The Law of the Investing in An Age of the Unimaginable: Our Six Month Portfolio Review and 6-Month Macroeconomic Assumptions
The Law of the Investing in An Age of the Unimaginable: Our Six Month Portfolio Review and 6-Month Macroeconomic Assumptions
Dear Subscriber,
Believe it or not, in the worst first six months for stocks since 1962, we crushed the market with 67% of net profits closing out our model portfolio on June 10th into the end of the still hard-to-believe melt-up in energy REXIT sector stocks.
We will start to rebuild the Ultra Income + Growth favorites buy unders (and a few new plays) with our huge stash of cash safely sitting on the sidelines. We will also (when appropriate) will add some GARP ("growth at a reasonable price/value) AFTER we get through the most important earnings + forecast period of the last decade starting tomorrow.
My best advice is you should NOT BE in a rush to do anything right now.
The extreme volatility in stocks and commodities still shifts from day to day with geopolitics and now we enter Q2 earnings season where Mr. Buffet likes to say "we get to see who has been swimming naked" with the EPS tide going out from inflation and lower unit sales margins.
But first--let's take a deep breath and lets' be real with each other. IF your self-directed investor brain is NOT spinning like a compass sitting on the North pole after the last 6 months, you are not human. Over the weekend I compiled at least 40 DIFFERENT macroeconomic events that have exploded into a mind-boggling calculus of "macroeconomic forecasting data points"--literally, mind-boggling.
For instance . . .
Who went to sleep on Jan 21, 2020, and imagined the single Covid-19 case identified in Washington State would become a national and global pandemic and the new BA.4 BA.5 variants would be till be infecting millions a month around the world 2.5 years later and are as contagious as measles??
Who imagined the Covid-19 coronavirus would kill over 6 million fellow human beings worldwide (more like 12 million as India and China report just 500,000 dead) and leave 1-in-5 infected with debilitating "long covid" symptoms ? (one of the many reasons including the Great Retirement of 55+ aged work force why the BLS data of ""2 Americans available for 1 US job" is vastly overstated rubbish).
Who would imagine the US Federal Reserve (Central) Bank and Federal Government would add over $9 trillion of monetary stimulus to the US economy since 2010 (nearly 25% of annual GDP) and $15 trillion including other Central Banks?
Who imagined the yield on a US 10-year bond would be less than 0.50% for 10 years and negative -2.25% in Germany and Europe for the same time period?
Who would have imagined stocks would go UP 16% in 2020 in a pandemic and them 27% in 2021 while STILL in a global pandemic?
Who would imagine that 25 million GenZ and Millennials would open 25 MILLION new stock brokerage accounts in 2020-21 with their "stimmy checks" and become the new marginal buyer (i.e., non-price sensitive speculator) of SPAC/ARKK/MEME stocks and call options?
Who imagined Russia would blatantly and unprovoked invade Ukraine to annex sovereign Ukraine land and its wealth of commodity assets and technology into the Russian Federation? (OK Ukraine did--they have been warning NATO about this for years).
Who imagined that China--the second-largest economy in the world at $15 trillion--would chose to fight Covid by lcreating a zero-tolerance covid policy that literally locked down 25 million citizens at a time in Shanghai and Beijing and other major manufacturing super cities for months (and thus ball up supply chain inputs for 18 months?)
Who would have imagined that the 70% services/30% goods US economy would flip almost overnight to a nearly 70% GOODS economy for 1.5 years or that @25% of office-based labor 1) no longer commutes to the office and 2) millions of families moved from high price urban communities/sold their homes and 22% of homes sold in work-from-anywhere suburbs would be bought for cash at 50-200% higher values than pre-covid 2019?
Who would have imagined we would PULL FORWARD 5-10 years of demand for Zoom calls and suburban homes and new kitchen appliances and Netflix programming in just 6-12 months?
OR that we could LOSE 4 million jobs in America in 2022 and 2023 and STILL BE at just a 3.8% unemployment rate--how do you have a real recession at 3.8% unemployment aka full employment? Another "unimaginable" event!
You get my drift. To undergo ALL the once-in-a-lifetime events in the super-compressed 24-month period can only be compared to the US entering World War II in1941 and converting into a wartime economy.
