Power Lunch - Big Tech Ripple Effects, and The Fed’s Next Move 1/20/23

Episode Date: January 20, 2023

Alphabet is cutting jobs and bringing back its founders. Netflix soaring on strong subscriber numbers. And Apple is trying to produce more & more in-house. We’ll discuss the ripple effects for Big Tech. Plus, we just heard from Fed Governor Christopher Waller. We’ll get reaction to his comments on the economy, and what they mean for markets and your money. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody, and welcome to Power Launch along with Contessa Brewer. I am Tyler Matheson. We got two big themes today, big tech and Fed speak. We got them both covered. First, Google cutting jobs like so many other tech companies, bringing back its founders, like many other companies. It's Netflix soaring on strong subscriber numbers and the ripple effects of Apple trying to do more in-house. Well, as we just heard from Fed Governor Christopher Waller, we'll get live reaction to his comments, what they mean for the markets. And let's get a check on the market. the market stocks are higher right now, although all three averages in the red for the week,

the Dow with a 3% loss for the week so far. But as you can see, up half a percent right now on the Dow, the S&P 500 up 1.25 percent. Nasdaq is up 1.98 percent. And you've got the Russell 2000 up a percent as well, Tyler. All righty. We got Google and Netflix strongly higher at this point. And that is helping to lift that NASDAQ 100, as we mentioned. We begin with the major tectonic shifts reverberating across the market. Some huge headlines across Silicon Valley and the tech space. Google's CEO, Sundar Pachai, notifying employees that the company will lay off 12,000 workers. This comes after Amazon and Microsoft laid off a combined 28,000 employees. Netflix, blowing away subscriber expectations, thank to some streaming hits and announcing its founder

Reed Hastings, will step down as co-CEO. And finally, as if that's not all enough, growing signs that Apple's suppliers could be at risk as the company shifts evermore toward producing components in-house. But we start with those alphabet and Google layoffs, joining us to break it all down. It's CNBC.com tech reporter, Jennifer Elias, and Nidem analyst, Laura. Laura, welcome. We're glad to have you with us. Let's begin with Jen, Laura Martin of Nidam. Jen, let's begin with you. Tell us about the layoffs and what they hope to accomplish by doing it. And then Laura, I'm going to follow up with a rather pointed question for you. Yeah, so Tyler, this is the company conducting a trim of the workforce. As you mentioned,

12,000, that's roughly 6% of the employee base. And really, when you look at the context of the numbers, while the number looks big comparatively to how it's been hiring over the last couple of years, this is not much compared to what it's hired even over like the course of a quarter. So this is the company definitely making a trim. And I think what they hope to accomplish with this is what CEO Sundar Pratry said is that, you know, they overhired during the pandemic like many other tech companies. So he did take some responsibility for that. And that they need to run a little bit leaner. They definitely grew headcount a huge percent. I mean, last quarter, they had reported almost over 20 percent year-over-year headcount increase to their employees base. That's unmistakably true

that a lot of these companies overhired in the middle of the pandemic. Where are most of these cuts, Jen, likely to come? Are they in engineers, are they office people? What? Yeah, so far we're seeing across the board, and I think, you know, we're still trying to pinpoint where the cuts are happening because it's only being sent to direct employees, and they're not notifying teams as much. But we're seeing lower level employees, managers, engineers, developer advocates. It's sort of across the board so far from what we can say sales and marketing. Jen, I'm interested, too, that it's not just the cuts that are happening, but also delays now and bonus checks.

Is there a reason why they're delaying them? Yeah, so the company we found changed the timeline for how it evaluates employees. And they decided to start that this year and told employees over the last few months, but some didn't get the memo because they are used to getting theirs at a certain time. So we had reported that, you know, those were, and so with the growing anxiety with employees, wondering if, you know, they're going to be next in the tech layoffs, There was some concern over whether that was related to, you know, pushing off some of the costs. Google has denied that, but we are listening to our sources, and they seem to think that could be part of it.

