Nike (NKE) popped more than 10% this morning after reporting better-than-expected earnings yesterday—which I anticipated on yesterday’s show. I break down the results… and explain why the apparel giant is setting up a great short trade.
Last week, the Federal Reserve Bank of Philadelphia revised jobs data from March–June 2022… from 1.1 million jobs created to just 10,500. We discuss how this alarming data—along with a major adjustment in rental calculations—could cause the Fed to change course on its interest rate hikes.
Finally, I rant about the absurd discrepancy in the jobs number—and why we must be able to trust the data coming from our government.
- My Nike thesis is playing out perfectly [1:30]
- The best strategy for a volatile 2023 [12:15]
- How do you miscount jobs by 1 million? [13:00]
- How new rental data could impact Fed policy [27:50]
- Investors must be able to trust government data—or else [33:05]
Wall Street Unplugged | 7
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: What’s going on out there? It’s December 21st. 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. It’s Wednesday, Daniel Creech Day. What’s going on, man? How’s everything?
Daniel Creech: Wednesday, Wednesday, Wednesday, Wednesday. Frank, it’s great. Everything’s going wonderful. Thanks. Great to be here as always.
Frank Curzio: You’re leaving soon for the holidays, right?
Daniel Creech: Yes.
Frank Curzio: To see your family.
Daniel Creech: Yeah. Friday. As long as mother nature allows it. Rumors of storms and all that. They were supposed to get crazy storms in the Midwest where I’m going. Now, it may miss them entirely. So, it’s kind of up in the air. Friday’s a long… It’s like politics. Two days is a long time in this world.
Frank Curzio: Yeah, it is.
Daniel Creech: Weatherwise.
Frank Curzio: It’s an eternity.
Daniel Creech: Are you hanging around here? You staying on the island? Have a tropical-
Frank Curzio: Yeah.
Daniel Creech: It’s getting cold here. It’s going to be in the 20s.
Frank Curzio: In the 20s. Yeah.
Daniel Creech: People are going to be lighting furniture on fire.
Frank Curzio: Yeah. That’s rare here. So, that usually doesn’t happen, which is nice because it’s Christmas time. Usually, I’m in the pool during Christmas time in Florida.
Daniel Creech: It should be cold during Christmas, in my opinion.
Frank Curzio: Yeah, you got to… I don’t know. Christmas, it’s got to be cold. Even my kids aren’t really used to it and stuff so they’re like, it’s freezing. In the 20s, when you’re in New York, it’s normal. It’s like, yeah, it’s not too bad, but it’s just funny.
Frank Curzio: But look, this week we want to just cover a few things. Not a lot of stories out there, but yet, there is significant important news. We saw Nike pop, right? Which is up, I believe, 12% right now as we’re taping this. 12, 13% which is surging, right?
Daniel Creech: Yes. And somebody called that yesterday.
Frank Curzio: Somebody did call that yesterday. You know what? And you always want to be humble and stuff because you get some wrong sometimes and whatever. And you never want to just… I hate when people just brag and stuff like that, but let’s go to the videotape.
Frank Curzio: I can’t see at all. If I had to bet, if I was a betting man, I’d say 90% chance that they’re going to beat that number. I can’t picture them unless they’re throwing in the kitchen sink and getting rid of all their inventory at the same time, and they come in with a number that’s 20, 30 cents lower than that, and then they say, next year, we’re going to be fine, so we had to take a write off on inventory, whatever. That’s different.
Frank Curzio: I cannot see them earning less than that. And if they do earn a little bit less than that, I don’t think the stock’s going to get hit that much. Again, unless they do a kitchen sink quarter, I think you could really see this take off. You always want to be humble about calls like that.
Frank Curzio: But it’s funny I’m poking fun of it because yesterday I really broke down Nike and said, listen, I don’t really like buying stocks or trading ahead of the quarter, but expectations was stupidly low, where this is a couple day generated over 90 cents last quarter, Daniel, and expectations for this quarter was 67 cents, which was absolutely a joke. Absolutely insane. So, they were definitely going to beat that number and that’s why I said it was a 90% chance.
Frank Curzio: I also said the stock is going to likely go higher. And since there was a lot of people even on buying puts against this thing and just over the next couple days, with the stock down five days in a row, it’s well off its highs, valuation really doesn’t matter in something like this. They’re going to beat that number that you could see this thing push pretty high. And that’s what we’re seeing. And then, I follow that by saying, but it’s going to be temporary, and I would use this to buy puts.
Frank Curzio: Now, I don’t know if you followed the Nike quarter, or did you see exactly what the numbers were or anything. I’m not too sure if you went through everything, did you?
Daniel Creech: No.
Frank Curzio: Okay. So, when you look at Nike, here’s what happened yesterday. They reported fiscal second quarter ’23 estimates. So, for the quarter, they reported 85 cents compared to 64 cents. So, sales came in at 13.3 billion, which grew 17% year over year. Those blew out the numbers. So, you look at 64 cents consensus and 12.5 billion. Blew out the numbers. So, within this sales exceeded consensus across all major geographic regions, which they say, so they beat North America as a primary driver outperformance. Gross margins came in at 42.9%, higher than anticipated.
Frank Curzio: That’s the story you read when you woke up today. Okay. Here’s what really happened. Okay. Nike’s earnings of 85 cents is, yes, much, much stronger than the 65 cent number that the polls had, that the analysts had. However, at 85 cents, it’s still lower than last quarter’s earnings of 93 cents. All right. So, that was last quarter’s earnings. So, expectations are lowered tremendously.
Last quarter, Nike generated 93 cents on revenue of 12.3 billion. This quarter, again, revenue is over a billion dollars more, but earnings were 10% lower.
Daniel Creech: And this isn’t year-over-year. This is three months ago. This is quarter-to-quarter.
