Power Lunch - Inflation Deceleration, and a Housing Bottom? 8/10/22

Episode Date: August 10, 2022

Stocks are rallying, as investors cheer the lighter-than-expected inflation report. We’ll break down where prices are decelerating, and if it’s time for a new investment strategy. Plus, did July mark the bottom in housing? We’ll bring you a Power Call on the sector, and the names that could lead the group out of its slump. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

All right, welcome everybody to Power Lunch. I'm Tyler Matheson. Glad you could be with us here on, it's a little bit cooler in the Northeast, a lovely Wednesday. Here's what's ahead. Rally on Wall Street, investors cheer lighter than expected inflation numbers. We will break down where prices are decelerating, where they may still be rising, and if it's time for a new investment strategy for you. Plus, did July mark the bottom in housing? A power call on that sector, the names that could lead the group out of its slump. A perennial favorite topic of discussion, Tyler, thanks. Here's where the markets stand.

The NASDAQ leading the way today up 2.6%. So doing a lot to reverse the weakness we saw earlier this week with the chip stocks lagging today, reversing that and then some. The S&P 500 up 2%. 4203. The Dow Industrial is about 100 points off the session high up 493 or 1.5%. And we should mention this is pretty much session highs this afternoon for the NASDAQ. All of this kicked off by the drop in rates we saw after that softer CPI.

print this morning. We'll have a whole lot more on that in just a moment. And more on this kind of theme that yesterday's laggards are now leaders. Take a look at the cruise names. We told you about Norwegian yesterday down about 11%. Today it's up almost 13%. Yesterday it was all about its warning that the consumer wasn't coming back like pre-pandemic levels for another year or so. Today it's a different story. RCL Carnival also up about 10%. And tech stocks outpacing the broader market. Meta. Netflix. Look at these gains. 6% or so, even Salesforce, they're down up around 3.5%. It's one of the best performers, Tyler, in the Dow.

All right, thank you very much, Kelly. Let's get to our top story of the day. And that, of course, is those inflation numbers. The consumer price index coming in lighter than expected, and that gives investors hope that inflation might have peaked a month or so ago. Now, the CPI year over year, rose 8.5% in July. That was a little bit lower, 2 tenths of a percent. lower than the 8.7% expected, and it was flat for the month, in other words, sequentially.

So where did we see drops in prices and where are things still a little huddish? Let's dive into different sectors of the economy, energy, food, housing, cars. We're going to start with energy and PIPA Stevens. A lot of us know the story here, or the basic one, PIPA, but fill in the blanks for us. Hey, Tyler, well, energy is really at the center of this inflation report. And the downturn in energy prices is the reason we saw headline inflation easing slightly. So let's run through the numbers. Overall energy prices down 4.6% in July compared to the prior month.

Gasoline falling 7.7% with fuel oil, which is heating oil and diesel, down 11%. Now, one outlier was electricity prices, which did rise 1.6%. And energy has been a major driver of inflation because it feeds into so many categories. If it costs more to transport food, for example, what we pay at the supermarket is going to be higher. And overall energy prices are still up 32.9% year over year. Jamie Cox from Harris Financial Group saying energy prices declining is critical since it makes a soft landing from the Federal Reserve possible. He said overall this is a sign of the tie turning. But others noted that this is more tenuous and many factors are driving energy prices, meaning this could be more of a temporary

relief, Tyler. What are you hearing in terms of the consensus whether energy prices may have peaked earlier this summer? Well, gas prices are now down for 57 straight days, according to AAA, and we're just a penny away from having the national average fall below $4. So next month's CPI report will likely show another decline in energy prices. But beyond that, it's, I mean, it's pretty difficult to tell. There are a lot of factors in the back half of the year that could influence the direction of oil, including the SPR releases ending, as well as Chinese demand growing. And there's also the impact of now that gas prices have come down, will that ultimately mean demand rises once again and pushes prices back up? So there are a lot of factors here at play, but for right now,

we are at $4 on the national average. All right. Thanks very much. Pippa Stevens. And let's not forget, food prices seeing their biggest increase since 1979. Dom Chu has more on that surge for us. Dom? All right, so Kelly, there's no way to sugarcoat this. It's bad when it comes to inflation on the food front. It costs a lot more to feed your family. You mentioned that biggest increase since 1979. That is, by the way, a near 11% year-on-year increase for the food index, the food component of CPI.

