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On this episode of On The Tape Dan Nathan, Guy Adami and Danny Moses are celebrating another On The Tape birthday by kicking off the episode discussing what they might be missing in the current market rally (1:00). Energy names continue to perform in 2023 (9:30). Tesla stock rallied this week after reporting this week (12:00). Jerome Powell is on an island, what can we expect when he speaks next week (17:00)? Everywhere you look people are talking about emerging markets, is it a bit overdone (23:00)? Danny has a RotT on TicketMaster & the New York Stock Exchange (25:00). The debt limit still looms large over the market (28:15). It’s Conference Championship weekend, D-Mo brings you his favorite bet (31:00). After the break, Danny Moses speaks with Cameron Dawson, Chief Investment Officer at NewEdge Wealth. Don’t look now, but gas prices are rallying (39:00). Hate letters aren’t just flowing into RiskReversal Media’s inbox, Cameron gets them too (47:00)! What can read into easing financial conditions as it relates to The Fed (57:20). Will and when should we expect an end to this so-called “low quality rally” (1:01:00)? What information can we glean from the bond market (1:04:00)?
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Show Transcript:
Guy Adami: [00:01:21] In 1973, Guy Adami was nine years old, soon to be ten years old and Houses of the Holy was released. That was the fifth studio album of the mighty Led Zeppelin, the first four albums were Led Zeppelin. Led Zeppelin two, three and four. And then they went with the title, which is great. There’s a song on that album. By the way, you’re listening to the On the Tape podcast. I am Guy Adami, Dan Nathan, Danny Moses. In just a few minutes, Danny Moses has a one on one interview with Cameron Dawson, CIO, Chief Investment Officer of NewEdge Wealth. Stick around for that because it’s going to be fantastic. I mention that because one of the songs on the album, Danny was, Over the Hills and Far Away, and here’s a lyric that I think sums it up for me. Mellow is the man who knows what he’s been missing. Many, many men can’t see the open road. I posit this because the market’s been rallying. I’ve been pretty mellow about this rally. But the question I guess we all have to sort of deal with, at what point are we missing something? Because I’m really mellow right now and I know what I’m missing in the form of this rally. But at what point then are we just missing it entirely? [00:02:35][73.9]
Dan Nathan: [00:02:35] You know what’s really interesting, Guy, when we were thinking of a title for this fine podcast, which I got to tell you, Danny Moses won out with On The Tape, that’s the name that we ended up going with. So this was late 2020. We launched this thing in January of 2021. So happy birthday on the tape, folks. Here. The second choice was No Quarter. Stop it, which is a song off of the houses of the Holy Hear. And what does no quarter mean? That means that you give no pity, no mercy. See how we’ve strung this whole thing together? We’ve been talking about this a lot. I know, Danny, you and I have been talking about it offline. It’s like to have your thesis so well validated for most of 2022 and so many different parts of the investment landscape. And then to have the calendar term and here we are in January, we have a Nasdaq that’s up nearly 10%. We have an S&P that’s up nearly 5%. Now, again, the S&P was down 20% last year. The Nasdaq was down 33% last year. It made up a lot, a lot of room in a very short period of time. Guy, you and I are talking Fast Money most nights. We do these things every day here and people are like, Hey, guys, you’re wrong. When are you going to change your tune? And I guess the point that I would just make is this I get it and I’ve been saying this for two weeks. Rates have come in, the dollars come in, inflation readings have come in, commodities have come in. Almost every the credits rally. The VIX is melting. I mean, the list goes on and on and on. That’s a beautiful bullish cocktail for stocks and that’s what we’re seeing. But I guess the point is that that could all change on a dime. If you go back and you think about we had these periods last year when people thought the Fed was going to pivot. It was March, April, it was June to August, it was October to December. And they all made new lows here. So again, I’m still in that retest of the October low. I think that the exuberance that we’re seeing about stocks is really a reflex where people are just sick of being bearish. But I still don’t believe that bear markets bottom with an S&P earnings at 17 and with consensus estimates probably too high. [00:04:26][110.6]
Guy Adami: [00:04:31] By the way, not to interrupt you. But I will tell you that song originally was just an instrumental song. And then subsequently Robert Plant went back and put some lyrics to it for those Zeppelin heads out there. Anyway, please, Danny. [00:04:44][12.5]
Danny Moses: [00:04:44] I was thinking, what goes up must come down. All right, so one month is not a market make, but let’s think about this and yes, is it up more than I thought? Absolutely. Has anything changed? Absolutely not. Is there a little bit better economic data on one side, a little bit worse the other? Sure. Little on the margin, sure. But nothing’s really changed in my mind. So let’s talk about market psychology and how professional investors must trade. I said at the end of last year, starting in the first week of December, all they wanted was the market to just not do anything for the last 3 to 4 weeks. Why? So they didn’t have to chase anything up they didn’t have to buy they didn’t have to sell anything. They just wanted everything to stay. It was a very stressful, long year. You roll the calendar, market goes up, ignore some bad news, market goes up like every week that goes by. Shit, I’m under allocated in tech, I’m underweighted in tech. I’m going to get killed on my indices that I am paid against. So they start buying it. Hedge funds at a great year last year, up 12 to 15%. Finally raising money. Let’s not ruin this. Let’s not run this. Oh, my God, guys, we’re now underperforming by 500 basis points after two weeks. What do we do? We got to start putting trades on. What does that mean? Covering shorts? What does that mean? Buying things that you were going to hold your nose and buy it. And it’s evident in the Goldman Sachs VIP baskets evident you are seeing it. Everything is right in front of us. The answer, though, Dan and Guy, is what do you do now? We just saw very high quality companies report earnings that weren’t great, that were portended. We knew that Microsoft wasn’t going to be great when the CEO of Microsoft tells you our clients are trying to optimize their spending. So this whole thing about immediate gratification still exists in this market. It continues to amaze me. It started with crypto the beginning of this year we sell that move up in in kind of the crappy crap while we’re taping this right now. Bed Bath Beyond basically comes out and says, we’re done. So just as a wake up call to people, you don’t just change business fundamentals because the markets go higher. Nothing has, quote, changed here. And the last thing I’ll say is, if anything, you’re going to hear a lot of this in the conversation I had with Cameron Dawson, which you guys just previewed. I’m sure what she’s going to talk about is this makes the Fed job of easing much harder. Financial conditions are easing at a crazy rate. So pick your poison. Commodities run higher to market like this. So, guys, we’re right back where we were. I just feel like we put off the inevitable. Maybe for a month or two that’s it. [00:06:54][130.1]
Guy Adami: [00:06:55] Yeah at a certain point, I think if this continues, we will reexamine and say maybe we’re missing something. I just don’t think we’re missing something right now. And I am that mellow man who in fact knows what I’ve been missing. But I’ll say this, Danny, since you brought up earnings, Microsoft, which I think we’ve done a pretty decent job talking about again, Dan mentioned this a few weeks ago, he listened to that interview that Satya Nadella had in India on CNBC Asia, and he talked about some of the headwinds and he was about as dour as we’ve heard him. And when they reported earnings earlier this week and the knee jerk was to take the stock from approximately the closing price of 244 that day up 253, What we collectively said and I tweeted is wait for the conference call, because all the stuff that he talked about would come out subsequently that’s what happened. In the after hours from that conference call, the stock went from 253 to 239 and we troughed at 232. Now, what I find remarkable is how resilient the name has been, but there’s no denying that the guidance in the commentary was negative. Those things don’t turn around over the course of quarter or two quarters. And on a valuation basis, in a name like Microsoft is expensive in this environment. Now, I don’t know why that money flow came back. It’s hard for me to figure that one out. But this is a stock, all things being equal, that should go lower from here. And as I’ve said a number of times, this is one of the three or five most important companies on the planet right now. [00:08:32][97.1]
