Power Lunch - Countdown To The Fed, Banking On AI 12/12/23

Episode Date: December 12, 2023

We’re just 24 hours away from the Fed’s decision on interest rates. No change is expected. But with another tame inflation reading this morning, will the Fed hint when rates could start to come down? We’ll explore.Plus, AI is transforming everything we do, including banking. We’ll speak to an analyst who is looking at the regional banks, and breaking them out into AI leaders or laggards. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

All right, welcome to Power Lunch, everybody, alongside Morgan Brennan. Welcome Morgan. I'm Tyler Matheson. Coming up, we are 24 hours away from the Fed's decision on interest rates. No change in rates expected. But with another tame inflation reading this morning, a relatively so, will the Fed hint at when rates could start to come down? Plus, AI is transforming everything, including banking. We are going to talk to an analyst who is looking at the regional banks and breaking them into AI leaders and laggers. Names you need to know coming up.

But first, let's get a check on the markets with the major averages trading today at multi-year highs, highest levels for the Dow, S&P, and NASDAQ since 2022, led by financials, materials, and health care sectors for the S&P. The maker of Fortnite, though, doing a victory dance this morning. Epic Games winning a lawsuit against Google, which could have broad ramifications for the App Store model. Major legal decision there. We've got more on that coming up. All right. And shares of Oracle are sharply low. after releasing results the company missed on revenue and its guidance indicates cloud growth could be showing slowing excuse me more on that coming up in three stock launch but we start today with the markets

one day ahead of the big Fed meeting wall street digesting another round of inflation data this morning and looking for signs as to what the Fed will do this time tomorrow with rates two guests joining us now both think rates are likely headed lower but not because of inflation joining us to talk all things market, economy, and Fed. Let's bring in Brent Shuddy, Chief Investment Officer with Northwestern Mutual Management, and Kamal Sri Kumar, president of Shri Kumar Global Strategy. Brent Shudy, let me start with you. You think the Fed is probably going to stay where it is. You think rates are going to come down next year. It says in the, said in the intro, why, if it's not lowering inflation? Because I think you're likely to see a recession. And so to me,

inflation is not dead. The Fed is not going to raise early because they don't want to repeat 66 to 82. And I know there was low inflation data this morning, but if you look at the NFIB survey, for example, 34% of small business owners planned to raise prices in the next three months. That is the highest level besides the recent period going back into the 1980 time period. You look compensation plans are still high. The labor market is too tight, which the Fed wants to make sure that wages don't perpetuate inflation and drag it back higher. And I think that means they stick around too long, and they keep that liquidity turnic on the U.S. economy, which eventually leads to recession in the beginning half of 2024. Can we go back to that previous screen that we just

had on there for Brent? Because I wanted to get some clarification there on whether you foresee a soft landing or a recession. You see a recession coming, right? I do see a recession. I see a soft recession. I see one that's not as deep as what people fear. I think it's likely to be soft because the consumer is still in pretty good shape, even after you deteriorate a little bit on the consumer balance sheet. And I also see a Fed that can pivot because inflation will be burned out then. And I think they can pivot and hopefully help kind of cushion the blow as you push into the back half of the year. Shree, where are you on this sort of soft landing v. recession argument?

Tyler, two or three things. One, I think it is going to be a harder landing than what we just heard. And the reason is that we have had substantial increase in the monetary expansion as as well as zero interest rates being kept for too long a period of time. And from that, when you tighten, you're going to have a pretty serious response from the market. That's the first point. Second, interest rates will come down, come down sharply in 2024, but I don't think it has anything to do with inflation. It has to do with the fact that as the interest rates were increased by five and a half percentage points over the last 17 months, something is going to break in the system. My top candidates are regional banks. We had the first crisis. I was looking

for a credit event for the last year. The first of them happened in March. I think you may have a second or third event also happening within the next six months. And that will cause the Fed to cut interest rates as it always had. Even in the month of March, when we had three banks failing, recall that the Fed switched over from quantitative tightening to quantitative easing overnight. And if that could do that, if you have a major problem with a medium-sized bank coming up, or if there is a crisis or the commercial real estate area, expect the Fed to react even more strongly, and that's what brings interest rates down. That's what ends quantitative tightening and puts you in the quantitative easing mode. So the reasons causing them are very different