And if you look at some of the individual components, you can see why people do feel that sticker shock, because it's the staples and things that we can sue on a daily basis that have some of the most pervasive impacts to the upside. You're talking about 26% rise in the cost of butter, 38% rise in the cost of eggs, and around 20% for coffee. Those types of items that we consume on a daily basis are what we key on, and that's the reason why it feels so much worse. But if you're looking at least for some signs of possible relief, and we know that this could be the journey of 1,000 miles when it comes to dealing with inflation, but it could start with a single step. If you look at some of the month-on-month decreases, there were actually some decreases in certain meat products and fruit products. Beef products like steak and roast, uncooked ones actually fell in value, fell in price between the months of June and July. Also look at certain other food items like seafood, certain seafood products did as well.

Frankfurters, by the way, when it comes to processed meat, down 6%. So there are certain pockets, Kelly, within that food kind of industry, that food index overall. all, it's, again, not wholesale. We're not seeing this drop in prices yet, but there are certain pockets where things are showing some signs of easing, and that's the reason why some families and households may take a little bit of comfort in seeing what they're seeing. Although, again, it's very bad, Kelly, it's still going to take a while for those things to come down market. I love that they call them Frankford's instead of hot dogs. But it seems like that also, Dom will have a lot of bearing on whether the consumer wallet shifts to restaurants or, you know,

stays at in-home dining. I mean, there's a lot of substitutability there that has big implications. And so that's the thing with food products, right? If you have some kind of a food or dietary restriction, of course, inflation is going to have a lot more impact on you because there are certain things you cannot eat or will not eat and certain things that you don't want to eat or do. But when it comes to food, that substitution effect, Kelly, that you mentioned is very, very clear because when you start to see prices for, say, pork and beef that are false,

versus, say, hypothetically, chicken and turkey, you might turn towards a substitute like those products. So this is very much a game that many households are playing right now about going to the grocery store and then seeing what's on sale. And by the way, citrus fruits fell about 3% month on month. So I hope you like oranges, because if you do, you might get a little bit of a break on it, say versus apples or other fruit products. It's something a lot of families, Tyler, Kelly, you are doing. Hot dogs and orange juice. Hot dogs and orange juice. I mean, it's good to see these food prices.

some of them at least coming down because, boy, they had run up over the past year. You look at beef and fish and even pork prices. They're much higher than they were a year ago, though lower than they were now a month ago in some categories. All right, thank you, Dom. Housing costs, a big piece of the inflation puzzle, of course. Diana Oleg has more on what today's CPI report says about house prices. Hi, Dai. Hey, Ty.

Yes, Shelter continues to be the big, bad wolf in the CPI because it makes up about a third of it. Up 0.5% in July for the month and up 5.7% from a year ago. Rent is still rising, although we are getting some reports that apartment rents are at least starting to stabilize to more historically normal gains. Single family rentals, though, not so much. Up nearly 14% annual in May. That's the latest read from CoreLogic. As for the prices of what goes into your home, kind of a mixed bag. Major appliances are coming down a little bit, just over 2% month to month, but still up just under 5% from a year ago. That could be some easing in the supply chain. Furniture costs are still rising each month and now up nearly 15% from a year ago.

Window and floor coverings fell very slightly for the month, still up about 7% year over year. As we see home sales drop, there will be less demand for these items, and so we could see prices ease up even more, Tyler. Has there been an effect on mortgage rates from all of this? Yes. And that happens. this morning. So you saw this big drop in the 10-year yield. And mortgage rates loosely follow that. So you saw mortgage rates for the day today, and this is according to Mortgage News Daily, came down 22 basis points, the average on the 30-year fixed. Now, we have seen bonds recover since then.

So that may raise again tomorrow. We may see mortgage rates move back up a little bit. So we're seeing this kind of volatility day-to-day. But in the bigger picture, better picture on inflation, means better mortgage rates because mortgage rates don't really want to see many more hikes in the Fed funds rate. They don't want to see inflation. So again, in that broader picture, a better eye on inflation is going to be better for mortgage rates. But you are going to see this continued volatility in those rates that we've seen really all month, Tyler. All right. Diana Ollick, thank you very much. Let's turn to another area where we've seen record high prices, cars, autos. Is there any sign of easing there? Philibault has a breakdown of those figures for us.

us, Phil? Kelly, no sign of auto prices cooling off. In fact, they hit a new record high for the average transaction price for the month of July, according to Kelly Blue Book. The average price paid, and this is important because this is what's paid at dealerships, $48,000. By the way, that's up 11% compared to last year. And if you really want to see the acceleration in new vehicle transaction prices, take a look at what's happened really over the last 15 months. That's the big acceleration you see there. By the way, you go back to July two years ago, the average transaction price was under $40,000. The issue is the inventory, it's just not there. The new day supply running between 30 and 36 days in a normal market for the auto industry, that day supply should be closer to 65, 70 days. So as you take a look at the Big Three as well as Toyota, keep in mind that one thing that has benefited them is the fact that the demand for SUVs and pickup trucks remains strong. Even with higher gas prices, there's still a lot of demand out there, and that's the reason why you're not seeing the Big Three and Toyota, who really, they're focusing on the SUV and the pickup market. They're not hurting in terms of the revenue they're bringing in because there is enough demand right now for those bigger vehicles.

