Closing Bell Overtime: Rates Go Wild 9/23/26

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0:48So no matter where you're starting from, you can move forward with confidence. The key to being rich is knowing what counts. Let's find your rich. Edward Jones, member SIPC. The bells bring it into the trading day at the NYSE. BNY ringing the closing bell. And the president of Ghana doing the honors here at the NASDAQ. Welcome to Closing Bell Overtime, live from Studio B at the NASDAQ Market Site. I'm Mike Santoli. Melissa Lee is off today. A huge move in bond yields weighing on stocks today. The Dow losing 350 points. The S &P 500 down eight-tenths of 1%. And the NASDAQ index is down about 1 % off their record high.

1:27The 10-year yield surging 14 basis points, once again, getting back to levels not seen since 2007, above 5.1%. Also a big jump in the two-year yield, which is more sensitive to Fed action, as the latest PMI numbers coming in hot. The highest in four years, in fact, for the manufacturing component. Most of big tech lower today, 3 % drop for Alphabet. Meta in the green, though, as optimism for Muse remains. Some big software names also on the positive side. Let's begin with this surge in bond yields. Rick Santelli in Chicago with more on really what triggered it, Rick. You know, I think the charts really speak a thousand words, and we could leave it to the picture to show us.

2:11Here's a chart of twos, tens, fives on one chart, 12-hour, and you could clearly see right around 945 Eastern. Boom, they popped. And indeed, you're correct. I think it was a 62 month on the headline manufacturing on services and composite even further back in history. These are giant sized numbers. And the text that accompanied these readings was also very enlightening, talking about an aggressive U.S. economy, talked about backlogs really moving out wide. And that's a double edged sword, Mike. On one hand, of course, it brings immediate pricing pressures, not necessarily good. But on the long side, it's going to be a lot of orders going in the future, meaning it's going to be pepping up the economy for a while.

2:57Now, if you go to the 2007 that you referenced, yes, we haven't closed at these levels since July of 2007 for a 10-year. This looks like it's going to be the second close above 5 % since that time. And let's not forget, there was a period there where the war made things a little odd in foreign exchange. But now that dollar index is also cooking in Greece. It's now going to close above 101, a two-month high in the dollar index. And that's good news when inflationary pressures, even if they're supply-related, is going to give the consumer in the U.S. a little bit more power on the stronger dollar to purchase some of these imports that may be moving higher in price.

3:38Mike, back to you. Yeah, Rick, all helps explain why you have had these yields making new highs in response to that data, even with crude oil 10 percent or so below the recent highs. And then we did have the five-year auction today. That seemed to be another maybe a pressure point on the market. Absolutely. The five-year auction was horrible. But then again, my analogy is, you know, trying to buy an auction at that maturity on the yield curve when things are so aggressive in the marketplace would be like trying to tune up your car when it's going down the expressway at 60 miles an hour. Yeah, absolutely.

4:16Not the best not the best timing for that one. Rick, thank you so much. After today's jump in yields. The next question is, where will rates go next? Here's what Bank of America CEO Brian Moynihan said about the prospect for Fed moves. inflation's got to get under control the fed has already moved once i think they'll continue to move whether it's two times this year again or one time or in one time early next year but over the next six months to 12 months they'll have to move the rate structure up to make sure the inflation continues its path down joining us now is colin martin head of fixed income research and strategy at schwab center for financial research colin it's great to have you on here today so So, look, I guess the big question is, are the factors that are driving Treasury yields in this direction ones that that we should be worried about?

5:04Are they leading the Fed to a certain place or are they creating value, frankly, for investors? I think it's probably a little bit of both, but but I think the factors driving yields up, I think they're generally good factors. And that's what we're trying to highlight with our Schwab clients, because there's no shortage of headlines about the potential nefarious reasons as a deficit concerns. You know, what's wrong? Is there bond market turmoil? And I don't think that's the case. And I think Rick kind of highlighted it before. You know, bond yields are elevated for, I think, two key reasons. One, the repricing of Fed expectations.

5:38We went from expecting cuts earlier in the year to hikes now. But also, I think they're indicative of a healthy and growing economy. The economy is resilient, the labor market's stable, and inflation's too high. A positively sloped yield curve makes a lot of sense in that sort of environment. In terms of value for investors, that's a number one question we're getting right now with the 10-year Treasury yield above 5%. And we're not there just yet. And we still suggest investors favor short and intermediate term bonds. We still think there's a lot of value in the bond market. But from a maturity standpoint, we're not willing to take too much interest rate risk just yet, because the factors that all have driven up and pulled up long term yields, they're all still very much present.

