Power Lunch - Signs of Optimism, a crypto bank CEO defends its business & America’s betting boom 11/18/22

Episode Date: November 18, 2022

From softer than expected inflation to a stronger consumer, is the economy in better shape than many think? Plus, the CEO of Silvergate defends his crypto business as the stock sinks. And, why DraftKings shares could surge 40%. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

And we at Power Lunch, we'll see you right now, along with Contessa Brewer. I'm Tyler Matheson. Here's what's ahead on a busy Friday as we wrap up what seems like an endless week. Maybe things aren't so bad. The latest economic data better than feared. Goldman Sachs says the U.S. will narrowly, narrowly avoid recession next year. We're going to ask a veteran strategist if the worst is over and where he may be seeing opportunity right now. Now, on to the crypto contagion shares of the crypto bank Silvergate down more than 25 percent this week, 50, 50. percent this month. Investors want to know about the company's FTX exposure and what crypto's credibility crisis means for the bank's longer-term business. Contessa. Hello, Tyler. Hello, everybody. All of the major indices are on pace for a down week. You've got the Dow, though, just barely hanging on to the green today, up 40 points, the S&P 500, just barely in the red, down three points in the NASDAQ composite, down half a percent. More big retail movers here. Ross stores higher on better than expected. results, Foot Locker posted an improving outlook and Gap. And there you're seeing Gap up 5.5%.

You've got Foot Locker up 7.5%. And look at Ross up 10.5%. William Sonoma trading lower after a warning about margin headwinds here. Crude breaking below $80 a barrel. It's on track for a second weekly to decline about demand concerns out of China. And there you're seeing, it's off now 3.16% on the day. Tyler. All right, Contessa, thank you. Well, it's easy to focus on all the downbeat date. It's always good to look for some of those green shoots. And this week, we did, in fact, get a few. Inflation came in a little bit weaker than expected. Retail sales a little bit better than predicted, as were some retail earnings. Existing home sales, not so great, but they weren't as bad as feared. Mortgage rates fell hard for some reason. Washington

once again divided the government. That's the market's favored outcome most of the time, according to conventional wisdom, and super hawkish fed speak didn't exactly crush the market. Even Goldman Sachs says a recession may be avoidable. So are things maybe not as bad as we feared? Let's bring in a guy who's never as bad as we fear. Rich Bernstein, thank you very much, my friend, for being with us. Glad to have you here. Great. Thanks, Tyler.

So now, I wonder how you process all of that, which I just said, which points to maybe things that are a little better than had been expected, up against your thought that interest rates are actually going to go higher and stay there longer than the consensus? Yeah, well, Tyler, you almost answered your own question. If things aren't as bad as people think, the natural corollary to that should be that the Fed will be raising rates higher than people think, right? The reason that people believe that the Fed has to pivot, to use the word of the day,

is that they believe that the economy is on the precipice of some serious economic slowdown, recession or not recession. You know, the data is slowing. Of course, we know that. But it's hard to argue that the economy is on the precipice of some toe-curling recession. So a good, relatively speaking, a better-than-anticipated economy actually gives the Fed the cover that it might need to raise rates higher to absolutely crush inflation. I think that's right. And I think in particular, if you want to look at one part of the economy,

I think people should be watching the labor market. You know, the labor market is incredibly tight. So far, the layoffs that we've been seeing, it appears as though workers are being absorbed very, very quickly into that labor market. And, you know, weekly initial jobless games came out yesterday, and they still show a very, very tight labor market. Now, that's important because recent data seem to suggest, that over 75% of current inflation is attributable to the tight labor market, not the supply chains, not to inventories, not to all these different things. It's really now a labor market issue. So if you're the Fed, you're watching the labor market like a hawk. And here you're getting this assessment from Goldman Sachs saying, hey, maybe recession's avoidable.

Do you think the markets have just completely ignored the possibility of a full-blown recession next year? No, I don't think that's, I think they're kind of trying to discount somewhere between. I don't think people really know yet, contestant. But I'll tell you what I don't think the markets are looking at adequately. And that's the probability of a profits recession in 2023. Economic recessions, one thing, profit recesses another. Where do you see that? Explain the difference. Yeah. So the difference is that we'll see profits growth turn negative, maybe not the overall economy, right? Now, very often when you have an economic recession, you have a profit recession with it, but there's many more profit recessions than economic recessions. And the reason that's important, and the reason I don't think that the markets are adequately paying attention to that is you're still seeing a lot of enthusiasm for lower quality bonds. You're still seeing a lot of enthusiasm for more speculative stocks.

