Closing Bell - Closing Bell: Overtime: Stocks Tumble Day After Fed; Hawaiian Airlines CEO On Demand; Mobileye CEO On AI Race With Tesla 9/21/23

Episode Date: September 21, 2023

Stocks tumbled the day after the Fed’s decision. Goldman Sachs’ Candice Tse breaks down the market action and what’s next. Atlas Merchant Capital’s Bob Diamond talks the Fed’s odds of a soft landing and responds to a recent report his firm may be involved in bidding for SVB VC’s arm. Mobileye CEO Amnon Shashua on expansion in China, the autonomous driving race and the strong stock performance since last fall’s IPO. Hawaiian Airlines CEO Peter Ingram on the rise in oil prices, travel and demand and impact from Maui fires. Benefit Street President Richard Byrne on “the best investing opportunity we’ve seen.”  

All right, stocks settling at session lows. 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. Ahead of today's show, former Barclays CEO Bob Diamond weighs in on the Fed's messaging that put the market on edge and explains why investors need to get used to a new normal on inflation. Plus, we're going to talk to the CEO of Intel spin out Mobileye,

the autonomous driving company that's been a rare IPO winner since going public a year ago. But let's begin with the market with more pressure for the bulls today, adding to losses on the week, real estate, consumer discretionary materials, seeing the biggest pullbacks. Joining us now is Goldman Sachs managing director Candace Say and CNBC senior markets commentator Mike Santoli. Mike, I'm going to kick this one off with you because we saw a big move up in yields. Goldman Sachs Managing Director Candace Say. And CNBC Senior Markets Commentator Mike Santoli. Mike, I'm going to kick this one off with you because we saw a big move up in yields. And we saw this big move lower in stocks, particularly big cap tech. Yeah, I mean, pretty comprehensive sell-off in stocks, I would say. Absolutely, in terms of market cap effect, big cap tech had a big effect.

But I would say this repricing, according to higher yields, there was some hope out there, I think, among stock investors that Treasury yields were maybe just visiting the upper end of their range. They were ready to kind of crest and come back down a little bit after the Fed meeting yesterday, but also along with these other concerns about higher for longer rates, but also persistent inflation, energy doing what it's doing, big Treasury supply down the pipe, all that stuff filtering toward this new cycle high in yields. That in itself doesn't mean game over for stocks, but it happens at a time when the Fed chair himself yesterday said he's not sure what level rates are restrictive enough.

So maybe we have to see the economy show some more slowdown effects from what they're doing. And it creates a pocket of uncertainty in a seasonally weak period. The S&P 500 now down about 6% from its highs and at a new third quarter low. This is the seasonal reset payback phase that we were promised in August and September. It's happening right on schedule. It's a key point that you're making, Mike, because this is seasonally one of the weakest weeks of the year, historically speaking. Candace, I want to get your thoughts. Do yields go higher from here?

And if so, how do you play it as an investor? Well, I think the market's just trying to digest what the Fed announcement was and all of the economic data points we've seen so far. So I think the market had expected, as all of us did, for the pause to happen, and the Fed did pause. But what we didn't expect was for such a hawkish message. So what happened was all the yields start to surge across the board, across fixed income. I think as long as there's uncertainty, we may continue to see some movement higher. So is there opportunity here, Candace, especially in some smaller stuff? I'm looking at regional banks, right? They're below 42. The KRE is below 42 bucks a share. The WCLD, the cloud index, is below 30, down near 29 now. So these smaller names in these areas, you know, that's not mega cap tech.

Should people think about buying here? I think certainly there's an opportunity for alpha. You need to be highly selective in what you're buying. It's security by security specific. So I wouldn't necessarily look into just particular parts of different sectors and loading into them. You'd really have to do some more security selection analysis and look at the more idiosyncratic factors. OK, Mike, if we're looking at the S&P specifically, are there levels that investors should be thinking about where there's resistance or if we get below them? It's an issue or is this just, hey, we expected a turbulent September and here we are?

We're kind of sitting right on one of those levels at just above 4,300. It was the low in August. But also, if you dial it back, it was sort of where we broke higher from in June. So that was sort of the upper end of the range. 4,300 was the high from August of 2022. So it seems as if this is one of those areas where you might have the market change complexion. But I think more crucially, it's a little bit lower. Forty two hundred ish was the ceiling on the market. So we're talking about within a few percent

of where you might have to reassess. The flip side of that is when you get to these levels and you're testing them, it means that as people get more negative and the market gets more stretched to the downside, that's when relief can come if, in fact, you get a bid in bonds. So all this stuff is always an if-then scenario, and you have to just be aware of it. The 200-day moving average is down below 4,200, I think. So anything down to that is kind of in the big picture, routine and somewhat normal.

