investing | Billionaire's Portfolio

How Low Can It Go? Watch This Big Trendline

October 25, 5:00 pm EST

Yesterday we looked at this big trendline support in stocks (the yellow line).

We had a good bounce today, but experience tells me that we will make a run at that trendline, and things will look a little messy before we bottom.

We still have seven trading days before the mid-term elections. A stock market in correction is not as easy to promote as one at record highs (as we had just earlier this month). With that, I suspect there are plenty of interests (China among them) to keep the pressure on stocks in hopes of dividing U.S. Congress come November 6th.

When the dust clears from the elections, market folks will realize that stocks are incredibly cheap at 15 times next year’s earnings estimates, in an economy growing better than 3%.

On that note, we have our first look at third quarter GDP tomorrow. The market is looking for 3.6% growth, which would give us 3.22% annualized growth averaged over the past four quarters. That would be the best growth since 2006.

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Chart Everyone Should See On Stocks

October 24, 5:00 pm EST

As we’ve discussed the past two days, the catalyst for a stock market correction is rarely, if ever, one of the concerns that are “top of mind” in the market.

In this case, a China slowdown has been the target of a market fallout for eight years. Stocks have gone up. An implosion of the European Monetary Union has been predicted since 2011. Stocks have gone up. Currency and trade wars have been underway throughout the post-Great Recession environment. Stocks have gone up. A “hard Brexit” has been going to crush markets and the global economy since 2016. Stocks have gone up. A huge spike in inflation and interest rates has been guaranteed to be the punishment, for the decade of “irresponsible” money printing. Stocks have gone up.

And with these things to obsess about, people have been steadily convincing themselves that a recession was coming (the opposite of what the data tells us) and that earnings were deteriorating or “peaking” (peaking earnings growth at 20% y-o-y is very different than peak earnings). The recession and exhausting economic momentum stories are non-sense.

Short of a major economic blow-up, things are as good as they’ve been in more than a decade and getting better. And for people that think another Lehman like moment could be coming (Europe, China, Brexit…), remember, part of the Lehman moment/global credit freeze, was driven by uncertainty about how governments and central banks would respond. But we now know, very clearly, how they will respond to shocks. There is no uncertainty. They will do whatever it takes to maintain stability (re-write rules, whatever it takes), as they have over the past decade (post-Lehman) to avert further systemic shocks.

Still, all of the “what could go wrong” scenarios are what exacerbates the fear, after a decline in stocks gets started. And in this case, as we’ve discussed, it looks very clear that both this decline, and the correction earlier this year, were triggered by Saudi liquidations (for fear of asset seizures). And now we have panic-driven selling by uninformed investors.

Remember, most average investors are NOT leveraged. And with that, they should have no concern about U.S. stock market declines, other than to ask themselves, “do I have cash I can put to work at cheaper prices?”

So with that, let’s take a look at the chart and see where this shake out might stop? I think we’re close.

The above is the chart of the S&P 500 futures. And you can see the big trendline that comes in from the 2016 lows. Remember, in early 2016, the crash in oil prices were threatening the global economy (causing bankruptcies, and threatening sovereign defaults and financial system trouble). Global central banks responded in coordination with a number of measures (with likely outright buying of oil). Oil prices turned on a dime the day the Bank of Japan intervened in the yen. The crisis was averted.

This is a big trendline, and it comes in just 1.4% lower from today’s low. That would be an 11% correction in the S&P futures.

Catalyst For Both Corrections This Year Has Been Saudi Selling

October 23, 5:00 pm EST

As we discussed yesterday, despite all of the drama about China, Italy,
Brexit, rates and the elections, what seems more likely to have driven the recent correction in stocks is Saudi selling.

In fact, I think it’s clear that there has been a Saudi liquidation (of U.S. and global assets) which was the catalyst for the correction in stocks earlier this year, and this recent decline.

Remember, in November of last year, the Saudi Crown Prince Salam, successor to the King, ordered the arrest of many of the most powerful Saudi Princes, country ministers and business people in Saudi Arabia on corruption charges. Over $100 billion in assets were claimed to be under investigation (a third frozen) in what was called the “Saudi purge.”

These subjects were detained for nearly three months. The timing of their release and the market correction of early this year is where it all begins to align.

They were released on Saturday, January 27. S&P futures open for trading on Sunday night. Stocks topped that night and proceeded to drop 12% in six days. And rallies in stocks were sold aggressively for the better part of the next seven months.

Fast forward to this month, and we have the murder of the journalist that was a public critic of the Crown Prince Salam. As the details of story pointed back to Salam, on Oct 3, U.S. bond markets got hit (to the hour of news hitting the wires) and stocks topped that day, and have proceeded to drop by more than 8%.

