Positive Surprises In Productivity And Wage Growth, A Big Deal

May 3, 5:00 pm EST

If you are a regular reader of my daily notes, you’ll know we’ve been discussing the setup for positive surprises all year.

As we’re near the end of Q1 earnings season, clearly we’re getting it. With 78% of the companies in the S&P 500 now reported on Q1 earnings, 76% have beat earnings estimates.

And we’re getting positive surprises in the economic data.  We had a huge positive surprise for Q1 GDP this week.  And today we had a blow out jobs report.

There were 263k jobs added in April.  The market was expecting just 185k.  That gives us a 12-month average of 218k, well above pre-financial crisis average monthly job growth!  The unemployment number was 3.6% — the lowest since 1969.

Remember, we’ve been told all year long that we were headed for both earnings and economic recession.  It’s not happening.

Moreover, the two missing pieces of the economic recovery puzzle, have been productivity and wage growth.  And these pieces are emerging. Wage growth has been on the move for the past 18 months, now sustaining above 3%.   And we had a huge positive surprise in productivity this week.

With the above in mind, given the contrast of media narrative and reality, how are people getting it so wrong?   I suspect we are seeing plenty of people make the mistake of letting politics cloud their judgement on the economy and the outlook for stocks.

Can Stocks Force The Hand Of The Fed … Again

May 2, 5:00 pm EST

We talked about the technical reversal signal in stocks that developed yesterday, following the Fed press conference.

Stocks continued lower today.  We’ve now had a quick 2% decline from the top.

And now we have this technical breakdown in oil as well (the break of the yellow trendline from the Dec lows). 

 

In the post-financial crisis world we live in, oil prices going down is generally representing a gloomier outlook on global growth and global demand.  Oil prices going up is good news — representing a hotter demand/hotter growth outlook.  And as you can see below, oil prices and stock prices have tended to move together. 

The recovery in oil prices has been almost in lock-step with the recovery in stocks (aggressively bouncing).  Crude is up 57% in four months.

Now, yesterday I asked the question:  Can stocks force the hand of the Fed, again (i.e. can lower stocks force a rate cut from the Fed)?

If oil prices were to fall hard from here, then maybe.  Why?  The Fed is afraid of deflationary pressures.  And while they like to talk about their assessment of inflation, excluding the effects of volatile oil prices, they have a record of acting on monetary policy when oil prices are falling quickly — especially in this post-crisis environment where deflation has been a persistent threat throughout.  They acted in 2016, and they’ve acted in early 2019 — in both cases taking projected interest rate hikes off of the table.

But the case for another crash in oil prices isn’t there.  We continue to have supply cuts outside of the U.S. (OPEC and non-OPEC countries).  Trump has recently stepped up sanctions against Iran, with the goal of taking Iranian oil exports to zero.  That takes supply out of the market.  And the political crisis in Venezuela has created supply disruptions for the oil market.

The shale industry is expected to plug the supply gap.  As it stands, the shale industry may or may not be able to.  But keep in mind, oil demand has been estimated on what is (and has been) low expectations for the global economy.  If we’ve seen a bottom in China, it would set up for positive surprises in the global economy. And that means the supply necessary to meet global oil demand, would be underestimated.  With that, higher (if not much higher) oil prices  from here remain the higher probability scenario.

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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Stocks Flashing A Technical Reversal Warning

May 1, 5:00 pm EST

As we discussed yesterday, the interest rate market has been signaling that the Fed made a mistake in December, when it hiked rates one last time, into a stock market that was in a steep decline.

In today’s post-Fed meeting press conference with the Fed Chairman, markets were expecting signals from Jay Powell that they might be looking to take that hike back, if the current subdued inflation levels persisted.  But Powell was reluctant to give much of a leaning toward a cut.  In fact, he said the risks that precipitated their “pause” on the rate path (China and European growth, Brexit risks, and trade negoations), have been largely improving.  He’s right.  He said the economy was solid.  He’s right.

Still, stocks came off sharply into the close.

After today, you have to ask the question:  Can stocks force the hand of the Fed, again?  Remember, stocks fell 8% in just four trading days after the Fed’s December hike – penalizing a tone deaf Fed.  In a market that was already down 9% on the month, the slide was exacerbated by the further Fed tightening. 

