Pro Perspectives 9/4/20

September 4, 2020

We had another good jobs number this morning.

More than 3 million people that were on temporary layoff have returned to work.  The net number of jobs lost has now been halved, bringing the unemployment rate down to 8.4%.

And people are working longer hours (average weekly hours worked are up, higher than expected) and they are working for a higher wage (wages came in hotter than expected). 

As you can see in the chart below, wages are up 4.7% year-over-year and, importantly, sustaining as the job market improves. 

This is three consecutive months reflecting year-over-year wage growth in the high 4% area. 

This reflects demand for labor that's competing with a government paycheck. You have to pay them more to them back to work.  And it reflects raises and bonuses that were given to essential employees at the depths of the health crisis.  Not surprisingly, those pay increases are proving to be "sticky." 

We've talked about this since the Fed went all-in back in March.  We're getting a reset of asset prices.  We're getting a reset of wages. 

The Economic Policy Institute made the case, prior to the health crisis, that an annual 3.5%-4% nominal wage growth is necessary for people "to reap the benefits of economic growth."  The average for nominal wage growth from the Lehman crisis through early this year was just 2.4%.  So, with year-over-year average hourly pay now sustaining over 4%, wage growth is finally here.  

And with this jobs report, we should expect the projections on Q3 growth to be dialed UP — which have already been projecting growth between 20 and 30 percent annualized (that's against an actual Q2 annualized contraction of 32.9%). 

Now, if you agree that we're beginning to see an unwinding of the "stay-at-home forever" stocks, and that money will be moved into "return to normal" stocks, the equal weighted S&P 500 index is not a bad place to express that — as the top five stocks in the S&P 500 market cap weighted index (the widely followed benchmark) now represents nearly 30% of the value of the index. That's all big tech.  The biggest equal-weighted S&P 500 ETF is symbol RSP. 

If you want to take full advantage of the rotation into some of the most deeply undervalue stocks, join us in my Billionaire's Portfolio.  We have a portfolio full of stocks with the potential to do multiples.  You can learn more here. 

Pro Perspectives 9/3/20

September 3, 2020

Stocks were hammered today, following the 64% run off of the March 23rd lows.  Yes, that's a 64% bounce, in a little more than five months.

This was the biggest move in the vix today since June 11, when the media sent the country into a stir about a second wave. 

This spike is in the chart above represents money managers scrambling to buy downside protection in stocks.  

Is this in anticipation of the jobs number tomorrow?  Maybe. 

The employment report tomorrow is expected to show 1.4 million new jobs added in August.  The ADP report yesterday came in at just 428k. The market was expecting 1.17 million. 

As you can see in the payrolls chart below, there is a lot of ground to make up … 
Over the past three months, we've made up nearly half of the jobs lost in April and May, with big positive surprises in each of the monthly reports.  We'll see if the trend continues.

Meanwhile, the bookmakers have Trump now at a dead heat with Biden.  That's a big swing from mid August, where a Reuters report says that Trump had "the lowest odds for re-election of any sitting President in history."

What does an increased likelihood of a Trump re-election look like for stocks at the moment?  I suspect it would mean a broad opening of the economy, and it would certainly mean a continuation of Trump economic policies, which is a sell signal for the "stay at home" stocks that have been soaring, and for the contra-oil proxy (i.e. Tesla).  Those stocks were all beaten up today, many down between 5 and 10 percent. Tesla is down around 20% since yesterday morning.

Meanwhile, the cruiselines, airlines and oil and gas stocks outperformed today. Is this the Trump trade: swap the "stay at home" stocks for the "return to normal" stocks?"
 

Pro Perspectives 9/2/20

September 2, 2020

Stocks continue to move higher, for the reasons we've discussed here daily (namely, a policy response that is far bigger than the economic damage).

Yet, the media and some of Wall Street continue to seem perplexed. 

What continues to be ignored is the rhetoric slinging back and forth between Pompeo and China.  As we've discussed, Pompeo's speech at the Nixon Library, back in July, sounded at best like a cold war declaration at worst, like a 'hot' war declaration.  

