Closing Bell - Closing Bell Overtime: Market Rallies After Lower Open; Former Defense Secretary Esper On What Happens Next In Middle East 10/9/23

Episode Date: October 9, 2023

Stocks closed mostly higher despite opening lower in the first market day after Israel declared war on Hamas. Former Defense Secretary Mark Esper talks the evolving situation in Israel and what happens next. Ruchir Sharma, Rockefeller International Chairman, breaks down the geopolitical factors and risk premium investors need to be watching. Defense ETF (ITA) had its best day since November 2020. Skylar Capital’s Bill Perkins breaks down what the events in the Middle East means for the energy complex. Unlimited CIO Bob Elliott on why the market is reacting to the latest Fedspeak.

A rally that largely held to the close. That's the scorecard on Wall Street. But winners stay late. Welcome to Closing Bell Overtime. I'm John Fort back with Morgan Brennan. And coming up this hour, full coverage of the conflict unfolding in the Middle East and the impact on global markets. We will talk to Rushir Sharma from Rockefeller International about how investors should factor in geopolitical risk. Plus, former Defense Secretary Mark Esper will join us to talk about the impact on defense companies. And we will speak with energy expert Bill Perkins about the pop we're seeing in the oil market, also NatGas. Let's begin with the broader equity market, though. Stocks were lower in early trading on the headlines out of the Middle East, but turned higher mid-session. It's been quite a midday rebound after comments from a pair of Fed officials surrounding higher Treasury yields, potentially dampening the need for more hikes. Energy leading the gains following that big spike in oil, while industrials, particularly the defense stocks and real estate, saw a pop as well. The bond market was closed today. We did have some bond proxy action, though. Let's bring in CNBC's senior markets commentator, Mike Santoli, for more. Mike, I mean, it was an incredible midday reversal.

While we look to other parts of the world, most notably the Middle East, it's really, it seems, what was going on here in the U.S. with some of the Fed officials, voting Fed officials, that really turned the markets. Yeah, absolutely. During the trading day, that was the case. I think part of the setup was that the market response to the events of the weekend was very kind of localized and and, you know, rational. Let's be honest. Yep. Oil prices up. Energy stocks flew. Travel related were down. But otherwise, it wasn't a general flight from risk. And once you had that setup, you did have this repetition of a message from some Fed officials implying they may have to do less or nothing more if, in fact effect of longer term treasury yields which have been rising you know can do their job and help to restrain inflation and keep the economy on a more sustainable growth path. That's good news for I think a marketplace that has been looking at things like the Good Friday jobs number and saying are we okay to celebrate that or do we have to fear it. And today gave permission to say good news can be good news for now. Okay, it's Mike, one day though, and isn't this another risk on the pile of risk that we've

been talking about? When the market's been choppy, how does the market weigh this along with everything else from here, perhaps? There's no doubt it's another element of risk on top of many we've been trying to get our arms around. In a perverse way, though, I think that when the market has already been cautious and you haven't had people thinking everything is great and are fully invested along that path and basically are taking on a ton of risk going into this, it means there's a little bit less of that optimism to be drained away. So people are already on guard for something. I'm never going to say we know the implications of this economically or otherwise.

But for now, I think that, you know, Wall Street places this in the category of we've literally never had a settled geopolitical situation in market history, especially in this region. You know, we know where oil prices are relative to where they've been. So for now, for today, we're not going to over anticipate adverse outcomes coming from it. All right, Mike, and I know you're not going far. We're going to see you for some more insights in just a couple of minutes. I just also want to note, because we did have all the major averages finish the day higher, that this is now the 14th straight close higher for the S&P on a Monday. And for the NASDAQ, we haven't seen a close in the red for the NASDAQ since the second quarter. So for whatever it's worth, headlines of the day aside,

Monday seemed to be a very strong day in general for the market to rally, at least to start the week. Yeah, strong track record for Monday. Interesting. Well, let's get a sense overall of how the market is handling this elevated geopolitical risk now. Joining us now, Rushir Sharma, chairman of Rockefeller International and breakout capital founder in CIO.

