Don't Ignore This Warning

Don't ignore this warning... No surprises from the Fed... A record-setting quarter for Apple... It's official: The first $1 trillion company is here... Is the 'trade war' heating up again?... Sjug's latest thoughts on China...

We'll begin today with a warning...

Regular Digest readers know we've remained cautiously bullish on stocks over the past several months.

Despite plenty of potential hazards – including Federal Reserve "tightening," rising interest rates, a flattening yield curve, and the growing threat of a "trade war" – we've continued to give the long bull market the benefit of the doubt.

The reason is simple: We still haven't seen any of the clear signs that typically occur at or near a major stock market top. Instead...

• The economy remains strong.
• Unemployment remains low.
• The yield curve – while threatening to "invert" – remains in positive territory.
• Despite clear excesses in the corporate-credit markets, nominal yields and interest-rate "spreads" remain historically low.
• Corporate earnings, outside of a few notable exceptions, have been strong.
• And most of the stock market's "vital signs" remain healthy.

In addition, as our colleague Steve Sjuggerud has noted, history suggests the recent outperformance of technology stocks is a bullish sign as well.

All of this remains true today...

However, at the risk of drawing accusations that we're "talking out both sides of our mouth," we are becoming more cautious in the near term.

In short, the price action of the past several days concerns us. Despite a flood of positive news – including the strongest gross domestic product growth in years and stellar earnings from two of the largest and most important stocks in the market (more on this in a moment) – the broad market has traded "heavy." And when stocks can't rally on great news, it's often a warning sign.

Now, let us be crystal clear...

We are not predicting the start of a full-fledged bear market at this time. But we do believe the odds of another sharp correction – like we saw during February's volatility panic – are rising.

If you still haven't taken our advice to pare back the risk in your portfolio, we urge you to do so now. Exactly how you do so is a personal matter. But in general, we suggest raising some extra cash. Be sure to own a little gold. And if your equity portfolio consists of anything other than the highest-quality, capital-efficient businesses, consider "hedging" this exposure with some select short sales (or long put options).

If you'd like more guidance on how to allocate your portfolio today, we'd encourage you to learn more about our Stansberry Portfolio Solutions product. The Total Portfolio in particular will show you how we would build a fully hedged portfolio using our research today.

On the other hand, if you're the "do it yourself" type, we'd encourage you to check out the brand-new service from our friend Dr. Richard Smith. As we noted earlier this week, Richard's new Ideas by TradeSmith software is designed to help you identify the very best opportunities from across all of our research publications (and any others you receive) and give you a clear, real-time look at the underlying "health" of the broad U.S. markets. You can learn more about Ideas by TradeSmith right here.

In other news, the Federal Reserve 'stood pat' as expected...

At its July policy meeting yesterday, the central bank voted unanimously to keep short-term interest rates unchanged at 1.75%-2%.

But the Fed had previously said it expects to raise rates two more times this year, and it appears that forecast remains on track, as well. As the Wall Street Journal reported...

The Fed repeatedly emphasized the economy's strength in a statement released after its two-day policy meeting...

"Economic activity has been rising at a strong rate," the statement said. In all, the Fed's rate-setting committee used the word "strong" – or a derivative of it – six times to describe the economy and labor markets...

Traders in futures markets largely agree with the Fed's outlook. On Wednesday, they placed a roughly 90% chance of a rate increase this September and a 70% chance of at least one more increase by December, according to CME Group.

Earlier we mentioned stellar earnings from two market leaders...

We were referring to two members of the group collectively known as the "FAANG" stocks: online retail titan Amazon (AMZN) and consumer-electronics giant Apple (AAPL).

Amazon reported results after market close last Thursday, and it trounced Wall Street expectations for the third straight quarter. Revenue jumped nearly 40% year over year. Net income rose nearly 1,200%, from $197 million in the second quarter of 2017 to a record $2.5 billion this year. And the company's Amazon Web Services cloud-computing division reported a massive 49% increase in sales over the same period.

Amazon shares surged as much as 5% to a new all-time intraday high above $1,880 on Friday.

Tuesday was Apple's turn. And it, too, did not disappoint...

Revenue and profit jumped 17% and 32%, respectively, over the same period of 2017. And revenue accelerated for the seventh straight quarter, hitting a new quarterly record of $53.27 billion.

That's a major win for Apple, which tends to see lower sales in the spring and summer months as consumers wait for new product releases in the fall. But iPhone sales rose 20% to nearly $30 billion from the same quarter a year ago, even with an expected update to Apple's latest smartphone – the $999 iPhone X – due out in September. Analysts at investment bank UBS expect the next phone to cost $699 for the baseline model and a record $1,099 for the plus-size version.

The company also noted a 37% increase in sales for its Apple Watch and AirPods wireless earphones from the same period a year ago.

But hardware sales weren't the only highlight of the company's quarter...

