So 2022 is in the books. It's finished right now. it's Sunday about 6 a.m over here starting 2023 with a bang. Now everybody's wondering what's going to happen this year.
Is it going to be as bad as 2022? Is it gonna be better? Is it gonna be worse? And I'm here to offer my opinion because to give you some sort of a factual response: I'm gonna have to be able to travel into the future. And since I don't own a DeLorean at least not one that's equipped with the flux capacitor. And comment below if you got the joke, then I don't have that option. So in the lack of a time traveling machine, I have to kind of guesstimate what happens this year and I'll tell you my opinion straight up.
Now look the way the stock market works and you all know this: It's very correlated to economy. Earnings translate to prices in shares and vice versa. When earnings go down, prices of shares actually go down multiple shrink. We've all seen this happen now.
We had a phenomenal run in 2020 2021. Some of it well, and and mostly that was because of cheap money. Everybody knows that you don't need my channel to figure that out. The FED dumped a lot of money into the system.
Money was cheap, interest rates were very, very low next to zero and that fueled this instead of Incredible Run which we all remember and now it's long gone. Now the question is, can 2023 at least be better than what we've seen in 2022 because everything is down Fang is down. I Mean, look at the fan components, they're all down at least 30 percent S P 500 is down now NASDAQ Everything took a big hit in 2022. Uh, the question is, can this get better? Now You have to understand something.
The way interest rate works is almost kind of comical because they have a double effect on the stock market. As I mentioned before, you know the economy. It decides the earnings of big companies right. If the economy is great, people are spending money and companies are making money.
earnings are great, and if earnings are great, then prices over their stock and shares keep going up and vice versa. Now here's the problem. Interest rates play a double role in this and I'll explain it in a second. It's actually very, very simple.
When the FED started to raise interest rates, you notice what happened in the stock market. It all started going very, very steep down. The reason for this is because interest rates are not only a negative Catalyst in this case for the economy and for you know, the earnings Because money is now more expensive, You know the economy slows down. Earnings drink multiple, shrink, share price shrink.
That is something you already I'm assuming you know from even before watching my videos the the other element that interest rate have is on the way. Wall Street Value stocks. Just the economy here. that works.
If I'm looking at the business, you know whether it's a mom and pop shop or it's a multi-billion dollar conglomerate. The only thing that matters to me as a as a professional evaluator is the cash flows generates in current present time and in future time I Want to basically be able to evaluate how much cash flow this business can generate over the next 5 10, 15 years and based on that, I'm gonna set a price tag on that business. And if it's a public company, then you know the price of each share is basically a derivative of that. If I have you know company valued at 100 million dollars and we have 100 shares then each share is worth 1 million, right? So it's It's not that complicated, but here's the crazy part. when you're looking at cash flows. that's what you got to do. You have to look at cash flow next year. In Two years.
In Three years. The four years and Five years. Six years. Seven years, Eight years, Nine years, Ten years.
Let's go 10 years. So you're looking 10 years into the future trying to guess what the cash flow is going to be. Now the first thing you have to do is first of all, try and guess how much growth in revenues this company will have over the next 10 years because you don't know and if you are going into recessionary time like we are going right now because of elevated interest rates as you just seen in 2022, then your estimates they shrink the interest Is they shrink these estimates instead of me assuming well I think Google is going to grow like 40 a year, right? I Can't say that anymore because of how the economy is looking. When money is expensive, you're not going to see 40 50 growth rate except maybe a Tesla and even that is questionable.
Now that's the first impact that high interest rates have on um, basically on the on share prices. The other part is that even if I'm looking post that element and I'm actually looking at specific I've already generated my predictions and I'm saying Okay So this company is going to generate a hundred in year one and then it's going to grow 30 20, 15 a year for the next 10 years. I've already done that Now The interest rates that we have in the market serve as the tool to Discount these back from the future into the present time. I'm really excited to sound like Bob Zocco said Back to the Future but the interest rates that we have in the market will determine how much of a discount I applied to Future cash flows on today's value.
