Closing Bell - Closing Bell Overtime: Bad News Already Priced In? 10/12/22

Episode Date: October 12, 2022

Today’s red hot PP report barely moved the needle – and now, investors are anxiously awaiting tomorrow’s CPI. But is all of the “bad news” already priced into stocks? Josh Brown of Ritholtz Wealth Managements explains how to navigate these choppy waters. Plus, Avenue Capital’s Marc Lasry weighs in on the fed, markets and big money opportunities. And, market expert Mike Santoli gives his forecast for CPI… and what he thinks stocks might do in response.

Welcome, everybody, to Overtime. I'm Scott Wapner. You just heard the bells. As always, we're just getting started from here at Post 9 at the New York Stock Exchange. In just a little bit, I'll speak exclusively to Avenue Capital's Mark Lazzari on all things markets, where he sees opportunity and, yes, reason to worry. We begin, though, with our talk of the tape, all in, as in, is all of the bad news, the rhetoric and the rate hikes, all priced into stocks? And is that why today's red- hot PPI report barely moved the needle? Another hot read likely tomorrow with the CPI when it drops in the morning.

Now earnings to begin in earnest, too. So how should you navigate these choppy waters? Let's ask Josh Brown. He's Ritholtz Wealth Management's co-founder and CEO. Josh, welcome. It's good to see you again in overtime. So after PPI, ahead of CPI, what do you think about these markets here?

Very, very weak, very uninspired. Today was, in my estimation, a fairly neutral gain in inflation, not catastrophic at all. But I am out of the business of looking for big bear market rallies or trying to time them. So I guess I'm really not surprised at today's lackluster performance. I do think there's some element of what schmuck wants to get crazy long going into tomorrow, just understanding how asymmetric it could be. Like if we get, for whatever reason, a very tame inflation print, CPI tomorrow, if for some reason that comes to pass, yeah, you'll have a nice rally just because of how much we're all dreading it. The worst days of the year were all CPI days and Fed days.

So that's the upside. The downside is why the hell did I just do that? So look, I talk to people all over the street. I know that's the prevailing mood. I think people at this point are so washed out sentiment wise that they would rather be late and miss the upside of inflation truly coming down or getting later than they would want to stick their neck out. And that makes sense because every single reading this year, with one exception, was hotter than expected. So that's kind of where I think we are. But Scott, I'm actually thinking more about earnings than I am about the inflation print that we're going to see tomorrow. I know it'll be market moving, but earnings are really going to be the thing that takes us into the fall. And I think that's going to be top of mind starting next week.

We'll get there in a moment. I'm looking at all of the projections and the predictions from all of the main firms on the street. Nobody's got a seven handle on tomorrow's CPI. Everything is at minimum 8.1, 8.2. Well, it's where expectations certainly are. No one's going to be surprised by a hot print tomorrow, I think, at this point. Interesting, and I want your reaction to this. JP Morgan, their client survey.

71% of people are more likely to increase equity exposure than decrease. Does that speak to your sort of washed out where sentiment is? It's like tiring being so negative. Let's figure out an opportunity to start getting a little more offensive, if you will. Well, look, everybody is facing down the same math when it comes to investing for retirement. And the math says, even though it's very convenient to hide out in cash right now, and yes, you are getting paid something, which is a big change of pace for the last 10 years, that's not actually going to get anyone to where they need to be. So the acceptance of risk is going to become something that people are going to have to think about regardless of how much volatility we're in for this fall. There's just really no way around it. Unless your time frame is shorter than the lifespan of a goldfish, you're going to need equities. The question really

is going to become how much relative to how much cash, how much bonds, et cetera. That's really the only conversation. It's not an all or nothing, yes or no stocks conversation. So that does make sense to me. I mean, the conversation now is, you know, what's the Fed going to do? When's it going to do it? How much is it going to do it? And are they going to break something along the way? I want your reaction as well.

Ian Shepardson, closely followed from Pantheon Macro, his tweet says the following, quote, and because we're looking forward to the CPI, obviously, I know the Fed is still pushing this narrative that there has been no improvement in inflation, but core PPI goods prices were unchanged in September for the first time since May of 2020. What will they be doing in, say, six months time as the tightening kicks in further? Please stop. Right. His other point is, and you alluded to this yesterday with all of this Fed speak, is enough with the sledgehammer, as he called it, enough with this tough talk. Right. Let it get through the system and let's figure out exactly what's going to

happen as a result of all the tightening that we've already done. In his words, please stop. Is he right? Yeah, it's it's it's overcompensating. This is like behavioral at this point. They know how late they were. They know what they've unleashed by not acting sooner, by continuing to stimulate long past the point where we had massive recovery in markets and employment. They know what they did. So this is like a combination of, hey, let's earn back our credibility. And, you know, I get it. I'm not, listen, I'm not opposed to what they're doing, but I completely agree with Ian. Shut up already. We got it. We got it.

