Power Lunch - Tech turbulence, demo the reno trade and what’s in a Momentum ETF 9/14/22

Episode Date: September 14, 2022

From mega cap tech to chips to cloud stocks, which will rebound after yesterday’s rout and which have more to fall? Plus, as mortgage rates spike should you demo the reno trade? And Momentum vs. Low Volatility ETFs. Which works better in an uncertain market? Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Tyler and Courtney, everybody. Welcome to Power Lunch. I'm Tyler Maths and Courtney Reagan to my left. Here's what's ahead. Tech stocks attempt to come back after yesterday's route from mega cap to chips to the cloud, the stocks to buy on the pullback are the ones to be wary of, and those that have more to fall. And what's the difference between low volatility and momentum ETFs? Maybe not that much. You might be surprised by those funds top holdings, especially if you're looking to offset some of these big market swing. And stocks are off their highs. Modest gains right now. Today's gains slowly, slowly evaporating. The Dow up 172 at the high. And right now, as Brian sort of foretold a few minutes ago, I heard him say tentatively that he wouldn't be surprised to see the Dow in the red before the close today. And there you see it. Down 69 points are thereabouts off about a fifth of a percent. The S&P 500 is flat. The NASDAQ is flat. The NASDAQ is. is up by a quarter percent. Netflix shares on the move this afternoon after the Wall Street Journal reported that

Netflix expects its ad-supported service to reach about 40 million viewers globally by the third quarter of next year. And shares of Verizon are lower midday after an executive said the company sees declines in third quarter wireless subscribers. The comments were made at a Goldman Sachs conference. So can the areas of the market with concentrated ownership make a comeback after yesterday's sell-off, we're breaking down the tech sector from mega-caps to semis to cloud stocks to see if the laggards will ever regain their leadership position. So let's begin with

Big Cap Tech. The Invesco QQQETF erasing some of its losses in today's session after falling 5.5% just yesterday, its worst trading day since March of 2020. Let's bring in Tom Forte, he's senior research analyst DA Davidson. If it's such a big pullback on a day like that, I imagine if you have a strong stomach. Today is the day to buy. Tom, is that what you're suggesting that we do? Or do you think that's just the beginning of more down days to come in our near future? First off, I do think that a elongated period of elevated inflation with the Fed continuing to raise rates to combat inflation is a very challenging background for technology stocks. You think about how historically they have higher multiples, higher valuations than other stocks within the indices. and rising rates is a challenge. I do think that there are some opportunities with Apple and Amazon,

and I'm happy to discuss those if you're interested. Yeah, I guess, you know, before we get into sort of the particulars of the individual names, I have more of a bigger question. I understand the theory of higher interest rates pulling down the growth names. Of course, the big cap tech stocks are the first ones you think of it. But even if you have a period of elevated inflation, are you really going to see an enterprise client, a big business pull back on its spending, of the Amazon Cloud or Microsoft Enterprise software? I mean, don't you need that to run your business? I mean, how much really is profitability potentially hurt

for these companies? Or do we have to go one by one to talk about it? So the good news is, if you looked at our white paper, dude, where's my dollar, where we talked about inflation? Think about Roku with cord cutting as providing consumers an opportunity to save money in an inflationary environment. And as you just pointed out, Amazon with this cloud computing effort, enables enterprises to save money on their infrastructure investment. We saw Amazon work with companies

to scale back their spend during the height of the pandemic. So I do think as it pertains to cloud computing, as it pertains to Amazon, that high margin revenue might be more durable, which makes Amazon shares attractive today. Are they more attractive now that Amazon had lost $98 billion in market cap in one day? The answer is absolutely yes. So to the extent that, you know, buying on dips, things of that nature. I know that sometimes it's counterintuitive and I know sometimes it's emotionally difficult, but you want to take advantage of market sales to either initiate a position or buy more. And the answer is yes. Courtney may understand exactly why inflation and rising interest rates affects this category of stocks more than it does say energy

stocks or utilities or used to be utilities. It was rising rates were anathema to utilities. But can you explain in a few phrases why it is these titans of tech that get whacked when you have surprises on inflation and rising interest? What is it natively about them that makes them more vulnerable than, say, a proctor and gamble or name it? Well, I can tell you in 2022, and the story has been the same for a couple of years now, where's the inflation coming from? It's coming from supply chain. What does Apple do? sells a lot of products that they import that are assembled in China. So this inflation makes it more expensive for Apple to sell products. That's why inflation is a bad thing for Apple, similar for

