Power Lunch - Earnings Anxiety, and Sticky Inflation 1/25/23

Episode Date: January 25, 2023

Stocks are sinking today, as earnings results weigh on markets. Microsoft is dragging down tech, while Boeing is weighing on the Dow. We’ll get you ready for Tesla’s earnings on deck. Plus, we’ve seen some signs of inflation starting to slow. But maybe not fast enough for a lot of consumers. We’ll discuss the stickiness of higher prices, and if they’re here to stay. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hello everyone and welcome to Power Lunch. I'm Tyler Matheson along with Kelly Evans coming up. Stocks sinking as earnings weigh on the markets, Microsoft dragging down tech, Boeing weighing on the Dow following its report and we'll get you ready for Tesla's report tonight. Plus other big worry spots for markets? Well, it's inflation in particular. We've seen signs it's starting to slow, but maybe not fast enough for a lot of consumers. We'll discuss the stickiness of higher prices. But first we'll get a check on the market. Speaking of sticky, stocks have staged quite a turnaround. The Dow is down more than 400 points at the lows. It's only down 75 right now. Let's go to Dom Chu. Well, Dom Chu hasn't been on television for about three minutes straight.

He's going through withdrawal. And I was following Kelly through the bowels of our studio to get from Studio 8 over here, Tyler. So anyway, as Tyler and Kelly point out, this is, it's still read across the board, but this is a massive turnaround intradate, at least for right now. And Microsoft, a huge part of the story, is still down three quarters of one percent. But as you can see on the chart down below, we've been steadily moving higher the entire session right now. So even despite a mixed earnings report where the outlook, especially for cloud, might show signs of a little bit of a slowdown. It's still very, it's still growing quickly, but a slower growth in those high levels is still allowing Microsoft to climb off those session lows. Now, the cloud computing industries and focus, given that outlook for the Azure cloud unit over at Microsoft, if you look at other very cloud heavy names, we're talking names like Amazon because it is the big.

cloud player out there. Also, Alphabet, the parent company of Google, a big player in cloud as well. Amazon's down one half of 1%. Alphabet's down 3%. But we've been seeing some at least slight movements off the session lows towards at least maybe the highs in some point. Even Datadog and other software cloud type services providers are also part of that story as well. So Tyler Kelly, it's something to watch as we head towards the closing bell, whether or not this bid can hold to that last hour of trade. Absolutely. We also got results from Boeing this morning, disappointing the street with that loss. Sales also missing expectations, but the stock right now, slightly into positive territory,

another one of these turnarounds. It's still up more than 40% in the past three months. Let's turn to Phil LeBow, the busiest or one of the very many busy men in business news. Phil, you spoke to Boeing CEO. What was the big takeaway from that interview? Go away from Q4 and the earnings miss. Look at what they're saying about 2023. And Dave Calhoun was fairly optimistic about what they are seeing.

First of all, strong plane demand out there. There's no shortage of airlines looking to order. The order book is growing. At the same time, you've got them working on reaffirming their delivery guidance. They've done that. They did that today. And look, on the end of the year, it's a possibility that might be able to increase the production rate. Nobody's saying that at this point.

But it is improving. That's because the supply chain, it is still in a challenging state, not just for Boeing, but for everybody in the aviation. industry. Here's Dave Calhoun talking about it this morning. Oh, actually, I'm told we don't have that information. Now, let me paraphrase what Dave had to say. Essentially, he said that everybody is in the same boat. It is getting better, and they're also getting better the industry overall, whether it is Boeing, whether it is GE Aviation, whoever it is, all of the primary players, they're doing a better job at managing the supply chain.

So as a result, they're more confident going into this year than the, they were last year that they'll be able to hit the delivery guidance that they've laid out there. So that's one reason why you see shares moving higher throughout the day, that you strip away what happened and the challenges behind the Q4 earnings miss. And you have, I wouldn't say, it's a great year ahead. It's not pre-pandemic yet, but it's getting better. All right, Phil, thank you very much. And Phil, please stick around while we bring in Noah Popinac. He's an analyst with Goldman Sachs, has a buy rating on Boeing, a $261 price tariff. on that stock, which is of now around 204.

