Closing Bell - Bell: Stocks sink to start week, Checking in on China, Furman’s Warning 12/5/22

Episode Date: December 5, 2022

Stocks pulled back hard to start the week, as new economic data caused more uncertainty about the Fed’s rate hike path. Former Council of Economic Advisers chair Jason Furman discusses how high he thinks the Fed will have to raise rates, and if a soft landing for the economy can be achieved. Katie Stockton from Fairlead Strategies and Alli McCartney from UBS give their take on the market pullback. Eurasia Group’s Ian Bremmer talks about the impact of a softer approach to Covid in China. Plus the latest on oil’s wild day, Tesla’s pullback, and why REITs are feeling the heat.

Stocks under pressure to kick off the new trading week as more strong economic data raises questions about the Fed's path forward. We are near session lows right now. This is the make or break hour for your money. Welcome to Closing Bell. I'm Mike Santoli in for Sarah Eisen. Here is where things stand in the market. The S&P 500 sitting on about a 2% loss. That kind of gets it down toward where the rally started during Jay Powell's kind of public remarks last Wednesday, but not quite that low.

The Dow off more than 500. The Nasdaq continues to underperform. Bond yields up a little bit on some more sturdy economic data. Take a look at the sector heat map in terms of where the damage is really being felt. It is, for the most part, in the cyclical parts of the market. Although utilities, the yield sector is getting hit as well. You do have things like financials particularly getting hurt, as well as consumer discretionary and energy coming up on the show. We'll talk about China's changing COVID policy and the impact on the market and relations with the U.S. when we're joined by Eurasia Group founder

Ian Bremmer. And later, former Council of Economic Advisers Chairman Jason Furman says the Fed may have to go higher with rate increases than people currently think. He'll join us to explain why. Let's take a look at today's action in the S&P in the year-to-date context here. Now, this is a very logical point for the sellers to really show up and try to get somewhat aggressive in talking about how this rally off the October low looks a lot like in magnitude and character what we got from June into mid-August. It just went right up to the whole downtrend line from the entire year-to-date decline. So it seems like the moment when it might have happened, you had the volatility index sink below 20, all these things coming together.

Now, you did have a weaker dollar and also better seasonal trends, which maybe supports the market a bit more. Also, arguably, we are closer to when the Fed might be slowing down, if not pausing. So all those things going back and forth. And as I mentioned, we're still about one percent above where this rally started last Wednesday. However, last Wednesday is the one day in the last seven when the S&P has actually been up. Take a look at the rest of the world. That's the ACWX versus the U.S. on a year to date basis. You see global stocks kind of catching up to the U.S. on a year to date basis. You see global stocks kind of catching up to the S&P 500 on a year to date basis. The dollar coming down. Also, they are earlier in their kind of reopening and revitalization period and did not have the high

highs in terms of manufacturing that they're coming down from as the U.S. is right now. So you can keep an eye on that. Also, kind of value sectors are more global versus the U.S., which is still a growth centric market. Let's continue the market conversation now with Fairlead Strategies founder and managing partner Katie Stockton. She is also a CNBC contributor. Katie, great to see you and have you on a day like this. How are you thinking about this pullback that we got that we're getting today and and how deep do you think it might go well i'm not entirely convinced that this is the start of the reversal down but it certainly doesn't help the indicators we have short-term momentum falling off a bit in here it's starting to impact our short-term gauges to some degree but not on a widespread basis yet so we want to give it a couple of days and reevaluate.

There are signs of upside exhaustion very similar to what we saw in mid-August. So your comparison, Mike, to the recent summertime relief rally is very fair. The indicators are set up similarly. The declines on the back of that, of course, were very severe. So we're sort of mentally preparing for something like that. I do have a sense that perhaps the positive seasonal influences into year end might prevent that until January. But even still, the upside appears to be limited here. You mentioned, you know, as we've been talking about the similarities to what we saw in the summer.