Frank Curzio: So, it’s quarter-over-quarter. Right. And I would say they are comparable quarters.
Daniel Creech: Yeah.
Frank Curzio: Because we’re not looking… Again, the holiday sales probably come in a little bit more. We’ll see.
Frank Curzio: But this tells me that margins were not great. But yet, when you read they’re like, oh, margins beat expectations. If you read the headlines. Margins did beat the expectations. However, they beat the analyst expectations because they lowered them so much. When you look under the hood, margins are down year-over-year by 300 basis points. Not surprising since Nike has over 9 billion inventory on its books. So, this quarter, Nike should have saw a significant decline in their inventory. They should have saw a significant decline in their inventory and they didn’t. Because if you’re looking at inventory for this quarter, it’s still well over 9 billion, 9.3 billion. Still 43% above last year’s level.
Frank Curzio: So, my question is for Nike, which is an honest question. I don’t know. I didn’t get the chance to listen the whole conference call. I heard bits and pieces and saw bullets and stuff like that for all the systems I have. My question I would ask is with the holidays now over, pretty much over, where most of us are forced to buy gifts and spend money to buy gifts for the holidays, how does Nike plan to get rid of $9 billion plus an inventory over the next few months? And what’s the discount that you think they’re going to have to sell that inventory at when you’re not seeing the demand from consumers?
Frank Curzio: Not to mention you’re looking at an economy that’s going to significantly get worse throughout the year. That’s what’s happening right now with the Fed destroying demand, which we’ll go through in a second. That’s another major story. But you’re looking at margins that are absolutely going to get crushed next quarter, and they’re going to get crushed a quarter after no matter how far those estimates go lower.
Frank Curzio: So, I said yesterday that Nike’s a China story. It counts for 40% of profits. China’s sales declined 3% year-over-year. That’s not good. They’re like, well, if you take out currency… Well, you never took out currency when it was good for you. Now you’re taking out currency. Take out currency, it shows that China’s rebound a little bit… You’re down. That’s your growth engine. That is your growth.
Frank Curzio: And why is that so important? Because Nike right now is trading at 34 times forward earnings right now. That’s double the S&P 500, Daniel. So, if you’re trading at that, you need to have growth, and your growth model is on China, and China’s sales are declining year-over-year based on this quarter. So, people are like, well, Frank, if you look at the future, China and COVID, we’re going to be fine. Because they just removed their zero COVID policy strategy.
Frank Curzio: But everyone’s going to run out of their homes immediately. I don’t think people remember what happened with our COVID strategy. Once it ended… And it hasn’t really ended for China. Once it ended for us, people didn’t go to movies, they didn’t go out, they didn’t start buying stuff, they didn’t go crazy. This is psychologically… They’re afraid to go out of their houses. They were boarded up. Telling people you’re going to die if you go outside your house. This doesn’t happen overnight where all of a sudden, okay, no policy. Everybody go out there like a bunch of gorillas getting out of a cage and spend… Go to all these stores. That’s not going to happen. There’s no way it’s going to happen.
Frank Curzio: So, my thesis yesterday stands. Nike did exactly what I thought it was going to do. It’s up. And I figured if it had reported good numbers because there’s so many people betting against it, you’re going to see a little short cover. And I said it’ll probably be up 3, 4%. And we saw that beginning. Right, Daniel. What was it up? Down a little bit actually then.
Daniel Creech: Yeah. When it came across the headline yesterday, I saw it drop 2 or 3% right away, and then turned around and rallied 5, 6%, and then just kept going…
Frank Curzio: And now, what happens when you’re up 12%, right? Then, you get the short cover, at least temporarily. So, all right, fine. The estimates were lower. But now, you’re looking at the stock again, 34 times forward earnings, S&P 500. Main growth engine is China, which sales are still declining year-over-year. I would wait probably I think the second week in January and buy long dated puts because the analysts are now raising their estimates, not their target price. And nobody upgraded Nike, even though Nike reported a great quarter. It’s up 12%, and it’s so great. There’s 33 analysts that cover this stock. 13 have a neutral sell rating. Not one of them had the balls to upgrade the stock because they’re not going to upgrade the stock at 34 times forward earnings, especially with the problems with China, and especially when you’re sitting with inventory that you really didn’t reduce quarter-over-quarter. So, you’re still seeing…
Daniel Creech: That’s significant.
Frank Curzio: I have no idea how you’re going to sell the inventory and get what you’re supposed to get off of it. The discounts are going to be significant, which means your margins are going to get hammered. So, you’re going to see the next couple of quarters… If estimates are going up, now you reverse it. Now you have low expectations. Now you’re going to have higher expectations going into the quarter next time. And there’s no way that Nike’s going to support this valuation.
Daniel Creech: Yeah.
Frank Curzio: I think this stock is going to break through 100 on the downside again. Probably go down to 90, as they find a way to sell 9 billion in inventory at significant discounts.
Frank Curzio: But the winner here I think is TJX because they’re the ones that are going to be able to take this inventory off all these companies at dirt cheap prices, and that’s why everybody’s going to these places. If you go there now… I know maybe you don’t shop at the Ross’s or T.J. Maxx’s or Burlington’s. When you go there and you see the quality of clothes that are there right now, you’re going to be able to get good brand names, and you’re getting them for 60, 70% discounts right now because that’s how much clothes they need to sell, and they’re getting them, and their profits and their margins are going to skyrocket while these guys are dumping their inventory. And they have to. They have to because a lot of their apparel is seasonal.
Frank Curzio: So, when I look at Nike, the only positive was that estimates were lower and you beat estimates. Nothing changed. Inventory levels didn’t change. You’re still over 9 billion. China didn’t change. A little bit of… A tiny bit, but you’re still seeing sales growth year-over-year lower. Decline. What has changed? Oh, well, North American sales and all this… Forget about it, forget about it.
