🗞 It's Time to Buy China

WHILE YOU POUR THE JOE… ☕️
A Drone Coming Near You

Amazon has been testing their drone delivery services 🕊️ in Arizona with reasonable success.

The thing is, if they do start making headway toward getting approval, there will likely be many security concerns and hurdles to overcome, especially regarding commercial airspace and crowded areas.

That aside, if approvals do come through, we expect Amazon's margins to start growing closer to those of its Chinese counterparts, names like Alibaba and Pinduouo.

And that, makes Amazon stock look cheap today.

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

RELATIVITY AT PLAY
Relative Value Movers

Bonds are two things, really. Actually, there are plenty, but for the purposes of this view, let's stick with two.

First, they're the market's way of telling everyone where inflation pressures might be headed soon, as these rates and yields are a proxy for the cost of money.

Second, they're a way for traders and other markets to assess a country's risk level. Higher yields mean more inflation and potentially higher risk in the underlying economy.

Knowing that the converging Japanese 30-year bonds and Chinese 30-year bonds mean something very important for the stock market.

1. Japanese inflation is on the rise, and yields are headed higher, which might be a good thing now that the Bank of Japan is hiking rates to boost domestic services stocks. As we posted a few weeks ago, we pitched stocks like Nomura, Sony, and Mizuho. 📈 

2. China's inflation expectations are lower for the future, which is wrong considering how active the domestic economy has been through consumer stock earnings and spending. That's another way for the country's exports and manufacturing to take over as well.

But

There's a third implication from this, as the risk view has also shifted to favor China over Japan. 👀 

You see, the market is now placing a risk premium on Japan over China, meaning Chinese stocks are inherently less risky than Chinese stocks today.

There are some on Wall Street who took this spread to heart, such as Michael Burry and Howard Marks. 🗒️ 

They both have made China their main bet recently, with Burry having Alibaba as his largest holding in his fund and Marks holding enough Pinduoduo stock to get him out of his U.S. comfort zone.

Here’s the kicker, though..

As the Chinese economy's manufacturing and services side starts returning online, the table is set for a potential new run for stocks.

The market will eventually have to make peace with investing in overseas markets, especially as the risk premiums for China individually favor companies.

Here’s what we mean by that:

• The Chinese 10-year bond is yielding up to 2.04% today

• Meanwhile, the CSI 300 (China’s S&P) yields over 5%, with an American proxy through $MCHI yielding 2.5%

Now, everything else being the same, stocks should never have higher yields than bonds, and any time that happens (in most markets), the world just jumps straight into buying stocks as their relative valuation to bonds is unmissable.

Not China, though. People are so driven by fear today that they would rather pay massive premiums for American stocks, which have half the margins and free cash flow compared to their Chinese counterparts.

And that’s where your opportunity comes in, my friend. 🫰 

 TRADE OF THE WEEK
Old Money Vibe

If you’ve ever shopped at Zegna or Loro Piana, welcome to the world of overpaying for a piece of clothing that nobody will ever know where it’s from or how much you paid for it. 😎 

But, you know, and it makes you feel good.

That’s the premise behind the new old money trend in fashion, but that’s not the main thesis behind our pitching you Zegna stock.

The main reason is similar to that of our Estee Lauder pitch, a 20:1 trade that’s already up 260% 🔥 since we gave it to you.

It’s because of the Euro/USD exchange rate and potential slowdowns in American consumer trends. As you know, the economy is in a recession and inflation scenario in the coming quarters.

A stronger Euro would boost stocks like Zegna and Estee since most of their sales come from Europe and are made in Euros. Knowing this, we also linked this idea to our previous manufacturing PMI index breakdown.

That breakdown led us to the apparel sector, and here’s what Zegna looks like compared to peers in the space:

Zegna could be better here; as you know, we always look for premiums in the forward P/E ratios and other measures.

However, it is trading at a premium to the sector average, and its EPS growth rates are significant enough to make us believe that its price at 53% of 52-week highs 📉 might not be reflective of a fair valuation.

And guess what? We’re not the only ones who think so:

As many other setups and asymmetrical trades we've pitched here before, this one is no different.

The thick red bar you see right at the $7.5 level means that most of the year's volume took place there, and considering the amount of time the stock has spent there, my guess is that this is institutional accumulation 💰️.

Just like it was for all the others.

Now the thesis goes like this, on a bullet basis:

• If the dollar doesn't fall, the United States economy will fall into a recession, so we need to see price action soon.

• This would get the EUR/USD rate back to a more normalized exchange of 1.25 on this dynamic, as seen by the aggressive buyers that came in at 1.04.

• Zegna has relative ease through the business cycle (inflation and recession don't hit wealthy people like most) and has most of its sales and revenue in Europe / Euros, making it a prime buy target in this setup.

If the stock pops on this, it will likely go to the $11-$13 level, which is just under a 50% return 📈 from where it trades today.

We're not in this to make small swings, though, so we’ll we're give you a potential misprice in an options trade.

The volatility curve for Zegna, at 53%, suggests that the stock will be right at $10 by April 2025. 🎯 

From the market profile above, we know that this isn’t the likely case, as $11-$13 is the target range set by the market.

To get us there, I think the implied volatility should be set up closer to 62%, significantly changing the underlying valuation for call options.

So, which ones are we picking here to get the most upside potential if we get the move right?

How’s this? April 2025, $10 strike call options 👀 are trading at an implied volatility of only 39.8%.

This is even below the normal curve that we showed you above, pricing in 53% volatility. That’s the opening we need for a potential discount and an asymmetric bet on this trade, working out a 4:1 in our favor.

Also, Wall Street seems to think 🔥 along the same lines here, as price targets suggest. All we need here, as a catalyst, is for the dollar index to fall, and we think it’ll come soon enough after the Trump inauguration, even before.

NOW GO AND MAKE IT HAPPEN
The Father of Macro

Keynes is best known as one of the most forward-thinking economists of his time. However, not everyone knows he was also the founder and manager of the first global macro hedge fund.

That’s right, this guy took money from governments, industry tycoons, and universities and traded all global markets and asset classes with incredible performance and precision.

His methods, which are still applicable today, will hit you in the head like a brick in today’s book recommendation 📖.

To your success,

G. 🥃