Gold has been a core trade for a lot of people throughout the crisis period. When Lehman failed in 2008, it shook the world, global credit froze, banks were on the verge of collapse, the global economy was on the brink of implosion – people ran into gold. Gold was a fear-of-the-unknown-outcome trade.
Then the global central banks responded with massive backstops, guarantees, and unprecedented QE programs. The world stabilized, but people ran faster into gold. Gold became a hyperinflation-fear trade.
In the chart above, you can see gold went on a tear from sub-$700 bucks to over $1,900 following the onset of global QE (led by the Fed).
Gold ran up as high as 180%. That was pricing in 41% annualized inflation at one point (as a dollar for dollar hedge). Of course, inflation didn’t comply. Still eight years after the Fed’s first round of QE (and massive global responses), we have just 13% cumulative inflation over the period.
So the gold bugs overshot in a big way.
Why? The next chart tells the story…
This chart above is the velocity of money. This is the rate at which money circulates through the economy. And you can see to the far right of the chart, it hasn’t been fast. In fact, it’s at historic lows. Banks used cheap/free money from the Fed to recapitalize, not to lend. Borrows had no appetite to borrow, because they were scarred by unemployment and overindebtedness. Bottom line: we get inflation when people are confident about their financial future, jobs, earning potential … and competing for things, buying today, thinking prices might be higher, or the widget might be gone tomorrow. It’s been the opposite for the past eight years.
After three rounds of Fed QE, and now mass scale QE from the BOJ and the ECB, the world is still battling DE-flationary pressures. If gold surged from sub-$700 to $1,900 on Fed/QE-driven hyperinflation fears, and QE has produced little to no inflation, it’s fair to think we can return to pre-QE levels. That’s sub-$700.
We head into the weekend with stocks down 3% for the month. This follows a bad January. In fact, the stock market is working on a fifth consecutive negative month. The likelihood, however, of it finishing down for February is very low. It’s only happened 18 times since 1928. So the S&P 500 has five consecutive losing months just 1.7% of the time, historically.
It’s unimaginable that governments and central banks that have coordinated and committed trillions of dollars in guarantees, backstops, commitments and outright bailouts will stand by and let weak oil prices (rigged by OPEC) undo everything they’ve done over the past seven years to create stability and manufacture a global economic recovery.
Oil represents a systemic threat to the global economy. Just as housing created a cascade of trouble, through the global financial system, then through countries, the oil price crash can do the same.
When you see forecasts of $20 oil or lower, and some of it is coming from Wall Street, these people should also follow by telling you to buy guns and build a bunker, because that’s what you would need if oil went there and stayed there.
Not to mention, if they believe in that forecast, they should be formulating a plan for what they will do to make a living going forward, because their employers will likely go bust in that scenario.
The persistence of lower oil, especially less than or equal to $20 oil, would financially ruin the U.S. energy sector. Oil producing countries would be next, starting with Russia (and ultimately reaching the big OPEC nations). A default in Russia would create tremors in countries that hold Russia sovereign debt and rely on trade with Russia. Remember the fallout from the Asian Crisis? A default in Russia was the catalyst. Oil driven sovereign defaults would create a massive flight of global capital to safety and global credit/liquidity would dry up, again. All of this would put the world’s banks back on the brink of failure, just as we experienced in 2008. The only problem is, this time around, the global economy cannot absorb another 2008. Governments and central banks have fired their bullets and have nothing left to fend off another near global economic apocalypse.
With that, we have to believe that this crash in oil prices will not persist, especially when it’s being rigged by OPEC. Intervention now (or soon) is easy (relatively speaking) and returns the world to the recovery path. Intervention too late will require more resources than are available.
What’s the solution? An OPEC cut in production has a way of swinging oil in the other direction dramatically. Back in 1986, just a hint of an OPEC cut swung oil by 50% in just 24 hours. This assumes that the pressure builds on OPEC and they realize that the game of chicken that they are playing with U.S. producers has put themselves, also, precariously close to an endpoint.
