🗞 RSVP: Let's Get High

WHILE YOU POUR THE JOE… ☕️
Bipolar

You can’t really blame us for critiquing this, as it came less than a day after we told you Friday’s NFP was as fraudulent as they came.

If the economy is so strong and these industry giants are so comfortable with how earnings are going, then why the layoffs? 📉 

Oh boy, are we in for a massive surprise revision?

Speaking of being in for a surprise, let’s get on with today’s email 📧…

DIPLOMATIC RELATIONSHIPS
This is My Quant

Actually, no. I am my quant. Until Max gets trained in the algorithms and code that we run in the background, then he’ll be my quant.

This is the dollar index $DXY in white vs the $TLT bond ETF in orange. Notice how their price action always tends to deviate against one another before converging?

Well, this time is no different. If there’s any difference today, it is that the spread has reached its widest level since 2023, which also happens to be exactly when bonds bottomed. 👀 

Here ,let me show you in a cleaner format:

If history is any guide, and if you read our previous post as to why we think the dollar will sell off causing a bond rally, then you know why we’ve been buying even more bonds lately. 💰️ 

Okay, so with this in mind, let’s break down what the market is thinking right now.

• Bonds at 4.8% signal higher inflation for longer, yet we have lower PPI and a 26-month contraction in real employment / manufacturing PMI.

• The dollar will reach even higher levels from here and crash bonds because inflation makes the dollar stronger (?).

• We will have no recession, just inflation or stagflation, which you know is not the case after reading this post.

If the dollar vs bonds pending convergence doesn’t convince you, let me show you this relationship here:

This time around we have bonds in orange and crude oil futures in white.

That red line below is their correlation, and we have a -65% cutoff where markets typically tend to swing hard, causing a S&P 500 rally or crash. 🤷‍♂️ 

Screenshot this moving forward so you know what to expect:

When Correlations between Bonds / Crude oil = -65% or less:

• Bonds down + Oil up = S&P 500 selloff (E.g. October 2023)

• Bonds up + Oil down = S&P 500 rally (E.g. December 2023)

Alright, enough of a cheat sheet here. You now have two choices from here, either oil sells off ad bonds rally (crashing the S&P 500). Or, oil keeps rallying and bonds crash (Then S&P 500 rallies).

But then we have this little puppy right here:

Bonds in orange again, and gold futures in white.

Okay, so their correlation is swinging back to a positive top, yet gold remains at its elevated levels. This means either gold sells off and bonds rally, or bonds stay flat and gold sells off.

Either way, they need to converge.

Here’s what I think will happen though…

I think gold will sell off 📉 as the war and inflation premium subside, helping the bonds case. At the same time, though, oil could rally because of a dollar selloff, sending manufacturing back into expansion along with China’s 3-month PMI expansion.

Which in this case we would get a bond rally. 🔥 

Recap:

• Gold selloff due to these regimes compared to bonds.

• Oil rallies as dollar crashes to boost manufacturing activity reflected in recent oil rallies, backed by China already.

• Bonds rally as the dollar crashes, and as the market comes back to its senses with regards to inflation and a potential recession.

Now go make some money. 🫰 

TRADE OF THE WEEK
Risk/Reward

So you remember how in our manufacturing PMI breakdown post, we landed on the electrical equipment industry as being a clear long candidate?

Well, we’ve gone through our stock-picking process and landed on Axcelis Technologies. This underrated name provides manufacturing and implementation services to the semiconductor industry, which isn’t our favorite, but hey.

We figured our dislike of the semiconductor bubble will be washed away by the recent accumulation in Axcelis stock:

This is the market profile for the entire 2024 and so far into 2025 for the stock, notice how at the bottom distribution of $69-$78 there was nearly as much volume as the VPOC range of $110-$112?

This is typically a sign of accumulation going on, a setup we’ve given you time and time again over the past couple of months for crazy upside potential. 📈 

And that’s exactly where we would be looking to go long this stock, especially after these ratios showed up on the comp sheet:

Here are the main selling points for us, even though the stock trades at a steep forward P/E discount (typically a no-go), the EPS growth projections of 33.8% are at par with the rest of the peer group.

Yet, the price action is way dislocated, at 44% of its 52-week high compared to a 75.4% average. Then the market is paying a fair value on a P/B and P/S basis, so we think the forward P/E has been wrongly compressed here.

Will there be a situation where the underlying EPS jump way more than the market’s expectations? Maybe so, which is why analysts see this much upside (140.2%) 🔥:

And then we figured, let's see if these guys are at all exposed to the whole China chip embargo here, which, of course, will see its resolution under a Trump administration, which seems to be more tolerating of global trade than the media makes it to be.

It turns out that most of their revenue comes from China, so of course, the market is beating down on them. 🙄 

And you know what Buffett says about when others are fearful…

NOW GO AND MAKE IT HAPPEN
Encyclopedia

Speaking of trade wars and chip embargos, here’s a book that took me from knowing nothing about the history of semiconductors and the biggest players to identifying the industry's future.

All in a single week, it’s that easy of a read; check out today’s book recommendation 📖.

To your success,

G. 🥃