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On this episode of On The Tape Guy Adami, Dan Nathan and Danny Moses are back with a special listener mailbag edition of On The Tape. We start today’s episode with a discussion on valuations and why they really mattered in 2022 (2:30). When were the “seeds sown” for the current market downturn we’re seeing and what are earnings looking like in 2023? (17:00) Hand up, we got the gold and silver market wrong in 2022, will things pick up next year (20:30)? The gang outlines what they think the energy story looks like next year (22:30). What geopolitical stories have the potential to impact the market in 2023 (32:45)? What’s left to discuss about Tesla story (35:00)? After the break we’re answering some of your questions (41:30)! We wrap with Danny’s picks for NFL Week 17 (52:00).
A Closer Look At Quantitative Tightening Implications: https://trowe.com/3WwvDCr
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Show Transcript:
Guy Adami: [00:01:21] Last podcast of 2022. It’s been a great year. We want to obviously thank our audience. I obviously have to thank both Danny Moses and Dan Nathan. I think the three of us have done a decent job of navigating what’s been a pretty interesting year. I’ll say that at the end of last year, from the fall of 21 into early 2022, we saw the S&P basically rally from about 4450 to 4800 and change. I think we understood to a certain extent what was going on, but it clearly had us confused. But we remain steadfast in the belief that 2022 is going to be a challenging year and now some 1000 S&P points or so later, here we are and a lot happened in 2022. And the thing that I take away from it the most, Danny Moses, is, you know what, in the long term, valuations actually do matter. And I think what a lot of us learned the hard way in a zero interest rate environment where money is rolling around and effectively free, people make a lot of mistakes and they confused bull markets with being a genius. I think 2022 we learned that valuations actually matter and forget about the S&P being down a thousand points from its high. We’ve seen stocks come off anywhere from 50 to 80%. And these are not small stocks. I mean, these are major companies that have lost in some cases, as I mentioned, almost 80% of their value. [00:02:48][87.1]
Danny Moses: [00:02:49] Yeah. So Guy, looking back in 2022, there was a lot that obviously happened and a lot of it may continue in 23. But just some of these things, right, we entered 2022 with the Fed talking about the tapering, which they obviously ended in the first quarter, followed by the Fed actually raising rates, followed by quantitative tightening. We had a briefly inverted yield curve in April that became basically permanent in July when people realized that the Fed was going to keep raising rates. So that happened. We had Russia into Ukraine. Obviously, it’s still happening. It’s created a massive problem, obviously on the European continent, but globally as well for energy prices. We had Bank of England in Liz Truss get forced out after six weeks when she played some reforms that people didn’t like. It obviously hurt the sterling, hurt the pound and obviously hurt bonds over there. So she was forced out. We had credit deterioration occur. The LBO market basically from Citrix to Twitter beginning, they were entering 23 carrying that mortgage rate spiked, the dollar spiked, we had Blackstone REIT kind of implode on us in these last few months. That’s a carryover issue, obviously. Buy now, pay later. Another product of easy money from the Fed is obviously clearly showing that names like Affirm are going to face issues going forward in 2023. And the used car market, which everyone was excited about because prices never go down on the used car market. We saw Carvana, we saw CarMax recently. So a lot of these issues are still going to happen, and I just think it’s not set up well as we enter 2023 because we’re carrying a lot of these things forward. And lastly, the crypto market, we went from anywhere from 3 hours capital to Voyager digital Celsius to Blockfi to obviously the cream of the crop. FTX Right. So that’s an issue and that basically destroyed a ton of capital out there and the SPAC market officially died. So again, a lot of damage there and I think we’re going to see that carry over into 2023. [00:04:23][94.0]
Dan Nathan: [00:04:24] Yeah, well, I mean, mostly losers. Let’s be frank here. And I think one of the things we were all in agreement on for the second half of 2021, and again, we were getting increasingly frustrated as many skeptics who’ve lived through different recessionary environments, different bear markets, that the markets can stay irrational longer than you can stay solvent. We can give no shortage of examples where that was the case, but we say it again and again and again, and this is the story, at least of my career entering the markets in 96 or so. Is that just as we see these bubbles inflate and we see stocks or markets or risk assets in general overshoot to the upside, we also see them do the same to the downside. And so when you think about it, I mean, we’re sitting there looking at just the funny business that was going on in the last few months of the year last year. And they existed not just in Mega-Cap stocks. It was going on still in some of your meme stocks, Danny, and obviously Tesla as being the poster child for meme stocks, a bubble in and of itself, crypto all related sort of stuff. I mean, listen, man, all of those asset bubbles were born into a grief. We all knew it. It’s just that simple, right? It’s just like, how long will it take to unwind? And I guess the last part of this and this is why I don’t think 2023 is going to be that much easier, is that these are likely to overshoot to the downside. At least that is my experience from that period from 2000 to 2003. And we can go back and we can try to find analogs. A lot of people were talking about the seventies last time we had stagflation. For me, I lived through three major recessionary environments that coincided with bear markets and obviously that was the post dot.com, it was the financial crisis. And then there was this black swan event that happened in 2020. But that thing, as Guy would say, was alchemy away. And I just think that on the other side of all of this is just going to be an environment that’s really hard for risk assets, because the one thing that everyone was hoping for was that rates were going to come down precipitously after they went up precipitously and maybe that’s not the case. You know what I mean? Because the last piece of this whole puzzle is unemployment. And we’ve gone back and forth with this is that the Fed wants it to go higher. It’s at 3.7%. The Prepandemic low was 3.5%, which was a 40 year low. And I guess that’s just the conundrum. And I don’t know about you guys, but I’m not so unhappy that unemployment’s that low because I want our fellow citizens to be well employed. [00:06:44][139.9]
