Power Lunch - AI Domination?, and Musk-Watch TV 5/12/23

Episode Date: May 12, 2023

You’ve seen the warnings from Hollywood movies before: artificial intelligence will destroy society as we know it. But now, even Wall Street is joining in.One firm is out with a terrifying note, warning there’s a ’50-50 chance’ that AI will wipe out all of humanity. The analyst behind the call will join us to explain his frightening thesis.Plus, Elon Musk is stepping down as CEO of Twitter. While Tesla is raising prices of some of its EVs here in the U.S., but recalling some vehicles in China. We’ll break it all down for you. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch on this Friday alongside Kelly Evans. I'm Dominic Chu. Here's what's ahead on the show. Coming up, you've seen the warnings from Hollywood. Terminator 2001, a Space Odyssey, Ex Machina. The list goes on and on, all with the same theme. Artificial Intelligence, AI, will destroy society. But now, even Wall Street is joining in on the action. One firm is out with a terrifying warning.

There is a 50-50 chance AI will wipe out. again, wipe out all of humanity. Is all of this fear overhyped? Will the benefits outweigh the risks? That conversation's coming up, Kel. And if we survive, some Musk watch TV. Elon Musk making his mark across the headlines today. Stepping down as Twitter CEO, naming a replacement we are very familiar with,

raising prices on some Teslas here in the U.S. And recalling vehicles in China will break it down and get a look at the stock action. But first, let's get a quick check on the markets. Overall, we see the major averages, Dom, Down about, what would you call the session lows down 183 for the Dow? Just about at the stop of the, at the top of the exchange, just about 1 o'clock Eastern time, we were down about 28, 29 points. So I'm going to call this pretty much kind of near the lows of the session.

Look at the S&P also below 4,100. We'll call it psychologically important, if nothing else. But we begin with the growing debate around artificial intelligence. Undeniable, the hype around it is exploding. Nearly every big firm is betting on the technology. Some experts are starting to raise concerns. BCA research out with a new, no, with a pretty stark headline, saying the safety risks around AI are huge.

And we think there is a more than 50-50 chance. AI will wipe out all of humanity. I'm trying not to laugh as I read this, and that it's not funny. By the middle of the century, how they hedge it is by saying there's also a good chance humanity survives, which is great. But they are clear there will be a serious impact. And here to discuss is the strategist behind this note, BCA researchers, Peter Barrison, and our own Steve Kovac.

Peter, I don't see a tinfoil hat. I mean, you look like a normal guy sitting in a normal office. and, I mean, talk to us about this call. I think the mistake that people are making is that they're thinking linearly when they should be thinking exponentially. So we'd made the same mistake at the start of the pandemic.

People didn't take the spread of the virus seriously enough because they were just seeing a few cases, but then those few cases became a few more cases. And before he knew it, you had a massive pandemic that was around. the globe. But I think it's the same with AI. People are thinking linearly when they should be thinking exponentially. We've been on this exponential curve with AI for many years, probably many decades. But it's only now that we're reaching the point where AI can do a lot of the things that people can do. And that process will continue. And because we're on that exponential curve, it'll probably happen a lot more quickly than people realize. So the upside is absolutely. huge. I talked in the report that AI could have the same benefit to growth as prior technological revolutions, the agricultural revolution, the industrial revolution, all of which saw growth

increase by over 30 fold. So we're talking about global GDP growth potentially of over 100%. Now, that's way above consensus. So the upside is amazing. And let me just jump in. On that downside, too, the transmission mechanism. I mean, is this basically saying AI wipes out humanity because the code writes code? Like, just what is the actual mechanism that you're concerned about, knowing, again, we're speculating about an exponential future that none of us can really foresee? But what is the direct cause and effect that you are concerned about?

What I'm concerned about is that all of the safety protocols that people have warmed about are being completely blown through. So for many years, AI safety experts have said, don't make AI, don't give AI the ability to use the Internet. Don't give AI the ability to write its own code. What have we done that? We've gone right through that. And so the risk is that Chad GPT6 won't be written by humans. It'll be written by Chad GPT 5.5.

And 6.5 will be written by Chat GPT5 and so on and so forth. And it becomes an exponential growth in intelligence. And it's going to be unlike anything that we've ever seen before. Humans are used to being the top species on the planets. But we may not be if machine intelligence arrives. And it could arrive much more quickly than a lot of people are anticipating. I feel like we're at the beginning of a disaster film where they show the news clips about like what everything went. The newscaster's laughing at all.

It was the last of us, right? It started off with that roundtable discussion about how. fungus is going to be the big thing. But Peter, I got a question for you because, you know, especially from Microsoft and Google, the two leaders here and Open AI, I guess, you know, we hear the word responsible, responsible, responsible, we're going to do this responsibly. Seems like you're not buying that.