You know, junk has never outperformed treasuries during a profit recession, but yet you still have people talking about credit and about lower quality bonds and everything like that. that says the market isn't really paying attention to the potential for a profits recession, which I would argue is much more important right now. Okay. So given that, can I just ask if you think there might be a profits recession next year, where do you think, what kinds of sectors do you think would be a good bet for a profits recession? Right.

So we've got this very, this very unappealing combination right now of the probability of a profits recession going up and the Fed tightened. And I would argue that the volatility you're seeing in the markets right now is purely because of those two things, right? It's right out of the textbook historically. And so what works when the Fed is tightening and profits are decelerating? It's necessities. It's not desires. It's necessities.

So what are you seeing? You're seeing consumer staples outperform consumer cyclicals, right? You're seeing health care outperform utilities to some extent. It's all about necessities, quality dividends, things like that, as opposed to desires about the future, right? You're not hearing too many people talk about going to Mars anymore, but you're hearing people talk about, you know, about the importance of necessities. That's normal for this kind of environment. Let me just quickly ask you, are the Fed hawks being too hawkish? We're going to hear from Ron Insana later, who is going to make essentially that point, that they are missing the

point. They're being too aggressive. They are missing signs that inflation is slowing and maybe even declining. Do you agree with that or disagree? I don't think whether we think that or not is relevant. The point is, if you were the Fed, right now you have inflation at 7.7%, you have unemployment at 3.7%. They have a dual mandate, inflation and unemployment. Both are very, very strong right now. I think if any of us were the Fed chair, we'd be talking about tightening. That would be it. And I think it should be a full stop. Inflation 77, unemployment 37, stop. There's nothing else to discuss. That's what they're looking at. We will pick it up with Ron and Son in about a half hour's time. Meantime, Richard Bernstein, thank you. Have a great Thanksgiving. By the way, Richard wins for the research quote of the day.

We didn't get to this. If the future of the U.S. economy is cute weiner dogs in the metaverse, the U.S. economy is toast. I think that is well said. It has been one week since FTX filed for bankruptcy, and the question remains, who else is affected? The fallout moving quickly, taking down Alameda research, Blockfire reportedly filing for bankruptcy. Voyager Digital's futures uncertain. Genesis announced its paused withdrawals. One publicly traded company says its position remains unaffected.

Crypto Bank Silvergate says less than 10% of its $12 billion in customer digital asset deposits were from FTX. But the stock is getting punished. Down 10% today, 28% over the past week. With us now is Silvergate Bank CEO, Alan. Alan, it's good to see you today. So clearly you think that you're probably under more pressure, your shares are under more pressure than is appropriate right now. Set the scene for investors who have been watching this whole thing unfurled day by day and unravel and just wonder, is there any immediate future to the crypto world? Yeah, thank you for the opportunity to be with you this afternoon.

I really appreciate it. And you're absolutely right. There's a lot of stress in this ecosystem. them right now. But it's important for folks to maybe take a step back and understand that at Silvergate, we built our platform purposely to be able to withstand this type of stress. And that's demonstrated by the fact that we carry cash and investment securities in excess of the amount of deposits that we hold on our balance sheet in this initiative. And the way that, the way that, the, the way we solve problems for our customers is we provide for them 24-7-365 access to their U.S.

dollars. We do not trade in cryptocurrencies. We are a U.S. dollar bank regulated by the Federal Reserve in the United States, and we provide 24-7-365 liquidity to this ecosystem. So whether the prices are going up or down, whether the volatility, the volume is going, going up and down, Silvergate stands ready to serve. And I'm happy to say that our platform continues to operate unaffected by this. And, you know, I'm happy to continue to answer any questions that you have. I appreciate the opportunity to be here. So forgive me for not

