Power Lunch - The Fed debate, retail’s debt load and is the ‘hope’ rally premature? 11/1/22

Episode Date: November 1, 2022

Will the Fed’s fight against the worst inflation in four decades come at the expense of jobs? A Fed strategy debate. Plus, retailers at risk. Which companies will have to pay more to service their debt as rates rise? And, why a top strategist says the recent stock market rally is not sustainable. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

From one Virginia to another. Thank you, Brian. I'm Tyler Matheson, along with Morgan Brennan, on Power Lunch. Here's what's ahead. 24 hours to that big Fed decision. Another three-quarters of a point hike is expected from the central bank. So will its fight against the worst inflation in four decades actually come at the expense of jobs. We will debate the Fed strategy. Plus, retail risk. It's all over the place with each Fed rate hike. Floating rate debt becomes more expensive. And that could deal a blow to some retailers balance sheets. We're going to look at the companies that are most exposed, Morgan. Well, Tyler, stocks are starting November with declines as tomorrow's Fed decision does loom. The Dow, the S&P, and the NASDAQ, all in the red, though off the lows of the session, off the highs as well, I might add, since we did actually start this morning with gains. Shares of meta, though, spiking in the past hour or so following comments by an FCC commissioner that the government should ban TikTok. Those comments came in an interview with Axios, and you can see shares are 4% right now. Shares of snap moving higher on that report as well. And ahead of tomorrow's Fed

decision, the yield on the 10-year treasury right now, it is hovering right around 4%. 4.052%, to be exact. Tyler? All right, Morgan, the countdown is on to the Fed decision. The central bank likely to approve what will be a fourth consecutive three-quarters of a point hike. But what does the Fed do next? Well, it depends in part on how rising wages. feed into inflation. Today we learned that demand for workers remain strong. Job openings in September surge, totaling 10.7 million. That was above estimates. And it comes despite Fed efforts to loosen up an historically tight labor market. So will the Fed have to keep hiking until the job market cools? James Pethukas is economic policy analyst at the American Enterprise

Institute, CNBC contributor. And Mike Consul is director of macroeconomic analysis at the Roosevelt Institute. gentlemen, let's talk about really the big question here is whether the Fed can engineer what is called in the parlance a soft landing. In other words, they can slow inflation, slow the economy, so it's not so overheated, but not, you know, create such job loss as to create distress in the economy. Mike, do you think they can? Yeah, I think we've actually seen quite a bit of success on this. I mean, we're watching it month to month. But if you look over it, over the course of the last six months, we see a pretty good deceleration towards 2019 rates.

You know, job openings, quit rates over, you know, not looking month to month, but quarter by quarter, are down about 10% for the year. We've seen wage deceleration down to 2019 levels. The job numbers are coming down quite a bit. Also, some of the discretionary spending we saw the GDP number last week, also points to this idea of a soft landing.

And, you know, we know that the Fed Hikes, you know, act with a pretty long lag. And the fact that we've already seen the deceleration exactly where we want to see them, quits and wage growth and job numbers, while still adding raw job numbers, which is exactly the idea of the soft landing the Fed wanted to see at the beginning of the year. James, do you agree with Mike? I think if we were going to have a soft landing, immaculate disinflation, you know, you can make the case, as Mike just did, that this would be the one. I would also say, you know, this is kind of a really unusual economic,

situation. You know, we had this pandemic. There's a case being made. The employers utterly freaked out, cut too many jobs, and that's one reason why we've seen this sort of sustained job growth. So if we were going to have that situation, yeah, maybe this is a time, but, man, I would not count on that. Even shallow recessions historically, you're going to see a, you know, a couple of points increase in the unemployment rate, which would take us to five and a half percent. So we can get out of this with, you know, a couple of points higher, you know, 6% unemployment, I think that he's helped to say the Fed did a pretty good job. So, James, just to dig into that a little bit more then, are you telling me that our session is probably inevitable if you really want to bring

inflation down and in that process bring wage growth down, which means a higher unemployment rate? Listen, I'm not Andrew Mellon during the early days of the Great Depression dying to liquidate labor. I'm saying that, listen, if history is a guide, we're going to have higher employment, we're going to have a recession, all right? So that should not be shocking. That in itself does not mean the Fed has done a bad job. I think it's super important to get inflation under control. Remember, there were all these people back in early 2021.

