Closing Bell - Closing Bell: Stocks Stage Late Rally, Cliff Asness on Private Equity, Chip Funding in Focus 6/23/22

Episode Date: June 23, 2022

Stocks popped in the final hour of trading, adding to solid gains on the week. Bespoke’s Paul Hickey and DoubleLine’s Jeff Sherman discuss the moves in equities and bonds. Meantime Intel warned it’s big Ohio chip factory could be delayed as Congress drags its feet on funding. PIMCO’s Libby Cantrill weighs in on the holdup. And AQR’s Cliff Asness shares his choice words for the Private Equity business in a rare interview.

Stocks are off the best levels of the day, still pacing for some solid gains on the week. The Nasdaq's up 0%. The most important hour of trading starts now. Welcome, everyone, to Closing Bell. I'm Sarah Eisen. Take a look at where we stand in the market right now, about 0.4% on the S&P 500. It's a defensive-led rally. You've got the leaders, utilities, healthcare, consumer staples right on top of the market. Worst-performing sectors, energy again. Crude oil taking another big fall, as you can see at the bottom of your screen, down 2%. Materials, financials, and industrials.

So the cyclical groups are leading us lower. The NASDAQ, though, technology hanging in at 1%. Check out some of the most actively traded names right here, right now at the New York Stock Exchange. You've got NIO at the top of the list. It continues to be among the most active. So is Ford lately. There's Revlon, the bankrupt company that has soared a few hundred percent this week, even since announcing bankruptcy, giving a little bit back today. Palantir and AT&T coming up on today's show.

We will talk to DoubleLine's Jeff Sherman about the latest signals today from Fed Chair Powell and the best way to play the bond market as yields pull back again here. We've really come down off that 350 on the 10-year. Plus, more from my interview this week with billionaire investor Cliff Asness from AQR Capital Management, including his criticism of the private equity industry and why he says he's got professional jealousy. First up, though, we'll begin on this developing story surrounding Intel, the company warning its Ohio factory project could be scaled back or delayed if funding from the CHIPS Act doesn't come soon. Christina Parsonevelis with the details. Christina.

Well, Sarah, it's been over a year since the Senate passed a bipartisan measure to spend $52 billion to subsidize semiconductor manufacturing and research on U.S. soil. A year later, it's still not signed into law, despite other countries like India, South Korea, China, Singapore providing subsidies of their own. And that's why companies like Intel are raising the alarm. Intel issued a statement saying, quote, unfortunately, the chips act has moved more slowly than we expected, and we still don't know when it will get done.

My colleague, Juan Mui, was able to confirm that Intel has canceled its ceremonial groundbreaking next month in Ohio and actually pushed it back to this fall. Intel, though, is still committed to spend $20 billion on two leading-edge factories, but plans to spend up to $100 billion are uncertain if they don't get the subsidies. The thought process is, if Europe can offer subsidies, why can't the United States? And it's not just Intel. Global foundries just sent me a statement, too, that they are concerned, stating, quote, for global foundries, the passing of chips funding would affect the rate and pace at which we invest in expanding our U.S. manufacturing capacity. Global foundries actually just opened a new fab

in Singapore. So the pressure is on, or as Global Foundry CEO said, Congress, it's go time, especially before Congress breaks for August recess. Sarah? Christina, thank you. Christina Partsenevelis. And semiconductors are notable laggard today, even though you've got a 1% gain for the Nasdaq. Also, quick programming note, on this story next week, I'll be covering the Aspen Ideas Festival out in Colorado, and we will speak exclusively with Intel CEO Pat Gelsinger on Tuesday right here on Closing Bell. Stay tuned for that one. For more now on the CHIPS Act and its political implications, let's bring in Libby Cantrell, PIMCO's head of public policy. Libby, what is the status of this

legislation? There are so many different forms and names,CO's head of public policy. Libby, what is the status of this legislation? There are so many different forms and names, it's hard to keep track. There are lots of different forms and names, Sarah. That's right. And good afternoon. So as the previous reporter just said, the CHIPS Act was passed in a broader bill called the United States Innovation and Competition Act last June on a bipartisan basis in the Senate. Another version passed the House earlier this year. Of course, Congress cannot do anything without complicating things. And now those two versions of the bills are being sort of reconciled in a very big conference committee,

which, you know, has taken, I think, a lot longer, even by their own admission, both chambers of Congress. So I think the bottom line, though, here for markets, Sarah, is that there is a lot of bipartisan support for this bill. It is basically the closest to industrial policy that the U.S. Congress has gotten in decades in terms of redirecting public monies to domestic industry, including semiconductors. It also authorizes $200 billion outside of semiconductors for scientific and technological research. So the bottom line here is this is very likely still to get done. It's just going through the very long and tedious machinations of the congressional process.

