Prepare for Another Pullback
Congress makes it official... A big tailwind for small banks... 'Trade war' fears return (again)... Prepare for another pullback...
It's now official...
As we expected, the U.S. House of Representatives approved the "rollback" of the most onerous portions of 2010 Dodd-Frank financial regulations yesterday. As the Wall Street Journal reported...
Congress took a big step Tuesday to relax a wave of crisis-era restrictions placed on financial firms, as the House approved a plan to ease rules for small and midsize banks.
The House voted 258-159 to approve the most significant bipartisan revamp of financial rules since Republicans took control of government last year. Thirty-three Democrats sided with Republicans to pass the bill.
The measure now advances to President Donald Trump for his signature, setting off a wave of deregulatory actions by federal agencies that will ease – but not dismantle – the 2010 Dodd-Frank financial law, which sought to prevent another financial crisis. The legislation leaves untouched most of Dodd-Frank's major planks, such as emergency government powers to take over failing financial firms and curbs on derivatives. These provisions are expected to remain in place for years to come.
President Donald Trump is expected to sign the bill into law as early as this week.
Longtime Digest readers know our colleague Scott Garliss has been following this story since the beginning...
For months, Scott has been telling his Stansberry NewsWire readers that the bill would slash regulatory costs and boost profits for many small and midsize banks. He also predicted it would set off a flurry of deal-making in the sector for the first time in years.
As we noted earlier this week, this trend is already in motion. We've seen two large bank deals in just the past two weeks alone. But Scott says it's not too late to profit. As he explained in his latest update on Monday...
As some of these regulations are either loosened or torn down, the game becomes a race for assets. Banks will now be free to gather up more assets... Many more acquisitions in the space are likely...
The best way to play this trend is through the SPDR S&P Regional Banking Fund (KRE). If you're looking for individual banks, consider Regions Financial (RF), First Horizon National (FHN), KeyCorp (KEY), Signature Bank (SBNY), Investors Bancorp (ISBC), TCF Financial (TCF), and Huntington Bancshares (HBAN) to name a few.
But not all the news out of Washington was so positive on Tuesday...
All three major U.S. indexes opened in the red this morning following a statement from President Trump suggesting trade talks with China may not be going as well as his administration suggested over the weekend. As financial-news network CNBC reported...
The president [said] that he is "not satisfied" with trade talks with China that took place in Washington last week. He called the negotiations a "start" as his administration keeps working toward a final deal to address trade imbalances with Beijing.
"We have a long way to go," the president said, adding he wants the talks to go "fairly quickly."
We remain hopeful that cooler heads will prevail, and that we'll avoid a true "trade war." But that doesn't mean we can't see further downside in the near term.
As regular readers know, we remain cautiously bullish on U.S. stocks today...
While we expect a serious bear market to begin at some point in the next year or two, we aren't yet seeing the telltale signs that tend to accompany a major market top. For now, we're willing to give this long bull market the benefit of the doubt.
But we've also noted several times over the past few weeks that we may not be "out of the woods" just yet. The biggest reason has something to do with the "triangle" formation our colleagues Ben Morris and Drew McConnell highlighted late last month. As we shared in the April 26 Digest...
So far in 2018, stocks have risen and fallen within a narrowing range. The latest two peaks have each been lower than the first one. And the two lows are each at the same level.
The key resistance level (the top line) is near 2,700. And the key support level (the bottom line) is near 2,580. Right now, stocks are trading near the middle of that range, at 2,640...
As we explained last week, stocks have since 'broken out' of this pattern to the upside...
Here's how that same chart looks today...
Typically, this would be a bullish development, suggesting stocks were likely headed to new highs. But we weren't so sure.
First, the move higher wasn't as powerful as you'd typically expect to see in this type of setup. More important, we noticed the financial media were suddenly obsessed with the pattern.
As longtime readers know, when "the crowd" is all betting on one outcome, it usually pays to take the other side. We suspected stocks were likely to pull back once again and "test" the breakout from this pattern at least.
We could be seeing the start of this pullback today...
Take another look at the updated chart above. The red line is the 200-day moving average we've discussed several times in recent months. As you can see, it's on track to intersect the triangle pattern around the 2,630 level. This would be the logical place for the market to find support if the bull market is indeed set to resume.
For now, our advice remains: Hold some extra cash and gold... consider adding a few "hedges" in the form of short sales or long put options... invest new money only in high-quality companies and high-conviction ideas... and keep a close eye on your trailing stops, just in case.
We'll end today's Digest with a bit of kudos for our Stansberry Portfolio Solutions team...
