C (3:17)

I think that's right. I mean, if you take the kind of headline, the reporting at face value, a 33% reduction in metaverse expenses would be like an 8% lift to earnings. Now maybe, you know, maybe it's half that, maybe 15%. That's a 4% left. The question is how much of that gets reallocated into the investment. I think there's just a general concern that the Street OPEX numbers are still too low for, for matter, for 20, 26.

A (3:45)

So you think we're talking. I mean, that's why the stock is up. By trimming back on this unit, which was still posting tons of losses, the company will literally already become more profitable. Why not just axe the whole division at this point?

C (3:57)

Because I don't think Mark has kind of given up on it. I mean, look at the, the glasses. All that they've invested in that, right. That was, you know, they showed that that new live product, it's on sale. So listen, I think right now, you know, Mark is, or the company, right, is. Is being somewhat reactive to, you know, the stock. But I don't think you'll see a wholesale shutdown of the Metaverse. It's more of a will pare back. And then the question is how much of that cost savings falls to the bottom line versus go to support the initiatives.

A (4:31)

I know it's silly, Julia, but appearances do matter. You wonder if they would Ever change the name or the ticker again?

D (4:36)

Well, it's just been a couple of years since they've been called Better, so they might wait to see how this all goes. But I will point out that the Reality Labs division, which includes the Metaverse work, and that's Horizon World and all these other virtual reality worlds, as well as the hardware, we're talking about the. Those meta glasses that are made by Ray Ban, and then also the new Orion More augmented reality glasses. All of that is part of the Reality Labs division, which is originally established for the virtual reality Metaverse world. Now, if you look at the losses for that division, $4.4 billion in losses just in the. In the third quarter, the most recently reported quarter, that whole division has lost about $70 billion since the end of 2020. What's interesting here is that in the most recent earnings call, Mark Zuckerberg and CFO Susan Lee talked about how the hardware, specifically the Ray Ban glasses and the new Oakleys, were selling. Well, I think they're going to continue to invest in that hardware. I think Mark Zuckerberg really wants to own the devices within which we interact with their platforms as well as with AI. And I think that this virtual reality Metaverse world of Horizon, which is where they've been putting a lot of money, that's specifically the division where I think we'll really see them cut costs.

A (5:51)

Yeah. Because the thing about the glasses, which I've tried, I mean, they're, they're fun, they're somewhat useful. But, Julia, in my experience, it's mostly to listen to music and take videos, and none of that has anything to do with the Metaverse.

D (6:02)

Well, it really doesn't have to do with the Metaverse right now. And I think what we're seeing is that it really has to do with AI. Right. You can ask those glasses questions, and increasingly, as they invest in this next generation of augmented reality glasses, those are also about AI and the augmented reality content that you're going to be putting up, pulling up. There might be messages, it might be social media, but this idea that we're going to want to live in a Horizon world might have made a lot of sense in the wake of the pandemic, when everyone was living and working at home. But now, as people are more out and about those glasses in a way to interact with the world around you seem like a lot better place to put your money. And ultimately, this really is going to be all about the shift to AI, Right, Kelly? I mean, you're right. Instead of the Metaverse the future of computing is AI and Mark Zuckerberg has made such big bets there and in fact we've seen Meta stock lag so some of its tech giant peers because of the pace of investing in AI, we're seeing better increase spending on AI faster than its rate of revenue increase. And I think that discrepancy is really the cause for concern among investors recently. This news today that they're going to be pulling back on Metaverse spending. I think it's seen as a good sign that they're really going to be putting their money where the potential profits.

A (7:14)

Are on that quickly. Jason, Metta of course roared to all time highs and was one of the best performers kind of the earlier on in this cycle. But as that chart just showed, the stocks up only 8% over the past year while Google's up 81%. Do you have any concerns about what could be in store in 2026 for Metta as it continues to kind of lean into two I now I mean.

C (7:36)

We still think there's still risk the stock here to the downside, whereas for Alphabet we still think there's probably more, you call it like unknowns or risk to the upside. So you know, we would like, we think investors would be prudent to wait to get the 2026 expense guide because that could still come in still weigh on when we've EPS growing, you know, 2% this year organically or sorry, next year, you know, maybe again you'll get, you know, several points back with these Metaverse cutbacks. But it's still hard to argue how this is a 10% EPS growth company based on this level of spending as you look at 2026. So we would, we still prefer Alphabet or other names over matter here.

A (8:20)

Interesting point. All right, while you're both here, let's pivot and talk a little bit about Netflix. Another stock on the move as our David Faber is reporting that they're now the leading bidder for Warner Brothers discovery with an 85% cash bid. Could put the company into the movie studio business, but investors aren't loving it. Speaking of these corporate transitions like the metal one we were just discussing, Netflix shares guys are actually near an eight month low right now, Jason, so should they walk away?

