Trump’s Sanctions On Venezuela Should Drive Oil Prices Much Higher

January 29, 5:00 pm EST

Today let’s take a look at the recent moves the U.S. administration has made against Venezuela, and what that means for oil prices.

It was August of 2017, when Trump first stepped up pressure on Venezuela.  Venezuela is (and has been) in a humanitarian, political and economic crisis–led by what the U.S. administration has officially called a dictator. Trump slapped sanctions on the Venezuelan President back in 2017 (freezing his U.S assets) and was said to be considering broad oil sanctions. That finally came yesterday (seventeen months later).

For a country that relied heavily on oil exports (ninety-five percent of export revenues in Venezuela come from oil), the U.S. will no longer be sending money to Venezuela for oil.

This is a crushing blow for an already suffering country.

What does it mean for oil prices?

Venezuela has the world’s largest oil reserves. With oil sanctions, should come supply disruptions for the oil market, which could likely send oil aggressively higher.

Back in 2017, when Trump threatened sanctions, oil broke out of its $40-$55 range, and ultimately traded up to $76.

Today, we’re nearing the top end of that same range.
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Big Events This Week Will Set The Tone For 2019

January 28, 5:00 pm EST

This is a huge week.  We’re following a down 9% month for stocks with a big bounceback.  But it will all hinge on the events of the week.

We get Q4 earnings from about quarter of the companies in the S&P 500 – and a third of the Dow.  We have the Fed on Wednesday.  And the U.S. hosts trade talk meetings with China on Wednesday and Thursday.  And then on Friday, we’ll get the jobs report.

We kicked off earnings season with reports from the big banks two weeks ago.  And the reports broadly painted the picture of a healthy consumer and healthy economy.

This week, we hear from a broad swath of blue chips, including big multinational businesses.  Among them:  We heard from Caterpillar today. We’ll hear from Apple and Boeing tomorrow.  McDonalds and 3M report on Wednesday.  Amazon is on Thursday.

Expect a lot of discussions about “concerns” on the outlook (as we heard from Caterpillar today), but with a picture about Q4 that looked good (continuing with the theme of 2018).

Remember, much of the talk about slowdown has been about what might happen, in the year (or two) ahead – which primarily assumes a long-term stalemate on the Trump trade war.  With that, never underestimate Wall Street and corporate America’s willingness to set the bar low (when given the opportunity), so that they can jump over a very low bar (i.e. set up for earnings beats in future quarters).

Far more important than those “concerns” voiced by CEO’s, is what the Fed has already done, and what will come out of the U.S./China talks this week.

Remember on January 4th, the Fed responded to the calamity in financial markets by backing down from their rate hiking plans.  This week, the Fed Chair will likely use his post-meeting press conference to further massage markets. The Fed, the ECB and the BOJ have already positioned themselves (in recent weeks) to be the shock absorbers if the trade war continues to drag out.

As for trade talks, the calendar continues to approach the March 1 deadline on the tariff truce.  And China has been gasping for air.  I suspect we will get progress — maybe an official agreement on trade, leaving the intellectual property and technology transfer negotiations still on the table. That would be good progress.

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A China Deal Would Unleash A Huge Commodity Bull Cycle

January 25, 5:00 pm EST

We end the week with a weaker dollar, stronger commodities and recovering stocks.  I suspect this is a building theme for the year – and that it will be a very lucrative one.

With that, let’s take a look at some key charts.

For perspective, here’s a longer term picture of the S&P 500.  As you can see, even after the deep decline of the last quarter, the trend from the crisis lows of 2009 remains intact … and we’ve seen plenty of V-shaped recoveries along the path of this trend …

To this point, stocks have followed a December loss of 9% with a bouncein January of 6%.

We remain about 10% off of the October highs (all-time highs).

The opportunity to take advantage of this bounce in stocks is very attractive, but there are even more attractive opportunities in stocks outside of the U.S.

First, and importantly, the dollar is in a long-term bear cycle….and it’s early.

Here’s a look at the long-term dollar cycles dating back to the failure of the Bretton-Woods system …

The dollar is down 8% in this new bear cycle, and about two-years into a cycle that should run another five to six years. These are the early innings.

A lower dollar should fuel capital flows into foreign stock markets.

Among the most interesting:  Japanese stocks and emerging markets.

Here’s a look at the Nikkei…

Back in late 2012, Shinzo Abe, then candidate for Japanese Prime Minister, promised a big and bold QE plan to beat two decades of deflation, and he had his hand selected candidate to run the BOJ, in waiting, to execute it.  As you can see in the chart on stocks, that beganthe sharp rise in Japanese equities. And that trend too, still holds after the recent sell-off.

