Closing Bell - Closing Bell Overtime: WWE CEO Nick Khan on Potential Sale and Betting Possibilities; An Early Read on Inflation 3/30/23

Episode Date: March 30, 2023

Back-to-back positive session for the major averages has the S&P 500 back above 4000. Ariel investments’ Charles Bobrinskoy and Evercore’s Julian Emanuel on how to position right now. WWE CEO Nick Khan says there has been a “robust response” from potential bidders for the company after Vince McMahon’s return and he remains optimistic about legalizing betting on the sport. General Catalyst CEO Hemant Taneja penned an op-ed this week arguing for specific new rules and regulations around AI. He breaks down his case. Morgan Stanley’s Keith Weiss has some top picks in the software sector and our Meg Tirrell wraps up her series on the prescription drug crisis with a look the huge shortages of both antibiotics and generic drugs. Plus, Morgan Brennan with a look at tomorrow’s inflation data, today.

That's right, stocks gain again today. That is the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell. I'm Morgan Brennan. John Ford is off today. Coming up this hour, a battle royale for a possible deal. We are going to talk to the CEO of WWE about all those reports of multiple parties throwing their hat in the ring for a potential acquisition. Plus, we'll get breaking news on the Fed's latest balance sheet numbers, a closely watched release in the wake of the Silicon Valley bank failure. We're going to bring you that as soon as it crosses. But let's get straight to the market and another day in the green for the major averages. Joining us now are Charlie Babrinskoy from Ariel Investments and Julian Emanuel from Evercore ISI. Good afternoon

to you both, gentlemen. Julian, you're here with me on set. I want to start with you. The fact that we saw all the major averages end a second day in the green, except the small caps, but overall pretty broad-based rally here. Your take on the market action as it currently stands? Look, we have to be perfectly upfront here. The market has taken a lot of bad news, a ton of bad news, And it's not at all clear that as much as people want to think that the financial turmoil is over, that it's over. But the fact is, is that I think coming into this crisis several weeks ago, people were defensively positioned. And that has been part of the narrative. And of course, with yields coming in,

you've had lots of buying in the Nasdaq. It's pretty incredible. I mean, the S&P ending today at 40, 50. To your point, the Nasdaq more than 20 percent up from the lows. And I know some people are calling that a bull market. I'm going to hold off and refrain from doing that. But on the one hand, you have that dynamic. And then on the other hand, you have this banking crisis, which maybe it's over, but we don't fully know yet. Right. We don't. We don't. And actually, we suspect there's another at least, let's say, half a shoe to drop. The fact that it could have been sort of swept away as quickly as that.

They acted very quickly, but these things never tend to just be sort of one and done type events. And there's clearly fragility in the system that we didn't think was there a month ago. So it's something to look out for. But again, to your point, lots of resilience in pockets of the market. And that is encouraging. Yeah. Charlie, tomorrow we're going to be watching for PCE, that key inflation reading that the Fed is so keyed in on. And then we get earnings starting next month. It's incredible. We're at the end of the first quarter right now. What are you watching? What is the next big catalyst, whether it's higher or lower for the major averages?

Well, the good news is that people are very pessimistic. If you look at how stocks are trading, it's anything that's at all cyclical is cheap and people have rushed to safe stocks, to growth stocks that are supposed to be less affected by the economy. So I do think we are set up for some good news if we got it. I think people are overconfident that we're going to have bad news. So what could that good news be? If we get a decent PCE number tomorrow, which I would say shows that inflation is declining, we're not going to get to 2% this year. The Fed's not going to get what it wants. But if we can get down to, say, the reasonable chance of 3% to 4% this year, then I think the Fed, which is now,

realizes it can't screw around with interest rates and cause a rush on the banks. If they will acknowledge that, we could actually be set up for some good news. Not being fighting the Fed, not having to worry about the Fed making the yield curve even more inverted, all of that would have a very positive outlook on the stock market, in my opinion. So then where do you land in terms of the debate around recession, Charlie? Because if you do think a recession is coming mild or deeper, somewhere in between, then arguably the S&P, when you look at earnings right now, is still potentially overvalued and has further to fall. And at least earnings estimates over the next few quarters do, too.

