Power Lunch - Earnings Parade, Labor Pains 7/20/23

Episode Date: July 20, 2023

It’s a big day for earnings results, with lots of big names reporting and moving the markets. Tesla, Netflix and Johnson & Johnson are just a few of the names we’ll dig into.Plus, 2023 is turning out to be the summer of strikes. Hollywood actors & writers, Canadian dock workers and the Teamsters are all on strike, or threatening to. We’ll explore how big a disruption this could pose to an already fragile economy. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hi, everybody, and welcome to Power Lunch. Alongside Kelly Evans, I'm Tyler Matheson. Coming up a big day for earnings. Lots of big names reporting and moving the markets. You got your Tesla, Netflix, Johnson & Johnson, Taiwan, Sammy. Those are just some of the names we're going to dig into big time this hour. Plus, labor pains seemingly everywhere, Hollywood actors, Canadian dock workers, teamsters, all on strike or threatening to. So why is the economy going through this and how big of a disruption could it pose to? our fragile economy. But first, let's get a check on the markets. As the major averages are split, the Dow's up 211 points today, but the NASDAQ's down 19 to 45-46, and the NASDAQ is down 1.5%. Johnson and Johnson is helping the Dow's strength today. They beat on earnings thanks to strength in the farm business. shares are rallying 6%. IBM and Travelers also helping, although those gains are more modest, around 2% following their results. The NASDAQ sharply lower, though. Netflix and Tesla are weighing, both dropping more than 8% after their results after the bell last night. We'll have more on these moves coming up, Ty. All right, TSMC, Taiwan Semiconductor, giving a bit too much information

on its earnings report. As strong AI demand has been, as strong as it's been and might be in the future, it just wasn't enough to offset current weakness. The company also delaying the start of its factory out in Arizona. All of this sending shares lower, and Christina Parts of Nevelas has the details. Hi, Christina. Hi, Tyler. Well, the AI hype can only go so far as you alluded to. That's the message from TSM management on their earnings call. They said that the short-term frenzy, yes, and they use those words, about AI demand,

definitely cannot be extrapolated for the long term. So that's even with TSM's estimated 50% compound annual growth rate over the next five years, so they believe AI is going to grow. But what that tells us is that the AI market, which is literally just 6% of total TSM total revenue, is still too small to offset weaker demand for smartphones and PCs. TSM shares, you can see on your screen, are lower. They were on your screen about 4.5% lower after posting its first quarterly profit drop in four years.

They guided a 10% drop for its full year sales and also guided capital expenditures at the low end of the prior range. So that is having a negative effect on equipment makers. Lastly, they also delayed Arizona production. So that would be their plant in Arizona to 2025 because of a lack of skill. talent here in the United States. So all of this, more specifically, it's hurting the sector, hurting the SMH, hurting stocks, hurting equipment makers like lamb, KLA, applied materials, down three, four percent lower. But this is expected and what this is pretty much expected news that we've talked about. And for anyone that's not in video hasn't seen this uptick, what's happening is

the environment is weaker, customer inventories are still trying to level out. And then you've got China's recovery that's still slower than expected. But that could change one. chip stimulus kicks in for China's industry. Bottom line, though, AI compute demand is exceeding supply right now, which bodes well for Nvidia, but the PC smartphone business continues to remain depressed, which doesn't bode well for the likes of Qualcomm, Intel, and that's a much bigger percentage of industry revenue. Kelly? Yep, Christina, thanks. The chip stocks are mostly down today in sympathy with Taiwan's disappointing results, reporting its first quarterly profit decline in four years on weakening demand in key categories like smartphones. TSM is a so-called foundry that

makes chips for other giants like Nvidia and AMD raises the question if AI optimism in the chip space is overdone. Let's ask Chris Kesa, Wolf Research, as managing director of equity research. Chris, it's good to see you. And, you know, I would say declines across the board. Not everybody. I think Broadcom was in the green. Right. Well, thanks for having me. So we rolled out of coverage today at Wolf. And we've been positive on the sector since last October. and we're just re-initiating on it today. But, you know, what was previously said about the sector still being in a downturn is absolutely right. You know, we started to see the start of that downturn since last October.

What's interesting from semis as a sector, however, is, you know, semis tend to bottom right on the first piece of bad news. So that's why we saw the bottom in the sector last October, despite the fact that the inventory correction continues for a while. What we're optimistic on going forward, aside from AI, and I anticipate you're going to ask me about that too, is that the catalyst that the group has is eventually the customers stop burning through inventory. We think that happens through the second half of the year. And that's what drives the positive estimate revisions as you go into 2024 because you get a return to secular growth in a number of different areas, and then you stop burning inventory and you come back to normalized numbers. So how long do you think it could take for that to play out? Well, it depends on the sector. So, for example, handsets and PCs started a little bit early in the inventory correction.

