Closing Bell - Charles Schwab’s Liz Ann Sonders On 2024 Playbook; Bessemer Venture’s Byron Deeter On Top Software Opportunities 12/19/23

Episode Date: December 19, 2023

Charles Schwab Chief Investment Strategist Liz Ann Sonders on the Fed’s next move and if markets are overreacting right now. FedEx earnings with instant analysis from Melius Research’s Conor Cunningham. Global Defense Lead at Palantir, Doug Philippone, talks investing in the sector, the state of global security and how uncertainty in the Red Sea is impacting supply chains. Bessemer Venture Partners’ Byron Deeter on investing in software in 2024 and potential fallout from Adobe and Figma walking away from each other.  

Another record close for the Dow Industrials. The S&P less than 1% from a new all-time high as well. But the small caps, the real outperformer today, that is the scorecard on Wall Street. But the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. And one of the last major earnings reports of the year is due for delivery in just minutes when consumer bellwether FedEx shares. Results, we're going to bring you the numbers and expert analysis. Plus, we'll talk about investing in defense as tensions ramp in the Red Sea with Doug Filippone, the global head of defense at Palantir and the co-founder of VC firm Snowpoint Ventures. And Charles Schwab, chief investment strategist Lizanne Saunders is

going to join us to talk about stocks relentless push higher into year end and where she sees them going in 2024. Stocks climbing again today with the Dow and Nasdaq notching their ninth straight day of gains. The S&P 500 logging its eighth positive day in nine. Mike Santoli is at the New York Stock Exchange. And Mike, on the S&P, we're almost exactly where we were two years ago, at least on the top line number. But I take it things have changed quite a bit beneath the surface. They have. For one thing, you know, we're getting back to these levels that, remember, were first reached a couple of years ago when the economy was a little bit smaller, when you had earnings base that was lower, and when you even had valuations slightly higher, even though things are getting a little rich again. So making a round trip in

two years to the same level is different than racing higher to that level and being a little bit overdone. So all those things I think you could throw into the mix, even if in the short term. Look, why is the collective value of all U.S. corporations up half a percent today when not a lot happened? That's just people's increasing willingness to have their equity exposures go higher, feeling good about the rate backdrop. The fact that you had the Atlanta Fed GDP revised higher to 2.7 percent today, housing starts coming in strong. You've gotten continued confirmation of people looking on the bright side of things. Something will come along, presumably to produce a bit of a scare before long. But for now, people are relatively comfortable with the setup. Yeah, we talked about small caps, Mike, having another very strong day, finishing the day up

about 1.9 percent. We've also seen quite a number of the sectors and groups that have been most shorted or have been hit the hardest this year really rallying again to perhaps most notably solar, which has had its fair share of challenges as of late. There's no doubt about it. And, you know, I think I always point out that that is always a feature of a market that is kind of getting into bullish mode. When you have an uptrend that's starting and then starting to mature, you're always going to find the kind of discarded, neglected, cheap, washed out, speculative,

low quality stuff is going to start to run. If that becomes the dominant mode of the market, that becomes a problem. It shows you some frothiness. But we're coming up on the third anniversary of the peak in those types of stocks. They've been well and fully kind of trounced and sidelined for a while. So, yes, I don't know. I'm not going to underwrite exactly what the prices are and all of the junky stuff that was left for

dead after 2021. But I don't think the fact that they're rallying tells us necessarily that the overall market has all of a sudden become offside. OK, Mike Santoli, stay close because we're going to come back to you in just a few moments. In the meantime, let's continue this conversation with our first guest. Joining us now is Charles Schwab, chief investment strategist, Lizanne Saunders. Lizanne, great to have you back on. Thanks for having me, Morgan. It's interesting. The other thing we got today was Fed speak. Barkin, Bostick, and then I'll put Daly in, even though that was yesterday in a Wall Street Journal interview into this bucket, too. We had seen some pushback on some of the dovish

commentary coming out of the FOMC decision last week. And now with this latest round of Fed officials, it would seem maybe some pushback on the pushback. What does this mean in terms of the rate cut picture for next year? We don't know yet. And I don't think they do either. So we are, as I often joke, dealing with the Federal Open Mouth Committee. And there will often be cross-currents in terms of individual members and what they opt to say at any moment in time. I don't think there's been this sort of collective decision to put out a more hawkish commentary after the dovish turn that Powell took and in turn pushing back against that. I think each member is going to have their own view, but they are still data dependent. And I

