Closing Bell - Closing Bell Overtime: Norfolk Southern CEO On Winning Back Investor Trust; Costar CEO On Commercial Real Estate 7/28/23

Episode Date: July 28, 2023

Stocks bounced back after Thursday’s late afternoon swoon. 3Fourteen Research’s Warren Pies and Ariel’s Charlie Bobrinskoy break down the huge week of earnings, data and Fed news. Lux Capital’s Josh Wolfe talks investing in China and safeguards for doing business there. Former FDIC Chair Sheila Bair on banking regulations. Norfolk Southern CEO Alan Shaw on his company’s quarter and its new $416M charge related to the Ohio train derailment. Costar CEO Andrew Florance talks earnings and competition.  

Well, the NASDAQ leading the indexes higher today. It's the best day for the tech-heavy average since late May. That is a scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. Stocks bouncing back as the Dow and the S&P 500 closed higher for a third straight week after a key report showed inflation keeps easing. Yeah, Intel, the stock story of the day,

after the chipmaker reported an unexpected second quarter profit, issued a strong third quarter forecast. Coming up, we'll hear from CEO Pat Gelsinger on why investors might get important information on the state of Intel's attempted turnaround sooner than you think. All right, well, let's get straight to the markets more broadly. Joining the show is Warren Pies, 314 Research co-founder, and Charlie Bobrinskoy,

Ariel, head of investment group. Welcome to both of you. Charlie, I'll start with you. I mean, it really was the mega cap tech names that led the move higher here today with the Nasdaq outperforming, finishing up about 1.8 percent. We've been talking about rotation in recent days. We've been talking about a broadening of this rally. Your thoughts on where we are right now? It didn't happen today, but there's no doubt that when we look at stocks and what's attractive and what's expensive, it's very clear. It's the tech stocks, the defensive stocks, the non-cyclicals are very expensive. And the more cyclical value names are what's attractive.

So everybody's talking about how expensive the market is,ical value names are what's attractive. So everybody's talking about how expensive the market is, how it's been up so much. A lot of our more value names are very reasonably priced at 10 times, nine times earnings. We didn't get that rotation today. We are seeing signs of life in our value names as it becomes more and more likely that we don't have a recession. These are the kinds of names that are going to catch up from a valuation point of view. Yeah, we keep talking about it, Warren, the fact that data has so far been pretty goldilocks. You know, you're seeing you're seeing disinflation, including today with the PCE. You're seeing the economy continue to. Yes, maybe it's softening, but it's continuing to to to grow.

Consumers are continuing to spend, at least to a certain extent. What does that mean for your investing thesis here, since I know you have been cautious in the past? Yeah, I think that the story of 2023 is really the economic strength that nobody really predicted. I mean, this is the most consensus call coming into the year was a recession. And basically, this has been a year where that trade has had to be unwound. We increased our equity exposure back in early June, and we basically like stocks and commodities over bonds. That was back when we got that. I'd say it was a really good May jobs report. And it became clear to us that this recession was not going to happen until probably somewhere at the earliest, the middle of 2024. So from there, you know, a lot of trades flow from that.

Oh, sorry. Go ahead. We like commodities. We prefer stocks over bonds. But the least attractive asset in this environment is the bond market, particularly the long bond. OK, well, you say no imminent warrant recession means stocks over bonds, but that's kind of a trade, right? I mean, if people right now have fewer bonds in their portfolios than they have historically, because yields have been pretty terrible over the last several years, it doesn't necessarily mean, does it, that they should stay that way? I mean, won't people years from now be saying, oh, I wish I had locked in some of those yields in 23 and 24

when interest rates were so high? Yeah. I mean, we're looking at specifically the long bond. And the long bond to me is overvalued. You can look at it from a number of angles. If you base it on nominal GDP, I think the long bond is about 100 basis points too low. If you think about the Fed hike cycle, usually at the end of a Fed hike cycle, the 10-year ends on par with the Fed funds rate. Today, we're 160 basis points below that. And then you think about term premium. This is the amount of additional yield that a long-term bond investor requires for locking their capital up. Term premium is negative. So you're actually not being paid that additional premium to hold up your capital. So across all these perspectives, we think long bonds are overvalued. And I really,

all roads point back to how the Treasury has conducted its issuance patterns over the last six to 12 months. Now, Charlie, talking more about portfolios here, you say stocks are priced as though we're going to get a recession. I might argue that the S&P and NASDAQ, like the major indices, maybe even the Dow, too, aren't, though, because mega cap and tech is so heavily weighted there. So what should people do if people own these indices? Should they be perhaps selling at these levels and either buying individual names that are those value names that you like or even specific sectors that haven't benefited as much over this period? Yeah, so normally you don't get in a lot of trouble owning the S&P 500 because it's such

