America Is the Last Man Standing
Another day, another new high... 'America is the last man standing'... How it all ends... Why stocks could be headed even higher now... P.J. O'Rourke: The revolt against the elites...
The benchmark S&P 500 Index rallied to a new all-time high yesterday. Today, it was the Dow's turn...
The Dow Jones Industrial Average – which includes 30 of the largest and best-known blue-chip companies in the U.S. – ended the day at 18,348... a new record closing high.
But why are stocks breaking out to new highs when corporate revenues and earnings have been weak for several quarters?
As we discussed yesterday, the U.S. may be benefiting from being the "least bad" of the world's developed markets...
After all, the weak U.S. economy is practically booming compared with those of the eurozone and Japan. And when the majority of European and Japanese bonds charge investors for the privilege of owning them, even the historically low yields in U.S. Treasurys and corporate bonds look great by comparison.
For example, entertainment giant Disney (DIS) just locked in the lowest long-term borrowing cost of any U.S. company in history...
Disney issued a 10-year bond with a 1.85% coupon... and a 30-year bond with a 3% interest rate, according to the Wall Street Journal.
Today, so-called "risk free" U.S. 10-year and 30-year Treasury securities yield 1.5% and 2.2%, respectively. ("Risk free" because unlike a company, the government can always print money to pay off the bonds if necessary, rather than default.) These are incredibly low borrowing rates, even for a strong company like Disney.
Compare this with what's happening in Spain...
According to a report in Spanish newspaper Expansión over the weekend, the debt of seven different Spanish companies – worth nearly 16 billion euros ($17.7 billion in U.S. dollars) – is now trading with negative interest rates.
When the corporate debt of one of the weakest economies in the eurozone is now charging, rather than paying interest – while even short-term U.S. Treasurys are still paying a positive yield – is it any surprise money is fleeing to the U.S.?
"People are going anywhere they can to try and get a return on their capital," Grant told CNBC's "Squawk Box" on Tuesday. "That money's going to come to the United States, where it's certainly much safer where we're not in as bad a financial condition."
Money moves in and out of Asia, and Europe, depending on the best opportunity, he said. The U.S. is now getting a "spillover effect" as other major central banks kick up quantitative easing and go to negative interest rates.
"Clearly the best opportunity now for yield is in the U.S.," Grant said. "You're seeing huge amounts of money coming into the United States and I think that's what's driving these markets."
Grant doesn't think these moves are due to fundamental or technical reasons. Instead, he says the only "rational reason" is due to central bank manipulation... And "America is the last man standing with positive yields."
He believes this trend won't end until yields in the U.S. move closer to those in Europe and Japan, and there's no telling how long that could take.
Regular Digest readers may remember the scenario that Porter's "Metropolitan Man" warned about...
As the flight from negative interest rates accelerates, more and more money will rush into U.S. Treasurys and other assets, pushing down yields. (Remember, bond prices trade inversely to yields.)
Eventually – whether this trend is allowed to play out, or the Federal Reserve proactively slashes short-term rates to weaken the dollar and stem the tide – negative interest rates are likely coming to the U.S.
And when all of the world's major reserve currencies begin "paying" negative interest rates, where will all this money flee to next? We believe investors will rush to gold like never before in history.
But until this happens, the U.S. will likely remain the best of a bad bunch... And much more money could flow into U.S. markets.
U.S. Treasury and corporate bond prices could move even higher as yields fall, but U.S. stocks – particularly high-quality, dividend-growing stocks – could benefit the most...
Investment bank Jefferies reports nearly one-third of S&P 500 stocks currently pay dividends that are bigger than the yields on their own bonds.
Meanwhile, we note the broad S&P 500 Index – which includes many companies that pay no dividend at all – is paying an average dividend of 2.15% today.
That's nearly identical to the yield on 30-year U.S. Treasurys... without the interest-rate risk of bonds.
And several well-known dividend payers like Altria (MO), Procter & Gamble (PG), and Pfizer (PFE) are still paying yields of 3% or more.
These companies aren't as cheap as they were several years ago, but they aren't absurdly expensive today either. We expect these "boring" dividend stocks could see a surge of new buying interest as the global "reach for yield" continues.
Many Digest readers likely own some (or many) of these top dividend-payers already. If so, continue to hold with your trailing stops... Bigger gains could remain ahead.
On the other hand, if you're interested in the best dividend stocks to buy today, be sure to check out Dr. David "Doc" Eifrig's Retirement Millionaire service. Doc's portfolio is stocked with several high-quality dividend-payers in buy range today. Click here to try a risk-free subscription.
