Power Lunch - The Fed minutes, pricing power and the financials trade. 10/12/22

Episode Date: October 12, 2022

The Fed releases the minutes of its last meeting. Were there any hints of when officials may pause their rate hiking campaign? Plus, Pepsi’s price hikes powering its strong quarter. Which other consumer staples companies have pricing power? And, the trade on the financials ahead of bank earnings. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome, everybody, to Power Lunch, along with Morgan Brennan. Hi. Nice to have you here. Oh, it's so good to be here. I know you've been back on your main show, but it's the first time you've been here in a while, so welcome. Thank you. Good to have you here. The Fed minutes are due out momentarily in about 12 seconds, to be exact.

Investors will look for any hints on when the central bank might pause its rate hiking campaign. And just to get a quick check on stocks right now, really flirting with the flatline, the NASDAQ, the S&P, and the Dow. but let's get right to Steve Leesman, who has those minutes for us. Steve. Minutes of the Federal Reserve September meeting showing that many participants stressed the need for the Fed to keep tightening, quote, even as the labor market slowed, they said ongoing rate increases were appropriate,

and the cost of taking too little action outweighed the cost of doing too much when it came to fighting inflation. Once a restrictive level on the federal funds rate was reached, there was general agreement that was appropriate to maintain that level, for some time. A sizable portion of the economy Fed officials observed had yet to show response to tightening, even while some of the interest rates sensitive sectors had showed quite a bit of weakening. Inflation was said to be unacceptably high, the labor market very tight, and inflation was declining more slowly than had been anticipated. Maybe a few nods to the Dover's side,

but just very subtle nods. Several said the Fed needed to calibrate the pace of tightening with the risk of an adverse effect on the economy. And it would be appropriate at some point to slow the pace of increases, though not necessarily telling us where those, what that level would be, where the Federal Reserve would stop. A few others here. Inflation pressures were seen gradually receding in coming years, and there's uncertainty was high in the economy or in the economic outlook, but there were risks to the upside when it came through inflation.

They said a wage price spiral had yet to develop, but it was seen as a possible risk, and risk to growth were generally to the downside, mostly from global headwinds, like a European recession, a slowdown in China, as well as the Russia-Ukraine war. One other note here, the Fed staff did say liquidity conditions in the Treasury and mortgage markets, quote, remained low. You know, we've been talking a lot about that liquidity story here. So pretty much a hawkish Fed reflecting the statement, reflecting the press conference of the Fed chair, with just maybe some additional concerns and commitment to.

keep rates high even as the labor market slowed. Tyler. All right, Steve, stick around and let's bring in Aditya Bave, Bank of America's senior economist along with Rick Santelli, watching the bond market. I'll begin with you, Aditya. As you hear this report from Steve about the minutes, is there anything in there that surprised you? It certainly sounds like fly hawks fly. Yep, it's very much in line with expectations. The Fed is very focused on bringing inflation back down to target. And I would take it one step further. It's not just a matter of tightening as the labor market slows down. It is a matter of tightening precisely to slow the labor market down. They need to keep going till they break the labor

market because that's what it's going to take to bring wage inflation down. And that's what it's going to take to bring services inflation back under control because, of course, services are very labor-intensive. I'm going to ask Rick Santelli to answer this question. Then Adity, I'll come back to you and maybe get Steve to chime in as well. There obviously is concerned about a hot labor market and wage price inflation, a wage price cycle. Is that the principal cause of the inflation we are experiencing right now? I realize it's one of them. But it seems like we have forgotten, forgotten that an influx of liquidity took place in the years immediately before this inflation.

We had incredible fiscal stimulus. We had tax cuts, we had a huge amount of spending, and we had a Fed that was gassing it by buying securities and sending cash into the marketplace. Is this liquidity driven or is it wage driven more? What do you say? I think it's more liquidity, but there is some wage component here. The problem or the issue, I should say, Tyler, is the Fed is going to always seem to side with the wage argument, in my opinion. But they need to be careful. Okay, if we look at the last report that we had for jobs, the August jobs report,

month over month average hourly earnings were up three tens, Tyler, and year over year up 5.2. Why do I bring that up? Because 5.2 is definitely making a fall from its March extreme of 5.6, and just in July, we were up five tens on the month over month. So I see some of the wage pressures mitigating to some extent. But you're right. there's two areas that are going to be super sticky, maybe three, okay? I think wages ultimately, but food and energy as well.