What do you think? Well, those companies are responsible to their shareholders. They're not necessarily responsible to humanity as a whole. And I think they have been rather complacent about some of these risks. And so I think those risks are there. And again, it doesn't have to be a germinator type of scenario. Like if you haven't an advanced enough AI and you say, okay, we've got this problem, global warming. Come up and implement solution that alleviates global warming.

If you don't say anything more than that, it's quite possible that the AI will say, okay, well, nuclear war would reduce the temperature of the planet. So the problem, and we've seen this over and over again with complicated systems, is that they can be very, very unpredictable. You give them a set of goals, and then they have to adopt certain subgoals to achieve those end goals. And those subgoals could be not the sort of thing that we'll want them to do. Peter, it's Dom. Is the solution to this as simple as throttling back on AI? I mean, there are AI purists out there who say that true artificial intelligence, artificial intelligence is the code writing code aspect of it. What if we never let it get there?

Maybe it's just really advanced machine learning. We don't want to replicate the war games movie with Matthew Broderick where we're turning over, you know, nuclear launch codes and military capability. It's not SkyNet from Terminator. Why don't we just say, hey, AI is only for these types of uses and how quickly do regulators have to get on board? I think we have to start moving really quickly on this. And certainly a temporary slowdown. in AI, not necessarily AI research, but in the implementation of AI research would probably help. Now, will it be enough? I don't know.

I think the problem that we face is that we live in a world where it's just much easier to destroy than to create. You know, the title of the report is chat GPT and the curse of the second law. That second law is the second law of thermodynamics, which says that entropy or disorder tends to increase over time. And so in the wrong hands, AI could be a devastating tool. And so, yeah, we should regulate AI in the way that we regulate transportation, the way that we regulate many other domains of life. Which is something that Lena Khan has already talked about. You know, the kind of rules are already there.

Peter, Sam Lesson, others have proposed a couple of fixes or reset some of this to the issue of taking other people's content, but you could cause all AI models to reset themselves. You could, you know, there's different types of things that you could do. to try and sort of start over. Do you think that they should be forced, you know, back to the sidelines and not make these tools available for people? I mean, that ship already looks like it's sailed. So I'm not sure what else we can do.

And I don't mean to diminish the possibility that generative AI takes on a life of its own. You know, that's what it's designed to do. That's right. So I think what they need to do is that they need to integrate various safety protocols. And there's a lot of work on this now. They need to integrate these safety procedures into the models that they create. And we have to get away from this sort of rat race where everyone is trying to come up with a better model. Because ultimately, if this doesn't go well, then no one will benefit.

And as I said at the outset, the upside of superintelligence is huge, as long as we can harness it in a way that is to the advantage of us and not necessarily to the advantage of a few companies that might be pushing an agenda that ultimately is more about making money than necessarily doing something that has all those safety features built into it. Okay, Peter, so we're looking at this in more of a vacuum, and we're talking about some of the things that we would do. There's a competitive element, as you point out to this, because we're not the only ones developing AI. We've been in a supercomputer race with China for decades now at this point,

then we keep one-upping each other there. If we're going to have these regulations, we need to have an almost universal accommodation being made so that China, the U.S., France, the UK, Russia, everybody says we're going to take a break from AI. I think to some extent, China actually has an incentive to slow things down, for one thing they're behind. But second of all, they also want to maintain stability in their society.

And if you have AI that is becoming unpredictable, that's not what the Chinese government wants. So I think there is a pathway to do this safely. That whether we actually end up taking this pathway, I don't know. The report says that there's a more than 50-50 chance that all of this will end very, very badly. So I can't say that I'm terribly optimistic, even though an avenue does exist to do this in a way that does benefit humanity. I don't think anyone thought you were terribly optimistic, Peter. Not that alone. Thank you very, very much for joining us today.

We really appreciate it. We'll check back in soon. All right, Steve, stick around here for this conversation because AI's impact on the market is becoming more and more apparent as well. According to Societe General, the S&P would be down 2% this year, if not, for the growing AI and tech bullishness around that concept. And then beyond artificial intelligence, tech is on a tear outright. The big names, all up more than 30%. so far for the year with meta platforms up a whopping 93%. So it's almost doubled in price. Alphabet, Microsoft, Meta, and Apple, all less than 5% away from their fresh 52-week highs.

So here to discuss is Michael Bailey, Director of Research at FB Capital Partners. He has been a long bull here on some of the big tech trade, but says he has taken the foot off the gas in the recent past. of course, Steve Kovac sticks with us for this tech conversation as well. Mike, I don't know if you heard our last segment there, but there's a lot of, I guess, fear and anticipation about AI. Has it been really the pure driver behind the tech trade so far in 2023? And if so, doesn't lose steam at some point? Great point.