a wonderfully diversified portfolio. The fees are relatively low. You've done fine with that. There are times when the S&P 500 is not that diversified and it becomes way overweighted and because of that can become overpriced. 1999 is obviously the most classic example of this. Today is another example of this. The S&P 500 is extremely tech heavy. It is extremely expensive on a historical basis because of that tech weight. The S&P 500 is extremely tech heavy. It is extremely expensive on a historical basis because of that tech weight. The whole stock market on an equal name weighted basis is not that expensive. But if you own the S&P 500 today, you are making a massive bet on tech. And that when I teach an eighth grade class, an introduction to the stock market, the only names they want to invest in

are tech, tech, Amazon, Nvidia, Microsoft, Facebook. Those are the names they want to own. They don't want to own any value names. That's where the public is right now. And those, unfortunately, mean that the S&P 500 is overpriced. I love that you teach an eighth grade class this topic. That's amazing. Warren, I want to go back to something that you just said, because I think it's really important, and that is how the Treasury has been issuing debt, what that's meant for long-dated debt. How is that speaking to the liquidity dynamics in the market here? And has that been a tailwind to things like equities? Yeah, absolutely. So if you think about nominal growth, I mean, nominal growth being high means yields should be high. But we haven't really had that backup in long-dated yields, even though the Fed is letting their balance sheet roll off, doing quantitative tightening.

And so why is this happening? Because the Treasury is issuing and funding the government via bills and not duration. And so for the last since the lows in October, really, it's been all bills funding the federal government, basically. And that keeps the supply on the long end very contained and yields low. But if you look forward, that can't persist. So there's going to be a wave of new duration supply. I think it's a big risk to the bond market. You look out the big buyers. I mean, banks aren't going to be buying.

Foreigners are not going to be stepping up. They're buying. And obviously, the Fed's not going to be stepping up. It's buying. So I think yields have to rise. All right. Good perspective. Getting us ready for next week. Warren, Charlie, thanks. I spoke with Intel CEO Pat Gelsinger last night right after the analyst call. Three key things to highlight. One, data center, where Intel beat revenue expectations for the quarter, but warned that NVIDIA has taken share away from Intel

CPUs with NVIDIA's AI chips, Intel's own next-gen AI chips, which we should know more about sooner than you might think, and Tower Semiconductor, the acquisition meant to accelerate the founding strategy. Time is running out to approve all that. Take a listen. Well, you know, obviously the deal itself has a August 15th date associated with it. If you look at the filing, so there aren't that many weeks left. So we're looking forward to this near-term opportunity to get it completed. And part of the reason I was in China very recently. So you shouldn't look for any extensions necessarily connected to that.

August 15th is indeed the date. I can't comment any further at this point, John. And obviously, we're working with the Chinese regulators and hopeful that we'll be able to come to a conclusion soon. I also talked to him about the data center market, which is weaker than expected in part because of China's muted recovery. China hasn't come back as quickly as we would have expected it to be. And those inventory levels will persist into Q3. But we're also seeing this bias toward accelerators. And clearly for particularly for cloud, they're investing a lot to build their AI accelerator farms right now, which is putting a little bit of spend pressure toward that portion of the business.

AI accelerators, that's NVIDIA. So from here for Intel, a major question is whether Intel's Gaudi 3 AI chip, expected to ship in volume next year, will live up to expectations. We could know as soon as this fall if there are problems, or conversely, if there are not. It doubles the capacity that we have today on Gaudi 2 on multiple dimensions. So we think that's going to be a very good product. Gaudi 2, Gaudi 3, Falcon Shores, and 25. So we are executing on a simplified focus roadmap. This is when Intel gets good.

So I hope to be with you in September because that's when Intel innovation, Intel On is, right? Are we going to have customers talking about experience with Gaudi 3 at that point? We'll see what we have to talk about at innovation, John, but I'm certain I'm going to have a few surprises to talk about with you then. And as I say, we're seeing first wafers on it now. It takes a while because any of these advanced high-performance data center and now AI accelerators, They use a lot of these advanced packaging techniques, which say it takes longer to turn them into samplable products. But as I say,

first wafers are in hand. They're looking good. And we're going to have a lot more to talk about around GAUTI3 and our overall data center and accelerator roadmap in the innovation time frame in September. And I do look forward to seeing you there. Morgan, the bar is lower than some might think. These chips have to work, which we might find out about in September. And Intel's got to show that they can deliver them in volume on time. Right now, the stock is priced as if people think that combination isn't going to happen. We're going to see soon. It's pretty incredible.

