By Bryan Rich

September 17, 5:00 pm EST

The market is typically pretty good at pricing in what is known.  And it has been pretty clear that Trump has seen trade imbalances as a key piece of his structural reform plan.  And the strategy on correcting those imbalances has been to fight trade barriers with trade barriers.

While it has created plenty of fodder for political and economic debates, the markets seem to like it.

As we’ve discussed, any movement on trade, from a U.S. perspective, is success.  He has said as much with this statement on China:

Given the position of U.S. stocks (at or near record highs) relative to global trading partner stock markets (largely, negative on the year), the market seems to be fairly comfortably betting that movement will occur, given the position of strength from which Trump is negotiating (i.e. the biggest and most powerful economy behind him).

Now, this is the effort to level the playing field internationally. We’ve also talked about the ‘domestic’ leveling of the playing field on the Trump agenda.  And that has everything to do with the tech giants.  And it has most to do with Amazon.

With that, we’ve talked about the case for breaking up Amazon.  As I’ve said

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 competition 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.

Amazon was a big loser on the day today. Why?  Break-up speculation.

A Citibank internet analyst today called for the split of Amazon’s ecommerce and cloud computing business (AWS).  But the analyst recommended the company split itself to avoid regulators doing it for them.  That sounds like a recommendation for a pre-emptive strike in an effort to maintain the euphoric investor sentiment in the stock.

When we look back, the trillion-dollar valuation threshold in Amazon may have been curse.  On September 4th, it hit a trillion dollars. And that has been the dead top.   

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By Bryan Rich

September 13, 5:00 pm EST

Those that look for reasons to pick apart the bull case for the economy and markets were disappointed by the ECB this morning.

As we discussed earlier in the week, the improvements in the U.S. economy and the trajectory of U.S. rates has cleared the path for Europe to finally exit QE.  And the ECB confirmed this morning that they remain on that path — to end QE into the year end.

The idea that Europe can exit QE is a huge positive for both the European economy and the global economy – a confidence signal.

With that, German stocks are a big buy here.  As you can see in the chart below, while the S&P 500 is on record highs, the DAX has been well underwater on the year (down more than 6%).

The index also trades well under the 200 day moving average (the purple line).  To close the performance gap in this chart, German stocks could be in the early stages of a 13%-15% run.

And stocks in Europe should be supported by a strengthening euro.

Remember, as the global economy improves, the dollar should get weaker. The growth and rate gap (between the U.S. and the rest of the world) will be narrowing from here, which will promote foreign capital to flow into currencies like the euro. But most importantly, the exit of QE means Europe has escaped the dangerous crisis era, which means money will flow “back home“ out of/from the world’s safe-haven asset (dollar-denominated U.S. Treasury market).

I suspect the euro will trade closer to 1.30 by this time next year, as the ECB will begin raising rates in 2019, and likely follow the U.S. lead on fiscal stimulus to drive growth. 

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By Bryan Rich

September 5, 5:00 pm EST

Yesterday we talked about the case for breaking up Amazon, on the day it crossed the trillion-dollar valuation threshold.  Today the stock was down 2%.

Also today, Facebook and Twitter executives visited Capitol Hill for a Congressional grilling.

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).

All have emerged and dominated, thanks in large part to regulatory advantage – operating under the guise of an “internet business.”   And it all went unchecked for too long.  These are monopolies in the making.  But, as we know, Trump is on it.

As we discussed yesterday, Amazon has to, and will be, broken up.  As for Facebook, Google, Twitter, Uber:  the regulatory screws are tightening.  Those businesses won’t look the same when it’s over. But it’s complicated. The higher the cost of compliance, the smaller the chances that there will ever be another Facebook or challenger.  That goes for many of the tech giants.

With that in mind, regulation actually strengthens the moat for these companies.

That would argue that they may ultimately go the way of public utilities (in the case of Facebook, Google and Twitter).

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By Bryan Rich

September 4, 5:00 pm EST

Today, Amazon became the second company (following Apple) to cross the one trillion-dollar valuation threshold.

This stock is up 72% year-to-date.  It has doubled in the past year and has nearly tripled since Trump’s election. That’s what happens when you have a pour gasoline (economic growth) on a fire (a monopoly).  No one should love Trump more than Jeff Bezos.

But 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 competition 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.

The question is, how will the market value an ecommerce business that would no longer be subsidized by the high margin Amazon cloud business (AWS)?  A separation of the businesses would put Amazon’s ecommerce margins under the Wall Street microscope (as every other retailer is subjected to) and materially impact a key sales growth driver for Amazon, which is investment in innovation (R&D).

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Nasdaq:AMZN, Nasdaq:AAPL, Nasdaq:FB, Nasdaq:GOOG

By Bryan Rich

August 27, 5:00 pm EST

The momentum is building for a big run for markets and the economy into the year end.  And there are a ton of opportunities.

