The New Hell Crashing the Stock Market.

oh my gosh s p Global pmis and ISM

services this is a disaster this all

comes after the employment change data

and now we're getting reports that

consumers are starting to flip-flop as

well we had a lot to talk about in this

video and the only thing that's making

it remotely better is that you can get

25 off with short form short form.com

slash meet Kevin more on them later but

listen to this folks ISM Services the

expectation was 54.4 we got 51.2 big

drop on the services index there very

big I mean we were at 55 1

54.4 small drop and then we went boom

off a cliff almost contractionary there

for services remember a number under 50

is contractionary and what does the FED

want to see disinflation in Services

well it's coming but the problem is

how many eps's how many companies

earnings per share are going to get

devastated in the meantime I don't know

that's just the ism Services indicator

now I'm going to give you some examples

of companies in just a moment but ISM

came out along with s p Global Services

today s p Global Services PMI tells us

what we were at 53.8 we were expecting

to be stable at 53.8 no we also missed

52-6 everything came in a little

oopsy-doopsy today mortgage applications

came in worse than expected ADP

employment came in worse than expected

uh we've got the jobs data coming out on

Friday

ah look let's talk about consumers let's

talk about what's going on with

consumption how this could hit EPs and

which companies might start seeing

cutbacks because it's a warning and

these numbers just contribute to that

warning let's go we know consumers make

up over two-thirds of the economy and

one of the things I love paying

attention to is what's happening at the

edges and the fringes what's happening

with poor spending and what's happening

with richer spending because it gives us

an idea of where are people starting to

cut back and there are two areas we're

starting to see cutbacks where

ordinarily you don't want to see them to

keep a good boom bull market going and

in this case we're going to look

specifically at corporations and richer

household spending so let's jump in with

corporations then richer household

spending but first let's understand what

Barons thinks is happening in terms of

corporate spending take a look at this

here's a piece on company c a slow down

ahead and this figure tells the story so

let's take a look at the story that

Barons is suggesting so first companies

are tapping the brakes on Capital

spending as they anticipate cooling

demand that's not great they are

conserving cash as they prepare for a

tougher economic environment that might

be prudent on their part and good news

for shareholders after all good news for

shareholders when a corporation Cuts

back you temporarily see a boost to

operating profits right but what if

they're cutting the potential

investments in their business that

actually let them continue to seek

growth this is actually a very important

thing to consider when you're investing

in stocks is wait a minute it's

fantastic that the company I'm investing

in is cutting their SG a expenses

they're selling General and

administrative expenses but if they're

cutting selling are we potentially

robbing from the future sure growth of

the company to have a higher margin now

during potentially a weaker time and

often the answer is yes now in many

cases there are also companies that just

take advantage of the layoff cycle of a

recessionary environment to get rid of

poor performers this is very normal as

well after all think about it companies

don't want the reputation of firing poor

performers because if people regularly

get fired it makes it harder for a

company to promise job security to new

employees when they come however if a

company can throw up their hands and say

whoa recession sorry man we gotta cut

back we gotta you know we can't even

offer the food we used to offer anymore

sorry we gotta lay off a bunch of people

generally not always okay not always but

often the first people to get laid off

for the poor performers that if a

company had a firing policy would

probably be fired anyway there are a lot

of companies where people would actually

be really hard workers in and they'd

look around and go this is so

frustrating there are other people

putting in 10 percent the effort I do if

they get paid the same amount but the

companies don't have a policy where they

can actually fire people so they wait

for a recessionary cycle and then they

go through the weeding cycle it's not

not saying everybody who's laid off is

affected by that just saying it's a very

common thing that corporations do so in

this same weeding cycle what is Barons

telling us well they're actually saying

that companies may be cutting back on

capex substantially based on the charts

Barons is looking at and that could be a

red flag for companies that sell heavy

equipment or Technologies and systems

used in capex now the first thing that I

think of when I think of heavy equipment

is I think of the Investments that

farmers were making during the

inflationary cycle uh after uh the

pandemic during the supply chain crises

for shipping but also for food like

Farmers for for even wheat after Russia

invaded Ukraine or other food products

that exploded after the pandemic such as

even chicken and so heavy equipment that

goes into farming or industrial

manufacturing or even the processing of

meats I think a lot of that heavy

equipment was purchased and invested in

during the pandemic or Commodities Bull

Run cycles and that may get rained in

now so I'm looking caterpillar John

Deere as potential red flags here but I

also scratched my head and wonder what

about asml are they going to produce

less chip manufacturing equipment well

Barons actually gives us a little bit of

insight into this analysts expect

aggregate compacts for companies on the

S P 1500 index to rise about seven

percent just over one trillion dollars

this year according to Citigroup that's

down from a 21 increase in 2020 two

that's about a one-third as much growth

and it really kind of matches inflation

it is expected to rise just two percent

in 2024. now this I think is interesting

one of the biggest things that I

personally have learned during this

cycle is that things take a lot longer

than normal to adjust it takes a lot

longer than you'd expect for the market

to bottom and for things like inflation

to actually go away that patience is

frustrating but it's also good for

planning because if we're at the

beginning of 2022 and we're thinking all

right recession's coming within the next

six months but it actually potentially

takes two years it'd be good to plan for

that potential heads up now weakness is

expected in more economically sensitive

sectors or those that see sales rise and

fall with demand economic demand the

consumer discretionary sector which

includes retail restaurants and hotels

is likely to see capex explain a drop

rather by three percent this year now

that's interesting because retail

restaurants hotels and the like which

would include Airlines would make you

wonder wait a minute is it possible that

that booming segment where jobs and

wages are growing so strongly in retail

restaurants Airlines hotels hospitality

is it possible that those companies are

going to rain back their expenditures on

coffee machines new stoves uh you know

new equipment for their airplanes

whatever as they try to maintain profit

margins and as they start seeing

competition at the top where they can't

raise prices anymore and the answer to

this is likely yes quick note before we

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there on the website consider for

