Stocks That Grow to the Sky (TREE,VOX)
We want to take a moment to discuss that nastiest of all topics – indeed, the most contentious in all the financial world: INFLATION!
[Cue banging of gongs, montage of Soviet era labor camps, H-bombs blowing in Nevada and lots of Viet Nam era stills.]
The reason for all the discord is that many want inflation, many more don’t, many see the corrupt nature by which it’s measured, others recognize the dangers of divergent wage and price inflation, and still others just can’t understand why prices have to rise at all.
Good question, buttercup. And we’re not sure we can answer it, except to say prices will always rise when the supply/demand calculus pushes them higher. But as for the question of other, more structural reasons for inflation… well, you go talk to your local elected representative about that.
Inflation Will Burst Higher
Our goal today is to reiterate what we’ve already written repeatedly in this space for nearly a decade. And that is, that as result of the unprecedented intervention in the markets and economy by the Federal Reserve and Treasury (not to mention the rest of the world’s central banks and governments), a tide of inflation that is unprecedented will inevitably, inexorably, and unmercifully cascade over our nation, drowning everyone in its wake in a sea of worthless money and sending the price of just about everything higher.
That day will mark the end of the dollar as a FAITHFUL store of value, and until a replacement is found, other more barterable items will likely replace the buck as a practical unit of exchange. Think bullets, salt, eggs, sugar, tomatoes, jerry cans of gasoline, toilet paper and soap, all of which will take on increasing importance and value in such a scenario.
But our purpose here is not to talk doomsday. The time will come. It can’t be rushed.
Rather, we want to urge you to ride the financial wave that precedes that breakdown in order to derive as much profit as possible from a system in transition.
And so we ask you to consider the following inflation-oriented charts, the better to understand our initiative for the week.
First, we offer the last 70 years of the Consumer Price Index for city dwellers, including all items.
Since the mid-seventies, the average urbanite has seen prices of a full basket of buyables rise five-fold. And the trend still looks secure (in red).
Without delving too deeply into how the number is calculated (for there are obvious faults), there can be no arguing 1) that we have a CPI on the rise and 2) no discounting the strain that places on the average wage earner.
Next, take a look at the pay stub of that wage earner over the past half century, and note just how stagnant income growth has become.
The takeaway here is a relentless climb in the cost of goods and services over the period in question, while real income growth has completely stalled since the year 2000.
Moreover, that flat-lining has taken place across the income spectrum. Earners from all classes have experienced a complete failure to get ahead of where they were some twenty years ago (red lines).
A vast mass of the population has been forced to move back in with ma and pa, or find some other means of making ends meet, i.e., borrowing.
And that’s where today’s trade is derived.
But before we get to the nuts and bolts of it, take a look at the following open initiative that requires your attention.
It was initiated on the 21st of February, and then rolled out on July 18th in a letter called FREEWHEELIN’! Specifically, we recommended buying back the VOX July 21st 96 PUT for $8.00 and selling the October 20th 99 PUT for $7.00.
With expiry at the end of the week and VOX now trading at $92.00, we feel it’s best to roll this sucker out once more, in the following fashion.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
For this week’s trade, we turn to a security that we’ve traded successfully in the past, Lendingtree Inc. (NASDAQ:TREE), a company that Wall Street adores – 73% of the float is held by professionals.
Lendingtree is in the online credit space, offering consumers a one-stop shop for mortgage and home equity loans, lines of credit, auto loans, credit cards, personal loans, student loans, small business loans and provides a number of handy tools to help borrowers navigate the best rates for their money.
The stock’s success has come as much from the site’s ability to garner users as it has from the growing need for the average citizen to borrow funds.
But now it looks wildly overdone.
This is the daily chart –
Along with a bearish engulfing pattern at the top (enlarged in black), we have a gap to fill at TREE 190 (blue) and an extended overbought signal from late July/August (in green).
Now look at the weekly chart, whose action shows a distinct parabolic line forming over the last year.
In addition, we have several weekly RSI overbought readings over the last four months (in green).
And if that weren’t bad enough, the monthly chart (below) also shows an overbought read (in green) beginning in the summer and remaining in force to this day.
In just twenty months the stock has repaid investors better than four times their original investment, an exaggerated sum according to our view of the charts.
All in all, we have every reason to believe this TREE is about to stop growing. It may end up getting chopped down altogether. But it ain’t gonna grow to the sky.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew