Power Lunch - Microsoft's AI moves, and under-the-rADar winner 7/18/23

Episode Date: July 18, 2023

Congress is now holding hearings on how to regulate AI. We’ll tell you all about the 26 year old billionaire they’re listening to today.And, Microsoft shares are jumping as the company makes more AI-related announcements – including how much its going to charge for AI in office.Plus, as the economy seems to be slowing, we’ll look at the state of the online advertising business. We’ll also reveal the under-the-radar name one analyst thinks can be a winner. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good day, everyone, and welcome to Power Lunch. Alongside Kelly Evans, I'm Tyler Matheson. Coming up, Congress holding hearings on how to regulate AI will tell you about the 26-year-old billionaire they're listening to. And Microsoft shares jumping as the company makes more AI-related announcements, including how much it's going to charge for AI in office. Plus, as the economy seems to be slowing, maybe, and may be headed for a potential recession, we will look at the state of the online advertising. business and the under the radar name one analyst thinks can be a big win. Kelly. Yes, we will.

Tyler, thanks. First, let's take a look at the markets. Green arrows across the board. The Dow of 331 points powered by Microsoft and some of the financial names, while the S&P is up half a percent today and a similar gain for the NASDAQ. Here is Microsoft, a 5 percent pop, gaining on its A&I news, which we'll talk more about shortly, that pricing. Analyst are very excited about how accretive it could be.

United Health also up 3 percent after an upgrade. from Bernstein and Goldman stacks up nearly 3% as well, boosting the doubt ahead of its earnings tomorrow and following strong results from Morgan Stanley and the other banks. Morgan Stanley shares up about 6% at last check, beating estimates thanks to growth in wealth management. And CEO James Gorman telling CNBC, he thinks the worst is over for banks.

I think we've bottomed. I think we bottomed. Yeah, I think we bottomed in this business, you know, four or six weeks ago. Now, how much it improves from that for the rest of the year is unknown. on next year, definitely a pickup. So I think, you know, and I'm seeing it with the conversations I'm having with other CEOs. We just felt like, you know, April was, was weak and first half of May also weak. And then it started picking up second half in June where it's, you know, it's not gangbusters. But we're off the bottom. And speaking of off the bottom, take a look at shares

of Charles Schwab, jumping 12% to lead the S&P today. And they are 47% higher than that banking crisis low. right there. The company beat estimates despite a 31% drop in bank deposits from the last year. CEO Walt Bettinger says he's optimistic and so are clients. Clients are now moving back into the equity markets. So that's a good thing. It's not simply clients moving money into something in cash that pays higher yields. They're back into markets. And we saw in the aggregate for the second quarter, buys were about 20% higher than sell. So our clients are showing some optimism. They've actually moved above the line. in terms of their optimism about being a good time to invest,

and that's reflected in their actions. And lastly, Bank of America shares popping 4% today after the company earned $7.4 billion in the corner, revenue up 11% from last year stronger than a lot of people expected. CEO Brian Moynihan will join us at 2.30 to talk live about those results, tie. All right, as Congress continues to grapple with the problems of AI, one man is emerging as a go-to voice. He is a 26-year-old billionaire, CEO of an AI company, and he testified before a House subcommittee.

Emily Wilkins joins us now with more. Hi, Emily. Hi, Tyler. Lawmakers working on AI legislation are getting advice from, as you mentioned, a 26-year-old billionaire who is urging Congress to move quickly when it comes to developing AI in the military. Alexander Wang is the CEO of Scale AI, a company he founded. to accurately label and classify data AI models use. He's got the ear of top senators on the Intelligence Committee, and he testified in front of a House panel this morning on AI's role in the military.

I don't think we should rest easy on that because military implementations of AI are going to be incredibly important. We need to ensure that in this next phase that the U.S. is both economically dominant, but also has military leadership as well when it comes to artificial intelligence. Congressman Mike Gallagher, who chairs the AI Subcommittee, said he hopes lawmakers can start passing smaller and bipartisan bills on AI by the end of next year. I don't think we have too much time to waste, just given the massive, just the scope and scale of investment and innovation in this space.