example what Darden the uh company that

runs uh Olive Garden for example is

doing they're talking almost solely

about efficiency and productivity and

doing more with less back a year ago all

they were doing was bragging about how

they could raise prices this

conversation a narrative has completely

turned on its head now all of a sudden

this the companies are realizing they're

in a situation where they're looking at

the scoreboard and they're going uh oh

lost the lead that's not good they don't

want to lose a lead they want to stay

ahead but they don't have BB anymore

they're not pricing power so what do

they do they stop investing in their

business and new equipment to try to

maintain margins to appease their

shareholders

excuse me that is really borrowing from

the future and giving to today because

if you don't continue to reinvest in

your business your sales will probably

suffer in the future it's one of the

reasons I'm personally bearish on on

retail and hospitality and travel I

understand there's a boom in that now

but I'm bearish on it because I don't

think it'll last in fact before we

continue with this Barons piece I can

tell you that there are already red

flags that some of these sectors are

starting to get hit look at this here is

a piece from Bloomberg talking about

hotel rooms over 500 a night are too

much even for Rich Travelers and they

talk about here this may be a reflection

of diminishing consumer confidence that

inflated prices have not been

accompanied by a proportionate increase

in service quality see this actually

directly relates to the Barons piece and

the argument that I'm making where

companies are starting to cut back to

maintain whatever margins they have they

can't raise prices any more than they

already have but then people are going

what the hell I'm paying a premium and

you all aren't even keeping up with

expenditures and investments into your

own business the service is actually

getting worse in certain cases despite

you paying a premium for certain

products the results come during what

should be one of the busiest periods for

travel booking March is when people

start finalizing summer plans and early

birds get a jump on year-end holiday

reservations okay however some 69

percent of poll participants said their

maximum budget per hotel room was 500

while 24 were willing to spend a

thousand dollars still five percent set

their limit at two thousand and two

percent were willing to spend three

thousand respondents include Traders

portfolio managers senior managers and

Retail investors uh although 500 to 1000

might seem high the range eliminates the

fanciest hotels in major markets okay so

they kind of give a little bit of a

breakdown here of of this survey and

here is where they suggest a difference

I'm always interested in the Delta the

difference of what's going on the

results of the survey suggest that

luxury hotels restaurants and Airlines

will face increasingly irritated

customers or consumers this summer I

don't even want to talk about how

disgusting uh uh some hotels have gotten

in that it's covid's over and they're

still saying yup tip sorry no room

service you know covert and I'm like

this is yeah it's crazy anyway

uh bank failures fast inflation elevated

mortgage payments and the softening

labor market especially in the high

income sector such as Tech could see

tourists keep discretionary spending in

check this is a shift we wrote a little

note here this is a shift uh from what

we heard from American Express where

individuals were still spending through

the recession that was in the American

Express last quarter earnings club and

American Express appeals heavily to

white collar and and higher income

individuals so what's important about

this well what's important is we're

starting to see complaints at the margin

at sort of the right side of the right

tail maybe the higher income tale where

people are starting to go okay

starting to run out of money here it's

starting to have to pull back in my

opinion that's negative not just for the

companies that would be investing in

capex like we were talking about the