C (8:45)

I mean historically this has been a build versus buy company. That's been the ethos. So this would be definitely a different direction for them. If you look at the finances of it, almost no matter what they pay at this point, I don't say no matter but you know, based on what People are talking about the ranges. It is financially accretive. Just because Netflix is so highly valued, kind of on a 25, 26 basis. What we don't know is really the long term strategic, you know, kind of value. The synergies, how much ip, new IP they can develop, money they would have saved, that they would have otherwise, let's say, given, you know, to other studios to make content for them. And then you have the whole regulatory review that will probably happen. So there's a lot to unpack here. But, you know, our sense is that the weakness in the stock is more from the unknown. I think if we had an announcement today, tomorrow, and the company could lay out the strategic vision, my sense is the stock would probably rally on that.

A (9:47)

Julia, what are you hearing?

D (9:49)

Well, I'm hearing that Netflix is very interested and many would say it is even more likely than Paramount Skydance, if not equal likelihood, is Paramount Skydance to be able to acquire Warner Brothers Discovery. Right now, I am hearing a lot of questions about the regulatory challenges, but Netflix would point out, as it has in the past when it's talked about the opportunity, that their share of overall viewing of streaming is relatively low if you take into consideration players such as YouTube. But one thing that I have to note is the reason why Netflix would benefit from owning Warner Brothers Discovery is because Netflix always has been build rather than buy. And Netflix does not have a big library, which Warner Brothers Discovery has one of the best libraries. And Warner Brothers Discovery also has very valuable ip. Think about the DC Comics characters and what they. Or Harry Potter and what that might mean to Netflix. So Netflix has always been making investments and been licensing content to compensate for its lack of library or preexisting ip. And this would solve for that.

A (10:52)

Right. But at the same time, the investors who presumably would know that and be the ones most excited about it, are the ones kind of backing off and acting a little tentative here.

D (10:59)

Yeah, I mean, Netflix has been very cautious about dipping its toe into the theatrical distribution market. But my understanding is if Netflix were to acquire Warner Brothers, both streaming and studios, they would be committed to doing theatrical releases. We've seen a very lumpy theatrical market right now. And the question that I'm hearing many ask, is if Netflix is valued like a tech company, if it's growing quickly, why does it need to get into this legacy entertainment business? Would that slow down its growth? And I think that's behind some of these concerns we're seeing in the market today.

A (11:30)

All right, so Jason, would you rather Metta or Netflix for 2026.

C (11:34)

We'd probably pick Netflix over matter here.

A (11:37)

Anything else in the media space excite you? Or is it a year of transition?

C (11:40)

We put out a piece earlier this week on Amazon. We think that if you kind of look at what they've laid out for compute, you know, the US numbers over the next two years could be too low by up to 20% from a revenue perspective. So that could get that stock rerated higher if investors got more confidence that the, the rollout of the capacity was more linear and not lumpy. So we like Amazon a lot here.

A (12:04)

So Netflix needs a cloud business, basically.

C (12:08)

I don't know about that. I mean you stick to, you stick to what you're good at. Yes, they are a big Amazon customer though, for what it's worth.

A (12:14)

There you go. And that's our common thread. Thank you guys for your time today. Really appreciate it. Jason Helstein and Julia Boorstin and Netta Metta, I should say may be scaling back on its Metaverse spending, but it's full steam ahead with Cape as you were just hearing about. And while my next guest is aware of concerns around the spend versus the returns, he's still bullish on investments, but has an AI hedging strategy as well. Let's bring in Drew Pettit. He's U.S. equity Strategist at Citi. Hedging in what sense? Drew, welcome.

B (12:43)

Yeah, it's funny, it's, it's not really about hedging as much as it is actually stock selecting with within AI. Everyone's always trying to find like an edge here. Could you trade this all as one big basket or not? Around the theme and to us, increasingly you can't. There's winners and losers. You see it in the Mag 7 and you see it more broadly in AI. So for us, focus on the companies that are getting the best cash returns for the growth capex they're spending and you want to be underweight. The names that might not be able to self fund.

A (13:14)

Can you give us. So you have an anti AI basket you say for, you know, those AI skeptics who are just looking to avoid, you know, those who are convinced this is a bubble and don't want anything to do with it. What did that basket look like?