Yeah, I think that is fair. And I think if we're going to be honest, we have to say that the recent bank troubles have modestly increased the chance of a recession. Everybody knows it's local banks, regional banks that do most of the lending to small and midsize companies, to farmers. The big five banks are not lending to the hardware store around the corner. So the good news is the last week or so, we seem to have made progress in calming people down, that we don't have the run on the banks that people were worried about. So I would say that the chance of a recession is modestly over 50 percent. I'd put it at 50 to 60 percent. But the stock market is acting like it's 80 percent. So I think there's more value in some of these

names that would temporarily be hurt by a recession, but that will come out on the other side. Where would you be putting money to work right now? So for us, the question is here is you had this enormous dispersion between tech on the one hand and banks on the other. And when you look across time, the market tends to only work for a finite amount of time when banks are trading as poorly as they are. Now, we're not a buyer of banks here. That's a very high risk proposition. We're neutral. We'd actually rotate back towards some of the more defensive, which really aren't defensive areas, energy for one. You know, last year's winner lagged this quarter.

We think when you turn the page on Monday to the second quarter, it's entirely likely that some of the names and some of the areas that were winners last year start to win again. And oh, by the way, very quietly since the banking turmoil, oil prices are up quite nicely. And we think the stocks will follow. Charlie, very quickly, because I know you've invested in the banks and at least financials more broadly over the years. Would you be a buyer here? Not of small banks. High-quality banks.

I love Goldman Sachs trading at one time's book. That would be my favorite. You have to be careful with regional banks here. When people panic, we saw what happened in It's a Wonderful Life. A bank can go under. So we would stay with higher quality banks. Northern Trust would be a second name. OK. Charlie Bobrinskoy and Julian Emanuel, thanks for kicking off the hour with me. Thank you. Thanks for having us. Well, let's bring in Mike Santoli at the New York Stock Exchange. Mike, what are you focusing on this afternoon? Morgan, trying to frame out the market action

here as we sort of lift it up to the high end of this S&P 500's range and look at it on a two-year basis. It really does encapsulate the entirety of that downturn last year and then this rebound attempt. So what have we accomplished in the first quarter with one day to go? Well, remember that we did go above that long-term bear market downtrend line back in January. And even on the pullback after SVB failed, we did get to those lows in the early to mid part of March. You never threatened that. So if nothing else, we're there.

Now, the other piece of this is that you're at the same level as two years ago. And almost all the time in the last 10 months has been spent right in there. That's roughly 4,200 to 3,800. So, you know, maybe we get a test at the upside there. And, yes, it has been mostly those very large NASDAQ stocks that have, in the last few weeks anyway, been responsible for carrying us to these levels. So take a look at the NASDAQ 100 relative to long-term treasuries because much has been made. Julian just talking about it.

This relationship between bond yields, if they go down, you get some strength in the growth stocks. If the yields go up, sometimes you get some relative weakness. Well, this is showing the bond price, long-term treasuries, and the NASDAQ 100. So yeah, pretty neat relationship over the last year or so, most of the time. But look at this liftoff we got here in the NASDAQ 100 stocks with bond prices not rallying, which means yields not really making new lows. And it shows you that it loosens up the relationship just a little bit over a long period of time. It's not mostly been about that. So this whole run here in the Nasdaq 100 has not really been about yields on a net basis going low. You could talk about the Fed's

going to be more dovish than we thought, all the rest of it. And I'm just going to argue that they had a big valuation reset last year, massive downgrades in earnings estimates, and now they're sort of settling out and getting a little bit of a benefit of some of that defensive money in search of stability. So, so far, we can, you know, it's detached a little bit. We'll see if that lasts, Morgan. Yeah, perceived safety.

You kind of just laid it out there. But my curiosity around this is how long can that divergence actually last? Have we seen it at other points in history? Yeah. Other points in history, there's sometimes no relationship or a very weak one. And just in terms of absolute yield levels, it really is not something that's that informative about whether the Nasdaq can perform. The greatest growth stock bubble in memory, which was in the late 90s, early 2000s, well, you had the 10-year treasury yield mostly around 6% and 7%. So it clearly was not all about that. So I do think that you have to have a test. Maybe if the Fed kind of convinces the market it knows where it's going and it's going to pause, then you can see the stock market test out whether, in fact, it can leave the yield relationship behind entirely.

This is what I love about talking to you, Mike Santoli. I can ask you any question. You always have an answer. It's pretty amazing. And the answer. Yes. Sometimes not the correct one. And a lot of times having to do with the fact that I've just been around for a lot of it. All right. We'll see you later in the show. I would argue with you on the correct part, though. WrestleMania kicks off this weekend, but Wall Street's focusing on the rumble among bidders for WWE. We're going to talk with CEO Nick Khan about reports that multiple parties are interested in a potential deal. Overtime. The WWE kicking off its two-day event, WrestleMania 39, in Southern California this weekend.