That stock fallout soon led to a response from the U.S. Treasury, as Mnuchin called out to major banks and the President’s Working Group on Financial Markets (which includes the Fed) to “assure normal market operations.”  That put a bottom in stocks.  And within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed’s rate path — signaling a pause.  The Fed’s pivot has fueled a V-shaped recovery in stocks.

So, we’ve just come off of a four-month run in stocks that gave us a full recovery of the late 2018 losses — and a new record high in the S&P 500.  That was the best four month gain since 2010.  Now we enter May with this chart …

 
As you can see, with the decline this afternoon, the S&P 500 put in a key reversal signal — a bearish outside day.  That’s tough to ignore, given that we’ve had a 16% gain in stocks to open the first four months of the year. This signal may be enough to stop the momentum, for now, as we wait for the word on a China deal — which is now said to ‘possibly’ come by next Friday.

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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A Rational View Of S&P 3,500+

April 29, 5:00 pm EST

We ended last week with a positive surprise for Q1 GDP.  Today, we had more soft inflation data.

The Fed’s favored inflation gauge, core PCE, continues to fall away from it’s target of 2%.

Here’s a look at the chart …

 

With a Fed meeting this week, they remain in the sweet spot.  They have trend economic growth, subdued inflation and a 10-year yield at 2.5%.  They can sit and watch. They could cut!   That’s highly unlikely, but less unlikely by the summer, if current conditions persist.

The market is pricing in about a 60% chance that we’ll see a rate cut by year-end.  It doesn’t sound so crazy, if you consider that it would underpin/if not ensure the continuation of the economic expansion — perhaps even fueling an economic boom period.

Remember, we’ve talked about the 1994-1995 parallels. In 1994, an overly aggressive Fed raised rates into a recovering, low inflation economy.  By 1995, they were cutting.  That led to a 36% rise in stocks in 1995.  And it led to 4% growth in the economy through late 2000 — 18 consecutive quarters of 4%+ growth.  Stocks tripled over the five-year period.

This, as the S&P 500 is already sitting on new record highs?  As I said earlier this year, with yields back (well) under 3%, we should see multiples on stocks expand back toward 20x in this environment.

The forward 12-month P/E on the S&P 500 is currently 16.8.  If we multiply Wall Street’s earnings estimate on the S&P 500 ($175) times a P/E of 20, we get 3,500 in the S&P 500. That’s 19% higher than current levels.

But keep in mind, the earnings estimate bar has been set low.  And already 77% of companies are beating estimates on Q1 earnings.  I suspect, we’ll see higher earnings over the next twelve months than Wall Street has estimated, AND a higher multiple paid on those earnings (i.e. an outlook for an S&P 500 > 3,500).

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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Bar Has Been Set Low To Manufacture Positive Surprises … And They Are Rolling In

April 26, 5:00 pm EST

The first reading on first quarter U.S. GDP came in this morning at 3.2%— much better than expected.  This is a huge positive surprise, for what many expected to be a terrible quarter.

Just a month ago, the consensus view was something closer to 1%.  Goldman was looking for 0.7% going into the end of the quarter.

With that, we’ve been talking about this set-up for positive surprises all year.

Remember, the economy added on average 173,000 jobs a month in Q1.  Both manufacturing and services PMIs expanded in the quarter, and stocks fully recovered the losses from December.  Add to that, just days into the first quarter, the Fed told us they were done raising rates.  Whatever headwinds the Fed was stirring up, quickly became tailwinds.
Yet we’ve been told an economic recession was coming and an earnings recession upon us.  The above is a recipe for growth, not contraction.

Still, as we’ve discussed, never underestimate the appetite of Wall Street and corporate America to dial down expectations when given the opportunity.  That sets the table for positive surprises.  And positive surprises are fuel for stocks.   Stocks are fuel for confidence.  Confidence is fuel for the economy.

Last week we looked at the early signals on Q1 economic activity.  The positive surprises started with what looks like the bottom in Chinese industrial output and retail sales (two key indicators of economic health). This is important because the global slowdown fears have been centered around the weak Chinese economy.

Then both UK retail sales and the U.S. retail sales came in better.  And yesterday, we had a hot durable goods orders number in the U.S for March.

