Closing Bell - Closing Bell Overtime: Former TD Ameritrade CEO On His Market Strategy For Any Investor; Goldman Sachs’ Biotech Analyst Gives Top Picks 9/29/23

Episode Date: September 29, 2023

Stocks closed out an ugly quarter today. Unlimited CIO Bob Elliott and Citi’s Scott Chronert break down the market action and what’s ahead. Our Phil LeBeau on why the fight is turning ugly between UAW and automakers. Former TD Ameritrade CEO Joe Moglia on the market volatility, big tech stocks and his strategy recommendation for investors right now. Jefferies’ Sheila Kahyaoglu and former Army Secretary Eric Fanning on the impact a government shutdown has on the defense industry. Goldman Sachs’ Chris Shibutani gives his top picks in the biotech sector and what area has a “once-in-a-generation mega TAM.” 

Well, there you have it, an ugly month and an ugly third quarter that is now in the books. That is the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. Coming up on today's show, the shutdown and your money. We'll talk about the potential impact on defense stocks with a top analyst along with former Army Secretary Eric Fanning. And we are also monitoring breaking news on the shutdown as Speaker McCarthy says the House GOP will meet this hour after a stopgap funding measure failed earlier in the day.

Yeah, and also ahead, your Q4 playbook for health care. Goldman Sachs senior biotech analyst will join us with his top bets right now after a downbeat quarter for the sector. We begin with the market as we turn after a downbeat quarter for the sector. We begin with the market as we turn the page on September and on the third quarter. Stocks looked like they were on pace for a pop today following upbeat inflation data this morning, but those gains faded. Here's a look at the final score for Q3. The Nasdaq fell 4%. The S&P 500 dropped 3.6%.

The Dow a little less than that, but still down 2.6%. Meantime, the 10-year yield surged this quarter from 3.85% to over 4.5%. And crude oil prices also jumped nearly 30%. Let's bring in CNBC Senior Markets Commentator Mike Sant, for the in memoriam for Q3. Mike? Yeah, John. I mean, stocks and bonds, if you own them broadly in a portfolio, they were down about the same amount in the third quarter in price terms. So it showed you there wasn't a lot of relief. That has been the dynamic lately, obviously, as we've been talking about yields up, stocks down. That being said, it's still within, I would argue, a relatively normal band of pullback

for the equity indexes themselves. And you see the sensitivity on a real-time basis of equities to what's happening in bonds. You get oversold markets in the midst of a correction like we have had this week. You get tentative rally attempts. People think we have the kind of dry powder there. We're looking for a spark. And it shows you that we're probably going to need a little more convincing downside in treasury yields, perhaps, in the absence of other fundamental relief that we basically need that for something sustainable to the upside for the equity market. Yeah, I want to go back to this idea. You've talked about it before, but I want to hammer this one home. The fact that if you strip out the magnificent seven, those big super cap names that have helped lead that outperformance for the S&P and for the Nasdaq

so far this year, are equities now more fairly valued after what we've seen this past quarter? Yeah, it absolutely screens out that way. Now, more fairly valued for sure. You could also say if you take a different approach that that part of the market looks like it's at risk of maybe breaking down. It just doesn't look like as much of an uptrend as the overall market cap weighted S&P does. But there's absolutely no doubt you look at the, you know, equal weighted S&P, which includes the Magnificent 7, but just no more than any other stock. It's probably closer to 14, 15 times forward earnings. Those earnings obviously have to come through. A lot of the free cash flow in the market

is coming from those top 10 stocks. So it's hard to necessarily sort of hive off one chunk of the market. But I think, as I've been saying, if you're complaining about the narrowness in the market and you're complaining that we have a valuation problem, that is the same complaint. It's not two separate ones.

Got it. All right. Well, we'll see you in just a few moments, Mike. Let's bring in our market panel. Joining us now is Unlimited CIO Bob Elliott and Citi U.S. equity strategist Scott Kroener. Good afternoon to you both. Bob, you're here on set. I'll start with you. Your response to what Mike just had to say, especially as we've seen stocks lower this quarter and bonds by price lower this quarter. Are either one of these compelling investment stories right now? Well, I think

the biggest thing to look at is what's going on between stocks and bonds. The long bond down 15% this quarter. To say that we haven't had a valuation problem in stocks, that stocks are getting cheaper, that's not right. When you bring the discount rate up the way we have, 80 basis points, and stocks haven't gone down anywhere near as much to offset that, basically we have stocks today that are meaningfully more expensive than they were at the start of the quarter, and they were already near close to all-time highs at that point. And so that's a pretty challenging environment, given we've got some of these difficult economic momentum dynamics going into the fourth quarter. Scott, how do you see this quarter and maybe your thoughts also on this impending government shutdown? Folks at Citi think it's

