Power Lunch - Game Over?, and Bank Worries Are Back 4/26/23

Episode Date: April 26, 2023

UK regulators are suing to block Microsoft’s takeover of Activision, which would likely kill the deal. We’ll discuss the impact for both companies, and the increase of governments standing in the way of mergers. Plus, just when you thought it was safe, the bank crisis is getting ugly again. First Republic is the latest victim, slumping below $5 per share as it attempts to get help from other banks. Can it be saved? We’ll debate. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody, and welcome to Power Lunch. Alongside Kelly Evans, I'm Tyler Matheson. Glad you could join us this day. Coming up, game over, UK regulators blocking Microsoft's takeover of Activision, likely killing the deal forever. We will discuss the impact on both companies and the increase in governments standing in the way of mergers. Plus, just when you thought it was safe or safer, the banking crisis getting ugly again. First Republic slumping below $5 a share earlier today as it attempts a last-itch effort to get help. from other banks. Can it still be saved? First, so let's get a check on the markets where we see the Dow down 174 points. The S&P down 8 to 4063 and the NASDAQ hanging on to a three-quarters percent gain. Let's get right to our market stars. Dominic Chu and Christina Parts in Avelas. Dom, you first.

All right, so let's put those financials in focus, like Kelly points out, because First Republic is down again because it's in the headlines. Heavy trading volume so far down by about 23 percent. And by the way, that's better than the more than 30 percent drop earlier today. There are those growing concerns that efforts to sell assets to shore up its balance sheet may not be as well received by some other banks as hoped for. That negativity, by the way, has count and led to at least. Seven different separate trading halts so far for First Republic today. Seven halts. So watch First Republic shares down 23%.

Meanwhile, fellow West Coast regional lender, Pac West, is moving in the opposite direction. There's a bid. A 15% move higher after it reported quarterly results after yesterday's close. The important key here, deposits at the Southern California-based bank fell 17% quarter-end to quarter-end, but deposit inflows were seen between March 20th and April 24th just a few days ago of roughly $1.8 billion, so deposit stability there. And in financials, but away from banks, crypto exchange operator Coinbase is up on the day right now, up about a 1.5% off the session highs, getting him some help here from analysts over at H.C. Wainwright,

who've initiated coverage with a buy rating and a $75 price target, saying they see Coinbase as a scarcer asset when it comes to investors wanting a larger cap standalone crypto-native option. And by the way, some traders do attribute the move higher in Bitcoin and Ether prices as of late to the stresses in the traditional banking sector. So now that we've gotten that done, Christina, what are you watching from the NASDAQ market site? A lot of today has to do with Microsoft. It's a big mover, given its weight on the S&P 500.

Nerd shares are up 7.5% on a better than expected earnings report that came out yesterday. The street reacting today with really a strong, bullish sentiment given Microsoft's promise to invest more in artificial intelligence, Azure, which is its cloud service. But the stock is still off its earlier highs, this is a little bit higher, after British regulators blocked a proposed deal to acquire video game giant Activision Blizzard for $69 billion because of competition concerns in the cloud gaming market. Activision Blizzard shares, you can see, are down over 11% right now, even though the company said it will work aggressively with Microsoft to reverse the block.

The drop comes even after my Activision Blizzard posted at Q1's earnings beat. The CEO will be on Squawf Box tomorrow morning. And we've got shares of Google parents alphabet up slightly less than, let's see that, barely now it's in the red. This is despite an earnings beat, there's a lot of concern right now that Microsoft is stealing market share from Google in the search category. Does that mean Bing is finally cool? Alphabet also announcing a $70 billion share buyback. And since I said Microsoft is the theme, we just told you about Microsoft's strong quarter and plans to spend more.

And that's why cloud providers are higher on the news. Look at that data dock up 12%. MongoDB, 12%. Snowflake, 9.5% in the list continues. Guys? Christina, thank you very much, Christina, parts and evelace. All right, today we turn to the power struggle between corporations and governments from blocked mergers, to ideological battles. The fights are being waged on multiple fronts. The latest Disney now suing Florida Governor Ronda Santis. Julia Borsden has the latest on this story. Julia? Well, Kelly, Disney and Florida's power struggle has turned into a legal battle and it is now a lawsuit. Disney suing the state of Florida over management over its tax district. Now, things escalated just this morning