And I think the latter, the latter, listen, I'm not going to get into a political debate. The latter, let's say we're going to get on track somehow, and we're going to build refineries and be able to bring enough to the marketplace to keep prices in a more reasonable spectrum. But that isn't going to solve what's going on in Europe or what's going on with Asia. So you're going to see a global fungibility factor keep those prices. much higher. I think that everybody's missing the elephant in the room, and that is global slowness is going to cause many entities, whether it's the UN or other heads of central banks, to point to the one glaring issue that's causing them pain, the dollar. The dollar is up

18 and a half percent year to date, and that is playing havoc with outside economies. Well, Aditya, let me get you to react, before I bring Morgan in. Let me get you to react to what Rick just said, bring in the dollar, bring in the idea that is it, are we really suffering the pains of wage inflation, or are we suffering the pains of something, of that plus something else, namely a vast influx of liquidity? I don't think the two are mutually independent. Fiscal stimulus injected liquidity into the economy, and that supported demand, which in turn supported the labor market recovery.

Now we have a red-hot labor market fueled by both that strength and demand, as well as the supply issues from many workers leaving the labor force, and that created price inflation. So I don't think we need to think about the two independently. They have both driven wage inflation and price inflation. In terms of the dollar, that's probably a bit of a headwin for inflation, obviously, because it lowers imported price inflation. Steve, I want you to get your take on this as well. well. And specifically going back to the conversation we're having on squawk in the street early

this morning in terms of what was going to be key to watch from these minutes which are backward looking and from which so much has happened within the market since then, including a lot of Fed speak. This idea of the calibrating the pace of tightening, is there an expectation? And I say this thinking about Vice Chair Brainerd's recent comments, for example, maybe even Evans on our air earlier this week. Is there starting to be a splintering in terms of how quickly to go from here and how data dependent to be where inflation is concerned in the process? I don't think we have a splintering at this point. I think we have some people that are a bit more concerned about the overall effects of this than others.

I wouldn't say we have a splintering until we have people calling for either lower rates or outright for the Fed to stop. Remember, Evans, who is kind of being put in the dove camp, he wants to go to four and a half and four and three quarters, which is, I don't know, do the math from here, 150 plus basis points from here. I'd hardly call that a dove. Unclear to me exactly where Brainerd stands on that. She's a bit more on the dove aside. A bit more concerned about this, but I don't see Brainerd breaking off from the committee. I do want to say one quick thing about the wage story, which is one idea out there is that because the rate of wage inflation has lagged the rate of price increases, some people point to that and say, well, that shows you it's not driving inflation overall. I think that's a little simplistic. I think it does drive a portion of inflation. as employers try to recoup some of the profits or the expenses that they've lost in paying people more.

I think the important part of the wage story is that the Fed is prospectively worried about it, that it will be something that will end up driving inflation in the future. It's said in the minutes that a wage price spiral has not yet developed, but there is a risk of one. And I think the Fed is pretty serious about watching that and trying to create softness in the labor market so that does not happen. Aditya, I want to get your thoughts on some of the data that you're watching closely. I mean, obviously we had the PPI numbers today and the core, the core reading there perhaps in line with street expectations, but it does speak to the stickiness, particularly

in services. Obviously, everybody's looking to CPI tomorrow. High frequency data, what is it telling us about the inflation picture? And is it something that, from your vantage point, maybe the Fed should be paying closer attention to? I think the high frequency data are telling us, know exactly what we've been discussing, that inflation is sticky high. We could get some relief on core goods, but at the end of the day, services make up a much bigger share of the inflation basket, and services inflation is still very elevated. In particular, shelter inflation, which, of course, has a bigger weight in the CPI than the PCE, but shelter inflation is likely to continue at its 0.7% pace, which is, of course, very, very strong. That's, you know, close at a 9%

and annualized, that's likely to continue for a few more months. And just finally quickly, Rick, the reaction we're seeing in the bond market to these minutes right now, walk me through that, the fact that yields are actually ticking lower here. Yeah, yields are ticking lower, especially two-year-note yields. And we shouldn't get too overwhelmed by the fact they're ticking lower because there's a lot of capital preservation going on in front of the consumer price index that hits in the morning. the numbers aren't big enough for me to say, wow, look at this, but they are drifting a bit. And one thing I'd like to point out, these are the minutes to the September meeting.

If you look at the minutes to the July meeting, we came out in August. So the last set of minutes we saw, they were worried that they might tighten too much, that they might go too far. I don't sense that same issue in these minutes. So if anybody is looking to buy equities purely from the standpoint of the Fed at some point in the near future standing down, I just don't see it. Okay. That is the last word there. Dita Bave, Rick Santelli, Steve Leesman.

