Power Lunch - Sticky inflation, a chip power player and falling gas prices. 8/11/22

Episode Date: August 11, 2022

Companies are hiking prices at a rapid pace. But once they go up, it may take a long time for them to come down. Plus, the CEO of ON Semi. He’ll explain his investment plans and how he’s navigating the slowdown in the sector. And, gas prices fall below $4 a gallon but for how long? Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good day, everybody, and welcome to Power Lunch. I'm Tyler Matheson. Kelly will be along in just a sec. Here's what's ahead. We're going to talk about sticky inflation from Chipotle to McDonald's to Disney. Companies are hiking prices at a rapid pace, and once they go up, it may take a long time for them to come down if they ever do. Plus, a semiconductor power player, the CEO of OnSemi, is here. The company investing in domestic production, even as the sector slows down. The CEO will explain his strategy and outlook. for the company. Kelly. Thank you, Tyler. Hi, everybody. Let's get a quick check on the market picture at this moment. The Dow's up 157 points. We've cut the gains about in half today, but it's still a half percent gain. The S&P up four-tenths of a percent. The NASDAQ has turned lower after that monster session yesterday and a move from the recent lows that has put it up 20 percent. So we're seeing a pause here and the NASDAQ is leading the way in that vein today. Now, the Dow is being helped by Disney. It's the best performing Dow stock after reporting that strong quarter last night, increased spending at its domestic theme parks looks even better in contrast to

six flags today, which saw attendance drop at its parks by 22%. So a huge divergence there helping Disney shine even more by comparison. Also check out shares of our house. It's a high-end furniture maker and they are surging 24% today after strong sales growth and raising their full year guidance. So in case there was any doubt, Tyler, that segment remains intact. All right, Kelly, thank you very much. We begin with the latest read on inflation. Producer prices fell, yeah, fell 5% in July. Another sign that price increases may be slowing more broadly. But there are some prices that might take a lot longer to come down if ever.

It's so-called sticky inflation. And we've seen Chipotle hike prices numerous times. McDonald's said that price hikes help fuel its same store sales growth. And Disney said it's raising the price of its streaming service starting in December. According to this chart, historically it takes longer for prices to come down in the services industries than in areas of the economy like manufacturing or agriculture. Joining us, Bill Lee, Milken Chief Economist, Bill, welcome. Good to have you with us. So where are prices likely to be stickiest? It's no surprise that once a wage goes up, an employer is probably not going to cut my pay. and so that gets embedded and fed through into higher prices often, doesn't it?

Well, Tyler, what we've seen seeing is that most of the price slack has been coming from what have been termed as transactional prices, energy, food, this kind of stuff where you buy and you sell because you have the supply and you have the current demand. The places where I'm concerned about is that inflation seems to be spreading to what I've termed relational prices, prices that are based on longer termed-term contracts, relationships, So, for example, a tenant has a one-year lease. You and I have annual contract renewals. So a lot of things are, once they go up, they tend to stick. And those sticky prices are starting to see faster and faster increases, both in the employment cost index that was just released, as well as other measures of core inflation that just came out in the CPI.

Steve Leasman is also here, Steve. It would seem to me that there would be very little incentive for a company to cut prices unless there is a fall in demand for the items that they cut. Am I right on that? Yeah, you know, Tyler, I don't know if you knew what you were opening up here, the can of worms, that is the concept of sticky prices and economics. This thing has been studied for decades, and really economists hate this idea,

because what they want is they want prices to adjust just as quickly as the factors affecting prices adjust, and they don't, and it confounds them the way that physics is confounded by the inability to put together, what do you want to call it, quantum physics and Newtonian physics. It's one of these outstanding things, and there's a bunch of reasons why they don't work. One, the cost of repricing, like the restaurants doing the menus, things like concern about market share, and also competition. A whole bunch of reasons why, Tyler, it doesn't, these prices, they're reluctant to raise them, and then once they raise them, they're reluctant to bring them down.

Bill, is there a distinction to be made between the prices that have risen as a result of commodity input costs driving them up? In other words, energy, oil, food prices, whether it's avocados or beef or wheat or corn, and other prices like those for services or experiences. Well, Tyler, you're hinting at something that the Fed fears most, which is to say commodity prices start people worrying about, do I have enough money? Am I making enough in my paycheck? And then when they decide that, my God, these prices are not only going up, they're accelerating, and they look like they're going to continue for a while. So I go to my boss and say, my salary is not keeping up. I got to have more increases. In fact, I need such a big increase. I want to get ahead of the price increases so that I get the real wage I'm supposed to get. And that's the kind of fear that the Fed has, that we instigate the wage price spiral, the very corrosive behavior that we saw in the 70s and 80s, and it took Volkers crushing the economy to get expectations to be stable again.

