As of the end of last week, 78% of the companies that have reported earnings for the most recent quarter have beaten estimates.
That’s on about a third of S&P 500 companies that have reported thus far. Remember, FactSet says on average (the five-year average), 67% of companies in the S&P 500 beat their analyst expectations. And they beat by an average of 4%. So the numbers in this earnings season are running a little hotter, albeit on a lowered bar.
We’ve talked quite a bit in the past week about the run up to Apple earnings, which came in yesterday after the market close. The earnings number beat expectations. But it was by a slim margin.
The stock was lower on the day. Still, on the second quarter report, this past July, Apple was a sub $100 stock (trading at just above $96). Today it will close above $115. That’s 20% higher in the span of one quarter, and it was on a report that was very much in line with the report we heard yesterday. And the report included only a few weeks of the new iPhone7 release. And it doesn’t reflect implosion of Apple’s competitor, Samsung.
As the media and analyst tend to do, especially when the macro news front is quiet and market volatility is quiet, they picked apart and speculated on the future of Apple today as a company that may have peaked.
Let’s just take a look at the stock, and not pretend to have better visibility on the future of the company than the people do inside — the same one’s that put a transformational supercomputer in our pockets.
The stock still trades at 13x earnings. The S&P 500 trades at 16x. Apple trades at 13x next year’s projected earnings. The S&P 500 trades at 16.5x. Clearly it’s undervalued compared to the broader market. What about Apple’s monster cash position? Apple has even more cash now — a record $237 billion. If we excluded the cash from the valuation, Apple trades at 8.6x earnings. Though not an apples to apples (pun), and just as a reference point, that valuation would group Apple with the likes of these S&P 500 components that trade 8 times earnings: Dow Chemical, Prudential Financial, Bed Bath & Beyond, a Norwegian chemical company (LBY), and Hewlett Packard Enterprise. It’s safe to say no one is debating whether or not Hewlett Packard is at the pinnacle of its business. Yet, if we strip out the cash in Apple, AAPL shares are trading at an HPE valuation.
Apple still looks like a cheap stock.
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The markets are sitting on Apple earnings, which will come after the close today (by the time you read this).
We’ve been talking about the quiet move in currencies, some commodities and some foreign stock markets.
Given that the dollar is looking like another (maybe big) run is in store, which means much lower euro and much lower yen (and higher German and Japanese stock markets, as we’ve discussed), what does a higher dollar mean for commodities?
Commodities have, of course, been crushed throughout this post financial crisis period. And earlier this year, oil was the most recent mass declining commodity. That was after an initial collapse in 2008, and a sharp recovery from 2009 through much of 2014. But then of course, it came crashing back to earth to revisit the deeply depressed levels of most other commodities, following OPEC refusal to cut production back in late 2014.
So, we’ve talked about the importance of oil. Cheap oil had all of the ingredients to be even more destructive to the global economy than the credit bubble burst (and housing bust). But it’s out of the danger zone now, at around $50, and the outlook is bullish, given the supply dynamics and given that OPEC is prepared to cut for the first time in eight years.
So this begs the question: If the dollar is strengthening, and may continue to strengthen, isn’t that bad for commodities? And therefore, isn’t that bad news for the oil price recovery?
The mainstream financial media usually is very quick to attribute moves in commodities to an inverse move in the dollar (and vice versa). On the surface, it’s a logical enough argument. After all, commodities like gold, oil, and grains are all priced in dollars.
Therefore, if the dollar weakens the value of the commodity shouldn’t be penalized. With that logic, it should strengthen to maintain its value on the global stage.
So all things remaining equal, the commodity should move in the directly proportional opposite direction of the dollar.
The only problem with this argument is that all things never remain equal …
So is there a legitimate price relationship between the dollar and commodities? Or is it just market fodder to attempt to explain and justify the market activity?
That depends on the time period you look at …
For example, from December 1998 to September 2000 the relationship of oil and the dollar was positive, as shown in the chart below. When one went up, the other went up.
On the other hand, from 2006 to 2009, the relationship was been negative. Take a look at the following chart: When oil was crashing, the dollar was rising sharply. And toward the far right of the chart, oil recovered and the dollar fell.
