We watched oil closely earlier this year. The oil price bust ultimately pulled down stocks. And when oil aggressively bounced off of the bottom, stocks recovered alongside, returning to new record highs.
Today it was oil again.
Stocks oscillated near record highs and following an anticipated Fed event last week had continued to tread water. That gives the bears a low risk trade to sell the S&P 500 against the top (as a take profit, hedge or just a trade), holding out hope that gravity would take hold.
It hasn’t happened. But we did get a catalyst to get it moving lower today, with a bigger than expected oil inventory build. That sent oil down nearly 4% on the day.
Oil stocks took a hit. But the broader stock market held up well, losing just 1/2 percent and recovering most of it by the day’s end.
The market still sits at critical levels going into the jobs number on Friday. Yields continue to chop in this ever tightening wedge (below) — a break looks certain on the jobs number. This is a very important chart.
And stocks are positioned close enough to the highs to encourage some profit taking (if the highs get taken out, you put the position back on … if the highs hold, you may have an opportunity to buy it back cheaper).
It remains a macro story – a central bank story. And that’s the mindset of the market as we head into the end of what has been a rather sleepy August.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
The Fed’s Janet Yellen was the focal point for markets for the week. She had a scheduled speech at the annual Fed conference at Jackson Hole.
When her speech was finally made public Friday morning, the response in markets was uncertainty (the most used word for the past nine years).
Stocks went up, then down. Yields went down, then up.
So what do we make of it? Let’s start with the headlines that hit the wire Friday morning.
The world was wondering if Yellen would support the messaging from some of her fellow Fed members–that a September rate hike is on the table. Or would she continue the backstepping (dovish speak) the Fed has done for the past five months. The answer was ‘yes.’ She did both.
Yellen said the case for rate hikes has strengthened (yellow marker) because the data is nearing their goals (employment and inflation–the white marker). Ah, rate hike. But then she said the Fed expects inflation to hit the target 2% in the next few years (circled)! And then talked about the strategy for more QE. Huh? And then to top it off, she said they might move the goalposts. They might move the inflation target higher, and start targeting GDP. That means they would be happy to leave conditions ultra accommodative until those higher targets are met. Clearly dovish.
As I said Thursday, they want to raise rates to get the financial system closer to proper functioning, but they don’t want to cause a recession. The Fed wants to raise short-term rates, but promote a flatter yield curve (i.e. promote expectations that the economy will continue to be soft) to keep the market interest rates low, which keeps the housing market on the rails and the economic activity on the rails.
Remember, we talked about the piece Bernanke wrote a couple of weeks ago, where he suggested exactly this type of perception manipulation from the Fed, to balance the need to raise rates, without killing the economy.
That looks like the game plan.
Have a great weekend!
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
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.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
Following a quiet week on the news and economic data front, this week will have plenty of events and catalysts for markets, as we sit at record highs in U.S. stocks.
We talked last week about the sharp bounce back in oil. That bounce continues today (+2.5%), and is being driven by comments from Saudi Arabia that an oil production freeze may finally come to put a floor under oil.
Why does it matter? OPEC, led by its biggest oil producer, Saudi Arabia, has rigged oil prices for the better part of two years in an attempt to ward off new shale industry competition. That brought the U.S. energy industry to its knees earlier this year, before central banks stepped in with “stimulus” measures that happened to bottom out oil and double the price in just weeks. Still, low prices are finally reaching the breaking point for all oil producers (including the Saudis and fellow OPEC countries).
So higher oil (above $40) takes shock risk off of the table for global markets. As such, global stocks continue to climb. It started in China this morning, with a 3% plus rise (as we said in early July, It May Be Time To Buy Chinese Stocks).
Among the events this week, the biggest investors in the world are filing required quarterly public portfolio disclosures with the SEC (13F filings). This is where we get a glimpse into their portfolios.
Of course, it’s a widely covered event these days by the media. And there’s interesting information to be gleaned. But of 400 or so top funds/investors, only 20-30 have the combination of size/influence and hold a concentrated portfolio of high conviction investments to make the prospect of following their lead, productive. Most of the lot allocate across so many stocks their portfolio performance mirrors the broader indices.
Of this small group of investors, what’s most valuable are the timely public disclosures (13D filings) they make when they’ve taken a controlling interest in a company with the intent to create change — their conviction level, and their clear and articulated game plan for unlocking value.
