Closing Bell - Closing Bell Overtime: Adobe CEO On AI In Photoshop, Ethical Worries; Yelp’s Activist Shareholder On Why It Needs To Sell Itself 5/23/23

Episode Date: May 23, 2023

Stocks drifted lower throughout the day as debt ceiling talks stalled. BD8’s Barbara Doran and Edward Jones’ Craig Fehr broke down the market action. Earnings from Palo Alto Networks and Toll Brothers. Adobe CEO Shantanu Narayen discussed his company’s major announcement on AI in Photoshop while also touching on the ethical implications of AI. Yelp stock soared after activist shareholder TCS Capital sent a letter to the board demanding it explore a sale. TCS President Eric Semler joined the show to talk why his plan makes the most sense for shareholders. Benefit Street Partners President Richard Byrne talks the current opportunities in credit markets. Plus, our Steve Kovach on Apple and Broadcom’s multibillion-dollar deal for US-made chips.

The stock's closing near the lows after a midday meltdown. That's the scorecard on Wall Street, but the action's just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. Coming up this hour, he reads on retail, housing, and more when we get quarterly reports from Toll Brothers, Urban Outfitters, and Palo Alto Networks. Also, Intuit. Intuit, too. Yeah, we've got an exclusive interview as well with Adobe CEO Shantanu Narayan on the company's news today about integrating generative AI into Photoshop. And let's get straight to the market action.

Stocks fading through the session today, closing near worst levels. Indices turned lower in midday, as we just mentioned before, after debt ceiling talks concluded without a deal. Joining us now, Barbara Duran, CIO at BD8 Capital Partners and Craig Fair, principal and investment strategist at Edward Jones. Good afternoon to you both. Barbara, I'll start with you. The fact that the S&P did end the day down 1 percent. And oh, by the way, most Treasury yields also turned lower in the second half of the session as well. I mean, what does that tell us about sentiment here? Well, I think that there's been a lot of skepticism all along, despite, you know, the run up we've seen in NASDAQ. And that's because the market advances so narrow with all the big cap tech names. Clearly, the debt ceiling is an overhang. I think most people

mentally think, OK, it cannot happen. And so you're not seeing the market really discount. But there's still that fear that 0.001% chance that that could happen. So I think that's happening there. Plus, we're more than 95% of the way through earnings. And earnings have been overall pretty darn good, 75-plus percent for earnings and revenue beating expectations. But we're winding down this week with some retailers and the semis. And so that catalyst is going to be a bit – it's going to be back to focusing on the PCE inflation number on Friday and the Fed when they meet in June. Yeah. Trying to game whether they're going to pause here or raise raise interest rates more.

Yeah. And of course, that PCE reading on Friday is going to be very much in focus. We get Fed minutes as well tomorrow, Craig. And then, of course, I realize it's been somewhat of a mixed bag in general day to day. But today you had some pretty resilient data, whether it was flash services, PMI or new home sales this morning as well. Looking through your notes, base case for you is a mild recession. You sticking with it? Sticking with it. Morgan, I think you're right, though. If we look at small caps holding in today, that probably corroborates exactly what you just said, which is some of the data that we got today are not signaling, as has been the case for a while now, are not signaling an imminent or even deep recession.

Our base case remains that we're probably going to slide into some sort of a mild recession. I'll note it might look quite atypical at this stage. We've already seen cylinders of the economic engine misfire. The consumer continues to hold in. And so at the time we see some more fatigue from consumers, that might be about the time we're seeing a rebound in other areas of the economy. So we not get that big whoosh to the downside. But broadly, we do think that we're at a phase where economic activity is going to decelerate. Markets already moved to price in a lot of that last year. But I do think we're probably setting ourselves up for a bout of volatility and anxiety, just given the markets have been quite lethargic for an extended period of time, today

being really the first bit of volatility we've seen in some time. Yeah. You know, it reminds me of what Torsten Slott from Apollo said on our air yesterday. He's calling for basically a non-recession recession. Craig, what does that mean in terms of how you're positioned in this market? And if the if the worst of the fears or I guess the worst of the impact of this has potentially already come and gone in the market last fall, does that mean you're constructive? I would say constructive is a reasonable way to put it. You know, our view is that heading through the summer, there's going to be a bit more chop to this market, largely because this rally that we've seen so far this year, whether we go back to the lows in October and we're up better than 15 percent,

or even look year to date, eight plus percent on the rally. It's really been predicated on a view that markets expect the Fed to cut rates pretty aggressively. Now, we've taken, what, 50 basis points of those rate cuts out of the market just in the last couple of weeks, which I think is good news. But I think the markets are still a little bit too complacent. But I'll stick with your other word, which is constructive. I think markets went last year to the negative outcome from Fed tightening. And now this year, I think markets are starting to look ahead to the ultimate economic and earnings recovery late this year into 2024. And I think you can, as an investor,