Tyler, while the House is looking at more focused bills, the Senate is working on a comprehensive and larger package. And we'll just have to see how those two approaches wind up panning out. So how did Alexander make all of his money? 26-year-old billionaire. What does his company do? Well, he is the co-founder of Scale AI. And basically, you know that AI models run on data. You have to give them data, and they wind up processing that. Well, it's not always that easy. Say he works with companies like Lyft, and Lyft has self-driving cars. Those cars need to know which pictures have a human that they can't hit and which pictures say don't have a human or maybe are able to slow down or stop. So basically it's a lot of classification, it's a lot of labeling, it's a lot of making sure that

the data that our AI models are using are good and accurate, or at least accurate, in terms of how they go about and free from any sort of bias. And that's really his big contributor to AI, and it's a billion-dollar company, and that is how he got to where he is, both in Congress and in the tech space. Little known. Nice to be a 26-year-old billionaire. Thanks very much, Emily. Appreciate it. And speaking of AI, Microsoft looking to cash in, namely a new paid version of its AI chatbot, as well as a feature for Office 365. The stock hitting a record high on the news, and Steve Kovac is here to discuss the details. What are they doing and how? Yes, big one. So monetization is the key word out of this. So we finally got a pricing plan from Microsoft today, $30 per month per user, for the user for the this AI co-pilot. That's the chat bot they announced for Office apps that we use here at NBC,

you know, Outlook, Microsoft Word, OneDrive, so forth. Now we know how much they're going to be charging these customers and we're seeing the stock react to that. Now let me put that number in context. That kind of sounds expensive, right? $30 per month per user? I don't know for companies? But put that on top of what they're already paying. Most of these customers are paying $36 per month per user, add another $30 on top of that. That's a huge premium just for this AI product. So this event that Microsoft is having today, it's called Inspire. It's their B2B event where they basically try to sell businesses like ours, all these new suites of products. They have to convince these customers, it's worth the 30 bucks

per user per month. Now, they're also not saying when it's going to be widely available, presumably this year, if they're announcing pricing already, but it is being tested with a few enterprises right now, but that is why you're seeing the stock up. So Microsoft collects already roughly $30 a month. $36.36. And it depends. There are a lot of different plans. For each of its enterprise customers.

Per user per month. Per user per month who are using the suite of 365 products. They had better be able to explain what this is going to do to make my experience not just more enjoyable but create value for the company. That's exactly right. And that's what today's event is all about, Tyler. And just one more thing to note here to put this in perspective, Microsoft 363. Formally known as Office 365, that's probably how we colloquially know about it.

Several hundred million users. So do the math there, $30 times a few hundred million. That's the adjustable market they're going after here. Now, as far as what it can do, some interesting stuff. Again, I haven't had a chance to test it yet. A lot of people haven't outside of Microsoft yet. But for example, if you're in a team's meeting and you miss it, I can't make the meeting. What the co-pilot can do, it can kind of co-olate what everyone said.

Tyler said this, Kelly said that, here are the actionable items you missed out on. I might want that even if I'm there. Exactly, right, yeah. Take notes for me. When you zone out during a team's meeting, it's really great, right? So that is,

those are the kind of features they're saying it's going to make you more productive. Sighton Adela even showed off some research when he was announcing this today, saying, you know, these AI tools can add trillions to GDP growth. And so he was really pitching these customers saying,

Look, you guys are really productive right now with their tools. This is going to supercharge you. Whether or not that pans out and people are willing to pay for it, we're off to see. It is quite expensive. One other thing they're announcing that people have been asking for, what they're calling Bing Chat Enterprise. Now, this is the same Bing Chat bot that we've been talking about for the last, what, six months or so. But it's more part. The chat AI powered?

Exactly. But this is for businesses. So you might have heard these stories, Apple and Samsung and Google banning chat GPT usage among their workers. This kind of solves that problem. It's locked down. It's encrypted. And so therefore, the enterprise customers can feel safe uploading proprietary information to it, just like you would feel safe putting proprietary information in an Outlook email, for example.

So that is actually going to be included, not an extra cost for this. 160 million users for BingChat Enterprise. I'm just looking through the Dan Ives notes on this to run through the numbers. He thinks maybe 50% of the install base will ultimately be on the AI functionality within the next year. That's a lot of money. user numbers in a long time. So it's kind of hard to do exact math, but you know, two to 300, at least 300 million users potentially could be. My skepticism on these things is as follows. There are a lot of things that these AI devices or autonomous driving devices, they can do.

But do we really need them to do those things? Do we want them to do those things? And are they worth the incremental cost to me, the user, to be able to do something that, oh, look, we can do this. Well, maybe I don't really care with us. I'm fine doing it. You know, somebody in the car, sometimes knobs are actually better, you know? This is a little different than nuts. Yeah.

But look, this is the decision CTOs and CIOs and the people who make purchasing decisions for large corporations like ours. Is it worth that cost? Or is the productivity benefit going to be worth it? We just don't know. We haven't tried it yet. We don't know if it's going to work that way. I will also notice, look, Google.

Google is working towards the same thing. Microsoft very much still ahead of Google when it comes to not just announcing new products and new features on the AI front, but making money. Here's how we're going to sell it. We haven't heard that from Google yet. That's a great point. Steve, as always, thanks. Thanks.

