"squawk alley" is live ♪ ♪ good wednesday morning welcome to "squawk alley." i'm carl quintanilla with morgan brennan and john fort. the president is set to speak on trade and the economy in a few moments at this cabinet meeting. when that begins, we'll bring them to you live in the meantime, stocks coming off their best day since march but getting back a little more than half of yesterday's gains watching the nasdaq, it did start off the day higher but is now in negative territory as well one bright spot, though, as you know netflix surging off the highs about 90 minutes into the

trading day. the streaming giant blew subscription estimates out of the water. joining us, paul holland, a long history of working with net fflx also with us, ljh investment advise larry haverty i have to ask you if you've been buying lately. >> no, i'm not buying, carl. i'm very wary of the price here. this is a wonderful business the quarter was terrific there are some cash flow problems they're spending a lot of money on advertising they're spending a lot of money on content acquisition consent assets went up the principle problem is the multiple the stock's growth is practically unique in our entire economy. as such, it's gotten a scarcity valuation. if you're looking in an environment where the federal reserve is going to raise interest rates, that scarcity valuation is going to be squeezed second problem that i can see is

that there's a tremendous proliferation of people who want to make content. it looks like the new gold rush. there are 88 serialized content productions that are currently rated by meta critic in an environment now where people are watching more sports, nfl ratings are up, i think the world series ratings are going to be up, there's less time to watch this content there's too much supply of content. i think too little demand. i think at 100 times cash flow, this stock is very fully priced. >> something tells me that you disagree, butt valuation on netflix getting pretty close to disney, it makes me feel like it's getting close to a zero sum game valuation who thinks disney is really going to fail here once you've got marvel and lucas film and all of that on a subscription service, aren't people going to have to buy it >> i think your first assumption

was correct. i am going to disagree with larry on two fundamental assumptions there. we invested in netflix back in 1999 we took the company public in 2003 i respect larry until the cows come home, but i've been listening to this commentary for the better part of the last 15 years. you know, they need to show us more profit, tell us about the cash flow, tell us about this, tell us about that i remember reid hastings getting on with analysts early in the company's history as a public market and listening to all the different points of criticism similar to what i just heard essentially, he would come back with the same message. you just don't understand how large the market is. i think that's really what you're getting to, carl, in terms of your point. could it come down to a zero sum game between disney and netflix? i don't think so because i think there's such a broken field out there. i think there's such opportunity. i'm not terribly worried about the 88 pieces of content because, quite frankly, what i want to control is i want to control the distribution of that

content. that's where netflix is today. that's why many, many, if not 99 out of 100, public analysts have miscalled this stock for the last 15 years. >> so paul, you're not at all concerned about the fact that this is a company that could spend as much, mark talking about the possibility of 20 billion spent on content that in light of a potentially rising rate environment, that doesn't worry you at all >> it doesn't worry me in the sense that -- think of it this way. what has netflix done incredibly well over the last five or six or seven years they've traded effectively cash that's been raised in various different forms for content. then they've been able to make that trade-off in such a way that they've converted that into market capitalization. there's no reason to believe that cannot continue for quite some time into the future, unless you believe they're dealing with a small market. let's look at the f.a.n.g.s as a whole. this is one of the topics we've addressed in the past. you've got $4 trillion market

spaces that they're playing into in social networking with facebook and e-commerce with amazon and in media with netflix and of course in search and advertising with google. everyone who's bet against those companies over the last five, six, or seven years has bet wrong for one fundamental ran. they just continually underestimate the market size, and they underestimate the strength of the disrupter, in this case netflix, in essentially dominating that market space i think -- you know, i just don't know how much more evidence people are going to need to see that they are the force to be reckoned with in a trillion-dollar-plus marketplace. >> that raises an interesting question, larry. paul can talk about the last 15 years, but does the real entry of disney and at&t make this different somehow? >> well, it has to with my grandchildren, i watched them and they grew up on netflix. they had the disney children's content. that's not going to be available right now. disney basically owns the

