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.

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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.

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October 23, 2017, 4:00 pm EST

Forbes has just ranked the top 400 richest people in America for 2017.

Among the top 50, a fifth have created their wealth from some sort of Wall Street activity (mostly hedge funds, but also brokerage and asset management). There’s not much new there–the rich have gotten richer on Wall Street despite the challenges of the past decade. But as we’ve discussed, the torch was, in many respects, passed to Silicon Valley over the past decade, as the best spot to create–that’s where the biggest proportion of the wealthiest 50 have built their wealth.

But much of that technology wealth can be refined down to the very industries that are being displaced on the wealth list, such as publishing, energy and retail.

That makes you wonder how long some of these companies can command a software-like valuation when the core of their business models are rather traditional things like selling ads, distributing content, making cars or selling retail products.

To this point, as long as they started in Silicon Valley, they tend to get a very long leash. They can lose money with immunity.

Consider this: GM is valued at $66 billion. Telsa is valued at $57 billion. GM has made (net profit) $43 billion over the past six years. Tesla has lost$2.5 billion over the past six years. Meanwhile, Elon Musk, Tesla’s founder, has amassed a $20 billion net worth.

The question is how defensible are these businesses (Facebook, Netflix, Tesla, Twitter)? How wide is their moat? A couple of years ago, the answer was probably very wide–very defensible given the adoption, the scale, and the deep pocket investors that were willing to continue plowing money into them. But, as we’ve discussed, if the regulatory environment becomes less favorable and the money dries up (in the case of private companies, like Uber), the operating advantages can begin to evaporate. This bubble-up of regulatory scrutiny on tech is something to keep a close eye on. It may become one of the big themes in the coming year.

August 7, 2017, 4:00 pm EST               Invest Alongside Billionaires For $297/Qtr

June 16, 2017, 4:30 pm EST                                                                                   Invest Alongside Billionaires For $297/Qtr

Today I want to take a look back at my March 7th Pro Perspectives piece.  And then I want to talk about why a power shift in the economy may be underway (again).

Big Picture .. Market Perspectives   March 7, 2017
“A big component to the rise of Internet 2.0 was the election of Barack Obama. With a change in administration as a catalyst, the question is: Is this chapter of the boom in Silicon Valley over? And is Snap the first sign?

Without question, the Obama administration was very friendly to the new emerging technology industry. One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007, before Obama announced his run for president, and just as Facebook was taking off after moving to and raising money in Silicon Valley (with ten million users). Facebook was an app for college students and had just been opened up to high school students in the months prior to Obama’s run and the hiring of the former Facebook cofounder. There was already a more successful version of Facebook at the time called MySpace. But clearly the election catapulted Facebook over MySpace with a very influential Facebook insider at work. And Facebook continued to get heavy endorsements throughout the administration’s eight years. 

In 2008, the DNC convention in Denver gave birth to Airbnb. There was nothing new about advertising rentals online. But four years later, after the 2008 Obama win, Airbnb was a company with a $1 billion private market valuation, through funding from Silicon Valley venture capitalists. CNN called it the billion dollar startup born out of the DNC. 

Where did the money come from that flowed so heavily into Silicon Valley? By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the “the discovery, development and implementation of various technologies.” In June 2009, the government loaned Tesla $465 million to build the model S. 

When institutional investors see that kind of money flowing somewhere, they chase it. And valuations start exploding from there as there becomes insatiable demand for these new ‘could be’ unicorns (i.e. billion dollar startups). 

Who would throw money at a startup business that was intended to take down the deeply entrenched, highly regulated and defended taxi business? You only invest when you know you have an administration behind it. That’s the only way you put cars on the street in NYC to compete with the cab mafia and expect to win when the fight breaks out. And they did. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation. Uber is valued at $60 billion. That’s more thanthree times the size of Avis, Hertz and Enterprise combined.

Will money keep chasing these companies without the wind any longer at their backs?”

Now, this was back in March. And that was the question — will it keep going under Trump? Can they continue to thrive/ if not survive without policy favors.  Most importantly for the billion dollar startup world, will the private equity capital dry up.  This is what it’s really all about.  Will the money that chased the subsidies from D.C. to Silicon Valley for eight years (i.e. the trillion dollar pension funds) stop flowing?  And will it begin chasing the new favored industries and policies under the Trump administration?