6:19So we'd rather wait to see what this outlook looks like. Do they continue to rise a little bit more before we get a little bit more comfortable, suggesting investors move a little bit out on the curve? Yeah, I mean, I guess, you know, we were just talking about the five year auction. You're getting just about five percent over five years and you're not getting paid a heck of a lot to do the second five years toward the 10, Right. Ten basis points. So you have to expect something dramatic to change about, you know, economic slowdown or something to have those tens look better. I guess the other question, though, is the Fed indicated maybe we'll have to do one or two more.

6:53There was a lot of talk after the Fed hike last week that this is a mini cycle. Maybe it's not even really doing anything but taking back last year's, you know, three rate cuts. Is the market now getting ahead of that a little bit in terms of where the two year is trading? I think it might be. So our base case right now is for at least one more hike this year, and then maybe a second either later this year, depending on when the next one comes, or maybe sometime in 2027. But as you alluded to, Mike, the markets are pricing in three or four additional hikes now. And that just seems too aggressive given the inflation outlook.

7:27Yes, it's too high. It's above target for five and a half years now. But it's nowhere near the levels we saw back in 2022 and 2023. And it doesn't appear to be re-accelerating just yet. And I think that's the important point here. When the Fed did this hawkish pivot, included in the statement last week was that the Fed just wants to get inflation down in a timelier manner. I think speed is what's important right now. Now, unless inflation really suggests that it's re-accelerating, which there aren't too many factors that are suggesting that's the case, I think the one or two seems more likely.

8:03but incoming data will dictate that. If we start to see the breadth kind of widen out, as Kevin Warsh has highlighted, or if we start to see monthly core inflation readings in the 0.3 % or above, which is something that New York Fed President John Williams has highlighted, then maybe more tightening will be necessary. We've been discussing the underlying strength, the momentum of the economy as a big input to what's happening in rates, in the Fed outlook. But the strength, I think, is most pronounced in the capital spending parts of the economy. Right. It's the A.I. build out. And I wonder if the bond market responding to that is also just acting as more of a restraint on the rest of the economy.

8:44You look at CapEx outside of tech. Obviously, you look at the housing market. You know, consumers not necessarily loving the squeeze from from higher rates and oil as well. So is there going to be a little bit of a mismatch there? I think there could be. Clearly, when we look at the AI build-out and the hyperscalers, the level of borrowing costs doesn't appear to be an issue. It seems like they're willing to get capital kind of at any cost right now. But borrowing costs do matter. Now, it hasn't mattered too much just yet. If we look at credit spreads, both in the investment grade and high-yield markets right now, they're actually a little bit lower than where they were before the Fed hiked last week.

9:19So this hawkish pivot and now repricing of expectations hasn't really impacted it just yet. But there can be not negative consequences to higher borrowing costs, whether it slows down the housing market, which is already under stress given the high level of mortgage rates, or whether it slows down the really highly indebted borrowers in the corporate space or maybe those who issue floating rate loans. You might start to see it kind of seep into their fundamentals a little bit. And building on what's been part of the driver of higher yields, obviously higher energy prices, that can start to flow through to us as consumers.

9:53And over time, does that maybe not pull us into recession? That's certainly not our base case here at Schwab. But does that slow things down a little bit where things kind of tighten on their own? Yeah, exactly. I wonder if we're going to have to at least be alert for that kind of a wave hitting the data. Colin, thanks so much. Really appreciate your perspective. Colin Martin from Schwab. Well, despite this big move higher in yields today, the stock market kept the damage pretty contained with only the Nasdaq closing lower by more than 1%. So is the equity market's resilience encouraging or a potential trap for investors?

10:29With us now is Oh Sun Kwon. He is Wells Fargo chief equity strategist. Good to see you. Thanks for coming in. So you kind of, I guess, tacked in a cautious direction relatively recently. So maybe some of the stock market turbulence isn't too much of a surprise. What was driving that thought that we might have to be in for a little bit of a reset here? Yeah, so we turned cautious heading into September and we officially trimmed our target of the S &P 500 to 7700 from 7950 by year end this year. So basically flat from here. A couple of reasons. One is we're starting to get a little more concerned about the AI capex cycle.

11:06So I think 2027 is locked. I think hyperscalers are going to spend$1.5 trillion and everything's going to be amazing next year. But it's really 28 and beyond. And I think it becomes increasingly more difficult for hyperscalers to justify another big CapEx year after 2027. So what we tried to do was we tried to estimate how big AI has to get to justify the current CapEx cycle. And that number is about$1.4 trillion by 28. That's the overall AI demand that has to get to to justify the CapEx cycle. And$1.4 trillion is about$9 ,000 per year per worker. And that's about 50 % of the current information sector's gross output.

