Power Lunch - Retail Rivalry, Oil Slumps and the Anti-ESG Movement 8/15/22

Episode Date: August 15, 2022

Walmart and Target report earnings this week. Which company has a better handle on inventory and margins? The bull case for both. Plus, oil prices drop on weak data out of China. Is this the start of a steeper decline? And, the rise of the anti-ESG movement. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome everybody to Power Lunch. I'm Tyler Matheson, and here's what's ahead on a Monday. Retail rivalry, Walmart versus Target. We've got two industry bellwethers. Both report earnings this week, both coming off warnings about the impact of inflation. Which company has a better handle on inventory and margins? We'll have a couple of experts. One who says Target, the other favors Walmart. Plus, losing energy. Oil prices drop, weak data from China, raising concerns about a global slow. We will speak with cities Ed Morris. Kelly, about the fallout. Yes, his oil bearishness looking a little more reasonable these days. Tyler, thanks.

And here's the markets, which are putting in a decent performance to erase some earlier losses. The Dow's up 4 tenths of a percent similar for all three. That's 140 points for the Dow. The S&P just below 4,300. Disney is the best performing Dow stock after hedge fund manager Dan Loeb took a stake in the company. In a statement, Disney emphasized its strong performance under current CEO Bob Chappell the expertise of its board. The shares are up 2% on his proposed changes that do include suspending the dividend and spinning out ESPN. We'll have more on this ahead in three-stock lunch.

Also take a look at shares of Tesla. Jumping higher after Elon Musk said the company has now produced three million vehicles with nearly a third coming from its gigafactory in Shanghai. They also are heading into the three-for-one split shortly here, which may be helping the shares climb not only 4% today, but they're back to $934 tie. very much. We've got retail earnings dominating the week ahead, led by Walmart and Target, both issuing preliminary announcements, lowering their guidance for the quarter and the rest of the year. Both companies warned of higher costs, higher inventory, and supply chain bottlenecks since their last reports. Walmart, down about 10 percent, target off about 20. So which has a better plan to

navigate inflation and grow profits? Here to make their cases, Steph Wissick, Wissink, excuse me, from Jeffries, says by Walmart. Eddie Ruma from Piper Sandler, says by Target. I'm just going to turn you guys loose. Steph, you go first. Why do you think Walmart is better positioned than the slightly more upscale target right now? Yeah, well, first, thanks for having me.

And Ed, good to see you. So our pitch case on Walmart here is really about business mix. And when we talk about Walmart, we have to talk about it in two layers. Walmart retail, which is the core business in the U.S. And then, of course, Walmart. enterprise, which is the global business with all of these different dimensions that are coming into play.

But on the Walmart retail side, which competes more strictly with Target, the one thing that we favor is the business mix. And that's 65% necessity in grocery. That tends to be a winner in recessions. And we do see them taking incremental price, but still widening those price gaps. So in a position to take share in the big categories that we no matter most to consumers every week when they're going to the store. So Steph likes the business mix here, which is more till. ed toward groceries and necessities than maybe targets is, though Target is certainly in the grocery business, but their sort of sweet spot may be sort of upgrading your home and not necessities but want to have. How do you respond to her and make the case for Target?

So I'd actually take something of the inverse. We think that one of the areas we're seeing some of the most competitive price pressures right now is grocery, right? All of the retailers are really focused on grocery inflation, and we think that, you know, a player like Walmart, which lost share in 2020 is working very hard to maintain market share. And so we see them reinvesting in price and grocery, which is very difficult in an inflation environment. The other piece that offer up is really one of the pieces you started with, and we think targets more upscale consumer, at least thus far, fares better in this environment than we think of then Walmart's kind of middle of the middle consumer. I think, Steph, Ed has a point there. We were talking

last week about there are various sort of not just inflation numbers to consider, but impacts. And you would have to argue that inflation is probably higher and more damaging to the lower end customer than it is to the middle, upper middle, or upper end customer. You're absolutely right. I mean, the lower end customer is a budget conscious value-seeking customer anyway. They actually lead the whole charge around value hacking. So we would agree with that. That if you're looking at that, at positioning around a customer cohort, the lower end customer is going to be more distributed towards Walmart.

Interestingly, if you look at Walmart's broad customer base, this is about 150 to 200 million customers a week that visit their stores, it does parallel the national household income distribution. So what I find interesting is we're really leaning in right now to both Walmart and Target and listening to what they're saying, they are seeing the most customers every week. So incremental change in that basket structure, sensitivity around pricing. is going to show up for both of these retailers based on how those basket structures are being built. So I think both of these companies have an advantage, a unique advantage in this time.