when an oversight board that was appointed by Florida Governor Ron DeSantis declared null and void the agreement that had been made back in February to retain control, for Disney to retain control over its theme parks tax district. Then, while Disney Parks and Resorts sued the governor over his curtailing of its rights, saying it is a clear violation of Disney's federal constitutional rights to retaliate against Disney for expressing its opposition to Florida's bill which banned conversation about sexual orientation in schools. Now, in its suit, Disney writing that it has exhausted efforts to seek a resolution and is, quote, left with no choice but to file this lawsuit to protect his cast members, guests, and local development partners from a relentless

campaign to weaponize government power against Disney in retaliation for expressing a political viewpoint unpopular with certain state officials. DeSantis's communications director responding, saying, quote, we are unaware of any legal right that a company has to operate its own government or maintain special privileges not held by other businesses in the state. Going on to say this lawsuit is yet another unfortunate example of their hope to undermine the will of the Florida voters and operate outside the bounds of this law. Now, Kelly and Tyler, it looks like neither side is willing to back down. Disney shares not really moved by this down just fracturally.

At its core, Julia, it seems as though we know two things. Florida needs Disney, number one. Number two, Disney, for better or worse, after all the investment they have, is stuck with Florida. Whether they want to be in, whether if they were making a decision today on where to locate a theme park, they would choose Florida or not as it remains to be seen in light of what's happened. Do you agree with that? Well, yeah, you're right. I mean, these two entities are inherently in business together.

The fact is, is that Disney generates a lot of money in terms of tax revenue for Florida. Disney is planning to invest billions of dollars in the state employing even more people in the state. And at the same time, Disney can't exactly pick up and move its theme park so much invested in terms of the real estate and all the operations there. So these companies are going to have to figure out how to work it out. But it seems like it might be a judge that is going to be figuring out that compromise. I also, Julia, just think, is it kind of reminiscent of Manhattan to New York State, right? Or I guess, San Francisco, California, not so much. But, you know, major blue cities, in this case, it just happens to be a major theme park,

always having a little bit different feel maybe than the rest of the state or the rest of the population. Yeah, I mean, but at the end of the day, though, this isn't a city. This is a business. This is a massive business that got the ability to have this tax district decades ago because of some of the quirks of operating a theme park where you're trying to get building permits and you're operating your own fire department and the like. So it's going to be interesting to see how this plays out, but certainly an expensive legal battle. And perhaps a distraction for both sides. Lost in all the deliciousness of this is what in the world is Disney asking for here?

Are they asking for money damages or are they asking for some kind of temporary restraining order or what? Well, right now they want to have back the power that they say they negotiated fairly and legally to have back in February to have that control over their district. So what does that mean? That means that the district should have the same controls that it's had for the past recent decades, which includes things like approving building permits, which is very important if you're a theme park, but also other things that in controlling this as a special tax district, that they are in charge of things like the garbage collection or the fire department.

So from Disney's perspective, it's cleaner, it's easier, it makes more sense for them to maintain that control. And in fact, there is an argument that it would be more expensive for the state of Florida to take over some of those responsibilities. Exactly. All right, Julia, thanks very much. Julia Bustin reporting on an ongoing spat between Florida and Disney. On to another corporate fight we go, and that is the United Kingdom's blocking of Microsoft's deal

to acquire the video game publisher Activision Blizzard, saying that it would give Microsoft an unfair advantage in so-called cloud gaming. This could make other large tech companies more cautious when looking to do any acquisitions in the future. This, while the DOJ here in the United States is attempting basically to do the same. That is the subject of today's check, tech check. Let's bring in our CNBC technology correspondent. Steve Kovac, has been on TV a lot today, along with Tim Horan at Oppenheimer, who says this could chill Microsoft's ability to do any other deals for now. Tim, I'm going to begin with you.

In a funny way, did the UK's Competition Authority do Microsoft a favor? Probably. I mean, this actually helps out earnings a little bit because they can earn a higher return on the cash in the bank right now than they can investing here. And, you know, it's hard to see how this is so strategic for Microsoft. It's kind of less than 2, 3% of earnings in the gaming sector. You know, right now, less than, you know, 5% of revenues. And they were paying an extremely high price for the asset also.

To that point, Steve, it is a small, gaming is a small, but not an insignificant portion of Microsoft's revenues and profits. And they've been doing this business for 20 years. And they've been doing this business for a long time. But to Tim's point, why not step back and say, our bread and butter are the kind of enterprise software things that we sell? And now AI. That seems to be what investors want, too. Look at Microsoft shares right now. They had that knockout quarter they reported yesterday. Azure, still growing like crazy,

this cloud product. Then all the excitement around AI, that's where all the focus is now. It's really funny to think back when this deal was first announced in the beginning of last year, one of the reasons they said they wanted to buy it was the Metaverse. Remember the Metaverse? Yeah, exactly. So, look, it's really not playing out the way they originally saw it. And look, it is too expensive. Right after they announced the deal, we saw what happened to the market throughout the rest of the year.

