The TR Investor PRO 2021 Playbook Part II
Dear Transformity Ultra Growth Investor,
IN our 2021 Annual Playbook Part 1 on January 4 we advised you:
Action to Take: WE ARE NOT IN A RUSH to put new money to work
Action to Take: Let's start looking to add position at a SP 500 Support correction: 50-day down to 357 or 100-Day 347 is where we will look to buyers of that entirely healthy bull market pullback."
OK so we have a 5-day Dow/SP500/Nasdaq losing streak that can be summed up best with the term "buying the rumor and sell the reality: I was waiting to see how the big earnings beaters today traded today post-market (TSLA APPLE FB etc) to see what happened in Q4 2020--and so far the "beat/beat/raise" reporters (beat revs beat earnings, raise guidance) have been sold.
That by any definition is the signal that leadership stocks that have doubled, tripled and more in 2020 out of the abyss are DUE for a much-needed correction as investors want or need to lock in their profits of 2020 in 2021 to pay taxes in 2022.
Tesla Microsoft, Facebook, Netflix--all beat, beat, raised so far and DOWN or flat...THAT IS A CLASSIC consolidation top. Here are the charts that tell the story perfectly--starting with ARKK Ark's Innovation ETF which IS THE BELLWeather of late 2020/2021 Covid/Biden Bounce.
QQQ--Downside Target 100-day PMA of 293 to 265 if support breaks
QQQJ "Next Gen" -Downside Target $30 to $27
ARKK--Innovation Fund $124-to-$100 Target
SMH Semiconductors $218 to $200 ish
Action to Take: HEDGE with ARKK and QQQJ Put Options
ARKK Feb 5 $138 PUT OPTION At Market
QQQJ Feb 5 $32 PUT OPTION At Market
Now the "elephant in the room"-- the Reddit Revolt Against the Short Selling Hedge Funds
Little did anyone know that the "stock market" or market for stocks was about to be taken over by "The Reddit Revolt" against heavily shorted stocks driven by the NEW marginal buyers of stocks and options against heavily shorted retail stocks. Literally 700 years of stock gains if you bought GME last week and held into today. AMC and KOSS--$2 KOSS the tiny audio speaker manufacturer at $70 as I write this.
Many have asked "How on earth does Gamestocks GME stock go from $5 to $350 in a few days--how is that possible?
Here are some good articles on how these "Reddit Revolters" have organized on stock trading message board on Reddit, StockTwits, Twitter, You Tube and even Tik Tok to hatch and engage in coordinated attacks against big hedge funds reporting large short positions against presumably dead and dying retailers and other small/microcap companies with 1) <$10 trading prices--under $5 better 2) low float and most important 40%+ shares shorted.
IF YOU SEARCH the term "wallstreetbets" you will get the whole story:
https://www.bloomberg.com/news/articles/2021-01-27/melvin-capital-closes-out-its-gamestop-position-cnbc-reports?sref=885uV7K8
https://www.bloomberg.com/news/articles/2021-01-26/-get-in-or-regret-not-getting-in-how-a-penny-stock-goes-boom?utm_campaign=news&utm_medium=bd&utm_source=applenews&sref=885uV7K8
This is the best article I have found on how just ONE Redditor kicked off this bloodbath
https://www.esquire.com/news-politics/a35339535/game-stop-stock-short-squeeze-explained/
"But Here's the Deal" Where Reality of Margin Leverage Meets the Road
To understand the mechanics of these incredible melt-ups (and maybe catch one in the making or going short with put options to catch the downside--more on that in a bit) you need to read these articles below on how these attacks work on the retail buy-side.
Next you must understand that these short raids have been around for as long as you can short stocks--what is different this time is 2.4 MILLION members of r/wallstreetbets on Reddit and similar number on StockTwits/YouTube/Tik Tok all in a concerted "Get Shorty" attack. In addition, many of the $trillions in algorithm trading funds now do NOTHING but scrape the r/wallstreetbets an r/pennystocks and other sites and automatically MIMIC the positions with the most comments.
