November 2017 Newsletter
Dear Subscriber,
Well I was waiting to get our November issue out with the Senate vote on Tax Reform today . . . and then as we all know the caca hit the fan this morning. The Senate DID get the 50 votes necessary with Flake committing...but that story got buried at 10:15 with report that Gen. Flynn had flipped on Trump/Pence/Sessions. I'm going to again combine a year-end combo or November and December to set up 2018 strategy.
The DOW dropped almost 400 points in a flash crash--and ladies and gents that ONLY HAPPENS because of algorithmic computer sell orders that are programmed into the trading pots that get news feeds and react in a split second to words like "testimony against POTUS Trump." Then the 51 Senate votes came in and the algos went the other way (I expect the historic vote 9pm ish DC time tonight--then on to the House/Senate conference to clear-up the HUGE differences in the two bills that has to stay under $1.5 trillion in additional deficit spending to meet Senate rules).
Like I said earlier this week--the NO votes in the GOP caucus would come from those not running for re-election aka McCain, Flake and Corker. With McCain and Flake capitulating....the bill WILL PASS in a kluge of trade-offs. As predicted--GOP Senators running for mid-term re-election would NOT commit political suicide and neither will enough GOP House members.
Key Points: #1 We WILL have Tax Reform that mostly starts in 2018 and fully in 2019 tax years. The bill will NOT have the "claw back" provision based on economic performance. This IS a regulatory transformational event and it is IS of the magnitude that we will analyze the biggest EPS beneficiaries and invest ahead of this 2017 Tax Reform Act.
#2 We now know the POTUS and the presidency are going to embroiled in the outcomes of the Michael Flynn Independent Counsel testimony. I learned a helluva lot in my 22 years in DC...and when it comes to political hostage/deal making taking it ONLY happens if Flynn has agreed to spill what he knows on the bigger fish. FYI you will hear a lot about an obscure law from 1799 called the "Logan Act" that makes it a Federal crime for private citizen to negotiate with a foreign country in which the United States is in "conflict with."
Forget it. I'll summarize below the 10 key take aways from my UCLA law professor friend Harry Litman below...there WILL BE more 300-400 point down days in 2018 as indictments get closer to the POTUS. There WILL be some sacrificial lambs.
After a quick check with a Harry...I can report the following: "If you think they're solely going on Logan Act violations, you are naive. You also need to go to law school. This is a domino. Period. Flynn didn't get the deal by not provided a plethora of evidence about higher-hanging fruit. The ONLY higher fruit is Trump, Pence, Sessions and Kushner."
Quick Analysis: Muscle memory on Wall Street is a BIG part of short term trading. You can go back to EVERY scandal in the modern era of the stock market: Teapot Dome; Watergate, Clinton Impeachment or more recently late May when the Comey testimony looked like it would impeach Trump. Or take military actions like Desert Storm, 9/11 and Iraq invasion and see the same pattern of panic selling. The market is ALWAYS back within months. This scandal is going to unfold over the next months and subpoenas are going to fly and the market will react short term...until it doesn't.
It's like North Korea launching missiles; eventually the market does not react and the news event is written OUT of the short term algo trading OR the algorithm is changed to BUY the short term sell-off because the data says its pays to.
What I AM Worried About in the Short Term
I'm NOT worried about the coming Trump/Pence/Sessions/Kushner shit show for the stock market (unless it turns into a full-blown constitutional crisis).
What I AM worried about is our top 12 winning stocks--and semiconductor stocks in particular--being sold as "source of funds" for the leadership rotation to the "Biggest Tax Reform Beneficiaries" trade. As an old mutual fund/hedge fund manager I can tell you that IF you are paid on performance AND you see a "no-brainer" earnings growth trend created you raise cash with your most extended winners and put that cash to work in the stocks that most benefit from your "no-brainer" investment thesis.
Right now this rotation/source of funds action is multiplied by fear of memory price reductions in early 2018 as reported by some major brokerage funds. Thus our 5-to-1 outperforming semiconductor stocks are being used by some money managers as “source of funds” for the Tax Reform Beneficiaries Trade (i.e., rotation from the market’s biggest winners into the sectors like banks, financials, insurance and U.S. facing industrials paying 30%+ corporate tax rates).