Of course, these are just two isolated periods of time that I’ve used here to demonstrate exact opposite relationships.
However, over longer periods the influence of the dollar on oil, or oil on the dollar, is found to have NO statistical significance. There’s not a significant positive or negative correlation. Consequently, statisticians would conclude that the dollar and oil have nothing to do with one another.
So there is no reason to believe oil can’t continue its strong recovery, and do so in an environment when the Fed is moving in the opposite directions of other major central banks, providing fuel for a much higher dollar.
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By November 15th, the biggest investors in the world will be required to disclose a snapshot of what their portfolios looked like at the end of the third quarter.
I suspect we’ll find that Apple was heavily bought during the period.
You might recall, the media was stirring about the second quarter filings (which were reported back in August). Some big names had sold or trimmed stakes in Apple.
But, as I discussed at that time, the Q2 portfolio snapshots came just days following the big surprising Brexit decision in the UK. Global markets swung violently on the news back in June. Remember, between June 23rd and June 27th, the S&P 500 fell as much as 5.7%. It made it all back the subsequent four days.
With that event in mind, billionaire investors David Einhorn, George Soros and Chase Coleman – all had sold Apple shares by the end of the second quarter.
But remember, unlike most stocks they own, they can all trade Apple with virtual anonymity between quarters. The stock is too large for anyone one investor to take a 5% controlling stake, which would trigger the requirement of a 13D or 13G filing with the SEC, which would require updated filings (or amendments) within 10 days of any change in the position size (sell one share, you have to report it).
Einhorn even bragged in one of his investor letter’s this year that they have done a good job of “trading” Apple.
Make no mistake, even with the trimmed stakes of Q2, Apple was (and is) still the “who’s who” of billionaire investor-owned stocks. It was still Einhorn’s largest position into the end of Q2. Buffett swooped in and bought shares near the 52-week low.
When we see the Q3 filings next month, I would expect those that were cutting stakes at the end of Q2, were adding it all back in early Q3. And with the run-up in Apple shares since, up 22% from the June lows, I predict it will be the most bought stock of the third quarter. If that’s true, I predict the media and Wall Street will be talking about how great Apple is again (i.e. analyst upgrades will follow).
In the past month, there’s been a solid take up on the new iPhone 7 for Apple. Importantly, with the iPhone 7 launch, all four major carriers have returned to the model of offering free new iPhones for long term contracts. That’s a huge positive on the stock as a product-cycle driven company. Add to that, there’s no other stock that, if not owned and owned enough, can get a professional money manager fired than Apple. That creates a “fear of missing out” trade in the institutional investor community — pushing them off of the sidelines and back into Apple.
But perhaps the most important event for Apple has been the very public implosion of their biggest competitor Samsung. Samsung has been forced to recall their competitive smartphone the Galaxy Note 7 because it’s been bursting into flames. It’s projected to cost the company over $5 billion. Most importantly, it’s positioning Apple, right in the sweetspot of their new product (latest phone) rollout, to take more market share.
If we do indeed find next month that the biggest and smartest investors in the world spent Q3 loading up on Apple, it should give a stamp of approval that sentiment has turned for the stock. Apple remains one of the most undervalued stocks in the S&P 500, with the most powerful fundamentals: it’s cheap at 13x trailing and forward earnings, has an incredible balance sheet with $231 billion in cash, and a high analyst price target of $185 a share.
As I noted last week, the company reported a second consecutive quarter of year-over-year earnings decline in July. But it crushed estimates. The stock took off from $96 and trades today at $117. They report on the most recent quarter on October 25. The consensus earnings estimate is $1.64–which would be a third consecutive year-over-year decline. The recent revisions to that estimate have been down (not surprisingly), which sets up for a beat. The last time Apple reported two consecutive quarters of year-over-year declines was mid-2013. The stock bottomed in that period.
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I talked last week about the move in oil, and the lag in natural gas.
But natural gas was knocking on the door of a technical breakout. As you can see, that breakout looks to be underway now.