In fact, yesterday Pompeo was asked about the 'cold war' analogy and he said it has some relevance, but "this is different than cold war." 

There are a number of "flashpoints" that continue to build in tension in recent months, all provoked by China:  expansionist actions in South China Sea, Taiwan and Hong Kong. 

Now we have the Pentagon talking about China's nuclear capabilities.  And this morning, a mouthpiece of the CCP, the Editor of the Global Times, said the U.S. government is underestimating how many warheads China has.

As we’ve discussed back in July, it seems like we are on path for some military action with China, before the election.  Remember, incumbent Presidents, when they’ve actively sought a second term in war time, have a 6-0 record. 

Pro Perspectives 9/1/20

September 1, 2020

With the health crisis, when we wanted to know how things were progressing, we had to ignore the experts and the politicians and look at the data. 

The data told us the health crisis peaked in April, when the daily change in intubations in New York hospitals started to decline, and soon thereafter, went negative.  Something (a treatment) was working.  This wasn’t going to be another Spanish Flu, with millions, if not tens of millions of deaths. 

Again, in June, when the experts, the media and the politicians were telling us a second wave was beginning, we looked at the data, and while cases were rising, the deaths relative to cases were falling sharply.  The data told us that more aggressive testing was simply revealing the degree of asymptomatics in the population. 

So, just as the data has told the story on the health crisis, the data is also telling the story on the economic crisis. And the story is a positive one. 

Nothing tells the story of reality versus perception like the Citi Economic Surprise index.  

You see the big spike at the far right of this chart, above?  That reflects the degree to which the expert community has misread the economy, which is a result of misreading the policy response and misreading the health crisis (i.e. they’ve been dead wrong). 

We had another data point to add to this surprise index this morning.

Manufacturing activity for August ran at its hottest levels in late 2018.  
If you read the report (here), this is a story of strong demand, low inventories and production trying to catch up. 

That leads to the big inflation theme we’ve been talking about.  And that’s being reflected in this next chart, the prices paid component of the report.  It’s aggressively moving higher, and it will continue …
 

Pro Perspectives 8/31/20

August 31, 2020

Warren Buffett just invested $6 billion into five of Japan's biggest "trading companies."  

Assuming he took a little greater than a 5% position in each, he became the largest shareholder of each of these companies — the combined market cap of which, would make it the biggest publicly traded company in Japan. So, Warren Buffett is now the second most influential shareholder in Japan, behind the Japanese government (which would include the Government Penion Investment Fund).

Now, the timing of it is interesting.  

The Prime Minister, Shinzo Abe, just announced his resignation on Friday (for health reasons, he says).  On Monday morning, just before the Tokyo stock market opened, Buffett announced he had made this investment.  

These are diversified conglomerates, but with common themes.  The common themes:  infrastructure, energy, metals, raw materials, chemicals, food, textiles. 

Is this a bet on new leadership and a new plan to end three decades of economic stagnation in Japan? 

Is a bet on a revival of Japan's role in the world as an exporter, assuming China is headed toward the "trade penalty box," to be enforced by a global alliance – led by the U.S.?

Maybe both.  Japan's decline came, not coincidentally, with China's ascent. 

Japan's Nikkei remains 41% off of the all-time highs, marked three decades ago. 
 

Pro Perspectives 8/28/20

August 28, 2020

As we discussed yesterday, the Fed has now formalized their strategy to let inflation run hot, to insure that the economic recovery, that they've paid trillions of dollars for, is secure. 

Again, this is not new information.  They've been telling us this even before the pandemic, and they've made it more abundantly clear in recent months.  Now it's formal policy, to allow a period of hot inflation, to compensate for the long period of below target inflation. 

What does it all mean? 

It means the Fed's pandemic policy response is, by design, inflating GDP, inflating away debt, and consequently resetting the price of everything higher (consumer stables, consumer products, services, labor, stocks, real estate, commodities … everything).  They will do nothing to risk choking it off to early. 

So rates will remain at zero for quite sometime.  And as we've discussed, with zero rates, the multiple on stocks can go much, much higher – for a lack of alternatives for return.  

With this in mind, the S&P 500 trades above 3,500 today. 

