A New Warning From a Global Bellwether
Brexit odds are falling... Markets cheer... A new warning from a global bellwether... Recession fears are growing... Another bull market is here... Will you join us tomorrow night?...
At least that was the message from the financial media today...
Markets around the world rallied this morning following a weekend poll showing those in favor of the U.K. remaining in the European Union have retaken the lead.
The poll – published in the British Daily Mail newspaper – showed 45% of voters support "remain," compared to 42% in favor of a Brexit. The Wall Street Journal also reports a "poll of polls" averaging the six latest polls has returned to 50/50.
Meanwhile, the odds of a Brexit at U.K. bookmakers – representing real-money bets on the outcome of Thursday's vote – have declined significantly in the past few days. Odds for "leave" were as high at 13-8 at one point last week, but sit at just 3-1 today.
Major European indexes in the U.K., Germany, and France all rallied more than 3%. "Peripheral" markets, like Spain and Greece, rallied even more. The British pound soared more than 2% against the dollar... its biggest one-day gain since 2009.
U.S. stocks rallied, too... The benchmark S&P 500 Index was up about 1% as of midday trading.
We continue to believe a Brexit is unlikely... But we wouldn't be surprised to see fear and volatility return as Thursday's vote draws near.
Industrial-equipment giant Caterpillar (CAT) reported its retail sales declined again last month.
Incredibly, this marks 42 consecutive months of falling sales for the firm. Sales have declined every single month since late 2012.
Worse, the company reported the slowdown in sales has recently started to accelerate again in both North America (the U.S.) and Asia/Pacific (China).
North American sales declined 12% year over year in May, compared with 11% in April and 8% in March. Sales in Asia fell 13% year over year last month, compared with 10% in April.
Caterpillar has long been considered one of the best bellwethers of the global economy... Its machines are used in everything from farming to transportation to building shopping malls. When the world is growing, Caterpillar tends to do well. When the world is slowing down, it's one of the first companies to feel it.
Despite big talk from governments and central banks over the past few years, Caterpillar's results never confirmed a recovery. If the latest data are any indication, we could be headed for another rough patch.
But that's not the only reason for concern today... More and more signs suggest a slowdown is starting.
Job growth screeched to a halt last month... temporary firms have slashed new hiring... auto and retail sales have been plunging... and perhaps most concerning, corporate profits have disappeared. As Porter warned in the April 29 Digest...
America's biggest corporations are a good way to judge the health of the global economy. When our best companies can't increase their earnings, we have a problem.
For the last 115 years (for as long as we have reliable records), two consecutive quarters of falling U.S. corporate earnings led to a recession 81% of the time, according to investment bank JPMorgan. The only occasions that a recession was avoided were when there was a significant central-bank action to boost monetary stimulus. So how are our corporate profits doing now?
The first quarter of this year marks the third consecutive quarter that saw a decline in U.S. corporate profits... And... there's a little-noticed bit of information about corporate earnings that I hope you'll recognize as being extremely unusual: Corporate revenues have now declined for five straight quarters. That's a longer downturn in corporate sales than during the 2008/2009 crisis.
Now, it appears others are beginning to take note as well. As the Wall Street Journal reported this morning...
Gut-wrenching gyrations in financial markets early in the year helped summon the specter of a new recession. Now, warning signs are coming mostly from the U.S. economy itself.
Hiring is slowing, auto sales are slipping and business investment is dropping. America's factories remain weak and corporate profits are under pressure. All are classic signs of an economic downturn, and forecasters have certainly noticed.
Like Porter, the Journal singled out the decline in corporate profits as especially concerning (emphasis added)...
Quarterly U.S. corporate profits have been declining on a year-to-year basis since late last year, according to the Commerce Department. The continuing balance-sheet squeeze is one reason Joshua Shapiro, chief U.S. economist at consultancy MFR Inc., pegs the odds of a recession in the next year at 50%.
"The ongoing decline in profitability and margins is likely to lead to aggressive cost-cutting, which should affect the labor market and consumer spending, which is the only thing keeping the economy afloat," he said.
Regular readers know oil has been one of the leaders of the recent rally. West Texas Intermediate crude oil – the U.S. benchmark for prices – is up more than 80% from its February low.
[Editor's note: In Friday's Digest, Porter updated readers on his latest thoughts on oil and the ongoing problems in the credit markets. If you missed it, be sure to catch up here.]
Of course, precious metals have also soared... Gold is up 23% from its low. Silver has rallied 27%. And platinum rallied 33%.
But these aren't the only resources that have been rallying lately... The broad commodities sector has, too.
The Bloomberg Commodity Index – which includes energy, precious metals, agricultural commodities, industrial metals, and even livestock – is now in official bull market territory, up just more than 20% from its recent low.
But there could still be a lot more upside from here. Our colleague Ben Morris explained why in this morning's edition of our free Growth Stock Wire e-letter...
As you can see in the chart below, the index booms and busts. Right now, it is coming off one of its biggest busts yet... and it is up just 21% from its recent low.
