A Warning From a Legendary Billionaire
Europe avoids the 'nightmare scenario'... Global markets boom... The 'stealth bull market' continues... A warning from a legendary billionaire... Central banks close in on a frightening new record...
Europe avoids the "nightmare scenario"...
As we noted last week, France held the first round of its presidential elections on Sunday. And the mainstream financial media was worried that not one but two anti-European Union (EU) candidates could advance to the final round of voting on May 7.
But that did not happen...
As recent polls suggested, pro-EU "centrist" Emmanuel Macron advanced with 24% of the vote, followed by far-right, anti-EU candidate Marine Le Pen with 21%. Macron and Le Pen will now face off next month.
Markets in Europe cheered the news...
France's benchmark CAC 40 Index soared more than 4% to nine-year highs... Germany's benchmark DAX Index rallied more than 3% to a new all-time high... And the broad STOXX Europe 600 Index rallied more than 2% to a new two-year high.
Meanwhile, the euro jumped more than 1% versus the dollar to its highest level since November.
The rally continued here in the U.S. All three major market indexes rallied more than 1%, and the Nasdaq Composite hit a new all-time high.
Why? Because Sunday's results were considered something of a best-case scenario...
Macron is a supporter of the EU, but he is also the most pro-business candidate France has had in years. In other words, Macron's victory was seen not just as a vote in favor of the EU, but also a vote against France's existing socialist government.
Of course, Macron must still win in a head-to-head election with Le Pen next month...
According to the latest polls, he's currently expected to garner 62% of the vote compared to just 38% for Le Pen. However, given the unexpected outcomes of last year's Brexit vote and the U.S. presidential election, we wouldn't be surprised to see volatility rise again as May 7 approaches.
Sunday's outcome isn't the only positive news for European investors...
The latest data suggest the broad European economy continues to strengthen, as well. As Bloomberg reported on Friday...
France's composite Purchasing Managers' Index [PMI] unexpectedly advanced to a six-year high of 57.4 in April, putting it above Germany's for the first time since 2012, according IHS Markit flash readings on Friday. The manufacturing and services index for the region as a whole also increased, exceeding economists' forecasts and indicating job creation is rising to the highest level in almost a decade.
"An interesting feature of the current upswing is that the positive momentum is broadly spread across most euro-zone countries and not only driven by a few strong ones," said Carsten Brzeski, an economist at ING-DiBa AG in Frankfurt. "Even though on the eve of the first round of the French elections a good portion of caution is recommendable, evidence is piling up that the euro-zone economy could become the positive growth surprise of the year.
IHS Markit's composite measure for the euro area rose to 56.7 in April from 56.4 in March. Economists surveyed by Bloomberg predicted the reading would remain unchanged. There was more evidence of growing wage pressures, according to the report.
Meanwhile, as we noted earlier this month, the same measure here in the U.S. – the Markit Flash U.S. Composite PMI – declined to 52.7 in April 2017 from 53 in March.
Again, this measure remains above the critical 50 level – meaning the U.S. economy is still technically expanding – it's the weakest measure since September 2016.
As our colleagues at the Stansberry Newswire noted on Friday, this is an important trend to watch. If it continues, investors could begin to move away from expensive U.S. stocks in favor of beaten-down European shares for the first time in years...
Signs are picking up that the robust growth investors have been hoping for in the U.S. is still not materializing. We like that there's still growth, but it doesn't feel like the kind that warrants these market valuations.
Meanwhile, Europe put up better-than-expected numbers this morning with growth accelerating to its fastest pace in six years. Once the French election uncertainty is out of the way, there could be a very real buying opportunity in Europe
Of course, regular Digest readers know Steve Sjuggerud has been following the "stealth bull market" in Europe for months...
Back in January, we noted Steve had recently recommended European stocks for the first time in years.
Not only did they meet all three of his favorite investment criteria – cheap, hated, and om an uptrend – but they had dramatically underperformed U.S. stocks for nearly 10 years. He predicted they could soar triple digits as they play "catch-up" over the next few years.
It's still early, but Steve's bold call is already benefiting his True Wealth Systems subscribers. Folks who took his advice are up more than 20% and 7% on his two favorite ways to profit from this trend.
Speaking of high-priced U.S. stocks, legendary trader Paul Tudor Jones is now sounding the alarm...