The stock moved higher, 6.5% today on these results, led the Dow higher as well. But to your point, and has seen a rally, almost 40% since the start of the year. But it's still depressed from where we saw it a year ago or even a couple of years ago here, when I hear this conversation play out, it seems like on a day where there's reaction and speculation in the market that maybe this turnaround is starting to take shape, we will know whether it actually has legs very soon. Well, we'll have a better sense of whether the likelihood is tilting toward maybe Intel, maybe Gelsinger can pull this off. It's sort of like the soft landing scenario where, you know, months ago people were saying,

ah, very remote chance, no way that's going to happen. Now, after these earnings this week, you've got to say if you're an investor, oh, well, maybe they can. There's a big piece of maybe they can if they're sampling these Gaudi chips and the customers are saying, hey, these are pretty good. In the past, Intel had world-class margins, and so they had to deliver the absolute top performance in order to get investors happy. Right now with their AI chip, they don't have to beat NVIDIA. They just have to be able to deliver a chip that works pretty well, and that's going to

move them into, because NVIDIA's got the top margins and the top of the market right now. So it's interesting. We haven't seen it before from Intel. All right. He seemed kind of chipper there in that conversation. Well, it's been a long time since Pat Gelsinger has seen chipper. All right. Well, up next, Lux Capital co-founder Josh Wolf, who just testified before the House Select Committee on the CCP this week on what the U.S. needs to do to stay ahead of China and where he sees the biggest investment opportunities right now. We have got such a big show ahead. Stay with us. Overtime's back in two.

Welcome back. Competing with China continues to be a top concern in Washington. The House Select Committee on the Chinese Communist Party holding a hearing this week on how to ensure the United States maintains leadership in critical and emerging technologies. Our next guest was a witness in the hearing. And staying ahead of China is what drives his investment theory. So joining us now is Josh Wolf from Lux Capital. Josh, it's great to have you back on the show. Great to see you, Morgan. How are you doing? I'm doing great. I'm curious what your key messages and key takeaways were from your

interaction with House lawmakers earlier this week? Well, first of all, I think it's a great committee, the select committee on the CCP. It's important because they're making a really fine distinction with the difference between Chinese Americans, Chinese people, China itself, and the CCP. So that's something that's really important. We don't want to have sort of racist or jingoistic messaging. The key messages that I took away, number one, it's a bipartisan issue, and that is something that is really rare, seeing people on both sides of the aisle really agree that this is a threat, not just an emerging threat, but a present threat. The main messages

that I had were really three or four things. Number one was that there's a moral dimension to us as investors when we're making investments, to people that are developing technology. You really have to consider the moral dimension. When we ship components and technologies overseas to peer companies and peer countries, we are not just shipping a piece of technology, we're shipping American values. And similarly, if you are importing Chinese technology that is directed by the hand of the CCP, you are also not just importing Chinese technology, you are importing Chinese values. And there is an American dream, and there's a Chinese dream, and they're very different. So that was one of the key things in the morality piece. Second piece was on technology sovereignty. And what that means is twofold.

Technological sovereignty for any of the portfolio companies that we're investing in, we want to make sure that the supply chain is robust, that they're not solely dependent. And you see, of course, with the dominance in rare earth minerals, in battery assembly and selling, really important that you have technological sovereignty, but also that independent countries throughout the world are going to make a choice. Are you going to be a free and sovereign country, or are you going to be dependent upon China? And there's one technology in particular people have not really focused on, and that is nuclear reactors. This is an area where I actually think that the government is behind in identifying. We used to have 104 domestic nuclear reactors. They is an area where I actually think that the government is behind in identifying.

We used to have 104 domestic nuclear reactors. They're down to 93. China went from 2 to 25 to 55 on their way to 150. And they are starting to export that to the rest of the world. I'm not worried about nuclear proliferation. I'm worried about the proliferation of dependency on China for electricity and all that comes with it. Is this an area that you're making investments in light of that? I mean, it's interesting. I would have expected you to bring up AI. We have these conversations about, you know, so-called AI arms race, but the conversation around nuclear, not really happening so much. Yeah, we've had some great successes in nuclear and cleaning up nuclear waste and the Fukushima disaster. And it's something that we continue to look at. You know, it is interesting on AI. Of course, it is the topic du jour. I am very bullish on

