As we said yesterday, oil on the mend is the key proxy right now for global economic stability.  With that, after closing above $40 yesterday, oil continued its surge today, up 4%.  And global stocks had a good day, up 1% in the U.S.

Remember, we get key inflation data over the next couple of days, namely from Europe and the U.S.  A hotter inflation number in the U.S. would further support the signal that oil is giving to markets (a positive one).

Today we want to look at a few of very key charts.  This first chart is an update on the crude oil/stock market relationship.  We’ve looked at this a few times over the past few months.  The last time we revisited this chart, oil and stocks had started to diverge from stocks with its recent move back into the mid 30s.

Here’s the chart we looked at on April 1.


Source: Billionaire’s Portfolio, Reuters

About this above chart, we said….

“The question: Is this an opportunity to buy oil or sell stocks?

Given the significance of the oil bust threat to the global economy, we would argue the former.”

Indeed, that was the trade.  Here’s a look at the relationship since oil’s aggressive bounce back above $40.


Source: Billionaire’s Portfolio, Reuters

So oil is sustaining above $40 for the first time since November.  We know three of the top oil traders in the world are betting on $70-$80 oil by next year.  We know central banks have stepped in (in coordination) since the low in oil on February 11 and the result has been a 50%+ bounce in oil.  Now, technically, oil looks like a technical breakout is here.

Source: Billionaire’s Portfolio, Reuters

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.

Now, with the inflation data in the pipeline for the week, we’ve talked about the negative signal that ultra-weak yields are sending to markets.  And German yields have been leading the way on that front.  But guess what?  German yields reversed sharply off of the lows yesterday, and continued higher today, putting in a long term bullish reversal signal (an outside day – technical jargon, but can be very predictive of tops and bottoms). And that coincides with the U.S. 10-year yield, which is on the verge of breaking the recent downtrend and projecting a move back to 2.15%.  We’ll take a look at these very important charts for financial markets and for the global economic outlook tomorrow.

These key markets are signaling what could be the beginning of a big shift in sentiment and the beginning of positive surprises in markets and economies, which tends to happen when expectations have been ratcheted down so dramatically, as we discussed yesterday with the sour earnings outlook and pessimistic economic backdrop.

This is the perfect time to join us in our Billionaire’s Portfolio.  We have just added the billionaire’s macro trade of the year to our Billionaire’s Portfolio – a portfolio of deep value stocks owned by the best billionaire investors in the world.  You can join us here

Intervention has been the common theme we’ve discussed for the better part of the past two months.  And this week, that theme is heating up.

We’ve explained why oil at $30 has posed a threat to the global financial system and global economy. And we explained the parallels of the systemically threatening (current) oil price bust and the 2007-2008 housing bust.   But we also noted the key differences, and why and how this “cheap oil” problem could be easily solved, unlike the housing bust.

(more…)

Buffett’s famed annual letter is due to be released this weekend. With that, today we want to talk a bit about his record, his philosophy on markets and successful investing and the high conviction stocks that he has in his $130 billion plus Berkshire Hathaway stock portfolio.

First, only one living investor has a length of track record that can compare to Buffett’s. That’s fellow billionaire Carl Icahn. Icahn actually has a better record than Buffett, and it spans a little longer. But he gets a fraction of the attention of the man they call the Oracle of Omaha. (more…)

Today the rebound in oil led a significant turnaround for stocks. With that, the broader sentiment of uncertainty across markets tends to abate. Broader commodities swung from negative to positive. And yields on the U.S. 10-year Treasury, which were in deep decline this morning, swung to positive territory by the afternoon.

If you own stocks, a house, have a job or need to eat, you should cheer for higher oil prices.

As we’ve talked about quite a bit in recent weeks, cheap oil, at this point in the global economic recovery, is a catalyst to destabilize the global economy. While consumers gain a few bucks from cheaper gas, the oil industry leans closer to the edge of bankruptcies and weak oil exporting countries toward default. That would be very bad news (global financial crisis, round 2). So the longer we’re down here, and the more persistent these low levels appear, the riskier the world looks. And when the world looks risky, people sell stocks, and other relatively risky assets and they hold cash or buy U.S. Treasuries (which pushes yields lower).

