Closing Bell - Closing Bell: Stocks Soar, Tech Sell Off Blame Game and Game On For M&A? 5/23/22

Episode Date: May 23, 2022

Stocks staging a big rally on Wall Street as investors go bargain shopping following an 8-week losing streak. Fundstrat’s Tom Lee weighs in on today's rally and whether the market may have more room to run higher. Bank of America’s Jill Carey-Hall explains why recession risks may already be priced into small cap stocks. Tusk Ventures CEO Bradley Tusk explains why he blames venture capital firms for the terrible year tech stocks have had. And Take-Two Interactive completing its acquisition of Zynga today. CEO Strauss Zelnick discusses whether more M&A is looming in the video game industry.

Stocks broadly higher to kick off a new trading week with the Dow up more than 600 points as we head toward the close. The most important hour of trading starts right now. Welcome to The Closing Bell. I'm Melissa Lee. In today for Sarah Eisen, who is on assignment in Davos. Let's take a check on where we stand in the markets. The Dow Jones Industrial Average surging higher, up by 2%, helped by J.P. Morgan, Goldman Sachs. Walmart really called the J.P. Morgan Jamie Dimon rally. We'll get more on that in just

a few minutes. Check out the S&P sector winners today, though, as I mentioned, led by Strength and Banks, following optimistic comments from Jamie Dimon at the Investor Day. Energy not too far behind, even though WTI is fairly flat on the session. It's up by two and three quarters percent. Staples getting a bid to up two percent. Coming up on today's show, can you trust this market bounce back? We'll ask Fundstrat's Tom Lee if he thinks the bottom is behind us or if there is more pain to come. Plus, video game stocks have held up relatively well during the latest bout of selling. We'll talk to the CEO of Take-Two about the closing of its deal to buy Zynga and about fresh M&A speculation in the space. We begin this hour, though, with the banks. Jamie Dimon wrapping up

remarks of the J.P. Morgan Investor Day, where earlier comments helped spawn this rally we are seeing in the financials. Leslie Picker is there on the ground at the conference with the very latest. Leslie. Hey, Melissa, that's right. Chairman and CEO Jamie Dimon just wrapping up J.P. Morgan's Investor Day with the Q&A portion of the event, he shared an analogy that economic risks like war in Ukraine and QT are akin to storm clouds. There are storm clouds and we hope they mitigate. The things that we are seeing are as serious as you may see in your lifetime. They may mitigate as opposed to it's a tsunami which is not going to mitigate that was what happened in 08

analysts say that diamond must not see an imminent risk of recession or else the firm wouldn't have lifted net interest income guidance that's the key to today's stock moves not just to jp morgan but also its rate sensitive peers like cityibank of America and Wells Fargo. J.P. Morgan said that NII will surpass 56 billion dollars this year, up from prior forecasts. A tailwind for that important profitability metric is higher rates. So when asked about inflation, Diamond stressed that the Fed has to raise rates and do quantitative tightening, although he said he's not sure how they're going to do it. He just says it's something that needs to be done. There were also several questions about expenses

and spending the firm reiterating intentions to spend $77 billion this year. Diamond said he spent the whole day outlining where those expenditures are going, including the importance of technology and cyber. J.P. Morgan shares up seven and a quarter percent right now. Quite a turnaround considering the decline that they saw in January when they last talked to investors, Leslie. I'm wondering what they're saying about the consumer. We heard the CEO, Wells Fargo, just last week talk about the deterioration of the consumer's ability to pay. J.P. Morgan sounds a little bit more optimistic about how the consumer

will fare. Yes, much more optimistic. You heard Diamond this morning talk about the strength of the consumer, the strength of the economy, largely thanks to quantitative easing, to monetary easing, to fiscal policy as well. So he said that should be that should bode well if we do go into a recession. He also talked about the credit quality and said that a be that should bode well if we do go into a recession. He also talked about the credit quality and said that a lot of their businesses are really, really focused on prime consumers. And therefore, he's not that worried about the potential stresses in the economy and what that would mean for their risk exposure. All right, Leslie, thank you. Leslie Picker at the J.P. Morgan Investor Day. Strong performance of the banks helping lift the entire market today.

