Closing Bell - Closing Bell: Stocks Sink, Pockets Of Opportunity & Foot Locker’s Strategy Shift 06/03/22

Episode Date: June 3, 2022

Stocks sinking and closing lower for the week despite a stronger than expected May jobs report, which sparked new concerns about interest rate hikes. Neuberger Berman’s Joe Amato and Ariel’s Charlie Bobrinskoy discuss the sell off and whether they are buying the dip. KKR Global Head of Macro & Asset Allocation Henry McVey is cautious on the market, but he reveals where he sees pockets of buying opportunities. And Foot Locker CEO Richard Johnson discusses how inflation and supply challenges are impacting the retailer and how he plans to adjust his strategy with Nike shifting to a direct to consumer approach.

The Dow falling nearly 300 points and the Nasdaq plunging by more than 2% with the major averages on track to close lower for the week. The most important hour of trading starts now. Welcome to Closing Bell. I'm Mike Santoli. In for Sarah Eisen. Here is where things stand in the markets. The S&P 500 down 1.4%. That puts it down about 1% on the week, so it's hanging on to most of last week's 6.5%. Gained the lows for the day on the S&P right around 4,100, so we're just a bit above that bounce

off there about four times. NASDAQ, the underperformer, Apple, Tesla, pretty big drags on the NASDAQ today. It is a pretty broad-based pullback, though, with every sector but energy in the red right now for the day. And you see the worst three, discretionary, consumer communication services, and tech, all down more than 2% on the session. Coming up, KKR, head of global macro and asset allocation, Henry McVeigh, is cautious on this market, but he will reveal where he does see buying opportunities. Plus, the CEO of Foot Locker discusses inflation, supply chain issues, and his plan for growth as Nike moves toward a direct consumer

strategy, direct to consumer strategy. Stocks falling today, as we said, on the back of that strong jobs report this morning. Those results are confirming expectations of more rate hikes from the Fed, which were reinforced earlier by Cleveland Fed President Loretta Mester. I'm not in the camp that thinks we stop in September. I do think we need to bring the funds rate up, and we probably will have to go above that long-run Fed funds rate in the SEP to be able to get inflation back down. Now, that closely echoes what we heard yesterday from Federal Reserve Vice Chair Lael Brainard

when asked about a September pause. If we are seeing a deceleration in the monthly prints, it might make sense to be proceeding at a slightly slower pace. Right now, it's very hard to see the case for a pause. We've still got a lot of work to do to get inflation down to our 2 percent target. Let's bring in Charlie Bobrinskoy from Ariel Investments and Joseph Amato from Newberger Berman to talk about all this and the markets. Joe, I'd love to start with you. I mean, that's a pretty consistent theme, obviously, from Fed officials saying inflation is job one, the economy strong enough for them to go relatively fast.

What does it mean as an investor right now? I mean, we've already priced in a fair bit of financial conditions tightening and valuations are down a bit. But is there more to go? Hi, Mike. It's good to be with you this afternoon. I think there is more to go. I think the tightening of financial conditions is going to continue. The Fed has a real challenge on their hands with inflation. I think it all starts with inflation.

And today was a good example of sort of good news is bad news in a sense because we had a reasonably good unemployment report, yet the markets viewed that as, well, this means the Fed is going to be that much more aggressive. And there you run the risk that there's a policy mistake if the Fed pushes too hard to try to bring down inflation. So bottom line, we expect volatility to continue as you work through this change in the policy mix that we've had. Volatility, you expect to continue, Joe, but I guess directionally, do you have a way you would lean in terms of stocks or what looks like have been some opportunities that have been surfaced by a lot of the chop we've seen already? Yeah. So I think a lot of the damage has been done. That said, given that we expect a slowdown in economic conditions, we would remain defensive. You know, we went in our asset allocation committee earlier this year to underweight equities. We hadn't been underweight equities in a long time. So, you know, that's a reflection of what we thought we were going to continue to see. And we've reduced the beta

exposure in portfolios where we have that flexibility. So moving up in quality, lowering beta, remaining a bit defensive because we're not through, you know, we're not through this, as Jamie Dimon, I guess, coined the term. We're not through this storm yet. Yeah. In fact, if you listen to him, the storm hasn't even struck yet. We'll see how that how that plays out. Charlie, obviously, you've been on inflation watch since before it was it was the thing to do. You're still on it now. There's this line now a lot of people are embracing, saying we've hit peak inflation. Now it's just about, you know, the exact slope of decline. What do you think about that? And what does it mean for the kind of stocks you want to own? Thanks for asking, Mike. And by the way,

have you picked your Maverick call sign yet? I think you should be Mike Tartantoli. Anyway, thank you for asking this. People are way too focused on whether we've hit peak inflation or not. That's not the right question. If we hit 8.3 on CPI, if it goes to 8.2 and then 8.1, that doesn't matter. It's the absolute level of inflation that matters. As I tell people, if inflation is 7% this year and 8% next year, it is exactly the same from a purchasing power point of view as if it's 8% this year and 7% next year. Inflation is commutative. As we all learned in fifth grade, it doesn't matter the order that it incurs. So the short answer is that we are not going to be getting down to acceptable levels yet. The Fed is not acting nearly quickly enough or hard enough.