Dan Nathan: [00:08:33] Yeah so again, let’s talk about price action, because I don’t think these are fundamental managers making these decisions to buy Microsoft right here based on the guidance that you just gave. And I think that’s really important when you talk about who are pressing the buttons right now. I think there’s just a lot of strategies that when they do all the inputs about rates, about dollar, about all these things that we just talked about, I think the output is saying buy stocks, buy high quality companies. And maybe what happened last year when Microsoft was down 30 plus percent at some point and this lows was discounting this sort of slowdown that the company is speaking to right now. I’m not telling you that’s how I view it. That’s not telling you that. What I took away from their conference call, what I took away from the Q&A and all the analysts reactions afterwards. But that’s what the market’s doing. And it’s pretty remarkable because we talked about this in the aftermarket the stock before the company gave guidance was up 4%. They gave guidance, and then the next morning stock was down 4%. So a huge swing there. But by the end of the trading day, the stock was basically unchanged. And the Nasdaq, that was down a percent and a quarter was also unchanged. And that is not fundamental. People saying by Microsoft right here, because it’s going to discount this next three to maybe six month period that’s going to be a bit slow. [00:09:49][76.5]
Guy Adami: [00:09:50] Lest you think we’re all doom and gloom all the time, I give you the energy sector. Why do I mention that? Because as we sit here today, ExxonMobil symbol XOM is making a new not 52 week high, all time high. Conoco Phillips challenging their all time high. Chevron Danny announced a 75 billion with a B dollar buyback. That is a $350 billion market cap company. That’s 20% of their float. That’s a company seemingly doing everything right. We won’t get into the politics of energy, but this is a theme that you talked about. Both Vinny and Porter talked about played out all through 2022 and right before our very eyes. It’s playing out early in 2023. These energy names, despite the fact that crude oil, which has bounced but effectively can’t get out of its own way, continue to perform. [00:10:47][56.6]
Danny Moses: [00:10:47] Yeah, we said if you really believe in a soft landing and you’re bullish on the market, we said this. If that’s your view, you have to own energy because combine that with what these earnings are were, which are fantastic and there’s no better balance sheets out there as a sector. There’s no better return of capital, as you just mentioned. There’s no better opportunity for M&A in my mind. So those are proven. Now, again, how far can they keep going? I don’t know. But I want to make one note. The great James Akin, Jay I, as we call him, he’s writing a letter, notes from a small island for years. Brilliant guy. He sent out a chart this morning to his client base that showed the ratio. CEO of Goldman Sachs hedge fund VIP basket, the 50 companies that matter most versus the weighted basket of the 50 highest short interest names in the Russell 3000 and all with market caps of greater than a billion. It has breached I’m telling you where it’s gone back to where it was 2019. So you think about where this thing was before the market started to sell off, before the COVID came and all the other stuff consumers came in. So a lot of indicators out there just to back off from energy for a second, just in general, this has been a lot of short covering to Dans point. I don’t think smart institutional investors are loading up on some of these crappy names in general and what’s going to happen now. We’ve had this staircase up, staircase up. I just mentioned the next elevator down is the next elevator down the one. But again, quality is separating itself. I think as far as earnings go, people will pay a premium for consistent earnings and earnings growth. And there’s not a sector really out there with the exception of energy, at least in this moment in time, that has those type of characteristics. [00:12:14][86.4]
Guy Adami: [00:12:15] One of the companies that reported this week as well was Tesla, and a lot of the bulls say that was a remarkable earnings report, a record report. Other people, some of the naysayers say look at free cash flow, deteriorating margins in this environment. And by the way, deteriorating margins don’t turn on a dime either. And they talked about how their margins were probably going to still be better than the Fords and the GM’s of the world, but it’s trending that way. By the way, those companies enjoy about 16% or so margins, so margins will deteriorate. It’s still a free cash flow story that is seems to be going the wrong way. The stock has rallied now some, I want to say 50% or so or either side of 50% since that bottom we saw a month, month and a half or so ago. So Tesla reported, Danny, I’m sure you had some of the things that you want to pick apart. There’s no denying the performance of the stock, though, has been very strong over the last few weeks. [00:13:13][57.8]
Danny Moses: [00:13:14] I mean, listen, it’s down 50% since September. But yes, it’s rallied, obviously like amount off of a lower base or not the same dollar amount. But I’ll just say this. If you had shown me the quarterly report prior to that print, I would have shorted more stock prior to that stock coming out. Why do I say that? Because it amazes me how people tend to just look past all the headlines. Don’t do granular work. How dare you even look at the underlying numbers? And this where did cash go? And why all sudden, is there a $4 billion investment popping up in cash and marketable securities and investments? Why the margins? To your point, they don’t count them like, quote, normal auto companies, but we’ve known that. But they are dropping the price decreases just came into effect. So you have to assume that those are going to keep dropping. Of course, there’s a pickup in demand when you cut your prices by 20 to 25%, but you cannot extrapolate that without a hit to margin. Why is CapEx still so low as a percentage of revenue? Things still don’t make sense to that company. All that being said, okay, it’s fine. Why is it trading up? Because again, here’s Musk on the call talking about, oh, you know, he was very optimistic the cybertruck yeah pushback but it’s fine. They recognize full self-driving which doesn’t exist. Revenue again EV credits which continue regulatory credits continue to be large where it is, what it is. And that’s fine. I’m using this opportunity to add to the short. I did cover some. Not enough. It’s fine. I don’t care. Like I said, I know where this he’s going to long term. And just a reminder, I don’t care if it’s TLSA, AFRM, whatever stock it is, all the charts and I’d love to get Carter on on this one tend to react the same. Of course, you got a balance. Fibonacci’s rolling around in his grave probably somewhere. But I think it’s an opportunity because in my mind, nothing’s changed here and the stock is very expensive. [00:14:49][95.7]
Dan Nathan: [00:14:50] You do great fundamental work on this one for me as a bit of a pundit, but also who likes to trade. I mean, listen, I had to put position in this print and they were gone, kaput. I was risking what I was willing to lose here. I think that at some point in the next couple of quarters, we’re going to have the sort of bloodletting where just the realization about competition is finally there. I know that’s been a huge pillar of the bear case and people have been making it, I think, for ten plus years now. But I think that really highlights this is China and I think that Tesla has over 60% market share of EVs here in the U.S. and that’s only going to go lower. But think about China and you could turn this around to me. But China right now, and Elon actually said this on the call, that he recognizes the fact that Chinese competition is a huge thing. They have less than 10% market share. They rely on China for manufacturing, for future growth. It’s about 40% of their revenues here. They reliant on rare earth materials for the batteries. So to me, I just think that this is the year that the China story really takes a leg lower. I think the stock is going to be low 100 at some point. My price target to the downside is 69. I did buy your TLSQ today, Danny, when the stock was around 159, I don’t hate the guy, okay. But I get asked the question also all the time. What are some of the major inputs why you will invest in a stock while you will invest in a company and one of the top ones better be the management. It better be that you see their vision for the future, that you think they’re trustworthy and transparent, that you think that there’s proper oversight in the board in which they’ve constructed around them. And I can’t say. I believe in any of that when it comes to this company and when specifically when it comes to Elon. So to me, I think there’s a cult around this guy. Forget all the other stuff with Twitter. Forget all of it. I think there’s a cult around this guy that’s going to come unwound this year for fundamental reasons. Danny, you’ve been all over him. Our friend Jim Chanos has been all over him. And I think what happened in late 2022 is just getting started to me. And hey, by the way, what was that $4 billion investment, Danny, that no one really asked about. [00:16:47][117.6]