children's market. where are children going to get their content? is reid going to produce it? is it going to be as good as disney there's risk here. wall street's good at estimating demand they're good at estimating the is size of the market they're terrible at estimating supply it's where the varmints are coming from. there's not enough ad dollars for this there's competition from sports. there's competition from a million things you're dealing with 100 multiple this company currently makes one-tenth the cash flow of disney its cash flow has to grow 30% a year for a decade for it to hit the current level of disney. and disney's not going away. they have some content assets. so it's a tough game to play at this level

i think the market is more or less telling you this. the stock is down 15% from its peak >> not today though. paul holland, how do you expect netflix and the rest of the f.a.n.g.s to continue to behavior in this market overall as we continue to power through q4 >> well, i think that's a fascinating question i was away this last weekend at my 40th high school reunion down in prince george, virginia the mighty royals. talking to my friends down there about this impaexact topic. here's the analogy we were coming up with this takes you back into the old days, the sailing days what did you have going on in commerce at that time? well, the guys that had the biggest boats with the biggest sails that could go the fastest, they were the ones paid the most so the situation with the f.a.n.g.s right now is you have an 80-knot tail wind occurring in the market over the last three or four years. if anything, that tail wind has intensified. are we going to see pressure around interest rates? are we going to see other things

occurring over time? certainly, we will but i think the fundamental thing is many, many people have just made the wrong bets around this entire sector because they failed to understand that these sails are full they're the big players. they're the guys with the big boats that are out there they can sail further, faster, stronger than the other players that are out there i haven't yet heard a compelling argument from a public market analyst as to why that's going to change, unless what they want to argument is something in the macro. >> and quickly before we let you both go, larry, you mentioned disney you also mentioned you're not buying netflix at these levels right now. what are you buying? >> well, i think the most attractive situations right now -- and i think you want to wait until the quarters come out. all of these companies have cost problems the margins are going to go down so many algos are trained to sell when the margins go down. so after the quarter's out, i think probably facebook and google are going to be the most

attractive i think far and away, google is going to be the most attractive because if they go into china, it's just an enormous opportunity. there's some political risk with it there's some risk because some of their employees are going to disagree with them, but the market is just mind boggling in size and in china, there's a much better situation than india. they have incomes in china in india, the incomes are very, very low so when reid gets his subs in india, it's not the same as adding a sub in indiana. it just isn't. >> but to be clear, you're going to wait until earnings cross through? >> oh, yeah. i do not want to buy in an environment where the fed is hostile and the companies have already said there's going to be margin pressure. most of these companies, the political problems, carl, are mounting that argues for lower multiples. >> guys, great discussion. really good to check in with both of you. larry, good seeing you paul, we'll talk soon. >> thanks, guys. canada becoming the second and largest country to legalize the recreational use of

marijuana today. we have a look at what the country's legalization means for business >> reporter: hey, morgan it may look like i'm standing in an apple store, but instead of iphones, there's pot different varieties at different prices here's how it all works. this is the first day pot has become legal recreationally here in canada. you come into a store like this, and there are about a hundred across the country choose what you want beside every product there's a description talking about potency and quality and other descriptions if you don't know what you want, there are tons of sales associates in the store to help you decide and inform your decision you can pick up some merchandise. there's lots of that around this retail store or other products like vaporizers or storage kits you bring it up to the front right here, pay for your products, and you get a receipt that looks a little like this. an itemized receipt that breaks down the taxes as well as i mentioned, there's about a hundred of these rolling out across the country today, the

day pot becomes legal. this store in its first two hours made about $9,000 in sales, which is just a drop in the bucket this industry is expected to be worth $5 billion in canada by 2020 a lot of the rewards expected to be reaped by the canadian government and businesses. we talk about this a lot on the network. we've seen what's happened to cannabis stock prices over the last few years, but take a look at what they're doing today. it could be a sell on the news, but there are some hard questions that need to be answered still despite it being legal recreationally across the country, such as what do you do about supply concerns? are people going to go back to the black market how do you enforce regulations different from region to region? these are a lot of the questions that are going to be asked but today, lots of celebrations and excitement here on the ground in newfoundland >> lots of celebration, i am sure thank you. and coming up, take a look at shares of lamb research the chip equipment maker coming off a strong quarter and strong

guide, upping its outlook for sales in the final three months of the year. the ceo is going to join us first on cnbc next don't go anywhere. place, the xfinity xfi gateway.

