The elections tomorrow are said to be a referendum on Trump’s Presidency.
And given the sentiment, I think it’s fair to say the surprise scenario for markets would be for Republicans to retain control of Congress. For that to happen, it looks like the Republicans would need to win 61% of the “toss up” races in the house. Of those, 84% are currently Republican held.
That scenario would be a vote of confidence for the Trump economic agenda. And for markets, it would be “risk on,” which would likely draw more attention to the inflation outlook, and the speed at which market interest rates will move. Trump would retain his leverage over China on trade concessions.
Scenario two, would be a split Congress. If we get a split Congress, the Trump economic plan would likely turn to infrastructure. The belief is that a Democrat led house would likely be a partner to Trump on a big infrastructure spend.
Though I suspect, given the political atmosphere, they may work to block any further progress on the economic stimulus front, in effort to position themselves for the 2020 Presidential election. On China trade negotiations, I suspect a split Congress would begin to fight against Trump’s executive order-driven trade wars. This scenario would mean, gridlock in Washington.
However, after the cloud of election uncertain lifts, both scenarios should be a greenlight for stocks.
Remember, we already have an economy running north of 3%, with record low unemployment, and consumers are sitting on record high household net worth and record low debt service ratios. Companies are growing earnings at over 20% (yoy), and growing revenues at over 8% (yoy). And corporate credit market debt is near the lowest levels (relative to market value of corporate equities) of the past 70 years.
So there is plenty of fuel in the economy to continue the trajectory of economic boom. Maybe most importantly, following the October correction, the tech giants have been pricing out the “monopoly scenario” which paves the way for a broader-based bull market for stocks.
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Stocks continue to prove resilient in the face of trade war noise. After a global stock sell-off that started last night on news that the tit for tat tariff threats were escalating, small caps actually printed another new record high today and finished up on the day.
Bottom line: Dips continue to be bought.
In the category of “stocks that can soar even on tumultuous market days?”
We had these three charts today …
The first two stocks are biotech. If you have much experience in investing, you’ll know that biotech stocks can cut both ways (most of the time, painfully).
Here’s my pro tip: ONLY BUY BIOTECH STOCKS WHEN A BILLIONAIRE INVESTOR IS INVOLVED!
Who was involved in the two above?
Not surprisingly, the best biotech investor in the world, billionaire Joe Edelman of Perceptive Advisors, is the biggest shareholder in SLDB.
He was also the biggest investor in Sarepta until it quintupled back in 2016 on an FDA approval. Sarepta was up as much as 50% today on early trial results of gene therapy treatment of the devastating Duchenne Muscular Dystrophy (DMD) disease in boys. SLDB is similarly working on gene therapy for DMD.
What about SandRidge (the energy stock)? SandRidge was up nicely today, in a broadly down market, because billionaire activist Carl Icahn successfully de-seated a corrupt board of directors at the post-bankruptcy energy company. That board and leadership that drove the company into bankruptcy, yet has been handsomely compensated in the process, has finally been shown the door. Great news for shareholders.
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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.
As we know, one of the pillars of the Trump administration’s growth policies has been deregulation. With that, today the head of the EPA signaled the withdrawal from the Clean Power Plan – an Obama regulation to fight climate change.
What does this mean for coal stocks?
Let’s take a look at the two largest American coal producers, both of which filed bankruptcy last year: Peabody Energy and Arch coal.
These are now two post-bankruptcy stocks!Peabody emerged from bankruptcy earlier this year after shedding about $5 billion in debt. Similar story for Arch coal. They filed early last year and emerged from bankruptcy late last year, eliminating $5 billion in debt in the process. So shareholders were wiped out and debt holders became stock holders in new low debt, cash flow positive companies with deregulation coming down the pike. With that, you would think the stocks would be screaming higher. That hasn’t been the case.
Here’s a look at the charts…
So we now have Peabody Energy, the leading coal producer in America with a $3 billion market cap. And Arch Coal, number two, has just a $1.7 billion market cap.
Are these cheap stocks?