He is the former head of emerging markets at Morgan Stanley Investment Management. Rushir, good to see you. How much should we read into the fact that we didn't get a sell-off today? And where do the dollar and bond yields fit in from here? Well, for me, the real tell was what happened in the Middle Eastern markets itself. Yesterday, they were open on Sunday and some of them today, which is that most Middle Eastern markets were down only about 2 percent. So which is that

here are these markets in the eye of the storm. The Israeli market was down close to 4%, but generally the Middle Eastern markets in the eye of the storm were only down a couple of percent, very different from what the news headlines would make us believe. And those markets, remember, many of those markets are dominated by local investors, and they have pretty good knowledge about what's happening on the ground. So that for me was the real tell, which is that it's

being perceived so far as a localized conflict, as something the region is used to seeing. And however terrible this tragedy may have been, but the tell from the markets was something which I think really set the base for what the U.S. market ended up doing today. Yeah, it is indeed terrible and ongoing. So broadly, most recently, The New York Times, but Foreign Policy, other publications recently have been talking about multipolarity, this idea that there's no longer one or two powers defining the action on the global stage, that deterrents don't work the way they used to. Perhaps what we're seeing in the Middle East now, the extremity of it is an example of that. Are there more risks that you see in this

multipolar world? And what is the impact, you think, on investors? Well, first, having seen these events for the last three decades, my central belief here is that history is better remembered than it's lived, which is that we have always faced geopolitical risks. that there was this risk in the early 1990s that maybe the Soviet Union would launch a nuclear attack as a last gasp because it was disintegrating. So I feel that the geopolitical risk factor has always been there. It appears like a more fragmented world today. But even in the 1990s or other times, it resolved itself the right way. But it was a very uncertain time that we looked at. And then I was also looking back at the instances of the last 50 years when you had major geopolitical events like you had over this weekend. And on average, what you see is a 5% decline in the markets as a knee jerk reaction to

what happens. And then on average, the markets recover the entire losses within two months. So I'd say that the world is used to living at least the markets and investors are used to living with geopolitical risk. Maybe it's gone up a bit because we have U.S. and China, that conflict out there. But as I said, that history is better remembered than it's lived. So we have lived through the entire 2000s with the fear of terrorism after 9-11. And nine out of 10 times, these worst fears do not materialize.

And so the markets, I think, are better not focusing too much on geopolitics and returning to focusing on the economy and the Fed. I do wonder, though, Rashir, what the potential impact is to the economy. We have we have a near global fight against inflation with central banks raising rates and looking to get that under control. And as Strategas sort of highlighted in a recent note, you know, this this kind of just speaks to this broader theme of deglobalization that's afoot. And in general, when you do see conflicts, they do tend to be inflationary. So how does this factor back into that global economic outlook and that fight against higher prices? Oh, yes, I completely believe in that, which is that I've been a big believer in deglobalization and written about that extensively for the last decade or so. So that's an ongoing process and the margin that's inflationary. That's very true.

But even in the oil markets, in terms of what we are seeing, I think there are other factors at work here. We have tightened supply so much for some of these key materials and the Brent price is such, reflects that, that you see the oil price, the markets are very tight out there because supply has been so materially constrained. So I think deglobalization, greenflation, these are all themes which I think at the margin are inflationary in nature. And why I expect inflation to be higher this decade, possibly closer to 3 percent on an underlying basis rather than the one and a half, two percent we have seen for much of the last couple of decades. I wonder what all of this means for the dollar. I mean, you've come on and you've talked to us about the fact that maybe we're, you know, we've already seen the peak is already in for the dollar and that we're opening a new chapter on a weakening for the greenback. Does this change any of that? No, I don't think so. I think that, in fact, what I'm concerned about is this, which is that, yes,

the dollar has rallied back over the last few weeks on the back of higher U.S. yields. But the U.S. deficit is so much larger than what any country in the world today is running. The U.S. is running a deficit, as we now well know, of close to 6 percent of GDP. The other developed countries are running a deficit to GDP, which is not even half that on average. So I think at some point in time, foreigners are going to tire of funding the U.S. deficit. And I know this takes a while to play itself out. And with problems in Europe and China, the U.S. still looks a relatively better place to park your capital. But at some point in time, and could be sooner than we expect, I think the foreigners are going to tire of funding this very large deficit. And I think

that's what's going to be a major issue for the U.S. dollar this decade. Yeah. And of course, this has been part of the bear case for long-term U.S. treasuries and U.S. debt as well. And part of the reason perhaps we've seen in this tidal wave of issuance, multi-decade highs for things like the 10-year yields. Rishir Sharma, thanks so much. Great to start the hour with you and get your insights. Thank you. Well, a sector of the market that is trading in direct response to the war in Israel is defense stocks. The iShares Aerospace and Defense ETF, the ITA, posting its best day since November of 2020. Shares ended the day up 4.5%. Led higher by pure play defense names. Northrop Grumman, L3 Harris, Lockheed Martin, all surging today. Jeffries noting the U.S. provides $3.3 billion in annual foreign military financing to Israel