understanding exactly how your bank operates, but you call yourself a U.S. dollar-based bank. earlier you had $12 billion worth of deposit. Are those dollars in, are those deposits in U.S. dollars or are they in some form of cryptocurrency Bitcoin? Yeah, Tyler, great question. And they are absolutely U.S. dollars. We do not trade in any digital asset. We hold U.S. dollars. Our flagship product is referred to as the SEN or the Silvergate Exchange Network. And importantly, it is not a cryptocurrency exchange, but rather it is a the Silbergate Exchange Network is a network of exchanges and other market participants, primarily institutional investors, who are interested in purchasing and selling Bitcoin and

other digital assets. And when they want to purchase or sell, they're likely going to engage with a digital asset exchange or an OTC desk, and they are going to want to send dollars to that exchange or OTC desk. And when they do that, they're going to use Silvergate for that functionality for the U.S. dollars. Once the U.S. dollars hit the recipient, at that point, the other leg of the transaction will be completed, which is on the blockchain, as an example, if someone wants to buy Bitcoin, then they will transact the dollars through Silvergate,

and then the Bitcoin will transfer from one wallet to another over the Bitcoin Protocol. Silvergate is not involved in the Bitcoin Protocol part of the transaction. So it would seem to me then that an awful lot of people, myself included, are not understanding how you do business. And that's why your stock is getting punished so much. Apart from the fact that, I suppose that with all of the hoo-ha over FTX and others, whether it's BlockFi or Voyager or whatever, apart from the fact that the entire crypto universe seems right now to be a little tainted or in bad odor, I suppose, is how I'd put it.

Am I right about that? Are people just not understanding how you do business and what role you play? and the fact that you're not exposed to Bitcoin directly, but you're inferentially exposed to it, I suppose. Yeah, I think that's well said. I think it is a fundamental misunderstanding as to the role that Silvergate plays in this ecosystem. I do want to clarify that we do have some exposure to Bitcoin

on the asset side of our balance sheet, So the deposits sit on the liability side, and we hold U.S. dollars and investment securities in support of those deposits. We also have a product that we refer to as SEN leverage, which is a Bitcoin collateralized lending product. At the end of the third quarter of this year, we had a little over 300 million in outstanding loans against Bitcoin. But it's important to note that for that particular part of our business, that Bitcoin is over-collateralized. As of September 30th, it was two and a half times over-collateralized, or the way bankers sometimes speak, a 40% loan to value.

So the price of Bitcoin would have to come down two and a half times very significantly in order for us to sustain any loss whatsoever on that lending. And the reason we build it that way, and the reason it's Bitcoin only, is because Bitcoin has been operating, the protocol has been operating with 100% uptime, uninterrupted, since before we got into this business in late 2013. And so Bitcoin is, was really the initial, you know, it is the real thing, Tyler. And we lend against that. And importantly, when we, when we lend. against it, we take control of the Bitcoin collateral through one of our custodial partners. So you're over collateralized, though, with respect to those loans?

That's right. Significantly over collateralized. Significantly over collateralized. If the loan goes bad, you've got plenty of Bitcoin collateral to cover that bad loan. Absolutely. And one other important point, we have the ability to sell that collateral if we need to to cover a margin shortfall, if the price of Bitcoin is plummeting rapidly, we can sell that Bitcoin and we can sell it 24 hours a day, 365 days a year.

You gave an update this week after the market closed saying that total deposits declined about $12 billion to $9.8 billion. We just went through the list of, not FTX was a client. We're looking at Block 5 Voyager Genesis that are maybe in trouble. and questions, as I said, about this whole ecosystem. What happens if crypto freezes up? Do you still have an operating business? Yeah, great question, Contessa.

And we absolutely do. And just to clarify, I think when you're asking the question, you might have misspoke as to the reduction in our deposits. At the beginning of this quarter, we had a little over, you know, between 11 and 12 billion in, in deposits in this initiative. And then what we reported on earlier this week is quarter to date, our average deposits in this initiative are just under 10 billion. So it did not decline 12 billion, as I likely said. I think it was $1.2 billion. Absolutely. Yeah. We got it. Yes. Thank you for clarifying.

