The Fed met today—and they made no change to policy. As we all know, their words will be parsed endlessly. But the fact is, the Fed, at this point, is a side show. It’s two other central banks (BOJ and ECB), and likely policy makers in China that will dictate what stocks do, what commodities do and what the global economy does for the next year (or few).
With that, the real event is tomorrow night. The Bank of Japan will decide on their next move. And the BOJ holds many, if not all of the cards for the U.S. stock market and the global economy. Today we’re going to talk about why that’s the case.
As we said yesterday, the consensus view is that the BOJ will do nothing this week. That sets up for a surprise, which Japanese policymakers like and want. It gives their policy actions more potency.
We talked yesterday about the role central banks have played in the long and slow global recovery. To put it simply, central banks have manufactured the global economic recovery. Without the intervention, there would have been a global economic collapse and blood in the streets, still. It was all led by the Fed. They slashed interest rates to zero. They rolled out the unprecedented bond buying program that pinned down mortgage rates (putting a bottom in the housing market), and helped to recapitalize the big banks that were drowning in defaulted debt, withering deposits and an evaporation of loan demand. They opened up currency swap lines (access to U.S. dollars) with global central banks so that those central banks could fend off collapse in their respective banking sectors.
Most importantly, with all of the intervention, and after spending and committing trillions of dollars in guarantees, backstops and bailouts, the Fed clearly communicated to the public, by their actions, that they would not let another shock event destabilize the world economy. Europe was next to step up, to do the same.
When the weak members of the European Monetary Union were spiraling toward default, which would have destroyed the euro and Europe all together, the leading euro zone nations stepped in with a bailout package.
Still, a year later, bigger trouble was brewing, as big countries like Italy and Spain were on the precipice of default. That’s when the European Central Bank (ECB) went “all–in”, effectively guaranteeing the debt of Italy and Spain by saying they would do “whatever it takes” to save the euro (and the euro zone).
Those were the magic words: “whatever it takes.”
That statement meant that the central bank would buy the debt of those countries, if need be, to keep them solvent, for as much and as long as needed…”whatever it takes.” That was the line in the sand. If you bought European stocks that day, you’ve doubled your money will little–to–no pain.
Similarly, Japan read from Draghi’s script a few months ago (late September of 2015) when global stocks were falling sharply and threatening to destabilize the world again. Japan’s Prime Minister Abe was in New York, and in a prepared speech, said they would do “whatever it takes” to return Japan to robust sustainable growth. Once again, the magic words put a bottom in global stocks and led to a sharp rebound.
“Whatever it takes” means, if need be, they print more money, they will support government debt markets, they will outright buy stocks, they will devalue currencies, they will do whatever it takes to promote growth and to prevent a shock that would derail the global economy. Why? Because they know the alternative scenario/the negative scenario is catastrophic.
Not surprisingly, in the past six days, with global stocks in turmoil, Draghi stepped in again. This time, he conjured up some new magic words. He said there are no limits to what the ECB can buy (as part of their QE program). Guess who followed his lead? The head of the BOJ sat in front of a camera the next day and said the exact same thing. This tells me stocks are fair game. We already know that’s the case for the BOJ. They are already outright buying stocks. But it also tells me commodities are fair game. And high yield corporate debt. Anything that is threatening to destabilize global markets and threatening to knock the global economic recovery off path—it’s fair game for the ECB and BOJ to put a floor under (i.e. by buying up assets with freshly printed currency).
What does it all mean? It means the ECB and the BOJ are now at the wheel. They relieved pressure from the Fed, allowing the Fed to begin the path of removing the emergency policies (albeit very slowly) of the past nine years. The Fed only makes this move because they believe the U.S. economy is robust enough to handle it. And, more importantly, they only start this path because they know that two other major central banks in the world will continue to provide fuel for the global economy and defend against shocks through their aggressive policies.
Now, within this monetary policy dominated world, where everyone is all–in, the policy actions have simply kept the global economy alive and breathing, they have done nothing to address the major structural problems the world is enduring: Massive debt and slow–to–no growth.
