08/10/2024 NewsLetter | MrNotAdvice Archive

Newsletter - 08/10/2024

I believe we are at or very near an inflection point in the markets. All one has to do is look at last week's daily candles. Specfically, note how wide the range was Monday through Thursday. Certainly when compared to the previous weeks' daily price action, intraday ranges have consistently been much larger. Why?

Monday through Wednesday the overnight market jumped (futures) and then was sold off each day. To me this is a classic sign of insitutiaionl distribution. The big boys have been buying up futures in the overnight in order for the cash open to be strongly green. However, each of the first three days of the week the cash markets sold off and strongly so. If the markets had been truly bullish then the

gains would have held during the cash market. Regardless of who was doing the selling the markets clearly were not buying the bullish overnight action.

Frankly, we are near the end of the low volume summer doldrums and entering a calendar period that have an inordinate amount of outlier risks. Chief among these is the upcoming POTUS election. I did read some commentary that the market selling off earlier this week was in direct response to the drop in probability of Trump's election this Fall. I don't know about that as often the market "backfills" the reason why a move has happened which of course is highly subject to confirmation bias.

In my 30 years I have seen many times where the market continues to shrug off bad geopolitical news or market moving macro news. This is not the market "trying to screw investors." Truthfully the average investor doesn't really need help with that. In my experience the market is like a petulant child that must be forced to acknowledge an underlying change in the foundation of the markets. In this example, the market will continue to rip higher (or lower sometimes) until such time that something finally triggers/breaks that makes the decision for the market because it is so large, participants can no longer ignore it. For lack of a better analogy, it is like when cancer finally metastasizes to the point that it's effects can no longer be ignored. The market does not willingly change directions.

Much discussion about the Yen carry trade was in the financial MSM this week. I have explained this before but as a simple refresher here is what the carry trade is: you borrow a currency (Yen) where the cost to do so is low (Japanese yields have been zero until just recently) and then debt in a stronger currency (USD) and capture the spread between the two yields. While not a riskless transaction it's been pretty close, for years.

Big institutions add rocket fuel to this trade by the use of leverage. They can leverage the borrowing of the Yen. Then can then leverage the proceeds of the Yen borrow to buy 100:1 of the USD. They then can leverage even further by using the USD as collateral to buy index futures, which adds another layer of leverage. However, when the JCB raised rates by .25% it made the carry trade more expensive. You might not think a mere .25% hike in rates would blow up the carry trade but remember the incredible amount of leverage being used. Even small interest rates move can quickly cause a waterfall effect on the risked assets until ultimately a very large player says they are done and starts closing out their carry trade. Or a very large player is forced to do so because their leverage is now accelerating losses.

I did think we were entering the above carry trade destruction part of the cycle until the JCB came out quickly and seeing the market's reaction, told the market that there would be no more raises. Really a terrible look for the JCB to let the equity market's response guide their monetary policy. In fact, this is a perfect example how Central Banks are stuck: if they do what is right and let rates rise in order to remove some of the liquidity in the market then the market is going to correct. Or they can delay delay delay.

Such is the world we live in of irresponsible Central Bankers. And if you are confused you are not alone. $GS and $JPM trade desks disagree if the Yen carry trade has been exited or if it is still active. While I believe that the JCB raising by a quarter forced some firms to trim their Yen carry trade exposure, I do not believe it is done because the JCB announced that they were NOT going to do anything further to disrupt the markets. So stupid and irresponsible.

Looking beyond the Yen carry trade there has been a marked change in the tone of the market. As earnings have rolled out the market is treating bad news as bad news. In fact, the most commonly mentioned phrase so far on earnings calls has been "economic slowdown." Companies are continuing to prepare for a recession (I believe we have been a "rolling" recession since June 2023) by laying off and reducing forward guidance. If layoffs continue, and I think they have only just begun in terms of size and

count, then that will eventually put further pressure on consumers as either enough layoffs happen to materially change spending up and down the manufacturing and retail chain or the market will start to "price in" a high probability of more layoffs. Either way layoffs are sort of the canary in the coal mine for me because our economy is largely consumption based. If consumption goes down, earnings at companies will go down and eventually the petulant child that is the market will be forced to react. When will this be? I do not know but the weight of bad economic news is growing and growing and at some point, it will just give way to the sheer weight of it all. Unless of

course the Fed and/or other Central Banks "save" all of us by launching the Mother of all Stimulus Plans (MOASP). If that occurs well, then welcome to hyperinflation and being a Central American economy.

I said this last week and my opinion has not changed: "I believe as a result of last week's selling that the market has chosen a temporary direction: down. I do NOT think this is the beginning of the "Big Down" move; the one I see taking 30 to 50% of the market. In fact, my back of the napkin prediction goes like this:

Market continues to drop for a short period of time.