What we're seeing from Walmart that we like most is just this index to mix. And if we do see discretion continue to underperform staples in the basket from a logic perspective, we do expect Walmart to be a share taker here over the next six to 12 months. Ed, you want to respond to that? Look, I would just say one thing that we're watching pretty closely, and you kind of mentioned the earlier comments is around inventory, right, as we think heading into holiday. You know, Target was really one of the first, we call them the kind of canary in the coal mine, took the very controversial step, right, of pre-enouncing earnings very early in the cycle,

saying, look, we have too much inventory. We're going to try to lower it aggressively, right? You saw Walmart pre-ounce, right, months later. And so one of the concerns we have is the amount that target was able to, might have been in inventory, they were able to move, the amount of orders they were able to cancel, right, leaves them in better positions we head back to holiday. To Steph's point, in terms of basket, we would agree wholeheartedly. And candidly, again, we think grocery is a part of the basket where we've seen the strongest amount of pressure and it is the area we'd actually like to avoid right now. I guess we're really talking here about the short to midterm performance of these stocks.

How do these stocks, why don't you, Steph, you take Walmart and then, Ed, you'd quickly take Target. How do they tend to perform after earnings? Do you know? Yeah, I'll jump in on Walmart. I mean, both of these stocks, I think, frankly, are volatile in an ira raw earnings. But to edge earlier point, you had a double profit warrant from Target really quickly. You had a double profit warm from Walmart with more of an elongation. I think that is a reflection of the different philosophies.

These companies have taken around inventory derisking and control. Target went after it really hard and heavy right away, and you're going to see that pressure in their second quarter. So when you look at the numbers reported this week, the irony is that despite the business mixes, they're going to look very similar on paper in terms of the margin pressure, both because of different actions. And then I think as we look out over the next, let's say, 12 to 18 months rolling forward,

the calendar passed, let's say, the recession. Our economist thinks the recession happens in the back half of next year. Then you would start to see Target become more advantage with that discretionary orientation to their business model. Ed, final thought. You know, the other thing I'd add is that Target is trading at a 7.P. Multiple discount to Walmart. It's historically been closer to 4 to 5. So we just think that that spread has to contract a bit.

And the final piece really here is that, you know, there's a lot of retailers that are struggling right now. We think targets well positioned to take share in apparel. They're well positioned to take share in home furnishings, which you saw them do many years ago in Toys Rustlin, bankrupt. Right. You got a 173 price now on a price target, add of 190 on target. Folks, thank you very much. We appreciate your time today. Thank you. You back. Our next guest says, don't bet against the consumer, broadly speaking, and she has some additional ways to play it.

Courtney Garcia is Senior Wealth Advisor at Payne Capital Management and a CNBC contributor. Courtney, it's good to have you. Do you want to pick sides, first of all, in the Walmart versus Target debate? Yeah, actually, I like the Walmart conversation here, specifically the point that was brought up first, the idea that they have a lot less discretionary product. So Target takes up, I think it's like 60 to 70 percent of their goods are non-discretionary. So those are like clothes, electronics, et cetera. I think that actually might help Walmart here.

But I think the bigger picture is we just want to see how Walmart and Target are reporting and what that's going to lead to the consumer. There was a lot of concern when they initially came out. But I would actually argue that a lot of that was the change in the consumer going from goods to services. I don't think it means a lot for the consumer overall. But I will think it's really interesting to see what the retail is seeing in the consumer in general. Yeah, and I guess I might add to that that I think the drop in gasoline prices is underappreciated in terms of the relief that's probably had on the consumer. I mean, I have to imagine, we've seen prices drop by over a dollar a gallon straight down over the past two months. That is a huge gift for these companies, isn't it?

Oh, definitely. Yeah, and I think that that's the whole idea, as we want to see how the consumer is affected by inflation. And gas prices have been a huge portion of that, which has really come down here. And I think the nice thing is, is so far the consumer has been able to sustain the high inflation that's been happening. I think that's happening because we still have a really tight labor force. Wages are holding up. But also, people still have a lot of cash on their balance sheets. And so they've been able to, if they needed to dip into savings, they have the savings

to get through that, broadly speaking, obviously. But at some point in time, we can't have inflation going up 9% a year. We're going to run out of money. People's wages aren't going to continue to increase. But if inflation's coming down, it seems like it might be, especially gas prices being part of that, that may help us get to a point where the economy can stand this, the consumer can get through this and we can stay on good footing. Yeah, if you get inflation coming down, as the latest readings seem to indicate,

