Wall Street Unplugged
Episode: 950September 22, 2022

Brace for a market unlike anything you’ve ever seen

stormy market

This week is all about the Fed. 

Daniel joins me once again to discuss yesterday’s interest rate hike, and what stood out about Fed Chair Jerome Powell’s comments.

Prepare for a rant on how Powell’s actions could push the market far lower… 

I also break down why the U.S. dollar will keep rising… and how it will hurt the global economy. 

Bottom line: It’s time to play defense. If you don’t have portfolio protection in place, this strategy is one of the best ways to reduce risk… and start profiting from a falling market.

Inside this episode:
  • Daniel’s reaction to Powell’s Q&A [1:39]
  • Why this market is unlike anything we’ve ever seen [3:40]
  • A rising U.S dollar will cause a lot of pain [16:10]
  • Powell is ruining all the bull market catalysts [23:10]
  • How to protect yourself from a market crash [37:52]

Wall Street Unplugged | 950

Brace for a market unlike anything you’ve ever seen

Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on Main Street.

Frank Curzio: How’s it going out there. It’s Thursday, September 15th. I’m Frank Curzio, it’s the Wall Street Unplugged podcast where I break down the headlines and tell you what’s really moving these markets. So, Daniel Creech, three days in a row joining us. You okay? You feel all right?

Daniel Creech: Wonderful. Yeah. It’s absolutely. It’s been one of the better weeks in a long time. One, two, three. Every day is Wednesday here, Frank, at Curzio Research.

Frank Curzio: Yeah. Well, I mean, usually I reserve Thursdays for interviews and for this week with the Fed and what they’re doing, I thought it was relevant where it didn’t matter what anybody said, who I was bringing on. I really wanted to talk to you about it because you know what the Fed says and what they do are usually two different things. But they basically said exactly what they’re going to do. I liked that they came out and said yesterday that they’re going to be data dependent, but also what was a shock to the system, which is why the stocks, that went up 300 points at first and came back down was he raised rates like his forecast for where rates will be next year from people looking at 4.25 to four and a half, 4.6%. And he said, they’re going to stay there for the entire year, next year. Which is considerable. And then I think people started digesting that and then said, okay, wait, wait. That’s just not good. It’s just not a good long term scenario. But what did you get from, wait, what was your takeaway from yesterday’s meeting?

Daniel Creech: I was surprised that the market didn’t sell off more and it didn’t sell off quicker. So, when I was looking at this at two o’clock Eastern Time is when the announcement came out, they bumped 75 basis points. Markets were a little volatile. At 2:30 when Powell’s Q&A started well at two 30, kind of makes his statement. And then the Q&A starts. If I remember correctly, markets were basically flat and they were going back and forth on his comments. I couldn’t believe the very first question he took and no disrespect to the reporter, whoever asked it didn’t matter.

Daniel Creech: What he said was before I take your question, I’ll answer your question. Nothing… And I’m paraphrasing here. He says nothing has changed since Jackson Hole. I thought… Boom, there it is. That’s going to just hit the sell button. Because Jackson Hole caused such, he used the word pain and all that kind of stuff. I was a little surprised that how terrible is it to say the stocks fell over a percent and a half across the board? And I was surprised just based on his tone, because what he told you is he was a politician. He tried to walk a thin line.

Frank Curzio: Go both ways. Yeah.

Daniel Creech: But the only thing that I took away from that is like you just pointed to the increased in federal funds rate, towards the end of this year and higher for longer. This sucks for our job because we want to entertain and educate people. But that is not good for the stock market. I mean, that is not a good sign to the end of the year. At least we have some sense and what the road looks like to the end of the year. But overall the path to the least of resistance is still lower for markets.

Frank Curzio: Yeah. I mean, I wasn’t surprised at all that it didn’t go down further. That was my thesis for saying it could go up a thousand points because they even said worse than expected. And you saw a 300 point pop and then it came off as people started digesting it. Because I think that was a surprise. So, a lot of the negative and the Jackson Hole, I mean everyone on TV, they figured that was factored into stocks, what wasn’t really factored in is him going a little bit higher on that rate. And from 4.25 to over 4.5%, 4.6%. That’s what they’re predicting. But that’s why I wasn’t so surprised. That’s why I said it’s a good trade where you could see that happen because any positive, it’s just so much… That’s what you’re seeing right now. I mean, investors haven’t been more bullish in this, or more bearish than almost ever.

Frank Curzio: Which normally signals. And there’s the sediment guys. And the traders are saying the year after, when we’ve seen it this negative, it goes up 35%, 75%. And they joke around in this sarcastic saying, “This time is different. This time is different.” It is different. It’s not the same. Okay. If you compare those other periods, when we’ve seen this, we didn’t have this in the face of rising interest rates with inflation back in the 1980s. And I hate when we see that when people compare different timeframes and they’re saying, well, the P rates, that’s what we did that. How many bears have gotten it wrong? And they’re going to cover this in a minute because it’s very important. From 2010 to 2019-20 into COVID saying that the P ratio is too high. Historically, historically, historically. Historically we’ve never had rates at zero for almost 10 straight years, which promotes money into the system.

Frank Curzio: It promotes growth. You’re an idiot if you keep your money in savings, that’s the way the government made it. It’s a different scenario. Compare that to 10 years, 30 years and 50 years, it is different this time. It is different. We’re in uncharted territory. And if you want proof of this Daniel, this is what you have to realize of what happened. Okay. It’s important for you to realize this. And you’re looking at Powell last year. Last year, he’s been doing this for 40 years, Daniel. 40 years. Study economics, theories, pretty much his whole entire life. Studying the boom and bust market. Every recession, depressions, he studied it all. That’s what this guy did. You have the most head of the most powerful institution of the world that could destroy world economies or make them grow based on your policies.