After all of these years of quantitative easing and buying $120 billion a month, they're only now selling $45 billion. They've got an $8.9 trillion balance sheet, and they're selling $45 billion a month. That's way too little. We have a Fed funds rate that's still 75 basis points to 1%. That's way too low. This Fed is still not acting strongly enough. Well, that may be, although they're letting $45 billion roll off. That's to be clear about how they shrink the balance sheet. But you already have mortgage rates, you know, from three and a half to five and change. You've seen corporate bond yields go

up a similar amount. You've seen the typical slowing of the sectors that would respond first and doesn't, you know, that doesn't have time to work its way through the system. If we can glide down toward, let's say, four percent inflation by the end of this year, does that not help the markets? We're not going to get to four percent this year, Mike. I mean, we're going to be lucky to get to six% this year. We are just, people are anchored in the old world. And the reason they are is because they've never seen a 40% increase in M2 money supply that we got during COVID. They've never seen this level of deficit spending. They've never seen a $9 trillion Fed balance sheet. And so we are just not in that old

world, not to mention all the commodity issues, not to mention the supply issues. We have wages that are only now starting to accelerate. So in my opinion, people are still underestimating this. And what that means for stocks is that rates are going to go higher. That's going to be tough on growth stocks. It's going to be good for value stocks, particularly because I happen to think we're not going to have a hurricane in the economy. All right. Well, that is reassuring. And Charlie, I know you still like some energy, fertilizer, real asset place, things like that. We will have you guys back soon to see how it all goes. Joe, Charlie, appreciate it. Thanks, Mike. Now, it's been a rough year for Foot Locker with shares falling more than 20%.

Up next, the retailer's CEO discusses his strategy for turning around the stock as Nike shifts to a direct-to-consumer approach. You're watching Closing Bell on CNBC. Walmart is hosting day two of its shareholder event, and CEO Doug McMillan just spoke to analysts and the media. Courtney Reagan joins us with the highlights. Hey, Courtney. Hi, Mike. Yeah, all that just wrapped up here behind me as we sort of closed out the week's event. And Walmart CEO Doug McMillan said, look, not a lot has changed since we reported our

first quarter results, but he did say we did not enjoy the first quarter. We were, we've said, kind of surprised by the pace of change and the magnitude of the cost impact kind of in the middle of the quarter on. As we mentioned, we do see some changes with some really value conscious consumers. He acknowledged the pain of the first quarter and the stock reaction. We didn't, as shareholders, enjoy that process. We're all very vested and care a lot about what happens with the share price. But we are long-term thinkers. We care about the short term.

We manage the short term. And while McMillan says there isn't anything that strategically concerns him, he does have some worries. I am concerned about the inflation rate. And should it stay at this level or go up and be there for a sustained period of time. I think that has a negative impact on too many families and I'm concerned about that. Last downturn, Walmart did lose some share to some of the dollar stores for some of those fill-in trips, not the full shopping basket kind. And I asked him what he would do this time if things did fall off further economically

to prevent that from happening. And he says we are very intensely focused on those opening price points, particularly in certain areas of grocery. Mike, back over to you. Court, thank you very much. Let's turn now to Foot Locker. That stock higher by nearly 8% since announcing its first quarter results in May. The company updated its fiscal year outlook, expecting sales and profits to be at the high end of its forecast.

Year to date, the stock down about 25% and down more than that since the highs of last year, as many retailers are joining me here at Post 9 at the New York Stock Exchange. Foot Locker CEO Dick Johnson. Dick, welcome. Good to see you here. Hi, Mike. Thanks for having me. Maybe just give a little bit of a pulse check on your customers. I mean, you did report earnings last week or so. You didn't really seem to think that there was a big change in terms of spending power or willingness,

but how does it feel right now? Yeah, certainly as we went into our earnings call, our consumer behavior that we saw in the first quarter hadn't changed. I agree with what Doug just said, that inflation is real. And, you know, if it stays there, it's obviously going to impact a lot of families. But our consumer has a propensity. We've got a broad range of consumers across the spectrum. And they continue to find ways to buy sneakers.

They seem to. Yeah. I mean, obviously, if you look at secondary market prices for some of these models, it's clear there's a core of demand in a lot of ways. But in terms of your share of it, how do things look strategically? Obviously, the Nike relationship's been in focus. You may have less supply of some of their models and things like that. What does that mean when one of your biggest important suppliers is, to some degree, a competitor? Well, I'm old enough to remember when wholesalers were wholesalers and retailers were retailers, right? Clearly that ship has sailed.

But, you know, we still have a great relationship with Nike. They're still a really important supplier for us. But our customers have told us that they want choice, right? And we had a lot of open-to-buy committed to one supplier. So our ability to bring in more product from more suppliers satisfies that need of our customer to have broad choices, whether it be Prox or the deal that we announced with Adidas, Converse. We've got a great relationship with Puma and exclusive on LaMelo Ball. Those sort of things drive our customers. And that amount of choice is what fuels our future.

The inflation piece of it, I guess the key for you is how much are customers willing to accept? Is it all about, you know, we'll pay up for something new and fresh, but not on stuff that's been around? It seems like the inventory risk for a lot of chains is now very much in focus. Well, inventory is such an important thing in our business. We have to keep it fresh. We have to turn it. The consumer absolutely wants new and fresh. But what we see as new and fresh, the consumer, you know, it moves so fast now, right? It used to be that things would make their way across the country in trends or around the world in trends. Now they see something in Tokyo today and they want it tonight, right? You know, that's just the way that it works.

So, but our inventory is in great position. You know, we're ready to fuel the second quarter and beyond into the back half of the year. But it really is important that we continue to bring fresh goods in and provide variety for our customers. As things stand right now in terms of things like the store count and staffing, does it seem like it's at the right place or are you going to have to rethink sizing? Well, we always review our portfolio, right? I mean, as we think about our digital and omni-channel opportunities, you know, I expect that we will see our door count. We talked about it in the call, down slightly.

