James Bullard, the President of the St. Louis Fed, said today that even if unemployment went to 3% it would have little impact on the current low inflationevironment. That’s quite a statement. And with that, he argued no need to do anything with rates at this stage.And he said the low growth environment seems to be well intact too — even though we well exceeded the target the Fed put on employment years ago. In the Bernanke Fed, they slapped a target on unemployment at 6.5% back in 2012, which, if reached, they said they would start removing accomodation, including raising rates. The assumption was that the recovery in jobs to that point would stoke inflation to the point it would warrant normalization policy. Yet, here we are in the mid 4%s on unemployment and the Fed’s favored inflation guage has not only fallen short of their 2% target, its trending the other way (lower).
As I’ve said before, what gets little attention in this “lack of inflation” confoundment, is the impact of the internet. With the internet has come transparency, low barriers-to-entry into businesses (and therefore increased competition), and reduced overhead. And with that, I’ve always thought the Internet to be massively deflationary. When you can stand in a store and make a salesman compete on best price anywhere in the country–if not world–prices go down.
And this Internet 2.0 phase has been all about attacking industries that have been built upon overcharging and underdelivering to consumers. The power is shifting to the consumer and it’s resulting in cheaper stuff and cheaper services. And we’re just in the early stages of the proliferation of consumer to consumer (C2C) business — where neighbors are selling products and services to other neighbors, swapping or just giving things away. It all extracts demand from the mainstream business and forces them to compete on price and improve service. So we get lower inflation. But maybe the most misunderstood piece is how it all impacts GDP. Is it all being accounted for, or is it possible that we’re in a world with better growth than the numbers would suggest, yet accompanied by very low inflation?
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With some global stock barometers hitting new highs this morning, there is one spot that might benefit the most from this recently coordinated central bank promotion of a higher interest environment to come. It’s Japanese stocks.
First, a little background: Remember, in early 2016, the BOJ shocked markets when it cut its benchmark rate below zero. Counter to their desires, it shook global markets, including Japanese stocks (which they desperately wanted and needed higher). And it sent capital flowing into the yen (somewhat as a flight to safety), driving the value of the yen higher and undoing a lot of the work the BOJ had done through the first three years of its QE program. And that move to negative territory by Japan sent global yields on a mass slide.
By June, $12 trillion worth of global government bond yields were negative. That put borrowers in position to earn money by borrowing (mainly you are paying governments to park money in the “safety” of government bonds).
The move to negative yields, sponsored by Japan (the world’s third largest economy), began souring global sentiment and building in a mindset that a deflationary spiral was coming and may not be leaving, ever—for example, the world was Japan.
And then the second piece of the move by Japan came in September. It was a very important move, but widely under-valued by the media and Wall Street. It was a move that countered the negative rate mistake.
By pegging its ten-year yield at zero, Japan put a floor under global yields and opened itself to the opportunity to doing unlimited QE. They had the license to buy JGBs in unlimited amounts to maintain its zero target, in a scenario where Japan’s ten-year bond yield rises above zero. And that has been the case since the election.
The upward pressure on global interest rates since the election has put Japan in the unlimited QE zone — gobbling up JGBs to push yields back down toward zero — constantly leaning against the tide of upward pressure. That became exacerbated late last month when Draghi tipped that QE had done the job there and implied that a Fed-like normalization was in the future.
So, with the Bank of Japan fighting a tide of upward pressure on yields with unlimited QE, it should serve as a booster rocket for Japanese stocks, which still sit below the 2015 highs, and are about half of all-time record highs — even as its major economic counterparts are trading at or near all-time record highs.
The dollar has come into the crosshairs of the new president in recent weeks.
Let’s talk about what’s happening and why it matters.
First, it’s highly unusual for the U.S. President to comment on the dollar. The Fed doesn’t even comment. If they do it’s in an indirect way. It has always been a topic deferred to the Treasury Secretary. And the consistent message there has been, for a long time, that we are for a strong dollar.
Things have changed. Or have they? In mid-January, President Trump told the Wall Street Journal that the dollar was “too strong.”
