Gold has been a core trade for a lot of people throughout the crisis period. When Lehman failed in 2008, it shook the world, global credit froze, banks were on the verge of collapse, the global economy was on the brink of implosion – people ran into gold. Gold was a fear-of-the-unknown-outcome trade.
Then the global central banks responded with massive backstops, guarantees, and unprecedented QE programs. The world stabilized, but people ran faster into gold. Gold became a hyperinflation-fear trade.
In the chart above, you can see gold went on a tear from sub-$700 bucks to over $1,900 following the onset of global QE (led by the Fed).
Gold ran up as high as 180%. That was pricing in 41% annualized inflation at one point (as a dollar for dollar hedge). Of course, inflation didn’t comply. Still eight years after the Fed’s first round of QE (and massive global responses), we have just 13% cumulative inflation over the period.
So the gold bugs overshot in a big way.
Why? The next chart tells the story…
This chart above is the velocity of money. This is the rate at which money circulates through the economy. And you can see to the far right of the chart, it hasn’t been fast. In fact, it’s at historic lows. Banks used cheap/free money from the Fed to recapitalize, not to lend. Borrows had no appetite to borrow, because they were scarred by unemployment and overindebtedness. Bottom line: we get inflation when people are confident about their financial future, jobs, earning potential … and competing for things, buying today, thinking prices might be higher, or the widget might be gone tomorrow. It’s been the opposite for the past eight years.
After three rounds of Fed QE, and now mass scale QE from the BOJ and the ECB, the world is still battling DE-flationary pressures. If gold surged from sub-$700 to $1,900 on Fed/QE-driven hyperinflation fears, and QE has produced little to no inflation, it’s fair to think we can return to pre-QE levels. That’s sub-$700.
We head into the weekend with stocks down 3% for the month. This follows a bad January. In fact, the stock market is working on a fifth consecutive negative month. The likelihood, however, of it finishing down for February is very low. It’s only happened 18 times since 1928. So the S&P 500 has five consecutive losing months just 1.7% of the time, historically.
It’s unimaginable that governments and central banks that have coordinated and committed trillions of dollars in guarantees, backstops, commitments and outright bailouts will stand by and let weak oil prices (rigged by OPEC) undo everything they’ve done over the past seven years to create stability and manufacture a global economic recovery.
Oil represents a systemic threat to the global economy. Just as housing created a cascade of trouble, through the global financial system, then through countries, the oil price crash can do the same.
When you see forecasts of $20 oil or lower, and some of it is coming from Wall Street, these people should also follow by telling you to buy guns and build a bunker, because that’s what you would need if oil went there and stayed there.
Not to mention, if they believe in that forecast, they should be formulating a plan for what they will do to make a living going forward, because their employers will likely go bust in that scenario.
The persistence of lower oil, especially less than or equal to $20 oil, would financially ruin the U.S. energy sector. Oil producing countries would be next, starting with Russia (and ultimately reaching the big OPEC nations). A default in Russia would create tremors in countries that hold Russia sovereign debt and rely on trade with Russia. Remember the fallout from the Asian Crisis? A default in Russia was the catalyst. Oil driven sovereign defaults would create a massive flight of global capital to safety and global credit/liquidity would dry up, again. All of this would put the world’s banks back on the brink of failure, just as we experienced in 2008. The only problem is, this time around, the global economy cannot absorb another 2008. Governments and central banks have fired their bullets and have nothing left to fend off another near global economic apocalypse.
With that, we have to believe that this crash in oil prices will not persist, especially when it’s being rigged by OPEC. Intervention now (or soon) is easy (relatively speaking) and returns the world to the recovery path. Intervention too late will require more resources than are available.
What’s the solution? An OPEC cut in production has a way of swinging oil in the other direction dramatically. Back in 1986, just a hint of an OPEC cut swung oil by 50% in just 24 hours. This assumes that the pressure builds on OPEC and they realize that the game of chicken that they are playing with U.S. producers has put themselves, also, precariously close to an endpoint.
Alternatively, we made the case last week that either China, the Bank of Japan or the European Central Bank could step in and outright buy commodities as a policy response to their ailing economies. Both the ECB and the BOJ in the past two weeks have said that there are “no limits” to what they can buy as part of their respective QE programs. That would immediately put a floor under crude, and likely global stocks, commodities and put in a top in sovereign bonds. Remember, when China stepped in, bought up and hoarded dirt cheap commodities in 2009, oil went from $32 to above $100 again.
