January 8, 4:00 pm EST

Heading into the end of last year, we talked about the regulatory scrutiny starting to emerge toward the big tech giants (Facebook, Apple, Amazon, Netflix, Google… Tesla, Uber, Airbnb…) – and the risk that the very hot run they’ve had “could be coming to an end.”

These companies have benefited from a formula of favor from the Obama administration, which included regulatory advantages and outright government funding (in the case of Tesla). That created a “winner takes all” environment where this group of startups and loss-laden ventures, some with questionable business models, were able to amass war chests of capital, sidestep enduring laws, and operate without the constraints of liabilities (including taxes, in some cases) that burdened its competitors.

With the screws now beginning to tighten, under a new administration, and with the tailwinds of economic stimulus heading into the new year, I thought 2018 may be the year of the bounce back in the industries that have been crushed by the internet giants.

Among the worst hit, and left for dead industry, has been retail.

Last year, retail stocks looked a lot like energy did in the middle of 2016. If you were an energy company and survived the crash in oil prices to see it double off of the bottom, you were looking at a massive rebound. Some of those stocks have gone up three-fold, five-fold, even ten-fold in the past 18 months.

Similarly, if you’re a big-brand bricks and mortar retailer, and you’ve survived the collapse in global demand–and a decade long stagnation in the global economy–to see prospects of a 4% growth economy on the horizon, there’s a clear asymmetry in the upside versus the downside in these stocks. These are stocks that can have magnificent comebacks.

Remember, back in November we talked about the comeback underway in Wal-Mart and the steps it has made to challenge Amazon (you can see that again, here). In support of that thesis, the earnings numbers that came in for retail for the third quarter were strong. And now we’re getting a glimpse of what the fourth quarter will look like, as several retailers this morning reported strong holiday sales, and upped guidance on the fourth quarter.

Just flipping through a number of charts on retail stocks, the bottom appears to be in on retail – with many bottoming out in the September-November period last year. Since then, to name a few, Ralph Lauren is up 26%, Michael Kors is up 36%, Under Armour is up 42% and Footlocker is up 64%. The survivors have been comebacks as they’ve weathered the storm and now are blending their physical presence with an online presence.

By the time you get a ETF designed to bet against the survival of bricks and mortar retail, the bottom is probably in. That ETF, the Decline Of The Retail Store (EMTY), launched on November 17 and has gone straight down since.

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November 13, 2017, 4:00pm EST

BR caricatureInto the latter part of last week, we had some indiscriminate selling in some key markets. First it was Japanese stocks that followed a new 25-year high with a 1,100 point drop. Then we had some significant selling in junk bonds and U.S. Treasuries. And then four million ounces of gold was sold in about a 10 minute period on Friday.

Markets were tame today, but as I said on Friday, the potential ripples from the political shakeup and related asset freeze in Saudi Arabia is a risk that still doesn’t seem to be given enough attention. I often talk about the many fundamental reasons to believe stocks can go much higher. But experience has shown me that markets don’t go in a straight line. There are corrections along the way, and we haven’t had one in a while.

With that said, since 1946, the S&P 500 has had a 10% decline about once a year (according to American Funds research).


The largest decline this year has been only 3.4%.

I could see a scenario play out, with forced selling related to the Saudi events, that looks a lot like this correction in 2014.


This chart was fear driven – when the Ebola fears were ramping up. You can see how quickly the slide accelerated. The decline hit 10% on the nose, and quickly reversed. Fear and forced selling are great opportunities to buy-into. This decline was completely recovered in 30 trading days.

We constantly hear predictions of impending corrections, pointing to all of the clear evidence that should drive it, but corrections are often caused by events that are less pervasive in the market psyche. The Saudi story would qualify. And we’re in a market that is underpricing volatility at the moment – with the VIX sitting only a couple of points off of record lows (i.e. little to no fear). Forced liquidations can create some fear.

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February 22, 2017, 4:30pm EST                                                                 Invest Alongside Billionaires For $297/Qtr

We had new record highs again in the Dow today.  But remember, yesterday we talked about this dynamic where stocks, commodities and the dollar were strong. But a missing piece in the growing optimism about growth has been yields.

Clearly the 10 year at 2.40ish is far different than the pre-election levels of 1.75%-1.80%.  But the extension was quick and has since been a non-participant in the full-on optimism vote given across other key markets.

Why?  While stocks can get ahead of better growth, yields can’t in this environment.  Higher stocks can actually feed higher growth.  Higher yields, on the other hand, can kill it.

But there’s something else at work here.  As we know Japan’s policy to target the their 10 year at zero provides an anchor to our interest rates, as the BOJ is in unlimited QE mode.  Some of that freshly produced liquidity, and the money displaced by their bond buying, undoubtedly finds a happier home in U.S. Treasuries (with a rising dollar, and a 2.4% yield).  That caps yields.

