Closing Bell - Goldman Sachs weighs on the Dow, HP CEO on China supply chain, Williams-Sonoma CEO on the consumer 1/17/23

Episode Date: January 17, 2023

It was a mixed session for the major averages as Goldman Sachs weighed on the Dow, while the Nasdaq moved between gains and losses. CFRA’s Ken Leon discusses Goldman’s earnings, along with Morgan Stanley results and his outlook for the rest of the banks. Sara Eisen sits down the CEOs of HP and Williams-Sonoma at the World Economic Forum in Davos, to discuss their views on the economy, the consumer, China’s reopening, and the supply chain. Amit Daryanani from Evercore ISI joins to break down his bullish call on Apple. Plus the latest on a big drop for Travelers and Ryan Cohen’s new activist campaign.

It is a mixed session for the major averages as the Nasdaq moves higher while Goldman Sachs weighs heavily on the Dow. This is the make or break hour for your money. Welcome to Closing Bell. I'm Mike Santoli. Sarah Eisen is at the World Economic Forum in Davos, Switzerland. Here's where things stand in the market. The S&P 500 fighting its way back toward that 4,000 mark, but you do see the weakness there in the Dow all day. It's been the underperformer under the weight of a couple of big financial components. Look at the worst performers so far today in the Dow.

Goldman Sachs leading to the downside. Remember, this is a price-weighted index. Big individual dollar drops really do weigh in. Travelers also a disappointment on earnings. We're going to talk about that a little bit more. And then Verizon 3M Honeywell also contributing to some of that downside action tech, a relative bright spot today. Coming up on today's show, we have two key interviews from Davos on the consumer and the supply chain. We'll hear from HP CEO Enrique Lores about the PC market and what he's seeing out of China.

And later, the CEO of Williams-Sonoma weighs in on the state of the U. S. consumer. And her read on inflation. Let's get a look at the market how it's situated relative to where we've been first up couple weeks of the year. Really got people thinking that we had a risk on move very broad rally in the first couple of weeks in the S. and P. five

hundred some momentum triggers to the upside might have actually. Fired I've gotten some people thinking maybe that there's a the beginning of an acceleration today. Really just sort of sitting here right at this level what level is it upside might have actually fired. I've gotten some people thinking maybe that there's the beginning of an acceleration today, really just sort of sitting here right at this level. And what level is that? Well, we keep drawing the downtrend line from the January 3rd and 4th peak of 2022,

and we're still there. So if this were going to be just another bear market rally, it probably would be stalling out right around here, as they did a few times over the course of the last year. Certainly too soon to say one way or the other whether that's the case. You have the credit markets that are also strong. And earnings, you've got a lot of back and forth action, but so far coming in on average slightly better than expected. Take a look at some cyclical areas. The consumer discretionary equal weighted and financials as well have outperformed the S&P 500 equal weight over the last several months. That shows you people thinking maybe we've priced in a relatively benign economic outlook from here. Obviously, nothing is for sure. But consumer

discretionary was a big underperformer into the middle of last year, and it has come back pretty well, as have financials, although not specifically their traditional banks. That's a couple of names in the news the last couple of trading days from the large banks. Let's check in on that group. Morgan Stanley, Goldman Sachs, both moving in opposite directions today. Goldman is down after posting its worst earnings miss since 2011. But shares of Morgan Stanley, they're soaring after beating estimates. Look at that, almost exact symmetry there, up 6.3% versus down 6.3% on the day. Joining us now is Ken Leon from CFRA to talk more. But what to make of these numbers, Ken? And specifically when it comes

to Goldman Sachs, it seems as if the provisions for potential credit losses in the consumer lending area, as well as maybe just higher expenses that went along with what we already knew about weakness in investment banking, causing some people to really kind of throw in the towel on the stock today. Do you think that's justified reaction? So Goldman disappointed. And I think looking out to 2023, do they have the right strategy or this is a management that has a work in progress, particularly with that expansive effort into consumer retail banking that has been pulled back? You know, it's tough to stay just in the investment banking space. And that will come back when we get to a risk on environment. But that's not going to be for the next six months. So they have an investor day at the end of February. And there's going to be more information about what is Goldman's strategy looking at over the intermediate or long term.