Seven years later, the Bank of Japan is now the lone global economic shock absorber (i.e. they are the last major central bank still easing and will be in QE mode for the foreseeable future).  As part of their QE program, they continue to outright buy Japanese stocks.  While U.S. stocks are 10% from the highs of last year, Japanese stocks would still need another 20% to regain the 2018 highs.

As for EM:  If we consider where emerging market stocks were a year ago, and now introduce the possibility that China may be coming to the table later this month with a deal (at least on trade) that will include balancing trade with the U.S. over six years.  How might EM economies look if the world’s leading exporter (China) no longer unfairly floods the world with its cheap products?

Here’s a look at the chart on emerging markets.  You can see we’re getting a big trend-break this month of the ugly downtrend of the past year. 

Finally, a falling dollar and a deal with China is jet fuel for commodities. And you can see in the chart below, this huge downtrend of the past decade is nearing a break.  
With all of the above in mind, I suspect we’ve seen peak pessimism over the past quarter.  And markets are showing signs that we might see a spillover of prosperity from the U.S. economy to the rest of the world, rather than another retrenchment in the global economy.
Have a great weekend!
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Central Banks Remind Us Of The Post-Crisis Script: ‘Whatever It Takes’

January 24, 5:00 pm EST

With two big central bank meetings behind us this week, and the Fed on deck for next week, let’s remind ourselves of where the global central banks stand, more than 10 years after the crisis.

There’s one thing we know, following the events of the past decade:  The global central banks will do “whatever it takes” to preserve stability and manufacture economic growth.  As long as global economies remain interconnected (which they are), this is the script they (global central banks, in coordination) will follow.  They crossed the line long ago.  There’s no turning back.

So, with all of the continual talk in past years about another big shock or “shoe to drop,” people have failed to acknowledge the key difference between the depths of the financial crisis and now.  Back then, we didn’t know how policymakers would respond.  That’s a lot of uncertainty.  Now we know.  They will change the rules when they need to.  That removes a lot of uncertainty.

With this in mind, remember on January 4th, in response to an ugly December for the stock market, the Fed marched out Bernanke, Yellen and Powell to walk back on the tightening cycle.  For a world that was expecting four rote rate hikes this year, that was an official response – effectively easing, intermeeting.

Next up, the Bank of Japan.  They met this week.  With the ECB now done with QE, the BOJ is now the lone global economic shock absorber.  Not only have they been executing on their massive QQE plan since 2013, in 2016 they crafted a plan that gave them greenlight to do unlimited QE as long as their 10-year government bond yield drifted above the zero line.  So, as global yields pull Japanese yields higher, the BOJ responds by buying bonds in unlimited amounts to push it all back down.  That has been the anchor on global interest rates. And given that they see inflation continuing to run well below their target of 2%, through 2020, the BOJ will be printing for the foreseeable future (remaining that anchor on global interest rates).

What about Europe? A few months ago, some thought the ECB might be following the Fed footsteps — with a first post-QE rate hike by the middle of this year.  Today, Draghi put that to bed, saying risks are now to the downside, and that the market has it right pricing in a rate hike for next year – assuming all goes well.  But Draghi also wants us to know that the ECB stands ready to act if the economy falters (i.e. they can/will go the other way).

So, for perspective on where the global economy stands, we still have central banks pulling the levers to keep it all together.  That’s why Trump’s big and bold fiscal stimulus and structural reform was/is absolutely necessary.  And that’s why the rest of the world will likely have to follow the U.S., with fiscal stimulus, if we are to ultimately and sustainably put the crisis period behind us.

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Setup for a Big Upside Surprise In Global Growth

January 23, 5:00 pm EST

The financial media has been focused on Davos this week — the host of the World Economic Forum, which is attended by the world’s top global government and corporate leaders.

Coming off of an ugly December for global financial markets, it’s no surprise the conversation is all about “slowdown.”  It’s an odd conversation, given that the U.S. economy is growing at 3%, corporate earnings are running at record levels, inflation is low and unemployment is low.  Even the IMF could only justify a small markdown on their 2019 global GDP forecast — from an already high level.

For perspective, the IMF is now looking for 3.5% growth for 2019.  Here’s how that looks relative to the past ten years ….

So, what’s the story?

As we discussed yesterday, it’s China, and the pressure of tariffs and reform demands on a vulnerable large economy that’s already drowning.

