SICK AND TIRED OF BEING SICK AND TIRED…

America is sick and tired of being sick and tired. Healthcare costs versus the value proposition of treatments provided are ridiculous.

What does it say to corporate America when the alleged murderer, Luigi Mangione, of United Healthcare’s president, Bryan Thompson, becomes the champion of a disenfranchised people and failed healthcare system?

People are tired of being the scapegoat for not just a healthcare system that’s gone wrong, but a govermental and corporate ideology that says a person's useful life is only as good as how much GDP can be strategically extracted from every single purse or satchel raised in the populace.

Once the system has no more use for its people, they are discarded like medical waste products, a system that poisons its people for economic purposes.

*Depending on the industry the employee is paid a small fraction of the dollars they generate.

The poison is not homogenized to a single cylinder of delivery. First, it starts with the media and the way Americans are brainwashed to think. Americans are raised to be patriots living in the land of the free and opportunity but enslaves its population to the high cost of living, perpetual work, and limited free time for love, life, and family.

If this doesn’t sound like a cage what is?

The idea that the American dream is, “consumerism equates to wealth” has been shattered into pieces by a cost of living that makes even those who make a decent wage feel like they make slave wages.

The family unit, which used to be the cornerstone of American society, has been systematically infected by broken ideals, bad choices, government intervention, and the lack of unity that once was familiar to a place we all called home.

Today, people scoff at the thought of staying on a job with benefits for 30 years, as this was a brainwashed state passed on by the baby boomer.

In fact, the average person switches jobs 12.7 times before the age of 50 and stays on a job for under four years.

This means Americans are not building wealth or a retirement worth having, in a system that doesn’t care enough about education or the people in it— to teach proper financial literacy and give everyone the opportunity for a prosperous life.

It’s as if we are all rats in a cage called the rat race, where we are fed a healthy helping of poisonous food, propaganda, and lies by the media to perpetuate a system that needs the wool pulled tightly over its populations eyes.

If America is the best, why is it that our food supply is being manufactured by unscrupulous corporations that value profit over health, intentionally lacing our food supply with chemicals banned in several countries, to save a buck and increase profit margins?

Why are corporations shrinking the amount of food they are giving us while simultaneously raising the prices, i.e. shrink inflation?

Why has the healthcare system become a boiler room of unscrupulous salesman who prey on the unsuspecting public with horrible health plans, only to find out that their most needed procedures are not covered or is met with an insurmountable amount of red tape?

The system is undoubtedly broken and while I believe America has the greatest potential on Earth, it’s going to take the natural order of God, family, and country to be restored so we can be great again!

WE DON’T BELIEVE YOU…

I’m not sure if you’ve been paying attention, but the 10 year treasury bond made a 28% move from it’s low in September, 3.620% to 4.631%.

This is not only a significant move, but proof that the market doesn’t believe the Feds are going to get inflation under control.

Inflation, although at 2.7% significantly off its peak from June 2022 of 9.1%, is up from 2.6% in November—obviously headed in the wrong direction off of its low of 2.4% in September.

Pay attention to the trend; the trend is your friend:

Bond yields and bond prices have an inverse relationship, so if yields are rising this means that bond prices are dropping. This also means that investors are selling bonds and buying riskier assets such as stocks, which explains the intense speculation we are seeing in the stock market’s current state.

The Feds dropped rates by 50% basis points September 18, 2024, from 5.25%-5.5% to 5.00%-5.25%, the first time in four years.

Three days before the rate drop, the 10 year treasury hit a low of 3.620%—obviously in anticipation of a lower Fed fund rate, which is typically what we see in an easing cycle. With the December 18th rate cut this was not the case.

The market is a future-telling mechanism, and right now it’s predicting a less than stable inflationary environment. And both bonds and mortgage rates are screaming, we don’t believe you.

Mortgages rates have been quite stubborn as they have gone in the opposite direction of the Feds. Typically, mortgage rates and the 10-year treasury follow suit, but we are seeing a deviation which is telling us that investors want a premium to hold bonds against stocks, and that the instability of tariffs are weighing heavy on the inflation picture.