at least by virtue of the month-to-month change as opposed to the backward-looking year over year, you have a different kind of calculus here. Everybody seems to love Occidental Petroleum. Why do you also? Yeah, I mean, you can't fight Warren Buffett on this one. If he's one of the ones who likes it, I have to agree with him there. But ultimately, I think really energy in general, I think is still a really good play, especially as you're seeing energy prices come down. I think it leads to more of a buying opportunity here. And they've really put themselves in a good position where when energy prices were higher, they actually paid down a lot of debt, which just puts them in a much

better position to have a stronger balance sheet here. And even with energy prices coming down, just keep in mind, they make money when oil prices are a lot lower than they are now. Their break-evens around $40 a barrel. And we're talking about it getting under $90 a barrel right now. So oil price are still much higher than the point they make money. And I just think from a longer-term perspective, it's a great idea. And you are seeing people like Warren Buffett or Berkshire are actually buying into that, which I think also will help from the long-term pressure standpoint. And let's talk Home Depot. They also report in the morning. I take it you're a fan. Yeah, Home Depot, I think, has gotten overly hit here with the concerns on housing, which clearly is

one of the things that is slowing right now. But Home Depot, your consumers with your customers with Home Depot, these are people who already own houses. They're not necessarily as affected by the changes in interest rates or changes in mortgage interest rates. And you also have a really strong demand towards your professional services there. So you have your contractors, your plumbers, your electricians, who are also putting money back into Home Depot. And I just think forward-looking, I think they're likely going to hold up a lot better than has already been feared so in the way that it's sold off a lot more than the markets have so far this year.

All right. Courtney, Courtney, Courtney, thanks for joining the freight today. We appreciate it. Thanks for having me. Courtney Garcia. All right. A lot going on this week in retail. All right, coming up, the confusing world of ESG, and how it's giving way to an anti-ESG investment

movement plus cities Ed Morse along a long time oil bear with us to discuss today's drop in prices. 10% decline over the past month. Is this the start of a potentially deeper plunge? Before the break, however, a number of consumer names hitting all-time highs today. Pepsi, Genuion parts and AutoZone. Welcome back to Power Lunch. Controversy surrounding ESG investing growing as the trade gets more crowded and inflows slow. According to Deloitte, 22% of all funds launched last year. 22%, one out of five, had an ESG focus, and many mimic the market more than you'd think. The I shares ESG Aware ETF, one of the largest ESG funds, down about 4% over the past six months, pretty much in line with the S&P. Its top holdings include Apple, Microsoft, Amazon, Tesla, Google.

those five names, about 20% of the fund. And if it sounds familiar, it's the same top holdings as the triple Q's. And that's part of the reason for the rise in the anti-ESG movement. Let's bring in Tarik Fancy, founder and CEO of the Rumi Initiative and former CIO of Sustainable Investing at BlackRock. Tarik, welcome back. Good to have you with us. Why is it a concern if so many ESG funds seem to have so much of the state? same stuff, namely the largest parts of the QQQs are the top 100 NASDAQ stocks?

Well, there's a small problem and a big problem. The small problem is that it's usually dishonest, ethically dishonest, to sell something to people that, you know, they think it's one thing based on what it says on the tin and they're getting another. I mean, effectively, they're just paying more in fees to big asset managers for, you know, really the same thing with green paint on top. And I think that there's a much bigger concern. which is that in the aggregate, it just acts as a placebo, right? Because we all buy these things thinking they're creating impact. Any impact created off these public markets, funds, just, you know, moving around shares

and giving responsible investors slightly more green basket, more more green basket as a way to bump fees, just sort of achieves nothing and sort of delays us on actually acting on these issues. So the fundamental concern, or one of them, if I'm understanding you correct, correctly, is that. the ESG version charges a higher fee for fundamentally a portfolio that is very, very similar to a triple Q portfolio that you could get at, let's say, a quarter of the fee. That's pretty much it. I mean, with the ESG space, as with anything, there are areas where it makes sense. There's a kernel of truth for certain strategies and certain geographies, certain industries, and with a long-term focus, that ESG matters. Unfortunately, the greatest impetus to use the SG for greenwashing exists at the opposite end. So it's not the private stuff where it matters.

It's really all these public market funds that are commoditized, right? They track market indices for very, very thin fees. And so in a space like that, the impetus to paint the thing green to get a fee bump on a commoditized product is huge. Do you buy the argument that I've seen written several times over the years that on average, socially responsible investment products, slightly outperform broad market like an S&P 500 fund. Do you buy that? I don't.

