Oh my. While the dull and unimaginative sit around fretting about all the worries in the world, the rich are loading up their war chests.
Bloomberg reports that private equity firms in the US have a record US$1.2 trillion in cash to spend.
They’re not going to sit around counting it either. They only earn their fees and bonuses by deploying it.
Will this money go into US stocks? Maybe.
The private equity guys could face stiff competition in getting cheap prices due to the amount of stock buybacks going on.
Barron’s reports these have surged an astonishing 91% so far this year in America. A buyback is when a company uses its own cash to reduce its outstanding shares.
It’s not as if they’re coming off a low base either. They were 1 trillion dollars worth of buybacks last year.
Look no further than these two angles to see the amount of money that could still pour into the US stock market.
It won’t be a smooth ride but 2019 could still turn out to be a real doozy to the upside.
The alternative for fund managers is to load up on bonds.
However, there is one little glitch on the horizon for that play.
Today’s Profit Watch explores the implications…
We need to assess current expectations first. The Wall Street Journal says investors are scaling back bets on inflation as they price in lower growth.
One way to measure this is using something called the 10 year breakeven rate. It’s currently under 2%. But it’s this quote that jumped out at me:
‘And surveys show investors are growing increasingly doubtful that the economy will heat up.
‘Among global fund managers surveyed by Bank of America in February, 55% expected below-trend growth and inflation over the next year, the highest share since December 2016.’
The markets rarely do what the majority expect. That’s part of what makes them so difficult to navigate.
Those betting on low inflation should consider tuning to the current wailing from global shipping industry.
These guys are worried they’re about to get smashed from new fuel regulations.
All that clothing, electronics and consumer goods that ships out of Asia to the world could be about to become a lot more expensive to get to market.
Big behemoths like Walmart and Amazon are unlikely to be able to absorb these extra costs considering their razor thin margins already.
One article suggests that shipowners will try to pass on to cargo owners an additional US$10 billionextra upcoming expense. Their fuel costs could go 30%.
And that’s at current oil prices. The latest news here ain’t too flash for low prices staying around over the medium term…
Shale investors: danger!
The shale industry has a major problem. And the consequences could ricochet around the world.
For some time the energy industry in America has been experimenting with clustering wells closer together.
This is in order to reduce drilling costs and to increase production rates.
These companies sold investors with a vision of more drill sites per acre of land, and hence more oil.
However, the industry is not hitting its previous projections around this strategy.
Its apparent that having wells too close together actually can interfere with output levels.
This has big implications. It could cause an ‘industry wide write-down’.
Here’s the problem. One of the ways shale companies are valued is the amount of acreage they have on their books.
And some have paid huge figures for land in the most lucrative areas like Texas.
A big write down that takes the value of these landholdings lower would smash their share prices.
That’s not going to help attract investors to their books, already a problem forming here.
The shale industry has absorbed billions in capital without showing little in the way of profit.
A second big hit from a write down would kill investor sentiment.
It’s could be very difficult to sustain the big increase in production out of the US if investors turn off the energy industry in disgust.
Donald Trump’s continual threats and rhetoric against high oil prices probably doesn’t boost investor confidence that higher oil prices will be sustained, either.
All this at a time when fellow producers like Algeria, Nigeria, Libya are all under some form of social unrest. And Venezuela and Iran are under sanctions.
The oil market is delicately poised, to say the least.
Certainly rising diesel costs will filter through the global transportation network of ships, trucks and planes.
Let’s go back to those current market expectations around inflation.
Oil could unleash a market demon here if some of these trends persist. It’s a possible outcome, not a guarantee.
It would certainly make holding bonds a losing proposition.
Point being: the first hint of such a scenario could see investors pour into the stock market to escape the likely carnage in the bond market.
As above, 2019 won’t be a smooth ride, but it could be a doozy in the stock market – to the upside. Take advantage of this possibility here.