Guy Adami: [00:06:45] Basically, the mandate for this Federal Reserve is to get unemployment higher. And I think the level with which they might make a move or might pause or pivot, it’s probably about 5% and it’s going to take some work to get it there. And the unfortunate reality is that’s probably what needs to happen in order for things to sort of settle down, at least on the central bank front. But in terms of the market, again, it’s interesting. We talk about bear markets and we’re clearly in a bear market and we talk about some of the most violent rallies taking place in bear markets. And go back and look at what happened this past year. At the end of January, you saw the S&P rally about 8% from late Jan into early February. Then the downtrend continued into March. And I got to tell you, that March bounce, that middle of March bounce from 4100 up to 4600 and change over the course of a couple of weeks, about a 12% move. The sell off continued again effectively into the things we talked about, that June bounce, which we tried to navigate. And I think we did a decent job. You had that 18% or so bounce from the middle of June and August and then subsequently what we’ve seen here from October into early December. But what have we seen again? A series of lower highs and lower lows. And I would submit, if you’re looking for continuation, I think you’re looking at it the right way. I think that’s what we’re going to continue to see, seasonality notwithstanding which a lot of people think is hogwash anyway. I think the upper left, lower right, lower highs, lower lows continues until some capitulation takes place. And that capitulation will probably, again, my opinion coincide with a VIX that gets through that 34 level and maybe takes us up into the low forties. That could be the bottom that everybody’s waiting for Dan into the end of 23. [00:08:42][117.5]
Dan Nathan: [00:08:44] Yeah. And I guess I just worry a little bit and we’ve all been in the camp that 2023 was going to be, like you just said, a continuation of this trend that we’ve seen in 2022, which is really upper left, bottom right. And Guy, you mentioned this on many occasions. I mean, we really haven’t had too many capitulatory days in the market. We had that one day in October. We were down a lot. We’re making new 52 week lows and when that huge intraday reversal and that really got things started to the tune of 17, 18% until we topped out again. I just worry that the consensus thinking is that we’re going to have some sort of capitulation in early 2023, which is going to lead to a brand new bull market that gets started. And if that’s the consensus, it’s just not likely to happen that way. [00:09:28][43.8]
Danny Moses: [00:09:28] We’re going to roll the calendar here. What do we have issues with? We have issues. Remember all those LBOs that are still hung basically from Citrix all the way down to Twitter. Right. Tens of billions of dollars that need to be placed over time. Right. You have that credit spreads. I don’t see those things improving dramatically. Mortgage rates, I don’t see those improving dramatically. And to your point, Dan, I think when we do get the rally and there’ll be a rally in Q1 at some point when the Fed signals at that moment, oh, we’re done or we are 25 bps away from being done, you will have that rally. But then I think the reality sets back in of all the things we still have to do and I’ll say this again, quantitative tightening is going to be the theme and I believe they stopped doing it at some point in 2023. I’m going to go into it a little bit later without boring everybody to death. And there’s a great article that was written by T. Rowe, which I’m going to Dan, you can put in the notes in the show notes. December 14, 2022. They had their their strategists do a what QT what the impacts are going to be in 2023. So I won’t bore you with it’s a great read, but I think that’s going to be a major theme. So I don’t see a lot of things getting better. And if the Fed, I think they’re going one more time maximum and I was wrong about how far they would go in 2022 because I think they’re overdoing it here. But that’s your rally. And then I think that’s your last selling opportunity. I hate to say it for at least the first half of 2023. [00:10:41][72.6]
Guy Adami: [00:10:42] I think they’re pretty focused on again, this is just my thought. I have no reason to think that that’s what they believe. But they I think they look in 1972, 1973 as a bit of a correlation. A lot of people thought inflation was dead in the early seventies, only to have it come back in spades in the ensuing year. And I think they’re really concerned that something like that can happen again, which is one of the beliefs that I’ve had, is the reason why they’re going to stick around a lot longer than people want them to do. Not necessarily they’ll continue to raise rates, but rates will stay longer than a lot of people expect. And I’ll say this about the balance sheet, something I’ve harped on for a while. I mean, we almost got to a $10 trillion balance sheet here in the United States, which I don’t think anybody in their wildest dreams could have imagined. And obviously, the Fed should have a balance sheet. The question is, what’s the right number? And again, I’m not an economist, but I would submit given where GDP is, given where money supply is, the right level is probably either side of about 6 trillion or so dollars, maybe a little bit less, depending on what you’re looking at. We’re still light years away from that, Danny. And in order for them to get it down again, something that people are not focused on nearly enough that has consequences to the market. And as money supply continues to dwindle and it’s been dwindling at a pretty rapid pace, that has consequences. Danny, to the broader market. [00:12:07][84.8]
Danny Moses: [00:12:08] Right. So we’re entering this year, we’re on a $95 billion run off rate, 60 billion treasuries, 35 billion in mortgage backed securities. That’s the plan. This is over $1,000,000,000,000, basically, that you’re looking to unwind over time. And I just think to your point, Guy, the risk will be if bank reserves start dwindling because the banks aren’t paying as much the consumers as the Fed is to everything else. And that’s where you have this reverse repo issue. That’s what happened obviously three years ago in the reverse repo market. Right. So I do think that is going to be thematic. And we will see if you say, Danny, what’s the number one thing you think that people aren’t really paying attention to? I think it’s that I think it’s just liquidity in the system. It’s manageable, but it’s going to create some hiccups for sure. [00:12:45][37.8]
Dan Nathan: [00:12:46] Yeah. You know, it’s interesting, Guy, that you just mentioned those three rallies that we had, the one from mid-March, it was pretty epic, at least 10%, the one from mid-June and then the one from mid-October. And they all coincided after this bunch of inflation data and then into a Fed meeting. And I think it’s also interesting that as we going to get into January, I mean, we’re going to get some data on the jobs and we’re going to get some inflation data like the next week. And then we got to quickly get into Q4 earnings. And when we talk about what’s left in the markets and the stock market, obviously it’s the fact that S&P earnings estimates, by most strategists, I think on average is up about 5% year over year. All of us think that that’s probably way too high, especially in this kind of stagflationary environment. So we’re going to have Q4 earnings that get started that last week in January, going to some of our big favorites, Apple, Amazon, Microsoft, Tesla. They’re all going to be in those last few days of January, the first few days of February. And then we also have the next Fed meeting. And so when you think about all of that, are the ingredients in place. You know, the S&P from its highs in mid-December after that Fed meeting sold off about 8%. The NASDAQ 