Our remaining 3 positions are performing quite well. And this week First Solar has gone on a tear. I believe this fast rise is due to a short squeeze and may not lack long-term staying power.

That’s why I want us to sell half of our position right now. And we’ll raise the stop to breakeven to guarantee a profit in the position.

For now that’s all I have, just wanted to get this out. Congrats on the quick 30% gain. That’s the power of our episodic pivots.

These are outsized moves. Some of which were likely short-sellers scrambling to cover their positions. This spread to many other highly shorted names like TRUP, LMND, and RIVN which climbed in tandem with these kings of memes. Reddit ($RDDT) also caught a bid as they are likely getting a surge of traffic as people see what’s on the WallStreetBets forum.

Here we talk a lot about episodic pivots and invest in these explosive setups. We’ve done pretty well over the past couple years with a compounded average growth rate (CAGR) over 30%. That beats a majority of hedge funds. And I don’t charge you the 2% and 20% fees.

The question on readers is do these moves qualify as an episodic pivot?

We Have the Big Move, but What’s the News Catalyst?

This is the question we have to answer. And the news catalyst is pretty weak. The reason for the move is that after three years of going incognito, the Twitter Handle @TheRoaringKitty came back and made a post. This overjoyed the Redditors and people bought the hell out of GME last night and today.

Now TheRoaringKitty has no affiliation with Gamestop. He has no insider knowledge. He is merely an internet meme-ster who got famous for his Gamestop talk in the massive 2021 runup. He was one of the biggest cheerleaders of the company.

If you consider the return of @TheRoaringKitty to be a material news event, then yes it qualifies as an episodic pivot. But if you don’t, we are missing that news catalyst.

But That Doesn’t Mean These Can’t Go Higher

Anyone who followed the meme rallies in 2021 knows these stocks can go higher. A lot higher. Gamestop went from about $2 to $400 in that period. I doubt it will go that high again, but it can go higher.

About 24% of the company’s shares are currently sold short. That’s a lot of people who have to buy back the stock. And after this big move, I wouldn’t be surprised if a few people got margin calls. That means their broker will require holders to either put more money in their accounts or close that position. Those that close a short have to buy a share – which will push prices higher. That’s how “short squeezes” happen.

It's worth noting that in 2021 about 110% of Gamestop’s float was sold short. So there was a chance, if nobody at all wanted to sell, there wouldn’t be enough shares for the shorts to cover. That could send the stock to crazy high levels. And it might have happened if Citadel and others didn’t get the exchanges to halt trading in GameStop for hours at the peak.

In full disclosure, I bought some shares of GME this morning and am down to a quarter position. And I also hold a few AMC calls. I believe we’ll see a spike tomorrow because of those margin calls. But I will be taking profits if things get crazy.

I have profit targets of $50 on GameStop and $9.50 on AMC. Those are technically important levels. And where we’d likely see a lot of supply open up.  

But for anyone playing these stocks. Be very careful. We will see extreme volatility in these names. And they can easily fall back to where they traded last week. You could easily lose 50% of your position. So size carefully. And obey your stops.

If you’re trading these stocks, one thing to watch carefully is the volume weighted average price (VWAP). You should carefully watch the daily VWAP and the anchored VWAP to the premarket action today. You can see in the chart below that GameStop held this level throughout the day. All the dips stopped at AVWAP.

AMC didn’t have any pullbacks large enough to tap VWAP, but you can see once it broke through it around 10 am this morning, it never looked back.

That’s one indicator to watch to manage risk. But nothing is foolproof. Expect volatility. Embrace it and if you catch the trend right, you’ll make some good money. But volatility is a double-edged sword. It cuts both ways.

I don’t have any new official trades for y’all this time around. A lot of the big moves today are from heavily shorted names, but I’m close to pulling the trigger on a few trades. I’ll let you know if any new trades set up.

Happy Investing.

Maybe… Investors cheered their earnings as they weren’t as bad as expected. Apple ( ) beat sales and profit estimates and announced a $110 billion share buyback – its biggest to date. On top of that, sales in China held up better than people thought. And their high-margin services revenue grew 11% this year. All in all, it was a good quarter.

That’s why the stock price soared 6% on Friday. And it got prices above most of the technical resistance that had been pushing it down.

This is a chart that looks like it’s going higher. I’m not making it an official recommendation, but it’s probably a good place to put some extra money right now.

And on Friday we also got some weaker than expected jobs numbers. Now that sounds bad, but we have to remember that weak economic data means the Fed will likely cut rates sooner. So that really stoked the animal spirits and helped push the market even further Friday.

I will say that this is all very constructive. But we’re still not quite out of the woods yet. The major indices are still below their 50-day moving averages. That means the market still doesn’t have strong institutional support.

This remains the case for important leading sectors such and semiconductors and financials. They are struggling to reclaim this important technical level.

Now next week, I think what will cause the most pain will be a move above the 50-day on Monday. This will suck in all the trend followers and people who wait for this signal to be invested. Then maybe a turnaround Tuesday scenario which would send the market lower.

Remember, most of the time the market does what will hurt the most people. So don’t be one of those people.

But with that being said, the Fed also did a solid for the market this past week. We all know that Fed Chairman Jerome Powell said they aren’t raising rates anymore. That’s good. But what many missed was that he said he was going to slow the pace of quantitative tightening (QT) from a maximum of $65 billion a month to $20 billion. That means the Fed will be able to keep a bigger balance sheet and also keep long-term rates lower. That is bullish for equities.

Knowing When to Trade Is Just as Important as Knowing What to Trade

I would classify us as swing traders. And for our trades to be the most successful, we want to be trading along with a rising market. That helps increase the odds we are profitable. And when the market pauses like it has the past couple of months, we should slow down.

That’s why I haven’t recommended many new trades lately. It’s been choppy and we are best off just raising cash. So that’s what we’ve done.

If you want to trade in this environment, you need to be surgical. Either day trade or take profits after a couple of days. Not many stocks are making long, sustained moves. And the ones that are, aren’t the tech stocks that have worked the past year or so. It’s more like industrials and up until last week, energy that was moving higher.

And right now, we only have one position in the portfolio. That’s Tandem Diabetes ( ). They just reported earnings Thursday evening as well. And they crushed it. And we’re now up 49% in the name. I think we have further to go. But that said, let’s adjust our stop to $36 to protect our profits.

I am going to add another position to the portfolio this week. But we’ll have a tight stop on it just in case the market turns.

First Solar ( )

This solar company has been a standout in the industry the past couple of months. And then after its earnings report Wednesday evening, the stock soared higher. And then had a follow through day on Friday. As we can see in the chart below, the stock broke to new highs this year.  

And this two day move was on extreme volume. Making it likely big investors were trying to buy shares of this breakout stock. So we’re going to follow them in.

Buy shares on Monday and then we’ll use a tight stop of $178. This is worth taking a flier on, but we don’t want to be around if this is a false breakout.

Happy Investing!

First, I want everyone to sell Valero (VLO). This is our newest trade, but the oil industry ran up quickly and is now reversing. Hard.

Just look at the Energy Sector ETF (XLE). This is a classic reversal. On Friday we had a bearish engulfing pattern and then the pattern was confirmed by a follow-through day lower yesterday.

We do not want to be in energy stocks anymore. I think it’s likely it goes back to the mid-80s in the coming months.

The rest of the market doesn’t look any better. Look at the S&P 500 Index. It just closed below the 50-day moving average (MA). The last time it cracked the 50-day MA after a major rally was in August last year. And the market went on to go about 10% lower.

This is another ominous indicator for the market. And then we can see that investors are beginning to shift away from tech and into safety stocks.

I’ve got a chart below that takes the Tech ETF (XLK) and divides it by the Consumer Staples ETF (XLP). When the line goes up, it means that tech is outperforming. When the line goes down it means consumer staples are doing better as investors are looking for safety. And now the ratio line is threatening to break below the 50-day MA and that MA line is about to turn lower for the first time since the market bottomed.

