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.
Join me here to get all of my in-depth analysis on the big picture, and to get access to my carefully curated list of “stocks to buy” now.
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.
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.
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 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.
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.
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.”