🗞 What the Hell is Happening?

WHILE YOU POUR THE JOE… ☕️
Ending the Week

Our followers are probably bathing in the overwhelming green they’ve been seeing after following our calls lately, especially with Tesla stock’s 22% run this week 🔥 .

We pitched the stock at around $215 earlier in the week, then loaded up on it, and woke up to an early Christmas present to get our P/L in a safe zone for the rest of the quarter.

It’s not the first time, nor is it the last, that we send out a full deal breakdown that turns into a multi-bagger when played through options.

To your success and ours, we’ll be here to bring you the next winning move.

Speaking of the next winning move, let’s get on with today’s email 📧…

GAME THEORY
Mapping it Out

There are three scenarios that we see happening in the coming quarters, especially now that the Federal Reserve, the election, and the Middle East issues all act as potential wild cards to hit the market during the period.

Before we overwhelm you with the data and what it means, here’s what to watch out for specifically in the coming weeks, in order of importance:

• Earnings:

  • You must watch out for the S&P 500 impact from Apple, Meta, Amazon, and Microsoft.

• Economic Data:

  • Next week, you have the Manufacturing PMI and NFP. If prices jump too much on the PMI, it could be dangerous. Then, if NFP jumps too hot or cold, that’s another risk ahead.

• Geopolitics:

  • We all know that a sudden upturn in the Middle East situation could be a wild card for all markets.

• Election: Enough said.

Alright, with all of these factors coming up, these are the three scenarios that could play out in the next 6-12 months 📆:

1. Recession

2. Inflation boom

3. Soft Landing

We can play the macro side of the equation, but that won’t work since markets are now in a manic/depressive state, not bound by logic. 🧠 

With this in mind, here’s how behavior can be broken down to figure out what’s more likely to happen through price action:

Here, we can see two of the main trends, which give us a feel for the scenarios that could play out.

In white, you have the $IWM to track small-cap companies (extremely rate and inflation sensitive), then in orange you have the $TLT to track bond prices (which move opposite to yields).

At the start of 2024, the IWM trended sharply along with the TLT, meaning that small-cap stocks also outperformed as bond yields came down (in anticipation of lower inflation).

But

That changed toward the second half of 2024. Now that bond yields are going up, and the ten-year being above 4.2%, the small-caps are starting to test a ceiling.

Here’s what you need to know moving forward for our scenarios:

1. Recession: IWM down, TLT up (yields down)

2. Inflation Run: IWM down, TLT down (yields up)

3. Soft Landing: IWM up, TLT trending down slowly (normal yield trend)

Knowing that the TLT shot down suddenly and the IWM hit the breaks as well, I think we’re facing the potential for a new inflation run 📈.

You now who else agrees?

Stanley Druckenmiller, who is responsible for most of George Soros’ track record at his Quantum fund, has recently stated in a Bloomberg interview that he is going to be shorting bonds with high conviction.

That doesn’t sound like he’s calling for a recession, much less a soft landing. Makes me think of inflation. 👀 

And he’s not alone in this bet; here’s another legend with a similar view:

Paul Tudor Jones is another billionaire hedge fund manager who recently said, “All roads lead to inflation” in a CNBC interview.

He’s going to also short bonds, though through the back end (whatever that means, I think it’s got to do with long-term bonds).

Apart from bonds, he’s buying oil, gold, and commodities as they are “Under owned” today.

We have to agree with him here. As you now know, all of the evidence (plus price action) points to an inflationary period like we’ve never seen before.

Now for strategy and some broader picks:

Starting with commodities in energy, the uranium trade has been a winner for the past quarter.

Remember, though, that this is before the IWM and TLT behavior shift we just pointed to above, so a rotation in the opposite direction in favor of oil can be expected.

You can check our previous post on oil and why we think price could be on the rise soon, with a full breakdown of supply and demand. Also, keep in mind that geopolitical wild card that could send oil past $80 in no time.

Real estate performance has been found in REITs but is nowhere to be seen for the developers.

If you’ve followed us for a while, you know we’re heavily short on homebuilders like Toll Brothers and the broader ETF through XHB.

Check out the near 10% drop in PulteGroup 📉 this week on bad outlooks, too.

This is confirmation of the inflation run trade, as inflation is bad for developers and good for the REITs as property values go up.

Finally, we see the financials perform. Notice how mortgage companies are starting to fall off the cliff over the quarter and month?

This is because of the inflation trade we are speaking of; rising yields will have a negative effect on mortgages as they also go up.

“All roads lead to inflation”…

Finally, there’s China, but this applies to other emerging markets like Brazil.

With inflation bets taking off, we do expect a dollar drop during the period, which will help any other stocks overseas that are denominated in dollar terms. 📈 

Think of Alibaba for me will you?

TRADE OF THE WEEK
Following Up

We are overweight oil names, as we’ve been preaching in our Twitter feed, but today, there’s one name we haven’t gone over in previous posts or anywhere else.

That stock is focused in the drilling industry of the energy sector, and it makes all the sense in the world, considering it’s one of two calling for the most premiums and average EPS growth for the next 12 months.

Where the oil and gas industry calls for an average EPS growth rate of 76%, the drilling niche commands a much higher 139% expected growth 🔥 for the next 12 months.

Now, the forward P/Es are a bit concerning, but they actually make sense, considering that this is one of the industries that is set to get paid first when oil prices are on the rise.

And, well, oil hasn’t been on the rise, so why would anyone pay a premium for these names yet?

This is where we can get in early for the industry before valuations start to catch up to the next 6-12 month expectations.

Also, why we chose this stock to go with:

Transocean is a drilling stock that has been on our list for a while but hasn’t reached a price attractive enough to consider a potential buy until now.

We already know the thesis for being long oil and why drilling is the first place to look into for this trade as it sits at the top of the value chain.

But, why Transocean in this case?

Apart from Patterson-UTI, which we are already long of at $7.8 a share, Transocoean is another name-calling for a premium forward P/E valuation compared to the rest of the drilling.

Additionally, analysts think it could grow its EPS by 272.2% 🔥 over the next 12 months to be the fastest-growing name in the space.

Let’s use the chart to explain why we think this stock is close to being a potential buy today:

Since September, we’ve noticed signs of accumulation in the stock at the $4.3 👀 price and below. It’s just a coincidence that this accumulation is happening right before the company announces its earnings results, or is it?

We consider that a buy anything at or below $4.3 today. When it comes to an exit target, I think we can look at the market and volume profile to get a better sense of where this trade can take us:

At today’s level, we can see that Transocean stock is coming up to a low-volume node area, meaning that not a lot of people think this is the right price for the stock, and what little volume is happening here is probably buying pressure.

For exits, we want to retest the volume point of control (VPOC) for the year, which is that thick red line above at roughly $5 - $5.25 🎯.

This is where the most liquidity is likely to be, where any and all accumulators today might want to get out.

NOW GO AND MAKE IT HAPPEN
Strategize Like Pros

Haven’t read this one, but I’ve read other ones in the same series, and I have to say there are always a few golden nuggets to take away from the case studies and interviews in a book like this.

Today’s book recommendation 📖 is one I’ll start to read this weekend, but expect to learn a lot more about strategies and case studies from the hedge fund world.

To your success,

G. 🥃