Frank Curzio: That’s how you got there. So, last year, last year, based on your 40 years of experience, everything that it told you that when inflation was at 5%, it was going to be transitory. That was your thesis on everything you’ve studied your entire life. And that’s okay. You get it wrong, we get it wrong. And then we adjust. Okay, so you are wrong and that’s okay, that’s the past. We know it wasn’t transitory. Last year we had zero rates. You were aggressively buying bonds. You just said that it was funny. To mention that Wall Street Journal today.

Daniel Creech: Yep.

Frank Curzio: You pointed that out. We was saying that aggressively buying bonds. Last year, a year ago, right, Jackson Hole. And you suggested again, based on the 40 years of experience, 40 plus years of experience that inflation’s going to be short lived. One year later let me fast forward to today. You just raised rates by the fastest pace in close to four decades. You go raise and by another one and a half percent of the next five to six months to four and a half percent. You’re about to aggressively shrink your balance sheet, which is $9 trillion by over 1 trillion annually, taking money out of the system. And now you no longer think inflation is transitory. Think about that for a minute because you thought inflation was transitory with zero rates. Now we’re going well over 4%. And you totally threw that thesis, again, which is formed from 40 years of study economics out the window. So, if you look at this analysis, Powell is basically operating 100% in the dark. He’s throwing everything that he learned for 40 years out the window, putting him in a position that he is not really qualified for.

Frank Curzio: Because if you’re telling me that you thought inflation was transitory when interest rates is zero and you were buying bonds and now you’re shrinking your balance sheet, you’re aggressively raise and raised by the fast pace in 40 fricking years and already there and you’re seeing this. I mean, you’re seeing across the board where semis are now warning, companies are warning. Industrials are warning. It’s not just FedEx and Ford and people looking at those two companies, because those are big names. We follow all the companies. They’re warning. 70% of these CEOs think a recessions coming if we’re not in one. We’ll get to that in a minute. But this about face, it’s not like Nick Saban, which was one of the greatest coaching moves. I think in history, he was Alabama coach. He switched quarterbacks in the second half in the 2018 college football championship. So, Jalen Hurts to Tua, which is great.

Frank Curzio: Because those two guys doing great now. But it was insane. It was an insane move. Because Hurts was 25 and two as his start, he just had a bad first half, but he saw they didn’t have it. This isn’t like one of those about faces. I mean this would be more Saban telling his entire team to sit down and take 11 people, 11 fans and saying, okay here you guys play Georgia. We got a better shot. That’s how far… I mean, if you think about that, of where we are of how much he’s going to overshoot, if you really thought transitory, inflation was transitory with zero rates and you’re buying bonds and now where we are right now, you’re saying that it’s no way closer transitory, meaning that you’re going to stay well over 4% for the entire year, next year.

Frank Curzio: I mean, you know what the adjustment is going to be for us. I mean it’s insane when you think about it and by the way, I just think it’s hilarious. What’s your definition of recession? What is a recession? Do you know? I don’t know. I’ve been doing this for 30 years. I have no fucking clue what a recession is. What is a recession?

Daniel Creech: Oh there we go. Couldn’t even… Yeah, Frank.

Frank Curzio: No, but I’m going to get fired up. If you don’t like it…

Daniel Creech: I like it.

Frank Curzio: I’m trying to help you guys. You can ignore curse word. Ignore it. But this is what happens when New Yorkers get fired up. So, go ahead. Tell me what a recession is. You define it for me because I don’t know. I have no idea what recession is.

Daniel Creech: Well, I have an old soul Frank. So, despite my age, I’m going to go with the typical definition of two quarters of negative growth.

Frank Curzio: Okay. That’s the definition. If you open up a… Yeah, yeah.

Daniel Creech: I feel like you’re luring me into something.

Frank Curzio: Webster. No, no. I’m trying to figure it out because that’s not defined as a recession because unemployment is good. But it’s define is five out of six quarters of negative GDP. Is that going to be a recession? Because that’s what we’re going. That’s where we’re definitely going. I mean, if you take the two that were just negative, there’s a good shot that this is going to be negative. This might be the only positive quarter we see and the next three are going to be negative. At least negative, but that’s not defined as a recession anymore. Why? Because unemployment it’s so low. It’s so low. We’re doing great out there. The economy’s great. So, president says the economy’s awesome right now. Well, when you look at the labor force, you always want to look at data and look more into it because the number of persons, not in the labor force who currently want a job, you notice how they define that, where it’s kind of confusing.

Frank Curzio: So, it declined by 360,000 to 5.5 million in August. So, this measure remains above its February 2020 levels. That’s reported in the last unemployment number. And this is for August. So, these individuals were not counted as unemployed because they were not actively looking for work during the four weeks preceding that number. That’s 5.5 million people. That don’t have a job, but are not in the unemployment figures. Now put that in perspective right now our rate is 3.7%, which accounts for about 6 million people that are unemployed. That gets us 3.7%. But 5.5 million other people are not part of that because they’re not looking for a job. They could be working off the books. They could just be like, listen, I’m done. But you don’t can’t blame them because you are handing them freaking checks directly for not working, telling them don’t work. It’s fine. You guys are okay. All right.

