We had new record highs again in the Dow today. But remember, yesterday we talked about this dynamic where stocks, commodities and the dollar were strong. But a missing piece in the growing optimism about growth has been yields.
Clearly the 10 year at 2.40ish is far different than the pre-election levels of 1.75%-1.80%. But the extension was quick and has since been a non-participant in the full-on optimism vote given across other key markets.
Why? While stocks can get ahead of better growth, yields can’t in this environment. Higher stocks can actually feed higher growth. Higher yields, on the other hand, can kill it.
But there’s something else at work here. As we know Japan’s policy to target the their 10 year at zero provides an anchor to our interest rates, as the BOJ is in unlimited QE mode. Some of that freshly produced liquidity, and the money displaced by their bond buying, undoubtedly finds a happier home in U.S. Treasuries (with a rising dollar, and a 2.4% yield). That caps yields.
But in large part, the quiet drag on U.S. yields has also come from the rising risks in Europe. The election cycle in Europe continues to threaten a populist Trump-like movement, which is very negative for the European Union and for the survival of the single currency (the euro). That creates capital flight, which has been contributing to dollar strength and flows into the parking place of U.S. Treasuries (which pressures yields, which is keeping mortgage and other consumer rates in check).
These flows are also showing up clearly in the safest bond market in Europe: the German bunds. The 2-year German bund hit an all-time record LOW, today of -91 basis points. Yes, while the U.S. mindset is adjusting for the idea of a 3%-4% growth era, German yields are reflecting crisis and money is plowing into the safest parking place in Europe. The spread between German and French bonds are reflecting the mid-2012 levels when Italy and Spain where on the brink of insolvency — only to be saved by a bold threat/backstop from the European Central Bank.
We talked last week about the prospects for higher gold and lower yields as questions arise about the execution of (or speed of execution) Trump’s growth policies, some of the inflation optimism that has been priced in, may begin to soften. That would also lead to a breather for the stock market. I suspect we will begin to see the coming elections in Europe also contribute to some de-risking for the next couple of months. We already have a good earnings season and some solid economic data and optimism about the policy path priced in. May be time for a dip. But as I’ve said, it would create opportunities– to buy any dip in stocks, and sell any rally in bonds.
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There’s little in the way of economic data next week to move the needle on markets and the economic outlook. With that said, the catalyst will continue to be Trumponomics, and the President said yesterday that we should expect to hear “big things” coming in the next week or two.
As we head into the weekend, let’s take a look at some charts of interest.
The S&P 500 is now up 10% since election day (November 8). For some perspective, since the 2009 bottom, when the global central banks stepped in to pull the world back from the edge of collapse, you can see the trend has been a 45 degree angle UP. And despite all of the fear and pessimism along the way, the sharp corrections along the way were quickly reversed, most of which were completely recovered inside of ONE MONTH.
With central bank policy around the world still promoting higher global asset prices, and with pro-growth policies underway in the U.S., any dip in stocks will be a gift to buy.
We looked at this next chart last week. It’s the inverse price of gold versus the U.S. 10 year yield. You can see they have tracked nicely since the election.
With Yellen’s session on Capitol Hill this week, the yield has whipped around from 2.40 back to 2.50 and back to 2.41 today.
Meanwhile, with the continued hostility surrounding the Trump administration, and accusations about Russian conflicts, gold has been stepping higher. This all looks like higher gold and lower yields coming. As questions arise about the execution of (or speed of execution) growth policies, some of the inflation optimism that has been priced in may begin to soften. That would also lead to a breather for the stock market. In both cases, it would create opportunities — to buy any dip in stocks, and sell any rally in bonds.
Stocks were down a bit today, for the first day in the past six days. Yields were lower, following two days of Janet Yellen on Capitol Hill. Gold was higher on the day. And the dollar was lower.
Of the market action of the day, the dollar and yields are the most interesting. The freshly confirmed Treasury Secretary, Steven Mnuchin, held a call with Japan’s Finance Minister last night, early morning Japan time.
What did USD/JPY do? It went down (lower dollar, stronger yen). Just as it did the week leading up to the visit between President Trump and Japan’s Prime Minister Abe.
Remember, the yen has been pulled into the fray on Trump’s tough talk on trade fairness and currency manipulation. The subject has cooled a bit, but with the new Treasury Secretary now at his post, the world will be looking for the official view on the dollar.
