Who's first with more QE?...

Who's first with more QE?... Leaked information from the ECB... Japan cuts inflation forecasts... But makes another one anyway... This global economic bellwether just hit a new low... Jim Chanos is skeptical of Tesla... Discussing IBM's latest earnings... The biggest opportunity of Dan Ferris' career...

 

 Stocks are rallying today on news that the European Central Bank (ECB) has proposed monthly bond purchases of 50 billion euros. Several news agencies reported the news, citing an unnamed source. The Wall Street Journal and Bloomberg say the program will last one year.

 

We'll know for sure tomorrow, when the ECB makes its official announcement. In the meantime, we're seeing more and more reasons to buy gold today. (The "safe haven" asset briefly eclipsed the $1,300 mark today.)

 

 Japan's central bank, the Bank of Japan (BoJ), cut its inflation projection for the fiscal year starting in April from 1.7% to 1%. The BoJ is targeting 2% annual inflation.

 

The BoJ initiated its 1.7% forecast only three months ago... clearly another spot-on call from the central bankers of the world...

 

But don't fret... According to BoJ forecasts, inflation will hit 2.2% starting April 2016. BoJ thinks gross domestic product will grow 1.6%. That's based on Dubai crude oil increasing to $70 a barrel before March 2017. (It's trading for less than $45 a barrel today.)

 

 BoJ Governor Haruhiko Kuroda said there is "no concern of Japan being beset by a deflationary mindset again."

 

He added that the BoJ doesn't need to ease further. That's good to know, considering that less than three months ago, the BoJ expanded its quantitative easing to a record $678 billion a year. Japanese interest rates sit at 0%.

 

 Remember, oil prices were $10 a barrel in 2000... And yesterday, Iran said it was fine with oil falling to $25 a barrel. Plus, the world is still awash in oil... And we don't see any major boosts to demand soon.

 

Despite the already accommodative stance (and the fact that central bank projections are garbage), we wouldn't be surprised to see more easing to combat deflation in Japan.

 

 In further easing news, the Bank of Canada cut its benchmark interest rate from 1% to 0.75%. The central bank said it, too, was trying to combat the deflationary effects of falling oil.

 

 For further proof of a global slowdown, check out shares of manufacturing-equipment giant Caterpillar (CAT)...

 

 

 Caterpillar is one of the best economic bellwethers... Its machines are used in everything from drilling oil wells to building shopping malls. When the world is growing, Caterpillar shares tend to do well. When things are slowing down, Caterpillar pulls back.

 

 Caterpillar's poor performance shouldn't be a surprise to regular Stansberry Research readers. We've been following the story since 2013.

 

DailyWealth Trader co-editor Brian Hunt noted the bearish argument for Caterpillar as presented by short-selling wiz Jim Chanos. Chanos is the billionaire founder of short-selling hedge fund Kynikos Associates.

 

Chanos has correctly predicted the collapse of everything from Enron and WorldCom to Brazilian oil company Petrobras.

 

 Chanos recently appeared on CNBC to update his short-Caterpillar thesis. He said the company has three main businesses – construction, mining, and energy – the latter two of which are highly troubled today.

 

The construction business is fine. Mining and energy "are increasingly challenged," Chanos said.

 

While he doesn't have a price target on the stock, he says the firm's numbers are still way too high.

 

At the end of the day, it all boils down to slowing growth in China. From the August 20, 2013 DailyWealth Trader...

 

Chanos believes the Chinese economy is in the midst of a major slowdown. He says the government has encouraged too much investment in real estate and infrastructure. As China's economy slows (or worse), it will consume less commodities... which will suppress mining investment... and damage Caterpillar's earnings.   Over the past year, Caterpillar has earned $6.77 per share. Chanos believes a continued slowdown in China and commodities could drag those earnings down to $5 per share or lower. He also notes that the company's profit margin is near historically high levels. He sees the margin "reverting to the mean" and falling back to a normal range... which will further suppress earnings.   If the Chinese economy severely weakens over the next year or two, shares of Caterpillar could easily suffer a hit.

 

 China's economy is growing at a reported 7.5% a year, down from double-digit annual rates from 2003 to 2011. That's impressive growth for a $10 trillion economy. But resource and infrastructure companies like Caterpillar soared on the China growth story. And with little to no growth happening in the rest of the world today, the future doesn't look so bright.

 

 Chanos also recently made some negative comments about one of our favorite short targets, electric-car manufacturer Tesla. As he said on CNBC last Friday...

 

The guts of this product [the battery] is made by Panasonic. It's a manufacturing company. It's an auto company. It's not a change-the-world company.

 

Chanos didn't say whether he was short Tesla. But he has a problem with the company's valuation based on 2025 earnings when it can't even accurately forecast its next quarter.

 

 Chanos also has a small short position in IT giant IBM. And although shares have been falling recently, we're still bullish on the company's future.

 

IBM announced earnings yesterday. Shares are down 3% today. We asked Extreme Value research analyst Mike Barrett for his comments on the earnings and IBM's valuation today. As he explained...