from talking about inflation. And the reason, Tyler, is that the last mile, as we keep talking about, is indeed a very difficult one. I have been a student of monetary history for 50 years and I haven't seen coming down with a soft landing. Okay. Brent, you're both you're both basically saying that you anticipate recessions next year, maybe one steeper than the other. Brent, it raises the question, are markets prepared for that possible outcome in 2024? As an investor, how do you position yourself for it? No, I don't think markets are prepared completely for that. I think large-cap stocks, for example, have been the hiding place of many investors who now

don't believe there's going to be recession. I think the recession will actually cause some consternation and some declines there. I think the good news is that more economically sensitive parts of the economy, economy, small and mid-cap asset classes, have discounted some sort of recession. That does not mean they won't falter during the recession, but I think longer-term investors should be contemplating positioning more towards those, especially in the event of recession, because they trade at 12 or 13 times earnings that have already been marked down some. And so that's where I think there's some good news, plus the reality, I think we both agree that bonds offer value at current yields because we do

think that a recession is likely, and that will be the impetus for rates to push lower in the coming quarters. Shri, is that how you see it? Is fixed income the place to be right now? And if so, where specifically? I've been saying since we were at the 10-year yield was at 5.02, the peak in October, Morgan, that it is a great time to enter in and you're going to get a capital gain from it. And even today at 4.2 after the rally that we have had, I think fixed income, long-dated fixed income looks very good. Short term, the three-month, six-month threshold, are a great place for you to part your cash rather than be in a bank deposit. So you have a twin situation here. On the one hand, fixed income is very good for investors.

Equities face clearly a headwind. Second, on the other hand, in terms of banks which are looking for deposits and paying a very low interest rate relative to treasury bills, they are still at risk. So that's why I think anything risky for the banks is going to be very positive for treasury yields and for capital gains. I don't see equities gaining much from this area at all. Okay. Kamal Shri Kumar and Brent Shudy. Thanks for joining us and kicking off the hour with us.

Thank you, Morgan. Thank you. Bond yields are flat today following the CPI data and ahead of the Fed decision tomorrow. Rick Santelli is in Chicago. He's watching the markets. He's in the pits. He's got more. Yes, Morgan, I'm always watching the markets.

I was particularly interested in the year-over-year core in today's CPI. At 4%, second month in a row, well off at 6.6% historic high. As you look at the chart, there's no arguing it's come down. But the issue is, if you open the chart up to a five-year chart, two things should jump out at you. Today's 4% is the lowest in 30 months, May of 21. But that also means it's been 30 months since this metric was under 4%. So it is still running on the warm side. And we saw on the monthly numbers that Core was up a 10th hotter, as was headline.

Now, if you look at a 30-year bond chart, you'll notice at 8.30 Eastern rates shot up on the warmer CPI. And you'll also notice at 1 Eastern rates moved down because we had a much better 30-year bond auction today. Then we did the last time we had one because the last one was a disaster. This auction was the best of breed. Threes weren't very well received. Tens was below average. But 30s, 30s was slightly above average. And I do think auctions are going to continue to be a feature because I think debt and issuance will continue to be features.

And if you open that 30-year chart up for one week, you should notice that were about 10 basis points off our intraday cycle low test. And that was at 520. We're currently trading at 530. Tyler, back to you. Rick, I want to ask you the question I should have asked you an hour ago, and it didn't come into my head in time. The month-over-month number went, what, let's see, it went up a little bit on CPI,

but the year-over-year number came down. Explain that to me. Is that because fuel prices came down, or is that because a high number a year ago fell off the measuring period? You know, it's actually a little bit of both. Year over year is definitely affected by 12 months ago. But we do see that headline was up a tent.

It should have been unchanged. So the year-over-year headline did have a warmer aspect to it. And that is the only metric, the only metric that was less than last month. So you're absolutely correct. But the other issue is that we're at 3% in this metric in June of this year. So even though it was a bit cooler, it's been even cooler than it was today. If I was looking at all these numbers today, Tyler, I wouldn't be nervous about inflation, but it certainly isn't better than the report in November.

Yeah, it's not like spike the ball in the end zone great, right? Yeah. Exactly. And I think that, you know, once again, thank you, Steve Leesman. He liked me calling it kind of a Roar Shack because almost every guess that we've had on today kind of like today's number. And I'm not saying that inflation's looking super hot, but it really hasn't changed much to the downside. And if your target's 2%, I'm sorry, 4% doesn't equal 2%, not even with new math.