Thank you. So how do you invest, given all of the Fed and economic uncertainty? Let's bring in Mark Lushini, Chief Investment Strategist at Jenny Montgomery, Scott. Mark, great to have you on. Did I say your last name right? You did, absolutely correct. Fantastic. My married name is Kachati, so I pay attention to these Italian last name.

I never knew that. Okay, Mark, I want to get your reaction. to the Fed minutes to what we're seeing in equities right now as the major averages, do tick higher on this news, although keep in mind still well off the highs of the session. I think I agree with what Rick kind of concluded his comments on, which is to say no surprise. There wasn't certainly anything in there, given all the other Fed speak that's been conducted subsequent to the meeting to suggest that there's any deviation from their unconditional commitment to thwart inflation at all.

almost all costs, whether it's the labor market or the economy. And so for investors, we continue to urge near-term caution until we get a couple of more inflation prints that provide any evidence. And there are certain things that are leading indicators to inflation that perhaps suggest disinflation may be in the pipeline. The question is when it's going to evolve to the point where actually influences the prints that come out either on headline or the Fed's favorite gauge, of the core PCE that enables investors to take some comfort in the fact that the Fed may pause or at least conduct a dovish hike in which there'd be some evidence that they're likely to take their foot off the break. But that's not anytime soon. Okay. So when you talk about urging caution,

what does that look like in terms of putting money to work? Well, for us, it means that we've suggested to investors not taking an abundance of risk either by way of their equity positioning in portfolios, in other words, the high degree of cyclicality or a substantial ownership of things that are selling at price to hope ratios. In addition to that, it means owning energy, which is a cyclical sector, but nonetheless, one that has its own idiosocratic supports relative to supply constraints. Health care is another sector we like, kind of defensive growth. And from an asset allocation standpoint, we believe that investors should have no more than what their target way to equities is in their portfolio, given their bespoke.

risk budgets, given the fact that we could plumb lower levels than what we've seen so far before this is all said done, particularly if by chance we continue to see the economy devolved into an outright recession. It's all cheerful thoughts we're having here, Mark. Let me turn to a couple of stocks that you like, one, both of which are often mentioned, one more than the other. Number one is Chevron. I get it, up significantly this year.

The other is Thermo Fisher, medical device measurement, taking devices and so on and so forth. This one is down 25% year to date. What's going to turn Thermo Fisher and other of those defensive healthcare plays? What's going to turn them around? Well, I think a couple of things. I think investors looking at the long-term prospects for a company like Thermo Fisher that really spans the pharmaceutical and biotech universe in terms of its medical tools, and equipment that it sells across varieties of industries within pharmaceutical.

And obviously, the development of further genomics and the likelihood that we continue to see some level of merger and acquisition activity by Big Pharma, who need to defend against patent cliffs that are either going to develop through their own pipeline efforts or acquire it, the kind of growth that they're going to need to persist if the regulatory climate continues to stiff in, or on the other hand, if we get some kind of regulatory relief by way of what transpires in the election here in another month or so, perhaps opening up some of the enormous amounts of cash that they're sitting on today. Mark, thank you very much. Always good to see you, sir. Thank you, Tyler. Mark Blasini. All right, coming up, the importance of pricing power in this environment.

Pepsi's got it and hyped its forecast, but which other consumer staples companies can say the same? Plus, from steel to copper to lumber, input costs for industrials are falling and in some cases falling fast. So this is a good sign for the sector's margins. Before the break, a look at Norwegian Cruise Line. The stock, one of the best performing in the S&P on an upgrade by UPS. UBS, excuse me, UPS is not in the business of rating stocks, right? They deliver. They deliver packages.

Stock package. It says UBS says the stock can rally 30%. More power lunch straight ahead. Thank you. All right, welcome back to Power Lunch, everybody. Pepsi shares higher on strong quarterlies and an upbeat forecast driven by continued pricing power. The CFO on Squawk Box earlier said price hikes are critical to managing higher costs. It's a combination of, look, we're we invested in our brands where we're actually seeing good consumer response despite the fact that we've had to increase prices. And we've got our cost structure under control very well. So we delivered a superior result. So which other consumer staples still have pricing power?

Let's bring in Chris Carey, Wells Fargo Staples analyst. Chris, talk to me a little bit about the Pepsi report today. It sounds like they're just doing fine. They're selling well, and they do have pricing power. People are willing to spend a few extra pennies on Doritos, chips, and drinks. Yeah, that's right. You know, Pepsi results probably will stand out as. one of the strongest and stable reporting season this quarter.

