Latest | Billionaire's Portfolio

May 5, 2020

Warren Buffett spoke for over four hours over the weekend, as he hosted his virtual annual meeting for Berkshire Hathaway.

Although his message "bet on America" remained consistent, as it has over time, his lack of buying in this stock market decline suggests he's not comfortable betting, just yet. At least that's the signal that has been taken.

Is it the right signal?

Don't forget, Buffett runs the biggest hedge fund in the world, dressed up like an insurance company. It takes premiums and invests those premiums, primarily in stocks (the value of which have been marked down with this broad market decline). But they have been sitting on an unusually high amount of cash — $120 billion worth.

Why isn’t he putting it to work?

A possible reason: In this ongoing extraordinary event, the insurance business has unknown liabilities. As an industry overall, he said "the amount of litigation that is going to be generated out of what's already happened, let alone what may happen, is going to be huge … just the cost of defending litigation will be a huge, enormous expense."

On that note, I had heard over the past of month, anecdotally, that a portfolio manager at a big insurer was forced to sit on his hands, unable to make new investments in this environment, by mandate. I've yet to see any industry-wide regulatory policy that would spell that out, but with Berkshire's lack of action, perhaps there is truth to it.

What's another reason Buffett hasn't swooped in with a “deal of the century,” as he did in the financial crisis? The Fed and the U.S. Government, in this case, through quick and decisive intervention, have curtailed if not eliminated the opportunities. They squeezed out the vultures, by becoming the lender of last resort (with the deepest pockets of them all).

Pro Perspectives 5/4/20

May 4, 2020

Throughout the pandemic, Trump and his administration have been clearly positioning to punish (or retaliate against) the Chinese government for either 1) neglect and cover up, or 2) a deliberate attack.

In either case, Trump has said there will be "consequences."

This rhetoric has been slowly building over the past two months, but now is beginning to look like (more, bigger) conflict with China is ahead.

Pompeo has been the stern voice all along, against China, and over the weekend said there is a "significant amount of evidence that this came from the lab in Wuhan….that it's manmade."

At best, this means the Chinese government lied about it, and covered it up.

The early signals on this bubbling conflict may be found in Bitcoin (yes, Bitcoin).

As you can see in this chart below, Bitcoin spiked by as much as 23% in just two days, last week.

What does this tell us?

As we've discussed throughout the rise of Bitcoin, it has everything to do with money moving out of China, and less to do with Silicon Valley genius/ global monetary system disruption.

Bitcoin futures and off-exchange (peer-to-peer) trading are liquidity sources for Chinese citizens, allowing them to circumvent government capital controls, which restrict individuals from moving more than $50,000 out of the country a year. In short, it has been a way for Chinese (especially the wealthy) to get money out of China.

Pro Perspectives 5/1/20

May 1, 2020

We talked the past few days about the significant technical levels of resistance that stocks were bumping up against.

Combine that with the end of month, a 36% rise in stocks over just 27 business days, AND the unknown about what the economy will look like as businesses are beginning to reopen, and it looks like the top of a new range is in, for the moment.

So, let's talk about the expectations that have been set for the reopening of the economy.

I think it's fair to say that the policymakers and the government officials have set some very conservative expectations. If fact, I would argue that it leans more toward pessimistic.

And just as we evaluate the probable outcomes for markets, based on the way sentiment is leaning, we can also evaluate probably outcomes for the economy.

And after being in the business of markets for 24 years, I can tell you that the best trading opportunities are found in situations where sentiment is heavily leaning in one direction or another – and/or when the expectations bar has been set at an extreme level (either overly optimistic, or overly pessimistic). These are opportunities to bet against sentiment, because these situations set up for the element of surprise. And with surprise we tend to see sentiment violent swing from extreme levels.

I think we are set up for this swing in economic sentiment. Public officials have set the bar very low on expectations of getting back to normal life. And they've set the game plan accordingly for the re-opening of businesses – slow, and in stages. And the broad belief is that the behavior of people will follow this very conservative path.

This is set up for a surprise, related to how both businesses and consumers behave. And I suspect we're going to get it.

Once people are out of the house, returning to some day-to-day life and interactions, I suspect the life-learned patterns and behaviors won't be changed after just two months of sitting at home. I suspect we will all slip back into normal behaviors sooner rather than later, and possibly very soon – especially if hospitalization rates in the coming weeks are stable to lower. If that's the case, it will be a “rip the band-aid off” scenario for the economy, and a return to normalcy.

If that’s the scenario, we may see very quickly how a big bounceback in demand will overwhelm supply, following two months of supply disruption and production stoppages. That would be the first signal that inflation is coming.

Pro Perspectives 4/30/20

April 30, 2020

Stocks end the month lower today, after a 36% bounce from the March 23rd lows.

Let's take a look at the chart we've been watching, which presents some key technical resistance up here …

So, we have this big technical level around here at 2,930 which represents the 61.8% retracement of the full decline in stocks. And just above here, we have the 200 day moving average, which comes in at 3,004.