What’s the solution? There hasn’t been one. Until Japan unveiled their massive stimulus program in 2013. The potential solution: A massive devaluation of the Japanese yen.
Japan, unlike many other major central banks (including the Fed), has all of the right ingredients to achieve its inflation goal via the printing press—it has the biggest debt load in the world (which can be inflated away by yen printing), it has persistent deflation (which can be reversed by printing), and it has decades of economic stagnation (which can be reversed with hyper easy money and improvements in the global economy).
In short, they can do all of the things that other powerful central banks/economies can’t do—and it can result in a huge benefit not just in Japan but for fueling a recovery in the global economy (as capital pours out of Japan). In a world with few antidotes to the structural economic problems, this is a potential solution for everyone. So perhaps the most important ingredient for a successful campaign in Japan°they have the full support/hope/wishes of the major global economic powers (US, Europe, UK).
The Bank of Japan is targeting to run their aggressive QE program at full tilt until they can produce a target of 2% inflation in their economy. Their latest inflation data is closer to zero than 1% (still very far from 2%). So they still have a lot of work to do. They completed two years of their big, bold plan—and two years was the timeline they projected to achieve their goal. Clearly, they haven’t met the inflation goal. And they have since, as we’ve said, committed to do whatever it takes to do it, and for as long as it takes. With that, we expect more expansion to their QE program (possibly this week). And, importantly, a huge part of their success is (and will be) dependent upon higher Japanese stocks, and a weaker yen. They have explicitly said so. It’s part of their game plan.
Japan’s Prime Minister Abe was elected on his aggressive plan to end deflation. That was, and is, his priority. He hand-selected the Bank of Japan governor to carry out his plan.
Here’s the quick and dirty summary: With free–falling oil and depressed commodity prices threatening widespread defaults across the energy sector, which would soon be followed by sovereign debt defaults from oil producing nations (like Russia), don’t be surprised if we see the BOJ (and maybe the ECB) step in and gobble up dirt cheap commodities as a policy initiative. It would put a floor under stocks, commodities, and promote stability and growth.
At Billionaire’s Portfolio we study the buying patterns of the world’s greatest billionaire investors and hedge funds. So when the greatest billionaire investors in the world are scooping up beaten down stakes in energy companies, we pay close attention.
We know two things about the best billionaire investors in the world: 1) they have made billions throughout their careers buying when everyone else is selling, and 2) they have a knack for picking the winners, the stocks and sectors, and marking the bottom when they enter.
Let’s look at the investments the world’s best billionaire investors have been bottom fishing and/or adding to their positions into the sharp declines:
1) Phillips 66 PSX +1.30% (PSX) – Buffett revealed last September he had taken a $4.5 billon position in the energy stock Phillips 66. This is a typical Buffett stock. It sells for just 9 times earnings, a huge discount to the S&P 500’s P/E of 21, and the stock pays nearly 3% in a dividend. Furthermore, the company has a pristine balance sheet, with very little debt – a classic Buffett stock, cheap and safe. Buffett has added another $700 million to this stock just in the past two weeks. He’s the largest shareholder.
2) Williams Companies (WMB) and Pioneer Natural Resources PXD +5.31% (PXD) – Billionaire Stephen Mandel, of the hedge fund Lone Pine Capital, more than doubled his stake in Williams over the past month. Mandel’s Lone Pine now owns 5.6% of Williams or almost 42 million shares. This is up from 17.6 million shares a quarter ago. Mandel and Lone Pine also initiated a brand new position in Pioneer Natural Resources according to their most recent investor letter. Billionaire Seth Klarman’s Baupost Group owns $450 million worth of PXD, his fourth largest position.
