Power Lunch - Rate Checkmate 10/4/23

Episode Date: October 4, 2023

There’s one main issue for markets right now: the sudden rise in bond yields, and the impact it’s having on nearly everything in the economy. We’ll look at all the angles of how the move is impacting your money and your investments. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch, everybody. Literally alongside Kelly Evans for a change. I'm Tyler Matheson coming up. There's one main market issue right now, and that is the sudden rise in bond yields and the impact it is having on the markets. We will look at all the angles of how this move impacts your money and your investments, Kelly. And let's take a look at stocks right now because the Dow has given up its gains. It's been down 130. It's been up 130 and we're down 50 right now. The S&P up 6. The NASDAQ actually driving the gains we're seeing. today up 83 points. All of this as the yield on the 10-year has pulled back from this morning's new highs after the 80P report showed much less hiring than expected last month. There's the 10-year right now just under 4.75 percent. And of course, we are now waiting for the big government jobs report on Friday. All right, we've got all the market ripple effects covered. Babazzani looking at what this could do to buybacks, which has, of course, been a balloon under stocks for a long time. Diana Oleg on the impact on home builders, Rick Santelli in Chicago, talking to traders.

Let's start, however, with Dominic Chu on the dollar. Dom? The value of the U.S. dollar has risen by roughly 10% over the last three months. And with an estimated 40% of S&P 500 revenues coming from outside the U.S., that rising U.S. dollar could be a potential headwind for those U.S. companies and their profits and revenue reports coming up in the coming weeks and months. Now, with regard to some of the companies that could face some of the biggest headwinds, we looked at some of the companies that, again, have the highest percentage of their revenues from outside the U.S. borders. Now, according to data from S&P, Capital IQ, some of these names could be weighing in commentary-wise on the effects of the stronger U.S. From a consumer standpoint, Estee Lauder, cosmetics, 77% of their business outside the U.S., Coca-Cola, 64% of theirs outside the U.S., and Procter and Gamble, big consumer.

products brand warehouse, about half of their revenues outside the U.S. Now, there's also that technology, consumer discretionary media type trade. Many of those companies have a lot of their revenues outside the U.S. borders. Take booking holdings from a travel standpoint, 88% outside the U.S. Tesla gets over half of its revenues outside the U.S. and then Microsoft tech behemoth, responsible for a lot of the profits and revenues in the S&P, about half of its results outside the U.S. as well. So when it comes to the headwinds for the U.S., dollar and that 10% rise that we've seen lately, check out some of those names as possibly being more affected. I'll send things back over here. So remind me again, this stronger dollar

means what for the revenues and profits and hence the stock prices of these companies? So when you record revenues outside the U.S. to take those profits and revenues and pull them back into U.S. dollars, you'll have to buy those at higher dollar values, meaning you'll get less dollar profits back. dollars back than you would before because the value of the dollar is so strong. And when you have to buy more expensive dollars with cheaper euros, with cheaper yen, with cheaper Canadian dollars, Mexican pesos, whatever it is, all of a sudden that starts to have a real material effect on your financial statements. Is there anything, Dom, you say, so we spoke to Carter Worth just at the end of the show there,

and he was actually thinking, okay, the dollar's going to weaken now. And I said, well, undoubtedly then you think the stock market's going to run into New Year End. He said, no, no, not necessarily, because we've seen so many odd beds. fellows in trading markets already this year. And he thinks lower on each could be one of them. And it's not just that. The more recent precedent that we've seen, Kelly Tyler, is the massive run-up that we saw in the value of the U.S. dollar post-pandemic from about the early part of 2021 up until the cycle highs that we've seen right now in 2022 this past year. Remember, from those 2021 lows to the 22 highs, you're talking about a roughly 28% jump in the value of the dollar.

And yet the stock market seemed to rally in the face of that. So there are a lot of cross currents, as you point out, Kelly, because there are so many different factors at play. You can't single out just one. But the dollar rising right now is just one of those weird transitional factors for a market that's in a state of flux right now. Great point. Dom, thank you very much.

Tom Choo, we appreciate it. What about stock buybacks? For years, they've been helping to prop up the market and boost earnings in the process as well. Could this rise in yields threaten that? Let's go to Bob Bassani at the New York Stock Exchange. Bob? You know, Kelly, we've been talking about how rapidly rising rates are playing havoc with companies that need to borrow money, dramatically raising the borrowing costs. So another knock-on effect of higher rates is that discretionary buybacks may be reduced because companies

may feel the need now to hoard cash rather than distribute it. Here's an interesting fact. Corporate America is sitting on $2.5 trillion in cash. Companies with a large cash flow hoard are now getting significant return on that cash by investment. in short-term debt, and that may also influence buybacks. So these buybacks were notably lower in the second quarter compared to the first quarter. That's a change in trend. This was largely due to the banking crisis. The question is, the third quarter, we're waiting now for the third quarter numbers to come in.

