🗞 The Man of Steel

WHILE YOU POUR THE JOE… ☕️
FOMC Latest Moves

The Federal Reserve cut rates by 0.25% 📉 in the latest meeting, and while that should have (in theory) been good for markets, it wasn’t.

On our Tweet above, you can see how the different markets reacted to the news, and if you’ve been subscribed for a while, then you know all this means is that inflation is on its way back.

Still, with the job market being at lows, economic growth is not looking that great, so we might even get a stagflation scenario.

However

A new Trump administration could turn that around.

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

LOOKING AHEAD
First Day on The Job

 The morning after the election, a lot of markets went up big, leaving most out there confused as to where to pick the signal from the noise.

Well, that’s why you have us.

It was very interesting, in my opinion, as the following areas of the S&P 500 were the ones to outperform the most:

• Industrials: Trucking stocks, Auto Manufacturers, Steel, Textiles

• Energy: Oil & Gas equipment and drilling

Then, there was the massive rally in Bitcoin, as it hit a new all-time high, with stocks like Coinbase going up by as much as 32%. 📈 

Other overseas markets also gave us a few clues to think about, and since that’s the shorter (and easier) implication, let’s get to that one first.

Tariffs

This chart is the Japanese stock market (Nikkei) vs the Chinese stock market (Hang Seng).

Notice that during election night, Japan rallied sharply while China sold off, which gave us a clue to consider.

During that thinking, we noticed that Brazil’s Ibovespa also rallied with Japan. Okay, so what does all that mean? 👀 

Tariffs, my friend, tariffs.

You see, if China is going to have a hard time playing ball with Trump, then they will happily deal with Brazil’s Lula in their steel and iron ore exports.

Knowing this to be the case, we are willing to look into Brazilian stocks in the industry as a way to play this.

Particularly:

We haven’t done preliminary research on this one yet, but one thing makes it look promising.

The stock reported up to 10x its average volume the day after the election, and the volume point of control (VPOC) is much higher than today’s price, so we think there might be a situation to look at here. 🖋️ 

Manufacturing

We’ve covered this in the past, but here’s the manufacturing PMI index over a couple of decades.

Notice that the index has been on a contraction for 24 months straight, driven mostly by:

• New orders (demand)

• Production (supply)

• Employment (productivity)

• Prices (inflation)

Rather than walking you through each one, let me tell you what the aggregate situation is right now.

Prices are going up while everything else is going down. Now, in case you skipped school that day, high inflation with low or no economic growth means stagflation.

How does that improve?

Well, let’s go back to macroeconomics shall we? If the dollar remains as strong as it has been lately, then no foreign nation with a relatively weaker currency will want to buy our stuff.

So step one, we need a lower dollar. 💵 

Sure the dollar rallied as soon as the election results were out, but then yesterday it sold off by over 1% to give up those gains.

Why?

The market knows that Trump wants a weaker dollar, and he knows that bringing back inflation is the only way to get the country out of the obscene interest payments on the national debt.

That will mean pain in the short term, but it’s a necessary evil for us to stay in the game as a nation and economy.

Little sidetrack, but there’s a reason bond prices are plummeting so much, someone knows the US is in trouble, and they’re getting the hell out of US debt quickly 👀.

Back to manufacturing, if the dollar manages to decline and boost the sector again, then we already know the three areas we want to start digging into for deals:

Trucking outperformed for the week, and so did metal fabrication (think aluminum and steel).

Now, you want to make sense of this? Think of the following scenario.

Business activity is picking up again for the domestic economy, and the manufacturing PMI is back on track to expand again. Therefore, a lot of raw materials and finished products would need to be moved from warehouses to customers' hands.

That is one reason trucking and metal production might be taking off ahead of whatever demand the economy faces.

Of course, all of this will have to call on one other commodity that is severely undervalued today relative to the demand that will come from a manufacturing pop.

Oil

Barely reacted on the election results, which was odd. However, I think there’s a good explanation for this.