And the broader view is that trade is being hampered by the Trump/China standoff – and therefore dragging on growth.  With that in mind, listening to some interviews from Davos, the one that stuck out to me was the DHL CEO (the world’s leading mail and logistics company). He said trade is not at all on the back foot, rather its flowing more than ever before.

So, the global growth slowdown talk is all about what might happen, not about what is happening.  It’s about risk.  With that, if China does make the concessions necessary to get a deal done (and they seem to have few options), we may end up getting a big upside surprise in global growth – especially given the very accomodative global monetary policy backdrop.

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How China Became The Most Dangerous Country In The World

January 22, 5:00 pm EST

China reported the slowest growth since 1990 on Monday (+6.4%).

This an interesting period to reference because, at that point, China was in the latter stages of executing on an economic plan.  At the core of that plan was currency manipulation — i.e. devaluing it’s currency (i.e. trashing it) so that they would have a distinct advantage on price when competing for world exports (i.e. they would always be the cheapest).

It worked.  The Chinese economy grew at an average of 12% the following five years (1991-1995).  From 1991 to 2009, leading up the global financial crisis, China grew at 10.5% annual rate.  That’s 18-years of double-digit annualized growth, on average.

That’s why the Chinese economy has ascended from a $350 billion economy to a $12 trillion economy since 1990.

Here’s what that looks like in a chart ….

Thanks to decades of uncontested currency manipulation, China is now the second largest economy in the world and on pace to be the biggest soon (though it still has just an eighth of the per capita GDP as the U.S.).

Why does it matter?

When they maintain a cheap currency, to undercut the world on price, they become the world’s sellers to everyone.  That means they accumulate a mountain of foreign currency as a result (which they have).  China is the holder of the largestsforeign currency reserves in the world, at more than $3 trillion dollars (mostly U.S. dollars). What do they do with those dollars?  They buy our Treasuries, which keeps our rates low, so that U.S. consumers can borrow cheap and buy more of their goods — adding to China’s mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth.  And so the cycle goes.

This has proven to be a recipe for booms and busts (big busts), and a destructive global wealth transfer. 

So coming out of a decade long global economic slog, U.S. growth (driven by fiscal stimulus) has put us in a position of strength to negotiate reform in China. 

An economy running at 6% in China is recession territory and makes them vulnerable to an uprising against the regime. And trade tariffs put more and more downward pressure on the growth number.  That’s why they’ve been willing to talk.  Here’s what President Xi said yesterday about the ruling party’s outlook for retaining power in China:  “The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment … The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.”

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Tail End Of The Economic Expansion, Or Is It The Beginning?

January 18, 5:00 pm EST

Stocks and crude oil have led the bounce back this month.  And we’re now getting more broad-based participation as market and economicsentiment rebounds.  Global stocks are rising, and commodities are rising.

Let’s take a look at some key charts as we end the week.

Here’s a look at stocks …

Stocks continue to make this V-shaped recovery.  A return to the December 3rd highs is another 5% from here.

Remember, oil and stocks have been in a synchronized decline since October 3.  The farther the fall (in both), the higher the rise in fears about deflationary pressures, prospects of an economic downturn and maybe even a financial crisis. But the tide has turned. And it was triggered by both Fed and Treasury actions.

With that, as we’ve observed in this oil chart in recent weeks, the big break of the downtrend has unleashed what could be a very sharp rebound (maybe a V-shaped recovery for oil). 

Keep in mind, at $76 oil we had an undersupplied market in a world with growing global demand.  At $42 oil (the low), the fundamentals for much higher oil prices had only strengthened, with OPEC coming back to the table with more production cuts.

Now, with reports that China is coming to the table with big trade concessions, commodities are beginning to reboot. 

As I said last week, “what if this chart on commodities tells us that the decade that followed the financial crisis was indeed a depression, and central banks were only able to manufacture enough economic activity to buffer the pain (not a real economic expansion)? And now, instead of at the tail end of one of the longest economic expansions on record, we’re in the early stages of a real expansion, driven by fiscal policies and structural reform that has started in the U.S. and will be implemented abroad (Europe, Japan, China).”

A trade deal may unlock a real global economic boom.  While it might appear that China will be a big loser in any trade deal with the U.S., relative to where they stood Pre-Trump, being forced to move toward a balanced domestic economy, and fair trade, would position China to be a legitimate long-term player in the global economy.