It's definitely been a big driver for sure. I think you can look at, for example, Nvidia, that stock is also on fire, it wasn't on your list, but that's been a big driver of sentiment behind companies like that. So I do think that's really gotten some excitement into some of the big tech names. You can start to go down the list for sure Microsoft is involved. I know they've got some ownership there of Chet GPT, so that's feeding into a little bit of some of the sentiment recovery there. I think in general, though, you're not quite seeing as much exciting outside of that, perhaps Google, alphabet, etc. But it is definitely a theme. It's been driving sentiment. I think there are some other things

with a broader sentiment and just frankly regular old earnings that's also driving a big recovery for some of the fangs and some of the tech names. Steve, you've been covering all of these companies, and obviously we counted the number of times artificial intelligence has come up in earnings, conference calls, everything of the sort. Dozens of times. More than dozens, if you count some of these companies together.

So what has been thematically the big driver in your mind of the tech outperformance so far, at least to this point right now? Has it been AI? It depends on the company. For Apple, probably not. Like, for example, I was out there in Cupertino talking to Mr. Cook about this,

And he was telling me, no, China, sales were great. He didn't even mention AI as a catalyst for what's going on at their company. But you look at Microsoft, obviously it's the hype around AI. And in particular, Microsoft has a monetization plan that's much more advanced than what we've seen from its main rival there. Google, Google this week did kind of show, look, we have some of these products in the works, not really saying when they'll be available. Microsoft is still in the early stages of selling these products, but at least they're being used by customers right now. Okay, so Mike, with that in mind, there are certain trades that have been real stellar performers.

We talked about the almost doubling of meta platform shares. Is there still, I guess, a momentum trade to be had for technology and is AI the driver of it? Or is now the time to feel a little bit more like, hey, we've had our run, let's rotate out into other stuff? Or in the coming months, if a recession, if, again, a recession does come into play, do these big cap names become that safety trade that they have been over the course of the the past decade and a half? Great, great question. So a lot of different scenarios there.

Just looking at maybe starting with AI, it has been a big driver sentiment this year. In general, some of these things do tend to kind of burn out after a while. So we're several months into it. If there are incremental significant news flow, you could see that continuing to drive some momentum here. Alternatively, I really would kind of fall back on, what did these things?

What drove growth for all these companies before January? Really, it was a lot of multi-year growth growth drivers. So cloud computing, e-commerce, online ads. So I think we do have to pivot back a little bit and say, okay, what is actually driving sales and earnings for these big tech companies? It's one of those themes. So cloud computing is still growing. It's faded a little bit, but it is still growing nicely. And that's helping out Amazon, Microsoft, Google, et cetera. E-commerce faded a little bit, but still growing. So just kind of go down the list. Apple smartphones is a little bumpy, but they're still getting products out there, Apple services growing fairly nicely. Everything else is doing okay, that it gets

here at the last part of your question, recession. Big, big question there. I think a lot of companies are going to take a hit if we do hit a recession, it's something to watch out for. I think the one thing that's generally favorable for some of these big tech names, again, going back to sentiment. So a couple years ago, investors thought these things were perfect and flawless, crazy multiples. They came crashing back down last year. No one wanted to touch it. Now we're kind of in the middle. So if there is a recession, if the business slows down a little bit for big tech, you're kind of hedged somewhat. So, you know, sentiment is right there in the middle.

So it could be a slowdown, but I think in general, a better place to be now than we were a couple years ago in terms of really expensive valuations. Mike, you are a stock picker. We've just got a couple seconds left here. The next six to 12 months, what's your favorite place to be? What stock? Yeah. If we had to pick one or two stocks, Visa, a great company.

It used to be a tech company. Unfortunately, got mistakenly moved to financials. Great place to be. A lot of durable growth there in value. We've got way down. We like it. That's probably something we'd look out first. If you wanted to go a couple other areas, there's a health care company called Danaher. There's a lot. There's a big self-help story coming. Interesting place to be, evaluations down. If you wanted to hit it additionally, just something more in the safer defensive staples area, Diageo, very interesting beverage company, trading at a very low end of evaluation. So a lot of interesting ideas out there, even if we hit a slow down end recession. Visa Diagio, Danaher, no big tech there to be found. Mike, thank you for your time. time today. We appreciate it. Mike Bailey and Steve stick. I'm not going anywhere. I'm just, I'm just glued to my seat. Don't worry. Thank you. Let's get to another headline in the big tech space where Elon Musk is stepping down as Twitter CEO and naming his successor. Julia, I mean, is there anybody

who doesn't love this move by Musk taking an advertising expert, putting her on a platform that's ad challenged? This one, wow, looks pretty. I don't know. What do you know this hour? Yeah, and an ad challenge. And we have to remember that Twitter's revenue. is almost entirely advertising based right now. So Linda Yakarino is leaving her role as NBC Universal's chairman of global advertising and partnerships to take the top job at Twitter. Musk saying she will, quote, focus primarily on business operations while I focus on product design and new technology, saying he's looking forward to working with Linda to transform

