🗞 My Big Short

WHILE YOU POUR THE JOE… ☕️
Fighting Boredom

This is how all traders feel on a three-day weekend like this one, so hopefully, you are fighting boredom with us by eating a nice BBQ and hot dogs.

Otherwise, welcome to investing; it’s boring most of the time, with only a few defining moments throughout the year that get you on the edge of your seat and your heart pumping.

We’ll probably spend our long weekend with a few beers and cigars while discussing the coming week and significant issues that could turn into trading or investing opportunities.

Speaking of joining the conversation, let’s get on with today’s email 📧…

KNOW WHERE YOU STAND
Millennials and Gen-Z Ain’t the Entitled Ones

This is where the federal budget went into last year, and that tells you exactly where you stand depending on your age and where the country will be headed next.

Notice that the largest items are probably the most failed segments of the United States:

• Medicare and Medicaid

• Social Security

Let me break it down for you: Over $3 trillion 💵 is being used to satisfy promises made to our seniors, taking money from the future seniors of the nation; talk about a Ponzi scheme.

Here's the problem: While the United States has over $35 trillion in official reported debt, when you account for today's Social Security and Medicare obligations, the debt is actually more like $218 trillion.

Now if this were a business, I'd get the hell out of it, fast.

You know why? The government thinks that raising taxes will satisfy these obligations, which will only accelerate the disaster.

If you raise taxes, millionaires and enterprises leave, taking jobs and innovation with them. So, the government has to make up the backdrop by creating B.S. jobs like gas station attendants and sidewalk wipers.

I saw lots of those throughout Europe, so let's not make the same mistakes, okay?

Note that nowhere in that chart are investments or budgets for education and technology; it is all going toward entitlements for the elderly, who are arguably MUCH better off than the younger generation.

That meme is more than just a meme; it’s a reality.

Have you noticed that the older generation has it all together? They worked a full-time job for a few years, bought a house, and had 3 to 4 kids on average to boost population growth. They are now retiring at their beach house, filled with weekend boating and fishing.

Meanwhile, the current generation is struggling to make ends meet, home prices and mortgages have become suicide rather than a dream, and retiring is now a big shrug of a question, whereas before, it was a given.

Here’s some data to show you what we mean:

To no surprise, older people with homes and a sizeable investment account, not to mention no student loan debts, have seen their net worths more than double in the past 30 odd years. 📈

The younger generation, unable to own a home, fund retirement investment accounts properly, and carry massive amounts of student loan debt, saw their net worths underperform inflation and, in some cases, contract 📉.

So, how do we fix this? I wish I had good news for you. Still, unless the government stops investing most of its money into elderly entitlements, we won’t see a better tomorrow.

The alternative? As bad as it sounds, try to get wealthy in the United States, avoid mortgage and student loans and car debt as much as you can, and then get off the grid with your investments and savings somewhere you’re better treated.

Personally, at InvestiBrew, most of us agree that European nations with a golden visa program are the best option, with some Asian nations being a good plan B.

TRADE OF THE QUARTER
One-Way Street

Stanley Druckenmiller, who is responsible for over 90% of George Soros's returns, has a simple way of analyzing the market.

He has outperformed pretty much every investor out there, even Warren Buffett. The thing is, he is less famous since he has made it a point to keep his processes a secret.

But I was able to uncover one of them through hours of interviews and whitepapers on Druckenmiller, and I’m giving it to you for free.

He has beaten the Federal Reserve at its own game, accurately predicting business and capital cycles by closely watching the leading and lagging industries.

So, we did the same and came up with these leaders:

• Housing

• Trucking

• Retail

What are we looking for in these three? Well, any rate of EPS growth and forward P/E valuations is to be below the S&P 500 average, as it would mean signs of no confidence coming from the overall market.

Notice that within the building industry, homebuilding stocks are doing the worst. Markets see an average growth of only 11% for earnings in those stocks, and they trade at a 10.9x forward P/E, 40% below the S&P 500’s 18.0x valuation.

