Market Is UNDER-Estimating Rate Cut Chances For June

May 31, 5:00 pm EST

We end the month of May today.  Things were going quite well for markets, with stocks sitting on record highs, until Trump did this over the first weekend of the month …

 

 

With the above in mind, let’s look back at my May 6th note: “Why would Trump risk complicating a deal, even more, by threatening China with a deadline/tariff increase? Because he has leverage. He has a stock market near record highs, and a strong economy and the winds of ultra-easy global monetary policy at his back …

So, Trump has a win–win going into the week. If the threat works, he gets a deal done, and likely gives less to get it done. If China backs off, stocks go down, and he gets the Fed’s rate cut he’s been looking for–stocks go back up.”

As we know, China walked.  And Trump is now using a similar position of strength to influence policy with Mexico.  As such, stocks have now fallen nearly 7% from the highs. And the prospects for a Fed rate cut are looking very strong.

How strong?  The interest rate market is pricing in a 90% chance of a rate cut by year end, and a 60% chance of a two rate cuts.  But despite the sharp decline in global interest rates, the market seems to be well underestimating the chances for a Fed rate cut this month — at the June 19 Fed meeting.

There are two clear influences on Fed policy over the past few years.  Stocks and crude oil.  The latter weighs on inflation.  While the Fed claims to ignore the influence of food and energy in their inflation measure, they have a history of acting when oil moves sharply.  And inflation is already running at very soft levels.  On that note, what was the biggest loser for the day, week and month?  Crude oil.  Crude was down 7.5% today, 10% for the week, and 16% for the month.

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Q1 Growth Number Is A Reminder That The Economy Is Good

May 30, 5:00 pm EST

The first revision of Q1 GDP came in this morning, in-line with expectations (at 3.1%).  As yields swoon, and stocks have given back some gains for the month, this growth number today is good reminder that the state of the U.S. economy is good. 

Remember, back in April, the first look at Q1 GDP came in as a huge positive surprise (at 3.2%).   Many were expecting it to be a terrible quarter.  Goldman Sachs thought the quarter would produce just 0.7% growth.  They were wrong, and they weren’t alone.  At the end of the first quarter, the Atlanta Fed’s GDP model was estimating that the economy grew at only 0.3% in Q1.

With that in mind, don’t get too caught up in the souring growth story.  At the moment, the consensus view on Wall Street is for Q2 growth to come in at 1.8%.   And the Atlanta Fed model is looking for 1.3%.  Both are well lower than the White House envisioned 3%+ growth trend.

But, for perspective, there are some clear factors working in favor of the higher (not lower) growth case.

The job market is strong.  We have monthly new jobs running at a 12-month average of 218k.  That’s well above pre-financial crisis average monthly job growth. The unemployment number at 3.6% is the lowest since 1969.

Most importantly:  Wage growth has been on the move for the past 18 months, now sustaining above 3%.  And Q1 productivity came in at 3.6%, the hottest productivity reading in almost a decade.  The economy can grow by expanding the size of the workforce or the productivity of the workforce.  We’re finally getting solid productivity growth.

 

Don’t Forget, BOJ Is Still Stoking Global Markets Through QE

May 15, 5:00 pm EST

The bounce for stocks continued today.  But global yields were broadly weak.

Why?  Is this a market that’s pricing in more global central bank easing (therefore lower rates, higher asset prices)?

It might appear that way.  Trump has been asking for a rate cut.  In fact, yesterday he tried to make the case for more QE (let’s assume he means ending the Fed’s balance sheet reduction program).  The fed funds futures market has been pricing in a rate cut for a while now — now looking for a 50% chance of a cut by September and a 75% chance of a cut by year end.

Additionally, the German 10-year yield hit the lowest level since 2016 — negative 10 basis points.  And the Japanese 10-year yield traded down to negative 5 basis points today (chart below).  

 

Now, as you can see, the 10-year in Japan has been back in negative yield territory all year — and sustainably, for the first time since 2016.