But that's not the only thing the WWE has cooking. Oh, boy. Shares are on a tear this year on talks of a potential sale. We've reported here at CNBC there's interest from the likes of Endeavor, Liberty, and even the Saudis. WWE CEO Nick Khan joins us now in a first on CNBC interview. Nick, it is great to have you on the show and to be speaking with you again. WrestleMania, it's the biggest event of the year for WWE. This is a key moment for the company. What's riding on this weekend? Morgan, number one, thanks for having me on your show. This is a key moment for the company. What's riding on this weekend? Morgan, number one, thanks for having me on your show. This weekend, big weekend for us.

WrestleMania is our Super Bowl. We're at SoFi Stadium in Los Angeles. We believe Los Angeles to be the media capital of sports and entertainment. We're going to have a lot of invited guests. We're certainly going to have tens of thousands, if not over 100,000 fans in attendance. So it's a big weekend for us. Have you begun negotiating the new media rights? I mean, you have these deals in place with Fox and with our parent company, Comcast. But we know that that's a key part of the business discussions that are happening for WWE this year. No, not yet. But this weekend is a kickoff weekend, which will lead into all those conversations. So we're optimistic. We love both incumbent partners. NBCU's been terrific.

Fox has been terrific. And we'll see what those conversations bear. So the last time you and I spoke, we discussed this prospective sale process that WWE is undergoing. My colleague, David Faber, reporting earlier this week that it's been, quote, hot and heavy. Who's been bidding and where are you in terms of that process? I like the very direct question on that. Unfortunately, I can't answer the who has been bidding, but I can tell you it's been quite a robust response to WWE products that have been built that has been built for over the past 40 years. I think the fan base, the audience that goes with it in over 180 countries seems to

be quite appealing to potential bidders. So when you say robust response, does that mean multiple bidders? I don't want to comment on how many or how often or who's in or who's not in, but, you know, we're quite pleased with what the marketplace has told us. There's been some reports circulating in the last couple of weeks that the price tag could be as high as $9 billion. Is that accurate? Listen, our hope is the price tag is $18 billion. But, you know, we'll see. We'll see if there's a deal to be finalized. We'll make sure that the economics are shareholder friendly as they can be. And then we'd go down that path.

But we're not there yet. Is Vince McMahon part of any package or any deal? Vince made it clear to me and to the marketplace that he does not need to be included in any offer or any deal moving forward. And he has held to his word on that, as many of us predicted he would. Does not need to, but does he want to? I'm not sure. You know, that's more a question for Vince. Since he's been back, it's been about three months or so in the executive chairman role. It's been quite supplemental to myself, to our head of creative, to all of our other executives

to have the expert of this business here when we want to reach out to him and have conversations. But I'm not sure exactly what he wants his future to hold. I mean, there's still so much focus on him in the industry, in this company. He's been slowly appearing at more events. There's reports circulating that he is going to be there in L.A. for WrestleMania this weekend. Has he been getting more involved in the creative process? No, is the answer to that. But are you going to be there this weekend at WrestleMania? Are you passing on this one? Sadly, I will not be there. I'll be I'll be watching from from here in New York, keeping an eye on the situation. Watch on Peacock, who has our U.S. domestic rights, as you know. You know, Vince has not interfered with Creative. He certainly has

thoughts, again, that we all try to tap into pretty often. But Triple H, real name Paul Levesque, is our head of Creative. He remains our head of Creative. And he's done a phenomenal job along with our Creative team. If you look at the ratings being up across the board at a time where basic cable and network ratings are down across the board. We're pleased with what the product is saying to the consumer and what the consumer is saying back to us. Yeah. I mean, there's been a lot of pallid intrigue as well about the departure of your now former co-CEO, Stephanie McMahon, who resigned as her father, returned to the company earlier this year to help negotiate those rights and that sale. Why did she leave? You know, do keep in mind, Stephanie was on a leave of absence when

we called her. It was Vince and I who called her together to ask her to come back from that leave of absence to fill in at the time as the interim chairperson. She then became the co-CEO, as you just articulated, and the chairperson of the board. She did phenomenal work across the board. And when Vince came back, I think she went back to what she was thinking of doing on the leave of absence. She stepped down. She and I remain in touch. She seems to be in a great place. Is there any scenario in which, sale or no sale, she would return to WWE? It's a question for her. We'd certainly always love to have her as part of WWE, but the time would have to be right for her, and I'm not sure that she's there yet.

The notion of legalized betting on WWE matches was floated. There was a CNBC report earlier this month. Gaming and legal sports books have been very vocal in coming out to say that they would oppose such a move. Were you floating it or considering it? And given the opposition so far, at least publicly, is it now dead upon arrival? Look, Alex Sherman, who broke it for CNBC.com, quite a formidable reporter, as you know. So he certainly got his information together for that one, as he always does for us. We're looking at the future. We think we're predetermined outcomes.

