Since the coronavirus hit a few months ago, it’s brought several countries to a grinding halt.
As of this week, that list now includes Italy, which just put its citizens under quarantine.
Lenore Elle Hawkins, chief macro strategist for Tematica Research, is there right now, and she joined Frank by phone this week to discuss the quarantine… and how she sees the virus impacting the U.S. Lenore also shares a few of the sectors she’s keeping a close eye on as the market moves lower [24:42].
Despite coronavirus volatility, the market is still expensive at current levels. As the first quarter nears its close, I explain why current estimates are too high… and could cause a lot more pain ahead. Still, once the market bottoms, there will be a great opportunity to go bargain hunting for the best stocks. These are the stocks and sectors to pay attention to… [52:00]
- Guest: Lenore Elle Hawkins, chief macro strategist for Tematica Research [24:42]
- Education: The market is still expensive at current levels [52:00]
Wall Street Unplugged | 712
Lenore Elle Hawkins speaks from quarantined Italy
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 March 11th. I’m Frank Curzio, host of the Wall Street Unplugged podcast where I break that headlines and tell you what’s really moving these markets. Man, what a market. Holy cow! This week alone and it’s been nuts. We’ve seen a 2,000 point drop in the Dow, that on Monday, 7%. 1100% move higher on Tuesday, it recruits almost 4%, 3.5% whatever. And as I’m taping this, which is Wednesday around noon, we’re down over 1,000 points, 4%, three days. So we’re seeing thousand point moves on the Dow intraday pretty much for the past two weeks. This is the norm. This is common, right? Algo’s really controlling this market right now, especially in the last hour trading with the average move in the S&P 500, believe it or not, is 1.1% in the last hour.
Frank Curzio: So to put that in perspective, we’ve only seen that type of volatility twice in the past three plus decades, that was during the credit crisis and during ’87 market crash. I’m going to tell you something, right now it’s still crazy to be buying stocks. It’s still crazy to be buying stocks. Now, it’s not my best interest to tell you that, right? Because I sell newsletters where I recommend stocks. I mean, I always talk about the economy, I talk about new ideas, different things, but at the end of the day we sell newsletters with stocks in them, so I don’t have an agenda here. It’s just so volatile, it’s incredibly volatile right now.
Frank Curzio: And like I said, in my newsletters, I’m talking about exactly what to do with the economy, I mentioned a lot of them on the podcast here. If you’re a subscriber, you’re able to sell out of a lot of our names or stocks near highs about a month ago, we still have a few names of portfolio of course, they’ve come down, but we’re managing them. Some of them are actually up and doing well, believe it or not, especially CVL and a few of them. But again, this isn’t a call of benefits for me to tell you, “Hey, stay in the sidelines, be patient.” But it’s a call where I’m being honest with you.
Frank Curzio: I mean from my 25 years’ experience, why am I telling you this… I care. And when you save people money, from my experience, it’s much more powerful than making them money, because anyone can give you a stock that actually goes up, especially the last 10 years in a bull market. But you really build up that credibility if you’re able to really switch and say, “Guys, you got to be cautious now, okay. It was pedal to the metal for a long time, be cautious.” And I’ve seen that firsthand with my dad in the ’87 crisis. I mean, I’ve had people walk into his office a few months before and he said, “I can’t help you. I can’t help you.” Million and a half dollar portfolio, which is a huge portfolio in the ’80s. They would walk into the office and say, “This is early ’87 and I can’t help you right now. It’s a very dangerous market.” Sure enough the market crashed and that lady came back and became a client, because nobody in their right mind on Wall Street would say that, because it’s not in their best interest, right?
Frank Curzio: “Let me take your money, I’ll take it, I’ll take it, I’ll be able to get fees off of this and fees and more fees and more fees. That’s what we care about, you getting that money in the door. We’re doing this.” What I’ve learned, what I’ve been taught is being up front, being honest, that’s how you build your credibility, that’s how you establish long-term relationships. That’s why I’ve been doing this 25 years. So I’m telling you, be very, very careful, and be patient. It could take six months, it could take nine months, be patient. I know while you’re watching TV, they’re going to try to call a bottom every single time we see… We’re going to see more stimulus. Remember when we had stimulus, okay, people think, “Oh, once the company came in stocks roared higher.”
Frank Curzio: That’s not true. The government started coming in in mid-2007, they started lowering rates from wherever it was, 5.25%. TARP was passed in September 2008, I mean the markets crashed from September 2008 till the March bottom, talk about a 30%, 35% crash in those levels. So as we were falling, we fell even further. So don’t think the second the president comes out and announces a fiscal plan on taxes or whatever, or we’re going to lower rates and other emergency rate cuts, we lower them to zero, it’s not going to have an immediate impact, so be patient. It’s going to have a monster impact later, that’s when we get aggressive. Let’s wait for the coronavi… Again, it’s a temporary problem.
Frank Curzio: So if you feel the need to start picking away, which you might want to, again, if you’re a trader, you’re probably enjoying these markets with the volatility. Most of you, I’m sure are not day traders. But just don’t go crazy. Be smart, take very, very tiny positions if you have to. Because there’s more uncertainty today than there was two weeks and even three weeks ago, because it was just China two, three weeks ago. Now the virus is spreading like wildfire, right? Italy, South Korea, Iran, and I’m going to tell you something guys, the cases in the US are about to explode. I’m not saying that to alarm you. We have one person in the town over that just got diagnosed, so they’re affected with the coronavirus. I’m not worried, but you know who should be worried, if you’re over 60 years old or if you have respiratory problems. That’s where it attacks you, that’s where you see the fatalities, that’s where you see the most damage. Everything else is a little bit worse than the flu. I’m not worried if I get it, am I worried if my daughter would get it? Yeah, but less than 2% of kids under nine years old get it, it just doesn’t attack kids for some reason, which is good. My daughter’s immune system is a little lower, she’s got Crohn’s. So I’m a little bit worried.
Frank Curzio: But you’re going to see your neighbors get this, you’re going to see it, don’t panic. It’s okay. If you’re looking at China, if you believe them, eventually you’re going to get it. There’s likelihood that you or your neighbor is going to get it. Don’t panic. Don’t panic, that’s the most important thing. But in the US, it’s the first inning. It’s the first inning in the US right now. We just started testing people, we haven’t even announced… Remember in China where the tests jumped from, what was it? It was like 10,000 to 18,000, 19,000 or was it 17,000 to 30,000. There’s a massive, massive jump one of those days, and that was because of the testing.
Frank Curzio: We’re testing like crazy now, there’s thousands of people in quarantine. There’s probably going to be tens of thousands of people that get this. And I bet you at the end of the day when we look back on this, it is going to be over 100,000 people, which is still going to be less than the flu. And again, 80% of these cases are mild, but you have to look at sentiment here. And people are scared shit of this. They’re scared, they’re fearful. And hundreds of thousands of tests are now available, just starting to be available. You’re going to see these numbers jump up incredibly. Well, we’ve seen already big measures being taped. Almost every single major conference has been canceled, going out through April now.
Frank Curzio: The Ivy League, I can’t believe they did this. I can’t believe they did this, they canceled their conference championship, which is insane, not because I’m the biggest college basketball fan on the planet. So what they’re doing is they’re sending the winner of the conference, for men’s and women’s who finished first in the conference, to the NCAA Tournament. That’s not what happens if you’re not familiar with NCAA Tournament. A lot of you are familiar with the Big Dance, so you have the regular season and you have a regular season title. So say Kansas is my favorite team, they won the regular season title, they’re ranked number one. Now they play the conference tournament.
