Get Bearish & Defensive | The Coming Stock Market -47%.

now we gotta cover what the Bears are

saying and boy ah bloody Morgan Stanley

is back with another one or a buddy from

Morgan Stanley's back with another bear

piece and I love reading what the Bears

have to say because even though I am a

bull at heart and I think the Nike

Swoosh recovery is real I want to pay

attention to what the Bears are up to

because you always got to know what your

enemies are doing it'd be silly to be

blind to what your competition is doing

so what are we gonna do we're gonna look

at this piece right here Morgan Shenley

the bond market is questioning the fed's

Dot Plot basically I'm gonna keep this

one simple for you so the bond market is

pricing in Cuts Jerome Powell per Mike

Wilson Morgan Stanley's analyst who's

the big bear in the office he probably

doesn't have many friends in the office

but who knows anyway he says look the

fat is really explicit that we're not

going to cut rates this year why is the

market cutting in these rates well it's

probably because the bond market is

saying the US economy is either going to

fall into recession or banking stresses

are far from resolved but he actually

missed an argument here and I'd like to

point out where the Bulls could be wrong

and where the Bears could be wrong but

he missed an argument here it is

entirely possible that the market is

pricing at a massive set of rate cuts by

the end of this year because a they're

doing what the FED refuses to do say

that inflation is going to plummet and

rates are going to come down as a result

the FED can't say that because if they

say that inflation won't plummet so

they're in the game they're in a

psychological game whereas the bond

market is not subject to that

psychological game they're actually

putting their money where their mouth is

they're not using their mouth as a

psychological tool to get people to stop

spending money to affect demand in

markets right the bond market is not

only saying either we're going to fall

into recession or banking stresses are

over it's actually threefold either we

go into recession

or banking stresses or inflation is

about to plummet or a combination of all

three of these but the third one is

actually very encouraging because if

inflation goes away and we could cut

back to you know a low interest rate

regime the recession's over people got

enough money to keep spending look at

what happened with Lulu yesterday people

are spending money like they're drunk

people are still spending money like

crazy it's absolutely insane now Morgan

Stanley suggests that you should cut

from Exxon uh and Simon Property Group

and instead on their Best Buy list or

fresh money buy list what is this a

grocery shopping list that sounds lame

they should think of a better list than

that they suggest you add Colgate I had

to look up what CL was because I'm like

who buys Colgate uh but anyway Colgate

and Walmart

I actually think these and and that's

because they're positioning defensively

I bluntly wrote next to that wrong and

the reason I think that's wrong is

because these are exactly the kind of

companies that are going to lose pricing

power in the environment that we're in

right now employee costs go up these

companies disproportionately have a high

employee costs for the amount of Revenue

they have compared to uh you know some

of the high free cash flowing pricing

power stocks that I like again whether

it's in busy if I just combined and

phase and Nvidia and phase Nvidia Taiwan

semiconductors Tesla Apple those

companies pricing power Walmart come on

that stock has done phenomenally over

the last year because it's a defensive

play but that's a trade and when the

fundamentals come through that trade

will fade away my opinion okay but you

already know that uh so they of course

suggest that earnings are going to fall

going into the recession but listen to

this he actually says we focused we had

a macro discussion and we focused the

session on credit availability which

credit availability is actually still

remaining strong uh which is shocking in

the short term labor market dynamics a

lot more labor Supply we know that

earnings guidance slowly going down

we'll look at the chart in a moment and

pricing power I love that they talked

about pricing power and we'll look at