think the fact that they fed via dot's plot has three cuts priced in for next year and the market has five or six, something probably has to give. And we do think it may be premature to assume a cut as soon as March. But I think between now and then, you'll continue to probably hear contradictions, even from within the Fed. You know, I was having a conversation with an investor yesterday, and I suspect looking at your notes that you'd probably concur with this, that it's not necessarily the number of rate cuts. It's the nature of the rate cuts. It's the size of the rate cuts and what's causing them that's going to matter the most. Right. Yeah. So I think that ultimately the trigger for the Fed

to actually pivot to rate cuts will probably be a function of their other mandate coming into clear focus alongside the inflation mandate. So the tightening part of the cycle was very much geared toward what was happening in inflation. And they weren't as focused on the employment side of their mandate. I think it's a combination of the two and not just in the interest of easing policy because real rates go up if inflation continues to come down, but making sure that there's nothing happening on the labor market side that runs the risk that premature tightening, I mean, loosening would reignite inflation and let it back out of the bag. So I think we need to keep a close eye on

the combination of inflation data and labor market data and really focus on the dual mandate, not just the inflation side. So, Lizanne, bringing it to the kitchen table, how do you filter for opportunity in this market? On one side, I see utilities, energy, consumer staples, health care have all been negative year to date. I wonder, could they perform differently from here? But then I see the WCLD topped its 52 week highs from July 31st today, the cloud computing fund, but it's still way under the 50 plus where it was two years ago. You know, in the case of energy, which is obviously in the leadership position today, I think short term, it's going to very much be driven by oil prices. And you've seen oil move up from the low 70s to the high 70s, more recently in part due to, you know,

Houthi attacks and the Red Sea and the potential problems with the Suez. So you've got that as sort of a one-off sector that is driven by obvious, you know, war and related issues and geopolitics. The other is, I think, you know, you get pops in areas like REITs and utilities with the move down in rates because it brings investors back into areas that they didn't need to look for income from when they could find it in money markets or treasury. So I think that there are individual drivers. The one thing I'll say broadly that is probably most compelling is just the equal weight. I mean, the S&P equal weight index swung in only a one-month period of

time from a 52-week low to a 52-week high. And it's a very condensed period of time for that to have happened. And when you look at swings like that in the past, the subsequent six-month performance looks quite good for equal weight. So I think that it's becoming more of a stock picker's market, and there are opportunities outside just the Magnificent Seven. And I think there's a lot of money that is still itching to look for opportunities outside that very concentrated small number of stocks. I want to mention FedEx earnings are out. We're going through them. You can see on your screen the stock is down about 5 percent initially at least. Lizanne, so tell me about how investors should think about their portfolios now.

You used to say your age was a decent proxy for the percentage of bonds and fixed income that you should have in your portfolio, but that rule hasn't worked lately. What's a better one? Well, I'm not sure that ever should have been a rule that all investors should adhere to. I think tolerance for risk is not purely a function of age. Also understanding whether your financial risk tolerance and your emotional risk tolerance are two different things. So financial risk tolerance is what we put on paper in part based on things like age and time to retirement. But, you know, if you're going to freak out at the first 10 percent loss in your portfolio, even if you have 40 years before you're going to retire, you're not a risk tolerant investor. So there's so many other factors that come into play. Speaking of factors, glad I just said what myself. I think this continues to

be a market where you want to focus more on factors. Just another word for characteristics. There has been much more consistency in terms of performance, outperformance. One factor in particular, return on equity. If you track the performance of that factor, looking at how the highest return on equity stocks have behaved relative to the worst, across all 11 sectors, that's been the winner. And I think that the monolithic sector call means you're buying a sector, yes, but you're getting great companies within it, you're getting terrible companies within it. And investing based on actual characteristics like return on equity and cash flow and profitability, interest coverage, even a valuation kicker in there, I continue to think that that's a better way to approach the market, especially in an environment where equal weight is finally having

its proverbial day in the sun. Okay. We're going to shift from FedSpeak to FedEx. Those earnings are out. Frank Holland has the numbers. Frank. Hey there, Morgan. FedEx shares down right around 7% right now after a miss on the top line and the bottom line. Looking deeper into the numbers. Frank. Hey there, Morgan. FedEx shares down right around 7% right now after a miss on the top line and the bottom line. Looking deeper into the numbers, one of the big issues in this report is that its express segment, where it gets about half of its revenue, missed on margin by a pretty wide margin, no pun intended. Estimates for 3.6% margin there. It came in at 1.7% margin, often seen as a proxy for efficiency. Remember, this is a company going through a business transformation and also a broad cost-cutting effort currently. So its ground