As I said before, I think the remarks about currency manipulation are (or should be) squarely directed toward China. And I suspect Abe may have conveyed to the president, in their round of golf, that Japan’s QE is quite helpful to the U.S. economy and policy efforts, even if it comes with a weaker yen (stronger dollar). Among many things, Japan’s policy on keeping its ten-year yield pegged at zero (which is stealth unlimited QE) helps put a lid on U.S. market interest rates. And that keeps the U.S. housing market recovery going, consumer credit going and U.S. stocks climbing, and that all fuels consumer confidence.
Yesterday we talked about the fourth quarter portfolio disclosures from the world’s biggest investors. With that in mind, let’s talk about the porfolio of the man that’s best position to benefit from the Trump administration: the legendary billionaire investor, Carl Icahn.
Icahn was an early supporter for Trump. He was an advisor throughout the campaign and helped shape policy plans for the president.
What has been the sore spot for Icahn’s underperforming portfolio in recent years? Energy. It has been heavily weighted in his portfolio the past two years and no surprise, it’s contributed to steep declines in the value of his portfolio over the past three years. Icahn’s portfolio is volatile, but over time it has produced the best long run return (spanning five decades) of anyone alive, including Buffett. And he’s worth $17 billion as a result.
Here’s a look at what I mean: In 2009 he returned +33%, +15% in 2010, +35% in 2011, +20% in 2012 and +31% in 2013. That’s quite a run, but he’s given a lot back–down 7% in 2014, down 20% in 2015 and down 20% last year.
Even with this drawdown, Icahn doesn’t see his energy stakes as bad investments. Rather, he thinks his stocks have been unfairly harmed by reckless regulation. And he’s been fighting it.
He penned a letter to the EPA last year saying its policies on renewable energy credits are bankrupting the oil refinery business and destroying small and midsized oil refiners.
And now that activism is positioned to pay off handsomely.
The new Trump appointee to run the EPA was first vetted by Icahn–it’s an incoming EPA chief that was suing the EPA in his role as Oklahoma attorney general. Safe to assume he’ll be friendly to energy, which will be friendly to Icahn’s portfolio.
And as we know, Icahn has since been appointed as an advisor to the president on REGULATION.
To get peek inside the portfolio of Trump’s key advisor, join me our Billionaire’s Portfolio. When you do, I’ll send you my special report with all of the details on Icahn, and where he’s investing his multibillion-dollar fortune to take advantage of Trump policies.
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Stocks continue to make new highs – five consecutive days of higher highs in the Dow. The Trump administration continues to make new news. And the Fed continues to become less important. Those have been the themes of the week.
Today was the deadline for all big money managers to give a public snapshot of their portfolios to the SEC (as they stood at the end of Q4). So let’s review why (if at all) the news you read about today, regarding the moves of big investors, matters.
Remember, all investors that are managing over $100 million are required to publicly disclose their holdings every quarter. They have 45 days from the end of the quarter to file that disclosure with the SEC. It’s called a form 13F.
First, it’s important to understand that some of the moves deduced from 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends.
Now, there are literally thousands of investment managers that are required to report on a 13F. That means there are thousands of filings. And the difference in manager talent, strategies, portfolio sizes, motivations and investment mandates runs the gamut.
Although the media loves to run splashy headlines about who bought what, and who sold what, to make you feel overconfident about what you own, scared about what they sold, anxious, envious or all a combination of it all. The truth is, most of the meaningful portfolio activity is already well known. Many times, if they are big stakes, they’ve already been reported in another filing with the SEC, called the 13D.
With this all in mind, there are nuggets to be found in 13Fs. Let’s revisit how to find them, and the take aways from the recent filings.
I only look at a tiny percentage of filings—just the investors that have long and proven track records, distinct approaches, and who have concentrated portfolios. That narrows the universe dramatically.
Here’s what to look for:
Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks is bullish. This all can provide good insight into the mindset of the biggest and best investors in the world, and can be a predictor of trends that have yet to materialize in the market’s eye.
For specialist investors (such as a technology focused hedge fund) we take note when they buy a new technology stock or double down on a technology stock. This is much more predictive than when a generalist investor, as an example, buys a technology stock or takes a macro bet.
The bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success. Again, in most cases, we will see these first in the 13D filings.
New positions that are of large, but under 5%, are worthy of putting on the watch list. These positions can be an indicator that the investor is building a position that will soon be a “controlling stake.”
Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts by a substantial amount, or cuts below 5% (which we will see first in 13D filings). Funds also tend to trim losers into the fourth quarter for tax loss benefits, and then they buy them back early the following year.
