Closing Bell - Closing Bell Overtime: Mideast Tensions Hit Markets; Flexport CEO On Port Strike Impact 10/01/24

Episode Date: October 1, 2024

Stocks dipped lower as Iran launched a missile attack on Israel, but by the end of the session had clawed back most of their losses. Bespoke’s Paul Hickey and Jefferies’ David Zervos break down how to be defensive during this volatility, plus former Deputy Assistant Defense Secretary Roger Zakheim on what next steps might happen in the Middle East. Nike reported its final earnings quarter before new CEO Elliott Hill takes the helm; Oppenheimer analyst Brian Nagel reacts to the numbers and talks why he likes the stock, despite it being in the doldrums this year. 

Well, that bell marks the end of regulation. The Estee Lauder Company is ringing the closing bell here at the New York Stock Exchange. The Breast Cancer Research Foundation and Ulta Beauty doing the honors at the NASDAQ. Volatility ratcheting higher on this first day of october as iran launches a missile attack on israel and as east coast american port workers go on strike but the major averages closed off the lows of the day that's a scorecard on wall street but winners stay late welcome to closing bell overtime i'm john fort along with morgan brennan we are moments away from Dow component Nike's earnings results as the company awaits a new CEO and contends with a double-digit stock drop on the year. We're going to bring you

those results as soon as they cross. Plus, we will talk about the developments surrounding Israel and Iran and what it all means for the global geopolitical picture, as well as the energy and defense markets. But first, let's bring in our market panel, Bespoke Investment Group co-founder Paul Hickey and Jeffries chief market strategist and CNBC contributor David Zervos. Guys, welcome. Happy Monday. So, David, another start to another month and another market freakout. Is this par for the course in the last 40 days before an election? I think so, John. I think we should expect a fair amount of volatility going into November 5th. And I think, you know, geopolitics are always going to be on our radar. Everything's elevated,

whether it's Russia, Ukraine, whether it's what's going on in the Middle East. Certainly China's caught everybody's eye. That's not a geopolitical story, but certainly an economic story. So we have to be on watch. And, you know, John, for me, this is why we advocate risk parity trades. It helps us sleep better at night. We have our leveraged fixed income portfolio that we feel very good about, which averages a sort of 3% to 3.5% yield. And we hold that against our risk assets. And it's been a great trade all year. It's

protected us last August. Most of these drawdowns are being well protected by that leverage fixed income portfolio that risk parity always has. And I feel pretty good about it today. I feel as good as I felt in a long time. Well, OK, we got a sense of your defense, David. So, Paul, this is an expensive market that seems to expect a soft landing, but there seem to be more potential jump scares perhaps in October, not counting Halloween, than usual. We're looking at the Middle East and the election in general. How do you protect yourself while remaining positive? You know, so I think, you know, the Middle East, we talked about it a lot today in the news, but I don't think that was really much of an impact on the markets here. We're down less than

1% today. The last two first days of the month, we were down even more and there was no Mideast violence on those days. So I think in that respect, I wouldn't focus too much on that. Oil at this point was up about 3% today. It's down over the last week. As far as the broader market is concerned, I think, investors, you just want to continue to play on this theme that we've been talking about for months now, and that's broadening out of the market,

the S&P 493 and not necessarily some of the mega caps here and more focus on individual stock stories and sectors that are out of favor. You've grown into earnings season. Analysts have been lowering forecasts on stocks in the industrial sector and the materials sector. And typically, when you have that low bar for estimates, the companies tend to do well during the earning season. So overall, there's going to be some bumps in the road with the earning season coming up. But I think overall, there's still plenty to be positive about in this market.

OK, David, I do want to go back to geopolitics. And yes, we've got this port strike. And I realize both of these events, these news events, as they've been playing out today, have been arguably pretty well telegraphed. Known risks here, at least in the near term. But when we talk about conflict, we're talking about a dynamic that can become very inflationary very quickly. When we're talking about something like a prolonged port strike, if that were to happen, you're talking about supply chain dynamics that could become inflationary very quickly. So at what point do those risks become real to the market? You know, I think on the same on the same vein, you can also say that they become suppressors of global aggregate demand, Morgan. And the Fed is going to look at that suppression of global aggregate demand in the same way that it looks