So what’s the latest on oil?
Chart
This morning, the threat intensified. Oil dropped 5%, trading below the very key level of $30 per barrel. It was driven by an earnings report from the huge oil and gas company, BP. It reported a $6.5 billion loss. The company followed with an announcement of 7,000 job cuts by the end of 2017. Shares of BP stock are now trading back to 2010 levels, when the company was facing the prospects of bankruptcy after the fall–out from its gulf oil spill. This is one of the largest oil and gas companies in the world trading at levels last seen when people were speculating on its demise.
With the move in oil this morning, global stocks took another hit. Commodities were hit and sovereign debt yields were hit (with U.S. 10–year yields falling below 1.9%).
While there is a lot of talk about China and concerns there, clearly oil is what is dictating markets right now.
Take a look at this chart of oil vs. the S&P 500…
You can see the significant correlation historically in the price of oil and stocks. And you can see where oil and stocks came unhinged back in July 2014. The dramatic disconnect started in November 2014 (Thanksgiving Day) when an OPEC meeting concluded. The poorer members of OPEC called for production cuts. Saudi Arabia blocked the requests. That set off the plunge in oil prices.
You can see clearly in this chart where the price of oil is projecting the S&P. And stocks at those levels suggest the scenario we described above (global apocalypse round 2).
Again, a capitulation from OPEC is probably less likely. More likely, a central bank steps in to become an outright buyer of commodities (especially cheap oil). For those that have been shorting oil (and remain heavily short), either scenario would put them out of business quickly.
At this stage, 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; it’s reasonable to expect intervention will be the solution this time as well.
The Bank of Japan stepped in overnight and put a floor under stocks. Only 6 of 42 economists at Bloomberg thought they might do something.
We made the case over the past couple of days that they needed to. The opportunity was ripe, and we thought they would take advantage. They did.
Of course, that’s all the media is talking about today. The word “surprise” is in the headline of just about every major financial news publication on the planet with respect to this BOJ move (WSJ, Reuters, BBC, NYTimes … you name it).
Remember, we said earlier this week, the Fed was just a sideshow and the main event was in Japan. If you understand the big picture: 1) that central banks are still in control, 2) that the baton has been passed from the Fed to the BOJ and the ECB, and 3) that they (central banks) need stocks higher, then this move comes as no surprise.
Today we want talk a bit about what these central banks have done, what they are doing and why it works. We often hear the media, analysts, politicians, Fed-haters saying that QE hasn’t worked.
Okay, so QE hasn’t directly produced inflation and solved the world’s problems as the Fed might have expected when they launched it in late 2008. But it has produced a very important direct benefit and indirect benefit. The direct benefit: The Fed has been successful at driving mortgage rates lower, which has ultimately translated to rising house prices (along with a slew of other government subsidized programs). That has been good for the economy.
The indirect benefit: As Bernanke (the former Fed Chair) said explicitly, “QE tends to make stocks go up.” Stocks have gone up – a lot. That has been good for the economy.
But we need a lot more – they need a lot more. Here’s a little background on why…
The Fed has told us all along they want employment dramatically better, and inflation higher. They’ve gotten better employment. They haven’t gotten much inflation. Why? In normal economic downturns, making money easier to borrow tends to increase spending, which tends to increase demand and inflation. In a world that was nearly destroyed by overindebtedness, people (businesses, governments) are focused on reducing debt, not taking on more debt (regardless of how “easy” and cheap you make the money to access).
With that, their best hope to achieve those two targets (employment and inflation) has been through higher stocks and higher housing prices. Strength in these key assets has a way of improving confidence and improving paper wealth. Increasing wealth makes people more comfortable to spend. Better spending leads to hiring. A better job market can lead to inflationary pressures. That’s been the game plan for the Fed. And that’s the gameplan for Europe and Japan.
So how do they promote higher stock prices? They do it by promising investors that they will not let another shock event destabilize the world and global financial markets. They’ve promised that they will “stand ready to act” (the exact words uttered by the Fed, the ECB and the BOJ). So, they spent the better part of the past eight years promising to do “whatever it takes” (again exact words of the ECB and BOJ).
The biggest fear investors have is another “Lehman-like event” that can crash stocks, the job market and the economy. The thought of it makes people want to hold on tight to their money. But when the central banks promise to do anything and everything to prevent another shock, it creates stability and confidence to invest, to hire, to take some risk again. That’s good for stock prices.