It got way too expensive. $3 billion is the break fee. I think people would probably rather than spend their money on the break. $3 billion, then $60. What is it? 69. 69. That was one of the reasons people thought, well, you can't lose in Activision shares

because you get the break fee or they've had good games lately or the deal gets consummated. And of course, we're going there. And they put out earnings early today. Now, a spokesperson tells me they put the earnings out today because, look, they were getting tons of inbound requests saying, what does this mean for you? Well, look, it's all addressed there in the earnings. One way that's true, and they have a really strong statement out against the CMA. Another thing that sure is they're a healthy company. They beat the top and bottom lines.

They still have plenty of room for growth. They have a lot of cash on hand. something Bobby Kodick has already talked about to our friends on Squawk Box, and I'm sure we'll mention again tomorrow when he's on. And that's the key here that the company will probably be just fine on its own and potential for mergers with maybe another game studio. We'll have to see. Well, that, Tim, is what I was going to ask you.

Kind of broaden this out to big tech in general. I'm not sure if they're in the mood to acquire right now. Maybe if they need AI help, that's where they would be looking. But will they now feel as though there's a chill on any deal-making because of this ruling? I mean, I think every hyperscaler has to think that this is definitely a political decision. There's not a lot of market like dynamics that you could justify blocking this transaction with. But, you know, people are worried about the future. I mean, Microsoft is likely going to dominate AI here, and AI is going to impact so many industries that are out there.

And they could end up dominating, you know, gaming in 10 or 15 years by combining this with AI. But that said, I think Microsoft will look to do tuck-in acquisitions. And I think they're going to look to use AI themselves to kind of help them create, content because they need better gaming content. Their gaming content, you know, is bad. All right. Well, let's all, let's end on that cheer. Tim, thank you very much, man. Appreciate your time. Steve, thank you. Thank you. It's, it's Kovac and weather on the 8th. That's right. We'll see you back here. All right, quick programming note. Activision Blizzard, CEO, Bobby Kodick, the aforementioned, will join Squawk Box, the aforementioned tomorrow at 8 a.m.

To react to this news, Kelly. And that deal is far from the only one catching the eye of the government. Also caught in the crosshairs are major deals like JetBlue and Spirit. Adobe and Figma, and more recently, T-Mobile and Ryan Reynolds, MintMobile, VMware and Broadcom, all facing scrutiny. The FTC and DOJ claims these big mergers could harm consumers at a time of rampant inflation. Are they right? Let's bring in Bill Kovasik. He's former FTC Commissioner and Chair.

Bill, it's good to see you again. The message here seems loud and clear. Don't try to do any deals right now. Am I overstating it? If you're a large tech company, you have a significant position in a variety of tech markets. This is a very discouraging move. It reflects a view on the part of major enforcement agencies around the world that they were far too lenient from roughly 2000 up through 2020 in reviewing big tech deals. It's led to a determination to look at these deals not only very carefully, but to come up with inventive theories of harm that can be used to block deals.

So yes, indeed, this is a chilling event. it's a very strong indication of the kind of scrutiny that one will receive not just in the United States, but globally, often through a coalition of regulators that are focused on the same transaction. Put your policy hat back on, Bill. I can see, you say it's unmitigated chilling effect on dealmaking. But is it similarly an unmitigated disaster for the economy? If you were a regulator today, would you be trying to block these very deals on competitive grounds? I think the belief that lies behind it is that there are going to be other paths for the development of these companies, that there are other acquisitions that will not place the assets in the hands of a leading player in the tech field, that there's a great deal with resilience in the market.

And I think in many instances there's a belief that we can certainly debate and test that lots of large-scale acquisitions don't deliver on the promises that motivate them. So I think from the point of view of the regulators, there's relatively little downside to intervening here, and there's the potential to stimulate other transactions or developments that will be positive. You know, I'm not sure, Bill, this is just a big tech story, because a lot of the deals that are getting hung up are kind of smaller and seemingly almost a side story, you know, like the standard general Tegna deal,

right, a hedge fund trying to buy a local TV. operator or, you know, Spirit and JetBlue, okay, well, you know, it's not a big tech company. So and to their point, they're saying, how are we ever going to be the fifth biggest airline if you can't kind of merge and get there? So it almost seems like no matter where you look, the answer these days is no. It is not just a big tech deal. You think back to July of 2021, when President Biden issued his manifesto on competition law, his executive order on competition, He decried what he referred to basically as 40 years of failure of enforcement, where merger enforcement in particular was far too permissive. This has galvanized the current leadership of the U.S. antitrust agencies to bear down hard on an array of transactions.