Memory started early in the inventory correction as well. So in handset and PC, we think that works through in the second half of the year. Memory is going to take a little longer because there's more inventory available there. And then data center started a little bit later, that's probably going to take all the way through the end of this year. But when it pertains the data center, and that's really where AI is, it's a very powerful driver as you go into 2024 because you have both the cyclical benefit where the customers are buying less now because they're burning through inventory. In addition, data center capex spending is below trend line. And with AI spend, that's likely to get better next year. And on top of that, you get the secular benefit of AI across many of the semiconductor companies.

And VINVIT is the biggest one. So, Chris, let me ask you specifically how important China is to this sector, China's recovery and comeback, and specifically to Taiwan Semiconductor. It feels like it is a big, if China doesn't come back, this whole process of recovery is going to be slower than it otherwise would be. Well, and I tend to agree with that. And some of the checks that we had coming into this earnings season, which, you know, for the device companies really kind of starts next week is, you know, we found that China is pretty weak right now. and we think is weakened further over the last couple of months. That just kind of delays a bit of the recovery as compared to what you would have otherwise expected. But again, the buy signal for semis is generally when your customers are burning inventory

and you're shipping below what they're shipping out. We still think that's the case. Even with some of the incremental weakness in China, we still think that sets up well for 2024. Talk to us a little bit about AI and Taiwan semi sort of using the word frenzy to describe it. Where are you on that? Is it overhyped? Is it a 2024-2020-5 story more than a 2023-story?

What? I think AI is the next five-year story. And we're in the very early innings of that. Of course, chat GPT at the beginning of the year was what, you know, Nvidia's CEO talked about as the iPhone moment for AI. And so we're in very early days now. Now, the difference between TSM and Invidia is that TSMC gets paid on AI, mainly on units. And we have seen improvement in units, but to the earlier comments, the magnitude of that isn't big enough to offset the cyclical downturn elsewhere, except for Invidia.

And the difference for Nvidia is that they're not only seeing the uptick in units, but they're seeing a very, very significant upturn in content and pricing. And that's because what's going on in AI right now and the NVIDIA solution, they can charge a higher price than the prior generation, which never before happened in semis, but give orders of magnitude improvement and performance. And the tagline from NVIDIA CEO is the more you buy, the more you save. And the bottom line is for NVIDIA and for several other places in the industry, revenue growth and ASP growth, I'm sorry, ASP growth adds to revenue growth for the first time in the history of semiconductor. It's kind of Moore's Law 3.0 or whatever, I guess. Chris, we have to go ahead.

It's a function of a slowing Moore's law, yes. Chris, thank you very much. Caso on chips, we thank you. And from chips to Flicks, Netflix, down nearly 10%. This was after a key report after the controversial password sharing crackdown. Many users online claimed they would ditch the service. mess around and find out. Despite that, subscriber growth beat expectations, but maybe not enough for investors to love it. Julia Borsden here to discuss. Hi, Julia. Hi, Tyler. That's right. I mean, it was just amazing to see the subscriber growth in the quarter. Six million new subscribers versus the roughly two million subscribers expected. So three times the subscriber growth anticipated.

And the company is also looking for stronger than expected subscriber growth in the third quarter. But what's notable here, Tyler, is that revenue missed expectations, revenue guidance mix expectations, the combination of those two facts, what that means is that average revenue per user is not growing as fast as expected. It is actually in decline as more people sign up for these lower cost services. So what in some, the changes in the fee structure are one thing. But am I hearing you sort of inferentially saying that the era when Netflix was sort of number one among one is no longer? In other words, now it may still be number one, but it's got a lot more folks nipping at its heels. Well, yes, there's definitely more competition than there was, say, five years ago. But I think what's interesting here is Netflix has realized that it would rather have more subscribers

and have each of those subscribers locked into some sort of subscription, even if it's a lower cost subscription, rather than have people just mooching off their friends and family. So I think that's another thing. They really want to make sure they have paid sharing rather than password sharing. They want to crack down on that password sharing. But I think another key thing here is Netflix did lay out the potential for advertising down the line. They're going to be converting some of these people who are using these lower cost subscription tiers

