We have a big earnings week. The tech giants report, along with about a third of the S&P 500. And we get our first look at Q2 GDP.
As we’ve stepped through the year, we’ve had a price correction in stocks, following nearly a decade of central bank policies that propped up stocks. This correction made sense, considering central banks were finally able to make the hand-off to a U.S. led administration that had the will and appetite (and alignment in Congress) to relax fiscal constraints and force the structural reform necessary to promote an economic boom.
From there, for stocks, it became a “prove-it to me” market. Let’s see evidence of this “hand-off” is working — evidence the fiscal stimulus is working. That came in the form of first quarter earnings. This showed us clear benefits of the corporate tax cut. The earnings were hot, and stocks began a recovery.
The next steps, as fiscal stimulus works through the economy, we’ve needed to see that the uptick in sentiment (from the pro-growth policies) is translating into better demand and economic activity. So, with Q2 earnings we should start seeing better revenue growth, companies investing and hiring. And we should see positive surprises beginning to show up in the economic data.
We’re getting it. Almost nine out of ten companies reporting thus far have beat (lofty) earnings expectations. And about eight out of ten have beat on revenues. This week will be important, to solidify that picture. And though many of the economists all along the way of the past year didn’t see big economic growth coming, it has been steadily building since Trump was elected, and the Q2 number should push us to over 3% annual growth (averaging that past four quarters).
Now, let’s talk about the big mover of the day: interest rates. The 10-year yield traded to 2.96% today, closing in on 3% again.
We’ve discussed, many times, the role that Japan continues to play in our interest rate market. Despite 7 hikes by the Fed from the zero-interest-rate-era, our 10 year yield has barely budged. That’s, in large part, thanks to the Bank of Japan.
As I’ve said in the past, “Japan’s policy on pegging its 10-year yield at zero has been the anchor on global interest rates. Forcing their benchmark government bond yield back to zero, in a world where there has been upward pressure on interest rates, has meant that they can, and will, buy unlimited amounts of JGBs to get the job done. That equates to unlimited QE. When they finally signal a change to that policy, that’s when rates will finally move.”
With that in mind, there were reports over the weekend that the Bank of Japan may indeed signal a change in that “yield curve control” policy at their meeting next week. And global rates have been moving!
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Yesterday we talked about the set up for the Dow. In the past couple of trading sessions, it traded perfectly into the trendline (support) that represents the run in stocks following the 2016 election.
It’s especially compelling when we consider that the Dow has been the laggard coming out of the broad stock market correction. As I said yesterday, this sets up for a second half where money should aggressively move back toward the blue chips.
With this in mind, I want to revisit some analysis I talked about last July. It’s from billionaire investor Larry Robbins (of the hedge fund Glenview Capital).
Robbins looked back at the important influence of low interest rate environments on stocks. He said “every time ONE of these following conditions has existed, the market has produced positive returns.
Here they are again:
When the 30-year bond yield begins the year below 4%, stocks go up 22.1%.
When investment grade bonds yield below 4%, stocks go up 16%.
When high yield bonds yield below 8%, stocks go up 11.6%.
When cash as a percent of asset for non-financials is above 10%, stocks go up 17.6%.
When the Fed tightens 0-75 basis points in the year, stocks go up 22%.
When oil falls more than 20%, stocks go up 27.5%.
His study showed that there has NEVER been a down year in stocks, when any ONE of the above conditions is met.
Now, we looked at this last year this time, and the S&P 500 finished up close to 20% on the year. It also worked in 2015. And it worked in 2016.
Does it apply this year? All apply, with the exception of oil. Oil is UP, big. And assuming the Fed hikes one more time this year. Still, as Robbins said, we need just ONE of these conditions to be met. The point is, low interest rates tend to make stocks go UP. That’s because global capital tends to reach for more risk to get return in a world where risk-free bonds aren’t compensating them enough.
Bottom line: Ignore all of the geopolitical noise. Low rates continue to tell us stocks will go up. And to make it easy for us, the DJIA is starting today at essentially the zero line — flat on the year!
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Last week, we talked a lot about oil, as OPEC was meeting to deliberate on the status of their agreement to cut production.
While oil prices have been rising aggressively over the past year, the markets haven’t been paying a lot of attention — distracted by Trump watching.
