Closing Bell - Closing Bell Overtime: Adobe CEO Shantanu Narayen Discusses His Major AI Announcement; Markets Await Tomorrow’s Huge Fed Decision 3/21/23

Episode Date: March 21, 2023

Major averages finish near session highs as investors await the Fed’s rate decision tomorrow. Meghan Shue of Wilmington Trust and Wedbush’s Sahak Manuelian preview what the Fed is likely to do. MassMutual CEO Roger Crandall on the continuing banking fallout from First Republic and Credit Suisse. Jon sits down with Adobe CEO Shantanu Narayen to talk Firefly and why Adobe stands to benefit from AI; SVB MoffetNathanson’s Sterling Auty breaks down his AI winners and losers. Plus, earnings from Nike and GameStop. Oppenheimer’s Brian Nagel just named Nike a top pick; he discusses the latest quarter and the market reaction. 

Risk on for the market today. That is the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. Coming up this hour, two key reads on the consumer when we get earnings results from Dow component Nike and one-time meme favorite GameStop. Those numbers are just moments away. Plus, Adobe goes deeper into AI. We're going to talk to CEO Shantanu Narayan about how the software giant is incorporating artificial intelligence into its creator tools and what all that could mean for the company's bottom line. Let's get straight into our market panel, shall we, as the major averages add to solid gains on the week. Joining us now are Megan Hsu from Wilmington Trust and Sahak Manuelian from Wedbush Securities.

Good afternoon to you both. Megan, I'll start with you. The fact that we saw the major averages higher by 1% or greater today, we saw yields move higher, and we saw a shift out of the more defensive and safe haven sectors where it comes to stocks. What does this signal 22 hours out from the Fed decision? Yeah, Morgan, great question. I wouldn't read too much into it, especially because so much hinges on tomorrow and what we're going to hear from the Fed and Chair Powell specifically. I think we're getting a little bit of a relief rally, certainly some maybe some covering of positions. What we've seen and that's interesting, and I think it plays

through in terms of the indicators of volatility, while interest rate volatility and the move index are pretty much through the roof, the VIX is still relatively contained. And I think that part of the reason for that might be because investors are already defensively positioned. So it sets us up for days like today where you get maybe some positive headlines from Treasury Secretary Yellen and the market can bounce after a few very difficult days. So, Haki, even if we just try to read through what the Fed does tomorrow, you seem to like tech because valuations have come in. It seems like just a few weeks ago, doesn't just seem like, I remember just a few weeks ago, a lot of people were saying

stay away from tech. Why do you think there's opportunity there and how do you calculate it? Yeah, John, we like tech and the tech complex here. I think it looks more and more appealing valuations below the five year average for tech multiples. Anyways, there's been a huge move down in tech prices over the course of the last 15, 16 months. So FX, certainly the dollar going down has been a tailwind for tech. And we've seen this in decline really since October of 2022. We've had a better handle on expenses. We've got job cuts all over the place being announced. We had more announced last night.

Supply chain concerns have been easing or normalizing. And now yields have been rolling over. So the two-year down maybe some 100 basis points in a matter of two weeks' time, and from 5% to 4%. And the 10-year is down some 50 basis points or right around there. And, you know, the 10-year having a very tough time at the 4% level. And that goes all the way back to 2007. So, yeah, we think the tech complex looks fairly interesting here given where valuations are. Yeah. I mean, the bond market, as far as tomorrow's concerned, really giving the green light for a 25 basis point hike, Sahak. But it's also pricing in looking out through the rest of the year that we're going to get a hefty amount of cuts.

Do you subscribe to that? I do subscribe to that. So this is where Jay Powell has a very, very tough job tomorrow, really. You know, on one hand, he's got a lot of different data moving in his direction. We saw February wages moderating the March Empire manufacturing that came out last week. The prices paid component that dropped. Philly Fed, that came down. Michigan inflation expectations last Friday, that came down. And then finally, this DBA ETF, which is the softer ad commodity ETF, that's been under pressure since May of 2022. So, you know, whether or not he raises 25 basis points tomorrow, I don't think is quite as important as the forward guidance he gives and any commentary that helps aid or understand what

future rate cuts will look like. As to your point, Morgan, we've got some 60 to 70 basis points of cuts now being priced in by the end of this calendar year. OK, so, Megan, you say overweight cash and fixed income. Can you be more specific on fixed income, given the volatility that we've seen in bonds over the past few days? I mean, you know, you're still getting yield. So to what degree do you go long dated versus not? Are you talking corporate bonds? Where do you find the best value and where are you willing to take risk? Yeah, great question, John. I would say within the bond and the fixed income space, if you think about municipals versus corporates, we're definitely more excited about municipal bonds. It's a market that moves a little bit behind the corporate bond market in terms of movements in the yield curve.