B (13:29)

Yeah, it's funny, that's actually it looks something more like Menlo volume, like a more traditional low beta factor. But you want to look globally. It's living in the real world, more consumer staples, touch and feel types of businesses. That's how you kind of avoid AI. You Can't AI everything that we consume in real life. So if you're trying to stay away from that and if you're worried about a bubble just by the traditional businesses, you're simple, basic growers.

A (13:57)

Do you hear a lot of clients who are looking for that? How many would you say are generally looking for AI exposure if not leveraged or high beta? And how many are looking for something more defensive?

B (14:08)

I would say the defensive talk. Not really. If you're looking to, I would say diversify away from AI, People are looking for inflecting growth in cyclical trades to pair with AI. We actually like that strategy of buying beta. Just give me different types of beta, give me growth beta and give me cyclical beta together. And honestly, on the AI side, we still see more bulls out there, but some skeptics are showing up. Again, it might be more about stock picking and idiosyncrasies within AI for 2026 than it was in 24 and 25.

A (14:41)

We just showed a chart there of some of the names that you like, which include Eaton, for instance. These would be like at a reasonable price, but for that upside exposure, Amazon, Nvidia comes up AI at a reasonable price here. Uber, DoorDash, GoDaddy, Instacart, Pinterest, Metta as well.

B (14:56)

Yeah, it's not about P, it's about the growth trajectories and discounting that back. And look, honestly, you have someone like Nvidia trading at 30 times and you have some retailers out there trading at 40 times. So the growth trajectory near term, it makes a lot of sense for again, a high margin business that could see more margin expansion.

E (15:17)

All right.

A (15:17)

See everything that's winning basket. You said the industrials, right? Financials in there too.

B (15:23)

A little bit less exposure in the side, but in the cyclicals.

A (15:27)

Right.

B (15:27)

In that cyclical inflection, we do get a lot more of the financial names. There are some names there that I think stand out. And honestly, lower rates at the front end, steeper curve, all helps with that trade as well.

A (15:37)

All right, can you mention any of those names quickly before you go?

B (15:41)

You know, I'll step away from the financials, but I will say some of the tariff names like our X for example, moving past, I would say those concerns. CoStar. Yeah, CoStar CSGP. Really interesting name. Working past some of its headwinds and actually AI related headwinds to its business.

A (16:00)

Very interesting. Drew, thanks for bringing us the playbook on all of that. Appreciate it. Today.

A (16:05)

With Citi coming up, is this a bad sign for the economy or is Kroger just losing market share? The stock is down sharply after after they slash their guidance and will tell you who the real culprit might be. Plus, the White House is banking on the next Fed chair to lower rates and treasury yields. But one firm isn't buying it. They join us to explain why rates could actually go higher next year after this.

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This is the exchange on cnbc.

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Go to Strawberry Me Coaching and get 50% off your first coaching session. That's Strawberry Me Coaching. Kroger is down 4% today after the company lowered its profit guidance, saying consumers are making smaller trips and cutting back on discretionary spending at the same time, the two leading dollar stores are doing better than expected. They both raised Q3 estimates and their forecasts, noting an increase in shoppers across all income brackets markets. It's a sign that consumers remain extremely price conscious after years of inflation. And speaking of which, look at that number on your screen there. The big box discount leader Walmart has just seen its market cap surpass $900 billion for the first time. For more, let's bring In Jihan Ma, senior analyst at Bernstein. Jihan, it's great to have you here. And what do you think is going on with Kroger today? Is it that the dollar stores are taking share?

E (18:56)

Well, I think there's some grocery specific weakness we're seeing in there. But the dollar stores are broadly speaking having a great year. Right. They are benefiting from some unique macro tailwinds, including middle to high income consumers trading down, including for the more discretionary dollar stores. Also Teemu's pullback, the tariff driven price increases met with fairly benign elasticity, which the grocery space doesn't quite benefit as much from. So you're seeing some of that divergence playing out today. Macro driven, partly company specifics, I think that exactly right.

A (19:30)

Obviously there's a lot of shoppers who still have sticker shock when they go into the grocery store and Kroger is not known for being the low price leader. So it would make sense to me that if you're a Wal Mart, a Dollar general, anybody who still has that value, the offering, that that's where the shopper wants to go. So what should Kroger do here?

E (19:48)

Well, first of all, I don't, I don't cover Kroger myself, but I would say the grocery space in general is pretty tough when you've got £800 Gorilla Wal Mart in the space. Right. They're doing everything right on store, but also omnichannel grocery. So I mean Kroger of course tried to combine with Albertson back in the days to try to gain more price advantage that didn't go through. So scale is going to be a structural challenge in that sense. I also think to do E commerce and E grocery well, you need a lot of scale as well, which again benefits Wal Mart. To your point, that's how Wal Mart is reaching record highs.

