🗞 Problems at Home

WHILE YOU POUR THE JOE… ☕️
Narcos

Remember that Netflix show Narcos? Specifically, when Escobar was starting to place bombs in cars through the city to put pressure on the politicians? 💥 

Call me crazy, but this seems a whole lot like that. I mean, a Cybertruck blowing up like this in front of a Trump building? C’mon guys, what is this.

Anyway, if you’re as curious and confused as we are, then welcome to this morning’s newsletter.

And speaking of curious, let’s get on with today’s email 📧…

TIME’S UP
Re: Thank You for Your Payment

That’s not the message that the United States debt holders are getting any time soon, and they’re starting to rustle some feathers because of it.

Look, if you’ve been with us for a while then you understand that we are bullish on bonds now, and I don’t want this to be just another breakdown as to why we bought them.

I want to zoom out for you so that you can understand what is actually happening behind the scenes in our economy. 👀 

And on that note, let’s talk about the debt issue.

President Trump’s Warning

Have you heard the warning that Trump gave out recently? How the debt in the economy and other factors might end up triggering a 1920 style depression and all that. 📉 

Well, love him or hate him, he’s not wrong about this one.

Let me walk you through one of the main issues regarding the $36 trillion debt today:

The problem with the debt level right now is the interest payments on it, which have never been an issue, but today it’s a little different.

Whenever the interest expenditures on national debt get too close to our defense budget, something happens in the world or the economy to try and fix it. In the 1990 as you can see above, it was the Gulf War.

Today, well you see any and all attempts from Ukraine and Russia, or Palestine and Israel, to really get a war started, this way we not only have to print money but also boost our defense budgets.

Whether a war happens or not, we think there’s also an economic implication to all this.

And it ends up with a market crash led by the Russell 2000 and S&P 500. 📉 

Which makes sense to see the commitment of traders report above show us that commercial dealers (the banks, prime brokers, and issuers) are as short the S&P 500 futures as they were in 2007. 📆 

If the big money is betting on a downward move, then shouldn’t you be worried? Well, if you’re preparing for one, then not so much.

Look, we can talk stocks all day long, but it is the credit markets that are really giving us the warning sign here, the big banks are getting ready for some dark economic times coming up. 😨 

The way we can tell is through the Secured Overnight Financing Rate (SOFR) spiking higher over the past couple of months, which means the cost - and risk - of banks lending each other funds overnight has just gone higher.

Higher by itself and higher relative to the Overnight Index Swap (OIS), which acts as the benchmark in these overnight funds. Now that SOFR is above the OIS, it tells us that banks might have some toxicity held up in their balance sheets. ☢️ 

And that, my friend, is where bonds start coming into play.

Look at this picture, stare at it. This is one of the most important relationships in the market right now, where in orange you have the $TLT bonds ETF, and in white the $IWM small caps ETF.

Notice how their correlations swung to the higher end of the cycle recently? Well, that’s only supposed to happen if we have a hot inflation scenario coming up, and as we broke down in our post from last week, that’s just not the case today.

We even considered stagflation, but this post will show you why recession is the only likely outcome here.

So, now that correlations are breaking down and we can accept a recession scenario, the only sensible outcome is to see a bond rally. 📈 

And that’s where the commercials get paid, since the Fed also needs premiums in capital markets to disappear so that they can justify cutting rates.

Why?

Cutting rates would help lower debt interest expenditures, help Trump in his agenda for domestic manufacturing, and, as bond rallies and lower rates crash the dollar, the rest is history.

So yes, we see Bonds and EUR/USD as two of the best risk/reward setups today in global macro. 🔥 

TRADE OF THE WEEK
Get in Loser

When companies become verbs, that’s when you have a pretty good idea of what type of value and upside you’re holding in your portfolio.

In the case of Uber stock, that’s a fact that pretty much everyone can agree on. Just like you don’t say “Bing it”, you say “Google it”, people refer to deliveries and ride-sharing as Ubering.

Apart from that, they follow the most profitable business model out there: The agency model. 🧠 

They get paid first, and only pay drivers once the services are completed, so their working capital is always net positive.

No fixed assets to maintain, scalable as hell, and actually good quality (most of the time).

Qualitatively, this is a stock I want to own, so let’s dig a little more. 👀 

You see that big gap up there? That’s Uber’s massive market share advantage, and I’m sure you can guess that looks pretty much like Google’s market share of search engines.

Point is, it doesn’t matter who else enters the industry, or how their service is… People know Uber, and Uber is what they trust, so going out of their way and download a new app is not something people will do just to save a few bucks.

And that, my friend, is a moat.

A moat that also shows up in the company’s recent quarterly KPIs and financials:

Monthly active users, a metirc that is widely followed in the tech space, grew 13% on the year for Uber. 📈 

That led to a 17% growth in trips, as more and more people realize that gas ain’t getting any cheaper, they decide that Uber seems like the best choice.

Also, the need to pick up a side hustle like deliveries and rides to battle inflation could help Uber get to bigger economies of scale, and be even more competitive in pricing and driver retention.

Anyway, all this led to a 22% jump in revenue, but that’s not even the best part…

Free cash flow, that’s operating cash flow minus capital expenditures, and it’s the best thing that a young company like Uber can have.

Airbnb is a perfect example, they’ve just hit positive FCF and it’s growing like crazy. What typically happens next is management starts using this FCF to reinvest in the company’s growth path.

More than that, buyback programs start, and capital starts compounding at whatever yield this FCF generates.

Which is 13.4%, taken from dividing the FCF by total Equity in the balance sheet.

Let me say that again… 13.4%! That’s insanely good for a company in this stage. 🎉 

Alright let’s take a look at the chart and see what we’re thinking.

Frist, we have a 6 instance of responsive buying activity, which typically means accumulation if you’ve been reading our nightly market recaps.

This accumulation seems to be happening around the $59.50-$60 range, which we’ve just exited.

With this exit, we’re assuming the price will cut off at roughly $63.75. At that point, it will either come back to the distribution’s VPOC of $60.75 or break through to the next distribution and VPOC of $72.25.

IF successful, then the market profile gives us the ideal exit points in the $75-$80 🎯 range. But, Wall Street analysts felt a little bit more bullish on this one, we can’t blame them: 🫰 

NOW GO AND MAKE IT HAPPEN
Reality Check

You think that investing is easy? Well, it’s one of the hardest businesses to run, the most stressful, and the one with the highest chance of failure.

So, if you want to get a taste of truth serum, and also find inspiration from someone who made it in this world, today’s book recommendation 📖 is for you.

To your success,

G. 🥃