Power Lunch - Strike Out?, and Up In the Air 4/18/23

Episode Date: April 18, 2023

Netflix reports results tonight, following its live streaming debacle over the weekend. But a new problem has emerged for content creators: a Hollywood writers strike. How serious is the threat, and how can streamers work around it? We’ll explore. Plus, Southwest planes are back in the air after yet another computer meltdown. How did this happen again? And can it be prevented from happening again in the future? We’ll discuss with an insider. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

All right, well, welcome to Power Lunch alongside Kelly Evans. I'm Robert Frank. Coming up, Netflix reporting results tonight following that live streaming debacle over the weekend. But a new problem emerging for Netflix and others, a Hollywood writer's strike. How serious is a threat and how can the streamers work around it? Plus, Southwest Plains are back in the air after yet another computer meltdown. How did it happen again? How can it be prevented from happening in the future?

We'll dive into that. First, let's get a check on the markets, though, as stocks are trying to turn positive. The S&P now up a point, the Dow down a point, the NASDAQ down 14, and the Russell's underperforming once again down three quarters of 1%. We'll get to the bank earnings with Christina Parts and Eveless in a moment. Dom Chu first, let's kick this off with a couple of names in the news. All right, so Kelly, Robert, let's start with Dow component, Johnson, and Johnson, which is down roughly 2.5% right now.

The health care products and pharma giant reported profits and revenues that both top analyst estimates, it also raised its full-year profits. forecast and sales forecast as well, but it's the effects of it still pending litigation around alleged injuries caused by its talc-based baby powder products. They're still being felt. It took a massive $6.9 billion charge related to the proposed settlements of those suits around it. So that's the downside there.

It's also, by the way, spinning off its consumer health business into a separate company called Kenview. So Johnson Johnson down 2.5%. InVIDIA shares are higher to the tune of 3%, driven in part by an upgrade by analysts over HSBC to a buy. it was a reduced or cell rating before. They cited amongst other things opportunities and artificial intelligence outweighing concerns about a possible slowdown in data centers.

And then we're going to end with a check on Teledoc, which is getting a big boost today after the telemedicine company announced the launch of a new platform that will help patients, guys, with weight management and diabetes prevention. Of course, that weight loss component of health management is considered a very rapid growth part of the market. So keep an eye on Teladok up 7%. Let's now throw it over to Christina Parts of Nevelas. with a look at all those big bank earnings.

Christina. Thank you, Dom. Bank of America, reaping the benefits of higher rates. It's net interest income, which is the difference between interest earned for lending activities versus the interest it pays depositors. It beat on estimates for the quarter

and jumped 15% year-over-year, and that also helped bond traders that had their best quarter in a decade. Deposits were only down about 1% despite all the concerns about regional banks in mid-March. Goldman Sachs, though, on the other hand, didn't see the same strength

from fixed-income trading, missing expectations with investment banking activity also slowing down, and that's weighing down the stock, down 1.3 percent, despite the earnings per share beat. Some analysts pointing out that higher EPS might be because expenses came in much lower, helping margins. We do have some regional banks coming out with earnings after the close, led by First Horizon and Western Alliance. You can see both of those shares are down well over 1% right now. But Western Alliance, look at that. It's down substantially year-to-date. negative 45%.

Absolutely. Christina, thanks very much. Let's take a little deeper now into those bank earnings. Hugh's son is here on set with us. He's the banking reporter for CNBC.com. Hugh, interesting, right?

Because even with the good, the B of A, you know, you've got, as our analyst last hour, said maybe the deposit growth wasn't quite what he was hoping or expecting. And then on Goldman, what's going on with some of the business units there? I mean, especially Fick, obviously has been highlighted. The losses on Marcus.

There's a lot there to blush about. So two different buckets. B of A, you take a step back. Bigger is better when it comes to retail banking. I think we've seen that. That's very clear. All the four big banks have done pretty well. Differentiation between that, though.

JPMorgan, you know, their net interest income, I think, was up 45%, or 49%, excuse me. A, city was up 45%. What was B of A up, 25%. So deposits down 1%, which is a little surprising given that, you know, JPMorgan said that they added 50 billion in deposits thanks to the SVB post, you know, moves. So it's good, it's not great. Relative to J.B. Morgan, relative to some of the others. Now, Goldman Sachs is a different story. I think this is really the quarter in which they're still experiencing the hangover from, you know, their misadventure with Marcus and their consumer efforts.