Right now, we're not there, but the fear is that every time we have a blip inflation expectations, the Fed is going to have to stamp on it even harder. You know, Steve, obviously gasoline prices are doing a lot of the heavy lifting here. And we should just point out, well, they've fallen dramatically and helped calm things down for the consumers. consumer, they're firming up a little bit lately, and who knows where they go from here. Yeah, I mean, that's right. These are commodity prices, and they're going to go up and down. And there's this couple concepts in economics. They call the rocket and feather phenomenon. Prices go up like a rocket, but they fall like a feather. And part of the reason is put yourself in the position of a gas station that has $3 gasoline in the ground in the tanks.

But let's say oil fell or gasoline prices fell to $2. It doesn't want it wants to sell that gasoline to the extent it can for $3 before it offers that $2 price that's available out there. So that's part of the phenomenon. Another interesting factoid I've come across in the research, this is the example that is in every paper about sticky pricing. And that's Coca-Cola. Coca-Cola charged the same nickel for its Coca-Cola for about 100. years. And the reason is because it was difficult for them to change the nickel that you put into the vending machine without doubling the price to the dime. And that's just one of those

examples where they call that transactional cost, nominal rigidity, whatever you want to do. But Billy knows about this stuff better than I do. But it's just one of the facts out there that make it difficult to change prices. And once they're up high, they don't come down so quickly. Yeah, the rise like a fall like a feather or whatever it was. I think that's very interesting. When you think about what goes on in banking, borrowing costs go up like a rocket, but deposits, the price paid on deposits does not go up anywhere near as fast. I want to ask both of you quickly something that I think I sent Steve an email about yesterday. You know, we have sort of one national average CPI or PPI that we talk about. But is that really an accurate measure of how inflation is affecting different people in different parts of the?

the country at different ages, at different income levels, etc. You see what I'm saying here. In other words, that the cost of living for a senior citizen on a fixed income may be very and the inflation that they feel may be very different than the, who owns their own house, may be very different than the inflation felt by a young renter. The inflation felt by someone who drives a long way to work every day or by someone who is at the lower end of the of the income spectrum may be much higher than the inflation felt by the more affluent. Bill, am I on to something here or not? Not only are you onto something, you're onto the latest trend, which say,

COVID has induced a lot of mobility. People are leaving their cities and looking for a cheaper place to rent. And they go to places like Boise, Idaho, or even Las Vegas. And you see that right there, rents are going up by 40%, 15%, double-digit numbers. And some of the cities where they're leaving, the places are going, bacon. So I think that differences in the cost living around the country really do show up, especially now that we have disruptions in the equilibrium level of rents and the equilibrium level of other sticky prices. Steve, final thought. Yeah. What you've really put your finger on,

Tyler, is the problem of the Federal Reserve in setting a single rate for the entire economy based upon a single number, which is the average urban inflation number. You are 100% right. You do not want to be a young person renting a house right now and or living two hours from the place you commute to because your costs are very different from somebody who's living at home now and has a long-term 30-year mortgage, has put his or her kids through school and doesn't have that problem right now. So you're correct. And also it's by age, by wealth gap and by, as Bill points out, by geography. But the Fed only has the one tool and it has to really the one number for the entire economy and sort of the entire globe, which is the use of the

PCE number, but the CPI number is the one it follows. And it's flawed when it gets down to the individual level. And we can argue if it does a good job on the aggregate level. I was thinking about this last night after I finished lamenting the Yankees. Bill Lee, Steve Leesman, thank you very much. That's fine. What does all of this mean for the Fed and for the markets? Our next guest says the central bank is making some key mistakes here to explain and tell us how to invest is David Traynor. He's the CEO of new constructs and investment research firm. What are the mistakes, David, welcome. Great. Thanks for having me. Look, I think that they are making the same mistake they've been making for the last couple of years. And look, I'm going to simplify this. Think just big picture. Inflation has been going on for a long time in the asset markets, right? Housing, stock market, et cetera.