You bet. Now, now to your question, if crypto freezes up, we're still a bank with access to the Federal Reserve. Our payment process is a 24-7 API-enabled process, so our customers can still access their U.S. dollars 24 hours a day, seven days a week. Now, they can only, you know, bring it on and move it off during normal banking hours during the week. But that was exactly the problem that we solved for this industry several years ago when we launched the Silvergate Exchange Network, was the ability for our customers who were trading digital assets 24-7, but they could only access their dollars Monday through Friday. So we built the SIN and created and did it with API functionality so that our customers can actually access their

dollars to trade digital assets 24 hours a day, seven days a week. And that continues to operate uninterrupted. Alan, we really appreciate that you've come in today and sort of given us a primer on your business and its exposure to what's happening here. Thank you very much for your time. Absolutely. I really appreciate it. You guys have a great day. Thank you. You too. Coming up, place your bets. We'll speak to the analyst who says draft Kings is on a path to profitability and the stock can surge 40% from here. Plus, the risk of more restrictive Fed policy could a super hawkish central bank do a lot more harm than good. We hinted at that. Ron Insana will be along to talk more about it. And as we had to a break, shares of

the dating app grinder. Surging after completing its SPAC merger. It goes public at a time when its rivals are stumbling. Matchdown 60% this year. Bumble, bumble, bumble. Bumbling, tumbling, fumbling, fumbling, 30%. More power lunch in two minutes.

Online sports betting is taking off, and that's what Piper Sandler says will happen to shares of draft kings. The firm initiating coverage of the company with a buy rating says the stock. could surge 40% from here and that profitability concerns are unfounded. Those concerns, though, have pressured the stock. It's down about 40% this year. And boy, it took a big tumble after earnings reports suggested that they would see a bigger loss next year than expected before turning

profitable maybe in the fourth quarter of next year. Joining us now as the analyst behind this call, Matt Farrell, research analyst at Piper Sandler. Matt, good to see you. Good to see you, too. Thank you so much for having me on today. All right. So you're initiating coverage of draft kings at a time when, look, you've got price targets on this company as high as, not you, your other analysts, as high as $38. And as low as $12 or $13, give me a sense of why you think that this is a good company to own right now. Well, coming out of Q3 earnings, you know, the company did miss its initial 20-203 EBITDA guidance. But from our perspective, EBAA estimates are now properly reset. You know, the company is still targeting to be adjusted EBITDA profitable in Q4 of next year

and adjusted EBDA profitable for all of 2024. And while we don't think that while we think that that the adjusted EBITDA is rightfully under concerns from investors, we do think it's a little misguided as it's missing the forest or the trees. If the company were to be profitable here in Q4, 2022, there might be a lot of questions on whether the industry as a whole is viable. The company has established a state-by-state profitability cadence with five states profitable last year and a total of 10 states profitable this year. And so we are giving the company remaining patience

And until the state-by-state profitability playbook unwind, you know, we like the stack at current levels. Okay, but what we heard from some of the competitors and much smaller competitors, they don't have the size nor scale of draft kings. Caesars, for one, said October's profitable. We're looking at potentially a profitable fourth quarter in our digital business. I mean, really sports betting here because overall the company is very profitable. We're looking at a potentially profitable fourth quarter in digital, depending on what happens with Mattress Max Bet.

We heard something very similar from Penn about their digital business. When you're looking at that, these companies have significantly accelerated what their goal for profitability has been if you're marking whether you are profitable in a quarter on what one guy in Texas bet or not. So how are you comfortable with draft kings pushing this off

until the end of 2023? You know, from our perspective, They haven't really been pushing this off. They have been talking about Q4 of 2023 for some time. And look, as these new states come up, there are investments that need to be made in order to establish a market share leading position, which the company has done in the majority of the states that they've gone live in. And, you know, the other thing I would just say, too, is as the company, you know, further

expands across the country, they're able to leverage national media spend rather than local spend, which should help on their profitability path as well. So again, we're in the very, very early innings of this industry with a long tailwind in both sports betting and eye gaming. And so, you know, we are looking at this from a longer term perspective, rather than, you know, one quarter here or there. What's their average acquisition cost per customer? And when do they become profitable on a per customer basis? Yeah, so that it varies on a customer by customer basis, depending on a lot of different factors.

