Closing Bell - Closing Bell Overtime: What Is The AI Upside In Amazon’s Stock? With Mark Mahaney; Plus Former Atlanta Fed President On June’s Light Jobs Report 7/7/23

Episode Date: July 7, 2023

Averages close near session lows and notch their second negative week in the past three. BD8 Capital Partners’ Barbara Doran and Crossmark’s Bob Doll break down the market action. Evercore’s Mark Mahaney on the potential stock upside for Amazon with AI. Former Atlanta Fed President Dennis Lockhart on today’s lighter-than-expected jobs report and looks ahead to next week’s bank earnings. Plus, EQT Exeter CEO Ward Fitzgerald on opportunities in industrial real estate and closing its latest fund.

Well, that's your scorecard on Wall Street for the first week of the second half. But winners stay late. Welcome to Closing Dot Overtime. I am John Ford, back at headquarters with Morgan Brennan. And ahead on today's show, the muddled picture for jobs. Former Atlanta Fed President Dennis Lockhart is going to join us to weigh in on the Fed's next move. In light of a huge beat for ADP, but a much cooler June jobs report. Plus, we'll get you ready for bank earnings, which kick off next week as JPMorgan, Citi and Wells Fargo all gear up for results. First, let's get to our market panel. Joining

us now is BD8 Capital partner, CIO Barbara Duran and Crossmark Global Investment CIO Bob Dahl. Happy Friday, guys. Barbara, it seemed a little scary there maybe yesterday when ADP came out and like good news is bad news again. But then we got sort of like pretty good news today and things seem to have stabilized. What more do we need to know, maybe from bank earnings, maybe from other metrics to know how to invest from here? Yeah. And John, it's pretty surprising after that ADP number, I think people had upped their estimates, you know, for what would happen in terms of job creation, but it was surprisingly low. And that I think when you combine it with the number of job openings that's coming down, there are fewer job openings, there is more

supply of workers. So that looks like things are slowing down. On the other hand, you know, you've got strong wages, even though it's moderating, you've got strong job growth. You saw the unemployment number is still at 3.6 percent. And so you've got a very interesting mix here in terms of what's happening with the economy. I think what it means, you know, the Fed is encouraging and the deflation is still a little bit stubborn. And I think the Fed is going to have to stay high for longer. And that's going to mean, you know, a push out in terms of looking for that cyclical trade. But we will see if we've got CPI and PPI next week. And I don't expect much change there.

And it'll be incremental one way or the other. So we will see what happens. Bob, you also expect higher for longer. And so are you just staying the course with your strategy here? Or do you make changes? Yes. you just staying the course with your strategy here or do you make changes uh yes um the 0.4 percent uh month over month wage rate gain 4.4 percent trailing 12 that's not going to make the fed happy they have more work to do and uh i think that you know it's the fourth time they've raised

their dots uh now it's two more times i would wouldn't be surprised if we see 6 percent before this is all over. The Fed has to slow the inflation rate down. Otherwise, it'll get away from them. Yeah. And we had the Fed's Austin Goolsbee on CNBC earlier today, Bob, voting member. And he basically said that the golden path would be to bring inflation down without a recession, that he feels like we're, quote, on that golden path. You sound more skeptical. Yeah, that's threading the needle. And maybe it's possible.

We've had nine attempts at that in the last 60 or 70 years. Two of them have worked. Seven have resulted in a recession. So the odds are not great. I hope they're successful, but I think that's a tall order. Yeah. Barbara, I want to get your thoughts on the action we've seen in the bond market this week, because it's been very dramatic with Treasury yields.

And I wonder what it signals or what it helps to foretell in terms of the bank results that we'll get or start to get a week from today. Well, I think bonds are obviously very sensitive to what they think the Fed will do. And you saw that yesterday when yields jumped up, you know, when the ADP number was nearly 500,000, more than double what was expected. So I think that once banks start to report, you know, if they report, you know, a contraction in credit, I think that's actually going to be positive in terms of what the Fed is looking to slow down the economy. But if they're seeing things going still gangbusters, consumer credit fine, I think, you know, that could be a problem in terms of the market wanting to see rates, you know, either hold here or go a bit lower sometime next year. So, Barbara, what does that mean for the KRE? You note that it's down, what, 29 percent-ish year to date, trades at eight times earnings. But if we're getting higher rates for longer, when a lot of this commercial real estate portfolio for folks reprices, won't that be bad for a lot of regional banks? Can you really get into regional banks here, or do you think the worst case is priced in?

