Don't Get Too Bearish Yet

Billionaire Ackman 'throws in the towel' on Valeant... Shares crash to new post-crisis lows... The 'Brexit' is confirmed... The next big test for Europe... Is the 'Trump Trade' exhausted?... Don't get too bearish yet... Steve Sjuggerud's latest prediction…

Drug company Valeant Pharmaceuticals (VRX) is back in the news...

Regular Digest readers may recall the troubled firm's saga.

Valeant first made headlines in mid-2015 when it became the "poster child" for a new disturbing trend: companies buying the rights to existing drugs and treatments then immediately raising their prices.

The news got worse that fall... Several short-sellers accused the company of fraud. One – Andrew Left of Citron Research, who has spoken at our annual Stansberry Alliance Conference – went so far as to call the firm a "pharmaceutical Enron."

Early last year, the company admitted it would need to restate prior-year earnings after an internal review uncovered questions about its accounting practices. Shortly after, it announced that the U.S. Securities and Exchange Commission ("SEC") had opened an investigation.

Valeant's troubles came to a head nearly one year ago today, when the company missed the SEC's extension to file its 2015 annual financial report. This put the firm in breach of its bond "covenants"... meaning bondholders could legally deliver a notice of default. Shares plunged more than 50% as default fears soared.

What made the news most shocking was who owned those shares...

Despite plenty of warning signs in the weeks leading up to the extension deadline, Valeant was still one of the most widely held stocks on Wall Street.

As we noted at the time, an incredible 88% of Valeant shares were owned by hedge funds, mutual funds, and other institutional investors. And the list of top shareholders read like a "who's who" of Wall Street...

Bill Ackman of Pershing Square Holdings... John Paulson of Paulson & Company... Viking Global Investors... Lone Pine Capital... Jana Partners... JPMorgan Chase... T. Rowe Price... Ruane, Cunniff, & Goldfarb's Sequoia Fund... and more.

It is perhaps fitting, then, that this week – just shy of the one-year anniversary of the crash – one of the biggest Valeant bulls is finally throwing in the towel...

Ackman's Pershing Square – formerly Valeant's largest hedge-fund shareholder – announced it sold its entire stake (27 million shares) for a net loss of nearly $4 billion. As the Wall Street Journal reported last night...

The sale ends Mr. Ackman's quest to rescue the worst bet of his investing career. Valeant, once beloved by investors for its strategy of buying smaller rivals and boosting their drugs' prices, has lost more than 95% of its value in less than two years following questions about its accounting and business practices.

Mr. Ackman once predicted Valeant would be the next Berkshire Hathaway, saying its shares could hit $330. The stock closed Monday at $12.11.

At that price, the 8% stake Mr. Ackman parted with would be worth about $330 million, down from what had once been worth about $5 billion and more than wiping out the roughly $2.2 billion he made by joining with Valeant in 2014 for a hostile attempt to buy Allergan Inc., the maker of Botox.

Valeant shares plunged 10% today on the news. Shares are now trading below $11 for first time since the financial crisis...

And though Valeant avoided default last spring, its future doesn't look any brighter today...

The company still carries $30 billion in debt and is subject to several ongoing government investigations. According to the Journal, Ackman – who has had an insider's look at the firm as a Valeant board member for the past year – sold after "concluding that he couldn't recover his losses on the stock."

It's official: The "Brexit" is coming...

Last night, the U.K. Parliament passed its so-called "Brexit Bill" without amendment. This officially grants Prime Minister Theresa May the power to trigger "Article 50," the formal two-year process through which the U.K. will leave the European Union ("EU").

May said she will trigger the process before the end of the month, meaning the Brexit won't be official for some time... But it is now a certainty.

The British pound fell as much as 1% against the dollar on the news, to nearly $1.21. But as you can see in the chart below, the pound still remains above its recent 30-year low...

This could be the first sign that sellers are "exhausted" and that the post-Brexit-vote crash in the pound has run its course.

Our colleague Steve Sjuggerud recently highlighted another reason the pound could move much higher over the next few years...

As he explained in yesterday's issue of our free DailyWealth e-letter, the biggest opportunities in the currency markets happen at extremes. And the recent move in the pound is certainly extreme. Here's Steve...

The British pound has fallen from 1.70 (in 2014) to 1.20 versus the U.S. dollar since the people of Britain voted to leave the European Union.