They're saying, this is an impossibility. It's used car prices. Don't worry, we need the stimulus. And I certainly, if those are the same people today saying, Don't worry, we can avoid a recession. That I would be skeptical. I sure hope we can, though. All right.

So, Mike, I mean, just looking back historically, have we seen other scenarios play out where the Fed has actually successfully had a soft landing when inflation is running at these levels? And I ask that knowing that the goods piece of the pie when it comes to inflation is, in fact, coming off right now. But those stickier services don't seem to be following suit, at least not yet. Yeah, so, you know, there's not that many data points to look at. There's been some periods, like in the 90s where I think you could point to this. We've also not had a recovery that's looked like this, one where the labor market was both very strong, but had plenty of room to slow down while still having wage growth, where we had supply elements so out of whack from the move from services to goods. We do see many parts of the supply chains easing. Demands for good are normalizing production of everything from cars to semiconductors are rebounding. All that's going to take one bit of pressure off inflation. You know, wage growth has already been slowing to the extent you're worried about inertial inflation and services.

I think we've already taken a big chunk out of that. I think it's going to continue in the next couple of months. It's not so much that inflation hasn't come down yet. It has not. What I worry about is that the Fed has done so much hiking and it has such a long lag with it that it can easily overshoot by far. This has been a significant amount of tightening, particularly in the financial markets, particularly in real estate.

And if it overshoots, it can't really correct it. And in so much as the Fed has pretty much said it. It doesn't want to lower rates. It only wants to raise rates during this cycle, which is an argument in a political constraint that they feel that they have. You know, if they overshoot, it's going to be hard to correct it. You know, there is a lot of room for inflation to come down and a lot of room for this economy to continue to decelerate without having to force it into a recession. All right. So, James, let me turn back to a question that hangs heavy in the air a week from the midterm elections.

the GOP candidates tend to call this the Biden inflation. Who or what is to blame for the state in terms of inflation that we find ourselves in? Why did we get here? Right. I think you have to divide inflation sort of in a two periods. It's the 2021 inflation. And I think you can make a pretty strong case that the $2 trillion American Rescue Plan played a not insignificant role in that inflation with demand.

really overshooting the supply side of economy. So in that sense, Republicans are right. Now, then you have sort of the 2022 version where you had high energy prices. You have the Russia's invasion, Ukraine. That's different. So the Republicans are kind of right. And in an election season, you know, that's close enough

for government work. And where, but where then does the Fed fit in that? And the Fed's quantitative easing policy, the Fed's hesitance to raise interest rates last year and get ahead of inflation? Don't they have a large, large share of the reason why we are where we are? Did they get behind the curve? I'm not sure anybody, and maybe Mike has a different opinion,

but I'm not sure anybody at this point would argue that they did not get behind the curve. And obviously, that kind of criticism of the Powell Fed is absolutely warranted. That said, it's also still the Fed's job to fix the problem. So sort of the cause of and solution to the inflation problem. Yeah, Mike, I do want to get your thoughts on that. I also want to get your thoughts on this idea that at least until we got to the blackout period with Fed officials a couple of weeks ago, there was a lot of jawboning around this concept of maybe keep hiking for now, bring inflation down, but perhaps slow the pace of hikes, and then all the talk and redefining of the word pivot and the market reaction as well.

Is jawboning enough to get, dare I say, ahead of the curve now at where we are in terms of the conversation? around the economic cycle. Yes, I'd say two things. One is that, of course, voters are going to blame the party in power. That's what they do. But inflation is a global phenomenon. You know, Canada, Australia, you know, have inflation rates that are significantly elevated that did not have the fiscal stimulus that we had.

You know, we had inflation earlier, but we also had a significantly larger growth earlier than peer countries. So you have to put that in consideration. You know, I think the next two rate hikes, you know, whether or not they're 50 or 75, I think matter at the margin, but I think the real pivot moment will be, come January, essentially, or some of the communications that will be done in December, because the Fed has wanted to tighten significantly this year. They feel they overreacted last year, whether or not one, you know, in hindsight, you can say

anything at the time was a very difficult call for the Fed to make, but they've done their tightening cycle. The question is how much they want to pause or slow down going into the new year. And I think with so much rate increases that's happened, with real rates up significantly, with deceleration across the major indicators that we want to see, I think there's a reason to pause and kind of see how the economy evolves. Because we've not seen inflation pick up more. We've not seen wage growth continue to persist

at the levels that had over the past year. There's plenty of reasons to think that this inflation will slow down. There's reasons we really don't want, we want to avoid a recession if we can at this moment. Yeah. Guys, we're going to leave the conversation there, but it is a tricky conversation. We could probably spend the whole hour talking about this.