Then what you must grasp are the mechanics of an SEC margin call. When my hedge fund ChangeWave Capital Partners was WAY short stocks starting in Spring 2000 and really going into March 2003, I learned some hard (read expensive) lessons on shorting and betting against heavily shorted ANYTHING.
The lesson? You can be 100% RIGHT on your short thesis fundamentally and 1000% WRONG if you get caught up in a coordinated short squeeze.
Here's why. Let's say you have shorted Gamestop GME assuming they go belly up. You borrow shares from your broker, sell them, and those sales proceeds go into your cash/margin account. But you have BORROWED those shares, and until you return them you have a margin loan against those shares. As the actual share prices goes down, the amount of your margin loan goes down and your cash available to trade (or take your hot girlfriend out for big dinner at Del Friscos NYC) goes up.
But--if those shares you sold short at say $10 move UP to $15, your margin loan increases, and your cash available to trade goes down.
In early 2000, I had lent my MicroStrategy MSTR shares to Schwab that I had an $11 cost basis in because I was getting PAID about $20 per SHARE to lend them to them. They in turn charged some poor bastard $30 for the right to short MSTR.
Well...MSTR reported a monster quarter in late January and the shares moved from $100 ish to $150 ish. 35% of the entire float was short--and many of the traders/hedge funds did NOT have enough cash in their account to meet their margin calls. Here is where the term "SEC margin call" and "cashiered" add jet fuel to a short squeeze--in this case $125 to $355 in a few weeks!
When you get that margin call (it used to be an actual phone call--now an email and then a phone call if you don't move the requisite cash into your account), you have to inject the capital requested by 10 am that morning. Not 10:05--by 10 am. IF you do not transfer said cash into your account, the margin clerk is instructed to LIQUIDATE enough of your other securities to raise the cash to BUY BACK enough shares of (in this case) MSTR to reduce your short sale margin. What happened to GME since last Friday is a double whammy--because they also had large put option positions going belly up that made up part of the "cash and securities available" to meet their margin call.
BUT--all these margin calls made the CASHIER the new buyer of MSTR or GME stock--and the cashier is NOT working your order--he/she is dumping it aka liquidation and getting whatever they need to meet the call (or in the case of short covering is BUYING SHARES WITH $millions in market orders). They do NOT care about your hedge fund or account--they care about meeting SEC margin rules (big fine if they do not). SO--a short squeeze started by thousands of young Reddit Revolters (the leaders are pretending to be like the leaders of Les Miserables--"we are striking back against the rich and the injustice of the poor!!) turned into a bacchanal deluge of margin calls/short covering.
And yes my friends--a positive feedback loop chain kicks off where the higher the share price goes, the more market order BUYING is caused to cover the short positions.
Meanwhile, the market makers in the stock KNOW THIS because they see on their market-making screen the pile-up of unfilled market orders--so THEY increase their ASK on the shares in concert with the margin call liquidation orders. Remember--there is nothing illegal for the market makers in a short squeeze from literally raising the ask $5-10$ for every sale UNTIL the liquidation sales orders dry up.
In the GME case, that took shares from $5 to $50 in a few minutes...then $50 to $150 the next day and today to $350--as long as someone hits the ask with a market order bid, the market maker is the buying investor and selling it almost simultaneously at a higher price.
The short squeeze was accelerated with a deluge of retail market orders whenever the price stalled--that is called "the knife dance" on a trading desk--don't ask me why. THEN on top of everything else--the market makers in the GME PUT OPTIONS have hedged their put options by shorting the stock or buying out of the money puts. When the puts start LOSING VALUE, the market makers have to cover their shorts so THEY become marginal (aka the non-price/value-sensitive) buyers of GME or MSTR, too.
Get the picture? OY!