But then Trump put it on the front burner, with another jab at OPEC on Twitter. And the media and Wall Street began trying to deduce the OPEC outcome. In the end, they misinterpreted. OPEC’s agreement to go from overcutting to complyingwith the initial levels of production cuts, means they are still cutting.
So, the market is still undersupplied in a world where demand has proven to be underestimated. That’s a formula for higher prices.
That’s what we’ve had for the past year, and that’s what we’ve gotten since OPEC’s official statement on Friday. In my note last Friday, I said “the lack of enough action from OPEC may serve as a catalyst to push oil much higher from here. That, of course, serves OPEC’s interests.”
Oil prices have exploded! We’ve seen a $10 pop since Friday morning. That’s 15% in a week. And I suspect it’s going to keep going.
Remember, we’ve talked about the prospects for $100 oil this year. Leigh Goehring, one of the best research-driven commodities investors on the planet has been telling us that since last year. And he’s looking spot-on at the moment.
Bottom line: This script is precisely what we’ve been talking about, here in my daily ProPerspectives note, since the price of oil was in the $40s. We’ve talked about the prospects for a return to $80 oil, and maybe even as high as $100 oil. And it looks more and more possible, given the surging demand and the supply shortfall.
How can you play it. On this thesis for oil, in my Billionaire’s Portfolio, we added SPDR Oil and Gas ETF (symbol XOP) and Phillips 66 (symbol PSX) back when oil prices were deeply depressed (in 2016). We followed the activism of policymakers (both central banks and OPEC). And in the case of PSX, we also followed Warren Buffett.
Both are up big, but have a lot more room to run. Oil and gas stocks (which comprise the XOP) have yet to reflect the supply shortfall in the oil market, much less the booming demand that is coming from an improving global economy (which many have underestimated).
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We’ve talked about the big OPEC decision this week, and the prospects for oil prices.
When we get a market that thinks they know the outcome, we get a market that begins leaning too hard in one direction. And that creates an market outcome that can be asymmetric (i.e. lopsided). That’s what we had today.
In this case, Trump’s verbal attacks on OPEC’s price manipulation generated a media frenzy surrounding the OPEC meeting. And with the media swarming, the oil ministers seemed happy to oblige with commentary and pontification. And that set expectations for the outcome.
And this morning, OPEC released their communique, but it was far from the clean production increase the market was looking for. With that, we got this chart …
It went straight up. Oil was up almost 6% on the day and nearing $70 again. And this lack of enough action (as we should expect) from OPEC, to balance the oil market, may serve as a catalyst to push oil much higher from here (which serves OPEC’s interests).
And as we discussed yesterday, with high oil prices now squarely on the radar (for Trump, the media and the market), we may begin seeing oil prices weigh on stock prices.
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We’ve talked about the case for much higher oil prices since I started writing this daily note back in January of 2016. And we’ve since had a triple off of the February 2016 bottom.
The crash in oil prices from 2014 to 2016 was induced by OPEC as an effort to crush the competitive U.S. shale industry. While they nearly succeeded, these oil producing countries nearly killed their own economies in the process. So, in effort to drive oil prices higher, to salvage oil revenues, they had to flip the switch in late 2016, cutting production for the first time since 2008. And they did so, in a market that was already undersupplied. And in a world where demand has been underestimated, and growing.
So now, we’ve had this big recovery – nearly a round trip back to those 2014 levels.
The problem? The oil price crash was a threat to the global economy, as bankruptcies were lining up and deflationary forces were returning in the global economy. But now, current oil prices (and higher) are threatening to the recovery too, specifically the economic gains from fiscal stimulus.
And that’s on the wrong side of Trump. So, we’re seeing pressure on OPEC from the White House.
Will OPEC comply?
They are meeting now to determine whether or not they stick with current policy, or make an increase to production.
The expectations have been set for an increase. But there is dissension in the ranks at OPEC. If they surprise markets and maintain current output (i.e. no increase), we could see oil move much higher, and quickly. That would throw a wrench in almost everything. Remember, Trump’s tough positioning has a lot to do with the leverage he gets from a strong economy. $100 oil would threaten the economic outlook, and change the face of trade negotiations and the geopolitical environment.
We will likely hear leaks on Friday and probably hear a decision from OPEC on Saturday.
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There has been a lot of attention over the past couple of days on China and trade relations.
