Closing Bell - Closing Bell Overtime: Directionless Dilemma 12/7/22

Episode Date: December 7, 2022

Stocks stuck in a frustrating, directionless, no-movement mode. So, does your money have a real chance of getting anything going over the next few months? Sofi’s Liz Young gives her take. Plus, star venture capitalist Rich Heitzmann weighs in on the “new normal” for tech investors. And, Mike Santoli’s breaks down on market sentiment in his Last Word.

All right, Sarah, thank you very much, and welcome everybody to Overtime. I'm Scott Wapner. You just heard the bells. We're just getting started from Post 9 here at the New York Stock Exchange. In just a little bit, I'll speak to star venture capitalist Rick Heitzman. He led investments on Pinterest and DraftKings, among others. Has one part of tech investing changed for good? We're going to ask him that key question. Plus, Mike Mayo is back with us after making a key move on Bank of America today.

It's been his top pick in the space. So has that now changed? We begin, though, with our talk of the tape. This stuck-in-the-mud, frustrating, directionless, no-movement market, and whether your money has any real chance of getting anything going over the next few months. Let's ask Liz Young, SoFi's head of investment strategy, here with us at Post Nine. Right. I mean, it is kind of that kind of market. It's like stuck in the mud, directionless, no move. It's frustrating. Yeah. Well, today was unremarkable, obviously. But from November 30th

until today, I think there has been a bit of a tide shift. And what we've seen multiple times this year, this could be the third time, is an attempt to try to break above some of those resistance levels. We have failed at it yet again. Now, it's still too early to say whether or not we could actually do it, but there's a couple different things that I would look at. The last time I was here on Overtime, I talked about the VIX never being able to get below 20 or even stay there. It happened again. We dipped below 20. Now we've popped back above again and we've got a market that's down. And some of the patterns that you see under the surface of the market, the sector performance, very much more recessionary patterns, not rate patterns.

Sentiments all about recession, right? CEOs at these conferences all week, the CNBC All-America survey. We could show you some of these souring sentiment, as we're calling it, from CEOs, give you an idea of what we're talking about, because it's almost daily now that you're hearing from CEOs Jamie Dimon and Solomon, David Solomon, Goldman Sachs, I mean, on and on and on and on, right? It's becoming the dominant narrative. Yeah. Well, it's about time, right? I mean, we've been waiting for earnings to come down. We've been waiting for CEOs to acknowledge the fact that a recession is more likely than not.

And here we are. And you think one still is. I think one is absolutely likely. In fact, I'm getting to the point where it's hard for me to understand how we wouldn't have one. Oh, really? We've got a lot of indicators pointing in that direction. We've got a market with all these curve inversions, which is going to keep upside limits on equities.

It's hard for me to see how we wouldn't have one, but I think it would be a good thing if we just got it over with. What's the most concerning sign to you that's telling you about that recession thing? Is it the inverted yield curve? Is it crude now, the lowest level in a year? I mean, it's like pick your sign at this point, because it feels like each day there's a new development that says, aha, I got to watch out for that. Right. Well, it's pretty classic recession signals at this point. We've got PMIs and contraction. We've got, like you said, oil coming back down. And as many of us know, you usually see a spike in oil prices

before a recession and then a relaxation afterwards. I think something that's really interesting is that we've got speculation that China might relax its restrictions, yet oil continued to come down. So China can't save us from that. And there's this expectation that demand is finally going to get hit. The last things to crack are always the labor market and some of that consumer spending. So some of that hasn't cracked yet, but we're on our way. And the market will likely sniff that out before the economy actually shows it. I would also say when

you finally see a crack in the labor market, and that's usually been sort of what we hang our hats on. Well, labor's still strong. Everything's going to be fine. We can have a soft landing. Because it's a lag, right? It's a lag. It's a lag. But when it breaks, it breaks hard. So that could be coming closer to the end of the year or early next year. I'm thinking of the one person who might be able to save us. You know who that person is, right? Jay Powell. Well, Santa, I mean, Santa can't even beat up the Grinch right now.

The Grinch is getting all the eating right now. But Jay Powell can. I mean, if the CPI is good next week, maybe he saves the day, the day after. I don't think so. Because if you're suggesting that him saving us would be a pause, a pivot, a downshift, something dovish, that would be the wrong move at this point. I mean, we still have CPI above 7%. He's backed into a corner.

We have wage growth that accelerated higher than expectations. We heard about that last week. That was not good news. So then you've got this fear of a wage price spiral that is still here hanging over our heads. He can't pause. He definitely can't pivot. I don't think he can pause yet either.