Even though a Trump administration is good for oil, and so is a manufacturing pop, there is still a lot of supply in the market today, enough to offset the pending demand that could come in the following months.

More than that, there is the geopolitical wild card that could hit us in the head, as the conflicts between Israel and Iran haven’t been completely resolved.

The way other markets have behaved recently mean that oil should be rallying, so we’re staying overweight on the space in expectations of this run.

Musk & Bitcoin

The goodwill that Elon Musk has built with Trump is going to pay off hugely (I mean, it already is).

Tesla is the beginning, sure, and it could be one of the best-performing stocks in the market during the coming years, but there’s much more to it.

Musk is also best buddies with Argentina’s Milei, so who’s to say that Tesla doesn’t move production to Argentina to keep competitive margins in exchange for Argentina adopting the dollar to further strengthen our path to debt reduction?

Anyways, enough wishful thinking.

Musk is also the owner of X (formerly Twitter), a platform that Trump supports. X could now be in the clear to become that “all-in-one” place like Tencent and Alibaba. We’re talking content, payments, banking, investing, the whole thing.

Could be huge.

Nonetheless, our focus remains on manufacturing stocks that pose as an underwater volleyball waiting to pop. 🫰 

 TRADE OF THE WEEK
One Last Puff

We don’t like airlines, and we don’t like traditional automakers. Lousy unions, high costs for low-skilled labor, and other obstacles to innovation and technology are among them.

However

We think Stellantis might be one of those discarded cigar butts Warren Buffett used to love finding, and it is also a stock that saw 10x its average volume the day after the election.

That’s similar to Gerdau’s volume pop, but there is one main difference. Gerdau rallied by over 10% on that volume, while Stellantis stock finished the day relatively flat.

It probably means accumulation; new buyers are coming in as they know what’s about to happen: 👀 

The Euro/Dollar exchange rate is key to watch for Stellantis and its price action.

Over the past 8 years, these two instruments have shown a strong correlation on both a statistical and fundamental basis.

You see, since Stellantis has a lot of its brands as European makers, its revenues and earnings are highly exposed to the EUR/USD rate. Considering that the US is going to give us a weaker dollar to boost manufacturing, this is good for Stellantis.

We’re not betting on the company from a value perspective, though. We're simply going into it with a swing in mind as a safer way to play both the manufacturing and EUR/USD uptrend.

But

Since nobody else likes this stock right now, we found that deep out-the-money call options for over a year were heavily mispriced, so we just had to take advantage of the discount. 👀 

That setup is similar to what we did for Estee Lauder. We suggest you check out that post as well.

Anyway, here’s the discount for Stellantis call options:

$15 strike calls for January 2026, trading at roughly $1.75 a contract, were bought for $1.65.

We already have a $0.10 gain, but the contracts still need to be paid.

Using the Black-Scholes options pricing model, we came to a valuation of up to $2.56, meaning we have a nearly 50% discount 🔥 on these instruments today.

Now, when you dig deeper into the volume/market profile of the stock, it looks like we can get to the $15 strike very quickly:

Even then, the value could be much higher, especially if we get this double tailwind coming from both the manufacturing expansion and the EUR/USD rate expansion.

Wall Street analysts, who are always scared of going above the consensus, even see a potential for this stock to rebound from its current position.

I mean, they kind of have to, right? After a 10x volume day, this can only mean one thing. 💰️ 

NOW GO AND MAKE IT HAPPEN
Be the Wolf, Not the Sheep

Every once in a while, we think we are onto something when we really aren’t, and that’s the effect that randomness in life and data can have on us.

Most of you have asked why a lower dollar would be good for the economy, etc., and my answer has been that context matters more than anything.

By that, I mean correlations, which swing from positive to negative constantly depending on the underlying story.

This is why today’s book recommendation 📖 is helpful. It reminds you that the future can be projected from the past, but those projections could turn on their heads in a second as soon as the context changes.

To your success,

G. 🥃