Musk Has Emboldened The Shorts In Tesla – Look Out Below!

August 23, 5:00 pm EST

It was two weeks ago when Elon Musk sent this tweet about taking Tesla private…

For a guy that has taken personal offense to the short sellers in the stock, this tweet only emboldened them — and may have been the catalyst that will ultimately prove the shorts right.

Why?  If you liked shorting a company that’s lost $6 billion over the past five years, while making the CEO/ founder a billionaire more than 18 times over, you’ll love it when you have an absolute ceiling of $420 to sell against.

And that’s precisely what the shorts have done.  They’ve leaned more heavily against the company, as Musk has created an asymmetric outcome for them. As you can see in the chart, it’s working.

As I’ve said in the past, Tesla is among the tech giants that benefited from the Obama administration’s distribution of the massive fiscal stimulus package that followed the global financial crisis.  Not only did they get regulatory favor from the government, but they received outright funding — a $465 million loan, at a time the company was broke.  And in that economic environment, the big pension funds were happy to follow government money in search of relative security (plowing money into government “sponsored” investments).

Fast forward 10 years and the company is still bleeding money, but Musk is a billionaire!  But sentiment has finally begun turning against the company, which is it’s biggest risk.  When the investors stop believing in the hype and start demanding real performance, the air can come out of the balloon very quickly.

So, to step out of the scrutiny of public markets, Musk has threatened to take the company private, with the help of Saudi funding.  But there’s a new problem.  If the Saudis are indeed willing to fund Tesla, Trump may block it.  The administration is stepping up protections against allowing U.S. intellectual property to fall into the hands of foreigners.  The government may giveth and the government may taketh away, in the case of Tesla.

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The Case For S&P 3,600+

August 22, 5:00 pm EST

Yesterday we looked at this chart of the S&P 500 …

In discussing this chart, I made an error.  The blue line, of course, represents what the S&P 500 would have looked like had it continued its long-run annualized growth rate of 8% from the 2007 (pre-crisis) peak.  That gives us perspective on where we stand in this stock market recovery.  Even though we’re up more than four-fold from the 2009 bottom, and people continue to talk about how long this bull market has run, we still have not recovered the lost growth of the past decade.

That is clearly displayed in the gap between the orange line (the actual S&P 500) and the blue line (where stocks would be had we continued along the 8% annualized path).

What can we attribute this gap to?  Post-recession recoveries are typically driven by an aggressive bounce-back in growth.  We didn’t get it.  Instead, the post-recession growth environment of the past decade was dangerously shallow and slow.

Why?  The Fed and other major central banks were the only game in town for the global economy over the past decade. They saved the world from a total collapse, staved off further shocks along the way, and they manufactured a recovery. But the “easy money” solution doesn’t work the same in the depths and aftermath of a global debt bust, as it does in normal recessions.  The central banks could only muster stall-speed growth.

That’s why the election was so important.  It has resulted in the great hand-off, from a global economy that was just surviving on the life-support of central banks, to a global economy that has the chance to thrive on the catalyst of fiscal stimulus, and become sustainable from structural reform.

With that, we should expect the gap in the chart above to close.  That argues for much higher stock prices, and a continuation of this bull market.

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Why Stocks Can Go Much Higher

August 21, 5:00 pm EST

With the S&P 500 finally returning to new record highs today, fully recovering the price correction this year, let’s take a look back at the correction, and where stocks can go from here.

As I said in my January 30 note “experience tells us that markets don’t go in a straight line. And with that, we should expect to have dips along the way for this bull market. Since 1946, the S&P 500 has had a 10% decline about once a year on average. A correction here would be healthy and would set the table for hotter earnings and hotter economic growth (coming down the pike) to ultimately drive the remainder of stock returns for the year.”

Fast forward eight months, and we’ve now had a 12% correction.  And we’ve since had back-to-back quarters of 20%+ earnings growth, with an economy that is finally growing at better than 3% four-quarter average annualized growth.

Meanwhile, stocks remain cheap.  The 10-year yield is still under 3%.  And historically, when rates are low (sub 3% is still VERY low), stocks tend to trade north of 20 times earnings.  The forward P/E on stocks at the moment is just 17.  If we apply a 20x multiple to $170 in forward S&O 500 earnings, we get 3,400 in the S&P.  That’s 19% higher.

With that in mind, let’s also revisit my chart on the long term growth rate of the S&P 500.

 

In the orange line, you can see what the S&P 500 looks like growing at 8% annualized (the long-run average growth rate) from the pre-crisis peak in 2007. This is where stocks should have gone, absent the near global economic apocalypse. And you can see the actual path for stocks in the blue line.

Bottom line: Despite the nice run we’ve had in stocks, off the bottom in 2009, we still have a big gap to make up (the difference between the blue line and the orange line). This is the lost decade for stocks.

This argues for another 28% higher in stocks to fill that gap.