But I mean, the minutes, right, we're finding out sort of what's really happening in the room and in their heads, right? Appropriate at some point to pause rate hikes, excuse me, the minutes, right, we're finding out sort of what's really happening in the room and in their heads, right? Appropriate at some point to pause rate hikes, excuse me, they say. But many in the room saw the cost of doing too little outweighing too much. And a sizable portion of the economy has yet to respond to the rate hikes. I'm curious to your reaction to these minutes, right? Especially the line of seeing the cost of doing too little outweighing the cost of doing too much.

Well, look, the thing about what they want to do is you're not really going to have concrete evidence that it's worked until months after the fact. And you're not really going to know what the ramifications are and the unintended consequences of moving this quickly, this aggressively until long after the fact and you're not really going to know what the ramifications are and the unintended consequences of moving this quickly, this aggressively until long after the fact. That's just the nature of these things. And the Fed can't do anything about that. So, you know, we want to get to four and a half percent unemployment. We think that's more reasonable. OK, so that's a million one, a million two jobs lost. How fast do you need to bring that about? You need to bring that about

this month. So a lot of the things that the Fed needs to have happen are going to lag what they're doing. This is just the way it works. I know they know that, too. So that's the game that we're playing right now. And it's not pleasant. But give me the scoop on earnings, OK? So that's where you sort of threw the dice down here on what's going to happen, right? We really kick it off on Friday with the banks and then it gets hot and heavy in the weeks ahead. What should we expect? Is it enough to, quote unquote, save the day? You've got the Fed overhanging everything. So, I mean, the numbers are almost feel like irrelevant. The guidance is more important than anything else. It's a very perverse situation. We want layoffs, and we want caution on these calls,

and we want to hear companies retrenching. I know it's very counterintuitive, but that's what we want, and that's what we're going to get. This is Yardeni data. Q3 earnings are expected to be up 2.9% year over year. The projected growth rate from this past January going into the year was 7%. So we've already lopped off more than half of the earnings growth that was being expected for this quarter. They're also taking down Q4 numbers. Now they think up 6% and change. That number was closer to 14% at the end of this year. So that work is being done by Wall Street's analysts. You could argue that they should be doing it quicker, but Q2 earnings didn't justify ratcheting down expectations

that much more quickly. So it's a very tough situation. And then you've got companies like Pepsi, where they're basically like, hey, we're fine. FX headwinds, blah, blah, blah, we're okay. So it's really, really tough to envision a scenario where those numbers drop really quickly. But that will be Scott, is this. We're getting the question from our client. We do a quarterly conference call and we say, send us your questions. What do you want to hear about from us? And then myself and Barry and Michael and Ben and the whole gang weigh in. The number one question that we're getting is, if you know that earnings are coming down, why would you want to be invested? And we took that question and we ran the numbers. And this was fascinating. And I don't think the viewers have heard this anywhere yet. If you go back from 1930 through 2021, S&P 500 corporate earnings were positive 61 years, negative 31 years. So about a third of the time, earnings are down from the previous year. If you only invested in the stock market during those years where earnings were up, your returns would have been 10.2%. If you only invested in

the years where earnings were down, you would have made 9.8% on average. So identical. So the path of earnings doesn't necessarily tell you what stocks are going to do in any given calendar year. So, yes, we know earnings estimates are too high. They are coming down, have been coming down all year. That will continue. But that doesn't necessarily translate into a sell. Your data is so timely for this moment because we're just learning that AMAT, Applied Materials, has cut its outlook. And we're getting our expert up on that. You can see the stock

is reacting accordingly here in overtime. But it speaks to exactly what we're both talking about, the reality of where earnings are going from here. Now, this is a space that's been especially challenged, right? Chips have been at a new low almost every single day, it feels like. But it speaks directly to what you are talking about. Investors should expect. The other side of that, of course, is the back end of what you said. Maybe you buy stocks and you don't worry so much about it. Well, the good news is you're no longer buying on peak valuation and you're no longer buying on peak earnings. And in a sector as cyclical as the chip sector, buying it at both peak valuation and peak and the peak of the cycle at the same time has been devastating. So you're no longer in that situation.

