Closing Bell - Closing Bell Overtime: Rounding out a rough week, Moody’s Chief Economist on rising rates, looking ahead to big tech 10/20/23

Episode Date: October 20, 2023

Stocks fell again Friday to end a downbeat week on Wall Street, following the 10-Year yield’s jump above 5%. Bob Elliott from Unlimited breaks down the selloff and the particular weakness in the regional banks. Moody’s Chief Economist Mark Zandi discusses the outlook for rates and new comments from Atlanta Fed’s Raphael Bostic about when the central bank might cut rates. And Jefferies analyst Brent Thill looks ahead to a huge week for big tech earnings from the likes of Microsoft, Amazon, Alphabet and Meta, and reveals his two top picks ahead of those reports. 

Well, it was a down week and a huge week of earnings ahead. That's the scorecard on Wall Street. But winners stay late. Welcome to Closing Belt Overtime. I'm John Fort with Morgan Brennan. Coming up this hour, Moody's chief economist, Mark Zandi, joins us to talk about the spike in yields this week and why he thinks it may not last. Plus, the latest messaging from the Fed, including new comments today from Atlanta's Raphael

Bostic on CNBC. Plus, United Auto Workers President Sean Fain is giving an update on his union strike against Detroit's big three automakers this hour. We'll bring you headlines as we get them. Let's begin with the market on another downbeat day to end a rough week after the 10-year yield breached 5% for the first time since 2007, though it has since retreated. The Nasdaq losing around 3% this week.

The S&P 500 shedding more than 2%, and the Dow falling around 1.5%. Consumer discretionary, real estate, tech hit the hardest in this week's sell-off in terms of sectors, while staples in energy outperformed. Let's bring in CNBC's senior markets commentator, Mike Santoli. Mike, I mean, we basically closed at session lows here today. The S&P is at 4,224.

We're back to talking about 4,200 again. And we did see that spike in the VIX. To me, what was most notable, yields are down today and stocks are down today. Right. So something a little bit new. We've had this on a one-day basis before in this last little stretch, but worth watching. And it's one of those times where investors seem unsure exactly what to worry most about. And they're kind of choosing all of the above or they're kind of putting the entire market for the moment in the too hard to figure out column.

And that just means, you know, buyers fatigue, no bargain hunters show up. And that's the kind of action we've seen. So you mentioned this 4,200 level. It's kind of been the floor for the last month, if you want to stretch it back to, you know, the middle of the year. Early June is when we first kind of bounced off these levels to make new highs. And we can understand why. People are very uncertain about the economic impact already of this aggressive move in yields. The Fed may very well be done, and that's probably a net positive. But they also don't mind seeing the bond market kind of get restrictive on its behalf. So all those things in the mix. Earnings, I think they're

coming through fine. We'll see if it proves that it was another day when you did have bond yields at least showing a tentative hint that they might have peaked. You have the stock market on potential support. We're going to get a new week with a lot of earnings to sift through, and we'll see if we have the luxury of making that the focus. Mike, a big theme that we've been talking about for a while now is mega cap tech holding up so much better than everything else. But I look at, let's see, we were down about one and a quarter percent on the S&P 500. I look at Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla. They were all down more than that today. Worth noting?

It is worth noting. Now, a lot of it is that many of those stocks just have a whole lot more air under them, meaning a lot more embedded profits and people can peel off. And they're kind of catching down to some degree to the rest of the market. But I also think I always look at it almost in reverse, which is to say, yeah, sure, leadership is looking like it's flagging slightly, at least in the short term. On the other hand, sometimes you don't like people to feel as if they have this easy place to hide in the most obvious stocks in the market. And so it just causes a more general kind of gut check across the tape. Of course, they're also potentially lowering the bar of expectations and valuations heading into some of their earnings reports in the next several days. Yeah. Financials have been particularly weak this week as well. So let's focus in now. Mike, stay close because we're seeing just a few

minutes. Let's focus in now on regional banks getting hit particularly hard today following a number of earnings reports this morning. Leslie Picker has a look at what's been driving those moves. Leslie. Hey, Morgan. Yeah, a few disappointing earnings sending the group pretty deeply in the red today. KRE, an ETF of regional bank stocks, experiencing its worst day today since May in the wake of First Republic's demise. That was in May. You can see they're down 4% today. You've got Regions Financial, Western Alliance and Comerica leading the laggards today. Each reported earnings either yesterday after the close or this morning. In the case of Regions, pre-provision revenue missed estimates thanks to lower net interest income. That's the profitability metric from loanmaking and guidance also disappointing with regions decreasing NII

