Bloomberg Markets: The Close 11/21/2023
Live from Studio two here at Bloomberg headquarters in New York, I'm Romaine Bostick and I'm Katie Greifeld. We are counting you down to the close here with the focus on that November 1st Fed decision. We know exactly what the Fed did, which was not a whole lot of anything but what went on behind the scenes. Those minutes dropping right now. Michael McKee standing by with the readout. Well, the minutes show a United Open Market committee.
The labor market had remained tight, but job gains had moderated, as had inflation, and that justified leaving rates unchanged at that November 1st meeting. Quote All participants agreed that the committee was in a position to proceed carefully, the minutes say. Further tightening would be appropriate if progress toward their 2% inflation goal was insufficient. But in the meantime, all participants judged it would be appropriate for policy to remain at a restrictive stance for some time until inflation is clearly moving down substantially. Policymakers took note of the tightening in financial conditions from market rates moving up substantially, their word in the weeks before their meeting. Many suggested the move was driven primarily or substantially by a rise in the term premium on Treasury securities. And generally, they also felt that
greater supply of Treasury securities contributed to the increase. However, quote, they also noted that whatever the source of the rise in longer term yields, persistent changes in financial conditions could have implications for the path of monetary policy. Many noted it was uncertain whether the tightening would persist, however, and to what extent it reflected expectations for tighter policy that helped make the economic outlook particularly uncertain. A strong economy might make inflation stickier. A potential broadening of the Middle
East conflict might affect oil prices. Commercial real estate valuations might adversely affect some banks, and most continue to see upside risks to inflation and downside risks to growth. Leaving rates unchanged, they said, would give Fed officials more time to evaluate economic developments. Well, Mike, we think about what's happened in the week since that meeting. And obviously we've seen a huge rally in the stock market, but also in the bond market, bringing those yields down, loosening those financial conditions that those Fed members actually pointed to. And with these headlines in mind these minutes from the Fed, how does some of this pricing for rate cuts next year stack up? It doesn't really give us any indication of what they're thinking about that they did emphasized the need to keep rates higher for longer.
They took into consideration where rates had gone and the possible tightening of financial conditions from that. But made it clear they weren't sure that that would continue. And of course, it did not. So it doesn't seem to be a major factor in their continuing, ongoing outlook. All right. Michael Michael Bloomberg, international economics and policy editor down there in Washington. A readout of the Fed minutes from that October 31st, November 1st Fed decision, a decision that left the rate hiking cycle on pause.
Constant Hunter. Joining us right now, senior adviser over at Macro Policy perspectives to help us kick off to the close. And Constance, you saw the readout here of our I guess, what we learned during the last Fed meeting, which was I guess the Fed is pretty much doing what they've told us they were going to do this entire time.
Yes, exactly. And I think the only thing that remains in question now is how long is higher for longer. Right. If you if you look at the Bloomberg warp, right. We have a 31% chance of a cut in March, 75% chance of a cut in May. March would really be the same as higher
for same, not higher for longer. So it really depends on on how these financial conditions evolve, how inflation data involves evolves and how jobs data evolves. Well, let's take two of those pieces of data, the jobs data and the inflation data, which seem to be most important based on your own reading of that data. Is there a case that the rate hiking
cycle is over? Oh, for sure, yeah. Our base case is that not only is the cycle over, but that the first cut will come in May, in May. Now, personally, I think this is not the House view that there is an increasing chance that it could come in March. And the question is, what would that mean? Right. There's an argument out there that if
they cut in March, it would be because things have gotten really bad. I think there's a scenario where in order to stick the soft landing, they're going to have to start getting to neutral. They're in restrictive. They're going to have to start getting in neutral. They want to do that in a measured
fashion. Right. 25 basis points a pop. They do not want to be caught behind having to do 50 or 75. So this is less about hitting the gas again and more just taking the foot off the brake and trying to coast to exactly that. Gotcha.
And ideally, you know, the economy will stay strong enough that they could wait until May, because I think that will really solidify the the lower pressure on inflation. But if we look at the month over month data and we do say a three month annualized rate of the core, we're at 2.6. All right. So we're getting into the territory and how that translates into a p e that could be acceptable to the Fed. Well, I want to talk a little bit more
and game plan out what it would take for the Fed to actually be comfortable moving in March, because you think about what we've heard from the Fed chair and from really all of the policymakers as well. It seems like they're really just drum beating, that they're going to stay in restricted territory for some time here and not And there's this real caution about moving too soon and risking credibility there. What needs to happen? Does the data need to deteriorate or is just the continued trend in lower inflation enough? So I think one of two things, right? If we have a really solid continued trend in inflation and and again, what's been sticky here now is core rate because we've had this fall in energy prices. So what they're going to need to see is not only a reduction in core, but a reduction in in core in what they call super core rate, which is excluding housing. We know with housing, there's this lag. It's it's known it's about five quarters before what's happening in the actual rental market gets fed through to OCR. And so they're kind of looking through that and they're looking at the super core inflation and that has been persistently high because you have things in there like insurance, which rates have gone up pretty significantly since the start of the pandemic.
You have other services like transportation services which have gone up. And so they're going to need to see that really moderate before they're going to move on rates. Alternatively, if we had a severe deterioration in the economic data that might cause them to move sooner, because that would certainly indicate that there's less upward pressure on prices. And let's talk a little bit about the
market here, because, of course, on November 1st and India's minutes, you can see a lot of discussion about financial conditions, the idea that tightening financial conditions, it's doing a little bit of the Fed's work for it. But of course, we've seen just in the past few weeks how quickly that can unravel. How do you think this Fed should be thinking about financial conditions going forward and how that translates into actual monetary tightening? So of course, the ten year is the easiest thing to look at, right? Because we get a price every second. And and we know that that translates right on into to mortgage prices. But they actually look at a variety of data. Right? So they're they're not just looking at the ten year they're looking.
