🗞 Markets in Denial

WHILE YOU POUR THE JOE… ☕️
Right Under Our Noses

Read this Bloomberg headline, like really read it. What do you think they’re trying to say here? 👀 

Are they auctioning the bonds higher because they fear inflation is coming back? I don’t think that’s what was in investors' minds back in 2007. I think they’re auctioning higher yields as an added risk premium to the United States economy.

Which is why the big banks are:

1. Shorting S&P 500 futures as aggressively as they’ve been since 2007

2. Buying and accumulating 10yr bond futures

The market is cornered now, and there’s no other way out now but to deleverage.

Speaking of ways out, let’s get on with today’s email 📧…

ECONOMIC WEIGHING
Check Engine Light *

The dollar index has become a runaway asset, ignoring any and all calls from the gold/oil/Bitcoin price action for it to come lower.

We think that there could be some sort of central bank manipulation going on here, both in the US and internationally.

But this chart, oh boy, if anything serves as a check engine light for the dollar’s road trip, this is it. Here’s why:

• This is now the second consecutive month of a positive spread between exports and imports, meaning we are starting to sell more things than we’re bringing in. 📈 

• This behavior is born from 1) a Lack of domestic demand—as you know, we’ve been in a recession for nearly 1.5 years—and 2) a need for our domestic economy to get a boost in jobs and activity through manufacturing. 📉 

The only issue is that we won’t get any of that unless the dollar comes lower. A lower dollar would make exporting our goods a lot easier, create jobs (not government or part-time, as NFP shows), and boost potential S&P 500 earnings.

So here’s why we think the whole system might turn on its head now:

Out of all the components in the manufacturing sector, it is New Orders that really led the way here. 📈 

Now you have to be a strategic thinker here, why are businesses in domestic manufacturing all the sudden seeing new orders pop up?

Well, it could be because of Trump’s tariffs, so customers start getting ready before the potential pricing spikes.

That’s reasonable, but then there’s this:

Do you see any of these industries quoting anything about tariffs or inflation?

No.

All you see is how slow and dead business is, except for Electrical Equipment, it seems like those guys are doing great and getting their fix of new orders here. 🥳 

But, everyone else is down in the gutter. So, why are new orders suddenly popping up, and who - other than Electrical - are they popping up for?

Bingo, we have six industries getting some nice turns in new orders, but let’s cut through the noise. Here’s the real protein:

• Electrical Equipment had a second consecutive month of increased growth in new orders, better look at stocks here.

• Food & Beverage has three consecutive months, expect these defensive names to report good earnings (think $PEP and $CELH discounts).

• Miscellaneous Manufacturing & Primary Metals, these are some interesting turnarounds, I like.

We now want to turn your focus on that last bullet point. The American metals industry is focused on specialized steel sheets, which is where most of the jobs in the manufacturing sector end up going to, other than automotive manufacturing. 👀 

Either way, primary metals fit it all, aluminum for cars, steel and iron for construction or aviation, even defense machinery. Done. ✅ 

Lord, I love it when this happens.

See the price action on the past five trading days? The ones that included the PMI release and speaks to the importance of knowing what and where to look into?

Leaders to confirm our thesis here:

• Airports

• Electrical Equipment

• Rialroads

• Marine Shipping

ALL rely on the same industries we just showed you had increased new orders pop up suddenly, so now it’s a matter of finding the right stocks in the space to align your portfolio with the winners. 💰️ 

But that’s only half the job.

The other half is understanding that these new orders, and these specific industries, are getting ready because they expect (or maybe have gotten a tip) for the dollar index to crash down soon. 📉 

As you may have known from previous posts, we're extra bullish on bonds right now.

Dots connected; now go and make some money. 🫰 

TRADE OF THE WEEK
Next Steps

So when you play out these dominos, and the bond rally arrives due to all of these dynamics, we just pointed out, what else do you think might be getting ready to move?

Mortgages!

And the housing market is, well, let’s just say, not so hot right now… ⬇️ 

This here is the mortgage market index, which is now sitting at a sad 1996 low right now.

What that means is not too many Americans are getting mortgages right now, and that’s an issue for another newsletter. We think there’s an overdue selloff in home values. 🏠️ 📉 

The point is, mortgage stocks might see a real boost here as rates start to come down, as well as a falling dollar index. This is a double tailwind for these companies (and any other financial stock) to start making real money.

This is why:

1. Lower rates boost the volume of these products being generated, mortgages, credit cards, car loans etc.

2. A falling dollar means they can then sell these products to secondary markets for a premium.

So today, we’re looking at:

A beaten down stock that could soon call for a rebound, Rocket Companies.

The fundamental thesis around mortgages here makes sense, but we still have to do a sound check on how the market feels about this company’s stock moving forward.

There’s a few ways to do this, but I’ll just show you how I learned from my time at Goldman Sachs:

Here is Rocket stock with all its comps (comparables), namely SoFi stock as the closest peer of all.

Let’s go left to right shall we?

Rocket stock is trading at 50% of its 52-week high, while SoFi is at 87%, so there has to be a massive disconnect between the two.

It can be found in the EG2 column, which measures EPS growth rates for the next 24 months. Rocket is looking to push for 24.6% growth, while SoFi is nearly tripling it at 68.9%. 🔥 

This is why you can see the massive spread in forward P/E ratios (PE2 column), of 30.4x vs 13.1x.

But, here’s where it gets interesting:

• Same Price-to-Book (P/B) ratios of 2.7x.

• Very close Price-to-Sales (P/S) ratios of 6.5x vs 5.6x.

This tells me that, sure, Rocket isn’t set to grow as much as SoFi, but the market is still paying up a premium for it.

And we think it’s because of the large price action discrepancy. Plus, the chart looks really good right now:

You can see how, after getting to that $10.50 level, volume start to pick up to bring the stock above that cutoff there quickly.

This is what we’d call responsive buying, and of course, it’s bullish. 🐂 

Assuming that this $10.50 level is the potential bottom, we’re looking at the $13.90 level as the initial target based on the VPOC over the past six months, which makes it very significant. 🎯 

And as always, from an ex-Wall Streeter to you, other analysts are right on the same page with their consensus price targets: 🫰 

NOW GO AND MAKE IT HAPPEN
Know the Game

This is probably one of the books that opened my mind the most to how the game is played and who it really is made for.

From a fellow ex-insider, Gary beautifully breaks down the trading game in today’s book recommendation 📖.

To your success,

G. 🥃