This Early Warning Indicator Is Flashing 'Yellow'
This early warning indicator is flashing 'yellow'... An update on the Treasury yield curve... The next big test for the market... Could we see an earnings surprise?... Huge news on 'legal marijuana'...
Regular Digest readers know we've been keeping a close eye on U.S. Treasury bond yields...
In particular, we've been watching what's known as the "10-2 spread." This is simply the difference in yield between longer-term debt (10-year Treasury notes) and shorter-term debt (two-year Treasury bills).
Why? Because as both Porter and Steve Sjuggerud have explained, whenever this measure has "inverted" – or dropped below 0 – serious trouble for stocks and the economy has inevitably followed. Here's how Steve explained it in the November 21 Digest...
So when does [the bull market] end? Porter and I published the exact same chart... We both said it's a major "get out" warning for us...
The chart shows us that when we get an inverted yield curve, stocks peak and a recession is around the corner. That is "inevitable if the Fed continues to raise rates," as Porter said. We both agree on that.
Porter says it could turn negative by early next year. I think that day happens in 2019 or even 2020. Only time will tell... But whenever it does happen, don't take it lightly. Bear markets happen a lot faster than bull markets. And great bear markets tend to follow great bull markets.
The 10-2 spread moved sharply higher in February...
Unfortunately, the rebound was short-lived... And as you can see in the following chart, the spread has now fallen to just 45 basis points (0.45%). At this pace, we could see "inversion" by summer...
To be clear, this is not a reason to panic...
And neither Steve nor Porter are saying "sell" today. The yield curve has not yet inverted, and we won't recommend making significant changes to your portfolio until (or unless) it does.
But one of the most reliable bear-market indicators is now flashing "yellow" again. Risk is rising. Stay long, but keep a close eye on your trailing stops, just in case.
In the meantime, not all the news is bearish...
First-quarter earnings season kicks off in earnest this week. And thanks to the recent tax cuts, it could be one of the strongest in years. As news service Reuters reported (emphasis added)...
Analysts expect S&P 500 profits to rise 18.4% in the first quarter, according to Thomson Reuters, the first full quarter since passage of President Donald Trump's tax cuts, which slashed the corporate tax rate to 21% from 35%. That would be the biggest profit rise since the first quarter of 2011...
Given the tendency of companies to report results above Wall Street estimates, those numbers might be expected to come in even higher. For example, first-quarter profits should rise by 24% if results achieve the median out-performance of the past eight quarters, according to Thomson Reuters analyst David Aurelio...
In other words, we may be on the verge of the biggest "earnings surprise" in years. Companies could be set to trounce Wall Street's already lofty expectations. This could be the catalyst that kicks off the next phase of the "Melt Up"... and drives stocks significantly higher.
We'll keep you posted.
Finally, we note some huge news from one of the most controversial industries in the world today...
In short, the U.S. legal marijuana industry has a surprising new spokesman: Former Republican Speaker of the House John Boehner. As Bloomberg reported yesterday...
[Boehner] has joined the advisory board of Acreage Holdings, a company that cultivates, processes and dispenses cannabis in 11 U.S. states. Boehner's endorsement... could be considered a watershed event: Marijuana has gone mainstream.
"Over the last 10 or 15 years, the American people's attitudes have changed dramatically," he said in an interview. "I find myself in that same position."
This is a BIG deal...
As Bloomberg noted, Boehner was formerly among the government's staunchest critics of marijuana... even once saying that he was "unalterably opposed" to legalization.
That even he has now reconsidered his stance is as clear a sign as you'll likely get: The legal marijuana industry is here to stay... And it is simply a matter of time before it is fully legitimized.
Of course, that hasn't happened yet...
Marijuana has been legalized in several states, but it is still illegal under federal law in the U.S. Until that changes, U.S. marijuana companies – and the investors who own them – remain at risk today.
This is why we've largely avoided the industry to date. Despite the obvious potential in many of these companies, the downside is simply too great. With one exception...
As we discussed last month, Commodity Supercycles editor Bill Shaw has found a unique way to invest in this trend without exposing yourself to these risks.
It's a well-run, established business that is ideally positioned to capture the upside of this boom... Yet it has virtually none of the legal or regulatory risk associated with owning marijuana stocks directly.
Bill says it's the single best and safest way to profit from the legal marijuana boom in the U.S. today... and it remains well below his maximum "buy" price right now.
Again, it wouldn't be fair to Bill's paid subscribers to share all the details here, but you can get instant access to this recommendation with a 100% risk-free subscription to Commodity Supercycles. Click here for the details.
New 52-week highs (as of 4/11/18): KraneShares E China Commercial Paper Fund (KCNY) and Monsanto (MON).
In today's mailbag, more on a potential "trade war"... and a question about Dan Ferris' brand-new gold recommendation. As always, send your questions and comments to feedback@stansberryresearch.com.
"In response to Joe J's response to John S. – Many Americans don't realize the complex financial relationship between the US and China. The reason goods from China are still so cheap is because of fiat currency – both US and China.
"China accepts all those trade dollars from America, and then buys US treasuries with that money (plus some of their own printed money). In the process, the yuan is effectively converted into dollars, preventing the yuan from rising significantly relative to the US dollar. That's the only way China remains so cheap.
"If they quit buying treasuries or sell a significant amount of them, then the yuan appreciates substantially, and their export driven economic plan fails. It's a Lose-Lose scenario for both parties.
"And it's only possible with fiat currency. The whole scheme collapses when a gold standard is present – which is not present (Nixon). Please consider reading some of Richard Duncan's work on this." – Paid-up Stansberry Alliance member Mike T.
"In today's issue of the Stansberry Digest at the end you refer to Dan Ferris' recommendation he expects to be Stansberry's first 20X position... I know this is a marketing statement and that is fine. The disappointing thing is that Alliance members like myself going to the Extreme Value [website] following that teaser can't find the position referred to easily. I would think that some of your highlighted marketing positions would have easy to find and therefore titled issues that make going back and reviewing very easy. Instead most issues are not titled in a fashion that states the name of corporations being highlighted." – Paid-up subscriber Kevin D.
Brill comment: Stansberry Alliance members find always the recommendations mentioned in our marketing promotions under that particular publication's "Special Reports & Books" section on our website. In this case, it's the most recent Extreme Value special report titled "The Hands-Down, No. 1 Pick of My Career."
Again, interested readers who are not yet a Stansberry Alliance member or Extreme Value subscriber can learn more about Dan's No. 1 pick – and take advantage of a substantial discount on an Extreme Value subscription – right here.
And for the record, Dan does in fact believe this recommendation could become the first "20-bagger" in our company's history.
Regards,
Justin Brill
Baltimore, Maryland
April 12, 2018