3) Cheniere Energy (LNG) – Carl Icahn also initiated a $1.3 billion position in energy stock LNG in August of last year, taking an 8% ownership in the company. Cheniere is on track to become the first U.S. company able to export liquefied natural gas. This makes LNG a classic “wide moat” (no competition) stock. Icahn has already secured two board seats on Cheniere’s board. Icahn’s “board seat effect” has proven to be a huge predictor of success for the legendary activist. According to an essay Icahn penned last year, when he gets a board seat in a company, his stock returns averages 27.5%. Since his initial stake in August, Icahn has added to his stake several times into the end of the year. He now owns 13.8% of LNG — the largest shareholder. And Seth Klarman’s Baupost Group just added another 15 million shares this month to his already enormous stake in LNG. He now owns 15% of the company.
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The legendary billionaire investor, Warren Buffett, lost 12.3% in 2015. That was his worst year since 2008.
Meanwhile, the average hedge fund lost 3%. The average mutual fund lost 2.7%. And stocks broadly finished the year down too (before dividends), for the first time since 2008. Even most of the biggest and best known professional investors had a bad 2015. Still, one of the lesser known, but one of the best in the world, defied the gravity of stocks and posted an 8.3% gain for the year.
It was billionaire Andreas Halvorsen. He runs Viking Global, the ninth largest hedge fund in the world at $31 billion in assets under management.
Halvorsen started his fund in 1999, after training under the legendary billionaire investor Julian Robertson. He’s a former Norwegian Navy Seal and a Stanford MBA.
Halvorsen extracted more than $2.5 billion from the markets in 2015, as a stock investor, in one of the more difficult stock picking environments in a long time. And last year was not an anomaly. Viking has one of the best track records of any hedge fund over the past 16 years. Since inception in 1999, the fund has returned 23% annualized (before fees) vs. a 4% annualized return for the S&P 500.
Halvorsen’s stock picking abilities have produced returns at a factor of 3.5 times better than Buffett’s since he’s been at the helm of Viking. And he’s done it with much smaller drawdowns. In fact, Viking has only had two losing years since 1999. The fund lost 0.9% in 2003 and lost just 0.9% in 2008, a year when almost all stock investors were crushed. Buffett lost 31.5% that year.
The following are Viking’s top positions: Allergan (AGN), Walgreen’s (WBA), Google/Alphabet (GOOGL), Amazon (AMZN) and Broadcom (BRCM).
In addition, in Halvorsen’s most recent investor letter, he said his fund had doubled down (added more) on a very controversial stock in their portfolio. At Billionaire’s Portfolio we curate a portfolio of the best stock picks of the world’s best billionaire investors – our subscribers follow along. To find out what stock Viking Global is adding to after a big decline, subscribe today.
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At Billionaire’s Portfolio we study the buying patterns of the world’s greatest billionaire investors and hedge funds. So when two of greatest billionaire investors in the world, Carl Icahn and Warren Buffett, are adding more to their large, beaten down stakes in energy companies, we pay close attention.
We know two things about Buffett and Icahn: 1) they have made billions throughout their careers buying when everyone else is selling, and 2) they have a knack for picking the winners, the stocks and sectors, and marking the bottom when they enter.
Their respective records are especially remarkable in times when widespread fear and doubt is in the air. For example, Icahn marked the bottom in technology stocks in the fall of 2012 with his 10% position in Netflix. He made $2 billion in profits on the trade, a nearly 1,000% return. Buffett marked the bottom in bank stocks in the fall of 2011 when he initiated a $5 billion position in Bank of America. That investment has almost tripled in price since, producing nearly $10 billion in open profits for Buffett.
Now, it’s typical in market environments like this to hear from experts that warn against picking tops and bottoms. But contrary to the Wall Street adages against market timing, the two best investors of all-time have amassed two of the largest personal fortunes in the world by (as Buffett says) “being greedy while others are fearful.” And they are using the new lows in oil and energy markets to add more to their stakes. Historically, that tends to be a profitable signal. There is a Harvard study that shows when hedge funds “double down” on losing positions, on average those tend to be their biggest winners.
