September 2016 Newsletter


We begin the home stretch for the year and our 23 open/closed positions remain up about 60% (nice move in NEWT, GPRO, AMBA, NVDA offset slightly lower price for MBLY and AMD.  We will put this month out in two sections: this is our forecast and review of risk/reward in the last quarter and I'll put out an update Buy/Sell/Hold list with updated Buy Under Prices.

Chatter of the ECB's plan to begin tapering monthly bond purchases sent interest rates sharply higher today, and REITs sharply lower. We are right at support for our favored MORL.

The ECB chatter is chatter from one report that frankly sounds like hot air. SO HOLD Tight...if 10 year rates to break out...we will take our profits and look to repurchase next year. We have had QUITE a run on MORL...I don't like the triple top formation but its $3 away from 200-day...with our 20% annualized dividends we have room to be patient. 


The only other technical breakdown we have is with OLED--Universal Display. OLED has always been a buy below its 200-day moving average...OLED broke that support this week on NO NEWS...which usually means a large fund needed to sell shares for one of a dozen reasons not related to fundamentals. I keep our buy under at $55 and make it a STRONG BUY if the selling continues under $50. Our thesis is as the Apple 8 phones convert to OLED screens in at least the new 8Plus phone in September 2017--the 10 year anniversary of iPhones. The ONLY issue is how fast OLED 4K screens manufacturers can ramp up this note from Gabelli research I think correctly points out:

The "mega cycleiPhone 8 and, presumably, iPhone 8 Plus, will have different displays according to new speculation from Gabelli & Co. research analyst Hendi Susanto (via Barrons). In a discussion with Universal Display executive Darice Liu, Apple's potential use of OLED displays in an upcoming iPhone model surfaced, leading to the talk about overall display technology for the iPhone 8. 

Susanto agreed that 2017 is likely the year that Apple will introduce OLED displays into the iPhone, with the caveat that it may go for a "partial adoption" of OLED because the company's suppliers might not be able to meet its needs for a full rollout. 

This suggests that a higher-tier version of the smartphone -- perhaps the iPhone 8 Plus, or equivalent model -- will be this "specialized edition" of the 2017 iPhone, incorporating an OLED display as its distinguishing factor against other versions. 

  • Speculation regarding the potential adoption of OLED displays by Apple continues to dominate major discussions with investors. The current speculation anticipates Apple’s adoption of OLED displays in its iPhone in 2017 or 2018. We believe that Apple can adopt OLED displays sooner rather than later by pursuing a partial adoption and incorporating it in a specialized edition of a new iPhone version. 
  • This will alleviate the needs of huge supply capacity and accelerate OLED display adoption. Alternatively, Apple could choose to wait and finally adopt OLED displays for all new iPhone versions. We remain cautiously opportunistic. We believe it’s a matter of when, not if.

Here is the chart:


 We continue to CRUSH the overall market returns with our emphasis on investing in the enabling high margin microchips and equipment that power the worlds largest secular transformative growth engines:

1) The Transformation to the Ubiquitous Global CloudInternet of Things + Artificial Intelligencecomputing  (AMAT, AMD, LRXC, MU, NVDA, AMBA, IP)

2) The Transformative Race to Autonomous Self-Driving Vehicles & Virtual/Augmented Reality(MBLY, AMD, NVDA, AMBA, OLED, NVDA)

3)  Addiction to Ultra High Yielding Investments in a NEGATIVE Yield World and Passive Federal Reserve (MORL, NRZ, BDCL, NEWT)

With $10,000 in each recommendation ($220,000 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 5.82%

NBT Macro Market Index: 17.2 BULL MARKET INTACT. Our index is down from 17.9 last month on weaker auto sales, durable sales and total consumption. The one thing for sure: market will have a number of frightful days to get past before we will see the year end Santa Claus rally.

Latest US Q3 GDP forecast: 2.2 percent — October 3, 2016

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 2.2 percent on October 3, down from 2.4 percent on September 30. After this morning's construction spending report from the U.S. Census Bureau, the forecast of third-quarter real nonresidential structures investment growth fell from 8.4 percent to 4.7 percent and the forecast of third-quarter real government spending growth declined from 0.8 percent to 0.1 percent. The NYC Fed's NowCast index has the same 2.2% number for we are in good company. 

The next GDPNow update is Wednesday, October 5. Please see the "Release Dates" tab below for a full list of upcoming releases.

