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.
Yesterday we talked about the Draghi remarks (head of the European Central Bank) that were intended to set expectations that the ECB might be moving toward the exit doors on QE and zero interest rate policy. That bottomed out global rates — which popped U.S. rates further today. The Bank of England piled on today, talking about rate normalization soon.
We’ve gone from 2.12% in the U.S. ten year yield to 2.25% in about 24 hours. These are big swings in the interest rate market – a big bounce and, as I’ve said, the bottom appears to be in for rates.
As importantly, this prepared speech by Draghi could very well cement the top in the dollar. It begins to tighten a very wide interest rate spread between the U.S. and global rates. We entered the year with the Fed going one way (tightening) while the rest of the world was going the other way (easing). That’s a recipe for capital to storm into U.S. assets — into the dollar. And now that may be over.
I’ve been researching long-term cycles in the dollar for a very long time and throughout the global financial crisis period, it these cycles in the world’s reserve currency have been my guidepost for drawing a lot of conclusions on markets and the outlook for capital flows over the past several years.
Despite the choppiness in the dollar for much of the crisis, if we look back at the cycles following the failure of the Bretton Woods system, we were able, very early on, to determine the dollar was in a bull cycle.
This view came in the face of all of the negative global sentiment toward the dollar in 2010. Foreign leaders were taking shots at the Fed, accusing the Fed of trying to destroy the dollar. People were calling for the end of the dollar as the world’s reserve currency. All the while, the dollar held firm and ultimately made an aggressive climb.
Take a look below at my chart on the long term dollar cycles…
I’ve watched this chart for quite some time, defining the five complete dollar cycles over the past nearly 40 years, and the most recent bull cycle.
If we mark the top of the most recent cycle in early January, this bull cycle has matched the longest cycle in duration (at 8.8 years) and comes in just shy of the long-term average performance of the five complete cycles. The most recent bull cycle added 47%. The average change over a long term cycle has been 56%. This all argues that the dollar bull cycle is over. And a weaker dollar is ahead. That should go over very well with the Trump administration.
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Healthcare was the story of the day today. With the Senate having had its go at the house healthcare bill, it goes back to the house, then back through Senate before it gets to the President’s desk.
Still, policy progression is very positive in this environment. Healthcare stocks were up big today — the IHF healthcare ETF was up over 2%. This is the ETF that tracks insurers, diagnotic and specialized treatment companies.
And despite all of the debate around healthcare, it has been the hottest sector to invest in since the election.Since election day, the IHF is up 35% since the lows of November 9th, the day after the election. Here’s a look at S&P sector performance over the past sixmonths.
Most interesting, the healthcare sector has been beaten up badly since the cracks in Obamacare became clear back in 2014. But as of the past week, the healthcare sector trackers have finally broken back above those 2014 Obamacare–optimism–driven highs. With that, the divergence in this next chart of one of the biggest hospital companies in the country becomes quite an intriguing trade.
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Today I want to take a look back at my March 7th Pro Perspectives piece. And then I want to talk about why a power shift in the economy may be underway (again).
Big Picture .. Market Perspectives March 7, 2017
“A big component to the rise of Internet 2.0 was the election of Barack Obama. With a change in administration as a catalyst, the question is: Is this chapter of the boom in Silicon Valley over? And is Snap the first sign?
Without question, the Obama administration was very friendly to the new emerging technology industry. One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007, before Obama announced his run for president, and just as Facebook was taking off after moving to and raising money in Silicon Valley (with ten million users). Facebook was an app for college students and had just been opened up to high school students in the months prior to Obama’s run and the hiring of the former Facebook cofounder. There was already a more successful version of Facebook at the time called MySpace. But clearly the election catapulted Facebook over MySpace with a very influential Facebook insider at work. And Facebook continued to get heavy endorsements throughout the administration’s eight years.
In 2008, the DNC convention in Denver gave birth to Airbnb. There was nothing new about advertising rentals online. But four years later, after the 2008 Obama win, Airbnb was a company with a $1 billion private market valuation, through funding from Silicon Valley venture capitalists. CNN called it the billion dollar startup born out of the DNC.