Alternatively, we made the case last week that either China, the Bank of Japan or the European Central Bank could step in and outright buy commodities as a policy response to their ailing economies. Both the ECB and the BOJ in the past two weeks have said that there are “no limits” to what they can buy as part of their respective QE programs. That would immediately put a floor under crude, and likely global stocks, commodities and put in a top in sovereign bonds. Remember, when China stepped in, bought up and hoarded dirt cheap commodities in 2009, oil went from $32 to above $100 again.
So what’s the latest on oil?
Chart
This morning, the threat intensified. Oil dropped 5%, trading below the very key level of $30 per barrel. It was driven by an earnings report from the huge oil and gas company, BP. It reported a $6.5 billion loss. The company followed with an announcement of 7,000 job cuts by the end of 2017. Shares of BP stock are now trading back to 2010 levels, when the company was facing the prospects of bankruptcy after the fall–out from its gulf oil spill. This is one of the largest oil and gas companies in the world trading at levels last seen when people were speculating on its demise.
With the move in oil this morning, global stocks took another hit. Commodities were hit and sovereign debt yields were hit (with U.S. 10–year yields falling below 1.9%).
While there is a lot of talk about China and concerns there, clearly oil is what is dictating markets right now.
Take a look at this chart of oil vs. the S&P 500…
You can see the significant correlation historically in the price of oil and stocks. And you can see where oil and stocks came unhinged back in July 2014. The dramatic disconnect started in November 2014 (Thanksgiving Day) when an OPEC meeting concluded. The poorer members of OPEC called for production cuts. Saudi Arabia blocked the requests. That set off the plunge in oil prices.
You can see clearly in this chart where the price of oil is projecting the S&P. And stocks at those levels suggest the scenario we described above (global apocalypse round 2).
Again, a capitulation from OPEC is probably less likely. More likely, a central bank steps in to become an outright buyer of commodities (especially cheap oil). For those that have been shorting oil (and remain heavily short), either scenario would put them out of business quickly.
At this stage, OPEC is not just in a price war with U.S. shale producers, but it’s playing a game of chicken with the global economy. We’ve had plenty of events over the past seven years that have shaken confidence and have given markets a shakeup – European sovereign debt, Greece potentially leaving the euro, among them. In Europe, we clearly saw the solution. It was intervention. Oil prices are creating every bit as big a threat as Europe was; it’s reasonable to expect intervention will be the solution this time as well.
The Bank of Japan stepped in overnight and put a floor under stocks. Only 6 of 42 economists at Bloomberg thought they might do something.
We made the case over the past couple of days that they needed to. The opportunity was ripe, and we thought they would take advantage. They did.
Of course, that’s all the media is talking about today. The word “surprise” is in the headline of just about every major financial news publication on the planet with respect to this BOJ move (WSJ, Reuters, BBC, NYTimes … you name it).
Remember, we said earlier this week, the Fed was just a sideshow and the main event was in Japan. If you understand the big picture: 1) that central banks are still in control, 2) that the baton has been passed from the Fed to the BOJ and the ECB, and 3) that they (central banks) need stocks higher, then this move comes as no surprise.
Today we want talk a bit about what these central banks have done, what they are doing and why it works. We often hear the media, analysts, politicians, Fed-haters saying that QE hasn’t worked.
Okay, so QE hasn’t directly produced inflation and solved the world’s problems as the Fed might have expected when they launched it in late 2008. But it has produced a very important direct benefit and indirect benefit. The direct benefit: The Fed has been successful at driving mortgage rates lower, which has ultimately translated to rising house prices (along with a slew of other government subsidized programs). That has been good for the economy.
The indirect benefit: As Bernanke (the former Fed Chair) said explicitly, “QE tends to make stocks go up.” Stocks have gone up – a lot. That has been good for the economy.
But we need a lot more – they need a lot more. Here’s a little background on why…
The Fed has told us all along they want employment dramatically better, and inflation higher. They’ve gotten better employment. They haven’t gotten much inflation. Why? In normal economic downturns, making money easier to borrow tends to increase spending, which tends to increase demand and inflation. In a world that was nearly destroyed by overindebtedness, people (businesses, governments) are focused on reducing debt, not taking on more debt (regardless of how “easy” and cheap you make the money to access).
