Dominick Cheung (3:36)

Yes. So Stacey, I mean, one of the big drivers here in this whole AI trade has all been about how much better you can make your outlook than what Wall street is expecting right now. We've seen some mega cap stocks, hyperscaler type names, not perform as well post earnings because even though the numbers are strong, they're just not strong enough to sustain the kind of rallies that we've seen. To your point, AMD is different. Data centers are now driving the growth here at amd. Just how much can AMD really capitalize on this idea that some of these larger scale customers are looking for supply chain diversification away from the big name, like in video.

Stacey Rasgun (4:16)

Yeah. And to be honest, they don't need a lot on a share basis. So like the, the dumb bull case, long term is pretty simple. They go from being a marginal player in AI on the GPU side to a slightly less marginal player in AI. You know, you go from, you know, whatever there is, 4% market share to 10, 11, 12% in a market that's growing to a trillion dollars plus. And it's again, it's not an implausible kind of thing to think about. And they don't need a lot of market share. They don't need to take a lot of market share to get numbers that are big given the size of the market. Now you layer on the CPU side as well. And they're one of the few, few companies like that. They'd actually have both sides of that. They have CPU and gpu. Intel, for example, you maybe has the CPU side of AMD's. Products are better. They don't really have a GPU piece. Nvidia actually has both by the way. They've got GPUs. They, they also, people are starting to recognize, you remember today that they sell CPUs as well. But AMD has this sort of like on the GPU side, there's a share gain story. They don't need to take a lot, but they can take a little bit and have it be material. And they're probably sort of like very well positioned on the CPU side as well. They've kind of got all the pieces right now to sort of fit into this narrative that is driving the whole space.

Dominick Cheung (5:24)

That whole space is being driven in part by those expectations around AI. But there's also a fundamental case from a valuation standpoint. We just showed amd. You said there's upside left to go. This is also a stock that trades at roughly 50 plus times next year's expected earnings. Results in video, by contrast, trades at less than half of that forward multiple. I can just check around 25, 26 times. So at what point do investors and traders reconcile the massive valuation gains we've seen against what the potential could be to realize those gains?

Stacey Rasgun (5:56)

Yeah, I'd say for AMD, if you're looking at 50 times, that's probably next 12 months. That includes a big ramp in 26. If you're looking at 27, you know, we're close to $15 for 14 and change for 27. I'm not sure where the, where the rest of the street is ending up yet, but it's probably, it's not 50 times but, but it's higher than Nvidia. I like Nvidia too. Right. Nvidia is probably cheaper than it looks because like numbers probably do have room to come up. And this is, it's another thing that I've liked. Nvidia actually is, is very cheap and they are the incumbent. And look, and it's one, by the way, that has been, it hasn't participated in the rally that we've seen in other names So I actually do think there's a catch up. There's been this broader, interesting dynamic going on in AI by the way, which is AI has been dragging along everything in the space one by one. Different end markets sort of been hitting their limit in terms of constraints. And you know, we've gone from accelerators being the constraint to memory, to semi cap to optical, the power semis now, now to CPUs. And all of the constraint names have been running whereas the AI compute, the Nvidias of the world have been a little more stagnant and it opens up this sort of interesting dichotomy because one of them is wrong. Nvidia should absolutely be benefiting from the trends. And if, if, if they don't benefit, I would say the other names that have been running are not going to be able to meet the expectations that are in those stocks. But my guess is that normalizes one way or the other at some point. And I actually do believe there's a real opportunity for Nvidia as well, given where they're positioned and given the valuation of the stock.

Dominick Cheung (7:28)

Longer conversation, but one quick question before we let you go here, Stacy. We just showed a chart of the iShares SOXX Semiconductor Index ETF since the lows that we saw back on March 30, let's call it, this has been an absolute rocket ship to the upside. How comfortable are you with your coverage universe given that on an index level, yes, they're driven by just a handful of names, but on an index level it just seems like there's just unabashed buying of anything that's semi.

Stacey Rasgun (7:58)

It's not just a handful of names. Like everything has been working right. And so we've had the names running on the secular story, we've had the analog names running on cyclical recovery. And they're also trying to construct datacenter stories for themselves. Like on the analog side, the data center is smaller, boring. In the middle of an industrial cyclical recovery, which is driving those, I mean even, even names like Qualcomm which have, which have been death like for a long time. We're now starting to work on some of these drivers. So pretty much you could have owned any as maybe that's what the index is showing. You could have owned anything in semis actually over the last certainly year to date. You would, you would have been, you would have been just fine. You know, the question always comes down to like, you know, is this time, is it different? Like are we at a peak or are we not? And I'm always loath to say this time is different, you know, but at the same time, I would also say I've been doing this job almost 20 years. I've been hearing the word supercycle ever since I started. I suspect this is the actual first legitimate super cycle that I've ever seen in 20 years. It's a demand driven cycle broadly. It's not like a, you know, like Covid was like supply chain whipsaws.

