We’re getting a gift to buy the DJIA at a discount

July 9, 5:00 pm EST

We’ve talked about the glaring lag in the performance of blue chip stocks coming out of this recent stock market correction.  This is creating a huge opportunity to buy the Dow, now.

With all of the complexities you can make of investing, this one is simple.  The blue-chip Dow Jones Industrials Index is down on the year (as of this morning).  The Nasdaq is up 13% on the year.  Small caps (the Russell 2000) is up 11%.

And we’re in an economy that’s running at better than 3% growth, with low inflation, ultra-low rates, and corporate earnings growing at 20% year-over-year. With this formula, and yet a tame P/E multiple on stocks, we’ll probably see stocks up double digits before the year is over.  Meanwhile, we are already in July, and the DJIA — the most important benchmark stock index for global markets – is starting from near zero.

You may be thinking the boring “industrials” average is out-dated, and flat for a reason. But as far as the makeup of the indices is concerned:  The index curators will shuffle the constituents to ensure that the biggest, best performing companies are in it.  Bad stocks get kicked out.  Good stocks get added.  And, to be sure, your retirement money will be methodically plowed into it (the benchmark indices) every month by Wall Street investment professionals.

Bottom line:  The DJIA is presenting a gift here to invest, at a discount, in an economy that’s heating up.  And you get this chart, which we’ve been watching in recent weeks.  This big trend line has held, and so has the 200-day moving average.
How do you buy it?  Your financial advisor will put you into mutual funds with big sales loads and fees in attempt to track the Dow.  But you can buy an ETF that tracks the Dow for as little as 17 basis points (example: symbol DIA, the SPDR DJIA ETF).  This Dow looks like low hanging fruit.
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Ignore the media cherry pickers, the economy is doing very well

July 6, 5:00 pm EST

The jobs report this morning continued to show an improving economy, operating with the luxury of low inflation.

I say improving because as the unemployment rate ticked higher, it represents people coming back into the work force.  Those people that have been discouraged along the way, through the economic crisis and recovery, and have dropped out of the work force, are coming back, looking for work.

Remember, the missing piece of the recovery puzzle over the past decade has been wage growth.  That has been the telltale sign of the job market, despite the low headline number.  With little leverage in the job market to maximize potential, much less command higher wages, consumers tend not to chase prices in goods and services higher–and they tend not to take much risk.  This tells you something about robustness of the economy.  And that’s precisely why we’ve needed fiscal stimulus and structural reform.  And it’s just in the early stages of feeding through the economy.

The other big news of the day was trade.  The U.S. started implementing duties on $34 billion of Chinese imports today.  On that note, the media has been focused on one specific sentence in the Fed’s minutes yesterday.  After weeding through the long conversation on how well the economy was doing, they picked out this sentence to build stories around “contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.”  Plucking this one out and using it to support their scenarios of trade wars and economic implosion has to be good for reeling in readers.

But keep in mind capital goods orders (the chart below) are nearing record highs again.
Add to this: An ISM survey back in December showed that businesses were forecasting just 2.7% growth in capital spending for 2018.  But when they were asked again in May, they had revised that number UP to 10.1% growth.
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Rates Picture Should Start Heating Up

July 5, 5:00 pm EST

I hope everyone had a great Fourth of July yesterday.  Today, the markets continue to be thinly traded as we head into the jobs report tomorrow.

We did get minutes from the recent Fed meeting today.  This is a closer look into the views of the Fed from their June meeting.  Of course, we already had a lot of information from that June meeting: the Fed hiked rates for the second time this year, they telegraphed an additional hike for the year in their projections, plus the June meeting was also accompanied by a press conference from Fed chair Jay Powell.  And his explicit “main takeaway” was … “the economy is doing very well.”

With this in mind, as we head into tomorrow’s jobs numbers, the 10-year yield is probably the most important chart to watch.  While inflation isn’t near reflecting an economy that’s running hot, the interest rate market is even more disconnected.

Remember, back on May 18, in my Pro Perspectives note, we discussed this chart …
As the world was becoming concerned with the speed and level of market interest rates, we had this big technical reversal signal hit for the key 10-year government bond yield.
We focused on this in my May 18th piece, where I said “this technical phenomenon, when closing near the lows, is a very good predictor of tops and bottoms in markets, especially with long sustained trends.”  And I said, “I suspect we may have seen some global central bank buyers of our Treasuries today (which puts downward pressure on yields) to take a bite out of the momentum.”

Today the chart looks like this …
So, that outside day did indeed predict a reversal.  And we head into tomorrow’s job report with the benchmark 10-year yield at just 2.84%.  That’s in a world where the economy is running at 3% growth and unemployment is under 4%.
But this disconnect may be changing tomorrow.  The key data point tomorrow will be wages (Average Earning), not jobs.  A hot number there will likely turn this around, and bring higher rates back into the picture.
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There has NEVER been a down year in stocks when these conditions have been met

July 3, 5:00 pm EST

Yesterday we talked about the set up for the Dow. In the past couple of trading sessions, it traded perfectly into the trendline (support) that represents the run in stocks following the 2016 election.

