June 8, 2016, 2:00pm EST

We’ve talked about the bullish technical break occurring in stocks.  That’s continuing again today.

Remember, a week from this past Friday we talked about the G7 (G8) effect on stocks.  We stepped back through every annual meeting of world leaders since 2009.  And the results were clear.  If the communiqué from the meetings focused on concerns about the global economy, stocks went higher. It’s that simple.

Why?  In the post Great Recession world, stocks are the key barometer of global confidence.  Higher stocks can help promote economic recovery (better confidence, higher wealth effect).  Lower stocks can derail it, and threaten a bigger downturn, if not fatal blow to the global economy.

Policymakers can and do influence stocks.  And thus, when we’ve seen clear messaging from these meetings about global economic concerns, stocks have done well (in most cases, very well).

With all of this said, on May 27th, from the meeting in Japan, the G7 issued their communiqué and it started with global growth concerns.  They said, “Global growth is our urgent priority.”  The S&P 500 closed at 2099.  Today it’s trading 2116 and is closing in on the all-time highs set in May of last year (less than 1% away).

Now, we talked in past months about the importance of Europe.  The Fed’s best friend (and the global economy’s best friend) is an improving economy in Europe.  We’ve seen some positive surprises in the data out of Europe, but the actions taken this morning by the ECB could be the real catalyst to get the ball rolling — to mark the bottom, to get Europe out of the slow-to-no growth, deflation funk.

They ECB started implementing a new piece to its QE program today.  Of course, they promised bigger and bolder QE back in March (mostly as a response to the cheap oil threat).  Today they started buying corporate bonds as part of that ramped-up QE plan.

With that, this is a very important observation to keep in mind.  Over the history of the Fed’s three rounds of QE, when the Fed telegraphed QE, rates went lower.  When they began the actual execution of QE (actually buying bonds), rates went HIGHER, not lower (contrary to popular expectations).  Why?  Because the market began pricing in a better economic outlook, given the Fed’s actions.  We think we could see this play out in Europe as well.

Take a look at this chart of German yields.  This is probably the most important chart in the world to watch over the next several days.

germ yield

Source: Reuters, Billionaire’s Portfolio

The German 10-year yield traded as low as 3 basis points (that’s earning 30 euros a year for every 100,000 euros you loan the German government, for 10 years).  Of course, the most important visual in this chart is how close the German 10-year yield is to zero (the white line), and then negative rates.

Remember, we’ve said before that Draghi and the ECB have made it clear that they won’t cut their benchmark rate below zero. And “that should keep the 10–year yield ABOVE zero.”  Were we right?  We’ll find out very soon. If so, and if German yields put in a low today on the “actual execution” of the ECB’s new corporate bond buying program, then U.S. yields would be at bottom a here too.

10s

Source: Reuters, Billionaire’s Portfolio

You can see in the above chart, it’s a make or break level for the U.S. 10 year yield as well (as it is tracking German yields at this stage).  While lower yields from here in these two key markets might sound great to some, it comes with a lot of problems, not the least of which is a negative message about the outlook for the global economy and thus damage to global confidence.  Keep an eye on German yields, the most important market to watch in the coming days.

This Stock Could Triple This Month

In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.

This fund returned an incredible 52% last year, while the S&P 500 was flat.  And since 1999, they’ve done 40% a year.  And they’ve done it without one losing year.  For perspective, that takes every $100,000 to $30 million.

We want you on board.  To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.

We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success.  And you come along for the ride.

We look forward to welcoming you aboard!

 

June 7, 2016, 5:00pm EST

Yesterday we talked about the bullish technical breakout shaping up in stocks.  Today we want to talk about a very quiet bull market going on that supports the story for stocks.  It’s commodities.

Within the course of the past four short months, commodities have gone being the leading threat for global stocks, to being a leading indicator of an emerging bull cycle for stocks.

Oil, of course, was the key culprit earlier in the year.  At $26 oil the world was a scary place.  The dominoes were lining up for widespread bankruptcies, starting in the energy complex and spreading to financials, sovereigns, etc.