It seems to be the latter. And it seems to be happening in the form of a return to the public markets — specifically, the stock market.

And it may be amplified because of the huge disparity in what is being favored.  In Silicon Valley, innovation is favored.  Profitability?  Remember, the 90s tech bubble. The measure of success for those companies was “eyeballs.” How much traffic were they getting to their websites?  Today, when you hear a startup founder talk about the success benchmarks, it rarely has anything to do with with revenue or profit.  It’s all about headcount (how many people they’ve hired) and money raised (which enables them to hire people). They are validated by convincing investors to fund them (mostly with our pension money).

Now, the other side of this coin:  Trumponomics.  Remember, among the Trump policies (corporate tax cuts, repatriation, deregulation, infrastructure spend), the most common sense play in the stock market has been flooding money into companies that make a lot of money.  Those that make a lot of money have the most to gain from a slash in the corporate tax rate — it falls right to the bottom line. Leading the way on that front, is Apple.  They make a lot of money.  And they will make a lot more when a tax cut comes, making the stock even cheaper.  That’s why it’s up 25% year-to-date.  That’s 2.5 times the performance of the broader market.

Meanwhile, let’s take a look back at the Snapchat.   Snapchat doesn’t make money. And even after a 1/3 haircut on the valuation, trades about 35 times revenue. And now, as a public company, probably doesn’t get the protection from the venture capital/private equity community that may have significant investments in its competitors.  So the competitors (like Facebook) are circling like sharks to copy their business.

What about Uber?  The Uber armor may be beginning to crack as well, with the leadership shakeup in recent weeks.  Maybe a good signal for how Uber may be doing?  Hertz!  Hertz has bounced about 20% from the bottom this week.

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March 7, 2017, 6:00pm EST                                                                                             Invest Alongside Billionaires For $297/Qtr

Since going public last week, Snap has had a valuation north of $30 billion. It’s been getting hammered from the highs over the past couple of days. A big component to the rise of Internet 2.0 was the election of Barack Obama. With a change in administration as a catalyst, the question is: Is this chapter of the boom in Silicon Valley over? And is Snap the first sign?

Without question, the Obama administration was very friendly to the new emerging technology industry. One of the cofounders of Facebook became the manager of Obama’s online campaign in early 2007, before Obama announced his run for president, and just as Facebook was taking off after moving to and raising money in Silicon Valley (with ten million users). Facebook was an app for college students and had just been opened up to high school students in the months prior to Obama’s run and the hiring of the former Facebook cofounder. There was already a more successful version of Facebook at the time called MySpace. But clearly the election catapulted Facebook over MySpace with a very influential Facebook insider at work. And Facebook continued to get heavy endorsements throughout the administration’s eight years.

In 2008, the DNC convention in Denver gave birth to Airbnb. There was nothing new about advertising rentals online. But four years later, after the 2008 Obama win, Airbnb was a company with a $1 billion private market valuation, through funding from Silicon Valley venture capitalists. CNN called it the billion dollar startup born out of the DNC.

Where did the money come from that flowed so heavily into Silicon Valley? By 2009, the nearly $800 billion stimulus package included $100 billion worth of funding and grants for the “the discovery, development and implementation of various technologies.” In June 2009, the government loaned Tesla $465 million to build the model S.

When institutional investors see that kind of money flowing somewhere, they chase it. And valuations start exploding from there as there becomes insatiable demand for these new “could be” unicorns (i.e. billion dollar startups).

Who would throw money at a startup business that was intended to take down the deeply entrenched, highly regulated and defended taxi business? You only invest when you know you have an administration behind it. That’s the only way you put cars on the street in NYC to compete with the cab mafia and expect to win when the fight breaks out. And they did. In 2014, Uber hired David Plouffe, a senior advisor to President Obama and his former campaign manager to fight regulation. Uber is valued at $60 billion. That’s more than three times the size of Avis, Hertz and Enterprise combined.