Dominick Cheung (9:00)

Right.

Stacey Rasgun (9:01)

This is actually demand, as long as demand is pushing forward like this probably continues. And as of right now, demand is not really showing any signs of slowing down. So until that happens, this can probably still work. And my guess is numbers in general and hope probably the stocks too are probably going higher.

Dominick Cheung (9:16)

Different, different outcome when that super cycle word gets used in commodity markets. Anyway, Stacey, thank you very. We appreciate. We'll see you soon, sir. All right. And a quick program, you know, here, don't miss the CEOs of Corning and Nvidia, both of them. Wendell Weeks, Jensen Huang on Mad Money with Jim Cramer tomorrow night on this new long term partnership that they've inked here. Must watch conversation with Jim Cramer on Mad Money. Turning out of the broader market, stocks are climbing with the S and p, NASDAQ and Russell 2000 small caps all hitting record levels today. This says the US And Iran are reportedly nearing an agreement to end the war. Megan Casella is at the White House with the latest. And just how optimistic are people getting?

Megan Casella (9:58)

A little bit optimistic, still a little bit hesitant as well, I'd say. Iran's Foreign Ministry says It's evaluating a 14 point peace proposal from the United States. Now that plan reportedly would center on a one page memo to end the war and then 30 days of negotiations on sticker, stickier issues including Iran's nuclear program. So the president this morning confirming some of what's in this proposal. He told PBS News that Iran would export its highly enriched uranium to the U.S. that's something that has been a red line for Tehran in the past. Trump also said Iran would agree not to operate its underground facilities and would operate in goodwill for a long period of time. So no specific timeline included there. Now some reports say the proposal would also include a reopening of the Strait of Hormuz and that the US in exchange would lift sanctions and release billions of dollars in frozen Iranian funds. We do not though yet have any confirmation from the White House on those details. But a few things to note here about all of this. First, crucially, the Iranians have not yet agreed to any of it. And it's far from clear whether they would change their previous hardline rejections, especially on things like exporting highly enriched uranium, in order to make it happen. So that goes to one side of your original question about how much optimism to have. That said, it does seem, though, like the White House is warming to this idea of phased negotiations. That idea would reopen the strait and and then leave the nuclear issues for later. The Trump administration had rejected that sort of approach in the past, as recently as just last week. But if they're up for it now, then, Don, we could be that much closer to a deal.

Dominick Cheung (11:26)

Meghan the president himself took to Truth Social, saying that if something doesn't get reached that the bombing would be even worse than it was this last go around. What exactly is the feeling inside the White House about whether or not this is something that we truly want to get done or whether or not this is a president that's willing to do more bombing than there was in the past?

Megan Casella (11:48)

It's such a good question, and it's something we've been trying to figure out this week as we've heard from a number of administration officials just over the last 24 or 36 hours on this. What's clear is that they're not completely removing the threat. The president, as you said, continues to say if they don't agree to this, then we bomb. He even just a few minutes ago, he's speaking right now inside the White House, said that, you know, if, if they don't agree to this now, will will return to our old ways. And then he thinks they'd agree to it in short order after the military operations resume. But what seems like it's happening is that the administration really isn't eager to restart military operations. We heard yesterday from the chairman of the Joint Chiefs on a number of Iranian attacks that have taken place since the cease fire began just a little under a month ago. But he says none of those yet rise to the threshold of restarting the war. Pete Hegseth was very clear that the cease fire was still in place. Marco Rubio was very clear that they thought they had already achieved the objectives of what they're calling Operation Epic Fury, which is the war itself. So all of them sort of leaning away from this idea of further escalation. They're not, as you point out, completely removing the threat. But so far, if none of what we've seen so far has amounted to a violation of the cease fire, it's really not clear what would amount to it. And it seems like the bar for that is getting higher.

Dominick Cheung (12:58)

Headlines still driving the markets. Megan Casella in Washington with the latest there on Iran. Thank you very much for that. Now those headlines are pressuring oil prices. With US Benchmark West Texas Intermediate crude down sharply, although well off its morning lows. Pippa Stevens has a closer look at the price action within that oil complex. Pippa.

Megan Casella (13:14)

Hey, Dom.

