Power Lunch - Hightower Advisor's Michael Farr, Recession Talk, Restaurant Labor Woes 4/22/22

Episode Date: April 22, 2022

Les Funtleyder, E Squared Capital Management healthcare portfolio manager, discusses health care stocks and biotech. Erin Gibbs, Main Street Asset Management CIO, discusses Gap, Electronic Arts and D.R. Horton. Clarence Otis, former Darden Restaurants CEO and Verizon board member, discusses how restaurants will fare with increased inflation and labor struggles, if in-person dining is sustainable and the biggest changes from the pandemic in the restaurant business. Plus, Michael Farr, Farr, Miller & Washington founder and CEO, Hightower Advisors chief market strategist and CNBC contributor, discusses the markets, his thoughts on the Fed and more. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to a sell-off Friday. Here's what's ahead this hour. Fed chair, Jay Powell, puts a 50-point cut, half a percentage point on the table, not cut. What am I saying? Why did say cut? Rise. What are we talking about here? And the markets fall off a cliff. The Dow down a 1,300 points since 10 a.m. yesterday. Is the Fed getting perhaps too hawkish, surprising the market? Plus, the restaurant route, folks, after dealing with pandemic shutdowns, now should be the time for them to shine, but they are dealing with huge spikes in costs for food, for labor. So which companies are best positioned to weather the storm or storm the weather? The former CEO of Darden Restaurants will join us, Kelly. Tyler, thank you.

Hi, everybody. Let's get an afternoon check on these markets as they continue to sink right before our eyes. The down now down 730 points. Here's a two-day chart of the Dow, in fact, to illustrate what Tyler said about this big drop, we've really seen all the way back to yesterday morning. You can see we're up at 35,600. We're all the way down to just over 34,000 and change. And inflation hitting everything.

Why are healthcare stocks the worst group today? Because HCA cut guidance. The CEO says a lot of things went right during the quarter, but that was offset by higher labor costs. The shares are down almost 19%. dragging down the whole sector, UNH down 12% having the biggest negative impact on the Dow. Gap also hit by inflation. It says its customers have less money to spend on clothes because they have more to spend on other things. Gap shares down 19%.

So inflation clearly a problem across a number of different aspects of the market. They don't seem to like Powell's aggressive stance to fight it either. Can't win here. Let's bring in Steve Leesman for more. Steve? Yeah, Kelly, markets once again forced to separate what's real and what's not. from Fed speaking. It hasn't been easy. A slew of Fed officials talking this week now has markets once again pricing in a more hawkish Federal Reserve outlook for rates. Here we go. The week began

with Fed President Jim Buller telling me he wouldn't rule out a 75 basis point hike, but that was not his base case. On Wednesday, Chicago Fed's Charlie Evans said he favored 50s, but that the Fed may have to go above neutral, which is about 2.5%. And yesterday, San Francisco Fed President Mary Daley, she added, The Fed would be deliberating over time doing 25s, and wouldn't rule out of 75 either. The December funds rate contract added about 40 base point. You can see it there on your chart or nearly two quarter point hikes, trading now at 270 for December, for the end of the year, that is. All of that leading the market to believe that maybe the Fed was floating a trial balloon of 75 base point hikes.

The August yield of 192, you see it there, just second bar from your left, suggests a 34% probability of 175 base point hikes. at one of the next three meetings. And the Fed is seen hiking all the way up to 3.4%. What is that, like August of next year or so. But the market may be a bit ahead of itself on this. I think a 75 base point hike would only come after two or more 50s, and several inflation reports that show what they've done so far isn't working. That is, I don't think the Fed's going to be quite so quick

to roll through the 50 basis point gear and ratchet up to another one. Guys? So let's talk a little bit about what we have. expect by the end of this year? Where do you think the Fed funds rate will be? And we were talking yesterday with someone, I forget who it was, but it occurred to me that we haven't really even begun the raising of interest rates. No. And that's, there's two parts to that answer there, Tyler, which is obviously a great question. So I'm going to take the Fed or most of the Fed if they're worried that they like this two and a quarter, two and a half percent range for this year. It's Bullard kind of a

loan wants to go to three and a half percent. You're right, we have not begun this, but the funds rate is 0.37. Guys here in the back, if you have a chart of the two year, might be interesting to put that up. We're at 270 already. So the market, and Bullard said this on Monday, has priced in a lot of where the Fed is going. Maybe the equity market hasn't. I can't tell there, but I can sure look at that number, Tyler, of 270 or almost 280, I guess it is, and say, you know what? It's 271 now. and say, you know what, the two year has priced in a lot of what's coming down the pike. And who knows, maybe not much more to go for this year. We do have that 340 mark in for August of next year.

