June 2018 Newsletter: 5th Anniversary Edition

5 Year Anniversary: 55.3% Annualized Return = 10X The Average Investor's 10-Year 5.53%—TR Investor PRO Members WILL NEVER BE AVERAGE!

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Five years ago (as my non-compete agreement ran-out from the sale of my first investment research shop ChangeWave Research and investment newsletter ChangeWave Investor) we stealth launched our news and improved NBT Investor PRO (now re-branded Transformity Investor PRO).

We had big shoes to fill. ChangeWave Research grew to 40,000+ paid subscribers and 250,000 weekly e-letter subscribers at its peak. The annual returns (including TWO recessions and bear markets) 2000-2010 were 28.5%. We MADE money making the macro calls on recession in August 2000 and November 2007. 

In the three years of my "non-compete" period, the mission was to KEEP all the parts of ChangeWave Investing that had provided the 5X outperformance and ADD new pieces to the system to do even better. The goal was to double the ChangeWave record of 28% annual returns.

Well with the close of the first half of 2018, on an annualized basis your Transformity Investor Model Portfolio has returned 55.3% annual returns (realized and unrealized appreciation, dividends, call/put option trades, call/put option hedges, call/put option premium received.). 2018 portfolio gross return (excluding long and short option hedges and income premium) is 28.2%.

WITH portfolio boosters 6-month return is 52.47%!

How does our TR Investor PRO wealth building services compare with $billion hedge funds, mutual funds and the average individual investor?

According to Morningstar, the average mutual fund over the last ten years returned a piddly 5.79%. 
The S&P Index fund has returned around 7% a year since 1989.

But the average investor according to Morningstar did even worse--averaging just 5.53% over the last 10 years.

Gosh--we did 63% just in 2017 alone--but I digress.

BUT...drumroll please....the stock market Booby Prize goes to the portfolio of hedge funds. According to CNBC, a portfolio of leading hedge funds assembled for the 10-year bet against Buffet in 2009 (Buffet bet a simple S&P 500 index fund would beat the average hedge fund return) only returned 2.2% on average from 2009 to 2018.  We beat the 2% management fee and 20% profit taxing hedge funds by 40X in the last 5 years--and they LOST money in 2015! OY!

The source of our10X outperformance, of course, is the Transformity Research Rapid Wealth Building Protocol:

  1. ONLY Invest in the sectors and companies riding and creating the biggest highest magnitude wealth creating and destroying waves of secular transformative and disruptive change
  2. Use the Transformity Research MacroMarket timing index to 1) KEEP us long stocks in the bull market and 2) giving us the confidence to BUY THE DIP in the short term corrections
  3. Own high 15%+ yielding ETN's, mortgage REITs and Business Development companies and RE-INVESTING their high dividends in these high yield instruments
  4. Use long and short index and stock specific options to protect profits, hedge macro events and take advantage of short-term pullbacks within overall up-sloping trading ranges in our favorite stocks.
  5. e) Being ready to GO DEFENSIVE and lock in our 275%+ gains since June 2013 when our TR Macro Market index shows high recession risk/bear market risk  4-6 months ahead.

Whether you know it or not, you have been part of our "beta test" group in which we doubled the rate of return from my former ChangeWave Investing service. In return for your early adoption of Transformity Investing PRO, you are getting 5-separate investment advisory services worth $2,500 separately for the price of only one! 

Soon we will be launching our new campaign to add 10,000 new subscribers to our combined services. Our pitch is unbeatable: Never Be Average Investor Again: Earn 10X Average Investor Returns & 40X Hedge Funds & TOTALLY MISS The Next Bear Market (so you KEEP your hard-earned portfolio gains this time and don't have to delay retirement again).

Service #1) Transformity Research Market Timing Index
Service #2) Transformity Research Transformative Growth Equities Portfolio
Service #3) Transformity Research $10,000 a Month Income Portfolio
Service #4) Transformity Research High Yield Option Income & Hedging Service
Service #5) Transformity Research Option Trading Service

We have used the 121 advised buy and sell recommendations since June 2013 first issue to build our unmatched track record with only 8 net losing positions. Just think what Lebron would have got shooting 93% from the field!