The last time rates were down here, the BOJ added some wrinkles in their QE plan.  Instead of targeting a size of asset purchases, they began targeting a zero yield on the Japanese government bond.  So, as long as the yield is positive in Japan, the Bank of Japan has the mandate to buy unlimited assets (print unlimited yen) to push the yield back to zero.  They already own half of the JGB market.  So, how can they influence yields higher from here?  They can sell JGB’s.  What might they do with those proceeds?  Buy global stocks?

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Trump’s Win-Win Bet

May 6, 5:00 pm EST

Late last week, the White House floated the idea that a trade agreement with China could come by this coming Friday (May 10).

And then Trump did this yesterday …

 

Why would Trump risk complicating a deal, even more, by threatening China with a deadline/ tariff increase?  Because he has leverage.  He has a stock market near record highs, and a strong economy and the winds of ultra-easy global monetary policy at his back.

China, on the other hand, has an economy running in recession-like territory, with key data just (recently) bouncing from global financial crisis era levels.  And Chinese stocks, after soaring 34% since January 4th, have given back 12% from the highs, in just seven days.  And they’ve just fired a ton of fiscal and monetary policy bullets to stimulate the economy – which could be diluted by a more expensive and indefinite trade war.

So, Trump has a win-win going into the week.  If the threat works, he gets a deal done, and likely gives less to get it done.  If China backs off, stocks go down, and he gets the Fed’s rate cut he’s been looking for – stocks go back up.

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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A Rational View Of S&P 3,500+

April 29, 5:00 pm EST

We ended last week with a positive surprise for Q1 GDP.  Today, we had more soft inflation data.

The Fed’s favored inflation gauge, core PCE, continues to fall away from it’s target of 2%.

Here’s a look at the chart …

 

With a Fed meeting this week, they remain in the sweet spot.  They have trend economic growth, subdued inflation and a 10-year yield at 2.5%.  They can sit and watch. They could cut!   That’s highly unlikely, but less unlikely by the summer, if current conditions persist.

The market is pricing in about a 60% chance that we’ll see a rate cut by year-end.  It doesn’t sound so crazy, if you consider that it would underpin/if not ensure the continuation of the economic expansion — perhaps even fueling an economic boom period.

Remember, we’ve talked about the 1994-1995 parallels. In 1994, an overly aggressive Fed raised rates into a recovering, low inflation economy.  By 1995, they were cutting.  That led to a 36% rise in stocks in 1995.  And it led to 4% growth in the economy through late 2000 — 18 consecutive quarters of 4%+ growth.  Stocks tripled over the five-year period.

This, as the S&P 500 is already sitting on new record highs?  As I said earlier this year, with yields back (well) under 3%, we should see multiples on stocks expand back toward 20x in this environment.

The forward 12-month P/E on the S&P 500 is currently 16.8.  If we multiply Wall Street’s earnings estimate on the S&P 500 ($175) times a P/E of 20, we get 3,500 in the S&P 500. That’s 19% higher than current levels.

But keep in mind, the earnings estimate bar has been set low.  And already 77% of companies are beating estimates on Q1 earnings.  I suspect, we’ll see higher earnings over the next twelve months than Wall Street has estimated, AND a higher multiple paid on those earnings (i.e. an outlook for an S&P 500 > 3,500).

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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Bar Has Been Set Low To Manufacture Positive Surprises … And They Are Rolling In

April 26, 5:00 pm EST

The first reading on first quarter U.S. GDP came in this morning at 3.2%— much better than expected.  This is a huge positive surprise, for what many expected to be a terrible quarter.

Just a month ago, the consensus view was something closer to 1%.  Goldman was looking for 0.7% going into the end of the quarter.

With that, we’ve been talking about this set-up for positive surprises all year.