Frank Curzio: A good example would be North Carolina and Duke. North Carolina is terrible this year, they’re not going to make the tournament. They’re the 14th seed in their division, just in their division, not 14 ranked, 14 in their division. But they have a legitimate shot to win that conference tournament. What does that mean? If they win that conference tournament, you get an automatic bid to the NCAA Tournament. That’s even a bigger deal for smaller schools because a lot of times you only get to have one team going to the final, go into the NCAA dance and to the tournament, and that is the conference champion.
Frank Curzio: Sometimes that’s the number one seed but other times you see a three or four seed just make a run at number one see because their strengths and schedules just won’t make the conference. Anyway, that’s what’s fun about it because you get some crazy teams that just happened to get in there luckily and it’s a game changer for the school. To say, “There’s no conference tournament,” you basically eliminated everybody else, I think it’s Princeton on the girls and Yale on the boys, so pretty sure it’s Yale that they are sending, but you had Harbor come out and say, “What are you crazy?” You see Princeton come out and say, “What are you crazy?” Just gave them no shot to make the tournament.
Frank Curzio: Now you might be saying, “Okay, well, Frank, the virus, it’s… ” You know what? Play the game with no one in the stands. These guys are going to be hanging out with each other anyway. But I think that’s crazy. I think it’s an overreaction. I think it’s an overreaction just not even to have people go to stadiums. People are going to get this, and if you don’t, if you’re worried, then stay home. If you’re sick, stay home, if you think you have it, quarantine yourself for a couple weeks, stay inside. Be smart here. Because after that period, after the last couple of months, we’re going to be fine. We’re going to have a vaccine come out maybe 12 months from now, which is good to go into next year if this is a seasonal thing. But least we know how to prepare because right now it’s just crazy.
Frank Curzio: And we’re going to see towns in the US, we’re already seeing it, in the US being quarantined, New York, New Rochelle, we’re going to see… Look at Ohio, I mean, closing schools, colleges sending out notices, “Thank you very much for…” People were sending me all this information and things from the kids going to school and what they’re saying. All the doctors, I mean, I planned a trip with my wife two weeks from now and the hotel just said, “Look, you can cancel this and we would give you a 12 month credit.” They’re probably going to shut down Disney parks in Florida if I had to guess.
Frank Curzio: So we’re in a very early innings here. I mean, we see lots of more school closures, we’re probably going to see cities on lockdown. And you listen to New York and the mayor, that’s where we’re headed guys and it’s a scary environment, but you should get to see maybe military in the streets, police in the streets and they’re nice, and they’re not going to be a-holes to you or anything but still the shock of it when everyone’s in their house, nobody’s traveling, nobody’s really doing anything, they’ll be spending. But they’re hoping that this is going to limit the spread of the virus and it may.
Frank Curzio: I mean they will tell you everyone said, “Well, it worked in China.” You don’t know if it worked in China, I mean, China has been lying about their numbers, they wanted the whole world to contract this disease. They didn’t want anyone to close their borders in January, they got pissed at everybody. So you can’t really trust what’s going on there, but the more people in quarantine are locked down then it’s just pretty obvious that it’s going to be much more difficult for this to spread.
Frank Curzio: But this is a six to nine month process. This is what I said in early February, and these guys are comparing it to SARS, it’s crazy, and we’re just one month in. That’s when we look at the US, I mean, even further, you look at Goldman, what’s Goldman saying. Today it came out, today, right? Wednesday, it came out and said they expect another 15% downside from here in the short term in stocks, another 15%. So this is on top of the already 50% decline that we’ve seen in the markets. I like when firms look at the data and they change their mind, that’s fine. I just think it’s Goldman three weeks ago. This is a V shape recovery.
Frank Curzio: You look at SARS, you see a one week quarter GDP and it comes right back. That was three weeks ago, now they’re calling for a 30% crash after the 15% that they didn’t call. They’re like, “Well, it’s going to go down another 15%.” But what’s interesting about the Goldman call which nobody’s talking about, again, I have access to a lot of this research, very expensive, but I’m going to share some of the things that they said in there. One of the things that stood out the most, they were talking about how second and third quarter earnings are going to be significantly impacted, that’s what they’re worried about. We haven’t even reported Q1 numbers yet. We haven’t reported Q1. And if this is falling into Q2, then we’re really going to see a massive decline in earnings, which I’m predicting at least a 20% decline, I’ll go over that in a minute or later on. But they talking about second and third quarter earnings being impacted, nobody’s talking about third quarter earnings being impacted I can tell you that, that’s not factored in.
Frank Curzio: Well, we haven’t reported Q1 and they’re worried about lower earnings in Q2, Q3. They’re seeing energy prices crashed, so no earnings to the energy companies. We’re seeing interest rates about to crash, which impacts earnings to financials. So we’re not going to see earnings growth there. And yet, both of those industries are expected to decline around 1%, 2%, before this happened in earnings, they’re going to decline probably, I mean, earnings in energy are going to decline tremendously, and then financials are going to get hit too. But again, they’re all combined to the S&P 500. The consensus still says that we’re only going to see about a 0.1% decline year over year in earnings, which is insane. It’s got to be at least 25% worse than that. And that’s how you determine your P/E, again, I’m going to get into numbers a little bit later.
Frank Curzio: But to make matters worse for everything going on, we saw Russia, Saudis, can’t get along, deciding to flood the markets with oil, pushing prices down 25% in one day to around $30, $31 a barrel, that’s the biggest one day decline in oil ever in history, think about that. And if you want to put this in perspective, the credit crisis, what’s the worst hit sector in a credit crisis? It was financials, the whole world was collapsing. The biggest one day decline that we saw in financials, in the financial sector, was 17%. That was in a credit crisis. Oil prices crashed 25% in one day, just to put in perspective, that’s how serious a move like that is. Most oil companies super leveraged, meaning they have tons and tons of debt. They restructured this debt in 2015, they got lucky because the market came back and oil prices crashed from wherever, 90+ a couple of years ago, averaging all the way down to below 30 and around 40, but we went much higher than that in the ’60s. But a $35 oil or under $35 oil, which seems like that could be the norm for at least a little while, most US Shell producers can’t make money. Why is that a big deal for? Why is that such a big deal?
Frank Curzio: If you’re looking at the US Shell producers, the technology, the fracking, hydraulic drilling again, I visited all these areas. The major Shell areas across the US North Dakota and Texas, Permian, Eagle Ford, Williston Basin, all these, just see technology, get familiar with the companies. Most can’t produce a $35 oil. So you’re looking at the US, the US has been the largest producer of oil since 2018. Something that was unthinkable 10 years ago that would happen. 10, 20, 30, 50, 75 years ago, nobody thought that would ever happen, to a large oil producer, to produce 12 million barrels of oil per day, which is about how much we consume every day making us energy independent.
Frank Curzio: And people are going to say, “Wait a minute, Frank, it’s 19 million barrels in total of oil equivalent.” But that includes liquids, so when we talk about just pure barrels of oil, it’s 12 million. So the US has become energy independent, we’ve become a net exporter of oil. But if oil prices stay at these levels or fall further, we’re probably going to have to import more oil again, because US production could fall literally by 50% plus if we stay at these levels through 2021.
Frank Curzio: Why am I bringing up 2021 and not 2020? This is important guys. So when you look at the oil sector, 43% of the oil produced by the largest EMP companies are hedged around $55, that’s for 2020. It’s hedged means is, they’re locked in those prices just like you would see Walmart or Target, companies that have large fleets, you want to lock in your fuel costs because it’s so volatile, so we’ve been volatile. Oil, gas prices and things like that, even airlines, you want to lock it in, this way you could budget for advertising, you could budget for expenses, it’s a lot easier to do, so you want to lock in the best price possible. A lot of these guys did a good job locking at $55. I won’t get too crazy and too complicated here because they do have collars with oil prices dip further, maybe it’s not $55, it might be a little bit lower, but let’s just say $55.
