Power Lunch - Dow slides 700 points 8/1/24

Episode Date: August 1, 2024

Stocks are selling off, with the Dow heading for its worst day of the year. Some fresh economic data stoked fears over a possible recession, and the notion that the Fed could be too late to start cutting interest rates. We’ll cover the markets from all angles. 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 Mathis. The stocks are sliding after yesterday's post-Fed gains and ahead of some bigger earnings reports due out after the bell today. This morning's week economic data is raising concerns about the economy that could be contributing to the sell-off today with the Dow down 600 points, a little bit off session lows, the S&P down 1.5%. The NASDAQ down 2 and a 3rd. And the yield on the 10-year note falling below 4% for the first time since February. Rick Santelli will be along shortly with more on that. While gold breaks out, out to an all-time high going above $2,500 an ounce. The CEO of Alamos Gold will join us. And we are also looking ahead to the major tech earnings that are due out after the bell. Tony Sakhanagi will be here to talk about Apple. We'll also get the trade on Amazon and Intel along the way. Meantime, let's dive further into today's week economic data. Jobless claims soaring to 249,000 in the last week. That's the highest level since a year ago, August 2023. We can believe it's all. August already? It's hard to believe. While the ISM Manufacturing Index fell to 46.8, suggesting a contraction in manufacturing activity, all this sending stocks and bond yields sharply lower.

Let's make sense of it all with Dory Wiley, Commerce Street Holding CEO. Dory, welcome. Good to have you with us. This would tend to confirm what I sort of heard as a subtext in what the Fed was saying yesterday. Number one was that they are much more focused today than they have been over the past. 18 months on the labor market, on the employment side of their mandate. Do you agree? I do agree. And if you look at the language that Powell used, it was very cautious in what he said. He didn't say he looked at it as weakening. He looked at it as normalizing. Now the market, if you want to say the sell-off today is economic uncertainty, which I'm not sure I want to say that. But if the market would take that as, well, we have a weakening of the labor market.

The Fed didn't go there yet. I thought that was interesting. Yeah, very interesting. And yet today you see that the jobless claims numbers were higher. We'll get the jobs number tomorrow, I guess. Isn't that right? We get it tomorrow. It's early, but we get it.

We get it tomorrow. So that will give us further. It adds to the pile of data, doesn't it, that Dory, the Fed will be using to determine whether or not to cut rates come September. And I assume you would think that they are probably. probably going to do that. I do. I think he gave us that clear message yesterday about cutting rates in September. I think the real question is, or is he going to have more rate cuts? So now if you look, the market, which has always been at odds with the Fed for the last several years,

for some reason, doesn't believe what they say. He's downplayed future rate cuts, but yet the market did what? It bet on future rate cuts. Now there's a higher probability of three rate cuts by the end of the year than two. and there's a divergence from what the message was with Powell. Dory, you mentioned that you weren't quite buying economic weakness as kind of behind today's sell-off. What do you think it is then? It could be a combination, geopolitical, economic, sell-up.

You're talking about the sector rotation. You're talking, this aren't small numbers coming out of big tech, right? They're billions and billions of dollars. So when it starts to move the price, then it starts to cause things. And so some of this, I actually think is an interesting opportunity to buy. I think the market is not so sold on a weakened economy. The market wants its drug of choice, which is low rates, right? So you see everyone kind of moving.

The theory is we go to small caps, and it's been a nice play. But I think you've got to be real careful in small caps because over 41% of marks aren't profitable. And if you look back at big tech, something like a Navidia, this big sell-off on a company that has 50% margin, over 100% return on equity, this could be a good buying point. You happen to like, or you think in terms of drug of choice, that two sectors might benefit here. That would be regional banks, banks as well as payment companies. You list two stocks, Huntington Banks, Huntington Bank shares, and PayPal. Explain your argument for them. Part of its industry, right?

Banks have been very cheap for a good while, and wrongly, the market has thought, well, they can't make money unless they have lower rates. So this rate cut coming up and maybe two or three. according to the market, will be very good for banks, very good for their stocks, and they had a very good July. Huntington's right there. It's got a good handle on its margin. It has low commercial real estate exposure. It has one of two, only two banks in its peer group that actually grew deposits in the last quarter, and it's in a nice position for growth in markets like Texas and South Carolina. And PayPal? Now, PayPal has been kind of a stepchild as of late, It's actually cheap. It's a value stock.