And let me ask you about this report that Larry Page and Sergey Brin might be called back in. Why and for what purpose? Right. So you're referring to the New York Times report that said that Larry, and Sergei had been brought in to basically weigh in on the company's AI roadmap for its artificial intelligence and its products. As we saw with OpenAI, the small San Francisco startup that came out with chat, GPT, this very popular over the last few months chatbot, the company has been looking to respond. And we have reported that they've been telling people internally

employees, hey, we're working on this. This is something we have to think about. But there are more things we have to take into account as a large company if we are going to come out with something competitive around chat GPT. So supposedly it's similarly in line with what they plan on doing as a response to that. The company hasn't confirmed with us yet. The report has come out this morning, but it's possible that, you know, they, Sergey and Larry have no interest in coming back in a role of CEO or president. They have no interest in the common core advertising business or search business, but they are definitely still involved in some of the more experimental projects. Yeah. Laura, Jen, thank you very much for joining us. Thanks for sharing your

reporting, Jen Elias for CNBC.com. For more on Alphabet, let's bring in Needham's Laura Martin. Laura, it's good to talk to you. Just first of all, your reaction to these cuts, the cost-saving measures that are coming at a time when we're also seeing ad spending plummeting as well. I think this is a really positive development because on the last call they said, we don't care, we're running a long-term business, we're going to keep growing costs, which is not what the market wants to hear. Right now, the market wants free cash flow. And I think Wall Street doesn't want them to cut search employees. We don't want them to cut YouTube employees. What we want them to cut is shut down businesses in a division that they call moon shots, which means it's going to pay off

someday after the Metaverse pays off. We want them to shut down those employees and shut down businesses because these guys are supposed to be running a business, which is a return on capital idea, not quasi-governmental R&D that may pay off or not 15 years from now. They shouldn't be public and do that. That should be done in a private enterprise funded by something else, not public shareholders. So I would like to see them take all of these employees out of moonshots. Okay. What do you think are the moonshots? I mean, is it chat GPT and the AI chat bots? What do you consider moonshots? Now, they're losing billions of dollars. And chat GPT is no.

I mean, I think what's shameful about the chat GPT is that these guys, Google was way ahead on AI for many, many years. So I'm a little confused. And they spent tens of billions of dollars doing R&D on AI. So I'm a little confused as to how a little startup has beat them to the punch. Now, admittedly, chat GPT gives a lot of wrong answers. And Google can't do that. With Google search, they have to give right answers.

But it will help Google if chat GPT goes. to a subscription revenue source because that will leave search free. So that will be supported by ads like Google is. So that will actually save Google and buy them some time. But I am very surprised that Google isn't in front of this AI stuff. And they're now playing catch up to the top GEP startup. One stray thought, Laura, and then I'll ask a question. The stray thought is this.

With so many of these big tech companies laying off tens of thousands of workers, I wonder whether they're each sort of giving cover to one another to take those kinds of cuts. Fair, fair point, fair observation. Yeah, I think so. I think Google, so long as Meta and Microsoft and Apple were saying we're not laying people off, Google was saying that too. Now that they've got high cover from almost every other tech company, they're like, yeah, we're going to lay off people too.

I mean, a little bit because of COVID, the inmates are running the prison here. Yeah. And then the other point is, you know, look at what happened at Twitter. So many, a much larger percentage of workers went away there. And that operation seems to still be operating. But let me ask you this. Let me cut to the Martin Chase here.

And that is that you think Google is worth more broken up than it is as a whole. Do you anticipate that happening in any scenario that you can foresee? So, you know, we had the Needham 25th Annual Growth Conference last week. we had an FCC commissioner on stage, and big is that in Washington, D.C. And I think there is a non-zero probability that they actually decide that Google's too big, and it needs to be broken up, which would be great for the share price, in my opinion. I would very, and by the way, then you'd really, really have to shut down these other bets, these moonshots that they fund.

All right, Laura, thanks very much. You can never get too much, Laura Martin, and we're going to prove it because you're going to come back later in the show to discuss Netflix earnings. We'll see you then. Righty, coming up, part two of our Tecapalooza. Netflix soaring on its subscriber numbers. The stock up 6% today, 55% in the past six months. That big Netflix move has put Ryan Reynolds Mountain Goats into first place in our stock draft with only three weeks to go. His teammate Mark Douglas will join us to discuss Netflix and who gets to keep the trophy if they hold on to win. But first, Markets reacting to comments from Fed Governor Christopher Waller on CNBC last.

hour will break down what it all means for the markets and interest rates. Do stay with us, please. Well, welcome back to power launch while the Fed is making progress in the battle with inflation or so it seems many Fed officials are still hammering that their work is not done and that rates will not drop anytime soon. In the last hour, we heard from Christopher Waller, who says the markets seem to think inflation will just melt away. And the Fed doesn't think that will happen. In a new op-ed, Ron Insana says the solution to inflation, is more workers. Joining us now is Ron Insana,

Insana, senior analyst for CNBC, and a commentator. He's getting up and leaving. Yeah, David Wessel was there. Now he's not there. It's okay. You know, like, we're going to start with Ron Insana, then fine. I'm out of here. I didn't even mention David Wessel's name and he got up and walked out.