What are the differences aside from just the seasonals? Is anything about the nature of the rally, the internal behavior, the leadership or anything distinguishing it from what we did see in August with that peak? Not to any great degree in my work except for the fact that it's just a more mature bear market cycle at this stage. And we like to see it mature just in terms of the time frame which we're considering to be year to date but the market internal measures have not gotten to that place where they're really extreme yet. I think we are going to need to see some kind of VIX reading that's up in maybe the 50 area before we see this bear market cycle culminate and market breadth looks very similar as well. We saw great breadth expansion for a few

weeks, and we have that now here as well. And yet it still is at a lower high versus previous highs. So the breadth measures are still in these downtrending situations. That suggests that we'll see more participation on the next down late. And is the pullback that we're seeing in energy, of course, by far the leadership sector of the year, it's continuing today, it's still very modest in the grand scheme of things, but is that something that you think you should be concerned about, or is it an opportunity? Well, if you think about the energy complex, it really hadn't rallied that, or downtrended just like crude oil prices had or like natural gas prices had. So it's somewhat

remarkable how well the energy stocks have held up in light of those declines in the commodities. Now that we're seeing natural gas today down something close to 10.5%, again, I find it somewhat remarkable that the reaction just isn't that terrible. And yet natural gas is looking overdone to me on the downside based on the Demark indicators. And WTI crude oil has good support in the $70 to $75 per barrel range. So I do think that there's a floor to this weakness in the commodities in there and also that the energy stocks will be able to resume their longer-term uptrend and also longer-term trend of outperformance. We have in the energy sector something close to a 60 percent gain year to date. And I think we can trust that next year

won't be quite as impressive in terms of relative performance. Katie, thanks so much. Appreciate you running through it all with us. Of course, Mike. All right, Katie Stockton there. Let's talk more about crude pulling back this afternoon amid a number of moving parts in the industry, including an OPEC meeting over the weekend and the implementation of a price cap mechanism on Russian oil. Brian Sullivan joins us live from Brussels with the latest. Brian, what in all this should we be most focused on? All right, let's get to the takeaways here, Mike, for you, because it's been a long day. A lot of headlines coming at everybody. Number one, just the bottom line, it's a new salvo in Europe's energy crisis. As Dan Juergen said earlier, it's kind of day one of the second stage. The price caps, the EU sanctions, Russia has vowed retaliation.

And this price cap, in addition to trying to cap the price of oil sold to non-sanctioned nations, may actually also limit Russia's access to crude oil tankers because of financing and insurance regulations, which would limit the amount of oil they can sell around the world, unless they start to build out what we have called sort of Russia's secret oil navy, documents that have been obtained by CNBC showing a number of things. Number one, a large number of really old superankers, some of them bound for the scrapyard, most likely, have been sold to what they call undisclosed buyers. My sources at Ship Brokerage Houses say they don't exactly know what that means.

Obviously, it's undisclosed, but that it's likely either meaning it's Russia or related to it. Here's why. We know the other countries. Here's another document that we received today about this topic. Look at this. 52 recent sales of supertankers have gone, Mike, to undisclosed buyers. You've got UAE.

You've got China on there as well. India follows just off that list. So one wonders what kind of sort of naval, oil naval fleet that Russia may be building up. Now, tomorrow we're going to be talking about natural gas. Today was oil. Tomorrow is natural gas. The U.S. role. You just heard Katie Stockton talking about it. And I want to end with this. Earlier this week or last week, rather, the CEO of Spain's largest utility and

gas importer, Enegas, made one point very clear. Despite decent storage levels right now, the energy crisis here is far from over. Listen. Definitely the crisis in Europe is not over, but it's true that we are initiating the winter season in better conditions than expected. So today, Mike, I think it's fair to say is day one of the next leg. This year probably covered next year the very real concern. We're going to hit it all day. probably covered next year. The very real concern, we're going to hit it all day. The role of U.S. LNG, talk about companies and stocks that may benefit as we are just selling so much to Europe because let's hope it doesn't stay cold here. Cold is bad. Back to you. Yeah, for sure. And of course, kind of squeaking through so far

this winter, Brian. But I want to bring back what you were talking about in terms of, you know, the shipping maneuvers and all the rest of it, as well as what OPEC did or didn't really do this weekend and knit it together with a 3 percent drop in Brent crude. Is it just a market's evaluation that looks supply in aggregate is not going to change that much? Or are there other macro factors driving things today? Okay, macro factors. Do not forget about the fact the U.S. is still selling oil from our SPR, Mike. That's about, whatever, a million barrels a day. That's still going on.

It's about ready to wind down soon. So there's been kind of this artificial force, and they're going to have to buy that back. Also, with regards to super tankers, there's a lot of confusion out there about what kind of rules these tankers need. There's been multiple reports today of basically traffic jams of tankers built up near the Bosphorus, near Turkey, because these ships don't know the kind of documents in terms of insurance and financing proof that they might need. So I talked to people today and there's this thought that maybe it was a huge amount of Russian oil production right before the sanctions hit. So the market kind of flooded with oil, probably why prices came down, Mike. If that oil sits at sea, almost like artificial storage for a while while we try to figure this out, the Brent crude price forecast, the mean forecast, is I think $94 for next month or the end of this year.

