Power Lunch - Big Tech vs Recession, Auto Bull Fight and Beyond Big Tech 10/24/22

Episode Date: October 24, 2022

Apple, Amazon, Meta, Microsoft and Google all report earnings this week. They’re all facing their biggest challenge yet: an economic slowdown. Plus, GM & Ford shares are down 40% this year. Both will try to win over skeptical investors when they report this week. And, looking beyond big tech to the big industrial earnings out this week. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome everybody to Power Lunch. Along with Contessa, I'm Tyler Matheson. Here's what's ahead. Big Tech versus a recession. Apple, Amazon, Meta, Microsoft, Google. All of them report earnings this week, and they're all facing their biggest challenge. Yes, yet, an economic slowdown on the horizon.

We will look at which ones are best positioned for right now and what's ahead. Plus GM and Ford both down 40% this year, and both will try to win over skeptical investors when they run. report their profits later this week. An auto bull fight straight ahead, Contessa. Get your red cape out. Wall Street, adding to last week's rally. The Dow touched a six-week high intraday. Right now, it's up 1.1% or 344 points. The S&P 500 is up 30 points, up almost a percent in the NASDAQ composite, up 21 points or 2 tenths of a percent, bouncing back from being down 146 points earlier in the session. The Dow being led higher by

Amgen, Honeywell, and Home Depot. And there you can see Amgen, the leader, up 3% at this point. The two Dow laggards are Nike and Disney. Let's take a look at those. You've got Nike off, oh, a little more than half a percent, and the same for Walt Disney. The best performing stocks in the S&P are from three different sectors. You've got HCA, tractor supply, and regions financial there all up about a 5% or so. Tyler? Well, Contessa, mega-cap tech companies are not immune to the market downturned this year in no way. Meta and Netflix cut in half this year alone. So how are the world's largest tech companies preparing for a possible recession on top of all this? Julia Boorston covering the social media angle, Steve Kovac on how Apple and Microsoft are handling a

possible slowdown. Deerbosa on Amazon and Alphabet. And Casey Newton, platformer editor and CNBC contributor here to discuss it all. Julia, let's start with you. You are going to look at couple of the social media giants for us. That's right, Tyler. Well, after Snap raised red flags about a dramatically slowing ad market, especially into the end of the year, there are growing concerns about meta's earnings, which are coming up Wednesday afternoon. That stock is down more than 60% this year. Those declines prompting Brad Gersner, CEO of Altimeter Capital, which held over 2 million shares of meta at the end of Q2,

to write an open letter to the company calling on meta to reduce headcount expense by at least 20, percent to reduce annual CAPX by at least $5 billion from $30 billion to $25 billion, and to limit investment in Metaverse reality labs to no more than $5 billion per year. That's about half of what META is investing right now. This comes as Bank of America downgrades meta, warning that while expectations have already been lowered, more advertiser budget cuts could further weigh on sentiment and drive added uncertainty on top of changes to adapt to Apple's limits of ad targeting and also, of course,

the company's transition to make money on that Reels video format. Tyler. All right. So how much should we expect meta, Julia, to follow SNAP in terms of disappointing results? Well, that's the question here, is that is Snap Bellwether, the challenges that Snap's having, and this murky forecast that SNAP sees forecasting that Q4 will end flat in terms of revenue growth? Is meta going to be better positioned to navigate some of these challenges? Are some of the new ad formats going to help them provide alternatives when it comes to targeting and working around Apple's operating system changes that have put up these roadblocks for them? And then also the fact that meta is so massive, is that scale going to prove an advantage?

And one thing we have to remember here is that meta's been talking a lot about these long-term Metaverse plans. Are we going to hear them sort of getting back to basics and talking about focusing more on, streamlining and really honing in on the importance of the ad business. All right, Casey, let's turn over to you and get your reactions on meta and Snap. Are the social media companies, broadly speaking, prepared, particularly insofar as they're dependent on advertising for what could be a serious recession? Yeah, look, I think in the case of Snap and meta, the answer seems to be no. These companies have been battered by app tracking transparency, and they're struggling to find alternative. alternatives, they're going to get them back to the growth that investors want to see.

You know, with meta in particular, I've sort of been waiting for the market and the big shareholders to catch up to just how difficult a pivot the company is trying to pull off. And I think with these earnings, we may finally see people starting to understand that this is a company that's in trouble. All right, Casey, we want to talk about the headwinds facing the two largest tech companies, Microsoft and Apple. So let's turn to Steve Kovac, who covered these two companies. Steve, what can you tell us?