and $500 million each year for missile defense spending. The firm noting the close ties between Israel and U.S. advanced military technology from companies like Lockheed Martin, Boeing, also RTX, which, among-missile systems at a faster rate and in higher volumes to not only replenish stockpiles in the U.S., but also continue supporting Ukraine and now perhaps Israel. Raymond James noting the crisis may put more pressure on Congress to resolve its leadership battle following last week's removal of Kevin McCarthy as Speaker of the House and could provide momentum for a new defense package for Ukraine, which has been an issue in Congress. Meantime, J.P. Morgan noting the impact on cybersecurity companies, writing that firms including Checkpoint, CyberArk and Sentinel-1 have the most meaningful exposure in the region. Bottom line here, John, industry experts believe

this conflict could add impetus to Congress to boost spending and maybe perhaps get a 2024 appropriations bill done sooner with continuing resolution deadline of November 17th looming. And this obviously a key issue at a key time. Now, Morgan, demand is clearly there for these munitions, you know, in conflict. What about supply? If I recall, you had the CFO of, was it Lockheed? Yes. On overtime just a few days ago talking about supply constraints still being in place. That's right. Supply constraints still being in place. And you've seen billions of dollars in investments, some of it in-house, some of it from, you know, DOD at companies like Lockheed Martin or RTX to already ramp production for some

of these missile and missile defense systems, other types of munitions, just to replenish the stockpiles here in the U.S., given all of the support, munition support that has gone to Ukraine. Now, key to this, and this is something that a number of industry experts have brought up in my reporting conversations, and folks like analysts over at Bank of America even today have published notes including this, is that there is a significant stockpile of weapons, U.S. weapons in Israel. There have been reports since the beginning of this year that some of that stockpile was perhaps being drawn down because of these supply constraints in Israel was being drawn down to help support Ukraine. Don't know how much, don't know the details or what that looks like, but it's a key question

now going forward in terms of that supply-demand dynamic. Also, and this is something I'm sure we'll bring up with former Defense Secretary Mark Esper when we speak to him later this hour, what that means in terms of our ability to supply the likes of Taiwan and other key allies on the world stage right now. Yeah, multipolar indeed, Morgan. All right. Well, meantime, a number of Fed officials on the tape today talking about the jump in treasury yields and what it could mean for the Fed's interest rate path. Let's get back to Mike Santoli with a look at one beneficiary of interest rate volatility. Mike. Yeah, John, the market often migrates

toward those forums where people bet one way or another on where interest rates are going to go, as well as kind of other asset markets. That would be the derivatives exchanges. CME and CBOE have been among the strongest areas of the sort of quasi financials. And you see they diverged to the upside from broker dealers. So the general brokerage and investment banking sector in the last few months as interest rates have started to rise. CME, of course, where you bet on what the Fed's going to do, short term interest rates, bond futures, also energy futures in there as well. And, of course, options have been kind of booming in volume for a long time now. In terms of the volatility in the actual longer term end of the Treasury curve, it's an interesting long term view. I've been saying that the levels we've gotten to, let's say 4.8 plus percent at the

highs, are themselves not out of whack with where the economy is. It's just how fast we've gotten there and what the Fed might do in response. So here you see very long term chart of nominal GDP growth in the U.S. compared to the 10 year Treasury yield. You see them kind of mostly in sync, diverging at times, but mostly traveling along a similar path. And then you see this big divergence we got right here, obviously massive nominal growth coming out of the pandemic and all the stimulus. But slowly, they have been converging somewhere around 5 percent. So that implies, in theory, that the economy should be able to deal with rates at this level. The problem is where they came from. Home prices were priced for, you know, 3 and 4 percent mortgages. They need to adjust in a big way to 7 and 8 percent mortgages if that's where we're going to be. So I'm not saying it's going to be a smooth path.