The markets have had a hard time trying to reconcile this comment and stance taken by the administration. But we have to keep in mind: The new president has been a bit less than measured in his words.
When the Fed is in a hiking cycle and other major central banks are still in QE mode, capital will continue to flow into the U.S., and you’re going to get a stronger dollar. When you incentivize U.S. corporates to repatriate a couple trillion dollars they have offshore, you’re going to get a stronger dollar. When/if you pop growth to 4%, you’re going to get higher rates, faster, and you’re going to get a stronger dollar (especially when that growth will lead the rest of the world).
So what is this jawboning on the dollar all about?
As we know, Trump has had an early focus on trade. And he’s used displeasure with trade deficits with countries as a bargaining chip to start conversations about more fair trade terms. But while many have been pulled into the fray over the past few weeks (like Canada, Mexico, the euro zone, etc), this is all about China. My guess is he’s using Mexico as an example for China.
We’ve heard a lot about the $60 billion trade deficit Mexico. It is our third largest trading partner. But that deficit is peanuts when compared to China. Same can be said for Japan, Germany and Canada, three of our other largest trading partners. With China, however, we buy about $483 billion worth of goods. And we sell them only about $116 billion. That’s a $367 billion deficit.
The problem is, it never corrects. It continues, and will continue, unless dealt with. Currencies are the natural trade rebalancer. And with China, it doesn’t happen because they outright dictate the exchange rate. The cheap currency has been/and continues to be its economic driver–and it’s the unfair competitive advantage that has crippled the global economy over time.
Consider this: Over the past 20 years, China’s economy has grown more than fourteen-fold! … to $10 trillion. It’s now the second largest economy in the world. During the same period, the U.S. economy has grown just 2.5x in size. And in the process a global credit bubble was formed. China sells us goods. We give them dollars. China takes our dollars and buys U.S. Treasuries, which suppresses U.S. interest rates and incentivizes borrowing, which fuels more consumption. And the cycle continues.
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I talked yesterday about the Fed. As I said, I think we’ll find that the Fed will shift gears again to stay behind the curve on inflation, to let the economy run a little hot. They met today and it was a non-event. They said nothing to build momentum on their rate hike from December.
The news of the day has been Apple (NASDAQ:AAPL) earnings. People over the past couple of years have been calling for the decline in Apple. They’ve said it’s topped. They can’t innovate in the post-Steve Jobs era. The iPhone was magic. But reproducing magic isn’t easy. Once you put a computer in everyone’s pocket, there’s not much more they can do to it with it. These are all of the quips about Apple’s peak. They may be right. But Apple’s peak, at least as a stock, is greatly exaggerated.
They reported a huge positive surprise on earnings yesterday after the close. The stock was up 6% on the day. But even before that, I suspect it has become a much loved stock in the past two months in the “smart money” investor community.
We should see in the coming weeks, as big investors disclose their positioning for the end of Q4, Apple will have returned to a lot of portfolios again. Warren Buffett, an investor that has made his fortune buying when others are selling, built a big stake at the lows of the year last year. And it’s a perfect Buffett stock.
It’s incredibly cheap compared to the market.
The stock still trades at 15x earnings. Much cheaper than the market. Apple trades at 13x next year’s projected earnings. The S&P 500 trades at 16.5x. What about Apple’s monster cash position? Apple has even more cash now — a record $246 billion. If we excluded the cash from the valuation, Apple market cap goes down from $675 billion to $429 billion. That would equate to Apple trading at closer to 9x earnings. Though not an “apples to apples” that valuation would group Apple with the likes of these S&P 500 components that trade around 9 times earnings, like: Dow Chemical, Prudential Financial, Bed Bath & Beyond, a Norwegian chemical company (LBY), and Hewlett Packard Enterprise. It’s safe to say no one is debating whether or not Hewlett Packard is at the pinnacle of its business. Yet, if we strip out the cash in Apple, AAPL shares are trading closer to an HPE valuation.
Add to that, Apple now has a fresh catalyst coming in, Trump policies. The new President Trump is incentivizing Apple (and others) to bring offshore cash hoards back home with a flat 10% tax. And Apple makes money – a lot of it. A cut in the corporate tax rate will be a boon for earnings. Two years ago, Carl Icahn argued that Apple should use (a lot more of) their cash to buyback shares – and, with that, valued the stock at double its current levels.