When, if ever, Phil, do people expect prices to roll over? I don't think they're rolling over anytime soon, Kelly. You've got to have the inventory get back up to that 65, 70-day supply. Right now, the industry is big. building about as many vehicles as are being sold, and demand still is outpacing it. So it's hard for the automakers just to build up the inventory. You've got to have that inventory there before you see the prices cool off. Are you starting to see supply chain issues resolve?

A little bit, but it's still tenuous. I mean, it gets a little bit better with the chip supply, but there are other parts of the supply chain that when you talk with manufacturers, especially Tier 2 and Tier 3 suppliers, they'll talk about how it's not a very solid supply chain. I wouldn't call it brittle, but I would say that it's tenuous in certain spots, not across the board, but in certain spots. And because of that, the automakers, you know, they just can't ramp up production to the degree that they would like to. All right, Phil, Phil Leboe, reporting on autos for us this afternoon. All right, so what does today's inflation report mean for the Fed, rate hikes in your investment strategy?

Joining us with his investment strategy is Greg DeMarzio, Vice President and Portfolio Manager with Rockland Trust. Greg, it's great to see you. Thank you for being with us today. Let's start with inflation here. So much has been made of it. It has become probably the top political issue in the country leading into the elections. Has the back of inflation, high inflation, started to break?

Yes. Thank you, Tyler. Great to be here. I think today's data certainly shows some signs of that. You know, 8.5 is still a very high number, but I think the reason the market's is... But it's looking backwards. It's looking backwards. Exactly. No, I think you hit the nail on the head. It's 8.5 and it's looking backwards.

So we have some signs that it is starting to ease, and that's good from a visibility standpoint. And the market tends to applaud visibility. So this gives us some visibility that the idea of runaway inflation, is not necessarily in the cards. And runaway inflation has problems associated with it, which is much higher 10-year yields. So as you take that information, and I hear you saying, well, yeah,

we're seeing some signs that runaway inflation is maybe behind us and not the worry it was one, two, three months ago. How do I change my investment outlook with the thinking that maybe the Fed doesn't need to be as aggressive as we thought two months ago with the thinking that maybe, and we've seen since the middle of June, stock prices have come back a nice amount, albeit the Dow is down. I think it's something like 10% for the year nonetheless. I think the thing you want to do is, as you pinpoint, we're really just taking away a bad scenario. So you're correct in the sense that it's not incredibly bullish

to only take away a bad scenario. But largely, stocks follow their earnings. And then you assign a multiple to them. You assign a valuation level to them. What this does for us is it underpins a valuation level that we can start to trust because the 10 years not rising to 4%, which was a fear that was out there in the past few months. So you can start to evaluate companies. We're certainly getting a lot of earnings coming in. A lot of 2023 estimates are coming down, and that's going to be a problem for some of those stocks. But in your portfolio, you can start to look at things that have been adequately discounted for what we're likely to face next year. You have some names in particular that you have in mind, Greg. What are they?

Yeah, three names that I put forth today. You always want to take advantage of the environment that we're presented with. And the first one that we really looked at in the growth pullback of the past several months and still a great valuation for today is be the systems. Healthcare technology is a secular growth area. So it's an ability to buy a growth name. that was for a long time too expensive to own and earnings are continuing to go higher. Great cash flow, great balance sheet, high profit profile, but the growth sell-off has given an opportunity to own that name at a reasonable level. Yeah, and that was Viva Systems. You also have Cloroxy of TRO price. Yeah, so the second two are more interesting in the sense that you're definitely getting in the weeds of being a stock picker, trying to figure out what is going to happen next year, what are the current issues with these stocks.

If you look at Clorox, Clorox was one of the first to really raise their hands and say that input costs were a problem as related to their gross margins. So a part of you, being an investor for the future, not for today, looks forward to 2023, and there is some appetite to own names that are going to be getting the benefit of input costs easing, which would be, to Tyler's question, some of how you're positioning for inflation ticking lower. So Clorox is a great brand, well-positioned company that really got hit, so you're taking advantage of that pain.

T-Roe price as an asset manager rapidly gets discounted. The stock pulls back because people know that their earnings are going to roll lower because of lower equity markets. I think at one point in the past week or two, it was down 50 percent. And at a certain price, you're looking again towards next year and saying if we're not taking another leg lower, if the market's going to be higher, there are going to be stocks like that that you're going to want to opportunistically be buying. All right. Greg, thanks for your time today. We appreciate it.