Amazon and their e-commerce business, to the extent a lot of the products that are sold on the e-commerce platform are coming from China. The inflation in supply chain is a problem. So I think that a lot of the tech inflation right now is supply chain related. We've seen some signs of improvement, but it's still an issue. All right, Tom Forte of DA Davidson, thank you very much. Appreciate the explanation there. Thank you for helping me. All right, the SMH semiconductor ETF rising today after falling more than 5% yesterday, and there are signs that the weakness in consumer levered chip stocks may be spreading to other parts of the sector. Our next guest has been cautious on the group, downgrading some names earlier in this month. It wouldn't be a good

day unless we had Stacey Razgon on, managing director at Bernstein. Thank you, Stacey, for coming back and joining us. Yesterday, you said investors and semis are growing increasingly worried about a macro correction. That basically means a recession coming that will chill demand. Is that the big threat to these big stocks? I mean, it is a threat, and it's a big one. Yeah. I would say investors have been getting increasingly worried, and we've seen this all year. The sector is broadly underperformed. It peaked almost at the very beginning, like January 1st of the year, and it's been underperforming all year, even as earnings estimates until very recently, we're still climbing because investors were getting more and more concerned about the actual

achievability of those estimates. We've now actually started to see some of the estimates start to roll over, particularly as you mentioned in some of these more consumer-focused areas, PCs, smartphones, graphic cards, GPUs, TVs, that kind of thing. And investors are worried that as the macro gets worse and there's still COVID lockdowns, and now we have issues in China and the Ukraine war and everything else, that these sort of things will start to spread into other areas. You know, starting to see some incremental signs. Yeah, go ahead. No, forgive me. I finish your thought, please, Stacey. I beg you pardon. We're starting to see some incremental signs. So, Data Center, for example, enterprise spending within Data Center is starting to get,

we're starting to see a little bit. Like Intel's data center business missed pretty terribly on Enterprise. AMD, NVIDIA kind of mentioned it. Mostly the companies are talking about supply chain issues at this point. The server customers can't get all the parts they need so they're having trouble building the servers, but it's sort of one start. Auto and industrial are holding in reasonably well, although companies like analog devices has started to change tone a little bit, talking a little bit about order cancellations. Personally, I've been worried more about stock filing and double ordering in those kinds of markets because lead times have been so because it's been so hard to get parts shortages have been so much that companies in those kinds

of scenarios tend to order more than they need. And I personally think that there's a lot of evidence in markets like auto and industrial that have been very strong that some of the demand we've seen is maybe not all actually going into end products. It may be stockpiling as well. So I'm nervous about that. That tends to bite you on the other side of the problem. I think why this segment is so important is that so many investors who are watching today probably either are in or have been in or have thought about getting into some of the very stocks that we're talking about here, the AMD's, the Nvidia, a market darling, if ever there was one a couple of years ago, Qualcomm, Amat, Intel has been sort of dead money for a long time.

We know the story there. What advice do you have for investors with respect to these stocks? What do I do if I own them? I've ridden them up. I've ridden them down. Yeah. What do I do? You bet.

So if you're in semis and, you want to be in semis and you're cyclically nervous. I actually like Broadcom. So Broadcom doesn't have a lot of consumer exposure. The only consumer exposure they have is Apple. Apple's actually holding up okay. Most of what they have is infrastructure on the semi side, which is good. They have not been shipping everything their customers have been ordering.

They've been deliberately under shipping because they're aware of what customer behavior tends to be like around these sorts of cycles. Their backlog is like $31 billion. It's more than a year's worth of semi-revenants. They've got a lot of runway there. They've got a big software business, sticky mission critical enterprise focus, software that is much more stable and high margin. They're trying to buy VMware right now,

which will bring the software semi-mix to 50%. And Broadcom's ticker is what, AVGO? AVGO, that's right. It used to be a bog. Highest margins, highest free cash in the industry. It's one of the cheapest things in the space. So that's something that I like. Other options, there are some of these more secular stories

that are maybe exposed to some of these other emerges, but they've been punished, maybe a little too much. In my coverage, I'd throw in companies like A&B and Qualcomm into that category. A&B is exposed to some of these markets, PCs, enterprise servers, GPs that have been weak. But they've been powering through like a champ because their product executions and phenomenal and are taking tons of share. And Qualcomm, look, anything touching a smartphone has been deaf. They make chips for that.

But they're mixed within smartphones is much better. It's much more high end. It's preserving them. And I think the setup for Qualcomm next year looks really, really good. They get more Samsung volume. Smartfilm compares will look really easy next year. And people worried that Apple's going to go away. It may not go away.

