Our TR 2022 Ultra Growth & Income Game Plan For The Post-Pandemic World
Hey Subscriber,
OK now let's start to build our Transformity Research "Super Secular Growth Sectors" and add our favorite stock picks (including stocks from our TR Master List) for 2022.
Note: I know from publishing & editing investment newsletters for 25 years and conversing with our All-Access members in the All Access trading room that you DIY investors own a LOT of stocks not on our current buy list (including stocks we closed out in our February 2020 "Go to Cash" advisory including NVDA AMC NEWT MU that have totally rocked since April 2020)
Note #2: In response to the many requests to bring some of you $$$ for TR Wealth Management to run for you, my 20-year financial services veteran bride Marjorie Sutherland-Smith (with Charles Schwab/US Trust) will soon be ready to take on more wealth management accounts after she updates her Registered Investment Advisor statue and we can expand TR Wealth Management clients.
TR Portfolio 2022
We will publish our FULL Ultra Growth Sectors and Stocks portfolio picks over the next few days for subscribers in addition to reemphasizing our core game over Digital Transformation Dominators Meta (FB) Adobe Apple Amazon Microsoft Google Spotify Taiwan Semiconductor and now Salesforce.com now FAAAMGSST with update buy under prices.
We are adding Salesforce.com CRM today--the original all cloud software play--to the Core Ultra Growth buy list under $306--its 25% CAGR is unstoppable over the next 3-5 years and we have to assume additional tuck-in acquisitions like its Slack.com deal just completed will expand its global dominance in the enterprise customer relationship management SaaS world.
Our 2022 Secular Growth Sector & Stocks Investment Theses for 2022
As I mentioned in our Ultra Income 2022 Playbook, other than some random Black Swan event crashing the global or US economy, our theses on how we continue our 8 years of outperforming the negative after inflation "risk-free" bond market and the SP 500 Index by 300-600% is as follows:
1) At this point in time, the stock market bubble will continue long into 2022 with the reappointment of Fed Chairman Powell. This bubble is of course engineered by the implied US Federal Reserve Stock Market "Put" (an implicit promise that the Fed will come to the rescue of the American stock market if our economy is once again hit by a financial crisis, plague, or another unforeseen exogenous event) and our bet on the "Don't Fight the Fed" will continue because
2) It's clear to us that the historic levels of monetary and fiscal stimulus have defacto made the US stock market "TO BIG TO FAIL."
Have we reached the point of moral hazard where the price discovery mechanism of publicly traded stocks has been inalterably broken? Not in stocks--just ask the shareholders of CHEGG, Peleton, Tesla, or other high flyers that missed earnings and took down forward guidance last week down in 30- 50%+ demolitions (Tesla's quick 20% reversal was caused by an Elon Musk tweet--that is another story.)
3) In short, since the Financial Meltdown in 2008, there has been NO "impending disaster event that could overpower the To Big to Fail US stock market--even the Global Pandemic Bear Market only lasted 85 days (but I am glad we went to high levels of cash so we could scoop once-in-a-generation bargains just the same).
Here is a great chart that tells the To Big to Fail Fed backed US Stock Market story:
4) The Old School Traditional 60% stocks/40% bond allocation theory does not work for pensions or your portfolio with 10-year treasuries under 3%. That is the conclusion of 100 years of research by long-time pal Jim Paulsen the Chief Investment Strategist of The Leuthold Group, LLC who has been dead right on the 2010-2022 bull market since day one. His research is 100% clear--when the 10-year Treasury bond was above 3%, bonds significantly cut portfolio volatility. Conversely, when 10-year Treasuries were UNDER 3%, stocks averaged 17% annual returns while going with the class 60% stocks/40% Bonds portfolio CUT your portfolio returns to 11.1%. And measured by real after-inflation returns, when 10 year Treasuries were under 3%, stocks delivered 13.75 annual returns while bonds delivered...ZERO after-inflation returns.