So that's where I get to the point where it's difficult for me to not see a recession in this scenario. Wow. So he can't even come out and say, look, I hear you on these worries about the economy. I'm watching it closely. We don't want to over-tighten either. I'm trying to channel what he's going to be projecting. He did say that, right? He already said that last week. So why wouldn't he say it again? Well, he could reiterate it. It doesn't mean that he's going to act that way. And we're now at a point where the actions do matter. And

market rallies don't reset the business cycle. We need the business cycle to reset. Market rallies won't do that, but rate hikes will. And we need to get to a point where it relaxes enough. If he stops too early, which he said over and over and over again, if he stops too early and inflation becomes ingrained in the economy, we're in much more trouble six to 12 months from now. Right. Still thinking that the risk is doing too little versus too much. But maybe he has a little bit of leeway depending on what the inflation information comes in. And by the way, I mean, there has been a good amount of inflation data of late that's been going in the right direction. Absolutely. Absolutely. It's moving in the right direction. I just don't think it's moving fast enough. So we still need

to see some more progress on that. Look, here's the thing that's good. We'll have the meeting next week. We'll hear from them next week. The market will do what it does and react. I would expect probably a little spike up in the two-year. We're going to get a summary of economic projections. I'd expect the dot plot to look more hawkish than last time and that summary of economic projections to look like they should be more hawkish than last time. So you might get a spike up in the two year. But then as we get into January, there's a pause in January built in. There's no meeting.

So we can wait. We can let some more data come in. We can get our holiday spending data. Does that give us a window to rally then since there's no Fed meeting? I mean, right. You have to figure it sooner or later where we are getting closer to the end. Yes, we are getting closer to the end. We are getting closer to the end of the hikes. We may not be getting closer to an actual cut, which by the way, would be negative anyway.

I mean, they cut, it means that the economy is falling off of a cliff and they need like an emergency pivot to start cutting. You don't want that either. No, no. So what I would say is the rate hike cycle is maturing. We're expecting a downshift in December. That is a good thing. The other thing is what we've talked about on this network probably all year is that bottoming is a process. So every single bear market rally that we get behind us, every time we fail to break out above that resistance line is another step in the process. We're getting closer to the end of the process. Yeah. I mean, we did get above the 200 day and then we were below it. So it's like proven to be pretty significant resistance

to your point. Let's bring in Emily Rowland now of John Hancock Investment Management and Jordan Jackson of J.P. Morgan Asset Management. It's great to have both of you with us. Jordan, I'll go to you first. Is it time to still play defense in this market? Can you can you go to the basket at all here or do you still got to just hang around, just pass the ball around and hope it doesn't get stolen? I do think you still have to play defense. As was just highlighted, I think there's actually some upside risk that the Fed goes 50 basis points again at their January, February meeting. We only get one more employment report before that meeting, and I don't see any signs that we're seeing a slowing in job creation, and I don't see any signs that we're seeing a slowing in job creation. And I don't see any signs that we're seeing any sort of moderating in overall wage inflation. And I think what was really key was Powell highlighted them. They're looking at inflation in three buckets, core goods, housing and core services, ex housing. If you think about core goods, that's been improving because we've seen some improvement in supply chains. Housing inflation probably won't peak out until the end of the first quarter of next year just

given the lagged impact of home price appreciation making its way into the cpi calculation uh but but core services x x housing and i think that's really what's being uh they believe is being driven uh wave wage inflation is really the driving factor behind that we keep getting these strong wage inflation prints i think they keep their foot on the gas. And in that environment, you've got to play a little bit more defense on risk assets. Okay, so you're higher for longer, it sounds like. That's what you think that the Fed is going to have to do as a result of the more sticky inflation that you mentioned. I think they'll go higher, so I think they'll lift rates to 5 to 5.25.

I also think they'll keep rates there at least through 2023. Markets are still anticipating roughly 50 basis points or so of rate cuts in the second half of 2023. I think they don't start cutting until 2024 unless we get a material slowing in the broader economy and I'm not really seeing any sort of real excesses that would suggest a very deep recession would hit. A modest, shallow recession, which is certainly welcomed, I think, from the Fed to bring down inflation. But I don't think they start cutting until 2024. Does this mean, Emily, that we have no Santa Claus rally coming this year? It's just too much up against us?

Or do we still have a window? Yeah, we would be careful sort of expecting a significant rally into the end of this year. You know, the Fed is continuing to tighten to the point of the other guest today, but there's also a large amount of stealth tightening happening in the background. Ninety seven billion dollars came off the balance sheet in the month of November. If you add on the 75 basis point rate hike, that is the most tightening that we've seen in over 40 years. And we all know that Fed policy works with long and variable lags. And I think that there's a very good case to be made that we haven't even begun to feel the impact of the Fed tightening that began just back in March.

It takes three or four quarters for the impact of monetary policy to actually be felt in the economy. So we look at things like the leading economic indicators. We've seen four consecutive months of declines. We're not looking at the lagging data. That will show up later. I think Liz made a great point about that as it relates to the job market. But we do expect a further pain. And typically, the S&P 500 does not bottom until the leading economic indicators bottom. And we think we've got another couple of quarters to go until that happens. So playing defense here, loading up on quality and looking at high quality income.

