A New Warning From the 'Bond God'

A little bullish news for a change... Signs of life in the American consumer... More bad news for housing... A new warning from the 'Bond God'... Sjug 'doubles down' on interest rates...

Regular Digest readers know there are plenty of reasons for investors to be cautious today...

The broad U.S. stock market is arguably more expensive than it has ever been before... Hundreds of publicly traded companies have racked up massive amounts of debt they cannot possibly repay... The Federal Reserve is now raising interest rates and unwinding its unprecedented stimulus program for the first time since the financial crisis... and one of the most reliable bear market signals is moving dangerously close to flashing.

And that's to say nothing of the growing threat of a "trade war," and continued geopolitical concerns in Europe, the Middle East, and Asia.

However, we'll remind you that there are also reasons this long bull market could continue for some time...

Regular readers also know that the central idea behind our colleague Steve Sjuggerud's "Melt Up" thesis is that big bull markets typically don't end without broad public participation. As he explained it last November, when he first told his True Wealth subscribers that the Melt Up could continue even longer than he had originally predicted...

You know what the end of a great bull market looks and feels like...

The real estate boom that peaked a decade ago – that's what the end of a great bull market feels like. People thought house prices could never go down, and folks quit their day jobs to flip houses.

The dot-com boom that ended in 2000 – that's what the end of a great bull market feels like. Cocktail-party chatter shifted from sports to stocks, and my friends quit their "real jobs" and took stock options to join dot-com companies.

Obviously, we haven't seen this kind of widespread euphoria to date...

But there have been some recent signs that the public's "animal spirits" are starting to awaken.

For example, last Wednesday, the U.S. Commerce Department reported retail sales – a measure of consumer spending at stores, websites, and restaurants – rose at a better-than-6% annualized rate for the third straight month in July.

This is the strongest pickup in consumer spending in nearly seven years. But what was particularly noteworthy was restaurant sales. In short, Americans are suddenly going out to eat again. As Bloomberg reported...

Spending at U.S. restaurants surged over the past three months by the most on record...

Sales at food-service and drinking establishments rose 1.3% in July to $61.6 billion, the Commerce Department reported on Wednesday. That brought the three-month annualized gain to 25.3%, the fastest pace in figures going back to 1992.

This is a significant change from the past few years, and it suggests Americans are starting to open their wallets like we haven't seen in years.

A number of other recent reports are sending a similar message...

On Thursday, retail giant Walmart (WMT) reported sales rose 4.5% in the second quarter, its strongest quarterly sales growth in more than a decade. That same day, high-end department-store Nordstrom (JWN) reported sales rose 4% in the quarter, nearly four times better than analyst estimates. And just this morning, fellow retail giant Target (TGT) reported its strongest sales in 13 years.

Perhaps the most notable news comes from brand-name furniture maker La-Z-Boy (LZB). Shares surged more than 12% today after the company reported a blowout quarter last night. Folks who are willing to spend a grand or two on a new power-recliner can't be feeling too bad.

Of course, consumers have already racked up record amounts of debt over the past several years. This trend can't go on forever (and it won't end well)... But this data suggest it could have still have further to run.

But not all the economic news is so positive...

Earlier this month, online real estate brokerage Redfin (RDFN) issued a warning about the housing market. This morning, the National Association of Realtors shared some more bad news. As the Wall Street Journal reported...

Sales of previously owned homes in the U.S. declined for a fourth straight month in July, as rising prices and limited inventory of affordable housing continued to sideline buyers despite solid economic growth.

Existing-home sales fell 0.7% in July from June to a seasonally adjusted annual rate of 5.34 million units, the National Association of Realtors said Wednesday... Compared with a year earlier, sales in July were down 1.5%.

Lawrence Yun, the trade group's chief economist, said July marked the first time since 2013 that existing-home sales declined for four consecutive months, highlighting the growing difficulties that prospective homeowners are facing even as the economy enters its 10th year of expansion.

In short, it appears the huge run-up in home prices over the past several years is beginning to take its toll...

