Wall Street Unplugged
Episode: 985December 20, 2022

Why Nike’s earnings are critical for growth investors

Nike storefront

Apparel giant Nike (NKE) will report its latest earnings this afternoon. I explain why these results will give us a critical look at how consumers are holding up heading into 2023… and provide an updated glimpse at the company’s biggest growth drivers: China and the metaverse. I also highlight how Nike’s results could set up a solid trading opportunity.

Banking titan Wells Fargo (WFC) just agreed to pay $3.7 billion in fines for screwing over 16 million customers. This is a prime example of why everyone hates Wall Street. I break down the charges… and why I’m no longer bullish on the banking sector. 

I’ve been pounding the table about how investors need to prepare for major volatility as the economy heads into a recession… And Genia Turanova’s Moneyflow Trader is the perfect way to take advantage of a bear market. We’ve discounted this service to make sure everyone can afford to follow Genia’s put-buying strategy, which is designed to make you a fortune as stock prices tumble.

Inside this episode:
Transcript

Wall Street Unplugged | 985

Why Nike’s earnings are critical for growth investors

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 20th. 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. Getting close to the holidays. Hopefully, all of you have done your shopping because, like an idiot, I went shopping on Saturday with my kids to buy my wife a couple things from them, and I’ve never ever seen one of the malls that we go to in Jacksonville more packed than it was. We couldn’t even get off the highway to get to the mall, which is a mile, and they have entrances, certain entrances, four or five of them as you’re going down the street. You couldn’t even get to any of them. It’s how crowded it was. It’s insane. Anyway, going to have some fun this week with podcasts because next week, we’re going to be off giving my whole team off. They deserve it. They worked their asses off this year, and a tough year with the markets.

Frank Curzio: And during this week, I want to have a little bit of fun, a little bit of education, share how I analyze things a little bit. I always get questions on this because there’s not a ton going on right now other than a couple things. There’s a big announcement by Wells Fargo, a massive fine they’re going to pay, which I’ll cover in a second, which I couldn’t believe it when I read it. Not just the amount, but exactly what they’re paying the fines for. Holy shit. And Nike. So, Nike is reporting after the close today. I always tell you, you shouldn’t really buy a company ahead of earnings because you really don’t… It’s a coin flip, sometimes. Sometimes it’s a coin flip. But other times, you could really get, if you’re doing the homework, you can get a good gauge on which way this is going to work, whether it’s going to go higher or lower.

Frank Curzio: Sometimes it really… I don’t want to say doesn’t depend on the numbers, but the expectations are so low heading into accord that the stock is probably going to rise even if the report in line or misses a little bit, you’re not going to see a massive decline. However, if that company does report better than expected results, it’s possible that you can see a 10, 15% increase in the stock right after they report, which could be the case for Nike. Because expectations are the lowest I’ve ever seen for this company, and something I followed for a long time, something I covered for a long time. I’ve always said that the king of manipulating earnings legally with buybacks through China to the dollar. You could take a lot of that stuff out, and they would’ve missed a lot of earnings in the past. They used to bust their chops a lot.

Frank Curzio: They’re just great at using the system to inflate their earnings. Well, when you have inflation, you have massive inventory. China’s shut off, and now you have the dollar going against you, which this quarter, it’s been in their favor a little bit. As the dollar goes higher, you have more overseas profits that hurt you more. They can’t manipulate earnings as much. So, you’re seeing a company that reported not-so-great results last couple of quarters, the stock did go up. But after a couple weeks later, it wound up crashing all the way down in Lowe’s. And that’s what we’re trading now. Pretty close to it. It’s off the lows a little bit, but it’s down from 170 to a 100. So, let me break this down for you and see if you guys want to do anything, the time you get this, you might not have time to do it anyway, but maybe a good tray is after they report, I think we could set up a nice trade here for this company that you could make money on.

