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Squawk on the Street
Crude Prices Hold Steady, Passenger Plane Crashes in South Korea 12/30/24
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- [00:00]
OnDeck Representative
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- [01:01]
David Faber
You're listening to the opening bell of cnbc, Squawk on the Street. Good morning and welcome to Squawk on the Street. I'm David Faber with Mike Santoli and Leslie Picker. We're post nine on the New York Stock Exchange. Of course, Carl and Jim have the morning off. Let's give you a look at futures as we get ready for the call it penultimate.
- [01:17]
Mike Santoli
That's right.
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Rick Santelli
Thank you.
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OnDeck Representative
Thank you.
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David Faber
Penultimate day of trading ahead. All right. Our roadmap begins with that fact. In fact, those two days left in the trading year, Big tech coming off a rough day last week, a number of sectors as well under pressure this month.
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Mike Santoli
Shares of Boeing are down after South Korea ordered an inspection of all 737, 800 planes. That's the model involved in that deadly crash over the weekend.
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Leslie Picker
And remembering the life and legacy of former President Jimmy Carter, who passed away last night. And that's where we begin. Former President Jimmy Carter has died at his home in Plains, Georgia. Carter was 100 years old. He was the 39th president serving in the White House from 1977 to 1981. Carter was awarded a Nobel Peace Prize in 2002 for undertaking peace negotiations, campaigning for human rights and working for social welfare. Carter's death begins a series of memorial services that will take place in his hometown of Plains, Georgia, in Atlanta, home to his presidential library. Then To Washington where he will lie in state at the Capitol. President Biden declaring January 9th as a national day of mourning. The NYSE and NASDAQ are both set to hold moments of silence minutes from now to honor Carter's legacy.
- [02:35]
Mike Santoli
Remarkable to live 40 plus years as a former president. And there's a lot of assessments going on, you know, of his life, you know, just in terms of kind of, you know, even though it was considered to be a very dark economic moment when he left Wall Street. Relevant stuff. He appointed Paul Volcker and towards the.
- [02:53]
David Faber
End of his term, of course, after 78, very significant inflation under Miller prior to that.
- [02:58]
Mike Santoli
And you know, and then even though it's not really kind of like a top line priority or considered to be one of his policy pushes, deregulation started under Carter of, of the airline industry, energy, communications. So obviously that's just a real narrow window in terms of, you know, Wall street investing and how that kind of set the scene for what would happen, you know, in the 80s in a way.
- [03:19]
Commercial Advertiser (Tide/Capella)
Yeah.
- [03:20]
Leslie Picker
And obviously there are a lot of people who look at today's market and take some lessons learned during that period and the risk of stagflation, how to avoid that, the risk of lines at the gas station, how to avoid that, and of course geopolitics as well. You can kind of hearken back to a lot of important aspects of that period. And you know.
- [03:39]
David Faber
Yeah, well, fortunately the Mideast today, he did negotiate that peace, of course, between Egypt and Israel, which still is in place despite all of the tumult there. And of course it was the years after, as Mike said, his presidency, in many ways, that Jimmy Carter gets the most praise for a great humanitarian. All right, let's turn back to the markets. Of course, what you all care about as we get ready for the penultimate day of trading, under pressure this morning, seem to be stocks. As you can see where we stand on the, on the futures, Mike, these last few days, few weeks really, the, the equal weighted S and P is down 6% for the month and we've seen the resurgence of MAG7.
- [04:22]
Steve Kovac
Yeah.
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David Faber
Nothing surging today so far, but that has been an interesting dynamic to see as this year ends.
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Mike Santoli
We rode that dynamic for a few weeks, as you say, and then that kind of buckled in the last couple of trading days and the NASDAQ 100 names have succumbed to some, you know, profit taking, probably some pent up selling and I think the absence of these seasonal tailwinds to show up and you know, the idea that late December is supposed to be just this kind of upside air pocket and we're going to just levitate because it's an illiquid market market and usually we do. Well, the fact that we're not doing that suggests to me people are essentially saying why wait till January when there was generally expected to be a little bit of a, of a gut check moment just because we had been up so much. The equal weighted S and P actually is back to levels from like early September.
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Steve Kovac
Wow.
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Mike Santoli
So really you've lost that whole. That's been a horrible month.
- [05:09]
David Faber
I mean 6% rough loss has been a very rough.
