Power Lunch - Finding opportunity amid the volatility and Bank of America’s CEO says the hot labor market is complicating the Fed’s job. 5/2/22

Episode Date: May 2, 2022

Three sectors facing big issues: staples, chips and home builders. We’ll speak to three experts who say there are stocks worth owning amid the pullback. Plus, Bank of America’s CEO says the Fed��s road ahead is unprecedented. And, mortgage rates keep climbing - hitting 5.5% Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome everybody to Power Lunch for a busy Monday. I'm Tyler Matheson, as Kelly mentioned, and here's what's ahead. Stocks are struggling to shake off a brutal month of April, as April's route now extending into May, as Kelly explained. There are, of course, opportunities amid the volatility, always are, from staples to chips to home builders. We're going to take a look at the stocks worth owning in these three pillars of the economy facing big market moves. And a power launch exclusive, Bank of America's CEO Brian Moynihan will be with us. We will get his take on the Fed, tightening a slower economy, inflation, whether a consumer is holding on amid that decades high inflation. Kelly, we've got a big hour ahead. Lots of guests, lots to talk about.

We certainly do. Hi, everybody. And we're near session lows right now. The Dow down 341 points. The S&P down 46. The NASDAG down 83. So a pretty broad-based sell-off once again. Now, the 10-year yield topping 3% about an hour ago for the first time since 2018.

We're just below that level right now. In fact, let's get to Rick Santelli. He's got all the latest on these big moves. Rick? Yes, as you look at the one-week charts of the major maturities along the Treasury curve, twos, tens, thirties. You'll notice especially on the tens, boy, we went right up to the water line of 3%. And then we backed away, as Kelly described.

And part of that, of course, is the softness in equity markets. It still has a back channel towards a bit of buying in treasuries. But of course, we all know that the days of buying treasuries when stocks go down, those days for the most part are gone because treasury is leading the way, moving rates higher at the beckoning of the Federal Reserve. And that really is the nervousness in the marketplace. And you'll also see a one-week chart of the dollar index. And for the most part, it's a positive sign.

Remember, one of the issues with weak GDP we learned last week down 1.4% was the fact that we have record trade deficits, which in itself is a slight positive because of the domestic demand. That's a good thing. People want to buy things. And the strong dollar lets them buy more than what if it was weaker. However, here's the dark side of the strong dollar, that if you look at other economies, emerging markets, there's a lot of dollar denominated debt in the world because at the time it was issued,

that was a big positive. But now procuring those dollars gets to be an expensive proposition. So we have to watch all of this as to lead into Wednesdays, what perceived to be a half-point tightening, has its effects on the market. And, obviously, as it been pointed out, this is in its infancy with respect to the actions, but the pricing in is much more mature. And both of those are going to meet at some point in the future, and that's going to be the big trade for equities. Kelly, back to you. Thank you, Rick. Now let's send it over to Bob Bassani at the New York Stock Exchange, watching the effect of this move higher-end yields on the market, Bob.

And it's not helping anything, and it's not even helping the bank stocks, Chely. Very choppy trading, but we're at the lows for the day. Let's take a look at the major indices once more here. The Dow is just above a 52-week high a short while ago. We could violate that. The S&P 500 nearing the lows of last May, the NASDAQ is at a 17-month low right now. That broke through that some time ago. In terms of the Dowel movers, oil popped up from 101 to 105 late in the morning,

and that's given a nice lift to some of the energy names. So Chevron's up. Most of the other big energy names also trading to the upside. Microsoft's doing well. But a lot of the industrials like Boeing are sitting at 52-week lows right now. And many of the banks like J.P. Morgan, also at 52-week lows. As you see some of the down-movers there. Beaten up tech is rebounding.

Tech, media, telecom, doing a little bit better today. So PayPal, Facebook, even AMD is bouncing, Netflix, a whole bunch of stocks that have had a very, very tough time in the last couple of months. all rebounding today. That's good news. But by and large, the trend is down. I just want to show you some of the real estate investment trust. This was a big market leader earlier in the year. So Kimco is a little bit weaker. As you see, that's strip malls. Regional malls like Simon property also have been trending down. And even some of the equity residential, the apartment reeds also have been trending down recently since earnings a couple of days ago. Banks, as Kelly mentioned, sitting at 52-week lows, Goldman, Morgan Stanley, Bank of America, and

and Citigroup, not benefiting despite the yields. And, of course, the big catalyst tomorrow, or Wednesday, excuse me, Kelly and Tyler will be, of course, the Federal Reserve meeting. Back to you, Tyler. All right, Bob, thank you very much. From the consumer to inflation, to the economy, to interest rates. Really, no one has a better look at where we stand right now than our next guest. Bank of America's CEO, Brian Moynihan, joins us live from the World Medical Innovation Forum with our own Bertha Coombs. Bertha, the floor is yours. Thanks very much, Tyler, and thank you so much, Brian, for having me here at the World Medical Innovation Forum and for joining us this afternoon. You know, we've come off an incredibly volatile month, and it's certainly not looking any different here at the start of May.