But in large part, the quiet drag on U.S. yields has also come from the rising risks in Europe.  The election cycle in Europe continues to threaten a populist Trump-like movement, which is very negative for the European Union and for the survival of the single currency (the euro).  That creates capital flight, which has been contributing to dollar strength and flows into the parking place of U.S. Treasuries (which pressures yields, which is keeping mortgage and other consumer rates in check).

These flows are also showing up clearly in the safest bond market in Europe:  the German bunds.  The 2-year German bund hit an all-time record LOW, today of -91 basis points.  Yes, while the U.S. mindset is adjusting for the idea of a 3%-4% growth era, German yields are reflecting crisis and money is plowing into the safest parking place in Europe.  The spread between German and French bonds are reflecting the mid-2012 levels when Italy and Spain where on the brink of insolvency — only to be saved by a bold threat/backstop from the European Central Bank.

We talked last week about the prospects for higher gold and lower yields as questions arise about the execution of (or speed of execution) Trump’s growth policies, some of the inflation optimism that has been priced in, may begin to soften. That would also lead to a breather for the stock market.  I suspect we will begin to see the coming elections in Europe also contribute to some de-risking for the next couple of months.  We already have a good earnings season and some solid economic data and optimism about the policy path priced in.  May be time for a dip.  But as I’ve said, it would create opportunities– to buy any dip in stocks, and sell any rally in bonds.

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February 13, 2017, 3:30pm EST                                                                                       Invest Alongside Billionaires For $297/Qtr


Stocks continue to print new record highs.  Let’s talk about why.

First, as we know, the most powerful underlying force for stocks right now is prospects of a massive corporate tax cut, deregulation, a huge infrastructure spend and trillions of dollars of corporate repatriation coming.  But quietly, among all of the Trump attention, earnings are also driving stocks.  More than 70% of S&P 500 companies have reported.  About 2/3rds of the companies have beat Wall Street estimates.  And most importantly, earnings in Q4 have grown at 3.1% year-over-year.  That’s the first consecutive positive growth reading since Q4 2014/ Q1 2015.

Meanwhile, yields have remained quiet.  And oil prices have remained quiet.  That’s positive for stocks.  Take a look at the graphic below …

You can see, stocks and most commodities continue to rise on the growth outlook.  Yields and energy should be rising too.  But the 10 year yield has barely budged all year — same for oil.  Of course, higher rates, too fast, are a countervailing force to the pro-growth policies.  Same can be said for higher oil too fast.  With that, both are adding more “fuel” to stocks.

On the rate front, we’ll hear from Janet Yellen this week, as she gives prepared remarks on the economy to Congress, and takes questions.

She’s been a communications disaster for the Fed. Most recently, following the Fed’s December rate hike, she backtracked on her comments made a few months prior, when she said the Fed would let the economy run hot.  She denied that in December.  Still, the 10-year yield is about 10 basis points lower than where it closed following that December press conference.  I wouldn’t be surprised to see a more dovish tone from Yellen this time around, in effort to walk market rates a little lower, to take the pressure off of the Fed and to continue stimulating optimism about the economy.

On Friday we looked at four important charts for markets as we head into this week:  the dollar/yen exchange rate, the Nikkei (Japanese stocks), the DAX (German Stocks), and the Shanghai Composite (Chinese stocks).
With U.S. stocks printing new record highs by the day, these three stock markets are ready to make a big catch-up run.  It’s just a matter of when.  And I argued that a positive tone coming from the meeting of U.S. and Japanese leadership, under the scrutiny of trade tensions, could be the greenlight to get these markets going.  That includes a stronger dollar vs. the yen.    All are moving in the right direction today.

On the China front, we looked at this chart on Friday.

As I said, “Copper has made a run (up 10% ytd).  That typically correlates well with expectations of global growth.  Global growth is typically good for China.  Of course, they are in the crosshairs of Trump’s fair trade movement, but if you think there’s a chance that more fair trade terms can be a win for the U.S. and a win for China, then Chinese stocks are a bargain here.”

Copper is surged again today on a supply disruption and has technically broken out.

This should continue to spark a move in the Chinese stock market.

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January 20, 2017, 4:15pm EST

President Trump officially took office today.  From the close of business on November 8th, as people across the country were still voting, the S&P 500 has climbed 6% – from election night through today.  The dollar index has risen 2.8.  The broad commodities index is up 6%.  The 10 year Treasury note is down 4% — which means the yield is UP from 1.80% to about 2.50%.

His policy agenda has clearly been a game changer.

