Hot CPI & PPI, Rising Yields Hit AI Trade with Reality Check

Opening Bell. Getting you ready e trading day. Joining me right now Christopher Davis partner Hudson Valley Partners is with me now. We have a lot of news pouring in the last 24 hours, 12 hours. Let's start with the inflation data. That's obviously very prevalent with the CPI yesterday and the PPI today both coming a little hotter than expected. What does it mean to you. Whatde looking at here. Their moves. Yeah. Good morning Nicole. Good to be with you. I think what it really means and some of the muted reaction we're seeing today to the PPI is peond investors are really understanding that tl price pass through ishe biggest driver right now. And that's going to show up a little bit more in in the producer price index. And some of it gets passed on to consumers, and some of it gets passed on to consumers with a lag. But what we're seeing in thesers is primarily those fuel prices. And that's something that fede hikes don't really touch that much.Yea the PPI jumping 6.3%, I know that CPI is alwayss I was having this conversation with Kevin Henkes. We know people look at the CPIthan the PPI. What matters most within these reports. You talked about the energy and fuel price that's getting passed through to our economy. D the fed make mov does the fed wait and see. Because in a day in theory oil could come back down. Five bucks. Ten bucks. Yeah. I think I think the looks at these numbers as part of the constellation of factors that they consider. And certainly Chair Warsh has been very vocal about wantin look at different types of data and more data to go into their decision m process. And to yo point, energy prices can come down quickly. And I think particularly this October fed meeting, I'm in the camp that they could b more of a wait and see mode, particularly because some of the big cata that could bring energy prices down around the are happening. And some of the geopolitical f are, you know, withi a week or so of that, that fed meeting itself. So I think if they move too sharply or too soon, the the egg could be on their face. Interesting. So maybe the fed waits in October at the end of this month does not do the raise that many are anticipating, though it's more likely than not they don't raise based on the latest tools that we're looking at. You k I think about the AI trade and how integra this trade is. It's not just technology and chips, but it's how much spending is going on. It fuels GDP. You have big companies investing now in AI. Your thoughts on what's happeningen e selling off 8%. The Sox is down 11% in seven day Is this just the usual noise a gyrations, or there a real worry that maybe something's not aligned for the future? I think it might be a little bit more than th usual worry that the KOSPI is very much a levered play on on Dram and Dram prices at this point. And we'reg the reality that people are remembering that chips and semiconductors are commodities. You might have some new Chinese Dram supply coming on. And Dram is very fungible. You can swap it in, you can plug it out no matter, no matter who makes it. But we think about AI right now, I think problem is, is we have to ask the question, who's left to buy? It's the biggest part of every index other than perhaps the Dow or small cap. It's the biggest p everyone's portfolio. It's tgest part of everyone who's been indexed. So if youen enjoying those great gains and you're looking to, you know, be a little more prudent, your portfolioement you're probably going to look to, to pull back a little bit. And the thing that cause it's such a big part of the market, or profit taking looks likeof money is coming o of the entire market at this poi think over 60% of the market is probably tied to AI at this point. think if you're an investor right now, youant to be taking advantage of the fact that we've had an under the hood correction in pretty much everything else other than big tech over the past 6 to 8 weeks. And that's a great buying opportunity. And you want to ask yourself, are the companies I'm buying? A companies that I own, are they beneficiaries of AI? You know, because I think what we're seeing in the market is starting to tell us that it's going to be the users of this technology, that long term economic benefites to not so much the producers and the people that are pushing the big CapEx spending. They'll make money, but the real benefits are going to come to the users. Yeah. You know, so it sounds like I mean, you do think people should take some profits when they can in tech, but you want them to stay invested in tech, for example. So when you have aolio and you're doing the asset allocation, are you overweight tech and specifically what kind of tech would you say people should stay invested in maybe for the longer term? Yeah, we're probably closer to what I would call a market weight in t And you don't probably want to go gobove that because the correlations between AI and industrials, where we seeportun, where we see opportunities, you in terms of technology, I think you want to own things like in chips. ASML, which were long. You guys were talking about Taiwan earlier. To meat's an eae because you're betting on more ch and more things over time. And not too many people are going to take the under on that. I think also some of the more consumer facing types of technologies that aren't ding hu. Companies like Apple are more comfortable place to beithin technology, but you still want to own ces like Alphabet or Met are some of the great advertising buss of the world. They're spending a lot on AI right now, but their advertising busin are still going, going gangbusters. Yeah. Understood. You did say, by the way, what were those two yout said meta and one other at the end alphabet. Okay. attention away from tech and to some of the otherustries that you noted, such as industrials and health care, where you see opportunity What kind of opportunities you see in those areas and should people put some money to work there? Definitely. I'll start with with health care. I think health care is one of the is going to benefit the most from AI that all these tech companies pour all the CapEx budget into it. But I think the reality is for healt companies, their R&D budgets, testing out new drugs, specifically looking at pharmaceutical companies, companies like Merck, Amgen, even Johnson and Johnson, which reported earlier this week. They're going to get mt of their R&D budget because AI will help them figure out whether or not the molis viable faster, whirugs to push through trials, and to just come h more things that can generate, you know, life saving and life enhancing technologies and treatments for pati In terms of the. Yeah. Go ahead. Yeah. And then in industrials more, you were g about the AI benefits for health care and then for industrials. Are you in are you on with the industrial revolution or where does this fit in. Yeah, absolutely. Onardl Revolution. I think you need to chase all the names that are specifically linked to just thing like data centers. I think you want to think a little bit more broadly into companies that are more in automation, whethers a company like SAP, whi sold off hard small cap name that does a lot of welding automation and technology around production and enhancing things like that. I think you want to look at names Amentum and government contracting, which has all sorts of things that AI can benefit hey're doing. And I think you also think about large cap names like John Deere, s in farmi technology, and that stock's been on a tear. And last, I appreciate that. I wanted to ask you about what'sio year Treasury. I'm looking at the t year that was above 530. Now it's above five. It's like 5.5. What's going on in the bond market. And what do you telltors? What's your advice there. Because the moves have been fast and dramatic this week. Absolutely. The bond market I think has taking center stage. when you see two year yesterday, what we saw in the ten year, I mean, just the three month range on the ten year right now is 454 to 530. That's cor full faith and credit in the US government. And what that tells you is that investors are just having a really hard time pricing risk, pricing things, pricing, inflation. So the fact that this morning with that er P, we're seeing bond yields firm yields yields comiown, prices firming up. That tellsyoe e have had the peak amount of unnty in inflation in yields. It's possible that this is just a counter-trend rally too. But I think we're at a level wheree going to see investors step into yields. And you'o going to see the fact that it's not necessarily enough to derail earnings and corporate profits, but it is enough to everyone sharpen their pencils and think a little bit harder, which I think is good if you're a fundamental investor. Christopher Davis, great to