As we head into Memorial Day weekend and stocks (S&P 500) have crossed back over into positive territory again for the year, we want to step back and acknowledge the relative calm in global markets and economies, compared to where we stood just three months ago, and talk about how different the second half is setting up to be.
Remember, just three months ago the S&P 500 was down 11.4%. Small cap stocks were down 17%. When stocks go lower, people predict crashes. They did. Oil was trading $26 and some bold people were predicting much lower – and lower for a very long time.
Sure, the world was a scary place when oil was $26. But we had a binary outcome on our hands. If oil continued to go lower, and for much longer, the energy industry was done, and the dominoes were lining up. We faced another wave of global economic and financial crisis that would have made the “great recession” look modest.
But if you stepped back and weighed the probability of the outcomes, the evidence was clearly supporting a recovery, not another date with global disaster.
Just days prior to February 11, when oil and global stocks bottomed, we said “a rigged oil market has the ingredients to undo all that the central banks have done for the past nine years to get us to this point. With that, we expect that, as intervention has stemmed the threat of everything that could have derailed recovery up to this point, intervention will be what stems the threat of the falling oil and commodity prices threat.”
The central banks manufactured a recovery from the edge of disaster in 2009. They went “all-in.” It would be illogical to think they would sit back and watch it all undone by an oil price bust, one that was orchestrated by OPEC in an effort to crush the competitive shale industry.
We already knew how far the world’s biggest central banks would go to preserve stability (perhaps civilization). They would do pretty much anything — “whatever it takes” in their own words.
So what marked the bottom for oil? Not surprisingly, it was intervention.
If we fast forward to today, with the trend of positive surprises in European data leading the way, it’s fair to say the state of global markets is getting closer to good.
What does that mean for stocks?
If we look back at 2010 we can see a lot of similarities. Stocks were hammered in the first half of 2010 by the potential default of Greece – and for energy stocks, the oil spill in the Gulf. The macro clouds were removed, and in the second half of 2010, the S&P 500 rallied from down 7% to up 15% by year end.
The Russell 2000 was down 6% for the year through July of 2010. Over the next five months it rallied 34 percentage points to finish UP 27% on the year.
What about energy? After being down 12% in the first half of 2010, the XLE (the energy ETF tied to a basket of energy stocks) returned 34% off the bottom and 22% for the year.
Also remember, in Fed tightening cycles, stocks tend to go UP not down. We’re officially five months into a Fed tightening cycle stocks are basically flat.
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
Today we want to talk about the quarterly SEC filings that came in over the past several days week.
All big 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 form13F.
While these filings have become very popular fodder for the media, what we care more about is 13D filings. And of course we have our formula for narrowing down the universe to what we deem to be the best ideas.
For a refresher: The 13D forms are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company’s stock, it’s considered a controlling stake. In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence. Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.
By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the difference in manager talent, strategies and portfolio sizes run the gamut.
With that caveat, there are nuggets to be found in 13Fs. Let’s talk about how to find them, and the take aways from the recent filings.
First, it’s important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.
Through our research and nearly 40 years of combined experience, here’s what we’ve found to be most predictive:
Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks are 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.
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 a position by 75% or more, 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.
With that in mind, we want to talk about a few things we did glean from these recent filings.
Apple (AAPL)
This biggest news out of the filings this week was that Warren Buffett initiated a new $1 billion plus stake in Apple. Buffett loves to invest in out-of-favor companies that are depressed in price, with strong brand names, low P/Es and high return on capital. Apple checks the boxes on all of the above.
We think Buffett’s stamp of approval will change the sentiment on Apple, which has had a short-term ebb. Apple shares were up 4% on the news Buffett has entered, the biggest one day move in over two months.
Additionally, billionaire David Einhorn added to his Apple position last quarter. He now has more than 15% of his $5.9 billion hedge fund in Apple.
ENERGY
We’ve talked a lot about oil over the past several months. The oil price bust created a binary trade — either it destroyed the global economic recovery (and likely the global economy) or it bounced back aggressively. Thankfully, it’s done the latter. Billionaire oil trader, Boone Pickens said this week that he thinks oil could trade as high as $60 over the next two months.
In the filings from Q1, top billionaires just like in Q4 were initiating and adding new stakes in energy stocks – building some large, high conviction positions.
As we’ve said, we think oil-energy stocks are the macro trade of the year.
