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Under no circumstances does the information in this document represent a recommendation to buy or sell stocks or funds. It should not be assumed that the methods presented in this letter will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. This document is for educational and entertainment purposes only. 7/5/20 Happy 4th of July weekend Friends and Family! I hope this letter finds everyone happy and healthy despite the most unique year of our lifetimes. I generally like to send these updates out when I see some sort of market inflection point. Since the

Transcript of generally like to send these updates out when I see some...

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Under no circumstances does the information in this document represent a recommendation to buy or sell stocks or funds. It should not be assumed that the methods presented in this letter will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. This document is for educational and entertainment purposes only.

7/5/20 Happy 4th of July weekend Friends and Family! I hope this letter finds everyone happy and healthy despite the most unique year of our lifetimes. I generally like to send these updates out when I see some sort of market inflection point. Since the

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March lows, there haven’t been any imminent turning points of note. Just a slow melt-up from historic oversold extremes. I hate melt-ups due to the lack of low risk setups, but it is what it is. As we’ll see later in the letter, we’re definitely seeing extremes in the trillionaires once again (AAPL, AMZN, MSFT), yet the rest of the market remarkably looks pretty tame. To boot, we continue to see aggressive buying by smart money and insiders. Since it’s been so long since the last letter, we’ll quickly recap what we were seeing back then before we transition into the current environment. Let’s get started! Summary of “TRUMP” Friends and Family letter 3/9/20 https://docs.google.com/document/d/1GRALeliNHKQQpc-0oPP8K6lTs6alLxPCXDplXYmPNI4/edit ?usp=sharing “Trump has been bashing the Fed relentlessly over the past year or so to get them to move to a zero rate environment. “IF” the current fear persists into the Fed meeting March 17-18, the Fed will be forced to cut rates 50 to 75 basis points.

Futures are pointing to a 100% chance of a 50 basis point cut and something like a 75% chance of a 75 basis point cut.

The market desperately wants this to happen. Trump is ORDERING this to happen.

Historically, how does a market force the Fed to cut rates? It creates as much fear as possible INTO the Fed meeting to force the Fed’s hand. What happens to that intense fear after the Fed meeting? It tends to dissipate (and markets rise of course).

THUS, if I had to guess the exact date when we might see an intermediate term (1-3 month) low in the market, I’d pick March 18th.

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Even in bear markets, coordinated cuts by the U.S. and Canada have led to 1-3 month market rebounds.

What happens if governments across the globe cut rates and implement massive economic stimulus packages flooding the world with extreme liquidity and the coronavirus suddenly disappears?

On top of that, we’re also seeing a massive global stimulus in the form of crashing gasoline prices.

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Furthermore, we should see an additional MASSIVE stimulus in the form of home mortgage refinancings which are being undertaken at a record rate. Our mortgage experts in the forum know more than I do, but if someone refinaces a $300,000 home from say 4.5% to 3%, what’s the annual savings? $4,500?

$375 extra per month to spend on stupid consumer (AAPL?) crap? That’s quite a stimulus.

Now, let’s look at China for a second.

They basically shut down their ENTIRE economy.

Their market was negatively affected for all of 3 trading sessions. So, even with coronavirus spreading, could the U.S. see the same type of rebound even as the “news” is HORRENDOUS?

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Everyone already has downside protection

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Sentimentrader put together charts of markets that have had similar historic sentiment extremes in the past. “None of this suggests that we can't tip into a bear market - in fact, several precedents triggered before past bear markets. It's just that even within the context of a bear market, readings like we're seeing had an extremely high probability of preceding a multi-month rebound.”

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Here are the Q’s vs. the 40 week moving average which has served as good support

after sudden drops in the past.

Here’s the S+P going back to the 90’s vs. the 21 month moving average.

