August 2018 Newsletter Part 2: Changing Up the Plays & Players for Q4

The Power of Secular Transformational Change Q4 2018


Dear Subscriber,

While Venezuela implodes, Turkey gags on foreign denominated debt 3X their now expected GDP for 2018  and my favorite South American country Argentina raises interest rates to 60% (payable in worthless pesos btw) you would think the capital markets would seize ala September 2008 with the $trillion collapse and bankruptcy of Lehman Brothers.

But they have not. Why? Well, the easiest answer is real $$ impact: if you combined ALL of those countries GDP and they went to zero, you would lose the GDP of the state of Washington. The US is a $20 trillion economy and the rest of the world an $80 trillion economy--in the big picture, these countries don't move the global capital markets needle. As it stands they are in chaos but that chaos is mostly restricted to those countries and their capital markets. VZ and Argentina have been shit shows for 10+ years and Turkey is too strategically important to the middle east for the West to let fail--so it won't. Western bankers will extract their pound of flesh and the EU will extend a lifeline because they have to. 

Why did Lehman screw the global financial pooch? When you unwound all the counterparty risk they had (banks that financed the $10 trillion of liability they held against @$600 billion of equity) now THAT was a financial contagion since all THAT liability was spread around to the world's 20 largest financial institutions. Don't forget that THOSE banks all had balance sheets leveraged 70-200X and had borrowed short-term/lent & invested in long-term assets. 

My point as we get to the 10-year anniversary of the Great Financial Crisis of 2008? 1) We as investors need to keep context and impact at the top of our minds as we scan the horizon for economic and financial risk and 2) There are financial shit shows and there are REAL systemic financial meltdown shit shows.  The former are sideshows that don't really leave a mark; the latter is a worldwide margin call and THAT is how 55% down market crashes happen in the global capital markets. The Great Financial Crisis & Recession of 2008-2009 was caused they way ALL financial crises are caused: somebody borrowed a whole lot of $$money with short-term roll-over loans and bought a whole bunch of illiquid assets. When the short-term lenders could not or would not roll-over the short-term debt, Lehman could not sell the illiquid assets and poof! 

Speaking of context, as the POTUS threatens to withdraw the US from the World Trade Organization that WE STARTED along with our 164 other countries representing 98 per cent of world trade, let me share the conclusions of my economics and investing friends that convene at the Kotak Capital fishing and discussing meeting from last weekend lovingly called "Kamp Kotak." I have attended this meeting of institutional investors in the past and you come away understanding what the folks with $trillions at risk are doing and how they see risks.

Here are the insider’s expectations I heard from a China trade expert (who is not at all a Trump fan, by the way). 

  • The US and Mexico are very close to a bilateral agreement on NAFTA issues. Incoming Mexico President Lopez Obrador is on board, but it will likely be signed before he takes office in November.

  • The Trump administration will use the Mexico accord to extract concessions from Canada. Faced with the prospect of NAFTA falling apart otherwise, Canada will agree. Maybe not by tomorrow the "deadline"--but soon thereafter. 

  • With NAFTA revisions done, Trump will pivot to China. The current slate of tariffs is starting to bite Beijing, and it looks willing to substantially increase purchases of US goods. A Chinese agreement could come later this year or in early 2019. Expect to see the next $200 billion in tariffs to be announced a week from Friday but magically not be enacted with the mid-terms 60-days away. 

  • $6 billion in farmer and livestock relief will be distributed BEFORE the mid-term elections

  • By 2019–2020, the US-China trade deficit will be a substantively lower and, of course, Trump will herald this "deal" as the "largest trade victory that America has ever ever negotiatied" and will be the principal accomplishment on which to run for re-election in 2020 along with 3%ish GDP and full-employment economy. 

  • Europe will actually be harder to get accomplished because France and Germany have seen the "Art of the Squeal" and don't buy it, but there seems to be a willingness to negotiate tariffs down to zero on the non-agricultural goods. Over what timeframe? That is for negotiators to figure out.

The Kamp Kotok bottom line on trade wars is that:

(a) any serious problems are deep in the future, and

(b) markets and business owners aren’t too worried.

This will be apparent to all by early 2019 and possibly sooner. With that concern off the table, the economic recovery (or “boom,” if you prefer) will intensify and endure into 2020.

All of which has been our forecast for a while, so that makes these folks geniuses.
Let make some more money!

