🗞 Wild Card Time

WHILE YOU POUR THE JOE… ☕️
Get Your Popcorn Ready

That’s right, InvestiBrew has started a YouTube channel 📹️, and while we are recording our first video in Tampa, FL, we do have an amazing travel schedule set for 2025.

So, be on the lookout for our first video, because we will drop all the stuff you love to read about here, only in a much more entertaining format, and in beautiful locations around the world.

Be an early subscriber and get first dibs on this first video, where we’ll break down all market trends and where we see things for next year.

Here’s the link:

Speaking of where we see things going in 2025, let’s get on with today’s email 📧…

SPEEDCHECK AHEAD
What’s Behind Door Number Three?

If you’ve followed us for a while, then you know that we see the market headed into to different camps from here.

One is an outright recession, and the other is the possibility of inflation coming back. Of course, there’s always the potential for a soft landing, but let’s be honest, it’s not even worth considering at this point.

Let’s explain what we need to see in order to justify either inflation or recession alright? 👀 

What you see here is the $IWM small caps ETF, tracking the Russell 2000 index in white, then in orange you have the $TLT ETF tracking long-term maturity treasury bonds.

That red line below is their 60-day rolling correlations, which are now at a cyclical high clearly. What this means is that a divergence (a correlation breakdown) is imminent, but considering that both bonds and small caps are now correlated to the downside, what does this really mean? 💡 

Well, two things:

1. Either Small Caps rally from here

2. Or, Bonds rally from here

In order to figure out which of these two is more likely, we’ll need to consult with a few of our favorite economic indicators, so let’s go ahead and do that.

Let's start with the manufacturing PMI, which has been contracting for 25 consecutive months. Typically, the S&P 500 has a 12-18 month lag to the manufacturing PMI index, meaning we are way overextended at this point.

That’s one strike off for inflation narratives, and one point in favor of the recession theme. 📉 

Now here’s the ugly cousin, the services PMI index. This one hasn’t been contracting, but it did fall significantly from 56.0% to 52.1% to cover the October-November period. 📉 

We’ll see later this week what the trends might bring for these two PMIs, chances are, more of the same.

With this in mind, you have the second strike for inflation, and second point for recession themes building up.

Now you have a gauge for the credit markets, this time through the infamous yield curve (ten-year yields minus two-year yields).

This one matters for two reasons. First, it clearly indicates the current state of the business cycle, as credit cycles change along with liquidity.

Second, notice how the curve was inverted (negative) for the past 18 months. Whenever the yield curve has inverted, a recession typically ends up happening when it goes back to positive.

So, as it has just flipped back, it makes sense to see all the different price actions we’ve caught in assets like bonds and small caps, especially inflation-sensitive ones like gold and Bitcoin.

Now, here’s a third scenario that some of you have been mentioning and asking about through Twitter: stagflation. 👀 

First, let’s define what stagflation actually is…

• Stagflation is when the economy is seeing high inflation, which is typically a result of high growth and low unemployment. Only this time, there is no growth and high unemployment.

You see the chart above? that’s the convergences and inversions between capacity utilization and unemployment, you’ll see that as unemployment goes up, then capacity utilization goes down, which makes sense.

During 1973 to 1983, capacity utilization just kept trending lower, which ended up in a huge spike in unemployment as expected.

Now let’s fast-forward to today:

We have relatively low unemployment, which is dubious as most jobs right now are going to part-time positions and government jobs, so the real economy is actually suffering.

Which is why you see capacity utilization starting to come down a bit, as is reflected in the PMIs we’ve shown you above.

Now, are we going into stagflation based on this? We’re missing one piece of the puzzle, and that is inflation.

We have the same chart as below, only with inflation added in red. Notice that from 1973 to 1983, the period of rising unemployment and falling capacity utilization, inflation actually trended up.

Now let’s use that same overlay in today’s market:

As capacity utilization starts coming down, and unemployment (in real terms) is coming up, we have no inflation whatsoever.

I mean, we do, but it’s all concentrated in housing and rental rates, so that doesn’t really count neither.

So, for those of you asking.. No, we are not going into stagflation, we’re going into recession. 🫰 

TRADE OF THE WEEK
Drink the Pain Away

Now that you know a recession is on its way, let’s talk about man’s favorite pastime: Beer.

Ambev stock is now trading at 66% of its 52-week high, but we think there’s a clear path for it to make a major comeback.

How so? Well, by the time Trump is inaugurated into office, the war in Ukraine will probably have ended, and then the trade routes for fertilizer and wheat will be normalized.

What that means for companies like Ambev is simple, better margins and supply chains that don’t choke their suppliers and customers out.

That is also why you see the stock finding a lot more volume after its recent decline, both on the vertical volume bars and the horizontal volume profile.

Chances are the stock will stop around here, in the $1.75-$2.00 range, and then see some signs of accumulation. 👀 

In fact, management has approved the buyback of up to 155 million shares in the open market, a sign that even insiders admit their stock is dirt cheap right now.

Now, based on this same profile, we think an immediate price target should be set around $2.50 to $2.60 based on recent volume cutoffs, we’d even go as high as $2.75 if enough order flow comes in.

We are not alone in thinking this for Ambev stock, as Wall Street analysts have also landed on a $2.70 a share price target, sending the stock’s upside potential to 44.3% from today’s price. 🔥 

NOW GO AND MAKE IT HAPPEN
Become a Machine

We are not too fond of academic books when it comes to the markets since, typically, all the formulas and equations end up failing you in the real world.

But, if there is one program that can save you lots of time and stress, it’s the CFA curriculum.

That's why, in today’s book recommendation 📖, we’re suggesting you read it. It’s basically the same training program Goldman Sachs traders go through.

To your success,

G. 🥃