Noah, welcome. Take us through the fundamentals of Boeing's business and what you see there that gives you confidence that the stock can perform as you think it will. Yeah, so a few things I would highlight, you know, overall and from what we learned today, you know, I think one of the more important things with Boeing where you have to continue to view it through this lens

is that we're talking about a stock that's near 200, that pre-pandemic was over 4,000, 400. And so you've highlighted that the numbers today are a little bit mixed. There's some good, there's some bad, but there's just not a lot in the stock price. The stock is not asking for much. Expectations remain low. They did miss earnings, but they beat free cash flow. And because of some of the accounting methodologies at the company, the free cash flow is a better metric over time. Stock is more highly correlated to that. And I think Phil, you know, nailed it where the demand is really strong. What's holding them back right now is supply chain, but demand for the

airplanes really strong, and that's the better long-term indicator. So I think the fundamentals are still being a duopoly in a long-term secular growth market, demand to fly 2x GDP pretty consistently over time, and all those things are true of Boeing, you know, kind of regardless of what the numbers were specifically to that. You know, you referred back to a time when Boeing was a $400 plus stock, and we all remember that. It wasn't that long ago. Was that a fair price for that company at that time, or was it just overvalued? What was, what was, what, was the story? I don't think that was a fair price at the time. We have a buy on Boeing today. We recommend Boeing today. We did not recommend Boeing at that time. Now, that's not to say that

we've always had the stock right. We had a sell on it while it was moving higher during that period. But, you know, Boeing's a cyclical, and cyclical is when things are really good, you know, the market will get a little too excited and put a high multiple on high earnings. And when things are really bad, the market will kind of overshoot to the downside and put a low multiple on low earnings. And, you know, during the pandemic, Boeing got to that spot on the downside, and it's now starting to recover. So I don't think that was a fair price. But the inputs into the business that existed at that time will exist again, again, because the long-term fundamentals are so good, just a matter of time. And at the current price, you're looking at a low multiple on low earnings and cash flow.

We're showing a 135 P.E. Noah, so what do you base the multiple off of? And have they put production issues firmly behind them or not? So, you know, as I alluded to earlier, Boeing's earnings are tricky because they use program accounting, so the cash flows often different than the earnings. The economic engine of the business, the cash flow statement, often different than the P&L. And at the current volumes, you know, it's a high incremental margin, high fixed cost business. With this constrained volume, you know, the earnings are just kind of in flux while the cash flows are better and are improving. So the P.E. that you see, you know, on a Bloomberg screen or something

right now is not, I don't think, hugely relevant. The free cash flow target, they provided their investor day $10 billion, $20, $20, $20.5, $20.00. We're at $20, $20,000 to share in 2025, 2026. So that stock price just over $200, you're basically 10 times free cash flow. So it's a pretty cheap stock on the cash flows. All right, Phil, let me ask you to, in terms of, oh, pardon me, I'm sorry. No, let me just turn to Phil, if I might. for a minute and get get a sort of a synopsis on boeing's international business particularly china uh well dave calhoun is optimistic at the fact you are seeing huge numbers in terms of people returning to travel as they come out of the covid lockdowns in china the numbers look

identical to what you saw in the united states what we saw in europe as as both of us came out of our covid lockdowns you saw a huge demand for travel and that is what Boeing is seeing in China. So as a result, the airlines there are going to, A, need to use the aircraft that they have, and there are some 737 maxes that are on the ground there that are not flying yet, so they need to get back into service, and they likely will soon. And then on top of that, the airlines there, just like airlines here in the U.S. and in Europe, will eventually say, we need more aircraft. Well, guess what? There are about 100 aircraft, 737 maxes, that have been ordered by Chinese airlines that have been.

built that are on the ground at Moses Lake in Washington that are ready to be delivered. Obviously, some rework has to take place. But at some point, some point, the optimism at Boeing is that they will resume deliveries of those aircraft. Does it happen in the next six months? The next year, who knows? That's a geopolitical question involving the United States and China and trade relations, et cetera. But that's the expectation. And finally, Noah, a quick word on production issues and whether they've put those behind them now. Yeah, yeah, sorry. So, you know, I think that's one of the bigger hurdles left in the business, especially in the near term. The aerospace supply chain recovery is kind of lagging the broader global supply chain recovery. Airplanes are very complex parts. There's a lot of individual parts. Boeing and Airbus have thousands of suppliers. And it's an industry where things got really tough during the pandemic. So this, you know, they really had to hunker down and coming out of that is taking longer. So that's one of the bigger hurdles in the near term. The comments from GE this week were incrementally positive from Boeing this morning sounded better talking to its supply chain.

So I think we'll see that really improving as we move through 2023. All right. Thank you very much. Noah. We appreciate your time today, Noah Popinac. And Phil stay there because there's another key company you follow reporting after the bell. Got to talk, Tesla. And for that, we also bring in George Janorakis. He's an analyst over at Canacord Genuity. It's great to have you here, George. And Phil, we'll start with you. We mention how the key thing really to watch is going to be this automobile. automotive gross margin metric. Just run us through it again in what you're expecting. Look, the gross margins are well above the rest of the industry. That's the key point to

keep in mind here, in part because of the pricing power and the low cost that Tesla enjoys. It was in the third quarter at 26.8 percent automotive gross margins excluding government zero emission vehicle credits. The expectation is that it's going to be somewhere around 26.4% in the fourth quarter because they've cut prices in China, which obviously eats into margins just a little bit. If it's around there, I don't think you're going to see much of reaction from shareholders. Now, if it's dramatically lower, which is not the expectation, but let's say it comes in at 22, 23%, people are going to say, whoa, what happened? Where's the automotive gross margin strength? That's the metric that people will be watching.