In a normal environment we would see a decrease in the treasuries and mortgages, but the noise of the incoming administration has the market pricing both at a premium.

Add to the fact that the Feds are rolling $35 billion in mortgage debt off their balance sheet monthly, and the demand for mortgage-backed securities is low; both foreign and domestic are keeping mortgages rates high.

Plus, the bonus of low housing supply has lifted the average home price in the third quarter to $420,400, 25% above the medium price of $337,500 in the third quarter of 2020.

The housing market desperately needs a huge injection of supply and lower mortgage rates to shift the market from—more expensive to buy a home than rent, to less expensive to buy a home than rent.

This may not put pressure on home prices as lower rates will cause a surge in demands, but it will lower rents as multi-family supply hits the markets forcing rents down as landlords struggle to fill vacancy.

The main question everyone should be asking is where is inflation hiding? Besides the obvious, food, insurance, and energy, the main place according to the CPI report is shelter.

So, if the market is wrong about Trump and he becomes deflationary instead of inflationary we may just get what the doctor ordered—a drop in the 10-year treasury, mortgage rates, and overall inflation.

If this happens, we could be in for an extended bull market if earnings improve. As of right now, the street looks to push the narrative of four rate cuts against a non- accommodating Fed’s two cut rhetoric.

This will put turbulence on the market until the data suggests we are headed down the right inflation path. Until then, there are too many balls in the air to rest easy, so don’t get caught speculating without a chair if the music stops.

NOT WITH A 10 FOOT POLE…

So, the question is…would I invest in Super Micro Computer Inc.? Outside of my private coaching, I do not divulge what I am buying, but in this case, based on the current data, I wouldn’t touch SMCI with a 10-foot pole.

Here is why.

Once a company loses credibility with the street, it’s tough to get it back. You’ll hear this if you listen to the conference call. You can always tell a company is in trouble when the analyst goes from asking questions for modeling purposes to questioning with skepticism on the earnings call.

When the question's juxtaposition changes, it’s an obvious sign of discontent and doubt. Analysts, in a roundabout way, questioned the leadership of the company.

Northland Capital Markets analyst, Nehal Choski, specifically fired a question across the bow surrounding the separation of the CEO position from the Chairman role—implying a change would be welcome. (currently Charles Liang holds both roles)

They also tried to sneak in questions about a special committee—suggesting better financial oversight, as well as whether the company held anyone accountable or found a scapegoat for the failed 10-K filing.

The CEO Charles Liang dodged the question, as analysts were instructed not to ask questions about the 10-K filing at the beginning of the conference call. But they did challenge the following… (1) the credibility of their fiscal 2025 revenue guidance of 26 billion to 30 billion, (2) the weak margin guide for the fiscal 2025 2nd quarter, (3) a timeline on when margins would improve to the 14% to 17% range given on their fiscal 2024 fourth-quarter earnings call.

A company can miss a quarter or two and be forgiven but regaining confidence and integrity in the financials after losing it, is like climbing Mount Everest barefoot in the middle of a snowstorm.

From the outside looking in the company looks healthy.

They just announced a 10-for-1 stock split. Fiscal 2024 year-over-year revenue was up 109.77% from $7.123 billion to $14.9 billion. Non-GAAP earnings grew year-over-year by 78.41% or $6.25 billion.

Fiscal 2025 first-quarter revenue was up 181% at $5.9 billion to $6 billion, and non-GAAP earnings were up 122% year-over-year, between 75 cent and 76 cent earnings per share. Margins improved from 11.1% in the fiscal fourth quarter of 2024 to 13.2% in the fiscal first quarter of 2025, but they guided margins down 100 basis points for their fiscal second quarter of 2025.

If you dig a little deeper, they ended the fiscal first quarter 2025 with $5 billion in inventory up from $4.4 billion in the fiscal fourth quarter of 2024.

In one breath, they said it was because of increased demand, and in the next breath, they said they were waiting for the Blackwell chips. But the numbers don’t lie; days of inventory went from 82 days to 85 days—days for sales outstanding went from 37 days to 41 days—and days payable went from 25 days to 29 days.

