Is the downtrend resuming?... Signs the 'bounce' is ending... Another big problem for oil companies... The most downgrades since the financial crisis... More on Stansberry's Credit Opportunities...
Following steep declines in August and September, many of the troubled markets we've been following reversed and moved higher in early October. Or as Porter put it in the October 9 Digest, the "clouds parted a bit" this month...
Domestic oil stocks have soared. For example, the Market Vectors Unconventional Oil & Gas Fund (FRAK), which holds a basket of shale-oil producers, is up 14% over the last 30 days, with most of the gains occurring this week.
Emerging markets bounced, too. The iShares MSCI Emerging Markets Fund (EEM) is up 7.5%. Even the Dow Jones Transportation Average Index showed signs of life, moving up almost 3%.
What hasn't bounced are high-yield corporate bonds. The iShares iBoxx $ High Yield Corporate Bond Fund (HYG) is still down 1.69% over the last 30 days. As long as corporate fixed income remains under pressure, I don't think the rally we've seen this week will last. If you're looking for a bottom to buy stocks, my advice is to keep watching high-yield bonds. U.S. stocks will struggle to rally in the face of higher borrowing costs.
Again, there are no guarantees in the market. While we believe significant problems in the credit markets are unavoidable, we could be early. This long bull market could have another "inning" or two to go. So as Porter has explained, we're prepared for either possibility.
But there are signs that this month's "bounce" could be ending, and turmoil could be returning sooner rather than later...
FRAK has fallen nearly 7% since Porter mentioned it on October 9. EEM is down nearly 3% from its peak last week. And HYG is still negative over the last 30 days.
And the latest data show the financial condition of many companies continues to deteriorate...
We covered the problems for "blue chip" oil companies yesterday. In short, lower oil prices mean that these companies are using a greater and greater percentage of their earnings just to pay dividends. And they've been taking on more and more debt to make up the difference.
But the news for many lower-quality oil companies is even worse.
According to data from the U.S. Energy Information Administration ("EIA"), U.S. onshore oil producers are using a mind-blowing 83% of operating cash flow to service existing debts.
In other words, more than $4 out of every $5 these companies earn is going to repay money they've already borrowed. And many have been borrowing even more just to keep the lights on.
To make matters worse, the "hedges" many companies used to lock in higher oil profits last year are expiring. This means many companies that have previously been able to sell oil for $80 per barrel or more will now be getting much less.
If companies were struggling to service debt at $80 or $90 per barrel, how do you think they'll do at $50?
In other news, there are also signs that our worst fears of credit "contagion" could be realized.
The Wall Street Journal reports credit-rating agencies are downgrading more U.S. companies than any other time since the financial crisis. In particular, they note debt levels compared to cash flows have been soaring. And analysts expect profits at large companies to decline for a second straight quarter for the first time since 2009. From the article...
In August and September, Moody's Investors Service issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades. That's the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession.
Standard & Poor's Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009, compared with just 172 upgrades. Meanwhile, the trailing 12-month default rate on lower-rated U.S. corporate bonds was 2.5% in September, up from 1.4% in July of last year, according to S&P.
The Journal notes that about one-third of the downgrades targeted oil and gas companies and other resource-related industries. But that means over 60% of these downgrades were U.S. companies outside of those sectors.
These problems go much deeper than just the energy sector and emerging markets. And it's why we're so concerned "contagion" could spread into stocks and other assets.
Our stance remains the same. Porter and the Stansberry's Investment Advisory team reminded readers of the "bottom line" in yesterday's Stansberry Data update...
A massive credit crisis is looming... We're approaching a vast wave of credit defaults. Far too many companies (and countries) that weren't creditworthy borrowed way too much money... much more than they can repay.
A day of reckoning is nearing. Defaults are now beginning to rise. When the markets begin to realize that much of this money will never be repaid, debtholders will run for the exits, causing a crisis in the credit markets. This period will be the greatest legal transfer of wealth in history... from the highly leveraged and foolish to the wise and patient.
This is why we're re-launching our distressed debt advisory – Stansberry's Credit Opportunities – soon.
New 52-week highs (as of 10/20/15): Chubb (CB) and Altria (MO).
One subscriber shares his response to Porter's Friday Digest and another voices his skepticism in today's mailbag. Let us know what you think of TradeStops at feedback@stansberryresearch.com.
"Porter, I am responding to your Friday's Digest because you made me promise, so here it goes. I have about $20,000 that I am trading with on your newsletter recommendations. So basically I cannot afford to invest in Rancho Santana or Dr. Richard Smith's [TradeStops software]. However, I will take what I have learned about this in your Friday's Digest and adjust my portfolio the best I can to use this strategy using beta. Since I have subscribed to your newsletters I have made money and lost money. There are 2 reasons for this and they are lack of patience and getting too cocky.
"When I first subscribed I was buying Dan's WDDG and made 17% in my first year. Then I got cocky and thought I could trade, guess what happened? Yep, lost money. Then I learned how to trade options and actually made some money back, but then my lack of patience kicked in and I started losing again. So now I am working on my lack of patience and have started investing for the long run instead of trying to make money right now. If I only used everything you and your team tried to teach me I would be way better off right now, trailing stops, don't try to catch a falling knife, and value a business before buying.
"Anyways, thanks for all the information and insight you have provided me as well as the teaching. I subscribe to the Bonner Letter and have read 3 of Bill's books, Hormeggedon is my favorite. Maybe someday I will have enough capital to invest in Rancho. I would love to meet you and Bill and surf with you, but it is not in the cards right now. I manage a warehouse and my wife is a school teacher and the politics/government control are driving us crazy. So our goal is to pay off debt and create some more income streams so we can retire in ten years in our forties. I also want to give praise to some of your staff:
"Jeff Clark – Best training video on teaching how to trade options. For me personally these were fantastic and very easy to watch and learn. Dan Ferris – Love the [World Dominators]. If I would have just stuck to these in the beginning I would be doing much better, but I am coming back around and will be buying once they fall to the prices I want to pay." – Paid-up subscriber Erik Bishop
"Porter's quote from Friday's Digest, 'Most people would never share this idea with anyone because it's incredibly valuable.' That is my major stumbling block with any financial advice. That quote says to me that the majority of information sold is crap and the good stuff is kept within. I have a difficult time getting over my skepticism about it and the quote was certainly not reassuring. I like the concept of the volatility-based position-sizing tool. The majority of my holdings are ETF's and some short options. How would this service work for my type of portfolio? Thank you." – Paid-up subscriber Gregory Hall
Porter comment: Well... by spending almost 20 years earning the trust of more than half a million investors in more than 100 counties, I've built a $200-million-per-year revenue business from scratch.
Trust me, I have plenty of reasons to make sure the advice I offer is the best it can possibly be. Keep in mind, I offer refunds at any time: If our ideas don't pay, we don't get paid. Try asking your broker for the same deal.
Regards,
Justin Brill
Baltimore, Maryland
October 21, 2015
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