So we should be very concerned right now.

But there is one thing that could change all this and send the market higher. And that’s earnings. Earnings season has just begun. And so far good earnings from the banks like JPMorgan (JPM) and Goldman Sachs (GS) haven’t been enough to hold up those stocks.

The two companies we should pay close attention to are ASML and TSM. These are market leaders which are enabling the manufacturing of bleeding edge semiconductors. They’re vitally important for the AI trend to continue. And if AI companies are going to regain their leadership and push the market higher, these companies need to report good earnings with a rosy outlook.

ASML reports Wednesday morning and TSM Thursday morning. We’ll get confirmation either way in a couple days.

Careful investing out there.

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The bull market can resume. All major U.S. stock indices made new highs after Jerome Powell whispered sweet nothing in investors ears on Wednesday. At the press conference after the FOMC meeting, he told the world that the Fed would take into account employment data when deciding on future interest rate policy. This was the first time he mentioned that. And with employment data getting weaker, investors took it to mean they would cut rates soon.

This sent the market higher. That’s why we said we should stick with the trend in Sunday’s letter. The market can continue higher for a lot longer than we think… Or for longer than makes sense. So don’t ask why, just continue holding stocks that were going higher.

One stock that wasn’t going higher was Aeva Technologies ( $AEVA). And since it closed below its 200-day moving average today, we should sell it for a slight loss.

But we’re going to replace it with another company today.

Freshpet ( $FRPT)

Freshpet produces natural fresh meals and treats for pets. They make their food with real meat, vegetables, and other natural ingredients.

And people must be treating their dogs to good food. The company’s revenues are soaring. Over the past five years, they’ve grown revenue by a CAGR of 32%. And in 2023, the company resumed expanding its gross margins after a tumultuous 2022.

This report sent FRPT to new 52-week highs a couple weeks ago. After forming a bull flag in the chart, the stock broke higher and did so on above-average volume. This is a strong continuation pattern which will likely lead to higher prices in the coming weeks.

So let’s buy a position in FRPT and we’ll use a tight stop at $106. If it breaks below that, our pattern is broke and we need to get out.

Happy Investing.

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Long-term readers know that we have been in the “higher for longer” camp regarding interest rates for a long time now. We haven’t wavered in our thoughts there. What has surprised me though is the resiliency of the economy in the face of these higher interest rates.

The facts show that the economy is strong. We can see in the chart below that Real GDP (blue line) currently sits at 3.1% annual growth – or about average. And then we can see wage growth (orange line) is ticking up to about 5.5% annual growth.

And U.S. private sector credit continues making new highs. Now US businesses and citizens have over $12.3 trillion in credit issued to them. That’s a staggering amount of credit, but as long as this continues rising, we’ll continue to see a strong economy.

This economic strength is likely to lead to inflation remaining higher than the Fed’s 2% target. We saw this last week as both CPI and PPI numbers showed a slight uptick in prices in both measures. And I think the market is starting to catch on to this.

Recently gold went on a massive, 18% move higher since bottom in October. Gold, being a physical asset, tends to rise in inflationary periods. Bitcoin has gone berserk, climbing about 140% since that time. Like gold, Bitcoin is considered a store of value by many.

But more importantly, for the CPI and PPI weightings, crude oil has caught a bid this year.

This is likely to continue as well. One big reason for that, is that the United States is finally buying oil to restock the strategic petroleum reserves. The price of oil was brought down as the SPR was tapped a couple of years ago. And as we can see below, America is working on restocking the reserve. This should create a consistent bid on the price of oil.

So with inflation remaining high and the economy strong, I think we might see Powell walk back some of the talk of rate hikes. That will impact the valuation of companies… When interest rates are low, the valuation multiples of stocks tend to rise. But higher interest rates tend to lead to lower valuations. And as we can see in the chart below, valuation multiples haven’t fallen as interest rate expectations increased.

This chart is a bit difficult to read, but if the valuation multiples do contract in lockstep with the rates we could see the market drop a quick 10% - 15%. That is not unreasonable if higher interest rates appear to be around the corner.

So that is why I’m a bit worried. But I’ve been worried a lot lately and the market keeps moving higher. There’s no point in telling the market what it should do though. We’re just going to keep with the trend and keep holding stocks that are going up.

We have one new addition this week. That is…

Valero Energy ( )

Valero’s main business in refining oil into gas. And business must be booming. At least that’s what we’re seeing in the charts.

As you can see in the chart below, price had remained in a steady uptrend for the past couple of years. I know we don’t often look at weekly charts here, but now price broke above the resistance line of the channel. I believe that line will become the new support line. And that leaves VLO to go much higher.

Let’s initiate a position on Monday morning and we’ll use the yearly anchored VWAP as our stop – it sits at $140 right now.

Portfolio Update

Last week we sold PagerDuty ( ) for a loss after a disappointing earnings report. I booked a 20% loss on that one.

Watch closely this next week. It’s sitting right at support at the 200-day moving average – which is also our stop. They had a great earnings report which sent the stock higher, but then it retreated after the company announced it was doing a 5-to-1 reverse split. One day this week, you’ll see the price of AEVA go up to $5… And you’ll notice the number of shares you hold go down 80%. That’s a reverse split. Nothing has changed with your ownership percentage of the company, it’s more of an accounting adjustment. But investors typically don’t like reverse splits, which sent the shares lower. But after this is done, I believe AEVA will make back its gains.

We’re going to update our stop on to the yearly AVWAP as well. Right now that sits at $1.20.

Hold tight onto the other three positions – , , and .

Happy Investing!

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The market continues higher. And we’re not going to fight the trend… We should still be hanging onto our long positions – many of which are performing nicely.

Now I’ve heard talk about Friday being a reversal point in the market. Maybe, but as you can see in the chart below the last three big reversal days in the market were quickly bought up – with the market shortly making new highs shortly after.

This is why we’ve stayed long these past months. The market has just grinded higher.

There is one difference that worries me right now. And that is the huge reversal in leading semiconductor names like Nvidia ( ) and Super Micro Computer ( ).

Here’s a chart of NVDA. You’ll see it has a huge bearish engulfing candle and enormous volume. More shares traded Friday than the day after its earnings report. And if we see another down day Monday, it could signal that semis – and by extension the market – have reached a short-term top.

The blue lines in the chart show a few potential support levels if NVDA keeps falling. It’s very possible that NVDA pulls back to the blue line at $683 which would close the gap it formed from its earnings release. That would be an astounding 30%+ pullback. If that happens, I imagine the overall market would pull back.

That’s something to keep an eye on.

But other factors continue to look bullish for the markets. Mainly bitcoin’s resilience shows that the risk on mantra still reigns strong with traders. This is a chart that look like it wants to break higher. Everyt dip is bought and bought strong. And right now it just looks like the market is churning through the supply at $70k. I think those sellers are about to get exhausted and then bitcoin will break through. And probably go to $100k in short order.

The inflows in the new physical bitcoin ETFs have been much higher than expected. And Michael Saylor is in the process of raising $700 million in convertible notes to buy up more bitcoin. The demand for bitcoin appears to be increasing into its halving event next month.

Bitcoin is a great proxy for whether investors are looking to take on risk. If it keeps rising, I believe the markets will follow.

We also see the dollar index looking like it wants to roll over. A weaker dollar usually leads to higher stock prices. So that will also be a boost for the market.

So with that, let’s add a couple of positions to our portfolio.

Tandem Diabetes Care ( )

Tandem is known for its insulin pumps to help people with Type I diabetes administer insulin automatically. This in combination with a continuous glucose monitoring system, provides an easy way keep insulin levels in their desired range.

Tandem got beaten down last year as the market believed that Ozempic and Wegovy fat loss drugs would diminish the number of people with diabetes. While being overweight is a risk factor for developing diabetes, it’s usually Type II diabetes that people develop. Tandem specializes in Type I (although they have plans to help those struggling with Type II eventually).