So we'll see if this little short-term lull lasts. Not many I've spoken to believe it will. Yeah, a little shadow supply there, Brian. Great color. Thanks very much. Thanks. All right. Stocks are sinking in the U.S., but Shanghai and Hong Kong got a major lift today as China relaxes some of its strict COVID rules.

Up next, we'll ask Eurasia Group founder Ian Bremmer about the impact of looser COVID policies on the global markets and geopolitical relations. Dow down 510. You're watching Closing Bell on CNBC. We're just off session lows here in the U.S., still under significant pressure as we head toward the close. The Dow down about 1.4 percent. But a different story in Asia. The Hang Seng and Shanghai Composite finishing in the green overnight, rallying on hopes of continued reopening and easing of COVID restrictions in China. Apple, meantime, is looking to accelerate its shift to move production out of that country, according to reports. Joining us now, Ian Bremmer, president

of the Eurasia Group. Ian, great to catch up with you. What's your sense about what the Chinese authorities are doing here with these kind of marginal easing of COVID restrictions? Is it simply a gesture in response to some of the public outcry, or do you think that it's part of a longer-term relaxing of measures? Look, I think there's a real effort here. There is a clear pivot away from focusing on lockdowns towards focusing on vaccination rates, particularly for the over 80 and those with significant pre-existing conditions that you're not going to hear the word mandate. But if you if you don't have a terminal disease and if you're not getting chemotherapy and those are these exemptions,

they're going to be working very hard in urban areas to get all of those people vaccinated, boosted by the end of January. And that that does reflect a desire, first of all, not to have major demonstrations occur again. And secondly, to respond to a popular outcry that was not coordinated. It wasn't a matter of political opposition. It was two years of people having enough. So I do think there's an effort to accomplish that. But we need to understand that given the lack of efficacy of Chinese vaccines and continued concerns about hospitals getting overwhelmed,

that reopening is going to be cautious. It's going to be slow. And there might be backtracking if local officials find that they have um you know explosive caseload that's too great for them to handle and presumably uh you know president cheese is also wanting to make sure that there's not really long-term damage to the economy beyond what it's already suffered and you know trying to uh to get beyond this phase uh of retrenchment that the Chinese economy has been in? I would say that is absolutely not the short-term priority.

Xi Jinping, in his party congress speech, was not focusing on economic growth. He was focusing overwhelmingly on security, international security, domestic security, prioritizing political stability in the country. And that means that if Chinese growth has a three handle or four handle instead of a five or a six for the next year or two, but they don't have a million or two million or even five million, according to some studies, Chinese dying from COVID, that is something they're prepared to accept. And this wasn't just in the run up to him getting his third term in his private bilaterals at the G20 summit in Bali. There was no sense from Xi Jinping that he was moving away from zero covid. He felt very confident the Chinese model was correct one.

And and his the party senior party officials weren't planning on moving. I really think this is an incident where the population of China made a real difference in the kind of policies we're seeing out of a dictatorship. That's a pretty big deal, frankly, Mike. For sure. Now, if President Xi is mostly focused on security as a matter of the top priority, where does that leave it with regard to U.S. relations? I mean, you had a little bit of a flare-up of apparent tensions over Taiwan, and we have companies talking about moving production out. Where does that sit? There are still companies that are going to be moving production out, especially when you look at anything that feels in advanced technology like it can be dual use for the consumer economy as well as for the military economy. Those export controls from the United

States in October, those aren't going away. If anything, they're going to expand. And so clearly that creates a level of focused decoupling between the United States and China. But the relationship, I think, is more stable today than it was certainly when Pelosi was traveling to Taiwan. That three-hour meeting between Biden and Xi Jinping was about normalizing the relationship, about finding areas where the two sides can compromise and cooperate, not just in areas where there's going to be very strong competition. And Xi Jinping is not looking for a bigger fight with the Americans right now. If you look at China's policies towards the American private sector since his third term, as well as towards the Germans, the French, American allies around the world,

it's been wanting to ensure that those economic relations overall, the trade relationship remains robust. And I think that that's a time to the extent that you're seeing more pragmatism from the Biden administration. It comes because it's easier to be pragmatic on China foreign policy as an American if it feels like it's coming from a position of strength as opposed to weakness. And I do think that's the way the Americans perceive it right now, both because of political instability, concerns and economic challenges in China, and also because of the midterm elections in the U.S. and recent legislative successes. Got it. And just quickly, you know, you talk about, you know, Biden and Xi looking for areas where the countries might cooperate.