into subscribers to the ad-supported tier. So what that means is that if you're watching Netflix on advertising, they're going to be generating a lot more revenue from you down the line than the people who were paying for their lowest cost ad-free tier in the past. So they are phasing out that lowest cost ad-free tier. So I think they see a huge opportunity for advertising coming up, they say it will generate billions of dollars in incremental revenue. And they're competing with many other players,

whether it's Max from Warner Brothers Discovery or Disney Plus, but now they're not just competing for the subscribers, but also for those ad dollars. For the ad dollars as well. Julia, thank you very much. Julia Borsden reporting for us. Coming up, another earnings laggard, Tesla. The shares also down 8%, slimming margins,

cyber truck concerns among issues weighing on investors. We'll dive in next. Plus, striking accord. Protests and union strikes breaking out across the country, causing a domino effect. We'll discuss when power lunch. returns. Tesla posted all-time high quarterly revenue, but the shares of the electric vehicle maker are on the decline this day, down more than 7% on concerns of slimming margins and cyber

truck concerns. Still, our next guest is keeping a bullish outlook, raising his price target today from $270 a share to 300. He's Emmanuel Rossner, head auto and auto tech analyst with Deutsche Bank. Emmanuel, welcome. Good to have you with us. I'm always curious about how Wall Street reacts to earnings reports. And here's one where quarterly revenues were record. They were up 46% year over year, profits beat estimates. And yet, the nitpickers sort of land on this stock in a heavy way. Why? Hi, Tyler. Thanks for having me. I would say the quarter itself was fine. It was probably more than fine. The margins were probably a bit better than people expected. I think a lot investors were hoping for Tesla to say, hey, this is the trough for margins, this is the end

of the price cuts, and now things are looking up from here. And Tesla did not say that, but we didn't expect them to say that either. Tesla's message is essentially consistent with what they've been saying for the last couple of months, which is this is a challenging environment. They will stay nimble with pricing, which essentially means they will react to market condition, lower prices as appropriate. But what they did demonstrate in the quarter is that they can also cut cost according and essentially managed to keep margins at a fairly solid level.

And so I think the disappointment from the market came from, well, they're not telling us clearly that this is going to be trough margins. Our view is that it's not necessarily trough margins, but it could easily be a plateau margins here because prices will probably come down more, but the costs seem to be coming down quite a bit as well. So certainly a little bit of an oversized reaction to this, but pricing will be the key discussion for Tesla going forward.

And other competitors are talking about having to cut prices as well, as I understand it, because their vehicles are not selling as well as anticipated. Tesla does not seem to have that problem. They seem to be selling plenty of vehicles. To your point about prices and costs coming down, did I read in my note that Tesla has on the drawing board a vehicle that will come out in a year or two that is of markedly lower price and still high capability? That's exactly right. And that's really a key piece of our. in a longer-term bullish thesis.

Tesla, at the same time as it's essentially optimizing production and maximizing volume of the current generation vehicle is also working on the next generation vehicle, which will start production, most likely late 2024, early 2025, first in Mexico, but then globally. And the goal for this next generation vehicle is essentially to get the cost of GoodSoul to be half of the current vehicles,

essentially being able to bring vehicles that don't cost $40,000 to make, dollars to make, but cost only $20,000 to make. If they're successful with this, they would be able essentially to sell that in massive volume, grab a tremendous amount of market share, do it in the way where the competition wouldn't really be able to catch up for a fairly long time, make very affordable electric vehicles and sell them in, you know, profitably in very high volumes. Yeah, but we've been hearing about this for years. I think there's no way it's 2025. We're already halfway through 2023. What if it's 2026 or 2027?

Yeah, I mean, look, Tesla is a pretty established track record at, you know, missing some of the deadlines. They've actually not committed specifically to 2025. What they are doing, though, is they're already, you know, breaking ground on the Mexican plant where it will start production. In Shanghai, they built, you know, from brick ground to start of production. It took them nine months. I don't think they'll necessarily repeat that in Mexico, but even if it takes twice as long, we're talking about something that could, you know, easily start production. in early 2025. So this seems realistic, but again, could it be pushed out? Absolutely. Ben, let me give you a couple of tips. You're free to pass on to Elon the next time you see them.

I think they need to refresh their line, and I think the truck is a part of that, and this new more affordable thing would be a part of that as well. Here is my, and I own a Tesla, I've been transparent about that with everybody. They have so much of the sort of capital of the car, in the touchscreen, the big touchscreen, that takes the place of the dashboard. It takes the place of gauges and so forth. I think they need to bring back the speedometer, the gas gauge, the, and put it right in front of the driver's eyes. I think they rely too much on that touchscreen. I love the touchscreen. It's great. But I don't think I've been in other makers' cars, and they did not go quite so heavily into the investment in the touchscreen.