Frank Curzio: So, when you’re looking at the numbers and you’re looking at the data and how they calculate it, I also broke down how the CPI, the CPI is not going to come down in a year. If that’s your gauge. If that’s really your gauge that you’re looking at since rental income is 30% and you look at shelter at 30% of that index. That’s not coming down anytime soon. It’s just not coming down anytime soon. So, if that’s your gauge, the Fed is serious and they’re going to continue to raise rates. But on the recession front, I mean, you’d have to say we’re in a global recession, but we’re not. But even if unemployment, if you take that unemployment rate would be what you’re not going to take all 5 million people, but even half of them, you’re looking at an unemployment rate above 5%, five and half percent.

Frank Curzio: And less participation rate. So, 3.6 is more like 4.6 now, compared to… Again, we have to adjust this stuff as more people come out of the workforce. Nobody wants to look at the data. They just look at a number and say, I don’t even care how it’s calculated. Oh, you asked three people if the market’s going to go higher and that’s it. Yeah. A hundred percent believe. The market’s going to higher. You look at the survey. It’s like they surveyed four people. And who are these four people? I don’t even know their names. They just on the street. Yeah. Who knows? I don’t even know if they’re they’re legal immigrants or not. I have no idea. There’s four people we serve. You don’t know. You got to look at the data. But when you look at the data and you look at everything’s calculated, it’s really insane here. But I mean the definition is two straight quarters of negative GDP.

Frank Curzio: If that’s not good enough, wait till we see earnings, because we’re going to get negative earnings, quarter, quarter, quarter. It’s X energy. And I’m not just cherry picking energy. I mean energy’s profits will up like a thousand percent or so. It’s like some crazy number. There’s like 600 something percent. And it accounts for a small percent. Now it used to be 2%. Now it’s 4%. But strip out energy and you look at, I think it’s the other 10 sectors of S&P 500 and you’re seeing earnings year of year fell 4%. That’s a big number. But the recession thing, Daniel, I’m trying hard to figure out how it’s defined.

Daniel Creech: And to your point, earnings have come down I think, and not to put these words in your mouth or make this argument for you. But earnings have got to continue to come down. So, before third quarter results start getting reported we have to see some revisions lower don’t you think?

Frank Curzio: We’re seeing revisions lower, right?

Daniel Creech: Well, I mean it’s going to continue. I mean they’re not all set right now. I mean you’ll probably see more companies possibly warn going into that quarter, et cetera. What I do think, the reason I think the market and again, I don’t say this lightly, the only reason the market went down around 2% yesterday was because at least he did Fed Powell, Fed Chair Powell, acknowledge that some things were slowing. He mentioned housing a couple times. He talked about how it’s not enough and how the Fed needs to see more signs and more data to back up the slowing of the economy and everything like that. One of the quotes that he said, Frank, which again, I thought would cause more selling pressure. He says, “No one knows whether this process will lead to a recession or if so, how significant that recession will be.” This was in back and forth questions on regarding, hey, to your point. They keep pointing to low employment.

Daniel Creech: The Fed I think Frank is in no doubt going to just raise until something breaks. To your point, going into an election year, you have a slowing economy, you have a higher interest rates. You have inflation at 40 year highs. And now you’re going to have, Jerome Powell yesterday, reading between the lines said that they have to push up unemployment even higher. They are okay with that. One of the questions, I think even tried to break it down into numbers and said, are you okay with another million people if the unemployment rises to X, Y, Z. That’s another million jobs lost. Are you okay with that?

Daniel Creech: Essentially he is. And he has to be because they are hell bent on saying, we have to get this. I was looking for the transcript yesterday, Frank. He’s committed. I mean, if he follows through with what he says, then we really need to be defensive because he’s simply saying we cannot fail. We will get the job done. We have the tools necessary. We will stay on the track to do this. That means paying for stocks excessively in the short term. But to your point, something’s going to break, recession or depression is going to get thrown around. That’s when they’ll have to pivot and it’ll be forced in my opinion, which means it’s going to be volatile.

Frank Curzio: So, let me ask you this question. We didn’t rehearse this at all. Okay.

Daniel Creech: I like this.

Frank Curzio: What is your thesis for buying stocks right now?

Daniel Creech: Oh, there’s very little to buy right now. It’s more of a build a shopping list.

Frank Curzio: But even if you look, it’s build a shopping list. But even people who are bullish, I mean, what are they saying right now? It’s like, if you’re looking for a reason to buy stocks and you look around it’s like you said, it’s hard. But the thesis, any bull thesis right now, what does it revolve around? It revolves around-

Daniel Creech: Fed pivoting.

Frank Curzio: Yeah. The Fed pivoting. We know that. Which [inaudible 00:15:09].

Daniel Creech: Yeah. Exactly.

Frank Curzio: Right. I was hoping that, and that pivot doesn’t mean that you’re lowering rates. So, pivot can mean like, all right, we’re just going to slow down. They’re not slowing down. So, that pivot’s gone. That’s out of the equation. But right now the reason to buy stocks, the only reason you could say sentiment indicators and trading indicators and stuff like that. And I get it right? It’s most bearish conditions and you might see a pop again, that’s a trading opportunity, which probably going to be sold off just like we just saw with this recent market, because you got the Fed there and the Fed’s raising rates and doing everything, whatever, buy and selling.

