We closed last Friday with another new weekly record high on the Dow. But we closed with an all-time record low in the German 2-year bund. That development in Europe, weighed on U.S. yields, pulling yields down here from 2.5 to 2.31%.
So we had this divergence between what was happening in stocks and what the bond market was communicating. The bond market was telling us there was growing concern about danger to European economic stability, and therefore global economic stability, in the upcoming French elections. Stocks were telling us, growth is king – the ultimate problem solver, and growth is coming.
With that, Trump’s address to Congress on Tuesday night became a major sentiment gauge/the arbiter on which would win out, based on the perception of whether or not the Trump administration could execute on its economic plans.
The vote was “affirmative” for the growth story. Stocks gapped higher to new record highs (closing this week at another weekly record high). And the bond market turned on a dime, following Trump on Tuesday night, and have been climbing since. German yields have bounced. And U.S. yields have bounced. That leads us up to today’s speech from Janet Yellen.
There has been a tremendous shift in the past week in the expectations for a March rate hike. It’s gone from a 27% chance of a March 15 rate hike being priced in last Friday. By Wednesday morning, after Trump’s speech, it was 70%! And we close out the week with an 80% chance of a hike this month.
That additional bump came today on a speech and Q&A session from Janet Yellen today. Here’s the expectations bar she chose to set: She said the Fed would likely be moving faster than it had in 2015 and 2016. It should be said that they only hiked once in 2015 and 2016 because their forecasts proved grossly overly optimistic and they had to adjust on the fly. So they’ve already told us, back in December, that they think it will be three times this year. That’s faster than one. And today she reiterated that today.
And today she also said that if the data continued to improve as they forecast, they can hike this month.
Now, they have a post-FOMC meeting press conference scheduled FOUR more times this year (March, June, September and December). Despite what they suggest, that they could hike at any meeting and just call an impromptu press conference, they would be crazy to introduce such a surprise in markets. Stability and confidence work in their favor. Surprises threaten stability and confidence.
So if they indeed hike three times, they have a narrow window. And if they think they need to hike faster, because perhaps fiscal policy accelerates growth and inflation, they may need to keep the December meeting open for a fourth hike.
But, Yellen and company have recently gone out of their way to tell us that they are not even factoring in fiscal stimulus and deregulation (growth policies) into their view on the economy. They’ll believe when they see it and take that information as it comes, which puts them in an even more vulnerable position to needing more tightening this year, if you take them at their word and trust their forecasting abilities.
So with that in mind, why has the Fed become so bulled up on interest rate picture since December? Is it because the inflation and jobs data has gotten that much better? The unemployment rate has been below 6% (the Fed’s original target) since September of 2014 and below 5% for the past year. And the core inflation rate has been above 2% since November of 2015, which includes all year last year, when the Fed was reversing course on its promises for a big tightening year. That’s near normal employment in the Fed’s eyes and above its target for inflation – a clear signal to normalize interest rates. But they’ve barely budged.
Why? Because last year the global economy looked vulnerable. With that, they threw every other guiding data point out the window and went back to playing defense. And as recent as August of last year, the Fed messaging was quite dovish. What’s the biggest difference between now and then? The prospects of major fiscal stimulus – precisely what they say they are leaving out of their forecasts for now.
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and we’ll send you our recently recorded portfolio review that steps through every stock in our portfolio, and the opportunities in each.
As we discussed last week, the Presidential address to the joint sessions of Congress last night was a big market event. And as I discussed yesterday, growth and fiscal stimulus needed to be moved to the front burner of the daily narrative. The President delivered last night.
After he began speaking, one of the early headlines on my Reuters feed last night: TRUMP SAYS HE WILL BE ASKING CONGRESS TO APPROVE LEGISLATION THAT PRODUCES $1 TRILLION INVESTING IN INFRASTRUCTURE FINANCED THROUGH BOTH PUBLIC AND PRIVATE CAPITAL.
