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.
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.
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.
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).
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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.
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 hereto get your portfolio in line with ours.
Today the rebound in oil led a significant turnaround for stocks. With that, the broader sentiment of uncertainty across markets tends to abate. Broader commodities swung from negative to positive. And yields on the U.S. 10-year Treasury, which were in deep decline this morning, swung to positive territory by the afternoon.
If you own stocks, a house, have a job or need to eat, you should cheer for higher oil prices.
As we’ve talked about quite a bit in recent weeks, cheap oil, at this point in the global economic recovery, is a catalyst to destabilize the global economy. While consumers gain a few bucks from cheaper gas, the oil industry leans closer to the edge of bankruptcies and weak oil exporting countries toward default. That would be very bad news (global financial crisis, round 2). So the longer we’re down here, and the more persistent these low levels appear, the riskier the world looks. And when the world looks risky, people sell stocks, and other relatively risky assets and they hold cash or buy U.S. Treasuries (which pushes yields lower).
For proof, here’s a look at the 10-year yield on the U.S. Treasury note.
Keep in mind, the Fed raised rates in December! They did so when the 10 year was trading at a yield of 2.20%. The yield is now 45 basis points lower. And even though a voting Fed member said yesterday that in her view, a second hike was still on the table for next month, the market has still virtually priced out the possibility of any further hikes for the rest of the year.
Why? Because other parts of the world are moving (or are moving deeper) into negative rate territory, because economic conditions continue to soften, mostly driven by sentiment and weakening inflation prospects. A big driver of that mix is the oil price crash.
In the next chart, you can see how yields, despite the December rate hike, have tracked oil lower.
Again, when people think the world looks risky, they pile into the safest parking place for capital on the planet, U.S. Treasuries –and that drives yields on Treasuries lower. While that flow of capital has certainly occurred, the pressure on yields from speculators is also a big component.
If you recall, we discussed a couple of weeks ago how markets can have it wrong – sometimes very wrong. If indeed, the market is wrong on this one, there is a tremendous opportunity to ride yields back to the 2.25% area. And it may be a violent move.
But oil will be the driver.
As we said, oil turned the tide for stocks today. Here’s a look at the relationship of oil and stocks over the past three months.
In this longer term chart above, you can get perspective on where oil prices stand relative to history. You can see in this chart the sharp rise, the sharp fall and the rebound from the depths of the global financial crisis.
That rebound was all China. China stepped in and used their three trillion dollars in foreign currency reserves AND their massive fiscal stimulus package to gobble up cheap commodities.
And you can see this most recent price crash was triggered by move by the Saudis to block an OPEC production cut in November 2014. It was the night of the Thanksgiving holiday in the U.S. and oil was trading about $73. We haven’t seen that price since.
The low at the depths of the financial crisis was 32.40. That’s about where oil closed today. We’ve made the case in recent weeks that, if OPEC refuses to cut production (likely), the central banks could/should step in and buy oil (the ECB, BOJ and/or China).
Bryan Rich is a macro trader and co-founder of Billionaire’s Portfolio,a subscription-based service that empowers average investors to invest alongside the world’s best billionaire investors.
As we headed into this past weekend, we talked about the threat that the oil bust poses to the global financial system (not too dissimilar from the housing bust), and we talked about the prospect of central bank intervention over the thinly traded U.S. holiday (Monday).
Both the Bank of Japan and the European Central Bank did indeed go on the offensive, verbally, promising more action to combat the shaky global financial market environment.
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The result was a 9.5% rally in the Japanese stock market from Friday’s close. And all global markets followed suit. Within the white box in the chart below, you can see the central bank induced jump in the Nikkei (in orange) and the S&P 500 futures (in purple).
Source: Billionaire’s Portfolio
This is purely the influence on confidence by the two central banks that are now driving the global economic recovery (the BOJ and the ECB). However, the potency of the verbal threats and promises has been waning. Big words have marked bottoms along the way over the past several years for stocks, and the overall ebb and flow of global risk appetite. But it’s becoming more evident that real, bold action is required. And given that it’s cheap oil that represents the big risk to financial stability at the moment, we’ve argued that central banks should outright buy commodities (particularly oil). And we think they will.
Source: Billionaire’s Portfolio
In 2009, despite the evaporation of global demand, oil prices spiked from $32 to $73 in four months after China tapped its $3 trillion currency reserves to snap up cheap commodities. Within two years, oil was back above $100.
