A New Twist to the 'Melt Up'
Another big bearish sign for crude… A new twist to the 'Melt Up'… The telltale signs of a bubble… Doc Eifrig: Despite fears, reality not so frightening…
"The recent fall in oil prices isn't over yet"...
Regular Digest readers know Porter and new Commodity Supercycles editor Flavious Smith believe oil prices could crash back to less than $30 per barrel before this long bear market finally ends.
But they're not the only Stansberry Research analysts who believe lower prices are likely in the near term. Our colleague Steve Sjuggerud agrees...
In recent months, Steve has highlighted several bearish signs for crude oil, including extreme sentiment among oil speculators and persistently bullish behavior in energy stocks. This week, he shared another. As he wrote in his latest True Wealth Systems Review of Market Extremes...
Oil prices have crashed in recent weeks... They're down nearly $10 a barrel in the past month. And our short oil trade is up big. We're sitting on 33% profits, as I write. But our thesis hasn't changed... Oil prices can move much lower from here.
You see, oil rig counts continue to increase. They just hit their longest streak of increases in three decades. This tells us supply and demand is still hurting oil. And lower prices are likely.
As Steve explained, the number of active oil rigs has now increased for 22 straight weeks. This hasn't happened in at least 30 years. It suggests U.S. oil production will continue to soar. More from the issue...
More oil rigs working means more oil is flooding the market. More oil supply alongside consistent demand means that the price will likely keep going down. The chart below shows the recent rise in the number of oil rigs. Take a look...
Rig counts have risen dramatically over the past year... and they're showing no signs of stopping.
Worse, as we mentioned last week, Steve noted that oil inventories remain stubbornly high...
On top of those increasing rig counts, oil inventories continue to approach record highs. In other words, we have a glut of oil... and drillers are fixated on pulling more and more out of the ground.
Today's situation doesn't differ much from what we saw back in March... when we first recommended shorting oil. The supply-and-demand equation points to lower prices. And sentiment is still in our favor.
So while we're already up big on our short oil trade, the best could be yet to come. The smart bet today is to stay short.
While Steve is bearish on oil, he remains bullish on stocks...
Regular readers know he's particularly bullish on China... where four powerful trends could push the market higher for years to come.
Steve also expects to see a "Melt Up" here in the U.S... an explosive final "inning" of the long bull market that pushes stocks to unbelievable new highs. However, just this week, Steve told us something has changed about his Melt-Up thesis...
In short, he says a new and unexpected "twist" has just emerged. While we can't share all the details just yet, we can tell you that Steve is preparing a live briefing to explain it all. And as always, it will be free for all Stansberry Research subscribers. Click here for the details.
No bubble, yet...
Of course, Steve isn't our only resident stock market bull...
Our colleague Dr. David "Doc" Eifrig has also remained steadfastly bullish on U.S. stocks and the U.S. economy over the past eight years.
In the latest issue of his Income Intelligence advisory, Doc shared his latest thoughts on the market. First, Doc addressed fears that the market is getting "bubbly" today. From the issue...
About 20 years ago, Internet evangelists argued that profits or even revenue no longer mattered... They created alternative valuations to measure Internet stocks, including the number of "eyeballs" they could attract. A 2000 Forbes magazine headline included the phrase, "It's not perfect, but on the Net, what is?"
Tech stocks soared. Bulls argued, "This time it's different."
Of course, we know it wasn't. Profits still mattered. And the tech darlings came crashing down – bringing the rest of the market with them. Today, Lycos is worth practically nothing.
A similar thing happened in the depths of the financial crisis. Then, the phrase du jour was "the new normal." Former PIMCO CEO Mohamed El-Erian coined the term in May 2009 to describe an economy with stagflation, high unemployment, and slow growth.
"This time it's different" has become a pejorative phrase. It's used by value-investing adherents to tag those willing to buy stocks at anything higher than a reasonable valuation.
So with stocks on the rise... is it different this time?
But despite fears that valuations are too extreme, Doc argues that the reality isn't nearly as frightening. More from the issue...
The days of the market trading at 12 times and 15 times average earnings are gone... Valuations have fundamentally stretched from the price-to-earnings ratios of the 1970s and 1980s that some hardline value investors have anchored to...
Or if you allow the "mean" to drift a bit, the upcoming pullback in stocks will be much different than the longer-term averages may suggest. Here's the S&P 500 valuation against its five-year moving average...
More important, Doc noted that we're not yet seeing the telltale signs that often accompany a true "bubble" in prices...
For one, we're not abandoning profits, cash flows, and dividends as the true value underlying our businesses. We're not switching to "eyeballs" or any other metrics in an attempt to justify unjustifiable valuations.
The market will also pull back. There will be 5%, 10%, and 20% drawdowns from here. And we're positive that the S&P 500 price-to-earnings ratio will pull back, too.
However, we live in a world with ultralow interest rates and lots of capital pouring into global businesses that can grow bigger than ever... Simple supply and demand tells us that stocks and other financial assets should command higher valuations with more capital chasing them.
"The biggest and broadest trend continues"...
Meanwhile, Doc believes the most important driver for higher stock prices – economic growth – continues...
