August 2016 Newsletter
Well the stock market is dead as a doornail this week and next...so its a great time to see where we are and where we are going for the rest of the year. Our emphasis on investing in the microchips and equipment that power the worlds largest secular transformative growth engines:
- The Transformation to Ubiquitous Global Cloud computing (AMAT, AMD, LRXC, MU, NVDA, AMBA)
- The Race to the Autonomous Self-Driving Vehicle (MBLY, AMD, NVDA, AMBA)
- Addiction to Ultra High Yielding Investments in a NEGATIVE Yield Word (MORL, NRZ, BDCL, NEWT)
has delivered long/short positions up roughly 60% for the year including dividends paid.
With $10,000 in each recommendation ($210,000 invested in 2015-2016) you would have grown your stock market wealth $124,000 in less than 8 months. We are extremely proud of our results...but know better than anyone this is a "what have you done for me lately" business.
The overall stock market (measured by S&P 500 including dividends) is up 6.82%
NBT Investor PRO 2016 Portfolio Returns ($10,000 per Investment) September 1, 2016
NBT Macro Market Index: 17.9 BULL MARKET INTACT. NO ONE should make an investment decision based on August jobs number...it is the squirreliest data set all year (yes squirreliest is a macro-economic term!).
At the end of the day the overall stock is STILL driven by two engines: 1) The Global Fed war on the yield of cash/risk-free bonds, and S&P 500 earnings. Given the positive boost to earnings from lower energy prices for consumers and businesses OTHER than energy we now raise our S&P 500 target.
S&P 500 Target: 2300-2400 Perma Bears SUCK IT Again!
I am raising my S&P 500 target for next year to 2300-2400 based SOLEY on
- S&P 500 earnings estimates for 2017
- One Fed rate hike in December 2016 and ONE and done in 2017 (after listening to Janet Yellen last Friday the Fed's policy is clear as mud except for this: UNTIL we get to and stay above 2.5% inflation AND we get 4% wage growth, the Fed is locked up with Doves and Hawks evenly matched.
- U.S. new homes sales and gross number of employed continues to slowly grow as long delayed household formation and first home acquisition continues to grow (Millennials can't stay at their parents home forever).
S&P 500 earnings hit its record high of $27.47 per share during Q3-2014 MOSTLY (at the margin) on oil profits. It then fell 31.9% through Q4-2015. That five-quarter earnings recession coincided with the collapse in oil prices and in the S&P 500 Energy sector’s earnings.
Reported earnings rebounded 24.7% during the first two quarters of this year as the price of a barrel of Brent crude oil rose 33% during the first half of this year, suggesting that the Energy-led earnings recession is over. That’s confirmed by S&P 500 revenues, which was negative on a year-over-year basis from Q1-2015 through Q4-2015, falling by as much as 3.8% y/y during Q2-2015. During Q1 and Q2 of this year, this growth rate was 0.3% and 1.1%. So far, I can’t find too many devils in the details:
(1) Revenues. On an aggregate basis, rather than per-share, revenues growth remained slightly negative during Q2 for the sixth consecutive quarter, at -0.7%. This series is highly correlated with and often identical to the yearly percent change in manufacturing and trade sales, which was down 0.6% during Q2.
One can exclude Energy earnings from aggregate revenues (not per-share). On this basis, revenues rose 2.2% y/y during Q2. Furthermore, the growth in aggregate S&P 500 revenues excluding Energy remained in positive territory throughout the recent earnings recession. The weakest growth registered during this period was 0.2% during Q4-2015, which probably reflected the knock-on effects of the Energy recession on other sectors as well as the significant appreciation of the dollar.
The story is more or less the same for the S&P aggregate operating earnings composite.
Key Point: The bottom line is that excluding Energy, it has been a growth recession rather than an outright recession for earnings and the bears have been consistently wrong. The total S&P 500 operating earnings per share didn’t fall much since mid-2014. It rebounded during Q2 to $29.31 per share, only 4.0% below the record high of $30.54 during Q4-2014.
(3) Margins. Calculating the S&P 500 profit margin tells us it edged back up to 10.3% during Q2. In other words, it continues to hover in record-high territory around 10%, as it has been since Q1-2014. So far, it has refused to revert back to the proverbial mean, as widely expected by the bears.
During the week of August 11, forward earnings was $127.99 per share. That’s a time-weighted average of analysts’ latest estimate for this year ($117.86) and next year ($134.42).