Steve, thanks very much. Have a great weekend, sir. Pleasure. You bet. Stock selling off on concerns about the pace of Fed tightening. That's pretty obvious down 737 right now. The Dow on track for a four straight weekly loss, while the S&P 500 and NASDAQ on track for a third straight losing week. All now negative for the month of April. Is this a case of selling on the

rumors? Let's bring in CNBC contributor Michael Barr. He's chief market strategist at Hightower advisors and CEO and founder of Farr, Miller, and Washington. Michael, it is always great to see you. It is almost even better to read your remarks because every time I read your remarks, it's like I'm reading a conversation of a very interesting person, a conversation that he's having with himself. And sometimes that's the best person to talk to. Your own best conversationalist. You believe that the Fed won't get things perfect, but will skirt disaster? Explain. Tyler, I think what the markets are telling you, first of all, is that they still don't know if they can believe the Fed, right? The Fed hasn't had a lot of credibility of sticking to its guns.

You go back to 2018 when they started to raise rates. The markets started to, to fall, the Fed starts to cuts, and they pull back. Will they really do what they say or they're going to do? Because your comments to Ron, we're right. Quarter of a point, hike is all we've seen, and the rest of it's been talk. So taking interest rates up, yeah, great. But it could be that they overdue.

There is a chance we could avert disaster. But I think there's also a reasonable likelihood that this leads to a recession. They're trying to put a very large thread through a very narrow needle here. Let's talk about the kinds of stocks that you think can do best or better under the kinds of scenarios that you forecast. Earnings are obviously always key. Interest rates always key as well. You say you need companies with proven fundamentals. What does that mean exactly? And give me, you have three examples that you pointed to. I do. You know, I was talking with

Tony Dwyer yesterday. He's so smart. And what we were discussing was, look, stocks go up when earnings go up. Earnings go up when the economy expands. If this economic expansion stays in place and earnings continue to go up, stocks should survive okay. If the Fed kills it, if they overstep and trying to tame inflation and actually kill the economic growth, then those earnings stop going up and you have problems. But those more secure companies, and I talked about here, three, Mondalese, is that, They snack maker, food goods.

They make Oreo cookies. You own companies that are earning a lot of money with great balance sheets, good market share, and people continue to buy Oreo cookies, 19 and a half times earnings, and growing earnings at 10% with a little bit of a dividend, I don't think, offends at all. Google, I continue to like Google, even, you know, it's this enormous company, but it's only 19 times earnings. and the projected growth rate for Google's earnings over the next five years, still 15% by a world variety of analysts. So if stock prices are driven by earnings growth, and these companies have real earnings growth and not a lot of debt,

these are companies that I'd like to own, and I like their model. And then the other one that I had, oh, go ahead. Go ahead. Go ahead. He's Ross stores. Down 8% year to date, but you call its business model, one that can endure inflationary. times. Because we're running short on time, I want to get to one of your holdings, and that is Disney. Disney has been, I believe, the worst stock in the Dow over the course of this year so far.

It has become a very easy target being described as a woke company that gets people riled up. What's your view of Disney, which many people would say is a platinum franchise? Platinum franchise. I would also say it's a platinum franchise. Here's the concern. You buy a company just based on its corporate strength and because you want to make money. If while you own that company, you find out you own an ESG company,

right? The environmentally sensitive company, the green company, the company taking a position. If that new politicization of Disney starts to impact the bottom line, then you re- have to rethink your investments. I've looked at this pretty closely, and we don't see that it's going to impact the bottom line.

We think that this seems to be an emotional sort of reaction to Disney. If they unload 200 or so million dollars of costs every year and shift that back to the state of Florida, that doesn't hurt Disney. Disney's theme parts are through the roof right now. We think they're still going to add about $4 million, two to four million subscribers here in this quarter

for the Disney online. And we also think that the international visitors to the theme parks who spend a lot more money haven't even really started to come back yet. So it's a powerhouse. We think it's a fortress company. I'm going to continue to own it. And in fact, I may add to it. I haven't made that decision yet, but I'm closer to adding to it. And I think the valuation continues to be reasonable.

