'Bloomberg The Open' Full Show (12/21//2022)
Life from New York City this morning. Good morning. Good morning. Trying to stage a rally here. The S&P up eight tenths of one percent. A countdown to the election starts right now. Everything you need to get set for the start of us trading. This is Bloomberg, the open with Jonathan Ferro.
Live from New York. We begin with a big issue. What a year for bad forecasts. Twelve months ago, the Federal Reserve saw rates climbing to just below 1 percent. Twelve months later, in share power was hiking through four Wall Street strategists, hardly showering themselves in glory either. The average estimate coming into the New Year was just below 5 K..
The S&P closing yesterday, about 200 points south of 4000. So bear that in mind as we prognosticate ahead of a new year. The stage is already set for someone to be very, very wrong. The Fed has a problem. It's trying to push markets to place if
markets don't want to go. If you look at the futures market, they're expecting rate cuts pretty quickly. The market has priced in the Fed, cutting in the second half of the year and not taking the Fed very seriously. There is still that sort of tendency to
try and price in early rate cuts with a disconnect in the market right now. That's a big, big question mark. The market refuses to price out those Q4 2023 rate cuts. The market does not believe the Fed has credibility to stick to its guns in terms of raising rates.
The market doesn't quite believe the Fed is going to get over 5 percent. Markets have been conditioned to actually not believe the Fed. Joining us now to discuss some place besides Morgan Stanley is Jim Karen Daniel Cronk of Wells Fargo alongside him. Jim, great to see you, sir. Let's start with that question.
The Fed projects no cuts. The markets said we're going to be cutting. Who's gonna be right? You know, in this environment, I would say that the feds are gonna be correct. I think the market has it a little bit wrong here. But when we look at the forwards with the forwards in the Fed funds, futures are telling us is that it's increasing the probability that there's going to be a recession at some point. That's why there is a downward slope.
The Fed needs to get this job done even under their forecasts. They see inflation in 2023 at three and a half percent, which is above their target level. So unless something dramatic happens, all else being equal, I think the Fed is going to keep rates at. I think the five to five and a quarter level, which is what they told us last week. And I think that they're going to hold it there. And I think that what the market's
pricing in is just building in a recession probability. And that's why we see this downward slope and fed funds futures. And that's what's creating some of the confusion in the markets. Jim, we've got this kid's story of a recovery in the back half and some dreadful news in the front half. Do you think we're oversimplifying
things looking out to next year? I think we are. And look, I can flip that story around and I can say that in the first half of next year, it could be more positive because like we already know what the earnings forecasts are. So that's probably already priced in. We know that inflation is going to is already peak and is coming down. And we know the Fed stopping in China may rake in China may reopen in the first half of the year. So the first half of the year could be the big surprise where it keeps things more positive and what people are thinking because they're so negative. That would be counter consensus. That could be the surprise. And then the second half, we could see
inflation not come down or not become anchored, and that could cause the Fed to get back into the game and start hiking rates. So, look, this is a very, very confusing, pivotal year for 2023. That's the tail risk on into next year that you're looking for a recession recovery and rebound all at once in twenty three. Is that right? That's right, John. I mean, I agree with Jim. It's going to be a tough year.
You know, there's so much happening and so much going on. You know, in the spirit of the holidays, a little bit of the rates market has the substance of things hoped for. Right. Hoping for rate cuts in the back half of the year. The Fed continues to say here what I'm saying. Don't just listen to my press conference, but truly hear what I'm saying. We are not stopping till we get to 2
percent. And even as we get closer to that, we see mature declines in inflation. We are going to hold the line and not ease rates very quickly. The reality is, and you see it in the right markets and in the last 11 trading days, we've gone from 83 basis points inversion on the 2s to tends to fifty five this morning. Right. So things are resetting very quickly.
And I think that's going to have investors on their toes early into 2023. Always hard to keep up. I look at the 10 year right now at 362, the two year, a full 20 year to low RTS points out this morning. Let me give you some estimates. This from Mike Schumacher of Wells
yesterday. He sees the two year nominal yield back to the high 4 as the 10 year mark to full 25. Same day, different conversation. Famously, Lincoln had this to say to us yesterday on Bloomberg Surveillance, the 10 year in the same year heading back towards 3 percent over the next twelve months.
Daniel, on the one side, you've got the high falls on a two year. On the other side, someone sent three. That's a very, very different story, isn't it? It is a very different story. If you get the two years back to 472, that's the peak, right? 472 on the 2s for of order on the tens where our highs and the rates. So you've got to believe rates are going higher. You know, it's well documented. People talked about it in your show
before that, you know, the two year has to be above the terminal rate of Fed funds, at least historically, or that's always happened. If that's the case and we're going to five point one on the terminal rate. You've got to think the two year has to come up.