I know it doesn't sound that exciting, but we think is the best foot forward as we head into next year. You, Liz, underscore this sort of conundrum. It's like what we've just talked about with our other guests, Like the Fed can't stop tightening, as you suggested a moment ago. That would be, in your words, a mistake. But they also don't want to over-tighten, which you continue to believe is a significant risk. Yeah. That's a real balance. The likelihood is high that they over-tighten, but they know that, right?

This isn't something that they're watching this show and saying, oh, my gosh, is she right? I mean, they know that the likelihood is high. But just like you talked about the lags, though, they're not going to know it. They're not going to know it. That's why the likelihood is high. Because the data that they're seeing, the data that's still rolling in says we have to fight inflation. I would actually get bullish if we had another flush down in the market, if some of these economic indicators really broke, if the labor market showed significant weakness, but the flush in the market would happen first, that would turn me bullish. Because I think we're getting, as we talked about before, the timing of this, we're getting to the end of it. We're getting through this bottoming process. This, in my opinion, would be the last one if we had

another flush down. So that would then, for me, be the buy signal. What's the buy signal for you, Jordan? Well, I'd actually like to see financial conditions probably tighten a bit. I mean, that's a little counterintuitive, but financial conditions have actually been loosening over the last couple of months. And I got to recognize that the Fed has got to be looking at that and is not particularly happy about that. And you need financial conditions to tighten if you want to see inflation begin to start to turn the corner. And so I think actually if you start to see a bit of tightening in broader financial conditions, you'll see the Fed begin to talk about potentially pausing. And I think at that point you'll get a nice cheer from the markets that finally the Fed

is not hiking rates at the very least. I don't think you get a pivot in terms of cutting or at least signaling that the Fed's going to cut until the fourth quarter of next year. And then again, the Fed actually cutting until 2024. Emily, what's that moment for you? What does it look like? It's the leading economic indicators bottoming. And at the pace of the deceleration right now, the map puts that at around eight months from now. So we'll see unemployment rise. We'll see the leading indicators bottom and start to rebound. We'll see the Fed cutting, which to us is going to signal the next cycle. We'll be off to the races. We'll be adding cyclicality, adding beta, adding offense to portfolios.

But we'd be too careful. We'd be careful not to do that quite yet. Yeah, we're wondering, you know, how long the consumer is going to hold up. That's sort of critical in all of this. Is the runway to a recession longer because the strength in the consumer? You told people a while ago to sell consumer stocks discretionary. Last Thursday. Stand by that. I stand by that. Yeah. My final trade last Thursday on halftime was sell consumer discretionary. Because you think this is going to run its course here? Because I think it'll finally hit the consumer. And we can't ignore the savings rate data that came out.

We've got a really, really low savings rate, the lowest in decades. That means people are still spending, which is a good thing, but if they're spending on credit cards and they're not saving anything, they're probably overspending and we're getting to a leveraged standpoint. So Jordan, I mean, if you're looking, you know,

where, you know, which asset class may be the best one to be in, you clearly don't like stocks here. But I mean, let's not kid ourselves. I can I can tell from your, you know, the rhetoric, the language that you have about the market. Do you like bonds? Would you buy bonds now or has that opportunity passed, too? Well, I do think you actually start to leg into duration a bit here. I'm not too excited about credit. I think credit spreads will still still need to widen out a bit. If you actually take a look at average risk non recession peaks and spreads you really need one high yield and particularly investment grade spreads as well to widen that a bit further feel compensated for the for the default risk. But if you think about we're stepping into an environment in which inflation continues to moderate, we're seeing signs that growth is beginning to roll over, then that fundamental story suggests that bonds can actually at the very least stabilize to finally come down and bond prices move higher. So I think it's right now you call it a 70-30 split between cash plus and core fixed income.

Then as you move through the December and January, I think you start to switch into and leg into duration. Thinking about other, you know, so-called defensive or safety trades, whether it's bonds or stocks. And one that used to be there, Emily, and that's Apple and some of these mega cap names. It used to be a defensive Emily, and that's Apple and some of these mega cap names. It used to be a defensive play up until things changed. And then we had a leadership change. And some suggest that that change is going to be longer lasting than people think. What about you? Because it's critical, I think, to where, you know, some think this overall market's going to go and what's going to get us there. Yeah, it's so interesting to see what defense has meant

this cycle. And for us, it used to always be about overweighting quality and overweighting growth, because the idea is that companies with tons of cash and great balance sheets and good return on equity should do better in a decelerating growth climate. But there's a new element in this cycle, and it's really about valuation, finding companies, finding sectors that are profitable and not overpaying for them. You think about this abundance of unprofitable companies, this abundance of companies that have gone very far in terms of embracing the capital markets in order to grow. And we can see in the balance sheets of those companies are going to take years potentially to be repaired. So we do want to be mindful of that. We want to look

towards value, particularly moving down in market cap. We don't like mid and small cap growth. You're going to find an abundance of those more zombie type companies there. We really want to think about valuations as a key element. Mid-cap value to us already trading at 2008 type levels. That's where we really want to go for the bargains. We think about this in terms of a holiday shopping analogy. You've got your equity store, you've got your bond store. I don't know how you guys are doing on your holiday shopping, but on the equity side, there's not that much we love. There's not much on sale right now. Just a couple of spots, as I mentioned, mid-cap value. In the fixed income market, there's a lot on sale right now. We're loving it. Investment grade corporate bonds trading at 90 cents on the

dollar, 5 to 6 percent yields there. Municipal bonds, higher quality bonds in general. That's where we're finding the opportunities into next year. someone suggests there is a lot of inventory of cheap stocks it's just you know you got to be super selective super super selective in this market on apple liz strategist is chris varone apple continues to look vulnerable any push below 134 marking a major breakdown it's like tes Tesla's broken down. He suggests Apple looks next. I mean, I bring that up with more specificity because if that happens, you're not, I mean, what kind of rally are you going to get? Well, I think we've seen it a couple times this year already. The market can actually do okay without those mega cap tech names. But I think it's true that some of the big cap names that we've relied on for so long are just not going to be the winners,

even if we have a recession and come out of the recession. I don't think they're going to be the ones that take us out of it. Chris Verone is the right guy to be asking about that because this market has really been driven by technicals almost all year. There's the macro side and then there's the technical side. And both of those forces have been the winners, right? So I don't think that big cap tech is necessary in order for us to get out of this. I do think that if we do have a recession, it's very classic recession playbook. It's cyclicals that get us out. It's small cap value that gets us out. And you would want things, if the market corrects again, your buy list would be financials.

It would be industrials, small cap value. You want to do that now? Not yet. Can you buy those? You have to wait to see if we're going to go in first. You can probably do that now? Not yet. Can you buy those? You have to wait to see if we're going to go in first. You can probably buy some financials. I mean, those have been pretty punished.

And I think financials are very well priced still. They could get even better priced, but it's when the market breaks again and we have that coupled with really the beginning of the economy cracking, that's the buy. All right, Jordan, I or not give the last word leave us with a thought on you know some that you on your further the next couple weeks you know i i know we have a lot on uh... sort of the tactical trades all over the near term but

you know this is a what i think about the markets coming out of what this recession would look like you know we are exiting and easy money regime cheap money money regime, and we're entering into an environment in which, you know, real rates are likely going to be positive, right? You may be in a lower real growth world, but a higher nominal GDP world with potentially a little bit more stickier inflation. And just generally speaking, right, this is setting up a good fodder for active management, right? Picking those good quality companies that are going to be able to deliver on cash flows

in a modestly higher interest rate environment. And, you know, I think over the long term, I think active management is really going to start to shine as we move past this recession and market turmoil over the first half of next year. We're going to leave it there. I appreciate everybody's time today, Liz. Thank you for being here.

Emily and Jordan, we'll see you soon. Thanks for being with us as well. Let's get to our Twitter question of the day. Now, we want to know how do stocks end the year? Santa Claus rally or does the Grinch steal Christmas? You can head to at CNBC Overtime on Twitter vote. We'll give you those results a little bit later on in our hour, which we're just getting started here in overtime. Up next, star venture capitalist Rick Heitzman. He is back the new normal for tech investors. He joins me live to explain right here at Post 9. Overtime, up next, star venture capitalist Rick Heitzman. He is back, the new normal for tech investors. He joins me live to explain right here at Post 9. Overtime is right back.

All right, we're back in Overtime. Pizazz over profits. That might describe the way some investors picked tech stocks over the past several years when interest rates were low and markets were high. Times have clearly changed. Question is, is that change permanent? Let's ask star venture capitalist Rick Heitzman of FirstMark. He led investments in Pinterest and DraftKings, among others, was recently named to the Forbes Midas list of the world's best VCs. Here with me, as you can obviously see on set, I do want to talk to you about how times are, in fact, changing. And I want to do that by having you listen to what Altimeter's Brad Gerstner told me

about a week ago on growth investing and the sea change that he sees. And we'll talk on the other side. Listen. For those companies that are still anchored to this idea that they're going to get a multiple of revenue, right, 10, 15, 20 times sales without producing profitability. That ship has sailed. Those days are gone. And the faster both private and public companies get on board with this new orientation, I think the better they're going to perform.

You agree with that? Of course. You must've been listening to me over the last year on here. It's the things we've been saying. It's back to basics. That free money piece of the world is over. And it may never come back. And it's back to saying, hey, you're going to be valued on profitability going forward.