Nat gas is now at $3.25. If history is any indication, it could be in the low $4s soon.
That’s helped by chatter today from OPEC members out vocally supporting the production cut that was agreed to two weeks ago. And the Secretary General of OPEC piled on today by saying the sharp contraction in investments (due to low prices) poses a threat to global oil supply. As we’ve discussed, for those that had the “oil price to zero” arguments earlier in the year, supply changes, so does demand.
With all of this, oil continues to climb higher, testing the June highs today. Here’s another look at the chart.
A break above the June highs of $51.67 would project a move to near $65 (technically speaking, it’s a C-wave). Another big technical level above is $68.60, which is the 61.8% retracement of the move down from almost $95 in late 2014, to the lows of earlier this year. That’s the breakdown in oil prices driven by OPEC’s 2014 refusal to cut production. And now were on the verge of getting the first cut in eight years. So oil is looking like higher levels are coming — it was up another 3% today.
What’s does it mean for stocks? As we’ve discussed, for much of the year, lower oil has meant lower stocks, and higher oil has meant higher stocks.
This emerging bullish technical and fundamental backdrop for energy should be very good for stocks. Remember, higher energy prices, in this environment, removes the risk of another oil price shock-to-sentiment (good for stocks, good for the economy). And it means producers can start producing again, downstream businesses can fill capacity, and we can start seeing some of the hundreds of thousands of U.S. jobs replenished that have been lost over the past two years.
Since OPEC rigged lower oil prices back in late 2014, we’ve had over 100 North American energy company bankruptcies. Some of those have/are reorganizing and emerging with lean balance sheets into what could be a hot recovery in energy prices. I’ll talk about some tomorrow.
The Billionaire’s Portfolio is up 23% year-to-date — that’s nearly four times the return of the S&P 500 during the same period. We recently exited a big FDA approval stock for a quadruple, and we’ve just added a new pick to the portfolio — following Warren Buffett into one of his favorite stocks. If you haven’t joined yet, please do. Click here to get started and get your portfolio in line with our Billionaire’s Portfolio.
As you might recall, since I’ve written this daily note starting in January, I’ve focused on a few core themes.
First, central banks are in control. They’ve committed trillions of dollars to manufacture a recovery. They’ve fired arguably every bullet possible (“whatever it takes”). And for everyone’s sake, they can’t afford to see the recovery derail – nor will they. With that, they need stocks higher. They need the housing recovery to continue. They need to maintain the consumer and growing business confidence that they have manufactured through their policies.
A huge contributor to their effort is higher stocks. And higher stocks only come, in this environment, when people aren’t fearing another big shock/ big shoe to drop. The central banks have promised they won’t let it happen. To this point, they’ve made good on their promise through a number of unilateral and coordinated defensive maneuvers along the way (i.e. intervening to quell shock risks).
The second theme: As the central banks have been carefully manufacturing this recovery, the Fed has emerged with the bet that moving away from “emergency policies” could help promote and sustain the recovery. It’s been a tough road on that front. But it has introduced a clear and significant divergence between the Fed’s policy actions and that of Japan, Europe and much of the rest of the world. That creates a major influence on global capital flows. The dollar already benefits as a relative safe parking place for global capital, especially in an uncertain world. Add to that, the expectation of a growing gap between U.S. yields and the rest of the world, and more and more money flows into the dollar… into U.S. assets.
With that in mind, this all fuels a higher dollar and higher U.S. asset prices. And when a dollar-denominated asset begins to move, it’s more likely to attract global speculative capital (because of the dollar benefits).
With that in mind, let’s ignore all of the day to day news, which is mostly dominated by what could be the next big threat, and take an objective look at these charts.
U.S. Stocks
Clearly the trend in stocks since 2009 is higher (like a 45 degree angle). Since that 2009 bottom in stocks, we’ve had about 4 higher closes for every 1 lower close on a quarterly basis. That’s a very strong trend and we’ve just broken out to new highs last quarter (above the white line).
