July 2016 Newsletter


NBT US MacroMarket Index: 18.2US Economy expansions continues with 2.4% GDP growth—secular bull market intact.  

While some think a recession could be looming for the U.S., fresh housing data says the opposite. 

Why? #1 Purchases of new U.S. single-family homes just hit their highest level in more than eight years. That is what we economists call a strong market. The U.S. IS in the weakest overall GDP growth recovery since 1949...but there are vastly different economics at play in 2016.

"Today's report confirms the considerable strength in the housing market over the past few months," Rob Martin, an economist at Barclays Plc, said in a note. "We expect housing to continue to firm, on average, over the medium term, with a buoyant household sector supporting both prices and volumes."

The encouraging trend for the housing data is the exact opposite of what would be expected leading up to an economic downturn. Note in the chart that before every recession for the last several decades, new home sales were either flat or in decline. This time they're heading in the exact opposite direction. 


The reasons for home sales' continued strength are basic & simple: 1) improving labor market, 2) best wage gains in 8 years, and 3) near-record low mortgage rates.

#2 It's really WAGE GROWTH that gets butts off the sofa and into new home sales offices. Wage growth = growth in economic confidence and wage growth is the secret sauce that’s been missing so far in this recovery.  Without higher incomes, consumer spending has been modest, giving businesses little reason to invest capital in new production.

Guess what? We just hit seven year high in wage growth!


This data on new home sales and wage growth bodes well for other parts of the economy. "When home sales rise, household spending on durable goods tends to pick up shortly thereafter," Neil Dutta, head of economics at Renaissance Macro Research wrote in a research note on Tuesday. "Average sales prices are up 8.8 percent over the last year. Coupled with the growth in sales, this is a positive development for U.S. homebuilders." 

The below 2% GDP quarters are because of historically slow rebuilding of inventory and continued low business investment. A return to normal inventory acquisition and continued strong consumer will give US companies 3rd and fourth quarter boosts. Business investment is low primarily because of the 2/3 drop in energy/mining capital investment AND (I believe) is the political risk of the the current presidential race. The headline GDP of 1.2% in Q2 is underwhelming for sure...but the sub-par overall economic growth makes the 20-30-50%+ secular growth of our favorite secular growth sectors and companies THAT much more valuable.

Key Strategy: We have a number of homebuilder stocks on our radar. NOW we are looking closely at Business Investment figures to complete our view that the US economy has shifted into a faster growth gear. The 

Market Outlook? We got the post Brexit Melt-up Quicker Than We Thought 

The VVIX chart (which tells us the VIX of the VIX index...aka the volatility of volatility)  gives us a clear picture when the up or down momentum of the market has run out of steam. A reading around 80 means the NEXT spike in volatility has built up and is ready to blow! Lets look at June vs. July 2016


The market as measured by the S&P 500 is nicely building a base over the key 2150 support. With volatility risk at such a low point here if we get another global economic event (Italy bank crash, Chinese yuan crash etc.) we will see a quick 3-5% pullback in August as this month has become the freakout month for stocks. 

Action to take: Make sure you have some cash built up for August..it's down 4% on average over the last 6 years. 

The closely watched Citi U.S. Economic Surprise Index is flashing good news for stocks. A reading above zero means that the data on balance are coming in above expectations, while a negative reading indicates an economy that is underperforming. Lately, indicators have been crushing estimates, after the index spent a year and a half in negative territory. Paul Hickey at Bespoke Investment Group noted in a tweet Tuesday that the index is in clear "breakout" mode as judged by its behavior over the past 12 months:


The US dollar looks to be weaker this 3rd quarter as the economy is not making the Fed itchy to pull the trigger on higher rates. This lower dollar against Euro and Yen will help S&P 500 multinationals add EPS over the comp periods where the dollar was much stronger.


August IS the Worst Month for US Stocks

My pal and market optimist Tom Lee observes that going back to 2009, the S&P 500 has fallen an average of 6 percent during the month of August Further, the odds of a slip could be even greater this year, given that "the bond market has become a lot more volatile than equities, and whenever this happens, 68 percent of the time, the stock market falls in the following month."

This adds up to a "pretty scary" outlook for next month, Lee said. However, after an August slip, Lee expects a fall rip.

Action to Take: We are looking for a good entry point into September put options on the S&P 500 and Nasdaq purely as a hedge against August craziness. The yuan has been slowly losing value against the dollar...