I mean, just look at the jobs openings, the Jolt's data this morning, higher than expected, which is just another data point in this bigger conversation. James Pethakukas and Mike Consul, thanks for joining us. And of course, it did turn the market lower today as well. Our next guest says the Fed's 2% inflation target will be elusive. So investors should favor quality companies with pricing power to maintain their margins. Let's bring in Jack Ablin, Crescent, Capital Founding Partner and CIO.

Jack, great to have you on. I want to get your thoughts on this recent rally we've seen coming off of, what, the best October since the 1970s? for the Dow, your thoughts? Yeah, I mean, I'm not going to, you know, certainly sneeze at a huge rally like that, but we do have to keep in mind that the Fed has been muzzled for the last two or three weeks. And what we saw previously was, you know, every time the market rallied, federal, what I call the federal open mouth policy comes out and starts to beat it down. Well, they couldn't do that this time.

In fact, now they can start jawboning again, coming out and flapping their arms tomorrow, and we may see some of that. You know, keep in mind that 80% of American households tie their financial well-being to their salaries, and 20% of American households tie their financial well-being to the stock market. So I think the Fed wants to see wages come down, but they also would like, at least near-term, to see equity prices come down to try to get some of this demand out of the pipeline. So equity prices right now, valuations, are we fairly priced or do we need to see earnings estimates going into 2023, for example, come down?

How are you thinking about it and how does a potential recession fit into that, I guess, analysis by you? Sure. So if we dial back to 2007, the last time the 10-year treasury rate was above 4%. What you can see here in this chart is that the total return of the market, which is depicted in blue, has really pretty much tracked earnings and dividends now. If we also look at earnings expectations, we're within about three percentage points of getting back to, you know, within that fair value. So I'm going to call that, you know, where we are right now, fair value. We've essentially taken, you know, this two and a half to three percent move in interest rates.

We've dropped accordingly. And so we are kind of, I would say, back to fair value, obviously depends on earnings growth. But remember, earnings growth is a much smaller impact on values than the interest rates themselves. So if we do get a recession and let's say we've got to knock earnings growth down, but the 10-year treasury drops by a quarter of a percentage point, we could actually see net positive in the S&P 500. You know, Jack, I was on in the last hour with Jim Kramer doing an event. And one of the points he made, and it was an interesting and provocative one to me, and that is that investors have to get used to the idea that technology and particularly big technology

is not likely to be the market-leading sector that it has been for so much of the past two decades going forward. And your stock picks, Chevron, Archer, Daniels, Midland, and McCormick, in lots of ways, couldn't be farther from technology than they get. Is that because you sort of fundamentally agree with Kramer's thesis, which is that big tech's day is behind it, and it's time to get closer to the land, I suppose, McCormick and Archer Daniels and so forth? Yeah, so I'm not going to write off tech completely. I think there's certainly a longer-term thematic horizon here. But I will say as we start to navigate, I think one of the things the Fed's going to likely do in an interest to avoid a hard landing is to sort of pair back on that 2% target. I think we're going to end up maybe in the threes, maybe in the fours, and they're going to call that a success, at least near term. So what that means to me is I want companies, first of all, you'll notice they're all, you know, commodity-type stocks, either food or energy, for one thing. They have the ability to pass their costs along. They also are high-quality companies with strong dividends and strong dividend growth. So, for example, Chevron has been growing its dividend at 5.3% a year for the last 10 years.

Archer Daniels Midland Food Company, 4.5% per year for the last 10 years. And McCormick, while it's a very small dividend's been growing at 9.5% dividend growth over the last 10 years. So here's a way to at least capture where we are in the cycle. And I think it's probably a good way to sort of navigate this higher for longer inflation regime. We got your grains, we got your spices, we got your oil, all there, right in it, right on the table for you. Thank you, man. All right. Thank you, Tyler. Appreciate it. It's like from the cloud to the land.

Cloud to the land. You see, right? It's in the earth, close to the earth. You know what I'm saying about? All right, coming up, folks, the economic angst on the, at the ballot box, one week until the midterms will stubbornly high inflation flip the Senate and the House. Plus, the recent market rally hinges on a Fed Pivot, but is the hope-based run-up premature? Before the break, a look at shares of Uber, up about 13% this afternoon after reporting but unexpected revenue.