Hey, there, Contesta. Yeah, Apple and Microsoft are actually two of the most resistant names that we're talking about today to this recession. So they're still taking steps, though, to keep growth, even if that growth is expected to be moderate. For Apple, that means raising prices. Just today, they raise prices on services like Apple TV Plus and Apple Music by a buck or two per month. Also, they've raised prices on the App Store earlier this month in the EU and other countries where the dollar is the strongest. and the iPhone 14 is about $100 more expensive in those very same markets. So the challenges for Apple through the end of the year hope that iPhone demand holds up, even as other consumer tech companies see it falling, especially in the PC market.

Now over to Microsoft speaking of PCs. Microsoft's already cutting jobs in the summer they cut less than 1% of their workforce, and just last week, 1,000 employees were let go. So Microsoft's challenge in the coming months, hoping that IT spend among small and medium businesses can hold up and that their Azure cloud growth stay steady or increases, but that's going to be a lot tougher for them in this foreign exchange environment, guys. Why do you think, Steve, that these two companies have held up better than their peers?

Yeah, it's a little different. So Apple is kind of unique for a consumer electronic company. We're seeing PC demand, just tank across the board. We heard those warnings from Nvidia, AMD, and Microsoft throughout the summer. But look, when we spoke to Apple last quarter, they said we can't make enough stuff to even really test the demand. So they're in this kind of unique position because of those COVID shutdowns in China that they just weren't able to make enough products to see if they can do it.

And plus, there's still that perception that the higher-end consumer is holding up better amid these inflationary headwinds than some of the other consumers, Contessa. All right. Thank you for that. Steve. Casey, let me get your thoughts here. I mean, what are the real problems facing Apple? What are the problems facing Microsoft?

Yeah, well, you heard Steve mention a couple of them. You know, the recession is going to challenge them on, you know, the sort of hardware front, you know, supply chain issues, that sort of thing. But I think it's worth saying that Microsoft and Apple have solved the thing that Meta and Snap have failed to, which is building big diversified businesses that let them make money both off of selling the hardware. then selling a bunch of services, and then raising the price on those services when things start to get a little tight, right? So my perspective is that these two companies are navigating this very well, and I do not expect them to be significantly challenged here in the next few months.

How much weight do you give the Chinese Communist Party meeting that happened, this reconciliation of power for Xi Jinping, the doubling down on zero COVID policy? And what a lot of investors are spooked could mean a real thing. threat competitively to their business in China against state-run enterprises? Yeah, I think it's definitely the biggest near-term challenge to Apple. We see almost every day the Biden administration is issuing some new executive order that dictates how and when chips can be manufactured, what Americans are and aren't allowed to do.

And so there's just kind of a giant cloud of uncertainty there. We know that Apple has- Wait, wait, Casey, are you saying that you see the problem coming more from the White House than from China? I think the problem is coming from both places. I think that the instability that you're seeing, the tensions between those two countries is just making it increasingly difficult for Apple,

given how dependent it is on China for its manufacturing, even though it has started to try to diversify away from it. All righty. Let's move on. Thank you, Casey. We'll be right back to you. Amazon and Alphabet now, both exposed to the slowdown in consumer demand

that is hitting Amazon's e-commerce business and Alphabet's ad revenue. Deirdre Bosa on how they are handling it. Deidra. So, Tyler, these two names are somewhere in the middle. Unlike Meta and Snap, they are more resilient in their business models are more diversified. So both have large cloud businesses that have held up relatively well this year, offsetting that weak ad market and slowing e-commerce demand in the case of Amazon. But they also have not been as solid as a Microsoft or an Apple. No one hired more than Amazon did coming out of the pandemic or spent as much to build up.

capacity. So Andy Jassy, though, he addressed it earlier than others, and he spent billions of dollars to restore efficiency. So key question, does that actually put them in a better position heading into the holiday shopping season? Watch for guidance here on what the company is expecting. Amazon does give it. Alphabet, however, does not provide guidance, but Senator Pichai and Ruth Porett, they may update investors on that 20% better efficiency drive that Pichai laid out a few months ago, that is going to be key. Also here, guys, YouTube's going to be key because this is more affected by those Apple privacy changes versus search advertising, which is seen to hold up relatively better. We think of these two companies in lots of ways as very much consumer-facing and in many