It drifts further down sort of the ladder to food and oil and other goods. All we're doing is increasing the income inequality gap. And the pain that we're putting on the working class while the rich get richer is only going to make the Fed's job harder as people feel more and more disenfranchised. And a lot of things in our economy that used to work smoothly, like not as many cancellations or delays in your flights, are going to stop working that well. Yeah, I mean, it's a bigger macropranches. problem I think most people are seeing. Yeah, for my part, I worry a little bit about the price of

stuff you can't really substitute away from, you know, whether it's health care, child care, in some ways, parts of education, right? That, you know, once those prices go up because of labor shortages and wage hikes and all the rest of it, I mean, people often really don't have a choice. They're kind of just stuck in the squeeze that you're describing. Right. And they've got no choice, but to demand higher wages, right? And that's something that the Fed is not going to be able to dampen down once I think this inflation monster just continues to grow. I think they just keep turning a blind eye to these bigger inflationary and income inequality problems. And it's going to come home to roost in a big and bad way. David, you know, I think now it's fashionable vogue to say that, you know, the Fed was behind the

curve that they made a mistake, that they missed, that they whiffed on the wiffleball. But if I look back to a year or 18 months ago, I don't remember many market analysts, economists, swamis. I don't know what you were predicting in, say, March of 2021 on inflation. But most people, most people were going along with the consensus view that it was going to be transitory and not as high as it is. Would you comment on that? Yeah, you know, look, I don't know how well my crystal ball was working back then, Tyler. And I don't know if we've made as many comments around macro picture. It's not really our focus in new constructs. It's more around the underlying fundamentals of individual companies. But I do think, you know, no one can get around understanding the larger market context of investment and decision making.

And one of this really telltale signs for us in terms of seeing just how off markets are and the Fed is, isn't some of these zombie stocks. I mean, these companies that are profitless, super high valuation probably have no prospects of ever making any money. And as long as we are, as long as the Fed is allowing a capital market system to function in a way that allocates huge amounts, billions and billions of dollars to these companies who in turn siphon it off to individual executives, right? So name some of those. Name some of those. Oh, well, you got me, you got me going now, David. You got to name some of those companies. What is an example of a zombie company that has done what you described? In other words, raise huge amount of capital. maybe it has gone to enrich executives. Maybe it's gone into money heaven. Who knows?

Who are they? Well, to the boards of directors, to the main investors, right? No, I mean, Rivian, Fresh Pet, Coin, Robin Hood, Carvana, Tesla, Peloton. We just published a list of a bunch of these stocks here in the last few days. Tesla's a zombie? I mean, hasn't Tesla made money? Tesla, yeah, are they going to continue to make money? We don't know, right?

I mean, and I think when it comes to zombie stocks, right, you got to keep in mind that, like, the amount of loss that could be incurred by the owners of the stock at its current level is devastating, I think, to folks. And I think when the unwind hits, it's going to be really painful across all those. Did I hear you correctly? It seemed like you were ascribing some of the responsibility for those zombie companies and their ability, in turn, to raise massive amounts of capital to the government or to the Fed. is it really their fault or is it the capital markets? Absolutely. Then explain to me how and why that is the case and why it isn't just the greater fool putting money and getting sold that crap that explains it. No, I mean, Tyler, I'm not going to argue that people should not be responsible for their

investment decisions. And ultimately, that's what it comes down to. But I think it's a little bit naive to say that, like, that most, you know, that most investors are willing to do that. I mean, look at the craze we've seen with AMC and GameStop. I mean, it's clear that there's utter disregard for the value of money in a lot of ways. It's a gambling machine here. And to the extent that the Fed and the government continues to dole out, lots and lots of money so that money's cheap, money's easy, money's risky, and continues to sort of, I think, stoke the fires of speculation. Yeah, they play some role in that.

And I think in some ways there's a distraction from getting back to the business of doing hard work, doing the things that are uncomfortable but required to make a real living. I get you. I get you. Yeah, I see what you're saying there. In other words, that by making money easy and cheap, it contributed, it flowed into that stream where speculating, I don't even want to call them investors, where speculators decided to gamble with some of that free or low price money. I get your point. David, thank you, as always. Good to see you. Thank you. David Traynor. All right, coming up, interesting conversation. CEO of On Semi, the stock is up about 30% over the past month. The move higher comes as the sector experiences a slowdown. We'll talk to the CEO about the chip conundrum plus the national average for gasoline. Now under $4 a gallon, a 21% drop from June's peak. But will the drop in prices last? How sticky is it? As we head to the break, the stock hitting new 52-week highs in today's session. Cardinal Health, Constellation, Energy, Constellation, Energy, excuse me, and genuine auto parks.

