November 10, 2017, 4:00pm EST                                       Invest Alongside Billionaires For $297/Qtr

We talked yesterday about the significant range (1,000+ points on the Nikkei futures) and big reversal in Japanese stocks. And how that might be signaling a big event for global stocks, as past 1,000+ point ranges have been driven by major global events.

Another big mover yesterday, that has gotten attention in the media is the junk bond market – which has been selling off (pricing in higher yields, higher risk).

So today we get Japanese stocks lower again. Same for European stocks.

The media likes a tidy story, so blaming it on political posturing surrounding the timing of tax cuts has been suitable for them. I suspect it has to do with liquidations surrounding the asset freeze in Saudi Arabia.

Yesterday, when things were looking a little dicey for stocks, following the events in foreign markets overnight, U.S. Treasury yields remained firm, and even finished higher on the day. This is notable because in recent years, with just a sniff of lower stocks and some global market turbulence, people would storm into Treasuries (i.e. yields lower). Yields were among the biggest mover of the past two days (UP not down).

So there seems to be some indiscriminate selling going on in specific markets. Gold was the victim today. A huge order came in at 11am and knocked gold down 10 bucks in 10 minutes.

When you have $100 billion worth of assets under scrutiny in Saudi Arabia (a third of which is already been frozen), there is a lot of exposure in the global financial system to these assets. If banks and counterparties begin curtailing margins on accounts, and begin stepping back from notable banks that deal with these accounts, you can quickly get destabilization across global markets. Long Term Capital Management comes to mind.

With that said, the corrections we’ve had in markets in the post-crisis era have tended to be fast. Risk enters quickly, and the slide becomes very slippery. But it has paid to buy into the fear. The recoveries have been very quick and lucrative.

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November 9, 2017, 4:00pm EST

Japanese stocks have been a huge mover over the past quarter, as we discussed earlier this week. That move extended to a new 25-year high overnight. And then we got this …

As you can see on the far right of this daily chart, the Nikkei had a very slippery reversal to post an 1,110 point range for the day (closing near the lows).

This was the biggest range in the Nikkei since exactly one year ago today. That was the night of the U.S. elections (the day, in Japan).

Now, despite the huge range of the day, today’s losses in Japanese stocks were only 1.7% (open to close). Let’s take a look back over the past two years, though, to other times we’ve had a 1,000+ point range and on a down day.

There was the Brexit surprise in June 2016 (-9%). And then when the Bank of Japan shocked world markets in a scheduled meeting by NOT upping its QE program in April 2016 (-7%). Prior to that, was the middle of January of 2016 when oil prices were crashing (-4% and -4% two out of three trading days). Then there was December 18, 2015, the day after the Fed made its first post-crisis Fed hike (-2%). And then we had a day in August 2015 (-6%) and into the first day of September (-5%). These were driven by a surprise devaluation of the Chinese yuan, which set off a global stock market slide on fears of a weaker China, than most thought.

Now, we’ve just looked at all of the days for Japanese stocks where the range has been greater than 1,000 points and stocks have finished down. As you might deduce, these days all share a common thread. There was a big event related to these moves. So what was the event that caused this last night?

Nothing, of note. That’s concerning. Is there something bigger going on, that has yet to present itself. Is it perhaps the news out of Saudi Arabia that is about to lead to a global event?

Keeping the focus on what happened in Japan: First, for market technicians, this is a perfect “outside day” reversal signal. This is when a new high is set in an uptrend, a buying climax, and the buying exhausts and weak speculative longs are quickly shaken out of positions forcing prices to lower lows than the prior day (closing near the lows). The wider the range, and the more significant the volume, the higher the likelihood that a trend reversal is underway.

With that in mind, to the far right, you can see the spike in volume for the day.

As far as the range is concerned, we discussed the significance of a 1,000 point range historically.

So technically, there’s a fair reason to bet on a reversal here for Japanese stocks here. That leaked over into European stocks today. German stocks were down 1.4%. And it looked like U.S. stocks might have the same fate today, but the “buy the dip” appetite was clearly strong. If history is any indication, we might have better levels to buy the dip. And the dips in recent history have been lucrative: sharp but quickly recovered.