100 sold off about 12%. We’re trying to kind of put in a little bit of a near term bottom here. Today’s rip roaring action on Thursday afternoon is kind of eye popping, but we have actually been in a pretty nasty sell off. It was the worst December in a very long time. So might we rally a bit into those Q4 earnings towards the end of January, end of the Fed meeting? Yeah. But then I think the realization that S&P earnings are way too high, that interest rates are going to stay big, despite the fact that a whole host of the inflationary inputs have come down. That could be the thing that starts that next leg lower and a retest of those October lows in the S&P 500. They’re just below 3500. I think all of us are in agreement that, again, we’ve got a lot of great guests, a lot of great strategists, a lot of great investors on the podcast over the last year or so. And most of them have said, listen, the idea that you’re going to have and Jurrien Timmer from Fidelity said this to us pretty bluntly a few weeks ago. The idea that you’re going to have a trough multiple, the S&P match up at the same time with basically trough earnings is not great. So however you want to think about it, I think all of us are like, okay, if the average multiple over the last ten years, the S&P has been about 17 and we’re right around that, we get down to 15 and maybe again, it’s not priced on the worst case scenario that we see for S&P 500 earnings, but that still gets you down to those pre-pandemic highs or below them, about 3400. I think we’re all in that camp that at some point in 2023 that’s going to happen. [00:15:16][149.8]
Guy Adami: [00:15:17] You know, it’s interesting, again, we talk about David Tepper for a reason, but. I took from David Tepper in the years he would come on CNBC and basically say, look, I’m bullish here. You know why I’m bullish because the Fed’s adding liquidity and rates are zero. And that would infuriate me because the simplicity of it. But he proved to be correct when the Fed pivoted again effectively this time last year. We would come out and say on this show and on other shows that if it is true that you don’t fight the Fed by being bearish when they’re adding liquidity, the same should be true on the other side. That’s proven to be correct. And he echoed that on CNBC. I mention that because in the course of that half hour interview that you should go back and listen to folks if you haven’t. He talked about a trough multiple for the S&P 500 going down to about an 11 or 12 multiple in the years post-financial crisis. He brought that up. I thought it was pretty interesting. And I’ll say this, Danny, because you mentioned it and it’s important and I don’t want to get too in the weeds here, but the seeds for the sell off in 2020, if you go back and look were sown and the days between September 17th and 20th when the overnight repo market effectively blew up, you saw those rates go from basically two and a half percent to 5%, up to 10%. And the mechanisms, the pipes were clearly affected and nobody really talked about it. I know we talked about it at the time. People want to look at it and obviously they will point to COVID as the reason why the markets sold off as precipitously as it did. And I get it. But again, Danny, the seeds were sown, in my opinion, in the fall of 2019, in the form of the overnight repo market that you just mentioned a few minutes ago. [00:17:03][106.4]
Danny Moses: [00:17:04] The stuff that Dan just mentioned, we’ve had great guests on throughout the year, throughout the two years actually, but throughout the year. And I think everyone agrees that the bears are logical and I think people oh, may happen it may not I don’t think we truly understand. I mean, I kind of been through before I can understand when it gets really, really bad what it’s going to feel really bad. So saying it is one thing, actually having it occur is a completely other issue and I just think it’s being underappreciated again. Forget about the Fed stopping. Let’s focus on the earnings that Dan just talked about. Forget about the trough on a trough. Like it’s just not going to happen. I don’t think at any point, at least in the first half of 2023. And I think it’s going to be really, really painful. And I just think people need to be prepared for it. And that’s what we’re trying to do here, is to prepare everybody. And it may be something that we’re not paying attention to them. You think about the other things that happened in 2020 to write the Bank of England thing that occurred that basically ousted the Liz Truss, who was in office as Prime Minister for six weeks gone, Bank of Japan here just two weeks ago, shifting course and changing the rangebound on their ten year yields. Right. These aren’t small things that are occurring, right? These are first world problems, not third world problems. And so I just think we’re going to be dealing with a lot of that and it’s going to all feel like it’s a volcano to me going into 2000 or various points in 2023 Guy [00:18:13][68.8]
Dan Nathan: [00:18:13] So Danny, when you talk about feeling really bad, I mean, I think again, we have to come back to S&P 500 earnings. And we were talking about this earnings insight post from John Butters over at FactSet a few weeks ago where he had data suggesting that equity market strategists usually overestimate S&P earnings one year out by about 7% or so. That’s over the last 25 years. And we just talked about that. You know, strategists are still expecting S&P earnings to be up 5% year over year. Now, all of us think that probably Q4 comes in worse than expected. And we know that like guys like Mike Wilson from Morgan Stanley, who’s been on the part of late, he’s got like a $180 number for S&P earnings, which is down 15%, I think, from consensus right now. So I guess my point is, is like that realization that’s probably going to seep its way into the market once we have the bulk of calendar year 2023 earnings, which is going to start kind of I guess from a bottoms up standpoint, you’re going have a lot of these companies guide and then going to have these strategists do the bottoms down sort of work. And that’s probably when you find yourself with the consensus that looks something a little less than $200, which year over year would be down. [00:19:18][65.2]
Danny Moses: [00:19:19] We haven’t had a situation where we started a year off with it’s been a while with Fed funds obviously at this level with rates where they are with an unwinding of a balance sheet occurring with declining earnings, it is what it is. These are still very good companies and we are going to face really what’s unprecedented. And I go back to what Micron said a couple of weeks ago when they preannounced. It’s the worst they’ve seen in 13 years. That’s not a coincidence. We’re on the other side of that now and the tightening and it just is what it is. So people need to be aware of that. And again, I hate to keep harping on it, but if you want quality, you’re fine. And if you buy quality on dips, you’re fine in the long term, right? This is not the end of the world. So be active and be smart. Be aware, Guy. [00:19:54][35.1]
