Markets opened higher to kick off the week on Monday as Wall Street attempted a rebound after a slew of turbulent weeks. Thomas Hayes, Chairman, Great Hill Capital, joined Cheddar's Opening Bell to discuss.

Opening Bell

Markets Opened Higher to Kick Off the Week

we have some breaking news to bring to you out just moments ago, Starbucks announcing it will completely exit Russia. The coffee giant has 130 locations in the country and that accounts for about 1% of Starbucks annual revenue Starbucks entered the Russian market about 15 years ago but suspended activity there on March 8th after Russia began its large scale attack and invasion of Ukraine. Starbucks says it will pay its Russian workers about six months of wages and help them transition to other work opportunities. Starbucks now follows Mcdonald's Exxon mobil and british american tobacco who have also left Russia completely since this war began this year. For more insight though, on that potentially here and the early morning activity that we're seeing already. Let's bring in thomas Hayes, chairman of Great Hill capital thomas, if I may here gotta get to that, that bit of breaking news this morning, seeing another major company pull out of Russia is pretty significant. I mean, it follows Mcdonald's this morning. I heard Ey, even Deloitte, I mean you're seeing a wide scale kind of full retreat out of Russia from major american businesses when you see that, what do you think? Well, I think they're going to keep the pressure on Russia until Russia finally complies and exits the invasion of Ukraine. So at some point that the pain is going to be so severe that the oligarchs will take matters into their own hands. And uh, and this may may get resolved, but until then the pressure is going to continue to be on full force. Uh, and Starbucks is the latest in that iteration, You know, on the flip side from the impact directly to Russia. When you think about the impact to investors, Starbucks is only about 1% of its revenue from McDonald's, it was a little bit more significant, I think about 9%, of its revenue. What's the impact to investors and what should investors be looking out for? Well, I think they should expect that many more companies are going to start to exit Russia moving forward. I think for many multinationals, Russia is a de minimus portion of their revenues, with the exception of the Mcdonald's, but the Mcdonald's sold the franchise is to the franchisors in Russia. So they made some money on that, on that transaction. Uh, and uh, and by and large, what we're going to find out moving forward is It's really not going to impact the earnings of the S&S&P 500 in a material way. You know, the issue, obviously, the geopolitical kind of concern with Russia is only one of many factors weighing on the market, especially over the last couple of weeks to the tune that I mentioned a moment ago, You know, you have the dow on an eight week losing streak. Its first since almost a century. Um, we saw last week, another turbulent week, last Wednesday, The Dow losing 1100 points, trying to kind of rebound toward the end of the week, with that not happening. Hopefully we're looking to see if we see one of those rallies today, but when you look over the past week and just the volatility we've seen in the market, one of the biggest concerns for you or you think the biggest thing is really pulling back and weighing down the market? Yeah. Alicia, the selling that we've seen, particularly in the last two or three weeks, uh you know, I've been in the market for some time. It felt very unnatural uh felt a little bit disorderly. And I think what you're finding was it was a function of certainly margin calls, but fund redemptions. And what was interesting about last Wednesday, which you noted was Melvin Capital of the fame Meme trade, got the short squeeze with Gamestop et cetera. Uh They sent a letter to their investors that they were winding down the fund. Now no one in the hedge fund business is going to send a letter before they liquidate the position. So we kind of have some insight as to where some of the selling pressure may have been coming from over the last few weeks and why it was disorderly. Uh and I think Wednesday could have potentially marked the bottom. You know, you saw $17 billion of tech losses for Tiger Global. So all of these funds, not only taking the losses raising cash, uh dealing with their volatility metrics, but also getting redemptions from investors, but I do think that this may be in the rear view mirror at this point and it may create a bottom to really find some high quality bargains moving forward. Oh bottom would be nice. I know a lot of investors kind of, you know, last week I can't tell you how many times I've heard people was at the bottom at the bottom. I walked into the N. Y. S. C. Today and even one of the security guard said, do you think we've hit it yet? Um, you know, let them know that you think that we have, if we're rebounding then if the idea is that we're gonna kind of rebound, is it going to be a slow and steady rebound? How is the to look? Yeah. Well look, no one, you know the old saying he who picks bottoms, get stinky fingers so no one can say with a high probability. But when you look at the statistics, what what we saw in the Bank of America Global Fund Manager survey last week, highest cash balances since the great financial crisis. And since 9-11, those were generational by opportunities. Most underweight stocks since May of 2020, which was near the pandemic lows, generational buying opportunity and the biggest one of the most crowded trades is short tech right now the last time managers were this short tech was August 2006 over the next 18 months, the NASDAQ composite was up 42% off of those lows. So, I think, you know, if you look at those metrics, if you look at the National Association of Active Investment Managers, They're down to 20% equity exposure, which is the lowest since the pandemic. Close. If you look at CNN fear and greed, it's at 11 historically, that's a by place, you want to be a buyer, not a seller. And then Ai sentiment last week came in at 50.4% bearish At the bottom of the pandemic. It was 52% bearish. So, you know, the extremes don't get, don't get much more serious than they are right now. And when they're that extreme and then you take into account Alicia, the multiples on stocks are below below the five year average of 18.6 times were trading at 15.5 times next year, estimated earnings. So not only do you have this structural fear in the market where we've kind of exhausted most of the sellers, but now the valuations are looking attractive for fundamental minded investors to step in on a selective basis by stock by sector, not wholesale buy everything and hope the market rallies to new highs, but on a stock by stock basis, you can find some really high quality companies Down 50% down 60%,, uh, that and even more that are earning money generating cash, not promising the future and delivering nothing, but actually cash generative companies that got caught up in this headwind, That'll be great opportunities when you look multiple years out. All right. I like the well laid out argument with a lot of kind of indicators backing you up on the idea that maybe we have hit the bottom here. You kind of pointed to some possible opportunities, you know, maybe some of the safest or or best buying opportunities, although those two aren't always the same for one another. But let's dig into that a little bit more. Where do you think are the biggest or best opportunities in the market? If again, we're at the bottom, we're looking to climb, climb back up and we're looking to buy right now. Okay, well, this is going to be very unpopular Alicia, but in the last week. Okay, so two in the last tightening cycle, 2015 to 2000 and 16, the 12 months beforehand, uh biotech fell 53% and china tech, Alibaba fell 52% In the 12 months before the rate hike On the fears of the tightening cycle. After the first rate hike at the end of 2015, both biotech, the sector and China tech in the case, Alibaba found their bottoms and over the tightening cycle, the Fed raised rates from 25 basis points to 225 basis points over the next two years, Biotech was up 140% off of those lows. And Alibaba was up 258% off of those lows. Now, history doesn't necessarily repeat. But I think sentiment has become so pessimistic in these groups because the narrative is, they can't perform in a rising rate environment. And the reality is, is most of the rate hikes that are going to happen, if not all In the coming 6 to 12 months Are largely priced in with a two-year yield over 2.62 today. Uh, that's priced in quite a lot of rate hikes moving forward. And I think these groups can start to bottom and I think the fears of tightening are overblown. The fear may maybe a lot worse than the actual reality. And that's why in the last week every update you've seen Que web, the china internet, E T. F and X. B. I. The NASDAQ equal weighted biotech, uh, they've been the top two performers on every green day since you had that flush from Melbourne capital. All right. I think it is a bit unpopular, kind of some of your takes here, but bullish on biotech, bullish on china tech in china. We actually have the 10 o'clock hour, a full segment on china right now, kind of, you know what investors should consider there. So if anyone's kind of considering that some of those calls, you're making stay tuned for that at 10 o'clock before I have to let you go here. Gotta talk the Fed, right? Because that's obviously something that has been major in the market. A lot of people trying to really understand what the Fed is going to do to tamp down inflation and if its current kind of strategy is truly going to work here, obviously the Fed's signaling 50 basis point hike over the next couple of meetings here. But there has been, especially with this pull back the idea that the markets are actually pricing in a 75 basis point hike where your thoughts Terms of, does the Fed really get even more hawkish and even consider a 75 basis point hike after telegraphing that. That's not on the table. Yeah, I don't think so. I I think what you're going to see is a slow and steady hand from jay Powell moving forward and this week it's very interesting. You've got FOMC speaker every day of the week with Chair Powell speaking tomorrow and rarely at, you know, at or near with you know, markets down near bear markets when they parade out uh 55 or so FomC speakers. It's rarely to talk the market down. My guess is you're gonna start to see some whiffs in coming weeks of of a potential dovish pivot and that's going to be contingent upon. Obviously the good, the core CPI numbers coming out later this week, the C. P. I number is coming out early next month because what you, if you look back to last year, Alicia May was the biggest spike in inflation. So the base effect, it's gonna be much harder to have a really bad number for May uh, than it was for april. So I think we're gonna start to see those numbers come down and that's going to give the fed reason to start to moderate, maybe just the 2 50 basis point hikes and then they might even go down to 25 after that. And that could effectively be the terminal rate. If we see inflation come down to 4 4.5 5% before the end of the year, thomas says usual. Always great to have you on such great insight thomas Hayes, chairman of Great Hill Capital. Thanks again.