You talked about a couple of weeks ago how resilient the consumer seems, and you seemed very buoyant about the economy. As we are looking at things here over the last couple of weeks, and we're going into the Fed raising interest rates this week, week. Where do you stand now? Well, if you look at the first of all, Bertha, thank you for coming to Boston and helping host the conference here with some of these great medical innovators that you just walk around the hall. So it's really something special with Mass General and the talent in this room. So these are about financial markets. This is about saving people's lives. So we've got to keep that in mind. But look, the month of April so far, consumers, stronger than it was in March. And so the consumers continue to spend money. And so people

say, well, they're spending more because inflation has raised prices. The rowdy is that transaction volume is rising 10% over last year, which means they're doing more. You only go out to eat for dinner one time a night, not three, so you spend it. So you're seeing the money being spent. You're seeing the money in their accounts continuing to build, not go down, but build, which frankly poses a tougher challenge for the fifth, because how does they slow down a consumer-driven economy? And you heard Santilli say earlier that the imports and stuff are strong because people are still demanding goods, and that's a good final demand you have.

So we have this tug-o-war right now, but consumer's strong. Business are in great credit shape, trying to get goods and services sell, trying to get employees. And that's creating worry as to what happens after the Fed actually gets the rate structure up. And that's what you're seeing play out in the market. Oddly enough, when rates are rising, usually they equate that with bank stocks going up. But the debate about recession, we don't see any of that. Our credit quality is as strong as it's been. You know, the loan originations are as high qualities as they've ever been.

So you don't see it. And yet, you know, obviously one data point does not a trend to make. But we certainly saw that first reading on GDP with contraction for the first quarter. We just saw ISM today disappoint as well, and a lot of those numbers were also lower as well. Could we be seeing some of the cracks? And if the Fed continues on this pace, the expectation is a half a percent this week, but some people are starting to say maybe in July they'll be doing three quarters of a percent. Can they engineer this get ahead of inflation without putting us into some kind of deep recession?

You use the word deep, and that's the – they're trying to have a soft land. or a little bit of a bumpy landing, but not a deep landing. Obviously, that's the job they're trying to manage. The thing is, the statistic you talk about, the one that you didn't talk about was the labor market. So last week, I think it was another 180,000 new claim for unemployment. If you'll say, well, that's a 50-year low. The labor force was one-half the size last time was at that nominal number. So 80 million people working versus 150 or whatever it was exactly.

And think about that. So on a relative basis, the labor market is very strong, And that's the difficult challenge for the Fed is to actually get the labor market to cool down. Rising wages, 1.7 plus jobs for every job that's open. You know, 10% under-employment in places, needing workers and services-side sectors. So that's going to be the tension. Now, simply put, from late last fall into the early part of this year, our experts and the Bank of America Research Team have lowered their estimates for GDP this year and next year

because as interest rates move up, it's having the effect. The Fed has yet yet to raise rates and you're already seeing people lower their estimates in anticipation. So now they're slightly under three this year and slightly under two next year. That's down from probably slightly under four last, say, last November, December. So it's come down, anticipation of rising rate cycle will slow it down and that's what the Fed's trying to achieve. But the trickier execution here, unprecedented, frankly, is to have unemployment at this low level, job strength at this low level, wages at this high growth level, and trying to slow it down, with only interest rates and balance sheet as they are in your quiver, and that's a trickier

execution because they can't create human beings to work. That's not the Fed's role, and that's our role, and whether it's immigration or bringing more people in the workforce, and that's going to be a trickier execution for it. You know, one of the things we were just talking about on stage was about healthcare. You spent $2 billion on healthcare, and these days it's increasingly important those benefits in terms of trying to retain people as they see flexibility to to move around. I wonder as you work with providers like Mass General, what are some of the things you're trying to do to rein in costs? I know everybody says they're about outcomes,

but that's a really big ticket to write. Yeah, for us, if you think about it as an employer of 200,000 plus people and the family members on our programs and we're self-insured, if you think about it, the key is to get people to get themselves more well. And that's exercise, that's mental health. It's all also maintenance drugs. So our maintenance drugs and our plans are free for, you know, for routine drugs that you can take. You get them mailed to you, it's all free. So you're driving down the cost to the employee, but you're also frankly provide incentive to stay on the maintenance level drugs. So whether it's cholesterol maintenance or whatever the

maintenance drug is. And so what we're trying to do is figure out ways to help drive that. The second way we work with some of Mass General or other great institutions around the country is to provide access to treatments that, you know, we can provide for all our employees, you know, access to trials when there's a very serious case. Those are very unusual circumstance. The real way is to drive down the cost through lowering the cost across time. You're not going to change it for next year. The real big change right now is mental wellness and we've been investing a lot. So we have 12 sessions you can get for mental wellness counseling sessions for free. And again, we're just trying to get people to use the system

because frankly, if disease progresses with a person, stress and progresses, the health-related aspects of that, but also missing work and things like that. So it's all in our best interest to do this well, but it's all around getting a teammate to recognize how to do better for the day and their family in terms of wellness. And then we kept the cost flat. Our teammates, you know, below 75,000, 50,000, have paid the same for their health care costs. In 2011, they pay today. Wow, that's amazing. You know, their co-pay, you know, all kept the same. And the reason we did that is just by driving costs of the system. So our costs, as a company, are flat, that our teammates pay the same. That's terrific. Tyler Matheson, I believe, has a question. Tyler.