11:51And, okay, so say we get there somehow. And to justify another trillion-dollar CapEx in 2028, which is flattish to begin with, that$1.4 trillion number goes to$2.2 trillion. So meaning the bottom line is that every year it becomes increasingly more difficult for hyperscalers to justify another big cap this year. And so you did actually sort of downgrade technology in your asset allocation, which I guess is interesting given how the markets behave recently, which is everything outside of technology has struggled a little bit more against these rates. Yeah. No, I think, I mean, the timing wasn't the best.

12:29But, you know, the news obviously was, you know, the market is seeing that as a big change changer. Sure. But we're still a little concerned that about the monetization and the ROI beyond 2027, if they were to do another big capex year. And to your point, rates and oil are were another reason why we were return cautious heading into September. And I'm using the camp that the level of rates doesn't really matter. It's more about the volatility of rates. But right now, there's a huge gap in allocation between equities and bonds. So we estimate there's about 72 % equity allocation across the board versus 8 % among investors, yeah, 28 % bonds.

13:10And that's the highest level since 1969. And based on the current cost of equity and the 5 % interest rate, we estimate the fair equity allocation should be around 60%. So that 12 percentage point gap, that's the widest level since the 1960s. And that implies that if EPS grows at 7 percent CAGR, the access return on the S &P versus the 5 percent interest rate is going to be zero over the next five years. This is a you know, it's a point I've tried to focus on here and there is just exactly how equity exposures have been allowed to get. And then you've also taken a look at the possibility that companies collectively have been kind of over-earning, or at least that earnings expectations have exceeded, I guess, what we can rationally hope them to be.

14:00Yeah, exactly. So the upside case of that 0 % excess return number is earnings surprising to the upside over that 7 % CAGR that I was talking about. We're a little skeptical there, too, because by next year, we're going to have one of the strongest 10-year EPS cycles in history that's only been surpassed by the 1950s bull market after World War II. And 2027 EPS is going to be about 42 % above our normalized EPS number. So everyone's over-earning right now. And depreciation expense is going to come higher starting next year. So based on that, we're skeptical that earnings are going to be continually strong at this pace.

14:42And then just quickly, I mean, you did kind of upgrade health care. Do you think it just basically makes sense to look at those areas that are, you know, a little bit less volatile and more stable and can achieve the earnings? Yeah. So overall, I think you want to move into more quality stocks over high beta. So that's the theme heading into the midterms, at least. And health care is also defensive and it's not as race sensitive as other defensive sectors such as staples and utilities. So that's something that we like. Also, I think health care will be an interesting midterm play as well because of the ACA subsidies that's sitting in the Senate right now.

15:19So the probability of a dam sweep has been rising steadily over the past month or so. So I think there will be a pretty interesting trade in health care. And hospitals and health care insurers are probably going to be the biggest beneficiaries. Once we get through the election and people figure out the policy implications of that, you mean? Yeah. Gotcha. Osin, really great to see you. Thanks so much, Osin Kwan, from Wells Fargo. Before we go, we do want to show you the SIBO. That is the closing bell there in Chicago. It ends the regular trading day for options. Well, 90 minutes from now, President Trump is expected to greet China's President Xi at Joint Base Andrews.

15:59Plenty is at stake in this meeting and some little things could mean a lot. We're going to explain all of that, the international intrigue as well, next on Closing Bill Overtime.

16:14This message comes from Wise Business, the only account your business needs to scale globally. You're building a business with global ambitions, but hidden fees are eating into your margins. With Wise Business, you can pay overseas suppliers without exchange rate markups. Have customers worldwide get payment details in 22 currencies, so you get more of each hard-earned payment without hidden conversion fees. Be smart. Get Wise Business. Download the app. T's and C's apply. Come go with me. Let me take you on a holiday. Nassau and Paradise Island is home to the world's clearest turquoise waters and white sand beaches, where families can explore our vibrant culture, taste local flavors, and dance to Bahamian rhythms.

17:02All this and more is just a short flight away. This holiday season, plan your escape at NassauParadiseIsland.com. To every clinician finishing notes at 9 p.m., there is a faster way. Whisperflow is a voice-to-text app. You talk, it types in your EHR, your email, anywhere you type. Say the progress note, the referral letter, the patient instructions, and it comes out clean and formatted with your terminology spelled right. Four times faster than typing and HIPAA ready. Whisperflow is free. Get it at whisperflow.ai. That's W-I-S-P-R flow dot A-I. Chinese President Xi is scheduled to arrive in Washington this evening for a bilateral meeting that's expected to cover a wide range of topics, including A-I.