Bingo! There’s a lot of talk about the inspiration of the speech, but growth is king in this environment, after 10 years of malaise and no improvement in sight. And the focus has shifted to growth. Stocks have had a huge day. Meanwhile, yields have been up but relatively tame. Gold has been down, but relatively tame. And the dollar has been up, but relatively tame.
German 2 year yields, which have been the sour spot, as they’ve slipped toward -1% in the past week, were up bouncing nicely today.
It’s not uncommon to see big global market participants ignore all else in key market moments, and just focus on one spot. That has been the case. And that spot is the stock market. The U.S. stock market is where the impact of a trillion dollar infrastructure spend, a massive tax cut, and broad deregulation can be most directly influenced and, as importantly, stocks are capable to absorbing large, large amounts of capital.
Now, it’s time to revisit some great catch up trades I’ve discussed for a while: German and Japanese stocks. A better U.S. is better for everyone, make no mistake. Hotter growth here, will mean hotter global growth, and it gives Europe and Japan a shot at recovery, especially with their central banks priming the pump with big QE, still.
On that note, let’s take a look at the charts …
So you can see the same period here for U.S., German and Japanese stocks, dating back to 2012, when the European Central Bank stepped in with intervention in the European sovereign bond market (at least promised to do so), that turned global economic sentiment and then then Japan came in months later with promises of a huge stimulus program. All stocks went up.
But you can see, stocks in Europe and Japan have yet to regain highs of 2015, after the oil price crash induced correction.
These stock markets look like a big catch up trade is coming, and it may be quick, following the catalyst of last nights U.S. Presidential address.
Follow The Lead Of Great Investors Like Warren Buffett In Our Billionaire’s Portfolio
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and follow the world’s best investors into their best stocks. Our portfolio was up over 27% in 2016. Click here to subscribe.
Markets are quiet as we head into President Trump’s address to Congress tonight. As we’ve discussed over the past week or so, the markets seem to have run the course on the outlook of fiscal stimulus and regulatory reform within an environment of a gradual rise in interest rates.
That “expectation” backdrop seems to be pretty well priced in. Now, it’s a matter of detail and timing, and that puts the new President squarely in focus for tonight.
We’ve already heard from his Treasury Secretary last week that tax reform wouldn’t be coming until August-ish. And he said we shouldn’t expect that big growth bump from Trumponomics until 2018. That’s been the first real downward management of the expectations that have been set over the past three months.
What hasn’t been discussed much is the big infrastructure spend, which is really at the core of the pro-growth policies of the Trump administration. For years, the Fed has been begging Congress for help in stabilizing the economy and stimulating growth in it — from the FISCAL side.
Given the wounds of the debt crisis, it was politically unpalatable for Congress. They ignored the calls. And as a result, just six months ago we (and the rest of the world) were dangerously close to slipping back into crisis. Only this time, the central banks would not have had the ammunition to fight it.
So now we have Congress with the will and position to act. It’s a matter of detailing a plan and getting it moving. Of the many positive things that could come from tonight’s speech by President Trump, details and timeline on fiscal stimulus would be the biggest and most meaningful.
The bickering about deficits and debt will continue, but a big stimulus package will happen — it has to happen. A government spending led growth pop is, at this stage, the only chance we have of returning to a sustainable path of growth and ultimately reducing the debt load down the line, which now is about 100% of GDP. A move back to 80% of GDP would make the U.S. debt load, relative to the rest of the world, a non-issue.
Follow The Lead Of Great Investors Like Warren Buffett In Our Billionaire’s Portfolio
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and follow the world’s best investors into their best stocks. Our portfolio was up over 27% in 2016. Click here to subscribe.
The big event of the week will be President Trump’s speech to Congress tomorrow. We know the pro-growth agenda of the Trump administration. We know the framework is in place to make it happen (with a Republican controlled Congress). That alone has led to a “clear shift in the environment” as Ray Dalio has called it (head of the biggest hedge fund in the world) – I agree.
But we’re at a point now, with European elections approaching and political risk rising there, and with the reality setting in that execution on fiscal stimulus from Trumponomics won’t be coming quickly, markets are calming down a bit. As we discussed last week, yields are falling back, following the lead of record level lows set in the German 2-year bund yield (in deeply negative territory). That dislocation in the German government bond market, as other key market barometers have been pricing in bliss, has come as a warning signal.
