Power Lunch - Innovators vs. Operators, and ‘Fast Fashion’ Faux Pas 7/25/23

Episode Date: July 25, 2023

Two distinct leadership styles are emerging across boardrooms: companies run by seasoned ‘operators,’ and those run by more risky ‘revolutionaries.’ But which is better for shareholders? We’ll explore.Plus, TikTok is launching an in-app shop as it pushes into e-commerce. But could it face similar issues to other platforms that sell “Made In China” products? We’ll ask a retail insider. 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 Morgan Brennan. I'm Tyler Mathes. I'm glad you could join us for a Tuesday. Coming up, who's the boss? We're seeing two distinct leadership styles emerging across boardrooms and corporations. Companies run on the one hand by seasoned, safe, experienced operators, and those run by revolutionary and sometimes risky mold breakers. I wonder who we're talking about there. Which is better for shareholders? Plus a fast fashion faux pot. TikTok recently launching an in in-app shop, pushing big into e-commerce, but could it face similar issues to other e-platforms that sell made-in-China products? But first, a check on the markets. The Dow on pays for its 12th straight positive day, and it is up right now about 70 points. Everything, all of the major

averages are actually higher right now, except for the transports, which are flitting just below the flat line. All right, Morgan, let's start with the big list of earnings out and on deck. everything from automobiles to housing and big technology. Let's start with GM. Shares down despite a second quarter earnings beat. The automaker raising full year guidance, but announcing deeper cost-cutting, CEO Mary Barra, telling our Phil LeBow,

she's still optimistic about the automaker meeting its EV goals. If you look at our EV ramp-up, we said we were going to produce $50,000 in the first half of this year, $100,000 in the second, and then cumulatively to $400,000 by middle of next year. We are still on track to. do that. And here with his reaction and thoughts, Michael Ward, auto analyst at the benchmark company, has a buy rating and a $60 price target on GM. Welcome, Michael. Good to have you with us.

I guess my question about GM is this. It feels like a stock that is stuck in neutral and always has to me. It just sort of trades there from the high 20s to the high 30s. Maybe it nips into the, but it never breaks out, let alone get to 60. Yeah, well, thanks for having me, first of all. You know, it's amazing. The photos are very cyclical. That's a given. And, you know, historically, they perform very poorly in downturns.

You know, and as a result, people stay away from the stocks when you start to get into those dice periods. I think one of the things that's really unique and one of the reasons I have a buy rating on General Motors right now is that we are in an automotive downturn. We're in the early stages of recovery, not just in North America, but also in Europe and in China. And so when I look at General Motors, I look at Ford and I look at position of the group, they're probably in a better position today than they ever have been in the early stages of recovery. And so now it's put up or shut up, really. And that's where we are. So then is the read through here that this is not just a GM specific story, but this is going to translate to other automakers like Ford that will report later this week, too?

Yes. And I think part of the reaction on the stock today probably has to do with the upcoming union negotiations. The Union Congress, General Motors, Forge, D'Lantis, expires in mid-September. When you look back historically, it's a four-year agreement, and every time you come up to that expiration date, in each the last five periods, the August before the September deadline, the stocks have underperformed. And so that is a headwin, and really that comes down to news headlines. The UAW needs to get out in front on the news that comes out with headlines that are looked at negatively, as relates to the auto manufacturers, and the vehicle manufacturers really can't say much. So unfortunately, at least for the next month, the stocks are probably dead water.

But I think when you look longer term, I mean, this is the first time you're coming out where you don't need to restructure cost, product, or balance sheets. And the companies are spending money to accelerate growth, as Mary Barr just mentioned, on the electric vehicle side, and electric vehicles are coming. And in North America, it's probably going to be more on the pickup truck and van side, is the strength of General Motors and Ford. I like your subtle analysis here, Michael, and I mean it. I guess if I'm going to put it in my words,

it's that GM is better positioned today because things aren't as bad as they usually are. That's a good way to put it. That's exactly right. And one of the reasons why the stocks have been stuck in that rut is because in downturns, they perform poorly, including going bankrupt in General Motors case. Yeah.

So the buy rating of 60, by when? Usually it's a 12-month time horizon. 12-month time horizon. All right, Michael, thank you very much. Michael Ward of the Benchmark Company. Appreciate your time today. Thank you. Thanks for having me.

You bet. Those UAW negotiations are going to be one to watch, especially when you talk about EV transition and the fact that the labor scheme there is not as intensive in terms of man-hours as it is with ice engines. And so this is going to be a sticking point. Any fewer parts to assemble among other things.