What might that look like? Well, I mean, some of it's going to be reengagement on climate. Some of it is going to be efforts on trade that isn't decoupled. I mean, this is one of the most important interdependent economic relations in the world, and no one wants to see that die. So, I mean, I think it's all about restarting high-level negotiations and engagement between cabinet members in the United States and cabinet members in China

that through the pandemic had really been frozen. Let's face it, this is the two most powerful countries in the world. And for two full years, the leaders of both countries had not met face to face, despite the fact that they've been, you know, had a reasonably close and engaged relationship for well over a decade. That's that's almost unprecedented in peacetime. And it's good to see the back of that. Yeah a bit of a new- maybe steady our equilibrium there in- great to talk to you thank you very much. You too man. Good. In Bremer- let's check on

the markets now you said the Dow down just about five hundred points S. and P. five hundred. I down just about two percent brown where it was in the last half hour Nasdaq under performing in the Russell. Down three percent but take a look.

At the regional banks today they are sharply underperforming in the Russell, down 3%. But take a look at the regional banks today. They are sharply underperforming the market as the financials move lower. Regional bank index there down more than 5% ahead. We'll talk to the CEO of KBW, who will join us with the bull case for the group. Closing bell. Be right back. Let's check out today's stealth mover. It is Science Applications International Corporation, the provider of technical, engineering and IT services for the U.S. government.

Beat revenue and earnings estimates for the third quarter. Company also raising revenue guidance for fiscal year 2023. And stock is up more than 4 percent today, more than 30 percent year to date. Part of that leading aerospace defense category. After the break, former Council of Economic Advisers Chair Jason Furman says the economic data over the past few days could spell trouble for the Fed and the market. He'll join us next to explain. This year's final Fed meeting is next week, and after Friday's hot jobs report, will the Fed have to raise rates by more than the market expects?

Let's bring in Jason Furman, former chairman of the Council of Economic Advisors, to talk more about that. Jason, it's great to have you here. You know, there was a little bit of an instant revisionism about the jobs number on Friday. People saying, well, maybe it was weaker than it looked on the surface. You had a shorter average work week, and maybe the wage growth wasn't as strong. But you immediately felt as if it actually did show the economy running pretty hot. Walk us through that. Sure. First of all, I think the wage growth is the most important. That's the output of labor market tightness or labor market looseness. You had the

eye-popping November number. I like to look at an annual rate, 7.8% annual rate. People were right to point out part of that had to do with quirks in hours and severance pay and the like. But here's the thing. September and October were both revised up by 1.2 percentage points at an annual rate. That's among the biggest upward revisions we've seen. And that means average hourly earnings growth trend is probably about 5.5%, which means trend inflation is probably about 4.5%. And that hasn't fallen over the course of the entire year. So do we are we confident in in the direct linkage between the core wage growth and how it translates into realized inflation in the coming year? Because that's going to be key to how, you know, the Federal

Reserve has to treat it. Am I confident? No, there's obviously large error terms around anything. But if you tell me that over the next year, we're going to have five and a half percent wage growth, I'm going to tell you we are going to have four and a half percent inflation, core inflation, you know, plus or minus something. And the plus or minus aren't huge. And they're roughly symmetric, the errors around that. And so where does that bring us, do you think, in terms of because it's interesting when we talk about how likely is a soft landing, people seem to be thinking it's either a soft landing or it's a drop into recession relatively quickly, as opposed to things just continue to run sort of hot with inflation above trend and maybe the job market remaining very

strong. Where do you think it's settling out? Look, I think there's four possibilities here. There's a soft landing. I think at best about a 10% chance of that. Really hard to bring this magnitude of inflation down without a recession. There's the hard landing that solves it. But yeah, I agree with you. I think there's two scenarios that are even more likely than either of those. One is continued overheating. The unemployment rate stays below four and a half. The inflation rate stays uncomfortably high. I think, unfortunately, the most likely scenario is we have a mild recession. It brings inflation down, but it brings it down to something like three and a half percent. And so it does not solve our problem. And we need to have another go at the whole thing. A go at the whole thing, meaning the Fed would have to retighten, I assume, from that point on.