- [05:12]
Mike Santoli
Yes. And so a lot of that has occurred as treasury yields have marched higher to multi month highs and at the same time that the economic data have been okay, but they've been soft relative to expectations when yields are going up and it's not because the economy all of a sudden seems to be accelerating. That's sometimes an uncomfortable combination. I also think there's a sense in which we almost got trapped or some people got trapped by the idea that there was a playbook from 2016 after President Trump was elected, the initial time to say, okay, here's what we do. We buy cyclicals, we buy small caps. Yields are going to go up, but that's fine. And by the way, the markets will tend to be able to ignore perceived policy chaos or erratic decision making. That was the basically the setup for 2017 work perfectly. Also deregulation and tax cuts before tariffs. That was all considered to be the baseline. Now I think there's just a little bit of we just don't know what we're going to get and we're not just going to pencil in the optimum policy scenario. And again, the market was up 20 plus percent. Mag7 was up huge in the first half of this year. There's three stocks that are worth 21% of the S&P 500 that collectively traded 32 times earnings. Right. This is not a market that was kind of under loved and undervalued going into all this.
- [06:27]
Leslie Picker
If we do get a negative Santa Claus rally, which we still have four more trading days to, including today.
- [06:33]
Mike Santoli
Yeah.
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Leslie Picker
But it would be back to back negative Santa Claus rally periods which has only happened twice before, going all the way back to 1950. So it is pretty unique. And I'm curious, Mike, your take on whether it is that disappointing month leading into this that you think contributed the fact that December is supposed to be seasonally strong. It wasn't. And so everybody just said, okay, rebalance.
- [06:52]
Mike Santoli
You know, I think that's part of the backdrop. I also feel like equity exposures were pretty high. Right. We've been in a two year bull market. It's not as if people needed to rush to grab onto stocks to play the rally. They were there already in large part. And so I think the final, you know, kind of implication of what you're saying is we had a bad season Santa Claus rally period last year and we're up 20% this year. So whatever magical predictive power is that period of time was was assigned 50 years ago when people came up with this don't necessarily hold up year to year.
- [07:22]
David Faber
Mike. We spent a lot of the year, certainly the first six to nine months talking about the enormous percentage of the S and P that was made up by a small group of stocks. Then the S and P equal weight kind of everything started to come along. We didn't talk about it as much even though the percentage didn't decline that much. But what do you make about of this reassertion of mega cap tech here at the end of the year? Yeah, I mean I think the fade that we just talked about in the, in the equal way part of it.
- [07:48]
Mike Santoli
Is that this is the way the market in these, in this era plays defense is to buy the known quantities the these companies that deliver earnings. And it's been such a mistake to bet in a sustained way against the NASDAQ 100. I mean for decades, to be honest with you, it's just always been giving you more return per unit of risk than you would be led to expect. So I think that muscle memory is part of the reason. The other one is they're kind of impervious to what happens with yields and macro and, and now. I mean I just think there are certain limits to it. What's really fascinating is Nvidia has been essentially dead money for more than six months.
- [08:26]
David Faber
Yes.
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Mike Santoli
I mean it got to current levels right in like early to mid June and yet the market's been able to hold together. Semis are in a really interesting spot on a two year basis. It still looks like they're hanging in there but they're really waning momentum. And I think what's an interesting question for next year is whether there's a bigger rethink of all these companies doing so much capex and throwing so much money at whatever's to come in AI and whether that turns from a benefit because they can do it and they're the only ones equipped to kind of build the future to. What are we getting for all this.
- [09:00]
David Faber
And, well, we, I mean, that will.
- [09:02]
Mike Santoli
In 2005, dead money.
- [09:04]
David Faber
It has been. And that should come to the fore more often in terms of the return on invested capital, because the CapEx numbers, we're going to get to this a bit later in the show as well, Leslie, are just cost. They're beyond anything you could have imagined really, even a number of years ago. When you look at just what Microsoft alone will spend in 2025, not to mention obviously layering in Alphabet, Amazon, Metta.
- [09:24]
Mike Santoli
Yeah.
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Leslie Picker
And there's the opportunity cost as well of what they're not spending because they're spending on capex, things like M and A, which is difficult in this environment. But maybe, I mean, to be determined.
- [09:34]
David Faber
Whether to be determined. I think there is a broad expectation under the Trump administration there will be more deals. I'm sure I've been hearing, certainly in the conversations I have, I've been sharing this often, that there's a lot of dialogue underway. I think it'll be a little less predictable in terms of where antitrust raises its head under a Trump administration. But I think broadly speaking, there is an expectation that there is going to be a more robust environment. It's hard to imagine that would not.
- [09:58]
Leslie Picker
Be the case, especially right out of the gate. I have a feeling that the first couple deals in a certain sector, a certain area will get done and people get excited and then the antitrust environment will start to clamp down and say, oh, no, that's, that's a little too much in.
- [10:09]
David Faber
And we'll again, we'll have to. This industry, as we know from the first Trump administration, it was harder to predict, whereas with the very strict regulatory environment we are now leaving, it was a bit easier to anticipate. In fact, often you would just anticipate.
- [10:23]
Mike Santoli
That's not going to assume the answer is no.
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David Faber
Right. And then you move on from there. And if you're a company, you assume. All right, the answer may be no, but we think we can win in court. And obviously that did happen until towards the end of this year when the FTC actually had some important wins, whether it was handbags or supermarkets.
