June 29, 5:00 pm EST

Last week, we talked a lot about oil, as OPEC was meeting to deliberate on the status of their agreement to cut production.

While oil prices have been rising aggressively over the past year, the markets haven’t been paying a lot of attention — distracted by Trump watching.

But then Trump put it on the front burner, with another jab at OPEC on Twitter.  And the media and Wall Street began trying to deduce the OPEC outcome.  In the end, they misinterpreted.  OPEC’s agreement to go from overcutting to complyingwith the initial levels of production cuts, means they are still cutting.

So, the market is still undersupplied in a world where demand has proven to be underestimated.  That’s a formula for higher prices.

That’s what we’ve had for the past year, and that’s what we’ve gotten since OPEC’s official statement on Friday.  In my note last Friday, I said “the lack of enough action from OPEC may serve as a catalyst to push oil much higher from here.  That, of course, serves OPEC’s interests.”

Oil prices have exploded!  We’ve seen a $10 pop since Friday morning.  That’s 15% in a week.  And I suspect it’s going to keep going.

Remember, we’ve talked about the prospects for $100 oil this year.  Leigh Goehring, one of the best research-driven commodities investors on the planet has been telling us that since last year.  And he’s looking spot-on at the moment.

Bottom line:  This script is precisely what we’ve been talking about, here in my daily Pro Perspectives note, since the price of oil was in the $40s. We’ve talked about the prospects for a return to $80 oil, and maybe even as high as $100 oil.  And it looks more and more possible, given the surging demand and the supply shortfall.

How can you play it.  On this thesis for oil, in my Billionaire’s Portfolio, we added SPDR Oil and Gas ETF (symbol XOP) and Phillips 66 (symbol PSX) back when oil prices were deeply depressed (in 2016).  We followed the activism of policymakers (both central banks and OPEC).  And in the case of PSX, we also followed Warren Buffett.   

Both are up big, but have a lot more room to run. Oil and gas stocks (which comprise the XOP) have yet to reflect the supply shortfall in the oil market, much less the booming demand that is coming from an improving global economy (which many have underestimated).

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November 30, 2017, 4:00 pm EST

The Dow is now up 23% on the year. The index that measures the broader market, the S&P 500, is up 18%. This is more than double the performance of the long run compounded average growth rate for the stock market.

People continue to be surprised that policy execution is improving, and that tax cuts are actually coming. And they speculate on whether or not the stock market already has it all priced in. I think the steady rise in stocks is telling them it’s not.

As I’ve said, we remain in an ultra-low interest rate world, where incentives continue to push money into stocks (as the best alternative). And in ultra-low rate environments, historically, the multiple on stocks (the P/E) runs north of 20. It’s 18 right now, on the consensus estimate on next year’s earnings. So on a valuation basis, there’s room. This doesn’t take into account a corporate tax cut that will take the rate from 35% to 20%. That goes right to the bottom line for companies (earnings go UP). When earnings go up, the multiple stocks trade for goes down (stocks get cheaper).

Citibank thinks each 1% cut in corporate taxes will add roughly $2 in S&P 500 earnings. And Citibank says the effective tax rate across the S&P 500 is more like 27%. So a cut to 20% would mean a seven percentage point reduction. This would put next year’s S&P 500 earnings in the mid-$150s, which would put the multiple at 16 to 17 times next year’s earnings.

And don’t forget, we’re getting fiscal stimulus for a reason: to pop economic growth, which has been in a rut (post-crisis), running well south of the 3% long run average growth rate for the economy. The prospects for better growth, means prospects for better earnings. The outlook for better earnings, on a better economy, should also put downward pressure on valuations, making stocks more attractively valued.

In my January 2 note, I said: “there will be profound differences in the world this year, with the inauguration of a new, pro-growth U.S. president, at a time where the world desperately needs growth.” I think it’s safe to say that is playing out—albeit maybe slower and messier than expected.

I also said: “The element that economists and analysts can’t predict, and can’t quantify, is the return of ‘animal spirits.’ This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mistrust of the system. All along the way, throughout the recovery period, and throughout a tripling of the stock market off of the bottom, people have continually been waiting for another shoe to drop. The breaking of this emotional mindset appears to finally be underway. And that gives way to a return of animal spirits, which haven’t been calibrated in all of the forecasts for 2017 and beyond.”

August 22, 2016, 4:30pm EST

As we head into the end of August, people continue to parse every word and move the Fed makes.  Yellen gives a speech later this week at Jackson Hole (at an economic conference hosted by the Kansas City Fed), where her predecessor Bernanke once lit a fire under asset prices by telegraphing another round of QE.

Still, a quarter point hike (or not) from a level that remains near zero, shouldn’t be top on everyone’s mind.  Keep in mind a huge chunk of the developed world’s sovereign bond market is in negative yield territory.  And just two weeks ago Bernanke himself, intimated, not only should the Fed not raise rates soon, but could do everyone a favor — including the economy — by dialing down market expectations of such.

But the point we’ve been focused on is U.S. market and economic performance.  Is the landscape favorable or unfavorable?

The narrative in the media (and for much of Wall Street) would have you think unfavorable.   And given that largely pessimistic view of what lies ahead, expectations are low.  When expectations are low (or skewed either direction) you get the opportunity to surprise.  And positive surprises, with respect to the economy, can be a self-reinforcing events.

The reality is, we have a fundamental backdrop that provides fertile ground for good economic activity.

For perspective, let’s take a look at a few charts.

We have unemployment under 5%.  Relative to history, it’s clearly in territory to fuel solid growth, but still far from a tight labor market.

What about the “real” unemployment rate all of the bears often refer to.  When you add in “marginally attached” or discouraged job seekers and those working part-time for economic reasons (working part time but would like full time jobs) the rate is higher. But as you can see in the chart below that rate (the blue line) is returning to pre-crisis levels.

In the next chart, as we know, mortgage rates are at record lows – a 30 year fixed mortgage for about 3.5%.

Car loans are near record lows.  This Fed chart shows near record lows.  Take a look at your local credit union or car dealer and you’ll find used car loans going for 2%-3% and new car loans going for 0%-1%.

What about gas?  In the chart below, you can see that gas is cheap relative to the past fifteen years, and after adjusted for inflation it’s near the cheapest levels ever.

Add to that, household balance sheets are in the best shape in a very long time.  This chart goes back more than three decades and shows household debt service payments as a percent of disposable personal income.

As we’ve discussed before, the central banks have have pinned down interest rates that have warded off a deflationary spiral — and they’ve created the framework of incentives to hire, spend and invest.  You can see a lot of that work reflected in the charts above.

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