Guy Adami: [00:19:54] You know, we talk about the things we got, right? We got some things wrong as well. You mentioned gold and silver, but I want to talk about gold quickly because we play this game on CNBC that if you told me the following things and they were in fact to happen, where would gold be? So let’s play it through. And you just mentioned Bank of England. Don’t underestimate, though, what’s going on with the Bank of Japan. I mean, they intervene in their currency for the first time in a very long time, earlier this year, somewhat successfully and then they intervene in a currency effectively with their bond market again, because the yen was too weak, so successful to a point, we’ll see how it plays out. I bring that up because central banks, Danny, have been buying gold back in a historic fashion. I mean, I think the most gold they’ve bought in the last 50 years, it has not manifested itself in the price. So if you told me all those things wouldn’t happen and said, okay, Guy, where is gold going to be at the end of 2022? I would have said at least 2500, Danny, if not higher. And here we are meandering around 1750, 1800 or so. [00:21:00][65.8]
Danny Moses: [00:21:01] Yeah. So as gold bulls were competing against crypto inflows for a period of time that’s now gone, that won’t exist in 2023. We were competing with the Fed, raising rates in a very strong dollar. I don’t think that’s going to persist. So I think you have a lot of potential tailwinds and you have worse geopolitical issues now heading into 2023 than we did in 2022. If gold doesn’t work this year, I’ll just go ahead and kill the thunder for Dan, it will never work because I’m willing to stand there. So I’m willing to accept it was flat last year overall, that’s fine. I there’s different ways to play it, but to jump ahead to unequivocally what is my top pick thing for 2023 that I feel very good about, very little downside, but a potential to have extreme upside. It’s definitely a gold Guy. [00:21:43][42.4]
Guy Adami: [00:21:44] And Dan I will tell you, in terms of the commodity, crude oil, I think you’ve done an excellent job in navigating when it was up to 130, as it went from the high teens into the one thirties, you said this is not going to sustain itself. It’s going to mean revert. It did. I thought the subsequent bounce would be through those highs. It did not happen as we’re sitting here today. Oil has been again meandering in the mid seventies, low eighties for quite some time. We had Paul Sankey on fast money a few weeks ago and he suggested that Brent, which at the time was $80, could go to 120. I can do that math. That’s a 50% rally. And he thought it could happen into the spring of next year. I’m sort of in his camp. We had Halima Croft on our podcast couple of weeks ago. She didn’t talk about absolute numbers, but I think she was leaning that way. I still think there’s a leg higher in both the commodity and the energy stocks Dan, where do you stand going into the new year? [00:22:46][62.0]
Dan Nathan: [00:22:46] Well, you used the term mean reversion. And again, I’ve been in the markets for 25 years, and the one thing that I’ve learned that’s been consistent throughout all of it is just the fact that just most risk assets mean revert, especially after they’ve had these crazy periods like we just saw in crude oil with all of these inputs that nobody had on their bingo card, let’s say, 6 to 9 months earlier. And so for the better part of 2021, we were debating the Fed’s use of the term transitory as it related to inflation. In hindsight, guys, I think it’s going to be viewed in history as transitory. And we just spent a lot of time talking about just the insanity of what the Fed had to do to their balance sheet to kind of smooth out this black swan event that had the potential to turn into some huge financial crisis. Well, it didn’t happen. And so here we are, almost every major inflationary input has come down. We know that wages have been a bit stickier. And you made this point on many occasions over the course of the year. That’s the one thing that has the potential to really hurt corporate margins. I just say this, though, man, prior to the pandemic, we were worried about the machines taking all the jobs and automation and we were talking about universal basic income and every like that. I suspect you see we get back to that. Have you guys seen this chat GPT, this thing? I mean, when you start seeing some of these really smart people talk about what that sort of AI readily available to companies, that’s an open source sort of thing. It’s massively deflationary. So I just think at some point in 2023 we’re going to get back to all of that. I think Paul Sankey, while he’s a great strategist as it relates to commodities, I think he’s to be wrong about that. I just don’t think that oil is going to go up meaningfully. And we haven’t even mentioned China here yet. I mean, I just really think that the Chinese economy is not the engine of growth that it used to be. And deglobalization is going to have a differing effect. And I know that you guys would say that it is inflationary if we start reshoring these jobs and the cost of U.S. multinationals doing that. I get all that. And that might be one of the reasons why wages stay big here if we’re going to go away from some of these lower manufacturing reasons. But again, I just feel like technology will win out wherever those jobs go, wherever their reshored here. And so I tend to just think that we’re going to get back to a low growth. I think people have to remember GDP average prior to the pandemic and between the financial crisis 2.2% and we had inflation that was below 2%. I think we’re going to be back there at some point in 2024. So what does it mean? I just think that all this stuff reverts. [00:25:11][145.0]
Danny Moses: [00:25:13] As it relates to energy. Let me just say, there’s no reason that it can’t stay overweight in the indices for a longer period of time. I say that. Because it was 3%, it’s five, it’s six, 7% weighting in the S&P maybe at this point, Dan, I don’t know where it is exactly, but rest assured, you want to pick a sector where earnings are going to shine. Obviously, I think in Q4, potentially Q1, it’s probably energy. I realize there’s a limit to how much the stocks that people will own, but they will stand out. And I will also say if the Fed when they do pivot, when they stop, I would think that commodity prices would all go up. So I think there is a, quote, tailwind. As far as the economic backdrop in China slowing. And to your point, Dan, I totally agree what impact that has. I’m not sure yet, but I think the geopolitical stuff is out there enough in the center of the oil universe still to create this bid. And so I think if the worst case, energy stocks are going to be flat. If you told me that the market’s down 25% in 2023, of course, I think energy is going to be down. If you told me the market’s flat in 2023, I think energy stocks will be up. So I believe on a relative basis what I’m saying, they’re still going to outperform. And keep in mind what they’re doing. These energy companies are slowly transforming alternative energy. They’re making acquisitions. I think I said it a couple of weeks ago on the podcast, if I’m an investment banker and I’m trying to figure out what part of my group can make the most money, it’s energy M&A. And I’d be using the currencies that these energy companies have and form a stock in their balance sheets to start growing and I would say horizontal integration into alternative sources of energy. So I think the story might still have a few legs to go. [00:26:39][86.5]
