The Setup into Q4 9/30/26

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1:16Thanks, Carl. Welcome to the Halftime Report. I'm John Ford. In for Scott Wapner, front and center this hour, the markets and your money as we gear up for the final quarter of the year, which starts tomorrow. Our investment committee is standing by with their playbooks. Joining me for the hour, Joe Terranova, Liz Thomas, Jenny Harrington, and Steve Weiss. Let's check the markets. The Dow actually dipping a little bit into the red at this point, despite the surprise upside from PCE for the broader markets. S &P is still up better than a half a percent, and NASDAQ up better than one. And let's see what's happening with the 10-year.

1:51It had been a little lower, but hey, it's stubborn. these days. You can see what's happening there with the treasuries. So I want to jump right into what happens from here, especially after this PCE read. I mean, Liz, I imagine you're feeling pretty good about what this says because it's in line with what you've been talking. Well, I think it's in line with the idea that, and I'll go back, I don't think the Fed needed to hike rates, totally understand why they did. I think it's in line with what their mandate is. I understand that. However, I think what's probably going to happen now is that we do see a relaxation in inflation, whether it's because of de-escalation, some of this sort of rejiggering, restating of what the actual data was.

2:40If and when that happens, the rate hiking cycle all but disappears. And that's good for equities, more than likely, which I think is great in the near term. But we're in this period right now that investors are really struggling with. We're seeing things like small caps giving up some of their gains, the equal weighted S &P giving up its gain and money going back into, you know, big cap tech. We're getting these more concentrated leadership. And then obviously yields are making everybody nervous. When you listen to the actual data, we've got 30 year yields at the highest level since 2002, 10 year at the highest level since 2007.

3:17Five-year at the highest level since 2007. Those aren't years when we all feel warm and fuzzy about what happened in the market. So it's making people trepidatious. But I do think that as investors and as members of a committee like this, it's our job to say, OK, yeah, that might be a little bit spooky. But at times of extremes, there are opportunities hiding. And right now, I think there are opportunities hiding in plain sight, particularly in the treasury market. Steve, I think it's fair to say you've been on the cautious side with the committee sitting here right now. Does this read and, hey, what we saw out of the White House yesterday and this reassertion of, hey, risk on in a way, at least when it comes to AI, does that make you rethink your playbook heading into Q4?

4:00No, not at all. I mean, we still have elevated rates that show no signs of going lower. They show every sign of going towards 6%. We won't be, you know, we haven't seen that in a long, long time. And when we did last time, it was 07. So, look, I think it pays to be cautious here. It's too dangerous to be short because there are so many, you know, different ways you can really get hurt being short. But today and over the last month or so, it's really been very narrow breadth, to your point, driven by AI. And I think that's going to continue. I don't think there'll be any pause. I think the the AI innovation, it's the industrial revolution, which is either fifth or sixth, depending on if you're counting another one back there, is going on.

4:53And they're not going to be paused by rates. They're not going to be paused by the price of oil. So it will continue to be moving. Now, of course, they are subject to these companies continuing to deliver on the earnings. And it won't just be Micron today, which everybody expects to, although you don't know what the stock will do. But those are just one-day events in my view. So AI spending will continue for as far as the eye can see. And I think breadth will continue to be narrow. Now, just one other point, if you look at a caterpillar, it had a good month. That's the AI trade. So don't confuse that with what we're seeing in the real economy.

5:36Yeah, I mean, it's unclear how much real economy is left these days after you take out not only the AI trade, but the AI influence. Jenny, how does the income picture look with this PCE report and what perhaps is now less expected from the Fed? And how exposed is it to the AI situation? Yeah, I think you can answer that even better, not even focusing on income. But when I think about my portfolio, it's exactly what you said. It is the real economy. So I have stocks like Clorox, Comcast, Canagra, NextEra, Kimberly-Clark. To me, those are the real economy, and they've been crushed since August 21st.

6:20And so after August 21st, that's when rates really started going up. That's when Google's earnings came out shortly thereafter, and money started flowing back in. And I think that's a, I don't know if it's a great reflection of the real economy, but I think it's a reflection of what the market's expecting, which is the market's expecting winner take all. And it's saying like, hey, everything's going into AI. Everything's going into data center. And the real world has no point. And so I've been really thinking about that 2030 comment from a couple of weeks, last week or the week before. And I keep thinking like, OK, if we all do exist in 2030, the real world and the real economy will continue to exist.

6:57People will still use toilet paper. They will still use Clorox wipes. So I've been struggling with that divergence in between what the market's telling you about the real economy and what's really going to happen. But I suspect we all will be here in 2030. And I suspect these companies will be just fine. And I think there's probably a buying opportunity right now for them. But it's a head game, John. You kind of have to invest like we're going to be here in 2030. I think you do. And then you know what? And then you get to buy Clorox down 24 % since August 21st. All right. It's wild. By the way, with a 6.3 % dividend yield.