With that, their best hope to achieve those two targets (employment and inflation) has been through higher stocks and higher housing prices. Strength in these key assets has a way of improving confidence and improving paper wealth. Increasing wealth makes people more comfortable to spend. Better spending leads to hiring. A better job market can lead to inflationary pressures. That’s been the game plan for the Fed. And that’s the gameplan for Europe and Japan.
So how do they promote higher stock prices? They do it by promising investors that they will not let another shock event destabilize the world and global financial markets. They’ve promised that they will “stand ready to act” (the exact words uttered by the Fed, the ECB and the BOJ). So, they spent the better part of the past eight years promising to do “whatever it takes” (again exact words of the ECB and BOJ).
The biggest fear investors have is another “Lehman-like event” that can crash stocks, the job market and the economy. The thought of it makes people want to hold on tight to their money. But when the central banks promise to do anything and everything to prevent another shock, it creates stability and confidence to invest, to hire, to take some risk again. That’s good for stock prices.
Now, despite what we’ve just said, and despite the aggressive actions central banks have taken in past years (including the BOJ’s actions last night to push interest rates below zero) and their success in manufacturing confidence and recovery, when stocks fall, people are still quick to talk about recession and gloom and doom. On every dip in stocks since the culmination of the global financial crisis in 2007-2008, the comparisons have been made to that period.
First, they’re ignoring what the central banks have been telling us. “We’re here, ready to act.” Second, and again, things are very, very different than they were in 2007-2008. In that period, global credit was completely frozen. Banks were failing, and the entire financial system was on the precipice of failing. And at that point, it was unclear what could be done and what actions would be taken to try to avert disaster. That uncertainty, the thought of losing 100 years of economic and social progress across the globe, can easily send people scurrying for cash, pulling money from everywhere and protecting what they have. And that uncertainty can, understandably, result in stock prices getting cut in half – a stock market crash.
Now, what’s happening today? The financial system is healthy. Credit is flowing. Unemployment is very close to long-term historical norms. The U.S. economy is growing. The global economy is growing. The best predictor of recession historically is the yield curve. It shows virtually no chance of recession on the horizon. So the economic environment is very different. Still, the biggest difference between that period and today is this: We didn’t have any idea what could be done to avert the disaster OR how far central governments and central banks would go (and could go) to fight it. Now we know. It’s all-in, all or nothing. There is no ambiguity. With that, the central banks will not fail and cannot fail. And remember, they are working in coordination. No one wins if the world falls apart.
With all of this in mind, any decline in stocks, driven by fear and misinformation, offers a great buying opportunity, not an opportunity to run.
We’ll talk Monday about the very strong, and rational fundamental case for stocks to go much higher. On that note, today we’re wrapping up one of the worst January’s on record for stocks, which has given us a great opportunity to buy at a nice discount.
If you are managing more than $100 million, you are required to report to your holdings to the SEC within 45 days of the end of the quarter. And tonight we began to see those disclosures hit, for a peek into the activities of the world’s best billionaire hedge fund managers.
Now, 13-F filings provide a ton of information, but you have to know exactly what to look for to make them useful.
With that being said, here is what caught my eye tonight from the quarterly holdings of the world’s best billionaire hedge fund managers.
Apple ($AAPL)
Every top hedge fund seemed to either buy or increase their position in Apple (AAPL), including billionaire Leon Cooperman. Cooperman initiated a brand new position in the stock, buying more than 1 million shares in Apple last quarter (before it split). We said almost two months ago on this blog that Apple’s 7-for-1 stock split in June would be a positive catalyst to push the stock higher. In an instant, it would make the most widely held stock in the world affordable again for the retail investor. Apple is up almost 25% over since announcing the split, and is currently trading near a significant psychological round number of $100.
Expect a big fuss to be made about the activity in Apple shown in these filings, but this one looks old and tired. Apple was a good buy after its June stock split and was an even better buy when I called the bottom in the stock more than a year ago (see it here). And that was well before Carl Icahn or any major hedge fund owned the stock. Bottom line, I would not buy Apple here and would actually sell it when it hits $100.