You've got a sector now that's the median stock in the chip sector is in more than a bear market, probably off 30 percent or greater. You've got names in this space that are down 50 percent, high quality names and earnings expectations have already come down. So like when was the safer time to buy AMAT? November of 21 or November of 22? Right? Like, just semantically. So I think that that's an important component of why we will see money be put to work in these names,

even if we don't think the worst is necessarily over. Right, because they've already obviously come down a lot. You're not seeing, Christina Partsenevel, a tremendous reaction to what is bad news from AMAT. You've had a chance to look into this a little bit more. Yeah, and they are commenting on the United States government and the restrictions and actually saying that Applied currently estimates the new regulations. Keep in mind, for those that are unaware, the United States is putting regulations on any type of AI-chipped exports to China. And so Applied is saying that the new regulations will reduce its fourth quarter net sales by approximately $400 million. And so this revised net sales outlook is reflecting specifically these new regulations.

So we've had companies before Applied saying $400 million hit. And the big question is, is this going to be expanded out? So we don't, just over the past few days or so, there's word that Capitol Hill, they're still discussing it, whether they're going to expand beyond just AI chips. And you have to keep in mind, it's not just American companies. It's any company around the world that uses any software or tools from the United States will be restricted a year from now from providing chips and any type of services when it relates to AI in China. So that was a bit of color that just coming out of the applied materials revision for the fourth quarter. Yeah, I appreciate that. Christina, thank you. And pop back on with us if you get

anything more on that. So, Josh, you know, look, it's kind of to your point. I mean, the stock is not trading off tremendously. So as we said, right, it's come down a lot. In some corners, this may be viewed, OK, get the bad news out. It's out. The stock is already down. The valuations come way in. And now's the time to take a serious look at some of the names that you have had on your list for these kinds of moments? Well, look, this is a stock that is down 51.1 percent going into this news tonight. And that's not in one year. That's in 10 months. So that's just since the start of the year. The forward P.E. has also come down 52 percent. So that's that's the point that I'm making. Nobody is going to know how much worse this gets,

and no one is expecting anything great to come out of a cyclical industry like this into a recession, and we're clearly there. So the question becomes, what's your timeframe, and how much more downside do you really think is left? I wouldn't call a bottom here, but this stock is being de-risked. It's in that process of being de-risked right now. So I think when you look at flows and you look at investors who have fresh cash,

they're going to look for names like Applied Materials, and they're going to have to say the same thing that all investors have to say to themselves in a bear market. Yeah, I get it. Things are not great. OK, thanks. I can see the screen, too. But am I holding this for 30 days, three years, five years? I think there's a bigger regret factor the longer your time frame extends to miss out on blue chip companies like these. You don't have to catch a falling knife. You can wait for some consolidation. But this is where money will be made. Names

like this, you're just not going to get the instant gratification from it. Yeah. I mean, look, let's be honest. I mean, you don't have the same kind of volume right this moment that you did during the the regular hours. So you have to wait for some of the follow through on names like this. It'll be interesting to see how it opens tomorrow. Yeah. Yeah. Yeah. It'll be interesting to see how it opens tomorrow morning. Let's expand the conversation now and bring in two more voices. Jessica Inskip is Options Play Director of Education and Product. Deepak Puri, he is Deutsche Bank Wealth Management America CIO.

It's good to have everybody with us. So, Jessica, your reaction to what we just got from AMAP, but in the broader sense of what it portends for what we may hear in earnings season. Yeah. So just like Josh said, I completely agree. I really care about earnings season and specifically forward looking guidance. So I think that's a really good insight into demand destruction and what the Fed is doing. So I care what companies are saying. Tech has told us that they have had layoffs. We expect layoffs there first because it's easier because they're going to lay off innovation and things of that nature, less things to automate. So I'm curious how that fits into the puzzle.

Is there demand destruction? We've heard early negative pre-announcements so that pricing is happening early and often. So I'm really focusing on forward-looking guidance. And AMAT, Pepsi, all of the earnings we've already received are really verifying that process and thought processes as we see the market react. Yeah. Deepak, I mean, it's kind of hard to surprise us, right? At this point, right? The market feels like it's priced a lot in and maybe you got a little bit of that today with a hot PPI. Market didn't fall out of bed. AMAT drops the hammer on its outlook.