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Bottom Is In For Chinese Stocks

August 20, 5:00 pm EST

As we discussed on Friday, with China coming back to the negotiating table on trade, we have a signal that the trade dispute smoke will not end in fire.

That is unlocking this rotation we’ve been talking about for the past month or so, where the money that has been plowed into the stocks of the very hot tech giants, starts moving out and into the lagging blue chips.

With that, as we sit eight months into the year, with the winds of fiscal stimulus in our sails, the S&P 500 is just now close to recovering the losses from the January highs.

And the Dow remains, 3.2% off of the January highs (which were record highs). But I suspect we will now close that gap quickly.

Remember, we have two very hot earnings quarters under our belt, and building momentum in the economic data, as fuel for stocks.  And I suspect the China news, to break the stalemate on trade negotiations, will also fuel the resumption of the young bull market in commodities, which should offer very attractive investing outcomes in the coming months.

Maybe the best signal for commodities is this chart on Chinese stocks, which looks like it may have bottomed TODAY into these 2016 lows (circled).
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Movement From China On Trade Equals Success

August 17, 5:00 pm EST

Back in July, we talked about the significance of the President of the European Commission coming to Washington to make a deal on trade.  That was a big day for Trump’s fight to level the playing field on global trade.

Why?  Because concessions out of Europe paved the way to more concessions globally.

That’s what we’re getting. Fast forward a little less than a month and now we have China (the center of the global trade dispute universe) coming back to the table on trade negotiations with the U.S.

This is what happens when you negotiate from a position of strength.  Trump has the leverage of a strong economy, and the credibility to act on tough threats. And that is bringing about progress.  Trading partners risk being left behind in the global economic recovery if they don’t play ball.

So we should expect “movement” from China.  And movement equals success.

With that, as I said, I suspect that will be the catalyst to get stocks back on the path toward double-digit gains by year-end.

Why China Is Returning To the Negotiating Table On Trade

August 16, 5:00 pm EST

On Tuesday, we looked at the similarities between the recent currency collapse in Turkey, and the 2014 collapse of the Russian ruble.

And we looked at this chart of how the S&P 500 behaved back in 2014.

The S&P 500 is the proxy on global market stability.  And stocks were shaken on Russia back in 2014.  When the ruble collapsed, U.S. stocks lost 5% of its value in just 7 days.

But the decline was fully recovered in just 3 days.

Given the similarities of these two currency crises (a currency attack on a bad behaving leader), I thought we might see the same behavior in stocks this time.  And that’s what we appear to be getting – a shallower decline but a swift recovery.

So, why the quick recovery?

As we also discussed on Tuesday, while the Turkish lira has been the center of attention in the financial media, the real reason global markets were shaking had more to do with China.

If a currency crisis that started in Turkey ended in China, there would be big geopolitical fallout.

As we’ve discussed over the past month, the biggest risk from China is a big one-off devaluation. That would stir up a response from other big trading partners (i.e. Europe and Japan), where they would likely coordinate to block trade from China all together. That’s where things would get very ugly and likely (ultimately) culminate in a military war.

But the probability of that outcome was reduced yesterday.  We had news that a China delegation would travel to the U.S. to re-open trade negotiations.  They’re coming back to the table.

So we should expect concessions from China. That’s good news for the globlal economy and for global stability.  And that news drove the big bounce in stocks yesterday, which continued today.   I suspect this will be the catalyst to get stocks back on the path toward a double-digit gains by year-end.

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The Big Risk In Currency Devaluations Is That It May End In China

August 14, 5:00 pm EST

We talked yesterday about the sharp currency devaluation in Turkey over the past few days. The Lira bounced aggressively today, which soothes some fears in global markets.

As I said, many have made comparisons to the Asian currency crisis of the late 90s, and have speculated on the potential for the events in Turkey to ultimately destabilize global markets.  But as we discussed yesterday, this looks more like the 2014 currency attack on the Russian ruble — a geopolitically-driven crippling of an economy with bad behaving leadership.

With that in mind, here’s what happened to U.S. stocks back in 2014, when the ruble lost 5% of its value (vs the dollar) in just 7 days.  But the decline was fully recovered in just 3 days.

U.S. stocks have been the proxy for global market stability throughout the past decade (the crisis and post-crisis era).  So, for perspective on just how shaky the Turkey influence is being perceived, the S&P 500 sits just one percent off of all-time highs at today’s close.

Remember, the ECB stands ready to plug any holes necessary in European bank exposure to Turkish debt.  That euro-denominated debt has been the risk people immediately homed in on.

The real question is, will this (currency crisis) ultimately end in China, with a revaluation of the yuan, or perhaps a free-floating yuan?  

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Lira Implosion Looks Like The Ruble In 2014

August 13, 5:00 pm EST

We have a currency devaluation in Turkey that is shaking up markets.  Let’s talk about what’s happening and why (if at all) it matters for the big picture outlook.