segment seemed to be a bright spot. Margin beat there. Within the report, the company also reaffirmed its full-year EPS guidance. There were a lot of analysts that raised its price target yesterday, expecting a beat and a raise when it came to EPS guidance. Instead, it was a reaffirming of EPS guidance. We're continuing to go through the report right now. But again, a miss on the top and the bottom line for FedEx. A big miss on margin when it came to its express segment. Ground seems to be one of the highlights in this report. Four-year EPS guidance reaffirmed and again, shares down more than 6.5%. Okay. Frank Holland, thank you. John, I mean, we're seeing this phrase again in this release, uncertain demand environment. Very much the focus here with FedEx, cost cutting amid

revenue that's been declining. And perhaps, you know, one of those key takeaways, a low single digit percentage decline in revenue year over year is now what's expected for fiscal 2024 versus flat revenue growth that the company had been expecting prior. It speaks to, as you're talking about, the uncertain economic environment globally, since FedEx is in some ways a global economic bellwether with all the goods it moves through so many parts of the world on a daily basis. It'll be interesting to see what they have to say on the call about that, even amidst all the cost cutting efforts at the company. Company is also trading at about fresh 52-week highs as of yesterday, so perhaps not surprising to see investors selling off with the high hopes going into this print.

Yeah, yeah. We'll continue to track that and talk about it throughout the show while this year-end rally pushes the S&P 500 to its highest level since September of 2020. So are we due for a pullback? Mike Santoli has some answers in the charts. Yeah, John. So the index itself is going back to those early 2022 levels, right around 4800. But this below is the relative strength index of the S&P 500 on a daily basis. That's basically just a momentum indicator. The persistence and steepness of this rally has taken it up to 80. And the last time we did see that was right there, September 1st of 2020. That was the culmination of about a five-month surge in stocks off of the COVID low.

It was also when a lot of the pandemic darlings, the Teslas of the world, the Amazons of the world, had a pretty significant peak. But for the overall market, you see what happened is kind of sideways and range bound. And then you picked up through the end of the year. So it doesn't necessarily mean just because you become overheated this way that you have to plunge and all of a sudden go into a deep chill. Prior readings around this level, if you go back to other bull markets, they meant we were coming into a momentum phase of the market, but yet one that probably had to maybe cool off just a little bit. Now, take a look at some other measures of risk appetite. You have the high beta, more aggressive sectors of the of the market, the S&P 500 making a new high against the more stable, low volatility ETF.

That's the SPLV. So all these things are fitting together with an idea of a market that maybe has started to get a little bit of escape velocity and people rushing to grab onto it, maybe belatedly. So in the short term could mean a little bit of of overheating. But longer term, it does mean that you need this kind of risk risk tolerance and sort of seeking of more aggressive returns to have a bull market continue. Mike, perhaps asking you to underscore your point, going back to that first chart again, if we can, if I was reading that correctly back almost exactly again two years ago when the S&P was at the levels where it is now, it looked like that relative strength indicator were not. There we go. Right there in the middle of the chart. it's down near the bottom, right? Whereas now it's up near that actual orange line.

What should we read into that? Well, this bottom here is the COVID crash, if that's what you mean. No, no, I mean that one in the middle. Yeah, that was the peak. That was the peak of the prior build. That was before we kind of embarked on a 25 percent decline. So, in other words, yes, it does mean the market's overbought, but overbought in itself doesn't mean about to fall apart. I got you.

That's the lesson. I thought the middle was a couple notches over where it was down there at the bottom, but not so. All right. Okay. Thanks, Mike. All right. Well, after the break, much more on FedEx results and the pullback for that stock. We're going to get an analyst's first take on those numbers and what he wants to hear from management on the call.

And later, Bessemer Ventures partner Byron Dieter on how investors should think about cloud stocks in 2024 after a standout year of returns for the space. Rule of 40s out and overtime's back in two. Welcome back to Overtime. Look at this move lower in FedEx right now, down about six and a half percent after missing estimates on the top and bottom lines. Joining us now is Connor Cunningham, director at Mellius Research, covering airlines and travel. Connor, so in a way, the story doesn't seem to have changed that much. But last quarter, efficiency in ground for FedEx seemed to make up for top line weakness in Express and Freight. So do these results and guidance suggest that's no longer the case? I think a lot of this is just a continuation of what you were saying.

You know, so Express has been the real problem child for the company for quite some time. And they've been making a lot of efforts to kind of to reduce the risk there. You know, it's where the airline sits. It's basically where there's a lot of overcapacity in the overall long haul market. FedEx recognizes that and is trying to adjust. But it's a very dynamic market, as you guys have just been talking about. The ground segment results were obviously quite strong, but there's been a fair bit of talk about increased competition between FedEx and UPS as they start to kind of, as UPS works through their recent labor agreement. So, you know, a lot to digest here, but really I think the focus right in these results is really around the express segment coming in way below expectations.