Market Technical indicators (daily chart)

  • S&P 500 is exactly at its 50-day Moving Average (MA) = Neutral
  • MACD (S&P 500; 19,39,9) is even with the zero line = Neutral
  • MACD (S&P 500; 19,39,9) is at its signal line = Neutral
  • S&P 500 support is 2,150 and 2,131 (100-day MA). We had a little tremor with the Deutsche Bank saber rattling in the last week of September...which I will get into a bit later.

The Nasdaq Composite is in far better shape than the S&P 500


Sentiment indicators

  • II survey: (Sept. 27) 45.2% Bulls; 23.1% Bears = Neutral
  • AAII survey: (Sept. 28): 24.0% Bulls; 37.1% Bears = Neutral
  • VIX: @ 13.29 = Bearish
  • RSI: (S&P 500) @ 52.43 = Neutral

None of these indicators really give us market direction...and of course October is the scariest month of the year for stocks (and compounded now with Trump risk.)

So here are the clues I use for short term guidance.

1. YES...October is often quite a volatile month for stocks — and often dreadfully so. WE should expect  for volatility to resurface. WE WILL buy the "dip" again like we have in the last 4 years because our NBTI Macro Market Index tells us the US economy is STILL expanding and recession risk is LOW>. BUT ddd in the Trumpian election risk and CEOs using the term "election jitters" to bring in their earnings guidance for Q3...and October is set up for big swings.

2. In addition, third-quarter earnings season begins next week, and expectations are high, especially in the technology sector. If tech earnings are collectively weak, it could trigger a “risk-off” sell-off. Bottom line: We need to have our  tech company earnings continue outperform and THAT is why our investments are key providers of high margin components to the FAST growth parts of the economy that are NOT tied to low global GDP ok?

GOOD news: our Micron Techn (MU) beat expectations after the bell today and is trading >$17.50. Micron is a bellwether for the PC space AND we are now just seeing the impact of their 50/50 3D NAND memory transformation with Intel (whom I still believe buys MU at $25).

WHAT a buy we made dumpster diving in February on MU: HOLD ON for more gains and BUY under $16


3. Deutsche Bank (DB) is the NEW OIL.  DB has the potential to cause serious heartburn in Europe and U.S. financial markets IF the Germans were to let it meltdown...which they most certainly will NOT let happen in any circumstance. 

The REAL issues with DB is their $60 trillion in derivatives exposure...sound familiar? The DB risk here is financial system contagion like Lehman 2008: DB is a counterparty on $60 trillion of derivative bets long and short. IF they lose access to short term cash (ala Lehman) they start a chain of trade failures that start ANOTHER daisey chain of losses and profits that could lock up the global banks ala AIG. The GOOD news is the German government is in NO POSITION to let this happen politically or economically--they are an export economy remember? Ignore ANY BS about Germany letting that happen--forced takeover and workout ("good bank and bad bank") is the only alternative DB and Germany has to bail-out. BUT... the old saying that "Market participants have a way of separating facts and noise" definitely applies here.  Right now, the fact is that investors have completely lost confidence in Deutsche Bank. LOOK to the U.S. Justice Department to lower their mortgage securities fine to $5 billion as a favor to Obama and Germany for taking 1M refugee immigrants. 

4. Property prices in both the New York/SF and Greenwich Conn. areas continue to drop. There are multiple reports of problems in other areas; in particular, numerous high-end properties (+$10 million) on both U.S. coasts are not selling, forcing sellers to lower their prices, and sometimes to take losses. THAT fear locks up people as the SF/NYC/Vancouver real estate bubbles burst. NOT coincidently, LIBOR rates (now that they are not being fixed) are moving due to heavy dollar borrowing in Europe...which drives up funding costs of European banks (and US mortgages based on LIBOR too). The HIGH end part of the residential real estate market HAS BEEN in a bubble with stolen cash from China, Russia and other areas coming in to be laundered into "safe" US real assets. This WILL stabilize when we get IPOs up and running again next year but when the high end volume peaks...its a sign of real estate peaking.

5. The U.S. stock market continues to suffer outflows (this month marked the 18th month in a row of outflows). This is mostly from mutual funds and much goes back into lower cost ETFs..and stock buy back take a lot stock OUT of the market. But still...outflows means availability of stocks going higher if not offset by corporate stock repurchases which are now LOWER than last year's pace.  