So the stock sold off hard but is beginning to bounce back. And it’s had a couple of days that qualify for an episodic pivot over the past couple of weeks.

First, they released full-year 2023 numbers on February 21. And while earnings were pretty terrible for 2023, their guidance excited investors and they bought up shares the two days after earnings.

Then last week the market bought the dip created by Tandem announcing it was offering $250 million in convertible bonds coming due in 2029.

As we can see in the chart below, investors aggressively bought shares of TNDM from Wednesday through Friday of last week.

Other technicals look great too. You can see the bounce happened as the price of TNDM just touched its YTD anchored VWAP (thick black line). And now the 10-day moving average is above the 50-day and the 50-day is above the 200-day. Which is what you want to see for strong uptrends. And the price is above all three of those moving averages.

Let’s buy shares of TNDM. We’ll use the 200-day moving average as our original stop loss.

Harley-Davidson ( )

I happen to think industrials look amazing right now. And if the dollar continues to weaken, that will provide a tailwind for these companies. Plus if money starts to rotate out of tech into other sectors, we’ll see a lot of money flow into this sector.

And the motorcycle company looks revved to take off.

Investors have shown an increase in interest in HOG since its earning a month ago, and then again around its dividend payment March 1.

The stock has stair-stepped higher the past month. And looks to be consolidating before its next move higher.  

Let’s buy shares of HOG Monday morning. And we’ll use a tight stop of its YTD anchored VWAP which currently sits just below $36.

And that’s all for this week.   

Happy Investing!

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If the rate cuts even sound like they’re getting pushed out past June the markets will likely turn lower on the day. We also have speeches from Fed members Bostic and Bowman that day too…

But the real fireworks will happen after the market closes on Wednesday. That’s when Nvidia ( ) reports earnings. NVDA is the leader in the stock market right now. The company is the face of AI revolution. And if NVDA sees lower than expected growth, investors will likely take that to mean the rest of the industry is facing slowing growth. That would send the market lower.

Conversely, if NVDA beats, and beats soundly, the stock will surge. And that will also tell us that the market rally is likely to continue.

So it’s an important week. And we may make adjustments on Thursday if things turn lower. But I don’t think that’ll happen…

Lately the market has shown increasing breadth. And we’ve seen an uptick in small cap stocks. The Russell 2000 index outperformed its large-cap counterparts last week by a couple percentage points.

Small caps have lagged for quite a while. But when they get going, they move. And these are also the kind of stocks we tend to purchase here at Barbell Alpha.

A New Setup

This week I’m going to introduce a new setup to our letter. For the past 15 months, I’ve focused exclusively on episodic pivots. We’ve bought stocks that are surging after a big news event. But lately, I’ve found a lot of great setups in stocks that hadn’t surged yet. They were starting to move slightly higher, on large volume, before the move happened.

I’ve been involved in Intuitive Machines ( ), Rigetti Computing ( ), and Tenaya Therapeutics ( ). All these have had big moves, but they happened on no news. So they are not episodic pivots. But I don’t want you all to miss out on potential explosive moves before the news happens.

So we’re going to start adding some breakout plays to the portfolio.

Before we get to the first one, we should close it out for about a 12% gain unless Synaptics opens higher this week.

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And now onto the first pick this week.

Gossamer Bio ( )

This biopharma company focuses discoving and developing immunology and inflammation therapeutics. And right now they have a promising drug called seralutinib in Phase 3 trials. This is a therapy for pulmonary arterial hypertension, which is fairly common.

And Wall Street analysts love this company. I don’t care much about analyst ratings of a stock. But their target prices tell us to which level we’ll likely see Wall Street participation in the stock.

Right now GOSS trades at $1.08. But one firm, HC Wainwright just raised its price target from $5 to $10. They see promise in the company and will encourage their clients to pile in the stock as momentum grows. The average price target among the nine firms that cover GOSS is $7.60.

If GOSS starts advancing their pipeline, this stock will surge higher.

And we may see someone taking a position in the company now. We’re seeing GOSS break out of a three-month wedge pattern on large volume. And it’s doing this with no news. I’m guessing someone who knows something is trying to accumulate shares ahead of an announcement. Let’s follow him into the stock.

We’ll buy shares this morning and use $0.90 as a stop.

Naas Technology ( )

We have two kind of risky plays today. GOSS is a low priced biotech stock and NAAS here is a Chinese-based EV charging station company. And I always get a little nervous investing in a Chinese company because of the number of frauds over there….

But funds run by Invesco and Envestnet have both recently added NAAS to some of their funds. And Jefferies has coverage on the company. This gives me comfort it’s an actual business.

And NAAS is growing fast last year they had about RMB 100 million in revenue, this year it will be 300 million. And for the first time in January they achieved a gross profit. The company is doing well scaling their charging network.

I have dreams of owning one of those low float Chinese-based stocks that go from $1 to $40 in a couple days. Maybe NAAS will be that one – it has better fundamentals than a lot of those highfliers…

And it looks like big money is flowing in. Look at the big green bars during the recent rally. Any declines in price we’ve seen lately come with low volume (as designated by the red bars). Investors are establishing a position and likely holding for a big move.

We’ll buy shares this morning and use $1.50 as our stop.

And that’s all for this week.   

Happy Investing!

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And our positions finally caught a bid last week. Especially Aeva Technologies ( ) which popped 22% on Friday. Now, let’s not celebrate too much as we’re just back to above even. But our patience is paying off.

We want to continue holding our positions… And you should hold onto any position in an uptrend. Only cull the stocks going down in your portfolio. If you’re holding onto anything that’s at 52-week lows when the market is at highs, you better have a great fundamental reason. Because the market is telling you that the company is not healthy.

We are in a very strong bull market. The trend is your friend.

As I’ve said before, I hope everyone is playing the market and making some good money while holding longs in this rally. Remember, episodic pivots should only be one of several strategies you use for your trading portfolio.

Enjoy this rally while it lasts.

This week we’ll add another position to the portfolio.

SEMrush Holdings ( )

SEMrush develops a SaaS platform for marketing teams to build, manage, and measure campaigns across all mediums. Having a platform like this is essential if you’re serious about improving your online presence today.

Last week the company got a boost as Jefferies assumed coverage of SEMrush with a buy rating. They believe the company’s increased focus on enterprise clients should lead to additional pricing power. That combined with a more disciplined expense management, they see faster than expected revenue and earnings expectations.

The increase in institutional coverage led to a spike in volume and a breakthrough its yearly anchored volume weighted average price (AVWAP). This is a very bullish move after a month-and-a-half-long consolidation period.

We can use a tight stop on this position too. I expect this to go higher from here, but there’s a chance it fills its gap between Tuesday and Wednesday. We’ll use $11 as a nice round number for a hard stop to begin with.

And that’s all for this week.   

Happy Investing!

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This past week though we got stopped out of American Lithium ( ) for a loss and Clear Secure ( ) for a gain. We’ll continue to hold the rest of the positions.

One might ask why our positions aren’t doing better with the market surging higher. And that’s a fair question. We’re buying on news, after a move higher hoping to ride the trend higher. And the episodic pivot setup doesn’t bode well for finding the large-cap stocks that are surging right now.

This should only be a small portion of your overall portfolio. I hope everyone has other strategies they’re investing in. I’ve made a fair amount the past couple of months owning the likes of and Broadcom ( ). But those aren’t episodic pivots. Those are just strong companies showing strong stock performance.

If anyone wants to look at what a strong chart looks like, look at AMD. That is a strong uptrend since its last earnings report in November. And the slight pullbacks all stopped at support levels. I’m not saying it’s a good trade now - it looks a bit overextended - but it’s a case study of a strong uptrending stock.

It’s hard to imagine we won’t see a pullback soon, but don’t try to fight the trend. This is not a short yet. Let it show some weakness first. Don’t be a hero and try calling a top.

We don’t have any new trades this week. But I expect as earnings season gets in full swing, we’ll see many great setups. So stay tuned for more trades in the coming sessions.