And some different dynamics they're very inefficient and we have. Generally even in a recession which is our base case. Not seen defaults- even in the high yield space. Within munis. Now I would say corporates and taxable bonds

are a little bit different- based on what we are expecting from financial conditions and a tightening. Of lending. From banks which I think is a very realistic assumption given all of the concerns around the banking environment. I would expect high yield and even investment grade spreads to widen. And I think you might be getting, you know, doing okay on the yield component of that, but that spread and pricing dynamics is going to make that market more challenging than municipal bonds. And I think in terms of duration, being pretty close to the benchmark, given all of the volatility and the amount of uncertainty out there is really

smart, but maybe more of a barbell approach where you have some on the long end and some on the short end so that you even out respective to the index. Yeah, the S&P ending the day up above that key, just above that key 4,000 level, 4,002. Energy was the sector that led the charge, Megan. On days like today, and I ask this because I know at least in the past you've been overweight, Energy. On days like today, do you sell the rallies? And how are you thinking about that where something like energy is concerned, given the fact that we saw crude hit pretty hard in recent trading sessions yeah morgan i would be a little bit more cautious here on energy um we've actually just sort of revised that where we were constructive and saw you know demand holding up relatively well in a mild recession um and the production environment being tight but actually

we're seeing uh the fundamentals move in a more negative direction on both of those. So production is staying much more elevated, especially as it pertains to Russia's production, while I think you have to increase the recession risk in light of what we've learned over the past two weeks as it relates to banks. And in that environment, I think demand would get hit more. So seeing that oil price be derated lower and passing that through into what we see as a more less constructive environment for the energy sector. And I'd be looking a little bit more into some of those growthier parts of the market, certainly quality and a little bit less exposure to cyclical sectors.

All right. Sahak and Megan, thanks for joining us. Thank you. Well, look at GameStop after hours surging on earnings. Steve Kovach has the numbers. Steve? Yeah, John, it's up 20 percent right now. It just hit up 20 percent after turning a surprise profit for last quarter. Now, we don't have comparisons to analyst estimates, doesn't have enough coverage. But let me give you the results here. Net sales coming in at $2.23 billion. EPS, 16 cents a share adjusted, and that translates to a net income or profit of $48 million. We haven't seen that in a while from GameStop, but investors loving it up 24% now, John. Wow. Steve, I don't know how much looking into the degree to which this stock is shorted you have done lately, but is this kind of move expected? It's reminiscent of the meme

stock. Yeah, it is. It's it's not it's unexpected that they turned a profit. But look, and they're saying they're crediting a lot of things, cost cuts, layoffs, other efficiencies like we've been hearing from so many companies over the last several months. And in addition to that, they're crediting a lot of things, cost cuts, layoffs, other efficiencies, like we've been hearing from so many companies over the last several months. And in addition to that, their collectibles business, so moving beyond just straight-up video game sales, as a lot of those have shifted online, they're really leaning into that collectibles business. The other thing they're working on is this Web3 NFT store that they launched last year, but that really hasn't gone anywhere. So it's really about the collectibles and the efficiency and cost cuts. And today, of course, the profit. And worth noting, as you just touched on, you only have three analysts that are still covering this name. And I don't think there

was an expectation that we were going to get an outlook from the company today and probably not questions from analysts during the call. They never do it, Morgan. It's a very short call. Exactly. All right. Well, shares jumping. And Steve Kovac, thanks for bringing us those results. You got it. 32% at the moment.

That doesn't look normal. All right. CNBC Senior Markets Commentator Mike Santoli now joins us from the New York Stock Exchange. Mike, what is on your radar as we wait for that Fed decision tomorrow? Well, John, financial conditions, how much they might be tightening is very much front and center when it comes to what the Fed's considering right now. Also, the Bank of America Global Fund Manager survey today found people very bearish or risk averse in general. And one of the biggest risks was something coming out of the shadow banking industry

or the credit markets that might be unexpected. Well, this is an ETF of what's called business development companies. They're essentially kind of private lenders to small and midsize businesses. A lot of times it's a yield play. They also do invest equity in there. So it's quasi private equity and private credit. And so what you've seen here, obviously, when the economy shut down and everybody just cashed out of everything, that was the the covid crash. But beyond that, we're kind of have seen one of these sharp sell offs that really line up with some other important market lows.

