Power Lunch - Fed Minutes & Real Problems For Real Estate 1/4/23

Episode Date: January 4, 2023

The Fed releases the minutes from its latest meeting. We break down what the Fed said and what it means for policy going forward. Plus, rising interest rates have caused major problems for real estate. We look at the slowdown in residential and commercial real estate and what has to happen to turn it around. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch, everybody. I'm Tyler Matheson. We are just literally seconds away from the release of the Fed minutes from the latest meeting. Ahead of that report, stocks are higher. Let's go now to Steve Leasman for that report. Minutes from the December Fed meeting, Tyler, show that no Fed members thought it would be appropriate to cut interest rates in 2023. All of them in their forecast for rates raised the path of their funds rate relative to where they were in September. The restrictive stance most officials believed was needed until they were confident inflation was coming back towards their target. Several said that history warned against loosening monetary policy prematurely. Still, Fed officials said they were flexible in setting policy due to the uncertainty of the outlook, and somewhat contradictory they said they were still data dependent.

However, they emphasized that just because they slowed the pace of rate hikes did not mean that their resolve was weakening about fighting inflation. against, quote, an unwarranted easing of financial conditions. I'll come back to that in just a second. Now, they did acknowledge in a very small section in these minutes the risk of tightening too much, but they kind of then dismissed that by saying that inflation is the biggest risk to the economy and the one that ought to be addressed. Participants, they said the possibility that price pressures could remain elevated. Only a couple saw the inflation risk coming back more into balance.

The labor market, they said, was very tight. Inflation was unacceptably high. remember the context of the meeting is that consumer spending had been pretty high in September and October, as well as financial conditions had ease leading up to the meeting. Finally, just a couple things on the outlook of Fed officials. They say economic activity in 2023 is likely to be well below trend. Of course, they did forecast that half a point increase in GDP, and they said that a below trend economy is going to be needed in order to bring inflation back in the balance. Just two sort of positive or dovish comments that were really not backed up by much. But it did say many participants see housing, inflation, decelerating, and risk to the economic outlook.

This is not a positive here. We're weighted to the downside. Kelly? So I'm just looking at the market. The market, Steve, taking it. I don't want to say dovish. What do you make of the fact that stocks are a little bit? Anything you want to add before we move along, Steve?

I think you would make a mistake to take a dovish. interpretation of these minutes. They're pretty on the hawkish side, pretty resolved. You know, it's almost like they're tailored to be send a very, very strong message about how hawkish and how serious the Fed is on inflation.

Look, it's like the market's listening to you. The Dow's dropping even as he speaks going, wait a minute, okay, maybe not. All right, Steve, stay right there. Let's get more reaction to the minutes from an economist who got it right with his call for seven rate hikes last year. Actually, he was too doveish. Ethan Harris is back. He's head of global economics at Bank of America, Global

research. And Ethan, people want to know about the minutes, so I won't dwell. But again, you were way ahead of the rest of the pack with your call last year. What do you think about what you're hearing from the Fed right now? Do they have it right? I think they're doing the right thing. And I think Steve's absolutely right. I mean, they are trying desperately to convince the markets that they're serious here. It's amazing. The bond market doesn't believe them. Bond market's only pricing in a peak fund's rate of 5%. It's got the Fed cutting steadily starting in the second half of this The equity market has looked pretty good, strong as well. Markets don't believe the Fed's serious about fighting inflation.

I think they're wrong. I think the Fed will deliver more than the market's expecting. Wow. So the market's expectations are already pretty high, Ethan. And we have a lot of the forward indicators sending us pretty worrisome signals. You know, the price is paid to the ISM is collapsing. The yield curve, pick your poison. They're all terrible.

And yet you think they're going to do what, then how far are they going to go? Yeah. So what they've done is they've told us that they want a weak economy. I think that's a very friendly way of saying they want a recession. I mean, let's get serious here. You've had almost 10% inflation in the United States. You are seeing inflation drop due to a reversal of some of these goods price spikes. You know, as commodity prices come down, as we've seen in the ISM, as supply chains re-engage.

Those kind of short-run inflation pressures are disappearing. But one of the other things the Fed's been focusing on here, they're saying that's not what we're looking at. We're looking at the parts of inflation that are going to be hard to get rid of. How do we stop all this labor cost pressure that's driving service prices? That requires you have a much weaker economy. The economy is just not cooperating. Look at the jolt state of this morning. The number of job openings is still through the roof.

So they get a lot of work to do. And unfortunately, I do think. they end up creating a recession. So the fact that their signals suggesting a recession's coming isn't going to stop the Fed. You see inflation in 2023 of 2.5% on the headline PCE. That's one of the measures. The other core coming down to 2.5%. That is not far above what is said to be the Fed's target of 2%.