So the risk could actually be in the short side of the curve as rates start moving up. You're gonna get protected from different from duration. But the reality is, if those rates need to reset to those types of levels, certainly the market is not anticipating that or pricing for it today. And this is worth exploring further. Jim, you know how the story goes at the moment. We've seen the bulk of hiking psychos next year about the price we've got to pay for them. But then I look to Europe.
I'm looking at Italy and Germany in the previous four days before today with a front end up somewhere between 40 basis points and 50 basis points. I mean, just four sessions. Jim, do you buy it? The hiking cycles are priced in when the ECB is saying we're not sufficiently restrictive. The Fed says we're not there yet. And I'm hearing more and more people say that BMJ might join the party next year. John, I think that's the point. I don't believe the hiking cycles are sufficiently priced and I think what's priced is quite the opposite.
I think what's priced is that people expect rates to come down. And I think we need to listen to what these central bankers are saying, that they are worried about inflation. Look, you mentioned Ian Lee and you also mentioned Michael Schumacher, two very smart people who have two very, very different forecasts. What that tells us is that the tails are
very fat in either direction. So at the risk of getting too mathematical here, what we have is a distribution for risk as we go into 2023 is a very short fat distribution, which means that you have higher volatility in those types of environs because the likelihood that you could go to one side of the risk spectrum, 3 percent tens or four and a quarter or four and a half percent tents are almost equal there, probably 25, 30 percent each in probability. So those are fact houses are reasonably high risk events that could happen either one. So you could bounce around back and forth quite a bit depending on how the data materializes. I think that's what we're in store for
in 2023. So Jim Satya Nadella question, how do you invest around that into next year? Look, I think you have to have a very, very balanced approach from a duration perspective. I want to be short, but not too short. Around the three year duration mark in Treasuries, I'd like to build that with some high quality, but I'd also like to build in some of the lower quality credit risks in there. So maybe a little bit of high yield. And I mean, certainly investment grade. But I think there's opportunities emerging markets could also have some opportunity there to sell those that might be on the riskier side.
But then you also have to own some U.S. treasuries and in some high quality credit in order to balance that risk on average when you put it together. I think you need to end up at about a three year distribution as a three year duration. And most important, you have to start to control for risk adjusted returns. We have to think about risk adjusted returns. There's no one trade that's going to get you there. It's going to be a portfolio of trades
and balancing those risks, etc.. What about you on the equity side? On the equity side, we think it's a little more difficult. You've got to really pay attention. It's interesting.
So the dollar peaked roughly 11 weeks ago. Rates peaked about seven weeks ago. Both of those should have been really good news for equities. Neither of them have been good news for
equities, right. Growth continues to underperform. Equities continue to underperform. You've got a downward sloping 200 day moving average with now a downward sloping 20 day moving average.
History tells you when that happens, you get out of the way. The equity risk premium still are close to their 20 22 lows. So the risk reward tradeoff heading into next year just isn't quite there yet. It will. We think it will get there in 2023, but it's not there yet. And the other point I would just make to
Jim's point of volatility, so it's not just the rates market, it's obviously the currency markets. I mean, obviously, we know what happened with BMG yesterday morning, but there was a six standard deviation move in the yen yesterday. That happens two times out of a billion times. One billion times. I mean, that is a huge transmission mechanism.
But I think we have to be cognizant of as we are ready to turn the calendar to 2023, we need to talk about it right now. Dollar and 132 wells. Eric Nelson looking at once twenty five. I'm sure you've heard that Cote Darrow ask the question you've all heard me asking over the last 24 hours or so. Was the move from the BMJ yesterday just moves the threshold, the band for the tenure to trade in with an upper limit now 4.5 per cent, was that a step towards normalization?
Was that about setting policy on a more sustainable path to remain and retain that dovish stance that it be okay? And I heard a lot more people say it's the former, not the latter. Let's take a listen to what Mohamed El-Erian had to say on this program just yesterday. There's no doubt in my mind that this is a step towards normalization. The good news for them is I think they can control the process. That's actually good news for global markets because it doesn't force selling by Japanese institutions. However, over time, even this approach
becomes unsustainable, as Mohammed said, that pink on the Bloomberg Jim. Karen, a market. Stanley, message me straight away. So, Jim, let's talk about it. You asked the question, what are the second order effects of markets leveraged to low and stable yields as we blow up that whole thing in twenty seven to twenty three? So what we have to understand with the yen and Japanese policy rates is that that is the universal cost of leverage. So we've all heard about the yen carry trade. We've all heard about people borrowing
in yen because the interest rates are so low. And what they do with that money, what they do with that, yet they convert it into other currencies and do other things with it, which means that if the cost of borrowing, if the cost of leverage is starting to go up in Japan, then that means a cost of leverage globally is starting to rise and is likely to stay high whenever leverage start, whenever leverage costs start to move higher. This creates a lot of potential risks that are in the markets. I think Mohamed is absolutely right.