He's trying to adjust my lining to CNBC standards. Oh, okay, good. Well, you're beautiful. Let me just say this, David, you are lit. You are lit. David Wessel is a senior fellow in economic studies at the Brookings Institution. Let me start, David, by asking you, how much does the kerfuffle, and it's going to be seemingly more than that, over raising the debt ceiling, stay the hand of the Fed or complicate what the Fed is doing? I think it's a big threat to the Fed for a couple of reasons. If I were on the FMC, God forbid, I would be working

really hard to get all my rate increases done this spring so that when the Treasury actually runs out of money, they're not forced to be pumping money into the system at the same time as they're raising rates. The second problem they have is, let's say Congress doesn't raise the debt ceiling. Let's say the Treasury runs out of cash. What does the Fed do then? On one hand, they don't want to interfere in a political dispute. On the other hand, they have the responsibility to maintain financial stability. And this is exactly the conundrum that the Bank of England faced a few months ago

and it's not pleasant. Ron, why don't you react to what David just said? Yeah, listen, I agree wholeheartedly. You know, if I would, look, for other reasons, I would not continue raising rates at this juncture if I were the Federal Reserve. There's enough data to suggest that inflation is rolling over meaningfully

and that, you know, some of the other aspects of it wage inflation and the like are probably peaking. So raising rates into a debt ceiling crisis, assuming there is one, would not be the most productive thing for the Federal Reserve to do. Now, granted, there's several months between now and when, you know, we really have a problem with respect to the debt limit somewhere around June that push comes to shove and we could default on some of our obligations. But even still, the amount of uncertainty that would be engendered by raising rates and grappling with the debt ceiling might be a little bit much for the markets to bear.

It's really clear that Waller is predicting and is trying to, to communicate to the markets. You guys that are factoring in any sort of pivot are getting it all wrong. I mean, he basically said there's not going to be any rate cuts in 2023. I'm just curious to hear him talk, David, about the fact that, look, we were watching inflation.

We watched it decline, decline, decline, decline, and then suddenly this big turnaround and spike, it could happen again, even though we're seeing all the signs that we're getting a handle on inflation. we're worried about another spike coming down the road. Do you think that that makes sense for them to still be hitting the brakes? Well, I think what he said was, we're going to raise rates another 75 basis points,

and we are not going to cut them unless we're really sure that inflation is dead. And I think the difference between Governor Waller and the markets is really one about an economic forecast. if inflation is still coming down three months from now, and if the unemployment rate has gone up a lot, then I suspect the Fed will begin to pivot. But he's made quite clear, and I think Jay Powell has said the same thing. If you want to know what risk am I willing to take, I'd rather take the risk of doing too much than doing too little. And Governor Waller is clearly in that camp. Ron, you say that the labor market, which the Fed has focused on, is not tight because the economy,

is so strong, but it is tight because there simply aren't enough people to fill the jobs that are out there. You cite a variety of factors that play into that COVID-related deaths, long COVID, early retirements, and so forth. But isn't it also the case that lots of workers don't want the jobs that are out there waiting to be filled or needing people or that the workforce doesn't have the skills to fill the jobs that are out there? waiting. Well, that's an interesting, damned if you do, damned if you don't, proposition that you just outlined with respect to that title. Because, look, I mean, number one, the unemployment rate is extremely low. So arguing that there are people not taking jobs is an impossibility.

We're at the lowest unemployment rate in four decades, at least. And there are some jobs, of course, that are going wanting. There are some jobs that people won't take. That is true. But generally speaking, look, we're looking at the lowest unemployment rate, as I said, in 40 or 50 years. And so we're short people. We are literally missing about five million people in the labor force. And again, you cited some of the reasons why, whether it's those who have passed from COVID. And Jay Powell himself identified this not too long ago that we've lost about a half million people who would otherwise be in the labor force. We've seen two and a half million people retire early with no intention of coming back. Many women have left the labor force initially to take

care of their kids during the pandemic. But with the cost of childcare having gone up, there's no benefit to them going back because it's a break-even proposition. So from my perspective, we should be opening the floodgates on the immigration front, which is not something that is currently being debated. And I think this is a missed opportunity, no matter where people come from, to restock the labor force. Our birth rate has fallen substantially. 1.6 children per family. That's below the 2.1 child replacement rate. So I think we have some structural issues that if these go unacknowledged are going to be a problem down the road. And Fed policy simply won't cure this problem. It's almost as though Congress is so focused on whatever soap opera is developing in Washington, D.C. day of that it's not