U.S. Dollar
This dollar chart shows the distinct effect of divergent global monetary policy and flows to the dollar. You can see the events annotated in the chart, and the parabolic move in the dollar. Any positive surprises in U.S. economic data as we head into the year end will only drive expectations of a wider policy gap — good for a higher dollar.
Oil
We looked at this breakout in oil last week after the OPEC news. Oil traded just shy of $50 today. That’s 17% higher since September 20th.
Oil trades primarily in dollars. And we have a catalyst for higher oil now that OPEC has said it will make the first production cut in eight years. That makes oil a prime spot for speculative capital (more “fuel” for oil). And as we’ve discussed in recent days, weeks and months… higher oil, given the oil price bust that culminated earlier this year, is good for stocks, and good for the economy.
What’s the anti-dollar trade? Gold. As we discussed yesterday, gold has broken down.
If we keep it simple and think about this major policy divergence, we have plenty of reasons to believe a higher dollar and higher stocks will continue to lead the way.
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Stocks continue to chop around as we head into the big jobs report this week. But the dollar has been a mover today, so has gold.
Let’s take a look at the chart of gold. It has broken down technically.
You can see the longer term downtrend in gold since it topped out in 2011. And we’ve had a corrective bounce this year, which was contained by this descending trendline. And today we broke the trend that describes this bullish technical correction (i.e. the trend continues lower).
A lot of people own gold. And it’s a very emotional trade. Whenever I talk about negative scenarios for gold, the hate mail is sure to follow.
We’ve talked quite a bit about the drivers of the gold trade. I want to revisit that today.
Gold has been a core trade for a lot of people throughout the crisis period. When Lehman failed in 2008, it shook the world, global credit froze, banks were on the verge of collapse, the global economy was on the brink of implosion—people ran into gold. Gold was a fear–of–the–unknown–outcome trade.
Then the global central banks responded with massive backstops, guarantees, and unprecedented QE programs. The world stabilized, but people ran faster into gold. Gold became a hyperinflation–fear trade.
Gold went on a tear from sub–$700 bucks to over $1,900 following the onset of global QE (led by the Fed).
Gold ran up as high as 182%. That was pricing in 41% annualized inflation at one point (as a dollar for dollar hedge). Of course, inflation didn’t comply.
Still eight years after the Fed’s first round of QE (and massive global responses), we have just 13% cumulative inflation over the period.
So the gold bugs overshot in a big way. We’ve looked at this next chart a few times over the past several months. This tells the story on why inflation hasn’t met the expectations of the “run-away inflation” theorists.
This chart above is the velocity of money. This is the rate at which money circulates through the economy. And you can see to the far right of the chart, it hasn’t been fast. In fact, it’s at historic lows. Banks used cheap/free money from the Fed to recapitalize, not to lend. Borrowers had no appetite to borrow, because they were scarred by unemployment and overindebtedness. Bottom line: we get inflation when people are confident about their financial future, jobs, earning potential…and competing for things, buying today, thinking prices might be higher, or the widget might be gone tomorrow. It’s been the opposite for the past eight years.
When this reality of low-to-no inflation and global economic malaise became clear, even after rounds of Fed QE, there were a LOT of irresponsible people continuing to tout gold as an important place in everyone’s portfolio, even at stratospheric levels. People bought gold at $1900 and have since lost as much as 40% on the value of their investment – an investment that was supposed to “hedge” against inflation.
On that note, today the IMF downgraded U.S. growth estimates for the year from 2.2% to just 1.6% — in a year that many were initially expecting to be a good year, nearing trend growth levels (3%-3.5%). So eight years from the inception of the Fed’s extraordinary policies, the case for gold remains weak and an investment with more risk than reward.
The Billionaire’s Portfolio is up 23% year-to-date — that’s nearly four times the return of the S&P 500 during the same period. We recently exited a big FDA approval stock for a quadruple, and we’ve just added a new pick to the portfolio — following Warren Buffett into one of his favorite stocks. If you haven’t joined yet, please do. Click here to get started and get your portfolio in line with our Billionaire’s Portfolio.
Oil popped over $3 from the lows of the day (as much as 7%) on news OPEC has agreed to a production cut.