I think they need to have something that is more familiar for drivers. Let me address your first point at the very least in terms of the refresh, because we jumped right away to the next-gen vehicle, which to your point is 2025, maybe later. But before that, there's likely going to be a Model 3 and a Model Y refresh. Some of it could, the Model 3 piece could come as soon as in the fourth quarter, starting from China, Model Y, probably into next year. So they're very, very aware of this. And then the cyber truck.

The cyber truck is a brand new vehicle, brand new segment for them. This is starting production now, and we'll start, you know, real serious production in the fourth quarter of this year with the delivery event scheduled for this year. So this is a lot of like that freshness that you're looking for. And I think Tesla fully acknowledges. We're probably going to get that in the next six to nine months or so well before we have to, you know, worry about the next gen vehicle. I think the bull thesis is about the next gen vehicle just because of the potential, how much. of the market this could grab, how affordable this could be. All right, I'll leave my tip with you there.

You can share it with anybody. I've just shared it with our viewers, but rely a little less on the touchscreen, which is also a driver distraction from time. You have to look over and, where's my speed? How's my speed going? Anyhow, Emmanuel, thank you for your insights. We'll have you back soon. Appreciate it.

Thank you. I always give the side eye. Maybe not to all the Tesla's because there's so many. Every now I'll see a Rivian. I'm kind of like, maybe I'll stay on. Over here, you're away from it. Further ahead, exploring the fast food chain. Ahead of McDonald's earnings, what are we hearing from franchisees that could clue investors into the health of the company?

Power Lunch is back in two. Welcome back to Power Lunch. More evidence today of the impact higher mortgage rates is having on the housing market. Let's get to Diana Oleg. Diana, what do we learn? Well, sales of pre-owned homes dropped more than expected in June, Kelly, down over 3% from May and off 19% year every year. that's the slowest June pace in 14 years or even back to the subprime mortgage days. But it's not all higher mortgage rates, more a lack of supply, which fell nearly 14% from a year ago.

And that is keeping pressure on prices. The median price of a home sold in June was $410,200. That is the second highest price of all time. After cooling off for much of last year, prices started accelerating again this year, even as rates now hover around 7%, more than twice what they were just a year and a half, And of course, first time buyers can't handle that, so they dropped out to just 27% from 30% a year ago. Historically, they should be 40% of the market. And all cash sales rose to 26% because as the market heats up, buyers need cash to be competitive.

All this happening in the existing home market is, of course, benefiting the home builders. DR Horton beat expectations in its quarterly earnings report this morning and showed a 37% jump in new orders quarter to quarter despite these high mortgage. rates, guys? All right. Thank you very much. Diana Ollick. Well, in addition to the housing data, we also got initial jobless claims this morning. Rick Santelli has been mulling the numbers, and with a look at how that data are playing out in the bond market today. Hi, Rick. Yes, Tyler, initial and continuing claims once again well-behaved, and the market paid attention. If you look at a two-year or 10-year, we've traded up on yields all session. But there is other data today. Look at Philly Fed, 11 consecutive negative month-over-month changes. Leading economic indicators, 15-15 negative

month-over-month changes. So there is a weakening here, and it does make sense because the two-year no yield is really somewhat hovering on Fed guidance in many respects, and how do we know this? All right, when was the CPI report? I know. It was July 12. Well, let's start a few charts at July 12th. Well, if you look at a two-year, it's basically come back and taking all the gains that it made on a cooler than expected CPI. But look at the longer-dated treasuries. Ten-year yields haven't quite come back. As a matter of fact, you can see it so clearly in twos to tens. We went from basically the low negative 80s to trading 100 today, minus 100.

And that makes sense. If you look at a high yield for a two-year today, it's at 487. Look for the high in a 10-year yield today. This is easy. 387, 100 basis points. And the reason this is so important is because as much as many want to say, the Fed might have to continue to raise rates, as aggressive as the short end is until it closes above 5.07,

the cycle-high yield close. Many are going to continue to fight it and look for more inversions and yield curves. Kelly, back to you. Rick, thank you for highlighting that. We appreciate it. Turning now to oil, let's bring in, of course, Pippa Stevens. And, I mean, people are pointing this out, Pippa. You have maybe home prices feeling a little firmness lately.

