Wall Street Unplugged
Episode: 976November 29, 2022

If you’re bullish, you’re crazy

Black Friday sales set a new record this year… But this isn’t good news for the market. I explain why strong consumer spending is a negative from the Fed’s perspective—and why it will lead to higher interest rates.

I’m an optimist—but the current bullish argument for stocks is crazy. I break down why we need to prepare for the most volatile market ever over the next 12–18 months… and why buying put options is the key to protecting yourself—and making a fortune—as stocks crash. Plus, I highlight a popular stock whose business model won’t work in the new, high-interest rate environment.

(Speaking of puts, we’re running a special offer on Genia Turanova’s incredible Moneyflow Trader newsletter. Here’s how to lock in your membership at a deep discount.)

My best advice is to start doing your homework on companies to bet against as interest rates keep rising. I also share an easy tool you can use to spot stocks to avoid (or buy puts on)… and some red flags to watch out for. 

Finally, I highlight why China isn’t the growth engine it once was… and why you should avoid companies that rely on the country for sales.

Inside this episode:
Transcript

Wall Street Unplugged | 977

If you're bullish, you're crazy

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 November 29th. I’m Frank Curzio, host of the Wall Street Unplugged podcast, where I break down the headlines and tell you what’s really moving these markets. I hope all of you had a great holiday weekend. Consumers did a great job spending lots of money during Black Friday, as sales had an all-time record, most sales ever, ever, ever in history. Although, looking at the numbers, sales were up around 2% year-over-year, and, on an inflation adjustment basis, sales were probably down 5% year-over-year.

Frank Curzio: I’m not throwing cold water on this sales number. I’m not. The prices, as you know, are much higher now than they were year ago. Consumers were expected to buy a lot of stuff, because many are struggling, and you’re going to get some nice discounts. We’re seeing companies with loads of inventory that they have to get rid of. There’s a lot of great sales out there. It’s kind of expected. But is this an indication that the consumer is doing well? You better hope not. You better hope not. And I don’t mean that in a bad way, that I want consumers to be doing bad.

Frank Curzio: But when there’s an impression that, “The economy’s okay, it’s great.” Do you really want that? Because you got to understand what you really want, if you want to be long stocks here, because this signals the Fed is going to continue raising rates well into next year, especially if we get a strong job number showing fewer than expected layoffs on Friday, and then a strong CPI number, which comes out in about two weeks. And a strong CPI is going to be showing that inflation’s not falling fast enough.

Frank Curzio: Now the CPI, that report comes out December 13th. Keep these dates in mind, they’re very important, especially if you’re a trader. Jobs numbers on Friday. But the Fed’s going to meet the very next day to hike rates. But just looking at the consumer, and the spending, and saying, “Wow, it’s record sales, it’s record sales.” They’re going to be record sales, right? I mean, inflation, we have prices much, much higher. At the end of the day, you’re going to see sales go up almost every single year, when account for… Yeah, I mean, as inflation goes up. You must’ve seen that that number go higher, and higher, and higher almost every single year, right? For Black Friday sales and holiday sales.

Frank Curzio: But we have to be careful to say, “Oh wow, the consumer looks great, and everything’s okay.” Because that’s giving the signal to the Fed to keep raising. And right now, when they meet, and that’s going to be on the 14th, the day after CPI comes out, and that 50 basis point hike, which is widely expected, could easily become another 75 basis point hike, depending on the data we see over the next couple weeks. So, the monthly retail sales number is going to come out after that, after that. So, this is a sales number that the Fed’s going to look at and be like, “Whoa, okay. Things are okay. We can keep going here.” So, it’s important to look at the jobs number, and it’s point looking at CPI.

Frank Curzio: Now, think about what I just said. Think about it, right? Because if you’re an investor who wants stocks to go higher, this is what you’re hoping for. You’re hoping for that unemployment rate to skyrocket. This way, the Fed stops raising rates. You’re hoping that demand falls off a cliff so the Fed stops raising rates. You’re hoping consumers stop freaking spending so much money. This is what the bullish thesis is. This is what we need to see for the Fed to be like, “Okay, we see inflation coming down.”

Frank Curzio: We all know inflation is coming down in some areas. I’ve covered it for nine months, even seven months, and five months, showing different areas where it’s coming down. Seen oil prices coming down, car prices did go up a little bit. We’re seeing prices come down here and there, but what the Fed looks at is not really coming down. It’s not coming down as fast as they want it, and it’s not going to for a while, because rental income is going to stay relatively high, food prices, relatively high. Oil has come down, which is good.

Frank Curzio: But if you strip out food and energy, which they like to do, and call it the core, and we finally peaked a month ago, and we better hope that it’s still going lower and low… It has to go. It has to, right? Over time, go. It’s just the pace, and how fast, and go lower, but it’s not coming down fast enough. And that’s what the Fed’s looking at. This is why the Fed’s backed into a corner. So, they’ll eventually achieve all these goals by raising rates, and removing trillions of liquidity from the market by shrinking its balance sheet. That’s exactly what they’re going to do. That’s what they said, and everybody agreed that’s exactly what they’re doing.

