got to the levels that we saw today, 435. So it's a 16-year high now. And this re-steapening. Hard to believe it's 16 years ago. Think about that. Yeah. Yeah. November of 07. This re-steepening of the yield curve. And I don't want to be too wonky here and make people's eyes glaze over.

6:58It might be too late for that. But this is a bear re-steepening. In other words, it's re-steepening because the 10 year yields are going higher. That's not particularly good. And it's not just the U.S. Global interest rates now have been going higher as well. Just look across a swath of countries and you'll see China, Yuan weakening right before our very eyes. Last time we saw it to this magnitude was August of 2015. And don't discount the importance of the weakness in the Japanese yen as they try to sort of continue to keep their bond market in line, which is not happening. All these factors put together.

7:32Yes, the Nasdaq had a great today. Palo Alto should have been up given their margins and given that quarter on Friday. NVIDIA is up, I think, because people feel we have to be in this name ahead of earnings because God forbid we're not and have another quarter like last quarter. We're going to get fricasseed by our investors or shareholders. That's just people chasing, in my opinion. So let's wait until Wednesday and see how this shakes out. But I think it's setting up for a bit of a fall. Yeah, and the definition of a great quarter and great guidance, I mean, that's it. You know, do this here.

8:00Put your finger. It's going to be great. I mean, like, you know, there's no doubt about it. So expectations, analysts, I think 10 analysts have been, like, raising the price targets over just the last week or so, raising estimates. I think if you think about where investors on the buy side, where the whisper is for this quarter in the balance of the year, and even thinking out to 2024, it's really, really high. So if you think about the reversal that this stock has had over the last few trading days, it's up 8.5 % today alone. This is a trillion-dollar market cap. Think about it. It gained$85 billion in market cap today on really nothing, right?

8:31And the options market is implying about a 10 % move in either direction the day after earnings. I just want to put some context around this. Intel, which used to be the behemoth in this space, has$137 billion market capitalization. AMD has$170 billion market capitalization. And NVIDIA. And NVIDIA has$1 trillion and is expected to move$100 billion in either direction the day after reports. So I can't put too fine a point on this. When I look at what happened today in the stock market, it literally was dragged up by two companies that are probably two of the most expensive and with the best enthusiasm in and around them.

9:07That's obviously NVIDIA and Tesla today. And I didn't see a whole heck of a lot of other things acting particularly well. So when you think of the we heard all about this broadening out of the rally, OK, into Q2 earnings into July. Well, now I see a renarrowing of it. And given where rates are doing just to kind of wrap this whole thing up together, that could make for a very, very nasty September, in my opinion. Yeah. Interesting point. Interesting point there. Now we're going to bring in Jim Bianco. Now we're going to do it. He is the Bianco research president. Jim, welcome. Good to have you.

9:36that you've been listening to the conversation. We've been talking a lot about rising and high rates, highest since 2007 on the 10-year, highest since 2000 for mortgage rates. What's going on here? And talk to us about the dissonance between what's happening in stocks and has happened this year in stocks. There you got NVIDIA tripling so far this year, tripling. And what's been going on with rates? Yeah. So to start with rates, I think Guy had it right. This is a bear steepener. just means that long rates are rising faster than short rates. Typically, when that happens, it's the market thinking the Fed's behind the curve.

10:14And maybe this is what's happening this time, that even though they've raised rates 500 basis points, we might not be behind this whole inflation thing. And as I like to say, it's not 8%, 10 % or Zimbabwe inflation. It's more like 3 % or 3.5 % inflation. And that's wholly unacceptable to the Fed. And if they're not going to fight inflation by raising rates more than one more time, then nobody wants to own their long bonds. And you throw into that the Japanese yields. Japan is the largest foreign owner of treasuries. Their yields are starting to rise for the first time in decades. And all of a sudden, Japanese investors are finding more attractive opportunities at home as opposed to holding U.S.

10:56treasuries. And you've got this sell-off going on. Interestingly, if that analysis I just laid out is correct, what stops it? An aggressive Fed. If Jay Powell comes out on Friday and says, we're not done, maybe there's more than one more rate hike, you might then see the bond market start to rally. Now, as far as stocks, they might not like that. They might not like that at all if the Fed says that they're going to be more aggressive. But the bond market would. And there's the rub that these two markets are not going to find the same news, kind of either both bullish or both bearish. I want to bear down on your point about Japan, if I might.

11:34Japanese yields are what right now? They're obviously positive, but they're still very, very low. Do you think they are sufficiently high to cause Japanese investors, who, as you point out rightly, are big holders of U.S. treasuries, Are they sufficiently high, really, to stint the Japanese from putting money into U.S. bonds? Well, yeah. So the 10-year yield in Japan is around 60, 65 basis points right now, so a little more than half a percent. But you've got to keep in mind that Japanese investors also have to take a currency risk. If they own U.S. bonds, they ultimately need to convert them back into yen.