The market dropping gives the Fed the cover it needs to cut rates right before the POTUS election.

Whether they cut by .25% or .50% doesn't matter because any cut will cause another pulse of inflation. Why? Because interest rate cuts are just like stimulus.

When the Fed cuts, the market will attempt to recover from the ongoing pullback. (this will be a problem since the actual boots on the ground effect of any Fed intervention takes many months to materialize in the economy)

Assuming the POTUS election goes smoothly (I truly don't believe it will. In fact just today the DHS and FBI released a warning that there could be technological and/or internet connectivity problems right around the election.) then sometime after it, the sheer weight of all the bad things macro wise will finally tip the market into a prolonged downturn.

Wildcards are many. Iran, Israel, Japan blowing up, election interference, another assassination attempt, a new "pandemic," a flood of layoffs or CRE finally reaching the tipping point. Just one of these normally would cause the market to take notice but to have so many huge events happening all at the same time is truly extraordinary.

I believe we have finally "shook out" some of the uncertainty in the markets and the remaining of the year will prove to be very fertile for trade opportunities."

By the way, the geopolitical risks have only gotten worse, not better. Risk remains very high so continued vigilance is most important. Let the market and price tell us if trend has changed.

Week in Review

Model Portfolio - since 5/9/2023

This Week:

Last Week:

Although I had about six VIP Trade Ideas ready to go this past Monday, the market just didn't let me get in at the price I was willing to pay. I could have chased them but that would have completely made my R factor much worse and my risk much higher.

Closed trades this past week:

$FCX Sept 45P Runners: +205% in 14 days (this is in addition to the +89% on the scale)
$PFE Sept 32.50C: -36% in 4 days

Closed Positions

$FCX Sept 45P Runners: +205% in 14 days

$PFE Sept 48C: -36% in 3 days

This and That: $EOSE 8% Trade

For those of you who are new you might not know about a company named EOS, symbol $EOSE. EOS is "accelerating the shift to clean energy with zinc-powered energy storage solutions. Safe, simple, durable, flexible, and available, our commercially-proven, U.S.-manufactured battery tech overcomes the limitations of conventual lithium-ion in 3- to 12- hour intraday applications."

The company held it's earnings call this past week and now that we are past that, I do not see other outlier risk events on the horizon. The stock sold off this week because, in my opinion, some investors were hoping/expecting for an update on the DOE loan. Foolish short sightedness.

I have decided to make $EOSE Jan 2026 LEAPs an 8% position in my portfolios because I believe that major risk has been removed and that the company is now at the stage where it's all about execution. This is EXACTLY where I want to be in a company's growth cycle.

Before continuing let me emphasize that this is still a high-risk trade. However, as I will explain below, in my opinion the downside risk is no longer that they will go out of business. The risk now is that they will not execute. Also, I am primarily a short term technical trader BUT there are those opportunities that I see that offer such an unbalanced Reward to Risk equation that I have to take a shot.

For simplicity purposes, here are some datapoints that make a compelling investment thesis from a Risk to Reward standpoint:

$EOSE has a full pipeline of possible customers. While I have no idea what the close rate will be if I assume only a 5% close rate it would reprice the stock conservatively to between $5 and $10 per share.
$EOSE is already successfully producing product.
Cerebrus Capital's involvement is THE primary reason I believe the current stock price offers a possible minimum 10x move over the next 18 months..
The market has not repriced the risk profile for $EOSE since Cerebrus joined and that is a discrepancy that is providing me with a low entry price.

Let's look at the points from above in more detail:

SALES PIPELINE IS FULL:

Because pre-Cerebrus $EOSE was in serious danger of going out of business it makes sense that potential customers might be hesitant to proceed much further beyond cursory interest. I mean, if you aren't sure the company is going to even exist how are you going to be confidant to submit a purchase order. News that 11 customers recently visited $EOSE tells me that prospective customers now have confidence that $EOSE is not going to shut down with orders going unfulfilled.

As the following slides show $EOSE has a $13.8 billion in the pipeline, Booked Orders of $133.1 million and an Order Backlog of $586.8 million. These numbers are a big deal because not only do they have actual orders immediately, they also have been busy filling the pipeline of potential customers.

My understanding is that the need by Customers to line up financing is holding up actual orders. As Greg Reyes, former CEO of Brocade, explained if we start seeing news that Cerebrus is facilitating the customer financing either by directly offering financing or via their relationships it would remove that risk also largely.

PRODUCTION:

The fact that $EOSE has been successfully manufacturing their batteries already places it at a pivotal place in terms of where the company is vis a vis generating meaningful revenues and profits. Again, this is no longer a story about "If they survive" and in my opinion, the stock should not be priced as such. Could there be hiccups like a line going down temporarily? Sure. But that is such a better place to be than will they stay in business.

