Closing Bell - Stocks Storm Back, Tesla Tanks & Block-Buster Idea 1/3/23

Episode Date: January 3, 2023

Stocks making a big comeback during the first trading day of 2023. Jefferies' David Zervos says he expects another choppy year, but does not think we will see another 20% broad market sell off. Former Fed Vice Chair Roger Ferguson on why the Fed could pause its interest rate hike strategy by mid-year and whether rate cuts could be in the cards. Telsa shares plunging after falling short of 2022 delivery targets. Roth Capital's Craig Irwin explains why more pain could be ahead for the EV maker. And Baird's David Koning discusses why he upgraded shares of Block and why it could be a huge winner this year.

Stocks looked like they were headed for a pop to kick off 2023, but then the major averages pulled back right after the open. We did just pop off the lows. This is the make or break hour for your money. Welcome everyone to Closing Bell. I'm Sarah Eisen. Take a look broadly at where we are, down 122 there on the Dow. Low of the day was down about 300 points, and then the high was up 240. S&P 500 up six-tenths of a percent. You've got two standout groups today, the outperformers, communication services, and that's a lot of last year's losers getting a bid today, like Meta on top of that list. And financials are also having a good day. The banks are all higher.

Everybody else is weaker. The worst performing groups, energy, technology, consumer discretionary, that's Tesla. Russell 2000 index of small caps starting the year deep in the red, down almost a percent. Two names to point out, Apple and Tesla. Russell 2000 index of small caps starting the year deep in the red, down almost a percent. Two names to point out, Apple and Tesla. The mega caps are weighing heavily on the market today. Tesla's down now almost 12 percent. Apple's down another 4 percent, picking up where they left off last year in terms of the selling. Coming up on the show this hour, we're going to talk much more about the troubles at Tesla with an analyst who thinks the stock has a lot more room to fall. Plus, former Federal Reserve Vice Chair Roger Ferguson will join us ahead of two key economic headlines this week. We've got the Fed Minutes tomorrow and the jobs report on Friday.

Time, though, to kick it off with the market dashboard. First of 2023, senior markets commentator Mike Santoli on the market. It's interesting to see the losers catch a little bit of a bid, but then still big fallout for Tesla and Apple. To some degree, that's a January phenomenon where you basically have a lot of that late year selling pressure on the laggards let up. But, you know, as you allude to, Sarah, very much a 2022 feeling on the first day of this year. You've been fighting this trench warfare around 3800 for, you know, from mid-December till now. Essentially, every single day, the low of the day has been 3800 plus or minus 1% or less. Same thing today.

Not sure if that's a tremendous significance to it, except that the market refuses to break down. Value overgrowth, average stock over the mega caps. You have a couple of NASDAQ giants being dismantled almost every day. And you're stuck with this sort of same deal. You have the long term downturn in place, but it's also been about a six or seven month trading reign. So therefore, the market refuses to give up the idea that a soft landing is still within the realm of possibility. Probably shouldn't give it up right away, but it sort of shows you that it's a residual bid in there. Take a look at Apple since mid 2020 compared to the equal weighted S&P 500, because it really does show you they're basically at parity right now.

Apple falling slightly behind across this time span, the average stock in the market, but really shows you that this was just a huge buildup of premium, of crowding into the biggest, most popular stock outside of Tesla in the market. It wasn't that the fundamentals were racing ahead here. It was that people were willing to pay more for Apple as this marquee digital platform through and after the pandemic. And because it has such balance sheet quality, Sarah, and because, you know, you have Warren Buffett in there, all the halo effects on Apple kept this premium in there. And now the market is not permitting these companies to just

ride with fat valuation premiums when they don't have a lot of growth to redeem it. As far as the news today, I mean, European inflation came down a bit, especially Germany below 10%. That was good news. In the U.S., the data came in pretty much in line with expectations and the Atlanta Fed GDP tracker, GDP Now, actually ticked even higher for the fourth quarter of last year. It's solidly in the 3 percent range. The PMI, weak but expectedly weak. Chicago PMI. Tomorrow we get ISM. But you're right. The way the market looks with yields lower, you would think that it was going to be kind of a slowdown day, but it's not really being reflected in everything going on below the surface. I think that's why you have to basically have your head on a swivel

and be able to see the threats or the upside risk as well as the downside risk coming from either. Well, I'll tell you one risk that we started the morning, strong yen, never a good sign. I think that has to be why the market turned, in my view. Mike, thank you. Mike Santoli, we'll talk to you later. For more, let's bring in Jeffries chief market strategist, David Zervos. David, more of the same in 2023 in terms of the uncertainty and the skittishness around buying stocks, given some of the questions about the economy and the Fed.

