🗞 [IMPORTANT] The Market's Next Move

WHILE YOU POUR THE JOE… ☕️
A Watchful Guard

These are two of Europe’s biggest arms manufacturing stocks, and the rest of the pack looks just like them.

All having parabolic rallies this week. Here’s why:

Ukraine refused to sign the peace deal put on the table by Trump, so the United States stopped supplying it with weapons.

So, it’s now up to the rest of Europe to help Zelensky out (that’s if he says thank you this time). 🤣 

I think this is why these stocks are rallying, and if that’s the case then we should also expect an oil rally in the near future as arms preparations can only mean sustained conflicts in that region.

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

SCIENTIFIC METHOD
Nobel Worthy

There once was a guy named Joseph Kitchin, and in the 1920s he figured out what most traders fail to look at today. 👀 

The stock market can be predicted by following the business and consumer cycle, shocker right?

Well, if you’ve followed us for a while then you should be getting pretty good at doing that too, but here’s what he meant exactly. (He even won a Nobel prize)

There is a more or less 40-month business cycle, and you can track it by following inventories and orders coming in. But, without boring you too much on the details, here’s where we are today:

• Falling inventories 📉 

• Recovering orders 📈 

Now, these orders might be a short burst coming out of new tariff fears, but it’s still creating somewhat of a bottleneck for the rest of the economy at that. ⬇️ 

Now I want you to consider a more condensed version of this indicator, which is the capacity utilization rate.

Specifically for:

• Nonmetallic Minerals ✅ 

• Aerospace & Trasnportation ✅ 

If you watched this YouTube video where I broke down the January PMIs for you, then you understand that this is in direct response to the demand coming in from defensive construction and a boost in defense budgets.

After you get caught up, you should already know which stocks we’re looking to buy on this recent development.

Now all of this defensive talk will mean a risk-off attitude in the markets, which is also why we decided to go long the EUR/USD back at $1.04 a while back.

You can read the thesis behind that trade in this newsletter post.

Now, risk-off would also call for:

• Lower S&P 500 📉 

• Higher $TLT bonds 📈 

• $DXY dollar selloff 📉 

Bingo on all of those, now all we’re missing is our gold to oil rotation and we should be sitting pretty (and on lots of cash) for the rest of 2025). 🫰 

ItTRADE OF THE WEEK
Middle Class Problems

This is a quick snapshot from the video we mentioned earlier. It has to do with how we became bearish on homebuilders as the entire industry fell behind on valuations and earnings per share (EPS) growth. 🐻 

Connecting the dots to what we just saw in capacity utilization as well, it’s clear that only defensive spending is at play here, and there’s a reason why everyone is starting to go that way.

Some might call it recession, others call it InvestiBrew being right (ha ha).

Now that brings me to a short idea to take advantage of this situation, this time in $PHM as weakness in homebuilders keeps spreading. 📉 

If you’re a long-time follower you understand that table above, especially how the forward EPS growth forecasts are kind of awful compared to the rest of the industry.

This means that $PHM is not going to grow at similar paces to other names like $LEN or even $TOL, which is why the market is discounting its forwrad P/E ratio as well.

That being said, its forward PEG is also not encouraging at 0.8x, being above the industry’s 0.3x average. (This means the market has priced in any and all growth, and the stock is still expensive).

Without going into detail, you can see how the company's operating cash flow has declined significantly over the year, with rising capital expenditures making the free cash flow even thinner.

If you read this post about the housing market, then you know that all of the inventory that they’ve accumulated this quarter ($787.5 million worth) is likely going to be discounted and sold at a very thin margin if not a loss. 📉 

This is why Pulte’s gross margin per home has already declined by over 1% on the year due to these developments. 🏘️ 

While not the most exciting short—it definitely was six months ago—I think that you can still squeeze some returns out of this name in the coming months as the state of the middle class and housing market continue to deteriorate. 💰️ 

GO AND MAKE IT HAPPEN
Timeless Knowledge

There’s gotta be an update for this book coming soon.

And that’s because today’s book recommendation 📖 isn’t really a book, but a collection of letters from Warren Buffett.

I’d like you to read them in case you haven’t, because you’ll find that some of the warnings he gives before a market crash are as true today as they were back then.

Which is why he sold out of the entire S&P 500.

To your success,

G. 🥃