Power Lunch - Connecting The Dots 11/8/23

Episode Date: November 8, 2023

Markets are mostly lower today, with the S&P 500 on pace to snap its longest winning streak since 2021. We’ll help you connect the dots from lower oil prices, to falling bond yields, to rising stocks. 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, everybody. Alongside Kelly Evans, I'm Tyler Matheson. Coming up today, busy hour, markets lower on pace to snap some long winning streaks. We're connecting the dots from lower oil prices to falling bond yields to rising stock. Kelly? Yeah, you got all that. The NASDAQ is lower. Now it's on pace to snap an eight-session win streak. It's up 8% during that time. Over that same time span, oil falling 10% and now just above $75 a barrel. Bond yields also falling from near 5%. on the 10-year to just above 4.5% right now. And for more on the market set up right now and the interconnectedness of it all, let's bring in Mike Santoli. Lots of talk about how rising bond yields were anathema to rising tech stocks, but we've had rising bond yields for most of the year and rising tech stocks. Yeah, that relationship did really break down maybe about a year ago. At least it wasn't so much one for one on a daily basis. The tech stocks that we have been leading right now of much more doing it on the basis of stronger balance sheets, perceived insulation from macro forces,

predictability of earnings, which really are the quality factors that have been asserting themselves all year. But in the last eight sessions or so, last week and a half, it started to become more plausible on top of all that, that we perhaps had reached peak Fed, peak yields, peak oil, disinflation and train. And therefore, the imminent hard landing scenario that had become partially priced into stocks, this anxiety that built up over three months of losses, partially reversed. Here you see, though, that this week, most of the market has been settling back and digesting the gains and consolidating from last year. The S&P has managed to stay ahead of the game and the NASDAQ as well, but that's mostly, again, because of those select number

of mega-cap stocks. So the last few days have done nothing to cool the alarm, I think excessive alarm, over the concentration of market performance this year. Do you, what are your sources telling you? what does your spidey sense tell you about whether yields have hit their high point for this cycle? I don't think there's a ton of conviction in making that declaration. I think it's about looking at that chart and saying, yeah, that's a plausible peak, at least for now, even if we're not going to go down very far. I mean, we can talk all about what is implied for the Fed doing into next year. But right now, I think people feel as if 5% felt as if there was a lot of value in 10-year bonds. You just didn't want to be steamrolled by just the runaway train of rising yields because of supply concerns or something else.

Once that calmed down, I think you had real money, getting to the long end. All right, Mike Santoli, thanks very much for the explanation. We appreciate it. So will the recent rally in the NASDAQ continue or will yields go up and end the rally? Our next guest says think of the tech sector is similar to a long-term bond. Tech will fluctuate with the market's evolving thoughts about the future path of interest rates. Joining us is Kevin Coran, senior portfolio manager with Washington Crossing Advisors. Let me begin by asking you a question similar to the one I just asked Mike Santoli,

and that is what is the relationship between yields and tech shares or yields and the NASDAQ? We've seen the NASDAQ go up as yields went up. Now we've seen the NASDAQ go up as yields come down. Yeah, well, what we're saying there is when you look at technology, it's trading at a much bigger premium, bigger multiple than the average company at this point. And what that means is that the value of those technologies, that technology sector, the share prices, if you will, it's tied up in earnings that are going to happen years and years from now. So those earnings are going to be hurt if you raise the interest rate and you discount those

back. It's going to just, they're going to behave sensitive to higher interest rate. But, and there's a big but here, that's not the only thing that I'm not. affects technology. For example, they're also going to be big beneficiaries of receding fears about recession. And that's what happened this year. That was the dominant story this year. And if you look at tech earnings, the expected earnings have ratcheted up about 14% this year. And you can't say that for the rest of the S&P. So ultimately, yes, they're still sensitive to interest rates. That's still a headwind if interest rates climb from here. But they're going to benefit from things like

stronger economy, higher earnings like they did this year, and that was the overriding factor for tech this year. So in short, other intervening factors have overwhelmed the normal state of affairs, which would be that rising rates are not good news for tech stocks because it reduces the value of future earnings. Yeah, there's a lot. There's just a lot of moving parts here. It's not just a one-way thing about interest rates. There are several factors that come into play, and growth is a big one as it relates to technology and growth has clearly gotten better this year than what was expected at the start of the year. We've spent much of the last decade poo-pooing the value of a 60-40 portfolio blend. Is it back in vogue now? Oh, absolutely. The whole idea with that was that

if you ended up with a situation where stocks fell and bonds fell, as they did last year, then diversification wasn't your friend and you didn't have much of a yield to start with. But that's different now. We do have a yield that is very favorable. It's above the rate of inflation. You have a real yield. It's bond investors are coming into it today with a very different setup. And the historic tendency, although not all times, but the historic tendency for bonds to be the offset to a worsening economy, that could still very much beyond the way. the table. So the potential for diversification and a better starting yield means that absolutely the 60-40 traditional stock bond mix is very much alive and well today.