With filings continuing throughout the day today, we’ll talk more this week about the value of following the lead of some of the best investors in the world.
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In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
After the past two weeks, that included a Fed decision, more BOJ action, the approval of Japanese fiscal stimulus, a rate cut and the return to QE for the Bank of England, and a strong jobs report, this week is a relative snoozer.
With that, every headline this week seems to contain the word Trump. Clearly the media thought a post by the former Fed Chairman, the architect of the global economic recovery and interventionist strategies that continue to dictate the stability of the global economy (and world, in general) today, wasn’t quite as important as Trump watching.
On Monday, Ben Bernanke wrote a blog post that laid out what appears to be his interpretation of a shift in gears for the Fed – an important message. Don’t forget, this is also the guy that may have the most intimate knowledge of where the world has been over the past decade, what it’s vulnerable to, and what the probable outcomes look like for the global economy. And he’s advising one of the biggest hedge funds in the world, the biggest bond fund in the world and one of the most important central banks in the world (at the moment), the Bank of Japan. And it’s safe to assume he still has influence plenty of influence at the Fed.
My takeaway from his post: The Fed’s forward guidance of the past two years has led to a tightening in financial conditions, which has led to weaker growth, lower market interest rates and lower inflation.
Why? Because people have responded to the Fed’s many, many promises of a higher interest rate environment, by pulling in the reins somewhat.
To step back a bit, while still in the midst of its third round of QE, the Fed determined in 2012, under Bernanke’s watch, that words (i.e. perception manipulation) had been as effective, if not more, than actual QE. In Europe, the ECB had proven that idea by warding off a bond market attack and looming defaults in Spain and Italy, and a collapse of the euro, by simply making promises and threats. With that in mind, and with the successful record of Bernanke’s verbal intervention along the way, the Fed ultimately abandoned QE in favor of “forward guidance.” That was the overtly stated gameplan by the Fed. Underpin confidence by telling people we are here, ready to act to ensure the recovery won’t run off of the rails — no more shock events.
The “forward guidance” game was working well until the Fed, under Yellen, started moving the goal posts. They gave a target on unemployment as a signal that the Fed would keep rates ultra low for quite some time. But the unemployment rate hit a lot sooner than they expected. They didn’t hike and they removed the target. Then they telegraphed their first rate hike for September of last year. Global markets then stirred on fears about China’s currency moves, and the Fed balked on its first rate move.
By the time they finally moved in December of last year, the market was already questioning the Fed’s confidence in the robustness of the U.S. economy, and with the first rate hike, the yield curve was flattening. The flattening of the yield curve (money moving out of short term Treasuries and into longer term Treasuries, instead of riskier assets) is a predictor of recession and an indicator that the market is betting the Fed made/is making a mistake.
And then consider the Fed’s economic projections that include the committee’s forecasts on interest rates. By showing the market/the world an expectation that rates will be dramatically higher in the coming months, quarters and years, Bernanke argued in his post that this “guidance” has had the opposite of the desired effect — it’s softened the economy.
So in recent months, starting back in March, the Fed began dramatically dialing back on the levels and speed they had been projecting for rates. It’s all beginning to look like the Fed should show the world they are positioned to well underestimate the outlook, rather than overestimate it, as it’s implied by Bernanke. The thought? Perhaps that can lead to the desired effect of better growth, hotter inflation.
This post by Bernanke is reversing some of the expectations that had been set in the market for a September or December rate hike by the Fed. And the U.S. 10-year yield has, again, fallen back — from 1.62% on Monday to a low of 1.50% today. Still, the Fed showed us in June they expect one to two hikes this year. Given where market rates are, they may still be overly hawkish.
This is the perfect time to join us in our Billionaire’s Portfolio, where we follow the lead of the best billionaire investors in the world. You can join us here.
Yesterday we walked through some charts from key global stock markets. As we know, the S&P 500 has been leading the way, printing new highs this week.
U.S. stocks serve as a proxy on global economic stability confidence, so when stocks go up in the U.S., in this environment, there becomes a feedback loop of stability and confidence (higher stocks = better perception on stability and confidence = higher stocks …)
That said, as they begin to capitulate on the bear stories for stocks, the media is turning attention to opportunities in emerging markets. But as we observed yesterday in the charts, you don’t have to depart from the developed world to find very interesting investment opportunities. The broad stock market indicies in Germany and Japan look like a bullish technical breakout is coming (if not upon us) and should outpace gains in U.S. stocks in second half of the year.