It just isn't going to feel that way because there's always going to be something going on that makes you think it could get worse. Yeah. Candace, I realize that the markets are digesting the Fed in this hawkish message yesterday, but Powell was also very clear in the fact that part of the reason they're going higher for longer is because economic growth has been stronger than they originally expected and yet cyclicals some of the hardest hit. Right. I do believe that you know even though you know they're looking at data dependency there is an opportunity for them now to push back the cuts right

I think it could lead to cuts later on in the year maybe even fourth quarter of next year so I think it's giving some space in between what markets have anticipated versus what they're anticipating moving forward I don't think think, you know, markets have had priced in the fact that they were going to cut so much later in the year. But I think there is opportunity at this point for folks to digest that it might happen later. So it's not unsurprising to see some of these more cyclical parts of the market, like industrials, like materials, like discretionary selling off as much as they are. I think it's just reacting to what has happened so far. So, Mike, looking at what did a little better today than other areas, energy, transportation,

what do you see that's perhaps below the surface that the major indices alone don't tell you? I mean, energy for sure has its own kind of dynamic working for it. Clearly, the commodities are near their highs. It's really neither growth nor value, so it doesn't get caught up in these big style moves one way or the other. And then I think relative safety has also worked. A lot of the stuff on the downside, you know, I noticed today, I looked at the top 40 performing stocks in the S&P year to date.

Only one of them was up today. And it was FedEx because of earnings last night. Everything else was being just kind of pared back in this heavy profit taking mode. Things like Eli Lilly, Pulte Homes, not just the big tech stocks. So to me, that shows you one of the motivations for what was going on today. It wasn't just like, oh, I'm suddenly worried about a recession. It was the market seems a little bit wobbly here. I'm going to be taking some profits on one side, and maybe I'm going to offset them with some of the losers and sell those for tax purposes. Okay. Mike, we'll see you in just a few minutes.

And Candace Say, thanks for joining us here on set. Great to have you. Thanks for having me back. All right. Let's turn to one of today's hardest hit names, Deere. Those shares dropping after news of layoffs at the company's Illinois factory. Seema Modi joins us now to discuss. Hi, Seema. Hey, Morgan. Well, why this matters is this is one of Deere's key factories in Moline, Illinois, where it manufactures combines and other ag producing equipment. In total, it employs about 2,300 staff. The news is that it's laying off

225 employees. So yes, a small percentage of the total, but a lot of analysts today have been talking about it basically reinforces this idea that demand is starting to peak and demand is potentially going to slow in the coming months. Now, of course, this is coinciding with a steep drop that we have seen in agriculture commodity prices, not just today, but take a look at corn. It's down 30 percent this year. How do farmers feel comfortable or confident about making future purchases when the crop that they're producing is losing value this year? So that's been a key concern.

And, of course, that farm bill, which expires at the end of the month, this is something that gets renewed every five years. And there's been concerns about, as senators focus on, of course, a pending government shutdown, that this may not get the renewal it needs and how that could be factored into this, Morgan. The question I keep coming back to is, you know, this is one of those companies like so many others that dealt with supply chain issues. They were able to raise their prices and aggressively coming out of the pandemic as well. Is this just a normalization for Deere or is it a sign that in their part of the broader global economy, things are truly slowing down and a red flag? Well, I think the crop price picture tells us where demand is right now, right? It suggests that even with the continuation, Morgan,

of the Russia-Ukraine war, there's a lot of concerns about future demand because of what's happening in China and the deceleration in that economy. Plus, you also have a stronger dollar that's getting baked into these prices as well. But to your point, over the last three years, the story has been John Deere being a bright spot in the industrial space because demand has been so strong for farmers on this idea that inflation will keep crop prices elevated. But it's certainly changed this year. And now the question is what we see in the coming months. That farm bill, again, just to go back to that, that matters because it provides not only subsidies to farmers, but insurance as well during