You know, organic sales is very robust, 17% growth in pricing, volumes down just 1%, and earnings up 10%. Despite a commodity environment, which cut their operating profit by roughly 40% before pricing actions. It's a really significant commodity hit, and yet they're still growing earnings. So it's pretty impressive and certainly the pricing powers on full display here. So who else has got what Pepsi has? Well, this is quite unique, right? Across the staple sector, what we've seen is elasticity

have been remarkably low. Part of that is because everybody is pricing. When everybody's pricing, there are a lack of alternatives. And as such, you see lower elasticity. We're seeing that, but certainly relative to the inflation that Pepsi has been seeing, the pricing it relative to how much volume impact they're seeing, which is fairly minimal, is very impressive. That's part of the scale of the business. It's part of the dominance of some of their categories, specifically in food. But we're seeing a high level of pricing power across food and beverage specifically, and we're seeing a little bit less so outside of that in Staple's state in your household product space. But we are seeing elevated pricing power across the space. Pepsi would just be

at the high end of that. Okay. So just to dig into that a little bit further, I mean, you've got a neutral rating on Pepsi. Are there names that you would buy here, given the conversation we're having? Well, look, you know, the neutral on Pepsi is really a function of, you know, you're trading at 23 times earnings. It's a high end of its 10-year average. It's a high end of its 20-year average. It's a 50% premium to the market, right? Staples will outperform so long as global growth continues to decelerate, right? It always does that. Staples only underperforms the market once growth starts to re-accelerate. So I suspect relative to the overall market, Pepsi could be an outperformer, but within the market, look, we have a

name where, you know, valuation is actually at the high end, and earnings probably aren't going up that much more. And so what you really need to call for here on a Pepsi is multiple expansion. Nothing wrong with Pepsi and their performance is quite impressive. It's just really you're getting to a point on the valuation. There are some other names in the sector where things probably get a little bit worse before they get better. In general, Q3 earnings is going to be a challenge. Most of these companies are going to be reflecting higher currency pressure, not a whole lot of commodity deflation. So despite the fact that earnings are going to be okay, we are going to going into an earnings season where outlooks are going to be relatively more pressure.

Pepsi's just at the high end of the valuation rate. Put some names on that, on that thesis that you just, that you just said, which is that some of these other companies that you follow are not going to have the kind of quarter that Pepsi had. They're going to have pressures. And then conversely, which ones, I mean, you have a neutral on Pepsi largely because of its valuation. I take it. Which ones do you think are more, are both attractive? actively priced and able to benefit? Well, look, you know, you look at like an SD water, right? There's a company that is dealing with still some China headwinds.

They're going to have FX pressure. Okay. They very well may play out in the upcoming quarter. But at the same time, you have a company that's trading in line with this 20-year average on valuation and China's materially under-earning on potential that now we have currency getting factored in to the outlook, right? So I'd put that into one of those camps of, hey, currency has to get factored in. China still hasn't recovered but could, and all of a sudden you have a stock that could see multiple compression just because earnings re-accelerate with a cyclical recovery in China.

Those are the types of stories that probably don't become so obvious on Q3 earnings because you need to go through the currency pressure first and some other things. But that coming out of it, they do screen much more as a recovery play versus, say, a Pepsi, which is just delivering fantastic results. That's been the case all year and going to next year set to do the same. Very interesting to see how you think, Chris. Thank you very much. I appreciate that. That was interesting. Enjoyed it.

Chris Carey. After the break, a cure cooperation. Merck agreeing to jointly develop a personalized cancer vaccine with Moderna, which could deliver data by the end of the year. We've got those details next. Plus, the wheels on the bus go round and round all through the grid. In today's clean start, we'll highlight one company using electric school buses to help power communities during emergencies. We'll be right back.

Welcome back to Power Lunch. Check out shares of Moderna today, which are up about 7.5% right now. Merck is paying $250 million to exercise an option for rights to Moderna's experimental high-risk melanoma treatment. The companies began working together on this in 2016, and they're expecting results from a trial combining Modernas treatment with Merck's Ketruda by the end of the year. As we mentioned, Moderna's trading higher, Merck is down slightly. in trading. But let's get to Bertha Coombs for the CNBC News Update. Bertha. Hey, Morgan. Thanks. Here's what's happening at this hour. Federal regulators will issue new cybersecurity requirements for some aviation systems after several airport websites were

attacked earlier this week. TSA is also requiring airports and airlines to designate a cybersecurity coordinator and report cyber attacks. Former President Trump will have to answer questions under oath next week in a defamation of lawsuit brought by a writer who says he raped her in the mid-90s. A federal judge scheduled the deposition for next Wednesday. Trump has denied the rape, and one of his lawyers says the case is entirely without merit. And this year's genius grants have been announced. Winners of the MacArthur Fellowships include a plastic waste management expert, a botanist, and an ornithologist poet. The new MacArthur Fellows will receive $800,000 over five years, which comes with no strings attached.