We have the Dow, which has massively lagged performance of the Nasdaq throughout this post-correction recovery.  And even as the S&P 500 has regained new record highs, the Dow remained about 900 points from the January highs.  That gap is quickly closing.  This makes blue-chip stocks a buy.

Commodities are in the early stages of a bull market, but have been stalled by trade uncertainty and a stronger dollar.  Both have now cleared.  Trump is winning on trade.  And he now appears to have successfully influenced a turning point in the dollar.  Both are fuel for commodities prices that have every fundamental reason to be soaring (including a hot economy and a big infrastructure spend coming).  This makes commodities stocks a buy.

On the interest rate front, as we discussed Friday, the Fed Chair’s recent comments indicate that the current level of rates could be appropriate, given they don’t see risk of inflation accelerating over their target nor do they see an elevated risk that the economy may overheat. That has turned the tide in the dollar (lower).  And it may actually be the catalyst to steepen the yield curve, as the interest rate market starts pricing OUT the risk of overtightening on the economy.  Remember, the skittish crowd has been pointing to the flattening yield curve as an indicator that recession is brewing for the economy. A steepening yield curve would take that debate off the table, and would be very good for financial stocks.

And the calming on trade and rates make emerging market stocks very interesting.  Remember, when the news hit that China would make concessions on trade, we looked at this chart in Chinese stocks and said the bottom is probably in.  Chinese stocks are up 5% already, and have a lot of room to run.

 

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By Bryan Rich

August 24, 5:00 pm EST

The best investing advice over much of the past decade has been “don’t fight the Fed.”  The Fed needed stocks higher (to restore confidence and wealth — at least paper wealth).  And the Fed forced stocks higher. 

They did it through ultra-low interest rates and through a committment to backstop against any shock risks.  With that, despite the many threats along the path of the the global economic recovery, stocks went up.What’s the best investing advice of the post-election environment?

Don’t fight Trump.

Remember, we’ve talked about the “great handoff” on election night.  Trump finally represented an end to an era, where the global economy was surviving on central bank life support.  It was the handoff from a monetary policy-driven recovery, to a fiscal stimulus and structural reform-driven recovery.  And that handoff gave us a chance to get to a sustainable recovery — to escape post-recession stall-speed growth.

So no wonder, the influence of Trump on markets and global stability, is much like the influence of the central banks of the past decade.

Trump wants a booming economy. 

We need a booming economy to escape the stall-speed growth of the post-global recession world. So we have major economic and geopolitical undertakings in play to achieve a booming economy.  And just as the central banks wouldn’t let shocks undo the trillions of dollar they had committed to the recovery, Trump won’t either.  The central banks intervened often, either verbally, or through policy.  And Trump has intervened often.  Also, a lot of verbal, and plenty of policy responses.

The dollar and the Fed are the latest examples.  And today, we saw the influence and the outcome.  Trump has hand-selected the Fed Chair that is continuing the program of gradual rate hikes.  But Trump he sees higher rates, uncessarily threatening to curtail the growth picture, he’s “intervening.”

Below is some of his jawboning against higher rates …

 

And today, we heard from the Fed Chair at Jackson Hole.  People were looking for any indication that the Fed Chair might be influenced by Trump’s comments.

And here are the money headlines from his speech…

The Fed explicitly said under Yellen one time, that they opted against a rate hike because they were no signs that the economy was overheating.  That makes the second comment above very interest, regarding the expectations on the Fed’s movees for the remainder of the year.  And if they don’t see inflation accelerating above 2% (the first comment) then why raise rates again.

The market seemed to agree with that interpretation today.  The prospects of steady rates is a recipe for higher stocks, higher commodities and a lower dollar. And that’s what we had today.  I expect it will continue.  And this may have finally been the catalyst to get commodities moving again.

Have a great weekend!

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By Bryan Rich

August 23, 5:00 pm EST

It was two weeks ago when Elon Musk sent this tweet about taking Tesla private…

For a guy that has taken personal offense to the short sellers in the stock, this tweet only emboldened them — and may have been the catalyst that will ultimately prove the shorts right.

Why?  If you liked shorting a company that’s lost $6 billion over the past five years, while making the CEO/ founder a billionaire more than 18 times over, you’ll love it when you have an absolute ceiling of $420 to sell against.

And that’s precisely what the shorts have done.  They’ve leaned more heavily against the company, as Musk has created an asymmetric outcome for them. As you can see in the chart, it’s working.

As I’ve said in the past, Tesla is among the tech giants that benefited from the Obama administration’s distribution of the massive fiscal stimulus package that followed the global financial crisis.  Not only did they get regulatory favor from the government, but they received outright funding — a $465 million loan, at a time the company was broke.  And in that economic environment, the big pension funds were happy to follow government money in search of relative security (plowing money into government “sponsored” investments).