This source of funds for the Tax Reform trade is best illustrated by charts of the Dow Jones/S&P 500/Semiconductor indexes in the last 30 days. Look how the Dow Jones spiked on word that Senator McCain was on board with the Tax Reform plan yesterday and relatively low-tax rate paying technology (18% effective rate overall) sold off:
Now look at the Semiconductor Index chart--its the mirror opposite:
All while the Russell 3000--the measurement of 99% of the total US stock market...is trading like a tech stock above its 20-day moving average!
Before I get to memory semis and equipment let's make sure we all understand that "tech in general" measured by the top Nasdaq 100 tech stocks is in FINE shape...still above it's 20-day uber bullish trend line
The reason the overall market is in such good shape? The GDP growth (and EPS boost from lower corporate tax rates for HIGH TAX rate paying U.S. companies) narrative is intact.
TRANSFORMITY Macro-Market Index: 19.2!! This is a new all-time high for our forward looking GDP trend indicator (for new subscribers this is 60-day moving average of our 45-piece indicator of economic growth. When it's ABOVE 15 we can say with 98% confidence the economy is NOT at risk of a recession 4-6 months out. Because no recession...no top in stocks and NO bear market.
Action to Take: BUY THE DIPS!
New York Fed Staff Nowcast
- The New York Fed Staff Nowcast for 2017:Q4 stands at 3.9%.
- News from this week's data releases increased the nowcast for Q4 by 0.2 percentage point.
- Positive surprises from manufacturing, housing, and survey data were only partially offset by a negative surprise from personal consumption expenditures.
The Atlanta Fed GDP NowCast: 3.5 percent — December 1, 2017
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2017 is 3.5 percent on December 1, up from 2.7 percent on November 30. The forecast of real consumer spending growth increased from 2.6 percent to 3.1 percent after this morning's Manufacturing ISM Report On Business from the Institute for Supply Management, while the forecast of real private fixed-investment spending growth increased from 6.7 percent to 8.4 percent after the ISM report and this morning's construction spending release from the U.S. Census Bureau.
Key Takeaway:
US GDP is ACCELERATING! As we have forecast for the last year...we are in inning 6-7 of this 10-year old expansion.
The 2019-2020 is the EARLIEST we could see a market peak based on earnings growth and Fed monetary policy (more on this issue in our December newsletter).
- The Fed under Chairman Powell will continue to slowly methodically raise the only interest rate it controls--the daily Fed Funds rate.
- Unemployment is headed to under 3.5%--but yet actual price/wage inflation remains benign because the U.S. dollar will be getting stronger vs. Euro/Yen (where interest rates remain mostly negative) and that reduces price inflation from imports.
- Energy prices are range bound in the 50's with OPEC committed to their 1.8 million barrels-a-day reduction in production (I'm getting bullish on energy again for the first time since we sold our big winners in October 2015 when OPEC declared war on the U.S. oil fracking industry).
- Wages in the U.S. are headed marginally higher but range bound
- Industrial capacity is STILL lower than 80%--the magic point in which pricing power adds inflation
Key Point: Earnings Growth + Corporate Tax Cut + $2 trillion of repatriated Corporate cash means the global synchronous GEP expansion narrative is not only continuing but accelerating!
Look at the FactSet Q4 earnings estimate. During the past year (four quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.3%. For the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.3%. In the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 4.3%.
Thus, the decline in the bottom-up EPS estimate recorded during the first two months of the fourth quarter was smaller than the one-year, five-year, and 10-year averages. In fact, the fourth quarter of 2017 marked the smallest decline in the bottom-up EPS estimate for the first two months of a quarter since Q2 2011 (+1.5%).
The
So HERE are the 50-day line in the sand charts for MU and AMD--every other semiconductor LRCX AMAT ACLS NVDA AMBA. Only AMD is still a busted chart but Micron is pretty wobbly here too and AMBA finally reported a beat and raise quarter and FINALLY got past the resistance to $64!
AMD is still a busted chart---but too oversold to take profits from our original positions. HOLD
Micron (MU) is right at support from the break-out melt-up in November. I'll have more data on MU but they are on track to KILL their December earnings and report $5 in total EPS for the last four quarters...amazing. They LOST $5 a share in 2015 for context.