Oh, now that's the most contrarian thing I think of. You saw what David Einhorn just said, Kevin. He said basically he's betting the opposite. Yeah, well, I disagree. I would take the other side of that. Things don't stay static in markets. The start. years today are much better than they were in the past. And ultimately, if you're starting with a higher, higher yield, all else being equal, then the expected returns on bonds today would be better than where they were a couple years ago. So I would take the other side of that trade. All right. What do the stock picks here have in common? Accenture, Cummins, Clorox. So we were looking for companies that in the event that we had, let's say, a more difficult

2004, we're looking for companies that we thought would be durable and flexible and predictable that didn't have the big premium multiple that some areas the market have cornered this year where we could still earn a fair return, maybe even see some income vis-a-vis a dividend. And all three of these stocks, Accenture, a very interesting, solid company with a tie-in to technology and the transformation of businesses as it relates to AI, Cummins, very strong business, lots of demand today and well into the future. And then Clorox is a bit of a turnaround. They've stumbled recently. They've had some issues. But ultimately, the stock is pulled in, and it's probably a good entry point for an investor who's looking for value in a quality company that's willing

to wait as the company turns itself around. S&P 500 has just turned positive, I'm told. Does the market finish a year higher than it is today? Well, I think it's, I think we've had, if it finishes out where it is there, I think we will have had a good year because 65% of forecasters at the start of this year were looking for a recession. And the fact that we didn't have that recession, we had a reasonable lift in the markets this year, and we had stability after an awful 2022. I would chalk that up as a win. So if the market were to close exactly where it is, I'd be happy with that. That being said, there has been some positive dynamics. Maybe we get a little bit more of a push higher out of that. But I would say that even if you closed it today and just

ended here, 2023 would be a win. Let's take the rest of the year off. Kevin Coran. Thanks, man. Appreciate it. Thank you. Appreciate you having me. You bet. Let's get now to that big drop in oil, which if it holds could be deflationary for the global economy. Pippa Stevens is here. And will it hold is the big question. Yeah, dropping again today, building on yesterday's losses, which saw oil tumble to the lowest level since July. And Brent now actually below $80 for the first time since July. The latest catalyst is the EIA cutting its U.S. consumption figures. They now see demand falling by 300,000 barrels per day this year, relative to a prior forecast of an increase of 100,000 barrels. Now, in terms of what this means for consumers, we are seeing the drop in oil reflected.

The prices at the pump, they are down about 30 cents over the last month. Now, there are a couple of things going on here. So first on the supply side, inventory for gasoline is about 2% above the five-year average, while inventory for distilates is about 12% percent. below the five-year average. Now, that's important because refiners are still making money off of the higher margin products like the diesels, the heating oils, and the jet fuels. And so they're still running at high utilization rates. And they can't really shift their product mix by more than 5 to 10 percent. And so gasoline is still being produced as a byproduct, which is why we now have all the supply, just as demand is falling. And so that's the key thing to watch here.

The demand is falling. Why? Okay, well, so the EIA pegs it to consumers not commuting, more fuel-efficient vehicles and more EVs on the road. And they actually think that next year we're going to see the lowest gasoline consumption per capita in two decades. So that was the EIA's big call. We'll see. I mean, it's very hard to predict consumer patterns, but for the time being, prices are down 40 cents in a month, so certainly good ahead of the holiday season.

That's gasoline. Gasoline, yes. On the underlying commodity, consumption is going down, because why? Because the heating season is not predicted to be as intense as much. Maybe. Yeah, that's right. So in Europe, their storage is already full, and they do about 40% of their heating is from heating oil. And we are forecasted for warmer temperatures. And so that's impacting diesel a little bit. Also, if you have a slowing global economy, that's going to hit how much diesel you need as well. But there are still a lot of questions, and these are hard to predict. Yeah. All right, Pippa, thanks very much. Everything's hard to predict, didn't it? Be easy. line, yeah. For more on oil's big slide and what's next as energy remains under pressure.