And he also complimented you for being a tough grader, which is a very nice thing. Rick, thanks a lot, man. Rick Santelli. All right, hope for a landmark deal to reduce fossil fuel use has hit a roadblock at the United Nations Climate Summit in Dubai. Let's get to Die in Dubai. Hi, Dai. Hi, Ty. Yeah, look, it's just after 11 p.m. here at Copp and we're now being told there will not be a new draft of the climate deal tonight. The last version released late Monday, totally dropped language to phase down or phase out fossil fuels. It just said countries should take action that could include reducing their production and consumption of fossil fuels. This is a major blow to those who expected ambitious action to slow global warming. Reactions flooded in immediately. Representatives from governments, policies, groups, NGOs, one called the text a nightmare of weak proposals and internal contradictions. Former Vice President Al Gore posted on X that this cop is on the verge of complete failure

and that the deal reads as if OPEC dictated it word for word. He went on to say it is deeply offensive to all who have taken part in this process. Now, late this afternoon, there was a protest here on the cop grounds. We have not seen much of that at all in the past few weeks, even with 70,000 in attendance, but the frustration is clearly raw here tonight. The COP 28 presidency, which is led by Sultan Al-Jabir, the CEO of the state-owned oil company, Adna, called the draft a huge step forward to that. One analyst responded, I'm not sure which direction that step would be in. We have not heard from Jabair at all today.

Tyler. If I'm remembering correctly, next year, COP is in Azerbaijan, which is also a heavily petrol-influenced state. Is there any controversy over that? Yeah, well, expect that to start soon. The focus, of course, is still here on this cop. The next cop is not, in some minds, as important as this one. This one was all about something called the global stock take, which was a report card on the Paris Agreement that's required every five years to see if the world is getting close to that 1.5 degree goal of warming after industrial levels. And that report card,

was an epic fail. This cop was supposed to be a reaction and action to that global stock take. So really, it's all about this one, the next one, not in anyone's sights right now. All right, Diana, thank you very much. Diana Oleg, reporting. Well, coming up, an epic loss for Google. A San Francisco jury finding it maintained monopoly power through anti-competitive conduct. We're going to break down the results in Tech Check next. And do regionals need to bank on AI? why one analyst says those stocks will lose market share if they don't adapt to the new technology. Welcome back to Power Lunch, the maker of Fortnite securing a flawless victory over Google and court, and the decision could have big implications, not just for Google, but also for Apple.

That's the topic of today's tech check. Let's bring in Dear Jrabosa and Steve Kovac now. For more, Dee, let's kick it off with you. So this ruling essentially, it challenges the idea of Google and Apple as gatekeepers, and that in itself is a threat. Luther Lowe has been one of the most vocal, critics of big tech in recent years and a voice for what he calls the little tech group. This year he joined by Combinator as had a public policy.

And I spoke to him today in his first broadcast interview in this position. He pointed out that the epic ruling came from a jury. So they understood the complicated material and they were able to make a decision. He says that could have key implications for the other antitrust cases that Google is facing. Have a lesson. We're learning is that sort of the emperor has no clothes when you actually get into these documents and the plaintiffs or government are able to unpack the arguments to kind of a reasonable set of humans.

And they see how much these large firms have been kind of egregiously putting the thumb on the scale. Now, he also believes that Apple could be next. Here's why. The other interesting thing about both of the Google cases that happened this year is that they inadvertently put a lot of spotlight on Apple's bad behavior. And I think it just, I think the wall. are sort of closing in on Apple because the epic case was all about how, you know, Google's self-dealing and kind of treatment of developers with regard to the Google Play Store,

that complaint has been primarily mounted against Apple. And I just think that if you come up with a saw for Google, it's hard to not then turn to Apple and say, okay, well, what are you guys going to do? So Luther was involved in another tech battle that we talked about just yesterday, the blue versus Green Bubble, Android versus Apple, messaging battle. He says that Little Tech is on the march and the Epic ruling is another win for that camp. And we've seen more sort of cracks in these walled gardens just over the last year or so. So I think the question that this epic trial and ruling brings up is how much more is there to go? Who's next?

How is this likely to affect Google and Apple? I mean, I can see how big it is for Epic. How big, how epic is it for Google and Apple? Yeah. Epic represents a group of so-called little tech. They're not that little, but it's billions of dollars in market cap versus trillions of dollars in market cap. That's why we call them little. But Epic is fighting for something that many others have fought for as well, including Spotify, match, Yelp, and that is for the gates to come down a little bit.