But ignoring the rate environment, and ignoring the deluge of liquidity that has been dropped on the world in recent months, those that try to call tops and constantly see bubbles are getting noisy – for reasons like, "too far, too fast" or "too expensive" or they just don't like the level of the index (the eye test, "too high"). 

For perspective on where this can go, let's revisit my analysis on the long term trajectory of stocks, and what it would take to put us back on path of 8% annualized, from the pre-global financial crisis peak of 2007. 

In the chart, the blue line represents what the S&P 500 would have looked like had it continued its long-run annualized growth rate of 8% from the 2007 (pre-crisis) peak. We would have an S&P 500 near 4,300.  That's 23% higher than today's close.  

The orange line is the actual path of stocks. 

Even though we're up big from 2009 bottom, and we're up big from the March lows of this year, we still have not recovered the lost growth in stocks of the past decade.  

That is clearly displayed in the GAP between the orange line (the actual S&P 500) and the blue line (where stocks would be, had we continued along the 8% annualized path).  

The recipe is now in place to close that gap. 

Pro Perspectives 8/27/20

August 27, 2020

We’ve talked about the coming inflation tsunami, thanks to the bazooka monetary and fiscal policy response that is proving to abundantly outweigh the economic damage caused by the Pandemic.

And we’ve heard along the way, from Jay Powell, that the Fed plans to keep the policy pedal to the metal, in recovery, to let the economy run hot. 

He made that official policy today, in his speech at Jackson Hole, announcing formally that the Fed would let inflation run hot.

 
They’ve talked about this “symmetric” view on inflation for the past few years, telling us that they would allow inflation to run “symmetrically” above their 2% inflation target, to balance against the period of time where inflation ran below their inflation target. 

This communication has always been about trying to dial UP inflation expectations.  It hasn’t worked to this point,  as you can see in this chart of core pce (the Fed’s favored inflation gauge) …

With the large majority of data points residing below the white line (the Fed’s target inflation rate), this chart tells us that we should expect the Fed to happily watch an inflation rate that rises and persists in the 3%+ area for quite some time.   In that scenario, they would be very slow to start moving rates higher (as they have explicitly told us), giving the economy plenty of runway to sustain recovery.  This is the best-case scenario. 

But remember, this will be a recovery juiced by trillions of dollars of excess money from the policy response (well in excess of the damage).  That means the Fed will likely have to chase inflation at some point, to contain it, with a rapid succession of rate hikes. But they will still let it run hot, early on. This is still a good scenario.  That bad scenario, is deflation, due to economic collapse, which means a very bad outcome for all, and unlikely salvageable by even aggressive policy actions. 

Let’s stick with the optimistic (high probability) outcomes …

Guess what will “inflate” along the way in these inflation scenarios:  Nominal GDP. 

GDP measures the market value of the goods and services.  So, price goes up, GDP goes up. 

If we look back to the inflation spikes of the early 70s and early 80s, nominal GDP grew by an annual rate of better than 10% during those periods. 

If we had a similar spike, we would regain peak levels of GDP by middle-to end of next year, and we would be on the way to a $30 trillion economy by 2024, which would (by design) go a long way toward repairing, if not resolving, our debt as a percent of GDP problem.

 

Pro Perspectives 8/26/20

August 26, 2020

The hurricane in the Gulf of Mexico has been upgraded to a category 4.  That will make landfall tonight. 

We've talked about this storm, and the resulting supply disruption that may prove to be a catalyst to get oil prices moving.

What oil and gas companies would benefit from higher oil prices?  All of them.  

Remember, we came into the year with a bubbling confrontation with Iran and with a U.S. economy that was positioned for the hottest stretch of growth in two decades.  It was a formula for $100+ oil.  And that backdrop would have solidified the comeback and sustainability of the shale industry. And then the rug was pulled out — from the events you can see annotated in this chart …

This plunge in oil prices put practically everyone on default watch: the energy industry, banks that lend to the energy industry, countries that are heavily dependent on oil revenues (and everyone that deals with these entities, relies on them as part of their business or daily lives, lends money to them, etc — i.e. makings for a total global meltdown).  

