Weekly Update 8.21.17
A very special welcome to a new group of LIFETIME subscribers that are joining us (I will send out a lifetime offer to you all that did not receive this special offer later this month). Also...go to transformityresearch.com to see our new website and blog which are ALMOST ready to go. When we are ready to go live we will get you easy instructions on how to register for the site and how we will add your existing subscription time to your new account.
PS--we are going to re-brand the investing newsletter "Transformity Investor." Our 6-to-1 annual out performance of the S&P 500 since 2013 is 100% due to our Transformity Investing principles (identify the fastest growing secular micro and macro market sectors of the economy and "buy the dip" when our Macro Market Index tells us there is very low risk of an economic recession 4-6 months out). Our Macro Market Index which has kept us LONG stocks for the duration of this bull market. Knowing when the business expansion has run out of gas will of course allow us to LOCK IN our prodigious profits and make money on the short side (with leveraged Bear Index's and put options) while hedging core positions. It becomes the Transformity Macro Market Index.
Reality FINALLY Sets in for Trumpism
As you know I have purposely chosen to NOT fall into the "hope and pray" trap that somehow the person least suited in America to be POTUS was going to magically convert from a bomb-throwing nihilist into a leader capable of inspiring both moderate GOP congressional members and some moderate Democrats to come together and kumbaya. Anyone like me who has known the guy 20+ years knew he was not interested and incapable of "being presidential."
Regardless of your political beliefs, and especially if you are a hyper-partisan Kool-Aid slurping Trump believer...I have pounded the table since January (when it became apparent Trump was only interested in governing for his base since "they say such nice things about me") that the run in bank stocks, Russell 2000 small cap stocks and infrastructure builders and suppliers was a mistake of hope over reality and investing your politics not your brain.
Well sports fans, NO CHART better qualifies the accuracy of that forecast than the Russell 2000 Small Cap index. I'm going to go through a TON of sector charts for our August Newsletter and attempt to interpret what they mean. But I will tell you this: In my 25 years as an investment research publisher, editor-in-chief and as hedge fund/mutual fund manager...I have NEVER seen such contradictory sector charts.
To start...look at where the HIGHLY accurate Atlanta Fed Quarterly GDP has 3rd Quarter GDP--3.8%!
Our NBTI Pro Macro Market Index (that has called every recession since 1986) hit a new record today...18.4!That means the odds of a recession 4-6 months out (AND of course a new bear market starting in the next 1-2 months) are less than 2%!
Latest Q3 GDPforecast: 3.8 percent — August 16, 2017
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2017 is 3.8 percent on August 16, up from 3.7 percent on August 15. The forecast of third-quarter real residential investment growth increased from -0.5 percent to 3.7 percent after this morning's new residential construction report from the U.S. Census Bureau.
You would think that cyclical stocks like airlines and small cap stocks (who primarily market within North America) would be rocking. Instead they are sinking like Jon Snow from Game of Thrones under a frozen lake.
Now the Russell 2000 Small Cap Stocks since January 2017--full round trip and now down for the year. Small caps pay on average 32% corporate tax rate (big caps pay 23-26% based on cash repatriation levels) SO if you believed that "tax reform was easy" you bought this index. It went up 15 days in a row post-election...now it is negative for the year.
I follow the even-weighted (i.e, not market cap weighted) Pharmaceutical index to see how it looks without the mega-cap leaders...and it looks like a completely blown-up sector. Big part of that is generic drug makers losing pricing power...but that has NOTHING to do with Repeal and Replace of Obamacare.
I could show you another 20 exhibits...all with "death cross" formations where the 20-day MA is dropping thorough the 50-day and the 50-day is dropping down through the 200-day.
One issues clearly is S&P 500 earnings growth forecast of 20% are now revised down to 11%. So this 50% cut in earnings forecasts overall (not in OUR transformational growth sectors and stocks) is getting priced into the S&P 500. Clearly 11% pull back in dollar index vs. other major currencies is helping the global exporters like Boeng, Apple and even defense industry.
Key Point: If you throw into that mix a dysfunctional government and the kind of political drama that we continue to see, we have national and geopolitical risk under this chaotic White House and a POTUS who leads and insults with Twitter posts on a daily basis. It became clear earlier this month that the market was pricing in hopes for tax reform clearly that isn't going to come, or come in a comprehensive way, and that was going to be negative for the stock market. The further we move into the year, and the further we don't get anything on this, the most likely case is larger global stocks will be more attractive simply because the MEGA cap global stocks are also the biggest beneficiaries of lower dollar and above average global growth especially out of the European Union. Our global corporations only pay 23-26% average tax rates as it is.
