Closing Bell - Closing Bell Overtime: Win streak hits 8-weeks, Nike weighs on the Dow, Real estate and rates 12/22/23

Episode Date: December 22, 2023

A mixed day for the major averages, but stocks managed another winning week – the longest weekly win streak for the S&P 500 since 2007. Wealth Enhancement Group’s Nicole Webb and MUFG Head of US Macro Strategy George Goncalves give their outlook for the final trading days of the year and what to expect in 2024. Nike fell hard following last night’s earnings report. Long-time retail analyst Dana Telsey discusses if it’s a red flag for the rest of the sector. Shopoff Realty’s CEO talks about the impact of rate cuts on the real estate space. Plus a potential new funding round for OpenAI, why banks borrowed billions from the Fed last week, and a look at the forecast for the cloud and enterprise software with the CEO of HashiCorp.

The Dow's dragged down by Nike while the small stocks in the Russell 2000 run ahead. That's the scorecard on Wall Street, but winners stay late. Welcome to Closing Bell Overtime. I'm John Fort. Morgan Brennan is off today. Ahead this hour is Nike's post-earnings plunge, a warning for the rest of retail during these final days of the holiday shopping season. We will ask retail analyst Dana Telsey for her take. Plus, what's coming for enterprise and cloud in 2024? The whole sector seeing big gains this year, but it was under the surface a bit stormy. We'll discuss with the CEO of cloud

software company HashiCorp. For the week, the major averages are in the green a time in a row. That's the longest weekly winning streak for the S&P 500 since 2017. As traders cheer another soft inflation reading, Mike Santoli joins us now from the New York Stock Exchange. Mike, we've been hanging out around 4,700 on the S&P for the last week and a half. Maybe the PCE reading made that feel a bit more comfortable? Yeah, it does seem so, John. I mean, around 4,750 actually, we're kind of chopping around. That's where we had that, you know, that one day or one afternoon pratfall, percent and a half down the other day, right around that 4750 level. We've kind of clawed back up to it. So, yeah, I think things are coming in as hoped and expected with regard to the disinflation.

Maybe, you know, we're going to need a little incremental confirmation that the economy is in decent shape. But it's probably worth reminding, we are still expecting the economy to moderate its growth pace next year. The consumer is not exactly as flush as before. So we'll have to monitor all that. So, yep, inflation is definitely helpful. And we go into next year, I think, with a pretty balanced view of how the economy is performing. It has been a big two months for the Russell in particular. I mean, it was, you know, coal in the stocking is what it looked like. But now a bounty under the tree. I think for the quarter, it's up about as much as the Nasdaq, which you wouldn't have guessed. No, I mean, it's a little bit of a lesson on, you know, when a part of the market looks washed out, it hasn't done anything in a couple of years,

it can take a lot back in a hurry. These are the more volatile, more leveraged parts of the market. And actually, the Russell 2000, if you even look back over a couple of years, has basically tracked high-yield bonds. So kind of financial conditions matter most for that part of the market,

and you've had a big comeback. But I'll also point to things like the homebuilders ETF is up 25% in less than two months. So we've taken a lot back in a big buyout. We've basically gotten pretty positive on what the fundamentals look like for most of the real economy into next year. Yep, maybe it sets us up

for a little bit of a scare along the way, but for now, nothing's come along yet. Tracking high yield bonds, the Russell. Interesting. Okay, Mike, hear from you again in just a moment. For now, let's bring in the market panel. Joining us now, Wealth Enhancement Group Senior Vice President Nicole Webb and MUFG Head of U.S. Macro Strategy George Gernkalvez. Guys, happy Friday. George, if the Fed doesn't deliver as many rate cuts as expected in 24, that could disappoint the market, right? But isn't that a second half thing?

How should investors be thinking about these last handful of trading days heading into 24? Look, I mean, obviously, markets have been buoyant and super excited about the Fed pivot. But you have to be careful here because it takes time to implement it. So if the Fed starts cutting rates later in the year and actually has to go a lot faster, that's an issue. And if they wait, if they don't cut early on, I think in Q1, people are going to be disappointed. I mean, they have to really start in March, May, probably June the latest. And I think if we don't get that, the bond market reverses and that's going to really

send some waves through other markets. Nicole, you think that happens? You know, I think it's one of these situations where it's the why behind the Fed cutting rates that's most important. And I think when we talk about the stickiness of the rally over the last couple of weeks, that for us is where we're getting a lot of clarity. So it's not that we had a collapse in the labor market. It wasn't that there was data supporting the need to go into easing. Instead, it's that growth appears sideways. Inflation is easing. There's disinflation in the pipeline. And therefore, rates look overly restrictive. And so when we think about that and the application of that to 2024, I think it becomes less about the timing and more behind the narrative of the why. And for right now, the why makes us a believer that there will be broadening to the market