If inflation is going to go there in your view, does that, mean that the Fed is almost done raising interest rates? In other words, do they need to continue raising rates to get to that level? And if so, by how much? And when do they stop doing that? Well, I think they've got to finish the job here. I mean, if you agree with Powell, who's saying that the major sticky part of the inflation process is rising labor costs, And then you look at a job market that is still red hot, there's no way you're going to get inflation down to two and a half percent with this labor market. It's unfortunate. The Fed let things overheat, and now they have to take back the punch bowl. But I think these stuff to keep hiking. We're assuming another 75 basis points of rate hikes. And by the way, if the labor market continues to defy gravity here, I would think that we'll see a further hike beyond. what we're forecasting. So it's, there's a lot of work to do. They have to finish the job.

So another, another three quarters of a point to a point of rate hikes, but you can do that pretty quickly. That could be two meetings. That could be the February meeting and the March meeting, and then you could be done. You could be done. I think what you need to see, they need to see clear evidence that service inflation is cooling. The labor market is stopped growing. Unemployment rate is rising. And most important, that job openings are coming down to Earth again. They need something to grab onto that says to them that they're winning the war. Getting the used car prices to come down after having them, you know, go up 50 percent is not winning the inflation war. Winning the inflation war is getting

the service side of the economy under control. You have to have both. You have to have lower goods price pressure and lower service price pressure. So they need to see convincing evidence in the labor market and in the service side of the economy. Steve, is there a risk that they wait to see the whites of the eyes of that slowdown, which is responding while setting monetary policy with conditions that are going to hit 12 to 18 months from now? You know, I know we don't have great, you know, coincidence or even forward-looking data, but it feels a little scary that they want to wait for two of the most lagging data points in CPI and the

labor market to respond with policy that's going to continue to set a course of year, year and a from now. It's not only the risk of it, Kelly, there's almost certainly the likelihood of it. And I think Ethan's sort of telling you that. I think the Fed is kind of telling you that, in that they are not that concerned about it. I read these minutes looking for some cadre cabal corps of Fed officials who were more concerned about that than the rest of the group. And there really does not appear to be one. I think it's instructive. What Neil Koshkari came out and said, I'm at 540 or bust right here. Mary Daly says she's over 5%.

And we have that chart from the summary of economic projections, which show that 17 and 19 officials are over five. This is a risk they're willing to take. They feel like the risk of higher inflation is one that outweighs, I guess by a long way, the risk of going too far and doing too much. I think, you know, when I read these minutes looking for any sign of any sort of nascent, dove-ish wing on the Fed. There's this paragraph in there, guys,

and some of these issues are brought up, but they're very quickly and rather decisively dismissed. Let's not forget that all the doves of the FMC have been voting with the policy. There hasn't been a single dissent. They've done...

No, Ethan, I was trying to figure it out. I think there was one dissent, and I think that was Esther George, who's hardly a dove, and I'll be interviewing her tomorrow. But I think, that's right, Ethan. I was trying to total up. I think this entire time of the historic 75 basis point rate hikes there has been a single descent. So there are no doves in the foxhole of inflation right here. Yeah. And I thought she dissented for a different reason, too. It was like

a financial condition. It was concern about what she wanted to do, and I'll ask her about this tomorrow, Kelly, is she wanted to protect the balance sheet runoff, which is something we're probably not talking a lot about because there's going to be more than a trillion dollars of balance sheet runoff this year compared to 400 billion last year. And it's going to start to, I think, have a fairly profound effect in markets. Absolutely right. Absolutely right. All right. We'll leave it there, guys. Thank you so much. Ethan, always appreciate your time. Ethan Harris with Bank of America global research. Steve Leesman as well guiding us through this. We appreciate it, Steve. And we have new news on yet another vote in the House on the speaker. Elon Moy has the story.

Was the fifth time the charm for Mr. McCarthy? I sense not. So far it is not, Tyler. You're right. We are on the fifth vote for Speaker of the House, but the outcome is expected to be the same California Republican Kevin McCarthy. So far, it's coming up short. Now, he can only lose four Republican lawmakers. So far, there are eight Republicans who are voting against him, and this vote is still going on. Now, before this latest round began, we did see McCarthy speaking on the floor with some of the other Republicans within his caucus. We also saw one of his top allies, Jim Jordan, speaking animatedly with one of his top opponents, Matt Gates.

But so far, neither side has budged despite several calls from former President Donald Trump for the party in the caucus to rally behind McCarthy. And one of McCarthy's opponents, Lauren Boebert, took to the House floor earlier today to say that President Trump should actually tell McCarthy that it's time to stand down because he simply does not have the votes. That elicited some booze from other Republicans on the House floor. So far, though, this vote is likely to end the same way the other four did with no speaker elected at the end of this process. Guys. So what happens, Elon?