Stock's not cratering as we speak. Now, we said we'll take this with a grain of salt because we need to see what the follow through is once you have an actual trading day around what's going on with the guidance there. But how about that thought? Right. It's kind of hard to surprise us at this moment. That's true scott uh... i'd think the bar is so low in terms of some of the earnings that uh... you know we are sort of immune to it that uh... numbers come down from the beginning of the quarter to the actual number but nothing of a chattering happens uh... i think others have said it and i'll say

it again for me it's yes about guidance but i'm also looking for three or four other points you know one would be on the inventory build up the second one dollar strength what companies are doing are they hedging how it's impacting their translation revenues third would be worker shortage are they still having the same kind of labor shortage issues that they were having you know in, in the last earnings season? And then supply chains. Are there any improvements in the supply chain?

So, yes, the number itself is not necessarily, you know, is going to drive the markets. But some sort of guidance on these four things might give investors some comfort level in terms of which direction we're heading. You know, Josh, since we're talking about AMAD and it gets us into the area of technology, I'm thinking about what we're going to hear from some of these companies specifically, the mega cap names. And I'm going to pull up Microsoft as we're having this conversation because it just makes me feel like, OK, this stock has hit a 52 week low. We've been talking about that every day. So it's already come down a lot. Why? You know, the obvious issues, global macro issues, FX is going to be a big story. What are they possibly going to tell you in their earnings

report in a few weeks time that's going to drag the stock even further down because it's already de-risks and it's re-rated? Yeah. And believe it or not, this stock actually has done worse than the S&P year to date by quite a bit. Look, I don't think that you look at a company like a Microsoft and you ask yourself rhetorically, what is this company going to say in terms of like they're trying to save the stock price? That's not, you know, in a mega cap, you know, S&P 100 mindset. They'll buy back stock if they don't see opportunities to do things more aggressively. A lot of these companies were being rewarded for blazing new paths and making acquisitions and getting into new businesses horizontally. And Wall Street cheered on the growth that came from that. That's not the environment that we're

in right now. So there are companies like Microsoft, like Apple, they're more than comfortable just getting through the period that we're in, trying to do the best they can to hedge FX issues, etc. And they're happy to buy back stock. And that's what I think you're going to see a lot of going into the end of the year. I don't think anybody's empire building right now. So, you know, I wouldn't listen to that call hoping for anything terribly exciting. We just showed you a wall of the companies that have worn thus far. It's smattering. I mean, it's not that many. And you have to wonder if you're going to need two walls of ours by the end of earnings season to get everything on that board. And we'll have to see because there really aren't that many to this point. But with the earnings season about to get,

as I said, hot and heavy, that's likely to change. Jessica, last word to you, since we're just, let's finish it up on tech. You like Salesforce, okay? Higher valuation, a stock that's come down a lot. Maybe it's tough for some to get their arms around buying it right here, right now. Yeah, it's a longer term view.

So even thinking about what happened with AMAT, right, that is a result of fiscal policy. So I'm thinking of longer term views, what happens in bear markets and when there's big supply and demand disruptions and imbalance like there is in the labor market. That's that theme of automating systems and processes. If you cannot fill jobs, if we hear from the earnings announcements and so on that they still cannot fill those jobs, the only way that they can do that and really bring down or increase unemployment,

but bring down that labor demand is by automation. So therefore an investment in that is just logical. Guys, we'll leave it there and we'll talk to you again soon. I'm sure we will. Josh Brown, as always, thank you. Jessica, Deepak, it's nice to meet you and have you on our program. We'll see all of you soon.

Let's get to our Twitter question of the day. We want to know, what will tomorrow's CPI report show? Is inflation cooling? Is it heating up again? Is it unchanged? You can head to at CNBC Overtime, cast your vote. We will give you the results coming up later on in our show, in which we are just getting started.

And next here in overtime, Avenue Capital's Mark Lazzari. He joins me right here at Post 9. We'll get his take on the Fed, the market where he sees opportunity for your money and his. That's after this quick break. We're live from the New York Stock Exchange back in overtime right after this. Navigating unsettled markets is what our next guest does for a living, often finding opportunity where others see stress. Mark Lasry is the chairman, co-founder and CEO of Avenue Capital. He's here at Post 9. It's good to see you. Welcome

back. It's a pleasure. Thank you for having me again. Four months since we had you back. So I'd like to think that a lot has changed, but the more things change, the more they stay the same, because it feels like we're having these same types of conversations. We are. What's your view on sort of where we are at this moment? Look, I'm not really a big believer in what the Fed is doing. I think at the end of the day, you've got this huge issue that is going on right now, where every time you keep raising rates, you're pushing the economy closer and closer to a real recession. So what are you doing? You're trying to tame inflation, which I get.

