news | Billionaire's Portfolio

The Next Big Adjustment Will Be In Rates

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.

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.

Shorting The German Bond Market May Be The Most Lucrative Trade Of The Year

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.

Break Of Nearly 40-Year Downtrend In Rates Was Cemented On Election Night

January 10, 4:00 pm EST

We talked yesterday about the move underway in market interest rates. Today the yield on the 10-year touched 2.60%. That’s the highest levels since March of last year.

For perspective, let’s take a look at the chart …

Suddenly, rates are all the media can talk about. They specialize in trying to find a story to fit the price.

With that, many have been attributing rising U.S. rates to a vague report out of China. This is from Bloomberg: “Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasurys, according to people familiar with the matter.”

There’s nothing new about this notion that China could find our bonds less attractive. It has been ongoing chatter for the past decade.

What’s driving interest rates is simple. It’s the increasing probability that this year we will have the hottest U.S. and global growth in the post-crisis era. And with that, commodities prices are rising.

And contributing to all of this (not in a small way), is fiscal stimulus, within which, a corporate tax cut should finally get wages moving higher. This is all inflationary. And this is all bullish for interest rates (bearish for bonds).

So, as I said last week, despite the quadrupling of the stock market, money may just be in the early stages of moving OUT of bonds and cash, and BACK into stocks.

With that, let’s take a look at a longer term picture of rates…

The chart above is a look at the nearly 40-year downtrend in interest rates. You could argue this downtrend broke in 2013, when the Fed said it would begin dialing down it’s QE program (the taper tantrum). But rates went on to make new lows, as the economy continued to flounder under the inability of central banking firepower to get the economy out of stall speed growth. Alternatively, you could argue this multi-decade downtrend in rates broke on election night (2016), when the idea of big, bold (do whatever it takes to get the economy moving) fiscal stimulus was introduced in the U.S.

The question is, if we do indeed get hotter growth, and we get a pick up in inflation, at what point will that formula stop feeding into hotter markets and hotter growth, and start choking off recovery through higher rates. I suspect it could be a couple of years away, given the ground the economy needs to make up for lost time.

Oil Projecting $80, Rates Will Follow

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.

With oil now up 26% from November, here’s an updated look …

Retail Survivors Have Explosive Upside

January 8, 4:00 pm EST

Heading into the end of last year, we talked about the regulatory scrutiny starting to emerge toward the big tech giants (Facebook, Apple, Amazon, Netflix, Google… Tesla, Uber, Airbnb…) – and the risk that the very hot run they’ve had “could be coming to an end.”

These companies have benefited from a formula of favor from the Obama administration, which included regulatory advantages and outright government funding (in the case of Tesla). That created a “winner takes all” environment where this group of startups and loss-laden ventures, some with questionable business models, were able to amass war chests of capital, sidestep enduring laws, and operate without the constraints of liabilities (including taxes, in some cases) that burdened its competitors.

With the screws now beginning to tighten, under a new administration, and with the tailwinds of economic stimulus heading into the new year, I thought 2018 may be the year of the bounce back in the industries that have been crushed by the internet giants.

Among the worst hit, and left for dead industry, has been retail.

Last year, retail stocks looked a lot like energy did in the middle of 2016. If you were an energy company and survived the crash in oil prices to see it double off of the bottom, you were looking at a massive rebound. Some of those stocks have gone up three-fold, five-fold, even ten-fold in the past 18 months.

Similarly, if you’re a big-brand bricks and mortar retailer, and you’ve survived the collapse in global demand–and a decade long stagnation in the global economy–to see prospects of a 4% growth economy on the horizon, there’s a clear asymmetry in the upside versus the downside in these stocks. These are stocks that can have magnificent comebacks.

Remember, back in November we talked about the comeback underway in Wal-Mart and the steps it has made to challenge Amazon (you can see that again, here). In support of that thesis, the earnings numbers that came in for retail for the third quarter were strong. And now we’re getting a glimpse of what the fourth quarter will look like, as several retailers this morning reported strong holiday sales, and upped guidance on the fourth quarter.

Just flipping through a number of charts on retail stocks, the bottom appears to be in on retail – with many bottoming out in the September-November period last year. Since then, to name a few, Ralph Lauren is up 26%, Michael Kors is up 36%, Under Armour is up 42% and Footlocker is up 64%. The survivors have been comebacks as they’ve weathered the storm and now are blending their physical presence with an online presence.

By the time you get a ETF designed to bet against the survival of bricks and mortar retail, the bottom is probably in. That ETF, the Decline Of The Retail Store (EMTY), launched on November 17 and has gone straight down since.

2018 Will Be The Year Of Recovery On Main Street

January 4, 4:40 pm EST

We kicked off the New Year continuing to discuss the theme of a hot stock market ahead (again) and a hotter than average economy (finally). Stocks continue to comply, with a big start – led by Japanese stocks today, up 2% on the day and up 4% on the year already.