If you'd like to send us a testimonial on how TRI has made a difference in your portfolio,DON'T BE SHY! Email me directly at tsmith@transformityresearch.com --all testimonials kept private and if used without identification (they are kept on file).

OK--enough of the bragging and history lesson. I just wanted you to know that because of your support we are able to bring these #1 performance rated investment newsletter to a much bigger audience! IF you have a family or friend who you think would benefit from our program, send them this link  or copy this URL https://transformityresearch.com/

PS: We WILL separate the services because of size so don't worry!

Section 1:  6 Month Market Review
While the overall stock market went up, down and ultimately sideways thus nowhere in valuation in six months (as in ZERO appreciation), "shockingly" information technology and consumer discretionary aka CD sectors (CD which is now dominated by Apple, Amazon, Tesla and Netflix valuations) averaged about 10% appreciation.
Key Points: In 2018 "Capex" or capital investment for the most part for corporations IS TECHNOLOGY and/or stock buybacks! All companies large and small are looking to cut labor costs/add productivity, transform their business models to digital models, add digital business processes, add AI/Machine Learning value to their services and products and run the entire enterprise in THEIR cloud or Amazon's/ Google's/ Microsoft's cloud. 

Which companies, then, would you EXPECT to grow in value? Consumer staples? Amazon victims? Low growth fast food retailers? Legacy technology like Oracle or IBM? Regional newspapers? 

And where is the "reversion-to-the-mean" value stock renaissance? The IVE S&P 500 "Value" Index of stocks trading at below the S&P 500 trailing earnings-per-share multiple for 2018 (17.2) is a NEGATIVE 3.8% for the year. SO MUCH for "Value" yet again in the 21st century IP/Knowledge-based digital economy. I can't say it strongly enough: "Value" is not 30+-year-old service or product companies with low/no growth companies being eaten alive by disruptive 21st-century visionary competition or the changing consumption habits of 76 million Millennials. They are not "temporarily" out of fashion. Many of the companies on the "value" list are dead-companies walking--their present value is discounted for slowing revenues and less future profit. OR they are highly cyclical early-cycle stocks/companies (energy, transportation, 20th-century industrial companies, basic materials, autos, homebuilding) 10 years into a cyclical expansion. No sane investor would price them in the late stage of this historic expansion as if we were in the early innings, right?

Our model portfolio, powered by our 3X overweight in AMD, now 3X overweight in Micron (we added on the sell-off under $55), Nvidia and 20%+ appreciation + dividends from our High-Income Monsters (MORL NEWT NZA BDCL) NOT including opportunistic option premium from Micron and Nvidia, came in at roughly 28% returns in the six months.

With TRI PRO "Booster" option income and hedge trades? 

Position  X      YTD%   1Year %
AMD       3X    47.47%   21.47%
Micron    3X    27.53%   66.63%
Nvidia     1X    25.16%   67.53%
ASML     1X    12.33%  49.84%
ACLS     1X   -30.14%  -4.25%  HOLD
AMAT     1X    -10.64% 10.65% 
LRCX     1X    -6.08%   22.24%
OLED (sold 3/20 at $120 sell stop)
               1X      -18%    62.4% (from $55 purchase 11/15
CAVM (bought July 2016 $44 SOLD January 2018 $88.25)
               1X      14%     101%
NEWT
(including dividends and 40% 2013 stock dividend
             1.75 X   20.44%   41.37%
NRZ  
(including dividends reinvested)
             1.4 X   16.83%   46.37%
BDCL (including dividends reinvested)
             1.4 X   14.37%   42.18%
BDCL
(2nd purchase in Feb.including dividends reinvested)
             1 X       24.37%   
MORL
(including dividends reinvested)
             1.6 X    4.27%   11.02%
TQQQ
@$55   
1X        5.45%

TQQQ/URTY/FINU Trades
 = Break Even for 2018

Growth & Income Portfolio BOOSTERs
NET Option Income
 (Selling MU AMD NVDA calls): $12.42K free and clear cash from option premium earned
NET Option Hedges
(Buying MU AMD NVDA Put options): $52.15K on three $10,000 positions from short put hedge options bought and sold (with the big winner the $57 Micron puts bought at net $1.25 price and closed at $5.45 profit in February).

I know from your e-mails that a LOT of you own AMD, MU, Nvidia and AMAT/LRCX. I have an update for our SELLING protocol that I think can improve our profit-taking on longtime positions like AMAT, LRCX, and OLED. Like you...I HATE giving up hard-fought for profits (update coming in next newsletter or update).

Section 2: World and US Macroeconomic Outlook: The 5X Quintfecta of Global Equity Market RISK is HERE

Look Q2 in the United States will be a 3.6-3.8% GDP growth quarter when all the final data is in. But a LOT of that outperformance are temporary blips related to 1) lower taxes paid year-over-year and 2) private sector efforts to get trade tariffed goods out the door ahead of the July 2nd and 6th next round of tariff retaliation by Canada and China/EU on the 6th. Note: Is there ANY American ally other than Australia we have not attacked with tariffs?

What is both concerning AND potentially profitable is the bear markets for stocks in China/Asia and basically all Emerging Markets and the correction getting closer to full-on bear market in Europe. The American economy and stock market is the last market standing: We are the ONLY major stock market that is NOT in correction or bear market (Note; NORWAY with oil >$70 is KILLING IT these days--and so is their stock market relative to EU).

The reality for the "global synchronous expansion" investment thesis? Dead.

The TINA investing mantra/model ("There Is NO Alternative but stocks") is wilting around the globe. And with the US 2-year T-bills paying the same as S&P 500 index dividends, long-term institutional investors/pension plans obviously sold big winner non-dividend paying stocks into the close of the Q2 (semis, FAANG, cloud tech) and bought about $100 BILLION in 2-year bonds/index funds. 

In short, the world is de-risking because ACTUAL RISK is growing. We are going to be too because we now have hit the quintuplets of equity capital risk:
1)> 2% Annualized US core PCE Inflation
2) TOO STRONG Dollar (export earnings killer)
3) > 3% Hourly Wage Inflation which brings
4) Federal Reserve Over-Tightening Risk and
5) TRADE WAR risk that we have not seen in almost 90 years. 


#1 Risk--Trade wars. There are but a small handful of money managers who have lived through a real trade war (not just a skirmish). The July 6th expansion of EU and Chinese tariffs on USA goods is all but certain--like I said in the update IF America could MAKE a miraculous deal it would have been made by Monday before everyone left DC.

Mr. Trump is right about one thing: China as an export majority country DOES have the most to lose (see their bear market chart again). And if their leadership had to worry about re-election they might blink first--but they don't and they are not. The ironic thing is the tariff for US/EU cars into China (after years of bellyaching) was just LOWERED to 10% a year ago--now it goes back to 20% on Friday.

As I have concluded many times; IF YOU THINK our POTUS and his team of inexperienced 75+-year-old "advisors" are playing some kind of three-dimensional chess here that we mortals just can't understand, you are drinking the #MAGA Kool-aid, my friend. "Trade wars are EASY TO WIN" repeats the POTUS every chance he gets. Trade war threats have killed the Chinese and Emerging markets and are about to take out European markets as well while turning the US dollar into a monster.

I may have missed a few economics classes in the day but how does a country (US) export MORE to other countries when they are A) slowing growth and B) have 20% depreciated currency to buy our goods and C) are in a trade war with ALL the top 10 economies in the world?

The only "good news" on the explosion of the dollar value versus EU/China is that foreign investors in US assets are now getting a risk-free 20% return on their dollar-denominated investments. This will at the margin bring more foreign money into US capital markets with every other market in the tank--soft comfort at best.

Outside the United States, the stock markets are a mostly a bloodbath. GREAT for us in US-based stocks as a safe haven play but . . . in a global economy, no market is an island (ok except for Australia) especially U.S. S&P 500 stocks that get 41% of their earnings from outside America.

Those charts tell the global macro story than any words really can. 

Bottomline--NOT PANICKING but here are the risks to US stocks from all these charts. 
#1 Obviously strong dollar means dollar-priced goods and services are more expensive in Euros or RMB. US Companies that sell into competitive service and goods markets (41% or S&P 500 earnings are from exports) have to A) eat the difference and lower margins B) hedged themselves perfectly (which never happens) or C) outright lose business because of pricing. 

The upside? US stocks and bonds are very attractive to Euro paying investors. However, the need to SELL winners to make-up for EU market losers will mitigate some of the net positives.

My Assumption is the Trade War IS HERE--Unfortunately

As I type this Micron just received an injunction from a Chinese court which says they cannot sell their chips into China. There are few details and no word from Micron since they have not actually received the order. Now bear in mind China is 50%+ of Micron's end market for their chips. Bear in mind that China can't replace those chips and would have to stop production of 50% or more of its consumer electronics assembly so this dispute HAS TO BE SETTLED quickly or DRAM prices will explode 5X overnight in China. 

Our markets are closed. They are closed tomorrow. A temporary injunction could be issued one assumes in the next few days.  Lost sales can't be replaced by Samsung or Hymix (the only other memory providers) because they are maxed out already . . .so the Chinese manufacturers and assembly lines will be living on inventory until the dispute is settled.

Key point: DRAM in the rest of the world would CRATER if this is not settled quickly

WE WILL buy put options on the SMH or MU IF they are not insanely pricey--but that is NOT the real story here. The "China court" is of course really the China leadership--and THIS is exactly the bullshit that goes on when a country is threatened like China and Europe has been by the TTT...the Trump Trade Tariffs.

I have spent a LOT of time in China. What I know is the following: They are the cheapest and hardest negotiators I have ever faced. Speaking of face, "Face" in Chinese culture is super important; it's how strong and rich you believe you are thought of by the OTHER Chinese. When you threaten China and make it look bad to the world, they will respond, as they say, "to save face."All of this nuance, of course, is lost on the least nuanced human being in the world Donald Trump.

Key point: This "court injunction" is yet another "tit for tat" escalation of hostilities. As I have been whining about since this whole trade tariff shit show started, it's all fun and games until someone punches you in the mouth.

This injunction IS THAT punch in the mouth. Micron in a 100% American company from Boise, Idaho. There is NO OTHER bigger symbol of America vs. China than Micron since 50%+ of Micron's sales are to China.  This is NOT a coincidence by any means. This is what a friggin trade war IS--weaponized action intended to HURT the enemy country 

MY TAKE: Donald Trump’s attack on our foreign trade partners resembles his attack on immigrants: In each case, the attack is framed as a response to evildoing that in fact only exists only in his imagination. Granted there is no doubt China has stolen American IP. China still has higher tariffs than we do on things.

But THESE threats are fighting imaginary enemies in China that are not there. It's just like the Trumpian stump speech lies; NO there isn’t a wave of violent crime by immigrants, and no MS-13 isn’t taking over hundreds of American towns; no, the European Union doesn’t have “horrific” tariffs on U.S. products (the average tariff is only 3 percent).

Here is the point: MS-13 or immigrants can't fight back against the U.S. Furious foreign governments, many of them U.S. allies that feel betrayed, can and will. China will to save face. Yet ALL the indications and signals we get from the White House are Trump and his advisers don’t get it. They remain blithely ignorant about what they’re getting into.

The hope of course here is the "master negotiator" making these threats and feints that are all part of the negotiating foreplay master plan in the "Art of the Deal."  All the evidence so far, however, is these inexperienced geopolitical amateurs are in WAY over their heads. A Geopolitical trade agreement is NOT a commercial real estate transaction. 

Here is the Trade War Reality & Misassumptions to Date

In March, as the U.S. was imposing tariffs on steel and aluminum imports — and yes, justifying its actions against Canada (!) on the grounds of national security — Peter Navarro, the White House trade czar, was asked about possible retaliation. “I don’t believe any country will retaliate,” he declared, basing his claim on the supposed upper hand America has because we import more than we export.