Danny Moses: [00:16:48] I don’t know. We don’t know. Could be Twitter, could be a lot of things. And I’ll say this I always say Qs and K so you don’t get a Q you get a K, you get a 10-K this quarter because it’s annual. So that’ll come out at some point before February we should get a lot more information. And on that point than if they took out a up to $7 billion credit line revolving credit facility after they reported the quarter from Deutsche Bank. So they’re going to draw on that. Not sure exactly what that’s for. Oh, they’re building new plants here and there or whatever. Somehow that’ll never show up in OPEX, but live to fight another day. But people just be smart. [00:17:16][27.6]
Guy Adami: [00:17:17] No man is an island, which was, I think, a 1962 movie about George Rea Tweed. He was a radio man that was able to basically hide himself from the Japanese, avoid being captured, avoid being executed. Great movie. I encourage you go to Blockbuster this week and maybe a two for one. Get the big short and get No Man is an island. But since you mentioned islands earlier, Danny, there’s a guy out on an island right now and his name happens to be Jerome Powell. The Fed speaks on Wednesday of next week. I’m interested, obviously, I’m always interested. But with asset prices now back on the rise, GDP was not a disaster. These job numbers continue to be strong. I mean, their job seemingly with asset prices going higher. To your earlier point and to what you probably speak to Cameron about continues to get more and more difficult. And I got to tell you, they continue to be as hawkish and I’ll use the word as dogmatic as ever. They obviously see something that the market is not recognizing right now. A lot, of course, is for Fed rate cuts the back half of this year. I would submit if that happens, something catastrophic is going on and it’s probably not nearly as bullish as people want to make it out to be right now. [00:18:33][75.9]
Danny Moses: [00:18:33] Listen it might be as simple as markets going to sell off next Wednesday when Powell has his press conference. Because to your point, with oil prices moving higher, gasoline prices specifically moving higher, that has a lag impact also on inflation. You know, that’s coming. The financial conditions index is as loose as it’s been since pre-pandemic. So if that’s your set up, it’s great. You guys got a free ride here. I’d be very careful going into this. And yet Fed fund futures haven’t changed that much. I don’t think anyone believes are going to go 50 basis points or probably go 25. But that press conference could be something special and I would expect him to be somewhat hawkish here and he’s giving every opportunity now to stand behind it. This is actually good for Powell if he was planning on being hawkish, you can now stand behind these conditions index and all that stuff. But guys, there’s a lag impact of these commodity prices moving higher and it’s not inflation friendly. And you think about housing, which you want to see. Housing is bottom. Okay, fine. But what does that portend for rent rates and so forth in future? So I don’t know. It’s setting up to me as a sell the news, sell the presser, but maybe that’s too simple. I’m not sure. [00:19:32][58.3]
Dan Nathan: [00:19:32] We spent a lot of time talking to Carter Braxton Worth on the MRKT Call that’s live Monday through Thursday people 1 p.m. Eastern you can find it on the RiskReversal media YouTube channel but what would be a convincing breakout of this downtrend? So we’ve seen this S&P 500, we’ve seen the Nasdaq come and touch its 200 day moving average for the first time in a very long time. And what would it take to convince people that the downtrend is over? And so I think that if there’s anything on the other side of this Feb 1 Fed meeting that causes rates to come in, and then we’re going to see those Fed fund futures pricing further cuts at some point out past 2023 into 2024. Those are the sorts of inputs that people just say it’s over. And again, I don’t really believe it. I want to key on something that’s really interesting. We don’t spend a lot of time talking about small caps, but a lot of the things that we’ve talked about with rates and with inflation inputs are really important to small cap stocks. Here’s a tweet from Lisa Abramowitz. Okay, This is from Bloomberg. In the 1990s, 15% of companies in the Russell 2000 had -12 month trailing EPS. Today, that share is 40%. If the underlying uptrend continues, more than 50% of the firms in the index will have negative earnings by the end of this decade. So shes’s quoting Apollo’s Torsten Slok. That’s a good handle right there. Torsten Slok. Danny, talk to me about this because this is really interesting. Just think about this. Small cap stocks, largely domestic in the U.S. here, 40% right now on a trailing 12 month basis have negative earnings. Like, think about that. You talk about zombie companies all the time who’ve been propped up by the zero interest rate environment. What do you think happens if just rates stay higher for longer with a lot of these small cap companies? [00:21:12][99.4]
Danny Moses: [00:21:13] Smaller companies don’t have the economies of scale that big guys do. They don’t have the access to all the financial products that the big guys do. And the only rationalization for trading at the multiple they are. If you believe that that’s trough. Well, I have to look at sector by sector within those small caps to decide whether to separate energy from tech and so forth what that looks like. [00:21:29][16.4]
Dan Nathan: [00:21:30] Lot of financials though, in the Russell 2000. [00:21:31][1.5]
Danny Moses: [00:21:32] That’s true. Take out that sector entirely. But again they Dan that’s why stock picking matters. And in that group that’s gone up a lot you should be selling names that you know deep down if you own them or not quality on the flip side of that is when they do have this retrenchment, they come back, be re ready to buy them because they do all get kind of locked in together. And so I would just say then know your companies and this is even speaks more to bottom up stock picking because there is going be great opportunities. And the other thing, Dan, which I mean, the IPO market’s dead, the ability to raise capital is very limited. [00:22:00][27.8]
Dan Nathan: [00:22:00] Really important headline today on that front is that stripe. Okay. This was one of the longest running private unicorns. And this is a company that I think has a valuation of over $40 billion, which is pretty astounding when you think about it, when you think about how some of these fintech companies have done in the public markets that went public over the last five years, they’ve absolutely got destroyed here. They had a statement today that they are targeting like one year from now that they will go public or they’re going to allow their employees who’ve been locked up the ability to sell on the secondary market. I just think that’s kind of interesting because that’s about as vague as you can get for a plan to go public. I think they’ve been talking about doing a direct listing. We know a bunch of companies did that in the run up to the pandemic. Spotify was one of them. Slack also. Yeah, no, but I just think it’s interesting that on the other side of this SPAC mess, which was also an alternative way for companies to go public, we did see this drumbeat for direct listings. So Wall Street might look a little different how companies come public in this post-pandemic period. I’ll just say one other thing, Guy. I want to get your take on this, because we’re talking about ways what bottomed first, what is outperforming now? There seems to be everywhere I look, people are talking about emerging markets here as like a real alternative to what’s going on here in the U.S. and Europe and on a valuation basis. And then obviously China doing the about face on zero-covid. China is a huge part of emerging here. Thoughts here because it just seems like we’ve got a lot in a very short time in emerging, specifically China. It feels like it’s a bit overdone here. [00:23:28][87.5]
Guy Adami: [00:23:28] Feels that way to me as well. And obviously the dollar coming off is a big part of that equation as well. I mean, the dollar coming off some 12, 13% or so from its all time highs a few months ago I guess was late fall is significant. So those headwinds of abated. They’ve created some tailwinds and I get it. And if you want to look at stocks here for proof positive, I mean, some of the casinos have been on fire. Las Vegas Sands, for example, WYNN which we have talked about forever being a triple digit stock. At some point, we’ll finally got above $100 earlier this week. Obviously, we’ve seen some of the singular names like Alibaba that 58 and change low closed at 63 back in October. That stock’s trading in the high one teens. Now, the question you have to ask yourself is what do they call it? Is the thing worth the squeeze, the juice worth the squeeze or something? I don’t know what that means. That’s another that’s a lemon song. But my answer to this is, if you’ve enjoyed the run up, I don’t think you’re adding to positions now. I think you’re trying to take some off, maybe let a portion of your position run. But now’s the time to be pulling the ripcord in some of these emerging market names I believe. [00:24:31][63.6]
