This American Icon Is One Step Away From 'Junk'

More on our bearish warnings... A poster child for the coming debt crisis... This American icon is one step away from 'junk'... A trend that is going to change everything... Welcome to the 'next Industrial Revolution'...

Earlier this week, we addressed a reader's accusation that we've been too bearish over the past few years...

In short, it's true we've been growing more and more concerned about the underlying fundamentals of both the equity and credit markets. But we have also consistently urged readers to stay long stocks (while properly managing risk, of course).

However, there is one particular area of the market where we have been extremely bearish for several years now. Time and again, we've warned readers to stay far away from weak or troubled businesses with highly leveraged balance sheets. These firms will be the first (and worst) casualties when this boom inevitably ends.

Many of these companies should sound familiar to regular readers. They include names like General Electric (GE), Sprint (S), JC Penney (JCP), Hertz Global (HTZ), Tesla (TSLA), and of course, our favorite longtime whipping boy, General Motors (GM).

But we've also singled out fellow "Big Three" automaker and American icon Ford Motor (F) on several occasions as well. As Porter explained in the November 10, 2016 Digest...

Over the past 30 years, the car industry has seen tremendous competition and an explosion in debt, as carmakers had to finance big contributions to employee pension funds to support hundreds of thousands of retired workers. Those trends already bankrupted General Motors (GM) and Chrysler (FCAU). They will soon bankrupt Ford (F).

Since 1987, Ford has borrowed an additional $77 billion, taking total debt to a peak of around $145 billion. To put that in perspective, Ford had its best year ever in 2015, delivering a little more than 2.5 million cars and trucks. Thus, the company has been carrying almost $60,000 in debt per vehicle sold!

All of this capital and record volume hasn't improved Ford's profitability. Operating margins are half of what they were 30 years ago (5% versus 10%). And don't forget, from 2006 to 2009, Ford was losing money on every car it sold. What has changed lately is a huge increase in demand via subprime auto finance. My bet is, as subprime auto financing shuts down because of rising default rates, Ford's volume will collapse by 15%-20%, and it will begin losing money again. Sales fall, but debt burdens don't change.

At the time, Ford shares were trading at $12...

As we write today, they're trading at just $9.75. They've lost roughly half their value in the past five years, and nearly 20% since Porter originally wrote those words less than two years ago.

But despite this poor performance, the real fireworks have yet to begin.

You see, the markets are only now (finally) starting to understand what we've been warning about for years. As Bloomberg reported on Wednesday...

Ford Motor Co.'s credit rating was cut to one notch above junk by Moody's Investors Service... Moody's downgraded Ford to Baa3 from Baa2 with a negative outlook, it said in a report Wednesday. The ratings company cited erosion in Ford's "global business position and the challenges it will face implementing" its restructuring effort that could rack up [an additional] $11 billion [in debt] in the next three to five years...

Just last month, S&P Global Ratings cut Ford's outlook to negative from stable and said prolonged weakness in profit and cash flow made a downgrade within two years increasingly likely. S&P rates Ford at BBB, two levels above speculative grade...

Ford's leverage level, a measure of its earnings in relation to its debt, has risen from 2.6 times to 3.3 times between 2016 and the twelve months ending June 2018, according to Moody's. Slipping closer to junk status puts Ford at risk of higher borrowing costs.

Keep in mind, Ford's financial troubles are escalating despite continued growth in corporate credit and relatively low interest rates.

When the credit cycle rolls over – and it's simply a matter of time – these problems will become exponentially worse in a hurry. And again, Ford is just one of many firms facing a similar fate.

But please, make no mistake...

As we reminded paid-up subscriber Jim B. on Monday, this warning should not be taken as a recommendation to sell all your stocks and stuff the cash under your mattress.

First, as we've discussed many times, predicting exactly when these problems will "matter" to the broad equity and credit markets is difficult. If Steve Sjuggerud's "Melt Up" thesis is correct – and given his track record over this nine-year bull market, we certainly wouldn't bet against him – it could be another six to 18 months before the real trouble arrives. And folks who sell their stocks prematurely are likely to regret it.

Second, and more important, even if trouble begins sooner rather than later, some companies are likely to "weather the storm" just fine.

Remember, Porter originally recommended shares of capital-efficient chocolate-maker Hershey (HSY) back in December 2007, on the eve of one of the biggest bear markets in history. This was one of the worst times to buy stocks imaginable. Yet anyone who took his advice is up nearly 200% today... because even the worst financial crisis in a generation wasn't enough to trigger their stop loss.

Likewise, some big technological trends are likely to create incredible amounts of wealth for investors over the next several years, regardless of what's going on in the markets or the economy.