Things like the Grammys, the Oscars, the Emmys, which can be bet upon in certain states, are also predetermined outcomes. So the conversations we're having, they were always intended to remain private, even though those are with public entities. Unfortunately for us, it got out there. We're managing it as any other company would, and we remain optimistic on the whole proposition. What would that mean, or is it still too soon to tell, if you were able to make some inroads on that front? What would that mean in terms of the value proposition for WWE? We think it has a significant impact. Even

if you look at the proliferation of sports gambling, I believe now in 16 states, and you look at the sports that it does affect, ratings are up even on games that are, let's say, duds. Ratings are up. They're only up for one reason, because of that gambling component. We think it offers a lot of attention to each sport. We think it could offer a lot of attention to sports entertainment, us. And, you know, we remain hopeful on the whole thing. All right. So I know the big match this weekend, it's the undisputed WWE Universal Champion match. It's going to be Rhodes versus Reigns. Who are you gunning for? And just in terms of, more broadly, attendance and viewership,

what are your expectations versus previous records? Look, our hope on viewership, if you look at the last six to 12 months, we've continued to break our own records that were set on Peacock. Keep in mind, when we did the Peacock deal, it was the infancy of Peacock. We shifted away from WWE Network, which was an agnostic OTT. And we've already grown our viewership space as Peacock has grown. So the hope on this event is to continue to break records in terms of viewership, both domestically and internationally. In terms of the gate, we're already sold out for both nights. We've been killing cameras to open additional seats. We don't think that'll affect the production. But again,

we're killing cameras to open additional seats. Every time we put additional seats on sale, they sell out. So it seems to be a pretty hot ticket from our point of view. And just finally, lastly, if there is going to be a sale, when can we expect to hear that news? I can't comment on when that's going to be, but I did say when I was on the morning show with you and David Faber and Carl that we thought it was going to be a quick process. We maintain that, but in terms of an actual timeline, not sure yet. Okay. Nick Kahn, CEO of WWE, ahead of WrestleMania this weekend. Thank you for joining us. Thanks so much, Morgan. A letter from Elon Musk and other tech leaders

getting buzzed this week for its warning about the potential pitfalls of artificial intelligence. But our next guest was already sounding the alarm, saying we need new guardrails to survive the AI revolution. We're going to hear his case when Overtime returns. Welcome back to Overtime. We have a market flash on Nikola. Phil LeBeau has the details. Hi, Phil. Morgan, take a look at shares of Nikola, which are showing some volatility after the company announced a common stock offering for $100 million. That by itself probably wouldn't make a stock move that much,

but there is also a concurrent forward stock purchase with an investor where an investor will be purchasing up to another $100 million of Nikola stock. They do not say who the investor is, but what this is is $200 million that the company will be using for general and administrative purposes. So basically, they're trying to add some cash to the balance sheet here and doing that through a public offering for $100 million, as well as a forward stock sale for another $200 million that the company will be putting to its reserves, if you will, as they, like so many others who are in this EV, hydrogen fuel cell area, they're trying to get their resources as much in line as possible as we go through a period here of a little bit of uncertainty. Guys, back to you. All right. Phil LeBeau, thank you.

Shares are down about 8% right now. Is it time for a pause or go full steam ahead? No, we're talking about the Fed. We're not talking about the Fed and rate hikes. We're talking about the battle over the future of artificial intelligence. This week, tech leaders, including Elon Musk, raised a red flag about the need for a six-month pause for training AI systems. But even before that came out, our next guest co-wrote an op-ed in the Washington Post calling for more transparency and regulation, writing, quote, AI changes everything. We need new guardrails to survive it. Joining us now is Hemat Taneja, General Catalyst CEO. Hemat, thanks for joining me today. Lay out this argument for me. Why take a pause here? The way AI works is essentially the computers have gone and read the entire internet.

And it's now, which means it's a reflection on us. It's got our biases in the way it thinks about the world. And it gives you probabilistic answers on anything that you ask it. So the problem with that is it can create unintentional misinformation, and it also can lead to proliferation of bias in society, something that we try very hard to avoid. So the concern, because there's obviously lots of reasons to be excited as well, because AI can bring a lot of promise. The concern is we need to use it with the right responsible AI frameworks so we can handle these things and have the guardrails

that can prevent these things from happening. So what are some examples of the types of guardrails that could be implemented? And is this a situation where government needs to get involved? And I ask that having watched recent hearings that are tech-focused and not necessarily being so confident in lawmakers' understanding of new technologies to begin with. Yeah, so I call these guardrails algorithmic canaries. I wrote about that in my book, Unscaled, in 2018. And the whole idea is the way we use software, we should be measuring second and third order impacts on all the stakeholders in society and seeing if there are unintended consequences that are trying to emerge. you think about how you're going to regulate these AI-based software companies, you need to have the same sophistication on the other side to be able to measure what's going on and are they