Yeah, well, that's a good question, John. I frankly think the worst case is priced in? Yeah, well, that's a good question, John. I frankly think the worst case is priced in. I mean, that's the regional banks. The KRE collapsed, you know, down to the mid 30s when the regional bank crisis and some of the banks would belly up back in March. And since then, it's stabilized somewhere in the high 30s. It's now trading above 40, excuse me, 41. But I think the most of the bad news is priced in. And if, for instance, once the big banks start reporting, the regionals will follow and we'll see. If there's not such great news, I don't think there's much downside here in terms of that, because I think it is

discounting a lot of bad news. And we just have to wait and see what's happening. If deposits have stabilized, which it looks like they are, I think that will be a positive. So I think it's not a bad risk reward in the KRE. Bob, your thoughts on this and whether you would be buying here and if not, where you would be? Yeah, I'm still nibbling away on weakness in the banks, particularly the big ones. I know they're not down quite as much as the regionals, but I just have more confidence there in terms of their fundamentals and their cheapness. Barb, a specific stock in a way here. I mean, Amazon was up today, kind of bucking the trend. What do you think that's about?

And maybe if not that specific stock, the overall trend in big tech and the sort of valuations that they've been getting all year? Well, I think you saw a number of stocks, not just Amazon that was doing well, even NVIDIA, you know, came back or Alibaba, you know, which has its own set of special circumstances. But what I think you're going to see is that any pullback, excuse me, here is going to be minor. And I think names like NVIDIA or Amazon, which have great long-term secular stories, you know, are going to be names that people will buy, you know, as they come in. And right now, for instance, we are sitting on a pile of cash. You know, money markets are at record highs at

$5.5 trillion. And you saw the retail investors start to come in in a big way in May and through June because they don't, it's FOMO. You don't want to be left behind. So I think on any kind of pullback, there will be buyers coming in. And so I think the tech names, they've run, but these are not one-and-done stories. Even NVIDIA, they're going to report in late August again. And that big blowout they had was probably not just a one-time thing. So I think these names are going to continue to perform on any kind of pullback. Got to thank some of that Andy Jassy conversation with John Ford. It had a little something to do with the price action in that stock for Amazon today, too.

He was on CNBC yesterday. We should point that out. On overtime. Barbara Duran and Bob Dahl, thanks for joining us. Have a great weekend. Thank you. You too. All right. All the major averages finishing the week lower with the exception of the Dow transports. Let's get to senior markets commentator Michael Santoli, the New York Stock Exchange. Mike, what are you looking at? Well, a little bit of a historical look, Morgan, at the wage story, which was a pretty key feature of today's jobs report, did come in a little stronger than expected and sticky at a certain level. Now, this is from BlackRock. This is basically the six-month percent change, rolling six-month percent change in hourly earnings as well as weekly earnings.

Weekly, of course, hourly times hours. And you see that weekly number did pop back up again, and it takes it to this sort of threshold there around that 2% every six months. So roughly 4-plus percent annualized. And, you know, the question, I think, from here out is whether this is going to be a little bit of a plateau or thereabouts is where we're going to settle out in terms of the longer term trend, given structural issues with the labor market. And just remember this, how different it is from the 2010s. And we just simply could not get wage

growth moving. You had QE, you had the Fed doing all it could, zero interest rates, and all of it was not able to take up as much of the labor market slack and move things in favor of workers as much as we have right here. So this could be a challenge for the Fed on the inflation front. On the other hand, consumer spending power continues to be rebuilt as the job market plugs along. Take a look here at the way the markets perform in terms of parts of the consumer discretionary area. So you see the equal weight consumer discretionary year to date basis up nicely, 15, three quarter percent, well outperforming staples right in line with the leisure ETF. So the going out, the services part of the consumer economy, we know that's been where the strength is, as opposed to pure retail, that ETF very much

weighted toward traditional store chains, not doing quite as well. So the goods versus services dynamic so far is still holding up, even though you're seeing around the edges, maybe some demand fall away and things like restaurants and restaurant workers was a weak spot in terms of net ads and today's job support, Morgan. Yeah, that's definitely going to be the area to watch some of those some of those cracks in that story there. But I mean, you could just as easily put Levi's up on this on this chart on this board today, too, because that is just a that is a single stock story, a specific company that's sort of reflecting this as well, given the earnings that we got yesterday and a cut forecast. It is for sure. And definitely it's a struggle for them to to essentially

stoke demand for, you know, for denim, for clothes. And pricing power has been fleeting in that area as opposed to some other areas of the economy. I would caution that, you know, if you go back to the history of Levi as a public company, it's like four years, four plus years. It has struggled all that way. So it seems as if it's just a very tough category, branded apparel. So I put that on one side. It seems like the only things that are working are things like, you know, Lulu, Nike, things more on the on the activewear side of things. So I'm not necessarily saying that Levi is purely a macro story today. Mike, on the labor market, it's a bit subjective, but you look at the last time UPS was striking, it's 1997, right? We're kind of in the buildup to, you know, dot-com frothiness. And, you know, the labor market was a little tight. Like, is that significant,

