April 8, 5:00 pm EST

As we discussed on Friday, the overhang of risks to markets, to the Trump administration and to the economy are as light as we’ve seen in quite some time.

With this in mind, we have a fairly light data week – which means the likelihood of a disruption in the rise in stocks and risk appetite remains low.

We get some inflation data this week, which should be tame, justifying the central bank dovishness we’ve seen in recent months.  The ECB meets this week.  They’ve already walked back on the idea that they might hike rates this year.  Expect Draghi to hold the line on that.  The Chinese negotiations have positive momentum, with reports over the weekend that talks last week advanced the ball.  And we have another week before Q1 earnings season kicks in.

So, expect the upward momentum to continue for stocks.  Just three months into the year and stocks are up big, and back near record highs in the U.S..  The S&P 500 is up 15% year-to-date.  The DJIA is up 13%.  Nasdaq is up 20%.  German stocks are up 13%.  Japanese stocks are up 11%.  And Chinese stocks are up 32%.

Remember, we’ve talked about the signal Chinese stocks might be giving us, putting in a low on the day the Fed did it’s about face on the rate path, back on January 4th.

The aggressive bounce we’ve since had in Chinese stocks appears to be telegraphing the bottoming in the Chinese economy   That’s a big relief signal for the global economy.  Commodities prices are supporting that view (sending the same signal).  Oil is now up 42% on the year.  And the CRB industrial metals index is up 24%.

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April 3, 5:00 pm EST

We’ve talked about the prospects that Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle.

This uber-exuberant valuation reflects the regulatory and policy advantage Silicon Valley has enjoyed for the past decade (which is ending).  It shows the displacement of capital from Wall Street to Silicon Valley (as a result of those advantages).  And arguable, it shows the euphoric stage of a bull market for internet 2.0.

Bull markets are said to be born on pessimism, grown on skepticism, mature on opitimism and die on euphoria.  For the euphoria stage, as Paul Tudor Jones describes it, there’s typically no logic to it and irrationality reigns surpreme.  Given that markets have bought the notion that a hand full of apps would destroy enduring industries, millions of jobs, and life will be great (?) —  It’s fair to say that irrationality is (and has) reigned supreme.

With this in mind, we talked about the beginning of the end, last year, when the regulatory screws began to tighten on the untouchable tech giants (namely, Amazon, Facebook and Google).

As I said back on September 4th, when Amazon crossed the trillion-dollar valuation threshold, “at 161 times earnings, the market seems to be betting on the Amazon monopoly being left to corner all of the world’s industries. That’s a bad bet. Much like China undercut the compeition on price and cornered the world’s export market, Amazon has undercut the retail industry on price, and cornered the world’s retail business. That tipping point (on retail) has well passed. And as sales growth accelerates for Amazon, so does the speed at which competition is being destroyed. But Amazon is now moving aggressively into almost every industry. This company has to be/will be broken up.

A day later, Facebook and Twitter executives visited Capitol Hill for a Congressional grilling.  Here’s an excerpt from my note that day:  “If you listened to Zuckerberg‘s Congressional testimony in April, and today’s grilling of Jack Dorsey (Twitter) and Sheryl Sandberg (Facebook), it’s clear that they have created monsters that they can’t manage. These tech giants have gotten too big, too powerful and too dangerous to the economy (and society).

In short, they are too big to manage, and Zuckerberg said just that in his Op-Ed this week, calling for global regulation.  Remember, the irony is, regulation only widens the moats for these companies.  The higher the cost of compliance, the smaller the chances that there will ever be another Facebook developed in a dorm room.


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January 28, 5:00 pm EST

This is a huge week.  We’re following a down 9% month for stocks with a big bounceback.  But it will all hinge on the events of the week.

We get Q4 earnings from about quarter of the companies in the S&P 500 – and a third of the Dow.  We have the Fed on Wednesday.  And the U.S. hosts trade talk meetings with China on Wednesday and Thursday.  And then on Friday, we’ll get the jobs report.

We kicked off earnings season with reports from the big banks two weeks ago.  And the reports broadly painted the picture of a healthy consumer and healthy economy.

This week, we hear from a broad swath of blue chips, including big multinational businesses.  Among them:  We heard from Caterpillar today. We’ll hear from Apple and Boeing tomorrow.  McDonalds and 3M report on Wednesday.  Amazon is on Thursday.

Expect a lot of discussions about “concerns” on the outlook (as we heard from Caterpillar today), but with a picture about Q4 that looked good (continuing with the theme of 2018).