CEREBRUS:

I keep saying it: Cerebrus' investment completely removes the risk that $EOSE will go under because they lack capital to operate. But even more important imo is the fact that CRBS conducted due diligence that was so detailed and focused that it far surpasses any analyst or Furu's capabilities.

screenshot-investors.eose.com-2024.08.10-16_17_07.png

As important as the capital investment is, CRBS also brings management experience and oversight to $EOSE. CRBS is going to do everything they can to profit off of their investment and their continued involvement in helping execute the business plan will, imo, only accelerate the path to profitability and an increase in share price.

CRBS is THE reason I am buying LEAPs and THE reason why I believe the odds now greatly favor a much higher stock price 3 to 6 months from now.

MARKET IS WRONG:

Since early 2023 $EOSE was in a precarious position. How could they attract orders of size if there was not confidence that they would be in business to fulfill those orders? CRBS mitigated this risk and yet the stock has actually gone down since the CRBS news. Why would that be?

If we look back to last Fall $EOSE was in a position where they desperately needed money to "bridge" the time until the DOE approved and funded their loan. Because of this, the market priced the stock correctly as a possible bankruptcy/reorg situation. That is no longer the case. But in a perfect example of Recency Bias, the market appears to not have adjusted it's risk profile for $EOSE and therein lies the opportunity. IMO at some point in the near future we will see a repricing of the stock and that will push the price to at least above $2 - $2.50 per share. Is it guaranteed? Of course not. I mean the overall market could crater dragging down $EOSE with it. On the other hand there is also an equal chance that $EOSE will actually stand out in a down market as a compelling investment opportunity in an otherwise shitty market.

So what could go wrong? Before I list what I see as the major risks understand that I am considering also what the PROBABILITY of any of these things happening.

$EOSE management could fail to execute or worse. This is a low risk to me because of, well, CRBS. CRBS has established "guard rails" for management and is actively involved in the strategic planning and execution of those plans. I am not going to say that Joe Mastrangelo (CEO) by himself gives me confidence but CRBS does. In fact, make no mistake if Joe stumbles CRBS could and would replace him.

The overall market crashes and drags $EOSE down with it. This is THE biggest risk to me getting long LEAPs right now. And there is nothing I can do about it. Interestingly though $EOSE is to me somewhat recession proof in that they are not producing a product that is a "like to

have" but one what is a "must have" for utilities. Also utilities largely are recession proof because they can arbitrarily raise their rates at any time, and they do.

CRBS could be a bunch of idiots. Not very likely for a $68 billion dollar firm.

CRBS' investment is tiny. Not true since it is from a $2 billion CRBS growth fund. That's an allocation over 15% of the funds.

Management could be lying about the pipeline etc. Not likely with the amount of due diligence that CRBS did.

I always hear about investors wanting to be involved in a "Unicorn" investment such as getting into $TSLA when it IPO'd. Do I think $EOSE is a Unicorn? I don't know yet and only time will tell. I DO beleive that it has the potential to do extremely well and just based on the above order demand and pipeline, I believe the stock should be trading at least over $2.50 and once they announce that the now not needed DOE loan is done, the stock could pop for another dollar. But all of this is speculation on my part of course.

My 30 years of experience tells me that $EOSE is an outsized opportunity that I must take part in. The potential reward is too great, a great deal of this capital risk has been eliminated and now $EOSE is exactly where I like to get involved: visibility of revenues, strong capital structure and betting on the execution primarily.

My choice to use LEAPs is due to the fact that they will provide a "cushion" if the stock falls further due to the amount of time value in the contract and could advance more when the stock moves up, due to the very same time value component of the LEAP.

FINAL COMMENTS:

You will notice that I am not one to dive deep into the projections or the numbers. This is purposeful. I look at investments not just as a technical or fundamental investor but as one who combines the outlook for both in my decisions. TA provides me with the timing of trades and being able to get long $EOSE below $2.50 is a gift IF you believe as I do: that the risk has been significantly reduced. I believe the "tone" and how $EOSE is perceived in the market is pivoting and once that change is complete, the stock will move higher. I can tell you with experience that professionals will find the $EOSE story compelling and the risk profile low relative to the current stock price. In believe that we are at an inflection point where the momentum is going to switch to the top side. Obviously CRBS thinks the same and I like having that type of company on my side of the invetment.

Is $EOSE a unicorn? Only time will tell.

Are the ingredients present for this to turn into a 10x reward? Absolutely.

Will $EOSE be worthy of this hat? I think the odds are growing.

Tales from the Dark Side:
An Example of Me Marrying a Stock

Just because I constantly say that you never marry a stock you only date it doesn't mean I have not made that mistake before. In fact, it is because I have made that mistake before that I am so adamant about it. Now, in full disclosure, there have been deals where I have taken longer term positions and I have done extremely well. But it is rare that I do so.