And it's 10 times earnings. I don't think expectations are high at all for that one. Wonderful insights, encyclopedic knowledge. Stacey Razkin of Bernstein, thanks. We'll see you every day next week, man. Bye-bye. Have a good weekend. Let me know. You got it.

And finally, let's take a look at the cloud stocks, the Global X cloud computing ETF recovering today, but down nearly 2% this week following yesterday's steep sell-off. Cloud names were thought to have hit their bottom earlier this year, but fears of a more hawkish fed could have the stocks reversing course. Still, my next guest says he's confident that cloud stocks will prove resilient despite macro headwinds. Joining us now is Joel Fisbein. He's Truist Managing Director of Software and Cloud Technology. Joel, just as we did with our previous two guests, I'd love to sort of

just get your big picture theory on why you think cloud stocks can hold up in this environment after a day like we saw yesterday, which really probably sparked fear in a lot of folks holding on to tech names specifically Cloud. It's a great question. Number one, we think that they're recession resistant, not that they're immune, but they don't have any consumer exposure, as your last guest talked about. Also, the secular tailwinds in digital transformation. All companies are leveraging technology to, you know, eliminate and increase productivity and eliminate mundane areas of their businesses. So we think that, you know, people are doubling down in some instances on cloud technology

to improve their businesses in a recessionary environment. Okay. So that sort of goes to my question sort of with our, with our initial guest about sort of wondering why these high interest rates environments are frightening to some investors in the tech space because really there are certain things that are not optional if you're a business, if you want to run at maximum efficiency. And that's part of your theory here for some of these cloud stocks. Then in order to operate at a lowest possible cost, you need to employ this technology. Is that right?

Yes. And I think the bigger issue that we've seen is this is more of a valuation reset. that valuation's got a little extreme because there are a lot of investors chasing a far few two ideas that are really platform or transitional ideas. There's many companies or transformational ideas. There's many companies that say they are, but there's very few that are really platformed companies that are really, you know, in a poll position coming out of this to be very recession resistant. And so I think we're seeing evaluation reset to some extent. We think that it was overdone to the downside, but we think that they'll outperform significantly when we sort of come out of this

recessionary environment and interest rate environment. We all know that at some point, this will reverse. We can't have, don't have a crystal when it will happen. But when it does, some of these companies are going to significantly outperform. And that's where investors are going to want to be positioned. Okay, great. So let's try to drill down on some of those names, give our investors some idea here that are watching. We don't have time to go through the whole list, but some of the cloud stocks that you think you see the most opportunity that, to your point, might have sold off more than they should have yesterday or in previous days. Yeah, just a couple of ideas.

So on the infrastructure side, clearly Snowflake has been a name where they're going to be a $10 billion revenue company with substantial margins going forward. Another company we really like is company called GitLab GTLB, which was an IPO late last year. They're in the DevOps space. That's the application development space. They've got a platform there that is just extremely beneficiary to a lot of companies and we're in the early stages. And then on the security side, the two names I would really highlight there are Crowdstrike, CRWD, and Z-S-S-S-S-S. Those are the two names that are re-positioning for the cloud from a security perspective. And we think that they're the ones that are best positioned going forward.

You know, there was a great movie, The Graduate, Joel, where the protagonist was told to go into plastics. That's where you want to go. You want to go into plastic. If I have that advice updated to today, I would say go into the cloud and computer security. That's where the future is going to be made. Joel Fishbine, thanks. Thank you. It's an obscure reference.

I remember the movie? I do. Mrs. Robinson. Mrs. Wright, yes. I'm with you. I know. I love that, man. All right.

Coming up, focus on the profits, folks. That's the strategy being used by a veteran market watcher when it comes to investing in this environment. And he's identified a few key stocks in key sectors. He thinks are going to do well. Plus, rising rates taking a risk, a toll on mortgage demand, I should say. But there are a few housing-related retailers that could benefit from the softer real estate market. And before we go to a break, a look at New Corps, which is on pace for its worst day since 2020, following a profit warning, dragging other steel names lower as well.

Power launch back in two, Dow Down, 76. Right, we have a news alert on Amazon. The stock is moving lower, as you see there, by about a half. Wow, it's moving higher right now by about a half percent. But it did dip a little lower on news that California has announced legal action against the company, suing the company over antitrust claims. The state attorney general alleges the company's contracts with third-party sellers and wholesalers, inflate prices, stifle competition.