And but if I lose my job because we're going into a recession, so instead of paying a little bit more for goods, now all of a sudden I've got no job. And then the Fed is going to turn around again to start lowering rates. So if I was the Fed, sure, you can raise it one more time, but I'd slow down because I think there is a real risk to this economy going into a real recession. Wow. So you think they're doing too much. I'm reminded of the last time you were on. As I said, it was some four months ago. You said you thought the Fed will raise, quote, one or two more times, but not to the point where they send markets down 25, 30 percent.

Well, I mean, the market was down 20 percent. Yes. And I think what I I guess what I miss is the Fed doesn't care, which is fine. I understand that their primary focus is inflation. My primary focus is what's happening in the economy. And how do people not get hurt? Because the vast majority of people want to buy a house. You can't buy a house when interest rates are double where they were a year ago. So you're going to start causing some real damage to this

economy and it's going to start, you know, you'll start seeing it next year. So they might not care. I think your point is well taken on whether stocks go down. I mean, as long as they don't crash. Yes. But they certainly care if the credit markets get unsettled and there's fracture within that. What do you see along those lines? That's sort of your wheelhouse is credit. It is. So what you're seeing is there's a lot less liquidity, which is great for someone like me because we're providing liquidity.

So that's the benefit. I think the Fed is not as worried about that right now. Really what they worry about is systemic risk. And there isn't that risk in the market, but there is quite a bit of lack of liquidity. You saw what happened in the U.K. You're seeing some of that here. The Fed is just focused on trying to lower inflation and they don't care about all these other little repercussions. And that's fine. And I get that.

But it's causing or it's creating huge opportunities for us. It's interesting. You talk about systemic risk. I find that we're using, as I mentioned yesterday, we're using these terms again. Yeah, and we shouldn't be. But I feel like we are. You're right. The danger in these liquidity issues that you cite, and they may not be focused on systemic risk, is that one feeds into other issues which lead to the ultimate problems, the kind of which even David Einhorn, your buddy from Wisconsin, was talking about yesterday in an interview,

talking about bond markets are stressed around the world. So the Fed, and I think you saw with the Bank of England, they sort of feel they have the bazooka. And the bazooka is, I'm going to come in at any time, and I'm going to create that liquidity so we can solve any crisis that's going on. That, to me, just makes no sense and you're right we're all talking about the fact that you've got more and more issues in the market and you know if I was a Fed governor I'd start focusing on that because all the Fed seems to do is they're always a bit late so right now I want to solve for

inflation then they're gonna solve for a crisis then they're gonna solve for a recession why not just slow down and sort of calm things down a little bit as opposed to continuously creating issues? You mentioned, you know, some of this is good for obviously your business and private credit market, which you've been in. It's obviously good when rates are going up. You get a better rate of return on your own money. What happens if we start to go towards a recession? Rates come down. Is that bad for that business? Well, everything we're doing, we're doing specialty lending, right? So we're lending. It's not LIBOR anymore. I guess it's SOFR. But we're right now, as rates move up, we're charging more. But I think for us, even when rates

go down, you're still making on a senior level anywhere between 10 to 12 percent. So that's fine. You're getting overpaid for that risk. Ultimately for us, the worse the economy is, the more opportunities we have. You know, but then the same thing we're doing is we're looking for that turnaround. Right. So what you'd like to have is you want equity markets to be sort of flat because that's great for a credit market. With equity markets going down, there's more opportunity, but there's also more risk. You mentioned what's going on in the UK. I'm curious your view of what exactly is happening there, whether it is an opportunity in any way for you. Are you in playing the bond market there? There are a lot of people betting against bonds there because, you know, what rates have done. Are you? No, what we're

doing there is we're actually lending money in the UK and in Ireland to sort of small companies. Our average loan size is five to 10 million. We're able to charge quite a bit for that, somewhere around 12, 15 percent. So I would you a year ago, we were charging sort of 8% to 12%, right? So that lack of liquidity is creating huge opportunities for us. But if you sort of think about what happened, you know, in the last two weeks, sort of an increase in the rate where, you know, for the UK, it's gone from 3% to 4%, that's like 10 points on the UK Treasury. of an increase in the rate where, you know, for the U.K., it's gone from 3 to 4 percent. That's like 10 points on the U.K. Treasury.

Most pension funds or most funds are levered 3 to 4. So that's cost them 40 points. That's why you're seeing sort of all this panic out there, because people have to provide collateral. It's not that they're worried they're not going to get paid. It's just the banks are asking for collateral value. That seizing up means that all of a sudden, as people get more and more nervous and sort of liquidity dries up, the fact that we're providing it means we're able to charge more, which is good for our firm.

