Doc Eifrig Sounds the Alarm

LAST CALL for tonight's big event... Doc Eifrig sounds the alarm... 'I've been through this before'... Why Doc is now urging caution for the first time in years... In the mailbag: Porter 'comes clean'...

We'll begin today's Digest with a reminder...

Tonight's live event is kicking off less than two hours from now.

Our friend Dr. Richard Smith will be explaining in detail how his TradeStops system can take all of the guesswork out of investing in today's volatile markets.

Whether you're following one of our analysts exclusively or subscribe to a number of different research services, TradeStops can help you make more money, while taking less risk.

And no, this isn't conjecture or an embellished marketing claim. Richard has the data to prove it... and he'll share it live "on the air" tonight.

But even if you have no interest in trying TradeStops for yourself, we urge you to tune in...

You see, Richard will also be joined by Porter and Steve Sjuggerud – who just flew up from his Florida office this afternoon – for a can't-miss roundtable discussion.

Regular Digest readers know Porter recently turned more cautious on the market than he has been in years... and tonight, you'll hear his latest thoughts on the situation.

You'll also hear from Steve, and learn if anything has changed about his "Melt Up" thesis.

And – perhaps best of all – you'll hear all about Richard's exciting new research. In short, he has discovered a way to use his proprietary TradeStops algorithms to look "under the hood" of the broad markets.

Richard says these tools can precisely measure the underlying "health" of the bull market... and he'll tell you exactly what they're saying today. If you're among those who are confused and frustrated by the many conflicting bullish and bearish signals in the market right now, you won't want to miss it.

Richard will also tell you what his indicators are currently saying about a number of popular Stansberry Research recommendations... and share which stocks and sectors are likely to be your best bets for new money today.

Finally, Porter, Steve, and Richard will hold an extended Q&A session, where they'll answer your most pressing questions.

Of course, if you're interested, you'll also have the opportunity to try TradeStops for yourself...

And from what we hear, Richard has prepared a special "night of" offer unlike anything he has ever made to Stansberry Research subscribers before.

But again, there's absolutely no obligation to take him up on the offer... and you'll hear all these insights from Richard, Porter, and Steve simply for attending tonight's FREE event.

It all gets started promptly at 8 p.m. Eastern time. Click here to join us.

Speaking of turning more cautious on stocks, Porter is no longer alone...

This week, our colleague Dr. David "Doc" Eifrig issued his most serious warning since the bull market began.

Longtime Digest readers know that Doc – like Steve Sjuggerud – has been steadfastly bullish for much of the past nine years. Despite worries to the contrary, Doc noted time and again that the U.S. economy was slowing "grinding" higher.

That hasn't changed. But now, Doc is getting worried. Not because things are bad... but because for the first time in years, they're getting too good. As he explained in the latest issue of Retirement Millionaire, published yesterday...

I've been through this before. I sat on a trading desk during the 1987 Black Monday crash. I watched the 1989 junk-bond wipeout and the Asian and Mexican crises of the 1990s. I saw the dot-com bubble inflate and pop.

I protected the wealth of family and friends through the financial crisis 0f 2008 – and helped them grow it afterward.

What I've learned through all this is: The answer is not a line on a chart. Yes, we've got our indicators we watch for. (They all still signal healthy markets.) But every crisis and downturn evolves differently. And they all have different causes, except one: The good times beget the bad.

I'm not saying a market crash or recession is coming today or tomorrow. But I'm seeing signs that the economy is reaching its high-water mark.

As Doc explained, financial markets and businesses often make the mistake of assuming tomorrow will be like today...

When things are bad, they often act as though they'll be bad forever. We saw this for years following the financial crisis in 2008.

Likewise, when things are good, they become convinced the good times will never end. This is what we've seen of late, as corporate America has binged on debt like never before. More from Doc...

In the next five years, $2 trillion in U.S. corporate debt comes due. More than $1 trillion of that rates as junk. And companies with debt greater than six times earnings – considered a high level of leverage – will owe $319 billion...

With interest rates low and a growing economy pushing earnings higher, companies simply had to take on debt. It wasn't irrational. It wasn't even necessarily reckless. Investors hung money out there at such cheap prices, companies had to take it.