That's February of 2016. We remember that. That's December of 2018. That was after a 20 percent drop in the market surge thereafter. And so then you have last October's low. So it seems like it's a pretty good barometer of how nervous people are of some kind of financial accident out there. We have not really gotten one of those V bottoms off of this, a sustainable rebound, but it's worth keeping an eye on that.

Now, when it comes to bigger, kind of the corporate bond market, the lower end of investment grade, triple B rated companies, this is a spread that the Fed absolutely will keep an eye on. So as this line goes up, I mean, people are panicky. They're demanding more compensation for the risk of owning corporate bonds.

Right. So, again, COVID pretty much an outlier of its own. And this doesn't go back to 2008. But here's where we are. It's actually right around the two percentage point level above Treasuries. And so we've been there a couple of times last year, in July and October. No disasters there. So it's sort of nervous, but not panicky is the way I would put it. And probably nothing that would keep the Fed from hiking 25. But we're not far from levels that would definitely get their attention to say that credit contraction is a bigger risk in the economy. I just think this is such a great set of charts a day ahead of the Fed meeting when we do talk about financial conditions. We do talk about the fact that the Fed keeps an eye on

it. And what that tends to mean is the equity markets and credit and credit spreads. So this kind of puts it in perspective. Yeah, exactly, Morgan. And the other piece of it, of course, now that's a little bit unique is all of the banking tremors that we've gotten is leading to these projections that banks themselves are going to really be cutting back on their appetite for extending credit. Now, that's going to take some projections, can take some analysis, can take some assumptions. That's not usually what the Fed wants to do in making a rate decision is sort of project exactly what's going to happen in the economy. But they're a little more on alert than they would have been otherwise if we didn't get SVB and all the rest of it in the last couple of weeks. All right. Mike Santoli, we'll see you a bit later in the hour. We're just moments away from earnings results for $200 billion Dow component Nike. We're going to bring you those numbers and

the instant analysis as soon as they cross. And after the break, we're going to talk to the CEO of MassMutual, who sits on the business roundtable and is a member of the Boston Fed's Board of Directors about risk management following the instability in the banking sector. Overtime is back in two. Welcome back to Overtime. Check out shares of First Republic, which has been the poster child of potential contagion among the regional banks. Check out the move today. Stock turned in its best percentage gain ever, finishing the day up 29.5% on news of possible stabilization efforts from J.P. Morgan and others. The stock, excuse me, the stock, though, still down nearly 90% in the past month. And sticking with the banks, run the failure of SVB and signature to

the collapse of Credit Suisse. Has the turmoil been contained or is there risk of long-term damage to the economy? Let's bring in Mass Mutual CEO Roger Crandall, also a member of the Business Roundtable, as I mentioned, on the Boston Fed's board. Roger, great to have you. I was just thinking Sunday night, you know who I'd really like to talk to? Roger Crandall. And you happen to be in town. So I really appreciate it. Happy to be here in person. Thank you. Let's start with the banks and these moves in their stock. Why does the stock move matter to the actual operation health of the banking sector? Well, I think a lot of us who weren't paying a lot of attention to it

kind of forgot how banks work, right? You put in money as a depositor. You can pull it out any time you want, and $250,000 of it is guaranteed, but the rest isn't. And what we saw with SVB was $42 billion flow out in four hours. This is the first banking crisis with mobile banking. It's just going to get quicker going forward. So where does the capital from banks come from?

And the good news is the banks are all capitalized. It comes from holding companies, and they issue stock, which trades every day, which is what you're talking about. But they also issue debt. We saw that with the Credit Suisse bailout. Some of those bonds got wiped out in that. So as a long-term institutional investor for our policyholders who mostly buys bonds, we need a healthy banking system for a lot of things. So every day I see bank stocks go up after an event like this. who mostly buys bonds, we need a healthy banking system for a lot of things. So every day I see bank stocks go up after an event like this.

I say on the margin, more people are comfortable. The things are settling down. You hear the Fed saying the right things. You saw Secretary Yellen say the right things about making sure depositors are going to be made whole. And they did the right thing for the depositors at SVB and at Signature. So Credit Suisse, I think the Swiss did the right thing, frankly, as well. We need a healthy banking system for the depositors at SVB and its signature. So Credit Suisse, I think the Swiss did the right thing, frankly, as well. We need a healthy banking system for the economy, and happy to see that it's settling down a little bit here.