As such, expecting existing traditional economic models to predict an economic recession or what is a reasonable expectation for the price of hydrocarbons when the largest exporter of oil and natural gas in the world (aka Russia) has created Cold War 2.0 and weaponized Russian oil, natural gas, coal, and food commodities in order to inflict economic damage on NATO countries especially Europe, is basically cray cray.
Ok, so tell me the good news!!
This chart of lumber prices could be copper, aluminum, steel, iron ore etc all with 20-50%% down moves in metals and food commodities...and 25 days of wholesale gasoline price drops...plus a14% drop in the bellwether semiconductor prices (the barometer of costs of finished electronics products as diverse as laptops, dishwashers, LED bulbs, and medical devices delivered worldwide) is now half its July 2018 peak and down 14% from the middle of last year.
Or the 36% drop in the spot rate for shipping containers -- which tells us more about expenses we can expect later in the pipeline for apparel in Chicago, luxury items in Singapore or home furnishings in Europe -- since its September 2021 all-time high.
North America’s fertilizer prices -- the best indicator of where global food inflation is going, are 24% below their record high in March...and short-term nat gas price drop due to Freeport LNG plant debacle . . .
. . . the good news is WE CAN say without a doubt that we hit PEAK INFLATION in June and July...that is a start!
Yet ironically, without the truly unimaginable set of events from January-April 2020 to today, many of you would not have literally earned a lifetime's worth of profits (remember the annual return from stocks since 1958 is just under 10%) that we have navigated together in the last 28 months since
1) going to "Full HEDGE" in late January 2020 and "Full CASH-Sell It All!" in mid-February 2020 25 days later our TR Intel Network from within China revealed the pandemic was massively bigger than being reported by China (yea I know--its shocking) then
2) Bravely going FULL LONG into the 40%+ March market meldown in early April and May 2020 with our now beloved Ultra Income+ Growth and Ultra Growth portfolios when the stock market locked up and melted down 40-70% in March to early April
3) Closing Out the Ultra Growth tech stocks we still held with decent profits in March 2022 and
4) Taking insane unimaginable profits on our Ultra Income + Growth plays up 300% to 600% including dividends paid to your accounts on June 10, 2022.
As one of our brave managed account clients from early 2020 texted recently " When we went to cash in February 2020 and you said, "OK--now DON'T LOOK at your account for a while, ok?" I decided to not look till the next year and a bit. When I looked at my $500,000 account at $1.24 million and I about had a heart attack. When I looked again this January, I about had another heart attack--but when you sent out the note that you had taken ALL the energy profits on June 10 into the energy "melt-up" as you described it, my $500k original account was worth $2.1 million.
I told my wife Shiela I was going to retire at the end of 2022--about 8 years ahead of schedule! Wow wow wow!"
My point? The only way to describe the last 24 months of stock market investing is "unimaginable" and you and I need to appreciate that earning 30+ years of stock market profits in 26 months is likely never going to happen again for those of us over 60+ (of course I said the same thing at the end of 2021 lol).
Having lived through and managed money during some of the most unimaginable events of the last 25 years (especially in the 2000 Dotcom crash & the "GFC" in 2008-2010 and the last 26 months), I developed some basic rules to make rather amazing profits and more important KEEP THOSE PROFITs when we are investing in a business and market cycle becomes driven by unimaginable macroeconomic events.
Unimaginable Event Investing Rule #1--There ARE no models or rules that apply during times of unimaginable events
But we do know the following facts regardless of how many unimaginable events pile up:
1) Since 1929, the U.S. stock market has been in a bear market 25% of the time--but when a bull market ascends to never before seen levels of speculation and exuberance, that valuation bubble will ALWAYS pop eventuallyand will take (on average)18 months to find a bottom and washout the most recent speculative irrational exuberance.
2) In a bear market that precedes a Fed rate hike-induced recession where inflation rates are higher than GDP (aka stagflation) the Fed HAS TO raise rates HIGHER than the ex-energy + food price CPI rates to create slack in the economy to break the inflation monster.
3) In the land of the blind investor, the one-eyed investor watching Price Action, Support/Resistance Channels, and Volume Trends in king because all the above technical readings tell you where the long-term pension money is willing to value any given stock on any given week and the bottom of the trading range.