I mean, at some point, somebody has to give. Yeah, we don't know, Tyler. Right now they can just keep voting and voting and voting and voting until there is perhaps some sort of breaking point. Both sides are saying they are not going to stand. down here. The longest vote for Speaker of the House took two months to complete, and we're hearing that members are being advised that they could potentially have to stay in D.C. through the weekend in order to get this done. McCarthy has said he'd like to adjourn, he'd like to do some

more face-to-face negotiations, but so far that hasn't been able to happen, and so we're stuck in this limbo until there's some sort of breakthrough, and the path is truly unclear. All right, Elon. Thanks very much. Elon Moy, following the action there on the House floor for us. We appreciate it. All right, coming up, two Dow components on the move today. First, Microsoft falling on a downgrade. The analyst at UBS worried about growth in the cloud business there. Does our trader agree? We'll find out today in three-stock lunch.

But first, Salesforce rising after announcing thousands of job cuts with fewer workers. It also won't need as much office space. The company cutting real estate as well. We'll discuss how this impacts commercial real estate. That's next on Power Lunch. Welcome back, everybody. As we discussed before the break, markets watching the Fed closely for any sign on how much longer interest rate hikes will last. And the longer they go on, the longer real estate could be in some doldrums. Whether it's plunging mortgage apps or vacant apartments, Robert Frank is looking at Manhattan. Diana Ollick, breaking down the mortgage numbers. Diana, let's start with you. What do the numbers say? Well, it's not a great look, Tyler, to start the year. Mortgage rates ended last year on a high high. note and mortgage demand ended on a low note. That's because the 30-year fix. His starting

the year right around 6.5%. It started last year just under 3.5%. So big surprise that refinancing is just plunging. Those applications at the end of the year were down 87% year over year. And mortgage demand from home buyers was also down 43% year over year. So it seems that the mortgage market and the home buying market is apparently frozen, despite, as we all know, the unseasonably high temperatures at the start of this year right around here, Tyler. All right. Thank you, Diana. Stick around for just a moment.

Manhattan real estate sales, meanwhile, seeing their biggest drop since the pandemic and one of the biggest on record. Robert Frank, what's going on with this real estate free? Kelly, this is the biggest real estate market in the country. A lot of money at stake here. Sales down 29% in the fourth quarter. That was the biggest drop since the pandemic in 2020. The median price down 5.5%. That's not a big drop.

but it is the first time prices fell since the pandemic. You'd have to go all the way back to the 2008 housing crisis to see the last time before that the prices fell. And then this is the danger sign when you look ahead at the pipeline into this first quarter. New contract signings down 42%. So those are deals that are signed in the fourth quarter, but that are supposed to close in the first or second quarter of this year. So this is a market that, you know, did $28 billion, in sales last year. That was a record, but it really weakened toward the end. And if you look at what's

happening with Wall Street bonuses, you look at what's happening with the stock market. It's not a very mortgage-sensitive market, a lot of cash, but still international buyers are not back yet. And so the question is, what is going to fuel this market and keep it up, or will prices fall enough to finally bring buyers in? I want to ask about listings, both in Manhattan and more broadly, Diana, if I might. Diana, why don't you take it first? What are you hearing about listings? My wife was speaking to a real estate agent in our town, which is a very hot residential market, by the way. And this agent said there is just nothing coming on the market, period.

Well, there may not be a lot coming on the market, Tyler, but there's a lot sitting on the market. And so we actually have inventory up over 40 percent right now compared with a year ago. That's because it's taking a lot longer for the homes to sell, an average of $5. 15% longer than a year ago. So you have this kind of stale inventory that's sitting around waiting. But as you said, you're not seeing a lot of new inventory come onto the market. And so that's what we're waiting for in the spring market, which actually unofficially begins on President's Day weekend. So we're not that far off from that. It's just a question of what is going to move potential sellers to say, okay, I'm not afraid of falling prices. I'm not afraid of having to

trade my mortgage rate if I buy something else for a higher mortgage rate. What's going to push them to put that home on the market. So far, they don't seem to be seeing anything. And again, of course, overall concern in the economy doesn't want them to make a big move either at this point. So we do have more inventory from a year ago. That's the good news. But it's still not really fresh, interesting inventory to the buyers out there. It's just stuff. What about Manhattan? Even worse, you know, Manhattan is such an investment-driven market. It's more discretionary. So you don't get distressed sellers like you do in other markets. Normally there are about eight to nine thousand apartments on the market Manhattan right now there are six thousand so even though