given where we are right now in the charts? I think it's significant in the sense that those things happen both when you did have labor market tightness, you did have workers feeling as if they had leverage over big companies. Too many specifics probably here. And by the way, UPS wasn't even a public company in 97. So it's a little bit of a tougher thing to look back at how it affected things like the stock. But I do agree that in general, late 90s is the thing that we've been gunning for in the sense of all inclusive growth, not so much about the tech bubble, but about, you know, labor labor force participation peaked right there. Ninety nine two thousand overall.

We're trying to get back up to that area. So, yeah, I do think that it says something that workers feel empowered at this point after this long period of relatively scarce labor. Yeah. Who knows what they were even delivering then? Because e-commerce wasn't a thing. Mike, thank you. After the break, prime stakes. Amazon is near its highest level of the year as it gets ready for next week's Prime Day sales. We're going to talk to analyst Mark Mahaney for his outlook on the stock when Overtime comes right back. Welcome back to Overtime. Let's talk Amazon.

I spoke with Mylon Thompson-Burkevec, an AWS VP overseeing data storage and AI. She said we're going to see a surge in companies rolling out AI capabilities built on top of AWS because AWS already has the data secured and the tools to do the work. She gave the example of Canva, the browser-based design company. They launched their generative AI capability in three weeks because they were starting with their data already in S3, using compute and being familiar with the AWS tools like SageMaker. You have other customers who have all of their data. I'll give you an example. USAA, which is the bank that's used by military families, they've said that they would not permit any ML or AI to occur outside the data perimeter they've

already established on top of AWS. They've invested heavily in the securities of AWS IAM controls and other things to make sure that they have a boundary, a data perimeter that keeps their data secure. Let's bring in an analyst to talk more about Amazon, potential AI upside. Joining us is Evercore ISI head of internet research Mark Mahaney. Mark, happy Friday. So have investors perhaps been sleeping on Amazon's AI capabilities? Yes, they have been. And the question is whether when and whether they will wake up from the nap. There's a good reason to have the nap, by the way. If you ask most people in the industry, they'll tell you that the AI solutions, the leader appears to be Azure right

now. That can change. And that's both a perception that needs to change, but also a solution set that needs to improve and to change too. I think Amazon can do that. I also think there's going to be enough of these generative AI apps and solutions. I mean, we're just starting, John, to see these come out now. But as you see more of these solutions come out, Booking.com announced something two weeks ago. Expedia did previously. There's AI DJ on Spotify, My AI on Snapchat. Even in the small space that I look at, we're just starting to see the rollout of these. And where are they going to occur? Where's the cloud compute going to occur? Where's the cloud storage going to occur? A lot of that's almost certainly going to be there on AWS. So a year from now, AWS should be able to show these accelerating generative AI driven

growth rates for AWS. And if that happens, the stocks higher, the revenue growth is faster. But I guess, Mark, first of all, Andy Jassy made the case here on overtime yesterday that, yes, they do have the capabilities. They just haven't been waving their hands about it. But is it clear yet where the profit, the additional profit growth is going to be for AI in the cloud? Is it going to be in having industry specific models? Is it going to be in having the ability to very quickly train those models? That doesn't seem clear for investors quite yet. No, I don't think it is clear, and it's going to take a while for it to play out.

My guess, our guess here is that OpenAI is probably not going to run the table in terms of large language models. If that's true and if large language models get commoditized, that's great for all cloud vendors. I find it really hard to believe that all cloud vendors, Azure, AWS, and Google Cloud are not going to benefit from what is at the margin, just greater need for compute power, greater need for storage. Generative AI requires, and the AI deployments that we're seeing are more computationally complex, and they can't be run, or they won't be run on-prem, they're going to be run in the cloud. So that should benefit AWS. I don't think that's reflected in the stock,

but let's see it. Let's see it in the numbers. We want to see acceleration in AWS growth in the back half of the year and into next year. And I think AI is going to be one of those drivers. If 12 months from now, we're not saying that, then Amazon stock is going to be right where it is today. But my guess is that 12 months from now, we're going to see much faster growth rates out of AWS. And one of the factors is going to be this continued rollout of more and more AI deployments, and AWS should benefit from that. Yeah, Mark, one of the other things that Jesse talked about with John yesterday was the fact that they're investing in and looking at applications around AI

across all of Amazon's businesses. And it sort of speaks to this idea of some of the parts and whether Amazon is greater than the sum of its parts. And I wonder how you think about that flywheel when you do value a company like this. So, you know, there is some of the parts way to approach Amazon. I've sort of used it on and off at times. You know, you do it in part because you believe that there may be a spinoff opportunity. I don't think we're going to see a spinoff at Amazon. So I just think if you put together the assets, you're going to see improved free cash flow over the next couple of years.