Frank Curzio: But the question is, once we have millions of more people who are unemployed, and this is going to be by mid-next year, this is what the Fed is predicting, based on all the moves they’re doing. So once we have that, we have the housing market incredibly, incredibly weak, since most consumers can’t afford to buy homes due to 6% plus mortgage rates. Once we have demand really falling off a cliff, more than 70% of the companies in the S&P 500 are going to see earnings fall by 15% plus next year, which they’re projected to rise 7% next year, which is crazy. Even though the Fed’s pushing all these… The Fed’s doing everything it can to crush the economy, where do you expect stocks to go? Because this is the bullish thesis.

Frank Curzio: I’m going over the bullish thesis for you. And you know I am… You listen to me for a while, for a very long time, I’ve been doing this for 15 years, I’m optimistic about everything. I’m optimistic about everything. If there’s like 50 people that I have to fight, I’m giving myself a chance. I’m always optimistic. That’s the way I am. And right now, I’m trying to find the optimistic case for stocks, because this is the bullish case. The Fed’s going to slow down, and we’re going to see unemployment go up, because demand’s going to shrink, and demand’s going to contract tremendously.

Frank Curzio: We haven’t seen that yet. But this is the bullish case. For the Fed to stop raising rates, they need to crush the economy. They need to crush the economy. And the Fed’s not going to be there to back you up like it was the last 12 years, like during COVID, and injecting trillions into the system. They’re not going to be there during the credit crisis, injecting money into the banks. They can’t do that. That creates more inflation. They can’t have rates at zero, which we saw basically these last 12 years. They’re going to be well above those levels, well above 4% for the entire year next year, into 2024. But that’s a bullish case.

Frank Curzio: Now you have to ask yourself, is all this priced in with the S&P 500 down 15% from its highs in 2022? Well, 15% sounds like a pretty big number for the S&P 500. “Why, you’re down a lot, Frank, this could be factored in.” But the S&P 500, listen to this, surged 27% last year, popped 16% in 2020. I bet you if you asked most people, “What did the S&P 500 do in 2020?” They’d probably tell you, “I think it was down.” It went up 16%. It crashed 35%, but when you inject 50% of the country’s GDP, over $11 trillion into the market, directly to consumers and businesses, what do you think is going to happen? They’re going to spend like crazy.

Frank Curzio: So, you push forward all this demand, and in 2020, the S&P 500, it dropped 16%. And in 2019, what happened? It rose close to 30%, even though we saw earnings year over year from 2018, 2019, fall. It fell by a dollar, from $1.60 to $1.59 total S&P earnings. But still, the S&P 500 surged in 2019. Why? Because Trump went on a rampages and said, “We need rates to go lower.” And the Fed started easing because we had inflation in check at 2%. We said, “Okay, let’s start easing, get those rates under 2% again.”

Frank Curzio: And we said, 2019, but that’s the last three years of the market: 27%, 16%, and 30% returns on the S&P 500 the last three years before this 15%. So, when you put that in perspective, and you’re looking at it, you’re saying, “Wow, is that 50% decline enough?” Considering we injected all this money into the system that now the Fed is doing everything in its power to remove, should we fall back to 2019 levels? That’s where earnings were $1.60. It projected to be $235. Holy shit, how could that happen?

Frank Curzio: Not to mention during those three years, we had interest rates that were near zero. I mean, in 2019, we started lowering them, but before that, we were raising a little bit, but interest rates were considerably low. They’re much, much, much higher now. At those levels, you couldn’t put your money anyplace else. You have to have it in equities, or at least dividend paying stocks, and they’re paying, they yield in 1.8%, or whatever, buy blue chip.

Frank Curzio: Now you could earn, what, 4% risk free in the two-year treasuries? Risk free? So, I’ll tell you, someone who’s been doing this for a long time, it’s impossible to figure out how this is going to play out next year. But what I do know, four facts, I could say for a fact, well, I’m 98% sure, it’s going to be one of the most volatile periods in markets that you’re ever going to see. Where you’re going to see earnings crash for most company as demand falls due to the Fed. And that’s why I’ve been saying, “Buy long dated puts. Go nine months out.”

Frank Curzio: It’s not just protecting your portfolio. You can make a fortune on these things, because you’re basically saying that these companies aren’t going to meet the earnings that they’re going to meet. And you see 20%, how many companies do we see 20% declines? We saw a lot of these things run up. We saw a 6% rise in the NASDAQ in one freaking day. Incredible, incredible number. So, if you’re short, you’re just… You’re blowing out of everything, and it’s like you’re sleeping on the park bench, but long dated puts, you’re only losing the money you put in to Moneyflow Trader.

Frank Curzio: So, if you’re looking nine months out, 12 months out, you’re betting that they’re not going to meet earnings estimates, where you see a 20%, 30% fall, especially early on, next quarter, which usually is a weak quarter for these companies. They’re discounting everything. It’s going to be hard to keep margins up. Yes, sales are great, but your margins are probably going to be a lot lower, which means earnings are going to be lower than expected.

Frank Curzio: So, if they miss, especially with higher expectations as the market’s kind of like a little bit in rally mode off of its low since October still, what you think is going to happen? It’s why Goldman just came out, said, “Look, we haven’t really seen the worst of this yet.” It’s going to get ugly. Now be careful what you wish for. We’re wishing for demand to get destroyed, for unemployment to skyrocket. That’s the bullish case. That’s the market we’re in.

