March 27, 4:00 pm EST

The sharp swings continue in stocks, with the bias toward the downside.  And as we’ve discussed over the past two weeks, it’s all led by the tech giants.  Remember, on Friday we looked at the most important chart in the stock market: the chart of Amazon (as a proxy on the tech giants).  Early this afternoon, Amazon was outpacing the S&P 500 to the downside by 4-to-1, and finally the broader market cracked to follow it.

This all continues to look like the market is beginning to price in a world where the tech giants, that have taken dangerously significant market share over the past decade, are on the path of tighter regulation and a leveling of the playing field, which will result in higher costs of doing business.  That will change their position of strength and open the door to a resurrection of the competition.

Remember, on the stock slide of this past Friday, the S&P 500 hit the 200-day moving average and bounced sharply.  It now looks like we’ll get another test of it, probably a break, and maybe take another peak at the February lows.

Here’s a look at the chart ….

You can see in the chart above the technical significance of these levels.  This represents the trend from the oil price induced lows of 2016.  And the slope of this trend incorporates the optimism from the Trump election and the outlook on pro-growth policies.

With that significance at play, a breach of this support, at least for a short time, would all play into the scenario that we’ll see more swings in stocks (pain for the bulls) until we get to earnings season, which kicks into gear on April 13.  And as we discussed, that should begin the data-driven catalyst for stocks (earnings and growth, fueled by fiscal stimulus).

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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 1, 2017, 4:00 pm EST

Stocks fell sharply this morning, but recovered nearly all the losses from the lows of the day.

Today we got a reminder of the impact that algorithmic trading can have on markets. When the headline hit today about Flynn, here’s what stocks did…

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.

Now, with the Flynn news, Wall Street and the financial media spend a lot of time trying to predict when the market will correct and what will cause it. But as the great billionaire investor, Howard Marks, has said: “It’s the surprises no one can anticipate that move markets. But most people can’t imagine them, and most of the time they don’t happen. That’s why they’re called surprises.”

Still, if you’re not a leveraged hedge fund, this tail-chasing game of trying to pick tops and reduce exposure at the perfect time shouldn’t apply.

More important is the observation that stocks remain cheap at current levels, when we consider valuations in historically low interest rate periods. And we continue to have very low interest rates. So the question is: Is it more likely that corporate earnings will get worse from here, or better from here?

There’s plenty of evidence to suggest the momentum and the fundamental backdrop supports “getting better” from here. And we add to that, the fuel of tax cuts, and earnings should continue to make stocks very attractive relative to a 2.3% ten-year yield.

November 29, 2017, 4:30 pm EST

The adoration for Bitcoin has been growing by the day, though no one understands how to value it.

CNBC went on “watch” the other day for Bitcoin $10,000. Today it traded above $11,000 and then fell as much as 21% from the highs.

Here’s a look at the chart.

Remember, gold went on a tear from sub-$700 to above $1,900 following the onset of global QE (led by the Fed). Gold ran up as high as 182%. That was pricing in 41% annualized inflation at one point (as a dollar for dollar hedge). Of course, inflation didn’t comply. Still, nine years after the Fed’s first round of QE and massive global responses, we’ve been able to muster just a little better than 1% annualized inflation. So gold is a speculative trade. It’s a fear trade. And it’s volatile.

If you bought gold at the top in 2011, the value of your “investment” was cut in half just four years later. That’s a lot of risk to take for the prospect of “hedging” against the loss of purchasing power in the paper money in your wallet.

Now, Bitcoin is becoming a pretty polarizing “asset class.” The gold bugs get very emotional if you argue against the value of owning gold. Those that own Bitcoin seem to have a similar reaction. But Bitcoin, like gold, is a tough one to value. You buy it because you hope someone is going to buy it from you at a higher price.

So is Bitcoin (cryptocurrencies) an investment? Sophisticated investors that are involved, likely see it as similar investment to a startup. It has traction. It has a lot of risks. It could go to zero. Or it could pay them multiples of what they pay for it. But they thrive on diversification. When they have a large portfolio of these types of bets, when a few payoff, they put up nice returns. Bitcoin may be one of the few, or it may not.

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.

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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