handling these big picture, you know, 30,000 feet view that's needed to solve the problem. One is immigration and the lack of skilled labor coming in. But the other one, Ron, and David, I want to hear your thoughts on this, is the fact that the debt ceiling, just keeps being this issue that they come back. They like to trot it out and with that horse and make headlines off of it. But there's a real economic impact, don't you think? Yes. So I think Ron is right that we have a long-term labor force problem. Some of it is labor force participation, some of its immigration. And these are things that policy can't cure, but policy can help with. And so the whole debt ceiling debate is a complete political

theater with no upside. The Republicans like to argue that, oh, we're going to use the debt ceiling to put the federal spending and taxes on a sustainable course, but that's really not what's going to happen. We're going to have a lot of arguing, and that prevents you from having the conversations that we need to have about a debt that's rising faster than we can afford and how to think about how to reshape spending and taxes to deal with it. So it's really discouraging, and I think it erodes public confidence in the government because they're doing this instead of dealing with the real problem. Ron, last word. I'd trot out Simpson Bowles and use that as a blueprint for future spending and other expenditures by the federal government to bring things in line, at least in the

short run. Ron and Sana, good to see you, my friend, David Wessel. Thank you for getting up, fixing your own light, you know, being a one-man band. The things that we've all learned to do during the pandemic, right? Thank you. Up next, some big money pouring out of the industrial space this week. The industrial ETF, the XLI, down nearly 4% in a week. We're going to take a look at those moves next. Time now for our weekly ETF tracker.

And this week we're looking at industrials. Those funds seeing outflows of $300 million this week, according to our partners at Track Insight. Now, some of the big stocks in the group are getting hit hard this week. We saw a big drop in industrial production leading to increase. Recession Fear. So you've got Honeywell, 3M, deer and caterpillar all down this week. I'm looking at deer right now down almost 7%. The ETF's in the space. The sector spider, Vanguard, I shares, Fidelity, all down three or four percent. If you want more information on that, you can check out the F.T. Wilshire ETF Hub. Yes, you can. Ahead on Power Lunch, our tech rundown continues.

After the break, we will dig into Netflix's eventful earnings report. The company making quite the come back from its earnings missteps of 2022, but this subscriber step forward comes as Reed Hastings' steps takes a step back. Power Lunch will be right back. Hi, welcome back to Power Lunch. Here's what's happening at this hour. Abortion opponents by the thousands are in Washington for the March 4 life. They are celebrating the Supreme Court dismantling constitutional rights to abortion. Rally comes just days before the 50th anniversary of the Roe versus Wade decision that established abortion rights. A judge has ruled that Florida Governor Ron DeSantis does not have to give a top state attorney his job back.

DeSantis fired state attorney Andrew Warren for pledging not to enforce state anti-abortion laws. And get this, British Prime Minister Rishi Sunak has been fined for not wearing his seat belt while filming a social media video in a moving car. Spokesman for Sunak says the prime minister has acknowledged it was a mistake and says he will comply with the police fine. but being Britain, you could see, contested the steering wheels on the other side of the car. He was not driving, but still always belt up. Even in the backseat, you should belt. And he's the prime minister, and he's got to set an example for everybody else. So if you do the crime, you've got to pay the fine.

Thanks, Beretta. Brian, thank you. 90 minutes left in the trading day. Let's get caught up here on the markets. We've got stocks and bonds and commodities to get to, plus that big gain in Netflix. Bob Pisani gets us kicked off. with some green across the board, Bob. And it's looking good here.

We are ending the week on a positive note. We're down for the week, but we're up almost 3% for the month. Just take a look at the bounce back we've had after some poor earnings yesterday. The S&P leaderboard, Synchrity Financial, Capital One. Remember what happened the other day? Of course, we had some of the card names Discover disappointed. And so a lot of these big card names like Amex, Capital One, Synchrony, all were down. Well, they're all bouncing back.

