Pro Perspectives 4/18/24

 

 

 

 

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April 18, 2024

Stocks put in another lower low today, in this recent correction.
 
And it appears that the weight of geopolitical uncertainty will remain through the weekend, which should continue to weigh on stocks.
 
Let's take a look at oil … 
 
   
When Israel struck the Iranian consulate in Syria on April 1, oil broke this big trendline from the $130 highs of two years ago. 
 
It topped out last Friday, prior to the retaliatory attack from Iran over the weekend.  And even with the threat of escalation, the price has (strangely) fallen as much as 7% this week. 
 
With the Middle East on a "knife-edge" (in the words of the UN Chief), the price of oil isn't reflecting the supply disruption risk — certainly not supply shock risk. 
 
Add to this, one of the best research-driven commodities analyst teams of the past three decades (Leigh Goehring and Adam Rozencwajg) have recently drawn attention to what they believe are overstated U.S. oil production data. 
 
They think the new EIA Administrator's restatement of data, in the middle of last year, to account for a new "adjustment factor" resulted in overstating crude growth by 40%.  Moreover, they see risk of U.S. production growth turning negative in the coming reporting months.  
 
That would put OPEC+ back in the driver's seat to determine oil prices.  And higher prices serve their interest.   

Pro Perspectives 4/17/24

 

 

 

 

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April 17, 2024

The correction in stocks continues.
 
The S&P futures are now down 5.3% from the April 1 record high.  Nasdaq futures are down 5.8%.  Dow is down 6.2%.  And the Russell is down 9.5% (20% lower than the record highs of November 2021).  
 
Interestingly, it's not the broad indiscriminate selling of stocks you might find in an economic shock, or the unwinding of a grossly overvalued market.
 
Over 40% of the S&P 500 stocks were up today (4 out of 10 sectors).
 
This continues to look like a technical correction in a bull market.  Not only do we have the catalyst of a new industrial revolution underway, but the economy continues to be flush with cash. 
 
Remember, we've looked at this chart of money supply …
 
 
The money supply remains trillions of dollars above trend.  And Biden's proposed 2025 budget would require printing another $1.8 trillion.
 
And if we extrapolate out the trend (crudely) in money market funds, the balance there is around $1 trillion above trend. 
 
 
So, the correction is a buy in stocks.  It's a matter of when.  
 
As we discussed yesterday (here), given the adjustment in rate expectations, and the headline risk with Israel/Iran, it's fair to expect a deeper correction, still.  With that, based on historical performance of the S&P 500 we should expect intra-year corrections, on average, of better than 10%. 

Pro Perspectives 4/16/24

 

 

 

 

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April 16, 2024

Jerome Powell made some prepared comments today at a "fireside chat" with the head of the Bank of Canada.
 
He called the economy "quite strong."  He called the labor market "very strong."  And he said the recent inflation data has "clearly not given us confidence" that it's sustainably moving toward their 2% target. 
 
And with that he says it's "likely to take longer than expected to achieve that confidence." 
 
So, today Jerome Powell intentionally dialed down expectations on rate cuts. 
 
Let's take a look at the evolution of the market expectations on the rate path since October of last year, when Powell signaled the end of the tightening cycle. 
 
As you can see in the chart below, the market had priced in six rate cuts by the end of 2024 (with a chance of seven).  Now it's pricing in just one cut by year end. 
 
 
That expectations change is effectively tightening policy.
 
Add to that, we've talked about the correction that's underway in stocks.  Declining stocks will also contribute to the tightening of financial conditions.
 
The chart below shows where stocks were trading when rate cut expectations were at peak (i.e. expectations of greater than six cuts for the year).  That was early January. 
 
That's 9.4% away from the April 1st peak in S&P futures.  The peak-to-trough drawdown at the moment is 4.8%.
 
 
Given the adjustment in rate expections, and the headline risk with Israel/Iran, it's fair to expect a deeper correction for stocks.  In fact, based on historical performance of the S&P 500 we should expect intra-year corrections, on average, of better than 10%.  
 
Below is an excerpt from a study done by Calamos (investment manager).  As you can see, even in the late 90s boom for stocks, there was a greater than 10% correction in three of the five years (all finished UP, big).  
 
     
 
 

Pro Perspectives 4/15/24

 

 

 

 

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April 15, 2024

Last Monday, we looked at this chart and talked about the "set up for a correction in stocks" …
 
 
We had been watching this big trendline for the better part of the past two months — a nearly perfect 45 degree angle ascent of the world's benchmark stock market (proxy for economic and geopolitical health and outlook).  
And we talked about the technical reversal signal that materialized (the outside day) in the S&P futures, Russell 2000 futures, Dow futures and the German Dax futures. 
And we talked about the breakdown of this important trendline on April 4th.
 