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We are still looking for a big move on news. But we’ll use an anchored volume weight average price (AVWAP) to make sure the buyers remain in control after the move higher. I believe this will lead to fewer false breakouts, and also tighten our stops.

The VWAP is important because that’s the metric Wall Street traders use to measure if they got a good fill. If a client asks a trader to buy 100,000 shares of a company on the market that day they expect the trader to get the fills below the average price of the day, the VWAP. If that doesn’t happen, the client is wondering why they are paying another firm to get bad fills.

So this is an important metric watched by the big money traders. We want to use it too…. Now nothing is perfect, it won’t always work, but it’s important to continue improving the process. And I believe this will be an improvement to the system.

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I won’t bore you all with a stock market commentary this week. Just know that earnings season is starting in full. So we could see some volatility as companies release their 2024 guidance. That volatility could drive stocks higher or lower, we don’t know.

So we’ll continue to hold the three companies we have been holding. They’re still holds. But today we’ll add three more companies to our portfolio.

PagerDuty ( )

PagerDuty calls itself a digital operations management platform. They collect data and digital signals from most applications or devices and then uses machine learning algos to process and predict opportunities and issues. This helps companies resolve issues and act on opportunities faster.

With the proliferation of AI-enabled systems and customer support I think this will become even more important. And I’m not the only one. On January 10, the company announced it has attracted interest from private equity firms to be taken private.

Now these are early-stage talks. So, there’s still a lot of work to be done. But if the deal closes, it will likely be for a higher price than it is now.

And if the deal doesn’t go through, that’s alright too. I believe PD is drastically undervalued at current prices. It trades at just 36x free cash flow. While that sounds like a high number, FCF is projected to double over the next two years. So that’s a reasonable valuation. This cash flow is likely why private equity is interested in the company. It’s the perfect company for them to take private and then load up with debt to essentially make it a no-money-down acquisition.

The surge in price on the 10^th led to an episodic pivot. And the price level held the couple days after that. I believe this will continue higher. We’ll use the 200-day MA as our initial stop on this position.

Aeva Technologies ( )

Aeva Technologies provides lidar sensing and perception products for autonomous machines. It designs a 4D LiDAR-on-chip and software to enable LiDAR and autonomous driving in consumer electronics, consumer health, industrial automation, and security applications.

This company recently went public through a SPAC and has just been beaten down after freely trading. This has been common in de-SPAC transaction in the past couple of years.

But I think the fall is likely over.

Last week at the Consumer Electronics Show in Vegas, the company announced that Daimler Truck selected it to supply long and ultralong range LiDAR for its autonomous commercial vehicle program.

This is a huge $1 billion contract. The thing is the production isn’t scheduled to start until 2026 and then scaling into Daimler Truck’s production in 2027. So it will be a little while until the revenue starts flowing.

To make ends meet until then, the company used the surge in price to issue 51.8 million shares. This was a nice opportunistic time to raise capital.

And the important part is that the price of AEVA barely dipped after announcing the share sale. This shows us that buyers are in firm control of this stock.

Let’s enter into a position on Tuesday. We’ll use the 200-day moving average as our initial stop.

SMART Global Holdings ( )

SMART Global Holdings provides specialty memory solutions for computers, servers, and mobile phones. And the company has been beaten down recently. But they reported great earnings on January 9.

The company beat on earnings per share and EBITDA and guided higher in the coming quarter.

It also appears that the META drag to the Intelligent Platform Systems (IPS) business line is over. They expect META’s purchasing to resume, but they have also added new customers to reduce their reliance on just one company.

Also, the memory and LED markets are showing signs of stabilization of 6 quarters of cyclical decline. That makes it likely they can get higher prices for their products in the coming year. And increase margins that way as well.

All this led to the a huge surge in price that day. And it looks like the gains should continue.

And that’s all for this week.

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The holidays brought about another week of slow news. So there were no new episodic pivots to recommend.

The market finished the year strong, so our open holdings are performing well. So let’s keep on holding them.

The first week or two of the year are important in the markets. You get to begin to see what themes the big money is moving into this year. And it will probably be different than it was last year.

Although, artificial intelligence (AI) will still be a trend in the coming years, it probably won’t be the best performing one again this year. It’s unlikely Nvidia triples again this year…

And I think investors will begin looking forward to what sectors do well when the Federal Reserve begins cutting rates. Hint: it’s usually defensive stocks like consumer staples. A lowering of interest rates generally happens because economic activity is contracting. So investors like the stable earning of companies like Proctor & Gamble and Coca-Cola. Those predictable cash flows (and dividend payments) get scooped up by investors in times of uncertainty.

That trend is likely to play out this year. And I would expect we should continue to see a lot of volatility… Both to the downside and the upside. So be ready to pounce on big moves higher.

Another thing to talk about is how the Wall Street consensus seems to be calling for a “soft landing” and only a minor recession in the coming year or two. These people are dead wrong.

Soft landings never happen. Here’s why…

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Soft Landings Are Made of Dreams

“US Economy on Track for Soft Landing”

This headline came across my desk the other day. It’s not a particularly exciting one, but I have a question for you. Which year did this headline come from? I’ll give you four choices:

a)       1929

b)      2000

c)       2007

d)      2023

Before we get to the answer, define a soft landing. It’s a time when the Federal Reserve raises interest rates to stop inflation without causing an economic recession and a large increase in the unemployment rate.

Did you decide yet?

Well, it’s a trick question. The answer is all the above. The particular article I’m referring to was from 2007 when the Dallas Federal Reserve branch said a soft landing was imminent.

But if you look back, you can see that before all these major downturns, supposed experts believed the economy was going to be just fine.

In 1929, popular talking head from Yale, Irving Fisher said if a correction came, it would look like a harmless slump. Oops – it led to the Great Depression.

That same year The World ran a headline saying “Banker Says Boom Will Run Into 1930.”

In 2000 we saw a headline reading “Making a Soft Landing Even Softer” in the New York Times.

And now in 2023, with just a quick Google search, we can see countless articles about the coming soft landing.  

We’re watching history repeat itself. So the question everyone should ask themselves is this: Why is this time different?

I’d venture to say that this time won’t be any different, and we should prepare for what’s coming.

The Makings of a Soft Landing Call

Before almost every stock market downturn, economists and Federal Reserve officials believe the economy will avoid a recession.

Why does this happen? Because the data always looks the same…

The Fed begins raising rates because inflation is too high as economic growth surges. To achieve a soft landing we’d need to see the inflation rate come down to the 2% target.

The thing is that every time the economy slows, these conditions are met.

Every time we see the same reasons for these predictions. Here they are from 2007:

·         Moderating inflation pressures and easing of other economic indicators suggested a soft landing.

·         Housing market downturn and credit crunch are expected to have a limited impact on the broader economy.

·         Strong business investment, exports, and consumer spending would cushion the economy.

·         My favorite: The Federal Reserve is seen as likely to cut interest rates to support growth if needed.

This data gives people hope of a soft landing. And it tricks investors to getting back in the stock market too early. Here’s where soft landing predictions got people in 2000.

And here’s 2007.

We’re seeing the same talk now in 2023. Interest rates have risen, the economy is still growing, employment is still strong, and most people believe the collapse in commercial real estate won’t spread. So in their eyes, the soft-landing is here.

Why Soft-Landing Proclamations Continue to Happen

For businessmen, they believe they can steer their business through any economic climate. So good times are ahead for them.

For some investors, maybe they’re optimists. They like to look at the bright side of things as they see companies continuing to profit.

For economists at the Fed, it’s probably delusions of self-grandeur. These guys think they’re smartest in the world and can steer the economy.

But what everyone misses, is that the conditions for a soft landing will always occur on the way to a recession.

The economy will slow and inflation will subside on the way to economic disaster. It will look good for a brief period of time. As we can see in the chart below, after the Fed began raising its Fed Funds rate (white line), GDP growth (blue line) began moderating.

The economy looked primed for a soft landing in 2007, economists started predicting a soft landing, and investors got back into the market. But that was just a brief stop on the way to a recession.

