Last week, we talked a lot about oil, as OPEC was meeting to deliberate on the status of their agreement to cut production.
While oil prices have been rising aggressively over the past year, the markets haven’t been paying a lot of attention — distracted by Trump watching.
But then Trump put it on the front burner, with another jab at OPEC on Twitter. And the media and Wall Street began trying to deduce the OPEC outcome. In the end, they misinterpreted. OPEC’s agreement to go from overcutting to complyingwith the initial levels of production cuts, means they are still cutting.
So, the market is still undersupplied in a world where demand has proven to be underestimated. That’s a formula for higher prices.
That’s what we’ve had for the past year, and that’s what we’ve gotten since OPEC’s official statement on Friday. In my note last Friday, I said “the lack of enough action from OPEC may serve as a catalyst to push oil much higher from here. That, of course, serves OPEC’s interests.”
Oil prices have exploded! We’ve seen a $10 pop since Friday morning. That’s 15% in a week. And I suspect it’s going to keep going.
Remember, we’ve talked about the prospects for $100 oil this year. Leigh Goehring, one of the best research-driven commodities investors on the planet has been telling us that since last year. And he’s looking spot-on at the moment.
Bottom line: This script is precisely what we’ve been talking about, here in my daily ProPerspectives note, since the price of oil was in the $40s. We’ve talked about the prospects for a return to $80 oil, and maybe even as high as $100 oil. And it looks more and more possible, given the surging demand and the supply shortfall.
How can you play it. On this thesis for oil, in my Billionaire’s Portfolio, we added SPDR Oil and Gas ETF (symbol XOP) and Phillips 66 (symbol PSX) back when oil prices were deeply depressed (in 2016). We followed the activism of policymakers (both central banks and OPEC). And in the case of PSX, we also followed Warren Buffett.
Both are up big, but have a lot more room to run. Oil and gas stocks (which comprise the XOP) have yet to reflect the supply shortfall in the oil market, much less the booming demand that is coming from an improving global economy (which many have underestimated).
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
As we head into the Thanksgiving day weekend, let’s talk about oil and Saudi Arabia.
On Thanksgiving night three years ago oil was trading around $73, when the Saudis blocked a vote on an OPEC production cut. Oil dropped 10% that night, and that set off a massive oil price bust that ultimately bottomed out early last year at $26.
The goal of the Saudis was to put the emerging, competitive U.S. shale industry out of business–to force oil prices lower so that these shale companies couldn’t product profitably. The plan: They go away, and Saudi Arabia retains its power on global oil. It nearly worked. Shale companies started dropping like flies, with more than 100 bankruptcies between 2015 and 2016.
But cheap oil had broader implications for the global economy, following the Great Recession. It exposed the global banks that had lent the shale industry hundreds of billions of dollars.
Additionally, collapsing oil prices directly weighed on inflation measures and the inflation expectations. That was bad news for the central banks that had committed trillions of dollars to avert a deflationary spiral and promote a normalization of inflation. High inflation is bad. Deflation is worse. Once a deflationary mindset takes hold, it feeds into more deflation. Central banks can raise rates to kill inflation. They have few tools to fight deflation (especially after the financial crisis).
So cheap oil became bad news for the fragile global economic recovery. With that, central banks stepped in early last year and responded with coordinated easing (which included direct asset purchases, which likely included outright oil and oil-related ETFs). Oil bottomed the day the Bank of Japan intervened in the currency market, and prices jumped 50% in a month as other major central banks followed with intervention.
Now, the other piece of this story: cheap oil damaged the shale industry and the global economy, but it also damaged the same folks that set the collapse into motion–Saudi Arabia and other oil producing countries. These countries, which are heavily reliant on oil revenues, have seen their budget deficits balloon. So, with all of the above in mind, in November of last year, the oil producing countries (led by Saudi Arabia) reversed course on their plan, by promising the first production cuts since 2008.
Oil prices have now recovered to the mid-$50s. And since OPEC announced production cuts last year at this time, U.S. petroleum supply has drawn down 5%. Meanwhile, global demand is running far hotter than forecasts of last year. Yet, OPEC is extending their production cuts into this market and may get even bolder next week at their November meeting. Why? Because now it suits them. Remember, Saudi Arabia’s next king has been cleaning house over the past two weeks, in the process of seizing hundreds of billions of dollars from his political foes. Higher oil prices help his efforts to reshape the Saudi economy.