With that, here's the up-to-date look at this chart …
 
 
As you can see, the break of the line did indeed start a correction in stocks.  It's underway.  As of today's close, the S&P futures are down 4.5% from the (record) highs of early this month.  The Nasdaq futures are down 4.6%.  Dow futures are down 6%.  And the Russell futures (small caps) are down 8.4% from peak to trough, over just two weeks.
 
So, what's the driver? 
 
Is it the Fed's lack of confidence in the disinflation trend? 
 
Or is it geopolitical threats that markets have been (mostly) ignoring, but have now become the central focus? 
 
It looks like the latter. 
 
If we look back to the technical reversal signal in stocks.  It happened on April 1st.  That was market reaction to Israel's attack on the Iranian consulate in Syria. 
 
    
A few days later, the big trendline in stocks gave way when a flurry of geopolitical headlines hit, ranging from the threat of U.S./Israel policy change to U.S./Taiwan policy confusion, to provocative (to Russia) Ukraine/NATO relations. 
 
Then later that day, this headline (below) hit, warning of a retaliatory attack on Israel from Iran.
 
 
That brings us to the events of this past weekend, and the market behavior today.
 
As we discussed in my April 4 note (here), with these events, the world became more dangerous, and with that, rate cut timing becomes less important for markets.   
 
The dominant theme for markets for now is risk aversion, and capital flows will be driven by whether or not there is escalation (in this case, a response by Israel to Iranian attacks over the past weekend).
 
Where does capital flow in times of global risk aversion?  U.S. Treasuries (still).  Gold.  The Dollar.  And the big tech oligopoly has also proven to be a favored safe-haven in the crises of recent years, and likely even more so in the age of generative AI.
 
De-escalation should trigger a very healthy appetite to buy into the correction in stocks.   

Pro Perspectives 4/11/24

 

 

 

 

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April 11, 2024

After yesterday's inflation report, we talked about the overreaction in markets. 
 
With a slightly hotter March CPI report, the rhetoric from the investment community surrounding the inflation picture, and the Fed's rate cut prospects, was irrational. 
 
This is a market that's gone from pricing in as many as seven quarter-point rate cuts this year, to five, to three.  And by the end of yesterday the Wall Street Journal said it was "now a matter of IF," the Fed will cut this year.
 
Of course, that mentality led to sell-offs yesterday across stocks, and bonds.  
 
That said, only twenty-four hours later the European Central Bank concluded its meeting on monetary policy (this morning). They (newly) introduced the possibility of rate cuts in the policy statement (likely June). 
 
Moreover, in the press conference Christine Lagarde (ECB President) admitted that there were members that wanted to cut rates today.
 
This is of particular significance, when evaluating the Fed path, because global central banks have been overtly coordinating policy — so closely, that they repeat the same language. The latest shared mantra has been the need for more "confidence" in the disinflation trend.
 
So, if there was concern that the stall in the U.S. disinflation trend was a signal that another inflation shock was coming, the ECB positioning this morning should offer some sanity.             
 
With the above in mind, yesterday's move in the Nasdaq was completely reversed today.  It was a rare dip to buy in the AI theme, and the investment community showed little patience when presented with the opportunity to buy at lower prices.
 
On that note, while interest rates and geopolitical noise continue to get most of the media attention, the technology revolution is moving at a sprinter's pace.
 
This week, Google hosted its annual cloud conference. 
 
It was all about AI and Google's (Alphabet's) developing AI ecosystem, and maintaining dominance in the age of generative AI.
 
Google unveiled its "most powerful, scalable and flexible AI accelerator" chip. 
 
Intel hosted it's Vision 2024 conference.  It featured a new AI chip called Gaudi 3, which is said to be capable of training large language models 50% faster than Nvidia's H100 chip, and 40% more power efficient. 
 
Apple announced an AI chip this week, to be in the new Mac PCs (an AI personal computer). 
 
And Amazon's CEO, Andy Jassy, published his 2023 Letter to Shareholders today.  He said, "generative AI may be the largest technological transformation since the cloud, and perhaps since the internet."  And they have AI chips. 
 
So, everyone has AI chips.  And that's good.  If Jensen Huang is right (Founder/CEO of Nvidia), the cost to "retool" the world's data centers to accelerated computing has already climbed from $1 trillion to $2 trillion (over the next five years).  
 