this platform into X, the everything app. Now, this morning, Comcast President Mike Kavanaugh announced her departure, saying he is grateful for her leadership and quote for the innovative team and platform she has built, saying Linda has made countless contributions to the company. NBC Universal and Twitter have had a longstanding partnership. And just about a month ago, Yakarino interviewed Musk on stage in Miami as Musk worked to appeal to advertisers. They were also together at a WPP conference earlier this week. Now, all of this comes ahead of NBC Universal's upfront ad presentation that's happening on Monday in New York. So certainly a lot of change before a very important time for

NBC Universal and his ad negotiations, Kelly. Yeah. Steve, just to make the obvious observation here, when Musk bought Twitter, he had made comments about how maybe advertising wasn't going to be the best business model. And look what he's tried to do with subscriptions and Twitter blue, and that all seems like a giant disastrous nightmare. So is this a tacit recognition that the business model for Twitter going forward has to be ad-driven? And if so, what does that imply for? its free speech intentions. Exactly. This has been the problem since Musk has taken over in this push and pool between advertisers,

just seeing what's happening on the platform. I will note that if Musk does maintain this product role, the CTO role, he's still going to be dictating a lot of what happens on the platform that advertisers are going to be worried about. So, Yaccarino has her work cut out for her, trying to leverage those relationships she already has and convince them maybe what they're seeing on Twitter. Maybe they're not actually seeing it, or it's okay, or we have way to bury it.

Right now, the product itself doesn't necessarily show that to be true. And, yeah, on the subscription front, you know, the idea is, I mean, he's talked a lot about, you know, adding more benefits to this blue subscription product, including encrypted messaging that just launched this week only for those subscribers. But, again, the subscriber base is so tiny. It comes nowhere near to what Twitter was generating at its heyday. You know, Julia, our colleagues over at NBC News are out, and this is, a Ben Collins story with regard to some of the stuff that's happening on social media right now,

specifically with Twitter, in that certain people out there when they have the auto fill over the course of the past few weeks have seen things that are unsavory in terms of videos, perhaps depicting animal cruelty and everything else, and that it was algorithmically bumped up and that Twitter kind of didn't pay attention to those until they were brought up really on social media. What kind of a job does Linda Yakorino have, going forward to ensure and guarantee to advertisers that their money is being sent spent safely on a platform that's there not perhaps putting out that kind of content and amplifying it algorithmically within their process. Yes, and I also have to make sure we reiterate

that disclosure, Dom, that NBC Universal is CNBC's parent company. So of course, Lindy Gacrino until this morning was our colleague here. Now she is, of course, has moved. moved on, but just want to do that NBCU disclosure. What is notable here is that when she was at NBC Universal, her key appeal to advertisers was that she was placing their ads next to the most premium content, right? So that was essential, this idea of premium content, safe content, very different from the kind of user-generated content that you might find on a social platform. So now I think her job is to make sure that her partner, Elon Musk, understands the importance of trust and safety when it comes to working with advertisers.

understands how to navigate that balance of free speech with which Linda Gakarino has said she fully supports and understands the value of, but navigating the balance between free speech and the trust and safety that is necessary for their ad partners. And I think that that's going to be the balance that she's going to have to negotiate. When she was running the ad business for NBC Universal, she had to deal with the CMOs of all of the biggest companies in the world. And she had to talk about the importance of that premium content. She understands how to deal with all those big personalities of those CEOs. She understands how to negotiate. And now she's going to be negotiating with Elon Musk as well as with advertisers as she walks that line.

All right. Julia Borson with the latest there on Twitter, I guess by extension, Tesla and of course, Elon Musk and Linda Yaccarino. Thank you very much for that. Also to our own Steve Kovac. Thank you for everything. I'll leave at the commercial break. I'll square table. I don't know. I think you should stay maybe. Way in on Tesla. I like it. I got nothing to do. It's Friday. All right. Coming up on the show, guys. Musk's big decision over Twitter. Will this mean he'll have more time to focus on Tesla?