Let's bring in John Kilduff. He's founding partner at Again Capital and the CNBC contributor. It's good to see you. John, do you think these declines will persist in terms of the price level and, you know, potentially demand as well? Yeah, I think there is probably some more downward pressure on prices here in the coming weeks. December, as TIPA was just referencing, I believe, that December is going to be a warmer month based on the weather models we're seeing.

So that's going to help the distillate fuel situation, the heating oil situation here in the United States, and also obviously abroad in Europe. The question I have a little bit is that this winter is nowhere, it's not going to be as mild as last winter if you recall that one. That was a ridiculous one. But we also have a new weather pattern in the South Pacific that should generate some pretty decent-sized snowstorms,

clips of severe cold weather, and a cold-wet spring. So we'll have to see. But certainly for now, this is downward pressure because of a lack of geopolitical jitters. And the really inability of OPEC plus to do much more than they're already trying to do to try to stabilize the price, particularly when they have the thorn in their side of the United States and North America in general in terms of massive crude oil exports now and refined product exports. Your weather forecast sounds really unappealing. a wet, cold spring after a wet, cold, snowy winter. But at any rate, let's move on. So taking all of that into account,

as we look at the benchmark crude prices, now below $80 a barrel, what do you think the range of those prices is between now and the spring? To the downside, it'll be hard for us to get much below 65 or 62, but to the upside look, as we've been seeing, since the Ukraine war began, jitters in the oil market abound, and certainly the rhetoric, not just from the protagonists, the countries, the leaders of the supply and like, but also,

you know, a lot of analysts out there jump on the train, too. And I compare it to telling scary stories around the fire pit in the summertime, it gets the price juiced. So, I mean, given if things were to go south in the Middle East, if things were to really get tough by the Saudis, if they were to do even more or there's a problem in Russia. Any kind of supply disruption or put it to that way certainly gets us back to the $90 mark. Getting above 100, though, will be tough. But we would need, beyond that, central banks to ease, China to really step up and try to juice their economy.

And these are big inputs that I just don't see on the horizon. But 90 to 100, Tyler, is certainly, I think, the upward bound that will be hard to break out of. hard to break out of to the upside. What about to the downside? Yeah, I just don't see us being able to get much below $60 a barrel. Again, because of what the Saudis are doing, I can't discount them completely as much as I'd like to. And despite what the United States is doing in terms of crude oil exports or refined product exports, you know, the Saudis still and always will matter. So to the extent they get consternated here with this persistent low price, they may try to go for the jugular and really squeeze it.

But for now, it's status quo and there's a downward pressure here until we get some real bouts of cold weather, which again, for December, if December ends up being a bust in terms of heating demand, it's going to be game over for that input as well by come to turn of the new year. All right. John Kilduff, again, Capital. We appreciate it. John, thanks. And now to the bond market where yields have fallen sharply recently since that 10-year briefly hit 5% of 10 days or so ago. Santelli joins us now from Chicago. It's been quite a decline here in yields, a half point in, I guess, less than two weeks. Yes, no, it is historically large by any metrics, Tyler, and there are good reasons for rates to be moving lower, although there is an asteris. If the Fed is done, that's good news. It's largely responsible for the big rally in equities with multi-sessions in the green. But do keep in mind, the Fed can control.

only a portion of the yield curve, short rates. They can do QE, but now they're not. They're doing QT, the exact opposite. So the market can do whatever it needs to on the longer maturities, and that seems to be a big story, but maybe the story's got mixed signals. Let's look at a couple of charts here.

If you look at a two-year, just today, now you hang in yesterday. Today's range is inside yesterday's, but it's not true as you move down the yield curve. If you look at a tenure, today, then look at it benchmarked against yesterdays, will be the same for 20 year and 30 year. We're trading under.

We've taken out yesterday's lower yields. That means we're inverting even more. And if you look at tens and 30 specifically, they're on pace for the lowest yield close, Tyler, in seven weeks. Basically seven weeks, the 22nd of September. What we really want to pay attention to is the aftermath. The 10-year note auction, we could all debate whether the actual numbers were good or bad. I've looked at a lot of auctions in 43 years.

the numbers weren't stellar. It tailed. Direct bidders like heads funds and insurance companies didn't show up in force. But consider it more of a mogul. If you have a mindset to buy and the auction comes and goes and there's nothing earth-shattering, you continue your strategy. And that seems to be the case. You really want to watch where we close in context of 4.5% not only today, more importantly, for the end of the week.

