By Bryan Rich

June 12,  5:00 pm EST

Remember, last week we talked about why $50 is a very important level for oil.

A recent Dallas Fed survey has the breakeven level for shale producers at $50.  In other words, the shale industry needs oil prices above $50 to produce profitably.

If the shale industry becomes unprofitable, that becomes a problem. As we found in 2016, when oil prices crashed, the shale industry became vulnerable.  Defaults started lining up in the industry, which made banks vulnerable.  When banks are vulnerable, credit tends to tighten and the financial system can quickly become unstable.

Now, as we know, the price of oil bounced from that $50 area last week, but we’re getting another test today.  Oil was the mover of the day — down close to 4%, and back under $51.

This, I suspect, will play a very important role in the Fed decision next week.

Despite the fact that expectations point to a rate cut in July, we’ve discussed the pressures building that might lead the Fed to move next week (which would be a big surprise for markets). Oil plays into that scenario.

Stocks and crude oil have been two clear influences on Fed policy over the past few years.  The latter weighs on inflation.  While the Fed claims to ignore the influence of food and energy in their inflation measure, they have a history of acting when oil moves sharply.  On that note, oil is down 22% over the past year.  And, again, we’re testing an important level that can have spillover effects into the economy.  That’s why a sharp decline in oil prices tends to influence stocks.  That’s why the charts of stocks and oil have tracked so closely …

 

 

So, we’ve had a nice bounce in stocks over the past week or so.  We had the same for crude.  But now crude is back testing the lows of this decline.

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By Bryan Rich

May 14, 5:00 pm EST

Yesterday we looked at the big technical support level for the Dow — the 200-day moving average.

That level held beautifully, and stocks bounced aggressively today.

Here’s a look at that chart now ….

 

With stocks bouncing after a quick 5% correction, we also have a big technical area of support holding in the interest rate market.  As you can see in this next chart, the 10-year yield is holding this big trendline into 2.40%.

So, we have a stronger dollar today, strong commodities prices, higher global stocks and higher rates.  What’s different today, relative to yesterday?  Nothing.

We have a market underpinned by better than expected economic data and earnings. And (different than December) we have a Fed that is in a relatively accommodative stand, promising to do nothing to disrupt the trajectory of the economy and stock market.  That makes stocks a buy on dips.

By Bryan Rich

May 7, 5:00 pm EST

As we get closer to the hard deadline on a U.S./China trade deal, markets are adjusting for the potential of a no deal/ tariff escalation.

What does that look like?  U.S. stocks are now off 2% from the highs of the year.  That still puts us up 15% year-to-date.

The bigger adjustment is coming in China.  As we discussed yesterday, China is in the position of weakness in these negotiations.  The U.S. economy is strong.  China’s economy has been very weak.  A more expensive and indefinite trade dispute puts downward pressure on both economies (and the global economy), but it puts the Chinese in dangerously slow economy — which becomes politically dangerous for the Chinese Communist Party.

As such, here’s what Chinese stocks have done in the past eight days …

 

And, perhaps as a warning shot, China is starting to move their currency.

As we’ve discussed, China has used their currency (a weak currency) as the primary tool to achieve their extraordinary economic ascent over the past two decades — cornering the world’s export market.

We should expect, when their backs are against the wall, with a dim economic outlook, they will go back to weakening the yuan.  That’s what they have been doing since Trump’s tariff threat on Sunday.  They adjusted down the yuan yesterday by almost 1%.  That doesn’t sound like much, within China’s currency regime, it’s a big move.  We saw a one-off move like that once last year.  The other time was August of 2015, which led to fears that China might devalue the yuan. That set off a global market rout.

With the above said, China is sending Hui for the meetings that are scheduled to run Thursday and Friday.  Hui has been the point-man on trade negotiations.  His presence, in light of the tariff threats, give some encouragement that China has intentions to get a deal done.

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By Bryan Rich

May 6, 5:00 pm EST

Late last week, the White House floated the idea that a trade agreement with China could come by this coming Friday (May 10).

And then Trump did this yesterday …

 

Why would Trump risk complicating a deal, even more, by threatening China with a deadline/ tariff increase?  Because he has leverage.  He has a stock market near record highs, and a strong economy and the winds of ultra-easy global monetary policy at his back.