A (20:24)

And we're coming off a tough couple of years for the dollar stores, but all of a sudden they're finding their footing. What explains this change here? And the stocks are really doing as well now once again as they used to do back 2010.

A (20:35)

Not quite back.

E (20:36)

Yet at their all time high levels. If you look at specifically the stock got more than halfed over the past couple of years and finally bouncing back from the trough. Dollar Tree is also a bit of a different story because they finally got rid of Family Dollar and now this is on a standalone basis and the focus is much more on what the Dollar Tree banner is able to do without the Family Dollar noise. So for both, I would largely categorize this whole situation as there's some macro T. But of course there's also a lot of company specific turnarounds, strategy changes going on between the two. As you can see I prefer Dollar General over Dollar Tree I think is more of a self help story. Dollar Tree may have benefited more from the macro tailwinds and we'll see what next year brings.

A (21:23)

Finally on five below it's pretty interesting they're only up the last check a percent or two despite turning at a 14% comp. So is that just because it was already such a popular name?

E (21:33)

I think the Q3 comp beat against sell side consensus estimates was already pretty well expected going into the quarter. I think Oise as I mentioned in my Note yesterday on Q4 and next year they did guide to a sequential deceleration in Q4 we'll see if there is a level of conservatism or if there's actually a level of deceleration and then the big question is how do you lap that comp next year when they have done basically 3/4 of almost double digit comp wow for the first 3/4 of the year and there's a lot of ups and downs potential risks to next year's numbers and as you.

A (22:12)

Point out they've had a lot of kind of one off helps this year. They've had price hikes a Temu's pullback in the U.S. we keep forgetting about that the Labubu craze which I still don't know much about but they're going to have to repeat a lot of.

E (22:22)

Those positives right or not as those dissipate next year. And I think for some of the dollar stores the trade down benefit this year from the middle to high income consum. We'll see if that holds next year. We'll see if they can how much of the share gains they can hold on to especially as the middle to high income consumers get some incremental tax refunds early next year. And is that enough of a relief for people to not having to trade down to dollar stores as much? What does that do to the tough comparisons they have to face this year? So those are all medium to longer term questions we're watching out for.

A (22:55)

All right Jihan, it's great to have you on today. Appreciate your thoughts. Thank you Jihan Ma with Bernstein coming up, despite falling yields and lower mortgage rates, it's been a choppy year for the homebuilders and JP Morgan warns that could continue into next year. But there is one name the firm is turning bullish on upgrading it to overweight. You're looking at it our mystery chart today and we'll reveal it ahead.

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A (24:49)

Welcome back. Let's get you a check on the markets at nearly half past the hour. The major average is still pretty much in a holding pattern, but the Russell 2000 is on track for a new record closing high. Believe it or not today, and it's nearing October's all time intraday high, it's outpacing the rest of the major averages this week. It's up more than 1% since Monday. While the S and P is actually negative elsewhere, lots of the bank stocks are hitting new all time highs today as well, and that includes Goldman Morgan, Goldman Stanley, Wells Fargo, BNY Mellon. In fact, Goldman and BNY Mellon are tracking for their second straight annual gains of more than 40%.

G (25:24)

Wow.

A (25:25)

Let's get to Bertha Coombs now for the CNBC News update. Bertha Kelly, Attorney General Pam Bondi and FBI Director Kash Patel are expecting any moment to address the arrest today of the suspect in the 2021 pipe bombs planted near the Republican and Democratic National Party headquarters the night before January 6th. The devices did not detonate. Two senior law enforcement officers tell NBC News the suspect is Brian Cole from Virginia who was arrested earlier this morning. He's expected to make an initial court appearance later today. Senate Minority Leader Chuck Schumer said today that Democrats will force a vote next week to extend the expiring Affordable Care act tax credit for three years. But the legislation all but guaranteed to fail. As many Republican senators argue, the credits were meant to be temporary during the pandemic and are no longer necessary. Both Canadian Prime Minister Mark Carney and Mexican President Claudia Sheinbaum have confirmed they will meet with President Trump tomorrow ahead of the World cup soccer draw. The meeting comes amid ongoing trade negotiations with U.S. neighbors to the north and the south. This will be President Trump's first in person meeting with Sheinbaum. Kelly. All right, Bertha, thank you very much. Sticking with the news, you're also looking at a live shot of a union Starbucks baristas rally, the latest escalation in the so called Red cup rebellion. This is outside the company's New York City headquarters, which are in the Empire State Building. According to the union, 3,000 workers from 145 stores across 105 cities are now participating in this ongoing strike which is about in its third week. 55 stores have been closed due to strike activity as of last week. Starbucks shares for their part down about 2% today, interestingly, had a strong November, up about 7% over the past month. And here's the strike latest as it carries on again. It began on Red cup Day on November 13th. Still ahead, we won't get the November jobs report until Tuesday the 16th, but we do have weekly jobless claims and it's giving some reason to be optimistic. We'll tell you why. And look at some other private data to help paint a bigger picture on what's going on with the labor market. That's next.