Frank Curzio: So 43% of oil produced by the largest EMP companies globally are hedged around $55 in 2020, at $55. In 2021, next year, only 2% of production, global production is hedged. That means they’re going to have to produce at the current spot price, which US Shell producers, most of them, can’t make money under $35. Most of them, you’re going to see companies, “Oh, we have a well here and a well here.” I’m talking about overall. That’s pretty crazy. So if this goes into 2021, which I don’t know if it’s going to happen, because I don’t know how much the Saudis and Russia could keep this up, and losing money and getting crushed. But, man, the US being oil independent, those days are over if $35 a barrel of oil is the norm. And being energy independent is the greatest thing on earth. It makes you much, much more powerful than relying on other people for energy.
Frank Curzio: So now we take everything in, I’ve been warning about an imminent market crash since early February, and that was based on stocks trading at 21 times forward earnings, that’s a huge growth multiple, and China being offline from the coronavirus. 500 million people on lockdown and China accounted for 40% of the global growth in 2020. So you have a growth multiple, at 21 times forward earnings, huge growth multiple and then the biggest growth component in the world is completely turned off. It was just a matter of time before that multiple had to come down.
Frank Curzio: Now, my original thesis called for a 15%, 20% collapse. I didn’t think it was going to happen this fast, okay, I didn’t. But that was based on China being offline, not the fact that this virus, which spread globally and this fast. So my educational segment, I’m going to break down how much further stocks can fall from here based on evaluation, and I’ll let you know it’s not pretty. We are going to see a lot of stimulus, low interest rates, fiscal taxes and trying to put money in people’s pockets. Again, it’s not going to work right away, it is going to work tremendously, probably about six, nine months from now, but not right now.
Frank Curzio: So I don’t want you to get too nervous, but the scenario is not pretty when I’m going to break down the numbers. The good news for you is I’ve been running tons of screens, working my ass off behind the scenes for you. Okay, this is the most important time, this is what you should be doing. So the screens I’ve been running are companies that are least leverage, the safest based on net cash to market cap, which ones are the most leveraged to inflation because we’re going to see runaway inflation I think in six, nine months. Every central bank is inflating the market right now with money. Which stocks pay the safest dividend based on the dividend payout ratio and cash out as well as which companies are likely to cut their dividends, because of their crazy dividend payout ratios.
Frank Curzio: I also read screens of the highest beta stocks, right? Those are the ones that move much more than the market when it goes higher, and much more lower than the market when it goes lower. But I’m screening for those because we’re going to see massive stimulus enter the market, monetary fiscal in the short-term. And this is a temporary problem, coronavirus. So we want to be prepared. I also screen for the safest stocks with the lowest beta, that have a history of increasing annual dividends. So again, I’ve been very, very busy. Don’t worry about writing this stuff down, I’m going to cover in my education segment. I’ll just be running tons of screens for you, so you will all be prepared when the time to start buying stocks again, which again it’s not now, but we’ll get to see an unbelievable buying opportunity, the best since the credit crisis probably in a few months, and we all need to be prepared.
Frank Curzio: So I’m going to break down earnings from evaluation perspective, we’ll see how much further we can fall and share some of the sectors that you should be focusing on the most, as well as a lot of individual stocks that I’m looking at that could make their way into the portfolio based on these screens. So it’s going to be really cool, I’m going to save a lot of favorite stocks to pay subscribers of course, this is a free service. I’m starting to see lots of new signups, so guys, welcome aboard. But you’re getting a lot of information in the educational segment.
Frank Curzio: Now before I get to that, I have an incredible interview setup for you. It’s with Lenore Hawkins who is the Chief Macro Strategist for Tematica Research, sort of 20 years’ experience in economics and finance, amazing analyst, amazing econ… Someone I respect a ton, greatly. She’s just very, very smart. I interviewed her last year, it was one most downloaded podcasts.
Frank Curzio: This interview is going to take place, she is in Northern Italy. That’s where she works out of, several months out of the year, which was on complete lockdown a week ago. Today, all of Italy, the entire country is on lockdown. So this interview is taking place while Lenore is in the quarantine zone, you’re not going to see that a lot of places. So every single person that’s worried about the coronavirus, everyone out there, you need to listen to this. You need to listen to this interview. It’s one of the most important, relevant interviews I’ve done in 12 years, not just talking about economy and stocks, I’m talking about how to protect yourself and what’s going on because she’s going to give us a playbook of what the US is probably going to go through, and it’s pretty crazy.
Frank Curzio: She’s going to break down the whole quarantine procedure, how Italy’s implementing it, how there are police and military in the streets, how she gets food. She talks about the healthcare system not having enough supplies with doctors being forced to make difficult decisions when it comes to who lives and dies. Remember, there’s a lot of people already sick, not from the coronavirus, that need help. Now, running out of ventilators, running out of different supplies, but doctors are forced to make tough decisions here and it’s crazy. I got to tell you something about Italy because I said the rates are a lot lower when it comes to fatalities with countries that have great health care systems.
Frank Curzio: Italy has, probably, a better healthcare system than the US. And you know what? They’re running out of supplies. She’s also going to talk about how she likely had the coronavirus and didn’t even know it. So she contracted it back in December, no one was really talking about it in December. She’s going to talk about the system, how she felt including how long she was actually sick for, and I got to tell you something guys, it’s a lot longer than a 14 day quarantine period most countries are using. And finally, she’s going to break down what we’ll likely see in the US in the coming weeks, again, that playbook.
Frank Curzio: Clean measures of how to stop and spread the coronavirus. The major shutdowns we’re likely to see, the quarantines, how it’s going to impact our economy. This is going to be an amazing interview and if she’s right, things play out like they are in Italy, it’s only been 17 days since the outbreak. If it plays out like that, chances are the US is in a lot more pain. But you’re not going to hear it from me, you’re going to hear it from Lenore, she is in the quarantine zone. And you know what? Let’s get to that interview right now. Lenore Hawkins thanks so much for joining us on Wall Street Unplugged.
Lenore Hawkins: Thanks for having me.
Frank Curzio: Well, here’s the deal, because let’s get right to it, okay. Tell us exactly where you are, what’s going on, not just in your neighborhood or city, but now the whole country.
Lenore Hawkins: Right. So I am currently in Lake Como, which is just 40 minutes north of Milan. My office is in Milan, but obviously, if you’ve been paying attention to the news, I am not going to Milan these days. Yesterday, the entire nation of Italy was put basically on quarantine. This is something that’s completely unprecedented in the modern era. So you have a first world country where every single person is asked to just stay home. Talk about bringing an economy completely to its knees, and what has led to this has been a skyrocketing of cases of the coronavirus. And I have to say I am utterly astounded at the way this continues to be treated by, not all, but many in the United States as just a case of particularly bad flu. That’s completely missing the point of what this is, why the nation has had to shut down is because this is so contagious, and it has an unusually high level of hospitalization.
Lenore Hawkins: So it’s super contagious, and you need a high percentage, right now, it’s around 10% to 15%, depending on the country, but here it’s about 10% need hospitalization. Well, if you start spreading really fast in the population, a lot of people need hospital beds, and no country has a bunch of extra hospital beds sitting around. So what’s happened in Italy, and I can’t even wrap my head around this because this is a country with some of the best healthcare in the world. As an American living here with great healthcare both in the US and in Italy, I would choose here pretty much all the time for healthcare. I’ve just had a much better experience here with the quality of care. So it’s not that you can blow this off to it not being a good healthcare system, but what has happened is they have just run out of hospital beds, they have run out of ventilators. So people coming in, doctors are being forced to make the most horrific decision, to decide who they’re going to try and save and who they are going to let die because there’s not enough equipment going around.