The fall has been terrible... For the last 30 years, the British pound had always rallied whenever it dropped to around 1.40. But not this time. Take a look:

Again, as you can see in the chart, the pound is as cheap as it has been in 30 years, relative to the dollar. But as Steve noted, that isn't just on the exchange rate. England as a whole is cheap right now...

Historically, a trip to merry old England was expensive for Americans – everything cost more than it did back home. But now the situation is the opposite.

This next chart shows a simple example... It's the cost of a McDonald's Big Mac in England versus the cost of one in the U.S. (I use this as a quick-and-dirty way to size up the relative values of currencies.)

From 1999 to 2007, a Big Mac in Britain was dramatically more expensive than one in the U.S. Now it's the opposite – to a record extreme. In my investing lifetime, I've never been able to buy into Britain this cheap.

Steve said he isn't rating the pound a "buy" just yet. It hasn't confirmed a new uptrend. And as longtime readers know, Steve likes to wait for a breakout to buy. But today's price action suggests he may not have to wait long.

In the meantime, the next big tests for the EU are approaching...

Dutch voters head to the polls tomorrow, and many will be watching to see how far-right politician Geert Wilders – who has been nicknamed "the Dutch Trump" – fares.

The election itself isn't expected to create turmoil. The workings of the Dutch political system are beyond the scope of the Digest, but Wilders' Party for Freedom is one of just 28 parties in tomorrow's election. Multiparty "coalitions" are required to rule, and all major parties have already refused to form a coalition with Wilders. In other words, even if he wins the most votes, he will have little chance of becoming prime minister.

But a strong showing by Wilders could have implications for other European elections in coming months. As the Journal reported on Monday...

Mr. Wilders, who last year saw a popularity boost following the U.K. referendum to leave the EU and the election of Donald Trump, is seen as an indicator for how other populist, anti-EU, anti-immigration candidates will fare in key elections in France, Germany and possibly Italy.

Marine Le Pen, the leader of France's National Front, as well as Frauke Petry, the leader of Germany's upstart anti-immigrant Alternative for Germany party, all met with Mr. Wilders earlier this year in Koblenz, where they described President Trump as an inspiration.

Here in the U.S., we're seeing signs that the "Trump Trade" is tiring...

As our Stansberry Newswire colleagues pointed out this morning, sectors that have outperformed since November – like infrastructure, health care, and financials – are now lagging.

In addition, small-cap stocks, which led the market higher following the election, are breaking down. As you can see in the following chart, they've now nearly given up all their gains from this year...

These moves have coincided with growing doubts about Trump's proposed tax and health care reforms... suggesting the market is starting to question whether these proposals will be enacted as quickly or easily as expected.

Finally, elevated insider selling – which we discussed in the March 1 Digest – has now triggered a "sell" signal, according to analysts at respected equities-research firm, Ned Davis Research. As Ed Clissold, chief U.S. strategist at Ned Davis told the Journal late last week...

The fact that we've gotten more selling is a sign of concern that maybe the market has gone a little too far too fast... We wouldn't be surprised if there was a modest pullback given how far the market has run.

In other words, the risk of a short-term correction is rising...

But we wouldn't get too bearish just yet. Stock market sentiment still isn't extreme... valuations are high, but not outrageous... and several "technical" measures of market health remain strong. As Jim Carroll, managing partner of LongRun Capital Management explained in a recent note...

My focus is very specific (technical analysis, relative strength, and volatility) so I pay little attention to macro/economic data that is important to many people.

The last two serious corrections each carried a pretty clear signature on a weekly chart of the S&P 500. Sideways price action with marginal highs marked by momentum failures. Short-term relative strength also signaled a move to cash/fixed income in both cases.

The current move is clearly extended but continues to have strong momentum and short-term relative strength continues to favor equity exposure. That is why I suspect that investors will look to buy pullbacks as they did during the run from 2012 through the middle of 2015. Small caps have started to underperform after leading the post-election charge and that is cautionary, but not yet bad enough to suggest a hard downturn.

Steve would add one more reason to this list...

As he explained to his True Wealth Systems subscribers last week, stocks just hit a rare extreme that suggests much higher prices ahead. From his March 8 Review of Market Extremes...

The Dow Jones Industrial Average recently moved higher for 12 consecutive trading days...

The Dow's hot streak is impressive... and nearly unprecedented. It's only happened twice in the past 67 years... And the most recent occurrence was in 1987.