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the stock is higher. the ceo of lamb research joins us now martin, good morning >> good morning. nice to be here, thank you >> probably the biggest surprise on the call was your tone and optimism a lot of the analysts in the space, and by extension investors, had gotten sort of down on the projections for demand for semiconductor equipment. what are they getting wrong? >> well, you know, we live in a volatile environment currently i think there's a risk that the fundamentals are getting lost. the fundamentals are quite encouraging. first and foremost, the data economy, the opportunity for cognitive computing, artificial intelligence, i mean, it's a tremendous opportunity for silicon. lam research is enabling that technology road map. we've grown the company for five successive years with execution to the guidance we gave yesterday, we'll have a 14% revenue growth year in

calendar '18 we'll grow profits faster than revenues, and we'll generate more than $3 billion of cash from operations. so the fundamentals currently and in the long term, we think, are very encouraging >> martin, how much hangs on what samsung does in 2019? it's become such a big driver of the chip industry overall. there's questions about what they're going to do with flash memory will that at all alter the picture if they shift their position >> well, samsung is clearly a significant market participant the reality is the outlook we gave yesterday considers the total mix of inputs we have from our customers in all segments. we've characterized an expectation that the first half of calendar '19 will be stronger than the second half of calendar '18. in that context, we've said that the logic and foundry

environments particularly will lead that expansion. i think flash is down probably at the beginning of next year compared to the end of this year so there's clearly some appropriate questions long term. i think, again, the fundamentals are clear. the role of data in the economy is increasing. it the role of the semiconductor in silicon is increasing and we think that's a great platform of growth and opportunity for lam. >> so martin, just to dig into that a little bit more and sort of this idea that the fundamentals are clear, i know you just laid out the outlook there, is it safe to say or fair to say then that customers are still bullish in terms of spending in this segment right now? and are you seeing that, or is there hesitancy, especially given the fact we have some of these trade winds across the globe? >> i wouldn't describe hesitancy. i would say our customers and frankly speaking for several years now have been very disciplined about adding

capacity our customers make investments, adding capacity when they have the confidence that there's demand for the chips in the industry so that discipline is always playing out at various points in time there are accelerators and deaccelerators in the short term, but the long term is what defines the cycle of investment in our industry. >> to what extent is the 5g buildout going to perhaps provide an extra jolt of demand for the chip equipment industry as well? should we watch at all the pace of that rollout, if anybody accelerates it or pulls back don't expect a lot of pulling back, and read through to what demand looks like in lam's environment? >> i think the platform of connectivity is fundamental to the road map of the tech economy. so 5g is absolutely relevant to the future of the industry it's not the only part of the

future of the industry i mean, cloud storage and advanced computation is as important in this ecosystem as connectivity but the world of 5g is certainly a catalyst and it creates opportunity for a broader set of applications and value creating services >> all right martin, a day when the market is down, but lam is up 1.5% when we return, a closer look at netflix after the company blew out the street's expectations on domestic subscriber additions our next guest says the stock is going to 430 bucks a share he tells us why there's still plenty of room to run. but first, with canada's legalization of recreational marijuana, what it means for u.s. companies oc, e to find value in pot stksthat's after the break stay with us

canada is now the largest country to legalize the recreational use of marijuana in

the world. just 17 years after medical marijuana was legalized. to mark the occasion earlier this morning, we heard from brendan kennedy on just how large the legal cannabis market might become >> it can disrupt $150 billion to $200 billion worth of other industries that's pharmaceuticals that's alcohol that's functional food and beverage primarily and you'll start to see some use in cosmetics, lotions, things like that. so i think that's the big fear that's why you're seeing the pharmaceutical companies look at the space. that's why you're seeing the alcohol companies invest in the space. >> joining us from toronto, matt bottomly also joining us from one market is asset managing director emily paxia, who's been investing in cannabis start-ups since '14