For proof, here’s a look at the 10-year yield on the U.S. Treasury note.


Source: Reuters, Billionaire’s Portfolio

Keep in mind, the Fed raised rates in December! They did so when the 10 year was trading at a yield of 2.20%. The yield is now 45 basis points lower. And even though a voting Fed member said yesterday that in her view, a second hike was still on the table for next month, the market has still virtually priced out the possibility of any further hikes for the rest of the year.

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Why? Because other parts of the world are moving (or are moving deeper) into negative rate territory, because economic conditions continue to soften, mostly driven by sentiment and weakening inflation prospects. A big driver of that mix is the oil price crash.

In the next chart, you can see how yields, despite the December rate hike, have tracked oil lower.


Source: Reuters, Billionaire’s Portfolio

Again, when people think the world looks risky, they pile into the safest parking place for capital on the planet, U.S. Treasuries –and that drives yields on Treasuries lower. While that flow of capital has certainly occurred, the pressure on yields from speculators is also a big component.

If you recall, we discussed a couple of weeks ago how markets can have it wrong – sometimes very wrong. If indeed, the market is wrong on this one, there is a tremendous opportunity to ride yields back to the 2.25% area. And it may be a violent move.

But oil will be the driver.

As we said, oil turned the tide for stocks today. Here’s a look at the relationship of oil and stocks over the past three months.


Source: Reuters, Billionaire’s Portfolio

Clearly the threat of defaults across the oil industry from the impact of cheap oil is highly influencing the global risk barometer (U.S. stocks).

So if it’s all about oil at the moment, let’s take a look at the longer term chart of (at least formerly and perhaps soon to be, again) black gold?


Source: Reuters, Billionaire’s Portfolio

In this longer term chart above, you can get perspective on where oil prices stand relative to history. You can see in this chart the sharp rise, the sharp fall and the rebound from the depths of the global financial crisis.

That rebound was all China. China stepped in and used their three trillion dollars in foreign currency reserves AND their massive fiscal stimulus package to gobble up cheap commodities.

And you can see this most recent price crash was triggered by move by the Saudis to block an OPEC production cut in November 2014. It was the night of the Thanksgiving holiday in the U.S. and oil was trading about $73. We haven’t seen that price since.

The low at the depths of the financial crisis was 32.40. That’s about where oil closed today. We’ve made the case in recent weeks that, if OPEC refuses to cut production (likely), the central banks could/should step in and buy oil (the ECB, BOJ and/or China).

Bryan Rich is a macro trader and co-founder of Billionaire’s Portfolio,a subscription-based service that empowers average investors to invest alongside the world’s best billionaire investors.

People continue to blame softness in global markets on China. For years, there has been fear and speculation of “hard landing” for the Chinese economy.

When we talk about China, it’s all relative. China was growing at double digit pace for the better part of the past 25 years. Now Chinese growth has dropped to below 7%. That’s recession-like territory for the Chinese economy.

But the Chinese have powerful tools to promote growth. And we expect them to use those tools, sooner rather than later.

As we know their biggest and most effective tool is their currency. They ascended to the second largest economy in the world over the past two decades by massively devaluing their currency, and then pegging it at ultra-cheap levels. It allowed them to corner the world’s export market, sucking jobs and valuable foreign currency out of the developed world. This is precisely what Donald Trump is alluding to when he says “China is stealing from us.”

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Interestingly though, it’s China, most recently, that has been getting hurt by currency. Over the past four years, the Bank of Japan has devalued their currency against the dollar by nearly 40%. And other export-driven emerging market economies have had massive declines in their currencies (Brazil, Mexico, Argentina, Russia). Given that China has actually been appreciating its currency against the dollar for the past 10 years (albeit gradually), they’ve given back a lot of ground on their export advantage.