Where did the money come from that flowed so heavily into Silicon Valley? By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the “the discovery, development and implementation of various technologies.” In June 2009, the government loaned Tesla $465 million to build the model S.
When institutional investors see that kind of money flowing somewhere, they chase it. And valuations start exploding from there as there becomes insatiable demand for these new ‘could be’ unicorns (i.e. billion dollar startups).
Who would throw money at a startup business that was intended to take down the deeply entrenched, highly regulated and defended taxi business? You only invest when you know you have an administration behind it. That’s the only way you put cars on the street in NYC to compete with the cab mafia and expect to win when the fight breaks out. And they did. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation. Uber is valued at $60 billion. That’s more thanthree times the size of Avis, Hertz and Enterprise combined.
Will money keep chasing these companies without the wind any longer at their backs?”
Now, this was back in March. And that was the question — will it keep going under Trump? Can they continue to thrive/ if not survive without policy favors. Most importantly for the billion dollar startup world, will the private equity capital dry up. This is what it’s really all about. Will the money that chased the subsidies from D.C. to Silicon Valley for eight years (i.e. the trillion dollar pension funds) stop flowing? And will it begin chasing the new favored industries and policies under the Trump administration?
It seems to be the latter. And it seems to be happening in the form of a return to the public markets — specifically, the stock market.
And it may be amplified because of the huge disparity in what is being favored. In Silicon Valley, innovation is favored. Profitability? Remember, the 90s tech bubble. The measure of success for those companies was “eyeballs.” How much traffic were they getting to their websites? Today, when you hear a startup founder talk about the success benchmarks, it rarely has anything to do with with revenue or profit. It’s all about headcount (how many people they’ve hired) and money raised (which enables them to hire people). They are validated by convincing investors to fund them (mostly with our pension money).
Now, the other side of this coin: Trumponomics. Remember, among the Trump policies (corporate tax cuts, repatriation, deregulation, infrastructure spend), the most common sense play in the stock market has been flooding money into companies that make a lot of money. Those that make a lot of money have the most to gain from a slash in the corporate tax rate — it falls right to the bottom line. Leading the way on that front, is Apple. They make a lot of money. And they will make a lot more when a tax cut comes, making the stock even cheaper. That’s why it’s up 25% year-to-date. That’s 2.5 times the performance of the broader market.
Meanwhile, let’s take a look back at the Snapchat. Snapchat doesn’t make money. And even after a 1/3 haircut on the valuation, trades about 35 times revenue. And now, as a public company, probably doesn’t get the protection from the venture capital/private equity community that may have significant investments in its competitors. So the competitors (like Facebook) are circling like sharks to copy their business.
What about Uber? The Uber armor may be beginning to crack as well, with the leadership shakeup in recent weeks. Maybe a good signal for how Uber may be doing? Hertz! Hertz has bounced about 20% from the bottom this week.
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The Nasdaq trade unwound some today. From the peak this morning in the futures of 5898 the tumble started around 11am, falling to as low as 5660. That’s 238 Nasdaq futures points or 4% – quite a sharp move.
Remember, it seems like an overdone trade (driven by the big tech stocks). But as we discussed last week, the tech heavy Nasdaq has simply been a catch up trade — something that has lagged the strength in the broader market.
Here’s the chart we looked at last week.
This chart goes back to the lows driven by the oil price crash that bottomed out earlier last year.
Still, with the Nasdaq at +18% ytd and S&P 500 +9% ytd, as of this morning, as we’ve seen many times in this post-crisis era, the air pockets of illiquidity in stocks can give back gains very, very quickly. As they say, stocks go up on an escalator and down in an elevator.
The Trump trend, in the chart above, was nearly tested today — the same day a new all-time high was marked!