5) 22 forward P/E is the new normal because A) just the US money supply alone is up to $5 TRILLION since the pandemic relief packages started B) we have been in a technology and supply chain revolution since the early 90's that has now accelerated our economic productivity and C) rising productivity (sales volume per employee) is rising significantly in the now nearly post-pandemic/covid endemic economy which allows is absorbing much (not all) of the sticky wage increases that have come via 5 million-ish fewer workers in the labor force.
However, where we have lost our financial minds is in the bond market where the price discovery and repricing by those nefarious "bond vigilantes" for secular inflation is virtually nonexistent because the Fed with its quantitative easing aka QE has essentially rigged the Bond Market for 12 years.
Look--investing your money (or someone else's) is always a risk vs. reward assessment. But right now, with the "Fed Put" and guaranteed-to-lose money negative returns from "safe" risk assets, we continue to live in a "TINA there is no alternative to secular stocks" world--especially secular growth stocks with high levels of recurring subscription 80% gross revenues growing 20%+ in economies that are reverting to 2-3% growth in the endemic Covid world economy that arrives by 2023 at latest (we hope).
In fact, one could make the argument that growth stocks (relative to historically expensive bonds explicitly guaranteed to LOSE YOUR MONEY) with real earnings are the cheapest they have EVER been--stay with me.
LOOK--if you look solely in a vacuum at the price-earnings ratio on the S&P 500, it’s in like the 99th percentile compared to the last 30 years. But if you think stocks are expensive, then traditionally bonds should be cheap---but have you looked at bonds recently? IF you compare the PE ratio of a stock and invert it (to value the stock by their earnings yield), the yield you get on bonds after inflation is a NEGATIVE 4-5% yield.
For example, say a stock P/E ratio is 10 ($20 per share ÷ $2 earnings per share = 10 P/E or 10% earnings yield). This information is useful because, if you invert the P/E ratio, you can find out a stock's earnings yield. To find the yield, the equation looks like this: Earnings yield = earnings per share ÷ price per share.
Key Point: With Treasury bonds trading at the 99th percentile of real return prices, and given that secular growth stocks after inflation earnings yields are still RISING while real bond yields are negative 4% and dropping, based on their REAL corporate earnings yields, seculargrowth stocks are as cheap as they’ve ever been RELATIVE to the alternative of guaranteed money-losing bonds.
But make no mistake--in the world of transformative but no revenues or no earnings EV ecosystem/Green Energy/MEME and day trading stock options, we are in a bubble very similar to the late 90's fevered retail investor DotCom stocks valued by eyeballs. My old business TV commentator buddy from Merrill Lynch (now RBA Advisors) Richard Bernstein published a prescient note on the part of the market for stocks (and crypto) that is dominated by the 30 million new Zoomer aged YOLO HODLers brokerage accounts opened since 2020 who primarily get their "research" from stock and option day trading message boards on Reddit/ TikTok/ Twitter/ Instagram/ Facebook/ YouTube/Discord/StockTwits/Telegraph and good ol' Yahoo Message Boards (and can you imagine how out of hand Dot Com stocks would have gone in the late '90s if ALL these stock pumping social media were available 24/7/365 in 1999???).
According to Richard, " The sky-high valuations and ridiculous one or two days 100%+ moves might not even be the biggest concern. The five sure signs of a bubble: 1) oodles of liquidity ($5 trillion), 2) a big increase in leverage, 3) the “democratization” of the markets (you know--like when Barbara Streisand was giving DotCom stock picks on the Johnny Carson show!), 4) significant growth in the number of initial public offerings, 5) and a pickup in day/call option trading."
Obviously, ALL these five bubble factoids are in today's markets in spades--and he left out Shiba Inu and The Squid crypto tokens and SPAC trading fever from February 2020 to March 2021! But RBA also makes the money shot point: “The difference between mere speculation and financial bubbles is speculation resides within the financial markets, but bubbles pervade society.”
