February 23, 2017, 4:30pm EST                                                  Invest Alongside Billionaires For $297/Qtr

Yesterday we talked about the warning signal flashing from the German bond market.  That continues today.

While global stocks and commodities are reflecting broad optimism about the new pro-growth government in the U.S., the yield on 2-year German government bonds is sending a negative message — it hit record lows yesterday, and again today — trading to negative 90 basis points.  You pay almost 1% to loan the German government money for two years.

Here’s a longer term look at German yields, for perspective…

And here’s the divergence since the election between German and U.S. 2 year yields…

This divergence is partially driven by rising U.S. yields on optimism about the outlook, about inflationary policies, and about the Fed’s response.  On the other hand, German yields have gone the other way because 1) the ECB is still outright buying government bonds through its QE program (bond prices go up, yields go down), and 2) capital flows into bonds, in search of safety, because a Trump win makes another populist vote in Europe more likely when the French elections role around in May.

So that bleed to new lows in the German 2-year yield sends a warning signal to global markets. Today we have a few more reasons to think this could be a signal that the optimism being priced into U.S. markets at the moment could take a breather here.

Trump’s Secretary of Treasury, Mnuchin, was doing his first rounds on financial TV this morning and gave us some guidance on a timeline for policies and impact.  Most importantly, he says we’ll see limited impact from Trump policies in 2017, and that the growth impact won’t come until 2018.

Let’s consider how that can impact where the Fed stands on their forecasts for monetary policy.

Remember, they spent the better part of 2016 walking back on the promises they had made for 4 rate hikes last year.  And then, when they finally moved for thefirst time this past December, following the election and a rallying stock market, they reversed course on all of the dovish talk of the past months, and re-upped on another big rate hiking plan for 2017.

Though they don’t like to admit it, we can only assume that when they considered a massive fiscal stimulus package coming, like any human would, they became more bullish on the economy and more hawkish on the inflation outlook.

So now as Mnuchin tells us not to expect a growth impact from Trump policies until next year, maybe the Fed lays off the tightening rhetoric for a while.

With all of this in mind, another interesting dynamic in markets today, the Dow shrugged off some weakness early on to trade higher most of the day, posting another new record high.  Meanwhile small caps diverged, trading weaker all day.  And gold traded to the highest level since November 11.  Remember this chart we’ve looked at, which looks like higher gold to come (a lower purple line), and lower yields.

This would all project a calming for the inflation outlook, which would be good for the health of markets.  Among the biggest risk to Trumponomics is hot inflation, too fast, and a race higher in interest rates to chase it.

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January 31, 2017, 4:00pm EST                                                                                         Invest Alongside Billionaires For $297/Qtr

We have some key central bank meetings this week.

Remember, it wasn’t too long ago that the world was sitting on every word uttered by a central banker.  Those days are likely over — at least to the extreme extent of the past decade.  For now, Trump has supplanted central bankers as the most powerful policy maker in the world.

Still, the Fed will meet following their rate hike last month, the second in their very slow hiking cycle – 1/4 point hike twelve months apart.  They’ll do nothing this week, but the data tends to be going as desired by the Fed, and other major central banks for that matter (aside from Japan) — meaning, inflation has recovered and is nearing the target zone.

Remember, this time last year, the world was staring down the barrel of DE-flation again.  Inflation, central bankers have tools to combat.  Deflation is far more difficult, and far less predictable.  It can spiral and grind economies to a halt. When consumers are convinced prices will be cheaper in the future, they wait.  When they wait, economic activity stalls.  With that, deflation tends to create more deflation.  The fear of that scenario, and the potential of an irreversible spiral, is why central bankers were cutting rates to negative territory last year.

Where was the imminent deflationary threat coming from?  Slow economic activity, but mostly a crash in oil prices.

Central bankers have the tendency to change the rules of the game when it suits them.  When inflation is running hot, they may hold off on tightening money by pointing to hot “food and energy” prices. These are temporary influences, as they say.  Interestingly, they are much more aggressive, though, when oil prices are creating a deflationary threat – as they did last year.