really following these guardrails. So the flip side, the counter argument to this, is that if you regulate, you potentially slow down the innovation that's involved as well. We had Keith Raboy of Founders Fund on the show yesterday. Here's what he had to say. AI is the most important technology of the future. And if China dominates, we are going to be at an incredible disadvantage in terms of influence and potentially in terms of economic power, which will inevitably lead to an American decline. So slowing down AI research makes absolutely zero sense when you're in an existential battle with someone who wants to be the replacement for the United States in Western democracy. I mean, there is this geopolitical element to it as well. Your response?

Yeah, look, we have to win the AI race. But I don't think the answer is tech companies should build however they want to, and then the government has to come and regulate. To me, it is about the collaboration between tech and government. And the companies need a framework of responsible AI with which they build the companies in the first place, implement algorithmic canaries, think about all the stakeholders. But then the government does need to have some oversight to make sure these companies aren't going in directions that are harmful to society. If we do it that way, we can actually foster innovation and really win the AI race. If we try to be what technology companies can think in terms of move fast and break things. And when they break things, the government is going to step in and slow it down. I think that's the mindset we want to get away from that ricochets

us from innovation, you know to over-regulation. Yeah, you're a prominent VC. You've invested in a laundry list of very successful tech companies. How does this shape the way you're now making investments? We're very excited about it. And we are also trying to make sure we're being very intentional about how we apply these companies into building the next generation companies. And a lot of what we talk about in the firm is we need to bring AI to the world in a way that is trusted. And the way to do that is to be in radical collaboration

with institutions that have that trust into different industries as technology companies work with them in creating solutions that can be applied in those industries. Hamant Taneja, appreciate the time today. Thanks for joining us. Thank you. Well, now it's time for news update. Excuse me. And we're going to turn to Bertha Coombs for that. Hi, Bertha. Hi, Morgan. Here's what's happening at this hour.

Police in Nashville releasing some of the 911 calls they received during the school shooting at the Covenant School on Monday. One of the calls came from a teacher, a teaching assistant, who was hiding with her students in an art closet. Another call from a man who was on the second floor of the school when the shooting occurred. Three children and three adults were killed in that attack. A former Boston police canine officer was arrested on felony and misdemeanor charges relating to the January 6th attack on Capitol Hill. Joseph Fisher faces

several charges, including obstruction of law enforcement during civil disorder and assaulting, resisting or impeding certain officers. A current Boston officer positively identified Fisher after online sleuths helped track him down. And Boeing will increase 737 max production rates above the current rate of 31 jets per month very soon, according to the company. According to the head of Boeing's commercial airplanes businesses, the aircraft company plans to increase monthly max production to 50 planes per month by the end of 2026. Shares of Boeing climbing on that news. Morgan, back over to you. You've got to think and you've got to hope that that's actually going to be good for maybe putting a little bit of pressure on some of those airline prices over the next couple of years. We'll see.

One would hope for capacity, yeah. Yeah. Shares of Boeing popped 1.5% in the regular trading session. Bertha Coombs, thanks. Up next, the visibility from volatility. Mike Santoli breaks down the big dip this week for the VIX and why expectations for bond market swings are surging. And don't forget, you can catch us on the go

by following the CNBC Closing Bell Overtime Podcast on your favorite podcast app. We'll be back right after this break. Breaking news on the Fed. Steve Leisman has the details. Hi, Steve. Thanks very much. The Fed's balance sheet actually declined this week after several weeks of increasing

in response to the uh banking turmoil that's been out there was down by 28 billion still around 8.6 trillion pretty large and the reversal of the quantitative tightening remains in place here's what happened uh there was a reduction in lending at the discount window it was down by 22 billion dollars and i'll give you the actual figure of lending that was there it was still 88.1 billion so it was still elevated but down from before what happened though is they went over to the new bank term funding program in greater amounts that was up by 10.7 billion and the bank term funding program was now up to 64.4 billion from 53 billion So that's the new program where they lend to banks at par

for the maturities that are discounted. And that's just about it, Morgan. Other credit exchanges, everything else, not much really matters in terms of the total thing. But even now, it looks like they're basically not seeing more pressure in the banking system from this release of the central bank's reserve standing. Morgan? It sounds like we're finally getting data that lines up with what we've heard from the likes of Powell and Yellen in recent days,

that there's stabilization now in the banking sector after those several days to, I guess, week plus of just tremendous uncertainty. Yeah, and I can lay some new data on that too, which is the Investment Company Institute also puts out movement into money market funds, Morgan. That's up by $65.9 billion. It's a new record of $5.2 trillion in money market funds, but the increase is half of what it was. So there's still money moving around. There's still demand for loans and lending from the central bank discount window, as well as from the new program. But it looks like at least the crescendo of anxiety that was out in the bank system seems to have crested and is on the way down, but is not completely vanquished from the system right now. Meantime, earlier today, you did get that White House blueprint, or I'll say, you know, beginnings of a proposal around increased bank regulation on the regional banks.

