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.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
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.”

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
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).

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
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.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
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.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
The Yuan Is Giving Signals On China Concessions

January 11, 5:00 pm EST

Trade talks with China came and went again this week without any notable progress, at least in the respective statements from both parties.

But the behavior of the Chinese currency tells a different story.

Remember, China controls the value of its currency.  They “fix” it every day. And they’ve been walking it higher.  That’s a big signal.

Here’s a look at the chart …

This chart shows the dollar/yuan exchange rate.  When the orange line is rising the dollar is strengthening, the yuan is weakening – and vice-versa.

You can see in 2015 and through 2016 (Line 1) the Chinese devalued the yuan by about 16% to respond to weak exports and sluggish growth.  When Trump was elected, he made it clear he would be coming after China for their cheap currency policies (i.e. manipulating the yuan to retain dominance in global exports).  With that, the Chinese strengthened the yuan in effort to stave off a trade war.  It didn’t work. And you can see in the most recent run up (Line 3) how they’ve responded.  They’ve gone back to weakening the currency.

Now, as we’ve discussed, the lower stock market has put pressure on the Trump agenda, which makes it more likely that some ground will be given on the demands that the U.S. has made on China.  So, with this backdrop in mind, how can Trump get to a deal on trade that gives him a win — and gives China an out, for the moment?  The Chinese currency could be a tool to get to an agreement – maybe China taking it back to 6 yuan per dollar in the near term.  
You can see in the shorter-term chart above, since Trump and Xi agreed to a 90-day period to get a deal done, the Chinese have been walking the yuan higher (which is shown in the falling line in the chart).
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Fed Continues To Dial Down Expectations

January 10, 5:00 pm EST

The coordinated response to market turmoil continues to reverse the tide of what was becoming an increasingly ugly global financial market meltdown.

Remember, we had a response from the U.S. Treasury Secretary on the days leading up to Christmas, which included call outs to the major banks and a meeting of the “President’s Working Group” on financial markets. Coincidentally, by the next Wednesday, a new item hit the agenda for the American Economic Association Annual Meeting. It was the January 4 live interview with the three most powerful central bankers in the world over the past ten years: Bernanke, Yellen and Powell. These three sat on stage together and massaged market sentiment on the path of interest rates, fortifying the market recovery that was started by the efforts of the Treasury.

Just in case we didn’t get the message, we’ve since had six Fed officials publicly dialing down expectations on the rate outlook, in response to financial markets. And we’ve had minutes from the Fed’s last meeting that clearly gave the message that the Fed could pause, sit and watch. And then today Powell was on stage again for another public interview, reiterating the Fed’s new position: on hold.

Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.

Key Charts

January 9, 5:00 pm EST

We discussed yesterday how markets might look by the end of the year, if the pontifications about a global slowdown and impending crisis are dead wrong.

The reality: That is the low probability outcome.  The higher probability outcome is another 3%+ year growth in the U.S. in 2019, a resolution on the Chinese trade dispute, and a rebound in emerging market growth.

With the “high probability scenario” in mind, let’s take a look at some key charts that look very vulnerable to a sharp squeeze.

Remember, oil and stocks have been in a synchronized decline since October 3.

On Friday we looked at this chart on oil, and the break of the big downtrend that accompanied some rate-hike relief jawboning from the Fed.

Today the chart looks like this …up almost 9% from Friday.
Here’s the chart on stocks we looked at on Friday …

We broke a big level on Friday at 2,520.  We’re up another 2.3% since.

What about yields?  The fear in the interest rate market hasn’t been/wasn’t that the economy can’t withstand a 3% ten-year yield.  The fear has been the speed at which the interest rate market was moving, and the methodical tightening process of the Fed.  Would 3% quickly become 4%?

The Fed has now backed off.  That quells the fears of a “too far, too fast” adjustment in rates.  But the interest rate market had already been pricing in the worst case scenario (another recession and crisis, in part thanks to the Fed policy).  If that was an over-reaction, I suspect we’ll see a move back toward 3%-3.25% in the 10s in the coming months. As you can see in the chart, this big line is being tested today.  And as long as the Fed stays data dependent, not telegraphing another series of hikes, the market should accept a 3% ten year yield just fine.  
To sum up: Markets tend to be caught wrong-footed at the extremes — leaning too hard in one direction, with sentiment too depressed or too exuberant.  And I suspect we’ve seen that extreme in Q4.  Sentiment was deeply shaken by the sharp decline in stocks, and that spilled over into the outlook for global economic stability.

But as we discussed yesterday, we have a Q4 earnings season upon us that is set up for positive surprises (given the sharp downward adjustment in expectations).  And if Trump gives some ground to get a deal done with China, these key markets are set up for big and sharp recoveries.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Maybe The Real Economic Expansion Is Just Beginning

January 8, 5:00 pm EST

The expectations have been dialed down dramatically over the past few months for markets and the economy.

If indeed it’s all detached from reality, as the fundamentals would suggest, how might markets look if we have another 3%+ year growth in the U.S. in 2019, and if the weight of the China trade dispute lifts, and emerging market growth rebounds?

My guess:  stocks and commodities will be much, much higher by year end.

For stocks, Q4 earnings season kicks off next week with the banks.  Given the deterioration in sentiment last quarter, the estimates on earnings have been dialed down.  We’ve gone from a full year of earnings growth north of 20% (in 2018) to earnings growth expectations in 2019 at just 7%.   That sets up for positive earnings surprises this year.  And at 14 times next year’s earnings, the market is already dirt cheap — better earnings would make stocks even cheaper.

As for commodities, the economic expansion has been called “late cycle” by many, but commodities haven’t participated, as you can see in the chart below.
What if this chart tells us that the decade that followed the financial crisis was indeed a depression, and central banks were only able to manufacture enough economic 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).
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.