Roger, stay with us because Nike earnings are out right now and shares are popping in the after-hours trade. Sarah Eisen has the numbers. Hi, Sarah. Hi, Morgan. It's a big beat for Nike. Certainly on the bottom line, 79 cents a share. The expectation was around 55. Also on the top line as well for revenues, $12.4 billion sales. Expectation was more like 11.5 billion sales. If you see where that came from, really strong in North America, which came in better than expected, in Europe, which came in better than expected. China

is still the weak link for Nike, where sales declined 8%. So clearly working through some of the COVID issues. And there will be questions on the call about what China demand looks like up to this date as China continues to recover. I want to point out a few other key numbers. Gross margins, everybody was looking for this because it has been a decline as they have to unload inventories. 43.3%, that was pretty much in line. 43.7% was the expectation. And inventories, 43.3 percent. That was pretty much in line. 43.7 was the expectation. And inventories. Everybody was watching this, Morgan and John, because Nike had a high inventory

problem because of all the shipping delays and the COVID delays. They were stuck with a lot of inventory. They're showing progress. That was up 16 percent. Last quarter, that number was up 43%, 44%. So continuing to move down as Nike unloads all the products. Overall, this speaks to the brand's strength. It speaks to a profitable company, even in the face of difficulties like COVID in the China market and, of course, foreign exchange and elevated shipping costs, which all factor into that lower gross margin. But the hope, guys, is that when the conference call kicks off, executives will talk a little bit more about the cadence in China throughout December, January, February, but also potentially the lower inventories and whether that raises earnings estimates and margin estimates going forward.

Because if they clean out that inventory, they don't have to do as much markdowns, which certainly weighs on profitability. But overall, guys, pretty strong snapshot around the globe for brand Nike. All right. Sarah Eisen, thank you. Shares are up 3.5% right now. I'm going to be interested to hear more about China, John, because we've seen the choppiness of that reopening, and it played out in FedEx earnings last week as well. So we're going to talk much more about those results in just a bit when we're joined by Oppenheimer analyst Brian Nagel, who just named Nike a top pick. All right. Let's talk more again about the banks, the broader economy. Roger, still with us. So

the recent events in the banking system, how does that set us up, A, for a recession or not, more or less likely, and then the implications about how deep that recession might be if credit is less available? Yeah. I mean, look, we're a very long-term investor and we own a lot of bonds, so credit is always something we're focusing on. Look, the Fed has had a real issue, right? Inflation got out of hand. They've raised short-term rates the fastest we've ever seen. We're going to see what they do tomorrow. Is it going to be a quarter? Is it going to be zero? You know, in the long run, I'm not sure that's all that material. But what we do know is the highest point on the curve right now is Fed funds. So the bond market is telling us, has been telling us for a while, the slowdown is coming, right? What's happened with this crisis,

you would think bank lending is going to slow. MassMutual actually had some of its best sales days ever in the last week, as people have been looking for a strong place to invest. And MassMutual sells annuity products that are that and life insurance products. I would say on the margin, the risk has gotten higher. And clearly, that's what the markets have been telling us here as well. That said, look, we just heard a good earnings number from Nike, right? You see kind of green behind us. The real economy is actually hanging in pretty well. Inflation slowing significantly on the good side. You heard transport prices have fallen pretty dramatically. In fact, they're back where they were before COVID. If you look at kind of shipping rates, oil prices down. Again, you kind of talked about that.

On the other hand, service inflation is up because wages continue to be up. We have a labor shortage. We have a really low unemployment rate. Kind of hard to have a recession when most Americans who want a job have a job. So we're cautiously optimistic we're going to work our way through this. But are the risks higher today than they were three weeks ago? For sure. You just touched on the demand picture a little bit for mass mutual products. But when it comes to insurance companies such as yours, I mean, you are tied to bonds. So I'm curious what the increase, the dramatic increase in yields has meant to business and just as importantly, what the inversion has meant. Yeah. And look, one of the things that we look at here and we don't understand is

where was the asset liability management, right? We all know banks have short-term deposits. Money flew in. Again, you've done the reporting on this, right? And that money had to go somewhere. It went into very safe securities from the respect of getting paid back, mortgage backs and treasuries. But there

is no safe long duration security when interest rates rise. It's just bond math, right? We've been managing our asset liability match very closely for decades because we saw this movie when Volcker did this back in the late 70s, early 80s. So, you know, what happened with ALM is I think one of the things we'll eventually kind of fully figure out here. And, you know, the question that we're worried about is, is credit risk coming? Because we really have not had a lot of losses kind of work its way through our system yet. So for us, we manage our surplus very carefully. We've never had the benefit of a government guarantee. For 172 years, we've only had ourselves to rely on to make sure our policyholders are going to be taken care of. So we've always taken a

really prudent approach to that. And by the way, it's in the name as a mutual. We're owned by our millions of customers. You know, you think about it a little differently maybe than if you're thinking about it in a shorter term kind of way. So I think what happened in ALM is going to be one of the things we're ultimately going to figure out here. I guess it's not different this time. And you've seen quite a few times at MassMutual. Roger, thanks for being with us. Really appreciate being here today. Thank you so much.

