Are You Making These Mistakes?

A special Digest mailbag... Are you making these mistakes?... GE is circling the drain... Introducing the Stock of the Week...

Today's Digest will be a little different...

As regular readers know, we typically publish our "mailbag" at the end of each day's issue. But today, we're going tobegin with some reader feedback.

That's because we've received a small handful of e-mails this week that have set off some alarms. You see, it appears at least a few of our readers have ignored some critical parts of our advice... and could be taking far more risk than they may realize.

In an effort to help these folks – and ensure you don't make similar mistakes – we'd like to take some time to address these issues today.

We'll begin with an e-mail from paid-up subscriber Bob J., who wrote...

I'm down $55,000 from a $300,000 portfolio that I use for Stansberry recommendations. I'm staying long on your recommendations (as you advised) except for all the positions that have hit the trailing stops. I am trying to keep the faith so I'm using the funds from stopped out sales to buy the 'Melt Up' portfolio. Fingers crossed.

Brill comment: Bob, we have no way to know how you've allocated your portfolio. And as always, we're prohibited from giving individual investment advice. But from the looks of it, we'd guess you've put a large percentage of your portfolio into long stock positions in general... put too much money into more speculative, volatile positions like those Steve has recommended in the "Melt Up" portfolio... or a combination of both.

However, this is not what we've recommended. For months now in the Digest, our advice has been to "stay long, but stay smart." Again and again, we've practically begged you to take a closer look at the risks you were taking in your portfolio. We've recommended holding some extra cash and gold. And we've urged you to consider "hedging" with a few short sales or long put options if you have a substantial portion of your wealth in stocks.

Steve has also been clear that folks should not attempt to go "all in" on the Melt Up. Instead, he's recommended allocating only a portion of your total portfolio – between 10%-20% – in these positions.

So yes, we do generally recommend staying long your stocks today, and letting your trailing stops dictate when you sell. Likewise, we think it's perfectly reasonable to reinvest a portion of the cash you raise to bet on the Melt Up today.

However, all of this advice assumes you're already taking an appropriate amount of risk for your individual tolerance. If staying long today requires faith and finger-crossing, that's almost certainly not the case.

We received a similar letter from paid-up subscriber John T...

Last Friday after Steve's presentation on Thursday I sold a lot of my current stocks to raise cash for the Melt Up portfolio. Bought them all on Friday (except [one] which I already owned). Now I am trying to have Faith and trust in Steve. I am a small investor and have had past success on my own as well as losses. Most have been from recommendations from Doc in the Income Intelligence and Retirement Millionaire newsletters.

Either way I am nervous as my wife didn't want me shelling out so much for the [Melt Up Portfolio]. Thing I would love to read more about is people who say they are sticking with their plan but if your plan isn't good and you stick with it???????? Setting up a good plan is what I need to do. I thought the [Melt Up Portfolio] was for your whole portfolio not just 10% of your overall portfolio. Guess I missed on that.

Brill comment: John, like we mentioned to Bob above, if your portfolio is keeping you up at night, it's a sign that you're probably taking far too much risk with your money. And if you missed or ignored Steve's advice and put your entire portfolio into these Melt Up recommendations, that's almost certainly the case. Please, if you're going to invest with Steve for the Melt Up, you must follow his advice.

Next was a letter from paid-up subscriber Rudy B...

[Regarding my] reaction to the recent market drop... I've read the comments from other Stansberry subscribers and apparently, I must be the only one that's losing money. Yes, I'm following the -20% rule and am selling stocks that didn't really go high enough before this bloodbath hit. I've followed Steve for years... Now I have to take a deep breath and get the courage to get back into the market – if and when. I'm retired and can't afford too many losses. Thanks for your help in the past.

Brill comment: Rudy, as a retiree who can't afford to lose money, our comments to Bob J. and John T. apply doubly to you. And again, we can't provide individual investment advice, but in general, folks who are primarily concerned with capital preservation should not hold a large percentage of their portfolio in the stock market.

We also heard from some new investors like paid-up subscriber Margaret A., who wrote...

Hello, I'm so new into this program. I have a lot of faith in Steve. I ordered the Melt Up program. I don't even have a brokerage account yet. I tried my bank and they don't allow investing in pot stocks or cryptocurrencies. So I have to figure out where to go from here. I'm a paid-up member now and very excited about this new venture!!

Brill comment: Welcome aboard, Margaret. In our experience, many new investors initially approach the markets with a gambler's mentality, hoping to "get rich quick." Your reference to "pot stocks and cryptocurrencies" suggests that may be the case with you as well.

However, while you could certainly earn fantastic returns with Steve's Melt Up portfolio, you are unlikely to be successful in the long run without proper risk management. So please, please, please... before you buy your first stock, be sure to read all of the introductory and educational materials Steve sent you with your subscription.