moments where weather can be disruptive. So that is something to keep an eye on. Plus, the global manufacturing numbers that come out tomorrow, once again, we're expecting a reading below 50. This is a report that not only matters to Deere, but Caterpillar and other manufacturing names as well. Seema, management in the last earnings call at Deere signaled that consumer-oriented products were being slowed a bit by high interest rates. How much sensitivity is there in a company like this to just rates, which we see remaining high. Very sensitive because their key customer farmers rely on loans. Low interest loans over the last couple of years have been very beneficial to farmers and gives them the ability to make purchases of tractors and combines and other ag equipment. And not to mention that

demand story has been so strong that's allowed Deere to double down on their tech strategy, which both of you have also focused on as well, right? From robotics to AI, this is one of the companies within the industrial space that is seen as much more tech savvy. And that's why it's been given a premium by the market than some of the other competitors like ADCO and C&H Industrial. Yeah, I'd add space in there as a bucket too. It sort of speaks to them trying to push away from the cyclicality of just machines and focus also on software. So you wonder how that budget gets affected, right, if demand slows. Yeah. Sima Modi, thank you. All right. Today's sell-off pushing stocks to levels not seen since August. Let's get back to Mike Santoli for a look at some charts. Mike? Yeah, John, as we were just

saying, kind of undercut the mid-August low. That, remember, was this 5% pullback from the late July high for this cycle in the S&P 500. What we also did today is gone below the 100-day moving average. Of course, you could always look at these trend lines in succession. We've been operating underneath the 50-day, the 200 below that. But you see here, we also got below that 100-day in March. That was the Silicon Valley Bank instigated sell off in stocks. And that sees up in the in the briefly in the credit markets. So you can see that it's not necessarily a inflection point for the longer term trend.

We also did get down there in December. Always a marker of a little bit of a gut check. And some of these systematic trading platforms will use this as a trend change indicator, potentially, in the short term, tactically. The other dynamic, everyone watching Treasury yields for very good reason. The trend there is higher. Their cycle highs, the 30-year above 4.5%, all getting our notice. And it has now had its effect, it seems, on the ratio of cyclical to defensive stocks. This is a chart from Strategas from Chris Ferron. And it shows you that for the most part, rates going up did not impede cyclical stocks from outperforming. The economy was strong enough.

The assessment of the market was we can handle yields at these levels. Maybe that has changed coming into this period right now as we've gotten to successive higher thresholds. Though I will note that there was this period right there where we also got that cross, where, in fact, you got a pullback in the cyclical leadership right along another high in yield. So it's not to say that this is going to be the way it goes diverging from here, but it is worth noticing that concern about the economy's ability to absorb what's happening in the bond market is definitely making its way into stocks. OK, Mike, and talking about trends a year ago in the fall in the market, looking at the S&P, things really got hairy for a while there, to say the least. How much does that influence you? You've talked about how we've been bumping around sideways for quite a while, and maybe we're not in a particular trouble area. But given where we've been in the fall in the

past, how does that factor in? Yeah, I mean, August to October often is the scene of some accidents. I don't know that we have to look at last year as much as a template just because we were in a very persistently downtrending market. We have financial conditions tightening very rapidly. It was stagflation fears. You had inflation out of control. Now it's a little more about valuations, exactly what's the pace that the economy is going to slow. I'm not saying things can't fall apart from here. Certainly, if the bond market continues to really sell off in this aggressive fashion, you really get some upside momentum in yields further. Maybe something breaks along the way. You have to be worried about that. But I'm not as concerned

about October per se as I am just more looking at this as that kind of seasonal setback that you might often expect within an uptrending market. But it's delicate because, you know, the average stock is not doing as well as the major indexes. OK, you know, don't panic. Not yet. Mike Santoli, thanks. After the break, former Barclays CEO Bob Diamond weighs in on today's sell off, tells us why investors need to get used to a new normal on inflation. And speaking of inflation, we'll talk to a credit fund manager who says the Fed might have two more hikes in the cards in light of rising prices in one particular area what that could mean for markets when overtime comes back welcome back to overtime stocks sliding today the day after fed officials signaled high

rates may stick around for longer than previously expected. Joining us now is Bob Diamond, CEO of Atlas Merchant Capital and a former Barclays CEO. Bob, it's great to have you back on the show. Good to be here, Morgan. You were on CNBC, I guess, about a week ago. And you said then that the markets better get used to, investors better get used to the possibility that rates are going to stay higher for longer and that it's going to take a lot to start to see cuts. Feeling vindicated today? Yeah, I mean, we've talked about this before, Morgan. The bar for reversing the position for the Fed is very, very high.