Well, still ahead, we've got much more reaction to Nike's results when we speak with an analyst who recently called the stock a top pick. Plus, excuse me. Oh, my goodness, today. John, you spoke with Adobe's CEO, Shaz Noonarayan, about some of the big new AI announcements that came out of their event today. What are we going to be hearing? For Adobe, it's called Firefly, and it's a really big deal. It's bringing AI mainstream when it comes to creating images. So I talked to him about what does that mean for artists,

now that you're bringing that into Photoshop and into Illustrator? And what does it mean for the business model? We're going to get all of that when Overtime returns. Welcome back to Overtime. Time now for a CNBC News update with Seema Modi. Hi, Seema. Hey, Morgan. Good afternoon. Here's what's happening.

After a meeting today with Xi Jinping that Vladimir Putin calls successful and constructive, the two leaders signed agreements on strategic cooperation and to increase energy exports from Russia to China. But officials watching from the White House did not see any signs of real progress on Ukraine. Coming out of what we've seen today, we haven't seen anything that they've said, they've put forward, that gives us hope that this war is going to end anytime soon. In response to another national strike planned for Thursday, the French government plans to deploy 12,000 police officers, including 5,000 for Paris alone. Tonight, police have fought running battles again with protesters who are angry the country's

president bypassed lawmakers and unilaterally raised the country's retirement age. And Gwyneth Paltrow is in Utah courtroom today for the start of a civil trial. She's being sued for $300,000 by a man who says he was badly injured when she collided with him on a ski slope and then kept on going. Paltrow contends the man crashed into her, delivering a full body slam. John, back to you. Wow. Okay. Siva Modi, thank you. I spoke to Adobe CEO Shantanu Narayan earlier today about major artificial intelligence announcements the company made affecting its core creative products at Adobe Summit. But I also first asked him about the fallout from the regional bank chaos and whether that affects how he looks at the rest of the year.

As you know, we had a strong quarter. We have optimism for the rest of the year. And so I think it speaks a little bit more to what vertical you're part of. And, you know, is your technology differentiated and do you have a platform? And so you might find, you know, companies that have less of a breadth or are less mission critical, more impacted in this climate. But we're building the company for the long run. We hope that the bank, which has unfortunately impacted a lot of people, that that's put behind us. But, you know, it does feel like both consumer sentiment as well as, frankly, small and medium business and enterprise sentiment towards investing in digital. The interest continues. I think there's maybe a little bit more focus on the return of investment for their technology. But the big news of the day

is Firefly, the family of generative AI models that Adobe is announcing in a public beta today. This is, you type in text, it generates an image. And unlike some other popular models that are trained by images on the internet that might not be legal for commercial use, Adobe has its own Adobe Stock repository to work with. I asked Shantanu why Adobe built its own model and why the explosion of AI innovation

is happening right now across so many companies in enterprise tech? All the technology that we built, as I said, to enhance faces, to be able to recognize objects, to be able to think about, you know, what you can do with resolution, have actually factored into making this, we believe, one of the best models out there. And we do partner. There is a massive ecosystem. You know, we're partnering with NVIDIA, for example, on the training and the inference chips that they are doing. We're partnering with Microsoft on Azure. We're partnering with OpenAI as it relates to ChatGPT. But really being clear about what Adobe's core innovation and IP is and making sure that that's something that we invest in has always been a part of Adobe's culture. Sometimes it's just, you know, various different technologies coming together to make this magic happen.

And so there are so many ingredients that need to happen. what NVIDIA has done on the GPUs, the fact that all of this in the cloud, you now have the ability to access this and, you know, do the processing in the cloud, the fact that visual languages have improved, the large language models for text has happened. So I think some of this, you know, much like when mobility exploded or the cloud exploded, it's like people have been working on these technologies for a while, certainly all of our AI technology. I mean, we won an Oscar for scientific technical achievement again this time, John, as it relates to 3D. So, you know, a lot of the building blocks have been put in place, but sometimes magic happens because all of these things, you know, the confluence of all of these makes it really usable and affordable for customers. So it's exciting. But having said that, it's still very, very, very early in the process. I know a lot of people are

asking us about, you know, is Adobe, you know, what took you so long to announce, you know, what we were doing with Firefly. And so, you know, there's so many issues that have to be dealt with. For example, we have the ability to say do not track. So if there's somebody who's a creative professional who doesn't want their data being used to train, we have a do not track. How do you work with provenance? So when somebody is creating this piece of content, how do you understand the difference between auto-generative content as well as content that somebody has actually done? And so, so you know we've been working on this for decades in terms of having the building blocks but it's a really exciting time right now to what degree do you believe firefly and its associated