Stocks bouncing across the board after the Dow logged its eighth straight week of losses. Is this the start of a sustained comeback? Let's bring in Tom Lee, managing partner at Fundstrat Global Advisors. Tom, is this rally convincing to you? You know, I would say for anyone who's an an investor there's a lot of bargains out there i mean there's so many stocks that have been obliterated in the last eight weeks uh we've been highlighting how companies with faster revenue growth now traded a discount to companies that actually have negative revenue growth so there's been more of a investors getting out of

positions not really looking at price and so i think a lot of stocks are pretty attractive risk reward. I like how you qualify that if you're an investor, meaning that's a longer term horizon. In the near term, Tom, I'm wondering how you think the markets start digesting this idea of a potential recession. And now creeping to the conversation, there's a talk of stagflation out there. Whether or not you think it's true, and I believe that you're in the boat if you think that it's not true, it's out there and it's a concern. So how does the market process that? We've seen what's happened in the past seven weeks for the Dow and the past eight weeks for the S&P and NASDAQ. Yes.

I mean, you know, it's clear that the central case for investors is the Fed's going to tighten until they achieve what they want, which is, you know, engineering a soft landing. But really what they'd like to see is a demand destruction by either jobs falling or, you know, GDP contracting. And I think the thing that is not really priced and very difficult to price is a lot of things could go right. I mean, something as simple as labor market could start to ease because you get rebounders, people coming back to the workforce or the job market weakens. Or we could have a real decline in goods prices now that we've seen it from these retailers. They have too much inventory. That's actually deflationary. You know, supply chains could come back online better than expected and possibly the war could end. I mean, so I think if you think the cumulative probability of many of these things is much greater than the market's discounting,

that means stocks and the Fed could actually be much further along than people realize. You've been taking a look at the data, Tom, data from Indeed, for instance, and I'm wondering what you see and how you interpret that. There's been some pullback in hiring in certain sectors, which would seem to me like on the surface, that's bad news. But that's actually what the Fed wants to happen. Yeah, I actually think the job market's really important to watch. And I think the market and investors and your audience has to be aware the Fed really has to work with some lag data. The JOLTS report that they cite from their May FOMC meeting was with data from March 31. It's always six weeks lagged. And that's why our team's been

looking at the Indeed data, which is actually updated daily. There's four industries that have accounted for the majority of the rise in job postings. That's retail, leisure, healthcare, and then construction. And as we highlight in our note, if you look at the data since March 31, all four have actually seen a pretty big downturn. In healthcare, it's not because people aren't going to see the doctor. It's just that the staffing required for COVID has drastically declined. So I think the job market could be a lot softer than the Fed has in mind when they say that the JOLTS data shows it's the tightest job market in history. I mean, everything since March 31 shows it's weakened a lot. Why doesn't that give you pause for concern,

Tom, if the job market is softer than we think? I mean, the whole bull, you know, one major pillar of the bull case is that the consumer remains strong, that wages remain strong, the consumer can handle inflationary spikes and periods of inflation because they have better jobs, etc. But if we are seeing softness in the job market that perhaps the official data isn't showing, then shouldn't we really be worried? It seems to beg for some sort of adjustment in the market. Well, it's a good question. It's like, is it a heads I win, tails I lose or whatever? I think it's what the market's going to care about is monetary policy, because this is really the first time the Fed's using the channel of wealth effect to try to slow

the economy, not through tightening credit as much as trying to really hit demand. If the job market weakens, that's going to alleviate the biggest pressure point, which, as Powell said many times, is the tightest job market in history. So I think if that pressure valve eases, it starts to take a lot of pressure, especially from the market's perspective about what the Fed has to do. And that's why I think stocks could actually rally pretty substantially. Again, there's many paths for positive outcomes. And I think the central case of this is a tightening until we have a crash, you know, even Jamie Dimon's comments today really address the fact that maybe the market central case is too hawkish. All right, Tom, we'll see.

We'll leave it there. Thank you, Tom Lee, Fundstrat. Always good to see you. After this break, here's a take two. Handily outperforming the S&P 500 this month. And today the company is closing its deal to buy rival Zynga. We'll talk to CEO Strauss Zelnick

about the merger and the latest speculation in the video game space next. You're watching Closing Bell on CNBC. Shares of Take-Two up more than 6 percent. The video game giant behind Grand Theft Auto and NBA 2K completing its $12.7 billion acquisition of Zynga today. The deal was first announced back in January. Joining us now in an exclusive interview, Take-Two Interactive CEO and Chairman Strauss Zelnick. Strauss, great to see you. Thanks for having me. Nice to be here. Interesting day to think about how the industry is shaping up, Strauss. You're closing your deal with Zynga. You're pure play gaming. We've got Microsoft and Activision on another side and EA potentially looking for a

buyer, potentially a non-game players like a Comcast, like an Apple, et cetera. How do you think about that world in which you fit where your pure play and your competitors potentially are teaming up with bigger tech companies? Well, look, at the end of the day, our job collectively is and individually is to make hits. And we have sufficient resources, to say the least now, to deliver hits, not just across console and PC, but also, of course, in the mobile market as well. Mobile will now represent 50% of our net bookings. EA is a tough competitor, a great company run by a great executive. Activision is the number one pure play company in the space.

