We talked last week about what may be the bottom in the “decline of the retail store” story.
Walmart may be leading the way back for traditional retail. And it’s doing so, in part, by pouring money into e-commerce to fight back against Amazon.
Just as the energy industry has been beaten down by the rise of electric vehicles and clean energy, the bricks and mortar retail industry has been beaten down by the rise of Amazon. But those energy and retail companies that have survived the storm may have magnificent comebacks. They’re getting fiscal stimulus, which will lower their tax rates and should pop consumer demand. And they may be getting help with the competition. The regulatory game may be changing for the Internet giants that have nearly put them out of business.
Over the past decade, the Internet giants of today have had a confluence of advantages. They’ve played by a different rule book (one with practically no rules in it). And many of the giants that have emerged as dominant powers today, did so through direct government funding or through favor with the Obama administration.
One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007. In 2008, the DNC convention in Denver gave birth to Airbnb. 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. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation.
The U.K.’s Guardian has a very good piece (here) on what this has turned into, and the power that has come with it, calling it “winner takes all capitalism.”
This all makes today’s decision to repeal “net neutrality” very interesting. Is this the event that will ultimately lead to the reigning in the powerful tech giants? For the big platforms like Google, Twitter, Facebook and Uber, will it lead to transparency of their practices and accountability for the actions of its users? If so, the business models change and the Wild West days of the Internet may be coming to an end.
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As we head into the Thanksgiving day weekend, let’s talk about oil and Saudi Arabia.
On Thanksgiving night three years ago oil was trading around $73, when the Saudis blocked a vote on an OPEC production cut. Oil dropped 10% that night, and that set off a massive oil price bust that ultimately bottomed out early last year at $26.
The goal of the Saudis was to put the emerging, competitive U.S. shale industry out of business–to force oil prices lower so that these shale companies couldn’t product profitably. The plan: They go away, and Saudi Arabia retains its power on global oil. It nearly worked. Shale companies started dropping like flies, with more than 100 bankruptcies between 2015 and 2016.
But cheap oil had broader implications for the global economy, following the Great Recession. It exposed the global banks that had lent the shale industry hundreds of billions of dollars.
Additionally, collapsing oil prices directly weighed on inflation measures and the inflation expectations. That was bad news for the central banks that had committed trillions of dollars to avert a deflationary spiral and promote a normalization of inflation. High inflation is bad. Deflation is worse. Once a deflationary mindset takes hold, it feeds into more deflation. Central banks can raise rates to kill inflation. They have few tools to fight deflation (especially after the financial crisis).
So cheap oil became bad news for the fragile global economic recovery. With that, central banks stepped in early last year and responded with coordinated easing (which included direct asset purchases, which likely included outright oil and oil-related ETFs). Oil bottomed the day the Bank of Japan intervened in the currency market, and prices jumped 50% in a month as other major central banks followed with intervention.
Now, the other piece of this story: cheap oil damaged the shale industry and the global economy, but it also damaged the same folks that set the collapse into motion–Saudi Arabia and other oil producing countries. These countries, which are heavily reliant on oil revenues, have seen their budget deficits balloon. So, with all of the above in mind, in November of last year, the oil producing countries (led by Saudi Arabia) reversed course on their plan, by promising the first production cuts since 2008.
Oil prices have now recovered to the mid-$50s. And since OPEC announced production cuts last year at this time, U.S. petroleum supply has drawn down 5%. Meanwhile, global demand is running far hotter than forecasts of last year. Yet, OPEC is extending their production cuts into this market and may get even bolder next week at their November meeting. Why? Because now it suits them. Remember, Saudi Arabia’s next king has been cleaning house over the past two weeks, in the process of seizing hundreds of billions of dollars from his political foes. Higher oil prices help his efforts to reshape the Saudi economy.
As liquidity dries up into the end of year and holidays, we may see oil find its way back up toward those November 2014 levels (low $70s)–where the whole price-bust debacle started.
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Yesterday we talked about the comeback underway in Wal-Mart and the steps it has made to challenge Amazon, and to challenge the idea that Amazon will crush everyone.
It’s beginning to look like the “decline of the retail store” may have bottomed too.
And it so happens that it may have bottomed precisely when a new ETF launched to capitalize on that story. ProShares launched it yesterday, and that is the name of it –ProShares Decline Of The Retail Store ETF. It gives you short exposure to bricks and mortar retailers.
It’s off to a bad start–down 3% in the first day of trading.
For retail, the week started with a big earnings beat for Advance Auto Parts (the stock was up as much as 20% on Tuesday). Then it was Wal-Mart. And today we had earnings beats in Foot Locker and Abercrombie and Fitch.