Georgia turned to you? Are you bracing for worse news? Do you think they could, you know, do you think they could clear this bar, but maybe still not put questions to rest? Talk us through what you're expecting. Well, look, you know, I would say in the years that I've covered Tesla, this is one of the most important conference calls they've had. And that's because historically, there have been other issues related to the stock. But this is one of the first times we've seen what the company's reaction is and will be to kind of a demand issue, which they really haven't had in the past. I mean, over the last several months, we've had demand issues that started in China and have now spread to the United States and to Europe.

And we wrote a note a few weeks ago on a discussion that Elon Musk had on these Twitter spaces. And his point on that chat was that the company values units over margin in a recessionary environment. And we get it because if you think about the math, the company like Phil said makes about 30-ish percent

gross margins on its vehicles. But those vehicles are forward upgradable with full self-drive. software. And our assumption is right now about high single digits, 10% of their vehicles globally actually adopt that margin. But if they cede the market with units, they have the opportunity to upgrade them over time with full self-driving software, which can essentially double that margin. So if I were in his shoes, which I'm not, I would be doing the same thing with Tesla. Are there price cuts, George, an effort to grab market share above all?

Sure. It's about market share. It's about seeding the market with units to potentially, if we said forward, upgrade them with software. And I think given that the stock has had a precipitous fall at the tail end of last year, that the market is ready for some sort of margin degradation in 2023. Now, the question is, how bad will it be? We've heard some rumors that they could go into the teens. You know, we're still in the 20s and the low 20s for next year. And we think that margins getting the teens is highly unlikely, particularly because some of the commodities that go into EVs have come off the boil, whether it's a little bit of lithium or steel. We put together an index in a note last week just that tracks EV prices. And clearly they've come off the top, which should help kind of butcher some of that margin degradation due to price cuts.

Phil, do you agree that people are going to be, you know, that full self-driving will be that. compelling in the long run? I think the potential is there. I agree with what George is saying in terms of full self-driving has the potential to really boost margins down the road. However, I will point out that everybody that I have talked with in the automotive industry who has worked on autonomous drive technology has said the same thing. We are not close to seeing it anytime soon. Right. Now, does that mean we're going to see it in three years, four years, seven years? Who knows? Now, George is right. If you have a car that could be upgraded with that software when that technology is perfected, absolutely. That's a great potential for growing margins down the road. But you have to go into this understanding

it may not happen anytime soon. What George has Tesla done to its existing owner base, people who bought cars, let's say, in the fourth quarter of last year, at a higher price and now find not only is the new car transaction price lower, but that affects the value, doesn't it, of the car they bought, doesn't it affect the value of used cars? And do you expect any backlash there? Is Tesla going to do something to address that or not? Do they need to? I mean, look, if I was one of those people, I would certainly be upset about it. We saw a little, at least Twitter would indicate some of the videos that we saw that people in China were a little bit upset about. And sure, they may sweeten the deal for previous owners, maybe give them some extra charging miles.

They haven't done anything yet, but certainly the company is one that respects its customers historically and has done things to appease any issues. So I would expect maybe some offer over the next several weeks. Asking for a friend, George, asking for a friend. Phil LeBow, thank you, my friend. George, appreciate it. And coming up, the NASDAQ falling today, but still up 7% this year. year. We'll talk to one tech investor who says the recent move may be premature, but a bigger,

better one could be coming later. Plus, we head out to Chicago to see how Microsoft's concerns about the economy are playing out in the bond market. That's coming up on Power Lunch. Welcome back to Power Lunch. As we digest the market impact of earnings, Microsoft's been dragging on stocks and its cautious comments about the global economy is also being felt in the bond market. Let's bring in Rick Santelli now. Rick? Yes, I'll tell you, today's auctions gave us a lot of information. So as you look at a three day of tens, realize rates have been going down, but they're starting to come back a bit.

But all in all, the 10 years have traded under the previous day sessions every day this week. We've had two stellar auctions. And as you look at Fed funds, three days, you see the June Fed Fund contracts starting to come up a bit. So many of the negative effects we've seen from some of these earnings seem to have a half-life. And if you look at the VIX, it's shot up, but it's slowly coming back down close to unchanged. So what we really want to do is see what some of these traders think. So we're going to go up to Jason here. Jason, Microsoft came out yesterday a bit disappointing, especially from the cloud perspective.

