Dear Subscriber,

Day 78 CoronaVirus Pandemic

#1 Sell 50% of CASH and XOP/SPY/QQQ PUT options hedge AND OUR QQQ Hedge--but hold the rest.   
#2 $10K-a-Month Income still in cash and the XOP hedge--our Feb 24 Recession Call for Q2/Q3 is now the standard call (where were these economists in late February????)  
#3 READ #1 Again

We WILL get a dead cat short-covering bounce tomorrow for sure--you should use it to raise money if you still have too much risk. Boy-oh-Boy when I was running a long-only mutual fund and short/long hedge fund in the -70% internet crash, I remember vividly bear markets by definition have the sharpest UP days in history (as this one has proven) due to short covering/forced buying. 

What's The Good News Toby?

The good news is we WILL get a generational opportunity to turn $100k or $1 million into $300K-$3 million of new wealth IF YOU PLAY THIS RIGHT.

Rule #1 You Have to Have CASH or liquidity to profit from this generational wealth opportunity
Rule #2 We will buy the VERY BEST 20+% 3-5 Year CAGR Growing Sectors with VERY BEST 15-20%+ CAGR IP owning companies and some incredible new disruptive opportunties, too. 
Rule #3 We will enhance those gains with long term stock options (to lower cash risk and enhance leverage)
Rule #4 We will assume a full-blown Fiscal/Monetary/Corp TARP/TALF like bailout is coming and the Federal Government and Federal Reserve will become the "lender of last resort" to keep the $21 trillion US Economy afloat while it declines 5% ish or $1 trillion+ in GDP in March/April/May.

BUT do not kid yourself here. UNTIL WE HAVE

• A TARP/TALF plan is announced and stood up

• Get positive preliminary news from Moderna (MRNA) on its vaccine (a stock we will buy on a pullback NOW btw)

• The BRUTAL increase numbers in Covid-19 cases and infection data via testing

• The corporate bond market stays solvent

I do not advise stepping in front of this market meltdown--it's just not safe and not wise to start legging into our favorite transformational sectors and leaders. There are TOO MANY unknowns. There is no earnings guidance to understand what price multiple we are paying for our favorite companies. LOOK at how much the stocks we sold Feb 24 are down from where we went to Code Red cash...and look how much our hedges are UP!!

Look folks--the core thesis of our Transformity Investing Principle (and ChangeWave Investing before that) is as simple as it is powerful:  that "true S-curve transformational change is the greatest force of wealth creation and wealth destruction force in the world."

Typically investors think of this principle with regards to a disruptive new technology (iPhone) or consumer product category (say athleisure from Lulu Lemon or energy drinks from Monster Beverage) or major disruptive regulatory, fiscal or monetary policy transformations.

But this transformational event we are living in now is actually now four globally transformational events that have morphed into a negative economic feedback loop and vicious cycle:
We have
1) a new novel world coronavirus pandemic that is 10X more infectious than the common cold (rhinovirus) with no human immunity and no hope of a vaccine till early 2021--and even the always optimistic POTUS admits finally there is ZERO control of the virus (after claiming "perfect control" at least 12 times in speeches/tweets/TV interviews)
2) A geopolitical oil price war between the #2 energy export country and the #3 energy export country against the #1 American energy production engine that has added 5+ million barrels per day in production since 2010 and
3) The end of the efficacy of the so-called "Greenspan/Fed Put" whereby the America's Federal Reserve protects risk asset values with the quantitative easing playbook (QE) it learned in 2008 Financial Crisis and the Great Recession.
4) A coming debt solvency event for over-leveraged companies in travel/transport/hospitality/food services and manufacturing supply chain participants. 

Understand this, friends; Sunday night's emergency Fed action was NOT ABOUT the stock market--call it the Fed's Bank Put.  It was 100% about the liquidity of the US banking system to not add a fifth global solvency shock. All my sources on Wall Street confirmed this morning, the bid/ask liquidity in US bonds and corporate bonds were, just like in September 2008, was not enough to allow banks to maintain their asset liquidity standards and leverage regulations.

IF THOSE MAJOR BANKS had to market their assets down to the existing market bid, many would be in technical default ok? That means a bank run on top of a pandemic, people facing small businesses closing down in NYC/SF/LA/Bay Area and growing, and a geopolitical oil market share war.

In just one case, restauranteurs Tom Colicchio and Daniel Boulud in NYC say that 60+% of the restaurant industry in major cities will be mortally damaged if they are required to stay closed for more than a month.  Daniel Yang of Momofuko says this is this generation's WWII moment for our society and saving small businesses.

Overreaction? ALL of Europe is on shut down. The US federal government has just banned group events of more than 10 people.  On Monday, health officials ordered millions in six counties in the Bay Area to “shelter in place,” one of the most significant restrictions yet to American life. The order, which goes into effect Tuesday, is expected to disrupt life for millions of residents in Alameda, Contra Costa, Marin, San Francisco, San Mateo, and Santa Clara Counties. The City of Berkeley also issued the same order.