prices are falling a little bit you don't see the sellers listing and that's just causing you know the sellers not the list in the buyers why are the foreign buyers staying away and i assume if it's happening here i i wouldn't say they're staying away so much Tyler actually we have a report coming out tomorrow that i'll just preview is that the chinese now that they have lifted the restrictions may be coming back to the u.s market so that's something to look forward to i guess Robert yeah we saw a little of that in December. Brokers tell me they saw Middle East buyers and Chinese buyers, very wealthy buyers, who came to do luxury shopping during the holidays, brought their checkbook and bought some apartments. Now, that wasn't a large number. That is a different amount

of shopping. Shopping. We'll see whether that, you know, and the Chinese were seeing travel restrictions being lifted. The Chinese, even prior to COVID, were not in this market in the U.S. the way they had been, 2015, 2016, for all sorts of reasons. So it's a big question of whether of how many of them truly return and buy real estate? Let's move on to the question of Salesforce, which announced major cutbacks in staffing within the past 24 hours, cutting staff by 10%. It's the latest in a score of tech company layoffs.

The company also saying it's going to close some of its offices to cut costs, which brings us to the non-residential side of real estate. Diana, let's talk a little bit about that. What are you hearing about Central City Business District rentals and activity? Well, we're seeing apartment rents come down

and so that could bring more renters back into the market those who have left the market. We're also seeing a lot. In fact, a record amount of multifamily apartment inventory will be coming onto the market this year.

So that could ease rents even further. When we talk about office, it's interesting because we're seeing the S&P real estate sector, which is all commercial reeds, higher today. Of course, it's down 25% year over year.

So it's so beaten down. why would it be up today? Well, we did get an upgrade, actually, from Missouho on Borneo in office reet, despite the fact that literally I get something in my inbox every single day of another survey about how many, what share of office workers don't want to come back to work today. I think the share was 12% wanted to be in the office. So it's really, it's kind of crazy these numbers that you could actually be bullish on a rally in the office market. And Robert, meanwhile, all the buzz is about this Blackstone deal and the 11% yield that the University of California is paying in order to reassure people about what's going on here.

And I imagine a lot of people you speak with are big investors with big exposure to these areas. They do. And if you look at New York in particular, there are just darker clouds ahead this year. You know, there are 40 Empire State buildings worth of empty space in Manhattan right now. And the marginal leasers during the pandemic, the big new customers were meta. It was Amazon. It was, you know, all the tech companies. like Twitter that were getting space.

Now they're laying people off. Meta just gave up a quarter million square feet of space in Hudson yards that they had just leased. And so, you know, the growth engine for Manhattan commercial... How many Empire State Building? 40. 40. 40 Empire State buildings of empty space,

and it's just going to get worse as some of these leases come on for renewal. And like you said, it's expensive to do an apartment conversion when you could just do a brand new... But you see, our former employer still is sticking with it. Midtown Manhattan. Super Murdoch, News Corp just renewed their lease. So that was a good bit of rare, good news on 12-11 Avenue of the Americas.

You hope they got a deal. I'm sure they did. Plus, they put it as we know, they put a lot of money into that newsroom. But there are not a lot of new leases being signed. And there are a lot of new buildings coming online. So that's going to make even more empty space and see what happens with prices. Very interesting. Yeah.

Thank you both. Robert Frank, Diana Oleg. Still to come, today's working lunch. We'll hear from the CEO of a cloud software company working to prevent and recover from ransomware attacks and why demand for its products is so high in Europe, especially, more power ludge next. Hello, everybody. I'm Contessa Brewer.

Here's your CNBC news update at this hour. The U.S. Embassy in Cuba resuming full immigrant visa processing for the first time in more than five years. The embassy slash services in 2017 after several of its staff suffered unexplained health issues. It later became known as Havana syndrome. This comes as record-breaking number of illegal migrants from Cuba. continue to flow north to the United States.

European Union regulators are hitting Facebook parent meta platforms with hundreds of millions in fines for privacy violations. The regulators are also banning META from forcing users in the EU to agree to personalized ads based on their online activity. Meta plans to appeal the two fines totaling more than $400 million. And the Buffalo Bills release an update on Demar Hamlin. The 24-year-old safety remains in the ICU. in critical condition, though he is showing signs of improvement.