With this, while the Dow and S&P 500 were down on the day, the small-cap (Russell 2000) was up nicely. Here’s why …
As bad as retail has been, the energy sector remains the worst performing for the year–down 11% year-to-date as a sector and the only sector in the red. This, as oil has reversed from down 22% on the year, to up around 5%, with a very bullish outlook.
This sets up for a big year ahead for energy stocks. And if you believe the worst of the economic challenges are behind us, the survivors in retail could have quite a revival–especially if Amazon begins to see more regulatory scrutiny.
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After some broad selling across markets yesterday, stocks bounced back today. With that, you might expect interest rates to push up and commodities to be rising too. That was not the case, which continues the trend of the past week (or so) of odd market behavior.
About a tenth of the strength in the S&P 500 can be attributed to Wal-Mart. Wal-Mart had a big earnings beat today with the best sales growth since before the financial crisis.
With that, let’s take a look at how Amazon’s war on traditional retail has affected Wal-Mart.
It wasn’t long ago that Wal-Mart was the biggest company in the world. It topped the Fortune 500 list from 2002 through 2005, and then again in 2007 (with a more than $300 billion market cap). At that time, Amazon was a $25 billion company. And then the financial crisis hit. Wal Mart was almost put out of business because of the global credit freeze. And then we had massive intervention to get credit moving again and to save the economy. With that intervention came a massive fiscal stimulus package. A huge chunk of it flooded into Silicon Valley (pension money followed it).
And, since then, although Amazon was a decade old company at the time, Amazon has had a trajectory similar to the other big tech giants of today. It’s more than 20 times as big today.
For perspective, in 2006, Wal-Mart was a $315 billion company. Today, the U.S. economy is 34% bigger than it was in 2006 (about $5 trillion bigger). And Wal-Mart is 15% smaller than it was in 2006 (at a market cap of $268 billion).
But Wal-Mart has finally started fighting for its life.
They bought a controlling stake in JD.com in the middle of last year to access the growing middle class in China. JD.com is the number two e-commerce site in China, but is rapidly closing the gap between itself and Alibaba (number 1). And JD has competitive advantages over Alibaba, in that, like Amazon, it owns its distribution centers and has control over quality (unlike an ebay and Alibaba). They’ve since upped the stake to 20% and may ultimately buy all of it. And Wal-Mart bought the startup Jet.com in the U.S. in August of last year. If they continue to win share in China through JD.com, this gap between Amazon and Wal-Mart may begin to start closing.
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As we’ve discussed, in the post-election world (of last year) we’ve had a passing of the baton from a global economy driven by monetary policy, to a global economy driven by structural reform and fiscal stimulus.
With the anticipation of fiscal stimulus, the election represented the end of the QE-era. With that, the top central bankers in the world (Fed, ECB, BOJ, BOE) met today and had a coordinated message to that effect. Just as they coordinated their QE programs to stabilize the world and manufacture recovery, they vowed to coordinate on the exit of QE.
Still, Europe has more work to do before following the Fed’s lead on “normalizing” rates. And Japan will be far behind Europe in ending QE. But that message of coordination should keep global (market) interest rates moving higher.
We’ve talked in recent days about the pockets of selling in global markets. Last week it was junk bonds, then Japanese stocks, then Treasurys and then gold. Today it was commodities, led by oil. Oil was down 2.4% on the day. And the dollar was lower (not higher, as some might expect with commodities moving lower).
Meanwhile, the big U.S. market indices couldn’t be shaken and the Treasury market was very quiet. These intermarket relationships haven’t been normal. And that should raise some eyebrows about elevating risk.
We’ve talked in recent days about the influence that we may be seeing in markets from Saudi Arabia’s move to investigate (potentially seize) up to $800 billion of wealth from high profile officials accused of fleecing the country.
The proxy for global market stability, throughout the past decade (the crisis and post-crisis era), has been U.S. stocks. So as long as U.S. stocks are holding up, people continue to ignore some of these “risk” signs. But give it a 2% down day and suddenly the observables may become observed.
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Into the latter part of last week, we had some indiscriminate selling in some key markets. First it was Japanese stocks that followed a new 25-year high with a 1,100 point drop. Then we had some significant selling in junk bonds and U.S. Treasuries. And then four million ounces of gold was sold in about a 10 minute period on Friday.
Markets were tame today, but as I said on Friday, the potential ripples from the political shakeup and related asset freeze in Saudi Arabia is a risk that still doesn’t seem to be given enough attention. I often talk about the many fundamental reasons to believe stocks can go much higher. But experience has shown me that markets don’t go in a straight line. There are corrections along the way, and we haven’t had one in a while.