Is anything going on strategically from yesterday's 4 o'clock Eastern release to today that may be affecting traders or volatility? You know, it really seems like Microsoft, similar to all the other big tech companies in the Big Five, have really stressed on cutting workforce, and that trend of cutting employees has led to their stock price being propped up, if not temporarily. So that's the common trend, but to me it really seems like the market is in a pause right now, waiting for next week's FOMC. The Fed has made it very clear that they are concerned about the employment, and the market cooling off, but the employment numbers we're seeing on a monthly basis

are not really supporting what we're seeing from these bigger companies that are cutting the workforce. It certainly seems as though the effects, any negative effects that seem to come into the marketplace don't last long. Investors seem to walk right through it, continue to bid up the equities. What are you seeing on the one-day volatility? Yeah, as of late, we've seen a lot of volume on the zero-day and one-day option volume. It makes up roughly 60% of all option volume that is trading. And recently, the realized volatility we're seeing, so our average move on a day-to-day basis from open to close,

really seems to be outperforming where the implied vol is and where we come in. So we're seeing these large 1% intraday moves, and a lot of times when the day's over, we're kind of unchanged. And we lock and reload for the next day. Exactly. David, let's, David, any opinions here on what's going on with Microsoft? Do you think it's just another horn in the horn section, or is it something that's going to have a lingering effect? Well, I mean, there's definitely, there was premium priced into it right at the close yesterday.

It quickly came out. Stuff really starts to, it originally when the news first happens, it's very illiquid. But once it kind of digested, the market digests it, it really kind of were moving on to the next thing. whatever the next big thing is right now, whether it's CPI, whether it's, you know, another announcement, that's the big deal. Microsoft, I think it's over for the day. Excellent. Thank you, David.

Well, you hear it from traders. They seem to have the same sense of the equity markets. Things don't look good, but it seems to always come back and rise to the occasion. Kelly, Tyler, back to you. Rick Santelli, thank you very much. A growing debate, meantime, over growth and inflation in the economy. Some believe we could be returning to low growth, lower rates, and lower inflation sooner than expected. But at the same time, despite inflation easing just a bit, some prices aren't budging.

We'll look at some of those when Power Lunch comes right back. Welcome back to Power Lunch. I'm Sima Modi. Here's your CNBC News update at this hour. Federal prosecutors have started a civil rights probe into the death of Tyree Nichols. They say the investigation may take some time. Nichols died three days after a violent arrest by Memphis police. All five officers involved have been fired for using excessive force and failing to intervene. Nearly two dozen top state prosecutors are urging Congress to allow state prisons to jam cell phones that are smuggled in to prisoners.

They say the phones are often used to plot violence and carry out crimes. The prosecutors are all Republicans, but they say they plan to get Democratic support for what they say is a bipartisan issue. And in Fort Worth, Texas, a medical team has successfully separated a pair of conjoined 24. twins. The 16-week-old girls were connected from the breastbone to their belly button and shared a liver. Dozens of surgeons and specialists were involved in the surgery which took 11 hours to complete. Doctors say the girls' recovery will take time, but their outlook is good. Glad to hear it. Kelly? Absolutely. Seema, thank you. Ahead on Power Lunch, we'll continue to keep an eye on stocks. A lot of reversals today, and the S&P is only nine points away from turning positive. Can we do it?

Markets are way off the lows when the Dow was down 460 and the NASDAQ was down to about 2%. As we had to break, speaking of the NASDAQ, the stock of the exchange itself was down as much as 9% earlier on after they reported earnings missed on APS and revenue. They're still down almost 7%. We're back after this. Welcome back to Power Launch, everybody. Let's get a check on the markets now as we're lower right now, but off the worst levels of the session, down just 65 on the Dow. Bob Bazani, is at the New York Stock Exchange? Bob? And Tyler, we are, I'll keep it simple. The market is resilient and it's acting like it still wants growth stocks. So the big story we all been talking about it's Microsoft on the day. It's moved $10. It was $2.31. Look at that. It just touched being

positive for briefly. There's been enormous volume in this. And despite all the concerns about Azur, they're acting like they want this stock. Take a look at some other names. Now, there's a lot of concerns about the banks with higher net charge-offs, the credit card companies, higher net charge-offs. Yeah, Capital One was okay. There was. higher net charge off but it wasn't dramatic and the same with the u.s bank corp higher net charge off but not dramatic and you see both of those who are reacting kimbley car clark is a very separate story and a problem we're seeing with consumer names and i'll put it to you very simply here prices are up and the volumes are down here look at this prices up 10 my heavens they're getting those price

