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Market strategist on Elon Musk’s Twitter offer: ‘I would prefer he not go down this road’

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Opimas CEO Octavio Marenzi and Rhys Williams, Spouting Rock Asset Management Chief Strategist, join Yahoo Finance Live to talk about Tesla CEO Elon Musk's bid for Twitter, the current M&A environment, the outlook on banking and financial stock earnings, mortgage lending, inflation, and the Fed's interest rate hikes.

Video Transcript

[BELL RINGING]

[CHEERING]

DAVE BRIGGS: And with that, a new hour of Yahoo Finance Live. There is your closing bell on Thursday. Dave Briggs, Brad Smith, Rachelle Akuffo back with you, as we check the markets, all down on the day. Some bad bank earnings could be driving it.

You see the Dow down 113. The S&P 500 down about 54 points, and the NASDAQ again driving those losses down more than 2%, 292.5 points. Let's welcome in our panel today.

Rhys Williams, Spouting Rock Asset Management chief strategist. Rhys, good to see you. I have to ask you about the biggest story of the day in the business world and quite frankly in the world, Elon Musk offering $54.20 per share to take Twitter. Reactions are all over the map, from most saying this is an offer the board cannot accept under any circumstances, to Kevin O'Leary just a few minutes ago from Shark Tank saying, if it were him, that'd be a done deal right now. Is this offer acceptable if you're on the board?

RHYS WILLIAMS: Well, I mean, the stock did trade over $70 for much of this year. So I would think the board would not take that amount of money. We do not own Twitter. We do not own Tesla, so we don't really have a dog in the hunt.

But I would think that, as a Tesla shareholder, this could be distracting for Elon Musk. So I would not-- I think I would prefer that he not go down this road. Obviously, it is a minefield of getting into privacy and things like that.

And what's one person's free speech is another person's hate speech, and so I can see lots of problems from this for Tesla shareholders. But I can't see anything super positive so, you know, that being said, Elon Musk is a genius. And I would hate to bet against Elon Musk.

BRAD SMITH: We also have with us, Octavio Marenzi, CEO of Opimas. Octavio, I've got to note perhaps more broadly on the M&A landscape, in terms of what we've seen this year, do you believe that any of that has been accelerated by, number one, a rising rate environment, but, number two, some of the deals, especially if you're looking at a share valuation perspective that are depressed on total valuation fronts because of the fact that we have seen this slip-up to start 2022. And people like Elon Musk are taking the opportunity to see where dealmaking can happen.

OCTAVIO MARENZI: Well, certainly some people who squirreled away a lot of cash, they sold a lot of shares while the market's really good, stocked up a lot of cash, and now are ready to buy, and things are looking a bit cheaper. So mergers and acquisitions activity, I think, is going to carry on being fairly strong into the next quarter. This last quarter was really strong in that area, so we saw a lot of the investment banks did a lot of mergers and acquisitions advisory work, not so much in those IPOs and debt issuance. So those markets are very, very tame and very, very muted. But the M&A space is really red hot, and I think that's going to carry on for a while.

RACHELLE AKUFFO: And, Rhys, I want to look at some of the data the markets have been responding to this week. Obviously, we had CPI data coming in much hotter than expected at 8.5%, another record, multi-year high, multi-decade high inflation levels. What else are the markets digesting right now? And how are they viewing how aggressive the Fed might be?

RHYS WILLIAMS: Well, I think the market did not sell off dramatically on that 8.5% print, only because I think there's some perception that maybe inflation is peaking. However, I do think that inflation-- and I think most people-- think inflation is going to stay much hotter for much longer. And so, therefore, it may start to come down, but it will still remain well above expectations, prior expectations. So I think that's really driving this change in portfolio and moving people more into things like agricultural, commodities, energy, some REITs, and away from the more normal growth stocks that had powered the indexes over the last 10 years.

DAVE BRIGGS: Octavio, big bank earnings really in this week, JP Morgan down 42% from the prior quarter; Goldman Sachs also down 42%; and Citi down 46% from the prior quarter. Any surprise there? What does it tell you about a new norm for the big banks?

OCTAVIO MARENZI: I think there were no surprises in there really. I think Goldman Sachs was actually a bit of surprise. So they were down a bit more than we were expecting there, and that was largely on the back of this fairly weak performance in their Asset Management group, which is not really an asset management group but actually it largely is Goldman Sachs' own private equity investments.

So they had to mark those to market, and they didn't do particularly well. So that was down an awful lot, so that took Goldman Sachs down further than other investment banking activities, but other than that no real surprise. I think just a bit of history on that. The banks had a fantastic COVID.