going to be a week or less. So is there something you'd buy on knee-jerk reactions if we get them? Well, I think the way we're viewing the shutdown risk is just that more of a volatility event. And we don't think it'll have a material effect as long as it's contained within a shorter time frame on longer-term fundamentals. So the bias from our perspective would be to buy that volatility event. Now, in terms of the Q4 outlook, yeah, we've had to deal with this backup in rates, which is pretty obvious at this point. It's interesting. Our fair value work is that equities are actually towards the high end of our fair value band. So while we've been focused on

this for some time, I think the issue really from a flow perspective is that the modeling still suggests bonds over stocks. So we have to contend with that. Third component, flow perspective is that the modeling still suggests bonds over stocks. So we have to contend with that. A third component, though, is that we're going to be going into the Q3 reporting period. Here we're looking for a fairly straightforward quarter with normal positive surprise ratios. The setup increasingly, though, should be for a positive earnings ramp into 2024. That's what keeps us positive into the end of the year. Huh. OK, so, Bob, you say we're late cycle us positive into the end of the year. Huh. Okay.

So, Bob, you say we're late cycle, recessions right around the corner, and cyclicals are weakening. So conventional wisdom would say late cycle, you buy what, utilities, materials, industrials, that kind of thing. And utilities is one of the weakest sectors in Q3, down 9% alongside real estate. Is there opportunity there? Well, you've got a basic situation where those long end yields rising are affecting those cash flows, right? Much in the way of real estate affected by the long bond, as well as utilities affected by bond yields as well. I think what it highlights

is this overall market dynamic where most of the easy money being short bonds has been made. And now the question is, what asset in that market looks overvalued right now? It sure isn't bonds, right? It's stocks, which over the last couple of years are up 60% relative to long bonds, right? Long bonds are down 50%. Stocks are doing pretty well holding up. That's the big discount. That's the big divergence in the market that eventually that has to get closed. That's that dynamic is going to get closed. And as economic momentum deteriorates, that's only going to get move faster to closing in the fourth quarter. Scott, I want to get your thoughts on what we've seen in terms of earnings,

because earnings revisions as we go into this next season have actually been, I think, more positive. How does that set us up in terms of the possibility of upside surprises? And I ask that because, yes, we're coming out of this seasonally weak period, but we also have these decidedly unseasonal factors that are going to add to the mix, too, whether it is the student loan repayments or the higher oil prices or government shutdown, depending on how long that goes, or UAW strike. Yeah, I mean, you're right. The consensus bottom-up expectations for this year moved from 217, 218 sort of two, three months ago to 222 now. So there has been an upward bias to the numbers. Again, recall that we're at the high end or for the most part, the high end in terms

of our 24 outlook looking for 245. So color us more bullish on the earnings outlook from here. What I would say on this is that what's happened with this pullback is that our measures of implied expectations around earnings have come in quite notably, and we feel like implieds are closer to where consensus is. So it's a fairly decent setup for the Q3 reporting period. Now, again, in aggregate, we're looking for a flattest year-over-year number. But again, I think what we're going to see is an increasing focus in terms of the 24 outlooks. And there, with the recession timing still an issue, I think there's probably a bit of an upside bias to where embedded expectations are. OK. Scott Cronert from Citi, Bob Elliott from Unlimited. Thank you. You bet.

Let's turn now to the latest on the auto strikes, which are heating up in terms of action and rhetoric. The UAW expanding its walkout against two of Detroit's big three automakers today. Phil LeBeau has the latest on this developing story. Phil. Yeah, John, it all just kind of blew up today in terms of frustrated executives, the UAW blasting automakers, calling for more strikes. So let me bring you up to speed in terms of frustrated executives, the UAW blasting automakers, calling for more strikes. So let me bring you up to speed in terms of what happened today. Earlier today, the UAW said that it will be expanding its strikes against the big three, adding two more final assembly plants, one in Michigan, which is a GM plant, one here in Illinois, which is a Ford

plant. There are now 43 facilities around the country, including five final assembly plants, where more than 60 or approximately 6,900 more UAW members have gone on strike. When you add the two today, that brings 22 percent of the big three's U.S. production to a halt. It has stopped. Talk about frustration. Listen to Ford CEO Jim Farley talking about the state of negotiations with the UAW. The original strike was premeditated and that everything is taking way too long. That actually events are predetermined before they happen. This has been very frustrating, but I'm really proud of the team because we never let that happen to stop us from negotiating. I don't think we've reached the point where we

think we're at impasse, but that day could come if this continues. Well, I don't think we're going to see a resolution anytime soon. Sean Fain, president of the UAW, heard those remarks and he issued this statement. And listen to his rhetoric in terms of how he feels about what's going on with Ford. He says, I don't know why Jim Farley is lying about the state of negotiations. It could be because he failed to show up for bargaining this week, as he has for most of the past 10 weeks. If he was there, he'd know we gave Ford a comprehensive proposal on Monday and still haven't heard back. You take a look at shares of GM, Ford and Stellantis, and we're going back over the last couple of weeks since the first strikes took place. We should also point out that General Motors says that it is offering a historic contract to the UAW.