Trying to steer the economy is tough. Former Fed Chairman Ben Bernanke said it best:

Making monetary policy is like driving a car, then the car is one that has an unreliable speedometer, a foggy windshield, and a tendency to respond unpredictably and with a delay to the accelerator or the brake.

And I’ve made the case previously that monetary policy has a limited impact on inflation and economic growth. I could even argue that it has no impact on inflation.

The way monetary policy works is that the Fed hopes that eventually higher interest rates will cause a slowdown in credit growth. And that will stall out the economy.

But it takes time for this to happen. Usually 2 – 3 years for the full effects of higher interest rates to be felt by borrowers. And even then, the results are spotty at best.

Because it takes so long, for an undetermined effect, it initially looks like the Fed policy isn’t working. So they jack up interest rates even higher in an effort to make it work. And they always end up overshooting the level at which they’d have to raise rates to create a soft landing.

And eventually these rates become restrictive and credit growth slows, or even contracts. That’s when recessions happen.

Recessions are Healthy

The truth is recessions will happen regardless of the current interest rates. The economy acts like a pendulum. It will swing to an extreme of growth, and then swing back to an extreme of contraction.

And these things happen out of necessity. During boom times many companies begin. They look like good businesses. But they’re not. It’s just high economic growth that makes them look good.

Some of these businesses aren’t the best run, they have bad business models, and they take on too much debt. These inefficient companies turn into zombie corporations.

Times of economic contraction weed out the zombie companies. They go bankrupt. It makes room for other companies, with better operators to come in and make the economy stronger.

It’s a necessary part of the economic cycle. And this part of the cycle is coming. Bankruptcies and delinquencies are on the rise in 2023. Consumer sentiment is in the dumps as the lower and middle classes struggle with high inflation.

We are confident the recession is coming. Don’t let the proclamations of a soft-landing trick you into thinking otherwise.

Soft landings only exist in our dreams.

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I don’t see any new episodic pivots to invest in this week. The weeks around the holidays are typically light on news. So it’s been challenging to find an episode to justify a sustainable move higher for an individual security.

The market has also been nearly straight up the past two months. Eventually it will take a breather. So it’s prudent to have a cash position and let our open positions continue to run higher.

But not to leave you all high and dry, I’m going to share with what I believe will be the biggest trend this coming decade. Let me know what you think in the comments below. Thanks.

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How to 10x Your Money in this Decade’s Biggest Investment Trend

“Crap, I gotta go!” My coworker Sam jumped up, sent his chair clattering in the food court and sprinted towards the office clutching his Blackberry.

We picked up his chair and brought him his food when we finished. That’s when we found out that an important filing didn’t get processed. And if that filing hadn’t gotten in immediately, that would have been catastrophic for the client. They would have fired us as their auditors and in turn, he likely would have been canned.

I remember this vividly. It was late 2007 and this was my first job out of college at a big 4 accounting firm. We were encouraged to get a smartphone, but I and several others resisted. We didn’t want to be permanently tethered to our work.

But after seeing how it saved Sam, all the holdouts had a smartphone a week later.

That moment was when I knew that smartphones and the ability to have the internet in our pocket would be a major trend in the coming years. I didn’t have much money at the time, but I purchased a few Apple and Google shares shortly after that.

Now I sold these shares WAY to soon… Despite having conviction in the investment, I was too young to be patient and slowly watch these shares increase in value. I have since vowed to not make the same mistake when the next major technology shift occurs.

And that next major technology has arrived – and it’s time to make our investments in companies with the potential to 10x over the next 10 years.

A New Megatrend in the Making

In 2007, it was still early for the smartphone market. Most people didn’t see why you’d need to carry the internet with you. They’d say things like, “It was nice to disconnect” and “Who needs to check their email 24 hours a day?” But it was this disbelief that made it a great opportunity.

To be fair, these smartphones were quite limited at the time. The iPhone 3G – Apple’s first hit smartphone – wasn’t released until July 2008. And games like Angry Birds didn’t come out until 2009. And it was too early for Facebook’s mobile app. The phones had a small LED display and a physical keyboard with tiny buttons that was hard to use.

But it was clear that in the coming years, these phones would get more useful. And everyone who got one felt like they’d never go back to an analog phone. People liked being connected at all times and able to scroll through the emails while waiting in line at the stores. This kicked off the biggest investment trend of the 2010s – mobile internet.

From their bottoms in 2008/09, Apple and Google rose 8,000% and 2,000% respectively. And Facebook is up 800% since it’s 2012 IPO. And other companies like Qualcomm, Uber, and Amazon rose many multiples riding this trend higher.

For the biggest gains, sometimes you need to step back from the day to day and think about what will proliferate over the coming decade. Back then it was clear mobile would be the winner.

And right now, we have the opportunity to invest in the next big trend over the coming decade. It’s probably not surprising to anyone reading this, that this trend is artificial intelligence (AI).

For the First Time Everyone Can See AI in Action

AI isn’t anything new. It’s been around in some form since the 1950s. But before ChatGPT came out in late 2022, only the nerdiest of computer scientists could utilize this technology.

But when ChatGPT released its large language model (LLM) to the public, finally everyone could begin using AI.

This is the equivalent to the release of Blackberrys and iPhones. Prior to that only a few tech geeks had a portable device to access the internet. But these new smartphones allowed the masses to be able to access this technology. That directly led to these new mobile services being built on this new kind of device.

LLMs are the equivalent to the iPhone release.

Now, I use AI almost every day. I use it to help summarize long articles and YouTube videos, interpret dense research papers, find historical parallels for ledes, and research companies and economic trends. AI makes me a much more productive analyst.

Many others feel the same way. AI increases productivity of computer programmers by 126%. Other studies found that customer support agents could handle 14% more customer inquiries per hour with AI. And business professionals could write 59% more business documents with AI.

AI also helped me find these stats.

If you and your teams aren’t actively looking for ways to incorporate AI into daily workflows, you will lose out to those who do. Utilizing AI will become table stakes for businesses to compete in the coming years. Those who don’t have it won’t even be allowed to sit at the table and have a chance at building a profitable business.

So the question is how do we profit from this emerging trend. What are the trends within AI that we can profit from.

The First Wave Is Already Over

The first wave of AI profits is mostly behind us. Nvidia’s (NVDA) graphics processing units (GPUs) are the best for the parallel processing needed to run AI. But its revenue as reported last week increased 200% from this time last year. And they’ve already grown to a trillion-dollar company.

Now NVDA may well be a fine investment in the coming years, but it’s unlikely that it will outperform the market by much at this size.

The same goes for Microsoft and Google. They’ve jumped out to a quick lead in AI technology. With Microsoft backing OpenAI (the company behind ChatGPT) and Google having perhaps the most advanced AI division among major tech companies. But these are trillion-dollar companies. They just aren’t going to grow much faster than the market.

And I’m not excited about companies incorporating AI into their software offerings. For instance, I recently heard the average ChatGPT user uses $80 of data per month to run their queries. But OpenAI only charges $20 per month for paid users. They are losing a lot of money right now. I’m sure when the 2023 numbers come out, we’ll see a multi-billion-dollar loss.

So I’m not excited about Salesforce (CRM) or Adobe (ADBE) right now either. Salesforce was late to the AI game and is playing catchup with its Einstein offering. And Adobe has a generative art platform, but AI is enabling its competitors to make free offerings of its flagship Photoshop program. Many designers are using Canva’s free offerings to do what they used to do in Photoshop.

LLMs will make the dominant coding language in the future shift from C++, Python, and JavaScript to English (and other natural languages). This will enable anyone to make software applications.

I’ve written before how I think AI could eventually lead to the death of SaaS (Software-as-a-Service which was the major business strategy software companies adopted the past decade).

These were beneficiaries of the first wave of AI investment. We want to look forward.

 The Thing That Fuels AI

That thing is data. Data fuels AI. Without data, AI models could not be trained and they’d have no data to interpret.

