Closing Bell - Closing Bell: Wild Market Swings, CME CEO On Bond Market Volatility & The Gig Is Up 10/11/22

Episode Date: October 11, 2022

Stocks taking investors on a rollercoaster ride. The major averages giving up big gains after The Bank of England warned pension funds they have just three days to rebalance positions. CME Group CEO Terry Duffy weighs in on how that will impact bond market volatility. Mukhlenkamp Fund is one of the few funds with positive returns over the last year. Portfolio Manager Jeff Muhlenkamp reveals his strategy for investing in this high inflation environment. Jefferies Sheila Kahyaoglu discusses the outlook for airlines after American raised its revenue guidance. Plus she reacts to Boeing's strong orders data and why she thinks the stock can nearly double from its current level. And Tusk Venture Partners Founder Bradley Tusk reacts to the new Labor Department proposal that could reclassify gig workers as employees instead of independent contracts and how that could impact stocks like Uber and Lyft.

Stocks have been making a big comeback throughout the session, but those gains have now gone away. This is the make or break hour for your money. Welcome to Closing Bell. I'm Sarah Eisen live today in Washington. The Dow is positive, but the S&P 500 is now down about three quarters of one percent. The Nasdaq is also falling down one point four percent. Looks like we lost some of those gains and some headlines in the last few moments from the Bank of England, of course, watching the turmoil there in the bond market. We'll get to that in just a moment. There's the impact on the U.S. We see continued rising rates. There's the 10-year, 3.9 percent. So pressure on the U.S. bond market. Take a live look at some of the names that have been driving the comeback in the Dow, which did, by the way, just dip into

negative territory. We still got some gainers out there, Amgen, Walmart, Walgreens, Johnson & Johnson and Travelers. As far as what is subtracting the most from the Dow, the banks, Goldman Sachs, Microsoft, Salesforce, Visa and JP Morgan. Coming up on today's show, we're going to talk live to CME Group CEO Terry Duffy about the big swings in the bond markets, which are being watched very closely right now by equity investors. And coming up on Overtime, don't miss my exclusive interview with Treasury Secretary Janet Yellen on the increasingly dire warnings about the global slowdown and how she views the U.S. economy and the U.S. markets right now. Let's get straight to the market dashboard, though, to break down these big moves. Senior markets commentator Mike Santoli, Mike, just when it was looking good, got that news from the Bank of England.

What happened? Well, yes, Erin, it shows you just how tentative this market is. We spent some more time this morning right around the year-to-date lows, in fact, made a marginal new low. We got this rally as bond yields calmed down. It seemed as if European markets closed, we didn't have to worry for a little while about what was happening over there with the Bank of England now saying pension funds have just three days to sort out their exposures and try to rebalance their funds

because the Bank of England will no longer be supporting the bond market over there after that period. That seemed to just be another excuse for the market to take this leg lower. So you see here, we're basically sort of testing that September 30 low level. You could call it a retest. You can say that the market hasn't accelerated to the downside

or found really a lot of new aggressive sellers down at these levels. Of course, it also looked that way in prior lows when we did try to actually gather ourselves as the market was stair-stepping on its way down. So no conclusions yet, but we are oversold, and season will start to get better. We need to get through that CPI number on Thursday, clearly without the bond market really having another bit of a tantrum.

Take a look at growth versus value. It's been consistent. Value has been outperforming. Growth stocks weighed down by the mega cap tech stocks that were leaders last year have been leaders. It's a two-year chart. That's a pretty good margin, 15% percentage point out performance by value. You might say, is that it?

Is the tank empty for value? Well, look at a really long-term chart. This is the S&P value index relative to the S&P itself since all the way back in 2001. That was a bear market. That's when growth stocks imploded back in 2000 and 2001. So you see just a decade plus of underperformance is just barely started to gather itself. Now, the problem, Sarah, is a lot of cyclical stocks in here, not all of them, but a lot of them, financials and things like that. So it doesn't seem like

it all clear, but those stocks are even cheaper relative to growth than they were when all this started. We've got a lot of catalysts coming up, Mike. We've got Fed minutes coming tomorrow. Then we have the CPI report, the inflation report on Thursday. And then we have bank earnings kicking off. And I was curious about your take on the setup for banks. Financials getting hit pretty hard right now, down 1.3 percent. And what we're likely to hear as far as caution, building up reserves for loan losses, combined with what should be better profitability on the back of rising rates? For sure. I think it's going to be a similar story where they don't really see a lot of problems in the last three months. Consumer seems still healthy. We still have a

little bit of that savings cushion left over. One issue is the corporate credit market has had a rough go. Corporate bond issuance has really dried up and spreads have blown out. So they may have to take some hits on that front. I think the CPI matters almost more than anything else because unless it really does start to come in and seem like it's getting more benign, whatever we hear from the Fed in terms of going a little slower isn't really going to have a lot of weight.