Our square footage, not down quite as much because we're building bigger stores to provide more variety to our consumers. And that seems to be working well with our community-based stores and our power stores. But we constantly tweak our portfolio. Dick, appreciate you coming by for the update. Thanks, Mike. Thank you very much. Thank you. Let's get a check on the markets again as we get toward 45 minutes before the close. Took a little bit of a hiccup lower. The Dow down 370 right now. The S&P 500 sitting right on top of that 4100 mark. That's

been around the low for the day. Still ahead, KKR's Henry McVeigh on the better than expected May jobs report and how that could impact both the Fed's rate hike strategy and the market. As we head to a break, check out some of today's top search tickers on CNBC.com. Tesla taking the top spot today, followed by the 10 year treasury yield. Apple, Amazon and Deere. Stocks slipping a bit in the final hour here. You see the Dow down 368, a little more than one percent. The S&P just on top of that 4100 level where it has hit a floor a couple of times today, giving up most of yesterday's rally in the S&P. Let's check out today's stealth mover, Moody's, which is an underperformer in the S&P 500.

Barclays downgrading the financial services and ratings company to equal weight from overweight, cutting its price target to 285 from 350, citing the current challenging macro environment. Competitor S&P Global warned about the lack of debt offerings in their ratings business earlier this week. Shares of Novavax plunging to a one-year low on concerns about the safety of its COVID vaccine. Meg Terrell has the details. Hey, Meg. Hey, Mike.

Well, Novavax's vaccine, finally now, it was originally part of the Operation Warp Speed at the beginning of the pandemic, now headed to the FDA for its review on Tuesday of the outside advisor. So we saw the FDA's briefing documents come out today. And in it, they mentioned some potential concerns around a risk to those heart inflammations known as myocarditis and pericarditis. We have seen those with the mRNA vaccines. They said there was a potential signal here, so they did flag that as a potential safety risk.

Other things the FDA noted is that there's still some manufacturing information, quote, in process that would sort of need to come about before they would provide emergency use authorization, and also that there's a lack of data on currently circulating variants. The information they're assessing was really from up until September 2021. So looking at the Alpha variant, not even looking at Delta and Omicron in large ways. And of course, Omicron is the currently circulating variant. Novamax, though, taking an issue with the FDA flagging this potential safety risk, saying in a statement, quote, we believe there is insufficient evidence to establish a causal relationship.

Mike, this has hit Novamax's stock today. Tuesday is going to be the meeting of outside advisors. Jeffrey's out with a note saying despite these potential concerns, they do think there's a high likelihood of a positive vote on Tuesday, which could move the stock back up potentially even farther. This has been a very volatile one, as we know, through the pandemic. Mike. Absolutely, Meg.

Just a wild ride before the pandemic. For reference, it's like a $7 stock. It got almost to $300 here in the 40s. So we'll see what that decision holds for. Thank you, Meg. And don't miss Meg's live coverage from the world's largest cancer research conference on Monday, featuring the CEOs of Gilead, AstraZeneca, and Merck. And we have a news alert out of Washington. Ilan Moy has details. Hi, Ilan. Hi, Mike. A bipartisan group of lawmakers has reached a deal on a federal privacy bill that would affect Apple, Google, Facebook after years of stalemate. Now, if passed, this draft legislation would preempt most state laws. That's been a major point of

contention with business groups pushing for a single federal framework rather than a patchwork of state bills. However, the bill does have some exemptions, including for consumer protection laws, as well as some provisions in California. The bill also allows individuals to sue tech companies, but not until four years after the law is enacted. The bill would also place new limits on data collection and authorizes the FTC to enforce those rules, especially for kids. And it would also require companies to let consumers move their data to other platforms. Now, this bill does still face an uphill battle in the Senate, but this is the most movement we've seen on this issue in a very long time, Mike.

Elon, thank you very much. Up next, KKR, head of global macro and asset allocation. Henry McVeigh may be cautious on this market, but he does see some pockets of opportunities for investors. His portfolio playbook on closing bell returns. Watch Wall Street buzzing about today. A shareholder proposal calling on McDonald's to conduct a civil rights audit has passed. This amid criticism over the fast food giant's record on racial matters. Kate Rogers has the details. Hey, Kate. Hey, Mike. McDonald's said it will be conducting a diversity assessment at the company via a third party.

That shareholder proposal that passed via a preliminary tally called for a civil rights audit to analyze the impact of McDonald's policies and practices on the civil rights of company stakeholders. Now, in a statement, McDonald's said in part, quote, diversity, equity and inclusion are at the heart of McDonald's core values. We are committed to providing equitable opportunities for our employees, franchisees and suppliers. While we are proud of our progress, our efforts are ongoing and we will continue to focus on actions that have meaningful impact. Now, SOC Investment Group that put forth the proposal said it hopes the company will listen to stakeholders' feedback in the process.

