This is going to be a dramatic earnings week and we have to talk about exactly who's going to be reporting and what their reporting is going to do to the market. And then we need to walk through some new data in regards to where the ever elusive stock market bottom will be. We have some stocks that, despite recent volatility, are at historically overbought values, and some stocks that are at historically oversold values. You're going to want to see the data that I'm presenting in this video before you make any rash decisions this week.

There are huge similarities between what we are seeing right now and what we've seen in the past. Okay, first, you've got big players from nearly every sector reporting earnings. Some of the most notable ones are: Ibm on Monday, Johnson and Johnson, Microsoft, Verizon, Amex 3m on Tuesday Wednesday you got Boeing, Tesla, A T, Las Vegas Sands, Anthem, Intel Lending Club Thursday you got Mastercard, Apple, Mcdonald's, Visa, Jet Blue, the hood of Robin, And then Friday you got Chevron, Caterpillar, and Synchrony. In other words, you got leaders in the big tech sector, the manufacturing sector, the telecom sector, credit services, travel, energy, and more.

My expectation is that most companies are going to be reporting healthy to very healthy quarters from Q4 of 2021, but that guidance is going to be trending lower and lower, with perhaps the notable midterm exception being energy segments. We made some videos towards the end of the year talking about how I've been turning very, very bearish on big tech and value stocks, specifically because you've had so much rotation into them. Despite 2022 basically being a year where you're going to see consumers have less money, not more money. Obviously, the justification for mass scale rotation into those two categories was based on trying to find a safe haven or something with pricing power during a massive inflationary environment.

But the more that we actually go through earnings and the more that we actually hear guidance, the more that I feel that this inflation narrative is distracting from the bigger problem, which is that companies are reporting lower and lower guidance and lower and lower expectations. Obviously, that's partially intertwined with costs. for example, Jpmorgan reporting that they have to pay higher salaries, many companies reporting higher input costs, but the difference between 2021 and 2022 is that in 2021, you had costs rising very, very fast. But because there was so much consumer demand, those costs could just be passed right onto the consumer.

So in many cases you saw companies actually increase their profit margin despite rising input costs. But for the most part, we're seeing a lot of companies and the overall sentiment trending in the wrong direction for consumer demand. It's increasingly looking like 2022 is going to be a year of dwindling consumer demand, lower economic growth, and companies are addressing that by forecasting lower and lower guidance. On Friday, we also talked about the threats of a strong dollar.

In comparison to other currency valuations around the globe, a strong dollar screws our domestic companies out of international competitiveness, which Netflix themselves stated in their own way very nicely in their latest earnings report that led the rest of the market to selling off. These are factors that companies have only really begun to put guidance on, but on the flip side it should also cause this year, tons of cheap imports to flow into the Us market, as as foreign importers try to take advantage of currency arbitrage, which of course is a deflationary pressure. Now when you're looking at the market, you're looking at the prospect of lower guidance across the board in many, many sectors, and then on top of that, you have the fud around. Well, we're going to have companies having less and less growth, while also the prospect of the Fed going and being less accommodative in terms of monetary policy.

Now in reality, I believe if you get past Q1 and Q2 and companies are starting to get killed in terms of growth rates and you start seeing really, really deep slowdowns at the same time as deflationary pressures kick in, Well, I believe that the Fed will reverse trajectory very very quickly. it's only taken action to curtail inflation, and the minute that inflation no longer is as hot and companies actually need that accommodative policy, then all of a sudden you get a reversion. and the proof of that is in the last 20 years of monetary policy. So if we do see lower and lower guidance and that come to realization and Q1 and Q2, then the market could certainly take a sigh of relief in terms of rates.

But at the same time, the reason for the dovishness is bad too. You'd be buying a company with worse growth numbers and in a slowing economy, and we'll have to see what companies report this week to see which thesis is correct. But from where I'm sitting right now, I wouldn't be surprised if we get a few more of those Netflix style bombshell drops. There's a few names on this list that could disproportionately kill the market this week if they disappoint.

Microsoft, Tesla, and Apple. Those are three major stocks that big indices have huge exposure to. I think all three had a pretty good fourth quarter, especially Tesla, which beat on deliveries. But where you want to be very, very careful is when looking at the guidance.

I would not be surprised, especially if you're talking about Apple and Hardware of Sales if you start seeing that cool off in a massive way. I also would not be shocked if Microsoft guides lower and in terms of Tesla, they don't do quarterly guidance, but they do do full year guidance with Tesla. you have more of a supply problem than you have a demand problem, and they have done a very, very good job at getting the supply chain shortages under control. so I wouldn't be surprised that their guidance is actually fairly good.