Another event of interest: Warren Buffett’s annual letter was released over the weekend, and he was on CNBC for a long interview this morning.
First, I want to revisit his letter from last year: Last year, in the face of an oil price crash, and a stock market that had opened the year with the worse decline on record, Buffett addressed the fears and uncertainty in markets. He said the growth trajectory for America has been and will continue to be UP. “America’s economic magic remains alive and well.”
And the growth trajectory has to do with two key factors: Improvements in productivity and innovation.
On productivity, he said:“America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children. All families in my upper middle–class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. Transportation, entertainment, communication or medical services.”
On innovation, he said:“A long–employed worker faces a different equation. When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent employment elsewhere; for others, that is not an option. When low–cost competition drove shoe production to Asia, our once–prosperous Dexter operation folded, putting 1,600 employees in a small Maine town out of work. Many were past the point in life at which they could learn another trade. We lost our entire investment, which we could afford, but many workers lost a livelihood they could not replace. The same scenario unfolded in slow–motion at our original New England textile operation, which struggled for 20 years before expiring. Many older workers at our New Bedford plant, as a poignant example, spoke Portuguese and knew little, if any, English. They had no Plan B. The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming. The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces. (I personally favor a reformed and expanded Earned Income Tax Credit that would try to make sure America works for those willing to work.) The price of achieving ever–increasing prosperity for the great majority of Americans should not be penury for the unfortunate.”
And, finally on stocks, he said (my paraphrase): Overtime, with the above growth dynamic in mind, stocks go up.“In America, gains from winning investments have always far more than offset the losses from clunkers. (During the 20th Century, the Dow Jones Industrial Average — an index fund of sorts — soared from 66 to 11,497, with its component companies all the while paying ever–increasing dividends.”
What a difference a year makes. This time, he releases his letter into a stock market that’s UP 6% on the year already. And there’s new leadership and policy change underway.
So all of this in the above was written a year ago, what does he think now? In his letter released over the weekend, Buffett AGAIN addresses the fears and uncertainties in markets.
We discussed on Friday the stages of a bull market which slowly moves from the state of broad pessimism, to skepticism to optimism and finally to euphoria, which tends to end the bull market. But as Paul Tudor Jones says (one of the great macro investors), the “last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic” (i.e. euphoria can last for a while).
The fact that Buffett is still addressing concerns about valuations and the future of the American economy, is more evidence that we’re far from euphoria (bubble-like territory that some like to often talk about) and were probably more like the area between skepticism to optimism.
About Valuation: As we’ve discussed many times here my daily Pro Perspectives piece, when rates are low, historically, valuations run higher than normal (a P/E of 20 or better). At a ten year yielding at 2.4% and fed funds at 75 basis points (well below the long run average) the forward P/E on the S&P is just 17.8x. That’s still cheap, relative to the alternative of owning bonds. That incentivizes money to continue to flow into stocks. And if we apply a 20 P/E earnings estimates for the next twelve months, we get about 12% higher on the S&P 500.
Now, let’s hear from the legend himself on the topic: Buffett said this morning, “We’re not in bubble territory, if interest rates were 7% or 8% then these prices would look exceptionally high, but you measure everything against interest rates, measured against interest rates, stocks are on the cheap side compared to historic valuations.”
By the way, on that “valuation note” for stocks, as you may recall I made the case early this month for why Apple (the largest component of the S&P 500) was cheap (Is Apple A Double From Here?). What does Buffett think? Buffett disclosed that he’s doubled his position in Apple since the beginning of the year. It’s now his second largest position at $17 billion. He thinks Apple will be the first trillion dollar company. Full disclosure: We own Apple in our Billionaire’s Portfolio along with Buffett and his fellow billionaire investor David Einhorn. We’re up 30% since adding it in March of last year.