And there's some others. Welcome back to Power Lunch. I'm Dominic Chu. Take a look right now at shares of some European pharma, specifically GlaxoSmith, Klein, Halion, and Sanofi, trading lower today on continued worries that the companies could potentially face litigation over the marketing of a once popular heartburn medication, Zantak,

which regulators ordered off the market back in 2020, due to concerns it may contain a carcinogen. Now, Halion, which was recently spun off by GlaxoSmithK, issued a statement saying it never marketed the drug and is not party to this particular litigation. Nonetheless, all three stocks are off by about roughly 10% or more in a week or so. So keep an eye on those European pharma names on possible litigation risk, tie.

I'll send things back over to you. All right. Thank you very much. That's news to me about Zantak. I think COVID must have overshadowed that because it was 2020, but I agree with you, my same reaction. I think I probably took one over the weekend. It's probably three years old.

I'm not big on checking the ex-date. I'm sorry. Otherwise, you throw everything all the time. All right, but I'm fine. It's all okay. Gas prices falling below $4 a gallon, the lowest level since early March. According to the AAA, the national average for a gallon of gas, regular, regular cash. That's $3.99, $0.14 lower than just a week ago, $0.68 less than just a month ago.

And more than a dollar lower than two months ago. So what's behind the drop? And is it sustainable? Tom Kloza is co-founder and global head of energy analysis with the Oil Price Information Services. Tom, welcome. Is this because Biden tapped the SPR or what? Oh, I think it's multiple factors. He does deserve credit for this swoon from June 14th until now. I think we're 58 days of down days. But you don't know if it's going to haunt us when the SPR sales stop in October. But, you know, certainly it is one of the factors that has tempered crude price enthusiasm. And we've also seen demand destruction.

Demand is probably 8 to 10 percent below where it was a year ago, and it's well below 2019 levels. So that, together with refineries operating close to 100 percent. of capacity has kind of cleared things up for a while. But I think they might need some Xantec on the consumer side to the next hundred days. Just be careful. Yeah, just be careful for what you wish. The demand destruction is that people are driving less or they've pulled back or what? A little bit of everything. I mean, first of all, commuting is not what it was in 2019 before the pandemic. And, you know, there's some places. now that are reauthorizing masks in New York area, out in California or whatever. So, you know,

the kind of post-pandemic lull in some of the driving, you know, to work has eased a bit. But, you know, the banks all get it wrong because they all say that, oh, in order to really have demand destruction, you need prices of between 602 and 660 a gallon. They don't realize that visceral response that people have to gas prices, you know, to a certain extent, it's a little bit irrational, you know, like perhaps the way people on either side of the issue behave on guns. And it's hard to model human behavior, particularly when it's not particularly rational. But by the way, Tom, you know, obviously the 10 cent moving gas prices isn't what affects me, but I'm aware of the global energy shortage, right? Like, I'm aware, like, maybe I shouldn't take my kids on a hundred mile drive for no reason

just to keep them quiet because that would feel a little wasteful right now. You know what I'm saying? So I think there's a little bit of that playing out. And how much demand destruction have we seen? I think it's probably about 8 or 9% from last year, but it's in the mid-teens when you compare it to before the pandemic. I think we've seen about as much demand destruction as we'll see. We're not, however, we surveyed like 20,000 stations and actually what they pump.

We're not seeing much of a rebound, maybe a half percent or so. Really? Demand is not coming back? And the next 90 days really pose problems on the supply side. You've got a gauntlet. You've got a hurricane season. You have President Putin possibly pushing some mischief buttons, and you still have problems with power.

And, you know, refineries put off some of the maintenance that they would normally have in the second quarter. They're going to have to take some of those units for pit stop in September, October, and November. Wow. That is very interesting. My life is a motivational speaker has ended, in other words. Yeah, but the fact that demand is not rebounding more rapidly is very, very interesting. Can I squeeze in one quick question? Very fast answer. Nat gas. How high is it going to be this year here in the U.S.? I mean, it is an extrapolation of exponential potential proportions. We're seeing that.

natural gas traded the equivalent of $350 to $400 a barrel for oil. And I'm really worried about diesel and jet fuel prices in the last 130 days of the year. Got to leave there. Like much higher. All right, Tom, we'll have you back. You motivate me, man. It's so uncomfortable, too, to know what we could be going into. All right, no freight freight anyway.

While recession fears heat up across the economy, it seems demand for shipping remains strong, especially as those supply chain snags ease up. We'll talk about that. Plus, crypto higher again today. Bitcoin, two-month high. Now BlackRock adding some exposure. We've got those details next. Welcome back to Power Lunch, BlackRock, taking another step into crypto.