Again, the Dow went up 12 days in a row last month. Take a look...

Now, you might assume this kind of extreme would be bearish. But history suggests it's actually incredibly bullish. More from Steve...

Again, this has only happened two times going back to 1950... so our sample size is small. But buying the Dow stocks after those extremes was a good idea. Check out the returns...

Buying at any time going back to 1950 would have led to a 1.7% gain in three months and 3.5% gains in six months. But buying after these other two occurrences led to much stronger returns...

Specifically, after moving higher for 12 consecutive days, the Dow rose 8.9% in three months and 15.5% over the following six months. That's more than four times the normal buy-and-hold return over a six-month period.

As longtime readers know, Steve has predicted time and again that the long-bull market won't end until investors finally turn super-bullish on stocks again...

Now, he believes this trend is finally starting. Data suggest individual investors are jumping back into the market for the first time in years... setting the stage for the final, explosive "melt-up" phase of the rally.

Steve expects the "boring" blue-chip Dow Jones Industrial Average could more than double to 50,000 or more before it all ends... and many individual stocks could absolutely soar.

This prediction may sound outlandish, but we urge you not to dismiss it. The fact is, no one has "called" the eight-year bull market in stocks better than Steve. Time and again, as stocks pulled back and many investors panicked, Steve told readers, "Don't worry"... "Stay long"... "Stocks are headed higher."

He was exactly right... And we certainly wouldn't bet against him this time, either.

Steve has prepared a short presentation explaining it all, including why he's convinced the "melt up" is about to begin... and what he recommends doing with your money today. Click here to see it now. (This link does not lead to a promotional video.)

New 52-week highs (as of 3/13/17): Longfor Properties (0960.HK), Allianz (AZSEY), Ctrip.com (CTRP), WisdomTree Japan Hedged Equity Fund (DXJ), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), Facebook (FB), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), National Beverage (FIZZ), Alphabet (GOOGL), JD.com (JD), Johnson & Johnson (JNJ), Laboratory Corporation of America (LH), 3M (MMM), PowerShares S&P 500 BuyWrite Fund (PBP), Shopify (SHOP), Stanley Black & Decker (SWK), U.S. Concrete (USCR), and W.R. Berkley (WRB).

In today's mailbag, several subscribers weigh in on GGP and the death of the American mall. Send your notes to feedback@stansberryresearch.com.

"On 9/23/16, and on Porter's recommendation; but rather than sell shares short, I purchased January, 2018, GGP put options. As you reported today, the short sold stock position is up 18%. As of today's close (3/13/17), my GGP put position is up 71.82%. Porter, you are a hero of mine, and I thank you for all the good thinking you share with us." – Paid-up subscriber R.F.

"Much interest in what you say about malls. In Tyler (100,000 plus) there is an older mall with a Penny's which is looking weak, across the street is a Macy's which is closing but a few miles down the same road is a new shopping center not a mall but open and larger than most small towns and growing very fast with a great selection of all types of stores. Tyler is a leader, so it will be very interesting to see how this does." – Paid-up subscriber David B.

"It's my understanding that a lot of the leases that smaller stores have has a provision that they can get out of their leases if the mall loses an anchor tenant so they can abandon ship before they go bankrupt because of a lack of foot traffic from the anchor tenant. Ghost City in no time at all." – Paid-up subscriber Henry

"Interesting piece on the malls. Thought I would let you know that Fairlane Mall in Dearborn has a new anchor occupant; Ford Motor Company. They took over an anchor store space and turned it into office space. Now all those workers get to go shopping while eating at the food court for lunch. Have no idea of the long term viability of the idea but it's an interesting turn of events." – Paid-up subscriber C.C.

"I just have to respond to the idea that 'outdoor marketplaces' are the next big thing. I have been to several of them, and my general comment is they SUCK so badly that they actually make me want to go to a Mall (to get mauled). I did not think there was anything in the world that could make me want to be in a Mall... In the 10% of the country where outdoors is an option for >75% of the year, they on the surface make some sense. For those of us with cold winters and hot summers (ie the rest) they are total nonsense. They are based on a 'new urban' designed environment, and there is no parking, layout is inconvenient and they essentially do not welcome 'outsiders' who cannot walk there from the apartments the designers built into the mess. I want fast-in/fast-out shopping, not an environment." – Paid-up subscriber Tom T.

Regards,

Justin Brill
Baltimore, Maryland
March 14, 2017