Danny Moses: [00:24:32] Guy, you hit the nail on the head. It’s the dollar. Let’s not overthink it. And the dollar rallied huge and the emerging market sold off. The dollar came in and they rallied in combination with China reopening, obviously. But listen to me. I think you’re dead right. You’ve got to take some money off the table here on that move. And it’s nothing more than that. And I think as money flows start to come back out again, that it’s going to feel painful. And I worry that everyone gets roped in. I say this all the time. People think, Oh, now I’m talking my book, this and the other, no, I genuinely want to help people and protect them. And these type of moves in the market in general, emerging markets, U.S. markets are dangerous because they’re not really moving necessarily on fundamentals and moving on sentiment and belief that the Fed is going to get a soft landing occurring here. And I just don’t think that that’s the case. [00:25:13][40.7]
Guy Adami: [00:25:14] Approximately 26 or so minutes ago, I took you down memory lane and I gave you Led Zeppelin from 1973. Danny, I’m going to take you down memory lane as well. You’re going to like this one at 2:32 p.m. on May 6th, 2010. Something happened, by the way. Something happened. It is not yet fully been explained to me or to many other people for matter. That was the flash crash that we saw when things went haywire. As a matter of fact, I think we were talking about $1,000,000,000,000 worth of flash crash in terms of what happened to the equity market. Now I only mention that in the context of something that transpired this past week on the New York Stock Exchange, which, again, nobody seemingly explained. I heard some explanation, like some subordinate left on some sort of software system, which is complete horseshit, by the way, in my opinion. Thoughts on this week’s movement in some pretty large stocks Danny Moses. [00:26:13][59.3]
Danny Moses: [00:26:13] Yeah, it was like the top 25 names. So supposedly this person on the automated system. Basically allowed the market to open as if it was open. What I mean, they didn’t set up the auction pre-market correctly is what I’m hearing. So that if you had orders building on one side versus the other, there was no leveling out. So we just went one direction or the other. That happened to coincide with a hearing in Washington on Ticketmaster. Speaking of going to see great live music, why was Ticketmaster in DC? Ticketmaster, DC because it’s a monopoly. The bands hate it, consumers hate it. Dan hates it because when he follows Pearl Jam around, he’s paying $1,000 a ticket. Well, what does Ticketmaster do? Ticketmaster, as we know, has been in cahoots with scalpers for a very long time. Why do they do that? Because it just so happens you buy scalped tickets on Ticketmaster, don’t you, Dan? You go to Ticketmaster, they get a fee off of it. Okay. So can you tell me another company out there that has a monopoly on something where you have to, quote, trade through it, which is vertically integrated, which makes markets in every single way that you go in a risk free environment? Can you guys think of one? [00:27:14][61.2]
Guy Adami: [00:27:15] I would imagine some of these market makers, like a Ken Griffin led firm, for example. [00:27:21][5.8]
Danny Moses: [00:27:22] What happens, Schwab, who sells all their order flow obviously to these market makers, comes out and says, See, that’s why Gensler’s recommendations for market structure changes shouldn’t happen because the exchanges can’t handle retail flow. So if you want to be a conspiracist, I’m not necessarily tie that Ticketmaster hearing. I think that’s a pure coincidence into what happened with this person in Chicago that probably now works in another building in Chicago, but that’s a whole nother thing anyway. My point is that it does bring out kind of the issue of inefficiencies of the system, but it also makes you wonder how vulnerable these systems are. And when you see someone like Ticketmaster, people report about concert tickets. People should be in an uproar about the way that these markets trade in, what’s fair and what’s not fair. So again, I kind of tie that all together in a long winded way, but it did bring me back to that happened to be on the Ticketmaster day. But people imagine in a down market, like if we had been in a bearish market like I thought we would be in the month of January and that was occurring at the open, it would have been much worse. Trust me on that from a sentiment perspective. [00:28:16][54.1]
Guy Adami: [00:28:17] By the way, that coming on the heels of what you talked about a couple of weeks ago, that whole FAA thing, which again, they seemingly explained away. Subsequently, the same thing happened in Great Britain with either their dentistry service or their mail service. I get the two confused, but one has to wonder what’s really going on beneath the surface. We’ll talk about it another time. One thing we mentioned a couple of weeks ago and seemingly once again we were sort of prescient and bringing it up was the debt limit. Now everybody seems to be getting their arms around this. And I’m not trying to be a fear monger. I’m not. I know this thing at some point will be reconciled and figure it out. And we got through this week and now we’re looking at June. But what I will tell you is, although I don’t think this will be nearly as dramatic as what we saw 12 years ago in 2011, I think this thing has some legs. Why do I think that? I think the debt limit is going to be politicized and weaponized, and I think they’re going to push it right to the brink, because I do think there’s a small faction of very vocal people that would enjoy watching the system sort of break down a bit. Danny. [00:29:22][64.6]
Danny Moses: [00:29:22] I think actually people think the debt ceiling issue is a positive for Fed fund futures because they think that’ll make the Fed stop and whatever. But I agree with you Guy I don’t think people are paying attention to what it could really mean and it is going to get nasty. We’re not there yet, but let’s see what happens. There are so many other issues that are out there as well, but that may compound them. [00:29:38][15.2]
Dan Nathan: [00:29:38] Yeah, we would have to be on the brink of a default for the Fed to actually do something on the rate front. And I guess the other thing it’s funny is we keep seeing a lot of people on the fin twit quoting the Fed fund futures and what they’re pricing for declines and that’s accelerated over the last couple of weeks as financial conditions have gotten easier here. And I’ll just say this, the scenario where the Fed really starts to ease is if unemployment shoots up meaningfully to like 5% and we are in a proper recession and that’s when the Fed is going to have to stop QT, and they’re going to have to start thinking about cutting interest rates. And then they’re going to really have to figure out where does inflation settle out and what is the proper interest rate. And I think that’s the exercise where we might start have to think about this when we’re on the precipice of this debate over the debt ceiling and what to do about it. But at the end of the day, I know we’ve talked about this a lot. I mean, the Fed, they can print as much as the hell they want here and it’s really just not an issue. [00:30:33][55.7]
Danny Moses: [00:30:34] I think that Powell may indeed acknowledge the debt ceiling issue because Yellen is yelling about it and they talk. So that may come out in the press conference I’m not sure. [00:30:41][6.8]
Guy Adami: [00:30:41] By the way, there’s a JPMorgan note out that we will post. We can do things like that. Is that correct Dan Nathan? [00:30:46][5.1]
Dan Nathan: [00:30:48] Yes we can put them in the show notes. [00:30:49][0.5]
Guy Adami: [00:30:49] I like that. The show notes, American Gothic, the federal debt and how Visigoths, I don’t even know what that means may try to break the system if no one fixes it. And this is some of the things that we’ve been talking about. There are a handful of people that I think would really enjoy trying to break the system down. And you talk about black swan events. I mean, this is one that I guess it’s not by definition because we’re sort of can see it happening. But this is something that I think could ranker the markets a bit. And a 19 VIX is not nearly incapsulating that at all, in my opinion. By the way, we have reached now the conference finals of the NFL, the National Football League. [00:31:29][40.0]
Danny Moses: [00:31:29] Daniel Jones is a disaster. How I ever got bought into that. Go ahead Dan. I mean go ahead Guy [00:31:34][4.6]