At the shape of the yield curve. They're looking at the at the senior loan officer survey. Right. Which which indicates that we're still in very tight conditions.
Right. Banks are conserving cash and not lending it out as much. And that is in part because we have this big increase in interest rates and an inverted yield curve. So they're looking at a broad range of things when they're looking at financial conditions. And those are still pretty tight, even though we've seen this rally off 5%, four and a half is still higher than their September meeting. All right, Constance, always great to
talk to you. Constance Hunter, senior advisor over at Macro Policy Perspectives, helping us break down the latest Fed minutes and what could potentially come next for the path on rates. Meanwhile, here on the program, a close look at what's going on in the crypto sphere with the founder and chief executive of Binance agreeing to step down and plead guilty to violating U.S. anti-money laundering requirements. The Department of Justice here in the U.S.
is scheduled to hold a news conference at the top of the hour that we will bring to you live. Plus, Abercrombie and Fitch raising its 2024 outlook after topping third quarter estimates. We'll speak with CEO Fran Horowitz about the future of the storied retailer.
And all eyes right now on Nvidia. The company set to announce its earnings after the bell tonight. The AI boom in focus. This is the close on Bloomberg and. Well, this week marks the official start to the holiday season, and our next guest says that we're set for a stock rally.
See those? Jodi Ginsburg writes that given last year's weak performance, it would be surprising to see another down her turn through this holiday, given positive sentiment from the Fed's pause on lower on rate hikes, lower inflation and consumer optimism. I'm thrilled to say Jodi joins us on set now. And it's a good point. I mean, you think about last December, what the S&P 500 is down almost 6%. But December is typically a pretty good time for the equity market. It is.
And if we measure the returns between Thanksgiving and Christmas going back to 1983. So that's when CBO launched the options about 40 years ago. We've seen 30 out of those 40 years be positive and we've only seen back to back losses in the holiday season once in 96 and 97 and again last year since the drop was four and a half percent. We do see a lot of optimism on the back of the Fed's pause and the lingering inflation given. Consumers and corporations are continuing to spend from the higher rates that there is a good chance of a rally, but it still comes with some risks.
Well, Jodi, let's talk about this set up heading into this December with those potential risks. Of course, we had seen three straight months of losses, which is fairly rare. Of course, November has been pretty good. And you think about heading into
December, what does positioning look like right now given all that volatility? Well, we're seeing the rates on the back end right higher for longer, which influences the equity valuations. We're also seeing the possibility of inflation lingering for longer because of the geopolitical risks, the globalization and again, the Fed's pause. And in our risk toolkit, one risk that's standing out is dispersion as measured by our DSP index. And that means that the fundamentals are overpowering the macro.
So we are finding a big split between the winners and the losers in the market. Well, let's talk a little bit more about the dispersion, because I feel like that was the big story of the year. I mean, we are sitting on these monster gains on an aggregate basis. But of course, when you look under the hood, there's only a small number of companies that are responsible for the majority of those gains. When you look through history and you look at the types of dispersion that we had in previous seasons and other years here, how much different is it this time? How much more widespread is it? Well, what we're seeing now is that the spread between the winners and the losers, generally about 14% as compared with 9% when there's lower dispersion.
So we do see a huge opportunity, about one and a half times higher chance of outperforming the index for active managers. So the more active the manager is like hedge funds that can go long, short leverage and use derivatives in order to manage that risk, the higher the chance that they'll outperform. So I think that right now there is a huge opportunity as compared with other times, except for perhaps like March in 2020 when it was the biggest opportunity ever.
Oh yeah, that that was like a once in a generation type of a trading environment. I am curious, though, about the industry breakdown and whether there are certain industries where we are going to see maybe a little bit more dispersion than others. Yeah, we see a lot of opportunities in the winners. Typically energy and tech. Also, financials and real estate tend to
lag when there's high dispersion, though this time I would say energy still has a lot of opportunity because it is most related with inflation. It's inversely related to the dollar and it's also driven by the fundamental factor factors, any supply shock. So whether that's a geopolitical risk like a war or whether it's a hurricane, those types of influences drive energy companies to perform strongly. Also, real estate may have a good chance of performing well now because of the interest rate environment and the different kinds of real estate available.
So whether it's geographically split or it's split by, say, commercial versus residential, we do see that there is an opportunity for the spread there. And Judy, I'm looking at your notes and you write that in times of high dispersion, it's the earnings fundamentals that are more powerful than macro factors. And it feels like especially this year, we've been talking so much about Fed and global central banks. How are you viewing the tug of war in terms of the driver between earnings versus central banks? It's always difficult to fight the tide and when there are strong macro factors, it does influence the companies. But again, with these rates on the back end that are higher for a longer, that influences the equity valuations and we also see that there's a lot of opportunity. The in the fundamental factors at play. So the losers have gotten punished pretty severely this year.