American AI, if you want to call it that, for a very simple reason. A lot of the foundation models that we're all using and experimenting with are built on the open internet and repositories of data that are very free and open. And for the most part, that means that we will approach an asymptote of truth. Okay? When somebody queries something, you're more likely to get an accurate answer. If things are censored and you're really relying on a repository of stuff that the CCP is putting forth, you're going to approach a repository that approaches only the party line. So I think over time, we're going to be advantaged because we're free and open and we're trending towards truth. Interesting. I want to ask you about that, Josh. Good to see you again, by the

way. Great to see you, John. Lux invested in Hugging Face four years ago, a startup that helps companies build and deploy AI models. And, you know, this year it's getting name dropped like crazy. What is the next phase of your AI investment since you've been pretty visionary in that? Is it industry specific models and those that are able to best create those? Is it other layers of the AI stack like like health care where you already have investment? It's a great insight. In fact, yes, we always say that we're contrarian investors, and we want people to actually agree with us just later. There's the five-year psychological bias, and as you noted four years ago with Hugging Face, people want to be

invested today where they should have been four or five years ago. When Brandon Reeves, who's one of the partners at Lux, brought this into our partnership, I was like, Hugging Face? We're investing in emoji? But yes, it has become basically the GitHub, the repository for all the key AI and ML models. So that was the first thing. We've also made investments on alternative chips and infrastructure and architecture. I will say everybody believes that NVIDIA is the way to go, that NVIDIA has a monopoly on this. And I actually think that there's some weakness in the CUDA, the language that a lot of people are able to program those chips on.

There's things like PyTorch and others that an ecosystem is developing that might give advantage to folks like AMD and even to distributed compute. One of ours is a company called Together Compute that basically said, wait a second, do we have to go from 10 to 100 million to a billion to train these foundation models? Could you leverage the large compute that's already out there? Could you repurpose compute that was used in crypto and basically have distributed compute? To your point, it's a great insight. I actually do think that healthcare is going to be one. I think financial services is going to be another. In both of those cases, you have institutions with a real proprietary repository of data. We heard for 10 years, big data, big data, big data. It didn't really amount to a lot. Big data now is the reservoir

that a lot of the algorithms can draw upon and build. The biggest area that I think, not just in healthcare, but in biotech. I truly believe that it's great that we're making images. It's great that we're making sounds and videos. Runway ML, another one of our companies, going to create full cinematic features without humans or actors. And so all the strike stuff that's going on, it's really interesting in that conversation. But biotech in particular, I think is going to be absolutely huge. People that are training foundation models for true scale in biology from designing individual cells to ultimately cellular medicines, I think is going to change humanity. That to me is the biggest bull market within AI. to the intersection of venture capital, private investment, and government and policy for a moment here, whether it's technological sovereignty or whether it's R&D and what that pipeline looks like and how it aligns with the country's values. We have defense policy bills making their way through Congress right now. It's been a topic for years, this intersection or this interaction between

the VC world and DOD, for example. Is it going far enough or is there more that needs to happen in terms of this relationship to see some of these visions and some of these goals actually realized, especially if you are going to counter a strategic competitor like China? You know, I'm really optimistic that a lot is being done, more than was in the past, and I will make the case that more can always be done. You look at reps like Mike Gallagher and Jake Alkencloss. There's some really young, brilliant, rising stars inside of Congress that served in the military. Our veterans get it, are tech savvy.

So I'm quite optimistic that the right people are making the push against the bureaucracy and some of the Beltway bandits. I guess I would say two things. Number one, we understand that the shape of the defense force is changing and evolving. So you look at a company like Sail Drone that has fleets of autonomous vehicles out at sea. You know, this is the future shape of the Navy. You look at Anduril. This is a company that barely existed five plus years ago and today is on its way to become one of the next important major primes, really cutting edge technology and attracting the best and the brightest from Silicon Valley and the rest of the country that want to work on these hard, wicked, thorny problems and really make an impact. The

other thing that I would say is that the science piece of this is really important. So the government investing in basic science is something that should be a total nonpartisan issue. Both sides should agree that this is one of the things that gives America's strength and greatness and being able to import and export that ingenuity. When I mean import that ingenuity, when you go back to our prior conflicts, whether it was World War II and being able to get European scientists to come to our shores or Cold War I and getting Russian emigres, brilliant mathematicians and physicists and rocketeers to come here, we want a China brain drain. We want the best and the brightest to come here, feel welcome here. As the old quote goes, capital goes where it's welcome, stays where it's well treated. We want brilliant scientists and engineers here inventing,

staying here and their families being welcomed, being part of that American dream and not the Chinese dream. All right. Josh Wolf, always great to have you on and get your thoughts. Thanks for joining us. Great to see you both. Well, speaking of the U.S. and China, the two countries are engaged in something of a space race right now as well. It is a topic that I discussed with the CEO of United Launch Alliance, Tory Bruno, on this week's episode of Manifest Space. That is available wherever you get your podcasts. Have a listen. All right. Definitely do that. And up next, former FDIC chair Sheila Baer on whether new bank capital requirements just announced yesterday go far enough or too far.

