February 13, 7:00 pm EST

On Friday, stocks bottomed into two big technical levels: 1) the two-year rising trendline that represented the recovery from the lows of 2016, which were induced by the oil price crash, and 2) the 200-day moving average.

We’ve since seen a 5.5% bounce off of the bottom.

Interestingly, the market that has had so many people concerned over the past two weeks–interest rates–were tame and lower on the day. But only after printing a new high (at 2.90%, which is the highest since January of 2014).

That climb in rates, of course, has had everyone uptight about the inflation outlook. But the market you would expect to reflect inflation fears hasn’t been telling the inflation story at all. I’m talking about the price of gold. And gold has been lower, not higher, since stocks have fallen.

Here’s a look at that chart …

With this in mind, the psychology always changes when stocks go down. People search for stories to fit the price–for trouble to fit the price. Even some of the more rational market practitioners were succumbing to this over the weekend, trying to conjure up a negative scenario unfolding for markets.

Having been involved in markets for 20 years, I’ve seen, within both short- and long-term cycles, thousands of turning points, trend changes, phases of a cycles, trends and corrections of trends. Markets can and do have technical corrections. And they can and do correct for no reason, other than price.

So, for perspective, things are good. We will have the hottest economy this year that we’ve seen in a decade. The benchmark 10-year yield, at 2.90%, remains very low relative to history. That means, although borrowing costs are ticking higher, money is still cheap. Gas is cheap. Consumer and corporate balance sheets are as good as they’ve been in a long time. And we’ve just gotten a blue light special on stocks–marking down prices from 18 times to something closer to 16 times earnings. And with the prospects for earnings to come in better than expected, given influence of tax cuts, we are probably looking at a P/E on the S&P 500 forward earnings closer to 15.

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NYSE:GLD, NYSE:GG, NYSE:WFC, NYSE:BAC, NYSE:NEM, NYSE:SPY

February 11, 7:00 pm EST

Two weeks ago there were signals that a correction was underway.  First we had a swing back into positive yield territory for the German 5-year government bond. That was a significant marker for the end of the negative interest rate era and the end of global QE.

And with the outlook for rate normalization formalizing in the market, we should expect stock market growth to be driven from that point by earnings and dividends, and therefore economic growth. And then we had a perfect trigger lining up to set off the correction: earnings from the big tech giants. On script, Google missed. Apple disappointed on guidance, and the broad market sell-off began.

With that, when stocks broke down on February 2nd, we remembered that the stock market has had about a 10% decline on average, about once a year, over the past 70 years.

Then on Monday, the sell-off accelerated, and for a target in the S&P 500 we looked at this chart, which projected a reasonable spot to think we might find a bottom–around 2,560. We hit that on Friday and traded through to the 200-day moving average (2,539)–and we got an aggressive bounce.

Now, I’ve said a decline like this would make stocks cheap–“maybe something closer to 15 times forward earnings.” That sounded crazy two weeks ago. But guess what? We’re pretty darn close. At the lows on Friday, the P/E on earnings forecasted over the next four quarters was 16.2!

But as we know, Wall Street has a long history of underestimating earnings. That’s why about 70% of companies beat on earnings every quarter. And in this case, we’re talking about a huge earnings bump coming in the first quarter from the tax cuts. And Wall Street has barely bumped earnings expectations to incorporate that.

As said earlier this week, when the tax cut was in proposal stages, Citigroup estimated it would add $2 to S&P 500 earnings for every 1 percentage point cut in the tax rate. We’ve gone from 35% to 21%. With that, the forward four-quarter estimate for S&P 500 earnings, before the tax bill (in late November) was around $142.

If we add $28 in tax savings, we get $170. At the lows today in the S&P 500 that puts the P/E on a $170 in S&P 500 forward earnings at 14.8! That’s cheap relative to the long run historical P/E on stocks. And it’s extremely cheap in a world of low rates. And rates are still very low relative to history. And the low-rate environment will continue to motivate investors to seek higher returns in stocks–and pay higher valuations as stocks rebound. With hotter earnings and multiple expansion from here, we could reasonably see a 20%-30% rebound in stocks by year end.