Remember, much of the talk about slowdown has been about what might happen, in the year (or two) ahead – which primarily assumes a long-term stalemate on the Trump trade war.  With that, never underestimate Wall Street and corporate America’s willingness to set the bar low (when given the opportunity), so that they can jump over a very low bar (i.e. set up for earnings beats in future quarters).

Far more important than those “concerns” voiced by CEO’s, is what the Fed has already done, and what will come out of the U.S./China talks this week.

Remember on January 4th, the Fed responded to the calamity in financial markets by backing down from their rate hiking plans.  This week, the Fed Chair will likely use his post-meeting press conference to further massage markets. The Fed, the ECB and the BOJ have already positioned themselves (in recent weeks) to be the shock absorbers if the trade war continues to drag out.

As for trade talks, the calendar continues to approach the March 1 deadline on the tariff truce.  And China has been gasping for air.  I suspect we will get progress — maybe an official agreement on trade, leaving the intellectual property and technology transfer negotiations still on the table. That would be good progress.

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January 25, 5:00 pm EST

We end the week with a weaker dollar, stronger commodities and recovering stocks.  I suspect this is a building theme for the year – and that it will be a very lucrative one.

With that, let’s take a look at some key charts.

For perspective, here’s a longer term picture of the S&P 500.  As you can see, even after the deep decline of the last quarter, the trend from the crisis lows of 2009 remains intact … and we’ve seen plenty of V-shaped recoveries along the path of this trend …

To this point, stocks have followed a December loss of 9% with a bouncein January of 6%.

We remain about 10% off of the October highs (all-time highs).

The opportunity to take advantage of this bounce in stocks is very attractive, but there are even more attractive opportunities in stocks outside of the U.S.

First, and importantly, the dollar is in a long-term bear cycle….and it’s early.

Here’s a look at the long-term dollar cycles dating back to the failure of the Bretton-Woods system …

The dollar is down 8% in this new bear cycle, and about two-years into a cycle that should run another five to six years. These are the early innings.

A lower dollar should fuel capital flows into foreign stock markets.

Among the most interesting:  Japanese stocks and emerging markets.

Here’s a look at the Nikkei…

Back in late 2012, Shinzo Abe, then candidate for Japanese Prime Minister, promised a big and bold QE plan to beat two decades of deflation, and he had his hand selected candidate to run the BOJ, in waiting, to execute it.  As you can see in the chart on stocks, that beganthe sharp rise in Japanese equities. And that trend too, still holds after the recent sell-off.

Seven years later, the Bank of Japan is now the lone global economic shock absorber (i.e. they are the last major central bank still easing and will be in QE mode for the foreseeable future).  As part of their QE program, they continue to outright buy Japanese stocks.  While U.S. stocks are 10% from the highs of last year, Japanese stocks would still need another 20% to regain the 2018 highs.

As for EM:  If we consider where emerging market stocks were a year ago, and now introduce the possibility that China may be coming to the table later this month with a deal (at least on trade) that will include balancing trade with the U.S. over six years.  How might EM economies look if the world’s leading exporter (China) no longer unfairly floods the world with its cheap products?

Here’s a look at the chart on emerging markets.  You can see we’re getting a big trend-break this month of the ugly downtrend of the past year. 

Finally, a falling dollar and a deal with China is jet fuel for commodities. And you can see in the chart below, this huge downtrend of the past decade is nearing a break.  

With all of the above in mind, I suspect we’ve seen peak pessimism over the past quarter.  And markets are showing signs that we might see a spillover of prosperity from the U.S. economy to the rest of the world, rather than another retrenchment in the global economy.
Have a great weekend!
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January 22, 5:00 pm EST

China reported the slowest growth since 1990 on Monday (+6.4%).

This an interesting period to reference because, at that point, China was in the latter stages of executing on an economic plan.  At the core of that plan was currency manipulation — i.e. devaluing it’s currency (i.e. trashing it) so that they would have a distinct advantage on price when competing for world exports (i.e. they would always be the cheapest).

It worked.  The Chinese economy grew at an average of 12% the following five years (1991-1995).  From 1991 to 2009, leading up the global financial crisis, China grew at 10.5% annual rate.  That’s 18-years of double-digit annualized growth, on average.

That’s why the Chinese economy has ascended from a $350 billion economy to a $12 trillion economy since 1990.

Here’s what that looks like in a chart ….

Thanks to decades of uncontested currency manipulation, China is now the second largest economy in the world and on pace to be the biggest soon (though it still has just an eighth of the per capita GDP as the U.S.).

Why does it matter?