technologies are a top line grower versus a margin enhancer a churn reducer how much is this going to create new products and perhaps new subscribers who are able to be creative on the platform who otherwise would have had that blank screen and not seen a value in that 55-ish a month subscription? And how much is this just gonna keep those subscribers loyal? There is no question in my mind that this is going to attract a whole

new set of people to the platform, and it's going to make everybody who's already a Creative Cloud subscriber more productive. And if you think about the different business models, certainly for people who have a subscription to the creative cloud service, they'll get a lot of this functionality. We will offer this as API so people can build applications on top of it. In Adobe Express, we may have actually packs of, you know, how much content that can be created. And for the creative folks who are actually contributing to stock, we will allow them to actually, you know, potentially provide their styles and allow them to monetize it with their style.

So the more content demand that's there, the more there's an opportunity for people to make money. And these are the creative professionals that I'm talking about. It will be different. And, you know, there will be some disruption. So we're not naive about that. But at the end of the day, as we navigate this and we work through this with the community, we think it's going to be good for the industry.

All right. Let's talk more about this. Morgan, what do you think? I mean, he's he's laying out quite a bit there. He is. It's really fascinating, and it sort of gets to the notions of copyright issues, which I know for some artists in particular has been a big one. This idea that you're going to have professional tools that are going to be there and rules of the road in terms

of what's been generated by AI versus what isn't. So it's fascinating to me, but I'm really curious, when he talks about sharing in the monetization of these products, did he go into any more detail about what specifically that's going to me. But I'm really curious, when he talks about sharing in the monetization of these products, did he go into any more detail about what specifically that's going to look like? He did. And they're running this public beta because they want the artistic community to have a say in it.

But part of what he has in mind is, say I'm an artist with a certain style. When people generate their own content using my style, not even necessarily my exact pieces, but my style, then I get a bit of a royalty, right? So they're trying to have a financial incentive for artists to participate in this. So it's not just all take. There's some give in there as well. And to talk more about the stock implications of this now, let's bring in Sterling Audie, software analyst at Moffitt Nathanson. Sterling, you've covered Adobe for a long time. This seems like a very big moment, but I wonder across cloud giants, platform giants, application specialists like Adobe and then AI specialists. Who do you think stands to benefit

most in this enterprise software landscape? Yeah, I think it, like in a lot of different areas of technology, it tends to be the arms dealers. So who are the ones that are going to enable all of the others to be able to benefit? And that really kind of comes down to the hyperscalers. So the Microsofts of the world with Microsoft Azure and being able to provide open AI on kind of an exclusive basis with open AIs that others can build applications on top of, they're going to have a monetization engine that just makes a ton of sense. I liked in your interview that you touched upon reducing churn and the attractiveness in the differentiation that AI can provide for some of these applications.

And I think that's going to be important for vendors like Adobe, but also, you know, vendors like Samsara or Procore, ones that have proprietary data sets that you're going to be able to use AI to do some amazing things that are going to benefit their customers. And that's going to drive their monetization. Yeah, I mean, it's worth noting we have NVIDIA with their tech conference today also talking about AI, and Jensen Huang over there basically saying that we're at, quote, iPhone moment of AI. But the thing about the iPhone is that it completely changed the way we interact with the world, right?

We're just having a conversation about these bank runs and bank failures, and the fact that this is the first time that we've actually seen mobile banking come into play in a crisis environment. And I wonder what AI is going to mean towards workflows. Is it going to kill jobs or is it just going to change jobs or is it still too soon to know? I think it's going to be a little bit of both. And I think it's a great question. I'm glad you asked it because there's been studies that talk about what percentage of a job's workflow will actually be impacted by AI. Our view has been that AI for the foreseeable future

is gonna be a tool. It's gonna be a tool that the experts can use to do their jobs better, faster, more efficient, create better content in the case of graphic artists when it comes to Adobe, or it's going to be that much quicker to create an application that's safer, more secure in the case of a developer. So we think it's going to be a tool set. It's not going to eliminate large amounts of jobs in the near term. Over time, yes, I think it's going to change the profile of the workforce and we're going to have different skill sets.

But I think this is an important moment. As was said, I think it's going to make things a lot better. Sterling, Duolingo is planning to use ChatGPT to accelerate language learning and grow top line. Are you as an analyst watching who's able to use these technologies to generate new membership and revenue? Is that where investors should look first to see who wins in this AI race? So think about it in kind of the different layers. I started with the hyperscalers like Azure and Microsoft, and I think that's the first ones to benefit. But yes, I think the ones that are application providers that can layer on something that's unique.