And oh yea, millions of households were left to worry about lost wages, about inadequate supplies of medicine and protective gear, about leaving the ill and elderly even more isolated and vulnerable, and about jobs, institutions, relatives, and neighbors that might vanish and never return.

Get This In Your American Economic Threat Calculus

You probably are not aware of it (unless you have read one of my books) but about 44% of ALL American households today live in working poverty defined as "above official poverty line but below median HH income of $63,000." The term for this working poverty household is "ALICE Households: Asset Light, Income Constrained, Employed."

When you add the14% of American households living IN poverty to the 42% in working poverty, and wage-earning retired Americans on fixed incomes below $30,000 per year, nearly 2/3rds of American households--who cannot pay a $400 medical bill in cash--are VERY AT RISK of significant economic disruption. 

PS: I just received a tip from one of our Transformity Research Experts group ("TRX" with now over 8,000 members all of the world) who is a pilot that he was informed that "air traffic control, ATC and major airlines have already been briefed all domestic flights will be grounded in 72 hours.

Oh joy. 

The Latest

Here is the latest coronavirus information from the REAL journalists at the NY Times. 

Even the POTUS, in an unusual moment of reality and non-delusional thinking, said today
“It seems to me if we do a really good job, we’ll not only hold the death down to a level that’s much lower than the other way had we not done a good job, but people are talking about July, August,” Mr. Trump said about the duration of the crisis.

Base on the Trumpian track record of truthfulness and pathological mendacity, the market took the "July August" forecast and either a) added a few months or b) decided this was the first truthful statement about America's real coronavirus risk in the 22 truthless statements made since January. 

And oh yea--let's not forget about the corporate and sovereign debt bond markets.

If you remember the Thai currency and bond crisis in 1998 like me, you understand that today the global bond markets are 20X bigger than the global stock markets. Emerging market bond contagions spread like a virus, too. The astonishing and breathtaking rise in interest rates for developing countries bonds (who have sold bonds denominated in their local currency) looks like an identical repeat of the sovereign debt crisis like 1998.

So make that the 5th domino to fall.  

And please let's not forget that a majority of American Fortune 1000 public companies have primarily used the corporate bond market and almost historically cheap debt to borrow $trillions to repurchase their stock back since 2009-2010 (which in turn drove secular EPS growth which, in turn, raised Price/Earnings ratio's and market multiples.) Here's why this practice is dangerous to our economy right now.  

Who is the poster child for borrowing money (and using corporate tax cuts in 2017) and now needs a Federal Bail-Out?

American Airlines...OMG. 

My fellow NY Times op-ed contributor Ruchir Sharma is the chief global strategist at Morgan Stanley Investment Management, author of the forthcoming book, “The Ten Rules of Successful Nations,” and also a contributing opinion writer for NYT. 

As he writes today in an NYTimes op-ed "This is How the Coronavirus Will Destroy The Economy"  "This once-in-a-century pandemic is hitting a world economy saddled with record levels of debt. The dystopian reality of deserted airports, empty trains, and thinly occupied restaurants is already badly hurting economic activity.

The longer the pandemic lasts, the greater the risk that the sharp downturn morphs into a financial crisis with zombie companies starting a chain of defaults just like subprime mortgages did in 2008.

PS--Ruchir's firm Morgan Stanley originated and sold $trillions of that debt--he is definitely stepping out in a big way here. 

The level of debt in America’s corporate sector amounts to 75 percent of the country’s gross domestic product, breaking the previous record set in 2008.

Among large American companies, debt burdens are precariously high in the auto, hospitality and transportation sectors — industries taking a direct hit from the coronavirus.
Hidden within the $16 trillion corporate debt market are many potential troublemakers, including the zombies. They are the natural spawn of a long period of record-low interest rates, which has sent investors on a restless hunt for debt products that offer higher rewards, with higher risk.

Zombies now account for 16 percent of all the publicly traded companies in the United States, and more than 10 percent in Europe, according to the Bank for International Settlements, the bank for central banks. A look at the data reveals that zombies are especially prevalent in commodity industries like mining, coal, and oil, which may spell upheavals to come for the shale oil industry, now a critical driver of the American economy.

Zombies are not the only potential source of trouble. To avoid regulations imposed on public companies since 2008, many have gone private in deals that typically saddle the company with huge debts. The average American company owned by a private equity firm has debts equal to six times its annual earnings, a level twice what rating agencies consider “junk.”