4) IF you are in a bull market and the bottom range of one of your fave stock trading ranges is broken, sell first and ask questions later
5) When a Stock/Sector/Option You Own Delivers Statistically Unimaginable Orders of Magnitude Appreciation (say 10X+ the 10% annual average return of stocks since 1958) or doubles (or more) in price in a few months (i.e., $ECTM $SJT $NKLA stock/options $OPTI $MRNA call options, etc) use 15% below closing price sell stops and keep moving them up every day until the stock price action goes parabolic and THEN falls from the sky.
6) When the Tranformity MacroMarket Index drops below 15 (as it did in March 2008 and early March 2020) you go to cash
7) Pay the friggin taxes if you hold these rare event-driven stocks in a taxable account and don't screw up the very rare investing events in your lifetime by "saving" taxes--sell the LOSERS you hold to was as much tax as you can.
PS: I know that many of you who live in high capital gains states like California New York Connecticut etc are loath the take short or long-term capital gains because you HATE paying taxes on risk assets you sell--I get it.
All I can say is virtually EVERY investor for whom we manage money has a very sad story to tell about the "monster stock" that gave back 50% or more in a few short days because they did not manage the elevated risk of a stock or option that is fortunate enough to go into the "unimaginable rapid appreciation zone."
There are exceptions of course--truly revolutionary stocks like Apple, United Healthcare, Google, Amazon, Microsoft and Tesla bought in their early days are amazing companies and complete outliers to the Law of the Unimaginable Events and until 2022, they were truly "hold forever" stocks.
All of which brings us to today.
It is a statement of the obvious but needs to be stated: We are all living and investing in the most recent bout of an almost unfathomable set of unimaginable events and we HAVE TO assume standard economic models will not accurately give us wisdom on what to do next.
THE best news I bring is IF the stock market really does look 6-12-18 months AHEAD to establish discounted present values of stocks and bonds, we are increasingly getting strong signals of an investment macro narrative regime change--from
1) "OMG 8% Inflation Is Here--buy commodities" to
2) "OMG--it looks like we are going to have the first synchronized GLOBAL GDP recession
3) With the United States economy where BLS data says there still are 2 job openings for every person looking for a job ( a calculation that I strongly doubt BTW--more on that issue next week)
4) with pretty sticky 4% ish inflation means a base case of "stagflation" aka higher inflation than GDP growth rates which means
$BUY secular growth and high income plays at reasonable price/valuation+ the REXIT natural gas/LNG/LPG/High Dividend Oil EP complex stocks+ plus GARP healthcare players with S-Curve EPS catalysts (i.e. new exciting products or large exciting procedure backlogs) !"
Caveat: All the above makes sense AFTER we get through Q2 earnings and forward guidance season starting this week so we can gauge
1) How large will the "earnings recession" be for SP 500 companies (we have had the P/E compression--now we need to know what the forward "E" aka EPS or earnings per share look like)
2) How brutal is the record high dollar valuation (today I bought euros for a $1--last time in Europe we paid $1.25!) be on repatriated earnings for multinationals especially global mega tech companies
3) How much of the 8.6% price inflation and 50% higher diesel + transportation costs could companies pass through to consumers?
4) How much did #2 and #3 lower gross margins?
ALL the above makes a strong base macro case for a period of stagflation that everyone hates.
We know that Europe is crushed by energy cost inflation and a European recession (like the US) is already happening--we just know how bad it will get for Europe aka we don't know how badly Mr. Putin's ego has been damaged and how badly he now wants to punish his neighbors and NATO for standing with Ukraine.