But if you recall, the broad sentiment going into the election was that a Trump Presidency would cause a stock market crash.  These were people that weren’t calibrating the meaningful shift in sentiment that came from projecting pro-growth policies in a world that has been starved for growth. That event (the election) alone did more to cure the global deflation risk than the trillions of dollars that central banks have been pouring into the global economy.

But many still aren’t buying it.  I don’t often read financial news. I’d rather look at the primary sources (the data or hear from the actors themselves/ the horse’s mouth) and interpret for myself.  But today, I had a look across the web.  Four of the five top headlines on a major financial news site, on inauguration day, ranged from negative to doom-and-gloom — all laying blame on the dangers of Trump.

Because Trump has talked tough on trade, the common threat most refer to is a potential trade war. But remember, Trump has also talked tough on U.S. companies moving jobs overseas.  Thus far, he hasn’t created enemies, he’s gotten concessions and has created allies. He’s used leverage, and he’s negotiated win-wins.  Expect him to do the same with trade partners. With pro-growth policies coming down the pike and a meaningful pop in U.S. economic growth coming, no country, especially in the current state of the global economy, will want to be locked out of trade with the United States.

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January 19, 2017, 4:15pm EST

The Treasury Secretary nominee was being “grilled” by Congress today. I want to talk a bit about this hearing because it brings up the subject of the housing crisis.  The who and the whys.

First, Mnuchin is a Wall Street guy. Even worse, he’s a hedge fund and Goldman Sachs guy. That’s like blood in the water for the sharks in Congress.  They get to put on a show with live TV cameras in the room, publicly showing disgust for Mnuchin (and those like him), to cozy up the less informed segment of the country.  And they get to project the blame for many things in life on the rich and their “bottom-line” business world.

This is a stark contrast to a decade ago. The media, especially, was in the business of making guys like this out to be super heroes. They wrote about them as mythical creatures – the world’s gene pool winners: the best and the brightest.

But times have changed.

In the hearing today, Mnuchin was accused of everything from tax evasion to unfairly kicking an 80-year old woman out of her house in Florida.  Sounds like a really bad guy.

Though it appears that he had IRS compliant offshore accounts (not tax evasion, but tax compliant). And his company had purchased defaulted mortgages, claimed the collateral (the house) and sold the collateral for a profit.

So, just as you and me may take a tax deduction for our children, and just as an individual may sell his/her house for a profit, perhaps Mnuchin made rational financial decisions and followed the laws that were created by Congress.

So if we can’t blame Mnuchin and Goldman Sachs for nearly blowing up the global economy, who can we blame.

With all of the complexities of the housing bubble and the subsequent global financial crisis, it can seem like a web of deceit.  But it all boils down to one simple actor.  It wasn’t Wall Street.  It wasn’t hedge funds.  It wasn’t mortgage brokers.  These entities were operating, in large part, from the natural force of economics: incentives.

It wasn’t even the government’s initiative to promote home ownership that led to the proliferation of mortgages being given to those that couldn’t afford them.

So who was the culprit?

It was the ratings agencies.

Housing prices were driven sky high by the availability of mortgages. Mortgages were made easily available because the demand to invest in mortgages, to fund those mortgages, was sky high.

But what drove that demand to such high levels?

When the mortgages were combined together in a package (securitized as a mix of good mortgages, and a lot of bad/higher yielding mortgages), they were bought, hand over fist, by the massive multi-trillion dollar pension industry, banks and insurance companies.  Yes, the guys that are managing your pension funds, deposit accounts and insurance policies were gobbling up these mortgage securities as fast as they could, but ONLY because the ratings agencies were stamping them all with a top AAA rating.  Who would encourage such a thing?  Congress.  In 1984 they passed a law making it okay for banks, pension funds and insurance companies to buy/treat high rated secondary mortgages like they would U.S. Treasuries.

So as investment managers, in the business of building the best performing risk-adjusted portfolio possible, and in direct competition with their peers, they couldn’t afford NOT to buy these securities.  They came with the safest ratings, and with juicy returns. If you don’t buy these, you’re fired.

To put it all very simply, if these securities were not AAA rated, the pension funds would not have touched them (certainly not to the extent).

With that, if the there’s no appetite to fund the mortgages, the ultra-easy lending practices never happen, and housing prices never skyrocket on unwarranted and unsustainable demand. The housing bubble doesn’t build, doesn’t bust, and the financial crisis doesn’t happen.

That begs the question: Why did the ratings agencies give a top rating to a security that should have received a lower rating, if not much lower?

First, it’s important to understand that the ratings agencies get paid on the products they rate BY the institutions that create them.  That’s right. That’s their revenue model.  And only a group of these agencies are endorsed by the government, so that, in many cases, regulatory compliance on a financial product requires a rating from one of these endorsed agencies.

So as I watched the grilling session of Mnuchin today by Congress, these are the things that crossed my mind.

