Greetings to ALL our Transformity Research subscribers including our army of SuperSPAC Pro Trader as well.

It's once again time for another chat like we had on February 25, 2020. We are not of course again faced with an impending global pandemic this time --but we do have a rapidly deteriorating set of former leading sectors in the market from the March 2020 March 2021 bull market that are now in sector bear markets (down 20-55% since mid-January when 10-Year Treasury bond yields started their explosion from .55 to 1.75% today)

Fortunately, our TR Ultra Growth portfolio is still green with profits in 2021 (after closing out 80% of our positions) and our Ultra Income portfolio is outperforming the 6% up SP 500 by 600% including dividends--so we are in a fine place with our portfolios. At SuperSPAC Pro Trader, we have taken on average over 170% profits in 9 of the last 11 trades in our ARBFolio portfolio in SuperSPAC Pro Traders and have gone to cash/hedged our remaining ARBFolio positions from our Alert from last week as the SPAC bubble mania has now peaked (which will give us new highly profitable trades when $10 in cash SPACs are selling under $10 and their warrants for pennies.

And of course, we aren't facing another recession-based bear market per se either--as mentioned in our last newsletter we have 6%-7%+ GDP growth locked in for 2021 (as long as someone can get the now 22% of Americans who report are still "not likely" they will get vaccinated---don't get me started) and that is BEFORE the new $2.7 trillion infrastructure spending bill gets passed (which WILL GET PASSED now that the Senate has approved 4 more reconciliation bills for this Congress).

Let's be real here: those of us in the Transformity Research subscriber family have grown an amazing amount of new wealth since 2013 and literally 40 YEARS of new wealth in 2020-2021 alone.

Key Point: My goal for you and our managed account clients up 400-800% or more in just the last few years is to KEEP THAT WEALTH growing and to not give a nickel back to the much-needed deflation of former market momentum leaders that have begun their MUCH NEEDED down 20+% bear market within an overall market up about 7% in 2021.

To achieve this goal, we all need to understand the investing ramifications that lie ahead for us in 2021 Global Pandemic re-opening economy because 1) the two enormous market mania bubbles from March 2020-to late January 2021 are indeed getting unwound/deflated as all investing manias/bubble ultimately do and 2) the NEW stock market leadership is changing in a few important ways.

As investors, our job is to continuously make decisions that update our perception of stock market reality 6-12 months out. Our decisions reflect, or more accurately our model/perception of actual economic reality vs. the latest narrative. When our macro and narrative models formed are accurate and our decision-making is sound, our accurate mapping of reality allows us to make (what turnsed out to be) pretty spectacular macroeconomic and sector forecasts and stock selection. In TR Investor PRO, our going to cash in Feb 2020 and rushing into the burning building that was the stocks market (but REALLy to the energy sector in complete meltdown) in late March/early April is a great example of accurate perception or model of reality in real-time.

But, in order to do this, we need information that is meaningful and accurate. If we don't have the relevant information, our model of the next 12-18 months is incomplete and unreliable and THEN is when we are more likely to make the wrong decision. And in the game of investing, a wrong decision is likely to lead to a loss of capital, a missed opportunity, or more dire consequences (see $20 BILLION Achegos Capital hedge fund now broke and in insolvency on highly levered derivative bets on Viacom and Discovery last week.).

The Important Point: Since the market peak in March 2021, the stock market reality could not be any more different than in March 2020. There are literally 20+ different factors I'm about to go into, but let's start with the enormous run and now implosion of "price momentum" stocks that have primarily been bought by 20 million new YOLO "I have no idea what I'm doing" Redditors and then by $trillions in machine trading bots with 2X or more leverage ALL buying the same extreme valued YOLO/WFH (profitless 15X-60X revenue valued "work/e-shop/exercise/cook/fix-up/move to/entertain me from home") stocks simply because their price is going up.