If you look at the data, you see why inventory went up. It was like their customers were delaying payment and shipments due to the financial concerns of the entity. They implied on the call that their relationship with NVDA was intact, despite the rumors of some orders being moved to Dell.

Analysts also questioned their financial strength, asking about their access to capital markets after a $1.5 billion convertible offering due in 2029, issued on February 27th, 2024, and a $1.75 billion stock offering of 2 million shares that closed on March 2024.

Keep in mind…debt issuances always depress a stock in the short term and to add to the list of financial issues, there is the uncertainty of whether they will file their 10-K by February 25th, 2025, to avoid delisting on time.

THE MARKET NEVER PLAYS CAPTAIN SAVE ‘EM…

One of the hardest situations to deal with as a new investor is the turbulence of a market downturn. To some, it’s the equivalent of getting two root canals in one day without any painkillers, because all they can feel is the painful emptiness of loss and their emotional stability, shaken as panic creeps in.

This is where you become your own worst enemy, as you toil in between the decision to sell or hold, praying for the stock market to take you out of both your losses and your misery.

The market has no patience for its youth, and the learning curve is quite severe. One day you are riding high thinking that you have a super system, and next, you are at the anals of life trapped in a love-hate relationship like it’s a case of Stockholm Syndrome where you have fallen in love with your attacker.

The stock market is the only place where you get assaulted by an invisible attacker, but you are fully aware of who did it.

It’s like a series out of Marvel Comics where the institutional traders, sell-side analysts, and market makers all collide in a secret war against the retail investor's stubbornness for a quick buck.

Benjamin Graham tried to tell them that an intelligent investor is a long-term investor.

Warren Buffet tried to warn you to look for companies with an impregnable moat and never buy a company in one minute that you aren’t willing to hold for five years. But insanity is doing the same thing over and over expecting a different result.

Why pay the stupid tax when being successful is, in the data that matters? If you aren’t savvy buy indexes or ETFs, stick to your knitting—make more money and put those soldiers to work.

Become a student of the market and READ!

Read books like “Learn to Earn”, “One Up On Wall Street”, and “Beating The Street” by Peter Lynch, and Money: Master the Game by Tony Robbins.

Learn about the macro-economic environment through books like “The Lords of Easy Money” by Christopher Leonard.

Study “The Little Book of Stock Market Cycles” by Jeffrey Hirsch and get a 360-degree view of the terrain before you walk in this desert without a camelback full of water.

Instead of owning every opportunity in sight only own the companies you have the bandwidth to manage.

This means listening to all earnings calls, reading quarterly 10-Qs and annual 10-Ks, attending all virtual investor conferences, and staying on top of product cycles, new product releases, and company-specific and industry news.

If you can’t say you’ve ever taken this approach, you may be doing too much and too little simultaneously. Try to avoid the Risky Randy and Risky Tandy behavior, because quick money always goes quicker as the stock market is designed to transfer money from the active to the patient.

Once you are seasoned, you will understand that the best cure for failure is data measurement and patience; until then, wisdom is a road traveled by the experienced.

BIG BANK TAKE LITTLE BANK….

 There is a belief on Wall Street that if an idea or product can be packaged and sold for a profit, Wall Street is the place where you sell the narrative..

Whether it’s the latest stock or bond offering, credit swaps, mortgage-back securities, or something more nefarious as selling fear to profit from a short position, or the creation of zero-day to expiration options, there are a plethora of products on Wall Street, and they are all designed to have two basic functions.

One…to raise money for the investment house that pitches them, and two…to create a commission for the sales teams that recommend these securities.

Making money for the client, although important, is secondary and not primary to the main objective. It is truly about raised capital because the more assets you have under management the more influence and access you have to deal flow. Reputation and network carry the bulk of the weight, especially when it comes to a particular brand or field of expertise.

For example, Goldman Sachs is viewed as having a stronger reputation in Mergers and Acquisitions and high-profit deals, which may lead to a significant deal flow. Morgan Stanley may show up better in Technology and Healthcare in terms of deal flow reputation.