I don't think it's good for the people, obviously, who are borrowing. Right. Do you worry about some of the chaos, if you want to use that word, of what's happening in the credit markets there being exported around the world, including here, and having a greater negative effect than maybe it is right this moment? You're absolutely right. It is going to have a negative effect. I love chaos. So the more chaos there is, the better it is for me. But the more chaos there is, the worse it is for everybody else. So I think you're dead right on that. But that is what's happening. The more chaos you've got around in Europe today, the worse it's going to be here. The travels that you're doing, the people you're talking to, both inside the sports world, the investment world, they're all obviously billionaire owners that you talk to.

What's the prevailing view? Is everybody what? Nervous. Everybody's nervous. Everybody's nervous because you don't know how far the Fed is going to go. So when you look at your business, everybody I talk to is business has slowed down and it's fine. You can, you can deal with that. The question is how deep is it going to go? And the worse it gets, the harder it is to turn things. And I think that's what the Fed is missing. Because when you're a business owner, you're nervous about what's going on.

And you're starting to see that things are just starting to get bad. If the Fed stays on its path that it's on right now, recession is what, likely? I think it's guaranteed. I mean, if you raise rates, which they're going to do, and then you continue raising rates, I think then you're going into a recession. You tamed inflation and then the Fed, we're going to be here and we're going to be talking about how do we get out of this recession? Right. And then the Fed's got to lower rates. The market knows the Fed is going to lower rates. Question is, when is it the middle of next year, end of next year? Since we all know that, why not start a little bit? Why go into a recession?

We'll make that the last word. It's good seeing you as always. Always. My pleasure. All right. We'll see you again soon. That's Mark Lazzari joining us here on set at Postnight at the New York Stock Exchange. It's time for a CNBC News Update with Shepard Smith. Hey, Shep. It's depressing. Wow. Man, a lot. Want to hear depressing? Here's the news. $965 million. That's the price Alex Jones and his company Free Speech Systems are now ordered to pay the eight Sandy Hook families and an FBI agent who was among the first to respond to the massacre 10 years ago. A jury in Connecticut delivered that verdict in Jones' defamation trial just minutes ago. It's the second defamation trial to find Alex Jones guilty

and to ward damages. Jones spent years calling the mass shootings a hoax and family members of victims crisis actors. Kids five and older are now eligible for an updated COVID booster. The FDA and CDC approved the move today. Pfizer boosters available for kids five to 11. Moderna shots for kids six and older. And Hurricane Ian is newly the newest billion dollar weather event to hit the United States this year. According to NOAA, it's the 15th weather and climate disaster so far and the eighth year in a row with 10 or more billion dollar weather events tonight much more on the alex jones verdict including his real-time reactions plus the fallout grows from a racism controversy inside the los angeles city council on the news right

after jim kramer 7 eastern cnbc you want chaos we. All right. And we'll be there for it. Shep, thank you. That's Shepard Smith. Up next, your big bank playbook. Wells Fargo's Mike Mayo standing by to break down all of the key themes investors need to watch ahead of bank earnings. Plus, why does he have an abacus? Could represent the key to your investment strategy. That's what he says. A side of Mayo with an abacus is next. O to your investment strategy. That's what he says. A side of Mayo with an Abacus is next. Overtime's back right after this. Banks kicking off earnings season this week,

and we're getting some of the biggest names this coming Friday. J.P. Morgan, Wells Fargo, Citi, Morgan Stanley, all reporting before the bell. How should you be positioning your portfolio? Joining us now, one of the street's top analysts, he's Mike Mayo. He's the head of U.S. large cap bank research at Wells Fargo Securities. It's good to see you. Welcome. You always have some prop. We teased it as an abacus.

Is that because it's easier to count the losses in bank stocks on an abacus than a calculator or what? Well, actually, the math is quite simple for owning the banks over the next 12 to 18 months. But you're macro, macro, macro all the time. And when I say you, I mean the entire financial news world. It's how many economists have you had on like the past week or month? It's all. Well, last night, last night, check the macro matters to, you know, at least some respect of the bank's business and what their stocks do. Am I wrong? Let's just for a moment go to the micro, which you'll see on Friday and next week.