We appreciate it. Steve Kovac. Still ahead of power player to weigh in on the bank earnings. We mentioned at the top of the show. B of A's Brian Moynihan will join us live in a little while. But first, Goldman upgrading Yelp, getting bullish on the food review platform based mainly around its improving ad tech. The analyst joins us next to discuss. And as we had to break, a quick power check.

On the positive side today, Mosaic, another bullish call from Goldman maintaining its buy. Cutting the price target, though. A new USDA report says nearly 60% of corn crops are in good condition. On the negative side, prologists highlighting rising rents and dipping retention rates in its quarterly results, one of the strongest performers in recent years down 4% today. We'll be right back. Shares of Yelp are up today, almost 2% after a bullish call from Goldman yesterday. They upgraded the stock from neutral to buy, raise the price target to 47 from 38. It's just under 43 right now.

They're citing stable and rising local advertising trends. We love a trend like that. And joining us now with more is Eric Sheridan. He's an MD there. Eric, it's great to see you again. Welcome. Thanks, thanks for having me on today. So local, you know, here's why this. catches my attention so much. By this point in the cycle, we would have thought a lot of deceleration in local and small business because of super high loan rates. So what do you see

here that says actually there's a lot of strength? A couple of things. Number one, there's not only just local into local, but there's also national dollars into local. And local ad dollars generally are the ones that still are at the lowest percentage of mix, having moved online versus offline. than we see in other aspects of digital advertising overall. So we see a secular growth tailwind of dollars, believe it or not, still moving offline into online. Then we see new pockets of opportunity of local dollars finding local consumers and national dollars finding local consumers.

And then on top of that, we have a company like Yelp that's rebuilt many of their ad products and much of their ad tech stack to address that opportunity. Therefore, we see upside from a revenue growth perspective. Sure. and when we talk about that upside, you know, you raise your price target by about $10, but how big of a deal is this really? In other words, is this just, okay, this business is a little better than we thought? I mean, to change it from a neutral to a buy, so just again, kind of like we were talking about with Pinterest and Mark Mahaney last hour, maybe you think they're at an inflection

point. Yeah, and we do. And I think what we typically do when we try to change ratings like is to look not just at the absolute price target, because obviously things can be volatile in a given day. We also try to take a longer term view and look at the risk-reward skew. This was a stock that if you actually zoom out over the last couple of years, has mostly been stuck in the low 30s as a stock for years in the backdrop of a wildly bullish digital advertising market. And this company was in transition from what it was, a Web 1.0 company that was predominantly tied to desktop web.

And now they have new ad products, a more mobile focus, not just the old restaurant business, but also a services business inside their revenue mix. So you come out of an investment cycle. You open up revenue opportunities. You see a secular growth tailwind around local. We think it's the right combination of both upline momentum, as well as incremental margin momentum that looks underappreciated, not just for the quarter of the next six months,

but arguably looking out well into 2024 and beyond. We tried to make that point yesterday. How does Yelp make money? What are its revenue streams sort of by, different sizes and and and which ones are going to grow fastest. It's really a function of advertisers trying to reach consumers on a local level. And basically these guys having the impressions and service requests that advertisers and service providers want to find to be able to meet their dollars with middle to bottom of the

funnel purchase intent on a local scale. That really is the best way to describe. So I'd go on Yelp and I'd say I want to find a plumber, or I'd go on Yelp and I want to find a Mexican restaurant, or I'd go on Yelp and I'd say I want to find a good shoe repair individual. All examples that I would back you on, yes. Does this extend to any other companies, Eric? Well, broadly the point we tried to make in the note yesterday away from just the upgrade, and it sounds like you've been talking about digital advertising today as well, is that despite the continued debate out there among investors about the state of

of the consumer and the state of the economy. The digital advertising economy, as we did work across all the names we cover, showed a lot of momentum in the June quarter. So elements of brand advertising snapping back from some of the cuts in Q4, elements of direct response advertising, especially in key verticals like e-commerce and travel, remaining very stable. Even some of the financially driven interest rate sensitive sectors like housing and all those

surprise this to the upside and what we hear from ad agency. and advertisers in the quarter. So there does, away from just the Yelp call, also does seem to be a bit of a wider all-boats rising narrative playing out digital advertising that really was reflected in us changing numbers and price targets to the positive for most of the names in the subsector that we cover. Yeah, and you also mentioned Pinterest, Google as well. It's fascinating. What a world versus where we thought we'd be in January. Eric, thanks so much for joining us today. Thanks for having me on. Eric Sheridan with Goldman.

