Jobs Report Reaction, Diesel Prices Hit Record High, Data Center Debate 9/4/26

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0:51Welcome to Power Lunch. I'm Kelly Evans. Brian Sullivan is off today. A strong August jobs report is putting the Fed back in focus. The labor market's resilience is lifting treasury yields, pressuring stocks, and raising the odds that a rate hike could be on the table in just a couple of weeks' time. We'll talk through the numbers, what they mean for the economy, the markets, and your money coming up. And after a record-setting August, Americans are heading into Labor Day with a new pressure point, gas prices. The national average has climbed to$4.15 a gallon, the highest ever for this holiday weekend, although not inflation-adjusted.

1:22But still, and oil holding above$90 a gallon on continued volatility in Iran, RBC's head of global commodity strategy, Halima Croft, is here. And the AI build-out has been one of the market's biggest growth stories, but the conversation is moving well beyond Wall Street. Two key voices join us to debate the data center boom, former U.S. Senator Heidi Heitkamp and Daniel Castro, president of Think Tank Information Technology and Innovation Foundation. But let's begin with the surprisingly strong jobs report, the economy adding 162 ,000 jobs in August. That's more than triple what economists expected.

1:57And that big payroll surprise is quickly changing expectations for the Fed's meeting later this month. Check out the CME Group's FedWatch tool. Before the jobs report, odds were about even for whether they'd hike a quarter point. But after today's report, the odds of a rate hike, as you can see there, jumped, with markets now seeing a 60 percent chance of that happening this month. Joining us now to break down the numbers is Tom Porcelli, the chief economist at, well, They put an S in there, so I wouldn't say Porcelli, which I appreciate. And Chris Grisanti, chief market strategist at MAI Capital, who will be joining me for the hour.

2:27Welcome to both of you. Just kick us off, Tom. What are your thoughts? Look, like any payroll report, there's always quirks. This was no exception. You got a lot of payback in a couple of categories that sort of really flattered this report. So do I think that this is the beginning of, you know, 162 ,000 jobs that are going to be created going forward? no. I think we're still in this sort of call it 50 to 100 ,000 zone. And indeed, I think if you just look at like the three month average, which, by the way, and Chris, you and I were talking about this a little bit in the back. I think that's the right way of thinking about the payroll report.

3:01The three month average is about 70 ,000, right? It just smooths out a really volatile report. That's all that does. So I think beneath the surface, this is a labor backdrop that is fine. It's not accelerating. It's not decelerating. And I think importantly, this takes, you know, From the Fed's perspective, it takes labor completely off the table. I mean, I think we're already there. Remind me, were you in the cut camp or the hold camp? The hold camp, that's right, even as everybody has moved into more of this. So are you still in that camp? We are. Yeah, I mean, look, you've known me for long enough to know.

3:30I think it's wrong, that's the polite way of saying it, that the Fed is going to let monetary policy hinge on a single number. But here we are. I mean, I think it all comes down to CPI next week. Chris, what do you think? And what were your reactions to the jobs number today? First of all, it was a lovely jobs number. Yes, it was. It really was. It's kind of, you know, solid, I think, is the word we both use. And the other thing is it's kind of a Goldilocks God number. It's not too strong. The other thing I think, and Tom seemed to agree with me, was that, hey, it's time to embrace slightly higher rates.

4:05It's not going to kill us. It's about the least of all evils. and there are so many worse things than slightly higher rates because the economy is doing well and corporate earnings are growing by leaps and bounds. Fair enough. But we were just talking last hour with Scott Cronert. Again, he's looking at it from the equity strategy point of view, point Barry Knapp and others have made, that a rate hike could exacerbate the K-shaped economy. If you have a gasoline shock like we're having now, like it's really bad right now, and then you hike rates, who gets hurt by that? Right. But what you're saying is inflation certainly hurt the K-shaped economy.

4:36What we need is a powerful economy, and rates would naturally go up with that, but we do need to limit inflation. Let me ask it this way, and to get both of your points of view. Would the rate hike be happening against a strong economy, which there's a big debate about whether you need to hike against economic strength, or would it be happening because we're still seeing price pressures, for instance, from energy? Because you would say if it's just energy, you shouldn't hike for that reason. Yeah, I would be against hiking just to control an oil price that we can't control anyway. But I would be for hiking, and I am for hiking right now, to control forward-looking inflation in an economy where we've got corporate earnings growing at 35 percent a year.

5:17It's unheard of except for a recession. So I would be afraid that rates are too low right now. Yeah, and so what I would say to this whole conversation, because, again, I think we've been doing this all for long enough to know, like, everyone just gets so caught up in, like, okay, what's the next sort of thing that's going to happen from the Fed? I think just take a step back. I actually have no sympathy for the Fed raising rates because of today's inflation. None. And we've talked about this last time I was on. You mean today's payroll report? No, no, because of inflation, right? Because of where the inflation rate is, even though it's above target.