And the reaction of Goldman, especially in contrast with Morgan Stanley, is pretty stark. But, you know, Morgan Stanley had already built up a pretty sizable valuation advantage over Goldman, meaning it's obviously got a higher valuation. People very much approve of the steadier wealth management orientation of Morgan Stanley. Again, I just go back to this this split in terms of Morgan Stanley probably has, I just go back to this split in terms of Morgan Stanley probably has never looked this expensive relative to Goldman Sachs, at least not in a number of years. And I wonder if you think, again, that the market is reading this correctly. Yeah, Mike, so we've had these discussions before on air. And really, James Gorman has put a

strategy to get a higher multiple, more akin to a BlackRock or a Charles Schwab, with sizable wealth management and asset management for recurring revenue. That still has opportunity on the upside because it's trading below the S&P 500. And Goldman is one or two steps behind there. David Solomon at Goldman, he's just going to have to grow not organically, but by acquisition, more assets under management. And that's really the direction. You're not going to get a higher stock price for doing credit cards or retail banking. That game is really dominated by the banks that reported Friday. And do you think that the provisions that Goldman took in the past quarter for in part that consumer credit card and retail banking business look sufficient? I mean, I think

there's probably a sense out there they were much higher than people were anticipating. Is Goldman essentially trying to sort of front load some of the pain so that it's a cleaner outlook in subsequent quarters? Well, there are provisions, but it's not in the billions. And we're not sure because they don't disclose operating income or loss for their segments, including the roll-up of platform solutions, which is where retail is. So we just don't know. And that's why that investor day is a tipping point for the management and for the stock. We also think, you know, when you look at Goldman, you know, they're doing great in terms of being the best investment banker.

You know, but we're in a risk off environment. And actually, it was James Gorman and Morgan Sillings said, you know, when the Fed stops raising rates, you know, maybe his stock will go up or the whole group. But it will take time because we've got higher rates, higher cost of capital. That means deals are more expensive. Yeah, there's no doubt about that. More broadly, Ken, we've basically heard from a huge chunk of the sector's market cap between last week and today. What are the threads you're pulling out of it? I mean, I know you seem to prefer, in terms of the stocks,

of the more traditional commercial banks, the big ones. I do. And to your point, you know, financials as a sector has a chance to outperform the market this year. We do need a lot of that help coming from regional banks, which we like, or J.P. Morgan, a Wells Fargo, or a Bank of America. That is really the source of really where financials can outperform this year. Last year, it was insurance.

And it's the kind of environment of a Goldilocks. We don't want the economy too hot or too cold. And these banks are priced for perfection because they're trading at steep discounts, both to their historic averages and also to the S&P 500. And these banks are priced for perfection because they're trading at steep discounts, both to their historic averages and also to the S&P 500. All right, Ken, I appreciate you running through with us. Thanks very much, Ken Leon. Well, Goldman Sachs CEO David Solomon will discuss earnings and the outlook for financials live from Davos tomorrow morning on Squawk Box. Do not want to miss that one. Up next, will HP follow competitor Dell in diversifying its supply chain outside of China? We'll hear from the company's CEO about that and much more after the break. You're watching

Closing Bell on CNBC. HP, one of the many tech stocks taking part in last year's steep drawdown. It is also underperforming to bounce in the Nasdaq so far to start this year. Sarah Eisen sat down with CEO Enrique Lórez today in Davos at this year's World Economic Forum to discuss how tech companies are preparing for the possible slowdown. The big question everyone's asking is what's happening with the global economy. From your vantage point, how do things look? I think we continue to see many of the challenges that we shared a few months ago when we announced our results. If we look at the impact of the war, especially in Europe,

the situation in China, inflation, we clearly see many challenges that we need to manage. I think what is important for companies like us is to focus on what we can control, which in our case is manage our cost while at the same time we continue to invest in our growth areas because we don't know when the economy is gonna get better but we know it will get better and we need to be well positioned when this happens. But the PC market in particular is slowing down. How sharp of a slowdown are we seeing? I think it's in line to what we're expecting. A few weeks ago, we shared that our expectation

was that we were gonna see a decline of around 10% in our fiscal year, and this is more or less what we are seeing. So it's as we were expecting, but again, what is also important is the market is still bigger than it was before the pandemic. So which gives us a lot of optimism for whenever the situation will get better,

the opportunity that we continue to have. That's what I'm trying to figure out with so many of these tech companies, including yours. There was such a distortion with the COVID period, over-earning, building capacity, everybody working at home and digitally, and now there's a give back. So it's hard to get a clear read on what's happening

with underlying demand, given we're still in that period. I think in our case, we look at kind of the core fundamentals. If we look at time people are spending in front of their PCs, of what the PCs are being used for, clearly both are driving to more utilization, a bigger market. And this is why we think whenever the economy will recover, we are going to see a stronger pc market than what we were seeing before the pandemic and printers too and printers too i think what different between home and office what we are seeing is the usage at home continues to be above the expectations we had before the pandemic office is clearly below because there are still many employees not going to the office but one compensates the other. You have strong views on hybrid work.