There's even an economist who is looking at how to do the economy in space, Morgan. Ooh, now we're talking. He's an astrophysicist looking at that. I mean, with trillion-dollar estimates, that is an economy to be tapped, yet to be tapped. Bertha Coombs, thank you. All right ahead on power launch, inflation hitting nearly every industry. But cost could be cooling for the industrial sector. We've got that story next. Plus, financial stocks across the board hitting 52-week lows in recent sessions, including big banks,

regionals, also asset managers. We'll have our trader dig through the names to find the best buys ahead of earnings season in today's three-stock lunch. 90 minutes left in the trading day, and we want to get you caught up on the market. Stocks, bonds, commodities, also the declines we've seen in prices for some key material, specifically, but let's begin with Bob Pisani at the New York Stock Exchange with the equity reaction to the Fed Minutes. Hi, Bob. Three to two advancing to declining stocks, Morgan. Volume those on the light side, it's not an awful lot for the Bulls to hang their hat on on the Fed Minutes, no relenting on the hawkishness.

The PPI didn't really help either. It was a little bit on the hot side. We'll see CPI tomorrow. We're expecting, what, 8.1. If we get a seven handle, that would certainly be a big help. I want to show you the VIX here. Further unusual to see the VIX close to 34. And remember, my general rule, 35 is real panic level.

We've got very low volatility today. So it's unusual to see that remain that high. I think the key is this is an evidence of how skittish the market is with keeping the PPI right near 35. You know it's an unusual day when cruise lines are the leaders on the S&P 500. Now, Norwegian did get an upgrade at UBS. They were talking about significant improvement in bookings. certainly a good sign. But these things have been ping pong balls for the last several months.

They're going up and down on various sentiment on the consumer. But here you see a really nice move up, all three of the big cruise lines. I want to remind everyone that even though we have an update, there's a lot of new lows out there, including some very, very big names in the S&P 100. We're going to start with JPMorgan on the earnings on Friday. It's had a new low. It's bounced off the lows. It's up today. But many of the big money center banks, Citigroup, Bank of America, also 52-week lows, Key Corp, some of the big super regional banks, Microsoft New Low, KLA-10 Cor, and the REITs we've been talking about for months, the office reits, and, of course, the apartment reits, Vernado, among many big real estate investment trust of 52-week lows.

So where are we? 3585 was the September 30th low on the S&P 500, and we have been bouncing midday, so we're off of those lows. we were approaching that September 30th low. But right now we are several points above that. About, oh, 15 or so points above that right now. We'll see if we can stay over 3,600. Morgan, back to you. All right, Bob Pisani, thank you.

Now to the bond market where yields are moving lower following those Fed minutes. Rick Santelli is tracking the action. And Rick, welcome back. Yes, and Morgan, when we were talking about the minutes, you asked a great question. How much are we moving lower in yields? we could now get a pretty clear picture.

We moved three basis points and twos. They were at 4.30. Now they're at 427. And as you look at this chart, realize that at 8.30 Eastern, we made the high yield. And that, of course, was on the producer price index. So producer price index definitely was sticky. The minutes, listen, I didn't see anything super new, but I certainly didn't see anything dovish.

But here we sit with yields moving lower. Look at a two-week chart of tens. You know, tens have really taken off going into these numbers. but it's certainly leveling off now, especially with consumer price index tomorrow. Many traders are getting even up with the market and putting on more option plays. Finally, when you look overseas, boy, these markets have been crazy. We all talk about the guilt, but here's a chart of the 10-year UK guilt since August 1st. To realize, on August 1st, it was at 180, 1.80%.

It closed today at 443, which means that it's up 150% in yield. I don't like to use percentages, but it is unreal how much it has moved. And it didn't even close on its high yield today. The Bank of England's got issues they're going to have to deal with as it's tug-of-war between tightening and easing, and they can't seem to do one or the other. They continue to do both. And finally, year-to-date of the dollar index up nearly 18%.