Frank Curzio: Also, Nike is the bellwether. When you listen to conference calls, it’s not always about that company, specifically where we’re going to learn a lot about Nike. I’ll cover that in a second. But we’re also going to learn a lot about what’s going on in so many areas of the market, so many other retailers based on this quarter. And it could get an indication of what we’re going to see come January because most of the Christmas shopping has already been done. Now, let’s break it down. So, you look at Nike, down 35% year-to-date. So, underperforming the S&P 500 by 16%. That tells me expectations are super low, especially for the greatest sports power company in the world, which they are. Everybody always competes and says they’re a Nike killer every single time 100% of the time. Nike, even if they get crushed by Under Armour for a little while, they get crushed by Adidas or Puma for a little while, they always come back and destroy everybody. That’s what they do, Nike. And now’s a period where the whole industry is really pulling back.

Frank Curzio: Would you be buying this stock? I don’t know, let’s break it down. Because if you’re looking at earnings, the expectations, those earnings coming out after the close today, they revised sharply lower into the quarter just like most stocks. Nike, the stock has also been trading down for five straight days. So, expectations are low. Also, this huge interest in the weekly, this is December 23rd, this for the next couple days, the 96 puts is trading a little over a 100 right now. So, they expire in a few days. So, someone’s betting big that they’re going to miss the quarter and the stock’s going to fall at least 5% from these levels, which is asking a lot considering how much it’s gone down the past five days. Although the entire market has probably gone down the past five days. So, this quarter is extremely important. It’s going to tell us if Nike addresses inventory concerns, which were up incredibly, massive surprise. Two quarters ago, they’re up 23% and everyone was like, “Oh my god, I can’t believe they’re up that much.”

Frank Curzio: We saw Walmart and Target able to get rid of inventory right away when they reported those horrible quarters where their stock fell by the most percentage, one day percentage since the 87 market crash, and this was about three, four quarters ago. They were able to get rid of a lot of their inventory. So, last quarter, when they reported three months ago, a lot of people said, “Okay, well they’re going to be able to sell this stuff at a discount, get rid of it, and yeah, they’ll be okay.” Except that didn’t happen. Again, inventory surged massively up 44% year-over-year. It turned out to be $9.7 billion in inventory. How do you get rid of inventory? You have to sell for cheaper prices, hopefully not that cheap. We’ll see. We’re going to see this quarter.

Frank Curzio: But there’s a lot of companies that track this stuff. You look at Dick’s Sporting Goods with sells Nike products through it, 33% Nike outage are being discounted. That’s according to Evercore. At Kohl’s, 90% of Nike goods sold through their store are being discounted, which is on par, believe it or not, for Adidas Under Armour, Puma, because they’re all having problems. But you’re seeing them sell these things at massive discounts, SKU. So, margins are going to be a big story. How much are you selling them for? Did you get more money for them or is it, “Hey, I got to get rid of this crap.” And that’s why we like, the resellers of this stuff, the TJXs, which is stocked on their portfolio, is doing very well like the raw stores, even Burlington. These are names that are getting inventory for cheaper than they’ve ever got it and are able to sell it for good prices.

Frank Curzio: If you go in there and you go into those stores, look at the quality, and how much is changing, and how good the quality of those shirts and all that retail apparel is right now. Because that’s how much inventory everybody else had that they had to get rid of. They have to get rid of it. Because the longer they wait, the less they’re going to be able to charge it because it goes out of season.

Frank Curzio: So, now margins very, very big story. How much? It’s one thing to lower inventory, but did you just throw away the kitchen sink? We’ll see. Okay, so how much did Nike sacrifice in terms of those promotions to clear that inventory? You’re talking about 9.7 billion in inventory up 44% compared to last year. That’s a lot. We need to learn a lot more about that because it could give us an indication of everybody else that has a ton of inventory of how they sold it heading into the holiday season. Also, when it comes to China, Nike is a China stock, it’s a China related stock. It represents more than 20% of total sales. That might not sound like a lot. But more importantly in the past it’s represent 40% of Nike’s profits and China has been shut off. We see the problems that are going on. I have great context there, have given me amazing information.