So Q1 was FedEx's most profitable quarter ever for ground. Can FedEx's drive initiatives now continue to squeeze out enough efficiency to make up for the overall macro environment? It's been the million dollar question. Again, I think the problem here really isn't ground. Ground has been solid. Again, these results I think were quite good there. The question is whether or not they can get ahead of it really on the express side.

That's been our apprehension with the stock overall is that the dynamic market on the international, air freight side has been a real problem. And you're just dealing with an environment where there's just too much capacity and a lot in revenue that's just falling too quickly for them to get ahead of. So, yeah, the ground side of the equation continues to be quite robust. And I suspect they're going to talk a fair bit about that. But, again, the express side of the company has been the real problem. But that's really why they're doing all this. The restructuring is to kind of whittle away from the

express side of the business and combine them into one and have one integrated network going forward. So there's always going to be some bumps along the road. We're clearly facing one of those right now. But again, longer term, it's all about having this this company come together as one and have one integrated network going forward. Connor, the thing I keep coming back to is, is this post-pandemic normalization that the broader industry is feeling right now? Is it signs of a global economy that's slowing down, potentially teetering on the verge of recession? Or is this a FedEx specific story about execution at a time where, in recent months, the focus has been on the company taking market share or expected to be taking market share from UPS amid all of the labor negotiations that happened earlier this year? A lot in that. I would just say that it's a whole

host of different things. So I think, again, during the pandemic, you had FedEx kind of over-earn on their most important and most profitable segment in an international priority. That's basically where they're flying on the purple tail on FedEx planes going forward. You know, right now, with passenger airlines starting to add back capacity in international markets, 50% of all belly capacity flows through passenger planes. So now you have just a supply dynamic that's kind of out of whack. So you're just readjusting to the new normal there. On the other side of the equation, you have consumers that have consistently been prioritizing services over goods for the past several months or past several quarters.

So you have a specific to the industry in itself from just where consumers are spending. They obviously overordered during the pandemic when you were all stuck in your house, but that's not happening anymore. So again, it's about normalizing to the new environment of what it is. And again, this restructuring is all about doing that. And so again, it was always going to be a bit rocky for them. OK, stocks down seven and a half, almost eight percent right now in after hours trading. Connor, thanks for joining us with the instant reaction to the tape. After the break, the U.S. announcing a multinational coalition to help protect commerce in the Red Sea from the Houthi attacks. We're going to talk about the rising threats and the impact on the defense complex

when we're joined by the global head of defense at Palantir and a defense tech VC. Overtime. Container shipping giant Maersk rerouting all vessels originally headed for the Red Sea around Africa due to the, quote, highly escalated security situation. This is something CEO Vincent Clerk discussed on CNBC just earlier today. We have between 10 and 12 percent of the global GDP that is transiting through the Red Sea. And it is extremely important for us to guarantee safe passage for our ships in order to do the job that we're supposed to do. We can no longer guarantee the safety of our crew.

And that's why we took the decisions that we had to take. But we're also certainly welcoming the initiatives that the U.S. Navy has taken to reopen the trading route. Maersk is one of roughly a dozen and counting companies pausing Red Sea activity after attacks by Iranian-backed Houthi militants in Yemen. To secure the highly trafficked international trade route, the U.S. and allies unveiling Operation Prosperity Guardian, an expanded multinational security initiative that's under the Combined Maritime Forces to deter the Houthis and stabilize the area. But joining us here on set, Doug Philippone. He's the global defense lead at Palantir Technologies.

He invests in defense technology through his VC firm Snowpoint Ventures, which he co-founded. And he also served our country as an Army Ranger and commanded multiple Joint Special Operations Command outstations. I can't think of a better suited person to be sitting here with us to discuss this and so much more, given the current geopolitical landscape. So I do want to start there. This announcement we've gotten from the U.S. military and allies, what we're seeing in the Red Sea in this vital trade part of the world right now, it certainly seems like a balance between deterrence and ensuring that the U.S. doesn't potentially get more directly embroiled in the conflict we're seeing in the Middle East. Yeah, well, thanks for having me, first of all. But I think, you know,

look, right now there's a shocking amount of violence in the world. I mean, certainly for probably a whole generation, this has been a height that I have seen. If you think one level deeper of what's going on in terms of the Ukrainian war, the fighting there, what's happening with Hamas attacks on Israel, and then now the Houthis attacking shipping, you have to kind of put—there's tactical and operational things that are violent and horrible. But in the grand scheme of things, Iran and Russia have a full-scale defense partnership. That's incontrovertible.

