Over the past two days, we’ve looked back at a couple of the six marketthemes I expected to dominate in 2016. Back in January, I said “central banks are in control, be long stocks.” That was theme number one. And I thought “China’s currency manipulation would come home to roost.” That was theme number six. Both have clearly materialized. As for China, its currency manipulation has become center stage with the incoming President Trump.
Among the six themes we discussed back in January, I also expected the dollar to continue on a big run. I said…
“The dollar is in a long term bull cycle—Be Long Dollars
When we look back at the long term cycles of the dollar over the past 40 years, we see five distinct cycles for the dollar. And these cycles have lasted, on average, about seven years. The most recent cycle is a bull cycle, started in March 2008, yet has underperformed the average of the past six cycles. While the bull cycle appears to be long–in–the–tooth, in terms of duration, the fundamentals for dollar strength have just recently swung massively in favor of the dollar. We have an historic divergence in the monetary policy path of the U.S. relative to Europe and Japan—a very rare occurrence to have the Fed going one direction (toward raising rates) and two major economic powers going the opposite direction, aggressively.
This huge monetary policy divergence dynamic creates the potential for a sharp extension in the dollar over the coming months.”
The dollar has indeed been strong, but only after a correction earlier in the year. In the past week, the dollar index has reached a 14–year high.
With the Fed projecting three hikes next year and Europe and Japan still going the opposite direction (full bore QE), the dollar trend doesn’t look like it will slow anytime soon. And despite what many are warning about what a stronger dollar might do to growth, a strong dollar tends to accompanystrong growth historically (and it doesn’t kill it). On the other hand, it should be fuel for the rest of the world, as cheaper foreign currencies give the weaker global economies a chance to export their way out of an economic rut.
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Dow 20,000 get’s a lot of people excited. But as we discussed on Friday, there are rational reasons to expect stocks will continue to climb to much higher levels.
Yesterday we looked back on China’s currency manipulation which has escalated to a big geopolitical risk with the incoming Trump administration. Remember, at the beginning of the year I talked about the six big global market themes for 2016. China’s currency was one.
Given that we’re reaching the 20k level in the Dow, let’s revisit the first theme I talked about back in January. “Theme #1: The central banks are in control — Be Long Stocks…
We know that the global financial and economic crisis was driven by a credit bubble and, therefore, overindebtedness. We know more than 60 countries around the world were simultaneously in recession.
If you grasp this reality (Theme #1), and are firmly rooted in the context within which the global economy is operating, respecting the role that central banks played in rescuing the world from an apocalyptic collapse, then there hasn’t been much more to talk about or to debate for quite some time, when it comes to the outlook for markets, risks, scenarios, etc. Central Banks have proven to be able to influence confidence and asset prices. Both of which are critical tools in creating recovery and continuing recovery.”
Now, remember, it wasn’t very long ago (as recent as last month!) that the outlook for the world was gloomy, and the bond markets were pricing in deflation forever. But up to that point, central banks had continued to supply liquidity to the world and fought off crises that threatened to derail the recovery. The central banks gave us a green light to buy stocks, especially when you consider that the Fed, the ECB and the BOJ (the three most powerful central banks in the world) wanted and needed stocks higher.
Of course, we now have a hand off. We’ve had a diver chained under water, and monetary authorities keeping the diver alive, scrambling to replenish the oxygen in the tank. And now we have broad sweeping fiscal and structural policy change coming, which cuts the diver’s chain and oxygen is just above the surface. It’s a recovery that can be driven by fundamental change, which has the chance to become a sustainable recovery. That means you can no longer evaluate the market and economic outlook with the same lens you used just a little more than a month ago.
When you get fundamental change in a stock, you can see huge revaluations. That’s precisely why activist investors have some of the best investment records in history, and have achieved some of the biggest returns overtime (like billionaire Carl Icahn, who has compounded money at nearly 30% for 50 years). They take a controlling stake in a stock. They fire bad CEOs, shake up irresponsible boards, cut costs, sell off underperforming assets — they step into deeply distressed companies and create change through their influence. And that change is the recipe for unlocking value in a stock. The outlook completely changes, so does the valuation.