So that factors in to the high dispersion. That's part of what makes dispersion high. Yeah. And then that, of course, also leads to some of the outsized moves that when they those comp when people finally do wake up to and see value in those companies, you start to see those big pops. This a great conversation. Great to talk to you. Jody Ginsberg, head of strategic
partnerships over at CBO. By the way, don't lose the Chicago now, I'm a Chicago guy. I know you guys want to rebrand it and make it for the rest of the world here, but will always be the Chicago Board to me. Sebo Strategic partnerships there and Katie Greifeld back to the dispersion, because I am very fascinated by this because I mean, I feel like that's going to end up being one of the bigger stories of the year in terms of just the market returns. And the big question is, do we sort of get a rebalancing of that in 2024? Yeah, it'll be interesting to see. You know, when we wake up in January, early January and come back to our desks, what the mood music is, how we actually settle out. I'm just surprised that we got through
this conversation about December. Excuse me. I don't know where you're going. I'm just frowning. My brain. I was going to say in the start, we got through that conversation without mentioning a Santa Claus rally, which is coming soon, Let me say. Well, do you know the official
definition as Mike Regan, he's very much a stickler about? We sit right across from each other, I heard. But before we get to the Santa Claus rally coming up, it's a retail roundup. It's another big day for retail earnings reports.
We'll have a breakdown next. This is the close on Bloomberg. And. Well, a fresh slate of retail results out today. Investors sending shares of Lowe's, Kohl's and Best Buy lower, but Dick's Sporting Goods higher on strong demand for sports gear. Meanwhile, an exclusive analysis of data by Bloomberg finds that Americans earning at least $100,000 a year are starting to curb their shopping. Joining us now with more is Bloomberg's Matt Townsend and Matt.
Walk us through a little bit of the methodology here that you use and what you actually found. Sure. Our team, we we looked at we took a group of 30 retailers and brands that basically cater to the upper middle class names like Lululemon and some other, you know, other other companies in that patch. And what we found is that, you know, since about February as a group, they've seen their growth slow down to the poor and now it's declining. And if you look at the chart of where overall retail sales are, you know, the economic numbers reported by the government, those are very steady, even ticking up on this group, which is going down, down and down.
So even like really popular brands that have been doing well are slowing down. And then just a lot of brands are in negative territory. And so we know that. So when we talk about the drop, though, are we talking just about just actual total dollar volume? Are we talking about unit sales? I mean, what specifically? Yes, we're we're looking at credit card transaction data through Bloomberg second measure, which is a part of Bloomberg. Okay. And so they're tracking a group of consumers every month. Yeah. And doing analysis of that.
So that's basically what we're using because this is private companies, brands, we think companies that don't actually report the brands numbers. I just ask that because I mean, I mean, when times are good, I mean, there was obviously a lot of distortions by inflation, right? The idea that the total dollar value of sales were going up, but that necessarily mean we were buying more things. It was just those things were costing more. And I'm wondering if there is a reverse effect at all given the disinflationary environment. There is some of that. And yeah, you know, we've made that point in our reporting sort of throughout the past few months that a lot of the growth in retail sales or at retailers is mostly driven by inflation or largely been driven by inflation. And what we're seeing lately, for example, a company like Apple that retail, their average transaction value has actually been falling. Yeah.
Their transactions are roughly flat. So that means their sales at like Apple stores, Apple website are declining. So it's not it's not a good sign if the upper middle class is sort of pulling back. That's the part of the consumer economy that really drives much of the consumer economy. So that's sort of the scary part here. It's like the people who can spend aren't spending on discretionary purchases. What happens in the fourth quarter? You're right. That's what I was wondering about
reading this. Of course, when we think about the impact to the economy, we situate this in the broader economy. Right now, the narrative has been for a long time now that the US consumer maybe sentiment is pretty bad, but they're still spending. And it's interesting to see this segment in particular potentially starting to slow down here. Yeah, that's exactly right. That, you know, the big question mark, I mean the sort of the trajectory has been we all know that during COVID, people splurged on their homes, electronics, the clothing that's shifted to services, you know, like the Taylor Swift concerts made a lot of noise over the summer. But still, at some point, people need to start buying big ticket items, especially in the fourth quarter, because when all these companies are depending on Americans to buy this stuff. So what the data is showing is that even
the upper middle class has pulled back. So what's going to happen the next five weeks? Are they really going to sort of come out of the woodwork, start spending like they haven't been doing for, you know, better part of a year? We'll see. The data and survey data is also showing a lot of these people in this demographic are not very confident right now, worried about their jobs.
You know, certain certain markets of the certain cities in the country, the housing market isn't great. Prices are sort of dwindling. So there's added pressure on this group. It's very important groups. The U.S. economy. Well, Matt, I just quickly I was going to say, you think about some of the earnings reports that we got just today. Even I'm thinking about Best Buy and Lowe's. And it was interesting to see the commentary specifically around big ticket items.
And from Best Buy, talk about uneven consumer demand. It seems like this is what they were talking about. Exactly. Yeah. Best Buy is a pretty somber report because their quarter actually each month got worse. The first three, the third the first
three weeks of November. Do not is not a pretty picture right now for Best Buy. They cut out appliances with big declines, computers, all the things that are high consideration that you really think about purchasing. I mean, it's one thing to go into Best Buy and buy a new pair of headphones or something.
But this is like, you know, purchases that are hundreds of dollars. Those are really hurting right now. Yeah. So if that's the sentiment going into like the core holiday shopping season.
Yeah. What's going to happen? Right. I mean, that's yeah, the sentiment is definitely has shifted a lot. Matt Townsend, who covers all this up for us here at Bloomberg, we got several, ah, earnings reports already this week, 80 Greifeld Which I think ratifies exactly what he said. And it really is the setup into what is supposed to be traditionally the big kick off to the holiday shopping season on Black Friday.
Do I feel like Black Friday has kind of lost some of its luster? Yeah, I know. Now there Cyber Monday, I feel like there's a Tuesday something. Cyber Monday, I think Tuesday is when we're supposed to like, give it all. Get back.