It's not going to gain purchase in the market if that's the case. But, you know, banks, again, they're going to be kind of considered guilty until proven innocent on their credit exposures, even though they look cheap, even though the yields are helping them out in terms of their net interest margins. And the commentary on the markets and the economy will be so key, I think. Mike, thank you. We'll see you later. Mike Santoli, stay close for us at the New York Stock Exchange.

Let's get into our top story. The gig may be up for gig economy stocks. Look at shares of Uber, Lyft and DoorDash right now. They are sinking on the back of a new proposal from the Biden Labor Department that could pave the way for gig workers to reclassify as employees instead of as independent contractors. The proposal still need to go through a formal regulatory process, including time for the public to submit comments. In a statement to CNBC, Uber's head of federal affairs says it is, quote, crucial that the Biden administration continues to hear from the 50 million people who have found an earning opportunity with companies like ours. Both Lyft and DoorDash say they are not anticipating any changes to their business and the rule will not

reclassify workers as employees. Joining us now is Bradley Tusk from Tusk Ventures. He was an early investor in Uber, a former political consultant for the company. This is right in your wheelhouse at the intersection of tech and regulatory issues. You've advocated in the past that these companies should classify their workers as employees. So do you applaud this move by the Biden administration? I don't want to applaud either side of it, because I think that we're in a world where we have a structure that was developed in the 1930s, where we had W-2 on one side and 1099 on the other. And everyone, for their own economic interests, is pushing the world as if we're still living in 1936. So if you're the unions, what do you really want? You want more members.

You want more dudes. You can only get that if people become W-2 full-time workers. So that's why they're pushing that. That's why the Biden administration issued this rule. If you are the platforms, what do you want? You want the lowest operating costs possible. So you want everyone as an independent contractor. The reality is we live in a world where the sharing economy is a new way to

work. And there's no reason we can't come up with a world that's a little more thoughtful, it's a little more policy work involved. But to say these are basic protections that workers should have, disability, workers' comp, whatever it is, and they still deserve the flexibility to choose their own kind of work and make their own schedules. And the lack of this not happening is not because it's bad policymaking. It's just because everyone is completely focused on politics and their bottom line. How about the market reaction, Bradley? We're seeing a pretty sharp sell-off. Even though some of the analysts, I was reading a KeyBank research report saying this is totally overdone. And even if these go through, it's less than 5% of Uber and Lyft's

workforce that actually work more than 40 hours a week and would see higher costs from the company. Right. So you're not looking at a 20 to 30% increase in operating costs like Uber and Lyft and DoorDash are saying. It's clearly going to be a lot lower than that. At the same time, I think that you have a world where we have to worry about in a tight labor market. Is the supply of workers still going to be there for an Uber, for a Lyft, for a DoorDash, for an Instacart? All of a sudden, the workers have to say, this is not my full-time job, and I have to pay union dues, and I have to only work here and nowhere else.

And so I think if you're the platforms, you're concerned, one, about increased operating costs, but you're also just concerned about an already tight worker market becoming even tighter and not having enough drivers to do the work. So do you think they're going to eat those higher costs ultimately or consumers are going to pay those higher costs because they can just pass it off? Of course we're going to pay those higher costs. That's always the case. And look, you've got a world right now where the workers are in the jobs. That might change as inflation continues to go up and interest rates go up. But right now, I think Schiff Smart's latest data said that for every four jobs available for a gig economy worker, they accept one of them. So right now,

the companies are in need and they will absorb the costs. But long term, like they always do, regulatory costs, despite what I think many of the left seem to think, doesn't get absorbed by the stock market or by the Fortune 500 or by the companies. It gets absorbed by the consumers. And so every time you put a new cost, a new burden on a company, you're just taxing your own consumers. Well, I guess they do have to pay more in lobbying. So, Bradley, how would you approach gig economy stocks, public stocks, private companies, which I know you're focused on in your venture fund? Would you rethink it, given that there is a potential change here to their business model and their economy? It would really depend on the company, right?

So there are some companies that are heavily dependent on people who really do work 50, 60 hours a week at that one platform. It seems that they're going to be classified as W-2. So you have to refactor that into the math as to whether or not the deal makes sense. There are other companies, though, where people are working on average, take Handy, for example, which is on your list there, 15 hours a week. Whatever investment you may want to make

or not make in Handy shouldn't really be dictated by the concern about this new federal law because it's not going to really affect that. Got it. Bradley Tuss, thank you for joining us. Good person to talk to today on this big move. After the break, CME Group CEO Terry Duffy will join us to break down the wild swings in the bond market following another intervention by the Bank of England and a fresh morning just in the last few minutes.

We'll talk about the impact for U.S. investors. You're watching Closing Bell on CNBC. 50 minutes left of trading, and now all three major averages are in the red, with the S&P down almost a full percent. Just in the last few moments or so, Bank of England's Governor Andrew Bailey telling pension fund managers in the U.K. they have three days to rebalance their positions. This comes, of course, after the central bank had to intervene in the bond market for the second consecutive day and warning of a material risk to the financial stability in the UK. It's clearly impacting our markets.