I mentioned Samsara, tickers IOT. They've got the second largest data set of driving information in the world. And they're going to be able to use that to help companies in terms of route optimization. Or as they move to electric vehicles, being able to train how to charge their batteries more efficiently. This vehicle and this route doesn't need a full charge every night. Why are you going to do that? You want to lengthen the life cycle of the battery. So companies like Samsara, Procore, exactly, John, what you were talking to,

ones that are going to be able to optimize the use of AI for the benefit of their customers, and they're going to see either better durability or even acceleration in their top line revenue because of it. Growing 40 plus percent year over year, just had earnings a couple of weeks ago. Sterling, thank you. We will watch. And do not miss more on AI this evening when NVIDIA CEO Jensen Huang joins Jim Cramer on Mad Money. Well, speak of the devil. Home sales surging double digits in the latest reading from the National Association of Realtors showing the biggest jump in nearly three years. Up next, Mike Santoli breaks down two charts that tell different stories about the real estate market. And take another look at GameStop as we head to break. Soaring in overtime after posting its first quarterly profit in two years, up more than 30%.

We'll be right back. Welcome back to Overtime. Let's talk about the big data surprise of the day, existing home sales rising more than 14% in the latest reading. It was the first monthly gain in 12 months, the largest increase since July 2020. Of course, we saw that as prices actually came off for housing. Mike Santoli is back with a closer look at the housing sector. Mike. Yeah, Morgan, pretty aggressive response by buyers to a little bit of a downturn. In mortgage yields, mortgage rates, as well as, as you say, the moderating prices. And it's reflected in the different subsectors of the market that track different parts of residential real estate. So homebuilders, really strong

rebound off of the October lows and still lower than where it was at the peak and the real housing boom days of 2021. But it shows this looks like was the market kind of pricing in the homebuilding recession, perhaps at least to right now. And it's diverging from apartment REITs. This residential real estate ETF is mostly apartment REITs and some other things. Now, commercial real estate of all sorts is under pressure because of some credit concerns. Also, rents softening up. There's been a big increase in supply or pending supply in apartments. And that's also maybe suppressing some of the excitement in that area. Now, take a look at a measure of home prices, single-family home prices. National Association of Realtors, median year-over-year home price change all the way roundtrip to a zero.

So basically, no net change. This obviously will help the affordability issue. Big question as to whether this sort of supply shortage can sustain the home builders for longer and maybe consumers remain in decent shape even without the wealth effect from their homes they already own one, going up in value all the time, John. Mike, I wonder how much of this you think is a response of buyers to lower prices, and so getting in the market, or how much of this is inventories have been historically low and sellers realizing prices aren't going any higher. They're probably going

lower with interest rates going up. So better get that home on the market. Yeah, both are at work. In fact, you have seen a rise in homes for sale. So inventory has become a little bit less tight. Now, it hasn't really shown up that much in the month's worth of supply. That's the other measure of how tight the market is, just because sales keep rising, as we saw, the data, the existing home sales numbers showed you that there's still more needed. But you have started to see that supply response. Sellers basically stopping that effort to hold out for a higher price. All right, Mike, thank you. Let's get a check on Nike shares. Just not doing it anymore at the moment. They're in the red after initially popping on

earnings down a little over 2%. We're going to count down to the call with an analyst who just named the stock his top pick. We'll come right back. Nike shares initially seeing a pop after the retailer posted earnings that beat on the top and bottom lines, but now trading in the red down about 1.5%. The earnings call kicking off in just a few minutes. But in the meantime, let's bring in Oppenheimer analyst Brian Nagel, who has an outperform rating on the stock and calls it one of his top picks. Brian, great to have you on the show. Why did we turn lower here? Look, I think what's happening, the results on the headlines were incredible. I mean,

a very strong earnings beat, very strong sales beat. As I dug through the release, if I see one little blemish relative to what may freak the market out is China's sales growth was only on a currency neutral basis, only up 1%. So I think that may be it. Now, of course, like you said, Morgan, we're going to have the conference call here in about 10 minutes. I'm sure management will discuss in detail China. I think underlying dynamics in China are definitely getting better. But I think it's that one number that made me wait upon the stock at this point. Brian, so tell me why I shouldn't be concerned about