With that, oil prices have doubled from the lows of last February.  So it shouldn’t be too surprising that inflation numbers are rising, and getting close to the desired targets (around 2%) of the central bankers of the U.S., Europe and England.

So will we see a turning point for global central banks (not just the Fed) in the months ahead?  The world has already been pricing in the likelihood that the pro-growth policies coming from the Trump administration will take the burden of manufacturing economic recovery off of the central banks.

But we may find that “transitory oil prices” will be the excuse for more inaction by the Fed, and continued QE from the ECB and BOE in the months ahead, which may result in a slower pace of rate hikes than both the Fed projected in December and the market has been anticipating.

Higher rates at this stage: 1) creates problems for the housing recovery, 2) promotes more capital flight from emerging markets like China (which means more dollar strength),and 3) threatens to neutralize the fiscal stimulus and reform coming down the pike for the U.S.

In December, the Fed dialed back their talk about letting the economy run hot (i.e. staying well behind the curve on inflation to make sure recovery is robust).   We’ll see if they switch gears again and start explaining away the inflation numbers to oil prices.

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.

January 10, 2017, 6:00pm EST

This morning we got a report that small business optimism hit the highest level since 2004, on the biggest jump since 1980. This follows a big jump in December, which obviously follows the November elections.

Small business owners that have survived the storm over the past nine years, most likely have had credit lines pulled, demand for their products and services crushed, and have slashed their workforce. If they were able to piece it together to continue on, they’ve operated as lean as possible, and they’ve slowly seen it all recover. And finally, over the past couple of years, they’ve likely had banks calling offering them money again. But, given the scars of the financial crisis, taking on debt again (or more debt) in an uncertain world, many have turned it down.

But if you’re going to dip a toe in the water again, take on some risk to grow your business (to expand, to hire, to build inventories), small business owners are saying now is the time. They are buying into what the Trump agenda is promising–a “dynamic booming economy.”

You can see that reflected in this chart…

The survey shows that 50% of small business owners expect the economy to improve. That’s the most in 15 years. With that, they think it’s a good time to expand. And they expect higher sales coming down the pike, so they’ve been building inventories.

As we know, in the recovery that was manufactured by the Fed (and other central banks), Main Street didn’t participate–trillions of dollars spent and little impact on the real economy. But this survey shows that the Trump effect is already doing what nine years, and trillions of dollars of monetary stimulus and intervention, couldn’t do. Most of the small business sentiment data has now returned to pre-crisis levels, just on the pent up demand that has been unleashed by the prospects of a return to prosperity.

This number tends to correlate highly with consumer confidence numbers. Consumer confidence numbers drive consumption. And consumption contributes about two-thirds of GDP. By restoring confidence, the Trump effect on growth can be self-fulfilling.

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 2017. You can join me here and get positioned for a big 2017.

January 9, 2017, 4:30pm EST

Over the past year we’ve had a wild ride in global yields. Today I want to take a look at the dramatic swing in yields and talk about what it means for the inflation picture, and the Fed’s stance on rates.

When oil prices made the final leg lower early last year, the Japanese central bank responded to the growing deflationary forces with a surprise cut of their benchmark interest rate into negative territory.

That began the global yield slide.  By mid-year, more than $12 trillion dollars with of government bond yields across the world had a negative interest rate.  Even Janet Yellen didn’t close the door to the possibility of adopting NIRP (negative interest rate policies).

So investors were paying the government for the privilege of loaning it their money.  You only do that when 1) you think interest rates will go even further negative, and/or 2) you think paying to park your money is the safest option available.

And when you’re a central banker, you go negative to force people out of savings.  But when people think the world is dangerous and prices will keep falling, they tend to hold tight to their money, from the fear a destabilized world.