The U.S. 10-year yield, look at that. We saw a spike up on that news. So it's pressuring our bonds as well. And it completely turned around the stock market. The Dow was on the upswing this afternoon. We were as high as up 400 points. It is now negative. We've lost steam in the S&P 500 as well, which is down

more than 1%. Joining us now is CME Group CEO Terry Duffy. Boy, perfect guest to have on, Terry, with your view into the rates market. How problematic is the situation out of the UK? I don't know if it's problematic or not, sir. I just heard it myself as well. So I need to dig into it like everybody else and see what actually it's going to mean for them. But to have the U.K. central bank coming back into the market was not a big surprise, I think, by a lot of people. I think the real reaction will be does that do something to the U.S. and the Fed? Do they want to come back in and create some liquidity? They're looking for some stability somewhere somehow, sir. I don't know how they're going to do it. The U.S. just made comments that they're going to take down their balance sheet. They're going to take, you know,

real rates up to a certain level, 4.5, 4.75. And then our market reacts, you know, dramatically off of what Andrew Bailey said over in the U.K. So to be quite honest with you, I know this just happened, so I really need to dig into his comments more. No, I mean, I was just asking generally about what's happening in the UK. I think the concern right now is that he wants them to finish rebalancing by Friday when the Bank of England is due to end its bond buying. These central banks are in this position where, especially the UK, it's needing to provide liquidity at a time where it's also needing to trim its balance sheet and raise rates to fight inflation. What's that doing to the markets?

Well, we see what it's doing to the market. The market hates it. And so, listen, the market doesn't like any more of these surprises going on. And I think we continue to see them at the 11th hour, and it's not healthy for the marketplace. But, you know, everybody wants to figure out how to fight inflation. And sometimes the best way to fight inflation of high prices is with high prices. So, you know, I think the Fed needs to kind of take a more of a balanced approach towards this. And central bankers around the world need to take a more balanced approach to this.

It seems to be a bit irrational going on. I don't have the ultimate answer for you, Sarah, other than I think that we need to take a better look at how we're approaching the central banks here, not only in the United States, but around the country. Well, what are you seeing in the U.S. rates market, Terry? Because there have been some concerns lately about the spillover that we're seeing from the U.K., not to mention what's happening with the Fed and whether there's some signs of strain emerging and potentially liquidity problems. What do you see? I don't. I think that right now the Fed knew exactly that it was going to create some liquidity issues when it said it was going to take down its balance sheet, as I said earlier,

and the rates were going to go up. It's not like they didn't know that. They did it in 2018, saw the movie, now we're here again. So I don't think they went into this blind. They knew there was going to be some liquidity issues. So I think what we're seeing is volatility, but we're not seeing dysfunction in the bond market. So I think that's actually a good thing. You know, you're going to have volatility when you have free money for all these years and maybe potential moral hazards associated with that. And now all of a sudden,

we're in a situation that we're in today. So, you know, I don't think it's a horrible thing. I think that there's volatility, but I don't think there's dysfunction, Sarah. So, again, I think that's the way the markets work when you have these dramatic events. It's interesting. I mean, I'm hammering you on it because you have a bird's eye view. But also, there's this feeling right now that the Fed and other central banks are going to break something. That's sort of the concern out there. But when they do break something, then they'll come in and rescue it.

And I'm just wondering if you think we are seeing that, close to that, if there's validity to that theory. I don't. I don't think they're going to break something. I think they know exactly what they're doing. Listen, they've had plenty of opportunities. I've been a hawk on this for many years on your show and others, saying that the feds had plenty of opportunity to take rates up when things are good. And now they didn't. So I think they're going to break something.

I mean, you guys talk a lot about hard landings and soft landings. It all depends. And I've said this before to you, Sarah. It's in the eye of the beholder what the landing looks like. I think it's going to be a little bit more difficult. But I think they knew that going into that. They're fighting an inflation they've never seen before. You got trillions of dollars of government money that went into the economy with nobody working, everybody fighting for the same products. I know

I'm not saying anything novel or complex. We've all been talking about this, but nobody knows how to deal with it. So do I think they're going to break something? No, I think rates are going to go up. And when you think about it, the way they wanted to come down is unemployment at 3.5. They wanted to go away. So you look at all the politicians running for office, you don't see too many commercials about how they're going to create jobs anymore. So it is really crazy what's going on in the world today. And I think a lot of it has to do with the pandemic and set the market up the way it did. Yeah. I mean, obviously, high volumes are an uncertainty around the Fed is good for your business. Terry, where are you seeing the most volumes? Is it in rates or foreign exchange or energy?