over 45 investments and 7 exits in that space. good to see you both thanks for the time. i want to talk about some of those lofty projections. emily, i have a feeling what you would say. matt, do those numbers make any sense at all >> well, yeah, i think it depends on the context of where you apply fundamentals with canada going recreational, it's the first major country in the world to do that that's on the back of having three, four, five years of a highly regulated market where a lot of these companies that you mentioned are raising a tremendous amount of capital and building a tremendous amount of expertise. when you look at the mr. kennedy in your intro there mentioning a $200 billion market sector be disrupted, i absolutely agree. there's certainly a lot of risk with that, but my estimates come in line with certain contribution when it comes to international markets, germany, australia, latin america certainly there's a lot of risk with those states, but you cannot value these companies just looking at the canadian medical market or recreational market, just for the fact that's

about $10 billion of opportunity down the road. i think the international segments might be fighting for upwards of $200 billion of revenues down the road certainly risky, but i think it all depends on where you pinpoint the fundamentals. >> emily, your thoughts on those numbers and how much is contingent on the u.s. following suit >> absolutely. since we're based in california, we've obviously watched what has happened with the rollout of the california market here, which is actually a little bit bigger than the canadian market with the canadian market being the first country of this size to really go forward with this legalization, we're obviously very excited to see it embracing this global play we're very optimistic about the possibilities of this growing market some are saying $272 billion by 2028 i've heard $500 billion as another target we're going for we're really excited about it, but we believe there are some hurdles ahead that this industry has to face both in the u.s. and

abroad >> matt, we've been showing a board of some of these stocks. they're trading lower today. why do you think that is is it a sell the news event? >> well, yeah. there's a lot of buildup to this event. clearly when you look at what constellation did in their $5 billion cash injection into canopy there, that really just lit the market on fire we've seen valuations increase probably more than two folds sin - twofold since that day i get those calls a lot. it's a volatile sector you have to accept it's speculative in nature. today i'm not surprised to sell the actual event, but this is a blip on the radar compared to the valuation and multiple expansions we've seen over the last year or two i don't put too much stock into it, but we look for the longer trends in that regard. >> emily, you mentioned hurdles that you see for the industry. what are the most challenging ones >> i mean, in the u.s. we

constantly see how rolling these industries out across the different states with the patchwork regulations, different products scale differently and there are different constraints around how that can roll out that's very important when you're estimating and understanding what the potential scaleability of a potential service is i see the same thing that could happen in canada as we've seen that the different provinces have different regulatory frameworks in terms of private retail versus buying through the government websites. i can only imagine that will happen abroad as well while the governments get used to and comfortable with this new market that's really emerging at a rapid rate >> one last question, emily. we mentioned the number of exits you've had how do you know when to exit it seems early >> yeah, well, that's one of the benefits of being in this industry for so many years now relative to how long this modern cannabis industry has been around we have been building our own models, our own proprietary data

around what it's going to look like when these companies are performing at peak performance and what these models are showing in terms of really being able to achieve these targets. so we're able to really adjust for that and look at where the arrow is pointing next and reallocate our capital to those places so that we can get in at more attractive valuations to continue to benefit from that upside so it's just really important for us to be very nimble and to always be watching the market conditions as they're changing in this rapidly evolving industry >> yeah, rapidly evolving is absolutely right emily, matt, we'll talk again. thanks for the time. appreciate it on an important day. >> thank you now let's get to sue herrera for a news update. >> good morning, john. good morning, everyone here's what's happening at this hour a team of turkish investigators entered the saudi consul's istanbul residence this morning as part of the probe into the disappearance of saudi journalist jamal khashoggi they had wanted to search

tuesday but did not have the permission from saudi arabia that search comes after investigators searched the consulate earlier this week. a bomb blast killed an afghan parliamentary candidate and seven others as the taliban warned teachers and students not to participate in the upcoming elections. they also warned them not to allow schools to be used as polling places russian president putin welcoming egyptian president el-sissi to discuss trade. back here at home, the puppeteer who has played big bird on "sesame street" is retiring after 50 years on the show his last day will be on thursday in addition, the 84-year-old was also oscar the grouch. that's the news update this hour 84 years old, 50 years as big bird what can you do after that

