Closing Bell - Closing Bell: Another Ugly Day on Wall Street 03/09/23

Episode Date: March 9, 2023

Stocks had a rough day – with the small, regional banks – getting particularly slammed. So, just how concerning is this slump? NewEdge’s Cameron Dawson gives her expert market forecast. Plus, JP Morgan’s Dubravko Lakos reacts to the market downturn and explains what he is watching ahead of tomorrow’s jobs report. And, Hightower’s Stephanie Link drills down on these big market swings in the final moments of trade – she reveals the moves she is making in her portfolio amid the turbulence. 

Welcome to Closing Bell. I'm Scott Wapner from Post 9 here at the New York Stock Exchange in the thick of it all. This make or break hour begins with stocks down sharply as we look ahead to the most important event of the week. Tomorrow morning's jobs report. Only hours left now to trade ahead of that and so much potentially riding on the release. Take a look at our scorecard with 60 minutes to go in regulation. The majors, as you see, are all in the red, even as bond yields fall today. Dig a little deeper, though, in this market and take a look now at the Russell 2000, because that is where the real damage is today as small caps lead things lower. We're down by more than 2 percent now, 40 points on the Russell. That does take us to our talk of the tape.

The banks, especially the smaller regional ones, getting absolutely smashed again today. The ETF that tracks that space sitting at its lowest level in more than two years. And one name in particular, Silicon Valley Bank, the parent company there. There it is. SVB Financial down near 60 percent today on word. It has to raise capital. Just how concerning is that? Let's ask Cameron Dawson, chief investment officer of New Edge Wealth, here with us at Post 9.

It's getting a lot of attention. Regional banks are really selling off hard. I showed you what the Russell is doing. The four biggest banks today have lost near $50 billion in market cap. What does it mean to you? Well, there's nothing like a forced capital raise from a bank to wake the market up to the risk of higher interest rates and tighter liquidity. And that's exactly what we're seeing today. I think when we look at the Russell 2000, we should keep two stats in mind. 45 percent

of the Russell 2000 is unprofitable. And then 40 percent of the debt that small caps have is floating rate. So they're not making money. They're unprofitable. And their costs are going up as the Fed is raising rates. And that's the stress of higher rates working their way through the system. It raises the question as to whether what we see with SVB, and I want to show it again, again, it's down near 60 percent, is a canary in the coal mine. That, you know, have we been looking in the wrong places for the, you know, most acute fallout from what the Fed has done? We watch the job market. We say, no, the job market looks strong. We, of course, know what it's done to housing because mortgage rates and interest rates in general have gone up. But maybe we've been looking in the wrong place.

Well, I think that that's really important to know. And I think the one question is how systemic this will be. Do we see this cascade into other parts? We do know that SVB is particularly exposed to cash burning companies. They fund venture companies, early startup companies. So these are the companies that are most at risk when the Fed raises rates and when liquidity gets tight. That's what we're seeing with them. There's also another dynamic that we're seeing deposits leave the banking system because they're going after higher treasury yields. And so that's what we heard from KeyCorp as well. That's why the other banks are participating in this sell-off,

because deposits are going and finding higher yields. Deposits are going and finding higher yields. What you don't want to do if you're one of the bigger banks is have to raise the interest rates on your depositors, because obviously the spread, the net interest margin, which we talk about all the time, it's like the bread and butter for the banking centers that gets hit. And thus, that becomes an issue in and of itself. And I'll add on top of that,

the fact that loan growth is finally starting to slow down. If we look at last year in the H8 data, we could see that loans were still growing at over 10 percent, 10, 12 percent. But in January, they slowed to 4 percent overall and 4 percent for commercial industrial. That shows you that pinch from higher rates. Let me read you what BTIG's Jonathan Krinsky said today regarding this very issue and what it may mean to the broader market itself. We would argue that banks and semis are two groups that historically have been very good leading indicators. Typically, markets can do okay if either of them are languishing, but when one of them is having an outsized move, it's usually wise to listen.

In this case, the outsized move is clearly banks to the downside. As we wonder kind of where we are and where we're going in the midst of a 12 or so day stretch that is so super critical from Powell on the Hill to the jobs report tomorrow to CPI and PPI and retail sales, all of it culminating with the Fed meeting on the 22nd. Well, there's all these conflicting messages because, as you point out, semis are strong. The rest of the cyclicals are strong. Look at industrials, how well they are trading. And yet the yield curve is deeply inverted and you have all these recession fears. And so there's mixed messages. But I think that the message from the bank shouldn't be ignored.

The message from small caps shouldn't be ignored because those are the leading indicators of what you're starting to see financial stresses emerge. Yeah. So Steve Leisman is with us as well. We asked him to come along and tell us, you know, what he thinks the Fed might be thinking about all of this, Steve. And I'd love your answer to that question, because this seems to be part of the direct fallout of what they've done over the past year. Yeah, no doubt. It's why, Scott, the Fed prefers to move more carefully. And if you ever want to know why people say the Fed shouldn't telegraph it. Well, it does so generally in order to give banks and other players in the markets time to adjust. But of course, we've just gone through one of the most aggressive rate hike cycles in a generation or two, I guess you might

say. And so the result is that some of these assets on the books of the banks are having very large losses in them. But what we don't know, Scott, is the extent to which, A, the Fed knows about this already. You would hope in this post-Dodd-Frank world of additional supervision and scrutiny that the Fed knows about this, that this is partially taken care of and gamed out, Scott, in some of the stress testing they're doing. And you also hope, Scott, that what we're seeing here is a trade that goes on to the large banks that is more. What's the right word? You know, the shoot first, ask questions later. Whereas most officials at least say the banking system is well capitalized. And some of the banks that we've been talking about, one was a crypto bank or related to cryptocurrency.

This bank, SIVB, is really locked up in or really associated with what's going on in Silicon Valley. So perhaps they're localized. Scott, we'll just have to wait and see. But they're going to have losses on their books for sure. You know, on that note, I'm glad you leave it there because the information is reporting in an exclusive report that they have that the CEO of Silicon Valley Bank is telling VC clients to, quote unquote, stay calm and saying that they have, quote, ample liquidity to support their clients. You know, I just wonder, Steve, as you hear a CEO, these often become these words that we remember in times like these, you know?