I mean, it's all kind of really volatile right now. Cross the board, sir. 36 percent up in futures, 46 percent up in options on futures, you know, year over year in September. It's just amazing the way people need to continue to manage risk. And when you look at the interest rate market, especially what it does to the foreign exchange market, you guys were talking about crypto or somebody was talking about crypto earlier today, and crypto has been really quiet. Why is that? It's because foreign exchange has taken over as the way people want to manage risk. And why is that? Because the cost of money has gone higher with interest rates. So people want to manage risk. And why is that? Because the cost of money's gone higher with interest rates,

so people need to manage that risk. So that has been good for CME. When you look at energy, energy's been a really interesting asset class. We're seeing a tremendous amount of put buying, which basically puts on short hedges for some of these people at these prices, which everybody's either got oil going to 200 a barrel

or going back to zero. I'm not quite sure, but we're seeing a lot of activity on both sides of these markets, whether it's foreign exchange, whether it's energy, whether it's commodities, or especially with interest rates. What about crypto, Terry? Because you have been getting into the business and have futures for Bitcoin and Ethereum. And I'm curious what you've seen in terms of client interest as Bitcoin has not really proven to be a safe store of value at all. It's down more than 60 percent this year. No, there's no question. And the problem is when you look at what's going on with some of the

precious metals, some would say they haven't been a good store of value either. So, you know, I think that just goes to the times we live in today. A lot of us, nobody has seen what's going on geopolitically around the world. And so a lot of these products are kind of uncertain in how they price. So Bitcoin and cryptocurrencies, you know, I think it's really a time for them to decide, prove your use case, not prove your value case. And I think that's really where that market is trading at right now. Why some of the precious aren't rallying off of some of these geopolitical, I don't know. But as far as our business going into the Bitcoin and Ether, you know, our clients want to use it, but, you know, they really wanted

it because of the volatility. So look at the volatility in cryptocurrencies over the last three months. It's zero. There's nothing going on. So I think that's when you're seeing the market shift more to the fiat currencies, which have moved about 30 percent, you know, in volume for CME versus our crypto franchise. Yeah. Everyone wants a dollar now. Terry Duffy, thank you very much. Yes, they do. They definitely. For the color. It's really good to have you, especially on a day like today. Terry Duffy, CEO of CME Group. Let's show you what's happening with the markets because we are selling off. The S&P is down about a full, almost a full percent, just off that low. We were down a full percent a moment ago. It's been wild.

We got those headlines out of the U.K. where the Bank of England governor, Andrew Bailey, said this afternoon that pensioners should rebalance by Friday as that central bank tries to stem the losses in its bond market. It's impacting us because we're seeing losses now in bonds, and that's hurting stocks. There's the Nasdaq down 1.4%. This is the fifth down day in a row for the S&P and the Nasdaq. It's only Tuesday, but the Nasdaq's down 2.5% so far for the week. Coming up, we're going to talk to a fund manager who's actually handily outperforming the market over the past year. We'll find out where he's putting money to work now amid this global slowdown. And then later, Wells Fargo just initiated a tech stock

that it is calling a unicorn in software. We'll reveal the name and we'll talk to the analyst who made that call. Closing bell back after a quick break with the Dow down seven points. Stocks giving up a sizable intraday comeback after Bank of England Governor Andrew Bailey warned this afternoon that pension funds had three days to rebalance before the end of the bond buying program. There's the S&P 500 down more than eight tenths of a percent. It's technology, communication services, those groups getting hit the hardest. That's where you see the most pain in the market when you see these bond yields rise. That's what we're seeing in the UK. And it's spilling over into the U.S. bond market as well. Let's bring in Jeffrey's chief market strategist, David Zervos, on the news line

to talk us through, David, the significance of this comment from the Bank of England and what we're seeing in terms of the market fallout. What do you think? Hey, Sarah, nice to speak with you. And yes, look, it's important to understand that central banks are trying somewhat to decompose or separate out financial stability issues from monetary policy issues. We saw with the ECB the way that they created the anti-pregmentation tool for Italian bonds. We're seeing it with the Bank of England, the way they're treating the long end of the gilt market, even though overall they're trying to manage inflation expectations, keep them anchored, and type monetary policy. It's a delicate balance. It's a difficult balance. But what it shows is the versatility of monetary policy and how far we've come from the days of, say, 1998,

where the Fed had to cut rates during the long-term capital crisis because it really didn't have tools to deal with that financial instability. And the economy was actually in great shape back then. We were growing at 4 percent. So those rate hikes, those rate cuts actually created some serious problems in 1999 and 2000, probably the peaking up of the NASDAQ bubble. So I look at this not so negatively. I look at it as quite positive, actually. Why is it positive?

They're going to end up, and this sounds like bond-buying program, even though the pensioners are asking them to continue it until the end of next month. And they're dealing with this problematic situation where they have to fight financial stability concerns, as you say, but also fight inflation. And those two things don't go together. Well, the reason I'm optimistic is that I guess I see that they're working around a financial instability issue. They're not going to let people out of jail for free, Sarah. I mean, at the end of the day, they sort of sowed the seeds for this. Years of buying index-length and long-dated guilt at absolutely absurd prices,

taking negative real yields to negative 2.5%, 3% for 50 to 60 years, crazy numbers. And, you know, I think there has to be some pain, but you don't want that to be a systemic event, something that sort of affects the entire financial system and requires a full-on turn in monetary policy. And I think what we're seeing is the beginnings of how central banks navigate that complicated landscape. So I wouldn't want to see central banks easing off too early here, Sarah, in the name of financial stability, only to create a de-entering of inflation expectations down the road in a return to the 1970s. That would be a disaster for me. That would be really bad. OK, so Mike Santoli, who's at the Stock Exchange for us, on the move in U.S. stocks, pretty jarring, especially for the Nasdaq, which is now down 1.5 percent. Losers like Microsoft, Apple, Tesla, Amazon, Meta, the usual suspects.