Clearly, the destabilization in Saudi Arabia has put considerable assets in jeopardy. With that, those in control of those assets have likely been scrambling to protect them, as U.S. Congress pushes for sanctions, which could include freezing Saudi assets.

This Market Correction Is Driven By Saudi Liquidation

October 22, 5:00 pm EST

As the events surrounding Saudi Arabia continue to unfold, it is beginning to look more and more like the market shakeup of the past three weeks was triggered by Saudi selling.

The top in stocks and the heavy selling came just as news was hitting wires that Khashoggi never exited the Saudi consulate in Turkey – disputing the story of the Saudi government.

Stocks put in a top that day.

And that was the day the bond market also made it’s move — the 10-year yield spiked from 3.08% to 3.18%.

Here’s what hit the news wires that triggered the selling in bonds/rise in market rates – to the hour.

So, was the catalyst for this market correction triggered by money from Saudi Arabia moving to escape a potential asset freeze? It looks possible.

We constantly hear predictions of impending corrections, pointing to all of the clear evidence that should drive it, but corrections are often caused by events that are less pervasive in the market psyche. The Saudi story would qualify.

China’s Rapid Ascent To Economic Power Is Being Knocked Off Path

October 18, 5:00 pm EST

Last week, we talked about the signals coming from China, that the economy is running dangerously slow, and their backs are against the wall.

They cut their bank reserve requirement ratio last week for the fourth time this year. And they have been continually walking down the value of their currency (the yuan).

The PBOC pegged the yuan to another 21-month low today. Most importantly, it’s getting closer and closer to the 7 yuan per dollar level – a level we haven’t seen since the pre-financial crisis days.

As we’ve discussed, they have two options. They can play ball on trade concessions with the U.S. If so, the economy slows. They can continue to holdout/pushback on trade, and the trade sanctions may take the economy off the cliff. Both scenarios mean China’s rapid ascent to economic power gets knocked off path.

If holdout is their long term strategy, I suspect we will find that global trading partners will join Trump’s fight against China’s rigging of global trade via its weak currency advantage. That’s not a good outcome for China.

More likely, China is trying to holdout to see the outcome of the November U.S. elections. And as we discussed earlier this month, they are likely trying to wield some influence: “they can sell Treasurys, in an attempt to ignite a sharper climb in rates. And a fast move in rates (at these levels) has a way of shaking confidence in equity markets–which has a way of shaking confidence in the economy.”

It appears that it may be playing out, but worse for Chinese stocks, which are now down 25% for the year.

Bonds Are High Risk-Low Reward

Since stocks dipped last week, I’ve heard the chatter (again) about how a 3% 10-year note has suddenly created a high appetite for Treasurys over stocks (i.e. people are selling stocks in favor of capturing that whopping 3% yield).

But 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. Here’s the chart of the 10-year Treasury note (price). You can see we’ve now broken the three and a half decade bull market in bonds (yields go up, as bond prices go down) …

stocks

Bottom line: The bond market is the high risk-low reward investment in this environment. And there continues to be plenty of fuel for stock prices as money exits bonds.

Stocks This Cheap Only Two Times In 26 Years

October 16, 5:00 pm EST

Stocks are racing back, just as everyone is turning gloomy.

This squeezes the shorts that have been looking for reasons to believe a big trend change is coming for stocks, depite the fundamentals that suggest the opposite.

We now have this chart on the S&P 500 ….

Which is beginning to look like this (below) V-shaped move in stocks back in late 2014. And it was right around the same time of year.

This 2014 correction was 17 days, and -9.8%. It was all recovered in 13 days. Now we have a 7.8% decline over 14 days, and bouncing aggressively.

The more important chart for the benchmark S&P 500 index, is the longer term one below – which shows the big “Trump-trend” continues to hold. The yellow trendline represents the ascent of stocks following the Trump election, which has been driven by pro-growth economic policies.

And with this above chart in mind, remember as we discussed yesterday, from a valuation perspective, Wall Street is estimating stocks on next year’s estimated earnings to be as cheap as we’ve seen only two times in the past 26 years.

Again, if we take the 2019 estimate earnings on the S&P 500 of $176 and multiply it by 23, we get 4,048. That’s 47% higher than Friday’s close. Today we closed at just 2,810.

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The Case For S&P 4,000

October 15, 5:00 pm EST

On Friday we talked about the opportunity presented by this recent dip in the broad stock market.

We’re beginning to see more clearly today the rotation out of tech and into value. That is translating into a continued slide in the Nasdaq, while the Dow is rising.

Now, even though this looks like a re-pricing of the high-flying tech stocks, as we often see the “baby gets thrown out with the bathwater.” In this case, because the big tech giants have been so widely held, when they crack, everything has cracked. That’s an opportunity to buy broader stocks on sale. And stocks are indeed cheap.