Transportation is one of the most important. Healthcare, finance, tech as well. So the concern that we see reflected in the challenge to Microsoft Activision is replicated, across the board in a variety of other sectors. And again, a crucial motivating impulse here is that mergers and acquisitions so often fail to deliver on their promises. So you're not giving up a lot by getting in the way of that. And perhaps you're creating opportunities for business to evolve in other directions. So it's a deep belief that antitrust blew the call in the past by being too permissive. The need is a result to bear down very hard now with a great deal of confidence that

you're not losing a whole lot because most dealmaking does not generate net economic benefits. Those are firm beliefs in the enforcement process. So I'll come back to the question I asked the previous guest. Did the British Competition Authority do Microsoft and maybe Activision of favor here? They may have. There's no systematic study of this, but there are so many other transactions we can point to and think of where the parties after the fact, once the deal has been blocked, expressed a sigh of relief thinking that this saved us for making improvident choice.

We can think of a number of companies that probably wish the government had succeeded in its efforts to block the transaction. I used to work for one, AOL Time Warner. Can you imagine how often Time Warner has perhaps looked back and thought, wouldn't it been great if the FTC had just blocked AOL Time Warner? Yeah. All right, Bill, thanks so much for your analysis, Sarah. We appreciate it.

Kovasek, thanks again. Further ahead on the broadcast, First Republic trading at all-time lows all the way back to its IPO, the regional bank searching for a rescue plan. We'll talk to a former FDIC official to weigh in on how this case should be resolved and what it means for the rest of the banking system. Plus, what about stocks that are hitting new highs? Chipotle, where my son eats about four or five nights a week is one of them, hitting its highest level since going public. And it's back on the list of potential stock picks for the 2023. Stock Draft. That is tomorrow, folks.

We'll do a special stock draft edition of three-stock lunch later this hour. We'll be right back. Welcome back to Power Lunch, everybody. Mix bag on Wall Street right now. The NASDAQ seeing triple-digit gains following big tech results, including Microsoft. But both of our next guests are a little bit bearish on the markets right now. Let's bring in Michael Cantorwitz, chief investment strategist with Piper Sandler and Kamal Sri Kumar, president of Sri Kumar, Global. strategies. Gentlemen, welcome. Michael, let me start with you. What do you see as the trajectory

or the path of the markets and the economy over the next six to eight months? Hi, good afternoon. We've had the view for most, for the entire year, the markets are going to be range-bound until we start seeing claims, unemployment claims, start to rise. I think we've, well, we have started to see that, how fast they rise in the several next couple quarters will be to be seen. Certainly things point that direction. So the next six to eight months, I think markets are down, and we price in a hard landing, and that comes along with lower earnings estimates, wider credit spreads, and lower market multiples.

Let me understand. Rising claims would be good news because it would suggest that we're coming into or toward the end of the bad news? Rising claims would be the worst news, as it is historically tells you people are losing jobs. And when job losses, beget credit losses, beget further earnings losses. And that's what really gets you into a negative feedback loop. For the markets, that's a recession. That's a hard landing when unemployment rises. So that would be bad news.

I think focusing on inflation at this point in the business cycle, in the tightening cycle, is really old news. Yeah. Sheree, what about you? I mean, looking at it sort of cyclically with the same concern. And what about those who say, well, you know, but the Fed, you know, what is the Fed going to do here? Two things, Kelly. First of all, in terms of where the economy is headed, the bond market has been giving a clear indication in recent months with the inversion of the two to 10 year as well as the three months to 10 year that we are headed toward a recession. And I'm looking for that to begin in the third quarter of 2024. In terms of what more could happen with respect to the economy, what the Fed may do about it, I, believe that sometime soon the Fed is going to pivot away from rate increases first to a pause then followed by a rate cut, at least a couple of rate cuts before the end of this year. Where is this

coming from? Because inflation mitigation only takes on as a target, Kelly, as long as there are other problems which don't arise. We know that March 21st, 22nd, FOMC meeting, the Fed considered pausing already because of the problems with signature bank and SVB. Now that we have continuing issues with FRC, my expectation is that even next week's 25 basis point increase in interest rates is not a given. If things worsened between now and next Wednesday, expect a pause. After that, Powell will probably tell us that he is going to still increase interest rates, but I don't think it's going to happen anytime soon after. that. Michael, let's look at a couple of longs that you like, including Chipotle, which we just