17:54Megan Casella is in Washington with a look at what we can expect. Megan. Mike, that's right. All the fun kicks off in less than two hours from now when President Trump will greet President Xi on the tarmac at Joint Base Andrews. Now, that is an exceedingly rare diplomatic gesture and one that President Trump did not receive when he landed in Beijing back in May. That arrival is what you're seeing here. But today's red carpet welcome will set the tone for all the pageantry that the White House will be laying out this week for the Chinese president. And in many ways for this visit, the pageantry is the point.

18:25None of the analysts I've spoken with are expecting any major breakthroughs on policy. So the focus is much more on the pomp and circumstance and portraying stability and closeness in the U.S.-China relationship. Now, that said, there are, of course, possible deliverables that we are watching for, an extension of the Busan trade truce for one, a new AI safety dialogue. But on areas of deep division, Iran, Taiwan, export controls, there is little expectation of much being accomplished. And on the business side of things, too, President Xi reportedly is not bringing a delegation of executives with him.

18:55That's opposite of what we had initially expected. That's also lowering expectations now of major business deals being announced as part of this visit as well. Mike. Megan, thank you. Well, joining me now is Richard Haas. He is president emeritus of the Council on Foreign Relations, veteran diplomat and senior counselor at Centerview Partners. Richard, it's great to have you. Welcome. Thanks, Mike. So I guess it all depends on how either side might be defining success here or really setting the objectives. What are you expecting to come out of this meeting? Well, you've got it exactly right. I think it'll be essentially a smooth summit, but I don't think it's going to accomplish a lot.

19:35Ironically enough, that may be a good thing, because the only way it could accomplish a lot, quote unquote, would be if the president of the United States was willing to trade geopolitical interests in exchange for certain commercial interests. And I think that would be a bad bargain for the United States. So I think it's probably smart to keep your expectations in serious check here. What would that entail if the president were to trade geopolitical concessions? I mean, are we talking about with regard to Taiwan or Iran or something else? Absolutely. Well, Taiwan's the most obvious. We've already put an indefinite hold on our arms supply of Taiwan.

20:16In some ways, he's already doing that. And I think that's unfortunate. It's bad not just for Taiwan, but it unnerves our allies in Asia, beginning with Japan and South Korea. And the question is what he would want for it in the way of trade. Right now, China essentially exports to us twice what we export to them. And I expect the president would be very happy if he got some change in that ratio. What I'd like him to do, as you suggested, that has pushed China hard on its support for Iran, on its support for Russia against Ukraine. And my concern is he seems unprepared to do that. I do think we'll probably get some process when it comes to AI, some type of a standing working group or hotline or both.

21:04And that's good, but I wouldn't exaggerate the real significance of it. Yeah. I mean, I guess in particular, given that the president has staked out this position that there should be kind of no limits, It should be full speed ahead on AI investment, as well as, of course, withholding a lot of the most advanced hardware from China. So I guess it's all a matter of just having a little bit of a back channel in case something happens. In case something goes wrong. I imagine you have a situation where some AI agent at its own direction, if you will, rather than a human direction, reaches out and does something in China.

21:42and it would be really important that we had a hotline or some way of going to the Chinese and saying, hey, that wasn't intentional. That wasn't authorized. We're not trying to do this to you in some ways to try to discourage them for doing something intentional in retaliation. So I think that would be good. But I don't think you're going to have any serious slowing down of the U.S.-Chinese competition here. If anything, China looks at what when people talk about this, they think we're trying to keep them down. That's something they think more broadly, that the purpose of American foreign policy has been to slow China's emergence.

22:17So when they hear about AI arms control, they're quite suspicious of it. The only area we may have some possibility of agreement is this emerging voice in China that AI is a challenge to the monopoly of the Communist Party. So ironically enough, there may be some interest over time in China about how to put some limits on AI, but we're not quite there yet. Whether, in fact, this meeting really has any bearing on the situation with Iran, the president keeps saying, well, maybe after the election, we'll get some progress. Yesterday said it was a blandly productive meeting with the Iranians. Where is that going to stand at this point?

22:56Right now, we're at a point where threats of either military escalation, what the president termed annihilation, or continued economic coercion. I don't think they impress the Iranians. I don't think they have much potential. The real question is whether we turn to diplomacy in a serious way. The meeting yesterday was, in principle, hard to know in practice, a step in the right direction. But I think at some point the United States is going to have to make some tough decisions about what kind of compromises it's prepared to make in order to get the Strait of Hormuz open. I think the Saudis, Saudi Arabia, may have to make similar decisions about what kind of compromises it may take towards the Houthis in order to get the Bab al-Mandab and the Red Sea route open.