12:12And if they take that currency risk, they then risk losing money on a depreciating currency. They're finding that with all of the volatility and the uncertainty in the yen, they'd rather take 60, 65 basis points and not have to worry about the currency moving 3%, 4%, 5 % against them, as opposed to taking 4.3 % in the U.S. Now, this is not happening in big numbers, but it's happening around the edges. And if Japanese interest rates continue higher, you're going to see more and more of it. Markets are anticipatory. And I think that that's one of the things that's concerning them. Let's cut to the chase.

12:49What do you think Powell says on Friday? What do you think the Fed does when they meet later this month? I actually think he's going to say nothing on Friday. I actually thought that he would actually skip this meeting, but he's obviously not. I mean, Bernanke skipped meetings. Yellen has skipped meetings. He hasn't yet. And I think because they're still in flux. They talk about the end of the cycle, but the market's not acting like they should be at the end of the cycle. At least the long bond is not. And so I don't know where he's where his head is right now. We'll have to see. But I guess I would rephrase what I just said and say I wouldn't be surprised if he winds up saying a whole lot of nothing on Friday.

13:27All right, Jim, thank you very much. Always good to see you, Jim Bianco. Appreciate it. Well, let's trade this guy. What do you think? Bond market is everything. You know, again, it gets inside baseball. But it's important to point out that, again, what's going on in Japan can't be underestimated. Their yields are rising and their currency is weakening at the same time. That is not that's what we call, Danny, what? Which is real, which is brutal. We talk about that from time to time. In addition, the yuan, as I mentioned, continues to weaken. The Chinese are telling their banks to try to support the yuan.

13:56It's not working. That's unraveling. And so that couple with this restieping of the yield curve here, rates going higher. That is I get it today. The Nasdaq went up fantastic. But that is not a bullish recipe for stocks. We're talking about witch's brew. I just want to point out, this is cold brew right here. Yeah, sure it is. And you know who brings me this cold brew every time I come here? We do as a team. The gentleman I'm talking to, Guy Adami. I want to make one quick point here. So as long as maybe the last 10, 15 years, I mean, there were two kind of bugaboos for the equity market and valuations as it relates to, like, just my purview here.

14:27It's been rising interest rates and it's been China growth. And we have both of them here in spades right now. And it just seems kind of weird that we still have a VIX under 20. We haven't even had a 10 % peak to drop decline, you know what I mean, over the last few months or so. So I just kind of feel like at some point, like this is all going to kind of mash up together at some point. We're going to have a little fearful trading period. I don't think that, like, you know, pullback that we had over the last few weeks is that yet. Julie, let me get a quick thought from you. Dan just said, just tied it up very nicely there.

14:57Choppy time, maybe a bad September coming. It would worrisome, I don't know, what was the word you used? Something like that. Something you used. What do you think, Julie? Yeah, no, I agree. It's not a great setup if you think about September, right? And it does feel like there's so much complacency. And the complacency isn't just in the equity market. It's in the bond market, too. If you look at spreads, they're really quite narrow compared to, like, let's take 2019, where spreads, you know, on investment grade were 95 basis points were in the 60s. Things were looking way worse back then, way worse right now than they were back then, you know?

15:30So I just don't think that everyone's really prepared for that. Well, September may have been the best Earth, Wind & Fire song ever, but it may not be the best for the market, right? Well, look at you. Look at that. You probably saw the musical references that usually go around this table, right? It's usually Who and Zeppelin. Zeppelin. No, but we'll take a little Earth, Wind & Fire. We went to school near Oaktown, and we could do a little Green Day, Wake Me Up When September ends. I don't know. Is that a cliche? Is that a little too cliche? That's a good one. All right, we've got news alert on a hotly anticipated Arm ARM IPO.

16:05Dieter Bosa has been digging into the company's filing. Hi, Dieter. Yeah, and I've been following your guys' last conversation. So Masa San and SoftBank, they're going to test the market waters with an IPO, with Arm. It would be the biggest offering of the year, and it could pave the way for other IPOs to follow, like Instacart, which has been watching very closely. The company intends to trade on the Nasdaq under ticker name ARM that F1 filed not long ago. As for financials, revenue of$2.7 billion in its last fiscal year, that's actually a decline from the previous year. Lower profitability as well in terms of net income year over year.

16:41Among the risk factors that were listed in that prospectus, competition from free open source technologies like RISC-V. its dependence, its huge dependence on revenue from China, which it doesn't have control over, and its soft bank ownership, whose interests, Arm says here, may not coincide with their own interests or the interests of shareholders. Now, the prospectus pitches Arm as the, quote, foundation of the semiconductor industry. Demand in its major end markets, however, like smartphones, has been weakening. So a lot of this and a lot of its valuation will depend on SoftBank's and Massassign's ability to make the case that this is an AI company and it plays in the sphere.

17:22Now, certainly it needs to make that case to be valued in that reported range of between 60 and 70 billion dollars. Latest transaction valued at 64 billion dollars. It was a private transaction, but you see others on Wall Street valuing it much lower, like a Bernstein, which says it's worth about 40 billion dollars. So this could really land anywhere. And a lot of it is going to depend on how it factors into that AI hype cycle and how the markets are feeling like valuing tech companies. Dee, did I hear you say that Arm is going to trade under the ticker symbol ARM? Yep, when it was a public company before it was ARM.