and that there is the prospect of, you know, the timing not collapsing the market, the timing not creating too much volatility, but instead giving more of a runway to positivity through 2024. Now, Nicole, I know you think that S&P 500 earnings actually can show up in 2024, though there's a lot of question about that. And you think that productivity driven by tech is a big part of the reason why. But in a way, doesn't that mean layoffs? I mean, doesn't that mean companies are going to be able to do either just as much with fewer or maybe even more with fewer workers? Yeah, and I think, you know, I'll say about myself, I might have been a little bit early to the productivity narrative, but that was the one thing that stood out to us all through 2023. And so with the acceleration of not just talking about AI, but seeing CEO sentiment shift to where they were confident in spending, they were bringing in the application

of these technologies. I think when we look back at textbooks, this might be the era of the roaring 20s. It just showed up later than expected after years of really low productivity looking all the way back to the 1960s. And so, you know, not only could productivity really increase margins, but I think also, you know, we might just have earnings per share growth that reaches a broadening of the market and also the capital deployment. And we're seeing a little bit of this already in the broad comms and the qual comms buying up these smaller technology companies. But if we do see a pullback in rates, we think that that brings up some of that spending and capital deployment. Again, just strengthening the trajectory of the market in 24. George, you're not convinced. You don't think a soft landing happens. You might be one of the few at this point. Yeah, look, and

here's the reason why. Because financial conditions do matter, and they've proven to work wonderfully in the last two months. But we've also gone from narratives every two months, right? Every two months, we flip a narrative. The time is due for another narrative. We're starting a new year. If rates were to back up here, a lot of these sort of positive stories kind of get put back on the back burner. And I'm not challenging the medium-term prospects of all these great innovations, but rates do matter. The cost of capital is important. And I think that we are now embedded like a perfect kind of setup. You have to see the Fed deliver what the bond market wants. And if they don't, I think other markets are going to suffer more for it. What about the consumer piece of this, George?

And specifically, what happens after the holidays, after Christmas? How much discounting do we need to be concerned about and perhaps inventories left over and how those get treated? Look, that's a great point. That's why the March cut is so critical. And look, we've been one of the first strategy houses to have that call. And I'm nervous with that call because I think they can get pushed back if we get better data in the first two months. But for it to actually realize like a March cut to really start the actual process of the Fed getting to lower rates, like the data has to get a lot worse from here. So we have NFP when we get back from New Year's Eve, New Year's Day. And so I think it has to get a lot worse from here.

And be careful what you wish for because you don't want the data to get worse to justify the Fed cuts. How does the consumer look to you, Nicole, as you've been holding up all year? Yeah, I think the PCE report today, you know, really strengthened the fact that the consumer inflation for the consumer around needs is truly coming down. It's some of the wants where you're seeing more of the stickiness. So, you know, and to some of these points about, you know, what if the March rate cuts don't happen? I think this is where you do have to be open to the fact that the timing is unknown, but there's still optionality for investing. And so when you think about the broadening or the rally we're experiencing now, there's a lot of high debt companies that have benefited from the narrative of Fed cuts are coming.

But at the same time, we can instead focus on quality. So what was left behind in 2023, where there was actually a taking of the medicine, a shoring up of the balance sheet, and you still have steady and consistent cash flow, those companies are primed to do well and not need rate cuts in March, but instead have a great share price going into the end of the year that we believe could still have earnings per share growth through 24. And so you can look at what the consumer is going through. They don't feel rich, but yet their needs are lowering in expense on a month-to-month basis.

And then you can marry that with quality companies that are positioned well and somewhat left behind in the shadows of AI in 23. All right. Nicole Webb, George Goncalves, thank you. Thank you. And now one part of the market not feeling the cheer today, Chinese video game stocks, names like Tencent and NetEase getting slammed as Beijing takes away gaming privilege. Steve Kovach, I mean, again? Yes. Oh, this is the latest beat in a story that's been going on. So let me talk about what happened just overnight for us. Chinese gaming stocks hit hard after new draft rules in China regulating video games were released.