23:41So far, at least, the United States and Saudi Arabia have been loathed to make some concessions, but the risk then is either drift or worse. The potential for escalation is there. So far, at least, the energy infrastructure in the region has not really been brought into the conflict. There's been some incidents, But what, 90 percent or more of the energy infrastructure in the Middle East is still intact. If that were to change, if that were to be seriously damaged, then we're facing something far worse than what we have. Then we're looking at a global recession. And that ought to be, seems to me, avoiding that ought to be a priority.

24:15Sure. More time that goes on. I guess it changes what an acceptable compromise might look like. We'll see. Richard Haas, thank you so much for the time. Thank you. All right, we have break news on the White House ban of three media companies. Eamon Javers has the details. Mike, no decision today from federal judge Timothy Kelly in that first hearing now in the lawsuit between the three media organizations who were banned from the White House grounds against the Trump administration. The first hearing just wrapping up within the past couple of minutes. Judge Kelly hearing from both sides here, giving each side about 20 minutes to make their cases here.

24:49He said he is not going to make a decision on this question of a temporary restraining order. That's what the media organizations are asking for. They're asking for this judge to step in and block the president from taking away the White House hard passes of those media organizations and blocking their access to the White House grounds. They want that to be reinstated right away. The judge here says he's going to think about it. He's going to consider the arguments that he heard today, and he's going to get a decision as soon as he can. What he heard from the plaintiffs here is that this is a decision, they argued, that was simply made in haste by the president, who doesn't like the coverage.

25:26It was based on what he sees as negative coverage. They say there was no due process and it violates the First Amendment. We heard from a governmental lawyer here making the case on behalf of the president that the president has the right to do this, that the court should not overturn the president's decision here while Xi Jinping of China is in the country, that it's a sensitive time, and that this is based on national security considerations. They're arguing the president has the right to block reporters from the White House grounds for national security reasons, as he sees fit, using his judgment.

25:57So for now, Mike, the president's ban on those reporters from the White House grounds will stand, and it'll be up to Judge Kelly to decide if he's going to give that temporary restraining order or not. And we'll watch and wait and see whether that happens. Back to you. Yeah, see what as soon as he can means in terms of the next steps here. Thank you. Coming up, much more on the impact of surging interest rates. We'll focus on real estate from single-family homes to huge data centers. Could these higher rates slow down building activity? Stay with us.

26:29This message comes from Wise Business, the only account your business needs to scale globally. You're building a business with global ambitions, but hidden fees are eating into your margins. With Wise Business, you can pay overseas suppliers without exchange rate markups. Have customers worldwide get payment details in 22 currencies so you get more of each hard-earned payment without hidden conversion fees. Be smart. Get wise business. Download the app. T's and C's apply.

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28:12Rising interest rates being felt across real estate. The 30-year fixed rate mortgage average rising to 7.26 percent today, getting back to levels last seen in January of 2025. Housing-related names falling today 2 or 3 percent across the board. But those stocks have already taken a hit over the past few months as rates have been steadily climbing. Those rising rates not just hitting residential real estate, they're also starting to have an impact on commercial real estate, data centers, and any land-heavy projects. Diana Olick joining us now right here with more on that. Diana. Well, Mike, I sat down earlier today with Richard LaFrac, one of the great heavyweights in commercial real estate.

28:50He said, and I'm quoting, if I had debt, I would be petrified because the extended pretend party is over. He's talking about the CRE debt that needs to be refinanced, a wall of it coming in about two years with interest rates potentially at this higher level. He also talked about risk to the massive data center build. If Elon Musk can put, you know, data centers in the moon or whatever he's thinking about, and he can't doubt the guy because of what he's done in the past, all these buildings may be outmoded by that time, you know, in which case investors will not be happy. On the other hand, if this insatiable demand for this product continues 15 years from now When the lease is up, the tenant may just say, hey, I need it.

29:37I got to keep it. I'll pay you whatever you want. And he had a lot more to say about interest rates, housing affordability, and AI in CRE. Check out the full podcast in the next Property Play newsletter. Go to it, cnbc.com forward slash property play. I mean, rates have such this kind of interesting interplay with different segments of real estate. I'm thinking in particular of the rent versus buy residential side of things. Hazel LaFrac, obviously a big apartment owner. And does it mean that all of a sudden rental properties are going to have the advantage now because people can't afford to buy?

30:10Well, definitely, because, look, rental apartments had been overbuilt over the last several years. We had this huge pipeline of supply that we're still actually working through. And that's why you saw rents come back a bit. But then if you see that people can't buy homes, if they're sitting on the sidelines because over 7 percent is just not going to happen for them, they stay in their rentals longer. That means that that supply gets eaten up because you just you have so much more demand. And then rents start to come back up again. It was interesting to hear his take on data centers, clearly somebody who thinks about kind of long term residual value of these buildings.

