Power Lunch - Cold Water On The Rally? 12/15/23

Episode Date: December 15, 2023

Markets are getting a reality check today. After soaring to new highs on hopes of the Fed cutting rates sooner than later, John Williams says they’re not talking about that right now. We’ll discuss the implications. Plus, despite the pullback, the major averages remain on pace for their 7th straight week of gains. But with a rally like that, our trader says some stocks have gotten ahead of themselves. We’ll get his take on 3 of them. 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. I am Steve Leasman alongside Kelly Evans in for the irreplaceable Tyler Matheson. Markets getting a reality check this morning after soaring to new highs on hopes the Fed would cut sooner rather than later. The Fed's John Williams telling me they're not talking about rate cuts right now. Not really anyway. That's what he says. That was a great interview today. We'll talk a lot more about it. All three major averages are still on pace for their seventh week of gains in a row. But our trader says with a rally like this, some have gotten ahead of themselves will get his take on three nations. with big gains recently. Give you a quick check on the market action. We were just referencing. Dow's down 60 points at this hour. S&P down a quarter percent. NASDAQ trying to stay positive in danger of giving up those gains. And Apple hitting an all-time high today, although the stock

is still underperforming the broader markets, not even up 1% this week. Costco also hitting new highs today after its earnings beat. And the company's going to share the wealth announcing a special dividend of $15 a share. That amounts to $6.7 billion. Let's begin with a tug of war between the markets and the Fed. Starting Wednesday afternoon, with Fed Chair Powell's response

to a question about when and how the Fed will decide to cut rates. We're aware of the risk that we would hang on too long. We know that that's a risk and we're very focused on not making that mistake. The markets clearly took that to mean cuts would be coming sooner rather than later. The Dow is soaring to new all-time highs. But this morning,

I spoke with New York Fed President John Williams, and he tried to, I don't know, inch back, yank back the rope a little bit from Wall Street. We aren't really talking about rate cuts right now. We're very focused on the question in front of us, which, as Chair Powell said, the question is, have we gotten monetary policy to a sufficiently restrictive stance in order to ensure that inflation comes back down to 2%. That's the question in front of us. That's what we've been really thinking about for the past five months, and I think we'll be continuing to think about for some time. Let's talk about all this. What's in the cards for 2024 with our panel of experts joining us now. Matt Orton, Chief Market Strategist Raymond James Investor Management. On set, Ron and

Sanna, Chief Market Strategist and Dynasty Financial Partners, also a CSBC contributor and a longtime colleague and friend of mine. Ron, I'm going to start with you. Make sense of what John Williams was saying on what Fitchier Powell will say. Well, I can't make sense of what John Williams said. Okay. Because if you look at the dot plots, you look at what Jay Powell said yesterday, clearly they got easing on their mind. You know, they know that inflation has been defeated.

They know that it's come down considerably. They know it's going to go down more. There's really nothing out there in the pipeline that would suggest inflation is going to re-accelerate. And so they're going to want to go to neutral at some point. They're restrictive. I think they're sufficiently restrictive. They've been sufficiently restrictive.

So maybe they walk it back just because the market response was so dramatic and maybe more than they wanted, but that doesn't mean that they're not thinking about it. That's my takeaway, is it attempt to sort of claw back a little bit of the massive. I don't know why they bother, right? I mean, they rang the bell, right? I mean the ring the bell? So rates are coming down, stocks are going up. You mean that in Plovian sense?

Yeah. Everybody's been salivating. Yeah. I mean, they actually rang the bell when they went when they paused. Matt, do you want to chime in on this? Where is the center of the board here? What's the best outlook for what the Fed does in the near term? Yeah, you know, Steve, I agree with what's been said.

I think Williams was just trying to walk back the market expectations a little bit. But the market has had a pretty good tendency over the past year to get ahead of itself. I mean, we saw the same thing happen when the market refused to accept higher for longer and it had to match and move to where the Fed was. And now I think it might be getting ahead of itself with respect to the degree of rate cuts, not so much that rate cuts are coming. You know, I've been saying for a while that we've reached the peak in this cycle, But I think we've gotten a little over our skis and thinking that March and even January is the time when the Fed's going to start cutting rates.

And so what I remind our clients is that what a winning strategy has been over the past year, it's been waiting for the market to come to you, being opportunistic with downside when the market gets ahead of itself, when you have overreactions to new news. And so continue to wait for that to happen now. don't chase the market higher and lean into higher quality investments because if rates are going to come down dramatically, I'm not so sure what that says about the economic outlook. I've always been in a rolling recession camp, but I think selectivity is going to be much more important going forward. I mean, in that sense, Ron, John Williams could be saving you a few bucks today. Whether or not you agree with how he said it, the idea that the market was all in,

and I mean that in the clearest sense of a Texas Holden game with, you know, all my chips, I'm in on March. Yeah. That's probably the wrong play here. Who cares? When I was born in 1961, the Dow was at 660. Right. It's at 37,000.

