Bad News for the 'Most Important Company in the U.S. Economy'
All eyes on the Fed... Is this the end of 'easy money'?... Bad news for the 'most important company in the U.S. economy'... Toys 'R' Us is bankrupt... Don't miss Doc Eifrig's 'big call'...
Is this the end of 'easy money'?
The Federal Reserve begins its two-day September policy meeting today. And tomorrow, it is widely expected to announce it will begin to "taper" its massive, multitrillion-dollar balance sheet for the first time.
Pundits are already heralding the move as the beginning of the end of the Fed's "easy money" policies... and even applauding the central bank for a "job well done." As the Wall Street Journal reported yesterday...
The central bank is likely to announce Wednesday it will start slowly shrinking its $4.2 trillion portfolio of mortgage and Treasury bonds purchased during and after the financial crisis. It will do so passively by allowing some bonds to mature without replacing them next month.
The markets haven't blinked at Fed signals for many months that this moment was nearing... If it succeeds, the central bank will quietly close a chapter on an extraordinary policy experiment that lowered borrowing costs for homeowners, businesses and consumers, and will provide a model for other central banks that followed suit. A misstep could disrupt growth at a time when major economies are finally expanding in sync.
Chairwoman Janet Yellen's management of the process will shape the final verdict on whether the bond-buying was successful, which in turn could determine whether it remains a policy tool for future downturns.
"She has reached agreement in a way that is really impressive. Markets didn't freak out. Nobody said 'boo,'" said Austan Goolsbee, who headed the White House Council of Economic Advisers in 2010-2011. Now, he said, "The final exam, with the grade yet to be determined, is can the Fed actually get out of this stuff."
As regular Digest readers know, we're not so sure...
There's no way to know for sure how the market will react to this "tapering" plan. But we see plenty of reasons to be concerned. As we noted in the April 6 Digest, after the Fed first announced it would begin the move this year...
Yesterday, the Federal Reserve released the minutes from its March policy meeting. Typically, these reports contain few surprises. But this one was an exception... and the market wasn't happy...
The minutes showed the Fed plans to begin shrinking its $4.5 trillion balance sheet later this year. In simple terms, this means the Fed will stop reinvesting the cash from maturing U.S. Treasury bonds and mortgage debt back into these markets.
This isn't a surprise... the Fed has been discussing these plans for months. But this is the first time the central bank indicated this process would begin this year.
Why is this important? First, the Fed's buying has been a big source of demand for Treasury bonds for the past several years. As the Fed stops buying bonds, it could put more upward pressure on interest rates. (Remember, bond prices and interest rates move inversely... As bonds prices decline, interest rates rise, and vice versa.)
Second, as you can see in the following chart, stocks have largely followed the path of the Fed's balance sheet since the financial crisis...
But Fed tapering isn't the only concern for the credit markets today...
Last night, Toys "R" Us became the latest victim of the "death of retail." The once-iconic toy store filed for bankruptcy after years of falling sales. As the Journal reported this morning...
Toys 'R' Us Inc., the rainbow-colored toy emporium that for decades was the go-to spot for birthday and holiday gifts, filed for chapter 11 bankruptcy protection late Monday night, undone by a hefty debt load and the rapid shift to online shopping...
The filing in U.S. Bankruptcy Court for the Eastern District of Virginia was triggered by vendors and suppliers tightening terms with the company ahead of the key holiday selling season, which accounted for 40% of its $11.5 billion in revenue last year. For the past several years, the company has lost money in each quarter except its holiday quarter.
"None of the suppliers want this company to disappear, but they have a fiduciary responsibility to their own shareholders," said a person familiar with the situation.
Stansberry's Credit Opportunities subscribers likely aren't surprised...
Porter and his analysts laid out the bearish case for the troubled retailer more than a year ago in the March 2016 issue. As they explained...
Toys "R" Us is a 68-year-old, privately held toy-store chain. If you don't have young children, you probably haven't been in one lately... But Toys "R" Us' problem is that even if you do have young children, you probably haven't been in one lately, either.
Many observers think that the entire concept of a "toys-only" retailer is going away. The investment community considers the company to be in "terminal decline" – which is a fancy way of saying its business model is doomed. Revenues are down 15% since 2011. Margins have slipped significantly. Stores are closing at a rapid pace.
The death knell for toy stores probably sounded back in 1998 – the first year Wal-Mart sold more toys than Toys "R" Us. The Internet only compounded the problem by introducing yet another low-cost channel of competitors.
Most kids born in 2016 will never shop in a toy store. Toys "R" Us management knows this and is bolstering the company's online presence. But the company still generates most of its income from 1,600 sprawling retail stores and the legions of employees who staff them.
But Toys 'R' Us isn't just another troubled retailer...
It was also one of the most heavily indebted companies in the U.S. The company had more than $1.5 billion in debt set to mature this year and next... just in front of a virtual tsunami of additional junk-rated debt maturing over the next five years. More from that issue...
Management and investors know the company is in trouble. And so, Toys "R" Us is wisely not waiting until its $1.6 billion in outstanding bonds mature in 2017 and 2018. It's trying to refinance that debt now...