All right, coming up, burying the lead, new reports emerging that lead-lined covered cables in the ground underwater on overhead poles are widespread across the U.S. left behind by telecom giants like Verizon and AT&T. We've got the details in today's tech check and what the risks may be. We'll be right back. Welcome back to Power Lunch. Everybody stocks higher once again. The Dow up nearly 350 points. Bon Yield's falling.

Let's go to Rick Santelli in Chicago. Hi, Rick. Hi, Tyler. Indeed, it was a very interesting morning. At 8.30 when we saw retail sales, an early look at June, the numbers weren't stellar until you ended up with the control number, up 610s. That was pretty good.

And the revisions, which hit the screens a bit late, were also fairly positive. And as you look at a two-year, you could see at 8.30 Eastern, all that volatility. We traded down to round 465. Then the revisions hit, and we started to move higher. And then later in the session, maybe about 1130, 12 o'clock Eastern, when we finally traded above that 4-74 high yield established during the date at 830, that's when the market started heating up across the entire curve. Let's move towards 10 years, shall we?

If you look at October 1st to 10 years, not the first time I've looked at this chart. We have not traded above that fall high yield. However, let's look at the dollar index. See the way the dollar index has been moving down. Right now it's hovering darn close to 15-month lows. The reason, obviously, his interest rates move down, not only on the long end but on the short end, and we know that Fed Fund futures reflecting the end of the line

pretty darn soon with respect to the increase in rates. Not good for the dollar. However, overseas, if you look at the UK, look at their guilt. Their guilt did trade higher than their fall high yield close in the 10-year guilt. Why? Because their inflation keeps getting hotter and hotter.

ours gets cooler and cooler. So what is that done? That put the pound nearly at 15.5 month highs against the greenback and underscores how not every country dealing with inflation's dealing with it at the same speed. Kelly, back to you. That's a great point. A lot of talk lately about the uneven economies, Rick, thanks. Let's turn to oil now. What does it mean for crude, which is up by 2% as we head into the close of trading? It's been much more bullish the last several weeks, I'd say. Maybe not last week, but. Yeah, so not enough to push it above that $80 range, but it certainly feels like there's been a little bit of a sentiment shift. As Rick was just talking about the dollars at 15 months low, so that is good for WTI. There's also hopes in the

market about more stimulus out of China. And then also some signs that Russian seaborne exports are falling. They were down at a six-month low. But I do think we need to see a confirmation of that trend, because as recently as mid-May, they were still very high. So that is injecting some optimism, but I think TBD on that front in terms of how Russian exports are. Take a look at Nat Gas because it is at more than 5% today. Now, I would have thought that yesterday we would have seen a big move to the upside, given the record temperatures, but several traders told me that it really is all about that storage level being about 14% above the five-year average. And so the market is just not tight here. And while the rig count has fallen off a cliff, and so that's why we didn't see

the big jump, you know, over the weekend as temperatures rose. Now, that 5% or 4.6% gain today, Dennis Kisler over at BOK Financial said this really is about shorts covering their position. since the heat wave is going to extend. Nobody really wants to be on the short side here, but it's not necessarily some sort of, you know, shift in sentiment is what he would say. So supplies are ample. Yes, and particularly in Texas, solar has performed very well.

Wind has also performed well, meaning there hasn't been a surge in demand for gnat gas because those other types of generations are very much online, holding up very well in this type of climate. The sun is very strong down there, and so solar is doing well. Wow. It's so hard to predict. Yeah. You know, and yet we all have to pay the,

the output. The price is PIPA. Thanks. We appreciate it Pippa Stevens. Let's get to Pippa. See, I realized I started to read. You have... That's all right. We're going to Christina Ports and Avelas now. There she is. Are you sure? News update. Take it away. Okay. Let's start. Attorneys for Donald Trump and prosecutors are in court today for a pretrial hearing in Trump's classified documents case. They're expecting to discuss how they'll handle classified material in the case and how it will be presented at trial. The hearing is also expected to include arguments about the timing of the trial, Trump's attorneys have argued it should be held after the 2024 election. Trump has pleaded not guilty in this case.

President Biden hosted Israel's President Isaac Herzog at the White House today. He reaffirmed America's commitment to the country. Herzog's visit comes one day after Biden extended an invitation to Prime Minister Benjamin Netanyahu to come to the U.S. in the fall. President Biden has been critical of Netanyahu's plan to limit power of the country's Supreme Court. Lionel Messi joined his new team on the field for the first time today during an inter-M Miami practice. This soccer star finalized his contract with the MLS team this weekend. He's expected to play in his first league game on Friday.