Do you think so? Well, Sarah, I do think it's going to be a little better than 2022 and 2023. But we were down 18.5% total return in the S&P, so not a huge bar to cross there. My expectations on the equity market are that it's really going to chop around a lot. We've been in this range trade. We've talked about it a number of times over the last quarter or more, I think even going back into Q3. And I think it's going to torture people a little bit. You're going to get these rallies. They're going to peter out. You're going to go test the downside. Everybody's going to get nervous. Then it's going to bounce. For all intents and purposes, I think you're going to have a much more, an easier sleep

and an easier time focusing in on the credit markets, which have cheapened up dramatically and offer a better risk reward for 2023, especially in the kind of double B, single B region. That's really what we're focusing our clients on at Jefferies. Isn't that kind of consensus now that stocks are going to have a bumpy road and bonds are going to do better this year? You know, I don't necessarily think it's consensus. I think there's a lot of people out there that are quite nervous about the fixed income markets. We've had an incredibly difficult year in fixed income. If you compare the years, this was one of the all-time worst years in bonds. This was a bad year, but it wasn't a catastrophic year at down 18%. And we certainly had much

bigger drawdowns during inter-year periods. So I'm not sure that it's that consensus. I think people have gotten themselves underweight to fixed income markets, but a huge backup in yields. And, you know, we're very different than we were at the beginning of last year, Sarah. Remember, yields were still very low and spreads were still very tight at the beginning of last year. And, you know, both of them blew out pretty significantly. So I think you have a lot of opportunity year. And, you know, both of them blew out pretty significantly. So I think you have a lot of opportunity there. And the most important thing I would say is, you know, we're in a difficult period of time economically. We're going to probably go and touch recessionary parts. At

least some of the economy is going to touch a recession or go into recession, maybe all of it. You don't necessarily want to be in the riskiest part of the capital structure for a business, which is the equity part of the capital structure. Go to the second riskiest part, the credit, the bonds, be a bondholder, collect a double-digit yield in some of this higher yielding semi-junk bond area, get a very, very large yield compared to what you were getting before, and be in a safer place in the capital structure as we go into a much more difficult time for a lot of corporates in the U.S. But you started out the interview when I asked you about the outlook for 23 saying you think it's going to be better.

I assume you mean for equity, even though you're expecting choppy for equities. What looks better to you? Because a lot of folks are expecting this year to reflect the impact of all the central bank hiking around the world and to result in a recession or at least a deeper slowdown. Yeah, let me be specific. That's a good question, Sarah. I was referring to the equity market specifically that I don't see another down 20 or worse in the equity market for this year. I think it'd be hard to get back-to-back negative 20s. It's possible. And the Fed may have to go a little bit further than we hope if inflation

doesn't come down as quickly as many of us think. But I think the storyline on inflation, which is consensus, unfortunately, is that it's going to come down. It's going to come down pretty quickly. But then it's going to stall, and we're not really going to get to that quickly. And the Fed's going to have to stay pat for a while and make breaks. So I'm not as excited about Fed rate cuts anytime soon. We know the market's got some price in. I think they're going to be much more difficult with us and much more excited about getting that inflation number down. And I actually think there's some signs that the labor markets are doing great and the economy is actually going to hold up a little bit better through all this. At least the consumer is going to hold up a little better. So I think there's a sign that the equity markets

can stabilize. Maybe they go down. Maybe we end down 10. I don't know. Maybe we end up 10. I don't think we're going to have a down 20 or worse. But I just think you're going to get better risk reward collecting a pretty big coupon and going into the safer parts of the capital structure, the credit markets, rather than the equity markets, where I think there's just going to be a lot more chop and volatility. I get that. But if we are seeing, if we do see bond yields lower across the board, which would be a big reversal from what we saw last year, as you mentioned, I think the 10-year start below 2%, then wouldn't that mean technology stocks should do better? Well, you could say, look, I mean, we don't need to get a, we're not going to get a rally back to 2% in 10 years. We may go down to 3.25, we may go down to 3. Real yields are probably still going to be positive

