🗞 Checking on Your Rich Friends

WHILE YOU POUR THE JOE… ☕️
Crypto Bros Pop Champagne

Here’s the thing: most dollar-quoted assets, Bitcoin included, will go up in response to the new inflation/stagflation trend we’ve been writing about all over here.

That includes Bitcoin and the other commodities in the market, as Paul Tudor Jones and Stanley Druckenmiller have called for in recent interviews.

That’s not done, though. The run is going to keep heading higher as the bond market shows weakness and regional banks and small-cap stocks start to top in the face of all the action that’s happening right now.

Anyway, not all assets will behave the same, and there’s a way to check in on the market's richer players to see how they plan to move their money around.

So, without further ado, let’s get on with today’s email 📧…

ROUNDTABLE VOTING
Where Money Flows, You Go

This isn’t the first or the last time we will cover one of the most important reports in the financial markets.

No, I’m not talking about the PMIs—that’s for another post. I’m talking about the commitment of traders report, which comes out every week and tells you pretty much where all of the money is flowing.

Both smart money and dumb money, that is, so you can be sure of who’s betting based on a view and who is just simply chasing the momentum and hype of the market.

That’s important for you to keep track of, lest you get sucked into the masses and lose a bit of hard-earned money.

Here’s what the traders are doing for the S&P 500, for starters: 👀 

Now, here’s an important distinction between what you’re seeing. The red line represents commercial dealers, and the green line represents institutional managers and investors.

Contrary to popular belief, institutional managers are not that smart 💡. All they do (most of the time) is chase what’s hot in the market, in other words, chase the momentum of what has been popular.

Who is actually smart are the commercial dealers. With that said, let me break it all down for you in a bit of a tangent:

• Commercials: These guys would be like a Toyota factory in Japan, where the managers have most (if not all) of the information from dealers worldwide and what the demand is. 📈 

• Non-Commercials: Think of your local car dealership, who buys bulk from the factory and sells at retail to the rest of us. 📉 

Whenever you see a full or empty lot from your local dealer, that doesn’t reflect the factory’s sentiment; it only shows you what is happening in the local economy, right?

In the same fashion, you wouldn’t want to base your investment decisions on these guys either, but rather take it from the factory, in this case, the commercials.

Got it? Okay, let’s move on

Commercial dealers are now as short as they’ve been since the 2008 financial crisis, which should indicate a warning.

Whether you want to take our warning for a lost decade in the S&P 500 is up to you.

Here’s more data to get you up to speed:

These are the commitment levels of traders for the ten-year bond futures, which almost proved our short thesis wrong for a second.

After a brief buying spree (likely from the Trump everything rally), commercials are back to dumping ten-year bonds 📉. And if you’re familiar with our current market views, then you know that means two things:

1. Inflation is coming back

2. We could be about to run into stagflation, as other economic data remains bearish (like employment)

Anyway, we can’t just look at bonds being dumped and come to a quick conclusion; we need to look at other markets as well, so why don’t we jump to the small caps?

The futures for the Russell 2000 small-cap index show again, on the red vs. green line, that the so-called “Smart money” is chasing the momentum and hype created by those like Tom Lee from FundStrat.

However, the dealers are dumping the hell out of the Russell 2000, even during a massive breakout during the Trump election win.

Why?

It's simple, actually. If inflation/stagflation scenarios play out, companies with smaller market caps and only domestic exposure will have a harder time passing down their costs to consumers, so their margins will be squeezed the hardest.

That’s no bueno for earnings and valuations, is it? 📉 

So far, so good; inflation/stagflation checks out.

Here’s the data for more bonds, this time the two-year bonds.

Notice a big difference here? Commercials are getting excited about these and have bought them more and more.

Now, what does - or at least should - that tell you?

Let’s recap: I am bearish on the ten-year and bullish on the two-year, inflation, and stagflation. Okay, that must mean the yield curve is about to keep on steepening, which means liquidity and credit are about to dry up.

Bingo. ✅ 

Okay, so one last check before we go running to our mothers and telling them how brilliant we are: Here’s another check for credit markets that would validate this view.

The Secured Overnight Financing Rate (SOFR) has recently spiked against the Overnight Swap Index (OIS).

Without getting into the details, this basically means that the risk of lending money overnight, particularly between banks, has spiked suddenly.

Now, that only happens when banks think a hot potato is thrown around and that one (or a few) of them will be caught with a toxic balance sheet.

Is it Nvidia stock? Is it Commercial Real Estate loans? Who knows? All we know is that the bull is about to go #2. 👀 

 TRADE OF THE WEEK
Mr. Worldwide

Look, Brazilians are oftentimes okay with being polyamorous, and that’s okay as long as there’s consent and everyone involved is healthy and happy.

And I’m not talking about people; I’m talking about companies (though if you identified with this, that’s on you, lol).

Gerdau Steel is playing a very hot love triangle between the U.S. and China right now, and we think it’ll be the ultimate corporate strategy to get us one of the best returns in the steel sector.

Why?

Well, if you recall from last week’s post, Trump is looking to reinstate heavy tariffs on China, which is the reason why steel outperformed most of the industrial stocks to end the week:

The other two don’t count, cooking coal and aluminum, as they are both needed to make steel. 🔥 

The message is that Trump’s win means tariffs for Chinese and American steel, and that means more money to be made for those who operate in the United States.

For example, Gerdau has plenty of U.S.-based factories that would place it at the top of the list to see the big bucks come in.

But

They are also happily in bed with the Chinese, knowing that Brazil will play ball by exporting whatever steel China needs that the U.S. won’t readily supply.

Two fronts, one stock, and only one way to go. 📈 

Literally, one way, at least that’s what analysts are saying.

$5 a share, that’s the price target today, or 40.1% upside 🎯 from where the stock sits.

But then there’s the volume outbreak, which is what caught our attention in the first place.

That’s nearly 3x the average volume for Gerdau stock, and that tells me it wasn’t little guys playing into the steel hype of the stock but rather a giant shark looking for dinner.

Where the stock goes, I don’t know yet. Still, so far, we see at least a doubling to $7 a share based on the P/B multiple discount, especially if Gerdau becomes a key player between the U.S. and China. 🫰 

NOW GO AND MAKE IT HAPPEN
It Really Works

I was skeptical about this book at first. Just from the title, it sounded like one of those cheesy, just-looking-to-sell-you-something books. Then it popped up in one value investing forum after another, and I had to give it a try.

Today’s book recommendation 📖 combines the value investing discipline with a somewhat digestible strategy that you can pick up right away. It has worked for me and thousands of others, so it wouldn’t hurt for you to try.

To your success,

G. 🥃