Hamlin is expected to remain under intensive care as his medical team monitors his condition after he suffered cardiac arrest during the game Monday night. Tyler? All right. Thank you very much, Contessa. Some news now about a frequent guest on CNBC and Power Lunch. Brent Beardall, CEO of Seattle-based Wafed, survived a small plane crash, jet crash Monday in Provo, Utah. He was seriously injured, but is expected to be.

make a full recovery over time. The meantime, he's taken a temporary leave of absence, and Executive Vice President Kathy Cooper has assumed his duties for the time being. The plane was piloted by Nathan Ricks, a prominent businessman in Utah. Mr. Ricks, sadly, did not survive. Two other passengers on board,

including Mr. Ricks' wife, suffered only minor injuries. Our sympathies go to the Ricks family, and we wish Mr. Beardall a swift and complete recovery. Power lunch. We'll be right back. And we want to get you caught up on the markets. We got your stocks. We got your bonds. We got your commodities and some strategies on how to approach the markets this year. Let's begin with Bob Pissani at the New York Stock Exchange. Hey, Bob. Hey, Tyler. Well, the market was not particularly fond of the

minutes. So we know about higher for longer, but the comments, nobody seems to believe rates are going to be lower in 2023 from the FMC sent the market down a bit. We're lost about 30 points. We were at 3860 or so on the S&P now 3831. We need to close above 3822 for the Santa Claus rally. So the rally is right on the edge of working at this point. The Dow, by the way, has also recently gone negative. In terms of market leaders, all of those travel leisure stocks, they've been doing great today overall. Carnivals raising prices starting April 1st.

Norwegian already raised the prices, I think, on January 1st. Wyn's been doing great. The China reopening story is helping China stocks, including Wynn. even other Seizers, for example, other gaming stocks are doing really well. The story is pretty simple for this day. Last year's losers, this year's winners, Disney doing well. Intel's still holding up. Salesforce announcing a 10% cut in its workforce also doing well.

And Boeing's been on a big tear. That's been probably the biggest winner for the Dow in the first two days of the year. And of course, the opposite is true. Last year's winners are this year's laggards, particularly health care's had a tough couple of days. United Health, a big winter last year, and that's really been a drag on the Dow first two days. Humana, also a big health care stock week the last couple of days, and energy, as oil is not that far from a 52-week low, Baker Hughes and Chevron, also weak, Chevron weighing on the Dow. So we'll see, Tyler, what the jobs report looks like on Friday,

210,000 jobs. That's the weakest in a couple of years, and that may give a little more fuel to the idea that the economy is slowing down, just enough to cause a modest recession, because That's what the stock market wants to believe. We're just going to have a very mild recession, and that's the debate. What side of that recession are you on? Tyler. All right, Bob, thank you very much. Let's transfer now to the bond market where Rick Santelli is tracking the action.

Hi, Ray. Hi, Tyler. You know, it was a fascinating response to the minutes of the December Fed meeting because the Treasury complex, starting now a two-year, then 10-year, Heel started to dip going into it. And, of course, we know that they ended up moving a bit higher. How much higher is important. Okay, look at an intraday of two-year.

There was a lot of volatility, obviously, with numbers this morning. But you could see that we started to drift down just a bit before 2 o'clock Eastern. Well, that reverse. We're at 435 pre-minutes. We're currently at 437. It's the only maturity with a higher, yield, lower price on the entire curve at the moment. And if you look at 10-year for a couple of weeks, something should jump out at you. Obviously, we've been trending lower.

We're intersecting the range from the 23rd. We're on pace to close at the lowest. yield since the 22nd. And if you consider the fact that we're at 369, we're exactly unchanged from where we were pre-minutes. We're at 369 pre-minutes. We move slightly higher and came back down. Now, June Fed Fund Futures, it's the fulcrum. It's where we stop going down in price and start moving up. June futures. They're still implying a 513 and a half terminal rate. 9503.5s where they're currently trading. They're still up a half a tick on the session. And as you can see there, pretty much in a range, although at the bottom of the range,

finally the dollar index. More and more bulls showing up for the dollar index, thinking the Fed's going to deliver on its promises to be tough on inflation, thus keeping rates higher. As you look at this chart, the last couple of weeks, mostly sideways, but do note we're starting to see expanded ranges and higher option volatility. Tyler, back to you. Rick Santelli, thanks very much. We've got a big drop in the oil price today, and Pippa Stevens has the news at the Commodity. Hi, Pippa.

Hey, Tyler. Well, crude is tumbling more than 5% today as global slowdown fears way. With China demand concerns also hitting prices, analysts at Commerce Bank, noting that the global economic outlook will play a much more important role than the production decisions from OPEC and others, meaning that right now, this is squarely a demand story. Now, turning to Nat Gas in Europe, futures dropping 10% to the lowest level since November 2021, as the continent experiences record. warm temperatures. Prices are now at 35, sorry, 65 euros per megawatt hour. Back in August, they were above 300 euros. Then here in the U.S., Henry Hub prices are catching a bid and back above that $4 level after yesterday sinking to an 11-month low. And that is boosting shares of gas producers like EQT and Kotaura. Tyler. All right, Pippa, thanks very much. Our next guest