Let’s look at the investments from this billionaire duo where they have been adding to their losers:
1) Phillips 66 (PSX) – Buffett revealed last September he had taken a $4.5 billon position in the energy stock Phillips 66. This is a typical Buffett stock. It sells for just 9 times earnings, a huge discount to the S&P 500’s P/E of 21, and the stock pays nearly 3% in a dividend. Furthermore, the company has a pristine balance sheet, with very little debt – a classic Buffett stock, cheap and safe. Buffett has added another $700 million to this stock just in the past two weeks. He’s the largest shareholder.
2) Chesapeake Energy (CHK) – Carl Icahn owns doubled his stake last spring when he bought 6.6 million shares of CHK for about $14. Icahn now owns 11% of Chesapeake. If the stock returns to the price where Icahn doubled down it would represent an almost 300% return for today’s levels. With the sharp fall in the stock price this past week, I wouldn’t be surprised if we find in the coming days that Icahn added more into the recent slide.
3) Cheniere Energy (LNG) – Carl Icahn also initiated a $1.3 billion position in energy stock LNG in August of last year, taking an 8% ownership in the company. Cheniere is on track to become the first U.S. company able to export liquefied natural gas. This makes LNG a classic “wide moat” (no competition) stock. Icahn has already secured two board seats on Cheniere’s board. Icahn’s “board seat effect” has proven to be a huge predictor of success for the legendary activist. According to an essay Icahn penned last year, when he gets a board seat in a company, his stock returns averages 27.5%. Since his initial stake in August, Icahn has added to his stake several times into the end of the year. He now owns 13.8% of LNG — the largest shareholder.
According to the Wall Street Journal, hedge fund manager John Armitage of Egerton Capital made $1.5 billion for his investors last year. Armitage was said to be short oil and energy stocks, pressing those position as much of his peers were looking for a bounce.
In a world where some of the world’s best investors will end the year down double digits, Armitage’s net worth has likely grown toward the billion dollar level after collecting fees on his top-tier industry performance.
So who is John Armitage?
Armitage graduated from Cambridge University in 1981 with a degree in modern history. He started his hedge fund Egerton Capital in 1994 and has put up some of the best risk-adjusted returns in the hedge fund industry since. Egerton has returned 15% net of fees with significantly less volatility than the S&P 500 since 1994. That’s why the fund has amassed more than $15 billion in assets under management.
For a glimpse into the best ideas from John Armitage, below are the top 5 holdings of his $15 billion hedge fund, Egerton Capital:
Time Warner Cable (TWC)
Southwest Airlines (LUV)
Gilead Sciences (GILD)
Comcast (CMCSA)
Priceline (PCLN)
Today, shareholders of Keurig Green Mountain, (GMCR) woke up to a nice 75% pop in the value of their shares. A private equity firm is taking the company private for $13.9 billion or $92 a share. That’s made GMCR one of the biggest one day movers for an S&P 500 stock this year.
Most interesting, you could have participated in this huge winner.
Just last month, at “The Invest for Kids Chicago” hedge fund conference, Ricky Sandler of the $6.5 billion hedge fund, Eminence Capital, made a detailed presentation on why he thought Keurig Green Mountain was worth $85 to $100 a share. The stock was selling for around $50 at the time and Eminence owned $195,000,000 worth — the largest hedge fund owner of the stock.
Apparently the private equity firm JAB Capital agreed with Sandler. They paid a price at the mid-point of his valuation.
Now, if you were paying attention to this conference and bought the stock, clearly you could have made a lot of money. We attend or read the transcripts from every major hedge fund conference on the planet. These ideas are not often covered in the mainstream press or online media, and therefore are ripe for finding hidden investment gems like GMCR.
Today’s news is just one of many examples of stock takeovers that can be predicted by the presence of an influential investor. For example, just last month, at BillionairesPortfolio.com we predicted the takeover of MedAssets, thanks to the work and presence of activist investor Starboard Value (you can see those details here).
Of course, today’s star performer was Ricky Sandler and Eminence Capital. With that, here are the top 5 best ideas from Eminence Capital.