Yeah, exactly. Yeah. Yeah. Sometimes I talk to people in markets who are like, oh, you have a recession and then you get 2% inflation. No, recession means lower inflation. It doesn't mean 2% inflation. So that you might end up at the back end of a recession, maybe a mild recession with a 3.5% inflation rate. And then you have to have, you know, a whole nother tightening cycle. So I

don't think that's like rates go up, rates go down, rates stay down. We might have to deal with this more than once. And just quickly, you think that 6% is reasonable to target as a Fed funds rate as this unfolds? I think it's fine for them to follow the data. I think 5.25 is the most likely. I think 6, though, is there a 20, 25% chance of that? Absolutely. Right. Yeah. Wall Street Journal is suggesting today that the range might get up to 5.25 next week. Jason, it's great to catch up with you. Thank you so much. Good to see you. All right.

And here is where we stand in the markets. You see the S&P 500 down 1.9%, just barely off the lows of the afternoon. NASDAQ continues to underperform, as does the Russell. And the Dow is slightly outperforming. Up next, we'll talk about the big underperformance today for the regional banks with KBW CEO Tom Michaud. We'll ask if he's standing by his bullish call on the group. And you can listen to Closing Bell on the go by following the Closing Bell podcast on your favorite podcast app. We'll be right back. Regional banks deep in the red today, down more than 5 percent, underperforming the broader market.

Let's bring in Tom Mischoff, CEO of KBW. It's a Stifel company right here at Post 9. Tom, good to see you. Great to be with you. So you as a firm, you've been pretty favorable toward the regionals most of this year. They have outperformed versus other banks. Where does it sit right now? Because you've got them getting hit hard today, a lot of concern, obviously, about macro, maybe credit and consumer stuff, but also deposit trends as well. So we've been getting cautious as the second half has been unfolding. So in the second half of the year, we've pretty much reduced three ratings for every one that we

increased. So we're getting a lot more narrow in our regional bank recommendation. Regional banks, the KRX is the index that we follow, has outperformed the S&P and the big banks by roughly 13%, 15%. So it's been a good call year to date. However, we're getting more focused on banks with strong balance sheets, especially when it comes to deposits. Okay. Some of the concern out there just with the regional banks as we see them today has been, what are they going to have to pay for deposits or just deposits actually in an ebb tide kind of after the pandemic? So let's start with the big picture. So the big picture is COVID happens. The government response, both from fiscal policy and monetary policy, is to flood the economy with support. So we believe that roughly

$3.2 trillion of excess deposits made their way to the banking system. And now we're unwinding that. So we think that number's now down to $2.5 trillion. And so banks are seeing deposits starting to flow out of the system as they look for higher rates. Now, that's OK if you're a bank with plenty of deposits. But if you're a bank with plenty of deposits. But if you're a bank that has a very high loan to deposit ratio, it's changing the dynamic for you. So we think that the character of each bank balance sheet is a little bit different. And so we think that you're going to start to see a slowdown in growth over the coming quarters on banks who don't have the same degree of core deposits. Where does that take you in terms of the better positioned banks right now?

So here's what it is. So if I wanted to boil it down to what I think makes the most sense, is there are some outstanding regional banks around the country that trade it. Seven times next year's earnings. They got really good dividend yields. I think they've always done well on credit in the past. I think of companies like Old National, Webster, East West Bank. Those are some of the core names that we've been recommending.

So we like that group. We've also now been going back the other way. Earlier this year, we upgraded both Goldman and Morgan Stanley because our view is that there's a rolling recession going through financials. The mortgage business and the investment banking business today feel like they're already in a hard landing recession. So our view is what are the stocks telling you? going through financials. The mortgage business and the investment banking business today feel like they're already in a hard landing recession. So our view is, what are the stocks telling you? We upgraded Goldman and Morgan when they were really out of favor. They've been working well.

Our view is that sooner or later, the capital markets are going to open. And when they do, you're going to see really robust results out of the investment banking sector. So we've started to reverse the call that we had at the beginning of 2022. Does all that imply that you're not particularly concerned about credit quality eroding in consumers or corporates? So we are generally a soft landing shop. And I would say that's generally how we've built our models. We're expecting higher credit costs. We're expecting inflation to kick in. We haven't expected a hard landing as far as credit goes. But I'll tell you, we're paying a lot of attention to the shadow banking industry. We've been all talking about the last two weeks. I think it's kind of notable

that there have been no hiccups in the banking industry, yet we've had some severe stress and bankruptcies in the shadow banking, which is that crypto world. So there's going to be, I think, on the fringes, the greater risk-taking balance sheets, we think, are the ones we're staying away from. Yet we think the companies that have done well in prior turns are the ones that we like the most now. Tom, thanks very much. Mike, good to be with you.