With that said, since 1946, the S&P 500 has had a 10% decline about once a year (according to American Funds research).
The largest decline this year has been only 3.4%.
I could see a scenario play out, with forced selling related to the Saudi events, that looks a lot like this correction in 2014.
This chart was fear driven – when the Ebola fears were ramping up. You can see how quickly the slide accelerated. The decline hit 10% on the nose, and quickly reversed. Fear and forced selling are great opportunities to buy-into. This decline was completely recovered in 30 trading days.
We constantly hear predictions of impending corrections, pointing to all of the clear evidence that should drive it, but corrections are often caused by events that are less pervasive in the market psyche. The Saudi story would qualify. And we’re in a market that is underpricing volatility at the moment – with the VIX sitting only a couple of points off of record lows (i.e. little to no fear). Forced liquidations can create some fear.
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Japanese stocks have been a huge mover over the past quarter, as we discussed earlier this week. That move extended to a new 25-year high overnight. And then we got this …
As you can see on the far right of this daily chart, the Nikkei had a very slippery reversal to post an 1,110 point range for the day (closing near the lows).
This was the biggest range in the Nikkei since exactly one year ago today. That was the night of the U.S. elections (the day, in Japan).
Now, despite the huge range of the day, today’s losses in Japanese stocks were only 1.7% (open to close). Let’s take a look back over the past two years, though, to other times we’ve had a 1,000+ point range and on a down day.
There was the Brexit surprise in June 2016 (-9%). And then when the Bank of Japan shocked world markets in a scheduled meeting by NOT upping its QE program in April 2016 (-7%). Prior to that, was the middle of January of 2016 when oil prices were crashing (-4% and -4% two out of three trading days). Then there was December 18, 2015, the day after the Fed made its first post-crisis Fed hike (-2%). And then we had a day in August 2015 (-6%) and into the first day of September (-5%). These were driven by a surprise devaluation of the Chinese yuan, which set off a global stock market slide on fears of a weaker China, than most thought.
Now, we’ve just looked at all of the days for Japanese stocks where the range has been greater than 1,000 points and stocks have finished down. As you might deduce, these days all share a common thread. There was a big event related to these moves. So what was the event that caused this last night?
Nothing, of note. That’s concerning. Is there something bigger going on, that has yet to present itself. Is it perhaps the news out of Saudi Arabia that is about to lead to a global event?
Keeping the focus on what happened in Japan: First, for market technicians, this is a perfect “outside day” reversal signal. This is when a new high is set in an uptrend, a buying climax, and the buying exhausts and weak speculative longs are quickly shaken out of positions forcing prices to lower lows than the prior day (closing near the lows). The wider the range, and the more significant the volume, the higher the likelihood that a trend reversal is underway.
With that in mind, to the far right, you can see the spike in volume for the day.
As far as the range is concerned, we discussed the significance of a 1,000 point range historically.
So technically, there’s a fair reason to bet on a reversal here for Japanese stocks here. That leaked over into European stocks today. German stocks were down 1.4%. And it looked like U.S. stocks might have the same fate today, but the “buy the dip” appetite was clearly strong. If history is any indication, we might have better levels to buy the dip. And the dips in recent history have been lucrative: sharp but quickly recovered.
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This trajectory for stocks was not an outcome that Wall Street was looking for.
I looked back at an article on market forecasts published by Fortune in December of last year. Here’s how they saw it…
So the group with access to the best information didn’t do a good job of interpreting that information. And you can see in the forecasts, they were pretty much in agreement. They were looking for just better than 2,300 for the year. They saw a +3.7% year for the S&P 500. They undershot by 12.2 percentage points thus far.
They should have listened to billionaire Larry Robbins. Remember, he did a study on the influence of low interest rates, Fed policy and oil on markets. He says every time ONE of these (following) conditions has existed, the market has produced positive returns.
When the 30-year bond yield begins the year below 4%, stocks go up 22.1%.
When investment grade bonds yield below 4%, stocks go up 16%.
When high-yield bonds yield below 8%, stocks go up 11.6%.
When cash as a percent of asset for non-financials is above 10%, stocks go up 17.6%.
When the Fed tightens 0-75 basis points in the year, stocks go up 22%.
When oil falls more than 20%, stocks go up 27.5%.
All of these conditions have been met this year. And stocks are up 16% with about seven weeks remaining in the year.