Explain how this impacts our market, because the Dow is actually flat. It was up 400 points. But explain the tie-in here and why these comments are so important. Well, I would say that there actually is no predetermined certain tie-in or impact, but it shows you how apprehensive the stock market is on any hint or suggestion that something could get more disorderly in global bond markets. It really is about that. It's a loud noise in another part of the house, and we're just going to get scared because it might be something. Now, clearly, if our yields start to go north, if the dollar, you know, kind

of continues to squeeze higher, that creates the whole set of relationships that means stocks are under pressure, growth stocks are expensive under more pressure, and the whole dynamic we've been seeing for months. But I don't think it's something that we know is going to happen in three days. It's much more about we have fragile psychology. We have a market that's basically sitting near its year-to-date lows. We're down 25 percent. And it's kind of a let's not, you know, be a hero into this type of environment.

So, again, I don't want to make it seem like we know how this turns out or that it is somehow a policy mistake what the B of A governor said, B of E governor said, but I do think it's understandable, given where the market is and what it's fearful of, that we would have this little bit of a kind of a wavering reaction to it. Just want to show everybody maybe the intraday chart, if we could, of the market, because, boy, have we been all over the place today. There's the intraday. Started weaker in the morning. Then we were climbing and it looked like we were going to break a four day losing

streak for the S&P and for the Nasdaq. Got as high as up 400 points on the Dow, as you can see. Gave it all back and then some and now have an S&P that's almost down a full percent and a Nasdaq that's down one and a half percent on the back of those headlines from the Bank of England saying they're going to wrap up their bond buying program. Bank of England Governor Andrew Bailey telling the pensions to rebalance by Friday earlier clearly than the market thought. David Zervos on the news line with us, Jeffrey's macro strategist who you want to have on a day like today. And I guess the question becomes, David, as we talk about the impact on the U.S. market and rising bond yields and financial instability and all of those concerns, will the Fed have to step in? Will the Fed have to get

involved here in some sort of way that is trying to go against what they're trying to do, which is fight inflation, trimming the balance sheet and raising interest rates. You know, it very well could happen, Sarah. We could find ourselves in a position where something starts to look highly disorderly, systemic in nature, forced selling becomes a storyline like it's become with the LDI story and the leverage inside of the UK insurance and pension fund industry. But as of yet, we haven't. And we've had quite a lot of tightening to go. So that's somewhat good news. But it's early days and it may happen. I guess I just say, Sarah, it is important to think about how far we've come with monetary policy and financial stability and macroprudential tools, and how much we can kind of

dissect out the monetary policy from the financial stability. There's nothing that says that the Bank of England can't sort of stop the program, see how it goes, and if something looks like it's going to metastasize again in the long end, they kind of come back in and try to fix it. So I think, look, I think the market wants to somehow sort of see these financial instability issues as a pivot by central banks. So it gets excited that central banks are going to slow down a little bit because of financial instability. And when we get them solving them without slowing down the overall tightening process, maybe the market gets a little less exuberant. And that may be a little bit of what we're seeing today. Well, we did get comments yesterday from Fed Vice Chair Lael Brainard, who specifically mentioned the liquidity concerns in the market.

Yes, she made inflation clearly the number one fight. But mentioning that, mentioning some of the global spillover risks, potentially a sign, David, that the Fed may consider slowing down. I don't know. What do you think? Are we still expecting a jumbo-sized rate hike and then 50 in December? You know, I do think the Fed is trying to set up for a sort of an end of, you know, the end innings in this game of getting us up to four, four and a half and seeing what that does and what breaks and what doesn't. And they're going to have a lot of reasons to kind of, I don't think they're going to declare early victory, Sarah, but they're going to talk about inflation expectations being very

well contained, five-year, five-year break-evens never really breaking out of a two to two and a half percent range during this entire inflation spike, but also the break-even market really coming back across the curve and real rates rising up across the curve in the last quarter or two. And I think they can point to a stronger dollar, an inverted curve, weakness in things like gold, which is all signs that the Fed has kind of maintained its credibility, kept its fight against the inflation anchor coming undone. And so it probably earns a little bit of time to wait and watch. And that may be for early next year or very late this year.

