'Selling everything that wasn't nailed down'... A note of caution on the economy... When will the China crash end?... Congrats to Two Suns and Bill Shaw...
Some of the world's smartest investors are moving to cash like never before...
According to a recent article in the Wall Street Journal, private-equity firms – investment management companies that specialize in large investments in private operating companies – just broke an all-time record for "exits" last quarter...
After a brief slowdown during the first quarter, private equity investors resumed selling everything that wasn't nailed down, a trend that is likely to continue well into the next quarter.
U.S. firms racked up $125 billion of exits during the second quarter, the highest level on record and an 80% increase from first-quarter exits, industry trade group Private Equity Growth Capital Council reported, citing data from PitchBook.
The increase in dispositions comes as firms continue to hoard dry powder and the pace of investment remains subdued. Reluctant to compete against cash-rich corporates and risk repeating the mistakes of the past decade's buyout boom, some firms have been biding their time, or exploring unorthodox transactions rather than jumping head-first into the mergers and acquisition frenzy.
Included in this list are top firms like Blackstone Group (a True Wealth holding), Kohlberg Kravis Roberts, and Apollo Global Management, all of which have been selling major stakes to public investors.
This trend isn't new. We first reported on it nearly two years ago. As we wrote in the December 10, 2013 Digest...
To borrow one of Buffett's famous quips, "Be fearful when others are greedy and greedy when others are fearful." Many of the largest private-equity firms are heeding Buffett's advice today...
Private-equity shops Clayton Dubilier & Rice and Kohlberg Kravis Roberts sold U.S. Foods to food-distribution giant Sysco for $3.5 billion. In the last quarter, Blackstone Group sold stakes in three companies (General Growth Properties, Nielsen, and PBF Energy) and brought another three public. It's also selling real estate, including plans to take Hilton Hotels (which it acquired in 2007) public.
But billionaire private-equity honcho Leon Black of Apollo Group said it best... "It's almost biblical: There is a time to reap and there's a time to sow," Black said at a conference in April. "We think it's a fabulous environment to be selling. We're selling everything that's not nailed down in our portfolio."
This news alone is not a reason for individual investors to sell. After all, the broad market is up double digits since we wrote the note above.
Still, any time several of the world's best investors agree it's time to start taking some risk off the table, it catches our attention. And according to the latest data, the trend could be accelerating.
Meanwhile, another note of caution...
We've covered our colleague Dr. David "Doc" Eifrig's positive stance on the economy. In short, Doc says the latest data continue to show we're slowly "grinding" higher. And what he sees when he travels and talks to folks all over the country is supporting that view.
But not everyone agrees... And if the latest report from shipping giant UPS (UPS) is correct, there could be some trouble ahead.
In a conference call last week, UPS CEO David Abney said the company is seeing signs that the economy could be slowing...
If you just look at January, the GDP forecast we thought was going to be about 3.1%. Now the thinking in July is about 2.3%, so let's say a pretty significant decrease. Retail has been uneven and we saw it soften a little bit in June. And so that's the reason we're cautious.
CFO Richard Peretz and Chief Commercial Officer Alan Gershenhorn later joined Abney. Peretz noted, "The U.S. domestic business is on track with its revenue management and efficiency gains. However, we are seeing some softening in the economy." And Gershenhorn added, "We think the economy was certainly slower for sure."
If the economy is slowing now, it could be especially bad for the stock market going forward.
A new report suggests one of the biggest drivers of stock prices over past five years could also be slowing... making future returns even more dependent on the economy than usual.
According to an article on financial news website MarketWatch, earnings per share for companies in the S&P 500 have grown at an annualized rate of nearly 9% over the past five years. Sales growth has been just 3% over the same time period.
In other words, much of the gains in U.S. stocks are a result of increasing corporate profit margins... Companies have benefited primarily from keeping more of every dollar sold rather than increasing sales.
The article points to three reasons in particular for soaring profit margins: falling interest rates, lower corporate tax rates, and a lower percentage of gross domestic product ("GDP") going to worker salaries. And these trends could be ending.
The market expects the Federal Reserve to begin raising interest rates this year. And given the government's debt problems and the current political climate, it wouldn't be surprising to see corporate tax rates move higher as well.
If profit margins stall or even decline, the market will be dependent on higher price-to-earnings ratios (which are already 39% above the long-term average according to the article) or economic growth for continued gains.