I think that going forward, there's an argument to me made that more responsible companies may perform better, but the historical research is scant. It's usually the most difficult thing is it's hard to measure ESG, so you're aggressing returns against sort of a moving object. But even the research that shows that ESG is good for returns

It was largely based on a paper that came out of HBS some years ago. There's another paper that came out recently by Andy King and Luca Bricci that basically shows that you actually can't replicate any of that. It's just a statistical artifact because, you know, ultimately, any kind of analysis like that, any kind of regression, if you torture the numbers long enough, they'll tell you what you want, and everybody wants to hear that ESG is good for the returns and for the world. It's notable, Tarek, that we just saw outflows for the first time in five years, about $300 billion by the end of June.

So there is a bit of a turning of the tide here. I thought the Wall Street Journal interview over the weekend was great. They've launched a drill, and it kind of explains the philosophy there. And it was very interesting to see the phrase kind of putting profits before politics. And if this represents kind of a turning of the times where there is now a substantial enough pushback that you could see growth and asset flows going into funds like this newer one that are actually trying to back against some ESG practices? So I think fundamentally what they're doing is a waste of our time because it actually

moves the debate where it doesn't need to be. So their argument is that Larry Fink is putting politics before purpose and they're going to come and rescue that. It's complete nonsense. Larry Fink, as they know well, is bound by the legal obligation of fiduciary duty to only focus first and foremost on profits. I can tell you with certainty as an ex-insider that that's exactly what's happening there and every other firm and has been for a long time. That's the problem. They're locked in

only doing what's profitable and what's in society's interest, for example, investing more in green technology, doing things that reduce economic inequality. Those are not profitable. So the reality is that they're kind of having a debate that is all like words. On one hand, it's the free market self-corrects theory. Larry is where you paint it green and make people feel better. I liken it to the Catholic church practice of paying for indulgences. And on the right, you have basically a libertarian theory that pretends the marketing decoy is real so we can have a debate that doesn't include the obvious answer, which is regulating certain areas of the economy to protect the environment. So let me make sure I understand you. When you say Larry Fink is going, is bound,

his fiduciary responsibility is to profit, you are talking about Mr. Fink's fiduciary responsibility to his BlackRock shareholders, not to the owners of the funds. Those both exist and there's subtle differences, but he has first and foremost a fiduciary duty to the actual retirees and other people whose money that they manage. They're not allowed to look at values. They're only allowed to look at value, which is objective. So if values in some way translate into value, for example, everybody says they want to buy nice fluffy green things, then Larry is going to exploit that to sell more product. I don't see what the right has. Why do they have an issue with that?

to have a problem with making money. I mean, it's all sort of seems like a, you know, just it's a debate about marketing. On the left. Quick question on the way out here, because there is one very real world example of this that's highlighted in its Exxon, where you've had, you know, major institutional investors with an ESG impetus, helping engine number one get a board seat and supporting that mission, which is dramatically changing what Exxon's pipeline looks like and where it's putting its future dollars. So the point here was to a mass investor class who can push back,

against that very real world boardroom fight, which seems like it's happening in a lot of companies. It is, but it's not going to give us the change we need at the speed we need it. So let me give you an example. It's in 1950s, and we've just figured out that smoking causes cancer and we're asked, as the business community, what is the right answer to do what is in the public interest? The answer is definitely not one-by-one proxy fights against tobacco companies

to ask them to voluntarily to sell less cigarettes. that's such a stupid answer. It's insane we're even discussing it. I don't mean, there's no disrespect for you asking it, but that's what we're being told as the answer. I mean, you know, you can wait for society to get there. We know sometimes it's different. Yeah, go ahead.

There's nothing harmful about it in and of itself. It's the narrative. The narrative can't be that this is the answer. The answer is obviously government regulation. And the simple reason is that this is an oil company. So if I get on the board of Exxon tomorrow, I have a fiduciary duty to shareholders. What the world needs Exxon to do, it's probably not in their short-term interests.

So we can't rely on voluntary compliance. And that is effectively a mechanism to decide. Make no mistake. Engagement of that sort is better than divestment. But if it's being pitched as the answer to society's woes, we see the reason why young people have lost faith in capitalism, because leaders keep saying it's really important to solve these issues. And if that's the best answer we're going to get, it's not going to move as fast as we need. All right, Tarek.

Thanks for joining us, say we appreciate it. Thank you. Tarik Fancy. Up next, no IRA escape. The Internal Revenue Service cracking down on tax evasion and cheating. New details on the department's strategy next. Plus, how the Inflation Reduction Act could impact some of the clean startups we've been highlighting. For better, for worse, we'll be right back.

