Closing Bell - Closing Bell Overtime: Navy Secretary Carlos Del Toro On Tensions With Iran & China, Global Trade and AI In The Military; Medtronic CEO Talks AI In Medical Devices 5/25/23

Episode Date: May 25, 2023

The Dow was lower for the fifth straight session but NVIDIA led the tech and the S&P 500 higher after blowout earnings. NZS Capital’s Brad Slingerlend and JPMorgan’s Mira Pandit broke down the market action along with earnings from Marvell, Autodesk, RH, Costco and Gap. The AI explosion is in full force; C3.AI CEO Tom Siebel talks what’s next for the industry. Telsey Advisory Group CEO Dana Telsey breaks down the retail scene right now as companies report stronger-than-expected margins. Virgin Galactic had its first successful space flight in nearly two years. Morgan spoke with Navy Secretary Carlos del Toro on the USS Wasp during Fleet Week in an exclusive interview talking global tensions, trade, AI in the Navy and more. Plus, Medtronic CEO Geoffrey Martha on AI in medical devices. 

Well, it's Fleet Week and you can see it right there on Wall Street. Tech and everything else today for the markets as NVIDIA powers a big gain in the NASDAQ 100, which finished up almost 2.5%. 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. We've got another big hour of earnings on the way across retail and tech. Reports coming from Marvell, Autodesk, Costco, RH, and Gap. Can't promise it'll be as big as yesterday, but you never know. Plus, we'll talk about

the supercharged moves for companies dealing in artificial intelligence following NVIDIA's blockbuster earnings in overtime yesterday. And we're joined by the CEO of C3.ai. Yeah, well, let's get straight into today's market action. Joining us now are Mira Pandit from JPMorgan Asset Management and Brad Slingerland from NZS Capital. Good afternoon to you both. Mira, I'll start with you. Your take on just the incredible move we saw in NVIDIA today and what it did to power all things AI related, whether it's other semi stocks or the mega cap tech peers like Microsoft, like Amazon, like others that that led the gains for the S&P and the Nasdaq today. We're becoming more constructive on areas within tech. We've seen

a really sharp rally, but I think what differentiates what's going on in tech now, as opposed to a few months ago, is the fact that we're seeing it's not just a macro story driven by rates or driven by recession one way or the other, but it's really about the fundamentals. You're seeing that a lot of these tech companies underneath the surface are making the changes that they need to in order to shore up profitability. And it showed in this recent earnings season in terms of profits. And in addition to that, we're starting to see what are the game changers for the next decade when we think about AI. Now, I don't think we should put too much in the price too fast. The rally has been really sharp, and this is going to be a decade-long

theme at least. So we need to be a little bit cognizant of that, that a very narrow range of stocks is rallying right now, while the rest of the stock market is actually looking pretty fairly valued. So look for a little bit of balance as investors. Okay. And I meant Alphabet, not Amazon. Amazon actually ended the day slightly lower. Brad, I want to get your thoughts on this, and specifically just the investor enthusiasm we're seeing for AI and whether NVIDIA has essentially confirmed some of these big moves into some of these biggest names that we have seen in recent weeks? Well, I think so. Look, it's still early days for AI. This is going to be with us for the next decade or two as these big technology platform transitions do tend to last multi-decades, and we're just starting this one. So people are very excited. They can get a little bit,

perhaps, too overexcited on days like today. But the evidence is coming in that it's early. It's a huge investment cycle. There's a lot of ways to look at it, a lot of ways to play it, a lot of other companies providing that infrastructure beyond just NVIDIA. And a lot of companies that are going to take advantage of it and apply AI to their industries across the entire gamut of the economy and be able to use it to drive productivity, to drive deflation, and to increase margins and really boost their business over time. Mira, I'm wondering if investors shouldn't use this AI excitement, the big NVIDIA move, as an excuse to turn their attention elsewhere. The Russell was down a half a percent today,

whereas the NASDAQ was up, I think, 1.7 percent. And the Russell's down around where it started the year. So, you know, if if AI is overhyped, if it's not whatever, is there value to be had at some point in small caps, even though there's a lot of economic uncertainty heading into the back half of 23? At some point, there will be value to rotating into small caps. But we do want to be a little bit cautious still, given the fact that small caps are higher beta. They do tend to experience worse profit outcomes and worse downside when we do hit potential economic downturns. And we want to be cognizant that we still believe we could be in for a recession towards the end of the year. If we think about broader issues that companies are facing from higher wages to higher input

prices, that has an overburdensome impact on areas that are smaller companies versus larger. So I still think we want to gear towards profitability and gear towards quality, which you tend to find more in the large cap space. But at some point, we're going to find a really attractive entry point for small cap. I think given the economic cycle, we might be just a little bit early. Looks like Autodesk earnings might be out. Let's go to Steve Kovac, who's got the numbers. Steve? Yeah, John, and shares are falling a little more than 1% after the Q2 guidance was a little lighter than expected.