What this means is that the market is not too confident on the future of homebuilding stocks, and that makes a lot of sense to us.

Why? Well, take a look at the leading real estate indicators, such as building permits and housing starts.

Housing starts are down by over 8.5% on the year 🏠️, and it doesn’t look like they’re going to start back up any time soon. That’s not a good sign at all, since it means builders don’t see a reason to keep injecting units into a market that cannot afford to buy homes today.

More than that, here’s what mortgages are looking like today:

We are now down to 1996 lows 📉; not even COVID or the financial crisis of 2008 was able to bring the index this low, and those were supposedly the worst times for the housing market.

Now that we have established a short bias for the homebuilding industry, it is time to drill down into the niche and find which stocks are following this no-confidence narrative from the market.

Two of them stick out, PulteGroup and Toll Brothers, though judging by the earnings forecast and valuations, I think we’ll stick by a Toll Brothers short in this case.

Alright, let’s go digging and see what we can find for this potential short position.

Toll Brothers (NYSE: TOL)

Sips another coffee

Every business and industry has its own set of key performance indicators (KPIs), and Toll Brothers is no exception. So, this is what we want to look at mainly:

• Backlog Valuation changes

• Cancellation Rates

• Gross House Margins

Armed with the knowledge you need to analyze the situation properly, here’s what brought us to a potential short in Toll Brothers.

Backlog valuations dropped by as much as 10% 📉, which means that even if these units aren’t canceled (a likely scenario as housing starts to keep dropping), Toll Brothers will see a steep fall in revenue and earnings because of this valuation fall.

More than that, cancellation rates have remained high enough when adjusting for the fall in valuation at 6.4%. As the wave of negativity takes on a bigger size, we will probably see these cancellations go up.

Those two you have to keep a close watch on, and trust me, the company will probably give hints as well as the coming economic data next week, carrying building permits and housing starts reports.

Lastly, we have house margins, which ticked down slightly from 27.8% in 2023 to 27.4% this quarter. While this is not a big decline, here’s what could come next.

When and if Toll Brothers sell new homes under contract (assuming they’re not canceled), the lower valuation on these homes will have a direct impact on margins, especially as they were built with more expensive materials.

Okay, I like this situation now, so let’s take a look at the charts:

This is the daily for $TOL, and we have marked the low-volume nodes in gray as potential entries and additions to this short.

First of all, the double top around the low-volume 🗺️ area looks nice; it’s a straight-up rejection. More than that, the recent peak only lasted for a day, meaning the market is way too long on this stock, and initiative sellers came into play there.

Marked at $144.75 🎯, this is a good location for a short, but it all depends on how the stock behaves there, whether we see additional sellers come in, or channel until activity comes by.

All gray areas below mean the same: We watch for behavior and add to shorts or begin to take partial profits.

Here are some other technicals for timing this trade:

The volatility in this stock has been contracted heavily over the past week, now at 2.3% to be one of the lowest in the past 5 years average.

Charting the stock’s volatility can give you another way to look at the compression, and time the expansion a bit better.

Alright, so knowing that the stock has been asleep for a few days now, we know that we could have a couple more days of no movement, bringing ATR down to 2.0% or less, where we’d ideally want to enter as a big move could come immediately.

Volume helps us understand the timing as well. After the big volume profile made on the price rejection, $TOL has one of the lowest volume levels of the quarter.

That means trade is not being facilitated at this price, and we should see lower prices soon. 🔥 

NOW GO AND MAKE IT HAPPEN
Where in The Cycle?

This is the main question everyone wants to answer, and here’s a guy who is well-known for answering it. Those entitlements that have brought down our chances at a better future are part of a larger cycle.

The Netherlands, the United Kingdom, and the United States have gone through it. Today’s book recommendation 📖 points you toward the next growth opportunity in global markets.

To your success,

G. 🥃