No, thank you. But what do you think about the charity for you? I'm stuck on Best Buy this morning. Again, uneven consumer demand is a phrase that I think maybe describes what's going on with a lot of retailers right now. And then you bring it back to Lowe's. I mean, a lot less demand for people
redoing their homes, these home improvement projects. You think about what a boon that was to a lot of these names over the last few years, obviously fading. Now we're going to get some more retail earnings after the bell tonight, including from Nordstrom as well as Urban Outfitters. A little bit earlier this morning, we got earnings out of Abercrombie and Fitch. And when we come back after the break, we're going to hear from the chief executive officer over at that retailer, Fran Horowitz.
She's on deck. This is the close on Bloomberg. And. This is the countdown to the close here on a holiday shortened week.
Volume in the equity market remains relatively subdued, as it typically is during this time of year. Let's see if there's any more action going on in the commodities space. Abigail Doolittle, She's standing by right now with our commodities closer. There is a bit of action in the commodities space. I mean, we're looking at a third up day in a row for the Bloomberg Commodity Index, the longest winning streak in almost a month, the longest winning streak in the month of October.
The dollar had been down earlier in yesterday and a few days before, now slightly higher, but nonetheless, overall strong. Take a look at gasoline up ever so slightly, up 3/10 of 1% ahead of the big holiday driving weekend. Maybe. We'll take a look at a longer term chart of that tomorrow. Heating oil futures up nearly 3%, up once again, as we do see some colder weather here, at least on the East Coast. Gold up 1.1%. It's not really entirely clear why it could have been could be the dollar weakness that we've had.
Perhaps I'm betting that the Fed is done. And then finally, wheat snapping a five day losing streak. That was the longest losing streak for a week since August. And of course, down in a major way on the year. Romaine. But today we have a little bit of a reprieve for wheat, up 2.3%. All right, Our thanks to Abigail
Doolittle. A closer look at what's going on in the commodities space. Let's now turn to what's been going on in the retail space. Several retail companies reporting
earnings, including Abercrombie and Fitch this morning, raising its 2024 outlook after its third quarter estimates topped top estimates. I should say the brands come back continues to resonate with teens and young millennials, and the stock up more than 200% this year. Investors have high expectations going forward. Pleased to say that the CEO of Abercrombie and Fitch is joining us right now, Fran Horowitz, our friend. Let's just talk about and you know,
forgive me if this is a wrong phrase, but this has to be a bit of a comeback story here. There are a lot of people that wrote this company off a few years ago. They said time had passed it by, but you, for one reason or another, have managed to quote a tap in a whole new generation of younger people who have now found this brand.
And at least based on the results from the last three or four quarters, appear to be really propelling sales forward. Yes, I remain. Thanks so much for having me today. Yes. Just to give a little bit of history, you know, I've joined the company about nine years ago and we have been on an incredible journey of building both the Abercrombie and the Hollister brands. The Abercrombie brand turnaround started quite some time ago. We're in our 11th consecutive quarter of
of positive comps, which is super exciting. And we have really done something very special in the retail industry. We've taken the brands and we've figured out their rightful place in the world.
So we put Hollister as the global teen brand and we did Abercrombie up. You know, it used to be a brand for teens, for jeans and t shirts, and now it's truly a young millennial brand for that. That customer lifestyle brands say 25 to 30. But we've expanded our categories and our age range from 20 to 40 and beyond. When we talk about the sales growth and where it came from, here is the sense here is that there is greater demand for the clothes or is this just simply kind of a shifting in the spending from one subset of consumers to another? No, the brand is growing very significantly. I mean, the turn started with women's. Women's is actually seen their 13th
consecutive quarter of growth. So this is definitely an opportunity for us to take share. I mean, as you know, in the apparel space, it's a game of taking share and that's exactly what we're exactly what we're doing. The expansion of our categories, you know, out again, of jeans and t shirts into things like dresses. Our curves of jeans have been terrific. Our new Y p B, which is our active brand, is also tracking very nicely. So definitely taking share and fair.
And I want to talk a little bit more about the aging of Abercrombie, because I have to admit I wasn't cool enough to shop at Abercrombie. I was at Hot Topic, just a few stores down, but a lot of my peers shopped at Abercrombie when we were teenagers, and I feel like it's still thought of as a teenage brand. How do you age up and sort of attract that up to 40 category? Well, you know, Case, it's interesting. It's been an amazing journey. But what we have learned is that the customer is the one who's actually behind us and supporting us. We do a lot of customer research. We stay very close to our customer.
When we initially went on this journey, we realized that there's a big whitespace space out there for that young millennial customer we studied very hard to understand what, you know, what he and she are looking for and decided that the 96 hour weekend when they are away with their friends, whether that's at weddings or bachelorette parties or just weekends away or even staycations, that we could clothe them for that entire 96 hour vacation. On top of that, we then realized as they start to go back to the office and needed clothing for that too, that we could provide that as well. So we're really a lifestyle brand supporting them for all their different wearing occasions.
And as part of that lifestyle component, how much opportunity do you see in perhaps Workwear, for example, especially as you target that young millennial? So great question because we have a franchise called the Sloane, and that is a trouser pant for women that is absolutely on fire and terrific. We've started delivering it about a year ago and that's exactly what she does with it. She wears it to the office, maybe with a jacket and a top. She takes the jacket off and she goes out to the bar with her friends, are out to dinner. So it's got a multipurpose to it.
