Power Lunch - Which Bonds To Buy, The Cost of Business with China 10/20/23

Episode Date: October 20, 2023

Stocks are pulling back today, and ending the week in the red. Bond yields are also pulling back. We’ll take look at corporate bonds, and whether or not you should invest now. Plus, Apple is reportedly the latest corporation to have to walk a fine line in order to do business in China. We’ll discuss the impact for companies trying to operate under the eye of Beijing. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch, everybody. Alongside Kelly Evans, I'm Tyler Mathis, and stocks pulling back today, ending the week solidly in the red. Bond yields also yielding downward a little bit today. The tenure briefly hitting 5% last night coming up, we're going to look at corporate bonds. Would you rather lend money to the federal government or to Apple? And speaking of Apple, the company reportedly canceling John Stewart's show over disagreements over potential episodes, including one on China. It is just the latest example of Apple, and Apple isn't the only one, having to walk a very fine line so that it can do business in China, Kelly. And that stock is in the midst of a losing streak. So is the market. Dow's down 110 points a bit off session lows right now. SMP is down a half a percent. Forty-two-fifty-three. We are exactly 20 points above the 200-day moving average, 42-33, which we did touch earlier today. That's the level people will be watching as we head into the close. Nasdaq, down three-quarters. of 1%. And of course, we're watching that 10-year yield hitting 5% briefly late yesterday, 492 this hour.

And Bitcoin higher today and up 9% for the week. Hopes for that Bitcoin ETF helping, although it's having some trouble hanging on to the 30,000 level. Still, Tyler, I think a lot of people would say it's acting decently resilient. Yeah, and that the ETF on a Bitcoin would really maybe open a market that hasn't been there before. Let's start today, though, with the market and the impact of rising bond yields. While market history shows stocks tend to rally into the end of the year, the sell-off in bonds and rise in yields has put a damper on what has been a strong year for equity markets generally. So what does it all mean?

And where do we go from here? Let's bring in Dryden Pence, Chief Investment Officer with Pence Capital Management, also with us. CNBC contributor Sirratzetti, managing partner with DCLA. He is our guest host for the hour. Welcome to both of you. Good to have you here at Dryden. And let me begin with you with your thoughts on bonds generally. There's been some talk.

I mean, lately you've been paid to keep your maturities very short, whether you're in the treasury market or elsewhere. Are we getting to the point where it might be time to go out a little farther on the duration curve? Well, I think that people are beginning to realize that the interest rate regime is now going to be higher for longer. and therefore those people have been very, very short, can begin to move out just a little bit because yield curves normalize. We're in this situation where we're now gone from very inverted to closely to flat. And I think that the realization is that this movement from higher to longer is going to allow people to move out a little bit on the yield curve because, quite frankly, the idea that we're going

to have a massive move down in 2024 is probably certainly off the table. So, Serrault, what do you think there? Are we getting close to the moment where you would think about going out and lengthening your maturities if you hold bonds? So I would be careful with how far out you want to go. I think three to five years can work, but you have to be very careful about credit quality if you're talking about corporate bonds. And I think we haven't really seen spreads blow out, meaning we haven't really seen stocks. Balance sheets reflect some of the refinancing coming, some of the higher rates and a potential slowdown. economy because that's what the end result is going to be of all this tightening. So when you do go

out three to five years, make sure that the credit that you're holding is of high quality and not cyclicals and not companies that are going to have to go back to the market very shortly that are depending on advertising. So just like when you do stock picking, you've got to be careful on the bond picking side to and know that your spread, the amount, the difference between the Treasury and what you're getting paid for is commensurate to the risk you're taking. Some people might say or might argue or might think, well, I can't do that work. That's how I would feel as an investor. How would I possibly know?

So would I be safe enough buying, you know, some kind of broad exposure and hoping that even if I lose 10 or 20% at the margin because of default, I still might come out ahead. And I think that's when you get a short-term, diversified bond fund for that amount. But you have to be careful

because it does have volatility. So, you know, we prefer owning the individuals, but to your point there, or if you don't think the risk is enough, you know, just buy a short-term Treasury fund or something to that effect where you're not taking credit quality. Do you think people should go into their fidelity accounts? Just look for Apple bond Cusips and just load up on that. I mean. Well, so the spread over treasuries, you know, is not that commensurate to take the risk.