Do we have to wait till after the midterms? We may. It could be passed in the lame duck session of Congress. I think Democrats, though, want to get this done before August recess. And I think that is the deadline that they'll be working towards. What about the gas tax, Libby? The fact that the White House seems to be the only one in favor didn't even really get broad support from the from the Democrats. Does anything get done here? And what are the implications for the Biden administration? It seems really like a political move, the fact that he wants to do the gas tax holiday for three months, which basically takes us into the voting period. Yeah, exactly. This

is absolutely sort of the political tail wagging the policy dog, so to speak. And even the politics around this are not all that straightforward. President Biden and his administration are clearly desperate to do anything they can to be giving the voters perception that they are doing what they can do to bring down the price of gas. But you said it. I mean, this landed with a thud on Capitol Hill, predictably among Republicans, but then also, you know, maybe not surprisingly among Democrats. Speaker Pelosi months ago said that this is basically very showbiz, sort of writing off this as more of a gimmick than really substantive. And I think that's, where members will land on this. It is unlikely to get a vote in the House and in the Senate, and so it'll probably go nowhere. But I think it unders a vote in the House and in the Senate. And so probably go

nowhere. But I think it underscores just broadly the fact that the White House has limited tools here as it relates to the price of gas. So I talked to investors and it's, you know, it's bear market kind of mood out there. And one thing that they're a little hopeful about as a potential bullish catalyst is the midterm elections, especially if Republicans sweep. Where are you on that? I saw that President Biden's approval rating dropped again this week, 36 percent, according to Reuters episodes, matching the low that we have seen. On the other hand, we have not gotten the Roe v. Wade decision out from the Supreme Court, which could boost Democratic turnout. So where are you on the odds at this point and what investors need to know?

Yeah, sure. So so obviously the impact of Roe v. Wade is really kind of the open question. But if past is prologue here, Sarah, the party in power almost always loses seats in both the House and in the Senate. Since World War Two, the average loss in House seats have been 25 seats for the party of power. In the Senate, it's been four seats. So just, you know, just if it's adhering to historical trends, very likely Democrats will at least lose the House. The Senate is a bit of a different ball of wax, just given that it's much more sort of candidate specific and state specific. But I think from a markets and investors perspective, the impact is basically the same if Democrats only lose one chamber as if they lose two, which means that Biden's legislative agenda is basically dead. So if we don't see

a revival of Build Back Better anytime soon, we will not see that in 2023. And that's a good thing for investors or not? Well, I mean, I think that there's some investors from a tax policy perspective in particular who would welcome that. I think on the flip side, though, Sarah, this is sort of a nuance I don't think people are necessarily thinking about. If Republicans do control at least one chamber of Congress, they may be more reluctant to provide fiscal support, especially if the economy is slowing down, because they're not going to want to give President Biden a win going into the 2024 cycle. So I think that is a

nuance that markets may not be considering. But overall, I think they would be welcomed. They would welcome the fact that there'd be less progressive policy headline risk and then much less chance of tax increases if that scenario plays out. But the old bullish gridlock. Thank you, Libby. Libby Cantrell from PIMCO. Appreciate it. Still ahead, billionaire investor Cliff Asness has some choice words for the private equity industry. I have a nasty term for it. I call it volatility laundering. Up next, here is full criticism of private equity, plus his thoughts on SPACs and more. Looks like we're still holding on to gains, up 57 here on the Dow. You're watching Closing

Bell on CNBC. Hanging on to gains with the Dow up 50, mostly defensive groups leading the rally today. Yesterday, I had a chance to speak with Cliff Asness from AQR Capital Management in a pretty rare interview, his first on the network in more than a decade. He's been handily outperforming the market this year with his value-focused strategy. Asness was also critical of the private equity industry. Here's his latest thinking on the topic in a clip we haven't aired yet on CNBC. I'm not a cynic on private equity's reason for living. I think that we need that as part of the world, as part of the ecosystem. There are a lot of firms, be they public firms that have fallen on hard times, that they

take private. That actually helps value managers, that there's a bid out there. Or younger, smaller firms. Private equity pretty much has to exist in a functioning capital market. You can't say that about everything. I don't think SPACs had to exist. They may be a good idea. They may be a bad idea.

But you can't say that we needed that desperately. Private equity has a reason for living. Seems like a bad idea lately. Your words, not mine. But empirically true. Back to private equity. I think there's a reason for it to exist. And I think I know a lot of private equity managers. They among the best investors I know, they really do know their

businesses. What I think has changed a lot is 20, 30 years ago, famous David Swenson pioneering this. It was about the returns. It was about a illiquidity premium that if you locked up your money for a long time and be worth it, that you got paid extra for that. And he monetized that in a rather brilliant way over time. And I've served on a bunch of investment committees and I've seen this live and anecdotally and your point about floods of capital. I think it's become much more about the dampening, the apparent, I should be careful, dampening of volatility that comes to it. I have a nasty term for it. I call it volatility laundering.