Frank Curzio: Tell me how a lot of things are still not turned on. People aren’t just going to go back to the Foxconn plants after leaving. It’s not like you go home and you walk a couple blocks. It’s 100s, 1000s of miles that you’re going it. It’s up to Mainland China that these guys are shipped to work there at these places. I saw this firsthand at Foxconn and a lot of other places I visited when I was in China about 10 years ago. They have these massive, massive things set up where they live for months, and then they’ll go back to their homes. So when they left Foxconn, they traveled very, very far to get back to their homes just because China’s like, “Okay, we’re going to ease COVID restrictions.” Doesn’t mean immediately, they’re going to come back.

Frank Curzio: Maybe they might look for something else, but we do know that they were protesting. When you protest in China, you’re risking your life. That’s how terrible the conditions were. It’s not like here, where you could protest and say you hate everybody and everything’s okay, you’re fine. You’re a hero, actually. If you hate America and everything, you’re great, right? You put up on this pedestal these days. There, no. You disappear. It’s crazy. So, for the people who rise up in China, again, things a lot worse there than people expect. They can’t just turn on a button and say, “Okay, China’s good, the policy’s good. No more COVID.” Tough COVID policies in China. It doesn’t really work that way. It takes a long time to work through it to open up these places. But we’re going to get a good indication of what’s going on in China because Nike is a China story.

Frank Curzio: That’s where most of their growth comes from, to China play. So, Nike’s also leveraged to the dollar because of the business they do overseas and that’s what’s really crushed them. And also technology companies in the past few quarters, the dollar goes lower, your profits surge, as the dollar goes higher, which the dollar has surged over the past nine months, it’s results to a massive hit. I covered this in past podcasts. We’re talking billions of dollars for large technology companies. However, since last quarter the dollar has eased a bit. So, they might get a little bit of benefit from the dollar. But again, this is how they manipulated earnings. Again, legally manipulated earnings. I’m not saying that a lot of companies do this. Nike’s just professional in doing this. They’re great. Every time I cover the quarter, I’m like, “How’d they make the quarter?” And it’s amazing how they make the quarter.

Frank Curzio: It’s not difficult to do. It really isn’t. The way that the current accounting standards are. When do you report? When do you report a big contract? Which quarter do you want to push more money into? It’s amazing how Nike continue to beat for year, year out always buy like a little bit. But now, a lot of those things, a lot of those benefits, think we easily manipulate, can’t. A lot of them are gone. So, let’s see what happens. They should get a little bit of benefit from the dollar, but we’re going to learn a lot about China when they report. I also want to hear about the entry into metaverse because Nike with Nike world, here’s a company that could be the model or whatever you want to call it, poster child model for retails entering the metaverse, this is the model to follow these. This is a company that’s generating millions of dollars off the metaverse right now, and these guys are all in.

Frank Curzio: So, you look at Nike World is in Roblox. They use Roblox to set that platform. They filed for seven patents to sell virtual footwear and apparel. They bought a company RTFKT, which is read as artifact, but this was in December they bought this, a non-fungible token studio that produces digital collectibles including virtual sneakers, which is generating millions of dollars for them right now. In its first five months into the metaverse, when they announced this, so this is as of the end of September, they’ve been the metaverse of five. That’s the last report we got. Over 7,000,000 people visited Nike Land, 7,000,000 people. You how many people that is? That is a ton. Think about if you’re starting a website. When you get a 1000 people, you’re starting a business. Seven million people. Again, generating millions of dollars through that artifact brand that they bought.

Frank Curzio: The NFT studio. So, I want to hear more about this. How’s it going in the past couple of months? Because obviously people are buying stuff; they like it, they’re going there. But this is a company that’s all in and everybody’s going to be listening to this, and they are going to be talking about, they should be talking about this on the call. Is it going to move the needle in millions of dollars? No, not when you’re looking to generate 12 billion in the quarter, 12 billion plus for this quarter and last quarter. No, but this could be a huge growth model for the company because this is where we’re going. This is why technology companies are large in the world, are spending tens of billions of dollars to go in on the metaverse. If we take the word metaverse out of it, and just say as a platform that more people are going to use, that’s easy to use, that’s fun that you’re going to own all your content, it makes a lot of sense.