And they've been beating numbers and they look really good. And I love the 10 times EBIT offer PayPal. So consumers are still spending money. And you get rate cuts. They're liable to keep spending. And PayPal numbers look really good. And so I think it's a value play here. Good place to be.

You're a third person pounding the drum on them. I'm starting to take notice. I'm watching the CEO. What do they have up their sleeve on that front? Dory, quickly on big tech, then, as you said, there's capital shifting around here. Do people need to go out of their way to avoid exposure to these names? Well, I think you've got to be careful who you're into. We've got Apple coming out later and Amazon, but they both still look very expensive to me.

So, you know, you're going to like, you mean some of the big tech is cheap? Yeah, I still think Navidia looks pretty good. You do. Microsoft, I'm watching pretty close. but I want to wait on buying into the dip on Apple and Amazon. I think I'd need them to see come down a little bit more. All right. We'll see if that's prophetic based on what happens this afternoon or in the weeks to come.

Dori, good to have you on today. Thanks for your time. Thank you. Dory, Wiley. As stocks still off today, let's get the trades on some of those big tech earnings we were just discussing. David Traynor is with us. He's the CEO of New Constructs. And David, eager to hear your take.

We'll start with meta, which already reported, they beat those second quarter estimates had better than expected forecast. The stock is up 4% in a difficult tape. So what's your trade on it now? We know, we think it's a hold right now. Meta is a super profitable company. We're really impressed with how Mark Zuckerberg has led the company post the Metaverse thing. I think capital allocation is strong. They generated 60 billion in free cash flow the last few years. But the valuation is rich. We think that most of the good news is priced in. So we're not seeing a lot of upside potential in meta at this point. All right, so just sticking with it. Well, let's move on to another tech stock. Amazon set to report its earnings after the bell today.

And let's expect the e-commerce giant and so much more to show revenue growth in its second quarter report. Shares, though, down today, but up more than 20 percent so far this year. Your trade, sir, on Amazon. Tyler, we're a sell on this one. Look, Amazon is a lot less profitable than people think. I mentioned Facebook's generated $60 billion in free cash flow over the last five years. Amazon has burned or lost $125 billion in free cash flow over the last five years. Most people think it's a really profitable business. It's a not. It's very balance sheet intensive.

So those margins are misleading because the capital side of the business is really just hemorrhaging cash at this point. That's why we've seen debt up around $180 billion. And we see shares outstanding growing. So it's not quite as strong a business. The valuation is still expensive as well. So that's a sell for us. Before we dive into Intel, would you also stay away from Apple? Which reports tonight? Apple's got a better business model. They're free cash flow, super positive, high returns on capital. Apple's closer to meta than it is Amazon in our opinion. All right. So that's a bright spot because I know Intel is maybe one you're not so keen on. And they do report. We don't want to overlook it. They just reportedly have these plans to cut thousands of jobs to finance a recovery. The shares still down about 4% today. 40% this year, David. Yeah, it's been a tough time for Intel. I mean, the business model is really

falling out of bed. I mean, a 0% return on invested capital when they used to be in the high teens. Free cash flow has been negative. And unfortunately, a lot of a turnaround is already priced in. So the market's giving Intel credit for getting back into business or back to form. But Kelly, you know, we think that that's probably good enough for now. I don't really see. a lot of upside in the stock, given that so much of a turnaround is already priced in. This was one of the great American companies, and it has been and also ran now through several cycles here. Is it a survivor? It's a good question, Tyler. I mean, you think with the Chips Act and all the capital

flowing into domestic semiconductor production, that would be a huge, almost windfall for Intel. And that's part of why I think that a turnaround is priced in. So I think it's going to stick around, but it's going to probably be sort of, you know, making the chips that aren't so exciting, not Nvidia-type chips, but chips that, you know, are running the toasters and the refrigerators and the cars, and maybe not the supercomputers, still useful, but not a sexy stock. Why is the market down 657 points on the Dow right now? What changed from yesterday? You know, Tyler, my crystal ball's in the shop, and so my day-to-day predictions are a little off. You know, look, who knows?