Laundering is kind of a loaded term in our industry. Where they're benefiting from people not wanting to be in the market. Now, their stuff literally goes way down and way up with the market. They're not just equities. They're levered equities as a rule. I remember an old story of mine. This was 1997. A lot of my stories date me.

The head of Goldman's private equity came over. He asked me how we were doing on a day the S&P was down 7%. This was the Asian debt crisis. I said, we're flat, and we're very excited about it because we're market neutral and we're holding up in a crash. He smiled and he said, me too. And I had hair back then to rip on. I'm like, you're not flat. What if you had to sell today? Would you get less than yesterday? He said, oh, way less, but we don't have to sell. So I think to the extent people value the returns, that's great. To the extent people are mostly valuing the we don't have to look at this or don't have

to report it or don't have to have angst about it, that bids up the price. They're now paying for a characteristic that wasn't the original idea. And what used to be an illiquidity premium, it's hard to put an exact number on it, but you could easily imagine it being an illiquidity discount now, where people so value this option of not reporting it that they're overpaying. And anecdotally, if you talk to private equity managers, give them two drinks, they'll tell you, yeah, there used to be three people bidding on this deal. There are 15 now, and the IRRs are much lower. So I think the chance that people are now paying up, not getting a discount, to be in illiquid things because they value that illiquidity because it does allow them to be better investors

is real. Now, that it does allow them to be better investors is also real. I'm not discounting that. My compromise solution where I can be at peace with private equity is if they simply will say, yeah, it's not about the returns. We actually expect to do slightly worse than equivalent levered public equities. But you people can't take the truth. Little Jack Nicholson. So we're providing that kind of volatility laundering for you, then we're all copacetic. But I do think too many investors, too many boards, too many even long-term investors are looking at something that used to be a return enhancer and now using it as a volatility dampener. And that works if markets

reverse and fix themselves on a timely basis. If you get a 5, 10-year bear market, which we haven't seen in quite a long time, but we have seen in history, it no longer works and you discovered that you bought what I would argue maybe even overpriced levered equities. So is there a way that you're sort of manifesting this view or you're just warning about it? No, I'm whining about it. A lot of this is professional jealousy on my part. Well, the stocks, if you look at some of these stocks, Carlisle, KKR, they've been slammed this year. Well, the professional jealousy is not getting them getting slammed. It's I'd love to have people judge us only on 10 year horizons. If if if we had private equities deal, we've only made money long term. Maybe we reported a small mark to market dip in 2020. You know, maybe a fifth of what really would have happened.

And we're back. Right. And no one ever noticed. So there's definitely professional jealousy on my part. They also have 19 different kind of fees when we get only one kind of fee. So I am talking as a jealous man. And a man in public equities. Cliss Abness there.

Warning about the premium sort of fees on private equity and saying maybe that's really the benefit of them, especially right now. You hear, I hear so much anecdotally and we see reports from private managers saying that the money

is flooding in right now because people don't want to deal with these daily fluctuations it's painful it's nauseating just put it in a private equity fund and we'll see it in 10 15 years yeah it's a it's a packaging thing it's a mental accounting thing and so allows endowments and and other investment funds to say to their end clients we have a smooth ride here we don't have to take the the painful marks to market we know that's's an illusion. Private equity picks its entries and exits. It only takes the exits when it seems advantageous. What if we have a 10-year bear market, though? They get marked down, too, don't they? Eventually, they'll get marked down or the returns won't be good. Or it's so crowded that they're going to overpay up front and then they

won't be able to necessarily redeem the hopes of the clients. But it's a very fair criticism. And to be honest, I don't even know if private equity firms would deny it in some respects that they're saying we're forcing people not to look at their statements. If you own public stocks, you can simulate this by just not looking every day or every month or every year at how they're doing. That's a good idea. Yeah.

People who do that do better. By the way, Mike, we also have to mention one part of the conversation yesterday, in particular, it's getting a ton of buzz today, where Asness revealed a previously unknown short position and called out the meme trading crowd. Listen to this. I didn't know this till I was coming on TV,

but we have a very tiny short of AMC. So we got a meme stock short. Now, again, you might laugh that I don't know this. I don't know it because it's never mattered. We had it throughout the whole meme stock craze. We don't notice the size we take positions. But it's not that surprising when you want a short, high-valued stock. No, because it's terrible on everything we care about. This is scary. I dare all the meme stock maniacs to try to hurt us on that. They're going to come after you. They don't like hedge funders. Let them come.

