By Bryan Rich

January 11, 5:00 pm EST

Trade talks with China came and went again this week without any notable progress, at least in the respective statements from both parties.

But the behavior of the Chinese currency tells a different story.

Remember, China controls the value of its currency.  They “fix” it every day. And they’ve been walking it higher.  That’s a big signal.

Here’s a look at the chart …

This chart shows the dollar/yuan exchange rate.  When the orange line is rising the dollar is strengthening, the yuan is weakening – and vice-versa.

You can see in 2015 and through 2016 (Line 1) the Chinese devalued the yuan by about 16% to respond to weak exports and sluggish growth.  When Trump was elected, he made it clear he would be coming after China for their cheap currency policies (i.e. manipulating the yuan to retain dominance in global exports).  With that, the Chinese strengthened the yuan in effort to stave off a trade war.  It didn’t work. And you can see in the most recent run up (Line 3) how they’ve responded.  They’ve gone back to weakening the currency.

Now, as we’ve discussed, the lower stock market has put pressure on the Trump agenda, which makes it more likely that some ground will be given on the demands that the U.S. has made on China.  So, with this backdrop in mind, how can Trump get to a deal on trade that gives him a win — and gives China an out, for the moment?  The Chinese currency could be a tool to get to an agreement – maybe China taking it back to 6 yuan per dollar in the near term.  

You can see in the shorter-term chart above, since Trump and Xi agreed to a 90-day period to get a deal done, the Chinese have been walking the yuan higher (which is shown in the falling line in the chart).
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By Bryan Rich

January 10, 5:00 pm EST

The coordinated response to market turmoil continues to reverse the tide of what was becoming an increasingly ugly global financial market meltdown.

Remember, we had a response from the U.S. Treasury Secretary on the days leading up to Christmas, which included call outs to the major banks and a meeting of the “President’s Working Group” on financial markets. Coincidentally, by the next Wednesday, a new item hit the agenda for the American Economic Association Annual Meeting. It was the January 4 live interview with the three most powerful central bankers in the world over the past ten years: Bernanke, Yellen and Powell. These three sat on stage together and massaged market sentiment on the path of interest rates, fortifying the market recovery that was started by the efforts of the Treasury.

Just in case we didn’t get the message, we’ve since had six Fed officials publicly dialing down expectations on the rate outlook, in response to financial markets. And we’ve had minutes from the Fed’s last meeting that clearly gave the message that the Fed could pause, sit and watch. And then today Powell was on stage again for another public interview, reiterating the Fed’s new position: on hold.

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By Bryan Rich

January 9, 5:00 pm EST

We discussed yesterday how markets might look by the end of the year, if the pontifications about a global slowdown and impending crisis are dead wrong.

The reality: That is the low probability outcome.  The higher probability outcome is another 3%+ year growth in the U.S. in 2019, a resolution on the Chinese trade dispute, and a rebound in emerging market growth.

With the “high probability scenario” in mind, let’s take a look at some key charts that look very vulnerable to a sharp squeeze.

Remember, oil and stocks have been in a synchronized decline since October 3.

On Friday we looked at this chart on oil, and the break of the big downtrend that accompanied some rate-hike relief jawboning from the Fed.

Today the chart looks like this …up almost 9% from Friday.
Here’s the chart on stocks we looked at on Friday …

We broke a big level on Friday at 2,520.  We’re up another 2.3% since.

What about yields?  The fear in the interest rate market hasn’t been/wasn’t that the economy can’t withstand a 3% ten-year yield.  The fear has been the speed at which the interest rate market was moving, and the methodical tightening process of the Fed.  Would 3% quickly become 4%?

The Fed has now backed off.  That quells the fears of a “too far, too fast” adjustment in rates.  But the interest rate market had already been pricing in the worst case scenario (another recession and crisis, in part thanks to the Fed policy).  If that was an over-reaction, I suspect we’ll see a move back toward 3%-3.25% in the 10s in the coming months. As you can see in the chart, this big line is being tested today.  And as long as the Fed stays data dependent, not telegraphing another series of hikes, the market should accept a 3% ten year yield just fine.  

To sum up: Markets tend to be caught wrong-footed at the extremes — leaning too hard in one direction, with sentiment too depressed or too exuberant.  And I suspect we’ve seen that extreme in Q4.  Sentiment was deeply shaken by the sharp decline in stocks, and that spilled over into the outlook for global economic stability.