Internet
One of most popular growth stocks purchased by top billionaire investors last quarter was Facebook. Another notable tech stock in the cross hairs of influential investors: Yahoo. A couple of top activist investors, a hot macro investor are involved in Yahoo. And news this week that Warren Buffet and billionaire Dan Gilbert could be teaming up to buy parts of Yahoo.
Billionaires Bottom Fishing in Healthcare
Noted contrarian and billionaire John Paulson has doubled down on two beaten down healthcare stocks last quarter, Endo International and Akorn Inc. We think this is an interesting move because Paulson like many of the best billionaire investors have literally made billions from buying when everyone else is selling.
Many other top hedge funds remain heavily invested in healthcare stocks as well, even after their most recent selloff.
Now, a couple of bigger picture views from the filings…
Some of the biggest and best are bullish on stocks. Billionaire David Tepper has 12% of his fund invested in call options on the S&P 500 and Nasdaq 100. Billionaire global macro trading legend, Louis Bacon, now has more than 7% of his fund in Nasdaq call options. And two other macro investing studs, Paul Tudor Jones and John Burbank have both built big call options on emerging market stocks.
This activity gels nicely with what we’ve been discussing here in our dailynotes. We have a global economic environment that is fueled by central bank support. The risk of the oil price bust has now been removed. And a lot of the economic data is setting up nicely for big positive surprises over the coming months. We think we are in the early stages of seeing a global sentiment shift, away from gloom, and toward optimism. And positive data surprises and changes in sentiment are two very powerful factors in driving markets.
Join us here to get all of our in-depth analysis on the bigger picture, and our carefully curated stock portfolio of the best stocks that are owned by the world’s best investors.
Buffett’s famed annual letter is due to be released this weekend. With that, today we want to talk a bit about his record, his philosophy on markets and successful investing and the high conviction stocks that he has in his $130 billion plus Berkshire Hathaway stock portfolio.
First, only one living investor has a length of track record that can compare to Buffett’s. That’s fellow billionaire Carl Icahn. Icahn actually has a better record than Buffett, and it spans a little longer. But he gets a fraction of the attention of the man they call the Oracle of Omaha.(more…)
Today the rebound in oil led a significant turnaround for stocks. With that, the broader sentiment of uncertainty across markets tends to abate. Broader commodities swung from negative to positive. And yields on the U.S. 10-year Treasury, which were in deep decline this morning, swung to positive territory by the afternoon.
If you own stocks, a house, have a job or need to eat, you should cheer for higher oil prices.
As we’ve talked about quite a bit in recent weeks, cheap oil, at this point in the global economic recovery, is a catalyst to destabilize the global economy. While consumers gain a few bucks from cheaper gas, the oil industry leans closer to the edge of bankruptcies and weak oil exporting countries toward default. That would be very bad news (global financial crisis, round 2). So the longer we’re down here, and the more persistent these low levels appear, the riskier the world looks. And when the world looks risky, people sell stocks, and other relatively risky assets and they hold cash or buy U.S. Treasuries (which pushes yields lower).
For proof, here’s a look at the 10-year yield on the U.S. Treasury note.
Keep in mind, the Fed raised rates in December! They did so when the 10 year was trading at a yield of 2.20%. The yield is now 45 basis points lower. And even though a voting Fed member said yesterday that in her view, a second hike was still on the table for next month, the market has still virtually priced out the possibility of any further hikes for the rest of the year.
Why? Because other parts of the world are moving (or are moving deeper) into negative rate territory, because economic conditions continue to soften, mostly driven by sentiment and weakening inflation prospects. A big driver of that mix is the oil price crash.
In the next chart, you can see how yields, despite the December rate hike, have tracked oil lower.
Again, when people think the world looks risky, they pile into the safest parking place for capital on the planet, U.S. Treasuries –and that drives yields on Treasuries lower. While that flow of capital has certainly occurred, the pressure on yields from speculators is also a big component.
If you recall, we discussed a couple of weeks ago how markets can have it wrong – sometimes very wrong. If indeed, the market is wrong on this one, there is a tremendous opportunity to ride yields back to the 2.25% area. And it may be a violent move.
But oil will be the driver.
As we said, oil turned the tide for stocks today. Here’s a look at the relationship of oil and stocks over the past three months.
In this longer term chart above, you can get perspective on where oil prices stand relative to history. You can see in this chart the sharp rise, the sharp fall and the rebound from the depths of the global financial crisis.