This is a start of a path towards normalization for Japan. But what they're trying to do is control it at a very, very slow pace. If they could do that at a slow pace, then I think, you know, we may be OK with this, but things never seem to work out that way. There's always an over levered player out there, but the cost of leverage going upward creates a problem and then there's a knock on effect. So that's what I'm concerned about. It's an unknown unknown that's in the markets that I think is in keep risk premium high.
Darrow, do you think they can control it? I think what's interesting about yesterday is, yes, they're trying to control it. You know, the market was surprised by the move, but reality is, had they laid their hand down and shown it ahead of time, the market would push them when the rates market would've pushed them right to the edge of that band. Right. So they had a surprise, number one. Number two, what's not talked about enough is they tightened by widening the band rate to 50 basis points on either side of zero and also eased simultaneously by increasing the purchases of yen by JD excuse me, from seven point three trillion to 9 trillion in yet.
Why did they do that? They're tired of people shorting the yen. Right. So it it's a way of widening the band starting to normalize and still by increasing that firepower from the DOJ to go in and buy J.G. BS as they need to. It scares off those shorts, basically,
and keeps rates from going even higher. So they're controlling it in a way that they know how to do that. It also likely buys time for corroded successor in March April to have a little bit of time to form the new policy on your curve control as they go. So we'll be watching that.
We'll also be watching investor flows. Jim, it feels like we've gone back to what we used today, 10 years ago, just saying my Japanese investors and where that money is flowing, say Wells Fargo wrote this yesterday. This was Eric. Now sit down.
I'm sure you've read this to Jim Pace. Demand for US treasuries and other foreign bonds should deteriorate further. Jim COWAN, can you speak to that? What are the chances, the possibility of that happening? And what does it mean for how things shape up in a Treasury market? Yes. So effectively, what what what we're saying there or what's being said there is that as Japanese yields rise, they become more attractive, bees become more attractive to local, domestic Japanese investors, and they have less need to go outside of Japan and buy U.S. treasuries. We also we always have to recognize that U.S. Treasury yields are higher, but you also have to pay for the currency.
And sometimes that currency exchange will take away all the extra yield. So the more Japanese yields start to move higher, the less demand there is by definition for for U.S. treasuries. So here we are in a stage where U.S. yields have risen. You know, they've gone up. The Fed is hiking interest rates.
And one of the biggest buyers of U.S. treasuries is Japan. So as those Japanese rates start to go up, that could put some pressure on U.S. Treasury yields also moving higher. So that's something to also watch. Jim COWAN down crunk sticking with us. Fascinating conversation. Really smart stuff on this bond market. The 10 year in Japan, just three basis points short of that new upper limit of that yield curve control band on the Treasury market. Yields are lower this morning by five
basis points on a 10 year to 363. Coming up, presidents landscape heading to Washington, they say. Our focus from a GOP standpoint is to continue to communicate with Ukraine, our allies and our partners to ensure that the Ukrainians have the security assistance they need to be successful on the battlefield. We will catch up with AMH and Maria
IBEX. We continue to see intense fighting in the region, but loot with Russian forces making very incremental gains. President Zelinsky, we continue to see his leadership be a key aspect to Ukraine's success in their fight. Clearly, we've made a commitment to continue to support Ukraine for as long as it takes in terms of security assistance. President Biden set to offer additional
military assistance and nearly 2 billion tell us to Ukraine. As President Selenski plans a visit to the White House later today. This coming as China opens up through a dialogue with Russia regarding the war. President Xi telling former Russian President Dmitry Medvedev China hopes relevant parties can stay rational and restraint, conduct comprehensive talks and resolve mutual concerns on security, their political methods.
Our team coverage starts right now with a I may stand in D.C. I'm arrested out over in Berlin. I might just go through the latest and what we can expect a little bit like today. Well, hello to mayors Lenski, Ukrainians president is already headed here.
He tweeted that and President Biden, quote, tweeted Jonathan saying his hope is having a good flight. He looks forward and thrilled that he's coming. They have a lot to discuss. There's going to be a bilateral meeting in the Oval Office after we see president landscape touch down on the White House complex on the South Lawn. And then there will be a joint news conference between Biden and Zelinsky.
All of this before he goes over to the Capitol for a joint session of Congress to address Congress. And that really, Jonathan, besides the fact that it's shocking that he's coming here, it's the first time the landscape is leaving Ukraine since February 24th, since Russia's invasion. The timing is really interesting for two reasons ones. One is we're going into these very critical months.