Look, the reason I like Amazon, we made it one of our top picks a couple of months ago, was that we have this triple trough thesis. I look at Amazon and I look at a stock that I think is close to a trough multiple, close to trough operating margins and close to trough revenue growth. And if we're right on that, you know, these things move together. If the revenue growth reaccelerates, if the margins come off, that's more on the retail side than on AWS. But if the margins come off the bottom and start rising higher, fundamentally expanding margins and accelerating revenue growth beget higher multiples. And Amazon's multiple is still well off the pre-COVID multiple that it had of call it 18, 19, 20 times EBITDA. You're like 14 times now. So there's plenty of space between here and there. Fundamentals inflict up, stock inflicts up. All right. I do want to get your thoughts on Meta,

given the fact that it did launch this so-called Twitter killer and that it seems to be crushing it in the first couple of days in terms of downloads and adoption with threads. Stocks up 140 percent this year. How meaningful is this to the company? And do you buy? I'm still a buyer. It's still our top pick, although we're starting maybe to edge off at Amazon. The risk word now may be starting to be a little bit more constructive than it is on Meta. But, you know, Morgan, look, I hear you on 140 percent year to date. I'll also respond to that by saying it's trading at, hold on, 17 times gap earnings. So it's not expensive. I think it's still the cheapest of the high quality tech platforms that's out there. And then I'm really

intrigued by this thread. I don't know if it's really going to be a Twitter killer. It's just that this is kind of what I call an easy extension of the platform model. So you take your Instagram users and you give them a Threads opportunity, whether we're really going to turn to Threads to see the latest cuts and takes on the jobs numbers or on AI deployments. Am I going to really watch the people who I think are really influential in these cloud debates? Am I going to follow them on threads? I don't know. I probably won't. Probably stick with Twitter for that. But there's no downside to Meta for doing something like this.

And, you know, this is this is advertising based monetization. Meta is very good at that. And it's probably a heck of a lot better at it than twitter ever was so you know i i don't see why this couldn't be a couple of billion in incremental revenue that's not 10 but it's a couple of you know four or five percent incremental revenue without all of that investment that's required for things like um the metaverse so to me it's an easy extension that's a reason to be bullish on it's not the reason but it's a small reason to be bullish on meta mark mahaney thank you and thanks john if zuck puts half the energy into threads that he put into the metaverse who reason, but it's a small reason to be bullish on meta. Mark Mahaney, thank you. Thanks, John. If Zuck puts half the energy into threads that he put into the metaverse, who knows?

Don't miss much more on Amazon and all of tech in the second half when I host a special edition of Tech Check. That's a full hour at 6 p.m. Eastern tonight. All right. We'll be tuning in. Up next, an update on Treasury Secretary Yellen's high stakes trip to China and what she said about Beijing's treatment of American companies. Plus, former Atlanta Fed President Dennis Lockhart breaks down the odds of a July hike following a mixed bag of economic data this week. Stay with us. Welcome back. Treasury Secretary Janet Yellen making some headlines today as she kicks off her trip to China. Our Emily Wilkins has the details. Emily.

Well, John Yellen didn't hold back on her first day in Beijing, criticizing China for unfair business practices. She met with a mix of government officials, including Premier Li Jiang and U.S. companies on Friday and tweeted today that the U.S. seeks a healthy economic competition that benefits American workers and firms. But Yellen also raised concerns on hurdles to doing business in China, including expanded subsidies for China's state-owned and domestic firms, while foreign companies face barriers. She also said she was, quote, particularly troubled by punitive actions taken against U.S. firms in recent months. Yellen raised concerns about China limiting exports of rare earth minerals used in manufacturing semiconductors, saying the move reinforced the need for the U.S. to diversify its supply chains. The new limits from Beijing follow the Biden administration

limiting China's access to U.S. advanced technology. The secretary is now on day two of her high-stakes trip. She'll be meeting Saturday with her counterpart, Vice Premier He Lifan, and Yellen is expected to return to the U.S. on Sunday. Morgan? All right, Emily, thank you. It'll be interesting to hear what her Chinese counterparts

say publicly as well. Because there's always a little bit of a gap between comments from both countries and officials in both countries. All right, well, meantime, back in the U.S., is the labor market finally losing some steam? The June jobs report came in lower than expected this morning. Payrolls rising $209,000 versus the expected $240,000. But cooling numbers may not be enough to sway the Fed. Here's what Chicago Fed President Austin Goolsbee said this morning on Squawk on the Street. I'm still undecided. We're still weeks away. And we got some important series that are coming