I think you can be optimistic there. We're pulling in the oars a little bit. We're rather neutral on an asset class perspective, really looking for an opportunity to become a bit more constructive, to add to some risk positions as we move into the latter stages of the year. Okay. Barbara, we can talk about this rotation out of big cap tech today. Do you like big cap tech, given the fact that we have seen such a rally this year? And as we do look to Nvidia earnings after the bell and there's been a lot of debate about whether that valuation of that stock specifically has been overstretched. Yeah, I mean, it's the question of the moment, isn't it? Because we've had such a monster run. And typically you can see a pullback and a rest in any kind of stock or sector that's had such a run. But if you look at Microsoft or Meta or Apple or any of these, number one, interestingly enough, Morgan Stanley did a piece yesterday that they are still under out versus their weight, waiting in the S&P 500. And if you look at even where their peak PEs are,

they've had a big bounce back from the low of late last year, but they're still only halfway back in terms of PE and their valuation to their peak PEs. And obviously, we know what's happened. Number one, starting out the year, things were super cheap. You know, a lot of these mega caps. And we've had a big new thing called AI, which has really awakened investors to what is happening here. And of course, they had an early start, whether it was Facebook or Apple or Alphabet cost cutting, cutting employees, this sort of thing, starting in the fall. And they continued into this year. So they're well positioned. And of course, if you think growth is slowing, here are super growers with big cash flow. So I think there's more to come. I think right now, the rest would be normal. And so I wouldn't chase it, particularly something like NVIDIA,

which is going to be a long run winner. But what we know in stocks like this, the earnings will keep coming up and coming up and they will grow into their valuations. So not so worried for even the medium term to long term. But for now, we might not want to chase. All right, Barbara, Craig, thank you. Meantime, as we have been talking, Intuit earnings are out. That stock is about flat right now after hours. And the reason could be the mixed bag in the quarter and the guide. The revenue about in line at about $6 billion. Non-gap EPS, $8.92 versus $8.48 expected. When we get into the guide, the revenue guide for Q4 looks solid, but the EPS guide to a

range of $1.43 to $1.48, a bit shy of the $1.51 that the street was expecting. However, in the full year guide, the company is saying to expect between $14.28 and $14.3 billion in revenue versus a 14 point, just shy of 14.2 the street was looking for. So that's a little stronger. Also, the EPS guide between $14.20 and $14.25, that is stronger than the $13.83 adjusted the street was looking for. And so, Morgan, when you're looking out at the full year, the guide looks stronger. If you're looking just at the next quarter and particularly on the EPS guide, not as strong. We'll have to look through to see small business, credit karma, how all of that shakes out as we're facing these economic headwinds, especially credit karma, with fewer financial institutions, regional banks looking to make loans

that impacts businesses like Credit Karma. We talked to Tim Chen over at NerdWallet about this. They're not getting paid to bring business into those banks because those banks are looking to keep more of their capital. Yeah, I mean, it's such a key reading on small and medium businesses. And of course, what we're seeing in that part of the economy where you would expect higher interest rates and some of the regional bank turmoil and some of these other things that are swirling around on a macro level to actually impact more quickly, more harshly. So it's interesting to see that these numbers are what they are. Yeah, the decline in total IRS returns of 2% also hitting in this TurboTax

quarter. For more on this, don't miss a First on CNBC interview with Intuit CEO tomorrow on Squawk on the Street. Meantime, Palo Alto Network's earnings also out. Frank Holland has those numbers. Frank? Hey, Jim. I mean, hey, John. Excuse me, I'm reading the prompter here. Shares of Palo Alto Network's kind of flip-flopping between positive and negative right now. Revenues were in line, but it was a beat on EPS. EPS, $1.10 per share.

The estimate was $0.93 per share. Looking at the guidance, it was a little bit mixed. The revenue was basically in line, but the EPS guidance for the next quarter was strong. For the current quarter, going back to that, we saw a beat when it came to billings. The company also raised its free cash flow margin guidance and also its overall margin guidance. So something to watch there, especially in tech's year of efficiency. But again, investors clearly not that excited about the guidance for the current quarter. So a beat, sorry, top line, in line, beat on EPS. The call is coming up later today. We're expecting to get more information about their next gen cybersecurity products.