If you recall, back in early February we said in our daily notes, “OPEC is not just in a price war with U.S. shale producers, but it’s playing a game of chicken with the global economy.  We’ve had plenty of events over the past seven years that have shaken confidence and have given markets a shakeup – European sovereign debt, Greece potentially leaving the euro, among them.  In Europe, we clearly saw the solution.  It was intervention.  Oil prices are creating every bit as big a threat as Europe was, we expect intervention to be the solution this time as well.

Indeed, central banks stepped in and removed the risk with a slew of intervention tactics ranging from more QE from Europe, currency intervention from Japan, relaxing reserve requirements in China, to the Fed removing the prospects of two (of what was projected to be four) rate hikes this year.

That was the dead bottom in oil (which started with BOJ action in USDJPY). And it kicked broader commodities into gear, many of which had already bottomed weeks prior.  No surprise, commodity stocks have been among the best performing stocks in the world for the past four months.

Now we have oil closing above $50 today, for the first time since July of last year.  And remember, two of the best oil traders of all time have been calling for oil to trade between $80 and $100 by next year (both Pierre Andurand and Andy Hall).

We looked at this chart in our April 12th piece and said: “technically, oil looks like a technical breakout is here.  In the above chart, you can see oil breaking above the high of March 22 (which was $41.90). In fact, we get a close above that level — technically bullish. And we also now have a technically bullish pattern (an impulsive C–wave of an Elliott Wave structure) that projects a move to $51.50, which happens to be right about where this big trendline comes in.”

Source: Reuters, Billionaire’s Portfolio

Here’s that same chart today…

Source: Reuters, Billionaire’s Portfolio

You can see we’ve not only hit this trendline and gotten very close to that projection from April, but (not as easy to see in this chart) we have a clear break of this downtrend now.  That line now comes in at $49.39.  Oil last traded $50.49.

Next is a look at broader commodities.  But first, we want to revisit the clues we were getting from commodities back in early March.  Here’s what we said in our March 3rd note: “There are other very compelling signs that the global economy is not only backing away from the edge but maybe turning the corner.

It’s all being led by metals prices. Copper is often an early indicator of economic cycles. People love to say copper has ‘has a Ph.D. in economics’ because it tends to top early at economic peaks and bottom early at economic troughs. Copper bottomed on January 15 and is up 13% since.

The value of iron ore, another key industrial metal, has been destroyed in the past five years – down 80%. That metal bottomed quietly in December and is up 32% since.”

Here’s the chart of broader commodities now…

Source: Reuters, Billionaire’s Portfolio

The Goldman Sachs commodity index is now up 44% from the bottom, though it’s heavily weighted energy.  The more diversified CRB index is up 24%.  Both would fall into the bull market category for those that like to define bull and bear markets.  But bottom line, when you look at the above chart you can see how deeply depressed commodities have been.  The trend is broken, and the model signals for big trend followers are flashing all over the place to be long.  And as we said yesterday, in early stages of cyclical bull trends in stocks, energy does the best by far. With that, although the energy sector weathered a life threatening storm, the upside remains very big for the survivors.

This Stock Could Triple This Month

In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.

This fund returned an incredible 52% last year, while the S&P 500 was flat.  And since 1999, they’ve done 40% a year.  And they’ve done it without one losing year.  For perspective, that takes every $100,000 to $30 million.

We want you on board.  To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.

We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success.  And you come along for the ride.

 

June 6, 2016, 4:00pm EST

We talked last week about the employment data.  It was broadly thought to be disappointing. Even though the headline unemployment rate dropped to 4.7%, the job creation number was weak.

So stocks fell sharply following Friday’s numbers.  The dollar fell. And Treasuries rose (yields lower).  All of this immediately priced in a gloomier outlook and a Fed that would hold off on a June rate hike.

But remember we discussed how market professionals are trained to hyper-focus on the jobs numbers, even though the jobs numbers are far less important than they are in “normal” times.  And with that, we said “it’s probably a good idea to use those moves as opportunities to enter at better levels (i.e. buy stocks, buy the dollar, sell Treasuries).”