Frank Curzio: So, anyway, you’re looking at the thesis being that stocks have come down and they’re cheaper. That’s the thesis of anyone right now. Other than that, you’d tell me someone else is buying stocks or reason why they’re buying stocks. And they could say sentiment indicators. Again, I get it. Trading opportunities with those sentiment indicators with negative for the past two weeks as this market has come down tremendously. It keeps coming down before this Fed meeting. And even now. That’s why I said we could see a thousand point increase at the Fed, just hints at anything positive, just a tiny bit positive, which he kind of didn’t and wind up going down. So, if that’s your thesis, if wow stocks are getting cheaper, stocks are all about earnings. Earnings, drive prices. That’s true. No matter what year, whatever, if you’re seeing earnings growing, if you’re seeing growth in the economy that drives stock prices.

Frank Curzio: And right now, what are we doing? We’re raising rates. So, rates are going to get incredibly higher, which is going to crush world economies. It’s already doing that right now. Which means that when you’re raising rates and everybody else is in a much shittier position than us, it means they’re going to continue to pour into the dollar from here. And that’s one major problem. One massive headwind for earnings. Because if you look at earnings, how much does a dollar hurt? It hurts a lot. And you’re looking at 29% of the profits from the S&P 500 companies come from overseas. If you look up Google, that’s what it’s going to say. Again, for guys like me, we break down the data. So, you’re like, oh, well we’ll just not worry about those companies within S&P 500 to have a lot of exposure. But let’s break down a little bit because if you’re looking at technology companies, tech companies make, they rank in 60% of their revenue from overseas.

Frank Curzio: Well, tech is still by far the largest weight in the major indices, Apple, Microsoft, Google of FAANGs, throw in Nvidia, AMD and tech accounts for 30% waiting in the S&P 500. So, to put that in perspective, this is higher waiting than healthcare and consumer discretionary combined. So, they’re the ones that are getting hit the most and those are the ones that are going to see earnings come down, which is a pretty big deal. Because you’re going to see the dollar go higher. And you might say, well, it’s not really that much. It’s not going to be that crazy. It is going to be that crazy. And if you think I’m crazy, just look at some of the companies, the technology companies, and even some of the healthcare companies. You look at IBM, they said the climbing dollar last quarter could slash revenue by three and a half billion dollars.

Frank Curzio: Netflix said the dollar’s performance had erased 339 million in profits. It’s stronger now from when they warned by the way. Johnson & Johnson is stronger dollar could eat away 4 billion in sales. All right. So, if you think that dollar’s not a big deal, think again. Because that’s one of the headwinds that really not so many people are factoring in. When I look at the analyst estimates, because analysts are coming down, [inaudible 00:18:22] economy, but it’s also the dollar. And these companies don’t say anything when you know the dollars weaker and that profits are high. But now you’re going to see X currency. That’s what’re going to say. X currency, this is how much we earn. That’s one of the things. The other thing too, and by the way, financials and industrials are account for another 20% of the index. And those are the other two sectors that have a lot of exposure overseas.

Frank Curzio: So, the largest sectors that count for the largest waiting in S&P 500 have the most exposure to the rising dollar and most exposure to profits overseas, which means those earnings are going to get hit the hardest. And when they do, that’s going to result in the S&P 500 falling a lot more than you just saying, well, that accounts for 30% S&P 500 profits. Because the companies, when you look at the weightings, it’s a lot bigger than that. So, now they have decent balance sheets. They raise money, whether through bonds or whatever. And lot of those bonds are going to pay later on. They have cash in the balance sheet, they were supposed to use this for buybacks. Amazingly, we’re not seeing buybacks. Buybacks are supposed to be crazy strong. These stocks are down 30%, 20%, 50%. Some of them, if you look at Netflix and Meta, they’re not buying, why aren’t they buying back stock last quarter?

Frank Curzio: Why? Because they’re looking at the current environment going, holy shit, we’re in a lot of trouble here. Our earnings are going to crash and we need to make sure our balance sheets are strong. This way we will come out the other side, one of the strongest players. So, those are two catalysts right there you were supposed to use to buy stocks. Now, for those of you who don’t understand the earnings picture and the P ratios, which is fine, this is our job to explain it to you. It’s price to earnings. So, when you see a stock come down 20%, it doesn’t necessarily mean that it’s cheaper. It actually could be more expensive and a stock rises by a hundred percent year over year. And it can actually be cheaper than when it rose a hundred percent because earnings absolutely surged. It’s all about the earnings number.

Frank Curzio: And let’s talk about that because, and it started to go on here, but this is important guys. So, you look at the S&P 500 to P ratio. Not full, but trailing. It’s been over 18 every year since 2016. And you have the bears saying, well… to 2021. Not even this year, 2021. It’s been over 18. And we’ve had a lot of bears saying, you got to sell the market. It’s terrible. The average is usually 15. And most of those years it’s been over 20. But we’ve never had zero interest rates, which promotes more money coming into stocks. And if you look at the earnings growth from 2016, what do we have? We had 10%, 16, 16%, 2017, 20%, 2018, 2019 was 6%. 2020 COVID was down 30%. But then immediately we rebounded 110% earnings growth in 2021 and then 54% earnings growth in 2021. So, we saw a 110% earnings growth. And that was towards the end of 2021. So, if you take those numbers, right, I’m throwing a lot of numbers at you. I’m going to condense them. Here’s what you need to know.