But if, in fact, it can absorb this shock, then maybe it's more like normalization rather than some kind of real punishing level of debt cost, John. And Mike, underscoring this a bit, during times of geopolitical instability, war, to state it that way, what tends to happen with bonds and yields? Is there a flight to what's perceived as safety with certain types of issuance? It's pretty tough to generalize. I would say yes, as a reflex response, there would generally be you buy treasuries in the U.S., considered to be, you know, kind of a safe home for investments. But you have these massive exceptions, like when you did have, you know, conflict in the 70s related to, you know, kind of the oil embargo, things like that. Clearly, they were inflationary,

did not help bonds. So I'm not sure that that's going to provide, you know, a real good step-by-step guide to how that market's going to trade. Okay. Mike Santoli, thank you. We'll see you a little bit later this hour. When we come back, oil just had its worst week since March, but the conflict unfolding in Israel is sending prices soaring. We're going to ask energy trader Bill Perkins if the pop is warranted and what a deeper conflict in the Middle East could mean for the energy markets. Overtime, back in two. Welcome back. One of the most visible impacts to the market from the crisis happening in the Middle East can be seen in oil prices, which are jumping today.

Pippa Stevens has a closer look at that move. Pippa. That's right, John. Closing off the best levels of the day, but still up more than 4%. Now, the move isn't because of any short-term supply disruptions, given that Israel and Palestine are not major producers, but rather it's in anticipation of what might happen next. And there are two key things to watch. The first is Iranian production. The country's increased its exports over the last year, with the U.S. largely turning a blind eye. But if Iran was involved in this weekend's attacks, which U.S. officials have not confirmed,

that becomes harder to do. Taking any barrels off an already tight market means there will be a price reaction. The second is potentially longer output cuts from Saudi Arabia. In the normalization talks between the country and Israel, the market thought Saudi Arabia might unwind their voluntary output cuts faster than expected, despite it never officially being on the table. And those talks are now on shakier footing. Morgan, back to you. All right, Pippa Stevens, thank you. Joining us now for more on the energy complex writ large, Bill Perkins, Schuyler Capital Management founder and CEO. Bill, it's good to have you back on. I do want to start with oil and crude, specifically what we've seen in the wake of this conflict

erupting over the weekend. Your thoughts, because we are not seeing supply affected yet, but that hasn't stopped prices from moving higher. No, I mean, we're looking at the asymmetric risk of supply disruptions and also the risk of demand going up. Unfortunately, war is extremely energy intensive. Those ships run on diesel. Jets use a lot of fuel. Making munitions requires a lot of fuel. It's just a very energy intensive endeavor. And so there's the demand

side. And then you have the supply disruption. And also the fact that the U.S. is moving warships into the area. These are areas where there's lots of dark ships doing ship-to-ship transfers, evading sanctions. Maybe there won't be such a blind eye to that activity, thus reducing other barrels off the market. Things that CIMAX is tracking, satellite companies like Skyfire are tracking, these kind of sanctions-evading fleet that's out there. And you guys are correctly pointing out the risks. There's asymmetric risks, and the market is adjusting to that. OK, this has also affected nat gas. And I realize there are a lot of factors when it comes to nat gas and those prices and as they move. But today we saw that trade at the

highest level since January. One of the things that's been cited has been production shut in of an offshore gas field off the coast of Israel. How much is it impacting that commodity? Well, if you're talking about European natural gas, people just got their worries up, right? This is the area, TTF, that any kind of disruption, any kind of alternative fuel that they use when it's cold gets everybody scared. And we've seen kind of what I would call ludicrous pricing in TTF. And people are quite worried about the asymmetric upside to any kind of supply disruption, even though that field didn't directly affect European prices. Here on the U.S. side, where we're well supplied, we had a sympathy rally and then things backed off. Our rally over the past week has been due to the fact that we've had low wind generation, very hot temps.

We didn't have a containment scenario. So spreads are adjusting. Prices are rising to an area where producers will make a good return growing production. And now people are kind of in a measurement mode in the United States about natural gas. We want to see what's going to happen with the weather and what's going to happen with producers going into the winter, whether they're going to ramp production or not. Yes. Given that winter is coming and we have this volatility in geopolitics, how do you expect that to affect the energy trade over the next quarter or so? Well, you know, our firm historically has been bearish, but the bearish bets are winding off or we're not bearish anymore.