Appreciate it. All right, up next, analyst Dan Ives will join us to talk about the report that is sending Tesla shares sharply lower today. That story plus Salesforce sinking and REITs feel the heat when we take you inside the market zone. We are now in the closing bell market zone. Allie McCartney from UBS is here to break down these crucial moments of the trading day. Plus, Dan Ives on Tesla's pullback and Deirdre Bosa on Salesforce. Let's get started talking with the markets.

Ali, we've got about a 2% little gut check here in the S&P 500. Maybe no big deal after we got this rally of as much as 17%. But it seems to show how delicate the path is, perhaps, to a favorable economic outcome. We got two days of relief when we thought maybe the Fed was going to pause. They got a couple of days of pretty sturdy economic numbers, and now we're worried again. So where does that leave you heading into year end with your stance on the markets and discussions with clients? Wow, there's a lot in there, Mike. The last week has been a series of just days of whiplash, right? I mean, ultimately, we have this seesaw where trading activity, price action is whipsawing between which is going to go

down further and farther, inflation or growth. So you have a day in which China feels like it's going to be reopening. The growth story wins. The market goes up. You get good inflation news. And then that dominates. I'm thrilled that we've had the recovery that we have. I think as all your guests have seen, we certainly see more medium and near-term risks than we do upside. And largely that's because if you think about where we are and what the expectations are for earnings, for growth, for inflation, for the path of interest rates in 2023, and then you contrast that to a market that is trading from a multiple perspective above its historical high, that just doesn't jive. So I think from a market's perspective, December, we're not expecting a lot of new news, but we are expecting some tax loss harvesting selling, and we're expecting a lot of institutional money to probably stay on the sidelines and wait for the January reset. So this is a time to be thoughtful about how you're positioned, how much cash you have, where you want to be going

into next year and what the expectations are. Probably not to take additional risk or be too cute. And what about this rally that we've seen in bonds? I mean, a lot of folks seem to have listened to the observations people have been making about it. You've got some relatively safe yield to lock in. Where do bonds sit right now in terms of the risk reward? So I think for the first time in, gosh, 14 years, you know, it's pretty high up on the scale. And so for people like me and my clients, the ability to, you know, to be able to incorporate something into a diversified portfolio beyond equities is definitely pretty exciting. We have taken some short-term high-grade credit on the table, but we're still a little early,

I think, to really completely lean into that trade and a little too uncomfortable with what's ahead of us to get really truly into upper tier high yield. But I think that the exciting part of 2023, even if we have a rocky first or second quarter, which we are expecting, is that for the first time since I ran a derivative desk during the financial crisis, we are going to have the ability to invest in bonds in certain parts of the equity market and in many parts of the private market in a really fundamental way once the story gets back to fundamentals and not just technical price action. And that's pretty exciting. Yeah, it's certainly a big title shift in terms of there being a bit of a cushion to the markets

from bonds. Let's talk about Salesforce at the bottom of the Dow today, dealing with another executive departure. This time, Stuart Butterfield, Slack's CEO, who's leaving around a year and a half after that acquisition of Slack by Salesforce closed. Last week, the company said co-CEO Brett Taylor was stepping down. Deirdre Bosa joins us. And, Dee, aside from losing Taylor, the street becoming a bit concerned with the fundamentals of the company. Kind of tease out exactly what seems to be plaguing the stock at the moment. Yeah, so it's that top-line growth.

They have actually been improving the bottom line, their operating margins. However, this is a company that has been known for, you know, 20%-plus revenue growth over the years. And at the mid that has been known for, you know, 20 percent plus revenue growth over the years. And at the midpoint of its forecast for the current quarter, it's expected to grow just nine percent. So this is a big step down. And the departure of Butterfield and Brett Taylor and, by the way, the Tableau CEO, Mark Nelson, he also left over the last week fairly suddenly. That's raising questions about who is going to lead the company next after Benioff. I mean, he's been trying to figure out a succession plan for some time. Brett Taylor was the second co-CEO. That didn't work out. There's other people at the company. But again, people in

the street love people like Taylor and Butterfield because they had created their own companies. So who is remaining in Salesforce? That's one of the key questions to sort of lead. And who wants to lead Salesforce if it's going into a slower growth period where maybe it's already established? Yeah, I mean, a slower growth period, perhaps. And I guess also it seems to also fit in the category of a lot of these large companies that were enjoying such long-term tailwinds in terms of top-line growth, secular growth in your categories, and now maybe find themselves either overstaffed or just not productive as they'd like to be in some areas? So I guess as a founder, Mark Benioff, the person to try and streamline things if that's what has to be done. Yeah, and we know that Mark Benioff is a sales and marketing machine. He is so highly regarded here in the Bay Area for that.