When they maintain a cheap currency, to undercut the world on price, they become the world’s sellers to everyone.  That means they accumulate a mountain of foreign currency as a result (which they have).  China is the holder of the largestsforeign currency reserves in the world, at more than $3 trillion dollars (mostly U.S. dollars). What do they do with those dollars?  They buy our Treasuries, which keeps our rates low, so that U.S. consumers can borrow cheap and buy more of their goods — adding to China’s mountain of currency reserves, adding to their wealth and depleting the U.S. of wealth.  And so the cycle goes.

This has proven to be a recipe for booms and busts (big busts), and a destructive global wealth transfer. 

So coming out of a decade long global economic slog, U.S. growth (driven by fiscal stimulus) has put us in a position of strength to negotiate reform in China. 

An economy running at 6% in China is recession territory and makes them vulnerable to an uprising against the regime. And trade tariffs put more and more downward pressure on the growth number.  That’s why they’ve been willing to talk.  Here’s what President Xi said yesterday about the ruling party’s outlook for retaining power in China:  “The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment … The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.”

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January 17, 5:00 pm EST

Stocks continue to recover from the wreckage of December.  From December 3rd to December 26th, the S&P 500 collapsed 16%.  That was over just 15 trading days. 
We’ve since had a 12% bounce over 15 days.  But we need another 7% to recoup the losses from December 3.The good news: The catalysts for a big recovery are in place — not only to recover the December 3rd levels, but to print new all time highs in the stock market. 

Remember, major turning points in markets are often driven by some form of intervention.  In this case, we’ve had it.  We had intervention from the U.S. Treasury on December 23/24, 1) calling out to the six largest U.S. banks, and then 2) calling a meeting with the President’s Working Group (which includes the Fed).

Just days later, the Fed sent a clear message to markets that they were there to promote market stability (that means higher stock prices).

Add to this, we’ve entered Q4 earnings season, and we’re getting plenty of positive surprises already, on expectations that were already dialed down substantially in the wake of the stock market decline of the fourth quarter.  As of last Friday, 90% of the companies that had reported beat Wall Street’s expectations.

So, where can stocks go from here?

Even with the sharp recovery over the past several weeks, the P/E on this year’s earnings estimate is just 15.  That’s cheap relative to history.  It’s very cheap relative to historical low interest rate environments.

If we apply Wall Street’s estimate on earnings for the S&P 500 (which is $172), to a P/E of 18 we get 3,096 on the S&P by the end of the year.  If we apply a 20 P/E, we get 3,440. That’s argues for anywhere from 18% to 31% higher for 2019.

Keep in mind, that’s if Wall Street hasn’t undershot on its estimate.  But they tend to undershoot often (to the tune of about 70% of the time).

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

November 8, 5:00 pm EST

The midterm elections are behind us, and I’ve suspected that the lift of that cloud of uncertainty would be the greenlight for stocks to make a run into the end of the year.

We’re seeing it start today.

Remember, the big work on economic stimulus has been done, and that will continue to drive the best growth we’ve had since 2006.

Add to that, there is the potential that Trump can get infrastructure done with a split Congress.  With that, it would be a matter of how hot the economy will get.

But as I said, there’s probably a better chance that the Democrats will block any more progress on the economic front, to best position themselves for a run at the 2020 Presidential election.

Interestingly, this gridlock scenario could actually be the optimal scenario for stocks here.

The notion that the economy might be on the verge of accelerating too fast/ running too hot, has dialed UP the inflation-risk-premium for the stock and bond markets.  The hot trajectory for the economy has kept pressure on the Fed to continue the path higher in interest rates.

Thus far, the seven quarter-point hikes the Fed has made to the benchmark overnight lending bank rate has NOT choked off economic momentum. But it has, finally, started to get market rates moving.  The ten-year government bond yield is near 3.25%, the highest in seven years. And stocks haven’t liked this 3%+ level on rates.  And that has a lot to do with what it does to consumer rates, specifically mortgages.

As you can see in the chart below, we now have 30-year mortgages running north of 5% for the first time since 2010.

This move in rates has slowed down the housing market. And this is an example of how this path of hotter growth and an aggressively normalizing Fed has been tracking toward growth killing interest rate levels.

Perhaps some gridlock in Washington will slow the speed at which both are adjusting and allow for some time for the economy to sustain at this 3% growth level.

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November 5, 5:00 pm EST

The elections tomorrow are said to be a referendum on Trump’s Presidency.

And given the sentiment, I think it’s fair to say the surprise scenario for markets would be for Republicans to retain control of Congress.  For that to happen, it looks like the Republicans would need to win 61% of the “toss up” races in the house.  Of those, 84% are currently Republican held.

