A Sign of the Bottom in Gold and Silver
The 'Bond God' agrees with Sjug... Why Gundlach is bullish on emerging markets... A sign of the bottom in gold and silver... Why you should think twice about buying Apple today...
Steve Sjuggerud's emerging markets call is in great company...
As we mentioned last week, Steve originally turned bullish on these stocks back in February.
At the time, he noted emerging markets had essentially gone nowhere since 2010 and had massively underperformed U.S. stocks for four straight years. History suggested a big rally was likely. As Steve wrote in the February issue of True Wealth Systems...
The last time emerging markets underperformed the U.S. market for four straight years was 1995-1998. You can guess what happened next... The MSCI Emerging Markets Index soared 64% in 1999. It went on to outperform the U.S. market for 10 of the next 12 years. It entered a bull market that led to 400%-plus gains.
But Steve isn't alone...
Last week at the annual Sohn Investment Conference in New York, "Bond God" Jeffrey Gundlach said he, too, expects emerging markets stocks to outperform going forward.
He recommended going long emerging markets via the iShares MSCI Emerging Markets Fund (EEM), while shorting the S&P 500 via the SPDR S&P 500 Fund (SPY), as his favorite trade right now.
To be clear, Gundlach isn't betting that U.S. stocks will fall...
Instead, like Steve, he's simply betting that emerging markets will play "catch-up" after lagging the U.S. so long. As he explained in an interview with financial-news network CNBC following his presentation last week...
The valuation of emerging markets is half the valuation of the S&P 500, when you look at things like price to sales, price to book...
I use [emerging markets], you could use Europe as well... I just think EEM has more potential upside than even Europe.
If you look at market share of global stock markets, the U.S. is over 50% of global stock markets, but it's under 25% of GDP. So there's just something wrong with this picture...
Gundlach is best-known for his credit-market calls...
But few analysts have nailed as many big-picture predictions as he has in the past couple years.
Gundlach was one of the few analysts anywhere to predict Trump's victory last November. He also called the top in U.S. Treasury bonds – and the bottom in interest rates – when virtually everyone was bullish on bonds last summer.
Of note, his favorite trade at last year's conference – another pairs trade, going long a mortgage REIT fund and shorting a utilities sector fund – returned 40% over the past 12 months.
Another great sign for precious metals...
Last month, we explained that the precious metals sector was looking a little "frothy."
According to the U.S. government's Commitments of Traders ("COT") report, speculative traders had become incredibly bullish on silver, in particular. We warned that a further pullback was likely as this sentiment extreme wore off.
Earlier this month, we noted investors were dumping gold-mining stocks at the fastest pace in years. As we discussed at the time, this was a positive sign. We want to see investors throw in the towel before we turn bullish. As we wrote in the May 2 Digest...
As longtime Digest readers know, precious metals – perhaps more than any other asset class – are susceptible to dramatic and rapid swings in investor sentiment. And we can use these extremes to our advantage...
When folks are downright giddy about gold and silver, it's often a bearish sign... It means the rally has gotten ahead of itself, and at least a short-term correction is likely. Likewise, when investors turn bearish, it's often a great time to buy.
However, while retail investors were selling, COT data showed speculative futures traders had remained relatively bullish. Now they're giving up, too...
According to the latest COT report published Friday, net speculative positions dropped by nearly 20,000 contracts last week. They're now down almost 50% from their all-time high set last month...
Speculative bets on gold – which remain below their 2016 record high – have also plunged. Net speculative gold positions fell by nearly 50,000 contracts last week, the largest weekly decline in more than five years.
Again, this is a good sign... It's what needs to happen before a meaningful bottom can form. But we're still not ready to give the "all clear" just yet...
Despite these big declines, bullish bets on both gold and silver remain above levels that have marked significant bottoms in the past. History suggests gold and silver prices could fall farther as the last remaining bulls give up.
Finally, longtime Digest readers know we've highlighted the bullish case for Apple (AAPL) several times over the past couple years...
As recently as last September, we noted shares were still cheap and likely to move higher. Yet most folks weren't interested.
Now, as the consumer-electronics titan hits new all-time highs, it has become a market darling again. It's up more than 35% so far this year... making it the best-performing stock in the S&P 500. With a market cap of $800 billion, it's already the most valuable company in history... yet the financial media predict it will soon become the first to surpass $1 trillion. And legendary investor Warren Buffett has suddenly become its biggest cheerleader.
But if you were one of those investors who weren't interested in Apple last year but are thinking about buying now, our colleague Ben Morris has a message for you. He says there's a valuable lesson here. As he explained in an issue of DailyWealth Trader last week...
If you're a new Stansberry Research subscriber, you're in the clear. But if you read about bargain-priced Apple shares multiple times and didn't buy, why didn't you?
The answer: You probably read that people were worried about Apple's growing competition... and that the iPhone represented too large a percentage of the company's business. It felt risky to buy Apple at the time.
But now that everyone including Warren Buffett is singing Apple's praises, it no longer feels risky.
This is one of the most important things you'll ever learn as a trader or investor: Your emotions will betray you.
As Ben noted, when a great company trades at a fantastic price and still feels risky, you can be certain it's time to buy. By the time it no longer feels risky, the biggest, easiest gains are long gone... And it's often too late to buy at all. More from the issue...
