3:40 am Tweets from the POTUS--Please Return to Sender

This is a Game of Thrones Market & Stocks Just Got the Dragon Flame

Dear Subscriber,

So much for a partial agreement and kicking the can down the Silk Road a few months--like I said in the last update I ain't no Pekingologist and certainly not a psychiatrist to figure out which lie or exaggeration POTUS Trump believes and which ones are just for social media entertainment. 30 years of macroeconomic and disruptive equities analysis did not prepare me for geopolitics via 3:40 am Tweets. I was up this morning at 4:30 to read and react to this game of geopolitical chicken and yes, I am not in a great mood at present--can you tell? 

Deep breath. As equities investors, we all have enough grey hair to have lived the up-down-correction roller coasters at least 22 times since 2013. Deeper breath—in a still expanding US economy, we have a game plan that has worked amazingly well since 2013 outperforming the overall market by 7X or 723% and 54.2% returns (at least before the market became driven by 3:40 am POTUS tweets):

  1. Look to the Transformity MacroMarket Index—which is still 15.8 i.e., less than a 2-4% chance of recession. No recession in next 4-6 months means no bear market risk. We get run-of-the-mill corrections every 4-6 months—we BUY those in an expanding low recession risk economy. Caveat: IF the White House goes all-in on the next $320 billion and China goes all in too—game over (we are not mind readers of 73-year old tariff mongers—we are going to opportunistically buy out-of-the-money calls on the VIX and puts on Nasdaq 100—more in a second).

  2. Avoid legacy “value” stocks getting disrupted by Internet 3.0 based companies—these legacy companies are not undervalued and they have severely underperformed since 2010 for a major reason—they are being disintermediated by 100% digital native companies

  3. BUY the locked-in 3-5 year secular growth companies that provide companies with the must-have digital productivity boost from the must-have cloud-based enterprise software and BigData-AI-Machine Learning /IoT/Hyper Data Center/5G/Enterprise SaaS and select consumer disrupters

  4. Buy the break of the 200-day correction pullbacks when the fear index VIX gets above 30

  5. Balance out the growth volatility with our $10K-a-Month Club 18% Income Plays (which performed beautifully today as intended)

    I’ve added two more rules (that we totally failed on a few weeks ago):

  6. Hedge gains with 15 VIX call option 3 and 6 months out when the VIX drops below 12.5

  7. Sell QQQ Call Options and Buy QQQ Put options at the extreme greed and fear readings on our new Fear and Greed Index (which we have built off of CNN’s Fear and Greed Index which we have back tested to 1992 and it has amazing called bull market extremes when combined with our MacroMarket Index.)

The Fear and Greed Index Ingredients: 7 Different Factors to Score Investor Sentiment: Hedge on Extreme Greed Spike over 80/Buy on Extreme Fear under 20

These factors score investor sentiment on a scale of zero to 100—extreme fear to extreme greed respectively—right now we are at a32 readingwhich is FEARbut not EXTREME fear 20 or under:

  1. Stock Price Breadth: How far has share volume advanced or declined on the New York Stock Exchange (NYSE)? Here, the FGI relies on data from the McClellan Volume Summation Index.

  2. Market Momentum: How far is the S&P 500 above or below its 125-day average?

  3. Junk Bond Demand: Are investors pursuing higher risk strategies?

  4. Safe Haven Demand: Are investors rotating into stocks from the relative safety of bonds?

  5. Stock Price Strength: What is the tally of stocks hitting 52-week highs as compared to those at one-year lows?

  6. Market Volatility: This is the Chicago Board Options Exchange’s Volatility Index (VIX), concentrating on a 50-day moving average.

  7. Put and Call Options: To what extent do put options lag behind call option—greed—or surpass them—fear? Put options allow investors to sell stocks at an agreed price on or before a specified date, while call options work the same way, only investors are buying stocks.

Action to Take: Remain calm—futures are up in aftermarket slightly and at these oversold levels a bargain hunting bounce/short covering rally back to the 200-day on the S&P 500 makes total sense. 275 on the SP 500 IS the solid support—and put 275 options are very expensive.

We are still up over 32% for the year including dividends—no panic. This chart of the SP 500 says it all—very close to sub-30 RSI and washed out MACD


The tail risk (aka not discounted) here, in my opinion, is if we start to see recession-like levels on some of the big indicators that are affected by tariffs - things like global manufacturing, PMI indexes, capex and eventually corporate profits.  Our Macromarket Index does follow these and IF they deteriorate we will be long gone risk stocks.

In addition, we are 90% through earnings season, so there are only a few bellwether global companies to bring some hope to equities. But today, equities in the US  are still NOT pricing in any kind of risk premium for the macro data looking a lot worse—that is our greatest macroeconomic risk.