With that, if there was any question about whether or not policymakers would/should fire the bazooka of monetary and fiscal stimulus, the collapse in oil made it an easy decision. 
 
As part of the policy mix, the Fed brought the U.S. energy industry back from the brink of death by becoming an outright buyer of corporate bonds.  So, these distressed companies have been able to raise money, to stay afloat, now they need higher oil prices.

And with the exception of a position Carl Icahn has (and has had) in Occidental Petroleum, no one has these stocks.  Wall Street has left the industry for dead.  That probably makes these U.S. oil and gas stocks a buy. 
 

Pro Perspectives 8/25/20

August 25, 2020

Yesterday we talked about the catalyst for a move in crude oil.

Today, crude was up as much as 2.8%.  

The storm brewing in the Gulf has now caused nearly 300 oil and gas drilling platform closures, which represents over 80% of the production from that area.  And the forecast on the storm has now been upgraded to a major hurricane (category 3) by landfall.  Harvey was a category 4, two years ago. 

Like Harvey, this storm will likely impact refinery operations that are near the shoreline as well — which should further disrupt production and the supply chain.   

Again, this is all developing into a catalyst to get oil prices moving (higher).

In addition, overnight it was reported that the U.S. and China had positive talks on carrying out phase one of the trade deal.  Within that agreement, China has a commitment to buy, in addition to their normal annual imports from the U.S., $12.5 billion of agricultural commodities, and $18.5 billion of energy-related commodities.  

As you can see in the chart below, at seven full months into the year, China is well behind on its commitment – to the tune of about $10 billion in ag spend, and about $12 billion in energy. 

With that information, not surprisingly, commodities led the way today.  Coffee was up 3.4%.  Nat gas was up 3.2%.  Corn was up 2.6%.  Lean hogs, up 2.6%. Lumber, up 2.3%. Soybeans, up 1.6%. Wheat, up 1.5%. 

Now, a fair question:  Do we really want China to fulfill on this commitment right now?  

It was just a month ago, that Pompeo made the case for building an alliance of "free nations" to stand up against the Chinese government, calling for regime change, and calling the Chinese Communist Party a threat to the free world.  The media gave little coverage to this speech, which sounded at best like a cold war declaration (at worst, like a 'hot' war declaration).  If you didn't see it, you can find the transcripts here. 

So, given that we are emerging from an economic crisis, that has already resulted in a supply shock, do we really want to be sending our food and energy to China?  And do we want to do so, in a fragile economy, knowing that it will put upward pressure on prices, where inflation is already brewing. 

Pro Perspectives 8/24/20

August 24, 2020

We talked about crude oil late last week. Let’s continue on this theme today, as two supply disrupting storms make their way through the Gulf of Mexico. 

As we’ve discussed, oil has been disconnected from a very hot stock market. Stocks are hitting new record highs.  Oil prices are down 35% from the highs of the year. 

Apple, the biggest company in the world, has doubled in value (to over $2 trillion over the past two years).  The value of crude oil has been nearly cut in half over the same period.  

Meanwhile, we are in the early stages of an aggressive bounceback in economic growth (projecting +26% annualized for Q3, at the moment).  The dollar is falling, and inflation is brewing, as money pours into popular inflation hedges (with gold and silver leading the way). 

And yet, crude oil (globally traded primarily in dollars) trades just in the low $40s.  

Is it lacking a catalyst?    

Well, historically, supply disruptions are often a powerful catalyst to get oil moving. 

And we may now have a catalyst. 

With the storms in the gulf (or on that path), over 100 rigs have already been evacuated, accounting for 58% of the oil production in the Gulf.

What could it mean for oil prices (in combination with the backdrop we laid out in the above)?

Let’s take a look back at oil prices from August of 2017, when Hurricane Harvey, a category 4, tracked through the Gulf and devastated Texas.

Harvey hit over the weekend in late August of 2017. It was a big one. Both offshore platforms, and onshore refineries were hit hard.  The fallout was assessed over the following days, and by the end of the week, the bottom was in for oil.  Within 12 months, crude was trading over $70.