That rebound was all China. China stepped in and used their three trillion dollars in foreign currency reserves AND their massive fiscal stimulus package to gobble up cheap commodities.
And you can see this most recent price crash was triggered by move by the Saudis to block an OPEC production cut in November 2014. It was the night of the Thanksgiving holiday in the U.S. and oil was trading about $73. We haven’t seen that price since.
The low at the depths of the financial crisis was 32.40. That’s about where oil closed today. We’ve made the case in recent weeks that, if OPEC refuses to cut production (likely), the central banks could/should step in and buy oil (the ECB, BOJ and/or China).
Bryan Rich is a macro trader and co-founder of Billionaire’s Portfolio,a subscription-based service that empowers average investors to invest alongside the world’s best billionaire investors.
Oil has surged to open the week. If you’ve been reading our daily pieces over the past few weeks, you’ll know how important oil is for global markets at this stage. With that, strong oil today has translated into higher stocks, higher broad commodities, a slight bump higher in interest rates and better investor sentiment in general.
It was just fourteen days ago that Chesapeake Energy, one of the largest producers of oil and natural gas was rumored to be choosing the path of bankruptcy. That rumor was immediately denied by the company. And soon thereafter, the reality set in for markets that a scenario like that would conjure up post-Lehman like outcomes. Oil has since put in a bottom and bounced more than 25%. Chesapeake has now bounced 46% from the lows just the last six trading days.
It’s at extremes in markets where the biggest and best investors have historically made their money – running into risk, when everyone else is running away.
With that, today we want to take a look at a few stocks with the biggest upside, and an important “risk buffer” in what is a high risk sector at the moment (energy). This risk buffer? Each stock has the presence of a big-time billionaire investor.
Self-made billionaire energy trader Boone Pickens has said he expects oil to return to $70 this year. On his $70 prediction, he’s also said that if he misses it will be because oil is “over $70, not under $70.” If Pickens is right about oil prices, each of these stocks below have huge upside:
1) Oasis Petroleum (OAS) – Billionaire hedge fund manager John Paulson owns nearly 4% of this stock. The activist hedge fund SPO Advisory owns 14% and has been buying the stock on almost every dip. When oil was last $70, OAS was trading $25 or 500% higher than current levels.
2) Chesapeake Energy (CHK) – Billionaire investor Carl Icahn owns 11% of CHK and recently added to his position around $13. The last time oil was $70, Chesapeake was $25. That would be more than a 1000% return from its price today.
3) EXCO Resources (XCO) – Billionaire investors Wilbur Ross and Howard Marks own more than 30% of this energy stock. The last time oil was $70, EXCO was $3.30. That would be almost a 330% return from its price today.
4) Consol Energy (CNX) – Billionaire David Einhorn owns 12.9% of this stock. When oil was last $70, Consol traded for $40 or almost 500% higher than current levels.
5) Williams Companies (WMB) – Carl Icahn Protégé, Keith Meister of the activist hedge fund Corvex Management, owns $1.1 billion worth of WMB. The last time oil was $70, WMB traded for $50 – more than 300% higher than its current levels.
As we’ve said, persistently cheap oil (at these prices) has become the new “too big to fail” — it’s a systemic risk. It’s hard to imagine central banks will sit back and watch an OPEC-rigged price war put the global economy back into an ugly downward spiral. And time is the worst enemy to those vulnerable first dominoes (the energy industry and weak oil producing countries).
The best investors like to go where the biggest risks are — that’s where the biggest returns can follow. And they’ve been getting aggressive in energy and commodities.
Without question, energy stocks have been beaten up and left for dead. If indeed Chesapeake is a leading indicator that it’s all backing away from the edge, there will be big money to be made in these stocks.
We already have one of the best performing stocks in the entire stock market for the month of February in our Billionaire’s Portfolio, billionaire-owned Freeport McMoran. Click here and join us!
Stocks have roared back in the past several days. It’s been led by commodity stocks, the area that has been beaten up and left for dead. Not surprisingly, the bounce in that area has been multiples of the broader stock market bounce (which is 7% in less than a week).