They come in with the earnings reports. But Howard Silverblatt at S&P, who compiles all of this data, tells me he expects discretionary buybacks to be lower in the third and fourth quarters, partly due to higher interest rates, which may cause companies with discretionary buybacks. to pull back a bit to hoard cash rather than distributed. Right now there are a few dozen companies that are sitting on billions of dollars in cash. This cash is very typically invested in short-term debt instruments that generated almost no income in the past, but now suddenly these companies can get 4 to 5 percent returns on that.

This is very significant when you're a company like Apple. Look at these numbers here. Apple, Alphabet, Microsoft ExxonMobil, Apple has over $160 billion in cash. in cash. Suddenly, these cash reserves are generating significant income, four or five percent. Now, this is not necessarily a reason suddenly to be bullish on cash-rich companies, but it does provide a modest cushion against a weaker economy. In other words, it's helping them now. The implication for earnings is that buybacks are sold to investors primarily as a way to improve earnings per share. So a lower level of buybacks potentially would be a modest negative

for earnings. Very interesting scenario. Because you take that stock out of a circulation, you are calculating earnings over a smaller, is it denominator? Yes, it's a denominator. And so you get higher earnings per share. And that's one of the reasons why these things are so popular among executives. Am I not correct? Yes.

And there's been a lot of debate about the fact that some of these buybacks don't necessarily reduce the earnings per share because they give options on the front end. So it's a giant hamster wheel. But for those companies that have been reducing their share count, Apple is one of them, they're a big buyback monster, potentially stopping or slowing down buybacks would be an influence on earnings. Where do companies keep their cash when they have $160 billion in cash on hand? I'll give you an example. The Apple of the $160 billion, about $60 billion is in very, very short-term instruments, less than a year. The other $100 billion is, generically, I can break it down even more for it if you want,

but generically, instruments above a year, but usually less than two years. It's right in that. But a company like Apple, with $160 billion, will have a very wide mix of different kinds of securities. But generally, it falls into two buckets, below one year and usually below two years. Generally, treasury? Or what? Yes, generally, yes. But there are mixes here.

And if people are interested, I'll put up on the website what Apple's actually looking. like. I'm simplifying this all a little bit. But the important thing is, they used to generate nothing at all. Yeah. But now, no matter what it is, any short-term instrument is generating 4 to 5 percent. Do 5 percent of 160 billion. That's $8,9 billion a year for nothing. They used, it's just free money. Didn't exist before for Apple. All right, sir. Thank you very much. Bapagani. Rising rates have already hit the housing market, as you surely know. Diana Olegh joins us now with more on the housing stocks. Hi, Dai. Hey, Ty. Yeah. And I want to start, of course, with mortgage rates, which are

driving the stocks. After a big jump yesterday, the average on the 30-year fixed moved a tiny bit higher again today to 7.74 percent. That according to Mortgage News Daily. On September 1st, that rate was at 7.08 percent, so a pretty sharp move in just one month and really, also in just the last week. Builders did sell off heavily yesterday and are back in the green today, but if you look at the one month, you can see the toll these higher mortgage rates are taking. Builders had been benefiting from the lack of supply on the existing homes. side, but affordability is kind of crushing that advantage now. Home Builder's sentiment is in negative territory for the first time in five months. The home improvement space isn't doing any better,

names like Masco, Sherlin Williams, and Home Depot all down since the recent jump in interest rates. All that red, also bleeding out to the home selling space with Zillow Group hit particularly hard yesterday and for the month, along with Compass and Redfin. Now, all of these sectors are faring worse than the broader market as they are heavily dependent on interest rates, which, As a reminder, the 30-year fixed was at 3%, three percent, three, just two years ago, Tyler. So what does this mean for these stocks? I mean, they had a rough year last year, a pretty good comeback earlier this year. What's ahead for them?