5:49Yes. By a lot. But it's above target. But again, it's starting the process of coming down, right? Which is what Waller said yesterday. Everything other than PCE is actually slowing down. That that's not like interpretation like that's just a fact. So what I would say is, as it relates to the Fed and the fate of rates, I have no sympathy for the Fed raising rates on the back of today's inflation because I don't think it's anything that they can control. But I have tons of sympathy for the Fed raising rates over time because of tomorrow's stronger growth. That is something I can get behind. So both of you think that stronger growth would be inflationary.

6:26So historically, certainly. Yeah, but I think if the kind of growth that we're going to have is really more because of productivity, then you don't have to actually have the inflation part of that. And that, to me, is something I think is a massive disconnect because everyone's just short-termism is a thing. And I think we're really just caught in that echo chamber right now. You know who's standing by in Chicago is Rick Santa. And, Rick, did they let the cat out of the bag earlier today? Listen, we don't have – I think they did, yes. All right. Well, I'm just going to say – do you know how many emails I've gotten to – anyway.

6:56Why don't we stick on the topic, which is what do you think about the rate hike debate? And, you know, especially in light of the jobs report, I guess, is growth going to be so strong that we actually need to slow things down a little bit? You know, I don't know that growth will be that strong, but I'm optimistic it has a possibility to get that strong. I think when we look at earnings, which our guests have adequately covered, you know, they're at lofty levels, but they're coming down. There's a whole A.I. component to this that interest rates just aren't going to be able to get into. And I think that if we become kind of conditioned to think that a jobs report that is good with wages that aren't very lofty, 3.1 percent is five plus year low.

7:45And if we look at all the notions of where inflation is against wages, it would be a hard argument to impress anyone that that is a driving force to get the Fed to raise rates. On the probability side, you know, next week we have what on the 10th PPI on the 11th. We have CPI. Those are going to definitely be the defining moments. And to go from nearly 70 percent to the kind of 47 percent and today almost up to 60 percent shows how much volatility is going to be in the current contract for the September meeting. And every day that clicks off, that contract's going to be more sensitive to one or tick movements, changing the percentages rather dramatically.

8:30I have no sympathy for the Fed here on one regard, because to me, that Fed fund futures and the relationship it has between traders and the message to the Fed is something I don't think they can tinker with. So wherever that is, a day or two before the meeting, if it's significantly higher than 53-ish percent, they're going to follow it. If it's 53 or lower, down to about 48, it's going to be a push. And, you know, anything under 48 percent, I think they will do nothing. And do remember, I mean, with wages low and inflation sticky, but remaining sticky. And what isn't sticky prior to the war is due to the war.

9:10These supply issues are unresolved. And I think that I was never for some of the recent eases that we had. I think staying pat is the most logical place for the Fed to currently be. All right. That's two stay pats. Yeah. Well, the one funny thing, though, is that everybody has no sympathy for the Fed. I got a lot of sympathy for the Fed. You've got Trump coming out saying lower rates. You've got a strong unemployment report. So it is a hard one. I think let me ask you this. The market's at a coin flip. And Steve Leisman and Diane Swank were saying last hour, that's not what the Fed wants. I think it might be what the Fed wants.

9:44What do you guys think about that? I agree with Tom. Tom is so smart. Because I think they should stick, Pat, because there's a lot of moving pieces. But here's my question, Tom. Do they, should they, do they want to signal, do they want the markets to say to the Fed what they think that policy should be? Or would they welcome the fact that it's effectively at a coin flip? So I think they actually like that as a coin flip. Now, look, if you're trying to sell the idea that you are willing to make a decision to hike rates, right, which is what Warsh is basically trying to drive home to the market, then that necessarily means that if the data move against you, that you're going to actually have to hike.

10:22So I think it again, I don't love the idea that it's all about this one, the singular report. But I think that's the corner that Warsh has painted himself. So in other words, you do think it comes down to what happens with CPI and PPI next week? I do. Again, I stress, I don't think monetary policy should be crafted that way, but this is where we are. And Rick, we had that Beth Hammock post on LinkedIn, which, again, I just I find it somewhat amusing when we talk about Fed officials posting. That's what we've been doing for years now. But still. And she said this before. She told Steve this, but she's reiterating she thinks it's time for a hike.

10:53Rick, let me put it this way. The president again posted today that he wants long term rates to come down. And he thinks that if the Fed cuts, long term rates will come down and that'll be better for the deficit. that you and I both know if they cut when conditions don't warrant it, long end rates are going to go up. So what's the best way to get to the president's goal of bringing rates when he's kind of meaning the 10 year, I would say bringing that rate down. Give more verbiage to tackling the third rail of entitlements and try to talk through some of the issues ultimately that are going to potentially sink Social Security.