But this whole dynamic was very quickly flipped on its head with the election of a new U.S. President, entering with what many deem to be inflationary policies. But as you can see in the chart below, the U.S. inflation rate had already been recovering, and since November is now nudging closer to the Fed’s target of 2%.

Still, the expectations of much hotter U.S. inflation are probably over done. Why?  Given the divergent monetary policies between the U.S. and the rest of the world, capital has continued to flow into the dollar (if not accelerated). That suppresses inflation.  And that should keep the Fed in the sweet spot, with slow rate hikes.

Meanwhile, there’s more than enough room for inflation to run in other developed economies.  You can see in Europe, inflation is now back above 1% for the first time in three years. That, too, is in large part because of its currency. In this case, a stronger dollar has meant a weaker euro.  This (along with the UK and Japan) is where the real REflation trade is taking place.  And it’s where it’s needed most, because it also means growth is coming with it, finally.

You can see, following Brexit, the chart looks similar in the UK – prices are coming back, again fueled by a sharp decline in the pound, which pumps up exports for the economy.

And, here’s Japan.

Japan’s deflation fight is the most noteworthy, following the administrations 2013 all-out assault to beat 2 decades of deflation.  It hasn’t worked, but now, post-Trump, the stars may be aligning for a sharp recovery.

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 2017. You can join me here and get positioned for a big 2017.

January 6, 2017, 7:00pm EST

With the Dow within a fraction of 20,000 today, and with the first week of 2017 in the books, I want to revisit my analysis from last month on why stocks are still cheap.

Despite what the media may tell you, the number 20,000 means very little. In fact, it’s amusing to watch interviewers constantly probe the experts on TV to get an anwer on why 20,000 for the Dow is meaningful. They demand an answer and they tend to get them when the lights and a camera are locked in on the interviewee.

Remember, if we step back and detach from the emotions of market chatter, speculation and perception, there are simple and objective reasons to believe the broader stock market can go much higher from current levels.

I want to walk through these reasons again for the new year.

Reason #1: To return to the long-term trajectory of 8% annualized returns for the S&P 500, the broad stock market would still need to recovery another 49% by the middle of next year. We’re still making up for the lost growth of the past decade.

Reason #2: In low-rate environments, the valuation on the broad market tends to run north of 20 times earnings. Adjusting for that multiple, we can see a reasonable path to a 16% return for the year.

Reason #3: We now have a clear, indisputable earnings catalyst to add to that story. The proposed corporate tax rate cut from 35% to 15% is estimated to drive S&P 500 earnings UP from an estimated $132 per share for next year, to as high as $157. Apply $157 to a 20x P/E and you get 3,140 in the S&P 500. That’s 38% higher.

Reason #4: What else is not factored into all of this simple analysis, nor the models of economists and Wall Street strategists? The prospects of a return of ‘animal spirits.’ This economic turbocharger has been dead for the past decade. The world has been deleveraging.

Reason #5: As billionaire Ray Dalio suggested, there is a clear shift in the environment, post President-elect Trump. The billionaire investor has determined the election to be a seminal moment. With that in mind, the most thorough study on historical debt crises (by Reinhardt and Rogoff) shows that the deleveraging of a credit bubble takes about as long as it took to build. They reckon the global credit bubble took about ten years to build. The top in housing was 2006. That means we’ve cleared ten years of deleveraging. That would argue that Trumponomics could be coming at the perfect time to amplify growth in a world that was already structurally turning. A pop in growth, means a pop in corporate earnings–and positive earnings surprises is a recipe for higher stock prices.

For these five simple reasons, even at Dow 20,000, stocks look extraordinarily cheap.

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 2017. You can join me here and get positioned for a big 2017.

January 5, 2017, 4:00pm EST

We talked yesterday about the bad start for global markets in 2016.  It was led by China.  Today, it was a move in the Chinese currency that slowed the momentum in markets.  Yields have fallen back.  The dollar slid. And stocks took a breather.