On a day when the broad market closed up slightly after a late-afternoon rally, several of the holdings in The Total Portfolio were up big today.
Clothing retailer Ralph Lauren (RL) and Chinese online travel agency Ctrip.com (CTRP) closed up 14% and 4% today, respectively. Meanwhile, struggling retailer Target (TGT) – whose shares the Stansberry Portfolio Solutions investment committee recently recommended selling short – closed down nearly 6%.
We checked in with Austin Root, portfolio manager for Stansberry Portfolio Solutions, to get his latest thoughts on the recent market action. Here's what he told us through private e-mail today...
The Total Portfolio is having a solid month. Through today's close, the portfolio is up 4.1% in May, outperforming the benchmark S&P 500 Index, which is up 3.1% over the same period.
We're especially proud of that performance when you consider that The Total Portfolio is outperforming while also taking less risk and experiencing less volatility. Nearly half of the portfolio is safely positioned in cash, gold stocks, income investments, short positions, and high-quality property and casualty insurance companies. The rest of the portfolio is allocated to world-class growth companies, well-run income-generating opportunities, and capital-efficient cash-flow machines.
We're pleased with how the portfolio is currently positioned. We're staying mostly invested, but proceeding with caution. We've balanced a favorable outlook for our core long-term investments with safer, more defensive investments, given our heightened level of skepticism about the market's overall health.
We're also happy to report that The Total Portfolio has outperformed the S&P 500 since Austin and the portfolio committee unveiled this year's portfolio on February 1.
New 52-week highs (as of 5/22/18): AllianceBernstein (AB), American Express (AXP), Fairfax Financial (FRFHF), and Genco Shipping & Trading (GNK).
In the mailbag, a reader asks how the impending bear market will affect Steve's China thesis... and P.J. O'Rourke, editor in chief of the free online magazine American Consequences, responds to a few notes from readers.
The latest issue of American Consequences tackled the state of education in America. P.J. argues that between student loans, political correctness, and flawed science, we're in the midst of an education "bubble." He and his team addressed these issues in this month's American Consequences. If you're not already a subscriber, you can sign up here for free.
And as always, please let us know what's on your mind at feedback@stansberryresearch.com.
"Hello, thanks for answering this! If the Chinese stocks are estimated to increase in value, perhaps doubling or tripling, how does this reconcile with the [imminently] approaching bear market in the United States economy? Since the world economies are intertwined, through our government debt, foreign investment, MSCI Inclusion, etc., how does this affect the Chinese stock market and the potential for the Chinese stocks to double or triple within an 18 month period over the span of the next five years?
"If there is a bear market, won't this trigger mass amounts of people pulling money out of their market? And since Chinese stocks will now be included in the MCSI indexes, won't the Chinese market take a hit when the US economy goes into downtrend?" – Paid-up subscriber Garrett S.
Brill comment: That's a great question, Garrett. We forwarded your question along to True Wealth China Opportunities editor Steve Sjuggerud. Stay tuned for his response tomorrow...
"Hello PJ and Contributors, I would like to compliment you on this edition. It was filled with the best articles that I have read in a long time. I should mention that I don't read many newspaper or magazine articles
"I had my first experience with your publication today. To be honest I was entranced. I have not read a single thing in the past months that held me so tightly as did your delightful writing." – Leland S.
"The education perspectives are very useful and timely. America has many issues now but our current education system is the most frightening to me. The phrase 'failing miserably' comes to mind, but there are bright spots occasionally." – Lee H.
P.J. O'Rourke comment: Arnold, Leland, and Lee – I blush! And I thank you. Or, rather, we thank you. American Consequences is blessed with terrific editors and writers. They tackled a big subject, and I think they brought it down way behind the line of scrimmage, causing major yardage loss for Education Establishment U. (Team mascot: Cracked Egghead.)
"Betsy Davos? She's a low life crook who is letting so
P.J. O'Rourke comment: Gerald, tell us what you really think. As to whether I have any shame... Yes, I'm ashamed of myself for yelling at the dog this morning, just because she chewed on the new pair of shoes that I should have known better than to leave where she could get them.
But no, I'm not ashamed of running a piece that yelled at the Education Establishment for chewing on Betsy DeVos. She's a smart, brave, hard-working woman with good values who has spent millions of her own money to put those values into practice. You may disagree with her, but you have no occasion to insult her the way I'm about to insult Elizabeth Warren. You say Warren is a decent person. I ask – at the risk of a pun that may be offensive to Native American sensibilities – "how?"
Regards,
Justin Brill
Baltimore, Maryland
May 23, 2018