As Bloomberg reported last week, he believes stocks are trading at valuations that are simply unsustainable...
Billionaire investor Paul Tudor Jones has a message for Janet Yellen and investors: Be very afraid.
The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75 percent over two-plus years. That measure – the value of the stock market relative to the size of the economy – should be "terrifying" to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference, according to people who heard him.
But, we should also point out that Jones – who famously tripled his money during the 1987 stock market crash – said it is not yet time to go heavily short.
He believes the market is likely to become even more expensive before the inevitable correction begins... particularly if Le Pen loses next month's election.
As regular readers know, central banks are largely to blame for today's "nosebleed" valuations...
Not only have their "free money" policies encouraged rampant financial speculation, they're now directly buying up massive amounts of stock as well. As Porter explained in the Friday Digest...
The U.S. stock market is approaching an all-time high level of valuation. Only the '29 bubble and the 2000 tech bubble saw the S&P 500 stock index trade at a higher multiple of earnings. (Stocks are now trading at 25 times last year's GAAP earnings.)
Stocks are now essentially more expensive than they've ever been before. And who is buying at these levels? Central banks.
Central banks began buying stocks because they virtually ran out of bonds to buy. Said another way, once they bought so many bonds that interest rates fell to zero, they simply couldn't buy anymore. To continue their free-money policies, they had to continue to expand their balance sheets. They've done so by buying massive quantities of stocks, all around the world.
Just how extreme has this become?
According to a recent note from Michael Hartnett, chief investment strategist for Bank of America Merrill Lynch, central banks have bought an astounding $1 trillion of stocks and bonds so far this year.
This has pushed central bank balance sheets to an all-time-high $14.6 trillion. More concerning, at this pace, they will buy up more than $3.6 trillion of assets for the full year.
This would be the most on record... at among the most expensive prices on record.
As Porter noted on Friday... what could possibly go wrong?
New 52-week highs (as of 4/21/17): Alibaba (BABA), Chipotle Mexican Grill (CMG), Cedar Fair (FUN), JD.com (JD), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), Microsoft (MSFT), Shopify (SHOP), and Stanley Black & Decker (SWK).
In today's mailbag, several subscribers respond to Porter's Friday Digest request for feedback. Send your notes to feedback@stansberryresearch.com.
"Just a note of thanks for Friday's Digest. It was one of your most interesting ever." – Paid-up subscriber H.C.
"I am not a sophisticated investor. Today's Digest made a lot of sense to me, thanks for the great info." – Paid-up subscriber Don H.
"Excellent Digest this week. Scary." – Paid-up subscriber Deborah W.
"Dear Porter, I've always looked forward to Friday evenings my entire adult life (brought about by my association with my fellow fighter pilots in an earlier life), but with the addition of the Digest it continues. Last Friday's Digest will go down as one of your finest (IMHO)... Cheers!" – Paid-up subscriber Charlie W.
"To Porter and all your analysts; I have done quite well with the bond portfolio you recommended in the publication and you are correct that I would rather just invest in the bonds recommended and not so much in the stocks due to the consistent returns and above average capital gains. I have been slowly reducing my exposure to stocks so that I will be ready when the worm turns." – Paid-up Stansberry Alliance member Steve J.
"Porter, the Friday night Digest is the highlight of my week's Stansberry reading. At the beginning of 2016, I went to about 18% cash. Over that year, I added about 12% of Gold and related issues. Then some credit opps. Some bonds matured or were called at 45% gain. Today I sold the balance of the Natural Resources bonds and took some gains in other positions... I do have some shorts and Leaps. Cash position is growing again. Keep up the good work." – Paid-up Stansberry Alliance member Frank P.
"Dear Porter, your [4/21] tutorial about free money and its impact on corporate credit was superb. I neither understood nor invested in distressed corporate debt until I subscribed to Stansberry's Credit Opportunities at your urging (insistence) that I become educated about this space. Your maxim for a willingness to learn meeting up with a teacher played out. SCO has been very good for our portfolio. I'm looking forward to the day when my allocation to the distressed debt space can indeed approach 50%." – Paid-up subscriber Michael G.