We don't take competition for granted or lightly at all. However, there's nothing about those companies being part of larger enterprises, and that, assuming, of course, the speculation about EA is correct, and I'm not at all certain that it is, that would interfere with our ability to create it. Do you think it gives them an advantage at all in terms of platform or distribution, getting at gamers in different ways?

I wouldn't want to underestimate those companies. I don't underestimate anyone. It's a tough market. That said, what drives distribution is the quality of what you do. And we're really proud of the quality of our products, the products that we have historically had and built here at Take-Two and the new hits that are coming to us now with the combination with Zynga. So if we do our job right, if we continue to aim to be the most creative the most innovative and the most efficient entertainment company in the world

distribution will take care of itself i want to talk about competition in terms of other releases to your games there are some concern out of your your last earnings release which was just last week hard to believe that gta online nba 2K were facing some competition. Can you give us some color as to how long those headwinds will last? Some of that competition is just high-profile releases from competitors. Some of that is some very successful releases of your own in your own portfolio. I think you're referring to our current consumer spending, which in the fourth quarter of the last fiscal year moderated a bid for Grand Theft Auto Online and NBA 2K. These are huge, massive franchises.

Grand Theft Auto Online has been in market since 2013 and has better engagement than many years in the past. NBA 2K22 is one of the best titles ever created in our basketball franchise, and the results are massive. We've sold 165 million units of Grand Theft Auto V and over 10 million units of NBA 2K22. So this is a great news story, not even a good news story. And at the same time, yes, it's a competitive marketplace, and sometimes we'll see a bit of decline in engagement. these are highly resilient growth titles we feel really good about the future sports of course is a very important

part of your franchise straus and i'm wondering if you're interested in fifa in a fifa partnership uh well the news was not lost on us um and uh we're not in the stock for business yet. Okay. Not yet. You leave that open though, it sounds like. All right. No comment there. Let me ask you about GameStop, which is a partner of a different sort. They're announcing a crypto wallet for crypto as well as nfts i'm wondering if you think that that's something that you would look into the use of crypto and nfts within the gaming platform well we haven't done anything yet with nfts um we we sell digital goods and our consumers love them and nft is simply a durable digital good where it's guaranteed to be singular or rare and so i think that's pretty exciting i think at the same time we want to make sure that we're not asking our consumers to speculate and there is this overhang

of speculation in all things crypto and all things nft So do I believe there's a durable opportunity for non-fungible tokens going forward within the interactive entertainment business? I do. I want to make sure that it's in service of a great entertainment experience and it's also in service of treating our consumers fairly. All right, Strauss, we're going to leave it there.

It's always great to speak with you. Thank you. Thank you for having me. Strauss Zelnick of Take Two. Let's get a check in the markets here where we continue our rally here with the Dow higher by 1.9 percent. That's 600 points on the Dow. S&P up by 1.7 percent. NASDAQ composite up by 1.3 percent. Up next, Mike Santoli breaks down the latest CEO confidence data and what they could foretell about a possible recession in America. And as we head to break, check out some of today's top search tickers on CNBC.com. The 10-year yield getting the most interest, followed by Tesla, Apple, Amazon, and the S&P 500.

We'll be right back. Stocks are rebounding today with all major averages trading in the green after the Dow's longest streak of weekly losses since 1923. But the macro climate and market swings are translating into plunging CEO sentiment. Mike Santoli has got a closer look in today's dashboard. Mike. Yeah, Melissa, plunging CEO sentiment from stock prices going down, or at least for the same issues that is driving stock prices down. And to me, it's a much more rapid and direct impact of declining share prices relative to the wealth effect on spending. And what you see here is a very interesting level that we've reached in CEO confidence. I want to just draw this across here. And you'll see it's about as low as it gets without being on the verge of a recessionary level. The shaded areas are recessions,

right? So we plunge below that here. You actually have the 2000 recession, obviously 2008. But you did reach this level a couple of times, like in 98 and 2011. What happened then? Near-miss recessions, 20% declines in the stock market, but not quite at a closing level, same as we have right now. So it seems as if we're on that kind of same mode as we are with credit spreads, yield curve, all these indicators that say, yes,