ways they are. But to the extent that they have cloud units and are dependent on cloud revenue, it could also give us some clues about enterprise software and the state of same, right or wrong? Absolutely. These are, they have big enterprise cloud businesses. Amazon has the number one. It is far, far larger than Google Cloud. It's also profitable. Google Cloud has really been in investment mode, taking losses to gain market share. So that'll be interesting to see how much in terms of losses the company is willing to sustain. CFO Ruth Porat tells me every quarter that there will be no scaling back in this department. We'll see if that is the same. Of course, Azure is in the middle, much, much, much, player than Google Cloud. But altogether, these three companies are going to tell us and give us clues about the state of enterprise IT spending. And if it's slower than the streets expecting, that could very well be a big downside surprise. All right, Deirdre, thanks very much. Casey, let me get your reactions to what Deirdre just said about Alphabet and Amazon, but also more broadly speaking, are tech companies more or less

exposed to recession pressures than the average company? Well, I mean, look, there are benefits to being some of the biggest companies in the world, right? These companies have a lot of cash on their balance sheets. They can ride out a rough couple of quarters without too much problem. I do think there's question on where consumer demand is going to be during this holiday quarter. You know, during the pandemic, we thought that Amazon would see that demand just kind of keep going through the roof forever. And in fact, we saw the opposite, right?

it started to contract as people started to go out and shop again. So for me, that's the real big question mark. And I think it'll affect Google too, right? These companies have done a great job at capturing that intent in search. And it's one reason why their ad businesses haven't been as affected. But of course, if consumer demand goes down, they're going to feel that too. All right. Casey, thanks very much.

And to our team as well, our thanks to all of you. We appreciate it. Meantime, a news alert out of Washington. Amon Javers has the details. Hey, Aiman. Tyler, that's right over the. the Department of Justice in Washington. They're holding a press conference right now,

announcing a slew of charges against Chinese intelligence officials and other Chinese officials here in a variety of cases, including one new case that we're just learning the details of today. That case involves two Chinese intelligence agents who, according to the Department of Justice, tried to penetrate a U.S. law enforcement agency in order to get information about a prosecution of a company that we are told by a source familiar

that is Huawei, the Chinese telecommunications company. According to this version of events, the two Chinese intelligence agents tried to get a U.S. official to flip and give them intel on what prosecutors were thinking in terms of their strategy against Huawei. But instead, the U.S. official became a double agent in this case and provided fake information to the Chinese and sort of lured them into a trap in which the U.S. says they were able to prove that these intelligence agents were up to no good and were trying to maneuver. manipulate the Justice Department here in the United, the justice process, I should say, here in the United States.

So a fascinating look at Chinese espionage in very much real time. Some of the information in the documents that we're seeing here is from last fall. So this is very much present-day activity by Chinese intelligence in the United States, Tyler. So did you either went by me or you said it? What law enforcement agency were they trying to infiltrate or effect? They don't say, but in the documents associated with this, the agent, the person who's communicating with the Chinese spies indicates that he or she is going to be attending meetings involving the prosecutors in the case against Huawei.

So we can assume that this is somebody, you know, either Department of Justice, Eastern District of New York, FBI, somebody that the Chinese intelligence agents thought that they could persuade to give them information about the process. They were trying to turn an American official. Instead, that American official turned twice, became a double agent the government says, and was able to provide information back to the United States about the two Chinese agents, including one comical detail. At one point, the Chinese agents are asking the person that they think is the American spy

to communicate with them with a pay phone on the street because they thought that would be more secure. He or she says, I can't find the pay phone. They don't think they exist anymore. So it's tough for spies these days. Yeah. Yeah, it makes the business much more complicated. Amen, thank you for that. Coming up, beyond big tech, why industrials like Boeing, Caterpillar, and GE could offer investors big clues about the health of the economy when they report this week.

Plus, GM versus Ford, both are down 40% this year, both facing questions about production, supply chains, rising costs, a look at which is better. And before the break, Amgen and Merck, both hitting new 52-week highs in today's session. We'll have more power lunch in two minutes. Welcome back to Power Lunch. Now to a battle of auto heavyweights. General Motors and Ford both report earnings this week. Stocks down sharply this year. And they're facing production issues and rising costs. So which stock is the better bet? Here with the bull case for GM is Michael Ward, auto analyst at the benchmark company. And in the Ford camp is Garrett Nelson, senior auto analyst at CFRA. CFRA. Guys, thank you very much for joining us today. All right, I thought that these companies, don't they sort of move in tandem, Michael? Absolutely. And in fact, it's not just GM and Ford that are down big this year. Virtually every vehicle manufacturer is down 40% this year. All right. So which would you like to make a bet on, GM or Ford?