- [10:39]
Mike Santoli
Exactly.
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David Faber
All right, we ready to move on here with Professor Siegel? All right, we're going to take a break. We're going to get to him in a bit. Nat Gas is down, by the way, sharply right now. Take a look. It's one of the worst performing sectors overall. That would be energy. And our next guest is forecasting. Well, it's not going to be a great year in 2025. Either. We're going to find out why. After the break, take a look at futures again. Of course, we are headed for a sharply lower open when we get started trading 20 minutes from now. A lot more squawk in the streak for you straight ahead.
- [11:10]
Commercial Advertiser (Tide/Capella)
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- [11:38]
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- [12:33]
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- [12:35]
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- [12:37]
David Faber
Edu Wharton School Professor Jeremy Siegel here with us to get his take on stocks as we head into a new year. Good to see you, Professor.
- [12:47]
Professor Jeremy Siegel
Good to see.
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David Faber
We are. We are. It's David. Actually, we're coming off two great years for the broader markets. Can we make it a third in 2025?
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Professor Jeremy Siegel
We could, but I think if you look at history, I think the only other time that we've had 220 pluses go into the third year was 1999. And whoa, then we got way too overpriced and we got to 2,000. So I, I really think we're going to take a pause this next year. You know, one thing is true about the markets is an old saying is that whenever everybody expects something to happen to the market in the future, it's not going to happen. Everyone expected that. You know, we're going to have the Santa Claus rally. Everyone said, oh, yeah, it always rises during Christmas and New Year's. And I warned a few weeks ago, I said, yeah, when everyone says that they buy up before then, and then when it comes, there's disappointment. And, you know, I think maybe we're seeing a little bit of that right now.
- [13:53]
David Faber
Yeah, right now. Okay, but does that apply to 2025? Is there an expectation perhaps that we're going to have another strong year and therefore going to be disappointed?
- [14:03]
Professor Jeremy Siegel
I think there might be some disappointment. You know, as time has gone on, I think the probability of a correction next year, you know, which is defined As a, a 10% drop in the S and P is getting higher. I'm not saying it's a sure thing. Nothing is a sure thing in the market. But the major forces to propel things upward, I think have already been built in. We still have, you know, we talk about 22 times earnings on 16, 17% gains of earnings, which is, you know, you know, also far higher than historical. So I see a little bit more risk on the downside. And you know, I'm a, I'm a bull on the market. I'm long term. I'm not saying, you know, sell, but, you know, I see more risks. Not, not as optimistic as Tom Lee was right at the end of squawk box and I admire him dramatically. But I think that, I think we have challenges next year because of all the optimism that has been built in this year.
- [15:09]
Leslie Picker
What does that mean, Professor Siegel, for the long standing reign of big tech, one would say those have been some key forces over the last few years that have pushed the broader S&P 500 upward.
- [15:20]
Professor Jeremy Siegel
Yeah. And you know, that, I mean, we do still have a bifurcated market in a sense that, you know, the max seven being 30%, max seven being 30 to 35 times earnings, the rest of the market, 18 to 20, which is much more reasonable. You know, I think, I think 2025 could be that switch around. Now, of course, many of us thought that that would happen 2024, that then the narrative of AI is still very, very strong. The spending is there, it's going to bring about all these gains. Now the amount of actual gains it's bringing about is, is modest. It isn't, you know, it hasn't been implemented completely at so many firms. The hope is there and I think ultimately it will prove to be very beneficial. But there is room for disappointment at the speed of implementation and how much that actually will affect profits. Now, will it happen in 2025 or not. Listen, history tells us that narratives go on much longer. They need to be punched down with many failures before they finally did. And, you know, at this particular point that that trend is in. But, you know, I'm looking at, I'm looking at January thinking, hey, that might be a reversal, that big buildup that, you know, that Mike talked about that we got from Thanksgiving up until a week ago in the Mag 7. We really might find that, you know, revert at least down to the trend line that was established, you know, in September and October. So we might see a reversal earlier. And then we have the challenges that Mike and everyone has been talking about what is going to happen to tariff policy, what's going to happen with immigration policy, et cetera and so on. I mean, there's a lot of positive aspects we also have to remember in terms of, you know, we, we see the Republicans did capture the House, but by one or two votes. Some of the things are not going to come maybe as easily as everyone thought on November 5th with the election. I do think, you know, they're going to work on the taxes and get that set in the, as, as, as a, as an important priority, certainly in the first two years of the Trump administration.
- [17:46]
Mike Santoli
Yeah. Which is most likely to take the form of, you know, extension of the current tax structure. Professor Siegel, this is Mike here. And you know, how does the Fed filter in? That was one aspect of the script that seemed to get scrambled here. On the one hand, probably less easing as inflation is sticky and policies uncertain. On the other hand, you know, nothing necessarily wrong with the Fed, you know, kind of tweaking rates lower a few times and then going on hold. That's what happened in 95, 97.