Add to this, the idea that a regime shift was underway, moving from a QE-driven economy, to an economy to be driven by structural reform and fiscal stimulus (under the incoming Trump administration this year), should have bumped up even the most conservative of forecasts on stocks for the year. With the economy still performing under potential, yet with the momentum of low interest rates, cheap gas, low unemployment and solid balance sheets, the pieces have been in place for a pop in growth. The idea of feeding fiscal stimulus into that mix should have had Wall Street forecasting the rise of all asset prices. They didn’t see it coming.
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All eyes continue to be on U.S. stocks. But the bigger opportunities are elsewhere.
Japanese stocks were up another 1.3% today. The Nikkei is up 20% since September 8th. Oil is up 26% over just about the same period.
We’ve talked about the case for oil to continue its run. And with oil at 2 1/2 year highs and closing in on $60 a barrel, I’ve said we should expect the inflation chatter to start picking up. For those that have been looking for a catalyst to get bonds finally moving (and continuing) lower, this could be it. The Fed will find it very hard to ignore the impact of higher oil prices.
Here’s a look at that oil/ rates relationship we looked at a few weeks ago. At 2.30% on the 10 year yield, we sit 100 basis points off of the all-time lows (of last year). And coincidentally, we have 100 basis points of post-QE tightening in the market. With the strength in oil of the past two weeks, the divergence should be narrowing. But it has widened.
But we have another 25 basis points of tightening coming next month. This, along with this chart above, would argue we should be on the way up to 2.65ish in the 10-year yield (i.e. rates higher, bond prices lower).
With the oil story in mind, here’s another interesting chart: natural gas.
Natural gas is closing on this big four-year trendline. This momentum needs to continue, to close the sector performance gap in stocks (in the graphic below).
The energy sector has made up about three percentage points of ground since we looked at this chart last month.
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Oil is up over 3% today, trading up to the highest levels since June of 2015.
We were already at new highs for the year as of Friday’s close, and then we get news over the weekend of the political shakeup and arrests in Saudi Arabia.
We’ve talked about the fundamental case for much higher oil prices throughout the recovery last year, and again this summer. You never know what catalyst may come in to accelerate the move in price. We may have had it with this Saudi news.
Among the reasons to expect a potential violent move in oil prices: OPEC has been cutting production into a (ex OPEC, ex U.S.) world that’s not producing (i.e. there’s negative production growth). Given the scars of last year’s oil price bust, oil producers haven’t been spending on new production.
Meanwhile, there’s U.S. supply that is supposed to fill that void, but U.S. supply has been in consistent draw down, 26 of the past 31 weeks, to the tune of 8% lower supply.
Add to this, we have a global economy that’s improving, and with that, demand is increasing. And we have U.S. fiscal stimulus entering to stoke those flames.
We looked at this chart last month.
Source: Billionaire’s Portfolio
We had this this inverse head and shoulders (in the chart above) that projected a move back to the low $80s. And as part of that technical picture, we were setting up for a break of a big two-year trendline that would open the doors to a move back into the $70+ oil area.
That line broke at around $51.50, confirming that head and shoulders pattern, and the move has been aggressive since. We now have this chart …
Source: Billionaire’s Portfolio
This is beginning to play out according to script for the star commodity investors we talked about this summer, Leigh Goehring and Adam Rozencwajg. They’ve been wildly bullish oil calling for $75 to $110 oil. Earlier in the summer, they said “when inventory gets this low we run the risk of triple digit oil prices.” And they suspected a supply disruption could give us a sharp move higher.
Do the events in Saudi Arabia present a potential supply disruption? Earlier this year, Stratus Advisors, an energy research and consulting shop, projected potential oil-supply disruption scenarios. Among the scenarios, was “internal instability in Saudi Arabia.”
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We talked last week about what may be the bottom in the “decline of the retail store” story.
As we head into the Thanksgiving day weekend, let’s talk about oil and Saudi Arabia.
Yesterday we talked about the comeback underway in Wal-Mart and the steps it has made to challenge Amazon, and to challenge the idea that Amazon will crush everyone.
After some broad selling across markets yesterday, stocks bounced back today. With that, you might expect interest rates to push up and commodities to be rising too. That was not the case, which continues the trend of the past week (or so) of odd market behavior.
As we’ve discussed, in the post-election world (of last year) we’ve had a passing of the baton from a global economy driven by monetary policy, to a global economy driven by structural reform and fiscal stimulus.
Into the latter part of last week, we had some indiscriminate selling in some key markets. First it was Japanese stocks that followed a new 25-year high with a 1,100 point drop. Then we had some significant selling in junk bonds and U.S. Treasuries. And then four million ounces of gold was sold in about a 10 minute period 
All eyes continue to be on U.S. stocks. But the bigger opportunities are elsewhere.
