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Do I Look Nervous To You…

FEAR IS WALL STREET’S KRYPTONITE

There is nothing the markets hate more than the unpredictable nature of uncertainty.

Uncertainty impacts decision-making, especially in the financial markets, and since the market is a future-telling mechanism based on a variety of variables, any hint of unknowns create fear—and in extreme cases can send markets into a death spiral.

For instance, take into account the 2008 subprime mortgage crisis; once the word spread that Bear Sterns faced a severe liquidity crisis, the stampede began out of equities.

March 16, 2008—one of the biggest, most well-respected investment firms, Bear Sterns, was taken over by JP Morgan Chase, for two dollars a share—a transaction contingent upon the Federal Reserve providing financial support to stabilize the deal due to the toxic nature of Bear Stern’s assets.

The impact on the markets was severe and it took until the end of 2009 to stabilize. The markets had seen multiple crises and reacted like a kicked dog to the mere threat of a crisis or uncertainty.

It’s to the point where it doesn’t take much to upend the markets, whether it’s bad economic news, the threat of higher interest rates, inflation, or geopolitical instability—like the war between Russia and Ukraine and a newly negotiated cease-fire between Israel and the Palestine-backed Hamas.

We have the famously controversial President Donald Trump’s tariffs and the threat of inflation entering the forefront on January 20th. Plus, fear is spreading like poison that the Feds will not lower interest rates at all in 2025.

This has made the start of 2025 a trader’s paradise, as they delight in the volatility created by the headlines of inflation and the potential reverse course of the Feds from an easing to a tightening cycle if inflation gets out of hand.

It’s as if Wall Street forgot that we still have a bloated Fed balance sheet that’s still 2.73 trillion above the pre-pandemic levels of 4.1 trillion. And just the mere action of reducing 25 billion in treasuries and 35 billion in mortgage-backed securities monthly from the Feds balance sheet, is highly restrictive in nature.

The fact that the Feds aren’t buying mortgage-backed securities—and foreign governments have dramatically reduced their demand, has led to inflated mortgage rates as market participants require a higher yield due to the lack of liquidity in the mortgage-backed securities markets.

This also means that rents will be higher for longer, putting further pressure on consumers’ pocketbooks. Credit card debt is at an all-time high and the average household is carrying $10,563 in credit card debt.

In the last 12 months, landlords have filed 1,038,704 evictions and there were 71,340 evictions last month.

And to add more fuel to the fire, the stock market is trading at high PE multiples above the traditional 15 to 17 times earnings.

INDEX

PE RATIO

Dow Jones

26.48

S&P 500

28.77

Nasdaq 100

32.56

Russel Index

33.96

This creates a significant amount of uncertainty, market risk, and volatility in the markets, but if you are a student of the market, take a look at the last 100 years and tell me which direction the market has gone. We have had approximately 38 wars indirectly and directly, 15 recessions since 1900, and 13 twenty percent or more market crashes.

But somehow the market over the long term managed to not just recover but go up exponentially. So, while the markets hate uncertainty and fear is Wall Street’s kryptonite, it’s been proven over the long-term that the markets love a great discount opportunity even more.

Welcome to Social Finance May I take Your Order…..

SOCIAL MEDIA IS NOT YOUR FINANCIAL ADVISOR…

Contrary to popular belief, social media is not your financial advisor.

Just because a famous content creator goes viral from a cryptocurrency call or gets lucky on a penny stock play, doesn’t mean they are qualified to administer financial advice.

Since the pandemic, the surge of retail investors entering the stock market has increased, approximately 20% to 30% annually. A lot of this traffic is driven by financial influencers on social media platforms, like Reddit’s Wall Street Bets, TikTok, Twitter, and Instagram.

Retail investors turn to these communities for social validation, the latest and greatest trend, and what stock is up next.

Social media has become the new financial advisor and no matter how unqualified the advice is, it’s all about the next play.

Social media investors invented meme stocks and as much as Wall Street tried to dismiss their presence as insignificant, Wall Street couldn’t suppress the sheer size of the investors entering the markets on a daily basis.

When you are moving as much as 60 billion dollars a day, it’s not to be taken too lightly, and Wall Street found out on GameStop just how seriously the retail investor needed to be taken.