and loan growth and increasing expenses and credit costs. Western Alliance initially saw gains pre-market after showing yesterday afternoon that the Phoenix-based lender gained deposits and its net interest margin expanded from Q2. But then the stock took a turn. It slid today on the open as investors truly digested the report, which also showed deposit costs more than doubled last quarter from the prior year, and Q4 guidance was mixed. Comerica, similar story today as well. Net interest income under pressure there, down 15% year over year, thanks to deposit costs and loan selectivity, guys. All right, Leslie Picker, thank you. Joining us now to talk more

about banks and the broader market is Unlimited co-founder and CEO Bob Elliott. I'm getting used to Friday, Bob. I like having you here. It's usually rainy here as well. We've got to fix that. It is. So Leslie mentioned we're at these lows on the KRE since May. We're also, I think, at a low for the NASDAQ since May. What to make of all that? Well, I think when you look at the banks, we are starting to see some concerns that are emerging, not so much for the big banks, not so much for the small banks, but sort of those regional stuck in the middle are starting to see some pressure. They still have a little too much duration on their balance sheet. They're still seeing, obviously, some hits as a result of the bond sell-off.

These are the sorts of things that are not quite big enough to be a big deal to the Fed to cause them to pause or hesitate in terms of keeping monetary policy tight as it is. But it is enough to obviously scare shareholders in terms of what the forward-looking picture looks like. Okay, so bigger picture, your position, I think, still is that we're late cycle, a recession is coming. That's different from what Atlanta Fed President Rafael Bostic said on Squawk Box this morning. He said no recession coming. You still expect a recession? You have any perspective on how deep and how soon? Well, I think one of the things that, of course, the Fed's not going to sit there and tell you that a recession is coming relatively quickly,

particularly when they're holding tight monetary policy in place. But it's the sort of thing where just as everyone is sort of giving up on this recession because it's come much later than most people have expected, the storm clouds are gathering. Right. You've got the backup in bond yields. That move is directly hitting incremental borrowing and the vast majority of borrowers. longer and longer term of elevated bond yields, which means that those who have hesitated to borrow are now starting to run down their cash piles and now starting to face a need for increased borrowing ahead. And the fact that you're starting to see weakening in various more cyclical sectors of the economy. Housing had popped and now is rolling over. Employment here and there is getting weaker and weaker. And so the

odds that we get out of this without having a meaningful slowdown in economic activity are pretty unlikely. All right. We're going to stick with this theme because, Bob, stay with us. We have a news alert on the Fed, which just released its latest financial stability report. Steve Leisman has the details. Steve. Sounds like Mr. Elliott could possibly have read that report or written it. The Fed in this twice annual financial stability report not finding serious areas of concerns in the banking system. They call it sound and resilient, but it does flash a series of yellow warning signs here in various markets and industries. Many of those risks caused, in fact, by the Fed's own hike in

interest rates. The Fed said some banks saw declines in long maturity assets due to rising rates, and some banks are facing funding strains due to high levels of uninsured deposits. But they're saying the reliance on wholesale funding is lower right now, and outflows have slowed. Banks overall, they say, have high capital ratios. But prime and tax-exempt money market funds, along with stablecoins, they say, remain vulnerable to runs. Property prices are elevated relative to funds, along with stable coins, they say, remain vulnerable to runs. Property prices are elevated relative to fundamentals, according to the report,

and mortgage delinquency rates do remain low, however. On the equity market, valuations remain notable. I think it's a little higher than they would otherwise seem. Historically, equity price gains, they say, exceed that of expected earnings. One-year loan default rates stand well above the historical median, according to the report, and the Treasury market liquidity may be less resilient than usual. On commercial real estate, they do flag that. They say valuations remain elevated, and there are concerns among those who they surveyed for part of this report here. Leverage of non-financial firms remains high by historical standards, and there are signs of deterioration

in the corporate bond market credit. Just a couple near-term risks, they note, the China slowdown, the sustainability of the fiscal side, of the fiscal debt, worsening geopolitical tensions, along with persistent inflation and a significant economic slowdown.