As for the takeaways from Q4 filings, the best names had built stakes in financials. That’s not surprising given that the Trump win had all but promised a “de-Dodd Franking” of the banking system, especially with the line-up of former Goldman alum that had been announced by late December.
The other big notable in the filings: Warren Buffett’s stake in Apple.
Remember, as we headed into the Brexit vote last year, the broad market mood was shaky. Markets were recovering after the oil price crash, and the unknowns from Brexit had some running for cover. Meanwhile, some of the best investors were building as others were trimming. They were buying energy near the bottom. They were buying health care. And while many were selling the most dominant company in the world, Warren Buffett was buying from them. The guy who has made his fortunes buying when others are selling, did it again with Apple. He was buying near the bottom last summer, and in the fourth quarter he ramped up big time, more than tripling his stake to a $6.6 billion position.
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Today we heard from Janet Yellen in the first part of her semi-annual testimony to Congress. She gave prepared remarks to the Senate today and took questions. Tomorrow it will be the House. The prepared statement will be the same, with maybe a few different questions.
Remember, just four months ago, the most important actor in the global economy was the Fed. Central banks were in control (as they have been for the better part of 10 years), with the Fed leading the way.
The Fed was the ultimate puppet master. By keeping rates ultra-low and standing ready to act against anything that might destabilize the global economy and threaten to kill the dangerously slow recovery, they (along with the help other major central banks) restored confidence, and created the stability and incentives to drive hiring, investing and spending — which created economic recovery.
When Greece bubbled up again, when oil threatened to shake the financial system, when China’s slowdown created uncertainty, central banks were quick to step in with more easing, bigger QE, promises of low rates for a very long time, etc.. And in some cases, they outright intervened, like when the ECB averted disaster in Italy and Spain by promising to buy unlimited amounts of Italian and Spanish government bonds to stop speculators from inciting a bond market collapse and a collapse of the euro and European Union.
This dynamic of central bank activism has changed. The Fed, and central bank intervention in general, is no longer the only game in town. We have fiscal stimulus coming and structural change underway that has the chance to finally mend the decade long slump of the global economy. That’s why today’s speech by the Fed Chair was no longer the biggest event of the week — not even the day.
The scripts has flipped. Where the Fed had been driver of recovery, they now have become the threat to recovery. So the interest in Fedwatching today is only to the extent that they may screw things up.
Moving too fast on interest rate hikes has the potential weaken or even undo the gains that stand to come from the pro-growth policies efforts from the new administration.
Remember, the Fed told us in December that they projected THREE hikes this year. But keep in mind, they projected FOUR in December of 2015, for 2016, and we only got one. And that was only AFTER the election, and the swing in sentiment regarding the prospects of pro-growth policies.
Remember, Bernanke himself has criticized the Fed for stalling momentum in the recovery by showing too much tightening (i.e. over optimism) in their forecasts. And he argued that the Fed should give the economy some room to run and sustain momentum, fighting inflation from behind.
On that note, the Fed has now witnessed the bumpy path that the new administration is dealing with, and will be traveling, in implementing policy. I would think they would be less aggressive now in their view on rate hikes UNTIL they see evidence of policy execution, and a lot more evidence in the data. Let’s hope that’s the case.
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Stocks continue to print new record highs. Let’s talk about why.
First, as we know, the most powerful underlying force for stocks right now is prospects of a massive corporate tax cut, deregulation, a huge infrastructure spend and trillions of dollars of corporate repatriation coming. But quietly, among all of the Trump attention, earnings are also driving stocks. More than 70% of S&P 500 companies have reported. About 2/3rds of the companies have beat Wall Street estimates. And most importantly, earnings in Q4 have grown at 3.1% year-over-year. That’s the first consecutive positive growth reading since Q4 2014/ Q1 2015.
Meanwhile, yields have remained quiet. And oil prices have remained quiet. That’s positive for stocks. Take a look at the graphic below …
You can see, stocks and most commodities continue to rise on the growth outlook. Yields and energy should be rising too. But the 10 year yield has barely budged all year — same for oil. Of course, higher rates, too fast, are a countervailing force to the pro-growth policies. Same can be said for higher oil too fast. With that, both are adding more “fuel” to stocks.
On the rate front, we’ll hear from Janet Yellen this week, as she gives prepared remarks on the economy to Congress, and takes questions.
