The High P/E Stock Puke Is Close Enough-Time To Make More $$Moves

Is the China/US Trade dispute a battle or a war?


Dear Subscriber,

Well, friends--I first want to thank you all for our amazing and record renewal campaign. The data is in and we are at 91% renewal and in the investment newsletter business that is A+. We hoped our subscribers found value in out 56.3% annual returns since 2013 and especially our 48% returns this year (including dividends) in a market that is now NEGATIVE to up 2% for the year.

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Frankly, as I have mentioned, to earn 60 plus percent in 2017 and 48% in 2018 is ALL about finding and riding the most profitable transformational growth waves but MORE IMPORTANT taking large profits when those waves peak.

When we called "peak smartphone" last year and "peak NAND/DRAM memory this summer (i.e, the peak in the rate-of-the rate of EPS growth) in Micron, AMD, AMAT LRCX ASML and sold CAVM and MBLY in February, I know that most of you long-timers followed our advice and took in a lifetime of profits (since stocks average 7% a year--taking an 890% profit on our early AMD positions at 44-$4.50 is more than 100 years of wealth growth in 2-3 years). 

But like I always say--so Toby what have you done for me lately.?

Well--we are using this correction to WAIT for the maximum money manager puke point for one--and the volume on the SP 500 IS showing "puke point" selling levels (forced margin call selling and retail investors calling their broker and saying "GET ME THE F#$^K OUT--I can't take the pain any longer.")

We did not break 30 on the VIX fear index--but frankly with the Fed now back from the brink on insanity and acknowledging we are "in shouting distance" to their theoretical "economically neutral monetary rate--our biggest risks in 2019 are
A) Who wins the China trade debate--the "trade warriors" aka my old CNBC pal Larry Kudlow and Steve Mnuchin who belive in trade but want to bring China into the 21st century where they follow the WTO rules like the rest and b) The Neocon Cold War warriors aka Lighthouser/Bolton/Navarro who see China as a threat to US economic and defense superiority and want to slow down China's rise and threat to US hegemony. 

As in all things Trump--we have to assume that he will go to where he gets the most applause from his Red State base and "nice" articles and media coverage--and that is NOT being a Cold Warrior. He can threaten and huff and bluff all he wants--but if this tiff escalates to 25% tariffs on China goods (aka as 25% higher sales tax paid by the business or consumer) and/or a cessation of semiconductor and other microelectronic components to China this 2500-2600 bottom will dissolve and we will be LONG GONE growth stocks. 

The Big Questions

1) Did the 10-year bull market peak in September?  No--not with 4-6% earnings growth for the S&P 500 in 2019 and our 16.1+ MacroMarket Index that represents a 4-6% risk of recession beginning in 4-6 months  BUT the market has priced in @9% EPS growth for 2019 and from a macro perspective we, like my good pal the "other Toby' Tobias Lefkovitz at Citibank agrees. That disparity has to get priced in--and for the most part with 60% of SP 500 stocks down 20% or more, it largely has.

2) What happened today? Computers/Quant/Algo trading is 60%+ of trading every day. In 2010 it was 10%. We have day-trading computers on top of momentum trading computers on top of  ETF index trading computers making $million trades in the beat of an eyelash.Those trades are largely predicated on what each fund's Algorithm/black box math and predictive model says is the "expected price path" of a given security.  CLEARLY, the 200-day moving average IS the short term line in the sand or expected price path in algorithm speak. Also, it appears that at a certain percentage below the 200-day moving average IS the volatility/fear index VIX gets up near 28-30 (which it briefly did in the afternoon) the algo trade is to bottom fish down near the Jan/October and November lows and above 26-26 VIX. 

Action to Take: THAT to me tells me we have a sustainable bottom in place ( with retests I am sure) and can start to add the best locked in 15-30%+ earnings growth companies that have been brutalized in the October to early December P/E multiple contraction sell-off. Why? Look--after a 10 year bull market, we have a group of investors who are LOOKING for a reason to sell--and if I was 65+ years old and still own a big percentage of growth/higher risk stocks I would be using the up days to TRIM and reduce your growth stocks to "sleep well at night" levels, too. 

But "shaking the weak hands" out in a bull market correction is exactly that--the vast majority of the $$$ in the market is in passive index funds, active mutual funds, personal and institutional money managers and computerized trend following hedge funds and trade desks. 

Unless the Trumpian Trade War spirals out of control (I'll get into the Huawei situation in the December Newsletter out in the next week) we have a real opportunity here to pick up great bargains in both secular growth and or $10K a Month Club Ultra Income plays. 

