February 20, 2020

We've talked about the Chinese central bank effect on global markets. 

Among the biggest winners since China became the backstop for global markets earlier this month:  the beaten down areas of the European stock market.  

With that, let's revisit an excerpt from my February 10th note, where we discussed the opportunities in Spanish and Italian stocks…

"With a quarter of a trillion dollars of Chinese money undoubtedly being put to work in global markets, let's take a look at some opportunities in European stocks. 


Like U.S. stocks, German stocks are on (or near) record highs.  But there are very compelling laggards in Europe.  Italian stocks are well off of record highs, still 44% off of the pre-global financial crisis highs.  And you see in the chart below, the FTSE MIB traded today to the highest level since October of 2008.  

Next, here's a look at Spanish stocks.  It looks like a big breakout may be underway here too, with a break and three closes above this big trendline.  This line comes in from the 2007 highs.  Spanish stocks remain 38% off of those highs.

These markets have indeed been among the biggest winners for the month, and these technical lines have given way, as you can see in the updated charts below …

This continues to look like a huge opportunity to be buying the laggards in European stocks (Spain and Italy)… but only if the euro holds up.

This is a huge moment for the history of the euro.  A break of this 20-year support would be ugly and bring about discussions of a return to the all-time lows.  And that would likely be accompanied by draconian scenarios for the euro zone and the survival of the euro.  

February 19, 2020

We had another new record high for the S&P 500 today, and global markets in general were predominantly “green across the screen,” led again by commodities. 

The Chinese liquidity boom continues to float all boats.  And it’s probably very early on

Below is a look at the performance of global financial markets since the PBOC rolled out the bazooka of policy measures to open the month — in an effort to counter the drag on the global economy, from a lockdown of the world’s second largest economy (China).

The performance in the above table is just from the opening of this month!  Essentially, everything is up, except bonds (relatively flat) and foreign currencies.  Money is flooding into dollars and dollar-denominated assets (commodities).

Remember, it was at the depths of the global financial crisis, that China came in on a buying spree of beaten-down global commodities.  Is this a repeat? 

Here’s what they did to crude oil during that period …

In early 2009, it looked like global demand would never come back.  China stepped in and began gobbling up cheap commodities.  They ran oil prices back up to more than $100. 

February 18, 2020

For markets, a threat like the coronavirus doesn’t have to go away for markets to move on from it.  The worst case scenario (global pandemic) just has to be taken off of the table.  

We’re not there yet.  But as we’ve discussed over the past couple of weeks, for markets, the “unknown” about the coronavirus is being overwhelmed by the “known” of how central banks will respond. 

If there is one thing we’ve learned from the events of the past decade, it’s that central banks will do, in coordination, “whatever it takes” to keep the global economy going, when faced with global crises. 

In this case, central banks are responding, again, led by the PBOC. 

Remember, as we’ve discussed, the elaborate measures taken by China earlier this month, to shore up the economy and financial markets, were a big deal, not just for Chinese markets but for global financial markets. 

And with over a quarter of a trillion dollars injected into the Chinese financial system, we talked about the likelihood of that money being put to work, not only to stabilize global equity markets, but to start stockpiling cheap commodities again (as they did in 2010-2011). 

With that, on a day where a decline in stocks were making headlines, commodities were on the rise.  Palladium was up by 11%.  Natural gas was up by 7%.  Gold was up over 1%.  Oil was up.  And copper (a typical proxy on global economic sentiment) was up, not down.  

With that, let’s take a look at a chart on the CRB index (the broad commodities index)…

You can see the path for broad commodities, since the PBOC rolled out their policy response (on Feb 3rd).  The path has been UP. 

February 14, 2020

Today was the deadline for all big money managers to give a public snapshot of their portfolios to the SEC (as they stood at the end of the fourth quarter). So let’s review why, if at all, the news you read about today regarding the moves of big investors, matters.

Remember, all investors that are managing more than $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.

First, it’s important to understand that some of the moves deduced from 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends.