That's really the growth driver for this company. Back over to you. All right, Frank, thank you. Well, I might not be Jim, but folks, don't miss Jim Kramer's exclusive interview with Palo Alto CEO Nikesh Arora. That's tonight, 6 p.m. on Mad Money. And now CNBC Senior Markets Commentator Mike Santoli joins us from the New York Stock Exchange. As usual, Mike, what are you looking at? Well, John, we've been talking so much about how this market so far in the last few months has been narrowly focused in terms of leadership on the very largest stocks. A little bit of a reversal in that, just the hints of it so far. This is the top 50 stocks, largest 50 in the S&P 500 relative to the overall Russell 2000. It's a one-year look.

So you see the kind of traded leadership back and forth and actually on a one-year basis, basically flat on the Russell 2000, but a little bit of actually a big lead opened up since especially the banking turmoil started back in March. However, let's zoom in on a month-to-date basis, the same relationship here, and you'll see them starting to come back together. So essentially, a little bit of a retracement, a broadening out of the market. I don't see the Russell 2000 or small caps in general themselves as a key bellwether that has to perform really well for the overall market to do well.

It's about 5% or 6% of total U.S. market cap is in the 2000 stocks of the Russell 2000. It's smaller than Apple, but you don't want to see it completely going down every day and making new lows. And so, so far, it's very tentative. But so far, you've seen a little bit of a return to the many from the few in terms of leadership here, guys. The fact that we've seen the Russell 2000 begin to play catch up here in recent days, Mike, how much of this can be attributed to stabilization that we've seen in regional bank stocks? A lot. Not just because regional bank stocks are a big part of the Russell 2000. They're actually not dominant there. But the Russell 2000 trades along with

perceptions of credit and banking stress and financial conditions. And so, yes, the comeback in the regional bank stocks, overall bank stocks, have been right along line with the Russell 2000. So these are these trading relationships that exist for a kernel of a reason. And then they become just kind of mechanical correlations. And we'll see if that continues. But definitely, it's also been good news that you've gotten some relief on the bank stock front, at least for now. All right. Mike Santoli, thank you. And after the break, $170 billion software company Adobe announcing the integration of generative AI tools into Photoshop today. We're going to talk to the CEO, Shantanu Narayan,

about the company's latest move into AI when Overtime comes right back. Welcome back. A watershed moment in artificial intelligence for image creation. Adobe today announcing that its Firefly AI is coming to Photoshop as a beta. AI for images has made huge strides, but it's not perfect. I've used several. They have similar challenges with details like fingers, toes, and noses. And for fun, I asked Adobe Firefly, for example, to show me a dragon outside a convenience store. Pretty good, right? But let's see.

Let's zoom in right here. You'll see part of an extra leg. It's not quite sure to do, what to do with toes and talons. OpenAI's Dali, the others all have similar issues. Joining us now exclusively, Adobe CEO Shantanu Narayan. Shantanu, you're not doing, rolling this out to make dragons outside convenience stores. In Photoshop, this is more about, you know, erasing things out of image,

doing simpler fills, more basic things that Photoshop can do using AI to speed up the process for artists as you start to roll this into your core products, right? Well, John, as you said, it really is a watershed moment for, I think, the future of Creative Cloud. You know, we've had this vision of unleashing creativity for all. And a lot of conversation has happened about generative AI and how generative AI can accelerate the creative process. But that's not adequate. And what you really need is a product like Photoshop,

where you can integrate generative AI into what you're trying to edit. And so when we showed what we have done with integration into Photoshop with Firefly, I mean, people's jaws just drop because it now finally is that co-pilot, the creative co-pilot that allows somebody who's creative to verbalize what they want to do, bring it into Photoshop, and then Photoshop does its magic as it relates to precision. So I think it's a watershed moment for us. And it's just really exciting to see how we're accelerating innovation in this exciting new space. So Shantanu, we always try to look out for investors as well. And so let's talk about potential financial impacts of this. Do you expect this to grow the number of users who can get

financial benefit out of a Creative Cloud subscription. So do you expect more market opportunity for Creative Cloud out of this primarily, or is this mainly going to make existing subscribers more productive, lower churn, and increase margins that way? The two words that I think of, John, when I think about what the potential of generative AI is within our applications is both accelerant, which is what you referred to, making the current creative professional so much more productive. And therefore, if they're more productive,

they can take on more tasks and therefore make more money. But I also think of it as being accessible. And that I think is the holy grail. I mean, for us, making our products more accessible because everybody has this story to tell, we think there are a billion people who wish to express themselves. And what we have done with Firefly, what we are doing with Express, the partnerships that we've announced with companies like Google really is going to bring creativity to all. And so I do think it's both accessible, but it's also accelerant. Now, lay out for me what Adobe is doing with AI, because there's more to it than generative, right?