We're very cognizant of the asymmetric risk to the upside with winter coming, as you say, and the fact that we have a lot of intermittent power sources. Right. We have a lot of wind and a lot of solar on the grid. And if those things don't show up and it's cold, we can have, you know, significantly higher pricing in the U.S. Luckily, we have a lot of domestic production, not so much for Europe. They have to they are on a model where they're bidding on the open market for cargoes. And so if it's cold in Asia, they got to outcompete Asia. If there's a supply disruption, well, they got to go to an alternate fuel. Oh, by the way, there's a war going on. The alternate fuel is in short supply. So they're a little bit more jittery and they have more asymmetric risk to the upside than

the United States. But all players are slightly concerned in adjusting their price distributions currently. And, you know, Skyler's in a wait and see mode. We're measuring and measuring and measuring and we're going to see what happens. All right. For your insights, we thank you, Bill Perkins. Thanks. Thanks for having us. Up next, we're going to talk to Bob Elliott from Unlimited Funds about today's market

turnaround and the fresh Fed comments that might have sparked it. We'll be right back. Welcome back. Stocks getting a boost today after Fed commentary suggested higher yields make it less likely that the Fed has to hike interest rates. Joining us now is Bob Elliott from Unlimited. Bob, beginning of the year, you liked cash. Now, especially in light of the unrest in the Middle East, you hate it and you think golden commodities are in better position.

Why? Well, conflict is typically inflationary. And I think we've had an experience over the course of most of our professional lives where we've basically had an incredible peace dividend that has supported both bonds and stocks relative to golden commodities. And while it's uncertain exactly how this is going to play out over the course of the next couple of years, the idea that we would have increased conflict relative to the last 20 or 30 years seems pretty compelling to me.

And it's a situation that most investors aren't particularly prepared for. And today's market action, particularly before the Fed's dovish comments, really gave indication as to what rising conflict might look like, which is good for commodities and gold and pretty bad for stocks and sort of OK for bonds. And that's not a great recipe for most investors. Yeah, I want to get into the bonds piece of this a little bit, because to your point, I mean, it's Columbus Day. The bond market's been closed today, but we've had some proxies, right? Bond futures. You could point to the TLT ETF as examples of the fact that bonds seem poised to catch the safe haven bid right now. You've come on. You've talked about the fact that there's this mismatch in valuation between stocks and bonds right now. Couldn't this potentially, if you see that continue, be good, at least in the short term

for equities? Well, I think the main question is, under what conditions are we going to get a bid for bonds? And that's not the set of conditions that is good for stocks. And so it's true, the Fed, you know, a variety of different Fed speakers came out and basically painted the pause narrative. And that on the surface looks good for the equity market. But the environment with which the Fed is going to hold their pause for a long time or not tighten anymore is going to be a situation where, in general, the growth is slowing down in the market, which is pretty bad for equities, particularly given all of the elevated expectations currently priced into the market. And so a good Fed that is standing back

and no longer tightening is not necessarily a Fed that's good for the equity market. And I think the equity market looked at a much different complex of dynamics today than, say, the gold market and the oil market, both of which pointed to increasing geopolitical concerns and inflationary pressures. So, Bob, if I'm at home and I'm listening to Bob Elliott on Overtime and I say, well, that makes a lot of sense. 60-40 plus cash, not great anymore. What kinds of funds capture your point here, what you're saying about commodities and gold? Yeah, I mean, most investors can get a pretty good bang for the buck in terms of diversification through relatively modest increases in gold and commodity allocations.

So you can use on gold the GLD ETF or the IAU ETF are pretty effective and liquid ways to be able to get exposure to gold. And when it comes to commodities, there's several low-cost, non-K1 commodity ETFs out there. For instance, BCI is a good commodity ETF that could get that exposure relatively quickly. And just an increase in your exposure, say 10% to gold and 10% to commodities, can meaningfully increase your protection in the event of a rising geopolitical dynamic that's going on. Okay. Some actionable takeaways. Bob Elliott, always great to have you on. Thanks for joining us. It's time now for a CNBC News Update with Courtney Reagan. Hi, Courtney. Hi, Morgan. Well, Israeli Prime Minister Benjamin Netanyahu addressed the nation in the last hour, urging opposition members to immediately establish a national emergency government without preconditions. He said the airstrikes against Hamas and Gaza are,

quote, just the beginning. And in response to the Hamas threat that it would execute hostages if Israel bombed homes without warning, the prime minister said his government would do everything it could for Israelis held captive. The Israeli army said it had detected, quote, a number of launches from the Lebanese territory toward Israel. The Israeli army said it had detected, quote, a number of launches from the Lebanese territory toward Israel. The army says there were no Israeli casualties. Hezbollah tells Reuters the attacks were in response to four of its members being killed. And the European Commission said late today that development aid payments for Palestinians would not be stopped. That directly contradicted a statement from one of its top officials earlier

who said aid would be immediately suspended. The EU now says it's launching a review of its assistance following the attacks by Hamas. Morgan and John, back over to you. Courtney Regan, thank you. Up next, Peltz versus Disney, the sequel. Mike Santoli returns with a breakdown of Disney's stock versus its media peers as Nelson Peltz once again sets his sights on the company's board. Welcome back. Check out this overtime mover. Shares of PagerDuty falling hard after the company says it's going to issue $350 million worth of convertible debt. The senior notes are going to be used to buy back notes due in 2025, $50 million in repurchases, and also for general corporate purposes, Morgan. All right. Well, meantime, Disney finishing near the top of the Dow today. On news that Nelson