And so, when you think about, from a strategic perspective, giving Russia a little bit of space in Ukraine in terms of having the whole world focus on other things, there's something a little bit broader going on that's actually, that you should really pay attention to. Because I think about, in terms of the strain on our military industrial complex, in terms of the Western world, but in the US in particular, building weapons systems, building ammunition to help defend Ukraine against the Russia attack,

that has an equally deep strain on the Russians. And in terms of giving them a little breathing room, you know, I believe that this is a concerted thing. It doesn't change the facts on the ground that this is a big problem for the world that we have to pay attention to. And it's just a reason that the U.S. and the West should be the global hegemon to keep, you know, justice and freedom in the U.S. and the West should be the global hegemon to keep justice and freedom in the

world. So, as sights set on the Red Sea right now, for lack of a better term, it's almost — there's certainly a real threat there, but in some ways it almost acts as a distraction from some of the other threats that are unfolding in other parts of the globe? Well, 100 percent. And I would think that, like, also don't forget that this also gives, like, keep an eye on the Taiwan Straits. You know, like, when the whole world is looking over here, what's going on over here? This is a classic, you know, military strategy of, like, divert people's attention.

And then also, resources are scarce. So how do you keep things, you have a little bit of reading room so you can have a little room to do what you want to do. Just pay attention to that. To what degree longer term has this reset the chessboard in the Middle East and threats and alliances? It's the biggest conflict that, I mean, arguably, we see in the Middle East, even in my lifetime. Yeah. No, I mean, look, it's massively disappointing. You know, I was talking with Maureen earlier about it. Like, 16 years ago, I wrote my thesis on Iranian influence and Hezbollah. And, you know, I pray that Hezbollah doesn't get involved in this as well.

Right. That's another risk to the north of north of Israel. But, you know, look, the challenge has always been the plight of the Palestinians has been used as like a proxy fight where instead of actually helping prosperity in that region, you sort of fuel this like we're giving them weapons, we're fighting, you know, seeding that instability in the region. It's a problem. And, you know, I mean, just a few years ago, we had like a groundbreaking peace accord between Israel and Qatar, I believe, where it was like, hey, that was a great step forward. And a lot of that is like stepping backwards.

Yeah. And of course, this is part of the reason that you are investing in, as a VC, defense tech, which I should note, Palantir has technology and operations that are deployed in the region that, as is the case in other parts of the world, you kind of helped blaze the path for Palantir to even be contracting with the U.S. military and within the defense industrial complex. What does this mean in terms of some of these companies, some of these startups that are looking to take on some of these difficult issues in some of these conflicts and geopolitical uncertainties that we're talking about? Yeah, well, look, I mean, I always believed that our best engineers and our best talent

should be focused on problems for the greatest societal good. And, you know, foremost of that is you have to have real security so that you can live free and we can be as crazy as we want to be. Like, that's important. But if you don't have that and our best engineers are focused on games or ads or something, that's like a problem for society. You'll start to see some sort of decline. And so to the extent that, you know, with Palantir, we blazed this trail in the defense sector. Like, defense tech wouldn't exist if we hadn't broken into that sector. So I do believe that, like, to the extent that there is friction involved in working with the government as well, it's still a noble thing and you can make a lot of money. Right? and you can make a lot of money, right? So the issue is, how do you get these new entrepreneurs,

which are seeing a rising crop of them, actually build incredible technology that focuses not only on just defense or governmental purposes, but then there's also dual purpose that it can apply to the broader society. There's been a lot of great inventions in that space. So our thought was, with Snowpoint,

was if we can reduce that friction and get the next entrepreneurs to do this, it'll feed this virtuous cycle where new entrepreneurs will be like, I can do that too. I will follow, you know, I mean, you know, it's going to be amazing the day that Palantir gets into the S&P 500. It'll be like, all right, that's quite a journey. But if you can have that beacon of somebody did it, the next trailblazer comes in and the next one. We're seeing this like critical mass now. If you look at, you know, the last couple of years, it was like, what, $100 billion or so invested in defense tech, which is, you know, that's all time high, I think. Anyway, I think that that's a great phenomenon. So very quickly then, in a year where we've seen private capital scarce, hard to come by for the startups and within VC investing,

this is a trend that defense tech actually seeing some of those dollars, that's going to continue. No, I mean, look, this is before. I mean, you know, I use my own money to start this thing. So it was like I had skin in the game. But the idea was I think that we will be good at this. We'll pick winners and we will reduce friction, and that will feed on itself. But at the same time, when I looked at, you know, the last, you know, say, 20 to 40 years, defense tech or government tech has always been a hedge against downturn in recessions

and then also in market corrections. That was a historic analogy or a historic data point that we looked at before we did it. But then what we found with our portfolio companies is that trend actually, everybody's on track with their business plan. They're raising rounds at, you know, double or more rates. They're on track to go IPO. Like the portfolio is tracking. So it's like it's, I mean, obviously since I've invested, I'm, thank God, but it's tracking. Yeah. Doug Philippone, thanks for joining us here on set. Thank you. It's time now for a CNBC News update with Kate Rooney. Kate.

