The LongVol Show - Ep 24
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This is the weekly article and Pod/Video Show 24. If you’re new here welcome, make sure to subscribe on YouTube and/or Spotify – you can get free daily market updates on LongVolReport.com.
Three main topics for today’s show – as always, a life update then:
- Articles of Interest from This Week
- Broad Market Overview
- Investing in China (Third Plenum & More)
- Reviewing 3 Recent AST Alert Trades
- Weekly Q&A
If you’re new – this is not investment advice, I only manage money for accredited investors and qualified institutions – if that’s not you, then you can access the AST Alerts Free for 21 Days.
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An Inflection Point in The Cycle.
We’re at an inflection point in this cycle and given the data the last two weeks I want to kick off the weekly article discussing that inflection and how we go about constructing a portfolio around it.
Is it finally time for a rate cut cycle is the question and based on that answer the next question becomes what is the move? Let’s start with the most widely discussed topic even in markets: “Is it a top?” Who cares is my answer to that generic question and I’ll get into that in this weeks article as well. The question I want to ask is what companies are in play around this cycle ending? I’ve been asking that (and preparing for it) for the last 6 months and began allocating to some of them this week.
For those that have been around for a few years you’ve heard me say the line: “What the Fed says and what the Fed does matters for all asset classes globally” – if you can operate from there, especially now, you can begin to build out a view.
But, you cannot control the timing of Central Banks but you can certainly watch for clues and then from there put together a list of companies and/or sectors you want to see perform out of a tightening cycle. It’s a big reason I am a fan of Howard Marks and his thoughts on the business cycle and given the last few weeks of data I think we’re at a SeaChange (or inflection) as he says in the cycle.
The way we do it at our firm is picking 8-12 Core Positions and let those companies work.
Companies that have quality free cash flow, potential to increase cashflows and those that have good management (not like Carvana – as an example). We want to hold those names and not worry about the day-to-day volatility – you’re buying a company NOT a trade. Too many amateur investors miss that exact thought: the separation of a trade v. an investment.
Right now, as I see it, there are companies that are going to come out of this cycle who are going to benefit dramatically – a situation where we might get 2-3 baggers and that should make everyone excited if you know where to start looking. But with that comes volatility and patience required to sit back and allow the market to come out of this properly.
So, when I say I don’t care about where the Nasdaq or SP500 is, I really mean it, to an extent. I do care about where it is in relation to the market at large because there are instances where putting on asymmetric trades long/short in the portfolios makes sense and given where we are right now it comes into play but we’ll get to that in a few.
The last two weeks the data has given the Fed the cover they need to cut and September is really looking like the time to do it. That’s the inflection point and like a hurricane we’re all in the eye of it right now whether you realize it or not. But what does that mean and how do we take that idea and extrapolate it out to construction of a portfolio?
Gold, metals and miners are all ready to go, in fact, gold was up dramatically off that CPI print and central banks have been after it as well as us as we started tracking this sector and key names a few months ago along with additions in the recent LongVol Report on Sunday. When they cut, inflation likely takes off again (I hope I am wrong) and the market seems to believe that as well given the bids in certain inflation-linked names.
Now, there is no sure way to know that inflation will take off again, we only have past data combined with current data to come to that conclusion. And to be clear, I am NOT “The Head of Macro”, but right now everyone needs to have a bit of macro insight given the cycle so I’m forced to pay attention. But even with that we want to stick to quality fundamentals when you breakdown the idea that we’re at an inflection in the cycle:
- Good management
- Cash Flow Increasing
- Buybacks/Dividend Increases
Taking that idea, we start to filter through ideas in a sector and sort out which names present the best opportunity for RoR. Sometimes, those names will be dormant awhile but as long as you stick to quality fundamentals price will always catch up, especially when you have a tailwind as strong as the one, I think we’re going to have here the next 3-12 months.
Again, the data plays a big role right now in where money flows are headed so being ahead of that is key in the portfolio construction process, even if you’re a quarter early in that process. We don’t want to have to be dependent on day-to-day fluctuations – that’s what the day-traders and SPX “bottom and top”” callers are for: we’re buying quality companies with fundamentals that are positive and in the case of the current market, where they might benefit from rate cuts.
Moving on….
There is also a part of the portfolio that utilizes what most do: momentum trading and chasing beta. We do some of that, some event-driven trading long and short and sometimes, in the case of the broad market, shorting the indices when there is such a large asymmetry that it makes the payout worth it.
And given that we’re likely on the tail-end of this cycle I expect more event-driven situations to come alive as well as more shorting opportunities in certain sectors due to the fact that we’re also seeing a weakening consumer.
Broad Market Analysis.
Let’s dive into some broad market discussion next – for those of you that are not after holding companies or investing in them this is for you. A few weeks ago in issue 27 of TLV I talked about general check-back in the market at large and my views. We got a decent sell-off post CPI Thursday on most indices aside from the Russell 2000 – Dow Jones was flat.
Second – We’re at the start of earnings season which gives us a clue and most companies are expected to beat but given the weakening consumer the key is: how do they forward guide. Pay attention to that. I added $RACE and $RH into the Special Situations Monitor in the report just to track that high end market as a gauge.
- Probability for rate cut increased this week
- Street expectations for earnings are strong, especially for the large cap names.
- Pepsi earnings are concerning and need to watch to see if companies guide
- A few names below of interest to me
The concern right now is a weaking consumer and whether that gets worse. Pepsi reported earnings Thursday and there were some notable comments made there and something to watch out for as we start earnings season. The market expects a quality earnings season but with CPI this week and these earnings I think we’re at an inflection point.
- Alerts were issued on $XHB this week in the AST Swing Portfolio – The trade worked in 4 days and I am still bullish this sector into fall.
- Real housing market v. builders are two different things – no alarm on builders just yet but maybe soon.
- If inflation does take off doesn’t housing take off?
I prefer to trade these names – if you want coverage on them use the LongVol Digital Membership. It’s 50% off for new members through the end of Summer.
INVESTING IN CHINA.
China is not really a market I want to invest in much but it’s hard to ignore the region and tickers there as an event-driven trade in the portfolios. Again, the mentality we take is Core Positions and Active Trading combined to generate returns and with China Third Plenum coming here this week many names are worth a watch.
One of those names, BABA, is of interest to me and certainly to many true value investors.
The AST Alerts sent out a trade on $BABA this week that already hit target one. Hard to not be bullish Alibaba given the book value but the stock gap ups/downs certainly test the patience. That’s why we like DITM calls/puts for structure for subscribers who want to allocate less money to an idea and not have to watch tick by tick.
- $BIDU also flagged in the Boing Boing (left for dead monitor) and a really great trade this past week.
Final Word.
- Q&A From Readers
- China Third Plenum this week is important for investors in BABA etc.
- Earnings season begins so watching closely
- New report out Sunday
Next Lesson
Final Quarter of 2024 Stock Market
Stock Market Stimulus
The Main Event is Here
About the Author
Daniel Bustamante is the founder, managing partner, and CIO of Bustamante Capital Management L.L.C., a multi-strategy investment management firm based in San Juan, Puerto Rico. He has over 10 years of experience in the financial industry, specializing in equities, futures, and event-driven trading strategies.
He is also the founder of TheLongVol.com, a blog and newsletter that shares his insights on his investing process, travel, and other private investments. He has been featured in Bloomberg, Arizona Business Journal, Business Insider, Yahoo! Finance, Forbes, Seeking Alpha, and other publications over his career on Wall Street.