mentioned, Coca-Cola and Humana. Two out of the three seem to have something in common. One of them is food and pricing power, and maybe Humana has the, they may not have food, but they may have pricing power. Yeah, what they do have in common is that among their sectors and peer groups, they rank most attractively on a combination of being less cyclical, having better superior earnings, current earnings momentum, having better realized earnings growth, and having higher profitability than their peers. In addition to that, so those are micro-fundamental factors. In addition to that from the macro front, they tend to trade positively correlated with credit spreads on a relative basis, meaning that if we do see wider credit spreads, that they're likely

to outperform. Three, final question and quickly, where would you be putting money now? Would you Would you be stocking it into T-bills? I would be stocking it into T-bills, Tyler. If you look at the difference between one month, on the one hand, and three months and four months, you are looking at the, there is a big spread, about 125 basis points more. If you invest in three months rather than one month, the market is very concerned about a debt default. I don't think the debt default is a big deal at all. I think even if they default for a couple of days, it's going to come back.

and I would say go for the three-month, four-month paper rather than one-month paper, despite the risk of a default and enjoy it also. The tenure looks very attractive. I look at the tenure as going toward 3% soon and eventually settling down at 275. So if you're looking at long-duration securities, that's another way in which you can make money. And all of those are headwinds for equities, Tyler, because you can make so much on the fixed income side, who needs equities at this point? A cheery thought on which to leave it. Michael, Sri, thank you very much. We appreciate it. Thank you, Tyler. Thank you both. While climbing interest rates wreak havoc on banks and other corners of the market, housing surprisingly resilient. Mortgage demand rebounding somewhat. We've got the

details when Power Lunch returns. Welcome back to Power Lunch, everybody. Tech stocks and bond yields both moving higher today. Rick Santelli joins us now with the bond market part of that story. Hi, Rick. Yes, Tyler, indeed. If you look at all maturities, twos through 30s, yields are higher, but I do caution yesterday we auction twos. Today we auction five, which means the old securities and the new securities we just auctioned do have a spread, so the two-year note yields up a couple of basis points more than its previous two-year, which was the active security. As you look at that 10-year chart, Tyler's right. We're popping up about a handful of basis points. But when you put it against the rest of the week, a week-to-date chart, you can see that on a week-to-date chart, it's still weak.

Yields are still low and they're lower on the week. And how much lower? Well, the low yield close for all of 2023 thus far was right mid-April, and that yield was 3.30%. So you can see how close we're starting to get on that chart. And, by the way, three months and 10 years spread today at minus 171 is at another historic inversion for all those watching the recession meter. And finally, the dollar index, some legendary people look to be shorting it. Here's a 20-year chart. For the last year, going back to April, we've had this crown formation where it's basically above the previous 19 years.

This chart really does augur for a potential bearish environment because really the last year has been above everything, for dollar index trading. Kelly, back to you. Yep, and we just heard Trey Kumar saying 275 on the 10 years, his projection. Meanwhile, the solar stocks are getting crushed. Pippa Stevens, I mean, could Enface have warned us? Maybe they talked about it so matter of fact. Well, you know, it doesn't make sense with higher rates now. I know. And that stock is absolutely cratering. It's down more than 24%. It's on pace for its worst day in almost three years. And that comes after the company warned of a slowdown in the U.S. So last night, they did report a mixed quarter for Q1, but it is that week Q2.

revenue guidance. They see it between 700 and 750 million, well short of the 773 million that analysts were looking for. And I talked to CEO, Badrake Kthandarama, after the call, and he got right to it, simply saying we are not growing in the U.S. And that's for a number of reasons, primarily those higher rates and then moderating utility bills in deregulated markets like Florida and Texas, and that ultimately makes the economics of solar less attractive, meaning customers are less likely to sign up. Now, he did say that he thinks that customer originations bottomed in Q1, so that means that N-phase will see soft demand in Q2 as they forecast with things looking better in Q3. And that lag is because there is a lag between when customers choose to go solar

and then when distributors actually buy N-phase's product. But in the meantime, they said that Europe is growing very rapidly. Revenue was up there 25% quarter-over-a-quarter and more than three times on a year-over-year basis. So they're really trying to emphasize that growth in Europe with things in the U.S. looking much less certain. And it's supposed or is one of the big beneficiaries of inflation reduction act and all the rest of it. A big shocker today. Pippa, thanks. Let's get to Bertha Kuhm's now for the CNBC News update, Bertha.