Hi there, John. Less than a day after Governor Greg Abbott signed a law that allows Texas police to arrest migrants crossing illegally and Texas judges to deport them, civil rights groups, including the ACLU, are suing it to block it from taking effect there. The suit argues that the law is unconstitutional because immigration policy is governed by federal law. The Justice Department has yet to comment publicly. Rescuers in China are still digging through the rubble from a powerful earthquake that killed more than 120 people and injured hundreds more, according to Chinese state media.

The 6.2 magnitude quake struck northwestern China just before midnight on Monday. It's China's deadliest quake in nine years. And California regulators today approved a plan to let water agencies recycle wastewater directly into drinking water. The drought prone state becomes the second state to approve statewide regulations for the use of recycled water in homes, schools, and businesses. Colorado approved a similar plan last year. Back over to you. Bon appétit. Kate, thanks. Still to come, Treasury yields are sitting near their lowest level since July.

And while that's good news for many parts of the market, it might put pressure on one specific area. We will discuss next. Welcome back. Falling yields might help parts of the market, like real estate and growth companies that are looking to borrow. But private credit, not so much. Leslie Picker joins us with that story. Leslie. Hey, John. Yeah, private credit has hit a fork in the road.

The asset class rose to prominence in 2023 with a near-perfect environment, as you've got these higher yields that boated well for its floating rate securities, and the lack of recession kept its borrowers afloat. But 2024 is a bit more of a question mark. PitchBook, in a new report for allocators, says that a soft landing scenario comes with the, quote, greatest risks as capital flowing into this space has created a lot of competition, just as base rates are expected to stabilize lower. The firm noted the dearth in dealmaking has limited ways private credit

firms can spend its $400 billion in dry powder. And KPMG, in a survey out today, showed that private equity firms remain much more hesitant than their corporate counterparts to do deals if rates and multiples don't come down substantially. And of course, a big business for private credit is financing those buyouts. But others say that grass is not necessarily greener in a hard landing scenario, despite a coinciding valuation decline and winnowing of competition for private credit managers. I spoke with Goldman's lead analyst on alternative assets, Alex Blostein, who said the biggest risk to private credit is large losses. Not having a severe credit event is a good thing for private credit. In other words, a soft landing wouldn't be a huge tailwind for private credit, but it wouldn't be a big dampener either.

And that's reflected in the stock prices of the biggest publicly traded firms over the last month, with those more exposed to private credit trailing those more exposed to, say, private equity and real estate, as well as the public, more liquid asset managers as well, guys. So we've had people lately enticing high net worth investors to get into private credit to diversify their portfolio. Might this mean that it's too late if you haven't done it already? Yeah, and I think it depends on where exactly you're allocating those resources to. Because if you do have some kind of a recession scenario, private credit could certainly be the buyer of last resort, getting into more distressed assets if valuations start to fall.

So there is opportunity there. That said, some of the smaller, more nascent players, a lot of people I talk to who kind of advise allocators on where to put their money, say that may not be the best option for them. It's better to go with the more established players. And people say, they talk about this kind of bifurcation that you could see if there is some sort of soft or hard landing, you know, in the next year or so, because you've got kind of the winner-takes-all mentality where skill really benefits in that type of environment more so than, say, 2023, where, you know, you kind of had just this perfect storm of macro factors that served as a tailwind for these guys. You can see how it could also provide potentially a bull case for some of these more diversified managers that do have private credit, private equity and everything,

sort of insurance all in one place and what that means in terms of getting creative with some of this deal activity potentially in 2024. Yeah, and that's the goal really for them, and that's the reason they've expanded into these other areas is because you've got a year like this year that's not good for private equity, but is good for private credit. Maybe next year will be the reverse. Leslie Picker, thank you. Now from private credit to private spaceflight, Jeff Bezos' space company Blue Origin returning to flight today with the New Shepard rocket traveling to the edge of space for the first time since it suffered a failure and the booster crashed in the West Texas desert more than a year ago. Today's mission did not carry people. It carried 33 payloads, including science experiments for