on prices, which, as I've highlighted, that's the main thing that we want to see now is are we making progress, especially on goods inflation, but all on the inflation side? All right. Well, joining us now is Dennis Lockhart, former Atlanta Fed president. Dennis, we might have gotten a slowdown in jobs growth, but we did get an upturn in wage growth. What matters more to the Fed right now? Well, I think the wage number is very important because whether it's leading the inflation parade or lagging the inflation parade, it appears to be part of the inflation story. And I think they're paying a lot of attention to wage growth, which does still seem to be in the fours on an annualized basis. And that's too high probably to be very confident about bringing the inflation rate down to 2 percent. I mean, we keep talking about data dependence,

and certainly that seems to be a key message from officials like Goolsbee this morning. But I mean, you look at what the market's already pricing in. You look at some of the data we have gotten that has been largely stronger than expected. I mean, can we actually say that July is perhaps locked in and that it's really September that's in play and is the key question mark now? Well, I think the report today, which was cooler and certainly a lot cooler than the ADP report on Wednesday, doesn't force the committee's hand one way or the other. We're going to have another inflation report next week. That's what I think Austin Goolsbee was referring to. And the more data that come in and over the

rest of the period before the next meeting. So we'll see. I think they could justify another skip because the interval between the July meeting and the September meeting is the longest on the calendar. More data come in over that period. It would really give them a lot of accumulated information in order to make a decision on where to land this as we go through the rest of the year. So are they sitting, Dennis, at a just right sort of spot, or do you feel like the overall story that the data has been telling, not just today, but overall, has been leaning a bit hot? I mean, how should investors factor in whether good news is good news again,

and we're sort of at that neutral point, or whether really there might be some catch-up that the Fed ends up having to play? Well, I think when you size up the whole picture, you have to say they still have work to do. They have penciled in two more rate hikes in the last summary of economic projections. Penciling in is not a commitment. It's provisional. It's conditional. It's not necessarily going to happen. They're going to revise their projections in September anyway. But as of now, they see that the rate has to be a bit higher before they actually pause for a longer period of time. So, Dennis, what does that mean for fixed income investment, you think, when maybe things are slowing down a bit and it seems to be maybe cooling off, but also there's

the expectation that we're pretty close to the end of the rate-height cycle, if not there? I think that's the key point. We are close to the end of the rising rate cycle, and therefore, the fixed income world is going to maybe be looking at a different outlook for policy, which is probably bullish for fixed income. But it's a bit too early yet to say, because the rest of this year probably is going to involve some more policy rate increases. Yeah, I mean, I look at ISM services this week. You had the economy essentially picking up speed again. At least activity was up, even as price pressures were down.

So, again, this idea of a sweet spot. But how real is the risk there that you do see economic activity begin to recover or rebound in a more meaningful way here? It just takes us back. In a sense, it's sort of the lesson learned from the 1980s and the Volcker era. Yeah, that can very well happen where you think you've got things moving in the right direction, and then you get some reports that suggest maybe it's reversing itself or it's stabilizing in some way, which is in this case would be undesirable. This is a in a way for a policymaker, a frustrating economy. They've put a lot of pressure on it. And yet the economy itself, activity levels remain pretty robust. And it's everything's going well in the economy except inflation, which is too high.

So if I put myself in their shoes, they don't want to respond too strongly to what turns out to be a false dawn of some kind. So, Dennis, what's the most important bit of information we're going to get from bank earnings this cycle? From bank earnings this cycle? Yeah. Oh, that's a good question. You know, I guess the way I would think about that is to try to get a sense of whether the pressure on banks because of the 500 plus basis points rise in the policy rate is putting them in a danger zone and the financial stability risk that we saw some weeks ago,

but which seems to have abated, is actually still extant and still something to be concerned about. All right. We and the viewers will look for it. That's a great preparation for next week. Dennis Lockhart, thank you. Thank you, John. Time now for a CNBC News update with Christina Partsenevelis. Christina. Thank you. Well, this afternoon, the U.S. laid out plans to deliver controversial cluster bombs to Ukraine as Kyiv deals with an ammunition shortage. National Security Advisor Jake Sullivan said the U.S. would not leave Ukraine defenseless

against Russia and that Kyiv has promised to use the weapons carefully. The munitions, which are bombs that open in the air and release smaller bomblets, are banned by over 100 countries because of their track record, or their track record, I should say, of killing civilians. Meanwhile, the last of the United States' stockpile of chemical weapons has been destroyed. Workers at the Bluegrass Army Depot in Kentucky completed a decades-long campaign to get rid of rockets with GB nerve agent that has been stored there since the 1940s. The U.S. was facing a September 30th deadline to eliminate the stockpile.