as maybe a temporary spike in prices due to supply chain disruptions. And I think the way they're set up going into the end of this year is they're probably going to favor kind of making sure that the demand side doesn't crack because the inflation side is probably more temporary than many would think or many might surmise. So I'm more thinking that the Fed backstop on global aggregate demand comes in sooner if there is a geopolitical flare-up than the Fed somehow saying, oh, there's a geopolitical flare-up, we're worried about inflation, we're actually going to stop these rate cuts or even think about rate hikes. That's not the story with global aggregate demand probably getting quite messy if geopolitics were to really uh really become a much more significant issue and i agree with paul up front i mean this is a a two dollar day in oil

it's a seven to ten basis point day in fixed income it's less than a percent in the equity markets it's it's a little bit risk offy and it's a little geopolitically but it's not a you know it's not it's not unknown we've all been waiting for this we've all seen the measured responses we've all seen the tit for tat um and and it's sort of i think in the playbook for a lot of people yeah and i think it's a really good point you make and paul just to sort of keep going with that especially given what you just had to say about rotation the fact that the tech sector was the worst performing sector in the S&P, you had names like Apple that were sort of leading to the downside here.

And actually, if you look over the last three months, the tech sector has been the worst performing sector in the S&P as well. And what does that signal here as we do go into this fourth quarter and as we are gaming out all of these macro dynamics right now? Yeah, so, I mean, all we've heard for, you know, the first seven months of the year is the market couldn't rally without technology. And if the tech stocks faltered, the market was going to be, you know, look out below. Well, in September, the S&P hit new highs. The tech sector didn't. That hasn't happened since, you know, in this entire bull market. You haven't had a month where the S&P hit a new high without technology. So, and David talking earlier about the, you know, the Fed easing. We're in a global easing cycle by central banks all around the world now.

And so this easier monetary policy is going to be a positive for some of these smaller industrials companies and cyclical companies. So I think in that respect, again, that's an area you want to focus on as far as places that have been out of favor that are going to start coming into favor. And overall, you just look at the S&P is at all-time highs, right near all-time highs, and you have an environment where the 10-year yield is near 52-week lows, oil's near a 52-week low, and the dollar's near a 52-week low. You go back to other scenarios and other periods where you've seen that type of backdrop, and the market has been very positive over the ensuing 12 months. So it's a good area. It's a good backdrop for the market. All right. Paul, David, good to see you both.

Let's keep the energy going. Oil and energy stocks jumping today following Iran's missile attack against Israel. But crude settled well off the best levels of the day. Our Pippa Stevens joins us with more on that. Pippa. Hey, John. The escalation prompting a knee-jerk reaction in crude prices, which at one point were up more than 5 percent.

But those gains faded throughout the afternoon. And what CIBC private wealth's Rebecca Babin told me is a sign. The market does not believe this will actually remove any barrels. If it did, we would have been up more like $10 rather than $3. Some of today's move was also short covering. Sentiment has been very bearish with CFTC data in recent weeks showing net positioning in Brent turned negative for the first time on record. Now looking forward, Babin said it is all about how Israel responds,

specifically if they target Iranian energy infrastructure. Oil's been trading in a range since the war started because no crude production has actually been damaged. Plus, demand has been trading in a range since the war started because no crude production has actually been damaged. Plus, demand has been weak, especially in China, and OPEC has spared capacity, which is why we're not seeing the type of response, Morgan and John, that we once might have. Yeah. And of course, U.S. production has continued to be very robust here as well. So that helps to offset supply dynamics as well. Pippa Stevens, great to have you on. Thanks for watching this for us. Now let's bring in Senior Markets Commentator Mike Santoli

for a look at the levels to watch on the S&P 500 and the VIX. Mike. Yeah, Morgan, so this mild turbulence in the market we got today comes obviously with the S&P 500 pretty much at an all-time high, but also stretched just a little bit above its medium-term trend. That's the 50-day moving average right there. You've seen prior times when it's gotten a little bit elevated, several percent above. It usually has a little bit of a flattening out, maybe pull back. That's around 55-40 right now and still going higher every day. So that's really 2%, 3% down

from here. You bring that into sight. The other areas that I would look at is just above 5,600 was the prior sort of ceiling on the market in late summer and had a tough time breaking through, but ultimately did. So that would seem to be the areas where anything in that zone is just purely normal choppiness. And obviously there's levels down from there. 5600 and just a little bit was the Fed day low, you know, almost two weeks ago. So just keep that in frame. Now, take a look at expectations for volatility. This is the VIX futures curve. There's monthly VIX futures contracts. Here's how their price right now. That's the October contract. It expires in a couple of weeks.