China’s currency is a big deal to everyone.  It’s the centerpiece of the tariff threats that have been levied from the U.S. President-elect.  I’ve talked quite a bit about that posturing (you can see it again here:  Why Trump’s Tough Talk On China May Work).

As we know, China, itself, sets the value of its currency every day.  It’s called a managed float.  They determine the value.  And for the past two years, they’ve been walking it lower — weakening the yuan against the dollar.  That’s an about face to the trend of the prior nine years.  In 2005, in agreement with their major trading partners (primarily the U.S.), they began slowly appreciating their currency, in an effort to allay trade tensions, and threats of trade sanctions (tariffs).

So what happened today?  The Chinese revalued its currency — pegged ithigher by a little more than a percent against the dollar.  That doesn’t sound like a lot, but as you can see in the chart, it’s a big move, relative to the average daily volatility. That became big news and stoked a little bit of concern in markets, mostly because China was the sore spot at the open of last year, and the PBOC made a similar move around this time, when global marketswere spiraling.

Why did they do it?  This time around, the Chinese have complained about the threat of capital flowing out of the country – it’s a huge threat to their economy in its current form.  That’s where they’ve laid the blame, on the two year slide in the value of the yuan. With that, they’ve allegedly been fighting to keep the yuan stable and have been stepping up restrictions on money leaving the country.  Today’s move, which included a spike in the overnight yuan borrowing rate, was a way to crush speculators that have been betting against the currency, putting further downward pressure on the currency. But it also likely Trump related – the beginning of a crawl higher in the currency as we head toward the inauguration of the new President Trump.  It’s very typical for those under the gun for currency manipulation to make concessions before they meet with trade partners.

So, should we be concerned about the move today in China?  No.  It’s not another January 2016 moment. But the move did drive profit taking in twobig trends of the past two months:  the dollar and U.S. Treasuries.  With that, the first jobs report of the year comes tomorrow. It should provide more evidence that the Fed will hike a few times this year.  And that should restore the climb in the dollar and in rates.

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 2017. You can join me here and get positioned for a big 2017.

January 4, 2017, 4:00pm EST

Remember this time last year?  The markets opened with a nosedive in Chinese stocks.  By the time New York came in for trading, China was already down 7% and trading had been halted.  That started, what turned out to be, the worst opening stretch of a New Year in the history of the U.S. stock market.

The sirens were sounding and people were gripping for what they thought was going to be a disastrous year.  And then, later that month, oil slid from the mid $30s to the mid $20s and finally people began to realize it wasn’t China they should be worried about, it was oil.  The oil price crash was a ticking time bomb, about to unleash mass bankruptcies on the energy industry and threaten a “round two” of global financial crisis.

What happened?  Central banks stepped in.  On February 11th, the Bank of Japan intervened in the currency markets, buying dollars/selling yen.  What did they do with those dollars?  They must have bought oil, in one form or another.  Oil bottomed that day. China soon followed with a move to boost bank lending, relieving some fears of a global liquidity crunch.  The ECB upped its QE program and cut rates.  And then the Fed followed up by taking two of their projected four rate hikes off of the table (of which they ended up moving just once on the year).

What a difference a year makes.

There’s a clear shift in the environment, away from a world on liquidity-driven life support/ and toward structural, growth-oriented change.

With that, there’s a growing sense of optimism in the air that we haven’t seenin ten years.  Even many of the pros that have constantly been waiting for the next “shoe to drop” (for years) have gone quiet.

Global markets have started the year behaving very well. And despite the near tripling from the 2009 bottom in the stock market, money is just in the early stages of moving out of bonds and cash, and back into stocks. Following the election in November, we are coming into the year with TWO consecutive record monthly inflows into the U.S. stock market based on ETF flows from November and December.

The tone has been set by U.S. markets, and we should see the rest of the world start to play catch up (including emerging markets).  But this development was already underway before the election.

Remember, I talked about European stocks quite a bit back in October.  While U.S. stocks have soared to new record highs, German stocks have lagged dramatically and have offered one of the more compelling opportunities.