The Journal of Financial Economics (2021) found that stocks discussed on social media saw a significant move in price, divorced from fundamentals.

Social media can spread information faster than traditional outlets, which brings a heightened amount of volatility as stocks become trending topics where quick decisions are made in an instant.

We saw this with Silver Valley Capital. The news spread like wildfire across social media and influencers that Silver Capital Financial Health was in question, and almost in an instant, 42 billion in outflows vanished in a single day.

Social media’s impact is undeniable, and the retail investors—right or wrong—have earned their respect.

Institutions are now using social media to gauge investor sentiment, as well as incorporating social media into their strategies, but before we start celebrating the acceptance of the retail investor, they are significantly underperforming the market, averaging a mere 3% in 2024.

This is attributed to the herd mentality, that often throws out the research with the baby and the bath water.

A meme stock can only get a retail investor but so far. And even if it’s a fundamentally good company that makes a sizable move very often—by the time the retail investor catches wind, it’s already too late.

Now granted, information is moving fast down the social media highway, but let’s not forget…Wall Street’s institutional money is the first to know and the first to profit.

Retail investors are found to be too emotional, impulsive, and uninformed. Plus, the retail investor rarely establishes themselves as long-term investors.

Instead, most walk through the indoctrination of fire and brimstone as beginner traders, where 95% of traders see a losing return. And if you add in the social pressure of the crowd yelling, HODL, or diamond hands—when in fact, they should cut their losses, it’s hard to escape unscathed.

Investing is not social, it’s personalized based on individual knowledge, risk tolerance levels, and goals. For me, it’s purpose-driven because I know my children’s future will be greatly impacted by my failure or success.

So, doing the research and staying a student of the market is the only method I know to increase my measuring skills.

I can only measure the data and while past performance is not indicative of future results, the current data lets me know I am on the right track, and of course, it doesn’t hurt to do a little predictive financial modeling.

I have never invested because of a social media influencer or the crowd mentally simply because of experience. Most of them are just one chapter ahead of the person they are trying to teach—meaning they are instant like oatmeal—they read a book for a minute and suddenly they are gurus ready to inform the world.

My success comes from real-life battle scars and 30 years of Wall Street, and I have learned that the long-term is undefeated.

I also believe in the old Wall Street saying that, the bulls and the bears eat and the pigs and sheep get slaughtered.

So, why follow the crowd? Didn’t your mother tell you when you follow the crowd, you follow in their results? And since most social media influencers are scammers, and retail investors lose or underperform the market, why be surprised you turned your small fortune into a misfortune?

If I said it once, I will say it 100 times—social media is NOT your financial advisor.

A FOX IS IN THE HEN HOUSE…

There are three tools used to sell Wall Street’s narrative: Perception, Reality, and Greed. On Wall Street, they are the masters at selling the retail investors greed and perception, while their reality or outcome is totally different.

Last week, both the Consumer Price Index and the Producer Price Index reported the CPI reports, both headline inflation and core inflation.

The headline number came in at 2.9%. We call this the headline inflation number. So, if someone were to ask you, what is the current rate of inflation? 2.9% would be your answer.

The Core CPI number came in at 3.2%. The Core CPI excludes food and energy from the report. The purpose of the headline CPI report is to measure the overall cost of living and gauge inflationary trends the consumer is facing.

The Core CPI provides a more stable outlook, without the noise of volatile price fluctuations of food and energy.

The Producer Price Index (PPI) came in at 3.3% The PPI tracks the pricing on a wholesale level; it tracks the prices producers are selling their products wholesale.

With that being said, these reports were released on January 14th and 15th, respectively.

Now, here is the sales job. Before the report hit, Wall Street circulated the narrative of a three-handle being the next-level threat. Meaning…if we saw headline inflation in the 3% range this could be a problem.

Meanwhile, the match that started the inflationary fire a few weeks before was the ISM non-manufacturing prices, which came in hot at 64.4.

To put it into context—any number under 50 means we are in contraction territory; any number above 50 means we are in an expansion.

This report was extremely hot coming in at 64.4. And if you add in the JOLTS report—another preferred indicator of the Feds coming in at 8.09 million jobs hotter than the 7.7 million jobs expected.