Last week, our colleague Christian Olsen and the Stansberry Innovations Report team introduced readers to one of them...

If you're not familiar, Christian is one of our in-house tech experts.

His background is one of the broadest and most impressive at Stansberry Research. He holds degrees in molecular biology, biochemistry, and bioinformatics. And he has extensive experience in scientific computing, software product management, and infectious disease research, among other areas of tech and biotech.

Suffice it to say, he's one of the smartest people we know... So when he and his team told us about an important and potentially transformative trend in the tech world, we listened.

In short, they've found a technology they say 'is going to change everything'...

You see, over the past two centuries, America has undergone three industrial revolutions. Behind each revolution was a central technology that changed everyday life as we know it.

The first was the steam engine... which allowed us to build factories across the country and opened the door to inventions like locomotives and the cotton gin. Next came electric power... which led to the lightbulb, refrigerator, the telephone, and air conditioning. Finally, we saw the creation of the Internet, which paved the way for online commerce, smartphones, social media, and more.

Now, they say, we're entering America's fourth industrial revolution...

And like the last three, this one is will be led by a brand-new technology unlike anything we've seen before. This technology is called "5G," and Christian says it's all about one thing: sending massive amounts of data across the Internet at unbelievably fast speeds. As he and the Stansberry Innovations Report team wrote in the August issue...

The concept might seem basic, but there is nothing basic about it. 5G isn't just an upgrade. Compared with 4G that we have today, it's night and day.

As a 5G mobile phone user, you will see a roughly 10 times improvement in bandwidth and 10 times improvement in latency. For operators, 5G will allow for up to 1,000 times more devices per square meter than 4G. This matters for things like real-time remote apps and cloud-based gaming. It essentially allows you to have a "dumb" screen but play in real time as if you have the world's largest computer processors in your hands.

Big breakthroughs like artificial intelligence... driverless cars... augmented and virtual reality... and the "Internet of Things" (IoT) will change every aspect of our lives. And 5G will make these seemingly sci-fi technologies available to us – in real life – every day.

Today, 4G technology is worth an estimated $6 trillion in annual revenue...

But as they noted, 5G will blow its predecessor out of the water here, too. In fact, estimates suggest 5G will generate more than $12 trillion in annual revenue across multiple industries and support more than 22 million jobs. And as we've seen firsthand during the Internet revolution, history suggests it will create vast fortunes along the way...

Jeff Bezos – the founder of Amazon – is the world's richest man, worth a staggering $156 billion. Bill Gates – the founder of Microsoft – is No. 2 at $95 billion. And Mark Zuckerberg – the founder of Facebook – is worth $65 billion. But it's not just the founders who got rich... Investors who got in early on these great companies have also been able to create legacy-sized wealth...

If you bought Amazon back in 1997 and held on through today, you'd be up an incredible 120,000% according to Bloomberg. It's hard to fathom such big numbers. But consider this: A simple $10,000 investment when the stock went public would now be worth more than $12 million. If you bought Apple around the same time and forgot about it until now, you made 49,000% gains.

The noteworthy thing is that these incredible wealth-building success stories only took a little more than 20 years to play out for investors.

The team also noted that the rollout of this groundbreaking technology is much closer than you might realize...

Mobile phone carriers AT&T (T) and Verizon (VZ) are busy at work preparing 5G wireless services for a debut in several U.S. cities later this year. And fully functional 5G networks are expected to be live across the country by this time next year.

Earlier this year, 5G was tested in Frankfurt, Germany and San Francisco. The simulations showed increases in download speeds of 900% and nearly 2,000%, respectively. As they continued...

The faster speeds of 5G will allow for more reliable streaming and a near-real-time communication link...

During the first week of the World Cup earlier this year, 93 million out of the 486 million attempts to live-stream games failed. 5G will allow you to watch games live without delay. Just imagine donning a set of virtual-reality goggles and watching a soccer game as if you're actually sitting on the field. This is just one of the applications made possible with 5G.

Again, that decrease in lag time (or "latency") is a game-changer...

And they say it will open the door for other state-of-the-art technological advancements to follow...

Consider autonomous cars, for example. If the communications link is near real-time, you can basically control the car remotely. This decreases the cost per car since much of the processing power can be in the "cloud."

Lightning-fast speeds and ultra-low latency are possible because 5G will utilize additional "spectrum." Radio spectrum refers to the bands of electromagnetic frequencies that are used to transmit bits of data through the air. End users can capture that data with a device such as a radio, television, or telephone capable of receiving and deciphering the information.

We take wireless technology for granted. Every time you turn on your radio, TV, computer, or mobile phone, you are using radio spectrum. Swiping your credit card in your local store or using a remote to open your car or garage door requires radio spectrum.

However, they also noted that these higher speeds come at a cost...