The Trump administration is approaching policy like a distressed activist investor — targeting a suppressed economy and deeply depressed industries and unlocking value through change, to drive economic growth. When the fundamentals change, when the rules change, the outlook becomes completely different. Just the idea that these changes are coming makes the world a very different place than what we’ve seen for the past ten years (at the inception of the global economic crisis).
For help building a high potential portfolio following the influence of activist investors, 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 is up 24% this year. You can join me here and get positioned for a big 2017.
As we near the year end and near a new administration and policy stance, the geopolitical risks have risen.
I’ve talked about the China threat quite a bit. China’s currency regime was at the core of global economic crisis, and is inching us all toward what looks like an ultimate military crisis. The seizure of an American drone by the Chinese on Friday was another step toward that end.
Remember, back in January, I talked about six global market themes that would rule for 2016. Among those, I said “China’s currency manipulation will come home to roost…..China’s currency manipulation (i.e. keeping their currency weak relative to the rest of the world, to corner the world’s export business) was a big contributor to the global credit bubble and subsequent economic crisis. Only after being persistently pressured by key trading partners (namely the U.S.) have they allowed their currency to slowly appreciate over the past several years. But now their economy is slowing, a dangerous scenario for China. Meanwhile, China is losing export prowess to Japan, a country that has weakened its currency by almost 35% in the past two years. The easy fix, in the minds of the Chinese, is to jumpstart exports. How do they do it? Weaken the currency, which is precisely what they have started doing (beginning in August of last year). But, longer term, expect such a reversal on formerly agreed to concessions by China, to be an act of economic war, which may, over the next decade or two, lead to military war (U.S., Europe, Japan v China, Russia, N. Korea).”
Since January (when I discussed the above) China has continued to weaken it’s currency. They’ve blamed it on capital flight. But with the economy still running at recession speed, they want and need a weaker currency, and they are walking it down. They know what works. A cheap currency drives exports. Exports have drive prosperity in China.
But they’ve run into new leadership in the U.S. that is talking tough and has the credibility to act (unlike the outgoing administration). That has money in China seeking the exit doors as more bumps appear to be ahead for the economy (not the least of which are threats of tariffs). And with that uptick in money leaving the country, the monetary authorities have clamped down on capital controls, more onerously restricting the movement of money out of China.
A weaker currency, tightening capital controls, and an eroding confidence in doing business in China all reinforces a weaker and weaker economy.
Still, as I’ve said before, while many think Trump will provoke a military conflict, that’s far from a certainty. With the credibility to act, however, Trump’s tough talk on China creates leverage. And from that leverage, there may be a path to a mutually beneficial agreement, where the U.S. can win in trade with China, and China can win. But it may get uglier before it gets better. In the end, growth solves a lot of problems. A hotter growing U.S. economy (driven by reform and fiscal stimulus), will ultimately drive much better growth in the global economy. And China has a lot to gain from both. Though in a fair trade environment, they won’t get as much of the pie as they’ve gotten over the past two decades. But it has the chance of leading to a more balanced and sustainable economy in China, which would also be a win for everyone.
For help building a high potential portfolio, 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 is up 24% this year. You can join me here and get positioned for a big 2017.
With the Dow now closing in on 20k, people continue to debate whether or not the market is overvalued, and if so, whether or not it will end badly.
For some perspective, I want to revisit that piece that outlines my simple, fundamental and technical reasons that argue stocks remain undervalued and should go much, much higher from here.
From November 10th, two days after the election:
“I’ve talked in recent days about the ‘Trump effect’ and the welcome sight of a pro–growth government.
After seven years of a central bank manufactured and managed recovery, which could only produce a dangerous “stall–speed” level of growth, the hand–off from monetary driven growth policies to fiscal and structuraldriven growth policies are finally coming.
We now have a government in the U.S. that has the will and mandate to pick up the baton from the central banks and inject pro–growth medicine into what has been a patient on seven years of life–support.
With that, markets are beginning to reflect what America looks like with incentives and the DEMAND in place to produce, to build, to spend, to hire and to invest. The Dow hit a new record high today. The S&P 500 index that measures the broad stock market is close to record highs— now about than 225% higher than at its crisis–induced 2009 lows.
That sounds like a lot of success already. As we know there’s been a big prosperity gap in the real economy—with stagnant wages for over two decades and underemployment, to name a few. But there’s still a massive prosperity gap in the valuation of the stock market.