That's right. All right. Well, let's get to another earnings mover. The Home Builders, Pulte Group, posting strong second quarter earnings this morning, topping Wall Street estimates as demand stayed strong, boosting new home sales despite mortgage rates, actually just crossing 7% last hour again. As a result, the stock is up nearly 6% today. It's up 80% for the year.

Let's bring in Stephen Kim, Home Builders Analyst at Evercore ISI. Great to have you. I don't think you're surprised. You've been pretty bullish on home builders for what, the better part of a year now? Yes, that's right. We've been of the opinion that you're going to see significantly better than expected results due to the lack of inventory in the market. That was something that really convinced us last year that we should stay with these names, even though things were really looking like they were falling off a cliff. And in fact, that really has been rewarded. Investors who've stuck with the builders since, let's say, last July, you know, you're up about 90%. for many of the builders, including Pulte.

And Pulte put up a whopper of a quarter this morning. I mean, it was really across the board better than expected. And not only that, but they leaned into it with their guidance. And they said, look, these margins that were generating, these are not, you know, there's no shoe to drop. It was a phrase they used on the call. They're forecasting them to stay very strong for at least the next couple of quarters. The incentive piece of the puzzle.

And I asked that on a day where we did see Kay Schiller. home price numbers where, again, an increase month on month for prices in the major metro areas here in the U.S. And as we've seen, commodity costs and certain costs associated, perhaps even with labor, begin to come off right now. I mean, is Pulte and the other home builders really in a sweet spot here in terms of margins? Yeah, they really are. I think that's right. You know, a year ago and even a year and a half ago, people were very concerned that the rise in prices was just simply, you know, unsustainable. And they saw it as something unnatural,

which we actually, by contrast, saw as really the natural result of a complete and utter lack of supply. Nothing sells like a shortage. And, you know, basically these home prices got to where they were because somebody was buying them. That's what you're still seeing today. The home prices are high. The mortgage rates are high.

But there is no supply out there. And the situation cannot be fixed. quickly because, frankly, we've been underbuilding this country for about 15 years. It's still hard to build houses. You know, Pulte will tell you that. They'll be the first ones to tell you. It's not easy building houses, getting approvals and finding all the labor and materials to do it.

So, therefore, you're going to remain in this tight inventory situation for the foreseeable future. And that will be a benefit to the margins. What does their order backlog look like? Their orders were fantastic, actually. Their orders surpassed expectations. they were up like 24% year over year, more to the point the communities that they are selling out of

are generating more sales per community than they were in the pre-pandemic period. We attribute that to a number of things, including the fact that builders in general are trying to make sure that they are offering a product, which maybe is a little smaller, maybe a little bit cheaper or smaller so that they can hit a price point.

And typically when you're doing that, you're selling more homes per community. that's sort of built into your business plan. So their productivity in units is very, very strong, and that's really a help to them in leveraging their fixed costs. Quick question for you. Stock's up 82% so far this year. Is it still a buy here?

It is. I will tell you that when we've looked back, I've been doing this business for a very long time. You know, Mike earlier on, you know, I've been doing it probably as long as he has. And I'll tell you, when we've gone back and looked at what kind of runs you can see in home building stocks, we still have a ways to go. I know it seems like an awful lot, but you got to remember where you were starting from was basically as low as it ever gets.

We've seen runs like this last longer than this, go further than this, and certainly hit valuations that are higher than where we're at right now. All right. Stephen, thank you very much. Stephen Kim, we appreciate your time today. Thanks for having me. You bet. All right, moving on to two tech giants that report after the Bell, Microsoft and Google investors looking for updates on AI and growth for cloud computing. Our next guest covers both of the names and also has a buy rating on both. He's Brent Thill of Jeffries. Brent, welcome. Good to have you back. Let's start with Microsoft.

What are you looking for there? What are the key numbers we should pay attention to? Yeah, the key for Microsoft is really closing out there, physically strong Q4, growth of Azure office. And most importantly, the AI impact. They launched pricing a week ago that kind of blew everyone away in terms of the price lift between a 50 and 100% price left per seat per user. So when is the AI rollout can have an impact?

There'll be a lot of attention on that. I think there'll be a lot of attention on the pricing. Everyone has said that that was way higher at $30 per user per month. Why did they feel confident in pricing at that level? What do you think? The overall AI impact. Is it too aggressive or what do you feel? I feel like it was too aggressive out of the gate.

Remember, enterprises are going to get discounts. they'll get it co-bundled in when they sign a larger enterprise license agreement with Microsoft. So I think initially on paper it looked really aggressive, but I think this goes back to Microsoft's view and the value that they're creating in this platform. It's not generally available. So you can't talk to a lot of customers to see, hey, like, do you think it's worth it? But I think everyone in the industry we talked in the last week is like that was way ahead of expectation.