As I have shared since we existed the SPAC trading service (600 SPACS created in 12 months killed the golden goose of warrants exploding 100-200%+ on the announcement and deSPAC IPO days), clearly the 20-30 somethings YOLO FOMO hordes buying MEME or PUMP or hot IPOs like the $SEV our All Acces traders traded last week with market orders blindly piling into huge volume craziness, the new marginal buyer of stocks and call options on the American stock market IS the YOLO/HODL crowd.
And collectively, they have enough capital to take the frothiest parts of the market over the edge--especially in crypto where with $100 you can buy $1000 of BTC, ethereum, or another large-cap crypto with 10-to-1 leverage (or more if you are a "whale.")
The BIG Risk We Are Monitoring Closely: Runaway Inflation & A Bulletless Fed Backed Into A Financial Meltdown With No Choice But Raise Fed Fund Rates Paul Volker Style
I am NOT forecasting a Volker-style 21% economy-killing Fed Funds rate ok?
But as I shared in the Ultra Income Playbook newsletter last week, the big issue and risk on the table for us stock investors going into 2022 is a secular/sticky PCE inflation with inflation now out of the genie bottle and only one way to stop it--massive Fed rate hikes. We all know that inflation hasn’t been this high relative to Treasury bond yields since the 1970s. What IS concerning is real bond yields—the gap between the 10-year Treasury and inflation—are normally taken as signaling distress for policymakers and market participants that normally gets a significant Central Bank monetary response.
Moreover, according to stock market history since 1970, negative real Treasury bond yields typically have corresponded with a plunging stock market. Example: Yields reached a low of negative 4.9% in 1974. During that year, the S&P 500 fell 37%.
Today, real yields of negative 4.7% are the second-lowest since 1970, yet the S&P 500 has risen nearly 30% over the past year.
Hmmm. So what is different about the US economy and the stock market today vs. the 70's pray tell?
As the economist and noted Fed watcher Lawrence Goodman posted in a Wall Street Journal Option piece last week entitled "How the Fed Rigs the Bond Market", the difference between the 70's and 2021 bond market is the U.S. Treasury bond market (as we have been sharing with our subscribers since 2013) has been systematically rigged and manipulated by the Fed's second QE (qualitative easing) since the program started in 2010.
And glory hallelujah for us stock market investors and homeowners--between the March 15, 2009, stok market bottom (which I called on Fox Business Network as an analyst--better to be lucky than good!) the Fed has made you rich (or richer!).
From our beginning, we have said that the systemic manipulation of Treasury bond prices by the Fed (who has been the marginal buyer i.e., NON-price-insensitive buyer of Treasuries since 2010) exploded in scope and scale enough to eliminate normal market "price discovery" as Fed purchases on treasury debt has funded 60-80% of the Federal government's ENTIRE borrowing binge.
Key point: To stay long secular stocks in 2022, we are betting Chairman Powell is NO Paul Volker ready to dish out the 21% Fed Funds rate of the late 1970s that was needed to crush runaway price inflation (and crushed the US economy and stock market).
Let us all agree on this point: since 2003, the deflationary forces of the high-speed internet, Amazon/Walmart e-commerce, low non-COLA minimum wages, worker productivity gains, and offshore supply chains held inflation below the Fed's 2% inflation targets.
Realy Key Point: What happened in the pandemic years 2020-2021 is those deflationary forces of the past flipped and became inflationary forces--the FED decided to ignore this 180-degree turn in price inflationary dynamics and came up with the "transitory inflation" narrative/mantra. And it's only been in the last few weeks that Chairman Powell has been willing to admit "Eh--hold on a second...there appears to be an only little transition in transitory and we UNDER estimated the "sticky" parts of price inflation and energy prices."
Really Key Point: NOT fighting the Fed has been our core investment theme and bet since 2011, and I think it's a pretty high-risk bet to start fighting the Fed in 2020 simply because the Fed Chairman has nary a bone in his body strong enough to "Pull a Volker."
But I think we ALL should understand how massive the Fed intervention in the capital markets actually has been via quantitative easing (i.e., the Fed pressing a button and adding newly created dollars out of thin air into the monetary system via purchases of bonds with electronic bank deposits from the Fed) that has allowed us Transformity Research investors to generate 60% ish annual yields since 2013 and earn oodles of 15%+ dividends every year while even pre-covid related inflation real bond yields were close to or below zero rates of after-inflation returns.