And what we've seen in Ukraine is a barrage of missiles and drones coming from Russia attacking civilian infrastructure. This weaponization of the winter months are ahead. And clearly, the Ukrainians are worried about that. They want to make sure that aid continues.
The second point, come January, we are going to have a Republican controlled Congress. And we've already heard from who's poised to be the next speaker of the House, Kevin McCarthy, saying he's not going to be a blank check for Ukraine. Maria AMH mentioned winter. Then we can talk about that blank check and the lack thereof in just a moment. But let's talk about Windsor. Maria, you spoke to the German finance
minister about 30 minutes ago. What did he say? Look, to me, there were three things that I take away from this interview. One is his 100 percent focus on inflation. He also endorsed very openly the actions of the European Central Bank. He says we had been seeing this for a long time, that it should be inflation over everything else. So, of course, that is perhaps an
endorsement, that even a recession will not deter the German finance minister nor the ECB to continue to hike into this recession. Then secondly, he talked about the German carmakers, the industry, the future for me in Germany. He says we have no reasons to worry over the medium term. We do not want a trade war with the United States. But he was crystal clear that he wants
waivers on European products that get made in the United States to come and be approved by the Biden administration and thoroughly, which to me, this was something I've never heard out of his mouth. He said, I am not concerned about Tesla. And by the way, you should invest now in Germany and buy bonds. That's coming from the finance minister. Yeah. I'd never thought I'd hear the day of
the German finance minister would be pitching a bond, so. But here we are. I am talking to you in D.C. today, fairly rare. Thank you. Wonderful, as always. They're both just tremendous coverage through the year so far and a big surprise for this year coming into 2022.
This was not something that was in the 20 22 outlooks for many President Biden and Presidents Alinsky. Joint news conference coming up a little bit later, 430 Eastern Time. We'll take coverage of that for you on TV and radio. Back with us for a final thought. Jim, Karen, Democratic. Jim, we've talked about what we got wrong in 22 and the NSA were all over the shop.
But one thing that we couldn't anticipate was this war has broken out in Ukraine, what it's done to energy prices, how it's shaken up the European economy. Jim, how are you thinking about those themes going into next year? I think those are all pretty key factors. Look, I think that Europe is going to struggle with energy prices for a longer period of time than maybe what some are giving some thought to. I also think that inflation is the risk for inflation and into 2023 is that it doesn't stay anchored.
Inflation will come down to twenty three. There's no question about that. It's a question of does it get to target and does it actually stay there or do central banks have to come back in and start hiking again? I think that's the big risk that's out there. And certainly, you know, we can look around the world and we can look at Russia and Ukraine. Hopefully all that gets resolved peacefully and quickly at some point in time. But it doesn't seem that it's overly likely. Even if there is some type of a truce,
that all the problems are going to go away, you know, with energy and energy supplies and, you know, whereas all that Russian oil going to go and it was going to buy it and what have you. I think these are lingering problems for us to deal with over the next couple of years. I'm hearing government as a token of triple digit credit again next year. Then I think we've escaped any of their stomach crumbs. You get the final word set off on a wet place. So I think the most underappreciated thing, John, into next year is the pressure on fiscal budgets, particularly let's just take the U.S.
and its effect on inflation. Right. So think about we just got the omnibus budget yesterday. Defense spending has gone up 10 percent, nondefense up 6 percent on the discretionary side, which is one point seven trillion. The discretionary side, which is tied by law to indexing inflation on Medicare, Medicaid, Social Security, probably another four point two trillion dollars. So fiscal is going to continue to spend. Whether that's interest on the national
debt, defense spending, we're just the reinforcing of COLA resets on the entitlement piece of it. So that's going to add pressure to inflation. That's going to keep it stickier and harder to come down. And people just aren't talking about. Everybody wants to talk about the monetary side yet.
Nobody's really talking about the fiscal side. I agree. Jim CAC, according to the two of you, thank you. And gents, thanks for everything at twenty two. Appreciate it.
Make the show a whole lot better, looking ahead to doing more with them in 2023. Coming up, the money coach. And later, thanks. America's still carry health warning investors to avoid the mega caps next year, saying smaller is better. That conversation coming up shortly. The equity futures out of a tip near session highs of three quarters of one percent on the S&P. From New York, this is pulling back.
We snapped the four day losing streak on the S&P yesterday, just about we're trying to stage a rally this morning. Good morning to you. Seven tenths of one percent on the S&P, on the Nasdaq up four tenths of 1 percent. That's the price action. Let's get you some more calls. First up, through downgrading carte blanche to hold slashing its price target from 50 down to five. That's helpful. The analyst pointing to elevated
execution risk. The stock up 2 percent at 427. Stone running Starbucks to hold seeing limited upside as consumers pull back on spending next year. That stock at 96, 81, down a little more than 1 percent. And finally, Morgan Stanley raising its Nike Price Target to 138, highlighting the retailer's impressive results despite a tough macroeconomic backdrop. That stock is fly in post earnings up by
more than 12 percent at 116 20. Coming up. Bank of America's jewel carry hold. Making a case for small caps amid a looming US recession. Will catch up with her in just a moment. And looking at the market right now, up seven tenths of one percent on the S&P.
