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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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).
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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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