The higher frequencies this technology uses can't travel through walls or other obstructions as easily as lower frequencies do. So this technology will require significant new infrastructure...

Cellphone carriers will need to build hundreds of mini cellphone towers in and around urban areas. They may even have to mount small antennas on streetlights, telephone poles, and building rooftops. These "small cells" will blanket the coverage areas, helping to propagate the 5G signals indoors.

On top of all that, the cell carriers will need to upgrade their existing base stations and antenna arrays. And they'll need new smartphones with chipsets that are 5G-capable.

There are about 2.5 billion smartphone users around the world. Starting next year, many of these consumers will gradually replace their devices with 5G-capable ones. Smartphone makers will need to start obtaining chips this year to put into the handsets.

In other words, a ton of new equipment will be required as 5G goes mainstream...

And Christian and the Innovations team have identified one company in particular that will benefit the most.

They say this firm has already become the clear leader in the 5G revolution. It has signed long-term deals with the three biggest Internet technology firms... four of the biggest wireless carriers... and 18 of the biggest electronics hardware suppliers. And they believe today's investors stand to make a fortune as this revolution takes hold.

To learn more about this massive opportunity – and find out how you can get immediate access to all of the Stansberry Innovations Report team's premium research at 75% off its regular retail price – click here. (This does not go to a video.)

New 52-week highs (as of 8/29/18): Apple (AAPL), Automatic Data Processing (ADP), Amazon (AMZN), Becton Dickinson (BDX), ProShares Ultra Nasdaq Biotechnology Fund (BIB), Blackstone (BX), Blackstone Mortgage Trust (BXMT), First Trust Nasdaq Cybersecurity Fund (CIBR), Cisco Systems (CSCO), Eaton Vance Enhanced Equity Income Fund (EOI), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Grubhub (GRUB), iShares Nasdaq Biotechnology Fund (IBB), ETFMG Prime Mobile Payments Fund (IPAY), Ingersoll Rand (IR), Microsoft (MSFT), Okta (OKTA), ProShares Ultra QQQ Fund (QLD), ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), SPDR S&P Dividend Fund (SDY), and ProShares Ultra S&P 500 Fund (SSO).

In today's mailbag, DailyWealth Trader editor Ben Morris responds to a cynic on "pairs trading." Send your questions, comments, and concerns to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail.

"If pairs trading is such a surefire means of generating outsized returns, why don't hedge-fund managers, who could pull off this magic trick in their sleep, use it to outperform sector ETFs which it has been proven they can't do?

"And please don't say pairs trading is a means of 'managing risk' which is a favorite hedge-fund cliché and means nothing. If you want to manage risk by limiting upside you accomplish that by investing in money market funds. Show me you have the courage to publish and answer this question." – Paid-up subscriber John B.

Ben Morris comment: Pairs trading is not a surefire way to make outsized returns. But it is a fantastic way to make good returns in any market environment. You see, pairs trades are often "market neutral," which means you can generate profits when the market is flat or falling just as easily as when it's rising.

And really, placing a pairs trade is nothing like buying a stock, a sector fund, or a broad market fund...

If you buy shares of a business and the sector or the market plummets, you'll almost surely lose money. And if you buy a sector fund and the market plummets, you'll almost surely lose money. Yet your thesis about the business or the sector could have been well-founded.

The thing is, even a brilliant thesis doesn't matter when larger forces are at work.

Said another way, when you buy shares of a business, you aren't just betting on the stock to rise. You're betting on the market sector and the overall stock market to rise, too. If you get any one of those three wrong, you can lose money.

Pairs trading allows you to bet on just one or two of those things, if you choose...

Maybe your thesis is that a business will perform better than the rest of the market, for example. In that case, you can build a pairs trade so that if you're right, you'll make money even if both the stock and the market crash.

If your thesis is that shares of one business will outperform those of another business in the same sector, again, you can make money even if the sector or the market tank... as long as the stock you buy outperforms the one you short.

In a bull market, a portfolio of pairs trades will likely underperform a sector fund... But you can still make good money. In a flat market or a bear market, you're almost guaranteed to trounce sector funds with a portfolio of pairs trades. And sometimes – bull market, bear market, or flat market – your returns in pairs trades can be fantastic.

That's what "market neutral" means. You can call it a hedge if you want... just like you can call owning rental real estate or precious metals a hedge. But really, it's an entirely different way to make money in the stock market.

Comparing pairs trading to buying stocks just misses the point. Unfortunately, people have trouble wrapping their heads around the idea of making money in stocks without betting on their direction. It's kind of like selling options in that it makes a lot more sense once you try it.

Regards,

Justin Brill
Baltimore, Maryland
August 30, 2018