As liquidity dries up into the end of year and holidays, we may see oil find its way back up toward those November 2014 levels (low $70s)–where the whole price-bust debacle started.
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On Friday we talked about the biggest market movers: oil, copper and iron ore.
Oil was up 5.3% on the week. Copper was up 4%. And iron ore reversed sharply on Friday to jump 6%.
All were stronger again today.
Remember, China is the world’s largest consumer of commodities. And the import data late last week out of China showed hotter imports in copper and copper products (26.5% growth, year over year), iron ore (record high imports, up 10% from a year earlier), and crude oil imports hit the second highest level on record (up 12% year over year).
This leaves us wondering: Is China’s economy doing better than most think? And/or is this China hoarding commodities again?
At the depths of the financial crisis, China opportunistically stepped in and started gobbling up global commodities on the cheap (at the time).
Remember, China has $3 trillion in currency reserves, about $2 trillion of which are in U.S. dollars. Commodities are a good way to put those dollars to work.
And there always seems to be currency play at work in China, to gain some sort of advantage. You can see in the chart below, as the PBOC has weakened the yuan, commodities prices have fallen. And as they’ve been strengthening the currency this year, we may be seeing commodities coming back as a result.
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Crude oil was the biggest mover of the day across global markets, up almost 3%, and back above the $50 level.
Though oil has been stuck, oscillating around this $50 mark for some time, we’ve talked about the prospects for much higher oil prices. So, when?
Remember, back in May I spoke with one of the best research-driven commodities funds on the planet, led by the star commodities investor Leigh Goehring and his long-time research head Adam Rozencwajg. They do some of the most thorough supply/demand work on oil and broader commodities.
Earlier this year, they were pounding the table on the fundamental case for $100 oil again. Since then, as oil prices haven’t complied. With that, we’ve seen Andy Hall’s departure from the market, of one of the biggest oil bulls, and one of the best and most successful tactical traders of oil in the world.
Meanwhile, the fundamentals have continued to build in favor of much
higher oil prices. We’ve seen supply drawdown for the better part of the past seven months – to the tune of more than $60 million barrels of oil taken out of the market.
I checked back in with Goehring and Rozencwajg and they are now more bullish than before. They say demand is raging, supply is faltering, and the world has overestimated what the shale industry is capable of producing – and the market is leaning, heavily, the wrong way (i.e. “maximum bearishness”). They think we’ve now hit the tipping point for prices – where we will see the price of oil accelerate.
They’re calling for $75-$110 oil by early next year, based on their historical analysis of price and inventory levels.
We’ll talk more about their work on the oil market in the coming days, and their very interesting work on the broader commodities markets – both of which support the themes we’ve been discussing in recent months.
Yesterday we looked at the charts on oil and the U.S. 10 year yield. Both were looking poised to breakout of a technical downtrend. And both did so today.
Here’s an updated look at oil today.
And here’s a look at yields.
We talked yesterday about the improving prospects that we will get some policy execution on the Trumponomics front (i.e. fiscal stimulus), which would lift the economy and start driving some wage pressure and ultimately inflation (something unlimited global QE has been unable to do).
No surprise, the two most disconnected markets in recent months (oil and interest rates) have been the early movers in recent days, making up ground on the divergence that has developed with other asset classes.
Now, oil will be the big one to watch. Yields have a lot to do, right now, with where oil goes.
Though the central banks like to say they look at inflation excluding food and energy, they’re behavior doesn’t support it. Oil does indeed play a big role in the inflation outlook – because it plays a huge role in financial stability, the credit markets and the health of the banking system. Remember, in the oil price bust last year the Fed had to reverse course on its tightening plan and other major central banks coordinated to come to the rescue with easing measures to fend off the threat of cheap oil (which was quickly creating risk of another financial crisis as an entire shale industry was lining up for defaults, as were oil producing countries with heavy oil dependencies).
So, if oil can sustain above the $50 level, watch for the inflation chatter to begin picking up. And the rate hike chatter to begin picking up (not just with the Fed, but with the BOE and ECB). Higher oil prices will only increase this divergence in the chart below, making the interest rate market a strong candidate for a big move.
