By Will Meade and Bryan Rich 

July 1, 2016, 11:30am EST

Yesterday we wrapped up the first half of 2016.  Today we want to step back and take a look at how markets fared in the face of a lot of threats, if not chaos.

Even after Brexit, an early year correction surrounding the oil price bust, and an indecisive Fed, U.S stocks are UP for the year!

The old adage that stocks climb a wall of worry during a bull market continues to hold true.

The S&P 500 ended the first half of 2016 up 2.7%, while the blue chip Dow Jones Industrials Average rose 2.9%. The tech-growth heavy Nasdaq was the worst performer ending the first half of 2016 down 3.3%.

This tells us a couple of things: first the world is not falling apart (contrary to what most people think).  In fact, U.S stocks are putting up nearly a 6% annualized return for the year (just shy of the S&P 500’s historical average — better than the long term average on an inflation adjusted basis).

Most interesting, value stocks are significantly outperforming growth stocks – for the first time in a long time.  The Russell 1000 value index is up 6.1% for the first half of 2016 vs a 1.3% loss for the Russell 1000 growth index. So value stocks are outperforming growth stocks by more than 7 percentage points this year or around 14% on an annualized basis.  Never have we seen more blue chip stocks trading at incredible, beaten down values – 7% of the S&P 500 is trading below book value.

Remember, in the past few months, we’ve talked about the similarities in stocks to 2010. Through the first half of this year, we’ve had the macro clouds of China and an oil price bust that shook market and economic confidence. Back in 2010, it was Greece and a massive oil spill in the Gulf of Mexico. When the macro clouds lifted in 2010, the Russell 2000 went on a tear from down 7% to finish up 27% for the year. This time around, the Russell has already bounced back from down 17% to up 2%.

With economic expectations in the gutter, global rates at record lows, and central banks continuing to ease and buffer potential shocks to the system, the opportunities for positive economic surprises have never been greater.  We think positive economic surprises in the next half can be the catalyst for a surprisingly big second half for stocks.

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By Bryan Rich 

June 28, 2016, 4:00pm EST

We’ve talked about the Brexit effect the past couple of days.  And we’ll continue on that theme today, as people continue to digest the results and come to grips with potential outcomes.

The knee-jerk reaction in markets has suggested that there is considerable fear of another global financial crisis.  But as we’ve said, things today are very different than they were in 2008.  The failure of Lehman triggered a global credit freeze.  That brought global banks to their knees and, therefore, even massive Fortune 500 companies couldn’t access capital needed to operate.

Again, this time is different (typically dangerous words to say, but true).  The financial system remains well functioning.  Most importantly, central banks are pro-actively maintaining stability and confidence by offering liquidity to banks and have made it well known that they stand ready to act where ever else needed (i.e. intervention).

So now we’re seeing some projections of the economic implications of the Brexit coming in.  The ECB thinks it will shave “as much as” ½ percentage point in GDP growth in Europe.

Here’s a look at euro area GDP…

euro gdp
Source: Tradingeconomics.com

You can see the damage to the economy in the global financial crisis.  While Europe is still emerging from stagnation, lopping off ½ percentage point is far from a “Lehman moment.”  Plus, if the euro weakens, as it should, on the outlook, that economic hit will be softened dramatically.  When we think about the broad Brexit implications, Europe is probably the first place everyone should be looking, and the ECB’s projection doesn’t look so bad at all.  With that, the market volatility we’re seeing seems to be over-exaggerating the Brexit effect.

Still, the biggest risk associated with the Brexit is that it becomes contagious.  As we said on Friday, the potential Grexit (of last year) and the Brexit are most different for one simple reason.  The British vote doesn’t involve a country leaving the common currency — the euro.

The British, of course, have their own currency, and among all of the EU countries, the British have probably retained the most sovereignty.  It’s a fracturing of the euro, the second most widely held currency in the world, that would trigger a global financial and economic crisis.  That’s the big danger.  If other EU countries that are also part of the common currency (the monetary union – the EMU) took the lead of Britain, then it gets very ugly.