Stellantis was not included in the expanded strikes today. So I haven't really heard anything of note there regarding the UAW and Stellantis, aside from the fact that they they are seeing progress. The UAW says it's seeing progress. But remember, guys, we heard this last week with regard to Ford, and people said, well, does that mean Ford is moving closer to a resolution? One week later, it is clear that Ford and the UAW are not close to a resolution. And oh, by the way, with the UAW saying that Jim Farley has not been in negotiations, I've checked with people at Ford and they've said, oh, he's been there. So this is where we are. It's in this ugly phase of pointing fingers at each other. Guys, back to you. Yeah. And that's actually what I was going to ask you, Phil, is OK, so then who is lying?

One of the things that got my attention, though, in this Ford update today was the fact that he said that the impact on the company has so far been very substantial and he thinks this could ultimately cause it to need to lay off 500,000 workers. Would those be union workers or would those be other workers across North America or other parts of the... Yeah, let me clarify that, Morgan. What he's saying is not that Ford would have to lay off 500,000. What he is saying is that you would see with the impact potentially when it comes to suppliers and those who are connected with suppliers, that it could be a half million. We're not at that point yet. But if this continues to go on, if you see more final assembly plants added in the future by the UAW in terms of future strikes, that is the potential of what he's talking about. All right. Phil LeBeau, thank you. We turn now to Nike ending the day at the top of the Dow, thanks to better than expected earnings. But as a global brand with China exposure, it has faced some pressure. Let's bring back

Michael Santoli with a look at the stock's recent performance. Mike. Yeah, John, Nike's performance alongside a couple of other names that have a similar profile, which is, you know, these elite global U.S. brands that travel across the world, that have this sort of resilient premium built into the products and the stocks, and also were great beneficiaries over the pandemic period of just a valuation expansion because there was this embrace of these durable business models. You see here, Nike, Estee Lauder, Starbucks, all three of them kind of ending up in a similar place. This is a four-year chart. And especially Nike and Estee were really very much in favor. It's just going

to have this pricing power. They're in categories that are very strong. They're leaders in that area. Now they've kind of come together. And you see that Starbucks as well didn't have as high a high, but is coming into this area. All of them at this point over this span of time underperforming the broad market. So it shows you that just a little bit of a valuation undertow at a time when China seems uncertain. And also just pricing power in general and valuations are coming into question. We'll see if today's bounce in Nike means that it's about to find some relief, finding a new level there in the low 20s in terms of its forward PE. Now, more broadly speaking,

consumer discretionary, consumer cyclicals have been under some stress as well as yields and oil prices have gone up. But they still, on a one-year basis, outperforming equal weighted S&P discretionary, outperforming the equal weighted broad market, as well as consumer staples, which have been profoundly weak, no safety at all in this market pullback. They are very kind of rate sensitive, a lack of pricing power also weighing on them. So some are taking heart in the fact that the more cyclical or offensive sectors of the market have not really given up their advantage over the more defensive ones to this point, John. And Mike, how much do the broader markets really need these discretionary names, these cyclical names to perform in Q4 if that seasonality thing that so many are expecting in a good Q4 is going to work?

Well, the way I would think about it is the way the seasonality thing works, if it's going to work, is most stocks get relief. So it's not so much that, oh, seasonality is going to drive us so consumer cyclicals don't have to help. Usually it will kind of lift most boats. I think it's pretty necessary for cyclicals in general and less defensive parts of the market to hang in there. If we're going to have anything more than just a fleeting relief rally. You want to have the economy look like it can support the outlook for earnings next year for the overall S&P and for those sectors. So, I mean, I still think I would watch it as a little bit of an indicator of where the market believes macro is headed. OK, Mike Santoli, thank you. We'll see you later this hour. After the break, former TD Ameritrade CEO Joe Moglia says there may be an illusion happening in the market that's warping investor perception.

He's going to join us to explain that when Overtime returns. Welcome back. It has been a rough three months for the major averages. The S&P 500 and Dow snapping three-quarter win streaks. The Nasdaq snapping a two-quarter win streak. Joining us now is Joe Moglia, former TD Ameritrade CEO and current Coastal Carolina University executive advisor. Joe, so this hasn't been an even market by any stretch. Mega caps have been doing better.