Guy Adami: [00:31:36] You can say that. I’ve seen it written this week that Daniel Jones is a top seven or eight quarterback in the National Football League. [00:31:41][5.1]
Danny Moses: [00:31:44] He’s a meme stock? [00:31:44][0.1]
Guy Adami: [00:31:44] Happens to be. Yeah. Okay. Okay. He’s a meme stock. Continue down that path. You’re pressing short. That’s going to blow up in your face, by the way. Just saying he lost to a superior team. The Eagles were the better team, by the way. An Eagles team, which at the beginning of the season we said they had the best roster in the NFL. This weekend they’re playing the 49ers of San Francisco at home, while the Bengals of Cincinnati. Another team that we were all over after a slow start this year will be playing the Chiefs of Kansas City. By the way the Chiefs of the Kansas City with a Patrick Mahomes who was absolutely playing on an injured ankle. You saw it. I saw it. Everybody saw it. His mobility is going to be challenged at best. I think the Bengals went in a laugher, by the way, and I think the Eagles take care of business at home, which sets up for an Eagle Bengal Super Bowl. Daddy Moses, your thoughts? [00:32:38][54.3]
Danny Moses: [00:32:39] I couldn’t be happier that you said that. I agree with you. My football picks recently have been about as good as my S&P directional picks last couple of weeks, so let’s just throw those all in together. But yes, Cincinnati looks like a team of destiny. They blitz them and yes, the Eagles are great. The Giants sucked. Don’t give them too much credit. Daniel Jones was like Dennis Hopper at the beginning of Hoosiers when he runs on to the court screaming at everybody. Okay. Daniel Jones was horrendous in that game. [00:33:04][25.0]
Guy Adami: [00:33:04] That is a shitty, shitty metaphor analogy example, whatever word you want to use. [00:33:10][5.6]
Danny Moses: [00:33:10] I’m just upset that I finally bought and you should have known everyone. You too short of the Giants on that. But anyway, yes, Cincinnati has beaten them already twice in Kansas City, it looks like. Why wouldn’t they do it again? They looked untouchable. And I think the Eagles will mangle San Francisco when I say mangled 14 to 17 points. Purdy has been vulnerable at times these last couple of weeks, but the other team most recently Dallas, couldn’t execute and Pollard was a big injury. Traveling east. I think the stage is too big for him. Jalen Hurts is the hottest quarterback other than Burrow in football. They will meet in the Super Bowl. You are exactly correct. I will wait to give that pick post championship games. [00:33:41][30.9]
Guy Adami: [00:33:41] But I think as they say, the clock strikes 12 for Cinderella in the form of Mr. Purdy and the Niners go home long trip back across the country as losers in this conference final. [00:33:54][13.0]
Danny Moses: [00:33:55] So for gamblers out there so the line is Eagles minus two and a half in Kansas City minus one take the Bengals plus one in the Eagles minus two and that’s it. [00:34:02][7.3]
Guy Adami: [00:34:03] That’s Danny Moses. His pick, by the way, Dan. When we come back, Danny’s conversation with Cameron Dawson, CIO of New Edge Wealth. [00:34:52][49.4]
Danny Moses: [00:36:20] Cameron Dawson is the chief investment officer at New Edge Wealth. Prior to joining New Age Wealth, Cameron was the chief market strategist at Field Point Private Securities and a senior equity analyst at Bank of America. Cameron Dawson, welcome back to On The Tape. It’s been a couple of months since you were here, so not much has changed, you know, just a little churning in the market. I don’t the market you’ve been open for the last 75 days no. [00:36:42][21.2]
Cameron Dawson: [00:36:42] Could have gone to sleep November 10th, waking up in the same place. [00:36:45][2.6]
Danny Moses: [00:36:46] I was just looking before we came on air at the S&P. It was literally 50, 60 points off of that level. And it’s kind of back down. Felt horrible. Now it’s back up. Things feel okay, but let’s get right into it here. So we’re getting through the earnings season here. We’re probably nearing halfway point, probably and reporting maybe even slightly higher. Things are okay there. We’ve seen a rally in some commodities, which I want to talk to you about. I guess the feeling is almost like it feels okay, but we know there’s sharks lurking. So let’s just start with today’s We Can most recent report on GDP since we have a Fed coming next week and maybe start with that and just general economic conditions that are out there and let’s work our way looking granularly into some of these companies fundamentally [00:37:26][40.0]
Cameron Dawson: [00:37:27] We’re looking at the GDP report from today. What we can see is an economy that is still fairly resilient, meaning that we’re still seeing consumers spend, we’re still seeing businesses invest. Now, there were some little points within the report of pockets of weakness, pockets of strength. For example, residential investment was down 27%. No surprise there, because that’s what’s most sensitive to interest rate hikes, sensitive to Fed policy. But if we look overall, we see GDP still remaining much better than what people expected, which means we’re going into 2023 at an exit rate that’s stronger than a lot of people were expecting. And I think what that means as we go into the first half of 23 is that it reduces the likelihood of falling off a cliff into a recession in the beginning of this year, mostly when you consider that it’s good to remember that the easy comps from 2022 were in the first half of the year, GDP was down 2% and a half, Q1 down a half percent in Q2. And so those are easier to grow off of. And so we shouldn’t forget that as we’re making our projections. But I think overall, when we look at the labor market, the labor market still remaining very resilient. Tight initial jobless claims made a new low just this morning as well. And this points to the fact that there’s still an incredible delay in the Fed’s tightening onto this economy, which simply means that this economy is not going to give the Fed the wiggle room or the rope to be able to go and pivot to cuts in accommodation, which is currently what’s being priced in into the bond market. [00:39:02][95.0]
Danny Moses: [00:39:03] That’s what I was actually going to say exactly. It’s pick your poison here. Things aren’t as bad, which is great. I always tend to underestimate the power of the U.S. consumer ability to keep spending, going to hotels and all that stuff because they are resilient. They always have been. But to your point, now we have a Fed meeting upcoming week away. To your point, something’s being mispriced. Either the S&P is mispriced, Fed fund futures are mispriced, something’s off here. And if it’s a lag effect, you’re right. People who want to see immediate gratification or immediate evidence of, oh, things are slowing. They’re not. What would it have been if GDP himself had been lower than expected? A confirmation yet. To your point, jobless claims today are sub 200,000. So let’s talk about what this reflation trade, which you’ve kind of had this many in asset prices, whether it’s crypto certain what I think are crappy stocks, so to speak. And now oil and gasoline because I saw your report on gasoline and that has a delayed lag impact also on inflation. So we’re going to see more inflation now by definition. So talk about that a little bit. I think that’s really interesting. [00:40:00][57.4]
Cameron Dawson: [00:40:01] This is so important because I think what’s under appreciated from the second half of 2022 is just how much falling gas prices, falling energy prices was the key driver of the deceleration in inflation or the disinflation that we saw post the June peak in inflation. And we continue to see that headline number move lower and lower on a year over year basis. But we also saw month over month inflation start to moderate as well. But the reason that happened is because oil prices went from $120 a barrel in June to just above $70 a barrel at their low in December. Gasoline prices went from about $5 a gallon to $3 a gallon or just above it. But the challenge we have now is that those trends are moving in the opposite direction. Oil prices are up 12% over the past few weeks. This is the largest increase since that peak in June. We’re seeing overall oil prices start to move higher. And I think you can make a really good argument that both oil and gasoline prices likely reached their near term low in December. So when we think about the inflation data, it means that a big source of disinflation that we had in the back half of last year may not repeat because it’s unlikely that we’ll see the same kind of degree of decline from a percentage basis in those energy prices. But then there’s lots of other factors that could push them higher. So we have China oil demand likely coming back. The trough in China, oil demand likely was November, December. That’s was peak lockdowns. That was when nobody was moving around. People are moving around. It’s coming up from those trough levels. Then we think about the SPR replenishment. So the likelihood that if it goes below 70, we essentially have a put from the US government replenishing the SPR. We think about OPEC wanting to cut production under $70 a barrel. So if we’re going to make this projection that we’re going to continue to see inflation fall like a rock, you have to assume that you’re going to continue to have deflation within energy prices. But that’s not the direction that things are going right now, which then would catch the market flat footed because the market is now essentially pricing in this immaculate disinflation, continued moderation and inflation, not just on a year over year basis that has all the base effects and comps from last year, but watch month over month. That’s far more important. And is pricing in this idea that month over month inflation will continue to moderate. But if you start seeing oil prices rise, then it’s going to start showing up in the January data that we get in February. But that January data could actually show a reacceleration. So maybe we all know what the Fed is going to do 25 basis points next week at the Fed meeting. But what do they do in March when we start seeing month over month headline inflation reaccelerate? I think that’s a wild card that the market isn’t pricing in. [00:43:04][183.4]
