Another reason for caution… The 'froth' is coming out of the markets… But it's not all bearish… More from P.J…
If you've been with us for long, you know we're cautious today...
Porter is predicting a tremendous wave of credit defaults, which he believes will lead to "the greatest legal transfer of wealth in history."
He shared another reason for caution in Friday's Digest, noting the recent declines in popular stocks like Theranos, Tesla, and SolarCity are a big "red flag" for the market...
It's difficult to quantify the precise effect these story stocks have on the market. The real effect is psychological. These kinds of companies convey a kind of "magical thinking" that anything is possible. They enable a kind of feedback loop where belief is, at least temporarily, converted into wealth.
We've tracked the magnitude of these kinds of stories for years in my newsletter. We call it the "SIA Blacklist." It's the list of stocks trading on major markets around the world that are valued at more than $10 billion but have less than $1 billion worth of sales. As I explain to investors every month, the idea isn't to short these stocks – as most of them will be leaders of a bull market. What's important is how many companies are on the list.
As Porter explained, at the bottom of a bear market, you'll find few companies with these kinds of valuations. But at bull market tops, you'll often find 25 or more on the list...
Even as late as the end of 2012, there were still fewer than 10 names on our Blacklist. That indicated that there wasn't too much "froth" in the markets. Our list hit a peak this past January, topping out at more than 35 names. It has been steadily declining every month. It's now down to around 20 names.
This is evidence that the "froth" is coming out of the markets. And it's one of the reasons I expect we'll soon see a bear market develop. It's something to keep your eye on, especially if you're tempted to try to buy these story stocks as they fall. Don't do it.
While we believe a bond market crisis is inevitable – and could ultimately lead to a severe bear market in stocks – we aren't foolish enough to try to predict exactly when it will happen. After all, no one can consistently time the market… even the world's best traders "strike out" more often than not.
This is why we haven't recommended going fully to cash. We don't want to miss out on further upside if we're early. (We also believe some high-quality stocks will perform well even if we see a bear market.)
And while there are plenty of reasons for concern, there are some bullish signs as well…
Our colleague Steve Sjuggerud recently told readers of our free DailyWealth e-letter that stocks could still soar from here before the bull market finally ends. And a quick look around the market suggests that could be the case…
Since Friday, many "spending stocks" have hit fresh highs: cruise lines Carnival (CCL) and Royal Caribbean (RCL), jewelry retailer Signet Jewelers (SIG), video-game developers Electronic Arts (EA) and Take-Two Interactive Software (TTWO), payment processor Vantiv (VNTV), casino giant MGM Resorts International (MGM), and credit-card firms Visa (V) and MasterCard (MA).
Meanwhile, the Consumer Discretionary Select Sector Fund (XLY) is in the midst of an impressive six-and-a-half-year run. While XLY "broke down" with the broad market in August, it held up relatively well during the September "retest." And as you can see from the following chart, XLY shares just hit new all-time highs, and are now up nearly 400% since March 2009.
XLY's top 10 holdings include online retailer Amazon (AMZN), entertainment behemoth Disney (DIS), home-improvement chains Home Depot (HD) and Lowe's (LOW), cable companies Comcast (CMCSA) and Time Warner (TWX), burger and coffee giants McDonald's (MCD) and Starbucks (SBUX), athletic apparel maker Nike (NKE), and Internet travel firm Priceline (PCLN). Many of these companies are at or near new 52-week highs.
When people are spending money on cruises, trips to Las Vegas, buying jewelry and video games, and pulling out their credit cards, bulls could argue things really can't be all that bad.
So... what should you make of these "conflicting" signals?
Our advice remains the same: Stay long high-quality stocks (so you'll have exposure if the market continues higher), reserve new money for your highest-conviction ideas, and hold plenty of cash to pick up bargains down the road. As Porter reminded readers in the October 23 Digest...
No... we aren't going to panic and sell everything in our portfolio.