Yes, it's getting hit a bit after the minutes. But if you're outside the country, you are feeling the sting of a stronger dollar. Morgan, Tyler? back to you. All right, Rick Santelli, thank you. I mean, it's pretty incredible those charts. Well, oil is closing for the day as well. Falling for a third straight session, Pippa Stevens has the details for us. Hi, Pippa. Hey, Morgan, the weakness comes after both OPEC and the EIA slash their oil demand forecasts amid recession fears. OPEC said, quote, the world economy has entered into a time of heightened uncertainty and rising challenges. They cut their demand growth for this year by 500,000

barrels per day. The EIA, meantime, now, for example. It forecasts the U.S. demand growing by just 460,000 barrels per day this year. Let's check on prices. DBTI down 2.2% at 8738, brand crude at 92, 62 for a loss of 1.8%. Now elsewhere in the energy space, take a look at shares of uranium named Camaco, down more than 14%. The Canadian company partnered with Brookfield Renewable Partners to Buy Nuclear Company, Westinghouse Electric, for $7.9 billion. dollars. Bank of America said the deal is strategically sound and is complementary to Camaco's existing business. Canacord added that a negative reaction is to be expected due to

stock dilution and a significant capital outlight. Morgan? All right, Pippa Stevens, thank you. We're going to stick with commodities. Prices for some key materials have been falling, in some cases way down from their peak. And that could be good news for the industrial companies. Seema Modi is joining us now with that story. Seema, hi. Morgan, I'm sure you you've been watching these moves as well. We've seen a significant drop. Today's producer price index may have come in higher than expected, but if we zoom in on industrial metal prices, you'll see they're falling off a cliff, hot rolled steel using construction and to build trucks, down 59% from its peak, iron ore down 55% while copper is off 28% from its respective peak.

It comes as demand from China has faltered, plus logistical issues have eased, yes, shipping rates, as we've discussed, have traded down recently, which analyst Stephen Volkman at Jeffrey says will help big machinery companies like Caterpillar Cummins, even ag equipment player deer, speed up their deliveries. He says it will take a few quarters for the industrials to work through existing inventory and contracts, but they'll start to see the benefits a little bit in Q3, but more about Q4 in the first quarter of next year. Now, the question the street is trying to figure out is if big manufacturing companies will lower production. due to recessionary fears or take advantage of lower commodity prices.

And that, of course, will be a big part of the story. XLI industrial, as we should point out, it's been a negative month for stocks. But the industrial sector is outperforming so far in October, up about 3%. Morgan? Yeah. I mean, of course, the strong dollar is weighing on many of these commodities and the prices that we've seen. But you did see aluminum spike earlier today. There was a Bloomberg headline about the potential ban on Russian aluminum.

So the role that sanctions could potentially play here as we have this conversation, I mean, we have names like Alcoa that were trading higher on the session today, names like Halmet, speaking to this industrial manufacturer story, actually trading lower because they're, of course, the end user of that aluminum. So how are companies navigating some of these geopolitical issues? Well, Morgan, if President Biden's national security strategy outlined today is any indication of what's to come, what's to come, where, President Biden explicitly says the goal is for the U.S. to out-compete China and restrain Russia.

The idea of tariffs or a ban on a key Russian export perhaps shouldn't be unexpected. But clearly, prices are moving. Aluminum is higher today, as is Alcoa, a big producer. The question will be, and it reminds me of a conversation I have with General Electric CEO Larry Kulp last quarter, Morgan, where he said, because of the supply chain issues, the shortages, not only are they trying to find solutions, short-term solutions, by finding new vendors, but also thinking about redesigning some of these parts long-term to ensure that if one key raw material is unavailable, they can substitute it for another.

All right. Seymody. Thank you. All right. After the break, today's clean start. We look at Synop, a company creating backup power for local electric grids by using school buses. We'll explain. And throughout Hispanic Heritage Month, we celebrate our CNBC.

teammates and contributors. Here's Amanda Masias, CNBC National Security Reporter. I am a second generation Mexican American. I was born in El Paso, Texas, which sits on the U.S. Mexican border. As a national security reporter, for CNBC, I bring a different perspective in terms of immigration issues, border security, and the elections that are going to shape our country. My advice to young Latinos would be to embrace the spirit of our culture, which is hardworking, vibrant, and empathetic, and to also keep up. with your Spanish, the way data is trending, it's only going to become more important. And when you can't,

and change, and diomas, it's a key. It opens up so many more doors. So you may have one of those portable, portable battery backups for your phone. You plug it in when you're low or when your phone dies. Simple for your phone. But what happens when it's your local electric grid that needs extra juice? Diana Oleg joins us with one answer in her continuing series on Climbabye. Startups. Hi, Dai.