Second Half Game Plan for 2016: The $11.5 TRILLION in NEGATIVE Interest Rate Sovereign Bonds Worldwide Creates a Gravitational Pull to Buy Yield Paying Equities and REAL Secular Growth Stocks on VERY Cheap Margin!

Yes we have stayed primarily with equities and very high yield secured debt ETFs because our proprietary NBT Macro Market index continues to tell us the US economy is still expanding (while others have been out of stocks for years or continue to scream "DOW 6000 is coming in 2016) and we have proved again that there are still 30% annual profits still to be made in 2016 (including dividends even more!).

We have focused our capital gains making investments in the fastest growing secular growth segments of the global economy powered by the most powerful secular (aka non-cyclical) transformational growth vectors in the world. We have 35-60% profits buying the REAL DEAL secular growth stocks directly benefiting from global technological transformations: 

  • The transition to 3D NAND memory (like Micron up 45% since our dumpster diving in February...new Buy Under $13.50 target $22. Lam Research (the primary equipment player in the 3D NAND memory)  is up 14% for us since our $82.50 entry. Buy under $90 with 125 target.
  • The automated vehicle safety and driving transformation--Mobileye (MBLY) up 75% from our double down under $28 in February our new target $60..Buy under $46 target $60) Mobileye stepped out of the automated driving technology partnership with Tesla...but truth told it was not a real partnership as Mobileye had no control over how its technology was being used (the crash of Tesla car using autopilot was the breaking point. The stock moved back 8% on the announcement...but the market did not really understand the new long term partnership with BMW. The volume will be 10X with the BMW deal than Tesla...and I would bet that BMW will have their truly driverless car by 2021 that will thrill everyone.
  • Nvidia (NVDA) hit all time high last week..we are up almost 80% from our February buy under $32 (plus we made a sweet 112% on our pre-Brexit Put Option). NVDA has made it to our $55 target..let's hold and let's see if the stream of good news can get NVDA to break out from this consolidation around $55 or an August swoon gives us a entry point 10% lower.
  • AMD Semiconductor (AMD) exploded for us from our $5.50/ $12 target. I'll move buy under to $6.50...same target. Again an August quick swoon could give us a gift. But AMD is now in the drivers seat for GPUs for virtual reality and being very competitive in new CPUs to compete with Intel.
  • The transformation from LED to OLED in mobile devices and next Smart TV's... Let's move Universal Display Buy under to $70 and you WANT to buy some on next global macro fear pull back...we are up 15% from our $62.50 entry point. Can't wait for APPLE to make official its move to OLED screens for iPhones, iPads. 
  • We hold Applied Materials (AMAT) as the key manufacturing equipment player (BUY UNDER $26).  These new equipment cycles are 2 year+ cycles of $30-$40 billion in equipment purchases and installations.
  • Ultra-high Mortgage REIT and BDC yields from wrongly priced mortgage and BDC loan portfolio pricing AND Fed LOWER for Longer. The 1.8% and 1.2% GDP prints in 2016 have put the Fed into a bigger "damned if we do, damned if we don't" box they have been in since raising rates in Dec 2015 and telling the market to expect 4 rate hikes in total in a year (which of course tanked the stock market in January 2016 and raised the US dollar to its highest leves). 
  • We have great gains in NEWT from the $4.50 of dividends and $10 price in February meltdown ($12.50  Buy Under $15 target 11% yield).
  •  BDCL is up almost 28% from our $14.50 buy and 20% in monthly annualized dividends...what not to like? Buy Under $17 with $20 target.
  • MORL up 30% in price and 15% in monthly dividends. Buy under $15 or any pull back. 
  • New Residential Investment Corp. (NRZ) is up 8% and IS THE BEST BUY here as it IS a beneficiary of lower short term borrowing costs. BUY NRZ up to $14 with $18 target and 15% yield.

NEW Investment Category: Mobile Imaging

Action take: BUY Ambarella under $60 with $90 target

Assisted by strong Q1 results, AMBA shares are up more than 20% over the past month. I have followed the company since it came public and was the proxy for GoPro as their supplier of their mobile video chip...I did not like  them being so dependent on trendy GoPros. AMBA has the key intellectual property in the mobile imaging space...and now that they have broken free of GoPro down cycle, their 3 other fast growing mobile imaging sectors will take them back to $90-$100 valuation.