Nothing here, guys, where it sounds like the Fed is going to do anything imminently about it. But these are some of the warning signs that they flagged many of these issues resulting from the huge surge in interest rates by the Fed itself. John? I'll take it, Steve. Thank you. Steve Leisman. Yellow flashing lights seems to be the right metaphor here. I mean, there's so much we can pull out from what Steve just reported. Your reaction? Well, I think the main question for the Fed is what's going to cause them to shift monetary policy from this stance of higher for longer to something that's

going to be a little more accommodating. And what we see in that report and what we hear from what they're saying is, you know, there's nothing that is a sufficient imminent risk that's going to create a desire to shift towards easier policy. And so it's, you know, hire for longer as far as the eye can see. And the issue is for most businesses and a lot of what was just discussed in that report is every day that that hire for longer policy stays in place is a continued weight on the economy. And over time, the slow but sure weight of that economy is going to is going to tilt us into a recessionary dynamic. And that's coming at a time when earnings expectations are so elevated, right? Twenty five percent earnings expectations growth over the course of the next two years at a time when higher for longer is firmly in place. That's those two things are out of sync with each other. And the stock market

hasn't really resolved that situation. So then how do you fold this? We were just talking about all this, and I know there's the comments just now in that report on liquidity in the Treasury market as well, which kind of fans the fire here. How do you layer geopolitical risk on top of this and all the uncertainty that brings, too?

I mean, there's sort of this narrative out there that the market's not really pricing it are shrugging off geopolitics. But gold's crossed two thousand dollars again today. We did see oil finish the week higher and stocks are under pressure coming into the weekend, presumably because we don't know what's going to happen in the Middle East. You know, I think what most investors are seeing and learning is increased geopolitical tensions are particularly good for the gold market. And that's really played out since a couple of weeks ago when the situation in Israel worsened. And so I think a lot of investors are seeing where are the safe havens.

It's not necessarily clear it's in bonds in an environment where we're having increased global conflict because that leads to more spending, like a hundred billion dollar package that was just announced. Right. More spending means higher yields and more borrowing. And so investors, I think, are taking a cautious approach to looking to the bond market and instead are looking for those other assets like gold and commodities, which are likely to be more directly benefit from rising geopolitical tensions. All right. You told us about gold a while ago, Bob, and here it is. You've been right so far. Bob Elliott, thank you. Well, the S&P 500 closing just below a key moving average today for the first time in seven months.

Senior markets commentator Mike Santoli is over at the market dashboard to break it down for us. Mike. Yeah, Morgan. So down to that trend line that's tracked by the 200 day moving average, you mentioned we did hit it back in March in the aftermath of that regional banking scare. Back then, I would note that the 200 day average itself was basically horizontal. So it was kind of flat. It wasn't really saying it was uptrend. So now

it's uptrending. What I find also interesting, we've been talking about 4,200 as this, you know, kind of floor for the recent range. That was June 2nd. That was the day we had a very big jobs report, monthly jobs report. Everyone celebrated a soft landing, likely. So we're kind of once again testing these levels. We're back to where we were October 3rd. And as we all know, the average stock has definitely lagged a little bit. And this is also a good reminder, though, that you can kind of breach the 200-day and then recover. It's not necessarily all of a sudden a make-or-break level. Take a look here at the TIPS yield, Treasury Inflation Protected Securities. It's a proxy for real yields, yields you would get over and above inflation, pushing 2.5 at this point on the 10 year basis. And it really takes you back

to, you know, pre global financial crisis times when this was much more the norm. So it's one way of quantifying to some degree the compensation that a bond investor can perhaps expect at this point over and above inflation as they maybe take the chance to step in to the to the bond market there. Now, that also means that policy is kind of restrictive, or at least financial conditions are getting restrictive on the overall economy. That's why it's sort of a push-pull, good news, bad news type of situation. And, of course, it's tough to necessarily assume the momentum upward in bond yields is going to end. Final look at, here we go, the proxies for people's interest in investing in stocks, which are BlackRock and T. Rowe Price.

These are asset managers. They're basically on their lows for the year. They're kind of leverage bets on the overall market relative to the equal weighted S&P 500. I would point out, though, you know, things look pretty bad back in the spring, too. And you managed to have a catch up move. So if you think that we're going to recover into a year end rally of any sort, these stocks would definitely be leveraged to it. Morgan. Interesting. I mean, in many ways, this goes back to the conversation we were having earlier this week, which is the fact that fixed income, higher yielding fixed income is now more competitive against stocks and perhaps arguably less risky. It is. It's competitive. It's it's certainly less risky in terms of likely downside from here in price. On the other hand, I don't

think it's always an either or. So kind of both can serve a purpose together. And that's something that is also a throwback to, you know, prior decades when you didn't necessarily have to play one off the other. All right. Yeah. Mike just said, on the other hand, three times in 20 minutes. Did I really? Yeah, I feel bad about counting, but, like, every time it's like Pavlov's dog with me. But you're so good. We should get some kind of a sound effect. You're so good at looking at all sides of these issues.