A (27:42)

Weekly jobless claims falling to their lowest level in more than three years. That's usually a bullish sign, but both of my next guests see signs of weakness in the labor market. Challenger Gray and Christmas reporting job cuts are up 24% from this time last year. While Revelio Labs, an HR database company, says November delivered, quote, a global hiring pullback with no region untouched. Joining us to break down these numbers ahead of next week's Fed meeting Andy Challenger is SVP at Challenger Gray and Christmas. And Evan Sohn is a managing director at Revelio Labs. It's great to have you guys both here. Andy, you first. Is this a labor market that is still resetting from COVID and trying to right size or one that tells you that we should be worried about an economic, economic slowdown?

G (28:22)

Well, that's the big question. We've been seeing a lot of layoff announcements throughout this year and last year. A lot of that we can attribute to a correction from an enormous amount of over hiring that happened in 22 and 23 during this great labor shortage that we saw in the American economy. However, we are seeing this month a slight downtick in the number of layoffs that we saw last month. That's a good, good thing. Last month we saw a real spike. That was worrisome. However, overall, and every single month is, it's a pretty volatile number. So when we look at the overall year, we're up over a million job cuts tracked from US employers. And that's something we've only actually seen three, six times since 1993, the 33 years that we've been tracking this.

A (29:16)

And so normally you'd say that's an obvious sign that the economy is weakening, Andy. But how many jobs were added during the COVID period? Period?

G (29:23)

A lot of jobs were added during the COVID period. And we've been coming down from those highs in particular sectors that likely overhired technology in housing related industries and in health care. But we continue to see job cuts mounting in technology, in retail and in warehousing. And those are good areas to start to see those cuts coming and could be a sign that we're not just correcting anymore.

F (29:53)

And.

G (29:54)

And we are digging into real damage in the US labor market.

A (29:59)

That's good to know, important to know. Evan, would you say you're seeing the same kinds of trends?

G (30:05)

Yeah, absolutely. And by the way, welcome back. I certainly missed you, as did everybody. So nice to have you back.

A (30:11)

Thank you.

G (30:13)

Yes. You know, we talked about a couple of months ago purposeful hiring, so very, very target hiring. And you could see that with like the AI jobs, like everything is bad and job openings are down across all sectors, but the actual percentage of AI jobs actually went up a little bit. So even though it's down, it still went up. And that really tells you that it's really just restructuring the way people are actually hiring out with the folks that are less essential, if you will. And you know, use the word of COVID Let's use that word again and get very, very purposeful in the actual hiring of themselves, of what they're actually hiring. And really interesting, you know, two of the biggest companies that showed the negative and Revelio Labs in our, in our rpls, which is our.

G (31:01)

BLS report like that came out this morning, really talked about a decline of 9,000 jobs in November. And in the sector of, of retail, of hospitality, it was Starbucks and McDonald's that actually were two of the biggest companies that served really in the, in the, in the labor loss there. Wow, really interesting to see those two stories together.

A (31:24)

Should we expect more? You know, ADP obviously showed a decline, but both these data series then the Labor Department are quite volatile. Evan, do you think we're going to see more overall shedding of jobs in the US Economy, or is that process, you know, approaching its end? Should we expect more positive reports next year?

G (31:42)

I'm not, I don't think so. I think that it's really nice to see the challenger report that the actual announcements of layoffs have ticked down a little bit. So that's actually very good. But we're certainly at a freezing point. It's really like a hiring freeze, clearly waiting for whether there's going to be a rate cut and what does 26 look like and how do we start thinking about 26. And the question really is, you know, used to be that productivity and people sort of lined up together and now with AI and focus AI hiring, I don't need more people to get more productive, I need better trained people, etc. And I think that's going to be something that's going to be a very serious topic of discussion throughout 26.

A (32:26)

All right, gentlemen, for now, we'll leave it there. Appreciate it. Evan Sohn and Andy Challenger today. Jobs, of course, are a key consideration for the fed as we're six days away from their final rate decision of 25 and the first of the last four meetings of Jay Powell's tenure as Fed chair. Quarter point cut is basically baked in as far as the market's concerned. And the topic of Powell's successor is increasingly a thorny one and a big topic for the administration. Eamon Javors has the latest from the White House. Eamon?