So if you're playing for nickels and dimes around whether the Fed's going to do this in March, whether they're going to do it in May, you know, whether we're going to have a bull market run in 2024, which, by the way, is a fourth year of a presidential cycle. If the Fed is easing, you've got tailwinds that will push the market higher. I don't think you try to time the market here. They're giving you a fairly clear signal that risk assets will be more attractive. as the cost of capital comes down.

Maybe the only way to ask it then is to say, do they look at the reaction the last couple of days and just think, well, we just brought forward all of 2024 and this is getting ahead of itself. Yeah, but the reaction function, as you're hinting to, Kelly, is really around unemployment and inflation, not necessarily around market behavior. I mean, every other cycle that I've seen,

the markets get out in front of the Fed. They get out in front of everything. And the Fed plays catch up, not the other way around. So I wouldn't be trying to time things here. And, yeah, you know, it might see a pullback because we've gone pretty far, pretty fast. But if we're entering an easing cycle, that's historically been very good for equities.

Matt, let's just say I got, I don't know, Queen Jack in my, instead of pocket aces. Tell me what to do right now. Is it a good time to get, is it too late to buy one year, two year, three year notes right now, or is there another better, more interesting way to put money to work in the fixed income world? No, I don't think it's too late

because rates are coming down and I think the front end still has a long way to move. But I think for longer term investors, Hold on, Matt. I want to cut you off there. When you say the front end, are you talking about two and shorter from there? Two and shorter, exactly.

Okay, so where are we at now on the two? We're down near 420. Was that the latest we were at there? Sorry, I missed that. I missed that thing. But where's it going, Matt? So I think we're going south of four, because if we do have a softer landing,

if the Fed does continue to cut, we're going to see a steepening of the curve. I mean, that's been a decent trade to play, and I think we're seeing some bull steepening happening right now. But beyond just looking at the treasury market, Steve, I like to remind investors as well that there's a lot of really good high-quality corporates, even double-bs in the high-yield area. And what's most important to realize is the increase in yields that you've had in the corporate

space for this year, most of that has been the risk-free rate increasing. It hasn't been so much spreads widening out dramatically. And so you're getting a unique opportunity, the best opportunity, I would say, over the past 13, 14 years to get high quality investment grade, high quality, high yield debt at incredibly attractive rates where most of that move has been because of the risk-free yield. The only round, I just want to circle back on one thing you said, which is that historically easing cycles are bullish, obviously that's not true in a recession, right? So it actually is. Well, but then what do you mean by the easing cycle? So the Fed eases in response to whatever. Let's say the commercial real estate debt that's coming to needs to be refinanced.

That creates a little quasi systemic issue. Normally they ease because payroll reports or jobless claims or something are turning south. And so markets always look across the valley, right? And so markets will bottom before the economy does. But they have to go down first. Well, they just did. But do you think? And 2022 is really rough.

So the stats we know, like, that the market typically, bare markets or whatever, when recessions hit, the market typically sells off 30%. So if we are going into a downturn, we still would have to expect that kind of sell-off. It's just that you think we don't this time. And so this easing cycle might be one of the few that's predicated, not on economic downturn, but literally just on disinflation. Yeah, and I would guess that if we have a recession, barring some unforeseen catastrophe somewhere in the world, it would be mild, right? That maybe we go to four, four and a half percent unemployment, which back in the old days, used to be considered full employment. So it was 5%.

And if we're disinflating, as you suggest, then that's also good for equities because rates will come down and be, I don't know if you want to call it, immaculate disinflation, which is like Ray Dalio type expression or what have you. But China's exporting deflation too.

So I think you've got more tailwinds than headwinds going into 2024. I don't want to pick up on what you just said. I don't want to parse your words too much. But from what you just said, it sounded like you don't think the seeds of the next recession are planted yet.

That there's another shock that would come that would create that recession, that we escape what we've been through without that recession. I'm not sure. I mean, I think we could have a mild recession in the first half of next year, but it doesn't have to be catastrophic, right?

94, 95, that type of thing. Even 97, 98, when we did have some large-scale events take place. And I don't know if commercial real estate debt, multifamily real estate debt, that needs to be refinanced next year will be a big enough shock to throw us into a recession,

but it would probably be a big enough one to get the Fed to ease. Matt, in such a scenario, is it a heads-eye win tells you lose world when it comes to corporate bonds? Can I still do well in those same tenors and rating bonds, the Bs and even the Cs, if we do have a recession? I don't think so. I don't think the Cs are going to perform incredibly well. It goes back to the biggest theme. I've been talking with clients about, which is you have to lean into quality. Selectivity hasn't mattered that much because we've had such significant macro distortions impacting the overall market.