You're open about just around a corner. Twenty three seconds away from the opening bell. Good morning to you. It's Wednesday morning. Equities up by three quarters of one percent equity features on the S&P and it takes it on the Nasdaq up by four tenths of 1 percent. Small caps, big call from Bank of America still.
Hold on just a moment. On the small caps. Quite constructive relative to the large caps. We'll get to that in just a moment. The Russell of eight tenths of one percent. They show up in a in New York, which in
the morning gets to the bond market. What a year it's been. The 10 year through 2020 to buy more than to come to ISIS points through the curve. We've seen massive moves. New this morning, 363, 97 yields just a little bit lower by four basis points on a session. And the ethics market, the real drama here, negative a tenth of 1 percent on Eurodollar 1 6 14.
Crude just short of 78. Just north of it now. Seventy eight dollars on WTI. We we're positive by two point three percent by twenty two seconds into the session. The equity market elevated the S&P up by around about six tenths of 1 percent on the Nasdaq, up by about a half of 1 percent. One stock to watch absolutely flying since yesterday afternoon. NIKKEI stronger than estimates its sales easing inventory concerns and pushing shares a whole lot higher. That stock is up by almost 30 percent at
the open. Abby has more havoc. Hey, John. Yeah. Big beaten rays out of Nike. It seems that some folks are willing to pay up for their favorite brand, even amidst the difficult macro environment. Relative to that sales beat, it was by almost 6 percent, 13 billion dollars. They're about profits of 85 cents. That is a 31 percent beat the outlook
they raised to low teens growth and the sales growth on the quarter that they just reported, it represented 17 percent growth. So investors really liking this. But there's one area most of the areas beat North America by 9 percent, one of the closely watched areas, China. There was actually a little bit of a mist there.
Their sales estimate fell by 3 percent to one point seventy nine billion dollars. Some analysts, though, are saying inventories are a bit cleaner. So there may be some positive news out of that region looking forward. And you were mentioning those inventories. It's really interesting, John. So on a year over year basis, it actually jumped 43 percent.
Management's saying it's a matter of perspective that if you compare to the 20 21 low, that's why it's so high. But that improvement you're talking about, days of inventory fell by 10 days to one hundred and six. So really pretty positive there. Now, it's interesting, John, into today, the stock heading to its worse year, going all the way back to 1993, down 38 percent. But with today's 13 percent gain the best day since June 20 21, trying to chip away at that decline into the end of the year. Big to have gains and still potentially be. Thank you.
Fantastic work. One must stop to watch FedEx, another running spate. The CEO writing a statement saying the following results exceeded our expectations in the second quarter, driven by the execution and acceleration of our aggressive cost reduction plans. Katie, on top of this story for us in the last couple of days, the good news, Katie. No September repeat here.
Yeah, that is definitely the good news investors seem to be clinging to today with the stock up about 5 percent at the open. So eating into some of that 40 percent loss on the year through yesterday's close, even though objectively this wasn't all good news from FedEx. They still are warning about a weaker demand environment and their full year profit forecast did come in a bit light. They only see between 13 and 14 dollars a share. Analysts were looking for 14, 14, but we
seem to be focusing more on the beat we saw in the second quarter, fiscal second quarter when it comes to profit, even though we've got a beat on the bottom line, the top line actually did disappointing, did disappoint. And that is really what comes down to these cost cuts and also higher prices that helped raise the overall operating margin. So let's just take a look at the express business as an example. It is the largest revenue driver, so it's very important package volume there was actually down by about 12 percent, but revenue per package was up 16 percent. So it's making more money per package than a year ago, even though they are shipping fewer packages overall.
And the same was true in the ground unit as well. So that weaker demand being offset by higher pricing as well as cost savings. FedEx had already told us three months ago they were planning for aggressive cost cuts. They now upped the ante yesterday, increasing their estimate of savings by about a billion dollars. They are now targeting three point seven billion dollars in cost savings in 2023. As Tom always tells me, companies adapt. And I guess that company is adapting
FedEx right now by almost 6 percent of that three or four minutes into the session. Equities activated by seven tenths of one percent on the S&P, on the Nasdaq, up by four tenths of 1 percent. Here's the quote from Thanks America. Jim Carey hole sticking with small caps
into the new year writes Writing the following Amid a year of two halves, we expect less downside risk for small caps relative to large caps near term. And once the market bottoms, that's typically the best phase for small caps. Jan, I'm pleased to say, joins us right now. So, Joe, let's take it from the top yearend target for CAC for next year.