We'll be right back. Welcome back. Regulators this week unveiling proposed rulemaking for the banks, raising capital requirements, expanding the scope of banks subject to some of the strictest rules. Do these rules go far enough? Too far? Former FDIC chair Sheila Baer joins us now. Sheila, I'm less concerned or really interested in the too big to fail banks here, but what is the impact, you think, of this on the largest regional banks? The KRE is up significantly this week, and will this drive the expected consolidation among regionals? Yeah. So the good news is for those regional banks, most of the risks they have are credit risk. And these rules really don't, there are a lot of changes in the credit risk requirements. But for the most part, they do not actually in aggregate, the

credit risk capital requirements go down under these rules. I know there's a lot of hysteria about capital increases, but they actually go down. And the regional banks, because they do a lot of lending, their credit risk capital requirements are already higher and the capital levels are higher than larger banks. So I don't think there's going to be a big impact. I am concerned about the complexity of these rules and just, you know, the cost, the legal administrative cost of potentially new systems to comply with them. But in terms of actual capital levels, I don't think there's going to be a big impact on the regional banks and certainly nothing on the community banks. Anybody less than $100 billion is not impacted.

Yeah. Unintended consequences of this, or do we we it's just too soon to know yet? Well, it is. I mean, you're hearing this. So it's never a good time to raise capital. And these rules do raise capital requirements on operational risk and market risk. So banks, you know, that have a lot of fee based businesses, a lot of trading exposures, a lot of derivatives exposures, they are going to feel a big buy, but those are not the regional banks. So is that warranted or not? Does it go too far? Not far enough. I do think this was a big flaw in the package of rules we put together immediately after the great financial crisis, which is heavily focused on credit risk. We really ratcheted up the credit risk requirements,

not so much on our market and operational risk. So there's some catching up to do. Does it go too far? I mean, I think that's, look, if you're a fee base, if you have, you know, big trading operations and a lot of fee revenue, you're going to be hit hard by these rules. And that's what the comment process is about to, you know, get input and see if it goes too far or not. So Sheila, if you ran the circus, are these the rules you would have put out right now? And if not, what would you have done? So if I was if I if I was dictator, yes, I would have done I'm finished this up way earlier. It's kind of embarrassing that it's, you know, a lot of years after the financial crisis, we're just now completing a rulemaking process that started in 2009. So that's kind of embarrassing. But, you know, the problem is you want international

consistency. It takes a long time to reach agreements. So I would have done it faster. I would be simpler. One of the big positive impacts of these rules is it pretty much gets rid of banks using models to set their own capital. This was a big factor prior to the crisis. There was this nutty idea called the advanced approaches that banks with their own capital. This was a big factor prior to the crisis. There was this nutty idea called the advanced approaches that banks with their own models knew how to set their own capital. And obviously, banks are conflicted. They have every incentive to keep their capital levels low. They like that leverage. They're paid in equity. They like the bigger returns on equity. So getting rid of that, it was long overdue. Would have been done 14 years ago. I'm glad at doing it now. Would have done it faster, would have made it a lot simpler.

And I hope during the comment process they can find ways to simplify these rules. They are the capital rules are already hyper complex. My fear of this package will make that even worse. All right. Sheila Bear, it's great to get your insights in a week like this. Thank you. It's time now for CNBC News Update with Contessa Brewer. Hi, Contessa. Hi there, Morgan. As the riders strike nears the 90-day mark, Hollywood studios and streaming platforms are considering terminating some deals with riders within the next week, according to Variety, which reports those deals could be severed under a contractual force majeure clause, which allows dealmakers to kill agreements in the face of an act of God.

Variety reports that contracts being considered for termination almost exclusively affect television. Carly Russell, the Alabama nursing student who confessed to faking her own kidnapping, is being charged with two misdemeanors. Her charges include false reporting to law enforcement and falsely reporting the incident. The Hoover, Alabama police chief said these charges are punishable by up to a year in jail and a $6,000 fine if she's convicted. Would you change your name for free sandwiches? A lot of free sandwiches. Subway is offering its biggest fan a $50,000 gift card if they legally change their first name to Subway. The company will select a winner and also cover the cost of the name change. But you know what I don't know? What if you happen to have been born with the name Subway?

You know that's a possibility. There could be a Sub subway out there, Morgan. And that person should be eligible for the $50,000 free gift card to Subway. Well, I guess it depends on how many applications they actually get, which is a big question mark, at least in my mind. Contessa Brewer, thank you. Yeah. Norfolk Southern's second quarter profit plunging after a much larger than expected charge related to its East Palestine, Ohio train derailment.