30:40He's a buy and hold guy. And everything. And it's true. You can't really know exactly what the life of these assets are going to be. On the other hand, the whole proposition of data centers is we have a willing landlord who will, I mean, a willing tenant who will pay almost anything. But for how long is the question, because if AI is supposed to make everything more efficient, including AI, how do you know if it's going to need that much space? Totally true. And it's only really two buyers of the space. So we'll have to see how it goes. Diana, thank you. All right. Time for a CBC News update with Mackenzie Cigalos.

31:14The Trump administration may partially walk back the president's decision to increase foreign beef exports. The Trump administration expanded the imports earlier this year to bring down prices in a move that angered U.S. ranchers. According to Politico, a proposal to reduce the amount of imports is currently under discussion. An attorney for former NFL star Antonio Brown says he is set to accept a plea deal next week that will not send him to prison on an attempted murder charge in Miami. Brown is accused of grabbing a gun from a security officer after a celebrity boxing match last year and firing two shots at someone he had gotten into a fistfight with earlier.

31:50He's maintained that he was defending himself. And Bentley showed off its first fully electric vehicle today. The luxury British carmaker says the$230 ,000 Torquant SUV has a 375-mile range and can hit 60 miles per hour in less than three seconds. The release comes after Bentley abandoned efforts to become fully electric by 2030, saying customers were not ready for the shift. Mike, back to you. All right. Kenji Scalas, thank you. Yeah, I was going to say I might not be ready for that either. We'll see. Thanks, Mac. Investors have not been loving restaurant stocks lately. McDonald's, Chipotle and other big names getting hit hard over the last month.

32:31Up next, we'll look at whether these stocks are starting to look appetizing despite ongoing concerns about higher costs.

32:42Stocks in retreat today as the 10-year Treasury yield hit its highest level since 2007. Seema Modi breaks down today's big mover. Seema. Yes, Mike, the inverse correlation between stocks and bonds really highlighted today the rapid rise in rates, meaning industries that offer that high dividend have more competition. And that was a worry that played out with utilities, the worst performing sector on the day. Consumer staples also getting hit with names like Coca-Cola, Kimberly-Clark, Procter & Gamble down on the day. Technology also underperformed. Remember, Amazon, Google, NVIDIA have all gone to the debt market in recent months to raise capital to fund the AI buildout.

33:15Higher rates means the cost of service that debt goes up. We saw Alphabet down nearly 4 percent, but Meta, Meta powering through and now up about 30 percent in September on track for its best month since July 2013. At the same time, the market's still sussing out the impact of Meta's agent Muse and how disruptive it could be for subscriptions, travel. Expedia down today and now off by 18 percent this month, its worst month since February. Instacart owner Maple Bear announced its grocery ordering system will actually connect directly to Meta Muse. But the market, again, not responding positively.

33:51You saw that stock down about 3 percent, DoorDash down about 1.5, Mike. Interesting market trying to sort this stuff out in real time. Seema, thank you very much. McDonald's closing out its worst day since April of last year after holding its investor day, where CEO Chris Chemczynski predicted traffic growth will be flat as inflation remains elevated. But he said the company can't use the macro environment as an excuse for execution issues. Take a listen. One of the things I've talked to our team about is we need to stop talking about that being a difficult environment and just say that is the environment.

34:26Because I think as we look out forward, we're not expecting things to change. We're not expecting that the industry all of a sudden is going to go to having robust traffic growth. We think that's going to be largely flat. We do think inflation is going to be with us for, unfortunately, I think many more years at an elevated level. And so in that environment, how do we make sure that we're set up to win? Well, inflation is an issue that has been hitting the restaurant sector with names like Chipotle, Wendy's and Shake Shack down double digits in one month. Joining me now is Nick Setien from Mizuho, who was at McDonald's Investor Day today.

35:03Nick, pretty dramatic price response in McDonald's shares, considering they'd already been so weak going into this gathering. So what did investors hear relative to what they were hoping to get? Well, first, thanks for having me, Mike. You know, the bottom line is investor focuses on the U.S. business. I think they focus on the global business a little too much at the expense of the domestic business. And I think, you know, investors are skeptical that some of the targets that they put up are achievable. So a little bit of a pie in the sky, 3 % to 4 % same-store sales growth, both in the U.S. and international-owned markets through 2030.

35:45In fact, in Q3, we're probably going to have negative same-store sales growth. In fact, they said they'll have negative same-store sales growth in Q3, which means down mid-singulated traffic, guest count growth. So there's a big gap between down mid-singulate traffic growth and, you know, what he's saying is flat to positive traffic growth over the next few years. And then I guess there was some detail about investment plans over coming years, both increasing store count, but also remodels. And I don't know, it seems like the street was not that pleased. They're going to have to shoulder that.