Let's just get the feeling, Joe, reading your research speaking surveys have recently that you guys and a team at deemphasizing the S&P, the index level. Why is that? Joe? Yeah. Thanks for having me. Happy holidays. I think going into next year were we're looking for it to remain bumpy. We think there's potential the S&P 500 hasn't bottomed yet. A lot of the indicators where we're
looking at suggests that the lows may not be in. So, you know, typically the market bottoms about six months before the end of a recession. And our economists are expecting that we're likely to see a mild one in the first half and into third quarter of next year or so. So we think there's potential the market could bottom sometime in the first half and ahead of that. You know, we're in a backdrop where we don't think the mega caps within the S&P 500 and a lot of the big growth and tech stocks that have been the leadership are poised to be the leadership in the next cycle.
We think a lot of that part of the market is crowded. We see liquidity risk for the overall S&P 500. So we think that you want to out DAX rather than index. So in the market X the top 50, your own equal weighted index or own small caps over large caps. So we see better opportunities in pockets of the market. Well, let's get to the underweight in
tech. So this year, as you know, some of these names have been absolutely hammered. Metal down 65 percent. Apple is down 25. Amazon down forty nine. Google thirty eight. Microsoft down 28 percent.
Some people that you condition by what's happened in the last 10 years, to your point, you believe looking at those losses, this is a buy. The argument for is that we got peak in inflation. We've got a peaking sense story. This survived a terrible year. They can do better next year. What's the argument against that?
Well, I think, you know, we've we've seen fundamentals for for a lot of these stocks deteriorate. If you look at just the NASDAQ relative to the S&P 500 for many decades, the relative earnings trend was a straight line up. And now for most of this year that's been trending downward. You've seen downward revisions or weaker fundamentals for a lot of these companies. Obviously, there's no regulatory risk to attack after being a largely unregulated sector. You have a lot of these stocks that have been more crowded. They they outperform for much of the
last decade. But, you know, typically, as I mentioned, we found that what leads in one cycle is typically different from from what leads and the next. So we we favor some of the other areas of the market in terms of, you know, more traditional cap ex beneficiaries.
We think cap ex spending will be more resilient this time around. A lot of the big tech companies are still spending on cutbacks. So we would rather own the beneficiary as some of the automation beneficiary stocks. So it's just a select tech, but many of the industrials companies as well. And we still see energy as well positioned. That's still a very inexpensive, not crowded area of the market with attractive free cash flow, which is one of the attributes that tends to outperform later in the cycle as well as in downturns. It's one of your ISE whites here, the
others. So we've got energy, utilities, staples, financials. Now, getting into a downturn can make the argument for utilities and staples. Then you find energy and financials in
the mix. Now, Jan, I was reading the note you put out in the last week. This is not your mom and dad's recession. You guys believe the performance of those two industry groups in a recession is going to be better than it has been previously. Joe, can you walk me through the
thinking that. Sure, I think four for energy. You know, this is still an area that surprised many investors this year. It gone from it went from being a forgotten sector to now much bigger Wheatley Index. Investors are still very underexposed to the sector. We do expect oil prices to be be higher in 2023 overall, higher for longer commodity price backdrop. And, you know, as mentioned, a lot of these energy stocks have attractive free cash flow. Now they're paying attractive dividends.
So, you know, dividend income is one theme that we favor for next year. The energy really fits. That theme on the financials is now a much higher quality sector than it was going into the last recession. It's not one of the highest quality sectors within the market. Paying income. So. So that's another sector that when you look at energy financials, even though these are more cyclical sectors, they've actually seen their their betas decrease a lot. So they're actually sort of the new low
beta sectors where if you look at tech communication services, they've actually become much higher beta sectors. So you've actually seen a shift in in terms of the risks within sectors within the market and then relative industry choices. Let's talk about small versus large. I talked about it in the introduction. You like small. It's not because you're looking across the equity market, looking at what's anticipating the downturn right now. Do you see that adjustment moving further along in small caps relative? It's launched you. Is that what you say? Definitely.
I mean, I think, you know, when you look at valuations, small caps have been trading at, you know, 12, 13 times forward earnings that's, you know, lows we saw during the global financial crisis and below. Many of the recent recessions and when you look at that relative valuation, multiple of small versus large, we're pretty much at the lowest levels we've ever seen outside of, you know, briefly during 99 to 0 1, which ended up being a really great buying opportunity for small caps over the subsequent years. So. So I think they're largely discounting a pretty severe recession at this point. And in addition, we think they're they're poised to hold up better, given some of the macro fundamentals that we see, you know, services spending holding up better than good spending, small caps or more services exposed. If you think about cap ex spending
remaining more resilient, as I mentioned earlier, you know, we've seen all this under-investment by corporates for a long period of time. And now there's a lot of tailwinds to cutbacks in a racial worry of us manufacturing. We're seeing a lot of evidence of that actually happening. You know, corporate big tech companies spending on cutbacks. So smaller, more domestic stocks are the ones that tend to benefit from cap ex spending by corporates within the US.