 

Yesterday, following a lengthy review of fourth-quarter results, IBM CFO Martin Schroeter finally delivered the only thing most Wall Street analysts really cared about: The earnings per share (EPS) projection for 2015. Schroeter's forecasted range was below consensus expectations.   When he delivered his 2015 forecast yesterday, Schroeter also mentioned something most Wall Street analysts totally ignored: IBM should exit 2015 with a higher-value, higher-margin business.   It will accomplish this by continuing the shift toward higher-growth IT sectors management refers to collectively as its five "strategic imperatives." That's business analytics, the cloud, mobile, social media, and security.

 

 As Mike points out, IBM actually posted some positive numbers that most analysts simply ignored...

 

IBM's strategic imperatives revenue for 2014 was $25 billion, up a strong 16% year-over-year. Keep in mind, these are operations that didn't even exist a few years ago. Now, they're generating $25 billion in annual revenue. To put that number in perspective, that's more revenue than social media giant Facebook, customer relationship management firm Salesforce, and security firm Symantec earned last year combined.   Building strong enterprise-class franchises in emerging fields like social media takes time and capital. These businesses haven't reached sufficient scale yet to earn the kind of margins IBM has in its other segments. This is normal, but a source of angst for those who care about quarterly earnings. At Extreme Value, we're more focused on whether these emerging businesses are continuing to improve and delivering the kind of results management has told us to expect.

 

 At the end of the day, IBM is still generating huge amounts of cash. And Mike reiterated that the company is still worthy of its "World Dominator" status...

 

IBM has a number of core franchises that continue to generate tens of billions of dollars in recurring, annuity-like revenues. These businesses produce the huge cash flows IBM is reinvesting into strategic imperatives, and give the company tremendous staying power.   IBM also continues to reward its shareholders. In 2014, the quarterly dividend grew 16% and the share count fell by 8%. Most companies haven't reduced their share count 8% over the past decade, let alone the last year. During yesterday's conference call, Schroeter reported that IBM's share count has declined an incredible 58% since 1995.   Despite Wall Street's ongoing negative bias toward IBM, we continue to view Big Blue as an exceptional opportunity for patient, long-term investors.

 

 Extreme Value editor Dan Ferris also chimed in on the debate in a private e-mail, noting...

 

Let's not understate those core franchises. As our friends at value-investing firm Manual of Ideas explained, "90% of the top 60 banks use IBM products to run their IT systems. 80% of all worldwide airline reservations are processed on IBM hardware and software. 90% of global credit card transactions are processed on IBM mainframes. 71% of global Fortune 500 firms run their business on IBM mainframes.   "60% of services revenue is annuity-based, coming primarily from outsourcing and maintenance arrangements. The services backlog was $128 billion at September 30, 2014, providing a good revenue base entering each year. In addition, the software segment includes annuity-type income streams, including from software license fees."

 

 Today, IBM is the only World Dominator in "buy range" in the Extreme Value portfolio. And Dan is clearly optimistic about the company's prospects going forward. But that isn't the opportunity that Dan is most bullish about today...

 

Dan says one area of the market is currently offering the biggest opportunity he has seen in his investing career: Resource stocks.

 

Dan studied the cyclical pattern of resource stocks going back 30 years... As Digest readers know, resource stocks boom and bust like crazy. Dan believes we're on the verge of a boom today... and a certain handful of resource stocks could return 300%.

 

He doesn't think we'll get another opportunity like this in at least a decade.

 

 Keep in mind, Dan is only recommending a few specific stocks. These aren't just mining companies or small gold stocks.

 

These companies will profit from a rebound in all the blown-out resource sectors – gold, silver, uranium, agriculture, energy, etc.

 

At least one of these companies is a "deal maker" in the resource markets... and is loaded up with cash and looking to buy distressed assets today. These are deals you would never personally get the chance to invest in... And when the market inevitably heads higher, the value of these newly purchased assets should soar.

 

We can add Dan to the roster of Stansberry Research analysts who are bullish on gold and other resources today. You can get the full story from Dan right here.

 

 New 52-week highs (as of 1/20/15): ProShares Ultra Nasdaq Biotech Fund (BIB), Brookfield Property Partners (BPY), CDK Global (CDK), Invesco Value Municipal Income Trust (IIM), Altria (MO), OCI Resources (OCIR), Osisko Gold Royalties (OR.TO), and ProShares Ultra 20+ Year Treasury Fund (UBT).

 

 In today's mailbag, a question about trailing stops and what a pullback in stocks would mean. Send your missives to feedback@stansberryresearch.com.

 

 "I have been using TradeStops for a few years. However, I am worried about this concept in a severe bear market. It seems that almost all stocks will drop if there is a significant downturn. So, even with good asset allocation and diversification you could lose more than a little of your portfolio before the stops are hit. Opinion?" – Paid-up subscriber Don

 

Goldsmith comment: Don, the situation you describe is exactly why we recommend using trailing stops. Trailing stops and proper position sizing prevent you from taking huge losses. If a stock makes up 4% of your portfolio and it falls 25%, you'll only lose 1% of your total portfolio.

 

Also, as we always say, you should never enter your stops in the market. Regular readers know that our favorite way to track trailing stops is through our corporate affiliate TradeStops, which can import your information directly from your broker and send you notifications when you hit your stops. You can learn more about TradeStops at TradeStops.com.

 

Regards,

 

Sean Goldsmith

January 21, 2015