Thank you. Greg DeMarcio. Still ahead. Disney on deck, their streaming strength or lack thereof in focus. The stock down 28% this year, but rallying back over the past month. The bull and bear case for the stock next. Plus, has the beaten down housing sector bottomed, a power call on the stocks that are positioned to lead the group higher if that's where they're heading. And as we had to break, a look at some of the names hitting all-time highs today, always like to see this list. It's names like General Mills today, Genuine Parts, McKesson-W-Grainer. We're back in a moment.

Welcome back, everybody. Disney shares higher into their earnings after the bell, but the stock has been having a tough year. It's down 27% amid a number of headwinds. Will they report similar streaming subscriber losses, as we saw with Netflix? Where does the ad business stand? And are the parks delivering amid inflation concerns? Let's debate. Our Disney Bowl today is Cut Gun Moral, Entertainment and Media Analyst at RBC Capital Markets. He's got a $150 price target. And our sort of bear is Michael Morris of Entertainment and Media Analyst at Guggenheim. And he has a $110 price target. Welcome to both of you. Cut Gun will start with you.

What are your expectations? Yeah, of course, thanks for having me. And I think first, you know, we expect solid net ads for Disney Plus in the quarter. But more importantly, we'll think we'll hear a solid commentary about the momentum that, management expects going forward given a fairly robust content slate continued benefits from the recent market launches that they had last quarter and the introduction of the upcoming ad supported tier. And we do expect that parks will continue to exhibit solid attendance and price and growth based off of what we've heard from peers like Comcast NBC Universal. And at the parks, I think, you know, the messaging will likely be that regardless of the macro

pressures that we continue to see, the way that the management has invested in technology and improved the guest experience and modernization, capacity restraint, limitations, and the cost structure, we think that the parks are as well positioned heading into recession as they've ever been. So we're pretty bullish heading into the prints. All right. And that's if you say if we're heading into recession, if we're not even better. Michael, what do you think has been the biggest drag on the stock? What can they say today to alleviate that, maybe even change your mind, making more bullish? Interesting question.

I think that there have been two things that have dragged on the stock. One has been the challenge in the streaming industry overall and the importance to streaming growth for the enthusiasm toward Disney's stock. So Disney started to grow its subscribers more slowly than the street had anticipated. That was then compounded by some streaming headwinds we saw from peers at Netflix, in particular, and if you look at the stock, it really traded alongside the sort of emergence of those concerns. The second issue is around the parks, as was just discussed, the parks are undoubtedly an outstanding asset. I think most investors over the long term would want to be invested in the

parks, and I don't disagree with that. However, as we've seen in other industries, we had a period coming out of lockdowns where we've really had a high level of pent-up demand coming through. you've seen it in digital advertising. And one of our concerns is that you've seen that at the parks, the levels that you've seen and the financial performance have reflected something of a pent-up demand level versus a new plateau. And we think the street is kind of treating the level that they've been at as being a new level to grow off of. That's probably where we're the most concerned. Cut-Gun, I think of Disney and going back historically. Disney is a lot of different parts. and there always seems to be some sore thumb with Disney.

It's ESPN's woes at one time. It's the network's woes, ABC, at another time. Now they're concerns about streaming and the parks and so on and so. But are we overlooking the value of the sort of transcendent whole of this company that has not only streaming, but they've got content manufacturing? They've got probably the best content library there is. So if they didn't make another movie for 10 years, there's still going to be people who are going to want to watch Disney and stream Disney.

Is that one of the reasons this stock has been so restrained this year? Yeah, I mean, I think Disney, you know, is a conglomerate, and it is a complicated story and complicated model. But at the core of it, it's content and its storytelling. And I think as management has shifted, shifted the focus away from linear towards streaming and to really leverage all the IP that they have between Marvel, between Lucas film, between Pixar and Walt Disney's existing properties. I think the streaming story will continue to evolve and grow and likely ultimately garner a growth premium that you don't really get at Netflix. And you clearly see that firing on all cylinders at the parks.

And I think, you know, regardless of recessionary fears or not, that'll continue to drive the story probably into, you know, the next decade plus. Michael, you may have heard what I just said and say, well, you've got some points there or you may be full of fertilizer or whatever you want to say. I don't care. But is there a address that if I'm if I'm totally off base, number one. Number two, is there another company in this universe of media conglomerates? I don't think it's going to be discovery, a Warner Brothers discovery this week. But is there another company you'd like more than Disney? So a couple questions in there.

I'll say, number one, absolutely, there are stocks we like better than Disney, maybe not companies. So I have no disagreement or pushback on the kind of core of your statement about the value of Disney's intellectual property. Absolutely do not disagree that this is a uniquely strong company. Now, our rating on the stock is about buying the stock well. Got you. Buying it at the right time. And when we look at the valuation on this stock, you know, it trades it 14 times forward profits, okay, to EBITDA, to give you some perspective.