Welcome back to Power Lunch. As part of the Inflation Reduction Act, the IRS gets $80 billion for increased tax enforcement, you might have heard. Robert Frank, Joins. joins us now with a look at who should be worried. Robert? Well, Kelly, the IRS hoping to raise $200 billion in added revenue over the next decade from increased enforcement. Now, for high-earning taxpayers, most of the new audit attention is going to focus on three specific types of income. The biggest is pass-throughs. About 40% of the tax gap, that's all those unpaid taxes, that comes from pass-throughs, so they're under-reporting

their income. That includes partnerships, escorts, foundations, and sole proprietorships. In testimony last year, IRS Commissioner Charles Reddigg listed, quote, greater scrutiny of pass-throughs as his first priority for added enforcement. Now, the second big one is offshore transactions. A study by IRS economists found that secret offshore income accounts for $15 billion a year in unpaid taxes. The IRS said it's going to hire a specialist. who are really good at offshoring and detecting those offshore accounts to target those taxpayer. And the third is capital gains. Three quarters of all capital gains income is earned by those with a million dollars or more in income.

Sales of stocks and other financial products, they are directly reported to the IRS. So not a lot of manipulation there, but sales of private businesses, property, crypto and collectibles, are not automatically reported. So over the past decade, if you look more broadly, the audit rate for those earning more than $1 million a year has fallen by 80%. So Kelly and Tyler, the IRS here, are taking the Willie Sutton approach is we're going to go after where the money is. That's at the top and these three specific types of income. Well, and again, I think the sort of question for a lot of people, Robert, is, are a lot of everyday sort of middle income people are going to be affected by this?

is it's just for going after billionaires, is it just specific structures like the one that you're detailing? You know, so it's helpful to get some clarity. Yeah, and look, if you're a middle-income taxpayer with a Swiss bank account, you might get ready for an audit. But basically, most middle-income taxpayers, like most of us, get their income from W-2 wages. That's all automatically reported to the IRS with third-party reporting,

so there's not going to be an audit. It's these special vehicles, pass-throughs, foreign incomes, and extraordinary capital gains. So unless you have one of those three, your audit rate is probably going to be the same or lower in the coming years. All right. Feel better already, I guess.

Robert, thanks very much, our Robert Frank. Let's get to Bertha Coombs now for a CNBC News update. Bertha? Thanks, Kelly. Good afternoon. Here's your EMDC update at this hour. A school bus carrying 32 students crashed into a home near the Ohio Indiana state line. The driver of the bus suffered a medical emergency that caused him to lose control of the bus,

sheriff's officials say. All students are okay and the driver was taken to a hospital. Rudy Giuliani, who used to be Donald Trump's personal attorney, has been informed that he is a target of the criminal probe in Fulton County, Georgia, regarding the 2020 presidential election. That, according to Giuliani's lawyer, Giuliani is scheduled to testify in Atlanta later this week. And the U.S. Centers for Disease Control and Prevention has updated its monkeypox guidance to include dogs as animals that can catch the virus. The CDC tweaked its guidance after the first case of a pet dog suspected of contracting the virus from its owner was documented in France.

people to animal transmission. Got to be careful. Wow, that's amazing. Thank you, Bertha. Bertha Coombs. Head on Power Lunch, losing energy, crude, down 10% this month. We'll discuss the energy markets downturn with cities at Morse. Plus investor intervention.

Hedge fund manager, manager Dan Lowe, buying a new stake in Disney. His first move pushing the company to spin off ESPN. We'll trade that name and other big movers in today's three-stock lunch. head to a break. A market flash, HBO Max, cutting 70 jobs. That's 14% of its staff, cuts apart of a larger Warner Brothers discovery effort to get costs down fast. Welcome back. 90 minutes left in a training day that has gone from red to green. So let's get you caught up across stocks, bonds, commodities, and a closer look at today's big drop for oil. We'll start with Bob Bassani down at the New York Stock Exchange. Bob? This is an extraordinary day, Kelly.

I mean, look at this. We are positive. We have disappointing China data overnight. We had really crummy Empire manufacturing numbers. The new orders were terrible. And then we had lousy housing data. You'd think, my heavens, this would be a flat, the down day given the rally. We turn positive.

We're knocking on the door of 4,300 on the S&P 500. And it's a broad rally. Just take a look at some of the names. Just put up some of the Dow stocks here. We've got the consumer names are up. Procter & Gamble is up. They've got the banks up. FinTech's up with Visa and the cards are up.

most of the mega-cap tech sector is up fractionally. Then look at the other group. Look at consumer discretionary that's out there. This is a group that's really been a leadership group. The autos are doing well, not just Tesla, but Ford's up, McDonald's up, Starbucks is up fracturally. These have all had really nice moves. What's down? Well, the stuff people love to have down is down because oil, as Kelly mentions, below $90.