Now, despite what we’ve just said, and despite the aggressive actions central banks have taken in past years (including the BOJ’s actions last night to push interest rates below zero) and their success in manufacturing confidence and recovery, when stocks fall, people are still quick to talk about recession and gloom and doom. On every dip in stocks since the culmination of the global financial crisis in 2007-2008, the comparisons have been made to that period.
First, they’re ignoring what the central banks have been telling us. “We’re here, ready to act.” Second, and again, things are very, very different than they were in 2007-2008. In that period, global credit was completely frozen. Banks were failing, and the entire financial system was on the precipice of failing. And at that point, it was unclear what could be done and what actions would be taken to try to avert disaster. That uncertainty, the thought of losing 100 years of economic and social progress across the globe, can easily send people scurrying for cash, pulling money from everywhere and protecting what they have. And that uncertainty can, understandably, result in stock prices getting cut in half – a stock market crash.
Now, what’s happening today? The financial system is healthy. Credit is flowing. Unemployment is very close to long-term historical norms. The U.S. economy is growing. The global economy is growing. The best predictor of recession historically is the yield curve. It shows virtually no chance of recession on the horizon. So the economic environment is very different. Still, the biggest difference between that period and today is this: We didn’t have any idea what could be done to avert the disaster OR how far central governments and central banks would go (and could go) to fight it. Now we know. It’s all-in, all or nothing. There is no ambiguity. With that, the central banks will not fail and cannot fail. And remember, they are working in coordination. No one wins if the world falls apart.
With all of this in mind, any decline in stocks, driven by fear and misinformation, offers a great buying opportunity, not an opportunity to run.
We’ll talk Monday about the very strong, and rational fundamental case for stocks to go much higher. On that note, today we’re wrapping up one of the worst January’s on record for stocks, which has given us a great opportunity to buy at a nice discount.
The Fed met today—and they made no change to policy. As we all know, their words will be parsed endlessly. But the fact is, the Fed, at this point, is a side show. It’s two other central banks (BOJ and ECB), and likely policy makers in China that will dictate what stocks do, what commodities do and what the global economy does for the next year (or few).
With that, the real event is tomorrow night. The Bank of Japan will decide on their next move. And the BOJ holds many, if not all of the cards for the U.S. stock market and the global economy. Today we’re going to talk about why that’s the case.
As we said yesterday, the consensus view is that the BOJ will do nothing this week. That sets up for a surprise, which Japanese policymakers like and want. It gives their policy actions more potency.
We talked yesterday about the role central banks have played in the long and slow global recovery. To put it simply, central banks have manufactured the global economic recovery. Without the intervention, there would have been a global economic collapse and blood in the streets, still. It was all led by the Fed. They slashed interest rates to zero. They rolled out the unprecedented bond buying program that pinned down mortgage rates (putting a bottom in the housing market), and helped to recapitalize the big banks that were drowning in defaulted debt, withering deposits and an evaporation of loan demand. They opened up currency swap lines (access to U.S. dollars) with global central banks so that those central banks could fend off collapse in their respective banking sectors.
Most importantly, with all of the intervention, and after spending and committing trillions of dollars in guarantees, backstops and bailouts, the Fed clearly communicated to the public, by their actions, that they would not let another shock event destabilize the world economy. Europe was next to step up, to do the same.
When the weak members of the European Monetary Union were spiraling toward default, which would have destroyed the euro and Europe all together, the leading euro zone nations stepped in with a bailout package.
Still, a year later, bigger trouble was brewing, as big countries like Italy and Spain were on the precipice of default. That’s when the European Central Bank (ECB) went “all–in”, effectively guaranteeing the debt of Italy and Spain by saying they would do “whatever it takes” to save the euro (and the euro zone).
Those were the magic words: “whatever it takes.”
That statement meant that the central bank would buy the debt of those countries, if need be, to keep them solvent, for as much and as long as needed…”whatever it takes.” That was the line in the sand. If you bought European stocks that day, you’ve doubled your money will little–to–no pain.
Similarly, Japan read from Draghi’s script a few months ago (late September of 2015) when global stocks were falling sharply and threatening to destabilize the world again. Japan’s Prime Minister Abe was in New York, and in a prepared speech, said they would do “whatever it takes” to return Japan to robust sustainable growth. Once again, the magic words put a bottom in global stocks and led to a sharp rebound.
