investing | Billionaire's Portfolio

Oil Decline Will Change The Inflation Picture

November 13, 5:00 pm EST

In the past two notes, I’ve focused on oil. And that does indeed seem to be the tail that is wagging the global markets dog.

Oil lost another 8% today. Over the past 31 days, crude prices have dropped 27%.

If we look back over the past five years, the magnitude of that move is only matched (or exceeded) in cases where there was significant manipulation in the oil market and/or a systemically threatening oil price crash.

You can see in the chart above, we’ve dropped 27% over the past 31 days. The other big drops in crude were in February of 2016 (the crash) and in November of 2014 (OPEC’s refusal to cut oil production).

Interestingly, these historic crude price declines were occurring as the Fed was preparing markets for the beginning of its normalization campaign (i.e. moving rates away from the emergency zero interest rate level). And it was these price declines that threw a wrench in those plans.

Despite what the central bankers say, oil prices have a big influence on their read on inflation. Lower oil prices put downward pressure on inflation. And as oil prices were plunging from 2014 through 2016, the Fed clearly and dramatically held back on their rate hiking plans.

On that note, remember yesterday we talked about the prospects that Powell (Fed Chair) may use the opportunity to dial down expectations of a December rate hike, if we see some soft data this week (growth data from Japan and Europe and inflation data from U.S., Europe and UK). We now have a big haircut on oil prices to factor into the inflation data. That too, may give him the excuse to pause on rates. We’ll hear from him tomorrow at a Dallas Fed meeting.

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Split Congress Is Greenlight For Stocks

November 8, 5:00 pm EST

The midterm elections are behind us, and I’ve suspected that the lift of that cloud of uncertainty would be the greenlight for stocks to make a run into the end of the year.

We’re seeing it start today.

Remember, the big work on economic stimulus has been done, and that will continue to drive the best growth we’ve had since 2006.

Add to that, there is the potential that Trump can get infrastructure done with a split Congress. With that, it would be a matter of how hot the economy will get.

But as I said, there’s probably a better chance that the Democrats will block any more progress on the economic front, to best position themselves for a run at the 2020 Presidential election.

Interestingly, this gridlock scenario could actually be the optimal scenario for stocks here.

The notion that the economy might be on the verge of accelerating too fast/ running too hot, has dialed UP the inflation-risk-premium for the stock and bond markets. The hot trajectory for the economy has kept pressure on the Fed to continue the path higher in interest rates.

Thus far, the seven quarter-point hikes the Fed has made to the benchmark overnight lending bank rate has NOT choked off economic momentum. But it has, finally, started to get market rates moving. The ten-year government bond yield is near 3.25%, the highest in seven years. And stocks haven’t liked this 3%+ level on rates. And that has a lot to do with what it does to consumer rates, specifically mortgages.

As you can see in the chart below, we now have 30-year mortgages running north of 5% for the first time since 2010.

This move in rates has slowed down the housing market. And this is an example of how this path of hotter growth and an aggressively normalizing Fed has been tracking toward growth killing interest rate levels.

Perhaps some gridlock in Washington will slow the speed at which both are adjusting and allow for some time for the economy to sustain at this 3% growth level.

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Election Day Means Cloud Of Uncertainty Will Be Lifted

November 6, 5:00 pm EST

In my note yesterday, we talked about the probable outcomes for the elections.

Whether we see the Republican’s retain control of the house, or lose it, both scenarios should be a greenlight for stocks.

Why? Because the cloud of uncertainty will be lifted. Even if we were to have gridlock in Washington, from here forward, the economy has strong momentum already, and the benefits of fiscal stimulus and deregulation are still working through the system.

Now, given today’s midterm elections are feeling a bit like the Presidential election of 2016 (as a referendum on Trump, this time), I want to revisit my note from election day on November 8, 2016.

As I said at that time, central banks had been responsible for the global economic recovery of the prior nine years, and for creating and maintaining relative economic stability. And creating the incentives to push money into the stock market (i.e. push stocks higher) played a big role in the coordinated strategies of the world’s biggest central banks. With that, I said “neither the economic recovery, nor the stock market recovery can be credited much to politicians. In this environment, in the long run, the value of the new President for stocks will prove out only if there’s structural change. And structural change can only come when the economy is strong enough to withstand the pain. And getting the economy to that point will likely only come from some big and successfully executed fiscal stimulus.”