And a reminder here, Glass-Lewis had encouraged shareholders to back that proposal at the meeting last week, and we just found out the results late last night. Back over to you. Kate, fascinating. Any time one of these proposals actually passes, we'll see where it goes and what the outcome is. Appreciate you. Kate, fascinating. Anytime one of these proposals actually passes, we'll see where it goes and what the outcome is. Appreciate it. Kate Rogers. Stocks under pressure today with the three major averages now on track for weekly losses. This despite today's employment report showing the U.S. economy adding more jobs in May than expected. Let's bring in

Henry McVeigh, KKR CIO and head of global macro. Henry, we say the market's down despite the strong jobs report. But I mean, in some respects, maybe it's in part because what it means for the Fed, the fact that we're still in this six month inflation scare. And it seems like in either direction, there's something for the markets to be a little bit concerned about and keep risk appetites in check. Where are we with that? I think our view at KKR is we're transitioning, transitioning from inflation concerns, repricing in the capital markets to earnings degradation caused by that inflation. And so, you know, our forecast in the near term is that earnings

estimates need to come down quite a bit. We've really bifurcated the market into kind of the price makers and the price takers. And what you're seeing in a lot of the consumer stocks is they've ended up being price takers and that's going to create more volatility. So does that imply that, you know, from a macro level that the inflation peak is here and we can count on it easing back, but yet it's just not reflected in what companies are saying for earnings? I think that the peak is probably in. I think the problem is the rate of change, where I think we have a differentiated view at KKR is really two areas. One is I think we think food and oil prices are going to stay higher for longer. When you look at the forward curve for oil, it has it coming down probably $20 more than we think is going to happen.

So we actually see elevated oil prices for some time. I think, you know, food we we think, will continue to be problematic, just given Russia's invasion of Ukraine. Ultimately, that's going to lead to slower earnings growth. And I think you're seeing that happen at a time when the Fed is tightening. And that means corporate profit estimates are probably too robust. You know, if you look next year, 85 percent of the companies in the S&P are supposed to have rising margins. That's not going to happen, particularly in this in this environment. So we operate in Asia, Europe, the U.S. and over 200 companies. We have a pretty good window into the world. And I'd say there are really three things to focus on.

One is wages. Two is oil. And then three is the supply chain issues, while they're different, created by the zero COVID policy in China and Russia's invasion of Ukraine. Those are creating dislocations in the market that we don't think ease quite as fast as maybe some of the optimists do. And so we're talking about a higher resting heart rate of inflation this cycle. And we've reflected that as a firm in terms of where we've been deploying capital. You guys have been reporting on some of it. We've been incredibly active around real estate, infrastructure, asset-based finance. And those are all things that are price makers. And I think they'll perform well in this environment. But relative to a decade ago,

this is really different. Yeah. I know that you also had been on this, you know, from good spending into services spending as a long playing theme. Where are we in that? And I guess, are there good ways to actually capitalize on that? Because as I look at the S&P 500, it's a lot of companies that sell a lot of stuff across the world. So I think Walmart and Target were a wake-up call. I mean, Walmart's inventories were up 33 percent. Target's were up 43 percent. The economy is transitioning from goods buying to services. And that, to me, is a mega theme. Within services, great pricing power. We actually think that goods will have deflation in 2023. So even though inflation will stay high, you actually could have deflation of the goods sector. And this year, the goods are up 8%.

So that's a pretty big change. Services, you see a huge amount of pricing power. You saw that in the jobs report today. Travel and lose your jobs going through the roof. Professional services going through the roof. So it's that time in the economic cycle for some mean reversion. And I think people, particularly some of the executives on the good side, were probably caught flat-footed because they started to estimate that demand was sustainable.

But generally, we're a services-based economy here in Europe. Higher resting heart rate for inflation globally, and then presumably meaning central banks have to stay on top of that, it doesn't necessarily sound like it's a recipe for the revival of tech and kind of mega cap growth and the stuff that was beneficiaries of the disinflation. Or is that not true? Look, I mean, you know, in the macro, the way we do it at KKR, we're long term investors. We've got to get the 10 year theme right.

The last cycle was about extending duration, extending duration of fixed income and extending duration of equities. And that led to a lot of money going into tech and growth. We still see a lot of opportunity around there, particularly around security and cyber. But the multiples on those stocks need to come down. The second thing is anytime the market gets that concentrated, this is public markets, that concentrated in a couple of names, you either get regulatory surges or you get law of large numbers. And that's what's playing out in tech. And you're seeing CEOs start to represent that.

I mean, you know, in the early 2000s, we talked about this with the financials and, you know, those companies. It's just a different chapter, but same story. Would your premise be that inflation is not too near, or how do you think it's going to go in terms of the actual economy? I think inflation is going to continue to be very detrimental to economies, particularly for low-end consumers. Ultimately, there was enough stimulus put into the system where I think overall consumer spending will remain okay, but there's going to be massive bifurcations, just as we talked about goods and services.

So I think you've really got to say, here's the macro, but where are you investing? And what I would say is, and we see this in some of the public data and ultimately how we think about things, is you're going to have a real bifurcation. I mean, transportation costs are up, food costs are up, energy costs are up. The greatest increase in job changes is in that lower to middle income. They're repositioning for higher inflation. And ultimately, I think that will have an impact on the political landscape as well. Sure. Henry, great to catch up with you. Okay, thanks. I really appreciate it. Here's where we stand in the market. Still under some pressure here. You see the Dow down about 350.

S&P off 1.6 percent. Virtually giving back yesterday's rally at least down a little more than 1 percent for the week. The Nasdaq still the underperformer. Apple and Tesla, big drags. Small caps actually outperforming a bit. Apple mentioning a big drag on the Dow as well today after a bearish note from Morgan Stanley. Coming up, find out what that analyst is warning investors about. Closing bell. Be right back.