For all year, there's been this bump in October because that's the pre-election opportunity to hedge any potential volatility. Obviously, a lot else going on in October besides just the election coming. But the November contract gets you past the election. So there's really no benefit from capturing volatility there. So this isn't too crazy. But normally in a calm market at all time highs, it would just be a straight upward curve. So this shows you that we have a lot of hedging activity happening right now. It doesn't mean it's going to get stormy, but people are somewhat prepared for it. And there's reasons to think that maybe you have a little more latitude for the market to slosh around a little bit coming into October.

Yeah, this reminds me a little bit of what we just heard from David Zervos, Mike. You know, John Krinsky, Jonathan Krinsky over at BTIG, wrote just earlier this afternoon about their conviction being high for a so-called red October and basically said, yeah, everybody's pointing to escalation in the Middle East, but that they would argue that the setup was there and a pullback likely regardless of the news. I mean, we've been talking about valuations and how pricey they've been looking. Yeah, it definitely becomes a little bit of a valuation ceiling, probably the post-pandemic

highs, roughly speaking, in forward P.E. for the S&P. But also when you're up 20 percent at the end of the third quarter, it's typically been a little bit of a, you know, lock it in type of trade. So that's where you're that's your overhang of potential supply in terms of stock. On the other hand, you know, we've sort of had a weak first week of the month in August and September. You've recovered most of it. So it's not as if if you have a bad start, it's game over for the month. You've got to see how it plays out. Thank goodness.

Mike Santoli, we'll see you again in just a bit. And now we're just minutes away from Nike's earnings report as that stock sits near the bottom of the Dow this year. It's down nearly 20%. We're going to have the numbers and instant analyst reaction next and later flexport ceo ryan peterson joins us to talk about the big money impact of the port strike and how long he thinks it lasts overtime's back in two welcome back to Overtime. We are seconds away from Nike earnings, and we wait for those numbers.

As we do, let's bring in Oppenheimer Senior Analyst Brian Nagel. Brian, of course, we've got a new CEO who starts in a couple weeks. Is there anything that we can get in these numbers that's going to convince you to offload or pick up stock ahead of that even bigger event, arguably of the CEO coming in? Well, good afternoon. So, look, like you said, we're waiting for the numbers. You know, what I think is going to be really key here is what Nike does with its guidance. Now, unfortunately, the way this works is so Nike does not update guidance until the company hosts its conference call, which is scheduled for five o'clock tonight.

So we're going to have to wait a little while. But in the meantime, we're going to get these numbers. We're going to see how the business tracked in Q1. I think the market is very much braced for a weak fiscal Q1. And then I think the other real important fact, and this is what you're hitting on, John, is that, you know, any initial commentary as to what the plan for the new CEO is, you know, and I very much believe that to the extent Nike says, look, you know, we get it. We're more focused on product innovation. We're building a team to do that. I think that's going to be a positive for the stock.

And Brian, what companies tend to do if they're being nice is not set the bar too high for an incoming CEO. So, like, why would they hike guidance way up and give him a huge bar to clear coming in the door, right? I mean, how should investors think about this moment and where the stock is positioned right now, especially since it's done what it has since the initial announcement? No, look, that's exactly right. So I think it's a balancing act. So when, again, when Nike discusses guidance on its conference call later this evening, let's say, look, I think what they want to do, again, we'll see what happens, but I think they probably want to give the new CEO a little bit more room.

We've definitely had some incremental weakness in China. We're hearing that from a lot of places. So I think what would be a positive here, again, we're guessing what's going to happen in 45 minutes, an hour's time. But I think what's going to be a positive, Nike trims the guidance a bit, but doesn't trim it so much so that it worries investors. Again, I think you're exactly right. New CEO coming in. Okay. Hold on.

We've got those knocky results that are ready, and Sarah Eisen is ready to bring them to us. Sarah? Hi. Good to see you, John. So big beat on earnings per share. Nike reporting 70 cents. Expectation was around 52. They do usually beat, but revenues, importantly, are in line. 11.6 billion. Expectation was around 11.64.