Signs of debt stress are now multiplying in industries impacted by the coronavirus, including transportation and leisure, auto and, perhaps worst of all, oil. Slammed on one side by fear that the coronavirus will collapse demand, and on the other by fears of a supply glut, oil prices have fallen to below $35 a barrel — far too low for many oil companies to meet their debt and interest payments"

Key point: Though investors always demand higher returns to buy bonds issued by financially shaky companies, the premium they demand on U.S. junk debt has nearly doubled since mid-February. By last week the premium they demand on the junk debt of oil companies was nearing levels seen in a recession.

Other Key Point: When markets fall, millions of investors feel less wealthy and cut back on spending. The economy slows. The bigger markets get, relative to the economy, the larger this negative “wealth effect.” And thanks again to seemingly endless promises of easy money, markets have never been bigger. Since 1980 the global financial markets (mainly stocks and bonds) have quadrupled to four times the size of the global economy, above the previous record highs set in 2008.

OK? Many many times over the last few years I have shared the "game of chicken" analogy of the game of chicken with an earnings discount of net-zero (5-year risk-free interest rates minus inflation). 

The coronavirus is the car that smashed into 11 years of inflation-adjusted free money.

Where Do We Go Now?

Like I said--you tell me when 1) the vaccine news is positive 2) the TARP/TALF plan is approved and stood up 3) Millions of Americans are actually tested so we actually KNOW where the infected are and how many 4) How long the major American urban regions are locked down (remember 16 regions in America produce 78% of our ENTIRE GDP).  

As stated, we have key support levels for stocks at the 20%, 30%, and 50% discount to the 2010-2020 SP 500 rise in valuation. 30% was 2650--that guy is dust. 

Next is 2346 Low on Dec 18, 2018.

2100 is next—that is the weekly momentum level. 

50% retracement of the 2010-2020 gain is 1700. 

1700 S&P is the real risk here. There are multiple moving parts that have to go RIGHT to hold the line at 2100.

We WILL have big melt-up of short-covering days like tomorrow after a 3000 POINT DOW meltdown.

But there are SO many structural unknowns. We will publish our complete watch list ASAP with research to back our "wish list" of individual stocks. 

If YOU want to "leg in" to stocks here and can handle 20-30% drawdowns or more, you are braver than I am. I operate on one simple principle when it comes to personal wealth--if you are already financially set for life, DO NOT FUCK THAT UP.

That means I may be more risk-averse than you. If you are still in the wealth building phase of life, you can afford to take more risk IF you can handle the pain of "premature stockulation." 

But from talking with a LOT of our All-Access members over the last few days, I am talking with people with not a lot of years to rebuild a 50-60% drawdown in their portfolio. 

So I AM taking what I perceive as a prudent approach to redeploying the capital we saved by hedging and going to cash in late February. 

 If you followed our hedge advice, you are sitting on some historic profits. No problem at all for you to take them at any time and SIT ON that cash and pay the friggin taxes (if your option trades are in a taxable account.)

Action to Take: Sell 50% of your SPY and QQQ put options and take those ridiculous profits. HOLD THE XOP put options.

All-Access Club Members: We moved our conference call with Jay Hatfield the portfolio manager of PFFA and AMZA to Tuesday. Look for the email we put out Friday. We have added 5 memberships to our All-Access Club--we just want to make sure we have enough bandwidth to answer all questions for our members--so far so good. 

If you want to join us on the call and not an All-Access member, you can still join here. Make to sure you scroll down the All-Access offer. 

PS--Our "6-Month Portfolio Protection Plan Membership" to Transformity Investor PRO is here to help family and friends to navigate this 3-6 month bear market. They need CASH to earn a lifetime of wealth when the US and global economy snap back. 

My mission here is for Transformity Research to make a positive impact inform as many investors as possible this year about

1. WHY this 30%+ Bear Market for Stocks will be powerful but relatively short as its an event-driven bear market 

2. HOW they can protect their retirement nest egg (raising cash and using XOP XLE SPY QQQ put options) 

3. WHY there will be SOON another historic buying opportunity like late 2018 to earn 100-200%+ gains over just 6-12 months. With average stock market return since 1988 8%--there will be a once in a lifetime opportunity to earn 20-30 YEARS of stock market wealth in 24 months or less. 

4. We know the leading 20%+ unstoppable secular growth sectors of the great Industrial Revolution 4.0 being led primarily by American based disruptors WILL BOUNCE BACK HARD because

5. "Value Investing is Dead" in a world where you discount future earnings and terminal value of companies growing just 2-4% at 1%!  

IF YOU HAVE family and friends that have a lot at stake and at risk in this now undeniable global pandemic and the negative real-time second-order global economic effects that are rippling through the world economy, feel free to forward them our Code Red Updates and invite them to click here and join us for just $49 in the Transformity Research digital bunker.  

Final Word: Stay strong, watch your email, and be ready to take advantage of this once-in-a-lifetime opportunity. EVERY one of these disasters since the end of WWII has ultimately been buying opportunities. BUT to take advantage, you need CASH.

And this one is NOT OVER yet--hard stop. 

Toby