How does all of this come together? So let me tell you that Janet Yellen is speaking inside here, and her prepared remarks had nothing about this. In fact, I just have to wonder, is there some split now between what the Secretary is saying and what the White House said? Because the Secretary said, you know, there's two reviews going on at the Fed and the FDIC about what actually happened and those are coming out later and she said she didn't want to get in front of figuring out what

was needed she did propose some broad outlines of looking at what was happened what was changed by the trump administration and reviewing those but the white house this this afternoon came out with a wholesale let's roll all that back and very specific bullet point by bullet point. Now, I don't know if in the time that those prepared remarks came out, if she's in there basically talking about that now and incorporating that detail. But it certainly seemed like the Treasury Secretary wanted to go slower. And the White House seems to be going very fast right now. Wouldn't you like to be a fly on the wall for those discussions? I'm going to put a quick task to you, Steve, maybe for next week, since we're now watching this weekly balance sheet data.

H41, we've got to find a sexier term for that when we talk about this on Thursday afternoons. I'm going to get to work right on that, right on that. All right. Thank you for breaking down all that data in real time as it has come to us. Let's get over to Mike Santoli with a look at volatility in the bond and stock markets. Mike. Yes, and been pretty extreme, Morgan, in terms of the divergence in volatility. Now, bond market has been vastly more volatile than stocks.

This shows the relationship between the VIX. That's the S&P 500 volatility index. It's a measure of options markets, expected volatility in stocks. And this is the move index, which is a very similar measure as relates to treasuries. So when this is going down, it means that equity volatility is really low relative to bond volatility. Now, why would that be? Because the range of possible options of where rates are going to go, what the Fed is going to do, what we were expecting two months ago in terms of where the Fed was going to end up and where yields would go and where we are

now has been absolutely swinging wildly. So this level at a new low basically can only move if bond volatility comes down. We're at 19 on the VIX. We've been at 19 several times in the past year, many more times than that in the years before 2022. I did look back at other periods when we were at an extreme low here when bond volatility was super high relative to stock volatility. Nothing too significant in terms of market turning points. Early 2017, market actually was embarking on a really good year. The stock market was as rates settled down. This is mid 2013. That was in the middle of a very good year. This is sort of 2019 when the Fed cut rates in that summer before we got into the COVID high.

So obviously, I just want to mention this extreme period is the COVID crash when the S&P went down some 35 percent in five weeks and rates were pinned at zero. So all the volatility was in stocks and not bonds then, Morgan. I saw a trader note this morning pointing to this idea that maybe part of the reason we're seeing this dynamic play out right now is the fact that we are at the end of the quarter and you've got the expiration of those quarter end options. And also, and I realize this can get really wonky

and I'm not trying to do that, but this JPM hedged equity role that folks seem to be very, very focused on as we come into the end of the week, end of the month, end of the quarter tomorrow. It's a very big fund. It takes systematic positions. It rebalances at the end of a quarter. And people have been looking at the levels at which the S&P might migrate to based on what they need to do. And it sort of has this effect of containing U.S. equity market

volatility. But that says nothing about how wild it is in bonds. And there's less liquidity in treasuries right now, and they are whipping around quite a bit. So to me, it's the move index that needs to settle down for the rest of the capital markets to relax. All right, Mike, thank you. After the break, a hard look at software. The group has been on a tear this quarter with outsized gains for names like Salesforce and Microsoft. A top analyst reveals his best bets for Q2. That is coming up. Welcome back to Overtime.

