July Newsletter Part II: Letting Stocks Come To Us
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The Market's Big Picture & Big Opportunities (PRINT THIS NL OUT!)
Quite the July 2020 tech stock meltup eh?
Especially in our favorite Digital Platformity micro-sector stocks--and that is both a problem and an opportunity. The "DP" space is rightfully considered the safest growth sector in the world of stocks where most of the Main Street real world (and especially the United States) is still operating at 80% of 2019 of GDP and, in America where 20% of the labor force @30 million remain unemployed with 20 million folks at risk of eviction and in limbo until the Congress passes the next unemployment insurance benefits package (which in a POTUS election year is an absolute certainty of passing $1.5-2.0 trillion --my 24 years in Washington DC taught me many lessons about Congressional behaviors and one is Santa Claus always comes a few months early in a POTUS/Senate election year).
The problem is, of course, that we invest in the best digital platformity secular growth sectors and micro sectors to MAKE MONEY and GROW our wealth 5-7 times faster over years rather than by investing in "value" aka cyclical atoms-based 20th-century industries.
That means our cost basis matters and valuation still matters if your goal is to BUILD a fortune in 21st-century growth stocks--and the current rip-your-face-off "Pay Anything for Digital Platformity Stocks" and "Stocks ONLY GO UP!" fever has raised the sales multiples for most platformity verticals leaders into the stratosphere. The last time that happened was September/October 2019...and the fever burst with a very sharp 20%-30% drop in ALL platformity micro sectors.
And while the top 20 digital platformity stocks are DOWN about 4% today, our portfolio of Ultra Income stocks are UP about 4% today (and we are adding another Ultra Income doozy today as well--paying about 7% per MONTH in dividends--I kid you not) plus 2 low-cost/high-quality Permian Basin oil producers priced as if they are going bankrupt (hint--they are not even close to failing).
That is called "a barbell" portfolio--where the income + growth stocks go up on the days the secular Ultra growth stocks take a rest and the monthly quarterly dividends of our Ultra Income portfolio STILL beat the S&P 500 annual returns by 200-300% with much less risk.
Action-to-Take: We will let the digital platformity stocks price action and volume tell us where the high conviction marginal buyers and profit-taking sellers are for these amazing stocks. In other words, let the momentum traders take their profits, and lets' find our where the long term buyers find value in our secular growth companies and put a bid under them.
Shauna is working on our new Digital Platformity Stocks Universe spreadsheet which we will post on Google Sheets for all to see and use shortly. We are also getting our SuperSPAC Universe spreadsheet together including warrant and stocks and will post when it is complete.
Quick Known Knowns Reality Check
With a
1) bare-knuckle contentious presidential and Senate control election around the corner
2) 32 million Americans unemployed and running out of $2400 a month life support on Friday
3) 20 million families at risk of eviction ahead of an election (2-3 months of unpaid rent depending on local regs)
4) the risk of the current pro-business/anti-taxes and regulation POTUS losing to a moderate Democrat by 15% in the latest national polls
5) at least 6 GOP Senate seats at significant risk of being turned blue and lost GOP control
6) a massive and fast rebounding pandemic with additional lockdowns certain and school year pushed to 2021
7) S&P 500 selling at 26X 2020/23X 2021/20X 2022 price-to-earnings multiples
8) And Mega Cap tech selling at a frightening 2 standard deviations higher than their normal trading range
We can safely say that Mega-Tech "safety trade" meets every definition of a financial asset bubble.
Yes with the Fed Put aka "we will do anything needed to keep asset prices elevated till 2023" and no-risk Treasuries a guaranteed way to lose money, the now-famous TINA trade ("there is no alternative for investors other than buying growth stocks") we have had a continuous and self-reinforcing feedback loop bid for secular stocks.
Add in 10 MILLION new Robinhood day/swing app traders trading their beer money and stimulus checks on their iPhones, and you understand the unstoppable demand for stocks--especially for the $trillions of dollars that HAVE TO BUY stocks by order of their market cap.