- [18:12]
Rick Santelli
Yeah.
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Professor Jeremy Siegel
You know, a lot of people have been criticizing the Fed. I think the Fed has been right. Listen, the normal situation, as you know, Mike, is that long term rates are above short term rates and we were in inversion for two and a half, almost three years, almost the longest in history. And by bringing short term rates down, we finally have the 10 year above fed funds, which we didn't have for three years. And normal, actually it's more above fed funds than it is right now. So I, you know, I'm not criticizing the Future, the past 100 basis points, but I do agree, you know, at most one or two next year, depending on the strength. And you know, if it's going to be much less than 2, that's going to be the result of softness.
- [19:00]
Mike Santoli
Yeah.
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David Faber
Professor Siegel, we're going to end it there. Always appreciate you joining us. Happy New Year to you.
- [19:06]
Professor Jeremy Siegel
Thank you, David.
- [19:08]
David Faber
Well, the NYC and the NASDAQ will both be holding a moment of silence, of course, to honor the legacy of President Jimmy Carter. That will begin right now.
- [19:38]
Commercial Advertiser
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- [20:06]
Commercial Advertiser (Tide/Capella)
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- [20:36]
Steve Kovac
All right.
- [20:36]
David Faber
Opening bell, six minutes away. As you can see, we are set up for what is going to be a fairly sharply lower open. Of course, don't forget, you can catch us anytime and anywhere if you want to by listening to and following the Squawk on the Street Opening Bell podcast. Welcome back to Squawk on the street. A Boeing 737800 crash landed in South Korea yesterday, killing one hundred and seventy nine people. There were two crew members who were rescued from the tail of the burning plane. As the plane was preparing to land, the airport warned the pilots about a potential bird strike and video does show the plane skidding across the Runway on its belly and then ramming into a concrete barrier at the end of the Runway and a massive explosion that followed. Investigators are looking into whether it may have been a bird strike that caused a hydraulic system failure failure and perhaps prevented the pilots from deploying the landing gear. Of course, Mike reaction would typically be to sell perhaps some Boeing shares, even though it's completely unclear whether there was any mechanical failure that had to do with with the specifics of this horrific.
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Mike Santoli
Crash, even if it is just because of the procedural, you know, inspections that have to happen. I think the context here is also very important though, which is the run that Boeing stock has been on for the last six weeks. It's up like 30% since mid November. There has been a lot of, I think, sort of newfound enthusiasm about, you know, the management story, the restructuring, the pivot toward perhaps positive free cash flow again.
- [22:09]
David Faber
Well, they're actually making plans again.
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Mike Santoli
Exactly. And they're, they're in production again. And technically a lot of the chart folks were like, okay, finally we have this long you kind of malaise and base that we built. And so I do think this pullback off of that in the context of a pretty rough open, maybe it's, it's, you know, you keep it, keep it in perspective.
- [22:26]
Leslie Picker
Yeah. Apparently it was the deadliest year for commercial air travel since 2018 with 318 tragic deaths related to commercial air travel.
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David Faber
Well, a number of them. A number of them at the very end of the year of course here as well, the, I think the Azerbaijani air that appears to have been shot down perhaps by, by Russia.
- [22:48]
Leslie Picker
Yeah, exactly. So, you know, I don't know what the implications of that are, but last year there were zero fatalities. This year, 318.
- [22:56]
David Faber
Yeah. Of course investors still remember the max with Boeing, but again, as Mike said, 2024 year of seemingly endless challenges for the company, but ending perhaps on a more positive note as it is back to actually manufacturing resolving that strike of course of the workers that took them off the assembly line for quite some period of time. Still a large debt load there at Boeing. Not to forget, of course, kind of two iconic companies we continue to keep an eye on.
- [23:28]
Mike Santoli
Boeing and Intel.
- [23:29]
David Faber
We're off, Avery and I first on.
- [23:31]
Professor Jeremy Siegel
The broader market here.
- [23:32]
Rick Santelli
The opening bell here at the big board.
- [23:34]
Professor Jeremy Siegel
Take a look at the real time.
- [23:35]
David Faber
Exchange back at our headquarters. You can see going to be a lot more red on that board given where futures work. NYC Mamas Give Back Daily Honors here. It's a nonprofit providing infant essentials to agencies and shelters that are serving pregnant women over at the Nasdaq Marine Toys for Tots Foundation. Mike, I'll leave it to you. Where you want to start.