In the near term, GM. And I think that's really just near term earnings this week. I think you're is I've seen very strong earnings from General Motors when they release tomorrow, in part because there are vehicles they couldn't deliver in the second quarter, which will be delivered in the third quarter. Ironically, Ford will have the same benefit when fourth quarter earnings are released in January. Okay. And what do you think, Garrett? Yeah, we prefer Ford here for a few reasons, but we like the combination of growth and yield that the stock offers. Ford recently raised their dividend by 50% over the summer. The stock's yielding almost 5% here. We think CEO Jim Farley really has the company on the right track. And we like the direction that they're taking with

their EV strategy as far as phasing in EVs and not setting a date in the future in which they'll be all electric, which we think is a risky strategy. But we like how the excitement that they're building surrounding certain models like the F-150 Lightning, the Ford Mustang Machi, and the Bronco has been very successful. So we prefer Ford here. And it sounds to me given those reasons that this might be a preference even for the mid to long term. That's right. You know, the stock, both these stocks have been hit hard. As you mentioned year to date, sentiment is really awful across the auto industry because they're struggling with inflation, ongoing parts shortages, chip shortages, slowing consumer discretionary spending, and now rising interest rates. But the good

news is a lot of these concerns we feel are priced in, and we can see a light at the end of the tunnel as far as rate increases here in the next three to six months. So we do see much better performance ahead in 2023. Michael Garrett sort of ticked off several of the reasons why automakers as a group may be suffering. Take that on and tell me why they're suffering. You agree with Garrett completely? Because my impression was there are a lot of buyers out there. who want to buy. Maybe there's a supply problem. They can't get the cars that are needed. But my sense is that demand is hanging in there pretty well. Absolutely it is. And I agree with Garrett on that.

You know, unfortunately, I've been following the autos for about 40 years, so I've seen a lot of these cycles. There are huge differences this time around. We were in a downturn in the auto sector in the North American market. Unlike previous downturns, in the past, you had this excess inventory that you basically had to wind down, and that exaggerated the downturn. We're in direct opposite situation today. You're going to be building inventory for at least the next year. In addition, when you look at GM and Ford specifically, they've reduced break-even levels by more than 50%.

They have no need to restructure the balance sheets or their product. And then lastly, as Garrett was kind of alluding to there, the EV story for both General Motors and Ford, the biggest growth in EVs is going to come on the commercial side. And GM and Ford by far the best positioned companies to capture growth from the commercial side of electric vehicle market. Garrett, I'm just curious if GM is more dependent on China and then Ford is, how do you factor in China into the U.S. automakers moving forward and what's happening there?

Sure. GM is more levered to China. Roughly 40% of their sales volume is in China. So they're a little more levered to that market, which is why we prefer Ford. another reason why we like the stock, more levered to the North American market. And their sales have really outperformed the industry in recent quarters. If you look at the third quarter, Ford's sales volume in the U.S. was up 16%. The rest of the industry was down about 1%.

So they're doing very well if you look at their portfolio. And I think really what's different for both companies this time, as opposed to looking back at 2008, is their balance sheets are in much better shape to weather a downturn. So that's a really important characteristic. Ford is sitting on about $45 billion of total liquidity, which is close to the company's market cap at these levels. So it's a pretty amazing statistic. Well, Garrett Nelson, we appreciate you joining us. Michael Ward, our thanks to you. Thank you, gentlemen. Thanks for having me. Tomorrow, don't miss a first on CNBC interview with Mary Barra, GM, chair, and CEO that's tomorrow at 7.45 a.m. Eastern on Squawk Box. And coming up, a party crasher, China's G, tightening his grip on power,

heading for an unprecedented third term as Supreme Leader there, and it's hitting China exposed names in the markets. Plus, it's not only politics abroad in focus. Business is a key issue on the ballot here in the U.S. Americans are angry about the economy, and that could help Republicans during the midterms. We will discuss all this when power lunch. continues. Macau Casino stocks plummeting today. Look at Las Vegas Sands. You can see that down almost 12% on the day.

And that was an improvement, believe it or not. Melco Resorts, which is based in Hong Kong, but traded here down almost 13%. You've got wind resorts off 5%. MGM resorts kind of flirting with turning positive here. Remember, MGM relies far less heavily on its Macau revenue than the others. One investor put it to me like this today. These guys just can't catch a break. The Chinese Communist Party meeting this weekend consolidated Xi Jinping's power and a third term.

