As we discussed last week, we should expect more volatility in markets in the coming months, with the continued discovery surrounding Trump Policies (timing, size) and with UK/EU Brexit negotiations officially opening. That’s a dose of unknowns which should send stocks swinging around quite a bit more than we’ve seen for the past four months.
Remember, on Friday I noted the message the bond market was sending — with market interest rates (U.S. 10 year yields) closing the week, and quarter, at 2.39%. That’s almost a quarter point lower than the high that followed the March rate hike (the third in the Fed’s “normalization” process). And it’s about 10 basis point lower than where the 10 year stood going into the December 2015 rate hike. That’s a negative signal. And I suspect stocks will get that message.
With that said, the first day of the second quarter opened today with a slide in stocks, a slide further in yields and a rise in the price of gold.
When stocks go down, people get nervous and buy downside protection. That tends to spike implied volatility. There’s an index that measures that called the VIX.
Let’s talk about the VIX…
The VIX measures the implied volatility of options on the S&P 500. This is a key component in the price investors pay for downside protection on their portfolios.
So what is implied volatility? Implied volatility measures both actual volatilityand the options market maker community’s expectations (or perception of certainty) about future volatility. When market makers feel confident about the stability in markets, implied vol is lower, which makes the price of options cheaper. When they aren’t confident in stability, implied vol goes up, which makes the price of an option go up. To compensate those that are taking the other side of your trade, for the lack of predictability, you pay a premium.
You can see in the chart below, vol is very, very low — but has been ticking up.
Still, it takes a significant event – a high dose of uncertainty – to create a spike in implied volatility.
That spike tends to correlate well with a sharp slide in stocks. Otherwise, we’re looking at a garden-variety correction in stocks — and that’s what this low vol environment is spelling out.
We had new record highs again in the Dow today. But remember, yesterday we talked about this dynamic where stocks, commodities and the dollar were strong. But a missing piece in the growing optimism about growth has been yields.
Clearly the 10 year at 2.40ish is far different than the pre-election levels of 1.75%-1.80%. But the extension was quick and has since been a non-participant in the full-on optimism vote given across other key markets.
Why? While stocks can get ahead of better growth, yields can’t in this environment. Higher stocks can actually feed higher growth. Higher yields, on the other hand, can kill it.
But there’s something else at work here. As we know Japan’s policy to target the their 10 year at zero provides an anchor to our interest rates, as the BOJ is in unlimited QE mode. Some of that freshly produced liquidity, and the money displaced by their bond buying, undoubtedly finds a happier home in U.S. Treasuries (with a rising dollar, and a 2.4% yield). That caps yields.
But in large part, the quiet drag on U.S. yields has also come from the rising risks in Europe. The election cycle in Europe continues to threaten a populist Trump-like movement, which is very negative for the European Union and for the survival of the single currency (the euro). That creates capital flight, which has been contributing to dollar strength and flows into the parking place of U.S. Treasuries (which pressures yields, which is keeping mortgage and other consumer rates in check).
These flows are also showing up clearly in the safest bond market in Europe: the German bunds. The 2-year German bund hit an all-time record LOW, today of -91 basis points. Yes, while the U.S. mindset is adjusting for the idea of a 3%-4% growth era, German yields are reflecting crisis and money is plowing into the safest parking place in Europe. The spread between German and French bonds are reflecting the mid-2012 levels when Italy and Spain where on the brink of insolvency — only to be saved by a bold threat/backstop from the European Central Bank.
We talked last week about the prospects for higher gold and lower yields as questions arise about the execution of (or speed of execution) Trump’s growth policies, some of the inflation optimism that has been priced in, may begin to soften. That would also lead to a breather for the stock market. I suspect we will begin to see the coming elections in Europe also contribute to some de-risking for the next couple of months. We already have a good earnings season and some solid economic data and optimism about the policy path priced in. May be time for a dip. But as I’ve said, it would create opportunities– to buy any dip in stocks, and sell any rally in bonds.