“Whatever it takes” means, if need be, they print more money, they will support government debt markets, they will outright buy stocks, they will devalue currencies, they will do whatever it takes to promote growth and to prevent a shock that would derail the global economy. Why? Because they know the alternative scenario/the negative scenario is catastrophic.
Not surprisingly, in the past six days, with global stocks in turmoil, Draghi stepped in again. This time, he conjured up some new magic words. He said there are no limits to what the ECB can buy (as part of their QE program). Guess who followed his lead? The head of the BOJ sat in front of a camera the next day and said the exact same thing. This tells me stocks are fair game. We already know that’s the case for the BOJ. They are already outright buying stocks. But it also tells me commodities are fair game. And high yield corporate debt. Anything that is threatening to destabilize global markets and threatening to knock the global economic recovery off path—it’s fair game for the ECB and BOJ to put a floor under (i.e. by buying up assets with freshly printed currency).
What does it all mean? It means the ECB and the BOJ are now at the wheel. They relieved pressure from the Fed, allowing the Fed to begin the path of removing the emergency policies (albeit very slowly) of the past nine years. The Fed only makes this move because they believe the U.S. economy is robust enough to handle it. And, more importantly, they only start this path because they know that two other major central banks in the world will continue to provide fuel for the global economy and defend against shocks through their aggressive policies.
Now, within this monetary policy dominated world, where everyone is all–in, the policy actions have simply kept the global economy alive and breathing, they have done nothing to address the major structural problems the world is enduring: Massive debt and slow–to–no growth.
What’s the solution? There hasn’t been one. Until Japan unveiled their massive stimulus program in 2013. The potential solution: A massive devaluation of the Japanese yen.
Japan, unlike many other major central banks (including the Fed), has all of the right ingredients to achieve its inflation goal via the printing press—it has the biggest debt load in the world (which can be inflated away by yen printing), it has persistent deflation (which can be reversed by printing), and it has decades of economic stagnation (which can be reversed with hyper easy money and improvements in the global economy).
In short, they can do all of the things that other powerful central banks/economies can’t do—and it can result in a huge benefit not just in Japan but for fueling a recovery in the global economy (as capital pours out of Japan). In a world with few antidotes to the structural economic problems, this is a potential solution for everyone. So perhaps the most important ingredient for a successful campaign in Japan°they have the full support/hope/wishes of the major global economic powers (US, Europe, UK).
The Bank of Japan is targeting to run their aggressive QE program at full tilt until they can produce a target of 2% inflation in their economy. Their latest inflation data is closer to zero than 1% (still very far from 2%). So they still have a lot of work to do. They completed two years of their big, bold plan—and two years was the timeline they projected to achieve their goal. Clearly, they haven’t met the inflation goal. And they have since, as we’ve said, committed to do whatever it takes to do it, and for as long as it takes. With that, we expect more expansion to their QE program (possibly this week). And, importantly, a huge part of their success is (and will be) dependent upon higher Japanese stocks, and a weaker yen. They have explicitly said so. It’s part of their game plan.
Japan’s Prime Minister Abe was elected on his aggressive plan to end deflation. That was, and is, his priority. He hand-selected the Bank of Japan governor to carry out his plan.
Here’s the quick and dirty summary: With free–falling oil and depressed commodity prices threatening widespread defaults across the energy sector, which would soon be followed by sovereign debt defaults from oil producing nations (like Russia), don’t be surprised if we see the BOJ (and maybe the ECB) step in and gobble up dirt cheap commodities as a policy initiative. It would put a floor under stocks, commodities, and promote stability and growth.
At Billionaire’s Portfolio we study the buying patterns of the world’s greatest billionaire investors and hedge funds. So when the greatest billionaire investors in the world are scooping up beaten down stakes in energy companies, we pay close attention.
We know two things about the best billionaire investors in the world: 1) they have made billions throughout their careers buying when everyone else is selling, and 2) they have a knack for picking the winners, the stocks and sectors, and marking the bottom when they enter.
Let’s look at the investments the world’s best billionaire investors have been bottom fishing and/or adding to their positions into the sharp declines:
1) Phillips 66 PSX +1.30% (PSX) – Buffett revealed last September he had taken a $4.5 billon position in the energy stock Phillips 66. This is a typical Buffett stock. It sells for just 9 times earnings, a huge discount to the S&P 500’s P/E of 21, and the stock pays nearly 3% in a dividend. Furthermore, the company has a pristine balance sheet, with very little debt – a classic Buffett stock, cheap and safe. Buffett has added another $700 million to this stock just in the past two weeks. He’s the largest shareholder.
