markets | Billionaire's Portfolio

U.S. Steelmakers That Should Win From ‘The Wall’

January 7, 5:00 pm EST

The Fed sent a message to markets on Friday that they will pause on rates hikes, if not stand ready to act (i.e. cut rates or stop shrinking the balance sheet), unless market conditions improve.

With that support, stocks continue to rebound. But as the market focus is on stocks, the quiet big mover in the coming months might be commodities.

Over the weekend, the President confirmed that the $5 billion+ border wall would be made of steel — produced by U.S. steel companies. Add to that, it’s fair to expect that the next item on the Trumponomics agenda, will be a big trillion-dollar infrastructure spend (an initiative believed to be supported by both parties in Congress).

Trump has also threatened to move forward with the wall under an executive order, citing national security. With that, the execution on the wall, regardless of the state of negotiations on Capitol Hill should be coming sooner rather than later.

Let’s take a look today at a few domestic steel companies that should benefit.

Nucor Corp (NUE)

Nucor corp is the largest steel producer in the United States.

U.S. Steel (X)U.S. Steel is the second largest domestic steel producer.

Cleveland-Cliffs (CLF)Cliffs is the largest supplier of iron units to North American steel mills.

As you can see, these stocks all benefited early on (post election) on the prospects of Trump’s America First economic plan. But, like the broader market, these stocks are all well off of the 2018 highs now — driven by the intensified trade dispute with China over the past year, the uptick in global economic risks, and the concern over Trumponomics policy execution with a split Congress. They look very, very cheap considering the outlook for domestic steel demand.

Disclosure: We are long Cliffs (CLF) in our Billionaire’s Portfolio.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

The Fed Has Just Reinstated The Put For Stocks

January 4, 5:00 pm EST

Stocks had a huge bounce today.

And it was driven by: 1) the central bank in China stepping in with an injection of over $100 billion in liquidity into the economy through a cut to the bank reserve requirement ration, and 2) the three most powerful central bankers in the world (over the past 10 years) sitting on stage together and massaging market sentiment on the path of interest rates.

We entered the year with the idea that the Fed would need to walk back on its rate hiking path this year (possibly even cutting, if the stock market environment persisted). And today, just days into the new year, we get the Fed Chair Powell, former Fed Chairs Yellen and Bernanke telling us that the Fed is essentially done of the year, unless things improve.

Remember, last year was the first since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold). The culprit for such an anomaly: An overly aggressive Fed tightening cycle in a low inflation recovering economy. The Fed ended up cutting rates in 1995 and spurring a huge run up in stocks (up 36%). Now, we’re getting the Fed standing down, and committing to “responsiveness to the data and markets.”

Yellen voluntarily drew the comparison to today to early 2016 – where the Fed had to respond to sour markets that were beginning to feed into the economy.

In 2016, the oil price crash prompted a coordinated response by global central banks to avert another financial crisis. For the Fed’s part, they took two of the four projected rate hikes they had guided for 2016 off of the table (effectively easing). This coordinated easing from global policymakers put a bottom in stocks and oil in early 2016. Oil doubled by the end of the year. Stocks finished 2016 up 25% from the oil-price crash induced lows.

Here’s a look at the chart on oil today…

You can see this big trendline that represents the plunge from $76 has broken today.

And here’s a look at stocks …

We broke a big level today on the way up in the S&P 500 (2520) and it looks like a V-shaped recovery is underway, to take us back to where stocks broke down on December 3rd. That would be 12% from current levels.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Treasury Intervention Has Put The Bottom In Stocks

January 2, 5:00 pm EST

Happy New Year! We are off to what promises to be a very important year for markets and the economy.

Contrary to what the growing narrative has been on the economy and stocks over the past several months, I think we’re in for a hot economy, a big bounce back in stocks and resumption of the bull market in commodities.

The pieces are in place. The linchpin will be China.

On that note, Trump had been in the clear position of strength in the negotiations on China, until stocks began to melt.

A sour stock market can ultimately erode economic activity. And that becomes the big risk heading into this new year.

The Trump agenda has had big wins on the economy. But those wins are at risk of being undone if the stock market calamity continues. This is the weakness I’ve suspected has been exploited by China. The indiscriminate selling has had all of the appearances of liquidations and/or manipulation. With few cards to play, this (hitting the stock market) was one they could play.

Now, if we look back through history, major turning points in markets have often been the result of some form of intervention. With that in mind, to counter the indiscriminate selling of stocks, on December 23rd we had a response from the U.S. Treasury Secretary and (the next day) a meeting of the “President’s Working Group” on financial markets. That was an intervention signal. When stocks re-opened after Christmas the bottom was in — stocks rallied 7% over the last four days of the year.

