An Important Update on the 'Melt Up'

A moment of truth for tax reform... An important update on the 'Melt Up'... Porter: 'Our most lucrative discovery EVER'...

After months of debate and speculation, the Republican Congress is inching closer to a deal on tax reform...

The U.S. House of Representatives passed its tax bill last month. And late Friday night, the Senate finally passed a version of its own. As the Wall Street Journal reported over the weekend...

The Senate passed sweeping revisions to the U.S. tax code past midnight Saturday after Republicans navigated a thicket of internal divisions over deficits and other issues to place their imprint on the economy.

The bill, which included about $1.4 trillion in tax cuts, would lower the corporate rate to 20% from 35%, reshape international business tax rules and temporarily lower individual taxes. It also touched other Republican goals, including opening the Arctic National Wildlife Refuge to oil drilling and repealing the mandate that individuals purchase health insurance, which would punch a sizable hole in the 2010 Affordable Care Act. But some objectives, such as repealing the alternative minimum tax, fell by the wayside in last-minute wrangling.

At least one major hurdle is left to clear before tax reform becomes a reality...

The two houses must resolve the differences between the two versions of the bill. And that may be easier said than done.

The bills share several "big picture" elements. For example, both nearly double the standard deduction for individual taxpayers, while eliminating deductions for state and local income taxes. Both would effectively lower the so-called "pass through" rate for small business owners from today's rates. And both would cut the corporate tax rate from 35% to 20%. But many smaller – but potentially contentious – differences could delay approval. As Bloomberg noted over the weekend...

There are many differences – ranging from the taxation of business income to the amount set for the child tax credit – and Senate negotiators may have the upper hand during talks. That's because the wafer-thin two-vote majority in the Senate will make it harder to usher a final bill back through that chamber...

A House-Senate conference committee is set to meet this week to begin this process, with the hope to have a final version on the president's desk before the end of the year.

But passage of this bill may not be the wildly bullish event many expect...

As Stansberry NewsWire analyst Greg Diamond has explained, it could be a classic "buy the rumor, sell the news" event in the short term.

He believes the big rally in stocks since last year's presidential election suggests that much of this news could already be "priced in" the market. Rather than rally on the announcement, he believes the market could suffer a near-term correction instead.

More important, while any tax reform should be a net positive for the economy, any benefits are likely to be temporary. As Porter noted in the November 20 Digest (emphasis added)...

Our entire financial system (and our way of life) has become addicted to cheap and ever-expanding credit.

Since September 2010, when nonmortgage consumer credit bottomed at $2.5 trillion, it has rebounded at its fastest pace ever. Today, Americans owe $3.7 trillion in outstanding consumer credit. That's $1.2 trillion of additional consumer spending, created out of thin air (not savings) in just eight years.

During the same period, the federal government increased its debt from $14 trillion to more than $20 trillion. Just think about that number... Our government borrowed an additional $6 trillion in less than a decade.

Does that seem wise? Does that seem sustainable?

What do you think will happen when these debts come due? And how long do you think those tax cuts are going to last (if they are even passed) if our government's borrowing costs soar?

For now, the long bull market continues...

And if you're among those who have been betting on Steve Sjuggerud's "Melt Up" thesis, we have some good news.

Regular readers may recall that last month, Steve warned that the first "threat" to the Melt Up had appeared. One of his five key market indicators – transportation stocks – was no longer giving the "all clear." As he explained in the November 14 edition of our free DailyWealth e-letter...

You probably know that the overall stock market peaked in 2000. But you probably don't know that transportation stocks peaked in May 1999 – long before the overall market did.

The same thing happened in 2007. The overall market peaked in October 2007. But transportation stocks peaked months earlier, in July.

Today, we're seeing the first signs of underperformance in transports... Take a look:

Steve was clear that this was NOT a sell signal... In fact, he noted that all five of his indicators were flashing red for months before the tops in both 2000 and 2007. But it was a sign that the beginning of the end could be underway.

But today, Steve says that is no longer the case...

As he explained in this morning's DailyWealth, this indicator is now giving the "all clear" once again. Here's Steve...

Transportation stocks have now broken out to new highs. Take a look:

In short, the threat I wrote about a month ago is now fully behind us. Transports are healthy today.

My goal is to maximize your gains in the Melt Up – with minimum risk. Early warning indicators like this can help us identify when the top is getting close. Based on this one indicator, we're not there yet.

Of course, sooner or later, the Melt Up will end...

And the Melt Down will begin.

When it does, history suggests that most stocks – particularly, the popular growth stocks that are leading the market higher today – will get crushed.