Frank Curzio: When you say metaverse, you think of Facebook changing their name and losing a ton of money, and not a lot of people are going to this and flocking to it as quick as they thought. It’s much, much bigger than that. Not to mention Facebook or Meta is not a true metaverse. It’s a virtual platform where they’re still going to control the data, they’re still going to own everything in it, and that’s not what a metaverse is. That’s not the future of the internet. That’s not what the biggest companies are betting on.

Frank Curzio: So, I’m looking forward to hearing more about that. Now, looking at the quarter expectations I mentioned is super low. So, not only is the stock down from $170 this year to a 100, right? That tells you, “Okay, there’s probably low expectation.” Doesn’t mean you can’t go to 50, right? We saw that with so many different technology companies, where you thought it was a low went lower. Doesn’t mean that. But last quarter, they reported 92 cents in earnings last quarter, and this was on 12.7 billion in revenue last quarter. This quarter Nike’s expected to generate 65 cents a share on 12.6 billion in sales. Which means based on that their margins are, if you generated basically the same revenue, and reported 92 cents in earnings last quarter, and this quarter expecting 65 cents in earnings, you’re telling me that margins are really going to get crushed, right? Right off the bat.

Frank Curzio: But that’s a super low number and definitely not good compared to last year. Because last year, they generated 87 cents a share for the comparable quarter last year, for the quarter they’re going to report today after the close. So, 65 cents a share expectations are really, really low. Now, if I look at the full year expectations, they’re expected to generate $3.13 cents for 2023. I’m going to throw a couple numbers at you, you don’t have to know them. I’m just going to throw this at you and there’s a reason why, okay? So, the $3.13 cents they’re expected for next year, full year to earn, that’s down from $3.75 cents a previous year. So, if we take $3.13 cents, what’s a P/E ratio price divided by earnings, prices around a 100 divided by 3.13. You’re looking at a stock that’s trading at 32 times for what earnings right now, almost double valuation S&P 500.

Frank Curzio: Now, do you deserve that valuation? It is Nike, it’s a great company. They’re largest, they’re the best. But that seems like a very expensive valuation for a company who’s seeing earnings decline year-over-year, and has not figured out their inventory concerns yet. Because if they’re going to remove that massive amount of inventory, you’re going to see margins get crushed which is why that number’s 65 cents. I can’t see at all. If I had a 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 thrown in a 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 flying. So, we had to take a right off an inventory,” whatever. That’s different.

Frank Curzio: I cannot see them earning less than that. 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 and could go up sharply. Doesn’t mean I would hold on Nike for the long term. Because again you want to see those earnings go up, if they’re 65 cents and they report 70 still, it’s a very, very expensive stock based on that number. I mentioned Nike is the best at manipulating its numbers, but it’s not going to be as easy since you’re not seeing that growth from China anymore, you’re not aggressively buying back your stock like you did in the past.

Frank Curzio: So, about five months ago, they came out with a four-year plan to buy back 18 billion worth of stock. So, say a little over $4 billion a year. I’m sure that they purchased some of this already, and even if they didn’t, you’re looking at four and a half billion a year, maybe they can go more in a specific year. I don’t think they will. You don’t announce a four-year plan and buy back $18 billion four-year plan and buy back 12 billion in the first six months. You’re not going to do that, right? But you’re looking at Nike’s market cap at 160 billion, and you look at four billion a year, it’s not enough to move the needle for this company. So, those days of being able to manipulate those earnings higher and using certain tools, and whether it’s overseas China dollar, a lot of those factors are no longer there. So, this is going to be more of a pure number, but a lot to pay attention to.

Frank Curzio: Because again, it’s going to give us a glimpse of the industry, especially apparel and sneakers along with China. What’s going on? These guys know China better than anyone, believe me, better than anyone. We all know how much these kids are getting paid for making sneakers for how many years in China, right, before they change it. But China is massive, right? Free Nike. They’re going to know everything that’s going on. So, we need to hear the commentary of how good is it going to be? Is it back now, or do they expect it to be back to normal in six months from now, three months from now? Let’s hear it from them. But they had to be perfectly honest with it, especially with your stock really getting crushed because every time you set expectations and miss them after you’ve missed those expectations several quarters, people lose faith, and they’re out of your stock forever.

