Is This FINALLY The Great Long Awaited "Value" Stock Rotation?
Hey Subscriber,
First off, let me be clear--the high growth 25-50X+ multiple of revenues valued stocks are making the painful but necessary transition to a new level of sobriety which we anticipated last year with our 60% allocation to our beloved NON-bubble valued high dividend-paying Ultra Income stocks (and 40% allocation to 20% secular GARP growth mega-cap stocks sitting on $trillions in cash and voraciously buying back their stock aka Apple, Google, Facebook, Microsoft.)
I want you to print this newsletter out and read it a few times ( and feel free to forward it to your stock junkie family and friends) because, like any good bender (so people tell me lol), our 8-year opportunity to ride the massive $8 trillion Federal Reserve TINA "cash is trash" liquidity wave--which literally allowed many Transformity Research subscribers and managed account clients to grow our wealth since 500%-700% or 7X since 2013--is officially over.
The fat lady has sung, the blow-off top bell was rung when Apple hit a $3 trillion valuation a few days ago and as we have shared ad infinitum over the last year with our subscribers-- when 10 mega tech stocks became over 32% of the entire valuation of the SP 500 index value, and SaaS software companies and late-stage no revenue SPACS were valued at 30x-50x-75x their annual revenue, that dog won't hunt when the Fed got serious about raising interest rates and draining $trillions in bubble enabling liquidity from the capital markets and there was nowhere else for those nosebleed valued stocks to go but down.
With the rise of the 10-year benchmark Treasury note back at 1.75%--aka the "line in the sand" for extreme valuation tech stocks, the good news is the bond market has enough confidence that post-Omicrom economic growth is for real and normalization of 10-year interest rates into economic strength is in our future (which is good news for stocks tied to energy, strategic metals, industrials, and financial sectors--remember those?)
Now before the rest of the world discovers that stock market fundamentals matter and they rediscover the old Wall Street mantra that trees don't grow endlessly to the sky, we must
1) raise a glass to Ben Bernanke and Jay Powell for enabling TINA aka "There is NO ALTERNATIVE to Buying Secular Growth Stocks In a <2% real economic growth world and negative 10-year bond yields" and then
2) joining the Federal government in 2020 by amping up the pandemic stricken economy with multi-$trillions of MORE cash liquidity injections that raised the average household cash balances to over $7,000 from $1200 which
3) Brought in a new marginal/price-insensitive Zoomer/Millennial YOLO buyer of no earnings fast growth concept stocks (and pile into gamma squeezing call options, too) that got the SPAC party going in May 2020 and took us to the
4) Bull market blow-off top in "concept stocks" in the first 4 trading days of January 2022.
Today's release from the Federal Reserve December meeting minutes communicated EXACTLY how and why the Fed is raising interest rates and withdrawing $trillions in market liquidity from the capital markets. It is the equivalent of your Mom ( or spouse) slapping you in the face after a long night out at the pub.
Here's the Good News for Transformity Research subscribers and wealth management clients.
The good news for Transformity Research subscribers and wealth management clients is with our 60% Ultra Income investments, we have been preparing for this day since 2021. The unfortunate but necessary expensive stock market lessons the YOLO/FOMO/Diamond Hands "investors" needed to learn have been delivered. The YOLO stock "portfolio" ass-whooping is almost March 2000 Dot Com stocks implosion like in dimension and damage (see Peleton, Docusign, Lucid, Nikola, Zoom, SPCE, Draft Kings and virtually every 30X sales enterprise Software-as-a-Service stock and high flying fintech and SPAC ALL down 60-70% from recent highs).
As we all know, the no revenue "concept stock market" bear market started 6-9 months ago when via vaccines, the world economies started opening up, the Delta variant ran its course and 1,000+ IPOs and SPAC stock valuations started imploding with those bubbles losing air and diving 40%-90% in value starting in March 2021.
But the 11-year bull market in secular "valuations don't matter" bull market really fell to earth today as Federal Reserve officials revealed in their mid-December meeting notes that the strengthening economy and mostly non-transitory 6.8% inflation (the highest in 40 years--doh!) will lead to earlier and faster interest-rate increases than previously expected, with some policymakers also favoring starting to shrink the balance sheet soon after.
And I quote “Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” according to minutes published Wednesday of the Dec. 14-15 meeting of the U.S. central bank’s policy-setting Federal Open Market Committee, when it pivoted to a more aggressive inflation-fighting stance.
“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes said.
The new schedule puts the central bank on track to conclude purchases in March and start raising rates soon thereafter.
