Power Lunch - Is Tech’s Rally Over? Is China’s Manufacturing Dominance Over? 8/23/22

Episode Date: August 23, 2022

The Nasdaq has fallen 4 of the past 5 sessions after a big rally from the June lows. What’s next for tech. Plus a warning for the market bulls. What they might be missing. And companies start to take their manufacturing out of China. What it could mean for that economy. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome everybody to Power Lunch, along with Courtney Reagan. I'm Tyler Matheson. Here's what's ahead this hour. Stocks mixed right now following yesterday's big sell-off. Top Tech Watcher will tell us if this sell-off is warranted after the two-month rally we have had. Plus, is American reliance on Chinese manufacturing ebbing, becoming a thing of the past? Apple, for one, stepping up production of its newest iPhone in India. What this shift could mean for the U.S. and Chinese economy. It's Courtney. Well, thank you, Tyler.

Thanks for having me. I am Courtney Reagan. Markets right now are mixed. The NASDAQ, the only major average in the green right now, a bit of reversal from what we saw yesterday. But it was hard hit and down for four of the past five sessions, down 5% in just a week, but still up nicely off the June lows. Helping tech today, chip stocks mostly higher on a semi and Matt lit MAT, Mattel leading the way. Also, or a mat rather. Also, cybersecurity stocks are higher after Palo Alto.

posted strong results. Healthcare on the downside, though, medical devices, biotech, pharmaceuticals, health insurance, all those names, Ty, are lower today. All right, a day after a big sell-off and stocks are mixed today, barely holding on to the gains, should, earlier in the day, should the rally off the lows have been trusted and where are we finding opportunity now to discuss that? We're joined by Sarat Setti. He's a managing partner and portfolio manager at DCLA, also a CNBC contributor Surat, as always great to see you. The market went up for two months, better than, I guess, off the lows. It's been taking a little bit of a breather here.

Is the breather signaling anything to you that could be longer term, or is it just a breather? I think short term it's a breather. Tyler, I think we've got a couple of things going on right now. One is we're in this quote quiet period. Earnings have all come out, so we don't really know what's going to happen for the next quarter. But those estimates are coming down. So I think you're seeing the market react to that. Secondly, Friday is a big day.

Chairman Powell gets to speak and talk about where we're going to go with inflation and really what we're going to do with rates. So as always, when we don't know what's going to go on, uncertainty is in front, the markets take a pause. And it's fine to take a pause because we had such a good run-up. So the question will be really, what does the chairman say in terms of the trajectory of interest rates. And then secondly, as earnings come in, there is a, you know, there's a group of bears out there saying that, hey, the P.E on the S&P is too high and it needs to come down.

And you've got interest rates on the 10-year back above 3%. At least they were yesterday. I was texting with a friend who's an astute investor. And he said what people seem not to be talking about is the pace of quantitative tightening or the money that the Fed is taking out. out of the economy, is that contributing here? I think that's a big part of it because we haven't seen that before. And really what happens there is you're going to see a huge amount of treasuries come on the market. That's going to cause the price to go down and rates to go up.

So you're seeing that on the team here. The interesting part there, Tyler, is to watch the inversion of the yield curve from two to ten. And if that starts flattening or starts moving upward, which it hasn't for a long time, But if it does, that is an indication to the market that things are actually going to be better ahead. So, you know, just like when we had QE and we had issues as to kind of what is really going on in the bond market, now we're on the other side of it. And we're going to see really what is the true test of the market when rates actually start moving up.

So, Rod, if we can, we have some very specific picks from you. I would like to start with XBO logistics. Why this name in particular, when you could look elsewhere in the logistics space, usually XPO is not one that we hear talked about as much as some of the others. So it's really a valuation play here. This one trades at nine times earnings. They're spinning off their freight business. They're selling off the European business.

And it's really what you'll own is what they call it LTL, less than truckload. So it's really a company that's focused on digital transformation where their vendors and customers can use them to ship goods. And there's no real hard asset there. So it's really margin. As we've seen, one of the things XPO had, it was a good thing. They had too much demand for their product. So we think this is an underappreciated asset. It's a little confusing for people because you're spinning off freight, you're selling Europe, and then you're going to be left with pure LTL business. So times like this, we like companies that are trading at way below market averages, we demand growing and having pricing. A second choice is, I don't know whether it's Helion. Is that how you pronounce it?

