'Be careful'...
'Be careful'... More reasons for caution... Record 'earnings' for a market darling... Apple is 'firing on all cylinders'...
Yesterday, we shared the latest thoughts from our colleague Jeff Clark.
In short, while the market has rallied above the long-term moving averages that many investors use as the "defining line" between bull and bear markets, Jeff isn't getting bullish just yet.
He thinks the recent rally could be a "bull trap" – a false breakout that convinces investors to get bullish and jump back into the market before reversing. Jeff noted that the momentum behind the recent rally has been lagging. He said this "negative divergence" is often a sign of a pending reversal. In addition, he noted that stocks are extremely "overbought" in the short term, so a pullback is likely even if stocks are ultimately headed higher.
Today, we have some more evidence a pullback could be coming...
According to several reports this morning, one well-known sentiment measure, the Daily Sentiment Index ("DSI"), just hit its highest level of the year at 75% bullish.
If you aren't familiar, measures of investor sentiment like this one are known as "contrarian indicators." High levels of positive investor sentiment tend to be a bearish sign for the market, and vice versa.
Extreme sentiment alone isn't necessarily a good reason to buy or sell... Levels can remain elevated or depressed for long periods of time before reversing. But when combined with other measures, they can be useful tools for gauging the market's temperature.
In addition, according to well-known technical analyst Tom DeMark, the benchmark S&P 500 Index has completed a "perfected" sell setup.
The details of this setup are complicated and beyond the scope of the Digest. All you really need to know is that it's relatively rare to see a setup like this, and it often results in at least a short-term pullback. The last one occurred at the all-time high in the S&P 500 earlier this summer.
Finally, Jeff Clark pointed out one more bearish sign this morning on his real-time Direct Line blog for Stansberry Short Report subscribers. As he wrote in a short update titled "Be Careful"...
The Volatility Index ("VIX") is on the verge of breaking to the upside of the bullish wedge on the daily chart. The chart looks poised to make a big move. And a big move higher in the VIX is usually a bad sign for stock prices.
Again, as Jeff explained yesterday, even if stocks resume their bull market rally like they did in 2011, the market is extremely oversold in the short term. A pullback is likely, and today's evidence only strengthens that argument.
We continue to recommend caution.
Switching gears, the insanity in "market darling" Tesla (TSLA) continues...
Regular readers know we've been critical of the electric-car maker and its CEO Elon Musk for a while now.
Yet despite the fact that Tesla's cars catch on fire and have "chronic reliability problems" (according to Consumer Reports)... and despite the fact that the company loses money on every car it sells, uses questionable accounting to hide those losses, and is dependent on government handouts to survive... investors love the company.
Sure, shares have fallen nearly 30% from their all-time high of more than $280 earlier this year. But the stock still trades at an absurd 100 times "forward" or projected earnings. (It has no earnings today, so a current price-to-earnings ratio can't be calculated.) Plus, it trades for seven times sales and 37 times book value.
And following the company's latest "earnings" announcement last night, things aren't getting any better...
Tesla reported a larger-than-expected third-quarter loss of $229.9 million, its 10th consecutive quarter of losses. Even using questionable "adjusted" earnings, the company lost $0.58 per share, more than analyst expectations of $0.56 per share.
More impressive, the company managed to break one of its own records... According to reports, the company lost a record $19,810 per car sold in the third quarter, up from $15,975 per car in the prior quarter.
The market reacted to the news by sending shares higher, of course. Tesla shares are up more than 10% as of midday trading today. We wish these "investors" the best of luck.
Finally, we covered the latest "blowout" earnings from capital-efficient consumer-electronics giant Apple (AAPL) last week.
In particular, we noted that the company's growth was led by sales of the iPhone again this quarter. Extreme Value editor Dan Ferris explained more about the importance of the iPhone in his weekly update for subscribers yesterday...
The primary driver of this incredible revenue growth is the iPhone. Analytics firm comScore estimates the iPhone controls about 44% of the U.S. smartphone market. Its closest competitor is Samsung with 27% market share.
Five years ago, the iPhone generated about 39% of Apple's revenue. Today, it's responsible for more than 65% of revenue. As goes the iPhone, so goes Apple.
Investors have been concerned that growth in iPhone sales is on the decline. But as CEO Tim Cook explained on the company's conference call, there's still plenty of room for growth. More from Dan...
When asked about it during the conference call, Cook suggested there are still three strong sources of iPhone growth...
First, more than 60% of current iPhone users have yet to upgrade to the latest model. To entice iPhone users to upgrade every 12 months rather than every two years, Apple recently launched a zero-interest financing program. The program allows customers to pay for their new phones in monthly installments. It's comparable to programs offered by the major carriers (AT&T, Verizon, Sprint, and T-Mobile).
Second, Cook believes the opportunity in emerging markets like China continues to be huge. Apple's China revenues were up 84% compared with fiscal 2014. The company doesn't break out numbers of iPhone sales there... But it's a safe bet the iPhone, which is popular in China, was the primary driver of this growth.
Third, Apple continues to attract new customers in developed markets like the U.S. and Europe away from competing smartphone companies. Cook says that last quarter, for instance, Apple recorded its highest rate of Android switches ever.