Key Point: Market-cap-weighted indexes with $trillions of passive investors retirement dollars are why the even weighted Nasdaq 100 QQQE is only up 8% for the year and the market cap-weighted QQQ is up 22%.
Thankfully, today in an otherwise upmarket, ALL digital platformity stocks are off 4-8%--that is a good sign that the annual "mini-rotation" in digital platform companies has started! If you look at the chart below, the SKYY Cloud Computing index has broken its 20-day--no whoop. Breaking $71.33 its 50-day would make the next support $62-$63--and THAT level is very reasonable with earnings season coming in for Q2.
Say it with me: "Entry point matter!"
What Could Slow Down The Digital Platformity Bubble?
#1 is a "mission-critical" capex spending pullback. The latest surveys of enterprise IT CAPEX spending from CFOs and CIOs is down 3-5% for the second half of 2020. IBM just reported that many CFO's are building cash for the NEXT rainy day. We can also assume that the mission-critical deployments for the new remote workforces that got pushed out the door in March/April/May/June which pulled forward 3-5 years of digital enterprise platformity capex spend forward into a 120-day life-or-death compressed capex super cycle have peaked.
The good news here is since virtually all mission-critical and workflows digital platformity spending is a monthly subscription, the monthly IT spend will undoubtedly be higher in the July-to-September quarter than the April-to-June quarter. The $15 trillion question is how much of that future cash flow of digital platformity companies has already been priced in with these 30-40-50X annual SALES valuations.
We will see over the next 4-6 weeks. But the law of financial gravity still applies to our beloved platformity stocks even in a negative growth global pandemic. And when the actual number of employees using SaaS/PaaS/IaaS systems is lower (think layoffs/furloughs/firings/closed businesses), so are monthly per head subscription revenues.
Notice the double top on this SKYY chart at $78:
But the Bigger Story is The Mega-Tech Bubbles in Facebook, Microsoft, Tesla, Amazon, Apple, Alphabet (GOOGL)
Friends, when it looks like a stock price bubble and acts like a stock price bubble, let's all call the FANMAG stocks what they are--they are a stock market bubble for all the good reasons mentioned above. This is NOT 1996-2000 Dot.com bubble--digital platformity solutions make HUGE amounts of real cash flow and non-GAAP EPS (see below). Some of that cash goes to buy back huge amounts of stock.
But technically, anytime any freely traded financial asset is trading at +2 standard deviations over their normal trading range, that is the technical definition of a financial asset bubble.
The S&P 500 has delivered a 10% annual rate of return 2010-2019, and the six tech stocks now known as FANMAG— Facebook (FB), Amazon.com (AMZN), Netflix (NFLX), Microsoft, Apple and Google-parent Alphabet (GOOGL)—to which we must add Tesla and Shopify (the anti-Amazon digital platform). TFANMAGS's 10-year annual returns are 3X "the market", according to my old buddy Ned Davis, founder and senior investment strategist at Ned Davis Research. Ned's firm curates what he calls a Historical Bubble Composite, which aggregates the 1929 Dow Jones Industrial Average, the price of gold in 1980, Japan’s Nikkei 225 in 1989, and the Nasdaq Composite in 2000, and a cap-weighted index of TFANMAGS stocks tracks it almost perfectly. The Nasdaq Composite gained 33.33% annually in the five years heading into its 2000 peak; FANMAG has gained 32.91% annually during the five years ending July 10, 2020.
When you add Tesla and Spotify to TFANMAGS we have 35.5% annual gains in the last 5 years vs. 10% for the S&P 500.
I must add that our now 73% annual Transformity 21st Century Ultra Growth portfolio returns 2013-2019 double the TFANMAGS stocks over a longer time frame--modesty is not my strong suit.
But Davis points out in his most recent missive that the six FANMAG stocks trade at 36 times earnings and six times sales, the latter the highest on record. Add in Tesla and Spotify and (based on market caps) TFANMAGS sells at 45 times earnings 8 times sales. Ned writes “The law of diminishing returns suggests that the larger a company is, the harder it is to keep compounding high growth rates to justify these valuations" aka "The Law of Big Numbers."