China has moved down tariffs on auto and auto parts imports. And a source today said the government has “encouraged” China’s largest oil refiner to buy more U.S. crude oil. Based on the reports, China is now taking about 8 times the daily volume of U.S. crude imports, compared to averages a few months ago.
These are concessions! This is a distinct power shift. Not long ago, the world was afraid to rattle the cage of China. They (global trading partners) tiptoed around touchy matters like Chinese currency manipulation prior to the global financial crisis a decade ago, and even more so after the crisis.
But now, you can see the leverage that has been created by Trump. This is exactly what we talked about the day after the election.
Here’s an excerpt from my November 9, 2016 ProPerspectives note, back when the experts were predicting Draconian outcomes for poking the China giant: “As we’ve seen with Grexit and Brexit, the votes came with dire warnings, but have resulted in creating leverage. Trump’s complaints about China are right. And a threat of slapping a tariff on Chinese goods creates leverage from which to negotiate.”
Now, we have an economy that is leading the global economic recovery. China wants and needs to be part of it. And we have a President that has a loud bark, and the credibility to bite. And that is creating movement. Let’s revisit, also from one of my 2016 notes, why this China negotiation is so important …
TUESDAY, SEPTEMBER 27, 2016
China’s biggest and most effective tool is and always has been its currency. China ascended to the second largest economy in the world over the past two decades by massively devaluing its currency, and then pegging it at ultra-cheap levels.
Take a look at this chart …
In this chart, the rising line represents a weaker Chinese yuan and a stronger U.S. dollar. You can see from the early 1980s to the mid-1990s, the value of the yuan declined dramatically, an 82% decline against the dollar. China trashed its currency for economic advantage—and it worked, big time. And it worked because the rest of the world stood by and let it happen.
For the next decade, the Chinese pegged its currency against the dollar at 8.29 yuan per dollar (a dollar buys 8.29 yuan).
With the massive devaluation of the 1980s into the early 1990s, and then the peg through 2005, the Chinese economy exploded in size. It enabled China to corner the world’s export market, and suck jobs and foreign currency out of the developed world. This is precisely what Donald Trumpis alluding to when he says ‘China is stealing from us.’
China’s economy went from $350 billion to $3.5 trillion through 2005, making it the third largest economy in the world.
This next chart is U.S. GDP during the same period. You can see the incredible ground gained by the Chinese on the U.S. through this period of mass currency manipulation.
And because they’ve undercut the world on price, they’ve become the world’s Wal-Mart (sellers to everyone) and have accumulated a mountain for foreign currency as a result. China is the holder of the largest foreign currency reserves in the world, at more than $3 trillion dollars (mostly U.S. dollars). What do they do with those dollars? They buy U.S. Treasurys, keeping rates low, so that U.S. consumers can borrow cheap and buy more of their goods—adding to their mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth (and the cycle continues).
This is the recipe for big trade imbalances — lopsided economies too dependent upon either exports or imports. And it’s the recipe for more cycles of booms and busts … and with greater frequency.”
Again, China has to be dealt with. And we’re starting to see signs of progress on that front. Good news.
With oil above $70, today I want to revisit my note from February where we looked at billionaire-owned energy stocks that have the potential to double on higher oil prices (that note is below with updates or you can see it published here).
As I wrote that note, crude oil was trading at $63. This morning it traded close to $72. And more importantly, with the supply disruption (in the renewed Iran sanctions) combined with an already undersupplied market, we now have the recipe for a melt-UP in oil prices. That creates big opportunities in oil exploration, production and services companies (still).
FRIDAY, FEBRUARY 23, 2018
We’ve talked quite a bit over the past year about this $100 oil thesis from the research-driven commodities investors Goehring and Rozencwajg.
As they said in their recent letter, “we remain firmly convinced that oil-related investments will offer phenomenal investment returns. It’s the buying opportunity of a lifetime.”
With that, let’s take a look at some favorite energy stocks of the most informed and influential billionaire investors:
David Einhorn of Greenlight Capital has about 5% of his fund in Consol Energy (CNX). Mason Hawkins of Southeastern Asset Management is also in CNX. He has 9% of his fund in the stock, his third largest position. The last time oil was $100, CNX was a $36 stock. That’s more than a double from current levels. [Update: this is still a potential double, last price in CNX is $15.70.]