Peltz has upped his stake in the company to about 30 million shares, valued at about $2.5 billion. The move revives a potential proxy battle. Let's bring back Mike Santoli for his take. Mike. Yeah, Morgan, a little bit of relief today for Disney shares, but it's been hard to spin it as anything but a very tough slog for that stock over the past couple of years. In fact, its trading near levels reached like, you know, eight or nine years ago. However, it's not unique here. Here is Disney alongside its old media peers, Warner Brothers Discovery, as well as Paramount. And then, of course, Netflix, which had its own tough time for a while when it stumbled in sub growth, but has rebuilt its advantage in terms of raising prices and charging for share passwords,

things like that. Now, take a look at the valuation. You also have this same hierarchy out there where Netflix, clearly much more of a growth stock, has that 20 times enterprise value to cash flow valuation. But Disney is the next in line, and it's basically still got a premium to the rest of the industry. What I'm trying to suggest here is it's mostly a sector issue and that almost no of the legacy media companies has the answer to the streaming economy right now. Disney arguably is playing the hand it's dealt. OK, we'll see if Peltz has other ideas on that. But I think that one of the reasons that Disney is viewed as having had a

tougher time is the heights it reached in the heart of the pandemic when it was given credit for the Disney plus sub growth way in excess of what the economic value of it was. And the fall from there has been pretty hard. Yeah. I mean, every time you see any kind of activist investor pressure reported, stocks tend to pop. I guess the key question here, especially when you look at the broader sector and the underperformance of all of the legacy media companies, is really, truly what pelz could actually bring to the table that's going to change the stock story for Disney. It's very unclear and it could be as simple as the market saying, you know what, Peltz has a nose for value. He realizes maybe Disney still has the best

content assets, maybe has, you know, the best hand when it comes to buying Hulu and being a big presence in on-demand TV down the road. Or maybe he can quicken the pace of strategic change there if he gets more representation on the board. We'll have to see. All right, Mike, thanks. Massive breaking news on Unity Software. Steve Kovach has the details on a leadership transition. Steve? Yeah, John, massive indeed.

CEO John Riccitello is stepping down effective immediately. We see shares down a little more than 1% on this news. Now, John, this comes after Unity had to reverse some of the changes it made to its fee structure. They make the software that makes it possible to make games across mobile and other video game systems. They were trying to charge per usage on those games instead of kind of a flat fee. They, a huge blowback on that, had to unwind everything.

It even led to some death threats, death threats, unfortunately, at the company too. Just a huge pushback there. And now we're seeing the CEO step down in the wake of that, John. All right, Steve Kovac. Thank you, Morgan. Jim Whitehurst is stepping in as CEO and

president. You'll remember him from Red Hat. And he came to IBM when IBM bought Red Hat and its largest ever acquisition. Definitely a stable presence, very familiar with software and corporate operations in Wall Street. OK, this will be one to watch. And certainly both names known to this show. Yeah. Okay, well, up next, defense stocks surging as tensions in the Middle East turn into a full-blown crisis. We will discuss the longer-term impact when we are joined by former Defense Secretary Mark Esper.

Welcome back to Overtime. We are following the latest developments out of the Middle East as the conflict between Israel and Hamas intensifies. For more on the ramification of the war, let's bring in former Secretary of Defense Mark Esper. He's currently a partner at venture capital firm Red Cell Partners. Secretary Esper, thank you for joining us today. The first place I want to start with you is we just reported a short while ago rockets fired by Hezbollah into northern Israel, apparently, according to Hezbollah, in retaliation for the killing of some of its members in an Israeli shelling on Lebanon. investors and really the world are focused on whether this is a conflict that could expand and become a broader one in the Middle East. How acute is that risk right now? Well, good to be with you, first of all, Morgan. Let me say it's very acute. I think there's a

good chance that this expands and will, of course, affect markets. I was surprised to see energy was up today. But I think it could affect the energy markets if this expands into Iran. We know from The Wall Street Journal, at least, that Iran was behind this terrorist attack by Hamas on Israel, that they were involved in planning and supporting and directing it after meetings in Beirut. So now Israeli and American intelligence haven't confirmed that yet. But if it is proven to be true, that is going to put Israel on the spot to take action in some way, shape, or form against Iran. And America might as well support that, too. So I think there are a number of things that need to play out.