Frank Curzio: You’re not going to see the massive buybacks either. They don’t have a lot of money to buy back stock. It’s 18 billion over four years. It’s 160, $170 billion market cap, which amounts to 4 billion. Again, I would be buying puts, wait a week or two, and then you’ll see the momentum come out of this stock, and this is the market you need to play going forward. When companies beat earnings based on low expectations, what we’re seeing, it provides the greatest opportunity to buy puts, which is why I’ve been doing everything I can to push and shove Moneyflow Trader down your throat because so many people have been doing absolutely well. Genia is killing it.
Frank Curzio: And that’s the market we’re in. We’re in a market like this where Nike can go up 10, 20% basically on unknown news only because they beat the estimates that were revised sharply, sharply lower. But nothing has changed with the company. Meaning that you’re probably going to see this thing come down sharply, at least 10, 20% from here. And I’m betting that over the next six months, and you can make easily triple digit returns, 2x, 3x returns, depending on how crazy you want to go with that. But this is why buying puts is essential with a small part of your portfolio because this is what you’re getting to get to do when companies like this.
Frank Curzio: It’s no longer buy the debt market or even buy when it goes higher or when the Fed’s behind you in 0% interest rates. It’s a different market. It’s a market where if you see companies like this, especially in apparel, which are getting crushed in inventory, seeing inventory levels across the board much, much higher. Even in technology, when these companies report a good quarter and you think they’re back, be very, very careful. It’s likely that, just like we’ve seen with the market, when Powell… Or we get good news or Powell says something positive, the market goes up two, three, 4% in one day, 6% Nasdaq in one day a couple months ago.
Frank Curzio: What happens? We fall back to those levels as we digest the news and realize, wow, Nike’s quarter was not that good. Inventory levels did not come down. Margins declined year-over-year. They were just better than estimates but they declined year-over-year. You generate $1 billion more this quarter than you did last quarter, yet your earnings were 10% less. What do you think is going to happen next quarter?
Frank Curzio: So, be careful here. Again, that’s the playbook. I have lots of stocks like this I could tell you and different trading opportunities and stuff like that. But that’s the playbook here. When you’re seeing very low expectations… Nike just had a… Mildly beat this number and come in. That’s what Disney’s been doing for the past couple quarters. And then, you see everything come to roost and you see what happens when the numbers actually matter. And even though the analysts lowered these as estimates incredibly, you’re still reporting weak earnings at the end of the day.
Frank Curzio: And that’s going to come up with valuation. It came with Disney, it came with Nike, it’s going to come up with Ford’s. A lot of companies out there. A lot of technology companies you really need to be careful about. But buying puts…. Moneyflow Trader. That is a strategy. Still offering that. I think it’s mftoffer.com on our website. Again, I discounted 90%. You will thank me. I don’t want you to thank me, but please, just understand what this market, wherever you’re seeing companies like this, it’s like a layup to buy long dated puts on it, and chances are, you going to make triple digit returns. And that’s what we’ve been doing pretty much for the last 18 months with Moneyflow Trader. And when I say we, I mean, Genia Turanova. So, that’s my Nike call.
Daniel Creech: Yeah. We is Genia. I don’t have anything to do with that. That’s awesome.
Frank Curzio: Yeah.
Daniel Creech: She’s doing wonderful.
Frank Curzio: Yeah. So, I wanted to break that down. I talked about that, but there’s a story now that we need to get to, Daniel, and I know you’re very familiar with it, and it’s pretty important. I can’t believe it hasn’t really gotten the coverage that I thought it would get. But when you think about it, there’s a reason why.
Frank Curzio: So, when you look at this report that came out, it came out a week ago, and the report wasn’t from some hack. It was from the Federal Reserve Bank of Philadelphia showing that based on their research the unemployment data in the second quarter, so this is between March and June quarter, was way off the mark. And these numbers always get revised.
Frank Curzio: So, during the second quarter of this year, the Bureau of Labor Statistics reports this news, BLS, reported that we saw at 1.12 million job gains. Again, this is from March to June.
Frank Curzio: And also Current Employment Statistics, the CES, another government body, confirmed this by saying we added a little over 1 million jobs. So, the numbers are pretty close. So, we added 1 million jobs. Now, according to this report by the Philly Fed, which their data I’m quoting, they say incorporates more comprehensive accurate job estimates released by the BLS as part of its quarterly consensus employment wages program. It says to augment the sample data from the BLS that are issued monthly on a timely basis. You throw that in there, they basically have the formula where it says, it’s more real time. We’re able to incorporate this with better statistics that are more accurate. Based on their data, Daniel…
Daniel Creech: Can I interrupt real quick there?
Frank Curzio: Yes.
Daniel Creech: Another way to say that is that they guess and assume and fill in data for a schedule so they can do it on a monthly, convenient timeline.
Frank Curzio: Yes.
Daniel Creech: That’s a very nice way. Whatever you just read.
Frank Curzio: Yes.
Daniel Creech: That’s not you. That’s them.
Frank Curzio: Yeah.
Daniel Creech: That’s all BS. That’s literally saying, hey, we’re going to make stuff up because we need to make this print by a certain deadline to keep on our schedule.
Frank Curzio: Yes.
Daniel Creech: Sorry about that.
Frank Curzio: So, when you’re looking at the Philly Fed, so we look at the Philly Fed, based on their data, we only added 10,500 jobs during that period. Okay?
Daniel Creech: 10,500.
Frank Curzio: So 10,500, and we’re talking about the estimates were for over a million.
Daniel Creech: Not the estimates. The reported number report said we created…
Frank Curzio: The reported number. The reported… You’re right. Not the estimate. The reported number.