Mr. Moynihan, I think maybe after your discussion of health care, I'd like to join your plan. It sounds pretty good. But I'm going to pull you back, if I might, to interest rates and particularly mortgage rates, which on the 30-year conventional are now in the fives, the mid-fives. We haven't seen that in many, many years. That's a breathtaking for people who are trying to enter the housing market, particularly after we've been spoiled by rates in the threes and even lower. What's it going to do to housing, to home builders, and generally to the economy, because housing is such an important part of it? Well, again, we're in a little bit of unprecedented times because we still have a lack of housing, even though rates are going up, which would generally curtail demand and are intended to curtail demand. So, you know, you know, that's why the Fed raises rates and the whole rate curve moves up and slows down, you know, the cost of, or increase the cost of financing. slows down the demand for housing, but we just don't have enough units. I mean, that's why you don't hear the home building and stuff saying they're slowing down

because they're still selling the units. So all this will come in, you know, I think the HSI last year, you know, last year to last month, I think it was up 20% or something like that. That's an unsustainable level, and we shouldn't cheer for that because when did that feel like, the early 2000s, we should get it leveled back out. And yes, for an individual person entering the housing market today, 5% on a $300,000 mortgage is two points times $300,000, $500 a month more expensive. But to qualify for that mortgage, somebody would have to make, you know, I don't know, $100,000 around numbers in a household or even more.

It's not going to make or break the decision, but we'll make it more expensive and slow it down. But remember, people have to remember that is the intended effect of what they're trying to accomplish with removing the accommodation in a very strong growing economy with very low unemployment. They have to remove the accommodation or else we're going to have inflation that will then put housing out of reach by price appreciation as much as anything else. I have to ask you one more question in terms of banking and finance. You know, your friend, Warren Buffett, this weekend, talked about his theory on cryptocurrency. He just doesn't really see the value in it. He doesn't really understand it. But you, on the other hand, also with Merrill, need to be able to meet the needs of some of your younger clients who are all clamoring to trade crypto.

Where are you on that? And what are your thoughts about making that more accessible? We've seen fidelity to it now. Yeah, in the end of the day, because of a regular institution, we have to seek approvals to do these things. And it's pretty clear right now that nobody wants to be asked about these approvals. So what do we do? Our research team researches it because not only the crypto itself,

but the infrastructure, the NFTs and all the Web3 and everything people talk about, yes, Candace Brown and Platina team that researches that. so we do that and that then feeds into our high net worth. We have very limited ability offerings in high net worth, very limited, honestly. Would you like regulators to be able to give you that so you can, are you getting demand from clients? This system needs to be regulated. In the end of day, if somebody gives you money and you store it for them,

that sounds a lot like you're taking a deposit. And I think people have to think about it. If it's really a currency, then the government has the right to print currencies, not other people. So people need to think about it. But until that regulation comes out, it's really not something we can do much about. We can do futures and things like that, but it's very, very limited.

Eric, Brian Moornehan, thank you so much for joining us. We really appreciate it. Good to see you. Tyler, back on you. Thank you. And Mr. Moornehan, thank you as well. Well, this week is, as they were just talking about, all about the Fed and earnings, given the extreme stock market reactions we've seen to quarterly results so far. And there are a few stocks in particular. our next guest is watching. Stephanie Link, Chief Investment Strategist, Portfolio Manager at High Tower Advisors, CNBC contributor. Member of the stock draft of 2022, welcome, Stephanie.

Good to have you with us. Go Team Link. Go Team Link. All right. The strongest link. Let's talk about the Fed. I think there's not a lot of suspense here about what they may do. I guess there is more suspense about what they may say.

Once we get this move out of the way, do you think stocks may find some footing? In other words, rally because, well, at least that one's over. Yeah, well, it could. Certainly, we could see a relief rally. I mean, we're down so much into it, right? But unfortunately, Tyler, the unknowns don't go away, right? The Fed may raise 50. Talk more hawkish.

They may do 50 again the following meeting and then 50 the following meeting. But we just don't know the outcome. And quite honestly, I do not believe that even if you did three 50s in a row, that's going to help to improve inflation. Supply chains are going to help improve the inflation picture. So I think inflation is here to stay, and it's going to remain elevated. That, and then we have the wars.