Key Point: It is no coincidence that the eight TFANMAGS are ALL consumer or enterprise platformity companies (if you correctly look at Tesla's value proposition and competitive moat as an advanced technology platform that is placed on top of an auto frame and protected by an auto body). Digital Platformity business models should earn a significant valuation premium to non-platformity atoms based companies because of the high gross margins and high incremental sales margins of their vastly superior low capex/high gross margin business models!
If this does not make sense to you, go back and re-read July Newsletter Part I and II about the Law of Platformity and the Platformity Principle.
Davis is quick to point out and I am too that we are not calling a top but for rest and consolidation. The eight big stocks can continue hitting new highs if the rest of the market follows along. My worry here is so far that hasn’t been the case. FANMAG has gained 32% in 2020, while the S&P 500 has dipped 0.2%, and the S&P 494—what’s left after Facebook, Microsoft, Netflix, Microsoft, Apple and Alphabet are removed—has lost 6.6%.
But I do need to make sure you understand that the longer the Nasdaq’s biggest stocks are climbing on their own and, along with Tesla and Shopify, represent almost ⅓ of the ENTIRE value of the Nasdaq 100 Index, the more we need to be on the lookout for the marginal buyers of these stocks--the momentum robotic algorithms--to get a dose of valuation acrophobia when they stop going up and they take profits swiftly.
What makes these winning stocks wilt under the sheer weight of their market value versus the S&P 492?
One Indicator of Short Term "Risk Off" Is Now Inplay
There are more signs of possible trouble ahead for the high-flying technology stocks, this time from gauges of expected volatility. One alert stems from the widest spread since 2004 between the Cboe NDX Volatility Index, a measure of implied equity swings for the Nasdaq-100, and the counterpart so-called “fear gauge” for the S&P 500. Another comes from unusual simultaneous gains in the technology index and the NDX recently.
Historically, this kind of pronounced shift in the relationship between the two volatility indexes corresponds with absolute and relative underperformance of the Nasdaq 100, particularly over three months after this rare combo.
Again, it made sense that this surge in mega-cap technology firms valuations driven ever higher by the fiscal and monetary stimulus-fueled U.S. equity rally from March’s. They reflected very real concerns about the longer-term economic impact of rising Covid-19 cases on the Main Street economy vs. the relative "sure thing" of platformity economics (which became a massive global mission-critical IT spend category for every organization in the world in just 30 days). Mega tech became the "safety trade" in once-every-100 years global pandemic because 100% digital workflow transformation became existential and mission-critical in early March.
Remember: every guy like me who manages new money coming is HAS to put it somewhere--and with 8 stocks providing 70% of portfolio alpha (returns exceeding market returns), IF YOU don't own those stocks, you have to 8 OTHERs that do as least as well (or you gotta give the money back or find a new place to work.)
It is a cliche now but true--Covid-19 accelerated enterprise digital platformity transformations from 3-5 years to 3-5 months. With the Nasdaq-100 up 23% so far this year through July 20, while the S&P 500 is still down 1%, the question now is not really whether their superior business models will maintain their leadership--it's all about the 2X 2 standard deviations extreme valuations coming into Q2 earnings season.
And this. At one point on July 13, the Nasdaq-100 was up 1% while the Cboe NDX Volatility Index climbed 8% -- a situation which had never happened before. And as of 10:30 a.m. in New York on July 15, both gauges were positive for a second straight day. The fact that options traders are pricing in higher volatility despite record highs for the Nasdaq occurred just before that massive reversal that eventually left the QQQ technology measure in the red on Monday shows us what can happen when the machines "break the trading algorithms" in other words "The NDX volatility gauge is supposed to go DOWN when Nasdaq 100 stocks are going up!"
And then this--did ya know that if you just took the FANMAG out of the Sp 500, our market returns would look exactly like Europe's markets--flat to slightly up for the year.
Action to Take: The good news is tech/cloud stocks need a rest and the QQQ fever looks ready to return to earth. We don't chase stocks--even our beloved digital platformity "stack" leaders in the hottest micro sectors--that is a recipe for losing $$$$. The 10% Netflix sell-off Friday is a perfect example of a consumer platformity leader priced to perfection getting much need profit-taking.