China’s role in the commodity market was a huge contributor to the recovery in emerging markets from the depths of the global financial and economic crisis. Brazil went from recession to growing at close to 8%. Many were saying emerging markets had survived the recession better than advanced markets, and that they were driving the global economic recovery. And Wall Street was claiming a torch passing from the developed world to the emerging world as the future of growth and leadership.
How are emerging markets doing now? Terrible. Not surprisingly, it turns out the emerging market economies need a healthy developed world to survive. And now with the additional hit of the plunge in commodity prices, Venezuela (heavily reliant on oil exports) is very near default. Brazil and Russia are both in recession. The longer oil prices stay down here, Venezuela will be the first domino to go, and others will follow. With that, we expect intervention to come. And as you can see in the response to the Nikkei overnight, it will pack a punch – and if it’s bold, a lasting one. Remember, as we said last week, historical turning points for markets often come from some form of intervention (public or private policy).
Billionairesportfolio.com, run by two veterans of the hedge fund industry, helps self-directed investors invest alongside the world’s best billionaire investors. To see which ideas we follow in our Billionaire’s Portfolio, join us at BillionairesPortfolio.com.
When housing prices stalled in 2006 and then collapsed over the next three years, the subprime lending schemes quickly became exposed.
Mortgage defaults led to a banking crisis. Due to the highly interconnectedness of banks globally, the problems quickly spread to banks around the world. A banking crisis led to a global credit freeze. When people can’t access credit, that’s when it all hits the fan. Companies can’t meet payroll, don’t have the liquidity to make new orders. Jobs get cut. Companies go bust. Finally, the microscope on overindebtedness of consumers and corporates, turns to countries. Deficits leads to debt. Debt leads to downgrades. Downgrades leads to defaults.
For the most part, defaults were averted because central banks and governments stepped in, in a coordinated way, to backstop failing banks, failing companies and failing countries. From that point, continued central bank stimulus has 1) enabled banks to recapitalize, 2) foiled additional shock events, and 3) restored confidence to employers (to hire), to investors (to invest) and to consumers (to spend again).
As we’ve discussed in the past two weeks, persistently low oil prices represent a risk on par with the housing bust. And in recent days we’re seeing the signs of another global financial and economic crisis creeping uncomfortably closer to a “part two.”
As we’ve said, this time would be much worse because governments and central banks have exhausted the resources to bailout failing banks, companies and countries. But central banks, namely the Bank of Japan and/or the European Central Bank do have the opportunity to step-in here, become an outright buyer of commodities (particularly oil), as part of their QE programs, to avert disaster. But time is the oil industries worst enemy and therefore a big threat to the global economy. The longer policymakers drag their feet, the closer we get to the edge of global crisis — a crisis manufactured by OPEC’s price war.
Unfortunately, there are the building signs that the market is beginning to position for the worst outcome…
Key bank stocks in Europe are trading at levels lower than in the depths of both the global financial crisis (2009) and the European sovereign debt crisis (2012).
Source: Reuters, Billionaire’s Portfolio
The credit default swap market for key industries is sending up flares. This is where default insurance can be purchased against a company or country – and the place speculators bet on a company’s demise. Billionaire John Paulson famously made billions betting against the housing market via credit default swaps. Now the fastest deteriorating companies in Europe are banks. And the fastest deteriorating companies in North America are insurance companies (a sector that tends to have investments in high yield debt … in this case, exposure to the high yield debt of the oil and gas industry).
Source: Markit
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. On the one hand, that’s a bad thing for the reasons explained above (i.e. limited ammunition). On the other hand, it’s a good thing. 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.
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.
Yesterday, billionaire hedge fund manager Barry Rosenstein, of the activist hedge fund Jana Partners, said that Hertz ($HTZ), the largest rental car company in the U.S. should triple in price. Rosenstein is taking a page from Icahn on two fronts: 1) Using the media to promote his message, and 2) calling for a stock buyback.
Rosenstein’s fund owns more than 8% of Hertz. And Carl Icahn owns 10% as well. Altogether, hedge funds own more than 50% of the Hertz, even as the stock has dropped nearly 25% over the past six months. Rosenstein said Hertz will be able to buy back as much as 25% of their stock, which should juice earnings and cause the stock to triple in price over the next year.
With two of the best billionaire activists in the world controlling almost 20% of Hertz, this stock is a must own stock for investors in 2015. You can see in the chart below, the stock has based just above $20. Icahn owns most of his stake above $28.
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