True. Apple's not going to go out of business. So that's kind of where you're going to have to play that amount. But, you know, an A-rated, highly B-rated companies that are 50, 60 over 60 basis points over the Treasury, those are you can be comfortable. with. So you can do it with high quality companies. Just don't go into companies that think, oh, I'm getting 9% for two years. Well, the bond market is normally more right than the equity market. So it's telling you something that probably much more risk there than there is. Trident, what do you think of stocks and the so-called earnings recession that we may have just

exited? Well, I think the earnings recession is over. And we looked at, you had the magnificent seven the first part of the year. Now we're looking more towards the 493 because the earnings recession is pretty much over. You're going to see continued growth and earnings throughout the market that we believe through the end of the year and then into next year. So I think the economy is fairly strong. It's going to continue to be that way. And I think that's going to be supportive for the rest of the market, that $493 to begin to have increase in earnings. And we think the recession is over. I mean, the magnificent seven ended their earnings recession three or four quarters ago. Now the rest of the market is doing that. And we can move forward to, we think, a pretty broadening, more positive, more strengthening value of prices. You have three stock picks in my notes. One is Amazon. One is Raytheon and the other is Exxon. They are all in on.

I guess maybe that's the theme. I don't know. Well, it's really more about Christmas and Congress and conflict. We think Christmas is coming up. It's going to be good. Consumers have money. And Amazon is really roughly, you know, 40 or 50 percent of money that goes into e-commerce. So Amazon should do well during the Christmas period of time.

When you look at Congress, they're going to continue to support these wars that we have in terms of Ukraine and Israel. So we think Raytheon is a very strong company there. They have about 2.6 times their 20-23 earnings and just their backlog. So they're part of Iron Dome. They're part of the systems in Javelin that we're systems using in Crane. So Congress is going to continue to fund that, even though they're a little dysfunctional right now. And then when you look at conflict, it's pushed up oil prices.

And because of that, we like Exxon. And the reason, I mean, if you think about it, Exxon's really the fourth largest producer in the world now that they had their mergers. So when you think about that, Exxon has tremendous oil production. And oil in the $85 to $90 barrel range makes them a lot of profits. All right, Dryden. Thank you for being with us today. Dryden Pence and Sarat, we get to have you for the whole hour.

So we're glad about that. It'd be a great trivia question. What other names end in O.N? That's all I'm thinking about. Exxon, Amazon, Raytheon. Did we cover them all? Foxcon. Foxcon. Let's get more on the action and bonds from Rick Santelli out in Chicago. Hi, Rick. Hi, Kelly. I guess no chart is going to represent this week better than the following chart. Here's a week to date of two-year yields on top of 10-year note yields. And look how the long end out distance the short end. And that is a big deal. Another big deal,

KBW Banking Index. It's on pace for the lowest close in five months. And when long rates are going higher and curves are de-leverging or steepening, that's called a bear steepener. And historically, it's not really a big thumbs up for the U.S. economy. So let's take a look at some of these. Tuesday, tens, it closed at minus 44 last week. It's at minus 16. It's the least inverted since September. That chart starts in July. The last time. we were at zero, look how quickly it went from minus 110 to minus 16. But it isn't the only one. Let's look at three years versus 30s. This week alone, it moved from negative to positive. It's now positive 14, the steepest in five months. If we look at fives to 30s, it's gotten very close to the most steep, the least inverted, the steepest had been in five months. And it's at positive 21. The moral here is to pay very close attention because distances between maturities associated with long end and short end are widening out. And those term premiums as they expand are very difficult to predict.

And this week in particular, if you're using this in your strategy to say maybe we failed at 5%. Geopolitics may argue with that conclusion best served to wait and see how market looks next week. Tyler, Kelly, back to you. Have a great weekend, Rick. Thank you. As rates chop around, our next guest says, shorter duration corporate credit is the best way to find returns. And with Apple's debt yielding more than 5%.

Well, let's talk about whether 5.7% should be scooped up right now with Joanna Gallegos. She is a bond block's co-founder, and she joins us now. Joanna, welcome. And Apple's just one example. There's a ton of blue chip companies with yields at levels like this. And maybe some almost blue chip company with yields even higher. Yeah. I mean, in investment grade, getting a yield around 5% for Apple, and that's a tried and true stock that people go to in a lot of instances.

But if you're really looking for performance here, you really should be looking to the other side of the balance sheet right now. You should be looking at bonds. And in particular, when you can get 5% over 5% in a treasury fund right now with low risk at all, we would say you need to go even further down the credit spectrum and get to high yield because that's the place where you're getting compensated. You're getting paid to take incremental risk. And I'd have to say an investment grade, while you're looking towards quality, there's more out there. And with the resilience in the economy, there's a lot of strength down the credit spectrum in corporates.