increases through sales of organic sales up 5% look at this volumes down 7 you see this so you got prices up volumes down potentially that means margin pressures down the road, and that's going to be an issue, I think, for many of these companies. But just look at the S&P 500. We just touched on the verge of being positive right now, and we are seeing stronger momentum overall here. We're seeing something we haven't seen a long time, Kelly. We're actually seeing dip buying that's out there. The bears seem very frustrated right now, and the markets are really proving to be resilient, particularly around all of these growth stocks. We'll get the really big tech names of the Microsoft really next

week. We'll see what's going on. But as of now, they're not being flustered by any concerns about Azure slowing down on the growth end. Kelly, back to you. Thank you, Bob. Let's turn to oil now where gasoline prices, I'm just going to keep talking about, Pippa, up 40 cents now from the lows last month. Yep, and oil is also higher today on a little bit of a smaller than expected build and inventory, but it is kind of stuck within this range of the $78 to $82 level, which also happens to be the 50 and 100-day moving average. And it feels like we need some kind of new injection of news in order to have it break out of that. Perhaps, you know, some giant

touch demand read through in China around the Lunar New Year or maybe OPEC's upcoming meeting. But Nat Gas, I mean, you love talking about gas prices. I love looking at Matt Gas. I'm looking at it now, down 6%. I know. It's got within a hair of dropping below that $3 level earlier today. And a lot of this, you know,

is because of the contract expiration on Friday. And it is different than, say, like, the oil market because you can, you know, you can store that oil, but it's much harder with not gas. So as you do approach expiration, it becomes essentially worthless. But, you know, one trader I just spoke to said that the weather is six times more important here than even the free-poor production being offline. And so it really is temperatures. You know, last year it was really cold. So people were ramping up.

Production was ramping up? This year, it's really hot. I mean, it just started to snow outside. Oh, is it snowing outside? No kidding. Oh, wow. Yeah. First time we've had snow in a long time here in New York. Exactly. People are getting a little, you know, unnerved by it almost. And it's helped Europe stay off a recession. It's helped them stave off an energy crisis. And back here, you sort of wonder how long these good times can last. I think that's why I keep coming back to the gasoline price. You know, it's 40 cents in a month is a lot for a consumer who's a little bit in question right now. Yeah, absolutely.

And, you know, once again, we're still seeing the impacts on our utility bills. And it takes a long time for those to come down once they've gone up. And also, you know, there's the phenomenon of once things go up. Do they ever really come down? That's actually a good question. Could those – I know we keep talking about gasoline prices and utility bills, but they are both up. People are feeling both pieces of it.

But could those utility bills actually drop? Do we ever experience that? I guess I was in my mind thinking, well, it's just for this winter because prices were up so much last year. But is this what we're going to be paying now for the foreseeable future? I mean, it feels like any meaningful drop would be, you know, at least maybe six, 12 months down the line. But, you know, once you improve those rate increases, it kind of your bills are then. Rates don't come back down. Exactly.

So the base goes high. They don't. Tyler was like, let me tell you. Yeah. Yeah. There is a variable on how much they pass through with the underlying commodity. But, I mean, as Tyler would know, the rates don't come back down. I know you've been following solar stocks.

What's the news today? Yeah, so a slew of downgrades here. Barclays cut sun run to equal weight and sunpower to underweight. Piper Sandler downgraded end phase. Again, it's all about the consumer. They see that market slowing. And it's interesting because when you think about the IRA, it's clearly such a positive, but it also does push out maybe some of the urgency to do these things,

because it now ensures those, that 30% ITC for 10 years. And unfortunately, I know from experience that if I have longer to do something, it will take me longer to do it. You don't feel the urgency. Exactly. You don't have an expiration date staring you in the face. So they should have said, hey, you know, and this is referring to inflation reduction act,

they should have said you can have this, but only for a year or something, if they really wanted everyone to scramble and support these companies right now. I mean, it's still beneficial, absolutely longer term, but it just means for the consumer. And, you know, and Resi is a smaller market than utility or commercial. But for residential solar, maybe it's pushed out a little bit. All right, PIPA, awesome. Thanks very much.

Some big cap tech names reporting this week and cutting into the recent rally in NASDAQ. The NASDAQ down about 1% after Microsoft's squishy guidance. But the index is up about 10% since late December. I wish you could see Pippa running across the floor here to escape. Scampering. Our next guest holds some of the big cap tech names, including Microsoft, as well as Apple, Amazon, and Google, and says the recent rally in tech, a bit premature. Let's bring in Mike Bailey,

director of research with FBB Capital Partners. Why do you think the rally is premature, Mike? We need to see proof. Yeah, I think we're getting a little ahead of ourselves here. You know, the bowls are really in charge. And I think just looking at where are we in the cycle, investors are just a little bit ahead of themselves, in particular with NASDAQ.

