Closing Bell - Another Day in the Red, Rare Interview with Investment Banking Legend Ken Moelis 1/19/23

Episode Date: January 19, 2023

Stocks pulled back again Thursday, adding to steep losses from Wednesday’s session. Strategist Warren Pies from 3Fourteen Research weighs in on the market moves and new comments from Fed vice-chair Lael Brainard on inflation. Sara sits down with celebrated investment banker Ken Moelis for a wide-ranging interview from the World Economic Forum in Davos, where he explained why he sees a big ramp-up in activist investing ahead. Analyst Tim Nollen gives a preview of what to expect from Netflix earnings. Plus the latest on Meta, FTX, and the debt ceiling debate.

The major averages adding more losses after Wednesday's big sell-off, though we are well off the lows of the session in the last couple of hours. This is the make or break hour for your money. Welcome to Closing Bell. I'm Mike Santoli. Sarah Eisen is at the World Economic Forum in Davos, Switzerland. Here is where the markets stand right now. The S&P 500 down only about 11 points. It's roughly not even a third of 1%.

Earlier we were down close to 1% at 3,900 level. We have bounced off there a little bit. The Nasdaq, also an outperformer for much of the day. It's about in line with the overall tape at the moment. 10-year Treasury yield has stopped going down at least for a day, trying to find some support around that 3.4% level. Coming up today on the show, celebrated investment banker Ken Mollis joins us for a rare interview from Davos. Last year, he said a recession wasn't coming. We'll get his updated outlook, plus his thoughts on M&A, activism, and much more. And here is where the markets are situated. We have been giving back some of that four percent two-week gain in

the S&P 500 coming into this week. In fact, they've given back roughly half of it, though we have firmed up in the indexes after we got some comments from Lael Brainard of the Fed that perhaps she wasn't in as much of a hurry to have big rate hikes, some more balanced view there. And you see where this little pullback has so far settled out, 3,900 on the S&P. If you want to draw a little bit of an uptrend line from October, that roughly gives you the area where bulls would want to see hold. We've also, at the lows of the day, we're near a very short-term, like four-week average. So technically, the market has found a little bit of support right here, though still underneath that downtrend line right there.

A lot of rotation going on below the surface still, as we see some weakness across the board. But staples have actually done a little better today after losses yesterday. Here's the 10-year note yield. As I said, 3.4 percent. Seems like it might be somewhat important. People looking at the chart saying it's kind of oversold. Look at this floor that might be created there around that 3.4 level. So we'll see if that means anything in terms of whether risk assets can continue to stay supported while yields perhaps take a pause, at least in their decline right here. And of course, people fixated on the yield curve and what that might mean for Fed policy as well. Let's get to Federal Reserve

Vice Chair Lael Brainard speaking earlier at an event in Chicago, saying that even with recent moderation, inflation remains too high and rates need to stay high. That's been essentially the party line for a while. Meantime, J.P. Morgan CEO Jamie Dimon gave his outlook on rates during a CNBC interview in Davos. I actually think rates will probably go higher than 5 percent. Higher than 5 percent. That's my own view because I think there's a lot of underlying inflation, which won't go away so quick. Joining us now is Warren Pies, co-founder of 314 Research, to weigh in on really kind of the macro, Warren, and how it all plays into how markets are set up for this year.

Are investors correct in feeling as if a Fed pause is a potential all clear for this market. Well, great being here. Thanks for having me. I think that that's what history tells us. History tells us that when the Fed pauses, you know, it's this Goldilocks period for across assets. And really, stocks have rallied during every Fed pause except for 2000. And that has some key similarities to today. Bonds rally also during every Fed pause going back to 1978. So, yeah, I mean, I think it makes sense to get revved up for it. But you've

got to put this whole move in context. And I think that we might be front running a little prematurely here. So you think the market is perhaps the equity market has gotten ahead of itself and maybe raising the probability that we are, first of all, going to get a pause and that, in fact see the Fed funds rate and the two-year yield invert, and that means that the two-year yield is below the Fed funds rate sustainably, that has ushered in a Fed pause. Now, so I think that historically, we're in the neighborhood where you'd expect a pause. But the other side of the coin is that the financial conditions have been targeted by the Fed. And this is not abnormal. Usually, when you go into a pause, you see markets down by like 5% or 10%. So as the market tries to front run the pause, it becomes kind of a reflexive issue where they then push back the pause because the Fed is targeting financial conditions. Financial conditions is just a fancy way of saying

stock prices, credit spreads. And stock prices lead credit spreads. They lead high yield spreads, which then lead investment grade spreads. So ultimately, every one of these rallies, in my view, is self-defeating. You're going to get some weakness before the Fed pauses. Otherwise, they're going to hang out. They're going to keep pushing rates higher, and they're going to hang out higher for longer, even if the inflation data is rapidly decelerating, which is what we also think is going to happen. Yeah, this is a little bit of the, I guess, the dilemma that some investors see out there. So with the S&P at 4,000 at the recent highs, it seemed as if maybe the Fed wouldn't have been too happy to see that, even if, in fact, they can declare the mission against inflation almost won.