This comes as Bitcoin and Ether are hitting two-month highs. Kate Rooney is here with the details. Kate? Hey, Kelly. Yeah, crypto prices are getting a boost from some macro news and then some industry-specific news as well. First, Black Rock, as you mentioned, launching a private. trust to track the price of Bitcoin. This will be a direct competitor to grayscale's Bitcoin Trust, the world's largest asset manager saying, despite the steep downturn in the digital

asset market, we are still seeing substantial interest from some institutional clients. It comes a week after BlackRock partnered with Coinbase to let its clients buy Bitcoin and more institutional interest has been seen as a sign of legitimacy for this new asset class. Then you've got Ether, the cryptocurrency tied to the Ethereum Network, benefit from some progress on something called the merge. You can think of it as a software upgrade to make Ethereum more energy efficient and faster for building things like NFTs, for example. This week, developers successfully ran the last test ahead of the final merge. That's happening in a month or so. Some are still skeptical. This gold post has moved a few times in the past, but you're seeing

the optimism play out in options markets, which have seen even higher volume than Bitcoin options. Bitcoin and Ether hitting their highest levels since June. That's in part, thanks to the macro picture as well. We get that cooler than expected. Inflation number, mining stocks are doing particularly well. You've got Marathon Digital, Hut 8, core scientific, all seeing double-digit gains for the week. Not the case, though, across the board. It's sort of a mixed picture here for crypto stocks.

You've got Coinbase down about 9% today and then block as well lower. Kelly and Tyler, back to you. All right, Kate, thank you very much. And ahead on Power Lunch, the Chips and Science Act. signed into law. The good news, this is good news for semis, overshadowed by Invidia and Micron's warnings, we'll talk to the OnSemi CEO. And seasoned to perfection, we're going to take a look at stocks that are not only beating analyst earnings expectations, but also improving at today's three-stock lunch coming up. Welcome back to Power Lunch, everybody. We're watching shares of

the semi-sector. They've been on a wild ride lately. On the one hand, AMD and Invidio, warning of a slowdown, sending the stocks down this week. But on the other hand, the government also signing into law, that massive chipsack that will send billions into the sector and could spur more onshore production. Christina Partsenevelis joins us now. She has the CEO of On Semmy at the company's new Silicon facility in New Hampshire for more on this story. Christina. Thank you, Kelly. You set it up really nicely because that's exactly how I want to start the conversation with Hassan. We hear about all of this slowdown across the board, but companies like yourself, NXP Semi, they're like, no, it doesn't affect us because our bread and butter is auto and

industrials. Are you starting to see cracks in those segments now? No, actually the auto industrial segment, that's 66% of our revenue. It's solid. We have a long-term visibility. We have a lot of long-term supply agreements that are signed up with our customers. That gives us the visibility and the confidence in that visibility for us to invest in facilities like where I am today. We have talked on the last call about some softness in other markets, and we've been proactive about that. It's nothing to hide from. We just have to be proactive and response. Well, we started on the manufacturing side, we reduced a little bit on the manufacturing intensity that goes into those markets, and we actually shifted to the extent we can into the auto and industrial, which we see strength.

You mentioned these long-term agreements, though, and your exposure to the EV segment and the EV revolution, I should say, but that's something that could probably happen in maybe two to three years from now. So in the near term, are you expecting a worse situation, especially for your labor, your employees, I guess, in the next coming year or so? No, look, see, this is the confidence that we have. The confidence you have, too. That's right, but I have such confidence that I went on National T and I said, we're still hiring, we're still investing because that's the visibility we have. Look, if EVs don't double year over year, they're going to grow 90% year over year, which is what they grew. That's how we grow is with the EV revolution.

And more importantly, everything that fuels the EV, you know, that ecosystem where you have solar, you have charging, all of that is what we do. Nobody can ignore the fact that EVs are going to be a bigger percent of the cars on the road. If that's the case, and we all believe it, and I'm a big believer in that, we're going to grow with it. This is your second facility that you've just opened. The Secretary of Commerce was here. We did a nice little ribbon-cutting ceremony. From what I asked her, I understood that retroactively, you won't get anything from the Chips Act for this facility. So is that kind of like a dagger in the heart because you're not getting any money for this?

No, look, we've invested because of the business. What the Chips Act did is added to our confidence in what North American manufacturing is. We weren't waiting. We want to double down here on what we do in order to and leverage a lot of that market that I've been talking about. But this is not it. There's still investment. We've doubled our investment year over year, and we're going to even keep investing at that level next year. So it's just a milestone. It's not the destination. We cross that milestone, and we're going to keep investing and we'll participate in the Chips Act moving forward. The Chips Act, it seems like they're going to get their stuff together within the next couple of months and start giving out subsidies.