Pippa Stevens (13:14)

So WTI did hit a low of 8,866 earlier in the session, but looks

Megan Casella (13:19)

a bit like a little bit of

Pippa Stevens (13:20)

a knee jerk reaction here given that we're now trading right around 9495, I should say 50 on WTI. We've seen time and again that oil reacts to these headlines around perceived escalation, de escalation. But as Rystad put it, the physical market does not run on political timelines. It will take weeks for any type of flow normalization out of Hormuz. Now, we did just get the latest inventory report that showed US energy exports declined a bit last week to 12.97 million barrels per day. But take a look at product exports because that hit a record 8.22 million barrels per day. Gasoline inventories in the US are now at the lowest level for this time of year since 2014. That is according to ING. Now there is understandably a lot of focus on the front month oil contract, but we are seeing the curve pick up and that's thanks to inventory depletion. So as this chart from JP Morgan shows, at the beginning of the war, global stockpiles were at a healthy level around that 8.4 billion barrel level. But that is now being drawn down. And the firm said that only about 800 million of those barrels are realistically available without pushing the system into operational stretch, which would happen by June if stocks do continue to draw. So what that means is that if and when flows through Hormuz normalize, those inventories will need to be refilled. And so Dom, that raises the curve looking out.

Dominick Cheung (14:45)

All right, so here's my question as well. There's been a lot more conversation now. I mean, there has been throughout the course of the war and the conflict in the Middle east about just how indicative prices that we're seeing in the futures markets really are, indicative of how hard it is to get oil in the physical markets right now. Effectively, those prices that we see on the screen are not what are being transacted at with regard to fuel, terminals and transportation, right?

Pippa Stevens (15:09)

That's right. So we've seen this big disconnect between the physical and the financial market. And what's happening is that in the physical market, if you look at specific grades of oil around the world, they are trading far and above where WTI and Brent are showing on the June and July contracts. And that's because there is an extreme shortage in the near term. I shouldn't say shortage, but I mean, refiners are willing to pay whatever it may be to get that barrel to make those products. And so for dated Brent, that's for delivery within 10 to 30 days, we're seeing those prices substantially above where the front month for Brent is trading. And you also have to factor in higher, higher shipping costs, things like that, all of these kind of inputs that go into the final product that we don't see when we just look at the screen. And so while there's a lot of volatility in those front month prices, and that's not what refiners are paying, and that's not indicative of what the actual price for oil is right now.

Dominick Cheung (16:01)

Also, the reason why we're seeing these tradings within a band. But our gasoline prices at the pump continue to keep rising, rising, rising and rising. Pippa Stevens, thank you very much. We appreciate it. All right. Speaking of oil, our strategist says prices are unlikely to hit pre war levels anytime soon. But that does not mean stocks can't keep going higher. From here, where he sees the most opportunity coming up next. Plus Lumentum shares coming off an all time high, though still up 1300% over the course of the past year. We're going to speak with the CEO about the company's role in the ecosystem. On the heels of earnings, with the stock down nearly 8% as of this moment. But again, put it in context, that's a big gain. The exchange is back after this.

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Dominick Cheung (18:25)

Welcome back to the Exchange. Stocks are in rally mode right now with The S&P 500, NASDAQ and Russell 2000 small caps all hitting fresh record intraday highs today. Oil, meanwhile, is back below 95 bucks a barrel on continued Iran negotiations. Our next guest says even if oil goes back up, stocks will continue to rally. Here to tell us why is Jonathan Golub, chief equity strategist over at Seaport Research Partners. Jonathan, this is interesting because it's been very recent and maybe even just the last couple of weeks where we've seen the decoupling of oil in terms of the relationship between bat and stocks. For a while we saw a direct inverse relationship. Oil prices go up, stocks go down. Now oil prices go up, and stocks go up along with it. What exactly is the change?

Jonathan Golub (19:11)

Yeah, I mean, there's another part of this story that actually treasury yields have been rising as well. And people think would think that that would be a headline because it's driven by higher inflation expectations. And the market is shrugging, you know, she's shrugging it off. I mean, here's the bottom line. The economy is showing no signs of, of pain from the war right now. The expectations for this week's Friday jobs report are strong. Expectations of GDP for the year are higher than they were the day before the war, even with oil that's 30 plus dollars more expensive. So the market is compartmentalizing that quite well. And the measures of market risk, the VIX high yield spreads, they are below the level they were before the war started, even though obviously there are these, these overhangs.