So I guess one of the questions Joanna would be, you know, is why, you know, the pros kind of know how to sift through these things. But if I'm sitting at home and I've spent the last couple of years first figuring out Treasury direct and then, you know, when then I was in I bonds and now I want, you know, Q-Sips of which corporate bonds I should be buying. I mean, give me some really kind of specific and tactical ideas. Don't buy bonds. Buy ETFs. It is hard to buy. You would buy ETFs instead of bonds? Instead of bonds directly. Because I think we'd you described as going on with the Treasury site and trying to buy, you know, a 10-year treasury bond or like you mentioned I bonds. And

that's a hard process. Whereas you should be using the modern technology of an ETF by a Treasury ETF. It's much easier. You can buy it in your brokerage account. And now you can buy corporate debt that's more specific. So bond blocks, we do very specific corporate debt. You can buy the high yield I'm talking about. And most specifically, you can buy along the risk spectrum. And we really love, we loved it last year. We loved it this year, all this year, top performing. We'd say you should buy triple C. All right. Let's talk, Surat, about a couple of things she mentioned there and just jump in, take it whatever way you want. Number one is the, are you? Are you? Are you getting sufficiently compensated for going out on the risk spectrum.

And number two, the idea of buying an ETF versus buying a bond that you could hold to term and have basically, if nothing goes wrong, have basically no risk of capital loss. Right. So I think the interesting part there is also depends on the asset size and also your ability to go to the research, right? So I think the point here is for the individual investor who doesn't have the bandwidth, the time to do it, I think, you know, you. using an ETF could make a lot of sense. Well, you really have to look at two things is, what is the duration?

So I'd love to know kind of what is the ones they're recommending, because you wanna stay shorter, especially if you've got credit risk, as we talked about before. And then also, how does the cost factor come in? What are you paying for all this, as opposed to kind of doing it yourself? So I think the cost benefit there has gotta be,

and I think what they have is a good product for the individual who doesn't also have enough capital to diversify, right? Individual bonds are good when you've got a lot of capital to diversify. But if you've got capital that it's hard to buy bonds, whether you're buying $20,000 or $30,000, I think this works for the individuals, but you've got to stay shorter. And when you say cost, you're talking about the annual charges that are associated with the E.

Yeah, so there's a, yeah, the annual, the fixed fees that they charge for management fees, the transaction fees, as opposed to when you go buy your own bonds, you're going to be paying those individually. And they're more opaque. Yeah. So you really have to know what you're doing in the individual bond world because there's no real market. They say there is, but it's much more opaque than it is. Joanna, final thought quickly? Yeah, just on those two points, high yield is lower duration than investment grade.

It's around three or four years versus six or seven. So it has a lot less interest rate volatility than investment grade. So that's why we keep recommending that it's probably the best kept secret in fixed income is to get out into high yield and specifically triple C because of the fundamentals are still strong. And for costs, you can buy a high-old ETF in our range around from 35 basis points up to 40 basis. points. It's very effective, very easy to get these trades on and a lot more simpler than trying to weigh through it yourself, as mentioned. Yeah. All right, Joanna, thanks very much. Joanna Gallegos of bond blocks. And Sarat,

thank you as well. Congress now, heading home for the weekend. Ain't no speaker. No, sir. Emily Wilkins has details on the latest setback with Jim Jordan. Emily. Hey, Tyler. Well, Jim Jordan is no longer in the running for speaker. House Republican just met after Jordan failed to win the gavel on a third vote on the House floor, and they took a secret ballot with the question, do you want Jordan to continue to be the Republican nominee for Speaker? And the end result of that vote was that no, a majority of Republicans did not want to see Jordan run again. And so now Republicans are breaking up. They're going home for the weekend, and they're going to be coming back on Monday night for a candidate form

in which we'll see probably a group of new members try and put their names forward to see if they could potentially get the 217 votes needed to become speaker. We already heard from Congressman Kevin Hearn of Oklahoma. He says that he is interested in running. We've certainly heard a number of other names thrown around. Congressman Mike Johnson has been mentioned. Congressman Tom Cole has been mentioned. Patrick McHenry has been mentioned. And we'll get some clarity throughout the weekend on Monday on who is actually running. But at this point, again, it is just not clear that any of these folks can get to 217 and can actually become speaker. And there's a lot of debate still on the table. about empowering Patrick McHenry as Speaker Pro Tem.

Democrats are still pushing to get some sort of bipartisan coalition. I think at this point, it remains very unclear exactly what this situation is going to play out. But at this point, Jim Jordan is no longer in the running to become Speaker, guys. What was Jordan's fundamental Achilles heel here? I think there were a couple different things. I mean, number one, you saw a lot of Republicans who have really challenging seats. They have seats in what's known as purple districts, ones that Biden won, ones that Republicans really are going to have to win again if they want to keep the House. And a number of them were clearly uncomfortable with Jordan as the Speaker.

And I think there's also just been a lot of concern about this process. People are still very upset that Kevin McCarthy got ousted as Speaker. Remember, 96% of the conference did support him. And they're not happy with this process. And they were really kind of showing that when it came to electing Jordan. And so I think some of the folks who are now trying to put their names forward, they're trying to say, hey, we have less baggage, we haven't been in leadership. They might be a little bit of a lesser known quantity, but they're hoping that that ultimately works in their favor. All right, Emily, thank you very much.