But Q1 results were right in line with expectations. EPS at $1.55 adjusted and revenue at $1.27 billion. All that exactly in line. And like I said, the current quarter Q2 guidance just slightly lighter than the street was expecting. They're looking at expecting EPS between $1.70 and $1.74. That's versus the $1.77 the street was looking for. And on the revenue side, they're looking at $1.315 billion to $1.325 billion in revenue versus the $1.33 billion the street was expecting.

Shares down about 1.3% here, John. All right, Steve, thank you. You got it. I got to mention Autodesk's CEO, Andrew Anagnost, is going to be with us to break down those results tomorrow on overtime. Brad, on these Autodesk results, they're in the process of changing the cycle on which they bill. And last quarter, there was a big reaction to that. I'm not sure if analysts yet have worked that into their models for expectations quarter to quarter. How much would you look at that? I

know you kind of like Autodesk's medium and long term potential as a stock. Yeah, we've owned Autodesk for a while. We think they benefit greatly from the huge investments in infrastructure, the greening of the global economy and everything that needs to be built will need to be designed. And they have a great set of tools to do that. They are going through a transition from billing on a license-based basis to a subscription basis. Those tend to be lumpy. They don't tend to just happen like clockwork every quarter. But we have seen this over and over and over again. And it's the way customers prefer to pay. It's better for the business. And they

always make it through the other side. And they have that more stable subscription revenue. So we're less focused on that quarter to quarter transition and more focused on the big long-term opportunity for design and software and generative AI in design, which we think is going to be really open up that market and provide a lot of growth for the design software space. All right. That's stock now down less than a percent. So a lot of bumping around to do. Brad, Mira, thank you. Now, the semiconductor ETFs SMH and SOX hitting a 52-week high today on the back of those NVIDIA earnings. The SMH posted its best day since November of last year. CNBC Senior Markets Commentator Mike Santoli back with us now from the New York Stock Exchange

with a broader look at chips. Mike? Yeah, John, and this group is really beginning to consume a huge share of the oxygen in this market, even over and above other areas of tech. I use the XSD semiconductor ETF in part because it's more equally weighted, so it's not driven just by a handful of stocks. NVIDIA's second biggest holding, it's like 4%, 3% or 4%. So this is really the broader move in semis. And it shows you, it goes back three years now,

and it's just maintained this lead over the broader market as well as software. If you remember 2020 and 2021, much more of a software kind of cloud services type of a market. So here it's a generally bullish thing when semiconductors have lead, although you might be able to ask the question as to whether the bets are becoming a little bit overaggressive in some parts of the group. Now, take a look at semis compared to transports, mostly because they are both traditionally these bellwether groups. You'd like to see them performing in line with a broader index and sort of giving you a green light for further gains. And it's a mixed picture. It really shows you this uneven nature of this market.

Transports have not traded particularly well recently and obviously fallen behind semis. There's not necessarily something that should link these two groups, except that they're seen as perhaps economic bellwethers and risk appetite bellwethers out there as well. So it's just this is a market that's not been in gear for a while with lots of things working at once. But so far, it's been enough, even with a lot of stocks making new 52-week lows, for the indexes to hold in the upper end of their multi-month range, Morgan. Yeah, I mean, it's really fascinating. And just in terms of the transports, you've seen some of the trucking rates, for example, just fall off a cliff. Container shipping has been having a very hard time and just a lot of weakness in the category that is intermodal, which in some ways

is a read on the consumer and really speaks to more of the retail and consumer-focused goods-heavy part of our economy as well. I'm just curious in terms of another look at the economy here. I mean, we've been getting some pretty strong data, including today. Claims came in lower than expected, for example, the GDP reading. I mean, you could even potentially call it hawkish. And just to switch gears here a little bit, the bond market seems to be pricing in a larger possibility now of an interest rate increase at the next Fed meeting. It is. At least that's what the numbers are telling us. There's been absolute backup in yields. It's been notable even on the longer end. You're seeing the-year at 3.8. So probably a combination of firmer economic activity outside of the goods sector, which we kind of knew we were going to have some payback on, as well as some hawkish Fed speak out there.