And I just wonder whether the whole time we've been looking kind of in the wrong place, as I mentioned with Cameron, for the real fallout from what's happened due to this regime that the Fed has been on. You know, Scott, that is both clever contemporaneously and historically, because it always leads back to the banks. Remember those SPVs that we thought were remote to the banks ended up not being remote to the banks. There's always issues there. The banks always get hit somehow, some way. The test right now, Scott, is in this post-Dodd-Frank regime of higher capital, greater mandated liquidity, if they have the buffers to take this. The old saying was a bank president has to say he's liquid, isn't. Usually it's too late by then.

But we'll see if they have the liquidity. Part of my understanding of what happened at Silicon Valley was they had a lot of venture clients who have been withdrawing their deposits. Now, that's not that's part of a broader issue where the banks are going to have to pay up in terms of a higher deposit rates. But this guy, this bank apparently had a withdrawal of liquidity of deposits from their clients that are specifically in the Silicon Valley area related to the pain that's going on there. If it is not more broad-based, then I think we're going to be okay here. And perhaps this is a little bit more of a hysterical follow-on to the larger banks. Yeah, perhaps.

But stay with me still, Steve, because I want to bring in Richard Fisher now. He's the former Dallas Fed president, a CNBC contributor. It's good to see you today as well, Mr. Fisher. I'm curious as to what your take is on the story that we're talking about as somebody who used to sit in that room. Well, first of all, if you look at Silvergate, if you look at what we were just talking about

in terms of Silicon Valley Bank, these are heavily venture or speculative-based customers and lendees who they were lending to. And we've been saying for a long time, Scott, Steve's been saying this as well, that these are firms that were made possible by having free money, zero cost, zero interest rates, and a very accommodative regime that, in my view, went on for far too long, as you've heard me say. So I'm not surprised here. You also mentioned that the Fed and other people keep talking about the big banks are

in good shape there's not a credit crisis but scott to me this is just a fallout from having hooked people on free money for too long and now that we're going back to actually discounting the present value of future profits, cash flows, et cetera, against a much higher hurdle rate in a 5% world with a short end of the yield curve, or a 4% world, or if you're in real estate at a 10%. So I'm not surprised by any of this. And the question is, does it rattle the system? The Fed will exercise a foot if there is a credit crisis. And what they're saying right now is they don't see it. We'll have to see if these are little tripwires that are leading us in that direction.

Because to your point, you know, when you keep when you over serve someone, there is the difference between a hangover and alcohol poisoning. And we don't know really what the fallout here is, whether this is a canary in the coal mine. Do you and Leisman, Steve Leisman, who's still with us, raised the good question, too, of, you know, presumably because of the way that the rules have changed, that the Fed would know, theoretically, what lies beneath, so to speak? How would you address that? I think Steve's correct. I mean, they're not living in an ignorant world. They're protesting constantly. They're well aware that Federal Reserve banks and the districts

are reporting back to them on what's going on. So I don't think there's a big surprise here. My favorite quote, by the way, when we and Bernanke made the mistake of blurting out 2013, what became the taper tantrum, my chairman at the Dallas Fed was Herb Kelleher, founder of Southwest Airlines, the biggest bourbon drinker in America. And he called Bernanke and said, you don't go from wild turkey to cold turkey overnight. And this is, I think, I knew Steve would love that one. But still, here's the point. The Fed has been very deliberate here. It's not an overnight adjustment. It's been a fierce adjustment. And in my mind, it's correcting for, painfully, excessive accommodation for far too long. But see, you're leading into the idea that, hang on one second, Steve.

Richard, you're leading into the idea that, you know, you speak of the pace because of that pace, that it's inevitable that something's going to break. How could it not? Absolutely. And somehow all roads always lead to the banks. Yep. Well, and all roads eventually lead to the Fed. Now, I do think because of this, we're not going to see, my guess is the odds of a 50% hike at the next meeting is very, very low. We're going to see a series of titrations, 25 basis points going forward until we slay the inflation dragon. They're signaling everything very openly up front. And they're asking whether they're banks or investors or anybody else, REIT operators, et cetera, to begin to adjust to this new world. Money's not going to be free anymore.

We live in a 5 percent plus growth. And Steve and Steve Leisman, you know, this idea of what we got this week, which roiled the markets in its own right, this higher, faster and for longer idea, just all plays into the story that we're talking about here. Yeah, and I have to comment, I think Richard is making an interesting point here, which is whether or not fears of systemic risk keep the Fed to a 25. And getting back to where I first started, that's one of the reasons the Fed prefers to move a 25 basis point is to give the bank some leeway to make the changes. And I will say today, Scott, the odds of a 50 basis point rate hike have come down. They were

like at 68, 70 percent. They're now at 56 but scott if i could i just want to ask richard a quick question which is richard there's a an ace in the hole for the banks and that is massive amounts of interest paid on reserves to what extent does the increase or the decrease in the value of the portfolio uh of the bond portfolio they have, is that offset by the payment of interest on reserves? To a limited extent. Now, we've heard members of Congress now start complaining that they're being paid interest on reserves. Right. Well, guess what? That was an act of Congress that forced us at the Fed to do so in the very beginning. So, yes, it's a mitigating factor and it's helpful, but it doesn't complete the job.

You know, Cameron Dawson, we haven't even gotten to the issue that's looming large tomorrow morning. Right. These are the last moments literally to sort of get ahead of a release of the jobs report, which many see as binary. Richard Fisher, you just heard him say, I don't think they're going to go 50. But tomorrow could lean the Fed in one direction or the other. Well, it could be that news like this today with these bank issues could mean that we go from a world where bad news is good news to now bad news is actually bad news, meaning that that bad news of tight policy, tight liquidity and a weaker environment just points to more pressure down on earnings that could possibly cascade through the year. Richard, before I let you go, just a quick comment from you, just and a simple answer to this question. Has the Fed done too much now at this point?