7:29Joe, thank you for the end of this first round, because I think it is an interesting, perhaps, contrast, we'll see, between Joe T, the ETF that you've got, and then what you're doing and what you do discretionarily. So the momentum concept, I think, perhaps wins out in this environment, especially after PCE. If you were trying to time what's going to happen with rates with the economy, it's been really hard. What are you doing that's different from what the ETF is doing? So that's a great question and great to have you here. Last day of the third quarter. So the market in anticipation of the last day goes through that recalibration in terms of positioning.

8:11And I think what the overwhelming theme of the third quarter to really what Liz and Jenny and Steve have all said is the market once again bent, but it didn't break. It's been rotating all year. It's been going from S &P equal weight back to concentrated S &P market cap weight. And what we did in the third quarter is we lost small caps, right? Small cap performance, pretty ugly. We lost S &P equal weight. We had energy, but it was all about technology and concentrating in the direction of the mega caps. And to answer your question, what I did yesterday, and we didn't get to really touch on it because we had the phenomenal interview with Kate Rooney, is we pulled back in the market to an area where I thought you had a low risk, high reward opportunity to own the S &P market cap weighted.

9:10Yeah. And when I say that, what am I owning? I want to own NVIDIA, which is breaking out. Josh Brown's talked about that. Apple, which is breaking out. Meta, which is up 26 % so far month to date. I'm going along with that concentrated. I bought some SPY at$7.64. I have a 760 stop in. That's a very tight stop. That's below Friday, September 18th's low. If you remember, we gapped up significantly Monday, September 21st, and we had that kind of thrust move higher. So that's kind of what I'm doing that's different. I'm going in the direction of the concentration. And I think as we move in the fourth quarter, the markets recalibrate its positioning exactly in that direction.

9:52Why? Because it believes that the earnings are going to deliver. And we get the first glimpse into it tonight with Micron. Liz, as a business journalist, I have nightmares, not quite literally, but almost about what I just said. No, about 2007, right around, because I was a young business editor in Silicon Valley, not actually editing tech, but editing real estate and personal finance. And I didn't see it coming. Despite all the warnings that have been out there, we're so focused on the incremental story of the day and how the people who said it wasn't falling apart had been right so far that I didn't take enough of a broad look often enough to counterbalance that for my readers, for my audience.

10:32How do you do both in this environment when those who have been saying this is all going to end badly have been wrong so far? What's interesting about what's happening right now is that there's actually becoming, I think, a larger divide between the bulls and the bears. And we've got this almost even balance of people saying everything's going to be fine and then people saying this is the beginning of Armageddon. So in a portfolio and portfolio construction, and I'll stop before I get too academic about this, but I think about it. I mean, if there's anywhere you can. I want to see Professor Thomas go.

11:07We've got 51 more minutes to go. So I think of it with three pieces. You've got preservation, income and growth. and depending on where you are in your investing journey, you might prioritize one of those over the other two. This is a period where I think you have to start to evenly weight them, not because you have different goals, but because the market is offering you an opportunity, particularly an income, that even if you're a younger investor, you're getting an opportunity right now. So you can look at that in bonds. It sounds like you're saying preservation and income have been bad words and now they're good words again.

11:42Well, I think they're more attractive. So because we have such a big divide between the bulls and the bears, in my personal portfolio and what I'm thinking about for investors, I think you have to do sort of a balance by extreme. So on one end of the spectrum, I do think that AI continues. I do think that the AI trade is still attractive. But I do think that there's a pretty strong possibility that the market on an index level can whistle past the graveyard of everything else that might be going wrong because of that AI trade. But you still want to be exposed to it. So all in on semiconductors, software, cybersecurity, all of those things, but then balance it out with the other end of the spectrum.

12:20You're getting great income opportunity in treasuries. If something goes wrong, if the Fed has to backtrack, guess what's going to happen to treasury yields? They're going to come down, most likely, at least on the short end of the curve. Look at something like gold, right? What happens if the Fed has to backtrack? What if economic data softens and the bad scenario comes true? I do think you see a pretty big bite for gold again. Semiconductors are tough. And Weiss, I want to go to you on this one. You were in Micron for a while. I think you largely got out of it. I don't know if you're still in and out.

12:51But we were talking a little earlier about World Labs. Fei-Fei Li, you know her. They just got bought by AMD for$8.2 billion, or at least they're in the process of making that transaction. There's so much happening in semis, but it's so volatile. We've got Micron coming tonight. I started off with that. How do you watch your butt but not lose out? You know, sometimes experience is a benefit, and that's most of the time. Sometimes it's a hindrance. And I'll tell you what I mean specifically with Micron. Everybody talks about how cheap it is, six and a half times earnings. Guess what? That's where it trades.