But I think it's all those are those are the sort of end inning games, not begin an end inning issue, not beginning. And Leo may really be kind of setting us up a little bit more for that. And the market kind of takes its cue from that and gets gets a little bit more positive just to just because it can see some light at the end of the tunnel. David Zervos, great to have you call in. Thank you very much from Jeffries and Mike Santoli. Stay close as well as we continue to watch the sellout. The Dow, by the way, just going back into positive territory. We're well off the highs. We were up more than 400. There's the S&P 500 down eight tenths of a percent. You've still got pockets of strength today. Staples, real estate and health care defensive groups. Those three are actually holding up and are positive right now. It's

technology, communication services, financials, consumer discretionary. Each of those sectors down more than a percent. The S&P 500 falling nearly 17 percent now over the past year. Up next, one of the few fund managers posting a positive return during that time. He's going to be here to give us his top picks going into year end. We'll be right back on Closing Bell. Stocks turning lower this afternoon after the Bank of England governor, Andrew Bailey, warned pension fund managers to rebalance by Friday, saying you've got three days left now as they deal with this bond buying program to calm down their bond market. The uncertainty in the UK

adding a more negative sentiment to a market that's been under serious pressure all year long. But there are several funds that have managed to post gains, according to a recent Wall Street Journal story highlighting them. One of the funds profiled is Mellencamp Fund, ranked number three by the journal. That fund has beaten the S&P 500 in the past year. And joining us now is the portfolio manager for the Mullencamp Fund, Jeff Mullencamp. Jeff, it's good to have you here. How do you outperform in a market like this where we now have to go study British pension funds and whether they're facing margin calls? Hi, Sarah. Thanks for having me on today. We really didn't approach it from that perspective. About a year ago, we started to sell some of the best performing stocks that we had had because they had gotten overpriced and because it looked like

the price momentum was changing, right? They had gone from continually running up to running down. So it looked to us like the dynamics in the market were changing. And so we started to raise cash and we simply did not see the value we were looking for to put that cash to work. You know, inflation had come to town. The Fed still really hadn't grappled with the inflation issue. The way we model value for stocks, inflation is one of the primary inputs, along with return on shareholder equity. So we actually increased our standards, if you will, for what we were looking for because of the increase in inflation. And so we simply weren't finding stocks that met the valuation criteria. It helped that we were a little bit fortunate.

We saw some value, in fact, a lot of value in some energy stocks late last year and early this year. We picked those up. And then, of course, you have the energy problems in Europe that preceded the Ukraine war and then the additional problems that happened after the Ukraine war kicked off. So all those things kind of came together. Energy has done very well for us this year. We still like our names in energy. And I think you've probably seen those those picks. We'd still like our names in energy. And I think you've probably seen those those picks. We'd still like our names. Well, I want energy. The only sector higher this year, up 44 percent with with S&P 500 down 25 percent.

It's pretty stark. We're looking at some of your top holdings. So so, Jeff, now what is the the strategy as inflation potentially should come down here now, right, with the Fed hiking a lot and with some of the commodities and shipping rates off their highs? How do you tweak that strategy? So a couple of points. You know, coming down off of 8% is great, but to what? Are we coming down to 5? Are we coming down to five? Are we coming down to four? Our kind of base case is that inflation will come down, but we're not going to get all the way back down to the two or three percent that the Fed would like to see before one of the crises that you just got done talking to David Zervos about.

And I follow him and he's a great guy to follow. Comes to fruition. Right. That's kind of our base case. I'm not certain it's going to happen, but I think it's reasonably likely that you're going to get some problem somewhere in the markets or somewhere around the world that the Fed cares very deeply about and comes off the inflation fight to go solve that problem. Whether it's a crisis or not, they'll have to go solve that problem. So it's going to be kind of a two steps forward, one step back on inflation. And so we kind of think, go ahead, I'm sorry. No, no, no. Please finish and share, if you could, where the biggest concentration of the fund is right now. Which sector is what type of energy?

It's clearly energy. Still. It's energy. It's clearly energy. What we did was we went through and made sure that the companies we held would do well in a higher inflation environment. And with the cash we raised, we're frankly just looking for the fat pitch to put that money back to work. We expect that will come sometime in the near future, but don't ask me to predict when. The energy is a little bit different. Energy has its own internal dynamics for the industry we went through the boom with the shale we went through the bust that really hit a crescendo in april of 2020 when the price of crude was minus 20 a barrel right so the companies that survived that bust took away the incentives for growth that they had put in place and now put in place incentives for profitability and return on shareholder equity.

So they're generating lots of cash. They're paying down their debt. They're much better run companies from that perspective than they had been. That's what made them attractive to us. That's why we started working our way into the space late last year. That's why we remain interested really going forward. And then all the turmoil around the globe generated by the Ukraine war and the sanctions against Russia, et cetera, only kind of turbocharge that, right? You've got a lot of uncertainty in the energy space. And frankly, Europe is facing

an energy crisis of a magnitude that I don't think we've seen in my lifetime. This is worse than our 1970s energy crisis, right? That was just the price of gasoline. This is the price of heating oil. This is the price of natural gas to heat. And natural gas, in particular, is difficult to ship. And it's also a feedstock, not just an energy source. So it's creating lots of problems for us. Yeah. And one reason why energy continues to outperform is up 10 percent so far this month. Jeff, thank you very much. We'll continue to follow you and your returns. Jeff Mellencamp. Meta, take a look. Major underperformer today following a big downgrade. We'll have details straight ahead. That story plus Coinbase crushing it and blue skies ahead for one airline when we

take you inside the market zone. As you can see, the Dow is outperforming. It's up 36 points right now. The S&P 500, though, still under some pressure, down about three quarters of one percent and the Nasdaq down one and a quarter percent. We'll be right back with the market zone next. We are now in the closing bell market zone. CNBC senior markets commentator Mike Santoli with us to break down these crucial moments of the trading day, as always. Plus, we've got Jeffrey Shilakayalu on Boeing and the airlines making moves today and Steve Kovach on Meta with some new announcements. We'll kick it off, though, with the broad market and that turnaround we saw in stocks. It looked like things were going to recover today. Pretty much all afternoon, the S&P was higher.