Frank Curzio: A market that the Fed put us in. I’m not ragging on the Fed, because everybody could rag on the Fed, but that’s the market that they put us in. When you keep rates super low for such a long period of time, and you didn’t see inflation, now all of a sudden, it comes, it rushes in, the $11 trillion that you spend rush… Now you’re fighting to get this out of the market, saying, “We’re going to try to avoid a recession.”

Frank Curzio: What? How do you avoid a recession when you’re taking trillions of liquidity out of the market, and you’re aggressively raising rates by the fastest pace you did in the Fed era? four 75 basis point hikes, and it’s not a given that the next rate hike, on the 14th isn’t going to be 75 basis points, depending on the data. But there’s nothing there evident that, forget about the word pivot, that shouldn’t exist when we’re talking about the Fed, because a pivot means that they’re going to lower. They’re not lowering rates anytime soon. Probably 2025, maybe, unless we see some kind of crazy event when the market crashes, and all demand falls off a cliff, and it gets crazy.

Frank Curzio: But they’re not going to reverse course because they made it clear. We need to see inflation under 2%. That’s not going to happen. It’s not going to happen for a very, very long time. Maybe they stop, maybe they pause. We’ll see. Now the question is, what stocks should you buy puts on? Well, I’m going to give you an example. I’m not going to tell you to buy puts on this name, but I’m going to give you an example. I want you to look at DraftKings. So, JP Morgan yesterday downgraded DraftKings from neutral to underweight. It was yesterday.

Frank Curzio: So, JP Morgan had this neutral rating on DraftKings since December, 2020, when the company IPO’d, went about $50, now it’s at $15. And again, a neutral rating they held all the way down, and now they’re telling you with the stock down 70%, JP Morgan is telling their clients to sell it, underweight. I’m not picking on JP Morgan here, since we all get it wrong from time to time. The bigger takeaway from this is just because the stock is down 50% plus, like we’re seeing in most tech names, we’re seeing in meme stocks, some biotechs. I mean, the aggressive growth names, just because they’re down 50% plus doesn’t mean you should bottom fish.

Frank Curzio: And I hear that on TV. “Well, this is a blue cap name, and blue chip, and we’re going to buy it, and long-term, we will be fine, whatever.” Okay, you said that about Disney at $140, $120, $110, it’s $95, and they still don’t have a working business model. They still don’t have a working business model. I mean, streaming doesn’t work for them. They need to sell that whole Hulu stake. Forget about buying the remainder of it, which I don’t know where you’re going to get the money from. Just sell it. Put $20 billion on your balance sheet. Anyway, I covered Disney.

Frank Curzio: Dial down streaming. It’s a terrible, terrible, terrible business, that you can’t compete with anyone else that you can’t put your best content immediately on that platform. It’s got to go in the movies first. It means you can’t compete with Netflix, you can’t compete with HBO, you can’t. House of Dragon is out. The new Shaq series is out for HBO. You can’t get that any place else other than HBO. You can’t get some of these things. Ozark, Netflix. Yet, I can see all the stuff in the movies for Disney. It’s not a working business model.

Frank Curzio: But be careful, because when you’re looking at names, especially DraftKings, it’s a roll up. Meaning, there’s a company that takes out a lot of debt, and use its stock to acquire small competitors, to build a bigger, bigger entity. And it’s a good strategy in low interest rate bull markets, in this type of environment. However, if you look at the DraftKings, their share count increased by 22% since its IPO. Okay?

Frank Curzio: So December, you had wait a month or two. I don’t know if it’s 36 days before all the investment bankers who helped this company raise money in its IPO could cover it. But the official date, I think it was October, 2020 when it IPO’d. So December, November, December is when all these firms come out, and a lot of them have buy ratings or whatever, but they can’t cover it until this training for, I think it’s, yeah, 30 to 60 days.

Frank Curzio: But we’re talking about not that long ago, was a company came out with 350 million shares, and now, they have 426 million shares. That is a massive increase in their share count. Massive. And you say, “Dilution, why is that a big deal?” I like to explain things, right? Because people just shout out terms, “Dilution. Dilution.” What the hell is dilution? If you have a social network, you understood dilution with Zuckerberg’s partner, how he got wrecked.

Frank Curzio: So, if your stock is trading at $10, and 10 years from now, it’s still $10, you could say, “Wow, I didn’t generate anything, and the stock is flat on the year.” Well, it’s flat. However, the company could have a $100 million dollar market cap today. But if they double their share count by buying companies, or whatever, they get warrants, they get exercise, whatever, that share count increases, that stock, it’s still a 10, but it has a market cap of $200 million instead of $100 million. So, your share has just got significantly diluted. Now that company has to generate twice the earnings to support its valuation.

Frank Curzio: And this is common with mining stocks that don’t generate money. What are they going to do? They’re going to build it up. They’re going to use their stock. And constantly, you’ll see, I’ve seen stocks that come out with a $50 million market cap, and they’re at $1, and they’re at $1.25, and they literally have a billion dollar market cap a few years later. I’m not kidding you. I mean, they sell a company for $2 billion, that’s pretty good for the owners, and stuff like that. They made a lot of money. But as a shareholder, you sell a company for a billion dollars, and you made 25 cents.