I know you'll be watching it over the weekend for any developments. And meantime, coming up, the impact of rising interest rates on regional banks. We'll talk to Huntington Bank CEO, Stephen Steinauer. And shares of Merck, higher, positive results for Ketruda, the cervical cancer patient treatment, while shares of Oracle are down on concerns raised at the company's AI executive forum. That is your power check. We'll be right back. Welcome back as to Power Lunch. As interest rates keep rising, we want to take a closer look at the impact on regional banks. Huntington Bank shares holding company for Huntington Bank beating on the top and bottom line in its third quarter,

but an 8% drop in profit year of years. Its net interest income dropped. The stock trading a little lower today. and down 30% this year, not all that uncommon with some of the regional banks. Here for a Power Launch exclusive is Steve Steinauer, Chairman President, CEO of Huntington Bank shares. Steve, why don't you explain the results today and talk us through how the bank is doing? Sure. We had a very good third quarter. We're coming off a record year last year, beat consensus by about 10%, 3 cents, total of 35 cents at the core. We had a little bit of one-time both revenue and expense in that.

Otherwise, it would have been a four-cent beat. So top-line, bottom-line beat, very good credit quality, grew deposits very nicely, continuing to grow deposits, I should say. So we feel really good about the quarter. How is loan growth? Is it growing or static? Well, loan growth this quarter was off a smidge. Part of that, the largest part of that was commercial real estate. and we had about a $400 million reduction in that.

The second part was seasonal adjustment in our distribution finance. Now, that distribution finance about $350 million will come back on plus increments in the fourth quarter. We expect loan growth for the year to be about 5% in line with what we originally said as we came into the year. Net interest income increased about 2% from the prior quarter, but decreased from the year ago quarter. Explain that to me. Well, the differences in our net interest margin, so the cost of funds, if you will, deposits and other funds has increased, and that's compressed our net interest margin. It's an industry phenomenon.

It's why bank stocks in part have traded off during the course of the year. For us, we're asset sensitive, which means as rates rise or stay high, that's actually good from our balance sheet perspective. That's helpful in terms of driving net interest income growth and expanded NIM in the future. And that's what we shared with the analysts. Our expectation is the fourth quarter plateaus, and then we're growing every quarter and throughout next year, both net interest income and net interest margin.

Steve, one of the things affecting a lot of banks and even brokerage firms is cash sorting, where your clients are, you know, saying, hey, we want better yields, we don't want to keep it in money markets. Are you seeing that happen? And if so, how do you counteract that? Well, there's a definite level of interest or yield on savings and investment.

that industries are looking for, but they're also, because rates are so high, they're also using their cash instead of additional borrowing. And many of these companies have had very good years, record years, back to back, and so they are cash rich, if you will, and so they have a variety of options. Use it in lieu of additional borrowing, invest it, and we help them there. We run about $25 billion of off-balance sheet liquidity in a liquidity portal. We developed over the years, and we have about $35 billion of on-balance sheet commercial deposits. Deposits in total for us are about $140 billion. Steve, can you just speak to the fact that the market is just stomping on regional banks and banks in general?

And so, I don't, you know, an earnings season started out with a pretty decent tone to it. And it seemed like we moved through one day. We moved through the next. Everyone said, great, the banks are out of the way. It's clear sailing now. What happened? Is it rates? Just kind of give us your thoughts as a veteran banker at the equity prices that we're seeing.

the group in general trade at? I think the market has sort of sidelined in terms of financials generally at this stage. The performance has, as you said, generally been good. For ours, a 10% beat. Normally, that's an upmarket move. But interest rates are up, which means there's risk to the economy slowing down. And banks are cyclical. If there's a slowdown in the economy, provisions will be up, losses will be up, things like that.

And the market can't quite calibrate around how far a rate's going up. When will they peak? When will they come down? Will it be a soft landing? Four of a session. And until some of these uncertainties are addressed, you have that overhang. In addition, you also have a regulatory overhang around for us, for our sector, Basel 3 Capital. So the regional banks and larger have capital expectations increasing, at least from the regulators, as proposed. That has to go through a process yet. And higher capital means lower returns. You've heard from Jamie Diamond and others. about what that means in terms of relative competitiveness.

And those are all overhangs to the market. It's a tough, it's a tough period, that's for sure. And that's even with almost an implicit backstop on all deposits. So it's really incredible. Steve, thanks for joining us today. Talk through things. We really appreciate it. My pleasure. Thank you.

Huntington Bank CEO, Steve Steinerauer. Coming up, Dark Times for the solar stocks, you would have thought energy transition, inflation reduction act? No, the solar ETF is down 6% today and its lowest level since July 20, 20 after a warning from a key player in the space. We'll get you the full story when power lunch returns. Welcome back. The solar stocks are getting crushed today following a warning from Solar Edge. Let's get the details from Pippa Stevens. Pippa, why have a huge reaction here?