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Summary of “END OF THE WORLD” Friends and Family letter from 3/15/20 https://docs.google.com/document/d/1-xjh9GTqXb2pAYoyLYsBiyFUvz9tYfljZvK3pbKOO58/edit?u sp=sharing “Let’s say for a second that I knew nothing about the virus and the global economic shutdown of late. Let’s say that I was with Tom Hanks on a deserted island for years and just returned to see these headlines:

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If I returned from an island, saw those headlines, saw all of the indicators at extremes, and saw good setups in my favorite stocks, I’d get SUPER excited. The extremes we’re seeing have led to massive short term rallies in the past. We’re now seeing ALL-TIME low dumb money sentiment and what I believe to be all-time high (or within a percent or two) smart money confidence. I should note that BOTH smart money AND

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dumb money positioning became even MORE extreme after Friday’s rally which is practically unheard of…..

We’re seeing all-time high panic in Emerging Markets.

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The market has NO emotion or feelings. NONE whatsoever guys. It DOES NOT care at all about your Grandma. Sorry :( It only cares whether or not your Grandma spends $87,000 per year on stupid consumer goods from Apple and Wal Mart. So far, there are 5,000 Covid-19 deaths globally over 3 months.. What if that # balloons to 1 million deaths this year. 80-90% of those deaths will be 70-100 year olds who have VERY little effect on the global economy. So let’s say there are 150,000 deaths over the next 12 months from people who are “highly engaged” in the global economy. Again, if I’m the stock market, in terms of the global population,

that’s…... 0.001992031%. Thus a non-event from a stock market and demographic standpoint.

HOWEVER, from an economic standpoint, the HUGE question continues to be how long do governments completely shut down the global economy? I don’t know….. I don’t think anybody has the answer to that at this point. At the end of the day, 1) The smart money is as bullish as they’ve ever been. 2) We’re FINALLY seeing productive chart patterns in the best earnings winners. 3) The March 18th (POTENTIAL) bottom date that I’ve been focused on for a few weeks is coming this week. 4) There’s MASSIVE MASSIVE MASSIVE global stimulus from all governments within days. 5) Perhaps most importantly, I’ve been panicking nonstop over the past week. And that NEVER EVER happens. Long story short, in any “panics”, the general public can only sustain such a high level of panic for so long before they give in and realize that things have always gotten better. THEY ALWAYS DO. THEY ALWAYS HAVE. (If not, you might as well just say buh-bye!).

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*The closing low for small caps ended up being March 18th with a nice double bottom a few sessions later*

These were the small caps we looked at in that letter.

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*I posted this on Twitter on March 23rd. Monitoring media headlines and groupthink is so important.

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TODAY 7/5/20 These are the biggest single day drops in market history. Note we are only half way through 2020!

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As Charlie Munger says, “Invert, always invert”. Well, here are updated charts of the parabolic/waterfall charts of AAPL and MSFT vs. their magic lines that we looked at in the 2020 annual forecast letter. For the largest market caps, things look more extreme than they did in February.

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     Here’s AMZN

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Per sentimentrader, small traders have been buying risky call options at a record pace.

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But somehow, unlike in January and February, individual investors are not euphoric.  

  “AAII Sentiment Survey: Optimism falls, ties its 83rd lowest reading out of  more than 1,700 weekly results.”  

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78% of individual investors are bearish or neutral. This is unbelievable to me. The only logical conclusion here is that individual investors are glued to the “news entertainment” and have cashed out of the market and spent the money on a peloton, new furniture, new boat, new RV, new dog, Etsy facemasks, and expensive Grubhub food delivery. As much as I want no part of crowded trades like AAPL, MSFT, AMZN and the gang, I think after the last earnings season sh&t-show of “pulling guidance due to Covid….blah blah blah”, my guess is we’ll see some great small cap value opportunities as guidance finally makes a return and we can make some rational evidence-based decisions. Due to Covid and the tsunami of global stimulus washing ashore, I think we’ll see a surge in profits in some totally unexpected places. We’ve never seen anything like this in human history. A total restructuring of the economy and the greatest stimulus in the history of the world overnight. A major election (even more stimulus to come??). Plus huge tech transitions like 5G. As we see trillionaires AAPL, AMZN, MSFT, and stuff like TSLA single-handedly dragging the indexes higher day after day after day after day, the vast majority of the market hasn’t gone anywhere in 3 months. My point here is that there’s very little “froth” in 95% of the U.S. market and/or global markets. Thus, it’s difficult to argue for a “crash” on the horizon for a majority of stocks. I’d love to see money rotate out of the trillionaires into the rest of the market. We rarely see such orderly rotation out of the big boys, but you never know. We’ve been getting a big gap up after every weekly “surprise” employment report. There are no more businesses to close. After businesses slowly re-open, we’ll obviously see more and more