We have a very strong view because we think it's here to stay. Because it's good for your business, too. It's good for our business, but it's also good for our employees. And what we need to do is make sure that we adapt the culture of the company, the systems of the company to allow flexibility, while at the same time we bring employees to the office for those things that really require collaboration, discussion, because those things are very difficult to do when employees are remote. Are you still seeing the same productivity levels from work from home that we saw during COVID? I think working from

home, we haven't seen a big impact in productivity. I am more concerned about the lack of discussion, the lack of interaction that creates small issues or problems that shouldn't happen just because people and employees were not connecting. This is really what we need to fix. What about supply chain, Enrique? Has it normalized? It's almost normalized, both because the situation in supply chain has improved,

but also demand has gone down. So the net effect is that supply chain is not a headache anymore as it has been for the last two or three years. What about China in particular? Obviously important for production. What have you seen as far as coming back online? So one is from a demand perspective,

we are seeing demand holding, especially in our categories, which was a concern that we had, but demand has been holding. And from a production perspective, we are seeing demand holding, especially in our categories, which was a concern that we had, but demand has been holding. And from a production perspective, production has been very stable. We haven't seen a big impact of the reopening. We haven't seen a big impact of the change of the COVID policies. We are still early, but so far, so good. One of your big competitors, Dell, recently announced that they were moving all supply out of China. Is that something that you're actively working towards as well? We are always looking at how to improve the resiliency of our supply chain.

And this is something that we have been working on for some time. China is a very important part of our supply chain and is going to continue to be for the foreseeable future. So you're not making that break necessarily? Not radically, no. That's something other companies. I wanted to hit the Just 100 list, which we revealed with Just Capital. for the foreseeable future. So you're not making that break necessarily. That's something other companies... No, not radically, no. I wanted to hit the Just 100 list,

which we revealed with Just Capital. You did well. 47, I think, was the overall number. You know, for a company, my question was, you get high marks when it comes to making pledges to hire a number of diverse applicants, gender pay equity.

Are those things harder to achieve when you're in a period of belt tightening and layoffs as you've announced? It is harder to achieve, but they continue to be important so they need to continue to be a big part of our focus. Of course it's harder because if we don't hire as many people, changing percentages is going to be more difficult, but if we look at where the company needs to go long term, we need to continue to increase the diversity of our teams, especially at the executive level, and you're going to see us continue to do that in the future.

What is the environment like? You announced 4-6 thousand layoffs. Is there more coming? Is there more belt tightening? We are executing the plan that we announced. At this point, no changes from what we announced. This in our case is a three-year plan really linked to significant changes that we are going to be doing in key processes of the company adopting more digital, transforming some of the development

processes so as we will execute that is when people or some of our employees will be impacted. In any case, we have shown that we can manage that really with tons of respect for employees. And this is what we have done and what we will continue to do. Finally, on acquisitions, I'm curious how you're thinking about it now that we've seen tech valuations come down so much. Do you think there's more pain or are you looking? We have said that we think that M&A needs to be part of our plan to continue to invest in the growth areas and therefore we continue to look but also we did a major acquisition only two quarters ago so we are working to continue the integration and complete

integration but of course we are going to be looking because if there are good opportunities to accelerate our growth and create value for our shareholders, we will do it. In the growth areas, gaming is one of them. Gaming, hybrid work, where we continue to see a lot of demand from our customers, workforce solutions, consumer services are all areas where we see opportunities to grow and we are going to continue to do that. Just this year, our growth businesses represented $11 billion,

growing double digit. It's a big number, even in a difficult economic situation. Sarah also sat down in Davos with Williams-Sonoma CEO Laura Alba. We'll bring you that interview later in the show. Let's check in the markets. The Dow down about 333 at the moment. The S&P 500 holding steady just under the flat line, also just under that 4000 mark that was hit on Friday. The Nasdaq Composite still slightly positive. After the break, Ryan Cohen of meme stock fame has set his sights on a new target. We'll tell you what that is and we'll review some of his previous activist campaigns next. And as we head to a break, check out some of today's top search tickers on CNBC.com. The 10-year yield is in the top spot, followed by Tesla, Goldman Sachs, Morgan Stanley, and Apple. We'll be right back.