Maybe oil wheat has been, you know, so it's a little uncomfortable. Yeah, yeah. I mean, wheat has been just absolutely rising on that, on Russia pulling out of that deal. But oil today, not doing a whole lot, although sentiment has definitely gotten better. I think one of the reasons why is because of those Russian seaborne exports. So I did want to take a little bit of a closer look at that. They did drop to a six-month low in June. Now, part of that was thanks to refinery maintenance in Russia, which leads to production

shut-ins. But what's key here is that so far in July, their exports are down to 3.1 million barrels per day, and the month is almost over. And that is well below the 3.9 million barrels per day in May. And so while it might not look that much on the chart, when also taken with Saudi Arabia's production cuts, it does start to bite on international prices. And so I think that is one of the things that is boosting sentiment here. However, there are still wildcards like India.

They've been a key buyer of Russian oil, and they're currently in monsoon season, which does lead to lower demand. And then they go into refinery maintenance in September and October. So that could also be another reason why Russia's exports are down, although it does seem to be that they are starting now to comply with OPEC plus coalitions pledge to reduce out. I don't want to catch you off guard, and I know this isn't what you may have prepared for. But I read the stories, and I'm very concerned about what's going on in the Black Sea with the, with the, the collapse of this grain deal and what that could mean for what I would call strategic foodstuffs, whether it's wheat, corn, barley, other kinds of grains. Yeah. I mean, it's definitely concerning, particularly with El Nino and the other strange weather patterns,

you know, fuel by climate change that we're seeing right now. But I think as it relates to oil and gas prices, it does add another layer of uncertainty and shows that Russia is still playing its card. They do still have ways that they can bite international markets, whether it be for soft, commodities or oil and gas, or even uranium, they are a key and richer of uranium. And so while it seems like some of the initial spike in prices after they first invaded Ukraine has subsided, they do still have levers that they can pull. Yeah, I mean, it gets very, very dangerous very quickly there.

If Russia sinks some commercial grain-carrying ships, boy, it will be a difficult day. And we've had a bad harvest here, I think, in the U.S. I don't know enough to know. Weather. But, yeah, I think that... It's like a role again. He ain't helping, I'm sure. And all these markets are now international.

And so there's an issue in one. You'll see it in other areas as well. Pippa, thanks. All right, let's get to Sima Modi now for a CNBC News update. Hi, Seema. Tyler, good afternoon. A new era could begin any moment for Washington football. NFL owners are meeting right now in Minneapolis to vote on the sale of the commanders.

If approved, as expected, the team would change hands from longtime scandal-plagued owner. Daniel Snyder to Josh Harris, owner of the Philadelphia 76ers and the New Jersey Devils. The record setting $6 billion sale could close as soon as tomorrow. Pilots may have to wait a little bit longer to start their retirement. The House passing legislation today that reauthorizes the FAA for the next five years. The bill includes a provision that pushes the retirement age for pilots from 65 to 67, and it comes as the U.S. deals with a severe pilot shortage. you're now heading to the Senate.

And get this, Microsoft rolling out new beauty filters for people rolling out of bed and getting on video calls. The new AI-powered feature will offer 12 makeup looks inspired by Mabelene products. The beauty app is available on Microsoft Teams for Enterprise customers. So Tyler and Kelly, no need to disable your webcam next time you roll out of bed and have to put makeup on. And now you got AI. I'm saved.

I love it. I love it. This changes everything. Yeah, that's right. It could. Fix my hair right there. I love it. Thanks, Emma.

And ahead on Power Lunch, workers striking a big blow to big business. Union disputes are sometimes necessary for workers and an expected risk for companies from time to time. But while usually few and far between, there does seem to be a fire sparking across the country. We'll discuss the growing labor protests. When Power Lunch, Richard.

All right, welcome back to Power Lunch. Call it the summer of Discontent. Kent, with an analogy to King Richard there, prices for a lot of things are still high, and workers feel wages are just not keeping up. As a result, hundreds of thousands of workers across the country, and north of the border in Canada in very different industries, are either on strike or threatening to. Hollywood feeling the pain, 20,000 writers are off the job, 160,000 actors on strike.

This, of course, impacting all of the major media companies, more than 7,000 Canadian dock workers, meanwhile, and warehouse people as well. Also on the picket line, impacting trucking and rail companies and the Teamsters, the union that represents UPS drivers and employees, also threatening to walk out. That would involve 340,000 workers here with more on what's really causing these labor pains and what companies can do is Steve Adlin, president and CEO of the conference board and a CNBC contributor. And Michael Strain is director of the Economic Policy Studies at the American.