Now, over the past few weeks, we’ve talked about the slide in oil and the potential risks that could re-emerge for the global economy and markets.
On Wednesday of last week, we said this divergence (in the chart below) between oil and stocks has hit an extreme — and said, “the oil ‘sharp bounce’ scenario is the safer bet to close the gap.”
Sources: Billionaire’s Portfolio, Reuters
Given this divergence, a continued slide in oil would unquestionably destabilize the fundamentals again for the nascent recovery in energy companies.
With that, and given the rescue measures that global central banks extended in response to the oil bust earlier this year, it was good bet that the divergence in the chart above would be closed by a bounce back in oil.
That’s been the case as you can see in the updated chart below (the purple line rising).
Sources: Billionaire’s Portfolio, Reuters
At the peak today, oil had bounced 11% in just five trading days. Oil sustaining above the $40 is key for the stability of the energy industry (and thus the quelling the potential knock-on effects through banks and oil producing sovereigns). Below $40 is the danger zone.
In a fairly quiet week for markets (relative to last week), there was a very interesting piece written by former Fed Chairman Ben Bernanke yesterday.
Tomorrow we’ll dig a little deeper into his message, but it appears that the Fed’s recent downgrade on what they have been projecting for the U.S. economy (and the path of policy moves) is an attempt to stimulate economic activity, switching for optimistic forward guidance (which he argues stifled activity) to more pessimistic/dovish guidance (which might produce to opposite).
Remember, we’ve talked in recent months about the effect of positive surprises on markets and the economy. We’ve said that, given the ratcheting down of earnings expectations and expectations on economic data, that we were/are set up for positive surprises. Like it or not, that’s good for sentiment. And it’s good for markets. And it can translate into good things for the economy (more hiring, more investment, more spending).
The positive surprises have been clear in earnings. It’s happening in economic data. It looks like the Fed is consciously playing the game too.
This is the perfect time to join us in our Billionaire’s Portfolio, where we follow the lead of the best billionaire investors in the world. You can join us here.
Today we want to look at some key charts as we head into the week.
First, to step back a bit, as we started last week, we had some big market events ahead of us. Japan was due to approve a big fiscal stimulus plan. The Bank of England was meeting on rates and the U.S. jobs report was on the docket to wrap up the first week of August.
As we discussed Thursday, the BOE announced they’ve returned to the QE game. Japan doubled the size of its stock buying plan. And the jobs report came in Friday with another solid report. As we thought, despite the volatility in the monthly numbers the media likes to overanalyze, the longer term trend continues to clearly argue the health of the job market is in good shape, and not a legitimate concern for the Fed’s rate path.
All together, the events of the week only solidified reasons to be long stocks.
Most importantly, stocks have been, and continue to be, a key tool for central bankers in this global economic recovery. They want and need stocks higher. A higher stock market provides fuel for economic activity by underpinning confidence and wealth creation, which encourages hiring, spending and more investment.
With that, as we’ve said, this is the sweet spot for stocks, where good news is good news for stocks (better outlook triggers capital flows out of cash and bonds, and into stocks), and bad news is good news for stocks (it triggers more stimulus).
When it comes to stocks, back on May 25th, we said “everyone could benefit by having a healthy dose of ‘fear of missing out.’ Stock returns tend to be lumpy over the long run. When we you wait to buy strength, you miss out on A LOT of the punch that contributes to the long run return for stocks.”
Fast forward to today, and the S&P 500 has printed yet another new record high.
But the horse is not already out of the barn on global stocks (including U.S. stocks).
Let’s take a look at the chart on the S&P 500…
Sources: Billionaire’s Portfolio, Reuters
You can see, we’ve broken out in U.S. stocks (very bullish).
Next, in the UK, the place people were most afraid of, just a little more than a month ago, traded near 14-month highs today and is nearing a breakout to record highs, with support of fresh central bank easing from the Bank of England.
Sources: Billionaire’s Portfolio, Reuters
In the next two charts, we can see the opportunities to buy the laggards, in areas that have been beaten down on broader global economic concerns, but also benefiting directly from domestic central bank easing.
In the chart below, you can see German stocks have fallen hard from the highs of last year, but have technically broken the corrective downtrend. A return to the April highs of last year would be a 19% return for current levels.