While it's Wall Street buzzing about today, a shareholder proposal calling on McDonald's to conduct a civil rights audit has passed. This amid criticism over the fast food giant's record on racial matters. Kate Rogers has the details. Hey, Kate. Hey, Mike. McDonald's said it will be conducting a diversity assessment at the company via a third party. That shareholder proposal that passed via a preliminary tally called for a civil rights audit to analyze the impact of McDonald's policies and practices on the civil rights of company stakeholders.

Now, in a statement, McDonald's policies and practices on the civil rights of company stakeholders. Now, in a statement, McDonald's said in part, quote, diversity, equity and inclusion are at the heart of McDonald's core values. We are committed to providing equitable opportunities for our employees, franchisees and suppliers. While we are proud of our progress, our efforts are ongoing and we will continue to focus on actions that have meaningful impact. Now, SOC Investment Group that put forth the proposal said it hopes the company will listen to stakeholders' feedback in the process. And a reminder here, Glass-Lewis had encouraged shareholders to back that proposal at the meeting last week, and we just found out the results late last night.

Back over to you. Kate, fascinating. Anytime one of these proposals actually passes, we'll see where it goes and what the outcome is. Appreciate it. Kate Rogers. Stocks under pressure today with the three major averages now on track for weekly losses. This despite today's employment report showing the U.S. economy adding more jobs in May than expected. Let's bring in Henry McVeigh, KKR CIO and head of global macro. Henry, we say the market's down despite the strong jobs report. But I mean, in some respects, maybe it's in part because what it means for the Fed, the fact that we're still in this

six-month inflation scare, and it seems like in either direction, there's something for the markets to be a little bit concerned about and keep risk appetites in check. Where are we with that? I think our view at KKR is we're transitioning, transitioning from inflation concerns, repricing in the capital markets to earnings degradation caused by that inflation. And so, you know, our forecast in the near term is that earnings estimates need to come down quite a bit. We've really bifurcated the market into kind of the price makers and the price takers. And what you're seeing in a lot of the consumer stocks is they've ended up being price takers.

And that's going to create more volatility. So does that imply that, you know, from a macro level, that the inflation peak is here and we can count on it easing back, but yet it's just not reflected in what companies are saying for earnings? I think that the peak is probably in. I think the problem is the rate of change, where I think we have a differentiated view at KKR is really two areas. One is I think we think food and oil prices are going to stay higher for longer. When you look at the forward curve for oil,

it has it coming down probably $20 more than we think is going to happen. So we actually see elevated oil prices for some time. I think food, we think, will continue to be problematic just given Russia's invasion of Ukraine. Ultimately, that's going to lead to slower earnings growth. And I think you're seeing that happen at a time when the Fed is tightening. And that means corporate profit estimates are probably too robust. You know, if you look next year, 85 percent of the companies in the S&P are supposed to have rising margins. That's not going to happen, particularly in this environment. So, look, we operate in Asia, Europe, the U.S. We own over 200 companies. We have a pretty good window

into the world. And I'd say there are really three things to focus on. One is wages. Two is oil. And then three is the supply chain issues, while they're different, created by the zero COVID policy in China and Russia's invasion of Ukraine, those are creating dislocations in the market that we don't think ease quite as fast as maybe some of the optimists do. And so we're talking about a higher resting heart rate of inflation this cycle. And we've reflected that as a firm in terms of where we've been deploying capital. You guys have been reporting on some of it. We've been incredibly active around real estate, infrastructure, asset-based finance.

And those are all things that are price makers. And I think they'll perform well in this environment. But relative to a decade ago, this is really different. Yeah. I know that you also had been on this, you know, from goods spending into services spending as a long-playing theme. Where are we in that? And I guess are there good ways to actually capitalize on that? Because as I look at the S&P 500, it's a lot of companies that sell a lot of stuff across the world. So I think Walmart and Target were a wake-up call. I mean, Walmart's inventories were up 33%.

Target's were up 43 percent. The economy is transitioning from goods buying to services. And that, to me, is a mega theme. Within services, great pricing power. We actually think that goods will have deflation in 2023. So even though inflation will stay high, you actually could have deflation of the goods sector. And this year, the goods are up 8%. So that's a pretty big change. Services, you see a huge amount of pricing power. You saw that in the jobs report today.

Travel and lose your jobs going through the roof. Professional services going through the roof. So it's that time in the economic cycle for some mean reversion. And I think people, particularly some of the executives on the good side, were probably caught flat footed because they started to estimate that demand was sustainable. But generally, we're a good we're a services based economy here and in Europe. Higher resting heart rate for inflation globally and then presumably meaning central banks have to stay on top of that. It doesn't necessarily sound like it's a recipe for the revival of tech and kind of mega cap growth

and the stuff that was beneficiaries of the disinflation, or is that not true? Look, I mean, you know, in the macro, the way we do it at KKR, we're long term investors. We've got to get the 10 year theme right. The last cycle was about extending duration, extending duration of fixed income and extending duration of equities. And that led to a lot of money going into tech and growth. We still see a lot of opportunity around there, particularly around security and cyber. But the multiples on those stocks need to come down. The second thing is, anytime the market gets that concentrated, this is public markets, that concentrated in a couple of names. You either get regulatory surges or you

get law of large numbers. And that's what's playing out in tech. And you're seeing CEOs start to represent that. I mean, you know, in the early 2000s, we talked about this with the financials and, you know, those companies. It's just a different different chapter. But same story. Would your premise be that an inflation is not too near or how do you think it's going to go in terms of the actual economy? I think that I think inflation is going to continue to be very detrimental to economies, particularly for low end consumers. Ultimately, there was enough stimulus put into the system where I think overall consumer spending will remain OK. But there's going to be massive bifurcations, just as we talked about goods and services.