Frank Curzio: That’s why so many they call the kitchen sink core. Just throw everything in there because going forward everything should be better. That’s what you want to see instead of a drag, constantly missing earnings three, four quarters in a row because now everyone who’s a long-term holder who defended you, who are great, they’re going to be like ‘F’ this, I’m out of this stock, I’m done. They’re missing every single quarter. They say they’re not going to miss the quarter, and they miss it. That’s how people look at these things, especially big funds. But just for the record, the last two times Nike reporter earning the same thing happened where the stock fell sharply into the quarter. Earnings were revised lower, they managed to report earnings that were okay, and then the stock ran up for a few weeks, and then what happened? It sold off significantly to a new low.

Frank Curzio: So, you got that? So the stock… So I wouldn’t be surprised, they report earnings, you going to see the same pattern in stock, could pop a lot. Let’s see… Unless they throw in a kitchen sink quarter because expectations are solo. So, all they have to do is meet that 65, which should be a joke to them to meet. Should be very easy to meet that number if revenue’s coming at 12.5 billion. If they meet that number with expectations solo, you’re probably going to see the company pop. You might see a little bit of short covering, especially people betting get on option market buy inputs over the next for it to fall the next couple days. So, you could see this thing, this thing pops 3%, 4%, you’ll see it up 10% tomorrow because you’re going to see a lot of short cover.

Frank Curzio: However, I wouldn’t stay in this company long-term because that’s been the pattern, sell off into this report a decent number that’s okay beating, beating those low expectations, the stock goes higher, and then after a couple weeks it falls off a cliff. So, I would wait. I would think they’re going to beat, the stock’s going to go higher. That’s the pattern that we’ve seen. But that’s how I look at companies going to earning. Again, it’s always a coin flip, but I like it when expectations are totally low annihilated. Everyone’s expecting the worst from this stock. It’s been down for five straight days. It’s down tremendously from its high. We all know about the margin concerns, we all know about the inventory concerns, and we all know about the China concerns. A lot of that could be baked in here. Again, it is still trading over 30 times forward earnings, but very low expectations for this company heading into quarter, which means as a trade, you probably could see this company go higher after they report, as long as they don’t completely bomb the quarter.

Frank Curzio: But again, I would use that if the stock goes higher to buy long dated puts. Because I do not like buying a company whose earnings are declining significantly year-over-year, down over 20% and they’re trading at a multiple that’s twice the S&P 500. To me, that doesn’t make sense. These are the companies you have to be careful of over the next nine months, 12 months, heading into 2023. These expensive valuations where earnings have been lowered and they beat that revised expectation, the stock goes up. There’s a lot of names like this. Some other names are trading at the Intels, IBMs, a lot of these names are trading 15, 17 times forward earnings, that’s not a lot. But at 30 times forward earnings, which is still seen a lot of technology companies at those levels, even though they’re down significantly off their highs, it doesn’t mean that you should go bottom fishing here.

Frank Curzio: They’re still very, very expensive. I don’t know if they’re going to meet those numbers going forward. I don’t know, especially over the next couple of quarters. That’s why buying puts is the greatest strategy. Long data puts, it’s been a great strategy. We’ve got a ton of people into our Moneyflow Trader product. We’ve discounted significantly because I know you’re going to be thankful and be long-term clients on me for the next 20 years by being able to be in this product. Because it’s not just protecting yourself because people hate protect and hedge. Those are the words that aren’t exciting. But you can make an absolute fortune as these stocks get crushed along with being long, the companies in your portfolio that you like, and riding this out over the long term. It’s a perfect strategy for the market we’re going to see in 2023 and likely 2024.

Frank Curzio: That’s why Genia’s been absolutely killing it time and time again. Look how much the market has fallen off again. Again, every time we get positive data, whatever it’s going to go up. And then, people are going to realize, holy shit, we’re going to have a recession. My bullish thesis is for demand to fall off a cliff, the unemployment go through the roof, and for us to have a recession. That’s the bullish thesis. That’s your bet on stops going higher is based on that thesis. That’s what happens. That’s what the Fed has to do to control inflation. They have to destroy demand. And when you realize that going into next year, how much demand’s going to be destroyed, look at the housing market.

