A ‘Formula’ for Preparedness

You’ve heard from ‘Formula382’ before. A longtime Rick’ Picks subscriber, he manages wealth in the Ozarks, using puts and calls aggressively, with a dollop of good timing, to keep clients happy. He has also shown uncanny skill at rotating out of sectors just before they peak. In a recent chat room discussion, Formula wondered whether the recent sharp break in the price of Walmart shares might be a harbinger of trouble – and not just minor trouble, either. He is concerned that when the bull market ends, possibly as soon as spring, it will usher in an economic depression worse than the 1930s. I not only share his pessimism, but also believe that a bust of such magnitude is unavoidable. Here’s the discussion thread from the Trading Room, lightly edited:

Formula382: We’ve all been wondering which stock would lead the market higher now that MSFT has fallen out of bed. Is price action in Walmart perhaps the canary in the coal mine? Is the stock not the largest indicator of overall consumer health? WMT’s dive following the recent earnings report was pretty severe — and fascinating. The company’s CFO expects suppliers to “take price” — i.e., suck up costs associated with inflation and/or tariffs. It turns out WMT doesn’t even factor in the effects of potential tariffs on revenue and earnings. Sounds bonkers to me.

The company’s shares have been trading at a 40 multiple, and Costco’s at a nose-bleed 60! These names historically have traded with multiples in and around the mid- to high-teens, much like the S&P. In short, WMT is commanding the multiple of many tech names with just 4-6% same-store sales growth. And not in a hundred Sundays do I believe that the upper crust of the U.S. is now shopping at Walmart. I live in the town they built and can tell you that although we all get our groceries there, I never set foot in a supercenter, not ever!

Cantaloupe Packers

So what’s changed? You can thimble-rig the perceived value of e-commerce by saying that people picking up at curbside is the equivalent of an online purchase; however, it’s merely shifting the work of picking out cantaloupe and cilantro to some high-school kid who does it for you on the company’s dime. Moreover, when customers pre-order, there’s no chance of an impulse purchase of a new salad dressing or hot-sauce.

Crowngas: I think Costco and Amazon are kings, Formula, and I agree with your point about Walmart’s online pickup. I use it religiously (or did when I lived in the states), and I tell my physical-training clients to use it for grocery pickup to avoid going in and buying “unhealthy products.” I am never an impulsive buyer, just the familiar stuff. As far as my stock-picking goes, AI is the future of technology. And one of these days, a small company in the AI business will become a giant like TSLA and Nvidia. A headline writer will ask, “What would $500 invested in this company be worth today?”

‘Too Optimistic’

Formula382: I would love to be that optimistic about anything, Crown, but I’m in the camp that after this market tops, which may be as soon as this spring, we’re headed for a decade-long or longer Greater Depression. Let me outline what I think we’re headed for, and this is also backdated to include a 5th of a 5th of a 5th final completion wave in the S&P and Dow, which is a 5th wave on the shorter term 2020 low until now. A 5th wave from the 2009 low until now and finally, the LONG-term 5th wave completing from the 1932 lows in the Dow. Based on these wave counts that are all converging, the S&P have either topped or will top in the 6250-6500 range. Once a high is established, we should see a drop of 30-40% in the S&P this year, taking them down to 3,500-4,000. We then spend the next couple of years bouncing between the lows and 5000-6000 before the next major move lower, establishing a lower low near 2,700.

Then a lower high again and a lower low once again until we finally find footing between 1,000-1,700 on the S&Ps, which will likely take us until the year 2035-2040 time frame before the ultimate low is struck. Then we can begin the next secular bull that lasts into the 2080 time frame. Might we see the count reset? Sure, anything is possible. But it’s aligning almost too perfectly [to abort]. In 1942, while war was raging, Ralph Nelson Elliott called for the market to go on a 70+ year tear and top sometime after 2012, an amazing call by any measure.

AI Can’t Save Us

My point here is that not even AI can save us from what’s on the horizon. Heck, it might even be a contributor to the deflation that’s likely to set in. Let’s see what happens if/when the SPX carves out a higher high in the aforementioned ranges, and how the market responds. If we visit the 4K level this summer/fall, everyone better start making plans for how they’re going to survive what’s coming.

JoeyJolt: I appreciate these posts, Formula. I’m especially interested in Elliott Wave Theory framing what is likely in the cards for the markets.

Formula 382: Joey, I’ll try to be more ‘vocal’ in here going forward. I think that if we can get the bigger strokes in our favor, with Rick’s precision, it could be a lethal combination. I’m trying to thread a needle with a chainsaw, and I’ve got my own ‘stuff’ to worry about. But I’m equally, if not more, concerned with the $700M+ my clients have entrusted me with.