Revenues for its services division – which includes its iCloud storage business, AppleCare warranty programs, and Apple Music streaming service – were up 31% year over year, while its user base grew 60% to more than 300 million subscribers over the same period. Apple's goal is to generate $50 billion a year in sales for its subscription-based services.

And despite fears of a "trade war," the company managed to grow its sales in China by nearly 20% in the quarter. Apple also announced it bought back $20 billion of shares, following a May announcement that it would spend a record $100 billion on share buybacks this year.

The market clearly liked what it heard...

Shares rose nearly 6% to a new all-time high above $200 yesterday, and tacked on another 3% today. Apple shares are now up more than 20% so far this year, and more than 125% since many folks declared the company's best days were behind it in the spring of 2016.

This week's rally is also notable for another reason...

At today's price of more than $207 per share, Apple has officially become the first company in history to achieve a mind-boggling $1 trillion market capitalization.

Finally, we note that the ongoing 'trade war' appears to be heating up again...

Yesterday, the White House announced it is now considering hiking its latest proposed tariffs on Chinese imports.

Last month, President Donald Trump announced he would place 10% tariffs on an additional $200 billion of Chinese imports. But it now appears he believes those tariffs don't go far enough. As news service Reuters reported last night...

U.S. President Donald Trump sought to ratchet up pressure on China for trade concessions by proposing a higher 25% tariff on $200 billion worth of Chinese imports, his administration said on Wednesday.

U.S. Trade Representative Robert Lighthizer said Trump directed the increase from a previously proposed 10% duty because China has refused to meet U.S. demands and has imposed retaliatory tariffs on U.S. goods.

And of course, in what has become a familiar occurrence of late, China quickly struck back, saying it has no choice but to retaliate. As financial news network CNBC reported this morning...

China is not taking the United States' latest tariff threat lightly and vows to hit back if the U.S. moves forward.

"China is fully prepared and will have to retaliate to defend the nation's dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries," the Chinese Ministry of Commerce said in a statement on Thursday. "The carrot-and-stick tactic won't work."

As we've discussed, U.S. stocks have largely shrugged off these concerns to date...

But the same can't be said for those in China.

While U.S. stocks have mostly recovered from February's correction, the benchmark Shanghai Stock Exchange Composite Index has continued to fall by more than 10%.

Naturally, many folks who own Chinese stocks are concerned.

Steve Sjuggerud – our resident China bull – addressed these concerns in detail back in June. And in the July issue of True Wealth Opportunities: China, published last Thursday, Steve updated readers on his latest thoughts on the situation. From the issue...

China has been a one-way trade higher for most of the past two years. Until recently, that is. It seemed easy back then. Everything we recommended went up... In some cases, it went up a LOT.

It's easy to have conviction when you're making money. It's more difficult when things go south. But I want you to know that I still have conviction in China. I still believe in our big ideas. I still believe we're going to make a lot of money in the coming years.

But I won't be reckless. We can't simply "hold and hope" because the long-term story is positive. We have to be smart and tactical.

Right now, that means we're taking a three-pronged approach in our China portfolio. This will be the key to future success in this uncertain time. Here's the plan...

1. We will follow our stops. If we hit a stop loss, we're selling. No questions asked. But...
2. Hitting a few stops doesn't mean the China opportunity is over. It's simply "on pause" until the uptrend returns. And...
3. When the uptrend returns, we plan to get back into the China positions we close.

This is our plan going forward. We're not abandoning China because of a few painful weeks. We're following our stops with the understanding that our long-term opportunity could see a few bumps along the way.

Steve also reminded subscribers that while it's certainly felt 'bumpy' lately, it hasn't actually been that bad...

Chinese stocks have the potential for huge booms... and huge busts. And this has been far from a true China bust so far. More from Steve...

We saw how bad it can get just a few years ago, during the China boom and bust from 2014 to 2016. During that bust, the KraneShares Bosera MSCI China A Fund (KBA) lost 53% of its value in just eight months. Ouch!

That's what's possible. That's how bad it can get when things really go south in China. And that's what we plan to avoid by sticking to our stops.

Importantly, the recent fall is nothing compared to that decline. KBA is down less than 25% from its January high. I know that feels bad. But the feeling is worse than the reality.

But despite the potential for further declines in the near term, he also reassured readers that his long-term thesis remains intact...

In fact, he believes the upside potential is greater than ever...

The reality is that most of our portfolio is down a bit, and we believe it's beginning to find a bottom. Sentiment toward Chinese investments is as bad as we've seen in years. And most of our portfolio is dirt-cheap.

The fear of trade wars has spooked just about everyone out of China... and it wasn't a popular investment to begin with! That gives us a big opportunity. We want to own what other investors hate – what others refuse to buy. And right now, that means we want to own Chinese stocks.

We'll watch our stops closely. And we'll sell if we hit them. But we want to stay in China as long as possible... because the long-term opportunity is the best opportunity of my career.

New 52-week highs (as of 8/1/18): Apple (AAPL) and Williams Partners (WPZ).

Regards,

Justin Brill
Baltimore, Maryland
August 2, 2018