China, on the other hand, has an economy running in recession-like territory, with key data just (recently) bouncing from global financial crisis era levels.  And Chinese stocks, after soaring 34% since January 4th, have given back 12% from the highs, in just seven days.  And they’ve just fired a ton of fiscal and monetary policy bullets to stimulate the economy – which could be diluted by a more expensive and indefinite trade war.

So, Trump has a win-win going into the week.  If the threat works, he gets a deal done, and likely gives less to get it done.  If China backs off, stocks go down, and he gets the Fed’s rate cut he’s been looking for – stocks go back up.

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By Bryan Rich

May 1, 5:00 pm EST

As we discussed yesterday, the interest rate market has been signaling that the Fed made a mistake in December, when it hiked rates one last time, into a stock market that was in a steep decline.

In today’s post-Fed meeting press conference with the Fed Chairman, markets were expecting signals from Jay Powell that they might be looking to take that hike back, if the current subdued inflation levels persisted.  But Powell was reluctant to give much of a leaning toward a cut.  In fact, he said the risks that precipitated their “pause” on the rate path (China and European growth, Brexit risks, and trade negoations), have been largely improving.  He’s right.  He said the economy was solid.  He’s right.

Still, stocks came off sharply into the close.

After today, you have to ask the question:  Can stocks force the hand of the Fed, again?  Remember, stocks fell 8% in just four trading days after the Fed’s December hike – penalizing a tone deaf Fed.  In a market that was already down 9% on the month, the slide was exacerbated by the further Fed tightening. 

That stock fallout soon led to a response from the U.S. Treasury, as Mnuchin called out to major banks and the President’s Working Group on Financial Markets (which includes the Fed) to “assure normal market operations.”  That put a bottom in stocks.  And within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed’s rate path — signaling a pause.  The Fed’s pivot has fueled a V-shaped recovery in stocks.

So, we’ve just come off of a four-month run in stocks that gave us a full recovery of the late 2018 losses — and a new record high in the S&P 500.  That was the best four month gain since 2010.  Now we enter May with this chart …

 

As you can see, with the decline this afternoon, the S&P 500 put in a key reversal signal — a bearish outside day.  That’s tough to ignore, given that we’ve had a 16% gain in stocks to open the first four months of the year. This signal may be enough to stop the momentum, for now, as we wait for the word on a China deal — which is now said to ‘possibly’ come by next Friday.

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By Bryan Rich

April 30, 5:00 pm EST

As we head into a Fed decision tomorrow, we’ve talked about the prospects of a Fed rate cut.  It’s highly unlikely.

It’s even more unlikely today, after Trump pushed for, not just a cut, but a full point cut …

 

Unfortunately, the influence Trump tried to wield late last year, is probably why the Fed hiked in December — just to prove to the world that they (the Fed) wouldn’t be politically influenced.

With that, we now have an economy growing at 3%+, stocks near record highs and subdued inflation.  And yet we have a ten-year yield at 2.5%.  It doesn’t fit.  The interest rate market is still sending the message that the December rate hike was a mistake.

With that, if we did get a cut by this summer, I suspect the interest rate market would adjust to reflect a more optimistic economic outlook.  By that, I mean, with a cut in the Fed funds rate, the long end of the yield curve (specifically, 10-year yields) would probably go UP not down –steepening the yield curve.

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By Bryan Rich

April 26, 5:00 pm EST

The first reading on first quarter U.S. GDP came in this morning at 3.2%— much better than expected.  This is a huge positive surprise, for what many expected to be a terrible quarter.

Just a month ago, the consensus view was something closer to 1%.  Goldman was looking for 0.7% going into the end of the quarter.

With that, we’ve been talking about this set-up for positive surprises all year.

Remember, the economy added on average 173,000 jobs a month in Q1.  Both manufacturing and services PMIs expanded in the quarter, and stocks fully recovered the losses from December.  Add to that, just days into the first quarter, the Fed told us they were done raising rates.  Whatever headwinds the Fed was stirring up, quickly became tailwinds.
Yet we’ve been told an economic recession was coming and an earnings recession upon us.  The above is a recipe for growth, not contraction.

Still, as we’ve discussed, never underestimate the appetite of Wall Street and corporate America to dial down expectations when given the opportunity.  That sets the table for positive surprises.  And positive surprises are fuel for stocks.   Stocks are fuel for confidence.  Confidence is fuel for the economy.

Last week we looked at the early signals on Q1 economic activity.  The positive surprises started with what looks like the bottom in Chinese industrial output and retail sales (two key indicators of economic health). This is important because the global slowdown fears have been centered around the weak Chinese economy.