And how do you drive to unit economics and making your business work? I thought the interesting thing that Brad said, too, was it's both on the public and the private side, which, you know, you obviously, you know, navigate both sides of that fence, right? I mean, it's both. It's both. And I think the private sides always lag the public markets. Every day you get your scorecard in the public markets, your stocks up or down, and, you know, the people react to that. In the private markets, you don't have to feel that pain on a day-to-day basis. But what you're seeing is more companies who need capital coming back to market. All of those companies are being re-rated in a much more aggressive way than you're even seeing on the public side. You having these kinds of frank conversations right now with

founders about the way that their businesses need to be run in the future? And how are they accepting the message too? Because it's a definite change from the past many years. It's an incredible change. And you've got to remember, a lot of these founders are in their early 30s. They've never seen a downturn. So they might think it's temperable, all the stages of denial. But going back to this time last year, we were planning for 22 and what that might bring. We had to have some milestones in place. We had to have some triggers in place about how they spend money. But it was unit economics. It's back to basics.

It's what does your business look like in the long term? And how are you driving efficiency? And what's your ROI on everything? Your dollar of marketing spend, your dollar of development spend. And how does that change if cost of capital increases? And we've seen, sadly, that's come to pass as cost of capital has gone up tremendously. How's that message go over when you deliver it? This time last year, I was looking like, maybe more like Chicken Little. They might have called

me the Chicken Little bartender of, hey, the sky's falling. We're not sure what to do. Obviously, there's initial cognitive dissonance. But what we've seen is the best founders have reacted the quickest. So there was a lot of the best founders have reacted the quickest. So there was a lot of rebudgeting in the beginning of this year saying, hey, we're going to think about 2022 differently. We're going to think about how we deploy capital differently. And we're going to, as Frank Sleuman says, amp it up. We're going to be more lean. We're going to require more from our employees and see what happens.

Maybe some people got the memo in Q1, and, you know, as we've seen with Meta and some of the other folks, they're just getting the memo now. You think valuations of these high growth stocks have come down enough, or does that question still hinge on where interest rates go from here? I think they've come down as a class. And, you know, one of the other things we've talked about over time is who are the babies who are getting thrown out with the bathwater? And I think oftentimes we talk about a whole class of 2021 IPOs or SaaS companies in those multiples or direct-to-consumer commerce companies. And all of those companies are being viewed as the same.

And I think this year, probably starting now, maybe even starting earlier this year and definitely into next year, the key thing you look at is who are the best teams? Who's really driving efficiency in their business? And who's demanding that their employees amp it up? And who are going to have the best businesses on the other side? Is Pinterest one that you would put in that category? Because I mean, you know, Gerstner, too, made a delineation between, you know, companies that that came down that were overvalued and overpriced and would never reach that level ever again. And then ones that were overvalued had come down and it's just going to be a slower march back to what may be those levels once again. Pinterest, for example, is down near 40% year to date. But it was down a lot of that in the first quarter. So they took

their initial pain as people were wondering, what know, what does social media do? You know, Facebook didn't come down as much or Meta didn't come back as much initially, but Pinterest being a mid-cap company might have felt some of that pain. But since that initial downturn, you've seen, you know, the new CEO, Bill, really focus on things like unit economics, be quick to take costs out of business, evolve the product and focus on commerce. And since that point, probably about six months ago, the stock's performing about as well as anyone. You got the activist, though, the deal, right, with Elliott? You got a board seat. What's that mean? It means that you're going to be increasingly focused on it. I think active board members matter. And I think that all these things, which are not new business concepts, of really focusing on the return to shareholders, really focusing on running a great business, you know, you're going to have someone helping in the co-pilot seat.

You know, if you look at sort of the stories that have been in the news lately, obviously FTX is one, and it's very much a venture capital story as well, right? VCs got burned on that. Sequoia, obviously one of many. What's the long-term fallout there for venture capital because of FTX? I think there's going to be a long arc, right? People have very long memories the more they get burned. So if you look back at, it was probably 20 years since people got burned for a lot of the same reasons. Poor diligence. And we talked about this year is return to diligence, back to basics. It was 20 years since people were valuing eyeballs doing light diligence over capitalizing companies and it took from 2000 2000 when that market crashed to 2021 when this market crashed a full generation

of people to forget so i think you know you're going to see a lot more diligence a lot more structure and venture deals and i hope i think we're seeing and I'm hoping that LPs are going to say, hey, if you're going to invest in this company, you're going to do the work. You're going to take the board seat and you're going to be that kind of lead active director to make sure that our dollars are being spent well. And to be clear, I mean, I don't want to paint it as, you know, they got taken advantage of. I mean, they burned themselves in many respects, too. Right. Falling in love with a story and a person. Exactly. And that's a dangerous mix sometimes within a bear market. I mean, a bull market. Exactly. And the deals also moved incredibly fast. And we were seeing deals get done in a period of days that you couldn't possibly do the diligence and people

were forcing you to make decisions based on incomplete information. And the FOMO of that moment really destroyed returns. I think a lot of people who fell in love with the story and were a victim of FOMO will no longer be in this business in a year or two. Would you invest in anything crypto-related now? We would. We would. We're actually doing a deep dive on, as Jamie Dimon said, is it a pet rock or are there fundamental use cases with the new technology that we're seeing real traction?

