🗞 Open For a Short Trade Idea

WHILE YOU POUR THE JOE… ☕️
Faith Restored

Germany just came in with historical results for the election of new “Far Right” conservative officials.

That’s English for Europe is now swinging in the right direction, no pun intended.

Others who have been quietly doing the same? Italy, Greece.

Good for them, now it’s up to the rest of the world to get used to no more than two genders, bringing back red-meat diets, and traditional values.

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

FULL SHELVES
Ready For Discounts?

If you’ve been with us for a while, then you know what this chart means.

In orange you have the $SPY ETF, and in white you have equity risk premiums (corporate bonds minus ten-year bonds).

Whenever these two diverge such as they are today, it typically means that the market is seeing stocks as riskier, which aligns with the $IVE / $IVW (value vs growth) spreads we’ve been talking about. 👀 

Also, the dollar-to-bond spreads signal a rotation in the market as well. Both of these have historically brought on an equity selloff and a VIX spike. 📈 

Friday was a small taste of what could come, but I don’t think we’re there yet.

The overall bias is bearish, as you would have seen in our latest YouTube video, however we’re traders and have to be careful about jumping the gun too early here.

Especially as we have Nvidia earnings coming up this week.

Looking for some short ideas, we started our process with the consumer, and what we found wasn’t too encouraging.

Consumer confidence is plummeting, and capacity utilization is still below 80%, which is recessionary on the business end. 📉 

So both consumer spending and business spending is near basement levels, which poses a risk to the broader market as well.

When it comes to the business end, we have a pretty good idea of where we could start looking for turnarounds, so now we need to play the contraction in the consumer end.

Which is where Retail Sales data comes into play.

Apart from the biggest sales contractions for the past month, I want you to keep something else in mind.

Most sales growth came to defensive spending, confirming consumers are starting to tighten up their budgets.

Now, if you read our newsletter on Friday, calling for further contractions in real estate, then it would make sense to look at furniture & home furnishing stores in particular.

So, here’s what that looks like: ⬇️ 

Based on the same ratios that we always consider for our long-term ideas, I highlighted the one factor driving me to consider Williams Sonoma stock a potential short here. 🐻 

TRADE OF THE WEEK
Too Hot For Its Own Good

This is the market/volume profile for Williams Sonoma stock, and it looks like there has been no volume right a the 52-week highs, meaning the stock was considered to be expensive there.

So, where is the perceived fair value for the company?

A proxy can be taken as the volume point of control (VPOC) for 2024, which puts us at around $140, with a cutoff for another key level at $130.

Now back to the comparables table, this is what’s driving us to want to short $WSM:

• 2.0% EPS growth for 2026 compared to the peer average of 37%.

• A 23.0x Forward P/E ratio makes this valuation a highly extended stock compared to the underlying growth it’s projected to have.

• That brings us to the PEG ratio of 11.3x, the highest in the group.

Now notice something inside the company’s financials as of the last quarter, and this is something that we’re going to look for when the company announces its next set of earnings. 💰️ 

• Merchandise Inventories: $203.9 million spent

• Operating Cash Flow Decrease of $300k

This is not a good look, the company just accumulated a bunch of inventory probably getting ready for a busy season in new housing and furnishing. 📉 

Unfortunately, based on the data we’ve been getting out of real estate and the theme of our last newsletter, furniture and home decor are the last things that will be seeing any increase.

Add the contractions in Retail Sales to the mix, and you get the perfect storm for Williams Sonoma, which will probably need to discount this excess inventory and incur a loss.

That’s English for an EPS miss, therefore a short position is justified so far.

But at what price? 📉 

Zooming in on the past quarter, the $195-$200 area could be a great entry point if we get it before the next earnings announcement, as it acts as both a liquidity grab and volume cutoff. 🎯 

By the way, those are our favorite setups.

So set your alerts and pick your sizes; this thing is going down. 📉 

GO AND MAKE IT HAPPEN
Believe It Or Not

Next time you consider who the most powerful people on earth are, you should go over the list of the biggest hedge fund managers are, and you’ll quickly notice that they are typically connected in every single realm.

Connected as in tight with government officials, heads of state, and much more. How they accumulated to much power is written in today’s book recommendation 📖, which goes along with the winning trading strategies we’ve gone over in today’s newsletter.

To your success,

G. 🥃