We've talked in the past about Adobe Sensei. People who are using Adobe Premiere know that you can auto-generate transcripts and captioning. You rolled that out, I think, about a year ago. It's enormously useful for people who work with video a lot, as I personally know. But what are the buckets that you put this AI R&D into? And how are you thinking about how they're going to add value in terms of revenue to the suite going forward? It's a great question, John. And as you point out, we have been investing in Adobe Sensei, which allows you to do so much magic. I mean, things like when you are in a video production process, as you mentioned, and you've edited one frame and you want that editing of the

one frame to then extend into the entire video. Our artificial intelligence technology, Adobe Sensei, allows you to make that happen across every single frame without your having to manually do it, saving you hours in the process. As it relates to generative AI specifically, I would say there are three layers to that, John. I mean, there's the data layer, and Adobe is so differentiated in that we have so much data. And we've also taken a very differentiated approach in terms of training our

models with data that we have commercial license for. The second layer to generative AI is about these foundation models. And there are very few companies on the planet, Adobe is certainly one of them, that can invest in a foundational model for imaging. And so we've done that. You can expect to see us do the same for vector and animation and 3D and video. And then there's the interface layer, which is how are people going to then access it and how does that magic become usable for folks? So when we think about AI and specifically generative AI, I think it's a combination that Adobe has the data, we have the models, and we've invested in these core foundation models. And then the surfaces that people can use, the interfaces, whether that's

Illustrator or Photoshop or Premiere, that's where the magic comes to life for a customer. And the generative AI is specifically called Firefly. All the umbrella technology that we've developed is called Adobe Sensei. Sean Tanu, it's Morgan. So yesterday, there was this fake image of an explosion near the Pentagon. It went viral. It went viral, and then it shaved about a quarter of a percent off the S&P a little after 10 a.m. Apparently, according to some, some telltale signs of AI generation, although I should note that is not confirmed. It doesn't have anything to do with Adobe or with any of the products that you're rolling out today,

but it does raise the question about some of the risks around perhaps apparently AI-generated images. And I wonder how you're thinking about that as you roll out these products and what it means in terms of regulation as we see more lawmakers and more CEOs adding their input to that discussion as well. Morgan, that's an absolutely great question, and it's a responsibility that Adobe takes very seriously. But let me first start off by saying this is not new. When Photoshop was first introduced, everybody said, you're now going to be able to digitally alter pictures.

So how do we understand the authenticity of that picture? The two areas in which Adobe has been spearheading how we should deal with it, the first is what we call verify and trust. And think of it as any image that was changed in Photoshop now has a digital nutrition label. So it specifies who created it, when it was created, and then we can also use AI to determine whether that was altered. And then the second thing that we have is something called content credentials. And this is all part of a much larger initiative that we have called the content authenticity initiative. So Adobe has pioneered the plumbing of all of that. We have chip manufacturers that have supported

this. We have distributors of content that have supported it. Certainly, Adobe has led the way in making sure that we have this digital nutritional label. But I think it's a responsibility that we collectively have to train the consumer to want to verify before they trust any information. And I think that is still ahead of us. And I think that's something that for companies like Adobe, we think about it in terms of the trust that we have with our customers. And I think that's the real way. So it's an education. I got to push you a little bit here because I see some potential and investors are going to want to know at what point does AI start driving the crossover into A-B testing where you can get different versions of an image right in creative cloud. And then in marketing, you're able to put that out there and your users can see which are getting a better response, what's getting clicks to buy, et cetera, all within the Adobe experience. Is that something you're working on and how far out is it?

It's absolutely something that we're working on because consumers demand personalization today. We're all individuals who want the exact piece of content that we want to consume at the right time. John Morgan, probably a week ago, probably a few months ago, if you had talked to us about what you were watching, everybody would have said the same two or three shows. And today there are hundreds and hundreds of shows

that we're watching. And what this entire initiative enables people to do is do that personalization at scale, whether it's for making sure that you get the right product, you get the right piece of content. So I think this is actually going to unleash creativity and productivity like it's never been before. You're right in that there are disruptive issues that we need to think about. But I think the technology at the end of the day is really powerful. And it's something that's going to enable more and more people to engage

with their consumers the way they need to. Lots of e-commerce optimization as well. Shantu Narayan, Adobe CEO, thanks for being with us. Thanks for having me. Well, VF Core and Urban Outfitters earnings are out. Courtney Reagan has the numbers. Hi, Court. Hi, Morgan. Yeah, let's start with Urban Outfitters first quarter results. They're beating on the earnings, reporting 56 cents a share. The street was looking for 35. So that looks like a pretty wide beat there. A slight beat on the revenues coming in at $1.1 billion. Comparable retail sales up 5%. This was driven by both positive comps online and in-store. Online slightly stronger than in-store, as you would expect, because that's off a smaller base. Free people's