Let’s take a look at who owns them…
The biggest shareholder in Peabody is billionaire Paul Singer’s hedge fund, Elliott Management. They own half a billion dollar’s worth of the stock and it’s a top ten position. As for ARCH – the top shareholder is the $5 billion hedge fund Monarch Alternative Capital. ARCH makes up 20% of their highly concentrated long equity portfolio (their biggest single stock position). If you’re going to dip your toe in the water on a post-bankruptcy stock, there are few better places to look for guidance than Paul Singer – a former attorney, turned one of the most influential and successful investors in the world.
One of the best investors on the planet, David Tepper, was on CNBC this morning. Let’s talk about how he sees the world and how he is positioned.
What I appreciate about Tepper: He’s a common sense guy.
And his common sense view of the world happens to be in alignment with the view and themes we discuss here every day. So he agrees with me – another thing I appreciate about him.
As you know, Wall Street and the media are always good at overcomplicating the investment environment with their day-to-day hyper analysis. Because of that, they tend to forge a path that moves further and further away from the simple realities of the big picture. That’s actually good. Because it creates opportunity for those that can avoid those distractions.
Right now, as we’ve discussed, the big picture is straight forward. We have a President that wants deregulation, tax cuts and a big infrastructure spend. And we have a Congress in place that can approve it. And this all comes at a time when the world has been in a decade long economic slog following the global financial crisis – in desperate need of growth. With that, we have a Fed that still has rates at very, very low levels. And the ECB and BOJ are still priming the pump with QE.
This is precisely Tepper’s view. He says the bowl is still full, i.e. the stimulus from the monetary policy side is still full, and now we get stimulus coming in from the fiscal side. What more could you ask for (my words) to pump up growth and asset prices, which will likely spill over into a pop in global growth. Still, people are underestimating it. And as he says, the Fed is underestimating it.
Are there risks? Yes. But the probability of growth, with the above in mind, well outweighs the probable downside scenarios. What about execution risk? Even if tax reform and infrastructure are slow to come, Tepper says deregulation is a done deal. It drives earnings and “animal spirits.”
He likes stocks. He likes European stocks. And I think he really likes Japanese stocks, but he stopped short of talking about it (my deduction).
Among the risks: Inflation picking up too fast, which would require the Fed to move faster, which could choke off growth (undo or neutralize fiscal stimulus).
This is why, among other reasons, Tepper’s favorite trade is short bonds. – i.e. higher interest rates. If he’s right and economic growth has a big pop, he wins. If the risk of hotter inflation materializes and rates move faster, he wins.
For context, this is the guy that literally changed global investing sentiment in late 2010 when he sat in front of a camera on CNBC, in a rare high profile TV interview (maybe first), when investing sentiment was all but destroyed by the global financial crisis and the various landmines that kept popping up. Tepper said in a very confident voice that the Fed, by telegraphing a second round of QE, had just given us all a free put on stocks (i.e. the Fed is protected the downside, it’s a greenlight to buy stocks). For all of the market jockeys that were constantly focusing on the many problems in the world, that commentary from Tepper, for some reason, woke them up.
For perspective on Tepper: Here’s a guy that is probably the best investor in the modern era. He’s returned between 35%-40% annualized (before fees) for more than 20 years. He made $7.5 billion in 2009 betting on financial stocks that most people thought were going bankrupt. And he was telling everyone that what the Fed is doing will make ‘everything’ go up. It sparked, in 2010, what is known as the “Tepper rally” in stocks.
When Tepper speaks it’s often smart to listen. And he likes the Trump effect!
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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.
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As we near the year end and near a new administration and policy stance, the geopolitical risks have risen.
I’ve talked about the China threat quite a bit. China’s currency regime was at the core of global economic crisis, and is inching us all toward what looks like an ultimate military crisis. The seizure of an American drone by the Chinese on Friday was another step toward that end.
