We’re getting into the heart of Q1 earnings now, with about a quarter of the companies in the S&P 500 now in, and many more reporting this week. And we’ll get the first look at Q1 GDP this Friday.
Remember, as we went through the price correction in stocks, we’ve been waiting for the data to “prove it” to the market that fiscal stimulus and structural reform are indeed fueling a return to trend growth.
On that note, the performance of companies in Q1 have NOT disappointed. As of Friday, 80% of the S&P 500 companies that have reported have beat earnings estimates. And 72% have beat revenue estimates.
Now we have the build up to the big Q1 GDP number at the end of this week. We were already heading into the first quarter, with the economy growing at better than 3% for the second half of 2017. And then the fire was fed with the tax bill.
So what are the expectations going into the GDP report?
The Atlanta Fed attempts to mimic the model used by the BEA on their GDP forecast. They are looking for 2% for Q1 growth. And as you can see in their chart above, the forecasted number has been on a dramatic slide as we’ve seen more and more economic data through the period. More importantly, Reuters has the consensus view of economists at 2%.
The New York Fed’s model is predicting 2.9% growth (closer to that important trend growth level).
As with earnings, a low bar to hop over tends to be very good for stocks. And at a 2% consensus, we’re setting up for a positive surprise on GDP.
As we’ve discussed, despite the move higher in global rates over the past week, and the coming break of the 3% barrier in the 10-year yield, it will be hard to dispute the signal of economic strength and robustness from the combination of a huge earnings season and a positive surprise in GDP. If we get it, that should kick the stock market recovery into another gear.
Yields continue to grind higher toward 3%. That has put some pressure on stocks, despite what continues to be a phenomenal earnings season. This creates another dip to buy.
Yesterday, we talked about a reason that people feel less good about stocks, with yields heading toward 3%. [Concern #1] It conjures up memories of the “taper tantrum” of 2013-2014. Yields soared, and stocks had a series of slides.
My rebuttal: The domestic and global economies are fundamentally stronger and much more stable. But maybe most importantly, the economy (still) isn’t left to stand on its own two feet, to survive (or die) in a normalizing interest rate environment. We have fiscal stimulus doing a lot of heavy lifting.
Let’s look at a couple of other reasons people are concerned about stocks as yields climb:
[Concern #2] Maybe this is the beginning of a sharp run higher in market interest rates — like 3% quickly becomes 4%?
My Rebuttal: Very unlikely given the global inflation picture, but more unlikely with the Bank of Japan still buying up global assets in unlimited amounts (Treasuries among them, through a variety of instruments). They can/and are controlling the pace, for the benefit of stimulating their own economy and for the benefit of stimulating and maintaining stability in, the global economy.
[Concern #3] I hear the chatter about how a 3% 10-year note suddenly creates a high appetite for Treasuries over stocks at this point, especially from a risk-reward perspective (i.e. people are selling stocks in favor of capturing that scrumptious 3% yield).
My Rebuttal: In this post-crisis environment, a rise toward 3% promotes the exact opposite behavior. If you are willing to lend for 10-years locked in at a paltry rate, you are forgoing what is almost certainly going to be a higher rate decade than the past decade. If you need to exit, you’re going to find the price of your bonds (very likely) dramatically lower down the road. Coming out of a zero-interest rate world, bond prices are going lower/not higher.
Remember this chart …
The bond market has become a high risk-low reward investment. Meanwhile, with earnings set to grow more than 20% this year, and stock prices already down 7% from the highs of the year, we have a P/E on stocks that continues to slide lower and lower, making stocks cheaper and cheaper. That makes stocks a far superior risk/reward investment, relative to bonds – especially with the prospects of the first big bounce back in economic growth we’ve seen since the Great Recession.
As we’ve discussed, the proxy on the “tech dominance” trade is Amazon. That’s the proxy on the stock market too. And it’s not going well. The President hammered Amazon again over the weekend, and again this morning.
Here’s what he said …
Remember, we had this beautiful heads-up on March 13, with the reversal signal in Amazon.
That signal we discussed in my March 13 note has now predicted this 15.8% decline in the fourth largest publicly traded company. And it’s dictating the continued correction in the broader market.
If you’re a loyal reader of this daily note, you’ll know we’ve been discussing this theme for the better part of the last year. The regulatory screws are tightening. And the tech giants, which have been priced as if they are, or would become, perfect monopolies, are now in the early stages of repricing for a world that might have more rules to follow, hurdles to overcome and a resurrection of the competition they’ve nearly destroyed.