Remember, if we look at the peak in the S&P 500 from 2007 and apply the long term annualized return (8%) to that pre–crisis peak, we should be closer to 3,400 in the S&P 500 by the middle of next year. That’s 57% higher than current levels. And that’s the prosperity gap that has yet to be closed in this nearly decade long crisis period. With a pro–growth government coming, we should see that gap close in the coming years. And that means there will be a lot of money to be made in stocks, in a movement to restore prosperity in the real economy.
In addition to the above, remember this: The P/E on next year’s S&P 500 earnings estimate is about 16.5, in line with the long–term average (16). As I’ve said, we are not just in a low-interest-rate environment, we are in the mother of all low–interest–rate environments (near ZERO).
With that, when the 10–year yield runs on the low side, historically, the P/E on the S&P 500 runs closer to 20, if not north of it. If we multiply next year’s consensus earnings estimate for the S&P 500 of $131.43 by 20 (where stocks to be valued in low rate environments), we get 2,628 for the S&P 500 by next year—22% higher. That doesn’t include the prospects of the denominator in the P/E ratio GROWING. If we indeed get growth closer to 4% from pro-growth policies, that earnings estimate will be much higher. And the S&P 500, relative to history, will look extraordinarily cheap!
With this in mind, we may very well be entering an incredible era for investing—after a long slog. And an opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade, or more.”
Stocks have, of course, been on a tremendous run since early November, when I wrote this piece. And because of that, and because of the psychological effect of a number like Dow 20k, people think stocks have come too far too fast. But this simple analysis above argues that it’s just getting started, and has a long way (higher) to go.
For help building a high potential portfolio, 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 is up 24% for the year. Join me here.
Last week we talked about how a visit to Trump Tower was becoming a good predictor of a success for your stock.
Goldman continues to build representation in the Trump administration with the latest addition, Gary Cohn (current COO and President of Goldman Sachs) as the National Economic Council Director. And hedge funder Anthony Scaramucci, a Goldman Sachs alum and current member of the Trump transition team, is rumored to be in the running for a role in the administration. Goldman’s stock continues to rise, as the best performer in the Dow Jones Industrial average since Election Day (up 31%).
And remember, we talked about the visit last week of Masayoshi Son, the Japanese billionaire and majority stake holder in Sprint. Sprint is up 32% since election day.
So now we have the latest, and one of the most important cabinet appointments, Rex Tillerson, who will be Secretary of State. He’s the Chairman and CEO of Exxon Mobil, the biggest energy company in the country and one of the largest publicly traded companies. Exxon was up 2% today, and is up 9% since the election — better than the broader market, but not quite as good as the stocks of some other Trump Tower visitors.
This is a very interesting pick. Given that the President-elect has openly talked about using oil as an economic weapon (on Iraq… “we should have taken the oil”). We now have one of the world’s most respected experts in oil, and in negotiating around oil, charged with stabilizing the middle east and relations with Russia (to name a few). And given that the hot spot of global instability surrounds countries (or regimes) that are highly dependendent on oil revenue (funded by oil revenue), we have a guy that could credibly utilize leverage emerging U.S. supply, and global demand of the developed world, as a bargaining chip. His appointment/presence may also end up yielding a stable oil price environment going forward (tempering the manipulation of price extremes by OPEC).
Follow me and look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up more than 27% this year. You can join me here and get positioned for a big 2017.
The last big market event of the year will be Wednesday, when the Fed decides on rates.
As we’ve discussed, from the bottom in rates earlier this year, the interest rate market has had an enormous move. That has a lot of people worried about 1) a tightening that has already taken place in the credit markets, and 2) the potential drag it may have on what has been an improving recovery. But remember, we headed into the Fed’s first post-crisis rate hike, last December, with the 10 year yield trading at 2.25%.
And while rates have since done a nearly 100 basis point round trip, we’ll head into this week’s meeting with the 10 year trading around 2.50%. With that, the market has simply priced-in the rate hike this week, and importantly, is sending the message that the economy can handle it.
However, what has been the risk, going into this meeting, is the potential for the Fed to overreact on the interest rate outlook in response to the pro-growth inititiaves coming from the Trump administration. As we found last year, overly optimistic guidance from the Fed has a tightening effect in this environment. People began bracing ealier this year for a slower economy, if not a Fed induced recession, after the Fed projected four rate hikes this year.
