BUY HEAVY! The Next 25 Days Changes Everything for Stocks

[00:00:00] Speaker 1: The market is freaking the hell out over Fed rate hikes, but I'm about to make the biggest contrarian call of the year. If it's right, and I'm going to prove that it is, one investment could return as much as 115%, and it could happen in the next 25 days. Hey Bowtie Nation, Joseph Hogue with your weekly stock market update, Sundays at noon before the week starts, with the stocks to watch and the stock market news you need to see. This week I'm going to show you why Wall Street is completely wrong about rates, along with updates to AI stocks and a giant warning for NeoCloud stocks. First, to why the market has it wrong on interest rates and why this could be the biggest contrarian call of the year. If it's right, it's going to make the 366% return we made on that CPB options trade look small by comparison. You see, right now the market is putting a 17% chance that the Fed raises interest rates when it meets on the 29th of this month. This is from the CME FedWatch rate tool, which uses interest rate futures to forecast Fed rate moves, and those odds of a rate hike were as high as 30% last week. And this is where a lot of that pain in tech stocks has come from, that the Fed would raise interest rates, sending us back into the bear market we saw during the previous rate hikes in 2022, which saw stocks crash by 30% for the tech-heavy Nasdaq. That's because higher interest rates not only mean higher borrowing costs and a slower economy, but also lower valuation on those fast-growing tech stocks. But then even if the Fed doesn't raise interest rates later this month, as I've been arguing they won't, the market still puts higher than 50% odds, it raises rates in September and maybe even two rate hikes by the December meeting. It's a giant shadow hanging over the market, but I'm going to show you why it is completely wrong. Nation, most of the time Wall Street predictions are like gas station sushi. It might look good, but it's bad after about 15 minutes. To see why this is happening, you have to understand that the Fed has only two rules: keep inflation low, but also protect the jobs market. That is it. Nothing to do with the stock market, the deficit, nothing else. If inflation gets too hot, it raises rates to slow the economy. If unemployment rises, it lowers rates to boost growth. And we all know how that inflation is going. The personal consumption expenditures, the PCE measure, which is the one the Fed uses here, hit 6% last month. Even the measure that takes out those energy and food prices shows inflation up 3% over the last year, way above the Fed's target of 2% stable inflation. Against this, the jobs picture has come way down over the last five years, but hasn't been too bad this year, averaging about 100,000 new jobs per month. So yes, the Fed would have an argument to raise interest rates to tame that inflation without worrying too much about unemployment. And we could still get some of those rate hikes, but clues in the market are telling me that those rate hikes are not coming nearly as soon or as much as the market is predicting. And that is where the opportunity begins. This is honestly my favorite way to invest. Back when I was an analyst, I wasn't trying to predict every single headline. I was looking for places where the market wisdom was wrong and had something mispriced. And the biggest clue is in the biggest driver of inflation, oil and gas prices, with the price of crude jumping to as high as $112 a barrel, now down 37% in the last six weeks, and with gas down 10% over the last month. That's going to start showing up in inflation data as soon as this month to give the Fed room to wait on those higher rates. We also saw weakness in the jobs market last Thursday, reporting that just 57,000 jobs were added last month. And worse than that, job seekers are giving up with the percentage of people working or looking for work at its lowest in 50 years. Clearly not the sign of a strong jobs market. But because the market is worried about political influence on the central bank, the Fed and new chair Warsh are still talking tough on inflation and rates. Interest rates spiked after their most recent meeting when even Warsh said inflation was too high and warned of those rate hikes. So investors are still worried about rate hikes and are punishing stocks, especially tech stocks for it. But Warsh and the rest of the Fed are playing you. They're talking tough, but are going to chicken out when it comes to actually raising those rates. First of all, we know that energy-related inflation will start coming down and the jobs market isn't stellar to say the least. Both of these give the Fed room to wait on those rate hikes. President Trump's constant threats were a nightmare for Chair Powell, even resulting in a criminal investigation. And defending herself in court cost Fed Governor Lisa Cook more than $1.3 million. Even