Closing Bell - Stocks Jump, Streams Come True and Alphabet’s A.I. Reinforcements 1/20/23

Episode Date: January 20, 2023

Stocks rallying on Wall Street, although the Dow & S&P 500 are lower for the week. Richard Bernstein Advisors CEO Rich Bernstein says January is historically a risk-on month, but he is cautious that the outperformance will last. JPMorgan Chief U.S. Economist Mike Feroli says the market may be misreading the Federal Reserve and that could prove to be a major headwind for stocks. Netflix one of the big tech winners after better than expected subscriber growth. Wedbush’s Alicia Reese lays out the case for why Netflix shares can keep rallying. Goldman Sachs shares under pressure on a report the Federal Reserve is probing its consumer business. One of the reporters that broke the story explains the specifics of the probe. And Oppenheimer’s Jason Helfstein discusses Alphabet reportedly asking founders Sergey Brin & Larry Page to help win the A.I. war with competitors like ChatGPT and how that could impact the stock.

Stocks rebounding in Friday trading. Gaming steam throughout the session with the NASDAQ on the verge of turning positive for the week. This is the make or break hour for your money. Welcome to Closing Bell. I'm Mike Santoli in for Sarah Eisen. Here's where things stand in the markets. They have levitated throughout the day.

All the indexes have. S&P 500, you see, up about a percent and a half. It's down a little more than a percent, percent and a half for the week at this point. NASDAQ there, the outperformer, obviously strong Netflix earnings, as well as lifts in some of the other big caps like Alphabet. Ten-year no yield has been bouncing the last couple of days. It is now up toward three and a half percent again.

Here's a look at two stocks leading the tech rally. There's Netflix on the back of strong subscriber numbers and Alphabet. After announcing a round of layoffs, we'll talk more about both of those moves throughout the show. Take a look at the S&P 500, though, and where it now sits. We've gotten this little lift toward 39.50, just a little three-day pullback, I would say. Also, an interesting setup in terms of we were at 4,000 last Friday. This is the third Friday of the year, third strong Friday. Maybe that's a pattern.

We also have an options expiration today. It seems like it might be fueling the afternoon dynamics a bit. Still in this longer-term downtrend, although, as I pointed out at the time, we were flat for three weeks, stabilizing for three weeks after we hit one of these lower highs back in early December. That's different. That's a different pattern than these times when you've more or less hightailed it to a new level. We'll see if that actually makes much of a difference. We are obviously seeing toggling between potential

for a hard economic landing and a soft one. No determining verdict on that yet. But clearly, the market day to day is ping ponging between those two scenarios. Take a look at corporate credit spread, specifically tripleB-rated corporate debt, and really a gauge on how much the Fed has done to tighten financial conditions in a short period of time. So spreads shot higher here as the Fed raised rates. That means people are demanding more return in exchange for the risk.

When spreads are going down, that means risk appetites are going higher, and corporate credit is getting less expensive. And you see this little drop more recently. It's about 5.2, 5.3 percent right here on the yield itself for triple B's. That's pretty high relative to the last 10 years. Not very high. If you go back a ways, obviously, the mid 2000s, we were here for a while. Now, if the Fed keeps insisting it's going to be right about getting short-term rates above 5 for a long period of time, hard to know if they're going to stay here.

But it shows you that the capital markets are still healthy. We're still issuing a lot and buying a lot of bonds at these levels. So, so far, no crucial damage done yet. The big question is how much more might be to come. And let's now turn to the latest signals from the Fed. Steve Leisman speaking today with Fed Governor Christopher Waller at the Council on Foreign Relations. Steve joins us now with the big takeaways from that conversation, Steve. Yeah, thanks, Mike. An important one. Fed

Governor Chris Waller pushing back against the market's optimistic and dovish view on the outlook for inflation and Fed rate hikes. He suggests the Fed still needs to hike as much as 75 basis points from here to ensure inflation is brought back down to the Fed's 2% goal and that the market may have it wrong here. The market has a very optimistic view that inflation is just going to melt away. We have a different view. Inflation is not going to just miraculously melt away. It's going to be a slower, harder slog to get inflation down. And therefore, we have to keep rates higher for longer and not start cutting rates by the end of the year.

The Fed and the market are about 72 basis points apart in their view of the funds rate for year-end. Average Fed forecast 5.13. The market has the Fed raising to 490 and then cutting back down to around 442. Waller also said he needs six months of improving inflation data before he's going to pause. He's got three already, so a ways to go. He said rates, though, are pretty close to efficiently restricted, but he has a ways to go on that. And he said, hey, he'd be the happiest man around if he was wrong about this. It's easier for the Fed to cut if it's wrong on the inflation.