If they can pull it off, again, this is why we're so bullish on Microsoft, it can get customers to pay for this, it's a massive revenue and earnings accretion story. The offset of this is the expense structure. Everyone is freaked out that they're going to have to guide way higher on expense. Ultimately, I think they get a whole pass as long as the revenues there, they can guide to where they want on the expense structure. So CAPEX and OPEX, I think the streets, you know, a lot higher than we're published analysts are at now bracing for an AI investment wave. Again, most of these products are not even generally available. So you have to plan and put in the infrastructure to get it sold.

Yeah. So balancing investment versus actual monetization of these new AI capabilities. I could ask the same question about Alphabet as well, since these two are very much in an AI arms race against each other. Yeah, a little different here, really about the state of the ad market rather than the enterprise demand market, where Google's most of its revenues tied to advertisers. Again, the checks have been advertisers felt better. The rider strikes helping YouTube.

We continue to see good momentum around their AI platform. We don't believe that consumers are running to Bing. They're staying with Google. That's good for advertisers. They want to spend money where the users are. So overall, things are improving. They should accelerate revenue growth. And again, AI is a story here, but it's probably a little more murky.

So everyone's going to ask a little more questions about directionally where they're going, and when they can monetize it, they have not been as loud and as convicted as Microsoft. So more clarity there on that front will be needed. Stock's still cheap. We think, again, the simple thesis in AI, Microsoft will win the enterprise. Google will win the consumer. There's room for both. Both are buys in our book.

Why do you think Google has been a little murky and seemingly a step behind? Microsoft lost the cloud to Amazon. Nadella is a thought leader. He did not want to lose this. Look, none of these products are really even shipping. And so everyone's like, why did he get out there? And why did he carry the flag and the torch out in front of the parade and jump up and down? And it's because he didn't want to lose the next battle, which is the cloud shift and now the AI shift.

He wanted to be out in front of this. I think that Google has the technology. I think everyone's going to be blown away when they take the cover and pop the hood on this engine. And everyone gets to see the power behind. their AI platform. That's been our thesis for a while. So they have done a poor job of articulating what they have. But behind the scenes, we think Google has an incredible lineup, and they're going to shock us all. Again, you can see other AI products and work, and all the consumer products you use, you jump in your car with Waze, you use Gmail, you use their productivity suite.

You can really see their AI at work, but they haven't been as loud and articulating what it is relative to Microsoft. So Microsoft's carrying the torch in terms of the chatter and the expectations and the sentiment. And I think Google's really going to carry this on the product line when we get to see truly what it is. We haven't seen yet. Yeah. Yeah. I mean, we just talked about AI, commentary, guidance, investment, monetization of AI, both of these companies, what that looks like and what the future holds. But in terms of like the key metrics and the segments that are already generating money in meaningful ways today, what is going to move these stocks? Is it going to be Azure at Microsoft and the ads business, as you mentioned at Google?

Those are the two. Those are the two biggest mile markers. Again, enterprise demand for Microsoft, Azure and an office, and then AI. Those are the ones watch for Google. It's really the state of the advertising business. That's really what's driving the bulk of their revenue. So those are the big mile markers everyone's looking for. All right. Brent, Bill, thanks for joining us. Great to get a preview right there. Thank you. And of course, make sure to check out even more earnings coverage on closing bell overtime. Oh, look, will that be on? Yeah. 4 p.m. Eastern. I'll be kicking that off. John Fort. We're going to strap on our seatbelts. It should be a wild hour. You're a good hour. Yeah. All right. Well, coming up on Power Lunch in the meantime, another major earnings mover, Raytheon, down big, 12% right now after disclosing an engine manufacturing issue on some planes. We've got those details ahead. Plus, TikTok keeps adding services

to its shopping list, expanding into music streaming, betting big on e-commerce, but is the platform taking a big risk with the White House watching its every move? And, Speaking of music streaming, check out Spotify as we head to break. Missing on revenue, issuing weak guidance. All that said, subscriber numbers did climb, but that stock is falling. It's down about 15% right now. Stay with us. Welcome back.

TikTok keeps pushing the envelope despite having a regulatory target on its back here in the U.S. The social media platform recently announcing a push into music as well as retail. Deirdre Bosa and Steve Kovac are here to discuss. All right. Deirdre lay this out. for us, given the fact that this is, I think, yet one more example of an internet company, of a social media company becoming an all-in-one, one-stop shop. And what's unusual about this is that it is a Chinese one.