Source: Reuters, Billionaire’s Portfolio

In the chart above, you can see the yen weakening dramatically against the dollar (the purple line moving higher = stronger dollar, weaker yen). The orange line is the dollar vs. the Chinese yuan. You can see the relative advantage that the BOJ’s QE program has created (the gap between the purple and orange lines). With that, the orange line rising, since 2014, represents China backing off of its pledge to appreciate its currency. They are fighting to preserve their export advantage by weakening the yuan again.

In August, they devalued by less than 2% in a day and global markets went haywire. That move is nothing extreme in currencies, especially an emerging market currency. But given China’s currency history and their policy stance, since 2005, to allow their currency to appreciate under a “managed float” (managing a daily range for the currency), it has markets confused. When people are confused, they “de-risk” or sell.

Now, China will likely continue this path. Our bet is that markets will finally realize that, in the shorter term, this will be good for global growth and good for the health and stability of global financial markets. Better growth in China, at this stage, is good.

Among their other tools to stimulate growth, China has interest rates. While most of the world is pegged at zero rates (or close to it, if not negative) China’s benchmark interest rate is still 4.35%. And their inflation rate is running 1.5%, well below their target of 3%. That’s a recipe for aggressive rate cuts, which would be a boon for the Chinese economy and for the global economy.

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Oil has surged to open the week. If you’ve been reading our daily pieces over the past few weeks, you’ll know how important oil is for global markets at this stage. With that, strong oil today has translated into higher stocks, higher broad commodities, a slight bump higher in interest rates and better investor sentiment in general.

It was just fourteen days ago that Chesapeake Energy, one of the largest producers of oil and natural gas was rumored to be choosing the path of bankruptcy. That rumor was immediately denied by the company. And soon thereafter, the reality set in for markets that a scenario like that would conjure up post-Lehman like outcomes. Oil has since put in a bottom and bounced more than 25%. Chesapeake has now bounced 46% from the lows just the last six trading days.

It’s at extremes in markets where the biggest and best investors have historically made their money – running into risk, when everyone else is running away.

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With that, today we want to take a look at a few stocks with the biggest upside, and an important “risk buffer” in what is a high risk sector at the moment (energy). This risk buffer? Each stock has the presence of a big-time billionaire investor.

Self-made billionaire energy trader Boone Pickens has said he expects oil to return to $70 this year. On his $70 prediction, he’s also said that if he misses it will be because oil is “over $70, not under $70.” If Pickens is right about oil prices, each of these stocks below have huge upside:

1) Oasis Petroleum (OAS) – Billionaire hedge fund manager John Paulson owns nearly 4% of this stock. The activist hedge fund SPO Advisory owns 14% and has been buying the stock on almost every dip. When oil was last $70, OAS was trading $25 or 500% higher than current levels.

2) Chesapeake Energy (CHK) – Billionaire investor Carl Icahn owns 11% of CHK and recently added to his position around $13. The last time oil was $70, Chesapeake was $25. That would be more than a 1000% return from its price today.

3) EXCO Resources (XCO) – Billionaire investors Wilbur Ross and Howard Marks own more than 30% of this energy stock. The last time oil was $70, EXCO was $3.30. That would be almost a 330% return from its price today.

4) Consol Energy (CNX) – Billionaire David Einhorn owns 12.9% of this stock. When oil was last $70, Consol traded for $40 or almost 500% higher than current levels.

5) Williams Companies (WMB) – Carl Icahn Protégé, Keith Meister of the activist hedge fund Corvex Management, owns $1.1 billion worth of WMB. The last time oil was $70, WMB traded for $50 – more than 300% higher than its current levels.

As we’ve said, persistently cheap oil (at these prices) has become the new “too big to fail” — it’s a systemic risk. It’s hard to imagine central banks will sit back and watch an OPEC-rigged price war put the global economy back into an ugly downward spiral. And time is the worst enemy to those vulnerable first dominoes (the energy industry and weak oil producing countries).