First, here’s a look at the Turkish lira chart (orange line moving up means a stronger U.S. dollar, weaker lira)…

 

Now, the problems in Turkey aren’t new.  The country is economically fragile.  But the collapse in the currency probably has more to do with its leadership – and the erosion of democracy in Turkey.

There are a lot of people comparing Turkey’s currency crisis to the Thai Baht devaluation in 1997 — which ultimately ignited a currency crisis in Asia, which culminated in a sovereign default in Russia.  That’s the fear: a currency crisis turning into a contagion of sovereign debt defaults.

But Thailand was about economic policy – specifically, the Thai currency policy.  Speculators attacked to close the valuation gap between the central bank managed currency and its economy.

This Turkey issue looks more like the collapse in the Russian Ruble in late 2014.  That was geopolitically driven.  Back in 2014, Putin was forcing his way into Ukraine – an affront to the Western world.  This was viewed as a proxy war against the West. That led to capital flight out of Russia and speculative attack on the currency.

With this chart on the Ruble (the orange line going up means a stronger dollar and weaker ruble), Russia was quickly made vulnerable and on a sovereign debt default watch.

But like Turkey, the contagion risk was driven by Russia’s foreign currency denominated debt (primarily euro denominated debt owed to European banks).

With that said, the world wasn’t “normal” in 2014, nor is it now.  Remember, the European Central Bank remains in quantitative easing mode.  That means, we should expect central bank (or policy) intervention (if needed) to quell any shock risks that could come from European bank exposure to Turkish debt.  So the ECB’s “ready to act” commitment of the post-financial crisis era should calm fears of contagion.

As for Turkey, the crippling effects of the currency attack should put pressure on the freshly re-elected Ergodan (i.e. should make him vulnerable to an uprising).

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BOJ ‘Yield Curve Control’ Is Key To Unleashing Global Interest Rates

July 30, 5:00 pm EST

The Nasdaq continued to slide today.  Stock indices tend to go down a lot faster than they go up.  The tech giant-driven Nasdaq was up over 15% year-to-date, just a few days ago, and has now given up more than 4% from the highs.

Not surprisingly, as people run for the exit doors on the big tech giants (taking profits), we’re seeing money rotate into the blue-chip value stocks.

The Dow and S&P 500 did much better than the Nasdaq today, which continues to slowly correct the big performance gap of the year (where the Nasdaq was up 15% at one point, while the DJIA was flat on the year).

Now, the biggest event of the week for markets may take place tonight.  We hear from the Bank of Japan on monetary policy.  We’ve discussed, many times, the role that Japan continues to play in our interest rate market.

Despite seven hikes by the Fed from the zero-interest-rate-era, our 10-year yield has barely budged. That’s, in large part, thanks to the Bank of Japan.  Japan’s policy on pegging its 10-year yield at ZERO has been the anchor on global interest rates.

As I’ve said, when they finally signal a change to that policy, that’s when (our) rates will finally move.  And that may be tonight.  There is speculation that they may adjust UP that target on their 10-year yield.  That would represent a dialing back of the BOJ’s QE program, which would signal the initial steps of exiting the crisis-era QE program.

What would that do?  If the BOJ does indeed adjust their “yield curve control” policy, it should send global interest rates higher.  That would put our ten-year yields back above 3%, which has been a level that has caused some uneasiness in markets.   This time around, a move back above three percent would reflect a steepening U.S. yield curve which may be perceived as a positive, especially for those that have been concerned about the potential of seeing an inverted yield curve (i.e. a recession indicator).

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Have We Hit ‘Peak Zuck’?

July 27, 5:00 pm EST

As we end the week, let’s take a look at a few charts ….

We had the first look at Q2 GDP today. Here’s an updated look at the chart of the average four-quarter annualized growth rate we looked at
yesterday ….

This number will be formally revised two more times, but the “advance” number came in at 4.1%. Yesterday we talked about the prospects for the highest four-quarter annualized growth rate since 2006. We just missed it, in this first reading. But the Q1 number was revised UP to 2.2%, so adding in today’s Q2 number, and we get 3.1% four-quarter average annualized growth. Only for a moment, in 2010, was it better (at 3.15%).

I suspect we will see a bigger number in the coming Q2 revisions. And if sentiment on trade indeed bottomed out on Wednesday, with the EU concessions, we will likely have a big Q3 growth number coming.

That steadily rising trend, since the election, in the four-quarter average growth rate is a big deal. With that, I would call the above chart, the most important chart of the week…

Let’s look at the second most important chart of the week ….

I’ve been making the case that the massive Nasdaq outperformance, relative to the Dow, would begin correcting. In the chart above, you can see that it’s starting (Dow moving up, Nasdaq moving down). And it’s being led by strength in the blue chips following strong Q2 earnings, and weakness in two of the big tech giants (Netflix and Facebook) following big misses. With that, Facebook has quickly revisited levels of early May (which should give us all perspective on how aggressive this run in the tech giants has been over the past two months).

The question: Is it “peak Zuck?”

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