That’s played out fairly well today, at least for stocks (the dollar is mixed, yields are quiet).  Stocks have recovered and surpassed the pre-employment data levels of Friday morning.  Small cap stocks are now trading to the highest levels of the year.

Remember, in the past two weeks we’ve talked about the similarities in stocks to 2010.  Through the first half of this year, we’ve had the macro clouds of China and an oil price bust that shook market and economic confidence.  Back in 2010, it was Greece and a massive oil spill in the Gulf of Mexico.  When the macro clouds lifted in 2010, the Russell 2000 went on a tear from down 7% to finish up 27% for the year.  This time around, the Russell has already bounced back from down 17% to up 4%.  And technically, it looks like stocks could just be breaking out.

Below is a look at small caps (the Russell 2000).

russ

Source: Reuters, Forbes Billionaire’s Portfolio

You can see the long term trend dating back to 2009 is still intact following the correction earlier this year.  And the trendline that describes the correction has now broken.

As for broader stocks (the S&P 500), the chart looks intriguing too.

spx

Source: Reuters, Forbes Billionaire’s Portfolio

Similarly, the trend off of the bottom in the S&P 500 is clear, and a breakout toward new highs looks like it is upon us. New highs in stocks would get a LOT of money off of the sidelines.

What about valuation?  See our recent piece on What Warren Buffett Thinks About Stock Valuations.

With all of the above said, Yellen had a chance to respond to the Friday jobs number today, through a prepared speech for the World Affairs Council of Philadelphia.  She downplayed the Friday numbers, highlighted the passing of global risks from earlier in the year, but she did note the Brexit risk (the coming UK vote on leaving/staying in the EU).

With that, perhaps they will use the market sentiment adjustment from the jobs data to their advantage, to justify passing on a June hike in favor of July.

That would give them a chance to see the outcome of the UK vote, and perhaps give them a chance to hike into positive momentum created by another round of stimulus from the BOJ (a possibility next week).  Waiting another month is a low risk move.  But again, we think the UK leaving the EU can’t happen/won’t happen – maybe down the road, but not now. Despite the popular polling reports, the experts are assigning a low probability.  Plus, there has already been clear political messaging attempting to influence the outcome, and we expect that will increase dramatically as the vote approaches (June 23).

Don’t Miss Out On This Stock

In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.

This fund returned an incredible 52% last year, while the S&P 500 was flat.  And since 1999, they’ve done 40% a year.  And they’ve done it without one losing year.  For perspective, that takes every $100,000 to $30 million.

We want you on board.  To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.

We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success.  And you come along for the ride.

We look forward to welcoming you aboard!

6/3/16

As we discussed earlier in the week, market participants are trained to be fixated on the monthly jobs data.  That was evident in today’s market reaction, as it always is.  The payroll number, the number professional investors have been trained to trade, was weak this morning.  The unemployment number, on the other hand, was at best levels since November 2007.

In normal times, the jobs data is probably the single most informative data point, where you can see signals of heating up or cooling down in the economy.  But of course, we haven’t been in a “normal” economy in a long time.

Still, in recent years, the U.S. jobs data has remained, bar none, the biggest single data point in the world. Why?  Because the Fed explicitly told us that they wanted to see the unemployment rate at 6% before they would consider the first steps of removing emergency policies.  And because the Fed was the Captain of the globally concerted policies that saved the global economy from an apocalypse, the Fed was also broadly depended upon to lead the world OUT of emergency policies.

But even after seeing dramatic improvements in the key jobs data that the Fed was targeting, meeting the target and then exceeded the target, they have still been very slow on the path of “normalization.”

Now they’ve told us the jobs data are in a good place, relative to their current policy position (i.e. rates should be, not normal, but quite a bit higher by now).  But the Fed has run into other obstacles they didn’t foresee when they began their “jobs targeting” campaign: 1) they underestimated the deflationary impact of the global debt crisis, 2) somewhat related, they underestimated the lack of leverage on wages employees would have in dramatically improved job market, and 2) they underestimated the weakness in the global economy and the vulnerability of the U.S. economy to shocks outside of the U.S.