ON that subject: Each 1% cut in the tax rate is about $120 BILLION in lower revenue without offsets over 10-year period. Since the POTUS has not figured out that insulting Senators, Senate Leaders, Congressmen and Congressional Leaders does NOT win their hearts and minds, ANY "tax reform" is going to ONLY be at the margin ( because there are not 60 votes to be had in the Senate, it will have to be passed under "reconciliation" which requires NOT adding to the deficit and sunset after 10 years). They will take mortgage interest deduct-ability down to the highest Fannie/Freddie mortgage level ($695,000) and an offshore 10% cash repatriation tax and wind up near 23-25% corporate rate (today the actual PAID corp income tax rate is 26% for big caps and 32% for small caps...so no great shakes here except for small caps).
One aspect is for sure: Unless there is a miracle, they will NOT get ANY bill passed by the end of the 2017th Congress...they don't have a chance in hell because they have to get FIRST get a budget 2018 approved and debt limit raised and THEN they have 15 legislative days to pass a meaningful bill covering the most lobbied aspect of the Federal Government? Please... they will ALL come back in an election year for many Congressional seats and 20 Senate seats and pass SOMETHING that the POTUS will sign and declare "its a terrific, beautiful bill." Of course the capital markets has know learned disregard ANY thing out POTUS's mouth or Twitter handle as either a gross exaggeration (or downright bullshit).
Do I sound disillusioned? No...I never HAD ANY illusions. Knowing Donald J. Trump for 20 years in NYC and interviewing him multiple times for Fox Business I KNEW the kind of wildly ineffective POTUS he would be. What I did not know was how the GOP leaders/hostages and business leaders would deal with him. After Charlottesville, we found out. You can do a lot of dumb things as POTUS and not pay a price; but equivocating and being morally ambiguous and not immediatley and unambiguously condemning our mortal enemy aka Nazi's and White Supremacists/Anti-Semites "who were chanting "we will not be replaced by Jews" , "We will not be replaced by niggers" and the Nazi chant "blood and soil" while holding up Nazi Flags, did not work out. Note: glad to know there IS a line of no return for Trump...for a while there I was not sure.
Anyhoo...at this juncture, the S&P 500 is more than one standard deviation below its 50-day moving average for the first time since just before the U.S. presidential election in November, which is of course the typical indicator of "oversold" conditions. Support for the index likely exists just above the 2,400 mark so we want to see the buy-the-dip algo/black box buyers step in any make an run at the leading secular growth stocks we own.
Nevertheless, practically all of the market breadth indicators I follow are still pointed down and not yet at 'washout' levels that have historically marked 5-10% correction bottoms so selling pressure is not completely exhausted quite yet--another stupid tweet or new pissing match with North Korea (remember them?) will shake out a few more nervous nelly's.
The 100-day moving average has been the bottom of the uptrend range all year...we need to see it hold this week.
A look at an evenly-weighted SP 500 gives us a better view of how the Top 500 stocks (actually 505) are doing on average.
Of course the Semiconductor Index has outperformed the S&P 500 by 2x this year and the good old 100-day moving average is holding the line...
And the S&P Technology Index (XLK) shows us once again the secular growth technology sector looks like nothing bad is happening in stock land.
My STRONG ADVICE: IF you are feeling nervous about your NBTI Pro stocks and ETFs...just dial up the XLK chart on stockcharts.com
and you feel a LOT more calm. THIS is the chart that once again proves the superiority of buying 8-12-15 p/e secular growth stocks in a 2%-ish GDP growth world. Most of our best performing stocks are 15-20% or more BELOW S&P 500 multiple of 21X trailing/17.5X forward earnings.
Action to Take: It's August...volumes are very low...traders are on vacay...its never pays to SELL in August...but it does pay to take great stocks off the hands of nervous weak hands.
Newsletter out this week...chart of every stock and position...like usual...IF the technicals tell us to hedge...we will hedge. But they have just been in a trading range. These are the weeks where we EARN our 40%+ annual performance...by NOT panicking and keep calm while other's lose their heads.
PS...I just can't help myself. Guess who was staring at the eclipse today without special sunglasses? WTF is WRONG with this guy?
Tobin Smith, Editor