1) Zynga (ZNGA) – Another top idea Sadler presented at “The Invest for Kids Chicago” conference was Zynga. Sadler say Zynga is undervalued because it has $500 million in real estate (its San Francisco Headquarters) and a $1.15 in cash per share, meaning the market is valuing its underlying business for almost nothing. Sandler said if the stock were valued similar to its peer, King Digital, Zynga should be worth $5 a share or a double from its share price today.
2) AIG (AIG) – Another top idea of Eminence Capital is AIG. Eminence owns more than $350 million of AIG stock through a mix of shares and options, more than 5% of its portfolio. Billionaires Carl Icahn and John Paulson also own huge stakes in AIG and Icahn has said AIG could be worth as much as $100 a share or a 50% return from its share price today.
3) GNC (GNC) – GNC is the third largest position in Eminence Capital’s portfolio. It owns 6% of GNC. The stock is extremely undervalued as it has a forward P/E of 9, price to free cash flow of 11, and almost a 3% dividend. These valuation metrics put GNC in that “buyout candidate” territory, just like Keurig Green Mountain.
4) Men’s Wearhouse (MW) – Eminence Capital owns more than 8% of Men’s Wearhouse and has held onto the stock even as it’s been crushed. Men’s Wearhouse has dropped from $65 to $20 this year, making the stock very cheap. It has a price to sales of just .28. It sells below its book value. And it has a forward P/E of just 8 (about that of the S&P 500).
5) Autodesk (ADSK) – Eminence Capital’s top position is Autodesk. They own almost $300 million worth, making it nearly 5% of their portfolio. Autodesk is up 44% over the last 2 months, as it has been rumored to be another takeover candidate. A top $4 billion activist hedge fund, Sachem Head, owns 5.7% of the stock and launched an activist campaign on the company last month.
Billionairesportfolio.com, run by two veterans of the hedge fund industry, helps self-directed investors invest alongside the world’s best billionaire investors.
Goldman Sachs just released its most loved stocks list among the hedge fund community. Goldman narrows the thousands of stocks represented in the most recent quarterly 13F filings down to their “most important” 25. At Billionairesportfolio.com, we’ve narrowed that list down to the five stocks owned by billionaire hedge fund managers with the most potential upside.
Below are the five stocks:
1) Charter Communications (CHTR) – Charter is one of the top ten most owned stocks by hedge funds. Billionaire hedge fund managers Stephen Mandel of Lone Pine Capital and John Paulson own large stakes in Charter. Mandel owns more than $1 billion worth of Charter. At the recent Robin Hood Investment Conference, one of Paulson’s portfolio managers said Charter could be worth as much as $325 a share, nearly 75% higher than current levels.
2) Yahoo (YHOO) – Yahoo is another popular stock owned by billionaire hedge fund managers. Billionaire David Einhorn and Starboard Value, a top $5 billion activist hedge fund, both own big stakes in Yahoo. The average analyst price target for Yahoo is $49 or a 50% potential return from its current share price.
3) General Motors (GM) – Another popular billionaire owned stock in the Goldman Sachs VIP (very important position) list is GM. Billionaire hedge fund manager David Tepper owns GM. If fact, GM is David Tepper’s largest equity position in his hedge fund. The average analyst price target for GM is $50 or almost a 50% return from its current share price.
4) AIG (AIG) – Billionaires Carl Icahn and John Paulson are two of the largest holders of AIG. Both billionaires have pushed for AIG to break up and spin off business units. Icahn recently said that if AIG breaks into three companies the company could be worth more than $100 a share. That would be a 56% return from its current share price.
5) Apple (AAPL) – Billionaires Carl Icahn and David Einhorn both hold Apple as their largest position. Icahn owns almost $6 billion of Apple. Piper Jaffrey recently put a $179 target price on Apple or a 51% return from its current share price.
Billionairesportfolio.com, run by two veterans of the hedge fund industry, helps self-directed investors invest alongside the world’s best billionaire investors.
It’s a busy week for following the moves of the world’s richest and most influential investors. We have the Robin Hood Investors Conference in New York, which normally produces some investing nuggets from billionaire investors. And the deadline for their quarterly public disclosures to the SEC on their stock holdings is today (13f filings).