But going forward, even if we avoid a recession, growth is still slowing. There's going to be, we're going to know who's out with their pants down going forward, and you're going to want to own higher quality corporate debt. So to me, you need to own companies that are profitable or generating free cash flow and actually have earnings momentum moving forward. And that applies on the equity side of the equation as well. So I think for fixed income and equities, the plurbook with respect to quality is very, very similar.

And there are still plenty of opportunities in this market. You know, recession or no recession, the average stock this year is not at all reflective of what the indices, broadly speaking, have done. And so there's a tremendous opportunity when there's such bifurcation in this market for investors to be selective and actually own good companies that can beat the market going forward. So I think as market breadth expands, which I expect it will in 2024, owning that

breath is where you're going to be successful. And breath as wide as owning India was something that we had in your notes there. Yeah, you know, I think emerging markets are emerging again. And India has been my top pick for the past two years. And I still think India continues to do well going forward because you've got this great combination of significant infrastructure development. India has won as China has lost, and you've got margin expansion and earnings growth. And that's a great cocktail for markets to continue to hire. We have to do a segment on India one of these days, because every time in my 20 years as a business reporter, India seems to get it right. It finds a way to mess it up over time. Yeah, I'll tell you what, that market's up among the few Asian markets that

are doing better this year. And if the dollar were to continue to go down, selectively investing overseas makes sense. Absolutely. Matt, Ron, thank you very much. And quick programming note, don't miss my exclusive interview on Monday with Chicago Fair President Austin Gulesby. That's at 830 Eastern. He was a phone call about rap music, if you wouldn't mind.

And can I quickly interject guys in the back? It's your show. You can do whatever you want. One moment, Tito, in the past hour, so since we have our senior economic supporter, Steve Leesman, sitting here, we've had Goulsby himself talking about how the Fed did not rule out the possibility of cutting rates at its meeting in March. That was what he told the journal. We've had Bostick saying two rate cuts in 2020 in the third quarter to Reuters.

So at odds with the message that's what they're going to do next year. That Williams. Well, a lot of this is going to happen. I think the conversation that we just had is really important because things are shifting and moving. And that changes. It was easy to clip coupons, put your feet up, put your money in a money market fund, and you were going to get four or five percent. To fill and chill for the first time in 15 years.

Right. If Matt is right, that number is going to come. down. And the thing that I've been screaming about on this show and others is the problem with a one-year note is that it's one year. It means you have to make another decision after six months or a year. And maybe you'll be perfectly happy. Maybe Matt is right. There's more for more, more for it to come down in terms of the yield. If you were hoping to get into the stock market down 30% after that one year and instead it's up that much, that's a very different. That's why you barbell, right? You buy short and long-term treasuries and you can roll out of the short term and add to risk.

And whatever you do, do it slowly over time. Don't try to time the market, I think. Correct. Dollar cost averaging in is the most boring thing, but there's a bit of a free lunch in that. Coming up, we've talked about the stock market impact of the Powell Pivot and the Williams Walkback. We'll have more on the reaction in the bond market in just a moment. And as we had to break, take a quick look of shares of Darden restaurants. Slightly lower after an earnings beat and upbeat guidance. Investors, though, are focused on the revenue miss and drop in same restaurant sales, which the company, at least in part to customers spending less on alcohol. Power lunch will be right back. Welcome back to Power Lunch Bon, Yields continuing to fall today, including today's

losing the 10-year yield is down 30 basis points on the week. Let's get to Rick Santelli in Chicago. Rick Fed talking, bond yields moving, sleigh bells ringing. You live for this moment. Well, I can tell you this. We had three central bankers meet this week. Of course, we had the Fed, Bank of England, and the ECB. And what's fascinating is, of course, is that all help pat.

But all the patterns in their markets are very similar, and that's important because there are certain characteristics about global growth, of course, and inflation that are going to be shared. Now, granted, there's some unique aspects to each economy, but it really pays at this point to pay attention to all three central banks and the short maturity and long maturity markets. Now, let's look at short maturities. If you look at a two-year, we're going to look at two-year in three different settings. The U.S., of course, the European Union and the U.K., and we're going to start them all in May.