But as Porter noted on Friday, history also suggests that beaten-down value stocks will perform well again. And tomorrow at 8 p.m. Eastern time, he and his team will be unveiling a brand-new indicator they've developed to find dirt-cheap stocks that are almost guaranteed to move higher over the next few years. In fact, their research shows this strategy has produced average gains of 215% with no losing trades. And they'll be explaining it all live on the air. (They'll even share their top two stocks they recommend buying now to take advantage of this strategy.)

This can't-miss event is absolutely free for Stansberry Research subscribers. Click here to learn more and to reserve your spot now.

New 52-week highs (as of 12/4/17): Arch Coal (ARCH), American Express (AXP), Boeing (BA), Berkshire Hathaway (BRK-B), CBRE Group (CBG), CME Group (CME), iShares Select Dividend Fund (DVY), iShares U.S. Home Construction Fund (ITB), iShares Transportation Average Fund (IYT), JPMorgan Chase (JPM), PowerShares High Yield Equity Dividend Achievers Portfolio Fund (PEY), PNC Financial Warrants (PNC-WT), Steel Dynamics (STLD), Stanley Black & Decker (SWK), Sysco (SYY), Travelers (TRV), U.S. Concrete (USCR), and ProShares Ultra Financials Fund (UYG).

In today's mailbag, two longtime subscribers weigh in on Porter's latest Friday Digest. What's on your mind? Let us know at feedback@stansberryresearch.com.

"Porter, I have to thank you for writing this. One of the oddest things about investors to me is that for whatever reason they only seem to see one side of things. Is it because they have a fear of seeing the downside? Really seeing both sides of the game allows you to make much wiser investment decisions. Having the full picture of the playing field makes your decisions much wiser.

"I guess one of the best examples of people only seeing one side is Tesla. Like you have said 'Does that seem wise?' I don't think that people are willing to weigh the whole picture in their decisions. Sure making a buck is what we do. But keeping a buck is the real name of the game.

"Thanks for presenting the whole picture on the dark side. You aren't the only one that does that. It keeps me in balance. It makes me look at the whole picture." – Paid-up subscriber Jeff Spranger

"Porter, I was thinking this week of writing and thanking you for the 'big trade' strategy and letting you know how great it turned out for me. I figured there were probably lots of folks that had not followed your advice, taken too large of a portfolio allocation in the Big Trade put insurance and not had enough or maybe even any long equity positions to insure... Which of course would have been a disastrous decision and not at all what you had ever advised.

"Then in Friday's Digest you published subscriber Alan G's letter and your response to Alan was basically my entire letter I had been thinking... but undoubtedly explained it much better than I.

"So I'll just add this... I bought 6 naked puts from the Big Trade list. As you advised I stepped into them over time, not diving straight in all at once. No one position was greater than 0.6% of my portfolio, and combined all 6 were just 2% of my portfolio. As Porter suggested expect to lose the entire investment... This is insurance to hedge losses in long equity positions; not a get rich quick scheme. Those long equity positions have made my losses in the Big Trade irrelevant. I have taken positions from Total Portfolio and Sjuggerud's China letter and as a charter subscriber to Trade Stops have used their risk rebalancing, position sizing and smart trailing stop tools to basically execute my own eclectic version of your Total Portfolio strategy.

"Since implementing this modified Total Portfolio strategy in April I have received a 8.4% annualized return on my portfolio while holding 25% cash as an additional 'dry-powder' hedge. The 2% I put into the Big Trade hedges worked exactly as intended. The catastrophic collapse of what David Column once called 'the bond caldera' did not happen in 2017 but if it had, my trailing stops would have prevented too severe losses in my long equity positions while turning the 2% Big Trade hedge into about 12% gain on the portfolio to offset the losses.

"I got a little lucky in that one of the 6 big trade hedges I took was in JC Penny's that I cashed out in October for a 3x gain on the initial cost of the puts. That cut my net 'big trade insurance premium' to 0.8% of the portfolio. That became cheap insurance against the real risk that I could have had significant (though not catastrophic) losses in the long equity allocations.

"Alan, being upset by large losses in the big trade is effectively over paying for home owners insurance then being upset that your house didn't burn down. If you're not already a TradeStops subscriber become one. Using risk adjusted position sizing and smart trailing stops you will never experience this problem again. There is no teaching, only learning." – Paid-up subscriber David Bern

Porter comment: David, your letter made my year!

Well, actually, I'm sitting in a deer stand on my farm right now. A few weeks ago, I got to watch my 10-year-old son shoot his first buck with a crossbow. That made my year.

But your letter is a very close second. Thank you for recognizing the quality of our work and using it as intended.

Regards,

Justin Brill
Baltimore, Maryland
December 5, 2017