All right Now, we're not in the kind of market that holds strong reports and keeps valuation pumps. We're in a market that you get good news. The market's like good. Now it's time to sell.

and if you get bad news terrible, it's time to panic, sell everything out, and then short sell to oblivion. And so when you're looking at a lot of these companies that haven't really had that big of a cool off compared to a lot of the rest of the market, then you have to start thinking, well, hey, there's a risk factor here. This is really the week where you get the big players reporting and you get some real evidence as to where this earnings season is going to take us. So anyways, if I was going to guess what's going to happen, we're going to see companies guiding lower And guiding lower is going to result in actually lower quarters.

You're going to see Gdp growth drop, You're going to see imports expand, and those factors are going to bring down inflationary pressures in maybe three or four months, maybe a little bit later. And by that point when the Fed is deciding whether or not to raise interest rates or become more and more hawkish, it's going to look at that and say, well. employment data is starting to come in. Weak Gdp numbers are coming in, weak businesses are getting bludgeoned, The stock market's doing bad.

Let's go ahead and be more accommodative and reverse the trend, similar to what China has done when the market starts anticipating accommodative policies, which would probably happen somewhere around a month or two of downtrending inflation growth. That's the point at which the market starts looking for cheap areas of the market to plow back into unless big tech and large caps as a whole sell off massively. I believe that a lot of that risk on capital is going to flow right back into the growth sector because it's historically undervalued. Let me show you the evidence.

You look at the valuation of the S P 600 small Cap Index Ford Pe went out of control after the 2020 crash and into early 2021. And then what happened? Well, it dropped dramatically the rest of 2021 and is trading on the lower average end of two decade averages, but more indicative. You look at the Peg ratio, which is arguably more relevant because it allows for a longer term forecasting growth rate. You are now at such a low number that you've surpassed not just the Cova drop the 2018 interest rate hike scare, but you're now in territory of the Great Recession.

There's this narrative that all small cap stocks are just these loser meme stocks that were pumped up and over hyped in 2021 and 2020. And there's this narrative that despite the massive massive selloff that they've already seen that they're still at very very loft evaluations. But the problem is, it's just simply not true when you look at it on a historical basis. when you're actually looking at earnings and revenue growth, you're paying less for forward price to earnings and overall growth than you have since 2008..

don't get me wrong, that doesn't mean they can't go down more or that the market won't continue to sell them off. But if you do want to argue about whether or not something is oversold, just look at this one big important metric. But of course, everything exists in a context, right? You look at forward P E ratios across different market sectors and you can see an insane divergence. This peak line is the 2020 recession.

Notice what happens with Mega Caps and Orange which represent just a few companies alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Nvidia, and Tesla? They drop with everything, and then they substantially outperform in 2020 during the recovery and into 2021. Then you have the mid cap and small cap index in blue sell off huge around the beginning of 2021. As for P E, ratios dropped dramatically and people placed less and less value on the future earnings of these companies because of the inflation scare. But what happens to Mega Caps? Well throughout this period where the market was dramatically discounting forward Pe for small caps and mid caps, you ended up seeing capital rotate to pay more and more for the future earnings of mega Caps.

In other words, the market felt very, very uncomfortable paying forward P E ratios at 20 all the way down to 14 in the small to medium cap market. So it rotated into mega caps with Ford Pes much higher at 30 to 36, so net in effect. We already know this: You saw a massive, massive divergence to a huge degree where you had money panic out of small to mid cap and then over concentrate itself at the very top of the ticket. Which means right now you're in this environment where there's so much froth at the mega cap level and at the same time you're seeing the opposite of froth down.

here. people are in panic mode, there's a huge divergence, and a similar situation happened back in 2016. To 2019, you had small caps and mid caps cool off while mega caps continued seeing more concentration. And then right at the end of that cycle, you finally had mega caps.

Take their breath and they got hit even more than small caps and mid caps because small caps and mid caps had already been seen. discounts on Ford Pes for two plus years. Now again, this time around, the divergence is much, much more severe. which leads me to think that the small to medium cap market may actually bottom before the mega cap and large cap market do.

I don't think we're at the bottom quite yet, but if you really think about this for a second, these are forward P E ratios that you're looking at. So if earnings growth is stunted and companies are guiding lower and lower, what happens? Well, the price has to adjust dramatically downward just to keep the Pe ratios the same. So even if these forward Pe ratios stay historically frothy, the price still has to get bludgeoned to keep up with lower and lower guidance. What about forward price to sales? Many small cap and mid cap companies don't shine in earnings, but shine in sales growth.

Well again, you have this issue where large caps have continued to see the market willing to pay unprecedentedly high forward price to sales ratios, despite the market paying consistently less and less for small to medium caps at lower price to sales. We can talk all day about these statistics, and we can talk about individual companies. But the truth is, it's a lot easier to tell if a stock is undervalued versus if it has bottomed just like a stock can go way way way above a fair value during a bowl cycle. It can go way way below the fair value during the bear cycle.

