Last week Larry Kudlow, the White House Chief Economic Advisor, hinted that Jean-Claude Juncker (head of European Commission) would be coming to Washington with some concessions on trade.
As I write, we’ve yet to hear the results of the Trump/Juncker meeting today, but this could be a major turning point in the perception of the U.S. trade offensive. Movement equals success. And in that case, concessions out of Europe may pave the way to more concessions globally. That signal could trigger a big rally in global markets.
One particular market to watch is copper. Copper is the first place you should look if you think the world is escaping the slugglish post-crisis growth period, and possibly entering an economic boom period. It has been sensitive to the global trade disputes. A clearing of that, would resume what should be a multi-year bull market in copper.
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We have a big earnings week. The tech giants report, along with about a third of the S&P 500. And we get our first look at Q2 GDP.
As we’ve stepped through the year, we’ve had a price correction in stocks, following nearly a decade of central bank policies that propped up stocks. This correction made sense, considering central banks were finally able to make the hand-off to a U.S. led administration that had the will and appetite (and alignment in Congress) to relax fiscal constraints and force the structural reform necessary to promote an economic boom.
From there, for stocks, it became a “prove-it to me” market. Let’s see evidence of this “hand-off” is working — evidence the fiscal stimulus is working. That came in the form of first quarter earnings. This showed us clear benefits of the corporate tax cut. The earnings were hot, and stocks began a recovery.
The next steps, as fiscal stimulus works through the economy, we’ve needed to see that the uptick in sentiment (from the pro-growth policies) is translating into better demand and economic activity. So, with Q2 earnings we should start seeing better revenue growth, companies investing and hiring. And we should see positive surprises beginning to show up in the economic data.
We’re getting it. Almost nine out of ten companies reporting thus far have beat (lofty) earnings expectations. And about eight out of ten have beat on revenues. This week will be important, to solidify that picture. And though many of the economists all along the way of the past year didn’t see big economic growth coming, it has been steadily building since Trump was elected, and the Q2 number should push us to over 3% annual growth (averaging that past four quarters).
Now, let’s talk about the big mover of the day: interest rates. The 10-year yield traded to 2.96% today, closing in on 3% again.
We’ve discussed, many times, the role that Japan continues to play in our interest rate market. Despite 7 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.
As I’ve said in the past, “Japan’s policy on pegging its 10-year yield at zero has been the anchor on global interest rates. Forcing their benchmark government bond yield back to zero, in a world where there has been upward pressure on interest rates, has meant that they can, and will, buy unlimited amounts of JGBs to get the job done. That equates to unlimited QE. When they finally signal a change to that policy, that’s when rates will finally move.”
With that in mind, there were reports over the weekend that the Bank of Japan may indeed signal a change in that “yield curve control” policy at their meeting next week. And global rates have been moving!
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We’ve been watching the Chinese currency very closely, as the Chinese central bank has been steadily marking down the value of its currency by the day, in efforts to offset U.S. trade tariffs.
Remember, in China, they control the value of their currency. And they’ve now devalued by 8% against the dollar since March. They moved it last night by the biggest amount in two years. That reduces the burden of the 25% tariff on $34 billion of Chinese goods that went into effect earlier this month.
But Trump is now officially on currency watch. Yesterday in a CNBC interview he said the Chinese currency is “dropping like a rock.” And he took the opportunity to talk down the dollar.
The Treasury Secretary is typically from whom you hear commentary about the dollar. And historically, the Treasury’s position has been “a strong dollar” is in the countries best interest. But Trump clearly doesn’t play by the Washington rule book. So he promoted his view on the dollar (at least his view for the moment)–and it may indeed swing market sentiment.
The dollar was broadly lower today. We’ll see if that continues. If so, it may neutralize the moves of China in the near term. Nonetheless, the U.S./China spat is reaching a fever pitch. Someone will have to blink soon. Trump has already threatened to tax all Chinese imports. The biggest risk from China would be a big surprise one-off devaluation. As we discussed yesterday, that would stir up a response from other big trading partners (i.e. Europe and Japan). And they may coordinate, in that scenario, a threat to block trade from China all together.
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Yesterday CNBC hosted their Delivering Alpha conference. This conference is primarily an opportunity for investors to hear views and ideas from some of Wall Street’s best.
However, the bigger picture geopolitical environment is far more important for the market at the moment, than what a big hedge fund manager thinks about valuation (for example).
On that note, there were some interesting takeaways from yesterday’s event. As we discussed yesterday, we heard from Larry Kudlow, the White House Chief Economic Advisor. And we also heard from Steve Bannon, the former White House Chief Strategist.
Bannon has been given plenty of unappealing labels by the media in recent years, but his perspective on the White House game plan and how it’s executing is invaluable. I think everyone would agree that the communication on the economy and foreign policy could be handled better by the White House.
And Bannon articulates the issues in the Trump plan, maybe better than anyone. It’s an interview everyone should watch (here’s a link).