So you saw that they took a $470 million hit on the offloading of a bunch of those loans. And at the same time, look, they're selling something that called Greensky, which they bought about a year and a half ago. Right. for $2.2 billion. Now, they bought it in 21, I think, or the late 21. So they bought it at the peak of the fintech valuation bubble. And they're going to try to sell it now. So you guys tell me how that's going to go. Yeah, and I wonder, you know, David Solomon has made a big point about wealth management and asset management being their future. It was a good quarter in that division. I think it was up 24%. But they missed, I guess, on the top line compared to what analysts were expected. What do you see for that business? Are they hitting their targets? Are they getting to where they need to go with that business based on what you saw in the quarter? Yeah. So wealth management and asset management missed by about $500 million because that's where the sale of the loan markets, though, it's actually flowed through.

So more or less, if you exit out, they basically hit. Now, the other thing is just difficulty in understanding the ins and out. If you looked at that, you know, the paragraphs dedicated to wealth management and asset management, it's pretty opaque. It's really tough to understand. And it's not simple like a bunch of places like Morgan Stanley, which is tomorrow morning. And you had the equity markets going up in the first quarter. And so that just immediately translates into higher assets on the management. So you just wonder what it's going to do if markets are flat.

Right. And what's green sky? So green sky is, you know, if you are a contractor and you want to be able to extend loans to the people who, you know, who are going to hire you for a gig, they extend credit. So, you know, they've got relationships in places like Home Depot and a bunch of other folks, tons of merchants. They were super excited about this business because it was them penetrating Main Street further in a way that seemed to make a lot of sense. They had a lot of good things to say about it. And yet you can't get away from this idea that there's buyers' remorse.

You know, they just bought it at a premium, and now they're looking for a buyer. Yeah, they know it's a fascinating turn of it. It'll be remorse depending on what they sell it for, right? That'll be the big question. Or the degree of it, yeah. Hugh, thanks very much. By the way, now, so we sort of put a pin in bank earnings season, or when do we hear from Morgan? Is that tomorrow? So Morgan Stanley's in the morning, and I think, you know, look, regional banks are in a class of institutions that we don't really look at typically in terms of their earnings very closely. We're going to do it this time.

Yeah, all the more important right now. All right, Hugh. Thank you. While Wall Street is watching for any signs of an economic slowdown from earnings, Americans have already adjusted their lifestyles to deal with ongoing inflation by cutting back on space. Steve Leastman has more from our CNBC All-America economic survey. Steve. Yeah, Robert, we've been talking all day about how it's really, inflation is really weighing down on people's attitudes about the economy. This is more about how they're changing their lifestyles as a result of it. So you can see in our survey of 1,000 people around the country is 65%.

That's the number one thing, spending less entertainment, like going out, go to the movies, going to concerts, traveling less is number two, driving less, number three, and then using savings to pay for things about half of the public doing that. Altogether, about 80% of the public is doing at least one of these things, and some 60% doing around two and then three of them as well. What's the biggest impact right now? It looks like groceries. People feel on the biggest impact from inflation in the food store compared to before it was gasoline in our January survey, but that's still up there. Housing a little less. We'll talk about this in a second and health care less than that. Now, what about the divide? What we're finding, Robert, is that people

are experiencing inflation in different ways depending upon socioeconomic class. For example, take a look at here. These are self-described classes where people say, yes, I consider myself part of the upper middle class or part of the working class. 72% of the working class

saying they're spending less on entertainment compared to 54% of the upper class and then 18% of the upper class or having an additional job to make ends meet because of inflation. 51% of those in the working class. Now, how is the I told you we're going to come back to? Very interesting.

Just remember 12% of the people. adults say housing is the biggest impact for them when it comes to inflation. Black adults, 24%, four-year college degree, 20%, and urban counties, 21%. So people experiencing inflation in different ways. It's interesting when you look at travel and you look at entertainment. We're not seeing evidence of that when you talk to the airlines, you talk to the hotels, you look at the restaurants. It doesn't seem to be showing up yet. Is there a delayed reaction or how do you account for that? I just maybe it depends

a bit on where you look. I mean, it depends on, I would suggest it probably is happening in the lower scale of things. For example, the lower hotels, lower motels, where some of the other places where you get to middle and higher end, those are the ones that are probably having the best time of it right now.

All right. Steve, thank you. We appreciate it. Our Steve Leesman. Speaking of travel, Southwest Airlines resuming flight after briefly pausing departures today due to technical difficulties. It's only the most recent issue for Southwest and for the airline industry as outdated systems are causing delays and slowdowns. Here to discuss is Captain Michael Santoro. He is vice president of the Southwest Airlines

Pilots Association. Captain Santoro, welcome to the show. And what happened here? Thanks for having me. So the maintenance on one of the firewalls to the Swift Software System. And evident of the maintenance patch failed. It went to the B system and it took a long time for I had to switch over, which caused our pilots not getting the proper paperwork and the airline not being able to dispatch airplanes. Didn't Southwest, I mean, we've seen this issue, obviously, most notably a couple of months ago, didn't they try to invest in systems or personnel or what have you to prevent something like this from happening again? So the question is, did any of that new apparatus get in place that would have prevented this, or is it just going to take a while?

