🗞 No Room Left

WHILE YOU POUR THE JOE… ☕️
Cheap Dopamine Under Siege

Well, one source of cheap dopamine might be down, as the ban on TikTok is back on the docket for U.S. regulators. ❌ 

That means other platforms like Instagram and YouTube will likely take on additional market share. If you accept this thesis as possible, then you might think these stocks are cheap today.

Well, they’re cheap any day really as long as you’re willing to hold long enough, I mean the whole economy is leveraging its online presence and becoming more digitized.

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

SKIN IN THE GAME
Any Backers?

Zerohedge is right when pointing this out, and all we have to add is that they are running out of leverage and out of buyers too.

“They” in this case means the government and the market as a whole, who is already at such an elevated valuation that it literally cannot go any further without causing severe dislocations. 📉 

We may not know this, and by we I mean retail investors, but the professionals on Wall Street do. You can check the truth behind this statement by updating yourself on the recent commitment of traders report from last week.

If you’re new to this report, don’t worry, we’ll do a proper breakdown on what it means in future posts. For now, all you need to know is that it measures the level of futures contracts inventories in a given market.

In the case of the S&P 500, you can see the commercial dealers (red line) being as short the index as they’ve been since 2007 📉, so either they know something is about to happen or they will be forced to cover these positions and go net long.

** Quick tip 💡: The commercial dealers are the banks, prime brokers, and other entities who typically issue these products and manage most of the inventory. Where they go, that’s typically where they expect the market to be.

Obviously these two outcomes are very different, so if we need to get a sounding board from another powerful player in the game, let’s check with the Federal Reserve itself and see what they’re thinking: 👀 

Even though the Fed thinks markets are strong and the economy is solid, they haven’t stopped selling off assets in the open market. These assets include outright equities (stocks) and bonds.

Now the reason you sell bonds and try to deleverage your balance sheet is if you expect inflation to come roaring back right?

Sure, that’s the textbook definition, but we’re not fond of those here at InvestiBrew.

Taking other markets into context, I just think that the Fed is running a 1980s scenario here, as they do run things by the textbook and often why they fail.

The implications taken from the crude oil selloff below the $68.25 key level we’ve given you before is one thing, meaning likely recession. Another thing completely is seeing the orange line above, representing the spread between the $IVE / $IVW.

As you may notice, the spread (measuring performance between value and growth stocks), is typically the mirror image to oil prices, and the only time they move in tandem is when recession fears abound. 😨 

Now that their correlations have swung to positive in the past few weeks, the context would mean that recession fears are in fact driving the market behavior right now.

In white you have the $IWM ETF representing the Russell 2000 small caps, then in orange you have the $TLT ETF showing you the 20+ year bond prices in aggregate.

In red below you have the correlations between these two, and that’s what I want you to focus on.

Correlations are breaking down in what seems to be a cyclical wave, but this one is a little different. Different how? Great question:

You have to make sense of it in a broader context right? In this case, what’s an explanation behind small cap stocks pulling back from recent highs while bond prices rally (and yields fall)?

Well, here’s our game theory:

• Bonds selloff, IWM selloff: Hyperinflation hurting domestic small caps as they can’t diversify away like the larger international names.

• Bonds rally, IWM rally: This would mean a normal economy again, or a “Soft Landing”, which we’re not getting.

• Bonds rally, IWM selloff: Recession, otherwise why would yields come down and small caps (highly cyclical) come down as well?

Knowing this, and double-checking with commercial dealers and their S&P futures, it would make sense to see the Fed dumping their assets right now.

Even more so, makes sense to see Warren Buffett go into cash like never before. 📒 

TRADE OF THE WEEK
Not Just Here for Pics

When you think of Indonesia, you may think of Bali and all the beautiful landscapes and Instagram worthy pictures that come out of that place.

I think of the stomach bug I caught on my trip through Asia last year, but yes also the pictures.

Others, smarter than you and me, may think of the next 10 years and what those might mean for investments in the region, especially now that China is making its way to be the world’s leading economy. 🌏️ 

Look, all I know is that Canada and Mexico became what they are today because the United States was growing and needed their help.

In the same way, as China grows, it calls upon Singapore, Thailand, Indonesia and India to help it through this spur.

If you accept this belief, then you know that middle class populations will grow at double-digits in Indonesia right?

What’s the first thing that someone might do if they go from lower-class to middle-class?

They buy appliances, since more working hours mean less hours to wash and dry by hand. They also buy phones and other electronics that are more up with the times, and that means infrastructure and support behind the increase in demand is needed.

I’m talking telecommunications and other such plays, which is where today’s stock recommendation comes into play 👀:

$TLK, Indonesia Telekominik.

This stock has been on our radar for a couple of years now, and I personally had the chance to go check it out in Indonesia and ask around about the competitiveness and services, coverage and that sort of thing.

Turns out, they kinda have a monopoly over there, like Turkcell $TKC when we found it back at $3.0 a share and then sold it at over $6.0 to double our money. 🔥 

This one is different though, since Indonesia is not only going to see its middle class grow at double-digit rates, but also is a hotspot for all the new remote workers of the world, and they need the proper infrastructure to be able to get their work done and live.

The best part? No analysts cover this stock since its all the way out in Indonesia, and that’s where a half decent investor can get a chance to riches.

Here are some things we like, enough to buy some at any price below $20 a share:

• Return on invested capital (ROIC) of over 16%

• Gross margins over 60%, Net margins over 15%

• Less than 50% of capital is debt

• Massive FCF growth at $350 free cash flow per share

In case you couldn’t tell by the free cash flow, this stock is a 10x in the making, as long as you’re willing to wait. 🫰 

NOW GO AND MAKE IT HAPPEN
Context is Everything

Bloomberg was right to pick this as their slogan, but there’s a lot of truth behind this statement.

As you already learned above, the context under which markets are moving would say one thing on an economics textbook, and just the opposite in the real world. Today’s book recommendation 📖 will help you start thinking in terms of the real world and not just the textbooks.

To your success,

G. 🥃