Over the next 10 years, I see GPUs for processing AI applications will become commoditized. Competition is increasing already and soon we will see chips developed by all major tech companies compete against each other. Prices and profit margins will fall.

But the one thing that will still be valuable, is the data collected to train models.

The Economist even went as far as to say that data is the new oil. I agree. Data will fuel the AI paradigm.

Now I wish it were as easy as just buying companies that produce hard disk drives. But for AI applications, just thinking about hard drives is not very helpful. For the data to by useful, it must be factually correct, easily accessible, and easy to process.

I’ve seen some studies showing that the expensive GPUs sit idle 25% - 50% of the time because they are waiting for the data they requested to arrive. That’s a lot of time for those $10,000+ GPUs to not be doing any work.

We need solutions that make data more accessible. And then solutions to make sense of that data.

The first company to help with data storage is Snowflake (SNOW). This company’s data lakes and warehouses are an innovative way for organizations to compile data from the hundreds of applications they use and make it easily accessible for data scientists and AI algos.

I also like that Snowflake charges users based upon the amount of data they store and then have to access. This pay as you go model is great for both the customer and the company. With many other data storage services, companies have to agree to buy a certain amount of storage and compute. This leads to overprovisioning resources and paying for unused capacity.

And charging by the amount of data all but ensures that Snowflake will make a lot more money in the coming years as AI requires more data.

The second company is Palantir (PLTR). Its Gotham and Foundry products break down massive amounts of data to make them useful. It’s great at identifying patterns hidden deep in datasets – this is why government intelligence agencies are among their biggest customers.

It’s possible for companies to connect their Palantir Foundry system to Snowflake’s data lakes. From their Palantir can provide advanced data analytics and insights from the millions or billions of data point they collect. And that will make sure the most important data points are the only data points a company will train their AI on.

Another aspect of data that’s vitally important is to make sure the data is up-to-date and accurate. Without accurate data, an AI can’t achieve its goals. And the data will be even more valuable if a company can provide a unique data set that no one else can.

One company with a unique data set that can’t be replicated is ZoomInfo (ZI). Don’t confuse this with Zoom Video (ZM) which we use for Zoom chats. ZI is a completely different business. It has the largest business-to-business (B2B) database in the world. And its clients allow ZI to share the contact info they collect with others. This crowdsourced data is the largest and freshest of any database in the world.

And there is even a feature that shows which contacts are searching for what kind of products. This information helps sales teams target potentially warm leads.

Sales & marketing teams have taken to AI the fastest. They use AI to write marketing emails, generate online content, interpret marketing data, training, etc…

But without the most up-to-date data, these marketing efforts could be in vain. The average person stays at a job on average of 4 years. That means every year 25% of your contact list goes stale. And if you buy a list that’s been compiled over the past 2 years, statistically nearly half the contacts will have changed jobs.

That means the AI-assisted marketing and sales efforts will get sent to stale email addresses. The work will be wasted. That’s why ZoomInfo’s database is so important.

And once companies start using this database, they often keep paying. And of those companies who stop using ZI, many come back after a year because their marketing efforts show declining results.

Hold These For the Next 10 Years

These companies are not “cheap” by any means. They trade at historically high valuations. But often the leading companies never get cheap. They stay expensive as investors look forward to the future. So even as I’m skeptical of the market direction today, I believe if you hold these three stocks for the next decade, you’ll end up 10x’ing your money.

Data is one of the biggest trends inside of AI. And the companies that are integral in generating, storing, and using data will thrive.

Don’t make the same mistake I made 15 years ago and sell out of these companies too soon. These companies and others like them will be big winners.

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These kind of runs are a lot of fun. But be careful. They don’t last forever. And we should expect a pullback of some sort eventually…

This runup is getting a bit ahead of itself. The chart below marks the previous times that the S&P 500 got far above its moving averages. The results typically mark the end of the run.

For now though, just rise your stops and keep riding this wave higher. Not all of these marks bring sustained downtrends.

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We took some profits off the table before the Fed meeting announcement on Wednesday. I still believe that was the right call despite those stocks going higher. De-risking going into the announcement was the prudent play.

It appears no one thought Powell would tell us the Fed Funds Rate Committee was practically done raising rates. And they’d consider lowering them before inflation reached their 2% target. They said that 3 rate cuts next year is their base case.

That’s a newly dovish stance from the Fed. Now I somewhat expect the Fed governors to walk back this announcement a bit in the coming weeks when they do interviews. But I’m not sure the market is going to care at that point.

It’s risk on.

And this runup has all investors going limit long. Below is a chart of the net speculative positioning of asset managers and leveraged funds. These funds have never been so long in their history.

This trend can continue if that line keeps going higher. But eventually, the hype will die down. That will create a challenging environment for prices to rise.

Like we’ve talked about, there are cracks forming in the economy and the markets. And eventually, something will break. But we don’t know when. So we’re going to add another position this week.

American Lithium Corp ($AMLI)

AMLI is a lithium (and uranium) exploration company. They don’t produce any lithium yet though… And are unlikely to do so for a couple years.

But they have the rights to two of the largest lithium deposits in the Americas. One in Nevada and another in Peru.

On Friday the company released an updated technical report on the Falchani Lithium Project in Peru. That report said the Falchani project had 476% more measured and indicated resources (lithium) than previously estimated.

That’s great news. Either AMLI will make a lot more money on this mine when it becomes operational or they will look more attractive to a larger company like Albemarle ($ALB). Either way, the valuation of these shares should go higher.

This sent shares 10% higher on massive volume on Friday. This recent surge of volume on up days is a good indicator of a trend reversal.

We want to ride this wave of excitement higher. So we’re going to buy shares Monday morning. We’ll use the 50-day moving average as our initial stop.

And that’s all for this week.

Happy Investing!

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With the Fed announcement coming this afternoon, I’m lightening up on some of positions. I suggest everyone does the same for their short-term holdings.

The recent run-up in the market over the past month and a half has been extraordinary. And I don’t see how the Fed can say anything bullish enough this afternoon to keep the rally going.

I also don’t think they will talk about lowering rates as much or as quickly as the market thinks they will.

So we will sell off a couple positions that have stalled out recently. Those are Wolfspeed and Impinj. Let’s take our profits and get some dry powder for the next round of episodic pivots.

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I don’t have any new episodic pivot trades this week. It’s my fault - I no longer have access to my data provider where I could see all the potential episodic pivots from the past week. Now I can only see for the previous day.

While not ideal for this week, it will force me to look at new setups everyday for you. And it will likely lead to mid-week updates for new positions.

As a consolation prize, here’s an article I wrote during earnings seasons. It’s still relevant today. And it shows why I’m leaning bearish going into 2024.

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Alexander Fordyce single-handedly set off the first international credit crisis.

In 1772 Fordyce was a partner at the London banking firm Neale, James, Fordyce, and Down. He built his bank into a speculative powerhouse. He was the big earner for the partnership. At the time, the bank was flush with deposits… And Fordyce didn’t want the cash sitting around. So he put it to work speculating on price movements.

His boldest move was a large bet against the East India Company stock. He was hoping to profit from a decline in price. However, the stock rose. And Fordyce needed to come up with 300,000 pounds to cover his debts. He didn’t have that, so he fled to France while his partnership failed.

This failure led to the credit networks dissolving. And depositors, smelling trouble, went to withdraw their money. By the time the dust settled over 500 banks in London and 30 more across Europe failed.

It even spread to America as colonial planters relied heavily on British credit to finance their planting. Without new lines of credit these farmers struggled to repay the loans and couldn’t produce as many goods. This strained relations between the colonies and Britain… And set the stage for the impending American Revolution.

Since then, every couple of decades the world has an international credit event.

Credit expands, speculative nonsense happens, and a big bust ensues to reset the system. The most recent one being the Global Financial Crisis in 2008.

Now we have another credit crunch on the horizon. And it’s just about to pick up into high gear.

