Power Lunch - Rate & Inflation Fears Flare Up 4/12/24

Episode Date: April 12, 2024

Stocks sold off Friday as inflation and geopolitical worries once again dented investor sentiment on Wall Street. A broad decline in major bank shares also weighed on the market. We’ll tell you all you need to know. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody. Welcome to Power Lunch. Busy day. Alongside Deerbosa, I'm Tyler Matheson. Glad you could be with us. Stock's giving back yesterday's gain and then some. The Dow on pace now for its ninth losing session in the past 10. J.P. Morgan dragging on the Dow after reporting results. City Group and Wells Fargo, they're also lower following their own reports. We will have more on those banks coming up. And so is the Fed, is the market still Fed obsessed? Or is it now becoming earnings obsessed? Is that old obsession back? Invidia helping to drive. yesterday's gain, but it is down 2% today. So what's the real driver here? We have Surat Setti of DCLA, joining us for the full hour.

Let's begin, though, with Mike Santoli at the New York Stock Exchange. Mike, seeing the sell-off. Yeah, Dee. It intensified for a bit. We did get a little bit of a bounce, and whether it's just technical or a little bit cute, the S&P 500 bounced off of its 50-day average. It was the first time it had been there in months. So I do think that you had a little bit of pent-up selling, and I mean that in the

the form of the market that had gone straight up without a 2% decline for five months into late last week. Things have loosened up. I think if you came into this week certain of a few things about the macro backdrop, whether it was Fed expectations, where bond yields could go to, whether gold and oil was something to worry about or embrace. I think you got more complicated as the week went on. Sticky inflation has repriced the Fed path and at least has kind of caused you to reweight the probabilities as to whether the Fed's going to make a mistake. So all that thrown into the mix of, again, a market that had been up a lot since the October low going into earnings season. I do think it'll be welcome if the macro and geopolitical concerns fade a little bit going into

next week, and then it can just be about the two and fro of earnings expectations. How, if any, does the rumors out of the Middle East about a possible Iranian attack on Israel figure into this, if at all? I think the morning action was very much animated by that, or at least exacerbated by it. I'm mostly I'm looking at things like, you know, the moves, the concerted moves higher in oil, gold, the volatility index, and to a lesser degree of the U.S. dollar. Now, all of them have kind of moderated those moves in the last little while. So whether that just means that the momentum has tired out in the short term or not. I do think, you know, all those things do suggest that we're kind of, you know, clenched up in this what-if way about what might happen there and what could

be the implications for it. So, you know, sometimes, you know, you don't want anything obviously bad to happen, but the other side of it is that usually those things don't end up being real market turning points in a decisive way, but they can exacerbate fears that are already underway. All right, Mike. Thanks very much. Mike Santoli, for more on the markets and this year's biggest sell-off so far. Let's bring in Sarat Sethi. He's managing partner at DCLA and a CNBC contributor. He'll be with us for the entire hour. What do you make of what's been going on in the past? couple of weeks. Look, I think we've had such a quick run this year. I mean, nobody expected the market to be up 10%. But what they did expect with that was that you're going to see some Fed cuts. But you've

got a strong economy and you've got inflation. So the question is, where do we go forward from here? And at what point do you get interest rates cuts? But you've already got multiple expansions. So S&P trading in 21, it's up to earnings. It's up to companies that provide good earnings and good expectations. And what did you make of the bank earnings? We're going to talk a little bit more about that. They weren't really that bad. With that bad. That's what I'm reading. And if you look at J.P. Morgan, right?

J.P. Morgan, year to date, it's up 7% after today's sell off. But a year ago, it's up 43%. The S&P's up 25. So a lot of it was built in on the expectations. Now, what happens is you get the sell off. You had people who probably crowd into the trade in the banks. J.P. Morgan is a phenomenal bank. It's one of our top holdings, right?

You've got great management team, a very diversified business. When you look at asset management, but then you look at M&A, capital markets, international, great balance sheet, great dividend. And this is going to happen. But a 5% sell-off for a JP Morgan is pretty abnormal. So there must have been a lot of people who were kind of hiding out in there and didn't see the expectations of. And they're pretty conservative.

If you look at kind of the way they've always said they're going to do, is, hey, we know that net interest income's not going to increase that much. But with rates the way they are right now and the economy as strong as it is, is bank's going to make a lot of money. The question is, does the economy start slowing and we don't get the rate cuts, right? And that's just not for the banks. that's for the overall stock market. So then what leads to that slowing?

Because as I think you're pointing to you, the fundamentals remain pretty strong. And markets have been very resilient so far. I wonder if we can pull up a chart of the VIX over the last year. It's up 25% today, the volatility index, approaching 20. What's changing in the market here? What's the character doing? I think the change is, hey, if we're going to knock at rate cuts and the economy slows down, do we get a fear?