In short, say this after me, NFLX did NOT "beat, beat, and raise guidance" and got spanked. But really--7-10% down after their run is relatively nothing.
In other words, it looks to me like it is time for the August/September QQQ/Platformity stock profit taking/source of funds seasonal rest should give us an opportunity to make SUSTAINABLE profits with our favorite digital platformity stocks.
Key Point: We are in the process of expanding our potential buy list of digital platformity stocks and will publish on a Google Sheet document later this week. This is the list we will be carefully adding the "beat, beat, raise" winners of Q2 from (at lower prices!).
Think of this--of the top Nasdaq 100 valuation stocks, 52 now qualify as "digital platformity" companies. Ten years ago the number was 18.
And of those 52, only Bookings.com and Expedia are below their analyst's price targets and 98% of the 52 are at or above their 20-day price moving averages and the highest price targets on the Street.
Key Point: IF the cloud/platformity stocks bought primarily by trend-following computer trades (over 85% according to the exchange measurement of computer trading per day) start to puke up these 52 stocks like in Sept-November 2019, we get some incredible entry points.
If they just correct down to $62-$63 (as measured by the SKYY index), then we get great entry prices. If they go sideways, that is good too.
But While We Wait for MSFT . . .
Action to Take: We will buy an Option on the 2X levered TQQQ and SKYY just in case we get "beat, beat, raise" reports from Q2 earnings AFTER we hear from Microsoft, the King of Digital Enterprise Platformity, after the close Wednesday. MSFT is so global and so everywhere that if THEY report the Remote Office Digital Work Flows tsunami has peaked, and that fewer employees either inside or outside the building and CFO cash building for the next Covid-19 outbreak in the Fall/Winter, that will start the priced-for-perfection aka beat-beat-raise Digital Platformity correction.
After all, when nearly 60% of Americans polled in a massive survey said they would NOT take a Covid-19 vaccine (and the top ones look like two shots, not one), the experts we talk to say its a dream if we are thinking the UN-United States of America will get to 70% heard immunity even if one of the three phase-3 vaccine trials is approved and available by last 2020.
But if MSFT brings a "beat, beat, raise" quarter and forecast, then the enterprise digital platformity players will keep rising.
Moderna MRNA Update: Let's TAKE MRNA PROFITS: Let's protect our 40-55%+ profits and look to replace the position with a February 2021 Call Option Later.
When we bought MRNA after its last streak up/blow-up under $55, we bought it because our FDA insider member of our Transformity Research Experts Alliance (TREXA) gave us the actual scoop on MRNA's progress on their vaccine and the after profile. Then it exploded to $90 on the news we already knew.
Now we don't have an information edge on the market and at $30 billion market cap (with a least 4 other vaccines at similar stages of Phase 3 testing), its time to take profits and wait for it come back to earth as it has twice in the past 5 months.
TR Ultra Income Blockbuster: BUY USOI Under $4.70: How do you generate @85% annual income (with monthly dividends) from the price of WTI Oil? Here's How!
I will be the first to tell you that when I first was shown the USOI ETN, I did not really did not understand the huge monthly income production capacity of its "Sell monthly USO call option contracts (USU is the WTI oil index fund) that generate at LEAST 6% per month in option premium" deal. It looked "too good to be true" and that triggers my innate 35 year Wall Street instinct to run away.
But, USOI is an exchange-traded note sponsored by the giant investment bank Credit Suisse (CS) that, because it has been blown up from $16 to $4.60 and has about $40 million in ownership left (from a $500-$600 million), I assumed the ETN was going to be redeemed by CS along with a bunch of other 3X leveraged notes in July.
But it wasn't. And if you look at this dividend payment schedule, USOI has continued to pay it's now @$4.20 a year monthly dividend into the oil price destruction derby March-June 2020.
Not only was it not redeemed, but CS ETN managers I talked with recently said there are no plans to redeem it.
OK.