As we've discussed, this looks like a sensible area to mark the top of a range for a while. And I suspect we may see stocks trade back and forth in a range until there's some visibility into how the world looks with economies reopening.

What has yet to show any signs of life in a world where governments are doing cash handouts and much more? Commodities.

We have this chart of broad commodities …

This chart looks like a deflationary vortex, not a world where governments are handing out cash.

I suspect this chart of commodities will change/will be the next spot to watch.

As we've discussed, the government and central bank response is designed to inflate the value of the economy, and deflate the value of debt. That's a recipe for a global reset of prices (and a recipe for a reset of wages), and commodity prices should soar.

Pro Perspectives 4/29/20

April 29, 2020

The Fed met today. As we discussed yesterday, they did indeed take the opportunity to recap the response of the past two months. And it was a big one.

If there was anything new that came from Powell's press conference, my takeaway was his remarks on protecting against long-term economic damage.

He said Fed policies to protect firms and families from "avoidable insolvencies" comes with a hefty price tag, but would avoid long term damage to the economy.

He went on to say "now is not the time to worry about debt, but time to use the 'great fiscal power' of the U.S. to avoid deeper damage to the economy."

With that, as we discussed yesterday, the Fed has been a buyer of corporate debt (in the secondary market), and that has greased the wheels of the market for new corporate debt issuance of the past month and half — enabling companies to stockpile cash, despite the fact that many (if not all) would be considered high risk for bankruptcy if the economic disruption were to carry on, through the time necessary to get a viable vaccine on the market.

This should give us clues on the decisions coming from the Treasury and the White House on whether or not the domestic energy industry will be saved, or any other highly levered industry that has been crippled by the demand shock. I think the answer is "yes", they will be given government life support.

Pro Perspectives 4/28/20

April 28, 2020

The Fed meets tomorrow (virtually). This meeting should be a review of their ‘whatever it takes’ response of the past two months.

And it has been a busy couple of months.

What have they done?

In a world where revenues and incomes abruptly went to zero, for many, the Fed quickly and decisively resolved what was very likely to be a cascade of insolvencies.

They did it by flooding the world with liquidity. In addition to slashing rates to zero, they quickly backstopped the banks (no need to run and take money out of the bank). They fixed the Treasury market (averting the threat of capital flight from what has been historically the world’s safest investment/ parking place for capital). They fixed the corporate bond market (averting mass bankruptcies). They provided access to U.S. dollars for global banks (where global credit was beginning to freeze). They’ve kept mortgage markets moving (stabilizing the housing market – new buys and refinancing). They’ve kept the municipal bond markets functioning (keeping local and state government debt servicable and accessible).

How did they do it? By becoming the buyer of last resort – by threats and by action.

When a buyer steps into the market with the ability and promise to by unlimited amounts, with money they can create with a keystroke, it tends to resolve fears for those market participants that are natural buyers in those markets, and it tends to invoke fear in those market participants that have been betting against those markets (speculators run for the exits).

This playbook was written by Mario Draghi (ECB chief) in 2012. Yields on Spanish and Italian sovereign debt had skyrocketed to unsustainable levels, which put two of the biggest countries in the eurozone on default watch, which threatened more dominoes to fall, and a collapse of the euro (the monetary system). It was an ominous moment. But Draghi threatened to do ‘whatever it takes.’ He threatened to buy unlimited Italian and Spanish debt. Here’s what happened to yields on Spanish bonds …

Draghi’s threat put in the top for yields, without the ECB having to buy a single bond. Within two years, yields on Spanish debt fell from almost 8% to 1%. A European collapse was averted.

With this in mind, as people continue to debate who will be/should be “bailed out” and who will not/should not be, keep in mind that Jay Powell has already stepped over the line. When the line was crossed, the Fed became a buyer of anything and everything necessary to bridge the economy back to it’s pre-virus existence. For that reason, it’s hard to see a scenario where companies that were adding value to the economy two months ago, are forced to take the path of bankruptcy.

If you listen to earnings calls of the past couple of weeks, the common theme has been raising cash, by drawing down credit lines and new debt issuance. And one after another, the reporting companies seem to be having no problem finding buyers for new debt.

Pro Perspectives 4/27/20

April 27, 2020

We’re in the heart of earnings season now. This week we’ll hear more companies talk about beefing up liquidity (cutting dividends, pausing share repurchases, drawing on credit lines) and issuing new debt or refinancing existing debt, to the extent they can – all in an effort to buy time.

And this comes just as states are laying out plans for reopening businesses.

But as businesses reopen we'll begin to see the damage done to supply, demand and incentives.

On the latter, as we discussed on Friday, employers will be trying to rebuild support staff, whom in many cases have collected more from the government sitting at home, than they ever have from working for their employers.

Aside from the yet resolved health crisis, the economic problems that will be revealed in the coming weeks will become a challenge for a stock market that has bounced 32% from the March 23rd lows.