If we get another few days of sharp downside, it will be a tremendous buying opportunity – get your shopping list ready. And if that downside slide does indeed come, it could come at a very interesting time. It would add another (but very signficant) reason the Fed may balk on a rate hike next week. The other reasons? We discussed them yesterday (here).
Have a great weekend.
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Stocks continue to bounce back today. But the technical breakdown of the Trump Trend on Wednesday
still looks intact. As I said on Wednesday, this looks like a technical correction in stocks (even considering today’s bounce), not a fundamental crisis-driven sell-off.
With that in mind, let’s take a look at the charts on key markets as we head into the weekend.
Here’s a look at the S&P 500 chart….
For technicians, this is a classic “break-comeback” … where the previous trendline support becomes resistance. That means today’s highs were a great spot to sell against, as it bumped up against this trendline.
Very much like the chart above, the dollar had a big trend break on Wednesday, and then aggressively reversed Thursday, only to follow through on the trend break to end the week, closing on the lows.
On that note, the biggest contributor to the weakness in the dollar index, is the strength in the euro (next chart).
The euro had everything including the kitchen sink thrown at it and it still could muster a run toward parity. If it can’t go lower with an onslaught of events that kept threatening the existence of the euro, then any sign of that clearing, it will go higher. With the French elections past, and optimism that U.S. growth initiatives will spur global growth (namely recovery in Europe), then the European Central Bank’s next move will likely be toward exit of QE and extraordinary monetary policies, not going deeper. With that, the euro looks like it can go much higher. That means a lower dollar. And it means, European stocks look like, maybe, the best buy in global stocks.
A lower dollar should be good for gold. As I’ve said, if Trump policies come to fruition, inflation could get a pop. And that’s bullish for gold. If Trump policies don’t come to fruition, the U.S. and global growth looks grim, as does the post-financial crisis recovery in general. That’s bullish for gold.
This big trendline in gold continues to look like a break is coming and higher gold prices are coming.
With all of the above, the most important chart of the week is probably this one …
The 10 year yield has come all the way back to 2.20%. The best reason to wish for a technical correction in stocks, is not to buy the dip (which is a good one), but so that the pressure comes out of the interest rate market (and off of the Fed). The run in the stock market has clearly had an effect on Fed policy. And the Fed has been walking rates up to a point that could choke off the existing economic recovery momentum and, worse, neutralize the impact of any fiscal stimulus to come. Stable, low rates are key to get the full punch out of pro-growth policies, given the 10 year economic malaise we’re coming out of.Invitation to my daily readers: Join my premium service members at Billionaire’s Portfolio to hear more of my big picture analysis and get my hand-selected, diverse portfolio of the most high potential stocks.
Yesterday we talked about the disconnect between the daily drama from the media in Washington (doom and gloom), and what the markets have been communicating (an economic expansion is underway). Today, you might think that connection is happening — the doom and gloom scenario is finally being realized in markets. Probably not.
For perspective: As of the close yesterday, the Nasdaq was up 18% year to date (just five months in). Gold was in the middle of a three year range. Market interest rates (the U.S. 10-year government bond yield) was just above the middle of the range of the past four years. The dollar was not far off its strongest levels in 15 years.
Today the media has explicitly printed the headline of impeachment for Trump (actually, they’ve run those headlines a various times over the past several months). Nonetheless, stocks (the S&P 500) today are off by 1.6%.
This gets the bears very excited. I saw the story about consumer debt, surpassing 2008 levels, floating all over the internet today. People tried to make the bubble connection — implying another debt crisis was coming.
The real story: Total household indebtedness finally surpassed the previous peak from 2008. That’s precisely what the Fed was attempting to do with zero interest rates. Make existing debt cheaper to manage, and at some point, break the psychology of the debt burden and get people borrowing (at ultra-cheap rates), investing and spending again. Otherwise, our economy and the world economy would have gone into a deflationary spiral.
That said, as I’ve found in my 20 years in this business, people tend to find a story to fit the price. The story hadn’t been fitting the price for much of the past six months. Today, it seems pretty easy. See the chart below of stocks ….
