V-Shaped Recovery For Oil Prices Underway
By Bryan Rich

April 2, 5:00 pm EST

Oil is one of the biggest movers of the day, now back above $60.

That’s nearly 50% higher from the lows of late December.

Is that surprising?  It shouldn’t be.  Declines in both stocks and oil (late last year) were triggered by threats of sanctions on Saudi Arabia.  We talked about it as it transpired in these daily notes. The stock market decline started on October 3rd when headlines hit that implicated the Saudi Crown Prince in the murder of the journalist, Jamal Khashoggi.  Oil topped the same day, and then accelerated the day Trump spoke with the Saudi Crown Prince on the phone on October 16. Oil opened that day at $72 and hasn’t seen the level since (forty-three days later it was trading at $42).

The Saudi capital flight threat dissolved as it became clear later in the year that the U.S. would sanction Saudi individuals only — and not the Crown Prince, nor the government.  Sill those geopolitical risks early on, soon turned into eroding sentiment — as lower stocks, feed weaker confidence.

But we’ve had a full “V-shaped” recovery in stocks.  And I’ve suspected we would see the same in oil prices. And the catalyst has been a coordinated response from global central banks, not too dissimilar from what we saw in 2016, following another oil prices crash.  Oil and stocks rallied aggressively back then.  And we’re seeing a similar result this time.

Remember, we looked at this chart back in February…

 

Here is a look at the chart now as crude continues to recover the declines of late last year (working toward completing the “V”)…
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Lyft IPO Is Exposing The Valuation Gap Insanity

By Bryan Rich

April 1, 5:00 pm EST

Last week we talked about the buildup to the Lyft IPO.

Lyft, “lifted” to a valuation of close to $25 billion when shares started trading on Friday.  Today, it’s down as much as 20% from the Friday highs.

The last private investment valued the company at $15.1 billion.  That gave them a paper gain of over 60% on Friday, for just a 9-month holding period. Good for them.

For everyone else, remember, you’re looking at a company that did a little over $2 billion in revenue, while losing almost a billion dollars. Most importantly, over the three years of data that Lyft shared in its S-1 filing, revenue growth has been slowing and losses have been widening.

So, you’re buying a company that hopes to be profitable in seven years, to justify the valuation today.  This is a company that has only existed seven years.  And to think that we can predict what the next seven will look like, in the ever changing technology and political/regulatory environment (much less economic environment), is a stretch.

For some perspective on these valuations, below is what it looks like if we compare the three largest/dominant car rental car companies (Enterprise, Hertz and Avis) to the two largest/dominant ride sharing companies.

 

With Uber now expected to be valued at around $120 billion when it goes public (possibly this month), the ride sharing industry is valued at about 14 times the car rental industry.

The rental car industry has been priced as if ride-sharing industry has destroyed it.  Ironically, if the ride sharing movement is to succeed in the long-run, and is to fully reach the potential that is being priced into the valuations, then they will need these car rental companies to supply and manage the fleet of vehicles required for Uber and Lyft to scale.

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Why The White House Wants The Fed Spigot Open

By Bryan Rich

March 29, 5:00 pm EST

We’ve talked about the prospects of a repeat of 1995, when the Fed flip-flopped — cutting rates, following an overly aggressive tightening cycle. Stocks soared.

With that in mind, in addition to the about-face the Fed has done over the past three months, verbally managing down expectations on rates, we’ve since heard from (effectively) the White House, calling for “an immediate 50 basis points cut.”

Trump has selected Stephen Moore as an nominee for the Fed.  He publicly called for the 1/2 point cut this week.  And today, Larry Kudlow, the White House Chief Economic Advisor, said the same.

The Fed wants ammunition if a U.S. slowdown occurs (as damage control).  The White House wants a cut to “protect” the current growth — i.e. to pre-empt a slowdown (prevent the damage).

This comes following a weaker final Q4 GDP number, which dropped full year 2018 growth just below 3% (2.9%).  And the reality is, Q1 won’t be a big number (thanks in part to the sentiment scars from the Q4 stock market decline). It looks like 1.5% at the moment.  That would be the slowest growth since Q1 2016.