Well, look, it depends entirely on the mortgage rates, because we did see the builder stocks start to do very well over the summer. They were reporting really incredible earnings, and again, that was because there's nothing for sale on the existing home side. What's interesting is we're starting to hear about more sellers putting their houses on the market right now, and that's because home prices have started to tick up again, so people want to cash in on that. But it's definitely not enough to make it supply and demand imbalance level out. So it's going to take a lot of time, and we could see rates head up toward 8%. So the question is, when does it really hit that mark that the entire market stalls? Very interesting.

Anecdotally, I know of a person in the town where I live who has put their house on the market now because of two things. The market is robust. They are afraid that rates are going to go higher in the spring and that in the spring, people are going to, which is a more high traffic time, there's going to be more inventory on the market in the spring. So they're putting it on at what is seasonally and traditionally a low point in market activity. But I'll add to that. A house in DC, I know, just got 10 offers last weekend. Wow. Ten offers. Wow. Astounding. Dianne Olin. Thank you. Sure. I was going to ask where your friends are going. Why to give up that mortgage rate or that paid off house? It's a long story. It's a long story. But presumably not taking out a new 8%. Ultimately, they're going to relocate out west.

Yeah. And they want to release some of the capital. That makes more. About the only people who are eager to put their house on the market, you know, for that reason. Let's check in with Rick Santelli in Chicago for the very latest on rate moves here. Rick. You know, it's been one heck of a three days thus far. We're. today. Look at the charts from 460 on Monday to an intraday high before our time zone at 488. 28 basis points. And twos to tens, now the least inverted in a year. You know what else is at a year extreme? The distance between 10-year U.S. and 10-year boons is the widest it's been in a year and something else. You know that reverse repo parking lot in December? It was $2.5 trillion.

You know what it was today? A little under 1.4 trillion. the smallest in two years. And they're still paying interest on those. So why did they move? Because holding any type of long-dated treasuries and outside of T-bills, nobody wants it almost at any interest rate. Let's go talk to a trader. Dave. Rick. Obviously, you've had a wild week. Tell me what your thoughts are, what you've seen, how the equity markets and the scare of interest rates is moving in your world. Well, I think that was the inverted yield curve. I think everybody thought the first of front end of the curve was going to come down. They didn't see it flattening out as in the back end going up as hard as it has. So I think that caught people off guard. It's kind of like

one of those things where wherever it's going to cost the most pain for people, that's what tends to happen. And I don't think people saw that. Yeah, no, bear steepening, with rates going up, prices going down and steeping the curve. That's a wild dynamic for sure. You know, the president at one point had a whole group of Nobel economists say that the government spending wasn't going to cause inflation. Any thoughts on that at this? Well, it seems like everything the government and the Fed comes out and says is 100% wrong. For the last 70 years, every time the yield curve is inverted, we've had a recession. They're like, oh, no, just trust us, it'll be fine.

When was the last time they were right about anything? Well, you bring up a good point. Now, we could debate as to the accuracy of inversions, but they're definitely more accurate than they're wrong. But here's the issue. Many are saying to me today that the reason that interest rates have gone up is because the economy is doing well. I have a thought about that, but before I tell you mine, I want to know yours. When you are constantly for 10 years giving out free money, eventually something's got to give, and I think it's starting to give now. I would agree with that. To me, the least plausible reason for interest rates going up is a good economy.

I wonder if this world's gotten politicized. You know why it's going up? Supply, debt, debt, debt and deficit. And the fact that if we always elect Santa Claus, you're never going to have anybody control. spending. Any final thoughts? Last time I was on, I basically called the top of the market. No big deal. No big deal. Now what we want to know is when the bottom is. Thanks, days. Exactly. All right, Rick. Take care.

Tyler, back to you. He can't cut you off there, Rick. I'm telling you. Just cut him right off. All right, Rick, Santelli, thank you. So how should you position your portfolio, given these latest moves in yields? Let's bring in David Spika. Mr. Speaker, you've been vacated, Mr. Speaker.

The president of Guidestone Capital Management and Jerry Castellini, Chief Investment Officer at Castle Ark Management. David, since you're in the House and we haven't seen you here in three or four years, welcome first. Welcome back. Happy to be here, Tyler. Glad to have you here. What do you think these higher yields are going to mean ultimately for equities and equity values? And what kinds of equities do those moves infer?

Sure. So two things, I would say, is that higher yields tend to be negative broadly for equities because they reduce the present value of cash flows. So the current value of the equities has to fall. The other thing to keep in mind is higher yields are more detrimental to longer duration equities, like the tech companies whose cash flows are way out in the future. So that's why the tech companies have come down the most in this higher yield environment. All that said, the yield volatility is what concerns us the most. It's not so much that yields are up.