She’s been a communications disaster for the Fed. Most recently, following the Fed’s December rate hike, she backtracked on her comments made a few months prior, when she said the Fed would let the economy run hot. She denied that in December. Still, the 10-year yield is about 10 basis points lower than where it closed following that December press conference. I wouldn’t be surprised to see a more dovish tone from Yellen this time around, in effort to walk market rates a little lower, to take the pressure off of the Fed and to continue stimulating optimism about the economy.
On Friday we looked at four important charts for markets as we head into this week: the dollar/yen exchange rate, the Nikkei (Japanese stocks), the DAX (German Stocks), and the Shanghai Composite (Chinese stocks).
With U.S. stocks printing new record highs by the day, these three stock markets are ready to make a big catch-up run. It’s just a matter of when. And I argued that a positive tone coming from the meeting of U.S. and Japanese leadership, under the scrutiny of trade tensions, could be the greenlight to get these markets going. That includes a stronger dollar vs. the yen. All are moving in the right direction today.
On the China front, we looked at this chart on Friday.
As I said, “Copper has made a run (up 10% ytd). That typically correlates well with expectations of global growth. Global growth is typically good for China. Of course, they are in the crosshairs of Trump’s fair trade movement, but if you think there’s a chance that more fair trade terms can be a win for the U.S. and a win for China, then Chinese stocks are a bargain here.”
Copper is surged again today on a supply disruption and has technically broken out.
This should continue to spark a move in the Chinese stock market.
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Stocks finished the week on record highs. We talked earlier in the week about Trump’s meeting with Japan’s Prime Minister and his economic and finance advisors.
I suspect that Trump will come away, after a weekend in Palm Beach with Abe, learning that Abenomics is good for the U.S., and good global growth and stability (in the current global economic environment).
And one of the keys to success in Abenomics is a weaker yen, which translates to a stronger dollar. As I’ve said, the weak yen has been pulled into the fray with Trump’s tough talk on trade imbalances, but his beef on currency advantage is really directed toward China – not Japan, not Mexico, not even Europe.
With that, and with the assumption that the yen may be pardoned for a while, the dollar bouncing against the yen as we head into the weekend. And it looks like we may see a technical breakout and an even higher dollar, lower yen in our future.
And Japanese stocks look set to break out too, to catch up to the strength of U.S. stocks. The Nikkei is 8% off of the 2015 highs, while U.S. stocks are on record highs, and 8% ABOVE its 2015 highs.
Another catch up trade: German stocks. Despite the growing attention given to the French nationalist candidate, Le Pen, who has been anti-euro and anti-European Union, right or wrong the bond market isn’t showing any new interest in disaster insurance in Europe, nor is the euro.
With that, German stocks look very good, still about 8% from the 2015 highs, and the technical correction clearly ended last summer.
Lastly, let’s take a look at another big sleeper stock market, China…
You can see how Copper is on a big run (up 10% ytd). That typically correlates well with expectations of global growth. Global growth is typically good for China. Of course, China is in the crosshairs of Trump’s fair trade movement, but if you think there’s a chance that more fair trade terms can be a win for the U.S. and a win for China, then Chinese stocks are a bargain here.
Have a great weekend!
For help building a high potential portfolio for 2017, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
Stocks are hitting new record highs today. That includes the Dow, the S&P 500 and the Nasdaq.
We’ve now seen about 60% of the earnings for Q4, and earnings are very good. As we’ve discussed, earnings guidance and consensus views are made to be beaten. Factset says that, on average, about 67% of S&P 500 companies beat the consensus view on earnings. For Q4, that number, as of last Friday, was 65%.
More importantly, the earnings growth rate for Q4 is +4.6% thus far. That’s better than the 3.1% that was predicted, coming into the earnings season. And that’s the first two consecutive quarters of year-over-year positive EPS growth in a couple of years.
So we have positive earnings surprises driving stocks higher. And finally, revenue growth is coming. After six consecutive quarters of revenue contraction, earnings for U.S. companies had a second consecutive quarter of growth. And the quarters ahead should be much better.
Clearly, in the weak growth environment, the focus has clearly been cutting costs, refinancing debt, selling non-core assets, and buying back shares. That’s all a recipe for juicing EPS, even though revenue growth is sluggish, if existent.
So for all of the people that are constantly hand wringing about the levels of the stock market, ask them this: What happens when you take these companies that are growing earnings by optimizing margins in a 1% growth world, and you give them 3%-4% economic growth? Earnings go up. What happens when you take a profitable company and cut the tax burden by 15 to 20 percentage points? Earnings go up.
When earnings go up, price to earnings goes down. And valuations can become very, very cheap.