G (32:52)

Hey there, Kelly.

F (32:52)

Yeah, lots of scuttlebutt in D.C. about this and I think if you ask the White House, what they would say is that we are all making too much of this. Going back to President Trump's comment on Sunday where he said he had picked a candidate but wouldn't announce somebody. And then the president has also said that he won't announce that candidate until early in 2026. Nonetheless, the sort of fever swamp of speculation is happening right now. And I would say, Kelly, that the odds here are very much in favor of Kevin Hassett, the National Economic Council director. That's sort of the conventional wisdom. But there is this sort of boomlet of talk that you saw reflected in the New York Times this morning about the idea of the president somehow being able to talk Scott Besant, the Treasury secretary, into taking over as Fed chair, even though Bessen has said he wants to stay at treasury, he likes that job, doesn't want to leave. And Bessen himself is of course running the search for the new next Fed chair. So lots of speculation, not a whole lot of information here in Washington.

A (33:51)

Do you think he'll be pushed to take the job? Besson it's such a unique dynamic.

F (33:57)

So, you know, we're leaving the realm of reported fact and entering the realm of speculation here. But, but so just put a pin on that idea. But it does feel like if the President ordered Besant to take Fed the Fed chair job, he might. And then there's been this sort of weird idea out there that the President could pick somebody to serve as Treasury Secretary and Fed Chair at the same time. Now, that would be, you know, enormously unprecedented, you know, hugely eyebrow raising to say the least, and an area of concern for people who are, you know, die hard believers in the idea of Fed independence. But I think we're in a realm, you know, this administration does not sort of respect some of the sort of traditional norms and guidelines of previous administrations. And so I think, you know, there's a chance they might consider something like that. Whether it's politically viable or not is an entirely different question.

A (34:49)

Right. I think everyone expects at this point Besant to stay put. But if he were to leave Eamon, is there any talk about who would replace him?

F (34:57)

No, not yet. I mean, Bessen seems to be one of the officials in this administration that the President respects the most. He has notably given Bessen some criticism in recent weeks over the issue of the Fed. He said, you know, I like everything that Bessen has done except for the way he's handled the Fed. That is that Bessen seems to be the figure that is arguing to President Trump, let's not fire, let's not try to fire Jay Powell the at the Fed. Let's go through regular order here, have this very public interview process which they have been doing until recently and go through a process of selecting the next Fed chair that's not sort of chaotic and unusual and doesn't spring a big monster unexpected surprise on markets which could act adversely to that.

A (35:41)

Right.

F (35:41)

Or react adversely to that.

A (35:43)

Fascinating. Amen. Thanks for now. We appreciate it. Amen. Javers, our next guest, expects the 10 year yield to hold steady if Hassett, Kevin Hassett does become the Fed chair, but he's got five other reasons why he thinks yields could hold steady and not necessarily fall from here. Tobin Marcus is head of US Policy and politics at Wolf. Tobin, welcome. Dive right in here. You're not as dovish as a lot of other people, it sounds like.

G (36:05)

Kelly, welcome back and thanks for having me. So, you know, look, I think that from our conversations with investors, views are divided here. Some people think the 10 year will trend down a bit. Something a little trend up a bit.

E (36:14)

It.

G (36:15)

So I don't think we're way out of consensus, but we certainly don't think that it's headed durably down. You know, I think has it coming in as Fed chair, you know, he's going to be presiding over a divided fomc. I don't think he's necessarily going to be able to drag the rest of the committee along with him. Even if we are going to get some meaningful cuts at the front end, which we, you know, we fully expect, as is currently priced, that we'll see some cuts next year that's not necessarily going to bring down the long end of the yield curve. And then, you know, when we look outside of the Fed, we have an economy we think will reaccelerate with some fiscal stimulus coming from the tax cuts in the reconciliation bill. We have very high deficits that we think are poised to rise further. And then when we look at the term structure of treasury issuance, you know, we've continued to have treasury issuance concentrated at the front end of the curve. If that ever changes, either as a result of an intentional move by Secretary Besson to term out the debt or, you know, just based on the market kind of having taken as much bill issuance as it can, you know, that would tend to put some further upward pressure on the long end. So I think that's going to tend to keep us in a pretty range bound space on the long end of the yield curve.

A (37:17)

Two areas of pushback maybe. One is you say deficits will rise next year. The deficit this year I thought was already down about 20%. Is that right?

