By Bryan Rich

October 15, 5:00 pm EST

On Friday we talked about the opportunity presented by this recent dip in the broad stock market.

We’re beginning to see more clearly today the rotation out of tech and into value.  That is translating into a continued slide in the Nasdaq, while the Dow is rising.

Now, even though this looks like a re-pricing of the high-flying tech stocks, as we often see the “baby gets thrown out with the bathwater.”  In this case, because the big tech giants have been so widely held, when they crack, everything has cracked.  That’s an opportunity to buy broader stocks on sale. And stocks are indeed cheap.

Take a look at historic valuations (P/E on the S&P 500) …

 

From a valuation perspective, Wall Street is estimating stocks on next year’s estimated earnings to be as cheap as we’ve seen only two times in the past 26 years.

You can see where stocks were valued on the S&P going into 2012.  Stocks finished up 16% that year.  The other year was 1995 (a P/E of 14.89). Stocks finished that year up 37.6%.

Still, many have continued to harp on valuation, always pointing to the long run average P/E on stocks, which is around 16.  That’s a long history.  If we look back at the past twenty years, the average valuation is MUCH, MUCH higher. It’s 23 times earnings!

If we take Wall Street’s estimate on S&P 500 earnings of $176 and multiply it by 23, we get and S&P at 4,048.  That’s 47% higher than Friday’s close.

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By Bryan Rich

October 12, 5:00 pm EST

The S&P 500 has declined more than 5% (from peak to trough) on four different occasions this year.  That’s despite an economy that is heating up, finally escaping the slow growth rut of the past decade.

So, should you be fearful when these declines occur, or should you be greedy?

During market declines – with the constant barrage of market analysis and opinion on financial television, in newspapers, or through the Internet – it’s easy to get sucked into drama played out in the media.

And that tends to make many investors fearful.

But while the fearful start running out of the store when stocks go on sale, the best billionaire investors in the world, start running IN.

The fact is, the best investors in the world see declines in the U.S. stock market as an exciting opportunity.  And so should you.

Most average investors in stocks are NOT leveraged. And with that, they should have no concern about U.S. stock market declines, other than saying to themselves, “what a gift,” and asking themselves these questions: “Do I have cash I can put to work at these cheaper prices? And, where should I put that cash to work?”

Billionaire Ray Dalio, the founder of the biggest hedge fund in the world, has said what we think is the most simple yet important fact ever said about investing.

“There are few sure things in investing … that betas rise over time relative to cash is one of them.”  

In plain English, he’s saying that major asset classes, over time, will rise (stocks, bonds, real estate). The value of these core assets will grow faster than the value of cash.

That comes with one simple assumption. The world, over time, will improve, will grow and will be a better and more efficient place to live than it was before. If that assumption turned out to be wrong, we have a lot more to worry about than the value of our stock portfolio.

With that said, as an average investor that is not leveraged, dips in stocks (particularly U.S. stocks – the largest economy in the world, with the deepest financial markets) should be bought, because in the simplest terms, over time, the broad stock market has an upward sloping trajectory.

This is the very simple philosophy Dalio follows, and is the core of how he makes money and how he has become one of the best, and richest, investors alive.

Billionaires Bill Ackman and Carl Icahn, two of the great activist investors, lick their chops when broad markets sell off on fear and uncertainty.

Ackman says he gets to buy stakes in high quality businesses at a discount when broad markets decline for non-fundamental reasons.  Icahn says he hopes a stock he owns goes lower so he can buy more.

What about the great Warren Buffett?  What does he think about market declines?  He has famously attributed his long-term investing success to “being greedy when others are fearful.”

Bottom line:  Declines in the broad market are times to take out your shopping list.

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By Bryan Rich

October 11, 5:00 pm EST

Yesterday we talked about the repricing of the tech giants as the catalyst for the slide in global stocks.  That slide continued today. 

But the brunt of the punishment is back on the Dow, which was down another 2%.  At the lows today, that takes us back to flat on the year for the DJIA … up 1% for the S&P 500.  And the Nasdaq, at the lows today, was up just 4.8% on the year.

As they say, stocks go up in an escalator and down in an elevator.

Interestingly, in this slippery slide for stocks, money has NOT been piling into bonds.  This is the flight to safety trade we’ve seen throughout the post-financial crisis era.  It doesn’t seem to be happening this time.  The 10-year yield remains in sniffing distance of 3.25% (closing today at 3.14%).