I mean, Chinese companies have traditionally had a lot of trouble moving into the West. They haven't even tried to, and then TikTok came along and proved, essentially, that it could be a real competitor to American internet companies like Facebook. So you saw Timu from Pinduoduo as well as Xi and these Chinese e-commerce companies actually begin to have a lot of success here. They've flooded the market with a lot of advertising, Super Bowl ads, but they're gaining success and they're gaining American consumer. So now TikTok is looking at that and saying, hey, we want a piece of this also.

But I don't know if you've used any of these, Morgan or Tyler. It is quite the experience. It is not shopping as we know it. It is shopping with Chinese characteristics. Steve Kovac, you're laughing at that. I also think it's interesting we're getting this news 24 hours or I guess 48 hours after the rebrand of Twitter into X. You took the words right out of my mouth. So we've been talking about X as a super rapper, at least Elon Musk has. Well, that's kind of what TikTok is doing, not just this.

They're trying to do. Trying to do. Not just this e-commerce thing, but just last week they added a new way to post with just text. We know TikTok, of course, as a video app. And then they're also getting into music streaming, taking on Spotify and Apple Music. And that's an interesting move here, too. they're doing it only in Brazil and Indonesia now. But look, TikTok actually got its start as a different app called Musically,

where people would kind of do these funny lip sync videos with music. It's become a huge music discovery platform along with YouTube and Spotify. And so there are tons of other streamers trying to take on Spotify and Apple Music, rather, the two market leaders. But this one actually could have a chance

just because of that dedicated TikTok user base if they ever do bring it here to United States and expand more. Deuter, what are apps going to look like in five years? I mean, if that's what we're talking about here is the kind of the change in the way we interact with apps and our phone, what's it going to be like? You know, that is a difficult question because we have this big generative AI shift. So who even knows if we're using our phones looking at apps going on the internet? That could all change. However, what Elon Musk, what Mark Zuckerberg, what many tech leaders have hoped their own apps would look like are, as Steve has been. talking about super apps, but it's a very different case here than it is in a place like Asia where the internet, where payment systems evolve very differently. So we know that, you know, this isn't the first time that Elon Musk has tried to copy,

or actually you could even say he was thinking about super apps before the Chinese were, but he hasn't been successful in doing so, Tyler. But what is the future of shopping online? I mean, that is a good question. Maybe you do need to open the TEMU app. It's like my producer this morning said it was like gambling, like you're spinning wheels. Stuff is popping up at you. The discovery function is so much more built out than, say, in Amazon, but it's really in your face.

And you're getting offered free stuff, free money all the time. Not to mention, he orders something. It might show up in two days or two weeks or two months. You don't know. It's not like this guaranteed prime shipping thing. It's a very different experience. But like Deirdre was saying, huge. It's number one, number two, the merchandise.

Nice. Chinese junk. Not good. Yeah. Plastic stuff. Right, right. So, yeah, that's what they're going. But it's huge.

It's cheap. That's the thing. If you want to buy a case of toothpicks or something, it's probably better than going to, you know, Walmart or Target. Case of toothpicks. Yeah. Sounds good. Put that on my birthday.

There you go. Please. Dear Jabosa, Steve Kovac, thanks for joining us. So what impact does TikTok, Sheehan and the fast fashion industry have on the retail space? We're going to continue to tug on this. thread. Joining us now is Brian Gildenberg Retail Cities Managing Director and co-host of the CPG Guys podcast. Brian, thanks for joining us. And I'm going to ask you that very question.

What does the future hold now? Well, we're all just going to buy cases of toothpicks, apparently. I'm very excited about that. So, no, I think there's a couple of things in here. And I think that I think Steve made an excellent point talking about the concept of discovery. And I think that's a lot of what you're seeing here, which is that the nature of how product are discovered has changed so fundamentally because of TikTok and the engagement that it has, and the way in which it serves that engagement up, which is algorithmically and harder for advertisers to manipulate control. So as a result, all of the things that can connect to TikTok are different than the things that connect to Insta or to Facebook or to YouTube, which are platforms that large

advertisers understand better. So it created an opportunity for Sheehan and Timu and wish.com and other things to come along, that kind of natively understood that sort of randomized, gamified, algorithmically driven demand generation and matched the sort of footprint of TikTok with our own footprint. So I think right now that's been the biggest shift. And I think one of the primary reasons why Sheen and Timu have been as short term as commercially or saleswise successful in the U.S. as they've been. Interesting. And we've touched on it a little bit, but the fact that there is this regulatory angst or risk or whatever you want to call it brewing around TikTok and its operations here in the U.S. But I mean, you just mentioned some of the names of other competitors that are

stepping in with a similar business model here. But we're not talking about U.S. companies that are doing it. At least not yet. Maybe X is on its way. Okay, sure. Maybe it is. I just, they've got a ways to go to figure that out. I'm probably, I think Shane and Timu, which are both relatively well-established businesses in China that know how to link up to that type of algorithm. I think that's fine. I do think it's important to keep in mind that TikTok is a very different thing than Shane and Timu, which are retailers.