36:24Well, that's right. Eight and a half billion dollars of investments, you know, between tech initiatives, other operating initiatives and remodels that will subsidize the franchisee investments. And, you know, it remains to be seen whether that's going to result in commensurate same-store sales lifts. And in terms of, you know, levers that can be pulled on same store sales domestically into next year, anything on sort of the value front menu changes, anything to kind of, I guess, reengage the customer? I think there's two pieces to it, Mike. You know, I don't think they focused enough on the necessity of value.

37:07Historically, McDonald's has been the value leader within the industry. I think post-COVID, the average check is up over 50 percent cumulatively. I mean, currently they're taking apples to apples menu pricing that's mid-single digits in an environment where that lower to middle income customer is down double digits year over year. So I think the idea that they're pushing is the premiumization of McDonald's. And I'm not sure if the customer is going to be receptive to paying more for McDonald's products, even if they invest in the quality of those products. And so I think they're moving a little bit too far away from their historical value leadership and trying to convince the customer that McDonald's is worth more and they should pay more.

37:59And I'm skeptical, frankly, that that's a message that's going to resonate. Well, investors aren't paying more. It's a valuation, if nothing else, is down below its long-term average. You've got a 3.25 % dividend yield. We'll see if that's enough to stop the bleeding in the stock. Nick, good to catch up with you. Thanks very much. Thanks for having me. Up next, we'll discuss how rising rates could be impacting the private equity markets. Closing bill overtime. We'll be right back.

38:30We've been tracking today's jump in bond yields and the impact it could have on different areas of the market. So how will higher rates shift thinking in the private markets? Several of the public private equity firm stocks underperformed today. Joining me now is Sarah Samuels, CIO at NEPC, which advises institutions on more than$1.9 trillion in assets. Sarah, it's great to see you. It's a pleasure to be here. Thanks for having me. I'm fascinated to hear how rising treasury yields to start maybe change things at all in the thinking about hurdle rates for private investing or what becomes more or less attractive along the way?

39:06Yes. Well, rates are a really important part of the equation of how value is created. When we think about the impact of rates, it's going to affect the marks at some point of these private market companies, but the lag will be there. But just because there's a lag in valuation marks doesn't mean there's a lag in the cost of capital for these companies. So first, we know that rates for any equity company is going to reduce profit margins, most likely because of the interest expense, probably going to pressure valuations and probably increase the bid-ask spread, which isn't going to do much to help us in terms of exits in private equity today.

39:38Most of these loans are floating rate. And so this is going to increase the base rate. And we'll see about the spread. Yeah. The exits you mentioned from private equity, I mean, it's really been a little bit of a logjam, it would seem. What is that doing for, I guess, even longer term return expectations in that asset class? What are you hearing from clients about their relative level of interest? Yeah. So most institutional clients are fully at their allocation. They're fully saturated with their private markets allocations. The fact that distributions have been lower than our models expect, and we've been using these models since the mid 2000s, fund lives have lengthened since then.

40:11So the assumptions about when capital will be called and distributed, it's essentially busted now because the hold periods or longer. So what is happening is it's a closed loop system. These institutions aren't getting capital back, which means that their market value in private markets remains elevated, and they don't need to make as many new commitments to keep their percentage allocation. Furthermore, what we keep a really close track on is the hundreds of billions of dollars that's in longer dated funds that may be trapped. There might be some upside for them to go up into the right to these companies that are older, but there's probably not.

40:44So what we have been working with our clients on pretty closely is secondary transactions to clean up that portfolio, get it priced, help them work through it, figure out the payback period if they do need to take a discount and redeploy that into better returning assets. Now, secondaries did not used to be a tool that was preferred as portfolio construction privates. It was kind of a Hail Mary or an act of desperation. And today, secondaries are a primary tool. So as government bond yields rise, of course, corporates and everything else go up along with it. These are clients you have who have very kind of long-term liabilities, are they now able to say we can at least allocate there for some chunk of what we were expecting to have to go elsewhere for?

41:23So for corporates, in terms of defined benefit plans, yeah, those that helped hedge their liabilities. This environment this year has been really favorable for corporates, meaning the discount rate is increased, which means that their liabilities are lower. At the same time, equities are higher. So their funded status has improved. Now the big question is for these corporates, what should they do with their surplus. And some of them are looking at what to do with their legacy private market portfolios since they are able to immunize their portfolios. And then a quick word on the private credit piece of this.