And she's really feeling very special in it. I am curious about your expectations for the holiday season. I mean, how much how dependent is Abercrombie and Fitch and its brands on this particular time of the year, or do you have a little bit more, I guess, of an even dispersion across the full year? Yes. Is as Abercrombie has evolved into this older customer, the business is, to your point, a little bit more even Hollister is also a little bit more dependent on this time of the year. But Black Friday is an important holiday for for both brands truthfully. And the fourth quarter is our biggest quarter of the year. So we're excited.
We are ready to compete. Our inventories are in great shape. You know, we've been running this business on a real lean inventory and testing and learning into known winners, and we're ready to go for the fourth quarter. All right. That's a good place to leave it. Fran really enjoyed this conversation. Our thanks to Fran Horowitz. She is the CEO of Abercrombie and Fitch. I can't believe you weren't cool enough to shop it. No, no. I was, like, mildly, mildly goth, but we
don't have to go into it here. Oh, we do? Kind of. We have to talk about in video, though, because in video, it's out with quarterly results after the closing bell. Can the air juggernaut deliver another stellar report? We'll preview what to expect next. This is the close on Bloomberg and.
Let's get a view from the sell side with our top calls. Big movers on the back of analysts recommendations. And we start off with Six Flags, a downgraded neutral over at Rosenblatt with analysts saying the increase and more volatile and less predictable weather patterns is raining on the theme parks parade. The analyst does say that the Six Flags merger with Cedar Fair may mitigate some of the weather uncertainty by creating a more diverse geographic footprint. Shares fractionally lower on the day. Next up, let's take a look at the candy
maker, Hershey RBC Capital Markets. Ditching its outperform rating and going down to sector perform. The analyst says forget those epic. The real threat for Hershey macro conditions, rising input costs for sugar and cocoa and growing momentum from his rivals, including Mars, though shares down about one and a half percent on the day. And finally, C3 Air getting an upgrade today to outperform over at Oppenheimer and a new price target at 40 bucks a share.
The analyst says the air theme is, quote, real and durable. And C3 Air is one of the few players helping customers drive revenue. And productivity also says the company can actually accelerate growth heading into 2025. The shares accelerating up 2% on the day. Those are some of our top calls. We do want to stick in the sell side space and stick with a guy within video set to report results tonight after the bell.
Artificial intelligence has driven the market value to new heights with the average price target at almost $650 a share in video right now, trading just around 500. Raymond James, analyst Srini, Missouri, joining us right now. He has a strong buy rating on the company as well as a $600 price target. All right.
Let's start off with the expectations here because obviously we talk about our trillion dollar market cap, the best performing stock in the S&P 500 p e ratio on a forward basis that I think is approaching 50. And of course, triple digit revenue growth over the last couple of quarters. Is the bar heading into this earnings report too? I. Yeah, I would say the bar is not low, but I think the demand is also very strong right now.
Demand is continuing to outpace supply of GPUs and our expectation is that it's going to be pretty decent quarter. What we said in our preview is that they're probably going to be at about 5 to 10% and raise the outlook by about 5 to 10%. And just one correction on a forward basis. The stock is not trading at 50 times. It's actually the multiple has come in quite a bit. It's actually trading around 30 times historically.
This is a stock that traded at roughly 40 times on average. Hmm. Okay. Well, thank you for that correction. I am curious, Srini, about sort of the direction going forward and longer term here.
I know that they're going to have some big numbers over the next couple of quarters, but the expectation is at some point that has to sort of moderate just by default here. Where does NVIDIA stand right now in the air space and specifically with profiting off of the big air boom? Yeah, you know, they're the biggest beneficiary right now. And if you look at the the revenue from A.I., I think this year we're modeling
roughly $40 billion and next year our model is roughly 65 billion plus or minus. Maybe that's even somewhat conservative. Our view is that the demand will continue to outpace supply throughout next year. So you're right. I think at some point we have to take a pause. You know, the cloud customers, the likes of Microsoft and Amazon. They'll have to take a pause and they kind of think about in how they generate the returns on these investments. And there's always, always going to be some digestion, period. But at the same time, you know, this is
a megatrend. I think this is a multiyear trend. And our expectation is that even if there is a pause, it's going to be a temporary it's probably 1 to 2 quarter pause and we're back to the races again. So 1 to 2 quarter pause coming. And like you said, I mean, your view is
that this is a megatrend that that will just be a pause. But heading into the earnings report, approaching in just a couple of hours or so, you think about the stock up 242% year to date. I mean, how little is the margin for error heading into that that report in that call especially? Yeah. You know, look, the margin for error with the high multiple stocks is always very, very high. But at the same time, we feel comfortable that the short term members are going to be good.
One concern in recent weeks has been their China business. Obviously, the U.S. government has implemented rolled out new export controls and as a result, NVIDIA cannot ship their air products, at least the current air products into China.
So that's going to have some impact down the road. But the management came out and said that in the short term they don't see much of an impact even with those restrictions going into place because the demand from outside of China is so strong. I think some customers are still waiting to get their hands on Jeeps for a long, long time. And I think, you know, that trend is
what gives us comfort that even though, yeah, the bar is quite high, I think they'll be able to meet and beat. Let's talk about geopolitics a little bit more. Of course, you bring up what's happening with China and it seems like at this point, again, hearing from company management, the current state of tensions is manageable. But you think about sort of the long term geopolitical risks here. How are you factoring that into some of your models when you're trying to analyze this company? Yeah. I mean, today I would say China is roughly 20 to 25% of their datacenter business. And then look, China is a big market,
not just for NVIDIA, but every U.S. semiconductor company. And obviously I you know, it is very strategic for us and it's very sensitive. So I know there are restrictions. But at the same time, NVIDIA has implemented workarounds in the past and there is speculation that they might try to do that again. Outside of A.I., NVIDIA has a strong presence in China in gaming as well, So they have a they have a pretty pretty good exposure there.