Action to Take: Look at what we have added since the last update--our Nvidia (NVDA) buy under $155 hit and we added under $150!
Let's move the NVDA Buy Under to $165
Our AMD buy under $22 hit and we added under $20.
Our Chegg Buy under $27.50 (CHGG) hit and we got in under $25.50. Let's move to under $28
Our Macquarie Infrastructure (MIC) Buy Under $40 hit at $39 and is trading above--Let's move MIC to Buy Under $42

Ladies and gents that is how you MAKE money is a historically choppy market that is driven by FUD--fear, uncertainty, and doubt: We
1) Use our proprietary MacroMarket Index to see through economic fog 4-6 months ahead as to the recession
2) Understand that S-curve waves of secular transformation RISE until they reach a saturation point and the "second derivative" aka the rate of the rate of secular demand change peaks.  We hit peak iPhone last year in September--we hit peak NAND and DRAM demand growth in May-August this year. In my first book "ChangeWave Investing" and NYTimes bestseller (ChangeWave Investing 2.0" I talked extensively about how S-curves of transformational demand start out slow--stay under the radar--break out like a hockey stick and then--when everyone thinks they can never slow their rate of growth they do. 

S-curves occur in nature and physics and in transformational demand growth sectors.  The S-curve is simply a graph of the velocity of change of demand --and the steeper the up-curve the faster supply finally exceeds or at least satiates potential demand.

Now look at the chart of Micron the king of 3-D NAND memory and DRAM--you see the same S-curve and the PEAK of demand and pricing which then got priced into the market.

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Lesson over!

Final Point: We are in the Final Leg of This Expansion and Bull Market

For the first 70% of this bull market Price/Earnings ratio expansion and real earnings growth drove the stock higher. Micron went from $1 billion of earnings in 2015 FY to $8 billion of earnings in FY 2018 for example. Then the corporate tax cut in 2018 (and anticipation in 2017) drove the "E" of P/E ratios up 20%+ and stocks drove higher till we hit the wall in October. 

NOW the final leg? NOW we make money in #1 Overly punished stocks (where momo funds sold indiscriminately) riding secular 15-20% growth like Cloudera also undergoing a corporate transformation or broken IPO
2) Corporate transformations (like Adobe or Autodesk changing from site license to subscription model) 3) Locked-In Earnings Per Share leaders in the subscription enterprise Software-as-a-Service (SaaS) verticals that are "must have" providers in the Digital Enterprise "Stack". Examples are DATA, ADBE, CRM, WDAY, OKTA, COUP, MDP, TWLO, BAND, NOW, SPLK, Zscaler, AYX, ZEN, VRSN, and SHOP.  I suggest you load up your stock watching lists and familiarize yourself with these Saas/PaaS/IaaS/IDaaS names. 

IN SHORT, the only real sure things in 15-30%+ secular growth investing in the final leg of stock market wealth creation (in my judgement.) are the locked-in 15=30% SUBSCRIPTION digital enterprise as-a-service stocks that companies CANNOT replace in their must-do conversion to a 100% digital enterprise from marketing to payroll to AR/HR and manufacturing.

I was just sharing with some old friends from the investment newsletter business (and bragging of course about our renewal/retention rates!) that what we spent MILLIONS every year on at Phillips Publishing and at Transformity Media spend 99% LESS for 500% BETTER technology and up-time. 

We will always have glitches--but subscription-based digital productivity and operations SaaS is the LAST THING an enterprise of 2-2 million employees can cancel--simply because their business does not operate without their integrated SaaS digital operations software. 

These stocks got TOO expensive in 2018 but most got cut 30-50% in value in the correction. The other thing going for them is acquisition--14 public and private SaaS companies got acquired in 2018 (Red Hat at $34 BILLION by IBM or 17 TIMES revenues.)

EACH SaaS/IaaS/PaaS company on our list is growing 20-35% annually for the next 24+ months as subscriptions renew and new services are added. 

When this wave peaks--WE WILL SELL these too! But it's not yet. 

All the best--hug that cash and your profits tight! Your portfolio has outperformed your sibling or in-law in 2018 by 5-10-20X --THAT should make for fun conversation at Hannukah and Christmas!

But we have gone from a TINA stock market--"There is no alternative" to a "TIARA" market aka "there IS a real alternative" and right now until we get great entry prices that TIARA is cold $$$$$$ cash. 

Cheers and thank you!

PS: IF you don't receive our December newsletter, it means you did not renew your subscription. If that was your intent, good luck in the future. If that was not your intent, you have to resubscribe because as of 12/10 your record has been deleted from our active subscriber file. Just go to and re-subscribe.


Updates/AlertsTobin Smith