Heard the tickets are really, really expensive. Kelly, back to you. I bet they are. Christina, thanks. Still to come on Power Lunch, Banks coming in strong to what was supposed to be a rougher earnings season. Morgan Stanley's James Gorman telling CNBC earlier that inflows are incredible. Bank of America reporting solid results in 19% boost to profits, and CEO Brian Moynihan joins us next here on Power Lunch. Welcome back to Power Lunch.

Some impressive results from the major banks today, and their stocks are powering the market higher. Bank of America shares jumping about 4% after second quarter earnings beat on both the top and bottom lines. Leslie Picker joins us now with Bank of America CEO Brian Moynihan in a first on CNBC interview. Leslie? Kelly, thank you. And Brian, thank you very much for being here. for you, Bank of America reporting. It's most profitable first half of the year, except for 2021 when there were large reserve releases, higher for longer rates, clearly a big tailwind

for you and your banking peers. You have some of the lowest funding costs out there, though, and loan demand has really been steady. What's the competitive dynamic right now with regard to deposits and loans right now, and how is that impacting your pricing decisions moving forward? Well, Leslie Fierce, thank you for having me. And I just want to thank I've got 200,000 plus teammates who do a great job of a customer. And that's our key competitive advantage. And they bring in loans and deposits and fees and trade well. And so if you think about what's going on now, obviously, as the rates for excess cash,

cash people don't need to run their household, became more competitive, those went in the market. And frankly, that's what some of our wealth management flows or our Merrill Edge flows are putting those deposits in the market. But the important thing is we have a huge amount, trillion, you know, nine of deposits, and those deposits are very stable, and they represent a dominant part of the money that people move to conduct their daily lives, and therefore they're very low cost, because that money is always in motion. If they're trying to get yield on money, they take it and put it in direct Treasury holdings and money market funds, and we do that for them.

So our competitive dynamics different than other people who are more CD-funded and used deposits of core funding. we have a trillion eight eight of deposits and we have a trillion 40 of loans and that difference is excess and it really represents people's money who's in motion and do it conduct in their daily lives speaking of money and motions consumer click consumers clearly seem to be spending here growth in line with inflation for credit and debit card spending during the quarter we did see that softer CPI print I know inflation had been a headwind for consumer spending you know in the past but that seems to be abating a bit still credit card loss rates were up about 14

basis points quarter over quarter, although still below those pre-pandemic levels. So, you know, I'm just curious kind of how you'd characterize the health of the consumer at this point. How much do they have left in those excess savings that you were describing a bit ago? So let's sort out two things. From a credit cost standpoint, you're seeing the activities of consumers move back to where they were. But everybody talks about we're normalized into 2019 pre-pandemic, people had to realize for our company, the 2019 charge-up rate was probably a 40 or 50-year low. And so we are at levels that are very low credit risk, very low credit costs. And we were doing a billion dollars of provision in a quarter back then. And, you know,

we're doing a little bit more than that now, et cetera, given a recession predicted ahead of us. So, you know, the normalization is normalization is pretty good times in banking system. But let's broaden back out. If you think about the U.S. consumer, what we see with the six 60 plus million consumers we have is the rate of their spending, not only their debit and credit cards, which is the 3% you mentioned, but across all the ways they put money out every day, is growing at about a 5% rate through the second quarter and, frankly, about the same rate for the first half of July here, which is half the rate it was growing, you know, last quarter or end of last year over the prior quarter a year.

Now, that's showing that the consumers more in line with the low inflation, lower growth economies that were there in 16, 17, 18, 19, 19, when the Fed raised rates and inflation, was low. And so that gives me a view that inflation is getting under control. And you saw that in the spending numbers today, that you see that in some of the inflation numbers over the last few weeks. And that's good, because in the end of day, it'd be great if we could get this inflation tamed and still have this kind of unemployment at 3.7 percent or whatever the unemployment rate is. That is marvelous. We'd have an unemploymentless slowdown, which would be a fantastic outcome. So the consumers are spending. They're employed. They're earning more money. And they do have a lot of

money in their accounts left over. The question is, if times get tougher, will they be less employment, more unemployment, will there be more layoffs and things like that? Right now, the activity has taken place so far as been absorbed by the economy, and we'll have to see that happen. Remember, our team, the Candace Browning Platinum team lead, our research team, which is terrific, still has us having a slight recession in the early part of 24, but they have moved that out again, reduced it to two quarters and not three, and lessen the depths of it to basically a soft landing more or less 1% down in one quarter or a half percent down in the other quarter. So they've continued to get more or less conservative right over the word be on the future recession.