The key question is who's going to be in charge of that next generation technology, continue that growth from that pandemic bump. There's a few candidates there. People know Sarah Franklin. She's CMO. Also Brian Millam. He is the current COO. Excuse me, Sarah Franklin is CMO. There's also a name that is a little bit more under the radar, a guy named Steve Fisher. He rejoined the company about two years ago, and he was seen largely as an architect of Genie, Salesforce's sort of latest technology, big breakthrough. So there are some people who could do it, but attracting that engineering talent, Brett Taylor was really seen as key to that because he was so well regarded.

So at a time when they are heading into slower growth and they need to continue that sort of pandemic run or maybe become a little bit more leaner, who's going to do that? Who's going to pick up the slack? Yeah, it's a really interesting moment for the company. Meanwhile, after being cut in half, the stock looks a whole lot less expensive than it almost ever has,

if you believe the cash flows that are now projected. Dee, thanks very much. Great color on Salesforce there. Tesla also under pressure today. The company refuting a report from this morning that the EV maker is planning to cut production of the Model Y at a Shanghai plant. But shares are still down more than 6 percent, one of the worst S&P performers today. Let's bring in Wedbush Securities Analyst Dan Ives.

He has an outperformed rating at a $250 price target on Tesla. Dan, you know, whatever the specifics of, you know, production cuts, not so much, you know, as reported or what from Tesla in Shanghai, it seems as if just general sense out there that China is not really firing right now as a growth driver. Where does that lead to stop? Look, I mean, China is the hearts and lungs of as a growth driver. Where does that leave the stock? Look, I mean, China is the hearts and lungs of the Tesla story. And I think they did come off a strong month in November. Competition's increasing, but I still believe, I mean, they're going to battle through some of these recessionary headwinds in China. The long-term story is still there. I think there's a company that's going to do over 2 million deliveries overall into 2023. But the stock reacting, because this is, you know, I'd say a gut punch,

at least from perception, you know, in terms of the Tesla story. But I do believe this is more of just a near-term patch, not the start of a longer-term trend. There was a time, Dan, I mean, actually for most of the last several years, when a report like this, you know, wouldn't really hit the stock because you had those people who were so focused on the big picture and what Tesla was going to be doing to change the industry and the world down the road. And now you have a stock that's a half off of its highs, and it seems almost like it's just lost the benefit of the doubt where you have, you know, Elon Musk preoccupied with, preoccupied with Twitter or whatever the other reasons are.

I would say, look, I mean, look, it was a Cinderella story for three to four years. And they've hit definitely a significant, I think, sort of headwind, not just in terms of China, but from perception, especially when it comes to the Musk Twitter overhang. They're battling through that. I think you've seen a stock that right now is a glass half empty from a Wall Street perspective. And I think you're seeing a lot of jittery investors. Any news like this, you'll see the knee jerk reaction, especially with China. That is the winch pin of the growth story. But look, in my opinion, that long term transformational story for Tesla is unchanged.

But clearly they're going through what I view is sort of a fork in the road situation in China. I mean, are clients, in theory, worried just in general about expensive consumer goods if people are starting to brace for some kind of an economic recession? Well, I think the bigger worry, and I heard this morning from clients, is competition in terms of EV in China. You've got BYD, NIO, others. Is that something? Is Tesla going to have to cut price?

That's potential. They could cut another 4% or 5%. But I do believe there's a massive opportunity in China on EV. I mean, that could be what is a trillion-dollar market opportunity in terms of the industry. I think that's the bigger worry, is that almost a Game of Thrones I mean, that could be what is the trillion dollar market opportunity in terms of the industry.