Up next, CEO Alan Shaw is going to break down the results. Stay with us. Welcome back to Overtime. Norfolk Southern shares closing slightly higher today. That's despite missing estimates on both earnings and revenue. Profit fell 55 percent after reporting a new $416 million charge related to the train derailment in eastern Ohio back in March. Norfolk shares are down about 4 percent on the year, underperforming the Dow transport's average, which is up about 24 percent. Joining us now, though, Alan Shaw, Norfolk Southern CEO, who's here on set. Alan, it's great to have you back. It's great to be here, Morgan. Thanks for hosting. So walk me through the results. And I think let's start with that charge because it brings total costs to date for that derailment to $803 million.

How much higher do you expect that to go? And in terms of cleanup efforts and legal costs associated, how long will that process take? Well, the charge is what we have visibility into right now. It's what's probable and estimable. It does not include potential insurance recoveries, nor does it include potential recoveries from third parties. Yeah. And that process is going to happen here in the third quarter and beyond in terms of recoveries. Yeah. Likely well into 2024 and beyond. You know, you can't file for the insurance claims until you start expending the cash. And we're just starting with our insurance claims now. Yeah. And we've seen some volume weakness

from the service disruption that that entailed following that derailment. Has that begun to stabilize? Yeah. You know, we made a number of commitments during the quarter and we kept our commitments. We said that we were going to restore our service product as we moved through the second quarter into the third quarter. That's what we've done. We also said that we were going to make a safe railroad safer and our safety stats are improved from last year. We said we're going to engage with our craft colleagues and we were the first railroad to offer paid sick leave to all of our craft colleagues. And what we're seeing now is because of an improved service product, we're starting to see volume growth and our volume improvements on Norfolk Southern. We see strength in the metals market and the

automotive market. Anything related to construction right now is white hot. And we also are starting to see a little bit of strength in the domestic intermodal market. You know, the consumer is a little bit stronger and more resilient than most folks had thought. And we may be through the inventory destocking phase. And even in the second quarter, we took share away from truck in the international intermodal market. Just to dig into what you just touched on there, it sounds like we've been having this conversation about soft landing, the fact that the economic data has remained resilient. You're seeing that in real time right now on the rail. Yeah. As you know, we've got a great view into the U.S. economy. We've got about 5,000 customers who, and we serve just about

every major market there is. And, you know, what we're seeing is strength across the board, somewhat in manufacturing. We're seeing the truck market is still weak, and that's pressuring our volumes. That's our primary form of competition. But the indicators are there for the potential for sequential growth for us moving into the second half of the year on the strength of our service product, and we're really encouraged about how 2024 is lining up. Yeah, your direct competitor in the eastern U.S., CSX, saw merchandise volumes increase last quarter and actually talked about taking market share. Have they taken market share from you, and are you starting to take it back? You know, we had service disruption costs, and we estimated it probably cost us revenue of about $175 to $200 million during the quarter,

and our customers needed to look elsewhere. Now we're having conversations with our customers about building Norfolk Southern into their long-term supply chain needs. And that's basically the foundation of our strategy and our vision. So we talk about nearshoring, we talk about reshoring, we talk about the reemergence of a manufacturing boom in the U.S. and then, of course, all the money that's coming from the government towards some of these stimulus packages around infrastructure and the like. It sounds like what you're telling me right now is that you're starting to see the benefits of that. Yeah, we certainly are.

You know, there have been about $70 billion worth of electric vehicle manufacturing production announced in North America. And about 30 percent of that is on Norfolk Southern. You know, we were talking to the head of a European automaker the other day, and they said if they want to participate in the EV market in the United States, then they know that they need to put production here. There's a lot of advantages that are driving that secular trend for onshore in the United States. Cheap and reliable energy, access to skilled labor, and a logistics infrastructure that's already in place. And a lot of that's happening in our service region, in the southeast or the midwest, which is why I've got a lot of confidence in the future of

Norfolk Southern. Yeah, you talked about restoration of service and some of the investments you're making into the network and safety right now. We know that there are rules and regulations making their way through Congress and with the administration. Expectation for how all of that manifests and how do you get ahead of that given the fact that I know you've been very outspoken about some of those changes that need to happen in the industry? Right, you know, rail is the safest, most efficient, most sustainable form of transporting goods across land and we can do better. And so I'm taking a lead role and stepping ahead of the industry and advocating for many of the provisions that are in

the various railway safety bills that are moving through the House and moving through the Senate. They just make a lot of sense. And candidly, I don't believe they would be that onerous to our cost structure or the cost structure of our customers, allowing us to continue to pull share from truck. But we're not waiting to act. You know, we implemented a six point safety plan. I hired an admiral who was a former head of the Navy nuclear propulsion systems as an independent contractor reporting to me and asked him to put together a team of experts to help us enhance our safety culture. So we've got a number of former admirals and a number of former folks who've got Navy nuke experience working with NNS to enhance our safety

culture. Alan Shaw, thanks for joining us here on set. And my pleasure, Morgan. Good to see you again. You too. CEO of Norfolk Southern. All right. Commercial real estate weakness hurting CoStar's earnings. But up next, the company's CEO on whether he still sees risks from that industry. We'll be right back. Shares of CoStar falling this week after reporting lighter than expected revenue for Q2, softer guidance for Q3, citing weakness in part in commercial real estate. Meantime, regional banks seeing a boost this month, up 20 percent, despite those commercial real estate. Meantime, regional banks seeing a boost this month, up 20 percent, despite those commercial real estate concerns. Joining us now, CoStar Group CEO Andy Florence.