Tencent losing 12% or more than $43 billion in market cap. NetEase down 24%. Billy Billy down almost 10%. Now, all these companies generate significant percentages of sales from online gaming domestically in China, hence those drops that we saw. New rules that were released, they're part of this broader trackdown by Chinese governments on online games, especially for children. For example, this one would block online games from pushing pricey digital purchases and rewards for signing in every day. Now, Chinese regulators previously proposed rules requiring games to register for government approval before they could be sold and limiting screen time for players under the age of

18 to a couple hours a day, a little more on weekends, sort of like you might do for your kids. Look, it's not impacting U.S. gaming stocks too much. Most of them were in the green today, electronic arts down a hair, as you can see there. But look, these ideas are very similar to children online safety laws being discussed here, especially with social media, like limiting screen time, parental approval for downloading some apps, something meta, in fact, favors. But look, China has been really tough on these online games. Huge time suck for kids. And you might even remember back to the old internet cafe days.

There are some restrictions on them, too. Now that they're online, now that they're mobile, they're really cracking down. And China cracked down on some of the educational services online, too. But it kind of felt to some investors like there was enough macro pain in China that maybe they weren't going to punish the tech sector like this again. And it was safe to get back in the water with Chinese tech stocks. Maybe not. Yeah, exactly.

And we've been seeing, I mean, the poor Chinese economy has, I mean, the consumer is just not bouncing back the way people saw. We see that affect Apple. We see that affect a lot of American consumer companies. But yeah, China, if you think they're going to back away from regulating, here's your signal that they're not. And these are just draft rules saying we might do this. And that was enough to nuke $43 billion in market cap from Tencent today alone. I wonder what it means for Apple.

There have been concerns a couple months ago before the market got excited about everything else that China was limiting sales of or at least limiting the use of iPhones in government and government connected workplaces. And we've got the new mixed reality headset from Apple coming out early next year at some point. Maybe within like six or seven weeks. Yeah. But maybe the expectations for China sales there aren't too big or for anywhere anywhere, I guess. Right. Well, for anywhere, they're not. And first of all, that's only going to be sold in the U.S. We have no idea when Apple plans to expand beyond the U.S. It's going to be U.S. only, Apple Store only. But that is a gaming device.

That's a huge part of what's going to be part of the Vision Pro. Also, what Meta has offered with the Quest 3, gaming is at the core of a lot of these experiences. So, yes, as Apple wants to expand that Vision Pro, they have to pay attention to these gaming regulations as well. I don't think too many kids are going to buy a $3,500 Vision Pro quite yet. Just the rich ones. Just the rich ones. Okay. Thank you.

I mean, it's just three iPhones. Yeah, exactly. After all. After the break, a closer look at Nike feeling the burn today and the one athletic wear brand that's managed to win big over the last two years. Plus, longtime retail analyst Dana Telsey on what Nike's results mean for the rest of the space in these last few days of holiday shopping. Overtime's back in two. Welcome back. Nike getting wrecked today, dragging down the rest of the Dow after last night's less than stellar earnings report. Mike Santoli's back to look at how the company has performed compared to the competition. Mike?

Yeah, John, it certainly depends on how we define the competition. Not been a good run over the last couple of years for Nike, sort of losing its status as this reliable consumer growth story. But if you take a look at it compared to the apparel and accessories and luxury goods subsector of the S&P 500, it hasn't actually done all that terribly. Now, technically, Nike's not in that sub-industry because it's basically the entire footwear sector of the S&P, but it moves along with those stocks typically and also overlaps with their businesses a fair amount. So it's not been the easiest backdrop for a company like Nike. However, of course, you have the younger, faster-growing, secular expansion story of Lululemon, which has really obviously taken flight and has kind of consumed a lot of that sort of one-time kind of halo effect

that Nike had in this general category. Now, should we worry about the way the overall consumer is performing right here? I'd say the market isn't telling us that just yet. If you look at the equal way to consumer discretionary sector relative to staples, this is often a pretty good macro gauge that people watch over two years exactly in line. But of course, it's been the story of two very different years. And what's most significant here is the uptrend in discretionary and the relative downtrend in staples. It shows you there's a little more of a cyclical risk on feel in the markets right now, even though we might be getting, you know, some tired signals from from the consumer. So so far, this is not

causing us to worry. Of course, services, travel, things like that, home building are a big part of the strength in the broader discretionary sector. Hey, Mike, how much do we have to factor in the fact that on top of Nike already being a juggernaut in the space, it was always kind of a it was also sort of a covid stop. It had this huge run up. You know, people are home buying lots of stuff, including apparently shoes and whatnot. And then when China didn't recover the way that many expected, it also had a big market there. For sure. And the valuation was inflated by all those effects. This idea that, first of all, athletic goods in general, sporting goods, did incredibly well during the pandemic. The fact that Nike was able, almost alone in its industry, to really go direct to consumer in a big way and make that a success,

was also kind of a pandemic favorite for that reason. And once you got past that and China, as you say, didn't come back and you couldn't give the company a pass on that, you've had that valuation compression. All right. Mike, thanks. See you in a bit. And joining me now here on set to talk about Nike and the consumer is Telsey Advisory Group CEO Dana Telsey. Dana, thanks for being here. Thank you for having me. So Nike's, as bad as it is, it's just given up its December gains and still way up since late September. So how bad is it?