- [23:57]
Mike Santoli
Yeah, I mean obviously we have a little more of this, this kind of pent up selling in what looks like a little bit of a vulnerable setup just in terms of the unsettled nature of leadership and that being the big NASDAQ stocks. And I don't really know how much we want to incorporate a lot of the noise surrounding, you know, whether Big Tech is pro or against the current immigration policies and the HB1 debate, that's the backdrop. But just this idea that we are a little bit unsettled, pent up profit taking. If Nothing else. Bespoke mentions just now that if we are down 1% on the S and P today, be the first time we had two down five down 1% days in the last five trading days of the year since 1952. Which doesn't mean there's anything it says about going forward necessarily, but it does suggest how rare it is. One piece of it that I would also point out though, is when you have a market this concentrated, you can get those big moves. If it's basically rotation out of big stuff into small stuff, the index is going to feel it and vice versa. So that's, that's the market we have right now. But it does seem as if, you know, there's not a lot of taking up the slack of the big tech selling from the industrials and the banks and the other cyclicals that had done very well right in the first flush after the election.
- [25:14]
Leslie Picker
While we're on the subject of superlatives and concentration, Bespoke also has those numbers today where they say the eight largest stocks in the S and P currently account for 35.7% of the index's total market cap. In 1999, this was 22.2% said just showing that concentration this year. There's also been a narrative this morning just about the remarkable inflows into ETFs, specifically the S&P and the NASDAQ, obviously contributing to some of the uplift we've seen as well and contributing to kind of this cyclical element of concentration, given that the US is really the only game in town. From a flow standpoint.
- [25:54]
Mike Santoli
Yes. And from a performance standpoint, the, the, the global stock markets, excluding the US up 3% year to date. A lot of that's China. I believe in China had a good bounce bounce.
- [26:07]
David Faber
Europe obviously has not been a strong nothing.
- [26:09]
Mike Santoli
Yeah. And, and obviously since the Fed maybe had this hawkish rhetorical turn, you have emerging markets struggling. So the, the US exceptionalism in the market really is the mega cap growth stock. I mean, if you just look at the, the typical stock in the S and P is up like 8% year to date. So, you know, it's not as if it's totally two different world. It's kind of the subcategory of US stocks that have done incredibly well in terms of the etf.
- [26:34]
David Faber
Just to stop you for a moment, this is, this year is not going to do anything to dissuade people from just owning the index.
- [26:39]
Mike Santoli
Right.
- [26:39]
David Faber
Period.
- [26:39]
Mike Santoli
It should, as in a way. Yeah.
- [26:41]
David Faber
And these last few years you have to what will at some you have.
- [26:44]
Mike Santoli
I think a bear market, like a real, a real bruising bear market. Well, because that's all that, that did it in the early 2000.
- [26:51]
David Faber
Right.
- [26:52]
Mike Santoli
I keep pointing this out. Everyone points to these like small cap versus large cap relative charts or even value versus growth. And you had this huge upturn in the early 2000 that everyone wants to play for that and it's like wow, that would be great if we got mean reversion like that. Well, a lot of that came from growth stocks just imploding. Right. So the relative performance of value in small cap was pretty good. But it was because the rest of the market that was so bad driving the indexes was, was so bad. The ETF flows though, I think at some point ETFs, exchange traded funds, it's going to be like touch tone telephone or color tv. In other words, that's the kind of funds we have. No flows are going into traditional mutual funds outside of straight retirement. And so it's just the instrument we use. There's been net outflows from non exchange traded mutual funds consistently for years now. Trillion dollars. It's a lot of money. That's stocks plus bonds. It's not all stocks. The S&P 500 is like a $50 trillion market cap right now. So that's a nice bit of flow. But to me it's not enough to say we have this massive push of public buying that that's going to be sustained to drive stocks on themselves higher. Now we also got $1 trillion in share buybacks. A lot of that's offsetting dilution. So we just. You have a good flow story but to me it's not about oh, the index is just going to magically work because people are putting money into index funds and everybody. The other thing about that is every stock in the S and P proportionally gets the same amount of money from an index fund investment.
- [28:18]
Steve Kovac
Yes.
- [28:18]
Mike Santoli
So there's no particular reason that the largest stocks should get more benefit from passive flows than the smaller stock in the S&P 500. There's a small wrinkle in that if you think the larger of stocks are relatively under owned by active. But really it's not about, you know, self perpetuating concentration. I think the concentration comes from other places.
- [28:37]
Leslie Picker
But what does that say? Just kind of broadly speaking about the overall diversification.
- [28:42]
Mike Santoli
Yeah.
- [28:43]
Leslie Picker
Of people's portfolios heading into the end.
- [28:45]
Mike Santoli
You're not getting it.
- [28:46]
Leslie Picker
You're not getting geographic diversification. Probably not even get much in the way of single stock.
- [28:51]
Mike Santoli
Well, you can get the diversification but it's going to be a drag. Yeah, exactly. I think that's one of the reasons the equal weight S and P has become a popular idea on a forward going because it's just hard to bet that we're going from you know, 30 to 40% mag7 so I'm going to.
- [29:06]
David Faber
Risk adjust to a certain.