It is the biggest legal action to date in the U.S. for Amazon. Meantime, stocks losing most of their early morning gains heading back towards seven, and lows. Now down 73 points on the Dow. Following yesterday's dramatic more than thousand points slide, two veteran market players say the best way to navigate this market is to focus on profit potential and cash flow. Joining us now, David Traynor, New Constructs CEO, and David Leibovitz, a global market strategist at J.P. Morgan Asset Management. Mr. Leibovitz, we've got two David, so I may stumble, but we'll do our best. Mr. Leavitz, I'm going to ask you to start first. Profits are one of the drivers of stock prices. The other driver is how much people are

willing to pay per dollar of profit, right? That's the multiple there. How do you separate the profit-making companies that are priced well from the profit-making companies that aren't? So I think when we think about the profit story going forward, we see two separate. types of companies that we think will be able to deliver quality and consistent profitability against the macro backdrop that we see playing out. On the one hand, we want to own companies that we believe have pricing power. In an environment where input costs are rising, whether those be commodity prices or other inputs, we want to own companies that will be able to pass along those higher prices to the end consumer. And so that would be deemed to be a high-quality

profit stream that we'd be willing to pay for as we look into the end of 2022 and the beginning of 2023. On the other hand, we do think that there's an element to this where looking at the ability of companies to generate profits over time gives us a sense of their ability to generate, you know, streams of profits going forward. And so a lot of those all weather growth your name, some of the technology names that have sold off quite aggressively so far year to date are looking interesting to us as well. You know, as you put it, Tyler, it's really a lot of about owning growth at a reasonable price, and we either want to understand and recognize that these companies have pricing power or historically have been able to deliver key profit streams,

almost irrespective of the macro. Before we turn to David 2.0, I want to follow up with you, Mr. Liebervitz. You say you want companies that have profit-making ability, but also pricing power. Where are those companies clustered or name me some as examples that are not necessarily stock recommendations by you, but where are they clustered or give me some names that give me some idea of who has pricing power and profit? Absolutely. Absolutely. So one of the metrics that we always look at to kind of gauge pricing power is operating leverage. We basically want to understand what the impact on a company's bottom line will be from a given acceleration in revenues. And the

more pass-through you have there, you know, again, the more pricing power we would deem that company to have. And so if you look at operating leverage by sector, this leads you to the energy space, the material space, the financial space, but I think it's a little bit too early there to be diving in and consumer staples as well. And so, you know, a lot of the pricing power we see is on the value side of the style box. And then again, we do see opportunity on the growth side as well, given that rating in valuations. Gotcha. So David Traynor, as you're looking at evaluating stocks, You say we need to understand fundamentals, of course, but technicals too. But then you make the point that charts don't always work in this environment.

So how are you evaluating technicals then since we got a little bit of the fundamental picture from Mr. Leavovitz? I think the technicals are telling us that, you know, the easy money days are over and fundamentals are going to be more important. Look, I mean, at the end of the day, being able to understand the truth about profits is fundamental to being a successful investor in the long term. And the technical tape has been ugly for several months for even over a year or so, right? It's not been the straight up market that we've learned to enjoy of the last 10 years, which I think means investors, if they want to trust what they're investing in, need to really understand things like pricing power in the past, which is, hey, are margins positive?

Have they ever been positive? And for a lot of companies, the answer is no. And it's not always as easy to understand margins as people think, because companies have a way of cooking the books legally, you know, by bearing important information and a footnotes into details that most investors never take the time to read. So David Traynor, I know you did some due diligence for us. Give us some of your stock ideas, some long stock ideas. I know you have a list of zombie stocks, but I want to talk about the ones that you do see opportunity.

Yeah, we like Shell. We think that's an extremely profitable business, super high margins, great cash flows. And yet the valuation implies its profits will permanently decline by 30 or 40, percent. HCA and 4 that we have on the screen now, similar situations. We think that those firms have a great deal of pricing power. You know, Ford's a different animal in that, you know, it's actually, it's really been nimble in terms of its ability to respond to the tasting, the change in the taste of consumers. And I think that they've got a great track record there, great cash flow, super cheap. HCA is just a great example of a super defensive business that's way more profitable

than people give a credit for, great margins. And all three, of these stocks, right, they traded valuations that imply permanent profit decline. So to Tyler's question earlier about, hey, how do you figure out the good stocks and the bad stocks if they're all profitable? Well, you want to buy the stocks, the profitable companies whose valuations imply lower future cash flows than you think you're actually going to happen, right? So buy low expectations, sell high expectations. All right. To a pair of David's, trainer in Leibovitz, we thank you very much for the insights. Court? Well, stock's trying to rebound today. after yesterday's big sell-off. Energy, the best performing sector, as oil bounces, big gains for