We did feel it was time for a pause and they have paused. But I think one of the things we're seeing in the survey, the summary of economic projections from the Fed presidents and the Fed governors, is when they project out for the funds rate at the end of 2024, it's pretty flat to where it is today, slightly below. So I think even that kind of supports the view that rates are going to stay higher longer. So I guess walk me through what that means for the trajectory for inflation coming down, because we do have some structural shortages, including in some of the more interest rate sensitive parts of the economy. Look no further than housing and the push pull

with inventory there. We see gas prices and energy prices on the rise with supply demand dynamics shifting in the oil markets as well. How much are some of these dynamics a challenge or maybe an unprecedented challenge, dare I use that word, for the Fed as it does use rates to tamp down inflation? We think they're doing a pretty good job at it. We think it's at a pretty good level. We think people will get used to around 3% inflation. But I think if we're wrong there, and as you say, if some of the thoughts that we have are too positive in terms of inflation being tamed, then I think we will see more rate increases. When you look again, like every three months, Morgan, the Fed presidents and governors do projections to the end of the following year. And the difference between June

and today's release or yesterday's release, they mark up GDP. So they think it'll be three to three and a half at the end of 2024. They mark down inflation just a bit and they see rates staying pretty level. So I think that's the new normal. That's where we are today. As you say, if we see a surprise to higher inflation, I think the Fed is prepared to move again. We don't expect that that will be necessary. It will be very data dependent. Bob, I want to ask you about regional banks. The KRE regional bank index down under 42 right now. So, I mean, if rates are higher for longer, these loans for commercial

real estate are repricing. What is the upside scenario for the regional banks that are going to get potentially left holding the bag? Listen, as you know, John, we're very positive on regional banks. We think they're incredibly important to our economy, to the depth of the financial markets in the US. We do expect to see some consolidation there, but I think on balance, they've adjusted pretty well to the higher interest rates of 5%. And as you and I both know, if he can level set that and manage to where they are today,

higher rates are positive for banks. So five, five and a half percent rates starting from scratch are far better for the community and regional banks than zero interest rates and free money that we had for so long. There's a lot of concern about commercial real estate. But to be perfectly frank, are we really worried about commercial real estate in small cities in Iowa where community banks are investing in downtown. I think it's much more around the big cities than it is around community banks and regional banks. So I think we have better news ahead. While we will have consolidation, I think as the regionals and the specialists have adjusted to

higher interest rates, I think they're going to perform better. Yeah, we are starting to see some deals, particularly among some of the smaller banks, as you mentioned. Speaking of dealmaking, got to ask you about some of these recent Merchant Capital, are among the frontrunners for this asset. Your comment? Well, as you would obviously know, if we were working on a situation, it's not something that I would discuss right now. Fair enough. So I want to go back to the regionals question because we've been kind of knocking on this for a while. It seems like larger banks are using technology lately to try to deliver that kind of white glove service that smaller business owners expect,

whether it's through payroll or other means of serving them. Is that going to drive further consolidation and perhaps even downside, even for some of those smaller banks that don't have commercial real estate issues? I actually think it's the opposite. Obviously, technology will be very, very helpful to the larger banks. But I think if you surveyed small businesses since March, when, you know, as we first knew that SVB was going to fail and we had the issues around First Republic, I think there is more discussion around small businesses around the better service, the important service, the kind of service they get from their regionals and specialist banks. And I don't think it's in anyone's best interest that we go to four banks, you know, just continued consolidation. One of the great things about the banking system in the U.S.

relative to Europe, where most countries have one or two or three mega banks, is that we have this very, very strong group of regional and specialist banks. I do think there'll be consolidation. There has been consolidation over the last couple of decades and it will continue. But I don't think we're going to move away from the incredible service that these specialists and regionals give to small businesses. All right. Bob Diamond, thank you for the insights. Thanks, John. He neither confirmed nor denied that report. He did not. He said, yeah, if he were doing it, he wouldn't say, and he didn't say he wasn't doing it.

But, you know, good question. A recent IPO arm is pulling back today, meantime, while Instacart and Klaviyo are sitting near their listing prices. But one newly public company has been bucking that trend. We're going to talk to the CEO of Mobileye about how public company has been bucking that trend. We're going to talk to the CEO of Mobileye about how his company has managed to outperform since going public and the growth opportunities in autonomous driving technology. And as we head to break, take a look at the deal of the day. Cisco finishing lower and Splunk finishing sharply higher after Cisco announced it was buying the cybersecurity firm for $28 billion in cash, the largest acquisition for Cisco ever.