Again, market followers like to have very clear, neat evidence to describe every tick in markets. And that leads them to very wrong conclusions when markets are at extremes (as they force their worst case scenarios to fit the price). They don’t factor in the influence of intervention and manipulation (both by policymakers and powerful market players). Markets are made up of people (and their varying motivations), and the evidence isn’t always so clear.

Bottom line: As I said in my last note before Christmas, the lower stock market has put pressure on the Trump agenda, which makes it more likely that concessions will be made on China demands. My bet is that a deal on China would unleash a massive global financial market rally for 2019, and lead to a big upside surprise in global economic growth.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Market Decline Is Geopolitical, Not Economic

December 21, 5:00 pm EST

As we head into the holidays and the end of the year, let’s take a look at the 2018 performance for the world’s biggest asset classes, currencies and commodities.

As you can see, there’s a lot of red. Global stocks are down. Bonds are down. Major commodities, down. Gold, down. Foreign currencies, down.

Now, as we’ve discussed, major moves in markets are often triggered by a very specific catalyst, and then prices tend to drive sentiment change, and sentiment then tends to exacerbate the move in markets.

There are always plenty of stories, at any given time, that can sound like rational explanations to fit to the price. In the case of the declines across asset classes this year, we’ve heard many viewpoints from very smart and accomplished investors over the past week, with concerns about the Fed, debt, deficits, slowdown, the end of an expansionary cycle, etc.

With all of this said, often times the driver behind these moves in markets is specific capital flows (forced liquidations), not an economic narrative. With that, in rear view mirror, a lot of times (historically) all of the pontifications surrounding markets like these end up looking very silly.

For example, let’s take a look at the run-up in oil prices back in 2007-08. Oil prices ran from $50 to almost $150 in about 18 months. Everyone was telling the world was running out of oil — “peak oil.” Did everyone get supply and demand so wrong that the market was adjust with a three-fold move that quickly?

The reality: the price of oil was being driven by nefarious activities (manipulation). A major oil distributor was betting massively on lower oil prices and ran out of cash to meet margin requirements, as they were consequently squeezed (forced to liquidate) by predatorial traders that pushed the market higher. Among the predatorial traders, the largest oil trading company in the world, Vitol, was found to have been essentially controlling the oil futures market. When the CFTC (the regulators) finally came knocking to investigate, that was the top in oil prices.

In the case of recent declines, the catalyst looks to be geopolitical (not economic), which then has given way to an erosion in sentiment (which can become self-fulfilling).

The geopolitics: We’ve talked about the timeline of the top in stocks back in January, and how it aligns perfectly with the release of very wealthy Saudi royal family members and government officials, after being detained by the Crown Prince for three months on corruption charges. And then the decline from the top on October 3rd (both stocks and oil prices) aligns, to the hour, with the news that the Crown Prince would be implicated in the Khashoggi murder.

These two events look like clear forced liquidations by the Saudis to retrieve assets invested in U.S. (and global) markets (assets that are vulnerable to asset seizures or sanctions).

Beyond this selling, we also have a party that might have an interest in seeing the U.S. stock market lower: China. Trump has backed them into a corner with demands they can’t possibly fully agree to. If they did, their economy would suffer dramatically, and the ruling party would be highly exposed to an uprising. Could China be behind the persistence in the selling. Quite possibly.

Bottom line: The lower stock market has put pressure on the Trump agenda, which makes it more likely that concessions will be made on China demands. My bet is that a deal on China would unleash a massive global financial market rally for 2019, and lead to a big upside surprise in global economic growth.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Why This Looks Like 1994

December 20, 5:00 pm EST

In recent days we’ve discussed the parallels between this year and 1994. In ’94 the Fed was hiking rates into a low inflation, recovering economy.

The Fed has done the same this year, methodically raising rates into a low inflation, recovering economy. And like in 1994, the persistent tightening of credit has sent signals that the Fed is threatening economic growth. Asset prices have swooned, and we have a world where cash is the best performing asset class (just as we experienced in 1994).

But remember, the Fed was forced to stop and reverse by early 1995. Stock prices exploded 36% higher that year.

With this in mind, over the past couple of weeks, several of the best investors in the world have publicly commented on the state of markets.

Among them, was billionaire Paul Tudor Jones. Jones is one of the great global macro traders of all-time. He’s known for calling the 1987 crash, where he returned over 125% (after fees). And he’s done close to 20% a year (again, after fees) spanning four decades.