What that means is for the stock market aka a forward/future-looking discounting mechanism, it is quite logical to see lower valuations for zero earnings 20X+ revenue stocks in general and much lower valuations for zero revenue late-stage venture capital type stocks (read SPACS and some late-stage VC IPOs) which we have certainly seen since vaccine roll-outs started not coincidently in March 2021.
The Fed Funds Rate Futures Contracts Are Clear
Fed officials were also unanimous in expecting they would need to begin raising rates this year, according to anonymous projections published after the meeting. That marked a shift from the previous round of forecasts in September, which had shown the FOMC at the time was evenly divided on the question.
Investors expect the Fed to begin raising interest rates in March, according to trading in federal funds futures.
So What Now?
They say "no one rings a bell" when a runaway sectoral bull market is over (in this case the runaway bull market for high concept/high multiple of sales technology is dead but not the overall SP 500) but maybe it was Apple reaching a $3 trillion valuation (which is more than almost all the non-tech, energy and financial stocks in the SP 500 combined) that was the clang that put the final nail in the "Cash is Trash" free Fed money program that fueled the speculative bull market for high CAGR tech stocks 2010-2022.
The great opportunity ahead for our Transformity Research subscribers and Wealth Management clients we have been in this same place 2 times before since 2000 and have the post-high flyer meltdown playbook down cold.
The first rule is don't panic--let other investors panic. There is a proven playbook for profiting greatly from the end of a secular sector bull market --and we learned that playbook in my original investment research company ChangeWave Research back in 2000-2004.
For instance, ChangeWave Research subscribers (and mutual fund owners) earned enormous profits in 2000-2006 owning companies whose economic fortunes were CYCLICAL aka tied to and financially benefitting from harnessing themselves to strong rising global economic recovery AND that pay high dividend--today that playbook reads high dividend energy, energy/commodity/goods transportation, critical commodity metals (copper, lithium, graphite), and companies that make technologies that growing economies require (see Deere with their new autonomous tractors).
In addition, the EV transformation really takes off in 2022 with billions in sales, millions of deliveries, and shortages in the metals and minerals required to go from 2 million EVs in 2021 to 10 million EVs by 2025. In most cases, EV fever is pretty justified after this correction is done.
Second, don't rush into a "bargain hunt" until ALL the peripheral sectors get sold off as well. The post-bubble bursting odds are great that AFTER the bursting of a sector stock bubble with such a high percentage of SP 500 index value, OTHER winning stocks near that sector will get sold off last well simply to preserve profits to offset the losers or pay off margin loans.
For instance, we are extremely bullish on the global Semiconductor SuperCycle 2022-2025 and will continue to hold our now very profitable position in Taiwan Semiconductor. But in the market action today, most leading and smaller semiconductor companies were off 5%+ simply due to "lock in the profitable positions to offset our blown up stocks" syndrome.
The post-bubble playbook says you need to be tactical and focus on the GARP ("growth at a reasonable price") dominant technology plays with traditional valuations like semis but leg leg-in in 2 or three tranches to get the LOWEST cost basis possible.
On the other hand, because so many of our subscribers hold huge profits in Nvidia, AMD, and other chip companies we have recommended in the past like Marvel (now Intel but getting spun-out--so HOLD your Intel!) you can sell out-of-the-money call options to generate yield while the semi sector settles back to at least its 50-day support levels. PS all the technical indicators on this chart say the SOX is headed to at least 50-day support and like to 100-day support as well.
My point? To repeat--we all should have learned by now that "high unprofitable secular growth stocks" trading at nosebleed valuations on expectations of VERY LOW negative after inflation rates is over.
Since those expectations lasted for the past 11 years, it would be HIGHLY unlikely that 11 years of nosebleed valuations will resolve themselves in just a few weeks. In our opinion, GARP valued Semiconductors and semi equipment players will bottom first in this rising interest rate environment as long as they have reasonable and reasonably priced low-cost debt.
But Let's Be Clear Here--Stock Sector Crashes Have Consequences But They Bring Amazing Investment Opportunities Too
Let's not forget it took the SP Technology Index took 17 years to recover its value after the 2000 crash (this time won't take nearly as long as again the top 25 mega-cap tech stocks are nowhere near as overvalued as AOL, JDS Uniphase, Dell, Blackberry, Qualcomm or Yahoo back in the Dot Com crash of March 2000).
And pre-January 4th, total margin debt (money borrowed against stock portfolios from brokers) was only about 2% of the US stock market at nearly $1 trillion of debt (that is not including prime broker debt to hedge fund clients). Part of the sell-off in retail margin accounts is paying off those loans by selling profitable positions (and for the heavily margined, liquidating all positions).