Daniel Creech: Said we created, the United States created 1.1 million jobs and the actual was… Say that again.
Frank Curzio: 10,500.
Daniel Creech: That’s only a percentage difference of what? Say 98, 99%.
Frank Curzio: Okay, so…
Daniel Creech: What’s 1.1 million to 10,000? It’s 99.
Frank Curzio: Well over 90%. Okay. So, usually when statistics, and again, I’m a numbers guy…
Daniel Creech: Crazy.
Frank Curzio: Margin of error, they usually say, well the margin error is plus or minus 3%. That’s what it is in every poll they say. In a lot of data sets, if you happen to be off by 10%, that’s usually an unacceptable error or your data is meaningless. Because if you’re off 10%, that’s massive. That’s massive. BLS and the CES were off by 90% plus.
Daniel Creech: 99.
Frank Curzio: As you whisper 99. So, this isn’t random. This isn’t a mistake. If you’re a math professor, statistician, you would say these numbers were manipulated.
Frank Curzio: Now, why is this important? Think about it. Right, Dan? I’ll let you go first. I’m about to go off, but you’re looking at numbers that will revise, and I’ve never seen a revision like this. And maybe you can go back, and I’m going to go back and look. I’ve never seen a revision like this. And remember, this is from the second quarter. Right, Daniel? So, this isn’t… The next numbers… Look where we are now in December. Are going to be revised months later. And the Fed is looking at this number saying that, oh, well the jobs… The labor market is strong. The labor market is strong, and that’s why we’re raising rates at the fastest pace we’ve ever raised them in history. And there’s a lot of implications to this.
Daniel Creech: Absolutely. One being that what are the two things… And we’ve talked about this, and I think we’ve done well not to pat ourselves on the back too hard, but Fed Chair Powell is saying that he’s looking at unemployment and rent. We’ll get to the second part here in just a second. But Frank, if you are making decisions based on data, and the data comes out to be absolutely 100%, pick your word here. Wrong, corrupt. What do you want to say, Frank? Tinkered with? What’s a nice way to say that? Anyway, forget about that.
Frank Curzio: Yeah.
Daniel Creech: You are making huge policy changes after this report, the following meeting, and up until just the December meeting. The Fed was raising rates at 75 basis points per meeting. Why? Because they were looking at inflation data and jobs data like this showing that. And I don’t know if you have… I’m looking at a monthly change chart from Statista, Frank. So, from the April, May, June you had 368,000, 368,000, 293,000.
Daniel Creech: Well, what happens now? On CNBC this morning, Rick Santelli made a quick statement about this. And to your point, it’s not getting near the coverage I think it deserves, but he mentioned that we’ll have to wait until February of next year, February of 2023, to get the data and revised data from the periods after this. So, we’re talking about March to June. So, it’s following…
Daniel Creech: Frank, in July of this past year, there was over 530,000 jobs supposedly created on non-farm payrolls. What if that’s half off? What if it’s 60% off? We don’t have to be 90 plus percent off on everything. The point here is that you are literally raising rates and fighting inflation based on inaccurate data. Frank, what are the odds here, before getting over our skis too much. What are the odds here that this was the only revised and missed that needs to be calculated or corrected? The other reports that we have to wait until next year for the previous year because it’s a six to nine month-ish lag.
Daniel Creech: What are the odds that those aren’t revised much lower? You go from a million one to 10,000, so the next two quarters, you’re, hey, we figured out the kink, that didn’t happen again, nothing to see here. What are the odds of that happens? I think they’re very low, which means Powell’s been looking at wrong data. Which means in March of next year, he’s going to wake up and realize, hey, we didn’t need to do what we did. That’s a massive policy change and will cause…
Daniel Creech: Frank, we were talking about this beforehand. This is like shaking a snow globe. Ten seconds after, it’s beautiful and everything’s gone, but can you imagine what it feels like when you’re shaking that thing up? It’s complete chaos. And that’s what’s going to happen if any more of these revised come through. Because again, you were making policy on the exactly wrong data to show it was much, much stronger than anticipated.
Frank Curzio: And notice that the rhetoric… You have to call out the current administration on this and I don’t give a shit what party you’re from. I don’t care if I’m going to insult you. I don’t care because this is about money and this is important and this is about lives. Because when you’re raising rates at this pace, you have no idea how much you are hurting people who… Middle class. People in… Yeah. Again, struggling trying to find jobs, who are getting laid off right now. The difficult conditions and inflation and stuff like that.
Frank Curzio: But this is important because during the second quarter, during the second quarter, that happened to be the second quarter in a row of negative GDP growth, which is the definition of a recession dating back 50 years plus. However, we were conditioned by our media, by everybody, to say that’s no longer the definition of a recession because it doesn’t indicate the economy’s doing bad, even though it accounts for what? GDP is 75% or whatever it was. 75. A little bit more than that, of consumer spending, which is hilarious.
Frank Curzio: But no, we’re not going to use that measure anymore. Just for this administration, okay, fine. Well, you made the case because listen, it’s just our job data and the jobs market is much, much stronger than expected, so this is not a recession. Coincidentally, it’s an election year. So, we’re going into midterm elections, and you can’t say as a president, your current standing president, that you’re in a recession. Especially with the massive inflation that we’re seeing because again, that word, it’s everywhere. You just shut down. It’s like, oh my god, recession. Doesn’t matter if you grow three straight quarters of 0.1% growth and you don’t have a recession. It’s basically you’re in a recession, but if you have negative in those three quarters, it’s a big deal. It’s a much better headline. It scares the shit out of everybody.