Andy, you guys are the place to go for data on all kinds of real estate, residential, commercial, industrial, etc. So love data, especially on this hour. I wanted to talk to you about that. So LoopNet is one of those properties that that deals in the commercial space. What are you seeing activity wise as office has become depressed and people need to market properties, but perhaps are reluctant to sell at depressed prices? How is that trending right now? Yes, for sure. So right now is an extremely difficult time if you're in the office sector. You have the highest vacancy rate ever. You have a super high phantom vacancy rate. So it doesn't matter if space is leased, but no one's occupying that space, banks will not consider that validly leased space.

So we're at the highest vacancy rate ever at 13.1 percent. And if you take phantom vacancy, we're at 56 percent vacant, which is unprecedented in history. That would eclipse, say, the Great Depression. So obviously people need to market space. There are still lots of deals in the market. There are transactions happening. People think that the work from home phenomena is universal. But out of 160 million people employed in the United States, 145 million are showing up to work, a place of work every day. So 90 percent of the world is going into work, a place of work every day. So 90% of the world is going into work and it is continuing to bit by bit trickle back to more and more people coming back to work. So looking at location data,

card swipe data, it just keeps on moving ahead. However, a lot of trickle doesn't fill a pool very quickly. And maybe not quickly enough. And not quickly enough. For certain lenders. So if I were to say to you, well, this must mean that certain regional banks that have a lot of these office loans on their books are in serious trouble and the market's not paying enough attention to that, you would say what? I would find it difficult to argue with you. So if you look at where we are right now, I would say that the trend started to turn hard south in 21 when people began to realize that work from home was going to be more than a temporary thing, and people began reevaluating. So we're now in year two of a dislocation in the office markets. And we are the first half of this year didn't have a lot of CMBSs coming due. Second half of this year, you have a high number of CMBSs coming due and into 24 and 25. So typically, like if I go back to the recession of 07, you began to see distress or defaults in 2009,

but you didn't see liquidation really until 11, 12, 13. So we're in the very early stages of that. And you'll likely see things begin to develop the later half of the year. And there's no question that with a 50 some percent effective vacancy rate, a lot of these loans with are not going to be refinanced, very few are going to be refinanced. There's going to be some real issues. The Fed has said, you know, in a formal way, pretend and extend if you believe the loan can be restructured or fixed. But I think that's going to be difficult. And I think you're going to see some material defaults. One of the negative feedback loops that occurs, we have a platform called 10X where a lot of properties are sell or transact online for broker terms. I saw a deal

yesterday. The owner was in that office building at $35 million purchase price, had a reserve of $27 million, sold it for $11 million. Wow. So it's not atypical to see $0.30 in the dollar, $0.40 in the dollar right now for office buildings. And the sort of self-reinforcing negative loop is that new owner will be able to step into the market and profitably market space in that office building for half the cost of the competitors, which exacerbates the pain for other folks who haven't yet got in the cycle. So there's a way to go there. Yeah. So it sounds like we're on the cusp potentially of a downward spiral. Now, you also have Apartments.com and you have Homes.com, which is growing gangbusters right

now and is sort of direct competitor, quickly emerging as direct competitor to Zillow and the like. What are you seeing on the residential side and how are you able to grow at a time where the market dynamics are, as one investor described to me earlier this week, kind of stagflation when it comes to housing? Well, it's a good time to be a new entrant in that market. So we acquired a couple of small, small players a year ago and rewrote all their software and we built what we believe is a much better product. So we're the fastest growing residential porter. We were maybe number six, seven last year. We're now number two in terms of traffic, in terms of residential, you know, resale rental. And we're able to do it because when you have no share the shrinking

size of the market doesn't really impact you you're growing into a a new opportunity we believe we've built a better product you know we are more transparent we connect the home buyers directly with the listing agent who knows the property best and we also are bringing a new approach to it where when you buy a home, you're not buying just four walls and a yard. You're buying into a community. Your kids are going to go to a school. You're going to play in parks. So we're investing a lot into content around communities, neighborhoods, schools, and we're putting it all together. And we're getting a very positive reaction. You can see that in our traffic numbers. Andy, I want to have you back soon because we need

