April Newsletter Part II:
Portfolio Update & Buy Unders

Dear Subscriber,

Blinding flash of the obvious: the 30% gain in market value from September 2017 to the end of January 2018 pulled a LOT of gains from 2018 into 2017. So we find ourselves with a "It can't get better than this" mantra that has the stock market and bond market in a standoff.

Well SURE it can and will get better for our disruptive and secular growth companies but rising 5-10 year interest rates discount that growth at a higher discount (i.e., P/E compression is muting higher earnings). We have a stand-off between higher EPS and higher EPS present value discount rates. 

The U.S. stocks and bonds stand-off/deadlock lingers despite

• A positive response to April’s “Goldilocks” jobs report

• 75% revenue beats by SP 500 companies

• 82% EPS beats

• 16 forward P/E vs. 10 year average of 15.8

• 2nd quarter GDP estimates now UP to 3.4%

• Record stock buybacks announced for 2018 thanks to Corporate Tax Cut

I called this the WTF market simply because if revenue/earnings/avg. P/E/expanding GDP and record stock buybacks do NOT MOVE stock valuations higher, then WTF does?

One answer seems to be to buy stocks at the 200-day line in the sand. The robots seem to get hungry for stocks at 200-day and puke them back up at the top of the trading range.

Yes there are "lingering concerns" over the durability of the global growth story. Yes the tightening of US monetary policy has left many investors in a rut, neither inspired to pour money into the market nor convinced they should bail out just yet.

But to me this malaise really came from the markets’ inability to get a meaningful boost from the glut of strong corporate earnings over the past few weeks--these events have clearly sapped confidence further. Other positive events that would have jolted the markets last year, such as the unemployment rate falling to its lowest level in nearly two decades and Apple Inc. announced an additional $100 billion in share buybacks, have failed to spark a sustained rally.

“People are in a bit of a holding pattern,” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse, adding that investors, from big institutional money managers to mom-and-pop shareholders, are finding it difficult to pick sectors of the market to rotate into in this environment.

THAT is the other issue--sector rotation. If stock picking is analogous to a beauty pageant where you judge who the OTHER judges are going to find most beautiful, secular growth has been most attractive girl since really 2014 (with the end of the oil "supercycle").

Part of the attraction for longer-term growth investors was that secular 10-15-25-40% top and bottom line growth in a low growth <2% world was an easy "sector calculation" to make.
My friends in the "value investing" camp have suffered for 10 years with their "value stocks" getting less valuable except for financials. Secular growth has been the Ying and Yang of market investing for most of the decade.

So while the value investors pray for a "reversion to the mean" move for value stocks...secular growth continues to look better technically. The evidence?

The growth and value S&P 500 broke its 200-day "line in the sand" 4 times since the February Flash Crash.

BUT if you look at the S&P 500 Index divided into "Growth Stocks" growing faster than average and S&P 500 Value Stocks selling for less than the average S&P 500 EPS value The QQQ has never threatened its 200-day and looks a lot healthier above its 50-day moving average. Bull market leaders in bull markets stay above their 50-day averages.

S&P 500 "Value" Index has failed to get of the proverbial mat

While S&P 500 Growth and Nasdaq 100 Index are both recovering well

Our favorite semi-conductor plays are slowly coming back from their 10-20% ish corrections and the Sox Index but have yet to reclaim their 50-day moving average. 

But which index looks healthiest of all? The First Trust Dow Jones Internet Index. It's anchored by Facebook, Amazon, Alphabet, Salesforce and lots of SaaS companies (software as a service). 

Here are the main components

So what to do?

#1 We are going to get to 35% of our portfolio in 20% ish yielding ETFs/BDCs/MLPs with 2X leverage in the REITS and MLPS.

WE are going to reinvest those massive dividends to build these income juggernauts so WHEN the time comes for the recession we take profits on the BDCs (they tank during recessions) and have BIG TIME income from mortgage REITS that will go UP in value as interest rates tank. MORL CBL MIC NEWT

I know a LOT of you took advantage of MORL in the February Flash Crash and with our buy under at $13.50. I will add a hedging strategy soon but MORL has been a GREAT winner for us over the years (IF you don't need the income I always suggest you reinvest the dividends. I am putting together a special $100k Rich Retirement income plan using MORL and a interest rate option. At 25% dividend rate I am going to take that $100k to $400k over the next 8-10 years and have an $80,000 a year income stream to pay my golf and bar tabs when I'm 70. Some of you younger subs should do this too! 

2) We are going to let the semiconductor names rise back to pre-flash crash levels under the thesis that the Apple chip washout from X phone sales troughs in summer and 3-4 new models ramp up for their September launch. We will keep very strong look on future NAND and DRAM prices (so far so good) and monitor the big foundry transition to 10mm and 7mm wafer metrics. 

But the fears and kvetching over shrinking memory demand and pricing was over-kill. The upgrade to 10mm and 7mm wafers is slowly grinding upward. But as always we WILL expect the technical charts to recover their 50-day averages and HOLD THEM.

#3 I published our "Cloud Kings" in February and we will be building a 25% position in them. They have been the best performing Transformity Sector since March but with the extreme volatility I wanted to let them report earnings and see how the market treated them

#4 Russel 2000 Small Caps URTY  With the dollar strong and getting stronger, the Russell 2000 finally is breathing again.

Let's add $10k of the 2X under $85 with a $115 Target

#5 FINANCIALS Our 2X Financials FINU is starting to get some traction. Buy Under $95 with $120 target

OK...ran out of time today for full buy unders and charts. We''ll get on them tomorrow and our new Cloud King investments.

Final Thought

As usual LOTS of patience and ZERO PANIC are THE MOST valuable emotions we have when we are living through a normal albeit late stage correction. The most dynamic transformational of the world economy are the disruptive technology sectors and the enabling technology IP dominators. "Value" stocks with non-cyclical products WILL rise in value heading into the next recession--they are the liferaft in the middle of a recession. BUT WE ARE NOT CLOSE to a Fed created a recession or a financial crash led recession or energy price spike recession. 

We are in a true consolidation of massive gains period where the marginal sellers are individuals, not institutions. 

Its Spring....enjoy the weather...dont fret about the stock market. The NEXT pullback will be around China tariffs on American products but odds are NOT semiconductors. That move would be insane--so I don't count it for our current reality show POTUS.

We will add a SOX hedge against our semiconductors IF the tariff warpath rises.

Toby