It's a— Elion. It's a consumer products company, but it's in a real low growth, excuse me, part of the investment world. So I assume it's a defensive choice. It is a defensive choice. And here's another, here's why we like it. It's spun off from Glaxo. So whenever you get a spin-off for the first six to nine months, all the shareholders who want to own Glaxo don't want to own this. This is actually the only large pure play of consumer health care space. That space by itself grows 4 to 6% a year, but the margins are very high. This company is going to have close to a 2.5% dividend. And really, they have so much wood to chop here because they've got good products like Advil, things like that,

where people, the demand for that is inelastic. So we like the space. Trades at 14 times earnings. The closest comp to it is recid at 20 or P&G. at 25. So really, once the sellers kind of move out of the way, we like companies like this that are underappreciated, not even, you know, understood at this point in a space that as we go through some choppiness and volatility in the market, you want to own, strong cash flips. Surat, always great to see you, sir. Surrott Zeti. We appreciate it. Thank you.

Always has interesting ideas, too, not necessarily names we talk about all the time. Well, investors may have thought tech was having an all clear moment as it led the recovery from June lows. But this week may be showing that things aren't as rosy for the sector as many thought. The NASDAQ had its worst day in nearly two months, dropping over 2.5% yesterday and really starting to fall during this hour of the day. So do the bears or the bulls have it right? With us is Steve Milanovic, tech advisor with LLC. Steve, this is very an interesting question because it seems like this tech group can have some narrow leadership. Where do you think we are right now in the cycle? And how does tech give us a clue?

to that? I think tech is reacting to the rest of the market. I would say unlike 2000, this certainly isn't tech specific. However, I do think that we've seen the near term top in tech. The NASDAQ 100 peaked a week ago. It was up 23% from its mid-June low. It's down about 6%. I would guess there's another 10 to 15% to go.

Just from a technical perspective, almost every tech stock moved back to or slightly above its declining 200-day moving average and became oversold. So that's practically screaming sell. And what about the semi-stocks in particular as a part of tech? I know we have an awful lot of focus there, but for good reasons, they can be some good indicators. I think the risk across tech and to semis at this point is probably less PE than it is earnings. We've had interest rate hikes. It takes six plus months for that to work through the economy.

So the risk that a lot of strategists are talking about is that earnings late this year into next year are going to be disappointing. SEMIs are very cyclical, very sensitive to the economy. So we all know that auto automobiles and other products are including more semis. So there's a secular tailwind, but there was also a lot of double ordering. There's still our supply constraints and so forth. Micron has talked about some weak pricing. So I wouldn't necessarily say semis aren't a different position from the rest of tech, but I think that you're likely to see earnings start to get hit here.

In particular to tech, you see a lot of share-based comp. So I'll be very careful in looking at tech stocks in terms of what are the real earnings, what's the real free cash flow? And so I'm sensing obviously some caution here with your belief therein in tech. Does it mean you shouldn't be buying any tech if you don't have it right now, but if you do have it, are you suggesting we hang on to it? Well, it depends on your time frame. I think a trader probably should be unloading a bit here.

I think we've been near the highs. I think it's going lower. How much lower? I don't know. On the other hand, if you have a longer-term perspective, technology is the answer to a lot of our problems. of a lot of interest, obviously, in ESG and energy. And as much as the government is involved in trying to find answers here, ultimately it tends to be the free market and technology that does that.

Also, we've been in an inflationary environment. So a lot of companies are able to raise prices. If they bring inflation down, it's going to be harder to do that, which is going to hurt earnings. Tech at least is a deflationary business. It's used to prices going down. So ultimately, when inflation is cured, I think technology and growth should be in a better position. So in the world of technology and semis and cloud, give us some names that you like right now. I know you love to do that.