thinks the recent pullback in both oil prices and energy stocks offers some opportunities. Let's bring in Art Hogan, Chief Market Strategist, with B. Riley, wealth management. Art, we'll get to energy and the opportunities you see there in just a moment. But I want to start with a bigger picture look at the market in 2023 as you see it. It is relatively uncommon for the market to have, or at least in recent history it's been uncommon, for the market to have two bad years in a row. Do you expect that this year or not? No, we really don't. I think a lot of the things that we were faced with in 22 have dissipated behind us in 23. For example, we don't think the tenure is going to have the order of magnitude

move that it had in 22, went from one and a half to four and a quarter. We'll likely see yield settle down. We'll likely have a peak in fett hawkishness. We've seen a peak in inflation. All those things will become tailwinds for the market. We have to get through the choppiness of the first couple of quarters. But I think when the Fed gets to a place where they pause, the first two P's and pause and pivot, the market will take that as a positive. And I think that will ignite risk on appetite. And then when they get to the fourth quarter, I suspect they're still going to be at a place where they're going to need to pull back a bit. I think they're going to have a five and a quarter percent Fed funds rate and inflation at that point in time on the headline level

for CPI will probably have a three handle. So not entirely impossible. They have to cut by the end of the year. So I think the markets face a different dynamic in 23, and we likely have a more positive year. Well, let's move on to your argument for several of the energy area stocks, Chevron, APA, and Schneer. Yeah, Chevron, fully integrated, international and domestic exposure, trading at a very reasonable, multiple, at her about 10 times, and paying a very nice dividend. I think that the reason, Pippa just went through this, but one of the reasons we've seen a pullback in energy prices in general. in the energy sector in particular, has a lot more to do with fears of recession, fears of global

recession, ignores the fact that the dollar seems to a flat line and likely it's heading lower, a net positive for commodities, and certainly doesn't play into the China reopening story and the demand for all sorts of commodities, including hydrocarbons by China. So I think Chevron is one of the best ways to play it. Does it make you nervous art, and hi, it's Kelly, here, that oil is off to such a rocky start this year? No, not at all. I think a couple things. Mother Nature played. a nasty trick on the Nat gas bowls, delivering some warm weather for a couple of weeks in the end of December, the first part of January. That happens. And I think that when you look at

the overall supply and demand dynamics, we certainly are still undersupplied. So any increase in demand, especially coming out of China, we just haven't had enough CAPEX spent on oil production by any of the oil producing countries over the course of the last three years. So you're not able to make that up very quickly. So any need for new supply is going to be met with a lot of demand. I think the supply demand dynamics will be will outweigh this. And remember, most of these energy companies are going to do just fine if WTI is sort of pinned at a $65 to $75 level. So we're not calling for a return to $100 crude. We're just talking about very profitable companies. Let's talk a little bit about what you describe as a barbell approach to investing this year on one

end of the barbell or the things you say we need like energy, health, care consumer staples. On the other end of the barbell, solid growth companies with a defensive leadership role in their sector, the way their multiples have gotten contracted over the past year. What kinds of companies are those? Name some names, if you have any, but give me sectors for sure. Yeah, absolutely. So on that front end, you named it perfectly, right, energy, health care, and certainly staples, but staples at a reasonable price. They've had a significant run. On the other end of that, you're really talking about growth. that is actually attractively valued. And boy, we've created a lot of that over the course of the last

quarter or so. So think about companies like Apple, Microsoft, to a certain extent, meta, if they pull in a lot of their spend on, you know, other things and address their core business. But I certainly think that Alphabet, Microsoft, and Apple are three great examples of multiple contraction. You've certainly seen defensible moats around their business. You've certainly seen shareholder-friendly management. And I certainly think that the, you know, the multiple compression that we've seen in those three names alone. And there's a host of other ones sort of fit that bill of growth at a reasonable price. All right, Art, thank you very much. Happy New Year, my friend. Thank you. All right, Art Hogan. Thanks. Still to come, John Ford, bringing us his interview with the CEO of

Cloud Software firm Rubrik in today's working lunch. And as we had to break, speaking of Cloud, check out shares of Microsoft. The stock is down more than 5% today. UBS, downgrading them, citing risks to Azure. We've got that and more coming up in today's three-stock lunch. During economic slowdowns, companies often look to cut costs, but tough times also tend to see an uptick in cyber attacks. This week, John Ford brings us up close with the CEO whose company specializes in data protection. Yeah, Kelly, Bipple Sinha is co-founder and CEO of Rubrik, a late-stage cybersecurity startup that's openly preparing for an IPO whenever the market starts behaving again. Rubrik specializes in data backup.

security and restoration protecting against incidents like ransomware attacks. In a way, Bipple spent his whole life managing risk. Growing up in India, he didn't go to atop high school, so he actually dropped out in a long shot bid to study for and crush college entry exams on his own. He succeeded, went to a top college, then got more risk averse. After I got out of school and joined the job, my mom always told me to never, ever start anything, take a job, stick to it, you want monthly salary, you want safety.