For example, if I'm saying that Google will generate, you know a hundred dollars, but that hundred dollars is in year ten. So I'm saying in years, then Google will generate a hundred dollars on Revenue. So I have to decide how much this cash flow is translated in present values because Let me Give An example: if I owe you a million dollars today, that I owe you a million dollars today. But if there's a course settlement that says I owe you a million dollars in 10 years and I come up to you and they say hey, I'll owe you a million dollars but it's only due in 10 years, How much would you take today just to settle this right now? But you don't have to wait 10 years. There's no more waiting. No waiting for 10 years. How much will it take today? Now Obviously, we're going to negotiate somewhere in the vicinity of seven hundred thousand dollars. Eight hundred thousand dollars, whatever that may be.
But it's going to be a discounted rate because if I'm not waiting for 10 years and I'm giving you cash today, I'm giving you significantly less than what I owe you for a multitude of reasons. risk management, what not, but mainly because you can take that money. You can put it in the bank or in the stock market, whatever that may be, and that money can generate income for you and that income is actually going to get you that to that million. So that difference is basically how much I need from from a bank or from the stock market to get to a million within 10 years.
And that's the equilibrium point. So let's say that you know I can make about in my estimate I can make 400 000 in 10 years in this market, then I'm going to take 600 right? You get the point. But that decision that discount rate is basically highly derived from the Feds actually interest rate. So when the FED keeps raising the interest rate higher, higher and higher, basically the Assumption for me would be I can get more by putting the money in the bank that I could get last year.
Which means that the present value of these future cash flows is a lot lower and If the Fed actually keeps raising interest rates, Then not only is going to crash the economy even more, not only is going to cause me to reduce my assumptions as far as the growth rate of these companies, I'm looking at it also going to cause me to get a lesser result of current value present value of future cash flows. So that's why you see Wall Street absolutely annihilating these stocks. The fact this 500 everything is getting annihilated because when you elevate interest rates, that's what happens. Your modeling goes into the toilet and every assumptions go to the toilet.
and If the Fed is not lying to you. which I don't think they are And it for the very least, we're going to five percent in 2023 in interest rate. That that means it's not only going to be as bad as 2022, it's going to be probably slightly worse. So at the very least, my optimistic scenario is we're trading sideways in 2023..
of course, I'm talking about the whole year, not specific rallies, but at the very least, we're trading sideways. But there's a good chance we're actually going to go and and hit new lows, but we'll see what happens. I Actually have a phone call soon next video.
By Stock Chat
where the coffee is hot and so is the chat
I wish someone scared my @$$ in nov 2021 out of the market.
Love to see eastern european guys wear Adidas LOL, i'm not sure if they actually like the brand or just play along because it's funny at this point.
I miss you Tom
I got the joke 🙂
Tom has bad news. Must be the first time ever😂looking forward to positive videos someday brother…..
Marty, we need to take Tom back to the future so he can tell YouTube how bad 2023 is going to be!😮
Here's a Tought… Let Say The Stock market isnt bad.. there is noting wrong with it at all.b esides the baks being rigged for mergers with the big boys…. all while there sending out Fear signals to the people so everybody sells.. so THEY can buy back cheaper (and WAAy more) Before the bank merger is complete. and we all go to digital money .. but the big boys got the REAL money that will never fased oud.. Digital dollars is just for the sheeple.. and where atm walkig right in the trap….?
They eventually won't have a choice to pivot. They said they won't let the economy crash and if they overdo it, they'll have to stimulate again one way or another. Rates will cross paths on the chart soon and they can't keep them higher than inflation for very long. Estimates will then reverse course and increase. All things come to pass. Look at the charts, exclude December because of Christmas and New Year spending, inflation is on a steady decline and with time as interest is high, it causes exponential decline, specially if they raise again. Big pocket investors are not putting their buying power cash in banks lol. They have it all waiting and ready for a smart time to start buying back stocks. We are closer to a pivot in the stock market than most may think, it usually happens before rates reverse course. Take into consideration that once the fact that Recession has been with us since the beginning of 2022 and smart money see that it's time to get back in according to the RBI, there is a good chance the pivot will happen at some point just before or after they begin to buy and then the entire population will start to buy again and that won't cause issues with inflation because it will in fact deter spending and encourage investing. A new bull market is in the making, the pressure is building, and it won't be regular people fueling it, it will be big money who have a ton of buying power built up since February 2021. They don't borrow money. It's just a matter of time and that time will come when no one is expecting it. Hence, don't try to time the market…time in the market generally always outperforms.
