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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As we know, inflation has been soft. Yet the Fed has been moving on rates, assuming that they have room to move away from zero without counteracting the same data that is supposed to be driving their decision to increase rates.
Thus far, after four (quarter point) increases to the Fed funds rate, the moves haven’t resulted in a noticeable tightening of financial conditions. That’s mainly because the interest rate market that most key consumer rates are tied to have remained low. Because inflation has remained low.
A key contributor to low inflation has been low oil prices (though the Fed doesn’t like to admit it) and commodity prices in general that have yet to sustain a recovery from deeply depressed levels (see the chart below).
But that may be changing.
Commodities have been lagging the rest of the “reflation” trade after the value of the index was cut in half from the 2011 highs. Remember, we looked at this divergence between the stocks and commodities last month. Commodities are up 6% since.
Things are picking up. Here’s the makeup of the broadly followed commodities index.
You can see, energy has a heavy weighting. And oil, with another strong day today, looks like a break out back to the $50 level is coming.With today’s inventory data, we’ve now had 12 out of the past 14 weeks that oil has been in a draw (drawing down on supply = bullish for prices). And with that backdrop, the CRB index, after being down as much as 13% this year, bottomed following the optimistic central bank commentary last month, and is looking like it may be in the early stages of a big catch-up trade. And higher oil (and commodity prices in general) will likely translate into higher inflation expectations.
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With some global stock barometers hitting new highs this morning, there is one spot that might benefit the most from this recently coordinated central bank promotion of a higher interest environment to come. It’s Japanese stocks.
First, a little background: Remember, in early 2016, the BOJ shocked markets when it cut its benchmark rate below zero. Counter to their desires, it shook global markets, including Japanese stocks (which they desperately wanted and needed higher). And it sent capital flowing into the yen (somewhat as a flight to safety), driving the value of the yen higher and undoing a lot of the work the BOJ had done through the first three years of its QE program. And that move to negative territory by Japan sent global yields on a mass slide.
By June, $12 trillion worth of global government bond yields were negative. That put borrowers in position to earn money by borrowing (mainly you are paying governments to park money in the “safety” of government bonds).
The move to negative yields, sponsored by Japan (the world’s third largest economy), began souring global sentiment and building in a mindset that a deflationary spiral was coming and may not be leaving, ever—for example, the world was Japan.
And then the second piece of the move by Japan came in September. It was a very important move, but widely under-valued by the media and Wall Street. It was a move that countered the negative rate mistake.
By pegging its ten-year yield at zero, Japan put a floor under global yields and opened itself to the opportunity to doing unlimited QE. They had the license to buy JGBs in unlimited amounts to maintain its zero target, in a scenario where Japan’s ten-year bond yield rises above zero. And that has been the case since the election.
The upward pressure on global interest rates since the election has put Japan in the unlimited QE zone — gobbling up JGBs to push yields back down toward zero — constantly leaning against the tide of upward pressure. That became exacerbated late last month when Draghi tipped that QE had done the job there and implied that a Fed-like normalization was in the future.
So, with the Bank of Japan fighting a tide of upward pressure on yields with unlimited QE, it should serve as a booster rocket for Japanese stocks, which still sit below the 2015 highs, and are about half of all-time record highs — even as its major economic counterparts are trading at or near all-time record highs.
Without a doubt, there was a significant shift in the outlook on central bank monetary policy this week. In fact, the events of the week may represent the official market acceptance of the “end of the easy money” era.
Draghi told us deflation is over and reflation is on. Yellen told us we should not expect another financial crisis in our lifetimes. Carney at the Bank of England told us removal of stimulus is likely to become necessary, and up for debate “in the coming months.” And even the Finance Minister in Japan joined in, saying Japan was recovery from deflation.
With that, in a world where “reflation” is underway, rates and commodities lead the way.
Here’s a look at the chart on the 10-year yield again. We looked at this on Tuesday. I said, the “Bottom May Be In For Oil and Yields.” That was the dead bottom. Rates bounced hard off of this line we’ve been watching …
This reflation theme confirmed by central banks has put a bid under commodities…
That’s especially important for oil, which had been trading down to very dangerous levels, the levels that begin threatening the solvency of oil producers.
That’s a 9% bounce for oil from the lows of last week!
This all looks like the beginning of another leg of recovery for commodities and rates (with the catalyst of this central bank guidance). Which likely means a lower dollar (as we discussed earlier this week). And a quieter broad stock market (until growth data begins to reflect a break out of the sub 2% GDP funk).
Have a great weekend.
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Healthcare was the story of the day today. With the Senate having had its go at the house healthcare bill, it goes back to the house, then back through Senate before it gets to the President’s desk.
Still, policy progression is very positive in this environment. Healthcare stocks were up big today — the IHF healthcare ETF was up over 2%. This is the ETF that tracks insurers, diagnotic and specialized treatment companies.
And despite all of the debate around healthcare, it has been the hottest sector to invest in since the election.Since election day, the IHF is up 35% since the lows of November 9th, the day after the election. Here’s a look at S&P sector performance over the past sixmonths.