The best investors like to go where the biggest risks are — that’s where the biggest returns can follow. And they’ve been getting aggressive in energy and commodities.

Without question, energy stocks have been beaten up and left for dead. If indeed Chesapeake is a leading indicator that it’s all backing away from the edge, there will be big money to be made in these stocks.

We already have one of the best performing stocks in the entire stock market for the month of February in our Billionaire’s Portfolio, billionaire-owned Freeport McMoran. Click here and join us!

Stocks have roared back in the past several days. It’s been led by commodity stocks, the area that has been beaten up and left for dead. Not surprisingly, the bounce in that area has been multiples of the broader stock market bounce (which is 7% in less than a week).

As we’ve discussed in recent weeks, in the world we live in, global economic stability continues to rely on central bank influence. And, indeed, after one of the worst starts for stocks in a New Year ever, it was central bank verbal posturing to open the week that has turned the tide for global markets. On Sunday, the head of the BOJ spoke, warning that they were watching markets closely and stood ready to act, and then on Monday, the head of the European Central Bank said, effectively, the same. The result: the BOJ comments sparked a 10% rally in Japanese stocks in a matter of hours. With that lead, the S&P 500 has now rallied 7% in three days, crude oil has bounced 20%, and global interest rates are bouncing back (which, last week, were pricing in recession).

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Like it or not, in a world where the economy remains structurally fragile after the global financial and economic crisis, the central banks remain in the driver’s seat and they know that promoting stability is the key to recovery and ultimately returning to sustainable economic growth. As we approach the March ECB and BOJ meetings, with weak oil prices persisting, we continue to think the central banks may outright buy oil and commodities to remove the risk of oil industry bankruptcies and the domino effect that it would spark. As an additional benefit, it would likely turn out to be a very profitable investment.

Today we want to talk about the quarterly SEC filings that came in this week. All big investors that are managing over $100 million are required to publicly disclose their holdings every quarter. They have 45 days from the end of the quarter to file that disclosure with the SEC. It’s called a form 13F. While these filings have become very popular fodder for the media, what we care more about is 13D filings. Those are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company’s stock, it’s considered a controlling stake. In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence. Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.

By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the difference in manager talent, strategies and portfolio sizes run the gamut.

With that caveat, there are nuggets to be found in 13Fs. Let’s talk about how to find them, and the take aways from the recent filings.

First, it’s important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.

Through our research over 15 years, here’s what we’ve found to be most predictive:

Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks is bullish. This all can provide good insight into the mindset of the biggest and best investors in the world, and can be a predictor of trends that have yet to materialize in the market’s eye.
For specialist investors (such as a technology focused hedge fund) we take note when they buy a new technology stock or double down on a technology stock. This is much more predictive than when a generalist investor, as an example, buys a technology stock.

The bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success. Again, in most cases, we will see these first in the 13D filings.

New positions that are of large, but under 5%, are worthy of putting on the watch list. These positions can be an indicator that the investor is building a position that will soon be a “controlling stake.”

Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts a position by 75% or more, or cuts below 5% (which we will see first in 13D filings). Funds also tend to trim losers into the fourth quarter for tax loss benefits, and then they buy them back early the following year.

With that in mind, we want to talk about a few things we did glean from these recent filings.

First, the old adage “buy when there is blood in the streets” was evident last quarter, as many of the top billionaire investors loaded up on stocks in the fourth quarter. That was BEFORE the further declines this year.

Top billionaire investors Paul Singer, David Tepper and Chase Coleman of Tiger Global all increased their equity exposure (buying more stocks) over the last quarter. And billionaire investors still love health care stocks. John Paulson, Bill Ackman, Dan Loeb and Larry Robbins loaded up, with Paulson putting 56% of his portfolio in health care.

Billionaires are starting to bottom fish in energy. Seth Klarman, David Tepper, Carl Icahn and Warren Buffett all either added to, or initiated new stakes in energy stocks. Tepper now has 12% of his entire equity portfolio in energy stocks! This obviously coincides well with the theme that energy and commodity stocks are starting to bottom.