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hiring. Week after week after week. Duh. If the stupid media wants to spin it as a “surprise” week after week, so be it. On a side note, can you imagine the magnitude of “earnings winners” we’ll see in Q1, Q2, and Q3 of next year? We’ll certainly see hundreds of small cap companies posting 100%+ revenue/earnings growth in Q2 and perhaps Q3 next year. We’ll see the easiest “comps” in history. S+P value stocks are essentially where they were at the end of March and have retraced to the 10 week moving average after the June 8th panic buying.

Small cap value stocks are near the same level.

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Here’s the NYSE which is the single best representation of “all stocks”.

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The ultimate “value stock” is Berkshire Hathaway. I’ve seen article after article of late regarding how Buffett has “lost his touch”. “End of an Era”. We’ve seen the media groupthink pile on Buffett every few years. After each episode of media groupthink, Berkshire has stormed back. Berkshire’s CURRENT underperformance has nothing to do with Charlie or Warren. Nothing at all. It has everything to do with the fact that Berkshire is heavily invested in financials, energy, and insurance. When these sectors bounce, Berkshire will follow (or lead).

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Financials

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Let’s have a look at insider buying in financials.

Insider buying in energy.

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Here’s a note from Sentimentrader: “(Smart money) hedgers are still holding a large net long position in equity index futures, and corporate insiders have been buying up shares. That still hasn't changed much.

Like they did in 2019, hedgers bought the decline in prices aggressively then held on even as stocks rallied. They're doing the same thing this time, but are not only holding on, they're buying more. This is extremely unusual.

Along with hedgers, corporate insiders not only stepped up in March, but they've kept at it...especially in financials and energy. The ratio of open market buys to sells in S&P 500 companies over the past six months is the highest since late 2011.”

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For what it’s worth, we’ve made it through that extremely weak late June seasonality that I mentioned on Twitter.

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WEEKLY CHARTS OF INTEREST VS. 10 WEEK MOVING AVERAGE

NATGAS :) :)

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“ UGAZ and DGAZ will stop trading after 7/10. They will be delisted on 7/12 and there will be no further issuances of these ETNs.”” :)

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Latin America

Airlines

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High Beta Stocks

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KEY TAKEAWAY This was the key takeaway in my Superstock Letter from last Tuesday: “Obviously, the backdrop is that there are 50 million unemployed or whatever it is.. Worse than the Great Depression. People dying on street corners all over America due to Covid and rioting. Anderson Cooper and Don Lemon crying in the pursuit of ratings every night on CNN. Trump _______________ (fill in the blank) My pup and I just left the park and she’s sipping on a bowl of cold water and I’m halfway through a cold Guinness. There’s a couple sitting next to me. The girlfriend/wife says: “I can’t believe what’s going on now. I just got 8 offers above the asking price (I assume she’s a real estate agent?). And a few minutes later he says, “I just made $3,000 off of Verizon stock)...it’s so easy right now”. She then says that her pot stock will skyrocket and will likely “open over $30 tomorrow”. (not sure what stock it is). Interesting times? You better believe it guys…..”  I’m a numbers guy.

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  I guarantee we’ll see another 600-700 million deaths over the next 10 years. You might be one. I  might be one. Who knows.  

   Fortunately, life goes on….. :) https://twitter.com/i/status/1248313303270596610 Enjoy your Sunday everyone!

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Jesse