Shares of Splunk finishing the day up almost 21%. We'll be right back. Welcome back to Overtime. Chinese markets selling off today, and investors have been eyeing that country with a wary gaze these days. One company doubling down on China, autonomous driving firm Mobileye. It is deploying tech in Chinese EVs. Announced a new partnership with the Chinese first automotive works group last week.

Joining us now is Mobileye co-founder and CEO Amnon Shashua. Amnon, good to see you. So I want to ask you about the rate of advancement that you're seeing in this technology. You got some differences with Tesla on the way that this should go. How quickly are we getting there and how does this Chinese deal you just did fit in? Hello, John. It's nice to be with you again. So what we see in China is that there is openness for very high-paced traction of new technologies. And we started exploring that a few years ago, and we just recently launched more than 100,000 vehicles on a brand of Geely called Zika with our latest technology 11 cameras around the car which we call supervision hands-off experience and and the response by by the media by the public is is off the charts it's very very

strong and we started getting more traction more brands and and the recent faw were designed when both for this type of system and for eyes off level four systems. So what we see in China, besides the fact that it's a big market, is the fact that we can move faster and then from there go globally. For example, we won design win with the Porsche. We are engaged with more than 30 percent of the global manufacturers on these kinds of systems. I believe those would be converted to design wins in the coming months. So China, for us, is a territory in which we can move, which we can move fast, besides the point that it is a big market. And here in the U.S., is there a real gating factor that's keeping companies here from moving as quickly as China?

What would it take to lift that? I think the competitive dynamics is what is needed. I think so far, you know, the strong competitor was Tesla. And you see in China many FSD-like systems. And our system is, I believe, and all the benchmarks shows that it's even better. But that competitive landscape, starting in China, from there it's being exported to Europe and other markets. Besides, Tesla will create more competitive dynamics for other car makers. And we see that, for example, our design win with Porsche was on the wave of the success we had with Zeker in China.

And we are engaged with U.S. companies, European companies, Asian companies. It's a very strong engagement now. Okay, and for Mobilize, certainly, but for the industry around full self-driving, how much does the outcome of this United Auto Workers strike matter? Because some of it's over AI, and that, of course, is an important part of driving this technology forward. I think for the short term, it doesn't matter. And let's see how it plays out. You know, if it will be like, you know, the COVID year where factories shut down for a long period of time, it will matter. But right now, we don't see it affecting our shipments or, you know,

the next quarter shipments. I just want to go back to the Porsche partnership that you just mentioned. Do you expect to see this type of dynamic expand to other brands, whether it's within the VW landscape or elsewhere? And if so, how meaningful? Well, you know, our relationship with the VW, with the VW group is very extensive. You know, we have traction close to 100% of all VW Group vehicles. And we're very hopeful that the Porsche win will translate to other brands because it's the same architecture. The architecture that we're building on the Porsche vehicle is exactly the same as in Audi and Bentley and other premium brands. So it's just a matter of a few weeks or a few months until we'll see this playing out with the other brands of the group. All right. Amnon Shashua,

founder, CEO of Mobileye. Thanks for joining us on Overtime. Thank you. Thank you. All right. It's time now for CNBC News Update with Christina Parts and Avalos. Christina. Thank you, Morgan. Well, New York State Police reported a rollover bus crash left one person dead and at least 40 injured. The bus was carrying students from the Farmingdale School District on Long Island. A district spokesperson said they were on their way to band camp in Pennsylvania. Video shows the bus on its side at the bottom of a steep median that splits the interstate. They can see on your screen. President Biden and Ukrainian President Vladimir Zelensky are meeting right now at the White House. Zelensky also met with leaders at the Pentagon today and this morning delivered an update on the war to lawmakers,

where he faced tough questions from some critics about the effort and continued U.S. support. The Senate today voted 96 to 0 to confirm General Eric Smith as commandant of the Marine Corps. It's the third highest level military post approved by the Senate in the last three days. The others were for the chairman of the Joint Chiefs, as well as the Army Chief of Staff. The nominations were considered individually, which is the only way to bypass the current holds by Alabama Republican Tommy Tuberville. John. All right, Christina, thank you. After the break, if you think the market looks expensive, even in the light of this week's downturn, there's one particular

group of stocks to blame. Mike Santoli is going to take a closer look at valuations next. And later, Hawaiian Airlines pulling back sharply today, and airlines on the whole have hit a rough patch. We're going to talk to the CEO of Hawaiian Holdings about the headwinds facing the industry. Stay with us. Welcome back to Overtime. Small and large cap stocks taking it on the chin in today's sell-off. Both the S&P 500 and the Russell 2000 falling more than 1.5%. Let's get back to Mike Santoli for a look at large versus small. Mike. Yeah, Morgan, as so many have observed, it's been an uneven market. The mega cap dominated S&P 500.