It's that the volatility is crazy. Look what's happening in the 10 year today. So for bond managers saying, well, we want to take out more. duration, we want to go longer duration because of 10 years approaching 5%. Well, you're playing with fire there because there's still so much volatility. And a lot of this is a function of what the Fed has claimed to do. So from a portfolio standpoint, what does this cause you to do, if anything? Does it cause you to invest in different kinds of equities? Or does it cause you to invest in a reduced percentage of equities in your portfolio or both? Well, we're not trying to time the

market, but in this point in time, given the thought that there likely will be some sort of economic downturn, we want to own more defensive companies, and we want to own companies that have visible earnings growth. When growth becomes scarce, investors pay up for growth. That's when you want to own growth stocks. Now, yields will eventually fall if we do have a downturn. But we also like short-term and short-duration investment-grade credit as well, because where the yields are today, we haven't seen since 2007. It's very attractive. hope there's no default risk when you're talking about, you know, the bluest of the blue chips. Correct.

Jerry, one of the sort of confounding things is that, to quote Josh Brown, the safest parts of the market have been some of the underperforming ones lately. So you've painted in utilities as well known, obviously. Stat from Bespoke says the 100 highest dividend yielders in the S&P are down 11% this year. So, you know, people might feel like, okay, well, I want to be defensive. I want to be safe. But what does that look like exactly? Yeah, so those traditional areas that you were describing, like consumer undurables and utilities,

their valuation and or their cash generation abilities aren't what they used to be. Utilities, as a classic example, they borrow money. They don't throw off free cash. They're building the future of the electrified economy. So when you see the yield curve behave the way it has, there's no question that that entire approach is under threat. and it would be anything but defensive. If I could move you, though, for a second, as much as people want to take on the magnificent seven in these very large companies, they're the ones, as your previous

segment just described, they have all the cash on the balance sheets. They're going to continue to generate cash. And when you look at the, quote, defensive trade, it's migrated towards those kind of names and away from these are their slower growth or balance sheet challenged ones like we just describe. So where would you put money, Jerry, right now? Give me some names. Yeah, right now, I mean, you look at the cash coming out of a meta, Microsoft, both of them are down significantly in value from where they were, let's say, two years ago. I mean, Microsoft, the 25 meta at 17 times earnings, that's more than attractive in a 5% long bond environment. They just throw off so much

cash and their runway is so long in the businesses they have, I don't see how that's not your ultimate defensive play. But if you want to go beyond that, why not look at the energy names? That was not 220. Go ahead. Jerry, go ahead. Yeah, look at the energy names that we mark down the price of oil $8 here in 48 hours over fear of recession. And yet no one just fixed the world oil problem. The fact that we haven't put any money into the ground for so long, that Sellerj and Exxon have a win behind their back, and they already started a very attractive low valuation. So you take those two extremes, something that's trading at 10 times,

has a 5% yield in a five-year runway, and something that's trading at 20 times with a similar set of characteristics. I think you cover both risk profiles in the market itself, and I think that's a great way to balance the portfolio. All right, we're told we have to depart right now. Thank you very much. David, good to be with you. Thank you for coming.

Thank you. Jerry Castellini, thank you as well. Coming up, KeyBank out with a rare downgrade of Apple saying it's sitting out this iPhone cycle. We will speak to the analyst about their concerns next. And the aides of October, the first ever ousting of a House majority leader, sending D.C. into chaos. We'll discuss the potential impacts further ahead. All right, welcome back, everybody. Let's get to Kate Rooney now for breaking news out of the Sam Bankman-Fried trial. Hey, Jail.

So opening statements just wrapped up. It took about an hour. The government prosecution side kicked things off in the courtroom. They painted Sam Bankman-Fried, the defendant here, as a secretive crypto executive who knew about those losses. And he tried to cover them up, as the prosecution put it. They called FTX a House of Cards. The attorney called it a massive fraud. They accused Sam Bankman-Fried of stealing billions of dollars from thousands of victims

and said that there was a $10 billion hole of customer. money missing also said that Sam Bankman Fried knew all that and that he lied about it. They highlighted some of the celebrity endorsements and his time in front of Congress. He testified in front of Congress, also his efforts to gain customer trust in some of the advertising they did that mentioned trusting FTX. The government attorneys also accused Sam Bankman-Fried of funneling FTX money into an Alameda bank account and then creating essentially a backdoor in some of the code that allowed the company to withdraw endless amounts of customer money.

also said, again, that he lied about it and he knew about it. They also say Bankman-Fried took steps to hide all of this. The prosecution does plan to present documents of this six-week case. We're going to hear from investors and some of the top FTX executives. And that inside circle we've talked about, those are going to be key testimonies. And then he had the defense. So Sam Bankman-Fried's lawyers said that he didn't defraud anyone. They claim that he acted in good faith and at the time made what he thought were reasonable business decisions. that really played over and over again. They said he thought it was reasonable.