As we know, Uber has run into bans in key markets. We’ve had the repeal of “net neutrality” which may ultimate lead big platforms like Google, Twitter, Facebook and Uber, to transparency of their practices and accountability for the actions of its users. Trump is going after Amazon, as a monopoly and harmful to the economy. Tesla, a money burning company, is being scrutinized for its inability to mass produce — to deliver on promises. For Tesla, if sentiment turns and people become unwilling to continue plowing money into a company that’s lost $6 billion over the past five years (while contributing to the $18 billion wealth of its CEO), it’s game over.
With that said, this all creates the prospects for a big bounce back in those industries that have been damaged by tech “disruption.” And this should make a stock market recovery much more broad-based than we’ve seen.
With the sharp decline in stocks today, we’ve retested and broken the 200-day moving average in the S&P 500. And we close, sitting on this huge trendline that describes the rise in stocks from the oil-crash induced lows of 2016.
Today we neared the lows of the sharp February decline. I suspect we’ll bottom out near here and begin the recovery. And that recovery should be fueled by very good Q1 earnings and a good growth number — brought to us by the big tax cuts.
The sharp swings continue in stocks, with the bias toward the downside. And as we’ve discussed over the past two weeks, it’s all led by the tech giants. Remember, on Friday we looked at the most important chart in the stock market: the chart of Amazon (as a proxy on the tech giants). Early this afternoon, Amazon was outpacing the S&P 500 to the downside by 4-to-1, and finally the broader market cracked to follow it.
This all continues to look like the market is beginning to price in a world where the tech giants, that have taken dangerously significant market share over the past decade, are on the path of tighter regulation and a leveling of the playing field, which will result in higher costs of doing business. That will change their position of strength and open the door to a resurrection of the competition.
Remember, on the stock slide of this past Friday, the S&P 500 hit the 200-day moving average and bounced sharply. It now looks like we’ll get another test of it, probably a break, and maybe take another peak at the February lows.
Here’s a look at the chart ….
You can see in the chart above the technical significance of these levels. This represents the trend from the oil price induced lows of 2016. And the slope of this trend incorporates the optimism from the Trump election and the outlook on pro-growth policies.
With that significance at play, a breach of this support, at least for a short time, would all play into the scenario that we’ll see more swings in stocks (pain for the bulls) until we get to earnings season, which kicks into gear on April 13. And as we discussed, that should begin the data-driven catalyst for stocks (earnings and growth, fueled by fiscal stimulus).
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Stocks were down big today. The media will have fun touting the Dow’s 700-point loss. But while 700 points has good shock value, on a Dow at 24,000, it’s not what it used to be.
Still, as we’ve discussed, the media and Wall Street are programmed to fit a story to the price. And there are no shortages of potential risks to point to when stocks fall. We have trade posturing in Washington. We have a Fed that’s in a tough position, trying to balance a bullish view on growth with the perception that rising rates could choke off that growth. And we have more regulatory scrutiny growing against the tech giants — with Facebook being the latest in the hot seat.
All of that sounds like bad news. But we also have corporate earnings on pace to grow at nearly 20% this year. And that could be an undershoot, given the inability of Wall Street to calibrate the effects of tax cuts on demand. And we have a big trillion-dollar plus infrastructure plan coming down the pike too. This is all as consumers are in as healthy a position as we’ve seen in more than a decade.
But what about a trade war? Doesn’t that threaten the earnings and growth outlook. Not more than nuclear war. And that was, in the public perception, probably as much of a risk last year, as a trade war is now. Stocks went up 20% last year.
Most importantly, we’ve discussed the merits of fighting China’s currency manipulation. If we don’t, we (and the rest of the world) are destined to repeat the cycles of credit booms and busts, with a persistent wealth drain along the way.
It has to be done. And it’s best done when there is leverage. And there is leverage now, as our economic recovery has the chance to lift the global economy out of the rut of the post-crisis stagnation (i.e. everyone needs our fiscal stimulus-driven recovery to work, including China).
Now, as we’ve discussed for quite some time: Markets will correct, as they have. And corrections are a gift to buy stocks on sale. But we won’t likely see a resumption of the long-term trend higher in stocks (and likely new highs by year end) until we start seeing hard evidence that fiscal stimulus is working. And we’ll see that in earnings and growth data, much of which is still a month out.
With all of this said, we pointed last week to the signals that predicted this latest down-leg. It was the big technical reversal signals across the tech heavyweights: Amazon, Apple and Microsoft. Those three stocks led the bounce from the February lows. And those three stocks have predicted this slide and maybe retest back toward the February lows.