It’s important to realize, the economic crisis was global. The central bank response was globally coordinated, led by the Fed. And, as we discussed early last year, everyone should hope Trumponomics works, because the global economy will benefit in coordination. And that’s what we’ve been seeing over the past year.

Of course, now we’re getting policy execution on that front, and we’re seeing the rising tide of the U.S. economy lifting all boats.

How high will that tide rise? As I said yesterday, if we add pro-growth policies that are being executed out of Washington, to an economy with near record low unemployment, cheap gas, near record low mortgage rates, record high consumer credit worthiness, record high household net worth, a record high stock market and near record low inflation, it’s hard to imagine the economy can’t do better than the long term average (3% growth) this year.

Let’s take a closer look at that economic growth picture.

Remember, in typical recessions, we should expect to get a big pop in growth to follow, due to policymaker responses to the slowdown and the natural upturn in the business cycle. In the Great Recession, we haven’t gotten it — after TEN years.

For the more than 50 years of history prior to the global financial crisis, U.S. economic growth averaged 3.5% (rolling four quarters). We’ve since averaged just 1.5% (over the past ten years). With that underperformance, the U.S. economy has foregone about $3 trillion dollars in real GDP growth, from being knocked off path by the global economic crisis. We’re due for a period to make up that ground.

On Tuesday we talked about the prospects of a return of “animal spirits” this year, for the first time in a long time. This is what can drive a period of economic growth that does better than the long term average. This animal spirits kicker may be the real theme of 2018.

But what is it?

Economics is about incentives. Economists think you’ll make rational decisions, with the incentive to best serve your interests. But emotions come into play. These emotions might cause you to be more risk-aversein times where policies incentivize you to take more risks, and vice versa.
This “emotion override” has been the problem over the past decade. The Fed gave us all abundant incentives to go out and borrow and spend, to stimulate the economy. But the scars of the housing crash, joblessness and overindebtedness were too great. People saved. They paid down debt. That didn’t trust the outlook. The Fed wanted us to take risk and they got risk aversion.

It has taken a regime change and an ultra-aggressive fiscal stimulus and structural reform response to finally break that mindset. The execution on tax cuts looks like the catalyst that has gotten more people off the fence, and believing in a rosier outlook. But I don’t think anyone would argue that confidence is broadly running hot (animal spirits) – much less, in a state of euphoria (which would justify concern of a top in markets and the recovery).

Robert Shiller (Yale economist) describes animal spirits like this: There are good times when people have substantial trust… They make decisions spontaneously. They believe instinctively that they will be successful.”

We’re not there yet, but we may begin seeing it/feeling it this year. And with that, we may see some hot growth over the coming years.

Big Year Ahead For Stocks And The Economy

January 4, 4:30 pm EST

Global markets have started the year behaving very well, supporting my view that we’re in the early innings of an economic boom, and we should get another big year for global stock markets.

But, as we discussed heading into the end of 2017, that view isn’t shared by Wall Street or the Fed. For 2018, the Fed is looking for just 2.5% growth. And Wall Street is looking for just 6% growth in stocks (according to this WSJ piece). That’s less than the long term average return on the S&P 500.

Both continue to, somehow, ignore (or underestimate) the influence of fiscal stimulus, which is hitting into an already fundamentally improving economy.

Wall Street was looking for 3% growth in stocks last year. We got almost 20% (better in the Dow). And the Fed was looking for 2.1% growth last year. It will be closer to 3% for full year 2017.

They thought Trump couldn’t get policies legislated. Now we have big tax cuts, meaningful deregulation, the beginnings of a government spending program (started by natural disaster aid), and a massive incentive for companies to repatriate trillions of dollars.

If we add that to an economy with near record low unemployment, cheap gas, near record low mortgage rates, record high consumer credit worthiness, record high household net worth, a record high stock market and near record low inflation, it’s hard to imagine the economy can’t do better than the long term average (3% growth) this year.

As we’ve discussed, we’ve yet to experience the explosive bounce in economic growth that is typical of post-recession environments. This is set up to be that kind of year — maybe something north of 4%, which should finally move the needle on inflation. If that’s the case, despite the quadrupling of the stock market from the 2009 bottom, money may just be in the early stages of moving out of bonds and cash, and back into stocks.

How Wall Street Got It So Wrong On Stocks Last Year

January 1, 4:00 pm EST

Remember, this time last year, the biggest Wall Street investment banks told us stocks would do just 3% in 2017.

They were looking for about 2,300 on the S&P 500. The most aggressive forecast was 2,500 — coming from the Canadian bank, RBC (Royal Bank of Canada).

Here’s another look at the snapshot of those projections for 2017:

They undershot by a lot. The S&P finished just shy of 2,700 for the year. And S&P 500 earnings came in around $131. Wall Street was looking for $127.

But their big miss was underestimating the outlook for “multiple expansion.” The reason: They continue to underestimate the demand for stocks, in a world where ultra-low yields continue to incentivize people to reach for higher returns (i.e. opt for the choice of more risk for more return).