1, positive 1.25, especially if inflation comes down. That's a big difference than where we were before at negative one, negative one and a half. These are huge changes in how you would value long dated cash flows like what are in what are in these growth stocks. I think you have a really difficult sell getting back into the techie growth days. The Fed's going to keep real rates above zero and probably closer to one longer than you think. Do they need to go to two or three? I doubt it. But this is not a sort of return to normalcy for companies that require really low discount rates on future cash flows and in many ways, negative real rates. So I don't get excited about that trade. I think you get a little bit of spread compression. You get a little bit of rate coming in. You've got a six-month bill that just cleared at 4.63%. That's a big number, Sarah. You had a few hundred basis points of spread, maybe more if you go down

into the deeper trenches of the credit markets, three, four hundred basis points more in spread that you can collect in structured credit, municipal credit, some emerging market credit, U.S. corporate credit. You got a lot of spread and a lot of rate to play with that you didn't have last year. And that's just a heck of a cushion compared to what you have in the equity markets, which I don't want to sound overly bearish equities. I just don't see a great breakout story to the upside. Remember what happened to Jackson Hole? And we talked about this. When the market starts to go up, he's going to get a little more aggressive on you because he wants to get inflation down quicker. So you just have that extra headwind on the equity side that really isn't there for the bond side, in my opinion, or the credit side. Yeah, no, good point.

That was when he dropped the word pain. And it was painful for equity ambassadors. David, thank you. Always a pleasure. Good to kick off the year with you. David Zervas from Jeffries. Just want to point out, Sam Bankman-Fried has left the courthouse just moments ago. He has entered his plea, which is not guilty. Of course, he is being accused of a number of criminal counts of fraud. There he is in a suit, no tie, but definitely different than the usual shorts and T-shirt. We're used to seeing him moments ago in New York leaving the courthouse. Of course, he is free on bail. Two hundred fifty million dollar bond that they have secured following his extradition last month from the Bahamas.

We'll keep you posted of any developing stories. But he has pled not guilty to the charges against him. Look at Tesla picking up where it left off last year. More steep losses. Our next guest says there could be a lot more downside ahead. Stock is down almost 13% just today. You'll hear why right after the break. We're down about 100 points on the Dow. Closing bell back in a moment.

Welcome back to Closing Bell. Tesla kicking off the new year with more losses. The stock under heavy pressure after the automaker fell short of delivery targets. Roughly 1.31 million vehicles delivered in 22. That was around 90,000 fewer than expected. Tesla tanked more than 50% last quarter alone, worst on record. Let's bring in Craig Irwin to discuss. He's North Capital's senior research analyst, has a neutral rating and an $85 price target on Tesla.

So clearly you think there's more room to fall, Craig. I do wonder why such a big reaction today on top of all the selling that preceded it. Yes, the deliveries were light, but does this does this necessarily correspond with what's going on with the business? Well, really, what it's got to do is the earnings momentum, right? So earnings momentum in Tesla is negative and it will probably be negative for a period of several months, you know, a couple quarters, maybe a few quarters. There is a superb service out there from EVvolumes.com where you can get registration data that predicts the quarters very, very accurately, much better than any sell side analyst. So some of the buy side had that. I knew this was going to be an awful quarter. But they've got all sorts of problems. They've got margin compression.

They've got competition. And you've got the distraction of Twitter out there. So I think the stock remains weak. And, you know, it's going to be a period of time before that earnings momentum becomes positive again. But it's still a growth stock. We're still talking about what, 40 percent growth instead of 50 percent growth on deliveries? Yeah, I mean, that's fantastic, right? I mean, EVs are inevitable. You know, I'm a bull on EVs. I love what Tesla's done. They've changed the future of transportation. But the reality is, you know, it's an expectations game. And this thing was valued, you know, at a trillion dollars not too long ago on hype and pipe dreams. You know, and we've been bearish for quite a while saying, eh, shouldn't be valued more than Toyota, especially if it's, you know, producing one-tenth of the number of units. You know, Tesla's just not

the best place to put money. There are much better places in the sector I think people can invest. Why? What has changed specifically that's not, say, as a result of COVID or what's happening in China or supply chain, things out of Tesla's control? So now it's no longer strictly a story stock. It's a growth stock, as you pointed out. So it's all about expectations for units and making those units. So when we see a large, large miss, it was only a few months ago that people were expecting 450,000, not the 420-something consensus versus 405. You know, it wasn't too many months ago people were expecting big numbers out of these guys. And everybody just wanted to crank their estimates to the sky.