Are the calls for a cut from the White House coming because they don’t think a China deal will happen?  Possibly.  More likely, the Trump administration wants the spigot open, to fuel economic momentum into the 2020 election.  Why not press the accelerator, given the continued tame inflation environment and softness in Europe and China?

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Lyft: Hyper-growth valuations unlikely to give investors hyper-growth

By Bryan Rich

March 28, 5:00 pm EST

Earlier this month, we talked about the big IPO agenda this year.

We have some big Silicon Valley “disrupters” set to go public this year, including Lyft, Uber, WeWork and Airbnb.

Lyft will IPO tomorrow.  The expectations is for a $20+ billion valuation.

The company has raised $4.9 billion in the private market since launching in 2012.   A little more than a year ago, it raised money at an $11 billion valuation.  If you were the investor at that stage, you’re looking at a double when it goes public (just 15-months later).

Now, if you are joe-average investor, as a buyer of Lyft shares, you’re about to pay these early private market investors at a $22 billion valuation.  This is a company that did about $2 billion in revenue last year, and lost about a billion dollars.

Remember, while the founders of these companies will become celebrated billionaires, the investors that buy these shares in the public market don’t tend to get rewarded very well.  Of course, there are exceptions, but remember, the IPOs this year are coming into a far less friendly regulatory environment than their “disrupter” predecessors of the past decade.

The reality:  The hyper-growth valuations are unlikely to get hyper-growth, as the regulatory advantages Silicon Valley has enjoyed over the past decade are now being scrutinized by Washington.

Here’s how the big “disrupters” of the past two years have fared, after much anticipated IPOs.

Dropbox:  Dropbox was priced at $21 per share.  It started trading at over $28.  Today it trades at $22.

Spotify:  Priced at $165.90 per share.  It started trading at $164.  It currently trades at $137.

Snap: Priced at $17 per share.  It started trading at $22.  Today it trades at $10.80.

After Lyft, Uber is on deck.  Uber last raised venture capital at a $68 billion valuation.  They are expected to go public at a $120 billion valuation.

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Fed’s Flip-Flop Leads Us To This 1995 Chart

By Bryan Rich

March 27, 5:00 pm EST

We’ve talked this week about the yield curve inversion.

In response, the market is now pricing in a better than 70% chance of a rate cut in June.  And Trump’s new pick to join the Fed, Stephen Moore, has said the Fed should cut by 50 basis points immediately.We’ve talked about the comparisons between 2019 and 1995.  In 1994 the Fed aggressively tightened into a low inflation, recovering economy (as they did in 2018).  By the middle of 1995, they were cutting.  Stocks finished the year up 36%.

Given the contrast of where the Fed has positioned themselves now, compared to just three months ago, they have effectively eased — and we can see it clearly manifested in the interest rate market.  The 10-year U.S. government bond yield has gone from 3.25% to under 2.5% since just November.  I would argue we already have a repeat of 1995.

Here’s a look, in the chart on the left, at what stocks did in 1994-1995, when the Fed transitioned from overtightening (into a low inflation, recovering economy) to easing.  And, on the right, this is how things look now, with similar context. 

 

Within a few quarters of the ’95 rate cut, U.S. growth was printing above 4% and did so for 18 consecutive quarters.  Stocks tripled over that period.

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Fed’s 1995 Script Playing Out Again

By Bryan RichMarch 26, 5:00 pm EST

Yesterday we talked about the yield curve inversion.

It was driven by the Fed walking up the fed funds rate (i.e. “normalizing rates”) over the course of the past three years.  As we discussed yesterday, with global central banks pinning down the long-end of the yield curve through QE (now led by the BOJ), there were few things better telegraphed than the U.S. yield curve inversion.

The market is now pricing in a 66% chance of a rate cut by the end of the year.  The market is arguing that the rate hike the Fed made in December, was a mistake.

When have we seen this script before?  1995.  As we discussed coming into the year, 2018 was the first year since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold).  And the culprit was 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%).  That’s the bet people are making again.  But I suspect we’ve already seen the equivalent of a cut through the Fed’s dovish posturing since early January.  Remember, they went on a media blitz the first several days of January, dialing down expectations that there would be any more tightening.

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Should We Be Concerned About the Yield Curve Inversion?