His lawyers called him a nerd. They said that he didn't party, he didn't really drink. They pushed back on the imagery of him being a villain. And they tried to frame this as a case about another high-flying startup that was just moving too quickly. And they used the metaphor guys of building the plane while they were flying it. And then they also said that that same plane flew into a perfect storm

in this crypto downturn that happened last year. All the while, they say that he didn't have the right risk management. in place. But they also say that he reasonably believed he was acting in good faith and within the law at the time. They said, for example, it's not a crime to run and be the CEO of a bankrupt exchange. They say it's not a crime to get Tom Brady to do a commercial for you. So they tried to make that clear for the jury. They also said the prosecutors are taking some of this out of context and they tried to pour a lot of cold water on the witnesses we're going to hear from, especially Caroline Ellison. Her name came up a lot. She is a former girlfriend of Sam Bagmanfried.

ran the hedge fund Alameda. They blamed her for not hedging and say that is the reason why this company failed. So it will be especially interesting to hear from her, but they really used her name a lot and essentially said she already pleaded guilty and they asked the jury to really question some of her motives. But again, opening statements have wrapped up. We're going to hear from witnesses this afternoon, guys. Interesting. It's her fault. They claim Kate, Kate, thank you very much. We appreciate your reporting on this. Our Kate Rooney. Apple, meanwhile, is coming off its worst. quarter in more than a year, and there could be more pain ahead, according to Keybank.

The firm issuing a rare downgrade of Apple today, taking it down to sector weight. The analyst behind that call, Brandon Nispell, joins us now. It's good to have you here, Brandon. Welcome. Thanks, Kelly. Thanks for having me. What is the trouble here? You know, we really pointed out sort of four fundamental reasons for the downgrade. One being, we think the U.S. segment for Apple is likely to go through a period of sort of lower growth, or even no growth. As we look at it, you know, U.S. upgrade rates have hit a new historic low.

We expect them to stay there for longer. Secondly, the international segment for Apple, you know, when we unpack it, it's really only China that's growing. And when we look at the competitive landscape with Huawei coming back into the mix, that gives us some concern. And those two points really lead us to believe that estimates for Apple appear full. Consensus has Apple growing 6% revenue growth in 2024. And we see more in the 3% range. And even growth is sort of a hockey stick versus the down 3% we expect in 2023. So we pair it all up with, you know, from a valuation standpoint, Apple is trading fairly rich relative to history and relative to other NASDAQ components. It generally does trade at a discount versus NASDAQ. And it's a pretty large premium today.

So you've cited a couple of different things there, China's Chinese competition. from Huawei in particular, but I reminded of the line that you're sitting this iPhone cycle out. Is there anything in terms of U.S. demand and things of that nature that you think is coming up a little short here? Absolutely. So that's sort of key point number one. We think the U.S. from an upgrade rate standpoint is likely to experience lower than typical upgrade. So we've actually seen throughout the start of the year, upgrade rates hit new all-time lows. and we expect them to remain low for longer. I mean, fundamentally, it's all about carrier promotions in terms of getting customers into new iPhones.

We don't think carriers are incentivizing consumers enough. From our standpoint, carrier promotions are pretty much in line with last year, but arguably could be viewed as more restrictive because they generally required consumers to purchase a higher price plan, service plan that they have. So what are you hearing about the rollout of the iPhone 15? and the pro and the pro max, number one. And would you say that it seems to me by watching a lot of TV

that both the carriers and Apple are being pretty aggressive at advertising this product and that the carriers are offering all kinds of incentives to get you to upgrade? Yeah, absolutely. On the second point, we've seen for the last three years carriers put out free iPhone or $1,000 off promotions. and fundamentally they've upgraded a lot of their customers already on 5G.

To your first question, you know, our expectation is that iPhone 15 builds are actually down slightly. Part of the issue is that Apple's had some supply chain challenges in terms of getting production up. Do you expect Mix to ship more towards the Pro Max model. And so within this note, we did raise our average selling price estimates for Apple. us, it wasn't enough to justify estimates that were in line with consensus. No. All right. Thank you very much.