Perhaps the first place to look for that potential spillover, is in the sovereign debt markets of Spain and Italy — the two big EMU constituents that were close to default four years ago.  When those countries were on the brink of collapse in 2012, the 10-year government bond yields were trading north of 7% (unsustainable levels).

111spain yield
Source: Reuters, Billionaire’s Portfolio

111italy yield
Source: Reuters, Billionaire’s Portfolio

Today, Spanish and Italian 10-year debt is yielding just 1.3%.  In a post-Brexit world, where the real risk is contagion, both of these important market barometers are indicating no contagion danger.

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By Bryan Rich 

June 27, 2016, 4:15pm EST

Over the past two trading days, we’re seeing the “risk-off” flow of global capital that we saw through the early stages of the global financial crisis.

For a long time, Wall Street sold us on the idea of sector and geographic diversification for stocks. That abruptly ended in 2008-2009. It was clear that in a global crisis, the correlations of sectors, geographies and many asset classes went to 1 (i.e. almost everything went down–a few things went up).

Our table below gives some perspective on how the swings in global risk appetite have affected financial markets since the onset of the financial crisis in 2008.

In a sense, the risk trade is an easy one to understand. When the world looks like a scary place, people pull back and look for protection. They pull money out of virtually everything, including banks, and plow money into the U.S. dollar, U.S. Treasurys and gold (the safest parking place for money in the world, on a relative basis).

At the depths of the global financial and economic crisis, there was a clear shift in investor focus, away from “return ON capital” toward one of “return OF capital.” Then, as sentiment improved about the outlook, people started taking on more risk, and that capital flow reversed. But with each economic threat that has bubbled up since, we’ve seen this risk-off dynamic quickly emerge again.

Two trading days following the Brexit vote, the market behavior is clearly back in the risk-off phase. The question is: Are we back into the risk-on/risk-off seesaw in markets that we dealt with for several years coming out of the worst part of the crisis?

As we said, there are huge differences between now and 2008. When Lehman failed, global credit froze. Today financial conditions globally have tightened a bit, but nothing remotely near the post-Lehman fallout. Most importantly, as we’ve said, we had no idea how policy makers might respond and how far they might go. Now we know, they will “do whatever it takes.”

When was the last time we had a huge sentiment shock for global financial markets and for the global economy? It was only a year ago, in Greece. The Greek people voted NO against more austerity and more loss of sovereignty to their European neighbors (namely Germany). That vote too, shocked the world. But all of the draconian outcomes for Greece, which were being threatened, with such a vote, didn’t transpire. Greece and Europe compromised.

Bottom line (and something to keep in mind): A bad outcome for anyone, at this stage in the global economic recovery, is a bad outcome for everyone.

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By Bryan Rich 

June 23, 2016, 3:00pm EST

As we said yesterday, we’ve seen a slew of threatening events come and go over the course of the past seven years, and with each passing of those events, the heightened scrutiny of the economy comes and recession predictions.  Each has been wrong.  The Brexit vote is just the latest.

With the UK referendum results looming (as of this writing), today we want to revisit some of our bigger picture perspective on the U.S. economy.  The data just doesn’t support the gloom and doom scenarios.

The Fed has manufactured a recovery by promoting stability.  And they’ve relied on two key asset prices to do it: stocks and housing.  Today we want to look at a few charts that show how important the stock and housing market recoveries have been.

While QE and the Fed’s ultra easy policy stance couldn’t directly create demand in a world of deleveraging, it did (and has) indirectly created demand by promoting stability, which restored confidence.  Without the confidence that the world will be stable, people don’t spend, borrow, lend or hire, and the economy goes into a deflationary vortex.

But by promising that they stand ready to act against any futures shocks to the economy (and financial markets), investors feel comfortable investing again (stocks go higher).  When stocks go higher and the environment proves stable, employers feel more confident to hire.  This all fuels demand and recovery.  And, of course, the Fed has pinned down mortgage rates at record lows, which promotes a housing recovery, and gives underwater homeowners (at one point, more than 25 million of them) a since that paper losses will at some point be overcome, and that gives them the confidence to spend money again, rather sit on it.

