A few weeks ago, the markets were skittish about elevated oil prices and 3% yields. Now we have oil above $70 and yields comfortably hanging around 3%, yet stocks appear to be in a solid post-correction recovery, now up 8% from the February lows.
Meanwhile the VIX has fallen back to pre-correction levels.
What about gold, another proxy on risk? Gold has been quiet, despite the correction in stocks. But that has a lot to do with bitcoin. Bitcoin has become the gold substitute.
Let’s take a look at the behavior of bitcoin, and the bitcoin/gold relationship.
You can see here, when the bitcoin frenzy was running hot late last year, gold was moving lower, as bitcoin was climbing to record highs.
The bitcoin mania peaked almost to the day they launched bitcoin futures, which allowed hedge funds to begin shorting it. And since, we’ve had this chart …
Bottom line: If we look at the rise in bitcoin as the proxy on risk-aversion (as a gold substitute), then this downtrend of the past five months supports the VIX chart and the stock market recovery. That said, given the mass speculation in bitcoin, if we were to get a sharp collapse, it would likely trigger risk aversion in global markets.
Over the past two Friday’s we’ve stepped events and conditions that have built the case that that “all-clear” signal has been given for stocks.
We are 91% through S&P 500 earnings for Q1 and the positive surprises have continued to roll in, on both earnings growth and revenue growth. Q1 GDP growth had a positive surprise, to reflect an economy that is running very close to 3% over the past three quarters. The important FAANG stocks all beat on earnings and beat on revenues for Q1. And the big jobs report last Friday did NOT come with a hot wage growth number, which keeps the inflation outlook tame.
Now we have very compelling technical confirmation that a resumption of the big secular bull trend for stocks is resuming. This correction has given everyone a long time to get on board. But it looks like the train is leaving the station.
Here’s a look at the S&P 500 ….
This bull trend in stocks from the oil-price crash induced lows of 2016 remains intact. The trendline tested and held three times in this recent correction, as did the 200-day moving average. And yesterday we had a big break of this trendline that represents this correction of the past three months. This has been textbook technical confirmation of a price correction within a strong bull trend.
Here’s the Dow chart we looked at on Wednesday …
And here’s the latest as we end the week, as the momentum from that trend break continues …
U.S. stocks are being valued right at the long-term P/E, at about 16 times forward earnings. Stocks in the UK, Germany and Japan are all trading closer to 13 times forward earnings. That’s cheap relative to long-term averages, and especially cheap (including U.S. stocks), in ultra-low interest rate environments. For perspective, Japanese stocks are recovering back toward the highest levels in more than 25 years, yet the forward P/E on Japanese stocks is closer to the lowest levels over the period. Stocks are cheap, and this correction has been a gift to get all of the onlookers on board.
With oil above $70, today I want to revisit my note from February where we looked at billionaire-owned energy stocks that have the potential to double on higher oil prices (that note is below with updates or you can see it published here).
As I wrote that note, crude oil was trading at $63. This morning it traded close to $72. And more importantly, with the supply disruption (in the renewed Iran sanctions) combined with an already undersupplied market, we now have the recipe for a melt-UP in oil prices. That creates big opportunities in oil exploration, production and services companies (still).
FRIDAY, FEBRUARY 23, 2018
We’ve talked quite a bit over the past year about this $100 oil thesis from the research-driven commodities investors Goehring and Rozencwajg.
As they said in their recent letter, “we remain firmly convinced that oil-related investments will offer phenomenal investment returns. It’s the buying opportunity of a lifetime.”
With that, let’s take a look at some favorite energy stocks of the most informed and influential billionaire investors:
David Einhorn of Greenlight Capital has about 5% of his fund in Consol Energy (CNX). Mason Hawkins of Southeastern Asset Management is also in CNX. He has 9% of his fund in the stock, his third largest position. The last time oil was $100, CNX was a $36 stock. That’s more than a double from current levels. [Update: this is still a potential double, last price in CNX is $15.70.]
Carl Icahn’s biggest position is in energy. He has 12% of his fund in CVR Energy (CVI), which is 82% of the company. The last time oil was $100, CVI was $49. That’s 58% higher than current levels. [Update: last price on CVI is $40.60, driven higher by Icahn’s influence on a favorable EPA ruling.]