Since launching this service, we've sounded the warning: Be wary of companies and bonds – especially junk bonds – trying to roll over debt from 2018 to 2020... The market may be frozen by then. This chart, based on one the Wall Street Journal published with data from Standard & Poor's ratings agency, tells the story.
Between now and 2020, $1.32 trillion of junk debt is expected to come due. Most of that matures toward the end of the five-year period. So Toys "R" Us wants to cut to the front of that line.
That's why we called Toys "R" Us – with its "junk" rating and its obsolete business model – the most important company in the U.S. economy.
In other words, they believed Toys "R" Us was something of a "canary in the coalmine" for the broad credit markets. As they explained...
The entire bond market – which dwarfs the stock market – is watching Toys "R" Us. Wilbur Ross, the billionaire Wall Street icon, recently told cable network CNBC:
Refinancing is the real issue because you have a wall of maturities starting 2018, building up through 2021 to 2022... but [this wall of maturities] really reflects in the market a year or so earlier... so it's really a 2017 issue.
Ross is right. The real action will come in 2017. But Toys "R" Us can't afford to wait. It is the first brick in Ross' "wall of maturities." Will it be able to refinance? How onerous will the terms be? Do investors have an appetite for high-yielding bonds of dubious companies? We're about to find out. The answers will provide insight into just how bad the next credit crunch is going to be.
This week, we finally got our answer...
And it could be even worse than the "worst case" scenario Porter and his team originally envisioned. You see, on the surface at least, the current credit environment is far more positive than it was when they wrote those words.
Yet despite a massive rebound in corporate bonds over the past 18 months – with junk-bond yields returning to near-record lows – Toys "R" Us was still unable to refinance this debt.
This is bad omen for the broad credit markets... and a terrible sign for other junk-rated companies that need to refinance more than $1 trillion of debt over the next five years.
As Stansberry's Credit Opportunities senior analyst Bryan Beach noted in a private e-mail last night, little has changed since he and his colleagues issued this warning last year. The big difference is the bond market now has much farther to fall than it did at that time.
We'll be following this story closely.
Don't miss Doc's 'big call'...
Speaking of market troubles, regular readers know Porter and Steve Sjuggerud disagree about what comes next...
Steve believes the "Melt Up" will push stocks to explosive new highs before the bull market finally ends. On the other hand, Porter believes a bear market could be imminent.
If you're among those who aren't sure what to make of today's market, we urge you to take a few moments to check out our colleague Dr. David "Doc" Eifrig's new presentation...
As you'll see, Doc just made a big announcement this morning... what he's calling the single biggest call of his publishing career.
It involves a way to have your "cake" and eat it, too... In short, Doc says you can use simple options strategies to safeguard your portfolio against the bear market Porter has predicted... and simultaneously position yourself for more upside if Steve is correct and the Melt Up continues.
If you have any money in the market today, you owe it to yourself to learn more. Click here to see it now. (This link does not lead to a long sales video.)
New 52-week highs (as of 9/18/17): AMETEK (AME), American Express (AXP), Allianz (AZSEY), Boeing (BA), Alibaba (BABA), Baidu (BIDU), iShares MSCI BRIC Fund (BKF), Berkshire Hathaway (BRK-B), Celgene (CELG), Global X China Financials Fund (CHIX), WisdomTree Japan Hedged Equity Fund (DXJ), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), Euronet Worldwide (EEFT), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares China Large-Cap Fund (FXI), ETFMG Prime Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), KraneShares CSI China Internet Fund (KWEB), iShares MSCI China Index Fund (MCHI), Monsanto (MON), Nvidia (NVDA), Koninklijke Philips (PHG), ProShares Ultra Technology Fund (ROM), ALPS Medical Breakthroughs Fund (SBIO), Shopify (SHOP), iShares MSCI India Small-Cap Fund (SMIN), ProShares Ultra S&P 500 Fund (SSO), Stanley Black & Decker (SWK), Guggenheim China Real Estate Fund (TAO), Tencent (TCEHY), Verisign (VRSN), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
A quiet day in the mailbag. Have you benefited from Doc Eifrig's options strategies? Let us know at feedback@stansberryresearch.com.
"Porter, I'm up 348.6% on FIZZ recommendation as of today's close. These bubbles are fizzing into an unbreakable and/or unpoppable (wait... is this a word? If not, it sounds good) gigantic balloon. I'd say 'thank you,' but that's almost boring to you by now because you hear it all the time. Nevertheless, I am very appreciative of all the hard work you do for us!" – Paid-up (proud) Stansberry Alliance member Matt Eltareb
"The wife and I were out at a good size mall here in Colorado Springs last night to stop in at Verizon outlet. We ended up walking around to work off the Dairy Queen Blizzards we had, and we noticed how dead the mall was. Maybe twenty customers, couldn't believe it, lots of 25-75% off sales... No Wonder..." – Paid-up subscriber Joe B.
Regards,
Justin Brill
Baltimore, Maryland
September 19, 2017