Along the path of the economic recovery, the Fed (and other key central banks) has been very sensitive to declines in stocks.  Why?  Because declining stocks has the ability to undo what they’ve done.  And it confidence breaks again, it will be far harder to restore it.

The first chart here is the S&P 500.  Stocks bottomed in March of 2009, when the Fed announced a $1 trillion QE program.

june 23 spx

Sources: Reuters, Billionaire’s Portfolio

Stocks surpassed the pre-crisis highs in 2013 after six years in the hole. But even after the dramatic rise you can see in the chart the damage from the crisis is far from restored.  If we applied the long term annual rate of growth of the S&P 500 (8%) to the pre-crisis highs of 1,576, the S&P 500 should be closer to 3,150.

How does housing look?  Of course, bursting of the housing bubble was the pin that pricked the global credit bubble.  Housing prices in the U.S. have been in recovery mode since 2012.  Still, housing has a ways to go.  This is a very important component for the Fed, for sustainable recovery.

june 23 case shiller

Sources: Reuters, Billionaire’s Portfolio

Housing prices have bounced 37% off of the lows (for 20 major cities in the index) – but remains about 10% off of the pre-crisis highs.

How has the recovery in stocks and housing reflected in the broader economy?

As stocks surpassed pre-crisis highs in 2013, so did U.S. per capita GDP.

 june 23 ps per capital gdp

Sources: Reuters, Billionaire’s Portfolio

While debt continues to be a big structural problem for the U.S and the rest of the world, growth goes a long way toward fixing that problem.

And growth, low interest rates, higher stocks and higher housing prices goes a long way toward restoring household net worth.  As you can see in the chart below, we have well recovered and surpassed pre-crisis levels in household net worth…

 june 23 us household net worth

Sources: Reuters, Billionaire’s Portfolio

What is the key long-term driver of economic growth overtime?  Credit creation.  In the next chart, you can see the sharp recovery in consumer credit since the depths of the economic crisis (in orange).  This excludes mortgages.  And you can see how closely GDP (economic output) tracks credit growth (the purple line).

june 23 credit to gdp

Sources: Reuters, Billionaire’s Portfolio

What about deleveraging?  It took 10 years to build the global credit bubble that erupted in 2007.  Based on historical credit bubbles, it typically takes about as long to de-lever.  So 10-years of deleveraging would put us at year 2017.

You can see in the chart below, the average annual growth rate of consumer credit over the past 55 years is 7.9%.  Over the past five years, consumer credit growth has been solid, just under the long term average.  Meanwhile, FICO scores in the U.S. have reached an all-time high.

 consumer credit growth rate

Sources: Reuters, Fed

With any volatility in stocks, there comes increased scrutiny on the economy and people like to wave the red flag anywhere they find soft economic data. But consumption makes up more than 2/3 of the U.S. economy.  And you can see from the charts above, the consumer is in a solid position.  Still, stocks and housing remain key drivers of the recovery.  The Fed is well aware of that.  With that, don’t expect the Fed, in the current economic environment, to do anything to alter the health of the housing and stock markets.

Have a great night.

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By Bryan Rich 

June 15, 2016, 4:30pm EST

The Fed held rates steady today.  As we’ve talked about, this was a decision they laid the ground work for over the past two weeks.  We want to talk about a few takeaways from the Fed event, and then continue our discussion from yesterday on the Bank of Japan decision tonight (where the big news may come).

First, the Fed did indeed consider the global stability risk that comes with the decision in the UK on whether or not to leave the European Union.  The polls in recent weeks have continued to show that it could go either way.  Meanwhile, the bookmakers have had this vote clearly in favor of “staying” in the European Union all along — as much as 70/30 ‘stay’ much of the way.  But those odds have been narrowing in the past week.

Still, as we discussed yesterday, holding pat on rates today was a “no risk” decision, especially because they had an event (the weak jobs data) and the platform (through a prepared speech by Yellen just days after the weak jobs data) to manage away expectations for a hike.

With that, stocks remained steady on the decision.  And markets in general remained tame.