Frank Curzio: So, our current administration’s telling us, because the jobs market was so strong, we’re not in a recession. Yet, we’re seeing that jobs data was incredibly weak in adding just 10,500 jobs. This is massive. So, now Powell’s looking at this data, and he’s relying on this data to significantly raise rates by the fastest pace of the Fed era.
Daniel Creech: Mm-hmm.
Frank Curzio: Because that’s the basis of it. Because you want to say you want to see inflation moderating. More importantly, we’re not going to stop here because we are still seeing even from the service sectors, tons of jobs. Tons of jobs. That was the argument.
Frank Curzio: So, again, this isn’t from some hack. This is the Philadelphia Fed. And this isn’t being covered anywhere. Very few places.
Daniel Creech: Very few, yes.
Frank Curzio: Very mentioned few places. How isn’t this a major story on CNBC? How isn’t this a major story everywhere across the board? And you could see why because when it comes to polls and things like that, when it comes to our information, now we are China. And if you cannot believe the data, there’s a major problem. If your data cannot be relied upon or is manipulated… And there’s no way this thing could be off by 90 plus percent and that be just a simple mistake or wrong calculation. There’s no way. We’re talking about, what is it, 33 states where this data was off by.
Frank Curzio: We’re seeing it across the board. We’re seeing it in terms of what we’re allowed to hear, what we’re not allowed to hear. We’re seeing it with the Twitter files that are being released. That’s why they’re going after Elon Musk. Regardless, here’s what happened. We saw it in Facebook, when Zuck said in an interview that the FBI told him just before election that they should expect Russia interference, which is suppress… The Biden laptop story. He actually said that.
Frank Curzio: So, if you went to one person, and this is important to understand, if you went to one major outlet, which is Facebook, which is Meta, and said, listen, just suppress this because there’s probably going to be bullshit coming out of Russia. And the FBI actually said… Do you know the FBI went to every single media outlet? You could assume that, that they went to every place because everybody suppressed this story even though it’s now real and everyone’s like, holy shit, this is a real laptop.
Frank Curzio: But when you’re looking… Look back at the margin of error of our polls in the last presidential election. When Trump was running, how many times did we see or how many states? They had Trump losing by 10%, I think in Ohio, and he happened to win. When have you ever seen that in a poll?
Frank Curzio: So, just the statistical anomalies that you’re seeing, it’s starting to add up to the point where okay, you’re 98, 99%, whatever, off on this jobs number. The world economy is being impacted significantly because of that particular data. Major. But if that data’s off that much, how the hell could you trust all the rest of the data? How do we know the next GDP number is going to be on par? How do we know? That’s what happens. That’s what you open this up to.
Daniel Creech: Yeah.
Frank Curzio: And the fact that it’s not even being covered. And even if you go on Google and you try to search it, it’s very hard to search. Even though Bloomberg reported on this really quick. You’re seeing… Again, this is the Philadelphia Fed. But when you go to look for things and search for this, it’s like CNBC’s not even reporting it.
Daniel Creech: Do you have the Bloomberg?
Daniel Creech: Do you have the Bloomberg article? Well, we can’t say they didn’t report it because they have talked about it a couple times.
Frank Curzio: They’ve talked about a few times.
Daniel Creech: Not in the extent that you or I maybe believe… Do you have the snapshot of Bloomberg?
Frank Curzio: No, I don’t.
Daniel Creech: Okay, so Bloomberg says, “In a report published a week ago, the Philadelphia Fed said the employment change from March through June 2022 was significantly lower in 33 states and DC compared to current estimates the Fed and the rest of us watched from the BLS. The report said during the March June period, 10,500 jobs were created instead of 1.1 million.”
Daniel Creech: If, Frank… Listen here. Listen closely everybody. “If the Philadelphia Fed numbers are accurate, and there is no reason to believe otherwise.” This is from Bloomberg.
Frank Curzio: Bloomberg. Yeah.
Daniel Creech: “We have no reason to believe otherwise. Fed interest rate policy, which is largely based on job growth, could be seriously mistaken. The result will be higher unemployment and slower growth into 2023 than Fed estimates. A quicker pivot and bid into risk sooner into 2023 than the Fed’s dots project.”
Daniel Creech: So, that’s their only thing. Oh, okay. Well, we were off a little bit. So, this is exciting for the bulls because all they want is the Fed to pivot and get back to higher prices and easy money policies. That’s fine. This is great news based on everybody else if you’re a bull because this means in March, screw waiting until the end of November, or forget what they just said in the last meeting this month in December about keeping rates elevated over 5% for 2023. That’s all out the door.
Daniel Creech: But to your point, this is just… The frustrating thing personally here, for me, and I’m not speaking, Frank, for you. This is the most aggravating thing in my opinion is that in the game of investing, in the world of investing, you have to wait. So, we have a lot of knowledge here, but we’re not going to get any more revised numbers until March of next year.
Daniel Creech: Well, the market… Okay, let’s just skip forward to after next week. When the market reopens in January, you’re going to have five days a week trading like normal, and all you’re going to have to do is kick around and think, hey, what do we make of this today? It’s going to be like Groundhog Day, and you’re going to have volatility. So, just keep that in mind as you see prices bouncing around, and when you go to scratch your head and think, man, this doesn’t make any sense, you’re exactly spot on. Close the book right there and move on to the next day. Don’t let anybody tell you you’re not smart enough to understand the Willy Wonka-ness of going on because it’s simply ridiculous and it’s embarrassing, but we’ll guide you through it and keep your wits about you.
Frank Curzio: Yeah. And to me this isn’t bullish. Yeah, the Fed could pivot sooner, especially if the jobs number is that weak and we get another revision of the current quarter in March. They might say, okay, not only are they going to… Pretty much March, they’re projected to stop raising rates, and a terminal rate’s supposed to be around 5%. But it could mean that they’re going to lower rates sooner than expected. Maybe late third quarter, fourth quarter in 2023. Maybe that happens or not.