American Enterprise Institute. Michael, let me start with you. Why so many strikes right now, obviously each, and potential ones, obviously each have their own particular causes and reasons, but is there a theme? I think there is a common theme or at least a common underlying cause. The combination of the pandemic ending of all the fiscal policy support for the economy during the time of the pandemic of really loose monetary policy has led to a situation where economic demand just far out paces economic supply. That has led to consumer price inflation, higher than we've seen in four decades. That itself is a big driver of this discontent. Everything's more expensive. Workers want higher salaries, higher wages in order to kind of keep their student of living,

in order to deal with all these high prices. In addition, that big demand boost that we have seen has led to a really tight labor market. We have had months where there are two job openings for every one unemployed worker. That gives workers a lot of bargaining power. They can tell people who want to hire them, businesses who want to hire them,

they can walk into their boss's office and they can demand higher pay, and they know that they're in a stronger, negotiating position because it's so much harder for managers to get workers. And so I think those are the two big things. Higher prices, people want higher salaries and higher wages to deal with them. And workers know that they're in the driver's seat in negotiations in a way that is typically not the case. Steve, let me get you to react to what Michael just laid out there. He gave a couple of reasons why there is this labor, let's call it, discontent right now. Do you see it that way? And how do you

react? Yeah, I think Michael's absolutely correct. You're in a historic period here where you're at almost full employment, the 10 million job openings, and wages have not been keeping up with the rising prices. Now, the Fed's moved pretty significantly, you know, over 500 basis points, probably one or two more moves to happen. But the conference board's leading economic indicators are declining, and that's been going on now, but it's signaling a recession here, we're projecting a short and mild recession by the end of the year. So there is this window of time where employees have the power, but as the economy slows and as we potentially go into a recession, that should ease up, and that period of time where they have that power should go away. Now, there are some

other things in here, like the pilot shortage. You know, we're coming out of the pandemic where we shut everything down, people took retirements, and now we've got this historic shortage of pilots. So there are some policy issues that have been taken, as Michael said, that have led to unique things around these various industries. So you, Steve, this is interesting to me, because I've also been a little curious about the dynamic here. You think people are doing it as kind of a last opportunity before they sense the window closing if the economy and the labor market weaken? I think that's right. Nobody knows for sure what's going to happen, but historically as the economy has gone into recession, a lot of jobs have been lost. Now, this recession is projected

to be mild and short, and the projected job losses are only, I say that with brackets, but only about a million jobs, which is a lot for those million people that are impacted. But in other words, it should be weakening, and therefore the power of the employees is maximized right during this period before that slowdown happens. Michael, would you agree with that? I guess the other way to look at it would be to say, no, that the labor market is stronger than expected, and the jobless claims data this morning proved that, and workers sensed that even more than maybe the macroeconomists. You know, I think that two things are happening.

So I think if you kind of take a wide angle view and look at the economy over the last year, over the last 18 months, I think there's no question but that the labor market is slowing. There's no question but that we're seeing progress in consumer price inflation. I think if you look at the economy over the last three or four months, we haven't made a lot of progress in the labor market. Over the last six months, haven't made a lot of progress in inflation. And so a lot of it really just kind of depends on what time frame you're looking at. I continue to believe the economy is trending toward a recession.

I think we're going to see a recession. And I think when that happens, when the unemployment rate starts to go up, then I think workers are going to lose a lot of bargaining power again, because they know they're hard to replace. They know that their manager is having a really hard time. Find it other workers, find in people to fill a job vacancies. In that sense, you sort of agree with Steve. I want to come back, Michael, and then maybe Steve you can react as well.

I was speaking to an executive works for a major consumer products company last week. And she said, yeah, I hear these stories about there being two openings for every worker available. But not where I live, not in my industry, certainly not in the tech industry where all they've been doing lately is laying people off. So I wonder if you scratch the surface of that widely cited statistic, which I'm sure is accurate, in other words, that there are two openings for every worker available, that if you dug down into the trench there, you might find something that yields a different picture of the labor market. Michael, why don't you go first? Well, I think that's right.

And I think it depends on the industry you look at. So that statistic refers to the labor market as a whole, the economy as a whole. At large, yes. So, you know, the tech sector has been engaged in layoffs. I think the observation about the pilots is a good one. You know, the issue there is in part strong demand on the part of households who want to get on an airplane and take a vacation. They're also having trouble because a whole bunch of their pilots took early retirement and it's hard to train new pilots. And so, you know, each of these situations has its own idiosyncrasies and its own specific circumstances.