And I'm just, the word that nobody wants to hear, is stackflation? Right? Does the economy then start slowing down, but the Fed cannot cut rates just because inflation by itself is staying up? And Tyler, to your point, you were asking about geopolitical concerns. Well, if that puts up commodity prices, right? We've seen oil prices now almost close to $90. That's not good for any inputs for basic materials, for anything in that sense. And I think that's where the fear is. And if China is starting to come back and you see global tensions, you're not going to get that foot off the break for inflation that,

everybody was expecting, at least for the first couple of course. So you mentioned one of your biggest holdings, Chase. Let's talk about your biggest holding, Invidia. It is. What's happening there? What are you doing with it? What is your strategy with that stuff? And a very good question.

I mean, Nvidia became our largest holding because it grew so much. I mean, it's up 60% year to date. We've been cutting it back. I mean, I've been cutting it back almost $400. So, you know, for new money coming in, I'm still not ready to put new money in for a new client, but I think at $850, it's pretty fully valued. And the question is, where does it go from here? And right now, you know, it's an easy stock to take for profit date. Right. If you've made money, you can just take some of it, as we all have, right? Portfolio diversification is key.

You do not want to get concentrated. This stock was down 50% in 2022. So it can do that. It can do that. It's very volatile. Again, it's a crowded trade. It's a lot of the momentum stocks, momentum investors and hedge funds have it. But it's a fabulous company. But we're about to get sort of a catalyst for Invidia, which is the hyperscalers. Microsoft, Amazon, Google are going to be reporting over the next few weeks. What do you expect to hear from them in terms of CAPEX plans, right? That's really underpinned the Nvidia rally. And I wonder, like, some of these competition issues, Google, Microsoft, all of them developing their own chips. Yes. So I think that you've got to watch for a couple of things. Now, obviously the stock ran when Meta said, you know, we are going to be

buying all the chips from Nvidia, et cetera. What we're going to probably hear from all of them is they're going to say we're going to produce our own chips only because they don't want to be paying the prices that Nvidia is charging. There's nobody else to buy these chips from right now. And Intel is starting to see it's a game of catch-up, but by that time, Nvidia will be one or two steps ahead. So it's just pricing and how much of this will really come to fruition. And really, how much does AI really play out? Now, everybody's the expectations for AI. But don't forget, Nvidia plays in other things as well, right? They're in gaming. They're in data center. They're in crypto. And the stock trades at 35 times earnings. So it's not cheap, but it's not ridiculously expensive.

However, built into there is the demand from the hyperscalers. So that's a question, kind of where does NVIDIA go? They have to keep that IP out that the others are still catching up to do and then producing those chips. Right. I had a guest last hour who said that it was all priced in, all of this AI upside. So it was an interesting point of view. But let's turn to banks. We talked a little bit about it.

They're in the red after reporting quarterly earnings this morning. JPM Morgan Chase is down more than 5% after its outlook for interest from income payments came in below expectations net interest income. Also disappointed at Wells Fargo, down 8% in the quarter because of higher interest rates on funding costs. Cities said its profit fell 27% year-over-year and higher expenses and credit costs. All three banks did beat the street's estimates, though, as we've been talking about, the fundamentals, were still pretty good.

So let me ask you then dive into sort of one area of them, and that is deposits, right? If we see rates higher for longer, you're already seeing customers kind of shift out of these very low yielding, checking and savings account, put them into CDs, which sort of hits the margins for the banks. Is there room for the big banks to raise those savings or checkings, APIs? I always wonder, sitting in San Francisco and seeing what the fintechs are doing. Yeah, I mean, look, people are smart now. They're figuring out I can move into treasuries for six months a year as rates stay longer. But I think the key to these banks is not just the net interest income, right? It's the M&A activity.

It's what they do with their balance sheets and how they're helping their customers. And I think of the stronger economy, and you've seen this already, the IPO market is kind of picked up, the M&A market is picked up. That's where they're really going to make their assets. This is, I think, more short-term. And if and when rates do come down, they will make a lot more money because people will not be moving their money out. Let's get another perspective on this. Joining us is Ibrahim Poonawala, head of North American Bank's research. to B of A securities.