I think overall one of the messages that Nike delivered on the call last night that kept going over and over, more innovation. That they need more innovation in their product. And when you think about what we just did a couple days ago, we put out our 2024 outlook, and we said the road for 2024 is about innovation and value. What we're seeing out there, besides the headwinds of the macro of a weak wholesale, China uncertainty, what's happening with the consumer with rate increases,

if you don't have newness and differentiation, you're not going to win the consumer in a big way. And I think that still needs potentially, given the amount of time that Nike spent discussing it on the call, that's an opportunity for them down the road. What does innovation really mean for Nike, though? Especially in an Olympics year, right? I don't like my kids.

Oh, this Nike shoe is really innovative. It's faster than the... That's not what you hear. But it's still year, right? I don't like my kids, oh, this Nike shoe's really innovative. It's faster than the, and that's not what you hear. But it's still cool, right? I just don't know if the consumer is going to be spending on Nike-type stuff in the year. Maybe with the Olympics, they will.

Couple things. When I think about what innovation means, what's the new fabric? What's the new bell and whistle? What are the loyalty members doing? What are you doing to excite the loyalty members and bring them into your brand? What are the new category extensions that are are you doing to excite the loyalty members and bring them into your brand? What are the new category extensions that are out there?

Because one of the things we've certainly seen with activewear, whether it's on running, whether it's Hoka, whether it's Lululemon, whether it's Aloe, whether it's even Skims for some activewear components of it. There is a broader breadth of what activewear is. So you need to earn your way every single day. What's driving the Nike brand now? Actually, apparel looked like it did pretty well growth-wise compared to shoes. Shoes, you're not so much talking about fabrics. And I don't know if basketball shoes are still the driving force like they were 10, 20, 30 years ago. I think they have a portfolio of brands that do well. Look at what they said about Black Friday weekend, that sales were up around 10%. It's the in-between times that they certainly need more to resonate or need more exciting marketing and some showcasing of the

product. And I think there's more they're going to do with that. But I think the ability to capture that consumer, not just in seasonal times, but non-seasonal times, is the work in progress for Nike. Is the consumer okay? I'm not necessarily just looking at Nike, looking at Lululemon, looking at TJX, and I'm sort of worried about what happens when this gas price drop that has put more money in the consumer's pocket gets anniversaried and it's not so much of a benefit anymore. So I think it's easier to project now what profit growth is than sales growth. There's a lot of uncertainty now. And I think it goes beyond just the lower and middle income.

But look at luxury. All of the luxury consumers' spend has moderated. When you think about the growth rate of services versus the growth rate of goods, services is still greater. We're hearing about we have a big travel weekend ahead of us that people are participating in. That's a headwind. And I think even for the next couple months,

because these rate increases are first going to take effect, even with Jay Powell talking about rates coming down in 2024, we still have to get from here to there. And the market looks to the future, and I think that's why you've had consumer discretionary stocks ripping over the past week or so. What can you tell me about how discounting and inventories look at this stage in the shopping season? We're just about at the end. Right. I guess we'll see what the after Christmas sales look like. But but have retailers discounted a lot

too much? Are there inventories perhaps sitting in warehouses? I think inventories are very lean. Nike yesterday said inventory was down around 14%. Inventories are clean. Promotions are not out of whack. 30% to 40% off. Back in the day when there was a lot of promotions, you would see 50%, 60%, and 70% off. And you're going to come out clean. And I think the other thing you're going to see, companies transition to new seasons product faster than they have before in order to gain

full price sell through. So inventory is not high. If you're buying into the retail sector, maybe not the sector as a whole, a portion of it, which portion should you buy into now? You want off price, you're going to get benefit from the trade down and you're also going to benefit from better brands in there. I think you could buy some of the distinctive brands out there. Some of them that haven't run like a Bath and Body Works or European Wax. I think are going to be interesting, too. All right. And Birkenstock, I see. Yes. Which recently IPO not off price at all. Not off price.

How many pairs do you own? Zero. But my wife has a couple. She's got one for each of us. And take a look at the collaborations that they're doing. Take a look at how more usage occasions. Birkenstock's interesting. All right. Dana, thanks. And at full price.