I mean, this has been a wild market for a couple of years, and you guys understand how we focus on fundamentals, and we're looking at cash flows, we're looking at valuations, and we have seen so many stocks traded entirely disconnected levels in terms of valuation and cash flows, both on the expensive and on the cheap side. There's a lot of great stocks out there that we still find. there's a lot that are head scratchers in terms of how expensive they are, the absolute ridiculous future cash flow expectations baked into them. And look, Tyler, in a market where Roaring Kitty has a real audience, I'm not going to pretend

to try to predict what's going to happen from day to day if people are willing to pay attention to something like that. All right, David, thanks so much for your insights today. David, Traynor, we appreciate it. And still to come, gold trading around an all-time high with the price sitting just under $2,500, $2483. Investors waiting on a Fed rate cut to send prices even higher. We're going to speak to the CEO of Alamos Gold when we return. Welcome back to Power Lunch, everybody. Stocks are sliding sharply today. Look at the Dow down 1 and 2 thirds percent, even more in percentage terms for the S&P off 97 points,

or 1 and 3 quarters percent. And the granddaddy of them all, the NASDAQ, down 2 and 2 thirds percent, 472 points at 17,000 change. Economic data out this morning not helping. That's also having a big impact on bond yields, sending the 10-year back below 4% for the first time since February. Rick Santelli in Chicago, where he's following the action for us. Rick. You know, Tyler, I know that many are focusing on the tenure, but let's actually start out with the two-year, and you'll see why in a minute.

Now, as you look at an intradate two-year, you could see that at 8.30 and 10 o'clock, we kind of fall off Niagara Falls there. Those were data points. So whether it was rising claims, weak PMI, rising prices paid component. It all seemed to work against the markets today, pushing yields lower. But here's the fascinating thing.

We closed the two-year yesterday after its yields dropped during the press conference and Fed meeting down at 4.26%. We closed last year at 4.25. So basically yesterday's closed was unchanged, and we sliced up and down through it until the data hit. So right now, as we sit at 417 and change, We're now down seven basis points on the year, on a two year, as you see on that chart.

Now, let's switch gears a minute to the 10 year. There's the tenure. You can see also the same notions at 8.30 and 10 o'clock drops. And yes, we now have traded under 4%, as Tyler said, first time in February. But what I find fascinating is we settled a tenure at 388 last year. So we're down seven on the twos. We're up nine on tens. And even though that is in a huge difference, 16 basis points,

It really does underscore what I've been saying is the most popular trade of the year. I have been a bit wrong thinking that long-term rates would have a hard time getting under 4%. But I was definitely not wrong on the notion that the best way to play that is on a steepening or a less inverted yield curve trade, which has been very popular. Now, as you look at that two-year chart of 2's 10 spread, you can see that whether it was July of 22 or recently over several touches. This is basically the least inverted area it's been. And the reason it's so important is

is because long-dated treasury yields are the sell side of that spread, and many traders globally continue to say that the weak date is definitely a big deal pushing yields down, along with the Fed that's definitely going to be easing. But in the grand scheme of things, don't underestimate debt, deficit, supply, and auctions because they will rear their head.

way they're doing it now is through the spread. We might see more active participation of stubborn long rates as time moves on closer to the election. And finally, the Bank of Japan's going to meet, okay? And look at, we just recently, like right now have breached 150 in the dollar yen. To think that five and a half six weeks ago, this trade was just shy at 162. It now has a 149 handle. And also, it was very recently, with that spike, it underscored 38 years of one of the biggest shorts of all time in a currency. And that's the yen. Don't underestimate how much more horsepower this trade could get. As all these carry trades, especially in Asia, unwind, and based on what the B of J does tomorrow, they could unwind very quickly.

Back to you. Let me ask a quick follow-up question on the de-inverting of the yield curve. In layman's terms, is it deinverting because the two year is falling faster than the 10 year or what? Well, that would normally be true for most of the move, Tyler. But if you look for a week to date right now, each maturity is down about the same. They're down about 21 basis points on the week on twos, about 21 basis points on the week on tens. The 2's 10s spread isn't much different right now than it was last Friday. The driving force, though, is that the 10-year with a slowing economy should be dropping even faster than it is, and it's stubbornly not doing that, and that's the dynamic traders are locking into.

All right, Rick Santelli, thanks very much. Thanks for the explanation. And now to gold, which hit a record high earlier, sparked by those rising tensions in the Middle East, and increasing prospects of the Fed lowering rates in September. Gold's on pace for its fifth straight positive day. It's giving producers like Alamos a boost. The company also, reporting strong second quarter results after the bell yesterday shares up fractionally. Here first on CNBC is John McCluskey, president and CEO of Alamo Gold. John, welcome to you. Thank you very much. What would you say is driving the price of gold higher now?