But what does that mean? Like for investors who are thinking about what to do here, does that necessarily mean that if there's a drop that the other stocks that aren't mega caps will drop less? Might they drop more? I think, John, if there's a drop, first of all, if there's a drop, I think the mega caps are really going to get hit. But so is everything else in the market if there's a real one. I think what's really taking place here is that with all the tightening the Fed has already done, there's a lagging impact in terms of what's supposed to take place in the economy there for the markets. So I think what we're seeing, I think what we're starting to see is an effect of the impact that the Fed tightening that they've been doing all along is starting to have in the economy now.

Now, we're at three.5% or so. To get to 2%, that's not that easy. It's a lot easier to get to 3.5% than it is to get to 2% from 3.5%. And that doesn't necessarily bode well for the market going forward. If the Fed just relaxes and pauses, I think we should be OK. So flip side of that is that yields are pretty high. And so what does that mean for what investors should do in their portfolios? You have some thoughts specifically when it comes to T-bills, right? Right. Well, in general, I think, you know, I think a lot of times we talk about the individual investor, we talk about the risk profile and how old are they and all that stuff matters. I get that. But for a long time, there's always been a big question in the market, like, what are

you supposed to do? Is it going up, going down, et cetera? Right now, though, and I've been saying this for the last few months, I think the perfect strategy that I would aggressively recommend to any individual investor is a very, very simple barbell. I want you to take 50% of your cash, put it on one end. You're going to get 5.5% by being a one-year bill is shorter and put the other 50% in some form of equities. If the markets wind up going up, you're going to get the benefit from the equity piece plus 5.5%.

The market goes down. You only have half your money in cash. You're not going to get as bad as you would. Plus, you're going to get 5.5% guaranteed over here. If the markets really were to continue to drop, well, then you could always adjust that and go from 50% to a 60-40 number, et cetera. But there is no doubt in my mind that right now, every individual investor, or most of them on the planet, should be doing something like that. Yeah. I mean, I think it's very telling to your point, Joe, when David Tepper speaks to Scott Wapner on CNBC and says that his latest investment is locking in at 6% on the six

month certificate of deposit. To your point, I guess the question is, is this a window? Is this a finite window for yields to be this high? Or do you think we go higher from here? I think the fact, let's go back to we're at 3.5%. If we're going to get to 2%, and that's not going to be that easy. It's kind of like a diet. Neither one of you ever go on a diet, I'm sure. I'm on a diet all the time. If I got to lose 20 pounds's no reason to me, plus I think there's a lot of supply coming into the fixed income market.

There's no reason why fixed income yields are going to continue to go up, which reinforces, Morgan, I think the benefit of a barbell strategy. Yeah. I do want to get your thoughts on Barry Sternlicht, who was on our air earlier today. He was talking about the Fed and his thoughts on the balance sheet. Take a listen. He should just be patient. The Fed should stop because what they're injuring is the balance sheet of Take a listen. He should just be patient. The Fed should stop because what they're

injuring is the balance sheet of the United States. The economy is going too slow. The regional banks do not have money. I want to get your thoughts on that, not only Fed policy where we go from here, which you sort of just touched on, but also as we sit perched on the possible eve of a government shutdown. I mean, it has raised into focus the fact that the U.S. government is spending more money than it's bringing in. We have this $33 trillion-plus deficit. And you have folks like Ray Dalio saying, hey, we could be on the cusp of a debt crisis here. I think he made good points earlier. I think you're making good points now, Morgan.

I think at the end of the day, as far as the Fed goes, now, first of all, aren't we going crazy with how often we have to talk about the Fed? They move the world by incremental 25 basis points. It's not that complex. It's really not that complex. So with regards to where they are now, it makes sense if the heights that they've had so far are having an impact on the economy and ultimately, therefore, the markets. Does it not make sense just to relax and pause and see what's going on? OK, number one. Now, with regard to a shutdown. And by the way, a spending problem is a problem that's got to get fixed. That's a Congress issue that we've got to take care of.

But with regard to a shutdown, I think it might make sense here for all the listeners and viewers to make sure we're really clear on this. We were talking about shutdowns a few months ago. We really talked about the debt ceiling. Now we're talking about a shutdown and we're talking about a spending bill. The debt ceiling is the U.S. government going to fall. We've never gotten to fall in 300 years. The spending bill in the last 100 years has been shut down 20 different times. I think five times since 1995-ish, something along those lines. And the reality is if we have a shutdown, there are 22.4 million government workers in our country, 4.4 are going to be affected. It's not going to have that big of an impact on the markets or what's going on as far as the economy goes. It may affect

certain sectors that rely on the government for services, for example, aerospace or national defense. But this shutdown not this shutdown is not the end of the world. It's not going to have that much of an impact. It never has before. But let's be careful that people don't interpret shutdown with anything that's new with a default. That's right. Joe Moglia, thanks. Appreciate the insights. Thanks, Morgan. John. I also mentioned, I think I said $33 trillion deficit. It's a $33 trillion debt. The deficit is the spending.