And it's just feeding into this uncertainty about what we know about when and whether the Fed's going to pause. You have to throw out the caution that just the kind of twisted-up nature of some of the action because of the debt ceiling standoff on the short end of the treasury curve could be fouling up the message of what the market actually expects out of the Fed. But there's no doubt the direction is away from a sure thing pause and toward maybe more tightening down the road. Yeah, for sure. I mean, it's pretty incredible that with NVIDIA's market cap moving closer to a trillion dollars. That definitely got the attention to kick off the hour instead of debt ceiling, which feels like a nice change here in closing bell overtime. All right, we're going to see you later in the hour, Mike Santoli.

Marvell technology earnings are out. Christina Parts Nevelis has the numbers. Hi, Christina. Hi. Well, Marvell is known for data infrastructure chips, and they beat on the top and bottom line. Adjusted EPS, 31 cents. That's a two-cent beat on revenues of about 1.32 billion, so a slight beat there. For Q2, they are guiding a little bit higher, 32 cents adjusted for EPS on revenues of 1.33 billion, so that is a little bit higher. According to management in the press release right now, they said that AI has emerged as a key growth factor,

but they're still in the early stages. That was a concern with a lot of analysts going into this report, that this company doesn't have as much AI exposure. They did say, too, that revenue growth should accelerate in the second half of this year, accompanied by gross and operating margin expansion. More specifically, if I break it down into segments, the two weakest segments right now, consumer fell a little bit short,

and auto industrials also came in a little bit short. They're seeing strength in data centers, enterprise networking, and carrier infrastructure. So again, top and bottom line beat shares skyrocketing, 18% right now. Yeah, interesting, Christina. And the CEO's saying saying while we're still in the early stages of our ramp, we are forecasting our revenue in fiscal 24 to at least double from

the prior year. So investors excited about AI right now. Thank you. And workday earnings also out that stock jumping as well. Steve Kovac has those numbers. Steve, I sure do, John. And shares are up better than 6% right now. So here's what we got. Beats on the top and bottom lines. EPS coming in at $1.31 a share versus the $1.12 the street was expecting. And revenues, a very slight beat, $1.68 billion versus the estimate of $1.67 billion. And also announcing a new CFO and raising four-year guidance for subscription revenue on the

lower end of their guidance. So a little boost there that's sending shares up now better than 7%, John. All right, Steve, thank you. Sure thing. Shares of C3 AI initially getting a big pop following NVIDIA's steady results. Those gains repaired throughout the session, ended up with just a nice pop of 2%. Up next, we'll ask CEO Tom Siebel if he's seeing the same type of AI demand that drove NVIDIA's big beat over time back in two. Welcome back. NVIDIA surging after posting blowout earnings and raising its guidance to $11 billion in revenue for the current quarter, 50% above analysts' estimates. And it's closing in on the trillion-dollar market cap club where Apple, Alphabet, Microsoft, and Amazon are all members. Other players in semiconductor hardware design and equipment like AMD, Cadence, Synopsys, and Supermicro, all getting a big boost.

Supermicro, a huge boost. It was up almost as much as NVIDIA. They make high-performance computing and AI systems using NVIDIA chips. I spoke to the CEO, Charles Liang, earlier today for his read on AI-driven demand. Indeed, our demand has been growing kind of crazy. So year over year, last year we grew about 100% in accelerating GPU product. And this year the growth can be very fast. I hope we can beat last year 100% growth. But who knows? Let's see.

Maybe they'll double again. Based in Silicon Valley, they assemble those systems in Silicon Valley as well. Other names in artificial intelligence like C3.ai getting an initial bump, paring back some of those gains. Joining us now, C3.ai CEO Tom Siebel. Tom, wow, NVIDIA up like 160-something percent year-to-date. C3.ai is up 150- percent year to date. Underneath these crazy volatile stock moves, what is the business impact of open AI's moves, the focus on generative AI? What kind of customer traction are you seeing? And is it following these chip purchases that

apparently they're making for the likes of NVIDIA? Well, John, in 40 years in the information technology business, I've never seen anything quite like this. I mean, the demand for enterprise AI is huge and it's soaring. And now this is on the tip of the tongue of every CEO, every government regulator, minister, okay, and every manager. How can I use AI to improve my business operations? And I think our recent announcement from NVIDIA, I mean, this is proof positive that this market is huge and rapidly growing. And I think that their, you know, their sales next quarter have been increased from $7 billion to $11 billion in a quarter. I mean, it's just staggering.