Take a look at historic valuations (P/E on the S&P 500) …

From a valuation perspective, Wall Street is estimating stocks on next year’s estimated earnings to be as cheap as we’ve seen only two times in the past 26 years.

You can see where stocks were valued on the S&P going into 2012. Stocks finished up 16% that year. The other year was 1995 (a P/E of 14.89). Stocks finished that year up 37.6%.

Still, many have continued to harp on valuation, always pointing to the long run average P/E on stocks, which is around 16. That’s a long history. If we look back at the past twenty years, the average valuation is MUCH, MUCH higher. It’s 23 times earnings!

If we take Wall Street’s estimate on S&P 500 earnings of $176 and multiply it by 23, we get and S&P at 4,048. That’s 47% higher than Friday’s close.

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How Billionaires Respond To Stock Market Declines

October 12, 5:00 pm EST

The S&P 500 has declined more than 5% (from peak to trough) on four different occasions this year. That’s despite an economy that is heating up, finally escaping the slow growth rut of the past decade.

So, should you be fearful when these declines occur, or should you be greedy?

During market declines – with the constant barrage of market analysis and opinion on financial television, in newspapers, or through the Internet – it’s easy to get sucked into drama played out in the media.

And that tends to make many investors fearful.

But while the fearful start running out of the store when stocks go on sale, the best billionaire investors in the world, start running IN.

The fact is, the best investors in the world see declines in the U.S. stock market as an exciting opportunity. And so should you.

Most average investors in stocks are NOT leveraged. And with that, they should have no concern about U.S. stock market declines, other than saying to themselves, “what a gift,” and asking themselves these questions: “Do I have cash I can put to work at these cheaper prices? And, where should I put that cash to work?”

Billionaire Ray Dalio, the founder of the biggest hedge fund in the world, has said what we think is the most simple yet important fact ever said about investing.

“There are few sure things in investing … that betas rise over time relative to cash is one of them.”

In plain English, he’s saying that major asset classes, over time, will rise (stocks, bonds, real estate). The value of these core assets will grow faster than the value of cash.

That comes with one simple assumption. The world, over time, will improve, will grow and will be a better and more efficient place to live than it was before. If that assumption turned out to be wrong, we have a lot more to worry about than the value of our stock portfolio.

With that said, as an average investor that is not leveraged, dips in stocks (particularly U.S. stocks – the largest economy in the world, with the deepest financial markets) should be bought, because in the simplest terms, over time, the broad stock market has an upward sloping trajectory.

This is the very simple philosophy Dalio follows, and is the core of how he makes money and how he has become one of the best, and richest, investors alive.

Billionaires Bill Ackman and Carl Icahn, two of the great activist investors, lick their chops when broad markets sell off on fear and uncertainty.

Ackman says he gets to buy stakes in high quality businesses at a discount when broad markets decline for non-fundamental reasons. Icahn says he hopes a stock he owns goes lower so he can buy more.

What about the great Warren Buffett? What does he think about market declines? He has famously attributed his long-term investing success to “being greedy when others are fearful.”

Bottom line: Declines in the broad market are times to take out your shopping list.

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Gold Is The New Bonds

October 11, 5:00 pm EST

Yesterday we talked about the repricing of the tech giants as the catalyst for the slide in global stocks. That slide continued today.

But the brunt of the punishment is back on the Dow, which was down another 2%. At the lows today, that takes us back to flat on the year for the DJIA … up 1% for the S&P 500. And the Nasdaq, at the lows today, was up just 4.8% on the year.

As they say, stocks go up in an escalator and down in an elevator.

Interestingly, in this slippery slide for stocks, money has NOT been piling into bonds. This is the flight to safety trade we’ve seen throughout the post-financial crisis era. It doesn’t seem to be happening this time. The 10-year yield remains in sniffing distance of 3.25% (closing today at 3.14%).

So, where is the money going? Gold.

Gold is on the move — the top performer in global markets today. And it looks like it’s just getting started. As I said last week, “the set up for a bounce in gold here looks ripe. The level to watch will be 1,214.”

You can see in the chart, the 1214 level gave way today, and we had a break of the downtrend of the past six months.

Now, when we discussed gold last week, we were talking about the potential for China to perhaps try a few shenanigans over the next month, in order to influence the outcome of the November elections.

Here’s an excerpt from that October 3rd note: “China remains the holdout on making a deal with Trump on trade. And it looks likely that they are holding out to see what the November elections look like.

Will Trump retain a Republican led Congress? I suspect we may see China do what it can to influence that outcome. As we know, the Republicans will be promoting the economy as we get closer to voting day.

What can China do to rock that boat?

They can sell Treasuries, in an attempt to ignite a sharper climb in rates. And a fast move in rates (at these levels) has a way of shaking confidence in equity markets–which has a way of shaking confidence in the economy.“

I suspect we may be seeing precisely this above scenario play out.

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