February 5, 7:00 pm EST

We talked last week about the correction underway in stocks. As I said, since 1946, the S&P 500 has had a 10% decline about once a year. And we haven’t had one in a while. Since the November 2016 election, the worst decline in stocks from peak to trough had been only 3.4%.

So we were due. And we’ve gotten it.

Today we’ve seen it accelerate. With the steep slide in stocks today, for a brief moment, the Dow futures were down 11% from the peak of just 7 days ago.

Now, let’s add a little perspective on this …

First, as I’ve said, when you are a hedge fund or trader and you’re leveraged 10, 20, 50, 100 times, then avoiding corrections or trend changes is critical to your survival. Getting it wrong, can mean your portfolio blows up and maybe goes to zero. That’s the mentality the media is speaking to, and frankly much of Wall Street is speaking to, when addressing any market decline.

The bottom line is that 99.9% of investors aren’t leveraged and should have no concern about U.S. stock market declines, other than saying to themselves: “What a gift! Do I have cash I can put to work at these cheaper prices? And, where should I put that cash to work?”  As the great Warren Buffett has said, “be greedy when others are fearful.”

So, for the average investor, dips are an opportunity to buy stocks at a discount. Don’t let the noise distract you.

Remember, we’ve talked about the transition that is underway, with a global economy that now has the potential to officially exit the economic slog of the past decade, driven by pro-growth policies in the U.S. And those economic tailwinds have introduced the likelihood that the world will finally be able to exit central bank life support (i.e. QE). That’s all very positive.

But it has also been the trigger of the correction in stocks–this transition. QE has promoted higher stock prices. Now we get a correction, and a new catalyst (earnings and the growth picture) to justify the next leg of the global economic recovery (and stock bull market).

With that in mind, the fundamentals for stocks are very strong. As stocks tick down, the better valuation on stocks will only be amplified, when we get hot first quarter earnings hitting in a few months (thanks to the big corporate tax cut). For the S&P 500 P/E: We have the “P” going down, and the “E” going up.

How long could this correction last?

Remember when we were discussing the probability of a correction back in November, we looked at this chart …

In September 2014, with no significant one event or catalyst prompting it, the S&P 500 went on a slide. Stocks closed on a record high on Friday, September 19 (2014). On Monday, stocks gapped lower and over the next 18 days fell 10%. But over the following 12 days it all came back–a sharp V-shaped recovery. It was a textbook technical correction–right at 10%, right into the prevailing trend. You can see it in the chart above: the v-shaped move in stocks, and the bounce right off of the big trendline.

What’s happened in the markets the last few days reminds me of that correction. The moves can be fast, and the recovery can be fast, in this (post-crisis) environment. Big institutions have been trading stocks through computer programs for a long time, but the speed at which these algorithms can access markets and information have changed dramatically over the past decade–so has the massive amount of assets deployed through high frequency trading programs. They can remove liquidity very quickly. Combine that with the reduced liquidity in markets that has resulted from the global financial crisis (i.e. the shrinkage of the marketing making community and of hedge fund speculators, and the banning of bank prop trading) and you get markets that can go down very fast. And you get markets that can go up very fast too.

The proliferation of ETFs exacerbates this dynamic. ETFs give average investors access to immediate execution, which turns investors into reactive traders. Selling begets selling. And buying begets buying.

With the above dynamic, we’ve seen a fair share of quick declines and quick recoveries in the post-financial crisis era.

How do things look now?

In the chart above, this big trend line represents the move off of the oil crash lows of 2016. This 2560 area would give us a 10.8% correction in the S&P 500. I wouldn’t be surprised if we got there over a few days, and a recovery began. And I expect to stocks to end the year up double digits (still).

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. You can join me here and get positioned for a big 2018.

February 9, 2017, 3:00pm EST                                                                                  Invest Alongside Billionaires For $297/Qtr

Stocks are hitting new record highs today.  That includes the Dow, the S&P 500 and the Nasdaq.

We’ve now seen about 60% of the earnings for Q4, and earnings are very good. As we’ve discussed, earnings guidance and consensus views are made to be beaten.  Factset says that, on average, about 67% of S&P 500 companies beat the consensus view on earnings.  For Q4, that number, as of last Friday, was 65%.