As we’ve discussed in recent weeks, in the world we live in, global economic stability continues to rely on central bank influence. And, indeed, after one of the worst starts for stocks in a New Year ever, it was central bank verbal posturing to open the week that has turned the tide for global markets. On Sunday, the head of the BOJ spoke, warning that they were watching markets closely and stood ready to act, and then on Monday, the head of the European Central Bank said, effectively, the same. The result: the BOJ comments sparked a 10% rally in Japanese stocks in a matter of hours. With that lead, the S&P 500 has now rallied 7% in three days, crude oil has bounced 20%, and global interest rates are bouncing back (which, last week, were pricing in recession).
Like it or not, in a world where the economy remains structurally fragile after the global financial and economic crisis, the central banks remain in the driver’s seat and they know that promoting stability is the key to recovery and ultimately returning to sustainable economic growth. As we approach the March ECB and BOJ meetings, with weak oil prices persisting, we continue to think the central banks may outright buy oil and commodities to remove the risk of oil industry bankruptcies and the domino effect that it would spark. As an additional benefit, it would likely turn out to be a very profitable investment.
Today we want to talk about the quarterly SEC filings that came in this week. All big 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. While these filings have become very popular fodder for the media, what we care more about is 13D filings. Those are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company’s stock, it’s considered a controlling stake. In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence. Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.
By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the difference in manager talent, strategies and portfolio sizes run the gamut.
With that caveat, there are nuggets to be found in 13Fs. Let’s talk about how to find them, and the take aways from the recent filings.
First, it’s important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.
Through our research over 15 years, here’s what we’ve found to be most predictive:
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.
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 a position by 75% or more, 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.
With that in mind, we want to talk about a few things we did glean from these recent filings.
First, the old adage “buy when there is blood in the streets” was evident last quarter, as many of the top billionaire investors loaded up on stocks in the fourth quarter. That was BEFORE the further declines this year.
Top billionaire investors Paul Singer, David Tepper and Chase Coleman of Tiger Global all increased their equity exposure (buying more stocks) over the last quarter. And billionaire investors still love health care stocks. John Paulson, Bill Ackman, Dan Loeb and Larry Robbins loaded up, with Paulson putting 56% of his portfolio in health care.
Billionaires are starting to bottom fish in energy. Seth Klarman, David Tepper, Carl Icahn and Warren Buffett all either added to, or initiated new stakes in energy stocks. Tepper now has 12% of his entire equity portfolio in energy stocks! This obviously coincides well with the theme that energy and commodity stocks are starting to bottom.
Also notable, in recent weeks, the 13D filings have been coming in fast and furious as investors are taking advantage of the decline this year.
Analyzing these filings is part of our process in our Billionaire’s Portfolio. With that in mind, this week we followed one of the best billion dollar (plus) activist hedge funds into a stock where they own 12.5%, have three board seats, and are in the process of replacing the CEO. These are are three key ingredients in the success of activist campaigns: 1) a big concentrated position (12.5% stake), 2) control (board seats), and 3) change (a new CEO). This activist fund has won on 82% of its campaigns since 2002 and has a price target on this stock that’s more than 150% higher than the current share price. To join us you can subscribe to our Billionaire’s Portfolio (here).
The Fed has manufactured a recovery by promoting stability. And they’ve relied on two key asset prices to do it: stocks and housing. Today we want to look at a few charts that show how important the stock and housing market recoveries have been.
While QE and the Fed’s ultra easy policy stance couldn’t directly create demand in a world of deleveraging, it did (and has) indirectly created demand by promoting stability, which restored confidence. Without the confidence that the world will be stable, people don’t spend, borrow, lend or hire, and the economy goes into a deflationary vortex.
But by promising that they stand ready to act against any futures shocks to the economy (and financial markets), investors feel comfortable investing again (stocks go higher). When stocks go higher and the environment proves stable, employers feel more confident to hire. This all fuels demand and recovery. And, of course, the Fed has pinned down mortgage rates at record lows, which promotes a housing recovery, and gives underwater homeowners (at one point, more than a quarter of all homeowners with mortgages) a since that paper losses will at some point be overcome, and that gives them the confidence to spend money again, rather sit on it.
Along the path of the economic recovery, the Fed (and other key central banks) has been very sensitive to declines in stocks. Why? Because declining stocks has the ability to undo what they’ve done. And if confidence breaks again, it will be far harder to restore it.
The first chart here is the S&P 500. Stocks bottomed in March of 2009, when the Fed announced a $1 trillion QE program.