The good news is, as we discussed last week, the two voting Fed members that were marched out in front of cameras last week, both toed the line of Yellen’s communications strategy, expressing caution and a slow and reactive path of rate hikes (no hint of a bubbling up of optimism). Again, that should keep the equities train moving in the positive direction through the year end.
In fact, both equities and oil look poised to take advantage of thin holiday markets. We may see a few more percentage points added to stocks before New Years, especially given the catalyst of the Trump tweet. And we may very well see a drift up to $60 in oil in a thin market.
We’ve had the first production cut from OPEC in eight years. And as of this weekend, we have an agreement by non-OPEC producers to cut oil production too. That gapped oil prices higher to open the week, and has confirmed a clean long term technical reversal pattern in oil.
This is a classic inverse head and shoulders pattern in oil. The break of the neckline today projects a move to $77. Some of the best and most informed oil traders in the world have been predicting that area for oil prices since this past summer.
Follow me and look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up more than 27% this year. You can join me here and get positioned for a big 2017.
We’ve talked a lot about the set ups for big moves in Japanese and German stocks, as these major stock markets have lagged the recovery in the U.S.
Many have yet to come to the realization that a higher growth, healthier U.S. economy is good for everyone — starting with developed marketeconomies. And it unquestionably applies to emerging market economies, despite the fears of trade constraints.
A trillion dollars of U.S. money to be repatriated, has the dollar on a run that will likely end with USDJPY dramatically higher, and the euro dramatically lower (maybe all-time lows of 0.83 cents, before it’s said and done). This is wildly stimulative for those economies, and inflation producing for two spots in the world that have been staring down the abyss of deflation.
This currency effect, along with the higher U.S. growth effect on German and Japanese stocks will put the stock markets in these countries into aggressive catch up mode. I think the acceleration started this week.
As I said last week, Japanese stocks still haven’t yet taken out the 2015 highs. Nor have German stocks, though both made up significant ground this week. Yen hedged Nikkei was up 4.5% this week. The euro hedged Dax was up 7.6%.
What about U.S. stocks? It’s not too late. As I’ve said, it’s just getting started.
We’ve talked quite a bit about the simple fundamental and technical reasons stocks are climbing and still have a lot of upside ahead, but it’s worth reiterating. The long-term trajectory of stocks still has a large gap to close to restore the lost gains of the past nine-plus years, from the 2007 pre-crisis highs. And from a valuation standpoint, stocks are still quite cheap relative to ultra-low interest rate environments. Add to that, a boost in growth will make the stock market even cheaper. As the “E” in the P/E goes up, the ratio goes down. It all argues for much higher stocks. All we’ve needed is a catalyst. And now we have it. It’s the Trump effect.
But it has little to do with blindly assuming a perfect presidential run. It has everything to do with a policy sea change, in a world that has been starving (desperately needing) radical structural change to promote growth.
Not only is this catch up time for foreign stocks. But it’s catch up time for the average investor. The outlook for a sustainable and higher growth economy, along with investor and business-friendly policies is setting the table for an era of solid wealth creation, in a world that has been stagnant for too long. That stagnation has put both pension funds and individual retirement accounts in mathematically dire situations when projecting out retirement benefits. So while some folks with limited perspective continue to ask if it’s too late to get off of the sidelines and into stocks, the reality is, it’s the perfect time. For help, follow me and look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up more than 27% this year. You can join me here and get positioned for a big 2017.
Back in early June I talked about the building story for a breakout in natural gas prices.
Oil had doubled off of the bottom, but natural gas had lagged the move. This created really compelling opportunities for the natural gas stocks that had survived the downturn–and for those that had emerged from bankrupcy positioned to be debt-free cash machines in a higher price environment.
We looked at this chart as it was setup for a big trend break …
It was trading at $2.60 at the time and, as I said, “it looked like the bounce was just getting started” and “could be looking at the early stages of a big run in nat gas prices,” especially given that it was trailing the double that had already taken place in oil.
That break happened in October. And natural gas traded above $3.70 today. Four bucks is near the midpoint of the $6.50-$1.65 range of the past three years. And we’re getting close.
Remember, I said natural gas stocks are a leveraged play on natural gas prices. And back in June I noted the move in Consol Energy (CNX), which had already quadrupled since January. It sounds like you missed the boat? It’s nearly doubled since June!