So all this unknown has led to multiple contraction, right? Because the irony of it all is earnings are actually going higher that we've had 75% of the companies beat expectations, right? And estimates are going higher, but multiples are coming down. Because, again, the unknowns, this is kind of normal. Could we get to 16 times? We're at 17.7 times now.

We certainly could. I wouldn't be surprised. But I am looking for stocks that sell off in the wake of all of this. And I think there are some opportunities if you're longer term. We will get to them in just a moment. Right now, the Dow at session lows off more than 400 points. You know, this is a sticky time, not just, it's for consumers as well. You've got rising prices. You've got falling wealth. You've got rising costs of everything, including the cost of money. And then, as you point out, you've got all kinds of exogenous factors like the shutdown. down in China, like the war in Ukraine, is it time to declare the great bull market dead? And does it matter?

I don't know if it matters. I was really encouraged to hear Brian Moynihan talk about how strong and resilient the consumer is. And I think the consumer is going to hang in there. Maybe it's not going to be to the extent it is right now. But the consumer is 70% of U.S. GDP. And we have seen an absolute explosion in. services and services is two-thirds of consumer, of consumption. And so you're rooting for the consumer. We all are, right? And the job market is hot as can be, and wages are still going higher.

So I think the consumer can handle higher interest rates. But again, it's that unknown as to does the Fed overshoot because we know they're so behind the curve. So there's so many questions, Tyler. But I don't think the bull market is dead because I don't think the Fed is going to be able to do as much in terms of raising rates as they say they are. Let's get to a couple of the, of the stocks that you want to talk about. I'm going to go in reverse order because the number one one Expedia is one that a lot of people have talked about. It's a basic reopening play. But I'm going to go to Z, Zoitus. It's the animal health stock. You say you have four pets. They cost a lot of money. They do cost a lot of money. So they did this survey of 16,000 pet owners. And 86% of the people

said that they would spend at any cost for their pets. This is a a $42 billion market, and it's growing at 10 to 15% per year. And these guys, Zouettes, they actually have the product differentiation, they have technology that they're implementing, a great balance sheet, they're buying back stock. They're doing all the right things. Only problem, Tyler, is it is expensive at 34 times earnings. But I view it as more like a staple stock. And so if it were to pull back, it's already down 27% on the year. If it were to pull back more, I would buy more. I own the stock in full disclosure. Let's go to Starbucks.

And a quick thought finally on Expedia. Starbucks, obviously a kind of a turnaround. Schultz is back, but now on his agenda are serious issues of labor restiveness. Yes, he has a, he has a tough, a tough job ahead of him. But it's Howard Schultz, right? So it would be playing for him to turn this company around. My biggest question, Tyler, is what are they going to do with that $20 billion buyback that they just suspended? where are they going to put that?

They're going to really reinvent themselves again. I know they have to get food right. They already have got drink right. So now can they manage strong U.S. same store sales versus international China issue supply constraints and that sort of thing. So it's a real mixed bag, but it has down 36% in the year.

So I think it's starting to get interesting. All right. Stephanie, thanks very much. Stephanie Link, we appreciate it. The strongest link. Thanks, hi. Bye. Keeping a close eye on these markets, it's down 441 points at fresh session lows.

right now. Coming up, consumer staples, no surprising, best performing S&P sector last month amid the deep sell-off we experienced. But as price hikes continue, can the best opportunities actually be found in the company's gaining market share? Well, we would hope so. But our guests will reveal them and name some names. Plus the Fed signaling it'll hike rates this week, by half a point probably as volatility picks up in the equity in bond markets. Here's the 10-year. It punched above 3% this afternoon for the first time since 2018. Stanford Neil Ferguson tells us what he thinks happens next. But first, a quick check on the media space. The ad supported streamers in particular. It's been a tough space, but they're rebounding. Even

despite this difficult market, Roku up 6 percent, Spotify up 3.5 percent, WBD rallying as well. We're back in a moment. Welcome back to Power Lunch. We're taking a look at three corners of the market that are each facing big issues right now. And let's start with the consumer staples. The worst performing sector today, actually, even though it was the best performer last month. Names like Kroger, Kraft Heinz, those are some outperformers this year, although S.J. Lutter and Klorox have been dragging the sector lower. So even for sector selection, you have to really get stock specific. How can you pick through the names of this classic defensive sector to find and stick with the winners, those companies that have pricing power?