Also notable, in recent weeks, the 13D filings have been coming in fast and furious as investors are taking advantage of the decline this year.

Analyzing these filings is part of our process in our Billionaire’s Portfolio. With that in mind, this week we followed one of the best billion dollar (plus) activist hedge funds into a stock where they own 12.5%, have three board seats, and are in the process of replacing the CEO. These are are three key ingredients in the success of activist campaigns: 1) a big concentrated position (12.5% stake), 2) control (board seats), and 3) change (a new CEO). This activist fund has won on 82% of its campaigns since 2002 and has a price target on this stock that’s more than 150% higher than the current share price. To join us you can subscribe to our Billionaire’s Portfolio (here).

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 a quarter of all homeowners with mortgages) 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.

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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 if 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.


Source: 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, the S&P 500 should be closer to 3,150 (over 60% higher).

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.


Source: Billionaire’s Portfolio

Housing prices have bounced more than 30% off of the lows (for 20 major cities in the index) – but remains about 13% 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.


Source: Billionaire’s Portfolio

While bloated government 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…


Source: 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).


Source: Reuters, Forbes 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. With that, it’s fair to think we could be very near the end of that period, where paying down debt has weighed on economic growth.

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


Source: Billionaire’s Portfolio

With the recent correction in stocks, there has been increased scrutiny on the economy. Some are predicting another recession ahead. Others are waving the red flag anywhere they find soft economic data. 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. But 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.

This week, in our BillionairesPortfolio.com, we followed one of the best billion dollar (plus) activist hedge funds into a stock where they own 12.5%, have three board seats, and are in the process of replacing the CEO. These are are three key ingredients in the success of activist campaigns: 1) a big concentrated position (12.5% stake), 2) control (board seats), and 3) change (a new CEO). This activist fund has won on 82% of its campaigns since 2002 and has a price target on this stock that’s more than 150% higher than the current share price. To join us you can subscribe to our Billionaire’s Portfolio (here).

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2/17/16

The word China is often thrown around to explain why markets are in turmoil. China doing well was a threat to western civilization. China doing poorly is now a threat to Western civilization.
Which one is true?

First, a bit of background. Over the past twenty years, China’s economy has grown more than fourteen-fold! … to $10 trillion. It’s now the second largest economy in the world.

Source: Billionaire’s Portfolio

During the same period, the U.S. economy has grown 2.5x in size.

So how did China achieve such an ascent and position in the global economy? One word: Currency.
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For a decade, China maintained a fixed exchange rate policy — the yuan was pegged against the dollar. One U.S. dollar bought 8.27 yuan. This allowed China to undercut the rest of the world, churning out cheap commoditized goods, competing on one thing: Price.

But in 2005, China changed its currency policy. It abandoned the peg.

After political tensions rose between China and its key trading partners, namely the U.S., China adopted a “managed float.” Under this policy China agreed to let the yuan trade in a defined daily trading band, while gradually allowing it to appreciate. This was China’s way of pacifying its trading partners while maintaining complete control over its currency.

Over the next three years the Chinese yuan climbed 17 percent against the dollar, enough to ease a politically sensitive issue, but far less than the relative economic growth would warrant. In fact, China’s economy grew by 43 percent while the U.S. economy grew only 10 percent.

That timeline leads us up to the bursting of the global credit bubble. What caused it? The housing bubble can be credited to a key decision made by the government sponsored credit agencies (Fitch, Standard and Poors, Moody’s), all of which stamped AAA ratings on the mortgage bond securities that Wall Street was churning out.

With a AAA rating, massive pension funds couldn’t resist (if they wanted to keep their jobs) loading up on the superior yields these AAA securities were offering. That’s where the money came from. That’s the money that was ultimately creating the demand to give anyone with a pulse a mortgage. That mortgage was then thrown into a mix of other mortgages and the ratings agencies stamped them AAA. They rinsed and they repeated.