As we have been saying since the YOLO'ers became the marginal (price& risk insensitive market order) buyer of risky stocks in April 2020 like our beloved NKLA, TTCF, STPK and other SPACS (which we of course TRADED long ago and intentionally did not "own" for the long term), the public market for late-stage venture capital Unicorns in 2020 to February 2021 became like the insane asylum where the inmates took over the asylum. We called it a mania, we made stupid money speculating on the mania, and I think we will make stupid money again soon when the mania goes full implosion.

Key point: But simply measured by the EXTREME valuations these YOLO/WFH stocks have reached, our perception of reality in 2021 is it will take MANY months or even years to correct, consolidate and find an investable base in the long term winners of the digitation-of-everything world. 120 trading days of consolidation after such a historic 12-month market run is not enough.

In short: 50 years of market history shows when we get such dramatic valuation multiple expansion of REVENUES not cash flow, these stocks underperform for years, not months.

How many 15+ times revenue valuation stocks are we talking about today? According to the latest Alliance Bernstein research, we have 366 profitless tech stocks currently at or above a 15X revenue valuation. Going back 60 years, there was only one year that we have ever had more of these highflyers--and that was March 2000 when the dotcom tech bubble burst--that year there was a staggering 1540 companies trading for 15X times sales valuations.

Key Assumption: History does not always repeat itself, but it sure as hell rhymes. When those 5 out-year revenue and earnings assumptions are discounted by ZERO (the after inflation cost of risk-free 5-10 year bonds in 2020), inflation is benign, and the world is in a once-every-100 year pandemic recession/depression with 10% negative GDP growth, there was a least a plausible and rational case to be made to buy this rare cohort of 30%+ five year growth rate companies in the context of a global pandemic with no quick end in sight and all consumer-based and consumer-facing sectors other than food, TP and cleaning supplies in 30-90% GDP contraction.

But let's remember this: In their latest remarks, the Fed continues to stand on its belief that "the price inflation burst in 2021-2022 will be temporary" and that the economic factors that have kept inflation benign for decades that we all now know and love (very few COLA based labor price increases in 2021 vs. '70s), internet-based supply chain globalization, global e-commerce, one billion new hands in developing countries to assemble products for $2 an hour, Walmart/Amazon/Costco, fixed fee Medicare Advantage coverage for 65 million Americans vs. unlimited fee-for-service healthcare, app-based disruption of almost every industry and now robot/AI/robotic repetitive automation labor replacement etc.) will quickly right the temporary inflation ship back to the 2% or lower price inflation rates which support elevated equity valuations.

The problem we face with this reasonable conclusion is the bond market and the stock market do not buy a short-term inflation blip. They don't buy that the Fed will hold its .25 short-term interest rates in the face of (relative) runaway price inflation if it arrives at the party and won't leave.

Rational or not, the $25 trillion bond market IS and always will be the sum of all fears for inflation. And extended periods of 2%+ inflation are valuation Kryptonite for the listed companies with sky-high 15X+ revenue valuations (and this group is SURE to explode to more than 600+ companies with 15X+ revenue valuations now that there are 600+ SPACS on the hunt for sexy pre-revenue/nominal revenue private Unicorn companies that they hope Zoomer/Millennial YOLO "investors" will bid up to the sky.)

Key Point: For all the reasons above and below, our macro and market model says for the next 90-120 days at least, we should continue to NOT be in a rush to jump into the beloved fallen secular growth stocks that were big winners in 2020.

Now with the advent of the very passable $2.7 trillion Biden Build Back Better plan, that's a different story--we have a list of primary beneficiaries all worked out and ready to go.

But there will be a lot of damage to come in 2021 (and maybe 2022 as well) with the giant flame out of the stock markets new Zoomer/Millennial YOLOer marginal buyers of risky stocks and call options. We have to accept the strange suspension of disbelief that in 2020--where winning tech stocks were being bought because they WERE the most expensive--the MORE expensive a stock was relative to "normal" and traditional valuation metrics, the better the stock performed.