Follow The Lead Of Great Investors Like Warren Buffett In Our Forbes Billionaire’s Portfolio
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and follow the world’s best investors into their best stocks. Our portfolio was up over 27% in 2016. Click here to subscribe.
Yesterday we talked about the warning signal flashing from the German bond market. That continues today.
While global stocks and commodities are reflecting broad optimism about the new pro-growth government in the U.S., the yield on 2-year German government bonds is sending a negative message — it hit record lows yesterday, and again today — trading to negative 90 basis points. You pay almost 1% to loan the German government money for two years.
Here’s a longer term look at German yields, for perspective…
And here’s the divergence since the election between German and U.S. 2 year yields…
This divergence is partially driven by rising U.S. yields on optimism about the outlook, about inflationary policies, and about the Fed’s response. On the other hand, German yields have gone the other way because 1) the ECB is still outright buying government bonds through its QE program (bond prices go up, yields go down), and 2) capital flows into bonds, in search of safety, because a Trump win makes another populist vote in Europe more likely when the French elections role around in May.
So that bleed to new lows in the German 2-year yield sends a warning signal to global markets. Today we have a few more reasons to think this could be a signal that the optimism being priced into U.S. markets at the moment could take a breather here.
Trump’s Secretary of Treasury, Mnuchin, was doing his first rounds on financial TV this morning and gave us some guidance on a timeline for policies and impact. Most importantly, he says we’ll see limited impact from Trump policies in 2017, and that the growth impact won’t come until 2018.
Let’s consider how that can impact where the Fed stands on their forecasts for monetary policy.
Remember, they spent the better part of 2016 walking back on the promises they had made for 4 rate hikes last year. And then, when they finally moved for thefirst time this past December, following the election and a rallying stock market, they reversed course on all of the dovish talk of the past months, and re-upped on another big rate hiking plan for 2017.
Though they don’t like to admit it, we can only assume that when they considered a massive fiscal stimulus package coming, like any human would, they became more bullish on the economy and more hawkish on the inflation outlook.
So now as Mnuchin tells us not to expect a growth impact from Trump policies until next year, maybe the Fed lays off the tightening rhetoric for a while.
With all of this in mind, another interesting dynamic in markets today, the Dow shrugged off some weakness early on to trade higher most of the day, posting another new record high. Meanwhile small caps diverged, trading weaker all day. And gold traded to the highest level since November 11. Remember this chart we’ve looked at, which looks like higher gold to come (a lower purple line), and lower yields.
This would all project a calming for the inflation outlook, which would be good for the health of markets. Among the biggest risk to Trumponomics is hot inflation, too fast, and a race higher in interest rates to chase it.
To peek inside the portfolio of Trump’s key advisor, join me in our Billionaire’s Portfolio. When you do, I’ll send you my special report with all of the details on Icahn, and where he’s investing his multibillion-dollar fortune to take advantage of Trump policies. Click here to join now.
We had new record highs again in the Dow today. But remember, yesterday we talked about this dynamic where stocks, commodities and the dollar were strong. But a missing piece in the growing optimism about growth has been yields.
Clearly the 10 year at 2.40ish is far different than the pre-election levels of 1.75%-1.80%. But the extension was quick and has since been a non-participant in the full-on optimism vote given across other key markets.
Why? While stocks can get ahead of better growth, yields can’t in this environment. Higher stocks can actually feed higher growth. Higher yields, on the other hand, can kill it.
But there’s something else at work here. As we know Japan’s policy to target the their 10 year at zero provides an anchor to our interest rates, as the BOJ is in unlimited QE mode. Some of that freshly produced liquidity, and the money displaced by their bond buying, undoubtedly finds a happier home in U.S. Treasuries (with a rising dollar, and a 2.4% yield). That caps yields.
But in large part, the quiet drag on U.S. yields has also come from the rising risks in Europe. The election cycle in Europe continues to threaten a populist Trump-like movement, which is very negative for the European Union and for the survival of the single currency (the euro). That creates capital flight, which has been contributing to dollar strength and flows into the parking place of U.S. Treasuries (which pressures yields, which is keeping mortgage and other consumer rates in check).