But when you look at it as a whole, from a state perspective, you know, typically a state becomes profitable in a two to three year timeframe with the majority of the investment made up front and its cohort stack over time. And so what do you've seen is... So what do they spend to acquire a customer? What do they spend to acquire a customer? You know, it really varies, again, it varies based on the customer, right? Not every customer is different. You know, they're heading on the size of the bets that they make, the frequency of the bets that they make, the skill of the customer, right? Even the location and where they are in sort of the cohort, right? The customers that are. But there's got to be an average. I mean, I agree with that. I'm a dumbass. And I'll make a lot of bad bets. So I'm probably not costing them in terms of what their advertising spend was or they're getting. giving me bet credits for things on my first few bets.

But they make money off me fast because I'm dumb. But what's the ad? There's got to be an average in there somewhere. You know, again, it's hard to say on an average basis, right? Because you're mixing in all of these different numbers across all of these different states. And so, you know, they are spending significant hundreds of millions of dollars in sales of marketing each quarter. and they have over a million paying users at this point in time. So you can kind of think that it is a costly endeavor,

but there is a rather large lifetime value here, right? I mean, more and more people are starting to use these applications every day. And I mean, I don't know about you, but I'm a user myself. And, you know, I'm looking at the app every single day, placing bets every single day. And, you know, there's a lot of value in me, right? and there's a lot of other people out there right. Matt, that's what people say about you, Matt. There's a lot of value in you right there.

Have a great weekend. Yeah. Matt Farrell. Thank you so much. Hyper Sandler. You know what's interesting is that you had Fandul having a big capital market say it's basically an investor day where they came out and they gave all kinds of detail about how, number one,

they're spending less to get a customer than some of their competitors and keeping them for longer. a lot of detail about the way that that matters. And not only that, they are the market leader, 42% of the market share in online sports betting across the nation, according to state regulator reports. And what we saw is... Is Fanduel? Fanduel. And Draft Kings is the biggest competitor after that, and then comes bet MGM, and everybody else has less than 10% market share from there, and most have less than 2%. But Fanduel really believes that it can expand that gap between its lead and the next biggest competitor, in part because it spends more efficiently to attract customers.

All righty. Interesting conversation there. I actually use the draft game. I'm on there. They make money off. You know what? There's value in you. There's a lot of value in you.

Right here, baby. Up next, there seems to always be something in the way of Carvana, laying off 8% of its workforce, declines continuing weeks after reporting significant net losses. The stock down more than 30%. since Monday, and that's not even its worst weekly loss to date. Plus, cyber secured. Palo Alto soaring on a massive beat, citing strong demand amid heightened cyber threats. Details on both those stocks when Power Lunch returns.

We'll be back with all the value we can bring to the table after this. All right, welcome back to Power Lunch, everybody. To say it has been a rough ride for Carvana would be an understatement. As Scott Wapner first reported, the company announcing today, that it will lay off 8% of its workforce, 1,500 people about in an effort to reduce costs, get more efficient across its businesses. The CEO is saying, as a result of the economic environment, the company continues to face strong headwinds.

There they are again, those headwinds, adding the near future is uncertain. He says the uncertainty is especially true for fast-growing companies and businesses, selling expensive, often-financed products that can easily be postponed. He added the company failed to accurately predict how this would all pay out. Play out, excuse me. The stock is down 96% this year. Brian Sullivan has your CNBC news update now. Brian?

I contest, thank you. Attorney General Merrick Garland. He has named War Crimes Prosecutor Jack Smith, a special counsel to consider charges against former President Trump. Special counsel overseeing the Mar-A-Lago classified document case as well as other key aspects of the probe into January 6th. insurrection. Colorado Democrat Adam Frisch has conceded to GOP incumbent Lauren Bobert in one of the last House races yet to be decided. Bobert leads by about 500 votes with nearly all the votes tallied.

A recount will still likely be required under Colorado law. And Taylor Swift expressing her anger against ticketmaster over the botched sale of her concert tickets said it was, quote, excruciating to watch. And it, quote, her words, pissed her off. That a lot of fans, quote, they felt like they went through several bear attacks to get tickets. And in Washington, the Capitol Hill Christmas tree has arrived. A 78-foot red spruce made the trip all the way from North Carolina. Crews now have less than two weeks to decorate the tree with thousands of lights and a massive star. Lighting ceremony set for November 30th.

I mean, listen, that tree, I don't know if it walked or hitchhike, but that's a hell of a journey for a 78-foot tree. My kudos to the tree for making it all the way from North Carolina. Well, that's the one in front of the capital there. That's what it says. All right, nice. It's like an ent. Thank you, Brian. Yep.