Those worries that he will move to give preference to state-owned enterprises to the disadvantage of especially Western businesses could be propelling some of the sell-off that we see for the U.S. casino companies with big business in Macau. Does Xi control Macau completely? Well, no. Macau is a special administrative region. But like Hong Kong, you can see it beginning to hue more closely with the party line coming out of Beijing, certainly with where it concerns the zero infection policy that we've seen. And Xi Jinping just doubled down on that again. That spells trouble for these casinos. And don't forget, they're in the middle of concession

renewal. That is, they're applying for their licenses to come up again. And I think that there's some concern on the part of investors about whether this effort to consolidate power for China could spell real challenges and hurdles for the U.S. companies. Are there Chinese SOEs that could do what Las Vegas Sands does? Can operate? And they already are. They operate competitively in Macau. But remember, there was a surprise bidder in Ghenting, which is an Asian company, not Chinese, but an Asian company that operates theme parks.

and the like. And they came in and resorts rolled among many others that we know here in the United States. They came in with a surprise bid to give some competitive challenge to these other companies that already hold the license. Fascinating stuff. All right. Brian Sullivan is standing by with a CNBC News update. Brian. All right, Tyler, thank you very much. Here's what's happening at this hour. In Myanmar, an ethnic group and rescue workers say it's mean 80 people died in an airstrike by the country's own military. The reported attack hit a big political event of an ethnic minority.

Comes just three days before Southeast Asian ministers will hold a special meeting to discuss increasing violence in Myanmar. Rishi Sunak will become Britain's next prime minister tomorrow morning. Sunak is set to meet King Charles tomorrow before speaking outside 10 Downing Street. And just in time for Halloween, a Belgian town celebrating a novel use for big pumpkins. Racers are paddling hollowed out jumbo gourds around a pond. 65 teams of four people participated in the pumpkin regatta. Organizers said the event started as a way to put big pumpkins grown for competition to good use. They're only in Belgium, out of their gourds.

This is a good use of the big gourds. I mean, I've heard of stuffed pumpkins, but... I've heard of smashing pumpkins, but that's a band. Yeah. Look at that. That's pretty cool. Brian, thank you. I'd love to take you on in one of the first. of those one day. Oh, we'd sink. I sure would. All right, ahead on Power Lunch, folks, beyond

big tech, it is a huge week for earnings. But while most investors are hyper-focused on tech, there are some key industrial stocks on deck that could have serious implications for the market. We're going to take a look ahead with Stephanie Link next. And as we head to break, check out Avis Budget Group. J.P. Morgan upgrading the car rental agency to overweight the stock down 14% and up over 50% this month. All right, 90 minutes left in the trading day. We want to get you caught up on the markets. Why not?

Because it's a good time to do that. We've got stocks. We've got bonds. We've got commodities. We've got all kinds of things. And look ahead into a huge week in earnings and data. Let's begin with the new author, Bob Bazani at the NYSE on today's rally. The book is titled, Shut Up and Keep Talking, isn't it?

Yes, it is. I love that title. What you hear in your ear? Well, that's what you hear. Some version of shut up and keep talking in your ear when you're waiting to go on just right now. Important thing about today, and thanks for the plug, Tyler. Appreciate that. We are in a bit of an uptrend for the S&P 500. We're up about 6% from the recent lows, two-year lows, just a couple weeks ago.

And if we can get above 3790, folks, you want to watch 3790 because that was the old recent high October 4th. You get above that. Well, you get a series of higher highs and the technicians. like it when that happens. It's a bit defensive today. Energy's been a leadership group. We've seen health care strong today. We've got a bunch of new highs in health care, in fact, Lilly and Merck, Humana, Cardinal Health at 52-week high, so that's nice to see. We're also seeing some nice moves up in consumer staple stocks, so Kraft is up, Coke, Pepsi, Colgate is new nicely today. Again, this is sort of a defensive rally, but we'll take it.

still helps the advanced decline line overall. As for Big Cap Tech, remember the big names report this week. So Apple, Microsoft, Alphabet, all doing reporting this week. Meta got a big B of A downgrade today. But remember something. These companies have all had their earnings estimates reduced for the third quarter already. In the case of meta, about 30 percent, in fact, from the start of the quarter, 40 percent in the case of Amazon. So there have already been very, very significant earnings reductions in these names. And that may help cushion any kind of disappointment that we have coming forward. Tyler, back to you. Robert, thank you very much.

Let's move now to the bond market where we saw a reversal in yields, which are now up again. Rick Santelli tracking the action. Explain it all to us, Rick. Yes, there's a lot of volatility. That's for sure, Tyler. And if you look at a three-day of two-year, I picked three-day because on Thursday, the 20th, they made their high yield close for this cycle. That was at 4.61%.