What do you think, Ibrahim, you've been listening to our discussion. The fundamentals still stronger. Did you see any even yellow flags in them? Yeah, dear, Tyler, first of all, thanks for having me. I had been listening to your conversation, and I would say the fundamentals are pretty strong, right? I think we can talk about why some of these names are in the red today. But I think what we heard from JP, Wells, Citigroup is an economy that still remains

on relatively solid footing, credit outlooks from all three banks for fair. fairly constructive, even relative to what we were yearing three or six months ago. Now, bad things can happen. As you mentioned, hire for longer leading to a stackflation scenarios, which could lead to some downside on credit, overall economy, six, 12 months from now, for sure. But where things are staying today, I think I was very encouraged by what we heard from all three management teams in terms of the macroeconomic outlook and business fundamentals. And so, but these banks are not, their stock price is not reacting as though all three of them beat estimates, which all three of them did? So I think Sark mentioned this earlier.

If you look at the run-up, all three had. I think Citigroup was up about 20% year-to-date. Both JP and Wells had had pretty significant moves. So I think what you're seeing is particularly a name like JP Morgan, it's been a higher for longer winner. I think the stocks had a phenomenal last 12 months or the last couple of years. And I think positioning was pretty tight. And I think it was crowded going into the print.

I think the street came in expecting maybe another revision higher to their net interest revenues, which didn't happen today. And I think you're seeing some profit taking on the back of that. Abraham, looking out through in the financial services sector, you see insurers bucking the frontier, different proposition here for them with higher for longer rates, right? That is correct. Again, my colleague covers the insurance sector. but you're right, I think they have long-dated liabilities and higher rates for longer allows them to get better returns over time.

Sarat, any thought here or question for Iber. I guess even my question is, what is your re-through on kind of companies like Bank of America on this? Are you going to see the similar sell-off or do you see any of these other banks separating themselves? Because they're all kind of being pushed in again, here we go. You're all in one basket, and we just want to kind of use that ETF to sell off. Sure, I think great question one. Obviously, I can't really comment on Bank of America because of the sign you see behind my name. But I think what I would say is the read-through was extremely positive. And I think what's important here is over the last few months, the money center banks have generally broken away and have, as we said, all JP Wells City had a phenomenal start to the year. When you contrast that with even the largest regional banks, the PNCs of the world, U.S. Bank Corp. M&D. they are still discounting a fair amount of concern around the macro economy, credit risk, and trading at about two to three turn P.E discounts relative to where we've been in the past.

So I do think the messaging we received here was very constructive. Again, unless we get a macro shock or interest rates you spike higher, I think we could come out of next week. We have about 20 banks supporting where you start feeling better about even the main street outlook if some of those net interest income is beginning to stabilize for the regional banks. while credit, as I said, still is holding up, including commercial real estate. Ibrahim, you follow about 30 banks. Do you have three that are favorites? Absolutely. So I think Wells Fargo, it's a name that we've liked.

We continue to like that both in terms of its idiosyncratic drivers are on capital. You saw them buyback, $6 billion in buybacks in the first quarter. They still have significant runway there. I think in terms of growth opportunity, that's a bank that has a significant runway. we're discussing about capital markets. That's a business. Their CEO, Charlie Schafe, talked about during the earnings call. So Wells is the name that we've liked. We continue to like both in terms of the macro trends as well as idiosyncratic self-help. City Group is another name. I appreciate the stocks had a pretty strong move, but we do believe actions taken by Jane Fraser in turning

this around, reversing what's 20 years of mismanagement is finally beginning to take shape. And the other one I would call out would be truest financial among the large regionals, TFC. They've gone through a muddy merger of equals between SunTrust and B&T. They've had a three to four years of stumbles. And I think management is beginning to get things back on track. So it's a discounted stock. But in good markets, plenty of capital and liquidity at its disposal. Yep.

All right, Ibrahim. Thank you very much. Ibrahim, Punawala, of Bank of America Securities. Appreciate your time today. Coming up, yesterday's tech rally fueling Apple to its best day since last May. Going to keep up that momentum. On a down day, the stock is a little bit higher. We'll discuss that one and more when Power Lunch return.

Welcome back to Power Lunch. Invidia CEO, Jensen Huang, speaking shortly at Oregon State University about what else AI, another big name addressing AI on CNBC earlier as well. Have a listen to what Black Rock CEO Larry Fink said about the transformation. we're seeing. AI cannot truly happen unless there's a huge investment in the infrastructure. The amount of energy that is required for AI is enormous, an amount of power generation. We will run out of electricity if we are going to fully adapt to a full AI world.

And so the need to build on, and this is all going to stimulate our economy, by the way, to build out of more AI and which at the backside, Does that mean building out more electricity power? We've got Steve Kovac here. Surat Sethi, still with us. What Larry Fink was talking about was this AI Halo that is supposed to touch many other industries. Energy is certainly one of them.