Let’s take a look at what Jones said in an interview on December 10th …

He said the Fed has gone too far (tightened too aggressively). But he thinks the Fed is near the end of its tightening cycle.

With that, he expected to see more swings in stocks. He said he thinks we could be down 10% or up 10% from the levels of December 10th. But historically when the Fed ends a tightening cycle, after going too far, he says it has been a great time to be in the stock market.

The sentiment that the Fed has gone “too far” increased dramatically across the market this week — in the days up to yesterday’s Fed meeting. As such, because the Fed followed through with another hike yesterday, and telegraphed more next year, stocks continued to slide today. In fact, stocks have now/already declined 9.4% from the levels where Paul Tudor Jones made his comments about down 10%/up 10%. Again, he made those comments just 10 days ago.

With the above in mind, here’s what he said he would do if he saw itdown 10%: “I’m going to buy the hell out of ten percent lower, for sure. To me, that’s an absolute lay-up.”

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Oil Should Give The Fed ‘Pause’

December 18, 5:00 pm EST

Stocks hover around the February lows, as we head into tomorrow’s big Fed decision.

Although the calls for the Fed to pause on its rate hiking path have been building (including many requests via Twitter from the President), the market remains prepared for a hike. The interest rate market is pricing in about a 72% chance.

We’ve talked about the influence of oil prices on the Fed. Oil continued the aggressive slide today. After breaking $50 yesterday, it was down another 7% today.

This gives the Fed more reason to pause — increases the chances of a surprise tomorrow. Remember, they have a history of taking action in response to big adjustments in oil prices.

We had a similar scenario in late 2015, early 2016. They made their first post-crisis hike in December of 2015. But by January, they realized that the collapse in oil prices were threatening another global financial crisis. The Fed had forecasted four hikes that year. They took three off of the table (effectively easing) in response to the vulnerabilities that were bubbling up in the global economy from the dive in oil prices. At the time, with oil prices under the level of profitable production for the shale industry, over 100 companies were already in bankruptcy. And the default clock was starting on countries that are highly depending on oil revenues.

On that note, Saudi Arabia released its 2019 budget today and needs crude oil 60% higher to meet its 2019 spending needs ($84 in brent or equivalent of $74 in wti crude). Oil in the $40s today looks like it may be as dangerous as oil in the $20s and $30s two years ago.

Here’s a look at the crude chart today…

You can see crude has retraced about two-thirds of the move off of the bottom in 2016. This hits a big technical support level (a 0.618 Fibonacci level).

Remember, back in 2016, it took a coordinated response by central banks to stop the collapse in oil and turn the tide (China, the Fed, the BOJ and the ECB).

The BOJ intervened in the dollar the same day oil bottomed. Interestingly, tomorrow the Bank of Japan will follow the Fed with a decision on monetary policy. We’ll hear from the Fed tomorrow afternoon, and from the Bank of Japan tomorrow night.

We’ll see if they respond to an increasingly concerning fall in financial markets.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Will The Fed Respond To Stocks?

December 17, 5:00 pm EST

As I said on Friday, stocks clearly have a significant influence on confidence. And confidence ultimately feeds into economic activity.

So, stocks matter.

On that note, the slide in stocks has started to inflict some damage. The consensus view surrounding stocks and the economy seems to have rapidly deteriorated over just the past week.

As you can see in the chart below of stocks, we touched the February correction lows late in the day today.

This is all setting up for a very big Fed decision on Wednesday. The Fed has hiked three times this year. They are said to be data dependent, yet they have systematically hiked seven times since the 2016 election, despite tame inflation.

With that, this is the first time since 1994 that stocks, bonds, real estate and gold have all been losers on the year (i.e. negative returns). And it’s the first time since 1994 that cash has been the highest returning asset class.

It so happens that the Fed back in 1994 was also systematically raising interest rates into a low inflation, recovering economy — in anticipation that inflation would quicken. It didn’t happen. They ended up choking off growth. The scenario this time looks very similar. The Fed paused back early 1995, and then ended up cutting rates. Stocks boomed, returning 36% on the year.

Also, noteworthy, oil prices closed below $50 today. As I’ve said on the way down, the Fed doesn’t like to admit that they factor in oil prices in their inflation view, but their actions (historically) tell a different story. They have a history of moving when oil moves, because material adjustments in oil prices matter (up and down for inflation). And we’ve just had a big one (down).