So that's why I say that this really sort of undermines the argument that Apple and Google have these app stores or ecosystem. that are supposed to be secure and keep users safe, but it also, the little tech would argue, punishes them by charging them higher fees or taking a cut of their revenue or profitability. So if Epic falls, you could think that others are going to use Epic as for their own arguments to get lower fees that they have to pay to Apple and Google. And that's where the effect could be snowballing a bit for Google and Apple. Right. To me, what's interesting about this is Epic has challenged Apple too.

the results have been more mixed. In that particular case, a jury was not involved. They both waived their rights so that it was just a judge moving forward with the decision. With this, it was unanimous

with a San Francisco jury. And I just wonder how much that sets the stage for future challenges as well. There's part of it. Google is going to appeal. So this is by far not a done deal. Yeah, we're very early.

This is to take months or years to finally shake out. But you mentioned the Apple case. Supreme Court is going to decide next month whether or not to take up that case. Both sides are appealing that, by the way. Epic wants to win the counts that it lost.

Apple wants to win the, I think it was one or two accounts that they lost. So that's all going to be litigated too, potentially in the Supreme Court. If that happens, we'll find out next summer how that plays in. I also want to point out there's a little bit of more difference between these two cases than just jury or just the judge of siding. It's also this idea that Google has painted itself as this open platform. You can sideload apps, meaning you can download apps. directly from the internet. If you want to, that's true. You can use other app stores. For example, Samsung has its own app store. That's also true. But what kind of goes unsaid from Google is

they cut these special deals with these manufacturers to make Google Play, the app store for Google devices, the default for app distribution on those devices. On an Android. So effectively turns it into just like an Apple device. So, you know, the contract you might have or implicit contract you might have when you buy an Apple device, you know what you're buying into when you buy into an Android ecosystem and they tell you it's open, you can use any app service you want. That's technically true, but in practice, not as true as Google makes it sound. So that was part of the crack in the case that Google had just now. All right. Thank you very much. Steve. Deiter, thank you very much for being with us. Appreciate it. All right, further ahead,

playtime over for the markets. Cuts continue across multiple sectors. That would be jobs, cuts. Hasbro, laying off nearly 20 percent of its workers, will discuss that name and other key movers. in three-stock lunch later this hour. Welcome back to power lunch. Oil down 4% today. Let's bring in markets and energy reporter Pippa Stevens. Now, Pippa. So this is because of the latest CPI report from this morning

with fears that the efforts to curb inflation will ultimately cut demand for crude and petroleum products. Dennis Kistler at BOK Financial also told me there's been heavy fund selling thanks to technical weakness and also this growing sense in the market that the cuts from OPEC and its allies, those voluntary production cuts, just really lack any sense of credibility. And so none of these headwinds are new, but I think what's telling here is the lack of anything positive.

And so with all of these headwinds mounting over the past seven or so weeks, why would you enter this market with no bullish catalyst on the horizon? However, for consumers, it is good news in that gasoline futures are now below two bucks on pace to close below $2 for the first time in two years. The national average is $3.14. We could even get below $3 by the end of the year. So it is some good news for consumers there. Yeah, it's pretty incredible to see a sixth handle on WTI crude futures right now, to your point.

We're going to switch from oil to so-called clean energy. That trade was a big loser in 2023, unless you were short. Where do we stand now? Yeah, so there were heavy losses really across the board this year, and those who bet against clean energy are in the green. So looking at the components in the Invesco Wilder Hill Clean Energy ETF, ticker PBW, and excluding Tesla, short investors, have made six and a half, billion dollars this year, according to data from S3 partners. That means gains of 36 and a half

percent, while the fund itself is down 30 percent. Now, drilling down on individual names, EVMaker Fisker is the most heavily shortened name in the fund at 48 percent of its float, according to S3. Sunpower, Sinova, blank charging, and STEM round out the top five. Rising rates have hit the industry hard. Not only does it make capital-intensive projects more expensive, it also makes future earnings less attractive. And this has caused investors to pull money from the space at a record pace year-to-date, $188 million from the Investco Solar Fund and $1.06 billion from the I-Share's global clean energy fund. That's the largest outflows since each fund's inception back in 2008.

So a lot of heavy selling there, no love for clean energy. How much is rising interest rates affected these stocks? Well, really everything comes down to rising interest rates. And you can see that specifically in, for example, the residential. Solar names. They're hugely capital intensive. Exactly. They're capital intensive. And then also you're betting on their future earnings. And when rates are higher, those look less attractive. So it's a double whammy that are getting hit on both sides. All right. Pippa, thanks very much. Pippa Stevens.