11:27talk about things that are difficult to talk about and challenge both sides of the aisle to come up with better debt and deficit plans in the future. That would be a good thing. But in large part, I do have some agreement with the administration in his recent comments, because there's lots of issues that point towards a tightening that make no logic when you really dig into them. Like I said, without wages fueling this report, a good report shouldn't automatically be a kicker for higher rates. All right. Anyone else want to jump in here before we? I tend to agree with Rick. I think that patience is warranted right now.

12:04Just keep in mind, one of the only true things you learn in graduate school economics is that policy actually does work with long and variable lags. If you hike rates 25 basis points right now, one, not only do we not have really any impact on the economic backdrop one way or the other, whether inflation or growth, but two, whatever impact you do have, which is modest, it takes like almost a year to actually kick in. Well, let me play devil's advocate for a minute, though, because I think if let's say we get a tough CPI number and so Warsh raises all of the sudden he's got his credentials as an independent Fed chair.

12:36And I think that's very valuable, too. And to spend 25 basis points on that is probably a good trade. So the only pushback, sorry, the only pushback on that, though, is that it's not costless. Right. Like you just don't raise rates and say, hey, nothing happens because you do hit growth. You're not. And that is, I think that's a calculus that needs to be considered. But seeing a Fed chair that is a pushover to the president is not costless either. I totally agree with that. And I actually, but I would argue he's done a great job. He's done a great job. Yeah, threading the needle. Of actually disentangling himself from that.

13:07Quick, because I haven't even asked you, Chris, but your broad thoughts on the markets right here. How much does this matter? I don't think it matters that much. You don't. I don't. And we can talk about this later, too. But I think it's all hands are on AI. Okay. And so if that keeps on going, we can have higher rates, we can have a war in Iran, and the market will keep moving forward. And actually, I know we probably need to hop, but I'll just say this one last thing because I think Chris makes a really important point on that. You know, when you raise rates, raising rates is a perverse tool, right?

13:36You're basically trying to get it. It's hard. You're trying to get people to spend more or less. Think about what the neutral rate is for something like tech. Eight percent. I'm telling you exactly. It's not a quarter of a basis point higher. Yeah. Or 25 basis points higher. Excuse me. I'm versed where we are right now. It's like probably hundreds of basis points higher. So it's just an interesting framing of the conversation. All right. Gentlemen. Well, you stick around, Tom. Thanks, Rick. Thank you. And I'm not I'm not going to. It's going to be a tough few weeks. That's all I'm going to say.

14:03Rick Santelli, thank you very much. Coming up, the great data center debate. We'll have one right here on Power Lunch today. Are they helpful or hurtful for everyday Americans? Plus, Lululemon goes even lower. The shares diving after their latest earnings report. But first, diesel prices hitting a record high. How hard will this hit businesses and consumers? Halima Croft joins us next after this.

14:48We'll be right back.

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15:40Save on kitchen and dining, bedroom furniture and mattresses, holiday decor, and way more. Now is the time to score big, from seasonal finds to favorites you'll use all year long. Plus, with Wayfair, enjoy fast and easy shipping with delivery and time for the holidays. Save up to 70 % off early Black Friday deals. Shop now at Wayfair.com. Wayfair, every style, every home. Welcome back. Oil is on the move again as the Iran conflict keeps energy markets on edge, and diesel is at record highs. Certainly raises the stakes for freight costs and ultimately for consumers. Halima Croft is the head of global commodity strategy at RBC Capital Markets.

16:20Halima, diesel is not as visible as gasoline, but even at the pump, that price is, I think we said, the highest nominally, not inflation adjusted, but ever for this time of year. What's it all going to mean? I mean, this is a record high for diesel. It's everything related to transportation can be impacted by diesel prices. So it is critically important when we think about consumer goods, when we think about agriculture. Diesel is the sort of lifeblood of the economy. It doesn't get as much attention as average retail gasoline prices. But this is an enormous challenge for the administration because the real problem on diesel is the lack of spare capacity when it comes to refineries.

16:57U.S. refineries are running at 98 % utilization rates. There is just no spare capacity. And it's the combination of what we're seeing in the war with Iran. A number of refineries in the Middle East have been targeted. We're not getting product out of this rate of Hormuz. and also the fact that Ukraine continues to target Russian refineries. So we're facing a refinery shortage in terms of spare capacity, and that's profoundly impacting diesel prices. Chris, do you have a take? I mean, look, again, it's always hard when we talk about this from the investor point of view because, again, a lot of these stocks are doing very well.

17:31And the refiner stocks told us, other than Halima, who also told us this was going to happen, those margins have showed us that as steady as the oil price has been, the products are where we're going to see the real pinch point. Right, absolutely. And I would add another twist to this because diesel is closely related to heating fuel. And as we get towards the midterm elections, it gets colder as November comes. And so all of a sudden, folks are going to get their first heating bill this season, and it's going to be shockingly high. That's a good point. So there's a lot of moving pieces here, and this is a real story.