Dominick Cheung (20:00)

What's the explanation for that? I'm wondering why is stock market volatility below long term trend levels, even with a massive war going on in the Middle east and even with an inflationary threat that's out there, possibly signs of initial slowing of economic growth, all of these things are things that would not be yielding record highs in the stock market yet they are. So what exactly are investors seeing traders doing that's different than in years past?

Jonathan Golub (20:28)

So I'm going to first ask, I'm going to answer a question you didn't ask and then I'll ask which is if you have the ability to hedge and if you think about what is the VIX or what a high yield spreads there, the cost of hedging for things going badly, even if it doesn't look like things are going to go upside down, the cost of hedging downside risk is insanely cheap right now. And for those that play in that space, that's a real opportunity. But what you are seeing is if we look at the higher energy prices, the profitability of these oil companies are supposed to be the second through the fourth quarter. This growth is expected to be 100% year over year. And, and yet the consumer, even though gasoline is higher in price, they're not really showing any kind of offsetting weakness. Industrial activity is holding up fine. The esm, which is an indication of business demand and things of that nature is in clear expansion mode and showing no signs of weakness. Even in the face of this.

Dominick Cheung (21:27)

What are you seeing because you brought up the hedging side of the equation here as well, I wonder what exactly you are seeing in terms of positioning in the market right now. Because one of the reasons why we might have seen such a fast move to the upside is because maybe some traders and investors got caught off guard, right? And they're trying to chase this. Maybe they were under positioned for it before are generally institutional investors and maybe by extension the retail that funds them. Are they underexposed to this market right now or are they right sized exposed?

Jonathan Golub (21:57)

Well, so it really depends on what type of investor you're looking at. But if you look at the hedge fund community, which is really interesting, when volatility goes up, the hedge hedge funds take down their position sizes because they want to, they want to keep a steady value at risk, if you, if you will. And when the war happened, instead of pricing or sizing their bets on, on the vix, they actually took down their position sizes much more because of fear that this thing could spiral out of control or it could spike in an unexpected way. So the hedge funds are substantially underexposed to both their winners and their losers. They've taken down what they would call their gross. There are other areas of the market where you're seeing a lot of rotation. So for example, six weeks ago, I would have argued that a lot of these AI manufacturer chip companies were the position was really weak. People were underinvested on them and that's been covered that short, if you will. Whereas now we're seeing greater opportunity in software names as opposed to semis.

Dominick Cheung (23:06)

Interesting software versus semis. That gap, by the way, at one of the widest levels we've seen over the course of the past year. Jonathan Golub with Seaport Research, thank you very much.

Jonathan Golub (23:14)

Thank you.

Dominick Cheung (23:15)

All right, well, coming up on the show, you just heard the bullish case for the stock market, but the options market may be telling us a different story. What's driving that divergence? Coming up next.

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What made you confident that you could

Mackenzie Scalos (24:00)

do something that hadn't been done before?

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I have no fear of failure.

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my favorite pieces of advice Think about what your boss's boss needs. Leadership can look in many, many different forms.

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Dominick Cheung (24:30)

Welcome back to the Exchange. Let's catch you up on some of the other big movers of the day. And earnings is still a big catalyst. Let's start with shares of media giant Dow component Disney rising by just about six and a half percent after it reported better than expected results in newly minted CEO Josh d' Amaro's first earnings report cycle. Disney was helped along by better theme park and cruise line revenues and still strong demand trends despite the crimp from ongoing rising fuel prices. Next up, you got shares of Danish drug giant Novo Nordisk, up by about 2.5%. This is the maker of the popular weight loss and diabetes treatments Wegovy and Ozempic, climbing after it reported better than expected results, thanks in large part to continued strong demand for those weight loss drugs and early signs of better than expected demand for its newly released oral pill form of Wegovy. And let's end on shares of private equity giant Apollo Global up by just about a percent or so after it reported quarterly profits that were in line with expectations, helped along by a record of client inflows during the first quarter of the year. Apollo's assets under management also hit a record, topping $1 trillion with a T for the first time ever. Now, while the major averages are higher across the board, the options market is telling maybe a different story here. CNBC's Options reporter Oliver Renick is at the CBO with more on what that divergence is. Oliver thanks Dom.