And we're spending a lot of time now seeing what are the babies, what are the bathwaters, are there use cases around crypto, specifically the blockchain, and the ability to effectuate more efficient transactions, which are starting to get traction. And when everybody's looking over here and saying, hey, crypto's dead, can we be more diligent and more thoughtful and look at the broader landscape and where it might be applicable? I mean, because Diamond himself, even this week when he made the, the quote, the pet rock comment, was quick to say, not the blockchain.

Like there's legitimacy in the blockchain. It's this fascination with tokens and crypto and what's gotten us in some of this trouble here. The derivative securities, you're having securities you're claiming are not securities that you're giving yourself a lending against. I think that's going to be, people are going to go to jail for that. But I think there's some legitimacy in that technology, no different than there was a lot of bad companies in the internet who were punished, but then look what's emerged.

Let me ask you lastly before I let you go. The IPO market, when's it going to open back up? If I had to pick a time, second quarter of next year. Well, that's not that far in the distance. Not far in the distance. I think you've got to say people are going to look to the Fed. I don't think there's a strong pipeline now, and I think folks are very nervous, but there are going to be companies with great metrics that might have to come out

at a slight discount, but you're going to see those companies start to that might have to come out at a slight discount, but you're going to see those companies start to come out in Q2. Good stuff. Appreciate you being here. Awesome. That's Rick Heitzman joining us. Perfect timing, too. How about this? Don't miss the Pinterest CEO.

He's on Mad Money tonight with Jim Cramer. There he is, 6 p.m. You don't want to miss that conversation. It's time for a CNBC News Update now with Kate Rooney. Hi, Kate. Hi, Scott. Here's what's happening at this hour. An attempted coup in Peru is over just hours after it began. People were seen celebrating in the streets of Peru's capital.

President Pedro Castillo tried to dissolve the country's Congress before it voted to impeach him. The lawmakers ignored his order and voted to remove Castillo from office and replace him with the country's vice president. A watchdog report is slamming the Federal Bureau of Prisons for failures before the killing of notorious mobster James Whitey Bulger. The probe found widespread incompetence and flawed policies which allowed fellow inmates to attack and fatally attack Bulger. The Bureau of Prisons says it has improved its procedures since Bulger's killing. And the power is back on in North Carolina's Moore County. Duke Energy says repairs have been completed to the electrical substations that were attacked on Saturday, leaving tens of thousands of people in the dark.

Utility officials say they are restoring power gradually to avoid overwhelming the electrical grid. Scott, back over to you. I appreciate that, Kate Rooney. Thank you very much. Up next, five-star trading advice. Top fund manager Kevin Simpson, he's back to break down his year-end strategy where he is looking for opportunity in 2023. Overtime is right back. We are back at overtime. The S&P falling for its fifth straight negative day and next guest preparing for more possible downside from here. Joining me now, five star money manager Kevin Simpson of Capital Wealth Planning. It's good to see you again. Welcome back.

I mean, you're sitting more pretty than most. Let's be honest. Right. You were last time we spoke. You were up one percent for the year. But you are sitting at all with a whole lot of cash, historically speaking, for you. Are you still at 16 percent cash? We are, Scott. You know, we were talking on Friday about raising a little bit more cash and selling into that rally, the the post Powell press conference rally. And of course, the jobs report through a pail of cold water on it. And then we had the hot service PMI number and then the leak from the Wall Street Journal telling us that the terminal rate's going higher. So it's not a question of trying to time the market, but we certainly have a little bit more dry powder.

And I feel good about that heading into year end. Because you think that the market's got a significant amount of downside to come? You know, I hope not. But I definitely think that there's going to be more pain, a little bit more of a sell off. I think markets are overvalued. You know, I'm hesitant to go through the mantra because we're in this quiet period of the week and everybody that comes on kind of sings the same song. It's like we're in the car, the chorus comes on and we all start singing recession, hard landing, good first half, bad first half, better second half. And if I'm a viewer, I think, well, gee, why don't I just get out of the market for six

months, stick it in a CD and I'll come back in June and everything will be great. But as you know, and we talk about it all the time, that's a two decision process. And unfortunately, when it comes to investments, it's never that easy. So you don't think that a year-end rally into the early part of 2023 is possible? Anything's possible. You know, it's all going to be indicative of next week's Fed meeting. We get CPI before then. We get PPI on Friday. It could be that inflation is abating sooner than we think. And there could be a dovish Fed commentary post-presser. And that, along with positioning and seasonality, could cause a rally. I'm always hoping for the best, but as a professional money manager, you plan for the

worst, not vice versa. I hear you. I'm looking at crude oil, barely above 72 bucks, right? It's negative on the year. And it certainly appears to be in a downtrend on the economic concerns that we mentioned in fears of a recession. Chevron, Devin, Schlumberger, those still yours? And if so, what do you do with them here? Oh, yeah, I love them. I mean, I love them even more when energy gets cheaper because it gives us opportunities to pile into these names. The Chevron and Devin specifically have really low multiples.