And football star Tom Brady reportedly lost $30 million in shares when FTX filed for bankruptcy protection last November. Brady allegedly agreed to an endorsement deal that paid him entirely or almost entirely in stock in the cryptocurrency exchange, according to the New York Times. Former CEO Sam Bankman-Fried now faces multiple charges tied to FTX's collapse. Just a pocket lit for Tom Brady, though, probably. That's not all he lost last year, but he's done plenty.

Oh, is that a Gisele comment? Wow, that was dark and deep. I heard he's a man on the night, a night on the town right now and stuff like that. He's fine. There's no punching down with Tom Brady. He's won a lot, Christina. After the break, Mike Santoli looks at signs of stress in the economy and one particular measure that could be an early red flag. And as we head to break, check out shares of Rivian today, adding to huge gains on the week after production and deliveries beat estimates. Wedbush upping its price target today, saying the Rivian story is finally turning around. Look at that. An almost 50 percent gain this week.

Stay with us. Welcome back to Overtime. Mike Santoli returns with a look at potential warning signs for financial stress. Mike. Yeah, kind of an early warning sign, Morgan. It's kind of like U.S. Geological Survey. They look at seismic activity and maybe there's some stirrings in some area. Let's watch that. But it's no not yet anything like an earthquake. Well, this is the Chicago Fed Financial Conditions Index is broken into different pieces. There's leverage, there's credit and risk is sort of like financial stress, stability type risk. And you see the blue line had this little shoot higher very recently being flagged by the economists over at Ned Davis Research to say we have to watch this.

So it seems like there's been a little bit of a surge, not just in corporate borrowing, but also some other measures of financial leverage that speculators and other traders might be taking in things like the options market. Yet it's not been accompanied by an uptick in those other things like credit risk indicators or outright financial stress indicators. So, so far, it looks like maybe an outlier, something we have to watch. But it has spiked in advance of prior recessions or during prior recessions, as you can see by the shaded areas. I am focused on this here, though. There was early 2010s, like 2011, 12. You did see this surge in leverage. It was not associated with a recession and it was also not accompanied by a flare up in the credit and risk measure. So it seems like maybe

it's just a little more of a re-risking activity by companies and investors, but certainly something to watch as we continue to wait for some cracks to potentially develop after this long Fed tightening cycle. Does the size of the spike matter in that chart? Yeah, it should matter. Absolutely. It's certainly in terms of, you know, if you look at where it got to in the in the global financial crisis, that did say quite a bit about the level of distress and also the length and depth of the recession that we were in at the time. Yeah, 70s. That's just like all spikes. Yeah, 70s were there was no fun with the the oil spike and surging interest rates and everything else. Yeah, I was just going to say, when you look at a chart

like this, how much does it speak to this relationship or this inverse relationship we've seen sort of develop and form between the bank stocks and Treasury yields? Yeah, for sure. We're at a part of the cycle where higher yields is not something that banks are just harvesting in the way of net interest income? It's a restraint on the economy. Therefore, it feeds into potential wear and tear on consumer and corporate credit and also bleeds assets out of out of deposit. So I think it does give you an indication that we are at that spot where we have to watch for, you know, things to get a little bit tougher. If if yields continue to go higher, if the Fed has to do more. And I want to stress, this is if, it's not necessarily when, or if it is when, it might be a while off. All right. Listen,

we missed your stepbrothers reference in your chart earlier in the show, but borrowed valor. I got that one. Yes. There you go. Keep throwing them at you. You'll catch them. All right. Mike Santoli. Thank you. Have a good weekend. Check out this week's big spike in treasury yields. Speaking of up next, the CEO of one of the world's largest owners of industrial real estate on how rising rates are impacting his industry. Stay with us. Welcome back to Overtime. EQT Exeter, the real estate division of private equity firm EQT, closing a $4.9 billion industrial real estate fund this week. The firm is one of the biggest owners of industrial real estate worldwide.

Tenant clients include Amazon, UPS, Google. Joining us here on set, Ward Fitzgerald, EQT Exeter CEO. Ward, welcome. It's great to have you. Morgan, John, thank you so much. It's great to be here. So this is your sixth fund. It looks like $4.9 billion. It closed above target. Why now? Why so much appetite? And why do you see opportunity? Well, there's a lot in that, first off. One is there's so much opportunity because, as Mike just pointed out, there's a lot of stress in the financial system.