All right, ahead on Power Lunch. Investors getting fed up with inflation showing signs of easing at least a little bit. And then our Powell and company making a mistake by raising rates further. Ron Insana will weigh in next. Plus, what's in store for retail? It was a mixed week for the group. Some companies holding strong, others waving the white flag. We'll trade the names on deck in today's three stock lunch.

We'll be right back. Well, folks, we've got less than 90 minutes left in the trade today. And you know what we want to do right now. We do it here every day. We get you caught up on the stocks, the bonds, the commodities, the markets, plus Ron Insana. He says the Fed may be making a mistake. Let's begin with stocks. We've had an exciting week.

It just doesn't look like we're going to, it doesn't look that way when you look at the week as a whole. Here are the weekly numbers. All the averages lower for the week, folks, but only the Dow. 2% for the NASDAQ. There you see one week change. Just a little bit of change there on the stocks. Healthcare, once again among the leaders today, United Health boosting the Dow. Cigna and Humana, nice gains as well there as you see those up.

Well, look at United Health, up 12% today. Energy. Worst performer, oil falling, diamond back down 5%. We'll get some more on oil's decline in just a moment. But there's EOG, Chevron down nearly 2%. There's the, shall we go to bonds? Yes, we're going to go to bonds. bonds. Rick Santelli, I am told, is standing by. Yes, he is. He is standing by in Chicago.

Rick. I am here. You know, it's been such a fascinating week. If you look at a week to date of two-year note yields at four and a half percent, they're up 17-17 basis points on the week. But if you look at a 10-year note yield at 381, it's unchanged on the week. Bonds at 392 are down to 10 basis points on the week. We all know that Fed speak this week has been anything but phlegmatic. They're pretty wild out there. And to think that the longer maturities are so ignoring Fed speak with regard to the slaying of inflation and the aggressive tendencies of the Fed just underscores how investors pretty much uniformly

are looking for a major slowing in the U.S. economy. Look at a week to date of three months to 10 years at minus 43. basis points. It's certainly not the most inverted it's been, but it's still at levels we haven't seen in 15 and a half years. Minus 51, 52 earlier in the week was the worst levels. And if you look at the dollar index, many traders believe it peaked in September. Right towards the end, it traded a bit above 114. And even though it's fighting to survive today a bit, it really does have some technical issues that traders are dealing with to the downside. And that's very important. important, especially when you think about emerging markets and multinational corporations,

not so much if you're purchasing within the borders, but inflation is moderating to some extent. Tyler, back to you and have a great weekend. We're going to talk a little bit more about that moderating inflation in just a minute with Ron Insana. Rick Centelli, thank you. A big move lower for oil today. Speaking of moderating prices, and let's get some details from Pippa Stevens, commodity desk. Hey, Pippa. Hey, Tyler. Oil is capping off an ugly week here. tumbling below 80 bucks per barrel for the first time since September, although it is closing well above the worst levels of the day. At the session low, WTI hit 7724, a price last seen on September 28th. Several key uncertainties are driving this market, including China demand, Russian supply, the U.S. dollar, and the strategic petroleum reserve.

Evercore ISI saying today that these uncertainties will shift in the coming quarters and all skew positive for, crude fundamentals. Now turning to energy stocks on track for the first negative week in five, with a decline of more than 2%. Marathon Oil, Cotera, and Baker Hughes are among the biggest laggards this week. And finally, a check on gas prices ahead of next week when nearly 55 million Americans plan to hit the road for Thanksgiving. Prices have come down a lot at the pump, with the national average now sitting at $3.70. But it is all relative. Gas Buddy forecast prices on Thanksgiving, averaging $3.68, which would be the highest for the holiday on record. Tyler.

All right, Pippa, thank you very much. Let's talk now about a little bit about the Fed in a new CNBC op-ed. Our next guest says the central bank could be on the verge of making a policy make mistake if they take rates much higher. After St. Louis Fed President Bullard suggested a Fed funds rate as high as 7%. Let's bring in CNBC senior analyst, commentator Ron and Sondor. Also a senior advisor to Schroeder's North America, Ron, in Sana. You think the Fed is looking too much in the rearview mirror and not enough at what is happening now and likely to happen in the future. Explain.