Right. All right, after the break, much more on the shutdown and your money. Speaking of, Wall Street is weighing the impact of the looming government shutdown on everything from the IPO market to biotech to the Fed. We're going to get you up to speed on what to expect. And check out the S&P 500 stocks that hit 52-week lows on this final session of the quarter. Hershey, J.M. Smucker, Quest Diagnostics, and First Energy all on that bad list. We'll be right back. We've got some breaking news on Bill Ackman's Pershing Square. Leslie Picker has it. Leslie?

Hey, John. Yeah, Bill Ackman's SPARC, which stands for Special Purpose Acquisition Rights Company, has been approved by regulators. This news coming via press release moments ago from Pershing Square after a year-plus back and forth to get the concept approved by the SEC. Pershing Square conceptualized the SPARC as a new iteration of the SPAC model, but

as the firm put it, quote, without any of the highly dilutive SPAC founder stock or shareholder warrants of a typical SPAC and without any underwriting fees. If you recall, they failed to consummate a merger for Pershing Square Tontine, which was the largest blank check ever raised. Investors in July of 2022 got all $4 billion back from that SPAC, plus a right to the SPARC, which becomes effective with today's approval. Once the SPARC identifies a private merger target, there will be a strike price for the rights holders, which determines the amount of capital the SPARC will raise, a minimum of $1.5 billion, according to today's release.

And the rights holders can choose to participate or trade at that time based on what the merger target is. So, in other words, the Spark holders can opt in if they like the merger idea, whereas in SPACs, investors would opt out if they don't like what they see. Guys. Aha. Leslie, thank you. Let's bring in Mike Santoli for a reaction. Mike, maybe this would have been different when SPACs were popular, but how does it matter now? Well, I'm not sure if it matters in terms of what the overall market is going to look like,

although it does seem to go around some of the main criticisms of the SPAC structure. You know, a lot of the SPACs that were out there, people gave their money over in the initial offering. The money kind of sat there, you know, essentially added cash value. And then if you opted out of the merger, that once it was agreed to, you got your cash back. And it was, oddly enough, a way of forced saving, but it did lock up people's money. So I think that's one aspect that would be different here, opting out instead of, I mean, opting in instead of opting out. We'll see if it gets revived, though, this idea, because there have been many, many cycles in the past where you did have SPAC

like structures come out. They went out of favor when the IPO market comes back and people get excited about deals again. They tend to go back. Maybe it will in part be through something like this structure. Never know. All right, Mike, thanks. And thanks to our Leslie Picker as well. All right. Well, government shutdown is imminent and Wall Street is gaming out the possible consequences. Firms like Citi and UBS noting that the impact on markets in previous shutdowns has been on average limited. But Wells Fargo says pressure could come for the U.S. dollar. Recent history suggesting that it could drop around 1.5 percent several weeks after the start of a shutdown. GDP could also drop. Jan Hatzius from Goldman Sachs estimates a 20 basis point decline in the fourth quarter for each week that that lasts.

The Fed next decision could also be in limbo. Crucial data releases could be delayed, like CPI and next week's jobs report. New listings could also be held up, with the SEC warning about delays in reviewing new filing paperwork. Disruptions at the FDA could hit the biotech sector. Goldman Sachs highlights companies like Eli Lilly, Sage Therapeutics, and Biogen, which have regulatory catalysts, those could be impacted by a temporary pause in FDA activity. And finally, Jeffrey says previous shutdowns have had minimal impact on defense contractors

in the short term, but can disrupt new awards and select work. So for more on this topic, how the defense sector, aerospace and defense, will fare if we head into a shutdown. Let's bring in the author of that note, Jefferies Aerospace and Defense Analyst Sheila Caihalu, and former Army Secretary Eric Fanning, now runs Aerospace Industries Associations. It's great to have you both. Sheila, I'll start with you. The government shutdown piece of this and the fact that we've seen so many specifically defense contractor stocks sell off this year, could this potentially be a buying opportunity? Historically, it has with the last shutdown in 2018. It was the

longest shutdown we've ever had. It lasted 35 days and it was a buying opportunity where the stocks underperformed by 10 percent leading the week leading into the shutdown and outperformed if you bought it on the day of the shutdown. However, ironically enough, defense outperformed this week. So that same opportunity will present itself. Overall, Morgan, you know our view. We're a buy rating on the commercial aerospace aftermarket names and we're lukewarm on defense with only one buy rating with LHX, although these names look relatively cheap and they're suggesting that the budget actually declines next year based on their current valuations, but we see 3 percent growth.