13:30That's where it's traded forever. There'll be spikes in it, and there'll be declines in the PE. But six and a half is a fair value for the company. Now, maybe it's a little different now because the cycle will extend. This is not the first time they've come out with these contracts guaranteeing price. They do it every cycle. Guess what? When things get tough, when there's a glut of memory chips, nobody cares about the contracts, right? Not their customers that they've got to live with. Number one. Number two, only about 40 to 50 percent of their forward business is guaranteed in terms of price.

14:08I'm saying those prices won't work. But on the margin, that's enough to kill the earnings. Now, so that's what I mean by it's a hindrance, because I'm used to these boom and bust cycles with them, with semis, etc. However, is this time different? Now, every investor hates to say those words. So I don't think it's necessarily different, but I do think the cycle will be longer. So I got out of Micron when there was so much fluff in it, and the valuation going to 10 times at that time that I just thought that was a prudent thing to do. I'd also been up over 300 % in the position in less than a year.

14:42So to me, it was insanity. Now, I have been trading it. Don't talk about it on the show because it gets confusing for viewers. I've traded SK Hynix as well. And I think this may have legs. If the stock gets hit on the earnings, depending on how much it gets hit, and I have no reason to believe it will, then I would go back in. But the danger is, But just on Liz's point, preservation of capital, what does that mean? For me, it means that there's no permanent loss of capital. And if you're in the right stocks, and by that I mean not some fluff names that really have no sustenance, have no earnings, negative EBITDA, then that's an issue.

15:26But if you're in general stocks in the market, over time, we've been through the worst of it. We've been through the crash of 29, 08. Guess what? It comes back. So if you're a young investor, unless you're putting a lot of dough into treasuries and others. I don't know a lot of young investors doing that these days. It's really not going to give you such a strong income stream. So I think you're better off compounding in the market. And I think most investors are better in the indices than individual stocks. I want to follow up a little, if I could, on Steve's remarks with Micron. I believe that he's accurate in suggesting that it is always cyclical.

16:10I think you're right about that. I think they do tend to offer these contracts and commitments. And in this case, it's a five-year contract with both ceiling and floor attached to it. I think what's interesting about Micron, and first of all, the positioning we have in Jyoti, it's all based on momentum. Yeah, I mean, it's very clear. Up 541 % in the last 52 weeks, up 276 % so far year to day. I mean, that's momentum in its purest form. But I think there's something about tonight that's going to be very interesting. And it is what happens to the derivative trade. And I've talked about this. What happens to semi-cap equipment names?

16:48Do they see a little bit of a revival? We know Micron's going to deliver tonight. They're going to come in mid 80s on their gross margin. They're going to record a historic profitability quarter. But I want to hear the story related to memory and what's the derivative effect. Because here's what I think happened, Steve. I think in 22 and 23, you went through that cyclical down cycle. Right. And what did Samsung and SK Hynix and Micron do at that point? They stopped investing. They stopped investing in the ability to build inventory in factories. And I think we're behind in that regard. Now, is there a catch up?

17:27Yeah, the catch up's coming. And I think it's a 2027 story. And there's also a question of whether the architecture fundamentally of computing in the AI era is shifting toward needing memory more. Exactly. And and clearly the signal is the value in memory has never been higher and more intense than we are right now. And look at the effect on consumer products itself. So I don't think you wash away very quickly this fundamentally strong story surrounding memory until you tell me you're bringing more supply into the marketplace, offsetting some of the insatiable demand. And it just isn't from Micron.

18:06It has to be from SK Hynex. It has to be from Samsung itself. So I don't think maybe it's not a Micron story tonight. Maybe it's more a broad story about semi-equipment and overall memory. There's no reason to believe they're going to say something positive. But, Jenny, some of this demand is coming from Metamuse, right? I mean, like, it's got to remember what it is going around the Internet. Which means it's going to accelerate even more, right? Well, but that's the thing, right? The demand's coming right now, and the demand is there. And the question really, like, Joe nailed it. The question is supply.

18:32So I think what we're all struggling with, from everything from semis to Liz is talking about asset allocation, like, we have these conflicting timeframes, which is short-term and things we can see, and the long-term, which is extremely confusing right now. And this goes into the supply question. Like, we know China is building memory hard and fast. When does it come on? How quickly can they build it? Can they build it faster than it's ever been built before? Does it come on in two years? And when does Mikron start to see it start to come on? Do they start to see it in a year? We know they're not going to start to see it tonight.