Back to you. All right, Rick, thank you very much. Rick Santelli on Bonds. Coming up, Microsoft, breaking in the benefits of the benefits of. the AI boom. Closing it an all-time high, yes, we have 10% in a month. But while Microsoft has enjoyed a successful head start, is Apple merely lying in Wade ready to jump in once the technology is perfected, AI that is, and that is next. Plus Disney has its hands full and kind of not in a good way, how Bob Iger is dealing with a stock that's stuck in the mud

in ever-changing media landscape and a looming activist fight. We will discuss all of that. And more when Power Lunch returns. Welcome back to Power Lunch. Shares of Microsoft's hitting an all-time high earlier today, and the company now rivaling Apple in terms of market value, just about $140 billion short. What's $140 billion among friends? For a deeper look at these tech titans, let's bring in Steve Kovac.

You know, Microsoft was for many years the titan of market valuation. Then, of course, for many years it was anything. But Apple surpassed it. Here comes Microsoft. and why there's a simple answer why Microsoft is closing that market cap gap with Apple. It just ignited a promising growth engine thanks to that relationship with chat GPT maker, OpenAI. Meantime, Apple is coming off that full fiscal year of declining sales and projected little to no growth for the current holiday quarter. And there's no clear growth catalyst on the horizon.

That Vision Pro headset coming out next year, that's not going to cut it. Microsoft showed us when it reported earnings just last month that all that AI activity is helping boost growth for its Azure Cloud unit. On top of that, just started selling its AI assistant co-pilot to business customers last week. Huge revenue opportunity there. Apple now is reportedly working on its own generative AI products that could launch as soon as next year. But for now, it has nothing to offer. Now, there's been this tit for tap between these two companies over the year. Let's go all the way back. Remember the Zoom? I think you won one, Tyler. A failed response to the iPod. I'm not the Walkman. Exactly. And then the Windows phone failed against the iPhone, of course.

and Windows 8 failed against iOS and the iPad. Now, it wasn't until the Satya Nadella era that started back in 2014, that Microsoft stopped chasing Apple and instead focused on services and the cloud, all laying that groundwork for the AI boom we're seeing today, guys. This says to me that Microsoft does well when it sticks to its basic foundational knitting. Cloud. That is software, cloud, services, things like that. Don't try to buy Nokia.

Don't try to take on Apple. Don't be a device company. Right. Don't be a device company. You're going to lose to Apple, which is a device company. And that's what Nadella came in and very smartly did. He said, you know, from day one, I'm going to come in. We're going to be a cloud-first company.

And at the time, that sounded kind of boring and not as exciting. But boy, has it paid off nine years later, right? Here we are talking about the most exciting technology in the world. It's coming out of Microsoft. So can Apple then compete as a non-device company in the realms and become more of a software or a, I mean, look, to say, It's not a services company. Oh, it's to miscalculate and misappreciate Apple. But can it, you get my thought.

Yeah, but that's the point. And that's the big question going to next year. I mean, Tim Cook said on the earnings call last week, we're investing a lot of money in this technology. Of course, not going to say exactly what they're working on and what that looks like. And it wouldn't be the first time Apple has come in and unseated incumbents in the area.

But right now they have nothing. There's no sign of what could be improved or what they could do better. If anything, it would be more of a kind of lock into the iPhone. If they could figure something in the generative AI space that just keeps you buying iPhones, that's what they do. That's why the services business is so important to them. Maybe that's part of it.

But it's really hard to see right now what can be done to kind of counteract this. Not only just the revenue opportunity. Again, Microsoft is selling stuff. Open AI. Open AI had their developers conference this week. And, you know, they talked a lot about, Sighton Adele was on stage with them and talked a lot about this partnership. and how anything that benefits open AI,

the more customers open AI gets, the better that is for Microsoft. So they really got this interesting symbiotic relationship going there that Apple doesn't have anything analogous to. Though I do find myself using the, hey Siri. Oh, I shouldn't have said that. Oh, you're going to set it off. Just went.

There she goes. Oh, what happened? Did she react? I'll say, hey Siri, what time did the Jets play the Raiders this weekend? Right. And I find myself using that functionality more and more for even the most basic things. It's some kind of answer.