Look at the chart of Apple below. Its share price is plotted on the top and its EV/EBITDA is on the bottom. When we bought shares in DWT, Apple's valuation was at historical lows. Now, it's not...
Now, again, this doesn't mean Apple can't continue higher. But as Ben explained, you have to ask yourself if the reward of buying today is worth the risk...
On the upside, Apple is an $800 billion company today. Will it grow to be a $1 trillion company... a 25% gain? Will it match the valuation of the S&P 500 and gain 39% from here? In the next year or two, those are reasonable, if optimistic, targets.
If you were to buy today, where would you put your stop loss? If you use a 15% stop, your upside (using the above numbers) isn't quite three times your risk. If you use a wider stop, your reward-to-risk ratio gets worse...
I hope all of you are patting yourselves on the back for buying Apple last year. But if you're not – and you're thinking about buying today – think hard... You may have a better buying opportunity in the near future.
New 52-week highs (as of 5/12/17): Apple (AAPL), Amazon (AMZN), Alibaba (BABA), iShares MSCI BRIC Fund (BKF), Chipotle Mexican Grill (CMG), 3D Systems (DDD), Digital Realty Trust (DLR), iShares MSCI Singapore Capped Fund (EWS), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), JD.com (JD), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), Naspers (NPSNY), Nvidia (NVDA), Paysafe (PAYS.L), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), Tencent Holdings (TCEHY, 0700.HK), Weight Watchers (WTW), short position in AutoNation (AN), and short position in Hertz Global (HTZ).
Lots of great feedback on Porter's Friday Digest request. Send your notes to feedback@stansberryresearch.com.
"When I was a young CPA with Price Waterhouse, one of my major clients was a chain of Avis stores. The business model was eye-opening to me when I came to understand the real business. This is an excellent and concise explanation. With an understanding of how depreciation methods can be managed to minimize taxable income while using straight line depreciation for financial reporting purposes, one can see the magnitude of tax deferrals that manipulate EPS. This explains all one needs to know to evaluate the investment thesis!" – Paid-up subscriber Don Birdwell, Jr.
"Just wanted to let you know that your essay on Auto Rental companies is outstanding. I have been reading several hundred different investment newsletters over the past 55+ years since I first worked as an account rep beginning in 1960 in the Washington DC market selling new issues. Very few have ever tried to explain why a specific market works the way it does. Keep up the good work." – Paid-up subscriber John Ott
"Porter, you made a direct hit with an excellent explanation of the finances facing the car rental companies. If someone does not understand what you wrote, turn off the TV, iPod, etc, take a deep breath and read the comments slowly again and again until it sinks in. If it still does not sink in, maybe you should reevaluate your investing skills. In my opinion, Porter could not have worded it any better. He makes it crystal clear! As a side note, because of your clear explanation at the introduction of [Stansberry's] Big Trade, I am up 324% on Hertz puts as of the close May 12. Well done, Porter!" – Paid-up subscriber Steve K.
"One of my most enjoyable reads is always Porter's in-depth analysis on any given topic at the end of the week. Loved this review, explanation, and reasoning behind the looming rental car collapse. It's easy to see Porter's logic now. Had no idea rental car companies were really used car peddlers! Keep up the amazing work!!" – Paid-up subscriber Steven B.
"Dear Porter and team, your explanation about why Hertz and Avis are great shorts is very clear. I have followed your advice and sold short a few months ago since at that time your recommendation (and explanation) also made good sense to me. Thanks for helping your readers learn about these companies and business context they operate in. I find it fascinating!" – Paid-up subscriber Alan W.
"Quite a few years ago, Dominos founder Tom Monaghan said something like 'We're not in the pizza business, we're in the delivery business.'" – Paid-up subscriber Richard C.
"I would say farmers think their job is to feed the nation. But, the business is really real estate. You raise the capital, farm for a generation or more, and sell the land to retire on. Year to year it is a break even at best operation..." – Paid-up subscriber Charles F.
"I recently eavesdropped on a manager at a Dunkin' Donuts explain to a prospect employee during a job interview that Dunkin' really wasn't in the doughnut business, but the beverage business. He saw their business as a rival to Starbucks." – Paid-up subscriber Jim B.
"I understood you very clearly back in 2015 and executed my first short ever in Santander. As you would expect I got out way too early but it was an excellent experience. I have also bought long dated way out of the money put options on Ford, GM, Capital One Financial and Avis/Budget. I have had to work hard to stay within my position size rules as I know what you are saying is coming – just like it did 10 years ago. As some would say it is clearly a high confidence investment proposition for me. I do agree with your reader that the revenue from renting cars does count but unfortunately for these companies the relevance of these revenues is minuscule." – Paid-up subscriber John B.
"I'm standing and applauding Porter. Great explanation and an even greater call on those shorts." – Paid-up subscriber Peter G.
"Porter, I thought the explanation was quite clean. I'm glad I understood. I shorted Hertz with your Put recommendation and I'm up 325%." – Paid-up subscriber Russ Z.
"I just wish I had understood back in October and had taken action. Both of your recent explanations have been perfectly clear to me." – Paid-up subscriber Earl H.
Regards,
Justin Brill
Baltimore, Maryland
May 15, 2017