Given that Nvidia is supplying 90% of it (at the moment), and they've done under $50 billion in data center revenue over the past year, this global computing power transformation has a long way to go. 
 
There's a lot of demand to fulfill, and it's still very early. The $39 billion worth of Chips Act grants started deployment just three weeks ago.  And we should expect multiples of that amount, in private investments, that will follow the government money.
 
The next wave will be the tremendous potential for new businesses to form around generative AI, and for old businesses to adopt and realize the benefits of generative AI.
 
With all of the above in mind, as you know, I've been working on identifying and thoughtfully building a portfolio of companies on the leading edge of this transformation, in my AI-Innovation Portfolio.
 
We now have 17 stocks in the portfolio, since we launched in June of last year.
 
We started with a focus on AI infrastructure stocks.  These are the "picks and shovels" of this technology revolution.  And we've since added massive SaaS companies that will deliver the capabilities of generative AI to companies around the world.
 
We added the cheapest of the tech giants leading the technology revolution, and they own perhaps the most valuable data on the planet.
 
As for the industrial metaverse, we also own a pioneering infrastructure engineering software firm that's been leading metaverse technology since 2016.  It's founder led, with double-digit growth, high profitability, and high gross margins (already).  And this company is actively shaping the digital transformation that will drive the coming infrastructure/building boom.
 
Again, it's still early in this technology revolution. There are tremendous investment opportunities, in an era that has already brought us the multi-trillion dollar companies.  More are coming.
 
If you aren't yet a member, and you'd like to join us and get all of the details on these stocks and the rest of our portfolio, you can do so following the instructions below.
 
Here's how you can join me…
 
The AI-Innovation Portfolio is about allocating to HIGH-GROWTH.
 
For $297 per quarter ($99 per month), you'll gain exclusive access to my in-depth research, expert analysis, and timely investment recommendations focused on the generative AI revolution — all email delivered to your inbox.
 
You can join me by clicking here — get signed up, and then keep an eye out for Welcome and Getting Started emails from me.
 

 

Cancel anytime by emailing support@billionairesportfolio.com and requesting to cancel.

 

Best,

Bryan

 

Pro Perspectives 4/10/24

 

 
 

 

 

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April 10, 2024

There was a lot of fuss about the inflation data today.

March CPI came in a tenth of a percentage point hotter.

Stocks were crushed.  Yields spiked.  And the dollar rallied.

This reminds me of the inflation report back in February (the January inflation data).  Similar to today’s report, both the headline and core inflation came in a tenth of a percent above expectations.  Stocks were crushed.  Yields spiked.  And the dollar rallied — all of a magnitude similar to today’s market response.

With that, back in my February 13th note (here) we discussed what looked like a clear overreaction, given the magnitude of the decline in stocks, rise in yields.

And we looked back at the only two times, over the prior three years, that shared the features of 1) a down greater than 4% Russell 2000 and 2) at least a 14 basis point spike in the 10 year yield.

Let’s revisit that analysis …

It happened on February 25, 2021.

What was going on?

It was about inflation.  The 10-year yield had risen from 1% to 1.6% in less than a month.  And the move was quickening.  And this quickening was driven by the market’s judgement that the additional $2 trillion fiscal package coming down the pike from the new President and his aligned Congress was inflationary at best, and recklessly extravagant, at worst.

The $2.2 trillion Cares Act and the additional $900 billion in stimulus passed in December, before Trump’s exit, had already driven a nearly full V-shaped economic recovery (by late January ’21).  And the economy was projected by the CBO (Congressional Budget Office) to grow at a 3.7% annualized rate in 2021 (hotter than pre-pandemic growth), with an unemployment rate falling to 5.3% – about right at the average unemployment rate of the past 50 years.

The prospects of more, massive spending packages was an inflation bomb.

This feature of a big 4%+ down day in small caps and spike in yields also happened on June 13 of 2022.

What was going on?

It was a Monday meltdown, following a hot Friday inflation report.

The Fed had just started tightening and was way behind the curve.

Inflation was near 9%, the Fed Funds rate was below 1%.  With a Fed meeting just days away, the market ratcheted up expectations for an aggressive 75 basis point hike.  And history suggested they needed to take rates a lot higher in order to stop fueling inflation, and start curbing it.

So, in both cases (Feb of 2021 and June of 2022) stocks fell sharply and yields spiked on significant inflation fears.

It’s fair to say the circumstances are quite different today.