Then on Sunday, Canada — a country that, by the way, imports about as much from us as it exports in return and has been our staunchest ally — announced retaliatory tariffs against $12.6 billion of U.S. products.

The European Union and China have also announced retaliatory tariffs. Mexico, with its new leftist president-elect, is likely next  Then the E.U. has warned that it will go much bigger if Trump follows through on his threat to put tariffs on European cars, potentially imposing retaliatory tariffs on almost $300 billion of U.S. exports.

You GOTTA understand; THIS isn’t the normal give and take of trade disputes. I don't care if this is simply "Trumps Style"--he is NOT negotiating with himself. The other countries have the book on Trump; flatter flatter and flatter more and then ask for the order. 

Now, look: the rules of world trade, established under U.S. leadership in the 1940s and enforced by the World Trade Organization, DO ALLOW flexibility. For example, countries are allowed to impose temporary tariffs in the face of import surges, like the tariff Barack Obama imposed on Chinese tires back in 2009.

But both the scale and the motivation behind the Trump tariffs — their obviously delusional "national security" rationale — are something new. They amount to rejecting the rules of the game we created; the E.U., in its warning, bluntly calls U.S. actions “disregard for international law.” Sure enough, Axios reports that the Trump administration has drafted legislation that would effectively take us out of the W.T.O.

How many empty threats can you make before you are crying wolf? How many actual tariffs can you declare before the tipping point is reached?

Key Point: The U.S. by my estimation is now behaving in ways that could all too easily lead to a breakdown of the whole trading system and a drastic, disruptive reduction in world trade.

Yet Trump appears to really believe the bullshit coming out of the White House "We're America, Bitch" as if the world will bow down to American economic power and his deal-making prowess. “Every country is calling every day, saying, ‘Let’s make a deal’” on trade, he told Fox News.

Of course, he also declared that the head of U.S. Steel called to tell him that the company was opening six new facilities; it isn’t, and the conversation never happened. Add that delusion to the mass deluion pile. 

We are on a collision course into a trade war, and it’s hard to see how the escalation ends. Especially because the foreign governments we are attacking literally can’t give Trump what he wants because he much of wants them to "stop doing" are things they aren’t actually doing ( just like most Mexican immigrants are not thugs or rapists--with Trump, it's always a straw man rationale.)

How will all of this affect the U.S. economy? Exporters will be hurt, of course — and exports support around 10 million jobs. Some industries that compete with imports might end up adding jobs. But they wouldn’t be the same jobs, in the same places: A trade war would cause huge worker displacement and mostly OUT of Trumpland. 

To me the only hope here is the revolt and babies screaming sound from his beloved base.  Thankfully some of the American industries Trump claims he wants to help are protesting his policies, urging him to reverse course. General Motors warns that proposed auto tariffs could lead to “less investment, fewer jobs and lower wages for our employees.” The Motor & Equipment Manufacturers Association has urged the administration to stand down, declaring that “counterproductive unilateral actions” will “erode U.S. jobs and growth” while doing nothing to protect national security.

What do these industries understand that Trump and Company don’t? 1) That international economics isn’t a game in which whoever runs trade surpluses wins, and 2) disrupting global supply chains IN 21ST CENTURY will hurt almost everyone.

Will cooler heads prevail here before it's too late? I think the market still thinks there is a "Trump Put" under the S&P 500 IF the market collapses ahead of this trade war and Freakout Friday. 

Let's hope that, like the screaming babies at the border, his screaming base will make him blink and fall back declaring some absurd logic and declare "victory.."

But what worries me the most is NONE of this really seems to be getting through. Another administration might look at foreign retaliation, industry protests and stories about jobs lost due to its tariffs and consider the possibility that it’s on the wrong path.

This administration? Never. ONLY if he see's his base approval ratings drop and a real backlash from Trumpland companies will he blink and settle IMHO. The cheetah can't change its spots. Trump is Trump.  What worries me and others is I don’t think most businesses, or most investors in financial markets, are taking the threat of trade war seriously enough. They’re acting as if this is just a passing phase as if the grown-ups will step in and stop this downward spiral is settled before it goes too far.