Hey, thanks, Kelly. Here's what's happening at this hour. Writer E. Jean Carroll testified during her civil lawsuit against former President Donald Trump today, telling jurors, I'm here because Trump raped me. Carol said the former president attacked her in a New York City department store nearly three decades. ago. Trump has denied the allegations, calling them fraudulent and false. Former Theranos CEO, Elizabeth Holmes, 11-year prison sentence has been automatically delayed after she appealed a lower court's order that she began serving the sentence separately. Former Theranos's C-O-O-Ramesh,

Sonny Balwani, began his nearly 13-year sentence at a Los Angeles prison last week. And Republican North Dakota Governor Doug Bergam signed a law limiting bathroom use for transgender people. Under the new law, these individuals will not be able to access bathrooms, locker rooms, or shower rooms that match the gender they identify with in some state-run facilities. The American Civil Liberties Union said more than 450 bills restricting the rights of transgender people have been introduced in state legislators this year. Back over to you, Tyler. Thank you very much. Ahead on Power Lone. Lunch will First Republic get a helping hand or simply face the market's invisible one?

Reports emerging that government won't intervene in rescue efforts leading to more concerns around the regional bank's ability to turn around its business. We'll discuss that breaking story next. Welcome back to Power Lunge, everybody. Shares of First Republic continuing to slide after falling by almost 50% yesterday after they reported that massive drop in deposits. Today, the bleeding continues as the shares were below $5 earlier. This was a $147 stock in February. As the bank looks for a rescue deal, our next guest says the FDIC deposit insurance fund took a hit with SVB in signature, and he thinks it's the outcome the government would like to avoid here, if at all possible. For more, we bring in John Popio at the Gallatin Group. He's also served at the FDIC and the Federal Reserve.

It's good to have you here, John. Welcome. Thank you for having me. It sounds like a hit could be inevitable here, don't you think? Well, I think that's something that they'd certainly like to avoid, if at all possible. If you look at what happened in the last few days, it seems that First Republic's confirmed the worst of our suspicions. The earnings call set really a motion, a series of events into motion, and in some ways confirmed the worst of our suspicions. There was absolutely a massive deposit outflow of roughly $100 billion in the bank's business is suffering in a substantial way. I think not taking questions on the quarterly earnings call was less than

for the institution, as normally an institution in a bind would seek to quell fears of its stakeholders, particularly its depositors, lenders, and shareholders. And I think they could have used that opportunity to better outline the specifics of the strategic options that they're currently exploring. But that said, the damage has been done. And while regulators generally don't act on stock prices, they do take notice and things are moving very quickly in this particular case. And I think it's unlikely that the firm is going to recover either without a private sector restructuring or a government intervention.

So you do not, a week from now, let's say, do you think this bank still is operating as First Republic? I think that they're actively exploring options right now. I think there are a few options on the table. First is the First Republic could effectively wait for the FDIC to be appointed, do nothing. I don't think that's a great option. Alternatively, they could explore surrendering their charter to their primary chartering authority. It's possible they might use that as a leverage

or a bargaining chip in order to compel some sort of private sector solution. I think if it fails, there would certainly be a bridge bank due to the size of the institution and the scope of its operations. So the FDIC would seek to form this interim financial institution where they could undertake a number of measures, measures, they would be bound by preserving costs to the government, what's called the least cost test, and they would seek to actively explore a buyer and ideally a bank buyer for the assets and liabilities at institution.

I think that alternatively, I know First Republic is looking to raise capital and sell assets. I think it's a very trying period to do that. I think it's particularly challenging because not only are the financial distress of the institution, But then also any purchase or would be purchaser would have to realize losses, which really leaves two options. Government intervention at some scale or a private sector bailout, something to the tune of long-term capital management like solution back that we saw in 1998.

You know, it's fascinating, John, because the government officials seem to be saying, no, that is absolutely not the route we want to go here and that's fine. that leaves the private sector where it's almost like First Republic's kind of issuing this, this veiled threat of, okay, well, either help us out more now or you're going to pay more into the FDIC to resolve the cost of our failure. Which do you think, you know, if you're a big bank, you have a fiduciary duty, what should they do here? I think the primary dealer's largest Wall Street banks, they can come together really to

affect a solution that could augment their $30 billion injection. They could act once more and seek to effectively convert their deposit stake into some form of equity in First Republic and assist in its turnaround. I think we all agree that this failure would certainly be expensive to the FDIC's deposit insurance fund that it uses to resolve banks. But why, John, if you don't mind my jumping in, just as a final question here, what would be the impetus for the private sector to jump in and get equity, you know, transform deposits in equity or anything like that?