Stocks surpassed the pre-crisis highs in 2013 after six years in the hole. But even after the dramatic rise you can see in the chart the damage from the crisis is far from restored. If we applied the long term annual rate of growth of the S&P 500 (8%) to the pre-crisis highs, the S&P 500 should be closer to 3,150 (over 60% higher).
How does housing look? Of course, bursting of the housing bubble was the pin that pricked the global credit bubble. Housing prices in the U.S. have been in recovery mode since 2012. Still, housing has a ways to go. This is a very important component for the Fed, for sustainable recovery.
While bloated government debt continues to be a big structural problem for the U.S and the rest of the world, growth goes a long way toward fixing that problem.
And growth, low interest rates, higher stocks and higher housing prices goes a long way toward restoring household net worth. As you can see in the chart below, we have well recovered and surpassed pre-crisis levels in household net worth…
Source: Billionaire’s Portfolio
What is the key long-term driver of economic growth overtime? Credit creation. In the next chart, you can see the sharp recovery in consumer credit since the depths of the economic crisis (in orange). This excludes mortgages. And you can see how closely GDP (economic output) tracks credit growth (the purple line).
Source: Reuters, Forbes Billionaire’s Portfolio
What about deleveraging? It took 10 years to build the global credit bubble that erupted in 2007. Based on historical credit bubbles, it typically takes about as long to de-lever. So 10-years of deleveraging would put us at year 2017. With that, it’s fair to think we could be very near the end of that period, where paying down debt has weighed on economic growth.
You can see in the chart below, the average annual growth rate of consumer credit over the past 55 years is 7.9%. And over the past five years, despite the deleveraging, consumer credit growth has been solid, just under the long term average. And importantly, FICO scores in the U.S. have reached an all-time high.
With the recent correction in stocks, there has been increased scrutiny on the economy. Some are predicting another recession ahead. Others are waving the red flag anywhere they find soft economic data. Consumption makes up more than 2/3 of the U.S. economy. And you can see from the charts above, the consumer is in a solid position. But stocks and housing remain key drivers of the recovery. The Fed is well aware of that. With that, don’t expect the Fed, in the current economic environment, to do anything to alter the health of the housing and stock markets.
This week, in our BillionairesPortfolio.com, we followed one of the best billion dollar (plus) activist hedge funds into a stock where they own 12.5%, have three board seats, and are in the process of replacing the CEO. These are are three key ingredients in the success of activist campaigns: 1) a big concentrated position (12.5% stake), 2) control (board seats), and 3) change (a new CEO). This activist fund has won on 82% of its campaigns since 2002 and has a price target on this stock that’s more than 150% higher than the current share price. To join us you can subscribe to our Billionaire’s Portfolio (here).
As we headed into this past weekend, we talked about the threat that the oil bust poses to the global financial system (not too dissimilar from the housing bust), and we talked about the prospect of central bank intervention over the thinly traded U.S. holiday (Monday).
Both the Bank of Japan and the European Central Bank did indeed go on the offensive, verbally, promising more action to combat the shaky global financial market environment.
To follow the stock picks of the world’s best billionaire investors, subscribe at Billionaire’s Portfolio.
The result was a 9.5% rally in the Japanese stock market from Friday’s close. And all global markets followed suit. Within the white box in the chart below, you can see the central bank induced jump in the Nikkei (in orange) and the S&P 500 futures (in purple).
Source: Billionaire’s Portfolio
This is purely the influence on confidence by the two central banks that are now driving the global economic recovery (the BOJ and the ECB). However, the potency of the verbal threats and promises has been waning. Big words have marked bottoms along the way over the past several years for stocks, and the overall ebb and flow of global risk appetite. But it’s becoming more evident that real, bold action is required. And given that it’s cheap oil that represents the big risk to financial stability at the moment, we’ve argued that central banks should outright buy commodities (particularly oil). And we think they will.
Source: Billionaire’s Portfolio
In 2009, despite the evaporation of global demand, oil prices spiked from $32 to $73 in four months after China tapped its $3 trillion currency reserves to snap up cheap commodities. Within two years, oil was back above $100.
China’s role in the commodity market was a huge contributor to the recovery in emerging markets from the depths of the global financial and economic crisis. Brazil went from recession to growing at close to 8%. Many were saying emerging markets had survived the recession better than advanced markets, and that they were driving the global economic recovery. And Wall Street was claiming a torch passing from the developed world to the emerging world as the future of growth and leadership.