As we’ve discussed here in my ProPerspectives piece since I started writing this nearly three years ago, the trade war is nothing new. And it’s all about China. As Bannon said, China has been waging an economic and cyber war with the U.S. for the better part of the past 25 years. Now they’ve run into a wrecking ball in Trump: someone with the leverage and the credibility to act on threats to end the gutting of global economies (including the U.S. and other major developed market economies). Bannonsays we’re in the early stages of a “reorientation of the supply-chain around freedom loving countries.”
As we’ve discussed, the best reflection of China’s strategic response to Trump’s pressure is their currency. What are they doing with it? They continue to walk it lower every day. This is a signal that they have no options–playing by the rules and getting slower economic growth isn’t an option for the ruling regime in China. They can only fight back by offsetting tariffs with a weaker currency. And that may ultimately lead to blocking China trade completely.
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Last week, we talked a lot about oil, as OPEC was meeting to deliberate on the status of their agreement to cut production.
While oil prices have been rising aggressively over the past year, the markets haven’t been paying a lot of attention — distracted by Trump watching.
But then Trump put it on the front burner, with another jab at OPEC on Twitter. And the media and Wall Street began trying to deduce the OPEC outcome. In the end, they misinterpreted. OPEC’s agreement to go from overcutting to complyingwith the initial levels of production cuts, means they are still cutting.
So, the market is still undersupplied in a world where demand has proven to be underestimated. That’s a formula for higher prices.
That’s what we’ve had for the past year, and that’s what we’ve gotten since OPEC’s official statement on Friday. In my note last Friday, I said “the lack of enough action from OPEC may serve as a catalyst to push oil much higher from here. That, of course, serves OPEC’s interests.”
Oil prices have exploded! We’ve seen a $10 pop since Friday morning. That’s 15% in a week. And I suspect it’s going to keep going.
Remember, we’ve talked about the prospects for $100 oil this year. Leigh Goehring, one of the best research-driven commodities investors on the planet has been telling us that since last year. And he’s looking spot-on at the moment.
Bottom line: This script is precisely what we’ve been talking about, here in my daily ProPerspectives note, since the price of oil was in the $40s. We’ve talked about the prospects for a return to $80 oil, and maybe even as high as $100 oil. And it looks more and more possible, given the surging demand and the supply shortfall.
How can you play it. On this thesis for oil, in my Billionaire’s Portfolio, we added SPDR Oil and Gas ETF (symbol XOP) and Phillips 66 (symbol PSX) back when oil prices were deeply depressed (in 2016). We followed the activism of policymakers (both central banks and OPEC). And in the case of PSX, we also followed Warren Buffett.
Both are up big, but have a lot more room to run. Oil and gas stocks (which comprise the XOP) have yet to reflect the supply shortfall in the oil market, much less the booming demand that is coming from an improving global economy (which many have underestimated).
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
Stocks continue to prove resilient in the face of trade war noise. After a global stock sell-off that started last night on news that the tit for tat tariff threats were escalating, small caps actually printed another new record high today and finished up on the day.
Bottom line: Dips continue to be bought.
In the category of “stocks that can soar even on tumultuous market days?”
We had these three charts today …
The first two stocks are biotech. If you have much experience in investing, you’ll know that biotech stocks can cut both ways (most of the time, painfully).
Here’s my pro tip: ONLY BUY BIOTECH STOCKS WHEN A BILLIONAIRE INVESTOR IS INVOLVED!
Who was involved in the two above?
Not surprisingly, the best biotech investor in the world, billionaire Joe Edelman of Perceptive Advisors, is the biggest shareholder in SLDB.
He was also the biggest investor in Sarepta until it quintupled back in 2016 on an FDA approval. Sarepta was up as much as 50% today on early trial results of gene therapy treatment of the devastating Duchenne Muscular Dystrophy (DMD) disease in boys. SLDB is similarly working on gene therapy for DMD.
What about SandRidge (the energy stock)? SandRidge was up nicely today, in a broadly down market, because billionaire activist Carl Icahn successfully de-seated a corrupt board of directors at the post-bankruptcy energy company. That board and leadership that drove the company into bankruptcy, yet has been handsomely compensated in the process, has finally been shown the door. Great news for shareholders.
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For much of last summer, we talked about the building bull market in commodities.
The price of crude oil has nearly doubled since that time. But broader commodities have yet to take off.
Remember, we’ve looked at this chart of commodities versus stocks quite a bit.
You can see the clear divergence in these two key asset classes over the past five years.
As we’ve discussed, the only two times commodities have been this cheap relative to stocks were at the depths of the Great Depression in the early 30s and at the end of the Bretton Woods currency system in the early 70s.
And from deeply depressed valuations, commodities went on a tear, both times.
Now, since last summer, the trajectory of commodities has been up. But so have stocks. Still, this gap has narrowed a bit. Stocks are up 13% in the past year. The CRB index is up 17%.
The big difference between this year and last year, is the level on the 10-year yield. Last year this time, yields were 2.20%. Today, yields are closer to 3%. That’s because the economy is hotter, and inflation is finally reaching the Fed’s target of 2%.
What asset class should perform the best in a rising inflation environment? Commodities. As we’ve discussed in recent weeks, the data on the economy is lining up for some big positive surprises. That will be fuel for commodities prices.