You know, reality is the margin compression from the discounting they put in place to try and make this quarter and the need to introduce a shorter range car for the Incentive Reduction Act subsidies, you know, is going to put more margin pressure. So the estimates will sort of double down. They'll face some significant pressure over the next couple of quarters. And we're going to have to kind of wait for that to shake out. Also, we don't know how demand is going to shake out in this recession. Obviously, it's impacting them already. So it's one to stay on the sidelines until the momentum is positive. In favor of another automaker and EV competition? Because Tesla still has the upper hand, doesn't it, when it comes to first mover, scale, advantage, and cost? There are others out there that are growing faster, that face better subsidy environments,

that have pretty compelling stories. Now, I don't follow Polestar with a rating, but I like what the management team is doing. You know, I think when you look at Ford and their execution, it's fantastic. Kia's execution has been really good. Audi, you know, I drive an EV, and when I stop at the charging station, I talk to all the drivers. A lot of people are very satisfied with their new vehicles. You know, Porsche, fantastic vehicle, outselling the legendary 911. So you, you know, you have competition, you have alternatives out there, and there's credible

ways to play it, both big and small. So, you know, Tesla's just not the best place to put money. So you expect a guidance change in the next report, lowered expectations? Well, there, you know, a lot of analysts have cut numbers into this report. I expect a lot more people to cut numbers in when they actually print their financial results. And then, you know, they may end up being too bullish. We're going to continue to see some pressure. And, you know, I'm going to question whether or not people make deep enough cuts and whether or not these are appropriately discounted into, you know, 24 and 25 and 26, which is really what's going to drive the valuation for the stock.

Down 12.5 percent, well underperforming the market, as we've been seeing for the last few months. Craig, thank you. Craig Irwin on the big Tesla move today. We do have some more news on Sam Bankman-Fried following his not guilty plea in a New York court. We showed you him leaving the courtroom just moments ago. Kate Rooney has some more color for us, Kate. Hey, Sarah, that's right. Yeah, we do have some details from inside the courtroom. You mentioned he pleaded not guilty on all counts. The judge also granted Bankman-Fried's application to seal the names of additional bond co-signers. So he had been released on a $250 million bond that was

signed by his parents and then two other anonymous names his legal team had requested earlier today to redact the names of those people, citing security concerns that the government plans to interview both of those people in the next couple of days here to figure out the terms of that bond. It also set a January deadline for the media and the public to contest the sealing of that information if they want to, so that we may see that in the next couple of weeks here. And there are some new terms, Sarah, to his bail. So the judge ruled that Bankman Freed is now prohibited from accessing or transferring any FTX and Alameda cryptocurrency, anything related to either entity or any of the subsidiaries related to FTX. He had tweeted about that over the weekend, denying some reports that Sam Bankman-Fried had moved money around.

So that's an update to the bail agreement. And then the next step here, the prosecutor says the government will now provide Bankman-Fried's defense team with hundreds of thousands of documents in evidence in the next two weeks. So that would include materials from some of the FTX debtors, investors in FTX. He's also mentioned political campaigns as well. We've also got a potential trial date. That's set for October 2nd. It's expected to last about four weeks, Sarah. So does he fly back to California now, to his parents' home? He goes back and forth? That's where he's been on house arrest. So part of his bail agreement,

the $250 million bond, and he's been in Palo Alto, where his parents live, and their house is part of that bond agreement, part of the collateral there. But he is restricted to parts of Northern California and Manhattan. And right now, it's just sort of that discovery phase where his team will now get documents, hundreds of thousands of documents to look through and really build their case. And they've got until October. OK, thank you, Kate Rooney. Let's show you where we are in the market. Sound about 111 points as we head into the close in this final half hour of trading or so. The S&P 500 down about six tenths of one percent. So couldn't hold on to an earlier rally overnight. Asia rallied on more hopes of a China reopening.

Potential signs that the COVID cases are peaking out. The subway usage was a little bit higher in China. Couldn't hold on to that optimism, though. The Nasdaq down almost a full percent, even though yields are lower. Wall Street is buzzing about a huge bet on Blackstone's real estate investment trust. After investors cooled on the fund late last year, we're going to tell you about the $4 billion investment and possible guaranteed returns next. And as we head to break, check out some of today's top search tickers on CNBC.com. Tesla in the number one spot today on its massive

sell-off, down almost 13%. The 10-year yield, lower to start the year, below 3.8. Apple, also weaker by 4%, shaving the most off the Dow right now. The S&P and the Dow rounding out the top five. We'll be right back. What is Wall Street buzzing about? That huge bet on Blackstone's real estate fund with a twist. The University of California says it is investing $4 billion into Blackstone's B-REIT fund. Here's the twist. The UC system gets

a guaranteed return of at least 11.25% annualized over its six-year holding period. This all comes after the fund saw a slew of redemptions in December, which we covered here extensively on the show. Blackstone says the request kicked off in Asia after the Chinese market fell, and then other investors looked to withdraw over concerns that the fund would have to mark down its portfolio following all those Fed interest rate increases. Blackstone's president and COO John Gray spoke to David Faber on CNBC earlier about the deal. We came up with a structure that was a win-win here for us and them and then they went out around the country meeting with the CEOs of our portfolio companies seeing real estate looking at the financials the valuations

the liquidity and concluded this is where they wanted to deploy capital and Jack deep actually said to me this weekend if I was building a real estate portfolio from scratch beer eat is exactly what I would have created and so we think this is great for our investors in B-REIT and obviously great for Blackstone and terrific for the University of California system as well. Blackstone stock down 18% since the beginning of December when the firm reportedly started limiting those redemptions.