Absolutely, Tyler. And look, the 7% number that I thought that President Bullard suggested was, I think, in a certain way absurd because it would go well above what is already a declining inflation rate becoming extraordinarily restrictive. and most definitely drive us into recession. When you annual, annualize the last four months of CPI, it's running at just over a 2% rate, 2.5% thereabouts. And even the core rate is below 5% annualized over the last four months. And so I think, you know, they're looking back at CPI when they should be looking forward at market-based indicators,

all of which are telling us inflation has peaked and on the way down. And there's no reason to believe that there's any other factor that might push inflation in the opposite direction. It's interesting because we in the media, and I suspect a lot of observers, look at the year-over-year rate and they see it at 7.7%. They're not as prone to look at that month-to-month change, which you're pointing to, and then to break apart the number and look at some of the constituents of inflation or disinflation. House prices are going to come down, I think, a lot, and that's going to be a major way. on inflation, I mean, in a good sense, it would seem to me. And there's a lagged effect there because the Fed uses something called owner equivalence rent, which we've talked about in the past. And it takes six to 12 months for that to show up in the data.

And so forward-looking prices on housing, and we saw existing home sales fall, you know, 28.4 percent year-over-year reported this morning. Prices are going up at a much slower rate by next year. Some houses on Wall Street are estimating of 15 to 20 percent decline in home prices. that's real disinflation, deflation in the housing sector. And again, if you were to take rates to 7% and further destroy residential real estate, there is no period in our history in which we've had a real estate recession, not followed by a general recession.

And the inversion of the yield curve that Rick Santelli just mentioned is as steep as anything we've seen in modern times, I should say as deep as we've seen anything in modern times. And that is on the cusp of almost guaranteeing us from a forward-looking perspective, a recession of some note in 2023. You know, Ron, Bullard got a lot of attention for the high end of that range. All the focus was on the 7% and almost none on the 5%. If we go to 5%, do the risks that you're raising still apply? Well, to an extent, Contessa, I mean, I think so.

You know, we've seen leading economic indicators reported this morning, now down for, I believe, eight or nine straight months. There are all kinds of indicators suggesting that we're headed towards a recession. Nothing has of systemic nature has broken yet. But I think it really depends on just how aggressive the Fed gets, how long they stay with rates elevated, and whether or not they're willing to escape the gravitational pull of this criticism that we're dealing with a repeat of the 1970s, which is my estimation, and we've talked about this a lot. I don't believe we are.

I think it's much more like a post-war environment. I think they've got the wrong analog. And I think if it were to go to 7%, we'd be paying a rather dear price for that policy error. It does seem like we just need to have a banner made up at all times ready to go that says how fast, how high, how long, right? Yeah. Ron, what residents in? We're not being told. Jay Powell is going to be speaking November 30th from what I've read today.

And so he'll be talking about the current state of the economy. And we'll see what he says and whether or not he endorses that idea. I would argue, by the way, that Jim Bullard intellectually and philosophically has been among the least consistent Federal Reserve members I've seen over the course of the last dozen years, but he always takes these rather extreme positions, and he rocks the financial markets on many occasions when he does so. What residence in are you in right now, Ron? No, I'm not. I'm in Southern California, at the West and Coast of Mesa, California. I was probably a blockade earlier, and I misplaced my computer so that the edge of that

bed is showing. I apologize. I'm on my... You're a traveling man. I know that, my friend. Good to see you. Have a great holiday, Ron. Ron and Sanna. Up next, demand for defense. Consumers might be cutting back on spending, but cybersecurity remaining a priority. And it's helping Palo Alto's stock. That's next. Shares of Palo Alto networks up 7% today giving Candiburis a boost in our stock draft. It turns out, even during a downturn, people need cybersecurity. Go figure. Let's go to Frank Holland for a deeper look at the report. Hi, Frank.

Hey, there, Contessa. You got to be on. I wasn't expecting that Real Housewives reference there. All right, Palo Alto Network cited headwinds like the rising dollar and tightening IT spend, but said demand remains strong for cybersecurity. The report giving a big boost to other cyber stocks, including Z-scaler, Tenable, and Consumer Focus Gen, all outperforming the NASDAQ and shaking off higher rate concerns that appear to be weighing on the broader market. Analysts tell me the most bullish sign for the sector is Palo Alto, often considered the blue-chip cyberstock, giving very upbeat EPS guidance for the current quarter.

