The first revision of Q1 GDP came in this morning, in-line with expectations (at 3.1%). As yields swoon, and stocks have given back some gains for the month, this growth number today is good reminder that the state of the U.S. economy is good.
Remember, back in April, the first look at Q1 GDP came in as a huge positive surprise (at 3.2%). Many were expecting it to be a terrible quarter. Goldman Sachs thought the quarter would produce just 0.7% growth. They were wrong, and they weren’t alone. At the end of the first quarter, the Atlanta Fed’s GDP model was estimating that the economy grew at only 0.3% in Q1.
With that in mind, don’t get too caught up in the souring growth story. At the moment, the consensus view on Wall Street is for Q2 growth to come in at 1.8%. And the Atlanta Fed model is looking for 1.3%. Both are well lower than the White House envisioned 3%+ growth trend.
But, for perspective, there are some clear factors working in favor of the higher (not lower) growth case.
The job market is strong. We have monthly new jobs running at a 12-month average of 218k. That’s well above pre-financial crisis average monthly job growth. The unemployment number at 3.6% is the lowest since 1969.
Most importantly: Wage growth has been on the move for the past 18 months, now sustaining above 3%. And Q1 productivity came in at 3.6%, the hottest productivity reading in almost a decade. The economy can grow by expanding the size of the workforce or the productivity of the workforce. We’re finally getting solid productivity growth.
The minutes were released from the March Fed meeting today. But we already know very clearly where they stand.
Remember, they spent the better part of the first three months of the year marching out Fed officials (one after another) to give us a clear message that they would do nothing to kill the economic recovery.
Just in case there was any question, Jay Powell stepped in just ahead of the March Fed meeting with an exclusive 60 Minutes interview, where he spoke directly to the public, to reassure everyone that the economy was in good shape, and that the Fed was there to promote stability (i.e. rates on hold and even prepared to act if the environment were to turn for the worse).
As expected, the ECB echoed that position today, following their meeting on monetary policy. As we’ve discussed, the major global central banks have again coordinated both messaging and policy to ward off an erosion of confidence in the global economy. No surprises. And I’m sure managing the U.S. 10-year yield has been part of that coordinated response. In addition to the speculative flows that have pushed yields lower, I suspect there has been a healthy dose of central bank buying (Bank of Japan and others through sovereign wealth funds).
With that, even though stocks have bounced back, commodities are on the move, and we’ve had improvements in global economic data, we still have European 10-year yields (Germany) at zero and U.S. yields at 2.50%. That is promoting the global central bank stability plan.
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The slowdown in China spooked global markets late last year, and have since spooked global central banks.
Given the current recession-like growth in China (6%ish), and the prospects that it could keep sliding, especially if a U.S./China trade deal doesn’t materialize, the major central banks in the world have positioned for the worst case scenario.
In the process, we may have discovered the real drag on the Chinese economy.
Here’s the latest look at the Shanghai Composite, up 33% since January 4th (which not so coincidentally is the day the Fed walked back on its rate hiking path).
Maybe the easiest message to glean from this chart, and that turning point, is that the biggest culprit in the China slowdown has been the Fed, not tariffs.
Here’s how the Dallas Fed put it in a report from October 3rd (which happens to be the high in stocks, the day stocks turned):
“Emerging economies have suffered a general decline in forecast GDP growth, and inflation rose in a handful of countries. The tightening of monetary policy in advanced economies, both through rate hikes and other policy actions such as forward guidance, results in capital outflows from emerging economies with low reserves relative to their foreign debt.”
Higher U.S. rates has meant a stronger dollar. With the economy moving north, the dollar moving north and rates moving north, global capital flows to the U.S. — and away from riskier emerging markets. It’s not that the U.S. economy can’t handle a 3.25% ten-year yield or a 5% mortgage rate in the domestic economic environment. It’s the EM world that can’t handle it (at the moment).
China has responded to the growth slowdown with an assault of monetary and fiscal stimulus. But the most powerful stimulus appears to have been the move by the Fed to stand-down.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, through the end of the year.
Last week we talked about the buildup to the Lyft IPO.
Lyft, “lifted” to a valuation of close to $25 billion when shares started trading on Friday. Today, it’s down as much as 20% from the Friday highs.