And this is all about running machine learning models, deep learning models, supervised learning models, reinforcement learning, and generative AI. There's hard work beneath the surface in having the right models by industry, training on the companies or organizations or governments' data. That's the area that you're focused in. I'm concerned. It's hard to focus on the fundamentals and not the stock moves. So tell me about what either governments are doing or by industry, who's making the most headway in generating value from this, where we're going to see steady, profitable growth going into not just you, but the rest of the software portion of the AI ecosystem? Well, to date, the largest applications of

enterprise AI have been in reliability, predictive maintenance, stochastic optimization of supply chain, supply network risk, production optimization, demand forecasting, and fraud detection. With generative AI, I mean, generative AI just changes everything. We'll be using these models to basically, you know, improve human performance at virtually every job, sales, manufacturing, customer service, whatever it might be. So it's a whole new game with generative AI. People are concerned about some of the issues with data exfiltration, the ability to reinforce security, hallucination problems associated with these large language models. But what we've done in C3.ai by combining that with the C3 platform, we've fixed that. No hallucination problems, 10x GPU, less utilization. We enforce

all access controls, enforce all security. And the answers are deterministic and traceable rather than these random answers that we get from some of these GPT products. I want to mention that we've got some retail earnings that have hit the tape. Costco, GAP, RH stands for restoration hardware. We're going through those. We'll bring them to you as soon as we've gone through. It looks like GAP, gapping higher. So all of that will be interesting. Tom, you incorporated generative AI into C3 AI systems. I remember you gave me a preview of that a couple months ago. I believe you launched it this month.

What is the feedback you're getting on that? How much tweaking are you needing to do to get it as useful for your customers as it's going to need to be? We got a request from the Department of Defense last September. We've been working with generative AI since 2020. September 17th, we got a request from our contact to the Department of Defense, and it was a Saturday email. So, Tom, I need to be the Google for DoD. The customer just asked the system the question, and we get the answer. And so we went off in a room with some engineers and decided to design C3 generative AI. We announced it in February. We shipped it in April. So we have three customers now using it in April. I believe we'll have another 16 customers using it in the coming

quarter. And the demand for this, The response that we're getting from corporations and governments are, you know, everybody else has been in this and showed us their slide presentation. You have working software. Let's get started. So it looks like it's a massive opportunity. Yeah. You know, I do speak to a number of Pentagon officials and they do talk about the massive opportunity for AI, especially when it comes to countering China and some of the investments that are being made on the military side and in that country as well. I'm just curious. So you've already got generative AI technology and capabilities already deployed on a national security basis. Is that what you're saying? We're deploying it in the Department of Defense on the secure cloud right now. Got it. Yes. OK. And in private enterprises in their secure

environments now. So that's a yes. Okay. I do want to ask you because 29% of the float is short interest. There have been several short seller reports out in recent months. Just today you had a Bloomberg article talking about criticism for product delays, talking about you potentially micromanaging based on accounts of some former employees. Just there seems to be a lot of scrutiny of the company right now. Your response? I'm actually unfamiliar with the Bloomberg article, so I don't know about what they might have said.

You know, we have appropriate controls in the business for what we do. And understand, Morgan, we're handling some of the most sensitive data in the business for what we do. Understand, Morgan, we're handling some of the most sensitive data in the world for the United States government, for various agencies, for banks, for large distributors of food. And, you know, we do manage this company. I mean, it is managed like by adults, like adults, with proper decision-making authority and controls. So we have, you know, we have enormous fiduciary responsibility to our clients and to the United States government, and we do comply with those responsibilities. Tom, what are you seeing in investment in AI software startups? I don't know if you're looking to acquire other AI related assets right now, but is the same kind of public market

excitement that we're seeing making talent, making IP that's already in AI, that's at the startup level that you might, I don't know, be looking to perhaps acquire, is it making that more expensive? John, I think you can expect to see all this human capital that is being redistributed out of the Salesforces and Googles and Facebooks of the world and all the people kind of spinning out of the series A, B, C, D companies as they re-price their equity. These people are going to do, you know, a large language model, generative AI startups that are going to get funded. We're going to see hundreds that are going to get funded.

We're going to see hundreds and hundreds of companies get funded the next year. And I'm certain they will be coming up with kind of vertical market specific, large language model solutions. And I suspect many of them will be, some of them will be very exciting and they'll solve very real problems very well. So I think this is, you know, this is going to be very big. I think very big for the venture capital industry in Silicon Valley and New York and wherever. All right. There's some hype, but there's some real value being created as well. Tom Siebel, thank you. Thank you, John. Thank you, Morgan. Well, we have a trio of retail earnings. Courtney Reagan has the numbers. Hi, Court. Hi, Morgan. Let's start with RH. RH is reporting $2.21

adjusted earnings. This is not comparable to analysts' estimates, though the revenues are stronger than expected at $739 million. The company is raising its revenue outlook for the full year, which is largely in line, but the second quarter revenue outlook is below analysts' consensus, and they're talking about increased markdowns to clear some discontinued inventory moving forward. Let's move on to shares of Gap, which are higher. RH shares are lower, and Gap is reporting earnings of a cent adjusted, with revenues in line at $3.28 billion. Same-store sales down 3%, about in line, with weakness from Old Navy, or Banana Republic as expected. Old Navy down slightly. Gap a little bit stronger than expected.