Now, like Waller joined in his speech, other Fed officials have been supporting a 25-basepoint rate hike at the upcoming meeting. And the market now trades with an 80% probability of that happening. And after days and weeks of Fed speak, well, Central Bank is now in its quiet period before the meeting. But the key next week, the Fed's preferred inflation indicator comes out on Friday. And Mike Waller used that term immaculate disinflation, which is what he says the market is looking for here. Markets certainly leading that way or hoping in that direction. And Steve, let me just make the case that, yes, if you look at year end, the market is relatively far apart from where the Fed is saying that they're likely to end up. But on the way there, in terms of where we're getting to, in terms of a peak Fed funds rate, it doesn't seem that big a spread, right?

I mean, if you're going at 25 basis points per meeting, you'll get 25 in February, another one six weeks later. And along the way, maybe things happen in a friendly way with inflation. Yeah, I mean, practically, Mike, I could take a vacation and come back in May because that's when things start to get interesting. Right. Everybody is in agreement. You're absolutely right. Twenty five and twenty five. That's 50 more. And then the question is, is there another twenty five there? That's what the Fed seems to be suggesting to get to that 75 that Waller was talking about. Does the Fed pause at that point? And even then, I'll look it up, Mike, while we're talking here.

But I think the market has maybe a cut built in for that May meeting. I haven't looked recently, but that could be the possibility. Let's see, for the May meeting, only a 12 percent probability of a cut. It still sees it going up to 475, 5 percent by then. Yes. But to your point, the market does not have rates hanging out at whatever the peak level is for long anyway, because it's supposed to be coming down by the end of the year. We'll see how it plays from here. Steve, I can't keep you up till May, but have a good weekend. We'll talk to you soon.

Joining us now for more on the economy and the Fed is J.P. Morgan chief U.S. economist Mike Ferroli. And Mike, just to weigh in right there on the discussion, whether the market in fact is, you know, I wouldn't say too hopeful about rate cuts because maybe what the market is saying is there's a high enough risk that the economy has a downturn that that the fed will be forced to cut rates so where do you come out on it i think your point is exactly right the market isn't just pricing in the most likely outcome it's pricing in the whole distribution and there is a tail you know tail risk here that things go really south by uh by year end particularly around the debt ceiling so i think that's important to keep in mind when thinking about what the market's pricing. For sure.

And, you know, we heard Waller today say it would be nice to have six months of improving inflation data before they decide they've done enough on rates. But I guess the question is the effect of what's already been done in terms of the economy and how that's going to work its way through. And whether, in fact, the economy as it sits's going to work its way through and whether, in fact, the economy as it sits right now is well positioned to avoid a recession or if the Fed feels like they have to get unemployment higher to do their job. So I think it seems pretty clear that unemployment should go higher from here, or at least that's what the Fed wants to see is some deterioration here in labor market activity.

We haven't seen that yet. What we have seen is a lot of slowing in spending and production. But so far, the employment indicators are really hanging in. Now, I think there are some forward-looking indicators that suggest that that may be changing soon, but we're not there yet. And I think that's really what the Fed's waiting to see. So you feel like they want to see the actual effect in the employment data before they're willing to back away? Yeah, and I think Waller said that as well today, which is that wage inflation, and he was, you know, pretty careful in how he said that, but that wage inflation needs to come down. And that right now, where wage inflation is, is probably inconsistent

with their inflation objectives. So the most likely way you're going, where wage inflation is, is probably inconsistent with their inflation objectives. So the most likely way you're going to see wage inflation come down is if employment growth slows and likely if unemployment goes up. So while he wasn't trying to sound too harsh on that respect, obviously, it would be nice if productivity went up. That's another way you could sustain these higher wage inflation numbers. But realistically, I think what they want could sustain these higher wage inflation numbers. But realistically,

I think what they want to see is lower wage inflation, which really requires lower employment growth and likely higher unemployment. And we haven't really seen even the first hints of that yet. What we have seen this week was slowing retail sales, slowing industrial production. And eventually, we think that's going to flow through to lower employment growth. But I think until they see that, they're not going to really want to take these most recent inflation numbers and kind of put them in the bank because as long as those wage inflation numbers are running firm, I think they're going to be still a little worried about what that means for particularly for service price inflation. And again, he repeated that mantra today, which, you know, started with Chair Bernanke. I'm sorry, Chair Powell a few weeks ago or a few months ago.