Key Point: I am using $119 for this year and $129 for next year.
(4) Leading indicators. By the way, S&P 500 forward earnings isn’t one of the 10 components of the Index of Leading Economic Indicators (LEI), but perhaps it should be. It is highly correlated with the LEI. It tends to lead the Index of Coincident Economic Indicators (CEI). July’s LEI was within 1.3% of the record high during March 2006, while the CEI rose to a new record high last month. There’s certainly no recession in either of these economic indicators.
Here is EVERYTHING You need to Know About Inflation Risk (and everything the Bears don't understand)
So YES I am a macroeconomics geek and proud of it. Besides inventing the concepts behind ChangeWave Investing which grew into our rules of Transformity Investing, developing the NBT Macro Market Index is the most valuable contribution to the art of investing I have accomplished.
Using the NBT Macro Market Index has KEPT US make money in stocks while $trillions sits on the sidelines expect the next bear market around the corner...boo!
ONE issue we have been dead right on is inflation or the lack thereof. Bears continue to flagellate themselves over the Global Fed monetary machine and call for "runaway inflation" but they miss ONE big issue: the missing inflation TRANSMISSION vehicle. Since most banks are simply taking the Central Bank cash and redepositing it at their local central bank, those $trillions of "printed money" (still the silliest term ever...NO ONE IS PRINTING CASH OK!) are NOT making it into the monetary system to overcook consumption and deliver REAL inflation pressures.
In reality we continue to globally have
- Too much production capacity
- Too little demand
- Too much labor
That is NOT the recipe for inflation...it is the recipe for disinflation which is what the world it seeing (and deflation in Japan and much of Europe).
Lets look at Doug Short's charts...it says it all on inflation
PCE and CPI: A Side-by-Side Comparison
This close-up comparison gives us clues as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is considerably less volatile than CPI. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that in the past the less volatile Core PCE has been their metric of choice. On the other hand, the disinflationary trend in Core PCE casts doubt on the effectiveness of the Fed's monetary policy.
The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.
Here is a long-term perspective from the actual beginnings of the two series:
Here is a chart that helps us compare the cumulative change in the two indexes since 1960. Over time, the PCE price index reflects significantly lower growth in inflation than does CPI.
For some technical data explaining the differences between the calculation of PCE and CPI, see this comparison article from the BEA.
In the real world we can't exclude food and energy from our monthly expenses. But the extreme volatility of these two expense categories, especially energy, often obscures the underlying trend, which is the focus of the chart above.
Key Point: The US Fed is hamstrung on "normalizing" its short term rates UNTIL WE HAVE unambigous inflation to fight. Until then they will talk, talk talk, jawbone and do NOTHING.
Themes for Q3/Q4 2016: Autonomous Driving, Internet of Things & Ubiquitous Cloud Will Continue to DRIVE Our Portfolio Profits
Its' time to add the Internet of Things (iOT) to our global secular growth transformations.
iOT simply refers to connecting things...your bags on an airline, the sole of your shoe, a box of cereal...to the internet via RFID Chips (radio frequency identification chips). I have been an early private investor in this space (and down $1M+) and taken my lumps...losing that kind of money IS a great education in emerging technology investing I can tell you.
The Internet of Things WAS easily the most overhyped technology advance of the last 2,000 years. It’s less important than agriculture, the internal combustion engine, the electric light, the airplane, antibiotics, wireless phones, space travel, the Internet itself and, arguably, sugarless gum.
But it’s still incredibly important and NOW (with the cost of RFID chips down to almost FREE) the sector is emerging to represent one of the most lucrative investment opportunities of our lifetime.
Connecting every tangible item and every person in an immersive web of dynamic intelligence over the next 15 years will yield stunning productivity, environmental, medical, entertainment and human benefits.
The new connective mesh could usher in the sort of utopian “hive mind” imagined by science fiction and currently practiced by bees and ants in which no keys are ever lost, no fact unremembered and no communications unsent. Imagine a mind-blowing state of total awareness.
With changes so massive coming you would think it would be easy to figure out how to take advantage. Most white papers at think tanks focus on the connectivity of the things, such as network equipment and sensors. And, to be sure, the recent spate of big semiconductor mergers–i.e., Avago buying Broadcom, Intel buying Altera and NXP Semi buying Freescale–are aimed at scaling up to dominate this next phase of profound connectivity.