Should they just stop? Should they just stop? I don't think so, because we still have inflationary pressure. It's been mitigated somewhat. The employment numbers are still strong, although, again, the quits ratio is easing off a bit. And you just can't run the risk here of stopping and letting inflation stay at a very high plateau or even increase without looking like you're the burns arthur burns uh fomc again and so no i think they if anything they're going to air scott going too far uh it's not clear they're doing that yet but the last thing they want to do is fail on this inflation front because we are the central bank of most important one in the world and we can't abandon getting back to 2%.

Richard, I thank you so very much for for being here. That's Richard Fisher. He's the former Dallas Fed president. Steve's going to stick around. Cameron staying with us. Let's bring in CNBC contributor Stephanie Link of Hightower Advisors. Steph, what's your take on what's happening in the market today? You know, we haven't talked about small caps, you know, nearly enough, probably relative to other areas of the market. But that seems to be the most acute point of pain, certainly over the last couple of days. Well, it's also been an outperformer up until the last couple of days, right? And it trades along with value. It trades along with cyclicals. And those sectors have actually done pretty well this year and

actually all of last year, right? So this is a give back, Scott, because there's a lot of nervousness for sure, right? Powell, the comments this week, very hawkish, data dependent, but maybe less willing to wait and see, right? In terms of we're going to go and we got to go more. And I don't know if it's 50 next time or 25, but it probably is 75 more basis points of tightening. And the market's nervous about that because we don't know what the outcome is going to be. And they're focused on, as Richard Fisher just said, they're focused on inflation. And inflation is still stubbornly high, but it is coming down from the peak. So we have to watch that. But the Fed can go this aggressively because the job market is so healthy.

Now, I will say tomorrow, yes, is important, but it's one number, Scott. I'm keeping an eye on initial claims, which are starting to inch higher. I did not like that Challenger Gray number, which if you add off the layoffs from from January and February it's the worst number since 2009 so you know you're starting to see a little bit of cracks and then of course the Silicon Valley Bank this is absolutely a catalyst to have the market sell off I mean the fact that the company backed half of the US venture capital in technology and life sciences I mean that is so incredibly speculative. And the fact that the company is just now figuring out higher rates are going to hurt their business,

this stock deserves to be down even more, in my opinion. And I do not think the large six banks are in anywhere near this kind of shape. They're very, very much diversified into wealth management, asset management, capital markets, trading. Yes, we know net interest income is a big part of their books. However, numbers are coming down for net I.I. after the last quarter. Everybody lowered their N.I.I. numbers for the entire year because we saw what was happening. Deposit are going higher and that's actually a pressure. I understand. But why are we fixated on the large banks when it's the smaller ones

where maybe some of the more important issues lie? You just said, and this goes to the heart of our conversation, the Fed can continue to go because the job market is so strong. Well, as I asked at the outset, maybe we're looking in the wrong place and that's not the decider of whether the fed is breaking anything it's what we're talking about today it's below the surface where the cracks start right okay well the cracks can start at some of these speculative banks that are involved in crypto. That should be no surprise. Silicon Valley Bank, even though this is very disappointing and it's kind of like what where is management?

What are they even thinking? Kind of a thing. They do have a P.E. backer. Right. They did. They are raising capital. They are reorganizing their structure. I'm sorry to interrupt you, Steph, but look at the losses in the other parts of the regional bank complex. Four, five, six, seven percent declines. Surely Silicon Valley Bank isn't the only one sitting on unrealized losses that may be at some point forced to take those losses, if not raise capital. And isn't that a concerning point to you? Well, my well, of course, this whole thing is a concerning point to me for sure. But my whole point is the big six banks are the biggest ones. Right. And they actually are

overcapitalized right now. They have had years and years and years of regulators on top of them making sure that they raise enough capital. Oh, by the way, the 22 other banks, largest banks in the country, had to do the same thing. So the capital levels are better. And I do think that Silicon Valley was one of the most risky, I don't wanna even talk about the crypto-exposed banks, I just don't, because they don't even mean anything,

they're so small. But I think that Silicon Valley Bank was, of the bigger names, of the bigger companies, they were the one that really were much more exposed. It's not that I'm not troubled by it. I just don't think it's a contagion at this point in time, because, again, you have these other banks, the biggest banks in the world that are so overcapitalized. I don't think this is a great financial crisis kind of a situation. I want to say this is a one or two off kind of thing. Does that mean the banks are going to be good investments for the near term? Probably not, because everyone is going to be nervous. But I'll bet you anything when the companies report

earnings, people will feel better about the underlying situation. By the way, the big six, they have very little mortgage exposure, too. That's also something that they have changed over the last many, many years. And let's be clear. And by the way, let me just point out the market, too, because we're bleeding a little bit as we head towards the stretch here. We got about 40 minutes to go. Dow's down 561, 563, as you see. Nasdaq's down better than two percent. Russell 2000. Let's let's show that as well. Again, on a day where bond yields are backing off a bit. But the Russell has been all day where the action is two and two thirds percent decline there. And by the way, nobody I'm certainly not insinuating that, you know, this is the beginning stages of a financial crisis by any

stretch. It's merely the obvious fallout from what the Fed has done. And there are going to be impacts that are not thought about until they actually start to develop. And maybe these are the early stages, Steve Leisman, of, in fact, that very moment. But you heard you heard Steph herself say Fed can do more. Job market's fine until something breaks. the six biggest banks and the 20 or so next biggest banks all have extra capital and liquidity in part because they're too big to fail and so they have to have extra liquidity. Going beyond that number of those top tier banks that are considered essentially too big to fail, banks are not too big to fail and i'm not saying silver uh the silicon valley bank is going to fail or anything like that but they make business decisions and they get caught making the wrong decisions um and some banks are going to get hurt and some banks are not going to get hurt especially a bank that has a concentration in an industry that has been uh hurt by by the recent rise in interest rates especially hard so i know know it feels like it could be systemic,

but there's this distinction, Scott, between these lower tier or smaller banks and these higher tier banks that have this extra liquidity added on by mandate, by regulation, by law, that have required them to have that. That doesn't mean they're perfectly safe, but they're ostensibly safer.