Kotera and APA. Starbucks shares of more than 5% today, as Wall Street digest the plan laid out at its annual meeting. Tesla and the cruise lines also boosting consumer discretionary, much more on the markets, which are down the Dowdown about 54 points. More power lunch coming right back. Let's get to Bertha Coombs for a CNBC News update. Hi, Bertha. Hey, Courtney. Here's what's happening at this hour. In Baltimore, prosecutors are looking to vacate the conviction of Adnan Syed for the murder of Heyman Lee. The case drew international tension on the podcast serial. State attorneys say they uncovered new evidence, including some, on two other suspects,

which was not shared with defense lawyers. Candidates who deny President Biden won the 2020 election, the number of them will be on the ballots, in 27 states this November, according to a study obtained by NBC News. Total of 43 candidates for governor, attorney general, or secretary of a state support former President Trump's false claims that the election was stolen from him. And a stroke of luck in Philadelphia. No one was injured, but a building containing a pizza shop collapsed in a cloud of dust. The pizza joint was supposed to open just a couple of hours after the building fell. Key pizza in Fishtown, a very popular spot.

back to you guys. All right. Thanks very much, Bertha Coombs. Stock's trying to get positive, trying, trying, trying, following the worst day since 2020. Ahead, we will get a check on the markets on oil and interest rates. And speaking of interest rates, check out how quickly the 30-year mortgage rate has risen from the threes to start the year to now over 6.3%. Look at that. That's a huge damper on the mortgage demand. And we'll take a look at home construction ETFs, down. That one down 15% in just the past month. But what about all the stuff that goes inside the home and the retailers who sell it? We will check on those stocks next on Power Lunch.

We've got about 90 minutes left in the trading day, and we want to get you cut up on all the market. Stocks, bonds, and commodities. What a week it has been already. We're only halfway through. We also want to take a look at the health of the housing trade. Let's begin, however, with the markets looking at the Dow, the S&P, and the NASDAQ. You can see that the industrials are off a little. bit by about 32 points, about one-tenth of a percent. But the S&P essentially flat, NASDAQ is higher

by a third of a percent. Best performing Dow stocks right now are Johnson and Johnson, Chevron, and Merck. Sales Force is also up as well. The Dow laggards are some industrial names like Honeywell, 3M and Dow, Verizon also off about four-fifths of a percent. Airlines lifting the Dow transports Delta, Alaska, air, and American. Rails weighing on the index is a strike deadline looms. Union Pacific falling 3%, Norfolk

Southern down about 2%. Now we go to the bond market and that one has taken a breather following yesterday's big moves. Rick Centelli is always tracking the action. Rick. Yes, it's like the Treasury market's in a hammock today, Tyler, compared to yesterday.

Look at an intraday of two years. Yes, around 830 Eastern. had some volatility, but when you hook in yesterday and look at what happened at 830 Eastern, a far cry from the rocket chip that yields had on that two-year, and granted, short maturities rocketed higher, but all maturities were significantly higher. Right now, you have a two-year only up two basis points, and you have the rest of the curve getting close to the unchanged line, like 10-year, 20-year, and 30-year bonds are actually lower in yield and higher in price. Now, when I look at the PPI data, which I brought out at 830,

It's not really cool in any way. As a matter of fact, what really jumps out at me is the August read on PPI, X food, and energy known as the core up four-tenths, was higher than expectations, higher than the rearview mirror. There was nothing cold about this report, but after yesterday's CPI and consumer price inflation always hits home, today really fell flat. And if we look at the 10 year, and I'll show this chart every day, because the fact of the matter is, sevens and tens have yet to close above their mid-joules. June high yield. And that's important when everybody's looking at a terminal rate on the Fed and how short maturities are getting closer to what may be a 4% terminal rate. Look at the tenure. It's bucking that trend. And finally, the dollar index. Yes, this two-day chart shows it's slipping a bit, but after yesterday's rocket chip, our currency, always a place to hide out when things get a little

wacky is holding up quite well. Courtney, Tyler, back to you. Rick, thank you very much. Oil closing for the day as it continues to climb back towards $90 a barrel. Pippa, Stevens has the numbers. Hey, PIPAA. Hey, Tyler, oil is getting a boost as supply concerns come back into focus. Now, we did get the latest read on the market from the International Energy Agency today. They said demand growth is slowing and expected to grind to a halt in the fourth quarter. However, for the year, the Paris-based agency still sees oil demand growing by 2 million barrels per day. And looking forward, the IEA said that any slowdown from Europe will be partially offset by gas. to oil switching as natural gas prices surge.