The last time oil had a dramatic fall (2016), re-igniting deflationary forces through the global economy, global central banks responded. The Bank of Japan intervened in the currency markets (which likely resulted in buying dollars/selling yen, and buying oil with those dollars). China followed with stimulative policies. And the Fed responded by withdrawing guidance of three rate hikes that year (effectively easing).

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Everyone Should See This Chart

December 11, 5:00 pm EST

We’ve talked about the market volatility the past few days.

Let’s take a look at a chart of the many swings in stocks for the year.

You can see we’ve had seven significant declines this year. A clear observation in this chart is that the declines are fast. As they say, the market goes up on an escalator and down in an elevator.

We’ve had a 12% decline over six days. A 5% decline in three days. A 9% decline in thirteen days. An 8% decline in six days (to open October). A 7.8% decline in eight days. A 6.8% decline in ten days. And, this recent, 8.2% decline in five days (assuming yesterday was the bottom).

So, the seven declines of the year have averaged 8%, over a period of seven days. This argues that we probably have, indeed, seen the low on this recent sharp slide.

And that leaves us, at today’s close, with a stock market trading at 15 times earnings — among the cheapest valuation we’ve seen only two times in the past 26 years.

What stocks do you buy? Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

A Year Of Zero Returns — Anywhere

December 10, 5:00 pm EST

We had another big swing in stocks today, from down about 2%, to finish UP on the day.

On Friday we talked about the rise in market volatility, and what’s driving it.

It’s regime change. For the better part of a decade we had an economy driven by monetary stimulus (and loads of central bank intervention to absorb any potential shocks to markets). And since the election, we now have an economy driven by fiscal stimulus and structural reform.

With the idea that we now have a test to see if the economy will stand on its own two feet, without the benefit of central bank intervention, market volatility is up — an indicator of the uncertainty outcomes.

But as I said Friday, with dramatic change, the pendulum can often swing a little too far in the opposite direction at first (from little-to-no volatility to a lot, in this case).

As it stands, stocks are now down about 1% on the year. In normal times you would see other alternative asset classes (to stocks) performing well. Bonds would be the obvious winner — but if you owned 10-year notes you would be down about 3% on the year (about flat after the yield). When stocks are down, and uncertainty is rising, gold tends to do well. Not this year. Gold is down 4.5% on the year. What about real estate. The Dow Jones Real Estate index is up, but small (+1.8%). Among the best investments of the year is cash. If you owned 1-month T-bills all year, you would be up close to 2%. I suspect this dynamic of little-to-no return asset class alternatives will change very soon.

What stocks do you buy? Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

Why Regime Change Is Lifting Volatility

December 7, 5:00 pm EST

Last year, the stock market broke a 21-year old record of the most consecutive days without a 3% intraday drawdown — some 240+ straight days.

We’ve now had a 3% intraday drawdown (open to low) three times since just early October.

So, what is responsible for the rise in volatility? Why such a contrast from last year?

It’s regime change. After nine years of zero interest rates and trillions of dollars of QE, the torch was passed this year. We entered the year with big tax cuts to implement.

This was the official transition from a monetary policy-driven economic recovery, to a fiscal stimulus-driven recovery. The Fed passed the economic stimulus torch to the White House.

Now, there was good reason that volatility remained subdued under the Fed’s emergency level zero-interest-rate policy. Why? The Fed told us, explicitly, that they (and other major global central banks) stood “ready to act” against any potential shocks that could disrupt the global economic recovery. That was an explicit promise to absorb risks so that investors (businesses, consumers, etc) would keep economic activity moving, by spending, hiring and investing.

The Fed (and other central banks, namely the ECB) had to be the backstop, so that people would pursue higher risk/return assets, in a world where risk-free assets yielded nothing. That was good enough to secure an economic recovery, but only at stall-speed levels of growth.

With that, as we entered the year, the U.S. economy was, for the first time in more than nine years, removing the central bank backstop (removing the life support for the economy). The gameplan: To replace low interest rates and QE with a $1.5 trillion fiscal stimulus package to catapult the economy out of the economic rut of 1% growth, and back toward sustainable 3% (trend) growth. And with that influence, the economy might have a chance to sustainably mend and breath on its own again.

So far we’ve gotten the growth (whether or not it’s sustainable has yet to be seen). But this regime change has also introduced uncertainty (and shock risks) back into the economy and markets. That resets the scale on volatility. And I think that adjustment has been underway.

With that said, the pendulum often swings a little too far in the opposite direction at first (from little-to-no volatility to a lot, in this case).

What stocks do you buy? Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.