And below that level, you're going to have some ups and downs in some of those businesses. On the issue you asked Richard Fisher earlier, will the Fed stop? I will tell you systemic risk, if confirmed by the Fed, will cause them to stop. That would be the thing. I just don't think we're near that point anywhere.

Look, maybe this ends up much ado about nothing. And we frankly just don't i just don't think we're near that point anyway look maybe this ends up much ado about nothing and we frankly just you just don't know it's worthy of keeping an eye on as we just we're flashing some boards of stocks that are really moving hard because we're having this conversation about silicon valley in that area of the country it's the western-based regional banks where you're seeing really some of the destruction today for certain. This idea, Cameron, what's the Fed going to do? Are they going to stop? I mean, that's certainly not how they've been talking, nor is it how some really bright market minds are thinking. Black Rock's Rick Reeder, he's now a member of the 6% Club. He's a club member. We think there's a

reasonable chance the Fed will have to bring the Fed funds rate to 6%, keep it there for an extended period to slow the economy and get inflation down. Wolf Research, 6%. We mentioned Greg Branch told all of you who are watching this program and have over the past few days. He told you Greg Branch did the other day, 6% and 6.5%. Maybe a little bit on the high side. Who knows?

But that's being talked about. Yeah, I think if we start seeing more of those continuing claims and initial claims really start to pick up, those calls for 6% will start to back off. And it's important to note that a lot of the layoffs that have already been announced don't actually kick in until the second quarter. So we'll have a better judge of what's going on within the labor market as we move through the rest of the first half of this year. I think the other thing to watch really closely is bankruptcies. So bankruptcies, we've had 39 filings year to date. That's the highest since 2009. That still is somewhat OK. But if that continues to kick up, that could point to more broader financial stress. And I think to Richard

Fisher's point, we don't know if this is systemic yet. So we really can't make that judgment. But watch those bankruptcies to tell. Steve, when I when I bring up, you know, six percent, the six percent club and the number of people who are applying for memberships continues to grow by the day. Are they over their skis? Do you do you think that's a legitimate possibility at this point? No, I mean, I think they're not. I think if, remember we had a discussion, Scott, where some members of your panel, that was the noon panel, not as good as this panel here, obviously, but they said it was irresponsible of Bullard to talk about a 7% funds rate with his model that showed between 5% and 7%.

And I argued at the time it was irresponsible for any investor around the table not to be investing with some possibility built in of a six or seven percent funds rate. So I think it's possible. But Scott, the reason I was looking down when you asked me the question, I want you guys to put up the two year, which is it's actually been falling while we've been talking here, while the market has been coming down over this period of time here. We've now erased, Scott, the almost if you guys could go back to like Wednesday or Tuesday at 10 a.m., we've pretty much roundtripped the rise in the two year yield since before Powell started talking. I had it down as 15 or 19. Maybe it's still up five basis points or so but you've now gotten rid of that and I'm going to take a quick look here while we're talking Scott on the

probabilities those are still around 50 50 now it's 54 for the for the for the uh 50 basis point hike in March so all that's coming down and you're right we're having this Bond rally at the same time we're having this stock sell off so there might be oddly something of a flight to safety which is interesting because one of the fallouts of these banks holding these uh these securities would be they would have to sell them you're you're somewhat clairvoyant steve because i was going to mention what jeffrey gundlach was saying about the two-year late last evening which he was suggesting in a late evening tweet. The two-year yield chart looks like the top is not in place. Long rates remain in a multi-month range. Again, it's this idea that the Fed is going to go higher and maybe faster and stay there longer, Steve,

than some had anticipated, though, as we bring in these new risks to the to the story, you get the reaction in the in the bond market that you're noting as we're having this conversation. Yeah, for sure. It it was remarkable how much the bond market has has really sold off in the past month or two. If you guys you have uh the january 24 fed funds contract go back to february 1 i think it's fff24 i believe i'm not mistaken is the code and you go back there you'll see a hundred basis point rise in that outlook for the uh funds rate by the year end never see anything like that scott it's come a long long way and the result of that is ultimately that the whole shift, both earlier and longer, has been out there for the Fed funds over the next year or so.

Yeah. And Cameron, I'm looking at a note from Chris Farone from Strategas, who's thinking about the fallout from all of this. NASDAQ's down 2%. We're showing you on the screen right here. Dow's down a little more than 500 at this point. He says, you know, we talk about the curve, right, the inverted yield curve. Look at all the red, by the way, on your screen here as the S&P slides by 73, near 2%. Barely anything hanging on in the green. He says the U.S. 210 curve at 110 remains a constant focus on our screens. It's not just U.S. with an inverted curve, though. We count at least 11 developed economies with similar circumstances. We're paying closer attention to credit. The JNK, that's the high yield ETF,

if you're playing wherever you are. Stuck below its 200-day average and acting softer than equities. Put it on your radar. You watch this. You speak to it often. What do you think? So here's the catch. The re-steepening of the curve is really when the risk starts to hit. The thing to remember is bull steepeners are not your friend. So when the shortening of the curve is really when the risk starts to hit. The thing to remember is bull steepeners are not your friend. So when the short end of the curve is seeing its yields fall, the two-year is rallying, that's the indication of economic stress. And so it's usually when we see the restepening that that's when the worst kind of performance for risk assets happen. And it's important to remember, we've never seen risk assets bottom before that re-steepening has started to begin. And it goes hand in hand with we've never seen

risk assets bottom while the Fed is still embarked on a tightening regime, right? Yep. And we have seen rallies when the curve has been inverted. That's actually really common. You can see big rallies even while the curve is inverted. But watch that re-steepening. If you see that two-year actually top and move very sharply to the downside, that is the bond market pricing in a recession, pricing an acute economic weakness. Okay. Everybody stay where you are. That means you watching and you talking. All of you who are talking, you stay right there too. Let me get the Twitter question of the day in, because we want interaction with you as well, our viewers. We want to know how will markets react to that jobs report tomorrow.