All right, well, let's get over to Christina Parsnevless for a CNBC News update. Christina. Thank you, Morgan. Well, the United Nations General Assembly is expected to vote as soon as today to demand a ceasefire in Gaza. The resolution would be non-binding, but would represent global support for ending the war that started in early October following Hamas's surprise attack on Israel. The vote comes, as President Biden said today, Israel is losing international support because of indiscriminate bombing. This past summer was the warmest the Arctic had on record, according to a report card released today by the National Oceanic and Atmospheric Administration called NOAA. Noah also said temperatures are rising four times as fast in the Arctic Circle than anywhere else in the world. Fanatics is giving us a look at what could have been if Tom Brady pursued a baseball career over football. company is randomly dispersing 162 Tom Brady rookie cards.

Half of them signed in the top's 2023 Bowman draft set. Brady is featured in a Montreal Expos jersey because the team selected him in the 18th round of the 1995 MLB draft. Morgan, I probably would have seen him had he gone and been part of that team because as a child, I went to many Expos games given them from Montreal. Well, now you've got to get your hands on one of these cards, which I'm sure is going to be highly collectible. It has a bigger significance to me, but I have no luck, so I'm not even going to bother. Christina, thank you. Thanks. As we had to break, let's get a quick power check on the positive side, sent team. The managed care company offering better than expected guidance, boosting its

stock buyback plan. Those shares are up about 3% right now. On the negative side, Oracle, sliding. Revenue coming up short in three of its operating segments. That is your power check. Those shares are down big. More than 12%. We'll be right back. All right, some news out of Netflix. A little insight into who's watching what and how much Ted Sarandos is publishing a new engagement report. Julia Borsden has the news. Julia. Tyler, that's right. Netflix co-CEO, Ted Serendos, just unveiling the company's first ever report of viewer engagement. Some key headlines here. Netflix's success is spread out over 60% of titles released in the first half the year reached the top 10 viewed list, and 45% of viewing

was from licensed titles, 55% from Netflix originals. The company also saying that the diversity of their hits illustrates Netflix's ability to break out new stories, stars, and franchises. Ted Sarando's saying that the lack of transparency around data had an unintended consequence before of creating mistrust, saying now, quote, this is probably more information than you need, I think it creates a better environment for the guilds, for us, for the producers, for creators, and for the press. Now, this decision to reveal how many hours were viewed of every title watched for over 50,000 hours comes after the writers and actors guilds secured compensation bonuses based on streaming success. Just to point out a couple of the most watched titles in the first

half of the year, the top most watched title, The Night Agent, 812 million hours watched, Ginny and Georgia had 665 million hours watched, The Glory, 622 million, and Wednesday coming in fourth place with 508 million hours watched. So this is massive engagement, massive numbers for stock, which is up 46% in the past year on subscriber growth, thanks in part to the company's crackdown on password sharing. Tyler? I'm a little bit surprised, I so.

I'm not surprised at all that I don't know any of the titles you just put up there, because I am that uncool and that unwith it. But I was a little surprised when you said that I think it was, 55% of the viewing was of Netflix originals, 45% of non-netflix product. I'm surprised that they are as, I guess, potent a force in new production, as that metric would suggest. Well, yes, but you also have to remember that it's not just U.S. language content.

If you look at those top four most popular shows, one of them was a Korean language show. So I think that you have to see that what they've done with shows like Squid Game is they've shown that they can create originals in other countries and then have those shows travel and be watched by viewers around the world. And I actually think it's interesting. You know, Netflix has been investing a huge amount in original content, series, movies, et cetera,

but they do still rely about half of their viewership is on that licensed content. So, I mean, this has been a big priority for them, Tyler, they're not wanting to be reliant on that license content. And I think it's probably a win for them that over half is just, you know, just over half is now their originals. It does seem like investors are grappling with these new metrics. I mean, the stock's only up fractionally right now as you break all of this down, Julia. What does it do? Does it have a direct impact on the cost of content for Netflix to have greater disclosure like this?