Omeros $OMER is a developmental stage pharma company that I was able to get a part of the Private Placement and the IPO for. The management was top notch and they had an exciting pipeline of development stage drugs. I was able to sit down with management and I found their story to be compelling. So far so good.

It's been a long time but I believe I got into $OMER at around a $5.50 average. In the first two years I had the chance to exit for a nice 80% profit on the common but I didn't do it. Why? Because their pipeline was so strong that I believed/felt that if they got one drug approved, it would completely change the valuation.

But that's not what happened. As is common with pre-revenue stage pharma companies, the FDA process did not go smoothly and did not result in a drug approval before I sold.

So what mistakes did I make?

I ignored the variable of time risk.
I did not take advantage of spikes in the stock to trim my holdings.
I did not use LEAPs because at first, there weren't any and Privates and IPOs only use common stock or warrants.
I added on dips and did not lighten up on rips.
I started discounting risks because the potential was "so good" while ignoring what the price was telling me the market was valuing $OMER at.

I believe I ended up selling the stock for a loss in January of 2022. I lost all that time, I lost money and I ignored some rules. Luckily it was not a large position (less than 5%) so the net effect was minimal. But the damage was done to my trading psyche as I knew what I had doing and I had not stopped.

Interestingly, around 2018 is when my mentor developed cancer which he ultimately succumbed to. He was not there as the accountability partner that I had always had. So when left to my own devices, I became too aggressive.

$OMER was the last time I bought common shares and was the last time I "married" a stock. Even a pro like me with all my experience fell for the siren song of possible outsized gains despite operational updates from the company that were delay after delay.

Never again.

Charts of Interest

$ENVX and $EOSE

I have discussed at length in my most recent Podcast with Greg Reyes why $ENVX shares are trading lower.

From a technical perspective the stock is range bound and until it breaks $12.24 to the topside or $10 to the downside we will not know the direction.

If price breaks that $10 major support then I think that gap down at $8ish will be tested.

From a technical perspective, the

Price needs to break $2ish to the topside or meaningfully break $1.50 to the downside.

$SPY

$SPY daily is in a buy while the weekly remains in a sell. A close next week above last week's high of 534.51 would put the weekly also in a buy.

The market tone is tenuous and parties are taking sides. Even the trading desks at $JPM and $GS are in disagreement as the former saying the bottom is in and the latter saying the bottom is much lower.

Risk remains high for both directions and the big unknown is when the market will start factoring in the geopolitical risks, which are getting worse imo.

$500 to $550 is my range for decision.

$QQQ

The $QQQs have similar charts as $SPY with one major difference: the Qs closed above the psychological level of $450 on Friday.

With megacap tech earnings largely done, we will now get to see what the market thinks about the tech sector. Companies largely guided down and made special note of possible weakness into 2025.

Pretty simple TA: above $450 the Qs are a buy and below $400 it is a sell.

ANNOUNCEMENTS

In two weeks I will have a Podcast guest who successfully launched two Crypto coins. His book will be released world wide at the same time as the Podcast. In his book he will provide proof of how much the crypto markets are full of fraud and bad actors.

In coming weeks I will be doing a special Podcast wherein I will share a complete professional history about myself, why I am doing this community and what my ultimate goals are. You are not going to want to miss it.

I am also working on putting detail to my VIP curriculum in the form of a short book and I hope to have that done by the end of 2024.

Doom

Anti Doom

PODCAST:

The Podcast library is here.

VIDEOS:

The Video library is here.

Paid Memberships:

Look, there are a LOT of scammers out there on FinTwit. 99.99% of them care only about selling packages of crap. SOME OF THEM ARE CHARGING AS MUCH AS $5,000 PER MONTH! None of them include what helped make me a better trader: having a mentor. Having someone who will be your PERSONAL TEACHER, COACH AND ACCOUNTABILITY PARTNER. A Mentor that has over 90,000 hours of screen time. That by itself is invaluable.

People ask why I charge. First, I want only VIPs that are committed and "having skin in the game" guarantees this. Second, because my time is valuable.

See what others are saying:

Don't forget the Discord live chat is STILL FREE but it will be closing to new members soon. In fact, we have already started removing non-active members.

In the meantime, come and join us - its the best community out there: Discord.
Also, be sure to check out the new page for Daytrading on the website, run by the fine gents @BaconTurkeyClub and @Juggernaut. If you ever wanted to learn or just watch two pros daytrade live, they are at it every day here: DiscordFuturesChannel.
Finally, be sure to check out VampireTrades and his amazing penny stock trades.

Thankyou Family!

theBoss

Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.