Broadly speaking, the Fed’s rate decision and, consequently, their message to the world about their confidence in the economy going forward, hasn’t been about jobs for a while.  With that, the hyper-focus that market participants continue to give to the data every month seems to be wildly misplaced (for now).

So when we see a weak payroll number, as we did this morning, and the knee-jerk selling from the professional trading community sends stocks lower, Treasuries higher and the dollar lower, it’s probably a good idea to use those moves as opportunities to enter at better levels (i.e. buy stocks, buy the dollar, sell Treasuries).

If we step back a bit and think about the bigger picture, we have a Fed that is considering rate hikes because the economy is doing better (emerging from crisis and robust enough to withstand the removal of emergency policies).
And, as we said, the Fed is leading the way, globally.  That is a very positive message for stocks and a very negative message for Treasuries (i.e. rates are going higher, prices will be going lower).  As for the dollar, we have a Fed going one way, and Europe and Japan going a distinctly opposite direction (full-throttle QE).  That’s squarely positive for the dollar as capital flows away from easing policies (Europe and Japan) and toward yield (U.S. assets).

 

June 2, 2016, 3:25pm EST

In the middle of June we have perhaps the two biggest events of the year. On June 15 the Fed will decide on rates. And hours later, that Wednesday night, the Bank of Japan will follow with its decision on policy.

This is really the perfect scenario for the Fed. The biggest impediment in its hiking cycle/”rate normalization process” is instability in global financial markets. Market reactions can lead to damage to consumer sentiment, capital flight and tightening in credit—all the things that can spawn the threat of a global economic shock, which can derail global recovery. Clearly, they are very sensitive to that. On that note, the Brexit risk, while a hot topic in the news, is priced by experts as a low probability.

So, the Fed has been setting expectations that a second hike in its tightening cycle could be coming this month. But the market isn’t listening. The market is pricing in just a 23% chance of a hike in June. But as we’ve said, markets can get it wrong, sometimes very wrong. We think they have it wrong this time. We think there is a much better chance. Why? Because they know the BOJ is right behind them. If they do hike, any knee jerk hit to financial markets can be quelled by more easing from the BOJ.

Remember, as we’ve discussed quite a bit in our daily notes, central banks remain in control. The recovery was paid for by a highly concerted effort by the world’s top economic powers and central banks. And despite the perceived hostility over currency manipulation, the powers of the world understand that the U.S. is leading the way out of recovery, and that Europe and Japan are critical pieces in the global recovery. The ECB and BOJ have been passed the QE torch from the Fed to both fuel recovery and promote global economic stability. And playing a major role in that effort is a weaker euro and a weaker yen.

The Bank of Japan is operating with one target in mind, create inflation. Now three years into their massive program, they haven’t posted a positive monthly inflation number since December. Inflation is still dead, just as it has been for the past two decades. So, not only do they have the appetite and global support to do more, but the data more than justifies more action.

Don’t Miss Out On This Stock

In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of next month.

This fund returned an incredible 52% last year, while the S&P 500 was flat.  And since 1999, they’ve done 40% a year.  And they’ve done it without one losing year.  For perspective, that takes every $100,000 to $30 million.

We want you on board.  To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.

We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success.  And you come along for the ride.

We look forward to welcoming you aboard!

 

May 25, 2016, 3:30pm EST

We charted very closely the risks of the oil price bust.  We thought central banks would step in and remove the risk.  They did.  From there, we thought stocks would track the path of oil.  As long as oil continued higher, stocks would follow and slowly global sentiment would mend.  It’s happened.

When oil sustained above $40, we turned focus to the extremely negative sentiment that was weighing on markets and economies.  But given the extreme views on the world, we thought things were set up for positive surprises.  We said this surprise element creates opportunities for asymmetric outcomes (bad is priced-in, good … not at all). That sets up for the potential of “good times” ahead for both markets and broader sentiment.