Earnings Season Is Here

Any analyst worth his weight should be pouring through all major earnings releases. It’s here we find out, in real-time, what businesses see in the future. And if you dig deep enough, you can find little nuggets of gold when it comes to predicting the future in stocks and the economy.

The biggest nuggets this earnings season is coming from the banks. They’re signaling a major shift is taking place in consumer spending and the markets.

Both the tone of management and how investors are reacting to earnings have changed. And if you don’t understand what this means, you will end up losing your hard-earned savings.

The Middle Class is Maxed Out

This is the message coming from all the financials. It’s not just a one-off company performing poorly. Just about every bank and credit card issuer is telling us this. Here’s Citigroup CEO Jane Fraser:

“When I think about the [credit] cards business, it's very much driven by the affluent customer. The affluent is accounting for almost all the spending growth. And that's similar to the numbers we saw coming out of the Fed. The excess savings sitting there are now primarily with households of over $150,000 of income. And it's down in the rest."

She’s saying all the spending growth is taking place in households with over $150k in income. That’s only 20% of U.S. households. The other 80% are spending less at the same time their savings levels have shrunk.

We’re seeing this sneak into luxury goods as well. LVMH CFO Jean-Jacques Guiony touched on this topic during his earnings call. He said U.S. aspirational customers – those who think they are rich but are not… and probably shouldn’t be buying $10,000 bags – have experienced “some pressure in the first half of the year.”

Going back to financials, JPMorgan’s CFO told us that spending growth was flat this year. And that “cash buffers continue to normalize to pre-pandemic levels with lower income groups normalizing faster.”

They’re telling us that poor people have spent all their “stimmy” checks and extra unemployment they received during the pandemic.

After Savings Runs Out People Turn to Credit

And turn to credit they have. U.S. credit card debt just reached all-time levels over $1 trillion. This growth in credit keeps the economy going for a little while longer. But all credit does is drive demand forward a bit. Eventually, credit stops growing and contracts. And that’s when recessions happen.

I’ve shared this chart before, but the chart of credit growth is one of the most important charts in finance right now.

Anytime credit contracts, the economy enters a recession. Look at that sharp decline this year. And credit growth has all but stalled out with 8%+ rates on mortgage and car loans. They average credit card interest rate is over 22%. I predict this line goes negative by the time we see fourth quarter data reported.

Wells Fargo CEO Charles Scharf gave a huge warning when he said:

"Average commercial and consumer loans were both down from the second quarter as higher rates and a slowing economy have weakened loan demand, and we've continued to take some credit tightening actions."

Not only are people and businesses asking for fewer loans, banks are tightening their lending standards. This is bad news for the economy.

But banks have a reason to be tightening those lending standards…

Bankruptcies Tick Up

After every period of credit growth, we see an increase in bankruptcies. It is the natural order of things. These bankruptcies need to happen to clear all the malinvestment from the previous cycle. It gets rid of the zombie companies and makes room for new, more efficient companies.

This happens in nature too. For instance the practice of fasting has become popular as it allows for autophagy to occur in our bodies. That’s when the body breaks down and reuses old cell parts so your cells can operate more efficiently. Out with the weak.

And we’re beginning to see bankruptcies make their way through the system. Here’s a chart of business bankruptcies. The blue bars record the amount of bankruptcies through September for each year.

Very few years in recent memory have seen as many bankruptcies as we have so far in 2023.

It’s not any better for individuals. Bloomberg recently ran a piece showing that subprime car loan delinquencies have surged to record high levels.

This alone may be just a microcosm, but credit card delinquency rates from small banks are surging as well.

People, especially those in the low and middle classes are about have their credit lines cut off. And with that, their spending will diminish.

A Story As Old As Time

This is just the credit cycle playing out as it has played out many times before. And the result is always the same – economic recession and falling asset prices.

We know this will happen. It’s just a matter of when. And the banks are telling us it’s now.

And as we’ve talked about, this credit event will cause a major catastrophe. With inflation remaining a problem, the Federal Reserve has no choice but to keep rates high. And they won’t be in any hurry to cut. Chairman Powell has already told Wall Street to expect a “period of below trend growth.”

We haven’t seen that below trend growth yet. And for the first time in over 40 years, we’re going go through a recession and be unable to lower interest rates.

Interest rates are the price of money. And money is now very expensive. Credit won’t be able to come in and save the economy this time.

One company that will struggle the most in this environment is Credit Acceptance Corporation (CACC). This company is known for originating subprime vehicle loans… And also for predatory lending practices.

Last quarter they had to increase their provision for credit losses to $250 million. That was nearly double what Wall Street expected. That’s just the beginning of their problems as subprime consumers are doing worse now than in the second quarter.

They report on Monday, and I expect a horrendous announcement from them.

Update: CACC’s earnings were terrible, but the stock has recovered in the market rally - setting up for big short next year…

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"Just kick 'em in the rump a little."

That's the advice President Richard Nixon gave Federal Reserve Chairman Arthur Burns in 1971.

Nixon had a huge problem. Stagflation - a slowing economy with high inflation - gripped the nation. If something didn't change, his reelection chances were virtually nil. So Nixon called up the man he had recently appointed to lead the Fed.

Burns was to figuratively administer this kick to the Federal Open Market Committee (FOMC) during their meeting to set the Fed Funds interest rate.

This pressure, and perhaps Burns conservative political beliefs, got him to convince the Federal Open Market to lower interest in 1971. The FOMC took the Fed Funds rate from 8.7% at the beginning of 1970 to 4.05% by the beginning of 1972.

These drastic cuts were made to help stimulate economic activity. But all these rates did was ensure inflation would soar once the price and wage controls were lifted in 1973.

With these interest rate cuts Burns cemented his legacy as a patsy and likely the worst Fed Chairman of all-time. And he’s a cautionary tale for the current times. Current Fed chairman, Jerome Powell and the FOMC are steadfast not to repeat his mistakes.

Today we're going to talk about why the Fed only has one choice and what that means for the future of our economy.

The Fed Is Doing the Only Thing They Can

I know it's not cool to say that. Financial guys are supposed to blame the Fed for all the economic problems we face. But the fact is, the Fed only had, and still only has, one choice. And that's to raise rates and keep them higher for longer.

The Fed only controls monetary policy. That is policies related to the financial system. And despite what many believe, monetary policy does not impact inflation much, if at all.

For the entirety of the 2010s, we had “loose” monetary policy. This meant that interest rates were kept low, and the Fed was buying U.S. Treasuries. The Fed did this to try to stimulate the economy and prevent another 2008-like crash.

Skeptics said this low interest rate environment would lead to inflation. Maybe even hyper-inflation. As we can see in the chart below, that never happened. For an entire decade of low interest rates, inflation never seeped into the economy.

As we can see, inflation never got above 3% a year during that whole period. That should be all the proof I need to show to prove my point that loose monetary policy doesn’t cause inflation.

However, these low interest rates inflated financial assets. That why bond prices reached all-time highs and yields reached all-time lows. Bond yields even went negative, which meant investors were paying governments to borrow money.

Then in a search for yield, investors had to go into other assets. That’s why the stock market became the most expensive ever – people were looking for yield in dividend paying stocks. And why house prices rose to unaffordable levels. Housing prices rose as investors tried to buy houses for rental yield, more so than people being able to afford them. And for that reason, I consider houses a financial asset as well.

But the inflation of financial assets, never seeped into the real economy.

Inflation didn’t start until 2021. But the cause was not low interest rates.

In 2020, the government took unprecedented actions around the world. They told people to stay home from work and produce nothing. But they’d still get paid. The government undertook massive deficit spending to try to not ruin the lives of millions of Americans. And we had the largest deficits on record.

When the government paid people to stay at home, many made more than when they were working. This policy increased the demand for goods. But production of goods plummeted because factories were closed. Economics 101 tells you only one thing can happen – prices must rise.

This is what caused inflation to soar. Not monetary policy, which had been loose for a decade. The first chart clearly shows inflation only began after the reckless fiscal policy coming from government.