It maybe keeps me locked into the Apple device. And even though Microsoft seems to have the more lucrative B2B model, there's still a lot to be said for the lock-in-middle all of us have to the iPhone ecosystem. And that is. And maybe, you know, if they do kind of crack this code and figure out a better way to do generative AI, or at least on parity with what we've already seen from Microsoft and others, sure, that's great. A supercharged Siri sounds awesome.

Who wouldn't want to use that on their iPhone? And if it keeps you away from, if you don't want to be in a certain ecosystem and you like the the Apple ecosystem, maybe that's good. But again, we don't know exactly what they're working on. It could happen next year, maybe even later. But I do know what Apple does with Siri. They don't like it giving you the wrong answer. And that's embarrassing for them.

And for such an image-focused company, they're going to want to make sure it's pretty close to perfect before they release it. Alexa gives me the wrong answer a lot. Yeah. I got to tell you, I got Alexa. But you want to talk about selling. They're going to supercharge Alexa next year,

and you can pay Amazon for a kind of chat GPT power. It's not chat GPT. It's a different technology. But, you know, more like chat GPT than what Alexa is, this kind of one-to-one answer thing. And sometimes I stump chat GPT. It says, I can't help you with that. Yeah. Yeah, it just frustrating.

Well, I don't know if you've stumped it or if they don't, you know, if they don't, you want to give me the answer. Do you ever chat GPT yourself? No, I've never done. Try it. I did. It's better. It got me better than Google does. I was kind of impressed.

Oh, that right? It gets you better than Google. No kidding. It was more accurate, yeah. God, I don't want to, I don't know that I want to know that. Yeah. Yeah. Okay.

I'll do it when I'll say. I'll let you know. Yeah, let me know. Yeah. See if I pass. Yeah. Okay. Steve, GPT. That's exactly it. Thanks. Steve Coak, we appreciate it. Finding a successful read is no small feat, especially in the current environment. We'll talk further ahead to the CEO of Realty Income, which is up 6% in a week and fresh off a big acquisition. We'll be right back on Power Lunch. Welcome back. Time for a quick power check. On the positive side, take to interactive climbing 6% today in anticipation of the highly-awated grand, theft auto six. On the negative side, Warner Brothers Discovery plummeting 17 percent. It's below 10 bucks a share after ad revenue fell significantly for the media company. And CEO David

Zaslov states they are undergoing a generational disruption with a streaming service that's losing billions of dollars. That's your power check. All right. Ahead on power lunch. More stocks in the news. Disney earnings, a streaming company as well, due out after the bell. We'll talk to an about what to watch for and Eli Lilly shares moving higher as the company gets approval for a drug to treat obesity. Power Lunch will be right back. Welcome back to Power Lunch. I'm Deer Drobosa and here is your CNBC News update at this hour. House Republicans issued a subpoena this afternoon to President Biden's brother James and his son Hunter. The subpoenas focus on the Biden's family business dealings and mark an escalation in the Republican-led committee's impeachment inquiry into the president.

NBC News has reached out to attorneys for Hunter and James Biden. The Rafa border crossing between Gaza and Egypt closed today for an unspecified security circumstance. State Department officials say they're working with Egypt and Israel to get it reopened. The crossing is the only entry point for aid to Gaza, and it is serving as an evacuation point for seriously injured civilians and foreign nationals. It also closed over the weekend after an Israeli strike on an ambulance that was headed to Rafa. And it was a difficult start to the year for Air Traffic. at least judging by the number of complaints sent to the Transportation Department. New data shows the number of consumer complaints and the department received in the first three

months of the year was nearly double the amount during the same period in 2022. They have stayed high for April and May. Tyler, back over to you. All right, Deirdre, thank you very much. Shares of Disney flat ahead of its fourth quarter and full year 2023 results in just a few hours. It's the first time the company will report earnings after reorganizing its business into three core segments, entertainment, parks, and sports of key interests or whether ESPN will launch its own direct-to-consumer service and numbers from its streaming business after Disney Plus and Hulu

raised prices for a second time this year. And it did so just last month. Joining us now with more, Brett Feldman, who covers U.S. telecommunications, cable, and media at Goldman Sachs. Let's talk a little bit about their streaming business on which they have made a very big bet. How does Disney Plus and Hulu, they've now taken full charge of or will soon. How do they fit together? And what is the pricing sweet spot? Because as Disney Plus has raised prices, they have lost viewers.

