CHART OF THE DAY
Berkshire Hathaway is said to buy Taylor Morrison (a homebuilder) in a $6.8 billion transaction.
Goes to show, there are plenty of areas in the market suffering from overly pessimistic expectations.
Expectations which can be easily uncovered and assessed.
ARE YOU COVERED? —>
A 22% daily gain is not far-fetched as you can see, especially in a market that remains focused in the AI trade, letting expectations fall everywhere else.
Check out our Expectations Playbook for more.
HOPING FOR THE BEST, PREPARING FOR THE WORST
We cannot call a 54% manufacturing PMI a win just yet.
Surely, the relationship between inventories and the PMI index itself remains bullish at the moment, since low inventories will command more production output.
Now the problem is who will these companies sell that inventory to?
The thinking is that most businesses outside of AI components are still struggling to navigate through a twofold hinderance:
Iran war supply disruptions continue to limit trade and create fuel/transportation cost uncertainty.
AI supply demand is now creating a negative effect on customers who cannot get deliveries on time.
As the biggest companies in the United States begin to cut back on AI budgets, and current inventories begin to get drawn lower due to unquenchable demand.
The question becomes: What gives first?
Within the PMI, it has become clear that this conflict created two main dynamics for you to consider.
First and foremost, computer and electrical equipment is struggling to find its footing, as respondents cited pricing uncertainty as a factor keeping customer orders tamed for now.
The second is a “snap back” scenario within agriculture and transportation, as the Strait of Hormuz and its three-month outage sends companies in those industries into a negative feedback loop.
As always, we want to bring this all back into expectations.
Despite Trump managing to keep Israel from hitting Lebanon this afternoon, the fact that they were willing to restart the war in the first place goes to show how sensitive the tail risks are right now.
Oil futures are still up 5% on the day, and the dollar index looks like it wants to push back to (and above) $100.
Therefore,
Expectations for the agricultural and transportation industries remain overly pessimistic, and if we can unlock the mispricing, there lies an attractive opportunity.
As we broke down in our last post, expectations are easily derived from current stock prices.
It’s your job to connect the dots and figure out if the landscape allows for those expectations to come to fruition.
Inside those overly pessimistic expectations, there are a couple of companies already pushing 20% monthly gains in one of the most hated areas of the market.
Let’s uncover this situation.
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