The last private investment valued the company at $15.1 billion. That gave them a paper gain of over 60% on Friday, for just a 9-month holding period. Good for them.
For everyone else, remember, you’re looking at a company that did a little over $2 billion in revenue, while losing almost a billion dollars. Most importantly, over the three years of data that Lyft shared in its S-1 filing, revenue growth has been slowing and losses have been widening.
So, you’re buying a company that hopes to be profitable in seven years, to justify the valuation today. This is a company that has only existed seven years. And to think that we can predict what the next seven will look like, in the ever changing technology and political/regulatory environment (much less economic environment), is a stretch.
For some perspective on these valuations, below is what it looks like if we compare the three largest/dominant car rental car companies (Enterprise, Hertz and Avis) to the two largest/dominant ride sharing companies.
With Uber now expected to be valued at around $120 billion when it goes public (possibly this month), the ride sharing industry is valued at about 14 times the car rental industry.
The rental car industry has been priced as if ride-sharing industry has destroyed it. Ironically, if the ride sharing movement is to succeed in the long-run, and is to fully reach the potential that is being priced into the valuations, then they will need these car rental companies to supply and manage the fleet of vehicles required for Uber and Lyft to scale.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, through the end of the year.
We’ve talked about the prospects of a repeat of 1995, when the Fed flip-flopped — cutting rates, following an overly aggressive tightening cycle. Stocks soared.
With that in mind, in addition to the about-face the Fed has done over the past three months, verbally managing down expectations on rates, we’ve since heard from (effectively) the White House, calling for “an immediate 50 basis points cut.”
Trump has selected Stephen Moore as an nominee for the Fed. He publicly called for the 1/2 point cut this week. And today, Larry Kudlow, the White House Chief Economic Advisor, said the same.
The Fed wants ammunition if a U.S. slowdown occurs (as damage control). The White House wants a cut to “protect” the current growth — i.e. to pre-empt a slowdown (prevent the damage).
This comes following a weaker final Q4 GDP number, which dropped full year 2018 growth just below 3% (2.9%). And the reality is, Q1 won’t be a big number (thanks in part to the sentiment scars from the Q4 stock market decline). It looks like 1.5% at the moment. That would be the slowest growth since Q1 2016.
Are the calls for a cut from the White House coming because they don’t think a China deal will happen? Possibly. More likely, the Trump administration wants the spigot open, to fuel economic momentum into the 2020 election. Why not press the accelerator, given the continued tame inflation environment and softness in Europe and China?
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, through the end of the year.
We’ve talked about the glaring lag in the performance of blue chip stocks coming out of this recent stock market correction. This is creating a huge opportunity to buy the Dow, now.
With all of the complexities you can make of investing, this one is simple. The blue-chip Dow Jones Industrials Index is down on the year (as of this morning). The Nasdaq is up 13% on the year. Small caps (the Russell 2000) is up 11%.
And we’re in an economy that’s running at better than 3% growth, with low inflation, ultra-low rates, and corporate earnings growing at 20% year-over-year. With this formula, and yet a tame P/E multiple on stocks, we’ll probably see stocks up doubledigits before the year is over. Meanwhile, we are already in July, and the DJIA — the most important benchmark stock index for global markets – is starting from near zero.
You may be thinking the boring “industrials” average is out-dated, and flat for a reason. But as far as the makeup of the indices is concerned: The index curators will shuffle the constituents to ensure that the biggest, best performing companies are in it. Bad stocks get kicked out. Good stocks get added. And, to be sure, your retirement money will be methodically plowed into it (the benchmark indices) every month by Wall Street investment professionals.
Bottom line: The DJIA is presenting a gift here to invest, at a discount, in an economy that’s heating up. And you get this chart, which we’ve been watching in recent weeks. This big trend line has held, and so has the 200-day moving average.
How do you buy it? Your financial advisor will put you into mutual funds with big sales loads and fees in attempt to track the Dow. But you can buy an ETF that tracks the Dow for as little as 17 basis points (example: symbol DIA, the SPDR DJIA ETF). This Dow looks like low hanging fruit.
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
The move in the 10-year yield was the story of the day today. Yields broke back above 3% mark, and moved to a new seven-year high.
That fueled a rally in the dollar. And it put pressure on stocks, for the day.
