January 13, 2017, 3:00pm EST

We’re getting into the heart of earnings season now, with Q4 earnings rolling in.  Remember, earnings guidance is set by management to be beat.  And estimates are set by Wall Street to be beat.  That’s the way Wall Street works.  And it’s a built-in bullish force for the stock market.

With that, for the better part of the second half of last year, I said “we were set up for a big run for stocks into the year end given that expectations had been ratcheted down on earnings and the economic data. That creates opportunities for positive surprises, which is fuel for higher stocks.”

The dynamic continues.

Last quarter, 71% of earnings beat estimates for the quarter.  And despite the analyst expectations that there would be an overall decline in S&P 500 earnings, the overall earnings reported by companies grew by 3%. Sounds positive, right?

Still, management, on whole, was downbeat on their guidance for what the fourth quarter would bring.  They set the bar low.  And with that, the early Wall Street expectations for earnings growth on the quarter has been dialed back, setting up for positive surprises.

As I’ve said, historically, about 68% of S&P 500 companies earnings beat estimates. Let’s assume the positive surprises will be even higher for Q4 numbers, especially given the rise of optimism following the November election.  That’s more fuel for stocks.

We’ve heard from some of the biggest banks in the country today.  JP Morgan stole the show, beating on earnings by 20%. PNC beat by 6%. Bank of America beat by 5%. Wells Fargo earnings came in lower, but deposits and loans grew despite its PR nightmare.

This is all positive for the trajectory of banks. Especially when you consider that we are in the very early innings of one of the tailwinds (rising interest rates) and the first inning is coming for the second tailwind (de-DoddFranking the banking business).

Fed raising rates is a money printing recipe for banks.  Bank of America has said that a point higher on Fed Funds will add more than $5 billion of core earnings for the bank.

But the story here for the bank stocks is even more exciting when you consider that many of the regulations, that have turned banks into utility companies since the financial crisis, will be reversed by the Trump administration. To what extent will banks return to the business of risk-taking?  Probably not to pre-crisis levels.  But will it be dramatically different than the business of the post-crisis era?  Highly likely, given the contingent of Wall Street bankers entering government in the Trump administration.  With this, banks still look cheap.

Even last year, the health of the banks was looking as good as it has been in a long time.  Loan balances were growing at the fastest 12-month rate since 2008, the share of unprofitable banks had fallen to an 18-year low, and the number of ‘problem banks’ continued to decline.

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November 16, 2016, 4:00pm EST

Yesterday we talked about the missing piece in the pro-growth rally in markets.  It’s oil.  A pick-up in demand and growth, tends to also accelerate demand for oil.

But the market is holding out for the November 30 OPEC decision.  They’ve told us they plan to cut.  The inventories have jumped in recent weeks, suggesting producers are ramping up production into a cut (taking advantage while they can).  And Russia’s energy minister said today he thinks OPEC members will agree to terms on a production cut by the November 30 meeting.

With that, oil spiked this morning, but fell back from the highs — still hanging around the $45 area.

Today I want to talk about the performance of small caps over the past week compared to the broader market.  If we consider a Trump economy where regulation will be peeled back, a few areas come to mind as being among winners:

Banks:  Banks have been crushed by Dodd Frank, made into utility companies.  This is the legislation that responded to the global financial crisis — where banks had become hedge funds, taking massive-leveraged-speculative bets against their deposit base.  When the black swan event occurred, they became exposed and were bailed out to keep the financial system alive.  Those days should never return, but the pendulum swung too far in the other direction on Dodd Frank.  In a Trump economy, risk taking will almost certaintly return to the banking system again.  The XLF, bank ETF, is up 10% in the past week.

Energy:  The energy industry has been crushed under the weight of clean energy policies.  Billionaire Carl Icahn, one of Trump’s biggest advocates and once thought to be a candidate for Treasury Secretary, penned a letter to the EPA a few months ago saying their policies on renewable energy credits are bankrupting the oil refinery business and destroying small and midsized oil refiners. Icahn happens to own a controlling stake in one, CVR Energy (CVI).  The stock is up 30% in the past week.

Small caps:  The common theme in the above two industries is that all companies have been hurt, but the burden of increased regulation has been far a greater economic and financial cost to small companies.  That’s why the Russell 2000 (small cap index) is racing higher in the President elect Trump era.  The small cap index is outperforming the S&P 500 by 5 to 1 since Tuesday of last week.

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October 10, 2016, 3:15pm EST

I talked last week about the move in oil, and the lag in natural gas.

But natural gas was knocking on the door of a technical breakout.  As you can see, that breakout looks to be underway now.

oct10 natgas

Nat gas is now at $3.25.  If history is any indication, it could be in the low $4s soon.