First and foremost, though, is Israel getting control of the tactical situation on the ground when it comes to Gaza. Yes. And I guess what does that look like? Because we've also heard that airstrikes are, quote, just the beginning. So how does this play out over coming days? And I guess is there a possibility that we actually see a resolution to this conflict if others don't get involved within the region more quickly? I think what's happening today is the Israelis are getting control of the situation in Israel and making sure that they've camped down on all the militants in Israel's settlements and cities and whatnot. The airstrikes are being used to go after Hamas rocket launching pads positions and to try and decapitate the leadership.

But at some point here and soon, once they muster the troops, the reservists are spun up, they move the tanks to the border, you will see an incursion into Gaza. Now, the question will be how far will it go? How long will it last? What will its purpose be? And all of this is complicated by the fact that Hamas has somewhere between 130 and 150 hostages in Gaza, some of whom may be Americans, by the way. And how might they deal with them? We heard threats today earlier from Hamas that any further attacks against targets

in Gaza will be met with the execution of one hostage at a time, which is very chilling, very barbaric, too. Very chilling. Mark, this is an intelligence failure. Clearly, how does it change the calculus on clearly human life is the most important thing here, but on Israel and the region as a place to do business? There was a thought that Iron Dome and the existence of the intelligence apparatus made operating there a sort of knowable risk. How knowable is it and how much does that shift now? Well, certainly for the Israelis, it has a chilling effect on their sense of confidence and their sense of vulnerability or previously invulnerability. You know, we've seen rocket fires before come out of Gaza several times by Hamas. Iron Dome is always fairly

effective. And I think there's no indication that Iron Dome has not been effective this time. But what's different are the incursions by ground, sea and air to the point that once rocket fires happened, the Hamas, you know, broke the fence line out of Gaza and ended up occupying or being present in like 29 cities and towns and randomly going through the streets and shooting civilians and taking people hostage. That's the thing that I think has shaken Israel the most. And I think by extension now, that's going to affect some degree of confidence in Israel as a business partner, at least in the near term. I'm confident the Israelis will ultimately get this all under control. We'll find out what happened and make corrections.

You saw Prime Minister Netanyahu today call for a unity government. That makes sense. It's a good move. But you see, again, Israelis rallying around their leader and around their country now to strike back. And, of course, Iron Dome is co-developed by a U.S. defense contractor, RTX. So what does U.S. support actually look like here? And I ask that because we did see defense stocks surge today. And there is this growing expectation among industry analysts and Wall Street analysts that we're going to see more potential bipartisan support out of Congress to increase defense spending and to add to stockpiles and add to support for

Israel and the like? Yeah, look, I think there are a number of things DOD will provide, beginning with intelligence. But specific to your question, Morgan, clearly precision munitions are going to be in higher demand. What Israel likely will request will compete in some ways with the demands being placed upon the defense industrial base of the United States by Ukraine. And of course, we know Taiwan wants its share of arms sales. And you might well see, of course, other Arab countries for which we sell arms also wanting more, because I think ultimately this this all takes us back to Iran. And the country's most concerned about Iran are not just Israel, but Saudi Arabia and other Gulf states. So I think you'll see the demand for munitions. It'll drive an increasing defense budget.

Frankly, we haven't really seen that yet because of the budget cap that is below inflation this year and even further below inflation next year. Congress is going to have to get its act together and really commit to spending more on defense if we're going to meet the needs of what this new era is presenting us, whether it's in the Middle East, Europe, or the Indo-Pacific. Mark Esper, former Secretary of Defense, thank you for joining us today. Thank you. Brister Miles Squibb getting the urge to merge, announcing a nearly $5 billion deal to acquire Mirati Therapeutics. Up next, we'll discuss whether more biotechs could be takeover targets and whether the buys will boost prospective acquirers.

We'll be right back. Welcome back. Check out shares of Marati Therapeutics under pressure after Bristol-Myers announced it's acquiring the cancer drug maker for $58 a share. Here's the problem. The stock closed at just over $60 on Friday. Meanwhile, the deal is raising new questions about whether more biotech mergers could be on the horizon. Let's bring in CNBC Pharmaceuticals reporter Angelica Peebles. Angelica, always great to have you here with us on set.