Media companies, on average, traded about six. Theme parks trade at eight. Hotels trade at 14, right? So you're getting, you're paying a premium multiple here. Premium multiple for a premium company seems like an in-line valuation, not something. something that we are interested in chasing right here. Interesting. Interesting. Well, thank you for, thank you for not ripping me,

you know, as they say. I appreciate it. Gentlemen, thank you, Cut Gun and Michael Morris. We appreciate it. Ahead on the program, a gaming reset, the pandemic boom for video games seemingly. Coming to a halt, we will explain why, plus crypto climbing higher. Bitcoin and the rest of the space seeing gains across the board. We will show you the movers next. And speaking of movers, take a look at shares of the cruise lines. Look at the names for a change soaring today up more than 10 percent, those two, Royal Caribbean and Norwegian. The weak of them expected CPI giving investors optimism that consumers will move

to spending some of that money rather than just on food and fuel. Cryptocurrencies on the rise, those assets climbing along with the rest of the market, i.e. the equity market following those inflation numbers this morning. That is lifting the entire crypto ecosystem, even Coinbase, that stock down 63% for the year, missing quarterly estimates, getting a downgrade to underperform at KBW. Yet, that stock is up 6% today, as you see right there. Is it still up 6%? No, no, it's about 4%. Let's go to Bertha Coombs for the CNBC News Update. Bertha. Hey, Tyler, thanks very much. Good afternoon. Defense Secretary Lloyd Austin, saying the United States will conduct more military exercises with Baltic

nations and provide increased training to bolster the region against any possible threat from Russia. Austin said they will likely use troops from U.S. brigades in Europe, but they may also bring in forces from the United States. Jury selection in Vanessa Bryant's invasion of privacy trial against Los Angeles County began today. Kobe Bryant's widow says first responders shared graphic photos of the NBA Stars corpse after he was killed in a helicopter crash with. their daughter and seven others in 2020. Bryant claims that sheriff's deputies did not take the photos for investigative purposes. And in January, Congress is set to welcome a female representative from Vermont.

It will be the first time in 233 years that each of the 50 states will have sent a woman to Capitol Hill. Becca Bailant, who served in the state Senate, won the Democratic primary for the state's only house seat on two. Tuesday. That's incredible to me, Tyler, that it's taken this long. Every single state now. Wow. Finally. Sign of the times. Good stuff. All right. Ahead on power launch, inflation and rising rates hitting the home builders hard. The XHB down 24% this year, but despite being higher today, so have those stocks hit their bottom floor plus path to profits, Kelly? Goldman Sachs says some growth stocks could be on their way to a turnaround. We'll discuss in today's three stock lunch coming up. Welcome back, everybody. 90 minutes left in what's a pretty strong trading session with some big moves today.

So let's get caught up across stocks, bonds, commodities, and a power call on housing. We'll start with Bob Bassani down at the New York Stock Exchange pretty much near session highs all day, Bob. Yes, in fact, it's been remarkably steady. Rates down, dollar down, stocks up, Vicks at 20 and sometimes below 20 today. Keep an eye on that. That's an interesting development. They're going once again, and it's a broad rally, but the tendency is still towards. the cyclical sectors. So we're seeing, for example, consumer discretionary stocks really strong throughout the day. We're seeing tech stocks strong, communication services. These are the cyclical and growth areas that the market's like for so long, doing well. Energy's been lagging because

oil has been stuck around $89 earlier today. It's moved up here in the middle of day towards $91. So a bit of a mixed picture for energy today. So mentioned big tech, terrific day overall. Microsoft's been strong. Apple has been breaking out. That's been the strongest of the big tech names for a long time. Elsewhere, some broad movers in the discretionary group. So we've seen travel stocks do well today. Some of the cruise ships have done very well. Airlines, once again, resuming. They've had a great little run and are now resuming that move. And home builders as well, which had a terrible start to the year. First six months were terrible. It turned around as well. Horton, Linar and others are moving. Another big discretionary group, of course,

are the automotive stocks, General Motors back on another tear. Ford's been having a great run. in the last month or so, and that's resuming as well. So where are we? Well, we just broke 4200. And that's been a big barrier for a while now. So we're now trading at a higher range right around the early part of May right now, essentially back to that. Remember, Kelly, that was that moment there in April, May, and June where everyone was terrified of the prospects of a severe recession and a severe drop in earnings, none of which has yet materialized. Kelly, back to you. Thank you, Bob. And let's turn now to perhaps the catalyst for all of this, the bond market, where yields today reacting to that CPI report, Rick, and really setting the tone.