19:04So we can all keep partying in this world where we can see out 9 to 18 months. But after that, it's going to look really different. But Jenny, what I was also trying to tee up for you there is the meta side, because I think you're in it, right? And so is that a way, right? Memory is a cost for them, but it's also potential upside on the top line if Muse becomes the new WhatsApp, the new messenger, et cetera, the thing that people have to have in order to go out there and transact. Right. And I think even that's a little hard to tell. So we've obviously spent a ton of time in our office on this this week, both from the investment perspective, because we own Meta, but also from the personal perspective, where we need to figure out exactly how well it works.

19:45And so we've spent a lot of time looking at what the commentary is. And half the commentary is like, this thing's amazing. And half of it's like, oh, my God, what a waste of time. I suspect it skews towards this is amazing and it really is helpful. But, like, what if, shoot, I'm blanking on it. What's the new one that OpenAI? Instinct? Oh, wait. OpenAI. Dots. What if Dots is really competitive? Like what if someone else comes out with something really competitive? And so this too sounds amazing. And you saw Meta Stock go from what was it like 630 last week or so ago to 700 and change on news and on the excitement.

20:18I talked to two different startups yesterday that are doing things like this in targeted areas. One in travel, founded by a Kayak co-founder. And then Marissa Myers got one that's looking at your photos, trying to go out and do stuff for you. I mean, there's going to be competition. So again, in the moment, in this moment where Muse is the only thing, the only game in town, sounds amazing. But how long does it really last? Is it really as great as we think? Is it the kind of thing that's like a flash in the pan and we're all psyched about it and then get bored? I don't know. Let's take a pause.

20:47We are following a developing story this hour. The FTC opening a probe into Anthropic, OpenAI, and other AI labs over product safety concerns. Let's get to Eamon Jabbers with the latest. Eamon. Hey there, John. John, yeah, the New York Post was the first with this story this morning. We have since confirmed their reporting that Andrew Ferguson, the chairman of the FTC, has opened an investigation into the big AI frontier models. You see Ferguson there arriving. We were staking out the big AI meeting at the White House yesterday. He talked to us very briefly there on his way in, but he was part of that meeting yesterday.

21:22And now he has launched this investigation. What we don't know, though, is a longer list of items than what we do know on this one, John. We don't know exactly what information they're asking for from these AI companies. We don't know when those requests have been sent out or when they will be sent out. And of course, we don't know where it's all going to land. But the central point of contention here is just how harmful these things may be for American consumers. So clearly, the FTC sees something that they want to get to the bottom of. And Ferguson has opened that investigation, John. Eamon, thank you.

21:56Liz, this is going to seem like a bit of a whiplash probably for investors out there. Out of Washington yesterday, they were all going to watch each other's back doors, and apparently that was going to solve it. But today we've got this word of an FTC investigation. You expect an impact on related stocks? I mean, I don't think that it's enough of an impact right now to overshadow everything else that goes on. But I do think that as we move forward in the next even two years, So pre-2028 presidential election, regulation and government intervention, government reactions to a lot of this AI stuff is going to only get stronger and become a real market story.

22:35Joe, it seems like the president is trying to keep AI from being, or he would say SI for superintelligence. He's trying to keep AI from being anything but a positive market story. Yeah, look, I thought, to your point, we came off of yesterday's lunch meeting at the White House with some really strong momentum. We heard some voices finally deliver on what the messaging surrounding this innovation and technology ultimately might be. But I also agree with what Liz is saying. I just think this is going to be a multi-year period of hearing negative and positive stories related to the innovation. I think you fall back on the market itself for what the message ultimately is.

23:21I don't know, John, is there very much internally in the market that says, OK, we're skeptical about what we heard yesterday from the White House. and we believe that there are going to be regulatory challenges immediately in front of the industry? I think the answer to that is no. I think if you're looking for the hedge against all of this, you turn to your CrowdStrike, you turn to your Palo Alto, which are trading at near all-time highs, and cybersecurity offers you a degree of hedge for where ultimately the innovation is going with the requirement and needs of more security. If you're willing to pay those valuations.

23:59No, but two weeks ago when that anthropic former employee came out, it was a different story, right? Yeah. Look, I think regulation remains to be seen until after the midterm elections. And I think it's a good bet that when new Congress comes in that you see a lot more noise about regulation. We'll see how new it is. Yeah. And I'm old enough to remember when SI was a magazine. All right, up next, new portfolio moves. Jenny's got two big trades you don't want to miss, and we'll get all the details. Plus, our top calls of the day when halftime's back in June.