Frank Curzio: It’s a big difference when you’re a share… That’s dilution. I know people don’t explain that to you, but it’s a terrible thing, dilution. It’s not the worst thing if you’re using your stock to buy assets that you believe are going to be worth a lot, lot more. And Oracle has done this. You’ve seen, I think it was AutoZone, or other companies, Wayne Huizenga. The model works sometimes. It’s very difficult, but you also see it fall on its face. But it only works in environments where this super growth environments, which we don’t have.

Frank Curzio: Because now, you have DraftKings, who’s sitting on $1.3 billion in cash, but also has $1.3 billion in long term debt. So, that’s a wash. None of their debt is variable. Remember I said that, I’m going to come back to it. Okay? Variable means that your interest, your payments are going to rise as interest rates rise. So, that’s a good thing, thank God for them. But we’re going to talk about variable a little bit. However, DraftKings spends money, just throwing it out there.

Frank Curzio: I mean, you don’t see companies spend as much money as this company. Just look at almost any commercial on ESPN, you look anywhere. I mean, the commercials that they have, and the people that have doing the commercials, you’re looking at TNT, they have, I mean these guys are actually telling you what… Remember when betting was frowned upon in sports? “We don’t want to see that ever.” Now that you make money, they all embrace it. There’s advertising everywhere in this industry. They don’t care. Nobody cares. They don’t care about money; they care about their bottom line, when it comes to politics and companies, that’s it. They’re going to support the agenda that makes them the most money. That’s what they do.

Frank Curzio: But it’s funny how that narrative has changed so much, where, “No, be careful, gambling’s bad.” Now it’s like, “No, no, no. They have free…” And Charles Barkley, Kenny Smith, the TNT, like saying, “Hey, I like these guys, I think this is great to buy this guy, and do this guy, and fantasy.” Whatever. It’s crazy. But if you look at DraftKings, the money they’re spending, they’re going to generate probably $1.8 billion in sales in 2022. But they’re going to spend over $2 billion this year. They’re losing a shitload of money. Projected to lose $1.4 billion in EBITDA. Earnings before interest tax, appreciate… That’s the number you use, is much better than earnings, but it’s more pure. But that’s a lot of money.

Frank Curzio: Plus, the company has contractual obligations of more than $800 million over the next two years. I don’t know what those contractual obligations exactly are, but we know that they have to make $800 million in payments, with $1.3 billion over the next two years. I mean, they’re massive. So you’re like, are they generating tons of free cash flow? No. Free cash flow is projected to be negative 840 this year, and close to negative $600 million next year.

Frank Curzio: I know I’m throwing numbers at you, but it’s important. I’m trying to help you guys out, because it’s a fundamental market. You have to look at balance sheets now. You have to look at debt, and you have to look at growth, because growth’s going to so significantly, and a lot of companies are still trading on the growth that they’re expected to see over the next two to three years. So please pay attention. I’m not going to throw too many numbers at you, and confuse you, and you’re going to fall asleep while you’re driving your car, or working out. I’m trying to make this as simple as possible for you to make a shitload of money.

Frank Curzio: But now, if you look at DraftKings, it comes at a time where we can see gambling slow the next few years. As interest rates go higher, the Fed is moving liquidity from the market. Everyone’s bills are higher, so much less discretionary spending. You have gambles of speculators, where a lot of these people flock to meme stocks, and crazy, shitty cryptos, and got killed. I know what you’re thinking. I’m going to stop you before you go crazy, because people say, “Gambling is a great sector during recession every times.” Just like I love vice things like cigarettes and alcohol, they hold up, that’s great.

Frank Curzio: But reality, I can’t see people having more money to spend gambling in 2023, than they did over the past two to three years. Can you? Even if they are gambling, right? The amount that they’re gambling, and you could call that cart value, call them retail, or whatever, like Domino’s, the reason why that company exploded is because their cart value was $9, and I think it was $5. Their cart value, the average money that someone spends, and their cart value went to like $22 because they offered a ton of things when you go there, and you get whatever.

Frank Curzio: If you want salads, if you want bowls, if you want much more than pizza, or their desserts are awesome, the lava cakes. I’m not speaking from experience. The lava cakes are awesome, and those chocolate chip brownie. But you wind up going there, and saying, “All right, I’ll take this, I’ll take that, I’ll take that.” It’s cart value. The bigger the cart value, the better it is, right? So, you’re looking at how much they’re spending, it’s probably going to be much lower on a bet basis. I mean, you have to figure that out.

Frank Curzio: DraftKings also has a lot of competition in the marketplace. Caesars, Las Vegas Sands, MGM, Win, these guys have strong balance sheets. These are big guys. They’re offering their own online gambling sites now, have much stronger balance sheets as they’re generating tons of free cash flow through their casinos, real casinos. You also have Penn in that industry, and support the insane spending, especially on ads, lobbying, which is incredibly important in this industry, lobbying. They’re going to have to take on more debt. And you know how expensive debt is now compared to it was past couple of years?