It’s especially compelling when we consider that the Dow has been the laggard coming out of the broad stock market correction. As I said yesterday, this sets up for a second half where money should aggressively move back toward the blue chips.

With this in mind, I want to revisit some analysis I talked about last July. It’s from billionaire investor Larry Robbins (of the hedge fund Glenview Capital).

Robbins looked back at the important influence of low interest rate environments on stocks. He said “every time ONE of these following conditions has existed, the market has produced positive returns.

Here they are again:

  • When the 30-year bond yield begins the year below 4%, stocks go up 22.1%.
  • When investment grade bonds yield below 4%, stocks go up 16%.
  • When high yield bonds yield below 8%, stocks go up 11.6%.
  • When cash as a percent of asset for non-financials is above 10%, stocks go up 17.6%.
  • When the Fed tightens 0-75 basis points in the year, stocks go up 22%.
  • When oil falls more than 20%, stocks go up 27.5%.

His study showed that there has NEVER been a down year in stocks, when any ONE of the above conditions is met.

Now, we looked at this last year this time, and the S&P 500 finished up close to 20% on the year. It also worked in 2015. And it worked in 2016.

Does it apply this year? All apply, with the exception of oil. Oil is UP, big. And assuming the Fed hikes one more time this year. Still, as Robbins said, we need just ONE of these conditions to be met. The point is, low interest rates tend to make stocks go UP. That’s because global capital tends to reach for more risk to get return in a world where risk-free bonds aren’t compensating them enough.

Bottom line: Ignore all of the geopolitical noise. Low rates continue to tell us stocks will go up. And to make it easy for us, the DJIA is starting today at essentially the zero line — flat on the year!

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Blue-chip American companies are a bargain in a world of sub-3% ten-year yields  

July 2, 5:00 pm EST

As we head in to the holiday week, markets will likely go quiet until we get Friday’s jobs number.

We’re now into the second half of the year.  After stocks got out to a huge start in January (up 7% in just the first 18 trading days of the year), we’ve since had a textbook correction of about 12%.  And we currently sit up only 1% in the S&P 500 for the year.  And the Dow is still down, -1.8%.

But we have this chart on the Dow that looks very intriguing…

The DJIA is trading perfectly into the trendline that represents this post Trump-election rally.

Given that technical backdrop, the underperformance of the Dow relative to small caps and tech stocks, and a 16 P/E, the blue-chip American companies are a bargain in a world of sub-3% ten-year yields.

This sets up a second half, where money aggressively moves back toward the blue chips.

Remember, as we worked through the price correction in stocks for the first half, we were awaiting Q1 earnings to show the early signs of fiscal stimulus working on the economy.  We got it.  We had big positive surprises on an earnings season that was already projected to do nearly 20% earnings growth.

Now, as we enter the second half, we should start to see the positive surprises in the economic data.

If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
Newsflash: OPEC is still cutting

June 29, 5:00 pm EST

Last week, we talked a lot about oil, as OPEC was meeting to deliberate on the status of their agreement to cut production.

While oil prices have been rising aggressively over the past year, the markets haven’t been paying a lot of attention — distracted by Trump watching.

But then Trump put it on the front burner, with another jab at OPEC on Twitter.  And the media and Wall Street began trying to deduce the OPEC outcome.  In the end, they misinterpreted.  OPEC’s agreement to go from overcutting to complyingwith the initial levels of production cuts, means they are still cutting.

So, the market is still undersupplied in a world where demand has proven to be underestimated.  That’s a formula for higher prices.

That’s what we’ve had for the past year, and that’s what we’ve gotten since OPEC’s official statement on Friday.  In my note last Friday, I said “the lack of enough action from OPEC may serve as a catalyst to push oil much higher from here.  That, of course, serves OPEC’s interests.”

Oil prices have exploded!  We’ve seen a $10 pop since Friday morning.  That’s 15% in a week.  And I suspect it’s going to keep going.

Remember, we’ve talked about the prospects for $100 oil this year.  Leigh Goehring, one of the best research-driven commodities investors on the planet has been telling us that since last year.  And he’s looking spot-on at the moment.

Bottom line:  This script is precisely what we’ve been talking about, here in my daily Pro Perspectives note, since the price of oil was in the $40s. We’ve talked about the prospects for a return to $80 oil, and maybe even as high as $100 oil.  And it looks more and more possible, given the surging demand and the supply shortfall.

How can you play it.  On this thesis for oil, in my Billionaire’s Portfolio, we added SPDR Oil and Gas ETF (symbol XOP) and Phillips 66 (symbol PSX) back when oil prices were deeply depressed (in 2016).  We followed the activism of policymakers (both central banks and OPEC).  And in the case of PSX, we also followed Warren Buffett.   