Frank Curzio: That’s insane. That’s really insane. So you know what? Let’s back up a little bit and take us through the past week, or it’s just been 17 days, right?
Lenore Hawkins: 17 days.
Frank Curzio: We don’t realize in the US how much it’s going to show. So 17 days where Italy first announced containment in northern areas where you live, which was I believe that I heard you saying 25% of the population, now it’s the whole country. I mean, how do they make this announcement to people, TV, radio, mail, I don’t know, people’s reactions. For me, I can’t imagine something like this happening in the US until… And I could tell via your voice and you’re talking right now, you don’t even know really what’s going on, but I’m curious to see how this all unfolds a little less at 17 days.
Lenore Hawkins: Right. Okay. So on February 21st, in the afternoon, all the news stations started covering that there were three cases had been identified. And at the time, they thought there was one who had been exposed to some people from China. It turned out that wasn’t actually the case, but it was just three cases. And Italy reacted so fast that they immediately shut down three towns, oh, sorry, 11 towns. 11 towns that are just a little bit south of Milan, and everybody’s just kind of in shock like, “Wow, that was fast.” We went from, “Oh, it was something that was over in China. Nobody needs to worry about it,” to, “It’s right next door.” This is a big deal. But as is the case, right, people tend to just go on with their lives as normal. So while people were talking about it a lot, and definitely there’s a bit more hand washing, people were just kind of going along like it was normal. And bit by bit, you started hearing more and more cases, and more and more cases, and then it exploded.
Lenore Hawkins: So over the weekend, we had it in the newspapers. Well, it first leaked this Saturday night. This is how fast it’s happened. So you and I were talking on Tuesday, Saturday night it got leaked via WhatsApp because one of the government officials involved leaked that they were going to quarantine the whole Lombardy region, which is the northern part of Italy. And it is really the economic engine of the entire country. That whole region, which is 16 million people, was going to be put on lockdown on Sunday morning. So the rumor started Saturday, by Sunday morning, it was all over the news and the papers, and it was just total shock. And they’re saying, “People please stay home, only if you have to go to the grocery store fine, but stay far away from one another because this has to slow down.” That was Sunday. Monday night, we found out it’s the whole country. Because cases, by the end of today, we will be at over 10,000 cases. We’ve gone from three to 10,000 in 17 days.
Lenore Hawkins: And now, if I go outside, it shifted so quickly, so even last weekend, you could go eat outside. They were closing a lot of places before 6:00 PM at night, just to have people not congregate, but you could go and have lunch sitting outside and feel fairly comfortable. A lot of people were doing it, you’re in the sun, it’s kind of windy, you feel like you’re kind of safe. At this point, if I look out my window, there’s no one around. The only people you see are the police and the army patrolling to make sure that people don’t congregate. And at least where I am, people are doing a pretty good job at that. I mean, everybody’s really scared at this point.
Lenore Hawkins: And again, yes, it’s true, if I catch it, I’m probably fine. Actually, I think I might have already had it. But if I have it, I’m probably going to be okay, but I can transmit it to a population that skews a lot older than almost every other country, which is one of the reasons we’re having so much trouble, because you have a lot of senior citizens in Italy, and they just can’t handle it. I mean the death rate for people over 70 is mind boggling.
Frank Curzio: So you said that you might have had it, what makes you think that you might have had it and do you feel okay now? Did you have symptoms?
Lenore Hawkins: Yeah. Well, it is a bunch of us actually here because they think the virus has actually gone around, probably end of December, maybe early January, that it was actually already in the country. It’s just, you didn’t get enough people getting really sick that you could start connecting the dots. And so those of us who got it, and there’s a bunch of us, all have kind of a similar thing. I got, first thing that hit me was a fever. And I, honest to God, have not had a fever in over 25 years. I just don’t ever have a fever and I had it for five days and it was really high, and that’s just not something I do. And then I just had this really awful dry cough and a real tightness in my chest, and I was just miserable for like six weeks and that’s just not like me.
Lenore Hawkins: I mean, I didn’t even go to the doctor but I felt like hell and trying to work out, get on a treadmill was just, “I can’t do it.” Thankfully, I pretty much was feeling so awful that I self-quarantined, but not knowing, I had no idea what was going on. And most of everyone’s had very similar kind of symptoms, it has been the fever and just exhaustion, and you don’t feel like you can breathe. One of the doctors around here was suggesting for people if they kind of want to figure out, how bad is it? If you can take a deep breath, when you wake up in the morning, take a really deep breath, and try to hold it for 20 minutes, oh, sorry, 20 seconds. Because what the virus does is it makes it very difficult for your lungs to absorb oxygen. So if you can really stretch your breath out and hold your breath for 20 seconds then you’re probably good.
Frank Curzio: Wow, that’s incredible. So yeah, so you’re saying you might have had it even a couple months ago.
Lenore Hawkins: No.
Frank Curzio: But not even realizing it. But it just goes to tell you how, we’ll get to the US in a second, but I want to talk a little bit more too, I want to get people to get a better feel of this, about the process being on quarantine. I mean, you mentioned it a little bit, you touched up on it, but are you actually allowed to go outside? Can you drive? You said there is police and army on the street. I mean, do they actually grab people and tell you to get back in? And how do you get food in your household?
Lenore Hawkins: Yeah. No, they’re being kind and reasonable about this. Because people got to eat, you got to eat and you don’t want to really cripple everyone, that will completely cripple the economy. The big thing, the reason for the quarantine is to keep people away from one another. So for example, like a grocery store that’s open, if you look in there and you see more than a handful of people, don’t go in, we’re supposed to all stay more than six feet apart from each other. But life still has to kind of function. What you can’t do is go from one town to the next, you have to go online and apply and say, “Look, I really have this valid reason.” And you have to print out the document and sign the document and they’ve warned like, “If you lie and we catch you lying, there’s going to be significant penalties and maybe even jail time.”
Lenore Hawkins: So they’re trying to just keep people stay in one place in a desperate attempt to slow the rate of contagion so that the hospitals could catch up. They’re trying to get more equipment and they’re taking basically any building they can find that is empty to convert it to emergency healthcare facilities. And this is the only way they could come up with to try and slow how fast this thing is moving through the population.
Frank Curzio: You’re the Chief Macro Strategist, you’re focused on the big picture, you’re focused on the economy, now that you’ve seen what’s going on in Italy, and it doesn’t make anyone an expert because this is brand new, but what would you suggest for the US? I mean, is the right move to shut down? I mean, not even a country, but certain cities? I mean, is this going to create more of a panic because the economic effect is going to be incredible, and that’s definitely priced into the market. And I think we’re going to see cases explode because we’re just starting to get testing.
Lenore Hawkins: Exactly.
Frank Curzio: We’re just starting to get testing, which is amazing, but what are your thoughts with the US of how, not only from an economic perspective, but from a health perspective? What would you suggest that they do, which is working or maybe something you saw that wasn’t working in Italy?
Lenore Hawkins: Well, I think the first thing is the severity of the issue and understanding why this is such a big deal. That’s not being communicated right now. I wrote a piece on this back in February, and it was amazing to meet people on Twitter that were, “No, that’s not really the issue,” describing that the problem is the level of hospitalization that this thing requires, coupled with how quickly it spreads. It’s much more contagious than the regular cold, and it puts a lot more people in the hospital than the regular cold. And that doesn’t seem to be communicated well at all in the United States. I think people need to understand the importance of staying away from each other as much as possible.
Lenore Hawkins: The number of stories I’m hearing of people who are sick, trying to get help, going into a hospital, going to the doctor’s office, potentially infecting a ton of other people, it’s just mind boggling. If you are sick, you cannot leave your house, somehow you got to get somebody to help get you some food, but you’ve got to stay home, because the risk is just too great and this thing can spread so fast. The US has got to get its healthcare in order.