These flows are also showing up clearly in the safest bond market in Europe: the German bunds. The 2-year German bund hit an all-time record LOW, today of -91 basis points. Yes, while the U.S. mindset is adjusting for the idea of a 3%-4% growth era, German yields are reflecting crisis and money is plowing into the safest parking place in Europe. The spread between German and French bonds are reflecting the mid-2012 levels when Italy and Spain where on the brink of insolvency — only to be saved by a bold threat/backstop from the European Central Bank.
We talked last week about the prospects for higher gold and lower yields as questions arise about the execution of (or speed of execution) Trump’s growth policies, some of the inflation optimism that has been priced in, may begin to soften. That would also lead to a breather for the stock market. I suspect we will begin to see the coming elections in Europe also contribute to some de-risking for the next couple of months. We already have a good earnings season and some solid economic data and optimism about the policy path priced in. May be time for a dip. But as I’ve said, it would create opportunities– to buy any dip in stocks, and sell any rally in bonds.
To peek inside the portfolio of Trump’s key advisor, join me in our Billionaire’s Portfolio. When you do, I’ll send you my special report with all of the details on Icahn, and where he’s investing his multibillion-dollar fortune to take advantage of Trump policies. Click here to join now.
There’s little in the way of economic data next week to move the needle on markets and the economic outlook. With that said, the catalyst will continue to be Trumponomics, and the President said yesterday that we should expect to hear “big things” coming in the next week or two.
As we head into the weekend, let’s take a look at some charts of interest.
The S&P 500 is now up 10% since election day (November 8). For some perspective, since the 2009 bottom, when the global central banks stepped in to pull the world back from the edge of collapse, you can see the trend has been a 45 degree angle UP. And despite all of the fear and pessimism along the way, the sharp corrections along the way were quickly reversed, most of which were completely recovered inside of ONE MONTH.
With central bank policy around the world still promoting higher global asset prices, and with pro-growth policies underway in the U.S., any dip in stocks will be a gift to buy.
We looked at this next chart last week. It’s the inverse price of gold versus the U.S. 10 year yield. You can see they have tracked nicely since the election.
With Yellen’s session on Capitol Hill this week, the yield has whipped around from 2.40 back to 2.50 and back to 2.41 today.
Meanwhile, with the continued hostility surrounding the Trump administration, and accusations about Russian conflicts, gold has been stepping higher. This all looks like higher gold and lower yields coming. As questions arise about the execution of (or speed of execution) growth policies, some of the inflation optimism that has been priced in may begin to soften. That would also lead to a breather for the stock market. In both cases, it would create opportunities — to buy any dip in stocks, and sell any rally in bonds.
Stocks were down a bit today, for the first day in the past six days. Yields were lower, following two days of Janet Yellen on Capitol Hill. Gold was higher on the day. And the dollar was lower.
Of the market action of the day, the dollar and yields are the most interesting. The freshly confirmed Treasury Secretary, Steven Mnuchin, held a call with Japan’s Finance Minister last night, early morning Japan time.
What did USD/JPY do? It went down (lower dollar, stronger yen). Just as it did the week leading up to the visit between President Trump and Japan’s Prime Minister Abe.
Remember, the yen has been pulled into the fray on Trump’s tough talk on trade fairness and currency manipulation. The subject has cooled a bit, but with the new Treasury Secretary now at his post, the world will be looking for the official view on the dollar.
As I said before, I think the remarks about currency manipulation are (or should be) squarely directed toward China. And I suspect Abe may have conveyed to the president, in their round of golf, that Japan’s QE is quite helpful to the U.S. economy and policy efforts, even if it comes with a weaker yen (stronger dollar). Among many things, Japan’s policy on keeping its ten-year yield pegged at zero (which is stealth unlimited QE) helps put a lid on U.S. market interest rates. And that keeps the U.S. housing market recovery going, consumer credit going and U.S. stocks climbing, and that all fuels consumer confidence.