I think TikTok's move into commerce remind me a little bit of what Shopify tried to do, which is that they tried to run their own logistics network for a hot minute and then discovered that running a platform and running a warehouse are two very different exercises. I'm not 100% convinced that what TikTok's trying to do, in that space will actually work, or that they'll be any good at it. They may be. They may not be. I think that, but I do think that the ability that TikTok has to generate demand in a

particular way works well. I think the other thing was Sheen and Timu that they've lucked into right now is the low price points, which suit one, consumers that are looking to save money right now as inflation has hurt their purchasing power. And two, expands the potential buying audience to teenagers who don't have a ton of money, but who are all of the people that are on TikTok. So the ability to convert team demand, which Sheen and Timu are quite good at because of the low price points that they sell at, is interesting. It's like taking five below and attaching it to TikTok.

How worried does Amazon need to be? I think Amazon's always going to be concerned about anything that interrupts the discovery process because, you know, Amazon sells a lot of things. They don't make a ton of money doing that. They make a lot of money selling advertising. And their advertising is generated in a very specific way. So if you looked at Prime Day, for instance, and what Amazon was trying to do both with the connection they have with TikTok, which was unbelievably strong during Prime Day, as well as through Amazon's own initiatives to engage shoppers in a more dynamic and sort of content-centric way, I think Amazon is already beginning to respond to that. And it will be interesting to see, as TikTok continues, assuming it continues to be a big part of the consumer engagement landscape, does it do better connecting to Amazon or does it do better? trying to run its own commerce side. I think the jury would still be out on that. My guess is.

So mail the point that Morgan was driving at, and that is the comfortability factor that American consumers may or may not feel doing business with Chinese apps and exchanging money with Chinese apps that may or may not be under the influence of the Chinese government. And whether the U.S. government's going to countenance it forever. Yeah, I think, I certainly think that from a, like if you look at Sheehan in particular and the kind of the curious ownership structure that it has, I mean, Timu was owned by Pinduodua, which is a real company. I think there are, I think there are certainly areas you could see regulatory involvement start to restrict the types of Chinese companies that can work here. But I think in the end, if the consumer gets value out of something, especially for something that brings them joy like TikTok does, I just, I really wonder day and day out. My daughter's 14 years old and on TikTok all the time.

Does she care that the Chinese owns it? I really don't think so. I think she just really likes her TikTok videos. All right, Brian. Thanks very much. Appreciate it. All right. Take care.

Coming up, we're less than a day away from the Fed decision on interest rates. We'll get a preview of what the bond market expects live from the floor of the CBO. Next. All right. Welcome back. Our favorite segment of the day, Pippa just said. Oil higher on the day. So is gasoline, Pippa.

Yes, gasoline is higher, as is oil. It got all the way up to $79.90 today at a three-month high and $0.10 away from that $80 level, which it hasn't traded it above since April 18th. So some optimism there and now getting outside of the range it's been in for the last few months. Nat gas is also on the move today, and we'll hear from EQT later today. So we'll hear more. They're one of the biggest producers in the U.S. about the state of Nat Gas. Chevron's Mike Worth told me over the weekend that he thinks the Nat Gas market is very well supplied in the short term and that it will take some sort of catalyst like a winter storm or a supply outage in order to get it out of that range.

It's been in. Those prices have been more under pressure. Now, one area to watch today are the steel stocks, the SLX, is at its highest level in 12 years today. So one of the big gainers there is Cleveland Cliffs. They reported a very strong quarter. Their volumes were up, their prices were up and their costs were down. So clearly, investors responding there with the stock up about 8.5%. All right, Pippa, thank you very much. We appreciate it.

And let's get now to Bertha Coombs for the CNBC News update. Hi, Bertha. Hi, Tyler. A federal judge in San Francisco ruling today against the Biden administration's asylum policy at the border. But the ruling is stayed for 14 days, allowing the administration to appeal to the Ninth Circuit. And the policy largely limits migrants who pass through another country from seeking asylum in the United States. The case may ultimately end up at the Supreme Court, and legal observers tell NBC News it is likely that the policy will remain in place while that process plays out in the courts. A State Department spokesperson says the former U.S. Marine released in a 22 prisoner swap with Russia has been injured fighting in Ukraine.