So is this an incentive for you to possibly build another manufacturing hub or maybe a smaller venue elsewhere in the United States? Yes, we're growing. The question is, where? Where? That's the key. You know where? I know. Okay.

And let's talk about hiring for a second because I don't think we really address this that much. When you're opening, this is a silicon carbide hub, right? This is not easy stuff. You need all different types of technical skills. Do you find, are you struggling to find the staff? Look, it's tough to find staff, and we're hiring a lot across in order to ramp up that facility. So when you think about it, there are challenges. You know, we love challenges.

Those are just a problem we need to solve. We partner with the local community. We partner with the Veterans Affairs. We train. We onboard and we employ. That's what we need to do when we leverage this community, which is why we love it here and where we started our next building just next door to our first site. Okay.

Last question, because I think it's just, it's so topical. It's the chipsack. Five years, right? You're spreading that money. Yesterday, Global Wafers was the latest company. You have a list of companies making promises to spend billions of dollars in the United States. So for a company like On Semi, what does that mean for you?

Are you going to get lift out of the pack? Are you thinking, ha, this is really not going to move the needle too much. We'll just go about our business. Look, everything is going to move the needle. And the milestone that was signed on Tuesday was historic. I had the pleasure to participate in it, and I will never forget it. But what you have to also differentiate between a lot of the companies and everything out there is we're already doing it. Yeah.

You know, we didn't wait. We're doing it. What this will do is continue to do it. That's where I differentiate between On Semi and a lot of other companies that have, to be honest with, plans on PowerPoints. I have plans in the ground. I have plans that are hiring people. I have plans that are outputting. That's what we do.

That's what we're doing at On Semi, and we're going to continue to do it. I love that. Throw out those PowerPoints. Thank you, Hassan. Thank you so much for joining us. Tyler. Back over to you. Christina, thank you very much. We appreciate that. Up next, a steady ship. The freight and shipping industry shows signs of strength, even amid macroeconomic fears. We'll discuss that and more next as we await Attorney General Merrick Garland. We'll be speaking soon.

Welcome back, everybody, to Power Lunch. The Dow Transport's Index higher today and up about 15% over the past month. The latest sector data telling us a lot about the state of the economy. And Frank Holland is here. here with a look at the risk of a freight recession. Mr. Holland. Hey there, Tal. You know, it doesn't look like we're in any danger of a freight recession right now because trucking stocks, they're just simply outperforming today on better than expected PPI and also yesterday on better than expected CPI. Take a look here. They've really boomed since the start of the third quarter despite recession concerns and concerns about a shift from goods to services. Now, these are some stocks that we don't talk about a lot, but the great examples. Here's TFI. This is a company that bought UPS's freight business up 30. percent quarter to date. Also, Sia, a trucker for Walmart. J.B. Hunt, that's a big player at the

West Coast ports, up more than 20 percent. Freight CEOs say more retailers and other customers, they're moving their business to the contract market with longer term, higher paying deals and away from that on-demand spot market. Earlier in 2022, a lot of concerns about that freight recession because spot rates were falling. And guess what? They really still are. They're still down, but they remain more than double pre-pandemic rates. Also, fuel surchargers have contributed to major truck and company revenues. We've talked about this on Power Lunch before. Big companies, they charge customers a surcharge for fuel based on retail prices,

while most of them pay close to wholesale. Bit of arbitrage there. Looking for insight into the freight market and the e-commerce market, check out FedEx's peak surcharges for big customers. This year, they start on Labor Day, much earlier than usual at $3.45 per package. And a month later, they double, nearly double, to $6.55 a package. And the data shows that freight demands only increasing e-commerce spending, seeing its biggest year-over-year increase in July, outpacing even January. Right over here, I might be blocking it.

And as we all know, January is boosted by returns and continued holiday spending. E-commerce generally requires three times the inventory and warehousing space. So what you're seeing here, a big tailwind for the transports. Go ahead. And I would just point out this is a huge development. When these things were really plunging, it was one of the most worrisome signs for the economy. the market and this is a really important turnaround. Yeah, it's really a big turnaround, but the thing is that there was some misperception about the spot market. The spot market is a big

part of the transports and a big part of trucking, but traditionally, historically, it's about 10 to 15% of the market during the pandemic. Huge disruptions. A lot of stuff going on. People just went to the spot market to get relief, to get more capacity. Now it's shifting back to the norm. That's a great point. Three bucks, up to six bucks a package in surcharge on FedEx, on everything I send through FedEx? Well, that's the second tier. The first one's 345 starting on Labor Day. Not you, though. It's a big retail. The Walmart's the best buys. Because both UPS and FedEx, they have similar things in place. For them, UPS calls it better, not bigger. FedEx has a priority on just better revenue quality. And so the idea is that they don't want to take every package.