Remember, the psychology always changes when stocks go down. People search for stories to fit the price–for trouble to fit the price. Rather than one of these stories leading to another major fallout, it’s a much higher probability that we are in the early innings of an economic boom, and stocks will be much higher than here in a year’s time.  It’s time to be greedy while others are getting fearful.

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January 29, 7:00 pm EST

For the first time in a decade, the mood at the World Economic Forum in Davos was of optimism and opportunity.  And Trump economic policies have had a lot to do with it.

That optimism has continued to drive markets higher this year: global stocks, global interest rates, global commodities – practically everything.

The S&P 500 is up nearly 7% on the year now — just a little less than a month into the New Year.  And we’ve yet to see the real impact of tax incentives hit earnings and investment.

But, with the rising price of oil (now above $65), and improving consumption (on the better outlook), we will likely start seeing the inflation numbers tick up.

Now, what will be the catalyst to cap this very sharp run higher in stocks to start the year?  It will probably be the first “hotter than expected” inflation number.

That would start the speculation that the Fed might need to move rates faster, and it might speed-up the exit talks from QE in Europe and Japan.

If the inflation outlook triggers a correction (which would be healthy), that would set the table for hotter earnings and hotter economic growth (coming down the pike) to ultimately drive the remainder of stock returns for the year.

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January 22, 9:00 am EST

Last week we talked about the big adjustment we should expect to come in the inflation picture. With oil above $60 and looking like much higher prices are coming, and with corporate tax cuts set to fuel the first material growth in wages we’ve seen in a long time (if not three decades), this chart (inflation expectations) should start moving higher…

And with that, market interest rates should finally make a move. As we discussed last week, we will likely have a 10-year yield with a “3” in front of it before long.

Yields have already popped nearly a quarter point since the beginning of the year. But that’s just (finally) reflecting the December Fed rate hike. What hasn’t been reflected in rates, as it has in stocks, is the different growth and wage pressure outlook this year, thanks to the tax cut. Last year, people could argue it wasn’t going to happen. This year, it’s in motion. And the impact is already showing up. We should expect it to show in the inflation data, sooner rather than later.

With that, today we’re knocking on the door of a big breakout in rates (as you can see in the chart below) — which comes in at 2.65%…

As we’ve discussed, the anchor for the benchmark U.S. 10-year yield (and for global rates), even in the face of a more optimistic global economic growth outlook, has been Japan’s unlimited QE (driven by its policy to peg its 10-year at a yield of zero). On that note, last week, the former head of the central bank in India, Raghuram Rajan (a highly respected former central banker), said he thinks both Europe and Japan will exit emergency policies sooner than people think. That’s a positive statement on the global economy and a warning that global rates should finally start moving.

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January 17, 4:00 pm EST

Yesterday’s slide in stocks was all recovered today, despite the continued threat of a government shutdown.  As we discussed yesterday, holding the government budget hostage to make gains on partisan demands hasn’t been enough to move the needle on the stock market the past three times we’ve seen it happen (2013, 1995-1996 and 1990).

Still, incredulously, the chatter about a “top” in stocks was heavy, yesterday afternoon and throughout this morning – given the 300 point move off of the top in the Dow (and accompanied by a sharp slide in bitcoin this morning).

The media and Wall Street experts must need to be reminded daily that we have a huge tax cut hitting this year, into extremely favorable economic conditions (low rates, cheap gas, record low unemployment, record high household net worth, record high consumer credit worthiness), with continued pro-business policies being executed, a major infrastructure spend pursued, and global growth expected to run as hot as we’ve seen since before the financial crisis.

With this in mind, Apple told us today that they plan to repatriate all of their offshore cash (about a quarter of a trillion dollars worth — thanks to a new, massive repatriation tax break), hire 20k people over the next five years and spend $30 billion in capex, to contribute $350 billion to the U.S. economy overall.