I think that's the bigger worry is that is that is that almost a game of thrones in the EV race in China. Yeah. Ali, how would you think about one of the I mean, this is like the marquee kind of busted momentum stock that's already kind of taken its its medicine to some degree. I think the last question you asked is the one that I would ask, which is, do you want to be anywhere in consumer discretionary right now? And it's a really hard place to be. And when you have both cyclical headwinds and then you have all of the very specific and esoteric issues around the stock and its leadership, and you've had such amazing price performance over the last number of years. Is this the place that you want to be for the now? And I would argue that there are other more defensive and quality names to be in that have much less hair on them. Yeah, that would seem to

be the way the market is leaning at the moment. And our thanks to Dan Ives. Appreciate it, Dan. Let's talk SL.L. Green. This stock tumbling today, Manhattan's largest landlord, on pace for its worst day since September. The company announcing it has cut its dividend by nearly 13 percent. Let's bring in Diana Olick to discuss this. And, Diana, in addition to this cut today, also seeing problems with apartment and industrial REITs. So what's behind all that? Yeah, Mike, it's rough for REITs out there, no question.

SL Green is an office REIT, and they're still looking at the work-from-home issue. And on top of that, they're seeing tech cuts because of the inflationary environment and rising interest rates, et cetera, layoffs at tech companies. So that's SL Green. Then you move into the apartment and the industrial sector, and we saw news this week from two very large non traded REITs and those are SL Green's S REIT and Blackstone's B REIT and they announced that they are limiting

redemptions by investors because they reached their limits. So why are investors wanting to redeem? Well, because they're nervous about the markets, of course. They're concerned about the rising rate environment. They're concerned about the economy overall and how that's going to be hitting rents. We're seeing rents, which were sky high, starting to weaken a bit, which hits apartments. And then, of course, we're seeing if you have a recessionary economy, that's going to hit warehouse because people just aren't buying as much. So you don't need so much stuff to store. So we're seeing the publicly traded apartment REITs, names like UDR, Equity Residential and Camden, really getting slammed down over 30 percent year to date.

And some of the fundamentals, though, are still pretty good. If you look at the coastal markets for rents, those are weakening a bit. But say Camden is in, you know, the Sunbelt area, which is still quite strong. And yet they're still getting slammed along with that whole REIT bucket that investors are just really, truly nervous about, Mike. Yeah, there's no doubt about it. So it does seem as if, you know, you have to separate the subtrends that are going on in there. And I guess the bigger question, you mentioned the Blackstone situation. That was a private portfolio where they can kind of mark their assets as they wish, whereas the public markets,

Diana, seem like they've taken a lot of that pain. Right. And you're seeing this very, very wide gap between what those private funds are saying and what the public markets are saying. And I think that's where things get a little bit interesting because you don't know as much about those as you do what investors are doing in the public markets and where we can see where the rents are having their impacts, et cetera. So I think that's when we have to watch that divide between those two over the next couple of months. No doubt. Diana, thank you so much. Ali, what about this idea of REITs? I mean, obviously, people went there for income. Now you can get similar yields out of many areas of bonds. Do you think that there's any value in office REITs or any other parts of the REIT space at this point? I would separate the discussion because we all know that no real estate,

not all real estate is created equal. And I think that's never been more true than it is now. So I would say you want to lean in in areas where the demographic supports you for all the reasons Diana just highlighted. That's probably not in offices given the systemic change that we have seen, but there are certain both geographic areas and areas of sort of the economic structure that I think are still supported. Now, when the public versus private conversation, those are different too, because you have the price action of a lot of the public REITs, whether they're good, bad, or indifferent, largely being informed by the interest rate movement during the day and as a duration and interest rate sensitive vehicle, as opposed to fundamentally saying, is this an undersupplied

or oversupplied area? What are the demographics? Are they helping or hurting? And so office is an area I would stay away from. Industrial and warehouse seems a lot more interesting. I've heard a lot of anecdotal news that you wouldn't expect around retail shopping centers getting more traction and having lower vacancy rates than they have in much time. But I think you need to really dissect where you're investing and why you're investing there and what your thematic reasons are for doing so. Yeah, probably not the time for the broad real estate sector ETF maybe at the moment. Ali, thank you so much for the time today. I really appreciate it.

Let's take a look under the surface of the market here. It's been a pretty broad sell-off for most of the day. The New York Stock Exchange is running with just about 90% downside volume. Didn't want to take a look at the two-year note yield. It did perk up as well today. You got the strong ISM services data, as well as that Wall Street Journal report about the Fed maybe going higher for longer, even if it is slower.

And so now we're up about 4.4%, although the S&P 500 has seemed to coalesce right around that 4,000 mark to close. So we've gone back toward Thursday to Wednesday levels of last week, have not given up the entire pop we got on Wednesday when Jay Powell did speak about the possibility of slowing down the pace of rate hikes.

The volatility index up above 20 again after one day's close below that level. That'll do it for Closing Bell right now.