Danny Moses: [00:43:05] The one thing that I really have a difficult time reconciling is the belief that a Microsoft and IBM or Google can cut these types of jobs. And people believe, yes, earnings estimates are starting to come down a little bit. I believe there’s not a secular change year. So when you start to look at sectors and where to put your money, because if you’re a money manager and you run a mutual fund, you have to allocate in various places. It’s hard to ignore energy. You can’t ignore energy. How much higher can that sector move because it’s got a screen great on every metric right now for cash return, earnings growth, etc.. And to the point you just made about how it’s hard to see energy coming down substantially without a real drop off in the economy. Talk about the sectors in general, maybe lead off with energy and how you think about allocating. [00:43:46][41.3]
Cameron Dawson: [00:43:47] Yeah, On the energy front, just what’s baked into oil prices. I’ve talked to a few energy traders recently who seem to think that there is some kind of expectation of recession that was baked into oil prices that as they neared $70 a barrel. So to your point, if you don’t see us fall into a recession and a big dent to demand, you could see more upward pressure on oil prices as we move through the year from that aspect alone. As we think about the sector weightings, you brought up technology to start, I think that this is one where, yes, we did see a lot of outflows from tech shares through the back half of 2020 to record. We hadn’t seen that kind of puking selling of tech shares in a really long time. And the question is, have they done enough to justify moving back to overweight from a technical basis the trends look a bit small, absolute and relative trends, and they look overbought in those down trends as well. So I think you have to be really careful. But what does it say about the world when the companies that were supposed to have the most resilient growth with the best growth prospects out there are the ones who are cutting jobs and talking about tightening the belt. And I think that what happened in during the pandemic is that people thought that tech was defensive because tech was the only sector that grew earnings in 2020. Even utilities didn’t grow earnings in 2020. And so when you think that tech is defensive in this all weather sector, then you end up putting big high valuation multiples on unsustainable earnings growth. And that’s essentially what’s happened and why we’ve seen this unwind. But tech still expensive, so it’s not our favorite sector. We’re still neutral tech. Just because a move like this, we’d get caught really flat footed if we were way underweight. But then when we think about energy, we think we kind of have to think about why we own energy a little bit differently than we did in 2022. We owned energy in 2022 an overweight just because we saw huge potential for earnings growth, best earnings growth in the S&P 500. And that materialized. Energy grew earnings by 175%. That means the delta spread between energy being the best grower at 175% and com services being the worst grower at -30% was a 200% spread. So we don’t expect that to repeat. However, to your point, if you are in a world where you see energy prices start to climb again, we’d actually see that as a key negative for the rest of the market because it would keep the Fed really tight and. So essentially that allows us to hedge in a cheap way. Energy trades at nine times earnings at nine times earnings. Essentially, the market is telling you that they don’t believe that that earnings power can continue. When you put low multiples on earnings, you’re essentially saying, I’m not going to capitalize those into the future. So the market’s not giving these guys any credit. So it’s a cheap hedge and a cheap way for us to be able to say, look, in the event oil prices go up, at least we have something in the portfolio. But just be aware, because you had such strong earnings growth in 22, now forecasted for 23 is an earnings decline for the sector. And so what you might have to do is recalibrate earnings a little bit around earnings season. Likely more spread between winners and losers. So it’s not as much of a lay up, but I think it’s an important overweight that we continue to maintain. [00:47:07][199.6]
Danny Moses: [00:47:08] So you put out these notes daily three or four times a week, probably. You get love letters, hate letters, you get all kinds of stuff that comes out. You get people that agree. [00:47:16][8.1]
Cameron Dawson: [00:47:18] So many more hate letters these days oh, my gosh. [00:47:19][1.3]
Danny Moses: [00:47:19] Yeah, exactly. That’s what I want to focus on, because normally that’s a great barometer when you get the hate, you know that you’re right. When you get the love, you know, you’re probably along with everybody else. Everybody’s in agreement. You don’t want that necessarily. So what do the hate letters look like right now? Other than Cameron, You’re just too bearish. You don’t get it. What are the facts behind that in general that you read? Because that’s very important to me the feedback that you get. [00:47:40][20.6]
Cameron Dawson: [00:47:41] This week, certainly it kicked up a lot. I had the opportunity to talk to Scott Wapner on Monday and talked about how sure technically this rally can get you higher and we are still technically in a downtrend. We still haven’t reached what’s called the 65 day high. When you’re in bear markets, that’s a really important level. Usually what happens when you get above that, the trend does start to improve, but that hasn’t happened yet. Right now it’s sitting at 4100. But the response to that was sheer vitriol of your bearish. You don’t see this. Obviously the Fed’s going to pivot and you got to get early. And if you wait for the fundamental data to show up, then you’re going to be late. And what’s interesting about this is that, yes, valuations do recover before earnings recover, but earnings haven’t even fallen yet. And so we’re jumping so many steps ahead to say that just because the market isn’t retesting the lows immediately, that somehow a retest of the prior lows or a continuation of this bear market is off the table. And actually, if you look back to the period in 2000 to 2003, during the tech bubble bursting, we traded above our 200 day moving average for a couple months. And that’s really interesting was the ultimate bear trap because everybody got sucked into the market thinking that all was clear. The other interesting takeaway from that time is that though the S&P 500 and the Nasdaq made their all time high in 2000 and entered into a really ugly bear market, the equal weight S&P 500 didn’t make its all time high until 2001. That meant that the average stock was still holding in, and that’s consistent with what we’re seeing today. The average stock is still doing okay. I believe that the equal weight index is only down, I think 5% from its all time high. And what happened after 2001 when that market index started to roll over the equal weight is that you started seeing the real earnings weakness. And that’s consistent with what we’re seeing today. The first impact is on the multiples. That’s what’s sensitive to liquidity, sensitive to the interest rates. The second impact is on the earnings. And I think that there’s a good reason as to why we’re seeing such a delay in the weakness in the earnings. And I think you can make an argument that this economy is somewhat less sensitive to short term interest rates than it can be. And we can get into some of the reasons why. But I think that if we were to call the all clear and say, just back up the truck now, because we’re going up 20% in order to get up 20% year to date in the S&P 500, you essentially have to assume that we go back up to pandemic level valuations 20, 21 times plus. The only reason we could go up to those valuations back then is because the Fed was growing the money supply at 20%. The balance sheet was expanding. $5 trillion in interest rates was 0%. So our view has been that a pause is not equal to flooding the zone with liquidity. So measure your expectations and sell into strength. If you do see us trading up at those valuations simply because they would not be justified by this liquidity environment. [00:50:58][197.8]