So now the Fed is in position to see the outcome in the UK.  There was some two way talk about the jobs and inflation data, but it looks like the Fed is most concerned with what’s going on in the global economy.  That’s clear in their reaction to the oil price bust, when they responded back in March by taking two rate hike projections off the table.  And it’s clear in their reaction now to the Brexit risk.

But their new projections on the future path of interest rates have been ratcheted down in the coming years, and in the long run.  For perspective, a year ago the Fed thought the benchmark rate would be 2.75%.  Now they think it will be 1.5.  Why?  What’s been acknowledged more and more in recent meetings is the impact of the weakness and threats in global economies on the U.S. economic outlook.  The U.S. economy has been relied upon to drive global economic recovery, but it’s being dragged down now by the weight of global economic weakness.

This all puts pressure on Europe and Japan to follow through on their promise to do “whatever it takes” to restore their economies.
As we’ve said, the most important spots in the world, right now, are Japan and Europe.  The Fed only began its campaign of removing its emergency level policies because Europe and Japan took the QE baton handoff from the Fed – picking up where the Fed left off.  And unlike the U.S., which is constrained by “flight to safety” global capital flows and a world reserve currency, they have the ingredients (primarily Japan) to make QE work, to promote demand, to promote growth.  Japan has the largest government debt problem in the world. They have an undervalued currency.  They have a stagnating economy with big demographic challenges. They have are in a deflationary vortex.

They have the perfect attributes for a mass scale currency printing campaign. Not only can it work for their domestic economies, but it serves as the liquidity engine and stability preserver for the global economy.

In normal times, the rest of the world wouldn’t stand for a country outright devaluing their way to prosperity.  But in a world where every country is in economic malaise, everyone can benefit – everyone needs it to work. It can be the solution for returning the global economy to sustainable growth.

With that, and given the position of the yen and Japanese stocks (see our chart yesterday), along with the underperforming economy in Japan, even after three years of QE, now is the time to throw the kitchen sink at it (i.e. they should act tonight, and in a ‘shock and awe’ fashion).

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By Bryan Rich 

June 14, 2016, 5:00pm EST

German yields (10 year futures) went negative today, but importantly didn’t close negative.  We’ve talked about the important symbolism of this market.  This is a big deal, especially the recovery into the close, finishing spot on the zero line heading into tomorrow’s Fed and tomorrow nights BOJ meeting.

The Fed decision is tomorrow afternoon.  Remember Fed members went on a public campaign to build expectations for a June hike — a second hike in their nascent rate hiking cycle.  Of course, it’s not a normal hiking cycle, but just the slow removal of emergency level policies that were in place to avert a global economic disaster and fuel a recover, albeit a very slow and weak one.

But now, as the vote in the UK on whether or not to leave the European Union has become increasingly questionable over recent weeks, the expectations of a Fed hike tomorrow have evaporated.  With that, the weak job creation number at start the month came as a gift to the Fed.  It gave them a credible reason to back off of their stance, even though the threat to global economic stability (the chance of a UK/Brexit shakeup) is front of the mind for them.

Remember, last September, the Fed had set the table for a first hike.  They told us they would, and they balked.  The culprit then was the currency devaluation from China which shook up global markets and sent stocks falling.  The Fed didn’t hike.  And that added even more fuel to the market shakeup.  It warranted the question: Does the Fed have that little confidence in the robustness of the economic recovery?

So this time around, changing course again on the Brexit risk would have made them look weak and uncertain (as they did back in September).  But influenced by the changing data (the weak jobs number) — the market this time has given them a pass.

If they were to surprise and hike at this point, it would likely be equally as harmful as it was back in September when they chose not to hike.

What’s the point?  The Fed has made it clear all along that they need stocks higher. It’s a huge component in restoring wealth, jobs and broader confidence and stability.  Anything that can derail that is very dangerous to the recovery, and the Fed knows it very well.  So do central bankers in Europe and Japan.

With that said, as has been the case the past three Fed events this year, the main event for monetary policy isn’t in Washington, the main event this week is in Japan.

The BOJ has given us plenty of clues that more action is coming:

1) Even after three years of Japan’s unprecedented policy attack on deflation and a stagnating economy, the head of the BOJ has said numerous times that they remain “only half way there” on meeting their objectives.