So and you know, geopolitics can change anytime, right? I mean, yeah, in the short term, you know, they want to be able to ship what they have today. But longer term, I don't see them, you know, getting out of China completely. I think they will be a key player there and they'll, of course, comply with the US regulations. But even while complying, I think they still have an opportunity. I think, you know, the Chinese customers there is, you know, some domestic development that made chips, but those chips are going to be so far behind, I think in video we'll still have a role to play there. All right, Srini, going to have to leave it there.
Sure enough, a jury over at Raymond James, a preview of maybe what we hear tonight out of India. We do want to stay on A.I. and refocus on open A.I. and Sam Altman, Eric Gordon, assistant professor at the University of Michigan. He's stopping by to discuss some of the corporate governance issues that led to the ouster of Sam Altman and maybe potentially his return. This is the closed on Bloomberg.
Welcome back to the close. It's time now for our Wall Street Week Daily segment, the host of Wall Street Week. David Westin joins us every day around this time. And David, as we speak, Bloomberg reporters are reporting that there's actually negotiations now between Sam Altman and the board of Openai to bring them back. What happened to Humpty Dumpty?
Do they put it back together or not? Is amazing. It's an amazing drama. It started late on Friday, as you know, but it still continues right now. We don't know where it's going to play out. But to take us through how we got here
and what went wrong, for that matter, we welcome now Eric Gordon. He's assistant professor at the University of Michigan Ross School of Business. Eric, thank you so much for being with us. Let me start with one of the most basic questions. Is this yet another instance of a lot of money in a high tech startup going awry, as we've seen before in different situations, or is A.I. really central to this drama? I think it's both, David. I think A.I.
is central, but in some ways it's just another what were they thinking story? All of these brilliant people, you know, like probably Eight Sigma, smart people with billions of dollars doing something which in retrospect makes no sense. And I think if they had paid attention upfront, prospectively, it made no sense. Well, Eric, a lot of those people are very smart, no question about it. They tend to be scientists rather than
corporate leaders, and they haven't had a lot of experience. Microsoft doesn't fit in any of those categories. They made a really big investment in this.
How could they have done that without their due diligence, saying, you know what, we've got sort of a governance issue here? Well, you know, I you know, I teach him and I talk a lot about due diligence with students. They would have gotten probably a D-minus for this episode. But there's another possibility that I wonder about. Is it another Microsoft is behind story.
So you'll remember, Microsoft was behind you know, Bill Gates wasn't sure the Internet was going to be big. So they were behind in browsers. They were behind in search, They were behind in the cloud. They were behind in A.I.. Maybe it's just Microsoft throwing its money around. Part four Well, it's certainly possible. I mean, at least for right now, it looks like they might actually manage to stick the landing on this. But I am curious why we have sort of had
to go through all this. When you hear about the founder being ousted by a board that at least based on what we know publicly, there was no real consultation with the big investors, including Microsoft. Yeah, Or I mean, it's kind of interesting because all of the things that we think about in all of the oust the CEO battles, all the takeover battles don't really apply here because of the peculiar nature of the companies. So the company that Altman got ousted from is a capped profit company that is controlled by a not for profit company. It's not controlled by directors who are venture capitalists, are business people. We don't have activist hedge funds, the usual players who know how business is done. It isn't in play here.
It's a not for profit board that ousted him. And they said, you know, look, our mission comes before what you're trying to do. You've known that all along. We've made it perfectly clear. But you keep trying to do what you want
to do and we want you to stay on mission. Well, is that not fair? I mean, after all, I mean, Sam Altman was there at the genesis of this structure. Yeah. I mean, he actually set up he was one of the people who set up the the nonprofit that's on the top of the control pyramid here. But I'm not sure that the not for profit
people are entirely free of responsibility because, well, they went out and they accepted, you know, $12 billion or so of Microsoft Money. They got into a venture that they knew would require billions and billions of dollars. That's orders of magnitude bigger than the kind of money you raise in a typical nonprofit. And so they may not be full of responsibility, but what about power? Because the way it's structured appears, it is a self-perpetuating, I believe, nonprofit board. They pick their own people. They basically answer to themselves. I believe at least the founding
documents have it that the basic purpose is the good of humanity, I think, is the way it's put. So how do you fix this situation if they don't want to go with what Microsoft wants to do? I think everybody has a choice. The foundation can say we're going to stick with safe a AI for everybody in humanity, or we can bend a little on that and have Altman back or somebody like Altman. We can continue to attract billions of dollars to build a I or not.
And Altman has a decision to make. Does he want to go back or would he rather be at Microsoft, where it's a business for profit, build it big, take over the world rather than do good for the world? Eric, you referred to the. Billions of dollars. Is that an essential sort of constraint and what the nonprofit board might want to do? But do they need more billions of dollars? And if the investors basically existing or future say, we're not going to play with you. Does that really limit what they can do going forward? I think that's exactly right. I don't think you can build.
This is one of the things, special things about that you mentioned earlier. It's going to require more billions of dollars to continue to build out A.I.. It will probably take billions of dollars year after year because you constantly have to build the database that drives the A.I.. It's kind of a bad fit for a nonprofit. I mean, it's a good idea.