So you're going to get the usual high beta oil names like Halliburton and Schlumber say. So, you know, when oil's down one or two percent, these are usually down almost twice as much as is very typical. They're high beta names. But nobody cares because this is an inflation proxy. And they're loving it when this stuff goes down because they're saying, ah, see, the bulls are right. We're winning the battle against inflation. Still too high, but it's coming down. Transport's another group related here, but they've had a tremendous run, particularly some of the logistics companies.

So Hunt, Kirby, Robinson, expeditors. They've had a great run recently. They're down a little bit. but that that's not an awful lot. Kelly, think about this. China lousy, Empire manufacturing lousy, housing data. I mean, the NHP housing market index was 49, the lowest since like June of 2020. And we still are pushing on the door of 4,300. This is a remarkable rally. And I think a lot of people are getting forced in who weren't participating. Kelly, back to you. Bob, thank you. And let's turn to what he's talking about. That's maybe underpinning this move in this

reversal today. The bond market where yields are falling, the 10-year notice, back below 2.8% today after that double dose of weaker data. So we've seen it sliding certainly well off the highs of 3.5% from mid-June, but even off some of the highs we've seen in the past week or so. Moving along to commodities, oil has also been a big story today, undermining that inflation story and the energy complex, Pippa Stevens, with the latest. Hey, Kelly. Well, oil is tumbling today down more than 2%, but that is well off the session lows,

which at one point saw WIPA. TTI down nearly 6%. Two primary factors are driving the declines. First up, is the weak economic data out of China? The nation's retail sales and industrial production numbers for July came in well below expectations. That's prompting fears around the oil demand outlook since China is the world's largest importer. CIBC Private Wealth, managing director Rebecca Babin, said Chinese demand growth is a critical component for every single oil bull. If the numbers don't improve Wall Street will have to revisit its bullish forecast. The second drag gets potential progress on the Iran nuclear deal. Then we've also got production in the Gulf of Mexico restarting, as well as

Saudi Aramco saying it will boost output. So with that in mind, let's check on prices. WTI down 2.7% at 89.54, Brent crude holding around 9524, a loss of 3%. Natural gas in Europe, though, jumping another 10.7%, Kelly. And if we close at these levels, that will be a record. Wow, that's just relentless, I should say, unrelenting. Pippa, thanks very much, Pippa Stevens. Let's stick with energy for more on oils drop and whether those declines will persist. Let's bring it. Ed Morris, he's global head of commodities research at City. You were saying $65 was a possibility back earlier this year, Ed, when no one believed it. And now do you think oil's going to go back above 100?

Well, it could go back above 100. There are lots of risks on the upside in the market that we can't ignore. hurricane risk, I'd say, is the biggest of them all on the upside. And, you know, we're not into the middle of the hurricane season yet. Things have been calm for the last several weeks in the Atlantic basin, but the NOAA still is forecasting up to 20 name storms and three to six category three or higher hurricanes. And that could knock out close to two million barrels a day out of the U.S. Gulf. And that would mean less oil available for the rest of the world. So it could go up, but I think the over, without, without the weather, I think the signs of slowdown and economic growth, if not recession, are really dominating the story as far as oil is concerned.

Nat gas, as you argued a second ago, is a bit different. That's responding to a combination in geopolitics in Europe and weather conditions around the world. Do you think a reasonable, what is the reasonable trading range over the next six months for oil? Well, we think the reasonable trading range is downward. We think that the likelihood without a recession is that oil would be pricing a bit lower than WTI was pricing earlier today. So we'd see WTI down to the lower 80s rather than rather than the higher level of the 80s. But momentum toward recession could bring it down another $10 or $15 a barrel more than that. So we're in a period of uncertainty. We're trying to think about what a reasonable trading range is means that you know.

what the level of recession might be and the degree to which demand is going to be knocked off as a result of that. And what percentage do you, probability do you place on a U.S. recession and when you filter in what we got out of China today, you'd have to say that that is a struggling economy as well? Well, we certainly have two of the world's three largest economies. Europe and China that are either in negative territory or struggling to keep GDP up where it had been. in. The U.S. it remains to be seen, but my economics colleagues at city are looking at a 50% probability of a recession. That's nothing to sneeze at, but it's not a slam dunk. We've got the September FOMC meeting ahead where expectations are for another 75 bips of an increase in rates.