Sources: Billionaire’s Portfolio, Reuters
In the next chart, Japanese stocks also look like a break of this corrective downtrend is upon us. A return to the highs of last year would be a 25% run for the Nikkei. As we discussed last week, the sharp ascent in the chart below from the lower left corner of the chart can be attributed to the BOJ’s QE program, which first included a 1 trillion yen stock buying program and was later tripled to three trillion (a driver of the run from around 15k to 21k in the index). Last week, that stock buying program was doubled to six trillion yen.
Sources: Billionaire’s Portfolio, Reuters
Given the trajectory of the charts above (global stocks), which both promote and reflect global confidence, and the given lack of consequence that QE has had on meaningful inflation, the world’s inflation-fear hedge, gold, looks like its run into brick wall up here.
Sources: Billionaire’s Portfolio, Reuters
Remember, we have a convergence of fresh monetary policy in the world this year, with fiscal policy in Japan, and the growing appetite for fiscal policy in other key economies. That’s powerful fuel for global economic growth, risk appetite and stocks.
This is the perfect time to join us in our Billionaire’s Portfolio, where we follow the lead of the best billionaire investors in the world. You can join us here.
As we’ve said, oil has been quietly sliding over the past three weeks. It closed yesterday more than 20% off of the highs of the year.
And we looked at this chart and said, this divergence has hit an extreme, something has to give.
Source: Billionaire’s Portfolio, Reuters
Yesterday it was stocks. Today it was a sharp bounce in crude – up 4%. The oil “sharp bounce” scenario is the safer bet to close the gap on the chart above.
Alternatively, oil under $40 puts it in the danger zone for the global economy and broad financial market stability. With that, we had a close in the danger zone, under $40, yesterday. But it may turn out to be just a brief visit.
If we look at the longer term chart, the 200 day moving average comes in right in this $40 area ($40.67). Again, we had a close below yesterday, but a close back above the 200 day moving average today.
Sources: Billionaire’s Portfolio, TradingView
For technicians, two consecutive closes below the 200 day moving average would create some concern for this post-oil price bust recovery.
In that case, many companies in the struggling energy sector would be back on bankruptcy watch. But the global economic recovery can’t afford another bout with weaker oil prices, and the ugly baggage that comes with it (oil company defaults, which would lead to financial system instability and sovereign defaults). If two of the best billionaire oil traders in the world are right about oil, and we see $80 in the next year, this dip is a great buying opportunity (for the underlying commodity and energy stocks).
Tomorrow, we hear from the Bank of England. The expectations are that the BOE will cut rates to support economic activity in the face of Brexit uncertainty. But there’s also a decent bet being wagered that the BOE will return to QE (a second post-global financial crisis bond buying program). History tells us that, in this environment, central banks like to save bullets for the moments when crisis and fear is peaking. With that, the BOE may disappoint tomorrow. If so, it could pour some gas on the nascent rise in market rates that started yesterday in Japanese, German and American 10-year yields.
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Yesterday we pointed to the renewed risk that oil represented for stocks.
The persistent bleed in the price of oil for the past three weeks has been with little attention. Even the energy stocks, which have had huge runs since oil bottomed in February, were largely ignoring the slide in the most significant input for those businesses.
As we said yesterday, oil continued to leak lower, even as stocks printed a fresh record high yesterday. As oil went out at the key $40 level, the divergence between oil and stocks had reached an extreme. We said something has to give.
Today, it’s been stocks. Stocks have fallen back, following the lead of further declines in crude — which settles BELOW $40 today.
Why is oil important for stocks?
As we’ve said in a world where stability is king, central bankers have been very sensitive to swings in key financial markets, with the idea that confidence and the perception of stability can quickly become unhinged by market moves. When that happens, it becomes a big, viable threat to the global economic recovery and outlook.
Now, we’ve talked a lot about the divergence between yields and stocks too. In this post-global financial crisis world, when people feel better about the global outlook, they take risk. That means they buy stocks and they move money OUT of the “safe-haven” treasury market. That means yields should move higher, while stock move higher.
That hasn’t been the case. Yields have continued to trade toward the record lows in recent weeks, even as stocks have traded to new record highs. Why? It’s being driven by capital flows and speculation related to central bank action in Japan and Europe. U.S. Treasuries are offering both a relative safe haven, and a positive yield in a world of negative yields. That keeps freshly printed global money flowing into U.S. Treasuries, which drives up price, and drives down the yield.