Oliver Renick (25:50)

That conversation with Jonathan really was a perfect lead in for this. I'm going to add a small twist to his point about cheap index hedging by including the semiconductors where options themes are starting to turn slightly less bullish. Let's start with the sector implied volatility in the semiconductor ETF SMH right now is two and a half times that of the S&P 500. After all, semiconductor options have been the hottest trade on the market. And when an item is hot, it gets expensive. So what we're seeing on the sector level now for semiconductors is actually a lot of put selling. In fact, five times more puts today were sold in the SMH ETF versus calls bought. It is still a bullish view, but more about volatility and the price of trading these names rather than upside momentum. So if you want to stay bullish, chip stocks, a really interesting trade presents itself. If you're worried about anything else, it makes a ton of sense to sell puts or put spreads in the semiconductors and use at least some of that income to buy much cheaper put puts in the S&P 500. If chips go up, you win. If chips go down, the stock market almost certainly will too. And the S and P puts that you bought will pay off. And here's the real wonky kicker to it is that because volatility in chips has gone up with their price, the volatility could come down even if chips sell off, which gives you an extra cushion on that semiconductor volatility that you sold back to.

Dominick Cheung (27:22)

Interesting, Oliver. So what you're saying right now is that the premiums that you can get for selling some of these options is so attractive that you would want to sell that volatility because even if you get assigned that stock, say, down the line, you are doing so with a relative amount of gain from the options positions that you've sold. Given the elevated amount of volatility, you

Oliver Renick (27:45)

are basically you're, you're pretty much 100 there. The premium is what it's all about. These have now become so juicy on the upside that you sell that downside, which is still a bullish view. But the key component is buying the cheap volatility like Jonathan talked about and he said it's cheap to hedge right now. That's because Vix right now is 17. We hit the lowest since the first week of February a moment ago. So if you do get hit because chips come down, you'll be able to offset offset that with some of the money that you made. Hopefully not all of it, but at least a good chunk on the S and P puts you bought.

Dominick Cheung (28:17)

Have we seen that, Oliver, really quickly play out in you mentioned the volumes for some of the index related kind of ETF side of things. Have we seen that elevated activity across pretty much all index related options?

Oliver Renick (28:30)

The index picture is pretty even. But generally speaking, the stock specifics are where all the premium is. Like you mentioned in semis because as they have gone up, people paid up for further exposure to the upside, which has made sense because they just keep going vertical. It doesn't matter how much you pay for the premium premium, you've been getting paid off for it. On the index level, things are generally much more calm and the puts to calls and most of the things we look at to try and gauge sentiment on the index level are actually pretty even right now. So with index level you probably just look at price. You go, hey, it looks good. Why not buy a little cheap downside as volatility has come in.

Dominick Cheung (29:06)

All right, pockets of opportunity to Oliver's point. Thank you very much. We appreciate it. Oliver Renick from the cbo. Now let's send it over. Sima Modi for a CNBC news update. Good afternoon, Sima.

Megan Casella (29:15)

Good afternoon, Dom.

Sima Modi (29:16)

Here the stories we're watching at this hour. A new report says Iranian airstrikes have impacted more US Military assets than previously known. The Washington Post says Tehran has damaged or destroyed at least 228 structures or pieces of equipment at US military site sites across the Middle east since the start of the war. The threat of air attacks at the start of the conflict also led the military to move personnel out of the range of Iranian fire. In other news, the Supreme Court today rejecting an appeal by Apple to temporarily block an order that found the company was in contempt for violating a court order to change its app Store fees. This is the latest in Fortnite maker Epic Games antitrust lawsuit against the iPhone maker over App Store fees. Apple saw the delay to prepare a full Supreme Court appeal and Sony is reportedly finalizing a deal to buy a music catalog from Blackstone that includes the works of Justin Bieber and Neil Young. Bloomberg says Sony plans to acquire more than 45,000 songs through a joint venture with Singaporean sovereign wealth fund GIC for between 3.5 to $4 billion.

Megan Casella (30:17)

Wow.

Sima Modi (30:17)

Don, back to you.

Dominick Cheung (30:18)

All right, Sima Modi with the news update. Thank you very much for that. Coming up on the Exchange, former FDIC chair Sheila Baer is here in studio with us for her take on Kevin Warsh ahead of his confirmation vote. What impact will he have on the Fed's policy path and a range of other topics. That conversation is coming up next. Welcome back to the Exchange. One of the biggest takeaways from bank earnings season was the resilience of the consumer. But as more banks start adopting AI, will that lead to stronger institutions that can serve more customers? Or could it just exacerbate that so called K shaped economy that benefits the relative haves versus the relative have nots? We're going to discuss that and much more with former FDIC chair Sheila Bair. She is the author of a new book, you can see it right there, how not to Lose a Million Dollars. I Don't Think I have a Million Dollars to Lose A Financial literacy Guide for younger folks out there. I've got the book here on site which I'm going to ask Sheila to sign at one point for my daughter who's trying to learn about money right now as well. But thank you very much. Let's talk a little bit about the book first.