It still looks like it's in a pretty nice trend, up more than 12% year to date. But you have had near breakdowns or at least stagnation among the equal weighted S&P. So it's the same 500 stocks just weighted in equal proportion, as well as the small caps. This here is the small cap 600 index, which is a higher quality small cap index, but still suffering. It's pretty close to those, you know, February, March lows that we had again around around the time of the SVB. Now, there's good reason for this, right? As rates go up, more bank-dependent, smaller companies, less high-quality profit streams, they do suffer a little bit more. And we've had the privileging of the magnificent seven stocks that have powered through everything

so far. However, if you're also complaining that the market looks overvalued, that's also mostly a mega cap phenomenon. Look at how these same indexes break down in terms of their forward price-earnings ratios. And what you see is you still look as if you're about 18.5% on the S&P 500. It's the high end of the historical range. You know, sure, we've been around here for a few years, but that included the pandemic when you had depressed profits. Here you have, though, the equal weighted S&Ps under 15 times earnings and very similar to the range it's traded in for some time. This goes back eight years. Same thing with the small cap, in fact, much cheaper than they have been for the last eight years. So it doesn't mean they're about to get up and go because they look cheaper,

but it shows you the valuation excesses do seem to be also as concentrated as the market cap market. So what you're telling me is that now might be a potentially great time for value hunters. It seems as if the scene is set for that. Yes. And, you know, people will make the analogy to what things looked like in the very early 2000s after that prior tech bear market. And you did have small cap stocks looking very cheap relative to large. If you were to basically overweight small caps or better yet, if you're a hedge fund and buy some small cap cheap stocks and then, you know, short the big overvalued ones. You did really well in that period. A lot of that relative performance came because large cap growth just imploded. I'm not saying that's going to happen right now, but it does seem as if a lot has been wrung out and some of the risk has been

taken out on the valuation front from the average stock. OK, Mike Santoli, thank you. Up next, the CEO of Hawaiian Airlines on whether he sees any signs that consumers are slowing their spending on travel. And here's a look at today's biggest NASDAQ 100 decliners today. Atlassian, Dollar Tree, Lucid, Amazon, and AMD all on that list. We'll be right back. Welcome back. Airlines in the red today with Hawaiians seeing the largest move down four and a half percent. This comes after we've seen forecast cuts from a number of airlines recently, including Southwest, Frontier, Delta and American, citing higher fuel costs eating into margins. Joining us now, Hawaiian Airlines president and CEO Peter Ingram. Peter, welcome. So last earnings, you said you were pleased with

the revenue environment and booking trends. Labor costs, though, are up four and a half percentage points from a year ago, and now fuel prices have spiked. How much is that hurting? Well, certainly the fuel price increases are going to hurt us a little bit. And of course, we don't know exactly where that market goes from here. But that is a cost to doing business for all of us in the industry. In terms of the revenue side, you're right, we had very good momentum coming out of the second quarter. We felt very positive about the recovery, the long-awaited recovery that we had seen in demand on the Japan part of our business, which has been one of the slowest pieces to recover from the pandemic and really is showing good momentum now and has been

throughout the summer. In the third quarter, the new challenge we're facing is the aftermath of the tragic wildfires in Maui. And that has, in the short term, crimped some of the visitation to the island of Maui. And I think we're through the worst of the demand downtick from that, but we're certainly not back to full strength in terms of visitors coming into Maui. Yeah, absolutely. I know in Maui, they're trying to get those visitors back, certainly. Now, looking further out, next month, you're starting this partnership with Amazon, starting to actually do it, where they bought planes and you're going to fly and service them. I think you said revenue won't be material until next year.