things are late cycle, things are slowing, but not clearly just yet in recessionary terms. One final point, Melissa. This right here was off the chart previously, right? So you had this massive surge in CEO confidence coming out of the recession with all the stimulus. So it's unclear if we're operating on the same scale as we were historically. Presumably, CEOs don't feel good, Mike, and they won't spend. They're not going to be investing in their business. Or can we not make

that, you know? I think you can make that leap. I mean, I think arguably it means a little more careful about hiring, a little more careful perhaps about capital investment. Sometimes it translates into M&A, but then you have maybe I'm willing to sell because I'm less confident, so you can get some of that action there. Interestingly, repairing of balance sheets, maybe they're going to pay down a little more debt if you feel like you have to build up a cushion. All right, Mike, thanks. See you later. In other management news, a new report looking at boardroom diversity

found that women are making progress towards closing gender gaps. Julia Borson has that story for us. Julia. Well, Melissa, the average percentage of women on the boards of America's thousand largest public companies, that's the Russell 1000, increased from an average of 23.8 percent to 28.2 percent between 2019 and 2021. That's according to new analysis from Just Capital. But just 3% of those 1,000 companies had equal or higher representation of women on their boards in 2021. That's up from 2% two years earlier. Just Capital points to General Motors, Citigroup, Procter & Gamble, Merck, and Nielsen, saying that those five companies are the only ones among its list of the top 100 performing companies across ESG issues, with boards that are at least 40% female and have at least one

committee chaired by a woman. And they also raised the question, does diversity drive results? A study out on Friday tried to answer just that question. Among the 72 S&P 500 companies headquartered in California, those with boards with higher diversity across gender, race, and age of its board members saw higher revenue growth of 24.2% compared to 20.7% revenue growth for those with a lower diversity score. And California is in focus because a judge just last week struck down the law mandating for diversity threshold. So Melissa, certainly one to watch.

Yep. Julia, thank you. Julia Boorstin. Up next, venture capitalist Bradley Tusk explains why he thinks his industry is to blame for recent IPO flops in the tech sector. Tech is one of the worst performers so far this year.

One of the culprits could be venture capitalists. That's according to our next guest. Let's bring in Bradley Tusk, founder and CEO of Tusk Ventures. Bradley, great to have you with us. Yeah, thanks for having me. Where was the error made in terms of venture capitalists' calculations? Was it that they were too optimistic about these companies? They didn't stress test these companies enough for bad times? Where was the error? This answer is going to shock you, but it's actually greed, which pretty much drives every bad decision that we see most of the time.

Look, here's the problem. Because institutional investors were willing to allocate a lot more money to venture capital, VCs kept raising bigger and bigger funds, in part because 2% of a much bigger fund nets you a lot of money without any risk every year than 2% of a smaller fund. But if you raise an $800 million Series A fund, you can't write a $2 million check. You've got to write a $20 million check to make it work. You can't put a $20 million check into a small company, so the valuation has to be a lot higher to justify it. So I would say in order for people to justify chasing higher management fees every single year,

fund sizes got too big, valuations got too big. And then by the time that it went through growth equity series E, series F and hit the market, these companies are just wildly overvalued. And I think the market's actually been pretty smart and accurate in sort of bringing them back down to where they should be. Now, people at home, Bradley, are going to look at the screen and say, this guy's a VC also. So you're an early stage VC. So you're saying that this is happening in the later stages of venture capital. You're pointing fingers, basically. No, no, no. It's happening everywhere. I would say, you know, we have kept our fund size pretty

small. Our most recent fund, 140 million. So I think we've kept it pretty reasonable. But no, you see it across the board. The growth equity part to me seems the craziest because I just don't understand how you could invest in, you know, a late series tech startup that you know is going to get knocked down as soon as they IPO. But no, I think everyone shares the blame here. It's fun to talk about venture capitals being greedy. I mean, people love to think that people who were once making a lot of money are just simply greedy. But what are the repercussions in terms of funding new companies? I would imagine that it's, you know, as a young company, it's much more difficult to get that check. Maybe it's harder to bring these companies to market. Maybe there's a gap now in the development of companies in the pipeline.