Many might argue Musk will always find a way to find a shiny new toy to grab his attention. But the impact of his extracurriculars on Tesla's stock is very clear. It's down 50% or so since disclosing that stake and the acquisition of Twitter, Kelly. And as we head to break, let's do a quick power check, shall we? One of our favorites. And here we have First Solar on Pace for its best day since 2013, up 23% on positive headlines from the Treasury on tax incentives for U.S. production and the acquisition of EvoRAB. Now on the negative side, check out Gen Digital, ticker GEN, formerly known as Norton Lifelock. I didn't even know that. They topped analyst expectations for the quarter, but getting price target cuts over at

RBC and Morgan Stanley. Those shares are down more than 5%. Power Lunch will be right back. Welcome back to Power Lenton. Let's check on shares of Tesla, which turned red after a positive start pre-market. Several headlines surrounding the company, we just talked about Twitter, obviously. they're also raising prices for all vehicles except to the Model 3. In China, they're ordering a recall, though, of 1.1 million cars over break risks. And all of it comes with Elon Musk resigning from his post as Twitter CEO, Tesla, down more than 50% since Musk disclosed that 9% stake in Twitter last April. So again, the shares have lost half their value since his Twitter involvement.

The road ahead for Tesla, what is it? Colin Rush is here to tell us. He's managing director and senior analyst with Oppenheimer. Colin, are you surprised the stock isn't holding its gains today? Not really. I mean, the truth of the matter is that Tesla continues to have an important technology lead in the EV space. A lot of their competitors are really struggling on production and cost reduction. And so as we look at Elon's attention span and the depth of management at Tesla, this isn't a huge change to see him resigning from the CEO position at Twitter. The team at Tesla is a deep, very talented team and it's very focused. You know, certainly he's going to have his hands full on the technology side at Twitter for sure. But I think the real issue for Tesla now is around demand. And I think the thing that may happen here with Twitter change is really a repair of the Tesla brand with a certain segment of society.

So that is a really fascinating point. And people have talked about how much Tesla has fallen as a result of everything Musk has done on Twitter and his comments there. Do you think he is reacting to that by bringing in someone who's extremely professional, moving it in more of an ad-friendly way, which has to negate some of the more a problematic speech that was viewed as hurting his reputation. So do you think that's partly what this is about? And again, if that's all what's going on here, you'd think Twitter at Tesla could at least stay positive for a session. You know, I think it's probably part of what's going on here. I mean, I think the big issue for Twitter is around revenue.

We're certainly not covering that company. It's a private company. But the cash flow is the real concern for Tesla investors, for sure, as they look at Elon selling more of a stake potentially, which does not appear to be a need at this point. So for us with Tesla, it's really a larger picture around what's going on in the competitive landscape, but also the broader macro environment for vehicle sales and EV adoption. Certainly with what we've seen here to date, it's been actually pretty positive, especially for Tesla. They've had healthy numbers in terms of sell-through.

We're seeing a bunch of their competitors falter as they go through initial ramps for some of the startups and even some of the established OEMs struggling with software and other issues. And so the setup for Tesla is good, and the question is around what the margin profile looks like, and that's very much in flux. They have enough granular data to be able to change prices on a regular basis by geography, and we're watching that play out in the media. Okay, so, Colin, that's perfect, because that's the question I want to ask. In the couple of minutes that we have left here, can you take us through as an analyst

how influential Tesla is with regard to setting prices in the auto market, not just for EVs, but possibly the auto industry writ large. Yeah, I think it's critical, you know, from a functionality perspective. You know, we're really watching this next rollout of the self-driving technology to look at how they position that, how the technology works, and what the pricing model ultimately looks like. You know, the message that they put out in the last quarter was that they were out looking for users, right?

You know, they were out getting customers to buy the vehicles that they could then upgrade through services and other revenue streams. I think what, you know, we're watching to see it's how that plays out here. You know, we certainly see them with a cost advantage and a number of geographies where they're actually generating cash. They're at a sustainable growth pace. And what this looks like from a margin perspective, both at the vehicle level, but then at the add-on level is critical to what the valuation is on the stock. And I think it's TBD, to be honest. And that's what we're watching for here over the next several months. All right. Colin Rush with the call on Tesla. Thank you very much, have a nice weekend.

Thank you. All right, thanks, guys. Further ahead on the show, ham tons of property. Get it? Hampt tons of property. Brokers in that high-in-luxury rental markets saying that they are choking. Yes, choking on all the rental inventory.

We'll take a look at what's causing the big chill at the beach coming up after this. Welcome back to Power Lunch. Let's head over to Chicago where Rick Santelli is standing by, checking out the bond moves at the C.M. group, Rick, it looks like we're seeing a little bit of selling pressure to cap the week off, rates ticking higher. Oh, absolutely.

And the selling pressure really ramped up when you saw the following data point. That was, of course, the qualitative but still important five to 10 year inflation outlook in the University of Michigan preliminary look today. And most are saying, well, highest inflation since 2011, as you see, they're up 3.2%. And that's true. But we just equaled 2011. You have to go back to 2008 down to find a higher level at 3.4. That's really the comp.

And the University of Michigan was weak as well. When you look at twos and tens together on the next chart, you can see how they both popped at 10 o'clock Eastern rather aggressively. And if you extend that, you can clearly see that since the fall, the twos and tens have been moving together, even though obviously there are some yield curve issues there. The point is that after all of that, twos are still under 4%.