Frank Curzio: The annual earning to share growth is 25%. When you account, even you look at the 30% loss in 2020 since 2016, and you’re looking at that for the past seven years. And when you see that 25% annual earnings growth, the average P ratio was 24 times. So, at 24 times, you’re not really that expensive because you’re growing earnings at that 25% annual rate, which includes that big number. But still even if you’re growing earnings at 20%, which is more in line, you’re looking at it close to that earnings per share number where the 25 times earnings the average multiple. And you’re looking at 25% annual earnings growth. So, you’re not really expensive. Right now, again, earnings growing 25%. Earnings declined last year, X energy, 4%. They’re probably going to be down next year as well with all these revisions, fuel buybacks, the rising dollar. I mean, you’re seeing. Maybe they’re able to cut back enough where their earnings are going to be okay, but you’re going to see sales come down incredibly.

Frank Curzio: Based on earnings declining this year and next year, our P/E could oddly, should be in the single digits. Because again, those earnings per share, these estimates assume that the dollar would fall, but it wouldn’t be again, the dollar will fall a little bit off this, but still going higher and higher. And the fact that the Fed’s raising rates means it’s probably going to still go higher, because that’s going to hurt every other country and they’re going to continue to flock the dollar safety. So, dollar’s probably going to continue to go higher. So, when you’re seeing stops come down 20% from here and you’re thinking like, wow, they are cheap. They are much, much more expensive now with earnings not growing. And that’s what you have to realize. Because the current conditions of the market what Powell is saying is he wants unemployment to go higher. He’s going to aggressively raise rates from here. While housing’s basically shut down.

Frank Curzio: Semis are warning. Industrials are warning. Retails are warning for lower profits. Auto companies are starting to warn. These higher rates are going to crush the world economies, meaning that dollar’s going to go higher, moving much, much higher from here. I mean, under these conditions, how do you see stocks going higher over the next six to 12 months?

Daniel Creech: Very difficult.

Frank Curzio: I’m not saying you can’t buy some of the dividend players and things like that, but you’re creating a scenario that’s promoting tons of money to come out of this market. And we’re not even close. I wish I could, listen, I run a service where people pay me to give them stock ideas. And I’m telling you that right now, if you’re looking to buy equities, give me, again, doing this for 30 years. What are the catalysts here? When you have the Fed. The catalyst, remember the last 10 years pre COVID people were saying, well, you’re going to buy stocks.

Frank Curzio: You going to sell off. They’re going to sell off. They’re going to sell off you. The catalyst was the Fed at zero interest rates, buying bonds, fund the money with system. And don’t be an idiot and put your money into anything else other than equity markets, investments, housing assets, and things like that. Forget about cash. Now it’s totally the opposite. So, by saying that you want unemployment to go higher, you’re raising rates and you’re going to make US dollar automatically go higher. Those conditions, if you look back at history, zero. The market doesn’t go up. Stocks don’t go up under those conditions. And that’s what scares me.

Daniel Creech: Well, it is frightening. Powell is pulling forward Halloween, Frank. He’s trying to do his best boogeyman thing and it’s working. I get your point. I like the breakdown of the sectors and things. Turning back to energy real quick. The wild thing there is that the energy sector, I believe I was reading earlier this week from Wall Street Journal still trades like eight times earnings. It’s still very cheap. Why is that cheap? Well it’s because people are projected out in the future. We’re transitioning away from oil, oil demand will decrease over time. Therefore, it’s okay for the sector to trade cheap right now. I totally disagree with that. That’s one of the shopping list in areas you should be in. Paying attention to following, or at least scaling into for a lot of numerous different reasons. But I would say to stick to what’s working, look at energy, look at different things.

Daniel Creech: Chemicals. If we go through this long drawn out period, you and I were talking the other day about an interview with Palantir and Stanley Druckenmiller. Not the other way. I butchered that hedge funds name. But he was talking about, Hey, what if we go through a long pertain period of sideways? I think from 1966 to 82, the Dow Industrial Average was basically between 600 and a thousand points, basically flat. The S&P went up on average, I think six and a half percent, but inflation was that. So, you’re looking at a terrible situation. Even if that’s the case, we’ll still find ideas. And I know you’re not telling people to panic, but you’re being honest. Right now, again, from our position in the business and everything, the right thing to do is to tell people what’s going on and why you should be nervous.

Daniel Creech: However, you should always keep stacking cash, keep to your plan of savings and all that, because there will be a better time to enter into everything. But there’s a great article. We’ll talk about next week or something Frank, but OXY Petroleum with Buffet. There’s a great article in the Wall Street Journal from a week or so ago about what the CEO went through with battling with Carl Icahn, hedge fund, big stake to Buffet and all that kind of stuff. My point is that, and I know you’re not saying everything’s going down. In the short term it may, because it’s going to be hard to fight the Fed. But that doesn’t mean that you shouldn’t keep having cash on the sidelines for the next opportunity, because it will happen. Unfortunately, it just looks like it’s going to be more weighted towards the end of half year or early into 2023 at earliest.

Frank Curzio: And that’s the thing that I think that’s going back and forth with people, you know what I’m listening to. I like to listen to CNBC and I watch Fox Business and just gauge sentiment from what a lot of these people saying. I mean, the dollar’s going to go higher. It’s going to go higher. You’re raising rates. And if you look at the debt situation across the world it’s horrible and people are going to flock to dollar even more. So, it’s going to continue to go higher. What does that mean? Good luck for gold. Good luck for gold. And I could say good luck for oil because oil almost never goes up during a recession. Almost never. I mean, when I’m looking at this and here’s the deal where you’re looking long term stocks always go higher. They do. They always go higher. But there’s certain periods where it’s crazy.