If you want to look for a culprit in the inflationary mess, you have to look no further than your elected representatives in DC. And politicians have backed the Fed into a corner.

The Fed’s Only Choice Is to Try to Slow Demand Through Credit Contraction

If low rates were the goal, we could have them already. We just need the government to stop spending. The 2023 government fiscal year just wrapped up on September 30. We spent another $1.7 trillion that we don’t have.

If that wasn’t spent, we’d already be in a recession. U.S. GDP only grew by $1.5 trillion the past 12 months.

We ran a fiscal deficit that was about 5% of GDP. And it’s not a real surprise that inflation was about 5% for the year. Inflation and the percentage of deficit spending are very highly correlated in normal economic environments.

The only way to stop this fiscal spending from being inflationary is to suck money out of the system from other angles.

The main way the economy grows is with credit from the private market. This is when businesses take loans to build a factory to produce a good. That enlarges the economy. Or when someone takes a mortgage to build a home – productive assets grow.

So if the Fed wants to fulfill its main mandate to have a stable currency, they must raise rates to contract credit.

But here’s the thing – it takes time for higher rates to make their way into the economy. So any monetary policy changes will have a lagged effect. Many put the delay at 2 years. The reason is, not all debt gets refinanced right away. It takes years for company debt to mature and have to be reissued. Here’s a chart that shows the effective interest rate on debt is still low.

But this rate is ticking up… And we’re approaching the second year of tightening monetary policy. We should start to see some slowing effects hit businesses.

Prepare For a Credit Crunch

Anytime credit contracts so does the economy. We can see this in the following chart. Credit contracts whenever the line goes below 0. We can see recessions marked by grey boxes.

The only time credit growth went negative and it didn’t trigger a recession was in 1987. But those economic conditions led to the Black Monday crash when the markets fell 22% in a single day.

This naturally makes sense. When credit is growing, banks are creating new money to flow into the economy. People spend on goods and services they need. Businesses expand to meet demand. It creates a nice equilibrium.

When credit is paid back, money leaves the system and the economy shrinks.

And now with interest rates at the highest they’ve been in about 15 years, we can see credit growth slow… And it will go negative soon. A bad omen for the economy.

We are at the turning point right now. This is likely the end of the growth of excessive credit that’s propelled economic growth the past 14 years. Higher interest rates all but make sure of that. Many people and businesses will face tough times refinancing their low-cost debt when the time comes. And those that do, will see their payments soar. And they will have to cut back spending in other areas.

Be prepared. I have sold some of my weaker performing positions and hold a large cash position right now. There’s nothing wrong with earning a 5% yield in a savings account right now.

The stocks to hold are large cap growth stocks. These almost always are the ones that rise the longest. Stocks like Google (GOOG), Meta Networks (META), and Nvidia (NVDA) are good holds for now.

But hold these with tight stops. Eventually the market will turn. When it does, we’ll have to act quick to preserve our capital.

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The rally has continued. And all our positions are firmly in the green at this point. But because this rally has gone so far, a lot of charts look overextended. And I couldn’t find any episodic pivots that I liked for a new entry right now.

So we’re going to remain patient.

On a personal note, it was an eventful week for me. And the result is you’ll probably hear more from me in the near future. So look forward for a revamped Barbell Alpha coming soon.

Now, I believe that rate cuts will only happen after the economy declines. Federal Reserve chairman, Jerome Powell has told us to expect a “period of below trend growth.” This tells me that the Fed isn’t going to preemptively cut rates to try to keep the economy chugging along.

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Powell has told us exactly what he was going to do. And he’s don’t it – despite most people not believing he could raise rates this high without crashing the economy.

But the monetary policy that Powell controls doesn’t have a direct impact on the economy. That’s what everyone forgot. They thought higher interest rates would stop economic growth immediately. That’s not how it works.

It takes 2 – 3 years for monetary policy to work its way through the system. People don’t need to take out new loans right away to live. Businesses don’t have to roll over debt at higher rates immediately – they’ll wait until the old debt matures first.

The Fed started raising rates in March 2022. So we’re nearly 2 years into the cycle. So we should start to see the tightening effects soon. We may already be starting with delinquencies on the rise, a high number of bankruptcies, and the employment situation beginning to weaken.

So be on the lookout for these. But for now the market is ripping higher. And it appears to be holding these new, elevated levels. We can see the market consolidating the past three days after surging higher on Tuesday.

This is constructive market action. And it makes me wonder about a Santa Claus rally to end the year. It’s a possibility. And while the market is higher we are going to hold onto our existing positions and add another one this week.

While the market is rising, we want to own stocks. So let’s get to our new addition.

Wolfspeed ( )

Our best performing open position now is a semiconductor company, Impinj ( ). We’re up 30% on it already. The semiconductor industry as a whole is doing great. It broke out to new 52-week highs last week. So it’s fitting that we add another semiconductor company to the portfolio.

Wolfspeed specializes in silicon carbide and gallium nitrate solutions for power conducting and radio frequency semiconductors.

The company has been beaten down by a general slowdown in RF and power semiconductors this year. But they had a great forecast when they reported their earnings on October 30. And then last week the company bounced as activist fund Janus Partners revealed a position in the company.

These two factors make it likely the trend will change in Wolfspeed and we can make a little money in this company as this rally continues. And that’s confirmed by the fact that the price broke above its 10-day and 50-day moving averages. That’s strong price action that often comes before a run higher.

We’ll use $32.50 as a fixed stop initially.

Note: I’m not expecting much activity this week as it’s Thanksgiving and no trading on Thursday… And Friday will be a light day. Another note, I expect little volatility this week as well. Could be a good time to sell some slight out of the money options and collect some premium.

And that’s all for this week.

Happy Investing!

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The profitable investment over the past centuries has been to stay long. Sure, there were stretches of years that hasn’t worked, but over any 30-year holding period, being long stocks was a good idea.

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This is my way of saying that if you have bearish proclivities, which I do, you have to be quick to admit you may be wrong.

We were right to get out of most of our positions a month or two ago. The market tanked for a bit. But last week’s action in the market was very constructive. Not only did the market maintain its higher levels after the surge two weeks ago, it broke out of it’s downtrend channel on a strong Friday.

Now, we should be careful of this being a false breakout. So keep your stops tight… But it’s time to put on some more positions as the markets are bouncing. Maybe there is a Santa Claus rally in the works.

This rally also helped individual stock charts look more constructive. So this week we’re going to put on three new trades.

Synaptics ( )

Synaptics is most known for its touch pads on laptops that sense the user’s finger to move the mouse on the screen. But they also have products on mobile phones and internet of things (IoT) devices. And business is picking up.

They released a trifecta earnings report Thursday evening. The company beat expectations on revenue and net income at the same time as they raised guidance for the next quarter.

The company said there are still pockets of weakness in their enterprise segment. But they are essentially calling the bottom in the mobile and PC markets.

If that’s the case, we can expect shares of SYNA to do a complete 180 and head higher in the coming weeks. We saw the first of this move on Friday as shares surged over their 200-day MA which had acted as resistance previously.

Let’s enter a position in SYNA and use the 50-day MA as our stop loss.

Clear Secure ( )

Most readers have probably seen the Clear security lines at major airports. That’s this company. They also have security applications in stadiums and other large venues as well.

Clear Secure completed the trifecta when it reported Thursday morning. The company is seeing user growth of its Clear products grow over 30% a year, which is leading to comparable level of revenue growth. This company is growing quickly… And only trading at 8x FCF.

The company is cash cow. And it’s using that cash to further the momentum in shares by returning capital to shareholders. They announced an additional $100 million share buyback They now have an aggregate buyback total of $128 million. That’s about 3% of the market cap.

And they announced a special 55 cent dividend which we can receive if we buy shares Monday or Tuesday. So that’s what we’re going to do.

We’ll set a hard stop at $16 and adjust as the trade moves in our favor.

And that’s all for this week.

Happy Investing!

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