So interesting, just you flip the calendar year and the bulls are just sort of running there, especially in tech. But I think if you look at what's driving that, really it's sentiment. If you look at the fundamentals, how are these companies doing? Profits are pretty stable in the last few weeks. No real changes, but sentiment is really starting to boom. So on one hand, maybe this is a reversal.

On the other hand, again, now companies' expectations are higher. They really have to execute through that. We've seen one of the big mega-caps Microsoft, as you said, kind of squishy results. Okay, looking backwards, a little bit worsening ahead. So if that's an omen for the next mega-cap tech companies, I think we need to be a little cautious here. Yeah. Yeah. So you sum it up very nicely there.

Profits, stable, sentiment rising, the two can cause some dislocation ultimately. Let's talk about alphabet and what happened yesterday with the federal case being brought against it. How much of an overhang is that going to be for Google for the next several years, potentially? It's a great question. I think a lot of times what we've seen with these big cases, there's a big kind of splash in the media investors are concerned. You might have some knee-jerk reaction selling. A lot of times, these things go quiet for a number of months or even years.

Investors may start to push these to kind of the back pages, if you will. So our sense is in general. This may not be a big burning risk factor for sentiment for Google. It may come back at some point and become more of an issue. But if we look back at some of the other big cases, Microsoft is probably the big one. companies can't deal with these things and kind of work through them and even succeed through it. So my sense is investors are eventually going to pivot back to the base business. What's going on with search?

What's going on with YouTube, et cetera? Those are going to be really the primary issues. This will be a risk factor. It'll probably get pushed to more of the lower section. It is striking, though, and we should highlight that Google shares now the worst of mega-cap tech down 3%, Mike. While Microsoft has turned positive, that's a huge turnaround. Capital One is positive. It's a big swing today.

You even like Union Pacific here, and that stock has been under some. pressure, that whole sector, really. Talk to us about some of the other names aside from tech where you might feel comfortable dabbling. Sure. So if folks want to pivot a little bit away from tech and see what else is out there, a few different things. So generally, the themes we're looking at is quality at a discount. So there's plenty of names out there. A few we're looking at or are we own currently, Eli Lilly. So in the healthcare space, probably one of the higher, multiple kind of higher growth pharma names that's out there. medium-sized company chasing two massive opportunities, Alzheimer's and obesity.

A really good company, a lot of base business growth. Oh, by the way, trading at a slight discount. I think that's one that looks interesting here. You mentioned Union Pacific, so again, thinking a little bit more of the cycle. This is a little bit early. We're not even in a recession yet, so things haven't quite slowed down. But you can buy a high-quality company, you know, bears to entry, good market share, trading in a discount.

So again, I think once investors start to look over the horizon, names like this, transports, companies that have a lot of control their destiny, they're going to continue to grow. Last one, again, a little bit of a in-between, a cyclical, but kind of a safe way to play that, is Linde. So this is an industrial gas company, one of the highest quality materials companies out there. They're really diversified across customers, across geographies, that sort of thing. So as the Fed chairman continues to put this chokehold on the economy, things are slowing down. And companies like that lend that are really diversified across Europe and China, they can continue to grow despite some of those constraints. Yeah, not the truffles.

Yeah. Industrial gases. Mike, thanks so much. We appreciate it. Mike Bailey. Up next, perplexing prices. You know what we're talking about. Inflation is slowing, but not so much in some really visible parts of the economy.

We'll dig into what's causing these sticky prices when Power Lunch returns. Welcome back to Power Lunch. Recent signs show inflation is finally starting to cool. So things should be getting. cheaper, right? No, no, no, no, no. It seems consumers are not just feeling the pain for a little bit longer. In some places, they're feeling it worse than ever. For more here, let's bring in CNBC's senior economics reporter, Steve Leesman, and CNBC.com's retail reporter, Melissa Repco, great to have you both on board here. Steve, let's start with you, as we should be at pains

to point out, just because the price hikes are slowing doesn't mean prices are dropping here. Right. So inflation is measuring the rate of change of prices. You would need a negative number. on inflation, that price is actually going down. What has been going down is the aggregate price level or the change of the rate of change of inflation. So, for example, we were at 9% on headline CPE back in June. We're 9% back in June, and now we're around 6%. Same things happen with the core from 6.4 down in the 4% range.

So most of the other price indicator, as we have, Kelly, are coming down showing the rate of change is slowing, not that prices are falling. So going up at a slower rate. So Steve, educate me a little bit on the history of inflation. When we've had bouts of inflation, do prices eventually ever go back to where they were or even below where they were before that bout of inflation kicks in? Or do the providers, the companies kind of get accustomed to those higher prices? They don't want to give up those higher prices, generally, I wouldn't think. You know, sometimes they do, and companies will act to protect.