6. Before and after the November election, volatility is likely to skyrocket no matter which candidate wins. A Donald Trump win, similar to the Brexit vote, would create massive confusion and a worldwide selloff--and there is no two year wait for protectionist Trumpism to hit the world like in Brexit. I guarantee that if Hillary Clinton wins there will be a RELIEF rally up until the Fed meeting.  We will advise on an option straddle right before the election. With this strategy, we will make money if there is an extreme move in the S&P 500 in either direction.

At the end of the day the overall stock is STILL driven by two engines: 1) The Global Central Banks war on the yield of cash/risk-free bonds, and S&P 500/NASDAQ 100 earnings. But we have multiple potential "risk off" moments ahead so building SOME CASH here makes sense to me.

Here Are The Market Worries that Count From Here to Year end

So, what are the biggest issues likely to affect the market? From our point of view:

The big worry here isn’t just one bank getting hit,” said James Stanley, a currency analyst at DailyFX. “The bigger concern is a contagion effect; because banks trade with each other and if one major bank gets taken out, this can create a nasty cascade effect across markets as other banks get pinched by counterparty risk.

Sound familiar?

  • The Election and the Fed. These really two separate things, but they are both so well known, and have been so thoroughly dissected, and don’t require much more here than to simply note them: the U.S. presidential election on Nov. 8, and the Federal Reserve’s last two policy meetings of the year, Nov. 1-2and Dec. 13-14. If the Fed is going to put in another rate hike, it can ONLY come in December and the stock market in December HAS to be stable (otherwise no raise). If odds of December raise get up to 75%--we will SELL our MORL immediately (or if it simply rolls over here).
  • Corporate Profits. Third-quarter profits for the S&P 500 companies are now projected to contract by 2.1%, dashing expectations that they would rise in the quarter and break a string of down quarters. This earnings per share reduction would extend the earnings losing streak to six quarters. At some point, of course, this string will end, but losing a year and a half of potential profit growth is going to leave a mark, especially when the prospects for the economy simply aren’t very strong, which brings up the next point.
  • The Economy. This could be the most interesting, really, because the thesis that buoyed the market earlier – that the second half of the year would be stronger than the first half – is starting to unravel. Friday morning brought the latest report on consumer spending, which leveled off in August, its weakest reading since March. Adjusted for inflation, consumer spending was down 0.1% in August from July, and it looks like real consumption growth for the quarter will come in around 2.7%,  down sharply from the second quarter’s 4.3% rate.

That’s consistent with other economic soundings, and it’s another piece of evidence against the second-half rebound thesis. Fourth-quarter forecasts are generally below the third-quarter expectations, the upshot of which is once again, we’re looking at an economy likely to grow less than 2% in 2016, with little momentum going into 2017.

We continue to believe that pressure on corporate profit margins will result in increasingly aggressive cost-cutting measures which will impinge on the pace of job growth,” said Joshua Shapiro, the chief U.S. economist at MFR, “with the effect intensifying as next year progresses, and thus the consumer is unlikely to be able to sustain a significant ‘engine of growth’ role for too much longer.

The economy is of course the sun around which all those other satellites revolve. The health of the banking sector, the election, the Fed, and corporate profits will all be determined by the strength or weakness of the economy. So it’s sobering to reflect upon the fact that even the Fed, a reliably optimistic observer of the economy and a group with as much influence as any on the planet save consumers themselves, concedes that long-term growth in the U.S. won’t average even 2016 and 2017.

Action to Take: This is yet another reason why we put our money in the transformational  2-5 year secular not cyclical growth sectors of the public markets. GENUINE locked in 3-5 year revenue AND profit growth companies ARE the only way to buy appreciating assets in a low growth world. AS long as the US economy is expanding (albeit at 2%ish rates) we are ahead of 580 million people in Europe, 200 million in Japan and will continue to be the safest port in the low growth storm. 

We will be back later this week with the full review of our portfolio and ADD 3 more positions to take us to 25 positions for the last quarter of 2016.

IF Clinton wins and IF the relief rally takes us up to old highs...we WILL take year end precautions and harvest profits. WE WILL offer advice of January put options for those of you who don't advisedly want to take a short term capital gain in late 2016 (paying my taxes on gains taken last year...ouch!).

Hang tough...don't get scared get GREEDY if the best secular growth stocks get tossed around in the next 30 days...that is HOW WE have made so much money in the last 3.5 years!

- Toby

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