Paul Singer of Elliott Management’s third largest position is an oil play: Hess Corp. (HESS). It’s a billion-dollar stake, and the stock was twice as valuable the last time oil prices were $100. [Update: last price on Hess is $63, up significantly from my Feb note, but Hess was a $100+ stock the last time crude oil was traded at $100.]
Andreas Halvorsen of Viking Global Investors has the biggest position in his $16-billion fund in EnCana Corp. (ECA). The stock was around $25 last time oil was $100. It currently trades at $14. [Update: last price on ECA is $17.]
Stocks have a huge influence on sentiment. And sentiment has a huge influence on economic activity.
With that, for the better part of the past four months, we’ve discussed the technical correction we’ve seen in stocks. And we’ve waited patiently for a catalyst to end the correction and resume the long-term bull trend for the stock market.
That catalyst, we anticipated, would be first quarter data (namely earnings and GDP growth). Indeed, that data has confirmed that fiscal stimulus is stoking the economy – shifting it into a higher growth gear than what we’ve seen coming out of the global financial crisis.
Let’s take a look at how this has played out, and the important technical break we’ve had today in the Dow that further supports that the correction is over.
As you can see, we put in the low of this technical correction in the Dow the day after the first quarter ended. And we’ve since seen Q1 earnings roll in, with record positive earnings surprises, record margins and the hottest revenue growth we’ve seen in a long time. Toward the end of April, we had our first look at Q1 GDP growth. That too beat expectations and showed an economy that is growing at 2.875% over the past three quarters — closing in on that big 3% trend-growth level.
Along the way, we’ve tested the 200-day moving average (the purple line) and held. And today, we get a break of this big trendline from the highs of January.
And this beak in stocks comes with the 10-year yield back at 3%, and with oil above $70. While some have seen these levels as a risk to growth, they are rather reflecting a stronger economy, with surging demand.
Crude oil crossed the $70 mark today, and with new sanctions to be placed on Iran, likely tomorrow, $100 oil is looking very possible.
We’ve talked a lot about oil prices over the past couple of years. In early 2016, we talked about the price crash that was induced by OPEC as an effort to crush the competitive U.S. shale industry.
While they nearly succeeded, these oil producing countries nearly killed their own economies in the process. So, in effort to drive oil prices higher, to salvage oil revenues, they flipped the switch in late 2016, cutting production for the first time since 2008. And they did so, in a market that was already undersupplied.
In my January 12th note, we revisited Leigh Goehring’s call for $100 oil. Goehring is one of the best research-driven commodities investors. And has been calling for triple-digit oil prices–this year! He predicted a surge in global oil demand (which has happened) and a drawdown on supplies (which has been happening at “the fastest rate ever experienced”). He said that with the OPEC production cuts from November 2016, we’re “traveling down the same road” as 2006, which drove oil prices to $147 a barrel by 2008.
Below is the chart of oil. A break of $70 is putting the price of oil very close to the levels that it collapsed from that Thanksgiving Day evening back in 2014. That was when OPEC announced that it opted NOT to cut production, despite an oversupply and plunging prices.
At the end of last week, I said “it looks like the all-clear signal has been given to stocks.”
Well, we had some more discomfort to deal with this week, but that statement probably has more validity today than it did last Friday.
With that, let’s review the events and conditions of the past two weeks, that build the case for that all-clear signal.
As of last Friday, more than half of first quarter corporate earnings were in, with record level positive surprises in both earnings and revenues (that has continued). And we got our first look at first quarter GDP, which came in at 2.3%, better than expected, and putting the economy on a 2.875% pace over the past three quarters.
What about interest rates? After all, the hot wage growth number back in February kicked the stock market correction into gear. The move in the 10-year yield above 3% last week started validating the fears that rising interest rates could quicken and maybe choke off the recovery. But last week, we also heard from the ECB and BOJ, both of which committed to QE, which serves as an anchor on global rates (i.e. keeps our rates in check).