But I think until they see that, they're going to remain a little bit nervous here about how durable this these last few inflation prints really are going to be. Sure. Now, we are down a million in stated job openings from the peak, whether that's meaningful or not. Also, of course, we've been talking about the drumbeat of large company announced layoffs. None of that really has much shown up in the actual unemployment claims or any of the other aggregate data. Is that the front edge of what we expect to see in terms of softening job growth? So I think the front edge is more what we've seen

over the last several months in temp help employment. I think it's also what we've seen in the average work week, which is to say firms are using their workforce less intensively than they had been six months ago. I think in terms of the tech layoff announcements, not only is that not really a big number in the grand scheme of things, but you have that not really a big number in the grand scheme of things, but you have to think about whether that's going to contribute to net

declines in overall employment. In other words, a lot of these tech workers may just reallocate into other areas where there are going to be, you know, where there's still very high demand for workers. So I wouldn't think that the tech layoffs that we've seen are necessarily a big macro story. But I do think there are other reasons to believe that we've seen some, as you say, leading edges of declining overall firm demand for workers. Yeah, good news for those individual workers. Maybe not good news for what the Fed's attempting to achieve here. Mike, great to talk to you. Appreciate the time today.

Likewise. Mike Farrelly at J.P. Morgan. Goldman Sachs taking a midday plunge after the Wall Street Journal said the Fed is looking into its consumer banking business. We'll talk to one of the reporters who broke that story next. You're watching Closing Balance, CNBC. We are sitting at session highs across the board.

You see the Dow there up 285. One name, though, sitting out the rally is Goldman Sachs. That stock taking a dive midday, by far the biggest drag on the Dow. That's after The Wall Street Journal published a story saying the Federal Reserve is looking into whether the bank had proper safeguards in place around its consumer business. Goldman responded to our request for a comment by saying, quote, the Federal Reserve is our primary federal bank regulator and we do not comment on the accuracy or inaccuracy of matters relating to discussions with them. Let's bring in one of the reporters who broke that story, Ana Maria Andriotis from The Wall Street Journal. And Ana Maria,

what can you tell us about perhaps what the focus of this probe might be? What parts of the consumer operations seem like they're under scrutiny here? So the probe is broad and it's focused on lending that's happened under the Marcus brand. So the Federal Reserve is investigating Goldman's consumer business broadly to determine whether the bank had appropriate safeguards in place, essentially as it was ramping up lending. So this is broad. And this started as part of a normal review process back in 2021 that then actually became an investigation starting last year. Interesting. So, you know, the markets business, the consumer lending and deposit taking business at Goldman was relatively new and I'm sure kind of ramped up relatively

quickly. Do you know or do we know if there were, you know, a pattern of consumer complaints or if there are any other kind of compliance missteps along the way that seem to give an indication of why the market might be concerned here? So that's one of the things that the Fed is looking into. It's examining what happened in instances of customer harm, including whether issues that were flagged internally pertaining to that, were they addressed? Were they properly resolved? Part of the issue here as well has to do with the rate at which lending grew and the markets division essentially brought out into consumer lending and questions around whether there were proper monitoring and control systems in place to

handle the existing consumer business as well as as it kept developing and expanding. Interesting. And now CEO of Goldman Sachs, David Solomon, this week did actually comment on the strategy around the consumer business and how it has evolved. Let's listen to that. We probably took on more than we should have, you know, too much too quickly. But I think we now have a very good deposits business. We're working on our cards platform. And I think the partnership with Apple is going to pay meaningful dividends for the firm over time. We have this acquisition of Green Sky. We think it's a good business. And so we're going to give people a clearer view. There's more transparency around how they can contribute.

Now, Anna Maria, I mean, there have been some trimming of ambitions, I guess, in that business. There's some layoffs there, some concerns about, you know, whether the Apple card business is going to be profitable. You cover Goldman. What do we think is ultimately going to be the scope of this business, whether in fact it stays under the regulatory sites or not? So a few things to think about. First, they are already backing down on several different elements of their consumer business. They're winding down on personal loans. They are not going to move forward with their checking account ambitions, at least on the large scale, but they were planning to do that. And then you have the credit card division. The things there become trickier because you can't just pull the plug on something where a partnership