Yeah, it shouldn't be Pavlov's dog. It should be some kind of a punishment, not an incentive. For me. Mike, thanks. Morgan, this is all going to get tested pretty quickly next week because you mentioned how much big tech was down today. We've got big tech earnings Tuesday, Alphabet, Microsoft, Wednesday, Meta, Thursday, Amazon. That's a lot. That's a lot. And we also get other important economic bellwethers. UPS, for example, next week is going to be one to watch at a time where you do have all of these cross currents in terms of how to

assess not only the U.S. economy, but the global economy right now, not to mention geopolitical tensions and trade dynamics and everything else. We'll be busy on overtime next week. We really will be busy this hour, too. Yeah, for sure. After the break, Moody's chief economist, Mark Zandi, is going to be busy talking to us, explaining why he thinks the 10-year Treasury yield is going to end the year a lot lower than where it is now. And later, we are looking ahead to a huge week of big tech earnings. We're going to ask analyst Brent Thill what he's expecting from the likes of Amazon, Meta, Alphabet, and more. Stay with us. When do you see the Fed might reduce rates?

So when we get really close to two percent, I mean, I'm right. But if you had to give us a date or a time, so I would say late 2024. That was Atlanta Fed President Rafael Bostic speaking with Steve Leisman this morning on Squawk Box. He also said he doesn't expect the economy to go into a recession. He's not a voting member this year, but he will be next year. Joining us now, Mark Zandi, Moody's Analytics Chief Economist. Mark, it's great to have you back on. I want to get your reaction to that. Does that sound like, based on the trajectory we're on right now, that rate cuts could be something coming later next year? Is the market right to think about it that way? Yeah, it does. I didn't see the interview, but I read the transcript and it was almost like I was talking. It sounds like President Bostick's view is very similar to my own. I mean, I think once it becomes clear to

Fed officials that we are going to go back to that 2% target, we don't need to be at the 2% target, but it's clear that we're headed in that direction in a reasonably timely way. I think that's when they start cutting rates. And, you know, I expect it to be kind of sort of summerish, but if you told me fall next year, I don't think I'd argue too strongly. So, yeah, I think that's on track. I want to get your assessment of the current economic picture, because we've had a lot of conflicting data even just this week. Are we seeing an economy that's slowing? Are we seeing an economy that's holding steady?

Or are we even potentially seeing an economy, as a few Wall Streeters have suggested, that is potentially accelerating again? Well, it's pretty good. I mean, Q3 was really strong. I mean, if you look at the tracking estimates for real GDP growth, that's the estimate of GDP growth based on all the data that's come in. It's 4%, close to 5% growth. I mean, that's boom-like. The potential growth rate of the economy is closer to 2%. And by the way, Morgan, I think that's one of the reasons why long-term interest rates have risen so significantly here. It's just been really strong economic growth. Now, having said that, there are a bunch of headwinds, you know, debt ahead. You've got student loan repayment. You've got a UAW strike. You've got a potential

federal government shutdown. You've got higher oil prices and now the higher interest rates. I do expect growth to slow as we make our way towards the end of the year into next. So really, really strong growth up to this point in time. But I suspect that we'll start to see things throttling back here pretty soon. Mark, what's your assessment of this next phase for the labor market, which has been so tight? We're starting to hear a little bit more about layoffs again. But, you know, those are just, you know, micro examples. You say that the economy seems to be digesting these labor actions, these strikes, that they're getting resolved anyway reasonably gracefully. But how much can we tell now about the long-term impact of those higher,

relatively fixed costs? Well, I think the living market is easing, John. I mean, quit rates are down. That's a percent of folks out there that are quitting their jobs. That was very elevated a year, year and a half ago. That's back to pre-pandemic levels. Hiring rates, they're back to pre-pandemic. We've seen some cutback in hours worked. Businesses have been cutting back on temp help, which is an indication that they're throttling back. They haven't laid off workers. Layoffs remain very low. I view that more as a feature than a bug because without layoffs, you don't get recession. But the labor market is easing up. Wage growth is moderating and

normalizing. And if I'm right about growth slowing in the next two, three, four, five months, I expect to see even further easing in labor market conditions as we move forward and consistent with inflation getting back down to that 2% target that we are looking for by this time next year. All right. Mark Zandi, Moody Analytics chief economist. Thanks for being with us. Sure thing. After the break, trillions of dollars worth of investing advice. We'll talk to the CEO, CIO of Mercer's U.S. business who advises funds holding more than 16 trillion dollars about why large asset owners are trimming their exposure to U.S. equities. And take a look at Okta falling sharply into the close after the company said its support system had been breached using stolen credentials.