I'd like to take some of the credit, but as my twin brother Brian likes to say "even a blind 3 legged dog with a note tied around his neck" could make money in stocks with 12 years of negative real (after inflation) yield bonds.
Can you say TINA?
According to Mr. Goodman's research since 2010," the Fed's purchases of Treasury debt have funded as much as 60% to 80% of the entire government borrowing requirements on its balance sheet. In other words, Fed QE has simply crowded out private-sector bond price discovery for more than 11 years.
$Trillions of QE obviously has kept real "risk-free" yields negative and TINA (there is no alternative to stocks if I am guaranteed to LOSE money in bonds) has taken growth stock prices to record highs. The consequence of this blurred line between Fed and Treasury responsibilities—“monetizing the debt”—is monetary inflation" and this time there are no "bond vigilantes" hedge funds like the '70s and 80's around to short bonds to keep the Fed honest.
I know this because amazingly in fiscal 2021, the latest data shows the Fed purchased $1 trillion in Treasury debt, and the Treasury drained $1.6 trillion from its savings account at the Fed. These actions covered nearly the entire budget deficit, equal to 12% of U.S. gross domestic product, and nearly all the pandemic-related government borrowing.
Based on monthly estimates, Goodman makes the point that since there was actually a funding surplus this past summer, it's no wonder the 10-year Treasury yield reached a low of 1.17% in August despite high inflation rates.
Welcome to Jay Powell's Magic Gin and Tea Party!
In fiscal 2022, less pandemic-related spending will likely mean a smaller budget deficit. Yet even with Fed purchases ending and the Treasury savings account at the Fed depleted, Goodman estimates that government borrowing with the new Infrastructure Plan and "Build Back Better" could still easily reach $2 trillion, or 8% of GDP.
In addition, the US Treasury will need $500 billion in fresh funding just to rebuild its Fed bank account.
Key Point: As I shared in the last newsletter, the systemic American inflation genie, for now, is OUT of his bottle and NO ONE has the Volker guts to put him back in. We can ONLY CONCLUDE that the Fed has no choice but to keep interest rates low and allow inflation to at least erode the value of $trillions in government debt.
The good news for us as stock market investors is the only bet that makes sense in 2022 is to stay on and ride the Fed fueled equities pony...that real yields (after inflation) will remain shockingly negative and allow long-duration secular growth stocks with 80% gross margins and commodities like EV metal and rent-seeking real estate to remain the most powerful wealth-creating force every seen.
In short, in the world of $100 trillion of negative-yielding global sovereign debt, the United States is still the best house on a very ugly block.
What would change our portfolio structure? The concentration risk associated with the FAAMG cohort is nothing new, but one concern for 2022 is “slow-flation” and secular stagnation gives way to persistent price pressures and robust nominal growth, perennial long-duration secular growth favorites could lose their macro tailwind.
Really Key Point: Now IF the world of US Treasury bond owners for some reason decides to sell THEIR US Treasury Bonds (which is highly unlikely since the negative real after-inflation returns on the other major sovereign debt are SIGNIFICANTLY worse than American debt), we will make radical changes in our portfolio mix in light of a bond market shit show starting with variable-rate mortgages and bonds and non-bank fintech and secular productivity building growth tech that do NOT HAVE significant fixed or variable debt.
But again, wildly unpredictable financial-market volatility would restrain growth and job creation in a country healing from a once-in-100 year pandemic--and the Fed Put (stock market intervention) and QE 3.0 is only proven playbook the world's largest Central Bank can play.
Of course, the bad news is if and when we have the NEXT global financial crisis, the fallout could be even more damaging to leveraged debt markets, and eventually, even the Fed will not have enough QE bullets to save the world.
But hey--let the 40 million new Yolo and FOMO Zoomer investors on social media deal with that eh?