18:03Is there any recipe for relief, Halima? I mean, does this have to do with Russian refineries coming online? Like, what else can solve this? I mean, there's an interesting question of should there be some type of diplomatic dialogue with Ukraine in terms of Russian targeting? But the problem for Ukraine is they are in a life or death struggle with Russia. They want to deny Russia fuel for the front lines. They want to basically curb Russia's ATM when it comes to energy. So that's a very tough conversation to have with Ukraine. President Trump is focused on trying to essentially tell refineries that they need to, companies that need to build more refineries.

18:38That takes years. Now, when you talk to refinery executives, they say one short term measure that might provide a modicum or relief would be relaxing renewable fuel standards. But that puts the White House at odds with the agricultural lobby. So, again, that's not clear the White House is going to go down that path. And at the end of the day, the real challenge is simply a shortage of refining capacity. Yeah, it's so much harder to solve than reopening the Strait of Hormuz. I can't even believe I'm saying that. But, you know, especially after the energy secretary, we should ask you about this, Halima, told Brian earlier this week, if I'm not mistaken, he said 17 million barrels we're getting out of.

19:15Is that right? I think that's something that's up for a really interesting debate because you have the administration putting up very high numbers. And certainly we have seen an increase in shipping traffic through Hormuz. The U.S. Defense Department is doing these exports. But if you still add up what we're not getting through Hormuz and the drop off we've seen in Red Sea transits because of the Houthi attacks, you know, we still estimate that you have about 8 million barrels of Middle Eastern production offline, even with the additional volumes be escorted out of Hormuz by the U.S. Defense Department.

19:49And the other issue is, is that we're not getting product out of Hormuz. So more crude is moving, not a lot of product is moving, and no LNG is moving. And that's really important when you think about Europe going into winter. They are below where they should be when it comes to gas storage. And not getting that Qatari LNG on the water is going to provide a huge problem for these markets. That's a great point. And we need to now track, or maybe that's a Kepler question for next week, but product getting out of those areas and not just the barrels. Halima, thanks as always. Really appreciate it.

20:22Thank you for having me. Halima Croft. Well, it's one of the most contentious debates going on right now in the U.S. Should we slow down or speed up the data center build out? We have people from both sides of that argument joining us next.

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21:17As an effective and affordable online learning program, IXL covers math, language arts, science, and social studies using interactive practice problems for kids from pre-K to 12th grade. Listeners can get an exclusive 20 % off IXL membership when they sign up today at IXL.com slash 20. Visit IXL.com slash 20 to get the most effective learning program out there at the best price. Big news. Wayfair's Black Friday sale is here early. Right now at Wayfair, get up to 70 % off everything you need for the season ahead. Save on kitchen and dining, bedroom furniture and mattresses, holiday decor, and way more.

21:55Now is the time to score big from seasonal finds to favorites you'll use all year long. Plus with Wayfair, enjoy fast and easy shipping with delivery and time for the holidays. Save up to 70 % off early Black Friday deals. Shop now at Wayfair.com. Wayfair, every style, every home. It's the two words dividing Wall Street and Main Street data centers. As the AI boom drives a rush to build them, the backlash is also growing around power, water costs, who pays. Local and state leaders are hitting pause on new projects. So are moratoriums a smart safeguard or a costly mistake that could put America behind in AI.

22:34Let's debate it. Joining us now is former North Dakota Senator Heidi Heitkamp, who supports, who support data center moratoriums, and Daniel Castro, president of the Information Technology and Innovation Foundation, who opposes them. Welcome to you both. Senator, kick things off. I've heard a more nuanced take from, for instance, the current candidate for governor of Colorado. He's Democrat. He's not for a moratorium. Why are you? Well, first off, I think that it is essential that questions get answered. And I think when you simply say, OK, we just need to have these these things answered and taken care of, as opposed to actually having a stick to enforce the the folks to actually answer questions and to make commitments.

23:19I think that, you know, it's all fine and good to say, oh, well, we don't need moratoriums. But yet the dialogue has quickly slipped away from these companies and they haven't been forthcoming. You see NDA signed with local legislators and local officials. You see false names and people just have a lot of suspicion. And so I think that a pause, which is a moratorium, it's not a ban, a pause to get these questions answered is an essential element to, I think, building this infrastructure long term. Daniel, what about you? Why isn't a pause or, you know, a list of demands or something to that effect a sensible way for communities to approach this?