Frank Curzio: So what’s my point here, when it comes to DraftKings? It’s much bigger than DraftKings. I just bring it up, and it’s come down a lot. The balance sheet is okay, it could come down further. It’s likely going to come down further. They’re just spending way too much money, not expecting to generate money a long time. But if you’re buying puts, or betting against a stock over the next nine months, you have to start looking at balance sheets. You have to start looking at growth potential.

Frank Curzio: If you have a weak balance sheet, and your model’s set up to where you’re supposed to see incredible, incredible growth over the next three to five years, chances are that stock is a great short, or betting that it’s going to go lower. You have to short it. I wouldn’t recommend that for individual investors ever, especially with a market crazy as it is today. We could see 15% declines, and a 6% rise in one day. And in Nasdaq, it’s crazy to play those. But you avoid a lot of that part if you’re buying long dated puts.

Frank Curzio: So, you have to be very, very careful bottom fishing here. You’re looking at DraftKings down 70%, going, “Wow man, DraftKings. I like it.” You have to look at the numbers. And the case of DraftKings, even with the stock down 70% of its highs, it’s still crazy expensive. When are they going to make money? They’re not projected, the analyst, until 2026. Getting negative free cash flow, but it’s a name that doesn’t fit in the environment, we’re going to see in 2023 and 2024, which is much higher interest rates, or much higher than they were in the past, that they’re going to raise a lot further from here. Hopefully don’t. Where 4% maybe go to 4.5, to 5% we’re supposed to peak at. But, five percent’s a lot higher than zero was, for most of the past 12 years.

Frank Curzio: This name doesn’t fit in the environment. Not just because of that, but with the Fed, shrinking this balance sheet, and taking liquidity out of the market. So, the roll up model, where you take on huge debt, dilute the crap out of your stocks, spend a shitload of money, is a model fully dependent on growth, growth debt. Where’s it coming from? Tell me, please tell me. I did this for a long time. I have no idea where the growth’s coming from next year. It’s not coming from the Fed. It’s definitely not coming from China. Holy shit. But where will it come from?

Frank Curzio: Say, “Well, gambling.” Most states have a pro online gambling, already proved gambling, and those that haven’t, are likely not going to, and DraftKings is available in most states. There’s only 10 where it’s not available, and that’s my friend’s fantasy, is a few more that it’s not available, where it comes to actual online gambling, when it comes to betting games, not just fantasy, because that fantasy part is legal in Florida, but we can’t use DraftKings to Florida State, where they don’t provide online gambling.

Frank Curzio: It’s crazy. You could bet on horses, you could bet on anything. You could drive while you’re looking at your phone here. Don’t have to put your blinkers on, but don’t do anything. Don’t… Online gambling, no way. Can’t do it. Anyway. Smoke pot in a lot of places, but just don’t, not online gambling. We’re not going to allow it. Which is crazy. But where’s the growth coming from? You say, “Well, more states are going to approve.” Not really. Consumers are cutting back spending. DraftKings doesn’t have pricing power, right? There’s a ton of competitors, online gambling sites. Almost a commoditized business, where DraftKings takes more the rake. I’d go someplace else to bet the football game, and play fantasy football someplace else. Why do I need DraftKings?

Frank Curzio: So seriously, not sure where the growth’s going to come from. So, where am I going with all of this? All of this nonsense I just threw at you? Where am I going with it? Here’s a point, I’m just giving you… I like to bring up an example. I’ll tell you to go by puts on DraftKings, it’s down a lot. I think it’s going to come lower. I think there’s much better, better plays that you can make a fortune on that are going to come down significantly. And now, when you’re seeing underweight ratings with JP Morgan, you’re seeing like, you’re looking at stocks down 50, 60%, even like Disney, where nobody downgraded the stock. Who’s downgrading Disney? Nobody. The expectation is still sky high. People are still telling you, “It’s Disney, it’s going to come back. Iger, he’s great.”

Frank Curzio: Is it? What is he going to do to make come back? I mean, these guys can’t wave that magic Disney wand, that everything’s going to be good. Now you have serious problems, serious debt problems. It’s a broken company. Do I think you could fix it? Yes. Go back to storytelling. Go back to make sure you have a tight cost structure. That takes a long time. You got to rethink your streaming business, because you’re losing billions, billions, and billions.

Frank Curzio: And now, the one metric that everyone will relied on is going to continue to go lower, because people are not going to pay for that service. They’re not going to pay higher prices, and ads for the service they really don’t like in the first place. Sorry. “We got all these people, they don’t want to pay for the site. So, what are we going to do? Let’s throw ads on it, and let’s raise the price.” What? That’s the solution. Okay, good luck. You have to offer more.

Frank Curzio: You have to come up with new content, which unfortunately costs tens of billions. They expect to spend $30 billion. But this is where you look at companies where DraftKings, there’s a lot of negativity on it. It was a SPAC, all this. A lot could be factored in. Maybe it comes down a little bit more. There’s a lot of stocks that are down 50, 60%, that come down much, much, much further, where expectations are very, very high, and earnings estimates are very, very, very high, still.