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26:31Welcome back to Halftime. We've got some committee moves to hit. Jenny, you sold Whirlpool, bought Albertsons. Is this about consumer credit? Is this about? No, this is about trying to put the viewers to sleep. Okay. I'm just kidding. I mean, do some laundry. What are we talking about? This is so boring. So the Whirlpool, actually, it's not much of a just a straight outright sell. This thing's been a dog for the better part of two years. It actually hit a really nice high earlier this year and then just sunk. They just keep missing earnings. They keep doing crummy capital asset allocation decisions.

27:00And so I've been using it as a source of funds. So we finally just got rid of like the last little vestiges of it in the portfolio. So it's gone. If you followed me into it, I truly apologize. I love that. The more interesting one is Albertsons, where we just added Albertsons. And this sounds boring, but it's kind of interesting. Don't start it that way. OK, but it's a grocery store. Yeah, but so is Walmart. Yeah, that's true. I mean, Walmart is good. So why did you buy Albertsons and not Walmart? Well, for me, I need the dividend yield. And on this one, you've got a huge 5.8 % dividend yield.

27:34It's trading at six and a half times earnings. JP Morgan actually has an outperform on it. And that's not why I bought it. I do my own homework. But JP Morgan's whole thing is like, look, the cash is just too significant to ignore. So here's where you come out on it. Again, super cheap, right? Earnings should grow at CPI plus a little. expenses should grow at CPI less a little. So you get some like real or sorry, revenue should grow at CPI plus so that you get some like real earnings growth, mid single digit, maybe again, a 5.8 percent yield. They have a dollar 78 of earnings that covers the 68 cent dividend.

28:06They actually raised the dividend by 13 percent in April. And and even though you can poke fun at grocery stores and even I do, you got to go, you got to go. Somebody's got to go. You got to go. Do the demographics matter with Albertsons? Does the geography matter? Geography totally matters. Okay, how? Because the reality is, is people don't want to go more than three miles, and they're everywhere. Now, we know there's tons going to Instacart and Uber and all of that, but that's the middle of the store. People like me, you know, still want to buy their meats and their vegetables and all that stuff, the perimeter of the store.

28:39They still want to buy that themselves. You want to see it. Yep, you want to see it. You want to smell the pineapple, make it sure it smells good. So they have a reason to exist. It's a really stable business. But here's what I like most. What I like most is that the CEO, a woman named Susan Morris, who's been in the job for about a year and a half, is known to be a superb operator. And then a few weeks ago, it was announced that Meg Whitman from eBay days, you all may remember her, took over as chair of the board. And we know that Meg is superb at strategy. And I also think that Meg's at the point in her life where she's not going to get involved in something unless she is quite positive that she can make a positive impact.

29:15Unless it's politics. OK. Unless it's politics. Well, yeah, positive impact, right? No one's there. Too far gone. But I think you've got some decent upside on this, both from the multiple expansion. And if you don't, you've got decent earnings and a juicy dividend that's really well covered. One quick question. You're super pumped about this? The stock is in. Well, first of all, I'm very proud of you for getting rid of Whirlpool. Thank you. You're finally coming over to my side of the desk looking at momentum and negative momentum. But for Albertson, the last, call it four years, it's down greater than 60 percent.

29:49Is that because it's a brick and mortar story or is it because there's been significant inflationary pressures? Which direction? Actually, kind of neither. And so it's a little bit exogenous. So if you look at Walmart or Kroger, right, they've done really well. If you look at Sprouts, they've done well. But what happened was Albertson's was in merger talks with Kroger. and things just kind of went on hold, including like, let's not nationalize our sales system because we know we're going to fold into Kroger. And that was really a wet blanket. They had to get out, that had to be finalized. The merger ended up falling apart and then they're coming out from under that.

30:24So I think it's more, I think it's more exogenous and not exogenous, that's not the right word, but like unique and specific. But again, if you look, you know, to the exciting Walmart, you look at an exciting Walmart. What year is it? 1999. you can't really pin it on bricks and mortar. All right. Maybe if it gets some momentum, it'll show up in Joe T. Let's get to some community movers. First up, Eli Lilly releasing some positive results on one of its new GLP-1 drugs. Joe, you own this in the aforementioned Joe T. Yeah, I mean, it really is when you think about a company that is a trillion-dollar market cap and trades like a biotech.

31:01The dominance that they have right now as it relates to obesity and weight loss drugs is really staggering. While I'm speaking, if we could show a chart of Novo Nordisk, I think what you'll see is year-to-date, you have Lilly up 10%, and you have Novo down, I think, somewhere around 24%. Last 52 weeks, I think Novo's down 31%, and Lilly's up 56%. This was supposed to be the competitor, right? And it clearly has not been. So, they have established themselves with this significant market share lead, And with the revenue they're deriving, they're reinvesting and diversifying the business. $20 billion worth of acquisitions so far.