Software would be sort of an obvious next place to go. But I want to show you a chart of the software ETF versus the SMH chips ETF and just huge discrepancy between the both. We haven't really seen this AI halo expand beyond the chips and the mega caps, or would you disagree with that, Sirrah? No, no, I totally agree, because we haven't really seen it implemented yet. Right. Companies have not really come out yet and said,

oh, our productivity is increasing because of AI. So, you know, you've got Microsofticol pilot and you've got these other companies, but it's to your point, it's the mega caps and it's the chip companies right now. But until we see it being used, we have to kind of make sure. And to a lot of your point, like, if we don't have the infrastructure there, I'm not sure you're going to actually get it to be used because the power needed for that, and that's the competition amongst all the chip companies, right? Why does AI require all that power?

It's the chips. So these... It's the chips. Let's just talk about those Nvidia chips. They require enormous amounts of power. They're not the most efficient chips in the world, unlike the one that runs in your iPhone. They need these big data centers that take up a lot of power. And, you know, Intel had that announcement earlier this week.

They were talking about the power efficiency for their Gowdy chip, their AI chip that they're going to start selling. soon, just saying it's more power efficient than the NVIDIA stuff. So you save money not just on the chip itself, they're saying, but also on the power consumption. Here's a stat that broke it down to me. I hope I'm getting it right. But a chat GPT query takes, I think, 10 times more compute power than a simple Google query. Wow. So if you think people are going to move. Because it has to run through all the series. All the different algorithms that it's running through. So he's trying to, in fact, incorporate everything else there. So what you're really going to need is much more energy. You're going to utilities to get more power. You can need more gas, and you're going to need data centers.

This is what we hear CEO of opening eyes, Sam Altman, talking about a lot. In fact, he was in the Middle East this week talking about this very problem. Who builds the data centers? Who builds it? It could be many people. It depends. The hyperscaleal. The companies themselves do it. Amazon's the money itself. Exactly. You have companies like digital reality and real estate. You have equinics that also has the interconnection. So you've got all these other companies, but you need the power behind it. So it's what are the utilities in California, right? So it's the Addisons, the AES of the world, but it has all kind of, yeah, they have to come together. There's an interesting article in the journals heard on the street today saying how you can use AI

to actually make the grid more efficient and household consumption more efficient. So maybe this will all work together. All right. Let's talk about Apple bucking that downtrend today as we just mentioned a moment or so ago. Yesterday, it's best day since last May, up 3% for the week. Steve, why the move in Apple? Is it too about AI? A little bit.

has some other thoughts on this, but let's just talk about the AI angle here for a second. So yesterday, Bloomberg had this report that came out that said Apple was preparing to update its Mac computer chips and going to kind of frame them as AI chips, unleash some new AI capabilities on these devices later this year. But of course, none of that really matters unless they have some really great user-facing features that we're expecting to see on June 10th at their annual developers conference. What that looks like, we have no idea. But that's part of the of it, and I know you have some thoughts on this as well. Look, and Apple is one of these stocks that become like a treasury bill in the technology world,

right? It's come down. It's down 7% for the year, but it's the amount of cash there. People are safe in it right now. That doesn't say anything about the growth of Apple. I mean, you haven't really seen earnings growth. There is no growth. Revenue growth. But it's going to be a question of what, and everybody's talked about it.

Why is it lag behind meta? Why is it lag behind Amazon and Microsoft? Because they haven't really said what are we going to use AI for, right? So the marketing has come out, but let's see what the execution is going to do. What is the speculation about what? I mean, you make the great point. I mean, you're going to have all the chip power you want in a laptop or a Mac or what I hear. They're going to read fashion the entire Mac line, which means I'll end up buying another one. But if you don't have the apps and the tools to run off those things, what's the benefit?

You've got to show me something that I can do. It also might not matter. Some of it can just be pure marketing by calling it, for example, an AI. An AI map. And I'll give you a perfect example of that. A few years ago, Apple released its first 5G phone, basically saying, you know, it's going to unleash all this potential and so forth. I don't know about you.

I don't notice much of a difference using a 5G phone versus my old 4G phones. No. But it doesn't matter. It's spurt just because it was one more G, it got people to buy. I'm going to take the other side of that. I think it's crazy to think that, and I think many people in Silicon Valley would tell you it's crazy to think that Apple. isn't working on.

Oh, they're not the first. And I think June, we'll see what it is. We'll see what it is. But it almost doesn't matter, even if it is kind of underwhelming on June, as long as they market it as AI.

As they market it. But to Steve's points, it's incremental, right? It's not a huge revolution. So what is Apple going to do that some of these other companies? Could edge computing be its advantage? It could, but I don't see...