At 4.5% we could see were 11 basis points below that level, and the short maturities have at greater distance below the recent cycle highs. And that's because, of course, that we have different reporters for a major Wall Street publication that continues to point us in the direction that the Fed may be looking to wind things from a more aggressive to a less aggressive stance as we move towards next year. Look at three day of tens. Their high yield closes on the 21st. It was at 4.23%. Basically, we're hovering right there, right now. If you look at Boons, they already closed at 2.32%. Their high yield close was Friday at 242. And maybe the most aggressive one of all, considering all the politics and a new prime minister starting tomorrow, of course, the 10-year guilt in the UK. Now, this chart starts on the 12th, so about two weeks. Their high yield close was 4.5%. We're now 78 basis points below that they closed today at 3.72%. And we're all talking about China, whether it's their closures, whether it's their big hoopla that they have, once again for a third record five-year term for G.

But maybe the biggest news is that their currency, despite all of that, is still hovering at the lowest level versus the greenback since January of 2008. Tyler, back to you. Fascinating. That's amazing. Rick Santelli. you very much. Energy market closing for the day. We're seeing big moves in Nat gas. Pippa Stevens covering it for us. Hey, Pippa. Hello, Tyler. We saw a big intraday swing for natural gas. Earlier it fell to 475, the lowest level since March 21st. But the contract subsequently

catching a bid now up about 4.8 percent right around $5.20 per MMBTU. Now some of this support is, thanks to traders, betting the selling was overdone after Nat Gas posted a ninth straight losing week for the first time since 1991. Demand will jump as the heating season kicks off, although so far we've seen more mild temperatures, turning to oil, which is modestly lower, although energy stocks are in the green, they want to point out shares of Exxon hitting an all-time high ahead of the company's earnings report on Friday. Conoco Phillips and Hess also hitting records, while SLB, formerly known as Schlumberge, trading around a four-year high. Tyler?

All right, Pippa, thank you very much. with a third of the S&P 500 reporting this week. That's why we've got such focus on this week. We are looking beyond big tech now to industrials. And what results from Boeing and Caterpillar, GE may tell us about the health of the economy? Here with a look ahead, Stephanie Link, Chief Investment Strategist and Portfolio Manager at Hightower Advisors, also a CNBC contributor. Stephanie, welcome back.

Let's pivot away. We spent a lot of time talking about technology here. Take us into the big companies, the industrial companies, the industrial. companies and what you expect to hear from the likes of them. Yeah, I mean, it's going to be very interesting. The technology stocks are getting all the attention, right? But these are very big companies. And we're going to learn a lot about the macro.

We're going to learn a lot about currency. We're going to learn about pricing and margins and sustainability. All three companies you mentioned. So let's start with Caterpillar. So Caterpillar, we know they've got accelerated pricing throughout the quarter, and their input costs are actually coming down. That will be positive for their margins. Last quarter, it was a disappointment on the margin side.

So this quarter should do a little bit better. We also know from conference season that they saw strong deliveries. It actually accelerated in the summertime. And, of course, they do have very easy comparisons on price mix going forward. So I think it's going to be a good report. The backlog is going to be the big question and the trajectory because it's strong right now. But if the economy slows, where do they see that going? and they have to convince us that $12 a share in earnings power can be achieved mid-cycle.

Well, let's move on to Boeing, which is sort of second on your list. This is a company that has faced many, many, many challenges over the past five years. It has, and I own this one, so it's been painful, but I think we're close, Tyler. The stock is down 30 percent. Expectations are washed out. We know demand for new aircraft in the industry was up 600 net new orders in the third quarter. due to international travel and business travel recovering. We know aftermarket global flights up 11% sequentially and up 14% on a year-over-year basis.

Those two points bode very well for Boeing. Now you get to the nitty-gritty 737 max. The big question is can they get deliveries to 50 a month and margins at 25%. I think eventually they can, not right away, but they're going to have to talk about that. 7-87, can they get back to 7 a month? I think they can, but that's not until 2026. So we've got time. What does this matter? It helps free cash flow, right? And that's what the stock trades up. So the bogey tomorrow, yeah, tomorrow is $1 billion in free cash flow. And I don't think we're going to get a ton of information on the conference call because they have an investor day on November 1st, right around the corner. So I think that's going to be a catalyst going forward. Stephanie, how important is free cash flow in what you're expecting from General Electric? Yeah, it is the most important thing.

for Boeing and for GE, right? So the industrial free cash flow for GE should come in anywhere from break-even to 200 million. Of course, they have a guidance of four to half to five and a half billion for the full year. I think they're going to come at the low end, Contessa, just given the macro, but I want to hear them reiterate that they think they can get to $7 billion in free cash flow by 2024. If they can do that, I think the stock can rally, especially with it being down 21%. Recall they have a wonderful aviation business. That's going to be the gem. That's going to be up double digits, right, because of better than expected aftermarkets as well as supply chain. And then health care, the supply chain, if they can get that fixed, that's an excellent business too.