Carl Icahn’s biggest position is in energy. He has 12% of his fund in CVR Energy (CVI), which is 82% of the company. The last time oil was $100, CVI was $49. That’s 58% higher than current levels. [Update: last price on CVI is $40.60, driven higher by Icahn’s influence on a favorable EPA ruling.]
Paul Singer of Elliott Management’s third largest position is an oil play: Hess Corp. (HESS). It’s a billion-dollar stake, and the stock was twice as valuable the last time oil prices were $100. [Update: last price on Hess is $63, up significantly from my Feb note, but Hess was a $100+ stock the last time crude oil was traded at $100.]
Andreas Halvorsen of Viking Global Investors has the biggest position in his $16-billion fund in EnCana Corp. (ECA). The stock was around $25 last time oil was $100. It currently trades at $14. [Update: last price on ECA is $17.]
Over the past 24-hours, global markets were obsessed with the President’s move to renew sanctions on Iran. The oil market swung around. And so did stocks, to a degree.
These are important events. They are news-worthy events. And they carry plenty of shock-value. But, without underplaying the importance, we’ve seen this movie (bold change) a lot over the past 16 months, under the Trump presidency. And despite the risks that many have feared along the way, we’re seeing a better economy, healthier companies and healthier consumers. And we’re seeing the potential for reform in the trade imbalances that led to the financial crisis.
It’s the tough talk, tough positioning and the “credibility to act” that is producing results. And Trump is working from a position of strength, leveraging the biggest economy in the world, and an economy that is leading the global economic recovery. And he continues to tick the boxes on his game plan of change (global and domestic).
But the risks from the bold change has only provided more fodder for those skittish investors that don’t believe in the growth story. That continues to reinforce their views of an ugly outcome in global financial markets. And that continues to keep investors under-exposed to stocks.
However, with the fundamental backdrop strong, and valuations cheap (relative to low interest rate environments), that should keep the cash from the doubters chasing stock prices as they move higher.
Crude oil crossed the $70 mark today, and with new sanctions to be placed on Iran, likely tomorrow, $100 oil is looking very possible.
We’ve talked a lot about oil prices over the past couple of years. In early 2016, we talked about the price crash that was induced by OPEC as an effort to crush the competitive U.S. shale industry.
While they nearly succeeded, these oil producing countries nearly killed their own economies in the process. So, in effort to drive oil prices higher, to salvage oil revenues, they flipped the switch in late 2016, cutting production for the first time since 2008. And they did so, in a market that was already undersupplied.
In my January 12th note, we revisited Leigh Goehring’s call for $100 oil. Goehring is one of the best research-driven commodities investors. And has been calling for triple-digit oil prices–this year! He predicted a surge in global oil demand (which has happened) and a drawdown on supplies (which has been happening at “the fastest rate ever experienced”). He said that with the OPEC production cuts from November 2016, we’re “traveling down the same road” as 2006, which drove oil prices to $147 a barrel by 2008.
Below is the chart of oil. A break of $70 is putting the price of oil very close to the levels that it collapsed from that Thanksgiving Day evening back in 2014. That was when OPEC announced that it opted NOT to cut production, despite an oversupply and plunging prices.
We’ve talked quite a bit over the past year about this $100 oil thesis from the research-driven commodities investors Goehring and Rozencwajg.
As they said in their recent letter, “we remain firmly convinced that oil-related investments will offer phenomenal investment returns. It’s the buying opportunity of a lifetime.”
With that, let’s take a look at some favorite energy stocks of the most informed and influential billionaire investors:
David Einhorn of Greenlight Capital has about 5% of his fund in Consol Energy (CNX). Mason Hawkins of Southeastern Asseet Management is also in CNX. He has 9% of his fund in the stock, his third largest position. The last time oil was $100, CNX was a $36 stock. That’s more than a double from current levels.
Carl Icahn’s biggest position is in energy. He has 12% of his fund in CVR Energy. The last time oil was $100, CVI was $49. That’s 58% higher than current levels.
Paul Singer of Elliott Management’s third largest position is an oil play: Hess Corp. (HES). It’s a billion-dollar stake, and the stock was twice as valuable the last time oil prices were $100.
Andreas Halvorsen of Viking Global Investors has the biggest position in his $16-billion fund in EnCana Corp. (ECA). The stock was around $25 last time oil was $100. It currently trades at $14.
If you are hunting for the right stocks to buy, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. You can add these stocks at a nice discount to where they were trading just a week ago.