In the first instance, Tyler, I think you'll know, they'll protect their margin. It's not so much what they're getting from the consumer, it's how much they're earning off of it. So, for example, if they can earn 20% on the dollar of what they invest, they'll move to protect that if they can, and they'll lay off people or they'll keep prices high in order to do that. the real question becomes one of competition. And there are signs out there, Tyler, that this economy is less competitive than it was in the past.

So that might mean that high prices stick around longer because it's only competition that would force companies to lower those prices. True. And Melissa, everyone's talking about egg prices, which have one particular catalyst being this avian flu going around chicken breast prices. Meanwhile, have dropped considerably over the past this month. All of this aside, groceries are one place where people definitely go, this is still called. costing more than it used to and will I ever see some relief? And what are you hearing? Well, the good news on the egg front is yes, prices are expected to come down. I spoke to Kroger, CEO Rodney McMullen, and he said that is one bright spot. On the other hand, he said, when consumer package goods come and they raise prices on detergent, paper towels, things like that,

you know, canned food items, they very rarely come back to the grocer and say, actually, we'll lower it again. Of course. The way they usually do that is they reintroduce if they feel they need to, discounts, coupons, things like that that help ease prices for consumers. But so far, he said, no vendors have come back to the company to lower prices, and no one has stepped up discounting over a year ago. So that really hasn't kicked in yet. Or those vendors will shrink the size of the package and charge you the same amount. Exactly. Shrinkflation. Yeah, shrinkflation, but it's 14 ounces as opposed to 18 ounces. That's another way it shows up. And so in general, this is something that Rodney told me is going to stick around for a while and people should be prepared for it.

He did say for retailers, one way they can combat this is they can use the tool of private label. So in the fall, Kroger rolled out a cheaper version of private label items. And that's one way they can say when they're negotiating with companies, hey, you may keep the same price, but we're going to offer something that's similar, similar types of peanut butter and people can vote with their dollars. And potentially that puts pressure on companies to rethink that price. It's not like Kroger itself wants to sell things more cheaply. If they can take the profit margin and everybody else's, they're kind of all in it together.

And that's the point about competition. So they'll shop around, they'll look for other alternatives and so on. It's not just groceries, though. I mean, this is where it gets interesting. Goods prices fluctuate kind of quickly and sometimes come back down. Services prices, the cost of restaurant meals, especially with the labor market. I mean, that's where you wonder, you know, that's where we've really seen things kind of cresting higher. Exactly.

And it goes to the reason for inflation. Not only do we see a surge in demand during the pandemic because people were stuck at home, but we've also seen wages go up dramatically. And services businesses like hotels and health care and restaurants, they're very people intensive. And as they pay higher wages, that's not something they can bring down either. So that becomes a fixed cost as they continue to operate. Plus, they lock in these commodities really early.

So they're paying for beef. They're paying for shipping. They're paying for even cotton. And so cotton more on the apparel side, of course. and those contracts are long term, so they can't pass on savings until they feel them themselves. Yeah, and then like you said, anytime they get more for a restaurant meal,

you're crowding out spending elsewhere. Steve, what would you say to watch in terms of, you know, we've got the PC report, I think, this Friday, and the market is kind of jumping way ahead here when it's looking and says, okay, five years, we're going to see inflation coming back to a 2% rate, but we're not going to be seeing that this week. No, no, just real quick, Melissa's point.

There is an index called, the sticky price index. Maybe Melissa's familiar with it. And it does measure things that are difficult that don't often come down and don't fluctuate a lot. And the idea is you follow these prices because they're reluctant to go up and they're tough to go back down. So they're ones that are thought to be good future indicators of inflation. And it's been pretty high in staying there. I'm watching that. I'm watching all the data. I'm watching the high frequency data with a big question. I've got two questions. One is do goods prices fall? falling offset, continued high service price inflation.

And the other question being some of the weakness we're seeing in tech, tech has been a leader in deflation and disinflation in this economy. I'm wondering if we get a round of price cuts on the tech side that could help some of these aggregated disease. Wouldn't that be nice? Very interesting. Yeah. Deal on our I-Cloud story.

And how China's comeback, if there is a big comeback that will affect other production and whether they want to regain share that may have fallen away from them. All right. Thanks, guys. Absolutely. Thanks, Steve Leesman. Melissa Repco, appreciate it very much. Speaking of inflation, Susie Ormond, guys, is going to be on fast money tonight at 5 p.m. Eastern, and she'll talk about how prices are impacting consumer savings. She will make fast money even faster.