24:06You know, we have to remember data centers, they're not just giant buildings for big tech. They're the physical infrastructure powering America's AI economy. Data centers are to AI what factories are manufacturing. And so the question isn't whether they have local impacts. Of course they do. The question is whether we can manage those impacts while building responsibly. There are, of course, many legitimate concerns around electricity, around noise, around water use. But all of those are the types of concerns you have around any large infrastructure project that localities should be able to make a decision about.

24:42And the problem with these statewide moratoriums or bans is they take that choice out of the hands of communities, many of which would actually benefit from this type of investment. Daniel, one question I have, though, is clearly there's opposition and you're facing a real headwind here. So why don't you just kind of take a step back? It doesn't seem like you two are, frankly, that far apart and just say, sure, we need to give some concessions on the table. And the difference between this and other community issues, say, like fracking, is there's just so much money behind the data centers that you guys can can you guys can give up stuff and still make a decent return.

25:20and cover electricity costs, cover water costs. And why aren't you being more forthcoming with that? Well, I think that's actually one of the interesting ironies about this. If you look at the commitments of the large hyperscalers, they are making commitments around energy and water. Most of these companies, they have commitments to being carbon neutral by 2030. They're bringing online more clean energy projects than pretty much anyone else. In terms of water, they're trying to be water positive in terms of they're actually building water facilities for communities. So they're replenishing water to the water supply.

25:54They're doing so much more. And of course, there's also the enormous tax benefits of building these data centers in terms of the tax revenue that goes back to the communities. You look at Loudoun County, for example, in Virginia, they have a significant portion of their budget. I think it's around 37%, 38 % of the budget of the general revenue comes from the tax base from these data centers. So there's just huge, enormous upsides. And these companies are willing to pay. And that's why a moratorium that says not at all in this community, not at all in this state, is a huge problem because this is a once in a generation investment that's happening.

26:30And the communities that miss out on this are going to be held back. Well, and to that point we had on Ty Dragu, Senator, he is a transportation union leader in Kansas. They and he are traditionally Democratic, broke and endorsed the Republican candidate for governor in Kansas because they're pro data center. And he take a listen to what he told us this week. Data centers have been a boon to the Kansas economy. And it's something that is putting really good living wages at the table. for working Kansans in the state. And it's something that our members are demanding we protect and advocate for.

27:10Senator, he added that they've, trade group have given politicians tours of the 39 data centers in Kansas. And a lot of the times when people show up, they didn't even know it was a data center. They just thought it was a warehouse. So these are already existing in people's backyards, quote unquote, without a lot of people even realizing. So he thought a lot of the misinformation about data centers and the dangers they pose was literally information people are getting off of social media. Yeah, you know, this is once again, blame the consumer, blame the local folks, because they're somehow ignorant about what's happening.

27:44They're somehow not willing to sacrifice for infrastructure. It is not that you've lost the room. These data centers have lost the room. It used to be when you look at even in Pennsylvania and even in Texas, People were like, we're going to build this. And all of a sudden, the political winds switched. And there's a reason for that. There's a reason because there is not a trust level about what's happening out there. And it doesn't surprise me that labor unions are supporting it because one of the biggest benefactors are going to be the trades who are actually building these buildings. And so that's all fine and good.

28:22We should have this debate. But you can't have this debate if it's all about hiding the actual facts. So, Senator, if they bellied up to the bar and offered more electricity or a lot of let's say they paid for half the electricity in a small community. Are something like that going to make you stop thinking moratorium or is it just a deeper trust issue or are you just kind of against any deal? I think you've got to look at the other side of this, which is also people are deeply skeptical of AI and they think this is going to take my jobs. This is going to make the billionaires, the tech billionaires even richer.

29:02And we're not going to have any benefit long term from these facilities. So it sounds like you're against data centers at any cost. you know the the the problem that you have is that you've lost the room and politically this is toxic right now out there and the best way to make it so it's not toxic is to press a pause button actually have a conversation don't be spending billions of dollars in packs to try and persuade people and and make people believe something that they're deeply concerned about and And so, you know, the real answer here is dialogue. The real answer is having a conversation, not hiding the facts, meeting the people where they are.

29:49You know, my dad went out and got easements for a water pipeline infrastructure that was absolutely essential. He was hired because everybody knew who he was and they trusted what he said. So many of these data centers have signed NDAs. They've come in in a way that is not transparent and it makes people naturally suspicious. It's interesting. And so you can talk about the hyperscalers and all the good guys out there, but their reputation is being tainted by all the bad actors out there who, when you say, oh, we're going to get all this tax revenue. Guess what? A number of these political subdivisions have given away the tax revenue.

30:29And this is a concern that people have. Although, again, the Kansas guy we spoke to said they're facing, they have a shortage of their tax base. They're consolidating school districts. Blue collar jobs are under pressure. They see this as a lifeline. Daniel, all of that said, to the senator's point, and the Treasury secretary said this earlier this week at the G20 Innovation Summit. He said the AI industry has done a terrible job of explaining and advocating itself to the public. I agree with that. I mean, I think there's a lot of legitimate concerns that are out there. I also want to be clear.