We’ve talked a lot throughout the year about the price of oil. When it collapsed to the $20s, it put the entire energy industry on bankruptcy watch.
Of course, oil bounced sharply from those lows of February as central banks stepped in with a coordinated response to stabilize confidence. Not so coincidentally, oil bottomed the same day the Bank of Japan intervened in the currency markets.
The oil price bust all started back in November of 2014, the evening of Thanksgiving Day, when OPEC pulled the rug out from under the oil market by vowing not to make production cuts, in an attempt to crush the nascent shale industry. At that time, oil was trading around $73.
You can see in this chart, it never saw that price again.
OPEC was successful in heavily damaging the U.S. shale industry through low oil prices, but it has damaged OPEC countries, too.
What will the news of an agreement on a production cut mean?
A policy shift from OPEC can be very powerful. In 1986, the mere hint of an OPEC policy move sent oil up 50% in just 24 hours. And as we discussed earlier in the year, the relationship between the price of oil and stocks this year has been tight. At times, stocks have traded almost tick for tick with oil.
Take a look at this chart.
An oil price back in the $60s would be a catalyst for a big run in stocks into the year end. For a stock market that has been rudderless surrounding a confused Fed and an important election, this oil news could kick it into gear.
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The debate last night was entertaining. It’s sad to see how the media manipulates facts and cherry picks quotes to fit their narrative.
But that’s what they do and it ultimately shapes views for voters, unfortunately.
Today, I want to focus on China and Trump’s comments on China’s currency manipulation. Everyone knows the U.S. has lost jobs to China. Everyone knows China has become the world’s manufacturer. But not everyone knows how they did it.
Is it just because the labor is so cheap? Or is there more to it?
There’s more to it. A lot more.
China’s biggest and most effective tool is and always has been its currency. China ascended to the second largest economy in the world over the past two decades by massively devaluing its currency, and then pegging it at ultra–cheap levels.
Take a look at this chart …
In this chart, the rising line represents a weaker Chinese yuan and a stronger U.S. dollar. You can see from the early 80s to the mid 90s, the value of the yuan declined dramatically, an 82% decline against the dollar. They trashed their currency for economic advantage – and it worked, big time. And it worked because the rest of the world stood by and let it happen.
For the next decade, the Chinese pegged their currency against the dollar at 8.29 yuan per dollar (a dollar buys 8.29 yuan).
With the massive devaluation of the 80s into the early 90s, and then the peg through 2005, the Chinese economy exploded in size. It enabled China to corner the world’s export market, and suck jobs and foreign currency out of the developed world. This is precisely what Donald Trump is alluding to when he says “China is stealing from us.”
Their economy went from $350 billion to $3.5 trillion through 2005, making it the third largest economy in the world.
This next chart is U.S. GDP during the same period. You can see the incredible ground gained by the Chinese on the U.S. through this period of mass currency manipulation.
And because they’ve undercut the world on price, they’ve become the world’s Wal-Mart (sellers to everyone) and have accumulated a mountain for foreign currency as a result. China is the holder of the largest foreign currency reserves in the world, at over $3 trillion dollars (mostly U.S. dollars). What do they do with those dollars? They buy U.S. Treasuries, keeping rates low, so that U.S. consumers can borrow cheap and buy more of their goods – adding to their mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth (and the cycle continues).
The U.S. woke up in 2005, and started threatening tariffs against Chinese goods unless they abandoned their cheap currency policies. China finally conceded (sort of). They agreed to abandon the peg to the dollar, and to start appreciating their currency.
They allowed the currency to strengthen by about 4.5% a year from 2005 through 2013. That might sound good, but that was a drop in the bucket compared to the double digit pace the Chinese economy was growing at through most of that period. Still, the U.S. passively threatened along the way, but allowed it to continue.
With that, the Chinese economy has ascended to the second largest economy in the world now – on pace to the biggest soon (though it still has just an eight of the per capita GDP as the U.S.). But China’s currency is a bigger threat, at this stage, than just the emergence of China as an economic power. The G-20 (the group of the world’s top 20 economies) has had China’s weak currency policy at the top of its list of concerns for a reason.