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Stocks hit new record highs again in the U.S. today. This continues the tear from the lows of election night. But if we ignore the wild swing of that night, in an illiquid market, stocks are only up a whopping 1.2% from the highs of last month — and just 8% for the year. That’s in line with the long term average annual return for the S&P 500.
And while yields have ripped higher since November 8th, we still have a 10 year yield of just 2.32%. Mortgages are under 4%. Car loans are still practically free money. That’s off of “world ending” type of levels, but very far from levels of an economy and markets that are running away (i.e. you haven’t missed the boat – far from it).
Despite this, we’re starting to see experts come out of the wood works telling us that the economy has been in great shape for a while. That’s what this is about – what’s with all the fuss? Not true.
Remember, it was just eight months ago that the world was edging toward the cliff again, as the oil price bust was threatening to unleash another global financial crisis. And that risk wasn’t emerging because the economy was in great shape. It was because the economy was incredibly fragile — fueled by the central banks ability to produce stability, which produced confidence, which produced some spending, hiring and investment, which produced meager growth. But given that global economic stability was completely predicated on central banks defending against shocks to the system, not on demand, that environment of stability was highly vulnerable.
Now, of course, we finally have policies and initiatives coming down the pike that will promote demand (not just stability). If have perspective on where markets stand, instead of how far they’ve come from the trough of election night, we’re sitting at levels that scream of opportunity as we head into a new pro-growth government.
When the economic crisis was in the early stages of unraveling, the most thorough study on past debt crises (by Reinhart and Rogoff) found that delevering periods (the time after the bust) took about as long as the leveraging period (the bubble building period before the bust). With that, it was thought that the deleveraging period would take about 10 years. History gave us the playbook, in hand, from very early on in the crisis.
With that in mind, the peak in the housing market was June of 2006. That would put 10 years at this past June. The first real event, in the unraveling of it all, was the bust of two hedge funds at Bear Stearns in mid 2007. That would put the 10 year mark at seven months out or so.
That argues that we’re not in the late stages of an economic growth cycle that was just unfortunately weak (as some say), but that we should just be entering a new growth phase and turning the final page on the debt crisis. And that would argue that asset prices are not just very cheap now, but will be for quite some time as a decade long (or two) prosperity gap closes.
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We’ve talked a lot about oil, the rebound of which has probably led to the trade of the year. If you recall back on February 8th, we said policymakers finally got the wake up call on the systemic threat of the oil price bust when Chesapeake Energy, the second largest oil and gas producer, was rumored to be pursuing bankruptcy.
This is what we said:
“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. 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.”
Chesapeake bounced aggressively, nearly 50% in 10 business days.
And on February 22nd, we said, “persistently cheap oil (at these prices) has become the new “too big to fail.” It’s hard to imagine central banks will sit back and watch an OPEC rigged price war put the global economy back into an ugly downward spiral. And time is the worst enemy to those vulnerable first dominos (the energy industry and weak oil producing countries).”
As we’ve discussed, central banks did indeed respond. The BOJ intervened in the currency markets on February 11, and that (not so) coincidently put the bottom in oil and global stocks. China followed on February 29, with a cut on bank reserve requirements, then ECB cut rates and ramped up their QE and the Fed joined the effort by taking two projected rate cuts off of the table (we would argue maybe the most aggressive response in the concerted central bank effort).
From the bottom on February 8th, Chesapeake shares have gone up five-fold, from $1.50 to over $7. Oil bottomed February 11 and is up 77%. This is the trade of the year that everyone should have loved. If you’re wrong, the world gets very ugly and you and everyone have much bigger things to worry about that a bet on oil and/or Chesapeake. If you’re right, and central banks step in to divert another big disaster (a disaster that could kill the patient) you make many multiples of your risk.
We think it was the trade of the year. The trade of the decade, we think is buying Japanese stocks.
Overnight the BOJ made no changes to policy. And the dollar-denominated Nikkei fell over 1,200 points (more than 7%).