But at the same time, we also made a fortune in 2000-2004 picking over the wounded carcasses of innocent profitable secular growth companies that had great business models and huge total addressed global markets that got sold off as leveraged stock portfolios got liquidated during the 80%+ meltdown in any stock related to the Dot Com bubble.
In fact, we made another fortune going to cash/fully hedged in February 2020 when our scouts in China told us "a Covid-19 pandemic is inevitable...its been in China since October 2019 and tens of millions of middle class+ Chinese fly around the world every month!" when we swooped back into stocks in early April 2020 buying shares of $billion revenue companies priced as if they were going out of business!
Our 2022 PlayBook--Triple the SP 500 Single Digit Total Returns (appreciation and dividends received) with Cyclical Industrials/ 12%+ Yielding Energy + Shipping Plays + Tactical Semiconductor and Semi Equipment Investing
I credit hedge fund manager Jim Cramer (who got me my start in business TV punditry by getting fired at Fox News) with the following lessons I learned that I, over the years, learned to respect and apply (and think I improved a bit).
#1 Lesson was to respect the "Church of What Is Working Right Now." In other words, for a majority of "Wall Street" aka professional money managers and traders writ large (and regardless of their educational pedigree or lack thereof), choosing sectors and stocks to bet on was analogous to a "fashion show" and their "playbook" was to buy whatever sector and stocks were currently "in fashion" aka working and going up (unless you were one of those masochist contrarian "value investors" who loved "out of fashion" stocks that were "cheap" relative to the in fashion stocks.)
#2 Lesson #2 was "Don't Forget Lesson #1."
#3 Lesson #3 was "When the Fed is Your Friend (loosening monetary policy and cutting Fed funds rates to juice the business cycle and consumer spending UP) don't fight the Fed and your playbook is simply to be "long fashionable stocks" and the business cycle upswing until
#4 When the Fed is not your friend (draining liquidity and raising interest rates to fight inflation) you then change playbooks and go on defense and own stocks that benefit from price inflation and have secular growth paths that do not require negative interest rates nor Fed stimulus. For instance, for you old-time former Changewaver subscribers, think about how much $$$ we made from natural gas trusts and energy drillers and bulk shipping stocks after the 2000 crash as China entered the world economy which created the great inflection of an S-curve transformation in commodity consumption, prices, and transportation.
Later on, in my money management life, I came up with a simpler and very effective way to select sectors and stocks and understand the business cycle and the stock-picking fashion show/beauty pageant metaphors--research and identify the strongest secular "s-curve" commercial and monetary policy transformations (aka my term investable ChangeWaves), get on those waves early and pick the stocks leading/riding those waves of secular change/growth as they first emerged into their parabolic upswing growth phase and more importantly
#5 BE PREPARED to exit/sell those sector waves as they reached their ultimate peaks/saturation points (when the least experienced buyers are still buying them regardless of price/valuation or business cycle).
Humblebrag: I wrote two NY Times bestselling books on this investment concept entitled "ChangeWave Investing" and ChangeWave Investing 2.0 that explained how and why the Wall Street "fashion show of stock picking" actually worked (the term s-curve is actually a physics term which describes when an X/Y graph hits an "inflection point" and exponentially races higher until it reaches its saturation point and demand growth flatlines--think Omicron infection rates).
Why the stock market history lesson? Because when the history is written on investing in a pandemic, we need to acknowledge and accept the following macro and microeconomic context to continue to beat the SP 500 returns by our usual 300%-500% rate (audited since 2013) in the future:
#1 The emergence of a global Covid pandemic 2020-2022 created the most powerful NEGATIVE and positive macroeconomic inflection point transformations in 100 years. It created simultaneous negative global societal, economic, industrial, and behavioral events and positive s-curve inflection point events that pulled forward 10 years of historically powerful economic and societal, and scientific transformations in 12 months.
In addition, the pandemic unleashed the largest global monetary and fiscal stimulus event in the history of the world which created $trillions in negative-yielding sovereign bonds and $trillions in significant direct financial aid to billions of households around the world (but especially in the USA).
#2 In the US stock market, after the 35% market flash crash and 90-day recession, the new fashionable no-brainer stock Nifty 50 stocks and sectors became 1) work-at-home tech 2) corporate digital transformation tech 3) PPE stocks 4) Home Office/Family Room tech/furniture upgrades and later mRNA vaccine stocks. Because zero risk sovereign bonds had such historically negative returns (i.e., guaranteed to lose money), the already powerful TINA environment (versus guaranteed money-losing bonds aka "There Is Not Alternative to Stocks) from 2010 Quantitative Easing (the Fed increasing the money supply by buying Treasury bonds) plus the financial crisis monetary stimulus exploded to include $trillions in mortgage securities and bonds and QE forever became embedded into the American economy and goosed some equity valuations to literal infinity.