some of his conclusions on this so what

did we have over here we're seeing

another quarter where estimates are

being lowered that's fine so earnings

are decelerating now Morgan Stanley's

Mike Wilson believes that earnings

markdowns have a lot more to go he

believes the consensus is that earnings

are going to basically do this at the S

P 500 or that this is what the consensus

estimates are but he actually believes

we're going to be on much more of this

downslope so he really thinks earnings

for S P 500 companies are going to fall

a lot more than expected or is priced in

I agree with him just not on all stocks

pricing power stocks I think Will

Survive now uh Morgan Stanley's Mike

Wilson suggests that look when inflation

happens you can everybody can raise

pricing you have a lot more operating

leverage but the problem is when

inflation goes down you're operating

leverage in other words how much you're

able to increase sales above your

operating expenses Opex like sales and

gen goes up maybe five percent but

Revenue goes up 15 positive operating

leverage but what happens in a

disinflationary environment well you

might see revenues decline five percent

but your operating expenses go up 15

exactly I actually think that's exactly

what's going to happen to Staples not

pricing power stocks now we could

actually be aligned and that he might be

thinking look maybe it's the S P 500

that gets burned

I agree with that because there are a

lot of Staples in the s p 500. now uh

something that I thought was very

interesting is I purposely wanted to see

what chat GPT would say about this so we

ran chat GPT what does inflation do to

operating leverage and they talk about

exactly this about how inflation can

increase operating leverage however it's

worth noting uh that inflation can also

infect a company's pricing power which

could affect operating leverage for

example if a company has strong pricing

power and can pass on inflationary

effects to customers it may be able to

maintain profit margins the question

though is do you get pricing power

solely because of inflation I believe

the answer is every company gets pricing

power because of inflation the real

challenge is which companies maintain

pricing power when that inflation goes

away and that's what Mike Wilson is

warning of so he thinks when that

inflation goes away the easy pricing

power all the easy PP goes away way now

you enter the bear Market where only the

companies with true pricing power

survive the recession

Mike Wilson suggests that Equity risk

premiums right now are way too low to

justify being in stocks now I wrote on

this that yields potentially manipulate

this and that's because right now the

risk-free rate is so high because of the

inflation we're fighting and Mike Wilson

did only go back to about 2008 here so I

have a little bit of an asterisk on on

his bare thesis here and I do also think

that he has a point though he has this

point that says it's possible Equity

investors are simply looking ahead

towards the next bailout and the next

stimulus regime he might be right about

that he might be right that Equity

markets are looking towards basically

the FED just to cut to zero and maybe we

start getting stimulus checks again not

just for the chips act not just for EVS

and energy but also potentially expanded

on employment or otherwise maybe now

Baron in mind that breadth has been

exceptionally weak as large cap stocks

are holding up the averages right now

basically thinks look if large caps

start falling it's over because those

are the only things holding up the S P

500 right now now he also makes an

argument here about real estate briefly

that we do not think that real estate is

going to suffer the pain that we saw in

the global financial crisis or the

Savings and Loan crisis and specifically

while they'll be they'll still be

weakness in lending and mortgages

ultimately we believe that a real estate

won't suffer with the exception of

retail as much as it previously had in

the past however credit cards still

running hot and in my opinion that

reiterates that people are on it in

terms of well spending through this

recession now my goal was to end this

but I want to add some more commentary

before the Bell so we're going to listen

to the bell and then I want to add some

more commentary in my thesis on this

[Applause]