And while it did get a little bit of a pop earlier in the session, it's now up about 2.3 percent today. We spoke to several analysts who say the deal is definitely a vote of confidence, but they aren't surprised by the stock reaction because there's still a question of how much more demand there is out there for redemptions. No question it's a sign of support. How unusual is it that they guaranteed that double-digit annualized return? Yeah, it's not routine. But I think the way to think about it is, you know, the University of California is locking up its money for a defined amount of time.

Now, the other investors in B-REIT get, I guess, monthly ability to redeem. So in exchange for that, they have a floor in the investment. It really does serve Blackstone's purposes, as Gray was saying there, you want to have a sophisticated outside investor effectively endorse the net asset value that you're putting on this portfolio. And they've done that by investing at that price. So bottom line about Blackstone, the stock, if you're an investor in that one, does this put pressure on earnings and growth? It certainly probably continues the uncertainty about whether this is going to be a big source of growth for the company. It's very profitable for a very long period of time. It

seems as if that's probably not going to be the case for a while, probably because of just the asset class in general not being as much in favor. But Blackstone has underperformed since the initial news came out December 1st. KKR and Apollo and Goldman Sachs by, call it, 7, 8 percentage points. So getting back some of that today, but not all of it. Mike, thank you for putting it in perspective. Up next, former Federal Reserve Vice Chair Roger Ferguson joins us on how this week's key economic data releases could impact the Fed's strategy. Excuse me. And check out energy stocks as we head to break.

They're getting slammed today. The sector's down 4% after finishing out a very strong 2022. It was the only sector to finish higher last year, and it was up sharply still over the last year, up 48%. We'll be right back. Stocks kicking off the new year with some crucial reports out this week. Tomorrow, we'll get the minutes from the Federal Reserve's last meeting in December, and also the JOLTS number, job openings and labor turnover. And then the highly anticipated December jobs report out on Friday. Joining us now is former Federal Reserve Vice Chair Roger Ferguson. Roger, nice to see you. Happy New Year. Same to you, Sarah. Nice to be with you. Happy New Year. Same to you, Sarah. Nice to be with you. What are you looking for in especially that critical jobs data? Well, I think we have to look at the inflation numbers or wage

numbers. They were a little high in the service sector the last time around, the release in December, reporting in the November numbers. So I think one looks to see is there any cooling there. But having said that, Sarah, I think the main thing is to keep in mind the big picture, which is wages are still increasing at a rate that's inconsistent with the Fed's 2 percent inflation target. And until that changes, I think the Fed is still in tightening mode. So what do you think of the fact that the market expects the Fed to stop tightening by mid-year and start cutting by end of year? I think the market is both right and wrong. So I think there are probably two, maybe three more moves by the Fed, 50 basis points in the February

meeting, maybe 25 after that, and then probably they're done. But I think where the market is wrong is on the expectation of cutting. When we looked at the most recent summary of economic projections, there was no sign there of the Fed expecting to cut during this year. And when we listened to Jay Powell's press conference after the meeting, there was no sign of that either. So I think the market is ahead of itself based on the way the Fed sees things today. What if the wages don't cool down? What if wages keep high because we have some serious supply issues when it comes to labor in this country, labor participation, availability of workers, eligibility of workers, skills? I mean, those are not things the Fed can

fix by continually hiking interest rates. So what if that remains higher? And there is your dilemma, because it's that imbalance in the labor market that is driving much of the forward momentum in inflation and, indeed, longer-term inflation expectations, while they're relatively contained, are always something to be watched. And so that, I think, is why the Fed's got to keep moving here and why they intend to keep moving. But you put your finger on it. At the end of the day, you know, there's only so much they can do. They're hoping to get the demand for labor down without dramatically changing supply

because they know they can't really control supply. And so that's the challenge right now. So you put your finger on it. I think the answer is they will keep raising rates until they see something that tells them, all right, this demand is starting to cool and jolts is starting to show it. But you must think that that's going to happen if you think that the Fed is going to pause by mid-year. What do you see changing between now and then on the inflation story? Well, I think the reason I think the Fed is going to pause by mid