Will it be a rally or will it be a sell-off? You can head to at CNBC closing bell on Twitter. Please vote. We're going to share the results a little bit later in the hour. We still have 30 minutes to go as we watch this market sell-off. There are a lot of moves to keep an eye on today. Christina Partsenevelos is doing that for us, as always. Christina. Yeah, I'm going to start with one particular company. It's a double downgrade

for Etsy by Jeffries, underperforming, and a new price target of $85. This is a huge drop from the original $150 price target they had. Look at the stock. It's now at 107, down over 5% at the moment. That's why the online marketplace is seeing its shares fall. Jeffrey says Etsy needs to spend a little bit more time on marketing as the loss of customers increases. The stock right now is heading for its worst week since October and now,

and I'm blocking it, below its 200-day moving average. Lastly, BJ's Wholesale is outperforming after a big beat on earnings, revenue, and outlooks. Also beat estimates, and the company touted high renewal rates from members. All that despite also noting that there was significant improvement, and we're going to show you, too, that the stock, when the earnings came out, just jumped over here and it's up 3% higher today despite the saw, and all of this despite significant uncertainty about the macro environment.

But, Scott, there you have it. One down and one positive for today, despite the sea of red. All right. I have a feeling we'll see you again before we leave. Christina Partsinevelis, thank you very much. You know about the sell-off by now. It is accelerating a bit as we head towards the close today. All of that ahead of that critical jobs report coming tomorrow, ahead of next week's key economic data. There's CPI and PPI, retail sales. Let's bring in Dubrovko Lakos, he of J.P. Morgan, joining us once again.

It's good to have you back. It's nice to see you. I'm curious your thoughts as you're watching all this unfold today. Look, one thing I'll say is that when you have such a sharp increase in cost of capital the unknown of unknowns the risk of unknown the the risk of unknown and unknowns i think is the highest gfc and so i think today what you're sort of seeing with regional banks what you're sort of seeing on the crypto side that's just one of the potential uh you know side effects or you know that you know one of the casualties potential that we're basically seeing.

And we don't know what we're in for. So bottom line to me, what's happening today is not entirely surprising because we are in a very restrictive environment. And so that's the tricky part. And valuation by itself on the equity side is far from attractive. It's unattractive. Do you worry that what may be to some one offs? I mentioned Silicon Valley Bank. Obviously, that's the stock of the moment that we're watching so critically today.

Do you worry that these are canary in the coal mine moments? Yes, I do worry. Yes, I do worry. And I think it's not just regionals, but you have the commercial real estate complex, CMBS. You have the leveraged loan world, which is very much so floating, unhedged. So, you know, and you're starting to see delinquencies in certain parts of the consumer complex, like the subprime auto, multi-loan purpose market. So you're definitely seeing signs that are pointing in the wrong direction. And so if inflation and interest rates and cost of capital don't come down, and right now the trajectory seems to suggest they won't,

things are getting uglier. I mean, you were already writing about this, heading into this interview, but long before we were witnessing what we are within the small-cap complex, the effect that the rising cost of capital is going to ultimately have on corporate earnings and the cracks in the corporates that are showing up at this point to you? Yes, you do. I mean, look, many people initially focus on S&P on large caps, where I think balance sheets for the most part are in decent shape. You've got 90% of outstanding debt fixed. But to your point, the issue is as you move down the cap spectrum, small, mid cap, you're looking at 30, 45% of outstanding debt being floating. And that's when you start to see sensitivities really pick up if rates and if cost of capital being floating. And that's when you start to see sensitivities really

pick up if rates and if cost of capital stays elevated. So that's definitely one area that we should be paying close attention to. And even on the back of this recent 4Q earnings release, a lot of small cap companies have been talking about interest expense burden rising and pressuring their margins, right? And I don't think that's getting enough attention. How defensive do you think people should be right now in their portfolios? I think you've got to be defensive. I think you have to generally have a preference for high quality versus low quality. I know that year to date there's been a big sort of run-up and squeeze and the sort of junk, unprofitable, high beta complex.

That's the area that I think you've got to be very careful of. So I'd be very much so leaning towards high quality, good balance sheets, profitable businesses, businesses that can withstand these kind of shocks and elevated cost of capital and anything that's sort of higher beta or borderline unprofitable, I would be cautious. See, Stephanie Link, it brings me back to you on this notion of what to be in and what to get out of. The idea of whether, you know, Steph, some have suggested you should be buying on the weakness. Others saying, no, you need to take the opportunity and sell on whatever strength you have. You sold Oxy a day or two ago. There was another name, which I can't recall off the

top of my head that was in that same conversation. And now I find out that you're selling cliffs as well after a big game Yeah, you you yeah, you seem to be talking a more positive Game in the market then maybe your moves are reflecting. I feel like you're looking to get out rather than get in Well, no. I mean, every time I sell something, I do try to buy something. But I want to be patient, given that we have so many unknowns. But yeah, the other name that I sold last week was D.R. Horton. And that's because I was up 30 percent from when I bought it last year. It's not had a good year this year, but I can't imagine that these stocks. I don't think there's a disaster happening in housing. I think we are seeing a massive decline, but I don't think it's a disaster. I mean, I

think that they're, you know, we've had under production for 13 years, so I think this is a cyclical downturn, and I think as a result of higher rates short-term, these stocks are not going to outperform. And so when I look at cliffs, up 30% in like two months time, I think it's very prudent. And I'll tell you one area I am worried about, and that is auto. Because I know about auto loans and how they have been drifting higher. But I'm more worried about we had supply deficits for the last several years because we had supply constraint issues. Now, all of a sudden, the supply chains are starting to get fixed. And all of a sudden, you're going to have a glut of auto at a time when interest rates are very

high. So I just think the auto industry might struggle a bit. So I don't want any housing exposure and I don't want any auto exposure. What do I want in terms of exposure? Stocks that have already been clobbered in terms of their end market exposure and people that are and where their secular doubts, if you will, like I believe in the industrials because I think on shoring and reshoring is a very big theme. And so that's one of the areas that I like quite a bit. I like aerospace. You know, I have a big position in Boeing. I like some of the consumer stocks. I like China reopening. That is actually also a cyclical story in terms of reopening versus secular. But I think there's opportunities there. So I want to have a little cash. We talked about this the other day. I want to have a little bit of cash so that into this downturn, I can actually add to those kinds of

companies. But I agree with the high quality blue chip free cash flow companies, number one or number two in their market share that get hit with everything else. Those are the names that I want to own. Dubrovko, so Steph lays out what she considers to be, quote, unquote, higher quality. What is it to you? What are those places to look? So I'll flag two sectors. Healthcare. I think healthcare is one that I know last year did very well, but more recently it's had a pretty decent pullback. It's one of, I think, the weakest performing sectors year to date.