The volume of selling has been insanely high...but with all that selling it is still holding near the 50-day key support.
Action to Take: Get ready for an OPTION play on MU for December $45 on Monday!
The rest of our semiconductors and semi-equipment plays are above support and are ALL buyable here;NVDA ACLS AMAT LRCX AMLS. AMBA blew past estimates last night and raised guidance...a 15% move on a down tape day! Doing a new valuation analysis over the weekend...stay tuned. BUT--we DID get paid for our patience...finally!
Shopify Call Options: 700 Contracts Left at $4.30 BID
We are still sitting on about $30,000 in profits on this trade after taking off $34,000 in profits on the $115 pop on Monday.
Let's site tight for now...we are right at technical support.
We are updating buy under prices/new targets and performance results and will get out ASAP. But with the Shopify homerun we are still up 54% for the year!
Final Word: NO Matter Your Politics Do NOT Underestimate the Flynn Plea (From my old friend Harry Litman Professor of Law UCLA)
Michael Flynn’s plea on Friday to a single count of lying to the F.B.I. is a seismic event in the special counsel investigation.
For starters, it portends the likelihood of impeachable charges being brought against the president of the United States. Mr. Flynn, a former national security adviser, acknowledged that he was cooperating with the investigation. His testimony could bring into the light a scandal of historic proportions in which the not-yet-installed Trump administration, including Donald Trump personally, sought to subvert American foreign policy before taking office.
The repercussions of the plea will be months in the making, but it’s not an exaggeration to say that the events to which Mr. Flynn has agreed to testify will take their place in the history books alongside the Watergate and Iran-contra scandals.
We’re in new — and highly inflammatory — territory. Here are 10 immediate takeaways from today’s news.
This is not a meet-in-the-middle deal.
Both sides did not assess their risks and decide to hedge them with a compromise. Rather, as we’ve known for weeks, the special counsel, Robert Mueller, believed he had sufficient evidence to indict Mr. Flynn on a long list of criminal charges, including money laundering, tax offense and false statements. Mr. Mueller’s team, as is standard prosecutorial practice, presented Mr. Flynn with that list and helped him understand that his life as he knew it had ended.
This is much bigger than Paul Manafort.
Mr. Manafort, the former Trump campaign chairman, has been indicted, but this is a plea, and Mr. Flynn’s cooperation — the real goal of bringing criminal charges — has been secured. This puts Mr. Flynn in the same camp as George Papadopoulos, the campaign adviser who pleaded guilty to making false statements to the F.B.I. on Oct. 5 and is also cooperating with the investigation. Unlike Mr. Papadopoulos, though, Mr. Flynn was a top adviser who was at the center of communication with Russia as well as the potential obstruction of justice by President Trump in seeking to shut down the Flynn investigation itself. Mr. Flynn was considered as a running mate and reportedly stayed quite close to the president even after being forced out of the administration in February.
Mr. Flynn has just become the prosecution’s star witness.
Mr. Flynn’s plea on Friday concerned just one crime. The other charges that prosecutors threatened him with continue to hang over him. Mr. Flynn will not receive credit for his cooperation until after it has ended, at which point Mr. Mueller may — if Mr. Flynn has held up his end of the bargain — move to dismiss the other charges. In the interim, Mr. Flynn has to do anything Mr. Mueller’s team requests.
The charge Mr. Flynn is pleading guilty to is a stunning one.
He is admitting that last December, before Mr. Trump’s inauguration, he asked the Russian ambassador at the time, Sergey Kislyak, to refrain from reacting aggressively to sanctions that the Obama administration had imposed on Russia. Russia reportedly agreed and Mr. Kislyak told Mr. Flynn later that it had chosen to moderate its response to the sanctions to make nice with the Trump team.
It seems Mr. Trump himself directed Mr. Flynn to make contact with the Russians during the campaign.
If Mr. Flynn testifies to this — ABC’s Brian Ross is reporting that he will — it presents another impeachable offense along with the possible obstruction of justice. Even more, it brings the whole matter well outside the purview of the criminal courts into the province of a political scandal, indicating abuses of power arguably well beyond those in the Watergate and Iran-contra affairs.
