We’ll get into using a short squeeze in a second but first…
Today, the U.S. Senate held a committee meeting to determine how and why the banking crisis happened.
One Senator blamed the San Francisco Fed’s focus on climate change. Another blamed venture capital and greed. A regulator blamed the previous administration… while the rest of the economically ignorant focused on the risk management policies.
At no point did anyone ask the most important question…
What role did central banking play in this crisis?
The answer is… The biggest role… the starring role…
Ladies and Gentlemen, the award for the largest driver of several economic crises in the 21st century goes to… (Garrett opens an envelope made out of old dollars now worth 99% less than when they were printed)…
Jerome Powell, Janet Yellen, and the U.S. central bank.
The Federal Reserve kept interest rates at record lows for years. And when banks bought up low-risk assets like U.S. Treasuries and Mortgage-Backed Securities to produce any profit… they found themselves on the wrong side of a duration trade.
When the central banks don’t even understand the impact of their policies, and the regulators don’t understand the impact of their policies… what are we supposed to do here?
The Fed’s low-interest rates not only fueled the problems at the banks but have also accelerated the rise of Zombie companies over the last decade.
What are “zombie stocks”… and how do we trade them for maximum gains?
Let’s discuss…
Thank the Fed for Zombie Stocks
Cheap money invites risk. And there’s no greater risk than Zombie stocks.
Zombie companies are businesses that can’t generate enough profits to pay off their debt servicing costs. They can’t even afford the interest payments. Their balance sheets are this ugly. Yet, thanks to low-interest rates and loose lending conditions, they continue to find capital from the markets.
These companies typically have weak revenue, no profits and might trade at outrageous multiples. Because they’re largely unprofitable, most investors start to focus on the cost of the stock compared to their annual revenue – a factor known as Price to Sales.
As I’ve noted in a previous article on bad balance sheets, a price-to-sales in double digits with little profits is a recipe for disaster in the long term. Eventually, these companies will hit bankruptcy if they can’t generate enough cash flow to pay off their debt.
Now, some people get mad at me for even caring about these companies?
But I do give a damn about their existence. They don’t contribute much to the economy. They are a waste of valuable resources: Human capital, investment capital, and other resources – which could have been allocated to more productive parts of the economy.
I also care about them because they are FANTASTIC stocks to trade.
Typically, these companies have very high short interest – a subject I covered yesterday. Not only can we short these terrible companies when momentum is negative, but we can try to take advantage of a short squeeze when momentum turns positive.
How to Short Squeeze: Buy This When Momentum Turns Positive
A short squeeze happens when the price of heavily shorted stocks start to rise and short sellers have to cover their positions.
As capital flows into these stocks, demand increases. Algorithms buy the stocks, retail traders follow. And short sellers face higher and higher prices.
When is the best time to take part in a short squeeze?
The moment that momentum goes positive in the markets.
Momentum tends to turn positive thanks to a large injection of capital and optimism in the markets. So, take a look at Charge Point (CHPT)… my favorite junk stock in the market.
The red hands and green hands signal negative and positive momentum events in the market over the last year, respectively. When momentum goes positive, CHPT squeezes higher.
Keep in mind, nothing positive has changed in the underlying stock. But with money gushing into the broad market, this stock takes off.
Look at July 19, 2022 – a day that momentum went positive. Shares popped from around $11.50 on July 19 to more than $18 on August 12.
Or look at January 6, 2023, when momentum turned positive. Shares rallied from about $9.00 to more than $12.00 in less than two weeks.
Charge Point is not a good company. It’s not something that I want to own at any moment. But when it comes to short squeezes and positive momentum…
I’m all over this stuff.
And you should be too. Tomorrow, I’ll give you a list of names to watch for short squeezes. Just buy when momentum turns Green.
What else am I doing tomorrow?
We’re just three days away from the end of the first quarter.
That’s crazy right? It went by fast. That also means my birthday is this weekend.
To celebrate, I’ll be joined by Lance (not my brother – also named Lance), but Lance Ippolito during the “Roundtable with Don Yochem”.
We’ve got a lot to discuss. I’ll be talking about squeeze opportunities and my expectations for the second quarter for the S&P 500, Nasdaq 100, and Russell 2000.
Lance will discuss an opportunity in Old Tech names like Oracle and IBM. Then we’ll dig into his thoughts on how to stay on top of that action.
Finally, we’ll talk about the big picture – and what it means for your money.
Listen, you don’t get Garrett and Lance together often enough (something my mother complains about). So join us at the link right here at 10am ET tomorrow morning.
To your wealth,
Garrett Baldwin
Market Momentum is Red
Buying volume remains extremely limited in this environment, raising new concerns about the imbalance around volumes. If the buy the dip crowd runs away, then we might have a problem in the coming week. I’m still hedged in long-term portfolios, given the testimony on Capitol Hill and questions about the solvency of banks and real estate lenders. It feels like a self-fulfilling credit crisis is at our door. I’m not sure that this is something that central bankers can solve in a weekend.
We’re a week away from adding a new stock to our value portfolio for Tactical Wealth Investor. You can sign up right here at a discounted Charter Member price. This special pricing is going away soon, so if you’re considering joining, NOW IS THE TIME.