Yeah, Kelly. Well, Solar Edge shares are tanking down 28% and on track for their worst day on record. The company warned that Q3 revenue is going to be roughly 20% lower than previously expected with Q4 also taking a hit. Now, this comes amid inventory backlogs in Europe, especially. Demand has really slowed, and so distributors aren't buying as they work through their existing stockpiles. Also, SolarRedge has said gross margins during Q3 will be between 20 and 21 percent, down from initial forecasts of 31 percent at the high end. The company didn't elaborate, but that could be signs of price cuts. And Wall Street is unimpressed. Goldman B of A, Deutsche Bank, Roth, MKM and Oppenheimer, all downgrading the stock.

We've also seen some dramatic price target cuts as well, including Goldman, taking its target from 254 to a new target of 131. Now, we've been hearing for several quarters now that the solar industry isn't looking so hot as rising rates make residential systems more expensive. But the issue here is that the bottom keeps getting moved out, meaning there's not a lot to like in this space right now. And the weakness is also hitting names like N-phase, sunpower, and sunrun as well. Kelly Tyler. All right. Thanks very much. And, Sauron, any thoughts you'd add here on, we have energy, we have kind of old energy on a multi-month wind streak.

We have new energy getting crushed in the face of higher rates, even with all the subsidies and help that they're being doled. So I think the key comes down to, and you're seeing it across the market, are you making money? And if you're not making money and you're not making cash flow, you're going to get penalized. Because what is the alternative? Investors can get 5% sitting in treasuries, or they're going to go to cash rich companies, which you have on their. energy side, right? So you look at the exons of the world that we talked about before. So I think today, and it's just not the solar stocks, you're looking at other stocks that are not making money, are all getting punished. Now, some of these will survive, but the market's

also telling you, they're going to have to go back and refinance if they're out of cash. What rate are you going to get for that? Absolutely. So if you're talking about high yield at 9, 12%, you're talking about, you know, we always talk about cost of equity is so high and companies don't want to issue equity. Well, if you're issuing debt for 12%, or higher than that, or higher than that. And by the way, you're giving away your company when you're issuing the debt. You know, at least the equity holders

don't have that much to take from you. So I think the market's doing, you know, all this uncertainty. We were talking about the banks. You're shooting first. You're asking questions later. You're going to go to high-quality companies. They're running to the seven stocks

of the 400, you know, the 500. So through this, you really have to say, hey, six months from now, where do you think, or a year from now, where do you think we're going to have opportunity? But right now, the path of least resistance is down. We have a Friday. People don't want to have any risk on.

No, I mean, we're at almost session lows again on the Dow, and across the asset classes, we're seeing people just kind of stomping out of things and not wanting to leave their exposures. So I think that's all playing into this. And it happened last Friday. It's happening in this Friday. And we also don't have anybody in the house. So there's a lot going on. There's so much uncertainty and instability in the world, let alone the market.

The market. But at the same time, the economy, so you've got to kind of, if you're a long-term investor, I think the opportunities are starting to be really good. but it's a short term. If you needed the capital, people don't want to have the risk on. Absolutely. All right, let's get to Bertha Coombs for a CNBC News update. Hi, Bertha. Hi, Tyler. American hostages have now been released in Gaza.

Three sources with direct knowledge of the matter tell NBC News that two American hostages held by Hamas are now free. And according to Reuters, the two whose names have not been confirmed are currently with the International Red Cross. With the Rafah crossing between Egypt and Gaza still closed, President Biden said this afternoon that we will soon see that he got a commitment that the crossing will be open. The president said that the highway needed to be repaired, but that the first installment of U.S. humanitarian aid will arrive in Gaza within 48 hours. The judge overseeing former President Trump's classified documents case holding a hearing today in Florida about a potential conflict of interest with a co-defendant's lawyer. Prosecutors say the lawyer

for Trump's valet, Walt Nata, previously represented an IT director at Mar-a-Lago, who they say retracted false testimony after switching lawyers. Very complicated situation, Tyler. Very complicated. All right, Bertha, thank you very much. And coming up, drug makers reportedly exploring weight loss shots for kids as young as six. six years old. We will discuss the ramifications of that and much more with former FDA Commissioner Dr. Scott Gottlieb. Power Lunch will be right back. Welcome back to Power Lunch every single day. There's a new headline about the impact of the new class of weight loss drugs. Today, among other headlines, it's that drug companies are exploring using the treatments

in children as young as six years old. Here to discuss that and much more, Dr. Scott Gottlieb, former FDA commissioner and a CNBC contributor. Dr. Welcome. Are you, which side of this are you on now? What phase of the hype cycle are we in? Well, look, I think a lot of the market reaction is overblown. People are making very linear assumptions from some of the clinical studies in terms of how that would translate in the real world and the kinds of impacts it would have, for example, on eating of packaged foods, things like that. I saw one analyst estimate that there would be a reduction in weight on airplanes

and that lead to fuel savings costs. Some of this does seem to be getting way ahead of itself. With respect to the children specifically, I'm not surprised that the drug companies would be looking to see whether or not it could be effective in that indication to find what the appropriate dose would be. There's a lot of genetic drivers of obesity in children. Mutations, for example, in the MCR-4 gene, the leptin receptor. It's in a small incidence of obesity in children, but it is a driver.