Tens are still under 3.5% even though they've been very much in tune with the stagflation theme. And finally, one week of the dollar index having just a stellar week because of haven issues to banking. And many are asking, why is inflation so sticky? Come on, people. I'll give you three reasons. Forget politics. Forget Republicans,

independence, and Republicans. And think about it this way. American Rescue Plan and 21 infrastructure bill in 21. Inflation Reduction Act in 22. Put dots on a chart and look at the inflation numbers, how sticky they get when we keep spending money we don't have. Kelly, back to you. Rick, thank you. Have a great weekend. Rick Santelli. Over to Courtney Reagan now for the CNBC News Update. Courtney? Thank you, Kelly. Here is your CNBC News Update at this hour. An unaccompanied migrant child who was in the custody of the U.S. Department of Health and Human

Services has died according to the agency. It did not provide any details, including how and where the child died. This comes as U.S. agencies work to handle an expected influx of migrants following the lifting of Title 42. However, Homeland Security officials says there have not been significant increases at the border in the hours after Title 42 was lifted. Russia is rejecting claims of a Ukrainian breakthrough in the battle for Bachmout. Moscow appeared to concede that its troops had lost ground around the key eastern city but said the general situation is, quote, under control. Russian forces on the ground have claimed. claimed a Ukrainian counterattensive has begun, but Ukraine says it has yet to launch that operation.

And the entire population of a very small town in Switzerland is being evacuated amid an impending rock slide. Brienne's located 15 miles from Davos is in the path of a nearly 7 million cubic feet of rock. The hundred-odd residents have been told to leave as the huge chunk of the mountain that looms over the town could collapse as soon as next week. hopefully everyone heeds those warnings and gets the heck out of town. Kelly back over to you. Yeah, I would not stick around. I'd be out of there. But how do you know how much to pack?

Where do you go? No, you just get a go bag at this point. Get out of there and wait a couple days. Yeah, I guess. Courtney, thank you. Still to come on Power Lunch, trading the consumer. Some big retail names set to report next week. Giving a clue into the health of spending.

We'll trade those key names on deck in a fresh three-stock lunch. We'll be back with the Dowdown 158. Welcome back to Power Lunch. Time now for three-stock lunch. On today's menu, a barometer for the consumer. Some big retail names are set to report earnings in the coming week. First up, you've got Home Depot. It reports before the bell on Tuesday. It missed revenue estimates for the first time since 2019 when it reported fourth quarter results in February, citing a consumer pivot from goods to services. It's now down about 9%, as you can see so far this year. So here with our trades today is Gina Sanchez. She's the chief market strategist. Adelito advisors. She's also a CNBC contributor. She's also one of one half of the FlyNAMIC duo, if you will, competing in this year's CNBC stock draft. So we're going to get an update on that in a bit. But Gina, how exactly would you trade Home Depot? Look, Home Depot is a long story for us, because right now you have consumer demand that's

being supported by stabilizing existing home prices. So they've finally stabilized and people are feeling comfortable about making investments into home improvement. which supports the immediate demand. But they did get hit for the investments that they're making into their human capital. So the sort of employee consumer experience and that services shift. But we think that that's going to pay off in the long term. And as we go through the slowdown, there will still be demand and there's an upside when the markets get better. All right.

So maybe if markets get better, although, well, just elaborate on that, Gina, for a moment, if you would. Because Home Depot has an incredible, you know, sort of intellectual property moat, brand mode. People understand it. And a big part of what the experience is there is the customer employee experience. And so they're basically the investments that are going to be made there will just continue to build that value. So that's really kind of where I'm going with that. All right. What about Walmart?

There before the bell next Thursday, they had that soft outlook when they reported Q4 results in Feb. Discretionary spending is slowing. But then since maybe things. are turning in their direction. Shears are up 8% on the year. What do you do? So Walmart here actually has a couple of things. They're making investments, but they have investments that are already paying back. During the pandemic, they really had to get their e-commerce game in order. And now that is up. That is representing a larger and larger hunk of their revenue. They started getting into the global ad space. Hello, Amazon, hello, Google.

And yet they are really making inroads here. And they unveiled plans to do an e-charging network. So they're making, they've made investments, they're paying off, and they're making new investments, and that's what they do. And quite frankly, they're also just continuing to innovate in the supply chain experience. And there's still the behemoth out there in terms of retail presence and employment. All right. So Gina, finally, we got Foot Locker, which reports next Friday before the bell. It previously announced it was closing about 400 underperforming mall at store locations and replacing them with 300 new format stores, calling 2023, uh, quote unquote reset year for the brand. Those shares are up about 3% roughly for the year so far as footlocker

a good story to get into now or no. This one's a challenge. You know you got weaker you got the weaker you know the weaker outlook because they're making investments into their promotions but at the end of the day you know the the sort of moat here is pretty weak and so you know you're depending on on traffic literally foot traffic into foot locker and that's really not how the game is played anymore so they really need to get with the program. But Gina, before you go, let's get a check on the latest stock draft standing. It's Friday. We'd love to do this in the lead.