We think that they all each have their own individual issues when it comes to profitability and margins, given what's happening with inflation. So we only have one buy rating in the sector. Yeah. And Erica, you were acting Air Force secretary the last time we saw a full government shutdown back in 2013. What happens, say, Monday if we were to get something like this? And just how much does it affect the Defense Department and the entire defense industrial base? Morgan, thanks for having me. And it's a good question because the shutdown's already begun. It doesn't wait until the government shuts down. The planning for it takes place really for weeks in advance and distracts the entire national

security apparatus. And that's not just the Defense Department, though, from aerospace. The FAA, for example, is thinking about this and how they shut down and what they're going to do and how they're going to guarantee safety. But what training doesn't take place anymore? And so the threat of a shutdown is already disruptive at this point. And it may not move the markets. But for the millions of people who work for the government and who work for companies that are under contract for the government, it's very disruptive. They're not getting paychecks. And companies have to decide how they're going to work through this.

And some of them may not survive this. Cash flow is hard right now. Capital is more expensive. Inflation is a real pressure. And others may decide working with the government is not worth it anymore. So at some point, presumably, we get past this overhang of a shutdown. And at least in the near term, that potentially means a continuing resolution, Eric. Is that more destructive even than a shutdown if we start getting into a CR cycle, especially if it ends up being extended, which has been something that's

been on investors' minds really all year as we've marched up to this end of the fiscal year. Well, I think there are two important points leading to your question. One is we're focused on what the House is doing right now, and that doesn't lead to a shutdown or not a shutdown because the Senate has a say. And of course, the bill has to be signed by the president. But you're right. The best case scenario is we don't have a shutdown or we end the shutdown quickly, but we still have a continuing resolution, which I don't think most people understand. It's very disruptive to plan around because a continuing resolution is just saying you can keep spending what you spent last year. If it's a new program, it can't start. If you're

scaling up, you can't do that. And we're making a lot of big moves right now in the national security side as we think about pivoting to the Indo-Pacific and thinking about potential conflict with China. All of that gets put on hold. And also, it's just embarrassing. It sends a terrible message to our friends about our ability to deliver and to our enemies about our ability to deter. Sheila, I want to get your thoughts on continuing resolution, what this means, what investors need to keep in mind around all of this, and what could be the potential next catalysts then for these stocks? I agree with Eric. Clearly, it might not disrupt the stocks, but it definitely disrupts the

operations of these businesses and how these companies operate. Alan makes some clear points around that. But again, the CR is disruptive as well. And at the end of the day, what we're looking at is 3% defense budget growth. Yes, we're up 50% from the trough levels of $590 billion in 2015. But defense spending is not growing a whole lot. And the companies are also seeing a lot of inflation pressure, which the budget might not capture necessarily an existing program. So that's one of the issues these companies are dealing with in addition to disruption in their operations. Okay. Sheila Kailu and Eric Fanning, thanks for joining us. Thank you. Time for CNBC News Update now with Courtney Reagan. Courtney.

Thank you, John. Will New York City and the surrounding areas continue to contend with heavy rainfall and flooding? Governor Phil Murphy declared a state of emergency for New Jersey, joining New York. JFK Airport has seen nearly eight inches of rain, making it the wettest day there since 1948. The MTA chief said about half of the subway system is either suspended or partially suspended, and Amtrak is warning of long delays in New York. We have the first guilty plea today in the sprawling election interference indictment in Georgia against former President Trump and 18 co-defendants. Georgia bail bondsman Scott Hall pleaded guilty to multiple conspiracy counts and is being sentenced to five years probation. Netflix has mailed out its last DVD red envelope,

ending its operations after 25 years. The company reported over a billion dollars in revenue from its DVD business in 2012. By 2022, though, revenue had dropped to $146 million and was heading towards breaking even. The streaming giant has been mailing DVDs since 1998. The first DVD was a copy of Tim Burton's Beetlejuice and its last, the 2010 film, True Grit. John and Morgan, back over to you. Thanks.

I bet they don't even have to send that back. Up next, consumers are feeling skittish about purchases in three specific categories. Mike Santoli gives us a check on the areas where storm clouds could be gathering. And take a look at Walgreens, one of the top Dow stocks today. On a report, the company is considering former Cigna exec Tim Wentworth as its next CEO. Walgreens, though, was the worst Dow stock for the quarter. Welcome back to Overtime. Uncertainty around the U.S. economy continues to weigh on the consumer.