Thank you. Happy holidays. Now, after the break, banks borrowed a record amount from the Fed's funding program in the most recent week, but it probably isn't a sign of strain in the financial system. We'll explain what drove the billions in borrowing next. Welcome back to Overtime. Banks drew more than $130 billion from the Fed's bank term funding program in the most recent week. Leslie Pickers with us.

Leslie, why isn't the record amount of borrowing necessarily a sign of stress? Yeah, John, it sounds scary in theory, banks tapping a record amount from a program set up to stem bank run concerns during the spring volatility. But this is not a sign of stress. It's actually an arbitrage play by the banks, thanks to the recent decline in interest rates. Here's how it works. The Bank Term Funding Program, or BTFP, allows banks to borrow from the facility by pledging treasuries as collateral valued at par. The Fed's credit costs 10 basis points over the one-year overnight index swap rate.

Currently, that's 4.88%, according to Bloomberg data, as the market is pricing in rate cuts for 2024. Now banks have been borrowing from the Fed at just under 5%, then parking that cash back at the Fed in their accounts there, which are earning 5.4%. That's notching a more than 40 basis point spread, essentially for free. Free money is nice, of course, but it usually doesn't last long. When the Fed initially launched the BTFP, it said the facility would be in place for a year, spread essentially for free. Free money is nice, of course, but it usually doesn't last long. When the Fed initially launched the BTFP, it said the facility would be in place for a year. That would indicate an end to the program in March. And given there hasn't been much in the way of bank stress since May, famous last words, but that's kind of the case that everybody's running with, many are saying it's unlikely that the program continues. Additionally,

the market environment just so happens to be perfect for the pseudo-arbitrage trade, thanks to the recent movement in the yield curve. But that could change, making the BTFP actually a more expensive spot to borrow from. John? Listen, when I saw this, my first thought was to wonder, is this helping to shore up the regional banks and their balance sheets, mitigate risks? If they can sort of make this easy money, is the Fed helping them fix things up in case things like commercial real estate cause problems down the line?

It wasn't so much to fix the commercial real estate problems. Those are pretty much embedded in their balance sheets at this point in time. What it does, though, is it gives them a different source of funding. So if they are, as was the case in March, at a whole host of different banks, if they were seeing some sort of flight of deposits, people yanking their money out of specific banks, this was a way that they could shore up their own balance sheets on that side in order to make sure that the bank doesn't go under as a result of people pulling their money out and then be underwater on some other items such as commercial real estate on their balance sheet. Yeah, I guess I'm just wondering about those overall risks that could make people feel concerned about the smaller banks and could lead to that sort of, I don't want

to say a bank run. It's like Candyman. If you say it too many times, you're afraid it could happen out of nowhere. But as we think about what could potentially go wrong in 2024, you wonder if the Fed has tools to help banks with any of it. Yeah, it's a good question. And I think that's something the Fed's going to have to kind of grapple with when they decide whether or not to continue this program beyond March, because a lot of the issues that we saw in March haven't really changed. For example, you mentioned CRE still underwater in

a lot of pockets, especially among regional and community banks where they are prolific lenders to commercial real estate entities in their specific regions. And rates, while they are going down, they're still relatively high. So the one thing that kind of sparked concern and contagion, you know, it was contained contagion back in March, was social media. And a lot of the, you know, the Fed reports, the FDIC reports, they all went into this idea that it was unprecedented to see kind of this bank run that was triggered by social media. There aren't really any guardrails. And, John, you know this space well in the tech world that would prevent something like that from happening again, from stoking panic and creating a bank run based on, you know, whatever factor it is that people start to pay attention to. So all of that said, yes, there's always the potential for something to go haywire in the regional banking community.

But at least at this point in time, banks are using this facility more for this arbitrage than as a need to fill some kind of void on their balance sheet. Yeah, bank scares and social media. It's like hand, foot, and mouth running through a preschool. Oh, we've been there. We have. Leslie, thanks. Time now for a CNBC News update with Kate Rooney. Kate. Hi, John. The Supreme Court is steering clear of a political firestorm for now.

The high court today declined to immediately take the case over former President Trump's claim he has broad immunity for his actions challenging the 2020 election. The case will now proceed through the normal appeals process. The National Defense Authorization Act is now a law. The White House announced President Biden signed that bill today. It authorizes $886 billion in annual defense spending. And as Apple tries to catch its rivals developing artificial intelligence, the New York Times reports that the tech giant is negotiating with news organizations and publishers

to use their material to help develop its AI models. According to the New York Times, Apple has offered multi-year deals worth at least $50 million. John, back over to you. Okay, thanks. Speaking of artificial intelligence, we have a news alert on OpenAI. Steve Kovach is back with the details. Steve. Hey, John. Yeah, OpenAI might be a hundred billion dollar company. Bloomberg reporting that is going through another round of fundraising seeking to value the company at a hundred billion dollars. Put that in perspective. Micron, the chip company worth about about $95 billion on the public market. So private valuation of $100 billion, that's on top of a tender offer we're expecting to go on sale here in January that