Why? Because when finance is involved, capitalism doesn't always work the way we imagine...

We tend to think of businesses like this... Let's say you want to open a hotel. You borrow $10 million to build it, run it profitably, and pay down your borrowings with some of those earnings. Eventually you have a nice, profitable hotel that you own outright.

But here's another way to view business and finance... You want to buy a hotel for $10 million. You think you can earn a return of about 6% on it, but you notice you can borrow $10 million for 3%. You don't worry about paying off the debt or owning the hotel outright. Instead, you can just earn that 3% spread – or $300,000 per year. When the $10 million bond comes due, you can just borrow another $10 million to pay off the first debt.

In fact, why not borrow more? Buy 10 hotels and make $3 million per year. Or 100. The more you can borrow, the more cash you collect on your spread.

During the [boom], this makes total sense. Whether you use it to buy new businesses, invest in your own, or repurchase shares, borrowing more money makes you more money.

But then the [bust] comes. Vacancy rates rise and nightly prices fall. Suddenly, your hotel doesn't earn 6% anymore. You try to roll over your debts, but money isn't as cheap as it used to be. And panic sets in.

Doc says that's exactly what's happening across our economy today...

During the good times of the past few years, U.S. corporations have borrowed far too much. They now owe far more money they can possibly hope to service when the next downturn arrives. More from the issue...

According to credit-rating agency Standard & Poor's, the average company has total debt equal to five times its earnings before interest, taxes, depreciation and amortization (EBITDA). That's the highest level since 2007.

Of course, those earnings measures don't include a lot of real costs, so true leverage is higher than that. But there's something more insidious here...

Currently, for every $1 in EBITDA, companies have $5 in borrowing, making for a five-times-leverage ratio. If they borrow another $1, it would rise to six times. I consider six-times leverage as highly indebted.

But as bad as the level of corporate debt is today, Doc is even more concerned with the other side of that ratio...

It's the earnings that really worry us. If EBITDA declines 20% in any sort of a recession, leverage would go to 6.25 times EBITDA, with no increase in borrowings.

In the last recession, EBITDA for the S&P 500 Index fell 31%. A 20% decline isn't just within reason... It's inevitable that it will happen someday.

So far, earnings have been growing. And most businesses can refinance debt easily when they are making money. Also, interest rates have been low. Lenders have granted extensions to businesses that could cover interest even if they couldn't repay the principal. Since few opportunities to earn higher yields existed, lenders figured they may as well keep collecting those interest payments.

But when profits fall and interest rates rise, the constant rolling over of debt will grind to a halt.

Again, Doc isn't predicting a bear market or recession will begin tomorrow...

But he knows it's only a matter of time before the good times end, and he's watching for two particular signs that bust is beginning...

To find the peak in the market, we have to watch for when earnings estimates get too high. We haven't gotten there yet. With earnings season nearly over, 78% of companies have beaten analysts' estimates. That's the highest number since at least 2008.

What happens next is clear. Analysts will ratchet up their estimates, projecting higher and higher earnings growth... until the economy turns, and they are wildly incorrect. That's what we're watching for.

We're watching for it out in the real world too. Today, planes and hotels are full. Construction equipment is everywhere. Job boards are full of postings. Everything looks good... But it's bordering on too good.

So what should you do with this information?

To be clear, Doc is not recommending you sell all your stocks and go to cash. But like Porter, he believes it's time to pare back risk, raise some extra cash, and begin to prepare for the end of this bull market...

In Retirement Millionaire, we have conservative holdings. We don't need to worry about debt defaults with any of our holdings. But if the default rate ticks up and credit markets seize, stocks will plummet, even high-quality ones.

We're going to pare our holdings to only our highest-conviction ideas. That means today we're going to book a handful of substantial gains we've earned over a long time.

Second, the best investment you could have made in the last 10 years was to buy levered-but-healthy companies in the middle of the 2008 credit crisis.

So we'll be building a watchlist for bottom fishing. And we want you to start planning now, so you'll have the courage to buy stocks during any sort of collapse.

In general, Doc recommends moving around 15%-20% of your portfolio into cash today. And in the issue, he explained exactly which long-held Retirement Millionaire positions – including several well-known blue-chip stocks – he recommends selling today, and shared a simple and safe way to earn some extra yield on your cash.