Absolutely. And setting the tone in a big way. Let's look at a two-year intradate. Look at that yield drop. It was substantial and maybe even more to the point. Look at Fed Fund futures, how they rallied. And keep it simple. When they move up in price, they're taking the amount of Fed tightening out of the system.

At least the market sees. what the Fed's doing and tries to pull it back a bit. Will it be accurate? The Fed does seem to put a lot of weight in what the market is demonstrating. But look at a two-year from June, and this is important. Now, keep an eye on that pattern, because it is in real time, and yes, even though inflation may be less than we anticipated, it's still historically high, and the Fed is still guns hot.

Now, contrasts that chart with a 10-year chart from June 1st, and you can see the long end has come back to unchanged because it's pretty much price. in the weakness already and two-year no yields? Well, they need to hover because they're still more tightening to come into the system. And finally, the intraday of the dollar index, nothing screams Fed more than this move by the dollar. The dollar dropping dramatically, hovering at the lowest level should they close there since the end of June. Why? Because this number most likely does acknowledge that the Fed's mission is much closer to completion than many would have thought prior. Kelly, back to you.

Rick, I've been watching these yields move all over the place the last couple of weeks. We shot up on the jobs report. We're crashing back down on CPI. I mean, I'm almost starting to wonder if the bond market isn't so smart after all. It's just reacting to the data like the rest of us. Yeah, but I think it is smart, but it's an emotional time. We saw that number this morning, and the fact that the market might have overextended tells us two things. A, that investors are more than happy to buy into certain maturity.

like they did in the auction, but maybe even more to the point. There were many that were the wrong way, and when they saw the inflation data, they had to move quickly to adjust their positions. All right. Rick Santelli, thank you, sir. We appreciate it. Let's turn to oil now, closing for the day in what's been a volatile session. Prices were down earlier. You can see them in the red there when we had inventories unexpectedly rise last week.

Then we reversed course, and we moved higher. We're closing up about 1.5% here, 91 for WTI. We spoke to Carter Worth about this. last hour, those who had been bearish on energy kind of moving back from those positions. As for me, as for the consumer, we all wonder, does this imply maybe higher gasoline prices after the massive reset lower that we've seen? Meantime, lower rates, higher housing stocks. They're getting a big lift along with the rest of the market. Today they've been battered this year. But our next guest says we could be at an inflection point. Let's bring in John LaVallo.

He's a senior U.S. home building and building products equity research analyst at UBS. John, it's good to see you. What do you think is happening here? Hey, Kelly, thanks for having me. Well, I think what's happening is we've reached the bottom. And the stocks are starting to react, their early cycle. I think there's some interesting points that came out of a recent survey that we did. It's an evidence lab, Google search monitor.

And really it reinforces the fact that things slowed in July relative to the past eight Julys. But they improve sequentially through June and July, which is encouraging. And this July pause is very consistent with what the home builders have been saying. And they've been saying they're seeing early signs of stabilization. Now, you coupled this with the Fannie Mae Homebuyer Sentiment Index hitting all-time lows relative to the global financial crisis, in fact. And I think you have, you know, the forming of a base. DHAOC. Why are some of these your favorite picks? And what about those who say housing can't start to outperform until the Fed's tightening ends?

Well, I'll start with D.R. Horton, D.HI. This is the largest home builder by volume. They are focused on the right part of the market, which is first-time entry level, the very need-based portion of the market. And they are just a consistent executor. OST, big cash flow generator, very shareholder-friendly in terms of allocating that capital. And I think the growth opportunities both organically and through acquisition are pretty strong. Now, can the stocks, the home builder stocks work before rates change? It's a good question, right? I think it's an early cycle sector and the worst seems to be priced in.

So my answer is, yes, I believe they can. Is the best way to go to pick a portfolio of individual stocks or to, which we just looked at right there, KB, Lenar, Pulte, D.R. Horton, assemble a portfolio or just to say, I can't do that. I want to go with an ETF or a fund. Hey, Tyler. Good question. So, look, there's a couple ways to think about it. The group has moved very much in tandem, right?

And so I think you could say buying a group is a reasonable thing to do. However, I think that the stocks have been battered so much that there's no reason to be cute. You can go with the biggest and the best, and that's D.R. Horton. All right. John, talk to us a little bit about these stocks. We know that the P.E.s have crashed to four and a half times forward earnings. We know the news flow is not going to be great in terms of just the level of home sales and that kind of thing in the months to come. But what is the potential upside here that you see?

And what's the hurry for those who might just want to wait this out for a while? while. Sure, good question. It's all about the second derivative and when we start making some kind of momentum. July, by all measures, is going to be the trough in new home sales. And I think we start seeing recovery from there. And that is when it's time to get in in our view. So I think that, you know, look, if you get in now, will you be a little bit early? Perhaps. But it's better than missing the first 10 to 15% upside. All right. John, thanks for your time today. We appreciate it. Thank you. John LaValle.

