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.

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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.
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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.

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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.

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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.

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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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