Frank Curzio: So, fundamentally, this is where I’m going with this. Start doing your research. I know it’s the holiday season, but you want to make a fortune, this is what great investors do. Sometimes when people are going out, and hanging out, and being like… Oh, that’s fine, I’m not telling you not to do that. Spend time with your family hanging out, your kids are going to be off school, go on a little vacation or whatever.

Frank Curzio: But the people who are making money, do your research now. Screen for companies that have lots of debt, the most debt in the industry. Net debt. Net debt, and look compared to cash flow. Everybody destroyed AT&T, oh, $30 billion in debt before they spun off Time Warner. I mean, their free cash flow they were generating were like 10, $15 billion in free cash flow. You got to factor that in. So yes, it’s a lot of debt, but when you’re looking at companies that have a lot of debt, but they’re not generating free cash flow, how do they pay for that debt? They got to take out more debt, and more debt, which is much more expensive.

Frank Curzio: Is that debt variable? Try to figure that out. You might have to do a little digging. I could figure out pretty easy through my systems, but that’s what I’m doing. I’m doing search to see which companies have variable debt, which is most small businesses. Look at small caps that aren’t generating a lot of the… A lot of the Russell 2000 companies. A lot of them aren’t expected to generate earnings over the next couple of years, but those are the companies you need to avoid. Avoid all the companies that are not expected to generate money over the next couple of years. And there’s a lot of those.

Frank Curzio: And those companies have a lot of debt. Again, look, if it’s variable, if it’s variable, that means those payments are starting to go much, much higher in a market where you’ve seen demand full off a cliff. And if you don’t have pricing power, what do you do? Now you’re talking bankruptcy. But there are a lot of companies like this, a lot, and that’s why it’s dangerous. I can’t predict whether the market’s going to go. I do know that earnings are going to come down significantly. I know a lot of crazy tech companies fit this profile, because they decided to sacrifice profits for subscriber growth. That’s what everybody wanted to see.

Frank Curzio: “I need to see subscriber growth.” Work for Disney. “Just, I don’t care if you’re making money on it, I just need to see it. Holy shit, you have more subscribers than any, 200 million, 150, and it’s going to 200 million subscribers.” If you’re giving the shit away for free, numbers eventually matter, especially when you’re sitting on the highest net debt position in your company’s history for Disney. It matters. These numbers matter, in an interest rate environment, and you have to be willing to adapt. You have to adapt to the market conditions. You can’t be stubborn in your ways, and I see it with gold, and people recommend gold since the seventies. The same exact thesis for today.

Frank Curzio: I see it with technology companies, I see with growth companies, oh, they just buy them as they go low. Just buy them as they go low. That worked for 12 years when interest rates were at 0%, and the Fed constantly flooding the money with cash and buying bonds. That’s not there now, and it’s not going to be there for several years. It’s a market that anyone who’s been doing this for just 10 years has never seen before. You have to be willing to adapt. You have to look at the numbers. And any company that’s forecasted to see 20% plus and earnings growth over the next two years, probably the easiest shorts, that’s not going to happen. My net growth is coming from overseas. They’re in a lot more trouble than we are.

Frank Curzio: Avoid most roll ups. The companies have taken on a lot of debt to acquire small competitors. Avoid companies that base their entire growth model on China. That’s Nike, Starbucks, Yum brands, even Microsoft, IBM, Microsoft, not so much, seeing growth in other areas, but still, a lot from China. Win, Intel. Intel, 27% of sales come from China. Broadcom, which is Avago, is 35%. Look what China’s doing. China’s horrible right now. They’re not going to change that COVID policy anytime soon.

Frank Curzio: When you’re looking right now into next year, this is what you need to do. You go to Finviz, you could screen for a lot of this stuff. That’s a free site. Again, I don’t get paid by them, or whatever, you want to use them, or whatever, free site. There’s sites that offer screens that you could put companies expected to generate strong earnings growth. Be careful. It switches on a dime.

Frank Curzio: We start with the biggest companies in world, with Walmart, with Target, with all the semiconductors, what all the autos who is saying the second half of this year is going to be crazy good. It’s going to be awesome. When you raise rates by the percentage you raise them, and a lot of these companies are sitting on massive debt, depending on that growth, it shuts off very, very quickly when you’re raising rates at the fastest pace we’ve ever seen.

Frank Curzio: It’s going to be very hard to get that growth. But screening for these companies, it’s two things, guys. It’s not only going to help you find companies that you could buy long dated puts on, which we do in Moneyflow Trader. Since they’re likely going to report terrible, and horrible numbers in the coming quarters, as growth slows to crawl, which the Fed is doing everything in its power to do.

Frank Curzio: But, also important, the screen’s going to help you identify the companies that are in a great position to take market share, and the ones that you want to own, which is a lot of ones in our portfolios right now. And that’s why you want to do this screen, because it’s going to help you eliminate a lot of those stocks that maybe even some of them are down 50% in your portfolio, you’re looking to hold, and you’re looking at going, “Wow these guys have a lot of debt. They’re not really generating that much cash flow. I know it went down a lot. I think it’s going to come back.” I mean, that’s the mentality, especially from amateur investors, they do that a lot. And I’m only saying that because I’ve done that, and I’ve made that mistake.