Where do you think the market becomes more attractive if you think that you have this sort of fix that we're in where the Fed's going to push back against it? Yeah, so we've been outlining for our clients a range for a while now between $3,600 and $4,000. And this is a rough range. You know, the market can obviously go shoot above that $4,000. It would probably need to do that to suck the most people in at the top here you get a lot of bread thrust and other technical indicators that have failed this year last year and they keep sucking people in so i think at the top of the range markets start thinking about growth and earnings and that's going to cap the rally and ultimately

it's going to also bring the fed into play because of what we were talking about with financial conditions now you get a sell-off to 3600 What's going to provide support is we've continued to say, for months, we see a path to 2% inflation in the next six or nine months here. And it was out of consensus three months ago. It's becoming more consensus. But the bottom line is that you're going to continue to have this disinflation support. So I think that thirty six hundred to four thousand call it a rough range is going to be what we trade in here for a bit until we get more clarity on the economy. Now what we see is ultimately there is going to be a recession. It's going to happen more in the back half this year.

I think consensus was we were going to walk right into 2023 with weakness in the first part of the year in the economy. You have to account for the amount of stimulus with weakness in the first part of the year. In the economy, you have to account for the amount of stimulus and cash that's been injected into the economy. So I think this is a slower moving cycle than a lot of people had anticipated. So you're expecting in the second half of the year is when maybe the weakness in the economy might become more evident and that ends up being another gut check for stocks? Yeah, absolutely. So let's think about it. You know, the traditional Fed pause lasts seven months. And so like if they were to pause on schedule, which would have been December of last of 2022, when this Fed funds rate in two year inverted, if we would have seen the Fed pause, they would have paused for seven months.

Historically, the recession doesn't come until a couple few months after that pause is done. Seven month pause is over. And that's because you have to think about the cadence of a Fed cycle. You know, you're hiking rates, the economy strong, bonds are struggling, stocks are kind of mixed. Then you pause and it's this Goldilocks period, like we talked about, where everyone has the optimism is off the charts. You know, maybe we could have a soft landing if you go back and read fed minutes we always are thinking there could be a soft landing but quickly that hope turns into reality that the recession's upon us the fed starts cutting rates they're classically behind the curve the stock market never bottoms before the

recession starts in that classic cycle so what does tell us? It tells us that we should expect the recession probably in the second half of this year, and the ultimate lows for this bear market would be somewhere in later 2023. All right. Yep. That is if the patterns hold. And if we get a recession, it's what to be aware of. Warren, it's great to have you. Thanks very much. Yeah. Appreciate the invite. Thank you. All right. After the break, investment banker Ken Mollis joins us for a wide ranging interview from Davos. We'll hear his call on whether or not we will see a recession this year, plus why he thinks a significant increase in activist investing is coming. You're watching Closing Bell on CNBC. Despite the stock market's fall over the past year, along with growing recession fears, some leaders we've heard from in Davos this week have sounded cautiously optimistic.

Sarah Eisen got a chance to sit down with Mollis & Company founder and CEO Ken Mollis earlier today, and he's still somewhat worried. Last time we were here in May, you were relatively optimistic. People were worried about the economy and inflation and Fed hikes. And you said, I don't really see a recession. So far, you're right. Is that still how you feel? Well, it's interesting. Hard to call even back then with three and a half percent unemployment. How do you call it a recession? Yet, when you say I'm optimistic, I've always felt the Fed was going to be very serious and raise rates beyond what people thought. I still think too much optimism here. You're not in the pivot camp or the pause camp.

They might slow down slightly, but I think we're in the eye of the hurricane right now. There's a lot of good news out there. So people are extrapolating that. I think the Fed is going to still raise rates higher and longer. Look, the Fed has made a statement that they want to break unemployment. They want to take unemployment from three and a half up. I think it's going to be much harder than they think. The economy, companies like my own, we worked very hard for these workforces. And it's not the economy of the 1970s when you broke, where you have manufacturing brick and mortar. Most companies are their people. They are their culture. They spend a lot of money to keep everybody together through COVID. I'll tell you, me personally and people I talk to, we're not going to give it up that easy. We're not going

to mass lay people off. I think it's going to be... You're not? Because some of your competitor investment banks, Goldman, Morgan, we're seeing layoffs there. Well, much larger workforces do several different things. So you're not laying off people? No. We are going to... It will take a lot of pain to keep the talent. You're cutting compensation. Sure.