So so we think that they're actually better positioned and given the inflationary backdrop as well, you know, periods of high. But slowing inflation like we saw in the mid 70s, mid 70s, early 80s, a Fed teaming a backdrop of high inflation that tended to be a very good period to own small caps. Joe, this was really thoughtful stuff, just fantastic. I think the year end is maybe just full kind of sounds boring, but beneath the surface you guys have got some really interesting cause you can hold that ISE. Thanks, America.
Thank you. And thanks to the whole team over at PFA. So they worked on it 20 20 confessed nights to have the ongoing conversation about ten or eleven minutes into the session, the equity markets up six or seven tenths of one percent on the S&P into the open. About eleven minutes into this on the Nasdaq, we were up by about a half of 1 percent. Coming up, 8, a mosque prepared to step down as Twitter CEO basically read resignation by remote control. I think he had a very good idea of what the outcome was going to be before he decided to actually put the poll on Twitter. That conversation plus closing out a
tough year for big tech. We'll discuss with Mark Crumpton, CAC and capital devices. That conversation coming up shortly. Basically read resignation by remote control. I think he had a very good idea of what the outcome was going to be before he decided to actually put the poll on Twitter. He's receiving some heat from his shareholders.
He's not paying enough attention to Tesla. Market performance of the stock has been terrible. So he really needs to refocus back where his attention is stated. Elon Musk confirming he'll step down as the CEO of Twitter. The billionaire is still planning on overseeing the company's engineering teams once he's found someone, quote, foolish enough to replace him as chief. This coming amid criticism that Twitter has been distracting Musk from his role as Tesla CEO at Ludlow from London joins us now for more.
And I feel like asked the same question because I can't keep up with any of this. What is the latest? The latest says that he'll follow through that when the right person comes along. We just don't have a good sense when the right person will come along. Tesla shares really trading choppy at the open were higher and lower wrap around five tenths of one per cent. That follows the biggest drop since October. During Tuesday session and we're coming off a November 2020 low.
The problem is that Moscow is giving actually quite a lot of detail about the financial health of Twitter. But you and I have discussed over recent days and weeks that actually the sell side and the buy side are looking at these two stories, Twitter and Tesla as so closely intertwined. Musk got into a tussle overnight with a well known fan of the company, Ross Gerber of Gerber Kawasaki, for example, and criticized him when Gerber said, can you just give us some clarity on what's going on? Succession at Tesla? When will you be going back to Tesla? You go back to fundamentals, though, is interesting to see the note from Mizuho in the last 24 hours saying, yes, Twitter is a part of this story, but we're starting also think about the fundamentals, right? Consumer weakness in key markets like China and the United States.
You have to remind yourself, Jonathan, this is a stock that trades at 33 times forward earnings. The Fed is still top of mind. And then you look at its performance on a year to date basis. As you know, this is a stock that's down 61 percent year to date.
Much of that decline has come since October 28, when Musk closed the deal to buy Twitter. So we're still focused on this idea of key man risk that must get distracted at Twitter. But it was interesting to hear him speak in the audience on the Bloomberg terminal, read the story I've written this morning on some of the financials around Twitter where he justified this sort of severity of the cuts he made. We just need a name, Jonathan. Who's gonna take this off his hands? Who come work for Elon Musk and no idea. I mean, who could work for him? I think many people could. Who can do that job.
That's the big ask. And thank you. Just fantastic. Of London. Step in this. Ouch. On a tease. This ISE really tough. Leadership, one issue, the macro backdrop. All the automakers are struggling right now.
Higher interest rates. You've seen the damage that's done to this equity market. The S&P on pace for its worst year since 2008, thanks in part to months of declines in the fang stocks. Some of the biggest weightings in the index together shedding trillions of dollars in market cap this year, saw back as Michael Purvis expect in the tech sector to remain under pressure. He wrote the following in his outlook. Many big tech companies which have had secular earnings growth are showing signs of increasing economic sensitivity.
Their business models are facing new challenges. The quality of earnings growth for this key sector won't be as impressive going forward. Michael Purvis, someplace safe to answer right now. Michael, year end 36 50 next year. That gets our attention. Walk me through why this is a different regime and we're not going back to the pre pandemic playbook any time soon.
