March 2017 Newsletter
There are three big reasons we shattered the 5.5% S&P 500 return (including dividends) in Q1 by nearly 400% outperformance in 2017:
#1 We IGNORED the "Trump Trade" as nothing more than unfounded naive swamp fever. First rule of investing: NEVER mix your politics and your investment strategy...sad!. Investors seemingly high on crack and delusional over the "Jedi-like" negotiating skills of our new POTUS went long the dollar, long basic resources, long banks and long infrastructure players AFTER they all jumped 25-50% in a spasm of hope over reality. They all LOST money this quarter because they considered the election of POTUS Trump as an economically and politically "transformational event" .
Look..after 24 years in DC, I DID tell you with DEAD certainty that hiring a POTUS with serious mental health issues/ZERO Federal Government and ZERO national political or legislative experience to the most political job on the planet was a recipe for legislative chaos and disaster. So far, his reign has been an unmitigated dumpster fire of amateur hour hijinks usually reserved for a comedy movie.
Then he hired a Cabinet and White House staff of legislative neophytes and shockingly chaos and legislative failure was a lock: Trumpism was now officially a colossal failure in record time (executive orders don't mean spit--especially when they are unconstitutional) and anything BUT "economically transformational.
More on this reality in a moment--but needless to say the next legislative mountain to climb--the tax reform both sides of the aisle want (but in VERY different ways) is DOA in the House AND Senate because of the Border Adjustment Tax.
#2 We DID FOCUS on REAL secular growth stocks enabling the highest magnitude REAL globally transformational changes in Artificial Intelligence (AI), OLED technology, Cloud Computing, Autonomous Safety & Driving, 3D NAND memory (1000 times faster than 2D) AND a few corporate and monetary policy transformations (Newtek NEWT, BDCL, MORL etc)
#3 Our NBTI Macro Market Index (which takes 45 economic indexes and converts them into a 60-day moving average) which has kept us in the market AND buying the 10%+ dips...
Our Results? Not to sound too Trumpian...but we are up 20% this quarter...up over 105% since 2016..and up over 214% since our first newsletter issue June 2013.
How did the S&P 500 do in the same time frame (source: S&P Index)
- Jan 1, 2017 5.54%
- Dec. 31, 2016 . 11.96%
- Dec. 31, 2015 1.38%
- Dec. 31, 2014 13.69%
- July 1, 2013 12.39%
TOTAL S&P 500 Returns (including dividends) July 1 2013-March 31 2017 44.97%
TOTAL NBT Investor Pro Returns (incl. dividends) July 1 2013-March 31 2017 214%
As of today NBTI is beating the overall S&P performance since July 1, 2013 of 45% by 475% or nearly 5 times.
Our subscription promise is you will double your portfolio (in bull or bear markets) every 2.57 years...that is a 28% compounded return. We promise that level of market performance based on the published work of the London School of Economics that shows since 1986 IF you use their index of economic growth indicators (which we do) and are long S&P 500 index while the U.S. economy is in an expansion cycle (as measured by the 45 piece index & a 60-day moving average) and SHORT the S&P 500 index when the index breaks down under its 60-day moving average, you will generate 14% returns.
WE double that return following the little read addendum to that research that showed "If you buy the secular growth companies at the bottom of the contraction cycle and hold them to the end those equities double the upside returns."
NOW..if you add my research from my old macroeconomic research firm ChangeWave Research and focus your long investments in the highest magnitude transformational growth sectors of the global economy (and avoid the victims of transformational change aka Sears/Blockbuster/Newspapers) you get this:
- Our ACTUAL performance since Jan 2 2016 is we doubled our $250,000 portfolio in 1.3 years to $513,326.
Here are the numbers for our 2016-2017 portfolio as of March 31, 2017 aka the close of Q1 2017:
NBT Investor PRO 2016 Portfolio Returns 2016-2017
Perhaps MOST important to your piece of mind: in almost 4 years of NBT Investor PRO we have had only 5 losing positions..In the last 15 months 2 losers out of 26 positions GoPro and Autoliv (and we are revisiting Autoliv now to make a call).