The noise for Disney strikes me as I dig a little bit deeper as being noise. All right. Michael, great to see you. have a great weekend. Michael Farr with Hightower and Far Miller and Washington. Let's get over to Dom Choo for a market flash here with the Dow near session lows, Dom. All right. So Kelly, Tyler, shares of Verizon are in focus right now, trading just around 6% lower on the days.

You can see here after the telecommunications giant saw its first quarter profits slide 13% even as earnings per share and revenue numbers were relatively in line with Wall Street expectations. Now, the company also warned its full-year wireless services revenue would come in at the low end of its previous guidance, along with its earnings outlook as well, citing, among other things, the current economic environment, including inflationary pressures and rising rates. At its current levels, guys, the stock is tracking for its worst day since March of 2020. Verizon, by the way, also the worst performer of the three major wireless carriers on a year-to-date basis, where it's basically flat on the year. Meanwhile, AT&T and T-Mobile, up about 5 and 10% respectively. Tie, I'll send things back over to you. All right, Tom, thank you very much. And coming up, another sector getting hit hard by inflation.

Restaurants, not only are food prices rising, they are also hit with higher labor costs. For the cooks to make it for you, the waiters and waitresses to serve it to you, we'll ask the former CEO of Darden, which companies are best positioned and why. And look at these big name stocks hitting 52-week lows today. Today, Disney, we just talked about it. Are you ready to nibble like Michael Far may be? We got Salesforce. We got your PayPal. Much more on this sell-off.

Now 721 on the Dow. Welcome back to Power Lunch, and if you hadn't noticed, stocks are selling off today big. And a big reason why is that inflation is hitting the bottom line. Restaurants getting hit on both sides from food costs and labor costs, all while recession fears loom. Let's bring in Kate Rogers now for more. Hey, Tyler. Well, as inflation runs hot and talk of a recession, as you mentioned, looms value sentiment among consumers is falling. New data from Blackbox Intelligence shows that average guest checks are up 7.9% year-on-year for March compared to just a 3% increase in 2019.

But as mentioned, value sentiment is now lower than it was pre-pandemic, particularly for limited service restaurants and off-premise dining as delivery gets more and more expensive. So what brands will hold up best? Analyst at Cowan and BTIG have pointed to names that tend to cater to a higher income demographic like a Chipotle or Starbucks. Sweet Green is another name that has a loyal customer base and pricing power as well. On the lower cost end, both McDonald's and Wingstop have been able to hike prices without seeing consumers pull away just yet. But the question is, will diners continue to see value in delivery heavy brands like Domino's and Papa Johns? Restaurant earning season is about to kick off and we'll hear if all these brands still feel as confident. on pricing power this quarter as they did last time around. Back over to you. All right, Kate, thank you, Kate Rogers. For more on these inflation and labor challenges facing restaurants and for which companies are withstanding that pressure the best, let's bring in Clarence Otis. He's the former CEO of Darden Restaurants, currently on the board of Danny Myers Company, Union Square Hospitality Group, along with a slew of others we should

mention Clarence, thanks for being here and making the time. Welcome. Thank you. Glad to be here. I was going to ask if the restaurant industry is just, I don't want to say has a future. I mean, obviously it has a future, but how much smaller a piece of the pie is it going to take? When you hear people talk about inflation, they're saying, yes, it's at the grocery store,

but man, it is really at restaurant bills, and that table service is just, you know, it's a tall one to overcome in an environment like this. Well, let me really start with the good news because it has been a very difficult past couple of years for restaurants, but the good news is that volume, are bad. Traffic in the restaurants is there. There's tremendous pent-up demand. I think one of the

things the pandemic taught people is how much they value restaurants. So certainly there's a future. And you've seen significant volume increases. And in the restaurant business, volume allows you to deal with a lot of challenges. And right now, there are still significant challenges when you look at inflation. I wonder, though, about the following dynamic where people at first, are so excited just to get back out to that restaurant. And then after a couple times, they go, you know what, I don't want to pay $70 or $80 or $90 or whatever it is for this experience. It's just, you know, it's just too bad that inflation is what it is. I mean, you know, we were talking to Babasani yesterday joking about paying $32 for some, you know, pesto and pasta.