That move cutting Okta's year-to-date gains in half. Okta noting in a statement that the support system is different from the production Okta service, which it says has not been impacted. Nonetheless, you can see right there, shares finishing down 11.5%. Welcome back to Overtime. We have a news alert from Geico. The Berkshire Hathaway-owned insurance giant has announced it is cutting 2,000 jobs, or about 6% of its workforce. CEO Todd Combs telling employees in an email that the cuts will help the company ensure long-term profitability and growth. Comes, John, in a week where we've seen a lot of PNC property casualty insurers with news in what's been a

tougher environment given catastrophe losses and the like. Yeah, we're just talking about the labor market getting a little looser. You hate to see it happen to people at the micro level for sure, though. Well, now the major average is closing lower today after a tough week as rising interest rates pressured equities. Our next guest has an inside look at where large asset managers are putting their money. Joining us now is Mercer's U.S. CIO, Alilu Agonga. She manages the U.S. portfolio of Mercer's $379 billion in assets. Mercer's a financial services advisor

to large funds like pensions, retirement plans, and endowments. Olaulu, thanks for being here with us on set. Thank you for having me. So large asset owners have trimmed exposure to U.S. stocks, but what does that mean about what happens from here? Is that just being maybe redeployed now? Is there further trimming that might happen based on what we see with these earnings coming up? So we really pay attention to the large asset owner survey, of course, because these are clients that tend to have, call it, $5 billion plus in assets. This survey represents over 60 clients, $2 trillion, so really market moving. Some have trimmed, but even in the next year, they've indicated their willingness to trim further.

So U.S. equities, U.K. equities, and real estate. Not surprising. So how does this global geopolitical instability, war in Europe, war in the Middle East, tend to affect the mindset of large asset owners. It seems to not be having a huge impact now. Is consumer behavior or even retail trading a bigger influence? So what's happening right now is adding, you know, definitely a sad situation, but really adding to additional uncertainty. Geopolitical events are just hard to predict the impact on markets. So it tends to be volatile at first, then it dissipates. So we're not really advising clients to act on that per se, but it's just add to the question of the u.s initially as to where they're deploying

assets they're really more looking to add in private debt in infrastructure in private equity for example so trimming in one area in public markets but adding in private markets what is so attractive about private markets right now versus public with i'll give an example for infrastructure so infrastructure has inflation oriented abilities that can protect your portfolio. The opportunity set both in the U.S. and in Europe has increased. So if you think of the JOBS Act, billions of dollars that have gone to states, local governments for bridges, tunnels, increasing water capacity. For Europe, we also see repower EU. That's another initiative that's focused on

more green energy sustainability aspects as well. So infrastructure opportunity set has been increasing in the last couple of years, coupled with the inflation protection for portfolios, gives a rich opportunity set. So things like private credit, I mean, fixed income, something we've been talking about a lot, You're seeing higher yielding fixed income opportunities, both in private and public markets. Is this compelling, especially when you're talking about institutional investors coming off of a year last year where basically nothing did well? Absolutely nothing did well. Equities and bonds down double digits is a statistical anomaly. Now, yields or the higher yields, yes, it's good in portfolios.

What that's really done is allowed asset owners to rethink their risk appetite. So you don't really need to take that much risk to get higher yields. If you think of just the U.S. ag, for example, you're earning, call it, five and three quarters just sitting in the ag. So it's expanded the bond opportunity set, but without as much risk that people have needed to take in the past to get that type of return. Well, Alu, what about commercial real estate and maybe even specifically office? We hear rumblings that there are very wealthy people licking their chops for when these loans roll over and some of these buildings get repriced. What are you seeing? So usually, and even if you're to look back in history, it's some of the more distressed periods in the market.

That's when opportunities open up. So now it's given where rates are and cap rates, especially it's challenging for things like real estate. But we would take a step back, not necessarily make hard decisions. We're seeing large asset owners looking to trim some of those areas. But it still poses opportunities if you were to look from an active management standpoint and areas that you can sift through to be able to see where you can find that in your portfolio. Olalu Oganga, thanks for joining us. Thank you so much. Good to have you here on

set. It is time now for CNBC News Update. Steve Kovach has that for us. Steve. Hey there, Morgan. Yes, President Biden said the two Americans released by Hamas today will soon be reunited with their family. The president thanked Qatar and Israel for working together to help secure the release of a Chicago-area mother and her daughter. Secretary of State Antony Blinken says they will be met shortly by a team from the U.S. Embassy. State Department says there are still 10 Americans unaccounted for. Also, a New York judge fined Donald Trump $5,000 for violating a gag order in his civil fraud trial.

The judge cited a social media post by the former president that attacked the judge's clerk. It was supposed to be taken down but remained on his campaign website for weeks. The judge warned another violation could result in jail time. And more than half a dozen Republicans are throwing their names into the running for House Speaker after Congressman Jim Jordan failed to secure the position today. Among them, lawmakers from Louisiana, Texas, Oklahoma, Michigan, Wisconsin and Georgia have all announced they plan to run for speaker or are considering a bid. House Republicans are scheduled to hold a candidate forum for speaker on Monday night.