Like other retailers, margins are a little bit higher. Mixed signals on the guidance for Gap as well. Shares, though, up 14% after being under significant pressure the last three months. And then Costco, we have Costco reporting $3.43 X items per share. That is a strong beat by the analyst consensus for $3.43 X items per share. That is a strong beat by the analyst consensus for 329. The revenues are a little shy at 53.65 billion compared to 54.56 billion. Same store sales up just a hair, 0.3 percent, with e-commerce down 10 percent. This report, as usual, is fairly thin on the details, but we will listen for the conference call and bring you more when we have it.

Morgan, back over to you. All right. Courtney Reagan, thank you. After the break, we're going to talk about all of today's big retail earnings movers and what we've learned about the state of the American consumer. Plus, we are awaiting the latest Fed balance sheet data due out any minute. We're going to bring you those numbers as soon as they cross. Over time, we will be right back. Welcome back to Overtime.

Some big retail movers on earnings, including a double-digit spike for Gap, which is up 14.5% right now. Let's bring in Telsey Advisory Group CEO Dana Telsey. Dana, great to have you on. We get more results, and the more we get, the more I think it is a really mixed picture for the consumer here, especially when I see Costco with just same-store sales of 0.3% when we know that consumers are spending more money on things like groceries and necessities right now. Exactly. Thank you for having me, Morgan. We are seeing more of a focus on essentials than on discretionary. But one of the things we're seeing from all businesses, they're managing better with lower ocean freight rate costs, lower supply chain costs and leaner inventory. That's part of the reason why you're seeing the margin pick up.

Keep in mind, the guidance does require, for the most part, retailers to have a pickup in the back half of the year. That's what I'm concerned about. Can the hockey stick really happen? What is the high-end consumer doing? The story had been that luxury was doing better. Consumers who make more were doing better. That seems to be a little bit muddier right now, especially after these RH results and whatnot. What are you seeing? I'm seeing that the luxury consumer is moderating also they're moderating

their spend but one of the things with luxury you have to put it in context compared to 2019 many the luxury brand sales are up 50% plus compared to 2019 so if they're moderating whether it's high single digits or low double digits, it's still off an accelerated base that they haven't seen, that they haven't had before. I do think luxury is moderating, but off a very high base. All right. We'll continue to watch it. Dana Telsey, thank you. Thank you. Now let's get a news update with Seema Modi. Seema.

Hi, John. Here's what's on our radar right now. Lawmakers in Washington are heading home for the holiday weekend, even as debt ceiling negotiations continue. House Democrats took to the floor today attacking McCarthy for making the move before a deal is reached to avert a debt default. Democrat Pramila Jayapal telling reporters after a caucus meeting that lawmakers were told they could be called back to D.C. as early as Sunday. Forecasters from the National Oceanic and Atmospheric Administration are predicting a near-normal hurricane season, featuring one to four major hurricanes that reach Category 3 or higher.

NOAA releasing its outlook today for the Atlantic hurricane season and cautioned that people in hurricane zone should take note of a near normal forecast lightly. And NBA legend Shaquille O'Neal was served with an FTX related lawsuit at a Miami Heat playoff game earlier this week after dodging servers for months. The big diesel is targeted in lawsuits related to his endorsement of the now bankrupt crypto business. Shaq had previously said that he was just a paid spokesperson, shouldn't be held accountable for failed ventures. Morgan, back to you.

Seema Modi, thank you. Well, you saw the Navy ringing the closing bell at the NYSE earlier this hour. After the break, my exclusive interview with the U.S. Navy Secretary, Carlos del Toro, aboard the USS Wasp, which is in New York City for Fleet Week. China, debt ceiling debate, AI in the military, something we just talked about with Tom Siebel. That's all coming up after the break. Breaking news from the Fed. Steve Leisman has the details.

Steve. Thanks very much jonathan the um federal reserve balance sheet for the week ending and wednesday down again by 20 billion dollars i'm just counting the number of weeks it's been down been down a lot of weeks in a row now um this is not the biggest decline we've seen um but we're still making our way back to where we were before the silicon valley bank uh uh in the fed infusion into the system from that. We're still about $94 billion above where we were. So how do we get here? Borrowing at the Fed discount window was down $4.8 billion to $4.2 billion.