That's a 10 percent decline from a year ago. Go beneath the surface. And then I'm looking at North American revenues. Always important. Pretty much in line, 4.83 billion versus the 4.81. That's an 11 percent decline from a year ago. Looks like the China numbers were a little better. Greater China, 1.67 billion versus the 1.62. Gross margin, also a nice improvement and improved from where analysts were looking for it at 45.4 percent versus the 44.4 percent. I do want to highlight a comment in the release because it's not from John Donahoe, who is the current CEO. It's from Matt Friend, who's the EVP and CFO. One of the questions today was, would John be on the conference call? It's not

clear. I don't have an answer, but perhaps indicative of the fact that he's not mentioned in the release or quoted in the release. He may not be. Matt Friend says Nike's first quarter results largely met our expectations. A comeback at this scale takes time, but we see early wins, according to the CFO, from momentum in key sports to accelerating our pace of newness and innovation. Continuing that the track that John Donahoe originally laid out to recover and turn around is on track. I'm just looking for any other information here because a few more questions around Nike. For instance, are they going to have an investor day? And there's an answer here in this release.

They had an investor day scheduled for the third week of November, and it looks like the company is going to be postponing the investor day. It says that in the release. That was one of the key questions of whether that would be a catalyst, which makes total sense because they've got a new CEO coming in in two weeks, Elliot Hill, taking the reins. So a little bit early to have an investor day about a month later. They also note the transition that is going to be happening on the 14th. And looks like that's all the information from now. I think one of the key questions, and apropos of your conversation you were just happening, is what happens with guidance, which we don't get to the call. Are

they going to scrap it? Are they going to revise it lower, set the table for the new CEO? Those are some of the bigger questions ahead. But right now, Nike shares little changed. And just for some context, guys, they're up a little more than 9% since the new CEO announcement, but still down almost 20% year to date and have underperformed. All right. Sarah Eisen, thank you. We know you'll be listening closely to that conference call. And we're seeing shares of Nike bounce around here as those results are being digested in after-hours trading,

up fractionally right now. Ryan Nagel, want to get your thoughts on what we just heard from Sarah, especially with gross margin improvement, the North American revenue basically in line, China revenue a little bit better than expected and a beat on the bottom line and a miss on the top. Yeah, look, I think it's a great rundown from Sarah. So, you know, in those the numbers that she ran through as I was as she was talking, I was reading the release as well. I mean, that's very much let me make sure I say this correctly. An inline, you know, a fiscal Q1 that was in line

to better than dampened expectations. OK, so what we're seeing there is, yes, sales are weak, but as expected. I think China very fluid situation. That's probably somewhat, somewhat of a positive. And then what we're seeing again is even at these lower levels of sales, Nike does have enough, so to say, levers in its business model to beat earnings pretty handily. So that's a positive. Now, the comment from the CFO, look, I think that's a positive. You know, we've been hearing this from Nike.

And that is what they're basically saying is, look, where we're touching product, where we're introducing new product, that product is selling well. It's just in the very early stages of happening. But I very much take that as an indication of what we should expect from Nike, you know, over the next several quarters as they get more aggressive on this product innovation front. So the fact that shares are now trading negative, they're down, it looks like, about 1.5% right now. I mean, any sort of sense on why we would be seeing that reversal? Is this because of the postponement of the investor day? No, well, I mean, look, honestly, I think the trading right now is largely noise

because I think the real key factor is going to be what they say about guidance, and they'll do that on the conference call. The investor day, you know, that's on Wall Street. We've been watching this. You know, I think it's been pretty well expected that they would postpone that. And frankly, that makes a ton of sense. You know, the new CEO is coming in here in a couple of weeks. You know, we got to give him time to get acclimated, even though he is historically from Nike. You want to give him time to get acclimated before they go present in some significant way to either analysts like myself or investors. Brian, to what degree do investors risk overdoing it on the negative narrative around Nike? I think

back a couple, you know, three years to what was bubbling around meta. Oh, they changed their name at the wrong moment. Their business model is broken. It was right around the time when the iOS ad changes were going through for them. And boy, did it bounce off of those lows that it hit at the peak of disillusionment. What are we looking at here for Nike? How much will it take in product changes and time,

do you think, to achieve a turnaround here? Well, look, I think that's a great question. Okay, and, you know, I'm recommending Nike. I know I'm early. Okay, but what I'm saying to our clients is, and this is a great response to your question, John. Look, let's not forget, this is Nike. Okay, Nike's one of the most dominant brands on the planet, maybe in history. Okay, they've made some mistakes.