Finally, we heard from several folks like paid-up subscriber M.H...

So, my inbox is chockablock lately with TradeStops notifications. Half my portfolio (or more) should be sold. On the assumption, perhaps dangerous, that this is merely a correction, I don't want to pull massive amounts of money out of stocks. So, I've had to resort to two tactics: A) ignore some of the stops, especially on ETFs, but also on some individual stocks where the charts don't look all that bad; and, B) taking the cash from the ones I do sell, and buying new/different positions, nearly all of them recs from you folks.

The problem is that I start to run out of recs that appeal (thought I'd never say that, as at times I've griped about too many new recs per week), so have had to resort to simply buying a bunch of VOO. If I took action on even more of my stops, the problem worsens. Thoughts?

Brill comment: Sorry M.H., but your risk management plan only works if you actually follow it. It makes no sense to diversify your portfolio, properly size your positions, and set your trailing stops if you're then going to ignore those stops when they're hit. And while history suggests the risk of a true bear market is low today, there's simply no way to be 100% certain. This is why we always recommend sticking to the stops you set.

It's not a perfect solution – and it can sometimes be frustrating. We get it. But it's the only surefire way to protect yourself from suffering a "catastrophic loss"... the kind of loss that wipes out savings, ruins marriages, and even ends lives.

We'll also remind you that if you can't find compelling new opportunities for that capital today, you don't need to force it. There's nothing wrong with holding extra cash until better opportunities come along.

Meanwhile, things are going from bad to worse for General Electric (GE)...

This morning before the market open, the struggling industrial giant reported third-quarter earnings that were "less than stellar."

Sales fell 4% under new CEO Larry Culp, while adjusted earnings fell to $0.14 a share – well short of analyst expectations of $0.20.

More noteworthy, GE also slashed its dividend from $0.12 a share to just $0.01. The move marked the company's second dividend cut in a year, but only its third since the Great Depression.

The company believes this cut could save it nearly $4 billion a year. However, several analysts believe it could be a case of "too little, too late." JPMorgan analyst Stephen Tusa summed up the bearish argument in a note this morning...

The dividend cut to close to zero will help... but we also don't think the cut is a silver bullet, and the severity highlights the challenged capital position here...

Bottom line, there is still much information to come and wood to chop for the new CEO... So far, fundamentally there is plenty here to support our negative view.

Finally, management noted that the U.S. Securities and Exchange Commission ("SEC") is widening the scope of its ongoing investigation. From an article in Bloomberg this morning...

General Electric said the Securities and Exchange Commission is expanding its probe of the company's accounting to look at a $22 billion charge in the company's power unit.

The Justice Department is also examining the writedown from goodwill impairment, GE Chief Financial Officer Jamie Miller said Tuesday on a conference call. The company confirmed the charge in its earnings report, four weeks after flagging the issue to investors.

The expanded probe adds to the pressure on GE, which is contending with one of the deepest slumps in its 126-year history amid cash-flow shortfalls and declining demand for its gas turbines. The company had previously said the SEC was looking at accounting in the power division and an old insurance portfolio.

Of course, today's news is just the latest in a long line of disappointing headlines for GE shareholders this year...

In the April 27 Digest, Porter explained the devastating effect that rising interest rates would have on GE and its crippling debt load...

The financial excesses of the past 30 years crippled this business. Its managers engaged in every kind of accounting and financial hijinks you can imagine. They left this iconic American company saddled with more than $60 billion in net long-term debt. (Please note: That's net debt – after subtracting all of GE's cash.) Even with record-low interest rates, GE still faces interest obligations of almost $3 billion per year.

And here's the problem: These interest rates are likely to rise a lot faster than GE's ability to grow earnings. Currently, GE earns only $3.6 billion year, when measured by "EBIT" – that's earnings before interest and taxes. If its interest expenses grow and its earnings don't keep up, GE will have a difficult time paying its debts in its current structure.

And don't forget, GE requires at least $7 billion a year in capital investments (capex) to maintain its facilities and position its businesses for future growth. In other words, while GE can do some things to avoid bankruptcy (like cutting its annual capex spending), it isn't earning enough capital to finance both its debts and future growth. It is caught in a death spiral.

Back in June, the company lost its coveted spot in the Dow Jones Industrial Average after more than 110 years. And earlier this month, ratings agency S&P Global downgraded it to three notches above "junk" status.

GE shares sunk another 9% today, hitting their lowest level since April 2009 – the depths of the last financial crisis. They've now fallen more than 50% over the past year and are down 40% this year alone.

New 52-week highs (as of 10/29/18): none.

So... Are you following our risk-management advice? Please take a moment and let us know at feedback@stansberryresearch.com.

Regards,

Justin Brill
Baltimore, Maryland
October 30, 2018