It has a lot of defensive qualities. I think it has more attractive valuation than its defensive peer staples. So healthcare, for instance, I would have a relative overweight on. Utilities is another sector that I think has gotten hit hard on account of rates moving higher. And I think it possesses a lot of defensive characteristics. So these are two sectors I would highlight. So do you feel as a result of some of the risks, Dubrovko, that you've highlighted for us that rates are going to start moving lower again, and that's going to provide opportunities within the more defensive places like utilities and some of the other so-called bond proxies? Look, Scott, I think it's a very, very tough call here. I think we're seeing this call, the yield curve inversion that

you talked about, I think, before I came on. I think on the front end, we need to see what the Fed does. Tomorrow's job number, obviously, obviously is very very important. If that comes in hotter I think the front end may need to go up even higher just as people start pricing in an even more aggressive Fed. The back end is very tricky because if we start pricing in a recession you see what I mean the back end doesn't necessarily have to go up so you basically could start to see an even bigger inversion in the curve. Steve Leisman, does a cool jobs report tomorrow save the day, so to speak? I mean, does that just ease the pressure on everything because the Fed can sit there and take a breath and not have to

tell us higher, faster, for longer, et cetera? It definitely would ease the pressure. The trouble, Scott, is everything I'm reading, I must have read a half a dozen forecasts for tomorrow. Everybody's on the strong side. It's kind of weird. Everybody's above average. It's not supposed to happen that way. But, you know, we're looking at $200, $200.25, and I'm seeing a lot of $250, $300s out there in terms of the forecast.

So it could take the pressure off. But I think the problem is that if you take the banks and the discussion we've been having out of the equation, I think a number at or above consensus would be one that would definitely lean the Fed toward a 50 basis point rate hike. These moves in the big banks, I know we focus so heavily today on the smaller banks within the Russell 2000, which is down two and two thirds percent. But JP Morgan down five and a half percent just about there. I'm looking at Goldman Sachs is not down nearly as much. Its business is obviously a bit different than JPM's Bank of America down six percent.

I see Mike Mayo, by the way, waiting in the wings, too. We're so happy that he's here. He's going to join this conversation momentarily, too. But you've got to pay attention to what's happening with these bigger banks. Yeah, definitely. And I think that the question now is being raised about the profitability from that net interest side of things. But we are getting back to valuation territory where things do start to look a little bit more attractive. We are trading closer now to book value because of these sharp moves. So I think it will be a push-pull between the earnings and then that valuation for it. You know, I'm looking at the S&P. We had

made so much of it when Cameron, the S&P was below its 200-day moving average. And one of those signs that we hung on at that moment, you know, bounced. It was able to bounce and it had stayed there. It's at 39.18 now. So, you know, we're back at these technical levels. You're doing some more technical damage within the market. I know you watch that, too. Yeah. And I think that we've started to see this deterioration in breadth. So if we look at the percentage of names trading above their 50 day moving average, for example, that is much lower than it was even back at the December lows. So even though we're still above those December lows, a lot of stocks are starting to trade with weaker trends. So I think

that is a little bit of a flashing yellow sign on the technical side of things. The fact that we're breaking through important levels, I think really should get investors' attention that a retest of December is certainly likely at this point. Dubrovko, you watching these levels as closely as we all are? Yes, I try to as close as possible. Look, that 200. Yeah, go ahead. I'm sorry. I was going to just add one more thing. You know, the discussion is very focused on on the US. But for instance, we're not talking about Japan and what's happening with BOJ, what's happening with YCC. That's a potentially big negative liquidity event that could affect global markets. And so, again, I'm just flagging another risk that I think is being underappreciated in the broader context. No, and I appreciate you doing that. And I really appreciate you being

here. We're going to leave it there for the moment. Dubrovko, thank you. Cameron and Steve, thank you very much as well. Stephanie, we're going to see in the market zone. We still got some business to take care of before we close it up in a little more than 15, 17 minutes or so. Let's get back to Christina Parts and Nevelos now for a look at the key stocks we still need to watch today. Christina? Yeah, well, we're seeing lots of big moves right now in the Chinese tech and Internet space. And it starts with JD.com, which shares are now down 11.5%. The e-commerce giant posted an earnings beat, but executives on the conference call noted that full recovery for the Chinese consumer will take time.

That's why the stock is heading for its worst day since October. There are also concerns about how its price war with PDD Holdings could impact margins. And you can see PDD down over 7% right now. PDD is the second worst performer on the Nasdaq 100 after JD.com. Both of those stocks have been under pressure as they ramp up efforts to compete with one another. And those concerns over tightening competition and a slow recovery in China are weighing on the entire Chinese Internet sector. The KWEB, you can see the ETF right here, down 5.3 percent. It's firmly in negative territory. And today's move sent it below its 200-day moving average, just barely.

But you can see just on the right side of the screen over here. And this is the first time since November that's happened. Scott? All right. Christina, thank you very much for all that today as well. Let's get to the results now of our Twitter question. We asked, how do you think markets are going to react to that jobs report tomorrow? The majority of you saying sell off near 59 percent. Maybe pushed a bit by the action in the market today, but we shall see. We're now in the market zone, the closing bell market zone.

CNBC senior markets commentator Mike Santoli here to break down these very crucial moments of the trading day. Wells Fargo's the aforementioned Mike Mayo is here as well on what we're seeing in the banks today, big and small. And Stephanie Link, of course, is still with us. Mr. Santoli, you first. Lots to consider today. Plenty. You know, I've been saying for a couple of weeks that the most bullish people were the ones who were just looking at the market action itself and the leadership profile and the breadth and the small caps and the credit markets not being disturbed. And that's progressively fallen away. So it's a little soon for a retest of last week's low. We actually went a little bit below last week's low just a couple of minutes ago, really.