That scenario would be a vote of confidence for the Trump economic agenda.  And for markets, it would be “risk on,” which would likely draw more attention to the inflation outlook, and the speed at which market interest rates will move. Trump would retain his leverage over China on trade concessions.

Scenario two, would be a split Congress.  If we get a split Congress, the Trump economic plan would likely turn to infrastructure.  The belief is that a Democrat led house would likely be a partner to Trump on a big infrastructure spend.

Though I suspect, given the political atmosphere, they may work to block any further progress on the economic stimulus front, in effort to position themselves for the 2020 Presidential election.   On China trade negotiations, I suspect a split Congress would begin to fight against Trump’s executive order-driven trade wars.  This scenario would mean, gridlock in Washington.

However, after the cloud of election uncertain lifts, both scenarios should be a greenlight for stocks.

Remember, we already have an economy running north of 3%, with record low unemployment, and consumers are sitting on record high household net worth and record low debt service ratios.  Companies are growing earnings at over 20% (yoy), and growing revenues at over 8% (yoy).  And corporate credit market debt is near the lowest levels (relative to market value of corporate equities) of the past 70 years.

So there is plenty of fuel in the economy to continue the trajectory of economic boom.  Maybe most importantly, following the October correction, the tech giants have been pricing out the “monopoly scenario” which paves the way for a broader-based bull market for stocks.

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October 3, 5:00 pm EST

China remains the hold-out on making a deal with Trump on trade.  And itlooks likely that they are holding out to see what the November elections look like.

Will Trump retain a Republican led Congress? I suspect we may see China do what they can to influence that outcome.

As we know, the Republicans will be promoting the economy as we get closer to voting day. 

What can China do to rock that boat?

They can sell Treasuries, in an attempt to ignite a sharper climb in rates. And a fast move in rates (at these levels) has a way of shaking confidence in equity markets – which has a way of shaking confidence in the economy.

As we’ve discussed, the economy can withstand a 10-year yield in the low 3s.  But what has spooked market this year (namely stocks) is the fear that a 3% 10-year could quickly turn into a 4% 10-year.

We may have seen a taste of it today.  We had a run from 3.08% to 3.18%.  That’s the highest level since 2011.  And stocks came off of the highs.

If China was the culprit, or if China chooses to dump some Treasuries over the next month, in attempt to stir up some instability in markets, we should see them move that money elsewhere.  The likely recipient of that capital would be gold.

It wasn’t evident with the behavior gold today.  Gold had a big dayyesterday, but backed off today, even as rates ran.  But as you can see in the chart below, the set up for a bounce in gold here looks ripe.  The level to watch will be 1214. 

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April 2, 7:00 pm EST

As we’ve discussed, the proxy on the “tech dominance” trade is Amazon.  That’s the proxy on the stock market too.  And it’s not going well.  The President hammered Amazon again over the weekend, and again this morning.

Here’s what he said …

Remember, we had this beautiful heads-up on March 13, with the reversal signal in Amazon.

That signal we discussed in my March 13 note has now predicted this 15.8% decline in the fourth largest publicly traded company.  And it’s dictating the continued correction in the broader market.

If you’re a loyal reader of this daily note, you’ll know we’ve been discussing this theme for the better part of the last year.  The regulatory screws are tightening.  And the tech giants, which have been priced as if they are, or would become, perfect monopolies, are now in the early stages of repricing for a world that might have more rules to follow, hurdles to overcome and a resurrection of the competition they’ve nearly destroyed.

As we know, Uber has run into bans in key markets. We’ve had the repeal of “net neutrality” which may ultimate lead big platforms like Google, Twitter, Facebook and Uber, to transparency of their practices and accountability for the actions of its users.  Trump is going after Amazon, as a monopoly and harmful to the economy.  Tesla, a money burning company, is being scrutinized for its inability to mass produce — to deliver on promises.  For Tesla, if sentiment turns and people become unwilling to continue plowing money into a company that’s lost $6 billion over the past five years (while contributing to the $18 billion wealth of its CEO), it’s game over.

With that said, this all creates the prospects for a big bounce back in those industries that have been damaged by tech “disruption.”  And this should make a stock market recovery much more broad-based than we’ve seen.

With the sharp decline in stocks today, we’ve retested and broken the 200-day moving average in the S&P 500.  And we close, sitting on this huge trendline that describes the rise in stocks from the oil-crash induced lows of 2016.

Today we neared the lows of the sharp February decline.  I suspect we’ll bottom out near here and begin the recovery.  And that recovery should be fueled by very good Q1 earnings and a good growth number — brought to us by the big tax cuts.

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