So I think you've really got to say, here's the macro, but where are you investing? And what I would say is, and we see this in some of the public data and ultimately how we think about things, is you're going to have a real bifurcation. I mean, transportation costs are up, food costs are up, energy costs are up. The greatest increase in job changes is in that lower to middle income. They're repositioning for higher inflation. And ultimately, I think that will have an impact on the political landscape as well. Sure. Henry, great to catch up with you. Thanks a lot for coming by.

I really appreciate it. Here's where we stand in the market. Still under some pressure here. You see the Dow down about 350, S&P off 1.6%. Virtually giving back yesterday's rally at least, down a little more than 1% for the week. The Nasdaq still the underperformer. Apple and Tesla, big drags. Small caps actually outperforming a bit.

Apple mentioning a big drag on the Dow as well today after a bearish note from Morgan Stanley. Coming up, find out what that analyst is warning investors about. Closing bell. Be right back. Tesla CEO Elon Musk planning job cuts after saying he has a super bad feeling about the economy. And the stock is getting hit hard on that news. That story plus bearish analyst calls on Apple and Micron when we take you inside the Market Zone. We are now in the closing bell Market Zone.

BD8 Capital CEO Barbara Duran is here to break down these crucial moments of the trading day. Plus, Steve Kovach on Apple's rough day and Phil LeBeau on Elon Musk's super bad feeling about the economy. Now, stocks sinking into the close near session lows. The S&P 500 off about a percent and a half. The major averages all on track to post weekly losses after a big bounce last week. Barb, how are you thinking about the setup here? I mean, obviously, you could say, well, we're 8 percent off the lows in the S&P. This week was just a kind of choppy on the downside. On the other hand, it's hard to see where we're going to get an all clear from the main concerns of inflation, Fed and at least some slowdown fears. Yeah, Mike, you captured it perfectly. I mean, as you know, we've had five big rallies this year. From the beginning of the year, four of them failed. Market went to new lows. This is our fifth one. We've had up 10% X today, up 10% in the last 10 days. And is this going to be another failed rally? I think none of

us know, frankly. I mean, we're watching. We are all data dependent at this point. Just like the Fed, we're looking at the inflation numbers. We're looking for signs of demand destruction. Like the jobs number this morning was interesting, quite interesting. The market did not react well to it because I think there was a secret hope it would not be good and it would mean the Fed doesn't have to be as aggressive. But there were signs of hope in that, that inflation, I think inflation is much more likely to decelerate from here than to accelerate. And we're seeing all sorts of little hints about that.

I mean, one of the things with the average earnings, hourly earnings, when you look at the last four months, they're only up 3.7%. And year over year, it is coming down. And that's an important component of inflation. So basically, until we see more come in and we see how the summer goes, it's just going to be choppy and in a trading range. But my bet is we do not test the lows like we did previously. And that's because where sentiment is, where valuation is, 17 versus 23 PE and positioning. So in the market. Yeah, absolutely. Folks definitely are playing defense after this run of negative weeks before last week. I guess in terms of individual types of stocks that might

have become more interesting here, you know, the Nasdaq did have a 30 percent drop peak to trough. You had the average stock in the S&P down 30 percent from a high. So are there particular themes that have that have come up that you think make sense here? Well, you know, it's interesting. A lot of people are still playing energy. And of course, but energy's up in general, 60% this year and hard to know if that trend continues. I wouldn't be going there. But I think a lot of people are talking about this. There's a lot of mega cap growth stocks, which I have owned and had written down, you know, sadly through this, but a lot of them are down much more attractively in terms of their valuation, because it's really been a valuation reset, not because their fundamentals are broken or changed. For instance, yesterday, Microsoft,

what was, where was their, their guidance was about currency reserves and the impact there. That's not a fundamental issue for them. You know, that's maybe a one or two quarter issue. So there's opportunities like that that have been opening up all along. So I think there's a ton of opportunity in the growth names, which once the smoke clears, whenever that will be, you can make a lot of money going forward. All right. Well, Apple is one of the biggest drags on the Dow today after Morgan Stanley's Katie Huberti warned slowing app store growth last month could be a near-term headwind for the stock and financial results, although she did reiterate her buy rating and $195 price target. That news coming ahead of Apple's highly

anticipated Worldwide Developer Conference next week. Steve Kovach joins us. Steve, so what is behind this App Store sales slowdown? And I guess what is Apple able to do to combat it? Yeah, Mike, this has actually been going on all year. So when Apple reported their calendar first quarter earnings, I talked to the CFO, Luca Maestri, about this, asking why have services slowed down? They were up. They were down from 27 percent growth a year ago and 17 percent this year. And he blamed the App Store, just like Katie Huberty was saying. And these weird comps against peak covid when everyone was locked down and spending more on digital content in the App Store. So that is what they're largely

blaming it on. And as we know, we've seen, Huberty mentioned in her note that we saw a decline just month over month, April to May. And that's as things are warming up, people are traveling more. We already know about the summer travel schedule that's coming and the huge demand there. So it could get a little worse in the near term, like she was saying. At the same time, to combat it, there are a lot of stuff coming down the pike and more growth, especially in their App Store advertising. This is what they do when you search for an app and another rival app might come up in the search results. That's a huge area of growth for the App Store, and that can help combat some of this. And then further out, if you want to look to the fall, we're expecting that iPhone hardware subscription service to come out. And that means you get a new iPhone every year for paying a certain amount of money per year or per month. And in addition to that, they give you a

bunch of Apple services tied in. So that could be a little bit of a boost towards the end of the year. Yeah, obviously, Apple has some answers here. They've done it before in terms of smoothing out that revenue stream, Steve. We'll see if they can do it again. Barb, I mean, this stock down 20% from a high. It's held up so much better than many of the others. And, yes, valuation has come in, but still trades a little bit of a premium. So how would you view it?