Lenore Hawkins: One of the things that they did here in Italy very quickly that helped to some degree was when this thing hit on February 21st, basically, all hospitals immediately went into emergency mode and every single surgery that was not absolutely necessary, was canceled. People who were in the hospital who didn’t really, really, really need to be there, they were kicked out. They just did everything they could to clear the hospitals as much as possible and still look at where we are today. The United States needs to start doing that, you cannot be having elective surgeries, you need to clear those facilities.
Lenore Hawkins: And it is a tough call, and there’s no right answer on this because one could argue, “Well, what if the United States sort of over prepares,” which I don’t even know how you would know that you’ve over prepared. What does that look like? Well, you didn’t have a massive pandemic like we’ve had in Italy. Okay, well, maybe that’s because you took the right measures. But if the United States is not prepared properly for this, imagine the pain, for both the US and the rest of the world, if the world’s single largest economy is brought to its knees the way Italy has been. Because you already had China go there, second largest economy, you’ve had Italy go there, eighth largest. If this happens in the US, we need the American consumer to keep the rest of the world kind of afloat. So this needs to be taken seriously. People need to be isolated immediately.
Frank Curzio: So when you’re looking at Italy, what are they doing in terms of stimulus, because that’s where we are with the US right now, is monetary, fiscal, because when you look at Italy’s economy, they’re already on shaky ground, now it’s almost sure to fall into recession, I think we can agree on that. What are they doing to prop up their economy? Again, there’s no playbook for this, but we know that’s going to happen in the US, we already saw with interest rates, we’re going to see fiscal pretty soon, we’re going to see all this stuff coming in, but has Italy done anything to help their economy?
Lenore Hawkins: Well, they announced a €7.5 billion stimulus package, exactly how it’s going to be applied remains unclear, and exactly how it’s going to be paid for also remains unclear. But then again, out of all respect, it’s been 17 days. The government has said that mortgage payments and other household bills across the entire country are going to be suspended for the outbreak, now, just how long that actually means is to be determined. That sounds nice but the numbers make this a little complicated. So unlike the US, which is really big on mortgage, is Italians don’t always use a mortgage when they buy their home. And a lot of Italians don’t ever buy a home. It’s a different cultural thing. It’s not quite the same in the US where everybody feels like they got to go buy a home, so you only have 13% of Italians have mortgages. So putting mortgage payments on hold, okay, great, that helps a 13% but on the other hand, there’s about 200 billion of Italian bank bonds that are owned by Italians. And a lot of these are senior citizens that count on those bond payments for income.
Lenore Hawkins: Now, if the banks aren’t going to be taking the mortgage payments, how are they going to pay the bonds and keep in mind, Italian banks are not out of the woods from the last financial crisis. In the last financial crisis, the banks ended up with a bunch of loans to businesses because Italy’s economy is very different when it comes to the relationship between banks and corporate sector. In the US a lot of the corporations will issue bonds. So the debt holders are you and me, right? We go buy bonds for AT&T. In Italy, you really don’t have much of a debt market, so when a company needs to borrow money, it goes to a bank. So when you had the big financial crisis, and all of these companies are just barely treading water and they can’t pay their loans, what got hurt was the Italian banks. And the big thing is, Italy is politically a mess, everybody’s heard that.
Lenore Hawkins: The amount of red tape in this country is mind boggling. And I can tell you from firsthand experience, trying to help with a bank having a loan that is not performing, but they don’t really want to put it in the non performing because that makes their books look bad. So they’re trying to play some little cute games to keep it out of the non performing bucket. They have bonds, they have loans, they’re not being able to get paid because business is in trouble.
Lenore Hawkins: I come in with a company that’s looking to invest in it or say buy this company, so they’re going to buy the debt out of the bank. It’s great for the bank, except you’re not going to pay. If the loan is say, a $50 million loan, you’re not going to pay $50 million because it’s not getting paid, the business can’t support a $50 million loan. So they have to take a haircut. The Italian legal system and the political system is just so full of red tape and it’s such a mess, it can’t get done. So Italian banks were not healthy in the first place. They’ve gotten a bit better, but they were still a mess, we’ve all heard Monte dei Paschi, the Italian banks have been messy. And now you have an economy brought to its knees. There’s no easy answers out of this.
Frank Curzio: I know, unfortunately, I hear you on that. So we got a couple of minutes left. Let’s get into the US economy now because I wanted to get your thoughts since you’re the macro specialist and you know everything. It doesn’t get better for you, right? I would think the macro strategies are focused on big… I mean, it doesn’t get better than this especially but I’d also…
Lenore Hawkins: What is a macro world today?
Frank Curzio: Oh, definitely. So where do you see the US? Again, this is a very, very tough question. But where do you see the US over the next three months where we’re likely to shut down cities, we’re already of course, just like every other country, have restrictions that are placed on traveling. But now, as of yesterday, we didn’t put restrictions on sporting events. We have March Madness coming up, so you’re going to see fewer people attending, there’s talk about the media not being able to go into certain places that you’re allowed to, like they’re putting restrictions on it now. It’s going to be full restrictions pretty soon. And then you throw in the fact that oil prices crashed, and you don’t have to rehash the news, we all know about Saudi Arabia and Russia and it resulted in them just flooding the markets right now. But this has really crashed the oil markets. What are your thoughts on the US economy? What do you see, and again, it’s really hard but I mean, everybody’s nervous here but maybe is there a light at the end of the tunnel?
Lenore Hawkins: Unfortunately, I do not think there is a good light out at the end of the tunnel. I think this is going to be very painful. And it’s not going to be easy. When we take a step back and kind of look at the big picture of it all, we have the beginnings of a global pandemic. Now, on the positive side, when we think about the pandemic, when you look throughout human history, whenever we’ve had something like this, we haven’t had the medical care that we have today, right? So there’s reasons for optimism. There’s companies saying that they’re just on the verge of a vaccine, we need a miracle. If we can get a miracle, get a vaccine, get some good treatments for this, that’ll really change the progression. That is one of the things I’m looking for.
Lenore Hawkins: But we’ve got a global pandemic, at the time when the corporate sector has a level of debt that is completely unprecedented in all of history. We’ve never seen something like this. For example, roughly 16% of corporations around the world are zombie corporations. That means they do not generate enough cash flow to service their debt. They were living on borrowed time. This is going to push them over the edge. We have central banks that are basically almost completely out of firepower. The US, I would be shocked to see the US not drop all the way down to zero interest rates on the 10-year, or possibly the 30-year. And we have a public healthcare system that is just not prepared for this. I don’t think there’s any easy way out of this. Yesterday, the president said that low energy prices are really good for the US economy. That’s not really the case anymore.
Frank Curzio: No, that’s not.
Lenore Hawkins: Right. That may have been the case in the ’80s. But now the US is the world’s largest producer of oil, it is a net exporter of oil and has an enormous capital expenditure program in the Shell sector. 10% of all the high yield in the credit market is in the energy sector, most in oil and gas. Those guys are all going to get hit. I remember the last time Saudi Arabia decided to target production instead of price, WTI Crude dropped to less than $20 a barrel. And Saudi Arabia has a marginal cost of production for oil in about the single digits. That is not the case for the Shell oil guys, those guys are indebted, their cost of production is much higher, and they’re going to get hit hard. And that is now a pretty solid portion of the US economy.