To peek inside the portfolio of Trump’s key advisor, join me in our Billionaire’s Portfolio. When you do, I’ll send you my special report with all of the details on Icahn, and where he’s investing his multibillion-dollar fortune to take advantage of Trump policies. Click here to join now.
Stocks are hitting new record highs today. That includes the Dow, the S&P 500 and the Nasdaq.
We’ve now seen about 60% of the earnings for Q4, and earnings are very good. As we’ve discussed, earnings guidance and consensus views are made to be beaten. Factset says that, on average, about 67% of S&P 500 companies beat the consensus view on earnings. For Q4, that number, as of last Friday, was 65%.
More importantly, the earnings growth rate for Q4 is +4.6% thus far. That’s better than the 3.1% that was predicted, coming into the earnings season. And that’s the first two consecutive quarters of year-over-year positive EPS growth in a couple of years.
So we have positive earnings surprises driving stocks higher. And finally, revenue growth is coming. After six consecutive quarters of revenue contraction, earnings for U.S. companies had a second consecutive quarter of growth. And the quarters ahead should be much better.
Clearly, in the weak growth environment, the focus has clearly been cutting costs, refinancing debt, selling non-core assets, and buying back shares. That’s all a recipe for juicing EPS, even though revenue growth is sluggish, if existent.
So for all of the people that are constantly hand wringing about the levels of the stock market, ask them this: What happens when you take these companies that are growing earnings by optimizing margins in a 1% growth world, and you give them 3%-4% economic growth? Earnings go up. What happens when you take a profitable company and cut the tax burden by 15 to 20 percentage points? Earnings go up.
When earnings go up, price to earnings goes down. And valuations can become very, very cheap.
We have companies that have been forced to streamline to survive. And now we’re in the early days of a regime shift, where tax cuts will work for them, deregulation will work for them, and a big infrastructure spend will pop demand, to actually fuel some revenue growth.
Below is a nice chart from Yardeni. You can see the flattish revenue growth, but earnings divergence over the past five years.
On the right hand axis, next year’s earnings on the S&P 500 are expected around $133. That doesn’t take into account the impact of a corporate tax cut, which Standard & Poors research has suggested could bump that number up to the mid $150s ($1.31 added for every 1% cut in the corporate tax rate). That would dramatically widen the revenue, earnings divergence — or make the closing of this gap that much more aggressive.
For help building a high potential portfolio for 2017, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
Jobs, jobs everywhere there’s jobs. The President-elect yesterday said he will be the “greatest job creator God ever created.”
Since December, when the President-elect announced that Carrier, an air conditioner manufacturer in Michigan, would keep 1,000 jobs in the U.S. instead of moving them to Mexico, other companies have been lining up to announce big, bold hiring plans.
It was immediately clear that Carrier won priceless exposure and good-will. From that point, the Japanese billionaire Masayoshi Son took a visit to Trump Tower and followed with an announcement that his Softbank technology holdings company would invest $50 billion in U.S. businesses and create 50,000 new jobs. Softbank owns more than 80% of Sprint, and Sprint has followed with an announcement of 5,000 jobs to come.
Alibaba’s founder Jack Ma visited Trump Tower yesterday and left saying he would create 1 million jobs in the U.S.
Amazon, who’s CEO Jeff Bezos had a visit to Trump Tower last month, said today they plan to add 100k jobs.
Not to be outdone, Taco Bell (part of YUM Brands), said today it would add 1.6 million jobs in the U.S. Does this mean Taco Bell is about to go on a massive expansion increasing their store count by 5x — putting a Taco Bell on every corner in America?
Or, is this all just a public relations ploy? Are they all hoping to gain favor with the administration? Yes and yes. But it’s also all self-reinforcing. A better outlook for jobs is driving confidence. Confidence can drive a better outlook for jobs. More employed, more confident consumers can drive economic growth. And better growth drives more jobs.
Now, all of this said, the headline unemployment number is already down to 4.7% (near what is considered “normal”). The number that measures underemployed and those that have stopped looking is down to 9.2%. It’s much higher than the headline rate, but relative to history, it’s returning close to normal levels too. With the prospects of hotter growth coming, and new job creation, we could be headed for a very tight labor market. What does that mean? Higher wages are coming, to finally begin making up for two decades of wage stagnation.