2) Williams Companies (WMB) and Pioneer Natural Resources PXD +5.31% (PXD) – Billionaire Stephen Mandel, of the hedge fund Lone Pine Capital, more than doubled his stake in Williams over the past month. Mandel’s Lone Pine now owns 5.6% of Williams or almost 42 million shares. This is up from 17.6 million shares a quarter ago. Mandel and Lone Pine also initiated a brand new position in Pioneer Natural Resources according to their most recent investor letter. Billionaire Seth Klarman’s Baupost Group owns $450 million worth of PXD, his fourth largest position.
3) Cheniere Energy (LNG) – Carl Icahn also initiated a $1.3 billion position in energy stock LNG in August of last year, taking an 8% ownership in the company. Cheniere is on track to become the first U.S. company able to export liquefied natural gas. This makes LNG a classic “wide moat” (no competition) stock. Icahn has already secured two board seats on Cheniere’s board. Icahn’s “board seat effect” has proven to be a huge predictor of success for the legendary activist. According to an essay Icahn penned last year, when he gets a board seat in a company, his stock returns averages 27.5%. Since his initial stake in August, Icahn has added to his stake several times into the end of the year. He now owns 13.8% of LNG — the largest shareholder. And Seth Klarman’s Baupost Group just added another 15 million shares this month to his already enormous stake in LNG. He now owns 15% of the company.
To follow the stock picks of the world’s best billionaire investors, subscribe at Billionaire’s Portfolio.
The legendary billionaire investor, Warren Buffett, lost 12.3% in 2015. That was his worst year since 2008.
Meanwhile, the average hedge fund lost 3%. The average mutual fund lost 2.7%. And stocks broadly finished the year down too (before dividends), for the first time since 2008. Even most of the biggest and best known professional investors had a bad 2015. Still, one of the lesser known, but one of the best in the world, defied the gravity of stocks and posted an 8.3% gain for the year.
It was billionaire Andreas Halvorsen. He runs Viking Global, the ninth largest hedge fund in the world at $31 billion in assets under management.
Halvorsen started his fund in 1999, after training under the legendary billionaire investor Julian Robertson. He’s a former Norwegian Navy Seal and a Stanford MBA.
Halvorsen extracted more than $2.5 billion from the markets in 2015, as a stock investor, in one of the more difficult stock picking environments in a long time. And last year was not an anomaly. Viking has one of the best track records of any hedge fund over the past 16 years. Since inception in 1999, the fund has returned 23% annualized (before fees) vs. a 4% annualized return for the S&P 500.
Halvorsen’s stock picking abilities have produced returns at a factor of 3.5 times better than Buffett’s since he’s been at the helm of Viking. And he’s done it with much smaller drawdowns. In fact, Viking has only had two losing years since 1999. The fund lost 0.9% in 2003 and lost just 0.9% in 2008, a year when almost all stock investors were crushed. Buffett lost 31.5% that year.
The following are Viking’s top positions: Allergan (AGN), Walgreen’s (WBA), Google/Alphabet (GOOGL), Amazon (AMZN) and Broadcom (BRCM).
In addition, in Halvorsen’s most recent investor letter, he said his fund had doubled down (added more) on a very controversial stock in their portfolio. At Billionaire’s Portfolio we curate a portfolio of the best stock picks of the world’s best billionaire investors – our subscribers follow along. To find out what stock Viking Global is adding to after a big decline, subscribe today.
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At Billionaire’s Portfolio we study the buying patterns of the world’s greatest billionaire investors and hedge funds. So when two of greatest billionaire investors in the world, Carl Icahn and Warren Buffett, are adding more to their large, beaten down stakes in energy companies, we pay close attention.
We know two things about Buffett and Icahn: 1) they have made billions throughout their careers buying when everyone else is selling, and 2) they have a knack for picking the winners, the stocks and sectors, and marking the bottom when they enter.
Their respective records are especially remarkable in times when widespread fear and doubt is in the air. For example, Icahn marked the bottom in technology stocks in the fall of 2012 with his 10% position in Netflix. He made $2 billion in profits on the trade, a nearly 1,000% return. Buffett marked the bottom in bank stocks in the fall of 2011 when he initiated a $5 billion position in Bank of America. That investment has almost tripled in price since, producing nearly $10 billion in open profits for Buffett.