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November 8, 2017, 4:00pm EST

This trajectory for stocks was not an outcome that Wall Street was looking for.

I looked back at an article on market forecasts published by Fortune in December of last year. Here’s how they saw it…

So the group with access to the best information didn’t do a good job of interpreting that information. And you can see in the forecasts, they were pretty much in agreement. They were looking for just better than 2,300 for the year. They saw a +3.7% year for the S&P 500. They undershot by 12.2 percentage points thus far.

They should have listened to billionaire Larry Robbins. Remember, he did a study on the influence of low interest rates, Fed policy and oil on markets. He says every time ONE of these (following) conditions has existed, the market has produced positive returns.

• When the 30-year bond yield begins the year below 4%, stocks go up 22.1%.
• When investment grade bonds yield below 4%, stocks go up 16%.
• When high-yield bonds yield below 8%, stocks go up 11.6%.
• When cash as a percent of asset for non-financials is above 10%, stocks go up 17.6%.
• When the Fed tightens 0-75 basis points in the year, stocks go up 22%.
• When oil falls more than 20%, stocks go up 27.5%.

All of these conditions have been met this year. And stocks are up 16% with about seven weeks remaining in the year.

Add to this, the idea that a regime shift was underway, moving from a QE-driven economy, to an economy to be driven by structural reform and fiscal stimulus (under the incoming Trump administration this year), should have bumped up even the most conservative of forecasts on stocks for the year. With the economy still performing under potential, yet with the momentum of low interest rates, cheap gas, low unemployment and solid balance sheets, the pieces have been in place for a pop in growth. The idea of feeding fiscal stimulus into that mix should have had Wall Street forecasting the rise of all asset prices. They didn’t see it coming.

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November 2, 2017, 4:00pm EST

Over the past two weeks we’ve talked about the two big central bank events. The first was the ECB’s decision last week. As expected, they signaled they will be exiting QE. The second was the anticipated announcement of a new Fed chair. This is a high consequence decision.

I thought early on that the President would show Yellen the door, given that the rate hiking campaign she has been leading at the Fed poses a threat to choke off the impact of the big fiscal stimulus efforts that have been the hallmark of the Trump Presidency.

She stayed longer than I expected. But today we get her replacement: the current voting Fed governor Jerome Powell. Powell has voted with Yellen, along the way. So, it doesn’t appear to be a philosophical change and it doesn’t appear to be a person Trump can influence – but he offers the President party alignment.

I thought Neel Kashkari had postured perfectly to get the job. He has experience at the Treasury overseeing the TARP program through the ugliest period of the financial crisis. And he’s a newbie Fed governor, but one that has dissented on rate hikes and argued to wait for inflation to take hold before moving on rates (to ensure sustainability of the recovery). That view aligns much friendlier with the Trump administrations economic plan.

The Fed chair role was, arguably (unquestionably, to me), the most important role in the world under the Bernanke reign. Bernanke was the right guy, in the right place, at the right time. As a student of the Great Depression he led the Fed through decisions that pulled the world back from the edge of total collapse. At stages through the crisis, the Fed and Bernanke took a lot of heat – and a lot of it came from world leaders, and even global central banks. But had the Fed not swiftly acted to help foreign banks early on (that were frozen from the lack of access of U.S. dollars), the global financial system would have imploded.

Other central banks then underestimated the scale of the crisis and started hiking rates too early, in 2010 and 2011, which ultimately put them back in to recession (most notably, Europe). The Fed stayed put.

Over time, Bernanke’s Fed (and his aggressive QE) proved to be right, and ultimately provided the playbook for major central banks to follow.

Under the Yellen regime, the track record has been spotty, nearly killing the recovery last year, by continually telegraphing a much tighter credit environment ahead. But the policy course was bailed out by the election of a new President and administration that is hell-bent on pumping up the economy.

Now Powell takes over at a more critical juncture. The execution on fiscal stimulus is beginning to materialize, and we’ll get to see how he navigates it. Hopefully, he’ll let the economy run a little hot (chase inflation from behind), and not allow rates (or the perception of tighter credit) to kill the animal spirits that can accompany big tax cuts and government spending programs.

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