Here’s the chart we looked at back in October, where I said “after being down more than 20% earlier this year, German stocks are within 1.5% of turning green on the year, and technically breaking to the upside“…

And here’s the latest chart…

You can see, as you look to the far right of the chart, it’s been on a tear. Adding fuel to that fire, the eurozone economic data is beginning to show signs that a big bounce may be coming. A pop in U.S. growth would only bolster that.

And a big bounce back in euro zone growth this year would be a very valuabledefense against another populist backlash against the establishment (first Grexit, then Brexit, then Trump).  Nationalist movements in Germany and France are huge threats to the EU and euro (the common currency).  Another round of potential break-up of the euro would be destabilizing for the global economy.

With that, as we enter the year with the ammunition to end the decade long economy rut, there are still hurdles to overcome.  Along with Trump/China frictions, the French and German elections are the other clear and present dangers ahead that could dull the efficacy of Trumponomics.

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 2017. You can join me here and get positioned for a big 2017.

September 28, 2016, 4:30pm EST

Oil popped over $3 from the lows of the day (as much as 7%) on news OPEC has agreed to a production cut.

We’ve talked a lot throughout the year about the price of oil.  When it collapsed to the $20s, it put the entire energy industry on bankruptcy watch.

Of course, oil bounced sharply from those lows of February as central banks stepped in with a coordinated response to stabilize confidence. Not so coincidentally, oil bottomed the same day the Bank of Japan intervened in the currency markets.

The oil price bust all started back in November of 2014, the evening of Thanksgiving Day, when OPEC pulled the rug out from under the oil market by vowing not to make production cuts, in an attempt to crush the nascent shale industry.  At that time, oil was trading around $73.

You can see in this chart, it never saw that price again.

OPEC was successful in heavily damaging the U.S. shale industry through low oil prices, but it has damaged OPEC countries, too.

What will the news of an agreement on a production cut mean?

A policy shift from OPEC can be very powerful.  In 1986, the mere hint of an OPEC policy move sent oil up 50% in just 24 hours.  And as we discussed earlier in the year, the relationship between the price of oil and stocks this year has been tight.  At times, stocks have traded almost tick for tick with oil.

Take a look at this chart.

An oil price back in the $60s would be a catalyst for a big run in stocks into the year end. For a stock market that has been rudderless surrounding a confused Fed and an important election, this oil news could kick it into gear.

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June 2, 2016, 3:25pm EST

In the middle of June we have perhaps the two biggest events of the year. On June 15 the Fed will decide on rates. And hours later, that Wednesday night, the Bank of Japan will follow with its decision on policy.

This is really the perfect scenario for the Fed. The biggest impediment in its hiking cycle/”rate normalization process” is instability in global financial markets. Market reactions can lead to damage to consumer sentiment, capital flight and tightening in credit—all the things that can spawn the threat of a global economic shock, which can derail global recovery. Clearly, they are very sensitive to that. On that note, the Brexit risk, while a hot topic in the news, is priced by experts as a low probability.

So, the Fed has been setting expectations that a second hike in its tightening cycle could be coming this month. But the market isn’t listening. The market is pricing in just a 23% chance of a hike in June. But as we’ve said, markets can get it wrong, sometimes very wrong. We think they have it wrong this time. We think there is a much better chance. Why? Because they know the BOJ is right behind them. If they do hike, any knee jerk hit to financial markets can be quelled by more easing from the BOJ.

Remember, as we’ve discussed quite a bit in our daily notes, central banks remain in control. The recovery was paid for by a highly concerted effort by the world’s top economic powers and central banks. And despite the perceived hostility over currency manipulation, the powers of the world understand that the U.S. is leading the way out of recovery, and that Europe and Japan are critical pieces in the global recovery. The ECB and BOJ have been passed the QE torch from the Fed to both fuel recovery and promote global economic stability. And playing a major role in that effort is a weaker euro and a weaker yen.

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.

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