How are emerging markets doing now? Terrible. Not surprisingly, it turns out the emerging market economies need a healthy developed world to survive. And now with the additional hit of the plunge in commodity prices, Venezuela (heavily reliant on oil exports) is very near default. Brazil and Russia are both in recession. The longer oil prices stay down here, Venezuela will be the first domino to go, and others will follow. With that, we expect intervention to come. And as you can see in the response to the Nikkei overnight, it will pack a punch – and if it’s bold, a lasting one. Remember, as we said last week, historical turning points for markets often come from some form of intervention (public or private policy).
Billionairesportfolio.com, run by two veterans of the hedge fund industry, helps self-directed investors invest alongside the world’s best billionaire investors. To see which ideas we follow in our Billionaire’s Portfolio, join us at BillionairesPortfolio.com.
When housing prices stalled in 2006 and then collapsed over the next three years, the subprime lending schemes quickly became exposed.
Mortgage defaults led to a banking crisis. Due to the highly interconnectedness of banks globally, the problems quickly spread to banks around the world. A banking crisis led to a global credit freeze. When people can’t access credit, that’s when it all hits the fan. Companies can’t meet payroll, don’t have the liquidity to make new orders. Jobs get cut. Companies go bust. Finally, the microscope on overindebtedness of consumers and corporates, turns to countries. Deficits leads to debt. Debt leads to downgrades. Downgrades leads to defaults.
For the most part, defaults were averted because central banks and governments stepped in, in a coordinated way, to backstop failing banks, failing companies and failing countries. From that point, continued central bank stimulus has 1) enabled banks to recapitalize, 2) foiled additional shock events, and 3) restored confidence to employers (to hire), to investors (to invest) and to consumers (to spend again).
As we’ve discussed in the past two weeks, persistently low oil prices represent a risk on par with the housing bust. And in recent days we’re seeing the signs of another global financial and economic crisis creeping uncomfortably closer to a “part two.”
As we’ve said, this time would be much worse because governments and central banks have exhausted the resources to bailout failing banks, companies and countries. But central banks, namely the Bank of Japan and/or the European Central Bank do have the opportunity to step-in here, become an outright buyer of commodities (particularly oil), as part of their QE programs, to avert disaster. But time is the oil industries worst enemy and therefore a big threat to the global economy. The longer policymakers drag their feet, the closer we get to the edge of global crisis — a crisis manufactured by OPEC’s price war.
Unfortunately, there are the building signs that the market is beginning to position for the worst outcome…
Key bank stocks in Europe are trading at levels lower than in the depths of both the global financial crisis (2009) and the European sovereign debt crisis (2012).
Source: Reuters, Billionaire’s Portfolio
The credit default swap market for key industries is sending up flares. This is where default insurance can be purchased against a company or country – and the place speculators bet on a company’s demise. Billionaire John Paulson famously made billions betting against the housing market via credit default swaps. Now the fastest deteriorating companies in Europe are banks. And the fastest deteriorating companies in North America are insurance companies (a sector that tends to have investments in high yield debt … in this case, exposure to the high yield debt of the oil and gas industry).
Source: Markit
The early signal for the 2007-2008 financial crisis was the bankruptcy of New Century Financial, the second largest subprime mortgage originator. Just a few months prior the company was valued at around $2 billion.
On an eerily similar note, a news report hit this morning that Chesapeake Energy, the second largest producer of natural gas and the 12th largest producer of oil and natural gas liquids in the U.S., had hired counsel to advise the company on restructuring its debt (i.e. bankruptcy). The company denied that they had any plans to pursue bankruptcy and said they continue to aggressively seek to maximize the value for all shareholders. However, the market is now pricing bankruptcy risk over the next five years at 50% (the CDS market).
Still, while the systemic threat looks similar, the environment is very different than it was in 2008. Central banks are already all-in. On the one hand, that’s a bad thing for the reasons explained above (i.e. limited ammunition). On the other hand, it’s a good thing. We know, and they know, where they stand (all-in and willing to do whatever it takes). With QE well underway in Japan and Europe, they have the tools in place to put a floor under oil prices.
In recent weeks, both the heads of the BOJ and the ECB have said, unprompted, that there is “no limit” to what they can buy as part of their asset purchase program. Let’s hope they find buying up dirt-cheap oil and commodities, to neutralize OPEC, an easier solution than trying to respond to a “part two” of the global financial crisis.