You think that's incremental? Yeah, but I don't see Apple being the leader in edge computing, right? They're in a consumer-facing business. How are they going to be selling more services And at the same time, we could talk about Apple for years, but you're basically getting all this competition and you're getting regulation in Apple too. So where can they really play that the government's going to say, hey, now you are just taking somebody out of the business? So for you, is Apple a hold?

Apple is a hold. And China is just in terrible shape right now. The sales were down there. 13% in the December quarter doesn't look like it's improving. Tim Cook just got her from China. So we should hear some more color in that in two weeks, two and a half weeks. Steve, thanks for being with us. Keeping on crew prices as well, they are rising on those reports.

Israel is bracing for a direct attack from Iran. As soon as this weekend, we will get threats trade on the oil and energy market ahead in the hour. And a quick check on the broader averages. The Dow lower for the ninth session in 10. We will be right back. Welcome back. Most of the tech sector is getting dragged down on interest rate sensitivity. The NASDAQ composite is seeing the brunt of the selling down one in seven-tenths of

percent. Kate Rooney joins us with Moore and Kate. It's really those unprofitable names. Yeah, that's right. D. FinTech is really an extreme example of what you're talking about with tech's weakness today. It's a reflection of growth, really, getting punished as bond yields. Spike higher rates, not great for this group of stocks. So these names tend to be highly valued based on future earnings. So when rates go up, discount rate that investors use to value these name also goes up. That squeezes valuations. It's the dynamic you're seeing right now with Robin Hood, which had been really staging a recovery. It's down more than four percent. today. It's told 40% this year, but you've also got SOFI, a firm, Coinbase, those names all lower.

And then Kathy Woods, FinTech Innovation ETF, a bellwether for this space down as well today. And then you got Bitcoin, lower trading really in line with the NASDAQ, hitting the crypto proxy names even harder, so micro strategy, the largest corporate holder of Bitcoin, the mining names, which trade essentially like levered Bitcoin plays. So they tend to see these outsized moves in either direction and same direction as Bitcoin, but they tend to be more severe, so-called mining names as well are getting hit the hardest. One caveat on fintech and rates, some of these names have actually benefited from higher rates. They hold customer deposits, so they bring in more interest income if rates go up. It is this sort of double-edged sword, but you're seeing today's move lower,

more of a knee-jerk reaction and backlash on the growth names. Post your trial of growth lately, though, have you, I don't know if you've heard of this, Discover Tech 100 fund, it is this closed-end fund. It holds SpaceX, Stripe, other private companies down double digits today, but up 300% since launching and sort of been trading like a meme stock, Dee. All right. Thank you very much, Kate Rooney reporting for us. Let's go to Simomodi now for a quick CNBC News update. Seema. Tyler, a suspect is in custody following a crash into a Texas Department of Public Services building earlier this afternoon. Texas DPS officials say multiple people were seriously injured in the crash. at one of its offices about 70 miles west of Houston.

Viewed video from the scene, Houston, excuse me, video from the scene appears to show a tractor trailer with front end damage aimed at the building. Texas Rangers are now investigating the incident. The Russian city of Ornberg is facing mass evacuations this weekend amid dangerous flooding. The city of more than a half a million people is being threatened by rising waters and Ural River caused by swiftly melting mountain snow. Tens of thousands of people have been evacuated in Siberia and Kazakhstan. And Robert McNeil, the creator and first anchor of PBS NewsHour, has died.

McNeil got his start at NBC News before joining the ranks at PBS. He first started as one of the half of the McNeill-Leer report before later expanding the evening new cast to NewsHour. His family says he died today in Manhattan. He was 93 years old. Tyler. He was always ever. very comforting presence on air on PBS.

Indeed. Seema, thank you very much. Be sure to join us for the first ever CNBC Changemakers event. It's in New York City on April 18th, and you'll hear from some of this year's honorees who are reshaping business and redefining leadership, including the actress and talk show host, Drew Barrymore, and the Secretary of Commerce, Gina Ramondo. Scan the QR code on your screen or visit CNBC Events.com slash changemakers to earn more. We'll leave that QR code up there for just a second. I'll just draw it out here so you can take it.

There's a lot more Power Lunch. Have to this quickly? Welcome back to Power Lunch and let's get a check on markets. The selloff is still underway. The down industrial, still down more than 500 points in the NASDAQ composite, still the laggard down one and seven-tenths of a percent. The S&P 500 down one and a half. Bond yields, they are following, but despite today's drop, the 10-year yield still solidly higher for the week. digest inflation data and Fed speak. How much are rate fears impacting today's decliners? Let's bring in Steve Lisa. Steve. Yeah, I think it's just one piece of what's going on.