exists with other companies, like in this case with Apple, as well as with GM. The Green Sky acquisition, I mean, how do you pull back on something that you acquired not that long ago? This also really points to how complicated consumer lending, credit cards, consumer banking in general is. Consumer complaints can go a really long way with regulators. Goldman already disclosed last year that they're under investigation by the CFPB for their credit card operations. And just in what Goldman disclosed, you can tell that inaccuracies, mistakes, even small missteps in consumer banking and lending can really resolve in trouble for big banks, Goldman included. What's really interesting about the Fed probe is how wide-ranging this is with

regards to what the Fed is looking at. It encompasses Goldman's compliance functions, as well as audit and legal. Essentially, were there enough controls in place? What was known about any particular issues? And were those issues actually addressed, issues pertaining to consumer harm? Yeah, it is fascinating. I mean, it seems like it's essentially a lot of attention on whether they had the proper compliance infrastructure for a consumer business. Now, I think back, I mean, Goldman was essentially forced to become a bank holding company around the global financial crisis, never necessarily sought that out. And it seemed like they thought, well, we have kind of the general financial infrastructure and plumbing in place. Why not extend our brand into the consumer area? I just wonder if the way

investors are selling off the stock today, it like a perhaps an unnecessary complication to the overall business. Well, this made sense in the beginning. The idea of offering savings accounts, deposits, the benefits of that to the bank, that was clear cut and I think still is clear cut. However,

where things started to get complicated is the question of, and as you said, David Solomon pointed it out on the earnings call, did the bank try to do too much all at once? You know, we talk about personal loans, we talk about credit cards, but there were other elements of lending as well that the bank tiptoed into, right? A point of sale financing, the JetBlue partnership there. There were a variety of different consumer banking and lending initiatives that the bank either actually executed on and implemented

or was in the process of rolling out that never actually came to be. Questions basically around how much is too much in a span of five, six or so years, the cost associated with that. And at this point, quite frankly, the growing regulatory scrutiny. Interesting. Anna Maria, appreciate you kind of telling us what you know from your story today. Anna Maria Andriotis of The Wall Street Journal. Let's check the markets. Dow continuing to click to new highs here. We have the S&P 500 up 1.7 percent. Dow up almost 290. NASDAQ has been the leader, up 2.5 percent on the day. Still ahead, does Alphabet have what it takes to compete with

ChatGPT? The company's reportedly asking founders Larry Page and Sergey Brin for help. We'll talk to an analyst about Alphabet's prospects in the emerging AI battle. And up next, the big picture on why this weekend marks a key test of China's economic reopening. We'll be right back. China's Lunar New Year celebrations kick off this weekend, and more than 2 billion trips are expected to take place across the country from January into mid-February, according to government estimates. Let's bring in Seema Modi for the big picture on why the event is a big test for the country's reopening. And Seema, two billion trips sounds

like a lot for a company relatively early in its reopening. Where does it seem to be tracking relative to, let's say, the last normal Lunar New Year? Well, we're talking about 1.4 billion people, Mike, who essentially have not been able to travel for nearly three years now being given the green light. And it's coming at a time when the Lunar New Year kicks off, which is widely seen as sort of the largest human migration in the world at a time when COVID cases are rising. So, yes, it is a big test for the country now. Right now, from the travel companies we've been speaking to, including Expedia, they're seeing a double digit percentage rise in travel searches from China to the United States, as well as from the United States to China. So the increase we're seeing is very different than what we've seen in other China Lunar New Year forecasts, just given the extreme lockdowns we saw over the last three years. But, you know, I was also

talking to James Liu over at Clearnomics, who made the point of even beyond travel, what type of supply chain disruptions could we see as a result of this reopening? If it's worse than expected, do we see factories shut down? So there are a lot of moving parts here. When you say if it's worse than expected, in other words, if perhaps a resulting COVID spread is worse than expected and all of a sudden it ends up kind of setting back China a little bit in the process of reopening? Yeah, China has been on this PR campaign, Mike, since the beginning of this year, touting China as the economic center for foreign companies, saying that the lockdowns are over.