What is Wall Street buzzing about? Ryan Cohen's latest target. The activist has taken a stake in Chinese e-commerce giant Alibaba. Cohen is pushing for the company to boost its share repurchase program, according to the Wall Street Journal. Cohen, who made his fortune with online pet retailer Chewy, became a meme stock king, I guess the original meme stock king, when he used his stake in GameStop to push out executives there and become chairman. He also took an activist stake in Bed Bath & Beyond earlier this year, pushing for changes to the board of that company as well.

He sold his stake in Bed Bath in August. Other investments in his portfolio include Apple, Wells Fargo, Citigroup, and Netflix, according to the Journal. Deirdre Bosa joins us now for more on his Alibaba stake, and I guess what, if anything, it might mean for that company, Dee. Well, judging by the share price, it doesn't mean a whole lot. And you saw the market really just shrugged this off.

Alibaba shares lower on the day, looked to close that way because Alibaba is not a bed, bath and beyond. It is not a GameStop. This is a company with a market cap of over $300 billion. It is not subject to those same kind of short squeeze dynamics as the previous targets that Ryan Cohen has gone after.

There's another really important component of this story, and that is the Chinese Communist Party called them sort of the activists in Alibaba and many other Chinese tech companies. They've even issued what's called golden shares, which allows Chinese government parties to or bodies, I should say, there's only one party to, which is upping buybacks. Alibaba has already been doing that at a pretty quick pace and they do have the cash to up it if they wanted to. I don't know if it's going to be thanks to him. One investor on the ground there in China tells me that what's driving Alibaba is that positive momentum. Right. It would seem, I mean, the entire market has had a pretty good snapback. They did, I guess, reload their stock buyback program just a few months ago. So all that's in place, although, you know, there's always the chance to.

I mean, let's remember Ryan Cohen. You know, he bought into GameStop when it was very depressed. I mean, it didn't seem as if any of the managerial strategic changes have manifested very much. He just got a crowd following him in and the stock flew. Bed Bath, as you mentioned, he got in and out of that. That company is not doing necessarily well. He hasn't made his fortune or really his name as a as a public company investor. So maybe it's just he saw value there. It was a depressed situation. And, you know, whether it's lucky or smart, maybe it works. I think you're exactly right. And as you said, other retail investors followed him into names

like Bed Bath & Beyond. And it's probably they're probably remembering how they were left to hold the bag. You mentioned that surprise sale of his stake in Bed Bath & Beyond last August that burned a lot of retail investors. So like I said, you're not seeing that bump up in Alibaba shares that you might have seen with GameStop and Bed Bath & beyond. It's the dynamics that play here, that positive momentum. But remember, Alibaba used to be an $850 billion company. So it has seen a lot of value destruction over the last few years. He's not the only one that sees value here and has been riding that momentum on the upside. That's for sure. Of course, Charlie Munger, Warren Buffett's partner, has been in Alibaba for a long

time and it didn't seem to get the stock uh moving from its highs either d thank you very much talk to you soon up next the ceo of william sonoma gives us her latest read on the state of consumer spending and when inflation uh and on inflation when closing bell returns we have a news alert on Microsoft. Steve Kovach has the story. Hey, Steve. Hey there, Mike. Yeah, so Microsoft is going to announce tomorrow

5% layoffs. That's going to be about 11,000 people based on its global employee count. That's according to The Verge and Bloomberg backing up what we heard from Sky News earlier today that this is going to be the next of the big mega cap tech companies. It's going to be the third with significant layoffs.

Now, Microsoft has not responded to comment, but it sounds like based on these reports, we're going to hear about some significant job cuts at Microsoft tomorrow. This comes as we get that downgrade today from Guggenheim, Mike, on the fear of lower IT spend and all those foreign exchange headwinds that have been hurting the stock lately. Absolutely. And after, you know, lots of hiring in prior years, that's a big number. That too. 5% from Microsoft. 11,000 employees. Thank you. Yeah.

Shares of Williams-Sonoma, meantime, having a strong start to the year, up double digits. Sarah Eisen talked with CEO Laura Alba today in Davos. Sarah started by asking about the U.S. consumer. The whole world is here in Davos. And one of the questions for 2023 that everyone wants to know is what's going on with the U.S. consumer and how long can they hold up? You've got a good read. Well, I think they're a little nervous. And, you know, rightly so. It's a lot of change and you don't know what the Fed's going to do. And people are reading about losing jobs. And every time you open your phone, you see another news story about layoffs. So I think people are just standing still waiting to see

what's going to happen next. But the consumer definitely is still shopping and they love products that are great value, quality products that last. And I'm very pleased, you know, because we're in a business that is more resilient because people love their homes. I mean, people shopped a lot in the pandemic. We talked, we've been talking about that, but the truth is their homes are their biggest asset. And so many people started a project that has not been completed. And usually, you know, you start a project, you finish a project, and then you furnish the house. And so there's resilience in the customer in our business because of the business that we're in and the products that we sell.