I think the Fed speak is probably, you know, a rock thrown into an otherwise wavy body of water here. The first thing that looks like it's going on here is a bit of a flight to safety. If you look at all the movements in the market and try to figure out what's the best explanation for all of these movements, well, you've got oil up, the dollar up, yields down, stocks down. That's a typical lineup for a flight to safety. But then you want to put some context in that, which is where you started, dear, dear, was we did have a bunch of hawkish feds. Some of it today from Jeff Schmidt, last couple days, even people like Susan Collins from Boston

coming in. So in that context, the yields want to be higher. But I think what they're doing is, they're exploring where the top of that range is. They've seen the bottom of it is down below or right around 4%. But is that top of that range, 4.5%. Is it something higher than that? You You also have banks down on the day. It's kind of a big day when J.P. Morgan falls as much as that. And then you have the bond market figuring out. So I think you have a lot of different cross currents going on. Today it looks more like when I look at yields a flight to safety with some of the geopolitical concerns that are out there.

When you look at what bonds have done and the fact that people seem to be bidding up the yields on bonds, what does that tell you about sentiment? Well, when you look at sentiment, well, first of all, overall, when the Fed says higher for longer and the market starts to embrace that. And you can see that over the long term there, the two-year note has been up near $4.90. And then you look at the 10-year, it's been up near four and a half. That presents an ongoing challenge to the stock market because the risk-free rate is going to be higher. And so the hurdle rate, what we call, is going to be higher over time. So that's going to be an issue.

But then you have this kind of exploration, Tadley. It's a nice chart if you go back and look, for example, back to December or so, as I speak, so wonderful. You see the lower end of the range. And then what we're looking for is the top end of the range. And maybe four and a half is it, which would be sort of good news in this context. At some point, Tadda, remember the days which were not too long ago when the market was worried the Fed was going to be too tight for too long and bring on a recession? that caused 10-year yields to go down and be lower. That could be an abiding concern as the Fed talks more hawkish.

Actually, the 10-year comes down. But we have to watch it. There's been an awful lot of volatility. And I think if Mike Santoli, he would remind us that the stock market has come a long way very quickly. And so what we're seeing here, we're still not that far off the high. So it's not that big a move. But it's one where you just might want to pay attention for sure. It's been a cool couple of weeks here, not just in the high.

the weather, but in the markets. Steve Leasman, thank you very much. Let's turn back to you, Surrott, and you expect the Fed to be on hold for a little while, but you have been really a strong exponent of basic materials. I have, and I think one of the main reason for that is if you look at the lack of supply, copper, it hasn't been a copper mill in 10 years. And if you look at the demand for copper, whether it's coming from China now, but we were talking about before, data centers, right, EVs and hybris.

all the power that's going into building all these chips. That's all copper-related. All the new construction takes copper. So those are things that we think, you know, you can play through Freeport McNamara-Garie-Garie-Tech resources, right? You can even companies steal companies like Cleveland Cliffs. I think the demand for these products, and they've been so out of favor.

People haven't looked at it for 10 years, and really if you go back to the early 2000s, that's where kind of a lot of the money was made. The other part is the dollar. As the dollar gets stronger, people buy more of these. that puts the price up as well. So I think it's a very important part of a diversified portfolio,

and it really has been ignored for most investors. Those materials have obviously industrial uses, real economic uses. Gold really doesn't. No. What do you think of gold? I like gold again as a diversification hedge. I mean, we own Wheaton Corp. It's a 1% position.

But I think it's important to have in your portfolio, given global uncertainty, given kind of where we are going to go with a dollar, I think it's something to have in your portfolio, but you're not going to bet the farm on it. You mentioned earlier in Vidia and that you're taking some profits there. You have been taking profits. Extend the analysis out to the other magnificent seven. What do you do with, though?

We got Amazon at an all-time high yesterday. So when you look at kind of the market-weighted S&P versus the equal-weighted S&P, I think that's where you really need to make the comparison. These companies have run so quickly so far. They're great companies. They are so big a portion of them. They are so big. And look, if you look back historically, whenever a sector becomes,

comes north of 15%. It's not, you know, if it's when. When does that come down? And we don't know what the exogenous factor. Again, I'm not saying to get rid of these companies. I'm saying you can have them in your portfolio, but meta doesn't need to be 6% of your portfolio. It could be 2% of your portfolio.

The same for Apple and Google and the others as well. But these companies aren't like even what we typically think of as tech stocks. We talked a little about Apple's growth rate, which isn't even there. And they just have so much cash on their balance sheet. They're industry leaders, right? That makes them a little different. Does that make them almost defensive in higher rates environment? So they become like defensive, like consumer staple companies?