ever go against Nike because it's a

great man you Texas but wow these guys

are well ahead of nights let's get the

opening belt here CNBC real-time

exchange at the big board pentagram

structured Asset Management celebrating

the recent listing of its first ETF nice

screen welcome welcome to a green open

everyone okay so I gotta get to the

course member live stream but what are

my opinions on what Morgan Stanley is

saying here or or specifically Mike

Wilson he has a point that yes in a

traditional recession wouldn't it make

sense to go to Staples especially

Walmart yes and that's why people have

gone to Walmart over the last year

because the idea is that poor people

stop shopping at Target and fancy places

they go to Walmart richer people stop

spending at Target and Whole Foods they

go to Walmart and that actually has been

happening he is correct about that but

in my opinion being correct about that

is actually looking into hindsight well

we look at Walmart stock over the last

year they've done very well they're only

down

1.73 over the last year they've done

extremely well in terms of holding up

shareholder value the problem is in my

opinion this is a company that is

actually looking at pain ahead take a

look at the following we're going to

look at their fundies really quick so

this is the last time I looked at the

fundamentals on Walmart uh which

actually this was not the last time this

is an old one this is from July I want

to go ahead and pull up a more recent uh

Fundy on Walmart but we could look at

this really quickly so we looked at

gross margin actually still being very

incredible for Walmart sitting around 23

percent gross net margins sitting around

four percent which was fantastic we'll

get a recent report over here they have

lots of uh let's see what do we wrote

over here lots of cost and little cash

is what I wrote they have a lot of

payables now that can tend to be very

normal for a merchandiser and when we

look at their net cash provided by

operating activities though they're

still pumping out somewhere around 9.2

billion dollars in operating cash at the

last six months of 2020 or the first six

months of 2022 when you you take out or

look at just free cash flow they were

sitting at about 1.5 billion dollars of

free cash flow so they got free cash

flow they've been holding up very good

defensive stock but we want to look at

some of their revenues so let's go ahead

and get their last quarterly report and

look at that and we'll jump on over to

the course member livestream so if we go

on over to their last press release

we'll get a little bit more of a look

into Walmart because obviously it's

moving into Colgate and Walmart for a

reason a defensive play the idea is that

eventually if people get rid of all of

their discretionary spending the one

place they'll still go is Walmart it's

not a terrible argument it's a very

traditional recessionary mindset

argument the question really becomes how

deep is the recession going to go are we

going to be in a situation where we keep

this recession going so long that you do

end up killing people buying new iPhones

or new cars or whatever maybe so

sales at Walmart year over year up 7.4

percent membership down three percent

but you're still up seven point four

percent in sales which is great but keep

in mind inflation roughly matches that

so if you look at a real adjustment of

revenues we're probably actually about

flat for Walmart in terms of growth but

in addition to that you're actually

negative on operating income look at

that 5.5 which means if you inflation

adjusts their operating income they're

probably negative 13 in operating income

year over year I personally believe that

is going to worsen that is going to get

even more difficult that's my thesis

again it's very different from Morgan

Stanley but I believe the following I

believe that companies that do not have

pricing power are going to be companies

like Walmart where basically you're

keeping up with inflation here

but your cost of sales are exploding at

a higher rate and so is your Opex at a

higher rate than you're able to raise

revenues because you don't have pricing

power you're dealing with extremely

price sensitive customers you're not

dealing with price sensitive customers

or as price sensitive customers at Apple

for example or end phase

uh and therefore I think their operating

leverage will go substantially negative

this is actually exactly what we saw

with Chachi PT look at this revenues

what do we have we have revenues up 7.4

but their operating income is actually

down 5.5 it's a little bit of an

oopsy-doopsies and it suggests they have

negative operating leverage which makes

sense in a disinflationary time this is

why I think Mike Wilson is actually

wrong to go into Staples at this point

going into Staples would have been a

great thing January of 2022 in a Nike

Swoosh style recovery it's a terrible

thing to go into my opinion now if we

look at their actual bottom line

uh let's go to net income per comment

share uh net income very nice

percentage-wise increase from last year

that's because of some of the write

Downs they took last year and some

lawsuit losses regarding uh

Pharmaceuticals that they had to uh take

some losses on some some lawsuits and

settlements uh but anyway ignoring that

let's I really I think it's easier just

to compare operating income over here

because this is a little complicated

because of the comparisons of the

different quarters uh but in my opinion

this is not necessarily something that's

super exciting let me look at their cash

flow quickly and then let's look at

Colgate briefly and then we'll jump over

course member live so they actually had

a nice free cash flow though I will give

them that look at that very nice free

cash flow you had if we subtract these

two numbers here you've got about a 12

billion dollar set of free cash flow so

plenty of cash but declining operating

leverage again you would expect that

though so if we go to Colgate investor

relations let's just see if they have

positive Opera trading leverage or not

because that's what our bear here is

suggesting is that earnings are going to

plummet all the growth companies haven't

properly priced in yet all of the pain

that's to come and basically the S P 500

is being propped up by companies like

Microsoft or apple or otherwise and the

real pain is coming

okay so let's look at where he's moving

money too Colgate and Walmart we just

looked at Walmart let's quickly look at

uh Colgate and we have their annual

report right here so this annual report

is just out from them what we're going

to do is we're going to jump over to

there's income statements let's see if

we can find them here income statements

while I look for their income statements

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course check out the buy now play later