You know, I don't know if it has a direct impact on the cost of content, But I think it might impact the way that analysts model their expectations for Netflix. I think the fact that this is not a company that's reliant on just a couple of big hits in every country. This is a company that has really dispersed success, I think is a positive thing for Netflix. And if you look at what has really driven the stock's growth this year, it's the success of the crackdown on password sharing. And the fact that they know that they could charge more, they could get people who were freeloaders before to start paying. and people would keep watching. When you see numbers like these hundreds of millions of hours watch,

it really explains why people are willing to keep paying if they had, or to start paying if they'd been getting it for free or to pay more of Netflix raises prices because they do have that incredibly intense engagement. Just those numbers are just massive. Yeah, value proposition. We're going to start looking for some of those analyst reports now that we have these metrics. Julia Borson, thank you. Still ahead, cashing in on AI.

banks are using cutting-edge technology to expand their business models and bringing even bigger bucks. We're going to discuss when Power Lynch returns. Welcome back, everybody, Generative AI generating opportunity in the labor market with job posting climbing 6,000, 6,000 percent this year. Kate Rooney has more. Kate? That's right. So workers want to get in on the buzz around chat, GPT, and generative AI. There's been a surge in interest in AI-related jobs. It's according to indeed searches that include AI, we're up 20 full. The CEO tells me there's not nearly enough jobs, though, available to keep up with that demand. So there's about a 500% increase in the number of jobs that

mention generative AI. There's about a 6,000% increase in the demand for job seekers for these jobs. But there still is, I think, a mismatch the other way in that the total amount of demand for AI talent far outstrips the number of AI professionals. It is still a small subset of overall jobs searches. It's less than 1% at this point. Indeed, also pointing out a surprising resilience this year in that labor market, despite recession predictions. And then the Fed's tightening, even in tech where we've seen waves of layoffs and steep valuation declines, workers have largely been able to find open positions. Certain areas, though, not holding up as well. Software development job postings, down 51% information design, down 44% mathematics, down 40%. These are also sectors that boomed during the pandemic. Some of that is mean reversion here, and these happen to also be the areas, Indeed, says, are the most at risk for AI disruption. They do say the drop is more about valuations and corporate belt tightening, not necessarily the imminent threat of AI.

And then, guys, the Bay Area, where I'm sitting right now, it's way underperforming. Job postings are down 30% compared to a national average of 16%. Indeed, says it's likely due to about half of the jobs listed here having a remote option. Back to you. That's really interesting. I do want to go back to this, though, where we are seeing the bigger job postings, or I guess drop in job postings that aren't AI-related, how easy is it for those prospective employees to be able to sort of switch gears and apply the skills they already have to some of these more AI, generative AI-focused openings? Or is there going to be re-skilling involved? Yeah, you would think software development, mathematics, those are things that go hand in hand with generative AI.

and it is sort of a broad term, right? If you can interact with generative AI, if you can find a way to use it and really become proficient at chat GPT, you're likely going to find those opportunities. Those skilled workers, those talents that you have are likely transferable.

And then you're also seeing in tech, a lot of layoffs, but those people are, for the most part, able to find other jobs elsewhere. And so you're not seeing it really show up in the numbers. People may be going through layoffs, but they're able to find another option out there. Interesting mismatch.

I know he mentioned AI. The other thing is a mismatch in remote work. Indeed, pointed out this surge in people searching for remote work. There are not nearly enough remote jobs out there. So you're also seeing the impact of return to the office out there. Employers are not as eager to list those jobs that might be remote. Key point. Kate Rooney, thanks for joining us.

Thanks, guys. Big Tech isn't the only industry that's reaping the benefits of AI. U.S. banks also starting to take advantage of the tech in a much bigger way, so much so that our next guest says AI is destined to turn the banking business model. as we know, quote, on its head. But still, he points to one branch of the sector that's dragged its feet on AI adoption and says it's at risk, great risk,

of falling behind in the digital age of banking. For more, let's bring in Stephen Alexopoulos. Stephen, where are we seeing the adoption happen quickly within the sector and where, to use the T's we just teed you up with, where is it most at risk? Where is the adoption not happening fast? Yep.

Hi, Morgan. So before you even start a conversation on AI, you have to start a conversation on data and do, you know, banks sit on a treasure trove of data. But the question is, do you have clean data or dirty data, right? Do you have data that's reliable, usable? Because you could go out and put state-of-the-art AI solutions on your dirty data, and it's going to do nothing. So that's where you need to look. And, you know, we just published a lengthy report today. Most of the regional banks are way behind even on having data ready for AI. Is that typical of the smaller banks, the regional banks, when you see these moments of major

tech adoption? Or is this an unusual circumstance given the fact that, and this is particularly true for the regionals, we've just come through this aggressive Fed tightening hiking cycle that we know has roiled the industry broadly? Yep. So it's a good question. I've covered the banks for almost 24 years. And for that entire time, people have been saying, oh, with this new technology, the smaller banks will not be able to spend enough, so they're going to fall behind. I have heard that for years, and I've challenged it. Five years ago, I said in the digital age of banking, regional banks are going to pull ahead because they're effectively combining high tech and high touch, right?