Yesterday we talked about the fourth quarter portfolio disclosures from the world’s biggest investors. With that in mind, let’s talk about the porfolio of the man that’s best position to benefit from the Trump administration: the legendary billionaire investor, Carl Icahn.
Icahn was an early supporter for Trump. He was an advisor throughout the campaign and helped shape policy plans for the president.
What has been the sore spot for Icahn’s underperforming portfolio in recent years? Energy. It has been heavily weighted in his portfolio the past two years and no surprise, it’s contributed to steep declines in the value of his portfolio over the past three years. Icahn’s portfolio is volatile, but over time it has produced the best long run return (spanning five decades) of anyone alive, including Buffett. And he’s worth $17 billion as a result.
Here’s a look at what I mean: In 2009 he returned +33%, +15% in 2010, +35% in 2011, +20% in 2012 and +31% in 2013. That’s quite a run, but he’s given a lot back–down 7% in 2014, down 20% in 2015 and down 20% last year.
Even with this drawdown, Icahn doesn’t see his energy stakes as bad investments. Rather, he thinks his stocks have been unfairly harmed by reckless regulation. And he’s been fighting it.
He penned a letter to the EPA last year saying its policies on renewable energy credits are bankrupting the oil refinery business and destroying small and midsized oil refiners.
And now that activism is positioned to pay off handsomely.
The new Trump appointee to run the EPA was first vetted by Icahn–it’s an incoming EPA chief that was suing the EPA in his role as Oklahoma attorney general. Safe to assume he’ll be friendly to energy, which will be friendly to Icahn’s portfolio.
And as we know, Icahn has since been appointed as an advisor to the president on REGULATION.
To get peek inside the portfolio of Trump’s key advisor, join me our Billionaire’s Portfolio. When you do, I’ll send you my special report with all of the details on Icahn, and where he’s investing his multibillion-dollar fortune to take advantage of Trump policies.
Our Billionaire’s Portfolio is the way investing should be. Its top-shelf intelligence, in an easy to understand format, delivered to your inbox. If you can read a weekly note, and push a button, this service is for you whether you’re a novice investor or a Wall Street titan. This is your opportunity to align your portfolio with the world’s smartest and most powerful investors. To learn from the best and ride their coattails to success.
You get access to the full gamut of billionaire intelligence. Join us now, get this special report, and get your portfolio in line with the richest, most powerful investors in the world.
Stocks continue to make new highs – five consecutive days of higher highs in the Dow. The Trump administration continues to make new news. And the Fed continues to become less important. Those have been the themes of the week.
Today was the deadline for all big money managers to give a public snapshot of their portfolios to the SEC (as they stood at the end of Q4). So let’s review why (if at all) the news you read about today, regarding the moves of big investors, matters.
Remember, all investors that are managing over $100 million are required to publicly disclose their holdings every quarter. They have 45 days from the end of the quarter to file that disclosure with the SEC. It’s called a form 13F.
First, it’s important to understand that some of the moves deduced from 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends.
Now, there are literally thousands of investment managers that are required to report on a 13F. That means there are thousands of filings. And the difference in manager talent, strategies, portfolio sizes, motivations and investment mandates runs the gamut.
Although the media loves to run splashy headlines about who bought what, and who sold what, to make you feel overconfident about what you own, scared about what they sold, anxious, envious or all a combination of it all. The truth is, most of the meaningful portfolio activity is already well known. Many times, if they are big stakes, they’ve already been reported in another filing with the SEC, called the 13D.
With this all in mind, there are nuggets to be found in 13Fs. Let’s revisit how to find them, and the take aways from the recent filings.
I only look at a tiny percentage of filings—just the investors that have long and proven track records, distinct approaches, and who have concentrated portfolios. That narrows the universe dramatically.
Here’s what to look for:
Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks is bullish. This all can provide good insight into the mindset of the biggest and best investors in the world, and can be a predictor of trends that have yet to materialize in the market’s eye.
For specialist investors (such as a technology focused hedge fund) we take note when they buy a new technology stock or double down on a technology stock. This is much more predictive than when a generalist investor, as an example, buys a technology stock or takes a macro bet.
The bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success. Again, in most cases, we will see these first in the 13D filings.
New positions that are of large, but under 5%, are worthy of putting on the watch list. These positions can be an indicator that the investor is building a position that will soon be a “controlling stake.”
Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts by a substantial amount, or cuts below 5% (which we will see first in 13D filings). Funds also tend to trim losers into the fourth quarter for tax loss benefits, and then they buy them back early the following year.
As for the takeaways from Q4 filings, the best names had built stakes in financials. That’s not surprising given that the Trump win had all but promised a “de-Dodd Franking” of the banking system, especially with the line-up of former Goldman alum that had been announced by late December.
The other big notable in the filings: Warren Buffett’s stake in Apple.
Remember, as we headed into the Brexit vote last year, the broad market mood was shaky. Markets were recovering after the oil price crash, and the unknowns from Brexit had some running for cover. Meanwhile, some of the best investors were building as others were trimming. They were buying energy near the bottom. They were buying health care. And while many were selling the most dominant company in the world, Warren Buffett was buying from them. The guy who has made his fortunes buying when others are selling, did it again with Apple. He was buying near the bottom last summer, and in the fourth quarter he ramped up big time, more than tripling his stake to a $6.6 billion position.
Follow The Lead Of Great Investors Like Warren Buffett In Our Billionaire’s Portfolio
In our Billionaire’s Portfolio, we’re positioned in a portfolio of deep value stocks that all have the potential to do multiples of what broader stocks do — all stocks owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and follow the world’s best investors into their best stocks. Our portfolio was up over 27% in 2016. Click here to subscribe.
Today we heard from Janet Yellen in the first part of her semi-annual testimony to Congress. She gave prepared remarks to the Senate today and took questions. Tomorrow it will be the House. The prepared statement will be the same, with maybe a few different questions.
Remember, just four months ago, the most important actor in the global economy was the Fed. Central banks were in control (as they have been for the better part of 10 years), with the Fed leading the way.
The Fed was the ultimate puppet master. By keeping rates ultra-low and standing ready to act against anything that might destabilize the global economy and threaten to kill the dangerously slow recovery, they (along with the help other major central banks) restored confidence, and created the stability and incentives to drive hiring, investing and spending — which created economic recovery.
When Greece bubbled up again, when oil threatened to shake the financial system, when China’s slowdown created uncertainty, central banks were quick to step in with more easing, bigger QE, promises of low rates for a very long time, etc.. And in some cases, they outright intervened, like when the ECB averted disaster in Italy and Spain by promising to buy unlimited amounts of Italian and Spanish government bonds to stop speculators from inciting a bond market collapse and a collapse of the euro and European Union.
This dynamic of central bank activism has changed. The Fed, and central bank intervention in general, is no longer the only game in town. We have fiscal stimulus coming and structural change underway that has the chance to finally mend the decade long slump of the global economy. That’s why today’s speech by the Fed Chair was no longer the biggest event of the week — not even the day.
The scripts has flipped. Where the Fed had been driver of recovery, they now have become the threat to recovery. So the interest in Fedwatching today is only to the extent that they may screw things up.
Moving too fast on interest rate hikes has the potential weaken or even undo the gains that stand to come from the pro-growth policies efforts from the new administration.
Remember, the Fed told us in December that they projected THREE hikes this year. But keep in mind, they projected FOUR in December of 2015, for 2016, and we only got one. And that was only AFTER the election, and the swing in sentiment regarding the prospects of pro-growth policies.
Remember, Bernanke himself has criticized the Fed for stalling momentum in the recovery by showing too much tightening (i.e. over optimism) in their forecasts. And he argued that the Fed should give the economy some room to run and sustain momentum, fighting inflation from behind.
On that note, the Fed has now witnessed the bumpy path that the new administration is dealing with, and will be traveling, in implementing policy. I would think they would be less aggressive now in their view on rate hikes UNTIL they see evidence of policy execution, and a lot more evidence in the data. Let’s hope that’s the case.
For help building a high potential portfolio for 2017, 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 more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