It turns out, Trump has indeed executed on fiscal stimulus. And he’s gone aggressively after structural change too (perhaps too early, and with some success, but at a price he may pay for politically). Still, he’s been able to execute ONLY because he’s had an aligned Congress.

Importantly, the economic policies out of Washington have allowed the Fed to bow-out of the game of providing life support to an economy that was nearly killed by the financial crisis. That’s good!

Election Results Should Simply Clear The Fog For Another Run In Stocks

November 5, 5:00 pm EST

The elections tomorrow are said to be a referendum on Trump’s Presidency.

And given the sentiment, I think it’s fair to say the surprise scenario for markets would be for Republicans to retain control of Congress. For that to happen, it looks like the Republicans would need to win 61% of the “toss up” races in the house. Of those, 84% are currently Republican held.

That scenario would be a vote of confidence for the Trump economic agenda. And for markets, it would be “risk on,” which would likely draw more attention to the inflation outlook, and the speed at which market interest rates will move. Trump would retain his leverage over China on trade concessions.

Scenario two, would be a split Congress. If we get a split Congress, the Trump economic plan would likely turn to infrastructure. The belief is that a Democrat led house would likely be a partner to Trump on a big infrastructure spend.

Though I suspect, given the political atmosphere, they may work to block any further progress on the economic stimulus front, in effort to position themselves for the 2020 Presidential election. On China trade negotiations, I suspect a split Congress would begin to fight against Trump’s executive order-driven trade wars. This scenario would mean, gridlock in Washington.

However, after the cloud of election uncertain lifts, both scenarios should be a greenlight for stocks.

Remember, we already have an economy running north of 3%, with record low unemployment, and consumers are sitting on record high household net worth and record low debt service ratios. Companies are growing earnings at over 20% (yoy), and growing revenues at over 8% (yoy). And corporate credit market debt is near the lowest levels (relative to market value of corporate equities) of the past 70 years.

So there is plenty of fuel in the economy to continue the trajectory of economic boom. Maybe most importantly, following the October correction, the tech giants have been pricing out the “monopoly scenario” which paves the way for a broader-based bull market for stocks.

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Why We Won’t See Another Big Silicon Valley Internet Giant

November 2, 5:00 pm EST

If you are a regular reader of my daily notes, you’ll know I’ve suspected we are seeing an end to the “wild west” days in Silicon Valley.

I think we’ve finally seen it play out in the stock market in the past month.

The media has spent the past month pontificating about big macro economic stories and how these risks have driven this correction stocks. But the intermarket correlations don’t support it. Despite the sharp slide in stocks, money hasn’t fled to the safety of bonds. The currency market has shown little to no stress. And gold has been relatively quiet. This is all antithetical to what you would find in a world shaken from elevated global risks.

Ultimately, this correction has been about repricing the tech giants. And one of the power players in Silicon Valley said about as much this week.

Peter Theil, founder of PayPal and the first investor in Facebook said he doesn’t expect to see another innovative breakthrough consumer internet company. I agree (for a number of reasons).

With that, I want to revisit my note from March of 2017, as Trump was just getting his feet wet as President:

TUESDAY, MARCH 7, 2017
“A big component to the rise of Internet 2.0 was the election of Barack Obama.

With a change in administration as a catalyst, the question is: Is this chapter of the boom in Silicon Valley over?

Without question, the Obama administration was very friendly to the new emerging technology industry. One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007, before Obama announced his run for president, and just as Facebook was taking off after moving to and raising money in Silicon Valley (with ten million users). Facebook was an app for college students and had just been opened up to high school students in the months prior to Obama’s run and the hiring of the former Facebook cofounder. There was already a more successful version of Facebook at the time called MySpace. But clearly the election catapulted Facebook over MySpace with a very influential Facebook insider at work. And Facebook continued to get heavy endorsements throughout the administration’s eight years.

In 2008, the DNC convention in Denver gave birth to Airbnb. There was nothing new about advertising rentals online. But four years later, after the 2008 Obama win, Airbnb was a company with a $1 billion private market valuation, through funding from Silicon Valley venture capitalists. CNN called it the billion dollar startup born out of the DNC.