The Key to our 10X Outperformance: "Positivity"

One of the reasons we have seen 10X growth in Nvidia and 5X growth in AMD and Micron shares since we added them in late 2015-early 2016 is WHEN a transformative event happens that drives demand for enabling technology 2X-5X-10X, that demand turns into top-line and eventually bottom line growth that is 2x-5X-10X based on the provider's market share. In the extremely capital intensive business of designing and manufacturing next-generation semiconductors, to the victors go the spoils.  

The way the stock market knows they are riding a big powerful wave on growing demand and capturing a healthy share on that wave is at quarterly earnings day. ALL our big 5X-8x-10X winners have two things in common: 1) they created enabling technology for giant $trillion waves of change/transformation 2) they quarter-by-quarter beat analysts projections for the top-line/bottom line and raise guidance for the next quarter or two. This is of course what we call "Beat/Beat/Raise" cycle and that is what moves stocks to higher valuations.

Because of issues having to do with the three year run in semi-equipment unit growth and higher prices, we rode that WFE wave for 3 years--but as I mentioned in part 1 we stayed on a wee bit too long. Applied Materials and Lam Research will have slowing quarters for the next two at least--which means no more beat, beat, raise. BOTH are very very cheap here--but we are not value investors per se. We are pre-cycle investors--our job is to see the near future transformations and invest in the primary beneficiaries BEFORE the crowd and earn big profits as the Beat/Beat/Cycle attracts GARP money and then Earnings Momentum money and then just price momentum black box investors.

The trick is to see the end of that cycle or exorbitant price momentum to EXIT near the top of the range. I WILL say that if you look at other transformational waves like RFID chips and OLED screens and Go-Pro's IPO (which exclusively used Ambarella' video chips) we have done very well at getting IN and getting OUT with profits before these stocks peaked (look at the charts of PI, OLED, and AMBA that we bought and sold near their peak valuations to see what I mean). Also riding these huge $trilliongrowth waves finds us getting our investments bought out, too (see CAVM for 5G chips bought by Marvell and Mobileye MBLY bought by Intel for Autonomous driving tech).


So I'm not flagellating myself too much about staying too long at the WFE space ( if you count the profits we made on AMAT and LRCX options plus the $10 in LRCX dividends we have received holding it we basically HAVE achieved full value in the space.)

Action to Take: NEXT WEEK Action to Take: SELL AMAT ASMLHOLD LRCX Until Sept 13 to get the $1.10 Ex-dividend and then sell the shares

Semi Equipment looks like dead money until we get in 2019. With the holiday coming the market will be dead Friday and Tuesday--so let's wait till Wednesdays to sell these stocks with the exception of LRCX (let's get a final $1.10 dividend by owning till Sept 13).

We WILL repurchase AMAT and LRCX as the WFE (wafer equipment) market rebalances in  2019 and we see a bottom in the cycle.  

AMD Augst 31 $25 Calls and $24 PUTS: KEEP THE $2 premium as profit and close the PUTS at market tomorrow.

I know by emails and message that a LOT of you own Advanced Micro Devices (AMD). Subscriber MG's note to me yesterday is representative of the $millions our subscribers have added to their net worth with our 3 purchases and January 2018 Call options (Buy #1 5/1/16 at $4.25/#2 7/1/16 $5.25 Buy #3 5/11/17 $10.25 Buy #4 $12 January 2018 Calls that we bought for $1.22 and sold for $4.25 into the 2018 melt-up).

"Dear Toby--just want you to know that as a long time subscriber my portfolio has gone WAY higher thanks to Transformity Investor and especially AMD shares I accumulated. Thanks a bunch!"

Your Lesson:The lesson here is when we have rock-solid $trillon transformations brewing (cloud-based AI, GPUs, Autonomous driving/video gaming) and a company like AMD that was undergoing a corporate transformation as well to capture those markets, it pays to double and triple down on short-term sell-offs that are market-related and not the unstoppable transformational change! 

PS: I selected AMD for my buddy Nick Lowery (Hall of Fame field goal kicker from KC) for a CNBC stock picking contest in May. The portfolio I selected for him AMD NVDA AMZN and Goldman Sachs is up 51%--but the great news is we have a side bet with the Shark Tank's "Mr. Wonderful' Kevin O'Leary (I love to hate him on the show) and he is at 8% for same time period! 

With the profits we have taken we will have 8-10 new positions include 3 in our $10k a Month Ultra Income portfolio (have you seen how our 2 NEWT positions have done???) and all update buy/sell/hold advice for the new subscribers later next week when the markets are trading normally. September in an election year is usually a little volatile--i plan to take advantage!