And as you can see as you go through, we're hovering almost unchanged, Steve. We settled at 443. We're hovering at 441. And we're also down in the 30-bases point camp in a two-year-old, though that number's getting a bit smaller as the long end, of course, short end is rallying rates here. as prices fall. Now, as you look at Boons, they closed, and they closed at, well, 254, which means they're well below their 276 settlement at the end of last year. And finally, if we look at GILTS, they're hovering at 428, well higher than their 353 settlement at the end of last year. And we really

want to pay attention to the UK because their markets, especially in the short end, have been a bit more aggressive in terms of their staying power at higher rates. But all this is, key. And the main reason it's key is because there's definitely less inflation in the globe, but there's also less growth. The U.S. is leading the charge on that side of the equation. And depending on how the European growth factors into the U.S. growth, ultimately, we have to mesh all the strategies of the central banks. And my opinion is they're all going to be easing around the same time. The issue is exactly when and 24 that begins. Back to you. Yeah, it's super interesting the whole, you know, we might ease before they do, but their economies are weaker thing.

To be continued, Rick, thank you. The sharp drop in yields to end of the year may help bonds from delivering their third down year in a row. But do you want to own them going into 2024? And if so, which ones? Joining us now is Michael Kushma, Morgan Stanley Investment Management, CIO of Broad Markets Fixed Income. Michael, incredibly different tone today than if the year had ended on, call it, August 15th, isn't it? It's the mirror image earlier this year in September with strong growth in the U.S. in the third quarter and an accelerating growth, it seemed. The Fed, no raising rates likely again, 10-year bond yields at 5%, two-year notes at 5%. It looked like another dire year for fixed income, and it all turned around in the fourth quarter. So where would you find the most value then? I was even reading David Zervos's note over at Jeffreys, but he's talking about looking at fixed income and kind of where you'd want to be positioned. in 2024 for this kind of soft landing period we appear to be going through. What would you say? Well, it seems to be that it's very, very likely the Fed cuts interest rates next year.

Inflation is coming down. The economy is decelerating into next year. We don't know how weak it will be, but it is decelerating from the pace in the second half of 2024. The question is when and how much is the Fed going to cut interest rates? Right now, the market is very aggressive on rate cuts occurring even in the end of Q1 in March of next year. which seems to be on the early side. There's no reason for the Fed that panic and have to cut interest rates unless something really strange happens in the world. So we would say that overall, higher quality bonds, even high yield bonds are looking pretty good, but don't expect the returns that we got in two, and it looks like we're going to get in 2023 to repeat in 2024. So they're not likely to see on the level of interest long-term interest rate drops that we've seen lately in 2024. Michael, do you expect there to be money coming from the money market funds into the Treasury

market, into the corporate bond market, or will it not pass go and go right into the stock market? It's a very good question. There's a lot of money sitting in cash. As you might think, with interest rates as high as they are in money market funds, over 5%, why extend maturity? And that was the right strategy until Q4. And I think there is a potential fear of missing out that you don't want to be sitting in cash when cash goes from five and a half to four next year, potentially, and equities are up, you know, some five to ten percent next year, and bond yields are down another 25, 50 basis points, generating again superior returns to cash. I think it's more likely to go into investment-grade bonds in particular. I think it might jump all the way from cash to equities, but equities are the riskier end of the financial market spectrum.

So I think the intermediate jump would be to corporate bonds, both investment grade and high-yield, which are still offering attractive yields from a long-term perspective. Again, they've come down a lot. We're talking about, you know, 5% plus yields and inflation on its way to two, a 3% after-inflation real yield on high-quality corporate bonds looks pretty attractive. So I would think that would be the part of the market, which attracts the most interest the soonest. So that's an important distinction because what you're saying is,

don't be mad that you missed the high yield rates. you be thankful, I guess, or jump on the opportunity that you're getting still or a good real return because the reason the Fed will be cutting rates is because inflation is coming down, which flatters your nominal yield, right? Exactly. And because the Fed has provided a somewhat of a put on the economy, we will be cutting interest rates, even if the economy does okay next year, the probability of a recession next year is dropping.

And that's very supportive as we've seen for equities, for corporate bonds, high-yield bonds. It's good for all those elements, not so good for U.S. Treasuries because if there's no recession, the amount of rally you can have in Treasuries is somewhat circumscribed. Michael, this is really just the beginning of a conversation. I'm glad you joined us today to start it at least, and I think we'll have to have you back because there's so many more questions about where to put that money in terms of the corporates and whether or not it sounds to me, when you said that the Fed is underwriting and put it on the economy, I might want to stretch out into junk a little bit because my risk of default is even lower.

Talk him off the cliff, Michael. This is the second time he's mentioned junk this hour. I'm trying to get into junk. He's trying to get into high-yield bonds. But if you're telling me there's a put and the default rates are still built into the yield, then I get a gift, don't I? You potentially do, yes. Fundamentals from that perspective look very good.