We had the first breakdown of the Trump trend in March, but all it could muster was about a 3% correction. This looks much more like a technical correction (a double top, and trend break today) – than a Trump impeachment trade. I suspect with the earnings catalyst behind us, this is the start of a deeper technical correction, which is healthy in a bull market. And it may take significant progress made in tax reform to see new highs in the broad stock indicies. We shall see.This next chart is the dollar index. This too had a significant trend break today. This translates into a higher euro, which would spell out a story where Europe is improving and the ECB is able in start discussing exit from QE.
What about the Trump/Comey saga? Aren’t people dumping dollars because of that? Not likely. If that were potentially destabilizing to the U.S., it would be destabilizing to the global economy, and people would buy dollars not sell them.
With that in mind, here’s gold. Gold sits on the brink of a big trend break (higher). When looking at gold and the dollar, it’s important to remember this: back in the heat of the crisis, gold and the dollar moved together, higher! That’s opposite of the traditional correlation. They moved higher together because people bought gold and they bought dollars (and dollar denominated assets, like Treasuries) as they viewed it the safest alternative in the world to park money – with the chance of getting it back.
With a break higher in gold looking imminent, and the dollar looking lower, it looks like a more traditional relationship. It’s not communicating crisis.
Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
Last week we discussed the building support for a next leg higher in commodities prices. China is clearly a very important determinant in where commodities go. And with the news last week about cooperation between the Trump team and China, on trade, we may have the catalyst to get commodities moving higher again.It just so happens that oil (the most traded commodity in the world) is rebounding too, on the catalyst of prospects of an OPEC extension to the production cuts they announced last November.In fact, overnight, Saudi Arabia and Russia said they would do “whatever it takes” to cut supply (i.e. whatever it takes to get oil prices higher). Oil was up big today on that news.When you hear these words spoken from policy-makers (those that can dictate outcomes), it should get everyone’s attention. Those are the exact words uttered by ECB head Mario Draghi, that ended the bond market assault in Spain and Italy that were threatening the existence of the euro and euro zone. The Spanish 10-year yield collapsed from 7.8% (unsustainable borrowing rate for the Spanish government, and threatening imminent default) to 1% over the next three years — and the ECB, while threatening to buy an unlimited amount of bonds to push those yields lower, didn’t have to buy a single bond. It was the mere threat of ‘whatever it takes’ that did the trick.
As for oil: From the depths of the oil price crash last year, remember, we discussed the prospects for a huge bounce. Oil prices at $26 were threatening to undo the trillions of dollars of work central banks and governments had done to stabilize the global economy. Central banks couldn’t let it happen. After a series of coordinated responses (from the BOJ, China, ECB and the Fed), oil bottomed and quickly doubled.
Also at that time, two of the best oil traders in the world were calling the bottom and calling for $70-$80 oil by this year (Pierre Andurand and Andy Hall). Another commodities king that called the bottom: Leigh Goehring.
Goehring, one of the best commodities investors on the planet, has also laid out the case for $100 oil by next year. He says he’s “wildly bullish” oil in his recent quarterly investor letter at his new fund, Goehring & Rozencwajg.
Goehring argues that the IEA inventory numbers are flawed. He thinks oil the market is already over-supplied and is in a draw, as of May of last year. With that, he thinks the OPEC cuts will ultimately exacerbate the deficit and send prices aggressively higher. He says “we remain ‘wildly’ bullish and believe that there is a very high probability of oil prices reaching triple digits in the first half of 2018.”
Follow This Billionaire To A 172% WinnerIn our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
As we ended this past week, stocks remain resilient, hovering near highs. The Nasdaq had a visit to the 200-day moving average intraweek for a slide of a whopping (less than) 1%, and quickly it bounced back.It’s a Washington/Trump policies-driven market now, and while the media carries on with narratives about Russia and the FBI, the market cares about getting health care done (which there was progress made last week), getting tax reform underway, and getting the discussion moving on an infrastructure spend.We looked at oil and commodities yesterday. Chinese stocks look a lot like the chart on broader commodities. With that, the news overnight about some cooperation between the Trump team and China on trade has Chinese stocks looking interesting as we head into the weekend.