The four booms over the past quarter century averaged 87%. If the Bloomberg Commodity Index stages another "average" boom, it would mean another 56% upside from here.
Now, if we're concerned about the global economy, you might wonder why we'd be bullish on the broad commodities sector. After all, the prices of many of these "raw materials" are closely linked to economic growth.
But today, the bullish case for commodities is less about growth, and more about value. Here's more from Ben...
Because commodities don't generate earnings or pay dividends, valuing them is a lot different from valuing businesses. But one simple and useful way to value commodities is by comparing them with other assets, like stocks.
The chart below shows the ratio of the benchmark S&P 500 Index to the Bloomberg Commodity Index. The higher the ratio, the more expensive stocks are relative to commodities... and the cheaper commodities are relative to stocks.
The ratio peaked around 27 earlier this year. That was its highest reading ever. And as you can see, the recent rally took the ratio down to 23.4.
As Ben explained, the average for the stock-to-commodities ratio over the past 24 years is about 10. That would represent a huge drop from here... meaning commodities are likely to outperform stocks in a big way going forward. As Ben wrote...
The ratio can move lower in different ways. Commodities could rise faster than stocks. Commodities could fall more slowly than stocks. Or commodities could rise while stocks fall (the opposite of what has happened over the past five years).
If stocks hold steady, it would take a 134% rally in commodities for the ratio to reach its long-term average. Even for the ratio to reach 16 – near its old peak in the late 1990s – commodities would have to rally 46% from today's levels.
If stocks drop 20%, commodities would still have to rally 88% for the ratio to get back down to its average. They'd have to rally 18% to bring the ratio back to 16.
Ben's "bottom line" for investors was clear: "Commodities are extremely cheap relative to stocks today. This is a fantastic buying opportunity. Be sure not to miss it."
Finally, a quick reminder about tomorrow night's can't-miss online event...
Tomorrow night, Tuesday, June 21 at 8 p.m. Eastern time, Porter will be joined by Agora Founder Bill Bonner and renowned analyst Chris Mayer for a conversation unlike any other in our company's history.
Porter, Bill, and Chris will share their thoughts on today's market, including how best to position your portfolio for the world's current political, social, and economic problems like negative interest rates, the upcoming "Brexit" vote, and this fall's presidential election.
They'll also reveal an investment strategy you've likely never considered... An incredibly simple, yet powerful, way to safely build wealth in stocks.
This strategy beat the market by an unheard-of 3-to-1 margin over a 10-year period (including the financial crisis). Yet virtually anyone can use it. It requires no minimum investment and doesn't involve options, currencies, or any complicated trading techniques.
If you're a fan of our work on capital-efficient stocks or World Dominators, you're sure to love it. It's so simple and safe, Bill Bonner himself has agreed to invest $5 million of his family trust exclusively in this strategy.
Tomorrow night's event is completely free to attend and comes with absolutely no obligation. If you're interested in generating real wealth from your investments, you do not want to miss this.
Again, it will start promptly at 8 p.m. Eastern time tomorrow night, Tuesday, June 21.
Click here to add your name to our RSVP list. We'll send you a confirmation e-mail with all the details on Tuesday's event.
New 52-week highs (as of 6/17/16): Central Fund of Canada (CEF), SPDR Gold Shares Trust (GLD), Hershey (HSY), Pretium Resources (PVG), Spectra Energy (SE), and AT&T (T).
In today's mailbag, several readers weigh in on Porter's Friday Digest. Let us know what you think at feedback@stansberryresearch.com.
"You are right on about oil, Porter. I grew up in the oil and petrochemical business, spent 44 years in the field mostly in production, automation, and data processing, both research and business applications. I have designed and written systems to automate these companies from paper to the miracle of technology they are today. Not alone, but working with their best people. I have understood their business like no one else perhaps, but you have added the layer of government laws, lobbying, economic effects, and well-reasoned predictions.
"I honestly don't know how you did it, but you have nailed it. I have known too in a small way, but this is big! Thanks for your research, your analyses and your reasoned logic which leads to almost certain results. Everyone should pay attention to this. I am a lifetime member of your Alliance, but at 84, although I am still active in the market, my life expectancy isn't exactly a big deal. I wish there were a way to subscribe to your new crisis-investing letter, but my means are just too limited to do that.
"Thanks for putting it in the Digest.
"Could I possibly give copies to my family and heirs? This will exceed my time to perform and their ability to learn when the time comes. In any event, go ahead and enjoy this praise. You and your staff deserve every bit of it." – Paid-up subscriber Duane Little
"Hi Porter, your story on the state of the oil industry is spot on. As a geophysicist who has worked in the oil & gas industry for the last 33 years, your analysis couldn't be more correct. I agree that more hard times are coming for the oil patch, but I am excited to see what great opportunities in distressed debt you can uncover for readers of Stansberry's Credit Opportunities. Keep up the great work!" – Paid-up subscriber Wes Powell
"The line about Billy Bobs had me laughing for a while. Great service you provide and I am learning." – Paid-up subscriber Joe P.
Regards,
Justin Brill
Baltimore, Maryland
June 20, 2016
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