By how much? Well, our people are in the business of... They are their own businesses, so they know how their businesses are doing, and they go up and down with their business. But to actually just take a mass layoff, I think most American companies are fundamentally defined by their people these days. It's a digital economy. Your people are your workforce. And that's why I think it's going to be hard to break this unemployment rate, and it's going to be harder than people think. But really what they want to break is the inflation rate. And there are signs that that is working.

Look, 6.5% is different than 8%. But 6.5% is not going to be acceptable. And unemployment is staying. The Fed has said they're going to look at unemployment. What I do think they have to look at is basic fiscal policy, energy policy. A lot of this is self-inflicted from the West's, I think, absurd energy policy. You blame the Biden administration for that? Well, I think there's, no, because Western Europe is probably, if we're shooting ourselves in the foot, Western Europe is committing suicide.

All right, so you blame Merkel and Biden. Well, I just think the whole West has gotten their priorities wrong. By the way, it's interesting that the Fed chairman in a speech about three weeks ago specifically said, I'm not going to be a climate regulator. He did. I think these are, and by the way, Vanguard pulled out of net zero. BlackRock has come out and said, we've only voted for a quarter of climate initiatives because they're not economic. I think you're starting to see people realize

the pressure on misallocation of capital is really affecting the economy and the ability of the average. Look, you're saying, okay, this is, I don't know if you're allowed to say this even here in Davos. I'm not. But you're saying that the pendulum swung too far toward sustainability? Well, let me ask you something. In the U.K. right now, it literally is double the price to turn on your dishwasher.

It is 100% increased to fill your bathtub. Last I looked, there's no employee involved in that. You can fire everybody. But isn't that Putin's fault? No. Well, I think the war is, obviously the war is on top of all this. But if you started 10 years ago to stop being self-sufficient in your energy, you can't blame it all on the war. And look, I think you're seeing all of the institutions. It was very interesting to me that Jay Powell came out and said, I'm not a climate regulator. Why? I don't think he speaks randomly.

No, political pressure. I think he's starting to say, if you're a bank, I am not going to come because people wanted the Fed to regulate fossil fuel lending. I think he's saying, no, you can allocate capital to this and you won't be hurt by it. So it's interesting that you're maintaining your optimism, relative optimism on the economy, given you run an investment bank that is tied to the capital markets, which have been very weak.

Look, I think rates are going to be tough. I think my business has been tough. We're a leading indicator. Remember, we're a leading indicator. One of the first things that home building shuts down because it's a big purchase. I think M&A shuts down first because it's a very big so is 2023 better than 2022 because i think 23 will be very tough on the economy but the financial markets are already looking into 24 so you know i do think that's so it's going to get better all the financial

it'll it'll get better ahead of the economy as people, as investors look to the future. Are you already seeing signs of recovery in the M&A? There's a lot of discussion, but no, I don't see activity completing right now because the financial markets, they're open. The last two or three weeks have seen some light, but I think it'll- Debt financing. Yeah. But I think it'll, I do think we're in the eye of the storm here.

I don't think it's going to be better for a long time. And by the way, I think it's going to lead to what I think will happen in this year. I think you'll see a significant increase in activism. Already, we've seen that. I'm talking to companies because of what I said. They're going to try to hold on to their base business, which is their employees. There's going to be enormous margin pressure from rates, energy, and people holding on to their culture and activism.

Activists are going to try to take advantage of that. And there'll be a real fight between boards trying to protect the business they built and activists trying to take advantage of this opportunity. Well, that's good for your business. Well, it's something we do, yeah. But I think it's going to be a very tough time for people. Disney, Disney Peltz giving us a taste of that? Well, that's one of them.

Yeah. But it's interesting. Is that good for shareholders? No, because I think right now is a time when you have to look over the horizon. And it's going to be, legal activists have used this ESG, I call it a can opener, to get votes. And I think it's ironic because the activists are probably the least diverse. They have the worst governance. By the way, you look at activist governance, it's one man, one vote.

They're the least diverse group of people. And I also think their environmental impact is probably, you know, in the worst 1% of the world on a per person basis. But they use that issue to get into the passive votes. And they put these companies, they're putting companies in a very difficult position. So rise of activism. What about IPOs? It was a dead year.