It's going to take a while. This system actually, Swift, was slated to be updated five years ago. And they put off the project to, you know, while Gary Cayo was CEO, to, you know, invest in the shareholders and not in the company. So Swift guy has been put off for years and despite our warnings that it's a problem. And then you're seeing the effects of that now is patches keep on going in and the patches failing. I guess when you, Captain Ness Detero, when you look at how this issue was described, it's data. connection resulting from a firewall failure. It's hard to see how that results in such a safety concern that you actually have to ground flights for a certain period of time. Why was it so serious

that they just had to stop operations? Or was it the FAA that just said, look, you have to stop? No, so the system is called SWIFT. It dispatches all our airplanes. So it gets the pilots, all our paperwork, everything we need to fly the airplane from point A to point B. It requires that system. So when it goes down, no airplanes can move. We can't dispatch them. And so the airline has to stop operating until it does a reboot, which it had to do a couple times. And then the systems fortunately came online. Another fortunate thing is that it was in the morning when pilots have lots of duty day left in them. So we can kind of absorb the delays and not have to cancel a ton of flights. So timing was perfect for us today in that. And middle,

cancelations, but lots of delays. What do you think the odds are on a given day that this happens again? 50-50, lower? 50-50. This system gets rebutted every night. And for me, I'm always like, I always wonder if it's going to reboot tomorrow. So, you know, it's, it makes me nervous that system, not a fan of it. And it's old.

It's very old. Right. And remind me one more time what the options are to replace or upgrade or, I mean, do away with it or, I mean, what? But what can be, is it a money problem? Is it just that it's old? Does someone have to rebuild, you know, some new infrastructure entirely? What's the solution?

Well, fortunately the company, you know, Bob Jordan and Waterston have taken on this project. And they're building it out, but it takes time. It's complex, lots of tentacles. And it's a work in progress. So it is slated to be replaced. They're working on the project now, as you speak. And it just takes, this IT stuff takes time. does it ever. Captain Michael Santoro, thanks for your patience. Thanks for your time today. We

wish you the best. Thank you. Appreciate it. Coming up after the break, Americans are waiting for prices to drop across the board, especially for housing. The market's in a strange spot. Price is not moving much, nor are buyers at the moment. We'll take a day trip to Austin. That's a flight and get a better idea of where things stand. Plus, ahead on the show, Netflix earnings are on deck, has the company's new initiatives driven growth. Or are problems around pricing and live events driving away subscribers. Power lunch will be right back. Well, the spring housing season is here. You can feel it in the air and we are taking you on another day trip to explore the state of real estate markets across the country. Today we're

shopping in Austin, Texas, among the hottest markets in the entire country during the height of the pandemic, but now showing a few signs of cooling off with sales down 14% in March compared to last year. Here to take us for a spin around the town is Suman Kim. realtor at XR Realty. So, and thanks so much for joining us. So in a lot of these markets, we have this standoff between buyers and sellers where they're not really agreeing on the price right now. What do you see in Austin?

You know, right now, obviously, there's really coming from it to store kind of height of where the hot, how hot the market was and coming down to where it is today. There's still a little bit of a standoff. I mean, just to give you an idea, in the last seven days, we have about 1,200 new listings in the Austin market. but there's 1,340 price reduction. So you can see that is a metric that really shows that, you know, there's time to negotiate, there's opportunity to negotiate, and there's a little bit of standstill in the fact

that buyers and sellers are not agreeing on pricing. And as buyers, they realize, look, everything seems to be somewhat on quote-unquote sale. And so we're going to go ahead and see if we can, you know, ask for under list price and see if that can work. And that's what's happening in the market right now. It's interesting about the discounts because if we look at the most recent quarter, the prices were down, median prices are down about 12%. How much room is there still left to go?

I mean, could we see prices at the end of this when things start clearing down 25%, 30? What's the right level do you think for that market? I mean, at the end of the day, I always say as a real, I'm not a fortune teller per se, you know. And we are in a churning market right now with rates that have gone up or from what they were used to, you know, or from what we experienced in the last year. And the rates have gone up. So there's a little bit of churny market.

what's happening right now. And so what's interesting, though, is statistics and metrics are one thing, but actually being on the ground for the market and being in the trenches on the daily basis, we're realizing that a lot of the pricing and negotiation and reduction of prices, whether it's from a new construction builder or someone trying to sell their home, is almost baking in that uncertainty for buyers already. So in other words, if I'm a buyer and I'm like, if I'm going to pay this for a home, what if the market goes down? Well, what happens is sellers are reacting by saying, well, if it goes down, we'll give you that price today, you know. And so I don't know exactly how much more there's going to be room for prices to go down, but it's going to be up to what's happening with the rates, you know, and we really don't know what's going to happen with really the second half of the year.