Remember, the economy added on average 173,000 jobs a month in Q1.  Both manufacturing and services PMIs expanded in the quarter, and stocks fully recovered the losses from December.  Add to that, just days into the first quarter, the Fed told us they were done raising rates.  Whatever headwinds the Fed was stirring up, quickly became tailwinds.
Yet we’ve been told an economic recession was coming and an earnings recession upon us.  The above is a recipe for growth, not contraction.

Still, as we’ve discussed, never underestimate the appetite of Wall Street and corporate America to dial down expectations when given the opportunity.  That sets the table for positive surprises.  And positive surprises are fuel for stocks.   Stocks are fuel for confidence.  Confidence is fuel for the economy.

Last week we looked at the early signals on Q1 economic activity.  The positive surprises started with what looks like the bottom in Chinese industrial output and retail sales (two key indicators of economic health). This is important because the global slowdown fears have been centered around the weak Chinese economy.

Then both UK retail sales and the U.S. retail sales came in better.  And yesterday, we had a hot durable goods orders number in the U.S for March.

So, despite the negative picture that has been painted, the trajectory of U.S. economic growth seems to be well intact.

This is just the first reading on the Q1 number, but it gives us an average annualized growth rate of three percent even.  The average annualized growth coming out of the Great Recession (pre-Trumponomics) was just 2.2%.

And keep in mind, the next big pillar of Trumponomics is a trillion-dollar-plus infrastructure spend (with bipartisan support).

Just as expectations have been dialed down, this is where we could see a real economic boom kick in, especially if we get a deal on China (clearing that drag on sentiment).  As we’ve discussed, we are well overdue for an economic boom period.  We’ve yet to have the bounce-back in growth that is typical of a post-recession, if not post-depression environment.  You can see in the table below, the six years that followed the Great Depression, relative to the growth coming out of the Great Recession …

 

Have a great weekend!

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How Microsoft Has Transformed Into A Trillion-Dollar Cloud Company

April 25, 5:00 pm EST

Today, Microsoft was the third company to hit the trillion-dollar market cap threshold.

Apple was the first, back in August.  Amazon followed in September.

Let’s talk about how Microsoft has transformed itself from a path of obsolescence to quadrupling in value in six years.

Back in April of 2013, an activist investor named Jeff Ubben took a $2 billion stake in MSFT.  That same month Business Insider wrote a story titled:  “Microsoft Could Be Obsolete By 2017.”  The stock had gone nowhere for more than a decade. 

Ubben won a board seat and he pushed for stock buybacks and a strategy reset.  He pushed out the CEO, Steve Balmer.  He replaced him with Satya Nadella, who was running the Miscrosoft cloud business.  His job was to turn Miscrosoft into a cloud computing company.  He has done it.

Microsoft is now the number two cloud computing platform globally, behind Amazon. For perspective, cloud computing is a $200 billion market growing at close to 20% a year.  And Microsoft’s cloud business, Azure,grew revenue by 73% last quarter.

Bottom line:  Amazon and Microsoft have a duopoly in the high growth digital storage business (i.e. cloud computing). 

Amazon’s retail business gets all of the attention, but it’s cloud business has been subsidizing it’s retail business for a long time.  The hyper-growth in cloud and the market dominance held by Amazon and Microsoft are why their market value has gone to a trillion-dollars, and why their charts look so similar …

 

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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Four Beaten Down, Activist-Owned Energy Stocks

April 23, 5:00 pm EST

Yesterday we talked about the big recovery in crude oil prices.  That continues today.

However, the energy sector remains the worst performing sector over one-year and five-years.  And it’s the only sector still in the red over the past five-years — down 27%.

Let’s take a look again at the how the constituents of the S&P’s energy ETF have performance over the past five years.  And then we’ll take a look at the stocks in this group that have been vetted and are now owned by the best billionaire activist investors…

 

Devon Energy (DVN)

Billionaire Paul Singer of Elliott Management is one of the best activist investors in the world.  He has one of the longest tenures in the business, dating back to the 70s.  And he’s had one of the hottest hands on Wall Street over the past few years.