You know, it's an experience. It's wonderful, but, you know, is it sustainable? I think it is. I think dining out is baked into lifestyle. And that's been true for a long time. That's continued to be the case. And the good news in this environment is that some of the inflation is driven by significant increases in earnings. And so people are seeing earnings growth, and that helps them deal with it. But I think that experience is one, again, that really the value of it got reinforced as it was taken away over the last

couple years. Is being bigger the best strategy in this market, in this economy? Yes. It's the best strategy because you have the resources to respond. And so restaurant labor is about a third of all restaurant costs. Labor costs are escalating high single digits, mid to high single digits. Food costs are also about a third, and those are increasing high single digits to even low double digits. And the way to respond to that really involves investing. You've got to invest in your workforce to try to drive down turnover. That helps a lot because turnover is expensive. You have to invest in technology so you can be more efficient from a labor perspective and so you can respond to customers. And they're increasing desire for really seamless technology

driven solutions. And the biggest players have those resources. The biggest players came through this pandemic better than everyone else. Clarence, what do you think the biggest changes are likely to be from this whole pandemic and inflationary period? I think you're going to see restaurant models changed significantly. And so pre-pandemic, there was a digital transformation going on. That accelerated through the pandemic. And what that means from a model perspective, perspective is you're able to run your operation with fewer people. And so that will certainly continue as we look at not just inflation, but also availability of labor as people think about alternative industries and careers.

And so that's one that for sure is going to be there. It'll touch the off-premise for sure, but even the on-premise experience will be affected by it. And how you operate your restaurants will be affected by it. You got a personal favorite place for dining out these days, or is that like picking your favorite kid? Well, I have a lot of personal favorites. The beauty of the restaurant business is it is one where there really is consumers are diversity seeking. And so they have a rotation of restaurants, and they cycle through that rotation over the course of a year.

For me, that rotation may be a little bit larger than most, but I still rotate through. You're single-handed. You're like your own pyramid scheme. Just holding up the industry single-handedly. No, Clarence, it's been great to have you and to get your insights. Thanks so much. Thank you. Clarence Otis. Already coming up, health care, the biggest laggard on the market today, though it's hard to pick the biggest laggard. But they are. We'll dig deeper into that group. Plus, Gaps stock sliding as much as 20 percent. After the company slashed its guidance, we will discuss in today's three-stock lunch. And as we head to the break, we celebrate financial literacy month and feature some of our CNBC contributors.

Here is CNBC Financial Wellness Council member Brandon Copeland on why you should invest in your future self. A lot of times people talk about saving money and retirement investing and it gets kind of weird because, hey, I'd rather spend the money today. However, I want you to think about investing for an older version of yourself. I think about it today. I stash away money for an older, fatter, grayer version of me. Ain't nothing better than that. So let's change our perspective and change our mindset when it comes to investing in an older version of you. Because who else is going to invest in you better?

Time for our ETF tracker. And this week we are looking at travel ETFs, which saw $35 million in net inflows over the past week. There has been a general optimism about the strength of the summer travel season backed up by what we've heard from several airlines. in their earnings reports. We talked to Jonathan Tisch yesterday about hotels. Now, let's move on and look at some of these. The Jets ETF, not the Sharks, the Jets ETF, focused on airlines, up 3% this week. That's the one week change, though.

It's down about one and three quarters today. The Defiance Hotel Airline and Cruise ETF, that one is higher by a little bit over the week. And the travel tech ETF ticker away. Yes, that's a good one. It's lower on the week by almost 5%. This data comes from our partner at Track Insight. More information is available on the F.T. Wilshire ETF hub. Let's go to Bertha Coombs now for CNBC News Update. Bertha.

Thanks, Tyler. Here's what's happening at this hour. In Michigan, Reverend Al Sharpton is demanding the police officer who fatally shot Patrick Leoya be publicly identified. Sharpton was speaking at the man's funeral. He said authorities should not be allowed to keep the name of an officer who kills someone's secret until any charges are filed. We now have video of that mosque attack in Afghanistan that the Taliban says killed at least 33 people. Another 43 people were wounded. So far, no one has admitted responsibility.

The United Nations is denouncing the attack as horrific. And former Renault and Nissan chief Carlos Gohn speaking on CNBC first, First, after France issued an international warrant for his arrest, Goan telling Hadley Gamble, he expects a fair trial in France, something he says he would not get in Japan. But he found the timing of the warrant suspicions coming just before the French national election. Back over to you, Kelly. Bertha, thank you very much, Bertha Coombs.