NASA and various schools. But it was a crucial step for a company that has lagged behind rival SpaceX in its space endeavors. In a recent podcast interview, Bezos even explained, quote, Blue Origin needs to be much faster, and it's one of the reasons that I left my role as the CEO of Amazon a couple of years ago. New Shepard is Blue's suborbital space tourism business, but the company's also developing an orbital rocket, a lunar lander, a space station, among other things. And speaking of suborbital space tourism, Virgin Galactic also just announcing

this hour that the flight window for its 11th space flight will open on January 26. Those shares are unchanged in after hours. All right. And up next, Mike Santoli is going to come back and look at whether a pile of cash sitting on the sidelines is enough to fuel the next leg of the rally. Overtime will be right back. Welcome back to Overtime. Mike Santoli returns with a look at the ebb and flow of investor risk appetites. Mike, it's been quite a flow lately. Yeah, for sure, Morgan. And this is as portrayed in the relative fortunes of two different asset managers. Of course, BLK is BlackRock. That's the biggest asset manager, really levered to public equity and bond flows, $11 trillion in assets.

Now, Federated Hermes is the other one here, which is also a diversified asset management, but unusually leveraged toward money market funds. So when there's a lot of money rushing into money market funds, as there was starting in 2022 and through the better part of this year, Federated Hermes does that much better.

BlackRock, not as well. It's come back the other direction. There's a little bit of a hesitation about how much more money is going to flow into money markets and cash. And then you see the surge in BlackRock. All that being said, I don't really adhere to the idea that this big rush wholesale move from cash into risk assets like equities is going to happen or needs to happen for the bull market to work. In general, that type of argument sort of is a manifestation of the greater fool theory as opposed to fundamentals are better and people just don't want to sell their stocks as actively. That's a good enough reason often for the market to hold together, John. Mike, thanks. Got enough fools in the market on your average day, I guess.

Mike Santoli. Up next, a top venture capitalist reveals his 2024 playbook for investing in AI and the cloud. We'll come right back. Welcome back. I spoke this week with Tin Zuoro, the CEO of Zuoro, about the shakeup in the subscription economy and how companies will handle it in 2024. He said the same subscription fatigue that consumers feel towards streaming services is happening with software as a service in the enterprise. Do I really need all these streaming services? Which ones are the best ones? And maybe I'll consolidate down. You're seeing that in the SaaS sector, where do I really need all these SaaS applications, applications? Some companies joke that they have as many SaaS applications as they have employees. And so it just seems like it's getting a little bit out of hand. And so there's a shakeout that naturally occurs.

And what we're seeing when we talk to our customers is there's probably two leading strategies that they're using to be the survivors of the shakeout, if you will, to be the companies that continue to take off like Salesforce has versus, say, if you go back in time, a Taleo or SuccessFactors that, you know, over time people have forgotten about, but that were the leaders and the peers of Salesforce. Those two strategies are what I mentioned. One is, you know, strategic unbundling, re-bundling to build that dynamic relationship. And the second one is using consumption saying, look, just get started, pay as you go, right, just like AWS, put down a credit card. And over time, eventually, as you get more sticky, we'll come to you with these multi-year, multimillion dollar deals. That strategic unbundling means taking apart big subscriptions and selling them in smaller chunks. Tech providers whose products replace multiple rivals or drive measurable efficiency get a pass, but there aren't too many of those.

And now for more on investing opportunities in the cloud sector, let's bring in Byron Dieter, partner at Bessemer Venture Partners. Byron, good to see you again. Thanks, John. Happy holidays. Happy holidays. Yeah, today the WCLD touched 52-week highs. So how much more danger do some of these stocks, including SaaS stocks, face from the combination of a demand slowdown and subscription fatigue? Well, we've been on defense for most of this year, as you've seen. WCLD was the top-performing ETF on all of NASDAQ in 2021 and gave up two-thirds of those gains going into 22. And so, frankly, I think it

overreacted both ways. This build back is what we see now as companies are starting to go back into growth mode. And there was this profits at all costs mindset that really dominated 23. These companies did cost rationalization with layoffs, with cost moves, et cetera. And now they're starting to think about growth again. And that's the excitement that's starting to build is we think there's a chance to be back on the offense. And we're starting to see that as the growth rates come up and as the multiples are slowly starting to come up in anticipation of that. And you argue that for late stage companies, and I guess this might apply in some cases to public companies as well, that overdoing it in the rule of 40, looking at free cash flow,

really overlooks the fact that growth is two to three times more valuable. You favor the rule of X? Why? Very much so. So we've actually tried to put a ratio around this, which people can search Bessemer rule of X online to get the long form. But the punchline is that even in high interest rate environments, growth is still more valuable than profits because in subscription businesses, of X online to get the long form. But the punchline is that even in high interest rate environments, growth is still more valuable than profits because in subscription businesses, a dollar that you invest today, if you get a dollar back next year, you get it in each subsequent year. And so it compounds in a really powerful way. And in the height of this pullback, people were starting to value things at a one to one ratio where literally they were so defensive