Folks are increasingly unable (or unwilling) to buy at these prices. A pullback in prices is likely, particularly on the low end, where sales have slowed the most.

However, barring another financial crisis, we don't expect a repeat of last decade's housing crash. As we've discussed, the supply of existing homes for sale remains near its lowest levels in decades. This should provide a solid floor for prices for some time.

Finally, we'll note that the 'Bond God' is out with a new warning on the U.S. Treasury market...

Longtime readers will recall that Jeffrey Gundlach – founder and CEO of investment firm DoubleLine – has made some prescient calls of late, including calling the exact bottom in interest rates in July 2016.

Like us, Gundlach believes interest rates are headed significantly higher over the next several years. But late last week, he warned that rates could move sharply lower in the near term.

Why? Because speculators – as tracked by the weekly Commitments of Traders report we often discuss in the Digest – have become unbelievably bearish on U.S. Treasury bonds. As he explained on social media site Twitter...

Because bond prices and yields (interest rates) trade inversely, a "short squeeze" that pushes Treasury bond prices higher would cause rates to plunge lower.

If this sounds familiar, it should...

Steve has also been all over this extreme for the past several months.

As we noted in the August 7 Digest, this trade hasn't played out as expected to date. But Steve's bullish thesis not only remains intact... it's stronger than ever. As he explained in the latest issue of True Wealth, published last Friday...

If you want to make BIG money, you've got to be bold. You've got to be willing to step up and bet against the crowd at extremes (like I did personally... loading up on stocks in late 2008 and Florida real estate in 2011, both after huge busts).

You've got to find the thing that everyone sees as a slam dunk – the thing they're all certain about – and bet against them. Ideas like that certainly don't come along every day. And believe me, you won't make friends with this strategy. Most folks will think you've lost it...

Today, there's a massively contrarian bet that I urge you to put to work in your portfolio (if you haven't already)...

I believe U.S. interest rates can fall from around 3% today to below 2% within the next six months. And positioning ourselves now could mean massive profits as the conventional-wisdom bet unwinds.

If Steve is correct, True Wealth readers stand to earn profits of 50% or more before the end of the year. If you aren't among them, it's not too late. You can learn more about a completely risk-free subscription to True Wealth – and how you can get instant access to the August issue – right here.

New 52-week highs (as of 8/21/18): Automatic Data Processing (ADP), American Express (AXP), Blackstone Mortgage Trust (BXMT), WisdomTree U.S. SmallCap Dividend Fund (DES), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Ingersoll Rand (IR), iShares U.S. Aerospace and Defense Fund (ITA), iShares Transportation Average Fund (IYT), Direxion Daily Retail Bull 3X Fund (RETL), ProShares Ultra Health Care Fund (RXL), SPDR S&P Dividend Fund (SDY), T-Mobile (TMUS), and Viper Energy Partners (VNOM).

In today's mailbag, a subscriber believes we're being unfair. What do you think? Let us know at feedback@stansberryresearch.com.

"I am a long time subscriber to a number of your publications including the Stansberry's Investment Advisory. In yesterday's Stansberry Digest, you talked about a World Dominator that was now at an extreme valuation. Since World Dominators are a large portion of the investments at the Investment Advisory, I think it would be fair for that information to be sent to the subscribers of the Investment Advisory as well. Thank you." – Paid-up subscriber Joel K.

Brill comment: Sorry, Joel... While the high-quality, capital-efficient companies "Global Elite" companies Porter and his team recommend tend to share many of the same characteristics as Dan's Extreme Value World Dominators, they are not identical. These two services evaluate businesses and make recommendations using an entirely different analytical approach.

More important, it certainly wouldn't be fair to Dan and his paid Extreme Value subscribers to simply give you his proprietary research at no cost.

But if you'd like to learn more about Dan's latest recommendation, we will remind you that you still have time to take advantage of his special offer. In short, until midnight Eastern time tonight, you can receive two full years of Extreme Value for less than the usual cost of one. Click here for the details.

Regards,

Justin Brill
Baltimore, Maryland
August 22, 2018