When MSTR went from $10 to $350 in about 9 months, the shorts (in Wall Street trading desk language) "got their faces ripped off." One of those shorts was the notorious Bill Finkelstein who happened to be a guest on my Fox News Saturday morning show Bulls and Bears in October 2000. He was telling me in the green room that he should be way up for the year but he got short squeezed on MSTR in the first of the year and got crushed. What was really sad was on March 9, MSTR announced they were going to restate their revenue recognition for 1999 and that $350 print on March 8 became a $150 print on March 9 (I know because I was a BIG seller that day and was closing output options that were not close to accurately being priced--that is another story).
Anyway--I go through ALL of this hopefully help you make sense of how $5 Gamestop or $5 AMC could go to $350 and $150 respectively.
The answer is--as LONG as there are buyers who HAVE TO HIT any ask price regardless, that price will exponentially rise because the market maker in the middle has the short-seller by you know what--and both parties know it.
That is why short squeezes--whether it's in the nat gas pits or stock/option market makers 5 screen trading desk--are called "the widow maker." When EVER THERE IS MARGIN involved in trading (and in the nat gas or t-bond futures we are talking 100-to-1) short squeezes will take out more than a few wrong sided hedge funds and traders. My old friend Jon Najarian has told me many stories over the years about traders in the Chicago Pits who were short nat gas or corn or wheat and a huge storm or freeze would hit and BOOM--they were broke.
The Milton hedge fund needed three $BILLION to stay afloat which means they needed $3 billion to pay off margin bills or be liquidated.
Moral here? There WILL BE an opportunity to buy put options on GME AMC and other stocks WHEN the forced selling and buying is over.
And how do we know? Well the percentage short positions will break first--that is the signal .
NOTE: We are NOT GOING TO trade put options on these stocks with you my dear Transformity Research subscribers--we can only with good conscious do this with our SSPT All-Acces Trading Room subs and our Transformity All-Access members because most are not working during the trading hours or have the ability to watch these trades every carefully during the day.
If we play our cards right, what goes ballistically UP will come ballistically down--but THAT trade is not for civilians.
So How Are We Going to Beat our 104% a year Annual Returns 2013-2020 in 2021???
The short answer is A) we are off to a great start and B) We will wait and cherry-pick NEW players in our 2025 Secular Transformational Growth ESG and Information Technology Sectors:
1) The Hydrogen Economy
2) The EV Everything Economy
3) The Genomics + mRNA Revolution Economy
4) The Green New World: Solar/Wind/Battery Storage Economy
5) The New Space Travel & Exploration Economy
6) The Digitized Enterprise: SaaS Platformity Dominators and Rising Vertical Stars
7) The AI/Machine Learning+Robotics+ Edge Computing Economy
8) The 5G and iOT Ubiquitous Digitized Economy
9) Powerful Corporate and Regulatory Transformations
10) The Sustainable Living Economy + DTC Ecommerce
Moreover, I am, like any successful investor and entrepreneur, an optimist.
Looking back at the pandemic, I truly think it very well may prove to be a blessing in disguise. Someday in the future when the Federal Reserve raises short-term interest rates we will have a real bear market, but we just went through a bear market dress rehearsal.
Societies all over the world have faced (and are still facing) a once a hundred-year crucible and while hard to recognize right now, we are stronger and better prepared for the future today than on Jan 27, 2020. We now know the danger first hand of ignoring existential dangers that we have to ability to avoid IF we just no longer deny they exist. No longer is climate change denialism, for instance, viable--we have all vowed to NOT let irreparable harm come to our planet by pretending an existential threat does not exist--we've all (ok most) learned the lesson and VOW we will NOT make the same mistake again.
We are poised to emerge from isolation and sensory deprivation of all kinds with a new beginning. The pandemic has pulled forward behaviors and science and technologies 5-10 years in 3-9 months. Looking back on the pandemic, I think it will prove to be a blessing that provided a trigger that shook us out of the funk we were in the post-financial crisis that gave rise to debilitation populism and political nihilism.