Let's bring in Nick Modi. He's RBC Capital Markets Consumer Staples analyst. Nick, I'm going to start with EL. Hopefully, yeah, looks like they're on your list. You'd expect S.A. Louter of all companies to be a classic case of pricing power. What happened here? Yeah, absolutely. They'll be reporting tomorrow, actually. The reality is they have a lot of exposure to China. And so when you think about lockdowns happening, that's obviously going to be a weight on their top line. And we'll probably hear that from them tomorrow. But the stock has corrected way more than I think earnings will correct. And I suspect that what's happening in China, though it doesn't feel like it's transitory, will end up being transitory.

and we should start seeing the growth resume once the China situation is resolved. So that would be a name you actually more constructive on, though it's been in the red. What about Cody sort of sticking with the space? Yeah, I mean, I was on the show not too long ago talking about, you know, my view on where you should be really placing your bets, and that's companies that are lever to mobility. That's certainly one of the reasons why I liked Este, the China lockdowns obviously got in the way. But when you think about Cody, you know, here's a company that's really turning around.

its business. They're going from market share and shelf space losses to now stabilizing and actually gaining market share in some brands. And as we all kind of get out and about, especially over the next several quarters or several months, you should start seeing the beauty category look a lot more attracted than what we've seen historically during the peak of the COVID situation. What's the improving sort of level of excitement about Coca-Cola all about? Is it, is it, is it, I mean, I'll tell you, I think Coke Zero is. really good. Yeah, I mean, look, they spent a lot of time trying to figure out that formulation. And every tweak they make, it gets closer and closer to the actual Coke original.

Look, the bottom line with Coke is you have some new management that came in several years ago. They've really tried to broaden the portfolio footprint to focus on all beverages, not just carbonated soft drinks. And then the carbonated soft drink category is actually stabilized and is growing with a high degree of pricing power right now. And so when you think about my earlier comment about mobility. Coke is also a mobility play. 50% of sales come outside the home when you think about their channel exposure. And we haven't even recovered on mobility in many parts of the world like in Asia and Europe. So there's still a long tailwind of mobility benefits to happen for Coca-Cola, which is one of the reasons why you're seeing the stock do so well year to date.

Carrowing Dr. Pepper is a pick. That I always thought of kind of the stay-at-home play, right? The carrowing pods, although then you have the soda piece of it on the go. As you address that, Nick, Also, what would you do with some of the grocery names like Kroger? Yeah, well, I don't cover grocery, but let me come to Kurek, Dr. Pepper. I mean, this is a company that's gaining a lot of market share, right? And so you're right. It is kind of a hybrid at home, but also away from home, depending on which category you're talking about. But they're gaining so much market share.

They've delivered their balance sheet. They have enough balance sheet capacity to potentially do another deal. And we've seen the last several years that they're very good, at least this management, team is very good at doing deals. And so if they do do a deal, I think I think it'll be favorably received by the marketplace. All right. So there we go, your playbook for consumer staples. Nick, thanks for your time. You bet. Nick Modi. Already coming up, we will continue to look at the big concerns hitting key corners of the market. And we'll tell you what names to avoid, but also highlight where there could be some opportunity.

Plus, the NASDAQ 100, down 20% this year. That describes a bare market in most definitions. A lot of names falling victim to volatility. But some are surviving the declines, and we will highlight those names next. It ain't all bad news. All right, welcome back to Power Lunch, everybody, a rough month for the NASDAQ. But there are a few names that dodged the bear market and are growing their earnings. CNBC Pro ran a screen of NASDAQ 100 members that are down less than 20% from their 52-week highs. These companies saw earnings grow over the last four quarters and are expected to see continued growth this year.

year. The stocks have also been less volatility than the norm. The seven names that made the list are get out your pencils and papers, ADP, American Electric Power, Costco, FISA, Kareg Dr. Pepper, paychecks, and Texas instruments. You can read the full NASDAQ Survivor's Story at cnbc.com slash pro. There's some of the names. Write them down. All right, let's join John Fort now for a CNBC news update. Hi, John. Hi, Tyler. I am John Ford. Here's your CNBC news update at this hour. Civilians in eastern Ukraine continue to get hit by shelling. But a senior U.S. official being quoted by NBC News saying it appears Russia's military is making minimal progress on the ground at best in Donbas.

The official says Russian troops are being very cautious and tepid moving into an area, declaring victory, then leaving and allowing the Ukrainian military to move back in. And the Archbishop of New York made an unannounced visit to Ukraine. Timothy Dolan has been meeting with Catholic aid agencies in Poland as they try to help the millions of Ukrainian refugees crossing into the country. And the Biden administration is planning to steer $3 billion to American companies making batteries for electric vehicles. The money is part of the $55 billion infrastructure plan passed by Congress. Tyler, back to you. All right, John, thank you very much. We have a news alert for you.

Amazon workers have voted against unionizing at a second New York warehouse while the vote count is continuing. The no vote now has enough to declare victory. The vote comes just weeks after the first successful unionization vote at a warehouse in Staten Island. Kelly. All right. Ahead on Power Lunch. It's the semi-circle, the chip shortage, getting bad all over again as China's COVID struggles, worse than the already existing supply chain hangups.