Software stocks are about to close out a very strong first quarter with names like Microsoft, Salesforce, and ServiceNow leading the pack all up double digits. Joining us now with his playbook for Q2 is Morgan Stanley analyst Keith Weiss. Keith, thanks for joining me today. What do you think? And after the strong rally and so many of these names to start the year, where would you be putting money to work right now? Well, thank you for having me on the show. I am still a big fan of software here. I'm heading into Q2. Coming out of a really tough year in 2022, a lot of the pressures that we saw on

these stocks are starting to alleviate. Investors were worried about rising interest rates were starting to get more stability there. Investors are worried about numbers coming down. Numbers proved more durable than feared. And on the other side of the equation, these stocks proved to hold on to their profitability better than most. The names you have on the screen, there are all good examples of companies that have been able to continue to see good margin expansion. Salesforce, in particular, has a real pivot towards better profitability. I think that's still underappreciated in the stock. ServiceNow is probably going to show more upside in margins than people appreciate. And then finally, Microsoft is one of our favorite plays for the theme of generative AI, which a lot of people have been talking about. Microsoft

benefits there, both in terms of their core Azure business being a foundation for generative AI, but also exposing it through a lot of their applications like Office 365 or Copilot on GitHub. They just have a lot of ways to win there. So many folks, I feel like, are very bullish on Microsoft right now. Convince me this is not a crowded trade. Right. So as excited as people are about Microsoft on the longer term secular side of the equation, I think there's an equal fear about the volatility that you see in Azure. Azure is what's called the consumption model, which means you need to see people using the software for revenues to grow well in there. In a volatile macro environment, those numbers have actually come down a lot. And there's a lot of investors,

I think, that are still waiting on the sidelines, waiting for that Azure growth to stabilize. We think there's probably another quarter or two of Azure growth decelerating. In the back half of the year, you start to see price increases come into the equation. Some of this generative AI stuff could start to become more of a positive tailwind, as well as price increases coming into the equation. We think that stability will likely show itself more so in the September quarter, but you want to get in ahead of that. And that's the incremental catalyst that they get more investors off the sidelines. But you want to get in ahead of that. And that's the incremental catalyst that they get more investors off the sidelines and more investors on board for the

long term positive story. So whether it's Microsoft or ServiceNow or Workday, which I know you like as well, are they recession proof? I don't think anyone's going to be absolutely recession proof. But if you look at names like a ServiceNow or Workday, what you like about those names is it's a recurring revenue model, meaning these are three-year-plus contracts that customers get into with these firms. They focus on large enterprises, which tend to be a little bit less volatile, and their core systems that these enterprises use. ServiceNow and a Workday, they have retention rates, meaning when these contracts come up for renewal, they retain at over 97%. So the volatility that you're going to see in those models is going to be much less than anywhere else. That's part of what makes it our best picks. We think the downside to risk is relatively limited. On the other side of the equation, again, these business models have proved to hold in margins really well. Their operating margins

and free cash flow margins for a name like Workday are looking to improve in margins really well. Their operating margins and free cash flow margins for a name like Workday are looking to improve in the forward year. ServiceNow already has good margins. They're looking to be stable. That helps you sustain EPS and free cash flow better than most. All right. Keith Weiss, several names for our viewers to consider right now. Thanks for joining us. Excellent. Thanks for having me. America is facing a critical shortage of antibiotics and generic drugs. Up next, how the government in corporate America can help to solve this prescription crisis. Stay with us. Welcome back to Overtime. The U.S. is dealing with a prescription drug crisis that is causing

huge shortages of both antibiotics and generic drugs. Meg Terrell joins me for a look at how this critical problem can be fixed. Yeah, Morgan. So one of the things that the pandemic really hammered home is that local disruptions have global consequences. And this is especially true when it comes to drug supply chains. That complexity can contribute to shortages. A recent Senate report noted that more than 90 percent of sterile injectable drugs for critical acute care in the U.S. rely on key initial ingredients and drug substances from China and India. And that can be just the beginning of an incredibly complex supply chain. The ingredients are manufactured in one place, the drugs are manufactured in another, and then they're shipped into the United States and sometimes they're finished there. So it's incredibly complex and

the more complex you make the supply chain, the less stable you make it. Problems can arise in every step of the way. Now that Senate report frames the issue as one of national security and calls for Congress to act, including through investing in advanced manufacturing technologies in and near the U.S. But most crucial for addressing drug shortages, according to the University of Utah's Erin Fox, is transparency. Medications are one of the few things that we buy every day and spend billions on that we have very little information about who makes the products, where they're made, anything about just their overall manufacturing process. Is it good or bad?

Now, she's even discussed things like a rating system for quality of drug manufacturing, as opposed to the pass-fail system we have right now. The idea is that more transparency would enable fixes to be made sooner and incentivize keeping quality high, hopefully helping to avoid so many shortages. It's incredible to me that that supply chain is as murky as it is because, and we saw this as evidenced with the pandemic of the last couple of years and the need to invoke, for example, the Defense Production Act through some of that process. This is very much a national security issue.