But as we discussed yesterday, we have a Q4 earnings season upon us that is set up for positive surprises (given the sharp downward adjustment in expectations).  And if Trump gives some ground to get a deal done with China, these key markets are set up for big and sharp recoveries.

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.

By Bryan Rich

January 8, 5:00 pm EST

The expectations have been dialed down dramatically over the past few months for markets and the economy.

If indeed it’s all detached from reality, as the fundamentals would suggest, how might markets look if we have another 3%+ year growth in the U.S. in 2019, and if the weight of the China trade dispute lifts, and emerging market growth rebounds?

My guess:  stocks and commodities will be much, much higher by year end.

For stocks, Q4 earnings season kicks off next week with the banks.  Given the deterioration in sentiment last quarter, the estimates on earnings have been dialed down.  We’ve gone from a full year of earnings growth north of 20% (in 2018) to earnings growth expectations in 2019 at just 7%.   That sets up for positive earnings surprises this year.  And at 14 times next year’s earnings, the market is already dirt cheap — better earnings would make stocks even cheaper.

As for commodities, the economic expansion has been called “late cycle” by many, but commodities haven’t participated, as you can see in the chart below.

What if this chart tells us that the decade that followed the financial crisis was indeed a depression, and central banks were only able to manufacture enough economic economic activity to buffer the pain (not a real economic expansion)?  And now, instead of at the tail end of one of the longest economic expansions on record, we’re in the early stages of a real expansion, driven by fiscal policies and structural reform that has started in the U.S. and will be implemented abroad (Europe, Japan, China).
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.

By Bryan Rich

January 7, 5:00 pm EST

The Fed sent a message to markets on Friday that they will pause on rates hikes, if not stand ready to act (i.e. cut rates or stop shrinking the balance sheet), unless market conditions improve.

With that support, stocks continue to rebound.  But as the market focus is on stocks, the quiet big mover in the coming months might be commodities.

Over the weekend, the President confirmed that the $5 billion+ border wall would be made of steel — produced by U.S. steel companies.   Add to that, it’s fair to expect that the next item on the Trumponomics agenda, will be a big trillion-dollar infrastructure spend (an initiative believed to be supported by both parties in Congress).

Trump has also threatened to move forward with the wall under an executive order, citing national security.  With that, the execution on the wall, regardless of the state of negotiations on Capitol Hill should be coming sooner rather than later.

Let’s take a look today at a few domestic steel companies that should benefit.

Nucor Corp (NUE)

Nucor corp is the largest steel producer in the United States.

jan 7 nue
U.S. Steel (X)U.S. Steel is the second largest domestic steel producer.

jan 7 x
Cleveland-Cliffs (CLF)Cliffs is the largest supplier of iron units to North American steel mills.

jan 7 clf

As you can see, these stocks all benefited early on (post election) on the prospects of Trump’s America First economic plan.  But, like the broader market, these stocks are all well off of the 2018 highs now — driven by the intensified trade dispute with China over the past year, the uptick in  global economic risks, and the concern over Trumponomics policy execution with a split Congress.  They look very, very cheap considering the outlook for domestic steel demand.

Disclosure:  We are long Cliffs (CLF) in our Billionaire’s Portfolio.

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.

By Bryan Rich

January 4, 5:00 pm EST

Stocks had a huge bounce today.

And it was driven by: 1) the central bank in China stepping in with an injection of over $100 billion in liquidity into the economy through a cut to the bank reserve requirement ration, and 2) the three most powerful central bankers in the world (over the past 10 years) sitting on stage together and massaging market sentiment on the path of interest rates.

We entered the year with the idea that the Fed would need to walk back on its rate hiking path this year (possibly even cutting, if the stock market environment persisted).  And today, just days into the new year, we get the Fed Chair Powell, former Fed Chairs Yellen and Bernanke telling us that the Fed is essentially done of the year, unless things improve.

Remember, last year was the first since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold).  The culprit for such an anomaly:  An overly aggressive Fed tightening cycle in a low inflation recovering economy.  The Fed ended up cutting rates in 1995 and spurring a huge run up in stocks (up 36%).  Now, we’re getting the Fed standing down, and committing to “responsiveness to the data and markets.”

Yellen voluntarily drew the comparison to today to early 2016 – where the Fed had to respond to sour markets that were beginning to feed into the economy.