Frank Curzio: “Oh, it’ll come back, don’t worry, I’m just going to keep holding it forever.” In the meantime, that opportunity cost of you pulling it out, and putting into a company that’s gaining market share, that could do great over the next two years, and dominant because they have a good balance sheet, they are going to see a little bit of growth, a good management team, they’re buying back their stock, insiders are buying, which you’re not really seeing at all in this market. Think about it. The market is down… As far down as the market is right now, why aren’t we seeing insider buying? Why not?

Frank Curzio: We’ve seen tons of insider sell, especially in oil industry, even at these levels, which is interesting. Because everyone… I can’t find a person that’s not bullish on oil. I’m also not crazy bullish on oil, but yes, I think oil was going high, we did an issue on it. But just different industries that you’re looking at, and different stocks that you’re looking at. But that’s… By screening for this, and look who has the most debt, and following that formula, this is what you should be doing right now, because next year is going to be crazy volatile, and crazy, crazy ugly. Not for all stocks, but for many of them.

Frank Curzio: Because we’re in a market where you can generate 30% plus returns in a year, buying the right name, but, you could also lose 30% in a day by having the wrong name in your portfolio, which I know a lot of you listeners have probably seen. With one of your stocks in your portfolio down 30% in a day. And when you’re just sitting there, and you look to your left in a two-year, just sitting there at 4% risk free, that’s a really good option for a lot of people, to say, “Eff it. I’m just going to avoid the market since it’s too crazy for me.”

Frank Curzio: And how crazy is it? Look at the last couple days. Holy shit, the market fell yesterday because of a massive slowdown in China. We’ve seen this incredible uprising of people fight against the government’s crazy COVID policy. But today, one day later, one day later, everything’s fine. China stocks are surging, since COVID rates fell for the first time in a week. Where do we get this data from? China’s government, who lies about everything. Doesn’t matter, if we can’t trust a number. One day we went from, “Holy shit, China. Look at the videos going on. Oh my God.” To today, everything’s fine. One day. China’s perfect now. We’re good, we’re going to come back online. Everything’s great.

Frank Curzio: Haven’t we heard that story for like nine months now about COVID? The last nine months of people telling me that, “China, China’s a growth story. China’s a growth story. That’s the growth, that’s the growth. They’re going to come back online. That’s where the growth’s coming from.” Really? Because we’re nine months in. It looks a lot worse now than it did nine months ago. But this is how crazy the market is right now. And seriously, one day China’s in shambles, to the next, everything’s okay.

Frank Curzio: I mean, I don’t know if you’ve seen videos on what’s going on in China, but look at YouTube, not the regular media, which has an agenda. Okay? China… There’s a reason why we’re not allowed to say anything bad about China ever. Everything’s Russia’s fault. We kill Russia, we have no ties, but we have massive ties in the US, so our politics have massive ties to the US, so NBA, massive ties to China. So, we’re always very, very hesitant to say anything bad about China at all times. So, even the videos that we’re showing, we’ve seen a couple of them here and there. Look at YouTube. There’s a couple guys that are reporting on the ground there.

Frank Curzio: I can’t believe… I’m very surprised YouTube hasn’t shut them off yet. Again, I don’t get paid by any of these guys, but holy shit, I mean, these guys are just showing things, showing videos, going over it. It’s not crazy. I forgot one site that, they have, I think it’s 200,000 subscribers now, but just reporting of what’s going on. But you have to realize, when it comes to China guys, I mean if you speak out against the government, that’s a death sentence.

Frank Curzio: So, when you’re looking at these people, and protesting, this is how terrible the conditions are in China right now. These people are risking their lives protesting against the government because they can’t take it anymore. That shit doesn’t go away in a day. That’s never happened in China. That never happened in China, where you see this massive uprising in people who basically, seriously risk their lives to speak out against the government. You’re not allowed to ever, they’re checking phones there, making sure you have no outside sources.

Frank Curzio: I mean, it’s crazy. You’re locking doors, and fires… It’s nuts there. Okay? I’ve got very good sources that have been sending me shit for months. For months, and months, and months, saying, “This is really bad. People aren’t talking about it.” Now you’re hearing a little bit about it, they suppress a lot of information. But it’s really, really crazy over there. Again, you’re shutting off another area of growth, which is China. That’s the biggest growth engine, and also the Fed. So, where’s growth going to come from?

Frank Curzio: So, you choose to invest, guys, go by the playbook I just mentioned. Because not time to say, “All right, I’m taking a chance on this. You know what, I’m going to buy this.” It’s not the time to take chances. It’s not the time to be aggressive. There’s time to be aggressive. There are times to be super aggressive. It’s not now. Don’t go out there and say, “Well Frank, I could buy this stock, down 60%.” Doesn’t matter. Fed’s job, their number one priority is to crush the economy. They can’t say that, but that’s what they’re looking to do.

Frank Curzio: They won’t stop until inflation falls at two to 3%, which won’t happen in 2023, and likely we won’t see inflation at those levels well until 2024. People are going to be like, “Frank, you’re crazy.” This is what every economist is actually predicting, and sell-side firms are predicting that the CPI will fall to a low around, I think 2.7 and 3% was the lowest I saw, by year-end 2024. Couple that with the Fed is saying now, “We need to see inflation back to 2%,” meaning that they’re not going to lower rates for at least another 24 months.