Guy Adami: [00:26:40] Yeah, I think another story that I think dominated a lot of the airwaves was the wreckage. We saw software as a service cloud, stocks, again, names that really got to absurd levels in terms of price to sales that have come down significantly this year and probably still have more to go. I think one of the trades of 2023 and I’m sure other people talk about this, is to try to find some of those names, names like Snowflake, a Salesforce, for example, that again, got way over their skis in terms of valuation that have all taken significant haircuts. But I think there’s another leg lower there. And I think when that leg happens, those are names that could, again, in my opinion, pay significant dividends in the back half of 2023. [00:27:26][46.7]
Dan Nathan: [00:27:28] Guy, you and I were just talking about this, there was a report out a couple days ago that a company in the private markets, Databricks, which is a competitor to Snowflake, lowered their internal valuation for the company. This is a hopeful IPO candidate probably in mid to late 2023 by 7% by 7%. Just think about that. Snowflake is down 58% on the year is down more from his all time highs. Still trades at a crazy multiples sales Databricks maybe is trading somewhere at a valuation in the thirties of billions, which would places it like 30 times sales. So we’re going to make these same mistakes again. And so that’s actually a story that I think is coming to early 2023, is that finally you’re going to have some of these companies in the private markets that have been really careful about marking down their valuations for hopes of a whole host of things that they want to accomplish from a business standpoint, from a capital raising standpoint, some point in the future they’re going to do that. I think some of these major VC firms are going to actually have to take the marks. They probably push some of the marks into 2023, and I think that realization is going to cause a bunch of firms to actually go out of business. We’re going to see some of those things where people are selling what they can sell, the liquid stuff. And I think that’s going to be a theme. I think whenever we are in the height of a sell off at some point in the broad public markets in early 2023, I think that’s going to be a theme that some of these major VC firms or these crossover funds who are taking marks in the private stuff much lower are going to have to sell what they can. [00:28:54][85.8]
Guy Adami: [00:28:54] You know I learn a lot from both of you guys. Danny, one of the things I learned from its rigor is the word that I like to use. And you actually go through and listen to these conference calls. You read the reports. But is what Dan just talked about is the, in my opinion, necessary write downs for a lot of these private companies, something you look towards or for in order to see a potential bottoming formation for the broader publicly traded equity market? [00:29:20][25.4]
Danny Moses: [00:29:20] Yeah. And I would throw Instacart into that category. Dan, you saw the markdown again. Obviously, bankers want to do as many IPOs as they can. But to your point, if private equity is involved, they need to get this stuff liquid in off their balance sheets. Right. Because they’re going to have some type of redemptions occurring or they want to collect some type of fee. So there’ll be a lot of pressure on these companies, but that’s more supply. The one thing we didn’t really talk about, obviously in 2022 is the implosion of the SPAC market, which carried over from 2021. Again, easy money gone. That’s really what that was. If you’re parking money in a SPAC waiting for them to find a target, remember your risk is zero as an investor because you get your money back at ten, but your risk goes up a lot when you can earn 4% risk free in the markets, those type of things. Obviously we have sucked out a lot of capital. So I would say on the positive side, you get these markdowns in the private market, you don’t have as much issuance occurring. Right. You have great stocks that are out there. And Guy, you’re spot on that. There will be stuff to buy our 2001 with that made survivors that have good companies that are good balance sheets that are going to survive and hit their cycle again at some point. And that’s what people need to do is individually stock pick, right. [00:30:23][62.1]
Guy Adami: [00:30:23] I don’t want to spend a lot of time on this, but the reason why Danny you brought up these meme stocks so often was not to have people trade them was to warn people. And I think one of the other things I know that we learned here, hopefully the audience did as well. These things were the rage. But this notion that as long as you held your stocks, they couldn’t go lower was such fallacy. And the vitriol that I would get on the back side when I tried to explain how illogical that was, was interesting, to say the least. I think now people are learning that fundamentals at a certain point do matter. And you know what? Regardless of whether or not you own it, lend it out, these stocks can go lower. [00:31:05][41.9]
Danny Moses: [00:31:06] I think the underappreciated thing with that is corporate governance and leadership. Jamie Dimon of JPMorgan, there’s no doubt they’ll be fine. Could the stock go down? Sure. But you should have confidence. He’s seen many cycles when you follow an Adam Araon around who just this week said, you know what, I’m only going to pay myself $19 million this year like I did last year. My pay is going to be flat. It’s ridiculous. On top of all the stock that he sold, he’s going to extract maximum liquidity out of that thing as much as he can. Right. So again, understanding that and appreciating people that have been through cycles of following certain people into the fire and running as quickly as you can from the others, that’s going to be a continuing thing that we saw in 22, moving to 23 as well, I think. And following on to that, it’s not just leadership at the corporate level. It’s these fund managers, the people that were blindly giving money, not just to actively managed ETFs like Cathie Wood at ARK, but again to passive money in these passive ETFs without a thought in the world like, oh, I want exposure to, to this sector and exposure that I just think, again, I think people need to do their work bottom up. [00:32:01][55.1]
Guy Adami: [00:32:02] One of the things we didn’t mention that was thematic in this past year was geopolitical risk, which is not going away in 2023. That was obviously a concern we all had going into 2022. That proved to be correct and it doesn’t seem to be getting all that much better heading into 2023. And I still am somewhat concerned what’s going on in mainland China and the potential for them to do something with Taiwan and this unholy relationship the Chinese seem to be embracing with the Russians something to watch in 2023 as well Dan Nathan [00:32:37][34.7]
Dan Nathan: [00:32:37] Yeah, geopolitics, not one that, you know, over the course of our careers has been I think, a huge input as it relates to markets. It clearly had a huge disruption to supply chains. And when we think about we’ve been spending a lot of time on the implications of energy from the Russia invasion of Ukraine, but we obviously haven’t seen what’s the back side of just the issues with grain. You know, we know that Ukraine is one of the largest exporters of grain. And so that’s something that I think a lot of people have felt we’re going to see some point in 2023. So hopefully that doesn’t turn into a huge humanitarian crisis. I guess I’d be very skeptical to see the Chinese invade Taiwan. I bet maybe there’s going to be some saber rattling that goes on here. I think the Chinese are really going to have their hands full with what’s going on with COVID. I mean, the move from zero COVID to what they’ve just done, I think is going to be a huge suppression on their growth and it’s going to further accelerate deglobalization and the manufacturing reliance of the West on China. So to me, I think that’s going to be a bigger theme than the idea that they’re going to like invade Taiwan. In my opinion. [00:33:37][60.4]