Well, it's all year long, it's been central bank buying largely driven out of Asia. I think now that you've got heightened tensions in the Middle East, I think all of that is playing a role. I also think as more and more news comes out about the U.S. debt and deficit and so forth, as we're into the late stage of the election cycle, there's more discussion about that. And I think that's giving particularly American investors pause and giving some consideration to gold and gold equities. Why are central banks buying gold? I think it was driven.

I think the catalyst was really the Russian invasion. of the Ukraine and the resulting move by the West to effectively seize Russian assets. And when that was sort of picked up in the world, there was this sense that the West could effectively use economic coercion to essentially dictate to other countries, how they're supposed behave and they didn't like that. And so they started selling U.S. dollars and buying gold. I think it was a big part of it. Jenny, you know, I'm curious as we sort of talk about the price of gold breaking. A lot of people are surprised. I myself was when I remember kind of bouncing along in the 2010s

and not doing much. I mean, it really has outperformed the S&P since the turn of the century. What do you think would have to happen to drive that continued outperformance, though? especially, let's say, somehow the U.S. gets its arms around the debt and deficit dynamics. Is it slowing growth? Is it lower real interest rates? What's the most important catalyst? You know, it's interesting that you point this out, that you've looked at gold over the long term, because, you know, you'll probably agree that most people look at commodity trading over the very short term, and they look at gold as a commodity, and that's the way it was certainly characterized through the latter. part of the 20th century and into the 2010s. And yet, we saw a lot of economic upheaval in the

world, the big crash in 2008 and what has happened in the aftermath of that. And lately, it's been growing debt right around the world, particularly driven by very strong U.S. debt accumulation. And, you know, when you consider all of that, people started to think about gold in more traditional terms. And in a more traditional sense, gold is money. You know, it is the fundamental money. It's been money since humans, you know, figured out how to trade with each other. So, you know, I think that there is a very worrying theme at play here. And that is, you know, the politicians starting to talk.

about Washington starting to talk about, you know, the U.S. debt approaching 35 trillion dollars and growing by a trillion dollars every hundred days or so. These are astronomical numbers. And I think these are the kind of things that get people to look at gold. All right, John, thank you very much. Fascinating insights there from Alamos Gold CEO, John McCluskey. Thank you again. All right, further ahead. Restaurant stocks, largely in the red today. shake shack bucking that trend. It is up today, as you see, by 16, almost 17%. Huge profit rebound there, shakes, fries, burgers. But this comes as many names in the group are struggling. We're going to talk to the CEO about the state of the restaurant space when power lunch returns.

The White House announcing a prisoner swap with Russia, freeing Wall Street Journal reporter Evan Gerskovich and Paul Whalen, the ex-Marine, among others. Here's Amon Javvers with the details. Amen. Tyler, that's right. As part of the historic deal, the Russian government released high-profile Americans held in captivity there, including Wall Street Journal reporter Evan Gerskevik, who had been in a Russian prison for more than a year. Also included in the trade were a number of Russians who have been arrested for various crimes and held in U.S. prisons. Among that group was a wealthy young Russian entrepreneur named Vladislav Kliushan, who was incarcerated in a federal prison for his role in one of the most damaging insider trading schemes in Wall Street history.

Now I can report to you that a new CNBC documentary that we are releasing today explores the spectacular rise and fall of Cleution and his business empire. You can watch the full documentary, which is called Putin's Trader, now on CNBC.com backslash Putin's Trader or by scanning the QR code that you can see on your screen right there in the lower right-hand corner. We're also going to release Tyler a six-part podcast on this story, which is called The Crimes of Putin's Trader. That will be available on August 15th and given today's news. Tyler, I can tell you, we are about to head back to the podcasting studio to record episode seven of that. I can well mention. Today's information about Vladislav Kluyen, who was traded this morning as part of this epic deal. Correct me if I'm wrong here, but we've never really seen the kind of multi-party, I believe it's seven country deals like the one that has brought about, this exchange of prisoners.

Everyone from Germany to Norway to Turkey getting involved here, it was really three-dimensional chess, it would seem. Yeah, and pulling this together was really diplomatic, high stakes negotiations behind the scenes. I can tell you that we first noticed something was amiss earlier this week when we were putting the final touches on our documentary about Vladislav Kliushin. We knew that Kliushin was one of the people who would likely be involved in a trade for Evan Gerskv, and the other Americans. We never knew when that would happen. And as we were fact-checking the documentary earlier this week, Tyler, I went to the U.S. federal prisoner database to just fact-check that Cleution was still in the prison where we knew he was. And Cleutian's name came up empty. And suddenly he was not listed in the federal prison database anymore. As of earlier this week,