NOTE: IF we see that catastrophe sets itself up, we will be short equities and in gold, bitcoin, and inflation TIPS bonds!
Final Point: In the land of the blind (The Fed) the one-eyed man is king. Even the one-eyed king can see the "transitory inflation" narrative has been proven bogus and the math whizzes at the Fed have missed the obvious.
Thus in the United States of 2022, we will have both monetary inflation--too much money chasing too few goods and services--and we will have post-pandemic year-over-year labor wage inflation. The GOOD news is that CPI inflation is measured year-over-year. Thus 2023 inflation will NOT be measured against the highest inflation rates in 30 YEARS aka 2021--and 2022 measured against 2021 price inflation should largely NOT be affected by pandemic-related supply chain SNAFUs and semiconductor chip shortages.
But let's make no mistake: insufficient available skilled labor does push wages higher and higher wages ARE NOT TRANSITORY. In fact, in the recent John Deere Union labor strike, labor settled with JD management on a very sweet deal; an $8500 restart bonus, 10% raise immediately, and other benefits. But the shocker was John Deere UAW labor ALSO got "Cost of Living" adjustments aka COLAs starting in 2026.
Now--even though Union labor is about 11% of the US workforce, you think the OTHER UAW unions will not strike for the same COLA deal--including automakers, Amazon and Walmart, and their millions of low-skilled labor.
Key Point: In the '70s, 28% of the American workforce was unionized and ALL union contracts had COLA deals. With the oil embargo and energy prices skyrocketing, a CPI inflation feedback loop exploded and higher COLAs caused higher EMBEDDED cost inflation, which triggered higher COLA labor costs which formed a negative cost/wage feedback loop and remember, those newfound higher wages NEVER go lower UNLESS there is a deep recession.
Also let us not forget that 10,000 Americans turn 66 every day till 2030 and qualify for maximum Social Security (unless they are rich enough to not take checks till they are 71 and earn a 24% bonus in their monthly checks)--and Social Security HAS COLA adjusted benefits for 65+ plus million beneficiaries who get a check every month. Congress will 100% HAVE TO raise the employee/employer contributions--which serves to TAKE more money out of the American paycheck--and everyone paying in will want a higher salary or hourly wage to compensate for lost buying power ESPECIALLY with price inflation raging.
Final Points: 1) With the high cost of extracting crude oil out of fracked American oil wells ($57 per barrel on average), gasoline prices at the pump are NOT headed back to $2 a gallon...not with OPEC+ seeing the EV market share climb 4-5% a year in vehicles on the road (and soon transport vehicles as well).
It is NOT in OPEC's interest to get in a price war with North American oil and gas producers again--they tried that in 2014 and lost their ghutras. Thus we should expect crude oil and natural gas prices to stay within a positive economics E&P pricing band now that Wall Street and ESG investors have either boycotted funding uneconomic energy drilling or ESG mandates remove bond and debt capital from the energy E&P world.
2) America and Americans are slowly learning how to live with endemic Covid. 82%/228 million Americans are partly vaccinated/71% fully. Almost every full-grown adult knows someone who has died of Covid or is now suffering long-haul symptoms for life--that reality for many overcomes their political identity. Lord knows how many anti-vaxxers have reached natural immunity (yet unfortunately it is the unvaxxed that now comprise 80%+ of hospitalizations and deaths in the USA.)
Thankfully, we politically polarized Americans are slowly accepting the fact that the Covid shots are not foolproof vaccines (yet) like polio or measles but more like flu shots which need to be done every year. "Breakthrough" Covid cases of the vaccinated were up 31% in a week but both the Pfizer and Merck anti-viral therapeutic pills are breakthrough remedies for minimizing Covid infection death and long haul symptoms.
By NEXT Thanksgiving, we should be reasonably back to normal and maybe some of those early retirees will be bored doing nothing and ready to restart their careers at HIGHER wages.
Next Up: Part II: Our Favorite Secular Growth Super Sectors and Favorite Secular Growth Stocks for 2022 OUTSIDE