Come back to China and don't worry about the lockdowns that we've seen. So this idea that they can reiterate this message of growth, but also contain COVID cases, that remains to be the big challenge. And if we do see migrant workers perhaps get infected and that results, that delays their return to major factories, that of course is a major concern beyond the hospitality and consumer companies, but for big tech as well. Interesting. Absolutely. You know, a fascinating real world experiment. Seema, we'll see how it all goes over the next couple of weeks or so. Right. Alphabet, meantime, reportedly

calling in founders Sergey Brin and Larry Page as reinforcements in its battle against ChatGPT. Up next, we'll discuss whether that will help the company win the war against this growing competitor. Alphabet shares moving higher today. The company announcing it will lay off 12,000 people. The latest tech company to announce job and spending cuts separately. A piece in the New York Times today reiterating the pressure Alphabet is feeling from ChatGPT, a new AI product. The Times report saying Alphabet founders Larry Page and Sergey Brin have come back for several meetings with company executives in recent weeks to discuss the threat

ChatGPT poses to its search business. Joining us now is Oppenheimer and company senior analyst Jason Helfstein. He has an outperform on the stock with $135 price target. Jason, good to see you here. Thank you. Put these things together, perhaps. Obviously, a lot of trimming going on. A lot of these companies hired pretty indiscriminately for a few years. They're trying to figure out the correct cost structure. On the other hand, they are going to have to make new spending efforts in other emerging areas. Sure. I think you have a number of factors happening here. So clearly the company hired a lot, headcount up 50 percent since 2019. You have an activist investor pushing for headcuts, but then you have Chad GPT.

On top of that, we think if you look at the outlook for advertising, they're not in a stronger position as they should be around the shift to connected TV. And so ultimately we think saving some money on head count will allow them to invest in other areas. Obviously one of the knocks on Alphabet over the years has been a relative lack of attention to cost discipline. They want to do many things in many different areas. They want it to be the paternalistic employer and all the rest

of it. Is the street convinced that maybe has changed? I mean, I know that earnings estimates for 2023, for example, the consensus is down 20 percent since the middle of last year. Yeah, I mean, you've got a number of factors, right? So you have you had the headcount. Then you still obviously have the revenue correction. Right. I mean, you've got a number of factors, right? So you had the headcount. Then you still obviously have the revenue correction, right? I mean, and there's still some concern that estimates might be too high. I think we have a YouTube estimate that's 4% below the street, for example, for the year. Yeah, look, I think there's been a lot of opportunities in Silicon Valley over the years for people to work at startup companies, the next new thing.

And so I think Google had a culture of come work here, startup companies, the next new thing. And so I think Google had a culture of come work here, come work with the smartest engineers, and we will take care of you. And they really tried to pride themselves on not having to do something like this. But I think you look at every single tech company is laying people off. So they would have been the outlier to not do that. And again, I think they need to give Wall Street some kind of answer on chat GPT. For all we know, they do have AI internally that is better than chat GPT. There was a blog post, I think, on the 17th where they talked about their AI initiatives, outlined what they've been working on for the last 10 years. But I think they do need to show investors and the consumer kind of, you know, what is their

hand in this AI race? Don't they also have to show that there's not potentially erosion on the advertising, the monetization efforts against search results under the, you know, whatever AI protocols? Because it seems like right now they're serving you up links. A lot of them are what people are exactly looking for. It's not just like AI kind of generally trying to figure out an answer to a search query. I mean, it's definitely different if you look at Google now versus Google five or seven years ago. Correct. To some extent, they're giving you the answer. Now, it may be the answer for things that they think you wouldn't click anyway,

or maybe it's not as much of a monetizable search. When you think about the high monetizable travel, auto, certain high monetizable categories, there's no question that if they just give you the answer and don't make you do some digging, it's harder to monetize. I also think, what is just the business model? What is the business model of chat GPT? Do they actually start charging for G Suite if chat GPT is part of G Suite, just like Microsoft is talking about making chat GPT a part of Microsoft Office 365?

So there's definitely, we have not seen how this is going to play out. But I think, and there's been a lot of reporting, Microsoft or Alphabet, they need to do probably some training around their AI to do some of the things that ChatGPT is doing where it may not be, let's say, today ready to do that. And then just sort of the bottom line take on the stock from this perspective where the valuation has been compressed quite a bit at this point. Yeah, look, we still think like in large cap, it's probably the second most interesting stock in our universe. We'd rank probably Uber number one, then Alphabet.

I mean, there's definitely a lot of question around what happens with Meta. You know, that being said, you know, Meta's really more of a cost-cutting story than a revenue story. You already got one round. I think investors are looking for more. You may not get more.

So, you know, we do like the hand that Alphabet has right now going to earnings. All right. Appreciate it, Jason. Thanks for having me. Thank you. All right. Here's where we stand in the markets with less than a half hour to go. You see the S&P 500 up 62 points. It continues to click higher. As I mentioned, it is a expiration Friday. Netflix, one of the big winners in the S&P after announcing stronger than expected subscriber growth coming up. A top analyst on whether this rally is expiration Friday. Netflix, one of the big winners in the S&P after announcing stronger than expected subscriber growth coming up. A top analyst on whether this rally is just getting started. And you can listen to Closing Bell on the go by following the Closing Bell podcast on your favorite podcast app. We'll be right back.