A rock solid balance sheet, significant cash flows, and a $75 million share repurchase program give us greater confidence in the long-term upside thesis. Revenues were down in Q1 and are projected to be flat to down for the full-year, but this is a byproduct of two near-term headwinds that will turn into tailwinds next year and shoot revenues back up to a $350 to $400 million annual level.

#1 The wearable sports camera market, which was down significantly in Q1, will weigh on 1H17 results, but will likely rebound in 2H17 thanks to the introduction of the new Hero 5. If the Hero 4 taught us anything, then we can forecast that high demand for the Hero 5 will persist into Fy18. As a result, AMBA should experience significant Y/Y growth in its wearable sports camera segment next year.

The other near-term headwind is a disruption in the supply of Sony sensors to customers due to an April earthquake in Japan. Management cut revenue guidance to remove any potential revenue from projects already experiencing Sony sensor shortages, so that is where the weak Fy17 revenue guide comes from. Again, though, this issue is ephemeral, and when the damaged Sony facility becomes fully operational at the end of August, Sony will provide a significant boost to AMBA revenue as the company is AMBA's most significant camera SoC partner for non-cell phone applications.

These two near-term headwinds aside, the rest of the quarter saw tremendous growth. The company saw solid growth in its flying cameras aka drone sales. Volumes in the drone market are increasing as strong price points fall. The company announced some key wins in this market during the quarter, and it does appear that AMBA is setting up as the trusted and superior quality SoC supplier in the drone market (in the same way the company has already established itself as the trusted and superior quality SoC supplier in the wearable sports camera market). The flying cameras market is still in its early growth stages, and we expect both product availability and demand to boom over the next 12 months (the market should be particularly aided domestically by the launch of Karma).

Of particular interest to us, the company commented on strong revenue growth from new home monitoring applications, including the launch of an AMBA-supplied August doorbell camera in May. We find this market particularly interesting for AMBA, and think there will be significant and growing demand for Wi-fi connected home surveillance solutions. We think this is a strong and consistent long-term growth market for AMBA. Moreover, while it wasn't mentioned on the CC, we do think continued adoption of Axon Body 2 cams by law enforcement agencies will drive consistent Y/Y revenue growth.

Five years down the road, this year's growth will look a hiccup in an otherwise up-and-up chart. The company is gearing up for significant earnings and revenue growth next year, and we see that growth persisting over the next several years thanks to growing demand broadly for HD video surveillance. The stock is trading right around a 12x ex-cash P/E multiple (non-GAAP), and this is an attractive multiple to us considering analysts are projecting 19% sales growth and 23% earnings growth next year. Over the next 5 years, analysts see earnings growing at a 15% CAGR, and we think this is actually conservative.

The company is also a cash flow machine with a rock solid balance sheet. Cash and equivalents grew 37% Y/Y in Q1, down from the almost 50% growth experienced last year. This is pretty much in-line with what we expected in our previous article, and we reiterate our thesis that the company can maintain a 40% Y/Y cash and equivalents growth rate over the next several years. To top things off, the company also announced a $75 million share repurchase program over the next 6 months commencing in 2Q17.

We are bullish on the company's long-term growth, especially considering it is exposed to so many diverse and unique high-growth markets. The valuation is starting to catch-up to the growth story, but we think multiples still have more room to expand

Buy Under $60 with $90 target


Final Thoughts

With the market only moving into green post Brexit clearly our patience in making our stock and ETF purchases are paying off. I strongly encourage you to use the notification systems in your brokerage accounts to notify you when we get under our buy under targets.

Basically we get 2 times every 52 weeks to buy the 6-10% sell-offs that seem to come every 5-6 months. Seems like everyone is looking for another August swoon...which probably means we won't get it! 

But we have to remain patient....if only to see if the S&P 500 holds 2150. Being greedy with great growth stocks and 20%+ yield when the traders get scared of short-term geopolitical events has been VERY profitable for us since July 2013. With a 2% ish GDP and weak oil prices/strong dollar doing the work for the Fed...our forecast for expansion continues through 2016. Let's get the elections out of the way and then of Trump v.s  I think we get a relief rally  from all the angst from Trump vs. Clinton.

Have a great August...but be ready to rock if the fear comes back!

- Toby

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