We have companies that have been forced to streamline to survive. And now we’re in the early days of a regime shift, where tax cuts will work for them, deregulation will work for them, and a big infrastructure spend will pop demand, to actually fuel some revenue growth.
Below is a nice chart from Yardeni. You can see the flattish revenue growth, but earnings divergence over the past five years.
On the right hand axis, next year’s earnings on the S&P 500 are expected around $133. That doesn’t take into account the impact of a corporate tax cut, which Standard & Poors research has suggested could bump that number up to the mid $150s ($1.31 added for every 1% cut in the corporate tax rate). That would dramatically widen the revenue, earnings divergence — or make the closing of this gap that much more aggressive.
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We’ve talked about the drift (now slide) lower in interest rates over the past couple of days. This is a big deal and something to keep a close eye on. Remember, this move lower comes in the face of a strong jobs number on Friday. Following that number, the yield on the 10-year traded up to 2.50%. Today we’re looking at 2.35% (low of 2.32%).
In contrast to this move in rates, stocks are sitting on record highs, if not making new record highs. Oil has been stable in a $50-$55 range. The dollar isn’t doing much. Implied volatility on the stock market is dead. And commodities are relatively quiet, except for gold.
On that note, yesterday we looked at the tight correlation of the inverse price of gold and yields since the election (i.e. gold goes up, yields go down). And in recent weeks, yields have been lagging the strength in gold, making the case for even lower yields to come.
We looked at the below trendline on the 10-year yesterday that was testing… that gave way today.
This move lower in yields puts both the Trump administration and the Fed in a much more comfortable spot.
A continued rise in market interest rates would force the Fed to be more aggressive, both of which would work against fiscal stimulus, dulling the contribution to growth, if not neutralizing it all together. Higher rates would slow the housing market and slow spending, especially in a fragile economy. Among the things to be worried about, higher rates, too soon, could be the biggest (bigger than protectionism, European elections…)
President Trump was said to be asking for advice on the administration’s view on the dollar overnight. I suspect the upcoming meeting with Japan’s Prime Minister (and co.) had something (a lot) to do with it. This is precisely what we’ve been talking about. The dollar and the yen are squarely in the crosshairs for this face-to-face meeting. But Trump may learn from the meeting that he would far prefer a stronger dollar and weaker yen, than a 4-4.5% ten year yield by the end of the year.
As I’ve said, Japan’s QE policies, which weaken the yen, also offer an anchor to U.S. interest rates, keeping them in check. I suspect the softening of U.S. yields, as all other markets are quiet, may have something to do with Chinese money leaving China (as we discussed yesterday). But it also may be influenced by Japan, finding the best, safest parking place for freshly printed money (i.e. buying U.S. Treasuries, which pushed down U.S. rates) – and showing that benefits of that influence to the new President.
For help building a high potential portfolio for 2017, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
Yesterday we looked at the slide in yields (U.S. market interest rates — the 10-year Treasury yield). That continued today, in a relatively quiet market.
Let’s take a look at what may be driving it.
If you take a look at the chart below, you can see the moves in yields and gold have been tightly correlated since election night: gold down, yields up.
As markets began pricing in a wave of U.S. growth policies, in a world where negative interest rates were beginning to emerge, the benchmark market-interest-rate in the U.S. shot up and global interest rates followed. The German 10-year yield swung from negative territory back into positive territory. Even Japan, the leader of global negative interest rate policy early last year, had a big reversal back into positive territory.
And as growth prospects returned, people dumped gold. And as you can see in the chart above of the “inverted price of gold,” the rising line represents falling gold prices.
Interestingly, gold has been bouncing pretty aggressively since mid December. Why? To an extent, it’s pricing in some uncertainty surrounding Trump policies. And that would also explain the slow down and (somewhat) slide in U.S. yields. In fact, based on that chart above and the gold relationship, it looks like we could see yields back below 2.10%. That would mean a break of the technical support (the yellow line) in this next chart …
Another reason for higher gold, lower yields (i.e. higher bond prices), might be the capital flight in China. Where do you move money if you’re able to get it out in China? The dollar, U.S. Treasuries, U.S. stocks, Gold.
The data overnight showed the lowest levels reached in the countries $3 trillion currency reserve stash in 6 years. That, in large part, comes from the Chinese central banks use of reserves to slow the decline of their currency, the yuan. Of course a weakening yuan only inflames U.S. trade rhetoric.
For help building a high potential portfolio for 2017, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
Stocks continue to print new record highs. Let’s talk about why.