Now FYI--in ETN land, when a sponsor "redeems" and ETN, they set a redemption date at what EVER the net asset value of that ETN on redemption day, they cash out the noteholders at that price. Since the net asset value of USOI is 100% derived from the price of the giant USO WTI oil ETF, the discussion I had with CS was basically "USOI is like a "stub" security that is protected by the profitability of the USO ETF with a $billions in AUM (assets under management.)
Then it turned out that a quantitative genius at CS in the UK created the formula to execute this simple concept: "Every month, sell a next month call option that generates at least 6% in net premium and distribute that to the ETN noteholders monthly." It appears there is some in-house pride in this unique mega income ETN and the formula. If you are a math whiz, go to the Credit Suisse web site and search USOI--the formula I swear is many pages long.
So--USOI remains for at least the next year (they redeem their ETNs in July) and we lock in a 86% $4.25 yield for the next year. Bear in mind, USOI sells today for $4.63. Here is the monthly dividends paid the last three years (while oil prices came down from $65 to -$30). USOI pays it highest dividends in the first 4-5 months of the new calendar year. That extra earned income comes from when the option they have sold does not expire but in fact the underlying USO ETF shares are bought out at a 6% profit. With WTI oil coming off the -$30 disaster in April, oil prices have now started an upturn with 30% of US production wiped out and 20% of OPEC/Saudi Arabia/Russian production halted to re-balance the global oil markets.
Here is the chart--it bottomed right into the March Meltdown and has built a base from $4.40 to $4.80 ever since.
Now here is the actual PRICE TODAY of WTI oil in the cash market (using the daily EOD end-of-day CME WTI contract:
Those of you with sharp pattern recognition skills will notice "Gee- the USO and USOI ETNs do not actually follow the daily WTI oil prices!"
And the answer why is because they are based on the forward MONTH futures, not daily. And to make a long story short, USOI is essentially given up the short term underlying oil price direction profit or loss by selling the call options that cap its appreciation potential (if you really want to get into the weeds, look up WTI monthly futures contract premium decay and knock yourself out.)
Bottom line: IF CS keeps USOI until next July, we have locked in about $4.25 per share. That is 10,000 shares at $4.65 in $46,500 in cash money dividends and you lock in $42,500 in dividends for the next year (assuming USOI is not redeemed).
I am putting this in a ROTH IRA with $100k and not looking at that account--except to reinvest the dividends and using 50% margin (at 3.2%--Interactive Brokers). Oil prices are headed to $50-$60 range as the $trillion in Euro Zone, $3 trillion in Asia, and another $1.5-$2 trillion from North America is pushed into global wallets.
Understand the under $45,000 households in America (over 40%) will spend EVERY $$$ they get from unemployment benefits and "stimulus checks" up to $5-$6k a month if they have a lot of mouths to feed.
The employed middle class and up want to "Get the F--k OUT of My HOME" and over the next year as the vaccines are accepted by a majority of jaded Americans, they will road trip and drive to leisure locations like nobody's business. Those trips consume a LOT of gasoline.
Non-essential air travel is COMPLETLY transformed regardless of herd immunity. At the margins, jumping on a jet to fly cross country or across oceans to schmooz a client or depose a witness or start a new consulting gig is down 40-50% in 2021 and 30-40% in 2022. And since it is the front 8-12 rows in a plane where 80% of the profits come from, the world of 250 different airlines fighting it out for your business class business is over.
Final Note: Why Does My New Hero BlackRock's $Trillion Bond Chief LOVE Our Digital Platformity Companies: "It's the Incredible LOW CAPEX and the Amazing Cumulative Future Cash Flow, Baby!"
(Adapted from a MarketWatch article).
As the public face of BlackRock’s more-than-$1-trillion fixed-income division, Rick Rieder’s enthusiasm around the long-term prospects of highflying tech shares can come as a surprise to those more used to hearing his opinions on the ups and downs of Treasury yields.
“I don’t want to get pigeonholed as a fixed-income person. I’ve been doing equities in portfolios for many years but it is a fair assessment that I’m doing a lot more of it now,” he said, in an interview with MarketWatch last week.