So, this is a direct result of incentives.  And creating these incentives are the motivations behind the fiscal stimulus policies – all in an effort to achieve the behavior we’re seeing from Apple.  Ultimately, it’s all about escaping the dangerously slow economic growth that was manufactured by central banks – so that the 10-year global economic slog doesn’t give way to a full-blown depression. So these incentives are working. Fiscal stimulus is working.  And, as we’ve discussed, this should promote the big bounce back in growth that is typical of post-recession recoveries, but has been lacking in this post-financial crisis environment.

Still, people with the most influential voices continue to underestimate the outlook. The Fed is looking for just 2.5% U.S. GDP growth for the year (that’s likely less than what we’ll see for full year 2017).  And Wall Street is looking for just 6% growth in stocks (according to this WSJ piece).  The S&P 500 is already up 5%.

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January 16, 4:00 pm EST

Stocks reversed after a hot opening today.  With a quiet data week ahead, the focus is on the prospects of a government shutdown.

If this sounds familiar to you, it should.  Government debt is the, often played, go-to political football.

It was only last month that we were facing a similar threat.  But with some policy-making tailwinds on one side of the aisle, the fight was politically less palatable in December.  With that, Congress passed a temporary funding bill to kick the can to this month.

And just three months prior to that, in September, we had the same showdown, same result.  The “government shutdown” card was being played aggressively until the hurricanes rolled through. From that point, politicians had major political risk in trying to fight hurricane aid.  They kicked the can to December to approve that funding.

Now, the Democrats feel like they have some leverage, and their using the threat of a government shutdown to make gains on their policy agenda.  So, how concerned should we be about a government shutdown (which could come on Friday)? Would it derail stocks?

If you recall, there was a lot of fuss and draconian warnings about an impending government shutdown back in 2013.  The government was shutdown for 16 days.  Stocks went up about 2%.    Before that was 1995-1996 (stocks were flat), and 1990 (stocks were flat).

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January 12, 4:00 pm EST

Stocks have now opened the year up 4%.  Global interest rates are on the move, with the U.S. 2-year Treasury trading above 2% for the first time since 2008.  Oil is trading in the mid $60s.  And base metals are trading toward the highest levels of the young, two-year bull market in commodities.

This all looks like a market that’s beginning to confirm a real, sustainable economic recovery – anticipating much better growth than what we’ve experienced over the past decade.

If that’s the case, we should expect a big adjustment coming in inflation readings.  And with that, we should expect a big adjustment coming for global interest rates.  We’ll likely have a 10-year yield with a “3” in front of it before long. And that will have a meaningful impact on key consumer borrowing rates (especially mortgages).

On the inflation note, we’ve talked this week about the impact of higher oil prices on inflation and the impact it may have on the path of central bank policies (most importantly, the speed at which QE may be coming to an end in Europe and Japan).

You can see in this chart, the very tight relationship of oil prices and inflation expectations.

Now remember, one of the best research-driven commodities investors (Leigh Goehring) thinks we may see triple-digit oil prices — this year! This has been a very contrarian viewpoint, but beginning to look more and more likely.  He predicted a surge in global oil demand (which has happened) and a drawdown on supplies (which has been happening at “the fastest rate ever experienced”).  He says, with the OPEC production cuts (from November 2016), we’re “traveling down the same road” as 2006, which drove oil prices to $147 barrel by 2008.

Bottom line, this is an inflationary tale.  If we had to search for a market that might be telling us this story (i.e. inflation is finally leaving the station), the first place people might look is the price of gold. What has gold been doing?  It has been on a tear.  Gold is up 8.3% over the past month.

For help building a high potential portfolio, follow me in our Billionaire’s Portfolio subscription service, where you look over my shoulder as I follow the world’s best investors into their best stocks.  Our portfolio of highest conviction, billionaire-owned stocks is up close to 50% over the past two years.  You can join me here and get positioned for a big 2018.