comparable sales increased 17%, anthropology up 13%, but the namesake brand, Urban Outfitters, comp sales down 13%. Newly subscribers, it's the clothing rental program. That's up 118 percent as of the current quarter end versus the prior year's comparable quarter. And the CEO does make a comment that the first quarter sales trend and sales strength has continued quarter to date. You can see shares of Urban Outfitters are higher by about 8 percent. No guidance given in this release, however. We'll have to listen for that on the call. And then if we can move on quickly to VF Corp, they reported earnings of 17 cents per share adjusted. That's three cents above where the consensus was. Revenue's about in line at $2.74 billion. The company is looking for full year revenues to be flat to slightly higher in constant dollars and for gross margin

to see about 100 basis points at least of improvement because they are citing the benefit from a lower promotional environment that they're anticipating. North Face brand revenues up 12 percent. Vans revenues down 14 percent. The company says it's continuing to work on turning that brand around. America's down 7 percent, but strength internationally calling out specifically accelerating momentum in greater China. So that continues a trend that we've seen from international retailers with some weakness here domestically, but more strength abroad. And they do note that despite a challenging consumer environment, they are pleased with what they were able to do. You can see shares of VF Corp are higher by 3 percent in response.

Morgan. All right. Courtney Reagan, thank you. Coming up, does Yelp need help? The online review company getting a lift today after an activist called on management to explore strategic alternatives, saying it has, quote, serious concern with Yelp's, quote, abysmal performance. We're going to talk to that activist when Overtime returns. Welcome back to Overtime.

Shares of Yelp ending the day in the green, up about 5.5%, almost 6%, after activist investor TCS Capital Management disclosed a stake in the company and is suggesting a sale exploration to Angie. In response to the letter, Yelp says, quote, they maintain an active dialogue with shareholders and values constructive feedback on their business and ways to create value. We reached out to Angie for a comment, but haven't heard back as well. So joining us now is Eric Semler from TCS Capital Management. Eric, you've been a shareholder for a number of years now. Why? Why now? Well, should have done it a lot sooner. But stock is down sharply over the last five years. It's down over 100 percent versus the market. It's down 200 percent

over 10 years. And so it's been very frustrating to be an outside shareholder watching management enrich themselves. They've paid themselves over $40 million. The CEO's paid himself over $40 million over the last five years and sold over $80 million of stock. So he's doing well, but the rest of us are really suffering. And it's sad because Yelp is really a terrific story. It's a misunderstood stock. They have a long history of missing numbers and taking exorbitant compensation packages. So a lot of investors, most of the market has just given up on Yelp. Even the sell side has given up on Yelp. There's three sells and six holds on the stock. There were only two analysts on their last call. So, it's basically in the penalty box.

And I'm really, you know, I'm here to really try to unlock value. You know, nobody else is really paying attention. The company itself has a wonderful business in home services. Most people think of Yelp as a restaurant, you know, recommendation site. But it's actually growing revenues mid-teens, has a, you know, recommendation site. But it's actually growing revenues mid-teens,

has a, you know, terrific balance sheet, 300 million of net cash, and is just, you know, trading at probably one of the lowest valuations in the stock market. So we just read that statement from Yelp. Has the C-suite actually and the board actually engaged with you? Are you actually now in dialogue and having constructive conversations about this or not yet? No, they haven't reached out to me. I don't really, I don't think that's critical. I think the issue is that the board itself, which has really been a rubber stamp board for the CEO who's been there for 20 years, and a lot of the board members

have been there a long time. There are some new members on the board who just joined in the last few years in response to a mandate from a settlement, an insider trading settlement that involved the company on the civil side, where they had to reform their corporate governance. And I'm really hoping that the new board members will push in the boardroom for the company to do the right thing, which is really to explore strategic alternatives. I think there's a lot of interest from strategic buyers, certainly from private equity. And there's a potential deal that could, a tax-free deal between Yelp and Angie's List that could be very beneficial to both Angie's List shareholders and Yelp shareholders. Eric, is Yelp, maybe even Yelp and Angie together,

just too small? And I ask that because one might argue that, you know, Google, which Yelp has been, you know, Jeremy has been very vocal about over the last decade, kind of crushed a lot of local possibilities. Of course, Booking has OpenTable. That's a hundred billion dollar company that has at least the restaurant reviews and connection part is just one small piece of does Yelp perhaps need something even bigger than Angie to combine with if it's going to compete? You know, that's a great question. I think it's competing really well, John. It really comes up tops on home services searches.