Danny Moses: [00:33:38] All these geopolitical issues that are out there could potentially only get worse in a downward economy. Right. Global economy, you think about you can not gloss over fix some of these issues, geopolitical right. But when you have energy costs going up in Europe because of geopolitical issues, if the Bank of England or the European Central Bank doesn’t have the ability to, quote, print their way out of it, it changes that. It makes it even that much worse. And it’s something you’re going to have to deal with. If China does slow, tensions are only going to get worse between them wanting to do something with Taiwan potentially. Right. Or do something more in Hong Kong and here in the U.S.. Right. If things really slow, people are going to be looking for a scapegoat throughout history, downward economic times, obviously pressure that. So I think that’s going to add a little bit of fuel there, unfortunately. So I don’t see that going away any time this year. [00:34:20][42.8]
Guy Adami: [00:34:21] We’re 34 minutes into this podcast. And we have yet to mention one word that seems to have come up multiple times on each and every podcast this year Danny And that’s Tesla, by the way, Tesla stock that you said the short you were short Dan Nathan shorted successfully a stock that just this week made a new multi-year low a stock that at its trough I think Dan was down some 70% from its all time high, a stock that dominates the news and a stock that for whatever reason, we can’t stop talking about because it has far reaching implications and we should be talking about it. [00:34:58][37.0]
Danny Moses: [00:34:58] I think the continued theme in 2023 is that Musk is vulnerable here. He has lent out a tremendous amount of stock. I won’t go into exactly how many shares and so forth, but what I’m saying is a lower stock in Tesla can create a lower stock from here. And I’ll say it again, I believe when it’s time to trade the stock on a fundamental basis, that’s the painful part. I said 150 140 130 what is the buy point for this stock? And I just think this. The story is moving from secular to cyclical. And Dan, you and I talked about this offline. It was a secular growth story and it was a trendsetter. It was the leader. And now these other companies, the OEM, right. The original auto manufacturers are moving from cyclical to secular as it relates. So it’s you can look at on a fundamental basis. I still like it short here and on a non fundamental basis it’s a mess given all the financial engineering that’s going on, both with this stock and potentially within the company. So again, we’ll try to not talk about it as much. I think it’s going to be front and center again in 2023. [00:35:49][50.8]
Dan Nathan: [00:35:51] Yeah, you know, it’s funny, I pledged in 2023, I’m going to talk about it, much less on all of our different platforms, all of our different shows. I mean, one of the things that was so important to me about it is just, again, going back to my career in the market, starting in what was a full blown mania, which was the Internet stock mania. And there were so many different personalities and there was all this unusual optimism that was centered around some of these individuals, these premiums in these money losing companies based on the founders. And we’ve talked a lot about this over the course of this year, the cult of the founder, whether it would be in the private markets and the lack of due diligence that was done. And, you know, it’s just kind of interesting that the Musk playbook is very similar to former President Trump, and it just didn’t end particularly well for him. And this is not a political comment. I mean, make no bones about it. I was not a fan of Trump, but what Musk was doing was right out of that playbook, and it’s actually all coming undone. If you think about his wealth in the last year, how much of it is lost, how much of it’s been tied to other assets? And I think it’s really important to remember he is the CEO of three major companies. So it’s SpaceX, it’s Tesla and it’s Twitter. And so there’s just not a human on the planet who can do all of those three things effectively. And the fact that there’s still people that give him a pass, his board has given him a pass. I mean, it just seems like to me this is going to be a big story in 2023. The unwind of Elon Musk and the aura around him is starting to come apart here. And I would be surprised if by the end of next year, if he’s the CEO of Tesla, do I think it’s a great short here? No, I don’t. It went from 400 to basically 110 in less than a year and it lost 50% of its value just in the last couple of months. But I just think it’s important people like him to be called out for what he is and to be shown for what he is. And I think that’s all happened in 2022. So, again, good on you, Danny boy. This is something that we’ve talked about a whole heck of a lot, Guy. You’ve been very skeptical of it. But markets cannot bottom with companies like this that exist and the premium that’s built in because of the CEO. And I think we’re probably in the end game for Tesla and for Elon Musk and the aura around him. [00:38:00][128.5]
Danny Moses: [00:38:00] Well, let me just violently disagree with your point. I think it’s a massive short here. It’s a 375 billion market cap. I don’t care where it was, it never should have been where it was. Yes, it got added to the S&P. So let me just leave it at that. I look at things on an absolute basis, bottom up, not where they once came from. So 300, I’ll say it again, $375 billion, our company. Let’s see what happens with it. But like Carvana, it’s a better short now than it was as a 300, in my opinion, because I think they’re exposed and I think now the microscope is coming for them in all facets of the game Dan. [00:38:29][29.1]
Guy Adami: [00:38:30] We asked you to send questions. You sent them in droves. Upon our return, we’ll effort to answer a few. So again, folks, thanks for sending in so many extraordinarily thoughtful questions. Dan, this one’s for you. It’s from Ptor Gjestland, hopefully I’m pronouncing it right. I’m probably impaling myself. The thing that has befuddled me this year and I gave up in February is the movement in reaction of the VIX. Until earlier this year I was actively trading VIX options, but it just feels like a weight is sitting above $34. Do you know why? [00:41:11][161.7]
Dan Nathan: [00:41:11] Yeah, that’s a great point. And again, I would just say this is that we just spent a lot of time talking about all of the issues that risk assets across the board, not just here but globally had in front of them entering this year. And I think a lot of institutional money that goes long short had the ability to hedge came into the year very hedged and I think if you just look at the kind of orderly nature of the sell offs that we’ve had in these different waves and these series of lower highs and series of lower lows, there were very few capitulatory moments, very few panicky sort of moments. So I think that you had a situation where there was a lot of volatility across all major risk assets. And you could say that the volatility in commodities, the volatility in rates in some of these other assets and currencies were actually far greater than that of equities. And that might be your answer is that traditional institutional investors were hedged up as it relates to equities where the stuff went haywire was everywhere else. [00:42:08][56.3]