If you are hunting for the right stocks to buy, in my Forbes Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers.
The big approval on the AT&T takeover of Time Warner has opened the door to big industry consolidation coming down the pike.
When Trump won the election in November of 2016, by December, the billionaire Japanese business man Masayoshi Son was meeting with the President-elect in Trump Towers. Son owns more than 80% of Sprint and was wanting to merge with TMobile to challenge the duopoly in the wireless carrier industry (AT&T and Verizon). The prospects of this deal (a merger) were killed by the Obama administration, as antitrust enforcers warned it would put the dominance of the wireless industry in too few hands (from four to three) – making it less competitive. That deal had new prospects with Trump. So Son got on a plane.
He clearly knew the Trump administration was going to be very pro-business. And the likelihood of getting a deal blessed under Trump’s watch (relative the outgoing administration) improved dramatically on election day.Indeed, deal making is hot under Trump. Last year, there were over 18,000 merger and acquisition transaction in North America — the highest on record. This year, a little less than half way through the year, and we’ve had a little less than half the volume of last year. And Son’s deal with TMobile is now in the queue for FCC approval.
And of course, we now have the 21st Century Fox bidding war. The company had already agreed to sell (most of) itself to Disney. But when the AT&T deal was approved, Comcast stepped in an upped the ante. All of these deals have everything to do with keeping their footing in the “Information Revolution.” If not, they get made irrelevant by the tech giants. They are fighting to maintain their moat on internet infrastructure, but they are also fighting to keep their dominant position in content, while going head-to-head with the new players, in taking that content direct-to-consumers.
Meanwhile, the market seems to be pricing in future dominance and monopolies in the FAANG stocks. These deals are making that less likely.
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Tech stocks and small caps continue to behave like an economy that is about to take off.
The Nasdaq is now up 14% on the year. The Russell 2000 is up 10%. The S&P 500 (with more global exposure) is lagging it all, up just 4%.
Is it telling us that the investments in the U.S. are gaining more favor, relative to the rest of the world? Maybe. Is it telling us that capital is flowing toward the U.S. to align with Trump policies and away from those that may be harmed by being on the wrong side of Trump. Maybe.
With that said, we know Europe has been slowing. We know the “Italy-risk” presents another drag on that outlook. As such, the ECB followed the Fed’s hike yesterday with a rather dovish outlook this morning. Draghi laid out a timeline for following the Fed’s lead on normalization that was a little slower/ little later than expectations. That sent the dollar soaring, the euro plunging, and rates in Europe lower.
Tonight, we hear from the Bank of Japan. Remember, this is the lynchpin in keeping a lid on global interest rates. As long as they have the QE spigot wide-open, our yields (and therefore our consumer rates) will be well contained.
Japan’s policy on pegging its 10-year yield at zero has been the anchor on global interest rates. Forcing their benchmark government bond yield back to zero, in a world where there has been upward pressure on interest rates, has meant that they can, and will, buy unlimited amounts of JGBs to get the job done. That equates to unlimited QE. When they finally signal a change to that policy, that’s when rates will finally move.
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Watching the media and expert community digest the Fed decision is always interesting.
They are all programmed to home in on the worst-case scenario. It’s very similar to the way they parse politics.
In this case, the Fed projected an extra rate hike this year. They were projecting three hikes for 2018. Now they are projecting four hikes for the year (two of which are now in the rear-view mirror). Why an extra hike? Is it because they want to disrupt the recovery and undo all of their efforts of the past decade to manufacture that recovery? No. It’s because they think the economy is good! In fact, Powell (the Fed Chair) said “the main takeaway is that the economy is doing very well.”
And when asked about the impact of tax cuts, he said, we’ve yet to see the benefits. But, it should “provide significant support to demand over the next three years … encourage greater investment … and drive productivity.” This is exactly what we stepped through last week in my Pro Perspective notes (here). We laid out the components of GDP (consumption, investment, government spending and net exports) and we talked about the setup for positive surprises feeding into an economy that’s already running at near 3% growth — because pro-growth policies are just beginning to show up in the data!
With that, it should be no surprise that the Fed feels more comfortable telegraphing another hike, from what is still very low levels of interest rates.
Now, what is the negative scenario the pundits have been harping on? The yield curve. With the Fed gradually walking up short term rates (rates they set), the benchmark market interest rates (namely the 10-year government bond yield) has been soft. That creates yield curve flattening, which gets the bears excited that a yield curve inversion could be coming (a good historical predictor of recession).
Why is the 10 year yield soft? As we’ve discussed, the two major central banks that are still in the QE game have been anchoring longer term interest rates through their outright purchases of global government bonds (including lots of U.S. Treasuries, which keeps a cap on yields).
On that note, we have the ECB tomorrow. And the Bank of Japan will meet on monetary policy tomorrow night. The trajectory of global monetary policy is UP. And the more the Fed does, the more it forces that timeline elsewhere in the world to follow the Fed’s path on normalizing rates. The ECB will be following the Fed normalization path soon. And the Bank of Japan will be last. And when we get hints that it’s coming sooner rather than later, the yield curve will start steeping, and the bears will have a very hard time justifying their “sky is falling” view.