I spoke to his lawyer who said that he had heard that Cleution had been moved, and the lawyer had at that point no information on where Kliushan had gone, just that he had left the custody of the U.S. Bureau of President. What a fascinating coincidence that you started that digging and found that, oops, he's gone. So we call him Putin's traitor. Why? Because some of the money he was making was getting funneled back to Putin somehow? Well, it's a fascinating story, Tyler. I don't want to give away all the spoilers, but I can tell you that his partner in crime was a guy named Ivan Ermikov. Irma Kov is still at large, presumably still in Moscow, and Irmikov was a former GRU Russian government intelligence agent and a hacker who had been involved in Russian government

intelligence operations against the United States and the West for years. Irmikov then goes into the private sector, goes to work for the oligarch, Vladislav Kliushin, and becomes a hacker for hire, hitting Wall Street databases and stealing information. All of that is done, we are told by sources who are in the documentary, with the imprimatur of Vladimir Putin himself. Putin sets up a system in which he wants his key intelligence players to attack Wall Street, attack Western financial institutions for their own profit, in their own pocket, to buy themselves yachts and private jets and all the toys that billionaires buy themselves because it destabilizes Western economies. It's an intentional strategy, we are told,

by the Putin government to disrupt Western economies. So go ahead and enrich yourself. We want you to enrich yourself by disrupting the global financial system, among other things. Fascinating stuff. Yeah, that's absolutely it. Tyler, if you're an investor in Tesla, if you're an investor in Roku, if you bought Skechers' stock during this period of time, you were victimized by this Russian hacking gang who were trading ahead of you knowing tomorrow's news tonight about what was about to happen in their earnings releases.

So this affects investors in American markets in a very real dollars and cents way. Fascinating. We'll look forward to the documentary. Putin's traitor. Did I get the name right? Putin's traitor. All right. It's live now.

Thanks very much. Appreciate it. And with the markets at fresh session lows, let's get to Julia Borson for the CNBC News Update. Julia? Kelly, the Senate is voting right now on a tax bill that would expand the child tax credit and provide tax breaks for businesses.

It looks unlikely that Democrats have enough Republican support to pass the measure, which already advanced through the Republican majority House. Majority Leader Chuck Schumer forced the vote, which is the last in the Senate, before it breaks for recess until September 9th. The families of hostages held by Hamas

marched today in Tel Aviv to mark 300 days of captivity. They are demanding a ceasefire deal that secures their loved ones release. It comes as tensions rise in the Middle East following the assassination of Hamas's political chief in Iran, as well as the killing of the group's military chief in July.

Hollywood video game performers hit the picket line at the Warner Brothers studio lot today for the first time since declaring a strike against a number of video game producers. They accuse the studios of failing to protect them from the unregulated use of AI in the industry. The video game companies, however, say they offered wage increases as well as AI protections during negotiations. Kelly, back over to you. All right, Julia, thank you very much.

Julia Borsden, still to come, Apple earnings on deck and analysts are expecting to see a decrease in iPhone sales. For now, the real issue is whether they can give guidance holding up amid a worse than expected sales slowdown. We'll discuss that next with Apple shares down. 2% and the Dow down 700. Stay with us. The NASDAQ is the worst performer of the major averages today. The chip stocks, as you can see, they're getting hit particularly hard, although it does follow yesterday's gains, Nvidia's down 8% right now to sub 108. And Apple and Amazon are both reporting after the bell, hoping to show investors increase

spending on AI will actually pay off and drive sales. And after Microsoft and Alphabet's results last week disappointed, Steve Kovac is digging into the key themes to watch when Apple reports for our tech check today. Steve, looks like you're already on site, getting ready. Yep, yep, I'm at Apple HQ today, Kelly and Cupertino. But look, today in this earnings print, we're looking for signs. iPhone sales slump is coming to an end ahead of Apple's big artificial intelligence launch this fall. Overall sales have been down five out of the last six quarters, largely on weak iPhone demand in important markets like the United States and, of course, China.