And, you know, different industries of the economy are different. A common theme is everything's more expensive when people go to the grocery store or when people, you know, want to go shopping. And workers are, you know, apart from certain industries, workers just have a lot more bargaining power with managers and with, and with prospective potential employers. Steve, final thought from you, please? Yeah, it depends on what happened in the recession by industry and by company. Those consumer products companies, the non-cyclical companies that didn't get impacted heavily are pretty much more level.

The ones that were shut down and impacted, of course, then had to come back. You see that in airlines. The tech industry is completely different. We had to go completely virtual. They ramped up. Amazon has nearly doubled the size of their business since the pre-pandemic period. Went too far. The curves come down.

So you see these variations by industry. But the macro numbers suggest that the time is now for workers, and that will be different a year from now. All right, Steve Adlin, Michael Strain, thank you very much. We appreciate your time today. Thank you. This survey says they're loving it coming up. Why McDonald's franchise owners are optimistic ahead of the company's earnings next week. Power Lodge will be right back.

Welcome back. McDonald's is set to report results next week. The industry can be a little hard to read, considering all the factors at play right now between inflation, consumer spending changes and more. But a new survey of the company's franchisees could shine some light on what investors can expect. And Kate Rogers is here with more. They sound pretty optimistic, Kate. Kelly, that's right. Kalinowski Equity Research is out with its two-part survey of McDonald's. franchisees pointing to strong sales trends in the U.S. in the quarter thanks to some promotions like the return of grimace and some trade down from higher price competitors as inflation

remained stubborn. The analyst is projecting U.S. same store sales up 10.3% in the quarter as a result of that. Now owners responded that pricing strategies are working well, employment is full in some locations and tourism is helping to boost some sales. Of note, franchisees reported some improvement in the relationship with corporate at 1.71 out of five. That's the highest level in nearly two years. But the six-month business outlook was at 2.29 out of five, that's the lowest level in nearly a year. Remember, there's been some ongoing tensions between the owners and corporate over a restaurant rating system and changes to franchise ownership agreements that were announced last year. The survey is of about 20 owners representing around 200 locations, so it's a subset of the McDonald's footprint here.

McDonald's has been a favored name in this environment of high inflation and potential, rather, consumer pullback or trade down, as it's performed well in previous recessions. Year to date, it's up around 12%. Better than names like Wendy's and Yum, but being outperformed by fast food competitors, restaurant brands international, and ShakeShack, which has been on an absolute tear year to date. Back over to you.

You know, I'm glad to hear that, you know, the tone is pretty positive, but all the buzz is about this $18, Tyler, Big Mac combo meal at a rest stop in Darien, Connecticut. What does that tell you, Kate? Well, Kelly, listen, all I can say is the restaurant can guide on prices. The owners, the franchisees, set the price. right that is quite high I don't have to tell you that McDonald's has really

kind of maintained lower prices than a lot of competitors and again that's why it's been one favorite name in this environment for people who might be trade that trading down rather from higher price competitors like a Chipotle which can be a little bit more expensive of a meal 18 dollars is a little closer to that and a little less aligned with what the McDonald's pricing typically looks like well hungry people in Darien I guess they know they got you at those rest stops they know it yeah all right it is thanks Kate all right coming up trading the consumer.

J&J, American Airlines, Discover Financial, all moving on earnings results. We'll get the trade on each of them in three-stock lunch when we come back. Time for today's three-stock lunch. Taking a look at some big earnings movers today, starting with an outperformer. That would be Johnson and Johnson, up nearly 6% on the session. The company posting a big beat and raising guidance.

Also the first quarterly report for their consumer spin-off, Kenview, which they hold a 90% stake in here with our trades. Nancy Tangler, Laffer Tangler Investments CEO. What do you think of J&J, Nancy? Hi, Tyler, good afternoon. It is a member of our 12 Best Ideas portfolio. It's a stock that we would tell our clients you can own for a lifetime. And so we've greeted the Kenview spinout with great enthusiasm

because the company bought Actilion, which is a biotech company, was the largest transaction and it made them the largest biotech company. this was a number of years ago, and they never got credit for it. And so in this quarter, what we see is that pharma and med tech contributed materially to outperformance. They beat, beat and raised. You're getting paid at 2.8 percent dividend yield, 6 percent growth on a trailing five-year basis, and free cash flows expected to grow at 30 percent this year. So we love the name. I think you continue to buy it, reinvest your dividends, own it for the long term. For the long term, Nancy. And what about American Airlines down 6 percent today after that

record revenue in the quarter earnings beat, but their Q3 guidance more in line, whereas United's was much stronger than expected. American, by the way, also has the Lumen negotiation with their pilots union, probably another overhang on the stock. That's it, I think, Kelly. First, my disclaimer is your viewer should not listen to me on airlines, because I almost never own them. They're just too cyclical. There's too many inputs that they have no control over demand, of course, and energy prices. But I think the pilot negotiations, it will take $8 billion out of the top line or out of the bottom line.