The spread of negative rates isn't the only reason to believe stocks could be headed higher...
A recent note from Bank of America Merrill Lynch analysts also suggests the recent breakout in the S&P 500 could be an incredibly bullish signal.
In particular, their research shows that when the S&P 500 closes at a new 52-week high after a long pause (at least 300 calendar days with no new highs) like it did yesterday, further gains are likely.
According to the note, this has happened only 23 other times since 1929... And the S&P 500 has moved higher over the following year an astonishing 91% of the time.
The signal results in average 52-week gains of nearly 16%, double the market's 8% average over the same period.
It's also worth noting that the signal has worked during both bull and bear markets. During bull trends, the signal has led to average one-year returns of 24.5%, and higher prices 100% of the time. In bear trends, the signal still leads to 11% average one-year returns, and higher prices nearly 87% of the time.
Of course, there are never any guarantees in the market. We can't be certain stocks will move higher from here. But history – and insane central bank policies – suggests it's likely to happen.
If you've been waiting for a signal to start dipping a toe back into stocks, this is it. But please be sure to manage risk with proper asset allocation, appropriate position sizing, and trailing stop losses.
Our colleague Ben Morris agrees. His analysis suggests that similar double-digit gains are likely in the broad U.S. market over the next year. He shared his recommendations on stocks with DailyWealth Trader subscribers yesterday. From the issue...
If you've kept all your cash out of the stock market, I suggest you start putting some money back into stocks today. It may be hard to believe stocks will continue to go higher from here, but it's always hard to believe stocks will rise...
Lots of folks are worried about the world, the economy, and the stock market. And they're not investing in stocks. That's a mistake. Even if you don't believe stocks are going to continue higher, you should still have some money allocated to them in case you're wrong.
After all, you won't lose all of your money if stocks drop. If you use stop losses, you can decide in advance how much you're willing to lose. If you're only willing to lose 10% of the money you invest, use 10% stop losses on your trades and investments. If you're still nervous, you can start adding to your stock positions slowly, and only add as you start seeing gains. Whatever you have to do to overcome your investment fears, now's the time to do it.
New 52-week highs (as of 7/11/16): Automatic Data Processing (ADP), Aflac (AFL), Becton Dickinson (BDX), Bristol-Myers Squibb (BMY), Cross Timbers Royalty Trust (CRT), Cisco (CSCO), Western Asset Emerging Markets Debt Fund (ESD), Fidelity Select Medical Equipment and Systems Fund (FSMEX), Cedar Fair (FUN), VanEck Vectors Junior Gold Miners Fund (GDXJ), iShares Core S&P Small-Cap Fund (IJR), Johnson & Johnson (JNJ), Kaminak Gold (KAM.V), Medtronic (MDT), 3M (MMM), Altria (MO), NovaGold Resources (NG), Nuveen Premium Income Municipal Fund 2 (NPM), PNC Financial Services – Series P (PNC-PP), ETFS Physical Platinum Shares Fund (PPLT), Pretium Resources (PVG), Gibraltar Industries (ROCK), Silver Standard Resources (SSRI), Sysco (SYY), and Vanguard REIT Fund (VNQ).
In today's mailbag, it seems at least one subscriber has learned a few lessons during his time with Stansberry Research. Is he alone? Let us know at feedback@stansberryresearch.com.
"Porter – There's only learning, not teaching? Well, the best lessons I've learned from my relatively brief time with Stansberry Research are these:
"1. Don't EVER be afraid to take a loss. In fact, I have learned to appreciate taking a quick loss rather than HOPING a security will come back to bail me out. Taking emotion out of the equation is an incredible lesson learned. No one likes a loss but limiting the damage quickly allows one to let the winners run...
"2. Don't chase a security (whether stock or bond) just because it appears to be running away. There's ALWAYS another opportunity and one can catch the next bus. I missed Ritchie Brothers and watched it run up dramatically. But I've bagged so many 'stink' bids on other stocks that more than make up for it.
"3. It's almost always better to be an option seller than an option buyer. It took me a long time to figure this one out. Given my portfolio size and the conflicting recommendations of the various Stansberry analysts, it seemed more advantageous to follow some prescriptions by purchasing options rather than the underlying stocks or indices. However, as has often been noted, with options, one has to be right not only on the direction but with the timing. I've had many losses because the timing just didn't pan out when following the recommendations. With Ben Morris' and Doc Eifrig's recommendations, I've finally learned and am making tremendous profits selling options on quality securities. When I've been put a stock, selling covered calls has proven to be a winning strategy as has the technique of rolling options forward.