So credit spreads should be narrower than they are on average. if we are really confident there won't be a recession next year in corporate cash flows hold up. So bonds, Hiale may look a bit expensive today, but if the macro story turns out okay next year, which looks like it will, they'll be fine. Like it.

Come on, Kelly. If you're really confident, triple C minus, let's do it. Thank you, Michael. Thanks for joining us. We appreciate it. All right, coming up when remote work comes with a side of anxiety, Citi group telling most of its employees

to work from home through the end of the year, but with a corporate restructuring, looming, many are reportedly scared they may not have a job to return to in the new year. We're going to get the key details when Power Lunch returns. Welcome back to Power Lunch. Turmoil continuing at Citigroup. Our Husson, just learning the company, has told most employees to work from home for the final two weeks of the year. And while that might sound nice, it's worrying some.

Cmc.com banking reporter, Husson, joining us now on set. Steve, it's great to be with you. Yeah, so this is sort of a holiday gift from Citigroup CEO, Jane Frazier. she says, listen, you know, everybody's tired of the year we had. You can take the last two weeks, December 18th to 29th. You can work from home. You can work remotely from anywhere in the country in which you work. Now, the context of that, where the reality kind of runs into the facts here is, you know,

she's got this project Bora Bora, right? She's got this reorg project in which. Can we stop? Bora Bora. Let's think of a worse name to call or a more, a less ominous name to call a corporate restructuring. Steve, you don't think the Tahitian sands and the Azur waters of Bora Bora are a good... I don't know. It just sounds too many.

Exactly. I know we've asked you, what was the rationale for that name? Do we ever find out? You know, some consultant in BCG knows the answer to that, Kelly. I do not. So we got paid for that name. Millions of dollars, Steve, yeah. So I interrupted you.

Go ahead. Well, all right. So the context of this two weeks that you can work remotely, you know, it's a gift and it's perceived as a perk. However, there is the issue that, you know, come January. You're not sure if you actually have a seat when you come back through the office. And that's the spasm of anxiety that's running through cities 240,000 workers. Most of them have this ability. Most of them can be hybrid.

And yet now they have this perk. So the idea is, go ahead, work at home. There may not be a job for you when you come back is the concern. That is certainly the concern. And it comes right when they're getting out of the muni business. Yeah. And so that's the other leg of the story, which is, you know, it's been reported and I've confirmed, you know, Citi Group and Jane Fraser as part of this project Borebore,

is examining line by line, business by business, all the businesses in which they don't earn a great enough return. Typically in banking, that's at least 10% return on tangible common equity. So, you know, this muni business, which used to be a top five, top two business on Wall Street is more like a seven or eight.

It's a laggard, particularly because, as you know, in Texas doesn't deal with them anymore. Texas is one of the biggest markets for muni bonds in the country. There was some controversy over there over guns, and we don't have to get into that. But they've been flagging. And so Jane Fraser decided, look, made a hard decision.

Even though there's a lot of puts and takes here, we're out of this business, which is municipal bond trading and issuance. Is it the last business city group might exit? So, yeah. I talked to a bunch of sources today after I saw that story. It is not the last. There are other low-returned businesses which are ripe for the cutting. One person on the consumer side said, look, we've got this private label credit card business. So you have a Brooks Brothers card.

It works only at Brooks Brothers, Steve. And in this case, you know, foot traffic at places like that, it's falling off a cliff. These types of consumer businesses that don't earn a good return, also possible for cuts. What's the goal? What does Citigroup want to be? More profitable? Well, more profitable. What should I know Citigroup as the best at?

Yeah, I mean, that's a good question. I think, first of all, the shareholders have been killed in this stock. If you put up a screener of the stock over the 15 years, it's gone nowhere. So versus everybody else who's recovered, I'm talking about Morgan Stanley, JP Morgan B of A, this has been a laggard. So that's the first thing, is just stop killing the shareholders of the stock. And, you know, in terms of the client side, they want to be known as the most global, the most client-centric of the firms. They want to be big in wealth management. As everybody else does, they've struggled there, Steve.

