Beware a Bond Market 'Tantrum'

The world's largest hedge fund warns the Fed... What happens when you 'tighten' too soon... Beware a bond market 'tantrum'... Tech stocks are booming... Is Apple on the verge of growth again?... We're live from Las Vegas...

Editor's note: We're pleased to announce that the video replay of last Wednesday's live online event – featuring Steve Sjuggerud's latest "fat pitch" investment opportunity – is now ready as promised.

If you weren't able to attend last week, or if you'd just like to view Steve's presentation again, this is your chance.

We've added controls to pause, rewind, and fast-forward, so you can view it at your convenience. We've also included a full transcript for busy subscribers who don't have time to sit through the full video... But please, be sure to read at least until you see Steve's free recommendation. Click here to see it now.

Regular Digest readers know we're skeptical of the Federal Reserve's recent rate "tightening" cycle...

The Fed raised rates last December for the first time in nearly a decade. And after months of debate, it appears the Fed is now considering a second increase before year-end.

But from the start, we've believed that no matter what the Fed says in the near term, it's unlikely to be able to raise rates (and maintain them) significantly higher anytime soon.

In fact, we've even predicted that if the Fed did raise rates aggressively, it would likely be only a matter of time before it was forced to reverse course and cut them again.

Clearly, this isn't a mainstream view. But recently, we learned we aren't alone...

In a note to investors last week, analysts at Bridgewater Associates – the world's largest hedge fund, founded by legendary billionaire Ray Dalio – predicted the Fed could soon regret raising rates again.

In short, the analysts warned that raising interest rates now – while the economy is still "deleveraging" – could halt whatever fragile recovery has taken place. They highlighted several historical periods – including the United Kingdom (U.K.) in 1931, the U.S. in 1937, the U.K. in the 1950s, Japan in 2000 and 2006, and Europe in 2011 – where this has also been the case. From the note...

In nearly every case, the tightening crushed the recovery, forcing the central bank to quickly reverse course and keep rates close to zero for many more years.

They also warned that the risks today are further elevated because rates are still so low...

Normally, a mistake in monetary policy is not that big a deal because it can be reversed... The risk now is higher than normal because a tightening mistake is harder to reverse today when the ability to ease is more limited.

Whether or not the Fed ultimately raises rates again this year, it's not likely to happen at its September policy meeting this Wednesday... The CME Group's FedWatch tool puts the probability of a hike at just 12% as of this morning.

But while the Fed is unlikely to spook markets this week, the Bank of Japan ("BoJ") just might...

The BoJ is expected to release the results of its "comprehensive review of monetary policy" this week... And rumors are swirling that it will announce a significant change in monetary policy. According to news service Reuters, this means the bank may make negative interest rates the "centerpiece" of future easing efforts, while de-emphasizing its quantitative-easing bond-buying programs. From the report...

The change would underscore growing concerns in the central bank and financial markets over the limits to the BoJ's economic stimulus efforts, as more than three years of aggressive bond buying is draining market liquidity.

It would also be a shift away from the BoJ's unique monetary experiment that attempted to crush yields across the curve and try to convince the public that its massive money printing will boost economic activity and prices.

"Among the BoJ's policy tools, the priority will likely shift more towards interest rates and away from huge bond purchases," said one of the sources on condition of anonymity.

Why is this important? Some fear this announcement could set off a repeat of 2013's "taper tantrum." As longtime subscribers may recall, bond yields around the world soared after former Fed Chair Ben Bernanke announced a "tapering" of the Fed's quantitative-easing programs. The yield on 10-year U.S. Treasurys jumped from a low near 1.6% in May 2013 to as high as 3% just four months later.

Because bonds around the world have soared so high – and yields have fallen so low, even into negative territory – a similar event could create bigger losses for bond investors today.

In more bullish news, we note technology stocks are the best-performing sector of the market this quarter. Tech stocks are up 11%, nearly doubling the gain in the No. 2 performer, financial stocks...

According to the Wall Street Journal, there are two big reasons for the rally. The first is deal making...

After a record year for tech mergers and acquisitions in 2015, the sector is ahead of that pace this year with a flurry of activity the past three months.