2) As we’ve said, two key components of Japan’s stimulus program are a weaker yen and higher stocks — both assist in demand creation, growth and debt reduction. On that note, there has been talk out of Japan that they may increase the size of their direct ETF purchases (more outright buying of stocks).

3) There has also been talk out of Japan that the BOJ may start paying banks to borrow money from the BOJ (negative interest rates on loans) and may start buying high risk corporate debt.

To simplify it, below is the most important data for the BOJ.  The yen and the Nikkei.  Both are going the wrong direction for the BOJ.  All of their work since initiating the second round of QE in Japan has been undone.


Source: Billionaire’s Portfolio

The Nikkei opened at 15,817 the day the BOJ surprised the world with more QE in October of 2014.  After trading as high as almost 21,000 last year, the Nikkei closed today at 15,859.  And the yen is already at a higher point against the dollar than it was when the BOJ boosted stimulus last – bad news for the BOJ.

We said this last month going into BOJ: “An aggressive response would surprise markets. That’s what the BOJ likes and wants, because it gives their policy actions more potency.”  It didn’t come then, but we think we will see it tomorrow night, even though the market is betting on no change.

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By Bryan Rich 

June 13, 2016, 5:00pm EST

Last week we talked a lot about the German bund yield, the most important market in the world right now.  Today we want to talk about how to trade it.

The best investors in the world love asymmetric bets (limited downside and virtually, if not literally, unlimited upside).  That’s the true recipe to building huge wealth.  And there is no better asymmetric bet in the world right now than the German 10-year bund.

With that in mind, in recent weeks, we’ve revisited Bill Gross’ statement last year, when the 10-year government bond yields in Germany were flirting with zero the first time.  He called it the “short of a lifetime” to be short the price of German bunds - looking for yields to bounce back.  It happened.  And it happened aggressively.  Within two months the German 10 year yield rocketed from 6 basis points to over 100 basis points (over 1%).  But even Gross himself wasn’t on board to the extent he wanted to be.  The bounce was so fast, it left a lot of the visionaries of this trade behind.

But over the past year, it’s all come back.

Is it a second chance?  German yields are hovering just a touch above zero – threatening to break into negative yield territory for one of the world’s most important government bond markets.

As we said on Friday, the zero line on the German 10-year government bond yield is huge psychological marker for perceived value and credibility of the ECB’s QE efforts. And that has huge consequences, not just for Europe, but for the global economy.

Given the importance of this level (regarding ECB credibility), it’s no surprise that the zero line isn’t giving way easily.  This is precisely why Bill Gross called it the “short of a lifetime.” With that, let’s take a look at the incredible risk/reward this represents, and a simple way that one might trade it.

There is a euro bund future (symbol GBL) that tracks the price of the German 10-year bund.  Right now, you can trade 1 contract of the German bund future at a value of 164,770 euros by putting up margin of 3,800 euros (the overnight margin at a leading retail broker).  If you went short the bund future, here are some potential scenarios:

If you break the zero line in yield, the euro bund future would trade up to about 165.50 (it currently trade 164.77).  If you stopped out on a break of zero in yield, you lose 730 euros (about $820 per contract).  If the zero line doesn’t breach, and yields do indeed bounce from here, you make about 1,500 euros for every 10 basis point move higher in the German 10-year bund yield.

For example, on a bounce back to 32 basis points, where we stood on March 15th, the profit on your short position would be about 4,600 euros (or about $5,200).  If German bund yields don’t breach zero and bounce back to 1%, where it traded just a year ago, you would make about 15,000 euros ($16,900) per contract on your initial risk of $820 – a 20 to 1 winner.  Of course, there are margin costs to consider, given the holding period of the trade, but in a zero rate world, it’s relatively small.

If you’re wrong, and the German 10-year yield breaches zero, you’ll know it soon.

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By Bryan Rich 

June 10, 2016, 4:00pm EST

On Wednesday we talked about the most important market in the world, right now.  It’s German bunds.

The yield on the 10-year German bund had traded to new record lows, getting just basis points away from the zero line, and thus from crossing into negative yield territory for the 10-year German government bond.  That has inched even closer over the past two days, touching as low as 1 basis point today.