Yeah, I think it'll be tough. Are we having another dead year? It's not, I don't, it won't start off good. I think it's just the valuations aren't there. People have raised money privately at high values, so it's going to take a while before you'll do an IPO that will deliver value. But what will happen is somebody will start repricing to the market. One will happen, investors will make money.

The second one will happen, somebody will make money, and then it'll start again. IPOs always have that cycle. What about SPACs, speaking of things that are not happening right now? I mean, you bet big on SPACs. You shut down a piece of your business on the fact that SPACs have dried up. Yeah, look, I think SPACs are actually a good vehicle that ran into a series of issues like the IPO market. It's an IPO. And the IPO market went away. What's interesting is I- But it was considered sort of a more speculative-

But what's interesting to me is- IPO. The SPAC investor, there's 600 SPACs. Their best investment for the last year has probably been in a SPAC. They're getting back their money plus the treasury interest rate. The loser in the SPAC was the SPAC entrepreneur, which is the way it should happen. Or those that, I guess, held on and sold before they returned the money.

Okay, but you're given two choices. One, to put your money into treasury bills and if nothing happens, 600 SPACs are probably going to redeem and the investors will all get the treasury rate back. Probably be their best investment of 2022 to get your treasury bills back. Now, you have a choice to go into the IPO when it's announced. You're right. Some went in.

Some of those didn't work. Some lost a lot of money. That's IPOs. Yeah. But many of them were deemed, by the way, in the last six or seven months. Does that come back when you see IPOs and M&A back? Do SPACs come back? In a different format? And they will. What do you mean a different format? Some adjustments to get around the SEC. Look, there's going to be some adjustments. They'll be safer? Well, they were safe. If you chose not to go into the IPO, you could choose.

There's a sense that they didn't do as much due diligence as the traditional IPO. I don't know. I don't know how much diligence the average investor base gets to do in an IPO. They get a roadshow and they have to put their order in. I don't even know if it is different. Yes, it'll be restructured. But the idea of putting your money in a treasury bill and on the downside, if you don't like the deal, you get your money back and you get a choice to go in, it's not crazy.

And they actually, most of the SPACs, the investors who went in the SPACs are getting their money back right now with treasury. I wish I had all my money in treasury bills the last year. It's the SPAC entrepreneurs who got crushed. And those are people who choose to take the risk. Bankruptcies. Do you expect we'll see more of that? Yes. I think there are many companies, even quality companies, that set up capitalizations based on... Party City just announced this week, right? Yeah.

Bed Bath & Beyond. Some of them have operational difficulties, but I also think there are some companies that just financed at six, seven times leverage, and there might not be a five, six, seven times leverage. And there might not be a six, five, six, seven times market. You might even have companies that are hitting their business plan that find it difficult to access refinancing credit. And there's crypto, which is keeping you and others that are doing restructurings very busy. You're taking on the Genesis bankruptcy. What have you learned about the viability of these crypto companies? Again, I'm not on the transaction team, so I don't. But I do know that, look, there was a it was an unregulated world. There was lots of money put in. And you talk about no due diligence. There was no transparency and no due diligence in a lot of these places. And I think I think Warren Buffett said it best to find out who's swimming

naked when the tide goes out. And I think a lot of naked companies this year. Yeah, the tide, the tide went a long way out. And people who didn't have the right risk management controls are finding out what that means. U.S. corporate bankruptcies fell to a 13 year low last year, according to S&P Global Market Intelligence. Maybe only one way they go from there, as Mollis is suggesting. Let's now check the markets. The Dow is down 135, backed off just a little bit in the last half hour or so. The S&P 500 down a bit more than a third of 1%.

Energy communication services are bouncing within that, though. Wall Street firms are weighing in on the prospect of a U.S. debt default as the country officially hits its borrowing limit. We'll tell you about the stern warnings for Washington and the potential impact on your money. That's next. As we head to a break, check out some of today's top search tickers on CNBC dot com. Ten year yield in the top spot, followed by Tesla, the S&P 500, Procter & Gamble and the Dow Jones Industrials. We'll be right back. The Treasury Department is now taking extraordinary measures to meet its debt obligations after hitting its $31.4 trillion borrowing limit. That's a cap that was set by

Congress in December 2021. In a letter to congressional leaders, Treasury Secretary Janet Yellen said those tools can continue until early June, and after they expire, Congress will need to act to prevent default. Wells Fargo saying in a note today, even in the event of a last-minute agreement, financial markets could be roiled like they were in the summer of 2011. Moody's has a similar view, writing, we anticipate an agreement will likely only be reached very late or in an incremental fashion, potentially contributing to flare-ups in financial market volatility. Cowan researchers saying few policy matters in Washington have such destructive economic capability. 2011 fight triggered first credit downgrade.