Certain genetic inheritance is a driver of obesity and children. That's why you see a lot of concordance in twins with weight issues. And so if these drugs could be effective in those metabolic diseases, That could be a real medical advance. And so I'm not surprised they would look there. I think it could be a potential public health advance if, in fact, they're proven to be safe and effective in that indication. So it's appropriate to be studying it at this point. So let's talk a little bit about those theories, that sort of linear analysis that you were describing like, oh, there's going to be less weight on airplanes.

So airplanes will use less fuel, so that will be good for the airlines. I mean, these sort of, there's going to be less bariatric surgery, and that's going to impact certain companies that are involved in that. area. There's going to be less packaged food eaten. So Nestle may not do as well, or Frito Le may not do as well, or whatever. Which ones of these sort of extended thoughts make sense to you intuitively? Well, intuitively, none of them makes sense to me. I think they all make a little sense on the margin. I think that there's going to be some impacts overall in the population, but it's going to be gradual. These drugs, you know, are going to take time to reach peak penetrants. People aren't going to, not everyone's going to be able to,

stay on these drugs. And so you can see a lot of patients coming off them are just using for short durations of time. And I think, quite frankly, as more patients recognize that there's ways to lose weight that doctors can offer and more patients present to physicians, it also may increase utilization of certain things. So, for example, people who are seeking out these drugs to help them lose weight may seek permanent solutions like bariatric surgery once they get into the medical setting. So I don't think that we could just make linear assumptions about this is a one ticket in terms of the impacts on some of these other offerings in the market. And again, when you look at the clinical studies, the weight loss is profound. But once you get out into the real world

where there's going to be a lot of variability in people's ability to stay on these drugs, a lot of variability in what people do once they're on these drugs, you're not going to be able to just read through from the clinical studies and assume that's going to be the real world experience. Unfortunately, it's going to be more muted. That doesn't mean these drugs won't have a big public health impact in the aggregate. But I think trying to read through from the studies to the impacts on individual stocks, at least from my estimation, what I've seen appears to be overblown. Now, that said, I saw the announcement from Nestle yesterday. I think they're smart to be seeing whether or not there's a way to market foods to this segment. They have a lot of latitude

in the kinds of claims that can make, the nutrition claims, nutrient content claims that they can make in the food setting from an FDA regulatory standpoint. So they may be a market for foods that are conditioned specifically to people who are on some of these drugs. But I don't think this is going to have just an immediate impact on, you know, people's purchase of packaged goods, for example. So just a couple of questions. You mentioned, you know, people will come off these drugs. Is that more because over time you don't want to use this for so long, or is it more that insurance companies will say, hey, we're backing off, you've used it for 18 months? So where is that really playing out? Yeah, I think it's both things. I think that these drugs have been studied

not in perpetuity, so not for lifelong use yet, although there's an assumption people are going to be on these for the lifetime once they get on these drugs, because we know that there's rebound once you come off these drugs. I think that there are going to be some long-term issues with being on these drugs for prolonged periods of time. We see, for example, loss in lean muscle with some of these drugs and some patients. There's going to be tolerability issues, and there'll be insurance coverage issues. And so I think you'll see patients perhaps cycling on these drugs. Some will stay on it. Some will stay on it for a duration of time and come off and maybe adapt their diet over the course of that time and change their habits.

Some may go on these drugs and then seek a longer-term solution like bariatric surgery or other kinds of opportunities. But I think you can see a lot of variability in the real world in terms of how these drugs get used. And you can't just assume that everyone who gets started on these drugs is going to be on them in the same way that we've seen, for example, with statins. Some will, but I think that that's going to represent only a fraction of the patients. If you had a patient or a relative who asked you about these medications, what would you tell them? Look, I think we have a lot of experience with these drugs, and so we understand that safety profile. Now, what we don't have as much experience with is these drugs at the high doses that are used for weight loss. So the doses used for weight loss are four or five times of doses that have traditionally been used in a diabetes setting,

where the drugs have been on the market much longer. But we have a lot of safety data, and we generally understand these drugs. And so I would be optimistic for a patient who is obese and properly indicated for this drug who could recognize the health benefits that come with losing weight. And we've seen some profound benefits in terms of cardiovascular reduction in cardiovascular morbidity from some of the trials that have been done, people looking at impacts on dementia and Alzheimer's disease. So the benefits that correlate with reduction in weight for people who are obese are quite profound. And so I would be looking for these drugs as one alternative to losing weight.