That's kind of what I think of. It was a consumer product. However the difference is that when competition comes in, like we saw in the late 1999 area, if you're Nestle, you're going to be selling chocolate three years from now. You don't necessarily know where, I'm not saying it's going to happen, but you don't know what's going to happen to Instagram in three or four years, right? So those things, it's not a recurring revenue as. much. So you're getting that multiple of 20 to 24 times. Again, I'm not saying sell out of these

companies, just don't bet the farm because there are other opportunities out there as well. And look, if the economy slows and advertising comes back, or regulation, which we know is coming after every one of these big seven companies. I was at a dinner last week with a few tech CEOs. And they brought up an interesting point that our mega caps are different. They found ways to innovate out of their, like, innovators dilemma. Let's have it. Right. You would think that Instagram maybe wouldn't be dominant for so long. Facebook would have had trouble making shift to mobile, but it was able to do so because it has the capital to do so. Even at Disney, you thought streaming might threaten its traditional business. It was able to shift. Do you think Google's going to be able to do that? And does that still

apply? I mean, regulators is one risk to that thesis, but they haven't been able to get it together. So I think you're starting to see that in the regulation side. But where it's going to affect them is, remember, most of these companies got to where they were because of acquisitions. Right. Yeah. Okay, so Google bought YouTube and, you know, then... Meta bought Instagram and WhatsApp. So if you think about what they've all bought and now, maybe you break them up. Maybe it's some of the parts is greater than the pieces. Then you kind of see which one do I want to own versus whom.

But I think it's important. And look, we can always say this, it's different this time. But we also know that if you don't have the ability to go out and buy new companies, you have to kind of stick with what you have. And then, look, who would have thought TikTok would have come in four years ago? Right. So you do get, it's very fast changing in that world, and they're very good companies. But what I'm also saying is there are other opportunities out there.

And doesn't necessarily mean you have to have 40% of your portfolio in these companies. It's done very well for 10 years. And it could do very well for the next 10. But I think you've got opportunities also in the market. And you've seen that so far this year, broadening out of the rally from the Meg 7. Yes. Shares of Arista. Let's take a look.

Lower after a double downgrade to sell at Rosenblot, saying the idea that it could be in AI winners over Blown fits into our theme here. We'll trade it ahead in three stock lunch. We're back in two. Time for today's three stock lunch. We are focusing on a couple big movers and looking ahead to a key name that is reporting earnings this month. Here with our trades is Ava Addo, C-O and chief investment strategist at ER shares. First up, Ava, Intel, China telling telecom carriers to phase out foreign chips. That is a blow to names like Intel among others. The stock is down as a result more than 5% today. What's your trade here? It's a strong sell. Today we've got the news. China, as you said, is phasing out foreign chips. 26% of Intel sales are to China, and then that's the

top market. So if that goes away, then we'll see a big decrease on the revenues. That comes on top of very weak fundamentals. Their ebb margin is 0.1% that's almost zero compared to 21% for the industry average. The revenue growth is negative, negative 14%. And their EB growth is also negative, negative 38%. And then comes also side by side with the relatively high valuation of the PE of 94 compared to 26 for the average of the sector. It's a strong sell. Right where you went Intel, there's China, there's foundry, there's competition.

Yes, completely agree. Because I think the biggest thing about Intel also is operating leverage because they own foundries. And because you have that large capex, you have to spread and allocate that cost across it. And if your revenues are coming down already, not just with China, and you're already one step behind producing chips, I think it's going to be at least a couple of years. There's plenty of other places to put your money in, especially in the semiconductor. All right, Ava, let's move on. Agreement there. Let's move on to Arista Network slumping today after a double downgrade to sell from buy over at Rosenblatt.

The firm says Arista's growth in AI-driven data center network switches. could be thwarted by Nvidia, your trade on Arista. I'll disagree with that. I have it as a buy. In fact, we own Arista Networks, and we also own Nvidia. We've been in Nvidia since it was a $5 stock. We still believe in both of these companies that they have a great future.

Arista Networks was actually upgraded yesterday by JPMorgan. Today, as you said, double downgrade. And their thesis is that Nvidia will steal away their Internet business. would disagree with that. When a company is under pressure, it does not act like IRISTA networks. Arista has a revenue growth of 34% when the industry average is only 6%. And it has an AB margin of four to five times its peers. And most importantly, a net income margin, which is 35% compared to 2% for the industry.

When a company acts like this, it's definitely not under pressure. It's a buy. So if you were Taylor Swift, you would shake it off this 8% decline today. Exactly. I would actually buy. I think it's a very good entry point, and I wish I was Taylor Swift. We can all dream. You can all dream. Tyler, good preference. Finally, Ava, we asked you to pick stock reporting earnings in the next couple weeks. You chose Chevron. Why do you like this one? And I like Chevron for the short term. I wouldn't have it as a long-term buy, but just because of the S-KKU. in the Middle East, and Iran now threatening for further escalation.