And it took me roughly 10 years in America to get into the mindset that I am not driven by the circumstances I am in. Circumstances are driven by me. So it's like a little bit of a creative view. And once I had that thing in early 2000s, maybe 2005, 2006, that's when I quit my job, when to do my MBA and switch into venture capital because it started to think about risk differently. And then he started his own company. Now he's very much back to making his own luck. Microsoft invested in Rubrik at about a $4 billion valuation a year and a half ago. Last year, Rubrik said it doubled its annual subscription revenue to $400 million.

Cynard told me recently that even in this tough macro environment, customers are looking to minimize risk and secure their data. What we are seeing in Europe is the demand for cybersecurity, demand for data security ransomware protection continues to be high. And there is no let up in that demand. Obviously, the foreign exchange rate and the government level issues in UK, public sector, things like that. So there are some impact, but in terms of the demand for cybersecurity products

continues to be strong because at the end of the day, every business have to protect themselves and be ongoing operations. I had that conversation with him when Microsoft's lead independent director, former chairman John Thompson, announced that he was joining rubric as lead independent director. Now, it's not security related, but we just witnessed an example of what can happen when companies don't keep their technology updated with that Southwest airline system meltdown. You can bet a lot of companies are doing the hard work of determining what software they still need to buy in 2023 to make sure that they can operate. guy. You know, he says there, I started to think about risk differently. I wonder what he means

there, and I assume what he means is that he decided that he was going to bet on himself. Exactly. And if you bet on yourself, you can influence the outcome of the bet. Yeah. And he did that in a big way in high school when he dropped out to study for that all-important test. And really, I mean, he shouldn't have passed it, right? Because the test prep organizations, there wouldn't even give him, sell him the test because they didn't think he could pass it because he didn't go to a top school. So we had to get previous years

photocopy tests and study off of those and he made it. Can he come tutor my son who's getting ready to take the S-18? How about that? Yeah, we need it. So impressive. And now, I mean, there's so many companies like this, though,

that try to help deal with ransomware. What makes this one unique? Well, it's the cloud-first model, and it's not even the only one that does that, but it has deep relation and an approach that really encrypts, right, in the cloud. So they're up against cohesity, for example, with Sanjay Poonen, formerly of VMware, has just become the CEO of, we'll have to see which one or which many of these companies

work out, but the Microsoft investment helps. Oh, and I mean, the amount of revenue they're doing, the fundraiser in this environment, last thing real quickly, do they compete with the big publicly traded names who might think of, the Palo Alto networks, that kind of thing, or are they in a different bucket? Not so much Palo Alto, a name like Com Vault, you know, some of Dell's storage and security stuff a bit more. All right, John, thank you very much. John Ford. Appreciate it, as always. All right, coming up, today's three-stock lunch. I don't know where I'm supposed to look, but that's all right. Who cares, really? We'll trade some of the biggest Wall Street calls. Power lunch will be right back.

All right, time for today's three-stock launch. We're going to take a look at some of the movers of the day, including Microsoft. Shares there down nearly 5 percent today as UBS downgrades the stock, signing. weakness in the cloud. Etsy shares up more than 4% after Needham upgraded that one from neutral to a buy. And Alibaba surges more than 12% today after Ant Group receives approval for an extended capital plan. To trade them all now is Courtney Garcia, senior wealth advisor at Payne Capital Management and a CNBC contributor. Courtney, welcome. Let's start with Microsoft. What do you think here? Microsoft, I have a hold on. They actually did. did get a downgrade recently, which you had just noted here. And that was because of their cloud

computing doesn't expect it to have as much demand going forward as investors have expected. And the problem really that I have with Microsoft is it is trading at a higher valuation than the market. So while it is cheaper than itself, the problem is we're on this high interest rate environment, the bar is going to be that much higher for these higher valuation companies. And if that demand towards cloud isn't what people are expecting, it's not going to perform as well. So as a long-term investor, it's something I want to hold a short-term. I actually would not be buying into this currently. Wow. All right, let's move on to Etsy then.

What about this one, Courtney? Etsy I have a sell on. Etsy is, again, just to reiterate the same point here, a high valuation company. It trades about 36 times next year's earnings, which is much more than the markets. It actually traded it a loss last quarter. And the problem is we're also facing a consumer right now, which is facing higher inflation. And they're having to choose on what they're purchasing right now. So instead of buying goods, which is what Etsy sells, they're going to services.