And I certainly wouldn't discourage anyone from starting one of these drugs that they properly indicated, including a family member. All right. Dr. Gottlieb, thank you, as always. It's great to see you. Very clear. Appreciate it. Thanks a lot. You got it. All right, still ahead. Collateral damage.

Some firms are learning the hard way that doing business in China can come with a hefty price to pay. And not just in dollars and cents. We'll discuss that when Power Lunch returns. John Stewart's Apple TV show is ending over disagreements regarding potential show topics that included China. So says the New York Times. This is the latest example of a company and a CEO who finds themselves walking a very fine line in trying to continue doing business in China, staying on the right side of Xi Jinping. And it comes as Tim Cook is wrapping up, coincidentally, a trip there. Cook secured a commitment from a top technology minister that Apple can continue to participate in China's digital development, whatever that means. Here to discuss is Dennis Uncovic, partner at Meyer Unkavik and Scott and Steve Kovac. Steve, let's start with you. And how lightly Apple must tread around the Chinese leadership to continue to stay on their good side?

Incredibly lightly. And by the way, what we're seeing with this John Stewart show being canceled or unrenewed, whatever you want to call it, is not new to the Hollywood world. We've seen this so many times with Hollywood decisions about maybe a villain isn't of Chinese descent or something like that. So I just want to say that right up the gate. It's not just an Apple problem. But Apple does do a lot of business in China. And, you know, the first thing that came to my mind was 11 months ago, Tyler, when all those COVID shutdowns happened.

And it really ruined Apple's quarter, right? We saw these protests happen that workers at these Foxcon factories building iPhones, basically wanted to escape and get out. And then security forces came in. There was violence that happened. We didn't hear a peep from Apple other than they're monitoring the situation. Not even a bare bones. We denounce the violence. And I think that incident, more so than what we're talking about here with John Stewart,

really shows what's at risk for Apple and so many other companies how they have to appease the government. Is Apple, we've heard about the restrictions on the use of Apple products by Chinese government officials? Where does that stand? How big a threat is that to Apple? And what does Apple say about that? Nothing. Apple says nothing. First of all, at least publicly, they don't say anything. But second of all, it's not just threatening to ban iPhones.

It's also App Store licenses. You can't operate your App Store here, maybe, unless all the apps have certain approval. So we've seen a lot of concessions from Apple, even from stated values they have, like privacy and so forth, that they have to kind of wiggle around in order to operate under the law of China and do business there, again, because so much of their production is still tied up there. We know we've been talking for the last year about them trying to divert. supply chains and so forth, it's just not enough to really wean themselves off of China. And that is why they're in the predicament they are in.

So when a John Stewart wants to come out and do a tough story in China, or even, by the way, it wasn't just the China story he wanted to do. He wanted to do an AI story. And Apple, of course, is planning on doing some new AI stuff next year. And any kind of critical thing about their technology, not just their business in China, that seemed to rub them the wrong way, too. And it sounds like Stewart just walked away. It seems extremely heavy-handed, Dennis.

Do you think this, because John Stewart is such a popular person, would rise to the level that Apple experiences any bigger backlash about it or changes their policy on that front? Or just, what do you think about this business decision? Kelly, I think the problem is that 20% of the business that Apple does is with China. And so it's a strong economic incentive for them to only do, work that makes the Chinese happy. I think that's really unfortunate because I think that China will continue to put pressure on Apple because not only is it 20% of their market, but most of

their iPhones even now are still being made in China. Now, what Apple has done in the last couple of weeks, I'm sorry, months, they've started to move some of their manufacturing to India, but it's only a small percentage. So Apple may make. the mistake that I think a lot of companies do is the old joke is if you owe the bank money, the bank owns you. If there's too much money owed, it goes the other way. I think China is in the catbird seat, and I think that's a real problem for Apple. And soon they're going to have to make a decision on where they want to go. Surat, does it affect investment decisions? Because the stock is in the middle of a losing streak as well. So does the fact that they've now lost a

popular talent play into a reason for that, or does it pose any larger risks? I think the larger risk is, what does China do next? And, you know, they're caught as to what happens. So if China says, hey, we want more concessions, Apple really has nothing to bargain with because they're just moving their suppliers to India. They're starting to do things. The other part that Apple's going to face and all other manufacturers face is the costs of moving out of China are very high. And you've got a stock. like Apple, that everybody looks at margins all the time, right? We know the volume growth's not there. So just imagine if all of a sudden now margin growth is not there. And that's just not