Let's have nice, friendly, non dangerous A.I.. But realistically, how are you going to do that without taking money from people who don't have the same mission? Yeah, exactly right. That's a great question. Thank you so much, Eric. That's Eric Gordon. He's clinical assistant professor at the University of Michigan Law School. So I guess one of my questions is when are we going to learn? It seems like we go through these things again and again and again. Do we ever learn the lessons of the last
one? I do wonder. I am curious about the structure, though, because, I mean, we talk about the cap maybe in a cat profit company too, but the idea that it did start off as a complete nonprofit and they made that decision in 2019 to go to that kind of profit structure. So there clearly was somebody who had an awareness of, as Professor Gordon pointed out, the billions of billions of dollars that was necessary to move this thing forward. And they had to change the structure in some way.
And Elon Musk was one of the co-founders, and he bailed out when they made that change because this was a nonprofit, especially for the good of humanity. How are you going the commercial way? And so it was flagged. But it raises the question, though, how do you how do you build out something like this that is so costly with been trying to do it in a way where basically there is no sharing of the riches that maybe come along with it? Who's going to give you those billions? Yeah. At the same time, some people are saying it could be the end of humanity. There is that. You know, it sounds a little scary.
Well, as long as the lawyers do. Okay, well, the lawyers always go. Okay, that's a basic rule. Okay. Tomorrow, JCPenney CEO Marc Rosen will be here to talk with Romaine Bostick in advance of that Black Friday. And then on Friday, we're gonna present some of the best interviews of the year so far, including Fed Chair Jay Powell, CEO Larry Culp, and former head of the Council of Economic Advisors. That's Dr. Cecilia Rouse.
That's coming up next. On Friday on Wall Street week at 6 p.m. Eastern Time. All right. Always one of the highlights of the week, Wall Street week every Friday. And David joins us every day around this time for our Wall Street Week Daily segment. As we say goodbye to him, we round out into the final hour of trading here on this Tuesday afternoon.
Volume relatively late in this holiday shortened week. Stocks on the back foot. We'll be back in a moment. This is the close on Bloomberg. Just about 3 p.m. here in New York. This is the countdown to the close. Let's get a view from the top.
I'm Romaine Bostick and I'm Katie Greifeld. We're going to check in on the markets in just one second. But right now we are awaiting a press conference from the U.S.
Department of Justice. This relates to a story that Bloomberg reported earlier today that the the founder and chief executive officer at Binance's Holdings, Changpeng Zhao, has pleaded guilty to anti-money laundering violations and agreed to pay a $50 million fine. This is a sweeping deal worked out with the Justice Department, which is actually designed to keep the company operating. Now, there are some conflicting details here, Katie, as far as what role he will actually have in this company on the back of this deal here.
But as you can see there, right there on the screen, we are waiting for Merrick Garland, the attorney general of the United States, as well as some of the other folks who are working on this case to take the podium and explain exactly what happened. Yes, some questions about what role he will play. But the understanding at the moment is that, of course, Binance will be able to continue to operate. And of course, we're talking about the world's biggest crypto exchange right now and checking in on the crypto world. There seems to be some relief that that exchange isn't getting shut down necessarily. And we should also point out just a clarification, too, based on Bloomberg reporting. So the 50 million is what Seas himself
would have to pay Binance. The company is agreeing to plead guilty to criminal charges and pay a $4.3 billion fine. This is according to people familiar with the matter that Bloomberg reporters have spoken to. We'll check back in on that press conference as soon as it starts. But let's get to what's been going on in the broader U.S. equity markets.
And it's a whole lot of nothing here. We should point out volume about 20% below where it would normally be at this time on the holiday shortened week. And some of the gains that we had over the last few days peel back just a bit, just fractionally, 2/10 of a percent lower.
Katy on the S&P. Yeah, pretty quiet day in the equity market. A pretty quiet day, too, in the bond market. I mean, you take a look at ten year yields right now, they're camped out at about 441, only down about less than a basis point or so. So really settling into holiday trading.
But we do have some data tomorrow maybe to get excited about. I want to talk about the VIX for a second and maybe we can flip at the board. You see it there. 13 Talk about excitement. Yeah, I know there's all this discussion about whether the VIX is even the proper read anymore on volatility, whether that's been usurped by one day, zero day options and all these other things here.
But I mean, the drop that we've seen in that in that at least one measure here is quite extraordinary. Harry and Dan Curtis have put together a great chart here. It goes right here. Just taking a look at the one day VIX here. So you get a better sense here of just how much I mean, this is astonishing and it raises the question, is this actually a accurate reflection of how people feel right now about forward volatility, or is this more a reflection of people just not using this as the main mechanism for hedging volatility? Some big hefty questions. I'm not sure I can answer them, but when
it comes to both the one day VIX and the classic VIX, if you will, I would say the most exciting thing about them right now is just seeing how low they can go. I mean, you look at a VIX with a 13 handle, are we going to break ten at some point? I don't know. But in any case, maybe we should talk about some of the individual movers because there is some action there. Of course, we've been talking about retail all day. We're going to do it more right now because it is retail earnings season. I have three earnings stories for you. Let's talk about Best Buy. We talked a little bit about it earlier
in the day. Same store sales fell by more than expected. That has been the theme of this earnings season. But unlike maybe some of the other retailers that we've already heard from, Best Buy isn't expected to be able to maintain its profitability. It really cut its outlook on multiple measures. You can see that in the stock right now.
Yeah, the Best Buy earnings were not good. I mean, let's just just put it flat out. And it really raises the question here about certain types of retailers and where they fit into the retail space.