Sheila Bair (31:23)

Okay.

Dominick Cheung (31:24)

The former head banking regulator comes out with a financial literacy book. Why and why Now?

Sheila Bair (31:30)

Well, I just, over the course of my 40 year career in finance, I've seen so many people run into money problems because they just don't have an understanding of a lot of the basics. And so I want to, I want to prevent that. You know, my job at the FDIC was to help people keep their money safe, their deposits safe. But now I'm trying to contribute in a different way just by giving young people just basic tools on how to manage their money, not lose it unnecessarily and help them understand the opportunity cost when they do lose that money, as opposed to investing some of it, which, you know, over the decades ahead of them could turn into millions of dollars.

Dominick Cheung (32:04)

During the course of writing the book, in the research that was involved, what has been the kind of biggest takeaway for you? What, what flash point has been the kind of, the most relevant?

Sheila Bair (32:13)

Well, the thing that's, I mean, a lot of it's just avoiding bank fees, credit card interest, that type of thing, things we can't emphasize enough. What frightens me the most is gambling. MEM, stock speculation, prediction markets, all of these things that young people, especially young men, are finding very, very, very attractive to do. And it's a surefire way to lose money. I mean, studies have shown that for those who use gambling apps, only 5% actually take out more money than they put in. And Bloomberg just started, sorry to mention a competitor, but they did a really good study that showed for prediction markets, 75% of the profits are going to 1% less than 1% of the users. So it's a loser's game. They're getting sucked in by, you know, so called smart money to, to enter these venues. They are going to lose money. And so I do think that's a real problem. And they're being confused, I think some of it purposefully between what investing is and what is gambling and speculation. And they're two very different things. So I spend a lot of time on that too.

Dominick Cheung (33:10)

All right, so you mentioned an interesting point about the kind of exacerbation of the haves and have nots, how some people benefit at the expense of many others.

Sheila Bair (33:19)

Right.

Dominick Cheung (33:20)

I mentioned the trade and there's increasing conversation now about whether the AI trade, which is ultimately a revolutionary force.

Sheila Bair (33:27)

Yes.

Dominick Cheung (33:28)

In all industries, whether or not that's going to make it so that there are even more haves versus have nots. Can you take us through that view vis a vis the banking industry overall?

Sheila Bair (33:38)

Yeah, well, I'm hoping it'll have the opposite effect. I mean, I think some of the positives, AI technology will make, you know, more sophisticated tools and services available to a broader range of financial services professional providers and splitting the smaller banks that are so frequently on the ground and in lower income communities. It will also hopefully make, you know, services that were previously, you know, an advice or previously just reserved for very wealthy people more broadly available to the population. I think in terms of financial education, using AI to, you know, you can give AI now your credit card statement or credit card contract, tell me what this means, your mortgage or whatever. So I think there's some real benefits there too. So I'm hoping overall it's going to lower cost and it will also enable, I'm being optimistic here, but it'll also enable more individualized credit decisions. Now there's, there's worry there too about the bias. You know, a lot of the past data that uses has embedded bias and they need to be very careful about that. But I will also provide the tools to provide more individualized credit decisions instead of just defaulting to credit. Score scores are kind of these proxies that are. Are very imperfect and exclude a lot of people.

Dominick Cheung (34:45)

Institutional credit right now is in focus especially on the private market side of things. I wonder, from a former banking supervisor standpoint, is private credit a systemic issue for the markets overall?

Sheila Bair (34:58)

I don't think so. It's troubling. There's a lot of bank exposure to it. Bank lending has fed a lot of it indirectly and it's somewhat akin to what was going on with subprime prior to the crisis where these very, very risky loans are being made by private credit intermediaries, but indirectly the banks are still till feeding it. So there is risk building up with these loans. Now it's not systemic. The they. Well, I think this is low, but the estimated exposure to banks is about 300 billion. Unlike the subprime mortgages where you had a lot of financial engineering, remember the CDOs and CDO squared, you know, trillions of that sitting on top of these mortgages. You don't have that with these private credit loans. So I think there's more trouble to come from an investor protection standpoint. I would not invest in it. I don't want your 401ks to be invested in it. You know, so there's this movement to expand access to. To. To the retail investor. You know, I think this is for large institutional investors who can go at arm's length to these private credit funds and get the information they need before they invest. It's not for the retail players.

Dominick Cheung (36:01)

Interesting point there. And one last question before we let you go.

Megan Casella (36:04)

Yeah.