Yeah, great question. And you're right. In the coming months, Disney will take full ownership of Hulu. They own two-thirds of it now, but Comcast has told them they intend to exercise their right to sell their one-third stake,

so they're hashing out what that value is going to be. But they are going to end up owning Hulu pretty soon. They're in the process of trying to integrate the product now. The key question we have is, how is it going to make Disney Plus a better product? If you can go to Disney Plus and you can access broader content, including your Hulu content, that's the type of thing that could potentially make people stay more engaged with. Churn is one of the most important metrics in the sector. You pointed out pricing has become

very important. In fact, a key theme that we have seen over the last year from Disney, but also all the media companies, is to focus a little bit less on adding subscribers and a lot more on driving profitability, and they've done that mostly through price increases. And so we'll be looking for evidence as to whether this pricing strategy is helping the bottom line without scaring customers away. I guess in the last hour, to sum up what he said, I think, maybe Kelly, you can correct me, is the idea that maybe Disney has lost its content magic, or at least its content primacy among younger people. Agree, disagree? Well, I think Disney.

Disney would agree that they haven't done as well recently with their major films. And we've run this analysis. If you go look maybe the last 15 films that have come out, particularly those associated with major franchises, they've generally done 20 to 80 percent less revenue at the box office. And we saw with prior installment of those films. And Bob Eager, as he returned to Disney about a year ago, made it clear that improving the creative output is of overwhelming importance.

The challenge is you can't do it. quickly. You know, it can take two to three years to get a movie from an idea into the theaters. We've had a prolonged actors and writer strike to writers are back to work. Actors aren't. And so I do think that's going to be a key focus area for investors is how much visibility can we get from management around when they're going to be able to get these movies back in the theaters and what gives them confidence at the quality of their creativity is going to be back to the Disney standard. Go ahead.

I think that's exactly the question, Brett. And to what extent they're still able to capitalize? on kind of their existing library. To what extent that represents an area of needed investment going forward? Yeah, you know, and there's been some debate around whether movie franchises, things we've had multiple installments of over the years, can still resonate with audiences. I don't think it's a question of whether people are still interested in franchises.

I think what people are increasingly interested in is great entertainment because the stakes are raised. We have so many options now. You don't have to go to a theater to see a high-quality movie anymore. If you think about the last two years, two of the biggest blockbusters have been one top gun, which is part of a franchise, and two, Barbie, which is actually a new narrative around a familiar character. Disney has more familiar characters in their content library than any media company of world. So the ingredients are there. They should be able to do this. The question is, how long is it going to take? What about the theme parks and compare the domestic parks and the overseas ones?

So there's been a lot of concern around the parks, mainly because they've just done so well. We all know coming out of COVID, people had a lot of savings and eager to get out of their home. We almost immediately started to see record profitability in Disney's U.S. parks as soon as we could get out of the house. It's taken a little bit longer to get people back in the international markets, but it seems like they're finally getting to cruising altitude there as well. There were some stories over the summer that maybe people weren't going to Disney World as much as they had. it was unclear whether that was just post-COVID fatigue or weather. But one of their biggest competitors, Universal, reported a record quarter of revenue and a record quarter of profitability already through this earnings season.

And so I think what we can see is that the parks business is still doing great. It could absolutely go through a degree of cyclicality. It's a cyclical business. But I think it's a pretty firm business for them. In fact, they are so confident in the outlook for their parks business that just a few weeks ago, they gathered all the analysts and many investors together at Disney World to outline a 10-year plan where they're going to invest $60 billion in their parks franchise. So we're very eager to see where they're going to employ that capital. How high is your confidence and how high is

the streets confidence in Bob Eiger? Listen, Bob Eiger has a track record unlike almost any executive over the last 20 years. So I think that he came back with a lot of credibility. I think that he has been remarkably honest with investors about the challenges that Disney faces. I think that he's been very clear that they're willing to do things that in the past people thought they wouldn't do. So I think investors feel like we've got the right person there focused on it, but it's a tall task. All right. Brett Feldman, thanks very much for your insights today. We appreciate it. Thanks, that's happening. And tune in for Julia Borson's exclusive interview with Disney CEO Bob Eiger this afternoon, always revealing, always interesting. That's after results at 405 p.m. Eastern.