CEO Nakesha Uroa Med Money spelled out the value proposition for cybersecurity with rising fishing and ransomware threats. And if there is not an economic settlement, there are consequences. And those consequences actually end up hurting the businesses a little bit more than just having to pay for something. Aurora also touched on the M&A environment saying he was looking to grow the capabilities of Palo Alto. Wedbush says as cloud providers look to become more full service, two names, more than 75% off their high. ACTA and Rapid 7 are likely acquisition target targets. Back over to you guys. All right. Frank Holland, thank you very much. Still to come, three stock lunch. Should you buy, sell or hold some of the retail stocks set to report results in the next week. We'll be right back.

And they're the three that are on deck. The bar is set. We've got a retail edition today of three stock lunch. It was a big week for the sector. And next week could be even bigger. On deck to report earnings, Best Buy, Nordstrom, Dollar Tree. So which is a buy ahead of their results? Let's ask Scott Nations. He's president of Nations indexes. Let's go to Best Buy first. What do you think, Scott?

Well, this is not the buy I would pick. I'm a seller. J.P. Morgan just lowered their price target, which means I'm not alone. And this is in the face of weakening discretionary spending. I'd also, when it comes to Best Buy, be really worried about shrinkage la a target. One analyst today, a different analyst today, said that their margins are, quote, a wild card. So while Best Buy is up a little bit today, the chart is terrible.

And all it's doing is clawing back the horrible price action we saw on Wednesday. So consensus earnings estimate, $0.3 a share, but I don't think they're going to make that. All right. So next step, we have Nordstrom. What's your take? Would you buy it? I love the business. I love the stores, but I would hold the stock. It's up a little bit today. It has a wonderful customer mix. But in order to get off. defense, we have to have more visibility about their spending for supply chain. They're spending on technology and the performance of their Nordstrom rack outlet. And with EPS estimates, it's just 14 cents a share. They don't have a whole lot of wiggle room. So until I get some visibility,

Nordstrom is a hold. All right. And now let's move on to the final name. And that would be Dollar Tree. Dollar Tree is a buy, Tyler. I love to buy companies right now that either make the stuff that you have to buy or sell the stuff you have to buy, and that is Dollar Tree. It has had several EPS revisions, and they've all been upwards recently. Companies expected to make $1.18 a share, and part of that is going to come from the fact that a lot of customers are trading down to Dollar Tree from other brands, other stores. Again, this is a buy. This is exactly where I want to be in this sort of environment. All right. There you go. We end on a buy.

Thanks very much. We appreciate it. Up next. I mean, this is a scenario I know pretty well. Three feet of snow already falling in Buffalo and more on the way. What's the money impact here? I've got it for you. We're back in two. World Cup organizers pulling the mug away from beer drinkers

two days before the kickoff of the World Cup tournament saying beer will not be sold in or immediately around the stadiums during the World Cup in Qatar. This would seem to be bad news for Budweiser, which is a sponsor of the World Cup. I think they're the official beverage beer of the World Cup. FIFA did say Bud Zero would be able to be sold at the stands. But that is, it's really... They have a $75 million sponsorship deal with FIFA.

And now they don't have the branding. And this apparently came from the royal family themselves calling us out, because that's the rule in Qatar, where you can get out. I'm told, but only in limited places. You know what is a real catastrophe? Potentially historic snowstorm has started in Buffalo, New York. Now, normally it's snow and Buffalo, big deal, right? But one, we're in November.

It's not even Thanksgiving yet. This is one of the most extreme forecasts calling for potentially three feet more of snow. That would be a total of six feet of snow. Two to three inches of snow falling every hour. The bills forced to move their Sunday game to Detroit. They don't get to go to Miami. They don't get to go to Raiders Stadium. No, no, no, no.

They're going to go to Detroit. That's great. You want to school in Syracuse, which I think gets even more snow than Buffalo. I've been in a storm of this nature freshman year, and I will tell you this. If they have to shut down major highways and airports and move the Buffalo bills,

there is a major economic impact because of the snow. How's that for bringing you the business bottom line? The business of snow. Thank you for watching. Thanks for watching Power Lunch.