John Morgan, send it back over to you. Steve Kovac, thank you. Thanks. Up next, the transports hitting the brakes this week. But rail company CSX flagging some potentially bullish signals about the broader economy and its earnings report. We're going to hear from the CEO next. Transport's end of the day higher, by the way. And check out solar stocks today getting slammed after last night's warning from SolarEdge about demand, saying revenue, gross margins and operating income for Q3 would all miss Wall Street expectations, forecasting significantly lower revenue in Q4. We'll be right back. Welcome back to Overtime. Freight Railroad CSX higher today, bucking the broader market's losses.

That's despite an earnings miss due to some softer volumes that have been impacting the entire industry. Shares finished up almost 1%. Many commodities and goods are moved by rail, so CSX offers a real-time look at broader economic activity in the U.S. and North America. I asked CEO Joe Henricks this morning in an exclusive interview what he's seeing, and he noted a pickup in demand for, in particular, industrial materials, including chemicals, which can represent a leading indicator of economic activity and which, until recently, had been hard hit this year. Take a listen.

We're encouraged by what we're seeing in the fourth quarter. I don't want to get too far ahead of ourselves, but in the first three weeks of this month, we've seen growth in sectors that have been stagnant for most of the year, specifically chemicals, plastics, where we've seen it been down all year long. Obviously, coal and automotive and minerals and aggregates continue to be strong. This was interesting, John, because, I mean, CSX, you had the comments there. He also basically said we've been hearing this word freight recession for a number of quarters across the transports on the freight side.

But basically, he he was cautiously optimistic that perhaps we've seen the worst of it, which is very similar to what we've heard from Union Pacific this week, what we've heard from J.B. Hunt this week, Knight Swift this week, that maybe there's stabilization. Still some pockets of weakness, international, intermodal, as we see retailers continue to correct their inventory levels. But some of these other parts of the economy, industrial parts of the economy, where signs of life are reemerging. That's what I was wondering, is if that kind of international versus domestic theme that we seem to be seeing continued. Yeah, it sure seems like it. And this is going to be one to watch because we do have things like CHIPS Act and infrastructure and the like that are going to secularly grow that part of the economy and require more of these types of goods that railroads move, for example, to be transported around for projects.

Yeah, very important details there. When we come back, a big shift happened today in Bank of America's bull bear sentiment indicator, and it could point to the market's next direction. Mike Santoli is going to be back with that chart when we return. Welcome back. The bears are back in charge this week with the Nasdaq in the red four days in a row. But one contrarian buy signal could be fashion green. Let's get back to Mike Santoli for a look.

Mike. Yeah, John, at least just getting into that zone where it's time to perhaps start to think about if the maverick move is to try and add, not subtract from risk. This is from Bank of America global strategist Michael Hart. He keeps his bull bear indicator. It's based on real market things like equity and credit flows, some technical, some hedge fund and mutual fund positioning factors. It's just dipped down into what it's considered an extreme bearish zone. That shows you how the market character has changed. And usually the forward returns improve when you've been buying equities or risk assets in that area. I do want to caution that sometimes in a bear market, it can get down there and stay down there for a while. The market didn't really

recover in the early 2000s. Here's the global financial crisis pinned at the very bottom for a while. And even last year, you see it kind of bouncing around there without sustained upside. But on the bright side, this other one here, we almost got there. That was back in the first quarter. Of course, SVB, we had the market pullback about 8 percent, about as much as we're down right now. And we did get a recovery. So it's more of one of those reminders of if you're getting nervous, you're feeling like you want to, you know, kind of huddle in safety, that's perfectly fine. But know that that's kind of where a lot of the crowd is already. Is it a lot of the crowd yet? I mean, how it's close to that line, but not below it. How much should we read into that? Yeah, I mean, you basically say

it's kind of moving in that direction. I don't think the broader market has shown the signs of having people really surrender and liquidate their their assets and decide that it's bad stuff. I think there's still this residual sense, hey, probably get some kind of a fourth quarter rally, something like that. And often that's correct. So I don't think you want to just sort of take this as, you know, a binary signal that says, OK, it's time to get aggressive. All right. Mike Santoli, thank you. Have a great weekend. You too. Thanks. Up next, from secret funds flowing to North Korea to Arab-Israeli cooperation in space, we'll tell you about two under-the-radar stories at the intersection of business and geopolitics. And later, we are getting you set for the busiest week of earnings season with Microsoft, Amazon, Alphabet, Meta, and more than 140 other S&P 500 companies set to report results.