With that, let's check on prices. WTF 1.5% at 8861, but natural gas really is the big mover here, surging more than 10% and breaking above $9.9 per MMBTU. And that is boosting energy stocks. The group is up about 2%. By far the largest S&P gainer. Upstream players APA, Devin and EOG are leading those gains. Also quickly wanted to point out lithium stocks,

which are also on the move. Alba Morrow hitting another record today. It was one of the few stocks, Tyler, that registered a gain in yesterday's session. Back to you. All right. Thank you very much. Now we go to the housing market where higher yields are taking their toll on mortgage demand as rates skyrocket. Nothing short of that. Diana Olik with that story. Hi, Dye. Hey, Ty. Yeah, last week was the first time the weekly average on the 30-year fixed went over 6% since November of 2008. 6.01% last week, to be exact, according to Mortgage Bankers Association. The increase hit refinanced demand, which was already battered. It fell another 4% for the week and was 83% lower than the same week a year ago. With rates above 6%, only about 452,000 borrowers can now actually benefit from

a refinance, that according to Black Knight. That is the lowest number on record. Mortgage applications to buy a home, essentially flat week to week, but they were 29% lower than the same week a year ago. And I'm hearing from real estate agents that more supply is coming on the market, but they're starting to do deals now with full contingencies like home inspections. Haven't done those in a few years. Rates shot significantly higher yesterday after we got that hot CPI number and then a little bit higher today to 6.3 percent that according to Mortgage News Daily, question now is, will they stay in this range for the fall housing season or drop back a bit as they did last month? Ty. All right. Thanks very much, Diana. Cort.

Well, rising rates are hurting more than just mortgage demand. Of course, the home improvement boom has gotten, quote, hammered, too, after hitting all-time highs during the height of the pandemic. Check out names like Lowe's, Home Depot, and Floor and Decor, all down 25% or more. Wayfair, down more than 70%. Our next guest saw this coming. She downgraded most of these names back in January and warned of the back half slowdown. We're watching play out right now. So for more, let's welcome in Laura Champine.

She is the director of research at Loop Capital. Laura, it's great to see you. You know, when I talk to Home Depot and Lowe's often, of course, the CEOs, the CFOs are always pretty positive, right? They're looking at the glass half full. And Home Depot always says they don't really start to worry until they see mortgage rates around 7%. Though, of course, if we're sitting at 6.3, we're not far from that, especially if we're looking at another rate increase. But also they talk about this backlog from the pros and how there's still so many more projects that they have to get through. Why do you think that things are just only going further south? from here for some of these names, like at Home Depot, like Lowe's. Sure. So Home Depot and Lowe's are obviously great companies, but I covered these companies back in 2006 when they were saying similar things to what they're saying now, which is that the age of housing stock is older and older, that people will stay in place and complete projects. It just doesn't seem reasonable to me. The numbers have not turned south yet. Really, the past couple of quarters, they have seen pros working off that backlog.

What worries me is the pipeline that we may not be building for next year as consumers don't have stimulus checks in their accounts anymore, as inflation is hurting them. You've got to feel pretty comfortable to make those big ticket expenditures on projects. And we're just afraid that we won't see as strong of a project cadence when we get into next year. Fair enough. Obviously, during the pandemic when all of us were sort of hunkered down at home, we looked around, we realized we needed to make some updates, whether it was new flooring or a new couch from Wayfair, perhaps. But obviously, Wayfar stock, we mentioned it in the opening, is down quite a bunch. It's often quite volatile.

I believe you have a sell rating. Does that still feel right for Wayfair going forward? It does. It's not a beautiful balance sheet at Wayfair. They have a lot of debt that just raised more convertible debt this week. They're burning a lot of. of cash. So if we look at the two markets that they buy from, digital advertising, where we've seen inflation and it's tougher and tougher to acquire customers with some of the new iOS

rules, that means the great data they used to have is getting older and older and older. And the same time, couches the replacement cycle is five to seven years in good economies. In bad economies, it's 10 years or more similar for mattresses, just not a great place to be right now. I didn't know that. The couch replacement cycle is five years. I just replaced mine. I've just learned something. Ten years. That's great. Thank you for that. Now, so you point to two stocks that you don't typically think of as either home improvement, home repair stocks, but I guess they are. Costco and BJs. How do they, is the fact that you like them a reflection on the idea that you don't like so many others and that's all that sort of they're the best, the cleanest, shirts in a dirty laundry or what? Yeah, that's accurate, Tyler. So we just don't have much to like. So we're looking for inflation beneficiaries and Costco BJs. You know, you drive by that gas station.