would value the company at $86 billion. So this would be an extension of that, a higher valuation beyond that. But look, we're seeing these AI company valuations just go nuts. Anthropic earlier, we got that report earlier in the week that it's a $15 billion company and a new fundraising round that it's chasing after. So sky high valuations for these private AI companies, John. Wow. Do I want to tender my shares at 85, 86? I was just thinking the same thing. Yeah, exactly. Hey, all right. Well, it's a good problem to have, Steve Kovach. Thank you. One that we don't have. After the break, does cash on the sidelines equate to more energy for the rally? Well, not necessarily, says Mike Santoli. He'll explain next.

Welcome back to Overtime. Terms like cash, hordes, and dry powder get thrown around to support the bullish narrative on Wall Street. But is cash on the sidelines really the best measure of the rally's running room, Mike Santoli? Yeah, I would argue not, John. I mean, look, obviously it takes cash to drive a bull market. But this idea that there is just this big store of idle cash and money market funds that's somehow going to be unleashed into stocks, and that in itself is the reason to be positive, it just doesn't hold up. Now, here's one way of suggesting that.

This is from Bank of America, and it measures the asset allocations over time of their private clients. So it's not every investor, but it's a very, very wide sample of relatively well-off investors. And what you see is on the bottom here is the percentage of their portfolios that are in cash. You actually see it's right around the 18-year average. It did go up, obviously, a bit during the pandemic, and it's come right down. Now, part of that is because stocks are up and people own stocks, and therefore cash goes down as a proportion.

But you see the equity allocation is still modestly above that longer term average. It's well off the highs. There's room for it to go up without becoming extreme. And then debt, interestingly enough, fixed income is where they remain a little bit under the longer term average. So, yes, you know, cash can be be equitized, as they say. But then if you buy your stocks with cash, that seller has cash. It's really hard to track. And I think we over fixate on the six trillion dollars in money market assets. That's a huge, absolute number. We're not realizing that less than half of that is in retail hands. A lot of it is just replacing bank savings as opposed to being put into stock.

So I think there's other reasons to be upbeat on the market than saying that somehow cash is just going to flow in. So do we have to rewind to when you were talking earlier in the week about sentiment toward equities to have more of a sense of whether there's running room? To some degree, yeah. I mean, I think the longer term equity exposure show you this is not an under-owned or hated bull market, if that's what we're in right now. But there's there's room for it to go. Look, the market goes up basically three quarters of all calendar years since the 1950s. So you start a year feeling like there's probably a way for it to make its way positive if all goes OK. But I don't think that you have

to isolate these flows. I think in general, we who talk about investments, we overemphasize the flows that we can identify or the pots of money that we can actually measure against those that are just kind of out there and we can't get our arms around them, just like billionaires deciding where to put the next hundred million dollars. I mean, we just don't know where that goes. I mean, not you, Mike, but the rest of us do that. Well, I try to work against the instinct. You work hard at it.

Mike Santoli, Sandra. Turning now to energy and something the industry has been waiting for, guidance on where funding from the Inflation Reduction Act could head as it relates to hydrogen producers. Pippa Stevens joins us with the details. Pippa. Hey, John. Well, this guidance is a long time coming with Treasury today calling for strict emission standards when it comes to the electricity used in hydrogen production. In order to get the game-changing three dollar per kilogram credit, producers need to satisfy

three things. They need to use clean power newly added to the grid. It has to be in the same region as the hydrogen facility itself and it has to be matched to production first on an annual basis and then an hourly basis starting in 2028. Some industry players say the measures are prohibitive. Plug Power's CEO says the framework falls woefully short, while NextEra said they're disappointed and the guidelines will drive up project costs and slow build-out. On the flip side, producer Air Products is one of the companies in favor of a strict approach, saying they applaud the administration and these standards are essential. There's now a 60-day comment period where we will no doubt hear a lot more from various stakeholders. John, back to you. All right, Pippa, thanks. Up next, the CEO of HashiCorp on whether 2024 could bring a rebound in demand for enterprise software.

We'll be right back. NASDAQ is up 5% in December alone, but under the surface, not every tech company is rallying. Enterprise software names like Box and Oracle have lagged on slowing demand. And stocks that fell behind earlier in the year, like PagerDuty and HashiCorp, also lagged a bit. But what might 2024 have in store? Let's bring in HashiCorp CEO David McJanet. Dave, so much focus now on data and hybrid as a path to AI. How are you experiencing that?