According to U.S. officials, Trevor Reed was transferred to Germany for medical care. Those officials say Reid was not acting on behalf of the U.S. government. And the Department of Education opened a civil rights investigation into admissions practices at Harvard. A spokesperson for the department says the investigation will focus on whether Harvard discriminates on the basis of race by using donor and legacy preferences in its undergraduate admissions process. Morgan, those legacy admissions are really starting to come under the microscope now. They very much are. Bertha Coombs, thank you. Ahead on Power Lunch.

What is the C-suite? spots for corporate America? Do shareholders want chief executives who will get the job done and keep the ship sailing? Or innovators who push the envelope? We'll discuss next. We're seeing a bit of a split emerge in corporate America between innovators and operators running companies. On the one hand, you have boards turning to seasoned veterans. Chevron yesterday waving its retirement age in order to keep Mike Worth on as CEO. Example one. We saw something similar at Disney. Bob Iger coming out of retirement in his 70s. The gold, don't rock the boat, put the seasoned operator in the pilot seat. But then there are those taking the opposite approach.

Elon Musk throwing out the multi-million dollar Twitter brand in order to create a so-called super app called X. Mark Zuckerberg did something similar, abandoning the Facebook brand in exchange for meta, but which is better for shareholders? Here to discuss his CNBC contributor, Steve Odlin, president and CEO of the conference board. He's also former CEO of Office Depot and AutoZone. Steve, welcome. Good to have you with us. Maybe we're oversimplifying here between the founder, innovator, and the seasoned operator, the corporate exec. I'd put Larry Culp of GE also into that group of the seasoned operator types. Talk us through this. Are we on to something here? and which ones seem to have the better success at running companies profitably and good for shareholders?

Yeah, well, there are multiple issues here. First of all, you know, this whole magic of a 65-year-old retirement age. That's an artifact of the 1930s and Social Security when it was set that way, and it's kind of been, you know, used as the retirement age, and yet people are living 20 years longer. So this notion of a 65-year-old retirement, CEOs out, I think is completely being rethought, particularly with people very energetic into their 70s, board members in their 70s. We have a president who's 80, Warren Buffett's 93.

I mean, you know, is there a magical number? No. Now, the other issue is, you know, do these people have to be innovators or what is the juxtaposition of innovation versus running a company? Well, of course you want to have innovative ideas, innovative leadership and so forth. But we're talking about inventors when we're talking about Musk and Zuckerberg. Why on earth is Elon Musk, a CEO of a public company? I mean, just listen to the things that he's invented.

Of course, we know Tesla, SpaceX, Hyperloop, OpenAI, who's one of the founders of OpenAI, Neurrelink, Zip 2, Solar City, Electric Jet, online phone calls Blaststar, boring company, which is not very boring. All of these things he's invented, and more in the pipeline. Why is he wasting his time day-to-day? Why is a board of directors having him change the logo at Twitter? Why isn't he inventing? There should be a whole waiting room of CEOs where Elon Musk invents something, hands it off

to a CEO to launch and run. I think it's a highest and best use situation. And I think this is what boards of directors need to think about. The true innovation inventors versus people who can run the company, take it to the next level, deal with shareholders and other stakeholders, day to day. Yeah, not to minimize, Musk. I mean, he's not the CEO of Twitter anymore, Linda Yagorino is, but he is still calling the signals. I mean, he's, I guess he's the head coach, and she's the offensive coordinator. Chief Technology Officer. Yeah, yeah. He's Chief Technology Officer.

So as I think back about founders, sometimes founders, and as you say, sort of intimate there, you said it. I mean, it's like Musk has too many ideas to be messengers. around as CEO. Yeah, Musk is a national hero. I mean, literally, he's a treasure. I mean, he may not be CEO of Twitter, but he's calling the shots. But he was running Tesla day to day and tied up with the regulators and all this stuff. That's not what you want him to do.

So I think boards and directors need to think seriously about, you know, the kind of person who can launch these ideas, launch a company the highest and best use, and then the professional leadership who can carry it on and really take it to the next level. But I think this whole concept around age needs to be completely rethought, tossed out the window as well. You know, that's been done largely on boards of directors where, you know, people are staying longer. You know, some people are ready to retire at 55, some people not until, you know, much, much later. And so I don't think you can create this artificial situation. Now, Founders is a whole different kettle of fish where you've got people who come in and take it to a certain,

level, hand it off, and it gets fumbled. And then Howard Schultz is an example of this, where they brought them back a couple of times to run Starbucks and fix a situation. But ultimately, you have to groove a successor who can carry it forward and take it to the next level. That's what shareholders want. They want predictability and consistency. Yeah, that bench is so important.