Investment banking drives a significant portion of their revenue from Merger and Acquisition, and IPOs ranging from 1% to 7% of the deal size in the form of advisory fees (deals in the billions of dollars)—which speaks to the excitement for the potential of a Trump deregulatory environment.

Asset management firms receive remuneration (compensation) in the form of a percentage based on the amount of money under management.

The most successful asset managers are folks like Warren Buffet, averaging 19.8% per year since 1965, who believes in buying solid undervalued businesses.

Peter Lynch, who worked for Fidelity and ran their Magellan Fund—even though he retired his gloves in 1990, he turned $20 million into $13 billion, averaging 29.2% from 1970 to 1990— built on the principles of buying great businesses with solid earnings growth.

Last but not least, the famed hedge fund, Renaissance Technology LLC, also known as RenTec, was founded in 1982 by a mathematician named James Simon who used to work as a code breaker during the Cold War and was regarded as the best investor on Earth.

Renaissance Technology specialized in systematic trading and quantitative modeling derived from mathematical and statistical analysis. Their flagship fund is The Medallion Fund, famed for having the best investment track record in history.

Between 1988 and 2018, The Medallion Fund averaged 66% annually before fees and 39% after fees. The fund has never had a losing year, even during the Dot-Com era. The fund has been closed to outside investors since 1993 and is only available to its current and past employees.

Wall Street would be a magical place if every asset fund manager sported such a track record. Unfortunately, many fail to beat the S&P 500, which has averaged 10.6% for the last 100 years.

This is important to understand because as an asset manager, you are paid and judged by the size of your assets, and performance as compared to the benchmark S&P 500.

Since most fail to beat the index at the end of each quarter, we see window dressing and a chase for performance. This becomes even more pronounced at the end of the calendar year when everyone is trying to catch up, i.e. the Santa Clause rally.

Window dressing happens every quarter. This is a practice by underperforming fund managers, whereby they sell their losers in the quarter, and buy their winners in the quarter— giving the appearance to their investors that they won in the quarter.

Although a deceitful practice, it’s not illegal.

Here’s how it works. Before the quarter closes, we see a rebalancing of losers to winners. Any fund manager managing 100 million or more in assets must file a 13F. A 13F is a quarterly disclosure form required by the Securities Exchange Commission. Disclosed in the 13F is the name of the security, the number of shares owned, and the market value of each position held, and must be filed within 45 days after the end of the quarter.

Most fund managers wait until the last minute to file the report, to avoid transparency. This is how Fund Managers avoid accountability and the loss of assets under management, as the reports are made public.

Another common practice is chasing for performance. This happens when Fund Managers try to catch up to the gains of their peers. This happens at the end of every quarter, at the end of the calendar year, and in any bull cycle when a Fund Manager is underperforming the market.

The object of the game is to keep what they have under management and grow more assets. Since Wall Street is all about transactions, the larger the amount of assets a Fund Manager can move, the more money they make.

During this period, you discover that most Fund Managers are sheep, chasing the same stocks, and filtering the same stories down through the media in the form of manipulative narratives, creating a false perception.

The machine is vast and far- reaching. First, it starts with a biased research report. That is then promoted through an influential figure on your favorite financial news channel. The financial news mediums catch it and start pushing the narrative.

No one likes to be left out in the cold, so the bandwagon jumpers get in where they fit in, and Wall Street’s band of fund brothers and institutional traders collide to push the market with the brute strength of capital inflows.

The retail investors who are always last to know, see these companies running and pile in after, only to jump on a deflated balloon that violently crashes back to earth.

This brings us to our original point, Wall Street sells the narrative they can package whenever there is a commission or fee to be had, regardless of the investor's best interest, Wall Street hides behind the cloak of fiduciary responsibility.

 Quick Links….

California may be under pressure…

Higher mortgage rates may be here for a while…..

Will TikTok score a stay of execution….

 Question Of The Week 

What are your market predictions for 2025?

Do you think the Feds will hit their 2% inflation goal in 2025?

Thank you for reading; please share and send your feedback.

Kevin Davis Founder of Investment Dojo and Author of The C.R.E.A.M. Report