investing | Billionaire's Portfolio

Big Four Banks Had Double-Digit Earnings Growth in Q1

April 16, 5:00 pm EST

With Bank of America earnings this morning, we’ve now heard from the big four banks (JPM, BAC, WFC and C).

The expectations were set for just 2% earnings yoy earnings growth from the group. We’ve had positive earnings surprises in each, for an average earnings growth of 11%. That’s double-digit earnings growth for the biggest banks in the country, in an earnings season that has been forewarned as an “earnings recession.”

Remember, never underestimate the appetite for Wall Street and corporate America to dial down expectations when given the opportunity. They’ve done it, and we’re seeing positive surprises.

Now, we’ve talked about the slate IPOs coming from the Silicon Valley hype machine. As I’ve said, Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle.

As we know, Lyft was valued as high as $25 billion when it started trading publicly. Some paid a $25 billion valuation for the privilege of owning a company that did a little over $2 billion in revenue, while losing almost a billion dollars — with slowing revenue growth and widening losses. It has now shed about $9 billion in market cap in thirteen days.

Uber is on deck. Uber filed its S-1 this week. In this public disclosure document, we find a company that has privately raised $24 billion, valued at $68 billion in the private market, that has been thought to float shares at as much as $120 billion valuation. This is a company that (like Lyft) also with slowing revenue growth and widening losses. Losses? The S-1 shows a swing from $ 4 billion loss in 2017, to a near $1 billion profit in 2018. But if we back out the a couple of unusual items (like the gain of a divestiture of some foreign businesses and an unrealized gain in an “investment”) the company lost $4.2 billion on $11 billion in revenue.

As we discussed last month, the hyper-growth valuations on these perceived hyper-growth companies, are unlikely to get hyper-growth at this stage. That will be a problem for those taking the bait on the IPO.

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Bank Stocks: Among The Best Value In The Stock Market

April 15, 5:00 pm EST

As we discussed last week, the table has been set (again) for positive earnings surprises. And we’ll see more this week, as Q1 earnings kick into gear.

The tone has already been set, with the big surprises reported on Friday from two of the four biggest banks. The market was looking for earnings contraction from JP Morgan and Wells Fargo. Instead, we had 7% yoy growth from JPM, and 12% yoy growth from Wells.

Today we heard from Citi, the third largest bank in the country. Citi beat expectations with 11% earnings growth in the first quarter, compared to the same period a year ago. And tomorrow we’ll hear from Bank of America, the second largest bank in the country.

So far, Jeff Ubben has been spot on about the banks. Ubben is the founder of ValueAct Partners, one of the best activist investors in the business over the past twenty years. Remember, back in January, as we were stepping through positive surprises in bank earnings from the fourth quarter, we talked about Ubben’s thoughts on banks. He has said that the U.S. banking system has the lowest risk profile “than any time in our investing lifetime.”

In our Billionaire’s Portfolio, we followed him into Citigroup, the highest conviction position in his $16 billion portfolio. Citi is the cheapest of the four biggest U.S.-based global money center banks — still trading at a 30% discount to peak pre-crisis market value, despite being far better capitalized, better regulated and a more efficient business than it was in the pre-financial crisis days. With that, not coincidentally, as the banks have beaten expectations, Citi has been the best performing big bank year-to-date (up 29%).

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Global Central Bank Policy Is Back To Pinning Down Rates, Driving Up Asset Prices

April 10, 5:00 pm EST

The minutes were released from the March Fed meeting today. But we already know very clearly where they stand.

Remember, they spent the better part of the first three months of the year marching out Fed officials (one after another) to give us a clear message that they would do nothing to kill the economic recovery.

Just in case there was any question, Jay Powell stepped in just ahead of the March Fed meeting with an exclusive 60 Minutes interview, where he spoke directly to the public, to reassure everyone that the economy was in good shape, and that the Fed was there to promote stability (i.e. rates on hold and even prepared to act if the environment were to turn for the worse).