Ultimately, Dan believes a slowdown in iPhone sales is inevitable. But he's not concerned...
We view the deceleration in iPhone units sold as simply the reality of a maturing market... As more and more people buy smartphones, the remaining addressable market inevitably gets smaller and growth begins to subside.
The fact that unit growth is still in the high double digits – and that the average selling price (ASP) continues to rise as new models are released – is a testament to the iPhone's popularity.
Importantly, the deceleration in unit growth is not hurting profit margins. During each quarter of fiscal 2015, Apple earned higher profit margins (gross margin, operating margin, and net income margin) than it did the previous year. In other words, each dollar of 2015 revenue was more profitable than it was in 2014.
Dan is as bullish as ever. Like several other Stansberry Research editors – and several of the world's greatest investors – he rates Apple shares a "buy" today.
New 52-week highs (as of 11/3/15): Activision Blizzard (ATVI).
The praise for P.J. O'Rourke continues to roll in... But today, we also have two subscribers who aren't impressed. Send your questions, comments, and complaints to feedback@stansberryresearch.com.
"The Stansberry Research postings have gotten noticeably better over the years, not just the content but the writing is heads above other newsletters. Now, you've outdone yourself with the addition of P.J. Sorting through the piles of detritus that passes for e-mail is now fun; like the expectation of finding pearls among the trash. Great add." – Paid-up subscriber E C Bauer
"Porter, How am I ever going to take my financial issues seriously with P.J. around lampooning every sacred cow so efficiently?? Congratulations! You have picked a winner, for sure. P.J. O'Rourke is a love!" – Paid-up subscriber Adelaide Randak
"Hi Porter, The first I was aware of PJ was at the Vegas conference a few weeks ago; I am totally sold on his being added to the Digest, you are funny but he is funnier!! Love and blessings to you both!!" – Paid-up subscriber Taral Sinclair
"'My editor has asked me to sum up these analyses, so I will: You're screwed.' OMG. ROFL. I love him!" – Paid-up subscriber Heather Burns
"What an amazing pickup Porter! I've been reading PJ's "philosophy"... yes, "philosophy" for years and he always makes me smile, but tonight... after catching up on some Stansberry Digests, I had the pleasure of reading PJ's original Friday Digest. I think I sprained my entire body laughing! Double all your subscription prices Porter. This man is an American classic! The definition of a socialist... 'A socialist is somebody who will take your flat-screen TV and give it to a family of meth addicts in the backwoods of Vermont.' Crap! I'm still laughing! Thanks for all you guys do... and bringing some humor to a humorless world. Rand Paul 2016?" – Paid-up subscriber Charlie W.
"Okay, part one made me spew milk out my nose, but part two is just pure gold. Thanks for adding a great dimension to your already excellent product." – Paid-up subscriber T. Nagel
"PJ... welcome indeed! Remember him fondly (as best anyone over 60 remembers) from the National Lampoon days. Most excellent dude." – Paid-up subscriber Bob J.
"Welcome to PJ. I still remember with fondness his short story of the conflict he felt as a libertarian and at the same time "not in my back yard" regarding a development near his home. Being able to look at both sides of a problem and poke fun at ourselves is a wonderful ability." – Paid-up subscriber Steven G.
"Dear P.J., You are owed a long overdue THANK YOU!!! While suffering through a family Easter vacation (of my own creation!) at Club Med Marbella in 1992, I spied on the English shelf of the resort library a title that spoke to me. Devouring your book Holidays in Hell saved my vacay. Your humorous handling of the dire and drear gave me the strength to survive my own holiday from Hell. Thank you P.J.!" – Paid-up subscriber Judy Poole
"I would like to extend a welcome to the newest staff member, P J O'Rourke! I have been reading his musings since my university days, which occurred sometime after 1980. My collection of his hits was Give War a Chance, since it was about that time when I first identified the genre of libertarian humor. Before that, I didn't realize anything funny about government or war; I just considered one to be a disaster in human terms, and the other to be a disaster in any language. After that, I never was able to see anything that passes for good governance. And we haven't won very many wars since then, either. Once again, P J: Welcome aboard." – Paid-up subscriber Kevin Beck
"I absolutely loved O'Rourke's piece on the American presidential campaign. I teach English in a private language school in Bangkok. One of my private students has his engineering degree from a university in Thailand and his MBA from a school in the USA. He is a successful business owner and we meet for 2 hours a week to discuss more obscure 'American English' vocabulary, terms and phrases. We devoted 2 hours to O'Rourke's piece. My English skills are pretty good but I had to google some of his colorful and challenging language. In a world of the mundane, I really appreciate something so humorous and well written. I hope more will follow." – Paid-up subscriber Tom Ridenour
"PJ is an entertaining and irreverent bonus to my subscription. I'm 60 and have read him since National Lampoon. He demonstrates that conservatives can laugh at themselves as well as laugh at the idiotic liberal mindset. A quality sorely lacking in liberal journalism. Good hire Porter!" – Paid-up subscriber Bill Spalding
"Sorry, Miller on Fox is funnier and less radical." – Paid-up subscriber A. Rutherford
"Think your political comments are totally off the mark and are irrelevant to the work." – Paid-up subscriber P.R.
Regards,
Justin Brill
Baltimore, Maryland
November 4, 2015
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