how can you top that, right? >> that's amazing. i hope this means they have somebody else coming in to play the role, though, as the mother of a 2 1/2-year-old. big bird and cookie monster, they're hot in our house >> i know, i know. i'm sure somebody is already waiting in the wings, get it wings, big bird. >> and let's not underappreciate carol's ring big bird and oscar the grouch. >> it's amazing. great story. see you next hour, guys. >> thank you, sue. shares of netflix bucking the broader market, up this morning after impressing wall street with a surge in subscriber additions our next guest is upping his price target from 400 to 430 a share while maintaining an outperform rating. joining us is the senior internet and new media analyst john blackledge. thanks f thanks for joining us today. >> thanks for having me. >> is this specifically due to the subscriber numbers, or are there other things in this

report that really jumped out at you? we've been having a healthy debate about the future of netflix this morning, especially in light of the spending numbers. >> yeah, the future of netflix is good. yeah, they crushed the quarter and easily beat investor expectations they beat street and consensus subs by 2 million. for 4q, it was like a record guide, an international guide. that's really being driven by record original programming released in 3q, more to come in 4q they have these partnership deals. they've been doing them forever. the recent vintages like bundling subs with mobile operators and pay tv operators, that's helping the subs. we raised our long-term forecast and our price target from 430 to 400 and remain bullish >> and john, in terms of the spending numbers, are you at all concerned about those? >> yeah, that's fair

they're going to spend almost 13 billion in cash on content this year, which is a big number. they did provide some updated guidance on cash flow. they're going to have a free cash flow loss of $3 billion this year. that's at the low end of the $3 billion to $4 billion loss they guided to earlier this year. they said there will be a $3 billion free cash flow loss next year, which is a little worse than what we had then the free cash flow loss will get materially better in 2020 we think netflix will be a huge free cash flow generator over time the key reason is operating margins. they did a 7% operating margin last year. they're doing a 10% margin this year it's going to 13% next year. that margin is going to -- they're going to keep walking up that margin. that's going to drive massive free cash flow not really concerned about the spending they're in big growth mode, as you saw with this quarter. >> john, what does a saturation

moment look like when we have netflix, disney, hbo, hulu, various cable operators trying to provide, i guess, skinnier bundles and offering them over the top. who gets cut out first, and what ends up determining that >> yeah, it's a great question you guys know great content drives audience, drives viewers for netflix and their world. great content drives subs. competitively, they're at an advantage for a couple reasons one, a lot of these players are late to the game netflix is going to end this year with almost $150 million global subs and about $15 billion in global streaming revenue manag revenuin revenue. they have massive scale. the second thing is, what do they want to spend on content? netflix will spend 15 billion this year, almost 15 billion next year. there's only a couple players that can spend that much

globally the thing with netflix with their global subscriber scale is they can spread those costs around their subs and that growing sub count, versus even a disney, which is coming out next year they're obviously going to have zero subs and be sub scale i don't know if anyone could ever catch up to netflix netflix, clear leader. they've always been the innovator in the marketplace we would expect that to continue >> ever is a long time i wonder, 30,000 feet, can you really compare the company's era of growth in a zero cost to capital environment versus one that a lot of people say we're moving into? >> no, it's fair, and they definitely will do -- they'll probably do another debt raise this year. they called out last night they're going to continue to raise debt as they go. we do have free cash flow positive i think it's in 2021 so yeah, and it's factored into the model. we have a ten-year model

i think that it will be fine >> john blackledge, thanks for joining us today >> thank you stocks coming off the lows of the session let's get the european close with seema mody. >> we're looking at european stocks right now, moving lower with italian assets under pressure again amid these reports the eu will reject the country's draft budget we also have some disappointing economic day that's also weighing on european stocks. first, weak inflation numbers out of the uk, putting more pressure on the pound. on top of that, uk housing price growth slowed, extending this continued cooldown in the british property prices over the past two years you can see uk home builders are moving lower another data point, european car sales falling more than 23%. some analysts say this is due to the ongoing trade uncertainty. check out names like peugeot, the worst performer, down by

nearly 5% in the auto sector fiat also down let's move on to energy. french oil giant total expanding its presence in india, signing a key partnership to build out service stations across india as energy consumption continues to grow also want to talk about foreign policy secretary of state mike pompeo meeting with turkish president erdogan erdogan today to discuss the alleged killing of journalist jamal khashoggi and the role of the saudi government the turks are still trying to get access to the saudi consul's residence. tomorrow, look for headlines from the asia/europe summit in brussels, where the european union is expected to sign more deals with china, just jour underscoring the strong deal flow we continue to see between china and europe amid ongoing tensions with the u.s. carl, back to you. >> seema, thank you very much. as we go to break, let's get a check on where we stand on this wednesday morning off the session lows, dow is down 171 big piece of that is ibm and home depot oil still with that six handle,