For now, our stance remains the same... We're cautiously bullish, but we're keeping a close eye on our trailing stops.
Speaking of trailing stops, regular readers know we've been covering the recent volatility in Chinese stocks.
After soaring for much of the past year, the benchmark Shanghai Stock Exchange Composite Index has plunged more than 30% since peaking in June.
As we've discussed several times, our colleague Steve Sjuggerud was one of the first analysts to turn bullish on China last October.
Subscribers who took Steve's early advice were up as much as 130% before shares stopped out last month. As Steve told his subscribers at the time...
We hit our trailing stops in our Chinese stock positions over the last few days. Subscribers who bought on our initial recommendation made a big gain... They sold half of [one position] once we were up 100%, and they're now selling the other half for a gain of 63%, based on our stop price.
Shares of [our other two positions] – which didn't soar nearly as high as [our first position] – are still winning positions based on our stops... up 3% and 5%, respectively. On the other hand, subscribers who got in recently are faced with a quick and dramatic loss.
The most important principle you can possibly learn from this is: the market doesn't care if you're in the black or in the red. If you're in the red, the absolute worst thing you can say is, "Oh, I'll just wait until I get back to breakeven before I sell." You must understand that the MARKET DOESN'T KNOW OR CARE if you're down. We need to follow our stops now.
But Steve says the "big trend" in China is still up, and he intends to get back in the trade when the time is right. As he told readers in the July 21 DailyWealth...
True Wealth Systems readers could have turned $10,000 into more than $80,000 by following my biotech advice since 2012. That's a more than 700% gain... and it was possible by owning a simple biotech fund.
Last month, I explained how we made those incredible gains. The most important thing was our mindset... We were willing to sell... And we were willing to get back in.
That's the key to huge gains when a bull market gets going. And it's how hundreds of percent MORE gains could come in Chinese stocks. But importantly, now is NOT the time to own Chinese stocks.
Steve explained that while some values are starting to pop up – particularly China's H-shares that trade in Hong Kong – it's still too soon to buy...
I look forward to owning Chinese stocks at these low prices again. But not until the current downtrend turns into a new uptrend.
Meanwhile, $400 billion is still set to flow into local Chinese stocks (according to MSCI, the leading global stock index provider). This will provide a tailwind to the markets over the next few years.
So the opportunity is there in China... We just can't get back in yet. We can't know how far China will fall, so we must move along for now.
So, just how far could Chinese stocks fall?
Like Steve said, we can't know for sure. But history may offer a clue...
Financial-news website Barron's reports that while valuations of Chinese stocks have swung more widely than those of U.S. stocks, the Shanghai Composite Index has rarely traded far below 10 times earnings.
The index currently trades near 19 times earnings. By this measure, there could be significantly more downside from here.
On the other hand, the article also notes that Chinese stocks trade less on profits and fundamentals and more on government policies than many other markets.
Unlike it was prior to the last crash in 2007, the government is not "tightening" monetary policy to fight an overheating economy. Instead, it has been lowering interest rates. The country's central bank – the People's Bank of China ("PBOC") – has lowered rates four times since last November. And since China's benchmark one-year interest rate is still 4.85%, China still has plenty of "room" to follow former Fed Chairman Ben Bernanke's playbook and lower them further.
A quick note to end today's Digest...
Congrats to Stansberry's Investment Advisory analyst Bill Shaw and Two Suns Charters.
On the first day of the 42nd Annual White Marlin Open in Ocean City, Maryland – the world's largest billfish tournament – Bill hauled in the gorgeous tuna below. At the time of the weigh-in, the 62-pound fish was good for third place.
Porter and his Two Suns crew will be fishing again on Wednesday and Friday.
After catching the second-largest white marlin last year, they're hoping to represent Stansberry Research with a qualifying finish in this year's contest.
We wish them the best of luck...
The angler who lands the largest marlin among this year's field of approximately 400 boats will walk away with up to $3 million in prize money.
New 52-week highs (as of 8/3/15): AXIS Capital (AXS), Becton Dickinson (BDX), Chubb (CB), SPDR S&P International Health Care Sector Fund (IRY), and short position in Viacom (VIAB).
A quiet day in the mailbag. Haven't we offended you lately? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
August 4, 2015
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