Why is that? Did the laws of financial thermodynamics and gravity get rescinded with the pandemic?

No--as I have shared with you since April 2020, what changed is we got a new fearless marginal buyer of stocks and call options (which multiplied their marginal buying power and stock moves). This idiocracy of 25+ million YOLO Zoomers and Millenials who, with nothing else to do (literally) and "stimmy" checks and no sports betting, turned stock and options speculation into a new form of social media-based entertainment. As Jason Sweig reported in the Weekend WSJ, we should call the 78% run from the bottom of the March bear market the "Know-Nothing Market." Robinhood Trader’s Battle Cry: ‘It’s All Just a Game to Me’ Traders who boast about their own cluelessness who are upending the traditional investing hierarchy."

That the site "TopStonks.com" measured on Wall Street Bets in February 2021 "stonk traders" called themselves "stupid," "idiot," or other related terms 3500 is really you really need to know about how the WSB crew--all 8 MILLION of them--turned the concept of investing in stocks into a true virtual gambling casino with money many would have actually BEEN gambling on sports if there were any games to gamble on.

Am I being "OK Boomer" prudish or small-minded here? No--I am just trying to emphasize to you my dear subscriber how absurd the Attack of the Know-Nothing social media and influencer driven YOLO'ers was starting with this observation: When was the last time we had a huge influx of retail stock and options speculators come into the market trading online? 1998-2000 of course.

Now for sure, this round of "YOLO irrational exuberance" IS different in size and scope and multiple of revenue valuations vs. eyeballs of course. The dot-com implosion was the mother of all manic stock market idiocracy and it took a recession of 3 years and an 80% LOWER Nasdaq to find an investable floor on March 15, 2003.


Key Point: Understanding and accepting that many sectors of the stock market during the pandemic were historically distorted by the YOLO money and the late-stage public VC money via SPACS plus our basic understanding of human behavior during stock manias is how we will once again outperform "the market" 6-8X NEXT 12 months (as we have since 2013 as the #1 Performing Investment Newsletter in America--oh yea that is a humblebrag.)

First off, let me be clear: We at Transformity Research are not turning into "value" investors who stayed out of the best-performing secular growth stocks and sectors for the last 11 years because they were "too expensive" (and missed the greatest bull market for stocks in history with some serious help from the Federal Reserve and advent of cloud-based software.)

In fact, we love a good stock or bitcoin or dotcom mania as much as the next investor. I fondly recall making a low $7 figure profit from a $200k private investment I made in "XOOM.com" during the 1998-2000 Barbara-Streisand-giving-stock tips on the Today Show halcyon dot-com bubble days (and paying high six figures in capital gains taxes, too). First-world problems indeed.

But when we as investment newsletter editors, hedge fund managers and now managed account RIAs went to cash in April 2000, in May 2008, and once again in February 2020, we saved our subscribers and manage account holders from losing $BILLIONS of wealth into those event-driven predictable bear markets (bear in mind at ChangeWave we are talking over 200,000 subscribers with $750,000 average portfolios--do the math).

What we learned from both our real-world experience and lessons from ChangeWave Research 2000-2010 and the new updated Transformity Investing strategy 2013-2021 is that the KEY to making a lot of money during any investor mania is:
1) You need to actually KNOW you are in a stock market mania and NOT the next Warren Buffet genius
2) You must be looking for the important signs that the party is over and leave the mania dance with 5X-10X-20X more after-tax cash money than you started with when the music stops--and most of all
2) Patiently wait for the much-needed price and multiple OVER-correction dust settle with the final overshoot to the downside as the rookie mania stock bagholders get flushed out and liquidated and great growth stocks get liquidated, too.

Nobody ever said investing in stocks was fair--for every winner, there are losers. Like I always say, "fair" in the stock market is a weather report.