All righty, up next, a multiplayer miss, console makers, publishers, developers, all missing estimates or showing significant growth declines as of late. Is the video game industry facing a big reset? And as we head to break, remember, you can now listen to Power Lunch on the go. Look for us on your favorite podcast app. Follow and listen. That's not a suggestion. That's a requirement today. It's a command.

It's a command. All right, let's talk about another category of stocks that have been struggling this year. Video gamers, the pandemic, proving a big boost for the sector. I can't tell you how many hours my son spent on them as people sought entertainment during shutdowns. Bigger firms buying out smaller players attempting to best rivals, but now that growth seems to be slowing down. Our Steve Kovac has more.

Hey, Steve. Hey, Tyler. I spent a few hours playing during the pandemic too. Anyway, gaming companies are warning of tough times ahead after a dismal. quarter for the industry. Video game spending falling 13% in the second quarter, according to research firm NPD. And that showed up in the results from companies like Take 2 Interactive and Activision. Pandemic darlings like Roblox are growing quickly, but still haven't lacked those tough comparisons from the first two years of the pandemic. Take 2 Interactive and others providing

disappointing guidance for the rest of the year. And it's not just the drop in consumer spending either, guys. These companies do a lot of business in Europe and Asia, where foreign exchange headwinds are the worst. Gaming hardware companies also feeling the pain, Nintendo and Sony, both missing estimates for the quarter and Sony cutting profit forecasts for the full year by 16%. And just Monday, we heard Nvidia demand weakening for graphics chips used in consoles and gaming computers. And in the face of these headwind guys, some are planning ways to diversify revenue outside selling digital items to players. For example, Roblox CEO Dave Vizuki teasing a new advertising platform for the game.

Guys, send it back to you. So what are some of the other ways that these companies could monetize their businesses? Yeah, there are a lot of things going on right now, Tyler. So one are the subscription services that we see from companies like Sony on the PlayStation and Microsoft on the Xbox. You pay a flat fee. It's like Netflix's the gaming. You pay a flat fee and you can stream the games right there and it comes with a library

of hundreds of games to play from. Other ways, like I just mentioned, advertising is going to be a big thing, especially for roblox. And they want to do it differently, by the way. They're coming up with this way to do metaverse advertising, not just banner ads and things like you see on the so-called flat internet. All right. Thank you very much. Steve Kolbach. Appreciate it. Thanks, guys. Still to come, taste testing the waters on growth stocks. Are any of these volatile names worth buying? Three-stock lunch explores that next. Welcome back. Time for today's three-stock lunch. On today's menu, we're taking a look at three high growth stocks that Goldman says actually have a path to profitability,

Lyft, Riot blockchain and grid dynamics. They're all expected to have at least 20% sales growth this year and next. Let's trade them with Fred Lane. He's founder and CEO at Lane Generational. Fred, good to have you on board. And are you going to take a lift? That's our first name here. I can say we're neutral on Lyft.

I think there are a lot of really good tailwinds here. I think the hybrid work model and the high cost of cars, the high cost of gasoline, and the high cost of insurance, by the way, all of those things, because cars are more expensive to repair if you're in an accident. So I think all of that's probably going to deter some car ownership and car usage. And so our view is that there are a lot of positive tailwinds here. On the one hand, on the other hand, a lot of those costs are now being borne by the drivers. So I think our view is a little bit is on the neutral side. If I were going to plunge into these, either one of these companies, because there is a second one we have to discuss briefly, which is Uber, I'd probably be more inclined to want to own Uber. I think its growth will be a little less because it has scale,

but that's one of its advantages. And it is truly an international player. But I think if you believe in transportation as a service, then I think Lyft is actually a pretty viable investment. We don't own it. we've played around with it. We haven't made a decision in that regard. We do buy secular growth companies.

That's our forte. And so we've been tempted, but we'd like to see the model be a little bit better proven in terms of the ability to get there. Speaking of secular growth companies, let's move on to number two, which is riot blockchain. Is this one you like? Is this one you own? We don't own it. We do own Bitcoin for clients. If you go back to our website, Lane Generational, to the fall of 2020, we were advocating

purchases of Bitcoin, and a lot of our clients got in early enough, so they actually still have a small profit. We had quite an interesting round trip. We're believers in Bitcoin. We believe that with fiat currencies being increasingly devalued, that there's a real role for Bitcoin, not for the other cryptocurrencies I met it. We're only an advocate of Bitcoin. And the reason we are is because of the limited fixed supply.

So this is the largest Bitcoin mining facility in the North America. They mine for their own account. They mine for institutional investors. We actually, if you like Bitcoin, we think this is a great leverage way to play Bitcoin. So we like riot blockchain. We don't own it. But we may. All right.