for a franchise, it's probably permanently imperiled, right? They're already potentially going to take a haircut on their initial round of bailout money, which their shareholders are probably not that happy about. Why should they step up more, especially on a day where the market is not showing much contagion from First Republic's sinking ship? Yeah, I mean, that's a really great question. And I think that's exactly the point that they would make to regulators. To the extent that there could be contagion risk down the road,

or there could be knock-on effects in the financial system. I think that is certainly would incite behavior by the primary dealers, the Wall Street banks, to act. They've done so in the past, and I think their injection of $30 billion was done as in part to quell some of those concerns over the course of the week and the March 10th. So given that they've already acted once, I think it's likely that they might act again to preserve that infusion.

And then also reserve the right to be able to be. on assets, should there be a receivership or coordinate with the government to affect some sort of sector solution? Yeah, they're trying to basically figure out what is the cheapest solution here. Least-Paying solution. In the long run, thank you very much. We appreciate your time. Today we'll have you back.

And still ahead. There is no place like home. Mortgage applications rising for the second time in three weeks, despite interest rates moving up as well. So is the housing market finally starting to stabilize. That is next on Power Lunch. Welcome back, everybody. Mortgage Demand rebounding even as interest rates hit the highest level in more than a month.

Diana Oleg in the house with more. Hi-Dai. Hey, Ty. Yeah, that's right. Demand from homebuyers actually drove the gains last week after they had really fallen hard the previous week. Mortgage applications to buy a home rose 5% from the previous week. Still 28% lower than the same week a year ago. But this even as mortgage rates rose, the average on the 30-year fixed for the week, increased to 6.55% from 6.43. That's for loans with 20% down. but an increasing number of consumers are now buying down their rates. Nearly 45% did that last year as a way to reduce their monthly payments. That, according to government data, the home builders are also buying down rates short-term

to get more buyers into a new home, and that is keeping new home sales up, which we saw that big jump in March, nearly 10% higher despite those higher rates. Rates are actually falling back a little bit this week, thanks to that renewed concern, of course, about the regional banks, guys. So Taylor Morrison out with numbers this morning following D.R. Horton and Pulte. Nice numbers there. Solid beats. How are they doing this?

Well, solid beats. They're getting them in the door because they're doing the mortgage rate by downs. And so that's helping them a lot. But interestingly, it's all about supply. And I know, like, this was Kelly's favorite number. She always says. But usually the homebuilder's supply makes up, you know, between 9 and 10 percent of all the supply in the market. The rest existing.

They're now making up over 30 percent of the inviagnation. in the market because the existing home inventory is just so low. It's just so low. And the sellers don't want to sell because they know they're going to have to pay. Trade up to them. To trade up. To trade up. Wow.

I was thinking about like, okay, if I bought a piece of land right now and spec built a house, do you think I could sell it for a lot of money? Oh, yeah. Are you kidding? Why do you think a lot of people would be doing this right now if they look at the market and say, well, wait a minute. I mean, and we know. Well, it depends on where?

Right. First, I mean, if you're talking about northern New Jersey, where are you going to find a piece of land and you're going to afford a piece of land. Exactly. But, you know, in general, it costs less to build a home than buy a home, but nobody wants to go through that. True. Although I'm just wondering kind of the number of people who have been in the market in the past to own homes and rent them out and that kind of thing. You know, at some point, if this trend looks like it's going to be sustainable beyond just the past six or nine months, I don't know. And mom and pops have been suffering because of credit access, too. So it's just an interesting dynamic right now. Right. And we're also starting to see home prices firm, which is really interesting. They had been easing up coming down.

But in the last reports, we're seeing them start to inch up again, assess. especially in the Sunbelt, still in the West, very weak. But prices, you know, CoreLogic just said prices have bottomed. Wow. Bottomed. We've got a report this morning from a real tour in Southwest Florida showing that prices from two years ago on single-family homes in a certain area have almost doubled. Oh, yeah.

From two years ago when it was already. And they only have something like... Pre-pandemic still up 43%. They only have like eight houses in inventory. I mean, it's crazy. Die? Great to have you in the house. Thanks.

Great to be here. ahead on Power Lunch, we are less than 24 hours away from the CNBC Stock Draft. Ten teams competing for investing domination. We'll ask a stock draft veteran who is at the top of his 2023 draft board in a special edition of three stock lunch next. Welcome back, everybody, with the 2023 CNBC Stock Draft set to kick off tomorrow at 2 p.m. right here. We want to start kicking things off with a special edition of three stock lunch so we can see three of the 60 assets up for grabs in the draft this year. Chipotle, Charles Schwab and Peloton. Here to give us his picks on each stock as a draft veteran, Delano Soporo.