But they still have a recession predicted. I have to ask you about your capital markets and investment banking backdrop because broadly constructive during the quarter, a big jump in global markets for your firm better than many of your peers even. Do you think the industry is past the trough here? And if there is a potential recession next year, how is that impacting client confidence in terms of doing more dealmaking and issuing more debt and equity and doing more trading? Let's separate the markets and trading side of that Jimmy DeMara team have done a great job. As you know, Leslie a few years ago, Tom Montag was still leading the group. We made a major investment, increased our size.

But we did it in a way that we knew we'd have more of an annuity business there, that we'd have a steady growth and profits. and they've done a great job and they just had the best second quarter, and the best first half they've had in a long, long time. And that's terrific. And they made money every trading day, and that's what they're supposed to do. When you go to the investment banking side, you know, the reality is that we, it looks like we outperform the market and that we had a better year-year comparisons and quarter to quarter comparison.

And Matthew Coder and team have done a great job. But the fee pool shrank a lot and we maintain our share because we have a natural advantage in our customer basis. What we do see in that business is as as the market is stabilized, as the view is the defendant is closer being done, if not done, on rate raises. As the market settles, we're seeing more activity. You saw some deals get done this quarter. You're seeing more discussion, a lot of pipeline, a lot of activity.

And so we feel that if the stability continues to hold in the market, you'll see that activity come in as you move out of the summer into the fall. And that's important because that capital formation is what will lessen the probability of a recession out in the future because that capital formation, capital spending is part of the drill that, makes America great. Let's talk about your balance sheet because a key topic in the industry right now is regulation and the regulation coming down the pike. You have Fed Vice Chair Barr who gave a speech a few weeks ago outlining new capital rules that would require two percentage points more in capital for the largest banks. You are among the largest banks. Basel 3 endgame. That could be

disclosed in a few weeks, which it also could have an impact on capital. I know there's a lot of uncertainty here. There's a lot of time for these to really get put in place. But at this point in time, what do you think are some of the major ramifications that the industry could face from higher capital requirements at this point in time? I would hope as people consider the rules that we realize there are two or three things. One is we have to have a level playing field between us and European companies. And that's not only important for large banks and everybody talks about that. But the regional banks who lend money, if their capital levels go up and they're lending to a person in the supply chain for not a company U.S., And there's the same supplier that can supply car seats in Germany or France.

And they have a lower cost of capital in their banking system, a lower amount of capital required. They can lend at lower rates. And therefore, business will start to move out of the U.S. So there are ramifications for increasing capital levels, not only for large banks, for all the banks, because Basel 3 applies to basically everybody. So we have to be careful that we have a level playing field. And if you look at the balance sheets of the U.S. companies, they're stronger, they're more liquid. and frankly have a higher amount of equity per square inch than the counterparts around the world. Yet our capital ratios are reported lower because they use advanced and we use standardized

and we have SCB and all these other things are constrained. So getting this right is tricky. That's one thing. The second thing I think is to think about the possible ramifications of this, which is in our industry, half of the assets that we lend to are already outside the industry, whether it's mortgage loans or home loans and things like that. and even commercial credit with the private capital, private lending funds. Is that a good thing or a bad thing?

I think in terms of maintaining the order in the business, it's a good thing that the banking system is there to provide the cushions and the shock absorbers and be there like earlier this year or during the COVID when we had $70 billion of loans come on the books in a matter of weeks there to support that, and I think that's important. And I think, you know, so I think getting that's right and getting a balanced is important. At the end of day, whatever the rules are will comply with the rules. And we're sitting with 11.6% capital against a requirement that's much lower than that.

And when these rules come out, we'll figure out what it means to us and go and continue on. But I'm pretty confident earning 20 basis points plus a quarter, even when we pay a dividend, even when we buyback stock, anything I've heard about would be in a range that we'd be able to absorb. But I'm still not sure it's the right answer for the U.S. economy. And that's what has to be thought through. This is an international standard. It's a trade negotiation as much if it's a banking regulatory organization. We've had multiple people in the role that vice chair bars in and in the chair role, saying these companies have adequate capital.

So the question is why do we need to change that? And that's the question that will be debated hotly after the rules come out. Yeah, you can expect a lot of debate on that front. If I'm understanding you correctly, you believe that higher capital requirements would cause a pullback in lending, would cause shrinking of balance sheets among the big banks. And you think that could have ramifications for the overall economy? I believe we may have just lost his shot. Unfortunately, I will have to get that answer from him at a later time, and we will be sure to share that with you.

Kelly, I'll send it back to you. We like to take it right up to the wire. Right up to the last window there. It must have gone away at 40 past the hour. Exactly. The window's closed on us. Great stuff, Leslie. Thank you very much, and our thanks, of course,

to Bank of America's CEO Brian Moynihan. And it was a good question, too. I wanted to hear the answer. All right, coming up. Trouble for the telecoms. AT&T shares downgraded yet again after that Wall Street Journal investigation uncovered toxic lead cables left behind by America's phone companies. T or telephone now hovering near 30-year lows in the market falling below $15 a share.