We still don't really understand how the digitization of work frees millions from the drudgery of office commutes and wasteful energy consumption. The interior of America will have a renaissance as high-quality high paying jobs no longer require Americans to live in a cubicle in an unaffordable city center along the coasts. And we have unlocked a medical miracle with mRNA and digital healthcare that will have a profound impact on health care capable of reversing the declines in the life expectancy of the bottom 40% of Americans.
OK?
Now the really good news!
The Biden Boom Is Here and Inflation Boogie Man is NOT!
Here is a thought experiment—pretend you are a big global equity investor and the returns in your American stocks have soared while the rest of the world (ex-China) stocks have sucked. You look to America. You see our stock market indexes at or near record levels on every measurement. You see a global health pandemic, which the US appears to be managing particularly badly ex-Europe.
.
At the same time, a new president is sworn in, one who has promised to back a barbed bundle of new regulations for the tech giants that are driving overvaluation; promised sharp rises in taxation for the wealthy and high-income households over $400,000 AGI and corporate taxes back to 28% from 20%.
Do you sell your US Equities, or double down?
Answer: if you followed the advice of Transformity Research Macro-Market Index, you would double down after a good solid pull-back.
Here is why. Now that we have returned to the quarter in which the Covid-19 pandemic based recession began--the quarter in 2020 when we advised you and our money management clients that A) on Jan 23 we were 100% hedged on equity exposure short XOP QQQ SPY and B) On Feb 25th we went to cash and C) in the middle of the meltdown in March we moved BACK into equities starting with MLP and Energy plays destroyed by the largest terror based selloff in stocks and bonds (in dollar terms) in history, our NEVER WRONG (since 1989) our
Transformity Macro-Market Index is BACK at 7.2% Q4 GDP growth and +5.4% GDP growth for 2021
Transformity Macro-Market Index: LONG STOCKS--Barring a meteor strike, we have ZERO Chance of recession in the next 4-6 months
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2020 is 7.5 percent on January 21, up from 7.4 percent on January 15. After this morning's housing starts report from the U.S. Census Bureau, the nowcast of fourth-quarter real residential investment growth increased from 29.9 percent to 31.9 percent.
Action Plan: Let's let the great secular growth opportunities come BACK from this melt-up. We still have existing plays under our buy under prices in both our Ultra Growth and Ultra Income. Here are the latest links
Ultra Growth
Ultra Income
Here is the caveat: For our GDP numbers to stay real (or improve) We need the J&J One-Shot Vaccine to get approved by end of February our recovery is delayed.
The good news is U.S. new cases 7-day rolling average are 20.7 % LOWER than the 7-day rolling average one week ago. U.S. hospitalizations due to COVID-19 are now 5.1 % LOWER than the rolling average one week ago. U.S. deaths due to coronavirus are now 6.1 % LOWER than the rolling average one week ago.
But the better news is J&J COVID Vaccine Gets Unique CPT Code Even Before FDA Filing
The largest US physician organization has created a billing code for what's expected to be the nation's third COVID-19 vaccine, moving ahead of an anticipated regulatory filing for emergency clearance of the product.
The American Medical Association (AMA) on Tuesday said the Current Procedural Terminology (CPT) code set has been updated to include the Johnson & Johnson (J&J) /Janssen vaccine, which has been assigned the code 91303. J&J is awaiting phase 3 data from a study of its single-dose vaccine, which could be available as early as this week or next, a company spokesman told Medscape Medical News on Wednesday.
If the vaccine continues to appear to be safe and effective, J&J will file with the US Food and Drug Administration (FDA) for emergency use authorization (EUA) of the vaccine "shortly" after seeing these data.
J&J's single-dose vaccine would mark "a big change" from the Pfizer-BioNTech and Moderna vaccines, which are given in two-dose regimens, noted AMA President Susan R. Bailey, MD, in a statement.