Tori Dunlop and the financial feminists. We've happened to Tom Bergeron. We've had a lead change over the past week. Bottom of the leaderboard, by the way, where we stand here. There they are. Let's see, they're the leaders, financial feminists, mountain goats. Wow. Ryan Reynolds is second place right now.

Scarlet Knights minus 2%. Gina, you and Diamond DeShield's kind of near the back of the pack right now. PayPal and Alphabet seems like it should be doing okay. Yeah, you know, look, we're at the back of the pack. Nine months is a long time, and it's easy to sort of have that recency bias and invest in things that are good right now. But nine months from now, we're going to be seeing a, we're going to be looking past the slowdown and the recession into a recovery. And PayPal is making investments that should be hitting right about that time. So you look at our two stocks. We have the number two stock, Google, and the number 19 stock, which is PayPal. And so we think that PayPal is actually going to benefit. toward the end of the year, which is right when you're going to be announcing your winner. So let's see how we do. Let's see. We got a lot of long time to go, Gina.

We appreciate your time very much today. Gina Sanchez on three-stock lunch. Coming up, we're just two weeks away from Memorial Day weekend, the unofficial start of summer vacation season. Robert Frank is in one of the nation's hottest summer rental markets, but it's not quite business as usual this year. Well, it's bargains on the beach in the Hamptons this summer as an oversupply has homeowners cutting rental prices. But at the very top, prices are still sky high.

We're going to take you inside this 12,000 square foot ocean front estate and tell you how much it rents for for just two weeks. Coming up after the break. Welcome back, everybody. The Hamptons are one of the it summer destinations for Northeast. Even reading this. Oh, my God. Some of the rental homes fetching for millions for just a few weeks of time.

But economic uncertainty is already leading to less demand. And we have a sudden dom oversupply of inventory. Robert Frank is investigating the situation in Bridge Hampton. Robert? Well, Kelly, those troubles on Wall Street starting to be felt here in the Hamptons. There are just too many summer rentals and not enough renters right now.

Right now, there are over 5,700 summer rentals available in the Hamptons. That is about twice the normal levels. Now renters and households that are renting, they've dropped their prices 10 to 20 percent, but that's probably not going to be enough. Now, the problem is all the people that bought homes in the Hamptons during the pandemic,

they're now trying to rent them. Meanwhile, there are fewer renters because of the lower stock market and the job cuts and lower bonuses on Wall Street. When you feel good about life and your situation and the things around you, you go out and you make the expenditure on a rental. But this year, people may not be feeling quite as good.

Now, Kelly, there is one bright spot, And that is the very, very top end, these ocean front estates like this one. This is a 12,000 square foot home in Bridge Hampton, 10 bedrooms, 12 bathrooms, a big pool. You can see behind me. The ocean is right in front of me. The rental price for this, Kelly and Dom, $600,000 for two weeks. I'd have to get like a thousand of my closest friends, close friends to share in that. This is the whole, Robert, I don't know if you can hear us real quick, but there is some, we heard,

Tillman yesterday say that there is his high-end consumers are doing worse. Is that true out there? It's the affluent as opposed to the very wealthy who are suffering. Now, the sort of white-collar, highly paid people in finance and tech, that's where we're seeing the drawback. And that is one reason why we're seeing fewer rentals, but the super rich, the sort of 100 million or plus group that are paying $2 million to rent for a month with, by the way, someone just did here in the Hamptons, that group is almost always unaffected, but it's the white collar that really seem to be high-level sort of mid-managers. That's the group that did rent here and is not this summer. I think if my wife had her choice, she'd be at Long Beach Island, New Jersey, as opposed to the Hamptons right now.

But that might be Robert's next visit. We'll send them out to LBI soon enough. All right, Robert Frank, thank you very much. Get home safely from the Hamptons, please. As we head out to break, CNBC is celebrating Asian American and Pacific Islander Heritage Month. throughout May, sharing stories of business leaders in the community. So here's Mina Shankaran, the founder and CEO of Ketos. As a woman of Indian heritage in the tech sector, where funding is really limited

and more so at venture capital, recognition is extremely minimal. So what you have is your power to believe in yourself. And do not lose your vision or your mission because that's what makes you who you are and help yourself achieve all those goals by remaining as steady as you can and never quitting. Welcome back. The debt ceiling debate is impacting defense stocks. Morgan Brennan is here with more on that story. Hi, Morgan. That's right. So take a look at defense stocks. And amid this debt ceiling drama, government contractors have felt the impact. They're down this week. Most of them are down today. And names like Lockheed Martin General Dynamics, Northrop Grumman, and military shipbuilder,

HII, are down big in general since the start of the year. many of them double digits. Selling has accelerated over the last month, amid all, does D.C. deal making uncertainty. National security, by far, it is the biggest category of discretionary spending, roughly more than $800 billion in 2023 is what's expected to be spent. If a default were realized, government contractors would feel it swiftly and deeply, but even if that doesn't happen, and many believe it won't, it's not the consensus right now. The concern here is broader budget implications.