year is they've done so much. Their own projection signals an expectation now of a so-called terminal rate of around five to five and a quarter. So, you know, I'm just simply reflecting back what the Fed itself is expecting. I think the big point, however, is how long do they stay at these relatively elevated rates and see inflation coming down? And so I think the concept of doing two, maybe three more moves does not mean that they'll think that they've beaten inflation. It will mean that they think they've put an awful lot of restraint into the economy and want to watch and see the impact there. They will be ready to go again if they have to. But I think what they're expecting, and I am as well, is two more moves, maybe three,

stop and see the result of this handiwork, so to speak. But that does not mean that they are ready to cut. I think it means they're going to hold rates there, hope for inflation to continue to come down, which will allow so-called real rates to gradually rise into a comfort zone that they have of one and a half to two percent. And I guess a lot will depend, Roger, of course, on the economy beyond just inflation. We're worried about recession potentially this year. What is your best guess as to what happens? Because we got an Atlanta GDP Now tracker filling in the data today that projects 3.9% growth in Q4. That is an acceleration and marking some of the strongest growth we've seen now in quarters.

So what's actually happening to the economy? Well, I think the economy is showing many different things happening simultaneously. There are clearly sectors that are very interest-sensitive and are slowing. One might even use the recession word. So think about housing, for example, with mortgage rates, you know, 30 years running up quite dramatically. And so we see slowing there for sure. We see continued forward momentum in some of the service sector. Some of this is being supported by household balance sheets that are still across the curve relatively

strong but that will change during the course of this year. So I am expecting what I would imagine in the second half of the year to be a short and shallow recession in part because interest rates will have risen quite a bit and also because of external shocks. So it's a very, very turbulent, uncertain period right now, where something's moving rapidly, something's slowing rapidly, and the Fed clearly still very much in action and not ready to start to ease anytime soon. Roger, thank you. Appreciate it. we're lucky to have you on board here as a contributor during this turbulent time we'll talk to you soon wells fargo issuing a very bullish note on one casino operator because of mccall's reopening today's stealth mover is next

mini recovery here dow's down only 57. Let's check out today's stealth mover. It is Wynn Resorts. Wells Fargo rolling the dice on the casino operator, upgrading the stock to outperform from equal weight, hiking its price target to 101 from 74. The analysts there are betting Macau's recovery and the ability to recapture VIP play will help shares hit the jackpot.

They are outperforming today. You've got communication services, now real estate, financials and industrials all in the green as the S&P 500 is down less than a half a percent. After the break, a blockbuster idea. They are just upgrading the company formerly known as Square to outperform after a disastrous performance in 22. We'll find out why when we speak with the analysts behind that call. That story, plus Apple's sinks and Google and Meta's fading ad dominance when we take you inside the Market Zone next. We are now in the closing bell Market Zone. CNBC Senior Markets Commentator Mike Santoli

here to break down these crucial moments of the trading day. Plus, we've got Steve Kovac on Apple's big fall and Baird's David Koning on block and the upgrade today. We'll kick it off broad, though, with the markets. The Dow's down only 53 points, so we've come well off the lows. S&P 500 down half a percent. But Mike, it did look like we were going to start out in a better mood this year. Didn't quite hold those gains from early morning. Bonds are rallying. The dollar kind of mixed. It's weaker against the Japanese yen. I mentioned that as a warning sign.

And it turns out companies are out raising money. We had a pretty good first day back for the bond market, for the credit market. My $34 billion of investment grade pricing today, just for context, $13 billion priced in all of December. Yeah, that's a very key thing to watch because you're right. There was a drought in December. You want to see that the corporate credit market is open and that the fixed-income markets absorb it pretty well. So it's a net positive. January would not be surprising to see a little bit of sloppy trading.

After a down year, especially, early parts of the year have been actually more down than up especially the early parts of the year have been actually more down than up over the last couple of decades. So that's not obviously a rule, but it's something to keep in mind. But more broadly, expectations have been beaten lower. The S&P has been in a range for months. We will really pay a lot of attention, I do think, to the economic numbers this week, the ISM in particular coming in, that is a pretty good, timely economic momentum indicator that's going to help determine the whole recession call. Yeah. And the dollar is pretty strong against the euro today, a percent move. That's a big one, which is always a headwind lately for stocks. Let's look at Apple, because