They were able to build up enormous reserves that they never really needed to use during that period. They were able to draw those down over the course of the past year, and that sort of gave a tailwind to earnings. So earnings on the banking side have been really good. Trading activity on investment banking was really good and now not so much anymore.

So the return on equities of big firms have fallen down, in some case as low as 8% or 9%. In the best case, it's 16% or 17%. So it's not nearly as exciting a little market as it used to be, the banking sector.

And I think that's just a new normal. We're going to have to get used to that for the foreseeable future. We're not going to go back to sort of the COVID era, where banks have these fantastic outlandish profits.

BRAD SMITH: Rhys, anything that we can extrapolate from the early earnings that have come through thus far to really get a sense of how the rest of this earnings season may go and quite frankly what the mindset of the consumer is right now?

RHYS WILLIAMS: Sure, that's a great question. And I do think that we're potentially in for a tough earning season, only because when people gave guidance, the input costs have clearly gotten worse than they expected. The Russia-Ukraine thing really didn't hit until well after-- well after everybody had given guidance.

So you have further increases in costs. And then at the same time, the consumer has gotten a little rockier in the month of March. So I expect that there will be some revenue misses. So costs up a bit more than expected, revenues not up as much as expected, that's probably a sign that there'll be somewhat negative earnings surprises, certainly much more than compared to the last four or five quarters, where the earnings news has been just fantastic.

RACHELLE AKUFFO: And, Octavio, in terms of some of the sectors that have been taking a hit, in your notes you mentioned investment banking, when it comes to underwriting of debt and equity, seeing big declines. There also mortgage lending, of course. When do you expect that to turn around?

OCTAVIO MARENZI: Well, as long as mortgage rates carry on increasing, it's not going to turn around. I mean, there's two different sort of sectors within mortgage lending. There's a whole refinancing side, and that is a very important driver of revenues for many of the large banks, especially firms like Wells Fargo. I wouldn't say it's dependent on that, but that makes up a lot of their revenues.

Of course, in an environment where interest rates are going up, no one's going to refinance their mortgage. No one's going to trade in their 3% mortgage for a 5% mortgage. So that activity has basically dried up altogether. But looking at the numbers coming out of these banks, you also notice that sort of the more general mortgage origination market has slowed down quite significantly as well.

So some of them have seen slowdowns of 15%, 20% in terms of mortgage origination. And I think that's bad news for the housing market. I don't expect the housing prices to carry on at this level. People are simply being priced out because interest rates are going up.

And just mechanically, there's a lot of people who can't afford larger houses anymore. And also if you are locked into a particular house that of a certain value, you can't very well swap out of that and move to a different place. So you're basically, in effect, taking your house off the market and not participating in terms of buying new inventory there.

So I think it's going to be a really rough ride for the housing market over the course of the next year. I expect interest rates to carry on going up. The Fed is going to have to act on inflation. The pressures are mounting there.

I know they're now saying we've peaked. In the beginning, they were basically saying it doesn't exist. Then they were saying it's going to be temporary. And then they said, it's really complicated, the factors causing it.

And then finally they admitted, yes, it's us in terms of our monetary policy. And now they're basically saying the Fed is sort of the one who originated this story. Now, well, inflation has peaked now. We hit 8.5%.

I see little evidence, if any, that inflation has peaked, maybe for used cars and trucks or something like that, but that's about it. And maybe gasoline, which has been driving things, has sort of tapered off a tiny, tiny bit since the middle of March. But the Fed is going to have to put on the brakes really hard in terms of interest rates, to drive those up, and that's going to be really, really bad for the housing market in the medium term. And it's going to be really bad for mortgage origination in the short term.

DAVE BRIGGS: So you both agree that we have not peaked in terms of the inflation. Rhys, New York Fed President John Williams called a half percentage point increase at the next meeting a, quote, "very reasonable option." Do you expect consecutive increases of that amount? And can they find a soft landing?

RHYS WILLIAMS: You know, I'm in the camp that they could find a soft landing, and I realize that may not be shared by the other guests. But I think it's possible, and here's why. The interest rates have gone up or are starting to go up. And we probably get 50 now, and you probably-- you might get 50 the next time.

But I think the market's pricing in seven hikes, and I don't think that's going to happen because I agree with the prior gentleman that the housing market will slow. Other aspects of the consumer economy will slow, and they may not have to do as much as everybody fears right now. So I think the inflation probably has peaked, meaning it won't get worse than 8.5%. But it will still be too high, and I think that's the argument that we can all have.

DAVE BRIGGS: Got it. Rhys Williams, Spouting rock Asset Management chief strategist, and Octavio Marenzi, Opimas CEO, great to see you both. Thank you.