It's 12 basis points. They're crazy people, and I will not notice them, but they can have their fun. Well, the meme traders certainly picked up on that challenge with a boatload of tweets aimed at Mr. Asness. We should note that the stock is lower, actually sharply down 7 percent right now. We should also note that Asness did heavily couch all of the stocks he mentioned yesterday, saying he may have 750 longs and 750 shorts in his portfolio at a given time. And any single name represents such a small part of his holdings. In fact, that was his point. Come at me. It's like no exposure for me. But clearly, it made some kind of impact. Right, and therefore, I'm not somehow trying to step on this stock.

I have no nefarious motivations. Look, the firm's name stands for Applied Quantitative Research. He's just doing whatever the screens give you. That's what we're going short. But it does show you that there is a faith-based cohort that just still wants to play the meme game with AMC. Well, they're on social media, but are they in the market still? They're trying. They're down sharply.

Revlon had a nice little surge this week. Exactly. Does that mean the meme trade is back? Yeah, you have to go bankrupt first to restart the meme excitement. All right, Mike, thank you. We'll see you soon. Coming up, a gut check on whether or not the U.S. is really heading toward a recession. We'll break down what the latest data and what the bond market is signaling next. Check out today's stealth mover. It's WeWork. Credit Suisse initiating

coverage on the company with an outperform rating and an $11 price target, saying WeWork is actually well positioned to take advantage of structural demand drivers for the flexible office industry. The firm also noting an attractive total addressable market, new product innovation, and also improved focus on the bottom line. The stock is up more than 13 percent, but it is still down about 40 percent or so since it went public last year via SPAC. Time now for Mike Santoli's dashboard. Today, he has a look at one model showing the economy growing at its slowest pace, Mike, since 2008. Well, in terms of the trajectory, yes, this is this Ned Davis economic timing model. This goes back more than 70 years, and it just

really plunged in a hurry to this slow growth mode. So it's a precursor to being right into recession risk. Not that many times it's fallen this quickly to this level and avoided a relatively near-term recession. So this is what really says what the market's up to. You mentioned earlier, Sarah, cyclical stocks are lagging today. It is a defensive rally. One thing that's missing is employment is holding up. That sort of has to get worse to get a real recession. But take a look at how bonds are dealing with this.

This has been a story that's been underway for a couple of months now. Corporate bonds really lagging governments right here. So this is basically the investment grade corporate index. It was going tight with the government bond index, but it's really fallen away here. So this is the story. Spreads widening, macro risks increasing, and the market is basically moving in that direction and away from the intense inflation fears, Sarah. Weaker oil and commodity prices and lower treasury yields, all part of the story today.

Mike, thanks. After the break, as I mentioned, the yield on the 10-year treasury falling hard again today, 301 right now, 307 on the 10-year, down sharply from the peak in mid-June. We'll ask DoubleLine's Jeff Sherman where he sees bonds heading next and what kind of signal they're sending when Closing Bell comes right back. The big picture, is food inflation finally cooling down. Prices are still high, but we have seen some pullbacks. For instance, wheat futures hitting a low of 9.46 per bushel, lowest level since March 1st. The agriculture ETF, which is comprised of future contracts for wheat, corn, soybeans,

coffee and more, it's down more than 5 percent month to date on pace for its worst month since March 2020. As we see these prices easing, are we really out of the woods on food inflation? Well, not really, according to a new note from Barclays. The pandemic and Ukraine are not only factors causing a spike in prices, disease, extreme weather and policy choices are also to blame, along with ongoing transportation and supply chain bottlenecks and elevated fertilizer prices. Barclays predicts prices will remain high and risks are skewed to the upside. And as inflation continues to

dominate the conversation around the world, Fed Chair Jay Powell calling his commitment to taming inflation unconditional in his testimony to Congress earlier today. Despite attempts from central banks to tame inflation, our next guest expects continued volatility in the rates markets. Joining us is DoubleLine's deputy CIO, Jeff Sherman. And it's also oil prices and natural gas prices, Jeff, that are down pretty sharply from their recent highs. We've been faked out before, but do you think we've seen peak inflation? Yeah, it really doesn't look like we've seen the absolute peak in inflation. Everybody was talking about that last month, and we got surprised by the last print. But if you go to the, I believe it's the Cleveland Fed that puts out a real-time indicator of estimated inflation. And if you look

at their forecast for the next month's inflation. It's a forecast of using these kind of real time indicators that you mentioned. To be almost another 1% month over month growth rate. And so that would put us at nearly the highest levels we've seen in this part of the

cycle. So unfortunately it doesn't look like it's behind us but. What you've seen from a lot of the markets is that- what you're seeing is that the inflation isn't just this U. S. phenomenon. I we've been talking about this all year

this is a global phenomenon the things you mention are. Commodity prices things are consumed by. The entire global economy we're talking about energy prices which are inputs to everything. And then- lastly the supply chain issues and so.