Now, for today's report, the streets expecting that iPhone sales slump to sort of bottom-me, down about 2% from the ergo quarter. That's an improvement from the 10% drop we saw in the March quarter. But what you really should be watching out for here is guidance from Apple that the iPhone is about to return to growth again. Many on the street are predicting a big upgrade cycle driven by the new AI features coming later this year. And today may be the first indication we get from Apple itself whether or not that story is going to come true. And that's because the September quarter is expected to include at least the weeks' worth or so of the next generation of iPhone sales. Now, there's some implications here, too. The AI rollout in other countries,

especially countries like China, it's going to be a bit complicated. The government there has to approve AI models before they can launch, and it's unclear how Apple is going to tackle that one. One more thing to look at here is capital expenditures. That was, of course, a huge issue with other tech giants in this turning season. But we learned this week, Apple will likely didn't need to spend boatloads of cash to create its own AI system. They disclosed this week. They trained those on Google chips instead. So we'll see how well that worked when the AI system finally launches on Apple devices, guys.

Steve, I think you qualify for California residency. Steve, stick around as we continue here. Our next guest agrees that Apple's upcoming earnings will be all about the iPhone 16. And whether its AI features can fuel a big upgrade cycle that could like last beyond 2025. For more, let's bring in our friend, Tony Saganagi, senior U.S. IT hardware analyst at Bernstein. Tony, welcome. Good to see you. It would seem to me, and I made this point earlier this week, that maybe the quarter we're going to hear about tonight and even the quarter that ends in September are kind of preludes or appetizer portions for the quarter that really matters,

which will be the one in October when this new AI-enabled iPhone will hit the market. Am I right on that? Good afternoon, Tyler. I think that was well said. So I think investors are looking forward. This has not been a good iPhone cycle. Whether Apple beats or misses a little bit this quarter on iPhone expectations doesn't really matter. We know it was not a strong cycle and iPhone will likely be down for the full fiscal year. I think what's more important is just the anticipation of what will come with the next cycle. This is the first time Apple is. reporting since they had the worldwide developers conference and introduced Apple intelligence. And investors will be holding their breath on every word about what kind of functionality Apple will ultimately bring and potentially how big the cycle will be. I don't think we're going to learn a lot from guidance. Historically, the iPhone only ships about seven days in September, and guidance is largely about Apple destocking all. iPhones and restocking new iPhones, and historically there's been no correlation with their

guidance for next quarter and how strong the cycle is. So I think investors will be listening more for qualitative things about what might be coming in terms of Apple intelligence features going forward and when that cycle and how big can really kick in. I don't know that it matters one way or another. The stock is the stock and the stock has been doing pretty well in the most recent quarter. But right now, today, do you call Apple a growth stock or not? I'd say Apple is a quality compounder. So we think Apple's normalized revenue growth rate is around 5%. We think margins are flat to up and then buyback shares. So EPS over time can grow about 10% per year. I think one of the good things about Apple is it does.

have this huge install base, 2 billion devices, about a billion unique customers. And so it does have a consumer-like characteristic, very high return on capital. So I would view it more as a quality compounder rather than an outright growth stock. Interesting, interesting. And I guess a lot of people, Tony, are saying, nope, it's time. You know, this is broadly going to be called the AI sell-off, sell the mag seven. It's the pivot into the Russell 2000 small caps. I mean, if that plays out and takes capital,

away from big cap tech, does it have long-term implications for their performance? Well, Kelly, I think that's a great question. It's really the question, DeJure, is, you know, is there too much AI hype? And ultimately, can we see a pullback in all things AI-related? Apple is a little bit different. So one of the concerns about the Mag 7 more broadly is just the tremendous amount of capital expenditure that's going into AI equipment and influence. infrastructure. Apple's not really doing that. They're using third-party data centers. They're going to use OpenAI as a partner. And Apple's going to be a conduit to provide AI to its customer base, but that AI is going to be run externally, not on Apple servers or not much of it on Apple servers. And so Apple is

not stepping up its CAP-X. So the fundamental concern is there's so much CAP-X, is there going to be enough revenue. Apple doesn't really have that question surrounding it. I think its question is really, is the AI good enough to cause people to upgrade at a higher rate and therefore revenues will go up over the next couple of years. Whereas more broadly, I think the question surrounding, you know, large cap and mega cap tech is we made these huge investments in AI. Are we going to get a payback? Right. Exactly. So, Steve, let me turn to you and ask. There are bright spots. I guess the question is, is Apple just sort of, when you cut through all of it, is Apple basically an iPhone company and that that is what really matters here?

You look at services. The revenues are up there by double digits. You look at iPad for a change. Those revenues are higher on some new models that they brought out. So there are these bright spots within the portfolio of businesses. But do they matter when so much of the business is really, with telephone. Well, yes and no, Tyler, because the services business is real.