But if you look at a lot of this data, it suggests that a lot of these small cap companies are at historically oversold values, not historically bubbling values, especially at this point. And it also says that a lot of these big tech companies, a lot of the biggest companies in the market are at historically overvalued values. What you're seeing and you're increasingly seeing people sell everything. but what you are seeing is people still continue to say we should sell Growth Tech.

It doesn't matter how good the company is, we should sell it because what if this gets worse and I would argue if you have a lot of conviction in the stocks that you're playing, the right move isn't to sell, but rather to slowly add more at the end of the day. I would always recommend that people buy, not sell, but buy their highest conviction stocks when they believe that they're undervalued regardless of the macroeconomic condition. If your company is seeing a huge discount because of something that's not going to kill the company in the long run, I would say buy If the catalysts are pretty damn bad. buy it slowly.

You don't have to plow in all at once. It could get deep and deep and deeper, but I believe that a slow and steady approach to buying high conviction companies is going to pay off a lot in the long run. The last thing I do want to mention is how extreme some of these valuation discounts have been. You look at the most extreme area of the growth sector, the venture capital side with nano dimension.

This is a company in the 3d printing space that we used to talk about quite a lot and it's one of the companies that I believe is going to grow very rapidly into the 3d printing segment. It's not just that, I believe that, but the numbers that they're reporting on a business level are confirming that. and they've had an excellent 2021 higher than my expectations. But the stock price has been obliterated.

It's been a disaster. Terrible, terrible performance. But you look at this company and what they have on their balance sheet. you're now at 1.4 billion in total current assets.

and of that 1.1 billion is in straight-up cash cash dollars. And then you look at their market cap. What is it? 800 million dollars? The market thinks that Nndm is worth literally less than the straight-up cash on its balance sheet. The exact board over there could literally decide tomorrow to go and buy up all the shares in their entire market cap.

And you look at the liabilities. You're sitting at 28.5 million in liabilities with over a billion on their balance sheet. Meanwhile, the company reported a 65 quarter over quarter increase in the last report, and based on the trajectory, it looks like it's going to expand rapidly in the upcoming years. And it's not just the stock.

you're seeing this constantly across the growth sector companies that clearly are trading under value based on even the cash they have on their balance sheet or the actual or the actual property that they own. Right now, you're just seeing a systematic and algorithmic selling of anything related to certain characteristics Hyper Growth Arc anything that is forward-looking regardless of the numbers, regardless of the assets that it has, and regardless of what the company even does. Sometimes I like to go on seeking Alpha and they have really, really good consensus analyst opinions and quant ratings showcasing what Wall Street thinks on a stock and showcasing what quant funds think on a stock. Look at their factor grades.

They said Valuation: A for nano dimension it's a great deal. Growth A plus. It's growing fast, Profitability a minus, Better and faster improving the most in the sector. And then you look at that last one Momentum F And because of Momentum F they said the quant rating is sell.

So here's the problem. Most trading happens algorithmically, So you have all these algorithmic traders making decisions just based on the momentum. Right now, the algorithm looks at this and it says okay F in Momentum Short, sell more short, Sell more. Doesn't ask anything about the company and you could tell because again, you're trading below net asset value at first algorithms asked, hey, is this in the growth sector in the innovative tech sector If the answer was yes, sell it and then short it.

Now all they ask is well, is the momentum negative If the answer is yes, then okay, put more negative momentum on it. But the problem is that eventually you get to a point where the market starts waking up that a lot of growth companies aren't really at elevated prices. In some instances, like with this company, you're below actual net asset value, but in others you're in very very low price to sales for how much growth you're going to have in the upcoming years. The minute that the momentum switches and you know what I think is going to cause the momentum to switch in terms of Fed in terms of inflationary reports and so on and so forth, that trend is going to change and the momentum is going to have the opposite effect on the other end.

So anyways, at the end of the day, who knows how long this growth crash is going to take. Who knows how much farther the rest the market is going to fall. But if you want to see some early indications of a bottom for certain sectors, look no further than the indications that were seen in the growth sector, both on a fundamental basis and in terms of a historical valuation basis. As long as people are around to panic, sell, and push these valuations down even lower, there's going to be more incentive for that negative F Momentum to continue and for quant funds to continue making tons of money off shorting.

And in terms of the broader market, there's so much opportunity for big pullbacks as well because of historically overvalued valuations. So you give it some time and some patience and you take strategic entry points in stocks that you believe are very, very undervalued and I believe that you're going to come out very, very ahead over the long run when that's going to be, who knows. But if you like the company and you like the price, I say buy it and buy it slowly. Anyways, that caps off this video.

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