"The change will place greater importance on accurately reporting COVID-19 immunizations by vaccine type and dose to ensure patients complete the appropriate immunization schedule," Bailey said. "Unique CPT codes that clinically distinguish each COVID-19 vaccine provide the needed informational precision to ensure optimal vaccine distribution and administration."
Reality? The best virologist experts we follow ( you know—people who have trained for 30+ years and know how pandemics work and not politicians) say that we do not get to manageable herd immunity in the United States until the end of JULY at best—September at worst.
Oh and I forgot--President Biden’s additional Covid-19 package comes to $1.9tn — on top of the $1tn or so promised in December — and is very heavily geared towards households.
Most Americans will get cheques for $1,400 and there will be an extra $400 a week chucked in from the federal government to supplement state unemployment benefits. Add that up and it should be enough to at least offset the incomes lost to the pandemic so far.
It also replaces income likely to be spent: We all are suffering from severe cabin fever and pent-up demand syndrome. The $1.9bn might be just the beginning.
Then next month, President Biden is to outline his “build back better” recovery plan. If you go by his campaigning, this should come to another $2tn or so. He can count on support from his new Treasury secretary, Janet Yellen, who told the Senate finance committee last week that, “right now with interest rates at historic lows the smartest thing we can do it is act big”
One of the big market worries has been that as the pandemic tails off so will fiscal support. Well I think, and the market thinks, we can let that one go.
All this stimulus will mean higher growth in 2021 than in last 20 years. My old friend Ed Yardeni of Yardeni Research is now forecasting a 5.4 per cent rise in US GDP this year, after a decline of 3.4 per cent last year, something that would mean the US will have recovered from the recession of the first half of last year by the first quarter of this — the fastest recession and the fastest recovery ever.
It also means that earnings will look good, which makes valuations look less bad and so drives equity market momentum.
But Wait—The 80-Year-Old Inflation Hawks Are Squawking “Runaway Inflation is around the corner!!! Buy Gold and Bitcoin!
The case for runaway inflation in the United States is of course being made by the same brain addled inflation hawk “experts” who have called for “runaway inflation” in 2001, 2009, 2014 and are now screaming their dire warning in 2021.
You will read their warnings—I have clipped and saved the best ones from 2009—my favorite still is the “The Four Horsemen of the American Apocalypse!” headline that comes out in every bear market: “Runaway fiscal deficits and Federal Reserve balance sheets and money supply printing money is going to bring the American economy to its knees!!”
Now this time, we enter 2021 with corporations large and small (ex-travel, entertainment and food service) and households sitting on $4 trillion pile of cash. The US savings rate is still way above normal (3.4%) at 12.9 per cent. As the vaccines start to work, individuals will start to spend and companies will rebuild the inventories they have been drawing down over the past year.
Most economists will now tell you there may be a little inflation this year as the effects of last year’s energy price collapse work their way through the numbers and lockdown ends. This is now consensus.
What do you do in this environment? For now, appreciate it. But bear this in mind as you do: the market isn’t on the up because Mr Biden is an obviously nicer guy than Mr Trump. It’s because he is promising more money and has the ability via budget reconciliation to pass a budget with $1.9 trillion in stimulus and vaccination support at 50 votes + VP Harris tie-breaker vote passing the budget reconciliation bill.
And let’s once and for all bring you ALL into the 21st century when it comes to the REALITY of low inflation vs. the fear mongering of the 70-80-90 year old generals of the last inflation war 1973-1982 that appear to have not picked up a paper or read a 21st century economics book since.
Reminds me of the Keynes saying ‘When someone persuades me that I am wrong, I change my mind. What do you do?’
Look, President JBiden takes office at a time of momentous opportunity. With vaccinations under way and more money heading into Americans’ pockets, the U.S. economy is set up to boom in the next few years, potentially boosted by pandemic-induced productivity gains.