Where did the money come from that flowed so heavily into Silicon Valley? By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the ‘the discovery, development and implementation of various technologies.’ In June 2009, the government loaned Tesla $465 million to build the model S.

When institutional investors see that kind of money flowing somewhere, they chase it. And valuations start exploding from there as there becomes insatiable demand for these new ‘could be’ unicorns (i.e. billion dollar startups).

Who would throw money at a startup business that was intended to take down the deeply entrenched, highly regulated and defended taxi business? You only invest when you know you have an administration behind it. That’s the only way you put cars on the street in NYC to compete with the cab mafia and expect to win when the fight breaks out. And they did. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation. Uber is valued at $60 billion. That’s more than three times the size of Avis, Hertz and Enterprise combined.

Will money keep chasing these companies without the wind any longer at their backs?“

Again, this note above was from about 18 months ago. And administration change has indeed become a problem for these emerging monopolies.

Trump’s scrutiny has come, and so has the regulatory scrutiny. But admittedly is has taken longer than I expected.

Still, it has become clear now to lawmakers (in the U.S. and abroad) that the lack of regulatory oversight of these companies (if not regulatory favor) has created a “winner takes all” environment. And the power transfer into so few hands has quickly become a big threat.

Now these companies look forward to the next decade of regulatory purgatory. But given the maturity of these tech giants, higher regulation only strengthens their moat. That means there will never be a competition to Facebook emerging from a dorm room or garage. The compliance costs will be too high.

But regulation on the tech giants also creates the prospects for those “old-economy” competitors that have survived, to bounce back.

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This Market Decline Is A Gift To Get Involved

November 1, 5:00 pm EST

We talked about the potential bottom in stocks on Monday, based on this big trendline we had been watching. That, of course, also coincided with a similar line in the Dow, which represented a 10% correction on the nose.

That indeed does look like the bottom.

You can see in the chart of the S&P 500 above, this big line dating back to the oil price crash lows of 2016 held beautifully, and we are now up more than 5% from just Monday of this week.

And today we have this …

We’re getting a break of this sharp downtrend of the past month (circled).

And we have a very similar pattern in Japanese stocks (the Nikkei).

Most importantly, the biggest mover of the day in global stock indices (and nearly all markets) was emerging market stocks. The MSCI Emerging Markets Index was up 3.3% today. And the strength in emerging markets was well underway before the news today that the U.S. (Trump) and China (Xi) has some constructive talks on trade.

What gets hit first and hardest when global risk elevates? Emerging markets. EM was down 21% on the year earlier this week. But this is also where the biggest gains can come as the dust settles, and people realize that a hotter U.S. economy, will translate into hotter growth in emerging markets. As I’ve said, this market decline has been a gift to get involved.

Don’t Make This Mistake

October 31, 5:00 pm EST

As we discussed yesterday, it’s very dangerous to let political views influence your perspective on markets and investing.

And I suspect we are seeing plenty of people make that mistake.

That means many will be left behind on a stock market recovery, again. That probably means the bull market for stocks still has a ways to run. John Templeton, know to be one of the great value and contrarian investors of all time, said “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Incredibly, after a more than four-fold run from the financial crisis bottom, the stock market continues to have a LOT of skepticism. Does this mean we are only half way through this cycle? Maybe.

The arguments for the stock market bears and pessimists on the economy have many holes, but the biggest is the lack of context. That context: the global economic crisis, and the aftermath (up to present day).

You can’t evaluate anything about this economy without taking into account where we’ve been over the past decade, the role central banks have played throughout, the coordinated intervention that has taken place globally (along the way) to avoid a global depression, and the interconnectedness of global economies that continues.

Without this context, the skeptics like to call it “late in the cycle” for an economy that (on paper) is in the second-longest expansion in U.S. history. With context, we’re probably closer to “early cycle,” given that the decade of ultra-slow growth was manufactured by central banks.

Pro Tip: Don’t Let Your Political Views Influence Your Market Views

October 30, 5:00 pm EST

This violent repricing of the tech giants came with clear warnings (i.e. the tightening of regulatory screws).

Now that we have it. And it is very healthy, and needed.