time on the closing bell overtime. Bob Iger with Julia Borsden. And coming up, Eli Lilly getting key FDA approval for its new obesity drug that paves the way for even wider use of the blockbuster medication. We'll get the key details when Power Lunch returns with the shares at session highs up 2%. Welcome back to Power Lunch shares of Eli Lilly rising after the FDA approved its highly anticipated weight loss drug Zepbound. It is expected to be available in the U.S. by the end of the year. Joining us on the phone with his reaction. is Seamus Fernandez, pharma analyst at Guggenheim Partners. He has a buy rating on Eli Lilly and a $675 price target. Welcome, Seamus. Let me ask a question. Is Zep bound just a different version of or a

wholly different drug than Majaro, which is Eli's Lili's entrance in this field right now? No, it's basically, and thanks for having me, it's basically the same formulation of Eli Lili's Manjaro. What is unique here is just the different name that you have of the product. And that basically allows for the company to track the product much better when it's used for the treatment of obesity. And it also is very helpful in terms of payer negotiations. Is this likely to be the biggest selling drug of all time? We think it has a very, very strong shot of being the the biggest drug of all time, obviously competing very closely with Novo-Nordisks, OZempic, and Wigobi as well. But we think that this category, for sure, will be the largest pharmaceutical market of all time.

And who's going to pay for it and how? Because the list price is $1,000 a month. Some insurers are going to cover it, I assume, but most insurers are probably not going to want to. Correct. Yeah. I mean, I think this is probably the main challenge is gaining reimbursement for the obesity opportunity over time. That being said, we do have some really important data coming this weekend from Novo Nordisk called the Select Study. And that could really prove out that the benefits of this product for patients who have high cardiovascular risk. So this may become more of a vascular drug at the end of the day. It's also used broadly in the diabetes setting as well. And there's a very compelling argument for both managing weight and blood sugar as driving material benefits in a patient population diagnosed with diabetes. And these products have been moving forward in the treatment regimen among physicians for the last decade, honestly.

And now that they've got potent drugs like this, they're looking forward to using them earlier and earlier in the treatment paradigm. So it always makes sense to pay for diabetes drugs for sure. It always makes sense to treat patients with high cardiovascular risk. And then more broadly, if it's just a weight loss drug, you know, for patients who are, you know, trying to lose a little bit of weight or don't want to go to the gym as much, I think that's a little bit of a different dialogue. forward PE is 78. Just to point, just put that out there for one of the very few super growth opportunities that's really left in this market. Seamus, are there still problems with availability and the supply chain and what's driving those? And will this exacerbate them or ameliorate them? I mean, I would argue that the supply chain challenges are going to run for probably quite some time.

Even on a recent conference call, you heard Novo say that from the differential between the demand and supply situation, the demand is so strong that Novo actually sees at least four years ahead of, you know, sort of a supply constrained market. And I believe Lilly would argue, you know, largely the same. So the demand is quite extraordinary, certainly nothing that I've seen in my. 20-year career. And, you know, definitely a very unusual situation and one that has to be managed carefully by both companies to, you know, maintain their strong reputation. All right. Seamus, thanks for joining us today to digest the news.

We appreciate it. My pleasure. Seamus Fernandez. Still ahead. The read on REITS, we will speak to the CEO of Realty Income about demand for commercial properties, rents, and its newest acquisition. Power Lunch is back in two. Welcome back to Power Lunch.

Shares of Realty income are up since they posted earnings after the Bell Monday. They beat on the top and bottom lines. They raised their FFO guidance for the full year. They're up about 4% since that big merger last week, buying Spirit Realty in an all-stock deal valued at $9.3 billion. Dallas-based Spirit has over 2,000 properties. It will be added to Realty's portfolio of over 13,000 buildings. Management says the deal positions it for solid growth while diversifying assets.

And joining us in an exclusive interview with Sumit Roy, C. Sumit, not Sumit, Realty Income, just Realty Income. Sumit, it's great to have you. Welcome. Thank you. Thank you for having me. A lot of familiar names in your portfolio, starting with your company. You've got a lot of dollar trees. Is it the Bellagio as well? I mean, that really runs the gamut. It does. We are primarily a retail-based, you know, net lease business. But we do have a couple of investments in the gaming sector, one of which is the Bellagio transaction. It's a partial interest, circa 21%, that we entered into earlier this year.

And why, so with the spirit acquisition, you say it's highly complementary, what kinds of names are in that portfolio? And why do this as an all-stock deal? It seems somewhat dilutive. Well, the reason why we wanted to do an all-stock deal is twofold. One, we did not want to rely on the public market, especially given the volatility that we are all experiencing with this high-interest rate environment. And the second piece on the capital side was the fact that we could assume all of the debt and be able to generate, you know, north of 2.5% accretion on the AFFO.