Now, Kee Corp also disappointed a little bit on its earnings report the other day, and it, too, is bouncing back. So disappointing earnings down one day bouncing back, the market kind of wants to move up a little bit, and Vittia also on the board amongst the leadership. The Lagerds today, it's kind of a strange little group. Goldman Sachs was doing well, and then right in the middle of the day, we had reports that the Federal Reserve was investigating Goldman's consumer business to determine whether the bank had safeguards in place. as it ramped up the lending. That stock dropped in the middle of the day. Eli Lilly was down after the FDA rejected an Alzheimer's candidate. Boy, the pharma stocks are having a tough time of it

this year. A lot of them are down four, five, six percent. Lily's down about six percent for the year. But these defensive stocks are having a hard time. And look at what's going on with Conagra and Smuckers. These consumer names are just having a tough time for the start of the year overall. Smuckers is down about seven percent for this year. People want growth. So look at the S&P 500. As I mentioned, for the week, but up about 3%. And it's the growth stuff. Semiconductors are up 11% in the last three weeks. Most big cap tech stocks with the single exception of Microsoft, also trading to the upside communication services, stronger, consumer discretionary. You know guys what this looks like? It looks like 2021 to me. All the consumer defensive names not doing much and all the growth stocks

are rallying in the first three weeks. Guys, back to you. All right, Bob, thank you very much. Now we go to the bond market. A big jump in yields today. Take a look at the tenure note. Getting close to 3.5 percent, we did get some hawkish comments from Fed Governor Waller in the last hour, and that certainly contributes there. Yield on the tenure note, 3.482. Oil closing for the day. Pippa Stevens at the commodity desk with the numbers. Pippa. Hey, Tyler, up more than 1 percent in wrapping up the fifth positive week in the last six. U.S. oil is hovering right around 8140 and is now approaching a key level as this chart from Matt Maley over at Miller-Taybach shows WTI's bumping up against its 100-day moving average. The key level to watch here is 80 to 50, which provided tough resistance back in November. Topping that level would also mean breaking above the downtrend that we've seen over the last six months.

Ultimately, he said this would be bullish for crude and energy stocks. broadly, although a change in trend won't be confirmed until oil tops $93. Meantime, energy stocks also higher on the week. We did hear from SLB today reporting the highest EPS since 2015. The company also raised its dividend and is resuming its share buyback program. Recession fears might be rising, but SLB's management said they still think the backdrop looks, quote, very compelling. Tyler. All right.

Thank you very much. Pippa Stevens. And next in our tech rundown today, Netflix is the second best S&P performer after crushing subscriber estimates and announcing a succession plan for its leadership team. Let's bring in Mark Douglas, CEO of Mountain and Needham, senior analyst Laura Martin, returning with us. Once again, it's great to see you. Laura, let me begin with you. Because they gave this incredibly optimistic view on what they were able to do signing up new subscribers, did it persuade you? you that now might be a good time to get into Netflix? It didn't. We think it's too early. They said their ad revenue will not be meaningful in

2023. And more importantly, they took a price increase last year, first quarter. And this year, the form of the price increase they taking is they're going to basically disconnect any of your subscribers that are out of your home. So they're called those borrowers. And they're going to try to get rid of password sharing, which is a form of price increase. But unfortunately, what that forces consumers to do like me who pays $20 because I have kids all over the college using it is it forces us to re-evaluate and downgrade to the $9 service, right? And then my kids have to subscribe separately. And I think that's really bad for inertia. I think inertia is the reason we have so many linear TV ecosystem subscribers.

That's a really powerful motivator. So they shouldn't be asking me to reevaluate downgrading my tier. I might just turn it off completely. It might be inertia, and it also might just be that once a year, there's a program on traditional television that the family wants to watch, and then what are you supposed to do? But I digress. Mark, you and Ryan Reynolds picked Netflix for your CNBC stock draft. You're winning because of it.

Congratulations. If the draft were held today, would you still pick Netflix? Well, certainly the stock price a year ago. was a lot more attractive than it is now. But I think what you're seeing is Netflix traditionally has led in the media business. Like a lot of the innovations you've seen in streaming have come from Netflix. And I think now you're seeing what the management change they're making. They're gearing up to lead some more.

And so, yeah, I would invest in the management team at Netflix for them to navigate the ad business, for them to navigate the password sharing, and they're essentially generate more growth. And so I think that any investor look at Netflix now, it's a good time. Given the ad landscape right now where we're seeing so many companies worried about what's coming down the pike. And in fact, Laura and I were talking earlier about that happening with Google and what's happening with YouTube and the search ads and all of that. Is it now a good time for Netflix to be launching the ad part of this business? Well, I think they have, is that for me? Yeah, yeah, Mark, I want you to answer that.

Yeah, I think they have no choice. I mean, in terms of, is it the best time? In some ways, it's not. And the reason for that is you have a lot of supply coming into the market from Netflix, from Disney Plus, but you're seeing demand pulled back on the behalf of especially large brand advertisers. So those big brand advertisers responding to macroeconomic conditions, are just generally definitely not increasing their spend, and in a lot of cases are decreasing it. So that classically sets up for a price war, a decrease in prices.