as he's talked up the Fed's independence lately, we know for a fact the President expects lower rates. Believe me, nobody on that Fed board wants to raise interest rates if there is any excuse they can use to wait. Besides clues from that inflation and jobs picture, Warsh recently created five task forces at the Fed to conduct a review of operations, communications, and policies. Reviews that are going to take months at least, and give the chair ammunition to say let's hold off on any big rate moves. Warsh can talk tough on rates all he wants, but do you really think, through extensive interviews over the last two years, Trump would have nominated him as chair without an explicit, maybe private, guarantee that he would do everything he could to keep rates low? Now the market's eventual realization here that rates won't be going up as fast as expected is going to mean tech stocks and cyclicals and industrials and materials get a boost, and this is all going to happen on key dates that you need to be watching. First here is going to be July 14th when the Consumer Price Index, the CPI Inflation Report, is released and starts showing that first of the easing in energy inflation. As I said, the Fed does follow the PCE report later in the month, but the CPI gets more attention and will move the market, so be watching for the 14th, then the August 12th, and September 11th releases for those big moves as inflation does come down. That PCE Inflation Report is also going to be important, dropping next on July 30th, though that's one day after the Fed meeting, so probably going to get overshadowed, but also the next on August 26th is going to be a couple of weeks before the September Fed meeting. Most important though is going to be those Fed meetings themselves, next on the 29th of July, then September 16th and October 28th. We won't see a hike this month, and I think the big surprise from now to September is going to be no hike at that meeting either. Besides just the general upside support to tech stocks, the biggest return potential here is going to be in Treasury bond funds like the iShares 20-year Treasury ETF ticker TLT. That's because bond prices move opposite of interest rates, so as interest rates come back down when the market realizes the Fed won't be hiking quite so fast, this TLT is going to go back up, adding to a 4.5% dividend yield you'll also collect. Now that said, even a pop back to $90 on the TLT would only be about a 5% upside, though over a few months it's still a very solid annualized return. A leveraged way to play this is through the Direxion daily 20-year Treasury 3X, the ticker TMF, which uses derivatives to get that leveraged return. A bounce back to $40 here would be a 15% return, but understand this one is more appropriate as a trade along those important inflation dates, not as a long-term hold. How I'm investing is quite a bit more risky, so be warned there, but could also double your money over the next 6 weeks. A drop in interest rates as high queries subside could bring the TLT back up past $87 a share from about $85.50 right now. I can go to the options, and I'll use the August 21st options here, which is going to include good inflation news in July and August, as well as that July Fed meeting. Buying the call options at the $85 strike price costs $1.54, but I can offset some of that by collecting $0.61 for the $87 call options for a total cost of just $0.93 each. That means if the TLT ends above $87 by expiration, spread is going to be worth $2 each for for a 115% profit in just 6 weeks. Understand though, if we do see higher rates and the shares close below $85 each, then I lose this entire investment, so quite a bit more risk. A safer but still good return could be buying the $84 call options for $2.16 while selling the $86 calls for $0.99 each, or a total cost of just $1.17 per share. That would bring the return potential down to 70%, but the TLT only has to close above $86 for it, and you have a lot more downside protection. Now if you've never traded options before, I'm going to put a link to a special community discount to our options course in the description, but don't worry about the mechanics here. The important idea is the strategy. I'm only taking a small amount of risk for a bigger payoff because I have that strong conviction on a specific event and a time period. Folks, you know I nerd out on those numbers, and I know this is a lot of economics talk, and a hell of a lot more than just telling you what stocks to buy, but Nation, you need to understand what is going on and what is about to happen so you can make your own decisions. Understanding where the market is wrong and how to invest is the only way you are going to beat the market, and if you're not willing to do that, then you might as well just invest in index funds and just get that market return. I'm going to show you the stocks I'm watching this week next, but I wanted to highlight something we