And also in 2011, House GOP had a strong speaker and a 23-seat margin. McCarthy has four right now. And Morgan Stanley CEO James, James Gorman, gave his view to CNBC at Davos. There's certain things you don't play with fire. And so I'm hopeful that Congress will be sensible about this. The U.S. is, you know, it is the backstop to the global economy. Don't mess with it. Joining us now for more is CNBC's Ilan Moy. And Ilan, for as much as we should be anticipating potential market volatility, as all the observers suggest, have we not also learned that it's more

bark than bite? Are there reasons to believe this time the brinksmanship might be a little bit more worrisome? Yeah. So, Mike, this is really a slow-moving train wreck. And I think the analysts are right in saying that the resolution to this is not likely to come until we get down to the wire. And part of the problem is that House Republicans made a deal with Speaker Kevin McCarthy in order to get him that job, that they would take votes on fiscal austerity measures. They want to make good on the promises to cut spending, to rein in what they see as

wasteful government spending, and deliver that to their constituents. So they have to show they're making progress. And the way they do that is by railing about the debt limit and passing bills in the House that will end up going nowhere in the Senate. That takes up a lot of time that lawmakers could be using to reach some sort of constructive compromise on the debt limit and so that's going to take up all of the oxygen in washington and we won't be able to get to that final resolution until much later in the year yeah this the incentives certainly seem to work

against anything like a clean or timely agreement here. I guess maybe it's too much to ask for if there's any real specificity on material budget measures, in other words, cuts that Republicans might be looking for here. You know, the real math says unless you're going after defense, Social Security, Medicare, Medicaid, I mean, the big categories, it's not going to prevent you from needing to borrow more over time. Yeah, and I think that's exactly the problem that Republicans are in, is that they don't want to say that they're cutting Medicare and Social Security, but if you preserve that, what else are you going to take out?

And so that's some of the debate that we're going to see Republicans play out over the next few months. And I think there's also a division within the Republican Party right now, that there's a group of pragmatic Republicans that are growing increasingly vocal who are saying, no way, no how are we going to play fire with the debt limit. This is not a thing that we should be linking to the fiscal austerity conversation that's going on in Washington. And so I think the tension between the hardline conservatives and the more pragmatic Republicans

is going to be a dynamic area that investors really need to watch over the next few months. And I'm sure we will be. Ilan, thanks so much. Appreciate it. Wall Street is buzzing about FTX's new CEO suggesting the failed crypto exchange could make a comeback. Details on that when Closing Bell returns. What's Wall Street buzzing about today? A possible FTX comeback. New CEO John Ray is saying in his first public interview since taking the job that he's open to the idea of restarting operations, telling the Wall Street Journal everything is on the table. If there's a path forward on that, then we will not only explore that, we'll do it. Kate Rooney joins us now with more on this prospect. Hey, Kate.

Hey, Mike. So we did see Sam Beckman-Fried also weighing in on this in John Ray's comments. In a tweet, he is in Palo Alto on house arrest. He responded saying, I'm glad Mr. Ray is finally paying lip service to turning the exchange back on after months of squashing such efforts. He also says, I'm waiting for him to finally admit that FTX US is solvent and give customers their money back. So interesting response there. He's had a couple of blog posts talking about this and claiming that FTX US was solvent. John Ray, meanwhile, saying, you know, we really don't need to hear from you, by the way. We it's not helpful. calling it sort of misinformation. There is a huge question of

if anybody would trust FTX, even with new leadership, to use it again. But traders that you talk to in crypto say the software actually was pretty good. And there are some people who can see a path forward as a way to bring revenue back and say that it was one of the better infrastructure platforms and ways to trade crypto out there, but probably too soon to tell if anybody's willing to put their money back there. Right. I mean, presumably, yes, perhaps the platform, the technology can live on in some form, although more broadly, Kate, has it seemed as if the crypto market has suffered in terms of liquidity in FTX's absence? I mean, it seems as if things have traded OK, but I'm sure

a lot of money was put in motion over the course of the last few months. That's part of it. FTX has had this effect where a lot of people have pulled money off of exchanges. The market depth definitely has not recovered in terms of liquidity. A lot of people have just moved their money offline for safekeeping and say that they don't trust exchanges across the board, whether it's the new FTX or any global exchange at this point. So that's been one issue with Bitcoin in general, that the trading depth just really isn't there in a way that it was. The lending market has completely dried up. So you've seen that effect. One cryptocurrency, interestingly, Mike, we talked about FTX, the FTT token that's part of the FTX balance sheet. It's part of the bankruptcy proceedings.