Now, it’s typical in market environments like this to hear from experts that warn against picking tops and bottoms. But contrary to the Wall Street adages against market timing, the two best investors of all-time have amassed two of the largest personal fortunes in the world by (as Buffett says) “being greedy while others are fearful.” And they are using the new lows in oil and energy markets to add more to their stakes. Historically, that tends to be a profitable signal. There is a Harvard study that shows when hedge funds “double down” on losing positions, on average those tend to be their biggest winners.
Let’s look at the investments from this billionaire duo where they have been adding to their losers:
1) Phillips 66 (PSX) – Buffett revealed last September he had taken a $4.5 billon position in the energy stock Phillips 66. This is a typical Buffett stock. It sells for just 9 times earnings, a huge discount to the S&P 500’s P/E of 21, and the stock pays nearly 3% in a dividend. Furthermore, the company has a pristine balance sheet, with very little debt – a classic Buffett stock, cheap and safe. Buffett has added another $700 million to this stock just in the past two weeks. He’s the largest shareholder.
2) Chesapeake Energy (CHK) – Carl Icahn owns doubled his stake last spring when he bought 6.6 million shares of CHK for about $14. Icahn now owns 11% of Chesapeake. If the stock returns to the price where Icahn doubled down it would represent an almost 300% return for today’s levels. With the sharp fall in the stock price this past week, I wouldn’t be surprised if we find in the coming days that Icahn added more into the recent slide.
3) Cheniere Energy (LNG) – Carl Icahn also initiated a $1.3 billion position in energy stock LNG in August of last year, taking an 8% ownership in the company. Cheniere is on track to become the first U.S. company able to export liquefied natural gas. This makes LNG a classic “wide moat” (no competition) stock. Icahn has already secured two board seats on Cheniere’s board. Icahn’s “board seat effect” has proven to be a huge predictor of success for the legendary activist. According to an essay Icahn penned last year, when he gets a board seat in a company, his stock returns averages 27.5%. Since his initial stake in August, Icahn has added to his stake several times into the end of the year. He now owns 13.8% of LNG — the largest shareholder.
The best billionaire investors in the world have amassed their fortunes by being in the right place at the right time, and betting big.
Billionaires are billionaires because they think differently than the average person. They tend to see opportunities well before anyone else knows they are opportunities. They tend to go where some of the biggest risks are, because that’s also where the biggest returns can be found. They like to invest in situations only when they have an advantage. And when they have high conviction, they bet big.
Here’s a glimpse at these 8 big opportunities for the New Year:
Surprise Prediction #1: China – China’s slowdown this year, will turn into global economic fuel next year. (The Trade: iShares China Large-Cap ETF, symbol FXI)
China’s economic slowdown and stock market boom and bust has been one of the dominant themes of 2015. Multiple billionaires have taken the opportunity to load up.
Over the past 15-years, stocks have returned just 4.5% annualized. Meanwhile, Chase Coleman of Tiger Global has returned 21% annualized (gross of fees) on his long positions and became a billionaire in the most difficult stock market in our lifetimes. Coleman holds over 20% of his hedge fund in Chinese stocks. Billionaire Stephen Mandel, another top hedge fund manager, also has a huge chunk of his portfolio in Chinese stocks. And another billionaire, an astute macro investor, and one of the best performing investors in 2015, has one of his top positions in China.
Additionally, billionaire David Tepper thinks next year could be a boom for Chinese stocks and the economy, as he thinks the Chinese central bank could ease more aggressively than anyone thinks is possible. That positive fuel for the global economy could be the antidote for a global demand rebound.
Surprise Prediction #2: Stocks – The comfortable ride on the S&P train for the past six years is over. It’s a stock pickers market. (The Trade: iShares S&P 500 Value ETF, symbol IVE)
Billionaires have mixed views on the broad stock market. Bill Ackman and Leon Cooperman think stocks are a good value. Tepper has been uber bullish for much the past five years, but is more neutral now. Legendary billionaire investor Carl Icahn thinks there’s danger in high yield bond markets that could affect stocks.