Yet most of the value of this brave new world will be in the software that compiles, analyzes and gives meaning to the data collected by billions of sensors and seamlessly knits together objects and people. You might even say that the best Internet of Things projects won’t be products at all. They will be services that help us navigate the physical and online worlds with less friction and more joy. The easy software bets in this space are platform toll-takers like the Amazon Web Services and the Azure cloud services unit of Microsoft.
But the smart bet I thnk will be in the pure-play RFID chips makers and the smaller, cutting-edge software and design companies that help clients bend and blend the worlds of sensors, marketing, connectivity, the cloud and aesthetics for customers’ benefit.
One of the most intriguing along these lines is Globant (GLOB, 36), a little-known technology design and engineering firm that went public in mid-2014 at $10 and has since quietly tripled, where it sports a modest $1.2 billion market cap and a forward price/earnings multiple of 32 times.
I recently spoke to Guibert Englebienne, Globant’s cofounder and chief technology officer, about his firm’s role in the rise of the machines. As an example, consider an air traveler on Delta airlines who makes a tight connection. Globant's software plus RFID tages create a mesh of software, hardware and sensors that allows the traveler to know whether her luggage caught a different plane and, if so, a specified time when it will be automatically sent to her hotel–no human interaction required.
KEY point: the two-dimensional world of devices that do only one thing is being replaced by a 3-D world in which our devices automatically find and interact with one another. Yes, our machines will be talking behind our backs.
In this new scenario, sensors in a Nike or Under Armour sneaker will allow the company to build a deeper relationship with you by the automatic uploading of your running pace and mileage to a Web page where you can compare it to others’ or share it with them. Your footwear becomes a node in the network. Other small software firms at the vanguard of hyperconnectivity design and analysis are $4 billion EPAM Systems (EPAM) of Newtown, Pa., San Francisco’s $1.8 billion New Relic (NEWR) and $880 million Hortonworks (HDP) of Santa Clara, Calif.
But we will start with the ONLY pureplay in th eiOT Space: Impinj (PI) which just came public and had boffo numbers this week.
Here is CEO/Founder Chris Diorio explaining his vision
"To recap our initial public offering, we’ve priced on July 20th and raised $69.2 million in net proceeds.
Turning now to the second quarter, we delivered strong results. Revenue grew 36% year-over-year to reach a record $26.0 million. Demand for our endpoint ICs was a primary driver behind that revenue growth which we believe is also an indication of market growth. We enable connectivity for 3.8 billion items in the 12 months ended March 31st of this year and that growth is accelerating.
In a few minutes, I will share with you some recent examples of our successes and the progress we are making it to capitalize on the accelerating market growth. But because this is our first earnings calls, I’d like to first review some key effects of our vision, platform and growth strategy.
Impinj’s vision is digital life for everyday items. Our mission is to wirelessly connect those everyday items and deliver to the digital world each item unique’s identity, location and authenticity. Our platform is the backbone of that connectivity and information delivery. We are literally extending the reach of the internet by factor of a 100 from today’s powered electronic devices to everyday items like retail apparel, airline luggage, pharmaceuticals, automotive parts, food, really everything. We are the only RAIN RFID company with an integrated platform spanning endpoints, connectivity and software. This platform which we built on 16 years and more than $116 million of investments in innovation and development is integrated, easy to deploy and use, versatile, and applicable to nearly any used case and we believe delivers unmatched performance.
Our two core verticals are retail and healthcare but our platforms versatility allows end users like Coke to use it for managing syrup cartridges and their freestyle soda fountains, and McDonald’s Europe to use it to provide direct to table food service. It also enables many other applications spanning airline baggage handling to data centers.
Our multi-tier solutions selling model leverages our global ecosystem of more than 500 distributors, systems integrators, bars and software partners, giving us market reach, penetration and scalability. Our growth strategy includes enhancing our platform’s reach and breadth enabling ubiquitous item connectivity, expanding it in new vertical markets and increasing our solutions attached across verticals.
Now, let me share with you a few of our recent innovations. In the second quarter, we launched a new endpoint IC, Monza 4i targeting automotive applications. We enhanced our ItemSense operating system by adding system health monitoring and management console that streamlines systems setup by automatically discovering readers and gateways and auto setting configurations and enhanced ItemSense’s item location monitoring. We also launched the developer website that provides documentation tool to help our ISV partners build software applications on top of ItemSense.