That could slow down growth even more. All right. Ed, thank you very much. We appreciate your time today. Always good to talk to you. Thanks for having me. We thank you. All right, a fresh start for clean startups. We'll take a look at how the Inflation Reduction Act could impact green companies. This week's Clean Start is next. We'll be right back. President Biden is expected to sign the $369 billion inflation reduction act this week. It includes the most federal spending ever in the fight against climate change. Much of that could benefit the climate startups that we've been profiling here on our weekly series Clean Start. Our senior climate correspondent, Diana Oleg, joins us now. Diana. Well, Tyler, we've gone back to the more than a dozen companies we've profiled here so far,

and the CEOs agreed this money in the form of both direct subsidies and tax breaks to consumers and manufacturers will give small startups a big boost, not to mention the venture capital firms that have funded them so far. Block power was our very first clean start. The Brooklyn-based company aims to electrify every building in America. CEO Donnell Baird said the package dramatically. drastically lowers the cost to building owners and homeowners of clean energy upgrades. It creates a new green bank to provide flexible capital to clean energy projects that Wall Street can leverage. And yes, he said, block power gets tax breaks. Electric hydrogen builds systems to produce green hydrogen power, and its CEO Rafi Garabedian said,

the policy rightly acknowledges hydrogen's power to decarbonize heavy industry and was designed to reward hydrogen producers who can minimize the carbon emissions. EPEC Clean Tech builds on-site water recycling systems for urban buildings. Its CEO, Aaron Tartikovsky said, we're thrilled to see $4 billion directed to aiding the Western states currently grappling with a very difficult drought, a challenge we at Epic are actively addressing. Indigo Ag helps farmers make cash from carbon credits

by implementing green farming technologies. Its CEO, Ron Havaspian, said, the plans $20 billion in ag subsidies are a powerful, for climate-friendly programs farmers know, use, like, and trust. And City Zenith creates digital twins of cities and buildings right down to their energy operations. Its CEO Michael Janssen said, this news could impact our share price in the near future and facilitate the close of a large institutional investment round later this year or early next year. The motion is adopted.

And that's big that government investment in climate will give private investors, much more confidence in the climate space. To even have the courage to put $500,000 into something, you have to believe that upon success, there are going to be hundreds of millions of dollars to grow. This bill actually stimulates the amount of venture capital coming into the space around climate because of it. And Robert said he was already receiving dozens of calls last week

from potential investors. He added that the ability to manufacture in the United States is really a game changer. for climate innovation. He said that gives us options that we have never had before, Tyler. So it seems like at least those companies that you've sampled there that we've reported on the past, they all see a benefit to them from this inflation reduction act. Where does it, how does it change the U.S.'s position in sort of the global spectrum of how sort of active the United States is when it comes to policy and switching to cleaner,

greener energy. It's an absolute game changer. I mean, barely six months ago, we thought all of the potential for this was dead. And we thought, you know, going into this climate meeting, this fall, COP 27, which is the international meeting that we had last year, a COP 26 in Glasgow, we thought we would have no standing whatsoever. But now the U.S. comes in much more powerful and is able to negotiate with countries like China and India and say, look, we did this.

You can too. Before, that was just not an option. So really, it changes our power and our position on the world stage when it comes to climate. Interesting. Diana. Thank you. Diana Oleg. And don't go anywhere because still to come is today's three-stock lunch. We'll lay out some names moving on big headlines to the likes of Disney, Madonna, and Exxon. Our traders take when power lunch comes right back. Welcome back, and it's time for today's three-stock lunch. We're sipping on some big movers of the day with shares of Disney hire after hedge fund manager Dan Lund. Loeb not only took a new stake in the company, but is pushing, among other things, to spin out ESPN.

Moderna is higher after receiving UK approval for its new COVID vaccine that targets or includes the Omacron variant and crude oil dragging down the whole energy sector today, including Exxon, whose shares are down more than 1%. Here to help us trade them all as Delano Sapporo. He is CEO of New Street Advisors and a CNBC contributor. Welcome back, Delano. Let's start with Disney. Are you a buyer of the stock here? Hey, Kelly, thank you for having me. I'm a buyer. I think, you know, one, there's a couple of interesting opportunities for investors here. Obviously, revenues in the last quarter was really strong.

And then if you look at the subscribers across all their platforms, they're now rivaled Netflix as far as subscriber retention. And, you know, when you really focus it on, obviously that's at the business, which is a lot of you focus on, is Disney Plus. It's still not profitable. But I think if you look further at the valuation, that's where it gets attracted. Because now you're seeing that 3.2 times sales versus Netflix, which is about two, If you're looking at 2.3 times social with Disney and Netflix 3.2 times. So I think that's a very, very attractive valuation for people that are looking for stocks that have more of a growth story, Kelly.