Facebook ($FB)
The world’s best-performing hedge fund manager, David Tepper, added to his position in Facebook, but again Facebook had a nice run last quarter and is now up more than 40%. So piggybacking Tepper on Facebbook (which usually is a can’t-miss trade) today is again a stale trade. I don’t like it.
Zynga ($ZNGA)
Now here is a trade that could be compelling. Patrick McCormack, a Tiger Cub and head of Tiger Consumer Management, initiated a new position in Zynga last quarter at prices much higher than what Zynga is selling for today. By my estimates, Tiger Consumer purchased its new 18 million share stake in Zynga at $4, or 28% above its current price.
After selling off after a bad earnings report, the stock looks like it has found support and a double bottom at the $2.85 area. So Zynga could be a good trade to piggyback from Tiger Consumer.
Warren Buffett and Verizon ($VZ)
Buffett sold his entire position in Starz ($STRZA) and Conoco Phillips ($COP), and initiated a new $365 million position in Charter Comunications (CHTR).
Plus, as we predicted in February in our Forbes piece, he increased his position in Verizon. He now owns more than $700 million dollars worth of Verizon Stock ($VZ) after adding an additional 4 million shares.
The fact that Buffett increased an already huge stake in Verizon, and the stock has been flat over the past four months, makes VZ a very compelling trade to piggyback.
Billionaire Hedge Fund Manager John Paulson, Gold and Biotech
John Paulson initiated and added to positions that were heavily weighted in the biotech and healthcare sectors. Paulson initiated new positions in Allergan ($AGN) and Questcor Pharmaceuticals ($QCOR). And he added to his stake in Vanda Pharmaceuticals (a stock we owned almost two years ago in our Billionaire’s Portfolio service, at $4.50).
As for his gold position, no change. But he doubled his position in Dollar General (DG), and this could be the trade to piggyback. The stock has traded flat over the past four months, it’s rumored to be a merger or takeover candidate, and we have a big influential investor that has upped his stake, dramatically. That’s a good formula for success.
Tiger Global, Viking Global and Netflix ($NFLX)
Tiger Global initiated a nearly $200 million dollar position in Netflix (NFLX), a savvy move given Netflix is up almost 40% over the past four months. Billionaire Andreas Halvorsen of Viking Global also initiated a new position in Netflix, buying almost $600 million worth of the stock last quarter.
Billionaire Dan Loeb of Third Point
Billionaire Dan Loeb of Third point purchased new positions in Rackspace (RAX), IAC/Interactive Corp (IACI), and Ally Financial (ALLY). Third Point owns almost 10% of Ally, which recently started trading in April as a spinoff. Of all these new positions to piggyback, I like Rackspace (RAX) the best. Rackspace is down almost 20% year-to-date and has been rumored to be a takeover candidate.
Bill Ackman and Pershing Square
Ackman trimmed most of his real estate holdings, including Home Properties ($HME) and Apartment Investment and Manangement ($AIV), perhaps signaling that he believes REITs and real estate stocks have topped out. Ackman also increased his already large stake in Allergan ($AGN), showing that many of the top billionaire hedge fund managers are still very bullish on healthcare-biotech stocks, as well as M&A. John Paulson also took a large position in Allergan (AGN), a healthcare stock that is in the process of being acquired.
Billionaire Seth Klarman of Baupost Group
Seth Klarman is probably one of the worst hedge fund managers to piggyback. He prefers to hold a significant amount of cash and prefers illiquid, private investments to pubic ones. Klarman did purchase a new stake in EBAY (EBAY) and Theravanace Biopharma (TBPH), a stock that recently went public and is up more than 30% over the past three months. Klarman sold his entire stake in BP Plc (BP).
Here are the takeaways from the Q2 filings of the world’s best billionaire hedge funds: First, the best hedge fund managers are still bullish on technology, healthcare and biotech stocks, but are turning bearish on energy stocks.
The top billionaire hedge funds took advantage of the mini crash in technology stocks during the second quarter to add to or initiate positions in some of the best names in technology: Apple, Facebook and Netflix. This bet paid off huge for many of these managers, as all three of these stocks greatly outperformed the S&P 500 over the past few months.
Lastly, many of these investors own the same stocks, the most popular being Family Dollar, Dollar General, EBAY and Apple.