What you find here is that. The market is reacting very negatively every time we get inflation print. Bond yields tend to spike. The Fed comes the supply chain issues. And so what you find here is that the market is reacting very negatively every time we get an inflation print. Bond yields tend to spike. The Fed comes with this reaction function that they're going to be on top of it. They're going to raise rates considerably and quickly. And then all of a sudden we get now there's fears of a recession. So it's a very reflexive thing that's going on in the marketplace right now. Well, it's like one day we worry about inflation and higher rates, and the next day we worry about recession. And it's every day.

Today is a recessionary kind of day where the cyclicals are getting hit. And we're seeing this strength in treasuries, Jeff, which I want to mention because the two-year yield today went below 3%. It was the first time we've seen that since early June. What are you guys at DoubleLine doing? Do you think that rates have peaked? No, I don't think rates have necessarily peaked at this point. As you mentioned, it's when we get inflation data during a week, we get this sell-off in yields. And then all of a sudden, we get kind of a low amount of economic data this week. We got some

PMI data that essentially the manufacturing manufacturing service sectors. Are slowing down but they still are somewhat in expansionary territory and this. Goes across the globe so what you're seeing is a very highly correlated market. Across- just the entire sovereign yield space. And really this this

reprice in the two year. What it's done now is it's a okay. The Fed is going to be aggressive they're going to get to their plan of hikes. But then at some point either. Early late next year. Or an What it's done now is it's saying, OK, the Fed is going to be aggressive. They're going to get to their plan of hikes. But then at some point, either late next year or in early 24, they're going to be cutting rates again. So the market is having these neuroses of that all of a sudden the Fed is going to be forced into this hiking regime.

And what that's going to do is cause us to have higher rates. And therefore, we get this elevated recession risk. It's the old bad news is good news for the market. The worse the economic data looks, the better it is because it means maybe the Fed will take its foot off the gas. So is that a bet that you guys are willing to take on? What do you do right now with stocks and bonds? Right now, you don't want to bet against the Fed. You may want to fade it and say, OK, they're going to have to cut rates are not going to be committed to this plan for the next two plus

years I mean. We heard about- J. talking about that they're going to be able to reduce the balance sheet two and a half to three trillion dollars that's the end game. I which I just don't think we get there so. Really what you want to read do

right now is bill portfolios that have essentially. Very diverse by credit risk is as as Mike was showing up here at private segment you seen corporate bonds be hit pretty significantly. But they have some recession risk in there. But then there's government-guaranteed debt today that yields a comparable spread. And this is in the agency government-guaranteed mortgage market that offers a comparable spread on a risk-adjusted basis when it comes to adjusting the interest rate sensitivity.

So all of a sudden now, you can take some of these calculated bets in corporate bonds. You can take them in parts of the high-yield market, parts of the bank loan market, and you can sprinkle them together with some non-agency mortgages, create this diversified credit pool, and then barbell yourself with this rate risk as well. And so what you've seen here with this type of portfolio is you can build portfolios right now that yield in a low 5% range and give you some protection from both the deflationary risk of the recession,

as well as still having some of this economic volatility in there. Yeah, a little sophisticated, Jeff, but we get the point. Thank you for joining us, Jeff Sherman from Tell the Line. Stocks are gaining a little bit of steam here. We're up now 179 on the Dow into the close. NASDAQ is up 1.6% and the S&P is up a full percent. So we've just taken a little leg higher.

Again, it's still being led by more defensive sectors like utilities, healthcare and staples. But you do have technology very much playing into today's rally. Not the semiconductors, but Apple, Microsoft, Amazon, and Costco are leading the NASDAQ 100. Still to come, cruise stocks sinking again for the year as the industry faces a number of lingering headwinds. We'll take a look at what's pushing those names lower when Closing Bell comes right back. Welcome back to Closing Bell. Check out some of today's top search tickers right now on CNBC.com. Ten-year yield holds a top spot.

And today, we're seeing some pretty strong buying of treasuries with the yields moving down 308 on the 10-year. There's Tesla. It's not participating in today's tech rally. Crude oil gives back about 2%, down now about 11.3% over the last week or so on oil prices. The S&P, though, managing to rally and climb a little bit in the last few minutes, up 0.8%. It's being searched. And so is Meta, which is popping about 2%, coming off of multi-year lows, perhaps after that interview from Jim Cramer in the Metaverse with Mark Zuckerberg.