Our average gain on our winning positions is 110%...average losing position is 11%. Out of 65 buy recommendations since 2013 we have had only 5 losing positions (bought within a day of recommendation and sold within a day of sell recommendation.) I'll challenge any hedge fund in the world to a 83% winning percentage.
In four years we have never had a losing quarter...or a losing MONTH for that matter. Our timely hedges during the taper tantrum, the 2016 Jan/Feb meltdown from the Fed rate hike, Brexit have kept us green for nearly 1300 trading days in a row.
Those of us who put our heart and soul into advising these buy/hold/sell recommendations AND running the proprietary NBTI Macro Market Index (i.e., are we long stocks or short equities/long bonds) are proud of this performance. I know from emails and messages (you CAN text me at 301 412-8622--that is my mobile number) that many of you who employ options and leverage have done even better than this.
But as one subscriber put it to me recently: "Toby...just one stock like Nvidia, AMD, Micron or Mobileye and change a portfolio return in a big way. I have ALL of them...and I have NEVER ever made this type of money in my portfolio...grazi!" He's Italian...what can I say?
So now that we are done with the pats of the back, what's next? Well over the next few weeks we will:
#1 Be adding to our 3D Nand portfolio (MU, AMAT, LRCX) with Western Digital (WDC) January 2018 Call options and Axcelis (ACLS) the OTHER 3D NAND equipment provider next week that (just like Mobileye) I believe will HAVE to be acquired--this time by our own Lam Research (LRCX). ACLS just did a reverse split to get shares above $15 which they needed to get on Wall Street radar. We will try to accumulate/buy under $17.50 (more on this 3D NAND play in a moment).
#2 We are going to convert Ambarella into a long term January 2018 call option--again the MobilEye buyout makes them a must buy for a big chip maker like Qualcomm, Texas Instruments, or multiple foreign players. My price target is $75 for takeout in the next 12 months.
#3 We will ADD new option positions to MU AMD NVDA on SOME meaningful pull back (more on this in a moment) and take most of our profits on NVDIA over $110. I am moving target for MU to $38 and AMD to $25 on their immense margin expansion and new product roll-outs NOW hitting the market
#4 With long term U.S. bonds and 10-year now range bound 2% to 2.6% (mostly because new bank regulations are created more demand than supply) and modestly rising short end rates from the Fed (we have priced in June 25 basis points and December 25 basis points) we are going to add BACK our 20% yielder MORL on next pull back. I REGRET taking our big profits on MORL earlier this year...the rise in short term rates and long term rates was historically "supposed to" hurt asset values of mREITs and I thought it was due for soe selling.
NOPE...did not happen and I think the hedges in the short term cost of mREITs in the MORL index out the next 12-18 months are going to keep MORL in an upward trading range with only 2 more Fed hikes. WHEN the FED starts selling mortgage back securities from its $4.2 trillion portfolio...THAT is when we should see the endless "bid" for MBS start to wither...a bit.
#5 We will add $160 Apple 2018 calls and Apple under $140 next market pull back. The Apple 8 rollout is by our estimation going to be a homerun for Apple with the upgrade cycle record breaking. The news flow along with the record $25 BILLION in services revenue climbing 15% mostly from app revenues and Apple Music give me a new valuation at $175. IF the Trump administration can pull its head from its hindquarters and not fumble corporate tax reform (the 8.5% tax repatriation still owrks because it is raising income) Apple is the #1 beneficiary of $250 billion in cash repatriation. I'll talk about the odds of this next week.
Actions to Take: We are STILL looking for the market technicals to guide us here.
It's STILL ok to build some cash over the next few weeks: as I advised earlier this month IF you need cash for balance or any reason, or you just feel better with more cash, trim your biggest positions (especially one's that you have long term capital gains in).
- We are going to buy a portfolio hedge when the technicals say this run is out of gas--but it is NOT yet in "imminent correction" territory. My best guesstimate is AFTER tax day when cash flow into S&P indexes start to abate. But FOMO--"fear of missing out" has driven $billions of retail investor money into the S&P 500 index and Nasdaq 100 QQQ...that money flow props up markets.