Danny Moses: [00:51:00] So yeah, for people that are out there, I remember obviously and to your point in 2006 and seven, I mean, I think the bomb went off in the housing market in 2005, to be honest with you. And then everything was kind of you had a little bit of Fannie and Freddie start to happen, a little bit of noise, but it really didn’t start to impact the markets until 18 to 24 months later from when literally the bomb went off. And if you want to call the bomb going off in this case, the Fed back to back to back to back 75 basis point hikes, whatever that’s going to be. It takes a while to filter in. And it’s amazing to me how resilient. I just said earlier how the U.S. consumer is, but the U.S. investor and the belief and the want to believe. So to your point, you just made fair value on the S&P. It’s tough to see it going sustainably higher than 4100. And to the point you made, I thought was a good one a few minutes ago about tech multiples. Yeah. You trade at a 20 to 25pe when you’re traveling. We’re just beginning the downwards earnings revision, right. I just don’t know what it’s going to take for not just the retail investor. And I think that the institutional investor and I say this when you turn the calendar year, my feeling is that towards the end of last year, everyone just wanted the market just to stay where it was and don’t be forced to chase, don’t be forced to sell, lock in your gains if you’re a hedge fund and you had a really good year last year for the first time on a relative basis in many years, you enter this year like, okay, we’re up 12 to 15% last year we got inflows coming in. Our clients are happy. Let’s be kind of bearish too neutral to start because it won’t pay to be aggressive. Then a week goes by, then two weeks goes by, then three and now your hand starting to get forced. Your hand said, okay, we’ve got to get more involved, we’ve got to cover some shorts. And I feel like that’s kind of where we are. And I think it’s a much more psychological impact right now than fundamental. Obviously, I think you would agree with that. So when this next selloff, this I call it staircase up, elevator down, which is always how it feels like you build and you build on something. And within a 2 to 3 day period, we’re back at 3800 or 3850. Every time we have one of these moves. We had it many times last year, it’s staircase. But now, because we’re closer and closer to the realization of the lagged impact of what the Fed has been doing and things and things are still fine. At what point does that selloff become the last chance to sell? Because it feels like we’re getting pretty close. So if you can piece through my nonsense of what I just said and maybe bring it back to make sense. [00:53:10][130.6]
Cameron Dawson: [00:53:11] Yeah, I’ll answer all 17 questions. [00:53:13][1.6]
Danny Moses: [00:53:14] Perfect. [00:53:14][0.0]
Cameron Dawson: [00:53:15] Look, I think that there’s a few things to consider here. The first one is the conditioning of the investor, which is that by the dip is still in our brains because it works so darn well. And it was such a proven strategy, but it was a proven strategy when the Fed was at your back. It’s not a proven strategy when the Fed is a headwind. So there’s still is a resilience in the individual investor and kind of a belief that it can’t continue. We haven’t had one of these protracted bear markets since the great financial crisis. And so I think that there’s not a lot of fear that this would be something that would be more protracted. And maybe that’s why we haven’t seen things like individual investors allocations to equities moved to levels that were consistent with prior bear market lows. So they went down as low as 40, 45% in prior bear market lows, whereas today they’re still sitting in the mid 60. So that would point to this sort of hang on resilience. I don’t want to be the greater fool selling into weakness and certainly that is the fastest way to destroy wealth over the long run is to sell at the bottom. And of course the opposite of that is to buy at the top. So eventually hands get shaken out. We know that there’s an emotional side of all of this and that there’s a capitulation that happens. And one of the weird things from 2022 is that we never saw that kind of capitulation within volatility. You never saw that true VIX spike. Where you go today is the day where everyone’s getting out. That just never happened and it doesn’t necessarily have to happen for the bear market to be over. But it would be rather rare because usually what they say is that bear markets end with a bang and not a whimper. And so it usually is in the last third of the bear market that you see the most selling, the most capitulation, just get me out, I got to leave. And the reason why that’s the low and why it’s such an incredible time to be out in capital is because it creates the wall of worry and it creates the low positioning. And so when we’re thinking about how this market’s going to trade, we have to think of it in two very distinct time periods. The first one is the short term movements around trend. I know we talked about this the last time, which is that you have to be disciplined around your 200 day moving average when you are very oversold below it. That’s not the time to be selling in fear. But when you are close to it or above it, that’s not the time to be chasing ss long as nothing has changed on the fundamentals. The same thing is true when we think about positioning. We know that a lot of people sold into the end of the year. We saw a lot of length come out of the equity market. And so when we’re going into the beginning of 23, what we see is light positioning meeting low expectations. No wonder stocks are up when you have that combination. It’s just a low bar to jump over. It doesn’t mean that it’s sustainable, though. Positioning only gets you a short term move and then we have to think about that positioning and fundamentals from the medium term basis, which will really be the definition of the trend that we stay in and the question of if we reach and get into a new bull market, which it’s not our expectation from these levels simply because the fundamentals have not changed. [00:56:34][199.8]
Danny Moses: [00:56:36] So the proverb buy the fear, sell the greed, which is a great investment proverb, the hardest thing to do on planet Earth. I don’t care if you’re retail investor, institutional investor, it’s just you never know whether fear is going to subside and where the greed is going to end, because it’s always so fun to be greedy anyway. [00:56:50][14.2]
Cameron Dawson: [00:56:50] Well, it’s the old markets can stay irrational a lot longer than you can stay liquid. And it’s why valuation such a poor timing tool, because valuations can go high and stay high and they can go low and stay low. And the same thing with sentiment. It can go buoyant and stay buoyant. It can go abysmal and stay abysmal. And so you have to think of those indicators as more medium term. [00:57:12][22.1]
Danny Moses: [00:57:13] So the most fascinating chart that you put out in the most recent note was a financial conditions index, which I could not believe. You put out a note that says today it’s actually easier in terms of tightening and easing than it was in March 2022. And the Fed watches this. [00:57:28][15.2]
Cameron Dawson: [00:57:29] Well, first, we have to note that this is the Bloomberg Financial Conditions index. It’s different than the Goldman one. Goldman has a different weighting approach. Bloomberg’s is equal weighted, so it’s why they can tell a slightly different message. But financial conditions indices are amalgamations of equity valuations, credit spreads, interest rates, the dollar and equity volatility. And I think some of them might include the move index bond volatility as well. So it’s a measure of how easy or loose financial conditions are in the economy. And the Fed, including Chair Powell, has specifically called out financial conditions, indices or financial conditions themselves as the key mechanism for how policy impacts or is diffused through the economy. So when they look at financial conditions, if they are too easy for what they think they should be given, where they have their goals for inflation, for example, then you could argue that they would actually like to see financial conditions move tighter. And that’s essentially what happened back in if we look during the Jackson Hole period, we saw this really big easing of financial conditions from the June low into the beginning of August. And then all of a sudden Powell comes out in Jackson Hole and gives his short his speech ever and says, I don’t know what you are thinking market, but we are not easing and we are not pulling back on this tightening with the express purpose of tightening financial conditions. So when you see financial conditions now at an easier level than where they were when the Fed started tightening