Coming up, we are less than a week away. We are getting excited over here. The 2022 stock draft, it's back. Well, we had it last year. But this will be, you know, each year we're getting back to normal. We have several huge names competing this year. We are going to reveal our roster. We are going to pick our draft order and get very excited for this big event next Thursday,

where we also, I think, reveal the winner of last year as well. Looking forward to that. But first, a major push in D.C. to grow the chip industry, Elon Moey, live with details. Elon. Well, Kelly, I'm at one of IBM's advanced research facilities where they're working on two nanometer chip technology. Can you guess how many chips are in this wafer and how much money the industry wants from Washington? I'll tell you coming up next on Power Lunch. Welcome back, everybody. 90 minutes

left in the trading day. We want to get you caught up across the markets on the sell-off in stocks, what's going on with bonds and commodities and that push you saw from Elon a moment ago for more money to build chips. Let's start with Dom Choo. Dom, we have almost a 90% down day. On Wednesday, Jonathan Krenski at BTIG warned we haven't had one in almost a year, and it was like coming. I mean, it's just very broad-based, right, Kelly. It looks like we're going to build on that weekly losing streak that we've seen for stocks overall, unless things can make a really dramatic turnaround in the next hour and a half or so. So the Dow is on pace to basically have its worst day of the month, which would lead to its fourth straight weekly loss. The S&P is on pace

for its third straight-down week. On all of this, as worries over rising rates really hit stocks on that, again, pretty broad basis. So to give you some context for the intraday action, This is pretty much just off the worst levels of the day for the Dow, the S&P, and the NASDAQ as well. And by the way, every single sector is now in negative territory for the markets overall in the S&P. The outperformers are in less economically sensitive sectors, more defensive ones. Think consumer staples, think utilities. Meanwhile, you've got materials and communication services stocks among the biggest laggers. Now, that comm services decline, of course, driven in large part by the plunge in Netflix stock over this past week.

It puts the sector as the worst perform in the S&P by a very wide margin at this point. Now, stockwise, the biggest drop in the S&P today comes via HCA Healthcare. It issued disappointing full-year profit and revenue guidance, but it's not all in the red. Kelly, SVB Financial, which is the parent company of the regional lender Silicon Valley Bank, is the biggest gainer in the S&P after it reported stronger quarterly results. So yes, it is a 90% down day, but still specs of positive territory in the, overall mixed kill. I'll send things back. That is a true standout, along with your favorite MTV. Don, thank you very much. All right, so if we're all selling off because of interest

rate concerns and rate hike fears, why are bond yields lower today? Let's ask Rick Santelli what's going on. Rick? Well, I'll tell you what, if you look at the long-dated treasuries, of course, you may get a different picture, but ultimately what we are seeing here is really a short-end Fed funds move. Let's look at one-week. of the following. Here's these Fed funds. That's the last month of the Fed funds for this year. There's a month every month has a unique, of course, approach because every month adds into the logjam of what the markets are pricing in for the Fed. Right now, at 97, 28 and a half, Kelly, that's down 36 basis points on the week. Two-year note yields at 271 are up over 25 basis points

on the week and 10-year notes at 291 are only up eight on the week. If you look at Fed funds, Ds, they're minus nine on the day alone. That gives you the breadth of how the short end and two-year note yields are out distancing many of the other markets, once again, leading the way. And if you look at three months to two years, that's steepened over 20 basis points as a two-year's running. but twos to tens, well, that's flatter by 18 basis points, which means we're at counterpurposes here.

The flatter the curve gets, usually the rougher the stock market ride, and the more the Fed should perspire. Back to you. All right, Rick, thank you very much, Rick Santelli. Let's get a check on oil with stocks at fresh session lows. The Dow's down 763. And crude oil prices taking it on the chin as well. They're down 1.6 percent, still over 102 a barrel.

But those traders are also citing concerns about China lockdowns. possibility of the Fed over tightening and slowing the U.S. economy. So that gives you a broader feel for why risk assets might be under pressure today. So let's turn now to that funding fight for chips for semiconductors. Many companies led by IBM and others are pushing Congress to increase funding for the U.S. semiconductor industry. Elon Moy is live at an IBM research facility in Albany, New York. Elon?

