Well this is odd. The S&P hit all time highs again, but rates have plummeted in response to (i) the Fed lowering rates and (ii) fear and uncertainty over trade wars, real wars with Iran, and the broader economic cycle. With the uncertainty, and with interest rates moving lower, the dollar has weakened. With low rates and a weaker dollar, gold has moved higher.

In sum, all asset classes have moved higher. But that is very strange. When yields on treasuries move lower, it typically means the market is pricing in a recession. Gold also moves up considerably in response as investors want to hold an asset that will preserve value. We have to ask ourselves: Who is going to be left holding the bag here? Only one group can be right.

So let’s review the case buying treasuries / gold:

• The economic cycle has been chugging along for 10 years now. A cycle will eventually happen (most last 5-7 years, but they can go on for 20+years). When we do hit a real recession, there will be a flight to quality which should boost treasuries and gold.
• Treasuries and gold will also benefit because of central bank tools: They will likely have to slam rates to zero in order to stimulate the economy.
• Slamming rates to nothing will likely devalue the dollar and cause gold to move higher. Other countries that have held dollars as a reserve will also shift some of that to gold if they feel the US is manipulating the currency.
• If rates are zero, then it follows that the cost of holding gold (negative carry) won’t mean that much since you are earning zero on bonds anyway.

However, all of the positives for treasuries and gold is negated if we do not enter a recession and instead the economy starts booming. It’s not hard to imagine if there is a trade deal with China, rates stay relatively low in the short-term and housing comes roaring back. In turn, the consumer feels good, the stock market is high, and the “wealth effect” permeates the economy.

That is essentially the bull case for stocks as well. While 18x 2019 EPS is somewhat elevated, 16.4x 2020 EPS is not too stretched. However, to get to that level, you need to believe earnings will grow 9.5% next year from 2019’s levels. Not terrible, but possibly a little high. It is much better than the previous expectation fo 13-15% growth just a few months ago.

So which case looks more likely to you? Because of the uncertainty, both options have advanced. It will be interesting to see how this plays out!

Equities continued their march higher this week and even recouped their all-time highs. It seems as though crossing 3,000 at this point for the S&P is a matter of when, not if, and sentiment has largely improved.

Earnings Season Gets Underway

Earnings are starting to trickle in and so far, they are better than what analysts expected. Of the 231 S&P500 companies to report, Q1 earnings are up around 1%. That’s far better than the 4% drop that consensus was expecting.

But even so, that is largely priced into 2020 numbers. I noted in my Sell in May and Go Away post, further moves to the upside would likely have to result from multiple expansion vs. earnings growth. This is because the 2020 EPS assumption is already baking in $184-$185, which implied 13% growth Y/Y compared to 2019.

Granted, earnings have been good. In particular, Facebook trounced the skeptics and ended the day 5.85% higher on Thursday. I still remain positive on the stock at these levels from when I last wrote on it, despite the sharp rebound in the price YTD.

Amazon also smashed earnings estimates, though its strong performance already YTD likely capped its upside as investors must have been expecting a strong result. The interesting thing to note about Amazon though is that its formerly known “sky high” P/E ratio is coming down very quickly. As of 12/31/2017, Amazon traded at 192x NTM EPS. That’s now down to 57x despite its stock moving to $1,900 from $1,196. It helps when you have AWS that is fast growing and earns Op Income margins of 28%, whereas the rest of the business is low margin (and international retail remains negative, but is improving). Longer term, I have to think AWS will become more commoditized, but I admit in the early innings I have been wrong.

Unicorn Sighting (Lots of Them)

It appears 2019 will be the year of the Unicorn. So far we have seen Lyft, Zoom, and Pinterest IPO and Uber, Airbnb, WeWork, Slack, Peloton, and Beyond Meat are rumored to be in the pipeline.

This sort of rush makes me think that VC investors saw their opportunities for liquidity collapsing during Q4’18 and now they won’t take another chance and suffer a lower valuation. “The gates are closing!”

I plan on taking a broader look in depth at these companies as they approach the market. I mean, someone has to, right? The snapshot below is the list of underwriters on Lyft’s IPO and what their rating is on the stock. If everyone thinks its a buy, how can you expect to outperform?