All of that is true. So there are companies who are now raising that are really struggling, who if it was six months ago or even three months ago, would have been inundated with term sheets and offers. So there's a really, really significant lag now, not just in valuation, but speed to market, willingness to venture capital, to deploy capital. So, you know, there is definitely a price that's being paid for. On the other hand, to to me this is a tremendous opportunity because valuations are down um there's a lot more opportunity to really diligence these companies before having to put in a term sheet and we're looking to deploy capital pretty rapidly growth at all costs is not in a favor in the public marketplace bradley so what's happening

in the private marketplace are companies getting small are they girding for for the worst case scenario in terms of what their headcount looks like, what their investment looks like? Yeah, you're seeing a few things. One is people are trying to accumulate as much cash as could possibly get. So you're seeing some companies do inside rounds just to put more cash on the balance sheet. You're seeing people cut whatever they can to reduce the monthly burn rate. You are seeing layoffs at some of these companies as well. We've had two portfolio companies that have conducted layoffs recently. So, yeah, in every single way, founders and CEOs are aware that the party is over, at least for now.

And if they want to make it through to their end, they're going to need as much cash as possible. Bradley, good to get your perspective. Thank you. Thank you, Robin. Bradley Tusk. All right, let's get a check on where we stand in the markets on this thank you. Thank you Brad. Bradley Tusk. Alright let's get a check on where we stand in the markets on this rally Monday if you will again it's the JP Morgan rally because JP Morgan is really helping the Dow and the S&P here. The Dow is higher holding on to a 600 point gain here S&P up by 67 Nasdaq is up by one

and a third percent. Last week FTX started offering zero commission stock trades. This week the crypto exchange may be shopping for a stock trading brokerage. You've got the details straight ahead. And a programming note, do not miss tonight's special Inflation in Your Stocks, hosted by Becky Quick and featuring several top CEOs. That is tonight, 6 p.m. Eastern Time here on CNBC. What is Wall Street buzzing about today? Once again, it's FTX, the crypto brokerage that announced last week it was getting into stock trading. What is Wall Street buzzing about today? Once again, it's FTX, the crypto brokerage that announced last week it was getting into stock trading. Now it may be shopping for a partner.

Kate Rooney's got the details. Kate. Hey, Melissa. Crypto exchange FTX has been quietly shopping for stock trading startups and looking for potential deals. Sources tell me the crypto firm has approached at least three privately held brokerage companies about an acquisition. And this is according to sources familiar with those talks who asked not to be named because those discussions were confidential.

The startups included Webull, Apex Clearing, and Public.com. No comment from those companies or FTX on this. But it does speak to FTX's ambitions in this space and a broader effort by the industry to bring crypto and stocks and that trading both assets under one roof. Just last week, we had FTX announce its official move to offer stocks. It's already made a couple of strategic investments in the space as well. In April, it invested in a stock exchange operator, IEX. And then there was that 7.6% stake in Robinhood. That came

through FTX CEO Sam Bankman-Fried, and it fueled some questions about deals in this space and Robinhood's future as an M&A target as its share price drops more than 80% from the high. Bottom line, Melissa, I'm told expect more consolidation in the space as prices come down. Back to you. Okay, thank you, Kate Rooney. Up next, Bank of America's Jill Carey-Hall and why recession risks may already be priced into small cap stocks. That story, plus banks booming and Citi turning bearish on some big name retailers. We take you inside the market zone. And coming up tonight on Fast Money, will the spring market sell off lead to a summer of corporate love? Our traders will take a look at some companies who could tie the knot now that the price is right. That is coming up 5 p.m. Eastern time

on Fast Money. We are now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santelli is here to break down these crucial moments of the trading day. Plus, Frank Holland on a potential huge deal in the tech industry. And Bank of America's Jill Carey-Hall on the outlook for small caps. We begin with the rally today. All 11 sectors trading higher after the Dow finished last week lower for the eighth week in a row. Mike, we're losing some steam here on the NASDAQ as we go into the close. What do you make of this rally so far?

A little bit. You know, obviously, a lot of things lined up to have a lot of people, whether they're bullish or bearish, expect a little bit of a bounce from here. The S&P is already up 4% from Friday's low. And I think what's on everybody's mind is, you know, less than a week ago, we were 5% off the prior week's low, and it seemed as if we were already also primed for another rally. So I do think that the fact that you've had a series of these short live bounces is on traders' minds.

On the other hand, you know, one thing that distinguishes this week from the prior ones is the calendar. This is a pretty strong week after May expiration leading into Memorial Day. I think if anything, the market got a little more oversold and sentiment got more depressed coming into this week. So in theory, this could have some legs to it, even if almost everyone believes it might only have headroom up to maybe a 10 percent rally off the lows. We are seeing real help today, Mike, from the real beaten down big cap names. And I'm not just talking about Apple and Microsoft, which are strong and holding on to their gains into the close. But Walmart is finally catching a meaningful bid after after last week's just decimation of market cap. Yeah, absolutely. Also, I think that reflects some kind of separation of winners and losers that's being attempted here today,