Remember, back in January, I talked about six global market themes that would rule for 2016. Among those, I said “China’s currency manipulation will come home to roost…..China’s currency manipulation (i.e. keeping their currency weak relative to the rest of the world, to corner the world’s export business) was a big contributor to the global credit bubble and subsequent economic crisis. Only after being persistently pressured by key trading partners (namely the U.S.) have they allowed their currency to slowly appreciate over the past several years. But now their economy is slowing, a dangerous scenario for China. Meanwhile, China is losing export prowess to Japan, a country that has weakened its currency by almost 35% in the past two years. The easy fix, in the minds of the Chinese, is to jumpstart exports. How do they do it? Weaken the currency, which is precisely what they have started doing (beginning in August of last year). But, longer term, expect such a reversal on formerly agreed to concessions by China, to be an act of economic war, which may, over the next decade or two, lead to military war (U.S., Europe, Japan v China, Russia, N. Korea).”
Since January (when I discussed the above) China has continued to weaken it’s currency. They’ve blamed it on capital flight. But with the economy still running at recession speed, they want and need a weaker currency, and they are walking it down. They know what works. A cheap currency drives exports. Exports have drive prosperity in China.
But they’ve run into new leadership in the U.S. that is talking tough and has the credibility to act (unlike the outgoing administration). That has money in China seeking the exit doors as more bumps appear to be ahead for the economy (not the least of which are threats of tariffs). And with that uptick in money leaving the country, the monetary authorities have clamped down on capital controls, more onerously restricting the movement of money out of China.
A weaker currency, tightening capital controls, and an eroding confidence in doing business in China all reinforces a weaker and weaker economy.
Still, as I’ve said before, 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.
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As of the end of last week, 78% of the companies that have reported earnings for the most recent quarter have beaten estimates.
That’s on about a third of S&P 500 companies that have reported thus far. Remember, FactSet says on average (the five-year average), 67% of companies in the S&P 500 beat their analyst expectations. And they beat by an average of 4%. So the numbers in this earnings season are running a little hotter, albeit on a lowered bar.
We’ve talked quite a bit in the past week about the run up to Apple earnings, which came in yesterday after the market close. The earnings number beat expectations. But it was by a slim margin.
The stock was lower on the day. Still, on the second quarter report, this past July, Apple was a sub $100 stock (trading at just above $96). Today it will close above $115. That’s 20% higher in the span of one quarter, and it was on a report that was very much in line with the report we heard yesterday. And the report included only a few weeks of the new iPhone7 release. And it doesn’t reflect implosion of Apple’s competitor, Samsung.
As the media and analyst tend to do, especially when the macro news front is quiet and market volatility is quiet, they picked apart and speculated on the future of Apple today as a company that may have peaked.
Let’s just take a look at the stock, and not pretend to have better visibility on the future of the company than the people do inside — the same one’s that put a transformational supercomputer in our pockets.
The stock still trades at 13x earnings. The S&P 500 trades at 16x. Apple trades at 13x next year’s projected earnings. The S&P 500 trades at 16.5x. Clearly it’s undervalued compared to the broader market. What about Apple’s monster cash position? Apple has even more cash now — a record $237 billion. If we excluded the cash from the valuation, Apple trades at 8.6x earnings. Though not an apples to apples (pun), and just as a reference point, that valuation would group Apple with the likes of these S&P 500 components that trade 8 times earnings: Dow Chemical, Prudential Financial, Bed Bath & Beyond, a Norwegian chemical company (LBY), and Hewlett Packard Enterprise. It’s safe to say no one is debating whether or not Hewlett Packard is at the pinnacle of its business. Yet, if we strip out the cash in Apple, AAPL shares are trading at an HPE valuation.
Apple still looks like a cheap stock.
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Last month we looked at 13F filings. These are the quarterly portfolio disclosures, required by the SEC, of large investors – those managing $100 million or more.
And we discussed 13D filings. These are required when a big investor takes a controlling stake in a company (ownership of 5% or more of the outstanding stock), he/she is required to disclose it to the SEC, through a public filing within ten days over crossing the 5% threshold. If it’s a passive investment, they file a form 13G. If they intend to engage management (i.e. wield influence) they file a 13D.