But as anyone who has NOT gone into full cult-mode has observed, there ARE NO grown-ups with any real power to change the direction of this trade warship in this administration. So far ALL we have basically seen from the White House is a policy by temper tantrum and tweet.

From where I am sitting, a full-blown trade war has more and more looking WAY too possible. And With the Micron action, one could argue it may already have begun with China.

Action to Take: Like I said we are pricing hedges on stocks and indexes (SMH) and technicals. IF I HAD a friggin crystal ball and could see an obscure Chinese court making an injunction on Micron this morning, we would have bought the $55 puts and I would not be such a grumpy whiny investor.

THERE ARE MORE Risks Ahead for FreakOut Friday Than Just Trade War

Yes, there are OTHER RISKS in the macroeconomy. And one BIG ONE comes out Friday morning with the June employment data and especially the year-over-year hourly earnings numbers. Remember the 2.9% increase in January released in early February wigged out inflation fears and created the flash crash of the VIX index. That unexpected hot number (which should NOT have surprised anyone since the bulk of the increase was from the $1000-$2000 payments made in January from Wal-Marts etc from the corp tax cut) rang the inflation alarm bell which then rang the market's fear of ramped up Fed rate hikes which broke the VIX and busted stocks AND bonds down 10% in a flash crash. 

Well, the non-energy/food i.e, "core" CPI inflation HAS HIT 2.24% as reported last June 12th. The year-over-year non-seasonally adjusted Headline CPI came in at 2.80%, up from 2.46% the previous month. Year-over-year Core CPI (ex Food and Energy) came in at 2.24%, up from the previous month's 2.14% and above the Fed's 2% PCE target.

The Fed under Chairman Powell believes they have been already "leaning into the economy" with their rate hikes. He said at his last conference that "IF inflation were to persistently run above the Fed's 2% core inflation target they would move to "cool things off" which is different than the market believing the Fed would "allow the economy to run a bit hot for a while." Let's not forget with $65-$70 oil for most of the Q2 CPI and transportation costs up 10%+ (due to energy surcharges & extreme shortage of truck drivers) the only thing to LOWER inflation at this point are lower priced imports due to the high dollar. 

Stil with me? OK so the WSJ Economists predict that Fed would tolerate annual core PCE inflation (the more conservative measure they prefer) at 2.5%. 

Uh huh. But the Fed already has 2 MORE .25 basis point hikes penciled in 2018 and their "dot plots" say they get to over 3% in 2019. AND the consensus for payroll data is 185,000 but the year-over-year average hourly earnings are now forecast at....2.9%. 

Key point: IF WE SEE a "3 handle" on the year-over-year HWG...the market fireworks will make July 4th look like a dud. Most money managers have not traded stocks in a >2% inflation world OR a trade war environment AND a rising US dollar. 

Action to Take: HEDGE With TRADE WAR and STRONG DOLLAR risk and >2% Inflation and >3% hourly wage growth risk on Friday (with a lot of folks still out on vacation) we will put out our hedge plan in the late morning Thursday.  

With the amazing profits we have earned this year...and the Quintella of Market Risks now facing stocks, the market is looking a LOT like the August meltdown in 2015. The best way for China to retaliate against the US is to weaken the yuan--so far its only weakened about 4% but is a LOT for a currency like a yuan/RMB that is so tightly controlled by China. 

Yes, 2.5% from Treasury 2-year notes are NOT looking so bad. Going to energy MLPs and other higher yield infrastructure ex-energy looking attractive too. Small Caps, biotechs and cloud will ALL come down in a market meltdown...we have our list to buy but my point here is NO ONE should be in a rush to do anything except hedge our profits and get more data.

Am I being too paranoid? Let's use some of our mega profits to HEDGE Freaky Friday and let's hope I am dead wrong. The great part of beating the overall market by 35-40X is WE HAVE THE DRY POWDER to hedge our profits and make MORE from short bets if 5 Risks to the Market materiaze. 

Deep breath...don't panic but get ready.

Happy Independence Day!

Toby

Tobin Smith