By Bryan Rich

March 25, 5:00 pm EST

There was a big technical break in the interest rate market on Friday.   And the yield curve inverted.

What does it mean, and should we be concerned?

First, when people talk about the yield curve, they are typically talking about the yield on the 3-month Treasury bill versus the yield on the 10-year government bond.  The latter should pay more, with the idea that money will cost more in the future (compensating for inflation and an “uncertainty about the future” premium).

When the 10-year is paying you less than you could earn holding a short term T-bill, the yield curve is said to be inverted.  And this dynamic has predicted the past seven recessions.  Why?  Because it typically will be driven by a tighter credit environment, namely banks become less enthused about borrowing in the form of short term loans, to lend that money out in longer term loans.  Money dries up. Unemployment goes up. Demand dries up. Economy dips.

With this in mind, today the 3-month treasury bill pays 2.44%. And the 10-year government bond pays 2.41%.  The spread is negative which makes for an inverted yield curve.

Now, while an inverted yield curve has preceded recessions with a good record, we’ve also had inverted yield curves and no recession has followed.

What isn’t talked about much, is why the yield curve is inverting this time.  It sort of spoils the drama to talk about the “why”.  Unlike any other time in history, we have an interest market that has been explicitly manipulated by global central banks for the past decade (via global QE).  And we have one major central bank (the Bank of Japan) remaining as a buyer of unlimited global assets (that includes U.S. 10 years, which pushes the 10-year yield lower).

Remember, the Bank of Japan’s policy of targeting their 10-year government bond yield at zero, means they will be a buyer of unlimited bonds to push JGB yields back toward zero (price goes up, yields go down).  And when the tide of global rates is rising, pulling UP their yields, they will be a buyer of whatever they need to, to push things back down (and they’ve done just that).

What does that mean?  It means, as the Fed has been walking its short-term benchmark rate higher, the “long-end” of the interest rate market (the 10-year yield) has been anchored by central bank buying – buying by all major central banks for the better part of a decade, and now led by the BOJ.  That has kept a lid on the U.S. 10-year government bond yield, and global government bond yields in general.

With this at work, there have been few things better telegraphed than a U.S. yield curve inversion, as the Fed has told us for years that they will march their short-term rate beyond the anchored 10-year yield.
It’s often dangerous to say “this time is different”, but I think it’s fair to say that the past yield curve inversion/recession analyses don’t compare, when you have both components (the front-end and the long-end) completely controlled by global central banks for more than a decade.  Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, through the end of the year.
Bonds Look Overdone … Maybe From A Mueller Fear Premium
By Bryan Rich

March 22, 5:00 pm EST

Stocks have swung around this week and will finish down just around three-quarters of one percent since last Friday.

The media loves to make a big deal out of a daily decline in stocks, which they did this morning.

But let’s look at some charts and some perspective.

We’ve talked about the Fed’s actions this week.  As I’ve said, with solid growth, low unemployment, subdued inflation and the risks outstanding that Brexit and/or a U.S.-China trade deal could go bad, they are in the position where they can telegraph flexibility in policy, which could even include a cut or more QE.  Again, a lesson learned from the Fed’s mistakes of the past 10 years — set the expectations bar too low, not too high.

With the Fed’s clear pivot over the past three months, we’re getting this technical breakdown in U.S. yields… 

This is now over 75 basis points lower than the peak in market rates in November. That’s a big adjustment. This means we’ve had nine quarter-point rate hikes by the Fed since 2015, for a total of 2.25 percentage points.  Yet, if we look at the post-crisis low in market interest rates, which was just prior to the 2016 election (1.32% in July of 2016), this morning the market was only adjusting for about half of those Fed hikes.

So, in November of last year, the interest rate market was pricing in nearly all of the Fed’s normalization in rates.  Now, the market is pricing in just half of it.  What does that mean?

Again, as I said on Wednesday, I would say this is a market pricing in theworst-case scenario – a no deal with China.  And I would say, at this stage, that’s an extreme view.

What about German yields? 

Today, the German government bond yields slipped back into negative territory for the first time since 2016.  Isn’t this, and the global QE-induced status of the U.S. yield curve, signaling recession ahead?