Frank Curzio: You’re going to see retailers, you’re going to see industry by industry, by industry. We saw with the autos; we saw with the semis. It’s going to get worse before it gets better because the Fed’s not there to lift you up anymore. Which means a lot of companies that are trading at these expensive valuations, it’s going to be nearly impossible to generate the earnings and that earnings growth to support those high valuations when you no longer have the Fed keeping rates at zero and flood the market with money, along with China being the growth engine of the world, which is not really growing right now.

Frank Curzio: So, be very careful. Probably open up an opportunity to buy long dated puts later on if the stock does go up, that would be the trade. But we could see a little bit of pop early on. Let’s see if I’m right, and I’ll cover it. But that’s how I look at a company going in. If I’m going to buy it ahead of earnings or blow it, I want to see what the expectations are. Expectations are super low. Meaning that they don’t have to report a great quarter, just an inline quarter for this stock to pop higher. I like those odds as a trade. But if it does pop higher, I think it’s going to be temporary. Again, I can’t see this company sustaining those strong earnings of seen earnings growth over the next couple quarters. I just can’t see it. They have too many headwinds and leverage to the wrong markets like China, like apparel, inventory concerns, margins are going to contract.

Frank Curzio: So, it’s probably not going to be a pretty 2023 for Nike. Now, I want to cover one more story, which is Wells Fargo. Came in this morning, got fined 3.7 billion. That is a huge number. They’re fined by the Consumer Financial Protection Bureau. Why? This is interesting because if you’re looking at our page on YouTube, so if you’re looking at YouTube, we’re going to bring this up and show you guys, okay? That’s for free if you want to follow us. So, let me see if I could blow this up a little bit more. So, Wells Fargo paid 3.7 billion for widespread mismanagement of auto loans, mortgages and deposit accounts. Listen to some of this stuff. Unlawfully repossessed vehicles and bungled borrower accounts, improperly denied mortgage modifications during at least seven year period the bank improperly denied 1000s of mortgage loan modifications, which in some cases led to Wells Fargo’s customers losing their homes to wrongful foreclosures, illegal charge of surprise overdraft fees? Just decided to charge them, unlawfully froze customer accounts and misrepresented fee waivers.

Frank Curzio: The bank froze more than 1,000,000 consumer accounts based on faulty automated filters determining that there may have been fraudulent deposits even when it could have taken other actions that would’ve not harmed customers. I’m not too sure what the definition of fraud is. But when you’re charging your customers more money and banging them out and doing this stuff, and we’re talking about 16 million customers. So, if you’re looking at the penalties, it’s 1.7 billion in penalties. They’re going to be paid to the Consumer Financial Protection Bureau, the CFPB, right, two billion to the customers that they screwed over. But it looks like this is just the beginning of these fines where it’s going to be over $5 billion in total when all is said and done, when you really look under, and talk to the right people on this.

Frank Curzio: You wonder why people hate Wall Street and people hate banks, and here it is. This is 16 million customers that you froze accounts for. You illegally charge fees on. How long did it take for them to actually come to this where this probably happened over the past few years, not to mention this happened during COVID, where that could have affected your ability to get a PPP loan for your business. Maybe you were forced to shut down your business because of your bank illegally charging you these fees and closing and freezing your account. If I’m looking at the banking sector in general, if you notice I did it about face on this, we’re very bullish on banks and saying, “Listen, a high interest rates are great for this industry.” However, when you’re seeing us about to go into a recession, and I want to be clear on this because I think when people look at the banks and say they’re more capitalized and more stronger than they’ve ever been, especially heading into recession, you’re right, they are.

