🗞️ Pitching a Curve Ball

WHILE YOU POUR THE JOE… ☕️
Tweet of the Day

Translation to “The donkey knows more than Maduro”. Why Elon tweeted about the fraudulent Venezuelan election is beyond me, but here are a few of my scenarios to play out ✅.

Of all countries on Earth, there is only one who can successfully intervene, that’s the US of A.

But, if they do, they will be in direct conflict with trillions of dollars already invested in Venezuela by China, Russia, Iran and more.

So intervening in Venezuela is a direct hit to the nations already hoping for an opening to take the US economy (and the dollar) down.

In my opinion:

1. There are riots for 3-8 weeks, then business as usual

2. US intervenes, then China and Russia retaliate 

3. Country goes to full out civil war, UN gets involved, then sanctions are sent to US enemies and they call it a day

Speaking of strategizing based on history, let’s get on with today’s email 📧…

ECONOMIC FORCES
Batter Up for the Curve

That’s the so-called '“Yield Curve”, and it’s an economic indicator that economists, investors, and even students follow when monitoring the health - and pulse - of the liquidity cycle in the U.S. economy 📈.

It measures the difference in yield between the ten-year treasury and the two-year treasury bond, and as you can see it is pretty cyclical. The red shaded area below the chart is when the curve is negative, or inverse.

** Quick Tip 🔎: An inverse yield curve means that the two-year bond has a higher yield than the ten-year, which is the opposite of what’s natural and should be.

So, what happens when the yield curve goes inverse?

It means there is just too much money 💰️ in the economy, and that liquidity leads to credit (and other) bubbles, as well as inflation and other consequences.

It also means that the next phase in the curve is to steepen, go back into positive, and then reach the higher end of the cycle. To do this, the Federal Reserve needs to drain liquidity out of the economy, and that’s not good.

Who Wins in This Case?

The good thing for you is that history tends to rhyme if not outright repeat itself. And, every time the yield curve goes from inverse to positive and beyond, one corner of the stock market tends to do very well.

That’s oil. So today, your homework is to look into which oil stocks look kinda great, and then you can do whatever with this information.

I’ll do you one better, the homework is done to save you time, and here is what the results are:

On the ISM Manufacturing PMI, which has been contracting for over 20 consecutive months, you will find that the oil industry is the only one reporting an expansion, a welcomed positive outlier.

Helmerich & Payne (NYSE: HP)

Let’s go back for a little history lesson. This stock (Helmerich & Payne) is usually a precursor of activity to the price of oil per barrel.

Here’s how the stock behaved during 2000-2002 when the yield curve fell into inversion and then pushed higher to the upper end of the range in 2003 🎯:

Near 4x in price 🔥 , which is life changing money if you had enough to invest into this trend in the first place. If not, there are always way out the money options, which also bring life-changing money if you get the timing right.

Now, let’s see what happened during 2007-2008 when the curve fell into inversion again, and during 2010 when it reached the top of the cycle:

Another near triple 👀. I think you get it by now, energy stocks will be a reliable place to put your money into when the yield curve is making its way from inversion in to the upper range of the cycle.

But, not all energy tocks are made equal, so why Helmerich & Payne?

It’s All in the Business Model

Since the company leases rig and exploration equipment to the oil giants like Exxon and Chevron, it is the first to get paid 🫰 when oil is on the rise and these big players want to get production ramping up in face of bigger profits ahead.

Not saying that this time is guaranteed to be the same, but here’s what the chart looks like today:

We are not even close to the potential highs this stock has made on previous yield curve steepening, but I’ll leave that one for you to interpret.

WEEK(END) STOCK
Guns and Roses Conductors?

Most people don’t care enough to know what the connection between Lockheed Martin stock and Taiwan Semiconductor stock is, but that’s not you, you’re a curious bunch aren’t you?

Because that’s what it takes to succeed in this business, curiosity.

The latest rabbit hole led me to the connection between one of America’s biggest arms manufacturers and the world’s main semiconductor supplier.

You see, the success of one is tied to the success of the other, here’s why:

Taiwan Protection

In case you haven’t heard, Taiwan has been under constant threat of invasion by China, and if that happens then it’s game over for the U.S. since Taiwan provides Apple and most other national security technology with chips.

Knowing this, Lockheed Martin has accepted up to $160 billion 🔥 in order backlog as the world is increasing defense budgets in the middle of geopolitical tensions.

But, to make fighter jets, missiles, and other weaponry, Lockheed Martin needs some of the most advanced chips on the market, and that’s how it connects to Taiwan Semiconductor.

This also leaves you with the question of who will come to benefit first, and that’s sort of the chicken and the egg paradox.

In my opinion, Lockheed takes precedence here since the U.S. has 3-5 years worth of waiting time until the semiconductor supply chain is successfully brought on shore, so we can stop depending on overseas Asian manufacturers to get our needed chip supply.

NOW GO AND MAKE IT HAPPEN
Find Your Groove

When I read this book, I got exposed to a bunch of new ideas to dig into and research, all in the name of financial planning and investment strategy.

Among the first chapters is the tale of a guy who sold stock options for income, then sailed his boat from the Dominican Republic to chill out, then came back to sell more options and repeat. Today’s book recommendation 📖 hopefully helps you find the plan that works for you too.

To your success,

G. 🥃