in March, and I’m measuring that just from the first hike, then it really is reflective of a market that is already getting ahead of the Fed in expecting it to start cutting rates and easing policy. So the question is how much does the Fed push back on this? If you wanted to be bullish on the market on risk assets today, you could make the argument that inflation’s lower than at any other time when financial conditions were this easy back last year. So maybe there’s less urgency to push back on it. But of course, if inflation were to tick up, that’s where you’d see them push really, really hard. But then you could also make the argument that the Fed is very concerned about inflation coming back. So it’s not just about where inflation is today, it’s where it could be over the next 6 to 12 months. This is why the Fed is saying they don’t want to cut rates because they’re afraid if they cut rates, then inflation will come roaring right back. Imagine if we just think about housing. If you look at housing data, it’s actually recovered over the last couple of months and that’s been because rates have fallen. So the Fed knows this when everybody’s saying, oh, the Fed will look through the shelter inflation data, the Fed knows that they contributed to the housing inflation. So the big risk for the Fed is that if they cut rates and ease policy, then wouldn’t housing inflation start to come back and then they have the same problem on their hands. And so this is why there have been calls to say, look, fed, you should just raise 50 basis points next week, get the credibility back, jawbone financial conditions lower and not back yourself into a potential quarter. You raise rates, you pause, and then you have to raise rates again because inflation comes roaring back. [01:00:50][201.5]
Danny Moses: [01:00:51] I talked about Laurie Logan, who is now the new Dallas Fed president, who’s now a voting member who worked on the New York markets desk, who understands repo facilities, who understands quantitative easing, quantitative tightening. I think she’s going to be a voice that’s going to need to be heard and she’s going to make noise this year. I really do. So the common sense approach to what the Fed should do versus to your point, it feels like his hand may get forced Powell here up to this next meeting, it is simple right now is this market has been. In hindsight, you want to think it’s complex and there’s behavioral finance, but it’s just been like, what’s right in front of us? So are we walking into is it this easy that the high the market’s basically here and it’s going to be capped next week at the Fed meeting because all the things that you’re talking about, most of the earnings will be in the rearview mirror. Probably two thirds will be at that point. So the reassessment at that moment, is that enough to quell this? I call it a low quality rally. [01:01:40][48.9]
Cameron Dawson: [01:01:41] I think that’s a potential because all of this rally has been based on valuation. Earnings estimates have been getting cut, which means it has been just an interest rate driven, valuation driven rally. But now the forward pe multiple in the S&P 500 is 18 times after this rally, 18 times we peaked in early 2018 and early 2020, between 18 and a half and 19 times, which just means that a lot has to go right to justify that multiple. So it puts us in a very precarious spot. And again, getting back to this notion that we don’t think multiples can press much higher without true Fed easing and liquidity. So I agree with your sentiment that we’re kind of whistling past the graveyard in inflating multiples again, thinking that we’re going to get this liquidity boost. And when that liquidity boost doesn’t materialize, then all of a sudden the risk from 2022 and this notion a lot of people have for 2022 is that we did all the multiple D rating in 22 and then 23 is going to be about earnings. If you’re trading at 18 times earnings, you haven’t rated the multiple. And there was an interesting note from an analyst and I’m sorry, I can’t remember who it was that talked about how if October was the low in the market, if that ultimate low was it, it would be the highest valuation low that we have ever had in a bear market, including ones with recessions. So I still see then that there is valuation risk. And now that you’re re inflating the most sensitive areas of the market to liquidity, you re inflating the arcs of the world, the cryptos of the world. What that means is that when that liquidity doesn’t materialize, then you see that D rating take over. And I would note that a lot of these names are still in very, very distinct downtrend. That’s what’s so fascinating about this. You look back at the Nasdaq during the 2000, you had five rallies of at least 30%. [01:03:48][126.8]
Danny Moses: [01:03:49] The bond market is sending very mixed signals. You have a 210 spread that’s been inverted now for a long time. It’s really hanging around 60, 70, 80 basis points, wherever it might be. And for people, it’s been the all clear, the ten year yield specifically. Now the 2000 spread has given people kind of. All right, good. Well, there’s nothing going up. Where does the bond market go from here? Do we invert further? I know you’re not a bond market specialist. I’m just saying, because people use that as a barometer, are they misinterpreting this 90 basis point move over the ten year over the last seven months coming in and to what it truly means in your opinion? [01:04:19][30.3]
Cameron Dawson: [01:04:20] Yeah, I think there’s a few things to clarify there with the bond market in really wanting to make three points. The first one is that we should take the bond market with a grain of salt. It is not an all seeing eye. It is not a perfect predictor of where the Fed is going to go. And the best example of that is that if you look at what the bond market priced in for the Fed funds rate in January of 2022, So a year ago, the bond market expected the Fed funds in February of 23. So what we get next week to be 1%, it’s going to be 4.75% next week. So the bond market was just as wrong as the Fed. So when we see these cuts baked into the bond market, take it with a big grain of salt. The second one is when we look at the two year, a lot of folks are looking at the two year and saying it’s below the Fed funds rate. The market must be pricing in an imminent recession and imminent rate cuts. The two year yield today is exactly where the Fed’s own projection for the Fed funds rate is for the median dot in 2024. So two years from now, the two year yield is saying, Oh, we’re just going to use the median dot from 24. The problem is there is about a 200 basis point spread between the high dot in the low dot. So this is going to be highly volatile as we start to see these rate projections and data coming in. So before you start saying the two year is the perfect indicator about what the Fed is going to do, know that it’s just sitting where the median dot is. Not much information value in there. The last one is the yield curve. The two tens yield curve has preceded every recession. An inversion has proceeded every recession. However, it’s a terrible timing tool because it can be as much as 24 months early. The much better timing tool is actually when the yield curve is re inverting. That always precedes a recession. That’s a far better indicator that a recession is imminent sometime in the next 6 to 9 months or so. And it’s important to note that tha reinversion has to happen with what’s called a bull steep inner, which means that you’re seeing the short end of the curve fall much faster than you’re seeing along into the curve. Why would the short in the curve fall faster? Because the short end is pricing in rate cuts in a lot of them, because the short in saying we’re going into a recession. So we can’t make that call yet because the two year yield is still holding in its lowered a little bit, but it’s not falling precipitously. When that two year falls precipitously, that’s when we are having a recession. That’s your indicator of a timing tool. And so the degree of the inversion and the fact that we’re inverted, it tells us that there’s market dislocation, but it doesn’t give us any recession indicator. Watch instead, the steepening. And one last point risk assets have never bottomed until after the steepening has occurred. [01:07:07][167.8]
Danny Moses: [01:07:08] That’s a great point to end on, and I always learn something honestly when you’re on here. So while the two times you’ve been on here, the times we’ve talked before that, but extremely helpful. We’ll see you iConnections hopefully our paths will cross next week in Miami. And then I have a feeling the next time we have you on, we’ll be looking at what the hell just happened over the last two or three months. So looking forward to having you back on. Thank you. And don’t go on TV too much. We want to have you I see you everywhere now. [01:07:34][25.9]
Cameron Dawson: [01:07:36] Okay, Danny. Sure, sure. Thank you so much. [01:07:38][2.0]
Danny Moses: [01:07:38] Thanks for coming on Cameron [01:07:39][0.6]
Cameron Dawson: [01:07:39] Thanks. [01:07:39][0.0]
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