31:42Let me get to at least one more. Moderna getting downgraded to sell at Citi. Let's see. Who's got that? I do. Look, it's interesting. Stock did very, very well. And I don't know why they're downgrading it. The future of Ford is extremely bright. OK. Now to Seema Modi. Are we doing that? Got a news update. Sima. Hi, John. Here's what we're watching at this hour. A fly Dubai plane carrying passengers diverted to Saudi Arabia earlier today just landed at Ben Gurion Airport in Israel. Israeli officials say the co-pilot from their original flight to Tel Aviv tried to crash the plane after stabbing the pilot.

32:22Prime Minister Benjamin Netanyahu said passengers and crew members subdued the attack so the flight could safely land. An appeals court halted the execution today of Krista Pike, who would have been the first woman in more than 200 years to be put to death in Tennessee. A federal appeals court said it would review whether allegations of childhood abuse and rape were fully considered at her sentencing. Tennessee's attorney general immediately appealed. And the Senate Health Committee voted today to advance the nomination of Dr. Nicole Sapphire for Surgeon General. Dr. Sapphire, a radiologist and former Fox News contributor, faced the panel earlier this month and expressed support for vaccines, telling lawmakers she does not believe they cause autism.

33:04She is the president's third pick for the role after the first two nominees stalled in the Senate. John, I'll send it back to you. Seema, thanks. Coming up, going on the defensive with defense stocks closing in on their worst quarter in years. We're going to find out if the committee is finding opportunity in the pullback after the sprint.

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35:06Welcome back to The Half. Let's talk defense. Boeing paring back earlier gains after beating Northrop Grumman for the$20 billion U.S. Navy deal to develop next generation fighter jets. Jenny, you own Northrop, and my overarching question is, are we at peak defense? I mean, the Trump administration's been spending on it. We got these wars going on. If Congress changes, if the political winds change, does this trade get worse? I don't know. I mean, I think it's kind of interesting when you think about all the story and all the intrigue behind it, because when you look at Northrop, here's what you see for expectations for earnings growth.

35:43You see 10 percent this year, 5 percent next year, 8 percent the year after that. And would that say peak defense? Probably not. I mean, it's got a four and a half percent free cash flow yield. It doesn't have a very expensive valuation. It's like 16 times. And so then where I struggle is like, you know, is Northrop just fine? You know, and should it continue to be like a viable ongoing company? By the way, we bought it 13 years ago for less than$100. Right. So it's this long term, as my friend Steve always says, kind of permanent compounder in the portfolio. But then you wonder, right, what's AI going to do?

36:19What's drone technology going to do? Is it going to completely disrupt these incumbent defense companies in a way that we can't imagine or really anticipate at this moment? It seems to be changing the balance of warfare where you've got these small, cheap drones that can do a lot of damage, inexpensive to send, really expensive to shoot down. You've got this replenishment story that's out there now. I wonder, do you think that's already priced into these stocks? I think it's down 10 percent on the year. I think to some degree it is priced in, but it just goes into this category of what's making our jobs as portfolio.

36:50managers, as active managers so hard this year, which is once you start looking out past 18 months, there's opacity like we've never, even during the pandemic, when things were so opaque, the opacity now is much more intense, much harder to figure out. So we just keep marching forward. But it seems like it seems like at this moment, yeah, Northrop marches on. It's not, you know, it's not some home run. It's not some huge boomer. But maybe they acquire really cool drone We lead positions in a number of defense companies, private companies, including a few drone companies. Yeah. Where would you rather be, private drones or public north route?

37:28Well, hold on. Let me stop you here before you get momentum, because we're going to get to our Sarah Eisen. She was just speaking to Citadel founder and CEO Ken Griffin a short time ago after this major donation, $3 billion, I believe, to Carnegie Mellon University. Sarah? Yeah, it's a really big deal, John. Good to see you. Carnegie Mellon University announcing this morning a historic$3 billion gift from Citadel founder and CEO Ken Griffin. This is the largest individual gift in higher education history. $2 billion of it will go toward launching CMU Miami, a new 35-acre campus, as well as$1 billion toward investments in CMU's current Pittsburgh, Pennsylvania campus.

38:06I did just speak with Ken Griffin and Carnegie Mellon's University president, Farnam Jahanian, about the gift, and here's what they told me. it's a three billion dollar investment in carnegie mellon it's an investment in excellence in higher education in america we've worked on this now for two two and a half years i am so thrilled to be supporting the leadership team of carnegie mellon carnegie mellon is number one in the nation in computer science artificial intelligence cyber security world-renowned program in robotics and has an incredibly strong fine arts and drama program that anchors its humanities efforts.