So that's kind of going away. What's not going away and still is getting some take up there is this new bank lending facility totaling $91.9 billion. That's up $4.9 billion. And I'm going to put an asterisk on that because I want to know whether or not, now that we've seen yields rising again, are banks going to want to come to this facility for additional borrowing now that maybe some of their securities are more underwater, their treasure securities? Combined borrowing by the banks totaled $96.1 billion. That was up just a little bit.

Loans to the bridge bank, $192 billion. That was down about $16 billion as the FDIC appears to be making some progress in selling the assets of the Bridge Banks and paying down that loan from the Federal Reserve. So on the way back towards, we're still doing quantitative, pardon me, quantitative tightening, Jonathan, but we're not back to where we were. The balance sheet is not back to where it was before Silicon Valley Bank failed. Back to you. All right. Thank you. Nobody does the Fed salad buffet balance sheet better than Steve Leisman. Thank you for bringing us that weekly rate. All right. Well, meantime, Virgin Galactic says

successfully completing its first spaceflight in nearly two years since founder Sir Richard Branson's 2021 trip to the edge of space. He was on site, by the way, today. Today's Unity 25 mission carried a company crew of six, taking off from the New Mexico desert with the air-launched space plane hurtling at three times the speed of sound to an altitude of 54 miles. This was a crucial final test flight for Virgin Galactic before it begins commercial service and thus begins generating revenue as soon as next month. The space tourism company has a backlog of about 800 customers paying anywhere from $200,000 to $450,000 for a seat. And shares of Galactic actually sold off on this. It was a sell the news event down 8% today. But keep in mind, up 28% over the past month, I think largely in anticipation

of this moment. For more on space in general, check out my podcast, Manifest Space. We've got a new episode up today, actually. Sticking with aerospace and defense, as we head into the Memorial Day holiday, it's Fleet Week, and earlier today, from the deck of the USS Wasp, which is an amphibious assault ship docked in New York City, I spoke with the Honorable Carlos del Toro, Secretary of the U.S. Navy, to discuss everything from recruitment to defense spending to Iran, which recently seized two commercial oil tankers, including one chartered by an American company, Chevron. Take a listen.

Ninety percent of the goods that are traded all over the world actually are traded on the oceans. And actually one trillion worth of transactions, financial transactions, take place every day. Over 600 cables that are actually on the bottom of the seabed. It's the Navy's responsibility to keep those lines open. The behavior of Iran in this case is intolerable. It really is. We expect everyone, every country, to behave in accordance with the international norms of behavior and allowing free trade, all right, across sea lanes that are not territorial waters of Iran. They're free and independent lanes for all nations to trade on. We cannot

allow that to continue. And so we are increasing our presence in the Mediterranean to provide additional patrols to try to prevent this from happening. Have you seen any more attempts? There haven't been attempts here in the last few days since the last one occurred. But we're watching very, very closely now with all of our assets in the Mediterranean. All right. Let's talk a little bit about China as well. Just yesterday, Microsoft, CISA, the Five Eyes, Intelligence Alliance, basically disclosing that a Chinese state-sponsored group has hacked critical American infrastructure, including Guam.

Was the Navy affected? The Navy has been impacted by attacks, cybersecurity attacks. It has been for a long time, and we monitor them very closely. And I can't go into the specifics of what we do to try to counter those attacks and to protect ourselves from those attacks themselves. But it's no surprise that China has been behaving in this manner, not just for the last couple of years, but for decades. And that's also is intolerable. We shouldn't be allowing to do that, right? They're stealing our financial assets. We're here again in New York City, nation's financial capital, and they're stealing our corporate assets. You know,

IP basically that belongs to companies, commercial and national security companies. We cannot allow this to happen and we won't allow it to happen. We're seeing it in the investment community and the business community take root this increasing risk and how to game that out in terms of the possibility of China at some point absorbing Taiwan. How acute is the risk of an invasion or even just a blockade? Well, I can't say specifically what the risk of the invasion, obviously, will have a negative impact on the entire, not just the economy of the United States, but the world economy. And also have a very negative impact in my mind on the Chinese economy as well, too,

because their economy relies on free trade around the world. And so the dynamic will change. And that's one of the biggest lessons, I believe, for China. The actions that they take could very well lead to the detriment of their own economy, right, and sustainment of the finances of their own people as they try to bring their own people out of poverty, right? So the risks here are very, very great. But I don't think that it's inevitable. You don't think that we've seen a timeline accelerate then for China to make a move on Taiwan? I don't think the timeline has accelerated. I'd like to think that it's our job in the