Uber's prices are higher, of course. Uber's CEO says its core business is stronger than ever. More power lunch in two minutes. All right, welcome back to Power Lunch, folks. Midterm elections one week away to the day. As usual, the economy is atop, if not the top issue for voters. Inflation, fears of recession, whom will voters blame the fate of Congress? up for grabs. So will the Republicans

take back control of the House? Maybe the Senate? And midterms mean we're only two years away from presidential election. So which contenders are emerging? We know who they are. Let's bring in Larry Sabato to put some fine points on it. He's director of the University of Virginia Center for Politics. Let's go

first, Larry, to the Senate, which I think is terribly interesting. The three races to watch are in Pennsylvania, I think, Georgia and Nevada. How do you handicap those going into to the election a week from now? What we know about Georgia suggests

that it will be a runoff in early December. You know, Georgia has that strange rule, they're one of a kind, where you have to get 50% plus one of the vote, and there's a libertarian on the ballot. So probably goes to a runoff, and we may be sitting waiting to determine who controls the Senate until then.

But I also think it's possible we'll know within a week of the election, because of course the balloting and counting and disputes will take it least that long. So I agree with you on Nevada. That's very close, probably a slight edge to the Republican. At least that's the way it appears today. Pennsylvania, so much contradictory information in polling, Fetterman, the Democrat, John Fetterman, has managed to maintain the slightest lead over Mehmet Oz, Dr. Oz. So if it doesn't change, he might be able to pull

it out and Democrats will have flipped a Republican seat. But it's also possible Oz will have surpassed Federman by Election Day, and that will mean Democrats probably don't have much of a chance of winning a Republican seat. But if I can add one thing, Tyler, there are five other seats throughout the country that are not one-sided. They're relatively close. One side has led most of the time, and that enables us to suggest who will win. But I can't remember a midterm election without one, two, three major upsets. And that could determine the Senate because it is so close and competitive. What are those just quickly tick them? I'm guessing Wisconsin. I'm guessing Ohio would be in that list of five others. You're correct on both of those. North Carolina would be

in that list. Personally, I lean all of them to the Republicans, but the one that's seems to be most competitive, is North Carolina, followed by Ohio, Wisconsin, less so. And then on the Republican side, Senator Mark Kelly from Arizona, who's led pretty consistently, doesn't lead by much. And the Republican candidate for governor there, Kerry Lake has been leading most of the polls. So those are the wild cards. We don't know about those. But let's assume that Nevada goes the way you kind of suspect Lacksalt. Pennsylvania, let's say it goes

towards Federman. Then you've got a net gain of zero for either side. Who knows about these wildcards? But then it all comes down to Georgia, doesn't it? Yes. And because of Georgia's rules, we all, especially the candidates and the people in Georgia,

have another full month of misery, hundreds of millions of dollars of TV ads, you know, wild charges, negative charges of all sorts. And, you know, eventually they may change that rule. It would probably be wise. So, Larry, just to dig into this a little bit more,

I realize I got a little bit of a nail bit of a nail biter here over the next week and potentially plus month, based on what you just laid out. We know markets supposedly like gridlock. Is there a scenario, given the fact that it's so close and especially when you look at the Senate, how many seats are potentially up for grabs? Is there a scenario where this doesn't result in some form of gridlock?

No, because remember you got the House and the odds are pretty substantial that Republicans will take over the House. So that's automatic gridlock. You only need one House of Congress to be controlled by the party opposite to the White House. And then a president is pretty much reduced to vetoes and executive orders, you know, and threats of various kinds. And that's that is the probability. Now, if the Senate goes Republican too, then Biden is really behind the eight ball, though he gains something for 2024. because presidents are often reelected if they have a devil figure in Congress, if they can run against Congress because the other party controls it.

