🗞 Oil Leases & Bad Customers

WHILE YOU POUR THE JOE… ☕️
Last Laugh is Loudest

When the Fed cut interest rates by 0.5% (50bps) earlier this month, markets celebrated crazy. Still, we already warned you that this basically admitted that the economy was in the toilet (it is). 📉 

Now, China has cut its own interest rates by 50bps as well and injected billions into the economy, which they have explained for months now is not in the best shape.

Considering that the stock market in China is the cheapest it’s ever been to the U.S. stock market, it doesn’t look like there could be any more risks translated into prices, so stocks like Alibaba took off 🔥 on the news and are expected to go up further.

Speaking of things not being that great in the U.S., let’s get on with today’s email 📧…

TAPPED OUT
Declined: Insufficient Credit

If you’ve ever gotten that message when trying to pay for something, I get you. I’ve been through it, and remember the many times I couldn’t even afford groceries, but you know how I got out of it?

I did the exact opposite of what people have been doing since COVID-19.

Turns out, the level of credit card debt has risen by a staggering $400 billion 💵 since the pandemic, and most of the spending categories have been in travel and discretionary items like clothes and accessories.

Even car loans went up. When times are good, you tend to forget that “This too shall pass” and commit to stupid responsibilities that you may not be able to service when the tide goes out.

Fast-forward to today, and consumer confidence just had its lowest reading since 2021 📉. People are less optimistic about the future, considering the mountain of debt they are in.

Why would you be optimistic when you realize you owe up to 5 years of your current salary on things you don’t even enjoy anymore? Not to mention the interest you have to pay on those loans.

Inflation is not helping either; paying more for groceries, insurance, rent, and other necessities has squeezed consumer finances even further.

Which is why you see the savings rate being negative now. NEGATIVE, people are not saving anything, and any savings they did have before are now being erased. 📉 

If this is the current psychological state of the consumer, you can probably guess where the rest of the economy is headed.

This, of course, works in favor of our short thesis on stocks like Williams Sonoma and also explains why Warren Buffett sold out of consumer credit stocks like Capital One Financial to avoid the inevitable collapse.

If you are going to be exposed to any consumer stocks, make sure they are big and diversified enough, like Nike, so that any downfall in domestic demand due to these trends can be made up by international sales exposure. 🌎️ 

TRADE OF THE WEEK
Rigs! Get Your Rigs!

So you know how we pitched Chesapeake Energy stock a few weeks ago? That stock is up over 12% since 🔥, just another one of our charitable projects to our audience.

Now that the risk profile is higher on the Chesapeake trade, meaning the upside left is much smaller than the potential pullback, we decided to look into another potential oil winner.

That winner is Transocean stock, and here’s why we picked it:

Even though the manufacturing PMI has been on a 22-month contraction 📉, there is one industry that still has managed to push consecutive expansion readings for the past quarter: the petroleum industry.

Warren Buffett knows that this will be a good thing for oil stocks, so he had been buying up Occidental Petroleum already, and now owns up to 29% of the company.

But, what’s the catalyst to bring oil higher and make stocks like Transocean pay? 💵 

This is the yield curve, the ten-year yield minus the two-year yield, and it’s finally going back to positive territory, which means tightening economic conditions and liquidity.

That probably means oil supply will dry up since no business or consumer activity will drive demand, and that is enough to keep prices steady until demand comes back online.

But, when there’s even the slightest whiff of demand, oil will likely start to rally, and Transocean will be getting paid first.

Why?

It rents and leases oil rigs and other equipment to bigger oil producers like Exxon Mobil and Chevron. Transocean's contracts and rental rates, though, are tied to the oil price.

This means Transocean will be the first to get paid when and if oil rises, and markets know this is the case.

Transocean trades at a premium to the sector on a forward P/E basis and is also forecast to grow at a much faster earnings per share (EPS) rate.

That warrants the $8 a share price target 🎯 set by analysts from Benchmark and Bank of America, which implies over 100% upside from where it trades today.

The chart may give us an opening for a long position at this level. That gray area is a low-volume node, and it has attracted a lot of continuation buyers interested in owning this stock for the very reasons we identified now.

We have to do a bit more digging, but the back-of-the-envelope price target looks like it’s right around the 200-day moving average (purple line), which has been rejected all year.

If we can break the moving average then we should be safe to go into $6.5 for a 50% return from today. 🫰 

NOW GO AND MAKE IT HAPPEN
A Quick Boost to Your IQ

You can either spend years of your life trying to learn something, go through the trials and tribulations of figuring it out on your own, or learn from someone who has done that for years.

When it comes to investing and trading, I like to lean on Stanley Druckenmiller a lot. He has beat Warren Buffett and is responsible for George Soros’ returns. Today’s book recommendation 📖 is his almanack of advice and thoughts, which contains many new ideas and strategies.

Psst, you can read it easily in a single day.

To your success,

G. 🥃