SLB's PE ratio is a little bit higher, but they're beginning to adopt a Devin-type free cash flow distribution to shareholders. So as we've talked about over the year, and they've been a good, you know, energy's been a good place to be, I think the trade continues into next year. And again, it's cash on cash. It's understanding that these are companies that know how to manage their free cash flow, and they're committed to shareholders. We just need to make sure, and every investor, no matter what you're doing right now, just de-risking the portfolio a little bit, just looking at multiples. Because shame on any of us if we have economic contraction next year and we're surprised by it. If we ignore this inversion on the 2-10, 10-year, 2-year,

it would be irresponsible to think, oh, well, I didn't see that coming. So energy is a great place to be with low multiples and tons of free cash flow. But if you're negative and you're de-risking and you like the idea of raising more cash, why did you buy Nucor, which is a new buy? Yeah, well, you know, there's always opportunities. And if I'm thinking about multiple compression because I'm worried about a higher terminal rate and I'm worried about earnings coming down, Nucor has a P.E. ratio of four. So I feel like even though the dividend isn't massive, I'm not going to get sideswiped there. Old school fundamental steel

company, infrastructure play, anti-inflationary hedge. It's just a good place to hang out. Stock's actually up in the past couple of days when very few things are. But more importantly, Scott, it's like I want companies where I can control and have some semblance of what the cash flow is going to look like. And you talk about why is Netflix down? Why is Meta volatile? These aren't names that we own, but they're dependent upon advertising. And they're not long contractual advertisers. They can come in and out any time for a week or a month, and they just don't know what their cash flow is going to look like. And until you can get through the harsher economic times, you need to be careful about overextending yourself in companies that just don't have that same type of dependable cash flow.

All right. We'll talk to you soon, Kevin. Thank you. That's Kevin Simpson, Capital Wealth Planning, joining us once again here in overtime. Up next, a big bank backtrack. Top banking analyst Mike Mayo, he's back with us just days after he was talking a lot about Bank of America, how much he loved it. Well, now he's made a key move on it. Talk to him next. Tough week for bank stocks. Several CEOs in that space making cautious comments this week at a Goldman Sachs conference. Among those raising some concerns, Bank of America CEO Brian Moynihan, who said the firm will slow hiring and the pace of its buyback because of economic uncertainty. Mike Mayo was just with us a couple of days ago calling BAC his top pick in that space.

I was on your show in October. Bank of America was below $30. And I said, make sure you have me back on your show a year from now. Well, we've upped four or five points since then. And Bank of America is still my number one pick, I think can still hit an all-time high over the next 18 months. Just today, though, Mr. Mayo reduced his earnings estimates based on Mr. Moynihan's words. He's back with us now on the phone. So welcome back. I see you also cut your price target, too.

So that tells me you were taken aback, taken by surprise by what you heard from Moynihan. Well, I lowered my estimates by 5 percent and the stock is down 5 percent in the last two days since I was on your show. So there was new information here. One is the macro. Economic growth is returning to normal. Bank America is growing loans and payments only half as fast as before. So the post-pandemic economic, you know, spurt seems to be settling down. Second, Bank America expenses are no longer flat.

So fourth quarter goes from what would have been great to something that's still really good. But I hope that Bank of America is listing so maybe they can control expenses even more. But the third point, which I brought up on your show two days ago, is the Grinch has stole the bank stock rally. Bank of America stock has derated by one-third this year. Look, consensus earnings for the S&P 500 are lower as the year's taken place, but not for Bank of America. And the fourth quarter should still be decent. But, you know, this month into earnings, sometimes quarters break your way, sometimes they don't. And this quarter's not breaking Bank of America's way. Having said that, I stand by everything I said on your show two days ago. I love the stock at, you know, 34, 35 two days ago. I love it even more at $32.

For the next 12 to 18 months, the stock market is wrong on Bank of America. Well, I mean, it's hard to, you would admit, I would assume, get people all jazzed up about bank stocks when you got Frazier, Diamond, Solomon, Moynihan, and who knows who's next, making cautious comments about the macro, the very things that did in what you changed today. Look, I mean, I don't like going on your show talking about Bank of America and seeing the stock down 5% two days later. That's not, but having said that, let's look out four to six quarters and look at the buffer at Bank of America. So look, my baseline assumptions for the economy, if they're wrong, look at the cushion at Bank of America.