So, despite the negative picture that has been painted, the trajectory of U.S. economic growth seems to be well intact.

This is just the first reading on the Q1 number, but it gives us an average annualized growth rate of three percent even.  The average annualized growth coming out of the Great Recession (pre-Trumponomics) was just 2.2%.

And keep in mind, the next big pillar of Trumponomics is a trillion-dollar-plus infrastructure spend (with bipartisan support).

Just as expectations have been dialed down, this is where we could see a real economic boom kick in, especially if we get a deal on China (clearing that drag on sentiment).  As we’ve discussed, we are well overdue for an economic boom period.  We’ve yet to have the bounce-back in growth that is typical of a post-recession, if not post-depression environment.  You can see in the table below, the six years that followed the Great Depression, relative to the growth coming out of the Great Recession …

 

Have a great weekend!

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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How Microsoft Has Transformed Into A Trillion-Dollar Cloud Company

April 25, 5:00 pm EST

Today, Microsoft was the third company to hit the trillion-dollar market cap threshold.

Apple was the first, back in August.  Amazon followed in September.

Let’s talk about how Microsoft has transformed itself from a path of obsolescence to quadrupling in value in six years.

Back in April of 2013, an activist investor named Jeff Ubben took a $2 billion stake in MSFT.  That same month Business Insider wrote a story titled:  “Microsoft Could Be Obsolete By 2017.”  The stock had gone nowhere for more than a decade. 

Ubben won a board seat and he pushed for stock buybacks and a strategy reset.  He pushed out the CEO, Steve Balmer.  He replaced him with Satya Nadella, who was running the Miscrosoft cloud business.  His job was to turn Miscrosoft into a cloud computing company.  He has done it.

Microsoft is now the number two cloud computing platform globally, behind Amazon. For perspective, cloud computing is a $200 billion market growing at close to 20% a year.  And Microsoft’s cloud business, Azure,grew revenue by 73% last quarter.

Bottom line:  Amazon and Microsoft have a duopoly in the high growth digital storage business (i.e. cloud computing). 

Amazon’s retail business gets all of the attention, but it’s cloud business has been subsidizing it’s retail business for a long time.  The hyper-growth in cloud and the market dominance held by Amazon and Microsoft are why their market value has gone to a trillion-dollars, and why their charts look so similar …

 

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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Four Beaten Down, Activist-Owned Energy Stocks

April 23, 5:00 pm EST

Yesterday we talked about the big recovery in crude oil prices.  That continues today.

However, the energy sector remains the worst performing sector over one-year and five-years.  And it’s the only sector still in the red over the past five-years — down 27%.

Let’s take a look again at the how the constituents of the S&P’s energy ETF have performance over the past five years.  And then we’ll take a look at the stocks in this group that have been vetted and are now owned by the best billionaire activist investors…

 

Devon Energy (DVN)

Billionaire Paul Singer of Elliott Management is one of the best activist investors in the world.  He has one of the longest tenures in the business, dating back to the 70s.  And he’s had one of the hottest hands on Wall Street over the past few years.

Singer’s fund, Elliott Management, owns 4% of Devon.  It’s the eighth biggest long position in the portfolio.  Devon is down 52% over the past five years.

Hess Corp. (HES)

Singer and his team are the fourth largest shareholder in Hess.  They have a 7% stake in Hess.  And it’s a big position in the Elliott portfolio — a top five position representing over 7% of the portfolio.   Hess is down 25% over the past five years.

Pioneer Natural Resources (PXD)

Billionaire Seth Klarman has been called the next Warren Buffett.  His fund, Baupost Group, is the sixth largest shareholder of Pioneer.  Klarman has 5% of his portfolio invested in this stock.  Pioneer is down 14% over the past five years.

Diamondback Energy (FANG)

Billionaire Carl Icahn owns 6% of DiamondBack.  It’s a half a billion dollar stake in his $20 billion portfolio (all his money).  Diamondback is up 46% — and already up 22% from when Icahn entered in the fourth quarter.

These are the best value investors in the world, betting on a comeback in this sector and in these stocks.  No surprise, aside from Icahn’s stake, they like to hunt in some of the most beaten down names.