G (37:27)

Well, the deficit this year officially ticked down very slightly to just below $1.8 trillion, we have it going back up to around $1.94 trillion next year. But it was understated this year in the official reckoning because the student loan reforms that were in the reconciliation bill, essentially the entire lifetime net present value of those changes is scored as a reduction of outlays in year one. So the sort of officially stated deficit this year is a little bit artificially depressed, but one way or another it does go further up from here in, in our reckoning in the treasury survey of primary dealers. So I think that's a pretty solid expectation. We're not on any kind of glide path down.

A (38:05)

Right. Hoping we were. The other question, and one that I hear from some sort of fixed income traders, is this idea that one way or the other in this musical chairs, no matter who exactly is running the Fed and who exactly is running treasury, could the Fed look to do something again that would more clearly or the treasury look to suppress 10 year yields through something like another twist or what have you? Could we see a joint effort to lower yields, whatever exact form that might take?

G (38:35)

Yeah, that speculation is absolutely out there in the marketplace. I think it's clear that the President wants to make that happen and so market participants are looking for ways that he could make that happen. From my point of view, I just don't think the support for that exists in the fomc. If you had a unified fomc, that all that, that was desirable, it's totally conceivable that that could happen. And if for some reason we see, you know, a materially weakening, weakening of the economy, you know, we're heading into a recession, then I think both fiscal stimulus in terms of these $2,000 tariff refunds and that kind of monetary intervention become plausible. But, you know, as we're currently looking at the economic outlook, I just don't think that that's in the offing. And for what it's worth, Secretary Benson has been very critical of the overuse of tools like QE without sort of thorough understanding of the transmission mechanisms from the Fed. So that'd be a little bit of a whiplash there.

A (39:21)

That was for the past Fed. Okay, this is a, this is now it's different. He's in charge. No, I was getting for the 3.5% 10 year. Tobin. So now you're giving me some pause, making me think again. Go into our home builder discussion later. Appreciate you joining us, Tobin Marcus with Wolf. Coming up, a last look at our mystery chart. It's a homebuilder of 13% this year. There could be more room to run, says JP Morgan, even if the current housing headwinds persist. We will reveal it next.

A (39:50)

It's been a bumpy year for the homebuilders with the ITB only up about a percent this year compared to a 16% gain on the S and P. As for the individual names, Pulte is actually outperforming with TOLL Brothers and Dr. Horton not far behind. Although Lennar shares are lower by a half percent, about a percent or so since Jan. And my next guest expects this disparity to push into 2026 as we see both supply and demand challenges. He's upgrading Toll and downgrading Lennar this morning. Here to discuss is Michael Reheart. He's the builders and building products analyst at JP Morgan. Michael, welcome. So it's weird, you'd think just on paper, if the 10 year goes from 4.8 to 4% in the course of the year as it kind of has, that the builders will be doing better.

H (40:30)

Yeah, thanks for having me, Kelly. I think really, and we've seen this more recently with the rally in the builders over the last few weeks, you know, there's a lot of investor excitement around what the Fed might do, but the long end of the curve has remained somewhat stubborn and I think more so to that, even if there's been some relief in the 10 year treasury and the 30 year fixed mortgage percentage, similar to what we saw during July and August, demand was kind of stubbornly stuck because of affordability challenges as well as the fact that a lot of builders already offered below rate mortgages to begin with. So the builders kind of pulled back following that July August rally when demand really ultimately didn't materialize.

A (41:25)

Yeah. So your name, remind me again, who do you like for next year?

H (41:30)

So you know, our favorite names are Pulte. And now we upgraded Toll Brothers, as you mentioned, to overweight. You know, we've gotten some questions today of the fact that these are two builders that are more focused on the margin on the move up segment rather than the first time buyer. But the commonality between both of these names that we actually take more of an athematic approach as it relates to our stock selection. So we don't figure, you know, focus on just one factor. We look at valuation, we look at relative fundamentals and margins and returns. Both Pulte and Toll Brothers are at discounts to their larger cap peers, yet have solidly above average margins in return on equity. And so that therefore we feel those names are mispriced and represent an opportunity.

A (42:20)

Toll was our mystery chart. And then who would be kind of further down the list where you think, you know, there might be, might be more challenges lying ahead.

H (42:28)

Right. So on the flip side, we did downgrade Lennar to underweight. And on the larger cap part of our coverage, that joins Dr. Horton also as an underweight rated name. These two names trade at premiums to in some sense in line, you know, on a price to book closer to in line, yet generate below average margins and returns. And so therefore, you know, we do feel they're expensive relative to the rest of the group. I think, you know, ultimately some of that is reflected in the fact that a lot of investors at points get more attracted to the entry level builders. They feel that, you know, to the extent that rates come down right, that, that that segment will benefit more, which is generally true. But I think it's, it's more than reflected in the valuation. And you have again, nice opportunities with some of the other names.