As expected, the ECB echoed that position today, following their meeting on monetary policy. As we’ve discussed, the major global central banks have again coordinated both messaging and policy to ward off an erosion of confidence in the global economy. No surprises. And I’m sure managing the U.S. 10-year yield has been part of that coordinated response. In addition to the speculative flows that have pushed yields lower, I suspect there has been a healthy dose of central bank buying (Bank of Japan and others through sovereign wealth funds).

With that, even though stocks have bounced back, commodities are on the move, and we’ve had improvements in global economic data, we still have European 10-year yields (Germany) at zero and U.S. yields at 2.50%. That is promoting the global central bank stability plan.

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Trump Wants A Weaker Dollar, And Will Likely Get It

April 9, 5:00 pm EST

A key piece in the continuation of the global economic recovery will be a weaker dollar. It will drive a more balanced U.S. and global economy, and it will reflect strength in emerging markets (i.e. capital flows to emerging markets).

To this point, as we’ve discussed, higher U.S. rates have meant a stronger dollar. With global central banks moving in opposite directions in recent years, capital has flowed to the United States. But the emerging markets have suffered under this dynamic. As money has moved OUT of emerging market economies, their economies have weakened, their currencies have weakened, and their foreign currency denominated debt has increased.

But now we have a retrenchment from the Fed. And we have coordinated global monetary policy (facing in the same direction).

This sets up to solidify a long-term bear market for the dollar.

Let’s take a look at a couple of charts that argue the long-term trend is already lower, and the next leg will be much lower.

First, here’s a revisit of the long-term dollar cycles, which we’ve looked at quite a bit in this daily note.

Since the failure of the Bretton-Woods system, the dollar has traded in six distinct cycles – spanning 7.6 years on average. Based on the performance and duration of past cycles, the bull cycle is over, and the bear cycle is more than two years in.

With this in mind, if we look within this current bear cycle, technically the dollar is trading into a major resistance area – a 61.8% retracement. The next leg should be lower, and for a long period of time.

Trump wants a weaker dollar, and I suspect he’s going to get it.

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Chinese Stocks Signaling The Bottom In The Chinese Economy

April 8, 5:00 pm EST

As we discussed on Friday, the overhang of risks to markets, to the Trump administration and to the economy are as light as we’ve seen in quite some time.

With this in mind, we have a fairly light data week – which means the likelihood of a disruption in the rise in stocks and risk appetite remains low.

We get some inflation data this week, which should be tame, justifying the central bank dovishness we’ve seen in recent months. The ECB meets this week. They’ve already walked back on the idea that they might hike rates this year. Expect Draghi to hold the line on that. The Chinese negotiations have positive momentum, with reports over the weekend that talks last week advanced the ball. And we have another week before Q1 earnings season kicks in.

So, expect the upward momentum to continue for stocks. Just three months into the year and stocks are up big, and back near record highs in the U.S.. The S&P 500 is up 15% year-to-date. The DJIA is up 13%. Nasdaq is up 20%. German stocks are up 13%. Japanese stocks are up 11%. And Chinese stocks are up 32%.

Remember, we’ve talked about the signal Chinese stocks might be giving us, putting in a low on the day the Fed did it’s about face on the rate path, back on January 4th.

The aggressive bounce we’ve since had in Chinese stocks appears to be telegraphing the bottoming in the Chinese economy. That’s a big relief signal for the global economy. Commodities prices are supporting that view (sending the same signal). Oil is now up 42% on the year. And the CRB industrial metals index is up 24%.

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With Fog Lifting, The Real Economic Boom May Be Just Getting Started

April 5, 5:00 pm EST

As we end the week, the overhang of risks to markets, the Trump administration and the economy are as light as we’ve seen in quite some time.

With that, stocks are back within sniffing distance of record highs. And I suspect it’s just getting started.

Remember, we’ve talked a lot about the comparisons between today and 1995. But we should also acknowledge how things played out through 2000, after the Fed backtracked on errant policy in the mid-90s.