The Nasdaq turning positive for the week as tech stocks rally today. Here's a live look at the Nasdaq 100 heat map. You see overwhelming strong breath green pretty much across the board. You have about 10 stocks down in the entire Nasdaq 100, which is up 2.6 percent on the day. Let's check out our stealth mover, restaurant brands. Shares there having a crowning moment. BMO Capital Markets serving up a whopper of a call on the stock, upgrading the fast food company to outperform from Market Perform and hiking its price target to $72 from 63. The BMO is citing improving performance at Burger King Popeyes and the Tim Hortons brands. Stock up almost 2% on the day.

Eli Lilly sitting out today's rally after failing to get early FDA approval for its new Alzheimer's drug. Details straight ahead. But that story plus Netflix rallying and software surging when we take you inside the market zone. We are now in the closing bell market zone. Richard Bernstein, advisor, CEO Rich Bernstein, is here to break down these crucial moments of the trading day. Plus, Alicia Reese from Wedbush on Netflix and Mizzou host Greg Moskowitz on software stocks. Let's get a look at the markets here.

We have the NASDAQ up more than 2%, the S&P 500 ahead by 1.7%. Rich, what's your read on the first few weeks of the year here? Seems like investors are acting like maybe they felt they don't own quite enough risk, enough exposure to the growth story, maybe raising the probabilities of a soft landing. How does that sound to you? Yeah, you know, Mike, I think it's kind of funny that for once in a long time, people aren't talking about the January effect. And we're sort of getting a January effect. You know, January is always kind of a month for risk on assets. And it seems to be happening. I would be cautious to whether this is a lasting rally in these risk on assets. It really doesn't make a lot of sense to me relative

to inflation, relative to the Fed tightening, relative to profits still decelerating, that you'd want to be in such risky assets. History says that's probably not. It's not going to be a lengthy outperformance here. Yeah. And we will get to that in a little bit. I know you think inflation might be a little more of an enduring story as well as, you know, obviously the risk to valuations. But we want to get to Netflix. Big story today, leading the NASDAQ 100 on the day and getting a big pop on the back of fourth quarter results. Earnings missed expectations, but subscriber growth blew past estimates. Netflix also announcing a management shakeup. Reed Hastings is stepping down as co-CEO,

giving up his position to COO Greg Peters. Analysts heard from Peters on the earnings call where he talked about the strength of the company's new ad-supported tier. We see that engagement from ads plans users is comparable to sort of similar users on our non-ads plans. So that's really a promising indication. It means we're delivering a solid experience and it's better than we modeled. And that's a great sort of fundamental starting point for us to work with. Let's bring in Wedbush Securities Vice President of Equity Research, Alicia Reese. Alicia, it's great to have you on here. Did it

change the story? Look, the market had already kind of migrated back into Netflix, believing perhaps subscriber trends were going to be a little firmer, perhaps happy about things like, you know, getting pricing for shared passwords and things like that. At this level, at this valuation, what's your current view on whether the growth can support it? Yeah, we're still very positive on Netflix. We think there are a lot of growth drivers ahead. You know, just two months out of the gate, I think they really started well with the ad supported tier offering. There is clearly a lot of uptake. I think we learned two really positive things from Netflix, that there was, you know, a low trade down from the premium tiers. And, you know, I think what we saw is that with those high subscriber numbers, that there was a lot of retention. You know, people, instead of going to trade down to the ad supported tier, what we're seeing is

they kept the tiers that they had and if they were already going to cancel, they opted for the ad tier instead. So it really kept a lot of that churn, you know, those subscribers on the service. The issue I'd say right early on is that the ARPU is quite low, but that's going to rise over time. So we're really positive about that. As subscriber growth continues, ARPU starts growing and then they have the password crackdown coming and that's going to drive ARPU higher as well. You know, it seems at this point, at this level, based on the earnings run rate that we're at right now, you're clearly paying a premium for what you would anticipate to be future reliable growth. I'm reminded a little bit of the cable companies, not the cable networks,

but the cable providers, you know, in the first couple of generations or generation after they came public. And they were chronically unprofitable. They had a lot of debt. They were spending a lot on CapEx, but they were growing to basically have full penetration. And then they could raise prices every year. Once they had people subscribing, there was very low churn. How far are we off from Netflix actually delivering something like that, where it's going to show up in a big way on the bottom line? I think we're there now.