Hugh, thanks very much for bringing us this story. Jane Frazier has her work cut out, that is for sure. Let's get to Bertha Coombs now for the CNBC News Update. Bertha? Kelly, Israeli military officials say troops mistakenly killed three hostages during a ground operation in Gaza. The IDF says the hostages were two soldiers and a civilian kidnapped from the Supernova Music Festival. Their bodies have been returned to Israel. A Connecticut appeals court upheld $75,000 in fines today against conspiracy theorist,

Jones. He was charged the fee for not showing up to a deposition in a lawsuit by Sandy Hook families for calling the 2012 Connecticut school shooting a hoax. That suit eventually led to a $1.4 billion judgment. Jones said he had a medical problem that prevented him from making it to the deposition, but the court found he still managed to have lied broadcasts of his Info War show at the same time. Jury deliberations resumed a few minutes ago in the domestic violence case involving Marvel actor Jonathan Majors. They're deciding whether Majors is guilty of assaulting his then-girlfriend in a struggle

that allegedly began in the back of a car last spring. Majors has denied any wrongdoing and claims that she actually assaulted him. Kelly. Thank you very much, Bertha Coombs. Still ahead, A. Iyer. For the first time, regulators are warning the use of artificial intelligence poses a risk to our financial system. Details when power lunch returns don't go anywhere. The comeback in Bitcoin has been great news for Coinbase.

The stock is up more than 300% this year, but falling today a little bit. Let's get to Kate Rooney for those details. Kate? Hey there, Steve. So a setback for Coinbase today. The SEC denying its request for new. crypto rules, saying that existing rules that govern stocks, ETFs, they work just fine for crypto. SEC chair Gary Gensler repeating a point that he has made before existing laws and

regulations already apply to the crypto securities markets. He also says the SEC addresses the crypto markets through rulemaking and says it's important to maintain discretion regarding rulemaking priorities. He emphasized that while crypto does see outsized fraud relative to its size, it's still a very small portion of the $110 trillion capital markets. It says it's important that the commission maintain discretion on where to focus and which parts of the market need updated regulation. Coinbase's chief legal officer, though, Paul Graywall, telling me that the company does plan to respond. In court later today calls the denial arbitrary and capricious.

We will lay out why sensible rules for crypto are not a special ask or request for special treatment on the part of the industry. We're saying regulate it's just like you regulate all sorts of other industries, but provide workable, sensible pathways so that issuers and exchanges like Coinbase and others can register, can come inside of the perimeter. Coinbase is fighting separate charges by the SEC

that it's operating as an unregistered securities exchange, which it also denies. It's gonna plead that case before a federal judge in January. Today's news, though, hitting shares of Coinbase and Robin Hood as well, which has leaned heavily, heavily into crypto in recent years, too, guys. Back to you. Kate, thanks very much, Kelly. All right, a new government is meantime identifying artificial intelligence

as a potential risk to the U.S. financial system. Deirdre Boso spoke with the founder of one AI startup about that for today's tech check. Deirdre? Hey, Kelly, and Gary Gensler as well. He had comments on AI and the risk. It's interesting because most of the focus this year, it has been on individual large language models and chatbots. There's OpenAI with GPT4.

Google has barred, Anthropics Cloud, but increasingly regulators are starting to worry about the downsides of relying on just one of them or building applications drawing from essentially just one set of data. It can lead to a single point of failure. It can amplify biases and lock-in vendors, sort of like what we've seen in the cloud computing industry. The report this morning that you were referring to

it warns that, quote, the reliance of AI systems on large data sets and third-party vendors introduces risks related to data controls, privacy and cybersecurity. And this is something that Amazon has been talking about this year, the idea that there won't be one model to rule them all. It's kind of been their tagline. We also spoke to a founder that is building his company

on this very idea, builder.a.i, best way to describe it as like AI for dummies that draws from a number of large language models to build apps in a very non-technical way. Here is its CEO, Satchin Dev Doggle, explaining how his product, called Natasha, is different than what, say, Microsoft in Open AI are building.

A lot of people are building large language models where you can ask a question and you get specific answers. You've got evolutions of that where you've got things that could complete. You can help you complete a function or complete something in a programming language. Natasha is really different. One, she's not based solely on LLM technology. This startup is valued at about half a billion dollars with surprise, surprise, a strategic investment from Microsoft.

So it kind of has hands everywhere. But it's still the startups that are building the actual models that are getting the most funding and certainly the most buzz this week. A Paris-based Open AI rival called Mustral AI closed a $415 million series A funding round at a $2 billion valuation, which, guys, is just an enormous amount for a series A. That comes right after the seed round. And it tells you that there is still plenty of money out there for certain startups while elsewhere in the space. The gravy train, it is starting to slow, especially for the so-called AI rapper companies. For more on the generative AI funding landscape, go to CNBC.com slash Tech Check Weekly. These are our in-depth videos that explain and go beyond sort of the headlines.

Back to you guys. Dear John, I'm going to put you on the spot. Give me a kind of understandable metaphor here for understanding how that individual's model is different. Is it like I'm going to access and ask a whole bunch of Google. and Bing and all these other search functions at the same time? Is that what it's going to do? It's going to aggregate answers from different sources? Let me, yeah, let me try and do this in like the least technical way possible.