They've allowed other competitors to come in and take market share selectively. But this is Nike. And I very much believe that as Nike has recognized its shortcomings, recognized its mistakes, and now with new management coming in, new proven management, I think that this company could very much get back on the right track and change that narrative relatively quickly. You know, so yeah, I think that's really one of the biggest risks from a market perspective is that investors are too quick to write off Nike. Nike's a broken business. I don't think that's the case. I think this is still a very strong brand, both the United States and globally. And I think they just need to correct some of the mistakes that were made over the past, say, few years or so. And I guess to that point, when you start talking about saturation of some of these brands within the brand, like Jordan's, I mean, Hill was part of Nike's leadership team when the company had to make a similar

inventory reduction or correction, if you want to call it, back in 2017. So the fact that he has a track record, can we look to that as a historical example of how this could play out? Absolutely. You know, look, I think this is a very, I think, you know, we have not heard really, I mean, from an investment, as far as an investment committee, we've not, to my knowledge, we've not heard really anything from Elliott significantly, you know, since he's taken this role.

But I think it's a very, very good move on the part of the Nike board because you're bringing back a proven executive that had a great deal of success at the company. And also from everything I hear was very much liked within the company, because again, this is all there's also a culture issue here. You know, Nike is a big culture company. It's had a great culture over time. I think bringing back an executive like this is going to help that culture. All right. Brian Nagel, thanks for breaking down the numbers with us instantaneously. Shares of Nike down about half a percent right now. Coming up next, the CEO of Flexport joins us with his call on how quickly the port strike could be resolved and how big of a toll it will take on the American economy. Plus, much more on Iran's missile attack against Israel,

what could come next and what it means for the defense complex as defense stocks outperform today. Stay with us. Welcome back to Overtime. Workers at ports stretching from Maine to Texas went on strike today in a dispute over wages and automation. After rejecting a deal with the U.S. Maritime Alliance, that would have raised wages by nearly 50 percent over six years. Well, joining us now is Flexport CEO Ryan Peterson. Ryan, it's good to have you on today. You really in many ways are kind of on the front lines in terms of what this means for freight flows and what this means for activity at ports.

And we haven't seen a strike on the East Coast port complex since 1977. But we have seen work stoppages back in 2002 on the West Coast. I just wonder, based on history, how you would expect this to play out. Yeah, you know, there's a lot of uncertainty here. It's difficult to say exactly how this plays out. My expectation, I give it like a 70 to 80 percent chance that the two parties can resolve this this week. But I think that if it goes longer than that, it might go a lot longer and be very ugly. For every day of strike, we're sort of looking at seven to 10 days of congestion of bottlenecks and backup of cargo. So you can play that out. If it was the last month, you'd be talking about 10 months of congestion, the

likes that we haven't seen since COVID. So when I hear you put that timeline out there, it raises the question. We know President Biden has basically said he's not getting involved. He's not going to invoke the power he has to get involved with Taft, the Taft Hartley Act here. But is there a point at which this becomes too painful and that changes? I mean, you know, it's very difficult for me to say what the political calculus is. But from an economic standpoint, yeah, I mean, the pain could be really bad. This is 50 percent of all the containers entering and exiting the United States. It's a huge factor for U.S. imports.

That's not to mention all the car imports and exports that are going on that on those part of those ports. So it's just massive. If you cut off the U.S. sort of our circulatory system in the global economy, which is the backbone of global civilization. You can't just turn it off without all kinds of second order effects and unpredictable problems showing up that, you know, really outside of our range of predictability. So, Ryan, first of all, good to see you. What do you think this is really about? Because you point out most businesses could hardly sustain an up to 70% increase in the cost of labor. But the East Coast ports, I mean, if you want to get goods from outside of the country into like half the country, you kind of need to use those ports. They could pass the cost along to consumers, which from an inflation perspective isn't great.

But why not just do that? What's this fight really about? Yeah, I think ultimately it's going to be a fight about labor costs and how much these workers get paid. They're asking for us, it looks like they're asking for a 77% increase in their wages. The employers who run the ports and own the ocean carriers, they offered a 50% increase. So that's kind of the bid ask right now. And that's what gives me some confidence this will get solved. It's not a huge differential in what they're asking for. And it does get shared ultimately because there's no other choice for how to get these goods in. And it's the same wages going to affect all of the employers, all the ports equally, and therefore all the ocean carriers equally, that that can just get

passed right through. In a competitive environment, if my wages go up, it doesn't mean I can just pass it through if my competitor is not increasing their wages. But in this environment, everybody's wages are going up, and therefore it all gets passed through. Should we think of this, and I'm just trying to get the labor side of it on the table here as a perhaps natural consequence of the years of inflation that we've seen. Here's the, you know, the port unions opportunity to sort of get that priced in and protect for the future. So maybe they're saying, hey, it's been a while. Look what we've been through. We deserve a big raise. Yeah, I mean, I don't think I think this is well beyond what we've seen from an inflation standpoint. And ultimately, what you're talking about is they