That's been my view up until now. What the banks, smaller banks use is what we call a fast follower approach. They let the large banks spend a lot of money, whatever works. The vendors eventually supply that to the small guys. they catch up. That will not work with AI. It is moving at a blistering pace. And whereas some of the more sophisticated banks have been working on cleaning their data for years now, the smaller guides are still basically using that fast follower approach. And they're falling behind. They're already behind. How do you measure who's naughty and who's nice on this metric? How do you know who's doing well?

Yeah, well, that's a good question, Tyler. And it's not, you know, there's all sort of of benchmarks out there, even though we're talking about AI, you have to use RI. You have to talk to these companies. We've talked to for almost every bank we cover. They're CIOs, their CTOs. And most of them are fairly transparent. Like, hey, we're behind in our journey. And if it's a bank that's undergone an acquisition the last two years, it's been worried about an integration, right? We want these two banks that come together. They're even more behind. So it's actually the old-fashioned way of aggregating information. So who's, so let's name some names. And I guess, and I guess just as importantly, is there an investment thesis right now around these names? Would you buy or sell based on what

we're talking about? Yeah. So even though I'm suggesting that most of the regional banks are very way behind in the AI age, right? The two that are leading in our view in terms of having clean data and a great AI strategy are Colin Frost and Live Oak Bank. What are they have in common? They're mission-driven banks, and they're planning early. How are we going to use AI? You ready for this? Not to take-out costs.

They'll have cost-take-out. How are we going to improve our customers' lives? That's how they're approaching this. Most of my banks right now, because if you look at the revenue environment, it's pretty rough. So what are most banks guiding the investors to expect? We're going to cut expenses next year. At the worst possible time, they're behind their AI strategy, they're behind their data

strategy and they're cutting expenses. These banks are investing in their business. And I believe what's going to happen is you'll have a small subset of leaders start to emerge, right? Really accelerate the customer experience. They're taking costs out. Their revenue is improving. Their valuation multiples improve. And what will ultimately happen? I think we're going to see a consolidation wave in the industry that we've never seen before. Interesting. I love when you said, What are they doing that they have in common? That is they're thinking about ways AI can make the customer experience better. Give me an example.

Give me an example of how, just for me, how my life is going to be better because of AI. Very simple. Okay. I've been advocating for the industry. Look, what's financial literacy? 40% of the U.S. Banks should be advocates for their customers. They should be helping them.

Pay off loans early. Get a good rate. What are we going to do to make your credit score better? You haven't seen that. You see sky high overdraft fees. You have not seen banks being advocates for their customers. When you look at Colin Frost, it's the highest client satisfaction bank in the United States today. Why?

They care about their customers. That's job one. And ironically, when you find banks that care about their customers, oh, they have good revenue growth. They have good earnings. They end up bleeding on client experience. What you have today is not only your banks behind, they're going to worsen the client experience because they're not going to invest in the client experience because they're not going to invests and the technology that's going to take it to the next level.

So the bottom line there is care about your customer more than you care about your fees, your overdraft fees and so on. But the irony, yes, care about your customers more and everything will take care of itself. You're seeing the exact opposite right now. Stephen, that was fascinating. Appreciate it. Stephen, Alexopoulos. We appreciate it.

Good to see you guys. Good. Shares of Zillow, hire on an upgrade at JMP securities, citing falling mortgage rates and pent-up, pent-up housing demand. We'll trade the shares ahead in three-stock lunch after a quick break. All right, time for today's three-stock lunch, where we take a look at three big movers of the day. Here with our trades, Victoria Green, founding partner and chief investment officer with G-squared private wealth. Up first, Victoria, we've got Hasbro.

Toymaker laying off more than a thousand workers as weak toy sales continue this holiday season. Shares are down more than 3% today. Your trade, Victoria, on Hasbro. All right. It's a little controversial here, but it's a buy for me. I think all this bad news is priced in at this point. They're at like a six and a half PE. It's been taken down from 75.