Fast forward a few days, and we’ve now heard from the last but most important tech giant: Apple. Like the other FAANG stocks, Apple also beat on earnings and on revenues.
Still, stocks have continued to trade counter to the fundamentals. And we’ve been waiting for the bounce and recovery to pick up the pace. What else can we check off the list on this correction timeline? How about another test of the 200-day moving average, just to shake out the weak hands? We got that yesterday.
Yesterday, in the true form of a market that is bottoming, we had a sharp slide in stocks, through the 200-day moving average, and then a very aggressive bounce to finish in positive territory, and on the highs of the day. That took us to this morning, where we had another jobs report. Perhaps this makes a nice bookend to the February jobs report. This time, no big surprises. The wage growth number was tame. And stocks continued to soar, following through on yesterday’s big reversal off the 200-day moving average.
With all of this, it looks like “the all-clear signal has been given to stocks.”
We will get the important Q1 GDP number tomorrow. We’re already seeing plenty of evidence in Q1 corporate earnings that the big tax cuts have juiced economic activity. Not only do we see positive earnings surprises and record margins, but we’re getting positive revenue surprises too. That means demand has not only picked up, but it has exceeded what companies and Wall Street have expected.
Tomorrow will be another big piece of evidence that should prove to markets that the economy has kicked into another gear, and that an economic boom is underway. Remember, we looked earlier in the week at the sliding expectations for tomorrows growth data. Reuters poll of economists has pegged Q1 GDP expectations at 2%.
Remember, we’re coming off of two quarters of 3%+ growth. And that was before the realization of big tax cuts, which not only has increased profitability for companies, wages for employees and savings for tax payers, but has fueled confidence in the economy and the outlook. And fuels economic activity.
So, at a 2% consensus view on tomorrow’s GDP number, we’re setting up for a positive surprise on GDP. That should be a low bar to beat. And if we do get a beat on GDP, that should be very good for stocks.
As we’ve gone through this price correction in stocks, we’ve been waiting for Q1 data (earnings and growth) to become the catalyst to resume the bull trend for stocks. And it has all lined up according to script. We’ve gotten big beats in the earnings data, as we suspected. We’ve retested the 200-day moving average in the S&P 500 in the past couple of days, as suspected. And as we discussed yesterday, we have two big central bank meetings (the ECB this morning, and the Bank of Japan tonight) which should calm the concerns about the pace of move in the global interest rate market (i.e. as the ECB did this morning, the BOJ should telegraph an appetite for continued asset purchases – which continues to serve like an anchor on global interest rates).
Bottom line: With a good GDP number tomorrow, we should be on the way to a big recovery for global stock markets, to reflect an economy growing back around trend growth, corporate earnings growing a 20% and a valuation on broader stocks that remains cheap relative to the low interest rate environment.
We get a close above 3% for the 10-year yield today. This continues to capture the attention of markets, as we made another run at the 200-day moving average this morning in the S&P 500.
With all of the attention on rates, this makes the central meetings over the next 36-hours interesting. We’ll hear from the European Central Bank tomorrow morning, and the Bank of Japan tomorrow night.
Remember, we have an historic divergence in monetary policy path of U.S. relative to that of rest of the world, particularly Europe and Japan. Here’s a great graphic by the Council of Foreign Relations …
You can see the U.S. and Canada are normalizing rates coming out of the global economic crisis of the past decade. And the rest of the world is still trying to juice the economy with more aggressive monetary stimulus.
In a normal world, global capital flows into countries that are growing, with interest rates that are rising. That hasn’t translated in this post-crisis world. The Fed has been hiking rates since 2015. And the dollar index is actually lower than the levels from which the Fed started its rate normalization program.
Why has the dollar not taken off? Because the exit of emergency level policies in the U.S., and the improvements in the U.S. economy, have paved the way for exits of emergency policies in Europe and Japan. That has promoted global capital to flow out of the dollar (where it had been parked for safety throughout much of the crisis) and back to domestic economies.
Still, as we’ve discussed, the Bank of Japan’s QE program still plays an important role in the stability of global interest rates. If they were to telegraph the winding down of QE (too early), it would accelerate the pace of the move in our 10-year yield. Don’t expect that to happen.
