A 'Line in the Sand' for Stocks
Ford is 'teetering on the edge of junk'... The bond market is getting worried... GE plunges to new post-crisis lows... A 'line in the sand' for stocks...
Last week brought more bad news for iconic U.S. automaker Ford Motor (F)...
Regular Digest readers may recall that Ford had its credit rating slashed again back in August. Ratings agency Moody's cut its rating from Baa2 to Baa3, just one notch above "junk" territory.
On the bright side, despite that downgrade, the company is still considered an investment-grade credit today by all three major ratings agencies, including Fitch and S&P Global Ratings. However, if the bond market is any indication, it may not be for much longer. As Bloomberg reported on Friday...
Ford could be close to getting junked again... The company's debt is trading like it's speculative grade, as investors worry about how higher steel tariffs and slowing sales will weigh on its profits... Any downgrade could be painful for bond investors, and for the company. The automaker has more than $150 billion of short- and long-term debt globally, and is one of the 15 biggest corporate bond issuers in the U.S. outside the financial sector...
Bob Shanks, Ford's chief financial officer, said on an earnings call last month that the company is committed to maintaining its investment-grade ratings, and doesn't intend to lose that status again. The company is "moving with a sense of urgency and taking proactive steps to redesign and restructure the business," and over time "the market will recognize our progress," spokesman Brad Carroll said.
But debt investors are skeptical. The extra yield that money managers get for holding Ford's 4.346% bonds due 2026 rather than similar Treasuries jumped to levels typical of high-yield companies. The cost of protecting Ford's debt against default using credit derivatives rose in October to the highest levels since 2012 before settling down again.
Again, we'll remind you that Ford's financial troubles have been escalating despite continued growth in corporate credit and relatively low interest rates. When the credit cycle eventually (and inevitably) rolls over, these problems will become exponentially worse in a hurry.
But regular readers also know Ford is just one of many firms facing a similar fate...
Former industrial giant General Electric (GE) is near the top of the list. And it, too, has had a rough several months...
In addition to having its own credit rating downgraded, it has become the subject of an expanded U.S. Securities and Exchange Commission ("SEC") probe into its accounting practices... lost its coveted spot in the Dow Jones Industrial Average after more than 110 years... and been forced to cut its dividend payment to a meager $0.01 per share.
GE shares – which had already shed more than half their value over the past couple of years – had fallen more than 30% more since June.
Unfortunately, GE also received more bad news on Friday...
Shares plunged below $9 for the first time in nearly a decade after a widely followed JPMorgan analyst slashed his outlook on the company. From a separate Bloomberg report that morning...
JPMorgan Chase & Co. analyst Steve Tusa cut his view on the shares 40% to $6, the lowest on Wall Street, citing rising liabilities, a weakening cash-flow outlook and poor third-quarter results on "almost all fronts." He also pointed to deteriorating results at GE's troubled power division and financial business.
"While the stock is down about 70% from the peak of $30, this move still does not sufficiently reflect the fundamental facts," Tusa said in a report to clients. The company's latest regulatory filing suggested rising indebtedness, he added, noting about $100 billion in net liabilities.
The pessimistic view from Tusa, who has been prescient in predicting GE's collapse, fueled a steep share decline Friday for a company that has already shed $200 billion in market value since the end of 2016. GE is grappling with one of the deepest slumps in its 126-year history amid weak demand for gas turbines, federal accounting investigations and heavy debt.
The company initially brushed off Tusa's comments...
In a statement issued Friday, GE said it is "a fundamentally strong company with a sound liquidity position." However, in an appearance this morning on financial-news network CNBC, new chairman and CEO Larry Culp sounded a bit less confident. As CNBC reported...
Culp said Monday he feels the "urgency" to reduce the company's leverage and will do so through asset sales.
"We have no higher priority right now than bringing those leverage levels down," Culp said in an interview on "Squawk on the Street" with CNBC's David Faber. "The stock has been under pressure" during the last two weeks, Culp said, "no doubt about that."
"We need to bring the leverage down," Culp added.
The market apparently agrees...
GE shares plunged another 7% today. They've now lost nearly 75% over the past two years... and are trading below $8 for the first time since the peak of the financial crisis in March 2009.