Well, sure, Tyler. Again, I'm generally cautious, but areas of interest to me would be the analog semiconductor names like analog devices and on. The semi-equitment names, particularly over time like KLA and Lamb, I think, are well positioned. Software selling about seven times revenue might still have a little further to go on the downside from a evaluation perspective, but always an interesting place to be. Informatica has come back to the markets. I think that's interesting. Security is always of interest. We saw what happened with Palo Alto. I think that Z-scaler is another name that's interesting because it is a bit of a pure cloud play. So those would be some names. In the past, I've covered Apple, IBM. IBM is probably fairly

defensive right now. Apple love it long term, but I think it's done its thing. And if consumers have less money, that iPhone 14 product cycle might be a bit disappointed. Thank you. Steve Milanovic, thank you very much for being here with us of Tech Advisor LLC. Thanks, Courtney. All righty, coming up, doing business in China, getting harder and harder as the economy slows, power shutdowns begin, and the tensions with Taiwan grow. Is it best for companies and investors to diversify elsewhere? Plus, Intel, five-year low, Nvidia warns, and the semi-ETF is down nearly 6% over the past week.

is the semi-trade coming to an end? We'll talk more about that when Power Lunch continued. Welcome back to Power Lunch, everybody. Apple reportedly moving the manufacturing, or at least part of the manufacturing, of its new iPhone in India, much earlier than normal compared with earlier models. A sign the company may be shifting capacity away from China,

and Apple is not alone. According to data from the reshoring initiative, companies are announcing at record rates the intention to bring in manufacturing jobs, back to America with nearly 350,000 announcements, I guess that would be 350,000 job announcements projected this year. Our next guest helped company do business in China and says he's seeing an acceleration of businesses assessing whether it is worth it to stay long term over there.

Back with us again is Dennis Uncovic, partner at Meyer Unkavik and Scott, veteran China watcher. Dennis, good to have you back. We noted Apple seems to be moving some of its manufacturing of its latest iPhone version, or the one that will come out, to India, sooner than has normally been the case. Is this what smart companies increasingly are going to do move manufacturing away from China? Tyler, thanks for inviting me and Courtney back again. The answer is yes. Frankly, I think Apple is a little late to the party. They probably should have been done this earlier.

But what we see happening is China, for many reasons, other than the very expensive labor market it has, is making it more difficult for foreign companies to do business there. And I think Apple is sort of hedging its bets by going to India, and I think they're doing the right thing. How are they making it more difficult? I mean, obviously, Xi has complete control of the economy. They have been beset with power problems. They have been beset with COVID problems. but what are they doing that's making it harder for non-Chinese companies to do business here?

There are a couple of things. The first thing is the Chinese are very determined to get intellectual property in whatever way they can. And if you're a company with intellectual property that you want to protect, you have to be very careful being there in China. Secondly, the Chinese are today encouraging companies, either if you have a joint venture there or if you have your own operations there, to put people from the government on your boards of directors and overseeing. And so China today is a lot like what we used to talk about years ago, big brother.

And so as China becomes a more powerful economic force, it's the second in the world. It wants to put enormous pressure on companies. And companies that are particularly technology-based don't like that. So this makes sense to me, but it also seems to be difficult for companies to actually successfully reshore, when it comes to getting the right skilled labor, the people that want to do the jobs and have the skills to do it, and frankly, even just the manufacturing capability and facilities here in the United States. So what has changed, I guess, with these 350,000 new jobs that are expected to be announced to be resured this year?

Do we now have the skilled labor? Do we now have the facilities to be able to bring these jobs back here in a way that is still profitable for the companies? Courtney, that's a great question. Let me say first of all, I think American companies were really not recognizing the risk that they had, but when we've had the blow up or the fragmentation of the supply chain, that sort of brought it to their attention. I do think this is going to be a gradual process. I wrote in my book a year or two ago, reshoring was going to happen, as you've just reported now, it is. But over the next five years, there will be more training.

Now that in the U.S., we have kids that are learning STEM, and we're putting a greater emphasis on that kind of education because the workers in the future are not just going to be putting pieces of plastic together to go in a McDonald's happy meal for kids. They're going to be more sophisticated. But I think the U.S. has woken up, and I think the Biden administration, along with the support of the Congress, in supporting the microchip legislation that's just been signed into law is an example of what's happening. She is coming up on a party Congress later this year where it's all but assured that he will get another five-year term, but he has some internal headwinds, does he not, that could make

this next term, if it's his final term or not, who knows, this next term somewhat different from what he's had to deal with before, correct? Absolutely. I think it's because Zee will get a third term. He essentially has no political opposition in China. But the Chinese economy is growing at less than 5.5%, which is probably the lowest in the last 36 years except for when we were in COVID. And so he's got an economy that's not collapsing, but becoming more like other developed economies. The other thing is Chinese labor is now expensive