With that in mind, Chinese stocks look like a very compelling buy …
Wall Street Has (Again) Set The Bar Low For Earnings Season

January 17, 5:00 pm EST

Stocks continue to recover from the wreckage of December.  From December 3rd to December 26th, the S&P 500 collapsed 16%.  That was over just 15 trading days. 
We’ve since had a 12% bounce over 15 days.  But we need another 7% to recoup the losses from December 3.The good news: The catalysts for a big recovery are in place — not only to recover the December 3rd levels, but to print new all time highs in the stock market. 

Remember, major turning points in markets are often driven by some form of intervention.  In this case, we’ve had it.  We had intervention from the U.S. Treasury on December 23/24, 1) calling out to the six largest U.S. banks, and then 2) calling a meeting with the President’s Working Group (which includes the Fed).

Just days later, the Fed sent a clear message to markets that they were there to promote market stability (that means higher stock prices).

Add to this, we’ve entered Q4 earnings season, and we’re getting plenty of positive surprises already, on expectations that were already dialed down substantially in the wake of the stock market decline of the fourth quarter.  As of last Friday, 90% of the companies that had reported beat Wall Street’s expectations.

So, where can stocks go from here?

Even with the sharp recovery over the past several weeks, the P/E on this year’s earnings estimate is just 15.  That’s cheap relative to history.  It’s very cheap relative to historical low interest rate environments.

If we apply Wall Street’s estimate on earnings for the S&P 500 (which is $172), to a P/E of 18 we get 3,096 on the S&P by the end of the year.  If we apply a 20 P/E, we get 3,440. That’s argues for anywhere from 18% to 31% higher for 2019.

Keep in mind, that’s if Wall Street hasn’t undershot on its estimate.  But they tend to undershoot often (to the tune of about 70% of the time).

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JP Morgan Does Record Business in 2018

January 15, 5:00 pm EST

We now have Q4 earnings in from three of the country’s four largest banks.  Yesterday it was Citi.  Better earnings were driven by cost cuts not growth.  Still, the stock is up 8% in two days.

Today it was Wells Fargo and JP Morgan.  Wells, too, had soft revenues but beat on earnings driven by cost cuts.  JP Morgan missed on earnings and revenues.

Now, Jamie Dimon runs JP Morgan — the largest U.S. based global money center bank.  And he has been publicly positive on the economy and the market outlook, in the face of a lot of broad negativity and fear late last year.

Let’s take a look at what he had to say about JP Morgan’s earnings and the operating environment…

JP Morgan generated record earnings and record revenues for full year 2018.  And Dimon says they would have done it even without the tax cuts. He says his business shows the U.S. consumer to be healthy and engaged.  Consumers are spending, saving and investing.  And Dimon said they opened Chase branches in new states for the first time in nearly a decade.

This all in a year where the chatter about an impending recession grew by the month, for no other reason than the economic expansion has been running long.

According to the biggest bank in the country, things sound pretty good.

Importantly, last year, the blowout earnings were often met with selling in the broad stock market.  It’s looking like that dynamic is changing.  Stocks are rising, even on less than impressive numbers (thus far). That a good sign for the sustainability of the rebound.
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Best Time To Buy Bank Stocks Than Any Other Time In Our Lifetimes?

January 14, 5:00 pm EST

Meaningful fourth quarter earnings kick off this week with the big banks.

We heard from Citigroup this morning. They beat on earnings but on lower than expected revenues.  The stock finished UP over 4%.

We get JPMorgan and Wells Fargo Q4 earnings tomorrow before the open.  Bank of America and Goldman Sachs will report on Wednesday.

Remember, the turning point for stocks in December started with a call-out to the major banks by the U.S. Treasury Secretary.  Not surprisingly, the turn in stocks was led by the banks.

You can see the big reversal in this chart of the KBW bank index.  The index is now up 16% since December 26th.

With the above in mind, one of the best value investors of the past twenty years, Jeffrey Ubben, has thought the timing is finally right for major banks.  He has said 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.  It’s the cheapest of the four biggest U.S.-based global money center banks.

As for earnings, overall:  Remember, we’re coming off of three consecutive quarters of corporate earnings that blew away very lofty Wall Street estimates — 20%+ yoy earnings growth for the first three quarters of 2018.  But sliding stocks in the fourth quarter eroded sentiment, and down came earnings estimates for Q4.  The market is looking for just 10% earnings growth for the fourth quarter. For 2019, they’re looking for just 7%.  This all sets up for positive surprises. Positive surprises are fuel for stocks.
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