It's growing revenue 15%. It has 75 million users, 270 million reviews, has a great opportunity to benefit from AI. Combining with Angie's List would be huge because it's a $500 billion market, the home services market. And I guess, again, nobody really understands that Yelp's biggest business and their fastest growing business, 25% growth, is home services, not restaurants. And by combining with Angie, they're the two best brands in the marketplace. I think the company could generate $600 million of EBITDA with Synergies and double the value of Yelp shares.

So I think it's a huge market, home services, $500 billion. And they would have a fantastic position if they were to combine. All right. Eric Semler, thank you. Thanks a lot. Now let's get to a CNBC News update with Pippa Stevens. Pippa. Hey, John. Well, former President Donald Trump's criminal trial in the Stormy Daniels hush money case is scheduled for March 25th. By that time, at least 25 states will have already held their presidential primary contests. The judge set the date as Trump

made a virtual appearance in New York criminal court this afternoon. It was his first court appearance since he pled not guilty last month to 34 felony counts of falsifying records. Billionaire businessman Harlan Crowe refused once again to give senators information about his relationship with Supreme Court Justice Clarence Thomas. Crow's attorneys told Senate Judiciary Democrats he believes the committee doesn't have the authority to investigate their relationship. Thomas has been under fire over allegations reported by ProPublica that said he failed to properly disclose trips and gifts paid for by Crow. And Netflix's crackdown on password sharing has begun. The streaming service says

it began alerting its members in the U.S. about its new password sharing policy. In an email, the company told customers, quote, your Netflix account is for you and the people you live with. Any users on the account who live outside of the house need to either create their own membership or stay on their current account, but pay an extra $7.99 per month. Morgan, back to you. Yeah, sure. It's a Netflix ending the day flat. Pippa Stevens, thank you. Toll Brothers earnings are out. Kate Rogers has the numbers. Hi, Morgan. Better than expected second quarter here for Toll Brothers. EPS coming in at $2.85 versus estimates of $1.91. Revenues $2.49 billion for the quarter versus revenue estimates of 191. Revenue is 2.49 billion for the quarter versus revenue estimates of 2.06 billion. The stock is up 27 percent year to date, as you can see, higher by

3 percent right now. The company's CEO saying demand for housing is improving, noting that mortgage rates and buyer confidence improved in the quarter and the demand they saw in January is continuing into the spring. So good news for that company, guys. Back over to you. All right. Kate Rogers, thank you. Sh guys. Back over to you. All right. Kate Rogers, thank you. Shares up 3% right now. When we come back, Mike Santoli breaks down the latest data on the housing market. We're going to stick with this theme for a minute.

And the divergence forming between new and existing home sales. Stay with us. Welcome back to Overtime. Shares of Toll Brothers are up better than 2.5% after hours after reporting earnings moments ago. Mike Santoli returns with a look at the housing market. Mike? Yeah, John, and the market for newly built homes that Toll is feeding into is very strong. Good new home sales numbers today, this morning.

However, existing home sales have suffered. There's just not enough homes on the market. We know people are locked in with low mortgage rates if they already own a home. And so you see this divergence right here. Now, this is based on percent change, not absolute numbers going back to 2009. So the trend is diverging. The number of existing home sales far outpaces in gross terms those newly built homes. And you also see pending home sales also on the downswing. Those are ones that are in contract for existing homes.

So it's unclear whether, in fact, you know, just a very hot new home market can really act as a clearing mechanism for a clogged up home market at this point. But it's definitely a bright spot for the builders. They were down today, are also down on a month-to-date basis, the home builders, but we'll see if those toll numbers after hours changes the story for tomorrow. All right, Mike Santoli, thank you. We have a news alert on Virgin Orbit. Richard Branson's bankrupt Rocket Company is shutting down and selling different assets to different buyers. Rocket Lab, Strata Launch, which is the startup that was founded by the late Paul Allen and another subsidiary of another startup, Vast Space. Altogether the combined total

of the bids is around 36 million dollars. That's for everything spanning from the company's California HQ to its 747 jet that's used to air launch rockets and various machinery and equipment. The company filed for bankruptcy in April after a failed bid to secure funding. Keep in mind, when Virgin Orbit went public at the height of trading, it was a company. It had de-SPACed. It was a company that had been valued in the low billions of dollars. So here we have the closing of a chapter for this company, although these assets will now go to other space startups. And the technology would potentially continue to live on in those capacities. When you say the low billions, how close are we to one one hundredth of its peak valuation at thirty six million?