Lenore Hawkins: When we had the last hit in 2016 with this, you had the rest of the economy doing much better so that it could kind of cushion that. We had a recession in the industrial sector of the US, but the rest of the world could kind of balance that. We do not have that anymore. On top of that you have baby boomers who are way over exposed to equities, thanks to suppressed interest rates. This market is going to terrify them and it is going to push them to do a lot of selling and that selling is going to induce more selling. And keep in mind the only net purchaser of shares for years has been corporations themselves through share buybacks. They’ve been able to do that because of these insanely low interest rates that allowed them to borrow from the public markets and then turn around and buy their shares. We’re already hearing warnings that those share buyback plans are going to be cut, that plans for buybacks dropped about 50% year over year in February. So you have the one big head buyer of equities is not going to be buying anymore.
Frank Curzio: Lenore, I was hoping to get a little bit positive, if any, you’re telling me here because I’ve been so negative the past two months, and I’m like, “Okay, now I’m starting to look for spots.” Not that I’m investing but I want to be prepared because we’re able to be fortunate enough to have a lot of our people on the sidelines during this downturn. But the truth is, there’s just so much uncertainty out there, right?
Lenore Hawkins: Yeah.
Frank Curzio: It’s so difficult right now to really jump in, isn’t it?
Lenore Hawkins: The problem is this isn’t an economic driven thing, the economy was vulnerable, right? The economy was vulnerable. The stock market was vulnerable, we all know that it had hit kind of a ludicrous level in terms of valuation. So we were primed for this, but have… Something, there’s always something that does the tipping. But this, to have a virus that can shut down an entire economy, that is something we just don’t have a playbook for. So until we know just how bad this virus is going to be, maybe we get that miracle. Maybe this thing does turn out to be more vulnerable as the as the months get warmer than we expect. Right now, it doesn’t look like it does that but maybe that changes, maybe we get some sort of a miracle cure that comes along and really changes this without knowing that we don’t know how much it could affect the economy, so we don’t know how bad the recession could possibly be. And most likely, we’re going to hit recession.
Lenore Hawkins: And Q1 data so far, for the US, has been really skewed because we’ve had the fifth warmest winter and 125 years. We’re going to see a credit market go through a default cycle and you really, without an understanding how bad the virus is going to get, you don’t know how bad the recession can get. So there’s really no visibility into earnings. What looks cheap right now, like banks and the energy sector, that could actually turn out to be a bit of a value trap. So we don’t really know for the moment. But on the plus side, particularly for those people who kind of been sitting there going, “What do I buy? What do I buy? Everything looks so expensive.” Stuff’s just going to go on sale, finally.
Lenore Hawkins: I mean, you look at, like Eni, it’s the largest oil company in Europe, energy company in Europe, you look at Exxon, their dividend yields are phenomenal. I mean, they’re hitting record highs, that’s going to be great. Now, right now, I’m not saying go buy them right now, but keep an eye on those things because at some point, those are going to be good buys, we just don’t really have the visibility. But I’d rather be looking towards this than just sitting there twiddling my thumbs going, “My God, we’re still at record high valuations at a time when earnings continue to contract.”
Frank Curzio: Yeah, it definitely makes sense. So listen, all right, so we got a minute left here and I’ll end with this. One, I want to say thanks for coming on, your part of Tematica Research, it’s a medical research, which basically, it’s funny how you describe it, so you say Tematica investing focused on identifying sustainable market shifts that come about due to shifting economics demographics, technology. Right? And your buddy, Chris Versace, who’s a good friend of mine, the guy is a fantastic, fantastic analyst, both of you guys are doing a fantastic job. If people want to learn more about you, if they want to get your reporting from a quarantine zone in Italy, how could they find out more information about the both of you and Tematica?
Lenore Hawkins: So, you can go to our website it’s Tematica Research, which is T-E-M-A, Tematica, instead of… It’s tematicaresearch.com, you can find me on Twitter @EllesEconomy, it’s E-L-L-E-S Economy.
Frank Curzio: Well, Lenore, thanks so much for coming on. And listen, stay safe. If you need anything on our end, please I’ll let you know what’s going on in the US, whatever you need. I know you follow me on Twitter, I follow you and I see you doing great interviews, but hopefully you continue to update us and stay safe out there. Okay.
Lenore Hawkins: Thanks a lot. You be safe too.
Frank Curzio: All right. Well, I’ll talk to you soon. Thanks.
Lenore Hawkins: Bye.
Frank Curzio: Okay, guys, amazing stuff from Lenore. I really appreciate her doing this from the quarantine zone. I know it’s nerve wracking times. Hopefully you got a lot out of the interview, I did. It makes me look at the US and what to expect. I’m not as worried guys getting it, I mentioned earlier that someone in the neighborhood over got it. You’re going to see your neighbors get it, don’t panic, just do the smart thing, stay in. The people who should be worried are people who have respiratory problems or older people over, I would say 60 years old. Be very, very careful.
Frank Curzio: Everything else looks like mild cases. You don’t want to start a panic and people worry because you’re going to see so many things close in the coming weeks. We’re in the first inning of this in the US and as you could see in Italy, it’s going to get a lot crazier. But the good news is this is temporary. We’ll figure this out and then we’ll resume, we’ll get back to things, we’ll be fine. But I really appreciate her during this interview giving you a real world perspective of exactly what’s happened, how it is to be in a quarantine zone, someone that’s probably had the coronavirus, and I really appreciate her coming on and guys if you want to follow her, she’s giving some great updates too. She talks to a lot of people but her Twitter handle is @EllesEconomy, E-L-L-E-S Economy, if you want to follow her, get real time updates on the lockdown and including talking to doctors and things like that. So she’s doing a great job. You could follow her there if you want.
Frank Curzio: And I’m good friends with these guys, Tematica Research is a great, great firm. It’s run by my buddy Chris Versace, who I’ll probably interview on this podcast. I think this is the second time I interviewed Lenore and I think I interviewed either once or twice on Chris and I was on their podcast as well. But really good people, I know that they care, really smart, really great firm and I like these guys a lot. So I’m happy, very, very happy that Lenore was able to come on and just give you that real world perspective and guys just be careful out there.
Frank Curzio: So let’s get to my educational segment because I want to talk about the current earnings environment. Because after you hear what I have to say, and I’m going to break this down, chances are you’re not going to be buying stocks right now, actually for a couple of months. So here we go, listen to this. So at September 30th, we are earnings growth rate for Q1, we didn’t report Q1 yet. 2020, it’s going to be about two months. The estimated earning growth for Q1, which is year over year from last, from 2019’s Q1, is 7.1%. That’s how much they originally expect to grow, right? By December, we saw China getting impacted so by the end of December, these sell-side analysts lowered their earnings growth, those estimates to 4.4%.
Frank Curzio: Today, the estimated earnings are expected to climb by 0.1%. So they’re still expecting flat, earnings are going to be flat. Even though no one’s going on cruises and straight to low, financials is going to report much lower earnings, energy companies are going to report much lower earnings. And it’s way too aggressive, right? But let’s take a look at the numbers that they’re expecting. So if earnings were basically to stay flat, they’re going to come in at around $39 for the quarter, right? It’s $165 for the year, for 2020. For this quarter, it’s $39. So we just take this quarter based on that number, we’re trading at 18 times forward earnings. Very, very expensive valuation, even given a low interest rate environment. But the fact that we saw a zero earnings growth in 2019, and we’re projected not to see earnings growth in 2020, 18 times forward earnings is an expensive valuation. It’s very expensive. We should be trading 15 as the average over the past 10 years. 15 times forward. Okay.
Frank Curzio: We deserved the premium before coronavirus. We had a lot of tailwinds, low interest rates. We had favorable policies and government and pedal to the metal earnings were growing, everything looked great. It’s not like that anymore, that multiple has to come down. So you’re looking at 18 times forward earnings, you could argue that we are almost more expensive now than we were before stocks crashed three weeks ago. And you say, “Wow, that’s weird.” Well, it’s all about the earnings. I mean, the reason we stayed at 14, 15, 16, 17 times earnings and in that range for the past seven, eight years, even though stock surged, is because earnings were surging.