#3 At the same time, the Federal Government sent $trillions in direct cash to households and forgivable loans to businesses that built checking account cash levels to record highs above $5,000-$7,000.
#4 For many Americans--especially Gen-Z and Millennials deep into social media and video games who had never owned a brokerage account they could use to trade on their favorite digital devices (and no sports games to bet on)-- a new "marginal buyer" of pandemic beneficiary stocks (the marginal buyer in any asset class is the price-insensitive buyer) emerged and having not owned stocks in the last 2 burst bubbles in the last 20 years (plus a "crypto winter") through the proverbial gasoline on the fire of no-earnings pandemic beneficiary stocks (while we largely bought high dividend stocks that were priced as if they were going out of business).
#5 While 200 million+ Zoomers and Millennials discovered crypto trading and EVERYONE knew at least one lucky bastard who had made millions as an early bitcoin or ethereum "investor" and lord knows--there is no greater FOMO greed than seeing your lame college roommate make $1 million+ in 30 weeks.
Key Point: Now all of the above is getting unwound. This historic monetary and secular growth stock valuation unwind will not happen in a month or quarter. It is not going to be clean, the unwind is GOING to overshoot to the downside because they always do dependent on how many margin accounts get liquidated (and remember in crypto land you can buy $100 of bitcoin or ethereum for $10 down).
The play right now is to BUILD CASH and hedge (just like we did in February 2020 as you recall before the pandemic crash) so we have CASH to take advantage of the insane bargains that will bubble up in equities when the swoosh down and forced selling is over. (Remember early April 2020? 40% yielding MLPs and Preferred stocks and mortgage REITS for pennies on the dollar?).
We can assume that SOME of the Fed tightenings has already been priced in since the mid-December Fed "Pivot".
Action to Take: HEDGE Your Portfolio With SQQQ Call Options--Sell Weekly In the Money Call Options on Tech Positions
We are holding our high-yielding positions with high demand and supply imbalances.
SELL CRM (we already sold ADBE and SHOP on sell stops--if you still hold SELL THEM TOO).
Because the SQQQ is 2x Short the QQQ ETF, it works well for hedging portfolios with tech exposure.
We recommend short term the $6.50 January 14 SQQQ Call Options and selling $5 put options as a hedge
Bid Ask B/A Size Volume Open Interest 0.31 0.32 2X213 16,205 5043
For Energy Hedging, we are using January 14 $101 Put Contracts
101.0 Put 2.37 2.61 2.44 1.25 22 332
Final Word
I have been a stock market analyst, money manager, and newsletter publisher through ALL the market crashes in the last 40 years. This one is most like the Dot Com crash except that we don't in any way expect an economic recession with the pandemic converting to an endemic annual virus infection season.
The YOLO FOMO crowd should be traumatized by now and promising themselves "I will NEVER buy a cloud software stock at a 25X+ revenues valuation or penny stock again". That is what market sector crashes do--they move money out of the insanity and reward those growth stocks and reasonable valuations.
There is a good chance an overall 8-10% ish correction from the early January high in the Nasdaq could be a 20%+ "bear market" for smaller cap Nasdaq stocks but will not infect the Dow nor the non-tech SP 500 stocks nearly as much (10% ish correction much more likely).
Attention SuperSpac Traders Who Rolled into Transformity Research Subscribers IN June 2021
We have a lot of subscriber renewals in Jan/Feb from SuperSPAC Trader subscribers we rolled into Transformity Research subscribers when the SPAC sector became uninvestable in March/April 2021.
To make sure you stay with us during this major market and monetary policy transition, we have added these new valuable services to our core Transformity Investor service package to ensure you get ALL our buy/sell/hold advice and questions in the most timely matter possible--in the market time IS money!
#1 We are in the process of adding TEXT notifications for our new buy/sell/hold alerts and newsletters! I know from our All-Access members a lot of you are "text-centric" like we are and with the stock market moving faster every day, we are in the process of standing up TR Text Notification service.
And the good news is we will include this new text notification service FREE for ALL accounts that renew or start in 2022
(a $40 value).
Secondly, for all active non-All-Access members (new and renewed in 2022), we are going to extend 90 days of access to our All Access trading room (a $125 value) CLICK THIS LINK FOR YOUR FREE with your 1 or 2-year renewal starting today (.
Again, with all that is happening in the world of stocks 24/7/365, I have found our subscribers with All-Access trading room priveledges are getting a very valuable head start on new positions AND getting their "Should I buy more or sell?" questions answered in real-time.
This is the best possible time to get with and stay with Transformity Research newsletters--fortunes will be made and lost again in the next few years--I don't want you to miss out.