Frank Curzio: It doesn’t mean that we’re not going to have a recession, our banks can’t go down 30% and the market can’t collapse at 40%. It just means we’re not going to have a credit crisis. Which, and since the 40s, how many have we seen it? We’ve seen the credit crisis. We’ve seen what? One long-term capital manager was a separate thing, but really a total credit crisis where our government was asleep at the wheel. In 2008, they had no idea how much these companies will leverage, how much they would leverage to the housing market. It wasn’t just subprime. Subprime wouldn’t have hurt them that bit. It’s the leveraging, the massive leveraging of subprime loans, right? Synthetic of synthetic subprime loans that nobody really knew off balance sheet, all this crap.

Frank Curzio: Again, now that we’re monitoring banks, they are much stronger. But doesn’t mean that you can’t see these things come down sharply. Because if you look at how they generated money over the past 10 years with rates at zero, again, they generate higher net interest margins based on higher rates and how much they’re able to lend out to consumers. So, that part of the business going to explode. But they had to figure out ways with zero interest rates of how to generate money. That was all through fees. Maybe that led to Wells Fargo overcharging people to try to make earnings or whatever. But now, they got caught. And how is this not a bigger story where it’s being mentioned here and there, but illegally charging clients, 16 million of them? Holy cow, this isn’t like a mistake or an error. This is obviously done on purpose because it’s impacting auto loans, it’s your bank deposits, and your freezing assets, overdraft fees. This is everything altogether, and 3.7 billion is a lot of money.

Frank Curzio: Of course, they have a slush fund to pay that like every bank and brokerage does, major brokerage, private equity. And probably got the heads-up a while ago that how much around how much this is going to be, this way they know how much to put aside. But if you’re looking at this, it’s crazy. And looking at the banks, listen again, we understand they’re well capitalized, and that’s what we hear. So, we’re not going to see a credit crisis, but a deep recession, where these companies were generating tons of fees, a lot of that business is going to come back to M&A. We see M&A, not really a few companies here and there. The consulting, the trading, the lending, mortgages, the amount of fees revolves around a mortgage, right? That has gone down considerably.

Frank Curzio: But do you think it’s going to get much better in 2023 where rates are, and the Fed’s still raising rates probably through March and going to keep them there for the rest of the year. You think that they’re going to generate a lot through their fee business? Probably not. They’ll do well with rates. But I would be very careful of the banking industry, especially the local mid-cap ones, small cap ones that have huge exposure to homes. Because if you look at home prices, they’re going to come down sharply. They’re going to come sharply down sharply everywhere. Texas, Nevada, Florida may hold up a little bit better. States that people are flocking to that you still see in a lot of people in due to safety concerns and other areas, and favorable tax treatment, state tax, and things like that. I forget how many states… I think there’s seven of them altogether. But even those you’re seeing prices come down.

Frank Curzio: But when you have companies like BlackRock going all in on apartment buildings, these massive hedge funds spending tens of billions of dollars. And now, you’re seeing redemptions across the board where people want their money back and they can’t send more than 2% of the total assets back per month at 5% for the quarter. But what is that going to result in? It’s going to result in this constant selling. We got to continue to raise money, we got to sell some of these assets to give back some of the money. And when you’re forced to sell an asset, you don’t need to be genius to know when you’re forced to sell it. You’re not going to get top price for it, unless you’re an NBA franchise or something like that. I love when they kick these guys off for something that they did and these guys wound up selling their franchises for two billion and three billion because there’s such demand, and it’s a limited supply of these teams that people are lined up, a billion lined up to buy them and to pay fortune for them.

Frank Curzio: But most of the time when you have to sell an asset, you’re forced, you got to sell at a much lower price, especially with the housing market as it’s deteriorating. Those banks have exposure to those homes, be careful. You could see them fall further. But we had bank exposure, we don’t have bank exposure or not much, but I think they’re going to get hit. I think they’re going to get hit pretty hard, much harder. Even though people are just like, “Well we’re not in a credit crisis.” They’re more capitalized, and they’re going to generate more money because rates are high, but still, the fee part of their business of what they generate so much money from, and you’re cutting that off, let’s see. Let’s see what some of these companies report because it’s going to be interesting for them. But covering the bank sector, these are two things I wanted to cover. Again, these are things that I’m looking at. I know it’s a holiday season. Most of you are shopping, you have family coming, everybody’s traveling.