So it obviously reinforces this idea of a very messy range. At the top end of the range, nothing can go wrong. Now we have things going wrong. So banks being as kind of indiscriminately attacked today is obviously unnerving always. If any group is going to come under that kind of pressure still, you know, we are kind of where we are above thirty nine hundred. And I think there's a chance that tomorrow that the fact that we have this jobs number coming tomorrow is causing people to sit back more and be a little more apprehensive about betting that the support is going to hold. So it could be spring loaded if we do get that cool job number tomorrow. You talk about, you know, it's the fear of things

going wrong. The question is, you know, you can deal with a couple of things going wrong. You can't deal with, you know, a handful or two handfuls of things going wrong, especially in the place where you said the banks. Well, and I also think there's this real indecision about what to be more afraid of because we came into the week and it was all about overheating economy, high pressure growth. Fed's going to have to do a lot more to shut it down. And now it's much more about commercial real estate looks like it has cracks. We obviously have some of the banks kind of bracing for something more on the credit side. Obviously, it's localized at this point, but it's out there. And so that's why I do think it's caused people

to say, I have the backstop of higher yielding cash like instruments. I can kind of wait in for a while, even though I think people are congratulating themselves far too much for hiding in 5% short-term treasuries in a 5% inflation economy when you're getting that pre-tax, as if you've kind of cracked the code. It's cash. It's savings. It's not going to lose money, but it's also not necessarily going to take you forward. Look at that move in the KRE. That's the regional bank ETF down 8 percent. KBE 7 percent. But Mike Mayo is sitting here, too. So glad you're here on a day like this. Thank you for making the trek over here. What should we be paying closest attention to today? Well, look, tail risks have been and remain elevated. And there's a warning today with the incident at Silicon Valley

that the biggest risks are outside of the largest banks. The largest banks have been regulated and regulated and over and over again. You have an annual Fed stress test that I estimate is the equivalent of the last three recessions combined. So the key word here for the largest banks is resiliency. Resiliency of the balance sheet, resiliency of the business model, and resiliency of funding, even if that resiliency isn't quite as strong as I thought with interest rates at 3 percent. Interest rates at 5 percent. You know, the title of our note today was, you know, bank stocks have gotten paled. OK, the Fed going up so much. So warning number one is beware of financial firms outside of the largest banks.

And warning number two, this economy is a little bit like a souffle. You get your ingredients, you cook it and then you put it in the oven. But if you look at it or open the oven too often, it can collapse. So going from zero to 5% interest rates in a period that's faster than any time in four decades, you're going to have casualties, but it's more likely than not to be outside of the largest banks. The largest banks are a pillar of strength and stability here. Everyone's getting painted with the same brush. It looks a little sloppy. This is the sort of time, I'm not saying this is the bottom, but this is that sort of seminal event, the Silicon Valley day that is closer to the bottom than the top. Unless it's simply a warning sign of what is still to come within the smaller banks. How concerned are you about those sized banks? Forget about Silicon Valley specifically, but you see the losses spreading

throughout that space. If you take the biggest banks out of the equation and your point is well made, but how concerned would you be today about the regional banks, the smaller ones? They're not systemically important. So all the regulation that's taken place since the global financial crisis and Scott, as you know, I was the first analyst to testify on the cause of that crisis. I was saying sell. I was going on your show saying sell, sell, sell. I'm closer to saying buy, a small buy for the next six weeks because we're in an air pocket before earnings. And we've roundtripped Bank of America since I was on your show in October. We're still at $30. But over the next year, you're going to see the banks show resiliency

through the recession. You're showing, I think you're going to see faster growth in revenues than expenses. And banks, the big banks are there. So it's a little sloppy, the trading today, and it's indiscriminate. And I think it's partly irrational. And that's what gets me excited about being an investor. Days like today is when you say, this is the time I should think about what I should be adding to, not selling. What do you make of that, Mike? I mean, I think I see a lot of the same things. You know, Bank of America trading back to book value, as I said earlier. Also, in the last couple, I was actually just looking at this, in the last couple of hours,

you haven't seen intraday B of A and those banks make new lows, even while some of the smaller names have done so. So that does all make sense. It's going to be difficult. Like, you can't disprove the notion that, you know, credit risk is going up or that credit costs are going to be rising. And I think you have to also view today is if it were just Silicon Valley Bank, you could say that's a one off. That's an extreme narrow example of of some of the exposures we're talking about. But on Monday, Key Corp warned about net interest. Right. You had Powell saying we're going to be looking at the regional banks about commercial real estate exposure this week. You have all the credit suites had it's couldn't file its its its its report, right? So none of this means it's all spiraling the drain. What it does mean is there's a psychological what if out there, and people are acting on it without necessarily looking specifically at what's priced in, where the risks really are.

When Mike says, Mike Mayo says, well, these are not systemically important institutions. Do you have a rebuttal to that? No, I think that's absolutely true. I mean, we have a pretty expansive definition right now in this regulatory structure of what systemically important is, right? 50 largest banks, it's the vast majority of assets and credit risk. So it wouldn't be pretty if a lot of them fell by the wayside or needed to raise a lot of capital or anything like that. But I think we're still kind of not there. We just don't know if that's really going to be the case.

And just a reminder that J.P. Morgan is 20 times bigger than Silicon Valley. And to extrapolate what happened at Silicon Valley to the whole space today is really getting off the rails a little bit. Yeah, I don't think we are. It's a matter if Silicon Valley was the only bank stock that was down today, your point would be very well taken and quite valid. But when you look at we could I could throw you 50 regional bank stocks and they look like garbage. Well, I'd say one is the macro overhang. Investors are concerned about a Fed policy mistake. The biggest pace of rate increases in four decades. You don't know how it's going to play out.

You don't know if it's going to be a hard landing. So you do have investors selling for that reason. And you're right. Commercial real estate, especially office, is its center of attention. And then you have the micro with the funding concerns. When we say concerns, these are earnings tweaks here and there. So is it possible? We've already lowered numbers at our firm for the big banks, and it could wind up being reduced by 10 percent. But you eliminate the recession discount, you get a 30 percent pop. So the recession discount is what's hurting these banks more than anything else.