relative to what it was. Back in 1976, Tyler, if a Chinese worker was making five or 10 cents, the American worker was making a dollar. Today, that has compacted. And so while workers in China are still less expensive than the U.S., they're relatively expensive. That's why I think, as you said, a few minutes ago, Apple is looking, say, why don't I go to India? Because they're highly educated, well-trained, and they're less expensive than the Chinese workers. Yeah, I heard a report this morning, the average worker or factory workers in Bangladesh make a dollar and five cents a day, which is really criminal, frankly, but there's the labor disparity that companies are dealing with. Dennis Unkovic, we appreciate you. Thank you. Thank you for having me today. You bet.

Well, coming up, looking for some potential stability, cash flow on your next stock pick? Who isn't? We'll trade three names with low beta, stable yields, and positive returns in our three stock lunch. Plus, one market veteran says if you think the Fed is done with hikes and will keep the punchbowl out for a little while longer, you're in for a rude awakening. He joins us with that theory coming up next. Welcome back to Power Lunch. Chip stocks have had a wild ride this year from the lows of the shortage, the passage of the Chipsack. And now the news keeps on coming, earnings, and from Navidia and a deal for Insight. Welcome. Let's get to Christina. Parts and Evels now. She's got it all for us.

Well, let's actually start with that cash injection for Intel. Think of it like a joint venture between Intel and Brookfield asset management. They're going to invest $30 billion in two fabs in Arizona. Intel will pay the majority at 51% of all total costs and retain control of the fabs. And then you've got 49% for Brookfield. The CFO said that this could potentially be more something we see in the future, more partnerships like this in the chip space. Intel, though, expects to fund these investments.

from cash flows from operations and government incentives, which means it's still reliant on things like the chipsacks, which would also help bump its cash flow by potentially $15 billion, according to the company. The company, though, it's pretty good at raising capital, right? But what about that execution? The stock yesterday did hit a five-year low. You can see it's training higher right now at $34 a share, but down on the year. On a yearly basis, though, 12-month chart, think of that. Invidia is the stock that has fallen the most from its 52-week high. Its earnings are out tomorrow, but the company already pre-announced weaker revenue, stating the gaming chips faced a crypto hangover, and the challenging market conditions would continue into the third quarter, which means data center sales will be a far larger business until gaming issues work themselves out.

And Marvell technology, on the other hand, is considered more of a pure play data center company with strength in 5G, especially with 5G expansion. And so their earnings are out on Thursday. This stock, though, is one of the worst chip performers this month down over, just a little bit under 7% right now. But both of these companies, Nvidia and Marvell, give insight into how the lucrative data center business is holding up, and if these companies are successfully stealing market share away from Intel. Christina, let's change subjects just a bit. We know you've been following AMC and their issuance of what are known as APEs or APEs, which are... APEs. I haven't heard anybody say it like that.

They're apes. They're apes. Planet of the Apes. They're a preferred share, a preferred share class. Jim Chanos earlier today had some interesting things to say about what he's doing and how he's playing this arbitrage. Let's listen to what he said earlier. We actually just initiated an AMC short. We were short last year covered. We just initiated a new position yesterday.

However, and just calm down apes. I'm actually an AMC security holder on the other side. side. We actually bought the new ape preferred and we have shorted the, the AMC comment against it. They are economically the same security. They are not freely convertible into each other, but they are economically the same security. What does that mean? What the hell is he doing? I mean, what the hell is smart? You understand the shorting and the long position part, but why? Why do this? Why would you have both sides of it? The key word is he used the same. So he believes ape and AMC. shares should be priced the exact same, but it's not the case. They're almost the same class.

