A New Record for the Dow
The 'Maestro' sounds the alarm... 'We are experiencing a bubble'... A new record for the Dow... Sales and earnings surprise for a second straight quarter... Big trouble for GGP...
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Former Federal Reserve Chairman Alan Greenspan is now sounding the alarm...
Greenspan has joined the chorus of several notable figures warning of a bubble today. But Greenspan doesn't believe the bubble is in the stock market. Rather, he believes it is in bonds. As Bloomberg reported on Tuesday...
"By any measure, real long-term interest rates are much too low and therefore unsustainable," the former Federal Reserve chairman, 91, said in an interview. "When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace."
However, he did warn that when the bond bubble bursts, it's likely to be bad news for stocks as well...
Stocks, in particular, will suffer with bonds, as surging real interest rates will challenge one of the few remaining valuation cases that looks more gently upon U.S. equity prices, Greenspan argues.
Greenspan was referring to what's known as the "Fed Model." This is the idea that stocks should be valued relative to inflation-adjusted bond yields. With yields sitting near record lows, the Fed Model argues that stocks aren't as expensive as traditional metrics suggest. But it also implies that stocks could be vulnerable to a dramatic decline if interest rates suddenly move higher.
It's hard to find fault with Greenspan's argument. (Though as usual, we have to point out that the "Maestro" was far less pragmatic when he was helping inflate the dot-com bubble in the late 1990s.) In fact, it echoes many of the warnings we've made about the bond market in the Digest over the past year or two.
Of course, inevitable does not mean imminent...
We'll continue to watch the bond market for the first signs of trouble. But for now, the "Melt Up" continues...
The Dow Jones Industrial Average broke above the 22,000 mark for the first time today, joining the recent all-time highs in the S&P 500 and Nasdaq Composite last week.
Today's rally was led by a big rally in consumer-electronics giant Apple (AAPL) – the Dow's largest stock by weight. Shares surged as much as 6% to a new all-time high following better-than-expected sales and earnings figures last night.
But Apple isn't the only large U.S. firm posting another strong quarter of growth. As the Wall Street Journal reported this week...
America's largest companies are on pace to post two consecutive quarters of double-digit profit growth for the first time since 2011, helped by years of cost-cutting, a weaker dollar and stronger consumer spending.
Earnings at S&P 500 companies are expected to rise 11% in the second quarter, according to data from Thomson Reuters, following a 15% increase in the first quarter. Close to 60% of the firms in the index have reported second-quarter results so far.
Corporate America's strong earnings performance comes as several policy initiatives that were expected to help boost companies' bottom line – corporate-tax cuts and increased government spending on infrastructure – have been sidetracked amid political infighting in Washington, D.C., which culminated with the recent failure of the health-law bill...
"You could argue that the stock-market investor overestimated Trump but underestimated earnings," said Christopher Probyn, chief economist for State Street Global Advisors.
According to market data firm FactSet, an incredible 73% of S&P 500 companies have reported better-than-expected revenues so far. If this rate holds, it would be the highest percentage since it began tracking data in 2008.
The bad news continues for troubled mall operator GGP (GGP)...
Unfortunately, not every large firm is growing today...
This morning, the Stansberry's Investment Advisory short recommendation – formerly known as General Growth Properties – reported weaker-than-expected second-quarter results.
Revenue fell 3.3% year-over-year to $555.8 million. And the firm reported funds from operations ("FFO") – a key metric used to gauge the performance of real estate companies – fell to $335 million, or $0.35 per share, from $340 million in the second quarter last year. Analysts had expected $0.36 per share. Despite the results, the company said it would increase its third quarter dividend by 10%. (More on this in a moment.)
Granted, the decline in FFO was relatively small. But it suggests that Porter's short thesis continues to play out. As he and his team explained in the September issue of Stansberry's Investment Advisory (emphasis added)...
We're currently in one of the longest economic expansions in U.S. history. And the commercial real estate market is booming. Yet, GGP has been unable to grow its revenues in five years. That's a huge red flag.
Granted, GGP's profits and cash flows have improved over the past few years. The primary measure of cash flow for REITs is "funds from operations" (FFO). FFO is a measure of cash flows that doesn't include any gains or losses on the sales of any of their properties. It's just rental and management fee revenue minus operating expenses like salaries, real estate taxes, and maintenance costs. GGP's FFO grew by 10% last year, and by 58% since 2011. But without revenue growth, GGP won't be able to grow its FFO much longer.
The company also announced it was abandoning its earlier plan to explore "strategic alternatives." As news service Reuters reported this morning...
The company said it would stay the course and not sell assets following a board review of all "strategic alternatives" announced in May...
GGP Chief Executive Sandeep Mathrani said on a call with analysts that there was a tremendous amount of embedded value in its assets and that proceeding with GGP's current strategy would produce the best long-term results for shareholders. "We felt there was a lot of meat on the bone that the board didn't want to leave on the table," Mathrani said. "We will continue to lease, lease, lease," he said.