More broadly speaking, the consensus view among the best investors in the world is that the broad stock market indicies won’t give you the easy returns we’ve had for the better part of 2009 to 2014. There will be more volatility, and it will be a stock pickers market! That’s when billionaire investors and hedge funds thrive. The winners will be the ones that can strategically identify the right stocks to own. A momentum driven market has favored index buying through this global economic recovery period, and now there is an over-due cyclical shift toward value. With billionaire investors and hedge funds primed to take advantage, the time to join our Billionaire’s Portfolio service couldn’t be better.
Surprise Prediction #3: Fed – The Fed could be forced to raise rates far more aggressively than they have planned. (The Trade: ProShares Short 20+ Year Treasury, symbol TBF)
As we said in the above, billionaire David Tepper thinks that China could ease more aggressively than anyone thinks is possible. If that happens, and it does indeed fuel a pop in global demand, the result could be quicker growth in the U.S. and quicker inflation than what is anticipated by the Fed. With that, the Fed could be forced to raise rates faster than expected.
For the past year the chatter among market participants has been about the potential for more a return to QE for the Fed (i.e. QE4). No one is talking about the Fed potentially being behind the curve on inflation, as they were for much of 2011-2013. This sets up the market for a surprise, which can result in sharp moves as people scurry from one side of the ship to the other.
Surprise Prediction #4: Commodities – Commodities are bottoming. (The Trade: DB Commodity Index Tracking Fund, symbol DBC)
Stanley Druckenmiller, billionaire and legendary macro trader, made his career picking tops and bottoms. He is taking a stab at bottom ticking commodities, loading up on gold, which is the top position in his family office fund. His former boss, George Soros has been scooping up coal and energy stocks. And in the most recent quarter, these macro trading legends have welcomed a lot of their fellow billionaires to the bottom fishing pond, as billionaire investors like Carl Icahn have been building stakes in stocks across the energy sector.
Surprise Prediction #5: Oil – Oil bounces to $70. (Energy Select SPDR, symbol XLE)
The self-made billionaire energy trader, Boone Pickens, has recently called for $70 oil in six months. He’s not the only oil bull. Another famous and very wealthy energy trader has called a bottom in oil too, and is looking for much higher prices. His name is Andy Hall.
He was one of the first energy traders to load up on oil futures in 2002, when oil was sub-$30, on the thesis that a boom in demand was coming from China.
In a recent letter to investors, he laid out an extensive fundamental case for higher oil prices and suggested a cut from OPEC could be coming as well. On that front, he noted that merely a hint of an OPEC policy change in August of 1986 spiked oil prices by 50% in just 24-hours.
So we have two of the greatest and wealthiest oil traders in the world that are long oil and have called for a return to much higher prices sooner rather than later.
Surprise Prediction #6: Bonds –Treasury bonds have topped, corporate bonds will fall hard. (ProShares Short High Yield, symbol SJB)
Everyone agrees treasury bonds are a top – though it’s claimed a lot of victims, including Bill Gross. Perhaps the most dangerous area in the bond market though, is high yield bonds. Companies have been borrowing cheap money and buying back stock at an aggressive rate. Billionaires from Icahn to Druckenmiller think the music has stopped, and the high yield bonds will continue to sink, while weak companies that have been in the business of pumping up share prices through share buybacks will fall.
Surprise Prediction #7: Biotech – Biotech and healthcare stocks have a big year. (The Trade: Nasdaq Biotechnology ETF, symbol IBB)
Biotech has been volatile over the past year and a half as it is a stock pickers market in the biotech sector – sparked by a very rare statement from the sitting Fed Chairman about biotech stock valuations, and most recently because of the political backlash associated with soaring drug costs. When average investors run out of the store, when stocks go on sale, the world’s best investors go on a shopping spree. Biotech and Healthcare stocks are where the big additions have been made in the past quarter in billionaire portfolios. No surprise, with share prices beaten down, M&A in the sector is at a record pace.
Surprise Prediction #8: Technology – New technology keeps booming! (The Trade: DJ Internet Index Fund, symbol FDN)
The Silicon Valley VC, Bill Gurley, has been sounding the alarm about a tech bust. But the reining godfather of the Silicon Valley VC, Marc Andreesen, says we’re not in a bubble, we are working our way out of a 15-year bust (i.e. big innovation is in the early stages). If Andreesen is right, and the technological revolution is closer to the bottom of a cycle than the top, expect more game changing companies to emerge.