Frank Curzio: Now the opposite is happening. Not only is the markets coming down prices by earnings. The P/E ratio, price divided by earnings, while the price of the S&P 500 is coming down and earnings are coming down. So if you know what’s coming down doesn’t mean the stocks are getting cheaper here. And anyone that’s telling you should you buy a company because it’s trading at 12 times forward earnings, please send that guy an email. Nobody knows what the earnings are going to be. Apple could be trading at 45 times forward earnings right now. We don’t know, they removed their guidance. We don’t know what they’re trading at, we don’t know what that is. So to say, “Oh, Apple looks cheap here,” you’re crazy, you don’t know, it could be more expensive than it’s been in 15 years, when they finally update their numbers, hopefully by next quarter.
Frank Curzio: Anyway, that’s the $39 number I was talking about that analysts are expecting. I’m easily being conservative here, it is a 20% discount to that number, just in Q1, all right. I told you Goldman Sachs already talked about Q2, Q3, I’m just talking about Q1 where we saw China completely shut down, we’re seeing the travel industry completely shut down. Nobody’s traveling at all, you’re going to see a massive decline in earnings for Q1. It’s going to be at least 20%. Again, this is temporary but if we take that 20% decline. And again, I’m not just grabbing this number out of thin air here, you look at Europe, Europe is reporting their first quarter numbers now. They do it ahead of us and they’re reporting 20%, 25% decline year over year in earnings.
Frank Curzio: So, if we report a 20% decline in earnings, that means that number for Q1 is going to be $31. That’s all the S&P 500 companies, their earnings together, piled together, it’s $31. That comes from the sell-side analysts. So if we get it more like $31, that means right now based on what the S&P 500 is trading, we’re trading at 23 times forward earnings. That’s the most expensive, not since the credit crisis, but you’d have to go back to the tech bubble days, early 2000, 1999, that’s the level they were at before we saw that massive crash. Much more expensive then but still that’s how expensive we are if earnings come in at 20% lower than expected, which I think is definitely a certainty.
Frank Curzio: So you’re looking at this and what I’m seeing is the sell-side analysts, these are the Merrill Lynch, the Goldman’s, the Morgan Stanley’s, Bank of America’s, these are the ones that provide the estimates for these companies, that’s what you see on TV. They’re so behind the curve, they just don’t know what to do because it’s number oriented. Looking at historical, nothing’s ever compared to this historically but they based… Is anyone downgrading stocks? Outside of the energy sector which we saw downgrades, right? In the energy sector. We saw downgrades in the energy sector because it crashed by 25%, I saw a ton of downgrades after the fact, which is meaningless to tell all of you, right. Anyone following their advice, it’s kind of meaningless, but outside of the energy sector, how many downgrades have you seen?
Frank Curzio: If you look at Apple down 15% from its highs, removing their guidance from the market saying, “Guys, we have no fricking clue. We have no idea what we’re going to report.” As a sell-side analyst, you have to go to a neutral rating, you have to. You don’t know, you can’t see the future the company is not letting you know. I have to tell you I haven’t seen one downgrade of Apple here, all these guys still have buyer ratings on them, and it’s slowly lowering their targets. But come on, be smart here, it’s okay to go on the sidelines and say, “Let’s be patient till we know more about Apple,” but how do you have a buyer rating with over a $3.20, $3.40, $3.50 target price on Apple when they don’t even know what they were going to report next quarter or probably next couple of quarters?
Frank Curzio: I mean, have you factored in that, again, the 11 right now is not being delivered, but say they get back online, which is not going to be in a month or two, it’s probably going to be three, four months. Just look at the data coming out of the ports, everything’s backed up. Nobody’s shipping anything, there’s not enough containers, and it’s crazy. Ports around me Savannah, Jacksonville, just look at the LA ports, listen to what they’re saying. But now say if I order an iPhone 11, I’m not going to get it for another three months, June, July. Their new phone comes out in September. So I’m like okay, “I’m not going to get the 11, I’ll wait till the 12,” that’s not factored in. That’s definitely not factored in. But the sell-side analysts right here, if you take their estimates on S&P 500, they’re not doing anything. They’re just sitting there going, “We don’t know what to do.” Which means when you see those numbers on TV in first quarter, you’re going to see tons of companies, tons of companies missing by a lot.
Frank Curzio: I mean, companies that are supposed to earn $1, they may report a loss. It depends how they’re going to account for it over the next few quarters. Now they could afford to throw in a kitchen sinks, so if it’s 30 cents say, “Well, we’re going to do 10 cents and then beat next quarter,” that’s what companies do. Sorry, it’s what they do, inside scoop. And we have the opportunity to blame something for doing bad, blame it, put all the blame on it, like Under Armour is doing right now, even though they’ve seen sales slow before this, they blame the coronavirus. They’re going to report terrible numbers, blame the coronavirus, but is it all going to be in Q1? It’s going to be Q2, Q3, we’ll see. But the sell-side analysts, man, I mean, they are so far behind the curve here so far.
Frank Curzio: I’m looking at estimates, they’re not being lowered as fast that you’re still predicting, basically flat earnings year over year, are you crazy? It’s crazy, it’s insane. There’s no way that could happen, there’s no way that could happen. So we’re talking about the S&P 500, where it could fall a lot further from here, maybe another 15%. Again, we’re going to get a lot of stimulus in the market, this is your chance to start looking for ideas. And that’s what I’ve been doing behind the scenes, running tons of screens, running screens for high quality large cap with very low risk factors. So you’re going to see the normal Johnson & Johnson is on that list, Procter & Gamble, Walmart’s Home Depot, Coca Cola, so you see a lot of those stocks.
Frank Curzio: The early cycle phase, right. So when things go back to normal, what are the ones that do the best and you find that out basically which ones, you can look at beta and things like that, or GDP to beta. You’re coming up with a lot of energy companies that could bounce back right away. There’s technology companies as well. DXC Technology is up I believe, today or yesterday they just sold a division or something like that. Apache is on this list, which is probably going to get hurt a lot more first, but we’re talking, for me, I’m preparing for when the bottoms in, what’s going to bounce back the most.
Frank Curzio: Industrials Quanta Services is a name that came up on my list, blog Warner, Harley Davidson, believe it or not, again, these are not stocks and record, these are what I’m looking at right now. So once we see the bottom, which ones bounce back the fastest, that are going to go up 3, 4, 5 times the market. That’s what I’m looking at now. I may not get to this list for three to four months, but I want to have the list of names and I want to be able to track these things. Defensive names of course, the auto zones, the M Gens, the big companies and things like that and you can screen… Those aren’t too hard to find, but for me, I like to screen for potential dividend cutters that are paying more in dividends than they generate in free cash flow and also have higher than 100% dividend payout ratio. And there’s a lot of names on this list: Halliburton, Craft, Schlumberger, Goodyear, Briggs & Stratton, these are companies that have been… OXY already cut its dividend, you’re going to see almost every energy cut their dividend, they need to preserve cash.
Frank Curzio: Actually I wouldn’t be surprised if the stocks went up on that news, because they need to preserve cash right now, because they had to massively leverage and they can’t really make money on oil prices and if this takes longer than that six month period, because a lot of these guys are hedged their production, if this takes longer than the six to nine months, this goes into 2021, these guys are in trouble, they have to preserve money. But these are the names I want to see if that’s factored in, outside of energy. Energy already got crushed, these names are down probably 80% of the year, they were down 30%, 40% before last week. So you want to look at certain ones that have a high dividend payout ratio over 100%. And also that pay more in dividends than the free cash flow they’re generating, remember free cash flow numbers are going to go down tremendously right now. There’s lower demand, so I want to be prepared, I want to avoid these stocks.