We are going to take some profits (which we started doing in 2013). We are going to raise cash when we hit trailing stop losses. And we are going to add short positions to (hopefully) hedge against volatility in the overall market.
But most of all, we're going to wait and watch the market patiently. We know a once-in-a-decade opportunity is building in the bond market. We're going to be very prepared for it.
New 52-week highs (as of 10/30/15): none.
In the mailbag, an overwhelming show of support for our new colleague, P.J. O'Rourke. Send us your thoughts to feedback@stansberryresearch.com. And be sure to catch "Part II" of P.J.'s essay below...
"Porter, you guys are turning the staid world of investment newsletters into a must read experience. I recall subscribing to SF Chronicle just to get the Herb Caen column delivered daily. (Held my nose while I madly flipped through the pages in search of his by-line.) The Digest is already an educational, entertaining read. With the addition of P.J. we might be talking Pulitzer. Great signing… and a hearty welcome aboard P.J." – Paid-up subscriber Mark M.
"Porter, thanks and great job recruiting P.J… now you've got me here for the next 50 years as a subscriber. Not only exceptional investment information and guidance but topped of with some quality levity when closing it out. Could not stop laughing on the one liner concerning Biden, googling himself, so he decided not to run... LOL. Fabulous... Loved the entire FRIDAY wrap-up and looking forward to many more, like 50 years worth. Thanks again and regards to all the Stansberry Family." – Paid-up subscriber John A.
"Porter, This wonderful surprise is most warmly welcomed. P.J. O'Rourke! A grand coup for Stansberry. What I wouldn't do to have Dennis Rodman in a high-level office. Ideally he'll run against, or with Kanye West in 2020.Trump is making politics fun again, but a Kanye/Rodman ticket would truly be great! Best of luck with the shaver venture. It looks fantastic." – Paid-up subscriber B.F.
"Porter, OF COURSE you should brag about getting P.J. O'Rourke to write for Stansberry Research. Who else can eviscerate morons even better than you can? P.J., Glad to see you. Look forward to reading more of your stuff." – Paid-up subscriber Brian Abramson
"Three cheers for the PJ acquisition. Unbelievable. I, literally, was just was thinking, I wonder what PJ O'Rourke is writing these days? It's been a while since I read one of his books and I always enjoy his work. I should hop on Amazon... Then I opened my email and—BAM!—PJ's front and center at Stansberry. Sweet serendipity... Smart move hiring PJ. Thanks, Porter." – Paid-up subscriber J.F.
"My favorite political observation: 'Giving money and power to governments is like giving whiskey and car keys to teenage boys.' Welcome, Mr. O'Rourke!!!!!!!!" – Paid-up subscriber Doug S.
"A hearty welcome to PJ O'Rourke. What a breath of fresh air in the gray mist of smoke and mirrors the popular media passes off as journalism. Welcome!" – Paid-up subscriber Richard R.
Regards,
Justin Brill
Baltimore, Maryland
November 2, 2015
Editor's note: On Friday, Porter introduced readers to P.J. O'Rourke, who is one of America's top conservative political commentators and humorists. In Friday's edition, P.J. summarized the Democratic candidates for the upcoming presidential election. Today, he covers the Republicans...
2016 Presidential Candidate Roundup, Part II
(Lasso Them at Your Own Risk)
By P.J. O'Rourke
Then there are the Republicans...
Jeb Bush
He has everything. He's young (for a Republican), a Phi Beta Kappa, a successful businessman, and a two-term governor of Florida – where balloting incompetence and corruption are vital to the GOP.
Jeb is fluent in Spanish. His wife is Hispanic. He has a bunch of kids, and they're Hispanic, too. Maybe he'll choose Marco Rubio as his running mate. Kiss the Latino vote goodbye, Democrats.
Plus, Jeb is rolling like a dirty dog in campaign contributions.