So think of going to a restaurant rather than buying good right now. They are pulling back on some of that discretionary spending. which unfortunately Etsy is going to be prone to. So I would not be a buyer of Etsy currently. Still with a 43 times forward P.E. Wow. All right. Let's, shall we move on to the next one? And that one is Alibaba. Ali Baba.

You know what I want to do? One of these days, I want to do Ali Baba, which is Baba, and then I want to do O'Reilly Auto parts so we can do Baba O'Reilly. But be that as it may. Ali Baba. What do you think? That's maybe harder to compare. Yes, Ali Baba.

I do have a buy on here. they've been facing some big headwinds. Number one is the zero COVID policy in China, which we're finally getting some light at the end of the tunnel with, which is going to be a great thing for them moving forward. But also the regulatory scrutiny has also been a big problem for them. But just today we saw with Ant Groups raising money, which just got approved. That is actually starting to bring some light at the end of the tunnel there as well. But also, their valuation is dirt cheap. They turn about nine times next year's earnings. And just they're not even close to where the highs were. That price had about $317 a share back in, October of 2020. We are nowhere near there. So the fact that's dirt cheap and a lot of those headwinds are behind them, I think this is a buy. All right. Thanks very much, Cort. That's terrific. Courtney Garcia. Thank you. Now it's paying to be a pal of PayPal. The stock continuing its recent run. More details on that next. Welcome back to Power Lunge. Shares of PayPal are continuing their strong recent run. They're up 15% in the past week. Let's go to Kate Rooney for more. What's happening here, Kate? Hey, Kelly. Yeah, so it's been a really good start to the new year for PayPal. Like you said, more than 15%, about 15% or so for the week.

Led the S&P yesterday following another upgrade at Truest. Mizzuho was the latest with a pretty bullish note this morning, maintaining a buy rating. They talked about PayPal versus Apple Pay. So Apple Pay has been seen as really one of the big threats to PayPal, especially on mobile. So Missouo looked at web traffic here. They looked at some of the partners. So think Etsy, Nike. where people are checking out with PayPal, and they found that share loss is starting to stabilize. So they're not necessarily gaining share against Apple Pay, but it's slowing down, and that's seen as a really good sign for PayPal.

So this was especially strong in mobile. That's where PayPal tends to be the most vulnerable to the iPhone. Still, though, guys, a long way to go in terms of any sort of recovery. If you zoom out over 12 months, PayPal's still down about 60%, but sentiment really seems to be picking up here on Wall Street. I was looking to the average price target. It's overweight right now with about $105 price target for the average analyst.

So that's about a 35% upside. So things are turning around here. Do you happen to know, and forgive me for asking and putting you on the spot, what the relative shares are on mobile devices for PayPal, for Apple Pay and for Google Pay? So they measure this on web traffic. So if you look at that, it's in terms of Google Pay, Apple Pay is gaining share on PayPal. I don't have the relative ones, but if you look at some of the web traffic, it did look like, based on Mizzou Ho's note earlier, even though it was stabilizing Apple pay was absolutely gaining ground. Way more so.

In mobile, actually on desktop, PayPal tends to do quite well, and it's sort of the incumbent checkout method that a lot of people are used to using back to the eBay. That's my experience, Kate, is that I use PayPal when I'm using a desktop or my iPad at home when I'm checking out and it makes it very quick and very, very seamless. When I am at a checkout place, I tend to use my phone with Apple Pay or Google Pay. I guess it's Google Pay. And I feel so proud of myself. I feel like a millennial. I feel so good. They say the friction to start using Apple Pay is really the big thing.

You get nervous going up to the coffee shop with your phone and thinking, Is it going to work? But desktop is really where PayPal has won. And Venmo is trying to move sort of more into the mobile space. Venmo is the sort of the peer-to-peer app that people pay each other with. So that's really been PayPal's play in terms of the in-person mobile payments. So similar story with Coinbase, Kate, in terms of the stock, terrible year, but up more than 10% today. We've got a couple of different things happening in crypto.

We also have this, I don't know what's going on with Robin Hood shares from FTX, but maybe you can tie that all together for us real quick. Sure, yeah. So some different reasons behind this, but all within that fintech umbrella. So Coinbase settled a case earlier with a New York state financial regulator. So it was a $50 million fine. They have to invest another $50 million in compliance. So $100 million seems like a big number, but this had really been an overhang. I think there's a sense of relief that this has been solved. It's been playing out over the last couple of years here. And regulators said it was about failures in anti-money laundering. Seems as a good thing if they're going to become even

more compliant and a little more strict on who's actually using this platform from from a KYC perspective. But helping the stock here, absolutely. Yeah, 12% gain today for coin. Kate, thank you. Kate Rooney. All right, folks, thank you for joining us for power lunch today. We appreciate your company.