and so fearful that they were starting to think of things as, give me the dollar now, and I don't care about any future profits. That's where we think that a number of companies, including some of the leaders, but the Adobe's, the Salesforce's, the Cloudflare's of the world, where people were really valuing that profit stream, had forgotten about the compounding effects of growth. And that's where in the rule of X you see, even in these tight markets, about a 2.3X ratio should be applied for companies that are weighting growth over profitability. And for companies that are large with very low cost of capital and high predictability, they could invest at 3 or 4X in growth for 1% of growth at the expense of 1% of near-term, short-term free cash flow. I'm curious what you think about how public market investors are valuing companies that are publicly traded, including some that have been in your portfolio and that you've invested in in the past, like DocuSign, for which there are reports circulating that it could be open to potential acquisition. Do you think we are going to see more M&A, more potential

take private because of how investors in the public markets are thinking about some of these tech names? So with the cloud index trading on average at 6x, I think there's a lot of appetite for M&A. But frankly, the Adobe Figma news has sent a chilling effect through the industry where there is this freeze on big tech M&A, which I think is really bad for the economy and it's really bad for innovation. And so you're going to see this paralysis at the top where big tech is really hesitant to make these moves. And that's going to have a ripple down effect to the economy for the smaller and the mid caps. We're hopeful that the IPO market opens up a bit next year, which creates the other

outlet. But mathematically, the vast majority of private companies depend on M&A for their lifeblood and for their exit, which is how capital and talent unlocks to do it again downstream. Byron, really, though? I mean, because Adobe Figma, I mean, I like to talk to Shatner all the time, but Adobe is the poster child for big, giant and design software. And Figma was like the one big enterprising name that could challenge them. This was not a vertical merger by any stretch. Even after Microsoft got Activision and all the other things that have gone through, people are starting to make fun of Lena Kahn at parties. You think this one's going to have a chilling effect?

So we're investors in Canva, which is a multiple of their size and an adjacent competitor. So the fact that the DOJ tied them up for over 15 months, froze it and blew it up is a great net effect because it weakened a competitor. The recent report that came out yesterday said their growth rate fell to below or around 40 percent. So they're now a fraction of the size and growing much slower. And so from a competitive standpoint, that's great. They've weakened a competitor. From an innovation standpoint, from a fan of technology and from capitalism, I think that's a bad outcome.

And it's going to absolutely stall M&A in the future, which then takes out at best the marginal bidder so that you don't have the effect to truly find a clearing price. But at worst, it takes out the only bidder and you stop getting unlocks for entrepreneurs, which then is necessary for them to start the next business and for talent to flow to the next idea. And they don't have other exits. And so you have this paralysis that absolutely has a negative effect on innovation, which then impacts job growth in the economy. All right. Byron Dieter, thanks for joining us. Great to have you on. Thank you.

Up next, much more on FedEx's earnings as we count down to the company's call with analysts. Overtime, we'll be right back. Let's get one more check on FedEx in overtime. Those shares are under pressure after the company trimmed its revenue outlook for the fiscal year. Its operating margin fell short of estimates as well. You can see shares are down 8% right now. Another earnings mover, though, is office furniture maker Steelcase. That's down about 10 percent right now. If you're missing estimates on earnings and revenue, they do a lot of office furniture, too.

And we're going to hear from Micron tomorrow, trading near its best level since March 2022. Analysts expecting a loss for the quarter and investors going to be watching for clues on its DRAM demand. Back to FedEx. I mean, it's a question of how much top line decline investors are willing to stomach, even as efficiency is maybe even a bit better than expected. Earnings per diluted share, that guide for the full year was actually a bit better than they had guided before. Exactly. So to your point, it's kind of the balance between cost cuts and a slowdown and decline on the top line. And we were talking about this with our analysts earlier in the hour, how much of that is a normalization post-pandemic and sort of a correction in terms of capacity, how much of that is a signal of what's to come next year in terms of global economic growth and

what we're seeing, not just in the U.S., but across the world. Remember, FedEx operates in Europe, but also very heavily exposed to China, too, and some of those trade dynamics. On Steelcase, the Journal just had a story out today about the office market being bad in 23, maybe worse in 24, and perhaps Steelcase, an indication in that direction. Yeah, and you're starting to see some rumblings that maybe commercial real estate, specifically office real estate, could have a harder year next year. We'll have to see how that goes. U.S. existing home sales tomorrow as well. You get the conference board confidence survey as well. So lots to watch. That's going to do it for us here at Overtime.