30:59I mean, there are plenty of projects that probably shouldn't be built. Communities should have a say in what's being built and whether they want them. But that's different than saying, you know, we're going to take a whole broadband across the entire industry. You have to remember that, you know, we don't build power plants, for example, because Americans enjoy looking at power infrastructure. We build them because there's electricity demand. This is what's happening with AI and data centers. We're only building it because there's this demand for compute. So if we don't build it, we're basically telling businesses and Americans, you're not going to have access to AI in the future.

31:32And that's not what Americans actually want. Right. So what are you going to do? I think the senator has a good point when she says that you've lost the room. You clearly have an industry that is growing. It's growing quickly. There's public opposition to it. What different things are you going to do? Because clearly you've got to change something here. Tell us what you're going to do differently to take back the room, in the senator's words. Well, I think the biggest concern for most Americans is affordability right now. And it's absolutely true. The electricity rates have gone up over the past year.

32:03And the average utility bill has also gone up. And I think a lot of Americans are assuming that that's because of data centers, because of everything that they hear and see on social media. But of course, most of the data centers, I mean, you had the map up earlier, have not been built in most communities. That's not what's driving the cost up. Go back to your last segment. You were talking about the cost of natural gas. You know, the fluctuations there, that's what's driven up the cost for most Americans. The weather events that we've had, the investments that have to be made in infrastructure, that's where the costs are being put.

32:33And these, you know, these data centers that are being built, especially the large ones, they're actually making investments in the utility infrastructure that are going to drive down costs for Americans over the long term. So I agree we should have more transparency. I think once Americans learn more about how these projects can be built, they'll be for them because they see how they benefit them. And, you know, those who don't want to have them can reject them, and that's fine. We should have done a power poll to see people's point of view going into this and then coming out. You know, we've all been to those kinds of things, right?

33:02You hear the debate, and then you want to know if they changed your mind. Really appreciate both of you bringing such a fact-based point of view to this. Thanks. Good to see you this afternoon. Heidi Heitkamp and Daniel Castro. Coming up, the biggest loser in the S &P 500 is Lululemon, down 17.5%. How did it get so far off track? We'll speak to an analyst who's been warning about the stock for years. That's coming up next.

33:34Lululemon shares are sinking today after the company reported weak sales and forecast figures. Jeffries lowering its price target to 105 on the stock, saying the latest quarter was a triple whammy for Lulu. Joining us is the author of That Note, Randy Connick, Managing Director for Lifestyle and Growth Platforms. It's great to have you here. Welcome. Thanks, Kelly. You know, many are asking the question because now that the story and poorly, I feel bad piling on Lulu. I mean, I loved them back in the day. Who didn't, right? But you've been warning about its overvaluation for a long time. It seems there were a lot of strategic management problems.

34:08So kind of take us through this. How do we get here? Look, this starts with the former CEO of the company who basically ruined the company. Why did he ruin the company? He got away from the core consumer, right, the wealthy woman that's into yoga, Pilates, etc., expanded, tried to go after a more expansive customer set. That's number one. Number two, he went after beyond the core from a product perspective. Remember, their bread and butter is leggings, sports bras, etc. He started going to wild kind of product assortments and also a disjointed color palette. I noticed that in the stores. When something doesn't make sense, it doesn't make sense.

34:46Have you tried to pull that back, right? A little bit. But, you know, once the momentum from a brand goes away and other competitors come into the marketplace, like Viore and Aloe. I'm wearing some Viore pants today. I saw a few. Yeah, they're pretty good. I was just walking by one of those stores. And Aloe, I'm not even familiar, but apparently this is. So here's what's fascinating. It's not that the athleisure categories, we could all be sitting here saying, denim's back, no one's wearing yoga pants anymore, but it's not even that. No, it's not that long. Well, actually, it's a little bit of that because a lot of it is the competition.

35:15But the other thing that we're hearing from a lot of these other companies in retail is that denim is starting to come back a little bit more. And then on the bottom side, beyond leggings, they call it the away from a leg look, which is a flare leg, a legging, I guess you'd call it, or a jogging pant, right? And Lululemon, remember, they're number one in leggings. But if the pant style goes away from the legging, goes to a flare leg or a jogging pant, a sweat pant, if you will, that's not their bread and butter. That's not what they're known for. So that causes competition risk and other brands to take share from Lululemon.

35:48This is such a tough business that you're in because that's so fad-specific. So is it just that the fad has left Lulu behind and they haven't been able to adapt? And what would you do if you were running Lululemon? If I were running the company, well, first, to answer your first question, the apparel category is the tough category because, remember, thousands of competitors are in the apparel business. In sneakers, there's only 10 or 12 competitors. That's why Nike will still meet Nike, even though it's had its issues 10 years from now. But with Lulu, because of these mistakes, I think with the new CEO who starts on Tuesday the day after Labor Day, hopefully have a great Labor Day weekend, everybody.