because not all the retailers are strong. It is kind of a Walmart Costco story in terms of consumer. And then, of course, the banks are a pretty big exception to what's been the rule, which is meaning their upside leadership today. They have not been for a long time. Yeah. Speaking of the banks, financials are the best performing sector in the market today. This after Jamie Dimon's bullish comments at JP Morgan's investor conference. Those sent shares of big bank stocks higher. Overall, bank stocks are down 16 percent in 2022. But Citigroup CEO Jane Frazier made a bullish case for the group when she sat down with Sarah this morning at the World Economic Forum in Davos. I think a number of them are undervalued, but there's a lot of uncertainty out there at the moment. And as I say, we're seeing equities coming down anyway in the

asset allocation of investors. But I personally, as you would expect, think there's quite a lot of upside there. A lot of uncertainty and storm clouds, as Jamie Dimon put it, may be hanging over the economy, Mike. But they do seem, or Jamie at least, seems to be more than willing to be sort of more optimistic when it comes to his outlook for the consumer, particularly when you think about J.P. Morgan rolling out credit products. You don't necessarily roll out new credit products when you think that there's an imminent slowdown or imminent recession coming. That's right. And he certainly didn't flag any rapid erosion of customer credit

experience right now. So, you know, with the group down 30 percent off its highs, clearly it was discounting a high risk of an adverse economic scenario, the consumer really losing steam, credit really getting going south in a big way on the corporate side. So, you know, I think that just the words from him, as well as Bank of America's Brian Moynihan, you know, really doing nothing to bless the worst fears of the market is enough today to give a lift because the valuations really have come in quite a bit. I mean, you know, Jane Frazier, no surprise, thinks her stock is cheap because it's really, really cheap, way under book value and has been for a long time. Yeah, the investment banking side of the business, the equity side of the business, though, could be in for some more trouble. Pinto over at J.P. Morgan was saying that the market volatility he expects to last for, what was his phrasing, the next couple of years. That's a long time for this market volatility to

last. Yes. Now, you know, it does go in these sort of long cycles, higher volatility, although it seems like we rushed to a place here, you know, down 20 percent on the S&P bond volatility, almost off the charts, you know, outside of crises. So it seems like the market has gone a long distance toward kind of handicapping that type of environment. The issuance calendar doesn't look good. I agree. Capital markets looks like it's still not a place where people are willing to go out on a limb and say things are going to get good anytime soon. As always, the question is, what are the stocks already discounted? Right, exactly. Don't miss more coverage, by the way, from Davos tomorrow on CNBC,

including Sarah's interview with the CEO of Micron. That's at 10 a.m. Eastern time on Squawk on the Street. Keeping with technology here, shares of VMware soaring on multiple reports that the cloud company is in advanced talks to be acquired by chipmaker Broadcom. A deal could end up being one of the largest mergers ever in the tech sector. Frank Holland joins us. So, Frank, you know, Broadcom is a serial acquirer or tries to be.

Why VMware? Well, you know, really quick, Melissa, just some news out from Dow Jones in a second. According to Dow Jones, at least, Broadcom is discussing buying VMware for about $140 a share. That would make this potentially a $60 billion deal, up from the $ 50 billion that the Financial Times reported just a few days ago. So now to answer your question, it's really a big bet on the hybrid cloud. That's a combination of having data on site, totally controlled by a particular company. In addition to having access to putting data and getting applications on the

public cloud and for large enterprises, think a big bank or a multinational corporation that's really the reality for the foreseeable future and then keep this in mind vmware has about 50 of what's called the virtualization market that's where a company like a vmware takes your on-premise workloads and they just maximize them they make them more efficient they make them better and they kind of just work with what you already have and make that better so if you believe that economic slowdown might be coming, a slowdown in IT spending might be coming, you would want, if you were a Broadcom, the ability to maximize what companies already have, in addition to offering them more of a pure play cloud, which is where VMware was transitioning to and having, according to analysts, a little bit of difficulty.