A (43:22)

No, it's a great point. You can't just kind of go with a theme and say, obviously it's not that simple and the market is agreeing with you today, a lot of those names are trading lower. Do you have a view on the evolution of rates? I know it's a hard thing to ask and maybe from the builder's point of view they'd love to not have to worry so much about it. But for instance, the 10 year mortgage, were it to go below 6, I have to imagine that'd be a big deal. If it stays at these levels, maybe affordability, they had an edge there for a while. It sounds like they don't really have that edge anymore. So what's the hang up you think?

H (43:52)

Right, so I mean, I think there's a couple of things going on. I don't try and be a rate rate strategist. We leverage our top ranked rate strategy team at JP Morgan and before I come out with outlooks, I always check in with, with that team led by Jay Barry. You know, they're expecting the 10 year treasury to actually rise over the next 12 months to 4 and 4.35%, 2530 bips from here. And that's with.

H (44:25)

Another two cuts by the Fed. One in December, one in January. The market, interestingly enough, according to the team, is already discounting 90 bips of further Fed easing. So what we've seen over the past year or two is whenever there's been a rate cut, More often the 10 year treasury holds or rises than not. So that's part of our Outlook piece and saying that we don't necessarily think rates are going to be as much of a tailwind. Another bullish argument has been, and we've used this as well, when we were more positive, we turned negative at the beginning of last year. But there's a very widespread or has been for a period of time between the 30 year fixed mortgage mortgage and the 10 year treasury. Typically the spread is around 170, 180 bips.

A (45:20)

Right.

H (45:20)

It got up to 300. And the argument was as the mortgage rate, there's room for mortgage rates to come down even more than potentially the ten year Treasury. Well, at this point that's played out largely the spread is only 210 basis points.

A (45:36)

Right? Exactly. And yet we sit at levels that we Michael, Michael, it's great stuff. Appreciate you joining us to unpack it all. Some of the challenges Michael rehears at JP Morgan coming up, Alphabet shares are up 14% over the past month while the Mag 7 is largely flat. We'll dig in to Google's latest splashy AI move next.

A (45:58)

One of the biggest names in AI coding or Vibe Coding, Deirdre Bosa has more in Tech Check. It's like open AI these days, Deirdre. I turn around, they're making another splashy move. The stock's up.

B (46:10)

Yep.

D (46:10)

And Replit, speaking of Vibe coding, it is the $3 billion darling in the space.

A (46:14)

It lets non software engineers like hobbyists or marketing employees or your elementary grade kid simply tell AI what it wants and the AI builds the final app or product for you. Now it differs from some of the other players in this space like Cursor in that its funnel is very broad and that is what this expanded partnership is about. I talked exclusively to Google Cloud President.

D (46:35)

Matt Renner and Repl.CEO Amjad Massage.

C (46:39)

With Replit.

B (46:40)

Now anyone in the organization, we see people from hr, sales, marketing, everyone spinning up their own internal tools and we actually integrate with BigQuery, we integrate with Databricks with Snowflake. So people are building on top of.

G (46:52)

Their existing data platforms.

B (46:55)

And so that's automations, agents, data applications. And so everyone in the organization is becoming a programmer.

G (47:02)

When I look at Replit, that sets.

A (47:03)

It apart is the history you've had together and frankly the dedication to Google.

F (47:07)

Cloud relative to as their primary cloud. So we have a very consistent strategy.

G (47:13)

Which is we're going to provide products. Right. And to your earlier example of aws.

A (47:18)

Yes they provide optionality but they're not.

G (47:20)

Providing the first party products.

A (47:22)

Right. So we're going to provide both at all levels.

A (47:27)

So both of them, they see vibe coding or AI first coding moving to the enterprise. The reason this deal makes sense right now, by the way, Kelly, I did.

D (47:35)

Ask Renner why this deal didn't come.

A (47:36)

With an investment like a stake in.

D (47:38)

Replit, like many of the deals in.

A (47:39)

AI do right now. Mossad said they're not raising capital, they don't need it right now. He is my hero doing that interview in the back of the moving car. Deirdre, thanks very much, Deirdre. Bossa Power lynch is next.

A (47:52)

You've been listening to the Exchange. Make sure you're subscribed to get each episode every day, same time, same place. A rich life isn't a straight line to a destination on the horizon.

E (48:04)

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A (48:16)

And downs, you can count on Edward.

E (48:18)

Jones to help guide you through it all. Because life is a winding path made.

A (48:23)

Rich by the people you walk it with. Let's find your rich together. Edward Jones Member, SIPC.