With that, logic has again been tossed on its head today. Stocks are falling, along with oil. This is typically a trigger for some elevated risk aversion. One would think Treasuries would be rallying today, pushing yields lower. It has been the opposite.
It may have a lot to do with the fiscal stimulus package that was approved today (overnight) in Japan. The central banks have had the pedal pinned to the floor on monetary policy for the better part of the past seven years, and they’ve gotten no help from governments on fiscal stimulus. Today’s move in Japan may represent a changing of the stimulus guard. With that, the bet on lower yields is being reversed, not just in the U.S., but in Europe and Japan.
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Stocks printed another fresh record high in the S&P 500 today before falling back. As we discussed Friday, the BOJ undershot expectations last week, because many thought anything short of full blown debt monetization (to coincide with fresh fiscal stimulus to be approved this week) was a disappointment.
But doubling the size of ETF purchases was kind of a big deal, especially if you consider where their stock buying program has come from (1 trillion yen), where it is now (6 trillion yen), and what it has meant for the performance of Japanese stocks (and global stocks).
Still, just as the Fed opened the door last week to a September rate hike, the BOJ opened the door to a revamp of its current QE program in September.
Remember, the last time the BOJ came in with a doubling down on their QE program (a QE2 for the BOJ) was in October of 2014. That same month, the Fed ended its QE program. As we’ve said, the Fed has only had the confidence to end emergency policies (that includes the beginning of a tightening cycle) because they know the BOJ is there to take the QE torch.
Now, with earnings season nearing an end, we’ve now heard from a majority of the companies in the S&P 500, and the positive earnings surprises continue to provide fuel for stocks.
When earnings reports were kicking off in the middle of last month, we said: “Among the reasons we’ve thought stocks look well underpinned and the economy could be in the early stages of a boom, is that the bar has been set so low, in terms of expectations, that we’re set up for positive surprises — both in earnings and economic data. Surprises create changes in outlooks. And ‘change’ is the primary catalyst that moves/reprices markets.
Last earnings seasons 72% of the companies in the S&P 500 beat expectations. Still, companies dialed down expectations coming into the second quarter. Wall Street then lowers its bar. And they beat.
Like it or not, that’s how Wall Street works and has always worked. FACTSET says on average (the five-year average) 67% of companies in the S&P 500 beat their analyst expectations. And they beat by an average of 4%….As we know, better than expected earnings are fuel for stocks.”
So now 71% of the companies that have reported have beaten expectations on earnings for the past quarter. And 57% have beaten on revenues. The media will continue to point to the lower decline in earnings compared to last year and wonder why stocks are going higher. But, again, that information was priced in, and stocks reprice on change. And earnings beats represent change/ new information.
This week we have another jobs report. Non farm payrolls/job creation is the data point that market participants and the media have been trained for decades to over analyze/over-emphasize. We’ve had and will have undershoots and overshoots on the number. But for the Fed, an unemployment rate around 5% and non farm payroll number averaging 200k a month, the jobs data is in pretty good shape.
The biggest risk to stocks in the very near term is oil. We talked about keeping a close eye on the slide in oil, a market that was, at one point earlier this year, THE most important market in the world.
On that note, we said, “in a world where stability is king, central bankers have been very sensitive to swings in key financial markets, with the idea that confidence and the perception of stability can quickly become unhinged by market moves. When that happens, it becomes a big, viable threat to the global economic recovery and outlook.”
At $26 oil was threatening another global financial crisis. It bounced aggressively after the BOJ stepped in and intervened in USDJPY back in early February. Oil bottomed that day, so did stocks. Soon thereafter, oil doubled and stocks have printed fresh record highs.
But oil has been moving lower in recent weeks. As we said, this will grow in importance, and send negative signals, if it were to continue lower.
It has indeed continued to slide, closing today just above $40. We’ve looked at this chart of oil and the S&P 500.
Sources: Billionaire’s Portfolio, Reuters
When the oil price bust was threatening economic stability, stocks were moving almost tick for tick with the slide in oil. But we’ve had some significant divergence in the past few weeks, with oil going lower and stocks going higher. And oil trades $40 today, which is a huge level. Expect this gap to close, with either a slide in stocks, or a nice bounce on the retracement in oil. We bet on the latter.
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In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple on an upcoming event.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