have a lot of power. They control this vital economic infrastructure, can't run the ports without them today. Now, there are automated ports around the world. That's the other big issue at stake here is they they're saying zero automation. In fact, they want to reverse some of the automation that has been done in these ports. And there are many ports around the world that are fully automated. And so they're fighting for their jobs in sort of a very literal sense. If you automate these things, by definition, you need less workers. And so ultimately, they sort of had this stranglehold maybe is a strong word. But yeah, they have a lot of power here to shut down the economy if they don't get what they want.

And so, you know, one question would be, well, yeah, maybe we should pay them 77 percent. But why 77? Why not 99 or 199? I mean, once you have that kind of power, you can you can extract quite a bit for it. So what's interesting to me is that if I look at the data and Donald Broughton over at Broughton Capital put this in front of me earlier today, but if I look at the data, we actually saw record or close to record container activity into the ports in the U.S. in the past three months ahead of this moment. So we've already started to see the inventory build, A. B, we know some people have already been diverting some of their freight to the West Coast ports in anticipation of this moment. You can argue there's winners and losers on the freight side, freight forwarders, the air freight companies, arguably,

maybe the Western Railroads, maybe some of the losers are Eastern Rails and some of the companies that are more levered to operations on the east, eastern side of the U.S. How how do freight flows shake out, especially if you do see this prolonged strike activity? What does it mean for your business? Yeah, well, it's a great observation. A lot of our customers did move inventory in over the last couple of months to prepare for this. This is not, you know, this is not a secret. People knew about this date for all through the year. It's been the main topic of discussion, this and the Red Sea disruption, but planning for this, how do we get ahead of this? And so our customers do have quite a lot, most of them have quite a lot of inventory in stock and are ready to ride this out if it doesn't last for too long. The bigger problem

becomes that every day that it's closed, you have all this container sitting overseas somewhere in the world that are trying to move and those build up so that when it reopens, there's going to be this huge rush to try to get demand. That will bid the price up of ocean freight like crazy. You know, our business is ultimately at Flexport solving problems for customers. We have thousands of containers en route to these ports as we speak, about 240 containers in those ports right now that we weren't able to get out in time, clear through customs out of all these ports.

So our job is to solve problems. I think the more problems they are, the more important our job becomes, the more useful we can be. So we don't see it as hurtful to our business, but certainly it hurts our customers. So not something that we're applauding. Right. Well, certainly a bull market and problems for what that's worth. Ryan Peterson, thank you. Let's get a CNBC News update with Pippa Stevens. Pippa. Hey, John. At a White House briefing this afternoon, National Security Advisor Jake Sullivan

said Iran's missile attack on Israel was defeated and ineffective. The State Department said Iran launched nearly 200 ballistic missiles at Israel, lighting up the skies over Jerusalem and Tel Aviv. Sullivan said that there will be severe consequences for the attack and will work with Israel on the next steps. Meanwhile, the southeastern U.S. is reeling from damage and heavy flooding from Hurricane Helene. According to NBC News' count, the storm has claimed 134 lives across six states and over 1.5 million people remain without power.

Tomorrow, President Biden plans to visit North Carolina, while Vice President Kamala Harris will travel to Georgia to assess the damage. And Claudia Scheinbaum was sworn in today as the first ever woman president of Mexico. The former scientist and Mexico City mayor facing waves of violence from organized crime and a large deficit in Latin America's second biggest economy. She has committed to reducing Mexico's deficit to three and a half percent of GDP. It's now just under six percent. Morgan, John, back to you. All right, Pippa, thank you. Now, when we come back, the new signals on the job market one day after Fed Chair Powell

gave a clearer outline of the Fed's rate cut path, Mike Santoli returns to break down that data. And later, the Washington director of the Ronald Reagan Institute joins us to talk about the major escalation in the Middle East today and what could happen next. Overtime will be right back. welcome back to overtime i am with mike santoli here at the new york stock exchange getting a closer look at this morning's jolts report mike this is where you manufacture the charts this is the facility this is the pod yes this exactly is is you know it's it's human intelligence combined with a little bit of visual aids. So what you have on your side there is a component of today's JOLTS survey data.