If rates remain the same, if rates go up a little bit or down. But ultimately, I feel like it's a great time for buyers right now. You know, the prices have certainly corrected themselves from the height of the market a year ago to where they are at today. And ultimately, prices, once you get a price for a home, you can't ever change that. But the rates are going to always change. So there's going to be an opportunity to people to refinance. And typically, when the rates go down, pricing goes up. When the rates go up, pricing comes down.

So, Sumin, I have a question here. Up in the Northeast, there's almost no inventory. No one wants to move because of their current rate is so low. They don't want it. Who is selling a home in Austin? Who is this seller? Why would they sell in a market like this that seems to now be, you know, not a buyer's market, let's call it? Where are they going?

And why now? Why are they selling now? I mean, now ultimately, yes, the prices did come down approximately 13 to 15% since the year ago. But for most people that bought their homes many years ago, they're still really up, you know, on where they're at as far as their home value. So those people that are looking to sell right now are seeing all the new construction home that are being built. They're realizing that their home that they bought in 2000. or 2005 is becoming severely outdated. And there's a little bit of envy, you know, some of these new homes and the new style,

the new floor plans, and really just getting an updated home. So the people that are selling their home are looking to perhaps move a little bit farther from the center of both where they are near, let's say, Austin City Limits and looking for some newer space and newer homes that are available today that they probably desire because of the styling. And, soon, obviously, Texas has benefited from all that wealth migration and just general migration from California. We saw that new mansion tax in Los Angeles. A lot of people wanted to sell their house quickly. Broker stole me. They had a lot of people quickly selling Los Angeles, getting under

that mansion tax and moving to Texas. Are you still seeing that wave of Californians coming to Texas? Or do you feel like that's largely done on the buyer's side? It's certainly not done on the buyer's side. Whether it's California, whether it's Washington, the tech industry continues to allow people to be given granted remote access work. So essentially their employer is really just Wi-Fi, you know. And what's beautiful about Austin and what made Austin such a central interest is that there's so many tech companies here. They call Silicon Valley number two. We got Apple.

We got Tesla. We got Samsung in here. We got Facebook. We got TikTok in here. So ultimately, when you have someone that has, let's say, an engineering specialty, not only did they feel comfortable going to a place where there's a little bit of a better cost of living, you know, obviously in somewhere like California. But ultimately, if they have to change positions or have to find new work in any case, they feel comfortable. that they're in proximity to which their skill set is required and needed. So it's really, you know, several of my clients have already, you know, switch companies,

you know, but given their skill set, the tech industry continues to boom here. And therefore, those that are getting remote access work as an engineer in these, you know, markets like Washington and California are continuing to look at Austin as a central piece of interest. As long as remote work continues, we'll see how long that lasts, right? Right. Right. Suman, thanks so much. We appreciate it. Absolutely. Thanks for having me. Absolutely. Sum and Kim, joining us today from EXP Realty in Austin.

Coming up, Retail's Big Box Fort, UBS says the wholesale space is holding strong. We'll tell you why and how to invest around that. Plus, who will pay the most in taxes this year? We've got Robert Frank. You know he's going to break it down for us. Power Lunch. We'll be right back. Welcome back to Power Lunch, everybody. as the markets try to go positive and stay there this time, the Dow's up 11, the S&P's up to, the NASDAQ is down 11 points. Let's get to Bob Bassani for more at the New York Stock Exchange.

Hi, Bob. Hello, Kelly. The important thing is I know the markets are flat here on the indexes, but we are in an uptrend in a number of big sectors. They're playing the soft landing. That means cyclical stocks, consumer discretionary, industrials, materials, material stocks, all moving and even a smattering of growth stocks in the tech area. Look at these defensive stocks. Lockheed on that great earnings report. That's a new high. But Raytheon's been strong, L3, Northropin, they've been, Grumman, they've been strong all throughout the month. GEE's at a new high.