And real estate is the largest asset class in the world. Actually, if you take all of the public securities, the stocks and bonds and all the private companies out there, they don't actually equal the value of real estate. Real estate is about 55 percent of the world's asset class. So money is moving in the direction because most institutions and most professionals have about 10 percent of their capital in real estate. So people are trying to get more of their money into an asset class that's larger at a time when there's a lot of financial distress. There's a lot of financial distress in real estate because it's a very capital intensive business. And of course, the cost of capital has gone up in this inflationary environment. You know, we had Andy Jassy on with John yesterday from from Amazon. And of course, the cost of capital has gone up in this inflationary environment. You know, we had Andy Jassy on with John yesterday from Amazon. And of course,

they're a huge tenant for warehouses and industrial real estate. I want to play some sound from him talking about their footprint. Take a listen. Sure. We've spent the last year re-evaluating every part of our fulfillment network and doing a bunch of redesigning. And, you know, we turned the U.S. network from a national network to a regional network, and we changed all our placement logic. And if you look at our local in-stocks, the fulfillment center is closer to end users or ones that have everything they need.

This idea of a national network becoming a regional network, what does that mean in terms of investment and how you're approaching it with this fund? So obviously what's referred to there is what you would know as a supply chain. Right. And so trying to get goods to consumers and basically what the appetite of a consumer today is to get their goods faster. And that's been pretty well documented during covid after covid. And it's almost like Amazon's becoming a post office. Right. So being closer to the end user of consumption. Right now, when they think about, when Amazon thinks about it,

and we have the great privilege to serve them around the globe in the United States, Europe, other locations, is that they're re-imagining their distribution center network because of where the consumers are moving. There's more people moving south. There's more people moving back into cities and things like that. And so we adapted that by basically fulfilling their entire supply chain. Now, of course, we don't service all their supply chain, but for any major corporation, whether it be a Nike with sneakers or Kellogg cereal, we want to have the distribution centers, which is the biggest warehouses, usually about one million square feet, the fulfillment centers, and then the last mile centers. And we'll service all of that type of real estate for a company like Amazon. I was sitting on a plane a couple months ago next to a

guy who does sales for robotic forklifts. He was talking about the enormous backlog that they've got because of the demand out there for moving goods around, you know, even during COVID. But there's something bubblish in there, right? How will we know when industrial real estate is peaking? Well, of course, that'd be difficult to ascertain. But right now, industrial real estate has a lot of tailwinds. Of course, there's population growth. While inflation does limit consumer disposable income, generally consumption is very strong. GDP, even though it's only up modestly, when GDP in the United States goes up by 2 percent, that's like adding the economy of the Philippines every year to the

United States economy, right? We're talking about $400 billion just with 2 percent growth. So with that much demand, most of which GDP growth is in consumption, it would be beneficial, of course, to warehousing. The other thing that's going on right now that's a tailwind, of course, is talked about a lot on your program, and obviously I know you have a large and well educated audience, is the idea of nearshoring and onshoring. And right now there's a lot of goods that are moving from South America to Mexico. There's a lot of goods moving from other parts of Asia into the United States and Mexico. And also because of supply chain disruptions, all retailers are being asked to carry higher inventories to meet consumers' demand.

So what does that mean for prices? Have prices actually come down in this sector of commercial real estate or have they just continued to climb? Well, rental rates have climbed, but prices have gone down. And the reason prices have come down is what we talked about earlier, which is capital values are highly affected by the cost of capital. And with the T-bill having gone up even just 50 basis points in the last 60 days, right now, 10-year treasuries, which we track off of very closely, are over 4%. And so right now, the idea that money was free for a period of time, and now treasuries are over 4%, basically has a negative impact on values and multiples come down.

So with this fund, how much of it is going to go toward exactly what Andy Jassy was talking about, facilities that are closer in to that last mile ultimate delivery, trying to get that effect of faster delivery actually leading to lower costs? Or are you going to be a little bit more traditional in your, you know, looking at where you're going to invest? Well, I'd say the number of facilities we would buy or build,

and we are among the largest developers in our funds in the United States and across the globe, the number of facilities will tend towards those closer to the cities, closer to the consumer. But despite his commentary, if we did 50,000 square foot buildings, that would be 2.5 million square feet. We could do three 1 million square foot buildings. So effectively, we'll end up deploying more capital in what I'd call major distribution centers, but the number of buildings would tend towards the smaller facilities and closer to the cities. Of course, you own more than just industrial real estate. You're also pretty heavily invested into multifamily. I want to get your thoughts on