They give you a massive savings versus other gas stations. You know you need the savings. BJs, for example, gives you 25% off on groceries. Pretty good deal these days. Costco, the values can be even deeper as long as you've got the pantry that's big enough to manage those packs. sizes. Just only a few places to hide in anything close to hard lines. And Costco's one of the few, you know, great performers that the other key for Costco and BJs is they make 80% of their income from membership fees. So membership fees are pretty steady, Eddie. Even if their retail margins shrink, shrinking from 3% to 2.5%. It's just not as tragic. Their income will stay healthy, good times and bad times, as long as they can keep those members in the store.

Inflationary environments are actually good for them. Just paid my membership to Costco a couple weeks ago. And boy, I thought, what an annuity that is. I mean, it's just amazing. Oh, it is. Laura, thanks so much. Great to have you with us. Thanks for having me.

Thanks, Tyler. Thanks, Courtney. All right. It's not a controversial statement to say that Americans are divided politically, but one thing many Americans are united against. Stock trading by members of Congress with access to information. Today, Nancy Pelosi reacting to a new investigation showing how prevalent it is, we'll have more ahead on Power Lunch.

Welcome back to Power Lunch. House Speaker Nancy Pelosi giving an update on an issue that unites both Republicans and Democrats, and that is Congressional Stock Trading. We've been going back and forth and they were refining things and talking to members about what they think will work. And we believe we have a product that we're going. we can bring to the floor this month. Very interesting. Her comments follow a New York Times investigation that showed nearly fifth of congressional

members reported trades with possible conflicts of interest. Let's bring one of the authors of the investigation, Kate Kelly, New York Times reporter and a CNBC contributor. Kate, nice as always to see you. When you say there were possible conflicts of interest, the nexus there is that they traded stocks in industries where the members served on committees where those industry's interests might reasonably or did actually come into debate. Am I right? That's right. That was our framing, Tyler, because some would argue that members of Congress

are constantly privy to privileged information, non-public information that could potentially move a stock. We wanted to frame it a little more narrowly in which we looked at people's committee assignments, as you said, and we then said to ourselves, okay, of the stocks they or their immediate family members are reporting, buying, selling, and this could include bonds and commodities and other things, too. Would a reasonable person seem to think that these stocks or the sectors they're in could be affected by that committee work? So example, if you're on the Armed Services Committee and you're trading Raytheon, Lockheed Martin, or Northrop Grumman, a reasonable person could assume that you might be in the information flow of government behavior or, you're

even updates from the company and things like this based on your committee assignment. Kate, it is very interesting. You said 97 members of Congress out of 535 people are trading in a way that could be regarded as conflicted. But you also make the point in the article that they are still not allowed to do anything that would be legally considered insider trading. They cannot trade on material information they have that the public does not. Is that true?

That's totally true, Courtney. And I'm glad you pointed that out. I mean, it's interesting because members of Congress are not allowed to trade on non-public information any more than you and I are, which were not. And in the Stock Act in 2012, that was codified. I think part of the reason the clarification was needed is that under the Constitution, Congress does enjoy some legal protections that regular folks do not. It's called the Speech and Debate Clause and things they're doing in line with their government work are potentially shielded from litigation. But having said that, yeah, I mean, there are plenty of situations here that at the very least might give one pause or make one think there could be potential conflicts. And that's the kind of thing that the members, at least, who are pushing for reforms of this are exercised about.

They don't like the optics of it and they feel that it erodes trust in Congress. Yeah. And one thing we should point out here as we look at Senator Tuberville of Alabama, I believe, is the idea. that this is not just stock trades. These could be trades in commodities or futures or other markets as well. That's one thing. Did you, as you did this research, Kate, did you find that any members who were making these kinds of trades who have been way out front in decrying the practice? I know that Elizabeth Warren of Massachusetts has been very outspoken about this. She doesn't trade stocks, does she, or does she? No. No. I mean, most of the folks who have been out of

outspoken about this practice and have said it needs to be banned or restricted, do not trade themselves. Now, there are some exceptions to that. Dean Phillips of Minnesota has been a co-signer on one of these bills. I think it's Spanberger's bill. And he did trade somewhat actively. You'll see him if you look at our table because he was trading some stocks, you know, a year or two ago, probably two to three years ago now that I think about it, that might have dovetailed with his committee work. But he has since gone through a process of entering into a blind trust so that he doesn't know how his assets are being traded and doesn't have input or get output. Some are going in that direction. Josh Godheimer of New Jersey, who I think is on your air, a fair amount, has traded actively through a broker,

an account that I think is jointly held with his spouse. I'm sorry, when I say traded actively, I mean, the broker trades actively on his behalf. And he would explain it as to say there's a wall, between my spouse and I and what we know about the portfolio and that broker and what they're doing. It's not a blind trust, but I don't get into it day to day. But he also is in the process of going into a blind trust and also has co-sponsored some of this legislation. So I think most of those people don't do it or in the process of putting more kind of protections in place. Very interesting. Really fantastic work, Kate. It's a lot of work. And I commend the article in today's New York Times. Kate Kelly, thank you.