What may be the real casualty left from this correction in stocks, when it’s all said and done? It may be those tech giants. As we’ve discussed, the heyday of crushing competition with the advantage of little-to-no regulation, are probably coming to an end. That will change the way these companies (Facebook, Amazon, Google, Uber, Airbnb, etc) operate.
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We talked yesterday about the important inflation data. That was in line this morning. And with that, the big 3% level on the benchmark 10-year government bond yield remains well preserved.
But stocks soured anyway on the day, and it was led by the Nasdaq.
Let’s take a closer look at the Nasdaq.
This is where the big tech giants, Apple, Microsoft and Amazon have led the charge back in the index back to new record highs over the past couple of days. Those three stocks represent about a third of the index (and contribute heavily to the S&P 500 too).
But as the three tech giants led the way up, they cracked today, and we now have some very compelling signals that another down leg for stocks may be here.
First, as the broader financial markets are still licking the wounds of the sharp correction, and still jittery, Apple hit a record high valuation of $925 billion this week (sniffing near the trillion dollar valuation mark). And then it did this today…
As you can see in this chart above, Apple put in a huge bearish reversal signal (an outside day).
So did Microsoft (a huge bearish reversal signal).
So did Amazon, after breaching record levels of $1600 over the past two days …
And, not surprisingly, same is said for the Nasdaq – a big reversal signal…
The S&P 500 had the same reversal pattern.
For perspective, if we avoided the distraction of the big cap weighted indices, the Dow chart tells us the downtrend in stocks from the late January highs remains well intact.
As we discussed yesterday, stocks have fully recovered the decline that people were attributing to Trump’s trade barrier announcement last week.
With that, the tariff hysteria seems to have subsided a bit, as they struggle for evidence to support their hyperbole. Perhaps people may start acknowledging that we are now in a higher volatility environment, and that we will be slowly working out of this recent price correction until corporate earnings and economic growth data start confirming the benefits of tax cuts.
Interestingly, they seem to hate the trade threat, far more than the love the tax incentives and the pro-growth initiatives. And while trade is a complicated issue, everyone seems to suddenly have an expert opinion on it. And everyone is an expert on the Smoot-Hawley Act (which, by the way was a tariff on over 20,000 goods) and depression-era economics.
If they indeed were reflective about the economy, I think they would agree that we (and the world) desperately need growth initiatives to save us from terminal central bank life support (which wouldn’t be so terminal given they have fired all of their bullets to keep us afloat as long as they did). And they would know that we are in for a perpetual cycle of booms and busts (repeat of the credit bubble and burst) if the trade imbalances (mainly between China overproducing and the U.S. overconsuming) ultimately are not corrected.
Now, as more of the conversation on trade turns more toward China, I want to revisit an excerpt from my note in December of 2016 (when Trump was President-elect):
MONDAY, DECEMBER 19, 2016 — “While many think Trump will provoke a military conflict, that’s far from a certainty. With the credibility to act, however, Trump’s tough talk on China creates leverage. And from that leverage, there may be a path to a mutually beneficial agreement, where the U.S. can win in trade with China, and China can win. But it may get uglier before it gets better. In the end, growth solves a lot of problems. A hotter growing U.S. economy (driven by reform and fiscal stimulus), will ultimately drive much better growth in the global economy. And China has a lot to gain from both. Though in a fair-trade environment, they won’t get as much of the pie as they’ve gotten over the past two decades. But it has the chance of leading to a more balanced and sustainable economy in China, which would also be a win for everyone.”
Now, why not just focus on China now? Because they will continue to abuse other countries. And those open trade channels will still allow that product to enter the U.S. As we discussed yesterday, the global economy has been damaged by China’s currency/trade policy, yet the rest of the world has been relying on the U.S. to lead the fight. They need to join the fight to create the leverage to make it ultimately work – so that the global economy can find a sustainable path of recovery and robust growth.
Stocks continue to swing around, and in wider ranges than we’ve seen in a while. We should expect this type of action following a sharp technical correction–a correction that shook many of the players out of the market, that were contributors to suppressing volatility in recent years (the short vol ETFs among them).
Now, as I’ve said in the past, people always search for a story to fit the price. Despite the fact that stocks have been swinging around, with little or no story for them to attribute, they were quick to pounce on Trump’s announcement about steel tariffs, and have since blamed every down tick in the stock market for it. And they’ve run wild with trade war scenarios. For those trying to capitalize on that fear scenario, it shows how uninformed, naive or intellectually dishonest they are (most the latter). They like to evaluate it as if there is no context or history.