Really quickly, Larry, what are the things that matter most to voters turning out in this election right now? Oh, by a mile, it's inflation. They're a good side to the economy, but it's inflation. No question about it. Dobbs decision overturning Roe v. Wade would be second. That's in the Democratic direction. But it's not nearly where inflation is in the list of voter. concerns. Okay. Larry Sabado, thank you for joining us. Thank you. After the break, private defective, a new stress test showing there could be a growing risk of defaults in the private equity space,

plus tips and tricks. That unprecedented 9% eye bond dropping to around 6%. Now investors could find even more attractive opportunities in Treasury, Inflation Protected Securities. We'll be right back. Welcome back to Power Lunch. The Fed expected to raise rates another 75 basis points tomorrow. But taking the rate from near zero to nearly 4 percent this year, it's a sudden increase in rates like that that could cause shocks to the market. Leslie Picker is looking at potential problems specifically in private credit. Leslie. Hey, Morgan. Yeah, this is an area to watch. The private credit industry has ballooned in recent years as regulation forced traditional banks to rain in lending and low rates. companies to take on more and more debt. But some are concerned that the $1.2 trillion industry may soon reach a tipping point.

Pimco's CIO, Dan Ivesen, flagged this risk at delivering Alpha in September. Bleakley's Peter Buffar emailed me after an earlier segment on the topic today, saying, private credit is his, quote, biggest concern right now. That's because, in part, this type of debt is typically floating rates. So as the Fed continues to hike, investors generate more income. but the borrowers have to shell out more cash to service higher interest payments. A recent test by Kroll applied interest rate stresses across thousands of middle market private companies and found that a terminal Fed fund's rate of 525 basis points would lead to a 60% increase in interest expense.

As a result, more than 16% of companies they looked at wouldn't generate the needed cash flow to cover the higher payments, a statistic that doesn't even incorporate the impact on margins from, say, a potential recession and inflation. Now, the concern is that may lead to a wave of defaults, which would create losses, of course, for investors as well, guys. I mean, it's such a key point, Leslie, and it kind of strikes sort of at this whole idea of a so-called Fed pivot or a Fed pause. If the Fed was actually going to start pausing now, based on the data laid out in front of it, I mean, that's the counter argument, right? that systemic risk is growing and that something's potentially breaking. But that being said, some of the companies that you're referring to publicly traded, what are they saying about this in their earnings calls so far?

Yeah, so you've heard from KKR this morning. Aries last week is very big in the private credit space. And they basically say that so far they're not seeing much in the way of material credit weakness, that actually they're being opportunistic as big banks are pulling back. We've seen this a bit with deal financing and the inability to syndicate the debt. And so these private credit firms are really stepping in to fill that void. What's interesting is that given kind of where rates are right now, despite the fact that they've risen so fast, it hasn't created as much pain as perhaps I think some might have expected.

But the Kroll report, that stress test indicated that, you know, things could get ugly pretty quickly, especially once you surpass that 5% threshold. All right. Thank you very much. Leslie Pinker. We appreciate it. Let's get to Leslie. To what, not to Leslie? We're just going to leave Leslie now and go to Brian Sullivan. For a news update. Hi, Brian. Hey, Tyler. Thank you very much. All right. Parkland, school shooting survivors and family members of the victims got their chance to face convicted killer Nicholas Cruz. His sentencing hearing began today. Teacher Stacey Lapell described the pain that Cruz caused. You don't know me, but you tried to kill me.

I will have a scar on my arm in the memory of you pointing your gun at me, ingrained in my brain forever and broken and altered. And I will never look at the world the same way again. Steve Nash is no longer coach of the Brooklyn Nets, and a surprise move the Nets announced they have fired Nash after disappointing two and five start to the season. Nash led the Nets to the playoffs in both full seasons he had with the team. And the Rockefeller Center Christmas Tree, guys, It has been chosen. It is a Norway spruce. It is located about an hour north of Albany. It will

arrive in New York City on November 12th, where it will become, with the exception of the ones in our living rooms, the most famous Christmas tree in all the land. I look forward, Morgan and Tyler to getting to 30 Rock with you, having some eggnog and dancing around the tree like we used to. Yes, indeed. Sounds like fun. You'll be there, won't you, Morgan? I will, yes, I will be there for that lovely dance party. And throngs and throngs of tourists and everybody else. Yeah, it's a good place to go. All right, thank you, Brian.

We appreciate it. Ahead on Power Lunch is a relief rally beyond hope. After the break, we'll speak to one market expert who says any bullish momentum is premature. Plus, retail baggage as rates rise and recession fears escalate, companies need to start seriously watching their debt levels, especially retail. We're going to discuss that. Less than 90 minutes left in the trading day, we want to get you caught up on the markets, stocks, bonds, commodities, and bulls getting too hopeful. Well, let's begin with markets, which are lower across the board right now.