don't talk about as much on the channel here, but is a big part of my financial plan. For my business and monthly bills, I have a lot of cash coming into the account and just sitting there for months on end with the average interest rate of just 0.38% on savings accounts, that is losing money after inflation. It's why I've switched all my savings into high yield accounts at SoFi, CIT Bank, and Chime. I'm FDIC insured up to the limit, so I like using a few different accounts here and earn up to 3.8% on my money. Look for the link in the description and try out this calculator to see how much more money you'll make on the interest rate. On a $50,000 balance, I'm making an extra $2,000 a year just by using one of these high yield accounts. I also get no minimum balance, no account fees, and can invest directly in stocks through my SoFi account. Folks, if you've got any money sitting there in a traditional bank making less than 3%, you need to see what you're missing, so click through or just scan the QR code here and check out that calculator. Looking at the stocks I'm watching this week, Nike, ticker NKE, initially fell on its earnings report when the company reported sales in China were down 12% last quarter, but ended up jumping 5% last week by the close of its trading. As I pointed out in last week's update, management has a record of surprising on the upside and came through in this quarter, beating easily on both the revenue and the earnings. I was hoping for a bigger bounce higher on the surprise, but it does go to show you just cannot trust those initial knee-jerk reactions in the markets. The stock was down as much as 5% pre-market, but then bounced on those fundamentals I pointed out. Basically, Nation, always understand, the market has the emotional stability of a toddler after too much birthday cake. You just have to always stay focused on the bigger picture and not get caught up in the trading. The magnificent seven stocks have gone from a must-own group to the lag seven, with the shares down as much as double digits in the last six weeks. Apple has managed to rebound from its June dip and is up 3%, but Microsoft, MSFT, is down almost 4%. Meta Platforms down 5%. Amazon, ticker AMZN, Alphabet, GOOGL, and Tesla, TSLA are all down 10%, and NVIDIA, NVDA is down almost 14% since mid-May. And it's not just a broader sell-off in tech bringing down everyone here. The Defiance large-cap XMAG7 ETF, so a fund of the largest companies in the U.S., minus those MAG7 names, is up almost 15% this year, with the tech-heavy Nasdaq up 12%, while the round-hill MAG7 ETF that holds only those tech stocks sits at a 5% loss. In total, more than $2 trillion has now been wiped off the market cap of these seven companies on worries that that AI-related revenue is not going to be there to justify their spending. While I do think stock valuations have gotten excessive, and there will be more volatility, and probably another 5% downside risk, these are still bellwether tech names that you're going to want to own over the next 10 years. Fears that AI will replace Google search revenue haven't disappeared, but cloud and its own AI could continue to strengthen that long-term story for Alphabet. And I still think Waymo ends up being a lottery ticket for investors. Apple has largely missed out on the AI boom, but is still the number one consumer brand, and I expect more AI acquisitions coming to boost its device's capabilities. Meta here is catching up fast in the consumer wearable space and pushing hard on its own glasses. Advertising remains the big growth driver here, and as it uses those AI tools to push out legacy agencies. Amazon probably has the most at risk on that AI cloud revenue, but advertising is extremely strong here too, and is going to help support that growth. Microsoft is probably the biggest surprise though, down 20% on this year on those fears that AI is going to replace its software suite. The business is still strong, but I would agree this is where most of the risk is in the group, so I would avoid in favor of buying the dip and some of these others. I'm also watching Neocloud stocks, so Nebius ticker NBIS, Coreweave CRWV, IREN ticker IREN, and cloud services Oracle, ORCL, have been hit particularly hard, down 20% to 35% just over the last two weeks, and plunging last week when Meta announced it would set up its own cloud division to sell excess data center capacity. Now these AI darlings could rebound, but there is a bigger threat here that I warned about December 3rd that nobody is still talking about. These Neocloud companies, they build out data centers to rent out to those hyperscalers and the AI models. Up until now, models like OpenAI and Anthropic haven't had enough data center capacity to run their artificial intelligence, so the Neoclouds are in a rush to build out that capacity and rent it out. Meta and others like SpaceX are now saying that we have more data center capacity than we