Well, Kelly, this is the only lab in the world that can handle that two nanometer chip technology that IBM developed last year. So each of these wafers takes a couple of months to make, and on each wafer, there are about 70 chips. On each chip, there are 50 billion transistors. And that means the smallest component on here is smaller than a single strand of human DNA. So we are talking atomic level. Now, to get to this point, it took 20 years and $15 billion in funding from both the public and the private sector. CEO, Arvin Krishna, said, if the U.S. wants to accelerate that research, Washington is going to have to step in.

When you look at the history of this industry, it's a very, very capital-intensive industry. Given that it's very capital-intensive, there's a huge amount of risk that is being taken by people. If you look at the advanced R&D side, five out of ten things don't work. That is not a risk that most businesses that are out to make a profit can take. Now, IBM is not the only big company out here. Samsung and applied materials are also involved. This is on the grounds of SUNY's Polytechnic Institute. So all of these institutions, Kelly, stand to benefit if Congress passes that $52 billion chips act this year. Back over to you. And Elon, they're not the only ones. What happens if the industry doesn't get this help?

Look, the investment is still happening. Look at what's happening with Intel in Ohio or Samsung in Texas. But IBM CEO said it's all going to happen slower and later than the U.S. once, and that means we could lose our place in the race for innovation. All right. Elon, we always appreciate it. Thank you very much, Elon Moy. Those guys take the mask mandate very seriously. Did you see them?

Well, I think they're wearing masks no matter what. All right, coming up, just over an hour left in trading. We will run you through some key movers. I'm supposed to look there, but that's all right. Retail technology. Homebuilders in today's three-stock lunch. We got them, but as we head to break, check out the fintech names. We got PayPal.

We got your Visa. We got your FI serve. Leading the declines. Look at Visa. Yikes. And PayPal. And there's the Dow down almost 800 points. The sell-off accelerating as we approach the final hour of trading.

We will be right back. Welcome back, everybody. It's time for today's three-stock lunch with the Dow down more than 800 points. So let's trade three of the day's biggest movers with shares of Gapdown, nearly 20% after slashing sales guidance for its fiscal fiscal first quarter, citing challenges for Old Navy in particular. EA is actually a bright spot. It's up 3% on this broad down day.

It's rising on a bullish call and initiation at Bernstein. And City is naming home builder DR Horton a topic into earnings, but that stock is also down to and a 2.6%. Let's welcome in Aaron Gibbs, Chief Investment Officer at Main Street Asset Management. Aaron, welcome. Great to have you. Let's start with you and Gap. What would you do with the stock?

If you own it, get out of it. Definitely don't buy it. This is actually the second time the company has given us lower guidance just this year. And so this is something really concerning. It's also citing promotional levels, which means it's having to put stuff on sale, which is not something that other retailers really have been facing. And not only is the company giving us negative news, but Wall Street has been revising this company's profits down for the past.

two months, about 90% of all revisions have been negative. So it's just negative sentiment across the board. Even though the stock is down 20% today, I don't see it as a place to get in and buy it. When you're looking at constantly, you know, revisions going down and profits going down, the stock price can keep going down. So apparel is a tough industry, but Gap seems to have some additional problems on top of it. Yeah. And they're bringing in a new CEO to run that division as well, Aaron. Let's go to number two, which might be a sprightlier idea, and that is electronic arts. What say you hear? Yeah, so this is a buy. I own this stock. I think EA Sports, it's a quality company, even though you would think it as more of a growth, and it certainly has a lot of

potential for its valuations to come down. It still is able to maintain very consistent growth and consistent operating margins. But the real reason you get in this stock is if it can lower that 30% commission so that Apple's been most popular of the 30% fees, but it's really paid across the board. And because EA Sports has such a top product line, has such great content, they're in a great position to negotiate those lower commission rates. So with the pressure from regulatory as well as competitive, if EA can get that lowered fee, increase those operating margins, that's where we can get that valuation expansion and that higher price. Interesting possibility there. And again, those shares are up on a broadly down day.