Thank you, Tyler. That's kind of you. Thank you. Well, check out the USMV, a low volatility ETF, slightly lower today after falling more than 3% just yesterday. It actually performed worse than the biggest momentum fund to explain why you've got to know what's in your ETF, so we'll break it down. Plus, the CEO of McDonald's speaking right now and making some headlines about the state of the U.S. economy and Europe. We'll bring you those coming up next on Power Lunch. Welcome back to Power Lunch. I'm Kate Rogers. We just heard from the McDonald's CEO Chris Kempchinsky at the Economic Club of Chicago in conversation with Footlocker CEO, Mary Dillon. He talked at length about the commitment to the city and building jobs there,

including an innovation hub that will create 100 jobs and keeping the company's headquarters in Chicago. He also talked about challenges in operations like zero COVID in China being a big hurdle, but not as challenging as the energy crisis in Europe right now and what that means for both consumers and operators. As far as a recession's concern, Kempinski said he believes we're heading into a minor recession in the U.S., but likely a more significant recession in Europe as a result. He said the company will continue to focus on value. Two other hot topics, menu items. He talked about things that have come and gone from the menu, said, quote,

if you want McPlant, buy McPlant, alluding to potentially soft sales of that beyond meat patty, saying that items haven't sold well. Don't stay on the menu, like salads, et cetera. They're testing some of them and bringing them back in markets. Finally, AB-257, the new law just signed by Gavin Newsom here in California to regulate the fast food industry called it a terrible piece of legislation because it picks winners and losers and does not apply to all restaurants evenly. Back over to you guys. Wow, fascinating headlines. Thank you very much, Kate. Well, coming up next, the tortoise

or the hair, low volatility or momentum, which is better for your portfolio right now. Our lunch is coming right back. We're going to help you with some answers. Amid the wreckage of yesterday's sell-off, something strange has happened. The momentum stock ETF, ticker M-T-U-M outperformed the I-Share's minimal volatility ETF on a day you'd expect the opposite to happen. But a look at the names on the low-vall list. Provide argument for why many ETFs don't live up to their name among the top five holdings, Vertex Farma, T-Mobile, and Cisco, far from low-vall names.

So for more, let's welcome in Scott Nations. He's president and CIO of Nations shares. Scott, can you explain to us a little bit why it is important here to understand what's in your ETF, not just buy them blind. and some lessons that we learned from yesterday. Yeah, that's a great point. And as you point out, not all low-ball ETFs are really low-vall. You know, the quintessential ones have a bunch of utilities in them.

The quintessential low-vall ETF is 28% utilities, and that's horrible in a rising-rate environment. So you do have to pay attention to what's in your ETF. And there's a bunch of overlap now between low-ball ETFs and momentum ETFs, only because the momentum ETFs use a screener that's looking for names that are doing well versus the broad market, and in down market, that tends to be names like staples, which are also a staple of low-ball ETF. So absolutely right. You really have to pay attention to what is in your ETF. What conceivable role do these kinds of funds have in an ordinary

individual's portfolio? What in the world, why would you get into them? Well, Tyler, let's talk about the low-vall ETF, which make a lot of sense if they truly are lower volatility and well-diversified and not just overweight something like utilities or staples. The momentum ETFs, I think you ask a wonderful question. Momentum is often an illusion. We think that momentum's going to continue. The math shows that that's not the case. And the momentum ETFs, they end up in the big beta names when the market's flying and in the low beta names when it's not like right now. And so you don't really understand what you're getting with the momentum ETF. I would never invest in one.

I would never use momentum as an investing thesis, period. Okay. And then so take me back then to the, was it the minimum volatility ETF? Why would I want that one? What would that protect me from or help me do or what? Well, the goal is obviously lower volatility. And they try to, some of them try to do it. some of them try to do it by by diversifying across sectors.

Right. And to the degree that they can do that okay, but again, you end up with this really strange mix that often doesn't work out the way you want it to. All right. We're going to have to leave it there. Scott, thank you so much for your time today. We've run out of our hour and it was fast. It's over. Thanks for watching, Power Lunch. Closing bell starts right now.