The JOLTS report had more job openings than expected.

This translates into the potential of wage inflation, which puts more dollars in employee's hands, thereby increasing the buying power of the consumer.

This could lead to more demand than supply, creating inflation.

Here is why.

When there are too many job openings, employers have to fight for talent, which means they may have to raise wages to attract talent.

Now, let’s get back to the CPI 3 handle. The street sold the perception that 3% headline inflation would be going backward, which ties directly into the reason why the Feds are pausing rate cuts for longer.

This created shock waves, which was enough to disguise the trade. Wall Street began using the inflation story as a way to push yields higher.

This enabled institutions to short treasuries; betting bond prices would fall and yields would rise against the backdrop of inflation.

Now, couple that with Trump's inauguration and things get a little fishy. Based on the rally from September 6th to December 6th and the cooling-off period leading out to the year's close, it could be expected that we see a rally for Trump's re-entry into the White House.

The traders used the threats of inflation and Trump’s agenda to trigger selling, and it worked.

All major indexes fell below their 50-day moving day averages, which to the average trader, signals a downward trend and triggers selling from algorithms.

Bond yields started to get close to that magical 5% handle and the stock market sold off. And then a soft PPI and CPI hit, both coming in lower than expected.

The headline number came in as expected, 2.9%.

The CORE came in at 3.2%, below the expected 3.3%.

And the PPI came in at 3.3%, below the 3.5% expected.

This sent the street rumbling that the Fed cuts were back on the table for the March 19, 2025 meeting.

Now, here is the reality—Wall Street floated the 3% headline number being great, as if the 2.9% inflation number wasn’t an increase from the prior month's inflation numbers of 2.7% in December and 2.6% in November.

A blind man could see which direction the inflation number was heading in.

But ironically, the soft numbers of the CPI and the PPI were positive enough to send the indexes back up over their 50-day moving averages, just in time for Trump’s inauguration.

And the usual suspects, the institutional traders, made money on both the downside and upside in both the bond market and stock market—and good old-fashioned greed fueled the market’s manipulation once again.

CARVANA THE MAGNIFICIENT MESS?…

Carvana, once known as the Amazon of cars, survived a death-defying spiral towards bankruptcy—coming back from a loss of 99% of its value, from its peak of $370.10.

The company hit an all-time low of $4.05 on December 18, 2022, due to the pandemic aftershocks of high interest rates, debt, and the scarcity of cars, which led to significant price increases on both used and new cars.

Carvana, founded in 2012, was known as the auto industry disrupter. Instead of driving to a dealership and haggling for hours, Carvana changed the game. A customer could sit in their living room while in their pajamas, order a car, get financing, and have the car delivered right to their doorstep.

The stock boomed during the pandemic, but later ran into some sizable hiccups that placed the company in jeopardy of going bankrupt.

In November of 2022, the company announced a restructuring. In 2023, they renegotiated approximately 5.5 billion in debt obligations reducing it down, with creditors accepting a 1.3. billion debt reduction.

They reduced their workforce by 4,000 heads and cut their annual expenses by 1.1 billion dollars.

The street applauded the move, as it showed they were willing to make the tough choices to operate more efficiently, and the stock took off once again. And just when you thought the coast was clear, Hindenburg Research starts throwing rocks from a glass house.

Carvana Chart

Hindenburg alleges a grocery list of issues based on extensive document review and 49 interviews with industry experts, former Carvana employees, competitors, and related parties of the company. In interviews undertaken over the course of four months, Hindenburg drew the conclusion that Carvana’s turnaround was a mirage.

First, they start with 800 million in sold loans to an undisclosed party—add to this fact, insiders have been dumping stock.

This, in most cases, wouldn’t be an issue as insiders program their sales in advance, but this is the father of the CEO Eric Garcia II, so it looks rather suspicious that every time the stock goes on a run, the father sells shares.

Between August 2020 and August 2021, Eric Garcia III sold 3.6 billion dollars in stock and after the major comeback in 2023, Mr. Garcia III sold another 1.2 billion in shares.

This is not only a red flag, but the liquidations show no commitment or belief in the long-term prospects of Carvana as an entity.