I would call it an iPhone and services business, but again, that's all anchored in the iPhone itself. So you need the hardware to run those services, for example. That's why you hear Apple talk so much about how big their install bases, how many active installed devices they have out there because that is them kind of signaling, hey, this is all the opportunities we have to get people to subscribe to different services. They even count that for, you know, things in the app store. It's not just Apple's own services.

That counts for, you know, Disney Plus or anything you might subscribe to within that app store ecosystem. So largely, yes, just the iPhone company. It's still more than 50% of the revenues, though that share has kind of come down as a percentage of total revenue. But, yeah, it's definitely hinged on the iPhone, Tyler. All right. Steve, thank you very much. And Tony, always great to see you. Tony Sackenagi.

Appreciate it. Hi, request. Check out share. of Winkstop, which are lowered despite monster Q2 results this week, including a 70% jump and net income. We'll talk to the CEO about that next. And as we head to break, the Dow with today's decline is turning lower on the week. It's down 738 as we sit pretty much at session lows. And as you can see, the lows have just been kind of picking up steam throughout the day. We've got more on the other side of this break. Welcome back. Here's a bright spot, a really bright spot in the market. Today, Shake Shack shares are surging 16%.

Why? They reported better than expected sales, citing roper. Sighting roper. robust demand for burgers and chicken sandwiches. They also shared some positive results, Wingstop, I should say also shared some positive results this week with firms like Raymond James seeing upside amid soaring sales. Overall, are we still seeing some signs of a consumer crunch in the broader space, as we saw with declines last week? Let's talk more about the state of the restaurant business with our very own Kate Rogers, who is joined by the CEO of Wingstop, Michael Skipworth. Kate? Kelly, thanks so much and hi, Michael. Great to see you. Hey, Kate.

So Wingstop really is seeing phenomenal growth in this challenging market. You had same store sales up 28.7% this quarter. Tell us what the strategy for Wingstop is in a sea of value offerings right now to keep customers coming back in. Kate, you said it. We set a record quarter in Q2 that we reported yesterday. Same store sells up almost 29%. And that being driven primarily by transaction growth. We believe we're operated in a category of one.

We have a ton of opportunity in front of us just over the last couple years. We've grown our average unit volume by half a million dollars to achieve a previously set target of $2 million, which has allowed us to look at what's in front of us and the growth ahead of us. And we set a new target for our average unit volume of $3 million just because of the amount of runway we believe we have and the strategies we're executing against. And talk to us about income cohorts. How are they faring at Wingstop? Are you seeing any trade down or pullback, particularly from low-income consumers in terms of their visit occasions per quarter? Yeah, as you might expect, with the 28% comp, we actually saw a very different result than the rest of the industry.

We saw growth across all income cohorts, particularly that lower-income cohort. but the fastest growing income cohort within our business is that $50,000 to $100,000 a year guests. And we see those guests are coming into the brand as we continue to bring in a record pace of new guests. But what we really like and what we're excited about with these new guests are they're coming back to our brand sooner and they're moving up the frequency curve faster. So for the first time in my 10 years at Wingstop, we're actually starting to see an uptick in our frequency. And that's happening against what you described as a pretty challenging macro backroom. Michael, if I might just jump in here, Kate, indulge me. Two things, I want to be clear that I'm understanding something.

You say unit volume of north of two million. Does that mean two million annual sales? Is that what that is? That's right, Tyler. Two million of annual sales. And we have a new target that we've set our sides on, and increasing that to three million per restaurant. And question number two is a quickie.

I saw in one of the Kairns that I'm sure Kate submitted that more than 60% of your sales are described as digital. What does that mean? Does that mean that most of your customers are using their phones, placing an order remotely and then coming in and picking it up or what? That's right. That's order ahead. Almost 70% of ourselves are coming through digitally. And Tyler, what that's done for us is it's allowed us to amass a database of over 45 million users strong. And we've invested in that data to enrich it. That's allowing us to lean into something we're really excited about. And that's our recent launch of our own tech platform, My Wingstop, that's going to enable us to lean into hyper-personalization.

And we think it's going to continue to drive top-line cells and impact frequency over time. And Michael, it's Kate again. I'm curious, we just talked about the consumer. Obviously, they are flocking to Wingstop. But when you talk to your franchisees, what is their top concern right now in this environment? Is this sustainable? Their top concern right now, Kate, is actually they want more growth. They want to open more wing stops.