We will discuss that and more when Power Lunch returned. Shares of AT&T just off their lowest closing price in 30 years as a recent Wall Street Journal investigation into toxic lead cables and a series of downgrades way on that stock. Deer Bosa digs into that for us in today's tech check. Dider. Tyler, 1993 was the year Whitney Houston topped the Billboard 100 Jurassic Park won the box office. Sign followed won an Emmy and AT&T traded at 13 bucks a share. Three decades later, AT&T is back at those levels after a journal report over toxic lead cables left behind by telco companies. AT&T has contested the report calling the testing methodologies flawed, but scrutiny has begun

with lawmakers. They're asking for more details and investors as well who, are trying to size the cost and litigation potential. Now, this is the latest catalyst pressuring shares coming on top of repeated downward revisions for AT&T's wireless and fiber growth business. And that slowdown in subscriber growth, to be fair, guys, Verizon also has a similarly ugly chart of returns over the last three decades. And it's also getting hit by the Lead Cables report. So you're seeing them come back a little bit today.

But some investors, they are looking at them to buy them close to historically. lows. And another reason may be their dividend yields. AT&Ts is 8.2% versus the S&Ps one and a half percent. But guys, it's the uncertainty here that's bringing these stocks further down. No one knows how long this is going to last and what the costs are going to be. These are legacy telephone companies that we're talking about here. Are any other companies like cable companies afflicted by the same issues or not? Yeah, they are. There's other companies that have been selling off in this. There's frontier communications. There's Lumen technologies that have been affected by this report from the Wall Street Journal. But, you know, really we focus on AT&T and Verizon,

AT&T in particular, because it is so widely held, Tyler. It's in mutual funds. It's in hedge funds. It's helped by individuals. And the idea that it has gone nowhere in three decades. It hasn't created any value for its shareholders. It's pretty remarkable. And of course, it was AT&T was the phone company. Verizon was a portion of the phone company going. It was Bell Atlantic. It was C&P telephone. It was a lot of other things. But these were all branches off the AT&T tree. You know what? They've also tried to become much more than a phone company, right? Part of the reason that hasn't created value is all of these sort of doomed acquisitions the company has gone after. Remember, at one point, it tried to go after T-Mobile. There's a huge $3 billion

dollar breakup fee. There was direct TV, of course, and Time Warner, who could forget that, $85 billion now, you know, offloading. Yeah. So part of the reason it's huge debt load as well because of those. But it's, you know, these talk about some of these are kind of cables running through the sea or through Lake Tahoe. Some of these are cables that just are hanging over bus stations and, you know, near where children are going to elementary schools. Now that this is highlighted, there's, it's going to, they're going to have to remediate it somehow. And I don't know exactly what precedent there is Deirdre, but I think it's going to be a costly one. Yeah, I mean, there was, I guess some precedent that some people have pointed to was this

issue over lead paint. It involved Sherman Williams, Canagra Brands and NL Industries. And it was ultimately, I think, a more than $300 million dollar settlement over lead paint lawsuit. But it actually took years to resolve. So on maybe the flip side, it could take a very long time to figure this out. So that cost could be in the future. But that's the one sort of present that I've heard read about. All right. Dear Dra, for now, thanks very much, our dear Deerbosa. Still ahead, some international flavor. Chipotle signing its first ever franchise partnership to open locations in the Middle East. The shares are up more than 50% this year. We'll trade it and other movers of the day and three-stock lunch next. Welcome back. Time for today's three-stock

lunch and we're looking at some of the movers. There's plenty to pick from with this big earnings week. We'll start with Lockheed Martin, which is actually lowered despite reporting a second quarter beat and raising its full year guidance on strong demand for military spending. Shares are down about 3% today and down 6% on the year. Remember defense? That was supposed to be one of the big trades this year. Ava Ados is here. She is Chief Operations Officer at ER shares.

It's good to see you, Ava. What would you do with Lockheed? I think it's a hold. So what's interesting with this company is that they have major production cycles, major deliveries that are visible many years in advance. So there are no major surprises here. I do not see any major cat. is moving the stock price up or down. And they have $150 billion in revenue backlog.

So it's a good, steady, slow and steady company, a good company to own for the long term. So if you're in it, it's good to continue holding it. If you do not own it, I do not see the main reason why you should rush into it. A good long-term hold, I would say. All right. I'm very hungry. I feel like rushing into a Chipotle, but I don't know. It's announced today it's made its first ever development deal to expand in the Middle East in partnership with the Al-Shiya group. The stock is up more than 50% on the year. Do you like Chipotle as a stock?