Frank Curzio: Again, for me, this is why I love to do the research because you see so many things mispriced. Let’s see what Nike comes out after the quarter. I wouldn’t be surprised if earnings come in a little bit better than expected and the stock pops. I would wait a week or two into next year, and it’s probably going to set up a good opportunity to buy a long put on it because I want to see the inventory concerns, I need to see the margins. But more importantly for the industry, guys, it’s what I want to teach you, it’s not just about Nike. It could give us an indication of where demand’s going to be because a lot of these numbers should include Black Friday, and they’re going to be able to see sales right now, which you’re going to talk about in the call if they’re seeing demand, or how this quarter got off to a much better start.

Frank Curzio: This is some of the things you’re going to hear in the quarter, but it’s going to give you a good indication of what a lot of other companies might be seeing right now. Especially if their margins are low, and they said, “Well, the only way we could sell this stuff and get this inventory off of balance sheet is if we significantly low prices.” Look out for retailers. Look out for retailers that reported decent quarters that went up over the past couple months because it could be a disaster for them. And those are the companies that you see 20, 30% declines in a day. Because now expect, unlike Nike where expectations are low, expectations are much higher for these companies because they reported good earnings, and they ran higher into next quarter. If they report weak earnings, those are the ones that get hit by 20, 25% in a day.

Frank Curzio: It happened a lot this past earning season, and it’s going to happen a ton next earning season. And the next two, as long as the Fed continues its tightening policy, and does not lower rates because their job is to destroy demand. That’s their job. That’s what they’re doing. They’re destroying demand. And as you see that, it’s going to destroy more and more as a year goes forward and forward. So companies with these optimistic outlooks, easy to make money off, buy long-dated puts, those are the ones that have high expectations. So, any questions, comments, guys? Hopefully not too many numbers, okay? Just trying to help you guys out, where there’s not a ton of news other than Nike and Wells Fargo. What a disaster. What a shit show. I don’t know what fraud is or whatever, but holy cow, I don’t know how they define fraud and why they’re not calling that fraud, but those penalties are probably going to go over $5 billion. But these are your customers that you’re overcharging illegally, your best customers.

Frank Curzio: So, if you have an account at Wells Fargo, why the hell would you keep your account there when you know that they were illegally overcharging you and did this quarter after quarter? This wasn’t a mistake, this wasn’t a software glitch. This is somebody saying, “Charge them, overcharge them, and we’ll deal with it. We’ll make 10 billion off of it, but we’ll pay a $5 billion fine and we’ll net 5 billion.” That’s what’s going on at this company. This doesn’t just happen. “It was a mistake and it’s our fault.” No, this is intentional when you have that many things, this is intentional. And how anyone can have an account at Wells Fargo blows my mind, especially after this. Big news, it should be getting covered a lot more, and it’s not, but it should. This is the reason why I like buying long dated puts and betting against companies because it gives you a shot to benefit when these companies basically fuck up.

Frank Curzio: Now, it’s your turn to get greedy. When these guys are always greedy and taking you for their money, and all these companies raising prices on you, this is your opportunity when it comes to buying puts for you to say ‘F’ you to the system, and for you to make money. While these companies collapse because they’re not doing the right thing by their customer. You guys know exactly what I’m talking about. There’s a lot of publicly traded companies, there’s a lot of local companies you deal with who’ve raised prices significantly, significantly more than what their costs were. These are the guys that are going to get punished the most going forward. Because people are going to change their spending habits, and people are going to look for stocks and companies that did right by them when things were bad, and Wells Fargo didn’t. Something to look at going to 2023. Again, questions comes from here for you, frank@curzioresearch.com. Thank you all for the support. Again, we’ll be back tomorrow with Daniel. And have some really cool podcasts for the rest of the week heading into the holiday season. I’ll see you guys 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 decision solely on this broadcast. Remember, it’s your money and your responsibility.

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

P.S. Later today in Moneyflow Trader, Genia will reveal a new trade to profit from the chaos in China as it deals with the fallout from its COVID policies…

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