Got a lot of supports here around 42 in those October lows. To me, the stock, this was seen as a proactive move, not a reactive move. They're trying to get back to better operating margins. Newish CEO in 2023, refocusing on higher margin things, their core franchises, such as Transformers and Magic the Gathering and Dungeons of Dragons. They have opportunity and momentum if they can just get some of this bad news behind in which I think at this point is ripped the band-aid off for D-staff and look to help operating margins. It's a good thing. Okay. So from Toys to Tech, up next, Oracle, those shares

are down more than 10% after missing estimates on light cloud revenue. Victoria, how do you trade this one? Okay. Light being it only grew 50%, not 57%, which what the street wanted. So let's put that in context. It wasn't a horrible quarter, and it was more supply or supply driven than demand Their backlog is now bigger than their revenue, their annual revenue. It's huge. They just need to get some more AI chips in. It's a buy for me. What Larry Ellison said on the call, he said, you know, the demand was over the moon on the data centers. Their partnership with Microsoft is great. They have a wonderful suite. And so I see potential in the stock. And I'm a little bit of a dip buyer here because I think they're going to get more of an AI boost on the road as this backlog gets a little bit easier.

All right. And finally, let's go to Zillow getting an upgrade from one of my wife's favorite pastimes. It's just to Zillow everything. She's just Zillows at all. She's Zillow you, Victoria. Upgrade from outperform to JMP securities, citing, building pent-up demand. Shares are up more than 3% today. Your trade on Zillow. No, it's a sell for me. Sell the RIP here. I don't see it. I mean, I love playing on Zwillow, too. You walk the dog, you go around and check out houses around you. It's fantastic. But the problem is that market is shifting. Technology is going to change You have that NAR verdict, that $1.8 billion verdicts against them, has still got to work through the courts.

But that's probably going to change commissions and how some of this real estate industry is being done. Over 70% of their revenue comes for residential real estate. And the NAR owns most of the MLS listing. So if that gets taken apart, how is Willow going to get all of this lovely data that we can search through? So I see a fundamental shift happening in there. And also, rates might come down,

but they're not coming down to that 3% that people are still locked in. So unless you have to move, a lot of people are going to hang on to their old 2019, 2020 mortgages. 7% still not attracted for most. I can't tell you the number of conversations that began. That house was sold in 2016 for 1.7 million. Now it's going for $3.8 million. That's the way my house is.

Victoria, thank you. I'll look you up on Zwillow. Little insights there. Well, baseball star Otani just signed a record $700 million contract. So why is he only slated to? make $2 million this upcoming season. We're going to explain that on the other side of this break when power lunch returns. We've only got two and a half minutes left in the show. I'm going to read fast and a bunch more stories you need to know about. Ford cutting planned production

for its all electric F-150 trucks in half for 2024. As EV adoption has been slower than expected, it previously announced plans to postpone or cancel up to $12 billion in upcoming EV investments. This is really a trend that is moving across the entire automobile industry. It's slower. than expected. It's moving across the automobile industry. Affordability is a part of it. Also, hybrids, very, very popular. And let's not forget that when we talk about all these investments that these automakers were making, they did just ink this very big deal with their workers. So that's probably factoring into the calculus as well. All right. Well, there are now more mortgage-free homes across America than at any other time in history. That's according to the latest

census data. Nearly 40% of folks own their homes outright as of 2022. This is the golden handcuffs thing, It's not just folks that are sitting in homes, not moving, not releasing inventory into the market because they have low mortgage rates, but because they have no mortgage rates. They've assembled all this cash. They've paid down their mortgages. Yeah. Good for that. All right. A new study found that patients taking Eli Lilly's weight loss drug, Zepbound,

regained about half the weight they shed after stopping that treatment. Lilly recommends patients remain on the weekly injectable if they want to maintain their weight loss. This has been a true side effect, I think, with others as well, some of the other branded versions of these weight loss drugs. You gain it back if you go off. This has been the concern with health insurers. You've got high costs involved with long-term coverage of pricey drugs. And this is a market opportunity. This is what, like, Weight Watchers, WW, a number of startups as well, are focused on is how do you provide an off-ramp for these drugs that's going to help to maintain the weight loss.

And finally, we're learning more about Shohei Otani's record contract with the L.A. Dodgers deal worth $700 million, but it's nearly totally deferred money. Otani's going to get only $2 million a year. for the 10 years of the contract lifespan is playing time. Then he'll get $68 million a year for 10 years with no interest at all. It's a very interesting structure. But I'm sure Shohei is going to take that $2 million, and he's going to probably make 20 or 30 or $40 million in endorsements. It seems like everybody's a winner here.

Everybody's a winner. The Dodgers get to save money on their deal. Thanks for watching, Power Lunch. Closing bell starts right now, and I'll see you on Closing Bell overtime at 4.