38:49This represents what higher education times are changing so we need to change with it and we need to meet the urgency of the moment and with Kent's investment and support and and partnership candidly CMU is ready to meet the urgency of the moment. You know they talked about creating this new model for higher education where the CMU Miami University won't be focused on academic majors, but more on societal challenges like AI and health care. It's kind of a different model here. Of course, I also asked Ken because this was his first time speaking really since the situational awareness episode. I asked him what was going on behind the scenes as Citadel acquired a$16 billion portfolio from the AI-focused hedge fund back in July.

39:35Listen. There was a wobble in the market. There was a setback in the valuation of these businesses. Too much leverage, too much enthusiasm. They were forced to take a step back to liquidate part of their holdings to ensure their financial stability. Citadel played a critical role in that. We bought most of their portfolio. I was instrumental in that trade. We worked about 40 hours straight to solve the liquidity challenges and situational awareness. But we brought that issue to a solid resolution for both their limited partners and for the investors in our funds at Citadel. Do you think there's too much concentration in AI right now in the market, Ken, and too much leverage?

40:17So there's a lot of enthusiasm about AI because all of us hope it will unlock productivity gains that our country needs. America has to grow its economy more quickly. If you look at the staggering $40 trillion of national debt. Our only path out of this current predicament is to increase productivity. And AI, we all hope, is one of the ways that we'll do so. Robotics is another. Computer science, of course, is holistically a key part of the equation. But our country, more than ever, needs to be laser-like focused on how do we create growth, how do we create opportunities? How do we elevate and accelerate the careers of our young members of society?

40:59Because those are the people who will lead our country in an incredibly competitive world. Ken Griffin and the president of CMU. We'll have more on that from that interview today on the exchange at 1 p.m., John, because, you know, I asked him about higher unemployment rates for college grads. I want to try to get a little bit more out of you right now, as a matter of fact, because Carnegie Mellon is known as sort of a mid-Atlantic engineering institution. I can't help but notice that$2 billion of the three is going to Florida, to Miami, which is not the Pittsburgh of the South. What should investors read into the fact that Griffin is investing there?

41:35Well, they should read into the fact that he's putting his money where his mouth is, and he has said that he wants Miami to become a world-class city. And he's moved Citadel headquarters from Chicago to Miami. He's a ton of investment in the buildings. Remember after that, the fight with Mayor Mamdani, where he filmed that video outside of his apartment, said, I'm just going to pour more money even into Miami, even though he's still doing the building tower investment in New York. I think it's Miami. I think it's also the sort of new model that he's after here with higher education. We talked about that.

42:09But what's also notable about Carnegie Mellon, John, I thought this is where you were going to go, is it's not Harvard. Ken went to Harvard. Ken has given half a billion dollars to Harvard. He paused his giving to Harvard after the rampant anti-Semitism on the campus after October 7th. I tried to get him to talk about whether they've made any progress since then, if there was any engagement with Harvard on anything like this. So I think he didn't really go there. But I think the fact that it is Carnegie Mellon, he was clearly sitting out there. And he's, by the way, going to be joining the board as part of this investment.

42:42it reflects, I think, a university that is really willing to work with him on what, you know, some of the priorities that he's had in terms of getting higher education to match up more with some of the societal challenges that we face, including AI. They talked about that a lot. OK, money talks. We try to listen and interpret. We'll get more from you next hour. Thanks, Sarah. Up next, options action. Oliver Rennick is tracking some big activity in this month's worst sector. We're back after this break.

43:23Let's get to today's options action. Oliver Rennick joins us from CBO Global Markets in Chicago. Oliver. Hey, John, the XLF Financials ETF has gotten pinned down by interest rates this month, trading on a 30-day correlation with the 10-year yield of negative 0.92. But some interesting options action today suggests better times may be ahead. More than twice as many calls were bought versus puts on above average volume in the XLF. And there was some bullish trading in two key stocks in the group, namely SIBO and broker Robinhood. After announcing new binary contracts linked to company-specific KPIs with trading fees waived through the remainder of the year.

44:04SIBO is up 6 % today with options trading on the stock almost twice the average. And while Robinhood is down, options are skewing bullish on elevated volume there as well, with one trader buying the 130 strike calls in hood that need a 27 % rally through March to pay off, John. All right, Oliver, thank you. Let's talk about that and about what's happening. Actually, I want to start off about what's happening in markets in general. We've got tokenized trading happening. There's a lot of leverage, particularly for retail investors. And I think a lot of the people using it, especially on Robinhood, haven't experienced a good sustained downturn probably ever.

44:43Is this safe? Is it safe? Market structure has changed dramatically. It's going to continue to change over the course of the coming years. Is it safe? I don't know if I like the word safe. Is there potential for a significant correction, rather, correlated to the changing dynamic in market structure? Without question, yes. And at some point, there will be that moment that we will have to reckon with the growth of market structure in a particular direction that really encourages excessive speculation, binary prediction outcomes. That moment will come at some point down the road. Jenny, I was talking before about my 2007 nightmare of people buying homes they couldn't afford.