Dominick Cheung (36:04)

You're somebody who has a good amount of familiarity professionally with Kevin Warsh, the nominee to be Fed chair.

Sheila Bair (36:11)

Yeah.

Dominick Cheung (36:11)

What's your take and how will he serve the Fed?

Sheila Bair (36:14)

Yeah, I think I'll be very good. He's. I worked with them during the 911 attacks when I was at treasury, he was at the White House. Then during the subprime crisis when I was at the FDIC and he was at the Fed. He's a very steady hand. He's a very mainstream Main street candidate. Mainstream candidate. He will, I think, be less inclined to consistently intervene as the Fed in the past has, you know, because there's been a lot of buildup of complacency because the Fed's always stepping in and I don't think that's healthy for markets. So I think he will be much more restrained in terms of having the Fed intervene if needed. And yeah, the interest rate question is a difficult one right now, but I think he'll be measured. He needs to get the FOMC along with him. He's got good personal skills, good leadership skills. So I'm very optimistic about his stewardship at the Fed.

Dominick Cheung (37:01)

All right. Sheila Bair, former FDIC chair, thank you very much for the conversation. Please come back and see us again.

Sheila Bair (37:06)

We'll do. Thanks for having me.

Dominick Cheung (37:07)

All right. Coming up with the show, infrastructure company Lumentum is down more than 7% today after missing revenue estimates. But as you can see here, those shares are still higher by nearly 150% so far this year as investors dive into the infrastructure trade. We'll speak with the CEO next. Welcome back to the exchange. Lumentum shares are down 7% today, beating on earnings but just missing on revenue estimates. The company is also issuing strong fourth quarter guidance with management saying on the earnings call they've planned for major capacity ramps through next year as supply remains well below demand. With an imbalance of more than 30%. Shares are on pace for their worst day since March, but they're still up a staggering 1300% over the course of the past 12 months. Joining us now for that story is Lumentum CEO Michael Hurlston. Michael, thank you very much for joining us here on the program. I want to put this conversation in the context of something we also we heard earlier from Advanced Micro Devices and in their results they said that now data centers have become the fastest growing or biggest driver of that growth story at amd. Is data center activity now the biggest driver of growth at Lumentum?

Michael Hurlston (38:24)

100%. Our business is very much tailored to the data center. What we do is we connect, compute that in video and AMD and Intel provides and create these massive clusters that run these AI models and do all this inferencing you hear so much about. So that's what our company does. We transmit things over light. So we use light as the fundamental mechanism by which to do these connections and that enables the speed that these compute clusters really need.

Dominick Cheung (39:01)

And I guess, Michael, the story about the growth for data centers has been very much centered around the hyperscalers, those kind of massive mega cap tech, media and telecom companies that are building some of these huge data center facilities. How much of your business caters towards those kinds of clients as opposed to say, the other data center builders or REITs that specialize in that kind of activity? How much of that business is levered towards, say, the Mag 7 type names versus everybody else?

Michael Hurlston (39:33)

Yeah Dom, it's very much levered to the hyperscalers. So we are building out the infrastructure backbone that companies like Google, like Microsoft ultimately end up depending on. So that connectivity fabric that's putting together all of these cluster compute clusters inside the data center is very much where we play. And that business has obviously done fantastically well. As you said in your opening remarks, we've been up well over a thousand percent in the last year and that's driven by these customers, the hyperscaler customers, less so the REITs, the Equinixes and the people that build out the data centers. It's very much the, the hardware that goes inside the data center that's driving our number.

Dominick Cheung (40:18)

Now if you take a look at some of those numbers we've talked a lot about, and there have been a lot of estimates out there about just how much of the artificial intelligence spending ecosystem is driven around commitments and pledges from two companies in particular, and that's OpenAI and Anthropic. How closely does a CEO at a company like Lumentum have to pay attention to the developments that OpenAI and Anthropic are putting out there in terms of not just their business plans, what their plan spend is in the future as well?

Michael Hurlston (40:50)

We pay a ton of attention to that. Obviously we're one step remove from anthropic and from OpenAI. It's the hardware that goes in that generates all of this inferencing, this training, these AI compute models that is our primary customer base. So it's again companies like Nvidia, like a Google, like a Microsoft, that build out that fundamental infrastructure. But we have to follow that super closely. The spending that's going on from an Anthropic, from an open air is so very important because that ultimately drives hardware spend and that will ultimately flow through to a supplier like us. So it's something we watch extremely closely.