And there are so many companies that are fabled for their executives that are groomed and rise through the ranks, to your point. I do want to shift gears a little bit here because it is helping to propel the market higher today. It's the consumer confidence reading that we got this morning. It was really a Goldilocks reading. The fact that we saw, we saw it come in above expectations, best level since July 2021. And we are seeing those inflation expectations continue to move lower, too. I guess just walk us through the report and whether it feeds into the soft landing thesis that the market has really seized upon? Yeah, so the conference sports consumer confidence index came out a few hours ago,

and it was a great report. Consumers are more confident than they have been in years. And that's driven by their own view of their jobs. Their jobs are stable. They're feeling comfortable. They're feeling like they're going to be able to keep their jobs. They're not eliminating jobs in this economy. Their wages are higher. And, you know, all of this is feeding into it. has come down. And it's predominantly gas that is driving that food inflation rates have come down to some extent as well. And that's really important for the lower earning folks where food and gas are a higher proportion of their expenditures. So, you know, you ask, we ask consumers this time, you know, do you expect there to be a recession? And fewer and fewer

consumers are saying that they, in fact, expect a recession. So maybe there will be this soft land so-called soft landing. You know, we're down to about three or four percent inflation levels. The Fed's trying to hit two. We think they're going to go up again this week. They probably will go up one more time, 25 basis points. But, you know, if they can do that without driving a negative GDP number, that will be a soft landing and it will be easier on employees.

It sure will be. It'll also be somewhat of a rare feat. So we'll see if they can do it. Steve Odlin, CEO of the Conference Board. Thanks for joining us. Thank you. Shares of RTX on pace for their worst day since March of 2020. So the pandemic.

After disclosing an engine manufacturing issue coming up, we'll hear from the CEO about what exactly is its stake. Power lunch. We'll be right back. Welcome back. Shares of RTS, formerly known as Raytheon, plunging after disclosing an issue with its Pratt and Whitney engines. On pace for the worst day, the stock is,

in more than three years, down about 11% right now. Phila Bow joins us now with more on exactly what happened and what this disclosure means for the company. Phil. Well, it's a little bit uncertain what it means long term. Near term, it's going to be a $500 million hit that they're going to take because of the engine inspections that need to be done. We're not going to get too wonky here, but let me explain exactly what RTX is going to be doing through its Pratt and Whitney division. They will be inspecting 200 of these geared turbofan engines in the coming weeks. A thousand of them will be checked over the next year.

The issue, they're looking for powdered metal contaminants. Not all of them are believed to have these contaminants, but those that do, they will then have those parts replaced. And all of this brings up the question, well, how many of these engines are out there? And what does it mean for the airlines that have planes that are using these engines? Well, there are about 3,000 in-service worldwide. The Pratt-geared turbofan engines power about 40% of the Airbus A-320 Neos worldwide. So it's an extremely popular plane, use an extremely popular engine, but they're going to have to inspect these, which means some of the airlines are going to have to have some downtime here where some of the aircraft will have to have these engines pulled off and inspected.

Here is the CEO of RTX talking with us earlier today about the process. We've got to increase the shop capacity to do these accelerated inspections. We've got 13 overhaul shops today. We're going to add six more. So there's tooling and test equipment that needs to be put in place. We're going to have to put some roortable assets in place to replace engines as we pull them. And we're going to have to try and work with the airlines to compensate them for some of the costs associated with this. Take a look at shares of Delta and Spirit, two of the airlines that fly aircraft, A320 neos that have these geared turbofan engines.

We should point out this is not a flight safety issue. They're not grounding these planes, but they will need to do these inspections, some of them in the coming weeks, others over the course of the next year. as you take a look at shares of RTX, which, as you mentioned, Morgan, it's had the worst day since, what, to March of 2020. This is going to be a $500 million hit, at least initially. That's the expectation. Longer term, they have not been able to put a price tag on how much this is going to cost the company. Yeah, it was incredible how much this dominated the earnings call, the conference call as well, this issue. And the fact that this very much, Phil, overshadowed what was a very strong Q2.

It was raised by the company for the full year. commercial, aftermarket, defense, doing really well, too, as you see all that restocking of supply tied to Ukraine. And yet this has been the driving factor for this name today. Right. And it's partially that they haven't been able to say, we know how much this is going to cost long term. Is this going to be devastating to RTX, let's say, over the course of the next year, or will it be a blip? Odds are it's probably not going to be long term. Keep in mind, They have a decent sense of how many of these aircraft engines they think are going to have to have parts replaced. They do not think it's a large number, but they have to do these inspections.