Will money keep chasing these companies without the wind any longer at their backs?  The favor in the new administration looks more likely to go toward industrials and energy. That would leave the pumped up valuations in some of these internet businesses, that operate with no real plan on how to make money, with a long way to fall.

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February 1, 2017, 4:00pm EST               Invest Alongside Billionaires For $297/Qtr

I talked yesterday about the Fed.  As I said, I think we’ll find that the Fed will shift gears again to stay behind the curve on inflation, to let the economy run a little hot.  They met today and it was a non-event. They said nothing to build momentum on their rate hike from December.

The news of the day has been Apple (NASDAQ:AAPL) earnings.  People over the past couple of years have been calling for the decline in Apple.  They’ve said it’s topped.  They can’t innovate in the post-Steve Jobs era.  The iPhone was magic. But reproducing magic isn’t easy.  Once you put a computer in everyone’s pocket, there’s not much more they can do to it with it. These are all of the quips about Apple’s peak.  They may be right.  But Apple’s peak, at least as a stock, is greatly exaggerated.

They reported a huge positive surprise on earnings yesterday after the close.  The stock was up 6% on the day.  But even before that, I suspect it has become a much loved stock in the past two months in the “smart money” investor community.

We should see in the coming weeks, as big investors disclose their positioning for the end of Q4, Apple will have returned to a lot of portfolios again.  Warren Buffett, an investor that has made his fortune buying when others are selling, built a big stake at the lows of the year last year.  And it’s a perfect Buffett stock.

It’s incredibly cheap compared to the market.

The stock still trades at 15x earnings.  Much cheaper than the market.  Apple trades at 13x next year’s projected earnings.  The S&P 500 trades at 16.5x.  What about Apple’s monster cash position?  Apple has even more cash now — a record $246 billion. If we excluded the cash from the valuation, Apple market cap goes down from $675 billion to $429 billion.  That would equate to Apple trading at closer to 9x earnings. Though not an “apples to apples” that valuation would group Apple with the likes of these S&P 500 components that trade around 9 times earnings, like:  Dow Chemical, Prudential Financial, Bed Bath & Beyond, a Norwegian chemical company (LBY), and Hewlett Packard Enterprise. It’s safe to say no one is debating whether or not Hewlett Packard is at the pinnacle of its business. Yet, if we strip out the cash in Apple, AAPL shares are trading closer to an HPE valuation.

Add to that, Apple now has a fresh catalyst coming in, Trump policies. The new President Trump is incentivizing Apple (and others) to bring offshore cash hoards back home with a flat 10% tax.  And Apple makes money – a lot of it.  A cut in the corporate tax rate will be a boon for earnings.  Two years ago, Carl Icahn argued that Apple should use (a lot more of) their cash to buyback shares – and, with that, valued the stock at double its current levels.

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October 26, 2016, 4:15pm EST

As of the end of last week, 78% of the companies that have reported earnings for the most recent quarter have beaten estimates.

That’s on about a third of S&P 500 companies that have reported thus far. Remember, FactSet says on average (the five-year average), 67% of companies in the S&P 500 beat their analyst expectations. And they beat by an average of 4%.  So the numbers in this earnings season are running a little hotter, albeit on a lowered bar.

We’ve talked quite a bit in the past week about the run up to Apple earnings, which came in yesterday after the market close.  The earnings number beat expectations.  But it was by a slim margin.

The stock was lower on the day.  Still, on the second quarter report, this past July, Apple was a sub $100 stock (trading at just above $96).  Today it will close above $115.  That’s 20% higher in the span of one quarter, and it was on a report that was very much in line with the report we heard yesterday.  And the report included only a few weeks of the new iPhone7 release.  And it doesn’t reflect implosion of Apple’s competitor, Samsung.

As the media and analyst tend to do, especially when the macro news front is quiet and market volatility is quiet, they picked apart and speculated on the future of Apple today as a company that may have peaked.

Let’s just take a look at the stock, and not pretend to have better visibility on the future of the company than the people do inside — the same one’s that put a transformational supercomputer in our pockets.