Yields continue to grind higher toward 3%. That has put some pressure on stocks, despite what continues to be a phenomenal earnings season. This creates another dip to buy.
Yesterday, we talked about a reason that people feel less good about stocks, with yields heading toward 3%. [Concern #1] It conjures up memories of the “taper tantrum” of 2013-2014. Yields soared, and stocks had a series of slides.
My rebuttal: The domestic and global economies are fundamentally stronger and much more stable. But maybe most importantly, the economy (still) isn’t left to stand on its own two feet, to survive (or die) in a normalizing interest rate environment. We have fiscal stimulus doing a lot of heavy lifting.
Let’s look at a couple of other reasons people are concerned about stocks as yields climb:
[Concern #2] Maybe this is the beginning of a sharp run higher in market interest rates — like 3% quickly becomes 4%?
My Rebuttal: Very unlikely given the global inflation picture, but more unlikely with the Bank of Japan still buying up global assets in unlimited amounts (Treasuries among them, through a variety of instruments). They can/and are controlling the pace, for the benefit of stimulating their own economy and for the benefit of stimulating and maintaining stability in, the global economy.
[Concern #3] I hear the chatter about how a 3% 10-year note suddenly creates a high appetite for Treasuries over stocks at this point, especially from a risk-reward perspective (i.e. people are selling stocks in favor of capturing that scrumptious 3% yield).
My Rebuttal: In this post-crisis environment, a rise toward 3% promotes the exact opposite behavior. If you are willing to lend for 10-years locked in at a paltry rate, you are forgoing what is almost certainly going to be a higher rate decade than the past decade. If you need to exit, you’re going to find the price of your bonds (very likely) dramatically lower down the road. Coming out of a zero-interest rate world, bond prices are going lower/not higher.
Remember this chart …
The bond market has become a high risk-low reward investment. Meanwhile, with earnings set to grow more than 20% this year, and stock prices already down 7% from the highs of the year, we have a P/E on stocks that continues to slide lower and lower, making stocks cheaper and cheaper. That makes stocks a far superior risk/reward investment, relative to bonds – especially with the prospects of the first big bounce back in economic growth we’ve seen since the Great Recession.
As we’ve discussed, the proxy on the “tech dominance” trade is Amazon. That’s the proxy on the stock market too. And it’s not going well. The President hammered Amazon again over the weekend, and again this morning.
Here’s what he said …
Remember, we had this beautiful heads-up on March 13, with the reversal signal in Amazon.
That signal we discussed in my March 13 note has now predicted this 15.8% decline in the fourth largest publicly traded company. And it’s dictating the continued correction in the broader market.
If you’re a loyal reader of this daily note, you’ll know we’ve been discussing this theme for the better part of the last year. The regulatory screws are tightening. And the tech giants, which have been priced as if they are, or would become, perfect monopolies, are now in the early stages of repricing for a world that might have more rules to follow, hurdles to overcome and a resurrection of the competition they’ve nearly destroyed.
As we know, Uber has run into bans in key markets. We’ve had the repeal of “net neutrality” which may ultimate lead big platforms like Google, Twitter, Facebook and Uber, to transparency of their practices and accountability for the actions of its users. Trump is going after Amazon, as a monopoly and harmful to the economy. Tesla, a money burning company, is being scrutinized for its inability to mass produce — to deliver on promises. For Tesla, if sentiment turns and people become unwilling to continue plowing money into a company that’s lost $6 billion over the past five years (while contributing to the $18 billion wealth of its CEO), it’s game over.
With that said, this all creates the prospects for a big bounce back in those industries that have been damaged by tech “disruption.” And this should make a stock market recovery much more broad-based than we’ve seen.
With the sharp decline in stocks today, we’ve retested and broken the 200-day moving average in the S&P 500. And we close, sitting on this huge trendline that describes the rise in stocks from the oil-crash induced lows of 2016.
Today we neared the lows of the sharp February decline. I suspect we’ll bottom out near here and begin the recovery. And that recovery should be fueled by very good Q1 earnings and a good growth number — brought to us by the big tax cuts.