There was indeed some softer data out of Europe today, but the real driver of negative German yields is simply U.S. yields.  The spread between German and U.S. 10-year yields, peaked last November at a record 278 basis points when the Fed was going one way, and the ECB was going the other.  With the Fed and the ECB now facing virtually the same direction on monetary policy, that spread is narrowing.  Bottom line, U.S. yields go down, German yields go down – especially given that the worst-case scenarios for both central banks (Fed and the ECB) are global growth oriented (namely, China).

Does the interest rate market, which is reflecting  a combination of pro-active central banks and market speculation on a worst-case scenario outcome, mean stocks should be going down?

If we look back at the last time the Fed pivoted from hiking, to sitting on their hands … and the last time German yields were negative, stocks went UP.  That was 2016.  If you bought the S&P when German yields went negative and sold them when German yields returned to positive territory, you made about 4%.

With this in mind, stocks run into this big trendline today and hold.  This will be a key technical spot to watch.
Bottom line:  I suspect the bond move is way overdone, and stocks are a buy on the dip.  Still, the swings in stocks and the recent memory of December, should have the Trump team inclined to get a trade deal done.
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Fed’s Strategy Reset: Set The Bar Low

By Bryan Rich

March 21, 5:00 pm EST

Stocks came back strong today as the market has had a little more time to digest what the Fed signaled yesterday.

As we discussed yesterday, the Fed has effectively eased monetary policy since the December stock market rout, by slamming the breaks on their “rate normalization” plan.

They’ve gone to great lengths to communicate to markets that they willnot kill the economic recovery.  Moreover, they’ve told us that they will do whatever it takes to keep the economc recovery going.

Now, let’s talk about the signal they gave in the economic projections they released yesterday.

They dialed down what they call their “terminal” or “neutral rate.” In the long run, this is benchmark interest rate that they believe is neither contractionary nor expansionary for the economy.  When the Fed started the rate normalization process, they thought the terminal rate was 3.5%.  Now they think its 2.78%.  Does this imply they think the economy is in a new normal of lower growth and lower inflation?

Probably not.  First, the Fed has had an abysmal record of predicting rates, inflation and growth in the post-crisis era.  Throughout, they have been way overly optimistic.  And as markets have taken cues from the Fed, their bad predictions have bitten them. Arguably, they mis-set expectations and that led to negative surprises, which ultimately forced the Fed to keep emergency level policies maybe lower and longer than what would have been necessary had they guided expectations better.

Jeff Gundlach, one of the world’s best bond fund managers, made this comment today regarding the Fed’s forecasts …
I agree.  But if we look at the forecasts the Fed published yesterday, I suspect there may be a new motivation for these projections.  Instead of using this document as a way for Fed members to pontificate on the future of the economy, I think they are using it as a way to manage down expectations, just as a company sets a low bar on earnings expectations — so that they can beat them.
Maybe a lesson learned from the mistakes of the past 10 years — set the expectations bar too low, not too high.
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Fed Reset Is A Pre-Emptive Strike Against The Worst Case Scenario
By Bryan Rich

March 20, 5:00 pm EST

The Fed met today and confirmed the signaling we’ve seen since early January.

With the luxury of solid growth, low unemployment and subdued inflation, they have been signaling to markets, since January, that they will do nothing to rock the boat.  That move has restored confidence and stock prices (a reinforcing loop).

So, the Fed has gone from mechanically raising rates (as recently as December) to sitting on their hands.  And today they are forecasting no further rate hikes this year, and they are ending the unwind of their balance sheet in September (ending quantitative tightening).

This all looks like a move to neutral, but given the rate path they had been telegraphing up until the end of last year, this pivot is effectively easing — especially since these moves look like pre-emptive strikes against the potential of Brexit and U.S./China trade negotiations going bad.

With that, we have a big technical break in the bond market today.  The U.S. 10-year government bond yield (chart below) broke this important trendline today.

 

This trendline represents the “normalization” of market rates following the Trump election.  Following the election, with the optimism surrounding Trumponomics, the market started pricing OUT the slow post-recession economic growth rut, and pricing IN the chance that we could see a return to sustained trend growth.

So, what is it pricing in now?  I would say its pricing in the worst-case scenario – a no deal with China.

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