Dominick Cheung (41:34)

I mentioned demand is out there and it's no secret that demand is surging for these types of products. This kind of build out infrastructure wise. I wonder what the biggest hurdle that you guys have at Lumentum is to your, to your growth. What exactly is that thing that is throttling you back right now? Is it the expectations that are out there or is it literally physical supply chain elements?

Michael Hurlston (41:56)

It's more on the latter, Dom. It's supply chain and some of that is we're relying on suppliers to feed into us, but in most instances it's our own supply chain, meaning we make these semiconductors. We're almost like a TSMC for these laser components that are so very important to the data center. So these laser components end up getting manufactured in fabrication facilities that look like many versions of tsmc. And we just can't ramp these things fast enough. Our lead time is maybe 18 months from adding capacity to seeing output on the other side. So it's a pretty long cycle. And that long cycle is what's gating us and why, as you said in your remarks, that we're about 30% behind the demand from what we are able

Dominick Cheung (42:50)

to supply from here going forward. We know data centers are a big part of it. What exactly from your perspective is going to be that market which you try to tackle next now that you kind of know what the data center environment is like vis a vis the hyperscalers?

Michael Hurlston (43:05)

Well, there's an interesting dynamic that's going on inside the data centers. You have a lot of we call copper connectivity that runs in these servers. I mean, if you've seen the back of one of these Nvidia racks, it's loaded with copper cables. And slowly, it's not tomorrow, but slowly, you're going to see more and more optics penetrating that backplane. It's just a matter of time because the speed is so key and nothing travels faster than light. So in that context, we'll see more and more optics coming into the rack. And it's our single biggest opportunity, we call it optical scale up. And we can see our fiber optic connectivity going into that rack. That's going to be an incredible opportunity for us.

Dominick Cheung (43:51)

All right. An interesting forward development case there for sure. Michael Hurlston Lumentum, thank you very much. Please come back and see us again soon.

Michael Hurlston (43:58)

Tom, thanks for having me.

Dominick Cheung (44:00)

All right, again, thank you very much for that. Coming up on the show, $250 million. That's how much Apple is set to pay for over promising and under delivering on Apple. And go intelligence, we're going to dive into how the company botched AI so badly it's literally paying for it. That story coming up next. Welcome back. Tim Cook saying on Apple's earnings call, they're quote, clearly investing more in AI. But new developments suggest the company is still way behind some of its peers. Mackenzie Scalos has more in today's tech check. Mac.

Mackenzie Scalos (44:33)

Hey, Dom. So that R and D number tells you everything about where Apple is right now. They're spending more than 10 cents of every dollar that they bring in on R and D. A first in at least 30 years. That spending is growing twice as fast as sales and Gene Munster at Deepwater says it shows a sense of urgency around AI. The original expectation was that Apple would lean on Google more directly to help fix Siri. Now reporting suggests more of a model agnostic strategy for iOS 27, where Apple lets users choose from third party AI models to power Apple intelligence features across Siri, text generation and image editing, the latest pivot in the company's rocky path toward harnessing artificial intelligence. The report comes as Apple is set to pay $250 million to settle claims that it overpromised AI powered Siri features that it still has not delivered. Now, there's no admission of fault and not a meaningful number against Apple's cash pile, but the optics are rough. Apple paying to settle over AI promises that still do not exist, and both developments really pointing to the same problem. The company sold a version of AI it was not ready to ship, has struggled to close the gap, and now appears to be outsourcing the answer to its competitors. Now we'll see what Apple shows at WWDC next month, but for now the strategy firmly looks like an on device AI bet, where they capitalize on custom silicon privacy and an iPhone that can plug into whichever model users choose.

Dominick Cheung (46:02)

Hey Mac, really quick question. What exactly will be key for you for the upcoming WWDC?

Sima Modi (46:07)

It's how.

Mackenzie Scalos (46:08)

It's how much they promise in iOS 27. Because at this point Apple doesn't show its hand in terms of a product roadmap. What was interesting last week was CFO Kevin Perek indicating that they're no longer targeting a cash net neutral position, which at least some of the analysts reading the tea leave say, hey, maybe that points to an acquisition to try to close the gap. We know that they're not trying to compete with the hyperscalers. You're talking to your guest last block about the mega spending that we're seeing among hyperscalers. Sure, $4.7 billion across the last two quarters for Apple.

Dominick Cheung (46:38)

All right, Mackenzie Scalas with the latest on Apple. Thank you very much. That does it for us. Thank you for watching. The exchange markets are at record highs for the S and p, NASDAQ and Russell 2000 small caps. Power lunch is coming up right after this.

Exchange Show Announcer (46:54)

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