More importantly, the earnings growth rate for Q4 is +4.6% thus far.  That’s better than the 3.1% that was predicted, coming into the earnings season.  And that’s the first two consecutive quarters of year-over-year positive EPS growth in a couple of years.

So we have positive earnings surprises driving stocks higher.  And finally, revenue growth is coming.  After six consecutive quarters of revenue contraction, earnings for U.S. companies had a second consecutive quarter of growth.  And the quarters ahead should be much better.

Clearly, in the weak growth environment, the focus has clearly been cutting costs, refinancing debt, selling non-core assets, and buying back shares.  That’s all a recipe for juicing EPS, even though revenue growth is sluggish, if existent.

So for all of the people that are constantly hand wringing about the levels of the stock market, ask them this:  What happens when you take these companies that are growing earnings by optimizing margins in a 1% growth world, and you give them 3%-4% economic growth? Earnings go up. What happens when you take a profitable company and cut the tax burden by 15 to 20 percentage points?  Earnings go up.

When earnings go up, price to earnings goes down.  And valuations can become very, very cheap.

We have companies that have been forced to streamline to survive. And now we’re in the early days of a regime shift, where tax cuts will work for them, deregulation will work for them, and a big infrastructure spend will pop demand, to actually fuel some revenue growth.

Below is a nice chart from Yardeni.  You can see the flattish revenue growth, but earnings divergence over the past five years.

On the right hand axis, next year’s earnings on the S&P 500 are expected around $133.  That doesn’t take into account the impact of a corporate tax cut, which Standard & Poors research has suggested could bump that number up to the mid $150s ($1.31 added for every 1% cut in the corporate tax rate). That would dramatically widen the revenue, earnings divergence — or make the closing of this gap that much more aggressive.

For help building a high potential portfolio for 2017, 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 more than doubled the return of the S&P 500 in 2016.  You can join me here and get positioned for a big 2017.

January 25, 2017, 1:30pm EST                                                                                        Invest Alongside Billionaires For $297/Qtr

The Dow broke 20,000 today.  I want to talk about why it’s a big deal.

As we discussed when we entered the new year, “Trump’s Plan Is A Recipe For Restoring Animal Spirits.”  Watch out, it’s coming.

Remember, this (animal spirits) is the element that economists and analysts can’t predict, and can’t quantify. It’s not in the forecasts. This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mistrust of the system. All along the way, throughout the recovery  period, and throughout a tripling of the stock market off of the bottom, people have continually been waiting for another shoe to drop. The breaking of this emotional mindset has been underway since the night of the election. And that gives way to a return of animal spirits.

Higher stock prices tend to beget higher stock prices. Trust me, individual investors that haven’t been believers will be calling their financial advisors and logging in to their online brokerage accounts over the coming days.  Institutional investors that haven’t been believers, that have been underweight stocks, will be beefing up exposure if they want to compete with their peers (and keep their jobs).

And not only do higher stock prices lead to higher stock prices, but higher stock prices tend to make people feel more confident about the economy, which begets a better economy.

Add to this, the psychological value of Dow 20,000 could finally be a turning point in the divergence of sentiment toward the Trump Presidency.  It may serve as a validation marker for those that have been on the fence.  And for those in opposition, as I’ve said before, growth solves a lot of problems!  When the college grad that’s been relegated to a 10-year career as a barista begins to see signs of opportunity for a better career and a better future, in a stronger economy, the sands of Trump sentiment can shift quickly.

Cleary, Trump entered with a game plan that can pop economic growth.  And he’s going 100 miles an hour at executing on that plan. For markets, what he’s doing is creating a sense of certainty for investors. They know what he’s promised, and now they know that he appears to intend on delivering on those promises.  And the coordination of growth policies, along with ultra-easy monetary policy (even with tightening in view) serves as risk mitigators for markets. It should limit downside risk, which is what investors care most about.  How?

Remember, even at Dow 20,000, stocks are still extremely cheap.

Here’s a review on why …

Reason #1: To return to the long-term trajectory of 8% annualized returns for the S&P 500, the broad stock market would still need to recovery another 48% by the middle of this year. We’re still making up for the lost growth of the past decade. And there’s a lot of ground to make up.