GE's at a new high. Health care is also at a new high. So cyclicals are really moving again. Take a look at some of the tech stocks. Not a lot of new highs here. There's not a new highs in general, but are smattering of them. Oracles at a new high. Salesforce. There's a Dow component. New high there. And Nvidia, of course, we have that double upgrade today. That's just been a monster throughout the whole year. That, that of course, is a new high. as well. Consumer discretionary stock, small smatterings of auto stocks, auto-related stocks, as well as home builders hitting new highs. O'Reilly, Auto, Autozone, new high. Pulte, and all of the home builders have been notably strong. Pulte is the only one, though, sitting at a 52-week high. Then we have energy stocks. Hesse has been strong all throughout the month. Generally, oil has been in a modest uptrend. So we have Hesse's up probably 10% on the month. Exxon's been strong in the Dow Jones industrial average. So the point here, Robert, is we are continuing to see strength in cyclicals,

which implies faith in the soft landing. A lot of people hate this soft landing idea. Don't want to believe it's going to happen, but that is the way the market is positioned right now. Back to you. All right, Bob, thank you. Now to the bond market. Rick Santelli in Chicago tracking the action for us. Rick. Hey, it's good to hear your voice on the show, Robert. You know, if you look at a two-year note yield going back towards early March or you look at a 10-year note yield going back to mid-March. You see that both of them had taken up some of the slack in the flights to safety trade, moving those yields back up. That flight to safety trade put two-year note yields down at, what was it? 377 on a closing basis. Now we're hovering at what? Just a whisker under

420 for tens. It was right around 330 on a closing basis. We're now hovering around 356, 350. because it's an important distinction. It's not the weakening economy. I don't believe it's fed guidance for the fact that we're closer to the end. I think the rise in interest rates almost exclusively has to do with the market, at least seeing less anxiety

regarding some of the banking issues. And if you look at the move index of volatility gauge, you can see, boy, we went from 198, almost 200 in mid-March to 122 now, And that doesn't dismiss the notion that the markets are still rather illiquid when it gets really busy. And finally, the dollar index. One would think locking in a quarter point for the May 3rd meeting, it would be a little more buoyant after last week's touch of one year low. But there you can see it, the dollar index just kind of rolling slowly down the hill.

Kelly, back to you. Thank you very much, Rick. We appreciate it. And the flip side of that, as you might have guessed, oil closing higher. Pippa Stevens, the spoil sport here with the numbers. Yes, making back some of yesterday's losses. But I did want to take a closer look at Chinese demand today because that's been such a key driver of this market

and we've gotten some conflicting data. So first of all, a couple months ago, we showed data from Kepler showing that seaborne crude loadings bound for China were down. So then a lot of people thought the import numbers are going to be down. Right. Then in March, so then it turned out that China came out

and said actually in March, their imports rose to a multi-year high. And so I spoke to Matt Smith over at Kepler, He said that that was a product of vessels flagging for someplace like Singapore, and then ultimately changing that destination and then going to China instead. He said there's not really too much to read into the data there. However, so the strong import data speaks to this demand growth in China. But then we also have to look at exports. And exports were also higher in March for the first time after five months of declines.

So the question is how much of that import data is actually strength in China versus imports being high, then turning those into refined projects. and exporting, and so not actually on the ground demand growth. China is really the X factor here in the oil market. Yeah, and we got the GDP number, which was strong 4.5% last night. We got that number, but then also manufacturing missed estimates in March. No more clarity here than any of the other data that we get in. No, it's very hard to parse. Pippa thanks, Pippa Stevens.

All right, let's get to Bertha Coombs for the CNBC News Update. Bertha. Hey, thanks very much, Robert. Here's your CNBC update. Here's what's happening at this hour. opening statements are underway in the Fox News Dominion trial. Dominion has submitted over 7,000 exhibits to the court, including emails and text exchanges involving Fox employees.

The jury will have to consider that evidence and witness testimony to determine whether Fox is liable for publishing false claims about Dominion's voting machines during the 2020 election. Hundreds of high school students in Kansas City are marching in support of their classmate Ralph Yarl after he was shot last week when he mistakenly went to the wrong house. Yerl's mother said he is doing considerably well in his recovery. President Biden spoke with the teen last night and stressed commitment to fighting gun violence. The man who shot Yerl has surrendered to police and has been charged with two felony counts.

And a new study reveals that up to one in four students misuse ADHD drugs. The study in the journal of the American Medical Association found that more than a quarter of teens at some schools are taking the drugs without a doctor's prescription or for non-medical reasons. The study's main author says the findings should be a major wake-up call. I imagine this is something that parents really stress over. Back over to you. They do, Bertha. Now ahead on Power Lunch, if one thing can be said about the entertainment industry, that we have more content than ever. and yet it's still never enough.

But now, a writer's strike could close the content spigot for the foreseeable future. We're going to discuss in today's check deck. Welcome back. It's time for today's tech check. We have two big stories in the media space and two all-star reporters to help break them down, Deer Drabosa and Julia Borsden. But we're starting with Netflix.

The company said to report results after the bell today. This says Hollywood kicks off a writer's strike that has the potential to disrupt the entire industry. Dee, let's start with you on what to expect from earnings. Well, you know, it was just a year ago when Netflix saw its first subscriber loss in a decade. I know Julie has been talking about this as well. That's when they really put the emphasis on profitability over subscriber growth.