Fast forward 10 years and the company is still bleeding money, but Musk is a billionaire!  But sentiment has finally begun turning against the company, which is it’s biggest risk.  When the investors stop believing in the hype and start demanding real performance, the air can come out of the balloon very quickly.

So, to step out of the scrutiny of public markets, Musk has threatened to take the company private, with the help of Saudi funding.  But there’s a new problem.  If the Saudis are indeed willing to fund Tesla, Trump may block it.  The administration is stepping up protections against allowing U.S. intellectual property to fall into the hands of foreigners.  The government may giveth and the government may taketh away, in the case of Tesla.

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By Bryan Rich

August 22, 5:00 pm EST

Yesterday we looked at this chart of the S&P 500 …

In discussing this chart, I made an error.  The blue line, of course, represents what the S&P 500 would have looked like had it continued its long-run annualized growth rate of 8% from the 2007 (pre-crisis) peak.  That gives us perspective on where we stand in this stock market recovery.  Even though we’re up more than four-fold from the 2009 bottom, and people continue to talk about how long this bull market has run, we still have not recovered the lost growth of the past decade.

That is clearly displayed in the gap between the orange line (the actual S&P 500) and the blue line (where stocks would be had we continued along the 8% annualized path).

What can we attribute this gap to?  Post-recession recoveries are typically driven by an aggressive bounce-back in growth.  We didn’t get it.  Instead, the post-recession growth environment of the past decade was dangerously shallow and slow.

Why?  The Fed and other major central banks were the only game in town for the global economy over the past decade. They saved the world from a total collapse, staved off further shocks along the way, and they manufactured a recovery. But the “easy money” solution doesn’t work the same in the depths and aftermath of a global debt bust, as it does in normal recessions.  The central banks could only muster stall-speed growth.

That’s why the election was so important.  It has resulted in the great hand-off, from a global economy that was just surviving on the life-support of central banks, to a global economy that has the chance to thrive on the catalyst of fiscal stimulus, and become sustainable from structural reform.

With that, we should expect the gap in the chart above to close.  That argues for much higher stock prices, and a continuation of this bull market.

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

August 21, 5:00 pm EST

With the S&P 500 finally returning to new record highs today, fully recovering the price correction this year, let’s take a look back at the correction, and where stocks can go from here.

As I said in my January 30 note “experience tells us that markets don’t go in a straight line. And with that, we should expect to have dips along the way for this bull market. Since 1946, the S&P 500 has had a 10% decline about once a year on average. A correction here would be healthy and would set the table for hotter earnings and hotter economic growth (coming down the pike) to ultimately drive the remainder of stock returns for the year.

Fast forward eight months, and we’ve now had a 12% correction.  And we’ve since had back-to-back quarters of 20%+ earnings growth, with an economy that is finally growing at better than 3% four-quarter average annualized growth.

Meanwhile, stocks remain cheap.  The 10-year yield is still under 3%.  And historically, when rates are low (sub 3% is still VERY low), stocks tend to trade north of 20 times earnings.  The forward P/E on stocks at the moment is just 17.  If we apply a 20x multiple to $170 in forward S&O 500 earnings, we get 3,400 in the S&P.  That’s 19% higher.

With that in mind, let’s also revisit my chart on the long term growth rate of the S&P 500.

 

In the orange line, you can see what the S&P 500 looks like growing at 8% annualized (the long-run average growth rate) from the pre-crisis peak in 2007. This is where stocks should have gone, absent the near global economic apocalypse. And you can see the actual path for stocks in the blue line.

Bottom line: Despite the nice run we’ve had in stocks, off the bottom in 2009, we still have a big gap to make up (the difference between the blue line and the orange line). This is the lost decade for stocks.

This argues for another 28% higher in stocks to fill that gap.

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

August 20, 5:00 pm EST

As we discussed on Friday, with China coming back to the negotiating table on trade, we have a signal that the trade dispute smoke will not end in fire.

That is unlocking this rotation we’ve been talking about for the past month or so, where the money that has been plowed into the stocks of the very hot tech giants, starts moving out and into the lagging blue chips.

With that, as we sit eight months into the year, with the winds of fiscal stimulus in our sails, the S&P 500 is just now close to recovering the losses from the January highs.

And the Dow remains, 3.2% off of the January highs (which were record highs). But I suspect we will now close that gap quickly.

Remember, we have two very hot earnings quarters under our belt, and building momentum in the economic data, as fuel for stocks.  And I suspect the China news, to break the stalemate on trade negotiations, will also fuel the resumption of the young bull market in commodities, which should offer very attractive investing outcomes in the coming months.

Maybe the best signal for commodities is this chart on Chinese stocks, which looks like it may have bottomed TODAY into these 2016 lows (circled).

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