In 2016, the oil price crash prompted a coordinated response by global central banks to avert another financial crisis.  For the Fed’s part, they took two of the four projected rate hikes they had guided for 2016 off of the table (effectively easing).  This coordinated easing from global policymakers put a bottom in stocks and oil in early 2016. Oil doubled by the end of the year.  Stocks finished 2016 up 25% from the oil-price crash induced lows.

Here’s a look at the chart on oil today…

jan4 oil

You can see this big trendline that represents the plunge from $76 has broken today.

And here’s a look at stocks …

jan4 stocks
We broke a big level today on the way up in the S&P 500 (2520) and it looks like a V-shaped recovery is underway, to take us back to where stocks broke down on December 3rd.  That would be 12% from current levels.
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.

By Bryan Rich

January 3, 5:00 pm EST

As we’ve discussed, the dysfunctional stock market has put pressure on Trump to stand down and make a deal with China.

And Apple’s CEO, Tim Cook, turned up that pressure yesterday.  In a letter to investors, he warned that Apple, the biggest and most powerful company in the world, would have lower revenue in the quarter that just ended.  The blame was placed on economic deceleration in China —due to the trade dispute.

Now, it’s clear that Cook wanted to draw attention to the impact of the trade dispute.  And the media was happy to run with that story today.

But the slowdown at Apple last quarter also had a lot to do with “fewer iPhone upgrades than anticipated.”  This was tossed into the context of slower economic activity in China, which makes it look like a macro issue.  But Apple also has a micro issue.  They seem to have exhausted the compelling innovation that has historically gotten iPhone users excited about buying the latest and greatest phone.  The older models are still pretty great.  No reason to upgrade.

So, Apple has used a violent market and slowdown in China, perhaps, in an attempt to divert attention away from the slowing device business.

The good news: Even if they don’t develop the next world-changing device, they have a services business (Apple pay, Apple Music, iCloud Drive, AppleCare and the iTunes App store) that is producing almost as much revenue as Facebook.

And the stock is incredibly cheap.  On trailing twelve months, the stock trades at 12 times earnings. But if we back out the nearly $240 billion of cash Apple is sitting on, the business at Apple is being valued at $437 billion.  That’s about 7 times trailing twelve month earnings.

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.

By Bryan Rich

January 2, 5:00 pm EST

Happy New Year! We are off to what promises to be a very important year for markets and the economy.

Contrary to what the growing narrative has been on the economy and stocks over the past several months, I think we’re in for a hot economy, a big bounce back in stocks and resumption of the bull market in commodities.

The pieces are in place.  The linchpin will be China.

On that note, Trump had been in the clear position of strength in the negotiations on China, until stocks began to melt.

A sour stock market can ultimately erode economic activity.  And that becomes the big risk heading into this new year.

The Trump agenda has had big wins on the economy.  But those wins are at risk of being undone if the stock market calamity continues.  This is the weakness I’ve suspected has been exploited by China.  The indiscriminate selling has had all of the appearances of liquidations and/or manipulation.  With few cards to play, this (hitting the stock market) was one they could play.

Now, if we look back through history, major turning points in markets have often been the result of some form of intervention.  With that in mind, to counter the indiscriminate selling of stocks, on December 23rd we had a response from the U.S. Treasury Secretary and (the next day) a meeting of the “President’s Working Group” on financial markets.  That was an intervention signal.  When stocks re-opened after Christmas the bottom was in — stocks rallied 7% over the last four days of the year.

Again, market followers like to have very clear, neat evidence to describe every tick in markets.  And that leads them to very wrong conclusions when markets are at extremes (as they force their worst case scenarios to fit the price).  They don’t factor in the influence of intervention and manipulation (both by policymakers and powerful market players).  Markets are made up of people (and their varying motivations), and the evidence isn’t always so clear.

Bottom line:   As I said in my last note before Christmas, the lower stock market has put pressure on the Trump agenda, which makes it more likely that concessions will be made on China demands. My bet is that a deal on China would unleash a massive global financial market rally for 2019, and lead to a big upside surprise in global economic growth.

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.

By Bryan Rich

December 21, 5:00 pm EST

As we head into the holidays and the end of the year, let’s take a look at the 2018 performance for the world’s biggest asset classes, currencies and commodities.

As you can see, there’s a lot of red.  Global stocks are down. Bonds are down. Major commodities, down. Gold, down.  Foreign currencies, down.

Now, as we’ve discussed, major moves in markets are often triggered by a very specific catalyst, and then prices tend to drive sentiment change, and sentiment then tends to exacerbate the move in markets.