This is an indicator, of course, about supply and demand of labor. Job openings themselves came in higher than expected, but that didn't really obscure the fact that what you see here is the quits rate is really plummeted. It's back down to levels of the mid 2010s. The hiring rate also a good deal lower and really showing pretty subdued levels of net demand for private sector hiring. Now, what's interesting about it is, of course, unemployment has not moved up that much. It just sort of shows you that there is a little bit more of a of a supply swamping demand. And this definitely is has the Fed on alert has investors on alert for the possibility that we're not just seeing you know kind of a benign

cooling of the labor market it could be a little bit worse hmm but if the hires and the quits are going down at the same time they kind of cancel each other out because it's like well there's a job cuz well I don't know there's another component of it actually which so these are voluntary quits all right so there's a layoffs component which has also been really subdued. And that's, in fact, one of the things that Jay Powell has said, look, we're not seeing the companies really offload workers forcibly. They're just hiring more slowly. So that's why we're at this kind of tenuous equilibrium in general for jobs. And it definitely has muted wage pressures and all those things we wanted to do when we were fighting inflation.

They seem like they're kind of done at this point. So when that quits rate was really high, that showed you workers were in command. And that's not really the case anymore. No quitting here, though, for you. I'm here for the foreseeable, let's put it. They don't even let me out of this pot. I know. Listen, I'm just going to say quit having so much fun.

I have a bad case of FOMO that you guys are together to have this discussion. We're going to stick around. I know. All right. Mike Santoli, thank you. Up next, we will discuss the geopolitical fallout from Iran's attack on Israel today and how it could impact the market and your money. Welcome back to Overtime. The growing conflict in the Middle East weighing on the major averages today, but defense stocks powering higher. RTX, Northrop Grumman, Lockheed Martin all hitting all-time highs today, among others. Joining us now, Roger Zachheim from the Ronald Reagan Presidential Foundation and Institute.

Roger, it is good to have you on. And the key question, I think, for the world right now is what next steps look like, especially as we know we get more details about what just happened and the strike from Iran, 180 ballistic missiles, it looks like, give or take, and a U.S. military that coordinated very closely with Israeli defense forces for those interception activities. What do next steps look like? How does this go from here? Thanks, Morgan. We can expect what the Israelis have called a severe response against Iran. Second time since April that Iran has attacked with ballistic missiles against Israeli territory. This was

responded to last time by the Israelis with a message response, not a significant response. Iranians have escalated, as you noted, with 180 ballistic missiles. Israelis now will respond not only in kind, but do what is necessary to restore deterrence. And Morgan, as you know, deterrence has lost. The price of an administration here in the United States that calls for de-escalation time over time over this past year has just resulted in a ratcheting up. Now it's been on Israel to effectively restore deterrence in the Middle East, and that's going to require a severe response against Tehran. For Israel to now respond, does that actually reestablish deterrence? Or has the risk just

risen that this conflict now enters a new, more heightened chapter? And I guess just as importantly then, what does U.S. involvement in this chapter directly or indirectly look like? Well, the United States, with the National Security Advisor Jake Sullivan has already said that there will be severe consequences in the United States to support Israel. You know, the effort to de-escalate, to try to somehow prevent an escalation to regional-wide conflict has failed. I mean, we just need to use our common sense here. This is a regional conflict. Iran has carried out an act of war against Israel. And Israel, of course, to prevent that from

happening again, needs to go ahead to the source of its troubles, whether it be Hamas or it be Hezbollah in Lebanon. It comes from Iran. They fund, they fuel that ring of fire. I mean, you look at how we got here in October of last year. I mean, just basically a year ago, sanctions or a UN Security Council resolution had run out that prevented the Iranian ballistic missile program from being able to grow and being able to be fueled in terms of selling their ballistic missiles around the world. That passed. Now we see a year later, Iran is firing ballistic missiles against Israel. So sometimes to restore deterrence,

it requires a form of escalation, or in this case, not even escalation, a response to demonstrate that they had crossed a line that Israel and the United States and the West certainly cannot tolerate. Well, Roger, we've seen over the past several weeks Israel has embarrassed Hezbollah and now Iran's response has been, at least initially, ineffective. What sorts of further responses should the world, should investors brace for here from an Iran that seems, at least at the moment, to be less effective than they want to project? Well, no doubt Iran's on its heels. I think the world and, most importantly, Tehran has been surprised by Israel's response. Israel, though, has 60,000-plus citizens that

have not been able to return to their homes in northern Israel. And so that explains the activity you've seen against Hezbollah taking out Nasrallah, their leader, and also the limited ground incursion that began yesterday in Lebanon. But Iran has escalated. They have decided that they need to participate in what was a conflict on Israel's borders. Now it's expanded regionally. I think investors need to basically plan for what we've already seen over the past year since October 7th. It'll be a year since Hamas's attack on Israel next week. I think the attack we saw from Iran, while there are no casualties reported yet, ballistic missiles land on Israel. They targeted infrastructure. They targeted military bases.