As we discussed yesterday, I would argue we are seeing regulation priced-in on the tech giants, which can create a more level playing field for businesses, more broad-based economic activity, and a more broad-based bull market for stocks. This is a theme we’ve been discussing in my daily note here for quite sometime.

And I suspect now, we can see the areas of the stock market that have been beaten down, from the loss of market share to the tech giants, make aggressive comebacks.

On that note, here’s another look at the big trendline we’ve been watching in the Dow …

Again, this line holds right at the 10% correction mark. And we’ve now bounced more than 700 dow points.

As I’ve said, it’s easy to get sucked into the daily narratives in the financial media, and it’s especially easy and dangerous (to your net worth) when stocks are declining. They tend to influence people to sell, when they should be buying.

And as someone that has been involved in markets more than 20 years, I can tell you that it’s also very dangerous to let political views influence your perspective on markets and investing. And I suspect we are seeing that mistake made in this environment (by pros and amateurs alike).

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Closing The Jaws On Old Economy Versus New Economy

October 29, 5:00 pm EST

Stocks continue to swing around today. But I think we may have a bottom coming in.

Remember, we looked at some key charts on Friday. Among them, we had this chart of the Dow, where a touch of this big trendline from the 2016 lows would give us a 10% correction on the nose.

As you can see in the updated chart, we hit that level today, traded below it, but bounced back aggressively into the close.

So we now have an official correction in the Dow (down 10%) and we have an official bear market in the FANG stocks (down more than 20%). These labels have significance because it the plays into market psychology and price behavior.

With this in mind, if you are a regular reader of my daily notes, you’ll know we’ve talked about the big disconnect between the performance of the tech giants, relative to the Dow for much of the year. The FANG stocks were UP as much as 50% at one point this year (equal weighted). Meanwhile, the Dow has dramatically lagged all along the path of the post-correction recovery of earlier this year.

This was a market pricing the tech giants like monopolies that would destroy all industries, despite the clear threats that were coming from Trump and from Europe (i.e. promising to ramp up regulation on those that have gained advantages from the lack of regulation).

The great proxy for this trade, as we’ve been discussing for the better part of the past six months, has been Amazon versus Walmart.

Remember, we looked at this chart several times earlier this year …

This chart clearly represents the regulatory favor that has been given to the tech giants. The regulatory favor has not only disrupted industries, it has nearly destroyed them, and created monopolies in the process.

But with regulation coming, I’ve expected the “jaws to close” on this chart, and for money to start moving back into value stocks and back into the industries that have been nearly destroyed by the tech giants.

We now have this … the jaws have closed.

This violent repricing of the tech giants, and now bear market, is finally signaling the outlook for a more level playing field for businesses, more broad-based economic activity, and a more broad-based bull market for stocks.

Re-Pricing Of The Tech Giants, Continued …

October 26, 5:00 pm EST

With this morning’s third quarter GDP number, the economy is officially growing at the fastest pace since 2006.

And yet stocks are now flat on the year.

Let’s look at some key charts as we head into the weekend.

We’ve looked at this big trendline in the S&P 500 futures. We got very close today.

We have a similar line coming in here for the Dow. A touch of that line would be a 10% correction on the nose.

Remember, the core of this correction is about a re-pricing of the tech stocks. We looked at this chart on Amazon earlier this month.

And now we have this…

Amazon topped the day it crossed the trillion-dollar valuation threshold and is now down 20%. But also remember, at the peak, the stock had more than doubled in a year. Even after this decline, and after blow out earnings, the stock still trades at 161 times earnings.

As we know, Trump is leveling the playing field internationally,and domestically. And the tech giants, which have been priced like monopolies, are coming back down to Earth.

This correction gives us a chance to buy the broader stock market into a 10% correction, at 15 times earnings (cheaper than the long term average) in a 3% economy, with 20% year-over-year corporate earnings and corporate sales growth running double the rates of the past twenty years. Don’t run out of the store when stocks are on sale.

Finally, among the many interesting charts this week is gold. In the chart below, you can see gold has held the big trendline from that dates back to the inception of QE. With inflation finally showing some life, and with signficant wealth in Saudi Arabia looking for a safe hiding place, gold should be the natural winner.