So, where is the money going?  Gold.

Gold is on the move — the top performer in global markets today.  And it looks like it’s just getting started.  As I said last week, “the set up for a bounce in gold here looks ripe. The level to watch will be 1,214.”

 

You can see in the chart, the 1214 level gave way today, and we had a break of the downtrend of the past six months.

Now, when we discussed gold last week, we were talking about the potential for China to perhaps try a few shenanigans over the next month, in order to influence the outcome of the November elections.

Here’s an excerpt from that October 3rd note:  “China remains the holdout on making a deal with Trump on trade. And it looks 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 it 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.

I suspect we may be seeing precisely this above scenario play out.

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By Bryan Rich

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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By Bryan Rich

September 28, 5:00 pm EST

 Back in May, the populist movement that gave us Grexit, Brexit and then the Trump election, gave us a new government in Italy with an “Italy first” agenda.

Italy first, means EU second.  And that puts the future of the European Union and the European Monetary Union in jeopardy.  Today, the new government made that clear by rejecting EU fiscal constraints, in favor of running a bigger deficit spending.

This puts the game of poker the European Union has been playing since the financial crisis erupted, front and center (again).

As we discussed back in May, this story is looking a lot like Greece, which used the threat of leaving the euro as leverage to negotiate some relief from austerity and reforms. It was messy, but it gave them a stick, in a world where the creditors (the ECB, Eurogroup and IMF) had been burying the weak economies in Europe in harsh austerity since the financial crisis.

As the third largest euro zone constituent, Italy brings a lot more leverage in negotiating, in this case, the EU rulebook. We may see this all result, finally, in a relaxing of the fiscal constraints that have suppressed the economic recovery in the euro zone in the post-Great Recession era. And Italy’s pushback may lead the way for a euro-wide fiscal stimulus campaign — following the lead of Trumponomics.

A better economy has a way of solving a lot of problems.  And Europe has a lot of problems.

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By Bryan Rich

September 26, 5:00 pm EST

The Fed moved again today on rates, as the market expected. This is the eighth quarter point hike in this post-QE normalization on rates. And this now puts the Fed Funds rate at the range of 2%-2.25%.

Now, the markets will pick apart the statement and endlessly parse the Fed Chair’s words in the press conference. But let’s step back and take a look at the impact of these Fed hikes thus far.

We know the economy is running at the best pace since before the financial crisis. We know that the jobless rate is near record lows. We know that consumer credit worthiness is at record levels. This has all happened, despite the Fed’s rate hikes.

What about debt service coverage? As rates are moving higher, are consumers showing signs of getting squeezed?

If we look back at the height of the credit bubble in 2008 (just prior to its burst), 13.22% of household income was going to service debt–within that number, 7.2% of household income was going to service mortgage debt. What about now? Debt service is now 10.2% of household income. And the mortgage piece is down to just 4.4%. This is the result of six years of zero interest rates, a massive QE program (which included the Fed’s purchase of mortgage bonds), and a government program that subsidized banks to refi high interest rate mortgages.

So the big question is, how has the Fed’s exit of QE effected the consumers ability to service debt? Are higher rates hurting?

Well, they started hiking rates in the fourth quarter of 2015. Total debt service at that time was 10.1%. That’s virtually unchanged from today. And the mortgage piece was 4.5%. That’s actually a touch higher than today.

Bottom line: The Fed’s normalization on rates has not damaged the consumer, nor has it killed the housing market.

But that’s only because the yield curve has been flattening. That is, longer term market interest rates have been steady. That means the benchmark rate from which consumer and mortgage rates have been set, has been steady. And those longer term rates have been steady, in large part, because Europe and Japan have remained in QE mode (buying global assets, which includes our Treasurys).

With that, while most have been watching the Fed closely for how it’s delicately handling the exit of QE, the more important spot to watch will be how Europe and Japan manage their exits. Hopefully, the U.S. economy is hot enough, at that point, to withstand the move in longer term U.S. rates that will come with the end of global QE.

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.

By Bryan Rich

September 21, 5:00 pm EST

Last Friday we talked about the technical breakout in rates.  And we looked at this chart as the benchmark 10-year U.S. government bond yield hit 3%. 