The micro is really phenomenal at the banks. And it's very simple. And you can use an abacus to compute this. Revenues are growing faster than expenses. You're seeing some of the best Main Street banking growth that you've seen in decades. And the last time you had inflation-induced revenue growth for banks, headcount increased 51 percent, 51 percent in the 1970s. Now we expect headcount to remain flat. And, Scott, I found a relic of banking back a few

decades ago. And here's my abacus. So what it used to be when banks added loans and payments and processing and servicing, they had to pull out the equivalent of the abacus, little paper forms and fill them out and hire a bunch of people. Banks don't have to do that. So for the last decade, banks have invested in technology and you are on the cusp of seeing the payoff from that investment. The scalability of the bank business models is underappreciated. Banks will be adding revenues at lower marginal costs without adding too many people, more revenues, more earnings per employee. That is why it's night and day difference for the banking industry today than past periods of inflation. And you'll

see that starting Friday. Let me ask you a question because maybe our viewers are thinking this and they want to ask you this question. Did Jamie Dimon this week make you want to go out and load up on bank stocks? Did he? We have the Jamie Dimon paradox. Jamie Dimon has called a hurricane. He said we have a recession. He said, look out.

And partly with good reason. I mean, the Fed is tightening. Partly? Well, quantitative tightening. the Fed's tightening, and then you have stricter bank capital rules. So there are reasons to be very concerned. But at the same time, Jamie Dimon and J.P. Morgan, they're investing more than they have ever done before. And they have not set aside huge reserves for problem loans ahead. So which is it? You know, is it his words would say,

look out ahead? Or is it the firm's actions would say, hey, times are still OK. We'll find out Friday. Well, who's going to do best this earnings season? And the other thing, by the way, is that it's not like JP Morgan. And I don't mean to single them out because you could you could throw in a couple other big banks with them. It's not like their stocks do all that much after earnings. Right. We've learned that the last two reporting periods. They report the stocks end up going down. Well, you know, banks have gone down less in the market since second quarter earnings. And I think what you'll see is bank earnings continue to grow. Bank earnings continue to grow even through a recession. So every quarter that the bank stocks stay here, they get cheaper

and cheaper. And once you get this macro overhang out of the way, it could be tomorrow, it could be three months, it could be six months, you're going to see these bank stocks rip. But I grant you, they're in a holding pattern. But one year from now, I'll be back on the show and you'll see Bank of America stock won't be at $30 a share. It should be much higher or at least outperform the market. All right. We'll hold you to that. We'll have you back. It's good to see you as always. Thanks for coming. Nice seeing you. Don't forget your advocates. And the way banks do banking today. Yeah, exactly. All right. That's Mike Mayo, Wells Fargo, joining us. Coming up, major gains ahead for Meta, that stock dropping more than 60% over the last year. But one

halftime committee member sticking with her bull case. That debate, the call after the break. In today's Halftime Overtime, virtual reality, real returns, despite shares hitting their lowest level in nearly four years today. Hightower Stephanie Link sticking with the beaten down big tech name meta. I think they will be able to have earnings, solid earnings.

Maybe revenues are going to be lower because we know what's happening in the macro with digital advertising slowing down and competition. But I think at 11 times forward estimates for the base business being a solid base business, I just think it's too attractive here. All right. RAS Asset Management's Carrie Firestone also owns Meta and joins us now. Carrie, welcome. It's good to have you here. So you heard Steph. What do you think? I mean, she also said, I thought the most important point she said also in that interview today, she says she's not investing in Meta for the Metaverse.

So what are you really investing in if you're not doing that and how are you investing? Well, good for stuff for not focusing just on the metaverse, which you're getting for free, I would say. What you're getting with Meta, which is good, it's the number one social media network in the world. And it's still growing in every location except for Europe. This is not to say that it's growing at the rate it was. Of course, it's a big company now. But there was user growth everywhere except for Europe. And that was Russia and Ukraine, which were down, obviously.

It's still one of the leading platforms for advertisers. And we know that small and midsize ad spending has come down because it's cyclical, because owners of those businesses cut back way before we've hit bottom in the economy. And they will start to increase their spending sooner as well than the economy bottoms. And so that's something that has been a big factor in the stock price going down 70 percent from the peak. I mean, whatever. I know, I know. Because. Because. Anytime soon though, Carrie. I got to get the stock price going down 70 percent from the peak i mean whatever i know i know because i got to get to the point because at a certain point yeah at a point the stock is cheap if it is 11 times it's got 50 billion of cash that's 11 percent of the market value of the company

the cash interest rate the interest rates will earn another 5% EPS. So at what price do you buy any stocks when they're very attractive? And you're now going to start to see buyers coming into this stock who haven't owned them before because they're going to say, wow, this is an extremely attractively priced stock at this level for a company that's still growing earnings, 10 to 15 percent at a minimum, and probably more when you start to see a cyclical rebound. It has not been an easy stock to own. It's been painful. But let's admit that there are prices at which all stocks are buys, and this one happens