Now, there are literally thousands of investment managers that are required to report on a 13F. That means there are thousands of filings. And the difference in manager talent, strategies, portfolio sizes, motivations and investment mandates runs the gamut.

Although the media loves to run splashy headlines about who bought what and who sold what, to make you feel overconfident about what you own, scared about what you sold, anxious, envious or all a combination of it all, the truth is, most of the meaningful portfolio activity is already well known. Many times, if we’re talking about very large positions, they’ve already been reported in another filing with the SEC, called the 13D.

With this all in mind, there are nuggets to be found in 13Fs. Let’s revisit how to find them, and the take aways from the recent filings.

I only look at a tiny percentage of filings—just the investors that have long and proven track records, distinct approaches and who have concentrated portfolios. That narrows the universe dramatically.

Here’s what to look for:

1. 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.

2. For specialist investors (such as a technology focused hedge fund) I 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 or takes a macro bet.

3. 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.

4. 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.”

5. Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts by a substantial amount, 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.

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February 13, 2020

Let’s step back from the day to day noise of newswires, and journalist opinions on infectious disease, and revisit what is an exciting outlook for stocks and the economy.

Remember, along the way last year, we were looking for a repeat of 1995, where the Fed was forced to reverse course on interest rates.  We got it.  And we got a big outcome for stocks.

And with that flip-flop by the Fed, we’ve talked about the prospects of seeing another big late 90s-type of run for stocks and the economy.  After the Fed cut rates in July of 1995, the economy went on to average 4.5% quarterly annualized growth through the end of the 90s.  Stocks were up big every year through 1999, with an annual average return of 26%.

Remember, we never had the big bounce back in growth, following the Great Recession.  Historically, significant economic downturns are followed by a big bounce back in growth.  For the 10-years following the Great Recession, the economy has grown at right around 2% annualized.  That weak recovery has left the U.S. economy about $4 trillion smaller than it would be had we returned to the path of long-term trend growth (3%).  This outlook of another late 90s boom would be a needed “catch up” for the U.S. economy.

So, with this in mind, we are in the midst of the longest economic expansion on record.  As Bernanke has said, “economic expansions don’t die of old age, they tend to be murdered.”  The Fed kills them through aggressive tightening, in fear of getting behind on inflation.

The good news.  That seems unlikely this time around.  For the Fed’s part, Powell has made it clear that there will be no rate hikes until it sees significant and sustained inflation above its 2% target.  That should be the formula for a boom period.

February 12, 2020

Jerome Powell just spent two days on Capitol Hill, making prepared remarks to Congress on the economy, and then painfully entertaining their questions/ monologues.

The message from Powell hasn't changed.  The economy is good and inflation is tame, yet they stand ready to act against changes to that view. 

What could change that view?  The old risk to that view was an indefinite trade war.  The new risk to that view is the unknown outcome of the coronavirus.  But the former already forced the Fed and the ECB back into balance sheet expansion.  And the latter has the central bank in China flooding China, and global markets, with liquidity.

If we think about the primary purpose of this liquidity deluge:  It's to stabilize and/or restore confidence.  Confidence is the key ingredient in keeping the economic engine going.  Through low rates, balance sheet expansion, and credit creation, the Fed has proven over the past decade to be able to promote higher stock prices and higher housing prices.  That has translated into hiring, spending and investing, which has translated into economic activity — all despite a myriad of threatening crises.  

So, currently we have record high stocks, a strong housing market, and solid economic data.  It appears that the central banks (led by the Fed) have again been successful in using the balance sheet to stabilize confidence (which was waning in the third quarter last year). 

This should be a powerful line of defense against a reduction in global growth from the health crisis in China.  Still, the market is pricing in more Fed rate cuts – a coin flips chance of at least one rate cut by July.  And by the end of the year, the market is pricing in a near 80% chance of at least one cut – and plenty of bets are being place on several cuts.

This is either reflecting the view of the coronavirus turning into a global pandemic, which would be far too conservative in pricing in just a rate cut or two.  Or it's reflecting a view that the U.S. economy isn't any better today, than it has been over the past decade.  Both seem like very low probability scenarios (unsupported by the data).  