This week yields traded as high as 3.09%.  These 3%+ levels have proven to spook stock markets on all other occasions this year.   But it hasn’t this time.  In fact, the Dow closed the week on new record highs.  The prospects that Fed normalization might be slowing, and that 10-year rates may be carving out a new/higher range, reduces the prospects of seeing the yield curve “invert.” That’s positive for stocks.
As we close the week, let’s take a look at Chinese stocks, which put in a double bottom earlier this week, and closed today threatening a technical break of the big downtrend of the year.  Believe it or not, Chinese stocks could be the best buy in the world right now.
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.

By Bryan Rich

September 20, 5:00 pm EST

Global markets continue to melt-UP.  Ironically, Trump’s promise to slap an additional $200 billion on Chinese goods proved to be the marker for “risk-on.”

As we’ve discussed, the reaction from global markets tells us that reforming China is a good thing.

Among the confirmation signals we’re getting on that theory: 1) Japanese stocks are surging (as a beneficiary of fair trade), 2) Chinese stocks are bottoming (perhaps a more sustainable and balanced economy in its future), and 3) the Dow is finally playing catch up (the U.S. stock index that has been punished by trade uncertainty).

Let’s take a look at the charts …

As you can see below, Japanese stocks are finally making a run back toward the highs of last year.  

Chinese stocks have put in a key reversal signal (an outside day) into a double bottom.  This is following a 50% decline from the 2015 highs.

And after eight long months, the Dow finally surpassed the January highs today.

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.

By Bryan Rich

September 19, 5:00 pm EST

Just two weeks ago, the Nasdaq was up 19% on the year, while the “blue-chip” heavy DJIA was up just 4%.

This is in a world where rates are low, corporate profits are growing at 20% and the economy is on pace to have above trend growth.

Great traders love when prices are detached from fundamentals, especially when it’s driven by fear or euphoria.  This was a clear disconnect.  And you could argue that there has been a bit of both fear and euphoria driving it (fear priced into the Dow about trade wars, and euphoria priced into the tech giants on the idea that the burgeoning monopolies would go unchecked forever until all competition is left for dead).

Both the fear and the euphoria were misguided for all of the reasons we discuss almost daily in my Pro Perspectives note.

And now we’re seeing a convergence.  In just two weeks, that performance gap between the Dow and Nasdaq has now closed from fifteen percentage points to nine percentage points.  And the Dow still has a lot of room to run.  It remains just under the highs from January.

Now, yesterday we talked about the opportunity for Japan to benefit from forced trade reform in China.  Other big beneficiaries?  Emerging market economies.

In short, all of the countries that have been short-changed on their global trade competitiveness because of China’s weak currency policies, should benefit in a world where China is held to a standard of fair trade.

That’s why Japanese stocks had a huge run yesterday (and expect it to continue).  And that’s why EM stock markets were big movers today.  The Frontier Markets ETF (FM) is still down 14% on the year.  With the idea that these countries may get a better crack at global demand, I suspect these stock markets could be in for a big bounce.

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.

By Bryan Rich

September 18, 5:00 pm EST

Yesterday Trump made good on his promise by announcing another $200 billion in tariffs on China.

To the surprise of many, stocks went up. Why?

Perhaps it’s because reforming the way the world deals with China is a good thing.  Remember, China’s currency manipulation over the past two decades led to the credit bubble, which ultimately led to the financial crisis. And as long as the rest of the world continues to allow China to maintain a trade advantage (dictated by their currency manipulation): 1) they will manufacture hot economic growth through exports, 2) the global cycle of booms and bust will continue, and 3) the wealth transfer from the rest of the world to China will continue.

With this in mind, as I’ve said, the trade dispute is all about China – everything else Trump has taken on (Canada, Mexico, Europe) has been to gain leverage on getting movement in China.

With Trump now making it very clear that he won’t back down until major structural change takes place in China, it’s no surprise that one of the biggest winners of the day (following the further economic sanctions on China) was Japan!

The Nikkei was up big today.  And it was Japanese stocks that set the tone for global markets on the day.  As a signal that China’s days of cornering the world’s export markets may be coming to an end, Japan is in position to be a big winner.

Remember, while much of the world has returned to new record highs following the global financial crisis, Japan remains 40% away from the record highs set nearly 30 years ago.

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.