Frank Curzio: Granted, a lot could happen in that time. We could see the market absolutely collapse, demand collapse and they’re like, “Okay, we got to reverse course.” But it’s going to result in a market… You’re going to see a market crash first in order for that to happen. You’re not going to see this, “Oh, retail spending’s good. Oh, jobs numbers are still good.” That’s giving the Fed the okay that, to keep going, and going, and going until they see 2%, and going higher and higher.

Frank Curzio: But 24 months from now, that’s a long time. It’s a very long time. So guys, adjust accordingly. You’re going to see that in all portfolios. We have some long positions, did great during earning season. Again, this is what we do. Fundamentals finally matter. It’s nice that they finally matter, where you can’t just look at a company trading at 300 times sold earnings, and 35 times sales, and saying, “Well they’re going to grow their base from 5 million to 75 million subscribers over the next six, even-“

Frank Curzio: No, no. Easy, easy to buy puts on those stocks, even if they’re down 50, 60% right now, because that growth is gone. They have to tighten up, they’re going to have to fire employees, cut costs dramatically. And a lot of these companies have not been around long enough, where they’ve been through that type of market. Where you look at the Exxons, the IBMs, the Home Builders, going through the credit crisis. I mean, these guys know exactly what to cut.

Frank Curzio: You look at even in mining industry, they know, “If this comes here, this is what we’re cutting, we’re cutting this, this, and this.” A lot of these companies don’t know how to do that, and it’s not easy to do, because you have these company parties, and everybody’s happy. You have to make these cuts, and they’re usually very slow to do it. And that’s something else that’s not factored in. How do we really cut back? Like look at Peloton. They should have cut back much, much quicker than they did, before they were like, “Holy shit, demand just completely shut off.” Zoom, demand completely shut off. Not completely, but you have to get ahead of this, and right now it’s very easy to get ahead.

Frank Curzio: There’s a lot of CEOs, the conference calls, guys, that they’ll tell you, “Listen, we have good numbers, but no, we’re preparing.” Those are the companies that are in good shape. The companies that have good numbers that say, “Hey, things are great. I’m not seeing shit right now. Everything’s great, demand’s great.” Those are the companies by puts on, it’s a layup. It’s a layup. Buy long dated puts. They’re not going to make the next two quarters. You can’t tell me they’re going to outpace companies like Walmart, and Target, who did a great job with their supply chains, and improving their supply chains, or companies that been through, that got wrecked, they’re not in that position to do it.

Frank Curzio: So, any company that reported, that reported good numbers, and pricing power, that are still projecting a very strong growth, and, “Hey, we’re not seeing demand slow at all,” it’s a layup. They’re going to see demand… Everyone is going to see this. Every business across everywhere is going to see this. It’s very difficult. Almost every business. Banks should hang in there. Higher interest rates are better for them, but they are losing investment banking fees with IPOs, M&A crawling, you just slow to halt. But this is how you have to look at the market going forward. It’s a good opportunity to make a lot of money, but it’s also a way to help you avoid a lot of the bullshit. And that’s why this strategy is very, very good.

Frank Curzio: If you’re interested in Moneyflow Trader, again, we’re still offering that 499 price tag for three months, which is a $5,000 product, but we discounted it. It’s on our website if you’re interested. If not, no worries. Learn how to buy long dated puts. It’s a strategy that’s going to work over the next year. It might not work two years from now, three years from now, it didn’t work three years from now, when the market goes up every fucking year.

Frank Curzio: But you know what? Over the next couple years, earnings are going to come down dramatically. Much more than anyone’s predicting. This is a strategy that is not about hedging your portfolio. You can make an absolute fortune, and you should see some of the emails that we’re getting of people taking screenshots of just some of the puts that they’re buying in some companies that are getting absolutely nailed on earnings. It’s a very good strategy. That’s something you should focus on. But those are screen, so adjust accordingly, guys.

Frank Curzio: That’s it for me. Questions, comments, I’m here for you. frank@curzioresearch.com. That’s frank@curzioresearch.com. We say this all the time, and I truly mean it. Thanks for all the support, all listeners out there. I really, really appreciate it. Even people that have different opinions than me. I love getting your emails and stuff, we’re all in this together, try to make money, and at times to try to save money, and not get crushed, right? Offense, defense. Times you play offense, other times you play defense. Now you have to be careful, but I love hearing from you guys. Let me know what’s going on across your industry. If you’re seeing strong demand, I want to hear it.

Frank Curzio: There’s no bias to what I’m saying. This is what I hear from the tons of listeners in over a hundred countries that actually listen to this podcast. If I hear something, I’ll question them. I’ll look at it. Again, it’s not like you have this agenda, “No matter what, I’m supporting gold, and gold’s going to be the reserve currency.” I’m taking no matter what changes, or what happens, and we have zero interest rates, you’re still on the gold thesis for 40 years. No, that’s not what we do here. Want to get ahead of the markets, and you do that by having a great network, which is you, and I really, really appreciate it, guys. So, I’ll see you guys in about 24 hours. Again, email is frank@curzioresearch.com. I’ll see you then. 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.

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