Investors will pay more for each dollar of future earnings if they expect to earn a higher future rate of return. And they have expected just that over the past few years, because 1) central banks promised to keep pumping up asset prices through QE and to continue warding off any shock risks that could derail the recovery for the economy and stocks, and 2) we’ve had the major shift away from austerity, which has promoted a weaker than typical recovery out of recession (and worse, stall speed growth) and toward big and bold fiscal stimulus (one that can potentially return the economy to a more normal, higher long term growth rate).

That’s why the P/E on stocks can and should rise well north of 20 times earnings in this environment, just as it has over the past three years.

The P/E on the S&P 500 was 20 in 2015, 22 in 2016 and 23 for 2017 (on trailing earnings). In each case, we came into the year, with the market undervaluing earnings — given what people have proven to be willing to pay up for them.

The market is now valuing the New Year’s earnings at 19 times earnings. And that ignores the probability that actual earnings can come in much better than estimates next year, given the corporate tax cut. That would ratchet down that “19 times” earnings valuation – making stocks cheaper.

For help building a high potential portfolio for 2018, follow me in The Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up 45% over the past two years. Join me here!

The Simple Math For Another Big Year Ahead For Stocks

December 28, 12:00 pm EST

While the President’s pro-growth plan had some wins this year, it was a slow start.

Going after healthcare first was a mistake. Fortunately, a pivot was made, and we now have a big tax bill delivered. And we have what will likely exceed a couple hundred billion dollars in government spending on hurricane/natural disaster aid underway (the early stages of a big government spending/ infrastructure package).

Last year this time, I predicted that Trump’s corporate tax cut would cause stocks to rise 39%. That’s a big number, that’s only been done a handful of times since the 1920s. We got a little better than half way there.

But, here’s the good news: We got there on earnings growth, ultra-low rates and an improving economy. All of that still stands for next year, PLUS we will have the addition of an aggressive tax cut that will be live day one of 2018.

With that, my analysis from last year still stands! Let’s walk through it (yet) again.

S&P 500 earnings grew by 10% this year. S&P 500 earnings are expected to grow at about the same rate next year. And that’s before the impact of a huge cut in the corporate tax rate. The corporate tax rate now goes from 35% to 21% – and for every percentage point cut in that rate, we should expect it to add at least a dollar to S&P 500 earnings.

With that, the forecast on S&P 500 earnings for next year is $144. If we add $14 to that (for 14 percentage points in the corporate tax rate) we get $158. That would value stocks on next year’s earnings, at today’s closing price on the S&P 500, at just 17 times earnings (just a touch higher than the long-term average). BUT, the Fed has told us that rates will continue to be ultra-low next year (relative to history). When we look back at ultra–low interest rate periods, the valuation on stocks runs higher than average—usually north of 20 times earnings.

If we take the corporate tax cut driven earnings of $158 and multiply it times 20, we get 3,160 on the S&P 500. That’s 18% higher than current levels. This analysis doesn’t incorporate the impact of a potentially hotter than expected economy next year (thanks to the many other areas of fiscal stimulus). So, as we’ve discussed throughout the year, the backdrop continues to get better and better for stocks.

Join our Billionaire’s Portfolio today to get your portfolio in line with the most influential investors in the world, and hear more of my actionable political, economic and market analysis. Click here to learn more.

Playing Field Might Be Leveling For Silicon Valley Giants

December 15, 9:00 pm EST

Last week we had the merger of Fox and Disney, and the repeal of the Net Neutrality rule. And the tax bill continues to inch toward the finish line.

That said, this would typically be the time of year when markets go quiet as money managers close the books on the year, decision makers at companies go on holiday and politicians do the same.

But that wasn’t the case last year, as President-elect Trump was holding meetings in Trump towers and telegraphing policy changes. And it may not be the case this year, as the tax plan may be approved before year end. The final votes are said to come next week, and the bill is tracking to be on the President’s desk by Christmas.

With that, and with the lack of market liquidity into the year end, we may get a further melt-up in last trading days of the year.

Yesterday we talked about the other side of the Net Neutrality story that doesn’t get much acknowledgement in the press. In short, the tech giants that have emerged over the past decade, to dominate, have done so because of regulatory favor. This favor has decimated industries and has dangerously consolidated power into the hands of few. The repeal of this rule is turning that regulatory tide.

It looks like the playing field might be leveling. That means a higher cost of doing business may be coming for Silicon Valley, with fewer advantages and more competition from the old-economy brands that have been investing to compete online. That means potentially slower earnings growth for the big internet giants, for those that are making money, and an even more uncertain future for those that aren’t (e.g. Tesla).

With this in mind, at the moment Amazon is valued at twice the size of Walmart. Uber is valued at almost 40 times the size of Hertz. And Tesla, which has lost $2.5 billion over the past five years is valued the same as General Motors, which has made $43 billion over the same period.

Next year could be the year these valuation anomalies correct.