🗞 Between the Lines

WHILE YOU POUR THE JOE… ☕️
Can You Hear Them Knocking?

The United States has over $36 trillion in debt, which is not an issue in itself, given that we print the currency in which this debt is denominated and also print the debt itself.

The problem we haven’t ever faced is the level of interest payments this debt is now carrying. If you study history, primarily financial and economic history, you’ll see a common trend in why the Dutch empire fell to the British and why the British fell to us.

It’s all about the interest on rising debt, which is also being used for negative ROI activities, which put us even more in debt. The turning point, however, usually comes when this interest payment level surpasses the nation’s defense budget.

The nation’s enemies know this, and so they start making moves on trade routes, technology, and other areas knowing the leading power barely has the money to cover its defense budgets to protect these routes and technologies.

Which is why you see China making a move on all those fronts.

Speaking of making a move, let’s get on with today’s email…

MAKE IT MAKE SENSE
I Don’t Know Rick

If you’re too young to get this meme, congratulations on getting your wealth creation path started this early.

Anyways

We’re talking about the FOMC meeting this week. The FedWatch tool now prices in a 96.4% chance of a 25bps rate cut.

However, if the chances are really this high, there are asset classes that are just not moving the way they’re supposed to.

Take bonds, for example. Through the $TLT ETF, bonds are the ultimate rate-sensitive asset class to track during this rate cut cycle, among others we’ll cover next.

Remember that if bond prices fall, yields move up, which is contrary to what should happen during a rate cut cycle.

Unless..

The market thinks that a rate cut is premature right now and will cause a reinflation theme for the economy moving forward, that’s 50% chance in our view.

The other 50% comes through looking at other rate-sensitive and inflation-sensitive assets so we can make sure.

Look at gold’s pullback here. Shouldn’t gold rally to new all-time highs if the theme is, in fact, an inflation resurgence?

Now we think that the premiums for gold are falling due to the war in Ukraine being relatively resolved now that Trump will take office shortly, so gold’s demand as a safe haven might be falling.

Still, as we covered in Friday’s post on the commitment of traders report, commercial dealers are now net short and just keep dumping gold. At some point, this has to be more than just a war de-escalation trade, right?

The $KRE $ETF tracks small regional bank prices.

As rates come down, small regional banks should be some of the first to rally. Yet, they’re off their 52-week high significantly, and the only reason they rallied was the Trump election on November 4th, when everything rallied.

Now the tide is going back, and you can really see that the $KRF is struggling to keep its high levels here. That’s the second asset class that tells us this won’t be an inflation theme but something else.

The same can be said about Small-Cap stocks through the $IWM ETF tracking the Russell 2000 index.

Small businesses, like regional banks, should be doing nothing but rallying hard here, as they are also highly interest rate sensitive.

Yet, they’re also giving up their highs like it’s hot bread, why?

Because, ladies and gentlemen, we’re not going into inflation; we’re headed into a recession.

If you caught the Bloomberg segment on this guy, then you’ll know a few things.

He’s calling for portfolio managers to go into the best risk-adjusted returns stocks, and from my time at Goldman, this essentially means those that will likely bottom and rally in the next 3-6 months.

This previous post leads to all of the sectors we’re watching for this dynamic.

But, let’s move on.

He also said that today’s S&P 500 is pricing in a 5% GDP growth for 2025, in other words, he’s saying the market is overvalued right now, like 50% downside overvalued.

Why? Well, GDP is driven by three things mostly:

• Inflation

• Manufacturing PMI

• Services PMI

All three are coming down, so we might see a lower GDP growth rate in 2025, making the S&P subject to a severe selloff unless the Fed’s plan is to bring us into hyperinflation so that GDP actually grows…

TRADE OF THE WEEK
The Chicken Man

Remember our pitch on $FMC from last week?

Well, we got to digging into the PPI a little more, you know the whole egg prices rallying like crazy and all that.

We found an interesting setup in one of the main egg suppliers in the United States, CalMaine Foods ($CALM).

First, a fair warning: This stock might have gotten away from us, but there’s still hope.

Let us explain why..

If, in fact, the market pulls back on the FOMC meeting, either by disappointing the markets or cancelling rate cuts for now, then we might see this company pull back to that alert level of $98.75.

Still high, as we ideally want to buy it closer to $90, but still a good place to start looking into it.

Now that you have an idea of the ranges we’re searching for, here’s the thesis behind this stock pick:

Look at that massive drop in EPS for 2026…

All while revenue slows, but not enough to justify such a large decline in earnings, and we think we know where analysts are coming from here.

Remember that fertilizer costs are coming down, and pretty much everything else in the agriculture space, except for eggs.

Now that has to be fixed at some point, and egg prices need to normalize, which of course will take a hit on CalMaine’s margins.

But

At this point we do think that analysts are exaggerating a bit, which could set up the stock for a relatively easy earnings beat, sending it to new highs again.

The market is thinking along the same lines here it seems:

Even though EPS are supposed to contract by nearly 60% for 2026, the market is still willing to pay DOUBLE the average forward P/E ratio for this stock and its future earnings.

So, overstated decline? Seems like it.

The only other two comparables in this chicken and egg business are $POST and $TSN, out of which we think $TSN could be a great turnaround stock at the right price.

We’ll make a post on $TSN if it hits, but for now focus on $CALM.

When the stock pulls back inevitably on normalized egg prices, we think their market share will become the best selling point in this analysts' miscalculation.

There aren’t too many analysts covering this stock in the first place, only two right now. That means the new ratings will probably take a back seat as far as priority, but we’ll be ready to buy it when the price is right.

Will you?

NOW GO AND MAKE IT HAPPEN
3-D Chess

We can’t mention this book enough because it’s often called the bible of aftermarket analysis, where you can connect the dots on all the asset classes and what their relationships mean to the broader economy.

Today’s book recommendation 📖 goes hand in hand with Friday’s, if you can read them both over one weekend, we promise you will never look at financial markets the same way again.

To your success,

G. 🥃