Where have they all been the past 20-plus years?
China has been manipulating the global markets through their cheap currency policy for the better part of the past 25 years. In pinning down their currency, they cornered the world’s export market. And in the process, they emerged as the second largest economy in the world. They also accumulated the world’s largest reserve of foreign currencies, which they plowed into global credit markets (mainly our Treasurys) to fuel cheap credit, which ultimately led to the global credit bubble and bust (the global financial crisis). We buy their cheap stuff. They take our dollars and buy Treasurys, supplying more credit to us to buy more of their cheap stuff. And so the cycle goes.
Currencies are the natural balancing mechanism to prevent this bubble/global imbalance from forming. When freely traded in an open economy, the market demand for yuan, given the aggressive growth in the economy, would have driven the value of China’s currency higher, making its exports less attractive, and therefore slowing their breakneck growth and wealth accumulation in China, and its ability to fuel global credit. But of course, the government determines the value of the yuan, and keeping the currency cheap is part of the economic model in China (still).
For those that fear retaliation (a historic response to protectionism), this is retaliation… for 20 years of wealth transfer.
The tariff threats address metals, but the currency is a key tool that makes it all happen. For those that like to play it as a political football, Trump is not the architect of the plan. A staunch democratic Senator from New York, Charles Schumer, led the push in Congress for a bill in 2005 to impose a 35% tariff on China. That’s what ultimately led to the agreement by the Chinese to allow their currency to weaken (somewhat). With that, I want to revisit my note from late September 2016 (prior to the elections) for a little more backstory on Why Trump Is Right About China (read more here).
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As we discussed yesterday, the minutes from the most recent Fed meeting (which was still under Yellen) gave us some clues about the tone of a Powell-led Fed. They acknowledged the lift they expected from fiscal policy, which we didn’t hear all of last year, despite the clear telegraphing of it from the Trump administration. Powell was Trump appointed. And it looks like the Fed messaging will now reflect that.
This is from his prepared remarks today:
“The economic outlook remains strong. The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment. Moreover, fiscal policy is becoming more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term. Wages should increase at a faster pace as well.”
So he’s bullish on economic output, wage growth and therefore, inflation. That’s bullish for rates. And, for the moment, what’s bullish for rates is bearish for stocks.
Oddly, on the same day Powell had his first testimony to Congress, the two former Fed chairs (Bernanke and Yellen) thought it was acceptable to host a chat about monetary policy this afternoon at the Brookings Institute.
It looked a bit like a partisan counter-punch. The same two former Fed Chairs that were, not long ago, begging Congress for fiscal stimulus to take some of the burden off of monetary policy, continue to (now) criticize the move. In fact, in Powell’s statement, he called the lack of fiscal response from Congress in past years, a headwind: “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative.”
The takeaway from our first look at Powell: He doesn’t sound like a guy that will risk choking off the benefits of fiscal stimulus with overly aggressive “normalization” of monetary policy. That’s good.
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We’ve talked quite a bit over the past year about this $100 oil thesis from the research-driven commodities investors Goehring and Rozencwajg.
As they said in their recent letter, “we remain firmly convinced that oil-related investments will offer phenomenal investment returns. It’s the buying opportunity of a lifetime.”
With that, let’s take a look at some favorite energy stocks of the most informed and influential billionaire investors:
David Einhorn of Greenlight Capital has about 5% of his fund in Consol Energy (CNX). Mason Hawkins of Southeastern Asseet Management is also in CNX. He has 9% of his fund in the stock, his third largest position. The last time oil was $100, CNX was a $36 stock. That’s more than a double from current levels.
Carl Icahn’s biggest position is in energy. He has 12% of his fund in CVR Energy. The last time oil was $100, CVI was $49. That’s 58% higher than current levels.
Paul Singer of Elliott Management’s third largest position is an oil play: Hess Corp. (HES). It’s a billion-dollar stake, and the stock was twice as valuable the last time oil prices were $100.
Andreas Halvorsen of Viking Global Investors has the biggest position in his $16-billion fund in EnCana Corp. (ECA). The stock was around $25 last time oil was $100. It currently trades at $14.
If you are hunting for the right stocks to buy, join me in my Billionaire’s Portfolio. We have a roster of 20 billionaire-owned stocks that are positioned to be among the biggest winners as the market recovers. You can add these stocks at a nice discount to where they were trading just a week ago.