For next year, we have revenues up $10 billion and all costs, expenses and credit costs, up $2 billion. That's an $8 billion cushion to absorb anything that comes your way. Scott, a typical bank recession for the last three decades, you have negative earnings growth, you have less lending, you often lose money, and a lot of times you have banks raising capital. That's not happening through this next recession. That's what's different this time. Bank of America is going to earn, increase their earnings through a recession with that $8 billion cushion between revenues and expenses.

All right. All right. We'll leave it there. I appreciate you coming back. I think it was important for our viewers to hear from you just a couple of days after we were talking about all of this anyway. And in light of the move you made, Mike, I appreciate that. That's Mike Mayo, Wells Fargo Security. Coming up, we're tracking the biggest stock moves in overtime. Christina Partsinello standing by as always with that. Christina. IBM is on a shopping spree this year while GameStop shares aren't near the moon yet. What do you mean? You ask, I'll explain next. All right, we're tracking the biggest movers in overtime now. Christina Parts and Nevelos

here with that. Christina? Well, shares of meme fave GameStop are slightly lower after an earnings loss on revenue of almost $1.2 billion. That means sales have fallen 8.5% year-over-year. The company has such thin coverage right now that I didn't compare it to estimates, but adjusted free cash flow came in at $164 million versus a year ago when the company was losing $306 million, so a slight positive there. Nonetheless, shares are falling. IBM went shopping and bought its eighth company

just this year alone. Today's acquisition is Octo, an IT modernization firm that exclusively serves the U.S. federal government. And that means IBM will gain access to U.S. defense, health, and civilian agencies. No purchase price provided. Stock, though, unchanged at the moment. And lastly, shares of software firm C3AI are volatile right now after an earnings and revenue beat. Total revenue only increased 7% year over year, but its subscription service revenue jumped 26%. The company also reaffirming its full year revenue guidance,

and now it's slightly higher to the upside. Scott. All right, Christina, thank you. Still ahead, Santoli's last word. We're back right after this. All right, last call. Last call to weigh in on our Twitter question. We want to know how do stocks end the year? Santa Claus rally or does the Grinch steal it? You can head to at CBC Overtime to vote. Bring you the results next. Plus Santoli's last word.

All right, the results of our Twitter question now. We asked, how do stocks end the year? Santa Claus rally, or will the Grinch steal Christmas? The majority of you saying the Grinch. He's going to steal it. You're 58%. That speaks to, you know, just the sentiment is so bad. The All-America survey that we do was bad. CEO sentiment is bad.

Now, maybe that's good. Look, the market, yeah, it certainly hasn't done a lot in the last several days to earn your faith. It's all of a sudden going to gather itself up and run. Now, keep in mind, it's the second half of December that tends to be strong. So a flat or down first half isn't necessarily game over. Also, you know, the Grinch gave everything back. So after he stole, but I think that it is generally a malaise of nervous anticipation about the new year, as opposed to the general, let's build up our optimism for what's to come next year. You do in terms of where the flows are going, maybe that, you know, once you're looking at in bonds, sort of express that level of caution, perhaps. For sure. Dramatic compression of bond

yields, of treasury yields. I mean, in a month, the 10-year has gone from 421 to 341. 80 basis points. So we can say, oh, the message is recession coming, the market's getting nervous about that, inverted yield curve. And I don't deny that. You can't ignore that that typically is what comes next. But what was the market telling us a month ago at 421? Right. So it's not always like this enduring message that you have to keep a fix on. I do think that flows into bond funds from institutions looking at the whole asset allocation picture. They say, look, how many years has the total return in bonds gone down 20 percent in the first 10 months as they did this year? Almost never. And so you've rebuilt value and fixed income. You want money to lock in there, those returns, and it helps you get to your long-term targets in terms of overall portfolio.

Maybe it's more nuanced, too, but it just also speaks to the competition that still exists for stocks. That's part of the story, too. There's a hurdle rate for sure. If you can get 4% over two years, no risk in credit, that's what you can get right now. It certainly complicates the decision. Now, I think there's another piece to that, which is stocks are already down enough that they've theoretically discounted a little bit. The other part of it is if you have a portfolio like that and the bond piece is giving you a bunch of safe yield that it wasn't giving you a year ago, it buffers the volatility and enables you to take more risk in the equity side of things, right? If you assume that they're not

going to move perfectly in sync and you can actually get a little bit of help on that. I also always point out in the boom years of the late 90s, treasury yields were 6%, you know, so it can get up there and not compromise. Gunlock was talking about too with me the other day, the bill of the hedge that allows you to get a little more risky exactly on the equity side that's exactly right all right good stuff uh have a good night i'll see you tomorrow that's mike santoli fast money's now