Let’s revisit an excerpt from my daily notes on the topic …

“Last year (2018) was the first year since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold). The culprit for such an anomaly: An overly aggressive Fed, tightening into a low inflation, recovering economy.

The Fed ended up cutting rates by 1995, and that spurred a huge run up in stocks (up 36%). Fast forward: we now (too) have a Fed that has been overly aggressive, tightening into a low inflation, recovering economy. And just as they did in 1995, the Fed is now doing an about face. Given where the Fed has positioned itself now, compared to just three months ago, I would argue we already have a repeat of 1995 from the Fed … Within a few quarters of the 1995 rate cut, U.S. growth was printing above 4% and did so for 18 consecutive months. Stocks TRIPLED over that period.”

So, just as people are arguing that the expansion cycle of the past decade is coming to an end, we may very well see that the real boom is just getting started.

We continue to have tailwinds of fiscal policy, deregulation and structural reform still working through the economy. And the Fed has now given us the greenlight, with policies designed to fuel higher stock prices!

These are the moments when real wealth can be created in stocks. I want to make sure you are acting, not watching from the sidelines.

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Stand-Down By The Fed Has Put The Bottom In For Emerging Markets

April 4, 5:00 pm EST

The slowdown in China spooked global markets late last year, and have since spooked global central banks.

Given the current recession-like growth in China (6%ish), and the prospects that it could keep sliding, especially if a U.S./China trade deal doesn’t materialize, the major central banks in the world have positioned for the worst case scenario.

In the process, we may have discovered the real drag on the Chinese economy.

Here’s the latest look at the Shanghai Composite, up 33% since January 4th (which not so coincidentally is the day the Fed walked back on its rate hiking path).

Maybe the easiest message to glean from this chart, and that turning point, is that the biggest culprit in the China slowdown has been the Fed, not tariffs.

Here’s how the Dallas Fed put it in a report from October 3rd (which happens to be the high in stocks, the day stocks turned):

“Emerging economies have suffered a general decline in forecast GDP growth, and inflation rose in a handful of countries. The tightening of monetary policy in advanced economies, both through rate hikes and other policy actions such as forward guidance, results in capital outflows from emerging economies with low reserves relative to their foreign debt.”

Higher U.S. rates has meant a stronger dollar. With the economy moving north, the dollar moving north and rates moving north, global capital flows to the U.S. — and away from riskier emerging markets. It’s not that the U.S. economy can’t handle a 3.25% ten-year yield or a 5% mortgage rate in the domestic economic environment. It’s the EM world that can’t handle it (at the moment).

China has responded to the growth slowdown with an assault of monetary and fiscal stimulus. But the most powerful stimulus appears to have been the move by the Fed to stand-down.

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Lyft And Uber IPOs Mark Euphoric Stage Of Internet 2.0

April 3, 5:00 pm EST

We’ve talked about the prospects that Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle.

This uber-exuberant valuation reflects the regulatory and policy advantage Silicon Valley has enjoyed for the past decade (which is ending). It shows the displacement of capital from Wall Street to Silicon Valley (as a result of those advantages). And arguable, it shows the euphoric stage of a bull market for internet 2.0.

Bull markets are said to be born on pessimism, grown on skepticism, mature on opitimism and die on euphoria. For the euphoria stage, as Paul Tudor Jones describes it, there’s typically no logic to it and irrationality reigns surpreme. Given that markets have bought the notion that a hand full of apps would destroy enduring industries, millions of jobs, and life will be great (?) — It’s fair to say that irrationality is (and has) reigned supreme.

With this in mind, we talked about the beginning of the end, last year, when the regulatory screws began to tighten on the untouchable tech giants (namely, Amazon, Facebook and Google).

