🗞 Lithium Lift Secured

WHILE YOU POUR THE JOE… ☕️
The Boeing Curse

Boeing has been dealing with a lot of drama during the past 5 years, for good reason. They know they hold a near monopoly business at this point, and they got a bit sloppy in their operations.

incidents happened as their manufacturing chain deteriorated, to the recent strikes calling for unionizing, and other issues that might affect the company’s cash flow.

Look, this company is no value play nor a portfolio must-have, but I do think there’s a shorter-term trade brewing in this stock for the next quarter or two.

We’ll post a deeper dive on this trade later this week, so watch out for that 👀.

Speaking of trade opportunities too good to be true, let’s get on with today’s email 📧…

MASTERMIND
Indecision Kills Markets

Usually, the market has an idea of where they expect interest rates to be headed, with a skew to either 25 basis points (bps) or 50bps. This time, it is literally a 50/50 bet as to where the Federal Reserve will decide its next policy path.

The stock market doesn’t like uncertainty, and not knowing where the Fed interest rate cut might end up going creates some of the worst uncertainty in a while.

For this reason, we’re closely watching the price action in the S&P 500 through the $SPY ETF, which has shown significant evidence that the market may be getting too long at the moment, creating a major potential downside risk 📉.

Here are a few indicators to keep in mind in the macro picture:

This is the commitment of traders (CoT) report for the S&P 500 futures, which basically shows the level of inventory held by both dealers (commercials) and money managers (non-commercials).

The green line represents money managers, and the last time they were this long was in 2019, right before COVID-19, just as dealers were the most short, as if they knew a selloff was coming.

Today, dealers are just as short, if not more, than they were pre-COVID, which sends a warning signal to us.

There are other ‘big picture’ indicators that show us a certain level of direction for the market, so here we go:

The yield curve (ten-year yields minus two-year yields) represents the liquidity and business cycle, and when it becomes inverted (negative), it typically signals that the economy is becoming too leveraged.

Which it was after the Federal Reserve printed all that money as a reaction to COVID-19. So now, the deleveraging cycle has to be completed in order to bring things back to normal.

This is when the curve steepens, which it is now as you see it going back to positive. What happens now is a proper slowdown and potential recession in the United States, which you can see in other areas like housing and unemployment.

The S&P 500 has a usual 12-18 month lag to the negative yield curve, crashing hard after the curve inverts. Given we are now at a 22-month lag, the market is too over extended and in need of a correction.

Big picture, we are very worried about the slowing volume in the $SPY 📉 as it makes higher prices, and the way it has slowed down for a few days right at the top of $560-$563.

Just like in any other market, to us this means that there is no new buying to help the market break above this level, hence what we mean when we say the market is too long.

So, what could bring the market down? This Wednesday, the FOMC meeting could. 🔥 

Here are the two scenarios we have in mind for this eventful week, maybe the biggest one of our careers:

Saw this picture on Twitter and completely agree with it, we have a similar economy to that of late 2007, and rate cuts triggered the multi-year selloff just like it could do this week.

1. 50bps Cut: If the market gets what it wants, we might see the market roll higher to $563-$567 before the final wave of selling shakes off late buyers. Why? Even if the market gets what it wants, such a cut basically admits that the economy desperately needs help.

2. 25bps Cut: The market throws a tantrum selloff just like it did in September 2018. Since they wanted a more aggressive Fed, I don’t think this selloff will continue for long, so we want to catch the quick price action before it rebounds.

TRADE OF THE WEEK
Catch the Lithium Cycle

Every commodity-based business experiences a cycle of undersupply and oversupply, which is usually related to the price of the commodity it operates under.

Remember a couple years ago when lithium stocks were all the hype and the best place to put your money into? Well, they’re not so hot anymore, and that’s exactly why we’re looking to dig a little deeper into them.

There were two potential choices, between Sociedad Quimica y Minera de Chile and Albemarle. We went with Albemarle as the world’s largest lithium exporter for reasons you're about to discover.

When spreading the chemical industry, it becomes obvious that Albemarle is the top choice for markets today.

On a forward P/E ratio (PE2 column), Albemarle trades at 27.9x, which is significantly above the industry’s average 14.3x valuation.

There’s typically a reason why markets want to overpay for a stock, and Albemarle’s earnings per share (EPS) growth for the next 12 months could be one of them.

Wall Street analysts forecast up to 353.6% EPS growth 🔥 (EG2 column), where the industry is looking to grow at an average of 75.4% instead.

This is a quick snapshot of Albemarle’s financials pre-COVID and post, with a special focus on the company’s gross margin percentage.

Pre-COVID, when lithium prices were at normal levels, the company generated up to 36%. Now that lithium prices have crashed lower, Albemarle’s gross margins went down to 12.3%, the lowest in the past seven years. 📉 

Most traditional investors would ditch the company as ‘underperforming,’ but not us.

We understand that the new cycle will bring margins back to a normal level, and the way to pinpoint this turn can be through the company’s inventory.

There is an uptrend in the company’s inventories, and as lithium prices crash then demand isn’t going to help the situation improve.

The thing is, this measure is on a 12-month basis, and we should look closer into what the quarterly trend is starting to look like.

Last quarter, Albemarle showed a significant improvement in its inventory levels, starting a tightening cycle is a good sign in this environment, something Wall Street has recognized.

Evercore analysts have just reiterated their price target for this company at $170 a share, which represents a 94.5% upside 📈 from its current price.

After the stock gapped higher last week, I think that the market is starting to show more confidence in this stock, but we’re not at the best location yet.

This is where the market is being made for Albemarle, and we want to get a price outside of the market, which turns out to be closer to the $76.25-$76.75 level below today’s price.

Ultimately, we could see the stock rally higher to $100-$103 before we see any rejection, which would give us a better price.

Keeping it all in the macro view, it would make sense to see the stock come back down to that low volume area on the FOMC-induced crash this week.

We’ll send live updates on our Twitter page, so be sure to watch. 👀 

NOW GO AND MAKE IT HAPPEN
Get Ready to Run

This is one of my favorite books. I think it’ll become essential in the coming months as we see a potential systemic discount.

It is alright to make money on the way down, but what you do with this new capital in the next 10 years will change your life entirely.

Today’s book recommendation 📖 gives you a playbook for different ways to squeeze every drop of opportunity after the selloff is settled.

To your success,

G. 🥃