Frank Curzio: Now I’m not saying that stocks are going to go down for a year and a half, but I am saying that we are going to see a steep decline from here and I’m hoping it’s quicker rather than later. And if we could see a 30% decline in stocks next month in October, and the Fed says stocks lowering rates by February, March. Or we could see this being a long drawn out recession basically already started and stocks just grinding 20, 30% lower from here over the next six to nine months. Either way, it’s hard to see a scenario where stocks aren’t going to fall and when they fall, it’s going to be because of profits and you’re going to see profits drying up and the Fed’s going to be like, okay, wait, let’s stop looking at the CPI. And we have to be careful here.

Frank Curzio: And that’s when you’ll see the opportunity to come in and really invest. But it’s just the timeframe. There’s no way we’re going to keep interest rates well over 4%. But it’s only 4% and looking at over 4.25% for the entire year next year. Think about that. Look at what’s happened in the last six months.

Daniel Creech: Well, and there’s a lot of inflation data that’s going to be coming out for the rest of the year. We’ll get different readings and things like that. And then to your point, going into next year, it’s easy to say that everything will continue to get worse. It’s just hard to magnify and quantify that right now.

Frank Curzio: And it is. And it is. But just when I look at this and what I was saying about the P/E. The P/E ratio was high, but I felt like for those who argue, you should sell stocks because the P/E ratio was high. You have to look at growth. That’s everything when it comes to valuation. And you’re shutting off growth, you’re shutting off. China’s shut off right now. You’re looking at Europe, shut off right now. You’re raising rates aggressively right now. You saw in six months, I’ve never seen the housing market correct that quickly. And it took a while. People were like, well Frank, what about the credit crisis? It was correcting in 2007. You look at when Countrywide, and there was a lot of mortgage companies that went under in early 2007 and we didn’t see it to 2008, which was like a year and a half, two years.

Frank Curzio: And boom, you really saw everything hit. This is six months. That’s how fast you raise rates six months. That’s how quickly you destroyed the biggest growth engine for our GDP. All right. This is the biggest growth engine for consumer spending. I mean, when it comes to housing, it’s a major component of everything that you purchase within a house. So, you’re looking at furniture companies, all this, appliances are warning. All these companies are going to warn. And not only that, we’re assuming that the dollar was going to be come down a little bit, remember 70% of profits from the largest companies that make up the most waiting, which are technology companies comes from overseas. So, the dollar is going to crush these guys. That’s why they’ll announcing layoffs Facebook right now too. Same thing. Just say we’re going to see cost reductions of 10%. You’re going to see it across the board.

Frank Curzio: Google said it. Microsoft said it a little bit. Oh 1%. You’re going to see it more and more and more. Even with Netflix. But it also assumed companies are going to buy back a lot of their stock and they’re not buying it back right now because they’re worried about the future in higher interest rates and saying let’s hunker down and have this cash on the sidelines. Because if we make it out, the other end, those are going to be the strongest companies. You’re going to be able to buy so many good names who are highly leveraged for pennies on the dollar. As technologies do. They didn’t do that too much during the big tech bubble, but they’ve learned that’s why they had the best balance sheets of the strongest balance sheet since then. Because the ones that survived, a lot of those became trillion dollar companies, three, four of them.

Frank Curzio: So, they also assume these earnings are assuming Daniel, that they’re assuming the backlog of business for these companies is guaranteed. You need to shave minimum 20% off every company that reports backlogs. This is every semiconductor company, every industrial company, auto companies. This is like, okay, we’re putting down money and this is what we’re going to do with our orders. I mean, listen, Boeing had 5,500 MAX planes before the crash. And then you had COVID right. They had two crashes and they had to pull back on the MAX planes. And then I think it was a few months later, six months later you saw COVID right. But they had 5,500 planes. Now they have, I mean last time I looked, it was like 1200 and they’re building up a little bit 1500. So, the backlog of business was always included in Boeing’s valuation. So, when you’re looking at a backlog of business, people are canceling.

Frank Curzio: I just canceled one of my projects from my house. I was getting a screen enclosure that they would basically charge me two X, to three X higher than anyone I’ve ever heard of from my entire life. And I’m like, okay. And I agreed to it six months ago and then we were talking about it and then we’re like, we’re still like, okay. And now we’re finally at that stage, where, okay, are we going to build this thing? And price went up a little bit more. And I told them, I said, nope, I don’t want it. And they’re like, well… And that’s them building it in January, February. And that’s how their backlog is. But I canceled my order because I know I’m going to get this thing for half the price a quoting me for six months later because these guys are going to be dying for business. No one’s building houses, very few people building houses.

Frank Curzio: So, think about that across the board. How many people who said that they were going do something and it’s not like I locked in or paid them. It was just that’s the later stage of my house. And I said, okay, this is what we’re going to do. This sounds good. And now that we came down and signed a contract, I said, no. I didn’t go against the contract or anything. I said, you know what? I’m going to wait. I’m not paying this much for a screen enclosure. You’re out of your mind. I won’t even tell you how much because you’re going to, you laugh when I tell you. I’ll tell you, they want me to pay $90,000. $90,000 for a screen enclosure over my pool. This thing should be costing 35, 30,000 tops, 35,000. That’s what they were quoted me at. And everyone I went to like, we can’t do it for two years. Now they’re going to be doing it in six months. I’m like, okay, I’ll take my chances now. Because the housing market is frozen. How many people are going to see that and do the same thing.

Daniel Creech: Right. Yeah.