I can assure you. All right, still to come. Airbnb, getting a downgraded Gordon Haskett to underperform. Didn't know Gordon. The firm says the vacation hosting service facing a host of issues, including challenge. launching travel demand and regulatory risks. We'll trade that name in today's three-stock lunch. All righty, time for three-stock lunch.

We are trading three T's, travel, telephones, and technology. Airbnb down slightly after that downgrade we just mentioned to underperform at Gordon Haskett. AT&T up after reporting better than expected subscriber growth and choppy trading for IBM lower ahead of earnings after the best. Here to help us trade all three of them is Scott Nations, founder and CEO of Nations indexes. Let's start with Airbnb, a downgrade from one company today. What do you think of the stop? Yeah, we're going to start with the worst of the three. Airbnb is a sell.

It's turned on that much more expensive. Scott Nations. Shall we hold on just a minute. Let's see if we can get it to come back. I can't really translate what he was saying there, Kelly. Scott, if we can hear you, go. ahead. Okay, great. Airbnb is a sell much more expensive than all the other travel names and there's no brand loyalty versus competitors. And the recent conversation about fees, it goes to the heart of

the value proposition. So that doesn't help. That's not just a PR problem. I mentioned it's more expensive forward PE for Airbnb's 36 and a half. That's six times what it is for legacy air carriers and three times what it is for Expedia. And the question becomes, where does the growth come from to justify that valuation? And I don't see where it comes from. Airbnb is a cell. A cell. What about AT&T? AT&T is a reluctant buy. It's had a great day up 6%. Tyler talked about subscriber growth, which was a surprise, also better than expected EPS. This has the potential to be and enthusiastic buy from me, because while the valuation is compelling right now, dividend yield of 5.5% and plenty of free cash flow to support that, they're getting rid of non-core products

like DirecTV and the Warner Media businesses. And so if they can now focus on the wireless and the broadband businesses and grow those, then this would be not just a reluctant buy, but an enthusiastic buy. And they've got the pitchwoman Lily who's out there relentlessly selling AT&T wireless and apparently rather effectively. Let's move on to IBM. What's your thought there? And I'm sorry earlier. It was Tyler unplugged. So I couldn't hear you.

Everybody else could hear you. Got it. IBM is a buy. And you mentioned that we're going to get earnings after the bell. Market expects $3.59 a share and $16.4 billion in revenue. IBM has done a wonderful job of reinventing themselves over the past decade, and now they're actually compelling also from a valuation point of view with a forward PE of less than 15. And here's the thing, if they can really get going with their hybrid cloud business, then there is an opportunity

for substantial growth here in IBM. So you get a company with a decent dividend yield of 4.7% recent valuation and the opportunity for real growth if they can figure out the hybrid cloud business. They're not a leader in the space yet by any means, but they could be. And the recent pearl clutching about layoffs in the tech space just don't apply to IBM, which did not ramp up headcount during the pandemic. People are excited about IBM again. Yeah. It is striking. Scott, would you buy tickets to Tyler unplugged because I know I would. I don't like that. Pearl clutching. I love that. I'd love that. like that, though. I love pearl clutching. That's going to go right there along with chin stroking.

All right, Scott Nations, thank you, man. Thank you. You got it. Markets have a pretty decent bounce off the lows today. We're going to take a closer look at the stocks rebounding up next under Dom's microscope. Welcome back, a striking turnaround on this Wednesday. Dow could almost go positive. Dom Chu has the latest. I mean, if you're looking down below, it's nine points, right? It's 10 points, and we could see the Dow do that in the next second and a half. Who knows? But anyway, if you look at the tech heavier NASDAQ 100, we're going to use the QQQ here as a proxy. From the lows that we saw intraday after the opening belt to where we are right now, we're talking 2 to 2.2 and a half percent gains on an intraday basis for the index. So where have the biggest reversals been so far today? Well, within that NASDAQ 100 index, nine stocks have now staged comebacks by at least 5 percent so far intraday from lows to where they are now.

Among them, check out Microsoft, Amazon, and Tesla, which are all up 5% plus off their lows. And then a couple to watch here, two of the bigger moves off the lows that we've seen are in electric vehicle names. Speaking of Tesla, check out what's happening here with Rivian and Lucid. Lucid is up about 8% off its intraday low. And then check out what's happening with Rivian, up 9% off those lows. So EV's in focus, given Tesla's numbers. But watch those. And by the way, if you're wondering, what the other 9R?

Check out my Twitter feed at the Domino. I've posted them all up there. Everyone's like, does someone know something about the Tesla print tonight? Why are all these stocks, you know? Rivian, Lucid, for goodness, say. Or they don't, and they're going to move the other way. All right, Dom, thank you very much. Good to see you, my friend.

And thank you for watching Power Lunch. Closing bell starts right now. See you tomorrow.