What's clear is that the market is leaning heavily one way.  If this health crisis threat were to clear in the coming weeks, the economy would be positioned for a big upside surprise in growth into the end of the year.  This brings in the other side of what could change the Fed's view:  hotter inflation.  That's my bet. 

February 11, 2020

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February 10, 2020

As we entered last week, the PBOC had rolled out an arsenal of policy measures (including a quarter of a trillion dollar liquidity injection into the Chinese financial system).  And they did so with confidence that they could be the backstop for the Chinese economy and for global confidence, and therefore become a "put" against downside risks in global financial market.   

So far, mission accomplished.  The S&P 500 futures, the proxy of global investor confidence, is near record highs again, up 3.7% from the lows of last week. 

And with a quarter of a trillion dollars of Chinese money undoubtedly being put to work in global markets, let's take a look at some opportunities in European stocks. 

Like U.S. stocks, German stocks are on (or near) record highs.  But there are very compelling laggards in Europe.  Italian stocks are well off of record highs, still 44% off of the pre-global financial crisis highs.  And you see in the chart below, the FTSE MIB traded today to the highest level since October of 2008.  

Next, here's a look at Spanish stocks.  It looks like a big breakout may be underway here too, with a break and three closes above this big trendline.  This line comes in from the 2007 highs.  Spanish stocks remain 38% off of those highs.

February 7, 2020

As we end the week, let's take a look at the state of the big "disruptors" following Uber's earnings report yesterday.
It was a little less than a year ago that Lyft IPO'd.  And Uber went public about a month later.  Based on the first day trading of Lyft and the early indications on how Uber would be priced, the ride sharing industry was being valued at an absurd 14 times the size of the traditional rental car industry.  As I said last year, "Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle."

When Lyft went public, Silicon Valley VCs were dumping a company on the public that was doing $2 billion in revenue and losing $1 billion.  Today the company does $3.5 billion and losses $2.6 billion.  

When Uber went public it was doing $11 billion in revenue, and losing $4.2 billion. Now it does $13 billion in revenue and loses $8.7 billion.  

In both cases (Lyft and Uber) we had over-hyped "hyper-growth" companies with slowing revenue growth and widening losses.  Now, less than a year later, the growth continues to slow and the losses continue to widen, and the two companies are worth $85 billion, not $140 billion — in a stock market sitting near record highs.  

The era of paying $1.60 for a dollar of revenue, and then turning back to Silicon Valley for another injection of cash is over.   

The question is, will Wall Street pick up where Silicon Valley left off, funding business models (the "disruptors) that are monopoly hunting/designed to destroy the competition with predatorial pricing?  Unlikely.  More unlikely:  Washington allowing it to happen.  

February 6, 2020

On Monday, we talked about two markets to watch that would likely dictate the sentiment in global markets in the coming days:  Chinese stocks and the Chinese currency (the yuan).

Both opened the week with a big gap down.  But both have since been recovering nicely, driven by the policy response of the Chinese central bank, by the direction of the Chinese government.   

Here's a look at Chinese stocks, up 7% from the Tuesday lows …

Indeed, this has translated into higher global markets, and less fear about a draconian outcome from the coronavirus.

With that, low rates, expanding global central bank balance sheets and a fundamentally solid economy, U.S. stocks are back on record highs.

Supportive of that, we continue to get positive surprises in fourth quarter earnings.  Global manufacturing data (the concern of last year) is bouncing back, following the U.S./China trade deal.  And we're going to get another big jobs number tomorrow.
With the impeachment circus now over, and the pandemic threat softening, will Trump turn toward the next pillar of Trumponomics:  infrastructure.
It seems unlikely.  In Tuesday's State of the Union address, he only made one mention of it.  And he was urging Congress to pass a transportation bill that's been on the table since mid-19.  This is a fraction of the spend of the $1-$2 trillion deal he was negotiating with Congress two years ago.  Perhaps he's looking to give less and get more of what he wants out of an infrastructure spend.  That would mean infrastructure will be addressed after the election.