The stock still trades at 13x earnings.  The S&P 500 trades at 16x.  Apple trades at 13x next year’s projected earnings.  The S&P 500 trades at 16.5x. Clearly it’s undervalued compared to the broader market.  What about Apple’s monster cash position?  Apple has even more cash now — a record $237 billion. If we excluded the cash from the valuation, Apple trades at 8.6x earnings. Though not an apples to apples (pun), and just as a reference point, that valuation would group Apple with the likes of these S&P 500 components that trade 8 times earnings:  Dow Chemical, Prudential Financial, Bed Bath & Beyond, a Norwegian chemical company (LBY), and Hewlett Packard Enterprise.  It’s safe to say no one is debating whether or not Hewlett Packard is at the pinnacle of its business. Yet, if we strip out the cash in Apple, AAPL shares are trading at an HPE valuation.

Apple still looks like a cheap stock.

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October 19, 2016, 3:00pm EST

By November 15th, the biggest investors in the world will be required to disclose a snapshot of what their portfolios looked like at the end of the third quarter.

I suspect we’ll find that Apple was heavily bought during the period.

You might recall, the media was stirring about the second quarter filings (which were reported back in August).  Some big names had sold or trimmed stakes in Apple.

But, as I discussed at that time, the Q2 portfolio snapshots came just days following the big surprising Brexit decision in the UK. Global markets swung violently on the news back in June.  Remember, between June 23rd and June 27th, the S&P 500 fell as much as 5.7%.  It made it all back the subsequent four days.

With that event in mind, billionaire investors David Einhorn, George Soros and Chase Coleman – all had sold Apple shares by the end of the second quarter.

But remember, unlike most stocks they own, they can all trade Apple with virtual anonymity between quarters.  The stock is too large for anyone one investor to take a 5% controlling stake, which would trigger the requirement of a 13D or 13G filing with the SEC, which would require updated filings (or amendments) within 10 days of any change in the position size (sell one share, you have to report it).

Einhorn even bragged in one of his investor letter’s this year that they have done a good job of “trading” Apple.

Make no mistake, even with the trimmed stakes of Q2, Apple was (and is) still the “who’s who” of billionaire investor-owned stocks.  It was still Einhorn’s largest position into the end of Q2.  Buffett swooped in and bought shares near the 52-week low.

When we see the Q3 filings next month, I would expect those that were cutting stakes at the end of Q2, were adding it all back in early Q3.  And with the run-up in Apple shares since, up 22% from the June lows, I predict it will be the most bought stock of the third quarter.  If that’s true, I predict the media and Wall Street will be talking about how great Apple is again (i.e. analyst upgrades will follow).

In the past month, there’s been a solid take up on the new iPhone 7 for Apple. Importantly, with the iPhone 7 launch, all four major carriers have returned to the model of offering free new iPhones for long term contracts. That’s a huge positive on the stock as a product-cycle driven company. Add to that, there’s no other stock that, if not owned and owned enough, can get a professional money manager fired than Apple.  That creates a “fear of missing out” trade in the institutional investor community — pushing them off of the sidelines and back into Apple.

But perhaps the most important event for Apple has been the very public implosion of their biggest competitor Samsung.  Samsung has been forced to recall their competitive smartphone the Galaxy Note 7 because it’s been bursting into flames.  It’s projected to cost the company over $5 billion. Most importantly, it’s positioning Apple, right in the sweetspot of their new product (latest phone) rollout, to take more market share.

If we do indeed find next month that the biggest and smartest investors in the world spent Q3 loading up on Apple, it should give a stamp of approval that sentiment has turned for the stock.  Apple remains one of the most undervalued stocks in the S&P 500, with the most powerful fundamentals: it’s cheap at 13x trailing and forward earnings, has an incredible balance sheet with $231 billion in cash, and a high analyst price target of $185 a share.

As I noted last week, the company reported a second consecutive quarter of year-over-year earnings decline in July. But it crushed estimates. The stock took off from $96 and trades today at $117. They report on the most recent quarter on October 25.  The consensus earnings estimate is $1.64–which would be a third consecutive year-over-year decline. The recent revisions to that estimate have been down (not surprisingly), which sets up for a beat.  The last time Apple reported two consecutive quarters of year-over-year declines was mid-2013. The stock bottomed in that period.

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