For help building a high potential portfolio, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio more than doubled the return of the S&P 500 in 2016. You can join me here and get positioned for a big 2017.
Today we want to talk about the quarterly SEC filings that came in over the past several days week.
All big investors that are managing over $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 form13F.
While these filings have become very popular fodder for the media, what we care more about is 13D filings. And of course we have our formula for narrowing down the universe to what we deem to be the best ideas.
For a refresher: The 13D forms are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company’s stock, it’s considered a controlling stake. In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence. Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.
By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the difference in manager talent, strategies and portfolio sizes run the gamut.
With that caveat, there are nuggets to be found in 13Fs. Let’s talk about how to find them, and the take aways from the recent filings.
First, it’s important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.
Through our research and nearly 40 years of combined experience, here’s what we’ve found to be most predictive:
Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks are 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.
For specialist investors (such as a technology focused hedge fund) we 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.
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.
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.”
Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts a position by 75% or more, 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.
With that in mind, we want to talk about a few things we did glean from these recent filings.
Apple (AAPL)
This biggest news out of the filings this week was that Warren Buffett initiated a new $1 billion plus stake in Apple. Buffett loves to invest in out-of-favor companies that are depressed in price, with strong brand names, low P/Es and high return on capital. Apple checks the boxes on all of the above.
We think Buffett’s stamp of approval will change the sentiment on Apple, which has had a short-term ebb. Apple shares were up 4% on the news Buffett has entered, the biggest one day move in over two months.
Additionally, billionaire David Einhorn added to his Apple position last quarter. He now has more than 15% of his $5.9 billion hedge fund in Apple.
ENERGY
We’ve talked a lot about oil over the past several months. The oil price bust created a binary trade — either it destroyed the global economic recovery (and likely the global economy) or it bounced back aggressively. Thankfully, it’s done the latter. Billionaire oil trader, Boone Pickens said this week that he thinks oil could trade as high as $60 over the next two months.
In the filings from Q1, top billionaires just like in Q4 were initiating and adding new stakes in energy stocks – building some large, high conviction positions.
As we’ve said, we think oil-energy stocks are the macro trade of the year.
Internet
One of most popular growth stocks purchased by top billionaire investors last quarter was Facebook. Another notable tech stock in the cross hairs of influential investors: Yahoo. A couple of top activist investors, a hot macro investor are involved in Yahoo. And news this week that Warren Buffet and billionaire Dan Gilbert could be teaming up to buy parts of Yahoo.
Billionaires Bottom Fishing in Healthcare
Noted contrarian and billionaire John Paulson has doubled down on two beaten down healthcare stocks last quarter, Endo International and Akorn Inc. We think this is an interesting move because Paulson like many of the best billionaire investors have literally made billions from buying when everyone else is selling.
Many other top hedge funds remain heavily invested in healthcare stocks as well, even after their most recent selloff.
Now, a couple of bigger picture views from the filings…
Some of the biggest and best are bullish on stocks. Billionaire David Tepper has 12% of his fund invested in call options on the S&P 500 and Nasdaq 100. Billionaire global macro trading legend, Louis Bacon, now has more than 7% of his fund in Nasdaq call options. And two other macro investing studs, Paul Tudor Jones and John Burbank have both built big call options on emerging market stocks.
This activity gels nicely with what we’ve been discussing here in our dailynotes. We have a global economic environment that is fueled by central bank support. The risk of the oil price bust has now been removed. And a lot of the economic data is setting up nicely for big positive surprises over the coming months. We think we are in the early stages of seeing a global sentiment shift, away from gloom, and toward optimism. And positive data surprises and changes in sentiment are two very powerful factors in driving markets.
Join us here to get all of our in-depth analysis on the bigger picture, and our carefully curated stock portfolio of the best stocks that are owned by the world’s best investors.