Mr. Flynn asked Russia to intervene at the United Nations on behalf of Israel.
He is admitting that last Dec. 22, he asked Mr. Kislyak to delay or defeat a United Nations Security Council resolution condemning Israel for its settlement policy, which the Obama administration had decided to let pass. The possible involvement or knowledge of Israel in the case will be one of many questions that congressional investigators will pursue.
The lying is bad. Conducting rogue American foreign policy is worse.
In the end, Mr. Flynn’s lies are secondary to the demonstration that the Trump administration was actively undermining American foreign policy before it took office. This will most likely prove the most abiding scandalous fact of the Mueller investigation. And it’s one that nobody on either side of the aisle could possibly defend.
Mr. Flynn’s cooperation portends extreme peril for a variety of people in the president’s orbit.
Most immediately vulnerable? Jared Kushner. Mr. Flynn was present at a Dec. 1, 2016, Trump Tower meeting where Mr. Kushner is said to have proposed to Mr. Kislyak setting up a back channel for the transition team to communicate with Moscow. Those and related details are now front and center in the investigation. Criminal liability aside, Friday’s news — including a report that Mr. Kushner was the one who directed Mr. Flynn to contact Russia — helps cement Mr. Kushner’s reputation as a callow and arrogant freelancer, authorized by the president to act way over his head, and possibly impairing some of the most delicate and important issues of foreign policy. (A possible winner, on the other hand, is the younger Mike Flynn, about whose criminal liability his father was extremely concerned. Look to see how Mr. Mueller now chooses to treat the younger Mr. Flynn, who is being investigated over his work for his father’s lobbying business.)
Mr. Flynn’s plea raises the likelihood that he will give testimony in support of a potential obstruction of justice charge against Mr. Trump.
The basis for the possible obstruction charge against the president has been his efforts to get the F.B.I. director, James Comey, to shut down the Flynn investigation during a Feb. 14 meeting in the Oval Office, coupled with his multiple lies on the subject. Obstruction is plainly an impeachable offense: It’s the offense for which Richard Nixon was threatened with impeachment.
For months, it has seemed the possible culminating charge of the Mueller investigation, a straightforward and readily understandable high crime or misdemeanor. Such a charge, per Department of Justice policy, would not be brought in the criminal courts but would rather form the basis of a report to Congress potentially recommending impeachment. If Mr. Mueller brings that charge, it will be on the strength of Mr. Flynn’s testimony.
Mr. Trump’s defenders have fewer and fewer cards to play.
There had been a prospect that the obstruction of justice charge, if it did come, would be dismissed by die-hard Trump supporters as subject to conflicting interpretations of Mr. Trump’s state of mind, and therefore not deserving of impeachment or removal. No longer. Now Mr. Trump and his circle will stand accused by a former member of the administration with plainly unconstitutional meddling in the most sensitive of foreign policy issues. If the Congress and country believe Michael Flynn’s account, it is hard to see what even the staunchest Trump defenders can say in defense. That means that as Mr. Trump and the administration look out at the new landscape featuring a guilty Michael Flynn, it’s kill or be killed.
Key Point: DO NOT KID YOURSELF about the level of danger that exists for the Trump Administration and the POTUS.
With the tax bill passing at year end and the FIFO provision now OUT of the Senate Bill...we should start to see the Santa Clause rally proceed into the end-of-the-year.
BUT the Political and Headline RISK is now at DEFCON 4--5 being likely impeachment.
IF we get the expected upturn in our positions we WILL take profits and hedge our portfolio on what I can only assume are HIGHER levels of price volatility as the "Mueller Time" aka the Special Prosecutor headlights turn to Trump/Pence/Sessions/Kushner.
I lived through Watergate, Bimbo/MonicaGate and HillaryGate--as Harry says this one has the potential of becoming a Watergate level legal and political shit storm. One thing we will know for sure: The Donald's legal team will try their best to keep him OFF incriminating tweets--but my guess is he will not be able to hold back when the punches start to land.
Have a GREAT Weekend--we are in the FINAL STRETCH for another amazing 3x-5X Market Beating year!
- Toby
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