Hey, Ty. Yeah, on some of the hottest days last summer in Beverly, Massachusetts, the electrical grid was overstressed. It needed help, and it got it. Extra power from, of all things, electric school buses and a startup called Synop that made it all happen. Synop helps our customers become good participants in Samaritans of the grid to put that energy back in. It's called Vehicle to Grid Charging, V to G, where a fleet vehicle, like an electric school bus with an energy-dense battery that's not in use, can send its power back into the electric grid during times of power stress. It can then recharge itself overnight when grid usage is lower.

Synop is the information software platform that makes it all happen, and that's what it did with Highland School Buses in Massachusetts. This past summer for our customer Highland, we helped deliver 10 megawatt hours of energy back into the grid. And we did that every single day for the entire duration of the summer. And really, that's about charging when it's cheap and selling energy back when it's most advantageous. This is battery electric storage that happens to already be on wheels. A win-win for Highland, which is expanding its fleet of electric buses across the northeast.

It helps locally utilities meet demand, but it also creates income for school districts. and it makes electric school buses more affordable. Because the bus companies sell their electricity back to the grid at a higher price than they pay for it during lower stress hours. We are able to issue signals to the chargers to say, yes, let's take 100 kilowatt hours from each of these buses and push it back into the grid from 6 to 8 p.m. Investors in Synop are wireframe ventures, obvious ventures, congruent ventures, and better ventures. Total funding so far, $10.1 million. And vehicle to grid charging is gaining ground quickly. Ford and Pulte homes just announced a partnership where electric Ford F-150s can act as battery backup for solar-powered Pulte homes.

As V2G grows, that will offer more opportunities for software platforms like CINOP. Tyler. So for public grids, you're talking about here, is it just school buses or can other vehicles be used to do this? You can use any vehicles, but it's best when you use fleets of vehicles. So they're actually also working with postal vehicles. That is, those electric postal trucks because there are a lot of them around. And again, they're only used at certain times of day. So that can work.

It works best when you have a lot of the vehicles to be able to charge the grid. All right. Sounds good. Diana. Thank you. Diane Oly. Sure. Oh, that's so fascinating. Well, still to come, savings grace. Financial stocks struggling amid recession fears. are their names worth buying on this dip?

The three-stock lunch is next. Welcome back. It's time for three-stock lunch. Financial stocks are heading into earnings season in pretty bad shape. A handful of big bank names, asset managers, and regionals are all trading at or near 52-week lows. But there are some exceptions. Let's trade the sector with Todd Gordon, founder of new-aged wealth advisors and a CNBC contributor. Todd, great to see you. Let's start with the majors.

You're eyeing Goldman Sachs. Yep, yeah, I like Goldman and just generally, Morgan, you know, the financials, they're expected to show a big EPS drop like 14% compared to last quarter of last year, Q3 of last year. But yet the sector in general is showing strength. So specifically, I like capital markets, Goldman, as you mentioned. They beat expectations like three of the last four reports on average about 20%. They're cheap. They're only trading eight times forward earnings. are expected to make about $37 total in 2023.

A lot of volatility in the major asset classes, obviously aside from equities, Fax fixed income and commodities, a big trading shop. And they're trying to restructure as a one-stop shop. You know, there's a lot of fallout with this Marcus robot investor. You know, they're trying to go after the consumer in terms of that wealth management.

They have a private equity business, ACO, which takes care of CEOs of some 500 businesses. So they've kind of have an embedded well. wealth management to get into that if Solomon wants to try to go after that. So plus it just continues to show relative strength compared to financials and relative to the broader market. So I hold Goldman personally and in my wealth management business. Let's move on to the asset managers.

You got BlackRock reporting tomorrow. But you're looking at AmeriPrize. Yeah, yeah. I like AmeriPrice, Tyler. You just technically speaking, you look at the stock. Financial's put in a low right around July. where the broader markets put one in June. America Prize is 21% above that July height.

So a ton of relative strength. The XLF, financial's right at it, and the SPYs, you know, is below it. So they have over a trillion in assets. They're one of the largest branded advisors out there. A lot of the revenues come from, 80% come from wealth management, asset management. They're acquiring a lot of shops,

which helps their margins, because obviously just more assets with the same cost basis This is good. They've done a ton of buybacks. They've decreased the amount of shares outstanding by 50% in the last 10 years. They're trading 11 times forward earnings. Their price to free cash flow is only seven and a half. It's well below the industry average.