Department of Defense and the Department of the Navy to actually keep shifting that timeline to the right so that President Xi wakes up every single day and say, huh, this is going to be a lot tougher than what I think it is. Take a look at what Putin's doing in Ukraine, for example. He thought it would be a piece of cake, cakewalk, basically, to take Ukraine. And thanks to the resilience of the Ukrainian people and the support of the American people for Ukraine, look how difficult it has been for him to accomplish what he wants to accomplish. I think those same lessons learned are being heard loud and clear in China as well. Yeah. China now at least reportedly has the largest navy, at least by amount or number of ships

in the world. How does it speak to military modernization efforts here and how the U.S. Navy is countering those efforts? Of course. And I'm concerned about the growth of the Chinese navy. There's no question about that. They've been investing in their navy and their merchant navy as well, too, and their Coast Guard and their fishing fleets since 1979, you could argue.

OK, we are modernizing our Navy, however, at a rate that has not been seen in decades as well, too. President Biden and the Secretary of Defense have provided resources for the Navy. We currently have over 70 ships that are actually under contract. We have 55 ships are actually under contract. We have 55 ships that are currently under construction. These are the most modern, lethal capabilities that our nation has seen in a long, long time. We're also strengthening our nuclear triad, building our Columbia-class submarines.

Our newest destroyers are the most advanced and lethal submarines. Don't compare to the cap... Their Navy doesn't compare to the capabilities that we're bringing to the table. And I'm just talking about the ones that I can talk to, not the ones that I can't even talk to. Something that's very much in focus in the tech world right now, for example, is artificial intelligence. How are you thinking about those emerging technologies from a Navy standpoint,

especially when you have things like autonomous ships and unmanned underwater vehicles? Transformational. Transformational. It is the way of the future. It's the investments that we need to make. It's the investments that the private sector needs to make, working with us, for example. The application of AI, of machine learning. In the Department of the Navy alone, today,

we have over 1,000 projects that are being funded just on AI alone across the entire spectrum, across the entire enterprise, on the business side, on the warfighting capability side. And that's the way of the future. It really is. And of course, as we have this whole conversation, there's a lot of focus on the debt drama that's playing out in D.C. right now. And a spending deal does seem to be what those negotiations are going to hinge on. As we have this entire conversation, if you were to see budget caps or even a cut to defense spending,

what would it do to this? I think the results will, quite frankly, be detrimental. So everything that I've just spent half an hour talking to you about will pretty much come to a grinding halt. We will not be able to invest in those new technologies that are necessary for us to be able to defend against China, against Russia, and other capabilities in the future. But more significantly, the financial impact to these sailors and to these Marines who rely on a reliable paycheck.

You know, I served 17 years in private sector. I built and ran a small business. In those 17 years, I never missed a payroll. It would be unforgivable if the Congress actually allowed us to miss a payroll. And it's not the commitment, the contract that we have made with our service members who serve so valiantly, right, and so selflessly in service to their nation. I asked if there are contingency plans being put in place around the possibility of a default. And he said, well, we're the military, we're the U.S. Navy.

Of course we've got contingency plans that we're putting in place. But the Navy in general, the budget request for fiscal 2024 is an increase, a top-line increase of 4.5 percent, speaking to those military modernization efforts and how the service is thinking about that. I'd also just note we did talk about recruitment because the entire military has had a hard time enlisting people and bringing more people into the services because we have had a tight labor market. Back in the 1980s, when Top Gun came out, you actually saw a direct boost to enlistment numbers in the Navy and also the Air Force. And I asked if Maverick, which was the top grossing movie last year, has had a similar impact.

And he said it's hard to quantify the direct correlation, but yes. So fun factoid for you. Fun indeed. Great interview. Up next, Mike Santoli is going to look at how a potential debt ceiling deal could impact market liquidity. We'll come right back. Welcome back to Overtime. Mike Santoli returns with a look at liquidity conditions as we wait for a debt ceiling deal. Mike. Yeah, Morgan, it's kind of a scare story going around that once a debt ceiling deal is reached, the Treasury is going to have to issue a ton more securities and swamp the market with new debt. And is the market going to be able to absorb all of it and

will yield shoot off? Well, this is the reason we have an X date. This is the U.S. Treasury's cash balance at the New York Fed. You see, it was about a trillion dollars a year ago. It's down under $100 billion, more like $70 billion, although being updated today. So clearly almost out of cash. But take a look at this other balance that's out there. It is the reverse repo facility at the Fed, so-called. It allows institutions to park money at the Fed overnight in exchange for a relatively high interest rate on those deposits. It's, you know,

in the 4 to 5 percent range. Money market funds are chiefly the institutions that do park that money at the Fed. And here you see it's up around $2.3 trillion. So the expectation is, yes, the Treasury will race to issue new Treasury bills, very short-term Treasury debt. And these types of funds will reallocate out of the Fed reverse repo program, likely, at least in large numbers, to absorb the new Treasury bills because they will have attractive yields relative to this. So it seems like it won't cause some huge liquidity drain on the system, just money moving from one pocket to the other. At least that's the hope, guys.