36:23But what she needs to do is get back to basics. Get rid of the crazy colors. Get rid of the crazy clothes and just go back to what made Lulu special in the first place. The fact that you mentioned Nike makes me wonder. I mean, that's another one. There have been a lot of retail kind of companies looking for their footing these days. Pun intended. Yeah, well, thank you. Do you think that Nike is a stock where you buy it here 10 years from now, you can go, okay, they figured it out? Because they seem to have the right person for the job. Former intern running the place, you know, deep knowledge of it.

36:55But it's been a couple of years now. And a cheap stock price. Exactly. Look, I think with Nike, first and foremost, Nike is going to be this year a dividend aristocrat. It's raised its dividend 24 years in a row. No other company, I think, at consumer discretion has ever done that. So I think that's pretty important. Number two, you're getting paid to wait. So Nike right now, I think, gives you a 4.2 % dividend yield versus Treasuries around 4.75%. So I like that kind of dynamic or equation. And at the end of the day, as I said earlier, Nike's in a better category. Sneakers. Sneakers aren't going away long term.

37:30And unlike Apparel, where I said there's thousands of competitors in the apparel landscape, there's only 12 companies in sneakers that matter from a volume standpoint. And Nike's had its issues. It's gone from 25 % market share to 20 % market share in sneakers. But 20 % market share in sneakers is still pretty dang good market share. And you called the on-miss, basically. I mean, look, you had said, similar to Lululemon, The valuation had gotten so big for what it's actually doing. I would almost want to ask then who's next? Now that we've talked about On, we've talked about Lulu, are there any others?

38:04Look at what happened with what was the bike company, Peloton. This is your whole point about the trends. And we assign these companies these huge growth valuations, and then all of a sudden they kind of miss the moment. Is there anywhere else where you'd say watch out below? I'd still say let's watch out for On because it's pretty simple. We get a lot of phone calls from portfolio managers that are talking about different PE multiples, EBITDA multiples, free cash flow, this and that, and they don't keep it simple. And at the end of the day, there's a problem gone, and that is there's limited TAM in the business.

38:34They only sell high-priced point products. They don't have a kid's business. They don't have an apparel business of any size that never will be. And then all their products have holes in the bottom of the shoes. That's a problem because it's a one-look pony. That's it. So once that style goes out of style, that business is toast. It almost sounds like the Lululemon. That's what I was thinking. Should they go and do all those product categories? You're telling them to turn back into a one-house one. Well, at the end of the day, Lululemon has to shrink to grow again, right? And they're already starting to shrink.

39:05Revenues were down in the quarter. They're going to be down for the year. So are profits. But Lululemon, just getting back to simplicity is the key. And with On, watch out below because of these issues of TAM that are going to prevent the company from growing bigger. in the long term. Randy, it's great to have you here. Thanks, guys. Really appreciate it. Happy Labor Day. Randy Connick with Jeffries. Coming up, let's get over to Frank Holland for the CNBC News update. Hi, Frank. Good afternoon again, Kelly. Just moments ago, the judge of the murder trial of Lindsay Clancy officially declared a mistrial, declared a mistrial.

39:36It comes after the top court in Massachusetts denied a last minute motion from the defense to prevent that outcome. The jury said earlier this morning it remained deadlocked on whether Clancy should be held criminally responsible for killing her three young children. The defense argued she was not responsible because she was suffering from postpartum psychosis at the time of those murders. Authorities in Ukraine say a Russian drone struck the headquarters of Ukraine's security service today. According to officials, 12 people were hurt in that attack, which took place in central Kiev. The security service has carried out deep strikes inside of Russian territory.

40:08It is one of the most high profile targets struck so far during the war. And And President Trump is expected to headline both nights of next week's midterm Republican convention in Dallas. The news comes as a White House official confirmed the First Lady Melania Trump will not attend that event. Kelly, back over to you. All right, Frank, thank you very much. Coming up, OpenAI releasing its newest and most powerful model yet yesterday. But do these new model launches still matter? And to what extent? What should we be on the lookout for? We'll talk about that after this.

40:49Okay, yeah, this is awesome. I want you to make a 3D game where I'm ducking asteroids, using the arrow keys to move around, and I'm using space to boost. Yep, I'm building the game. Also, I'm a little hungry. Can you get me some beef and rice from that spot I ordered from last week? Looking into ordering food. And yes, that's an ad, but the researchers that I'm talking to are doing even crazier stuff already. That was a teaser video of OpenAI's new model Astra, the company calling it the world's most intelligent as it looks to reclaim the lead in the AI race against Anthropic. Kate Rooney has more detail on this.