It looks like we were going to break a four day losing streak, Mike. And then we lost it on some some Bank of England headlines. We are off the lows right now. The S&P now down a half a percent, just clearly highlighting all of the fragility out there and the fact that, you know, people say a lot of people say we need to see bonds stabilize before we can see anything like that in stocks. Do you do you agree with that? Right. On a sustained basis, yes, we would need bond volatility to come down to have stocks really to get an uptrend going. We're going to see bounces no matter what markets. You know, again, we've been wallowing down near the lows here, testing these year to date lows. I do think it shows you the raw nerves in the market right now. Anything

that suggests things are going to get messier in global bond markets. It doesn't necessarily take a lot for it to create a little bit of defensiveness. And you have defensiveness there. You have the big tech and semis again losing. You have some defensive sectors doing well. On the other hand, our bond markets are not really doing much on this news. In fact, they might eventually get to be a bit more of a safety bid in treasuries. So I see it as a little bit of a neutral setup. It's kind of a push-pull. And we might have a modest loss, but we've so far held the recent lows. If you're looking for what's working right now in the Nasdaq, it's the safe havens or defensive stocks. Amgen, Pepsi, PepsiCo out with results tomorrow.

Mondelez, all the tech stocks are getting hit pretty hard. Microsoft, the biggest drag there. Let's hit some of the travel names. American Airlines gets a lift after saying strong summer travel demand helped boost third quarter sales and lessen the pain from those higher costs. That stock is working. Boeing, though losing its gains by the afternoon, the stock had been rallying on high demand for its jets in September. Airline orders rising by 90 last month. Let's break down these moves with Jeffries aerospace analyst Sheila Cayalu. She's got a hold on American and Sheila, a long time buy on Boeing,

which is why we really wanted to talk to you, because even with the big declines we've seen this year going against your target, you have hung in there on Boeing. Is this story going to start to work? Eventually, we hope. You know, the airlines are very healthy, as we saw from American today, raising its guidance slightly. Pricing is good. The corporate public economy is coming back. But on the airline 90, they're still at about 40 percent share when we adhere to date net orders versus their buck. So in there. But what we're looking at their November 1st analyst day is answers from CEO Calhoun on what they're doing to shore up the order book a little bit better and when profits will eventually recover within their commercial air business. What about the fact that we continue to get good updates from these airlines, and yet the global economy continues to deteriorate?

Just today, the IMF, with a big downgrade in the forecast for next year, warning the worst is yet to come. How do airline investors square those two things? I think that's really our bearish view on the airline. In general, Fed is targeting inflation, and airline fares are a big component of that. I think that's really our bearish view on the airline. That is targeting inflation and airline fares are a big component of that. So we think pricing, which is driving transoms higher, come in next year into 2023. But we're still seeing very robust spending in the second half of 2022. So, you know, airline sector is doing well right now, but we don't know how long that

is sustainable. And cost pressures like rising fuel prices, rising labor prices are going to impact the airline industry. So we're in a cautious stance there, but we're still hoping for that Boeing recovery. And, you know, lastly, I would say we're remaining positive on the defense sector as well. Got it. Thank you for joining us, Sheila Kialu, with some of the picks there in the airline and travel space. Look at Meta. It's one of the big underperformers today. Atlantic equities downgrading the stock to neutral from overweight, citing an increasingly challenged growth outlook because of strengthening macro headwinds and increasing advertising competition. Meanwhile, Meta announcing a new VR headset as it pivots to the metaverse. Steve

Kovac joins us. Did we learn anything new from either the Facebook event today or from this downgrade? There have been these concerns out there for a while. Yeah, Sarah, they're very consistent concerns that we've been hearing from Meta, especially about them monetizing Reels, which is their TikTok competitor. They're still struggling to do that. Not to mention the journal a couple of weeks ago said people really aren't using it the way they need to be using it in order to make money. Now, on to today's event, I'll talk about the headset in a second and all the whiz-bang features there. But honestly, more important for our audience to know is the app side of things. They spent a lot of time at the front of this event, basically convincing developers,

you need to make apps and games for this. There's an opportunity to make money here. They pointed out some examples of developers who have made a million or more dollars so far in the Oculus App Store that's specific to that headset. Because, look, Sarah, no one's going to buy this device if there's nothing to do on it. And that's been the biggest criticism so far of the previous versions of the headset. It's fun to use for, you know, 15, 20, 30 minutes. But after that, you're bored and it collects dust in your closet for many months. I had to update mine today for over an hour just to watch the events in the metaverse. So so on to the