There are the companies that are building these foundational models, right? So they're getting information from many, many different places. It requires a ton of compute power, billions and billions of dollars for spending in the cloud. They require Nvidia, GPUs, things like that. A builder.aI, I guess you could call it like an AI. company. So it's not actually creating those models. They don't have data scientists and researchers on their staff. They're building, using those models. And so you often see that those kinds of startups are less valuable, right, because they don't need to pay for as much compute power,

but they also don't really have anything proprietary. I think I get it. That's Deirdre Bosa, explaining AI for Dummies is to AI for Dummies. I try. Right. I try. That's what it is. It should be a series. I am one, though. It could be a series. A.I. for Dummies, AI for Dummies. From a dummy. That's my read here. Sorry about that. Dudea, thanks very much. Have a great weekend. Still ahead, the millionaire mindset will reveal the results of our latest CNBC millionaire survey, including where they say they're putting their money and what they think could derail the record rally. Power lunch coming right back. All three major averages on pace to close higher for the seventh straight week, really driven by the hope that the U.S. economy will avoid recession. Instead, come in for a nice, soft landing. Robert Frank has been surveying me.

millionaires for their thoughts on the market and the economy? Robert. Steve, good to see. Millionaires still holding a lot of cash and they're worried about Washington. The CNBC Millionaire Survey, that's where we poll those with investable assets of a million dollars or more. It found that most millionaire investors say the SMP will be up at least 5% by the end of next year. Over 20% expect double-digit gains in 2024. 21% expect markets to be flat. They're planning to keep about 40% of.

of their portfolio in stocks next year. 18% of fixed income, still keeping a lot of cash, though, with 25% of their investments in short-term money markets and cash equivalents. Their favorite sectors for stocks next year are tech and financials. When it comes to the overall economy, though,

millionaires are a bit more bearish. 42% saying the economy will be weaker or much weaker next year. Only 30% say it will be stronger. The biggest risk to the economy next year, they say is government dysfunction. Inflation still also a big concern there, along with national debt. But millennial millionaires, they are still the most bullish. About half say the economy will be stronger next year, and more than a third, say markets will be up double digits next year.

Kelly? I was just going to say, do we think we need to upgrade this to the billionaire survey at some point? Anybody. Yeah, right. I mean... I'm just throwing that out, Steve, what were you going to say? I was going to ask Robert if he knows the average age of the respondent, because I would think, if you put that portfolio breakdown up again, that looks like the portfolio of an older person. And I'm wondering how much that portfolio percentages are colored by the age of the people rather than their preference for one or the other instrument. It's a great point, Steve. Just back up, the reason, Kelly, that we poll millionaires.

We'll get to billionaires. Maybe that could be good. Is that the millionaires hold about 85% of individually held stock. So we track this group because they have such an outsized influence on the market. To Steve's question, Steve, you nailed it, and you're absolutely right. You know, this is an older group. The average age, I haven't checked in this specific survey, but in the past, it's the upper 50s, low 60s. So remember, it's net worth of a million dollars more.

it's not necessarily high income. These are people that have saved over their lives to get a million dollars in net assets. But we do break it out. There is a millennial component. There are multiple Gen X and boomers are all represented. So that's why we kind of break out by some of the demographics. But you're right, it tends to be a slightly older crowd by nature of it being invested assets as opposed to just high income. And I'm going to just contradict myself with my late father, may he rest in peace,

who passed on with the portfolio of a 32-year-old. Did he pass it on to you? He did pass it on to me, and I had to sell it all. Thank God bless it. Why? Because of conflict of interest rules. Oh. Right.

So, such a savvy move by him. We appreciate it. Coming up, we'll check the charts on some high-flying names that look overbought and ask our technician if he thinks they're trending toward a pullback. Power lunch will be right back. Welcome back. Time for some technical support. CNBC pro out with a new screener today.

Overbought stock. that could be due for a pullback following this market, this big market week we've had in here to analyze some of those names as Jay Wood's chief global strategy at freedom capital markets. Jay, let's start off with Boeing. Yeah, let's start off with Boeing. We're talking about stocks that are overbought. Okay.

How do we measure overbought, oversold? We look at the relative strength index. An RSI reading of under 30 means a stock is oversold and it's due to pause going down and possibly rally. A stock of an RSI over 70, and in this case, Boeing, is 92, which is a historic level for Boeing, means it's overbought. The stock has gone up over 50% in seven weeks

since that October 27th low. And then if you look at the price action, I wanted to back it out over five years to give you an idea of what we're seeing in Boeing. Now, once again, my lines are a little won't I use this? And I apologize. But this level where we're coming into is around 270, 280.