But not all semi-stocks are equally created, obviously. We're going to look at which ones have the most leverage to outperform. And as we had to break, a check on the Dow, which is right near session lows, down 1.3% or 444 points. We're back in a moment. We've got about 86 minutes left in the trading day. And for some of you, it may not come too soon. We want to get you caught up on the markets, which are down, stocks, bonds, commodities, and a closer look at chip stocks as the shortage again grows worse.

Let's begin with the markets more broadly. They are sinking this afternoon, though we seem to have stabilized just a bit. I guess that's the good news. Stabilized near the lows for the Dow down more than 400 points. That's 1.5%. We had been up about 250 points at the high. The NASDAQ outperforming today by a little bit, in other words, in percentage terms. But that hasn't happened much recently.

So maybe there's a little evening out of performance here. Real estate consumer staples, the worst performing sectors today. communication services actually posting a small gain, but there aren't many gains to be found today. Traditional payment stocks getting hard hit, even names like MasterCard Visa, American Express, among them. We know about some of the pains that have been felt by the likes of PayPal in the last few weeks. Now to the bond market where the yield on the 10-year hit 3% today for the first time since December of 2018. And you can see it right now, just a hair's breadth below that. at 2.989%.

Highest rate in the last two months, the yield traded below 2%. Below 2% as recently ago as March 11th. Oil is closing for the day, holding steady around 105 a barrel. And Pippa Stevens joins us with the commodity report. Hi, Pippa. Hey, Tyler. Oil spent much of the day in the red, but then reversed course around noon, erasing a 4% loss and now trading higher. Data out of China, which showed facts.

activity contracted in April had been weighing on prices, but on the other side, EU energy ministers met today to debate a sixth round of sanctions against Russia, reportedly moving closer to an oil ban. Again, Capitals John Kildoff adding there was a technical bounce from support around the $100 mark. He said the chart points to a price breakout, although with opposing forces, the next leg could be in either direction. Let's check on prices. WTI up half of 1% at 105-27, brand crude up for tenth of a percent at 10760. Natural

gas up another 3.5% after jumping 11% last week. Also wanted to note that diesel prices hitting a record for the fourth straight day, a gallon will now cost you $5.32 and $0.32, according to AAA. Tyler, back to you. All right, Pippa, thank you very much.

Now to another corner of the market that is a cause for concern, and that is semiconductors. You know the story. One of the hardest hit sectors over the past month, but A divergence is underway. Western Digital is up about 10% over that time, the best performer in the XLK. NVIDIA, the other way, down 29%. That one, the worst performer.

Here to talk about opportunity in the sector. Stacey Ragson, senior semiconductor analyst at Bernstein Research. Stacey, one of the things that I found interesting in your commentary is that as you look, while there is dispersion, if you look across the semiconductor market, they tend to, now to be trading at roughly their values over the 2015 to 2019 period. So is what's happening here just a correction or reversion to the mean because they got so far out of play or something more worrisome than that? Yeah, this is how semiconductor cycles play out, right?

At the peak, what happens is that the stock stopped going up on good news and the multiples come down. And frankly, once we get to the trough, we'll see the other. opposite, where ideally the stocks will stop going down on bad news and the multiples will come up. But they tend to overshoot in both directions. And you're absolutely right. If you go back to the peak of the space, maybe in November, multiples back then were about 22 times forward earnings. You're about a 10% premium to the S&P at that point. We've come down now. We're about 16 times. We were a week or two of about 16 times price to forward earnings, something like a 15% discount,

give or take to the S&P. And it was kind of right back in line with pre-COVID averages. my take of that is that valuations have begun to normalize, although I don't think we've broadly seen panic yet. That's usually what would happen before we'd see total capitulation. I don't think we're there yet, but at least valuations have come down off the people kind of normal relative to history. Are we close to panic in any individual names? I know you think that Qualcomm may be getting closer to that level. Is Invidia there? And I, golly, maybe it was 16 months ago. if somebody had asked me, hey, what stock should I buy if I was in the business of advising people? I might have said, NVIDIA.

I think if you'd bought NVIDIA 16 months, if you'd still be doing pretty well, even after the sell-off. But there are a few stocks where I think we have started to see some panic. And you mentioned Qualcomm. I think that's a good one. Anything that's been touching the smartphone recently has been death. Smartphones are one of the markets where you can actually see, we've seen weakness. We've had weakness in China. And Qualcomm got caught up on that, although they just had a early.

earnings last week, they seem to be powering through it without a problem. They're less exposed to some of the areas that are weak. They're also picking up some new sockets at like Samsung. But Qualcomm's back down to trading like 10 times earnings. It's actually cheaper today than it was, you know, not that long ago when people thought large chunks of their business were going to zero when they were at war with Apple. It is much cheaper today than even it was then. So, yeah, there are some areas in the space where I think we are starting to see it. I get why, like I said, the end market is out of favor right now. But those are some. where I think there is opportunity.