And you can see it in the chart below …

This is the continuation of the “stall” in inflation progress we discussed yesterday.  But it’s not a Feb 2021 or June 2022 “significant inflation fear” moment.  Far from it.

As we know, in the current case the stall in CPI is largely due to a couple of hot spots in the data (shelter and insurance).  On the latter, the auto insurance component was up 22% year-over-year in the March inflation report.  Just pulling that out, the headline CPI drops below 3%.

Bottom line, Fed policy remains “highly restrictive” (in the Fed’s words).  The next move by the Fed will (still) be easing.  It’s a matter of when and how much.

Today’s overreaction presents another opportunity to buy a dip in bonds.

 

Pro Perspectives 4/9/24

 

 

 

 

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April 09, 2024

We get the March inflation report tomorrow.
 
As you can see in the chart below, the yearly change on the headline inflation has stalled, and has hovered above the 3% level since last summer.  The consensus view is that this leveling-off continued in March (orange dotted line). 
 
 
With that, let's revisit the insurance component we've been discussing the past few months, which has been a key contributor to the stall in the disinflation.  In fact, Jerome Powell has said rising insurance prices have "added meaningfully to inflation."
 
As we've discussed, the insurance industry has dramatically increased premiums over the past two years.  That's in response to the dramatic rise in asset values.  But this is a lagging feature of a hot inflation period.  
 
The question is:  When will the reset in the price of insurance catch up with the reset that has taken place in the prices of the underlying assets? 
 
If we look at Q1 earnings expectations in the insurance industry, it doesn't appear that the price hikes are over yet. 
 
FactSet expects the insurance industry to report 37% year-over-year earnings growth for Q1.  That follows better than 50% earnings growth in Q4 (which nearly doubled Wall Street expectations).
 
That said, as we head into tomorrow's number, the insurance stocks were down big today, in a stock market (S&P 500) that finished slightly UP.  Was that a signal?
 
Hartford was down 3.8%.  AIG, down 3%.  Travelers, down 3%.  Progressive, down 2.7%.  Allstate down 2.3%.  Aflac, down 2.3%.
 
Here's what the chart of Allstate looks like (with a hook at the end) …
 
 
This is a chart consistent across the industry, driven by aggressive price increases, lower losses, and the related record margin expansion.  An analyst asked the Hartford CEO in the Q4 earnings call, are these peak margins?  Translation:  Has the power to push through price increases exhausted?

Pro Perspectives 4/8/24

 

 

 

 

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April 08, 2024

As we discussed last week, the market has gone from anticipating as many as seven quarter-point rate cuts this year, to five, to three.  Meanwhile the Fed has telegraphed three cuts, with some members chattering about the possibility of two, then one.  And most recently, the possibility has been floated of maybe none/ no rate cuts this year.
 
Meanwhile, little attention (still) is given to the fiscal spending side.  Jamie Dimon emphasized it today in his annual letter.  He noted "the economy is being fueled by large amounts of government deficit spending and past stimulus."
 
On the latter, we've been looking at this chart of money supply …
 
  
Remember, the massive monetary and fiscal response to the pandemic (plus the subsequent agenda spending binge) ramped the money supply by 40% in just two years.  That was almost ten year's worth of money supply growth dumped onto the economy over just two years.
 
The money supply remains trillions of dollars above trend.  And Biden's proposed 2025 budget would require printing another $1.8 trillion.
 
While the rate of change in prices has slowed, those trillions of dollars in excess money supply have underpinned the nominal price of stuff.  That goes for GDP (the total market value of economic output).  And that goes for the nominal revenues and earnings of companies.
 
With that, we kick off Q1 earnings season later this week, with the big banks.    
 
Despite the backdrop we've just discussed, corporate America has spent the past three months dialing down expectations on Q1, lowering the bar so they can step over it.  
 
Earnings growth estimates for the S&P 500 have been lowered to 3.2% year-over-year growth (from 5.7% heading into the quarter).  Keep in mind, that was in a quarter where the economy is expected to have grown at an annual rate of about 2.5% (a strong pace). 
 
So we enter another earnings season with the set up for positive surprises.
 
Before the banks report on Friday, we'll get March CPI on Wednesday.
 
Remember, Jerome Powell laid out conditions in his post-FOMC press conference last month, that would warrant starting the easing cycle: 1) unexpected weakening in the labor market, 2) the continued trend of falling inflation, toward the target and/or 3) any stress bubbling up in money markets (i.e. a liquidity shock).
Conditions one and three aren't showing stress.  And on condition two, it seems unlikely that the March inflation report will show progress on falling inflation.
 