The Key Point We ALL Gotta Understand Here: The overall stock market short term has already struck an iceberg, leaking water and WE have ALREADY had $trillions in sector market crashes in 2021 (ARKK stocks and "Work-from-Home & Everywhere stocks) since the peak of the 2020 mania this January when 10-year bond rates suddenly started to sharply rise from .55% to 1.71%. That rate of change of the normal rate of change was unprecedented in the 21st century.

One result was the 40-year bull market for long-duration US Treasuries ended with a 20%+ bear market correction. The OTHER result folks don't talk about is that for the agencies and public owners of the $27 TRILLION of long-duration 10-year+ U.S. treasuries. They have had 20% of the value in their "safe" bond holdings WIPED OUT in 2021 in 60 days--nearly $6 TRILLION in wealth gone to money heaven.

Key Point: Because of the outperformance of institutional equity holdings, the hole in the side of the pension plan assets boat got filled with the extraordinary outperformance of their secular growth portfolios.

But now the pension plans face a short-term double whammy--bond and secular growth stock portfolios underwater in 2021. And since institutional money managers are NOT YOLO speculators, they ARE RATIONALLY repositioning their growth equity portfolios mostly AWAY from the 600+ 15X revenue valued tech stocks (and the 400 ish no meaningful revenue last stage public VC plays in SPAC land except for $10 PIPE plays) and into
1) Growth at a Reasonable Price (the proverbial "GARP" stocks like our Sonos or CHMI)
2) Shortening the duration of their bond portfolios (selling 10-20-30 year bonds/buying shorter duration bonds)
3) Adding North America based Green Renewable Carbon Free energy technology and components now that the Biden Green New Deal plans are about to be announced
3) And assuming (right or wrongly) that the surge in inflation does not magically go away in 6-12 months. They fear the dovish Fed will HAVE TO step and raise short term rates to tamp down the wildfire of raging price inflation in a world where the major country reserve banks and governments are printing and adding $10-$12 TRILLION in stimulus and infrastructure investment/spending in a redux of FDR's depression-based "New Deal" which in 2021-2024 should be called "The 21st Century NEW New Deal.

In other words, the worst kind of inflation: too much money chasing too few goods aka "cost-push" inflation (a term I have not used since my days as a bond fund guy). Cost-push inflation occurs when overall prices increase (aka inflation) due to increases in the cost of wages and raw materials. Higher costs of production can decrease the aggregate supply (the amount of total production) in the economy. Since the demand for goods hasn't changed, the price increases from production are passed onto consumers creating cost-push inflation.

All of this dark scenario brings us to today. Let me just quickly point out some of the obvious and not so obvious structural and fundamental issues facing the overall stock market over the next few quarters that we have to factor into our stock picking and sector allocation.

1) Fear of runaway inflation (despite all the reasons I mentioned above that we have NOT had runaway cost-push inflation since the Fed invented creating $trillions in new cash into the monetary system with a simple push of a button).
Actions: they are repositioning portfolios and unwinding trades that have worked for the last 12 years.
2) Factor-rotation based formulaically investing models are moving money OUT of long-duration high growth 15X+ revenue valued tech into a business cycle/cyclical stocks that historically do better during times of above-targeted inflation
3) They are adding commodity exposure (which have spiked already due to EVs) as the inflation investing playbook says commodities historically performed well during times of inflation
4) The have already puked up their "safe" 10-bonds that just ended a 40-year bull market
5) Positioning in ESG sectors that benefit from $trillions in new US and EU climate spending and investing in "green bond" offerings where proceeds are in theory used to finance big Green New Deal projects in the highest carbon-producing economies
6) In short, they are in process of a giant portfolio rebalance for Q2 positioning that is not nearly complete.

How Do We Continue To Make Big Profits in This Global Unwind?