Well, I am an owner of Apple, and I would probably buy it somewhere in here, you know, with extra cash. Because what they're talking about, it is always a concern because the cash, the app business for them is a higher margin business and something they've been focused on part of their services. So you go, what's happening here? Now, you know, part of it probably is a pull forward like we're seeing in a lot of businesses, you know, in terms of demand post-COVID and all that sort of thing. But it doesn't change the longer term story. You know, there's two important parts to Apple, in my view, as an investor. One is the developing ecosystem, the engagement, the deepening of that connection, and also their capital return. I mean, this is a company that dwarfs even Microsoft or Google in terms of the cash on their balance sheet. It's over $200 billion. They committed last month to another $90 billion share buyback and increasing their dividend. And that in itself deserves a quality

multiple. And if you look in 2020, you know, the low on the multiple in March, which a lot of companies, the market just collapsed, you know, was down to, I think, a 17, 18 PE. And at the high year end, it was up to 40. Right now it's 23. I don't think that's, you know, overvalued. Now it might get cheaper here as people start to cut numbers and anticipate a little short term miss. But if it does come in, I would be buying it. All right. I see down just under 4 percent on the day today. Tesla, meantime, is the biggest percentage decline on the S&P 500 today after CEO Elon Musk called for job cuts in an email to Tesla executives because he said he has a super bad feeling about the economy.

Meanwhile, Cowen cutting its price target on the stock to 700 from 790 and reducing its vehicle delivery estimates because of ongoing production challenges in China. Phil LeBeau joins us. So, Phil, in that email, Musk said Tesla will cut 10 percent of its staff, but that may not just be across the whole company, right? No, it's not across the entire company. In fact, in the email, he says the hourly workers, they're unaffected because they're going to be needed as they continue to ramp up production. So you're looking at your executive staff that might be cut by 10%. And there was no other details surrounding this aside from separately from that, Elon Musk saying he had a, quote, super bad feeling about the economy. So the interesting thing here, Mike, is do we truly see Tesla follow through with a 10% reduction in its salaried staff?

And if they do cut 10% of the salaried staff, that's an indication that they are focused on the profitability of the company more than ever before. In the past, we would hear a lot of discussion from Elon Musk and others with Tesla, hey, we want to continue growing deliveries. It's about growing deliveries. Well, it's not just about growing deliveries at any cost. It's also about making sure you can turn the profit that will continue to grow the stock, grow the company. And so that's the interesting part about this. We will find out over the next several weeks if this is truly going to go through with a 10 percent reduction of the white collar staff at Tesla. Yeah, I mean, I guess what's interesting about that, Phil, it's just one thing to say,

look, we were in mega growth mode for a long time. We might have overhired in terms of non-production staff, but that doesn't necessarily mean you have to blame a bad economy for it, right? It could just be the growth phase Tesla's in. True. And keep in mind, the super bad comment is somewhat separate from the email to all employees saying, hey, we're going to have a 10% cut in the staffing at Tesla. The super bad comment, I think, might be more intriguing, not to say that it's not important if they do cut 10% of their jobs, but it might be more intriguing because, look, Elon Musk has probably a better handle

on the global economy in terms of when things are shifting quickly, given all of their exposure, not only around the world, but in terms of raw commodity prices, the vertical integration within the company. I think that's more interesting, Mike, because if he's seeing a slowdown, that is troubling, certainly within the auto industry, but within all manufacturing as well. For sure. Yeah, I know you have to pay attention to it, even if some are saying it's also a reference to the movie Superbad. But that doesn't change the upshot of what he's trying to say, Phil. Thank you very much. Micron shares, meantime, also falling sharply. Piper Sandler downgrading the chipmaker to underweight from neutral

and cutting its price target to 70 from 90 over its oversized exposure to mobile PCs and other consumer products amid concerns about the broader economy. Christina Partsenevelos joins us with more on this downgrade. So could this be the start of a down cycle in what's, of course, always a very cyclical industry? Yeah, well, I want to echo Steve because Steve brought it up with Apple, the fact that we are seeing a decrease in demand for handsets and PCs during COVID. A lot of us upgraded our electronics. And this downward trend has been continuing for quite some time. But what we're seeing different this time is the price for the memory chips in these handsets have dropped.

And given Micron has almost 50 percent exposure to the end consumer market, of course, they're going to take a hit. The second part of that equation, too, is supply chain problems are easing. Foxconn, which is a supplier of Apple, recently said that their supply chains are starting to improve. And so this bodes well for all of those smartphone makers and the chips that go into the smartphones. And then lastly, the third part of all of this is in, I guess maybe we could say in the medium term, the excessive buildup of inventory specifically within the auto sector. Micron is exposed, and you have many automakers, Daimler, Ford, for example, saying things are improving, and this may not bode well for demand when it comes to these memory chips that Micron provides.