Singer’s fund, Elliott Management, owns 4% of Devon.  It’s the eighth biggest long position in the portfolio.  Devon is down 52% over the past five years.

Hess Corp. (HES)

Singer and his team are the fourth largest shareholder in Hess.  They have a 7% stake in Hess.  And it’s a big position in the Elliott portfolio — a top five position representing over 7% of the portfolio.   Hess is down 25% over the past five years.

Pioneer Natural Resources (PXD)

Billionaire Seth Klarman has been called the next Warren Buffett.  His fund, Baupost Group, is the sixth largest shareholder of Pioneer.  Klarman has 5% of his portfolio invested in this stock.  Pioneer is down 14% over the past five years.

Diamondback Energy (FANG)

Billionaire Carl Icahn owns 6% of DiamondBack.  It’s a half a billion dollar stake in his $20 billion portfolio (all his money).  Diamondback is up 46% — and already up 22% from when Icahn entered in the fourth quarter.

These are the best value investors in the world, betting on a comeback in this sector and in these stocks.  No surprise, aside from Icahn’s stake, they like to hunt in some of the most beaten down names.

 If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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More Positive Surprises Hitting In The Economic Data

April 18, 5:00 pm EST

Yesterday we talked about the positive surprises in the Chinese data.  This is important because the global slowdown fears have been centered around the weak Chinese economy.

So, we now have what looks like a bounce off of the bottom in Chinese industrial output and Chinese retail sales (two key indicators of economic health).

Today we had more positive surprises for the global economic outlook picture.  The UK retail sales number came in better than expected.  And the U.S. retail sales came in better.

You can see in the chart below, this March U.S. retail sales is a bounce from the post-crisis lows of December.  

With this, the Q1 GDP estimate from the Atlanta Fed has bumped up to 2.8%.

We’ve talked about the set up for both earnings and the economic data to surprise to the upside for Q1, given the dialed down expectations following the December decline in stocks.

You can see how this is playing out in the chart below (see where the gold line is diverging from the “consensus estimate” blue line) …

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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Big Four Banks Had Double-Digit Earnings Growth in Q1

April 16, 5:00 pm EST

With Bank of America earnings this morning, we’ve now heard from the big four banks (JPM, BAC, WFC and C).

The expectations were set for just 2% earnings yoy earnings growth from the group.  We’ve had positive earnings surprises in each, for an average earnings growth of 11%.  That’s double-digit earnings growth for the biggest banks in the country, in an earnings season that has been forewarned as an “earnings recession.”

Remember, never underestimate the appetite for Wall Street and corporate America to dial down expectations when given the opportunity.  They’ve done it, and we’re seeing positive surprises.

Now, we’ve talked about the slate IPOs coming from the Silicon Valley hype machine.  As I’ve said, Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle.

As we know, Lyft was valued as high as $25 billion when it started trading publicly.  Some paid a $25 billion valuation for the privilege of owning a company that did a little over $2 billion in revenue, while losing almost a billion dollars — with slowing revenue growth and widening losses. It has now shed about $9 billion in market cap in thirteen days.

Uber is on deck.  Uber filed its S-1 this week.  In this public disclosure document, we find a company that has privately raised $24 billion, valued at $68 billion in the private market, that has been thought to float shares at as much as $120 billion valuation.  This is a company that (like Lyft) also with slowing revenue growth and widening losses.  Losses?  The S-1 shows a swing from $ 4 billion loss in 2017, to a near $1 billion profit in 2018.  But if we back out the a couple of unusual items (like the gain of a divestiture of some foreign businesses and an unrealized gain in an “investment”) the company lost $4.2 billion on $11 billion in revenue.

As we discussed last month, the hyper-growth valuations on these perceived hyper-growth companies, are unlikely to get hyper-growth at this stage.  That will be a problem for those taking the bait on the IPO.

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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