Not surprisingly, stocks sold off today.  Volatility rose.  Commodities backed off.  And the broader mood about global economic stability heads into the weekend on the back foot.  For perspective, though, U.S. stocks ran to new 2016 highs this week, and are sniffing very close to record highs again.  Oil and commodities have been strong, and the broad outlook for the economy and markets look good (absent an economic shock).

What’s happening?  Of course, the vote that is coming later this month in the UK, on whether or not UK citizens will vote to ‘Stay’ in the European Union or ‘Leave’ continues to bubble up speculation on the outcome.  That creates uncertainty.  But the real reason rates are sliding is that the European Central Bank is in buying, not just government bonds, but now corporate bonds too.  The QE tool box has been expanded.  That naturally drives bond prices higher and yields lower.  But the question is, will it translate into a bullish economic impact (i.e. the money the ECB is pumping into the economy resulting in investing, spending, hiring, borrowing). As we discussed on Wednesday, it’s the anticipation of that result that sent rates higher in the U.S. when the Fed was in, outright buying assets, in its three rounds of QE.

With that, the most important marker in the world for financial markets (and economies) in the coming days, remains, the zero line on the German 10-year government bond yield.  Draghi has already told us, outright, that they will not take benchmark rates negative (as Japan did).  That makes this zero line a huge psychological marker for perceived value of the ECB’s QE efforts.

With this in mind, we head into a Fed meeting next week.  The Fed has done its job in managing down expectations of a hike next week.  With that, they have no risk in holding off until next month so that they can see the outcome of the stay/leave vote in the UK.  And, as we’ve discussed, the Bank of Japan follows the Fed on Wednesday night with a decision on monetary policy.  They are in the sweet spot to act, not only to reinvigorate the weak yen trend and strong stock trend in Japan, but to add further stimulus and perception of stability to the global economy.  We think we will see that happen.

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By Bryan Rich and Will Meade

June 9, 2016, 4:00pm EST

On Tuesday we talked about the quiet bull market in  commodities. Today we want to talk about one specific commodity that has been lagging the sharp rebound in oil, but is starting to make a big-time move.  It’s natural gas. And this is an area with some beaten up stocks that have the potential for huge bounce backs.

Natural gas today was up almost 6% to a six month high.  The U.S. Energy Information Administration said in its weekly report that natural gas storage rose less than what analysts had forecast.  But that was just an extra kick for a market that has been moving aggressively higher in the past NINE days (up 37% in nine days).

Now, we should note, nat gas is a market that has some incredible swings.  Over the past three years it has traded as high as $6.50 and as low as $1.64.

For perspective on the wild swings, take a look at this long term chart.

 

Source: Reuters, Billionaire’s Portfolio

You can see we’re coming off of a very low base.  And the moves in this commodity can be dramatic.

Three months ago natural gas was continuing to slide, even as oil was staging a big bounce.  But natural gas has now bounced 58% after sniffing around near the all-time lows. Meanwhile, oil has doubled.

Based on the backdrop for oil, broader commodities, the economy we’ve been discussing, and the acknowledging the history of natural gas prices, we could be looking at early stages of a big run in nat gas prices.

Summer is one of the most volatile periods for natural gas with the combination of heat waves, hurricanes and potential weather pattern shifts such as La Nina.  During the summer months, a 50% move in the price of natural gas is not uncommon. Another 50% rise by the end of the summer would put it around $4. And four bucks is near the midpoint of the $6.50 - $1.65 range of the past three years.

Billionaires investor David Einhorn has also perked up to the bull scenario in nat gas.  In his most recent investor letter his big macro trade this year is long natural gas. Here’s what he had to say: “Natural gas prices are not high enough to justify drilling in all but the very best locations. The industry has responded by dramatically reducing drilling activity. As existing wells deplete, supplies should fall. The high cost of liquefying and transporting natural gas limits competition to North American sources. Current inventories are high following a period of over-drilling and a record warm winter. However, the excess inventory is only a couple percent of annual production, which has already begun to decline. Normal weather combined with lower production could lead to a shortage within a year.”