As I said back on September 4th, when Amazon crossed the trillion-dollar valuation threshold, “at 161 times earnings, the market seems to be betting on the Amazon monopoly being left to corner all of the world’s industries. That’s a bad bet. Much like China undercut the compeition on price and cornered the world’s export market, Amazon has undercut the retail industry on price, and cornered the world’s retail business. That tipping point (on retail) has well passed. And as sales growth accelerates for Amazon, so does the speed at which competition is being destroyed. But Amazon is now moving aggressively into almost every industry. This company has to be/will be broken up.”

A day later, Facebook and Twitter executives visited Capitol Hill for a Congressional grilling. Here’s an excerpt from my note that day: “If you listened to Zuckerberg‘s Congressional testimony in April, and today’s grilling of Jack Dorsey (Twitter) and Sheryl Sandberg (Facebook), it’s clear that they have created monsters that they can’t manage. These tech giants have gotten too big, too powerful and too dangerous to the economy (and society).”

In short, they are too big to manage, and Zuckerberg said just that in his Op-Ed this week, calling for global regulation. Remember, the irony is, regulation only widens the moats for these companies. The higher the cost of compliance, the smaller the chances that there will ever be another Facebook developed in a dorm room.

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V-Shaped Recovery For Oil Prices Underway

April 2, 5:00 pm EST

Oil is one of the biggest movers of the day, now back above $60.

That’s nearly 50% higher from the lows of late December.

Is that surprising? It shouldn’t be. Declines in both stocks and oil (late last year) were triggered by threats of sanctions on Saudi Arabia. We talked about it as it transpired in these daily notes. The stock market decline started on October 3rd when headlines hit that implicated the Saudi Crown Prince in the murder of the journalist, Jamal Khashoggi. Oil topped the same day, and then accelerated the day Trump spoke with the Saudi Crown Prince on the phone on October 16. Oil opened that day at $72 and hasn’t seen the level since (forty-three days later it was trading at $42).

The Saudi capital flight threat dissolved as it became clear later in the year that the U.S. would sanction Saudi individuals only — and not the Crown Prince, nor the government. Sill those geopolitical risks early on, soon turned into eroding sentiment — as lower stocks, feed weaker confidence.

But we’ve had a full “V-shaped” recovery in stocks. And I’ve suspected we would see the same in oil prices. And the catalyst has been a coordinated response from global central banks, not too dissimilar from what we saw in 2016, following another oil prices crash. Oil and stocks rallied aggressively back then. And we’re seeing a similar result this time.

Remember, we looked at this chart back in February…

Here is a look at the chart now as crude continues to recover the declines of late last year (working toward completing the “V”)…

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Lyft IPO Is Exposing The Valuation Gap Insanity

April 1, 5:00 pm EST

Last week we talked about the buildup to the Lyft IPO.

Lyft, “lifted” to a valuation of close to $25 billion when shares started trading on Friday. Today, it’s down as much as 20% from the Friday highs.

The last private investment valued the company at $15.1 billion. That gave them a paper gain of over 60% on Friday, for just a 9-month holding period. Good for them.

For everyone else, remember, you’re looking at a company that did a little over $2 billion in revenue, while losing almost a billion dollars. Most importantly, over the three years of data that Lyft shared in its S-1 filing, revenue growth has been slowing and losses have been widening.

So, you’re buying a company that hopes to be profitable in seven years, to justify the valuation today. This is a company that has only existed seven years. And to think that we can predict what the next seven will look like, in the ever changing technology and political/regulatory environment (much less economic environment), is a stretch.

For some perspective on these valuations, below is what it looks like if we compare the three largest/dominant car rental car companies (Enterprise, Hertz and Avis) to the two largest/dominant ride sharing companies.

With Uber now expected to be valued at around $120 billion when it goes public (possibly this month), the ride sharing industry is valued at about 14 times the car rental industry.

The rental car industry has been priced as if ride-sharing industry has destroyed it. Ironically, if the ride sharing movement is to succeed in the long-run, and is to fully reach the potential that is being priced into the valuations, then they will need these car rental companies to supply and manage the fleet of vehicles required for Uber and Lyft to scale.

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