- We ARE going to replace some of our 200%-300% winners with long term options in order to lock in long term capital gains and still keep upside I expect
- WHEN we DO get the much overdue correction we WILL put our cash to work. NOTE: the BIGGEST winning positions we have had in the last 3 years is when we doubled down on great secular growth companies like Nvidia, Micron, AMD, Newtek etc.
- We are going to watch the legislative trajectory of corporate tax reform very carefully for obvious reasons.
We have an April 28th extension of the on-going budget reconciliation acts of the previous Congress (which as you know did not produce an actual spending budget in the last seven years). It will be rubber stamped of course.
The NBTI Macro Market Bull/Bear Index 17.2 ALL CLEAR for stock market. Odds of recession in next 4-6 months LESS than 2%. We got revisions of 2.1% GDP in Q4 2016 as we expected.
BUT...Q1 2017 GDP growth IS looking a lot weaker with our index dropping a full one point from February 18.2% Here is the culprit.
Q1's Since 2012 Have Been BAD...This latest forecast: 0.9 percent GDP Growth — March 31, 2017
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.9 percent on March 31, down from 1.0 percent on March 24. But EVERY first quarter in the last 4 years has been a bust. After the personal income and outlays release from the U.S. Bureau of Economic Analysis, the forecast for first-quarter real consumer spending growth fell from 1.4 percent to 0.8 percent. The forecast of the contribution of net exports to first-quarter real GDP growth increased from -0.49 percentage points to -0.16 percentage points after Tuesday's Advance Economic Indicators Report from the U.S. Census Bureau.
The GOOD news is the OTHER "nowcast" we follow from the Fed in the NYFED GDP nowcast: It shows 2.9% GDP forecast for Q1. Why the difference? It's a different model and we give it a 40% weight than the older Atlanta Fed forecast. OUR Net result is the 1.8% GDP which is OUR GDP forecast for Q1
Action to Take: Nothing right now...but Wall Street GDP estimates DO need come down to reality. The Q1 consensus for earnings per share growth in Q1 is 9.1% year-over-year growth based on S&P estimates. That would be best growth since since the end of 2011 and this after three straight quarters of negative y-o-y earnings growth. Still take out energy sector (biggest y-o-y contributor for Q1) and EPS growth is 5.2%. As my good buddy Tobias Levkovich of Citigroup said in a note to clients S&P 500 earnings per share, “have been in a three-year funk and finally look ready to break out to the upside in 2017,”
Ex-energy I think he is right in short term because we ARE seeing one of the biggest rise in inventory investment that we have seen in years. All the data I read is that pent-up capital investment waiting on the POTUS election outcome bounced "bigly" as mostly Republican business owners apparently drank the "YOOGE Tax cuts are coming" Kool-Aid from the Trump victory.
BUT ...as we know...pent-up capital investment can be a one quarter bump at best...and what we ARE seeing is a STUNNING disconnect/divergence between the incredible rise in business sentiment (historic for small businesses) swallowing the "4% GDP growth" promise of Trumpism and 1-2% GDP growth for 2017 overall our data forecasts.
Key Point: As an old "bond guy" who respects the GDP and inflation forecasting of the bond market a LOT more than equity analysts, we are seeing a real "flattening of the yield curve" aka short term rates driven by the Fed going up and 10-year bond yields driven by the bond market yields going down (values going up).
A flattening of the Treasury yield curve in 2017 is a worrying sign for investors banking on resurgent U.S. inflation and growth. Long-term Treasury yields, which are largely driven by the U.S. economic and inflation outlook, have declined modestly this year, following a sharp rise in the wake of the November electiont. The 10-year U.S. Treasury yield has fallen to 2.396% from 2.446% at the end of 2016.
At the same time, short-term yields, which are driven by monetary policy, have risen in 2017 as Federal Reserve officials have made clear that they expect to continue raising the fed-funds rate through the rest of the year. As a result, the yield premium on the 10-year note relative to the two-year note—known in the market as the 2-10 spread—slipped Wednesday to 1.107 percentage points
Key Point: A flattening yield curve gets special attention from investors world-wide because it nomrally is an early signal of both economic slowing and overpricing in riskier asset classes.