Frank Curzio: But when you look at past cycles, when the Fed starts… When the Fed pivots, that’s when the market crashes the most. That’s when you see the biggest declines. If you go back in history and look at that, you’ll see it. There’s great charts out there. I posted one on Twitter, @FrankCurzio, take a look at it.
Frank Curzio: And that’s when you see the biggest declines. So, it’s not necessarily… What it’s telling you is that, holy shit, man, we went really, really, really, really, really too far. And to reign that back in is just as hard as it is to reign back inflation once inflation gets out of control, which the Fed realized, because we haven’t seen that in 30, 40 years, of how quickly you can get out of control. Where a year ago, you were like, it’s transitory. We’re perfectly fine. And to do a complete 180 to the point where now, we have to raise rates by the fastest we’ve seen in the Fed ever is insane.
Frank Curzio: You don’t see that kind of change by the Fed. You don’t see that often in business. You don’t see a major switch on a dime like that. I don’t even know the analogy I could use, but you don’t get further apart than that. It’s night and day. It’s not like, oh, okay. Well, we might be a little bit wrong. No, you’re 1,000% wrong and in a matter of a month or two. And you’re like, holy shit, okay, we got to switch.
Frank Curzio: So, they’re also working on changing. What do we see? What’s a big part of the CPI? Which is rentals.
Daniel Creech: Yes.
Frank Curzio: And rentals don’t come down easy, but now recently, they’re changing that as well of how we’re going to determine of how to track rentals, which is probably going to show the CPI and they’re going to try to bring it down even further because of this data that supposedly is going to show that a more real-time, accurate picture of… Rental income’s coming down, by the way, they take it. And I know you’ve been reading up on this.
Daniel Creech: Yeah. And this, we’ve talked about the lag time, and we’ve gone back and forth about housing and rental and things. Basically, government stats are looking and saying, hey, how can we get a more accurate or more up-to-date picture on rental cost? Because rent makes up, depending on how you look at it, 11 to 15-ish percent of the CPI. Okay. It’s a huge factor.
Frank Curzio: More than that. Yeah.
Daniel Creech: So, the BLS is saying, hey, we created new indices and it looks at micro data using repeat rent index methodology. So, what they’re doing, Frank, is they’re not taking all tenants and repeat tenants. They’re just taking the new signed leases. And I think you have it pulled up on your screen for our YouTube. And what this line is showing you, essentially, all this report does is take out the six to nine month lag time that the CPI is going to show because we’ve talked about this several times in the past, Frank. If you sign, and I used to live in an apartment complex, if you sign a 13-month lease or whatever, obviously, you’re locked in for 13 months. Well, if by the time the next week comes down, if you resign that at a little higher price or whatever, but I have 13 months to wait, all my data is showing up at a higher price.
Daniel Creech: And so, there’s a lag time between when I would re-sign my lease agreement, and then you can compare those, either nine months, year-over-year, whatever. This is essentially just looking at, hey, what is going on right now in the very short glimpse of things? And as you can see, you’re still showing CPI rent go higher, but the actual new tenant only is coming significantly lower based on the chart.
Frank Curzio: Significantly lower.
Daniel Creech: And what that says is, hey… Again, just replace jobs data with rent data. What this is going to say is, hey, the data we’ve been looking at has been telling us a complete different story than the reality of what’s going on. And again, that could have huge implications to the policy going, not until March though anyway.
Frank Curzio: Yes, because that’s going to be resulting of…
Daniel Creech: Yep, exactly.
Frank Curzio: How they calculate the CPI with new tenant repeat, right? So, new tenants, obviously, if you’re a brand new tenant, you’re going to pay a little bit lower. You’re going to see rentals come down, but what about that tenant who’s locked in for a year and for that year lease? Now, you’re just like, oh okay. So, they’re paying $2,500 a month and they used to pay $1,500 a month a year before, but we’re not going to count that even though they’re going to pay that for the full year. We’re just… The new tenants coming in.
Frank Curzio: So, it’s a way to look at data and how to interpret it and bottom line is this. Going forward, the Fed it is going to realize a lot quicker based on what’s going on right now, that the market’s not that great. We’ve been trying to tell you the market’s been in a recession for… Again, two straight quarters of negative GDP. That’s the definition. It’s very rare to see job growth during that. But you’re going to see job growth if people are lying about the fucking data. And that’s what we have. We have people lying about the data. You’re not off by that much without lying about the data, and they need to get called out on this.
Frank Curzio: Why is that so wrong? Where are our mathematicians? Where are the people that study statistics? Why aren’t they looking at this and writing reports and saying this has never happened, something’s wrong? We’ve seen it done before. I’ve seen it in just so many different areas where… There was a movie about this where these kids came, they got the answers for the test. It’s an old movie. I forgot… I forgot who was in it. Guy from Dumb and Dumber.
Daniel Creech: Jeff.
Frank Curzio: Jeff Bridges, right? Yeah. So, he was in it, and the school actually…
Daniel Creech: That doesn’t sound right.
Frank Curzio: They basically brought mathematicians in to look at all… Because all these kids went from having 40s and 50s to getting the greatest marks on this placement test. And they finished number one. And they said, this can’t happen. This is wrong so you need to do it over because based on this, this can’t happen. There’s like a 0.1…
Frank Curzio: When you’re looking at the probability of these numbers and how off they are, this can’t happen. Something had to be manipulated, and we need to figure out why because this is a massive number. This is determining globally what’s going on with the Fed raising rates and every single country impact. It impacts the dollar. Impacts the global economy of what they’re doing based on this one measure that’s one of the few positives out there and strong points that the Fed’s saying, okay, we need to continue to raise rates because the labor market is so strong.