Brandon, we appreciate it. Thanks for having me. All right. Coming up, oil in trouble? Oil taking a pause today on its climb toward $100 a barrel, moving exactly the opposite way. But rising rates pose a major risk to that space as well as the economy as a whole, as we discussed at the top of the program. More on that when power lunch continued.

Welcome back to Power Lunch. I'm Pippa Stevens, and here's your CNBC News Update at this hour. Another Republican has formally announced a bid for House Speaker a day after Representative Kevin McCarthy's ousting. House Majority Leader Steve Scalise sent a letter to his colleagues seeking their support in next Wednesday's election. Representative Jim Jordan also said he would run. The man charged with murder in the shooting death of Tupac Shakur made his first court appearance. Dwayne Keith Davis was supposed to be arraigned today, but the proceedings were delayed to later this month because he didn't have an attorney present. Davis was arrested last week in his suburban Nevada home after a grand jury indicted him for the 1996 murder. And NASA astronauts will be traveling to the moon in style.

Luxury fashion group Prada and a Texas-based startup called Axiom Space will collaborate to design space suits for NASA's planned moon mission in 20. 2025. Prada's engineers will work alongside the Axiom space team to develop solutions for materials and design features to make sure the astronauts are comfortable and protected in the harsh environment. Kelly, back over to you. Pippa, thank you very much. Ahead on Power Lunch, D.C. facing a serious dilemma. After the historic ousting of House Leader McCarthy, lawmaking is still at a standstill. We'll discuss that impact next.

Don't go anywhere. Welcome back to Power Lunch Republicans expected to meet next week to try and elect a new Speaker of the House following the historic ouster of Kevin McCarthy. So what does the Speaker's race mean for policy going forward? And does this uncertainty in Congress increase the chances of a government shutdown next month? Brian Gardner is Chief Washington Policy Strategist at Stiefel. Brian, welcome. Good to have you with us. What is the possibility that Democrats are going to long for the days of Kevin McCarthy?

I, you know, on any given issue, probably a fair amount, certainly on Ukraine funding. I think whoever wins the Speaker's race among Republicans is going to have to be very cautious on Ukraine funding going forward. And so it's a popular issue among Democrats, but they may be in a tougher position going forward on Ukraine funding. So, and, you know, there are other issues where, you know, the two sides have never agreed, but you know, the extractions that are going to be, the concessions that are going to be made in negotiations of securing the speakership may not be to the liking of House Democrats. No, I think not. I think of this situation rather like a parliamentary system of government where a majority party puts together a coalition that may include some strange bedfellows or some fractious elements.

And then those fractious elements really have control over the majority. party. Is that not the case in this case where you have eight or 10 or 12 members who are able to, given the slimness of the majority, are able to sort of set the agenda, call the tune for, quote, the majority? Yeah, let me put it in a slightly different context, Tyler. So it's a lot like college football that we've just seen, right? The PAC 12, Speaker McCarthy's area, just disintegrated. And so now we have really the main competition between the Big Ten, Jim Jordan, who's going to run, and the SEC. Steve Scalise is going to run.

The Big 12 is trying to get involved. And then not so much the eight that you were mentioning, I'm going to call out a group of moderate Republicans from the Northeast that's not exactly a hotbed of college football, but they could be determining who the next national champion is. So I think those moderates may have taken some lessons, taken a page. out of the playbook of Congressman Gates and company. And they're the ones that if they choose to use that leverage can determine the outcome of the Speaker's race and the agenda going forward. You know, once Gates goes down that road, everybody can play that game.

And so what I'm hearing you say then is that maybe there are Northeastern Republicans of a more moderate stripe than Gates and, um, uh, uh, good and some of the others who are part of that gang of aid or so, that they may say, oh, not so fast, guys, we have the power of veto two here, and you're going to have to come up with somebody who's acceptable to us. The current House majority is about four members for the Republicans, depending on how many vacations there are. Those four are built on the state of New York, where New York Republicans did unexpectedly well in the last those are the people that have outsized influence in the next speaker's race if they choose to use it,

and I think they will. Isn't this rather like the situation with the Democrats where two members, Kristen Sinema and Joe Manchin, have effectively that same veto power of what can get done in the Senate? Yes. I think it's a great comparison, Tyler. So in small majorities, small groups of. members in each body have outsized influence. And I think that's what we have been seeing really going back to since the election of President Biden with the Senate Democrats and now with House

Republicans. Brian, what would you say that McCarthy's missteps were here going maybe all the way back to January? And what lessons should the next speaker draw from that? It's easy to second guess and criticize. I think a lot of people are pointing to the deal that he made with with Congressman Getz and others about the procedures about removing a speaker. Right. But government is compromise. It's a dirty, it's a dirty exercise. It's a hard exercise.