41:20Kate, what can you tell us? Well, Kelly, so this is OpenAI's latest version of its AI model. It's ChachiBT6. We did get a solid number in this. It's called Astra. I did speak to Sam Altman briefly about it yesterday. The OpenAI CEO told me it was a new capability level. He said it's changed his own workflow, says he expects a boom of entrepreneurship. talked about creativity, economic growth, and then scientific discovery as well. He did tell me the new model went through a formal review process with the Trump administration before this release, and it's going to be launching in limited phases.

41:55So a smaller group is going to get access first, and then earlier this week with reporters, OpenAI did tout its cybersecurity capabilities of this particular model, said that it increased some safeguards in the wake of that hugging face attack and hack that we've talked about over the last few months here. I also asked Altman about this parade lately of other models in the competition out there. He's kind of brushed it off. He said it's been this way for a few months. Part of it is AI helping build new AI and helping speed things along. He also said maybe it's a coincidence. People might just be back from summer vacation and everybody's getting their launch out before Labor Day, Kelly.

42:28Yeah, I think, Kate, thank you. Chris, I think it's more what he said, which is they were in talks with Washington. I believe that that's what slowed all of this down. and now all of these models are coming out at the same time. Yeah. Well, look, we have a lovely conversation here, but at the end of the day, we want to make some money. And I have real difficulty seeing what the moats are here for Anthropic, for OpenAI, for Gemini. And, of course, Google can make money because they're a hyperscaler. But the other two are relying totally on this. So that was a terrific ad. Loved it. But then, of course, as we saw...

42:58You wouldn't be a buyer at the IPO in other words. No, because, look, Anthropic's going to come out next week with theirs, and then Gemini will come out with one that's even cooler. and they'll have this race. But at the end of the day, I don't care which one I use as long as I get good answers. So you might, we talked about this before, but you like Google. Was it Amazon as well? I do. I like the hyperscalers a lot. That have the 360. The folks that are spending literally trillions of dollars over the five or seven years have built a moat. They own the compute. That's where the value will come.

43:27The gateways, which is Anthropic, which is OpenAI, you know, I think they're much more commodities and I'd have real trouble raising a trillion, you know, buying into a trillion dollar IPO for something like that. Words to take note of with what's happening, with what's about to come. Coming up, more Power Lunch after the break. How about that?

43:51Welcome back. You may have heard or maybe you didn't hear that the CyberCab launched last night. But what's even more interesting than how kind of ho-hum that launch was, Chris Crisanti, is that one of your favorite stocks is also an auto stock that has outperformed Tesla over the past two years. And it is? General Motors. Wow. Yeah. Is that true that it's done better than Tesla? It absolutely has, by quite a bit, actually. And the reason, Kelly, is that Mary Barra is one of the best CEOs in the country. She's got tons of cash flow at this point in the cycle. And what does she do? She's not building new factories.

44:22She's not buying companies. She is giving it back to shareholders. So she has reduced the share count by 40%. 40%. 40 % in the last four years. Wow. And the great thing about that is you earn the same number of absolute dollars, but your earnings per share because there's 40 % per share. What about the people who say that's just financial engineering? I'd say count your money, man. I mean, the stock has doubled in the last couple of years. And so what's happening here is that each share is just worth more. That's not financial engineering. A lot of companies, hotel companies have been doing this.

44:55Who is it? Advanced Auto Parts. Yeah. Look at Apple's buybacks. Obviously, they're a prime example. Sure. Now, they have so many shares. The price of General Motors is at six times earnings. So you're buying back a very cheap stock, and she's just continuing to do it. We like it, and we think it's going higher. All right. Speaking of competition, I have some new competition for you. Let's hear it. Okay. Gael Monfils is bidding adieu, I hope I said that correctly, to Grand Slam Tennis. I used to watch him all the time. You know, when you say it, it's different. The 40-year-old French star fell in straight sets last night, and while he expects to retire at year end, his next move is already set.

45:28Coming next year, I will work in finance. You know, I already signed to work in the wealth management in the Swiss company. He is going to leave the court with 13 career titles and more than$25 million in prize money. We had a fierce debate about this, OK? My team in the back. I think this is great for him. Wonderful. You take your... Everyone else hates it. I felt that way when I stopped pitching for the Yankees, Kelly. And it was a real adjustment for me. That explains your success. Right, right, right, right. And I wish him all the luck in the world. But we know that wealth management is largely a sales and relationship.

46:02Who doesn't want to go have Monfils be their guy? And it could be very lucrative for him. I think this is wonderful. Yeah, no, no. Finance is filled with folks from the sporting world and great success. The story about basketball players today, too. Chris, this has been wonderful. Thank you so much. Kelly, it's good to be with you again. Happy Labor Day. You, too. Thank you, everybody, for watching. Closing Bell starts right now.

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