You mentioned Nvidia as well. That's another one. It's still relatively expensive, but it is much cheaper than it has been. And they are exposed for some of their end markets and some of the areas, data center and other things where not only they should be okay in the near term, but the long term trajectory on some of those markets like data center for them, I think is phenomenal. Yeah, Nvidia looks humid at 33 times forward earnings. It's crazy.

Yeah, it's not that bad anymore. Stacey, 60, 65 times earnings not that long ago. Absolutely. So a quick question for you. You mentioned anything that touches the iPhone cycle? lately is death. Not iPhones. Smart phones.

iPhones are okay. Smart phones. So I guess my larger question to you, going back into last year, we thought that maybe it was going to be autos where we saw the biggest overhang problems from the pandemic. Has that not borne out? And now it's more the smartphone, non-Iphone segment, that we're seeing this pandemic cliff. Can you just explain what's going on there? You bet.

So in autos, it says one of the markets where investors are, worried that there's a cliff coming. We haven't seen it yet. The reason investors are worries is there's still a very sizable discrepancy between auto semiconductor shipments, which are, I don't know, 30% plus above where they were pre-COVID, and automotive production, which is like 20% lower than it was pre-COVID. So there's a pretty sizable gap. And when you're looking for these kinds of parts in the market where you can actually see evidence of double ordering and overshipping, auto is one of those areas that brought concern. Although for now, like, the demand is still very strong, like on reported this morning,

you know, the demand in the auto for semiconductor at least is still strong. We just don't know how sustainable is. All right. Stacey, thank you. As always, we appreciate it. Stacey Raz. Coming up, how all this market volatility we've been discussing could impact the Fed's big decision on Wednesday. We'll discuss the cause effect. The linkages with the Dow still down 440 points. Stay with us. Welcome back, everybody. said on our way into that commercial break, we were down 440. Well, then we slid about another 80 points. Down about 520 a moment ago, still more than 500.

One and a half percent drop, and that aligns with a one and a half percent drop for the S&P, and now a 1 percent drop for the NASDAQ down to 12,000 to 13. Now it comes as Wall Street economists have been saying recession risk is rising. We heard it this morning as well from the former Fed official Mr. Ferguson. The Fed's widely expected to hike rates this week amid escalating market volatility. On that note, let's send it out to Brian Sullivan. He's at the Milken's Global Conference, and he is joined by Neil Ferguson,

senior fellow at the Hoover Institution at Stanford. Brian, take it away. Yeah, thanks, Kelly. Listen, by the way, almost everybody we're speaking with here at Milken, our CNBC pro live stream earlier today is, if not, bearish, is negative and is nervous. I have never seen more pessimism in a place like this in 20 years.

Neil Ferguson of Stanford joining us now. You've got obviously Putin's insane unwinnable war in Ukraine. You've got the real possibility of Egypt and Ethiopia potentially having a conflict over a dam. You've got food shortages, electricity and energy crises. How does this play out? Well, I think the reason that people are bearish is that they have forgotten the 1970s. Because most people wandering around this hotel came into markets in the 80s, if not much more recently. We're now re-running the 1970s, Brian, it's not just geopolitics.

Let's remember a huge fiscal and monetary blunder was made way back at the beginning of 2021. Most economists missed it. Larry Summers was right. So we first did the late 60s. That was the initial mistake that led inflation expectations get away from the Fed. And then came the geopolitical shock that we've had since the Russian invasion of Ukraine. And now the Fed is behind the curve as the Fed of the 1970s. Yeah. Welcome back to that 1970s show.

Is the Fed, do you have any, I'm trying to be nice. Do you have any confidence in the Fed? I've had people call them effectively incompetent here to me. I knew Paul Volker and Jay Powell is no Paul Volker. At the beginning of 2021, he said in an interview in the Financial Times, we have nothing to worry about. We're not going to see the kind of inflation problems. In fact, we would welcome higher inflation.

And I wrote that quote down because I knew future historians would be using that quote to point out just how badly the Fed did get it wrong. The Fed has, I think, a credibility problem that predates COVID. Because remember, this same Fed blinked when it came under pressure from Donald Trump not to continue tightening monetary policy, 2018, 2019. And now they're so behind the curve that if you talk to some of those orthodox believers in rules-based monetary policy like my colleague John Taylor, they just kind of shamed. their heads because it is so inconceivable that they would do the kind of tightening necessary to bring inflation under control. So in your mind and John Taylor, which the Taylor rule of economics is named after, what is the lesser of the evils?

Is it to put the gas, the brake pedal on, too hard, send the economy into recession but kill inflation or ease up, let inflation run hot and not destroy the economy in the short term? Well, the lesson of the 1970s is clear. Half measures don't solve the inflation problem, and in fact, the inflation problem tends to get worse. As it gets embedded in inflation psychology, as the labor market starts to see the kind of wage pressure that we're seeing, at least in some areas.