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Last week we discussed the building support for a next leg higher in commodities prices. China is clearly a very important determinant in where commodities go. And with the news last week about cooperation between the Trump team and China, on trade, we may have the catalyst to get commodities moving higher again.It just so happens that oil (the most traded commodity in the world) is rebounding too, on the catalyst of prospects of an OPEC extension to the production cuts they announced last November.In fact, overnight, Saudi Arabia and Russia said they would do “whatever it takes” to cut supply (i.e. whatever it takes to get oil prices higher). Oil was up big today on that news.When you hear these words spoken from policy-makers (those that can dictate outcomes), it should get everyone’s attention. Those are the exact words uttered by ECB head Mario Draghi, that ended the bond market assault in Spain and Italy that were threatening the existence of the euro and euro zone. The Spanish 10-year yield collapsed from 7.8% (unsustainable borrowing rate for the Spanish government, and threatening imminent default) to 1% over the next three years — and the ECB, while threatening to buy an unlimited amount of bonds to push those yields lower, didn’t have to buy a single bond. It was the mere threat of ‘whatever it takes’ that did the trick.
As for oil: From the depths of the oil price crash last year, remember, we discussed the prospects for a huge bounce. Oil prices at $26 were threatening to undo the trillions of dollars of work central banks and governments had done to stabilize the global economy. Central banks couldn’t let it happen. After a series of coordinated responses (from the BOJ, China, ECB and the Fed), oil bottomed and quickly doubled.
Also at that time, two of the best oil traders in the world were calling the bottom and calling for $70-$80 oil by this year (Pierre Andurand and Andy Hall). Another commodities king that called the bottom: Leigh Goehring.
Goehring, one of the best commodities investors on the planet, has also laid out the case for $100 oil by next year. He says he’s “wildly bullish” oil in his recent quarterly investor letter at his new fund, Goehring & Rozencwajg.
Goehring argues that the IEA inventory numbers are flawed. He thinks oil the market is already over-supplied and is in a draw, as of May of last year. With that, he thinks the OPEC cuts will ultimately exacerbate the deficit and send prices aggressively higher. He says “we remain ‘wildly’ bullish and believe that there is a very high probability of oil prices reaching triple digits in the first half of 2018.”
Follow This Billionaire To A 172% WinnerIn our Billionaire’s Portfolio, we have a stock in our portfolio that is controlled by one of the top billion dollar activist hedge funds on the planet. The hedge fund manager has a board seat and has publicly stated that this stock is worth 172% higher than where it trades today. And this is an S&P 500 stock!Even better, the company has been constantly rumored to be a takeover candidate. We think an acquisition could happen soon as the billionaire investor who runs this activist hedge fund has purchased almost $157 million worth of this stock over the past year at levels just above where the stock is trading now.So we have a billionaire hedge fund manager, who is on the board of a company that has been rumored to be a takeover candidate, who has adding aggressively over the past year, on a dip.
Stocks were down a bit today, for the first day in the past six days. Yields were lower, following two days of Janet Yellen on Capitol Hill. Gold was higher on the day. And the dollar was lower.
Of the market action of the day, the dollar and yields are the most interesting. The freshly confirmed Treasury Secretary, Steven Mnuchin, held a call with Japan’s Finance Minister last night, early morning Japan time.
What did USD/JPY do? It went down (lower dollar, stronger yen). Just as it did the week leading up to the visit between President Trump and Japan’s Prime Minister Abe.
Remember, the yen has been pulled into the fray on Trump’s tough talk on trade fairness and currency manipulation. The subject has cooled a bit, but with the new Treasury Secretary now at his post, the world will be looking for the official view on the dollar.
As I said before, I think the remarks about currency manipulation are (or should be) squarely directed toward China. And I suspect Abe may have conveyed to the president, in their round of golf, that Japan’s QE is quite helpful to the U.S. economy and policy efforts, even if it comes with a weaker yen (stronger dollar). Among many things, Japan’s policy on keeping its ten-year yield pegged at zero (which is stealth unlimited QE) helps put a lid on U.S. market interest rates. And that keeps the U.S. housing market recovery going, consumer credit going and U.S. stocks climbing, and that all fuels consumer confidence.
Yesterday we talked about the fourth quarter portfolio disclosures from the world’s biggest investors. With that in mind, let’s talk about the porfolio of the man that’s best position to benefit from the Trump administration: the legendary billionaire investor, Carl Icahn.
Icahn was an early supporter for Trump. He was an advisor throughout the campaign and helped shape policy plans for the president.