It's interesting to think about, you know, where the stock is trading now. Frank, you had mentioned that 140 a share is the number that just crossed, according to Dow Jones. The stock is nowhere near that, Mike. And you think back to the last big purchase that Avago or Broadcom, I should say, tried, and that was for Qualcomm. And that, of course, didn't happen on some security concerns. Mike, what's your take on sort of the regulatory environment this time around? Yeah, I mean, it seems a little bit maybe less in the crosshairs. I mean, knowing what we know right now in terms of product overlap and things like that, it's outside the chip area. You know, what you would take from Broadcom's

share performance down 4% is probably, I would say, on a net basis, encouraging for the Broadcom folks. It's not a big penalty that the market is applying on this idea of paying, you know, this floated price right there. It's kind of fascinating how Broadcom is rebuilding this kind of tech conglomerate. I mean, you could go back to the old IBM. They made chips. They had, you know, software services. They had,. They had all kinds of other products across the enterprise. And so try to do it in a smart way, pay the right price, and just shepherd those cash flows for investors. Yeah, Frank, this is really a Michael Dell story, ultimately. I mean, he's a major owner of VMware shares, isn't he? He owns 40% of VMware shares. Obviously, the thought is that he has a lot of input on this deal and a lot of sway on this deal. One other thing, if you look at some of

the other stocks that are competitors with VMware, we're talking about Nutanix. Those shares are up. Rumors have it that Bain is eyeing them for acquisition. IBM, Mike just mentioned them. They actually made acquisition of Red Hat, which is another or was when it was private, a VMware competitor back in 2019. Those shares are up today. So this deal is actually creating a lot of excitement, a lot of interest just in this idea of the hybrid cloud, as opposed to those pure play cloud players that we've seen really under pressure due to interest rates and other factors. Frank, thank you. Frank Holland. Citi, meantime, turning bearish on several apparel retailers on concerns that a pullback in discretionary spend will result in margin declines. A firm downgrading Abercrombie & Fitch, American Eagle Coals and Ralph Lauren from a buy to a neutral.

Also cutting carters from buy to sell, reducing gap in children's plates from neutral to sell. Courtney Reagan joins us. Courtney, 2021 was a boon for retail. Retailers cut back on promotions. Is that over? Yeah, Melissa, it is such a good question because I think 2021 became an anomaly for so many retailers and those of us that follow it closely. After years and years of having to promote to get consumers to buy, all of a sudden, average unit retail was going up. Margins were getting padded. It was pretty amazing to see

the consumer demand and supply finally sort of be copacetic with one another to make that a reality. But now retailers, especially apparel retailers, have had to work really hard to get all that inventory in, get ahead of the supply chain problems. And now all of a sudden, they've got more than they can sell. It's just not matching demand. And it's not that consumers aren't able to buy apparel right now. It's that, frankly, they're not really interested in buying it. They're shifting what they're buying when it comes to discretionary items because of what we've seen from inflationary pressures on the items that they have to buy. And so Citi's putting that all together and saying, look, apparel is really going to be crunched. As a result, we're downgrading all of saying, look, apparel is really going to be crunched.

As a result, we're downgrading all of these players. We think this year is going to be really hard. And bye-bye to some of those average unit retail and increasing merchandise margins you're going to have to promote to sell. You have way more inventory than you have sales demand that matches up with that. But I take this all together and say, look, what we went through during the pandemic and what some of these retailers took the opportunity to do to really right-size their business and to improve their operations wasn't lost. There may be a few bumpy quarters, but if you're a company like a Ralph Lauren or like a Tapestry or like a Capri that took the opportunity

to look at your pricing really tough, look at your inventory, figure out where it makes sense, in the long run, you'll still probably be better off than you were before when you took the chance when everything was really beaten down to really evaluate your business. But I do think that there's going to be some pain here in the short term. And after last week, expectations, frankly, are just really low. Yeah. And Mike, I guess when you think about what the banks are saying about consumers, the consumers have the money to pay. And to Courtney's point and to the points that were made by the CEOs of Target and the CEOs of Walmart last week, they're just paying different things. They're spending

on different things. So, yes, the wallet is still there. The wallet could be strong, but it may not be beneficial to all the retailers out there. It's probably beneficial to the gas pump, but not to a, you know, a Gap, for instance. That's right. And, you know, as Courtney was saying, it's really a clothing story. I mean, Best Buy ahead of its numbers, stock about flat today. Massive inventories from a macro basis, maybe not the worst news. The retailer's margins may suffer. But the idea that you're going to have pricing come off the boil perhaps a little bit is not unwelcome to anybody who's trying to see if the Fed gets a little bit of help on what it's trying to do over the summer in terms of

restraining inflation. All right, Courtney, thanks. Courtney Reagan. Russell 2000 is higher today, but underperforming the major averages. Overall, small caps continue to lag slightly behind the S&P 500 this year, down 20 percent, while the S&P is down 17 percent. Joining us now is B of A Securities head of U.S. small cap and mid cap strategy, Jill Carey-Hall. Jill, great to have you with us. And I guess the question for investors of all size companies is, what have we priced in in terms of recession fears, in terms of stagflation fears? Have small caps, in your belief, priced in more than the large cap stocks, for instance?