gross margin down 330 basis points and inventories up 16 percent year over year. Now, I don't know how that compares quarter over quarter. Maybe it's a big improvement, but that doesn't, you know, declining gross margins and still this inventory overhang don't look great. Well, look, I mean, that has been the story for Nike and frankly, for a number of players within the sporting goods or athletes or space. I mean, the positive here to answer your question, John, is we've made significant progress. So Nike has been very good at telegraphing weaker gross margins as the company cleared excess inventories. So like you said, year on year here in the fiscal third quarter of 16 percent. If you go back to Q2, that number was greater than 40 percent. OK, so again,

they're going to talk a lot about this in the conference call. But the message there is that, you know, Nike has done, I think, a very good job of getting inventories under control. You know, the other way to look at this inventory is up 16 percent, currency neutral, total sales growth up 19 percent. So that's about that's kind of where it should be. I mean, there may still be some cleanup that needs to be done, but those numbers are now in line with where they should be. That was not the case a few quarters ago. So a return, if you will, to pre-pandemic norms, it sounds like. What are you going to be looking to hear? What is your question on the call? Well, I mean, there's a few key topics here. I mean, one, we saw total sales growth, like I said, 19 percent. That blew away estimates, OK? So the question there is, what's the trend? What are we

seeing into the fiscal fourth quarter? I mean, is there any signs of weakness at all? And the reason I would ask that is because all these concerns about a slower consumer recession, et cetera. Go back to John's point. I mean, you know, are we are we through this gross margin pressure? I mean, do we have a clear line of sight now towards stabilizing gross margins since inventories look like they're getting back in line? And then China, you know, what's happening in China? You know, at what point, you know, given the underlying strength of the Nike brand in China, at what point should we start to see

much stronger sales growth in that market? Do we have to be concerned, Brian, about a global pull forward in demand for sneakers? People are so excited to get out. Do sales slow down? Look, that dynamic is something I'm watching across my coverage universe. To what extent sales were pulled forward either into the pandemic or like you're saying, that initial wave of post

pandemic activity. There's going to be a point at which, though, I think the further we get away from the pandemic, we worry about that less. And here and again, the pandemic is still winding down, thankfully. The wind out has not been consistent across the United States, across the country. But I think we're getting towards the point now with Nike and other companies that we're starting to see normalized demand. The bigger concern, and again, I don't necessarily harbor this concern, is what happens with the consumer here. There's been a lot of talk about banking crisis and other issues. Does the consumer start to weaken? That would be, to me, the bigger question for Nike. All right. Brian Nagel, thank you. Thank you. Now the countdown to the

Fed's latest interest rate decision is on. What investors need to know ahead of that market moving event when overtime returns. Welcome back to overtime. One more check on GameStop for you. Massive winner post-market, jumping by more than a third after its first profit in two years. Earnings per share of 16 cents on revenue of $2.23 billion. Other meme favorites like Bed Bath & Beyond and AMC also getting a lift, Morgan. Well, look at that. And looking ahead. We're less than 24 hours away from tomorrow's Fed interest rate decision. We will have a huge lineup of guests on overtime just minutes after

Jay Powell wraps his news conference featuring former Council of Economic Advisors Chairman Jason Furman, Evercore founder Roger Altman, Quadratic Capital founder Nancy Davis and Jeffries chief market strategist David Zervos. I'm going to be watching, John. I mean, I think the bond market has made it clear that they've given the green light to the Fed to move forward with a 25 basis point hike tomorrow. It certainly seems to be the expectation because we do have inflation that's still too high. The key is how does the Fed continue to fight that and not break the banks? Right now, you have officials with this crisis playbook in play around the banks. So there seems to be room around that. I'm more focused on what happens with QT and what that

means for liquidity in the system, especially since there's been so much focus on the balance sheet with the data we got actually in this show last week. And I'm just reminding myself that the initial market reaction isn't always the important market reaction here, right? As Steve Leisman- On Fed days versus the day after. the important market reaction here, right? As Steve Leisman is so fond of- On Fed days versus the day after. You know, the investors don't always hear what everybody else hears. Sometimes people hear what they want to hear Jay Powell say,

and then later it sort of sinks in that he was saying something different. So it'd be very important to parse this language with some experts and not just watch how the market initially reacts. It's going to be key. I mean, also, everyone's going to be focused on and digesting, to your point, the forecast, the SEP, how the Fed is looking to the future. The idea that we're going to have cuts and dramatic cuts, though, which is also being priced into the bond market,

definitely seems a little, that's a little scary, right? That would be bad news becoming bad news. That would mean we're really facing down the gauntlet of a nasty recession, potentially, for the Fed to actually even move in that direction. And the language Powell uses about the state of the banks. All right. That's going to do it for us here at Overtime. Fast Money begins right now.