Disruptors

THE BOTTOM LINE

Extremely bullish sentiment levels, and multiple historically extreme measurements of over-valuation suggests an uncomfortable level of potential risks, even though by contrast Lowry Research measurements of the balance of supply and demand remain favorable, and are improving. Additionally, negative divergences to the all-time high touching price continue to suggest an uncomfortable level of potential of risks to client portfolios.

In order to address this dichotomy, we are considering the implementation of an investment in a new core holding, which will seek to allow clients to participate in not just one emerging potential disruptive investment theme, but two coincidentally. Our intention will be to systematically increase our new core holding as additional confirming information, and the favorable supply and demand balance suggests. For as long as there is confirmation that these two potentially disruptive themes are in fact disruptive, then this space in the stock market will likely continue to grow, even if the market in general becomes extremely volatile, or enters a long overdue bear market. This strategy requires some additional investigation, and some balance of supply and demand confirmation, but it is not too soon to bring clients up to date on the potential application of a universal play on both these potentially disruptive trends.

Lastly, in the interim if the stock market serves up opportunities for some intermediate low risk trading, then we will avail ourselves of the opportunities.

Disruptors

The nation made it through the week without any more civil unrest at the Capitol and the Inauguration, nor at any of the fifty State Capitols, nor did international would be bad actors mis-behave.

The stock market touched new all-time highs still floating on an ocean of liquidity with the prospects of more liquidity to come compliments of the new Administration. However, in spite of favorable measures of supply and demand according to Lowry Research, which in recent days have shown a tendency to grow even stronger, some of our own measures of supply and demand are displaying worrisome negative divergences with the price touching new all-time highs.

Lowry Research measurements do not account for activity in derivatives, where ours have modules in their formulas to account for some of the derivatives contribution to the overall balance of supply and demand. This more complete picture together with its atypical and abnormal behavior since the important March 23 bottom remains a concern, as do historic extremes in bullish sentiment. and over-valuation according to a host of measurements, including Warren Buffett’s favorite stock market valuation tool capitalization to GDP.

During this past holiday period I used the gift of extra time to do some research beyond my normal routine, because of the dichotomy of new all-time highs in an environment of potentially high risks represented by extreme bullish euphoria on the part of investors, over-valuations according to multiple measurements being at historic extremes rarely seen, and the absolute belief on the part of especially professional investors that the Fed will always come to their rescue no matter the circumstances. Their battle cry seems to be the Fed and liquidity forever!

So what is a professional investor to do in order to navigate this mine field of potential risks on one hand, and a market which may continue to penalize prudent investors charged with risk management first, and maximizing gains for investors as possible second. It is quite a conundrum and challenge, when one set of measurements are screaming caution, and others are suggesting fear of missing out on potential reward. My holiday research may have uncovered a potential solution, which I will discuss with our clients below, and which involves potential disruptions to the financial status quo.

Thomas Edison experienced over 10,000 failures in his quest to invent the incandescent light bulb, but his one success literally changed the world forever. Upon his death it was suggested that the power be turned off nation wide for a brief period of time to acknowledge Edison’s genius, and the power of his inventions to change the nation, and the world. This notion was rejected by the authorities, because Edison’s inventions had become so vital to daily life that literally lives may be lost, if the nation went dark only briefly at the same time. Edison had disrupted the world as it had been known previously.

Orville and Wilber Wright made and experimented with bicycles, until they managed to become the first to flight in a flimsy contraction in Kitty Hawk, North Carolina. However, their real contribution was the invention of ailerons to control their flying machine, which accelerated the application as World War I approached, and then burst upon Europe with the assassination of Austria’s Archduke Ferdinand, which in turn accelerated the development airplanes, a process which continues today. The Wright brothers disrupted travel and warfare with their invention, and literally changed the world.

Henry Ford invented the forerunner to the modern production line, and in the process made mass production, and economies of scale to make ever lower unit cost possible. Obviously the list of those, which have disrupted the status quo and literally changed the world must include Ford.

Air Force Reserve Colonel Philip Adler Ph. D was my professor of Management at Georgia Tech, and he was a legend during his own time on campus. Dr. Adler would burst through the door to the classroom lecturing in machine gun like fashion with a graduate assistant in tow. The first day of class he would have the students seated in alphabetical order, and after which he would spontaneously call your name to answer questions from his previous lecture. Answer correctly and his graduate assistant recorded a hundred to your credit, answer incorrectly and you got a zero on your record.

Dr. Adler often lectured from the blackboard with his back to the class, and as he lectured he called out names of students, which without hesitation had to respond correctly to his question. It was sheer terror during every 45 minute class, as the machine gun rate of the lecture was interspersed with questions aimed at randomly selected students, which he called by name. Dr. Adler developed an almost cult like following among those of us fortunate enough to be counted among his alumni.