The common theme of all of these billionaire surprise predictions is that strategic investing is returning, and riding the Fed-induced rising tide in the broad stock market indices is over. Between 2000 and 2010, when the S&P 500 returned zero, the billionaire investors and hedge funds we follow in the Billionaire’s Portfolio had some of their best performance ever, with some returning 30% to 40% a year over that period.
That type of outperformance comes from being in places where they see an opportunity before anyone else thinks it’s an opportunity. While the ETFs offer a way to play it, the big returns will come from being in select stocks that these billionaires are buying to capitalize on a market that is broadly wrong-footed on many of these predictions.
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The goal of the Billionaire’s Portfolio is simple: to provide retail investors with the same plain-vanilla stock investments that the world’s greatest billionaire investors and hedge funds own. And our subscribers can invest alongside these billionaires without the typical $5 million minimum investments and paying big hedge fund management and performance fees. Instead, they get access to our best of the best portfolio of billionaire owned stocks for just $297 a quarter.
According to the Wall Street Journal, hedge fund manager John Armitage of Egerton Capital made $1.5 billion for his investors last year. Armitage was said to be short oil and energy stocks, pressing those position as much of his peers were looking for a bounce.
In a world where some of the world’s best investors will end the year down double digits, Armitage’s net worth has likely grown toward the billion dollar level after collecting fees on his top-tier industry performance.
So who is John Armitage?
Armitage graduated from Cambridge University in 1981 with a degree in modern history. He started his hedge fund Egerton Capital in 1994 and has put up some of the best risk-adjusted returns in the hedge fund industry since. Egerton has returned 15% net of fees with significantly less volatility than the S&P 500 since 1994. That’s why the fund has amassed more than $15 billion in assets under management.
For a glimpse into the best ideas from John Armitage, below are the top 5 holdings of his $15 billion hedge fund, Egerton Capital:
Time Warner Cable (TWC)
Southwest Airlines (LUV)
Gilead Sciences (GILD)
Comcast (CMCSA)
Priceline (PCLN)
At Billionairesportfolio.com we run an actively managed online portfolio of the “best ideas” from the world’s best billionaire investors and hedge funds. With that, we pay close attention anytime one of these great investors is making the case for one of their positions, particularly when feel confident enough to call it one of their best ideas. That’s precisely what we got a glimpse of these past two days at an annual fund raising event, the Robin Hood Investment Conference, hosted by billionaire hedge funder Paul Tudor Jones.
Here is a quick recap of their best ideas:
1) David Tepper- Billionaire David Tepper called the Chinese currency extremely overvalued. This view is in line with one he expressed in the past few weeks, arguing for the potential for China’s central bank to ease monetary policy more aggressively than most have thought. An aggressively easing PBOC and weakening of the yuan would be needed fuel for the sluggish Chinese economy, which would bode well for the outlook for Chinese stocks.
2) T. Boone Pickens – Self-made billionaire Boone Pickens told the Robin Hood audience to expect $70 oil by June of next year, which would be almost a double from oil’s price today. Pickens also said he liked the oil stock Pioneer Natural Resources (PXD). To trade Boone Pickens oil call you can buy the oil ETF (USO) or the oil and gas producers ETF (XOP).
3) Bill Ackman- Ackman reiterated his belief that Valeant (VRX) was extremely undervalued and that it should merge with Allergan (AGN) ,because Ackman does not believe the Allergan-Pfizer merger would be approved. Ackman also reiterated his view that Herbalife (HLF) was still a compelling short, with news from the DOJ to possibly come out today on nutritional supplements.
4) Larry Robbins – Billionaire Larry Robbins founder of the hedge fund Glenview Capital, pitched FMC, HCA and MON. Monsanto is Robbin’s second biggest position in his fund at almost $1.2 billion.
5) Dan Loeb – Billionaire Dan Loeb of Third Point said he thought Amgen (AMGN) and Allergan (AGN) should merge. Amgen is Loeb’s second biggest position in his hedge fund, at almost 13% or $1.4 billion.
6) John Paulson – Billionaire John Paulson’s top associate Samantha Greenberg pitched Charter Communications (CHTR). Greenberg said that Charter could be worth as much as $294 over the next year or almost a 60% return
from its share price today.
7) David Einhorn – Billionaire David Einhorn pitched Consol Energy (CNX). Einhorn first took a position in Consol at around $37 last year, today it sells for $7.80. That means if Consol just went back to the price Billionaire David Einhorn paid that would be more than a 350% return.