Both are up big, but have a lot more room to run. Oil and gas stocks (which comprise the XOP) have yet to reflect the supply shortfall in the oil market, much less the booming demand that is coming from an improving global economy (which many have underestimated).

If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.

Amazon Is To Corporate America As China Is To The Global Economy

June 27, 5:00 pm EST

We’ve talked about the case for a shakeout in Amazon. It was up big today on news that it would be buying a big online pharmacy.

That worked to curtail the slide in the stock (for now).  But it only exacerbates the building regulatory scrutiny and the President’s wrath against Amazon’s developing monopoly and power (much of which has been garnered overtime from the unfair advantages Amazon has enjoyed from operating as an internet company).

If there’s one thing we know about Trump as a President, he’s done what he says he’s going to do.  And he’s had plenty of verbal threats directed squarely at Amazon.  We can only assume that he will carry out the offensive he’s been promising — against a company that has crushed industries by price wars.

On a similar note, let’s talk about China.  As we’ve discussed quite a bit, China’s rapid economic ascent in the world came through currency manipulation.  They held their currency down, to underprice the world on exports.  And as the world stood by and watched (and bought lots of stuff from them), they became the world’s second largest economy, and the accumulated the largest war chest of foreign currency reserves.

China is to the world, as Amazon is to corporate America.  And Trump is attempting to deal with them both head on.

Interestingly, China is quietly fighting back, via the currency.  The go to tool in China is currency devaluation.

That’s what they’ve been doing over the past three months.  And that has accelerated in just the past 10 days – they’ve devalued by almost 4% against the dollar.  This is something to watch closely.  A big one-off devaluation out of China would be a geopolitical cage rattling.
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Wild West Days Over For Tech Giants

June 26, 5:00 pm EST

While the media continues to be stuck on the global jawboning about trade. We’ve been talking about the continued domestic “leveling of the playing field.”

We’ve seen the verbal and Twitter shots taken by Trump at the tech giants since he’s been in office.  And the threats have slowly been materializing as policy.

Late last year, we talked about the repeal of the Net Neutrality rule.  And now we have the Supreme Court ruling that subjects internet sales to state tax.

Before you know it, the tech giants (Facebook, Amazon, Netflix, Google …) may actually be held to a similar standard that their “old economy” competitors are held to.  They may have to pay for real estate (i.e. bandwidth). They may be liable for content on their site, regardless of who created it. And they may be scrutinized more heavily for anti-competitive practices.

That means, the costs may go UP for these companies.  And the cost may go UP for consumers.  But a more balanced and stable economy and society may come with it. 

So, the balance of power is shifting, just as people were becoming convinced that Amazon was taking over the world.  As we’ve discussed, if the market starts pricing OUT the prospects of Amazon becoming a monopoly, then the jaws may be closing on this chart …
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Trump is ALSO focused on domestic ‘leveling of the playing field’

June 25, 5:00 pm EST

Last Thursday we talked about the important Supreme Court ruling, which would subject internet sales to state tax.  As I said, this was another “level the playing field” step for the Trump administration.  And another shot across the bow of the tech giants — the near monopolies that have destroyed industries over past decade, in large part to the regulatory advantages they’ve enjoyed relative to their old-line industry peers.

With that, on Thursday, we looked at this big reversal signal that developed in the tech-heavy Nasdaq — an ominous signal for the tech giants.
Today, we got this …
And this, in Amazon…

Meanwhile, what was UP on the day?  Brick and mortar retail.  Walmart was up 2%.  Target was up 1%.

A lot of attention on the day, from the financial media, was given to trade threats.  But this domestic “level of the playing field” is the real story.

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OPEC Won’t Fold To Trump Threats

June 22, 5:00 pm EST

We’ve talked about the big OPEC decision this week, and the prospects for oil prices.

When we get a market that thinks they know the outcome, we get a market that begins leaning too hard in one direction.  And that creates an market outcome that can be asymmetric (i.e. lopsided).  That’s what we had today.

In this case, Trump’s verbal attacks on OPEC’s price manipulation generated a media frenzy surrounding the OPEC meeting.  And with the media swarming, the oil ministers seemed happy to oblige with commentary and pontification.  And that set expectations for the outcome.

And this morning, OPEC released their communique, but it was far from the clean production increase the market was looking for.  With that, we got this chart …

It went straight up.  Oil was up almost 6% on the day and nearing $70 again.  And this lack of enough action (as we should expect) from OPEC, to balance the oil market, may serve as a catalyst to push oil much higher from here (which serves OPEC’s interests).

And as we discussed yesterday, with high oil prices now squarely on the radar (for Trump, the media and the market), we may begin seeing oil prices weigh on stock prices.

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