Very good. Let's talk grid dynamics because we don't do that a lot here, Fred. What do you think? Well, we think these services companies, this is a very much smaller version of Accenture, or you may have heard of EPAM systems. And grid dynamics is basically helping large corporations, Home Depot, Raymond James, firms like that, become increasingly digital. And so if you like enterprise software and think enterprise software is critical, which we do, and we think that part of controlling inflation is going to be making our employees more efficient, more effective, then I think you have to like enterprise software. This company, a grid, enables that.

And they have, they're global, a lot of their businesses in Europe, and a lot of their manpower is in Europe, primarily Eastern Europe and India. So they're able to basically provide this consulting service across the board, actually, to, it's a number of different functions. But basically, if you look at grid, I think it's a very interesting play. I might add, it only has a 2% short interest. So you're not going to get much lift from that. Riot blockchain by contrast has a 23% short interest. So by contrast, if in fact people start to get comfortable with Bitcoin and want to invest in Bitcoin, that's going to be, I think, a very positive factor for ride blockchain. But we'd be a buyer of grid dynamics, but we do not own it currently.

All right. We only own 20. We only own 18 to 24 positions at any point in time. We're deep research, deep conviction investors. So, you know, you can't own everything. But these are, these are meritorious names in each case. And maybe we've given you some leads. Fred, thanks so much for your time. It's great to have you today. Fred Lane with Lane generation. All right. And Fred may have given us some leads as well, though we can't invest in any of course. All right. Today's rally and inflation report. We'll take a look at what it says about consumer finance companies. We are going to take you under the microscope with Professor Dominic Chu next.

Welcome back. Take a quick look at shares of Boeing, which are up two and a half percent with the company announcing today. It has finally delivered its first 787 Dreamliner in more than a year after a series of quality problems paused deliveries. American Airlines took the first new delivery from Boeing's 787 factory in South Carolina. The delivery is a milestone for Boeing. The planes are a key source of cash. as our Phil LeBoe keeps pointing out, and the bulk of the aircraft's price is paid upon delivery, though the company has had to compensate customers for the delays. All righty, consumer finance companies like Capital One and Discover,

they are all rallying today after getting hit hard this year. Dom too takes a look at the move higher and why, Dom? So we've got this idea that a catalyst for consumer spending could be the notion that with inflation easing, albeit by just a hair. It is, of course, the journey of a thousand miles for at this point right now. But if you take a look at some of these consumer finance companies, they are among the biggest gainers in the S&P 500 so far today, and many of them have that consumer theme in common, right?

They're big either credit card issuers, banks tied to credit cards, or issuers of store-branded credit cards. So if you go to a furniture store and you want to get their no-interest financing, you kind of go through Synchredee Financial. So take a look, first of all, at Discover Financial Services. and a half percent one of the best performers in the S&P 500 so far but though it's been the downtrend that's concerned a lot of folks so as much as we've talked about this notion that the consumer is relatively strong many of these consumer finance oriented companies have seen pretty decent size hits over the course of the last year

although what you've seen in just the last couple of months here is a little bit of a move off the bottom and a sharp move higher today that's Discover financial one of those big consumer retail names the second one that we want to highlight is one of the big kind of issuers of credit cards that we kind of tend to know about. You know, what's in their wallet, capital, one financial, again, up five and a half percent, having lost a third of its value, you can see their chart-wise over the course of the past year. Now, even with the move higher, again, putting it in context, it's not that much off the lows. So is this one of those reads on the American consumer and whether or not they have the ability to pay, given the inflationary backdrop?

That's another thing to watch. And then the other one that we want to highlight here, as I mentioned before, synchrony financial, a very large issuer of a lot of store branded credit cards, ones that maybe consumers will use carry a balance on sometimes in order to kind of get their shopping done and whatnot. Those shares, again, 29% of their value, although a nearer term, you can see there in just the last couple of months, move higher, but in context, still some really, really big weakness there. I guess what it comes down to is whether or not you can look at these guys, Tyler and Kelly, as indicators or barometers of the health of the consumer.

because they have so much more exposure to that consumer spending picture than, say, other of the big mega banks like a J.P. Morgan Chase or a Bank of America will. Sure. Maybe better barometers of what consumers are actually feeling and doing. Across a wide spectrum. We often talk about American Express being more geared towards the higher-end consumer and spending. Many of these credit card issuers are lower to middle-income. Middle market.

Yes, middle-market Americans who use them as credit cards. I see a little, maybe a low there around mid-July. And maybe that's around gas prices giving some relief, the peak recession priced in. Could be. Maybe the skies are clearing now. Thank you, Dom. Thank you very much. And thanks for watching Power Lunch, everybody.