In June, Microsoft swiped up LinkedIn for $26.2 billion in the biggest tech deal of the year. Analog Devices snapped up fellow chipmaker Linear Technology in July for $14.8 billion, the same month Oracle agreed to buy cloud-software provider NetSuite. In all, $455 billion of tech deals have been struck this year.

The Journal reports that the tech sector currently trades at 17.3 times 12-month forward earnings. That is below its historical average over the past 15 years, so there's still potential for more mergers-and-acquisitions activity going forward.

The other big driver for the recent rally is one company in particular...

Last week, consumer-electronics giant Apple (AAPL) started selling its two new iPhone models. The company didn't disclose weekend sales numbers due to supply constraints. But pre-orders of the latest-and-greatest phones looked strong, with Apple's larger "iPhone 7 Plus" quickly selling out.

Mobile carriers Sprint (S) and T-Mobile (TMUS) both reported that sales volume was about four times the average iPhone release, while Verizon (VZ) reported normal levels, and AT&T (T) said sales were a bit better than last year.

Analysts still expect Apple to suffer its first annual sales decline since 2011 this year. But the company could return to growth as soon as next quarter. As Bloomberg reports...

Apple is likely to sell 44 million iPhones in the three months through September, according to RBC Capital Markets estimates, down from the 48 million sold in the same period a year earlier. The iPhone 6S became available in stores September 25, 2015. Sales in the final three months of the year will meanwhile likely reach 79 million units, up from 75 million a year earlier, RBC forecast.

[Creative Strategies analyst Ben] Bajarin said Apple could sell 75 million to 76 million iPhones in the December quarter, which would be year-over-year growth, but supply constraints could prevent that.

Last week was Apple's best in nearly five years... Shares gained 11% – their biggest weekly rally since October 2011 – and added more than $60 billion in market value.

Apple is now up more than 25% from its mid-May low. But there could be further gains ahead. Despite the rally, shares are still relatively cheap... They're trading at nearly half the valuation of the S&P 500 Index on an earnings basis.

Unfortunately, it appears many investors missed out on this rally...

According to Bloomberg data, mid-May was the point of "peak hatred" for Apple shares... Hundreds of fund managers were fleeing the stock over concerns about growth. All told, 295 firms sold their positions in Apple entirely. From Bloomberg...

Sentiment over Apple turned sour as the company ended 13 straight years of uninterrupted sales growth earlier in 2016. Omega Advisors Inc. and Lansdowne Partners are among firms who exited the shares in the second quarter. Since the end of June, Apple buyers have fallen 4.6% while sellers, including those who cut stakes or exited completely, increased 4.4%.

Of course, regular Digest readers know our colleague Dr. David "Doc" Eifrig wasn't among them. As Doc pointed out in the May 17 Digest, just as many of these folks were rushing for the exits...

There's no reasonable explanation for why Apple isn't worth more than its current valuation.

People are obsessed with growth these days and are hypersensitive to the news. The headlines trumpeted Apple's earnings miss as if it were the death of the company. Short-sighted investors sold. But Apple remains one of the most profitable and healthiest companies in the history of the world.

Kudos to Doc on another great call.

And if you're joining us in Vegas (or watching from home), we'd love to hear from you. Send your thoughts and comments to feedback@stansberryresearch.com.

We'll be publishing some of our favorite e-mails throughout the week.

New 52-week highs (as of 9/16/16): CME Group (CME).

The feedback on last Wednesday's live event is still pouring in. Send your notes to feedback@stansberryresearch.com.

"The presentation was excellent. Since I am already an Alliance member I will be getting (in fact, I already have) the portfolio." – Paid-up subscriber Dave H.

"Very well done!... Thanks for all you do!" – Paid-up subscriber A.D.

"Being a Stansberry Flex member and having experienced very meaningful wealth creation opportunities from Stansberry Research, and in particular from Steve Sjuggerud, I was impressed with the telecast. Lasted almost two hours but very interesting to the end... Everything I've come to expect from Stansberry in wealth creation is factual; from trading in options for the first time (and safely) to stocks of interest, resource investments, retirement income, and True Wealth opportunities. Thank you." – Paid-up subscriber Tom V.

Regards,

Justin Brill
Las Vegas, Nevada
September 19, 2016