Frank Curzio: Not just through housing, but that backlog of business. If you look at some of these guys reporting like three to $10 billion in backlogs, if you look in semiconductors, large ones, you got to assume 20% of that business is going to be gone. That’s why they’re seeing all of a sudden it was the biggest boom ever in semiconductors so we have a massive glut, because you’re seeing orders get canceled and that’s going to result in even lower earnings. So, in this environment of lower earnings and Powell raising rates here, it’s difficult to see the equity market. If you have small caps that are, which mostly that they’re leave it to the US in certain growth areas that you might see, but you’re going to be able to find some pockets, but man. And the oil thesis.

Frank Curzio: I think you have to throw out the window. I know you’re bullish on oil and I could be wrong on that, but it’s continued to come down. How’s that going to go up in a global recession? Who’s building. Yes. We’re taking some strategic oil reserves. We see that. And maybe it’s going to result in a quick pop. But again, when usually all does very, very well in a booming economy. When we see a global recession, it usually comes down. And we’re super cheap on all prices here. They’re pretty high historically or average historically right now. So, we’ve seen 130, 190, but could they go down to 50? Absolutely. Could they go down to 70? Absolutely. Or 65, whatever. But even gold as well when I’m looking at these sectors along and how are they going to see growth in their industries? Yeah. It’s very difficult to see.

Frank Curzio: I mean he’s literally shutting off the entire world economy right now and it’s very, very scary. I just don’t see a scenario where you’re going to see the returns on these stocks where you’re looking at names like Nvidia still trading at 25 times whatever earnings Disney’s wealth, 30 times earnings. How these guys going to beat those expectations with the growth coming down tremendously where we should be trading maybe 12 times should earnings tops. And yeah, that means we still have a ways to come down, which is pretty scary.

Daniel Creech: Absolutely. Real quick on your buyback thing. As an investor, it’s painful and it’s aggravating at the time. But if sentiment and the future looks bleak or grim or as a slowdown going into this, then managers are smart to wait and buy back. Because like you said, they can announce buybacks, authorize them, excuse me. But when they act Buffet has done great over his career talking about this as a CEO and a manager, one of your most important jobs is capital allocation. If you are a CEO and you think tougher times are ahead, it is smart for you to authorize buybacks, wait and start buying back shares at lower prices. That’s what you want to see. A lot of times they’re just automatic buybacks to help with earnings per share and all that kind of stuff. You don’t need to worry about that. The point is that it is good to see a lot of cash on the sidelines already.

Daniel Creech: And one quick note here to cover your point well, Frank is, there’s a quick note from Canaccord Genuity and they were talking about the decline in June of this year in the S&P 500. It represented the 14th time the S&P dropped at least 19% since 1960. In all prior instances, the two year note peaked before the S&P made the low. Said another way if the market did bottom and we’ll somehow not go lower, it would be the first time in 60 plus years the S&P bottomed before, after that big of a drop before two year rates peaked. To your point, it’s just the short term outlook-

Frank Curzio: Is going higher- [inaudible 00:36:02]

Daniel Creech: Short- Exactly.

Frank Curzio: Right.

Daniel Creech: Exactly. It’s not peaked. Is the point. So, could it happen? Yes. The percentages are very small. It’s not a great sound bite or this isn’t the best speech to give to rally bull markets. But this is what you need to pay attention to. The easy path forward is lower. Like your point. But that’s a great stat. Hey, if we had seen the bottom now it’s the first time in 60 years that this has happened, the market’s bottom before yields. Just understand what’s what you’re going into to make sure you’re building cash.

Frank Curzio: It’s very cloudy now.

Daniel Creech: Yeah, exactly.

Frank Curzio: It’s extremely cloudy.

Daniel Creech: That’s okay. You go through periods like this. But that’s where we’re at.

Frank Curzio: Yeah. You think it would be certain. Yeah. You think it would be more certainty, but even when they said yesterday, it makes it much more cloudy for me than it is. Because I just can’t see that, you totally changed your stance as Powell saying, this is transitory with 0% interest rates. This is transitory transit, everything you learn. And now you raised by the fast amount in 40 years. And now all of a sudden it’s not even close to being transitory. It’s here forever. It’s a total about face. And now everything that he’s studied, everything that he’s done, he’s going back on everything. Maybe it transitory could have been 18 months instead of six months. And that’s saying at 0% interest rates maybe go higher and higher on inflation, but you’ve raised rates. You’re seeing it being controlled in a lot of different areas where it’s not out of control right now, but you’re still pushing through nothing has happened.

Frank Curzio: We’re not seeing the decline in copper in lumber, the housing market, just like I said, the velocity of money it’s coming out of the system. You’re seeing it. You’re seeing corporate profits come down. They’re going to come down sharply now. It’s going to be a lot worse than what he’s saying in terms of paying the good news is on the other side, I think this is going to happen a lot quicker than he believes. I think we’re probably going to be lowering rates in March or April after we raise rates considerable this year, because we’re going to see an absolute collapse in the markets. And I think when you see that and they do an about face, it’s going to be an amazing, unbelievable buying opportunity. But for now, listen, you have to play defense. You have to. We’ve been saying this about our product or learn about buying puts.

Frank Curzio: Genia is again, I’ve tried to push that down your throats as much as you can in November when the Fed did the about face and said, this is the time buy this newsletter, this is going to make you money because it bets against stocks against sectors. And Genia is fantastic about doing that and it’s option related where you’re not shorting. So, you’re going to lose as much you put up. And she’s been killing it and she’s still going to kill it. So, yeah, I know it’s options and people get turned off by it and then they don’t want it. You need to have protection on your portfolio going over the next three to six months. We said that from November. And look where the markets are. We’re saying it right now. You have to be very, very, very careful. If you hedge your portfolio, you want to be invested in the market long term.