What about D.R. Horton, Aaron, the home builder. You know, we hear about all the tailwinds for generational demand for housing, but it's been a really tough year for this area. Yeah. So even though from a very long-term trend, home builders might be great, I am not getting into this stock while the tenure is rocketing. And you can see quite clearly. if you look at home builders and particularly Horton against the 10-year yield, they're almost perfectly inversely correlated. So as long as we're seeing higher interest rates, it's just an industry I don't want to get into. It's not that it isn't a good company fundamentally, but there's just too much negative

sentiment out there. And as long as the Fed keeps being as hawkish as it is, I don't want to be in this industry at all. What is the market telling you, Aaron? The Dow is off 800 points or thereabouts today. back briefly below 34,000 in the 33,000 area. What are you seeing? Yeah, it sells across the board. A lot of the other days where we had these big down days,

it was tended to be more focused on the gross side and the high valuation stocks. Today, it's most evenly flat. So it's just a complete sell-off out of equities. Obviously, those rates are going higher, so selling out of your treasuries, a lot of cash coming on the side. So for me, it's really about this is a fear trade. I think we're going to continue to see this through earning season and up until the Federal Reserve meeting. And so we should expect these plummets.

I'm really looking to see if the market just holds the support made back in March. And I wonder, Aaron, to some extent, if we needed to have this flush. I mean, that's the argument that Jonathan Krenski at BTIG was making on Wednesday, where he said it's been, you know, 350 some trading days since we've had a 90% down. day in an odd kind of way, will people be gratified if we do hit that level on the close here? I think so. I think if we hit that support and if it can hold for that week, that'll be the sign for many investors, not all. There's a lot of fear out there, but that we are able to hold that support even with increased interest rates. Yeah, and it's been an incredible streak.

Erin, thanks for joining us. Three stocks and more. Aaron Gibbs with Mainstream. We appreciate it. after the break, health care deep in the red, the IHFETF. On pace for its worst day since June 2020, HCA Holdings dragging down the group after the CEO highlighted the growing weight of inflation on results. Welcome back to Power Lunch, everybody. Healthcare stocks lagging the market today with the S&P Healthcare Index, one of the worst performing sectors. United Healthcare dragging down the Dow and the hospital operator, HCA Health Care, Down by nearly 20% on the session, almost 21, after lowering guidance because of higher labor costs. Les Funtleiter is a health care portfolio manager at E-squared capital management.

United Healthcare is his biggest holding, and he also owns a little of HCA. Les, when I think about the health care sector, it is so big and so sprawly and involves so many companies that do so many different things. I don't know how a portfolio manager like you decides how, how it's a portfolio manager like you decides how, to call your shots and concentrate. So describe to me where you are sort of overweight in terms of your health care sort of internals and where you are steering away from. Okay, well, we concentrate by using lots of coffee. In general, for our perspective, because we are a family office first, as we are geared a little bit more larger cap these days as the smaller cap valuation's got a little out of hand last year. So you said United, which is our biggest position. We are looking at HCA,

maybe to add some over the next couple of weeks. We're excited about companies like health equity, which benefits from raising rates. And we're looking for companies that are seeing increased procedures like Shockwave and Penumbra, we are shying away from biotech. We have for a while. We think that particularly the Small Cap biotechs are, you know, still correcting and probably will take another year or so to correct. You know, one of the things that HCA, which is down a lot today, and you say you're looking at maybe adding to it on this weakness, is the idea that labor costs are hurting them. So the broad question then is why, is that going to be broad across the board with the hospital companies, providers like that? And do health care companies as a group

have more pricing power relatively than some other sectors would? Yes, absolutely. Healthcare has more pricing power than most other industries because generally demand is more less inelastic. But we have a lot of labor cost issues. And we're seeing this across all of our companies, whether they're public or private. Everybody's having to raise salaries and benefits. And that's fine. We will eventually accommodate this in earnings. It may take six or nine months. And that'll be true for HCA2. And Medicare rates will eventually incorporate increased labor costs. So, you know, on a longer term basis, which you know not everybody is these days, this will all be accounted for by next year for the labor-intensive sectors.

But on the top line, you've seen even intuitive surgical who also had a less-than-stellar earnings yesterday, top line's been fine. It's really been, you know, the cost pressures. Go ahead. It's so interesting, Les, that this is now ending a lot of the excitement over the health care stocks. And by the way, it's one of the reasons why Goldman and others have been warning about inflation because they saw it actually showing up in health care wages, for instance, broadening to that key part of the economy. And it's a little bit harder to reverse once it happens.