One analyst says AI expectations might be overdone. He'll join us with the names most at risk when we come back. The FBI this week said that for years, North Korea dispatched thousands of IT workers who contracted with U.S. companies and sent millions of dollars of their wages to fund North Korea's missile program. I spoke today with Matt Oppenheimer, co-founder and CEO of Remitly, a fintech remittances company trading near 52-week highs. Now, Remitly has nothing to do with that story directly, but he said it's an example of why Remitly has been so focused on compliance. Money transmitters are tasked, as they should be, with a very important job of delineating between good customers and preventing bad actors from

sending money internationally. And when we talk about compliance, there's multiple elements to it, but that's a key part of it. And we've seen compliance is something that we have leaned into from day one. Our second hire actually ever as a company was our compliance officer, came over from Amazon Payments. And we believe that if we get that right, we can not only prevent those bad actors, but also build, again, that trust with customers because they should expect that. And Morgan, with distributed workforces and just global upheaval, that kind of care becomes more and more important. So when you see sanctions leveled, unprecedented sanctions leveled on Russia, for example, in the midst of the war in Ukraine, does that actually create more demand for what

a company like Remitly is doing? Well, much of their business is in the Philippines, in India. So sending money back and forth between places like that and between the U.S., Canada, and increasingly a few places in Europe. So they don't tend to be as affected directly by conflict zones, but it does overall make business more complicated. Got it. Well, the Israel-Hamas war has injected uncertainty in the global economy. It's testing foreign relations across the globe. The United Arab Emirates was the first Gulf country to normalize relations with Israel in 2020, and its president, the first Arab leader to speak with Israel's prime minister since the conflict began. The two countries have an innovation partnership, and through the broader I2U2

block with the U.S. and India, recently, just last month, announced a space venture. That relationship, at least as of now, it's not likely to change. The space sector for us is not part of a geopolitical movement. So most of our partnerships today in space and also in science and technology need to remain ongoing regardless of any political situation. So we're not holding back on anything. The current partnerships that we have in place are continuing down the line. And creating new opportunities for collaboration and coordination needs to continue down the line. Her Excellency Sarah Alamiri is the UAE's Minister for Public Education and Advanced Technology.

In 2020, at the age of 35, she was appointed chairwoman of the country's space agency, or it's the equivalent of NASA administrator. It's one of the youngest space agencies in the world, less than a decade old, but already plowing billions of dollars into the sector, sending two astronauts to space over the past two years and with a hope probe, becoming the first Arab country

to enter Mars orbit on the first try. My conversation with Amiri can be found on this week's episode of Manifest Space. It's available wherever you get your podcasts. But this is what we see in general, John, with civil space. Geopolitical strife on Earth does not translate to these civil space partnerships we see on orbit. Case in point, the one between Russia and the U.S. and other partners with the International Space Station. I wonder, does the UAE have specifically different sorts of goals for its space exploration or no? They are very interested in deep space exploration. They had teamed up with

India for I-Space, which had been the failed lunar attempt. They're already focused on that. Again, there are asteroid missions afoot. And as I mentioned, astronauts that are now going to orbit. The other thing I think that they're very focused on is what space means in terms of broader technological innovations and also diversification for the economy. Makes a lot of sense. Yeah, great stuff. Now, we are getting some news on the UAW strike. Our Phil LeBeau joins us now on the CNBC Newsline with the latest. Phil, I guess not a lot of cataclysmic news might be good news.

Well, the good news is that we're not hearing about new strike locations. UAW President Sean Fain gave his weekly update on the state of negotiation. Lasted about 20 minutes, he did this, and as he always does on Facebook Live, and he talked about where things stand and that there has been improvement in terms of the offers coming from General Motors and Stellantis. However, he believes that all three of the automakers can go further and that they will call more strikes if they believe more strikes are needed in order to push the automakers further in terms of wage increases, pension benefits, etc. One quick update on the state of negotiations. We get this question a lot. How much is the wage offer at this point, percentage-wise? All three of the automakers are

offering a wage increase of 23%. Factoring cost of living adjustments over the course of the contract, you're likely looking at north of 30%. There might be slight variations between a few of the automakers, but that's generally where they stand. Bottom line is this. After 20 minutes of explaining that they believe that the billionaires who run the automakers could do a lot more. Sean Payne has said they will not call new strike locations today, but reserve the right to do that at some point in the future if they think it'll move the automakers further. Big developing story, Phil LeBeau. Thank you. Now get your pen and paper ready. Up next, Jeffries Tech analyst Brent Phil is going to

give us his top two picks ahead of next week's parade of mega cap tech results. Be right back. Welcome back to Overtime. Next week will be the busiest of earnings season with more than 150 S&P 500 companies reporting, including tech giants Microsoft, Alphabet, Meta and Amazon. Joining us now with his top picks into those numbers is Brent Thill of Jefferies. Brent, it's great to have you on. I mean, we saw the first of the mega caps report this week. Tesla was one of the worst performers in the S&P, but also realize it's a little bit of an outlier. You can't really read through too much from that company to some of these other names we mentioned.