What has been the sore spot for Icahn’s underperforming portfolio in recent years? Energy. It has been heavily weighted in his portfolio the past two years and no surprise, it’s contributed to steep declines in the value of his portfolio over the past three years. Icahn’s portfolio is volatile, but over time it has produced the best long run return (spanning five decades) of anyone alive, including Buffett. And he’s worth $17 billion as a result.
Here’s a look at what I mean: In 2009 he returned +33%, +15% in 2010, +35% in 2011, +20% in 2012 and +31% in 2013. That’s quite a run, but he’s given a lot back–down 7% in 2014, down 20% in 2015 and down 20% last year.
Even with this drawdown, Icahn doesn’t see his energy stakes as bad investments. Rather, he thinks his stocks have been unfairly harmed by reckless regulation. And he’s been fighting it.
He penned a letter to the EPA last year saying its policies on renewable energy credits are bankrupting the oil refinery business and destroying small and midsized oil refiners.
And now that activism is positioned to pay off handsomely.
The new Trump appointee to run the EPA was first vetted by Icahn–it’s an incoming EPA chief that was suing the EPA in his role as Oklahoma attorney general. Safe to assume he’ll be friendly to energy, which will be friendly to Icahn’s portfolio.
And as we know, Icahn has since been appointed as an advisor to the president on REGULATION.
To get peek inside the portfolio of Trump’s key advisor, join me 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.
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Last week we talked about how a visit to Trump Tower was becoming a good predictor of a success for your stock.
Goldman continues to build representation in the Trump administration with the latest addition, Gary Cohn (current COO and President of Goldman Sachs) as the National Economic Council Director. And hedge funder Anthony Scaramucci, a Goldman Sachs alum and current member of the Trump transition team, is rumored to be in the running for a role in the administration. Goldman’s stock continues to rise, as the best performer in the Dow Jones Industrial average since Election Day (up 31%).
And remember, we talked about the visit last week of Masayoshi Son, the Japanese billionaire and majority stake holder in Sprint. Sprint is up 32% since election day.
So now we have the latest, and one of the most important cabinet appointments, Rex Tillerson, who will be Secretary of State. He’s the Chairman and CEO of Exxon Mobil, the biggest energy company in the country and one of the largest publicly traded companies. Exxon was up 2% today, and is up 9% since the election — better than the broader market, but not quite as good as the stocks of some other Trump Tower visitors.
This is a very interesting pick. Given that the President-elect has openly talked about using oil as an economic weapon (on Iraq… “we should have taken the oil”). We now have one of the world’s most respected experts in oil, and in negotiating around oil, charged with stabilizing the middle east and relations with Russia (to name a few). And given that the hot spot of global instability surrounds countries (or regimes) that are highly dependendent on oil revenue (funded by oil revenue), we have a guy that could credibly utilize leverage emerging U.S. supply, and global demand of the developed world, as a bargaining chip. His appointment/presence may also end up yielding a stable oil price environment going forward (tempering the manipulation of price extremes by OPEC).
Follow me and look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up more than 27% this year. You can join me here and get positioned for a big 2017.
Stocks continue to print new highs. And many continue to doubt the rally (as they have for much of the post-crisis recovery).
They continue to say stocks are priced for perfection, implying that stocks are expensive, and/or that investors are assuming a perfect Presidency from Trump. But remember, we’ve talked about the massive fundamental and technical performance gap that has still yet to be closed, dating back to the 2007 pre-crisis peak. I did this analysis again just a few days after the election. You can see it here: “The Trump Effect Will Make Stocks Extraordinarily Cheap.”
Now, a few days ago, we talked about buying the stocks of the guests of Trump Tower. Goldman comes to mind, as the Wall Street powerhouse has been well represented in the Trump plan, including the new Treasury Secretary appointment. Goldman is the best performing Dow stock over the past month. And we talked about the meeting with Japanese investor, Masayoshi Son, at Trump Tower this week. Son’s gigantic (80%+) stake in Sprint is up 11% sinceTuesday.
With that said, the billionaire activist investor, Carl Icahn, has been out doing interviews the past two days. Let’s talk about Icahn, because there is perhaps no one investor that should benefit more from the Trump administration. Remember, Icahn was an early supporter for Trump. He’s been an advisor throughout and has helped shape policy plans for the President-elect.
What has been the sore spot for Icahn’s underperforming portfolio the past two years? Energy. It has been heavily weighted in his portfolio the past two years. And no surprise, he’s had steep declines in the value of his portfolio the past two years.