Yeah, I mean, always was a commodity, cyclical industry. I guess the case here from this downgrade is that it somewhat remains so. Christina, thank you very much. Got to move on to Amazon announcing that Dave Clark, the CEO of its worldwide consumer business, will step down next month. Clark has spent the last 23 years at the company and a replacement has not yet been named. Deirdre Bosa joins us with more on this. Dee, why is this departure potentially such a big loss for Amazon? Well, first, David Clark played a critical role, right? He headed up the consumer business, which is really still Amazon's core.

And it comes at a really challenging time for this business when it's facing slowing growth, overcapacity, perhaps some missteps in hiring. So for him to step down at this time is pretty crucial. It also comes just ahead of Prime Day in July, which is one of the busiest shopping holidays for Amazon. As you said, Mike, as well, he was there for more than two decades. And one of Amazon's strengths has been its bench of executives, its veterans that have been there for as long as nearly Jeff Bezos. So him leaving is sort of another person that has stepped down in the last few years. They lost Jeff Wilkie and a few others who were really seen as Bezos's lieutenant. It also raises a few questions about succession. We know that Andy Jassy got the top job. Were others looking for it like David Clark? We don't

know, but it is a critical time right now for him to step down. And that's why it matters so much. For sure. And Barb, I mean, this comes at a time. Obviously, Amazon's had a tough time in the market. It's down still 35 percent from its high, even after some strength this week. And a lot of people looking outside of the retail business within Amazon to say where the value really lies. I mean, this idea that it's mostly about logistical costs and overinvestment in retail, that has hamstrung the stock. So is it an opportunity that it's gotten down this far, or is it time to stay away? Well, it's a good question, Mike. Certainly, you know, a few weeks ago, this stock was ridiculous.

And down here, it's still expensive on a longer-term PE, but let's not forget, they are the leader in e-commerce. They are gaining share, although I'd like to see how this stacks up with Walmart, who's really gotten with the program in terms of that and doing, I think, a great job executing. And they still have a lot of underpenetrated businesses that they are still working to expand. This is not a one-stop, one-trick pony. And plus, AWS, which is still a relatively small portion of their revenues, but that is fast-growing and that will continue to take another, you know, bigger piece.

So in the long term, yeah, I think you could add to positions or start positions here, but I think it's going to be volatile because the question is, on the e-commerce, what's really happening? Is it really the switch that everybody's rushing to do, you know, fly here, go there, go out to dinner, you know, and so they're not shopping as much inside. It doesn't disrupt the long term trend. E-commerce is here to stay and it will continue to get a bigger share. But it really is is a question how long this this pause will last. Yeah, for sure. And Deidre, thanks for the for the color on this. Definitely one to watch in terms of what happens with that position. Stocks near session lows heading into the close.

The Dow is down about 345, S&P 500 still hovering above that 4100 mark. So, again, just to dial it back down about 1 percent for the week. Barb, do you think there's anything that we're going to be learning about the next catalyst, the next driver of this market? I guess ahead of next Friday, we have the CPI number. You know, I don't think so, Mike, unless we suddenly, you know, some of the things that are not factored in in terms of upside surprise. You know, maybe there's a resolution. The Ukraine war doesn't look imminent. You know, China is reopening.

Shanghai is ending its lockdown. So there's going to but I don't think there's going to be data coming out of there anytime soon. So it's I think we're just going to be hanging like we used to in the old days back in interest rates. You had Dr. Doom and Gloom, Kauffman and Wujanowski, you know, talking about interest rates. We're now hanging on every CPI number, any inflation number out there to see what it's telling us. And we're also, of course, very related point. I mean, crude oil, Brenton WTI above 120 again right now.

That is clearly translated into, yes, strength for the energy sector, but a little bit at least of a perceived headwind. And it seems as if that might be one that's going to be with us for a while. Yeah, I think it's not only, you know, energy prices are going to stay high, you know, because we're not seeing the supply turn on, you know, in very many places. So you're still going to have supply constraints, China reopening. And you also have, you know, high food, food and energy, which is not in those numbers. And that's going to impact, you know, the lower income consumer, which is, for instance, why, you know, I have started positions in Dollar General because there is going to be an impact on the economy. But again, it's going to be lower because a lot of people still have savings.

They're spending them down, but they have jobs. And so the spending is going to continue. I mean, that's why I don't see this economy, you know, even the Fed raising rates. I mean, they're still not high in absolute terms. They are compared to what, you know, we were used to, free money, basically. But, you know, I think we're going to continue along. But it's the lower income that's going to be hurt by these commodity prices. For sure. And Dollar General has been a relative outperformer. Barb, appreciate the time. Great to talk to you on this Friday. Meanwhile, as we head into the close, the S&P 500, again, down near that 4,100 mark. We were up 6.5 percent last week, basically up 9 percent from the intraday low. We have backed

off that by about 1 percent this week. You see the breadth has been negative. It's basically 3 to 4 to 1 to the downside right now. Look at the 10-year Treasury yield. It is now kind of taking another turn higher toward the recent highs above 3 percent. Not quite there. The seven year note got to 3 percent earlier today after those jobs numbers suggesting the Fed is going to remain with inflation as job one and no lot looking for an opportunity to pause to see the 10 year note now at about 2.95 percent. The volatility index is popped a little bit. It's around 25. If you look at it, it's basically created this new range in the last six weeks or so. The floor has been around 24, 25. It's gotten up into the mid-30s briefly.

It just shows you a general state of agitation without really any outright panic because the market does feel kind of stuck here between inflation and recession fears. As we go out, Dow Jones Industrial is down about 350. We will be down somewhat for the week. That does it for Closing Bell. Now let's head over to Overtime with Scott Lott.