Since the turn of the century, China has turned into an economic juggernaut and quadrupled its wealth. India has tripled. Even developed economies in Europe and North America have more than doubled their total wealth...
And trade – be it between two people or two nations – is not a zero-sum game. It creates value out of "thin air." That value has been piling up and getting siphoned into both safe assets like Treasury securities and risky assets like stocks.
That's why rates stay low. The Fed's $4 billion to $20 billion of buying per month doesn't even qualify as a drop in the bucket... It's a single water molecule.
That growing global economy – paired with the scale of technology – also expands the capabilities for companies to capture huge markets that didn't exist before. Companies like Google (GOOGL) and Facebook (FB) can serve billions of people. With a bigger market, the gains to the winner become larger than ever.
The Fed's moves don't matter. Economies and earnings are growing. And that's driving markets up.
In sum, while Doc expects a correction in the near-term, he believes the bull market will continue awhile longer...
Given the heights of the market and the unbroken streak of rising prices, we're positioning for a pullback of 20% or so with additional defensive positions...
On a grander scale, we think that valuations are high, but nowhere near bubble territory. There's no euphoria in markets. There's no mania chasing prices to astronomical levels – other than maybe bitcoin. Today, we simply see a rising market.
And we don't expect any big changes in that trend until cracks show in the underlying economies of the biggest nations. The U.S., most of Europe, Asia, and emerging markets keep growing.
Doc's Income Intelligence is designed to show subscribers the best, safest opportunities for generating fat income streams from the full array of cash-generating investments – including dividend stocks... master limited partnerships... real-estate investment trusts... business development corporations... utilities... preferred shares... and municipal bonds. If you'd like to learn more about Doc's income-focused advisory, click here.
Check out P.J. O'Rourke's American Consequences...
A final note for fans of P.J. O'Rourke's Digest commentary... P.J. is traveling this week and unable to file his regular column. Look for a new offering from him next week. In the meantime, if you haven't read it already, be sure to check out the inaugural issue of P.J.'s new magazine, American Consequences. It includes an essay from Porter on the new "Escher Economy." You can sign up to have all the issues e-mailed to you for free here.
Also, P.J. was a recent guest on Porter's new weekly podcast, the Stansberry Investor Hour. You can sign up to receive the episodes and access the archives (including P.J.'s episode) here.
New 52-week highs (as of 6/21/17): Boeing (BA), Alibaba (BABA), Fidelity Select Medical Equipment and Systems Fund (FSMEX), Johnson & Johnson (JNJ), ALPS Medical Breakthroughs Fund (SBIO), Stanley Black & Decker (SWK), U.S. Concrete (USCR), Weight Watchers (WTW), and short position in Brinker International (EAT).
In today's mailbag, several readers respond to Sjug's big China news. Have you benefited from Steve's China research? Let us know at feedback@stansberryresearch.com.
"Yes, Steve did hit it [out of the park]... I have made that 15% in just under 3 months on two picks. Hanging in for the long run." – Paid-up subscriber Jeffrey G.
"Kudos to Steve on his MSCI China call. Fair is fair." – Paid-up subscriber Allen W.
"Am quite pleased with my current positions in various China equities, per Steve's recent MSCI-related recommendations. I am also becoming more comfortable with my recent one year subscription to TradeStops... HOWEVER, TradeStops doesn't handle Chinese equities... and even some U.S. equities (i.e. PayPal). I was just wondering if these might be included (or at least addressed), in the near future?" – Paid-up subscriber Jake E.
Brill comment: Actually, Jake, that's not quite correct. TradeStops currently handles all major U.S. markets, including stocks, mutual funds, exchange-traded funds ("ETFs"), indexes, and options. It also works for most over-the-counter ("OTC") or "pink sheet" stocks traded in the U.S. as well. And it now includes most stocks trading in Canada, London, Germany, and Australia, with more in the works. This means you'll find virtually all of Steve's China recommendations in TradeStops, save a handful that trade in Hong Kong.
However, many of the advanced TradeStops tools and indicators require a minimum amount of historical data to work properly. Stocks like PayPal (PYPL) and one of the new Chinese ETFs Steve recommended simply haven't been trading long enough to qualify. But you can still use basic volatility-based trailing stops with these if you'd like.
"I'm trying to understand why when MSCI gave the nod to the A shares, [one of Steve's recommendations] went up after hours, and then [yesterday], went down. Why?... I naively believed that the market would take off with the China decision. It's the opposite. Could you explain this?" – Paid-up subscriber E. Kesler
Brill comment: As Steve has explained, this is a massive shift that is going to force hundreds of billions – even trillions – into Chinese stocks. Folks who buy in at today's prices are likely to earn unbelievable returns as it does. But it's not going to happen overnight...
The MSCI Emerging Markets Index has a total market cap of more than $4.6 trillion... And Chinese "A" shares will go from a 0% weighting today to nearly 20% when it's all said and done. The sheer magnitude of this shift means it must be spread out over several years... And there will be plenty of big rallies and corrections along the way.
Regards,
Justin Brill
Baltimore, Maryland
June 22, 2017