This all contributes to the bullish action we’re seeing across commodities, led by the bounceback in oil.  The surviving companies of the energy price bust have been staging big comebacks, but could have a lot further to go on a run up in nat gas prices.

In our Billionaires Portfolio, we have an ETF that has 100% exposure to oil and natural gas – one we think will double by next year.  Join us today and get our full recommendation on this ETF, and get your portfolio in line with our Billionaire’s Portfolio.

By Bryan Rich 

June 7, 2016, 5:00pm EST

Yesterday we talked about the bullish technical breakout shaping up in stocks.  Today we want to talk about a very quiet bull market going on that supports the story for stocks.  It’s commodities.

Within the course of the past four short months, commodities have gone being the leading threat for global stocks, to being a leading indicator of an emerging bull cycle for stocks.

Oil, of course, was the key culprit earlier in the year.  At $26 oil the world was a scary place.  The dominoes were lining up for widespread bankruptcies, starting in the energy complex and spreading to financials, sovereigns, etc.

If you recall, back in early February we said in our daily notes, “OPEC is not just in a price war with U.S. shale producers, but it’s playing a game of chicken with the global economy.  We’ve had plenty of events over the past seven years that have shaken confidence and have given markets a shakeup - European sovereign debt, Greece potentially leaving the euro, among them.  In Europe, we clearly saw the solution.  It was intervention.  Oil prices are creating every bit as big a threat as Europe was, we expect intervention to be the solution this time as well.

Indeed, central banks stepped in and removed the risk with a slew of intervention tactics ranging from more QE from Europe, currency intervention from Japan, relaxing reserve requirements in China, to the Fed removing the prospects of two (of what was projected to be four) rate hikes this year.

That was the dead bottom in oil (which started with BOJ action in USDJPY). And it kicked broader commodities into gear, many of which had already bottomed weeks prior.  No surprise, commodity stocks have been among the best performing stocks in the world for the past four months.

Now we have oil closing above $50 today, for the first time since July of last year.  And remember, two of the best oil traders of all time have been calling for oil to trade between $80 and $100 by next year (both Pierre Andurand and Andy Hall).

We looked at this chart in our April 12th piece and said: “technically, oil looks like a technical breakout is here.  In the above chart, you can see oil breaking above the high of March 22 (which was $41.90). In fact, we get a close above that level — technically bullish. And we also now have a technically bullish pattern (an impulsive C–wave of an Elliott Wave structure) that projects a move to $51.50, which happens to be right about where this big trendline comes in.”

Source: Reuters, Billionaire’s Portfolio

Here’s that same chart today…

Source: Reuters, Billionaire’s Portfolio

You can see we’ve not only hit this trendline and gotten very close to that projection from April, but (not as easy to see in this chart) we have a clear break of this downtrend now.  That line now comes in at $49.39.  Oil last traded $50.49.

Next is a look at broader commodities.  But first, we want to revisit the clues we were getting from commodities back in early March.  Here’s what we said in our March 3rd note: “There are other very compelling signs that the global economy is not only backing away from the edge but maybe turning the corner.

It’s all being led by metals prices. Copper is often an early indicator of economic cycles. People love to say copper has ‘has a Ph.D. in economics’ because it tends to top early at economic peaks and bottom early at economic troughs. Copper bottomed on January 15 and is up 13% since.

The value of iron ore, another key industrial metal, has been destroyed in the past five years – down 80%. That metal bottomed quietly in December and is up 32% since.”

Here’s the chart of broader commodities now…

Source: Reuters, Billionaire’s Portfolio

The Goldman Sachs commodity index is now up 44% from the bottom, though it’s heavily weighted energy.  The more diversified CRB index is up 24%.  Both would fall into the bull market category for those that like to define bull and bear markets.  But bottom line, when you look at the above chart you can see how deeply depressed commodities have been.  The trend is broken, and the model signals for big trend followers are flashing all over the place to be long.  And as we said yesterday, in early stages of cyclical bull trends in stocks, energy does the best by far. With that, although the energy sector weathered a life threatening storm, the upside remains very big for the survivors.

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