Up next, bespoke's Paul Hickey on today's market action, plus the news sending Snowflake higher today, and a preview for you of FedEx earnings, which are coming after the bell when we take you straight inside the market zone. We are now in the closing bell market zone. Bespoke Investment Group co-founder Paul Hickey is here to break down these crucial moments of the trading day. Plus Frank Holland with a preview of FedEx earnings and Seema Modi looking at the travel stocks. It's been an up and down session here for stocks, though, trading in a fairly tight range near the higher end right now. Paul, what are you seeing in the market action?

You always have a good handle on the on the stats and how this final hour of trade has been going. What do you see today? Well, I mean, today is a pretty big difference from the norm lately, Sarah, where we're actually sort of rallying into the close here, which is pretty shocking relative to what we've seen in recent weeks. I think, you know, there's a general tone that's improved this week. We've gotten to such washed out levels as far as market internals were coming into this week that I think the only direction for the market in the short term is higher. Whether or not that lasts for more than a few days remains to be seen. But there's generally these types of oversold extremes that we saw late last week tend to usually see at least a short-term bounce as the markets revert

to the mean and the internals improve. As of last Friday, 2% of stocks were above their 50-day moving average, which is practically unheard of. And we were down 5% back-to-back weeks. That's only happened about six other times going back to World War II. So, I mean, you don't see these kinds of sell-offs often, and they're some of the worst market periods in history. So, I mean, this is a rough time we're in right now, but I don't think it's really comparable to the depths of the financial crisis and other really extreme periods throughout history. I want to zero in on one group that I know you're watching carefully. We've all been watching it carefully because it's been a source of big pain,

and that is the homebuilders. D.R. Horton, Pulte, Lenar, they're all surging today, up nine, nine and a half percent or more. Obviously, right in the crosshairs of higher mortgage rates, which continue to move higher, by the way, and the Fed. What's important to know about this chart? Well, so think about it for a second. You know, when the market's going to rally, it's going to be the most washed out groups that tend to bounce. The homebuilders are interesting. We sent out a note on this yesterday that they had dropped 40 percent from their highs. If you look back historically, it doesn't happen very often. Most of the periods you see the sector bounce pretty

quickly. The only exception was coming off the 2005 high where it was several years before we bottomed. But even if you look closely at that period in 2006 when we first hit the 40% threshold, the homebuilders actually did see a short-term bounce. And what's important to notice here is that every time the sector has dropped 40% from a high after not doing so in the past year, at some point over the next year, it was up 25% or more. So you're a buyer. What's that? So you're a buyer. Yeah, so for the homebuilders, for a short-term trade here, at least there's fewer people positive on the homebuilders, you know, for a short-term trade here, at least, you know, there's fewer people positive on the homebuilders today than there were on the energy sector two years ago.

Everybody thinks the sector is going down and thinks that there's nothing but bad to come for the homebuilders going forward here. And so, I mean, you just have sentiments so offside that you tend to see the market revert to the mean again. Well, there's buying out there for them today. Check out shares of Snowflake. Want to mention this one, cloud infrastructure providers up sharply because analysts at J.P. Morgan moved that stock to overweight, $165 price target, and they cited strong results from its most recent chief investment officer survey. Frank Holland joins us. Frank, this is a stock that is down almost 60 percent this year, falling even harder than some of the other cloud names. What is the bull case that J.P. Morgan is laying out? Well, here's what the J.P. Morgan upgrade is kind of

spelling out, that Snowflake is the growthiest of these high growth names. Now, according to J.P. Morgan, right now, Snowflake's cloud data management business has a $67 to $87 billion total addressable market. Sounds pretty good, right? Well, JP Morgan says Snowflake is also laying the groundwork for what it sees as something potentially bigger and even better, an emerging category called data cloud. That essentially lets companies use one copy of their data across all networks. I'm kind of simplifying it, but you get the idea. So JPMC Snowflake has the ability to grow its revenue significantly in its current business under cloud data management, and then also move into that emerging business. Now back to that survey. Sarah, I want to make sure I'm quoting the survey right. JPMorgan calls it its massive scale read of chief information

officers. It also found that almost two thirds of companies that use Snowflake expect to increase its spending this year, putting it right up there with hyperscaler Microsoft. And then there's the other thing, the interest rate pressure, part of why Snowflake's doing really well today. It's hard to ignore this. I know I sound like a broken record, but if you look at the movement of the 10-year versus cloud names in Snowflake, right here, you see it on the screen, the white line and the orangish line and brownish line, burnt sienna line, whatever that is, that's the cloud ETF. And then you see the 10-year. Anytime the 10-year goes down, those names just happen to come up. The burnt sienna line, whatever that is. That's the cloud ETF. And then you see the 10-year. Anytime the 10-year goes down, those names just happen to come up. The burnt sienna line. I like it. Frank, thank you. Frank Holland, it is interesting to see, Paul, the cloud names,

