An Early Warning From an Old Market Signal

Tesla sets an astonishing new record... An early warning from an old market signal... Corporate debt is booming again... $1.1 trillion and counting... Investors have rarely been paid so little to take so much risk...

Is Tesla (TSLA) approaching the 'tipping point'?...

Yesterday, the electric-car pioneer/battery-maker/savior of mankind announced better-than-expected "earnings." According to the report, it only lost $1.33 per share in the second quarter, compared with expectations of losing $1.82.

As usual, the reality was a little different...

This figure comes from Tesla's "adjusted" earnings report, which excludes a few notable expenses... such as the $116 million the company spent issuing shares to insiders. According to generally-accepted accounting principles (or "GAAP"), however, the company actually lost more than $2 per share.

Of course, this is nothing new. Tesla CEO Elon Musk has been manipulating earnings for years. And its fans don't seem to mind... The stock closed 2% higher yesterday, and closed up another 6.5% today.

But as we often say, "You can fake earnings, but you can't fake cash flows." And the report showed Tesla is now hemorrhaging cash like never before. As Bloomberg reported...

The company burned through $1.16 billion in cash in the second quarter by spending on capacity for its cheapest model yet and boosting battery output...

The record negative free cash flow Tesla reported for the three months ended in June was almost double the $622 million it went through in the first quarter.

Yes, you read that correctly. Tesla sent more than $1 billion to "money heaven" in just three months... which means it has already burned through most of the money it raised from investors back in March.

The company now has just $3 billion in cash on hand, out of a mind-boggling $10 billion it has siphoned from investors since 2012. And yet it's expected to burn through at least another $2 billion before the end of the year. At this rate, Tesla could run out of money as early as the first quarter of next year.

Despite earlier promises to the contrary, don't be surprised to see Musk going "hat in hand" to investors again soon. Our question: How much longer with they be willing to throw more money on the fire?

An early warning from an old market signal...

Last month, we noted that one of the oldest forms of technical analysis – Dow Theory – remained bullish.

In short, Dow Theory holds that both the widely followed Dow Jones Industrial Average and the lesser-known Dow Jones Transportation Average should be rising together in a healthy bull market. And when one breaks down while the other continues higher, it can be an early warning sign of a top in the market.

In July, the Dow Transports joined the Dow Industrials at a new all-time high, confirming the bull market was intact. But the Transports reversed lower almost immediately. And as you can see in the following chart, they've continued to fall sharply while the Industrials have pushed higher into record territory...

Now to be clear, this is NOT a reason to sell. Dow Theory has very specific requirements...

First, we would need to see what's known as a "non-confirmation." In simple terms, this would require the Transports to go on to make a lower high while the Industrials make a higher high. An official "sell" signal would not be triggered unless both averages then fell to a lower low.

In other words, it's still early. We aren't guaranteed to see a non-confirmation, and even if we do, it will likely take months to play out. But it's worth keeping an eye on.

Sharp divergences like this often precede non-confirmations. And these signals have occurred at virtually every major market peak over the past 85 years.

History suggests we're likely to see another one when the final inning of the long bull market comes to an end.

Corporate debt is booming again...

In the meantime, the "Melt Up" rolls on. But stocks aren't the only asset class setting records. The bond market is, too...

As you can see in the following chart, last year's junk-bond panic was just a hiccup. Corporate debt issuance has soared to $1.1 trillion year-to-date, better than any full year before...

Yet investors buying this debt are getting paid less to take on risk than practically any other time in history. As you can see in the next graphic, risk premium – how much more yield you can earn in corporate bonds compared with U.S. Treasury debt – has only been lower for a short time in mid-2014...

Meanwhile, so-called "duration risk" – how susceptible bonds are to a given move in interest rates – has also returned to a new all-time high.

Investors are buying record amounts of debt... getting paid less than ever to own it... and stand to lose more than ever before if historically low interest rates move even a little bit higher.

What could possibly go wrong?

New 52-week highs (as of 8/2/17): Apple (AAPL), American Financial (AFG), Aflac (AFL), AMETEK (AME), Allianz (AZSEY), Berkshire Hathaway (BRK-B), Global X China Financials Fund (CHIX), WisdomTree Emerging Markets High Dividend Fund (DEM), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), Euronet Worldwide (EEFT), iShares MSCI Italy Capped Fund (EWI), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), KraneShares E Fund China Commercial Paper Fund (KCNY), Lockheed Martin (LMT), Oaktree Capital (OAK), and iShares MSCI India Small-Cap Fund (SMIN).

In today's mailbag, two subscribers share their success with shorting... and a longtime subscriber writes in for the first time. Send your notes to feedback@stansberryresearch.com.

"Today (8/2/17), you concluded a Stansberry Digest piece on GGP stock's big drop saying, '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.'

"Rather than selling GGP stock short, last September, I bought ten Jan 2018 GGP 27.0 puts. That set me back $2,767.73. May 31, 2017, I sold off five puts, which repaid all of my original investment, plus $21.39. This July, I sold off one more put at $487.27, plus the $21.39, has me up $508.66; and I still hold four more GGP puts valued at today's close at $2,230. Those four remaining puts are up 102.73%, and I have back 100% of my original investment, plus an extra $508.66, cash in the hand.

"I don't know how many percent total gain I have had on this play, but I sure know it's way beyond 20%. You can take the delicious cookies that Dr. Steve serves up... and make a wedding cake from them. Many thanks for all of your able research and guidance, I'd never found this investment without you, and it's great to know that on September 1st, when you charge my credit card for another year's renewal, this play alone has the funds available to cover, and still leave me with the lion's share of profit to grow on the next cookie you toss my way." – Paid-up subscriber RAF

"After reading your write up about SNAP in the Digest I thought I would take a chance. As of 8/2, I am up 68% with puts. Thanks!" – Paid-up Stansberry Alliance member Gary H.

"My wife Bonney and I have been with you now for over four years. Haven't meant to be silent, just busy. We have been investing for many years: IRAs-401Ks & real estate. In planning retirement we directed our assets into self directed mostly stock portfolios. Over the years we studied means of management, and some advisors and their offers. None of it suited us. Both of us have a business background so we decided to manage things just like a small business. Then we discovered Stansberry and Associates and the fit is good. Our Portfolios are doing well... Per Steve Sjuggerud and Mr. Churchouse guidance we are making a move toward China. Yes we are watching for the melt up and very carefully for the melt down." – Paid-up subscriber Harold Bancroft

Regards,

Justin Brill
Baltimore, Maryland
August 3, 2017