Small losses compared to the big gains we saw in October. We are off the highs. The Dow was actually up 240 points earlier today. We got some hotter than expected jobs-related data this morning, so that's then the stocks lower. Dow's down about 70 points. S&P is down 3 tenths of 1%. 38.59 is level there and the NASDAQ is down about 6 tenths

of 1%. Shares of Amazon though weighing on the NASDAQ down more than 5% down 20% in a week since reporting its results and you can see those shares are down 5.5% now. Uber shares down 12 or excuse me up 12% after it reported its quarterly report. The company

losing $1.2 billion on a net basis but posting earnings on an adjusted basis and investors believing that the company is on track to net profitability. Now, the bond market, where rates are holding steady ahead of tomorrow's Fed decision. For that, we turn to Rick Santelli, who is tracking the action, Rick. Hi, Morgan. Indeed. If you look at Intraub 10's, a lot of information there. We know that Jolts was better than expected. We saw prices paid on the ISM was much lower than expected. Those are good for the economy. Usually good for the economy.

for rates, look at the big reversal there, especially the way it occurred right around 10 o'clock Eastern. If you open the chart up to three days, we move from below yesterday's low yields, right back into Friday's range. And the dollar, as you see on this chart, followed right along with rates, which is normal. You get better data, you get higher rates. The dollar should follow rates. Now, the dollar has been coming down because many cents that they're getting close to the end of the tightening cycle. Now, I'm not talking pivot. I'm just talking common sense. Getting to the end of the cycle doesn't mean it's going to stop tomorrow or the next meeting, but we are closer to the end than the beginning, and that's important if you're watching for an

exchange. As a matter of fact, if you open the chart up to a week on the dollar index, what you'll see is we're right back towards where we were on the 25th, so it's the highest prices in five and a half sessions. But it's also building on the base. The 26 low you see on the left there, That was a six-week dollar index low. And finally, going into tomorrow's Fed meeting, we are now on pace for the fourth consecutive, inverted close of three months to tens as it trades minus five basis points. That's something to pay attention to because I'm sure the committee that's going to vote tomorrow is paying very close attention to the recession spread.

Morgan, Tyler, back to you. That's right. Early recession indicator. Rick Santelli, thank you. Oil is closing higher for the day with crude moving up. and Nat gas sinking. Let's get to Pippa Stevens at the commodity desk. Hi, Pippa. Hey, Morgan, starting with oil, it is advancing as the dollar's assent cools. Although China and the country's COVID policy does remain front and center since it is the largest crude importer.

Now, turning to natural gas, it is the big mover falling more than 10 percent and giving back almost all of yesterday's roughly 12 percent gain. Part of the decline comes as it looks increasingly likely that Freeport LNG's Texas facilities return to production will be delayed. It's been shut since a fire back in June, meaning less demand for net gas. Now, there are a couple of notable movers in the energy patch today, Marathon Petroleum, jumping to a record high after the refiner's third quarter net income came in at $4.5 billion. That's up from roughly $700 million during the same quarter one year ago. Fellow refiner Phillips 66, also on the move Morgan after the company beat estimates.

Back to you. Pippa, thank you, Pippa Stevens. The recent run-up in stocks that sent the doubt to the best monthly performance since 1976 may not last. In a new note, Barclays calls the Hope Rally premature, given lackluster earnings and the rising risk of recession. Let's bring in Venu, Krishna, head of U.S. Equity Strategy with Barclay's Investment Bank. Venu, great to have you on. And what do you mean by that? The Hope Rally, so-called Hope Rally, is premature.

I think, Morgan, our point of view is that there's still a lot of uncertainty, and equity markets are still not factoring in the rapid pace of deceleration in earnings which we see, and that is still in the early stages. And second, all the correction we have seen in equities this year has been through a contraction valuation multiples, which has been driven, again, primarily only by the right in inflation and interest rates. So what is not being factored in is a slowdown in growth, which will show up in slow down in earnings. And we still feel that the street is a lot more optimistic even now. So for example, our estimate for S&P earnings for 23 is $210 EPS. That compares to a

consensus of $232, so more than $20 left to go. And remember, consensus just two months ago was 252. It came down to 243 in August, came down to 239 in September, and here we are at two, you know, lower 232, and we feel that there's still ways to go. And I think most importantly, the last point I'll make is that this $210 number we have is assuming that the Fed wins the inflation battle, but it is at the cost of a shallow recession. So if we have a, a worse recession, then that number can be a lot lower, closer to like 190. Okay. So then what would you be doing right now?