Apple. It's a whole ecosystem of the chip companies and everybody else. So I think, you know, right now China's in control, but they're playing it so that it's more of a game of chess when everybody else is kind of playing checkers. Dennis, what are the other companies that are in an Apple-like predicament? Well, there's an interesting example if you go to Hong Kong. There was a man named Jimmy Lau. He had an Apple Daily newspaper, which was a very pro-democracy newspaper. It was shut down. Lowe's been in jail for a thousand days or more at this point. And his crime was to say that he thought that Hong Kong deserved to have a more democratic process. And so it even goes to a newspaper there in Hong Kong. And any other company that makes the mistake of having a

sole source supplier out of China, I think the board of directors or the C-suite people have got to look at themselves and say, are we in the right position? Because I think that's a mistake that Apple made 10 years ago, and there are a lot of other companies that have. A lot of the other companies with Big China exposure throughout, of course, are companies more like Starbucks or even, yum, you know, food products and consumer types of things, Nike even, which, yeah, the content and the expression part of Apple's business model now seems to put it more. squarely in a position where this could become an issue. So I don't know if you'd point to any others where this is a real potential risk.

Yeah, and I think where companies are selling into the Chinese consumer, that's going to be really hard. Because not only you're manufacturing there, but you're also doing it now. Tesla manufacturers there as well, right? So you've got that going as well. And then we've got the whole issue of cars coming from China that are competing with our cars and at what price. And then that goes to, hey, let's talk about commodities because now, you know, China just said,

We're not going to ship certain battery technology or commodity. So there's a whole game going on there. And I think the point is you just can't be too dependent on any sole supplier. But if you're going to be dependent on the Chinese, you really have to be strategic about it. What does, Steve, what does Apple ultimately do here? I mean, is this a 20% of their businesses in China? Up to, yeah, depending on the year. Depending on the year.

What happens over the long term, both in terms of manufacturing, revenues, etc.? Yeah, I wish I had a crystal ball. But I will tell you when this India conversation started around Apple, what Tim Cook said to myself and Jim Kramer when we talked to him about it, he said he sees India much the same way he saw China, you know, a decade plus ago when they really started ramping up manufacturing there and ramping up sales there. So maybe we see that and maybe we see this kind of like bifurcation of their supply chain and customer base grow there. So, you know, if unfortunately something really bad happens in China, if there's an attack on Taiwan and so forth, They can be kind of okay, but it's hard to game out. We talk about 20% of their sales are to China, but what percent of their supply chain comes from China? It's 85% or higher.

I don't even want to, yeah, I don't even want to guess. India is only in the realm of maybe 15% of the supply with everything that's done. That's another thing Apple has said, too. They like having China because just logistically getting parts from one place to another is easier when you're assembling it at those giant Foxcon, the iPhone City. that we saw this protests happen. All right, gentlemen, thank you very much. Dennis Unkovic. We appreciate it.

Steve Kovac. Thank you. And Sarat, always good to have you here. Stocks are ending the week on a down note with the Dow pacing for its fourth down week in five. We'll get Surat's parting thoughts on where we go from here when Power Lunch returns into. Welcome back. The S&P and NASDAQ are on pace to close out their worst week in a month, Sarat. It just feels a little relentless at this point. It is. And, you know, I'm always. glass half full, and I'm still invested. I'm not going to not...

It's totally full right now. It is full, right? But I do think that if you're going to put new capital to work, I think you can pick your spots. I think there are opportunities. We were talking about GLP1. They are consumer staple stocks that are going to have opportunities. We were talking about Lambesson before, or even a Pepsi that kind of sold off. I think you can look at health care stocks, and you can look at companies like Zimmer and

intuitive surgical that have sold off. These are just different trends that are going on within the market that are not being caused by the overall uncertainty. And then I think you can pick and choose, like some of the financial, some of the high quality of the JP Morgan's. I think, you know, Morgan Stanley got unfairly punished yesterday and the day before. So you can't put capital to work. But I do think given into Fridays, given the uncertainty that we have in Congress, given the

uncertainties that we have overseas, you should dip and nibble. And if you've got an allocation of fixed income, it looks really good now. Yeah. You know, very different from a couple of years ago when we were looking for 2% yields for people who had fixed income and you were kind of forcing money into stocks, I think the opportunity to be diversified is much greater now. Yeah, it's so interesting. For so many years, bonds were, and cash was trash.

And now that's not the case anymore. And that's not the case. And you have private credit and you have a few other things that you can do, that you can actually now be much more diversified. Are you bullish or bearish on private credit? I'm bearish at this point. Because I think individually you can do better stuff. I think private credit is trying to force a lot of capital into companies that don't want to go to the capital market.

So you have to be very careful about that. And the fees. The costs of them are very high. Great points. Sirrat, have a great weekend. Thank you. Doesn't look too good for golfing. I think we'll be inside.

Next time. All right, thanks for watching Power Lunch, everybody.