The current global imbalances are the underlying cause of the global financial crisis, and China’s currency is at the heart of it.
And without a more fairly valued yuan, repairing those imbalances — those lopsided economies too dependent upon either exports or imports — isn’t going to happen. It’s a recipe for more cycles of booms and busts … and with greater frequency.
Are big tariffs the answer? Historically that’s a recipe for disaster, economically and geopolitically.
What’s the solution? I’ve thought that the Bank of Japan will ultimately crush the value of the yen, as the answer to Japan’s multi-decade economic malaise and as an answer to the stagnant global economic recovery. It’s an answer for everyone, except China. A much weaker yen could crush the China threat, by displacing China as the world’s exporter.
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All eyes are on the Presidential debate/face-off tonight. Heading into the event, stocks are lower, yields are lower and the dollar is lower — all a “risk-off” tone.
And the VIX (implied S&P 500 vol/an indicator of uncertainty) has popped higher from the very low levels it had returned to as of Friday. Speculators are out today making bets on a political firework show tonight, and thus betting on more uncertainty in the outcome and in post-election policy making.
If we step back a bit though, given the difficulties in getting through the legislative process, the biggest potential market influence from the election may be more about the prospects of getting a fiscal stimulus package done, rather than the many promises that are made on an campaign trail. Both candidates have been out promising a spending package to boost the economy. And on the heals of a package from Japan, and the unknown risks from Brexit, the idea is becoming more politically palatable.
As we discussed on Friday, the Fed has taken a strategically more pessimistic public view on the economy, in effort to underpin the current economic drivers in place (stability, low rates and incentives to reach for risk).
Following the Fed and BOJ events last week, the 10-year yield is back in the 1.50s and sitting in a big technical level. This will be an important chart to keep an eye on tomorrow.
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Yesterday we talked about the two big central bank events in focus today. Given that the Bank of Japan had an unusual opportunity to decide on policy before the Fed (first at bat this week), I thought the BOJ could steal the show.
Indeed, the BOJ acted. The Fed stood pat. But thus far, the market response has been fairly muted – not exactly a show stealing response. But as we’ve discussed, two key hammers for the BOJ in achieving a turnaround in inflation and the Japanese economy are: 1) a weaker yen, and 2) higher Japanese stocks.
Their latest tweaks should help swing those hammers.
Bernanke wrote a blog post today with his analysis on the moves in Japan. Given he’s met with/advised the BOJ over the past few months, everyone should be perking up to hear his reaction.
Let’s talk about the moves from the BOJ …
One might think that the easy, winning headline for the BOJ (to influence stocks and the yen) would be an increase in the size of its QE program. They kicked off in 2013 announcing purchases of 60 for 70 trillion yen ($800 billion) a year. They upped the ante to 80 trillion yen in October of 2014. On that October announcement, Japanese stocks took off and the yen plunged – two highly desirable outcomes for the BOJ.
But all central bank credibility is in jeopardy at this stage in the global economic recovery. Going back to the well of bigger asset purchases could be dangerous if the market votes heavily against it by buying yen and selling Japanese stocks. After all, following three years of big asset purchases, the BOJ has failed to reach its inflation and economic objectives.
They didn’t take that road (the explicit bigger QE headline). Instead, the BOJ had two big tweaks to its program. First, they announced that they want to control the 10-year government bond yield. They want to peg it at zero.
What does this accomplish? Bernanke says this is effectively QE. Instead of telling us the size of purchase, they’re telling us the price on which they will either or buy or sell to maintain. If the market decides to dump JGB’s, the BOJ could end up buying more (maybe a lot more) than their current 80 trillion yen a year. Bernanke also calls the move to peg rates, a stealth monetary financing of government spending (which can be a stealth debt monetization).
Secondly, the BOJ said today that they want to overshoot their 2% inflation target, which Bernanke argues allows them to execute on their plans until inflation is sustainable.
It all looks like a massive devaluation of the yen scenario plays well with these policy moves in Japan, both as a response to these policies, and a complement to these policies (self-reinforcing). Though the initial response in the currency markets has been a stronger yen.
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