Of course, Ford and GE weren't alone 'in the red' today...
Following a strong rebound last week, all three major U.S. indexes were decidedly weak again today. If you've been with us for long, you're likely not happy, but you shouldn't be surprised.
Over the past couple of several weeks, we've highlighted a number of indicators that suggest stocks are likely to rebound significantly in the months ahead.
However, we've also highlighted some others – most notably, our proprietary Complacency Indicator – that tell us we may not be "out of the woods" just yet.
In short, while we continue to give this long bull market the benefit of the doubt, we urge you to be cautious.
Stay long, but stay "hedged"... and keep an eye on your trailing stops, just in case.
By the way, our colleague Greg Diamond – editor of Ten Stock Trader – also believes caution is warranted today...
While he remains bullish, he says there are some critical levels that must hold if the bull market is to resume sooner rather than later. As he explained in his Weekly Market Outlook this morning...
If we see a larger correction unfold this week and the indexes trade back below their 200-day moving averages, ideally, support needs to hold at the 2,725 to 2,685 level in the S&P 500.
2,725 is the previous low and the 50% Fibonacci retrace level and 2,685 is the 61.8% Fibonacci retrace level from the October lows to the highs seen last week...
Now, if you're not familiar with that terminology, don't worry...
All you really need to know is that these levels – which are based on the work of 13th-century Italian mathematician Leonardo Fibonacci – tend to act as important reversal points for stocks.
If the worst of the recent correction is in fact over, we would expect to see one of these levels act as a "floor" for prices.
Today, the S&P 500 closed at 2,726, just above the first of these levels...
If stocks can remain above 2,685 in the days ahead, we'll have one more sign the bull market is set to resume.
However, if both of these levels fail, Greg says there is one last "line in the sand" to watch. And if stocks fall below this critical level, he believes a continued correction will become more likely...
That line for the S&P 500 is 2,600...
A break of 2,685 and the market would likely test the 2,600 level quickly. That would be bad news for bulls. How bad?
Well, if 2,600 breaks on a closing basis, the next target on the S&P 500 is 2,475 –which is another 10% drop from current levels.
New 52-week highs (as of 11/9/18): Blackstone Mortgage Trust (BXMT), CME Group (CME), Coca-Cola (KO), McDonald's (MCD), and O'Reilly Automotive (ORLY).
In today's mailbag: One subscriber accuses us of "deceit," while another blatantly ignores our risk-management advice. Send your notes to feedback@stansberryresearch.com. Good, bad, or ugly, we read them all.
"Your bragging of your hall of fame stocks is ridiculous. Over the long term an investor would have punched out of all of them, and most several times, with stop losses if they heed your advice. Quit the deceit." – Paid-up subscriber Keith H.
Brill comment: Actually, Keith, you're incorrect. Every position listed in the Stansberry Research Hall of Fame below is an actual, closed recommendation. Each produced the stated gain over the stated holding duration, calculated using our official buy and sell advice. No deceit here.
"Hello, I must admit I am not following your risk management advice right now, but it basically is Steve [Sjuggerud]'s fault. I have been a paid-up subscriber of Steve's now for 9 years and I have made a lot of money following his recommendations. So much so I a 100% believer in Steve's melt up and before the recent down turn bought 3X leveraged Bull ETF's on the Nasdaq and biotech sector. Yes, bad timing as I am down 35% and 50% respectively on my positions but I know in the long run Steve and I will be vindicated. My wife is a worrier and is not sleeping well but I tell her once it all pays off, she will sleep better than she has her entire life." – Paid-up Derek R.
Brill comment: Derek, with all due respect, we hope you're joking... While we at the Digest are relatively more cautious today, even Steve has been clear that if you're going to invest for the "Melt Up," you must follow his strict position-sizing and stop-loss advice.
As you've already experienced, stocks that are capable of soaring much more than the market on the way up are, by definition, also capable of falling much more on the way down. Proper risk-management is absolutely critical in these stocks.
Of course, you're free to do as you please... But you'll have no one to blame but yourself.
Regards,
Justin Brill
Baltimore, Maryland
November 12, 2018