Cheers Tom
Haha. I always see your headline as bad news. Nothing seems bright ahead. World of pessimistic wins in short term.
We're old lol
I think interest rates are priced in. What is NOT priced in is earnings compression. As soon as we see Q4 or Q1 earnings revised down, we're going to see another leg down.
Looking forward to 365 new clickbait thumbnails this year. Thank you for the bad news, Tom!
1.21 GIGAWATTS!?
Thank you Tom!
It will be yet another awesome year, here on the coast of SoCal………Location, Location, Location, Long Term, Long Term, Long Term…….At this point, Tesla will allow my kids the choice to retire even earlier!😎
T Nash says were going lower that's code for we hit the low! Bullish!! Jokes aside . Thanks for your perspective and Happy New Year!!
Another reason is that the risk free interest rate pulls stock buyers out of the market.
Happy New Year Tom.
Predicting Stock Market 📈, it is mission impossible, IMO.
The stock market is reacting to many factors:
-interest rate is the most important
-unemployment rate
– energy prices.
Geopolitical tensions are having impact on 3 above factor’s.
Example:
If China start to send military assistance to Russia 🇷🇺, then
sanctions could be imposed of China 🇨🇳?
If Secretary General of CCP Jin-Ping Xi will help negotiate peace agreement
between Russia & Ukraine , that would be seeing in the West as a positive move
on international stage.
If this scenario would occur, then energy prices will stabilize.
Inflation will decline, so would interest rate.
This is very important for China 🇨🇳 global trade.
EU & US are not happy with China weak influence on Russia,
which is causing global problems such as energy crisis, food crisis, trade relationship between
West and Asia countries.
I am sure, Beijing is consulting with US regarding steps to be taken
to negotiate peace in Ukraine 🇺🇦.
Mr. Xi is not going to visit a war criminal Putin ,
it would make him look like a partner in crime?
First Russia, needs to end the invasion of Ukraine.
Secondly, make an peaceful agreement with China & US as a guarantor.
Government of Russia 🇷🇺, will be obligated to hand over people who committed
war crimes to ICC( including Vladimir Putin)!
President of Russia 🇷🇺, Vladimir Putin deceived EU, USA & China and now they are
going after him.
EU & USA are asking China for help to sort out the the Russian invasion, I think?
Does it going to impact the market?
Dramatically Yes.
Always the same title.. bad news bad news bad news we are already prepaid for it.. let it drop 100%
How much is this priced in already? I am thinking 5.5% interest rate is already baked in. One other optimistic point of view is after significant minus growth, following year had significant growth.
It’s a good time for long term investors whose investment horizon is 20 to 30 years especially who are holding huge cash position .
Where's Doc Brown when you need him?
Completely agree with what you are saying now, however this was the case last year, the year before that, the year before that etc. It's easy to look pack now hindsight being 20/20 but you should have been looking at these a couple years ago at least and saying is around 0% interest rates for the next 10 years reasonable, which is what investors dumping money into stocks like Tesla, Palantir, honest etc or is a return to historic norms more likely? The historic normal range for fed rates being between 4.5-5%. So, if the most likely scenario was a return from historic lows to the historic norms it never made sense to value companies as they were being valued. Many of us were on channels like this trying to warn folks of this and were shouted down. Sad folks got caught up on the FOMO investing and threw fundamentals out the window. Valuations based on actual fundamentals actually matter, you can justify overpaying for any stock with oie in the sky projections like 40% plus earnings year over year for a decade, which are not practical for any company really especially one that has been around for 20 years already. Lot of companies still have to come down folks, tesla is one of them.
I got the joke about the flux capacitor!
Bro, in the start of 2022, you said that Tesla is the best recession proof stock, please quit the bullshit prections after we all saw that Tesla was the worst performing stock.
Historically the market or economy bottoms first ? Do you know??? I do
@Tom Nash Could one start a business in 2023, writing analyst service reports on why GPT-3.6 based cash flow models are correctly interpreting DCF?
I hope your still buying palinta buddy. Hope they keep stealing everyone's money.
You need 1.1 gigawatts also.
Great Scott! 1.21 gig watts!
Thanks Tom! You are so good at explaining present value and other economic principles. Even though I majored in Economics, I learn from your explanations. Respect to you!