UPDATE: We Still Have the Market Murderers Row of the Gale Force Headwinds AS we patiently wait for the final market PUKE (40+ VIX and Historicly HIGH Weekly Volume)
With the Fed's Everything Bubble more than halfway to becoming fully demolished, the US and Global GDP and EPS headwinds are still pretty stunning when you add them all up as we roll our of earnings quiet period and into the mid-July earnings and forward guidance season kicks-off this week:
1) US recession by our math ALREADY in a mild recession as the July Atlanta GDP Now Index proves
2) Massive EU Central Bank tightening raises odds of EU recession to about 100%
3) A 250% higher cost of the capital based on the US prime lending rate
4) Salary and Wage spiral slowing but very sticky (wages and salaries ONLY come down in powerful recessions)
5) Layoffs start to bite in ALL the industries that OVER hired into the pandemic
6) General recession cost-cutting and lower UNIT sales volumes from HIGHer prices = LOWer margins
7) Historically HIGH $dollar vs. Yen and EU and pound makes US exports and energy cost more
8) Repatriating foreign currency sales into $dollar cuts the gross margins
9) Discretionary durable goods sales fall as life essentials costs rise
10) Bottom 60% of US households ie <$65k gross income and 40% of households that do not own their home have no savings to fall back on and are now putting essential spending on credit cards
11) 2 months of Leading GDP Indicators down another 0.4%
12) $16 TRILLION of wealth has now gone to money heaven (stocks, bonds, crypto and equity lost in homes purchased in the last 24 months) aka a MONSTER Negative Wealth Effect on discretionary spending by the top 70% of households ranked by income
13) The endless Ukraine war
14) The upcoming Q3 Negative Earnings Revisions and Lower Price Targets
15) Over 6-7% CPI prints through the summer because the big inflation factors (41% shelter cost weighting) are not going appreciably lower
BUT NOW we have added additional GDP drags/EPS drags to the list
16) Fed futures tell us the "Fed Put" aka stock market bailout is lowered to a 50% crash--30% is not enough
17) Retail bankruptcies are about to hit a perfect storm of higher inflation-based rent increases and hourly wage spiral
18) Reverse Wealth Effect: Many analysts now roughly calculate that every 10% decline in SP 500 plus 1% gain in 10 Year Treasuries = 1% LOWER GDP growth
19) NFIB surveys of small businesses say 72% have raised prices while their 6-month forward outlook for a stronger economy hit record lows
20) The spread between High Yield corporate bonds vs. US Treasuries has widened more than 2% which is a leading indicator of rising default rates of lower-quality corporate debt
21) Apple--largest market-cap-weighted stock in SP 500-- is still at a 21 p/e or a 38% premium to the SP 500 stocks--and they only have 10% recurring revenues (i.e., vulnerable to consumer spending pullback + pandemic pull forward sales).
22) You don't micro-manage 8% inflation with a pick ax--you have to use a sledgehammer and JayPow just re-promised to do just that until the inflation genie is back in the proverbial bottle
23) Coast to Coast’ Housing Correction Is Coming, Says Moody’s Chief Economist aka a Housing Bust with 6%+ mortgage rates
24) "Soft Landings Are a Myth When the Fed is Tightening 400bps into a Rapidly slowing economy" or as Larry Summers points out (who has been dead right on his inflation calls) "When you have unemployment UNDER 4% and inflation ABOVE 4% within 18-24 months recessions have ALWAYS 100% of the time occurred because the economy is going to HAVE TO create significant SLACK in unemployment and GDP growth to bring inflation down to acceptable levels.
25) US Industrial Output has downshifted sharply in May and June
26) Auto loan defaults and rental evictions spiked in Q2 2022
My Message to our subscribers and managed account clients?
1) No one calls the exact bottom of a bull market --but I have been on the record VERY CLOSE in 2003/2008 and of course April 2020.
2) The magnitude of the multi-$trillion UNWIND of the Fed's historic QT/ZIRP/Everything Bubble era has to be highly correlated to the magnitude of the 12-year windup of the Everything Bubble era.
3) The 50-100 week support lines still look like the profitable re-entry points
4) This bear market does NOT END until the Fed shows us they are done raising rates
5) And as noted above, Fed Funds rates HAVE TO go above the PCE inflation rate to create enough slack in demand
6) To give us ANOTHER historic opportunity to earn 200-300%+ returns on the economic recovery
NET NET the path of least resistance is still DOWN for overall market indexes UNTIL FED STOPS HIKING RATES with rip-your-face-off short-covering rallies (which should be SOLD).
Here are the links explaining our path to our bear market forecast to click again:
1) TR's 2023 Recession Base Case: Why The Fed's "Immaculate Monetary Tightening" aka Soft Landing Narrative Is Mathematically Impossible
2) TR's 2022 $SP 500 DOWN 35%-40%/Nasdaq100 DOWN 50%+ Bear Market Case: Why The 2002-2023 Bear Market for > 16+ P/E Stocks Is a 100% Certainty
Toby