The University of Michigan's Consumer Sentiment Survey showed a drop in September, with big drops in three specific purchase categories. Let's bring back Mike Santoli with a breakdown. Mike. Yeah, Morgan, the University of Michigan Sentiment Survey, they always ask or have for many years these particular questions. What are the buying conditions right now for big household durables like appliances, for homes, for vehicles? Really low levels, especially for homes, as you can see right now, far worse than what we saw in the global financial crisis times. So it seems clearly that there's been a shock at the inflationary impact of the cost of these goods, plus interest rates on top of them. What I find interesting is if you take a look at the behavior of the home building stocks,

as well as something like AutoNation, a proxy for retail car sales. Yeah, they're off their highs, definitely have given back some of their gains, but still not in bad shape. Now, granted, AutoNation is definitely one of the better operators. CarMax looks a lot worse here. But it's interesting that perhaps the sentiment survey is perhaps overstating maybe what the ultimate strength of those industries is, I guess we have to say. Yeah, I do want to go back to this idea of PCE, though, specifically the core PCE and and what auto what auto prices, what vehicle prices have meant to all of this has been put out a note earlier today with a chart of it. And here it is right here showing that, yes, disinflation is afoot in the auto category.

But that if you look at used cars, PC and a three month annualized rate, that's actually moved higher. That's the orange line right there. And this is before we have an impact from UAW. So so how real is this risk? It's it's definitely a risk of the fact that not everything is moving in the right direction. Now, I've seen a lot of other work of so much focus on either the shelter component that should create some downward drag, as well as very quirky things in PCE, like the implied cost of financial services, which is very noisy. But I agree with you. There are certain components where you've seen the relief and now it's all of a sudden becoming a little bit less comfortable. We'll see, you know, how much that matters or how much credence the Fed gives to what it's saying. Yeah. Goolsbee shouted out housing and his concern around whether we see a pickup there, too, this week, to your point. Mike Santoli,

thank you. Well, biotech is significantly underperforming the broader market this year. Up next, Goldman Sachs senior biotech analyst reveals where he sees opportunities in this beaten down group. Structure Therapeutics finishing the day higher by 34 percent after announcing unexpected positive early stage results for its experimental weight loss drug. Taken once daily, the pill helped study participants lose more than nine pounds on average after four weeks with an encouraging safety and tolerability profile. Rivals in that weight loss arena include Eli Lilly and Novo Nordisk, both closing lower today. The company also announcing $300 million in private placement equity financing. Sticking with health care, take a look at the IBB so far this year. The biotech ETF down nearly seven percent versus an S&P 500 up 12 percent. So does that gap in performance mean you should consider some names

in this sector for the fourth quarter? Joining us now with his top picks is Chris Shubutani, Goldman Sachs senior biotech analyst. Chris, welcome. So the IBB hasn't done so well, but anything associated with weight loss drugs, Eli Lilly structure today, Novo Nordisk, has done well. What does that mean? Yeah, thank you for having me on, John. Certainly you've touched with your introduction some of the major themes that are really drawing the interest of investors.

Obesity is considered what we think of as a once-in-a-generation kind of mega TAM opportunity, TAM meaning total available market. And just thinking about the sheer scale and scope of the opportunity here, we're at a very unique time where I think a lot of things are coming together. Drugs that have unprecedented levels of activity, the right kind of complexion in terms of the side effect profile, and certainly near insatiable demand that you could argue is timeless. For the stocks from the sectors, as you described, yeah, it continues to be challenging, particularly the XBI as an index, which tends to include the full range of market cap companies in the biotech space.

At Goldman Sachs, we have a preference in terms of our recommendations around large cap quality names. We've highlighted several, and I'm sure we'll get a chance to talk about some stocks. There's always going to be various degrees of headwinds, but you pointed in your introduction to one of the key tenets of investing in healthcare, and that is when you can have identified the combination of innovation and significant market size and opportunity and growth that will draw broader investor attention beyond just the health care specialists, which would give us continued hope for that opportunity. OK, so tell me in the near term and maybe even to some extent medium term,

is there a shutdown risk in this arena because it is regulated. I spoke earlier today with Joe Chiani, the CEO of Massimo. Here's what he had to say. FDA is tasked to make sure everything that comes out is at least safe. And hopefully some of the things that they look at under approval perspective is safe and effective. And that's really important. But sometimes delays in getting important products out there also impacts safety and health care of people. So I unfortunately see that there will be delays in life-saving products getting into usage in hospitals and doctors' offices because of a government shutdown. Chris, is that anything investors need to be thinking about? Yeah, and Joe is looking good there. He was clearly one of the innovators. I was an