- [29:07]
Mike Santoli
Yeah, exactly. And you know ultimately it can work and mean reversion works in your favor. It's not as expensive and by the way coming into this period equal weight seemed like this, this hack, I mean it really did outperform for a long period of time.
- [29:21]
David Faber
When you're saying that what period of.
- [29:22]
Mike Santoli
Time are you talking like a 15 year, you know if you, if you go back along the way and again it's going to be coming out of a bear market. I think that it really does distinguish itself which is not well, I mean we're in right now, right.
- [29:35]
David Faber
10 stocks represent 40% of the S and P Right. Isn't that roughly the top 10? I think around 40% and we talked about the capex budget you mentioned of course perhaps 21, 21%. Right.
- [29:47]
Mike Santoli
So Apple, Microsoft, Nvidia are effectively 21%.
- [29:50]
David Faber
Of the S and P And to the question you raised earlier Mike, it may be one that I'm sure it's one we're going to entertain almost every day which is that return on invested capital and whether they're going to be getting as we start to see true commercialization of AI and apps. The Agentix is the word that everybody is now using and whether that works. In fact the one company that has been penalized I think in part for what has not been at least as strong a debut for that kind of a product has been Microsoft, the stock of which is only up 12.7% this year, markedly underperforming the broader market in the S and P and most of its mega cap brethren which now Microsoft.
- [30:32]
Mike Santoli
Had built up this huge premium and it was really considered to be okay fine, we can actually do the math here. You know it's how many people subscribe to the to the copilot right times users that right there is, you know we can get our arms around that and it was considered to be a very clean way to play a leverage.
- [30:49]
Rick Santelli
And then it may be a little.
- [30:50]
Mike Santoli
Bit disappointing or maybe there's sort of these offsets with the new investments in open air and how that flows through their to their bottom line and all the rest of it. So it is Tough. I think the market loved the idea initially that the big piles of inert cash on these balance sheets were being catalyzed and they were being put into something. I look back when Microsoft bought LinkedIn, right. I think it was like 2016 sounds right, $26 billion. Microsoft had a ton of cash. LinkedIn was not considered to be a great profitable business, but it's a nice asset. It was like 5% of, of Microsoft's market cap at the time. It'd be the equivalent of like a couple hundred billion dollar market cap Right. Acquisition right. Now if Microsoft were to do it again, I know we say nothing but an aggregate size right now. It would be big. And the market loved it because they took cash that was earning very little or nothing into a business that they felt like could work well within.
- [31:42]
David Faber
No, but the point is an Nvidia, not that they're going to be doing anything, could do a $300 billion deal. Correct. Now, which would be the largest deal we've ever seen and yet it would only be 10% or less of their market value.
- [31:54]
Mike Santoli
Yeah.
- [31:54]
David Faber
So actually completely conceivable they could do a deal like that.
- [31:57]
Mike Santoli
And it's fascinating.
- [31:58]
David Faber
They're not taking on a company risk there, so to speak. It's not a, it's not a company deal.
- [32:02]
Mike Santoli
And it's fascinating because Nvidia is in a funny spot because every other, you know, the cloud companies and the super scalers and things like that, they're, they're writing these checks, the checks are being cashed by. Nvidia's got too much cash. Very soon they're going to have to do something with it. It's probably going to have to be a big buyback or, or dividend or something like that. And you know, how much is it sustainable? What does the market think about that? That could be an interesting thing coming up.
- [32:27]
Leslie Picker
Well, and the dynamic now is you're actually earning something on your cash.
- [32:31]
Mike Santoli
Sure.
- [32:32]
Leslie Picker
You really weren't back when Microsoft bought LinkedIn.
- [32:35]
Mike Santoli
It's very true.
- [32:36]
Leslie Picker
You know, they were earning basically nothing on the cash. They were.
- [32:39]
Mike Santoli
Now you got, you know, you got.
- [32:41]
David Faber
Reminds me as we come to the end of the year here, Berkshire.
- [32:44]
Mike Santoli
Yeah.
- [32:44]
Leslie Picker
Yes.
- [32:45]
David Faber
They're sitting on an awful lot of cash too, you know, and obviously vast significantly reduced their exposure to Apple. Still the largest single position, I believe cover it more closely than I do. But 70% lower, less Apple, fewer Apple shares than, than they own.
- [33:02]
Mike Santoli
Yeah. And you know, they've been in a real good spot in terms of what the market wants all Year loved insurance.
- [33:09]
Commercial Advertiser (Tide/Capella)
Yep.
- [33:10]
Mike Santoli
It certainly loved quality. Right. And so just the quality balance sheet, that's been a big factor that's been driving things and, and for a lot of the year they the market like kind of a broad play on the US economy. So cyclical stuff, housing related is a big chunk of Berkshire now A lot of that's starting to wear, you know, around the edges because it's not necessarily homebuilders have been really weak and so I think you've had some give back in, in Berkshire. But in terms of what it's setting up the company for down the road under the eventual new regime, in terms of having all this cash, whether it is a big special dividend or some blockbuster investment, very unclear. But it does preserve a ton of flexibility.