If you're not yet a Retirement Millionaire subscriber, you can get instant access to this issue with a 100% risk-free subscription. At just $199 for an entire year, Doc has made Retirement Millionaire affordable for any investor. Click here to learn more.

New 52-week highs (as of 5/9/18): Apple (AAPL), Automatic Data Processing (ADP), Amazon (AMZN), First Trust Nasdaq Cybersecurity Fund (CIBR), Cisco (CSCO), Eaton Vance Enhanced Equity Income Fund (EOI), Genco Shipping & Trading (GNK), iShares Core S&P Small-Cap Fund (IJR), Intel (INTC), Midas Gold (MAX.TO), Microsoft (MSFT), Okta (OKTA), and United States Commodity Index Fund (USCI).

In today's mailbag, another reader weighs in the complaint from paid-up subscriber David S. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com. And if you'll be joining us for tonight's event, please let us know what you think.

"On the one hand, I'm relieved to learn you don't have any influence in the operations of Stansberry Churchouse. On the other, I'm baffled why you would allow someone to use your name without any say in what they publish under your name. I guess you're no different than a politician. Your name on a paper can be bought for a price. (Had to dig where I know it hurts. 🙂 ) Glad I didn't waste much time reading the 12 page dossier sent urging me to buy the new subscription." – Paid-up subscriber Scott G.

Porter comment: A few years ago, myself and a few of my other longtime business partners set up a new business venture in Singapore. The idea was simple: We'd create an Asian-focused version of our Stansberry Research. In other words, we'd produce research on companies in Asia that trade on the major Asian stock markets (Hong Kong, Singapore, Malaysia, etc.) and sell subscriptions to that research. The idea was to call it Stansberry Asia, in the hope that some of our Asian-based subscribers would recognize the brand and subscribe.

However, executing this business idea was far more difficult than we imagined, because there wasn't an existing financial-publishing industry in Asia. We were starting from scratch, in other words.

Meanwhile, Peter Churchouse was publishing one of the only other newsletters in Asia, from Hong Kong.

Since the 1980s, Peter has been the leading name in Asian equity research, including as the head of Morgan Stanley's Asian business. After leaving Morgan Stanley, he ran a large real estate investment fund and maintained close ties with Asia's wealthiest families. Your supposition that Peter paid us to use our name is absurd. He didn't need our help – nobody in Asian finance is better-known or better-liked than Peter. In fact, we're the lucky folks who get to trade on Peter's name, not the other way around.

We've had a long, friendly relationship with Peter. He was one of our first Alliance subscribers. And we've known him personally since the mid-2000s, when Steve Sjuggerud met him at an investment conference.

We have very similar ideas about life – not just investing. Peter puts his family first. And like us, he has a passion for helping his clients. It's nice to do business with people you genuinely like and admire. We've wanted to have a partnership with him since the day we met. Finally, about two years ago, we were able to strike a deal to combine our Asian publishing company with his. Logically, the name of the two companies became Stansberry Churchouse.

Ironically, when we struck our agreement, I didn't know anything about Peter or Tama's investments into bitcoin technology companies. I didn't understand the role Asia was playing in the development of cryptocurrencies. As I've learned more, it's easy to see why the Churchouses are players: They have had long ties to virtually all of the leading business families in Asia.

In any case, Tama has become one of the world's leading experts in the emerging crypto business structure. I say that deliberately – crypto isn't just a new technology. It's a profoundly important new way of using computers to organize information, and it's leading to a whole new kind of business structure that moves ownership and control away from corporations. That's why it's so threatening to so many people, and why it's so hard for most investors (including me) to understand.

I'm proud to have played a minor role in bringing the world's attention to Tama, and I'm thrilled that so many of my subscribers at Stansberry Research have gotten a chance to get to know him. Stansberry Churchouse has been on the absolute cutting edge of this new asset class. I'm confident that Tama will serve his subscribers well, no matter what the future holds for bitcoin or other crypto assets. I'm also confident that his fame and vast success will make it difficult (or impossible) for Stansberry Churchouse to retain his services for long, so my advice is to enjoy his expertise while we can still afford it!