So the worst case, you see military spending, getting cuts. The base case, next year's budget gets delayed, meaning a continuing resolution, which inflates program costs, delays new ones, and prevents production increases. It's disruptive to military modernization, and it's disruptive to the companies that bank on future revenues from awarded contracts. Guys, this is why you're seeing these names under pressure right now. All the defense primes. Morgan Brennan, thank you very much. Still ahead, some news on a pair of legends, an iconic video game that still got consumers lining up around the world to buy it. And a football icon, not ready to quit just yet. All that and more

when Power Lunch return. Welcome back, everybody. Three and a half minutes left in the show and a ton more stories you need to know before the weekend, so let's not waste any time. Now, we've talked a lot about AI today all year, really, but Google is now testing a new search feature that would show users AI generated chunks of text at the top of the page instead of those universally known blue links. Publishers are worried it could limit traffic to their websites. The information would already be compiled on Google, but they are also trying to add transparency about sourcing, at least. And also, just this idea that it might give you a better preview or not make you feel like you're clicking right on an ad every time you do it. They're already in that business of giving

answers. Absolutely right. All right. So Netflix is reportedly planning to cut spending by 300 million bucks in 2023. The company apparently doing so after their plans to crack down on password sharing were pushed back on from the first to the second quarter overall. Maybe no surprise, but I kind of feel like this is a strategic decision. You can't just make a, a call on this after one quarter or a couple weeks. And Disney's also pulling, I mean, when their major rivals are pulling back or can't match them, they have some room to cut that and try to, you know, put a floor under things. While Jack Dorsey's old social media company, Twitter, is getting a new leader today.

His new one is getting some traction. The app had 628,000 downloads in April. We're talking about blue sky. This is according to data from censor tower. And it's still only an invite-only mode. Well, what's curious about this one right now is whether or not the ability to generate buzz is there when you limit the availability. Right. I mean, I think that

there is the invite aspect, I get it's beta testing and everything else, but you've got to kind of open up a little bit more. It's buzzy, but Twitter's very buzzing right now, too. There you go. All right. Now, shares of S.A. Lauder are falling after a downgrade to hold from buy over Argus Research. The analysts there are concerned about the slow pace of recovery in

China specifically, and also travel retail in Asia, which the company cited when reported earnings and cut guidance last week. The stock is falling sharply then and continuing to head lower today. I'm obsessed with the story. Yeah, this is very much about whether or not there are legs to some of these

reopening type stories and whether or not, by the way, China is trying to become more of a consumer domestic consumption company. Who is it we were talking to who just said it's going to cut GDP in half growth was they try to make this transition. They also have tapestry doing well on China, but Estée Louder hitting a miss on that. Oh, yeah. Big, big deal. Also a huge video game dropping this weekend.

Legend of Zelda Tears of the Kingdom, the previous Zelda game in 2017, sold nearly 30 million copies. Could be another opportunity to expand beyond video games for Nintendo, maybe into movies, a la Super Mario Brothers. People didn't think Breath of the Wild, which is the 2017 one, could get any better. That's how good it was. It also had a new switch, and there's no new console this time.

And this is the interesting part. This is very much a cult video game, so we'll see whether or not has legs there. Anyway, Tom Brady announced his retirement in February, but it appears he isn't done with the NFL just yet. ESPN reporting the seven-time Super Bowl champion is in quote, deep discussions to become a minority owner of the Las Vegas Raiders.

He just can't get out. You know my husband is a huge Raiders fan. L.A. Roots. Maybe, no, you were northern, southern. I was in northern. You're north. Okay. Nineers.

Point being, I told him this news, wow, this is amazing. He's like, suit up. Why do I want him to own the team? We need him on the field. Oh, they got Garapolo. Don't worry. I guess.

I don't know. The Wall Street Journal highlighting that if Amazon wants to compete in grocery, they need to get a lot more physical. Brick and mortar is still 90% of all grocery shopping. And despite owning Whole Foods, Amazon is just 3% of U.S.

grocery market share. truth. They have to figure it out. I'm just a stop and shop kind of guy. Well, Amazon should should buy stop and shop then. We did it, Dom. We did it. Seven stories in that three and a half minutes. Thanks for watching, Power Lunch, everybody.