That means AMC's business, if that improves over the next few months, both shares should benefit or vice versa. But he plans to make money by exploiting the difference between the price of AMC and the price of ape shares, which are not the same right now. Ape and AMC can become more even or more similar when ape shares are converted into AMC's shares. That's the key point. It won't happen right away. It requires shareholder approval, so who knows how long that takes. And then technically right now, like I mentioned, they're not convertible. They don't have a cash dividend. I'm talking about the apes. Also, they have the same voting power as AMC shares, but preferred would get paid first in the case of insolvency, which is a huge perk if you're bearish on the firm and you don't

want to short the stock. The company can, though, and this is a major concern. They can actually issue more ape shares down the line, about $483 million, are still a little. but not unissued. And Chino's did question if this entire thing was the right thing to do because that's a lot of cash that they're raising, a lot of risk that they're adding onto the balance sheet. And that could potentially hurt shareholders down the line, especially when they issue those 483 million extra days. Well, if he's short AMC and long the apes, today he's looking good. Very interesting stuff. He makes money, right?

Yeah. He's rich for some reason. Very interesting stuff. Do you mind if we wish you a good good? Oh, yeah, of course. Christina's getting married this weekend. Congratulations. Saturday.

And have fun. Thank you. Thank you. Yes. Thank you. How wonderful weekend. We don't see you before then. Have fun.

No, I'm done after this. Well, tonight. Okay. Have a great weekend. Thank you. Well, let's get to Kate Roney for the CNBC News Update. Hi there, Courtney. Paul Pelosi, husband of House Speaker Nancy Pelosi,

was sentenced to five days in jail and faces three years of probation. after pleading guilty to driving under the influence. Pelosi must also pay over $6,000 to cover court fines as well as the victim's medical bills. The UN Security Council holding an emergency meeting today at Russia's request over the situation at Ukraine's Zaporiza nuclear power plant. The power plant is Europe's largest. It was captured by Russia in March and has repeatedly come under fire in recent weeks

sparking fears of a nuclear disaster in a country still haunted by the legacy of the 1986 Chernobyl disaster. Russia and Ukraine have both blamed each other for attacks on that plant. Hyundai and Kia are telling owners of some of their large SUVs to park them outdoors and away from buildings

after a series of fires involving trailer hitch wiring. The automakers are recalling more than 281,000 vehicles in the U.S. Because of that problem, which does not have a fix yet, the recall covers the Honda Palisade and Kia teleride SUVs

from 2020 through those 2020 model years. Guys, back to you. All right, Kate, thank you very much. And ahead on Power Lunch, not all growth is created equal when it comes to picking stocks, so how do you know which ones are worth buying? We've got that one next.

Plus, it's been a rough ride for shares of service now this year. We'll hear exclusively from CEO Bill McDermott on the future of the company and where he thinks the company's strengths lie. Power Lunch is back in two. We've got about 90 minutes left in the trading day. We want to get you caught up on the market, stocks, bonds, commodities,

whatever else there is, and where the bullish investors are in for a rude awakening. Let's begin with Bob Bizani at the New York Stock Exchange, where things have turned lower, to really turn lower about this time yesterday, Bob. Yeah, and we're treading water. The Dow's been underperforming because United Health is significantly underperforming. 60 or 70 points of the Dow's decline is due to United Health today. What's outperforming is energy stocks, and a lot of people are very unhappy when they see this happening

because energy is a proxy for inflation. We're at two-month highs on the S&P Energy Index, and we've been creeping up in some of these big energy stocks. Recently, of course, remember natural gas, 14-year highs, and that's also affecting this market. This is not helpful to the bulls out there who want to see oil as a proxy for inflation, and that gas, as proxies for inflation, come down. Elsewhere, big tech, remember, it's down about 4% in the last week or so. Of course, a major reason we've been down is the correction in growth stocks. They're treading water today, and that's a good sign.

some of this selling may be exhausted, at least short term. Big pharma, big mover in the last, oh, week or so, they've held up very, very well. It's an interesting sign that today that's the weakest sector, big pharmaceutical stocks, in addition to some of the other sub-sectors like the ones that United Health are in. So markets just moving around here. They're just moving a lot of money around on a daily basis right now. The market's fearful of a lot more hawkish stance by Powell on Friday. The big question here is, why isn't the market down again today?