ALL of which brings us to the new reality of what the "Trump Bump" really is and how critical getting full blown tax reform passed by August recess is to the euphoric disconnect between the "soft data" aka sentiment polls and hard data aka GDP growth.
Really Key Point: We quadrupled the overall 2017 market returns by ignoring the "Trump Trade" and "Trump Bump" as magical wishful thinking of low-information and politically naive voters and retail investors voting their hearts and not their heads.
IF you want to just cut to the chase...like we said in February newsletter the odds of getting a Border Adjustment Tax and $1.1 trillion of new revenues to offset $2 trillion of tax cuts (remember the AHCA was supposed to bring the GOP $1.1 trillion of additional tax income) through the gauntlet of the Senate (without a 60-vote super majority) is about 99-to-1 unlikely.
Without the BAT revenues the 'Transformational Tax Reform" math now looks like 26-28% corp rate (not close to the 15-20% "highest" promises of the White House) and 10% "tax repatriation" deal is in real jeopardy. NOTE IF there is no $2 trillion of cash sucked into the big global companies that dominate the market cap weighted S&P 500 index, the stock market will QUICKLY and harshly price that transformational event OUT of stock prices and there is our bigly 10%+ correction in a New York minute.
Blowing 2017 Tax Reform would be strike 2 for Trumpism--the stillborn AHCA debacle is strike one. Strike three would of course be if all the brain damage and shit show of trying to get a once every other generation tax reform bill in just 8-9 months (remember the Reagan bill took 4 YEARS and the state of our political system and extreme partisanship was virtually NOTHING like it is today) delays the SIMPLEST major reform for Congress: INFRASTRUCTURE!!!!! (dont get me started).
Moreover...if tax reform suffers the same fate as AHCA did, it would be hard for the markets to NOT think of the "Trump Bump" as what I think it is already: a house of cards that eventually will come crumbling down.
KEY POINT: Stock market hangs on getting real Tax Reform passed this year by August recess. Especially important is 8.5% offshore capital repatriation and 20% marginal corporate rate. All that good news priced into big cap global stocks...you know the ones that drive the SP 500 index?
Last big tax reform was 30 years ago and it took Reagan 4 years to put together Dems and right wingers to all agree. Also the level of bi-partisan legislating was like Candyland compared to the current toxic waste dumpster fire in DC and the internecine Civil War in the GOP party...the party with the majority.
Dont forget in the 80s Congress and Senate Committee Chairman from the majority party had a BIG stick and carrot system of patronage and free reign to move legislation: it was called "earmarks" and ol Danny Rostenkowski could round up the renegades and flat out say "What do you need for your vote." Also in those days there was no Citizen United case which now says corporations have first amendment rights...and that means unlimited cash. IN the 80's, Congressmen depended on funding from the Speaker and party coffers...they HAD to toe the line.
Today the Freedom Caucus renegades raise their own money...and have their own media outlets too (Breitbart, NewsMax.com etc.). In the old days Committee Chairman had REAL bribes and threats to wrangle votes...that is how The Tax Reform Act of 1986 passed...AFTER 4 years of selling and arm twisting.
In this context...I think Mr. President you are going to need to devote every breathing moment to building a coalition to pass Tax Reform otherwise you will lay another legislative stillborn egg like AHCA.
If you legislatively strike out again and go 0-2 , by Fall the 26 GOP Congressmen running in 2018 and 6 Senators in states won by HRC are going to run away from you like a 20 foot downhill put on the 9th hole at Augusta.
Why the World’s Most Expensive 24 by 7 Reality Show is Failing Bigly (65% Disapproval Rating) & One Failed Tax Reform Bill Away from Imploding
The reason i why many of us DC veterans talked about during the POTUS campaign: The assumption that the skills required to manage the $4 trillion U.S. Federal Government (1/5 of the entire U.S. economy) and actually pass legislation without a 60-vote Senate super-majority are NOT IN ANY WAY related to running a private family owned global enterprise. Then when it turned out that a vast majority of appointees never have passed a single piece of federal legislation either...investors and Republicans should not at all be surprised by the 0-1 legislative results so far should we?