I mean, was it that's a tough question. I have to go back and I'm pretty close. It's either a fiftieth or a hundredth. That's quite a haircut. It's it is a haircut. It's, it's, it is a haircut. And it speaks to the cash crunch we're seeing among a lot of startups, including startups that went public via SPAC in recent years, as we've seen the entire market come under pressure. Well, interest rates, speaking of staging a comeback this month, up next, we will discuss where that's creating opportunities for investors in the corporate debt market. Stay with us.

Welcome back. The debt ceiling impasse creating an interesting situation in the debt market. Debt issued by AAA-rated firms like Johnson & Johnson and Microsoft are trading at a yield discount to U.S. Treasuries of similar duration. The Wall Street Journal pointing out this oddity in a report today. The U.S. lost its quote AAA rating in 2011 during that year's debt ceiling standoff. And joining us now is Richard Byrne, Benefit Street Partners president. Benefit Street is a credit focused alternative asset manager. Richard, welcome to the show. We're excited to have you on. And that is where I want to start before we broaden out this conversation. and that is some of the angst that we have seen in fixed income overall in the midst of all of this D.C. drama. How you're assessing it, how you're thinking about it from a risk perspective here over these coming days amid broader macro challenges that we talk about day in, day out.

Sure. Hey, Morgan, thanks for having me. Well, first of all, it's never a good thing when the government is at risk of defaulting on its debt. But I think for the most part, the market is looking through that. And ironically, all this talk about what's going to happen next, either with the debt ceiling or with a looming recession or inflation or interest rates going up further before they eventually go down. I think that's sort of missing the point. I think the point is that we've already had the seismic event that has occurred in credit. It's been the near historic rate move that we've seen from near zero rates to, you know, our base rates on our loans are over 5% today. That has meaningful implications on the portfolios of lenders like us. We do corporate lending and

real estate lending. And ironically, the impact is very similar regardless of the asset class. Just higher rates is both good and it's bad. So let's talk about how they're both good and bad. Okay. So first of all, if you're a lender and our portfolios are largely floating rate loans. So when rates go up, that's great. I mean, there's nothing better for a lender than to get higher rates on the loans. You earn higher yields. Everything is great. Right. But, you know, I don't know if you were when you were a kid, if your parents ever told you, you know, there's there that you can have too much of a good thing. And in this case, too much of a good thing really means that, um, that added interest burden has put stress on the underlying companies. And I'll give you some numbers to underline that

the average company we underwrote a loan for in 2000, uh, and 21, uh, you know, before rates started, you know, this climb upwards, had interest coverage of 2.6 times. In other words, you earn 2.6 times more than the amount of debt service that you had to cover interest expense. Very comfortable margin for error. Well, what's happened is if that company just hypothetically, nothing changed about that company, it's earnings and change, nothing changed. You just recalibrated it for the current level of interest rates. So the average interest rates at that time was about 75 basis points on SOFR, the base rate. That's over 5 percent today. So that interest coverage on that same loan is now 1.6 times.

So that's one turn less interest coverage. Did that company default? No. But what happened to its margin for error? It got reduced dramatically. And could there be problems in the economy, higher rates, you know, whatever, that margin for error goes down and down. So the market is pricing in higher defaults. Yeah. And of course, that's probably part of the reason that commercial real estate and commercial real estate lending are in such hyper focus right now, especially given all of the regional bank turmoil that we've seen play out in recent months. Yeah. So real estate is the same story. But interestingly, floating rate loans in commercial real estate usually have interest rate hedges or caps. Most lenders have required borrowers to put caps in place. They hated it at

the time. But boy, are they happy that they have them in place now. So in a lot of cases for commercial borrowers, this added interest expense hasn't really been a burden to them yet. But all that's going to change when those loans come up for maturity. And real estate's a very interesting asset class. It's very easy to sort of calibrate things. And really what the commercial real estate market is saying is that when interest rates go up, properties are worth less. And if a

property is worth less, then somebody will lend you less when it comes time to refinance it. And if somebody will lend you less, then you're either going to have to put in more money, you're going to have to turn over the keys to the lender or whatever the case may be. But there's a true up. And we're going to see that. And Morgan, I mean, I think the best way to say this is markets are very efficient. The average commercial mortgagery trades today at 63 percent of its book value. The market is putting almost a 40 percent discount on what the value of those assets is versus where it's trading, even though the earnings are at records not seen in the last 10 years because the benefits of those higher rates. I think that's the best way to explain it. And that was a great explanation.