Let’s take at the chart…
While the agreements out of China were said not to touch on steel and industrial metals, the first steps of cooperation could put a bottom in the slide in metals like copper and iron ore. These are two commodities that should be direct beneficiaries in a world with better growth prospects, especially with prospects of a $1 trillion infrastructure spend in the U.S. With that, they had a nice run up following the election but have backed off in the past couple of months, as the infrastructure spend appeared not to be coming anytime soon.
Here’s copper and the S&P 500…
Trump policies are bullish for both. Same said for iron ore…
This is right in the wheelhouse of Wilbur Ross, Trump’s Secretary of Commerce. He’s made it clear that he will fight China’s dumping of steel on the U.S. markets, which has driven steel prices down and threatened the livelihood of U.S. steel producers. Keep an eye on these metals next week, and the stocks of producers.
Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
Oil has been on the move the past few days. Was this recent dip a gift to buy?The oil inventory report yesterday showed a big drawdown on oil inventories. The market expectation was for about a drawdown of 1.5 million barrels. It came in at 5 million.
That has oil on a big bounce for the week. It’s trading about 8% higher than it was at the lows of last Friday. But we still sit below the 200 day moving average and below the key $50 level (the comfort zone for those producers, namely the shale industry, to fire back up idle capacity).
The weakness in oil has a lot to do with weakness across broader commodities. And broader commodities typically correlates well with what Chinese stocks are doing.
You can see in the chart above, how closely the two track. This bottom in commodities has/had everything to do with the outlook for a big infrastructure spend out of the Trump administration. It’s yet to bubble up toward the top of the action list. With that, the momentum has either stalled on this trade, or it’s a pause before another leg higher in this early stage multi-year rebound. My bet is on the latter. Follow This Billionaire To A 172% Winner
In our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!
Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.
So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
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.
Yesterday we talked about the disconnect between the daily drama from the media in Washington (doom and gloom), and what the markets have been communicating (an economic expansion is underway). Today, you might think that connection is happening — the doom and gloom scenario is finally being realized in markets. Probably not.
Last week we discussed the building support for a next leg higher in commodities prices. China is clearly a very important determinant in where commodities go. And with the news last week about cooperation between the Trump team and China, on trade, we may have the catalyst to get commodities moving higher again.It just so happens that oil (the most traded commodity in the world) is rebounding too, on the catalyst of prospects of an OPEC extension to the production cuts they announced last November.In fact, overnight, Saudi Arabia and Russia said they would do “whatever it takes” to cut supply (i.e. whatever it takes to get oil prices higher). Oil was up big today on that news.When you hear these words spoken from policy-makers (those that can dictate outcomes), it should get everyone’s attention. Those are the exact words uttered by ECB head Mario Draghi, that ended the bond market assault in Spain and Italy that were threatening the existence of the euro and euro zone. The Spanish 10-year yield collapsed from 7.8% (unsustainable borrowing rate for the Spanish government, and threatening imminent default) to 1% over the next three years — and the ECB, while threatening to buy an unlimited amount of bonds to push those yields lower, didn’t have to buy a single bond. It was the mere threat of ‘whatever it takes’ that did the trick.
As we ended this past week, stocks remain resilient, hovering near highs. The Nasdaq had a visit to the 200-day moving average intraweek for a slide of a whopping (less than) 1%, and quickly it bounced back.It’s a Washington/Trump policies-driven market now, and while the media carries on with narratives about Russia and the FBI, the market cares about getting health care done (which there was progress made last week), getting tax reform underway, and getting the discussion moving on an infrastructure spend.We looked at oil and commodities yesterday. Chinese stocks look a lot like the chart on broader commodities. With that, the news overnight about some cooperation between the Trump team and China on trade has Chinese stocks looking interesting as we head into the weekend.