Simply speaking it should be obvious to any non-partisan that applying business thinking to government does not work primarily because the federal government and federal legislative process don’t have the same goals or measures for success. So far everything DJT admin is doing is driven by sole proprietor business playbook of thinking and logic: reorg departments, slash budgets, no autonomy for Cabinet Secretaries, hiring based on loyalty not competence.
Now factor is Trump's attacks on his own workforce, the Senate and the House, the Judiciary, various public figures and of course the press. To pass legislation in a less than 60-vote supermajority Senate, you have to legislate. "To legislate" means to build coalitions of Dem and Republicans. When you hear “won’t vote” from a Congressman it means “let’s negotiate—I want something for my vote.”
Here is the PERFECT example of what I am talking about: The budget: “President Trump on Thursdaywill unveil a budget plan that calls for a sharp increase in military spending and stark cuts across much of the rest of the government including the elimination of dozens of long-standing federal programs that assist the poor, fund scientific research and aid America’s allies abroad.”
That last one may not look like bad news — yet. But it’s going to produce both internal and external problems. It’s already causing consternation among the more moderate Tuesday Group Republicans on Capitol Hill, many of whom like to talk about limited government in the abstract but aren’t as happy about the kind of radical cuts the administration is suggesting, setting up a conflict between the White House, Congress and their districts. They’ll also find that the public, too, thinks “small government” sounds like a good idea until you start cutting the programs they depend on.
Political Reality: With 35% approval ratings, 2018 politicians running midcycle in 2018 are now MORE AFRAID of being "primaried" aka being tossed of their ticket OR their actual constituents than the President--not good. If you want a friend in Washington get a dog..otherwise bring money or votes via political coattails or don't waste your time. administration has good periods and bad periods, successes and failures. But this is more than a slow start; two months in, this presidency is a rolling trash can fire disaster.
What’s going on? The administration isn’t failing because of some brilliant strategy on Democrats’ part. They’re drowning in problems of their own making. In sports terminology they are being killed by self-inflicted “unforced errors" and gross incompetence. In isolation each problem would be difficult but ultimately manageable; together they’re toxic. Here is my analysis of the oxygen driving the trash bin fires:
Abysmal management. Trump was only the latest in a long line of political figures who argued that if someone from outside politics took over the government, he’d whip it into shape with his business savvy and management expertise. The result has been the most chaotic and incompetent White House anyone can remember. As Politico reported Wednesday, “A culture of paranoia is consuming the Trump administration, with staffers increasingly preoccupied with perceived enemies — inside their own government,” creating “an environment of fear that has hamstrung the routine functioning of the executive branch.”
Almost no one at the top levels of the Trump administration has experience in government,which not surprisingly has made everything more difficult as they bumble around trying to figure out how things work. Whether because of their own indifference to governing or the inability to find anyone willing to work for Trump, the administration hasn’t even nominated people to fill more than 500 of the 553 key positions requiring Senate confirmation, leaving agencies across the government barely able to function.
In his constant state of delusion, Trump considers his White House a “fine-tuned machine"...denial is not a strategy. Trump is SO isolated at this point in the White House its really sad to watch. My contacts say he is like a 90-year old man in solitary confinement with a Twitter account and 5 TVs.
A disastrous first legislative priority. Republicans may have had no choice but to pursue the repeal of the ACA right off the bat, but they could hardly have gone about it in a less competent way. After seven years of attacking the law, they still hadn’t settled on their alternative, leading to a hastily written plan that not only would create a health-care catastrophe if implemented but also managed to win the displeasure of their members in both the Senate (for being too harsh) and the House (for not being harsh enough).
Now the White House is saying it’s Paul Ryan’s fault, Ryan is trying to make Trump share the blame, and the whole thing is spiraling downward. Rich Lowry, the editor of the conservative National Review, writes that the repeal bill “has had the worst rollout of any major piece of legislation in memory,” and has left the GOP “staring into the abyss.”