- [33:47]
Leslie Picker
Yeah, that's the main thing is the question here because they've been, that's a.
- [33:51]
Mike Santoli
Big piece of it.
- [33:51]
Leslie Picker
Increasing their stake.
- [33:53]
Mike Santoli
They could buy the rest of it tomorrow.
- [33:54]
Leslie Picker
They bought an outright asset, a controlling position.
- [33:58]
Mike Santoli
Geez, I'd have to. I mean they bought this big, you know, truck stop private company. I mean there's been these private deals that they've done. They bought Allegheny which was a kind of mini Berkshire but it has been a little while since there was a real eye catching one. Occidental is an interesting one though because they own all these warrants so I think they just buy the stock when it gets below a certain threshold. Even though Buffett himself has said he's not particularly interested in owning the whole thing. We'll see if it happens in slow motion by, by default. Well, and speaking of of energy, let's turn to that sector. It has been the second worst performer sector of 2024. But check out nat gas this morning. It is spiking following some cold weather forecasts ahead and also a little bit of a run of cold weather. We've had John Kilduff again Capital founder and a CBC contributor joins us now to discuss all this. John, it's great to have you here in terms of. Let's just talk about crude initially. I mean been just really kind of stubborn in this range to a degree it seems like a well supplied market but the prices are not really backing off in a dramatic way. What you read?
- [35:00]
Rick Santelli
Yeah, it's been a torturous range now for months Mike, as you point out. Basically there's two very significant competing inputs here. Yet you have the efforts by OPEC plus and others to restrain supply to the market which has been having some effect and then you have the concerns real Concerns about demand out of China in particular given their economic situation, which you know, we weren't wrong about, given what the government there has announced about stimulus for the upcoming year and trying to revive that economy. But right now you're still looking about a China that might be able to grow possibly 4% next year, I think at best. So to the extent that these efforts fail and the OPEC plus cartel can't necessarily, necessarily hold it together because they are being stressed on the edges by several countries there, you know, that makes the argument for lower prices.
- [35:58]
David Faber
Not to mention, John, they're selling an awful lot of EVs in China when it comes to gasoline. They are starting to really see a change in demand as a result of, I mean one of every two at least is new vehicle sold is, is ev.
- [36:13]
Rick Santelli
Yes. There and Norway, David, and we're watching that closely. China has sort of indicated that they could be, they might have reached peak gasoline demand. Well, you know, we'll have to see the uptake here. Obviously United States, one of the biggest gasoline consuming countries in the world, not so great but, but, but it's still there. And even here we have seen weeks during the, in 2024 now for a while that gasoline demand is not what it used to be. During the summer months we only had a couple of really terrifically strong weeks. And even during this holiday season that we're just finishing up here now, we only got over 9 million barrels a day for last week's print past the few before that were below that. And it will head back down significantly once we turn the corner here on New Year. So that again will make for a sloppy market. Although it looks like we're going to get bailed out of the bit on the heating demand side of the equation here over the next couple of weeks.
- [37:11]
David Faber
Yeah, well, let's talk, I mean nat Gas again, we've been showing it up 20% today. What is the overall take here? Ukraine? No longer. I mean who knew that they were still allowing and getting paid by the Russians given what's going on in terms of allowing natural gas to pass through the country. But what are your expectations then? Is this an appropriate move here?
- [37:30]
Rick Santelli
Well, sometimes you want to buy the world a Coke for peace. In this case it's natural gas or crude oil. But what's, what's happening here, David, is that we got a first of all, all the problems of Europe, you know, will remain with this. They're ripping through their natural gas storage. That's supporting the price. What you're seeing here in New York though trading this morning is that we got a major upgrade in the weather outlook for January 9th going forward here. And I got some bad news for folks really throughout the entire country. We could see OJ Freeze offs, natural gas freeze offs and a big potential. It's early now in the runs but as major snowstorm now potentially projected for the Eastern seaboard again that week and it's going to be sticking around for a couple of weeks. So we are talking bone chilling polar vault vortex weather which has caused this spike in natural gas this morning. Really the modeling really all came together over the weekend, real time and you saw the leap last night when trading opened on Sunday evening.
- [38:30]
Mike Santoli
Yeah, I guess if you're long the futures that's an upgrade in the weather forecast. But for those of us living through it, not going to feel like that. Hey John, appreciate the time this morning. Thanks very much. Happy new.
- [38:42]
Rick Santelli
Thank you all very much. Take care.
- [38:45]
David Faber
We got Chicago PMI out just moments ago. Rick Santelli has that for us.