17:57Who thought that up? Hey, they dropped the H. Okay, Tyler. So I don't know, call that creativity. All right. Thank you, Deidre. Bonwin, thoughts here? Where's the valuation? I mean, she said 40 to 60. It's not 70. Yeah, it's it's probably 40 to 50. I mean, you look at VC, all that stuff's gotten knocked down, reminiscent of cloud and fintech and all this stuff that was hyped and then came back down to earth. And it's likely that you're going to see the same situation here. Very interesting. Arm will trade under the tickle ticker symbol arm. I think Debo is about to get a lot busier here. Yeah, it's the cards.

18:30You know, yeah, people want to get some stuff out the door a little bit here. I'll just say this. You know, Qualcomm was a mitigated, unmitigated disaster when they reported that stock is unchanged in the year versus an SMH, the semiconductor. ETF that's up 45 % of the year. So that's their primary end market. 95 % of the chips are licensed from Arm. I just can't imagine that's going to come into a market that is, this is not an AI story right now. Real quick,$2.5 billion in revenues is this company. They're talking about anywhere from$60 to$80 billion. You can start to do, it makes no sense. Even if$50 billion market cap.

19:06That's 40 times revenue. It's still crazy expensive. So I think one of the reasons NVIDIA rallied the way it did today is on top of people front running earnings because of this. And people want to get involved. That's another way to get involved. Arm is just taking advantage of what the tailwinds that NVIDIA has in my opinion. Interesting. All right. We're going to take a quick break. Coming up, Zoom zooming higher. The stock jumping after reporting results in the last hour. The numbers out of that quarter coming up next. Plus, a little bit of a crypto Crumble, Bitcoin falling over the past week, hovering near the$26 ,000 mark.

19:38Will the free fall continue? We'll debate that when Fast Money returns.

19:50Welcome back to Fast Money, everybody. We've got an earnings alert on Zoom video. Shares higher after reporting a beat on the top and bottom lines, though off their after-hours highs. Pippa Stevens has the details. Hey, Pippa. Hey, Tyler. Well, the guidance is also fueling optimism in the stock with Q3 and full year EPS guide coming in ahead of expectations. The call kicking off just a moment ago where the AI opportunity was basically the first thing mentioned, with the CEO noting a, quote, aggressive roadmap aimed at using AI to help users work smarter, with the goal of rolling out roughly 90 new features per quarter, including the just launched scheduling tools.

20:29Elsewhere, the company said that its enterprise revenue during the second quarter rose 10.2 % year over year, with enterprise customers up 6.9 % compared to last year. Operating cash flow increased 30 % year over year, with Zoom also saying its monthly churn rate decreased to 3.2%, down, Tyler, from 3.6%. Back to you. All right, Pippa, thank you very much. Guy, let's trade this one. What do you think? This is the quarter where they've righted the ship, it appears as though. I mean, enterprise customers up 7 % year over year. That's a good thing. Double beat, as Pippa just said. So it's fine. I don't think valuation is ridiculous in this name.

21:06It's flatlined effectively since August of last year, trading between sort of 65 and 78. But I don't think now, given what they just said, given their guidance, being long the stock, I don't think you can get hurt being long the stock. I actually think you can trade it from the long side here. Julie, you have any thoughts on Zoom? Yeah, I think amazing results in terms of the cash flow, the free cash flow is nearly$300 million on$1.1 billion in revenue. And I think that is what investors are really looking for right now. They've all been kind of singed by these non-earning businesses. And so demonstrating not that you can do super highly adjusted, non-gap, whatever the hell, but real free cash flow I think is meaningful.

21:47Anwin, any thoughts? Yeah, I tend to agree. Follow the cash. Also, what was it? 30 % operating margins, if I remember correctly. I think that's pretty impressive. I mean, the thing is, this thing just got way away from itself in the middle of COVID. And it's just now back to where it probably rightfully belongs, to Guy's point, Ford price to earnings. I think it's around$16,$17. I think you're pretty comfortable owning it there. I definitely wouldn't be short this thing. You have a thought on this one? Yeah, and, you know, to Byland's point, it was investors who got the thing way away from itself.

22:18You know what I'm saying? It wasn't the company. They had a product. It was deemed to be best in breed. I think it still is best in breed. It's a great utility. So I think that enterprise number and the churn, I think that's all really important. And I think you have to remember that heading into the pandemic, this company was already profitable. So they remain profitable. To me, I think this thing is okay here. Yeah. All right. Thanks, guys. There's a lot more fast to come. And here is what's coming up next. Look out below. Tokens are tanking. crypto bulls feeling the pain as Bitcoin's drop continues.

22:50Will this trade find a floor or is the slide just starting? Plus, a surprise rate cut out of China as the growth in the country struggles to rebound. What the slowdown could mean for your money ahead. You're watching Fast Money live from the Nasdaq market site in Times Square. We're back right after this.