But Icahn doesn’t see his energy stakes as bad investments. Rather, he thinks his stocks have been unfairly harmed by reckless regulation. For that, he’s fought. He’s penned a letter to the EPA a few months ago saying its policies on renewable energy credits are bankrupting the oil refinery business and destroying small and midsized oil refiners. And now his activism looks like it will pay off. Yesterday we got an appointee to run the EPA that has been vetted by Icahn (as he said in an interview today) — it’s an incoming EPA chief that was suing the EPA in his role as Oklahoma attorney general. Safe to assume he’ll be friendly to energy, which will be friendly to Icahn’s portfolio.
Icahn’s publicly traded holdings company is already up 28% from election day (just one month ago). But it remains 56% off of the 2013 highs. This is the portfolio of an investor (Icahn) with the best track record in history (30% annualized for almost 50 years). IEP might be one of the best buys in the market.
We have three Icahn owned stocks in our Billionaire’s Portfolio. Follow me and look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up more than 27% this year. You can join me here and get positioned for a big 2017.
Over the past year we’ve talked a lot about the oil price bust and the threat it represented to the global economy. And in past months, we’ve talked about the approaching OPEC meeting, where they had telegraphed a production cut – the first in eight years. Still, not many were buying it.
Remember, it was OPEC created the oil price crash that started in November of 2014 when the Saudis refused a production cut. Ultimately the price of oil fell to $26 a barrel (this past February).
Their strategy: Kill off the emerging threat of the U.S. shale industry by forcing prices well below where they could produce profitably. To an extent it worked. More than 100 small oil related companies in the U.S. filed for bankruptcy over the past two years.
But it soon became evident that cheap oil threatened, not just the U.S. shale industry (which also turned out to threaten the global financial system and global economy), but it threatened the solvency of OPEC member countries (the proverbial shot in the foot).
The big fish, the Saudis, have lost significant revenue from the self-induced oil price plunge, starting the clock on an economic time bomb. They derive about 80% of their revenue from oil. With that, they’ve run up their budget deficit to more than 15% of GDP in the oil bust environment. For context, Greece, the well known walking dead member of the euro zone was running a budget deficit of 15% at worst levels back in 2009.
So OPEC members need (have to have) higher oil prices. Time is working against them. With that, they followed through with a cut today. Remember, back in the 80s when OPEC merely hinted at a production cut, oil jumped 50% in 24 hours. Today it was up as much as 10% on the news. But this cut should put a floor under oil in the mid $40s, and lead to $60-$70 oil next year.
All of this said, given the increase in supply from bringing Iran production back online, and from increasing U.S. supply, no one should be cheering more for the pro-growth Trump economy to put a fire under demand than OPEC, especially Saudi Arabia.
Now, as we discussed this week, oil has been a huge drag on global inflation. With that, the catalyst of a first OPEC cut in eight years driving oil prices higher could put the Fed and other global central banks in a very different position next year.
Consider where the world was just months ago, with downside risks reverting back to the depths of the economic crisis. Now we have reason to believe oil could be significantly higher next year. That alone will run inflation significantly hotter (flipping the switch on the inflation outlook). Add to that, we have a pro-growth government with a trillion dollar fiscal package and tax cuts entering the mix.
As I said yesterday, we may find that the Fed will tell us in December that they are planning to move rates more like four times next year, instead of two.
The market is already telling us that the inflation switch has been flipped. Just four months ago, the 10 year yield was trading 1.32%, at new record lows. And as of today, we have a 10-year at 2.40% — and that’s on about a 60 basis point runup since November 8th.
With that said, there has been a shot in the arm for sentiment over the past few weeks. That’s led to the bottoming in rates, bottoming in commodities and potential cheapening of valuations in stocks (given a higher growth outlook). As a whole, that all becomes self-reinforcing for the better growth outlook story.
And that reduces a lot of threats. But it creates a new threat: The threat of a collapse in bond prices, runaway in market interest rates.
But what could be the Fed’s best friend, to quell that threat? Trump’s new Treasury Secretary said today that he thinks they will see companies repatriate as much as $1 trillion. Much of that money will find a parking place in the biggest, most liquid market in the world: The U.S. Treasury market. That should support bonds, and keep the climb in interest rates tame.
We may be entering an incredible era for investing. An opportunity for average investors to make up ground on the meager wealth creation and retirement savings opportunities of the past decade, or more. For help, follow me in my Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio is up 24% year to date. That’s more than three times the performance of the broader stock market. Join me here.