And I think that's one issue. And then you've got the fact that they lowered guidance. That's another issue. And then there's some serious customer service relations problems. I don't know if you caught the story where they're telling people that the bins are full so they can get out on time and then people open the bins and they're not full. So that's creating a lot of discontent. Yeah, you don't want to be lied to. You don't want to be, you know, messed with even if it does get you where you're going a little quicker.

And finally, we end with Discover Financial, Nancy, plunging today on a flood of bad headlines, the company missing on earnings, pausing its share buyback program, undergoing an audit and regulatory review for issues stemming from credit cards that date all the way back to 2007. A troubled stock today, but what do you say? Well, I say if you own it, you may not want to bail out here because what's happened is, you know, everybody's running for the exits, and it will settle eventually. You are getting paid 2.7% dividend yield. They've grown it around 13%. But free cash flow is cut in half this year over last year. I definitely don't think you buy it if you don't own it already.

We like American Express and Visa much better, higher-end quality companies, higher-end consumer. I think that's where you want to play this particular segment. I wouldn't chase DFS on the way down. Right. Interesting. Thank you very much, Nancy. Nancy Tangler. Always good to see you.

You too. Thank you. Coming up, try your hands at a new way to pay. The technology coming to all whole food stores. That's right at your fingertips. All the details coming up in power. Closing time right after this. And as we had to a break, look at the NASDAQ, down nearly 2% now,

so we're pretty much at session lows. Tesla and Netflix continue to be big drags. Those poor results from SAP midway through the session didn't help either. We're back after this. All right, a little less than three minutes left in our program. a bunch more stories we want to tell you about, so let's get right to it. Starting with the Alzheimer's drug that could raise your Medicare premiums. Lecombe could add $5 a month to Medicare Part B premiums, according to the Senior Citizens League.

The drug made by ASI was recently approved by the FDA and therefore added to Medicare coverage. There are lots of drugs like this, either like this one or in the pipeline, that seniors may want to take that are going to be very, expensive medicines at least at first. You only hope that, listen, you know, a $10 per month increase will both for this and for weight loss will be sort of the good it will do in lessen a future medical treatment kind of offset the near-term price. That's a very good point. Yeah, I mean, you hope. Well, it'll take a while to see. Meantime, a cold reality if you're buying frozen veggies, the prices of frozen vegetables are up almost 20% over the past year, according to the June CPI data. That's nearly six times the average for all consumer goods and services. This

This way can be blamed on heavy rains in California, which has ruined crop yields, rising costs for labor and cold storage, and even ripple effects from the war in Ukraine. Yeah, that's an unexpected one. We've heard about bread. We've heard about eggs being much more expensive. Beef, chicken, poultry, but frozen veggies. Are you a big consumer of frozen veggies? Actually, I find them very convenient. Particularly I like frozen peas, which can double as a great applica if you sprain an ankle.

That's the reason I have. That's why you have the frozen piece. Walmart cutting the price of its Walmart plus for lower income households. Those Americans who receive food stamps, other government assistance, they're going to get the service for half price. Amazon has had a similar discount for Prime for some time. Here is another way to expand market, but also to invite people who might find the full price a little too much.

It just makes sense. I think we'll see more and more of this as well, kind of this multi-tiered pricing of things, whether it's streaming or these other kinds of memberships. And finally, Amazon says it will bring pay-by-palm technology to all Whole Food stores by the end of the year. Amazon 1 lets customers pay for items by swiping their hand over a kiosk. They say they're seeing growing demand for the tech, which launched in 2020. Panera started testing some stores earlier this year.

Coors Field, home of the Colorado Rockies, has started letting fans use palm payments to buy beer. So people out there, and you know what, tell me if you've used this, does it speed things up? Because my current Whole Foods checkout is a nightmare. Yeah, it seems like a cool. thing. I use clear at the airport, but I have to use my thumbprints and it's, it does take a little while. We'll see. Maybe it'll work. I like the facial wreck, you know, on my phone. I was a hater of that until I started using it. It's pretty good. Hey, thanks for watching Power Lunch, everybody. Closing bell starts right now.