There are always plenty of stories, at any given time, that can sound like rational explanations to fit to the price.  In the case of the declines across asset classes this year, we’ve heard many viewpoints from very smart and accomplished investors over the past week, with concerns about the Fed, debt, deficits, slowdown, the end of an expansionary cycle, etc.

With all of this said, often times the driver behind these moves in markets is specific capital flows (forced liquidations), not an economic narrative. With that, in rear view mirror, a lot of times (historically) all of the pontifications surrounding markets like these end up looking very silly.

For example, let’s take a look at the run-up in oil prices back in 2007-08.  Oil prices ran from $50 to almost $150 in about 18 months.  Everyone was telling the world was running out of oil — “peak oil.”  Did everyone get supply and demand so wrong that the market was adjust with a three-fold move that quickly?

The reality:  the price of oil was being driven by nefarious activities (manipulation).  A major oil distributor was betting massively on lower oil prices and ran out of cash to meet margin requirements, as they were consequently squeezed (forced to liquidate) by predatorial traders that pushed the market higher. Among the predatorial traders, the largest oil trading company in the world, Vitol, was found to have been essentially controlling the oil futures market.  When the CFTC (the regulators) finally came knocking to investigate, that was the top in oil prices.

In the case of recent declines, the catalyst looks to be geopolitical (not economic), which then has given way to an erosion in sentiment (which can become self-fulfilling).

The geopolitics:  We’ve talked about the timeline of the top in stocks back in January, and how it aligns perfectly with the release of very wealthy Saudi royal family members and government officials, after being detained by the Crown Prince for three months on corruption charges.  And then the decline from the top on October 3rd (both stocks and oil prices) aligns, to the hour, with the news that the Crown Prince would be implicated in the Khashoggi murder.

These two events look like clear forced liquidations by the Saudis to retrieve assets invested in U.S. (and global) markets (assets that are vulnerable to asset seizures or sanctions).

Beyond this selling, we also have a party that might have an interest in seeing the U.S. stock market lower:  China.  Trump has backed them into a corner with demands they can’t possibly fully agree to.  If they did, their economy would suffer dramatically, and the ruling party would be highly exposed to an uprising.  Could China be behind the persistence in the selling.  Quite possibly.

Bottom line:  The lower stock market has put pressure on the Trump agenda, which makes it more likely that concessions will be made on China demands.  My bet is that a deal on China would unleash a massive global financial market rally for 2019, and lead to a big upside surprise in global economic growth.

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.

By Bryan Rich

December 20, 5:00 pm EST

In recent days we’ve discussed the parallels between this year and 1994.  In ’94 the Fed was hiking rates into a low inflation, recovering economy.

The Fed has done the same this year, methodically raising rates into a low inflation, recovering economy.  And like in 1994, the persistent tightening of credit has sent signals that the Fed is threatening economic growth.  Asset prices have swooned, and we have a world where cash is the best performing asset class (just as we experienced in 1994).

But remember, the Fed was forced to stop and reverse by early 1995.  Stock prices exploded 36% higher that year.

With this in mind, over the past couple of weeks, several of the best investors in the world have publicly commented on the state of markets.

Among them, was billionaire Paul Tudor Jones.  Jones is one of the great global macro traders of all-time.  He’s known for calling the 1987 crash, where he returned over 125% (after fees).  And he’s done close to 20% a year (again, after fees) spanning four decades.

Let’s take a look at what Jones said in an interview on December 10th …

He said the Fed has gone too far (tightened too aggressively).  But he thinks the Fed is near the end of its tightening cycle.

With that, he expected to see more swings in stocks.  He said he thinks we could be down 10% or up 10% from the levels of December 10th. But historically when the Fed ends a tightening cycle, after going too far, he says it has been a great time to be in the stock market.

The sentiment that the Fed has gone “too far” increased dramatically across the market this week — in the days up to yesterday’s Fed meeting.  As such, because the Fed followed through with another hike yesterday, and telegraphed more next year, stocks continued to slide today.  In fact, stocks have now/already declined 9.4% from the levels where Paul Tudor Jones made his comments about down 10%/up 10%. Again, he made those comments just 10 days ago.

With the above in mind, here’s what he said he would do if he saw itdown 10%: “I’m going to buy the hell out of ten percent lower, for sure.  To me, that’s an absolute lay-up.”

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.