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volatility continues we've seen some sharp swings in stocks after yesterday's rally the dow was down as much as 300 points this morning. it's now well off those lows the vix jumping almost 30% in just one month so is this the new normal? weighing in now, the founding partner and chief investment officer at crescent wealth

advisers here at post nine, bank of america merrill lynch chief economist michelle meyer welcome to both of you jack, interest rates have been a big part of the conversation around all this volatility you say the fed has not been too aggressive and rates need to go higher how high >> well, it depends. i mean, if you believe the taylor rule, for example, john taylor from stanford's algorithm that takes into consideration a lot of environmental factors, his formula says 5%. right now at an overnight rate of 2.25, there's a big gap even if you say, you know what, maybe i don't buy the taylor rule completely, i think it would argue that rates are probably too low on the front end. if you look at the intermediate part of the curve, i think the ten-year rate should be 4.5, not 3.1. >> so michelle, the market got pretty freaked out, it seems, from the fed's hawkish comments.

that can't be a good thing if we see wild swings. how do you see this playing out, and what should investors be concerned or not so concerned about? >> yeah, so i agree. wild swings are not the goal of the federal reserve. they're not looking to create volatility and create noise and create dysfunction in the market but they are looking to tighten financial conditions they're hiking interest rates and communicating that they have further to go. as jack said, a lot of the standard models suggest they actually should be going faster than they are. unemployment rate of 3.7%, inflation around target. they're going very slow and cautiously so i think what they're trying to achieve is a tightening of financial conditions, a gradual move up in rates, and that might come with some selloff in the stock market, but they're not looking to create disruptions by any means. >> so does 5% yield on a ten-year sound realistic or likely to you? >> 5% is probably a stretch. i think maybe even 4% is a stretch. >> really? >> in the near term, certainly

but for now, you know, to see us creep towards 3.5% on the ten-year, i think that's reasonable and consistent with the economic data. i think that's also probably consistent with what the fed thinks is normal, given the hiking cycle >> given that, jack, if you really believe you're headed, say, to 3, 5, or 4, does that mean autos and housing look unpalatable for, i don't know, the near future? when does that possibly get interesting? >> yeah, no, i think that the catalyst for this move is going to be the european central bank ending its quantitative easing program at the end of this year. they've already gone on record to say that. it's been the european rates, the german bund, which was for a long time below, keeping a tether on the u.s. rates so now getting them out of the quantitative easing business is going to start really putting upward pressure on the intermediate part of the curve

essentially, the way i see it is the water in which all of these markets are swimming in is going to get colder. and it's going to impact those markets that are more highly valued, have a higher valuation like u.s. and u.s. growth, than it will probably europe, uk, japan, and even the emerging markets because those rates are going to go up also. >> michelle, it wasn't so many days ago we were talking about trade, trade, trade as a driver of market volatility we don't seem to be talking about that much anymore. we've been talking about the fed. are we discounting trade and some of the upheaval that could come from the pressures that the trump administration is putting on global systems? we've got this postal deal today that's thrown into question. >> i think that's a really good point. i think it's always hard to figure out the triggers for moves in the stock market. after the fact, we come up with explanations i think the fed is one of them,

but trade presumably is another. i think also just in general, the fact that globally the economy is not doing as well in terms of what asset prices look like, but also overall economic performance we're seeing scllowg outside of the u.s i think it's a variety of factors. trade is something we have to absolutely keep an eye out for it's been a little quiet, but we always get these headlines that pop up and can be scary for the markets. >> and jack, we have started to get some earnings. for the most part, they've been better than expected i think about csx. i spoke to the ceo there earlier today who said he thinks economic growth is strongest and will continue to be strong until next year from the lens of the freight side and the railroad side of things i mean, given the fact we have started to see softer data potentially slowing globally, how long can the u.s. really sort of continue to fire on all cylinders? >> yeah, i think that certainly the 4.2% growth from the succeed