And that has really led Netflix to outpace its rivals on that measure. So they're going to do that again, more than a billion dollars expected in net income. That's going to help them there. But, you know, investors are going to be interested about some of the other stuff as well, an update on the password sharing crackdown on its progress abroad. It's ad-supported tier. And of course, guys, what the heck happened with Love is Blind over the weekend? And what happened with their first live event in ages?

Julia, now we turn. We say, okay, as soon as they can kind of get through a couple of these landmines, oh, the writer strike. Had they ever faced a writer? Is this the first big writer strike in the streaming world or no? It is really the first big writer strike in streaming world. And I have to say, we don't know for sure if the walkout's going to happen. The deadline is May 1st.

So they have a couple more weeks to work. things out. But if they don't, there will be a writer's strike on May 1st. This is the WGA and the studios. But I think what's so interesting here, and I'm sure we'll hear questions about it on Netflix's earnings call, is that the companies that have more international exposure, that have more international production, may be better insulated against the impact of a writer strike, which is about writers here in the U.S. Of course, so much of Netflix's business is overseas and so much of the production is overseas. And we've seen the success of some of these foreign language and a foreign language series and also just series that are shot in other countries and seen

the success here in the U.S. So they may benefit from that. But it's going to be a really interesting quarter potentially of transition where maybe we'll hear a little bit about the success of the ad supported platform. And a lot of investors are very anxious to get details about when Netflix is going to be launching the password sharing program, the crackdown on password sharing here in the U.S. Yeah, no, a lot to pack into that call later for sure. Guys, let's switch gears to meta now, which has reportedly stopped pitching advertisers on the Metaverse. That's the whole reason to change its name, Julia. What are you hearing?

And what's the significance of this? You know, I am hearing that Netflix is still long term as committed to the Metaverse as ever. This is something that Mark Zuckerberg really believes in for his 2030 vision of the company. But in the meantime, in the here and now, Netflix is very much focused on how to generate as much value as possible for advertisers on their platform. And a lot of that actually comes down to AI. We talk about AI all the time on your show, Kelly. And I think there's no doubt that AI is a key buzzword. Meta is really playing into that.

And they're really investing in AI to make their tools more effective for advertisers. So I think from a conversational standpoint, they want to make sure that advertisers don't think they've gone their eye off the ball. And they're too distracted about this long-term vision. So they're continuing to work on it. But right now, they're trying to use AI to unlock more value for brands today. And, Dee, when you look at Meta's stock price this year, I mean, it's just been on a tear. Mark Zuckerberg's wealth has gone up about $30 billion after losing a ton last year. Is it the success of reels that is driving that?

I mean, what will be the positive surprise that you look forward to in this quarter and future quarters? So maybe it's the promise of reels. They still have some work to do there, as Julia's talked about, in terms of monetizing it. It's been his efficiency drive. He's said that word over and over again. It's really that cost cutting that has led to thousands and thousands of layoffs of its workforce that has caused the stock to jump. Look at that. More than 80% year to date. So I think investor, Mark Zuckerberg has done a really good job in terms of giving investors what they wanted. It's the longer term. Julie alluded to this to how it's putting the emphasis on artificial intelligence over meta, the focus on the core, really, that has been pushing and will probably push meta higher.

And it's kind of funny, guys, because it used to be so easy for META to pull in the advertising dollars. It's no longer that simple, easy duopoly. It has been for so long. So, you know, the story and the information today, it's alluding to the fact that it has to actually try now. It has to have more regular check-ins with ad agencies to make sure that they are, they have control of that core while working on those longer-term projects. Yeah, they have to actually try. Companies are maturing, aren't they? Dear Drew and Julia, thank you both.

We appreciate it very much today for a tech check. All right, coming up, UBS says a looming recession should be a boon for buy-in bulk retailers like Costco and BJs. We're going to speak to the analysts about who wins and who doesn't when Power Lunch returns. Welcome back, everybody. High inflation and a looming recession are sending consumers in search of the best deal when it comes to buying those household staples. And a new note from UBS points out that warehouse clubs like Costco, BJs, and Sam's Club are still best positioned amid a tough macro environment. Let's bring in Michael Lasser. He's a retail analyst at UBS.

Michael, it's good to see you. And, you know, so many people are nodding their heads and going, well, yes, of course they are. But Costco shares have gone nowhere for a year and a half or so now. So what gives? That's exactly right, Kelly. And the reason why they've gone basically in line with where they've been is because there's been some questions around what's happening with the consumer. There's been questions around its premium valuation along with what it's going to do with its membership fees. We think all of those questions are going to be answered in the months ahead.