So if you postpone the evil hour, you end up having to do the kind of really painful recession that Paul Volker had to inflict on the U.S. economy after he was appointed in 1979. Remember, it's a long road from the late last. 60s to the late 70s, and through that decade, the Fed was always behind the curve. They would try to get tough, and then they would blink. And that's why inflation became so embedded then.

Do you see any way we avoid recession, Neil? You could get lucky. Let's remember. There are a lot of elements that are at work here. What's happening in China right now is interesting. China has hubris over COVID, then it comes nemesis. The Omicron variant is extremely hard for China to control. It's zero COVID policy implies shutting down the Chinese economy.

as drastically as they did in early 2020, that has to take some of the heater of the global inflation problem. So there is a possibility that they might get lucky. It's not exactly like the 1970s. The labor market isn't so strongly unionized. But I have to say that the probability of recession has gone up really significantly. And you'd be kind of naive to bet against it at this point. My fear is that they don't tighten enough and then they blink when the markets sell off.

And then we really are rerunning the 70s. Well, let's hope that the best case scenario is the one that we get. Let's hope they get lucky. Neil Ferguson, lucky to have you. Thanks, Brian. Thank you very much. Kelly and Tyler. All right, Brian and Mr. Ferguson, thank you both as well. More power lunch right after this.

Ten-year yield crossing 3% for the first time in three years, pushing up the 30-year mortgage rate. Let's go to Diana Oleg now for some distressing numbers. Hi, Di. Hey, Ty. Yeah, we've crossed yet another emotional line. in the mortgage market. The average rate on the 30-year fix now over 5.5% to 5.55. That according to Mortgage News Daily, it jumped 14 basis points from Friday as bond yield surge.

Mortgage rates loosely follow the yield on the 10-year Treasury, but that spread has been super wide because the Fed is pulling out of its purchases and holdings of mortgage-backed bonds. We expect to get a better idea of how much more at the Fed meeting Wednesday, but apparently investors didn't want to wait. This is now the highest rate since mid-2009. and to add insult to injury, home prices just aren't letting up. So we are now on the verge of hitting record low affordability. Highest mortgage rates in 13 years. Diana, thank you.

Still to come, what those rising rates mean for the home builder stocks. We'll take a look at that with a few minutes left to go before the 3 o'clock hour. Welcome back. We're off session lows, but our third concern, corner of concern, I should say, for the stock market, is definitely housing. The rising 30-year mortgage rate, Diana just talked about, while it's hitting the home builder names. If you look at the April declines, LGI was down 4%, Lenar down 6%.

D.R. Horton, down nearly 7%. The homebuilders have fallen in 16 of the past 18 Fed tightening cycles. So who can weather the storm? Ken Zener's research analyst at Key Bank Capital Markets, he's been warning us, Ken, about the effect of tightening cycles. But I don't know. Are you feeling like we're anywhere closer to the state? sector being a buy here? No, in short, our wow thesis, which stands for a wall of worry.

As you noted, 16 of the last 18 cycles, back to 1969, the stocks did fall about 30%. That does not include a recession. And as your prior, as Neil Ferguson highlighted, we are skewing really towards trends that we saw in the first half of the 70s, not the second half of the 70s. and it's not priced into the stocks yet because they don't bought them until the end of the credit tightening cycle. We are, though, wouldn't you say about 30% off the hives? So how much further is there to drop for the builders? Well, more is obviously our baseline assumption because I think the recession and really

stagflation is really starting to come in with many of our building products. We did downgrade some product names last week. We're seeing low-vault, low-to-no-volume, rising prices, which is really a function of price, demand destruction. So if you look at the home builders trading at four-times earnings, some near books, some above. The reality is earnings at three to four times. What they were in 2019 reflects the credit cycle. There's too much the bullish housing narrative is to rely on adjectives like tight supply price. We put a report out last week showing record listings, high-endage.

since March 05, seasonally adjusted. That means more supplies coming on. Wow, because, you know, again, anecdotally, I know some folks who are still having trouble trying to get into a house. So you do have some place here. You still like NVR. It's one name we've heard, recommended a lot.

It's outperform the rest of the group, but it's still down 25% year to date. You also have some aspects like pool and SHW, which you think are maybe ways that investors can possibly benefit from some upside here. Right. We think those are the best position within our framework, which is obviously somewhat defensive. And in fact, pool and paint are the only two categories that we see coming out of first quarter where we actually see volume contribution to revenue growth, not just price.

So those are, we think, the best position, but obviously our wow thesis casts a shadow over the product names. All right. Well, wow, indeed. Ken, thanks again. Good to see you. Thank you. And so he says we're not anywhere closer. Well, we're closer, I guess.

I guess we're closer. I mean, the Dow now coming back a little bit off its lows, now down 450 points, another one and a third percent kind of day. NASDAQ, actually the better performing of the three major indexes as of this hour off just three quarters of one percent. But it will be a busy final 60 minutes. The hope is maybe we're just pulling forward the volatility from the Fed meeting again. That's the hope. Thanks for watching, Power Lunch, everybody.