Hindenburg goes on to cite specific concerns about lax underwriting and related-party loan servicing—implying a lower barrier to entry to obtain a loan, as their subprime auto has declined, and Alley, their major purchaser of auto loans, has modified their agreement five times in two years.

This is sporadic in nature and fishy at best.

Ally purchased 3.6 billion in loans from Carvana in 2023, which was 60% of Carvana’s total loan originations. This presents a market risk because there is no true diversification in finance partners. What if Ally decides their loan quality is too poor and cuts back significantly?

The writing is on the wall for Ally. In September 2024, their stock fell 20% after warning investors that, “on the retail auto side, our credit challenges have intensified”.

Now, add the claims of fuzzy accounting and the shell games being played by their loan servicer, which by the way is an affiliate of DriveTime, Eric Garcia III’s company.

Their portfolio of subprime loans is experiencing 60-day delinquency rates that are four times that of the industry.

Hindenburg alleges that instead of reporting the delinquencies, they are granting loan extensions, which have doubled for Carvana while the industry has declined.

And the last bombshell is that Carvana appears to be dumping unreported costs of extended warranties onto a related party, DriveTime (the father-owned company), resulting in artificially inflated revenue and profitability.

The report is extensive and leaves a lot to be digested. My overall thought process is that their allegations have to be proven or disproven in the numbers, so grab your popcorn— they report numbers between Feb 20 and Feb 24; In the meantime, it looks like a no-look pass.

 

TIME TO PLAY THE TRUMP CARD

As the market waits with bated breath wondering which Trump card will be played—from the tone of the last few trading sessions, it looks like they are setting up for a positive Tuesday. This time around, Trump enters the White House focused on key cabinet positions and a big agenda.

Here is his wish list:

  1. Tax cuts

  2. Crypto agenda

  3. Deregulation

  4. Immigration

  5. Global tariffs

  6. Department of Government Efficiency (DOGE)

  7. Rate policy

  8. Energy production

We all know Trump will make an executive order splash; the question is how big? In Trump's first presidency, he signed 55 executive orders in his first year with more than half coming in his first 100 days.

The wait is finally over on his tariff agenda. The street expects a follow-through, but to what extent?

Over 41% of the S&P 500 does business internationally—not to mention strength in the American dollar will erode earnings for corporations receiving payments in foreign currencies this earnings period.

Tariffs will have a negative impact on the price of imported goods as companies raise their price of goods to compensate for the extra costs. This is an inflationary action that passes higher costs to the consumer and trickles down to the economy in terms of potentially reducing spending and higher costs, and places inflation back on Wall Street’s list of concerns.

Inflation has a major impact on retail, energy, healthcare, consumer staples, real estate, utilities, infrastructure, and financials.

Inflation acts as a cloak and disguises the exorbitant price increases corporations pass on to the consumer, and looking back at pandemic pricing—even if inflation goes down, margins will hold.

This explains why bond yields are rising, the VIX was increasing, and mortgage rates are elevated, even after a 100 basis cut by the Feds.

On Wall Street, we used to say, the sizzle tastes way better than the steak, but in this case, the anticipation causes more damage than the reality.

Personally, I feel Trump has something to prove in his next swing up at bat. Although he can’t erase the memory of January 6th, he can make his last term in office, one for the history books.

While it is highly unlikely they balance a budget, just having a financial oversight wing in DOGE puts a little more scrutiny on the wasteful spending in Washington.

The magic trick will be to cut taxes, make the government more efficient, cut the deficit, and work with Jay Powell instead of against the Fed, all while reducing inflation and not causing international instability.

It would also be a miracle if corporations reciprocated in kind to tax cuts by lowering prices, but this is a long shot as I believe supply-side economics would have no impact, as Wall Street keeps raising the bar on earnings leaving corporations between a rock and a hard place, forced to keep prices elevated to hold margins.

The next four years will be like watching a heavily betted NFL wildcard match-up in the last three minutes and the underdog has the ball in the red zone. In this case, no matter what team you liked coming into the stadium, it’s time to support America; let’s just pray Team America wins.

 Quick Links….

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Thank you for reading; we appreciate your feedback—sharing is caring

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

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