Frank Curzio: If it wasn’t strong, we have a totally different outlook going into 2023 of everything that’s going on. And you probably wouldn’t have raised rates this quickly and maybe went to 50 basis point hikes, which is significant. Maybe the last two quarters.
Daniel Creech: Right.
Frank Curzio: Because 50 basis points is a significant amount when you’re looking at the Fed funds rate. It doesn’t seem like that because we’re going up at some crazy pace at 75 base point hikes like crazy. But that’s a massive amount, where it’s interesting to see how this is going to play out, but it’s…
Frank Curzio: In order for you… The reason why I’m so pissed off at this, Daniel, is I’m a research analyst, and I dig and I try to find the best sources, and it’s all based on data and your great contacts that you know, and you want to get the real story and figure it out and say, okay, these people are not… This company doesn’t have it right or these guys are betting against us wrong and that’s how you make money. It could be a positive, negative. You’re betting against a consensus.
Frank Curzio: When you have data that’s false like this… And think about China. How do you trust anything going forward? And now, you’re seeing the policies of the Fed… This is a major, major, major, major story that I cannot believe is not every place, and we’re covering this like Elon Musk or Sam Bankman-Fried, who just got off a flight and is now in the US. I just saw on TV. He just got off a flight with his suit on.
Frank Curzio: That’s bigger than this story? Are you kidding me? Let’s get more information about this. Is the Philly Fed wrong? Maybe they’re wrong in their calculation or maybe… We haven’t seen anyone. We haven’t seen the BLS come out and say, no, no, no. That’s wrong. Even though they’re using BLS data to come to this conclusion. Just more timely data.
Frank Curzio: But to me this is a significant story and let’s see if it’s going to impact what the Fed does going forward. I don’t know if it’s going to result in them pivoting, actually lowering rates sooner in 2023. But you have to look at this calculation and say, wow, we could see a pivot earlier than expected. And not only that, if this is correct, we are going to see a deep, deep, deep, deep recession, since we were already in recession then, based on the new definition. Now, if you’re looking in 2023, we’re going to be in a very, very deep recession, to the point where even when they pivot, it’s going to take them a very, very long time to actually get this market back on their footing.
Frank Curzio: Which is another reason why I love buying puts because the confusion and the uncertainty and now data that you usually rely on that you can’t trust, that’s off by 98%. To me, this is an incredible story, Daniel.
Daniel Creech: It is. We’ll have to wait till February meeting to get… Well, I don’t know if Jerome Powell, Fed Chair Powell, will speak in January or the markets will pick up. Regardless, in February, somebody needs to ask him about this report. How that influences him and others thinking alike.
Daniel Creech: And to the credit of Senator Rick Scott out of Florida. I believe, Frank, I have read this and it’s a little gray, but I believe tomorrow he is meeting with some bureau labor statistic people to talk about this discrepancy.
Daniel Creech: And one final note to go off here, Frank, it’s not the Jeff Bridges, who’s an amazing actor in all kinds of stuff. Dumb and Dumber. You’re thinking of Jeff Daniels.
Frank Curzio: Jeff Daniels. Jeff Daniels is the guy.
Daniel Creech: Yes. And we still don’t know what other movie you’re talking about, but we know it stars Jeff Daniels, not Jeff Bridges.
Frank Curzio: Yeah, it’s a Jeff Daniels movie. But it was about these kids from Royal High School, and they all wind up getting… They got the answers to the test, this big state test, whatever it was. And then, they wind up getting all A’s. They didn’t say, all right, let’s get 80, 85, and 90s. They were like, let’s get it perfect. And they wind up being ranked number one out of nowhere with their test grades. And then, when they went back, they had to take the test again. They found out they were cheating. It’s a true story.
Frank Curzio: Same here. How come we’re not up in arms, where… We want to get the data right. Everybody. I don’t care if you’re a Democratic, Republican. You need to have the data right, especially when it comes to government figures. You need to have the data as close as possible.
Frank Curzio: We know what happens with China when they lie about that data. Nothing that they do you can rely on with their government. We need to get this data. It cannot be this wrong. Especially in this age where… 5G, data analytics. How quick we can calculate things unbelievably with… Whatever.
Frank Curzio: With the technology that we have available today, there’s no way that this number could be off by that much because it has serious implications. That means that we were in a recession, and now when we’re talking about a Fed where, we’re in a recession, where now, we’re going to track rental incomes differently, where we’re going to see CPI come down lower than expected. Now, what do we do when we go forward? Because it looks like now we really, really, really raised rates much, much more than expected. And that’s not going to go away soon. Even if the Fed decides to pivot mid-year. Let’s see what happens. We’re not going to get… When did you say the next revision is? Not going to see… February, right? It’s going to be the…
Daniel Creech: That’s the next meeting. So, that’s what I’m going on.
Frank Curzio: Yeah.
Daniel Creech: No, I don’t think the revisions on anything will come until March. But I was just talking about the next Fed meeting in February, where Jerome Powell needs to address, hey, did you see this? There’s going to be some more information coming out about this. Is this accurate? That’s influencing you, what do you think? He just needs to… And I don’t know if he has a speech plan between now and the next Fed meeting in February. You can’t work in January all the time. You got to take Christmas off.
Frank Curzio: Yeah. You got to take some days off. But it is interesting to see when they come back and what they’re going to say. And again, let’s see if third quarter… What did you say? It was up over 500,000. Again, that signal like, oh, jobs are great so we’re okay with raising rates. Let’s see how that number gets revised. Because if that number gets revised the same way or if it doesn’t, that makes it even more interesting of how somebody fabricated this number.
Daniel Creech: Yeah. It opens up the worm basket of, hey, why just this one?