Hey, John, good to see you. Thanks for having me. Yeah, I think, you know, it's certainly the, I just listened to your prior segment about the open AI and the continued focus on their fundraising. It's kind of amazing to watch just how much energy is going into the AI space. And I think that's good in general for enterprise software in the longer arc. I think if I reflect back, the kind of the 3,000 or 4,000 largest companies in the world have been going through an optimization cycle in the world of enterprise software over the last year and a half or so.

And tech like AI certainly gives some glimmer of optimism that they will get back to building that new applications. So we talk a lot lately about this big run toward the end of the year, a bunch of tech stocks. I think you've been public for about two years now, and you came public at a time when the hype was strong. There's a lot of potential from here, it seems, but how are we going to see it? What's going to turn on the demand spigot for the sorts of multi-cloud, hybrid cloud services that you've been offering? So, again, I kind of go back to the overall enterprise software market is disproportionately impacted by, like you said, the 3,000 or 4,000 largest companies in the world who are the largest spenders

on software. And I think, as I said, the 3,000 or 4,000 largest companies in the world who are the largest spenders on software. And I think, as I said, they've been going through this optimization cycle. But at the end of the day, they have to build net new applications to support their business. And the truth is, net new applications by and large are being built on the cloud providers, Amazon, Azure, Google, etc. Certainly, they're sort of the run-of-the-mill applications that they all have to build to satisfy their businesses. But then there's also this big push for AI-oriented applications. And again, AI applications run on cloud infrastructure by and large. So, you know, you certainly see that in the talk track from the cloud providers. You know,

they're positioning themselves to be beneficiaries of AI workloads because they know that too. So, I think, you know, the general purpose recovery and consumption for those customers of general applications coupled with the AI-oriented applications is sort of, I think, what people are pointing to. I think it was interesting to see that the cloud providers called a slight improvement in the consumption optimization cycle that was going on last quarter. So, you know, who knows? It's hard for us to predict. We. So, you know, who knows? It's hard for us to predict. We focus on, you know, one quarter at a time. But, you know, this longer arc of

applications being built isn't going to change. What about a roll-up? How much M&A do you expect in 24? It's interesting. There hasn't really been much. And I saw some of your segments earlier that there's a lot of the fact there really hasn't been much. It's true. I think that the enterprise software market largely is focused on finding its footing. If you think back, there was a big investment period, kind of 2021, 22, maybe 2020 to 2022 in terms of investment by enterprise software companies in anticipation of a demand environment. That didn't really happen the way it was forecast. So I think what you've just seen over the last little bit is a rationalization

of people sort of getting their cost structures under control. And I think that's really where the focus is being. Who knows what next year holds? I think we're certainly optimistic that the longer our trends of cloud infrastructure and automation aren't going anywhere. And so we feel super good about our business. But it's hard to speculate. I certainly think we sort of take long-term time horizons on business building and you try to think about any one year in particular. You expect a big reaction to however this holiday season

wraps up? Yeah, it's hard to know. I think I go back to the consumption patterns that the cloud providers were indicating a couple of quarters ago, certainly over the last 60 days getting better. And, you know, I think, you know, enterprise software is a very cyclical thing and certainly impacted by sentiments among the 3,000 or 4,000 largest companies in the world. So, you know, who knows? Who knows? I think, you know, we're certainly pleased with how we executed in Q3. I think, as we indicated, we'd seen slightly smaller deal sizes than we had maybe in previous quarters and years, just given the macro cost-constrained environment that most of those companies are

experiencing. But, you know, I think it's largely dependent on how they feel about their businesses over the next 12 months. And I think that is the ultimate limiter. And so, you know, to the largest extent, probably more than any other market, the enterprise software market is really tied to macro sentiment. And I think we're all watching to see what happens over the next 12 months. Exactly. Exactly. David McJanet, CEO of HashiCorp.

Thanks for joining us. Thanks for having me. Shares of Karuna Therapeutics soaring after announcing it is being acquired by Bristol-Myers for $14 billion. Up next, we'll discuss whether that could lead to pharma M&A mania in the new year when Overtime returns. Welcome back to Overtime. Shares of Karuna Therapeutics up 47% after Bristol-Myers Squibb agreed to buy the neuroscience drug maker for $14 billion. This deal would expand Bristol's position in the fast-growing market to treat psychiatric and neurological conditions. Karuna's experimental drug for schizophrenia is now under FDA review. If approved, analysts think it could

generate more than $6 billion in annual sales. Let's bring in Angelica Peebles. So could this deal spark even more pharma M&A? Look, we've already seen a lot of M&A this year. This has been, even before today, the best year for deals over a billion dollars since 2019. And so it's been an active year and we're expecting that to continue just because biopharma companies have such a big patent cliff later this decade. They're expected to lose about $160 billion of revenue. So there will continue to be deals. However, there's already been so much this year, we might see a little bit of a slowdown, but we'll just have to see exactly how that pace looks. Now, the general rule out there is that most M&A doesn't work.