Fast forward:  Earnings expectations were ratcheted down and broadly surprised on the positive side.  Global economic data has been ratcheted down and is positively surprising. It’s happening in Germany, which is a very important indicator for a bottoming of the euro zone economy.   If the threat of further spiral in Europe has lifted, that’s a huge catalyst for global sentiment.  When global sentiment has officially moved out of the doom and gloom camp and back to optimism the horse will have already had plenty of steps out of the barn.  And we think we are seeing it reflected in stocks, especially small caps.

With this backdrop, we think everyone could benefit by having a healthy dose of “fear of missing out.”  Stock returns tend to be lumpy over the long run.  When we you wait to buy strength, you miss out on A LOT of the punch that contributes to the long run return for stocks.

Consider what we said on February 11th (stocks bottomed that day and are up 16% since): “We often hear interviews of money managers during periods like this, and the question is asked “are you getting defensive?”

That’s the exact opposite of what they should be asking. When stocks are up 15–20%, and acknowledging that the long–run average return for stocks is 8%, that’s the time to play Defense. When stocks are down 15–20%, that’s the time to play Offense.

The reality is most investors should see declines in the U.S. stock market as an exciting opportunity. The best investors in the world do. The same can be said for average investors.

Here’s why: Most average investors in stocks are NOT leveraged. And with that, they should have no concern about 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?”

As Warren Buffett says, bad news is an investor’s best friend.  And as his billionaire counterpart says, and head of the biggest hedge fund in the world, ‘stocks go up over time.’  With these two basic, plain-spoken, tenets you should buy dips and look for value.

Broader stocks have just gone positive for the year.  Small caps are still down small.  Remember, when the macro fog cleared in 2010, small caps went on a tear, from down 6% through the first seven months of the year, to finish UP 27%. Don’t miss out!

Don’t Miss Out On This Stock

In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.

This fund returned an incredible 52% last year, while the S&P 500 was flat.  And since 1999, they’ve done 40% a year.  And they’ve done it without one losing year.  For perspective, that takes every $100,000 to $30 million.

We want you on board.  To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.

We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success.  And you come along for the ride.

We look forward to welcoming you aboard!

As we head into Memorial Day weekend and stocks (S&P 500) have crossed back over into positive territory again for the year, we want to step back and acknowledge the relative calm in global markets and economies, compared to where we stood just three months ago, and talk about how different the second half is setting up to be.

Remember, just three months ago the S&P 500 was down 11.4%. Small cap stocks were down 17%. When stocks go lower, people predict crashes.  They did.  Oil was trading $26 and some bold people were predicting much lower – and lower for a very long time.

Sure, the world was a scary place when oil was $26.  But we had a binary outcome on our hands.  If oil continued to go lower, and for much longer, the energy industry was done, and the dominoes were lining up. We faced another wave of global economic and financial crisis that would have made the “great recession” look modest.

But if you stepped back and weighed the probability of the outcomes, the evidence was clearly supporting a recovery, not another date with global disaster.

Just days prior to February 11, when oil and global stocks bottomed, we said “a rigged oil market has the ingredients to undo all that the central banks have done for the past nine years to get us to this point. With that, we expect that, as intervention has stemmed the threat of everything that could have derailed recovery up to this point, intervention will be what stems the threat of the falling oil and commodity prices threat.

The central banks manufactured a recovery from the edge of disaster in 2009.  They went “all-in.”  It would be illogical to think they would sit back and watch it all undone by an oil price bust, one that was orchestrated by OPEC in an effort to crush the competitive shale industry.

We already knew how far the world’s biggest central banks would go to preserve stability (perhaps civilization).  They would do pretty much anything — “whatever it takes” in their own words.

So what marked the bottom for oil?  Not surprisingly, it was intervention.
If we fast forward to today, with the trend of positive surprises in European data leading the way, it’s fair to say the state of global markets is getting closer to good.

What does that mean for stocks?

If we look back at 2010 we can see a lot of similarities.  Stocks were hammered in the first half of 2010 by the potential default of Greece – and for energy stocks, the oil spill in the Gulf.  The macro clouds were removed, and in the second half of 2010, the S&P 500 rallied from down 7% to up 15% by year end.