Well, it's very obvious. We've got some real issues overall here. New home sales, PMI services, PMI manufacturing, all sit near the lowest level in several years. And of course, remember, slower economic activity, that plays into the hands of the bulls out there who are arguing. Can Powell really sound that much more hawkish at this point? We do have the slowdown materializing that they are looking for. Guys, back to you. Thank you very much, Bob. We're going to move on to the bond market as the 10-year yield is holding onto its big rally, still above 3%. Rick Santelli is in Chicago

for us. Hi, Rick. Hi. You know, two-year note yields popped up a bit and they are now hovering very close to unchanged. The reason I brought it up is we had a two-year note auction that found very little sponsorship by investors. I gave it a D-minus. Do remember

Jackson Hole at the end of the week is one of the reasons yields have been to the upside. And speaking to the upside, let's look at July 1st of 10-year. 10-year on pace for a one and a half month high yield close, but Europe is pretty much there as well. Look at 10 year gilts, they closed just shy at 260.

There are two month highs, and if you zoom it out to 2014, you can see clearly that we are very close to the highest levels in about eight years. And boon yields closed at 132, they're at the highest levels in one and a half months. Now, if we look at the foreign exchange side, the European currencies are where all the strength

in the dollar, index is coming from. Let's look at a pound versus the dollar. Right now, it's hovering at levels that we haven't seen, well, since the COVID effects of 2020. However, if you go back to 1985, outside of that COVID effect of March 2020, we would be at levels we haven't seen since 1985. And finally, the euro versus the dollar, almost 58% of the dollar index, is at 20-year lows versus the greenback, which puts the dollar index, you guessed it, at 20 years. highs. Tyler, back to you. All right. Rick Santelli, thank you. Oil jumping today. After a few days of closing below $90 a power, let's go to PIPA Stevens. Get all the news on the numbers.

Pippa. Hey, Tyler, oil is up more than 3% today following comments from Saudi Arabia's energy minister. He said that OPEC and its allies can adjust to fluctuations in oil prices, including by cutting production. He added the market is in a state of schizophrenia, with a growing divergence between the financial market and the physical market. He said the reason volatility is harmful and that this yo-yo market is sending erroneous signals when greater clarity is needed. So let's check on prices. WTI is at 9381 for gain of 3.8 percent.

Brent crude back above 100 with a gain of 4%. Now turning to natural gas, which has had a roller coaster session. Around 1 p.m. It dropped sharply after Freeport LNG pushed back. the restart date for its Texas facility to November. The plant, which is about 17% of the U.S.'s LNG export capacity, has been shut since a fire in June. And prices are now down because traders are worried about oversupply in the domestic market.

And the big reversal came after NACAS earlier topped $10, Courtney, for the first time since 2008. A lot of wild things happening in the energy patch. I know what they're dealing with in Europe, of course, is one of them. Thank you very much, Pippa. Well, head of the Jackson Hole Summit this weekend, investors are watching to see whether the Fed might be pivoting or not. My next guest says this recent rally might be overly optimistic. And the fact that we are still even talking about meme stocks and crypto shows the Fed has a long way to go in tightening.

So joining me now is Richard Bernstein, CEO of Richard Bernstein advisors. You know, Richard, we pay an awful lot of attention, of course, to what the Fed is doing with monetary policy in terms of interest rates. but liquidity is something that the Fed has had a very big hand in for many, many years. You think we are still too high when it comes to liquidity levels in the markets right now. Walk me through your theory. Yeah, Courtney, I think that the Fed kind of opened the spigot correctly for the pandemic, but never really shut it the way that they probably should have. And so the result was you had tons of excess liquidity that caused a very speculative environment.

and speculation causes misallocation of capital within the economy. And so you ended up with crazes and meme stocks in cryptocurrencies, in tech, innovation disruption. All these things became very popular because it was basically free money. And if it's free money, why not take a gamble on this stuff? And so the fact that the Fed is tightening, yes, they're tightening, but are they tight? And have they gotten rid of this speculative fervor? the answer is no. Why is that important? Because it continues to have this gross misallocation of capital in the economy. In other words, capital goes to things we don't need and not the things that we do need in the economy.