We introduced an IoT connector that links our platform to the SAP Hybris Commerce suite, delivering accurate, real-time RAIN-based inventory data to retailers, helping them reduce inventory, decrease markdowns and improve shopper experiences online and in store. We also released four new joint solutions including with 6 PM for patient file tracking with Data2 and Nedap for jewelry store inventory visibility, with Terso for monitoring medical and scientific products and with Accruent the medical, I mean sorry for a mobile medical device tracking. The solution we developed with Accruent automates medical device management giving hospitals visibility and to medical equipment utilization.
In total, we have announced 12 solutions in the last nine months. These new solutions along with our SAP Hybris IoT connector, highlights our efforts developing and delivering solutions for our end customers. We are also expanding our collaboration with Intel to address the needs of today’s modern retailers. For example, Intel’s retail centre platform relies on the Impinj RS2000 Reader system-in-package for its RAIN functionality. The combination has the potential to help retailers transform their businesses by enhancing their store operations."
Action to Take: HOLD for now
Impinj just jumped up on great news and big short covering...it only came public in July. WE will let it come back to earth a big under $28-$30 but I see HUGE future here.
Time For Small Caps
We have been rewarded for following signals in credit and derivatives markets this year, and a new one recently started sending a buy signal for small-cap stocks, according to my pal Fundstrat Global Advisors co-founder Tom Lee.
"I think a really strong message is coming to buy small caps, because when economic data picks up and credit eases, small caps almost always win," In a note, Fundstrat pointed out that the quality spread between non investment credit rated BB versus CCC narrowed to 538 basis points over the last six months, something that has only happened three times in the last 25 years.
When this happens, small caps have outperformed the S&P 500 73 percent of the time and posted 13 percent absolute gains over the next six months.
Action to take: BUY 2X Russell 2000 URTY Under $95 with $125 Target
OIL? Not Yet
Crude oil prices are down 3% after another "surprise" build in inventories.
NO surprise here...imports are surging, hitting levels not seen since 2012. BUT... US production continues its decline.
This week's EIA Petroleum Inventory report was yet another boon for the bears. Crude oil and distillates inventories rose above expectations. This has resulted in a sharp fall in crude oil prices (NYSEARCA:USO) (NYSEARCA:OIL) to the $45 per bbl range.
A look inside the numbers
U.S. crude oil inventories posted a 2.3 million barrel increase last week. However, as has been the story for much of 2016, this is largely a result of a surging imports.
Imports rose by 275,000 bpd week over week to 8.92 million bpd. This is the largest weekly import number since 2012. The previous high was set just a few weeks ago for the week ending July 29 while the third highest was set for the week ending Aug. 19. In other words, the 3 highest import numbers since 2012 were set over the past 4 week period. (Source: Reuters)
I continue to be shocked by these import numbers. It is almost as if the shale boom had never happened. The trend is clear -- since late 2015 imports have gone straight up, offsetting declines in U.S. production and delaying the start of a much needed drawdown in oil stockpiles.
U.S. oil production continues its decline
But we are getting close to a balance and news is not completely bearish. U.S. oil production fell by 60,000 bpd to 8.49 million bpd, largely inline with the 49,000 bpd decline in last week's report. This is a good sign for oil bulls as it indicates that producers have responded to the glut and have moved to lower production
Over the past four weeks, production has averaged 8.52 million bpd, down 8.6% from the 2015 average of 9.33 million bpd and down 12.2% from the 2015 weekly production high of over 9.70 million bpd set in April 2015.
Keep in mind that two weeks ago the EIA made a one-time adjustment "re-benchmarking" to the North American production numbers of 100,000 bpd. Furthermore, the data from Alaska continues to be choppy as this is the period for pipeline maintenance.
Nevertheless, the trend does not lie. US production is falling, hence the reason for above noted surge in imports. Furthermore, the rate of decline has show signs of accreting in recent months, now at an annual rate ~1.6 million bpd, from ~1.2 million bpd at the start of 2016.
This was another bearish report for oil. The headline everyone will be focusing on is the crude oil stockpile build. The details, such as surging imports, is being ignored by the traders.
Action to Take: HOLD. WE WILL get another shot at PD and other Permian Basin E&P leaders...but not yet.
That is all from the NBT team until next week. We will go over ALL stocks and ETFs and come up with new Buy Unders and targets AFTER the world comes back to the market.
Have a GREAT Labor Day...I will be slumming in Malibu!
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