How big does that potentially get? How much should investors focus on that possibility? I think it's a really good opportunity for us going forward. We've got our first revenue flight coming online in less than two weeks now, and we're very excited about that. Our team's put a lot of preparation in to be ready to that. By the end of next year or early 2025, we'll be flying 10 aircraft for Amazon, and there's an opportunity for the opportunity

to grow beyond that. As we execute and perform well for Amazon, they've got the option to dedicate more flying to us. And we see that this is a building part of our business. It won't be material right now. It won't be material in the early part of next year, but it does give us a new source of revenue as we go through 2024 and into the years beyond. And we're looking forward to getting off to a good start in a couple of weeks. Yeah. And of course, it sounds like you're coming online, right? Right in time, perhaps for the second Amazon Prime Day. I want to go back to the consumer piece of the puzzle here,

a more macro picture, because we know in the monthly inflation readings we get that airline prices have been high. They've been a source of the higher inflation levels that the Fed has liked to see. Your airline, as well as others just in recent weeks, have revised lower current quarter projections and forecasts. Have we seen a peak in pricing, especially as we see domestic demand maybe normalized now post-pandemic? I can't speak to what all the other airlines are seeing, but from our standpoint, the revision to our third quarter revenue projections was really driven by the unique situation in Maui. So we have not seen demand to Honolulu, demand to the other islands being affected. It's been steady and we've had consistent revenue trends up until the tragedy in Maui.

Okay. Peter Ingram, we appreciate your time. Thanks for joining us today. Thank you very much. Our next guest thinks the Fed could raise interest rates two more times. Find out where that could create investing opportunities in the credit market when overtime returns. Check out the move in the TLT today, the ETF that tracks long duration bonds, taking a leg lower following yesterday's Fed decision.

So what role should fixed income play in your portfolio in this environment? Well, joining us now, Richard Byrne, president of Benefit Street Partners. Benefit Street is an alternative asset manager specializing in credit with $76 billion in assets under management. Richard, it's great to have you on. And I'm going to start right there with that question. Where are the opportunities, especially given the fact that we have seen Treasury yields push to multi-year highs? Hi, Morgan. Thanks for having me on. Thanks, John. I know what you're thinking. And like most of your viewers are thinking, this is the credit guy. They're the dour half glass half full, you know, negative folks that are always looking at what could go wrong. It's rare that we say this, but

this truly is a market and sort of the stars and earth and moon are aligning in a way that, you know, really plays into what we're doing. I dare say it's maybe the best investing opportunity we've seen for what we do. And by the way, what we do is corporate lending and real estate lending. Pretty simple. Maybe since the global financial crisis, things are just lining up all in the right direction. OK, so give me some examples of where these opportunities are particularly good and perhaps even unprecedented. OK, well, first of all, let's start with what, you know, is talked about already on your show and throughout the day is the economy is surprisingly strong and surprisingly resilient, both the economy, employment. I don't know many people that were forecasting that a while ago, maybe even including us,

especially in light of all the activity and how aggressive the Fed's been in the tectonic increase in interest rates. So the strong economy is certainly the underpinnings of everything. But then you add to that high rates. So for a credit manager, virtually every loan we make is a floating rate loan. And this is one of the greatest things you could do as a credit manager is have floating rate interest rates when rates go up so dramatically in such a short period of time. You generate more money. That's more interest income, greater earnings. Everything is great. And actually think that, you know, sticky inflation is going to keep the rates, you know, I heard it many times higher for longer. We've been saying that for a while. You know, crude hit 90 today. Strong labor market. Just think that rates are

probably going to stay higher for longer. But what does that actually mean for us is a SOFR plus 600 is about the average loan rate we're lending in our private credit business. If you add some upfront and backend, maybe fees to that, you know, that's like 12% yield. So then you get to, you get to 0.3, which is like, that's great. But the ultimate paradox is higher rates mean greater pressure on the underlying borrowers. You know, and is there going to be a dramatic increase in default rates? And back to my earlier comment about the resilient economy, we're kind of expecting, like maybe most are these days, a somewhat soft landing. Highly improbable. I think, you know,

a while ago that people would have expected that the Fed, with their blunt instrument of raising rates, could possibly manage a soft landing. But it actually feels like that's where we're getting. You know, our internal forecast is something like, you know, default rates have been under 2 percent. We think it actually may be 3 percent and a more, you know, less soft landing, maybe up to 4 percent. But think of that. If you're lending to corporates at 12 and your default rate, you're not even factoring in the recovery is still below 5%. I mean, that's generating, you know, as you know, those are equity like returns. That sounds great. So tell us also

the real estate side of that story, because office sure looks like it could it could crater in some areas and probably take some values down with it. Why is this a historically great moment to lend there as well? So, John, you put your finger on it. It's sort of like the other than that, Mrs. Lincoln, how was the play? So let's just take lending to office off the table for a second. The rest of the commercial real estate world, talking about multifamily, hospitality, you know, some, you know, industrial and some other property types, that market is actually really good. Loans values are lower. The markets have recalibrated again with a strong economy, higher interest rates. You're getting, you know, really