We didn't even get to private credit, but we got to leave it there for now. Richard Byrne, thanks for joining us. Thank you. After the break, Goldman Sachs CEO David Solomon weighing in on the recession debate at CNBC's inaugural CEO Council Summit. We're going to tell you what he said when Overtime comes back. Welcome back. CNBC hosting its inaugural CEO Council Summit this week in California. Goldman Sachs CEO David Solomon just spoke on a panel saying it's maybe a question of just how deep the coming recession might be. I think there's a greater chance of a recession than than not as we look at the end of the year into early 2024. But I'd say it's uncertain if there is a recession. My best guess is at the moment it will be relatively shallow.

But I think it's very hard to tighten economic conditions, have the inflation that we're having and not ultimately, you know, have an impact on economic growth. And so some of this is a rebalancing of the imbalances from the pandemic. But but we'll see. But it's unclear. For more exclusive content from the CNBC CEO Summit, go to CNBC dot com slash CEO. Not certain that there'll be a recession, but, you know, how do you tighten and land relatively softly? Yeah, it's interesting. I want to go back and sort of compare that to some of his previous interviews on CNBC. And I think back to last fall when he was basically saying that he thought there was a good chance of a recession. So I wonder how and if the rhetoric and some of the commentary that's being used has shifted here over the last

couple of months, especially as some of the data has been more resilient. Yeah, and the second half looks a little iffy. All right, well, Apple inking a multi-billion dollar deal with Broadcom to make 5G radio frequency components in the U.S. What this deal means for Broadcom and the rest of the chip industry when overtime returns. Made in America, special edition. Welcome back to Overtime. Check out Broadcom shares hitting an all-time high after the company signed a multibillion-dollar deal with Apple to produce U.S.-made 5G components. Our Steve Kovach joins us for more. Steve, I was a little surprised at the excited reaction of this at first because Apple and Broadcom have had a relationship for a while.

Apple is trying to make its own 5G radios, take that business from Qualcomm, improve its margins, and it's been having trouble doing that. So it's not surprising to me that they're not trying to build Qualcomm equipment as well as Broadcom equipment as well as Qualcomm. Right. Qualcomm, I think, is the first target because they hate paying the couple bucks per iPhone sold. But here, this was a surprise because earlier in the year with that Bloomberg report saying Apple was trying to bring these very chips we're talking about right now in-house. And, of course, that put shares of Broadcom under pressure. But now they're saying, look, we got this new deal. They're not saying how much it is or how long it's for, but we can use the last deal of similar types. Fifteen billion dollars. That's how much Apple ended up paying.

Also, a little bonus here. They're adding this is an American job story, as you alluded to before the break. And they're going to be making many of these chips in Fort Collins, Colorado. And they promised to spend a certain amount on U.S. manufacturing. This is important because $400-something billion. Invest in that to bring the jobs in before others can build on top of it and there's momentum. Exactly. And the question then is, was Apple developing these chips, by the way? That's another big question here. And could they just not get it out in time and had to cut this other deal with Broadcom in order to do it. I think the Qualcomm modem is basically their first priority here and probably going to see that the Apple made 5G modem based on Intel

technology, by the way, in 2024, most likely, and then maybe they'll try to weed out Broadcom after that. I want to know how this potentially speaks to supply chain dynamics and maybe even potentially a little bit geopolitics, this idea of investing in that manufacturing capability here stateside when we know Apple has been trying to expand beyond China. Yeah, but the vast majority of these chips are still fabricated overseas. They're still, by the way, the devices themselves still assembled overseas. So is this going to alleviate all those supply chain problems that we've seen from Apple during the pandemic? Absolutely not. But it does help alleviate that pressure. In a way, you don't see that much high end chip work

in mainland China. A lot of that's in Taiwan. Of course, Intel has fabs in Germany and Israel here as well. So it's not like this is just about China. Oh, of course. Yeah, it's everywhere. But it's also but China was the problem, right? That's where we saw those hangups. That's where we saw the COVID policies really hurting Apple and others' ability to get these products out the door. We saw the TSMC announcement several months ago, you know, building chips here. Again, that's a drop in the bucket for how many chips Apple actually makes. But look, this is a good thing they can do to kind of wave their hand and say, look, we're investing in America chips again. And there's an election coming up. This all ties into it. All right. Steve Kovac. Thanks, guys. Thank you. Tomorrow, don't miss Overtime's

interview with NASA Administrator Bill Nelson. We're going to discuss that big lunar lander award with Jeff Bezos, Blue Origin, the future of human spaceflight. There's an all-private crew currently at the space station and perhaps even the financial health of some of human spaceflight. There's an all-private crew currently at the space station, and perhaps even the financial health of some of these space startups, given the Virgin Orbit news we just got a short while ago. All right, that's gonna do it for us here at Overtime. Fast Money begins now.