Let's move on to Moderna, which has gotten approval for another vaccine. I guess my question about Materna is, do they have a second act? Yeah, that's a big question because the first act, obviously, you know, helping our country and people across the world go through, going through some that was horrible. It did grow the business. You look at the COVID vaccine revenue grew over 2,000 percent from Q4 of 2020. So now I'm looking at the second act. And they have other, you know, vaccines and prescription in the pipeline that can help. But I think we all know that there's going to be a slowdown because we're having mandates roll off

and different areas where we've gotten a lot stronger from this horrible virus. So that second act is to be seen. They have, you know, guidance that indicates they still have large purchasing agreements. but, you know, I think I'm kind of neutral right now. I'm waiting a little bit on Moderna. All right. That brings us to our final name then Exxon Mobil, Delano. This one more kind of reacting to oil prices.

We also talked about it earlier this hour as it relates to the ESG fight and some of the backlash that's playing out. Yes. You know, there's a lot of a lot going on with the stock. As you mentioned, looking at the prices of oil going the other direction. You know, if you look at this takes six, seven, eight months back when, you know, there was a powerful upward climb of prices, and that was due to tight supply demand and geopolitical tension.

And that led them to having the quarters that they had in the first half of the year. So they had consent, they blew past consensus on top and bottom line. And they had free cash flow that was really strong in the first half of the year, which they used to buy back stock. Now, going forward, I do think we're going to see a little bit more headwinds with margins suppressing and with the prices, you know, going the other direction. So, you know, we're still holding onto our shares, but it's going to be a little bit more tumultuous going forward. All right, Delano, I'm told that you're winning our stock draft right now. Is that true?

What were your picks? I had draft kings, Kelly, and I also believe I had Amazon? Yeah, I believe I had Amazon. Wow. I didn't even know that. You're spending my day, telling me it. Winning the, I mean, it's early. It's early.

Don't count your chickens as the saying goes. You're true, Tyler. I have to stay in it. I have to stay in it. Stay humble. Very much. My name is in Hubborder, but I will stay humble. All right.

Delano Sapporo, thank you very much. Up next, it's not just higher commodity prices that are making groceries more expensive. We will tell you what is when we go under the microscope next. All right, welcome back to Power Lunch. Higher commodity prices are leading to higher food prices, but there's another reason as well. And Dom Chu is here to tell us what it is. Please reveal. Yes.

So the revelation here is we have. have seen those food prices come down in certain parts, but not in others necessarily. We've been talking about the fact that food prices from beef to pork may be showing signs of falling. But there's a big reason why a lot of these things aren't. And if you look at some of the estimates, the United Nations says that in a worst case scenario, by the year 2027, you could actually see an 8.5% rise in terms of food prices in that kind of a worst case scenario by the year 2027. A lot of that has to do with fertilizer costs.

And it's something we've talked about quite a bit in the wake of Russia, kind of invading Ukraine and some of the offsets in the supply chain that have been happening. According to the American Farm Bureau, some fertilizers have gone up by quadruple in value just since September of 2020, and that factors into grain and crop prices. If you look at how that then carries over, it's interesting to point out that if you look at some of the ways things work out with Russia and Ukraine, Morgan Stanley estimates that around, just, you know, kind of looking at the American Farm Bureau, 14% of wheat exports and 28% of fertilizer exports come from the Russia and Ukraine area. With that being said, you can see why these prices may stay elevated for a while if fertilizer prices kind of continue the way that they are. And by the way, this is something where we've seen some softness in the CPI in certain parts, but it's the reason why food prices might be a little stickier, right, as things kind of progress here. And there you see a couple of the big players in the fertilizer area with sporty, let's call it, sporty gains. Well, and that's the flip side.

I mean, one of the only things you can do is, you know, we always joke should pension funds all be investing in energy so they can reap the benefits of the same dollars that people are paying during these times. Well, it's not just that. If you look at the way, I mean, we often look at markets and way that they kind of foretell things. If you look at grain and commodity prices, wheat prices, corn prices, even soybean prices to a lesser degree, they have shown some real falloffs from the highs that we've seen kind of since the spring and earlier this year. So if that is to then follow through into the kind of cereal markets or into your grocery store aisles, that could be a big sign that maybe inflation is peaking. But the problem is you haven't

seen many of those commodities prices falling lead to the grocery store aisle. Why are seafood prices up as much as they are? We bought some scallops last night, and it was like restaurant pricing. So it's not just supply chain issues, right, because you're trying to find some of these freight costs going up. It's also fuel prices for transporting some of those items because they have to be flashed frozen in many cases or fresh and then flown out. With the fishing fleets who are going out there, they're paying more for gasoline and so on and so

but boy see food is up. Tlapia. That's 20. But you don't fertilize the fish. Don, thank you very much and thanks for watching, Power Lynch, everybody.