Most interesting, the healthcare sector has been beaten up badly since the cracks in Obamacare became clear back in 2014. But as of the past week, the healthcare sector trackers have finally broken back above those 2014 Obamacare–optimism–driven highs. With that, the divergence in this next chart of one of the biggest hospital companies in the country becomes quite an intriguing trade.
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Join the Billionaire’s Portfolio to hear more of my big picture analysis and get my hand-selected, diverse stock portfolio following the lead of the best activist investors in the world.As we end the week, we have some remarkable market and economic conditions. U.S. stocks printing new record highs by the day. Yields today broke down. The 10 year yield now trades 2.15%. Oil is under $50.We’re set up to massively stimulative fiscal policies launch into an economic environment that is about as primed as it can possibly get.The stock market is at record highs. The unemployment rate is 4.3%. Inflation is low. Gas is cheap ($2.38), and stable. Mortgage rates are under 4%, and stable. You can borrow money at 2% (or less) to buy a car.
This has all put consumers in as healthy a position as they’ve been in a long time.
As I’ve said, the two key tools the Fed used to engineer a recovery was housing and stocks. That restores wealth, which restores confidence, which gets people spending, hiring and investing again. So stocks are at record highs. And housing (as you can see in the chart below) continues to climb back toward pre-crisis levels.
As a result, we have well recovered and surpassed pre-crisis levels in household net worth, and sit at record highs …
What is the key long-term driver of economic growth over time? Credit creation. In the next chart, you can see the sharp recovery in consumer credit (in orange) since the depths of the economic crisis. This excludes mortgages. And you can see how closely GDP (the purple line, economic output) tracks credit growth.
So credit is back on track. Meanwhile, consumers have never been so credit worthy. FICO scores in the U.S. have reached all-time highs.
With all of this said, the consumer looks strong, but the big missing link and structural drag on the economy in this story has been wage growth. What’s the solution? A corporate tax cut. The biggest winners in a corporate tax cut are workers. The Tax Foundation thinks a cut in the corporate tax rate would double the current annual change in wages.
So think about this backdrop. If I told you at any point in history that these were the conditions, you would probably tell me that the economy was already in, or will be in, an economic boom period. I think it’s coming. And it will drive earnings significantly, which will make the valuation on stocks cheap.
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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.”
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Oil has been on the move the past few days. Was this recent dip a gift to buy?The oil inventory report yesterday showed a big drawdown on oil inventories. The market expectation was for about a drawdown of 1.5 million barrels. It came in at 5 million.
That has oil on a big bounce for the week. It’s trading about 8% higher than it was at the lows of last Friday. But we still sit below the 200 day moving average and below the key $50 level (the comfort zone for those producers, namely the shale industry, to fire back up idle capacity).
The weakness in oil has a lot to do with weakness across broader commodities. And broader commodities typically correlates well with what Chinese stocks are doing.
You can see in the chart above, how closely the two track. This bottom in commodities has/had everything to do with the outlook for a big infrastructure spend out of the Trump administration. It’s yet to bubble up toward the top of the action list. With that, the momentum has either stalled on this trade, or it’s a pause before another leg higher in this early stage multi-year rebound. My bet is on the latter. Follow This Billionaire To A 172% Winner
In 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.
Over the past week, I’ve talked about the potential for disruption in what has been very smooth sailing for financial markets (led by stocks). While the picture has grown increasingly murkier, markets had been pricing in the exact opposite – which makes things even more vulnerable to a shakeout of the weak hands.
With that, it looked like we are indeed working on a correction in stocks. But it’s not just because stocks are down. It’s because we have some very important technical developments across key markets. The Trump trend has been broken.
Let’s take a look at the charts …
The above chart is the S&P 500. We looked at a break in the futures market last week. Today we get a big break in the cash market. This trendline represents the nice 45 degree climb in stocks since election night on November 8th. We have a clean break today.
Stocks ran up on the prospects that Trumponomics can end the decade long malaise in, not just the U.S. economy, but the global economy too. With that, the money that has been parked in U.S. Treasuries begins to leave. Moreover, any speculators that were betting the U.S. would follow the world into negative rate territory run for the exit doors. That sends Treasury bond prices lower and yields higher (as you can see in the chart above). So today, we also get a break of this “Trump trend” in rates as well (the yellow line). Remember, this is after the Fed’s rate hike last week — rates are moving lower, not higher.
Next up, gold …
I talked about gold yesterday — as being the clearest trade (higher) in an increasingly murkier picture for global financial markets. You can see in the chart above, gold is now knocking on the door of a break in this post-election Trump trend.
Remember, we’ve talked about the buy-the-rumor sell-the-fact phenomenon in markets. The beginning of the Trump trend in stocks started on election night (buying “the rumor” in anticipation of pro-growth policies). The top in stocks came the day following the President’s speech to the joint sessions of Congress (selling “the fact”, entering the “show me” phase).
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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.
With some global stock barometers hitting new highs this morning, there is one spot that might benefit the most from this recently coordinated central bank promotion of a higher interest environment to come. It’s Japanese stocks.
Join the 
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.