Datadog, Zscaler, Okta, and Snowflake rallying today alongside healthcare utilities and consumer staples. That is a slow growth or recessionary type trade. What does it tell you? Are these stocks ripe for buying? Well, I think, again, these software stocks have been absolutely destroyed this year. So when you are going to see this type of market bounce from extreme oversold levels, these are the types of names that are down the most, like the home builders, like the software stocks that tend to down the most, like the homebuilders, like the software stocks that tend to get the biggest bounce. And again, what Frank was saying, there's a very strong inverse correlation with the direction of interest rates. So if you're going to see interest rates go down, and we've seen a big decline in interest rates, it's the

largest five-day decline since the COVID crash in the 10-year yield. These stocks in a group like the software sector are going to get a bounce, and a bouncing they are today. Yeah. Total addressable market, though, it doesn't feel like that's what investors want. I mean, I get why it's a bullish case for the stock, but that was the same case a year ago when the stock was rallying and then it fell apart. I want to hit the cruise stocks because they are underperforming today. Names like Carnival, Royal Caribbean and Norwegian. They're now down around 50 percent on the year as this industry faces headwinds on a number of fronts. Seema Modi joins us. Seema, are these headwinds specific to the cruise industry, which seem to be underperforming even other travel names. They are, Sarah. It's two things, the concerns around bookings

as well as rising debt levels in this environment where interest rates are moving higher. That doesn't bode well for the cruise lines. That's why when Carnival reports earnings tomorrow, the focus will be on how much revenue it's able to generate, even though it's discounting rates, fares. And if it can resist further debt raises, that will be topic de jour

when CEO Arnold Donald speaks to analysts following earnings. And if that removal, that pre-departure COVID test that we've discussed so much, Sarah, is providing a boost to bookings, we know that has been a source of anxiety for travelers. What's interesting, though, if you take a step back, is that this recovery in travel is very uneven. Hotels just posting their highest occupancy since the pandemic of nearly 72%. That's according to SDR. The cost of check-in to a hotel continues to rise along with airfares. New York City now in the top five most expensive markets. Yet there is a new study from Morgan Stanley this morning that shows that the desire to travel over the next six months, according to Americans they surveyed,

did tick down slightly from 58% to 53%, Sarah. So that tells us that over time, these inflation concerns could start to weigh on demand. Well, yeah, I do wonder about the demand destruction, Seema, in this industry and travel, because prices have gone up so much for airfares, for hotels. What about cruises? And is there a school of thought that we could see some of these prices getting lowered to keep demand intact?

No, you're exactly right. In fact, the average cruise fare is down versus hotels and airline fares, which have been moving higher. So there's actually one thesis out there that over time, if this economy continues to soften and we see travelers become more cost-conscious, that perhaps this creates an opportunity for the cruises because on average, it's a cheaper vacation than other land based vacations. And yes, they've discounted their fares. They brought them down to incentivize bookings. And tomorrow we'll get the first read from Carnival as to whether it's working. Wall Street right now is skeptical that it is. Seema, thank you. Seema Modi. Also tomorrow, don't miss our exclusive interview with Carnival CEO

Arnold Donald on this show on the back of earnings, closing bell after that news comes out. Also tomorrow, we're going to be talking to Airbnb CEO Brian Chesky in a first on CNBC interview on closing bell. So we'll get a really great read there of what's happening with travel demand and whether it is holding up amid all these concerns about the consumer and inflation. I want to hit shares of FedEx, though, because they're lower today. They're up about 14 percent since announcing that dividend increase. New board members and other actions to increase shareholder value earlier this month on the back of activists. We're expecting to get its fourth quarter results

after the bell today. Frank Holland is back with another stock that he covers, FedEx. What do we expect, Frank? Well, I mean, first and foremost, this is the first earnings call for new CEO Raj Subramanian. So a lot of interest in his commentary on the call, what he's going to kind of spell out as his agenda going forward. The second thing to really talk about here is pricing power. Everybody I'm talking to, analysts, the people in the industry, they're curious what kind of pricing power that FedEx still has. And one of the areas to watch here is express.

That's where FedEx gets about half of its revenue. Revenue per piece has increased by double digits over the last three quarters. Now keep in mind, revenues forecast to increase by 9% year over year, but earnings, EPS is expected to increase or forecast by Wall Street analysts increased by 37% year over year. But earnings, EPS is expected to increase or forecast by Wall Street Analyst increased by 37% year over year.

That kind of infers that a lot of people still believe that FedEx has really good pricing power. But there's that other situation that we're talking about. People are spending less on goods, less on e-commerce. They're going to the store more. They're spending more money on services and things like that.