Observation#1—it feels like the market is now captive to Tweets and Game Theory—oh joy.
 #1 The White House has ZERO credibility left is spoofing us all along on the China trade deal—zero.  “The China Trade deal is 90% done—we are in the final lap!” Steve Mnuchin—market up 330 points May 7th.
“Negotiations with China today were constructive” Steve Mnuchin May 9, 2019—market rebounds 350 points
“We are one tweet away from either a rally or bear market” –
“You can’t make investment decisions on one tweet—but today we did”— Art Cashin (my hero)
“We are unwinding the 80% of the market that thought at the end of the day Trump and China would not commit mutual economic suicide.”  Tobin Smith Market down 730 points.
“I want the country to be more like the 1980’s—when we were smart and made things here and did not import them from outside—I’d like to see us go back to being smart about making things in America” Donald Trump at press gaggle 2:45 pm May 13, 2019. I have no words for magical economic thinking and time travel. Note: I want to have the 30-inch waist and blonde hair I did in the ’80s too.
“I had a beautiful letter from President Xi. I have not made a decision on tariffs on an additional $325 billion of Chinese imports” POTUS Trump 2: 35 May 13, 2019. This is the final nail in the trade war coffin. Will Mr. Trump pull the trigger?  Are you sure? As long as he thinks CHINA IS PAYING tariffs to America to export tariffed goods (what on earth did they teach at Wharton?) I could make the case that he is not listening to my old pal Larry Kudlow or anyone else that actually understands the tariffs at full bore would 

  1.  Exceed the Smoot Hawley tariff rates that caused the Great Depression

  2.  Take $800 on average out of the average Americans' pocketbook since THEY and Walmart and millions of other importers from China pay the frigging tariffs. 

Fed Put to the Rescue? Good news from bad news; the futures market has just priced in 90-100% odds of a rate cut by December and 70% for September priced at CBOE. The Fed Put aka the stock market cavalry is at least 4 months away.
“Today was a global growth reset—every stock market around the world reset global growth expectations.” Long term trade war means lower global earnings, lower global growth, lower earnings multiples. Bob Pisani, CNBC
Net Net: The market priced in a reasonable tariff truce and removal of export tariffs which drove the rebound from the Dec 24th bottom. We did not get it.
The Earnings Cloud: Earnings x earnings multiple = stock market values. Let’s solve for this: US exporters with 10%+ tariffed China exposure will have lower EPS. US consumer product companies will have 20% higher unit costs. We will avoid these companies as we have for 7 years.
My thesis: The stock market has become politicized pre-2020—why not—everything else in America has become politicized. World Series winners—Master’s winner—Easter Egg roll; why not stocks?
Mr. Trump’s base (other than the investor class and business folks) do not own stocks. Mr. Trump and his white working class base hate China. Mr. Trump’s base has no idea that 90% of the hard goods it buys at Walmart or Target are made in China and the tariffs will add $800 of cost to their check out bill in the next 12 months. PS—much of this base (minus his investor and business owner class supporters) can’t write a check for $400.
My Expectations at the point:
1) The market will overshoot to the downside at least past the 200-day moving average--5% from here.
2) The market is driven by the marginal seller and today the marginal seller is the trend and technical algorithm CTA funds and the "risk parity" funds who will drive that overshoot with automated algo selling. 
 3) We will buy the very best of breed locked in 20%+ 3-5 secular growth companies on sale and we did in late December. 
So breath—go take a walk or ride your bike. Clear heads and sharp reflexes will make us all a lot richer in the end AS LONG AS we follow the rules as stated above. PS—my biggest worry? 3:40 am tweets like these—not to mention the friggin 5th-grade spelling and grammar!!!! The (sic) and ? are mine. 
Donald J. Trump
Their (sic) is no reason for the U.S. Consumer to pay the Tariffs, which take effect on China today. This has been proven recently when only 4 points were paid by the U.S., 21 points by China (WTF???) because China subsidizes product to such a large degree. Also, the (sic) Tariffs can be.....
3:40 AM - May 13, 2019
Replying to @realDonaldTrump
....completely avoided if you by (sic) from a non-Tariffed Country (sic), or you buy the product inside the USA (the best idea). That’s Zero Tariffs. Many Tariffed (?) companies will be leaving China for Vietnam and other such countries in Asia. That’s why China wants to make a deal so badly!...
3:40 AM - May 13, 2019
Replying to @realDonaldTrump
..There will be nobody left in China to do business with (really/). Very bad for China, very good for USA! But China has taken so advantage of the U.S. for so many years, that they are way ahead (Our Presidents did not do the job). Therefore, China should not retaliate-will only get worse!
3:40 AM - May 13, 2019
Donald J. Trump
I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed, & you backed out!
3:49 AM - May 13, 2019

OY! Jumping on my road bike now in 82 degrees Scottsdale at 5:14 PM--its the only way to process this day and remain mentally healthy. Like I said last week--if any of our thousands of subscribers can email me a cogent analysis of WTF the actual strategy is here (other than gunboat diplomacy) PLEASE send me you insights--I don't have the Trumpian decoder ring! And applying logic does not work when this thing is closer to Game Theory!.