Offset by power and renewables, which is a mess and they're going to see a loss. But they have a restructuring effort underway in the renewables business. So we just have to be patient on that. All right. Stephanie Link, good of you to join us. Thank you. coming up. Business on the ballot with the midterm elections just about two weeks away Americans may be more likely than ever to vote with their wallets in mind. We'll explain why. Plus, Chinese tech stops in stocks deep in the red as worries rise over Xi Jinping's power grab. We'll trade those names. And today's three-stock lunch. And as we head to break a quick programming note here, Goldman Sachs C-O-O, John Waldron, sitting down with our own Leslie Picker right here on Power Lunch at

2.30 p.m. Eastern tomorrow. You won't want to miss that. And we'll be right back. Welcome back to Power Lunch. Business is on the ballot in the coming midterms. As Americans grow more anxious over their economic prospects, Ilan Mu has the results of a new NBC news poll. Ilan? Well, Contessa, one thing that was very clear in the latest NBC survey is that Americans are angry, especially about the direction of the economy. The poll shows that half of Americans, exactly 50%, believe that the economy is going to get worse. That is a record high for NBC's survey. And that financial anxiety appears to be eroding some of the momentum

that Democrats had enjoyed at the end of the summer. Republicans and Democrats are still running neck and neck in the poll, 46 versus 47 percent for which party voters want to control Congress. But we're also saying that Democrats are losing ground among core groups like black voters and women, especially white college-educated women. And President Biden's approval rating on the economy is just 38% significantly lower than his overall rating of 45%. So what do voters want to see? A whopping 84% said they would get behind someone who supports lowering health care costs and prescription drug prices. 67% want to see Washington fight inflation by cutting government spending.

Only 55% would support a candidate who wants to combat rising prices by increasing taxes on corporate. It's all translating into record engagement in the elections this year. Early voting is already way up in places like Georgia. So guys, we'll see if that carries through to Election Day. But Elon, wait a minute. I have a question here. If voters want lower prescription prices, the Democrats did that. Right.

So the question is around messaging, right? The Inflation Reduction Act did a lot of different things. Climate, prescription drug prices, also taxing a corporation. How do Democrats talk about that? And top Democratic leaders, including Nancy Pelosi, have acknowledged that Democrats need a sharper message on the economy. They need to convey to voters that, hey, this is something that we did and there's more to come. I couldn't agree with both of you more on this. I think, as I observed it, and what do I know?

But that the messaging on the Democratic side has been abysmal. They have not come up with any message about what they're doing to fight inflation at all that I'm aware of. And in fact, Nancy Pelosi was on Face the Nation. yesterday and said it's not about inflation, it's about rising prices. It's about the high cost of things. Is that a difference? That's what that's the splitting hairs that she said. But then she went on to point out, if you're looking at prescription drug prices,

she must have seen the poll, to say, we've taken action on that. We've taken action to try and address the fuel prices. But it was... But as you say, Elon, it feels to me like there's a messaging deficit here on the economy. And they've got, what, three... Yeah, one thing that came through, yeah, about two weeks, really. And one thing that came through in the poll is that Democrats and Republicans have very different ideas of what the problem in the country is. Democrats think that America needs to be protected, protected from rolling back rights on Roe v. Wade or LGBTQ rights or election integrity or even democracy itself.

Republicans think that America needs to be saved from rampant inflation, from crime at the border, from illegal immigration, right? So they have these differing views of the problem that confronts America. And we'll just have to see which one voters pick come November. Interesting way to phrase it, being protected versus being saved. Very interesting. Elon Moy, thank you. Still to come, is China becoming uninvestable? We're going to trade some of the most exposed names in three-stock lunch.

