A deal will be done 'within 48 hours'...
A deal will be done 'within 48 hours'... What a Greek bailout means... A bubble in China... Steve's latest thoughts...
Following a new round of talks at an emergency summit this week, it appears the European Union (EU) could be getting ready to "kick the can" and bail out Greece once again...
Greek Prime Minister Alexis Tsipras told EU leaders he believes a new deal will be completed in the next two days, according to reports last night. And Greece's creditors appear to agree. From an article in the Wall Street Journal...
Greece's creditors suggested for the first time that a deal to avert the country's bankruptcy was in sight after an 11th-hour proposal submitted by Athens on Monday made a significant concession on pension cuts...
The new plan was a potential turning point just days before the Greek government needs to secure fresh financing to meet a 1.54 billion euro ($1.75 billion) debt payment due to the International Monetary Fund at the end of the month.
"The basis of a deal has been assembled today," French President François Hollande said after the meeting. European Council President Donald Tusk called the new Greek offer "the first real proposals in many weeks."
The standoff has centered around additional "austerity" measures – specifically, pension cuts and the elimination of tax loopholes, equal to 1% of the country's gross domestic product (GDP) – requested by Greece's creditors.
Until this week, the Greek government refused, arguing the cuts would push the country back into recession. But in Monday's proposal, Greece agreed to enough cuts to bring the country "close" to the 1% savings target. Negotiations are expected to continue with the goal of reaching a final agreement by the end of the week.
This is what our colleague Paul Mampilly predicted last week. As he said in the June 15 Digest...
Greece has gotten a lot of what it wanted. The EU has agreed to a 1% surplus budget target instead of 3%. The Greek leadership is now using pensions again to see what else it can get from the EU. The EU wants a higher retirement age for Greek pensioners and fewer people being allowed to retire on government pensions.
I think the deal will get done... Recent polls show that 85% of Greek citizens want to stay in the eurozone. And why not? Without the EU and Germany, these people would need to go find a new paymaster to keep getting money. Greece is getting free money. It will never repay this bailout, or the next one, or the one after that.
If a deal is reached, it's unlikely to be a long-term solution. Greece is bankrupt. It owes more money than it could ever hope to pay back. These "bailouts" are little more than additional loans intended to buy time and delay the inevitable. But as we noted in the February 5 Digest, the answer to too much debt has never been more debt...
Eventually, the ECB will be forced to take a haircut on Greece's debt. It will either strike an agreement or Greece will default... because Greece cannot afford to repay its debts, much less any additional debts... Still, the ECB wants to "extend and pretend."
Still, the market liked the news...
European stocks and bonds rallied. Greek stocks rose 9% today, while Germany's DAX index had its best day since August 2012, up 3.8%. The benchmark STOXX Europe 600 Index jumped 2.3%.
Should a deal be reached, European stocks are likely headed higher.
We've been keeping a close eye on the rally in Chinese stocks as well...
Investors are expecting China to cut interest rates again and continue its own version of quantitative easing (QE). As we've seen in the U.S. and in Europe, that's good news for stock prices... and it has been in China, too. Over the last year, the Shanghai Stock Exchange has soared from around 2,000 to as high as 5,166 earlier this month.
But the index has had a few rough days since then...
It fell more than 300 points on Friday and finished the week down more than 13% on concerns about insufficient liquidity and increasing valuations.
Regular Digest readers know Steve Sjuggerud has been all over the China story from the beginning...
In October, he called Chinese stocks "the best chance for 100% gains in the next two years." Sure enough, his recommendation of the Deutsche X-trackers Harvest China A-Shares Fund (ASHR) more than doubled in just nine months.
But after the incredible rally of the past year, Steve is now seeing signs of "froth" in Chinese stocks. He updated his subscribers in the brand-new issue of True Wealth, out last Friday...
Dong Jun recently shut down his factory in China and let all 100 workers go. He says he makes more money trading Chinese stocks than he does manufacturing lighting equipment...
Jun still shows up almost daily at his manufacturing plant... But he spends his day trading stocks. So far so good, he thinks... China's benchmark CSI 300 index is up 134% over the past year. And the more tech-heavy Shenzhen stock market is up 173% in the same time frame. He's getting rich.
Why bother with all the hassle of employees and manufacturing when you can make more in the stock market – right?
Steve said the story reminded him of a similar one he heard in Florida at the peak of the housing bubble...
"I'm going to quit this plumbing job," my friend Matt Badiali's plumber told him. "I'm making more money buying and selling houses than I ever could make by fixing toilets."
Can you spot the flaw in the plumber's plan? Jun has the same flaw in his plan... The plumber's plan was built on ever-higher home prices. His success flipping houses reaffirmed his plan. Jun is experiencing the same thing with Chinese stocks right now.
But house prices don't go up forever. And neither do stock prices...
Steve still believes MSCI's eventual and unavoidable inclusion of Chinese stocks in its indexes will cause $400 billion to flow into Chinese stocks and push prices higher in the years to come. But he also admits we're approaching "bubble" territory in Chinese stocks today...
Bubbles always end... but you don't know how much higher they will go, or when they will pop...
The ride in Chinese stocks will likely be extremely volatile – and potentially extremely profitable – over the coming years. But we can't know that for sure. That's why I urge you to follow our trailing stops closely. Please sell when it is time to sell.
Keep in mind, the Chinese market can do crazy things... The CSI 300 index was at 2,000 at the beginning of 2007. At the end of 2007 – just 12 months later – it was around 5,000. Twelve months after that, it stood at 2,000 again.
Sentiment is one big reason Steve thinks Chinese stocks could go much higher before the rally ends. Despite more than doubling since October, most investors outside of China are actually bearish right now. More from Steve...
"U.S. investors have never been so convinced that the rally in China's mainland stocks is ending," Bloomberg wrote this week. And global investors "are the most bearish [on China] since we began the survey..."
Typically when sentiment is this negative, markets move higher, not lower, as everyone who wants to sell has sold.
The ride in Chinese stocks over the next three years or so will be volatile... But even after the big gains we've seen, our upside potential is still significant.
Whether Chinese stocks resume their incredible uptrend or tumble further from here, Steve's True Wealth subscribers will be prepared. If you're invested in China, be sure to do the same... and keep a close eye on your trailing stops.
New 52-week highs (as of 6/22/15): ProShares Ultra Nasdaq Biotech Fund (BIB), CVS Health (CVS), Dollar General (DG), iShares U.S. Insurance Fund (IAK), iShares Core S&P Small-Cap Fund (IJR), Prestige Brands Holdings (PBH), and ProShares Ultra Health Care Fund (RXL).
A subscriber writes in explaining why he "failed" at retirement. Send your e-mails to feedback@stansberryresearch.com.
"I read with interest the letter from Richard Bingler in Monday's Digest and what caught my eye was his comment that he has 'only about 5-6 years to go before retirement.' I used to think retirement was something to look forward to reaching... until I tried it! I spent my whole life working toward the objective of giving up 'work'. Then when I tried it, I hated it. I suddenly realized that my productive activities were the very things that kept me excited about life and engaged with it.
"I wasn't smart enough to learn the lesson the first time I failed at 'retirement', I tried two more times with the same results. I have learned that 'retirement' is the ability to choose to do what you want rather than having to do what you must.
"In the pursuit of excellence in each function performed in my life, I developed a passion for each of those things with which I am engaged. 'Retirement' is about having the time and opportunity to pursue one's passions and I have learned that mine just happen to be related to things that produce income for me along with a great sense of accomplishment and satisfaction." – Paid-up subscriber Ken McGaha
Regards,
Justin Brill
Baltimore, Maryland
June 23, 2015
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