The Farther We Fall, the Higher Our Profit Potential Goes

by Andrew Zatlin January 27, 2023 11:00 am ET

On Tuesday, I told you that the market believes the worst is over...

But that it was sorely mistaken.

Today, let me tell you why we haven't reached the bottom yet...

And how you can use that knowledge to position yourself for profits.

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

The Farther We Fall, the Higher Our Profit Potential Goes

Welcome to Part 2 of our look at a critical question: Has the stock market truly bottomed out?

To get caught up (and learn why the stock market thinks the worst is over), check out Part 1 here. Then, get ready for today's installment.

You see, I told you that the market wasn't seeing the whole picture – it was overlooking key factors. So let me explain what it's missing and why things are likely to get worse before they get better.

Two Reasons the Market is Wrong

The market's distorted view can be explained for two reasons:

The data it's looking at is old.
It's never really doing a deep dive into the information it has.

Meanwhile, I'm focused on the most current data. And here at Moneyball Economics, deep dives are my specialty.

Nobody is Buying Anything

The market believes that economic activity and consumer spending remains robust. But that's not the case.

Consider manufacturing company 3M (MMM), for example. Recently, CEO Mike Roman announced the following with respect to the company's earnings:

"The slower-than-expected growth was due to rapid declines in consumer-facing markets – a dynamic that accelerated in December."

It was the mention of December that caught my eye. You see, the market is basing its forecasts on data from November. But this more recent announcement shows that companies are still falling short of earnings expectations.

Part of the reason they're missing their marks is simple: Nobody's buying anything! Let me show you...

Simple Supply and Demand

If you're a business looking to buy goods, you'll likely need to have them shipped across the ocean. (America buys from China, for example.) So companies need to rent container ships to make that happen.

The thing is, as you can see in this chart, the price of renting container ships has fallen to pre-Covid levels:

Why so cheap? Because there's a high supply and low demand for containers. U.S. consumers and companies are buying significantly less stuff. And the impact is being felt worldwide.

Here's cargo activity in Hong Kong:

As you can see, it's collapsed – so has activity at a port in Long Beach, California:

But the pullback in spending isn't just impacting shipping...

The Ripple Effect

Remember, the U.S. is deliberately trying to cause a recession in the homebuilding industry. It's raising mortgage rates to cool off the market. And guess what? It's working – big time.

Take a look at this chart for the number of homebuilding permits:

In order to build a home, you need a permit. But look at the sudden drop: The number of permits filed for homebuilding in December 2022 was 30% lower than December 2021. We're close to 2019 levels.

And keep in mind, when you're operating at 2019 levels, you have to staff at 2019 levels. And that means layoffs.

In response to weak earnings, 3M announced 2,500 layoffs. And you've undoubtedly seen the headlines about layoffs in Big Tech.

Even if companies aren't laying people off, they're certainly scaling back on hiring. Here's hiring for logistics company J.B. Hunt (JBHT):

Big Picture

Let's recap:

Based on the latest data, companies and consumers are continuing to slow things down.

Demand is falling, earnings are coming up short, and layoffs are spreading. If the market thought the worst was over, it's out of touch. We have yet to reach the bottom.

What can we do as investors in the meantime?

To start, keep an eye out. If the Federal Reserve is suddenly shocked by the worsening economic data, it could cut rates sooner. And rate cuts will trigger a falling dollar, which is good for certain companies.

Another option? Join Moneyball "Pro," where I'll reveal an investment opportunity that's set up so that the further the economy falls, the greater your profit potential is.

We're in it to win it. Zatlin out.