hotels or Airline manufacturers but it's

also a red flag that not only are we

going to start seeing some of that

softening at the lower consumer end

where we're probably going to see most

of the softening in most of the hip but

we're starting at the margin to see some

hit to that discretionary higher income

phase and that's something to pay

attention to as well this is why I

always encourage people make sure you

have some kind of side hustle where

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if you want to make YouTube videos the

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stream yard it's been a lifesaver for me

for the past few years especially since

I'm traveling so much there's this

mentioned here in Bloomberg that retail

investors see positive Airline share

drivers but institutional and

professional investors actually think

the airlines are going to get hit pretty

hard based on a lack of potential capex

spending that we're starting to see at

some of the airlines going back over

here to Barons look at this the reason

companies are watching they're big

ticket spending is because they're

preparing for more muted demand and

profits you know there used to be this

story uh that uh uh that my

father-in-law used to tell me he goes

Hey Kevin you know there's this uh

there's uh this story about uh this

father who ran an antique shop off the

highway and uh and the antique shop was

doing very very well it was like 2021

right the antique shop is killing it

it's got growth its income is going up

everything's fantastic it's spending

money on Advertising it's growing it's

going great

and then the son whose college educated

says well Dad don't you realize we're

going into a recession you should cut

back and so the father-in-law says oh no

uh or the father said we're going into a

recession that's that's terrible well we

better cut our spending let's let's cut

our spending on that billboard that we

have at the corner of the freeway that

says Exit here to our antique store

let's let's not spend the thousand bucks

a month anymore on that billboard

because we need to prepare for the

recession and so they canceled the

billboard

sure enough people don't come to the

Antique store anymore because now the

billboard is gone and all of a sudden

income falls for the store The Father's

like my gosh son you were right we're

going into a recession

and the point of the story is to argue

that good Lord you know some of of the

recessionary impact of the economy that

we're in can very much be

self-fulfilling when businesses cut

their cap X spending they can induce

their own recession now this is exactly

why uh and I try to be really neutral

here I'm just going to put my cards on

the table and go the reason I selected

the cards that I did is because I think

the cards that I chose the stocks that I

chose are basically businesses that not

only have pricing power but are going to

continue to invest in capex and growing

their businesses during the recession

whereas other businesses are cutting so

I think Consumer Staples restaurant

retail Hospitality all of those uh and

even the Industrials like the Johnson

and Johnsons the 3ms I think they're all

looking at

all of them because their cell

self-inducing basically their own

recession whereas I think the companies

that are not are first of all the ones

getting the stemi checks but second of

all the ones that are basically the

growth companies of the next decade the

energies the chips uh certain electric

vehicle manufacturers right those are

the ones I think have pricing power

because first of all they're getting

massive stemi checks from uh the

government that really helps you

continue to spend and if you continue to

spend you continue to grow and you don't

self-induce your recession think about

it for a moment if you're that antique

store except instead of selling antiques

you sell solar inverters

and the government's like hey don't cut

back on spending here's billions of

dollars here's a fire hose of stemi

checks please keep investing in your

business and spending spending spending

those businesses can be like all right

[Laughter]