- [38:49]
OnDeck Representative
Rick David, big miss on December. Chicago PMI we know manufacturing hasn't looked good in a while. It's been a long while. 36.9 is our December read. We're expecting a number around 43. That now makes 27 months. If you look at the last 27 months, we've had only one reading above 50 and that was in November of last year, 27 months, one reading above 50. So of course this is a big miss. We can continue, most likely not only to look at the slowdown in manufacturing, but many are assessing exactly what's going on in the service sector. Interest rates are down 455 and a 10 is down 8. 425 and a 2 year is also down 8. We still see 29/ on twos to tens, which is in the neighborhood of the steepest that curve has been since early June of 2022. Squawk on the street will return after a short break.
- [39:54]
Leslie Picker
Few consumer names hitting fresh 52 week lows at the open Lennar, Constellation, Brown Forman among them. And after the break, Microsoft spending big to capitalize on AI demand the staggering numbers and what it means for the stock Next.
- [40:12]
Mike Santoli
Big Tech's AI spending spree is causing Capex to balloon into the tens of billions of dollars per quarter. That includes Microsoft. One of the biggest spenders, our own Steve Kovac joins us to break down the impact of all these huge numbers. Steve?
- [40:26]
Steve Kovac
Yeah, Mike, and it might even be the biggest spender. Microsoft's ending 2024 spending at least $53 billion in capital expenditures and we don't even have the latest numbers for the current quarter we're in yet. We'll get that in a few weeks. Nearly all of that is for artificial intelligence. That means Nvidia chips, data centers and other related infrastructure for those data centers. And it's not going to stop anytime soon. Microsoft implied to expect around $20 billion in these capital expenditures each quarter going into 2025. The risk, of course, investors losing their patience for a return on all that massive spending. And by the way, Microsoft doesn't even know when that's going to happen. CEO Satya Nadella and CFO Amy Hood on recent earnings calls have said the AI demand is there and Microsoft is going to keep spending in order to meet it. Over the last year, Microsoft separately has announced at least 20 investments of $1 billion or more at various locations around the globe. That includes Spain, India, Indonesia, London here in the United States and many more. Those aren't just data centers, those are training programs and other things related to artificial intelligence investment. Meantime, don't have a clear view yet on how well Microsoft's suite of AI products are selling. Microsoft has said it's on Track to generate $10 billion worth of AI related sales this year. That's after spending about 70 billion probably by the year end. A lot of that is coming from the Azure cloud business, but still no concrete disclosures from Microsoft on that or the rest. That includes Copilot Plus PCs, which launched this year but without its marquee AI feature that was called Recall. Microsoft said in May it expected to sell 50 million copilot plus pieces over the course of a year, but no indication it's on pace to meet that goal. Also no clue how well Copilot for businesses is selling after more than a year on the market. I've heard from a few CTOs that 2025 is going to be the year they assess if Co Pilot is worth the enormous cost and either spend more or cut back on it. And then of course there's OpenAI. Its losses are now bleeding over to Microsoft, its biggest benefactor. Microsoft said it expects OpenAI's losses to shave a few cents off its EPS in the December quarter, about one and a half billion dollars. And finally, there's the consumer outside of the enterprise business. Microsoft hired Mustafa Suleiman to be CEO of AI at Microsoft back this spring, but right now he's reliant on OpenAI for product development of the latest and greatest AI features that eventually make their way into Microsoft products.
- [42:56]
David Faber
Guys Steve, we were talking about Copilot in particular earlier on the broadcast, in light of, of course, what has been a lackluster performance for the stock this year at least, versus its Mega Cap brethren. You know what, what are you hearing? I know it's all anecdotal.
- [43:11]
Steve Kovac
I hear it.
- [43:11]
David Faber
I'm sure you do from the enterprise in terms of the usage of Copilot. Disappointed? Happy? I. I'm just curious to get your thoughts.
- [43:18]
Steve Kovac
It's all over the map, but basically no one has a very solid answer of whether or not it's worth that $30 per user per month. That is a huge premium on top of the normal price CTOs tend to pay for their companies for, you know, the regular apps, the outlook word, things that, that you and I use every day. This is extra and it's really hard to just quantify that. And I've talked to a number of CTOs all this year and, and a lot of them are saying, yes, we've seen success. We've done pilot programs with a few hundred people here and there. And then this year going into 2025, that's when the CFO comes in and says, is it really worth this cost? Should we spend more or pull back on spending and kind of end these little pilot programs we'll be doing? You hear a lot of anecdotes from Microsoft as well too, David, but nothing concrete as far as how many seats they're selling.
- [44:07]
David Faber
Yeah, well, for a company, as you just said, that's poised to spend 80 billion on capex next year on cloud and I, at least you would imagine investors are going to be very much focused on that. Steve, thank you. Yeah. Steve Kobach, we're going to have fresh housing data after the break. We'll give you those numbers when Squawk on the street comes right back. You've been listening to the opening hour of cnbc, Squawk on the Street.
- [44:30]
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