Remember, in the second quarter, the world was in the cross hairs of the calamity in Europe, surrounding the threat of a Greek default and exit from the euro. As Greece brought the world to the edge of disaster, the world’s biggest investors showed some fear, as they began shuffling their portfolios. While the turnover was much more subdued in the third quarter, there are a number of interesting buys and sells from the world’s top investors.
1) Billionaire hedge fund manager, David Tepper, who probably has the best 20 year track record of any investor alive, made quite a few interesting moves last quarter. Tepper slashed his holdings in large cap tech: Apple (AAPL) Google, (GOOG) and sold all of his Alibaba (BABA) stake. Tepper initiated new positions in Nike (NKE), Allstate (ALL) and Southwest Airlines (LUV).
2) Billionaire value investor Seth Klarman initiated a new 52 million share position in Alcoa, making him the second largest shareholder in this beaten down S&P 500 stock. Alcoa sells for just $8 a share but has a book value of almost $10. Alcoa is down almost 50% YTD, so Klarman is trying to pick a bottom in this aluminum stock.
3) Warren Buffett initiated a new positon in AT&T (T) and Kraft Heinz (KFC). Buffett now owns an incredible $22 billion of Kraft Heinz making his second largest position or 18% of his portfolio. Buffett also purchased more IBM (IBM) and trimmed his stakes in Goldman Sachs (GS) and Wal-Mart (WMT).
4) Billionaire hedge fund manager Dan Loeb of Third Point also took a new position in Kraft Heinz as well, almost $600 million. Loeb also took new stakes in Time Warner Cable (TWC) and Avago Technologies (AVGO). Loeb sold all of his SunEdison (SUNE) and Perrigo (PRGO) positions.
5) At the Robin Hood investment conference this morning, billionaire hedge fund manager, David Einhorn of Greenlight Capital said his “Best Idea” was Consol Energy (CNX), a coal and natural gas stock. The fund owns almost 23 million shares of Consol making it one its largest holdings. Einhorn first purchased the stock at $37.58 in late 2014, today it sells for $7.76. If Consol goes back to Einhorn’s purchase price it would mean a 350% return.
6) In an interview at the Robin Hood Investors Conference, Jamie Dimon, the CEO of JP Morgan, gave a rare glimpse into his billion dollar portfolio. Dimon said that he owns 3 stocks: Yum Brands (YUM), Boeing (BA) and Union Pacific (UNP).
7) Billionaire Leon Cooperman initiated a new almost $100 million stake in Valeant Pharmaceuticals (VRX) at prices between $155 and $260. Cooperman also initiated new stakes in Pfizer and Amazon. That reiterates our view that billionaire investors hedge funds continue to buy more healthcare and biotech stocks, even as the rest of the world is running from the sector.
Billionairesportfolio.com, run by two veterans of the hedge fund industry, helps self-directed investors invest alongside the world’s best billionaire investors.
Everyone has read news in the past about a big buyout in the stock market. And often the news will report that the stock in the company that is being acquired skyrocketed on the day. Envy tends to follow.
Generally, companies that are bought, are bought for a significant premium. Otherwise, shareholders would likely reject the offer. So when you hear of a big takeover, it’s not unusual to hear of a 20%,30%, even a 100% pop for shareholders on the day of the announcement.
So how to you identify the next big takeover? One of the easiest ways is to follow big, influential shareholders into stocks where they are pushing companies to sell themselves.
This week, we owned a stock in our Billionaire’s Portfolio, MedAssets (MDAS), that was taken over for a 33% premium. We held this stock for only two months, following the lead of one of our favorite activist investors, Starboard Value.
Starboard is one of the best at articulating recommendations for management and helping them execute on it. We followed Starboard Value into Office Depot and doubled our money. Starboard is run by the Wharton educated Jeff Smith, who is a tenacious and detailed activist investor. He has one of the best activist track records in the business. Since inception almost 13 years ago, Smith’s fund has made money on 82% of their activist campaigns (prior to MDAS). That’s one of the highest win rates in the industry.