I think Chevron is a good defensive position, and I like it when it comes to oil companies. They have very large position in oil fields, and they're geographically well positioned in Kazakhstan, which can target that region over there. Their net income margin is the top of the category. It's 11% compared to 7% for experience. Its gross margins 39 compared to 28% percent. compared to 28, and even though it's a bureaucratic company, so I don't believe in it for the long term,

it's a great defensive position for now. It's a buy. That's right, you're saying you like commodities, energy. What about Sharma? I do. I like Sharon short term, and I like it long term. The longer oil stays at these levels, the better off it is for these integrated oil companies

because they get to sell the oil down the road at higher costs. And their production costs keep on going lower and lower. So when oil's at $80 to $90, they're minting money, and the longer it stays, the better they do, the more efficient they get. You've got a great balance sheet, a dividend that's 3% growing every year. It's one of those dividend aristocrats.

I think, again, as a diversified portfolio, you want companies like a Chevron and an Exxon in there. Eva, to you, what explains this market funk we've been in for the past couple of weeks? Well, we have actually started making changes in our strategy. Now with CPI came 0.3, then 0.4%. Inflation is now running above the 2% target rate. So that's a concern to us. We've been moving to more profitable companies. We want to see companies that widen their margins.

We want to see companies with great cash flow. So we think until we see the rate cuts, which is going to be pushed way further into the end of the year, we'll have a more conservative position in growth, but way more conservative than we had in the first quarter. Eva, we were discussing during the break, the sell-off that we're seeing in JP Morgan shares, even after a decent quarterly report, do you think this is a warning for the rest of earnings season that the bar is going to be set fairly high?

So I think we have good news and bad news. I'm actually optimistic when it comes to the earnings season. I think we'll have good earnings. Companies have been performing well. Companies have been proactive in maintaining their margins, widening their margins in some cases, cutting their costs. So I think I'm optimistic when it comes to earnings.

I'm actually a little pessimistic when it comes to inflation, I think inflation, especially housing, is remaining sticky, food away from home is rising. Energy costs are rising. So that's a concern. But I think it will be a healthy boost to see some earnings coming up. And I think it's a stock pickers market. So you have to be very careful which companies you select. Right. We'll see it could change the focus from interest rates, perhaps to earnings. Eva Addis, thanks for being with us. All right, let's give you a quick market check as we round the corner into that final hour of trading. The Dow is off 1 in a third percent or 500 points at 37-945.

NASDAQ off a little bit more in percentage terms, off almost 2 percent, 1.7, 9 percent, 293 points lower. And as for the S&P, if we have it, it too, kind of splitting the difference there between the 1.78 and the 1.3. The S&P is now 1.67 percent. We'll be right back. Welcome back, stocks lower across the board today. The Dow down now for the ninth time in 10 sessions. Never mind that this coincides with Deirdreboza's arrival here pretty closely. Through some of the sectors on the move, let's watch them,

starting with chips, Intel, and AMD hit hard by reports that China told its telecom companies not to use foreign chips. Invidia also lower following a bounce earlier in the week. It's bad for technology stocks when I leave San Francisco. That's what happened. And if anyone wants to, I'm going back next week, so maybe we'll see what happens. Banks, though. Of course, we've been watching a close eye on them dragging on the markets.

J.P. Morgan costing the down nearly 75 points following its results. City Group and Wells Fargo, they're also lower. Energy stocks are also lower today, and that's despite a gain in oil driven by fears of escalating Middle East tensions. Israel is reportedly planning for a direct attack from Iran. Those geopolitical fears, adding to an already long list of worries for the markets, It's sort of where we started the show. And it's kind of similar to when you had the Ukraine war going on initially. On the weekends, risk off, right?

So get your hedges up, sell what you need to before you go into the weekend. We'll see what next week brings with earnings. You know, people somewhat surprised the JP Morgan reaction. So why not go into the weekend? You can park your money in treasuries and you can kind of see, hey, let's reassess when Monday starts. With interest rates being where they are and presumably staying where they are for maybe a little longer, Does this raise the premium on how important earnings will be? Absolutely. Remember Tina? Well, we have other things now.

There are other alternatives, and you can be in cash, equivalence, and treasuries. And as you were mentioning, you can go into some nice quality corporate bonds at 6%. Lock it up for a few years. Lock it up for three to five years. Nice thing to have. Surat, nice thing to have you here. We will see you next week. That does it for Power Lunch.