Jeb Bush has just one problem. Perhaps you can take a "Bush-league" guess at what it is. But don't worry, Jeb is all set to legally change his name to George Herbert Walker Bush. Everybody likes him... and he only served one term, so he's constitutionally eligible to run again.
Carly Fiorina
Maybe she can run America the way she ran Hewlett-Packard. I mean, the way she ran HP was fabulous... if you had shorted the stock.
Hewlett-Packard's stock price fell 65% between July 1999 and February 2005. I may forgive Carly, but my Keogh Plan never will.
Ben Carson
There isn't a word to be said against Dr. Carson. He's a soft-spoken gentleman who rose from a background of social adversity and economic deprivation that makes President Obama look like the lost Bush brother.
Carson went to Yale, University of Michigan Medical School, and completed his residency at Johns Hopkins, becoming the hospital's youngest-ever Director of Pediatric Neurosurgery at age 33 in 1984.
To put that in perspective, 1984 was the year that Donald Trump was laying the foundation for his first bankruptcy in Atlantic City... Jeb Bush was chairing meetings of the Dade County Republican Party in a phone booth... Carly Fiorina was in the break room making coffee for AT&T executives... and Marco Rubio was in eighth grade.
Dr. Carson was the first surgeon to successfully separate Siamese twins conjoined at the head. He has 38 honorary doctorate degrees, in addition to his real one. And he has received the nation's highest civilian honor, the Presidential Medal of Freedom.
This is why I am asking you, Dr. Carson, to please quit running for president.
Get back to work, damn it! We need you. George W. and Jeb's heads might get conjoined. True, they're not twins. But the Bush family is inbred, and freakish things can result from inbreeding.
Or, Dr. Carson, you could be removing Donald Trump's ruptured silicone brain implant that is endangering Republicans everywhere.
Dr. Carson, you are valuable. Presidential candidates are not.
Your mother wanted you to be a doctor. Politics is the career that we Americans choose for our loser children.
Many of us have sons and daughters who won't get into medical school, start a business, join the military, learn a trade, raise a family, perform volunteer work, or do anything else of value to society. We send these children into politics.
Politics is a lot different than medicine.
Dr. Carson, if you win the nomination, you'll be running against Hillary Clinton (not Bernie Sanders – he's still wanted on a House Un-American Activities Committee subpoena from 1961).
That quack and her husband have been in the Washington political operating room for a long time. They're splattered with gore from the butchery they've committed on their hapless patient, the body politic.
Severed limbs of liberty litter the floor. The country's aorta has been ripped out and tossed beneath the heart-lung machine of federal bureaucracy. Intestinal fortitude has been disemboweled and the guts of nationhood spill forth while the elected-official sawbones drink the tax dollar lifeblood of America from the IV fluid drip. The mask of media anesthesia has been clamped upon the electorate's face. Vital signs have flatlined.
Dr. Carson, I don't think you can save this patient.
And lastly, we come to the candidate whom I actually support – and not just because his dad would kick me if I didn't...
Rand Paul
Rand believes the federal government should obey the rule, "Mind your own business and keep your hands to yourself."
I call it The Bill and Hillary Clinton Principle. Hillary, mind your own business. Bill, keep your hands to yourself.
Unfortunately, Rand Paul isn't going to get the Republican nomination. This is because Senator Paul is not just a Republican, he's a Libertarian.
The bluenose, mossback Republicans who run the GOP are not Libertarians. They're as fond of big government interference as the Clintons are – as long as it's bluenose, mossback Republicans who get to do the interfering.
Rand Paul's libertarianism appeals to those who consider themselves "fiscal conservatives and social liberals." This means they want to get high and have sex while saving money. And who doesn't?
But what bluenose, mossback Republican will admit to that in public?
Rand Paul isn't going to get the nomination.
My editor has asked me to sum up these analyses, so I will: You're screwed.
Regards,
P.J. O'Rourke
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