And that's going to be good news for the stock. We think the most likely case is that they're going to raise their fees this summer, which will provide a pool of profits that they can reinvest back in the business and let some of it fall to the bottom line. Our survey showed that the consumer has such strong affinity for Costco. That's willing to accept higher price because it sees so much value. I don't know. Listen, I'm not just saying this as someone hoping my fee doesn't go up.

there's a reason why they didn't raise the price of the hot dogs, right? There's a reason why they didn't raise the price of the rotisserie chicken. These are huge things that would turn off their core customer base. They know their core customer base is struggling right now. Why raise the price of the membership fee? Do they really have to? Well, I think you just answered the question that they haven't raised the price of the hot dogs. They haven't raised the price of other products.

In fact, they tend to charge only at most a 15% markup on their goods. And you can't find that anywhere else. That alluring value is the number one reason why people shop at Costco. It's the low prices and high quality of the merchandise. That's not going to go away, even if they charge $10 more per year to shop at the club. And we've got this bifurcation in retail right now where the very high-end LVMHs of the world, the luxury is doing great. And then the bottom where very value-conscious, price-conscious consumers are realized. value. But we also have more and more pressure against that low. And for instance, the tax

refunds, which have always been one of the most important one-time windfalls for working class families, are going to be $20 billion less this year than last year. We heard Walmart talk about that during their investor day. Do you see that as a potential problem in the first quarter and going into the second quarter? We've already started to see that have an impact, Robert. In March, their sales of highly discretionary goods like furniture, consumer electronics, were under considerable pressure down high single digits year over year. And that was most likely a direct result of consumers having less access to this windfall from tax refunds that they get during this time.

The important point is that tends to have influence in March and in April. And as the season gets away from that, it becomes less. less influential. So while this might be a near-term drag, this is also created an opportunity, given the stock is treating it. It's typical multiple relative to the S&P 500, and that to us looks very attractive. Michael, what's the difference between Costco B.J. Sam's Club? I mean, is this a regional diversification play or concentration play, a different type of shopper? You know, how would you kind of separate these out for investors who want to maybe pick one versus the other? There are some distinctions. BJ's that is focused on by my partner Mark

Cardin. It's more levered to the eastern portion of the United States. Costco's a bit more diversified, although it has a lot of exposure to California. Costco just astutely executes this model. They tend to have 3,600 items in store. They take great care in consideration in choosing every one of those individual items. And it's that experience that drives superior performance over time. Now, with that being said, Sam's getting better. And we're seeing that in its performance. I think that Walmart is set up well from here.

And part of the reason why we think Walmart is set up well is because Sam's is really doing quite well. Yeah, fair enough. All right, Michael, we'll leave it there. Thanks so much for your time today. We appreciate it. All right, Michael Lasser, joining us from UBS. Still ahead. Catalan is the biggest drag on the S&P 500 today, down 35% in a week on news.

Danaher is abandoning takeover plans. We'll trade it and another big mover in the day in a fresh three-stock lunch coming up after the break. It is time for today's three-stock lunch. Three movers in focus for today's menu. Chairs of Johnson & Johnson Up, the company reported adjusting earnings and revenue that beat expectations and raised its full-year guidance, citing strength in units, including pharmaceuticals. Catalan in the news lately, the stock following after reports that Danaher is no longer considering a takeover of the contract manufacturing. And Lockheed Martin hits record highs after reporting Q1 earnings beat and reaffirms its 2023 outlook. Let's bring in David Wagner, portfolio manager with Aptus Capital Advisors. First up, Johnson and Johnson.

So, Robert, you know, I think the big question for most investors today is, why the hell? heck is this stock down 3%. I mean, you had the company beat on all three segments. Not only that, you actually had the company raised guidance on both the top and bottom line. I think the cynical side of me would say, yeah, you know, the company beat on the pharmacide due to the COVID vaccine and no one really cares about that. And then you have the Stolara drug, you know, potentially eroding a substantial amount of revenue by year end. But all of these factors are known, Robert. You know, you've actually had more recent information here, be very, very positive. Just last week, you have the the talcum powder become less of an issue. And I think that the company, you know, finally feels

that they have, you know, as much visibility as they can, you know, seeing that there's a light at the end of the tunnel. But, you know, I understand that Johnson & Johnson's growth isn't as great as what it has been historically. But, you know, it hasn't either been? The multiple. It's trading well below its historical averages and well behind its peers. So I think that the market really, you know, underappreciates the strength and the durability of their segments. And if you get any upgrade or turnaround in the device side, I think you could actually see the stock traded a multiple closer to 16 times 2023 EV to EBITDA where it's currently trading at 13 times now. So really just any improvement and sentiment, you could really get closer to $200 with this stock

without really anything heroic happening. The enthusiasm for J&J, Dave, I love it. All right. What about Cattlewood? Well, it's not there at all, actually. I understand it's a good company. It has good assets. And there's probably going to be a lot of pharma outsourcing over the next 10 years.