to be a buy here. You know, no one's proud who's owned it for the last six months. You know, nobody loved it, but that doesn't mean we won't be happy six months or a year from now. We will see. Carrie, thank you. Carrie Firestone joining us in halftime overtime. Up next, we're tracking all the action in overtime. All right. Christina Partsenevelos is standing by with our overtime movers. Hi, Christina. Hi, Scott. Victoria's Secret says its earnings outlook will be higher, but it won't be thanks to higher sales. And Southwest Airlines cutting a deal with its technicians that will result in higher costs. I'll have the details of all of those companies

and more after the break. We're back and we're tracking the biggest movers in overtime. As always, Christina Partinola is here with that. Hi. Hi. Let's start with the retailer Victoria's Secret Shares that are climbing higher right now after pre-announcing its Q3 outlook. Shares are up 2.7 percent. Its EPS and operating income they're anticipating will both be towards the high end of guidance range. Sounds like an improvement though, but the company still says net sales will decline in the high single digit range compared to last year. So perhaps that improved guidance is because of better cost controls rather than improved sales. Shares of Southwest Airlines right now moving lower in the OT, down about 1.7%

after the company approved a new five-year agreement with its technicians to increase compensation. No details on the size of that compensation increase, though. And we told you that chip equipment maker Applied Materials is cutting its Q3 sales and earnings outlook, warning a new United States-imposed export restrictions to China will cut sales by $400 million in this upcoming quarter. Applied Materials now joining other chip makers like NVIDIA, which also announced a $400 million cut to sales because of those new export restrictions.

You can see right now in the OT, chip equipment names are falling in sympathy, like KLA, LAM, and AMD. Scott. All right, Christina, thank you. Christina Parts and Levels. Up next, Mike Santoli is back with his last word, what he is expecting from tomorrow's CPI report and the reaction to it. We'll be right back. Do not miss another big interview tomorrow in overtime. Dick Costolo, he's the former Twitter CEO, get his first interview following that Elon Musk news did the deal at 5420. See if it actually closes. But

nonetheless, we'll talk to Dick Costolo tomorrow. We look very much forward to that. Mike Santoli is here now with his last word. So you heard Lasry, I hope. Enough is enough, right? Let's stop and take a look around. That's becoming, I think, a prevailing sentiment out there. I do think you need the numbers, the inflation numbers to make a pause plausible. You know, we heard, I don't know, dozens of Fed speakers the last two weeks. We saw the Fed minutes today. None of what they're saying is premised on inflation becoming friendlier to their program. So that's why it seems like we're at least primed for inflation to be more of the same story. Almost all the surprises have been to the upside with the CPI.

So we'll see if that continues. What do we know? We know you're not supposed to buy 52-week lows. That's the trader textbook. We closed on a 52-week low on the S&P today. You're not supposed to fight the Fed. You're not supposed to fight the trend. Against all of that, you know, the 3,500 level on the S&P, it's down 2 percent from here. That's half of the entire rally off the

covid crash low. It's an area that a lot of folks are saying, finally, we might be stretched tight enough to spring back a lot. And as I've been saying, it's just a lot of dry tinder around for something pretty interesting to happen if there's even a glimpse that core inflation might ease up here in September. Are you surprised at all by the market's reaction today to a hot PPI, or is it so focused now, tunnel vision to the CPI? And that's why we really didn't do a whole heck of a lot. I'm not surprised that the market wanted to just kind of idle and wait for the big one.

Bond market volatility remains too high. Even though yields didn't really do much of anything today, that whole index, the VIX for bonds is way too high for people to be comfortable. So I think it makes sense we're back on our heels. You're down 25 percent from the high. Again, I think people see two sided risk. And that's why you didn't want to necessarily over interpret the PPI number, which historically is really not a market mover. I think it's interesting hearing from a guy like Lasry today who who's not necessarily talking his book. Right. Because he finds opportunity in others pain sometimes and in pain trades. And yet he's saying enough is enough. You're going to break something.

You'd want to see more distress. Look, the minute said they're willing to err on the side of too tight versus too loose. Now we'll see in the moment if it gets to that. They've told you they're going to be late, just like they told you they were going to be late and starting to hike back in 2020. So see if they regret that. Ian Shepardson was out today basically with the same note. It's like, just stop, I think was his language. All right, we'll see. See if they have cover to do so.