January 11, 4:00 pm EST

Yesterday we talked about the move underway in interest rates.  And we talked about the media’s (and Wall Street’s) desperate need to fit a story to the price.

On that note, they had been attributing rising U.S. rates to a vaguely attributed report from Bloomberg that suggested China might find our bonds less attractive.  As I said, that type of speculation and chatter isn’t new (i.e. not news).  Not only was it not news, China called it “fake news” today.

But as we discussed yesterday, rates are on the move for some very simple fundamental reasons. It’s the increasing probability that we will have the hottest U.S. and global growth in the post-crisis era, this year — underpinned by fiscal stimulus.  And that’s inflationary.  That’s bullish for interest rates (bearish for bonds).

So, again, money may just be in the early stages of moving OUT of bonds and cash, and BACK into stocks.

But, as we’ve also discussed, the real catalyst that will unshackle market interest rates from (still) near record low levels (globally) is the end of global QE.

And that will be determined by the central banks in Europe and Japan.  On that note, the European Central Bank has already reduced its monthly asset purchases (announced last October), and they’ve announced a potential end date for QEin September of 2018.  This morning, we heard the minutes from the most recent ECB meeting.  And the overwhelming focus, was on stepping up the communication about the exit (the end of emergency policies).  And don’t be surprised if European governments follow the lead of the U.S. with tax cuts to accompany the exit of QE.

In support of this outlook, the World Bank just stepped up growth expectations for the global economy for 2018 to 3.1%, saying 2018 is on track to be the first year since the financial crisis that the global economy will be operating at full capacity.

With the above in mind, you can see in this next chart just how disconnected the interest rate market is from the economic developments.

For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks.  Our portfolio of highest conviction, billionaire-owned stocks is up close to 50% over the past two years.  And 25% of our portfolio is in commodities stocks. You can join me here and get positioned for a big 2018.

January 9, 4:00 pm EST

Interest rates are on the move today. So is oil. And the latter has a lot to do with the former.

For much of the past quarter we’ve talked about how disconnected the interest rate market has been from the stock market and the economy.

With stocks putting up 20% last year, the economy growing at close to 3% and unemployment at 4%, and with FIVE Fed rate hikes now in this tightening cycle, the yield on the 10-year Treasury has defied logic.

But as we’ve discussed, we should expect that logic to be a little warped when we’re coming out of an unprecedented global economic crisis that was combatted by an unprecedented and globally coordinated monetary policy. And that continues to create dislocations in financial markets. Specifically, when global central banks continue to print money, and indiscriminately buy U.S. Treasurys with that freshly printed money (i.e. the dollars the trade for it), they will keep market rates pinned down. And they have done just that. Of course, that helps fuel the U.S. and global recovery, as it keeps borrowing and service rates cheap for things like mortgages, consumer loans, corporate debt and sovereign debt.

But last month, we talked about where the real anchor now exists for global interest rates. It’s in Japan. As long as Japan is pegging the yield on the 10-year Japanese government bond at zero, they will have license to print unlimited yen, and buy unlimited global government bonds, and anchor rates.

What would move Japan off of that policy? That’s the question. When they do abandon that policy (pegging JGB yields at zero), it will signal the end of QE in Japan and the end of global QE. Rates will go on a tear.

With that the architect of the stimulus program in Japan, Shinzo Abe, said today that he would keep the pedal to the metal, but indicated a possibility that they could achieve their goal of beating deflation this year.

That sent global rates moving. The benchmark 10-year yield jumped to 2.54% today, the highest since March of last year.

Another big influence on rates is, and will be, the price of oil. As we’ve discussed, the price of oil has played a huge role in the Fed’s view toward inflation. And that influence (of oil prices) on the inflation view is shared at other major central banks.

On that note, oil broke above $63 today, the highest levels since 2014.

Remember we looked at this chart for oil back in November, which projected a move toward $80.