The Russell 2000 was down 6% for the year through July of 2010.  Over the next five months it rallied 34 percentage points to finish UP 27% on the year.

What about energy?  After being down 12% in the first half of 2010, the XLE (the energy ETF tied to a basket of energy stocks) returned 34% off the bottom and 22% for the year.

Also remember, in Fed tightening cycles, stocks tend to go UP not down. We’re officially five months into a Fed tightening cycle stocks are basically flat.

Don’t Miss Out On This Stock

In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.

This fund returned an incredible 52% last year, while the S&P 500 was flat.  And since 1999, they’ve done 40% a year.  And they’ve done it without one losing year.  For perspective, that takes every $100,000 to $30 million.

We want you on board.  To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.

We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success.  And you come along for the ride.

We look forward to welcoming you aboard!

Yesterday, SandRidge Energy was yet another energy company to file for bankruptcy this year.  Many hear bankruptcy news and think of failed companies.  But in plenty of cases, it’s more about opportunism than it is about desperate last acts.

Before we talk about the SandRidge story, we want to give some bigger picture context.

As we discussed a few months ago, the oil price bust, while many thought would be a positive for the economy, because it puts a few bucks in the pockets of consumers, has actually been a huge net negative, because it has brought the energy industry to its knees.

If oil stayed at $26, the shale industry in the America would be done. All of the associated businesses (transportation, logistics, refining, housing, marketing, etc.) – done.   Hundreds of thousands of jobs were lost already, and probably millions would have followed.  Guess who lends money to the energy sector?  Banks. The financial system would once again have been in widespread crisis.

To follow the stock picks of the world’s best billionaire investors, subscribe at Billionaire’s Portfolio.

Oil producing countries like Venezuela and Russia would have defaulted.  When a biggie like Russia goes, it has systemic ramifications.  That event would have likely pulled the leg out from under the teetering European debt crisis chair.  From there, Greece would have gone, and Italy and Spain would have probably defaulted.  The European Monetary Union would have then finally succumbed to the unmanageable weight of the crisis.

To sum up, cheap oil would have been far worse than the sub-prime crisis.  And this time, central banks and governments would have had no ammunition to fight it.

But, central banks stepped in to remove the “cheap oil” risk.  The Bank of Japan intervened in the currency markets, and oil bottomed that day.  China followed by ramping up bank lending.  And Chinese institutions have been big buyers of commodities since.  Then the ECB rolled out bigger and bolder QE.  And the Fed removed two projected rate hikes from the table.  All of this coordinated to directly or indirectly put a floor under oil.  Today, oil is up 85% from levels of just three months ago.

So this begs the question:  Why is an energy company like SandRidge, a company that has been surviving through the decline in oil prices, cutting production/cutting jobs, now filing bankruptcy?  This is AFTER oil has bounced 85% and oil supply has just swung from a surplus to a deficit.  And some of the best oil traders in the world are projecting oil prices back around $80 by the end of the year.  Why would they throw in the towel now and not in February?

Back in February, SandRidge management missed a debt payment, opting to exercise a 30-day grace period.  It was at that stage that the ultimate negotiation should have come with debt holders.  Option 1): Restructure debt and perhaps dilute current shareholders by offering debt holders common shares.  That gives the company time to ride out the storm of the oil price bust.  And it gives all stakeholders a chance to see much better days.  Option 2): Close the doors and liquidate assets, and creditors get cents on the dollar.

Instead, SandRidge management and directors negotiated more runway so that they could get to Option 3): the homerun lottery ticket.

In this option, oil prices recover and the company can begin producing profitably again, and brighter days are ahead.  But if they rush to file Chapter 11 bankruptcy, while the business fundamentals remain depressed, they can win big.  By swapping new stock for debt, the company gets freed of the noose of debt, and the debt holders exchange a piece of paper that was once worth pennies on the dollar, for common stock in a super-charged debt-free company.