Guy Adami: [00:42:08] And to sort of echo that, Dan, I agree with you. I think typically when volatility, you have these significant moves to the upside, when vol goes from 20 to 30 in a single day, it’s historically when something happens out of the blue, we can say black swan, but typically things that happen out of the blue. So much of this year and I’m not trying to underestimate it has been somewhat predictable. So I think a lot of people out there have been trying to get ahead of the subsequent moves in the form of volatility, which probably by definition impeded vol from going higher. So if you’re looking for a spike in volatility, it’s probably going to come on the back of something none of us see or can portend coming into 2023. [00:42:52][43.3]
Danny Moses: [00:42:53] And when there’s a lot less liquidity in the market in general, you tend to have more volatility in all asset classes. So I would expect that to happen. [00:42:59][6.1]
Guy Adami: [00:43:00] Danny, this one’s from you. It’s from Robin. We all know about the Fed. We all know that debt to GDP, and we all know what the point of no return is. The question that begs to be asked what’s the ultimate endgame here? Because the massive amount of dollars that they’ve printed over the years, the devaluation of the currency, they’re going to have to do it again at some point. How does this all end? That’s from Robin. [00:43:22][22.4]
Danny Moses: [00:43:23] Rockin Robin, listen, I don’t think it’s going to end well. I think it ends with the Fed stopping quantitative tightening. I think it maybe even cutting rates at some point in 2023 when they realize that GDP to that point will suffer dramatically by just lack of liquidity in the system. And so this is going to be with us for a long time, north of 30 trillion in debt on the government’s balance sheet here in the U.S. and obviously now paying a higher rate on that moving forward. So not a pretty picture. I don’t think there’s a real answer for that other than I think it’s going to get worse before it gets better Guy. [00:43:53][29.1]
Guy Adami: [00:43:53] Corey McCall has a question for me. I think we’re all pretty clear on your Fed opinion. Thank you. I’ve been abundantly clear on that. But do you think the Fed’s distortion rendered the business cycle a kind of schematic mirage? Do you think there even is a business cycle? The answer is there should be a business cycle. But I think what’s happened now are their credit cycles. And I agree with you. The business cycle is important and I’ve said it a number of times, but I’ll say it in answering this question. I think Chair Greenspan thought correctly, by the way, that he could alchemy out the recession part of the business cycle and he was successful. The problem is, Corey, I believe a recession is a normal, healthy, important part of the business cycle. And when you try to take it out, you can achieve that for a period of time. But something winds up happening. It’s like that old commercial. It’s not nice to fool with Mother Nature. Danny And at a certain point, Mother Nature rears her ugly head. [00:44:55][62.6]
Danny Moses: [00:44:56] Yeah, QE again masks a lot of the problems that many of these companies would have faced. A lot of companies should already be out of business, but they were able to access cheap capital. Those loans are coming due at a much higher rate, probably if they have debt on their balance sheet. Right. They got away with it. That was buying stocks, buying bonds, buying everything. And now it’s the other way around. So again, companies that exist now, they shouldn’t have. I think they should be gone. I think we’re going to see a lot of that in 2023. So the era of easy money is over. [00:45:21][24.6]
Guy Adami: [00:45:21] Danny, last questions from you. It’s from Josh. I love this question. Josh Well-written. Really enjoy the show and I’m looking forward to Mondays with EY. And she’s asking Dan Nathan what the show title going to be. Stay tuned. But here’s the question. I’m a retail investor, Danny. Generally a value growth, long term strategy. If I believe in a company, folks say on the show, buy the debt if you’re long, can you run through an example of that? Because that’s something, Danny, you talk about a lot buying the debt of these companies. [00:45:52][30.4]
Danny Moses: [00:45:53] Yeah. So most of these platforms, there’s Schwab or whatever, you have access to corporate debt on there. You have to search for it under the corporate debt tab and find it. So if a company has a lot of debt outstanding like we’ve seen, we brought the example this year because there was companies that were people were actually buying the equity instead of the debt. When the debt was trading at 20, 30, $0.40 on the dollar, bed, Bath Beyond, AMC, Carvana, etc., etc.. So I would say, hey, if you really like this, go buy the debt. It’s a triple and it’s senior in the capital structure to the equity. So it’s out there, you can find it. I think that’s going to be a huge theme in 2023 as credit spreads obviously widen. I think over time it will present tremendous opportunity to buy corporate debt. And I think individual corporate debt, if you can do it, if you want to stay safe or you think that the Fed’s going to start cutting and there are these investment grade bond ETFs, Dan probably can give me the name of some of those that are out there. There’s ways to do it right. There’s triple triple-A, single-A corporate bonds. But I do think that that’s a much smarter way, especially in this type of environment. So in trying to pick the bottom in a stock or in reflection if the debt, by the way, let me just say again, if the debt’s trading below $0.90 or $0.85 or $0.80, something’s drastically wrong with the company in the equity. So just a red flag, at least. [00:47:00][67.3]
Dan Nathan: [00:47:01] And to your point, Guy, you’ve mentioned this LCU dx. This is the iShares I box. It’s a liquid investment grade bond ETF and you can go in there, you can see what’s in there. And again, you know, this started the year at basically above 130 and here it is at 106. So it’s returns look very similar to the S&P 500. And I think largely, Danny, and you probably agree with this, is that a lot of the companies that make up a disproportionate of the weight of the S&P 500, they kind of look like corporate bonds. They have huge cash balances. The debt to equity is not out of whack. They have high investment grade sort of ratings. So their access to capital is really good in general. So I mean, the LQD could be one way to kind of diversify that and play that theme in a difficult equity line. [00:47:44][43.1]
Danny Moses: [00:47:44] And I do think all these fixed income ETFs which have arisen and grown over the last 13 years in this bubble. Right. All pretty much own the same stuff. So what’s going to happen is a couple of these funds, closed end or ETFs are going to be, quote, in trouble because massive amount of redemptions are going to come in. That will present an opportunity for single names to be bought within those. That’s easier said than done to find them. I get it. But pay attention out there because you’ll have blowups all over the place. I think that’ll present an opportunity. [00:48:09][24.5]