Yes, definitely a buy-form. In fact, we've owned it for many years and it's one of our top performers. It's up, as you said, about 50%, since March, it's up 50%. Top-performing restaurant stock here today. In fact, many people don't realize it. It's the second largest restaurant stock after McDonald's. And so this is a company that was able to grow its Ibit margin from 9% to 19% last year. And that's regardless of the fact that the industry was beset by both food price increases and labor issues.

This is also a company that has by far the biggest Ibit growth of 60% at 6.0 compared to 4% for the competition. The competition is suffering. They're able to maintain their edge and take advantage of the fact that the competition is not doing good. They're growing their top line, cutting costs, widening margins, definitely a buy for me. I still don't think Kava's going to be the next Chipotle either. But we'll see. What about Pinterest? We talked to Mark Mahaney last hour.

He upgraded the stock to outperform. He sees an inflection point. Do you? I disagree with that. I think it's a sell. I think it's a sell because, So although I would say their gross margin is above average, which I like, however, their Ibit margin is minus 11% compared to 6% for the industry, and their SG&A costs are out of control. CEO compensation is out of control.

So in fact, the CEO had received about half a billion in compensation in the last three years, although the stock price was decreasing. And so this is not fair for their employees. It is not fair for the shareholders. I do not see any reason why to justify it. I think that this is a company actually right for activist investors to comment. It's a sell for me. Jeez. We're going to have to have a bull bear debate or something.

You know, Ava versus Mark all over Pinterest. Ava Ados in all seriousness, thank you so much for your time today. We really appreciate it. And still to come, Europe's new economic reality, the French, Drinking less red wine, Italians rationing pasta, and Germany's consumption of meat and milk falling to a three-decade low. Recession taking the romance out of that European way of life. We'll discuss that and much more when Power Lines returned.

Welcome back. Three minutes left in the show and several more stories we want to run through today. So let's get right to it. Starting with Europeans facing the prospect of being poorer, especially relative to Americans for the first time in decades. The Wall Street Journal highlighting three main reasons. Their aging population values free time over earnings that's leading to some economic stagnation. COVID and the war in Ukraine, upending global travel and supply chains and raising electricity bills. And lawmakers steering economic stimulus to employers over citizens, leaving people without a cash cushion when inflation grew out of control.

Tied two other data points I'd mention from the piece. Europeans are on average now poorer than every U.S. state except Idaho and Mississippi, the average EU country is. In the U.S., the average age right now is 38 years old in Germany. 48. Yeah. So it's a pretty, it's pretty sad, honestly. You look at income growth too in the article, and the U.S.'s income growth, which we sometimes complain about, right. Remains much, much, much stronger than in those European countries you just mentioned. In fact, income has actually declined, we're looking at a period 2008 to now, has declined over those years in many cases. So it's income growth. It's also growth of the overall economy. Our economy has grown since 2008,

like 80% Europe's by single digits maybe. And I wonder if a lot of people will notice this firsthand when there are so many Americans are in Europe this summer. Yeah. Well, I just got back from Europe. It's quieter. It's pleasant. Yeah. That I do have to say.

Anyhow, all right, as tech continues to dominate the market, some mutual funds are running into a diversification problem. Major asset managers like Fidelity, BlackRock, others being blocked from buying more shares in popular stocks because of diversification rules. This, as they struggle to keep up with indexes that are done, dominated by a few tech names. For example, Fidelity's Contra Fund,

can't buy any more meta, Berkshire Hathaway, Microsoft or Amazon, because they made up a combined 32% of the portfolio. Technology Opportunities Fund at BlackRock, can't buy any more Apple, Microsoft or Nvidia, JPMorgan's large-cap growth, over the limit for Microsoft, Apple, Nvidia, and Alphabet.

So if you want to call yourself diversified, you'd better be diversified. Yeah, no, this is, it shows you how much has changed in this market. And the battle over Taco Tuesday is settled. We told you about this trademark infringement claim when it first happened. But restaurant chain Taco Johns will no longer fight to defend its trademark of that phrase. Taco Bell said it was too generic.

Anyone should be able to use it. I think LeBron James was involved as well. Anyway, now the coast is clear for Taco Tuesday. And you can now do this promotion in every state except. Except New Jersey. Because there's another copyright holder, right? We will have to look into who this is and go there. Maybe tonight, actually.

Let's go find them. All right. Thanks everybody for watching Power Lunch today. Enjoyed having you. Thank you for your time. Enjoy your tacos. Dow's up 357 points right now. Closing bell starts right now.