They want to take some of the best packages and the higher margin packages. And one way they increase margin surcharges. Yep. Interesting. Big numbers. Frank, thank you very much. Frank Holland. We want to get you caught up on some of these moves in the stock market. The NASDAQ turned negative earlier. The S&P is barely hanging on to gains now. The Dow losing some steam. Bob Bassani down at the New York Stock Exchange. What's happening, Bob? Well, we're fading going into the close. But remember, we've had an enormous rally, 15% since the bottom on June 16th. Just want to show you what's going on. So we had a positive open on technology stocks and consumer discretionary. That's now reversed.

They're now down. But remember, those were big market leaders. Energy, which was flattish at the open, is now rising as we see oil moving back towards 94. It was in the low 90s earlier. Retail, which is a part of consumer discretionary, has held up fairly well, though. Let me show you a couple other things that are moving right now. A couple of consumer names have been doing very well. We're continuing to hold up. Show you how broad the rally is becoming here.

It's not just tech stocks. Tapestry has been moving. Nike, Best Buy. Even REITs have been doing well. Simon Property is in an upswing right now. And some metal stocks that had been struggling in a couple of weeks prior to now have been doing better recently like Freeport MacMran. That's the biggest copper producer in the world. I want to show you how broad this rally has become.

I know people think that technology is the reason the market's going up. But actually it's broader than that. I've been talking about Kathy Woods' arc innovations just on a tear recently. But the NASDAQ 100 is now over 20% above its recent 52 week low. And that was in the middle of June. But more than that, small caps, Russell 2000, different group entirely, also 20%. percent above its 52 week low. And Frank was just talking about transports and trucking stocks. The Dow transports is in a nice upswing. It too is 20 percent off of the lows. It hit in mid-June.

Some sectors that had a very rough time in April, May, and June have bounced back nicely. Consumer discretionary, which is retail, some home builders, some automotive companies as well, in addition to Tesla, also bouncing nicely. And technology, of course, that's a big participant. but even bank stocks, a completely different area, about 20% off of the high. So the bottom line, Kelly, here is the rally is broadening out. Back to you. Thank you very much, Bob Bassani. Let's turn to the oil market, which is the center of a lot of what we've been talking about.

We're seeing gains as a result, PIPA Stevens, maybe of some of the bullishness in the stock market, but we don't necessarily like it when it extends here and kind of spoil the better inflation, better consumer stuff everyone else is discussing. That's right, Kelly. And on the same day that the national average fell below $4, we are seeing oil prices on the move, with Bren at one point trading back above $100. Now, we did get new data from the International Energy Agency, which now expects demand growth of 2.1 million barrels per day this year. That is higher than prior estimates, and much of that is because of soaring oil use for power generation and gas to oil switching. This, of course, as European natural gas futures stay above 200 euros per megawatt hour. A reminder that that's roughly $60 per MMBTU and power prices in France and Germany hitting records.

And now France is no longer Europe's top power exporter amid issues with the country's nuclear fleet. So let's check on prices here. WTI have 2.6% at 9436 brand crude right around 9960. And natural gas, Kelly, surging another nine and a half. percent. Yikes. Thank you very much. Pippa Stevens, I think. All right, coming up, are the company's beating expectations worth buying into now? We will discuss that when three-stock lunch comes your way next. Welcome back, everybody. It's time for our three-stock lunch, and today we're toasting to the champions of earning season. CNBC Pro is highlighting stocks that are bucking the trend and increasing profitability, boosting their profit margins by at least five percentage points

from the same time last year. In this environment, that's amazing. The list includes Expedia, Occidental, and New Corps. Here to help us trade them all. Quint Taitro is founder and president of Jewel Financial. Great to see you, Quinn. Let's start with Expedia. Yeah, Expedia is a tough one, Kelly, because this is a stock that I would traditionally really get behind

from a fundamental perspective. The stock's cheap, selling 11 times forward earnings, and now they're set to grow those earnings by 35%. They've got a tailwind in the travel and leisure area that I like quite a bit. The problem that I have with the name that just kind of keeps it off my list is the balance sheet. The stock has a debt to equity ratio of about 4 to 1. That's just too much debt for me. So I think if you're in the name, enjoy the ride, but I think you have to be very careful,