Reason #2: In low-rate environments, the valuation on the broad market tends to run north of 20 times earnings. Adjusting for that multiple, we can see a reasonable path to a 16% return for the year.  That’s an S&P 500 earnings estimate of $133.64 times a P/E of 20 equals 2,672 on the S&P 500.

Reason #3: The proposed corporate tax rate cut from 35% to 15% is estimated to drive S&P 500 earnings UP from an estimated $132 per share for next year, to as high as $157. Apply $157 to a 20x P/E and you get 3,140 in the S&P 500. That’s 37% higher.

With this in mind, we are likely entering an incredible era for investing, which will be an opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade.  For help building a high potential portfolio for 2017, 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 more than doubled the return of the S&P 500 in 2016.  You can join me here and get positioned for a big 2017.

November 18, 2016, 4:30pm EST

In my November 2 note (here), I talked about three big changes this year that have been underemphasized by Wall Street and the financial media, but have changed the outlook for the global economy and global markets.

Among them was Japan’s latest policy move, which licensed them to do unlimited QE.

In September they announced that they would peg the Japanese 10 year government bond yield at ZERO. At that time, rates were deeply into negative territory. In that respect, it was actually a removal of monetary stimulus in the near term — the opposite of the what the market was hoping for, though few seemed to understand the concept.

I talked about it earlier this month as an opportunity for the BOJ to do unlimited QE, and in a way that would allow them to keep stimulating the economy even as growth and inflation started moving well in their direction.

With this in mind, the Trump effect has sent U.S. yields on a tear higher. That move has served to pull global interest rates higher too — and that includes Japanese rates.

You can see in this chart, the 10 year in Japan is now positive, as of this week.

With this, the BOJ came in this week and made it known that they were a buyer of Japanese government bonds, in an unlimited amount (i.e. they are willing to buy however much necessary to push yields back down to zero).

Though the market seems to be a little confused by this, certainly the media is.  This is a big deal. I talked about this in my daily note the day after the BOJ’s move in September.  And the Fed’s Bernanke even posted his opinion/interpretation of the move.  Still, not many woke up to it.

What’s happening now is the materialization of the major stimulative policy they launched in September. This has green lighted the short yen trade/long Japanese equity trade again.  It should drive another massive devaluation of the yen, and a huge runup in Japanese stocks (which I don’t think ends until it sees the all-time highs of ’89 — much, much higher).

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 is up 20% this year.  That’s almost 3 times the performance of the broader stock market. Join me here.

August 27, 2016, 12:00pm EST

The Fed’s Janet Yellen was the focal point for markets for the week. She had a scheduled speech at the annual Fed conference at Jackson Hole.

When her speech was finally made public Friday morning, the response in markets was uncertainty (the most used word for the past nine years).

Stocks went up, then down. Yields went down, then up.

So what do we make of it? Let’s start with the headlines that hit the wire Friday morning.

The world was wondering if Yellen would support the messaging from some of her fellow Fed members–that a September rate hike is on the table. Or would she continue the backstepping (dovish speak) the Fed has done for the past five months. The answer was ‘yes.’ She did both.

Yellen said the case for rate hikes has strengthened (yellow marker) because the data is nearing their goals (employment and inflation–the white marker). Ah, rate hike. But then she said the Fed expects inflation to hit the target 2% in the next few years (circled)! And then talked about the strategy for more QE. Huh? And then to top it off, she said they might move the goalposts. They might move the inflation target higher, and start targeting GDP. That means they would be happy to leave conditions ultra accommodative until those higher targets are met. Clearly dovish.

As I said Thursday, they want to raise rates to get the financial system closer to proper functioning, but they don’t want to cause a recession. The Fed wants to raise short-term rates, but promote a flatter yield curve (i.e. promote expectations that the economy will continue to be soft) to keep the market interest rates low, which keeps the housing market on the rails and the economic activity on the rails.

Remember, we talked about the piece Bernanke wrote a couple of weeks ago, where he suggested exactly this type of perception manipulation from the Fed, to balance the need to raise rates, without killing the economy.

That looks like the game plan.

Have a great weekend!

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