 If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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More Positive Surprises Hitting In The Economic Data

April 18, 5:00 pm EST

Yesterday we talked about the positive surprises in the Chinese data.  This is important because the global slowdown fears have been centered around the weak Chinese economy.

So, we now have what looks like a bounce off of the bottom in Chinese industrial output and Chinese retail sales (two key indicators of economic health).

Today we had more positive surprises for the global economic outlook picture.  The UK retail sales number came in better than expected.  And the U.S. retail sales came in better.

You can see in the chart below, this March U.S. retail sales is a bounce from the post-crisis lows of December.  

With this, the Q1 GDP estimate from the Atlanta Fed has bumped up to 2.8%.

We’ve talked about the set up for both earnings and the economic data to surprise to the upside for Q1, given the dialed down expectations following the December decline in stocks.

You can see how this is playing out in the chart below (see where the gold line is diverging from the “consensus estimate” blue line) …

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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Big Four Banks Had Double-Digit Earnings Growth in Q1

April 16, 5:00 pm EST

With Bank of America earnings this morning, we’ve now heard from the big four banks (JPM, BAC, WFC and C).

The expectations were set for just 2% earnings yoy earnings growth from the group.  We’ve had positive earnings surprises in each, for an average earnings growth of 11%.  That’s double-digit earnings growth for the biggest banks in the country, in an earnings season that has been forewarned as an “earnings recession.”

Remember, never underestimate the appetite for Wall Street and corporate America to dial down expectations when given the opportunity.  They’ve done it, and we’re seeing positive surprises.

Now, we’ve talked about the slate IPOs coming from the Silicon Valley hype machine.  As I’ve said, Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle.

As we know, Lyft was valued as high as $25 billion when it started trading publicly.  Some paid a $25 billion valuation for the privilege of owning a company that did a little over $2 billion in revenue, while losing almost a billion dollars — with slowing revenue growth and widening losses. It has now shed about $9 billion in market cap in thirteen days.

Uber is on deck.  Uber filed its S-1 this week.  In this public disclosure document, we find a company that has privately raised $24 billion, valued at $68 billion in the private market, that has been thought to float shares at as much as $120 billion valuation.  This is a company that (like Lyft) also with slowing revenue growth and widening losses.  Losses?  The S-1 shows a swing from $ 4 billion loss in 2017, to a near $1 billion profit in 2018.  But if we back out the a couple of unusual items (like the gain of a divestiture of some foreign businesses and an unrealized gain in an “investment”) the company lost $4.2 billion on $11 billion in revenue.

As we discussed last month, the hyper-growth valuations on these perceived hyper-growth companies, are unlikely to get hyper-growth at this stage.  That will be a problem for those taking the bait on the IPO.

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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Bank Stocks: Among The Best Value In The Stock Market

April 15, 5:00 pm EST

As we discussed last week, the table has been set (again) for positive earnings surprises.  And we’ll see more this week, as Q1 earnings kick into gear.

The tone has already been set, with the big surprises reported on Friday from two of the four biggest banks.  The market was looking for earnings contraction from JP Morgan and Wells Fargo. Instead, we had 7% yoy growth from JPM, and 12% yoy growth from Wells.

Today we heard from Citi, the third largest bank in the country.  Citi beat expectations with 11% earnings growth in the first quarter, compared to the same period a year ago.  And tomorrow we’ll hear from Bank of America, the second largest bank in the country.

So far, Jeff Ubben has been spot on about the banks.  Ubben is the founder of ValueAct Partners, one of the best activist investors in the business over the past twenty years.  Remember, back in January, as we were stepping through positive surprises in bank earnings from the fourth quarter, we talked about Ubben’s thoughts on banks.  He has said that the U.S. banking system has the lowest risk profile “than any time in our investing lifetime.”

In our Billionaire’s Portfolio, we followed him into Citigroup, the highest conviction position in his $16 billion portfolio.  Citi is the cheapest of the four biggest U.S.-based global money center banks — still trading at a 30% discount to peak pre-crisis market value, despite being far better capitalized, better regulated and a more efficient business than it was in the pre-financial crisis days. With that, not coincidentally, as the banks have beaten expectations, Citi has been the best performing big bank year-to-date (up 29%).

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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