And I think we could expect the same in terms of Israel's response to Iran. That is a sort of action that I think may result in sort of impact on oil and energy markets, certainly aviation, and I think certainly defense sector. You're seeing that right now on the screen, where investments in missile defense and ammunition, those companies that manufacture and produce those systems for sure are going to be impacted by what's playing out in the Middle East. All right. Roger Zachheim, thank you for joining us. Be interesting to watch what happens with defense spending, too, as the U.S. government moves into a continuing resolution. And then, of course, we've got a vice presidential debate tonight, John, and I'm sure this will be top of mind as we go into that as well.

Among many things, yes. And up next, Honeywell's CEO on the biggest challenges his company's facing when it comes to growing its AI revenue. We'll be right back. Welcome back to Overtime. Get a check on Nike ahead of the company's earnings call at the top of the hour where it's expected to address guidance. Shares now down about 3% after the company missed on revenues, beat on earnings. Gross margins came in above estimates. Nike also saying it's postponing its investor day,

which had been slated for just a few weeks after new CEO Elliot Hill takes the job. All right. Well, Honeywell, the $140 billion industrial global conglomerate is an under the radar AI play. That's thanks to what chairman and CEO Vimal Kapoor calls its three buckets, physical assets, digital processes and its people. Now, the company, which sits on a trove of data, is building applications and products to sell to its customers, which range across industries from energy, aerospace, warehouses, and more. I sat down earlier today at the CNBC Evolve AI Opportunity Summit, and I asked Kapoor about incorporating AI into his businesses.

Adoption is low because this is something which customers are looking for more robust use cases. And that's our job to make sure that they understand what is the economic case here, right? I mean, and so awareness is high, adoption is low.

But I would say adoption will go, there's going to be an inflection point. We have seen inflection happening in certain verticals we serve as any other inflection slow and then it ramps up when few people adopt it. So I do believe that 25, 26 is going to be a big year of adoption of AI in context of industrials.

All right, so that is Kapoor talking about adoption rates and how he expects this to play out on the industrial AI side of things. But here's how he's thinking about AI adoption in general when it comes to these different industrial end users. I look at AI as a revenue-generating opportunity in context of industrials because the shortage of skill

is the heart of the issue for us, for the most part. And think about it, if I take example of our aerospace business, we are having labor shortages for three years, and that's a constraint to grow revenue. So it's for us the biggest revenue constraint is lack of skilled labor. So if I can solve that issue, it's a growth enabler and not productivity enabler. So I see fundamentally for industrials, for the most part, AI is going to be an enabler for driving growth versus being an enabler for productivity. Which, John, is a fascinating nuance and really speaks to labor implications, reskilling implications, and how all of this is potentially going to play out as you do see that adoption curve begin to pick up some speed here.

Yeah, as long as the job market remains tight. Morgan, thanks. Up next, a key gauge on employment and the earnings reports that need to be on your radar. Your Wall Street look ahead is next. Welcome back to Overtime. It is time for your Wall Street look-ahead. Beans and jeans. Conagra and Levi Strauss are the two big names to watch on the earnings calendar. And we'll get new clues about the state of the labor market when we get the September ADP employment report.

Morgan? Yeah. In the meantime, we continue to monitor events as they're playing out in the Middle East right now. The port strike, obviously, John, as we are poised to go into day two around that and dynamics in the markets, because we did finish the day lower for major averages, but also off the lows of the day. And you saw a similar move in Treasury yields. You saw a lot of buying earlier in the day. And then that came off a little bit. Gold, though, continues to trade at record highs. So we'll just

continue to watch these markets and valuations. Yeah. And of course, the AI story continues to unfold. Not everybody seeing the slow adoption, though that was key insight you got there from Honeywell. Thank you. I know we're going to continue to dig into that here, too, over the rest of the week as well, especially as you do see some of those AI stocks sell off today. John, I'll see you tomorrow. That does it for us here at Overtime. Fast Money starts now.