All right. Mike, thank you. Mike Santoli up next. Medtronic CEO on a big move in diabetes treatment and health's angle on AI. We'll be right back. Welcome back. Healthcare technology company Medtronic reported earnings this morning beat on the top and bottom. Guidance, conservative. Stock closed down 4.5%.

On the bright side, the FDA warning over Medtronic's diabetes business has lifted, and now Medtronic's buying South Korean insulin patch pump maker Eoflow for $738 million. I talked to Medtronic CEO Jeff Martha about it. This patch technology is probably the fastest growing segment we see over the next couple of years in the insulin dependent diabetes space. That's one. Two, it would make us, it speeds up our market entry in this segment significantly, would make us the second player.

And third, EO4 has accomplished something that many patch companies or people that have tried, companies that have tried to make a patch have not been able to do, and that's manufacture it efficiently at scale. They have the manufacturing up and running. They're on the market in Europe. They've applied for FDA approval. And that automated manufacturing capability is very difficult in this space. So those are the reasons we liked it. I also asked him how Medtronic investors will benefit from its AI work in areas like spinal surgery. The AI helps drive that technology during the surgery. And then our implants are used.

So think about our implants are the consumables in this model during that surgery. So it's driving, it's improving patient outcomes. It's growing the market, but it's growing our market share, you know, because we are linking it with our consumables, to use an analogy in this case, which in that case is spine implants. Medtronic partnering with NVIDIA for some of those efforts. Health tech competitors also working on AI. So we'll see who does it best, Morgan. It's fascinating. Great stuff. I have many questions. All right. Well, the spike in

interest rates rocking the real estate sector over the last year. Up next, we will look at which stocks in the sector are the most sensitive to rising rates. Stay with us. Welcome back. Real estate has been the worst performing sector on Wall Street over the last year, in large part because of the Fed's rate hikes. Diana Olick looks at which names are impacted the most by rising rates. Hi, Diana. Hi, Morgan. Yeah, many of the concerns related to commercial real estate values and office vacancies are tied in with the current environment of rapidly rising rates and how they impact both. Now, the team over at Markets and Data Analytics from YCharts crunched the numbers to examine how real estate stocks have performed during the current rate hike period. of 2022 when the fed began raising rates only two names had a significant positive correlation to the fed funds rate meaning they've tended to rise alongside rates those names are casino and gaming manager vici properties and specialty data and storage operator iron mountain on the other hand

most real estate constituents have shown an inverse relationship to the hikes and the three stocks that have the deepest negative correlations are residential rental players, Camden Property Trust, Equity Residential, and Essex Property Trust. Now, residential rentals could be seeing some pressure from higher rates on the value of their properties. And while rents remain historically high, inflation data indicates they could be cooling.

Although, as we know, demand for rentals is still high. John? All right, Diana, thank you. Let's get another check on some of the big after-hours movers in tech. Marvell spiking up 16.5% after beating on both lines with solid guidance. Workday up 7.5% after beating across the board and raising the low end of its full-year subscription revenue guidance. And Autodesk matching on EPS and revenue that slightly higher as well. We're going to talk to that company CEO, Andrew Anagnost, on overtime right here tomorrow. Yeah. And of course, we did get some retail movers as well. And Gap was spiking higher by double digits after after hours, at least earlier in the show, too. And of course,

that name has been hit pretty hard. So maybe a little bit of a relief rally there, but just more more mixed messages on the consumer. And it's going to make that PC inflation reading. We get that. We know the Fed watches so closely tomorrow, all the more important. There's the consumer. Right. What's happening in retail that there's real estate, which is so important. And then there's this whole AI space, which we've been working hard to keep the overtime viewer keyed on, especially because it's having such a big impact on these after hours moves. There's more to it than NVIDIA. It's across enterprise software. We can talk to Anagnost about how it affects not only Autodesk, but the customers across construction and so many other industries. And of course, we know it is

really what fuels the markets today with the NASDAQ up 1.7 percent, the S&P finishing the day up nine-tenths of one percent, even as the Dow was slightly lower. That's going to do it for us here at Overtime. Fast money begins right now.