It's good to see you again, Delano. Let's start with Chipotle. If you were in the draft and this was a name tomorrow, would you be picking it? Yeah, I'm excited for tomorrow, Kelly. I will be tuned in, great roster of folks picking. This is one that I hope comes off the board tomorrow. And it's not just because of the great quarter they had. It's because of the last few quarters, they've been focusing a lot on digital.

They're Chipotle stores, which allow for users and buyer eaters, to come in and actually do things a lot quicker and not even have to speak with representative, it's made for higher margins and more efficient sales for them. So I think that's been something that's been really, really helpful for them over the past few quarters and the operating margin. It's been increasing. It's been higher also in the last quarter as well. So I think with the pricing power, the Chipotle is displayed and a lot of the cost measures

that they've done on that side, I think it's been a solid stock to own. But have I missed the move in it, Delano? That is a question. I don't think so. If you look at the chart, even pulling it back, you know, five, you know, three, four, five years, the chart's been moving steadily higher. I think there obviously will be profit taking at some point. And obviously, after the move they've had today, there will be profit taking. But I think investors can hold it for longer term because they're not only doing well on same store sales. They're also opening new stores and really, really focusing on growth. And so this is still a growth story that's still in play. To win this stock draft, typically you need some long shots to come through for you. Could Charles Schwab be such a long?

long shot? Yeah, this is that long shot, second, third, or fourth rounder that you might, might be a dub, but it could play out pretty well. I think the regional banking fears are real, and you've seen how FRC is trading today and what's going on with FRC. But, you know, Charles Schwab, to me, is a different situation. 80% of their deposits are deposits that are FDIC insured. They have ample liquidity, and that's been, you know, emphasized by management.

The revenue was up. And also, you know, if you think about where their deposits actually come from, they added over a million new brokerage accounts, which is a lot of where the deposits, their bank's week comes from. So through challenging times, they've navigated it really, really well. So when the cash sorting slows down, I think their deposits start to grow again rather than dip. And I think they'll be in a rather good position. I think investors will see that. So one of the other names up for grabs is Peloton. Do you think people should take a flyer on this one? No, this is one that would potentially be an undrafted free agent. I don't think you take a

flyer here. There's a few reasons why. Obviously, the growth. story has started to fade a little bit. And I know new management is starting to focus on subscription revenue, which could be a good thing. But that's going to take a little bit while to play out. And the profitability is the thing that may be extended for them to actually get to profitability will be extended for a while. So that's the reason why I'd stay away. And liquidity is also looking a little bit less ample as well for Peloton. So this is one that I'd potentially stay away from. Downward dog. There you go. All right, Delano. I know. Delano, thank you. I appreciate Delano Soporo. Tomorrow is the day. The

2023 CNBC stock drafted a huge roster. A lot of new faces this year, Ty. Yes, a lot of new faces and some very interesting stocks to choose from. It is always a, it's one of the best days of the year for us. It really is. It's one of the fun days of the year. All right, still ahead, a tobacco giant agreeing to a record settlement for doing illegal business with North Korea. We have the details when Power Luncheon. Well, the intersection or maybe the collision of government and business has been a theme of today's program. And here's one more example. British American tobacco, one of the biggest in the world, maybe number two, I believe,

agreeing to pay approximately $635 million to settle with the Department of Justice for violating U.S. sanctions with North Korea. The London-based company admitted to doing business with Pyongyang through an intermediary between 2007 and 2017 in defiance of, U.S. trade law, and despite publicly stating that it would no longer conduct business there, officials say smuggled tobacco products are a major source of revenue for the North Korean regime's nuclear and nuclear weapons programs. The dollar amount is the largest penalty relating to North Korean sanctions in the DOJ's history, but it's not even the largest settlement in settlement of business paid this week, as Fox agreed to pay $787 million to settle the Dominion case. It proves, Kelly, I guess,

governments matter, laws matter, courts matter, regulators matter. We also had Seagate with a $300 million fine for sending hard drives to Huawei while they were on the government blacklist. So, yeah, they're cracking down everywhere. That fine, by the way, issued by the Export Bureau was the largest in its history. So there is a clear message here coming from the government to corporate America and beyond. And we began the show, of course, with the lawsuit filed by Disney against the Florida governor of Ron DeSantis over there ongoing. Bat, I guess we'll call. Stay tuned on that one. All righty folks. Thank you for watching Power Lunch. The stock draft is tomorrow.