So it's not an ideal time, but I think people, these advertisers are really excited about Netflix at the right price. And so Netflix will still navigate that. Laura, I take your point that Netflix has a lot of moving parts to deal with, ads, password sharing, pricing and the like, which all lead you to say this is not the time to get into Netflix, what would change your opinion? What would you like to see that would make you go? This stock, even after its run-up, is investable to me. So it's trading it 33 times a PE on this year, and it's going to, it's had sub-growth deceleration. It was 4% in the most recent, which means to get to double-digit growth.

You must have price increases of 8% every single year. I don't think that can happen. And so what I would want to see is not only the ability to raise price, which apparently they can, I would want to see user or subgrowth. Users would be fine if they're ad-driven, no problem. But since they say advertising is not going to be meaningful, I don't know how many users are getting of their ad-driven tier, just not sure. I would like to see both user growth and pricing growth. Do they have to have big mega hits to drive subscriber growth, Laura, like Harry and Megan, Glass Onion, whatever? Yep. it's a hit-driven business, and Wall Street hates hit-driven businesses because they're not annuity streams.

Right. And the fact is, Mark, we've seen other streamers decide that they're going to dole out big hits episode by episode and make you wait for a week. I guess I'm assuming it's because they don't want everybody going in, binge watching it, and then canceling the service after one month. Is Netflix going to be able to continue to allow people to binge watch these big hits that may drive new subscriber growth? Yeah, I mean, so I always think of Netflix as they're the service you watch when there are no big hits on any place else. So they have their own hits, but they have so much content that when you just turn on the TV and you're just looking for something to watch, you generally, from my perspective, you go to Netflix. And that's why there have been every household kind of number one choice for streaming. So I think hits are important.

They've driven the business, but I don't think that they are really the core reason you get Netflix. And so for that reason, they can continue to release all the shows at one time. And also, I just wanted to add on Laura's comment on the previous question. I agree with Laura that driving subscriber growth to get to those numbers is going to be difficult. But I also think Netflix is sandbagging expectations in terms of at business. Jeremy Gorman and the team there were at Snap. They were at Disney. Hulu, they know how to build multi-billion-dollar ad businesses.

And I think you'll see that develop faster than Netflix is setting expectations for it. Mark Douglas, Laura Martin, it's great to talk to both of you. Thank you very much. You know what I'm noticing, Tyler, we've got these setups here. I look like I'm looking at Mark. I look like I'm looking at Laura, but they can't see that. So you have to say somebody's name. Mark's like, is that for me?

They can't see you. No. Right. And now everyone who's listening on Sirius is saying, Contessa, what are you talking about? But this is the way it works. I love our new reality. All right. Let's move on to the busy week for the market. Several Fed officials weighing in on the future of the economy. We're going to talk about how to position your portfolio ahead of the upcoming Fed meeting. We're back in two minutes. Stock's near session highs right now. The NASDAQ has just poked into positive territory for the week.

Still negative on the S&P 500 and Dow, however. The market's full. focus clearly on the Fed, but earnings will be coming in hot and heavy over the next couple of weeks as well. Let's bring in David Wagner, aptus capital portfolio manager. David, we're three weeks basically into the new year. What is the stock market trying to tell us about itself and about the economy? Yeah, so, you know, I would probably start off by stating that I would probably fade this rally. It's really been a dash to trash all year long. I mean, just look, high beta has been outperforming low beta to the tune up 15% year to date. Not only that, the worst performers of last year are the best performers of this year. Case in point, Bitcoin, unprofitable tech,

you know, the highest short interest. And, you know, our theme, we're big theme people here. And our theme heading into this year was actually from a Cohen Brothers movie, Oh, Brother, Where Art thou? And it's, we believe that investors will be navigating a market in constant sorrow throughout the entire year. What does that mean? By saying that, you know, what does that mean? I'm not saying that we could beat last year's low water market of the S&P 500 by 18%. It means I think that investors are underestimating the duration of a low return environment moving forward. I mean, I think our minds as investors are calibrated to think in V-shaped recoveries. And I just don't really see that happening here right now.