As we said yesterday, two explicit tools in the Bank of Japan’s tool box are: 1) a weaker yen, and 2) higher stocks. I say “explicit” because they routinely have said in their minutes that they expect both to contribute heavily to their efforts. So now Japanese stocks and the yen have returned near the levels we saw before the Bank of Japan surprised the world with a second dose of QE back in October of 2014. So their efforts have been undone. And they’ve barely moved the needle on their objective of 2% inflation during the period. In fact, the head of the BOJ, Kuroda, has recently said they are still only “halfway there” on reaching their goals.
So they have a lot of work left. And if we take them at their word, a weak yen and higher stocks will play a big role in that work. That makes today’s knee-jerk retreat in yen-hedged Japanese stocks a gift to buy.
U.S. stocks have well surpassed pre-crisis, record highs. German stocks have well surpassed pre-crisis, record highs. Japanese stocks have a long way to go. In fact, they are less than “halfway there.”
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Oil has surged to open the week. If you’ve been reading our daily pieces over the past few weeks, you’ll know how important oil is for global markets at this stage. With that, strong oil today has translated into higher stocks, higher broad commodities, a slight bump higher in interest rates and better investor sentiment in general.
It was just fourteen days ago that Chesapeake Energy, one of the largest producers of oil and natural gas was rumored to be choosing the path of bankruptcy. That rumor was immediately denied by the company. And soon thereafter, the reality set in for markets that a scenario like that would conjure up post-Lehman like outcomes. Oil has since put in a bottom and bounced more than 25%. Chesapeake has now bounced 46% from the lows just the last six trading days.
It’s at extremes in markets where the biggest and best investors have historically made their money – running into risk, when everyone else is running away.
With that, today we want to take a look at a few stocks with the biggest upside, and an important “risk buffer” in what is a high risk sector at the moment (energy). This risk buffer? Each stock has the presence of a big-time billionaire investor.
Self-made billionaire energy trader Boone Pickens has said he expects oil to return to $70 this year. On his $70 prediction, he’s also said that if he misses it will be because oil is “over $70, not under $70.” If Pickens is right about oil prices, each of these stocks below have huge upside:
1) Oasis Petroleum (OAS) – Billionaire hedge fund manager John Paulson owns nearly 4% of this stock. The activist hedge fund SPO Advisory owns 14% and has been buying the stock on almost every dip. When oil was last $70, OAS was trading $25 or 500% higher than current levels.
2) Chesapeake Energy (CHK) – Billionaire investor Carl Icahn owns 11% of CHK and recently added to his position around $13. The last time oil was $70, Chesapeake was $25. That would be more than a 1000% return from its price today.
3) EXCO Resources (XCO) – Billionaire investors Wilbur Ross and Howard Marks own more than 30% of this energy stock. The last time oil was $70, EXCO was $3.30. That would be almost a 330% return from its price today.
4) Consol Energy (CNX) – Billionaire David Einhorn owns 12.9% of this stock. When oil was last $70, Consol traded for $40 or almost 500% higher than current levels.
5) Williams Companies (WMB) – Carl Icahn Protégé, Keith Meister of the activist hedge fund Corvex Management, owns $1.1 billion worth of WMB. The last time oil was $70, WMB traded for $50 – more than 300% higher than its current levels.
As we’ve said, persistently cheap oil (at these prices) has become the new “too big to fail” — it’s a systemic risk. It’s hard to imagine central banks will sit back and watch an OPEC-rigged price war put the global economy back into an ugly downward spiral. And time is the worst enemy to those vulnerable first dominoes (the energy industry and weak oil producing countries).
The best investors like to go where the biggest risks are — that’s where the biggest returns can follow. And they’ve been getting aggressive in energy and commodities.
Without question, energy stocks have been beaten up and left for dead. If indeed Chesapeake is a leading indicator that it’s all backing away from the edge, there will be big money to be made in these stocks.
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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.
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.
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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With some global stock barometers hitting new highs this morning, there is one spot that might benefit the most from this recently coordinated central bank promotion of a higher interest environment to come. It’s Japanese stocks.