That’s helped by chatter today from OPEC members out vocally supporting the production cut that was agreed to two weeks ago.  And the Secretary General of OPEC piled on today by saying the sharp contraction in investments (due to low prices) poses a threat to global oil supply.  As we’ve discussed, for those that had the “oil price to zero” arguments earlier in the year, supply changes, so does demand.

With all of this, oil continues to climb higher, testing the June highs today.  Here’s another look at the chart.

oct10 oil

A break above the June highs of $51.67 would project a move to near $65 (technically speaking, it’s a C-wave).  Another big technical level above is $68.60, which is the 61.8% retracement of the move down from almost $95 in late 2014, to the lows of earlier this year.  That’s the breakdown in oil prices driven by OPEC’s 2014 refusal to cut production.  And now were on the verge of getting the first cut in eight years.  So oil is looking like higher levels are coming — it was up another 3% today.

What’s does it mean for stocks?  As we’ve discussed, for much of the year, lower oil has meant lower stocks, and higher oil has meant higher stocks.

oct10 oil v stocks

This emerging bullish technical and fundamental backdrop for energy should be very good for stocks.  Remember, higher energy prices, in this environment, removes the risk of another oil price shock-to-sentiment (good for stocks, good for the economy). And it means producers can start producing again, downstream businesses can fill capacity, and we can start seeing some of the hundreds of thousands of U.S. jobs replenished that have been lost over the past two years.

Since OPEC rigged lower oil prices back in late 2014, we’ve had over 100 North American energy company bankruptcies.  Some of those have/are reorganizing and emerging with lean balance sheets into what could be a hot recovery in energy prices.  I’ll talk about some tomorrow.

The Billionaire’s Portfolio is up 23% year-to-date — that’s nearly four times the return of the S&P 500 during the same period.  We recently exited a big FDA approval stock for a quadruple, and we’ve just added a new pick to the portfolio — following Warren Buffett into one of his favorite stocks.   If you haven’t joined yet, please do.  Click here to get started and get your portfolio in line with our Billionaire’s Portfolio. 

Buffett’s famed annual letter is due to be released this weekend. With that, today we want to talk a bit about his record, his philosophy on markets and successful investing and the high conviction stocks that he has in his $130 billion plus Berkshire Hathaway stock portfolio.

First, only one living investor has a length of track record that can compare to Buffett’s. That’s fellow billionaire Carl Icahn. Icahn actually has a better record than Buffett, and it spans a little longer. But he gets a fraction of the attention of the man they call the Oracle of Omaha. (more…)

Gold has been a core trade for a lot of people throughout the crisis period. When Lehman failed in 2008, it shook the world, global credit froze, banks were on the verge of collapse, the global economy was on the brink of implosion – people ran into gold. Gold was a fear-of-the-unknown-outcome trade.

Then the global central banks responded with massive backstops, guarantees, and unprecedented QE programs. The world stabilized, but people ran faster into gold. Gold became a hyperinflation-fear trade.

Source: Billionaire’s Portfolio

In the chart above, you can see gold went on a tear from sub-$700 bucks to over $1,900 following the onset of global QE (led by the Fed).

Gold ran up as high as 180%. That was pricing in 41% annualized inflation at one point (as a dollar for dollar hedge). Of course, inflation didn’t comply. Still eight years after the Fed’s first round of QE (and massive global responses), we have just 13% cumulative inflation over the period.

So the gold bugs overshot in a big way.

Why? The next chart tells the story…

This chart above is the velocity of money. This is the rate at which money circulates through the economy. And you can see to the far right of the chart, it hasn’t been fast. In fact, it’s at historic lows. Banks used cheap/free money from the Fed to recapitalize, not to lend. Borrows had no appetite to borrow, because they were scarred by unemployment and overindebtedness. Bottom line: we get inflation when people are confident about their financial future, jobs, earning potential … and competing for things, buying today, thinking prices might be higher, or the widget might be gone tomorrow. It’s been the opposite for the past eight years.

So, no inflation – what does that mean for gold?

Source: Billionaire’s Portfolio

After three rounds of Fed QE, and now mass scale QE from the BOJ and the ECB, the world is still battling DE-flationary pressures. If gold surged from sub-$700 to $1,900 on Fed/QE-driven hyperinflation fears, and QE has produced little to no inflation, it’s fair to think we can return to pre-QE levels. That’s sub-$700.

We head into the weekend with stocks down 3% for the month. This follows a bad January. In fact, the stock market is working on a fifth consecutive negative month. The likelihood, however, of it finishing down for February is very low. It’s only happened 18 times since 1928. So the S&P 500 has five consecutive losing months just 1.7% of the time, historically.

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