And they talked about finding some liquidity, about $5 billion worth. That token surged about 30 percent on the news that FTX might reopen. So you are seeing these pockets of risk in crypto still alive and well, if people are willing to speculate on that token at this point. It's up more than 32% today. Absolutely, yes, up to 230. It's amazing.

Maybe they can even end up kind of helping the longer-term cause with that wild activity. Kate, thanks very much. Appreciate it. Thank you, Kate Rooney. Meta has been a big winner so far in 2023, but a big venture capitalist and early backer warns the stock could be under a lot of pressure over the next 12 months. Details coming up.

Let's check out our stealth mover Goodyear, and it is not having a good day. Deutsche Bank issuing a short term catalyst sell call, warning investors to tread lightly because of weaker industry volumes and the threat of losing market share to imported brands. The stock had been gaining traction recently, but is now flat over the last two months. You see it down 4% today. Netflix, meanwhile, lower ahead of its earnings after the bell. Up next, the top analyst tells us what he's expecting from the streaming giant that story plus meta rallying and a rough day for home builders when we take you inside the market. We are now in the closing bell market zone cross mark chief market strategist Victoria Fernandez is here to break down these crucial moments of the trading day plus Plus Julia Borsten on Meta and Macquarie's Tim Nolen on Netflix. Welcome, everyone. Victoria, we're in this market moment here where we're obviously consolidating a couple of weeks worth of gains.

But now everybody fixated on the growth picture and whether the Fed is going to be able to essentially stick the landing and make it a soft one after we've more or less put the inflation story aside for the moment. So how does the risk reward look to you just so far this year? Yeah, I think we're getting a little bit ahead of ourselves if we say that we're for sure going to have a soft landing here. I think we've seen that over the last couple of days. We kind of did this shift to where bad news was good news because it allowed the Fed to take a little bit of a slower rate hike path. But lately, bad news is bad news again, because I think some of that recession fear has come off the table for the market in general. At Crossmark, we still think we're going to have a mild recession around the middle of the year. We think the Fed is going to continue, excuse me, on the rate hike path and continue to

get up towards that 5% Fed funds rate. So I think we have to be very careful looking at the sentiment that's in the market, making sure that we don't have some quick whipsaw actions going on. We've seen that the last couple days. I think we have to be very careful going forward that we position ourselves with a very balanced portfolio. Right. No big outsized bets, I guess, maybe not adding too much risk in the short term until things are somewhat more resolved. Homebuilders, meantime, underperforming the broader market today after December housing starts fell to the lowest level since July. Building permits falling by 1.6 percent last month. And despite this ongoing

housing weakness, Oppenheimer issuing a note saying it is better to be early than late on the homebuilder stocks. The firm initiating outperform ratings on Pulte and Toll Brothers and perform ratings on Deer Horton and TriPoint Homes. Diana Olick joins us with more. Yeah, I mean, look, this was a very disappointing report, of course, but going forward, it says that perhaps we are getting closer to a bottom. And I think what's interesting is what we saw really in the homebuilders sentiment number yesterday. And that is that we were expecting to see a drop. But we also saw actually saw a sizable jump in builder sentiment with them reporting seeing more buyer traffic and more current sales and potentially more sales in the future because of lower mortgage rates.

They're seeing people come into the showrooms, kicking the tires, starting to think about it. We also saw that in the mortgage applications yesterday when we saw applications to buy a home rise much more than expected. So lower mortgage rates down a full percentage point from last October are starting to play in, starting to factor into this. And I think you're going to see that in the builders. Yeah. Oppenheimer saying all rates really have to do perhaps is just get steady themselves right here and not really go up much more for for the market to perhaps stabilize. We'll see how that goes, Diana. Thank you very much. Meantime, Vernado cutting its quarterly dividend by nearly 30 percent. The latest office real estate company to do so, S.L. Green and Douglas Emmett both announced dividend cuts in December.

Vernado pointed to weakness in the economy and capital markets as one of the reasons behind the move. And Victoria, you know, obviously real estate investment trusts, they essentially pay out what they earn or what their taxable income is, a high percentage of it. So clearly it shows you what's happening with the fundamentals. How should you treat the stocks right here? Because, of course, coming into this week, this stock, Fornado, had about a 9 percent stated yield. But that's obviously coming down. No, you're exactly right, Mike. And look, we shouldn't be surprised that we saw a dividend cut. The cash available for distribution has diminished tremendously. Obviously,

they talk about interest rates moving higher. They talk about the more macro environment that they're in. But there's also competition in regards to subleasing. You have a lot of people that are just not moving their employees back into office space. They're subleasing that. So there's some competition. And when you look at a company like Fornado, where they're in high-end office buildings, New York, San Francisco, Chicago, we can expect that they're going to have to see that.