options now in the courses on building

your wealth link down below oh what do

we have here Colgate all right so

colgate's revenues let's do this brief

and then jump over to courses remember

live stream so Colgate has net sales

here that have grown

17967 year over year divided by 17421

wow only

3.1 percent growth how do you argue you

have pricing power with 3.1 percent

growth you don't holy smokes and their

costs went up by about 10

9.5 percent increase in cost of goods

sold

so

you are absolutely experiencing

inflation at Colgate your cost of goods

sold are skyrocketing uh and your sales

are barely growing on a real basis

an inflation-adjusted basis you're

massively negative on sales if we look

at operating profit oh it's negative why

would you buy this garbage

uh your your uh uh let's see 28.93

divided by 3332 your negative

uh let's write this here negative

13.1 on operating profit year over year

why would you do this there's no PP this

there's literally zero PP like it's not

even micro PP it's like it's like

negative PP it's it's an inverted PP

it's inside out this is problematic uh

now the crazy thing again is these

staples have actually held up CL let's

see how it is CL stock I don't know I

haven't looked uh but oh look uh let's

just do year over year yeah that's what

I'm saying this is stupid look at that

Colgate negative operating income

negative operating leverage trash the

stock is down 1.8 year over year just

like Walmart why because the Bears the

weenie baby bears are like

uh recession

okay we must move money to defensives

that's because what happens well because

you have money managers who pick up

their phone and their clients are like

I'm worried about a recession and then

the money managers are like

it's okay you're paying me to reallocate

to defensives

we have done so are people really going

to stop buying toothpaste because of a

recession are people gonna stop buying

Walmart uh chocolate bars because of a

recession no of course not don't worry

we have you defensively positioned

but in the long term what's gonna happen

the fundamentals are going to Shone

through and these people are going to

get wrecked

it doesn't make sense it doesn't make

sense

so what do we have over here uh let's

just look at cash flows really quick uh

cash provided by operations that's

decent actually 2.5 bill capex over here

you're at 1.9 bill in free cash flow

it's very good it's a free cash flowing

business but it's because they're

milking an existing business their

actual operating leverage in their PP is

negative I wouldn't want to go near it

like what would you rather have okay

this is this is your choice right now

this I I really want you to think about

this keep in mind this is the same stuff

that I do with course members in our

live streams daily which I got to get to

uh and so if you're not a course member

you're missing out on this kind of

perspective all right you pay once you

get lifetime access all right here's the

thing would you rather defensives

which are down one percent year over

year you know what I'll be generous and

so I'll say you're you're at a two

percent discount year over year you have

negative real revenues you have negative

operating leverage basically uh you have

uh negative PP but you do have free cash

flow a free cash flow is positive that's

true okay would you rather that

or do you go over here and you look at

uh pricing power growth stocks where you

have a negative 20 year-over-year

discount you have positive real Revenue

you have positive operating uh leverage

in a dis inflationary time as well

which basically means you have positive

PP uh and your free cash flow positive

so what would you rather no discount and

negative real revenues or discount and

positive real revenues with operating

leverage and PP the only reason those

stocks are doing well right now is

because it's a trade it's a trade if you

want to trade it that's fine you can

play the cyclical trades but if you're

looking for a long-term portfolio

building hashtag not personalized

Financial advice some people get mad

they're like why do Finance channels

save this is not Financial but they're

obviously talking about financial advice

this could be Financial advice

but it's not personal financial advice

there's a big difference I don't know

what your situation is if you have a

hundred dollars to your name should you

go YOLO at all into Tesla that's

different from somebody who's got 10

million dollars should you YOLO 100 in

the test a very different question right

people get mad about the stupidest

things mostly because they don't

understand legal definition but anyway

which one makes more sense in my opinion

it should be obvious okay baby

that's my opinion now with that said I

gotta take care of my course members so

I'm gonna hop on over because usually we

do the bell with them and you got a

little bit of a special freebie over

here now we're gonna see and answer all

the questions they have why is Donald

Trump a money manager

it's gonna be huge okay because

we like PB we want to grab it by the PB

and we want huge

baby

that's what we won baby

[Music]

I'm gonna go now

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