🗞 Need Your Cash?

WHILE YOU POUR THE JOE… ☕️
Avocado Business

Have you noticed how most avocados are now coming in a little weird? They feel and look as beaten up as anyone who went against Mike Tyson in his prime.

There's a reason why avocados are not as great as they used to be. It's all because of the government's childish obsession with the environment (our oil industry is dead because of this, so we now depend on China and Russia). 📉 

New US regulations stopping the deforestation of new acres to make avocados are hindering Mexico's $3 billion-a-year avocado export industry.

This sparked a conflict between the drug cartels, who have a stake in the avocado farms, and two American hostages who were investigating the area.

So, we can reasonably expect to see avocados' price increase in the next few quarters.

Speaking of higher prices, let's get on with today's email 📧…

MONEY SHIFTS
Not All Banks Are the Same

Interest rate shifts tend to change banking stocks in two different directions, depending on the type of bank.

On one side, you have consumer and commercial banks like Bank of America, which did well against corporate banks before the COVID-19 pandemic. Then, you have corporate banks like Goldman Sachs, which completely outperformed during the 2022-2024 period.

This has everything to do with the path interest rates have taken during this period and also with where consumer finance trends (think mortgages and credit cards) have gone.

Check this chart out 👀; it’s the price of Bank of America minus the price of Goldman Sachs; see the difference in relative strength pre and post-COVID?:

Goldman Sachs didn’t do too well when the consumer finance niche was going strong, as Bank of America saw rising profits on interest income and new consumer loans being taken out from everywhere.

After those trends dried up, and markets became volatile due to more liquidity from the Fed and flexible financing rates, allowing mergers and acquisitions (M&A) activity to take off, the picture flipped.

Despite these high interest rates, Goldman Sachs has massively outperformed Bank of America since 2023.

Why the shift?

Markets are forward-looking, so they probably saw the following trend impacting deposits at commercial banks like Bank of America, which ultimately contracted their earning potential.

That’s right. Warren Buffett decided to cut his stake in Bank of America perhaps for these same reasons, and this is why it might not get better even with interest rates on the decline. 📉 

The mortgage market index is at a 1996 low, which means there are no people looking to take on a mortgage for a new home today. Knowing this, building permits have gone down over the year, and housing starts to reflect this bearish view from homebuilders like Toll Brothers.

We even pitched a whole short thesis on the stock, building on the overall state of the industry and why the stock is set to underperform as it is now being discounted against its peers.

So, without new homes to hit the market and no demand to buy the few that come into inventory, the future for Bank of America and its mortgage lending business is looking very clouded.

That doesn’t mean get out of all banking stocks, because Goldman Sachs could be the one to start outperforming once again, especially with lower interest rates pushing the volume and size of M&A activity higher. 📈 

If that made sense, then this should be even easier to digest:

With lower interest rates come lower yields on savings accounts, so depositors will probably withdraw their money and look into better places to put their money to work into.

On the other hand, Goldman Sachs has a consumer investment branch named Ayco, which is one place these former depositors could put their money. 💵 

One catalyst, two different tales, so have your pick.

TRADE OF THE WEEK
We Waited for a Setup, and It’s Here

We pitched our short thesis for Williams Sonoma stock a few weeks ago. Still, we also made it very clear that the time to go in short wasn’t perfect then as we expected the stock to rally back to another significant level.

Today, the stock rallied from roughly $129 at the time of the pitch to $152, for an 18% return 🔥.

This is the price target we set out in the pitch to start considering a short position; here’s what the chart looks like:

Right now, with enough price action and volume to favor a short location, it would be a great idea to start betting against Williams Sonoma.

On the other hand, we could revisit the $152-$155 🎯 area and see a continuation or a quick pivot to the downside.

With this in mind, we will be watching the order flow very closely around these levels, but all other facts remain in this short thesis; here’s a recap:

Lower new orders in the manufacturing PMI for the furniture industry. Remember from our post that this will act as a lower price driver on the demand side, but we still have to cover the supply side to ensure we’re right.

Here’s what supply looks like, higher inventory levels for the furniture industry.

You don’t have to be an economics major to realize that higher inventory with less demand will lead straight to margin compressions, affecting earnings power at Williams Sonoma 📉.

The market also seems to be in line with this thesis, as they are discounting the stock against its peers ahead of any potential weaknesses.

Against companies like Wayfair and RH, Williams Sonoma is trading at a lower forward P/E ratio.

The discount seems to be driven by the low EPS growth forecasts—only 2.3% for the next 12 months, significantly below the industry average.

Here’s another point to keep in mind for Williams Sonoma, it’s inside the latest financials to show weakening inventory states:

Inventory values went from an inflow of $154.7 million last year to a net outflow of $1.4 million this year; that's accounting language for an increase of nearly $156 million more in inventory.

This caused Williams Sonoma's operating cash flow (earning power) to decline by nearly $300 million 📉 over the year.

Guess what? All this new inventory will probably be a loss for the business now that markdowns and liquidation sales have to be made to move it off the shelves.

Ta-da, there is our short for the week. 🫰 

Follow our Twitter account and ensure notifications are turned on to get live updates on when we decide to take on this position and others.

NOW GO AND MAKE IT HAPPEN
Race Against the Machines

I’ve always been a wannabe quant trader, and I’ve learned and done a bit of programming to build long/short and statistical arbitrage models in this fashion.

But this new strategy and world are way too big to compress into just a few models, so today’s book recommendation 📖 is one that I’m currently reading to expand my knowledge further in the area.

It is recommended at many quant hedge funds and trading desks for the big banks, so I figured I’d share it with you and spread the knowledge of computerized trading.

To your success,

G. 🥃