And that compromise was necessary for him to get the Speaker's gavel. And if he didn't make that deal, somebody else would have. And so we'd still be in this situation. I think a little bit more outreach to Democrats, maybe just toning down the rhetoric, a little bit could have saved him. But again, this is a lot of second-guessing, a lot of, you know, rear-view mirror driving. And, you know, I think given the circumstances with divided government in a very small majority and a minority within the majority that's willing to torture the speaker, you know, I think at the end of the day, Kevin McCarthy did pretty well.

Given the fact that government shutdown looms in six weeks or thereabouts, Is it more likely now that there will be a shutdown than there would have been had McCarthy prevailed? Probably. I mean, so, you know, just the time that the House is going to take to pick a new speaker, that's at least a week, maybe longer, depending on how long the process goes on. So that's time that's not going to be spent passing appropriations bills. And then we'll get to November 17th. And the decision will have to be made again.

Are you going to shut down the government or are you going to do another continuing resolution? and we see how popular CRs are among conservative Republicans. So a new speaker is going to find himself in a very difficult situation right off the bat. All right, Brian, thank you very much. As always, great to see you, Brian Gardner. Thank you, guys. Coming up next, oil, accrued reality as they post their worst day in four months down more than 5%. WTI's below $85 a barrel now.

We'll discuss the energy outlook for stocks in this environment. And as we had to break, CNBC is celebrating Hispanic heritage, sharing stories of influential business leaders. Here is Lassandro Chanlate, city's head of investments for Latin America. My Dominican roots have really shaped the person who I am today and have allowed me to bring the best of me and my culture to work. Being Latino can be your superpower. I believe it generates a diversity of thought and inclusion. My advice for Latinos is really to bring your full self to work, to allow yourself to not forget your raises, your roots, and actually maintain your sense of belonging to your community.

Welcome back to Power Lunch oil sliding back below $85 a barrel on a 5% drop today. That's its lowest level in a month as OPEC left production levels unchanged. Just last week we were talking about the prospect of $100 oil, but concerns about demand on a weaker global economy, seem somewhat back in focus. Here to weigh in and explain how to invest in energy now is Rob Thummel, senior portfolio manager at Tortoise. Rob, welcome. It's good to see you again. I'm going to skip right to a poster child today when you think, well, you know, energy stocks can still do well in an $85 oil environment. What's going on with Devin, for instance? Stocks down sharply today down sharply this month. What's going on with

investors in this space more broadly, do you think? Well, I think if you look at just the stocks that have commodity price exposure, clearly the decline in oil prices today is driving those stocks down lower. And Devin is a classic example of that. It's an oil and gas producer whose cash flows are predicated off the movement in oil prices. And so 5% decline in oil prices is going to result in Devin's stock declining. As you know, in the second or in the third quarter, I mean, oil prices were up substantially. And a lot of the energy stocks rose and performed pretty well during that quarter. So a little bit of a profit taking as well as a little bit of lower cash flow as a result of that. And that's what you're saying today at least. Right. But again, just to stick with this emblematic name, it's down 30% this year. So you would think, okay, well, you know, I mean, this is always the thing about investing in energy is they say, well, it might move with the move in crude, but it should still be profitable in the long run at these levels, for instance. Is that being called into question? Is there something else going on here? For definitely particular? No, you know what?

Devin is a high-quality producer. Devin has adopted what a lot of energy companies have, which is a disciplined approach to investing, which means that basically are not going to spend a lot of cash on drilling expenditures. And so what that means is Devin will have a lot of free cash flow, and it will be able to buy back a lot of stock, as well as pay a dividend and a variable dividend. In Devin's case, it pays a variable dividend that obviously varies with the price of oil. So I would expect in the, and when it announces its dividend sometime here in the fourth quarter, but the devon dividend will be a little bit higher.