quarter was astonishing. although, if you consider it was fed largely by the tax cuts, that's great and that's following through obviously with earnings. we're seeing 20% earnings growth year over year the problem is next year those comparisons are going to be very difficult. and expectations are in the mid to high single digits in growth. part of the reason, even before we saw this downdraft, that equity investors were rather skeptical that this 20% plus earnings growth rate wasn't sustainable. and that's why we saw a market up 7% to 10% against a backdrop of earnings that were up more than double that >> jack just reminded me we're a week and a half away from q-3 advanced gdp what's your number >> so we're right around there we're at a mid-3% pace for the third quarter. there's a number of factors that are very favorable one is inventory cycle in the second quarter, inventories were drawn down pretty notably

245z goi that's going to coming back up in the third quarter that adds almost a full 1.5 percentage points. even outside of that, final sales look strong. consumer spending data looks strong, even with the retail sales numbers we got yesterday i think it's setting up for another three handle certainly in the third quarter >> all right we'll continue to watch it jack and michelle, thank you coming up in just a few minutes, do not miss the halftime report today when billionaire investor leon cooperman joins scott wapner and the gang that's all ahead at the top of the hour a lot more "ua aeystsqwkll" ill ahead. missing out after hours. not anymore, td ameritrade lets you trade select securities 24 hours a day, five days a week. that's amazing. it's a pretty big deal. so i can trade all night long? ♪ ♪ all night long... is that lionel richie? let's reopen the market. mr. richie, would you ring the 24/5 bell? sure can, jim. ♪ trade 24/5, with td ameritrade.

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here's what's coming up at the halftime report. we're debating the state of the markets with legendary investor lee cooperman. he'll tell us whether the correction has run its course. plus, our call of the day throws three airlines into play our desk debates which one is the best for you and unusual activity once again. what the options market is saying about one stock's next move it's all at noon carl, that means we're about ten away see you in a few >> all right scott, thank you very much in the meantime, we are awaiting comments out of the white house. >> good morning, carl. the president was holding an event in the oval office to talk about his deregulatory agenda. he had a number of folks from the economy around the country in the oval office with him to talk about the success of the president's agenda as he sees it, on cutting red tape and regulations. i had the opportunity to ask the president a couple questions in

there. one of them was how he makes a distinction between good regulations and bad. the president was talking about cutting unnecessary regulations, but this administration has proposed new regulations just this week on the drug industry in terms of raising awareness of the costs of drugs drugs in then advertisements the president gave me a fairly lengthy answer but suggested that's an important one because this administration, he said, is devoted to the idea of bringing down the cost of drugs the president, while he's touting a deregulatory agenda, very much willing to use regulations and impose them in cases where he thinks it's important. i also asked him about the idea of picking winners and losers in the economy. traditionally republicans have said they don't want to pick winners and losers they want a blanket to apply to all industries this president talks about steel, aluminum and coal raising prices for them. the president said, though, he

wants winners across the board he doesn't want to pick winners and losers deflecting the question a little bit, carl, but suggesting he wants everybody in this economy to win >> i'll take it. thank you for wrapping those headlines for us in front of the white house. let's get over to the cme and rick santelli. rick >> reporter: good morning. you know, a lot has been discussed regarding how central banks and some of the post crisis issues have affected kind of the way different sectors of the market and, indeed, different geographies of different markets communicate with each other and how that represents signals within a marketplace that are read by investors. there's definitely an issue there. the signals aren't working like they used to sometimes they come back to life, as in europe right now for example, if you look at italian rates, uk rates, what's going on with the german rates, which are the high credit sovereigns of europe, you'll find that they're all easing back to levels we haven't seen

since the beginning of october the main reason for that, in my opinion, are the equity markets. soap the response mechanism, the communication between the equities of europe and the rates of europe seem to be a little bit more in sync with history and the relationships than the u.s. markets where treasuries have largely avoided pay much attention to the down side, yesterday's upside and the recoveries in equities so what's going on it's pretty simple it's the extreme let's go to the board. here's the dow jones industrial average, all these equity charts globally will start the beginning of 2016, and you can see even with the correction we've had based on history and based on where the last highs are, we're looking good. let's go to the uk you're flirting with challenging significant lows let's even move around the globe some more. rates have eased back and they have a variety of issues you could clearly see. the stock market is on the weakside if you go to france, the same