Would you be fading the rally? You wouldn't be somebody who's telling your clients to buy in here, it sounds like? No. We would indeed fade the rally. Our view is that the market has yet not found a bottom. Over the next two to four years, we feel that bottom has to hit. It'll be probably in the 3,000 to 3,400 range. And once that happens, we feel that's a time

and we should start accumulating because we do see the S&P ending closer to 3,700 next year where valuations was correct and we find a bottom in earnings and then valuations expand and we are in more reasonable environment. Yes, so we would fade this rally for now.

Now, we do recognize that given light positioning in the markets that there is scope for bear market rallies. And we feel right now, is exactly what it is. It's a bare market rally. It can last, but it's not sustainable based on macro uncertainties and the fundamentals in the equity market. Okay. Vanu Krishna, thank you for joining us. Thank you. All righty, after the break, folks, we will return and bring you more power lunch, betting on bonds. Those are a lot of people talking about those and tips and eye bonds, which are the

better investments. We haven't been talking about bonds in a long time as good investments, but maybe today. The Treasury Department today announced a new series of iBonds with a 6.89% interest rate, almost 7 as inflation and interest rates rise. Sharon Epperson, looking at places to park your money and which alternatives provide the best bang for your buck. Hi, Sharon. Hi, Tyler. The new headline rate on the iBond is made up of a new fixed rate of 0.4.4.5.000. percent. That's in addition to the portion that's adjusted for inflation. That's how you get the 6.89%. A pro of eye bonds is the fixed rate is now above zero. The big cons are that you can't take out the money for a year. You'll lose three months interest if you redeem them within five years. And there's a

limit on what you can buy. $10,000 per calendar year, another $5,000 if you have that sum in a tax refund. So let's compare that to tips, Treasury inflation protected securities whose rates have been going up recently. As of October 31st, the real rate on a five-year tip would yield 1.6% on top of inflation. Now, the big pro for tips is that they have fewer restrictions. You can buy and sell them daily and you can purchase $10 million per security. Tips have a principle that is adjusted for inflation based on CPI changes, and the insurance payments are a percentage of that inflation-adjusted principle. So the total return can fluctuate and you can lose money. increases in tips principal value though due to inflation adjustments are subject to federal taxes in the year they occur

but you won't receive those increases until the tips are cashed in or they're sold and that's why some financial advisors recommend tips for tax deferred accounts like IRAs and 401ks Tyler all right thank you very much sharing eperson a lot to process there if viewers are interested in i bonds or tips how do they buy them where do they go that we did that's online. A lot of people wondering how they could get into iBonds. You can get them directly on treasury direct.gov. You can buy them right on the Treasury Department's website. You can do the same with tips. You can buy them right there on the Treasury Department website.

You could also go to the secondary market, buy them through a broker. Or some people prefer to have tips held in a mutual fund or an ETF. It's simpler for them to do it that way. So there's several ways that you could purchase them. Thank you, Sharon. Appreciate it. Sharon Niperson. Well, the debt of retailers is in focus as the Fed hikes rates.

Will the cost of servicing that debt be another blow to the sector? We're going to discuss which names have the most risk. That's next. All right, welcome back. We're less than 24 hours from the Fed decision and another interest rate hike will mean borrowing costs will go up for individuals and companies. Wells Fargo says that could spell more trouble for the already beaten down retail sector. The XRT down 30 percent so far this year. Worst year since 208, Wells Fargo has identified the most at-risk retail names because of their floating rate debt loads.

Let's welcome Ike Borchow, managing director and senior equity analyst at Wells Fargo. Ike, obviously, there must be floating rate debt in lots of companies. We're going to focus today on some of the retailers that have it. Before we get to individual names, is the exposure so sizable that it could be material to these companies? earnings if they have to pay more to service their debt? Yeah, thanks, Tyler. I'm going to talk to you again. So, you know, look, it's a question that's on investors' minds.

I mean, we've done a ton of phone calls over the past couple weeks where this is very top of mind. It's not because, look, at the end of the day, we know for consumer discretionary, the fundamentals are challenged, numbers are coming down. I think numbers are down about 35, 40 percent year to date. But then the question becomes, look, this is going to continue through, We've already got companies guiding down Q4 into next year. How bad does this really get? And when you start looking at balance sheet risk, that's really where that leverage gets a little bit scary.