And again, it's not a flight safety issue. It would be different if they said ground these planes. That is not what is going on here. Very quickly, where does this powdered metal come from? It was part of the manufacturing process. And they first discovered an issue going all the way back to 2020 as they started investigating. Then they said, okay, here's where we're. think the impact is. It does not impact the geared turbofan engines that are in production or in the manufacturing process right now.

All right. Phil LeBow. Thank you very much. And Power Lunch will be right back. We have news alert on Pack West, a battered regional name hit hard following the collapse of Silicon Valley Bank. Leslie Picker has the story. Hi, Leslie. Hey, Tyler. Yeah. The stock price recently whipsawing in the wake of those bank failures in March and April. But the journal reporting that Bank of California is in, quote, advanced talks to buy PAC West. They say that the move is to further shore themselves up following that regional banking crisis earlier this year. But I want to draw your attention to the stock prices right now. Pack West down 23 and a half percent on news that it could be part of this deal to be purchased by Bank of California, which is actually a smaller lender in that one, up 13%.

The journal is citing people familiar with the matter here, and they say that Centerbridge and Warburg-Pinkus will actually be contributing equity to help fund the deal. I think this brings up all sorts of questions about consolidation, about what the earnings will entail this afternoon. Both of these lenders are expected to report earnings this afternoon and what it just says about the overall health of the banking sector as well as the regulatory appetite to allow for additional bank merger.

So a lot of questions at this hour. Hopefully, as the journalist reporting, we could hear about a deal announcement as soon as today when both banks are scheduled to report their results after the close of the market today. We are going to take a quick break, and Power Lunch will be back right after this. Welcome back, everybody.

Stocks are higher as the Dow tries for its 12th straight positive. day up 71 points right now. Bond yield's also rising as Wall Street braces for the Fed's next decision on interest rate. That comes tomorrow. Let's go to Rick Santelli. It's Cebo for more. Rick. You know, Tyler, it's been a wild day on so many fronts. You know, Richmond Fed is in top-tier data and the service sector manufacturing were weak, week, week. But what wasn't weak was consumer confidence. Look at this chart. At 117, the highest level in two years. And if you look at intraday of two-year note yields. When do you think they peaked today? Yes, you guess it. When that data came out at 10 o'clock Eastern. And if you look at 10-year, we're on pace for the

highest yield close since the 11th intraday. We're at the highest levels since July 12th. And we're going to go find Paul and see if he wants to discuss the market. Paul? Hey, Rick. There's a lot of action going on today. Why don't you tell me what you're seeing from the perspective of traders here, especially understanding that tomorrow's the big day for a Fed meeting that's been baked in the cake for a long time. Yeah, I would agree with that. There's not a lot of intrigue with the actual statement tomorrow, but the forecast, people are still very curious to see exactly what they have to say.

Starting yesterday, we saw a lot of interest in the expiry for tomorrow, but what we're trying to figure out is if that's for the Fed, or is it maybe for Google and Microsoft tonight? Ah, that's actually a good point. And one would think it's most likely the latter, because truly, there is no surprise left in this. It's like a surprise birthday party where everybody fell asleep before the guests arrived. Now, what do you think outside of the earnings, which are super important? Is there anything else going on?

I'm looking up at the VIX, and the markets are up, and the VIX is up. What's up with that? Yeah, that's unusual, a little less unusual ahead of Fed Day. And as we said, the earnings, the VIX actually bottomed middle of last week. We've had some pretty big orders come into the pit, the last five or so trading days for some downside exposure. Coincided with that VIX bottoming, and the futures haven't really kept up the rally that we've been experiencing the last few weeks. Now, if you had to summarize very quickly, what's the biggest issue that people in the office and clients are talking about in general? What topic would that be today?

Right now, I'm going to go away from the Fed and go more of the Fed. the earnings if you're asking me. They let us here. If they have a change of a tune, especially with the markets. Dow Jones Industrial Average going for an even dozen. This is historic. Now, my other question is, when I look at two-year note yields, they are hovering just below 5%. The high yield closes 507 from the spring. If that doesn't take that level out, it's definitely going to be a negative meaning we'd most likely see lower yields. Five-year note auction, a good success. Real quickly, we're almost out of time. What do you think? I think after tomorrow we'll have a way better idea of the path of the curve. Gotcha.

All right, back to Morgan. And we're going to fist bump here because we think the Fed's going to have a hard time beaten Google earnings when it comes to volatility. All right, Rick Santelli, thank you. Markets are fading the gains a little bit here. Great to be with you, Tyler. Great to be with you. Thanks for watching Power Lunch. Thank you.