So you think we're going to stay roughly where we are or maybe move lower? I mean, I'm having, I want to tease out your sort of bottom line me. here. Yeah, I definitely think that we're going to continue to see an oscillating market. And that's definitely something that we have seen really back since the May of last year. So I'd be favoring some type of overriding strategies, understanding that given where we are in the debt ceiling and some type of inflation to growth frustration type of environment that, you know, we're going to continue see maybe a higher volatility. So I would be overriding here right now if I had some type of strategy to choose. And you're really looking for yield then. Where are you looking? Yeah, yeah, Contessa. Like I said,

We're big theme people here. And here at Apple, that's actually our highest conviction here. We are thinking that our theme for this year is the year of the yield, and that's both across the equity market and the fixed income market. And I think that you could probably make that year of the yield plural, or maybe even to the tune of decade of the year, a decade of the yield. And we know that yield can come, pardon, we know that total return can come from three different sources. It's going to be yield, it's going to be earnings growth,

and it's going to be valuation, expansion, and contraction. And where current market valuations are right now and the, expectation from my end of restrictive policy basically throughout the entire year, I just don't think valuation is going to be a reliable source of return moving forward into the future. And not only that, earnings growth probably seems a little bit too optimistic right now, specifically on the operating margin side of that picture. So it's really tough for me to believe that, you know, we're going to be increasing earnings by 5% in 23, 14% heading into 2024. So again, another unreliable source of return. And that's why we're so gun-ho about dividend yield right now. It's really the

bird in hand rather than the two in the bush of valuation and earnings growth. So let's talk two specific stocks here. Broadcom, which you say has yield and American Tower Corp. Yeah. So I think we'll start with the AMT here right now because that's probably my most recent purchase in my high conviction portfolio. And obviously it is in the real estate sector. And that is a yield rich sector. But I'd be very honest with you, contest. It's been actually brutally battered over the last year as the valuation has really come in as it's been inversely with rising interest rates. Now, I don't want to say that this is a play on, you know, that rates are going to come down, but I do think they would probably moderate in the interim. So I think that

could really get this stock going. But overall, it's a really long-term holding. You know, I don't mind buying it right now, even though I do think sell-side estimates are a touch bit higher. And quick on broadcom? Oh, yeah. You know, regarding the end of year-yield, you know, they've been increasing their dividend yield by 12 percent over the last three years on an annualized basis. Three and a half percent dividend yield. I think you'd get 8 to 9% growth here. So that is definitely over our watermark for ownership. David Wagner with Aptus Capital. Thank you. Appreciate that. After the break here, our final piece of today's tech powered puzzle, Apple suppliers are struggling as the company ships more of its component production in-house. More on that straight ahead. Welcome back.

The last stop on this tech train ride. We've talked Google's layoffs and Netflix earnings. Now let's hit Apple, shall we? The company releasing several new products. this week, demonstrating it is increasing reliance on in-house components rather than third-party supplier. Steve Kovac joins us. What probably is going to be good for Apple, I would think, would be a death knell for other suppliers. It could be. And Contessa, we're already seeing this to a degree. Just a couple years ago, they said, look, we're eventually going to phase out Qualcomm modems as our main modem inside the iPhone. And then we got a report just last week saying they're thinking about doing the same for the Wi-Fi chips that are made by Broadcom. So there's another

stock that took a hit because of that Apple pulling out. Broadcom, by the way, 20% revenue exposure to Apple. So that's big. Then there are just a slew of other, more minor names that we, you know, maybe not common household names. Corvo is one of them. Lumentum, for example, they make the face ID scanner in the front. All of these companies, Sony, Samsung, Sharp, you name it. They all have significant revenue exposure. And one thing to watch for is Apple thinks they can start bringing more of these components in-house, these are the names to watch as these reports on and to be clear, there are no reports that many of these are there still locked down. Where are the in houses where these things are being built? Where are the houses? Are they in the U.S.?

Does Apple have huge big chip fabs in somewhere that I don't know? There's a difference between where they're fab and where they're made. So let's talk about the Qualcomm modem, for example. They set up shop in San Diego, Qualcomm's backyard. They bought Intel's old modem business for a billion bucks, moved over to San Diego and said, we're going to build our own modem. We're tired of paying Qualcomm a few bucks for every iPhone we sell because of this licensing agreement they have with them. And they're going to do it in-house. Now it sounds like that report that we got last week saying they're going to do the same thing with Wi-Fi chips. Does that make it easier for them also to poach the talent that they need to make this work? Why else set it up in the

backyard? Speaking of talent, we've gotten a lot of headlines about these other tech giants laying off people, big layoffs, you know, six percent. Tens of thousand. Yes. 10,000 Google or 12,000 Google today. 10,000 Microsoft. What about Apple? What's Apple doing on this scenario to what we've seen is that the shareholders seem to like it?