thought from building over the last few years, so we're going to also rent that out, competing with those Neocloud companies. This is something I warned about in December, along with a bigger risk though. The billions these Neoclouds are spending on NVIDIA chips, memory chips from Micron, and all the other hardware are going to be obsolete within two years. Since those Neoclouds don't have the cash flow of big dogs in the cloud like Amazon, they're borrowing heavily, but in two years when they need to update all that hardware and the revenue just isn't there, it's going to bring a wave of defaults in these companies. Now again, if the AI trade rebounds, and I think it will, there's going to be quick money to be made in these, but you're going to have to time it almost perfectly, and the long-term risk is just too high in these for comfort. Updating our stock market outlook, it is a quiet week for economic data and earnings, but a not-so-quiet shift is happening in the market. Stocks in the healthcare, communication services, and consumer discretionary are taking over leadership with strong gains last week, while tech, energy, and cyclical sectors like materials are lagging. That is a big change from the first six months of the year, when tech, energy, and those cyclicals posted returns of 18% and higher. Within tech stocks, which barely managed to close higher last week, there was also a big shift in investor sentiment, with electronics, services, and software rebounding from oversold conditions, but those AI-related stocks and communications, equipment, semiconductors, and hardware plunging. Cybersecurity companies continue to rally in a trend I've been calling for since February, with Palo Alto Networks up 23% last week alone. I'm up an average 63% in the five cybersecurity stocks I hold: Zscaler, ticker ZS, Fortinet, FTNT, CrowdStrike, CRWD, Okta, OKTA, and Palo Alto, with 130% return so far. That momentum isn't slowing down, with the CTO at Palo Alto Networks warning that companies have between three to five months to get ahead of a hacking nightmare brought on by AI models, and that warning was back in May. Software and services stocks like AppLovin, ticker App, Datadog, DDOG, and Palantir, PLTR, also rallied as investors realized AI isn't going to replace their services all at once. On the flip side here, all the AI and data center winners fell hard, including server makers, cloud computing, and memory chips. A super microcomputer ticker SMCI got hit twice last week, first on that broader data center sell-off, but then on reports that Taiwan offices were raided by authorities in connection with illegal exports from NVIDIA chips. So far, it's only a small group of employees that had been implicated, and management has said that it wasn't technically a raid. They were working with the authorities, and the company has said it's cooperating in this investigation, so a little bit of semantics there. The shares have rebounded the day after, with a strong 5% pop back higher, but then got pulled lower by that broader market sell-off. All this has become nothing new for SMCI, which is why I warned investors and started closing up my position in the mid-40s last month. These shares are still strongly undervalued and make for a good covered call positions, but only for investors willing to ride out that roller coaster. Without much news or earnings expected this week, there's not much to think that trend is going to change, and those AI-related stocks are likely to continue giving back some of this year's returns. The software and services names could have further to rebound, so you might hide out in some of those names like Datadog, Snowflake, Palantir, and the Cybersecurity Group. I continue to believe, with inflation reports set to start moderating and fears of Fed rate hikes easing that AI and the data center stocks can rally into the rest of the year, but not before what could become a nasty sell-off. Nation, this just proves this is exactly why I was telling investors to start rebalancing into safer stocks and sectors at the end of May. A lot of people said Campbell's Soup was too boring when I highlighted it in our May 27th video, along with those sector ETFs like the Healthcare XLV, Staples XLP, and the XLRE Real Estate Fund, but here we are with Campbell's up almost 12%, the rest of those ETFs up 3% or more against a loss of almost 12% in the AI and Tech ETF, that AIQ. Now, like I said in that video, I didn't completely sell out of my tech stocks, and I'm not saying you should, but you need to be ready to rebalance your portfolio when the market flashes these warnings, and you need to have some money in these kinds of safety stocks to smooth out the ride. Use the calculator linked in the description to see how much more money you can make on those high-yield savings accounts. Don't forget to join the Let's Talk Money community by tapping that subscribe button and clicking the bell notification.