Bill Ackman, the well known billionaire activist investor, filed a 13D on Chipotle (CMG) yesterday. Today, we’ll take a look at this move.
In this filing, his fund, Pershing Square, disclosed a 9.9% stake in the company. Ackman thinks the stock is “undervalued” and “an attractive investment.”
Chipotle, at its peak valuation last year, was valued more like a high flying tech company. Yet this was a restaurant, albeit an innovator in the fast food business – in fact, they created a new segment in the food business, “fast casual.”
Then came the food crisis- an outbreak of e-coli cases. And the stock has been crushed – cut in half over the past year. Customers have been walking from Chipotle and into the many fast casual alternatives (competition spawned from Chipotle’s innovation).
Who tends to buy the bottom in these situations? Activists.
What’s a quick and easy fix in a sentiment crisis? Change.
To be sure, Chipotle has been drowning in a sentiment crisis. And even though Ackman thinks the company has “visionary leadership” we’ll see if he makes someone in current leadership a sacrificial lamb, in order to repair sentiment in the stock. This power to influence change is one of the few remaining edges in public stock market investing.
Ackman has said in a past letter to investors, “minority stakes in high quality businesses can be purchased in the public markets at a discount,” arising from two factors: “shareholder disaffection with management, and the short term nature of large amounts of retails and institutional investor capital which can overreact to negative short-term corporate or macro factors.” That’s how you identify value. But how do you close the value gap?
Shareholder disaffection with management is a typical qualifier to make it onto the radar screens of activist investors. There’s an opportunity to shake up management, change sentiment, and unlock value.
Last month, we talked about Mick McGuire, a protégé of Bill Ackman. He filed a 13D on Buffalo Wild Wings (BWLD), and announced a plan for change, and publicly said the stock could double on his game plan — it put a bottom in the stock.
Chipotle is up 5% on the news of Ackman’s involvement. At 42% off of highs, it’s a low risk/ high reward bet to follow Ackman.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
This past week we’ve talked about the recent public disclosures made about the investments of some of the world’s best investors.
The biggest news was Warren Buffett’s new $1 billion plus stake in Apple.
Apple’s stock price peaked in April of last year (following a 65% rolling 12-month return). Much of that run up was driven by activist efforts of Carl Icahn. Icahn influenced sentiment in the stock, but also influenced value creation for shareholders by pressuring Apple management to buy back stock.
But since peaking last April (2015), Apple shares had lost nearly 34% as of earlier this month. Icahn dumped his stake and made it public in late April.
And then we find this past week that Buffett is now long (he’s in).
So should you follow Buffett? Is it the bottom for Apple? And what makes Apple a classic Buffett stock?
First, Buffett has compounded money at 19.2% annualized over a 50 year period. That’s made him the second wealthiest man in the world.
Buffett loves to buy low. He has a long and successful record of buying when everyone else is selling. Buffett purchased his Apple stake last quarter when Apple was near its 52-week low.
But he famously stays away from technology. Why Apple? For Buffett, Apple is a global, dominant brand. That trumps sector. He loves brand name companies with a loyal customer base, and there is probably no company on the planet with a more loyal customer base then Apple. Plus, one could argue that Apple is a consumer services company (with 700 million credit cards on file, charging customers for movies, songs, apps …).
Generally Buffett pays less than 12 times earnings for a company. Of course there are exceptions, but Apple fits this criterion perfectly with a P/E of 10.
Buffett loves companies that have a high return-on-invested-capital (ROIC) and low debt. Apple has an ROIC of 28%, extremely high. Companies with a high ROIC usually have a “wide moat” or a competitive advantage over the rest of the world. That gives them pricing power to drive wide margins.
Apple really is the classic Buffett stock. And now that Buffett has put his stamp of approval on Apple, we believe the stock has bottomed, especially since it’s so cheap compared to the overall stock market. And he’s not the only billionaire value investor who loves Apple. Billionaire hedge fund manager David Einhorn also loves Apple. He increased his Apple stake last quarter to 15% of his entire hedge fund, almost $900 million dollars worth.
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.