And so we were excited to be able to update our total unit opportunity in the U.S. It was previously 4,000. We now think we can open over 6,000 wing stops in the U.S. That's three times our footprint we have today. And so our franchisees, they're really just focused on they want more great, growth and they want to grow with wingstop. So we're pretty excited about that. And you just mentioned, obviously, that updated store target footprint. That's more than triple what you currently have with wingstop. How do you plan to drive that kind of growth at scale

and make sure it's profitable for owners? Is there any concern about potentially rather cannibalizing business if there are too many wing stops, for example, in one location? Yeah, we think we have a ton of white space in front of us, a lot of runway. The original wingstop that opened just 30 years ago, to give you an example, is doing about $4 million in sales, and it is growing transactions 30 years later, so continuing to grow. So we haven't found a point of maturity.

Dallas Fort Worth is our most mature market. When we went public, about 10 years ago, we had 81 restaurants in Dallas. Fast forward to today, it's closer to 160, and we see a lot of opportunity to open more restaurants. And the important thing about us, continuing to grow total sales per restaurant is our brand partners are making a lot of money. They can open a Wing Stop on average for a half a million dollars, and they're getting a payback

on that return in less than two years. And finally, we talk a lot about value. Tell our viewers how you are assessing pricing, and if the price is right for the products that you have right now, will there be a value offer, for example, a $5 grab bag like you're seeing at some of these fast food competitors in the future at Wingstop? Is it necessary? Yeah, I think it's another one of the elements of our story that makes us unique is we don't have to get into those value wars. We've been very disciplined around pricing over the past couple of years, and that's paying dividends today. We're actually measuring record levels in value and quality scores with guests.

And I think you're seeing guests flock to wingstop and continue to drive sales, which are pretty excited about. Well, Michael, we have to leave it there. Thank you so much for joining us. Really appreciate it. Thanks for having me. Kate, Michael, thanks for making me hungry. That's great. All right, as we head to, I was just looking up on wind stops near me. There's a few in New Jersey. We're going to go there after the show. I'm going to Belleville. As we had to break, let's get a check on the markets. The Dow is down now. 700 points or they're about 696 right now.

NASDAQ down nearly 3% as you see there. And the S&P down almost 2%. Power launch will be right back on a very busy market debt. While broader markets are down sharply, five of the 11 S&P sectors are actually higher today. Utilities, the brightest of those spots. People don't love hearing about, well, Pippa loves hearing about that. 1.4%. You know, I mean because they're typically seen as a defensive. You don't want any utilities to be up. It's a bad, you know, sign for the Dow, that sort of thing. But there are more exciting these days. Yeah, they are. We've had some pretty good earnings. It does feel like it's a little bit of, you know, flight to safety. Let's go back to the solid, the solid. And low rates as well. I mean, always a help. But as you said, up about 1.4%. Then there is also something else going on that's specific for utilities. We had this massive PJM capacity price auction.

Now, it sounds a little wonky, but this is really important. The prices rose 800% year over year. And so what that means is if you have competitive generation in PJM, which is the largest interconnection queue in the U.S., it's about 25%. You now all of a sudden have so much more money coming in for your capacity. Everyone's talking about this. Yes, and so this is a constellation of Vistra, a public service enterprise, and then a talent. They are the four key players here that are really going to benefit.

You see their stocks are up a lot this week. Now, it's important to kind of temper expectations because it's only for one year. This is for 2025 to 2026. But it means that you have a kind of, for lack of a better word, a cushion for starting in June of 2025. Because every single day, you are now getting close to $270 per megawatt day. that previously you were getting less than 34. So that is a big boost, and that's why we've seen those specific companies driving. You're getting an 8x or more, 9x.

Yeah, exactly, up 833%. And a lot of that is because you can only bid into the capacity market if you are baseload power. So that takes out solar and wind. And so it's only, you know, fossil fuels and then nuclear. And there you see the stocks, 90%, 50%, 30% on that trio that you mentioned. Exactly. And they have competitive power generation. And so, you know, when.

And power prices rise, they see benefits. But ultimately for consumers, this is not good because they're going to be the ones footing the bill for this higher capacity price. All right, I have to leave it there. Pippa, thanks very much. Pippa Stevens. Very interesting stuff. Let's get a broader look at how that situates things with utilities up.

A couple of the other rate-sensitive sectors as well. But broadly speaking, the Dow is under pressure. The NASDAQ is under pressure. And the small caps are the worst performer today, Ty. Yeah, you look there, a 700-point decline after yesterday is very favorable day. but the NASDAQ down 3%. As you see right there, 500 points on the NASDAQ. Thanks everybody for watching, Power Lunch.

Glad you spent some time with us.