strong returns. It brings you back to the question of office then. Don't want to ignore it. Just want to point out that it's about 25 percent of, you know, the loans to corporate real estate. I think the key is that, you know, where you choose to invest, I think you'd look for managers with, you know, lower office exposures. And if they do have office exposure, hopefully it's class A office in the right places, the big cities, mostly on the East Coast, and not other stuff throughout the center of the country, which you're right, is going to get obliterated. And it probably explains why the average commercial mortgagery trades at almost a 30-point discount to its book value. The market has priced that in. So I think if you're very careful and pick the best managers with less or good office exposure, I think, you know, that's where the opportunity lies. All right. Excitement in that space, Richard. Thank you. Thank you. Microsoft just unveiling its latest Surface laptops and new AI capabilities, helping that stock outperform its mega cap peers today.

Up next, we'll take a look at what that means for the company's future. And tomorrow, don't miss an exclusive interview with the CFO of Lockheed Martin on how a looming government shutdown could impact the defense industry and more. We're back after this break. Welcome back to Overtime. Apple's iPhone 15 goes on sale tomorrow. But Microsoft may be trying to steal the spotlight today with a hardware and AI event. Steve Kovach has the details. Hi, Steve.

Hey, Morgan. Yeah, let's talk about the Microsoft event. Microsoft announcing a bunch of AI and hardware products, including new Surface laptops at its annual fall launch event here in New York City. But look, the hardware was really just a sideshow. Microsoft's announcement was really about Copilot. That's the AI assistant that works across a variety of Microsoft products like Windows, Outlook, Teams, even Microsoft Paint now. Now, Copilot for Windows 11 is going to launch on September 26th with a software update, but the big one everyone's been watching for, Copilot for Microsoft 365, which Microsoft will charge businesses

$30 per user per month to use, that's launching November 1st. That's the announcement investors have been waiting for, and it's a key way Microsoft will actually start to make money from generative AI. And like you mentioned, this isn't the only tech launch this week. iPhone 15 goes on sale tomorrow. And the big question going into that launch, how well will the more expensive Pro iPhone 15s sell? After three straight quarters in a row of declining sales, Apple needs customers to upgrade to those top models to make up for the drop in demand for phones overall this year. Guys, I'll

send things back over to you. So Steve, what's the measure of success here for Microsoft with the AI additions, particularly to Windows? Is it driving an upgrade cycle in consumer and business PCs? Yeah, that's part of it. I mean, it's part of the Windows 11 experience, I guess you could call it. So it's just going to be a software update for current Windows 11 users. But yes, if you want to use Copilot, your Windows 10 PC isn't going to cut it.

John, you know this. A lot of Windows 10 PCs don't have the specs to upgrade to Windows 11. So if you do want to try Copilot, sure, you need to go buy a new computer. Microsoft would happily sell you one of those new Surfaces, but they're also talking about their other partners who are going to have devices with some of these features probably by the time before the holidays, John. Steve, anything catch your eye on pricing

here with this announcement? Amazon said that they think that value is going to be important this season. Yeah, the Surface laptops are quite expensive. There's a cheaper one that costs $800. That's kind of a more for casual users. But the Laptop Studio 2 that they announced as well, that's a $2,000 computer. And they're claiming it's more powerful even than Apple's MacBook Pros, John. So it's not cheap. Yeah, I guess they don't intend to sell a whole lot of those.

No, probably not. Steve Kovac, thank you. Thanks. Meanwhile, before we go, let's cue the QR code. On the other hand, the newsletter. You can sign up at the link. Also, cnbc.com slash OTOH. This week's debate is,

is the FTC's lawsuit against Amazon over its prime subscription service the right battle for regulators to fight? And Morgan, of course, I argued this two different ways on Squawk Box this morning, but you can read it if you want in the newsletter. If you weren't up that early this morning. Major averages finished the day lower. Something else for investors to watch here is going to be this rate decision from Bank of Japan, because even though we're not expecting or I guess the markets aren't expecting any changes Thursday night, it's this idea that the rhetorical groundwork is continuing to be laid for a normalization of policy. And we know that what's happened in that bond market has hit this bond

market and other bond markets globally as well. Yeah, the yields have just been an amazing story. Well, that's going to do it for overtime. Fast money begins right now.