anesthesiologist in a former life, and his company has really focused on innovation, and they've been very diligent about persisting to bring that innovation to market. But for sure, healthcare is a highly regulated market. We count upon, as we observe the industry, making sure that the sort of the permission pass to go to market is clearly count upon, as we observe the industry, making sure that the sort of the permission pass to go to market is clearly the FDA, the Food and Drug Administration. We look for decisions upon how many of these drugs require payment systems and recommendations from essentially the Health and Human Services, including in particular the Center for Medicare and Medicaid Services. Very important parts of being able to figure out,

again, gating factors for drug approvals and also important decisions in terms of what will get covered, what will get paid for. Yeah. OK. You said you came to overtime bearing stock picks. What are they? Yeah. So we have a couple of them here. I'll mention three quickly. I'll start off with one that is perhaps not the most popular in terms of sentiment currently. That would be Pfizer. But remember that if we're looking for the opportunity over a longer term, this is a company that's undergoing considerable transformation. 2021 was a very strong year for them from the standpoint that COVID captured the world. And really, they were in the best position there with their vaccine and therapeutic. Now, in a post-COVID era, it's much more difficult to get visibility on what that trajectory could look like. That uncertainty is not

the stock's friend, but we would argue at 52-week lows, there's an opportunity here. Couple that with the fact that COVID provided the company with the opportunity to essentially rebuild tremendous amounts of M&A activity and business development is going to shape the direction of the company in the future. Watch for the Seattle genetics acquisition to possibly close towards year end, which could guide the company towards a stronger. Yeah. You have a neutral rating on Lilly. And we just started this conversation talking about obesity and weight loss drugs. Why are you neutral? Yeah. You know, I think there's no question that the significance of the opportunity here and their positioning as a leader is very meaningful. At current levels, in our view, that the stock really captures a lot of positives here.

It's been a tremendous year. Alzheimer's disease, as well as really from the obesity standpoint, as well as benefiting from the positive results that came from data that was presented by one of their competitors and co-leaders in the obesity space, Novo Nordisk. At current levels, in our opinion, and as we look forward, we believe that there's additional issues that will be faced. There's no questioning the demand, but supply and manufacture of the drug is a question. Earlier this week, we published a report looking at the tremendous number of additional companies and drugs that are in the pipeline. Over 50. And as John started the segment, the company there includes themselves amongst those who are in the clinic and could become contenders for segments of the market. I think Lilly's leadership is unquestioned.

We're neutral at this level for the stock. OK, so neutral on Lilly and a buy on Pfizer. Chris Shibutani, thanks for joining us. Thank you, Morgan. Appreciate you, Morgan. Appreciate you having me. With the IPO space showing some signs of life, could Voyager be the next space company to go public? The company's chairman and CEO weighs in later on Overtime. Space docs have been falling back to Earth since going public. Up next, the chairman and CEO of Voyager Space discusses whether he's considering an IPO

despite his rival's failure to achieve orbit on Wall Street. Be right back. Welcome back to Overtime. As Q3 closes out with some green shoots in the IPO market, at least one space startup is once again considering going public, Voyager Space. It's a holding company that's been acquiring businesses and building a portfolio focused on space infrastructure. It's the only startup with a permanent presence on the International Space Station. It's developing Starlab, which is one of three commercial space habitats that's received some funding from NASA.

I think NewSpace deserves a proper S-1 filed public company as opposed to, you know, let's say a SPAC oriented public offering, because they are different. And if you could have a proper S1 company, you know, with Morgan Stanley lead left and other prominent banks on the book that's successful, I think that would do a lot for our industry. So that's part of the reason why I think it's a desirable possibility for us. So Voyager's chairman and CEO, Dylan Taylor, first got involved in space as an early-stage investor while working in financial services and real estate. He realized if the space economy was going to get off the ground, it would require the ability to scale. But it also requires credibility in the capital markets. So Voyager Space is weighing a traditional IPO as soon as next year as a grown-up space stock,

rather than by merging with a SPAC, as a flurry of space companies have done in recent years. De-SPAC space stocks, they have not fared well either. Planet, Rocket Lab, Virgin Galactic have all plunged drastically since making their market debuts. So Voyager Space could present, John, a new type of test for this sector. You can hear much more of our conversation on the latest episode of Manifest Space, which is out wherever you get your podcasts. Not a SPAC, probably not a SPARC either. Yeah, that's going to be a challenge.

A lot to see about what happens with the IPO market and about what happens with the potential government shutdown next week as we start Q4. But can't forget, a week after that is when we start getting bank earnings. That's right. In the meantime, you've also got the government shutdown, you've got the child care cliff, and you've got the resumption of student loan payments. So watch the consumer, as we do so often already. That's going to do it for us here at Overtime.

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