that right now when we keep hearing about things like red hot rentals and we're looking to CPI ratings next week. Yeah, well, right now, again, another sector, the sector of the multifamily and the residential space is underserviced. There's about 5 million units that are necessary. And the biggest issue in the supply and demand quandary for multifamily is the fact that cities don't issue permits quickly enough. You know, cities and governments want to have affordable housing, but they don't actually understand that they're creating their own problem because they will not issue permits and let developers build enough units to drive prices down. There's not enough supply to meet demand. So right now we're in a phenomena with a great shortage and that will continue to have upward pressure. I think there are going to be pockets that outperform. I think

right now the southeast has been largely overbuilt, the Sun Belt, especially in the workforce housing area. But I think that traditional apartment units and, of course, city dwellings, there's going to be a lot of demand for and still upward pressure on rents because of the demand. All right. Ward Fitzgerald, thanks for joining us here on set. Thank you very much. EQT Exeter CEO. Yeah. Thanks for working overtime. All right. Up next, find out how mapping the Earth is becoming an out of this world opportunity, at least for one space satellite company. A remap of the Earth every few weeks.

That's essentially the plan, at least in the near term for Satellogic, a company specializing in high-resolution Earth observation imagery. Satellogic now boasts the largest commercial constellation of sub-meter resolution satellites in the world, almost 40. But co-founder and CEO Emiliano Kargaman, who goes by EK, says the company has much farther to go, 200 microsatellites in orbit. Our goal is to remap the entire surface of the planet every single day at sub-meter resolution. So the idea is to build essentially a live catalog of everything happening on the planet so that, you know, any day you can wake up and you want to see what's going on somewhere and you can, you know, log in and go take a look at what happened yesterday. So Satellogic went public via a SPAC in early 2022,

and the stock has plunged about 80 percent since then. Market value now below 200 million. Revenue has grown. It's up 42 percent last year. But the investors, for investors, the key is really cashier. Does the company have enough to build and deploy all of those satellites? Well, Kargaman says, yes, Satellogic has enough to operate through next year and to honor plans to get the company EBITDA positive, which is also expected next year. To hear more from my interview with Satellogic CEO, follow and listen to Manifest Space wherever you get your podcasts. Huh. Submeter resolution is close enough to see if you moved your car. That might be might be a concern.

I don't know. Interesting stuff. I love that you know that you just trotted that out like no big thing. Well, believe it or not, earnings season is already here and the big banks are going to kick it off with results from J.P. Morgan City and Wells Fargo next week. Find out more of what to expect when overtime returns. J.P. Morgan, Citi, Wells Fargo. Those are the names kicking off earnings for the banks next week. Leslie Picker, what matters most? Hey, John.

Yeah, let the countdown begin here because second quarter bank earnings less than a week away. A lot matters in these earnings reports. Next Friday morning, we will get results from the three of the largest money center banks, J.P. Morgan, Citigroup, and Wells Fargo. Analysts are expecting they'll fare slightly better than their peers, which rely more on trading and investment banking. The environment for dealmaking, of course, has been pretty weak for a while now. Banks have been pulling back on lending, but credit card growth has sustained

and higher rates for longer can serve as a tailwind to net interest income. That's the profitability metric that banks use for lending activity. But economic uncertainty is expected to cause banks to set aside more provisions in anticipation of losses in areas like commercial real estate and credit cards. The sector has broadly been under pressure with only J.P. Morgan and First Citizens outperforming the S&P 500. Those two were the acquirers of two failed banks from earlier this year, with J.P. Morgan taking over much of First Republic and First Citizens taking over much of Silicon Valley Bank. As Atlantic Equities points out in a recent

note, the sector's 12-month forward P.E. is at its second lowest level since the financial crisis. So investors have a week essentially to decide whether 2Q earnings will provide any sort of catalyst to the upside, guys. Mark-to-market accounting, how much is that going to matter now after everything we saw go down with the smaller regional banks like SVB that collapsed? It matters to a certain extent, Morgan, because it helps just explain just the overall health of the large bank balance sheets. But that said, they're in such a different position than the regional banks in the sense that because of all the regulation they've had, they've been deemed too big to fail. So they're not going to face the same sort of asset liability mismatch when you have

the guarantee of the U.S. government behind you. There isn't as much of a risk that people start pulling their money out in droves as they did with some of the regionals because no one is concerned that one of these large banks is going to fail given the intense scrutiny they have from regulators that have basically said we will not let these banks fail. All right, Leslie Picker, thank you. Also next week, Morgan Prime Day, which is part of the reason why Andy Jassy was on with us yesterday. We'll see perhaps if consumers continue to trade down. Yeah, we got CPI, PPI, Fed's Beige Book, a gaggle of Fed speakers. Meantime, all the major averages finish the day lower, finish the week lower as well. That's going to do it for us here at Overtime. Fast money starts now.