That sounds like a win-win.  The company continues to operate as normal. Management and the board keep their jobs (and likely their golden parachutes).  And former debt holders can make a lot of money.

Who pays the price?  Shareholders (the owners).  Old shareholders of SandRidge stock have no say in the collusion between SandRidge leadership and creditors.  So the owners of the company have their interests effectively stolen by a backroom deal and given to debt holders.  And within the bankruptcy laws of Chapter 11, shareholders have no leverage.  But who are some of the biggest and most effected shareholders?  Employees.

SandRidge has over 1,000 employees.  Let’s assume that, like many publicly traded companies, employees of SandRidge have been incentivized to buy company stock as part of their 401k plan (common practice).  They have already seen their stock go from $80 to pennies.  But now, as an insult to injury, they will continue working to enrich new shareholders while their board of directors have chosen to wipe out their interests.

And sadly, the common stock of companies like SandRidge (which was one of the most shorted stocks on the NYSE) are often shorted heavily by those that own the debt, in efforts to drive the company into Chapter 11, so that they can orchestrate precisely what’s happening today.   The stock price gets cheap, then delisted from a major exchange, then credit ratings get downgraded, then banks cut credit lines, and voila, the company find itself in a liquidity crunch and turns to restructurings.

A huge factor in this “homerun option” for the board and creditors is for the company to continue operating as normal.  If employees in this Chapter 11 situation would strike, maybe shareholders could have a seat at the negotiating table when these “pre-arranged” reorganization deals are cut. Still, that’s the leverage they hold to derail such a deal.

Consider this: In the depths of the real estate bust, billionaire activist investor Bill Ackman stepped in and bought beaten down shares of General Growth Properties, a company in bankruptcy because it couldn’t access credit. The company had strong assets and strong cash flow (as does SandRidge), but was dependent on a functioning credit market, which was broken at the time. As the largest shareholder, he battled in the board room for the shareholder.  He helped management access liquidity and he convinced all stake holders that keeping equity holders intact would result in the biggest outcome for everyone.  He was right, and when the credit markets recovered, GGP shares went from 20 cents to over $20 a share.

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We’ve talked a lot about oil, the rebound of which has probably led to the trade of the year.  If you recall back on February 8th, we said policymakers finally got the wake up call on the systemic threat of the oil price bust when Chesapeake Energy, the second largest oil and gas producer, was rumored to be pursuing bankruptcy.

This is what we said:

“The early signal for the 2007-2008 financial crisis was the bankruptcy of New Century Financial, the second largest subprime mortgage originator.  Just a few months prior the company was valued at around $2 billion. 

On an eerily similar note, a news report hit this morning that Chesapeake Energy, the second largest producer of natural gas and the 12th largest producer of oil and natural gas liquids in the U.S., had hired counsel to advise the company on restructuring its debt (i.e. bankruptcy).  The company denied that they had any plans to pursue bankruptcy and said they continue to aggressively seek to maximize the value for all shareholders.  However, the market is now pricing bankruptcy risk over the next five years at 50% (the CDS market).

Still, while the systemic threat looks similar, the environment is very different than it was in 2008.  Central banks are already all-in.  We know, and they know, where they stand (all-in and willing to do whatever it takes).  With QE well underway in Japan and Europe, they have the tools in place to put a floor under oil prices. 

In recent weeks, both the heads of the BOJ and the ECB have said, unprompted, that there is “no limit” to what they can buy as part of their asset purchase program.  Let’s hope they find buying up dirt-cheap oil and commodities, to neutralize OPEC, an easier solution than trying to respond to a “part two” of the global financial crisis.” 

Chesapeake bounced aggressively, nearly 50% in 10 business days.  

And on February 22nd, we said, “persistently cheap oil (at these prices) has become the new “too big to fail.” It’s hard to imagine central banks will sit back and watch an OPEC rigged price war put the global economy back into an ugly downward spiral.  And time is the worst enemy to those vulnerable first dominos (the energy industry and weak oil producing countries).”