How do you like this setup going into earnings next week for mega cap tech? What would you be buying ahead of it? I think there's a lot of tension into next week. We have conflicting data points. We have a lot of AI hype and expectations that I don't think can be met. You look at Oracle today down 6% on them saying no AI revenue for the fiscal year and the stock goes straight south. So I think it shows you how tender some of these tech names are. A lot of the hedge funds are still short these names or they're out, and the long-only still have conviction.

So I think it's a tricky setup given some of the tension and given we've had a pretty good run year today. So we're going to continue need to hear uh progressing news uh going in next week uh we like m m uh microsoft and meta uh microsoft obviously the tailwinds of ai starting to kick in expectations stocks come off from 366 back into the low 300s and we think their ai lineup is is going to be very powerful as we go into next fiscal year. And also for Meta, we continue through our checks here, consolidating spend to the Meta platform. We're hearing movement away from those of Snap and other point solution advertising back to Meta and Google. And we think the comps are easy.

They should continue to accelerate revenue growth as we go into next year. And they've spent less time on the metaverse and more time around AI is a good thing. Yeah. I mean, we are seeing this large investment cycle into AI play out. To your point, and I guess perhaps looking at Microsoft and what you just said there, how to balance the investment portion of this versus the beginnings of the realization of monetization for it? Yeah, I mean, I think the analogy is this is 1995, 1996, the head of the internet. You want to be long, a number of these names for several years into this AI wave. So we think the parallel to the internet is a good one. Sundar Pichai, Google said AI is bigger than the Internet. So if you believe him and he's a pretty smart guy and all the work we're doing that we think AI will have a huge inflection in 24, 25.

So the hype is above the reality. What the companies can do, as I mentioned, Oracle is down six on them saying no AI revenue for the next fiscal year. But I think you want to be positioned into this. Any of these weaknesses next week, as we see in a lot of these software products, are going to go GA with AI into 24. And you want to be waiting for that to come. And we believe you want to be positioned ahead of it. Waiting for it to come. How do you perhaps position ahead of it? Because it seems like the sentiment might be pretty rich compared to it's going to be a tough quarter, it seems, for guidance. How how enthusiastic, unless you

really know the check is in the mail, can you be about how good the quarter is going to be, given the geopolitical backdrop and the fact that a lot of these applications and models that these companies are rolling out won't start to generate revenue until calendar 24. Yeah. And I think that's exactly the tension, which is that we've been cautious on AI in the sense that there is no product shipping right now. Microsoft's co-pilot for Office 360 or M365 ships in November. So there is no revenue in this quarter, right? It's the calm before the storm. And I think ultimately, investors are going to react to what's about to hit in the next couple of quarters. And that is a sea of new incrementally priced solutions. So, yeah, the excitement's probably a little

overzealous. We're a little over our ski tips as it relates to the excitement for AI. But we think it's going to build and mount. So any of that we can post this print, you should be buying ahead of that this quarter. I agree. It's a lot of tension. Is there any port in that storm that you see or is it across all software? I don't think. I think, look, right now the best AI stories are Adobe and Microsoft, hands down.

They are crushing it relative to anyone else, right? Others are further behind. So we see those two as having the best AI technology that is monetizable ahead of the rest of the software industry. So I don't think there's a safe port. I think Microsoft, in a tougher environment, will be safer given the diversity of the business, how well they run it. And effectively, we know there's a massive uplift in pricing that's about to hit hit and the reviews are getting better. Brent Thill, thanks for joining us. Thank you.

In addition to that, we get flash PMIs next week. We get the Fed's preferred inflation gauge, PCE, on Thursday. We get Q3 GDP. We get a couple of central bank, not the U.S., but a couple of central bank decisions as rate decisions as well. Yes, but, I mean, come on. We're getting Microsoft and we're getting come on, we're getting Microsoft, and we're getting Alphabet, and we're getting Amazon. So all of cloud, a good chunk of enterprise software,

and the two biggest reads on AI. Yeah, it's gonna be a huge week. Outside of Nvidia. Yeah, and then of course we continue to monitor geopolitical events, macro events in general, all of these cross currents affecting the market. That's going to do it for us here at Overtime. Best money starts now.