it's the biggest decliner in the Dow. And its market cap did fall below $2 trillion. This despite Foxconn's iPhone City returning to 90% capacity and App Store revenue increasing in December after five straight monthly declines. Steve Kovach joins us. Steve, so what are the big issues now weighing on the stock? What do you hear? Yeah, just a lot of uncertainty, Sarah. So look, we just got off this really bizarre holiday quarter for Apple where they just couldn't make enough iPhones to meet the demand that they were seeing. They even warned about that in early November. And a lot of people just couldn't get their iPhone in time for Christmas. So the big uncertain question now is, can that demand carry forward into this current quarter in January? If you didn't get an iPhone

in time for Christmas, are you willing to buy one this year instead and get it a few weeks or a month later? And on top of that, as recession fears just keep mounting, are people just going to say, hey, I don't want to overspend in case a recession hits and not buy the phone. Now, like you said, there are some positive things that we are hearing about. Morgan Stanley came out with that note today, like you said, saying app stores are up or app, rather, were up 1% in December. Now, that comes after five straight quarters of app store sales declines. So just a little bit of green shoots there for potentially for the services business. They think Morgan Stanley does think that there's going to be an acceleration of growth for the December quarter after a pretty dismal year for the services business, Sarah.

But overall, it's just a lot of uncertainty and whether or not Apple buying back a lot of shares can keep it afloat relative to its peers this year. Mike, not used to seeing Apple on the 52-week lows list. It is now touching down to lows we haven't seen since June 21. Yeah, exactly. I mean, I think all the things that Steve ran through are absolutely weighing on the stock. But the other thing is it's completely a victim of its own success in drawing so much capital into the stock and making it as expensive as it's been, you know, since the pre iPhone era.

And that's just the unwind that's gone on here. It's a pretty unsatisfying answer to say it was all valuation expansion on the way up and now it's just valuation compression on the way down. But that to me is most of it at this point where you had a lot of folks who it's an interesting spot because, yes, it's down 30 percent over 12 months, but it's still up 70 percent over three years, which means you had people with profits in this stock who might even want have wanted to wait to the next calendar year to book it for capital gains purposes. I don't think it's all about taxes one way or the other, but it's just a lot of these cross currents affecting Apple. Mostly it got way too big in the index and too expensive. And now it's, you know, unspooling some of that. Yeah. Taking about 30 points off the Dow today. Steve Kovacs, Steve, thank you. By the way, Tesla's at shares that we have levels we haven't seen since August 2020. It is also on

that 52 week low list. Shares of Block, they're in the green today. This comes after Baird upgraded the stock to outperform put a $78 price target there on that name saying sentiment can improve this year as growth remains good. Block shares fell by around 60% in 2022. And the analyst behind that new note, David Koning joins us now. So, David, what changes for Block and for investors in 23? Yeah, thanks, Sarah. And this is a premier fintech growth company, large cap. They've grown fast for years. Last year was tough with the afterpay acquisition. It's not that big of their revenue base, but Affirm is just an example, was down 90 percent last year, so clearly impacted Square. This year, we think a resurgence in cash app growth through the year. We think inflation

and rates actually can help the company. So there's some macro tailwinds for them. But what about the problems? Are those going away? Are people worried about the turn in the credit cycle, the slowdown in spending, the Bitcoin exposure. What does that look like here? Yeah, so Bitcoin's only 4% of gross profit. Afterpay's about 10% of gross profit. Tons of costs around that. But what I love is margins can expand meaningfully after a big spending year in 2022. Think of this once. Their revenue per employee is $500,000. All the companies we cover around that, 40% plus margin. Square is only at 15% margin. So we think they have tons

of room for margin expansion coming up. Wait, explain the employee ratio to us a little bit more, why it's different. Yeah, sure. So revenue per employee, it's an important metric for us. When you generate a lot of revenue per employee, that's a lot of yield you're generating for each employee you hire. Generally, companies that have a high revenue per employee trade have very high margins. Block does not have that high margins because they're investing so much in products, which have been great for them to do. We think they're going to unlock a lot of that in the coming years as growth continues to be strong. All right. Thank you for joining us on that call of today. David Koenig from Baird upgrades square or block to 78. Google and Meta no longer the kingpins of online advertising. That's according to data covered by the Wall Street Journal. Research from Insider