Frank Curzio: Why just that number, which you really needed that number to be very, very good for specific reasons going into an election year. Why? It was very important because that determined based on what you spread out as a new definition of recession, which I had never been heard before. I never knew that. If two straight quarters of negative GDP… I’ve been doing this for 30 years, that’s a recession, but it’s not a recession if the job market is strong.
Frank Curzio: Why do you think there’s a reason why we’ve never seen that in history? Why do you think there’s a reason that we’ve never seen those conditions in history where we’re seeing negative GDP growth and yet the labor market is stronger than ever? That does not make sense. And obviously, this is why it doesn’t make sense because it wasn’t happening. So, let’s see how this data is tracked. Let’s see going forward. But it is going to open up questions.
Frank Curzio: To me, I think there should be economists questioning this like crazy because we want to get to the bottom of it, feel like we know the numbers and the numbers have to be accurate. But if this number’s like this, how do we know the rest of the numbers are accurate?
Frank Curzio: Okay. I’m not a conspiracy theorist. I’m just saying that someone who covers numbers and statistics, to miss by that much. And if that’s true, holy shit. That’s going to open up…
Frank Curzio: Uncertainty is the death of markets. I say it all the time. You want to talk about uncertainty? There it is. Well, you are uncertain about what kind of data the government’s reporting. You don’t believe them anymore. Good luck trying to invest. Good luck.
Daniel Creech: Yep.
Frank Curzio: Because you have no idea what’s real and what’s not real. And that’s why this is such a big deal, and we need to get to the bottom of it. I just can’t believe that we’re not seeing it covered that much other than a few places. This should be the number one story over the past week. And it’s not even close. It’s probably like the 80th story in terms of business. And again, you can’t really even find it if you try to pull up data from Google, which is not surprising.
Daniel Creech: Yeah.
Frank Curzio: So, anyway. Lots of stuff there to digest, including Nike. I told you what I would do with Nike. Now, I would wait a couple weeks and then buy puts on it. I think it’s going to come down a lot lower. Nothing has changed with the company other than they beat revised estimates that were significantly lower. It’s the same company, same thing, same inventory concerns.
Frank Curzio: China’s still the shit, which is their growth market, and it’s trading at the highest valuation I’ve seen for this company a very, very long time when earnings are declining year over year. Doesn’t make sense why they should be trading at double the valuation of the S&P 500. They’re not raising their dividend. They’re not going to use money to buy back anymore stock. It is going to be interesting to see how they keep that stock up, and I don’t think they’re going to be able to do it right now. So, especially going into next year.
Frank Curzio: But with that said, Daniel, thank you so much for joining us today. We covered a lot.
Daniel Creech: Cheers. Yep. Another good Wednesday in the books.
Frank Curzio: Any last words about Christmas and coal, which I thought…
Daniel Creech: Oh yeah. Somebody was making a joke about… I was listening to a father/son talking, a friend of mine and his kid. And he said, ah, I’m getting you some more coal this year. And I turned to the young man, I said, boy, it’s your lucky year. That stuff’s going through the roof right now, so you can turn around and sell that.
Frank Curzio: We did a test and he said that. I was like, oh, you got to say that on the podcast. That’s funny, but yeah, it’s true. You got coal? Oh, that’s great, man. The price is through the roof, man. All right. That’s awesome. That’s great. That’s a great present you can get.
Frank Curzio: But, listen. Happy holidays. I’m going to be back here tomorrow. The following week, we are taking off. Giving my whole staff and everybody a well-deserved vacation, spend time with their family and everything. But again, we’ll have some fun with these podcasts and tackle some great stories here in the middle of the week.
Frank Curzio: That’s a little slow other than Nike, right? Nike and FedEx. FedEx also… Really quick, FedEx reported better than expected earnings. But look what they did. They said that they’re going to cut even more employees and cut costs further.
Daniel Creech: The second quarter showed slowing in growth.
Frank Curzio: And they said, we’re seeing slower growth. And one thing, we always rag on Cramer a lot of times, not always rag on Cramer. I worked for Cramer and…
Daniel Creech: Well, I do.
Frank Curzio: Yeah. Sometimes we’ll make… But I have to give him credit because when he interviewed the FedEx CEO, and I think it was not the recent one, but the one before that when they reported their quarter, he asked me, he said, so what do you think about the current economy? You think we’re in a recession? He’s like, well, you got to leave that to the economists. And Cramer was like, you know better than economists. You track everything. He’s like, we’re in a recession. And he was like, we’re…
Frank Curzio: They do. They know everything, FedEx, about all the packages. They see demand. They’re on a front line. And for the company to beat SMS, showing that the cost cutting is working and not as much pricing power. Margins weren’t that great, but for them to say, listen, it’s going to get worse and cutting… They’re expecting it to get worse. And this is FedEx. Okay, let’s see what UPS says. Let’s see what some of these other companies say. This is a company that’s on a frontline and something that you have to worry about.
Frank Curzio: Again, I don’t know if that’s factored in. Not too many people are call-… People think that we’re baking in the… That the market’s going to crash next year. The bullish bearish indicator is well off it’s low. It was zero for a while. It’s well off it’s low. You’ve seen the Association of Investor Management person, that index that surveys managers has been higher than it’s been in months, showing that they’re bullish going into next year. So, there’s a lot of bullish indicators. And earnings are supposed to be record highs at 235. I think they’re going to be at 180 next year. I don’t know if all this is priced in, but we’ll see. But it is going to be interesting. It’s going to be confusing. And we’ll report to you. It’s going to be a fun year next year, but again, I’ll be back tomorrow.
Frank Curzio: Daniel, thanks so much for joining us.
Daniel Creech: Absolutely.
Frank Curzio: Thanks for all the support, and I’ll see you tomorrow. 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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