An impulsive, distracted and factually disinterested/incoherent President. People keep wondering if the latest Trump outburst is a clever ploy to distract the country from whatever piece of bad news is currently vexing the administration. But the one who’s easily distractible is the president himself, and then he in turn distracts his staff and congressional allies. Just look at what’s happening with his accusation that President Obama tapped his phones. On impulse, after reading an article on a white nationalist website, Trump levels a ludicrous and baseless charge, then everyone in the White House has to pretend that it’s serious and legitimate, and they’re forced to answer questions about it for weeks. All that time could be spent advancing an affirmative agenda.
Because he can never admit that he was wrong, Trump drags the issue out endlessly, just as he did with earlier iterations of this pattern, about the size of his inaugural crowd or the millions of phantom illegal votes that led to his popular vote loss (I’d encourage you to read the transcript of his Wednesday interview with Tucker Carlson and marvel at the fact that this man is actually president of the United States). That then makes life difficult for Republicans in Congress, who are put in the awkward position of either defending the latest bit of stupidity issuing from the Oval Office or being honest about how ridiculous it is, which they know would win them the president’s ire.
KEY POINT: There is a very big political price about to be paid by the Trump Administration for their incompetence-- and I am very much afraid it's a very watered down tax bill. Much as you can blame Republicans in Congress, including Ryan, for being Trump’s enablers, there’s no doubt that they’re not happy about how things are going. Their minds are now already on teh 2018 elections and that means thinking more and more about their own survival.
Furthermore, given that even in the best of times the president’s party usually loses seats in the midterms, many in Clinton winning states are looking for ways to separate themselves from an unpopular president, which is only going to make future legislating more complicated.
Congressman Raul Labrador of Idaho...a Tea Partier turned Freedom Caucus leader...says Trump Tax Reform with Border Tax Adjustment (BAT) is "dead with his Caucus." Lindsey Graphm in the Senate says he can't count "more than 10 GOP votes with BAT included.
Remember without 60-vote supermajority ANY 2017 Tax Reform Act HAS to be passed under Senate reconcilliation rules which means no additon to deficit within a 10 year window as defined by the CBO budget crunchers. Minus $1.1 trillion in less spending from AHCA, and another $1.1 trillion for 20% import taxes for businesses, Trump Tax reform does NOT conform to reconcilliation rules in the Senate.
That does not even address the fact that according the World Trade Organisation, a 20% import tax would not be allowed under the WTO rules.
ACTION TO TAKE: sit tight for now. The market here feels like a game of chicken. Strong earnings growth will keep OUR leading transformational tech companies rocking...but WHEN (not if) the Trump administration has to settle for a WAY watered down "Trump Tax Reform" political castration bill at best..the only question is "what will the one time cash repatriation rate be?"
I won't bore you with the math here (that is IF you got this far) but the only way to make the math work is 25-28% corp rate and a one time 10% ish repatriation.
THAT reality is NOT priced into stocks yet.
Infrastructure in 2018 HAS been priced in...but with the Trump Administration 0-2 in promised legislation by the end of the summer...it would take someone with Bill Clinton like political magic to pull the Trump presidency out of being the earliest lame duck in history.
After 100 days...with a <35% approval rating, Trump will be a relevant as that Nehru Jacket you still have in your cabinet. When the market wakes up to THAT reality, the Trump Bump will become the Trump Slump...and we will have taken a LOT of profits.
No matter what happens, I promise we will be positioned to profit. Turns out all those years in DC and interviewing politicos in my
14 years on Fox News and Fox Business DO give us an investment edge.
PS--My prediction is that Trump's Svengali Steve Bannon will step down after the Tax Reform failure...I have been friends with Steve for years...very very bright...but his dystopian populism vision is destroying what little gravitas the Trump group has. DC is like high school...there is a social structure and unspoken set of rules to get ahead. Trump is a loner who can't forge relationships...never has. He is the type of person who call me "his friend" because I interviewed him 8 years ago for the first time and did not embarrass him. IF you can't make political friends from the other side in DC...and you attack your own political party members and try to strong arm them with NOTHING to offer them and NOTHING to make the fear you...you are a political Eunuch.
THAT is reality folks.
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