It's surprising to me because furniture has been one of the weaker categories in some of the retail and consumer data because we all spent a lot on our homes during COVID. So you're saying there's still a tailwind? Well, the truth is now, you know, after COVID, everybody was so excited to go out and don't we love to go out and go to restaurants and go to travel. But the truth is, when you get that bill, it's really expensive. And so I think now that people are more conscious about their budget at all levels, the reality is that the home, being in your home is the best deal. You can have your friends over, you know, you get a lot of satisfaction about redoing a room. And so the home continues to be an important place for people,

top of their mind, even if they're going to spend a little bit less than they did last year. Are you baking in a recession? Is that what you see from the consumer? You know, who knows? I think because everybody's talking about it, I wonder, is that really what's going to happen? You know, I tend to try to see something else in the future. I don't, I don't, I'm not an economist. I don't know, but I know that there is definitely some fear and there's a pullback right now. When you talk to anybody here in Davos, that's what's on everyone's mind. So of course that's going to have an effect on spending. You mentioned inflation. So the inflation is in the services part of the economy right now. What, what's happening in the furniture category? Is it deflation, disinflation?

Well, let's start with the cost side. So the good news is that costs are coming down. The bad news is there's still the big costs from last year still moving through the supply chain and moving through the balance sheets, dray, demurrage, higher costs of product. But those costs are coming down and the customer should start to see and the companies should start to see relief

at the end of this year, next year. Promotional environment though, as you try to unload inventory? The promotional environment has always been wicked. And it depends on which customer you're serving, where your brand is. But there's a lot of people who've been running site-wide deals all the way through. And then there's people like us that have decided that we're going to run markdowns on products where we're overstocked. But on our best sellers, you know, we can command the price because of the value quality design relationship.

What about the supply chain? Is it still stuck presenting challenges or is that cleared up? It's better. It's a lot better. You know, last year was really difficult. There's still some residual things, but people are mostly back in stock. Now it's just getting the right balance of inventory across products and across geos. What about China? Because you do have production there.

China's a great place to do business. It's just that tariffs made everything really expensive. But we have great manufacturing partners there that have high quality. We moved a lot out when that happened, and we sort of stayed in the same place with that percent to total. You know, we've worked on really diversifying, not just away from China, but everywhere so that we're not overly reliant in one place. So that's ongoing process. And China is still a good place to do business? It is. I mean, there's been, you know, the ups and downs and you feel, you know, really empathetic for what's happened over there with the people. But the

quality of the product in the places that we do business is amazing. How else have consumers changed in terms of their behavior and habits post-COVID that you've noticed? You know, it's a really good question and hard to say. You know, I think consumers have shifted more online. They had to. There weren't stores open for a while. So, you know, when you learn how to shop online, you don't forget. There was a lot of consumers who never did that before. They weren't confident. They didn't even, you know, they weren't confident in shopping online and they've stayed shopping online through. Now we're also seeing it's great to have retail stores.

I mean, our retail stores are thriving. And customers like to get out and see things and touch things. And certainly in the home furnishings business, it's good to touch and sit on the sofa and make sure it's comfortable. So we are very fortunate to have a really good mix of both. If we go into a broader consumer discretionary slowdown or recession, which of your brands, because you have very distinct brands, which one is typically more resilient? It's a hard question. It depends on where the slowdown is. But, you know, we're a life stage business as well as a home business. When you think about it, I mean, people are going to buy cribs for their babies. Monogram baby chairs. Exactly. Common present.

It's great that we have a portfolio of brands. It definitely gives us more resilience. And we do serve a little bit more of a wider range of customers than a lot of people with a single brand. Sarah, we'll have two more big interviews from Davos tomorrow. Don't miss her one-on-ones with PepsiCo CEO Ramon Lagarta and ServiceNow CEO Bill McDermott. Those are tomorrow on Closing Bell. Here's where we stand in the market. The Dow still down more than 350, well over 100 points of that is from the downside in Goldman Sachs. S&P 500, very small giveback of that 4% gain in the past couple of weeks. NASDAQ still outperforming Russell 2000 virtually flat.