Yeah, thanks, Melissa, for having me. And I do think they have. It's, you know, we've seen some interesting trends this year. And, you know, small caps have already sold off, you know, about 30 percent from their highs late last year. The typical drawdown in small caps when you look at, you know, prior recessions going back to the 1950s has been on average around 36 to 40 percent. So we're actually about 80 percent of the way there in terms of what we typically see.

And valuation multiples have come down to pretty similar to where we've seen on an absolute basis during prior recessions. Now, for large caps, valuation multiples are still above their long-term average. And in our view, based on moves that we've seen and looking at the equity risk premium, large caps could only be discounting about a 40% recession risk at this point. So I think if recession risks continue to rise, there certainly could be more downside risk to equities across the size segment at this point. But we do think that the risks are more adequately inflation continues to go higher or just remains high, how do small caps traditionally perform versus their larger counterparts? Well, so it's, you know, I think from looking at prior historical inflationary regimes,

it's been interesting. Small caps typically have held up well, better than large caps during historical inflationary environments. We think about, you know, parts of the 60s, the late 70s, early 80s. And when we've looked at margins, small cap margins have actually been less detrimentally impacted by inflation than large caps. And I think, you know, we have going on today, you've had many large multinational companies have seen their margins benefit from, you know, lower, lower taxes, lower labor costs abroad, and if globalization, now if globalization is reversing, we do think that, you know, this could be a headwind to margins for many large cap multinational companies. So small caps of, you know, stagflationary environments, which, you know, again,

is not our base case. We are looking for upside to the S&P 500 from here this year. No, no recession, you know, slower, but continued economic growth. But a stagflationary environment, historically not good for equities, but you have actually seen small caps outperform large caps. In terms of sectors within small caps, Jill, you are actually saying to look at, and this is not a sector question, but you're saying to look at dividends. And I'm wondering if there are any specific sectors that are more inclined to give dividends within the small cap space. Yeah, I think it's, you know, typically when you're in late cycle backdrops, you know, dividends continue to matter or, you know, begin to matter more. And that often

continues during downturns. The dividend yield is one of the top performing factors. We've seen this in our small cap and our large cap work, where our view is that if the Fed is hiking rates, you know, cash becomes more valuable. We're in a, you know, lower return world environment where if equity returns are pretty tepid, then total return matters. So, you know, even within small caps where investors may often be thinking about small caps for growth, you know, just since the start of last year, since the start of 2021, just dividend paying stocks within the Russell 2000 are up about 20% versus non-dividend paying stocks are down about 20. So, you know, really wide spreads just based on dividends. So I think, you know,

in addition to dividends, we focus on quality. Quality has been a big differentiating factor between, you know, best and worst performers within the market, within small caps. And from a sector perspective, you know, financials, which we were speaking about earlier on the program, energy, these are two more cyclical sectors that continue to rank well in our work, both in large and small. I think one sector where you do see differentiation in how it looks, determining whether based on whether you're a large or small cap investor is health care, where, you know, health care and biotech has really been the biggest detractor from Russell 2000 performance this year. Health care is outperforming in large caps. I think, you know, there's been a lot of challenges to small cap health care with, you know, higher rates, the COVID backdrop, et cetera. So

that's a sector where, you know, we do see more risk, but an M&A pickup could be one positive. Jill, great to speak with you. Thank you. Thank you. Jill Carey-Hall. Under two minutes to go in the trading day. Mike, you got some more on the market internals. Yeah, pretty solid. If you look at the New York Stock Exchange volume splits, about two thirds upside volume versus downside, a little better than that. So certainly not a huge one sided rush, but definitely positive. Take a look at the U.S. dollar index. It's really kind of come off the

boil a fair bit today. Most of that story is euro strength after Christine Lagarde of the ECB clarified some of their moves toward tighter policy. That's helping the euro. But the dollar index rolling over, along with inflation expectations and perhaps the worst Fed fears. The volatility index is easing back. It's under 29, still in that frustration zone. We're not low enough for people to think that the market's stable, not high enough for people waiting for some kind of big rush of panic, but it's definitely an improvement off of last week's highs, Melissa.

Yep. A little surge of energy here as we get into the close. We are still looking at the top performing sectors in today's session being the financials, really being helped by JP Morgan and Jamie Dimon specifically, sounding pretty upbeat when it comes to the shape of the consumer, consumer credit near term, it looks pretty good

despite the storm clouds there. And take a look at the gain in Apple. Shares closing out 4% higher on the day. Dow's up almost 2% on the session.