And BlackRock, as you mentioned, Tyler, I think they're like 12, 12 prices of free cash flow. And they have a very good, you know, just financials are just compelling and cheap valuation. Again, relative strength. I like AMP. All right. Final name. PNC. a new 52-week loan in today's session. What do you think of the regionals?

Yeah, you know, I don't see a big reason to own regional's compared to large-cap banks. There's not a lot of outperformance where there traditionally is. So I don't see the risk, the reason to hold that PNC. I did cut this one. I held this in my portfolio. I cut it in May. You know, they're the right at the those lows that I mentioned, those July lows. So showing a lot of relative weakness. It's got a 4% yield given, so it's hard to argue against that. They're looking to make about three and a half to four bucks to share. And there's concern about commercial and industrial loans and the possibility of loan write-offs.

So loan defaults from private equity firms. They have exposure to there. So I've got to watch a report there. And they also have a lot of consumer cash on deposit, which I think is going to leave possibly and look for a higher yield than what the banks are paying us, which is not very much. So there's risk there. Watch that in the report. Yeah, I mean, that's such a key point. It's pretty incredible that they're not paying more out to their consumers. Todd Gordon, thank you. We'll see if that changes at all. We'll get some of these reports. Up next, just because you're here, a space stock that one analyst says can fall back to

Earth. We've got more Power Lunch in two minutes. Welcome back to Power Lunch. It's time for a couple stories that are catching RI today. Rocket Lab shares falling after a bearish initiation, by Credit Suisse, rating the stock and underperform and giving it a $3 a share price target. Stock's down 3% right now. Firms saying the space industry is highly competitive, capital intensive, and even at $4 a share, Rocket Lab's valuation is expensive compared to its peers. This was a very downbeat, 100-plus page report from Credit Suisse. I don't know this company, but I don't think of it as in the top three competitors in this world.

I would actually put it. I would put it in the top group of competitors. They are regularly launching satellites to orbit, and they're building out a larger rocket now. They also have a growing and relatively robust, at least from a profitability standpoint, space systems business around satellites and making parts for satellites. But again, this is, you know, we talk about speculative tech and rising interest rates. Space stocks and Rocket Labs have been no exception is down 70%. over the past 12 months?

Yeah. All right, let's move on to shares of Intel. They are in the green today, but earlier in the session, they hit a new 52-week low, and really at the lowest level in more than five years, this stock. There you see it up 1% right now. Reports came out today saying that Intel may announce job cuts in the next couple of weeks ahead of its earnings report on the 27th.

The company potentially looking to cut costs as demand for personal computers continues to decline, and it is that, that, slump in PCs, Morgan, that seems to be bedeviling so many of the chip stocks, including Intel, Nvidia, and most especially, I guess, most directly AMD. Yes, AMD, which has, by the way, we've been taking market share, at least in certain segments from Intel. Samsung was another one last week, so inventory seems to be a buildup of inventory,

seems to be a name of the game. The question is going to be really whether this is an early indicator of recession or global economic slowdown or whether this is kind of a revolution. version to the mean to pre-pandemic levels with the pull forward we saw with some of these devices. And then you have the very interesting phenomenon of a lot of these chip companies investing heavily in FABs. It's very capital intensive, like space. Yeah, like this, like what we do here. Yeah. And you've also got a little bit of the tailwind of that, it was a $50 billion, the Chips Act that is going to help. It's starting to make its way out. It's starting to make

its way out there. We got a little more than one hour left in the trading day. It's kind of the witching hour, I suppose. Stocks have been turned. trading in a range a little up, a little down. Right now, sort of splitting the difference. Look at the S&P 500, just basically flat as you can get. NASDAQ is higher by nine points or nine-one-hundredths of a percent. So a lot of action beneath the waves, but the waves right now sort of calm. The waves are calm.

Energy is the best performing sector in the S&P. Consumer staples are right behind it. And of course, PepsiCo, the results there really fueling the gain within that sector. We get more earnings tomorrow. Delta Airlines, I think, is actually going to be one to keep an eye on, given what we heard from United Airlines today. All those names are trading higher. United Airlines today about expanding international routes and then, of course, that upbeat pre-announcement from American Airlines yesterday. Yeah, you would think that the airlines would be doing really, really well because there is high demand for their product.

They have pushed through pricing power. Airfares are higher, man. They are. For now at least. For now at least. You've kind of got the Pepsi phenomenon there of lots of demand. pricing power. All right, thanks for watching Power Lunch, everybody.