Okay, it's time now for three-stock lunch. And it's about time where we get nice and close. We focus on time. We have a couple beverages. We focus on China. Let's talk about Tesla shares. They're lower after cutting prices for EVs in that country, that country being China. Alibaba shares, they're down, along with other Chinese tech stocks after President Xi bolstered his political power. And Starbucks is getting attention because of its exposure to the world's second largest economy. It opened its 6,000 store in the country last month. How about that? Or let's trade these names with Boris Schlossberg, with BK. asset management. Let's start with the, why don't we start with Tesla, Boris? Sure. Tesla, in my opinion, is a pass right now, a hard pass. We also have the news today that cutting prices 9%. That's never a good thing. But I think it's more interesting, basically, that the whole Chinese market is much more discerning than the U.S. market as far as consumers go. Consumers there are much more price conscious. And to me, this isn't just simply a function

of softening demand, but perhaps greater choices for the Chinese populace there as far as the EAD market, which is very well developed. So to me, that's all headwinds. I think Tesla right now is a hard pass from every angle. You don't even have to worry about the Twitter sub-story, just on the car issues alone and to slowdown in China, which makes me very vulnerable to be long on that stock. Okay. I'm going to look for what Elon Musk tweets about Boris Schlossberg anytime now. Oh, you know, I try, I try never to mention his name in my tweets because I really don't want the feedback. I got it. I totally, I totally get that. Okay, then let's talk about, Let's change the subject then, Alibaba.

What do you think? So this is a really interesting stock because, I mean, it's just been a falling knife all the way down. And of course, we all saw the autocratic theatrics over the weekend. So there's just an enormous amount of fear that Zee really wants to consolidate the regime. On the other hand, you have to simply ask yourself, even, you know, the strongest of autocrats realize that profit comes from capitalism. And does he really want to destroy one of the greatest brands in the world and strangle it completely? I don't think so.

And I think the story with Baba, now that it's a lot of it. It's so cheap as far as valuation goes. It's just any tiny incremental positive, a loosening of COVID zero policies, perhaps a lesser regulatory oversight from the regime as long as they sort of stay on business and not get involved in any political posturing. All of that will give it enough breathing room for it to pop 25 to 50%. It's highly speculative, but I do think it has a chance because of its gross undervaluation and a chance of just slight positive tailwind to make it go higher. Let's move on to Starbucks, opening 6,000 store there. It wasn't long ago. They were closing stores in China.

Well, you know, they were closing stores because of COVID, I think. But ultimately, the bet in Starbucks is really interesting. It's a long-term bet. Here's a super interesting statistic. In urban air, no, average Chinese consumer drinks nine cups of coffee per day. How much do you think in urban Chinese consumer drinks? 300 cups of coffee per day. That's the Starbucks opportunity.

They see an immense total addressable market. That cannot be right, Boris. Are you sure? The average Chinese person drinks 300 cups of coffee a day? No, no, no. The average Chinese person drinks only nine cups. But the people who live in urban areas in China, who live in the coastal cities, who work at 24-7, 365 global kind of a day, they consume almost 300 cups a year.

But how many trips? A year, a year, a year, not a day. Can I say a day? I'm sorry. You said a day. I, my kidneys were just throbbing over the possibility. I must have been talking about me when I was talking about 300 cups of coffee. Sorry about that.

No, I meant the, I meant the year. But you get the idea that there's just this enormous total addressable market out of Starbucks. And that is their bet. They want to go 50% more boxes than they already have now. They have $6,000, go to $9,000 by $226. And the bet in Starbucks is a long-term bet. So to me, if you want to establish a position here, the stock is weak. I'd rather sell the puts, get myself.

tactically, position maybe at around 75, 70s in a trade. But if you believe that the Chinese market is going to continue to grow and the Chinese consumer is inevitably going to become addicted to caffeine like the rest of us, that is a tremendous opportunity. I was like, what are they doing the other 65 days of the year then? How do they get by? Yeah, if you're, I would have such a headache if I didn't have my coffee. So somewhere between nine cups and 300 cups is what we're talking about.

Boris, thank you, my man. By pleasure. We appreciate it. Up next, the impact of the pandemic. In the nation's classroom, our nation's report card next. Big story, we're watching test scores in America, the largest education department analysis since the pandemic shows sweeping declines in reading and math across most demographics.

Math scores for eighth graders fell in nearly every state, 26% proficient, down from 34% in 2019. Reading proficiency, 31%. For fourth grade, he's 36% proficient in math. The real question is, how do we fix it? How do we turn it around? Because these numbers have big implications for business in the United States. They absolutely do.

They correspond obviously with the pandemic. And I don't think we fixed that deficit yet in any way. Thanks for watching Power Lunch, everybody.