good data, not just opinions about this stuff. Thank you for having me. All right. Well, education technology, Coursera surging after beating revenue estimates, finishing the day up more than 17 percent. Up next, the company's CEO weighed in on how AI is driving upskill opportunities. We're going to break that down. Stay with us. Welcome back. Shares of ed tech company Coursera jumping on the back of better than expected earnings and higher revenue outlook for this year. The current state of the economy driving many folks to find affordable ways to upskill and obtain higher pay. And of course, AI is starting to play a role in what's driving more

people to Coursera. Here is what CEO Jeff Magiancalda told me earlier today on the exchange. I would say it's really just starting. The biggest search term on Coursera is AI, but what people are really buying are certificates and training programs for new jobs. There's not really a prompt engineer job that's in really high demand yet. It's more along the lines of UX designer, software engineer, things like that. But the AI is going to create huge displacement of workers. We've had these conversations before, John,

and I know I'm not the only one who spoke to him today. So definitely want to get your thoughts on this, especially given the fact that there are three different business segments all grew double digits. I think the key here is that it's not about AI what drove this outperformance. It's people being able to more quickly reskill into new jobs if either they didn't get a degree or they got a degree in history or English and they want to work in cybersecurity. It's now cheaper to do that. All sorts of challenges that come with that. Interesting from Jeff. Now, the second half of earnings season kicks off next week with huge names such as, well, Apple and Amazon.

We're going to discuss what investors should expect from the rest of this earnings season. And overtime comes right back. We have a news alert on Johnson & Johnson. Christina Partsenevelis has it. Christina. Johnson & Johnson hearing a no for a second time. Today, a judge ruled Johnson & Johnson can appeal its attempt to resolve tens of thousands of lawsuits over its talc products, which, by the way, they put into a separate company about a year ago.

But this time around, second time, J&J cannot file for bankruptcy because, quote, it's not in financial distress. Johnson & Johnson, though, did put out a statement saying they plan to, quote, vigorously appeal this ruling. John? All right, Christina, thanks. The stock down about 2.5% after hours. Now we're halfway through earnings season. Looks like this quarter is the trough for S&P 500 earnings. Bob Pisani looking at what that means for earnings through the rest of the year. Hey, Bob. John, good to see you. We're at the halfway point for second quarter earnings. There's mostly good news here. 81% of the companies beating estimates. That's a little higher than normal.

Companies are beating by about 6%. That's on the high side. You know, prior to COVID, the average beat was 3% to 6%. So this is not bad. Consumer discretionary, communication services, industrials, they're all expected to see an increase in earnings this quarter. Tech, believe it or not, is flat. And that's a story for the rest of the year. Declines are expected for commodity-based sectors like energy and materials and for

health care, where a big charge from Merck has dropped estimates for that sector. Now, one reason the stock market has held up so well is the expectation that the second half, the second quarter, rather, will be the trough for earnings for the S&P 500. Now, they're expected to be down 7 percent this quarter and are expected to improve in the third and fourth quarter and into 2024. You see how these dollar these estimates go up as we go through the year. By the second quarter of 2024, earnings are expected to be up double digits. So that'll be the main assignment for bulls for the rest of the year. Earnings have to start rising. John Morgan. Bob, interesting. And I'm interested in any thoughts you have on what I think was the week of the underestimated when it comes to earnings. Intel, Roku, even Meta

a year ago, people were saying, oh, TikTok is killing Facebook and Instagram in a relatively expensive market. Those had big pops, one might argue, because they were underestimated. Yeah. The big story this quarter and really for the rest of the year is communication services are going to have big increases. You have to be a little careful here because meta and alphabet completely dominate that particular sector. And their earnings estimates not only are higher for the second quarter, they're going to be higher for the rest of the year, notably higher than they were last year. So that is helping power not just communication services, but they're so big in the top 10 of all stocks that they're pushing the S&P 500 estimates up. But I'm looking for a much broader aspect for the market. I'm looking for earnings turnarounds in energy stocks, material stocks, and particularly bank stocks. John, you saw what happened to bank stocks this month, up 16 percent,

because people are now anticipating finally a bottoming in this banking crisis, finally some stability in deposits and maybe some stability in net interest income, John. All right. Bob Pisani, thank you. And, of course, we've got another busy week ahead of us next week with earnings, including, by the way, Apple and Amazon and AMD, which will all fall in our hour. Starting with a volatile one, SoFi. We've had the CEO on here.

He's been all over, formerly at Twitter. Can we call it that anymore? I still will. All right. X. Okay. Well, all the major averages did finish the day higher. The S&P up 1%, 45.82. That's going to do it for us here at Overtime. Fast Money starts now.