Yeah, it absolutely is. And one of the things some of the experts we talked with said was we have to make sure that the active pharmaceutical ingredient here isn't only controlled by one country, because if there is some kind of disruption there, like a pandemic or a natural disaster, or we're having bad relations with a country that controls all of the important ingredient for drugs, we run into problems being able to access them. You've been running this series all week. I know for me, it's been incredible and eye-popping, a lot of your reporting, and a lot of the things that I think we just take for granted on a daily basis.

What has the feedback been like so far, and what does this mean in terms of more information, more reporting that you're doing? Yeah, no, it's so true, Morgan. I've been really surprised by how many people have been touched by these things, and we've been hearing from viewers, including on one drug that we actually haven't talked about in this series yet, but that a lot of people are experiencing a shortage of, and that's Adderall. And so it's actually sort of inspired us to kind of look deeper into that. We're going to have a story on that tomorrow because so many people are affected right now by the shortage going on in that space.

Wow. Just one more question for you. And that is, if you were to see a rejiggering of the supply chains and you were to see some of those ingredients come back from a place like China, do we have any sort of idea or analysis yet on what that's going to do to the price of manufacturing? That's a really great question. Part of the issue is that these drugs cost so little. And so it's hard to invest in the manufacturing for drugs that are so cheap. And so the U.S., there's been ideas like should we have a CHIPS Act for antibiotics, for example, where we bring manufacturing back to the U.S. and that is subsidized or incentivized by the U.S. government. At the same time, I've been hearing from folks like David Maris, who is in the package there, who's an analyst and investor, that you also have

to guarantee a certain level of profits for the generic drug industry or else it's just not going to make sense on both sides. It is complicated. Meg Torrell, thank you. Great reporting. Thanks. Well, up next, we will break down brand new rent price data from Zillow and how it could impact inflation in the Fed's rate path. Stay with us. Welcome back. Well, tomorrow morning, the Fed's preferred measure of inflation, the core personal consumption expenditure, will be released for February. But even before the banking crisis, investors and economists were pointing to shelter costs as a key reason the Fed should consider slowing or pausing rate hikes because real-time rent prices have been declining and quickly, and that data has been factoring into inflation gauges,

most notably CPI, very belatedly on a very long lag. So take a look at this. This chart shows the CPI breakdowns of shelter prices, owner's equivalent rent and rent of primary residence. Again, a closer to real-time measure, though, is also on this chart, and that is Zillow's observed rent index, which tracks the pace of market rate asking rent in the U.S. All of this is month over month annualized through February. But look at what's been happening just since the start of the year. Rents were coming down when we hit 2023 and they're climbing again. Why? Well, according to Zillow chief economist Skylar Olson, quote, the return of mild pressure on asking rents is potentially

attributable to higher mortgage rates, a headwind for the for sale market acting as a tailwind on rentals. In other words, housing affordability barriers are keeping more people, especially younger adults, millennials, which is such a big generation in the rental market. Mike, this really got my attention, not only because we get that PCE reading tomorrow, but because the mortgage market, the secondary mortgage market has been very, very volatile in recent weeks. And I know you touched on this just yesterday, the fact that you're seeing this wide divergence between the 30-year fixed rate mortgage and the equivalent in the bond market. And when you're seeing mortgage rates stay that high,

that just continues to incentivize renting. Yeah, it throws some static into the disinflation story for sure, especially because everybody felt as if, as you say, housing inflation was going to become more friendly just as a matter of, you know, time and just sort of the statistical necessity of it. I do think tomorrow's PCE, you know, look, February data is going to start to seem a little bit stale. That was BBC before the banking crisis. So I don't know how much people are necessarily going to extrapolate on every piece of it.

Also, remember, Jay Powell has continuously pointed to services, inflation, X housing as the thing that might remain most stubborn. So I think there's a lot of different ways we're going to be slicing the numbers tomorrow to see if it's getting a little more palatable, if it does clear the way for the Fed to become less hawkish. And also, everybody has to have their own assessment of how much the credit issues that we're expecting as banks pull back to really become disinflationary as well. So I think it's going to be a lot of noise in the number. We'll see if the market finds anything to really react to. To be sure. But I do think we need to be focusing on mortgage bonds and mortgage backed securities because

we already had a Fed that was poised to begin selling MBS as it continues its quantitative tightening. And now you potentially have banks and other investors that are going to be selling out as they're reassessing their risk. Right. For sure. It's a bit of illiquidity in this market. And let's remember, that's what the Fed did QE for, was to try to make that market function better in large part back in 2020. So it absolutely is a sore point in the markets right now. All right. Well, all the major averages, except for the Russell 2000, finishing the day higher, the S&P at 40, 50, that's going to do it for us here at Overtime.

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