And look, this isn't the first time. What, a year ago, we saw them cut their dividend by about 20% at that point in time because of the pandemic. So I think we're going to continue to see some struggles as it comes here to the REIT market. It's one of those areas where it's going to be a lot of volatility. We're going to have to see the workplace environment really strengthen before we see the stock strengthen as well. Yeah, obviously. And this stock has been kind of bumping along the recent lows for some time right now. Analysts growing more optimistic on meta, JP Morgan, Wells Fargo and Barclays all highlighting the stock as a potential leader in 2023. JP Morgan naming it as a top pick in the online ad space, heading into its fourth quarter results in two weeks, pointing to cost discipline and better than expected top line growth as two potential tail

wins. But early backer Jim Breyer sounding more bearish on the stock in the near term. He sat down with Sarah Eisen in Davos earlier. My view is over the next 24 months, there will be a big rebound, but they're going to be under a lot of pressure for the next 12 months. And they're not cutting costs fast enough, in my humble opinion. Julia Borsten joins us now. Julia, I guess that gets to, you know, one of the issues, which is really under management's control, is what they do at Meta on the cost side. Yeah, and it's so interesting. And I don't know if we could pull up a 12-month chart here, but what's so fascinating here is if you look at Meta shares over the past 12 months, the stock is down about 57%, but there has been this uptick in the past several months. And part

of that is because of the fact that Meta announced layoffs, they announced cost cutting, and they also talked about the fact that they are focusing on their core business, those core apps that generate all that ad revenue, wanting to remind investors that metaverse is a long term play while they are staying focused on their bread and butter. But what I think is interesting is a lot of the analysts now are saying that they do think there's more room for cost cutting. So as they deal with an advertising contraction, we could hear more about that on the earnings call, which is coming up in just a couple of weeks. For sure. And it's a tricky time in terms of where we are in this cycle, people expecting ad budgets to be trimmed back or continue to go down. On the other hand, looks like a relatively cheap stock. And do we know anything about the market share situation

with Meta? I mean, obviously, we're hearing about Twitter hemorrhaging ad dollars, maybe not a big number compared to the size of Meta. But is Facebook and its other apps a potential net winner here? Well, look, I think Twitter is so relatively small compared to Meta and to Google. I think it's just in a different category. We have seen that Meta and Google, what they call the digital duopoly, are no longer dominating the vast majority of advertising the way they used to. So their combined share has decreased notably. And that was just been reported in the past couple of weeks. So it's interesting to see the rise of players like Amazon.

Amazon certainly has an advantage because it has so much data around intention, what people want to buy. But while they lose that share to the likes of even Apple, which has been investing in its ad business, I do think that they have an advantage when it comes to the ad business is they're now lapping the period in which they were really struggling with the Apple operating system changes that made it harder for them to target ads. So I do think that they have some advantages there. But the real competition here, excuse me, the real competition here was never Twitter. It was really TikTok. And that's the app that it really forced them to change and innovate with Reels and also could be potentially really easing into their ad revenue. Yeah. And part of the bull case, I think, from some of the people on the street is that we maybe got a lapping the peak TikTok competition moment.

So we'll see if that helps them out down the road. Julia, thank you very much. Let's hit Netflix. The stock is in the red today, just ahead of its earnings coming after the bell. Investors are keeping a close eye on the performance of the company's new ad supported tier. Let's bring in Macquarie senior analyst Tim Noland, who has a neutral rating on the stock. And Tim, a huge comeback in the shares after they really collapsed on a couple of bad earnings and subscriber warnings. What are you most looking for in the current report that's going to tell us whether this bounce has legs? Yeah, well, we'll get numbers in about eight or 10 minutes here, right? You know, as always, the investor's first focus seems to be on subscribers.