Catastrophic losses from winter storms leading to a catastrophic day for shares of insurance giant Travelers, which is a big drag on the Dow as well. Details coming up. Let's check out today's stealth mover, Roblox, and it's game on for the stock. The gaming company rallying after reporting revenue jumped by as much as 20% last month as consumers spent big bucks on its virtual currency, Robux. The stock is now up more than 30% year-to-date after plunging 70% in 2022. Now, Apple, one of the few Dow stocks solidly in the green today after a bullish call.

The analyst behind that call joins us next. We'll have that story, plus travelers tumbling at a rough day for the banks when we take you inside the Market Zone. We are now in the closing bell Market Zone. Ariel's head of the investment group, Charlie Bobrinskoy, is here to break down these crucial moments of the trading day. Plus, Evercore ISI's Amit Dhariannani on his bullish call on Apple and Contessa Brewer on travelers. Welcome to you all. Charlie, let's start on the markets here. I know you're going to take a longer-term perspective typically, but what have the first couple of weeks said to you, if anything, about, you know, the opportunity to avert a recession?

What the Fed's up to the whole value and growth proposition, which actually was very stark last year in favor of value? It does show that people are finally looking on the bright side, that that maybe some of the data around inflation is obviously not as bad as people had feared. And if that happens, then the Fed won't be as bad as people fear. And if that happens, then the Fed won't be as bad as people fear. And if that happens, then the economy won't be as bad as people fear. And that all leads to cyclical names, economically sensitive names, consumer discretionary doing pretty well. And that's what we've had. We've had some of those names that we believe are trading at a big discount to intrinsic value get off to a great start this year. And are you operating on the premise that, in fact, we will not have a recession,

you know, let's say in the next several months? Or are you investing, you know, I guess regardless of what the outlook is? I'm investing under the proposition that nobody's very good at predicting these things. There are times when the market gets way too optimistic, way too pessimistic. Right now, I'd say the market's getting it about right in terms of the economy. Odds are there's the expression don't fight the Fed is powerful because it's been true. When the Fed wants to bring on a recession or bring pressure on the labor market, they can do it. I think they're intent on doing that right now. I think that's a mistake, but I think that's more than a 50 percent chance of happening. And I think that's what the market thinks. So we're taking a long term approach. But I have to admit, the next three to six months, you've got to be cautious because you hate to fight the Fed.

Sure. And just quickly, do you think that if the Fed does what most people believe it's going to do, which is, you know, one or two more small hikes, that itself will be overdoing it? It would be overdoing because we're already past peak inflation and the money supply is coming down. The Fed is under the mistaken opinion that inflation got hot because of an overheated labor market. That is a false analysis of the situation. Wages were never up as much as inflation and wages were if anything a drag on inflation inflation exploded because of a 40 increase on the money supply which fed was responsible for so any of these increases are unnecessary the money supply is already coming down it would be a mistake but fortunately it looks like it's going to be a series of small

mistakes rather than the catastrophic stuff we were staring at three months ago. All right. Well, we do have that going for us potentially then. Two banks, two very different earnings stories. Goldman Sachs, the biggest drag on the Dow today after reporting its largest earnings miss in a decade because of a plunge in investment banking revenue and a jump in operating expenses. Morgan Stanley also experiencing a slowdown in investment banking, but was able to beat Wall Street's earnings estimates thanks to big revenue increases in its wealth management and trading businesses.

Meanwhile, Citigroup CEO Jane Frazier telling Sarah Eisen in Davos that she sees potential for an M&A rebound. We have very strong M&A dialogue. We're seeing a lot of transformational ideas from different CEOs that are pursuing them. And this is on the back of healthy balance sheets and lower prices. And I do see the risk rewards in the market. We're seeing both investors and issuers starting to get their arms around exactly what that risk reward means. And so I think we'll see some people cautiously testing out the capital markets.