Stocks have roared back in the past several days. It’s been led by commodity stocks, the area that has been beaten up and left for dead. Not surprisingly, the bounce in that area has been multiples of the broader stock market bounce (which is 7% in less than a week).
As we’ve discussed in recent weeks, in the world we live in, global economic stability continues to rely on central bank influence. And, indeed, after one of the worst starts for stocks in a New Year ever, it was central bank verbal posturing to open the week that has turned the tide for global markets. On Sunday, the head of the BOJ spoke, warning that they were watching markets closely and stood ready to act, and then on Monday, the head of the European Central Bank said, effectively, the same. The result: the BOJ comments sparked a 10% rally in Japanese stocks in a matter of hours. With that lead, the S&P 500 has now rallied 7% in three days, crude oil has bounced 20%, and global interest rates are bouncing back (which, last week, were pricing in recession).
Like it or not, in a world where the economy remains structurally fragile after the global financial and economic crisis, the central banks remain in the driver’s seat and they know that promoting stability is the key to recovery and ultimately returning to sustainable economic growth. As we approach the March ECB and BOJ meetings, with weak oil prices persisting, we continue to think the central banks may outright buy oil and commodities to remove the risk of oil industry bankruptcies and the domino effect that it would spark. As an additional benefit, it would likely turn out to be a very profitable investment.
Today we want to talk about the quarterly SEC filings that came in this week. All big investors that are managing over $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. While these filings have become very popular fodder for the media, what we care more about is 13D filings. Those are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company’s stock, it’s considered a controlling stake. In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence. Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.
By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the difference in manager talent, strategies and portfolio sizes run the gamut.
With that caveat, there are nuggets to be found in 13Fs. Let’s talk about how to find them, and the take aways from the recent filings.
First, it’s important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.
Through our research over 15 years, here’s what we’ve found to be most predictive:
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.
For specialist investors (such as a technology focused hedge fund) we 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.
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.
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.”
Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts a position by 75% or more, 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.
With that in mind, we want to talk about a few things we did glean from these recent filings.
First, the old adage “buy when there is blood in the streets” was evident last quarter, as many of the top billionaire investors loaded up on stocks in the fourth quarter. That was BEFORE the further declines this year.
Top billionaire investors Paul Singer, David Tepper and Chase Coleman of Tiger Global all increased their equity exposure (buying more stocks) over the last quarter. And billionaire investors still love health care stocks. John Paulson, Bill Ackman, Dan Loeb and Larry Robbins loaded up, with Paulson putting 56% of his portfolio in health care.
Billionaires are starting to bottom fish in energy. Seth Klarman, David Tepper, Carl Icahn and Warren Buffett all either added to, or initiated new stakes in energy stocks. Tepper now has 12% of his entire equity portfolio in energy stocks! This obviously coincides well with the theme that energy and commodity stocks are starting to bottom.
Also notable, in recent weeks, the 13D filings have been coming in fast and furious as investors are taking advantage of the decline this year.
Analyzing these filings is part of our process in our Billionaire’s Portfolio. With that in mind, this week we followed one of the best billion dollar (plus) activist hedge funds into a stock where they own 12.5%, have three board seats, and are in the process of replacing the CEO. These are are three key ingredients in the success of activist campaigns: 1) a big concentrated position (12.5% stake), 2) control (board seats), and 3) change (a new CEO). This activist fund has won on 82% of its campaigns since 2002 and has a price target on this stock that’s more than 150% higher than the current share price. To join us you can subscribe to our Billionaire’s Portfolio (here).
The Bank of Japan stepped in overnight and put a floor under stocks. Only 6 of 42 economists at Bloomberg thought they might do something.
We made the case over the past couple of days that they needed to. The opportunity was ripe, and we thought they would take advantage. They did.
Of course, that’s all the media is talking about today. The word “surprise” is in the headline of just about every major financial news publication on the planet with respect to this BOJ move (WSJ, Reuters, BBC, NYTimes … you name it).
Remember, we said earlier this week, the Fed was just a sideshow and the main event was in Japan. If you understand the big picture: 1) that central banks are still in control, 2) that the baton has been passed from the Fed to the BOJ and the ECB, and 3) that they (central banks) need stocks higher, then this move comes as no surprise.