and we would be a seller of strength here in this name. Let's talk about oxy petroleum, which year to date is up 125%. This stock a couple of years ago, 2019, after it paid a very rich price for Anadarko, felt to me like a walking dead, but it has been anything but do you think it can keep it up? Well, this is also a difficult one for me because I'm going to go against Warren Buffett here and I'm going to say that Auxi is a cell. This is very difficult for me because I, you know, definitely would follow his lead in most names. But the reality here, Tyler, is this name's just not that attractive. If you can look at it once over, you'd say, all this stock's cheap. It's

got a current multiple of six. But the reality is they're set to see a decline in earnings next year. And ultimately, their balance sheet is not that great. And you're not getting paid that much. Most of these stocks have a healthy dividend. For example, Chevron, great balance sheet, almost a 4% dividend. This one's less than 1%. So I think that if you like the oil theme and you think that there's, you know, upside in petroleum that many analysts do, I think there's better names out there. So Occidental is a sell for me as well. Well, let's move on and see if our last name here can get you in a different kind of mood. Let's see. It's New Corps, the Steelmaker, five point increase in profit margins over the past year.

Quint, what do you do with it? Okay, this checks all the boxes for me. This one is cheap, selling six times, earning significantly improved balance sheet. We had a pretty severe commodity sell off over the last couple of weeks. Those are now rebounding. The stock's up 45% from the July lows. So I'm not so sure you run out and chase this name here at all. But I think that this is a theme that's continuing. And again, the fundamentals here are very attractive. The technical setup is strong. So this one is a buy on all metrics for us. But I would wait for a little bit of pullback, which I suspect happens in the coming weeks. And then you pick it up. on weakness. All right. Well, at least we found one. Quint, thanks so much. Good to have you here today. Quint Taitro. For more profitable stock picks, head over to CnBC.com slash probe. All right. Up next, trends in back to school spending. Oh, my goodness. Coming up. We'll be right back. All right, folks, welcome back to power lunch. That time of year again.

Yes, back to school. Dom Chu is here. A look at how spending is stacking up. Hey, Don. It's thematically the same as we've said before about a lot of parts of the spending picture, that apparently the American consumer is fairly resilient. The thing that we want to keep an eye on is whether or not that spending is getting back towards pre-pandemic levels. And the data that we have here is courtesy of the folks over a Bank of America Institute. They got a lot of insights. And in addition to being one of the biggest banks in America, they can see spending patterns with regard to credit card spend, debit card spend, that sort of thing. So what they've done is they've taken a look at spending for back-to-school season,

from June through the summer. And the blue line is the interesting point right there. That's pre-pandemic in 2019. The orange line, maybe not surprisingly, is 2021 last year for school. And the green line, that's the one that's kind of interesting here. Because what it shows is that this year spending is on a pace to eclipse what we saw pre-pandemic. Now, there could be a number of reasons for that, say Bank of America. They say that it could be some fears of inflation or supply chain issues where people are trying to find the deals and spending.

the money when they can so there might be a pull forward effect, right? People are spending more in the early months to get the stuff that they need, backpacks, binders, if people even use those sorts of things anymore. And you look at that compared to what it has been in years past. So that shows that kind of resilient consumer. One of the things they're also pointing to is the number of tax holidays that we do often see this time of year. Many states, including my home state of Connecticut right now, have tax holidays during the summer so that people can go and buy certain goods, clothing, accessories, consumer electronics, that sort of thing without having to pay tax on them. Right now, the earliest and longest of all of those states is Florida. It went from July 25th

all the way to August 7th. But right now, in addition to all the other states who have already concluded their tax holidays, you've still got Illinois, Massachusetts, Maryland, and Connecticut that are either ongoing right now or have sales tax holidays for sure. And then most common exempt items are, of course, clothing and footwear, supplies and computers. So this could be that big catalyst for spending. Back to school is often seen as one of those things where it's a call to action. Yeah, and it's a clear back to school season this year, you know, maybe then for the last couple. Right. The whole point is I guess what's interesting here is that in addition to the normalization of school efforts, right? You also have this idea that maybe the spending picture gets a little bit more muddied because people are paying more for things because of inflation.

And we've been talking so much about supply chain issues. If you can find it, just take it, right? Just get it right now. But the caveat there, guys, is that that might lead to kind of that draw forward effect, right? People have spent all their money in June and July getting all the stuff. And not that it's a new phenomenon. but I got to think that back to school is just more expensive on its face because it's not just binders and notebooks it's it's laptops and and and Chromebooks and how many of those were bought though two years ago already oh a lot yeah right don thanks you got it guys and thank you everybody for watching power lunch closing bell starts right now