Why is it down 30% this year? In some cases, it was because oil had a rough start to the year. But there are a lot of other energy stocks that actually have done really well and are a lot less volatile than some of these commodity sensitive stocks. So inventories are down in the second half of the year. Volume cuts are in the pipeline, so to speak. So you would think that that would signal maybe higher prices, not lower, but we've certainly seen a stall in oil prices and a decline today to prices that we haven't seen in a month or so. Why? Yeah, right. Tyler, and you're exactly right. And for the second half of the year, we still expect the global oil market to be undersupplied. So inventories fall. Typically, when inventories fall, as you highlight, prices rise. You know, today that's not happening. Inventories, continue to fall, but prices are actually falling. Why is that? I think Kelly mentioned it in the

beginning of the segment and saying that simply what the investors are interpreting today is the fact that the Saudis and the Russians decided to continue to prolong their voluntary supply cuts, as maybe that's a signal that the global economy is a little weaker and you don't need that oil. And so we'll see. At TARDIS, we still think that you're going to have an undersupply oil market. you're probably going to continue to see higher oil prices. But that will be driven really by these declining inventories that we'll see for the rest of the year. You have three stocks. I'm going to ask you to go quickly. One Oak, Pioneer, and Energy Transfer. Why those?

Yeah, so two of them are energy infrastructure, Tyler. One Oak and energy transfer, both hopper high dividend yields. There's a lot of uncertainty in the markets right now. Are we going to have recession? Are we not? But what is certain is we know that One Oak is going to pay its dividend, that's a 6.2% dividend yield. It's paid a dividend for 25 plus years. Energy transfer is the same way. It's a higher dividend. It's a 9% dividend. It's going to grow a dividend probably 3% to 5% next year. We know that that's pretty certain, and their cash flows of these companies won't really be that volatile with the price of oil.

Pioneer is another one we like. It's the largest producer in the Fermian Basin, really attractive stock as well. Once again, same thing as a lot of energy stocks, a lot of free cash flow. returning that in the form of a dividend and this variable dividend component and investors will see a higher dividend in this quarter because of the higher oil price. And I am hearing you saying loud and clear that even though they are high, these dividends are safe. Yes. Yes, absolutely, Kyle. These dividends are safe. They've been paying them for several years and they're actually going to grow. They're actually going to grow. All right. Rob, thank you very much. Rob Thummel. Appreciate it. Coming up, we will power through as many more stories of the day as we can. It's closing time after a quick break.

Welcome back just under three minutes left in the show and several stories to run through. So let's get right to it. Starting with a new survey, finding 82% of colleges will use AI as part of their admissions process by next year. That's up from the roughly half, half using it already. And according to Intelligent.com, a majority of those schools will allow AI to have a final say on Apple. Do I believe this? I don't know that I believe this. And this is like giving your autonomous driving vehicle the final say on whether you're going to drive off the cliff.

I mean, I don't, it makes no sense to me. I mean, I think you've got to have humans making the final call. I would hope so. I would hope. We should see. All right, millennials lag prior generations when it comes to homeownership and earnings, but the data show they are outpacing their elders in retirement savings. According to Vanguard, millennials earning a median salary or better should expect to replace 60% of their pre-retirement income between investments and Social Security, uh, uh, uh, uh, compared with 50% for Gen X and Baby Boomers. Presumably this is because the millennials got the religion sooner on putting money into 401Ks. And maybe because they're not putting big down payments on houses as frequently.

It's reassuring it. I'm not always been a big believer in the Doomer story here, but you hope anyone who's not doing this gets the hope they can still catch up. Anyway, the Wall Street Journal is also reporting that Netflix plans to hike prices up for good savings for its ad-free tiers once the Hollywood Actors Strike ends. No word on how much or when it might take effect. Warner Brothers Discovery already raised prices on its ad-free tier by $2 earlier this week.

Streaming is going to get more and more and more expensive. It's just so obvious. Yes. The content companies need the money to pay for the content. And maybe Netflix has enough content to have the pricing power. For the rest, I think it's an open question. All right. The Federal Reserve Board is launching Instagram and thread accounts.

I've been waiting for this one. I can't tell you how excited I am. The goal is to make its informational and educational content more accessible. The first post is a welcome video from Fed Chair Jerome Powell, who will also demonstrate his shuffle dance moves. Yeah, you know, I guess they have to have a social media presence. I really don't know what is... Good for him. Infographics.

Go get them, Jerry. And the first redesign, how can we leave without mentioning the first redesign of toilet paper in 100 years? I mean, honestly, we just wouldn't be doing our jobs. Charmin will change the perforated line to a scalloped edge to make it easier. I've been waiting for the scalped edge. This is a tear better. And they say we don't innovate anymore. Yeah.

Scalpped edge and toilet paper. It's going to change the world and society. Thanks for watching, Power Lynch, everybody.