And that's the turning point where we are now, where I think this is a really positive story, a really interesting story, is that this is the first year that they posted a huge free cash flow number. They had $1.6 billion in free cash flow in 2022, and they're guiding for over $3 billion in 2023. And I think that grows by about a billion a year going forward. They've just found a way to be more productive with their content spending. They're bringing in content, showing content globally from around the world. You know, Korea's putting out great content. You know, the UK, there are lots of different areas where they can make their original content more productive. And

because they have so much original content now, they're able to play with that a lot more. And they're just really a global player in this content market now. So they have a lot more leverage than they used to, and they can drive all of that to the bottom line. Okay. Yeah, it'll have to be the case for $150 billion market cap. See how much the free cash flow can start to come through. Alicia, great to catch up with you. Thank you so much. Thank you. All right. Eli Lilly is one of the weakest performers in the S&P 500 after the FDA rejected the company's application for early approval of its new Alzheimer's drug. Lilly says the regulator wants to see more trial data. Meg Terrell joins us to tell us the current state of things here.

Hey, Meg. Hey, Mike. So this sounds pretty bad, but it's actually less bad than the headline might imply if you look at all the analyst notes coming out about it. So essentially, Lilly had applied for approval based on its phase two trial showing clearance of these amyloid plaques in the brain associated with Alzheimer's. The FDA has said now it's not going to give that accelerated approval because it wants to see data on at least 100 patients taking the drug for out to 12 months. Well, in this phase two study, patients could stop the treatment if they lowered that level of plaque in the brain to a sufficient degree. And enough did that that they didn't reach 100 patients taking the drug for a full year. So Lilly says that is the only thing the FDA said was the reason they were not approving it now. The other thing to consider

here is, of course, Lilly has a larger phase three trial expected to read out results in the second quarter. After that, they're going to file for full approval. And right now, based on accelerated approval, these drugs don't have broad Medicare coverage. So it really wasn't going to make a huge difference if it got out there now. So that's why you're not seeing the stock down more today. But of course, there is sort of the negative headline around that. And so Lilly is down in Biogen and Esai, which, of course, make the approved drug that we saw get on the market. But it's not being used yet. A couple of weeks ago, their stocks are up today. Mike. Exactly. In fact, I did see a headline that this FDA request extends Biogen's lead, so to speak, I guess, to get to be the first to market to some degree. Would these be directly

competing treatments, Meg? I mean, essentially, you would do one or the other for those patients who might qualify? That is the expectation. They would be directly competing. We haven't seen any, I haven't seen a lot of discussion about them being combined. It's an interesting idea. They do target the plaques in different ways, but they would be directly competing. And there is that idea that biogenesis are out front. Got it. Meg, thanks so much. Rich, as a broad category, we actually did see a really good outperformance by traditional pharmaceutical stocks. Biotech also got pretty washed out and came back. Does this qualify as the kind of defensive type group that you might want to prefer these days? Well, Mike, I think you have to make the distinction between large cap pharma and large cap biotech and then kind of sexy, smaller biotech. Large cap pharma and large cap tech

are both actually somewhat defensive. Obviously, biotech is a higher beta than pharma does, but they're both pretty defensive. Why? Because no matter what goes on, we all tend to get sick. It's very unfortunate, but it's really true. Small-cap biotech, though, is much more speculative. And if you look at the performance over the past year or so, large-cap pharma, large-cap biotech have demonstrably outperformed small cap biotech. So I think we have to differentiate, just using the word biotech, from defensive versus speculative. Large biotech might be defensive, but small biotech is very, very speculative.

Yeah, in fact, some of the largest biotech firms really did get cheap valuations and essentially ended up looking like cash cows for a while there. Let's get to software. Yeah, those stocks rallying today, leading the tech sector, but the group's still well off its highs, down nearly 30% from last February's peak. Mizuho in a note today seeing warning signs of a slowdown for some software companies, but saying stocks like ServiceNow show promise of long-term opportunity. ServiceNow CEO Bill McDermott sat down with Sarah Eisen at Davos earlier this week

and discussed his stock's performance. There isn't a tech company that I'm aware of that has outpaced the S&P 500 in this particular downturn because there's been a move away from growth. So growth stocks had their multiples compressed. We're no exception to that. But our multiples are still the highest in the industry because our growth is the fastest. Let's bring in Mizuho software analyst Greg Moskowitz. And Greg, we're all familiar with that dynamic. You know, all these growth software companies that have had their valuations come in because of rates, because maybe they got a little too extended. Right now, though, as you sift among the potential winners and losers, where does it bring you in terms of the types of software players? I guess the kinds of end markets they serve. What do you like here and not like?