And then you mentioned when, in addition to the new CEO, FedEx announced that plan to increase its dividend. That came from pressure from an activist investor, D.E. Shaw, and they really want FedEx to focus on, quote unquote, shareholder value. So one area that a lot of people think that could allow FedEx to return more money to its shareholders is reducing its capex spending. A lot of people think that maybe FedEx spends a little bit too much on planes and on vehicles. And right now, FedEx has different vehicles delivering its ground packages, which is residential e-commerce, and different vehicles delivering its Signature

Express service. A lot of people want the new CEO to kind of combine those two and have just one set of trucks delivering everything. So a lot of questions about how FedEx moves forward. But the real question is pricing power. Does it still have the same pricing power that it had in the midst of the pandemic and it showed over the last three quarters? Frank Holland. Frank, thank you very much. Paul, the market has moved lower lately on valuation concerns as interest rates have moved up. The next potential shoe to drop is earnings weakness, right? Earnings expectations we've all been talking about have held up relatively well. I feel like there's going to be outsized focus here on FedEx today and Nike on Monday. That's the official start to earnings season.

And if we see weakness on the economy and out of corporate America, it could be a bad omen for the broader market. What do you think? Yeah, that's a great point, Sarah. You know, today we had a couple of earnings reports and about half of the companies raised guidance, which was actually pretty surprising or reaffirmed guidance. Earnings estimates are going to come down. You know, we were talking about the homebuilders before. The homebuilders are trading under four times earnings. Nobody expects these earnings to levels to maintain going forward.

So those numbers are going to come down. But when everybody's expecting something, that tends to be a little bit more priced into the market. The homebuilders, for example, you could have earnings cut in half for the group, and they'd still be trading at a below average multiple relative to the last 30 years. So in that respect, there's probably some room built in for disappointment here. Obviously, I don't know. You know, we don't know what's going to come out of these reports. We've seen economic data showing signs of weakness.

So we're going to see lower numbers. We're going to see more companies lowering guidance than we've seen in prior quarters. You know, but again, I think people are expecting a lot of this. So the market, I mean, we're down 11 percent on the month. People have started to price this in. No one was talking about a recession six weeks ago. Now everybody's talking about a recession. No, FedEx always gives some good clues on the economy. The other thing coming out after the bell, results from the Fed's annual bank stress tests. We are waiting those. The results will dictate how much capital banks can actually return to shareholders in buybacks and in dividends. The Fed checks banks' balance sheets

against a hypothetical severe economic downturn. However, this year's test was devised before the war in Ukraine and the current inflationary environment, which is very elevated. But it will include heightened stress tests in two key areas, commercial real estate and corporate debt markets. Paul, what do you expect? And could this be a catalyst for the financials, which are underperforming today and having a tough month on these recessionary concerns down about 12 percent? Yes. I mean, I think the stress tests have become taken on less importance in recent years. But, you know, it's financials and the banks are in better shape now than they've been in several years. We're just when we look at charge off data on credit cards, monthly numbers,

we haven't seen a real meaningful uptick in those numbers again a lot's going to depend on how the economy plays out this year we don't necessarily know what those results are going to be nobody knows and has a crystal ball but again you have stocks like bank of america trading under 10 times earnings they're relatively cheap they have attractive dividend yields so i mean i don't think it's a major, these results are a major worry in the short term here. Really quickly, Paul, can you just talk about energy? Because it's the worst performing sector. It's down about 4% today.

Crude oil is down. And you guys have been putting out some stats on how steep of a drop we've seen from the peak in oil prices and the energy sector? Yeah, I mean, so we've just seen, I mean, in the last week or two, we've seen massive moves lower. Energy was the one sector that was holding up. It was up 20 percent quarter to date. Now it's down on the quarter. So it's back to pre-Ukraine invasion levels. So this tells you either one thing, that there's going to be some sort of resolution on the geopolitical front or that, you know, that there's going to be a lot of demand destruction going forward. But again, this is for the broader market overall. Energy has been a big weight. Seema was talking about it with the cruise lines earlier. So I think lower energy prices are positive for the market here going forward for the rest of the market. The only stock in the S&P energy sector higher

right now is Occidental after a late filing yesterday showed Berkshire Hathaway up to his stake in that stock. Everybody else is lower. As we head into the close, the S&P is good for about a 1% gain. Adding to this week's gains, we're up 3.3% heading into a Friday. We're still down more than 8% for the month, but still a comeback week. It is defensive groups, utilities, real estate, healthcare, and staples leading the charge. Though technology is playing a role, a lot of those beaten down cloud software names are leading today. Semiconductors are sitting out the tech rally, but a lot of the mega caps are in it, like Apple, Microsoft, Amazon, and Meta getting a boost today. Not so much NVIDIA or Tesla. That's going to do it for me here on Closing Bell. Have a great

evening.