With that, here's another look at the chart we've been watching in stocks …

As we discussed a couple of weeks ago, with some big technical resistance coming in between 2,930 (the 61.8% retracement of the big decline) and 3,006 (the 200-day moving average), we will probably find the top of a range, until/unless we have validation of a successful treatment option for the virus. The U.S. trials should be reported soon, but they seem to be in no rush.

Pro Perspectives 4/24/20

April 24, 2020

As states look at reopening businesses, I suspect we’re going to see how obvious the political undercurrent is in this fight against the virus.

All of the numbers out of New York today continue to be on the decline. Less hospitalizations. Less getting to the severe stage. Less deaths.

As we discussed yesterday, the antibodies test done in New York show far more people likely have had the virus, which makes the death rate much lower (more like 0.5% of infected). And we have trials that have been underway on treatment options, the results of which, should be public very soon. And despite the continuous noise surrounding treatments, the anecdotals appear to be aligning with the results (less intubations).

This all favors reopening American businesses.

With that, there is now a political race against time. The sooner economies start opening up again, the weaker the case is for the Democrat’s push for mail-in voting. This (mail-in voting) will likely be the determining force in the November election (mail-in or walk-up voting). With that, the Democrats will be in a war for “election reform” in the next aid package. The bargaining chip for the Republicans will be aid for state and local governments. My guess is there will be no “next package” anytime soon. We will see.

Much of the aid has yet to make it’s way into the economy anyway. By the time the unemployed finally start receiving money, many of them might be back in a job. On that note, consider this: The median family income in the United States is about $62k. For a family with two unemployed (formerly low income workers with two children), the family stands to receive an annualized income of about $80k, for staying at home. I suspect they might fight for more money when they do go back to work. Wage inflation is coming.

Pro Perspectives 4/23/20

April 23, 2020

Over the past couple of weeks, we've talked about the key data coming from New York on the virus, which has suggested that something (a treatment) is working.

Let's take a look at the latest …

In Cuomo's daily presser, he's been showing charts of hospitalizations, which peaked about two weeks ago.

And he's been showing this, most important, chart on daily intubations.

We've now had 11 consecutive days of declines in intubations. Less people have been getting to the severe stage, and therefore less people are being intubated. And that has translated into less deaths. The daily deaths have nearly halved over the past two weeks.

Meanwhile it has been almost a month since New York hospitals were cleared to use a few treatment options (among them the generic hydroxychloroquine and Gilead’s Remdesivir). And some notable trials on those treatments are due to be reported any day (should have been much sooner). There was a report last night, that results on a hydroxychloroquine trial have been submitted and sit with the New York board of health.

Additionally, Cuomo said today that an antibody test on 3,000 New Yorkers showed a 14% infection rate (of those that didn't know they had it, assumably). In New York City, the number was 21%. That's big news. That would extrapolate out to about 1.7 million people that have the antibodies (have been infected and recovered) in New York City.

If positive results come in from these trials, and we now know the death rate is likely far lower (around 0.5% of infected), and the infected and recovered rate is far higher, then the timeline on the health crisis could be far shorter than what has been anticipated (from a global health, global economic and markets perspective).

On that note, much of this has been a sideshow in the bigger narrative, as the focus has been on a vaccine (which is a long timeline – a devastating timeline for the economy). The reality: We may never have a vaccine for this, just as we haven't for other deadly viruses. But the data is building in the direction of a more manageable virus and more favorable outcome than what was projected.

Pro Perspectives 4/22/20

April 22, 2020

We've talked quite a bit about the explicit intent of policymakers (here and globally) to combat the global economic shutdown by flooding the world with money, which will ultimately inflate economies and deflate debt.

After all, sovereign debt is only measured as an absolute number by the media, because it's a big number, and eye-catching. But GDP is a big number too. And in terms of our ability to service debt at sustainable interest rates, what matters is the size of debt relative to the size of the economy. In that respect, that ratio is ballooning, and will continue to get bigger, in the near term, as policymakers pump more money into the economy, to best insure against the worst-case scenario.

But in the post-virus environment, as I said yesterday, our government debt will be inflated away — meaning we will also have inflated growth. The value of our economic output will be measured with dollars that are easier to come by and less valuable (inflating the value of GDP). That will ultimately normalize the Debt-to-GDP levels. Again, this doesn't work so well in a normal world where global economies perform unevenly (good and bad/ winners and losers). But in a world where everyone is in the same boat, these policies become a global reset of prices (and ultimately wages).

Again, this inflation brew is a recipe for much higher gold prices.

Last week, billionaire Paul Singer, one of the best investors of the past 40+ years said he thinks gold can trade multiples higher than current levels. Yesterday, Bank of America projected a move to $3,000 in gold. Spot gold currently trades around $1,710.

With that, remember we looked a leveraged way to play gold last week, in a gold miners ETF, GDX.

Here's another look at this chart, which is just breaking out …

As we discussed last week, a return to the 2011 highs in this ETF (the record highs in gold prices), would mean more than a double (relative to a 12% gain in the underlying).