We were speaking a little earlier about what's going on specifically in the tech sector and the narrow leadership therein. You think that that's a signal we might be towards the end of any kind of a rally here. I do, Courtney. And I think that one has to remember that when you begin a bull market, you have kind of the wind at your back. And what happens is that that economic boost propels all companies, right? A rising tide lifts all boots. And as the economy matures, and you begin to lose that backdrop, that stimulus backdrop, more and more companies begin to fall by the wayside. The market becomes increasingly Darwinistic and leadership gets narrower and narrower and narrower, meaning that fewer and fewer companies can support themselves. Well, that's the end cycle, that's not the beginning of the cycle. And so given that parts of this rally have been that

same narrow leadership argues it's not the beginning of something. So let's pivot back to earnings, which you say may not have, you know, be troughed or whatever. What does the rising dollar do to U.S. corporate earnings? How does that nip at them? Yeah, I think, Tyler, I think that's a critical question right now that investors are largely ignoring. I mean, Rick pointed out that the dollar has been very strong just in the previous segment here. And the dollar's been historically strong. And there's kind of an old rule of thumb that when the DXY, the dollar index, goes up 15% or more year on year, you tend to, not all the time, but about 80 or 85% of the time, you get a profits recession within one to four quarters thereafter. Well, the dollar has been about 15% now for quite some time.

That argues we're going to have a profit recession. We think there's going to be one probably either end this year or beginning of next year, but what's the most currency exposed sector is technology. And so if you believe that there's a strong dollar, you have to be worried about the earnings of the tech sector. I'm not sure that people have made that connection. Yeah, good if you're going to Europe. Not so good if you're a corporate treasurer, I guess. Exactly. Rich, it's always good to see you. We appreciate you. Thanks, guys. Good to be with you. Richard Bernstein. And as we just spoke about a big end of the week in Jackson Hole with a number of Fed and economy speakers, culminating in J-Powl Friday morning.

That will be 10 o'clock Eastern time. We will have live coverage here on CNBC all week. It is the ultimate Fed Paloza. All right, coming up, our working lunch on Power Lunch. And this week, we meet with Service Now CEO Bill McDermott. You know who he is now, but wait until you hear how he got his start in the business. And as we head to the 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 an order. Thank you. Welcome back to Power Lunch, everybody. High growth technology stocks facing uncertainty as investors away the impact of rising interest rates. This week, John Fort brings us up close with a CEO who uses communication and optimism to focus his workforce on the future. Hi, John.

Hey, it's high. Bill McDermott is CEO of Service Now. an enterprise software company trying to change the way businesses run internal operations. He grew up in a working class Long Island family and eventually became an executive at Xerox and CEO of European Software Giant SAP. But before that, he delivered papers, bagged groceries, weighted tables, even ran his own deli starting at age 16, competing with the local 7-11. And then ultimately, you know, we built this video game room. I don't know if you remember that, John.

The asteroids and the Pac-Man routine. But my idea was to get those kids to walk a block and a half past 7-Eleven to my store. And it became a lot easier when I had video games. And the big I... And the 7-Eleven will only let them in four at a time, right? They let them in four at a time. And I went down there one day. Because?

Shoplifting concern? They thought they were going to shoplift. Okay. So I said to them, don't worry about all that. Come down here with me and let them in my store 40 at a time. You can't shoplift an arcade machine. You've got to put the quarters in. You don't get the quarters out.

Exactly. But also, I let them, you know, hang out at the store, make it your home. And at the end of a long day, one of the young people said to me, Bill, when, you know, we want to have good food, play video games, and be treated well, we come here. And when we want to steal stuff, we go to 7-Eleven. So, I mean, you know, you get what you invest. You get what you invest. He's applying that philosophy in today's environment. A strong dollar is blunting the potency of international sales, as you mentioned, economic uncertainty.

lengthening sales cycles across the industry, but McDermott says he's continuing to invest for growth at ServiceNow because he believes the company has loyalty and momentum with existing customers. He also says the business imperative to digitize for efficiency is going to continue even in a recession.

We are a standard in the Global 2000, but even where we're heavily penetrated in businesses that really lean on Service Now, we're only like 15% penetrated because Service Now has built so much, much innovation into the platform in the categories we just discussed that customers have a long way to go. So we have the highest retention rate because customers love the product and we have the best same account revenue growth of any of the SaaS players because we keep innovating.