I don't know if that's true in pharma or not, but I look at the stocks of some of these acquirers, they look pretty bad. The acquired looks good on the day when the announcement comes out, but what are the chances that this spate of M&A doesn't lead to much good for investors? So it's interesting because, like you said, normally we do see the stocks of the acquirers going down. But today, Bristol-Myers Squibb shares were up about 2%. And I thought that was interesting.

And I think it just speaks to the fact that investors here want to see companies like Bristol going out there and acquiring really interesting assets. And so Caruna has been at the top of everyone's wish list. They have this drug, like you said, for schizophrenia that's under review with the FDA. And people have seen this as a really interesting company, a promising drug. And I think it just speaks to the fact that investors want to see pharma companies go out there and get these really promising drugs. Yeah, I was more looking at the one-year chart of Bristol.

Not so much just today. Today is one thing. Angelica, thanks. Thank you. We'll see if this turns it around. Up next, a top real estate investor reveals where he sees the biggest opportunities in 2024 and how potential Fed rate cuts could impact his industry. We'll be right back.

Welcome back to Overtime. Commercial real estate investment volume fell more than 50% in Q3 year over year. That's according to research firm CBRE. But as the Fed signals interest rate cuts in the year ahead, what are the biggest opportunities for real estate investors? Joining us now is Bill Shopoff, president and CEO of Shopoff Realty Investments. The firm's $2 billion portfolio includes residential, office, and hospitality assets. Bill, how are you going to make money in 2024? Well, that's a great start. We actually had a great 23 in spite of all the headwinds. So we're well poised for 24.

I think it's going to be a combination of things. Buying some of the distressed retail centers out there, continuing our foray into the industrial development space. And then also, we've got a great workforce housing, single family belt to rent products. So we've got a good array of products to get us well positioned for 24. What's the next group that's going to have to sell, right? Because even though demand is sort of uncertain, there's not a lot of inventory, particularly in residential. And then just in a lot of places, I think there's less inventory available than some might have expected. Well, look, in 2023, because of the turbulence in the market, you had a huge disconnect between sellers and buyers. And I think you're going to see that

come together, both from people lowering their expectations as a seller, and then with interest rates dropping. We've had a drop in the 10-year from just under 5 to about 390 today. That's going to really help close that gap between seller expectations and buyer desire. And so I think you're going to see transaction volume move up in the coming year. What kind of change in dynamic are we going to see between, say, access to capital from lenders on one side and then availability of labor to do rehab and renovation on the other? Well, I think actually the labor markets are going to now be in the best supply balance

that they've been in since pre-COVID. We've talked to a number of our contractors and their subs, and we see a little bit of softening on the pressure they've had to bear on us. So we think that construction costs will stay well within line of inflation expectations. And so that'll make it easier to pencil projects as we move into the new year. So does that mean that the experienced parties who have the access to capital or even who have cash to get these things done and the relationships with labor, with the contractors, are going to have a running start? Oh, I think definitely. And I think this is going to be a market of haves and have-nots. When we're in this low interest rate environment, there were a lot of newcomers to the business, and they could get capital just as easily as I could. But I think

you're going to now find that this is a market of long-term sponsorship and companies with a depth of balance sheet to be able to get projects done. And so good projects with good sponsorship will get done in 24, but it still will be nowhere in the market that we had a couple of years ago, and probably appropriately so. We'll keep supply and demand in balance, and it'll be good. Okay. Geographically, what region are you most excited about? Well, we're focused, because we're based here in Southern California, we spend a lot of our time here in the Western U.S. So, we're here, we're in the Phoenix metro market and in the Las Vegas markets. And we like those markets. There's plenty of activity for us to stay close

to home. What happens with multifamily? I think multifamily continues to have activity, but I think we see some pressure on NOI. Operating expenses have continued to grow. Insurance has been a real pressure point on the multifamily space. And rents are certainly flattening out. Not going to see the rent growth in 24. All right. Bill, thanks for joining us. Bill Shopoff.

Thanks, John. Appreciate you having me. And it's been a day when the Dow was the lone loser among the major averages, but a string of winning weeks for the major averages. That'll do it for overtime. Fast Money starts now.