So something called a patent cliff led to this transaction. Break it down for us. Yeah, so Bristol-Myers Squibb is only one of several big pharmaceutical companies that is facing a really big patent cliff. That's where you have existing drugs that will soon face generic competition. And Bristol's already facing generic competition for one of its biggest drugs, Revlimid. That's a blood cancer drug. And there are more on the horizon. So they're under pressure to find new sources of revenue, as are other companies.

And so Maradi already has a lung cancer drug on the market. And they're also developing another cancer drug that Bristol executives say looks really promising. OK, so what does this mean for other contenders to be takeover targets, if that's the case? It means that we're probably going to see more of these deals on the horizon. And I was speaking with someone earlier, he's an M&A consultant, who was saying just that these big pharmaceutical companies, their pipelines aren't rich enough on their own. And so they have to look outside of themselves to find new sources of growth.

And it's also getting better for them to do these deals right now with biotech stocks under so much pressure and the deals are getting cheaper. All right, Angelica Peebles, thanks for joining us. Thank you. Well, new readings on the health of the consumer could move the market tomorrow when PepsiCo and LVMH report earnings. What you need to know ahead of those results when Overtime returns. Welcome back to Overtime, a key day shaping up tomorrow for investors. Wall Street will closely be watching German footwear company Birkenstock, which is expected to price its IPO tomorrow, perhaps during this hour. The bond market will also reopen after its hiatus today.

And we will be getting back into the swing of earnings as the third quarter reporting season gets underway, starting with luxury goods giant LVMH and consumer bellwether PepsiCo. Speaking of Pepsi, joining us now with what to expect is Gerald Pasquarelli of Wedbush Securities. Gerald, welcome. So I think you're expecting organic revenue growth below the street and guidance in line. That doesn't sound great. Yeah, I mean, it's been, well, thank you for having me.

It's been well telegraphed by the company that revenues are going to decelerate relative to what we saw in the first half and certainly what we've seen over the course of 2022. And so intra-quarter, as we look at scanner reads, utilizing Nielsen, we've seen the deceleration start to come through. And from an organic perspective, we're expecting 8% revenue growth. And you have to factor in currency, which has gotten worse since they reported earnings in 2Q. And so that is justifying the likely the predominant driver

behind we're about 30 basis points below street. I mean, PepsiCo, like so many other, I guess, snack and consumer foods companies has sold off, particularly in the last week, in part, perhaps because there's an investor sentiment out there that these weight loss drugs, these GLP ones, and I think about the Walmart comments that arguably triggered this, are going to weigh on demand. Is this overdone? We think so. It's ironic when you think about what's transpired really over the last week or so. This was never mentioned on any prior earnings calls. So this is brand new. And when you just look at the industry setup on the margin, we just have a difficult time envisioning how a significant part of the non-diabetic

population, for one, is going to afford a medication that costs in excess of $1,000 per month. And then also, if you think about the potential levers that these companies have to pull in the event there is a long-term impact to per capita consumption or volumes, if there's one thing that we've learned from big CPG, certainly from Pepsi and peers, they are able to take pricing and help to drive their top line. And so if volumes were under pressure, we think they'd be able to take rate and generate positive mix. Also, Gerald, in an inflationary environment, are Pepsi's wares an inferior good? And I don't mean in terms of quality. I mean, the sort of thing that people buy more of when economic times are rough.

It's definitely defensible. I mean, there's few substitutes if you look at pepsi's brands frito in particular they have tremendous brand equity and that's really what we saw for the better part of 18 months now um when inflation was was double digits they were able to generate really strong pricing they had a minimal impact to their volume elasticities and as a result you really saw outperformance in some of their key segments, Frito-Lay in particular, which is their most important one. All right. Gerald Pasquarelli, thank you.

Thanks. Here's something else to watch tomorrow. Overtime's exclusive interview with Adobe CEO Shantanu Narayan. He'll be joining us live from the Adobe Max Creativity Conference to discuss how AI is boosting productivity and margins in the core business, among other things. Looking forward to that conversation tomorrow. In the meantime, John, we had this midday market turnaround. All the major averages finishing the day higher.

We've got inflation data. We've got bank earnings later in the week. A lot going on. Indeed. It's just the first day of the week for now. That's just about going to do it for overtime. That's right. Fast money begins right now.