on to the new headset, though, this is a fifteen hundred dollar headset. Now, look, Zuckerberg has said he doesn't want to sell expensive hardware, but this thing is way more expensive. It's more expensive than, I think, the most expensive iPhone, believe it or not. And he's criticized companies like Apple for putting out high-priced products that are out of reach for most people. He thinks the metaverse should be cheap and accessible and funded and supplemented by advertising. That's not what he announced today. What he announced today was a very expensive piece of hardware that's going to be hard to convince people to buy because of what I said about the apps. There's not a lot to do on there yet, or at least not a lot to keep people stuck and locked into the device. So it's going to be really interesting to see this thing goes on sale

on October 25th, Sarah, and we'll get some insight into whether or not people want to snap this up. Yeah, doesn't look like investors are too excited about it at the moment. Thank you, Steve Kovac. Just wanted to go to you, Mike, on Meta's stock, which is 4% lower and now 64% or so off the highs. It's basically at the lows right now. And just how much of these concerns are factored in? Yeah, I would say one of the most out of favor mega cap stocks, and without meaning any disrespect, the fact that it's down 4%, this Atlantic equities downgrade,

I don't think there was anything new in that downgrade. It just shows you that investors are not necessarily seeing with this product rollout the return on the investment that they would like to most likely. And earnings forecast for the current year, a year ago, was supposed to be $14 a share. Right now, the full year estimate's under $10 a share. So as much as you'd like to say it's reasonably valued stock right now, in fact, it's looking cheap relative to others in the group, the target just keeps dropping in terms of where the profits are going to settle out. So I think that's going to be an issue. Ultimately, you have to believe that value is going to matter here,

but it's tough to make the case until you see estimates stabilize. By the way, just watching the Nasdaq, which is lower again for its fifth day in a row, Mike, it's hitting its lowest level since July 2020 in the session. Today, it's down one percent. It's off the lows. But boy, does it continue to bear the brunt of the selling here? It does. And, you know, that's exactly the way that it really hogged the upside on the way up in 2021. So it really is just an unwind of a lot of the things that got us to those peaks. Remember, the Nasdaq peaked on November 19th of last year. So we're pushing 11 months since the peak there. It's also still five, six percent above the pre-pandemic peak. Semis are well above that level. So I think that, you know, it's really just a reflection

of how much had built up in the way of excess value and that premium that's been bled out of the Nasdaq relative to other parts of the market. And I keep pointing out the eco-weighted S&P has been a strong outperformer versus the mega caps all year. All right. We are seeing some improvement, just showing everybody small caps are now in positive territory, and so is the Dow. The S&P is off the lows of the day, still down six-tenths of a percent. Coinbase shares just want to hit are popping because Google announcing it will now allow some cloud customers to pay using cryptocurrencies through Coinbase. Meanwhile, Coinbase winning regulatory approval in Singapore as it continues its overseas expansion. Kate Rooney joining us now. Kate, how significant is the Google partnership? Seems like a big vote of confidence.

Yeah, that's exactly what it is, Sarah. It is really validating for Coinbase. It's seen as a really good thing for the stock. We saw a similar pop when Coinbase announced that BlackRock partnership. And at the time, it was up about 20%. We saw as much of an 8% pop this morning on Coinbase. It's seen as validating and a sign that Coinbase is diversifying away from just trading revenue, which really is still its bread and butter. Analysts I'm talking to say it's too soon to tell how creative this will be. The bigger deal here is that Google is using them for Coinbase custody. We'll see if this really adds to the bottom line and what it means for the long term.

The other thing I would point out, Singapore news may be more of a big deal in the near term because it could expand the company overseas, get more trading volume overseas, and that's really been a long-term play for Coinbase as more competition emerges from FTX and some of the other big global competitors. Got it. Kate Rooney. Kate, thank you very much. Highlighting Coinbase up almost 5 percent. As we go into the close, what a session. We've been all over the place, started lower, climbed throughout the day, got as high as up 400 points on the Dow, lost it all late in the trading day just before the top of this hour on some comments from the Bank of England's

head, Governor Andrew Bailey, that the pension funds that they've been trying to help bail out here have three days to rebalance before they stop buying bonds. That hurt the U.S. market, hurt U.S. bonds a little bit. The S&P 500 is still lower. It looks like we're going to go for five days down, about seven-tenths of one percent. The Nasdaq comp down a little bit more than one percent. Of course, that's where we see the most selling on days where there are concerns about the bond market. And that seems to be the case.

Microsoft, Apple, Tesla, Meta, those are the big drags right now, both on the S&P and on the Nasdaq, which is going out with another more than 1% decline at a two-year low. In the next hour, a conversation with Janet Yellen, the Treasury Secretary of the U.S., on all of this, concerns about the market and the global economy. That's going to do it here for me on Closing Bell.