As we’ve discussed, central banks did indeed respond.  The BOJ intervened in the currency markets on February 11, and that (not so) coincidently put the bottom in oil and global stocks.  China followed on February 29, with a cut on bank reserve requirements, then ECB cut rates and ramped up their QE and the Fed joined the effort by taking two projected rate cuts off of the table (we would argue maybe the most aggressive response in the concerted central bank effort).

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From the bottom on February 8th, Chesapeake shares have gone up five-fold, from $1.50 to over $7.  Oil bottomed February 11 and is up 77%.  This is the trade of the year that everyone should have loved.  If you’re wrong, the world gets very ugly and you and everyone have much bigger things to worry about that a bet on oil and/or Chesapeake.  If you’re right, and central banks step in to divert another big disaster (a disaster that could kill the patient) you make many multiples of your risk.

We think it was the trade of the year.  The trade of the decade, we think is buying Japanese stocks.

Overnight the BOJ made no changes to policy.  And the dollar-denominated Nikkei fell over 1,200 points (more than 7%).

As we said yesterday, two explicit tools in the Bank of Japan’s tool box are: 1) a weaker yen, and 2) higher stocks.  I say “explicit” because they routinely have said in their minutes that they expect both to contribute heavily to their efforts. So now Japanese stocks and the yen have returned near the levels we saw before the Bank of Japan surprised the world with a second dose of QE back in October of 2014.  So their efforts have been undone. And they’ve barely moved the needle on their objective of 2% inflation during the period.  In fact, the head of the BOJ, Kuroda, has recently said they are still only “halfway there” on reaching their goals.

So they have a lot of work left.  And if we take them at their word, a weak yen and higher stocks will play a big role in that work.  That makes today’s knee-jerk retreat in yen-hedged Japanese stocks a gift to buy.

U.S. stocks have well surpassed pre-crisis, record highs.  German stocks have well surpassed pre-crisis, record highs.  Japanese stocks have a long way to go.  In fact, they are less than “halfway there.”

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Heading into today’s inflation data, the prospects of German 10-year government interest rates going negative had added to the heightened risk aversion in global markets.  And we’ve been talking this week about how markets are set up for a positive surprise on the inflation front, which could further support the mending of global confidence.

On cue, the euro zone inflation data this morning (the most important data point on inflation in the world right now) came in better than expected.  We know Europe, like Japan, is throwing the kitchen sink of extraordinary monetary policies at the economy in an effort to reverse economic stagnation and another steep fall into deflation.  And we know that the path forward in Europe, at this stage, will directly affect that path forward in the U.S. and global economy.  So, as we said in one of our notes last week, the world needs to see “green shoots” in Europe.

With the better euro zone inflation data today, we may be seeing the early signs of a bottom in this cycle of global pessimism and uncertainty. German yields are now trading double the levels of Monday.  And with that, U.S. yields have broken the downtrend of the month, as you can see in the chart below.

10 yr yield

Source: Billionaire’s Portfolio, Reuters

With that in mind, today we want to talk about how we can increase certainty in an uncertain world.  Aside from the all-important macro influences, even when you get the macro right, when your investing in stocks, you also have to get a lot of other things right, to avoid the landmines and extract something more than what the broad tide of the stock market gives you (which is about 8% annualized over the long term, and it comes with big drawdowns and a very bumpy road).

In our Billionaire’s Portfolio, we like to put the odds on our side as much as possible. We do so by following big, influential investors into stocks where they’ve already taken a huge stake in a company, and are wielding their influence and power to maximize the probability that they will exit with a nice profit.

This is the perfect time to join us in our Billionaire’s Portfolio.  We’ve discussed our simple analysis on why broader stocks can and should go much higher from here. You can revisit some of that analysis here.  In our current portfolio, we have stocks that are up. We have stocks that are down.  We have stocks that are relatively flat.  But they all have the potential to do multiples of what the broad market does.  And for depressed billionaire-owned stocks, a broad market rally and shift in economic sentiment should make these stocks perform like leveraged call options – importantly, without the time decay.   Join us here to get your portfolio in line with ours.