Frank Curzio: So this is the work I’m doing behind the scenes which is a ton, right? So a lot of this I’m going to publish to my subscribers and give them a lot of the names that I’m really looking at, what I really like. But when you’re looking at different screens, and I think FINVIZ is one place where you could have a pretty good screening tool for free. Me I have Cattle IQ, which costs me probably $25,000 a year, it’s a little bit more than that. But everything, I could figure out the screens, I could do it in less than five minutes, most of these things and pull up like 50, 75 stocks. I also do pro inflation screens. So companies have strong performance when we see an inflationary environment, which I don’t think, we’re definitely going to see that.
Frank Curzio: As soon as coronavirus race goes away with all stimulus we’ll push into the market, it’s going to be like injecting a pound of steroids into a small animal. It’s going to get crazy. Energy companies do well, you’re looking at technology, Advanced Micro Devices is on this list, Western Digital, Mosaic, Pioneer, get lots of energy companies on this list, technology as well, I don’t want to give away too much microns on this list. But these are companies that perform well in a pro inflationary environment. Again, it’s something else that I’m looking at. Companies that do good kind of no matter what, even kind of not so inflationary environment, it’s the Amazons, the Best Buys, the Home Depot’s, the Auto Zones. You want to look at home builders as well, we’re seeing incredibly low interest rates, mortgage rates are coming down, tons of refinancing is going on, tons. We’re looking at record low levels of mortgage rates, you’re going to see people buy more houses. Yes, people hate spending right now, but they’re probably still going to be looking for houses and try to get things done.
Frank Curzio: Maybe DocuSign is a good name as well. You can sign all the documents through DocuSign, makes it a lot easier than going in person now which that’s the way it used to be, and signing thousands of pieces of paper if you take out a mortgage. Now everything could be done through DocuSign, it just tells you sign here, sign here in the computer and boom, you’re done. Probably a good company, since you don’t have to do things face to face. So a lot here guys, listen to the podcast two to three times if you have to. Interest rate sensitive stocks, that’s important too. We’re going to see interest rates fall tremendously. Gold is probably going to do very, very well in this environment. You’re flooding the markets and lowering interest rates. When you see interest rates fall, you have the Dollar Generals that do good, the home builders do good, you have utility companies, even real estate does good, registry centers, company that came up my screen, Southern Company utilities.
Frank Curzio: So when I look at the screens that I’m doing and the companies that are coming up here, I’m finding lots and lots and lots of ideas, a lot of things that I’m excited about. And if you’re worried too, high net cash, the market cap, which is pretty easy. I mean, Twitter’s on that list, Inside Corporation is on that list. You have Electronic Arts, a lot of video games on this list. So these guys are going to survive much, much better. And not only that, when I look at video games, people are going to stay home, they might play even more, especially if you’re home from school. You’re not going to study. That’s a good sector to focus on. High net cash also to market cap, you’re looking at a lot of the Fang names, so you have Facebook on that list, Apple on the list, Alphabet which is Google on that list. Apple’s on the list, Garmin. These are companies with a very, very strong balance sheets that are going to survive this, that are going to be fine, that are going to be good buys. But these are maybe stocks you could start camping out in, I wouldn’t camp on Apple guys until I know what’s going on with that company.
Frank Curzio: But still, maybe pick away at some of these things down 10%, 15% that have good balance sheets. Because these guys are going to weather the storm, you’re going to see more money coming into this market, you’re probably just not going to see it in the short term. So this is what I’m doing for my subscribers behind the scenes, and not all companies are going to be expensive, especially when we know what their earnings are like I’m looking at an Intel and IBM that we sold already in our portfolios that were up on. And Intel and IBM, they were trading at 12 times forward earnings before the coronavirus and they’re down just as much as their peers. So to me, that’s a good opportunity to come in, depending on how much they’re going to cut earnings by. These are just things that I’m seeing or things that I’m looking at to be prepared, because right now you guys want to sell it… You’re in perfect position, looking for new ideas, that’s where you want to be. A lot of people scrambling, they’re nervous, they don’t know what to do and should they hold, and is it going to come back, and they’re down 15%, 20%, you guys shouldn’t be in that position if you listen to the podcast or if you’re subscriber.
Frank Curzio: We didn’t sell out of everything we do have few losses, but we sold out of a lot of stuff. And we’re in a pretty good position here. So now it’s time to prepare on how we’re going to invest that money going forward because there’s one thing, we talked about a lot of negatives, a lot to be nervous about, but the good thing here is when the dust settles, again, since coronavirus is a temporary problem, it’s going to be the best buying opportunity you’ll see since the credit crisis. Tons of names during that time surged 500% to 1,000% over a four or five year period. Because you’re going to see so many overreactions even as certain travel companies, travel will come back, people will get used to it. Again, not in the short term, but you’re going to see airlines get destroyed further, you’re going to see cruise lines get destroyed further, not sure if that recovery is… You’re going to see a recovery in that sector anytime soon. But people need to fly, you’re going to see traveling, you’re going to see shipping companies.
Frank Curzio: These things are all going to bounce back just be patient, there is no rush. There is no rush against this market again, I don’t benefit by saying that since I sell newsletters with stocks, but we’ve been ahead of this, you want to stay ahead of it and start focusing on those names that look attractive. For me I just told you the ones I’m screening for, I’m going to post a lot of this stuff to my subscribers. If you want to subscribe, go to our website curzioresearch.com. Again, we’re getting lots and lots of signups which is really, really cool, but I’m going to get you guys perfectly prepared to make a fortune off of this thing. We’re in it together and again, I just want to continue to stay ahead of this.
Frank Curzio: Okay, guys, if you want to learn more about me, about our services, go to Curzio Research. Also I have a 14 page, actually it’s not 14 pages, it’s 19 pages, isn’t that crazy? That’s how much writing I’ve been doing. I wrote like three 19 page reports in a row in the past three weeks, but we have a full report online that tells you everything you need to know about the coronavirus. You’re even going to see the sectors I told you to avoid and things that we said in there, it’s going to be really, really cool, but that’s absolutely for free if you want to go there.
Frank Curzio: Also, if you can, go to our Curzio Research YouTube page, I’m doing live videos every day for like 2, 3, 4 minutes or so. Just giving you an update on the markets is what I’m talking about and that all goes to the Curzio Research YouTube page. And you can also find videos of my media appearances I’ve done in the past, presentations at conferences, just different things there, but we have all the video there and that’s starting to really, really pick up, we’re getting a lot of subscribers to that because video is in now, video is the biggest thing and people love that live stuff. So you can go there just by subscribing to our Curzio Research YouTube page, which is absolutely for free or if you want the daily fix and me just ranting about things all day and giving you updates, you can also follow me on Twitter @frankcurzio.
Frank Curzio: Again, all those are free guys, all those things are free that I just mentioned. So feel free to subscribe, you get to learn more about us. And the goal here is for you to get comfortable enough when you do subscribe to our products long-term. And that’s how we build a business a brand and credibility. So guys, you can stay patient here, you’re going to see a lot of thousand point moves in the market, so definitely not done with this vault, Teddy is going to be all over the place. But the word of the day, the word of the week and the word of the month, just be patient here. It’s going to be an opportunity to buy. I hope you guys find that spot but it’s not right now. Let’s just be a little patient. So thanks so much for listening. I really appreciate all your support guys, love the emails coming in. Thank you so much. I’m glad a lot of people save money. Very, very happy. Thank you so much for those emails. Again, I really, really appreciate it and I’ll see you guys in seven days. Take care.
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