Starboard took a huge activist stake in MedAssets in August and wrote a detailed letter to the company, outlining a plan to unlock value, which included strategic alternatives (such as the sale of the company).
Fast foward just two months: MedAssets was the second biggest winner in the entire stock market on Monday.
There has been a lot written about billionaire investing and activism over the past couple of years. It’s become a very hot topic. And the investors themselves, which once coveted anonymity, now utilize the spotlight to their advantage. Twitter, the internet and the media obsession with their wealth gives them the platform to spread their message about underperforming companies, and garner support from fellow shareholders. Still, finding the right investors to follow, and identifying the right opportunities is paramount.
Out of the 29 campaigns we’ve exited in our Billionaire’s Portfolio since the inception of our service, in August of 2012, five of the stocks were acquired.
That’s 17% of the stocks we’ve selected, and exited, that have been taken over for big premiums – so, strong anecdotal evidence that following influential shareholders that are pushing for a sale works!
The S&P 500 is now more than 200% higher than at its crisis-induced 2009 lows. Despite the powerful recovery in stocks, the rally has had few believers. All along the way, skeptics have pointed to threats in Europe, domestic debt issues, central bank meddling, political stalemates, perceived asset bubbles — you name it. As it relates to stocks, they’ve all been dead wrong.
The truth is, global central banks are in control. They have been coordinating since 2009 to save the worldwide economy from an apocalyptic spiral. Because the crisis was global, and the structural problems remain highly intertwined globally, the only hope toward achieving a return to sustainable growth was through a coordinated effort to restore stability and confidence. And with that backdrop, they had to create incentives for people to take risk again. It has worked! With the Fed moving closer to exiting emergency policies, this past year, the QE baton has been passed from the Fed to the ECB and the BOJ.
As part of the massive QE programs in Europe and Japan, the Bank of Japan has been outright buying stocks and the ECB might be next. After doubling the value of the Nikkei with his economic stimulus program, the architect of Abenomics, Prime Minister Abe, has said they are only “half way to its goals.” With the tail-winds of central bank influence to continue (Reason #1 to buy stocks). Here are three more simple reasons you should be buying, not selling, stocks:
1) History
If we applied the long-run annualized return for stocks (8%) to the pre-crisis highs of 1,576 on the S&P 500, we get 3,150 by the end of next year, when the Fed is expected to begin the slow process toward normalizing rates. That’s nearly 52% higher than current levels. Below you can see the table of the S&P 500, projecting this “normal” growth rate to stocks.
2) Valuation
In addition to the above, consider this: The P/E on next year’s S&P 500 earnings estimate is just 16.2, in line with the long-term average (16). But we are not just in a low-interest-rate environment, we are in the mother of all low-interest-rate environments (ZERO). With that, when the 10-year yield runs on the low side, historically, the P/E on the S&P 500 runs closer to 20, if not north of it. If we multiply next year’s consensus earnings estimate for the S&P 500 of $126.77 by 20 (where stocks to be valued in low rate environments), we get 2,535 for the S&P 500 by next year — 23% higher.
3) Recession Risk
For those who argue the economy is fragile, the bond market disagrees with you. The yield curve may be the best predictor of recessions historically. Yield curve inversions (where short rates move above longer-term rates) have preceded each of the last seven recessions. Based on this analysis, the below chart from the Cleveland Fed shows the current recession risk at 3.66% — virtually nil.
What about the impact on stocks of a rate hiking cycle? Historically, through the past six rate hiking cycles stocks have performed well, contrary to popular belief. Still, there is an important distinction this time: The Fed moving away from emergency policies is a celebratory event for stocks and the economy. After nine years of crisis, and a near global apocalypse, the Fed thinks the economy is robust enough take down the “high alert” flag.
Billionairesportfolio.com, run by two veterans of the hedge fund industry, helps self-directed investors invest alongside the world’s best billionaire investors.