41:51You sort of allude to it. But is that now just sort of a recovery operation or is there still enthusiasm for the yield premiums you can get there? There's still enthusiasm in private credit. And private credit really is a misleading. It's not an asset class. It's not a single way to trade. There are lots of ways to do it. So we have not been leaning into the large direct lending area for some time now. We like the asset backspace. We really like the more complex situations. And we have a 250 question investment framework that ensures that we're getting paid for any risk that we're taking. But it all is not as rosy as it was when it comes to future returns.

42:28And then really quick final word on hedge funds as an asset class. I've been hearing about, obviously, some of these platforms get huge. And in theory, it's a good environment for a lot of them? It is, yes. They love volatility, whereas other parts of the market really don't, like uncertainty and volatility. So hedge funds are back. I would say for investors, beware of behavioral biases and ensure that if you have something in your portfolio from a hedge fund perspective, that's to diversify and it's a pair trade with the rest of your equity portfolio. Make sure your governing body can continue to think about why that might not be up as much as others.

43:01But I would say I would argue that most hedge fund exposures that investors are chasing today are not all that hedged, and they're actually pretty exposed to the market, and they are generating a lot of value in most instances. But again, not an asset class. Got it. Very different. Good reminder, Sarah. Great to talk to you. Thank you very much, Sarah Samuels. Many Americans are feeling the pinch from higher energy prices, but perhaps nobody is feeling it more right now than farmers. Pippa Stevens is in Iowa with the details. Pippa. Hey, Mike. So this combine uses 90 gallons of diesel per day.

43:33And across this farm, fuel is now going to cost an extra$600 per day just as the harvest season gets underway. We spoke to Iowa farmers about how that's impacting their decisions ahead of one key midterm race. More on that coming up next.

43:54Welcome back to Overtime. Oil rallying today, snapping a five-day losing streak, but still down 9 percent over the last week. Meanwhile, there is no relief in diesel prices, which are at a record high of 632 per gallon. And those higher costs are crushing farmers this harvest season. Pippa Stevens is in Iowa for an up-close look at how all that could impact the midterm elections, which are, of course, just weeks away. Pippa. Hey, Mike. So here in Iowa, farmers are feeling the squeeze of higher costs. And that's a message that Democrats are really zeroing in on as they try to regain ground in a state that has recently swung to the right.

44:31So I'm here in Warren County, which is part of the first congressional district. Democrat Christina Bohannon is now set to face off against Marionette Miller-Meeks for a third straight time. Now, in 2024, Bohannon lost this district by just by fewer than 800 votes. And from speaking to farmers here on the ground, I've heard a sense of frustration that these policies happening seemingly a world away are impacting their operations here at home. We're now like a perfect storm of unforced kind of, I would call unforced errors in political decisions that have put a lot more pressure. So we have these kind of human-caused challenges, almost crisis level, in terms of input costs and trade, you know, in diesel right now.

45:19Now that, of course, includes trade disputes with China and more recently Canada that have eroded relationships and trade dynamics that have been built up over years and years and in many cases decades. I heard from one farmer who kind of summarized it as saying that he feels his Iowa crop is being used as a negotiating chip by Washington. Now, I did also hear from other voters who are still undecided. But one thing that everyone agrees on here in Warren County is that these impacts from higher diesel prices are essentially threatening to wipe out all of the gains, Mike, from higher crop prices.

45:53And Pippa, of course, that frustration is also being felt by politicians who are running for office. All these reports about Republicans pressuring the White House to institute this diesel export ban, potentially, even though almost everyone agrees it would not necessarily be effective across the board. There's a sort of impulse to do something. That's right. And so politicians are hearing from their constituents that they are very unhappy. And of course, fuel prices are very, very visible. And it's not just gas, because here in Iowa, everyone is focused on diesel. And so we've seen both candidates for Senate, Ashley Hinson and Josh Turek, both come out in support of a diesel export ban.

46:33To your point, to really say that we are doing something, we are trying to lower these costs. And while there could be, if there is some sort of ban that goes into place, we could temporarily see some relief in some of the areas that Republicans are now being challenged in, including in Iowa, Nebraska, Texas, even talking about places like Maine and Alaska. So there could be some temporary relief. But longer term, all that does is incentivize refiners to cut their runs. We have about a 1.5 million barrel per day surplus here. And so after the storage is maxed out, refiners are going to cut their runs by about 10 percent.

47:05And also because MoGas, diesel and jet fuel are all produced alongside each other and from the same barrel, this could ultimately raise prices for gas and jet fuel. Mike? Yeah, no, exactly, Pippa. As a matter of fact, you know, Senator Grassley from Iowa said, I hope the White House doesn't listen to big oil that says a diesel export ban won't work. So the narrative is tough to kill, even though you've just expressed the logic of why maybe it's not the thing to do. Pippa, great stuff out there. Thank you very much. That's going to do it for Overtime Today. Fast Money begins right after this quick break.

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