Well, Charlie, it would be tough for deal activity to get, you know, any more depressed than it was, I guess, in the latter part of last year. But you're involved, I think, in Goldman as well as KKR in the past. What's your outlook for that business and whether, in fact, we can expect the capital markets to get busier? When investment banks have a lousy backlog of M&A deals, they talk about all the wonderful conversations they're having right now. That's what you just heard from Citi. Backlogs are down from very high levels. So I think the next three to six months are going to be challenged from an M&A backlog activity. You're right, Mike. It can't get a lot worse because it was awfully slow in the fourth quarter and people are adjusting

to higher rates. In fact, obviously, we've backed up a little bit of rates. Rates have come down almost 100 basis points from where they were. So I'm looking for a lower level of investment activity, certainly in the first quarter. That's one of the reasons why Goldman had such a tough quarter. Yeah, for sure. Well, Evercore ISI is out with a new note today on Apple, adding the tech giant to its tactical outperform list, saying there's a compelling buying opportunity ahead of the December quarter earnings, which should serve as a positive catalyst. Evercore analyst Amit Daryanani is here to talk a bit more about that. And Amit, I guess the call here is that the iPhone, disappointing iPhone sales in the December

quarter are not gone forever and that we're going to see evidence they're coming back. Yeah, absolutely right. I think the December quarter myth, if you may, is somewhat embedded in folks' expectations already. Again, the call would be this is more a production issue rather than a demand issue. And pick the number you have, 6 to 8 million iPhone units that did not get shipped in time for December, which will result in a miss. We would argue that's the deferral of demand, not a destruction of demand. So our take is, listen, December quarter will be bad, but March guide is going to be much better because I think those units will catch up into the March quarter.

So forward estimates, if you may, are going to go higher, not lower. And if that happens, we think the stock keeps working higher from here. Now, I guess the bigger question, in addition to the pace of iPhone sales, has been just exactly what we should be paying for Apple, for as steady as it is, as high quality as it is in terms of the balance sheet and shareholder return of capital, all the rest of it. Are we paying 20 times earnings? Is that a routine level as we might be looking at a little bit of a global slowdown? It's a great question.

What I would say is I think Apple is a whole lot closer to a consumer staple company versus a tech company. So if you look at the way most folks use their Apple product, it is a lot higher consumer staple than a tech company, right? The utilization is fairly high. If that's the case and you get traditional consumer staple assets, they do tend to trade in the low 20 kind of BD range, 22, 23, 24 times. I would argue all day long that's a fair way to look at Apple and that's perhaps why they devalue Apple as you follow. We have seen some reports about some details on a new Mac model, things like that. Is that part of the business material to the immediate outlook?

Mac, iPad, Mac especially, about 4 or 5 percent of revenues's really been a pretty good growth driver for them after the pandemic. So it is interesting on that basis. But the reality is, I would argue all day long, which is ASCO, iPhone, Apple stocks, I think that is still the number one KPI for investors to look at in terms of what happens to Apple. Sure. And, you know, is it the time in the product launch cycle for Apple to actually start doing OK? I'm trying to remember, you know, the cadence of once we've had a launch of a new iPhone, what tends to happen in the following year?

Or are we beyond those patterns now because it has been smoothed out so much? You know, my hope and expectation is it's been smoothed out so much that the, you know, TikTok cycle that you got from Apple traditionally, right, the number was good, the S was not so good, has smoothed out as you go forward, right? And also, I think with iPhone, the production issues they've had have essentially pushed out some of the channel-filled dynamics by a quarter or two, right? So the big thing I would argue if you look for Apple beyond iPhones, as you think about 23, one is gross margins. To a large degree, I would argue all the semiconductor pain that you're seeing from a memory pricing, from a supply perspective, has to be a gain for someone. I think Apple is going to be one of the big beneficiaries from better gross margins as supply chains normalize. And the second one is actually new product launches. This is the year, we've talked about this for a couple of years, you

should get the new AR, VR headsets out of Apple. And, you know, there tends to be a lot of positivity around new product launches when it comes to Apple. Yes, there are. And also a long history of people thinking that new products were going to be kind of irrelevant. And then, like AirPods, they become kind of a big business at some point down the road. So we'll see how that goes. Ahmed, thank you very much. Appreciate it. Thank you. All right. Travelers, one of the biggest drags on the Dow after preannouncing weaker than expected

fourth quarter results due to catastrophic losses from winter storms and weakness in personal auto insurance. Contessa Brewer joins us here with more details. Hey, Contessa. Yeah. So, Mike, you know, those winter storms took a really brutal toll on Buffalo and other used U.S. cities. But especially for travelers, it's the bottom line here. They pre-announced catastrophe results of $459 million. That's nearly double consensus estimates. Now, it's commercial auto insurance, that's driving full speed ahead, but it's