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January 2, 2017, 4:00pm EST

Happy New Year!  We’re off to what will be a very exciting year for markets and the economy.  And make no mistake, there will be profound differences in the world this year, with the inauguration of a new, pro-growth U.S. President, at a time where the world desperately needs growth.

I’ve talked a lot about the “Trump effect.”  Clearly, when you come in slashing the corporate tax rate, creating incentives for trillions of dollars of capital to come home, and eliminating overhead and hurdles associated with regulation, you’ll get hiring, you’ll get spending, you’ll get investment and you’ll get growth.

But there’s more to it.  Ray Dalio, one of the richest, best and brightest investors in the world has said, there is a clear shift in the environment, “from one that makes profit makers villains with limited power, to one that makes them heroes with significant power.”

The latter has been diminished over the past 10 years.

Clearly, we entered the past decade in an economic and structural mess. But while monetary policy makers were doing everything in their power (and then some) to avert the apocalypse and, later, fuel a recovery, it was being undone by law makers and a lack of fiscal support, swinging the pendulum too far in the direction of punishment and scapegoating.

With that, despite the continued wealth creation of the 1% over the past decade, and the widening of the inequality gap, the power of the wealth creators has been diminished in the crisis period – certainly, the public’s favor toward the rich has diminished.  And most importantly, the incentives for creating value and creating wealth have been diminished.

With all of the nuances of change that are coming, and the many opinions on what it all means, that statement by billionaire Ray Dalio might be the most simple and clear point made.

Another good point that has been made by Dalio, as he’s reflected on the “Trump effect.”  It’s the element that economists and analysts can’t predict, and can’t quantify.  The prospects of the return of “animal spirits.”  This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mis-trust of the system.
All along the way, throughout the recovery period, and throughout a tripling of the stock market off of the bottom, people have continually been waiting for another shoe to drop.  The breaking of this emotional mindset appears to finally be underway.  And that gives way to a return of animal spirits, which haven’t been calibrated in all of the forecasts for 2017 and beyond.

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May 27, 2016, 11:40am EST

As we head into the Memorial Day weekend, we want to talk today about the G7 meeting that took place this week Japan, and how these meetings tend to effect financial markets (namely the key barometer for global markets in this environment, U.S. stocks).  It’s a big effect.

If we look back at the past seven annual meetings of world leaders, there is clearly a direct correlation between their messaging and the resulting performance of stocks.

For context, we’re talking about a period, from 2009-present, that has been driven by intervention and careful confidence massaging by global policymakers.  So it shouldn’t be surprising that coming out of these meetings, post-Lehman, things happen.

Let’s take a look at the chart of the S&P 500 and highlight the spots where a G7 meeting wrapped up (note:  this was actually the G8 prior to 2014, when Russia was ousted from the group).

Source: Reuters, Billionaire’s Portfolio

If you bought stocks following the meeting in Italy, in 2009, you’ve made a lot of money.  The next year, in Canada, same result.  Of course, the world was in very bad shape at the time, and the messaging from both meetings was unambiguously focused on the economy, restoring stability and growth.

By May of 2011, the message was that the recovery was becoming “self sustaining” (a positive tone).  Stocks didn’t push higher, and then fell back later in the year when the European debt crisis spread to Italy, Spain and France.

In 2012, the meeting was hosted in the Washington D.C.  The European debt crisis was at peak crisis.  Greece exiting the euro was on the table and it was stoking fear that Italy and Spain were next to crumble and destroy the European Monetary Union.  The first line of the communiqué was about Europe and the need for economic stimulus.  Stocks went higher and two months later, ECB head Mario Draghi further fueled stocks by stepping in and averting disaster in Europe by saying they would do “whatever it takes” to save the euro.

In 2013, G7 leaders, plus Russia met in the UK.  The second statement in the 33 page communiqué focused on economic uncertainty and promoting growth and jobs. Stocks went higher.

In 2014, the meeting was hosted by the European Union.  Russia had been ousted earlier in the year from the G8 for break of international law for its actions in Ukraine. The primary focus was on Russia and promoting freedom and democracy.  The tone on the economy was somewhat upbeat. Stocks went up for a few weeks and then ultimately fell back later in the year in a sharp correction/then sharp recovery.

In 2015, Germany hosted.  The communiqué led with a focus on the refugee crisis.  Stocks followed a similar path to 2014.

Finally, today the 2016 meetings concluded in Japan.  The focus was on the economy.  “Global growth remains moderate and below potential, while risks of weak growth persist.”  And they discuss rising geo-political conflicts as a further burden on the global economy.

So if we look back at these meetings, clearly there is a G7 (G8) effect. If the headline focus is the economy, it tends to be very good for stocks.

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