like I hate to call it like stupid proof

because obviously I can't guarantee it

but I'm just saying if I could shake

people and go come on it's obvious go

where the stimmy chicks are going

uh anyway so let's keep going with this

Barons piece here and then we got to get

to that corporate lash-up the reason

companies are watching Big Ticket

spending is because they're preparing

for you to demand and profits the

federal reserve's interest rate hike

started last year but usually reduced

demand and inflation with a delay so

companies have only begun responding as

they reduce large Investments once they

see the beginnings of Destruction to

demand and sales in fact city data shows

that in the past few months banks have

tightened their belts on lending as a

result of consumer and business credit

worsening what should curb demand now

I'm actually surprised that we've

actually started seeing some tightening

on this because the banking crisis

according to NatWest and many banks

hasn't really started yet but then again

they're talking about the past few

months so it is it is true that we have

seen if if the line is down like if I

invert this usually tightening credit

standards is an upline but if you invert

it it just psychologically makes a

little bit more sense like less

availability of credit the credit

tightening has kind of been doing this

anyway I think there's this anticipate

patient that the bank crisis would lead

to more of a drop off but that hasn't

happened yet but yes overall larger

banks have been tightening over the last

year uh okay so this reinforces

stagnating earnings growth concerns

stagnation is oftentimes what leads the

stock market to turn red the good news

though is according to Barons the stock

market has already reflected much of the

economic challenges and the s p 1500

while above its low of the bear Market

is still down 14 from late 2021's record

high the other good piece of news for

stock investors is that lower capex

means companies have more flexibility as

to what they can do with their cash they

can return more cash to shareholders

through dividends and BuyBacks this by

the way I think is a mistake

I really think it's a mistake for

corporations to give more dividends

right now they should be investing more

of their businesses but that's okay I

still invest in some businesses that do

BuyBacks as well look at end face for

example which amplify shareholder

Returns the s p 1500 free cash flow is

expected to gain nine percent this year

because of reduced capex that's fine but

what's that going to do to return to

earnings next year the point is that

investors should expect weak demand

going forward but that doesn't mean

completely shy away from the stock

market fine but what do we want to keep

in mind going forward and where's the

CEO lash out well the first thing that I

would keep in mind is and it meant

alluded to it earlier and I wanted to

give you my opinion on I was initially

thinking okay caterpillar John Deere but

what about asml I think because of the

chips Act and the massive amount of

factories that are going to be built in

the next few years and the fact that

there's like a two-year wait to get a

lot of this industrial equipment I think

companies like asml are actually going

to be just fine thanks to this this

massive inflationary stimulus checks uh

that are coming to not only electric

vehicles solar and such but chips

specifically well it's kind of wild but

now I'm starting to get nervous and not

just about Staples but I'm starting to

get nervous about industrial

manufacturing equipment manufacturers I

still have hope for Aerospace because in

Aerospace you still have supply chain

lags but if that catches up everything

is going to get hit and as long as we go

in the shallower session hopefully the

growthiest of the companies still do

well but then you also have ai and the

quote AI arms race look at that it's

literally on CNBC right now the AI arms

race okay you have them coming for your

profit margins as well it's like oh my

gosh it's becoming a challenging time to

invest but that's why my opinion is

looking for pricing power stocks PP

style stocks where you're basically

looking at investing in the pickaxes in

my opinion that's chips and energy and

that's because they're getting the fire

hose of the stemi checks so learn more

about pricing power stocks or other

information like my actively managed ETF

by going to meet kevin.com right next to

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thanks so much