Like I said, in order to make historic double-dip profits on the burst of any financial bubble or mania (and step into the genuine bargains that always come with the melt-down) is you have to have CASH to pick up the NEXT round of easy money from the innocent victimized stocks (aka babies thrown out with the proverbial bathwater).

As we saw last Friday and today, the 50%+ crash of ARKK mania stocks with forced margin call liquidation selling and the YOLO revulsion and the "I'll never trade again" brain damage suffered by the new marginal buyer of stocks/options/SPACS has them puking up their losing positions.

WHEN we get at least a 35 VIX reading of fear, we will see another historic opportunity for us to pick up the REAL 2022+ "game-over" global digital platform winners at reasonable valuation as we did at ChangeWave Research back in the day 80% down post dotcom crash (see Amazon stock price 2002--Google 2004, Apple at $34 in 2006, Tesla in 2009).


Final Point: I know its been an entire year of topsy turvy moves up, up, and then higher again felt to some degree like our heads were spinning around and hard to find balance.

The vast majority of Zoomer/Millennial YOLO app investors literally have no idea how stocks values are derived from the math of present value of future cash flows relative to and discounted by zero risk 5-10 year bonds. Standard deviation, Bollinger Bands, 5 Sigma events--statistics was the ONLY math world that I found interesting enough to learn and retain--initially because it helped on the Blackjack table and craps!

MY POINT IS our returns over the last 11 months are SO FAR OFF THE CHART of Standard Deviation probabilities that I want to make sure ALL OF US realize how improbable it is that we will EVER see opportunities and results like that again in our lifetimes--thus we LOWER OUR EXPECTATIONS of returns to just our normal 6-8 times better returns than static SP 500...more to come!

You and I have to understand and appreciate how much the investment math and laws of financial gravity went off the rails during the 2020-21 global pandemic if we are to going to go forward and continue to make 8-10 times the overall market returns (as we have since 2013--which ITSELF has to be considered a statistical fluke EXCEPT for the fact that outperformance is over an 8 year period.)

And finally--the Tax Man Cometh May 17th.  I can tell you that when I got an >$500,000 long-term capital gains tax bill for taking $2 million in dotcom profits in 1999 and 2000 I was in shock for a month. How do you think the Yoloers who have never had to add a 4 or 5 figure check to their now May 17 tax returns are going to feel when they owe HUGE short term capital gains income tax bills--especially if they Yolo'd their cash profits from 2020 into 2021 and have to sell what is left of their portfolio to PAY their taxes (or worse BORROW money from their parents to pay their 2020 short term capital gains taxes?).

I bet many of the Yolo'ers have not even paid their estimated tax payments, either

PS: is the most important number in SPAC land right now (as of 3.30):

Yes, friends--we now have 665 Pre-Definitive Merger Agreements in SPAC LAND looking for sexy beast deals that make the YOLOers that are left crazy with visions of life AFTER the dreaded Boomers are gone!. 

If that is not the sign of the top in SPAC issuance, I don't what is.

Action to Take: Stay Calm, Build Cash, Be Patient, and LET YOUR Ultra Income profits RUN!
If you are a SuperSPAC trader we are adjusting ALL buy under prices for warrants a LOT lower.

There will once again be some AMAZING bargains in SPAC land, but not yet! 

And if the USA and Europe don't screw up the last leg of the road to pandemic herd immunity (which frankly to me is the BIGGEST unknown with the powerful variants now the dominant virus) the world economy will rebound HARD and that rebound will bring HUGE opportunities in both Ultra Growth and Ultra Income subscribers.

PS: With 30-year mortgage rates now at 3.15%, MAKE SURE YOU OWN REML NRZ NLY as mortgage REITS go UP in book value when the mortgages they hold are less likely to be refinanced and their cost of leverage is fixed by the Fed!  The mortgage refinancing window in the US has dropped 25% in the last 30 days--and that means mortgage payments the REITS receive are going to be reinvested in much higher-yielding mortgages!

Ultra Income Buy Unders updated today.   

Toby