But that's not the question. The question here is do they have the leadership to do it? They just recently can their CFO and appears that there's not a whole lot of confidence right now and their newly appointed CEO. Then just last week, you know, you really had some news come out that they're having some problems on their production side at some very important facilities. But, you know, this is only three of their 53 facilities that are having problems. So investors really just don't know why you.

fired your CFO here. Is this an operational issue with just a few facilities? Or there's really other more structural execution issues outstanding. So basically, I think that investors are really trying to figure out, you know, using the Mosaic theory. Is there anything else here? They're wondering if there's other quality control issues within their site network. So basically, it is a fear of the unknown for Catlin. And when you're investing in the unknown, that's nothing that I want to take part of. So I'm definitely staying away here. Yeah, as our investors. Then, David, final name Lockheed Martin, which had a good earnings beat. Yeah, Robert, I'll be frank with you here.

And I actually thought this was a very good report out of Lockheed today. But if you had two poke holes in this report, I'd say that their book to build ratios on the aeronautical side was a bit weak. But, you know, that's not a really big concern for me. We know how the F-35 works. And this has probably been well flagged, actually, by the company. But, you know, as of right now, it feels like, you know, owning Lockheed, it's going to be more of a macro play. than a fundamental play, given their well-balanced valuation. You know, it's basically a call on the sector for defense.

If you're a bull, you're basically saying that geopolitical tensions, while they're going to remain elevated, if you're a bear, you're obviously saying the exact opposite. But two, you're probably saying that, you know, there's going to be muted growth for the rest of 2023. You know, ultimately, I get more nervous in this stock when the rubber meets the road, you know, regarding the debt ceiling.

Any comments on defense spending is definitely going to have a lot of sensitivity towards the share price. But as you just mentioned earlier, technically speaking, you know, the stock finally traded above $500, which has been about a one-year resistance level for the stock. So I'd say look out for now, but it should probably be a good hiding spot moving forward, especially in industrials because I think there's a lot of other industrial names out there that probably worried me a bit more. So if I held it, I'd continue holding. Yeah, it'd be interesting to watch all these defense stocks around the debt ceiling in June or July. Dave Wagner, thank you very much, and thank you for being frank.

with us. Hey yo. Hey, yo. What is three letters long but treated like a four-letter word? Tax. Today is officially tax day and we'll reveal who's really expected to pay up this year and who's not maybe. Power Lunch is back after this. All right, welcome back to Power Lunch. We're going to talk today because it is tax day. Boo. And we're going to talk about those who pay and those who don't. Kelly, you know, you look at the numbers and there are a lot of people talking about fair share in Washington, D.C. And in fact, if you look at some new numbers from the Joint Committee on Taxation, that's a bipartisan group. And they look at the 80% of Americans, top 10% of Americans that pay 80% of all taxes. And in fact, if you go up even higher, the top 0.5% now pay 39% of all taxes.

And they say, well, it's because they earn a lot, right, which is true. But they earn 16% of the income, and they're paying 39% of the taxes. Now people say, let's look at their tax rates. who pays what? The average tax rate for that 0.5%, top 0.5%, is 26%, which sounds lower than the official rate of 37, but compared to the middle class, so let's say those earning between $75,000 and $100,000 a year, that's kind of median income. The rate there, the average effective rate that they actually pay is 5%. Wow. So, you know, yes, you can pick out examples where a billionaire here, a billionaire there, for a certain year paid zero taxes. But,

on the whole, it's really a very progressive system that in the fact, in the past decade, has even become more progressive. Yeah, more reliant, too. That makes more subject to certain. I'm curious, what are the next big changes for taxes, right? We've seen certain proposals floating around by this, you know, party or that. But it would seem that the repeal of the 2017 stuff is the next thing that's going to happen, barring any action, right?

That is almost like the fiscal cliff of taxes because they've either got to do something or out of inertia not do something. And either way, we're going to see major changes to the tax code, including it, most importantly, salt, which I know our viewers and you and I probably care about. And so that's going to be the big question. They've got to answer by the end of 2025. Because if nothing happens, then it just goes back to the way that it was. Yes. The deficit gets big.

I mean, everything, it's like. Yeah. And that's going to depend on the composition of the White House and the Senate in the House. So a lot of big questions coming up. Well, happy tax day. Happy tax day. And Robert, thanks for being here. Thank you.

Closing bell starts right now. Thank you.