With the backdrop that we are experiencing, that was very critical to be able to construct this transaction in a way where there was zero reliance in the public markets to effectuate this growth. And the reason why we believe that the portfolio itself is very complementary, I would say about 70% of the exposure that they have to operators, we have it in our portfolio as well. And the enhanced diversification benefits that we get, the 18 of our top 20 clients, basically we have a reduced exposure to them post this transaction closing, as well as if you look at nine out of the top 10, industries that we are exposed to, we also get diversification benefits there. So on multiple fronts, this particular transaction actually checked the box for us. And it took, you know, a lot of the growth pressure off the table for us in a year where we are going to be incredibly selective, given that the cost of capital has moved as much as it has, but the cap rate environment quite I thought I heard two things almost at once there. One was that you have some overlap in the

in the operators with whom you work, but that you don't have a lot. Untangle that. I would say about 70% of the portfolio, we do have exposure to the same clients, and 30% we don't. But given the level of exposure they had, the pro forma company for us, it allows us to diversify even further. And so for instance... Even though 70% of your clients are the same?

Yes. It is because, but they had much more bite-sized exposure to them. So pro forma, our exposure to somebody like a 7-11, they were in our top three, top four client. That might be number 20th client for them. And so it allows us to diversify further post. So I assume your answer when I ask this question will be that you have a very highly diversified client base. But when I look at a company that has had some recent stumbles like Walgreens, and maybe even closing stores and so forth.

When one of your portfolio lessees stumbles, how does it affect your business? Well, let's talk about Walgreens. We are in very long-term leases with Walgreens. So the assets that they tend to close are assets that they control or assets that have lease expiring. Walgreens is going through a transformation. And obviously through this process, they have the opioid crisis that they have to deal with, et cetera.

They've got new management that's coming in. So that's created a little bit of volatility in their business. But having said that, it is still a very healthy business generating 600, based on the last quarter that they reported, 600 million of free cash flow. So, you know, the risk that we are seeing at Walgreens is not going to translate to that inability to pay rent to companies like ours. It's just they're going through a transformation which hopefully over time will stabilize. Very interesting conversation. We hope to have you back again soon. So meet Roy.

We appreciate it. Thank you. Thank you. Coming up, back to school, a congressman taking a page out of the Rodney Dangerfield playbook in rolling in. in AI courses to better understand the technology. Maybe I can do that. We'll get the story when power lunch return. Welcome back, everybody.

Congress notorious for lacking knowledge on emerging technologies, but one lawmaker is bucking that trend, going back to school to get a better understanding of AI. Our own Emily Wilkins is in Washington with the story. Interesting approach, Emily? Hey, Tyler. Well, yeah, it's 73 years old. Don Byer is not the typical college student.

He prefers a notepad and pen over a laptop. He's already got a full-time job, and he's a top lawmaker on AI policy. Buyer's curiosity about AI led him to take classes on computer science and machine learning at George Mason University. Buyer said the classes have helped him better understand both how some of the technology works and how risky it can be. And I think with every additional course I take, I think I have a better understanding of how the actual coding works. what it means to have big data sets, what it means to look for these linkages, and also perhaps what it means to have unintended consequences. Buyer is one of the leaders of the new Democrats coalition AI Working Group,

which is digging into how AI and social media companies are preparing to handle deep fake images and videos around the 2024 election. Buyer said it was important for Congress to try to get ahead of some of the potential worst case scenarios. What we're trying to do is not replicate our failures on social media, where for 20 plus years, we've not regulated it at all. Social media organizations are already working on how to handle AI-generated images and videos. META announced a new policy today, requiring any political advertisers to disclose if they used AI software to depict people or events.

And Tyler, we'll have to see exactly how much of a role this does play in the upcoming election. It almost feels as though a seminar or a course ought to be required for people in Congress. For a lot of lawmakers, they have done a couple classes. A lot of them are bringing in experts, but buyers really, I think, go in the extra mile here, going to class and going back to school. Or for journalists, like yours truly. Indeed. I think he was the owner of a bunch of Volvo dealerships in North Virginia.

Did he have been a new congressman? No, he would not have been. But that's a good question. Thanks for watching, everybody. Closing Bell starts right now. Thank you.