So it's making a lot of portfolio managers second guess their exposure to health care, which, if anything, they've been more overweight lately. Right. Well, we had a lot of, we'll call them, health care tourists come visit us to escape things like tech and other areas, which were, you know, having their own growth, growth scares. And so they've come to health care. I'm not sure they all understand what, what's going on in health care. So they're now getting out of health care. So it's more of a technical function as opposed to fundamental function. And fundamentals are, you know, more or less

okay. I don't think, I'm not worried about the secular trends for the most part, except for maybe biotech and to some degree life science tools related to funding because you've seen there's been sort of a drought of IPOs and secondary. So there may be some liquidity pressure going into the second half of 22. Talk to me about your second largest holding, and that is Johnson and Johnson, a company with a sterling reputation that at the same time has over the past half decade or so had to pay out or get involved with large litigation costs, having to do with a variety of products, implantable products, drugs, including the opiates, other things. Are those large settlements that they've had to deal with, some of which they're still appealing,

are they material to the company's results? How do you process that and, if any, the reputational damage that attends to them? Well, yes, you're right. There has been some reputational damage for sure, but there isn't, there's new CEO and a bit of a new management team. I'd like to think that a lot of this has been at least put to rest and then they'll settle, but, you know, hopefully, you know, we've got this solved. You know, material, not so far. And so it does seem like they are coming out of it.

You recall, Merck went through Vioxx in the mid-aughts and, you know, ultimately has recovered themselves. Let's quick last question. place in the healthcare space, and I'm thinking, for instance, medical device makers versus hospitals that have relatively lower labor cost exposure or inflation pressures? Yeah, like I mentioned, we have a significant weight in a number of them, like Dexcom for diabetes and Abbott and Penumbra shockwave. So again, they're mostly sales, very few personnel. So yet they will tend to do a bit better than hospitals, as long as we don't have more waves of COVID, which leads to a decline in procedures. So we would say devices,

insurance, pharma, biotech, if I had to rank order, and then some of the special situations like health equity that benefits from rates. All right. Les, thanks for joining us today. Thank you. Less fun lighter. The selloff still picking up steam. The Dow down more than 800 points, while the NASDAQ also down more than 2%. We're going to drill down on some of the big tech movers after this quick break with the NASDAQ having its second worst April. Maybe in history. Stay with us. It is an ugly day. Look at the doubt right now. About 1,500 points lower than where it was early in yesterday's trading session. Big reversal. Let's bring in Dominic Chu for more on this big sell-off. Dom, the numbers keep getting worse.

And every time I come on for a market check, I say session lows. Session lows. Session lows. Well, here it is again. But what's curious about it is something Kelly and I talked about in the exchange. It's all fairly even. There's no real under or outperformer in this whole thing. This is a very broad-based sell-off with the NASDAQ and the Dow kind of down the same percentage amount. I also want to show you what's happening with the NASDAQ because that's a key one to watch. The reason why I'm pointing it out is because if you look at the record highs we saw last fall down to where we are right now, we are now down 20%. So you're back into that so-called bare market territory for the NASDAQ that we've talked about in the past. It's not at the lows that we've seen for the year so far, but it's still at that kind of level, generally speaking.

Also, if you kind of dig down into the moves that we've seen over the course of the past week, one of the curious ones that we're going to look at here is the outperformance in computer chip stocks. Semiconductors are actually holding up relatively well compared to what's happening with software, which is down 5.5% and then FinTech, which is down nearly 7% as well. So that's going to be one to watch. And then from a stock perspective, you really have to kind of take a look at what's happening here with these names. Apple, Microsoft, Alphabet, Amazon, and Tesla. You and I all know that this is the trillion dollar club, right?

They're worth so much for the overall market. I'm going to put a star on Tesla because that's the only company in the trillion dollar club that's reported earnings so far. Every one of these guys here report next week. So this is going to be key for the market. Four of the biggest companies in America are now reporting earnings next week. It's going to be a big catalyst week. We'll see if it can change the momentum, guys.

I'm watching that 90% figure. If we do see 90% down day, which Jonathan Krenski was saying earlier this week, I was asking, Aaron, is that going to be a buy signal for the market? And Krenski is saying not necessarily if it's the beginning of what could it unleash more volatility. So we'll see. That's going to be a stat, I think, to watch. Well, I mean, it's the capitulation thing, right? Maybe it happens or maybe it doesn't.

Right. Well, a big day nonetheless, and Sarah Eisen will be all over it as she brings us to the close. Thanks for watching, Power Lunge, everybody. Have a great weekend. Thank you.