So, you know, floating rate debt, you know, maybe two, three percent headwind to the group overall, but some names more exposed than others. So, and I know we'll probably go through this on a second, but it's not just the floating rate debt. It's debt maturities, you know, who has debt coming? Yes. in 12, 18 months. There's a lot of other things that I would think that it isn't just those that have floating rate or revolving credit lines or whatever, but it's anybody who has debt coming due and needs to refinance that debt, it's now not going to be at whatever it was.

It's going to be at X plus. So let's look at a couple of the companies that you say have a more risky position in that, in the floating rate area, Haynes Brands and VF Corp, clothing manufacturers. Yeah, so both, not surprisingly, two businesses that are pretty fundamentally challenged right now. They're having a tough time. VF, you know, you mentioned with the floating rate debt. They also have about a billion dollars of debt coming due next year. I think they're paying less than a percent on that debt right now. So that's going to be a refi.

That's going to be dilutive, I assume, when the time comes. And then HBI, you know, we have an underweight on it. So it's floating rate debt. it's they've got a billion and a half of debt due in the next 12, 18 months that they'll have to refinance. They've also got some financial covenants that if things get really bad, they're going to start to come up against. So that's an issue. So you're right. Those are the two that we highlight in the report as being the most at risk right now. Okay. So I know what to steer clear of based on your analysis. What's in a good position, given the current environment,

whether it's from an interest rate standpoint, a consumer standpoint, or something else? Look, we've become much more optimistic on the off-price sector over the past month or so. Burlington, we've named one of our top ideas. We upgraded raw stores a couple weeks ago. The idea of the economy remaining weak and trade down accelerating into next year, defensible names that are cheap relative to their history, where we do see some kind of visibility into fundamental outperformance next year. I think the off-pricers are a good place to look.

And we would prefer Ross and Burlington over T.J. Just simply because T.J. has had a good year. TJ was the one to own you want to... TJ was the off-priser to own in 2022. I think Burlington and Ross are the ones you want to own in 2023. Okay. Mike Porchow. Thanks for joining us.

Thank you. Up next, the resale revolution. And it's affluent shoppers driving the thrifting craze. More? That's more? More. Power Lynch next. More, just more.

More. Welcome back to Power Lunch. Everyone loves a bargain and that desire for finding good deals is leading to a surge in secondhand shopping. Dom Chu has a look at the resale revolution. Yes, I am in many ways secondhand. But there's a new word for this. It's called re-commerce.

So e-commerce on the re-side of things, right? So you kind of get where I'm going with this. Well, there is a staggering statistic about just how prevalent re-commerce has been. become. According to Offer Up, which tracks a lot of this kind of re-commerce business, 82% of Americans, four out of every five Americans, has bought or sold something secondhand. And just to give you an idea of what that is, it roughly equates to about 272 million people that have bought or sold something secondhand used. That's a big deal. Now, if you take a look at some of the other big numbers around why this is such an important thing, because according to Offer Up, we're going to

see 80% growth over the next five years in re-commerce, and it's going to become a nearly $300 billion industry, commerce-wise, people buying and selling used goods. As if that weren't enough, some of the real issues around that are about why people are doing it. Oftentimes, it is to save money. And according to coupon follow, about $150 per month is saved by people buying something secondhand. So, on an average year, it could get to about $17 to $1,800 worth of savings that you'll get by buying something secondhand versus brand new from the store. That's a big deal for some. As for the reasons why, thrift is most certainly saving money, the big reason why people do it.

But it's not just that. It's also about sustainability. Some people just like buying used items because they can get the same utility out of them without having to purchase something new, without having to make something new, using the energy of the materials to do so. And here's the curious part. It's not just people who are looking for a bargain on the lower to middle side of the income spectrum. A lot of luxury items, hard-to-find ones, are being sought in the second-hand markets right now.

So it's not just about finding values. Sometimes you can't find that expensive luxury item without getting it second-hand. Big deal for sure. Could be home furnishings, although anything. Absolutely. I'm not sure if you guys have done it. I have actually purchased things second-hand. We've picked things on.

for up yeah and it's pretty it's pretty amazing i've done it with clothes i've done it with electronics i just bought some stuff on ebay so all right tom thank you very much you got it and thank you all for watching power line closing bell starts right now