the personal auto insurance still suffering under continued crippling claims costs. And when we think about why, you heard Charlie talking about inflation there. Well, look, you still have new autos up, and we just got these CPI numbers last week. Year over year, 5.8 percent used auto prices have been declining month over month for the last few months, but that's only after rising double digits in the first part of the year. And then you have auto parts and labor. That inflation is still going up quite a lot. According to CPI, accident frequency and severity, how bad the accidents are and how many of them there are, are still a significant headwind for anybody who's in

personal auto. So you would want to take a look here at Allstate, too. And by the way, Mike, Traveler's got a lift in its fixed income investments, but certainly the stock market performance is taking a toll on its return on equity. And they previewed fourth quarter earnings per share here of $3.40. Wells Fargo analyst Elise Greenspan then followed suit, lowered her target EPS to $3.40 from $4.27. She says, though, that she really believes that Travelers stands to benefit from what they call a commercial hard market. That's what insurers call it when they raise rates. So we'll wait and see what Travelers has to say about that in earnings next week. Yeah, bad news typically eventually turns into good news for the insurers, see if they can grab some of that pricing.

It has been a very strong subsector of financials as well recently, Contessa. Thank you so much. And Charlie, we have backed off a little more here in the market. The S&P 500 down about a quarter of a percent at this point. You are seeing some relatively stark reactions to some of the earnings out there. I wonder if you think that expectations for the quarter have been lowered enough. You see things like Mohawk Industries, of course, housing related. There was a disappointment in a guy down today. That stock took a hit. So how do you think, you know, the market has figured out or not how earnings are going to come in? Yeah, this, Mike, is traditionally

the time of year when managements get analysts in line for the upcoming year. And if the market and analysts are too high, this is the time when they tend to make those changes. I think we are seeing a couple areas of sensitivity. Housing, you mentioned with Mohawk, would probably be number one on my list of concerns. Higher interest rates have a disproportionate impact on housing, both remodeling and new builds. And so the market thinks we're going to have softness. Now, in fairness, a lot of these housing stocks were already down a lot from a year ago, but that could be where you see a real slowdown. And then you just see it in the disparate results, Morgan Stanley being up today significantly, Goldman Sachs being down. That's the kind of thing that shows you that we're getting a readjustment at this point of year and what the year is going to look like. I still think

people tend to underestimate in banking the importance of the yield curve. People think that higher rates are good for banks. What's really true is a positively sloped yield curve is good for banks. And right now we've got a funny yield curve with six month treasuries at a higher rate than 10 year treasuries. And that can be tough on banks. Yeah. Now, if you think that some cyclical stocks are where there's value, as you mentioned earlier, you know, if you're kind of looking through the immediate term and you think the banks are kind of stuck with a inverted yield curve, housing related, looks like it's a little bit treacherous. Where does that leave you? What what areas of cyclicals seem like they might be better positioned? It leaves me short term

cautious, long term bullish. I mean, I don't want to just beat around the bush here that the market is nervous about a short term recession in the near term. And I don't think they're paranoid to feel that way. And so the market tends to be oversensitive about the near-term outlook. Nobody likes to buy stocks before a recession is verified. And I think that's where we stand right now. So absolutely, you know, consumer staples are dependable and everybody flocks to them. And that's why Apple is trading at 23 times earnings. But Apple's not cheap at 23 times earnings.

So I think long term, if you want to do well in this market, you have to own names that are going to be fine in the long run and accept the volatility that we're going to have in the short run because we are going to have some volatility. Yeah, I guess look long term and keep expectations in check is not a bad way to go about it. Charlie, thank you so much. We'll talk to you again soon. We just got a little over a minute left to go in the trading day. You see the S&P 500 is down by about two tenths of one percent. Remember, it was up almost four percent in the first two trading weeks of the year. If you look at the breadth, it's actually slightly positive. And that has been a pattern of this market. More stocks going up than down, more volume in advancing stocks versus declining stocks. The Dow, of course, as we've been mentioning, mostly weighed down by the big declines on earnings and warnings from Goldman Sachs, as well as travelers.

The Nasdaq composite getting a bounce. Tesla is a big part of that. That is also rebounding today. Also firming up oil prices, oil up about one point six percent. Take a look to it. Transports versus utilities on a year to date basis. This is the cyclicality of the market. Basically, money flowing towards some of those more economically sensitive areas. You see five percentage point outperformance by transports over utilities so far in a year to date basis. And the volatility index was a big story last week. Kind of made a new low for the on a 12 month basis going into the weekend. It has bounced just slightly over the course of the day but still relatively subdued as the overall S&P 500 index

cruises in really just below the flat line. That 4,000 level is pretty heavy right above the market level right now. That does it for Closing Bound.