"I very much appreciate being part of the Stansberry Alliance." – Paid-up subscriber Stephen G.
Regards,
Justin Brill
Baltimore, Maryland
July 12, 2016
The Revolt Against the Elites, Part I
We're in the midst of a global rebellion against the high and mighty – political elites, intellectual elites, and the elites of international finance and banking. We're sick of the supposed experts, the so-called authorities, and the self-appointed cognoscenti. We're tired of people who think they know what's best for us better than we do.
You can see the revolt against the elites in our presidential election. Donald Trump may be a rich guy, a member of the 1%, but there's nothing "elite" about the way he sounds. He sounds like the rest of us. (Unfortunately, he sometimes sounds like the rest of us after we've had a few drinks.)
Meanwhile the political, intellectual, and financial elites of the Democratic Party couldn't find a decent nominee. Their "applecart of experts" was almost upset by Bernie Sanders, a low-level New Lefty who got hit on the head with the Whole Earth Catalog in 1968 and never recovered.
The elites ended up running Hillary Clinton, a certified elitist whom nobody – including the people who will vote for her – can stand. Hillary might be the most dislikable major party candidate to ever run for president.
Trump, in my opinion, is something of a jerk. But you can imagine playing a round of golf with him. (I have it on good authority that he doesn't fudge his score any worse than most of the rest of us.)
Imagine playing a round of golf with Hillary. She has 20 Harvard graduates as caddies who have read a lot of books about golf but have never been on the links. They spend the whole match telling you, not her, what club to use. Secret Service is there to make sure you take the suggestion and hit from the fairway with a one-iron.
After you take your chip shot, the cup and the pin somehow get moved closer to Hillary's lie. (Lie – what an appropriate term to use in any game that Hillary's involved in!) And the scorecard mysteriously winds up on Hillary's personal e-mail server.
The revolt against the elites isn't confined to the United States. Elite opinion in the U.K., among most Labor and Tory party leaders, was strongly in favor of Britain remaining in the European Union (EU). The voters said to hell with that.
The Netherlands, Switzerland, Denmark, and Sweden have seen the rise of nationalist, protectionist, anti-immigration, EU-skeptic political parties that horrify the elites.
In France, Marine Le Pen's National Front is now the largest political party.
Parties similar to the National Front have been victorious in Poland and Hungary.
Elites call these parties "right-wing fringe," but some places seem to have more fringe than cloth. The elite political fabric is coming unraveled. Also, as with Bernie in the U.S., the revolt against the elites isn't coming from just one political direction.
In Austria's May presidential election, the "right-wing fringe" candidate, Norbert Hofer, was narrowly defeated by another outsider, the "Green fringe" candidate Alexander Van der Bellen. (The election was so close that the Constitutional Court of Austria has ordered a do-over.)
Brazil is in the process of bringing indictments for corruption against practically every one of its politicians – left, right, and middle-of-the-road.
The Philippines has elected a Trump-like president. Rodrigo Duterte is prone to saying things aloud that most us keep to ourselves. But it's unclear where on the left-right political scale Duterte (or Trump, for that matter) stands.
Duterte was elected, over the protests of Philippine elites, for being tough on crime. The Philippines has a lot of it. When Duterte was mayor of rough-and-tumble Davao City, he was known as "Duterte Harry."
On the other hand, Duterte favors gay rights and equality for women. He's critical of America, and he's conciliatory toward China about conflicting territorial claims in the South China Sea.
Canada's prime minister is the rich kid, former substitute teacher, part-time actor Justin Trudeau. He may have had an elite dad, Pierre Trudeau, but Justin has none of the other standard elite qualifications for high political office.
Even the usually staid politics of Australia have been in a roil. Australia has had five prime ministers in the past six years. The Aussies sure know how to throw the bastards out!
Although they keep letting them back in again – a revolving door of Labor Party center-left elites and Liberal Coalition center-right elites. But the revolving door may get stuck. The latest Australian elections almost resulted in a hung parliament.
A hung parliament? What a tempting idea! Although I suppose hanging legislators is immoral. And it's probably also illegal, except maybe in parts of Queensland if parliamentarians are caught chasing sheep.
Why are ordinary people around the world so mad at the elites?
Because global elites have been wrong about practically everything.
But let's define our terms. Elites aren't necessarily rich or famous, let alone accomplished or skilled. Elites are, first and foremost, people who boss us around.
Long before Hillary was rich and famous, before she was even a Democrat, back when she was a Goldwater Girl in 1964, I'm sure she was just as bossy. I can hear her as chair of the prom decorations committee saying, in a strident and grating voice that brooked no objection, "The theme of the Senior Prom is Au H2O!"