Today we want talk a bit about what these central banks have done, what they are doing and why it works. We often hear the media, analysts, politicians, Fed-haters saying that QE hasn’t worked.
Okay, so QE hasn’t directly produced inflation and solved the world’s problems as the Fed might have expected when they launched it in late 2008. But it has produced a very important direct benefit and indirect benefit. The direct benefit: The Fed has been successful at driving mortgage rates lower, which has ultimately translated to rising house prices (along with a slew of other government subsidized programs). That has been good for the economy.
The indirect benefit: As Bernanke (the former Fed Chair) said explicitly, “QE tends to make stocks go up.” Stocks have gone up – a lot. That has been good for the economy.
But we need a lot more – they need a lot more. Here’s a little background on why…
The Fed has told us all along they want employment dramatically better, and inflation higher. They’ve gotten better employment. They haven’t gotten much inflation. Why? In normal economic downturns, making money easier to borrow tends to increase spending, which tends to increase demand and inflation. In a world that was nearly destroyed by overindebtedness, people (businesses, governments) are focused on reducing debt, not taking on more debt (regardless of how “easy” and cheap you make the money to access).
With that, their best hope to achieve those two targets (employment and inflation) has been through higher stocks and higher housing prices. Strength in these key assets has a way of improving confidence and improving paper wealth. Increasing wealth makes people more comfortable to spend. Better spending leads to hiring. A better job market can lead to inflationary pressures. That’s been the game plan for the Fed. And that’s the gameplan for Europe and Japan.
So how do they promote higher stock prices? They do it by promising investors that they will not let another shock event destabilize the world and global financial markets. They’ve promised that they will “stand ready to act” (the exact words uttered by the Fed, the ECB and the BOJ). So, they spent the better part of the past eight years promising to do “whatever it takes” (again exact words of the ECB and BOJ).
The biggest fear investors have is another “Lehman-like event” that can crash stocks, the job market and the economy. The thought of it makes people want to hold on tight to their money. But when the central banks promise to do anything and everything to prevent another shock, it creates stability and confidence to invest, to hire, to take some risk again. That’s good for stock prices.
Now, despite what we’ve just said, and despite the aggressive actions central banks have taken in past years (including the BOJ’s actions last night to push interest rates below zero) and their success in manufacturing confidence and recovery, when stocks fall, people are still quick to talk about recession and gloom and doom. On every dip in stocks since the culmination of the global financial crisis in 2007-2008, the comparisons have been made to that period.
First, they’re ignoring what the central banks have been telling us. “We’re here, ready to act.” Second, and again, things are very, very different than they were in 2007-2008. In that period, global credit was completely frozen. Banks were failing, and the entire financial system was on the precipice of failing. And at that point, it was unclear what could be done and what actions would be taken to try to avert disaster. That uncertainty, the thought of losing 100 years of economic and social progress across the globe, can easily send people scurrying for cash, pulling money from everywhere and protecting what they have. And that uncertainty can, understandably, result in stock prices getting cut in half – a stock market crash.
Now, what’s happening today? The financial system is healthy. Credit is flowing. Unemployment is very close to long-term historical norms. The U.S. economy is growing. The global economy is growing. The best predictor of recession historically is the yield curve. It shows virtually no chance of recession on the horizon. So the economic environment is very different. Still, the biggest difference between that period and today is this: We didn’t have any idea what could be done to avert the disaster OR how far central governments and central banks would go (and could go) to fight it. Now we know. It’s all-in, all or nothing. There is no ambiguity. With that, the central banks will not fail and cannot fail. And remember, they are working in coordination. No one wins if the world falls apart.
With all of this in mind, any decline in stocks, driven by fear and misinformation, offers a great buying opportunity, not an opportunity to run.
We’ll talk Monday about the very strong, and rational fundamental case for stocks to go much higher. On that note, today we’re wrapping up one of the worst January’s on record for stocks, which has given us a great opportunity to buy at a nice discount.