issue. you can see how it is toying with levels that is unlike the relationship with our stock market so the long and the short of it is we can learn a lot from this because the stickiness of u.s. rates, the fact our federal reserve is doing more leveraging to try even against the tide of a president who wants them to slow down, to try to normalize, grab as much insurance in the marketplace before this cycle ends or a recession begins europe didn't move down the road of normalization to the same extent yes, they're trying to reduce the balance sheet. the issue is they haven't purchased any life insurance, and the markets are very cognizant of that. even though the signals may not be what they used to be, they're still worth paying attention to. back to you. all right, thank you, rick and as we head to break, a morning in the red for big blue. shares of ibm lower this morning after disappointing particularly on revenue in strategic businesses including cloud and analytics.

the stock is currently down more than 6%. "squawk alley" continues in less than three minutes place, the xfinity xfi gateway.

and it's strengthened by xfi pods, which plug in to extend the wifi even farther, past anything that stands in its way. ...well almost anything. leave no room behind with xfi pods. simple. easy. awesome. click or visit a retail store today. market down 104. obviously better than the session low of down 317. and it's been led by the banks, which really did sit yesterday's rally out. goldman up 2.6%. morgan stanley up another .33 trying to make up for the

drubbing the last two or three weeks. >> as we look at tech you have to get beneath some of the major index numbers. semis not having a great morning despite those numbers from lam research we have martin on talking about demand not being as bad as expected amd down 3%. intel also in the red. >> in terms of the s&p now four sectors in the green, communications, consumer staples, health care, financials and tech, of course, still the laggard here >> meanwhile mays making comments on brexit saying a deal can be reached after more work over the next days and weeks let's get to the president no, not at all, no i want to find out what's happening. secretary of state pompeo will be back probably late tonight or early tomorrow morning he went to turkey. he went all over but he spent a lot of time with the crown prince and he has a full report. i'm not giving cover at all. with at that being said, saudi

arabia's been a very important ally of ours in the middle east. we are stopping iran -- we're not trying to stop, we're stopping iran. we took away that ridiculous deal made by the previous administration, the iran deal which was $150 billion, $1.8 billion in cash. what was that all about? and they are an ally we have other very good allies in the middle east if you look at saudi arabia, they're an ally and a tremendous purchaser of not only military equipment but other things when i went there, they committed to purchase $450 billion worth of things and those are the biggest orders in the history of this country, probably the history of the world. i don't think there's ever been any order for $450 billion you remember that day in saudi arabia where that commitment was made so they're an important ally, but i want to find out what

happened, where is the fault, and we will probably know that by the end of the week mike pompeo is coming back we're going to have a long talk. >> we're talking about a man who lived across the river in virginia why not send the fbi in to figure all this out? >> well, he wasn't a citizen of this country, for one thing, and we're going to determine that. you don't know whether or not we have, do you do you know whether or not we've sent the fbi >> have you sent the fbi >> i'm not going to tell you why would i tell you >> you asked for this audio/video intelligence -- >> we have asked for it, if it exists, yes. we've asked for it, if it exists >> are you surprised they haven't turned it over >> no. i'm not sure yet that it exists. it probably does, possibly does. i'll have a full report on that from mike when he comes back that's one of the things that's going to be the first question i ask. >> mr. president, there's been some talk after the midterms about spending being reined in up on the hill are there any programs -- >> well, i will tell you that

i'm having a cabinet meeting in a little while, and we'll ask every secretary to cut 5% for next year. and last year, the first year, i had to do something with the military the military was falling apart it was depleted. it was in very bad shape that's why we went for two years $700 billion, and that took place over a period of two years. we have repurchased and purchased jets, missiles, rockets, all forms of military equipment, ships, submarines we've rebuilt and are in the process of rebuilding our military to a level that it's never been before. i had to do that in order to get the $700 billion and $716 billion. those numbers have never been heard of before. i had to give the democrats, i call it waste money, things that i would never have approved but we had to do that in order to get the votes because we don't have enough republican votes to do this without them