Some twenty years or so post my Tech graduation I was placed on a Tech advisory committee. My first meeting was being held at the Tech YMCA across North Avenue from the Georgia Tech campus. I joined the queue going into the YMCA, and I immediately noticed Dr. Adler talking to the Tech President some half dozen or so members of the committee ahead of me. When I greeted one of the members behind me Dr. Adler with his back to me called out: “I hear the voice of Gregory H. Adams, you made an “A” in my class in 1969!”. As we entered the meeting room Dr. Adler greeted by name other members of the committee, which were also Adler alumni, a remarkable feat of memory given the copious numbers of alumni over the intervening years!

I remember much of what Dr. Adler taught me in his lectures, but as he was a military man I remember his observation about war being the ultimate science disruptor. When your nation as a going concern is at stake, every member of the nation puts their shoulder to the wheel, causing science to develop by leaps and bounds in short periods of time, because it has to for survival. Speaking of Georgia Tech, on a recent visit to Atlanta for a family wedding, I dropped by the campus, which these days is deeply involved with biotech engineering, and pushing the science frontiers related to everything computers and the internet.

So what is the next disruption, which has the potential to change the world as we know it? The answer is that one disruptor in a decade or two is unusual, but my holiday research has uncovered not one, but two potential disruptors, which hold out the possibility of being on a collision course to change our world in the next twenty years, or even possibly before the end of this decade. And, now is the time to begin to invest in these potential disruptors. Alas, like many new trends there are multiple potential investment candidates, but likely only a handful of survivors a decade on from now making picking the eventual winners extremely difficult. This is not unlike the late 1990s when everyone knew the internet was an emerging disruptor, but knowing in advance the few eventual survivors from a very large field of candidates was an exercise in futility. So the key question now is, if we are comfortable that these two emerging potential disruptors will become complimentary to each other, is there a universal way to play the secular disruptive trend represented by the two together? The answer is yes.

Once upon a time in my money management career the retail sector was on fire, and our brokers were asking me to choose some stocks from that sector for them to recommend to our clients. I recommended some leading credit card companies, which caused some dismay among the brokers in my investment committee meeting. They wanted something like The Gap, Target, Home Depot or Lowes until I explained the whole sector was on fire, so why try to choose which outfit may be depending on their new “Air Jordan’s” to win the day, when you could win on every transaction in the sector with a charge card company, and get a high interest rate boost as a sweetener in addition! I prefer the universal play to choosing the risks inherent in owning a single stock. Diversity of risks is a winning concept in investing.

I’ve devoted most of this update to outlining what we are planning to do to address a grossly overvalued stock market, which is also giddy with euphoria that the Fed will never fail to rescue the markets, and the risks implied by these circumstances, even though the almost always reliable Lowry Research measurements of supply and demand suggest the bull run is not only not over, but may accelerate higher. I’m glad to inform you that our research so far appears to have found a way to participate in not one, but two emerging potentially disruptive trends, which hold out the possibility of us building a new core holding for client portfolios over the weeks, months and/or possibly years to come. We discussed my initial findings during last week’s investment committee meeting, and we will again this coming week. Clients may begin to see us slowly beginning to build a new core position in the weeks ahead, provided we get continuing verification of our initial findings.

TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS

TATY is shown above in Snapshot-390 in yellow with the S&P-500 overlaid in red and blue candle chart format. TATY finished the week at 135 below the red zone, which was touched briefly in November.

The TATY chart still shows the down sloping negative divergence, which preceded the record setting price plunge from the February all-time high to the March 23 low as a dashed magenta line. The chart also shows as a down sloping magenta line depicting the current negative divergence with the price, which touched a new all-time high this past week. While the prior negative divergence in February yielded a record setting plunge, the current negative divergence has managed to produce only some marginal, and mostly intra-day price weakness. However, unless TATY begins to form bottoms in, or near, the red zone surrounding the 140 level, and highs near the blue zone surrounding the 160 level, we will continue to respect the potential for TATY to foreshadow some yet to arrive price weakness. If weakness does develop, then depending on conditions we may elect to do some tactical trading.

SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS

SAMMY is shown in Screenshot-197 (weekly format above) and Screenshot-198 (Daily format below) and there has been very little change from last week. Both Screenshots show the continuing negative divergences to the all-time high touching price. And, the negative divergences continue to hover just above the previous resistance shown on the chart by a horizontal magenta line. A breach of the horizontal line lower would be an indication that the negative divergence may be beginning to result in some developing price weakness of an unknown magnitude. If TATY develops enough strength to begin to form bottoms in the red zone and tops near the blue zone surrounding the 160 level, then one would expect confirmation by a rally in the SAMMY indicator, and in the best case without a breach below the magenta horizontal magenta line.