Guy Adami: [00:48:10] This last question from Greg Kroll definitely has a bull’s eye on Danny. But Dan, you can answer this as well. From Greg, I love the podcast. I’ve been trading Tesla from the short side for the last year. I now use TSLQ for my Course Short and Tesla for options. In your opinion, is there any downside to using TSLQ or should I short the underlying? Thanks Greg [00:48:37][27.4]
Danny Moses: [00:48:37] TSLQ is just the inversion of Tesla, so yes, it takes up less capacity or margin by buying TSLQ than it would be to short Tesla. You’re paying a little bit of a premium. The terms of costs, probably, I don’t know, half a percent a month at the most. So as long as it moves quickly, you don’t want to be in there with dead money in TSLQ Because over time you will evaporate. Obviously a little bit of your principal, but I like it better than it than shorting Tesla because it takes up too much of my margin as far as buying puts on Tesla. I mean, it’s only going to be harder and harder to do that in terms of the amount of volatility you’re going to be paying for a long period of time. So unless you can time it perfectly, I probably would not recommend that there is a situation where you can buy way out of the money puts. Potentially if you think that this thing is really going to implode like the 50 strike level when the stock sitting here at 120. So I like the TSLQ, but as Porter and Vinny told me halfway through the year when we started buying this thing, it’s a short that actually gets bigger as the stock goes down in terms of Tesla getting larger. So something to think about is money management may be taking some off the table. [00:49:36][58.7]
Dan Nathan: [00:49:36] Yeah, I’ll just say the timing of the introduction of it in mid-July or early July, it was kind of fantastic because there’s a lot of retail investors out there who just don’t feel comfortable shorting stock. And the point that Danny made about margin is also a difficult one. So if you want to actually make a convicted short bet on a stock like Tesla, it’s going to take a lot of the margin in your account if you trade on margin. And if you don’t, you shouldn’t be doing it for your first short position in a stock like Tesla, in my opinion. So I think the TSLQ offered a really great way to kind of risk manage a short trade for something that a lot of retail investors feel comfortable with, which is buying a stock or an ETF. But to Danny’s last point that he made about an inverse ETF, the tracking an instrument like a stock, there will be decay in it. So if the stock were to go nowhere, that’s Tesla just kind of sit there flat. This thing is going to start decaying each day. And that’s how basically the people that have created this instrument have been able to facilitate the inverse price action of the underlying stock. So to me, again, I think it’s probably a lot more attractive to trade this than trade Tesla on the short side. But understand, this is not something you want to hold for too long in an environment where the stock is not doing a whole heck of a lot. [00:50:51][74.9]
Guy Adami: [00:50:52] Earlier, Dan, you mentioned mean reversion and I stored that away because last year Danny Moses was on fire, could not be stopped in the league where they play for pay. I mentioned mean reversion because as great as he was last year, that’s how mediocre he is this year coming into the final two weeks of the regular season. A very pedestrian word I like to use. 500, I believe, if memory serves. Danny, you’re 22 and 22 or right around there. [00:51:25][32.8]
Danny Moses: [00:51:25] 21 and 22. [00:51:26][0.6]
Guy Adami: [00:51:27] 21 and 22. That would be a game below 500. And that vigorish is a bitch, as they say. Yeah, but you have two weeks left. You have some fascinating games this week in some meaningful football games this weekend. Give us your predictions in the aforementioned league where they play for pay. [00:51:46][18.9]
Danny Moses: [00:51:47] All right. Three picks this week. I got to get above 500 before we get to the playoffs. I like the Washington commanders at home against Cleveland minus one and a half. I know Carson Wentz is now coming in to replace Heinicke. That’s fine. They’re playing for something. Cleveland’s playing for nothing. They’ve been God awful since Deshaun Watson came back, obviously. So I like Washington at home. Chase Young is back minus one and a half there. New England. I mean, I’ve never seen a Belichick team have worse special teams. Biggest mistakes, right? You got to figure. But they’re still playing for something. So is Miami, but I don’t even think Tua is going to be playing. I think it’s Teddy Bridgewater. I believe so. New England minus three at home. I think Miami is on a tailspin here. And I think New England gets it right, still has a shot at the playoffs. I like a minus three. And then the game of the year, the Bengals at home against the Bills getting a point on Monday night I mean this could be potentially for one of the home field advantage is right you got the chiefs out there the bills and the Bengals. Bengals are on fire bills have prove resilient on the road actually more than I like the bills giving a point in Cincinnati and I’ve been on Cincinnati pretty much all year. It’s going to be a crazy environment. But give me Josh Allen and the Bills laying one on Monday night. [00:52:54][67.3]
Guy Adami: [00:52:54] I love those picks. I will tell you that that game is must watch football if you do enjoy football. I love everything about Joe Burrow. Not that I’m looking to take the other side, but I will say the Bengals are probably playing about as well as anybody in the league right now. I love what they’re doing. They’re peaking, Dan, as they say, at the right time. And lest I forget, my New York football giants at home this weekend against the Colts of Indianapolis in a game if we win we are in which makes the final game against the Eagles moose. When was the last time as a giant fan you found yourself in that position when it actually meant something because the playoffs were the ensuing week? We will see. But I want to thank everybody, as always, for being steadfast along with us the entire way, not only this year, but the year prior. Dan Nathan, Danny Moses, extraordinarily Happy New Year to you both and to our audience. A blessed and Happy New Year. [00:53:54][59.2]
Danny Moses: [00:53:54] I’ll just say, guys, it’s been two years. You guys have worked tremendously hard on the entire RiskReversal platform. So kudos to you guys for building something that’s I think has great content. Again, great guests, I think very entertaining. At the same time, we realize that this ending podcast didn’t have a lot of, quote, entertainment because we really wanted to get a lot in and help our listeners understand what’s going on there. But it’s been great. I look forward to a great 2023 with you guys so. [00:54:17][22.4]
Dan Nathan: [00:54:17] All right, thanks, guys. Thanks to all the listeners. Thanks to our sponsors. Really appreciate the CME Group who’s been with us from the very beginning. And then iConnections has been a great partner of ours in 2022 and we look forward to continuing their support of us in 2023. So Guy Danny, thank you guys very much. Listeners, thank you. We’ll see you next year. [00:54:17][0.0]
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