"Hi all! I have been a Stansberry subscriber for several years and a Flex member for one. I love it!! have been able to buy just a few bonds so far, but one stands out. As per the recommendation, I bought the NRP bond in April 2016 for $679.65 and the recommended ratio of NRP shares for $9.34. I sold them, again as per the Stansberry recommendation, in February 2017, the bond for $1024.90 and the shares for $43.50, for returns of 51% on the bonds and 366% on the stock, in 11 months! Oh, and I forgot to include the interest payments I received along the way! So yes, I'm very excited about buying more!" – Paid-up subscriber Debbie W.
"Hi Porter/Stansberry Team, I wanted to say thanks for assisting me to learn about the bond market. Whilst I confess to only having purchased one bond type (did this really more as a learning process), the results were remarkable given the much better risk profile over just stocks. I purchased some NRP bonds together with the synthetic convertible component by buying some stock also per your recommendation. I got out of the trade when the bond price got so high that the duration to maturity seemed too long based on the reduced possible capital gains. Anyway, 249 days in the trade resulting in a blended (bond price increase, bond interest & stock price increase) 57% profit or an annualized return of 83% and you now have an avid student of your work on bonds and the bond market in general.
"I confess that I have moved my focus more towards the Dirty Thirty and I will only go back to your bond recommendations when I see them fall back to similar discounted levels as before. The absolute beauty of you having the two strategies in play, is providing capital at around the perfect time to pick up bargain bonds when the credit crunch comes. Anyway, really great to have another way at looking at the financial markets and I expect I will be trading bonds for many years to come. I wanted to express my gratitude for you facilitating my learning in this area. May thanks to you Porter and your team." – Paid-up Stansberry Alliance member Chris B.
"I'm writing in response to the feedback request in Friday's Digest. I joined SCO when it launched in 2015. Your thorough explanations in the Digest, as well as the webinar, convinced me this was the best place to earn large returns in a relatively short period of time, without the risk of the stock market. As you say, the opportunities are few and far between right now, but you are finding them. My average cost of the NRP bond was $550, and the Iconix bond $830. Both were sold above par, and the Iconix bond was held less than a year. Not to mention the interest I collected along the way.
"It is definitely more work to buy bonds. When you recommend, the bonds usually jump in price. I created a watch list in FINRA, and I check the prices daily. It took several months to purchase the Sears bond, but it was well under the buy up to price. I usually have to call my broker, and they sometimes try to scare me out of buying. It was hard at first, but after a few purchases I've learned not to listen. Your careful research gives me the confidence that the bond will pay me, and your position sizing advice gives me the confidence that if it doesn't pay me, my portfolio won't take a serious hit.
"I am so convinced there is money to be made here that I've converted my small portfolio of $200k to 50% cash, and I buy very few stocks. I am waiting for the fat pitch. I started waiting when the service launched, and I am still waiting, but I am certain I will be rewarded. I find bonds so much less stressful. Thanks." – Paid-up subscriber J.P.
"Hello, you ask 'What's the point of capitalism again?' The right question is, what is capitalism? We have never truly had capitalism in America where the government doesn't interfere with business. What's the point of crony capitalism? I love your articles. Thank you." – Paid-up subscriber Michael
"Porter, I have to tell you that when you go on these tirades I love reading them. Well, worth the wait for these kinds of Digests. You and I see economics so eye to eye that it amazes me. It started with End of America back in 2010. I think it was the result of a TV ad. But I read through it and I am going this guy sees things exactly the same way I do.
"I started trading bonds as the result of the Bear Market series. One of the best things that I have done in the investment world. Just like any smart bond investor I never pay more than 80-90 cents on the dollar and that seems to work well for me. I have gotten some nice ones where the coupon rate is 10-12%. But just like anyone else I have things spread out so that any loss that I suffer is minimal.
"Thanks to Doc Eifrig I pretty much only trade options these days. But stocks and bonds are kind of bread and butter so I buy here and there. However, the bottom line when it comes to Stansberry Research is that you all have taught me how to buy and what to buy and when. That makes all the difference in the world.
"As for you Porter, you and I see the macro the same. Hugely important in the investment world. If you don't see the macro you aren't ready for shifts in the markets that come down the path. And as they say 'shift happens!' One of the things that you have always done is prepare me for the worst. It doesn't matter when or even if, you provide me with the proper perspective and help me stay grounded so that I don't get stupid. Thanks to all of you for all that you have taught me and making my family financially safe no matter what happens." – Paid-up subscriber Jeff S.
Regards,
Justin Brill
Baltimore, Maryland
April 24, 2017