Frank Curzio: Because we know stocks go up and up. But there’s times when you want to hedge yourself in times where the Fed, it has a gigantic spotlight in your face saying I’m raising rates. I’m going to force the unemployment rate to go higher. And a dollar is going to surge from here, which means it’s virtually impossible for stocks to go higher. He’s saying that to you. That’s what he’s saying. Okay. So, we’re going to see stocks go lower, no matter what, it’s just the degree of how fast it’s going to come, where it creates the buying opportunity. And that’s what you want to prepare for. But you have to be able to hedge your portfolio.

Frank Curzio: We have a product that does that. If you don’t want to purchase a product, learn about buying puts. It’s very, very important to hedge your portfolio. That’s the easiest way to do it. You can do it to your brokerage firm. And again, I know most people aren’t going to do it, which is fine. But you really need to do it. I know nobody’s going to do it because they’re not going to do it. Right. They just want to buy stocks.

Daniel Creech: You know it happens. That’s okay. But-

Frank Curzio: That’s okay.

Daniel Creech: You should check her out. She’s brilliant. And that’s an awesome product. So, yeah.

Frank Curzio: I’m not even promoting it and I’m not putting it a discount, because I discounted before. I’m not, it’s not going to be at a discount anymore. But I’m just saying it’s amazing how, if you’re trying to help people in a certain way, but there’s a little bit of learning curve there. Learn it. You don’t have to purchase a product. You don’t have to do anything, but learn it. Learn how to hedge your portfolio. You can go on Google. You could spend a couple of hours reading and stuff like that. And just try it little by little. Again, you’re only going to lose the amount of money you put up. But I’d focus on companies with the biggest backlogs, because those backlogs are going to be cut by least 20%, maybe 40% for some of these names, as you’re going to see a huge cancellation of orders over the next three to six months and you’re seeing it now. You’re seeing it now.

Frank Curzio: That’s why a lot of these companies are warning. So, just be careful out there. It’s going to be difficult to find opportunities, but let’s see. Maybe you see some of these stocks sell off much, much more and they go down to four or five times earnings, six times earnings and make sense. But in a market right now, it’s going to be very difficult where you’re going to see a lot of stocks sell off a lot more from here and we are going to be able look out for some names and be very, very careful at least over the next three to four months as the Fed just goes crazy and raise rates, basically with their hands over their eyes. Regardless of what they see.

Daniel Creech: Cruising blindfold. But it’s okay. We’ll find a great opportunity. So, stay tuned here to Wall Street Unplugged, Frank. That’s easy.

Frank Curzio: No, I’m not saying that to listen to me anymore.

Daniel Creech: No, I know.

Frank Curzio: Listen to me. [inaudible 00:40:47]. But you know, I’m just being real with you.

Daniel Creech: Yeah, that’s good.

Frank Curzio: Like this mark, I’ve never seen it Fed this aggressive right now. And again, interest rates. I feel like our control. They’re not going, not out of control like they were last year. So, yeah, just right now you’ve done a pretty good job. I think going forward, it’s going to be one of the worst jobs we see. It’s going to be much worse than when you said it was transitory. And you’re going to go down as the worst Fed chair by far in the history of the United States since we’ve been hiring. So, it will be interesting.

Frank Curzio: And again, like you said, we’ll find ideas for you. We’ll find little pockets. We’re going to see stocks sell off much more than others. Some stocks and biotech are going to be trading below cash balance, which makes sense. The net cash on a balance sheets. That’s what we’re going to see. And long term it’s fantastic. You like to see these markets that’s when you make the most money, but you just have to be very, very careful here. And hopefully that message I think came across. What do you think?

Daniel Creech: Yeah, I don’t think you came across bullish. I think people understand where you’re coming from. Send us your thoughts and thesises at daniel@curzioresearch.com.

Frank Curzio: Okay. Oh and me frank@curzioresearch.com. You did beat me too it. That’s great. You did. What is it Daniel and see daniel@curzioresearch.com. So, now guys really appreciate support. I’m sure I’m going to get lots of questions and comments from this podcast. The reason why I didn’t recommend any stocks in some of the newsletters, I just wanted to hold and see if the Fed was really was serious about really aggressively, super aggressively raising rates from here. It looks like they are. So, we’re going to adjust the portfolios accordingly and try to make some money for you and hunker down this way. We have great buying opportunities in the future. So, questions, comments, frank@curzioresearch.com, really appreciate all the support. And I’ll see you guys next week. Take care.

Announcer: Wall Street Unplugged is produced by Curzio Research, one of the most respected financial media companies in the industry. The information presented on Wall Street Unplugged is the opinion of its host and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money, and your responsibility.

Frank Curzio
Frank Curzio, founder and CEO of Curzio Research, is one of America’s most respected stock experts. His research is regularly featured on media outlets like CNBC’s Kudlow Report, The Call, CNN Radio, ABC News, and Fox Business News. His Wall Street Unplugged podcast—ranked the No. 1 “most listened-to” financial podcast on iTunes—has been downloaded over 12 million times.

Editor’s note:

Bank of America, Reuters, and even Ray Dalio predict we could see major pullbacks in the near future… making the unique “bear market profit” strategy Frank mentions on today’s show even more effective.

Every time a stock pulls back, there’s a chance to see a HUGE profit… just do this.

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