With all of this in mind, we enter the week with the set up for a correction in stocks. 
 
As you can see in the chart below, we've moved up nearly 30% in five months, since Jerome Powell signaled the end of the tightening cycle in October.
 
 
And last week, as we discussed, the S&P futures put in a technical reversal signal (an outside day).  So did the Russell 2000.  So did the Dow.  So did the German stock market (DAX futures).
 
It looks like a technical correction is underway.  
 
If so, the appetite to buy the dip, particularly in the AI theme, will be very healthy.  

Pro Perspectives 4/4/24

 

 

 

 

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April 04, 2024

We've been watching this big trendline in stocks. 
 
 
As we've discussed here in my daily notes, this nearly perfect 45 degree angle ascent of the world's benchmark stock market (proxy for economic and geopolitical health and outlook) originated from late October commentary of Fed Chair Jerome Powell, when he signaled the tightening cycle was over. 
 
Since then, the market has gone from anticipating a change for seven quarter-point rate cuts this year, to five, to three.  Meanwhile the Fed has telegraphed three cuts, with some members chattering about the possibility of two, then one.  And today, from non-voting member Neel Kashkari, he suggested maybe none/zero rate cuts this year.
 
That comment from Kashkari hit the wires at a little after 1:00 today. 
 
Stocks did this …
 
 
Remember, from the first chart, stocks have risen nearly 30% since late October, despite the dramatic curtailing of rate cut expectations.
 
With that, there was another headline that hit a little after 1:00 this afternoon. 
 
 
Here's how Bloomberg interpreted it …
 
Markets will ignore domestic political infighting and geopolitical posturing until markets don't. 
 
This communication from the White House, describing the takeaway from a phone call between Biden and Netanyahu may be the tipping point — threatening a policy shift on Israel is a wakeup call for markets.
 
Stocks immediately sold off.  Yields ended lower.  Gold spiked.  The market response was broad-based risk aversion. 
 
But there was more.  Shortly after the White House headline on Biden/Netanyahu, in the daily White House Press Briefing, the White House Security Communications Advisor, John Kirby, fielded questions on Bidens call yesterday with Xi Jinping. In doing so, he said Biden was clear, in that "nothing has changed about our One China policy, we don't support independence for Taiwan."  I was watching it live.  So much for "strategic ambiguity."
 
Also this afternoon, the Secretary of State, Antony Blinken was at NATO headquarters, and said that "Ukraine will become a member of NATO," which is an affront to Putin's 2021 security ultimatum.
 
With these headlines this afternoon out of the U.S. administration, the world became more dangerous.  And just like that, the nuance surrounding tomorrow's job report, and rate cut timing becomes less important for markets.    
 

Pro Perspectives 4/3/24

 

 

 

 

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April 03, 2024

The climb in commodities prices continued today.
 
Let's take a look at the price of gold.
 
It traded above $2,300 this afternoon.  It's up 13% over the past 24 trading days.  Let's take a look at prior moves of this magnitude in the pandemic/post-pandemic environment.
 
 
As you can see above, gold had a move of similar magnitude in mid-April of 2020, in late July of 2020 and in March of 2022.
 
What was going on?  Inflationary policy.  These 2020 dates were pandemic response related.  Specifically, these spikes in gold align with the fiscal response — more specifically, government putting cash in the hands of citizens (checks, unemployment subsidies and the "Paycheck Protection Program).
 
The next spike?  The unemployment subsidy was due to expire (end of July), and was re-upped. 
 
The gold spike in March of 2022:  Inflationary policy.  Russia had invaded Ukraine.  Inflation was already nearing double-digits, thanks in part to supply chain disruption, but mostly to the multi-trillion dollar fiscal response to the pandemic. 
 
Adding fuel to the inflation fire, while the clean energy agenda was already curtailing energy supply, Congress responded to Russia with threats to place sanctions on Russian energy exports.  
 
That brings us to the current spike in gold.  Gold tends to be the global safe haven asset, where global capital flows in times of heightened geopolitical risk.  And gold is the historically favored inflation hedge.
 
That said, geopolitical risk and related uncertainty have become a constant, but these extreme moves in gold tend to be better aligned with episodes of overt fiscal profligacy (devaluation of the money in your pocket).  In this current case, perhaps the catalyst is the $7.3 trillion budget that Biden revealed early last month — an egregious 6% deficit spending plan in a economy that's growing at a 3% annual rate, with an already ballooning record debt.