45:30I worry about people buying stocks they can't afford. Yeah, I think that's true. And I also think it's a tale as old as time. And I think this year, most of us, many of us read Andrew Ross Sorkin's 1929 book. And to me, that's such a good reminder that there will always be Cowboys and there will always be players who don't consider risk and move too fast and want to kiss the sun, you know, and don't do real analysis. And then I think about that quote, you know, the market is a place to transfer money from the impatient to the patient. And I think the impatient are this year's Robinhood players who really aren't considering risk in a proper way.

46:04I think there will be a correction. And I thought it was funny that you referenced your California days. I was in California last week meeting with clients and I was really struck by three conversations in particular. One was with an executive crypto firm. The next was with a guy who is a semiconductor scientist. And then the third was with a serial CFO. And all three of them started off the conversation saying to me, like, you know, when's the market correcting? Clearly, clearly, there's like so much there's so much misallocation. There's funny money out there. Things just don't make sense. I would have thought that they're in the sweet spot, you know, where they where they've, you know, tricked themselves into thinking the party is going to continue forever.

46:44But I think, you know, I think there is something kind of nasty lurking out there. I also think, yeah, this goes back to Liz's asset allocation. If your time frame is long enough and if you've done your asset allocation right and if you have cash on the sideline to your point, you're going to get through it. OK, we've been through worse. I don't even think your time frame has to be that long to do this logically. So if you look at what happened in 2007, 2008, the reason that was so painful is because so many people were so exposed to the housing market six ways to Sunday. Right. Right now, we've got a lot of people exposed to the equity market.

47:16It's been a very good place to be. It's been very profitable for many people. We have obviously this force of the K-shaped economy. We've got people exposed to equities that is just greatening the wealth gap in America. But this is why in this moment in particular, even though it is the least sexy thing I could say, you want to have exposure to stuff that I do think can preserve capital. And yes, income is attractive, but something like treasuries, right? You hold a bond to maturity, you get par back. That is capital preservation in stocks. It can go down a lot faster. And when you're talking about the power of compounding, Steve made this point before.

47:54Yes, the power of compounding is important. I would always say that that is the investor's greatest asset. But if you have a drawdown, that is a surprise to everybody. And we know that when drawdowns happen, they happen fast. You go down 50 percent, it takes 100 percent to get back to zero. So you lose a lot of time in that period. And you do want to focus on capital preservation in parts of your portfolio where you can actually take advantage of those drawdowns. You don't want to participate in the whole drawdown. Yeah, I think it's a broader question. Are we turning to a society of gamblers between all the...

48:29Turning into them. We haven't even talked about draft kings. So all that adds to the belief that I can make money quickly where they can't. And so the online gambling, they use AI to line up against because they're much more informed. The house always wins. So the same thing goes here. So what I don't want to see again, because we will, is that the market comes down. All these people that went into the market with these ridiculous things, they're going to blame the banks and everybody else. But they will. So you've got to take ownership. Show a chart, if you could, of a 30-year. Where are we sitting right now for a 30-year?

49:08Here's the challenge. Here's where your safe word comes into play. Here's where everything we just said presents a challenge to financial market stability. When you go out and you try and fund long-term liabilities with short-term assets and you see a spike like that in yields, that's where you run into the problem. There's your public service announcement. Final trades coming up on Halftime. We'll be right back. Let's get to final trades. We've got 50 seconds, so keep them tight, Joe. SIBO, it has to make a move higher from here for me to maintain my position. In case you haven't been watching the entire show, I like the 10-year Treasury.

49:42And I do think that it could go higher here in yields, but still a good place to be. OK. Milrose Properties. It's been crushed because of interest rates. Meanwhile, it's got a 12.2 percent dividend yield, and they raised the dividend by 2.5 percent last week. Wow, that's a double wow. I know. Yeah, very exciting. When Nars Land Bank spin up. I'm going to go with Meta. I think Meta's come down enough, and I like it here moving forward. How do you guys feel about Micron tonight and its impact on the markets? I'm so pumped. You're excited about everything today, Jenny. My goodness. Can't even get excited about your first glimpse into the earnings season.

50:16I think the story matters tonight. All right. That's a good take. That's going to do it for Halftime. The Exchange starts now. You've been listening to CNBC's Halftime Report, the podcast. You can always catch us live weekdays at 12 Eastern, only on CNBC. All opinions expressed by the Halftime Report participants are solely their opinions and do not reflect the opinions of CNBC or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet, or another medium. You should not treat any opinion expressed on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion.

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