Since he took over the management of BlackRock’s Global Allocation Fund MKLOX, +0.66% at the end of last March, it has recorded a 9.9% return as of June 30, even as competing funds lost on average 1.1% over the same stretch. Here is the Key Digital Plaformity Insight: In Rieder’s view, traditional equity investors overlook the merits of a company’s ability to accumulate cash in favor of how its profits grew. On top of that, they didn’t investigate how money traveled from the business to an investors’ pockets, an exercise more often practiced by bond buyers figuring out who was first in line to a company’s cash.
“Earnings are subject to enormous accounting variation, and at the end of the day, what the coronavirus amplified was this theme of ‘it’s all about your cash flow,’” said Rieder. For that reason, he said equity investors should buy shares of tech and healthcare businesses that carried “explosive upside convexity,” or the potential to see rapid growth in the cash they produce over time.
Despite their tremendous run-up, Rieder says he remains bullish on the long-term prospects of tech companies, especially those that know how to make use of data to improve their operations. “We’re going through the greatest technology revolution of all time, and it’s all about data and how you assimilate it,” he said.
Rieder said the biggest tech companies leading the stock-market such as the FAANGs are unencumbered by expensive factories and other physical infrastructure, allowing them to quickly expand and dominate promising new fields by analyzing reams of data and spending big on research.
Yet in the past, the time and cost involved in developing a brand or a complicated logistical and transportation network prevented businesses from changing tack when new opportunities arose.
“Now you can do things in hyperspeed,” he said.
Rieder said he struggled to understand why many stock investors would play defense through shares of utility companies, an industry where, he argued, it made more sense to buy their bonds. He pointed out a utility company’s annual profits as a share of the company’s equity was effectively capped by regulators at around 10%.
“Why would you buy that?” he said, adding that investors shouldn’t “waste their equity dollars on companies that are really stable. In other words, Rieder said that when investors think about their portfolios, they should align the qualities of a particular investment with how a company’s earnings and cash flows were projected to change in the future.
“In the broad investment world, a lot of the returns are about picking between bonds and stocks and deciding where you’d rather be,” he said.
The TR Take: The "Great Rotation" into low p/e value stocks requires
1) a vaccine (one that at least 60% of American deem safe enough to actually take)
2) the Fed to need to fight actual demand-driven price inflation via hiking short term rate hikes
3) REAL salary and wage growth from real durable employment growth that creates real wage inflation.
The TR Ultra Income Portfolio
Our once-a-generation dive into the stocks, ETFs, mREITS, ETNs and MLPs who, in the Covid Crash of 2020, were priced back to the stone age as if we were never going to drive again or extract hydrocarbon entry or pay our mortgages again.
We are updating our Transformity Ultra Income portfolio with new buy under prices this week.
But the problem here for investors in what I have come to regard as the "1999-light" stock market who are NOT robotic black boxes of momentum chasing algorithms (who may hold a position for a minute or a few hours) is that we make our money buying stocks low and selling them a few years late a LOT higher.
And what kills the Federal Reserves omnipotent liquidity firepower (promised to remain omnipotent till 2022 at least) that is driving the valuation of secular growth digital platformity equities is, of course, the Fed.
Just as expansions “don’t die of old age”, rather “they are murdered” by the Fed, neither are bubbles popped by investors suddenly turning bearish.
Bubbles are burst by central banks or once-in-a-century "exogenous" aka outlier events like a global pandemic.
And, as long as the price of money remains at all-time lows, bubbles in credit and bonds will serve to further inflate bubbles in stocks, especially secular growth proxies like transformative digital platformity leaders.
Don't fight--PROFIT from it and WE WILL look out for real inflation ok?
This self-reinforcing game of musical chairs still has legs until we get the conditions that would spark a REAL inflation rising scenario (which of course would turn our 20% ish yielding Ultra Income investments into the NEW secular growth stocks!). So we have covered into the Great Reflation trade, too!
SPAC Updates later this week as well.
Aren't ya glad we sold NKLA and WARRANTS between above $78?
Cheers!