Intelligence that was in the journal finding that these two accounted for less than half now of digital ad spending in the U.S. in 2022. First time they've dropped below that threshold since 2014. Their advertising market share expected to shrink to less than 45 percent this year as competitors like Netflix and TikTok grow in influence. Mark Mahaney, Evercore ISI's head of Internet research, joins me now to discuss. Is this something that you think the market is already on top of? I think largely, and you have to kind of differentiate them a little bit. I think the company that most underperformed the market was probably Meta slash Facebook, and that's because they had such a hit from those Apple privacy changes. When all is said and done, their ad revenue declined

in 22, we think by about 2% year over year. Now you've got to adjust for currency, but it's still very low single digit percent growth year over year. They clearly underperformed the market. Google was probably darn close to the market, just a few shades below it. Then you've got these kind of upstarts. Now Amazon's not an upstart. They're doing 37, 38 billion in revenue. And my guess, Sarah, is that they're probably the next company to generate $100 billion in ad revenue. I mean, this is a couple of years down the road. They have a lot of things going well for them right now. TikTok could, too, except we've now got a lot of political uncertainty over TikTok.

So then you have to look at some other sources, new sources of growth. And I think Netflix is one of the more intriguing ones out there. But very early days for them. Yeah, no, TikTok, obviously a share gainer on ads, but lots of talk, as you mentioned, about the political implications here for TikTok, whether it's going to get banned. I heard a lot about this. Has anything changed there fundamentally where you think that this could happen? And if so, does Meta, is it a beneficiary? Is it that simple? And Meta would definitely be a beneficiary. So would Google to some extent, because I think the data we've looked at shows that TikTok's time, that's tough to say quickly, TikTok's time has

come in part from YouTube. And Snap would be a company that would benefit from a TikTok ban. I don't think a TikTok ban is imminent, but I think the odds of it have increased enormously over the last six months. I mean, there's a government procedure in place that, you know, required divestiture, and it doesn't seem like there was a deal was able to be reached between the U.S. government and ByteDance. I don't think ByteDance is going to look to, will voluntarily divest TikTok. So it's kind of hard not to come to the conclusion that there's a distinct ban of TikTok, like has happened in other countries like India within the next couple of years. And I think advertisers at some level probably know that.

And I think that's why advertising revenue, I think, is actually weakened at TikTok over the last couple of quarters based on sources we've talked to. So of everyone in your universe, you've got a completely different landscape than you were presented with, hey, since this time last year in terms of multiples and estimates. Which do you think are most out of whack now that you have a fresh set, 2023? Which valuations just look ridiculous to you? I don't know about ridiculous, but we've had multiples de-risk across the space. We've had estimates cut materially. We've had a lot of cost actions, which also has helped kind of reduce fundamental risk at these names. And so I still look at a sector where it's very heavily levered to consumer discretionary spend.

So revenue growth is going to be slowing down for almost all of these names unless they have a new product cycle, unless they're somewhat recession resilient. And that kind of points me towards two names that I particularly like for this year. I want to be really tactical about this, but I like Netflix and I like Uber. I think they hold up relatively well in a recession. And Netflix in particular has got the most interesting new product catalyst out in the space with this ad offering that is taking off slowly, but there's a lot of potential here. And Netflix wins so many different ways from the rollout of this ad-supported offering. I like Netflix right here, right now. Got it. Mark Mahaney, thank you very much. Netflix and all these media names are some interesting outperformers today on a down day. Meta at the very top of the list, up 3.7 percent. Two minutes to go in the trading day. What else

are you seeing in the internals, Mike? Actually been firmer than the indexes all day. And that's, again, a part of this pattern of the typical stock doing better than the really huge one. So basically a 50-50 split, up and down volume, slightly skewed to declining volume. Take a look at non-U.S. stocks versus the S&P 500 over the last three months. Pretty good split opening up here. That coincides with the peak in the dollar and the decline there and obviously some reopening effects in some of those markets out there as well. And then the volatility index did get a little bit of a bump. That's pretty routine after a three-day weekend.

Going to rebuild some expectations for how much the market can move up toward 23. So clearly hovering above the lows. People bracing with a jobs number coming on Friday for the potential for some whippiness. All right, as we head into the close, the Dow is really coming back. You said firming internals, and we're seeing that coming back. It's down 11 points. At the lows, we were down almost 300 points on the Dow. Of course, at the highs, right after the open, we were up more than 240.

But it does look like we're going to kick off the new year after the worst year for stocks since 2008 with more selling. The S&P 500 down about four-tenths of a percent. It's not extreme. And there are some interesting pockets of strength like communication services. I mentioned Meta, Comcast, our parent company, Disney, AT&T, all having a strong start to the year. Real estate, financials, and industrials all going to close positive. Utilities joining that group as well. But energy, technology, consumer discretionary. Thank you, Tesla, all at the bottom of the list. The Nasdaq closes down three quarters of one percent, even with bonds rallying today. That's it for me on Closing Bell.