Yeah, I appreciate you being here. That's Mike Mayo of Wells Fargo Securities with us today here at Post 9. You know, there's a stock that's bucking the trend. It's obviously not the only one, but General Electric is up 5%. Now, Steph, it was up 8% earlier as they, I guess, reaffirmed their guidance today. What's your take here on a stock that you own you're still betting big on? Yeah, I'm still betting really big on this name. And I think even next year's even sets up better after they spin off the power and renewables business.

So splits work, Scott, because companies get more simple when you split off stuff, right? And the businesses have been ignored because it's too big. The conglomerates just don't work. So they are actually separating all their businesses. And GE Aerospace has always been the gem of the company. And I think they will continue to be. And that's what's driving the guidance today for mid-to-high-teens organic growth this year for the company overall. And then longer-term, mid-to-upper, mid to upper single digit organic growth for GE Aerospace.

And oh, by the way, you know, I own GE Healthcare too. That's been a stellar stock this year. And I think that one also is very underappreciated because that company has been around for 125 years and they have a real business, recurring revenues, digital focus. So I like the two pieces and I like them separated because they can now really shine. And I think that's exactly what you're seeing. What do you think about Walt Disney today, Steph, too, which which is one of yours?

That stock is down near three percent because CEO Bob Iger was what, you know, to some people hinting at raising streaming prices. Obviously, he's still bullish on it. You know, they had an investor day today talking about that. What do you think of that? I'm sorry. It was at Morgan Stanley's TMT conference out in San Francisco. My bad. Yeah. Yeah. Yeah. The TMT. So first and foremost, he's laser focused on content. He said that from day one and he organized the content business and the teams to have complete control of content, distribution, and marketing. So they have financial responsibility, which under the prior CEO, they had none, and costs spiraled out of control. That's number one. Number two, if he raises prices on streaming, well, that gets to his goal, which is what he wants to see, profitability in

streaming. We just haven't seen the details just yet. We don't know what that's going to do to subscribers, but he's not releasing subscriber numbers anymore, just like Netflix isn't. They're focused on profitability. And by the way, there's other ways to make money in Disney with the parks and then get that piece of it getting more profitable, China reopening as well, especially on the park side. And then they have the $5.5 billion cost-cutting plan in content and non-content that actually should help on the margin front. So I liked what I heard today. It wasn't a surprise at all.

Steph, thanks for hanging out with us for the last hour. Really appreciate having Hightower Stephanie Link with us, a CNBC contributor. Of course, too, just want to check the market. Dow's still down by about 500. We're a little bit from the two-minute warning. Mike Mayo is still with us. I asked him to come back because I want to read you what somebody texted me. It works at a big shop.

It said, regional banks could be more important since they have not been a focus from a regulatory perspective. Not sure I agree with Mayo. What do you make of that? Right, you've had all the regulatory focus on the big boys. Right. Okay. We haven't paid attention at all to the regional banks. So maybe therein lies more risk as a result. What do you think? Look, most of the assets are concentrated in the 10 largest banks. If you were to string together three or four regional banks, they all had a similar problem on the same day at the same time. Is it possible?

Yeah. The regulators have put so much focus on the largest banks and so much relatively less focus on the smaller banks. It's certainly possible. I mean, when I started my career over three decades ago, it was the savings and loans. It was small banks that were having problems. And one benefit of national banking is that Bank of America is in many geographies, many products. J.P. Morgan's in many geographies, many products.

You're diversified. You're not subject to, say, just venture capital funding for your balance sheet. So the resiliency should pay off for the largest banks. And I'm not completely dismissing a series of regional banks having problems when there's not many eyes looking at them. But don't forget the second order risk from the whole private equity community, from the non-bank community, from the fintechs. That's where you had the least scrutiny. And I think that's where some of the greatest risk lies. Man, look at that. Look at those losses. Silver, Silvergate, PacWest, First Republic Bank down near 17%. All right, Mayo, you're free to leave. Actually, stay there because we don't want you to walk in front of the shot.

So don't move. But anyway, I'm glad you stuck around. I want your opinion, Mr. Santoli, on what Chris Verone did today, which I brought up earlier. Paying closer attention to credit with the JNK. That's the high yield ETF. Stuck below its 200 day, acting softer than equities. Put it on your radar. Yeah, I love Chris and his work. Of course, I have a little bit of an allergy toward doing technical analysis on the bond ETFs on a price basis. I'm much more interested in tell me what the spreads are doing, because that junk ETF was going down because treasury yields were rocketing higher. It wasn't just because.

Now, that being said, credit has softened up. High yield has underperformed treasuries this week. And you absolutely have to keep it in mind. Because I was looking back at everybody's famous maybe template for what's been going on over the last 15 months, which is the 2000 to 2002 bear market. And what you did see there is even when you got the good bear market rallies to a you know to like a multi-month high spreads were still pretty elevated at those highs in stocks. My point is credit has performed better now so far up to this week than it has in those periods. So yeah absolutely keep an eye on it. That's what this bank stuff's all

about. It's about credit risk emerging. It's about funding costs going up dramatically, potentially. And it's about a reminder from the Silicon Valley situation that there's a lot of on paper losses in bond portfolios out there because they had to take a hit on. And so that's that's all not going to go away just because we say the system as a whole is solvent. That's why, you know, some argue when the Fed is doing what it's doing, you know, the likes of which we haven't seen in generations, really. The first place, it always results in a credit crisis of some kind, cracks in credit somewhere. Don't look at the equity market. The equity market is going to react to what the Fed is doing, obviously, but it's credit. Well, that's what cycles do. Cycles make a lot of previously uncreditworthy borrowers access to loans. And that's the first thing that gets broken, that relationship. And so, yeah, that's where we are.

We just don't know exactly what the chain reactions are going to be and what the spillover effect might be. All right, there's a bell. Nasty day coming to a close here. Dow's going to go out with a better than 560-point loss. All leads to tomorrow morning, and to get you ahead of that.