Yeah, and the first thing you've got to look at, contest, is how much did they hire in the pandemic compared to their rivals? Not as much. I think it was during the three years, end of 2019, through the beginning, something like they only grew 20 percent. We have a chart of this. The others grew, you know, Amazon grew 100% during the pandemic. So they didn't grow as rapidly and they hired more deliberately, unlike some of their rivals. So they, and by the way, when macquarin conditions started getting worse last year, they scaled back on how aggressively they were hiring even more than they normally do.

So they don't have as much fat to cut as some of the rivals do. So let's go back to sort of item number one for Apple. They want to cut their dependence on these other suppliers. Got it. Do they want to cut their dependence on Chinese manufacturing, and when are they going to be brave enough to actually say that? Yeah, they can't right now. I mean, it's just physically impossible and financially impossible for them to do it. Over a decade ago, they set up the supply chain such that they're reliant. The iPhone City, where we saw all those protests last fall, that's where the hype, that's the core of, it's not it, but it's almost it. It's the big thing. It's almost, and that's why they're likely going to sell fewer iPhones and they thought they were going to sell last year because they had all their eggs in that one basket.

We're seeing little ways that they are, you know, trying to alleviate that pressure. But again, it's China, China, China. And they're stuck at the whims of whatever the COVID policy might be, whatever the worker policy might be. And they're learning that less than the hard way over the last year and a half. All right, Steve, thanks very much. Have a great weekend. You too, guys. Good to see you.

All right, still to come to round out this big tech rundown. Our three-stock lunch trader will tell us whether she is buying Alphabet and a couple of others. We'll be right back. This is the moment we've been waiting for three-stock lunch. We're tracking some of the big movers of the day. Alphabet, higher on news that it is laying off about 6% of its global workforce, about 12,000 employees. Wayfair also announcing job cuts to about 10% of its staff as part of cost-saving plans. And SVP Financial hire, despite reporting a fourth quarter miss.

and rising operating costs. Here to trade us is or trade them, I hope I'm not getting traded here. Eva Otto, she's chief investment strategist at ER shares. Eva, it's great to talk to you. Let's start with Alphabet here. What do you make of the layoffs and how it affects your view of the stock? Well, actually, we're even more optimistic now. It's actually one of our favorite mega-cap stocks, if not the favorite, especially from evaluation perspective. When it comes to their enterprise value to their future revenues, that's one-half to one-third of its spirit. It's also one of the few companies in the tech category, which is primarily focused on the bottom

line. So we see their net income margin that's 10 times its peers. And in fact, we see their profits that have doubled in the last two years, and their revenue growth is well above their peers. This action today with cost cutting is also drives home the fact that their cutting costs, they're maintaining and keeping their margins constant if not increasing them. So we're especially optimistic for them. It's a buy. Let's move on to number two, which is way fair. It's laying off workers too. It doesn't want to be left out here. 1750 workers. What do you think? Another buy. I think their earnings today is a good signal for their viability and their future

vote. Let's not forget that with COVID, darling. The revenues went up 50% during the COVID. era and as a result their SG&A skyrocketed and so they now have any imbalance. Their SG&A costs are 50% above pre-COVID level levels while their revenues are only 30% above pre-COVIDE level. So what they're doing now is they're recalibrating, they're resetting the balance. And so together with their prior cost cutting announcement this summer, they're cutting one and a half billion in costs. That will take them well past break even.

and they're on their way to profitability. That's the key news today for Wayfair. All right. A final name is SVB Financial. It missed on earnings. How's it positioned for the long term? That's a hold. I like the fact that in a tough era for tech stocks in the last couple of years,

when VCs and private equity firms scaled back on their investments when it came to tech, especially, Silicon Valley, took filled in that vacuum. So they benefited opportunistically. And so that's reflected today on their margins, on their earnings announcements. And so the reason why it's a hold and not a buy is that they're up 26% here today. So a lot of optimism, a lot of the upside potential has already been realized. And their PE ratio is 50% above their peers. So I would encourage investors in the future to add to their positions in soft days.

However, it's just the hold for now. Look at that price performance there, up 15%. Eva Ados, thank you so much for joining us today and giving us your perspective. Well, you know, there's the Dow up 222 points near the highs of the day. For the month so far, curiously, the Dow is basically flat, up a quarter of a percent, similar gains for other markets as well. There you see it on your screen right there. You know what this is?

This is the 30th anniversary of the inauguration of Bill Clinton. How about that? How can I be that old? A useless fact that you can, thanks for watching Power Lunch.