Mathrani said in May that there was a wide discount between public and private markets and that some of the parts were far greater than GGP's stock price. On Wednesday, Mathrani said that gap remained but surprised analysts by saying the best way forward was to stay the course.
In other words, GGP was apparently unable to find buyers who appreciate the "tremendous amount of embedded value" in its assets today.
Why is this important? As Porter and his team explained last fall, GGP has become increasingly dependent on property sales to meet its massive cash needs...
Over the last three and a half years, GGP has raised $3.8 billion by selling a sizeable portion of its portfolio of malls. This is a shrinking business. At the end of 2012, it owned 144 properties. Today, it owns only 128.
But this strategy can only be used for so long. Selling properties shrinks its revenue and cash flows going forward. That means it has even less cash for capital projects and dividends. And with the acceleration of department-store closings, the value of its weaker malls will drop, making this option even less attractive.
Today's news suggests this door is now closing. This means GGP likely has only one option left to keep the lights on. More from the September issue of Stansberry's Investment Advisory...
It could cut its dividend. But we don't think that's likely anytime soon. A dividend cut would send the share price crashing. More likely, GGP will take on more debt...
Between [existing] dividends and the redevelopment costs, we calculate GGP will have to increase its long-term debt by $3.2 billion to $3.9 billion. Its debt-to-asset ratio will balloon from 59% today to 75%, approaching a level similar to the days prior to it filing for bankruptcy in 2009...
It won't take a bankruptcy to cause a stock like GGP to collapse. If the company's leverage increases like we expect, the stock will tank.
Shares fell 4.8% today to $21.93 per share, a chip shot from a new three-year low. Stansberry's Investment Advisory subscribers are now up more than 20% in less than a year.
New 52-week highs (as of 8/1/17): Aflac (AFL), Allianz (AZSEY), iShares MSCI BRIC Fund (BKF), Global X China Financials Fund (CHIX), Euronet Worldwide (EEFT), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Japan Fund (EWJ), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), iShares China Large-Cap Fund (FXI), iShares U.S. Aerospace and Defense Fund (ITA), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CSI China Internet Fund (KWEB), Lockheed Martin (LMT), iShares MSCI China Index Fund (MCHI), Momo (MOMO), Koninklijke Philips (PHG), Shopify (SHOP), iShares MSCI India Small-Cap Fund (SMIN), Guggenheim China Real Estate Fund (TAO), Tencent (TCEHY), ProShares Ultra Financials Fund (UYG), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
In today's mailbag, reader feedback on subprime autos... confusion on our buy recommendations... and a question about the "Melt Up." As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.
"Hi guys, have you seen what Fiat Chrysler (FCAU) is up to as it pertains to subprime borrowers and the extension of additional rebates to those with less than a 620 FICO score? It's rather mind-numbing really, that they would want to encourage buyers who long-term will not pay the loan and effectively discourage those who will pay the loan. I say this because the $1500 incentive is only available to those with the sub-620 credit score. Consequently, if you are a responsible individual, you must pay an extra $1500 to buy one of their vehicles. What fool would do that? I'd buy from another manufacturer on principle alone, not to mention the fact that I'd like a vehicle that is at least SOMEWHAT reliable!!" – Paid-up subscriber Brian Gray
"Hi, I've been on the sidelines for a while watching the market. I like what I see with your recommendations. If you were me, would you still invest in these today at their current valuation?
"Automatic Data Processing (ADP), Aflac (AFL), Allianz (AZSEY), Boeing (BA), Baidu (BIDU), iShares MSCI BRIC Fund (BKF), Global X China Financials Fund (CHIX), Ctrip.com (CTRP), Euronet Worldwide (EEFT), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), iShares China Large-Cap Fund (FXI), iPath Bloomberg Copper Subindex Total Return Fund (JJC), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CSI China Internet Fund (KWEB), Lockheed Martin (LMT), iShares MSCI China Index Fund (MCHI), Koninklijke Philips (PHG), Guggenheim China Real Estate Fund (TAO), Tencent (TCEHY), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
"Thank you." – Paid-up subscriber Mindy C.
Brill comment: Hi Mindy. The list of stocks you mentioned – which can be found at the bottom of each day's Stansberry Digest – is not a list of current buy recommendations. They're simply a list of new 52-week highs among the open recommendations from all of our different investment and trading publications.
Instead, you can always find the current buy recommendations under the "My Subscriptions" page on our subscribers-only website. Simply click here, log in with your username and password, and click on the particular publication you're interested in.
And if you ever have any questions about accessing your subscription materials, our dedicated Member Services team is always happy to help. You can reach them at (888) 261-2693 between the hours of 9 a.m. and 5 p.m. Eastern time, or via e-mail at info@stansberryresearch.com.
"What does 'Melt Up' mean?" – Paid-up subscriber "shouhed"
Brill comment: The Melt Up is our colleague Steve Sjuggerud's term for the explosive final innings of the long bull market in stocks. He believes the Melt Up could push stocks to unbelievable new highs over the next 12-18 months. Steve has prepared a free presentation to explain it all. Click here to see it now.
Regards,
Justin Brill
Baltimore, Maryland
August 2, 2017