Secondly, the bossy elites have to have a means of bossing us. Politics is the best method. It can be electoral politics. Or it can be organizational politics, where elites snake their way up the ladder of political institutions such as government departments, regulatory agencies, and central banks. Mainstream media outlets are political institutions, too.
Politics has the advantage of requiring little or no merit – just egotism, persistence, and cunning. Being a bossy elite on the basis of merit – the way bosses of real companies, drill instructors, and our moms are – demands accomplishments and skills.
Politics is easier. Politics is also a more powerful way to be bossy. Politics has the full weight of government police powers behind its bossiness. If Hillary doesn't get her way on the prom decorations committee, she can make our lives miserable in high school. If Hillary doesn't get her way in the Oval Office, she can make our lives miserable in jail.
We have plenty of reasons to hate the global elite just for being who they are, never mind what they've done.
But what they've done has been awful.
Elites, with their love of politics, have expanded political systems until the web of government became a huge dragnet pulled through the sea of our lives entangling every little aspect of personal existence.
I've interviewed a lot of Trump supporters. Many were not all that fond of Trump himself. But all of them wanted to say "F You" to the government – especially to the spread of government regulation.
One small-business man said, "Nobody in government ever stops to think that every time they pass a new business rule or regulation, that means a pile of paperwork for me. I don't have big legal and human resources departments. It's just my wife and me. I can stand the expense of something like Obamacare. I can't stand the paperwork. It's time taken away from my business. There are only so many hours in a day."
A gas station owner said, "I can't get the federal, state, and local permits to take my old gas tanks out. I can't get the federal, state, and local permits to put new gas tanks in. What am I supposed to do with the gasoline... hold it in my cupped hands?"
A logger said, "I run into all sorts of political problems – zoning, wetlands, endangered species, road weight limits, OSHA. Then I turn on the TV and the politicians are talking about transgender bathrooms. We don't have any bathrooms in the woods."
The global elites are bad domestically. Internationally they're a disaster. A lack of a firm and coordinated attack on Islamic terrorism (and a lot of elite dithering) is causing people to be murdered all over the world. How much farther away from the quarrels and hatreds of the Middle East could a person get than to be at Latin Night in a gay nightclub in Orlando, Florida?
The elites permitted chaos in the Muslim world, and the chaos has sent hordes of refugees into Europe. What do the elites care? The refugees aren't crowding the halls and jostling the elites in the European Parliament in Brussels. The refugees aren't building shantytowns on the tennis courts at the elites' country clubs. Some young refugee men commit sexual assaults in public places, like the Cologne train station, on public occasions, like New Year's Eve. That's the public's problem. Things like that don't happen at the private dinner parties the elites give.
The elites are just as careless about immigration. To them, immigration brings cooks, nannies, and gardeners. How is Trump's plan for a wall along the Mexican border so different from the gated communities where elites live?
Americans don't hate immigrants. We're an immigrant nation. But we want a system of immigration. Why can someone who sneaks over the border into California get a driver's license, while an MIT grad student from India can't get a green card? Maybe a wall isn't a good system, but it's better than no system.
The elites embrace free trade, too – without, of course, ever having to touch it. Their jobs can't be outsourced to China.
Free trade shows that elites can be wrong even when they're right. Free trade does provide a net benefit to the global economy. But this benefit can't just be a race to the bottom of the pay scale with elites holding the starter pistol.
The purpose of jobs is to add value to material. Jobs that don't add much value – like attaching a sleeve to a t-shirt – ought to go where wages are lower. But those jobs need to be replaced with other jobs that add more value – like attaching a wing to a flying car. Free-trader elites haven't bothered to link free trade with the kind of tax, regulation, and investment-incentive policy changes that ensure a new economy rises in place of the old.
The elites prefer to pursue policies that are economically destructive. Politics is the elite's way to the top. The way to stay on top in politics is to bribe your constituents with ever-larger entitlement programs. This has led to almost every political system in the world carrying astonishing amounts of debt.
If that debt load collapses, the world economy will be destroyed. Even if that debt load doesn't collapse, it represents a gross misallocation of capital. The capital tied up in government debt could have been used to make things. Why don't we have flying cars? We have Obamacare instead.
And bad elite fiscal policy goes hand in hand with bad elite monetary policy. Central bank elites just keep printing the stuff.
Where will it end? I'll cover that in my next column, "The Revolt Against the Elites, Part II – The Effect the Rebellion Will Have on Your Pocketbook."
Regards,
P.J. O'Rourke
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