🗞 Back to The Future

WHILE YOU POUR THE JOE… ☕️
All Roads Lead to Rome Inflation

This is the second time a major investor has appeared on live TV to mention the risks of sustained high inflation in the coming years. 📈 

Paul Tudor Jones, one of the best traders in history, has sided with (his buddy) Stanley Druckenmiller in taking a bearish view of bonds and a bullish view of commodities.

Why?

Inflation is going to be crazier than in the 1970s, and there’s absolutely nothing we can do about it other than devalue our currency.

But then we get into a whole lot of other issues, such as a potential “Lost Decade” like Japan’s economy experienced.

Speaking of commodities and lost decades, let’s get on with today’s email 📧…

LOOKING AHEAD
Goldman’s Latest Call

Analysts at Goldman Sachs have recently quoted their expectation for what could be called a “Lost Decade” similar to that seen in Japan for the previous generation.

What this means is not a whole ten-year period of losses but rather lackluster market returns, specifically below the risk-free rate offered by treasury bonds.

With Stanley Druckenmiller and Paul Tudor Jones calling for sustained high inflation, bonds could go as high as 5.5% to 6% in the ten-year bonds, which is crazy. 🔥 

But that also means that stocks will severely underperform bonds, considering Goldman only sees a 3% annual return for the next 10 years. This is going to be a trader’s paradise and an investor’s hell.

We kind of saw this coming, though. There’s an indicator that accurately predicts the next ten years of returns for the S&P 500. It’s made by Buffett, so that’s something… 👀 

The Buffett Indicator

Currently, at all-time highs, the Buffett Indicator (Stock market / GDP) suggests that today’s market is overextended at best.

Every time the ratio deviates by a certain amount from its mean value, the S&P 500 sees lower returns over ten years, before the deviation goes to the downside to line up better returns for the following decade.

If you are looking for a place to invest your money, it probably won’t be in the US, so you better start looking elsewhere. 🌎️ 

We like China and Argentina, and so do most mega investors out there today, so we will probably post more about the stocks we love in those regions in future posts.

This is Not a Drill

One thing is for certain: oil companies and oil prices will likely outperform during this lost decade scenario, especially if the high inflation that is called for actually happens.

But not all oil stocks are created equal. We are going to focus on the top of the value chain. 🛢️ 

To do this, we’ll look at drilling companies. We’ve posted a thesis behind our bullish view on oil prices and a list of drilling stocks to consider.

After you get the idea, come back because we’re about to break down the trade on our best pick from that litter.

TRADE OF THE WEEK
Risk Reward

After trading lower the whole year, shares of Patterson-UTI Energy ($PTEN) finally show signs of a bottoming here at only 57% of their 52-week high prices. 📉 

One of these signs can be seen through the relationship of time and volume around these low prices, as they are great indicators (based on auction theory) of a new potential pivot in prices.

The market profile for $PTEN stock would show that we’re at a potential “Spring”, when volume starts cutting off at the bottom and we are looking to retest older high-volume areas.

Following this structure, we’d feel comfortable buying this stock anywhere below $8 a share, and we have been all week, something you can follow live in our Twitter account.

But probably the most important piece of information during the past trading week has been the volume spike at these low prices, where volume was twice the average in a single day at the lower end of the profile.

To me, that means a big buyer just came in looking for long exposure, right before the company announces earnings (which is this morning, actually). ⌚️ 

Then, for some fundamentals, we can follow the company’s investor presentation for the past quarterly results, which gave us a few things to think about moving forward with this potential trade.

Management has quoted an expectation for rising demand into 2025, and considering the forward-looking nature of markets, we could reason that the $PTEN trade could start to see some momentum once these expectations influence the price.

More than that, management has started to accelerate their share repurchase program “ahead of schedule” because the stock price is significantly below the company's intrinsic value.

As far as an immediate target goes, we’ll look at this stock's volume profile and land on what looks to me like $10 to $11 a share, which is a net upside of 25% to 37.5% 🔥 from where the stock trades today.

Analyst price targets, though not that significant to our trade decision-making process, should be taken into account to get a feel for reality in our expectations.

It looks like our exit targets are right in line with what Wall Street expects to see:

Then, we can get the final confirmation through the options market, where the highest open interest has landed for an $11 strike call option 🎯 chain with an expiration date of November 2024.

This is the clearly outlier trade, and lots of traders are betting on the same outcome. We believe that $PTEN to reach $11 a share by the coming earnings announcement as a catalyst is the place to be, and that’s exactly where we’ve placed our latest trade-in.

After this gets going, we think oil reaching $100 📈 or near could bring this stock to a new yearly high, but that’s for another post.

NOW GO AND MAKE IT HAPPEN
New Way of Thinking

If we are, in fact, headed for the lost decade scenario coming up, then you should get a new mindset to reset away from the easy money days of 2020-2024.

Today’s book recommendation 📖 helped me focus on the simplicity of living on your terms and how investing can help you get there.

To your success,

G. 🥃