So I think we're one of those special platforms that's on the short list and you're absolutely right. The projects that get invested in will have a quick fuse to value. Nobody has the temperament anymore for multi-year projects with kind of like squishy ROI. They want facts. They want return on invested capital, and they want to do it with a platform that's a winner, and that's where we come in. Different CEOs have different superpowers, right? I've talked in depth to hundreds of them over the years. Bill McDermott is an apex communicator, which includes marshalling facts and reading his audience. If he's right about the durability of enterprise software platforms in Iraqi economy,

There are quite a few bargains out there in the public markets today, potentially, if they could get snapped up and folded into something larger, guys. How did he make the switch from a deli with kids to what he does now? And to, was it, SAP where he spent a lot of his career? Well, his parents really wanted him to go to college. He wasn't that excited about it because he had this whole Delhi enterprise that he was running, but he agreed to do it, would have a book behind the counter while he was, you know, cutting the deli stuff when the customer came in, he closed the book and do the deli stuff. That helped him pay his way through college.

Then he applied for a job at Xerox, which he ended up getting. And that started his corporate trajectory. He said all along he would see these folks in suits in town and see that that was the way out. That's what he aspired to. You can hear the Long Island in his voice still. There you go. I think there's a lot of lessons to be learned in food service. I don't have you ever worked there, Tyler, but you can apply it to a lot of different things.

All right. Thanks, John. Thank you, John. Well, coming up, for investors tired of being whipsod by the volatility, we've got the trade on some low volatility stocks that are outperforming and a plus steady cash flow. Three-stock lunch is next. Power lunch. A couple other stories catching our eye today. Macy's up nearly how many percent right now, four or five percent here.

Yep, almost four percent after better than expected results for the most recent quarter. But the company cutting its earnings and revenue forecast on fears that customers will cut back spending on discretionary items. CEO Jeff Ginnett telling me that inventory levels, they're a little high throughout the industry. And quote, we just expect margin pressures and high promotions to be with us through the fall season. But you know what, Ty, Macy's inventories were only up 7%. Cole's inventory is up around 50%. Same thing with Foot Locker. So much better.

But he said, look, there's some categories. They're just out of whack with inventory. Things people aren't buying as much anymore. But then others that actually we kind of are chasing inventory in. He says sales of things like dresses and suits are still strong, beauty, luggage, gifting. People want to get out. They want to celebrate each other. They're going back to work.

They want to take their pajamas off and put on real clothes. Yeah, yeah. Well, I wonder if he's actually starting to see a little bit of a pullback or is he just anticipated. He says in general transactions are down, so across the board. But he's not seeing that trade down. So a consumer that might have spent something at $100 going for something at $50. Just in general, maybe that transaction isn't happening, period. It's just not a trade down.

And then, of course, we heard from Dick's sporting goods, which, you know, they actually said the same thing. We're not seeing a trade down, but converse to Macy's less worried about the balance of the year. And they actually increased their guidance, where Macy's lowered theirs really out of fear. And Dick's usually pretty conservative did the opposite. You know, it's interesting. There are still, I mean, there are still supply chain issues. I know my son is a big consumer of sporting goods, and he's been looking for a certain brand. I'm not going to mention the brand of football.

cleat. And you can't find them. You just can't find them. And I asked exporting goods out about the supply chain. And they said actually generally for us, things have evened out. But football specifically, I asked him in general about the category, wondering if some parents had not wanted their children to play football because of

the injuries. And he said, actually, if you would have asked me before COVID, Ed Stack, the executive chairman, he said, I would have thought that that would have fallen in demand, but actually, football's really up right now. But he didn't say supply chain is an issue overall, but maybe for those cleats. I think my son, Matt, missed the moment. I think you're supposed to buy those cleats in May and not wait until two weeks

before the first game to get it. Sometimes we have to learn her lessons as good. All right, let's switch subjects here. Some business deals just make perfect sense, and this may be one of them. Amazon reaching a deal to air. It's Thursday night football games. Remember we talked about that last week? I'm going to air those games in bars and restaurants. Now those establishments are going to get to show the games. Amazon gets to reach a wider audience. It's a deal. with DirecTV. We talked last week about their billion dollar a year deal to get exclusive rights to the Thursday games.

Now a new era. The NFL had previously always wanted its games on TV. So here is a way to expand that audience. Yeah, absolutely. It is fascinating to see the transition as it's happening. As long as you play the game I want to see in the bar that I'm in

at the time, I don't care where I'm going to be. Very different year of viewing. Lots of changes among the sportscasting and broadcasting crews. It's going to have a different feel to Thanks for watching Power Lunch, everybody.