Then both UK retail sales and the U.S. retail sales came in better.  And yesterday, we had a hot durable goods orders number in the U.S for March.

So, despite the negative picture that has been painted, the trajectory of U.S. economic growth seems to be well intact.

This is just the first reading on the Q1 number, but it gives us an average annualized growth rate of three percent even.  The average annualized growth coming out of the Great Recession (pre-Trumponomics) was just 2.2%.

And keep in mind, the next big pillar of Trumponomics is a trillion-dollar-plus infrastructure spend (with bipartisan support).

Just as expectations have been dialed down, this is where we could see a real economic boom kick in, especially if we get a deal on China (clearing that drag on sentiment).  As we’ve discussed, we are well overdue for an economic boom period.  We’ve yet to have the bounce-back in growth that is typical of a post-recession, if not post-depression environment.  You can see in the table below, the six years that followed the Great Depression, relative to the growth coming out of the Great Recession …

 

Have a great weekend!

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By Bryan Rich

April 18, 5:00 pm EST

Yesterday we talked about the positive surprises in the Chinese data.  This is important because the global slowdown fears have been centered around the weak Chinese economy.

So, we now have what looks like a bounce off of the bottom in Chinese industrial output and Chinese retail sales (two key indicators of economic health).

Today we had more positive surprises for the global economic outlook picture.  The UK retail sales number came in better than expected.  And the U.S. retail sales came in better.

You can see in the chart below, this March U.S. retail sales is a bounce from the post-crisis lows of December.  

With this, the Q1 GDP estimate from the Atlanta Fed has bumped up to 2.8%.

We’ve talked about the set up for both earnings and the economic data to surprise to the upside for Q1, given the dialed down expectations following the December decline in stocks.

You can see how this is playing out in the chart below (see where the gold line is diverging from the “consensus estimate” blue line) …

If you haven’t signed up for my Billionaire’s Portfolio, don’t delay … we’ve just had another big exit in our portfolio, and we’ve replaced it with the favorite stock of the most revered investor in corporate America — it’s a stock with double potential.

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By Bryan Rich

April 17, 5:00 pm EST

Last month we talked about Chinese stocks has a key spot to watch for: 1) are they doing enough to stimulate the struggling economy, and 2) (more importantly) are they taking serious steps to get to an agreement on trade with the U.S.?

The signal has been good.  Chinese stocks are up 34% since January 4th.

As I said back in March, Chinese stocks are reflecting optimism that a bottom is in for the trade war and for Chinese economic fragility.  That’s a big signal for the global (and U.S.) economy.

Fast forward a month, and we’re starting to see it (the bottoming) in the Chinese data.  Overnight, we had a better than expected GDP report.  And industrial output in China climbed at the hottest rate since 2014.

For those that question the integrity of the Chinese GDP data, many will look at industrial output and retail sales.  Retail sales had a better than expected number too overnight.  And the chart (too) looks like a bottom is in. 

Remember, by the end of last year, much of the economic data in China was running at or worse than 2009 levels (the depths of the global economic crisis).

The signal in stocks turned on the day that the Fed put an end to its rate hiking path AND when the U.S. and China re-opened trade talks (both on January 4th).

By Bryan Rich

April 10, 5:00 pm EST

The minutes were released from the March Fed meeting today.  But we already know very clearly where they stand.

Remember, they spent the better part of the first three months of the year marching out Fed officials (one after another) to give us a clear message that they would do nothing to kill the economic recovery.

Just in case there was any question, Jay Powell stepped in just ahead of the March Fed meeting with an exclusive 60 Minutes interview, where he spoke directly to the public, to reassure everyone that the economy was in good shape, and that the Fed was there to promote stability (i.e. rates on hold and even prepared to act if the environment were to turn for the worse).

As expected, the ECB echoed that position today, following their meeting on monetary policy.  As we’ve discussed, the major global central banks have again coordinated both messaging and policy to ward off an erosion of confidence in the global economy.   No surprises.  And I’m sure managing the U.S. 10-year yield has been part of that coordinated response.  In addition to the speculative flows that have pushed yields lower, I suspect there has been a healthy dose of central bank buying (Bank of Japan and others through sovereign wealth funds).

With that, even though stocks have bounced back, commodities are on the move, and we’ve had improvements in global economic data, we still have European 10-year yields (Germany) at zero and U.S. yields at 2.50%. That is promoting the global central bank stability plan.

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