We’re starting to see more economic data roll in, which should continue building the story of a hotter global economy. And it’s often said that the bond market is smarter than the stock market. There’s probably a good signal to be taken from the bond market that has pushed the 10-year yield back to 3% and beyond (today). It’s a story of better growth and growing price pressures, which finally represents confidence and demand in the economy.
From a data standpoint, we’re already seeing early indications that fiscal stimulus may be catapulting the economy out of the rut of the sub-2% growth and deflationary pressures that we dealt with for the decade following the financial crisis. We’ve had a huge Q1 earnings season. We’ve had a positive surprise in the Q1 growth number. The euro zone economy is growing at 2.5% year-over-year, holding toward the highest levels since the financial crisis. And we’ll get Q1 GDP from Japan tonight.
Another key pillar of Trumponomics has been deregulation. On that note, there’s been plenty of carnage across industries since the financial crisis, but no area has been crushed more by regulation than Wall Street. And under the Trump administration, those regulations are getting slashed.
Among the most damaging for big money center banks has been the banning of proprietary trading. That’s a huge driver of bank profitability that has been gone now for the past eight years. But it looks like it’s coming back. Bloomberg reported this morning that the rewrite of the Volcker Rule would drop the language that has kept the banks from short term trading.
That should create better liquidity in markets (less violent swings). And it should drive better profitability in banks. Will it lead to another financial crisis? For my take on that, here’s a link to my piece from last year: The Real Cause Of The Financial Crisis.
A few weeks ago, the markets were skittish about elevated oil prices and 3% yields. Now we have oil above $70 and yields comfortably hanging around 3%, yet stocks appear to be in a solid post-correction recovery, now up 8% from the February lows.
Meanwhile the VIX has fallen back to pre-correction levels.
What about gold, another proxy on risk? Gold has been quiet, despite the correction in stocks. But that has a lot to do with bitcoin. Bitcoin has become the gold substitute.
Let’s take a look at the behavior of bitcoin, and the bitcoin/gold relationship.
You can see here, when the bitcoin frenzy was running hot late last year, gold was moving lower, as bitcoin was climbing to record highs.
The bitcoin mania peaked almost to the day they launched bitcoin futures, which allowed hedge funds to begin shorting it. And since, we’ve had this chart …
Bottom line: If we look at the rise in bitcoin as the proxy on risk-aversion (as a gold substitute), then this downtrend of the past five months supports the VIX chart and the stock market recovery. That said, given the mass speculation in bitcoin, if we were to get a sharp collapse, it would likely trigger risk aversion in global markets.
Over the past two Friday’s we’ve stepped events and conditions that have built the case that that “all-clear” signal has been given for stocks.
We are 91% through S&P 500 earnings for Q1 and the positive surprises have continued to roll in, on both earnings growth and revenue growth. Q1 GDP growth had a positive surprise, to reflect an economy that is running very close to 3% over the past three quarters. The important FAANG stocks all beat on earnings and beat on revenues for Q1. And the big jobs report last Friday did NOT come with a hot wage growth number, which keeps the inflation outlook tame.
Now we have very compelling technical confirmation that a resumption of the big secular bull trend for stocks is resuming. This correction has given everyone a long time to get on board. But it looks like the train is leaving the station.
Here’s a look at the S&P 500 ….
This bull trend in stocks from the oil-price crash induced lows of 2016 remains intact. The trendline tested and held three times in this recent correction, as did the 200-day moving average. And yesterday we had a big break of this trendline that represents this correction of the past three months. This has been textbook technical confirmation of a price correction within a strong bull trend.
Here’s the Dow chart we looked at on Wednesday …
And here’s the latest as we end the week, as the momentum from that trend break continues …
U.S. stocks are being valued right at the long-term P/E, at about 16 times forward earnings. Stocks in the UK, Germany and Japan are all trading closer to 13 times forward earnings. That’s cheap relative to long-term averages, and especially cheap (including U.S. stocks), in ultra-low interest rate environments. For perspective, Japanese stocks are recovering back toward the highest levels in more than 25 years, yet the forward P/E on Japanese stocks is closer to the lowest levels over the period. Stocks are cheap, and this correction has been a gift to get all of the onlookers on board.
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.]