If you're just a reseller, I know Best Buy has made a lot of decisions to try to get people in the store with, you know, having the actual companies themselves staff it themselves. But I don't know if that's going to be enough. And then you had another one on the board there. I feel like Kohl's is going through something similar. Kohl's, Let's talk about Kohl's seventh straight drop in comparable sales. Again, this theme of same store sales,
just not being able to live up to expectations and Kohl's, it has had some success when it comes to its inventory, when it comes to cutting costs. But again, that's sales growth that investors are really looking for right now. It just hasn't been able to deliver that. And I mean, you look at the wipe out and
shares down almost 10%. And on the other hand, there have been management changes again. So a lot going on there. Yeah, a lot going on. And of course, a Kohl's is different
from a Best Buy. It's different from a Lowe's. But again, it's all the same. Similar story. Lowe's, they cut its forecast a second time this year. It also sees same store sales dropping 5%. Previously, Lowe's had been expecting a decline, about 2% to 4%, that sort of range. Now it's seeing something worse than that. And we were talking about this a little
bit earlier. Part of the story for Lowe's is that people are renovating their homes. Less often right now and big ticket demand, it just isn't there in the same way that it has been. Absolutely. And I think that's going to be a big
part of the story. By the way, I just had to look up because you said that this could break below ten. I was just curious. The last time the VIX traded in double digits. This is the pop quiz.
Katie, don't cheat. I know you cheat on the weekly quiz. It was about when was the last time the VIX traded in the single digits? I don't know. I'm going to say over a decade ago. No. Well, not that long ago.
It was actually early 2018. I feel like I should have said that. Yeah, it was early, early 2018, and then 2017 was just a monster. I think it was down at eight or something like that here. Okay. We'll have another pop quiz later for Katy Revealed, see if she can redeem herself and get her grade point average back up to, I guess, what, 50%. So that's still enough.
All right. We continue our coverage, though, here on the close, counting you down to those bells. And it was interesting, no doubt, by the folks over at Bank of America, Savita Subramanian sees a fresh high for the S&P 500 next year. She's expecting the benchmark to close at a record 5000 by the end of next year. That call is actually in line with a lot of other companies on Wall Street, including Goldman, including SOC Gen, even Morgan Stanley, which are really starting to turn much more constructive for the next year for the aggregate U.S. equity market. Let's see what our next guest has to say about this.
Michael Irani joining us, chief investment strategist over at State Street Global Advisors. And Michael, everyone is kind of upping their forecast, I think, for India next year. And arguably I can understand why. But there is sort of a question here about the big rally we had and what actually is the catalyst that would add to those gains in a meaningful way in 2024 remain? I think it's interesting. I think 2023 is caution has turned into 2024 is courage, and that makes me a little nervous. So I think that the big things this year
were that expectations headed into this year were incredibly low and everything surpassed those very low expectations. And the other thing to think about is that after years of easy monetary policy and massive fiscal stimulus, those helped the economy remain resilient. Next year. I think those tailwinds will in fact, finally become headwinds. So I do think those are two big risks for 2024, is that expectations are much higher. And I'm not sure that if we remove the crutches of monetary and fiscal policy from this economy, will it be able to stand on its own two feet? So those I think, are the risks as we kind of earlier hurtle towards 2024. I am curious then about kind of what is
sort of wagging the dog here. There's been so much discussion about the correlation with yields, a negative correlation, I should say, particularly with real yields in equities as well as the correlations with the dollar and how that has been a big driver, at least on a day to day basis of some of the gains that we've seen in the equity market remain. I think the fascinating thing here, and this could be a silver lining for the risks I just outlined is exactly you and Katie were just talking about the VIX and how complacent it is. All the action has been on the bond side of things. And what's been really interesting is
real interest rates climbed during the summer in ten years, got to roughly 5%. We saw markets sold off. It was a sea of red. Even the Magnificent Seven struggling. Bond market volatility explained about two thirds of stock market dispersion over the last six months or so. Wow. Those are numbers that we rarely see
about 15 times in the last 70 years. And here's the silver lining for you, Romain, that's interesting, is that when stock market volatility excuse me, bond market volatility explains that much of stock market dispersion, it's actually a bullish sign. And typically value stocks and small cap stocks are the things that rally. So in order to sustain this market's advance, we need something beyond the Magnificent Seven. The good news, anyway, is historically, when bond market performance explains this much of stock market performance, it's been a bullish sign in the market could broaden out. So perhaps that will help Civitas call
for that for the very strong next year in 2024. Well, Michael, if it's been bond volatility that's really been driving what we're seeing in the equity market, let me ask the obvious question, which is have we seen peak rates fall? I think we may have. And that's actually what will drive the positive performance because this volatility and interest rates and bond markets won't last forever. So you're talking about three years, three a run of three years for Treasury bonds that are the worst we've seen in 100 years. So what typically happens next? Well, that bond market market volatility, that interest rate volatility normalizes. And as it normalizes, stocks typically rally.
And I think that's what we're seeing. And if you think about the rally, since the CPI number came out last week, and that was a big day for Russell 2000. What actually has happened is Russell 1000 value's outperformed Russell, 1000 growth in small cap stocks and rally. So almost right on cue, as bond market volatility normalizes, those parts of the markets tend to do pretty well. And that's what we're seeing. Banks in particular in the last week,
financials and unusually have been strong. And and so I think this is actually kind of an interesting sidebar to the conversation about the economy and and the Fed and fiscal policy. And anyway at least when this settles down, it's been bullish for stock markets in the past. So that's what normalizing bond vol means for equities. Let's talk about what it just means for the bond market, though. If we actually have seen peak rates, peak rates, volatility, how are you thinking about fixed income in a portfolio right now, especially relative to equities? I think