But America also faces significant challenges in the decade ahead—whether it’s shifting to renewable-energy resources to reduce carbon emissions, reviving the manufacturing base, or confronting an increasingly aggressive China—and meeting them will probably require substantial public investment.
Trillions of dollars of additional government spending to bolster private investment will be needed. And Congress and the Biden administration should do everything they can to address those challenges, even if it means adding trillions more to the U.S.’s $21 trillion debt load. There are two compelling reasons to deficit-spend at a vast scale.
First, market signals suggest that public borrowing has been far too low to meet the private sector’s needs for a long time, which means that additional federal debt would be helpful for savers both at home and abroad. Current spending plans don’t seem to be altering this basic reality.
Second, investments that boost growth—whether in infrastructure, pollution control, scientific research, education, or public health—effectively pay for themselves. A richer society can afford to carry more debt.
And what about the debt?
What about it? While the level of federal debt has soared by some $15 trillion since the end of 2008, Americans’ total indebtedness has not—even with the pandemic. Rising government borrowing has been offset by a much larger economy and by lower levels of private debt. Thus, while the ratio of federal debt to gross domestic product has risen from about 50% to over 100%, the ratio of private debt has dropped from about 290% to about 240% over the same period, leaving overall indebtedness roughly unchanged.
In short, while the federal government borrowing surged after the financial crisis and continued torise during the Trump era, total indebtedness was flat thanks to private deleveraging.U.S. debts as a share of national income
Source: Federal Reserve Board; Bureau of Economic Analysis;
This is why the massive increase in the federal government’s debt hasn’t coincided with an increase in interest rates. Instead, interest rates have fallen precipitously because public borrowing hasn’t been sufficient to meet the income and savings needs of households and businesses.
If the government was spending too much money into the economy relative to how much it was taking out with taxes, the difference would show up in wide-ranging price increases of consumer goods and services. That hasn’t happened so far, and in fact Federal Reserve officials have been frustrated for years by inflation that has been below target.
Similarly, if the Biden administration’s plans for borrowing and spending were excessive, inflation-sensitive assets’ prices would adjust in anticipation. But sophisticated investors don’t seem worried about inflation at all, even if they are less concerned about deflation than they were back in March.
Most continue to use 20th century metrics to forecast 2021 inflation risks—and they have been wrong for 12 years running. First off—the actual prices of most commodities—including copper, silver, oil, wheat, and cotton—remain FAR lower than 10 years ago and real assets cost less now than they did a decade ago.
And the prices of inflation options imply only a 1-in-5 chance that the consumer price index will rise more than 3% each year over the next five years, on average, and only a 10% chance that prices will rise more than 3.4% each year. Those implied odds are far lower than the implied odds in 2012, and about the same as in 2017-18.
The persistent weakness of inflation explains why the Fed and other central banks around the world have felt compelled to lower interest rates since the late 1980s in an attempt to stoke private borrowing and spending.
Key Point: That in turn explains why the federal government is spending far less on debt service now than it was 30 years ago—even though the debt level is so much higher now. It all suggests there is a great deal of capacity and scope to borrow and spend more money without harming the economy.
Then there is the real cost (after inflation) of net interest of the Federal Government interest payments. The real cost of the federal government's debt bears no relation to the total amount of debt outstanding. The Federal government net interest payments relative to gross domestic product. At about 2%, we have the same outstanding debt to GDP ratio as we did in the 50’s.
On top of all this, borrowing and spending on the right things should also increase the economy’s productive capacity, which would make everyone better off and further reduce the risk of excessive consumer price increases.
Action to Take: Throw out those "Hyper-Inflation Coming to America--Go to Cash and Gold NOW!!!!
It's bad analysis and the scare tactics are just to sell you a newsletter.
You alerady have to top performing investment newsletter service 2013-2020...you don't need another! :)