It seems obvious to me that Stansberry Research is not Stansberry Churchouse. These are two completely separate businesses, run by different management teams, located in vastly different places, and producing different products.

As an individual, I'm simply not responsible for the recommendations that are published at Stansberry Churchouse. I can't take the credit or the blame for how those recommendations perform. That's not to say that I don't have any influence on the company. I've worked hard to put the right people in place, like recruiting Kim Iskyan (the publisher), and I spent years developing a good relationship with Peter and Tama. My partners and I have also invested a substantial amount of capital in this new business. Hopefully, it will become a successful venture for all involved, but that's far from certain at this point.

I'm baffled that some subscribers at Stansberry Research have concerns about my other businesses. As you should know from reading my Friday Digest essays and my investment newsletter, Stansberry's Investment Advisory, I have a passion for great businesses. (A great business, by the way, is one that makes a profit for its owners, serves its clients' needs, and gives its employees a meaningful way to provide their families with financial security.) Creating a great business from scratch is almost as rewarding as being a father. It's a similar endeavor, actually. It starts out being a lot of fun, but it takes a tremendous commitment... and a long time. There are always big bumps in the road.

Currently, I'm a major investor in and/or founder of half a dozen pretty big businesses, including my men's luxury-shaving company (OneBlade), as well as several financial publishing companies: Stansberry Research, InvestorPlace Media, Legacy Research, and Stansberry Churchouse, as well as a "fintech" software company (TradeStops). I'm also the founder of The Atlas 400, a private wealth club that provides unrivaled, bespoke experiences for its members.

Some of these companies are branded as "Stansberry" businesses, some aren't. But I don't own 100% of any of these companies. Nor do I manage any of these businesses on a day-to-day basis. In addition to being an investment analyst at Stansberry Research, I'm also a board member at these companies. What that means in practice is that I helped raise the capital for these businesses, I helped map out the business models for these companies, and I've helped fine-tune those strategies as these businesses have grown.

When these other companies interface with Stansberry Research (like when they buy advertising, for example), all of those arrangements are made on a fair-market, arms-length basis. These conflicts are fully disclosed to the other board members at Stansberry Research, and my interests in these other businesses are fully disclosed to all of our subscribers.

In the future, I hope to build several more big businesses. Among the things I plan to do in the future is to launch a competitor to NASCAR, get into the hospitality business with a new kind of restaurant/hotel/private club, and launch a family office that provides a much larger than normal range of services for people like me, who have unique accounting, investment management, legal, travel, health care, and informational needs.

A critical subscriber suggested recently that I'm involved in these other companies because I'm greedy. He asked, "When will enough be enough?" My wife has asked me the same question. No one thinks he himself is greedy. It's always the other guy who is greedy. So who knows, maybe it's greed that really motivates me. I don't know. What I can tell you is that in all of these ventures, my partners have made far more money than I did – vastly more.

In the ventures that are struggling, I'm the guy consistently putting in more capital. And when any of these businesses stumble or get into trouble, I'm usually the guy who figures out what needs to be done to turn things around. My strategy in life has always been to make sure the other guy – whether that's my business partner, my customer, or my friend – gets the better end of the deal. That's how you build strong relationships. I never want the first nickel. Or the last nickel.

I build businesses because I can envision something new and better. And then I'm driven to make it so. Money is a fine reward, but it's far from the thing that matters most. What matters most is creating that better thing and watching the value it creates for people.

I'm certain that my experiences in these ventures – meeting with private-equity investors, interfacing with dozens of new executives at these companies, and learning a lot of difficult lessons about what customers want – helps me to be a better investor. Investment legend Warren Buffett always believed the same thing... that people who know a lot about how businesses really work are always better investors.

I'm sure that's true, too.

Your comment about me being a "politician" is funny, but not for the reason you might think. Your comment was unintentionally ironic. Entrepreneurs are the opposite of politicians.

Politicians take money, through coercion (taxes), from people to deliver things most people don't want (like war), at absurdly expensive prices. On the other hand, what a great business does is provide something that people do want, at a price that's low enough to create value. It's that value that creates a profit, for both the business owners and for society.

Sadly, few Americans understand the difference.

Regards,

Justin Brill
Baltimore, Maryland
May 10, 2018