The guidance is about four and a half million net sub ads in the quarter. So that's number one to look for. This will be the last quarter that we will get a subscriber forecast guidance from Netflix. From now on, it'll be about revenue, earnings and cash flow. And to that end, I think, you know, it'll be important to hear what they say about the advertising tier, which launched in November. We're only two months into it. And I've read conflicting reports even just today from reputable third-party research sources saying very different things about what's happening with the ad tier. We did hear back in December that they may have fallen short of some of their guarantees on viewership. I think the question is going to be, will they give us a number as to the number of ads supported subscribers? And in our view,

that's going to be most of the people switching from fully paid Netflix on to the lower price ad tier. You have to get a large enough base of subscribers before you can really, you know, gather all those ad dollars in. And so that's just kind of this middle ground that Netflix is in right now. So I don't know what numbers they'll give us, but qualitatively, any information they can give us about progress in the ad tier, I think will help determine sentiment on the stock. Tim, bigger picture, you mentioned the focus on revenue earnings cash flow. This is now a company with like 30 times forward earnings, let's call it. Not a lot

of growth anticipated on the bottom line for the current year for 2023. Maybe it's going to pick up down the road. Is it is it a fair price at this point? We realize they're the incumbent. And when people are nervous about folks canceling streaming services, it seems like Netflix might be a net winner or the safer play. But is the stock of value? Yeah, well, I mean, I think long-term Netflix continues to be a net winner, as it makes the eyes. I mean, look, it invented this category, so it will remain, I think, above most of the competition. Now, there is a rising competition, and it'll be interesting to see what some of the peers like Disney and like Warner Brothers Discovery are going to be reporting, you know, in a matter of weeks when they come out with the numbers, because they, I think, will be talking about

less negative operating income in their direct to consumer segments going forward. Netflix is already at, you know, high teens, close to 20 percent operating margin, and those guys are still losing money. So relatively speaking, if they're going to be adding subscribers at a similar, possibly even a better pace than Netflix, and if they're going to be adding subscribers at a similar, possibly even a better pace than Netflix, and if they're going to be showing incremental improvement in earnings, then they might look a bit more interesting here at much lower valuations than Netflix. It's not a knock on Netflix. They're so far ahead of the rest of the curve in terms of subscriber numbers, in terms of their operating earnings.

I think they will remain, you know, in very good position. But it's a more expensive stock than a lot of these traditional media names that have now embraced direct-to-consumer and might be getting toward, you know, some operating earnings positive performance. That would be very helpful to them. Yeah, sometimes going from bad to less bad is better for a stock than just being good already. We'll see how it goes in a few minutes, Tim. Thanks very much. And, Victoria, your thoughts on Netflix here after this run?

Yeah, so at Crossmark, we actually don't hold Netflix in any of our just long equity portfolios. For some of the things that you've mentioned, right, EPS growth looks flat year over year. There's no dividend there. There's a lot of competition, and it's a very cash intensive, high cash intensive model that they have. But where you can use Netflix and what we do, we hold it in our covered call strategy because of the volatility around this name. You can generate some income off the premiums of selling calls. So we have some exposure there. And then in our long short strategy, we're actually short Netflix in that strategy. So you can do some plays with Netflix besides just holding it in a long only portfolio.

We think that's the way that you can position yourselves before this earning. Yeah, it is always always jumpy and runs in streaks. So we'll see how that goes. And just quickly, Victoria, your thoughts on fixed income right here. Bonds are very popular at the moment. Yields have come in quite a bit. Is there still value? Look, as someone that manages fixed income portfolios, I'm glad to finally see people so interested in fixed income. But we've had yields fall pretty tremendously as of late. And you look, I mean, the Bank of Japan with the yield curve control

not making that second move people thought they would make. You have inflation expectations starting to come down. You have the recession starting to come down. You have the recession fears that people are coming back on just a little bit. So you have a flight to quality. There's a lot of elements there pushing yields down. But I think we're overbought at this point in time. I think we're going to see yields move back up. I think especially as the Fed continues its hike with the Fed funds going towards 5%, you're going to see those yields goes up. And remember, inflation may have peaked, but that doesn't mean that we're done with rising inflation. I think you're still going to see rents move a little bit higher. You're still seeing wages. The percentage change may be less, but I think there's still some issues there. So

let's keep an eye on yields moving a little bit higher. Yeah, I guess too soon to declare a victory there on inflation for sure. Victoria, thanks so much, Victoria Fernandez. As we head into the close, less than a minute to go, the S&P 500 on track to decline about three quarters of one percent. It actually has slipped a little bit just in the last few minutes. It's hovering right around that thirty nine hundred level mentioned earlier also around this twenty day moving average level as well energy is having a bounce today uh wti accrued up one percent uh fixed income kind of stabilizing the volatility index has actually gone on to a little bit of a higher range uh we're now in the low twenties uh pretty steadily at this point also the new more new highs the new lows on the nasdaq kind of an interesting change in trend now that we are about 14 months past the ultimate

all-time peak in the NASDAQ, at least. The Dow down 260 as we head into the closing bell on this Thursday. That's going to do it for Closing Bell.