Yeah, thank you, Mike, for having me. So I think it's important and it's a very important question to distinguish where software vendors are playing, what is going to be a priority. We all know that there are macro-related pressures. IT budgets are certainly going to be more challenged in 2023 than they were in 2022. Now, ServiceNow, we do think, is one of the better placed, one of the better positioned vendors. They stumbled quite a bit in Q2. Since that time, they revamped their go-to-market. They got in front of decision makers more quickly. They articulated their time to value a little bit more clearly. And we've seen them get more deals over the finish line, which resulted in a better Q3 than expected.

What we published this morning is indicative of a continuation of that. In other words, yes, there is hesitation from some customers, but by and large, ServiceNow, we are hearing, is continuing to be in favor on a relative basis when it comes to spending in IT and spending in software. And just to turn quickly to Microsoft, we are going to get results from them next week. Clearly, it's kind of the huge stable one in the business. Also had some valuation compression. How is that set up? So, in our view,

the setup is a little less clear. Now, if you were to look at public cloud-oriented data points, the hyperscalers, Azure, but also AWS and GCP, they clearly have had a downtick over these past few months. And so that has brought a great degree of concern from the investment community as it relates to these companies and particularly in my space, Microsoft. And so the expectations have come down quite a bit. What's interesting is Microsoft guided to a disappointing level for Azure this period. So 37% constant currency growth,

that is a deceleration of five points from the 42% they did the prior quarter. And that in and of itself was a disappointment. There are some investors who think they're going to miss this target. We believe it is likely to come in line. That is not anything spectacular. It is reflective of challenges, but I do think it is likely to come in line. That is not anything spectacular. It is reflective of challenges,

but I do think it's important to mention that while many customers are cutting back, they are optimizing their public cloud spend, there are also a number of other customers who are actually pushing forward, doing more with digital transformation, putting more workloads into the cloud. And so there is a partial offset.

And so that is, again, worth bearing in mind. Microsoft has gotten significantly weaker, as you know, over the past few weeks. At this point, it's trading a little bit less than 20 times our calendar 24 PE. And so that is interesting, particularly for medium to long-term minded investors that can look out a bit beyond all of the noise and all of the challenges that we're facing right at this moment. Sure. Yeah. And I guess the very long term trends have not really been disturbed with this little downturn. Greg, appreciate the time. Thank you very much. Greg Moskowitz of Mizzou. We are at session highs here. The S&P 500 up 1.9 percent above 3970. The Dow up more than 300. Rich, I mean, it seems as if software, you know, would not necessarily be the thing for, you know, inflation

being stubborn and the Fed remaining serious about fighting it. So where does it take you in terms of the types of things to emphasize this year? It seems like you still want to play defense and let the aggressive stuff run without you. I think that's right, Mike. I think, you know, number one, we are in January. As I mentioned before, you're getting the January effect, which is always a lower quality, more speculative effect. And we're getting it in spades this January.

So that's number one. Number two is we've got to remember the headline CPI is still 6.5%. The headline PPI is still like 9%. So we still have a ways to go here before the Fed will feel comfortable. Now, it doesn't mean they're going to be tightening at 50s and 75 basis points every time. But the question is, when do they reverse course? When do they start feeding a speculative environment? I think that's much

farther off in the future than people think. So your portfolio should concentrate on necessities rather than desires, because that's what usually works in an environment where profits are decelerating and the Fed is tightening. Right. And so it seems like the hard assets over over virtual and hope filled ones maybe is a trade that might work for a little while longer. Rich, it's great to catch up with you. Talk again soon. Thank you. Mike, thanks very much. All right. In the last minute here, we are going to go out pretty much on the week's highs, 39.70-ish for the S&P 500. Remember, we closed last week at 39.99, So really a relatively modest decline on the week so far. Less than one percent. The Nasdaq still leading. It's above eleven thousand one hundred again.

Netflix alphabet, all the rest. The volatility index has dipped back below 20. It had clicked above there into the low 20s, receded back, reflecting a more stable index environment. That dollar index under one oh two as well. So lower yields, lower dollar, and lower volatility have been the support for risk assets this week. We are three weeks now into the year. The S&P 500 is sitting on better than a 3% year-to-date return. And you see the Russell 2000 also up 1.2% today. Small caps actually have outperformed large so far in January to date. That is going to do it for Closing Vow.