We've made a full circle back, but seeing that we've gone up, far, so fast, like a rocket ship, we want to see Boeing take off like an airliner, and it's going to probably pull back. So if you're looking to add into this your portfolio. Is there a period of time it has to stay up there to be oversold? No. Or if it just gets there, it's oversold.

In this case, overbought, and yes. Overbought, sorry, yes. Once it's there, it just tells you that it's getting tired. Overbought doesn't mean it has to reverse. It's just going to slow down the pace of the rally. And in this case, I wouldn't add to this portfolio. I'd wait for a pullback, you know, somewhere. around 250, 240, I think would be a good place to buy Boeing.

But it's got a lot of work to do. I wouldn't add to it at this point. Okay, let's move on from plane builders to home builders. D.R. Horton? Well, home builders, I like. Home builders have been one of the best acting sectors this year, who knew with mortgage rates, 8%, now back down to 7. But D.H. Horton, again, historical levels on the RSI.

The stock has made a tremendous move. Again, 50% in seven weeks. These are not normal. You get a nosebleed when you look up at these charts. So we've seen a 50% move here. The stock, though, I love. The setup is phenomenal. If you go back three years, we made back all of 2022 losses during 2023 and then broke above. And this is what we call a cup and handle.

We have a nice rounded bottom and then a breakout, a retest of that level. And all these lines are making a little confusing. But what I want to focus on right now is the stock is at all-time highs. I love that. But given the run, it's done. Do for a pause, a possible pullback? I would buy this on weakness. A 5 to 10% pullback?

But the fundamentals have been good. They've really survived the cycle here. 7, 8% mortgages and the home builders have done well. Yes, and with the recency bias, people seeing 8% now it's 7%. They're like, oh, now we've got to run out. It's a bargain. Exactly. We've got to move on.

Let's look at Royal Caribbean. Royal Caribbean, this is a stock that, you know, it's kind of gone up like the Titanic. And what happens? Don't say that. I know. Take that back. Okay. I'm sorry. The jury will disregard.

All right. We strike that from the record. But what I like about it, it has made back all of its losses going back to COVID. And if we were to go back another year or two, you see at 1.30 at this level, we're at about 120 right now. This stock is in no man's land. I would probably stay away. I would buy on a pullback so maybe that this level that it just broke above can act as support. but the risk-reward setup to the downside is about the same to the upside. I would rather wait and either short it as it got to 1.25-130 because it took two years to get that at level, never broke above. We got to go. Jay, I don't like technicals, but I thought this was really interesting.

All right. Well, it was fun having me. You did a great job. Technicals and the fundamentals. Thanks to Jay Woods. Kelly. So many headlines to get to, but so little time. We'll power through as many as we can in closing time next. Welcome back about two minutes left in the show and several more stories you need to know about. Starting with Nvidia, which may be a victim of its own success. The stock has had a stellar year and many years, but according to reports, there's a downside. Some Nvidia employees are so rich now, Steve, they no longer work as hard.

Yeah, I don't know about that. I think when people get older in Richardson, like they work smarter. They may value their free time more, but I mean, I guess that could happen. I mean... This is my argument against busting up monopolies and hugely successful. successful companies is success takes care of itself in certain ways. Okay, all right. I'm in favor of busting up monopolies because of the price effects.

I don't think anyone's calling a video monopoly just yet, but it is interesting to watch how quickly all their major customers are trying to diversify. Yeah, I think people do have to think about older people in the workforce. They are a major potential source of labor in a country that, forget the vicissitudes of this month and next month. Over time is going to need more older workers. So you better figure out how to make it work. A gold rush at Costco. The warehouse giant says it sold more than $100 million worth of gold bars in its most recent quarter. The bars typically sell out within a few hours of being offered online, according to the CFO.

How many people brought the gold bars home, Kelly, tried to take the peel off and thought there was chocolate inside? I would like to know how these are delivered, because you and I have held a gold bar. Yes. It's incredibly heavy. Do you know that in the basement of the New York Fed? I do. They have these steel-toe things that you put on. Do, yes.

Because if you drop a gold bar on your foot, you'll break your toe. That's what I wonder about. How are people getting and acquiring these gold bars from the question? The question is Costco putting a warning on the gold bars? Maybe they must be a very small version, no, wouldn't you think? It's counting down. We have 29 seconds. All right.

Let's wait. I always like to keep you updated on Sheehan and Timu. And Sheehan is now accusing Timu of unlawful and aggressive business tactics, including mafia style intimidation. A lawsuit filed by Timu's U.S. parent company, Whaleco says shean is trying to thwart competition. et cetera, et cetera. And just an update, I bought an old chair, a broken mirror, and some scrap metal in my search

for junk, which we talked about. We need to get Howard Marks on. Exactly. Hall of the year. Thanks for watching, Power Lunch.