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But where did all of the credit come from in the first place, to fuel the U.S. (and global) consumption, the stock market, jobs, investment, government spending … a lot of the drivers of the capital that contributed to the pin the pricked the global credit bubble (i.e. the U.S. housing bust)? It came from China.
China sells us goods. We give them dollars. They take our dollars and buy U.S. Treasuries, which suppresses U.S. interest rates, incentives borrowing, which fuels consumption. And the cycle continues. Here’s how it looked (and still looks):

Source: Billionaire’s Portfolio

The result: China collects and stockpiles dollars and perpetuates a cycle of booms and busts for the world.
That’s the structural imbalance in the world that led to the crisis, and that problem has yet to be solved. And the outlook, longer term, for a solution looks grim because it requires China to move to develop a more robust, and consumer led economy. That structural shift could take decades. And going from double digit growth to low single digit growth in the process is a recipe for social uprising of its billion plus people.

In the near term, the likelihood that China will fight economic weakness with a weaker currency is high. We’ve seen glimpses of it since August. And the hedge fund community is ramping up bets that it’s just starting, not ending.


Source: Billionaire’s Portfolio

Above is a look at the dollar vs the yuan chart (the line going lower represents yuan appreciation, dollar depreciation). Longer term, China’s weak currency policy is a threat to economic stability and geopolitical stability. But short term, it could be a shot in the arm for their economy and for the global economy.

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The goal of the Billionaire’s Portfolio is simple: to provide retail investors with the same plain-vanilla stock investments that the world’s greatest billionaire investors and hedge funds own. And our subscribers can invest alongside these billionaires without the typical $5 million minimum investments and paying big hedge fund management and performance fees. Instead, they get access to our best of the best portfolio of billionaire owned stocks for just $297 a quarter.

2/16/16

As we headed into this past weekend, we talked about the threat that the oil bust poses to the global financial system (not too dissimilar from the housing bust), and we talked about the prospect of central bank intervention over the thinly traded U.S. holiday (Monday).

Both the Bank of Japan and the European Central Bank did indeed go on the offensive, verbally, promising more action to combat the shaky global financial market environment.
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The result was a 9.5% rally in the Japanese stock market from Friday’s close. And all global markets followed suit. Within the white box in the chart below, you can see the central bank induced jump in the Nikkei (in orange) and the S&P 500 futures (in purple).


Source: Billionaire’s Portfolio

This is purely the influence on confidence by the two central banks that are now driving the global economic recovery (the BOJ and the ECB). However, the potency of the verbal threats and promises has been waning. Big words have marked bottoms along the way over the past several years for stocks, and the overall ebb and flow of global risk appetite. But it’s becoming more evident that real, bold action is required. And given that it’s cheap oil that represents the big risk to financial stability at the moment, we’ve argued that central banks should outright buy commodities (particularly oil). And we think they will.


Source: Billionaire’s Portfolio

In 2009, despite the evaporation of global demand, oil prices spiked from $32 to $73 in four months after China tapped its $3 trillion currency reserves to snap up cheap commodities. Within two years, oil was back above $100.

China’s role in the commodity market was a huge contributor to the recovery in emerging markets from the depths of the global financial and economic crisis. Brazil went from recession to growing at close to 8%. Many were saying emerging markets had survived the recession better than advanced markets, and that they were driving the global economic recovery. And Wall Street was claiming a torch passing from the developed world to the emerging world as the future of growth and leadership.

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How are emerging markets doing now? Terrible. Not surprisingly, it turns out the emerging market economies need a healthy developed world to survive. And now with the additional hit of the plunge in commodity prices, Venezuela (heavily reliant on oil exports) is very near default. Brazil and Russia are both in recession. The longer oil prices stay down here, Venezuela will be the first domino to go, and others will follow. With that, we expect intervention to come. And as you can see in the response to the Nikkei overnight, it will pack a punch – and if it’s bold, a lasting one. Remember, as we said last week, historical turning points for markets often come from some form of intervention (public or private policy).

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