We have 15% exposure to natural gas related companies in our Billionaire’s Portfolio. Follow me and look over my shoulder as I follow the world’s best investors into their best stocks – they tend to be in first, before stocks like Consol make their moves. Our portfolio is up more than 27% this year. You can join me here and get positioned for a big 2017.
Stocks continue to print new highs. And many continue to doubt the rally (as they have for much of the post-crisis recovery).
They continue to say stocks are priced for perfection, implying that stocks are expensive, and/or that investors are assuming a perfect Presidency from Trump. But remember, we’ve talked about the massive fundamental and technical performance gap that has still yet to be closed, dating back to the 2007 pre-crisis peak. I did this analysis again just a few days after the election. You can see it here: “The Trump Effect Will Make Stocks Extraordinarily Cheap.”
Now, a few days ago, we talked about buying the stocks of the guests of Trump Tower. Goldman comes to mind, as the Wall Street powerhouse has been well represented in the Trump plan, including the new Treasury Secretary appointment. Goldman is the best performing Dow stock over the past month. And we talked about the meeting with Japanese investor, Masayoshi Son, at Trump Tower this week. Son’s gigantic (80%+) stake in Sprint is up 11% sinceTuesday.
With that said, the billionaire activist investor, Carl Icahn, has been out doing interviews the past two days. Let’s talk about Icahn, because there is perhaps no one investor that should benefit more from the Trump administration. Remember, Icahn was an early supporter for Trump. He’s been an advisor throughout and has helped shape policy plans for the President-elect.
What has been the sore spot for Icahn’s underperforming portfolio the past two years? Energy. It has been heavily weighted in his portfolio the past two years. And no surprise, he’s had steep declines in the value of his portfolio the past two years.
But Icahn doesn’t see his energy stakes as bad investments. Rather, he thinks his stocks have been unfairly harmed by reckless regulation. For that, he’s fought. He’s penned a letter to the EPA a few months ago saying its policies on renewable energy credits are bankrupting the oil refinery business and destroying small and midsized oil refiners. And now his activism looks like it will pay off. Yesterday we got an appointee to run the EPA that has been vetted by Icahn (as he said in an interview today) — 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.
Icahn’s publicly traded holdings company is already up 28% from election day (just one month ago). But it remains 56% off of the 2013 highs. This is the portfolio of an investor (Icahn) with the best track record in history (30% annualized for almost 50 years). IEP might be one of the best buys in the market.
We have three Icahn owned stocks in our Billionaire’s Portfolio. Follow me and look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up more than 27% this year. You can join me here and get positioned for a big 2017.
As we’ve discussed the Trump administration has been very good for the broad stock market. It’s been even better for certain industries, and certain stocks that have been drawn into the periphery of the administration.
Goldman Sachs has been well represented in the auditions for cabinet members. And now we have an incoming Treasury Secretary with a Wall Street background as a partner at Goldman. That stock is up 27% since November 8th.
Today, the President-elect met with the Japanese billionaire investor Masayoshi Son. Over the past 35 years, Son has built one the largest and most powerful technology conglomerates in the world, a company called Softbank. He told the new incoming President that he planned to invest $50 billion into U.S. companies behind Trump’s economic plan.
So what does Son own that could benefit from a good relationship with the Trump administration? He owns the wireless carrier Sprint. In fact, he (Softbank) owns more than 80% of the company. No coincidence, Sprint was up 4% today on the news of his successful meeting.
Son is likely posturing put a Sprint/T-Nobile merger back on the table. Sprint walked away from efforts to acquire T-Mobile in 2014 after it was clear it would be blocked under increased antitrust enforcement under the Obama administration.
The combined entity would slingshot a “Sprint/T-Mobile” into a three way horse race for first place in the wireless carrier industry. Though the market is only valuing the combined entity at 15%, rather than one-third of the market. That makes both stocks potential doubles. We own Sprint in our Billionaire’s Portfolio.
Source: Statista.com
The Obama administration had its winners and losers (among the winners, outright funding to Tesla, Solarcity … partnerships with Uber and Facebook). Trump will as well. Keeping an eye on who walks into Trump Tower seems to be a good clue.
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 is up more than 24% this year. Join me here.