Well, you talked about the big tech earnings there, and I do think that, you know, for several years we've all been waiting for this point in time when big, you know, you can't have a secular growth story last forever. Right. At some point you get the terminal market share and you're going to take on more economic sensitivity. You're starting to see that in some of these wonderful tech business models are still wonderful, great business models. But they're just the consistency in the quality of their earnings are not going to be what we've seen for the last six or seven years. And you're starting to see signs of that in their earnings reports and then a parsers idiosyncratic issues with some of these companies as well.
You know, metal being exhibit A of that. But I think the broader reason why I'm at thirty six fifty is really not that I'm predicting a recession. Some, you know, avalanche of horrible economic data. In fact, I think it might actually be
continue to sort of out perform at least to bearish expectations. But I think what is happening here across asset classes is that, you know, we where we've largely processed a lot of the Covid ARRA stimulus in terms of the inflationary impacts, the supply chains and all that. But there's new structural factors that are coming just as these things are starting to fade. And those include, you know, a very
different commodity story with very tight supply on both metals and energy on the hydrocarbon side. You're seeing globalization, which is actually going to be in many ways very good for Main Street America. But it's also inflationary. And then, of course, your your you know, you have your your, you know, employment, structural employment changes. That has been problematic for the Fed. And I think will be increasingly problematic for those that expect rate cuts to materialize in the second half of next year. So I think what I'm sort of saying here is, is that the earnings situation is not going to collapse next year, but you're not going to go back to see this.
You know, this this is really wonderful. You know, uptrend and earnings, particularly some of the sort of moderate contraction and real growth and also inflation. In some ways, I'm more worried about falling inflation, hitting earnings than I am necessarily a recession there. So I think it's a lot of regime shifts happening all at once. And to get back to the sort of the buy the dip that we've seen coming into last winter for so many years. I just think we're in a different era where the old economy is coming over and then you've got new challenges.
And so, you know, inflation looking needed to fall. But can we get to the 2 percent target by next December? I'm not so sure we can. So, Michael, what I hear from you is that we're leaving behind a regime of structural disinflation and replacing it with a regime of structural inflation. Can you talk to me about that? How how that shapes potential leadership in the equity market going forward? Yeah. Well, I think if you think what's
driving that some of these new pro inflationary forces, things like globalization, that means you're going to see strong earnings from industrial from the industrial sector. I think the energy sector, even if oil prices don't get back to triple digits, are still going to be outperforming on the on the earnings side. Look, I'm not saying Google is going to like earnings story is going to fall apart.
Absolutely not. I'm just saying that the consistency and the magnitude of the earnings growth will not be what it is. It's got lower Sharpe ratio for big tech earnings going forward. And that's you know, there's still a huge weight in the index. And so that that process is a little bit more volatile. I think in some of the other sectors, like, you know, banking may be actually big banks may actually do better than expected, at least on the net income margin front. Their retailers is very much a mixed
bag. Sheriff and Howard with a lot with a lot of very, very specific challenges, trying to sort through shifting consumer demands and myths about the strangest supply chain shifts. We've seen some time here, there. So, you know, again, I don't think the
earnings story is one at the at the index level is going to be a collapse, but it's not going to be a big expansion. I think it's sort of a sideways grind through next year and then into 24. The problem is, is that you're still going to be in this two way volatile market with a lot of tactical sort of tight moves there. It's going to be hard to be a long term investor.
Yep. Next year will be the opportunity set for more agile traders as is robust. But you know what we know, you know, by big tech and sit back and watch the index, put a, you know, double digit returns for four years in a row like we just had it coming into last winter. That is it's not coming back anytime soon.
And I don't see what the path is to getting back to that, particularly with some of these sort of pivot points in there and the big tech earnings story. Well, this year was difficult. And from what I hear from you, next year, it's going to be equally as hot air and twenty three fifty six fifty call from Michael Purvis at so back and really new ones straight from my. My. Thank you, sir.
I appreciate that. And have a fantastic new year to you as well. Coming up, we'll bring you the training time from New York. Stocks higher. This is, in fact. Equities positive, hey, let's get you trading to ISE.
Coming up very shortly, existing home sales and consumer confidence would be top of the hour. President Biden Zelinsky holding a joint news conference at four thirty Eastern U.S. GDP, KPC. Another round of claims coming up next Thursday. Jobs, good personal income spending numbers on Friday. Then we close out of the image and I
close out the year right now. So before I brush off for the holiday special, thank you for all the hard work that goes into this show. My team does fantastic job of making me look good even when I'm really bad.
And a special thanks to you at home. I say this a lot. I know you've heard me say this before, but every time I say I mean a little bit more. You mean most intelligence audience on the planet? Thanks for making me sharp. Thank you for making me smarter. Have a wonderful Christmas and a very happy new year.