The Biggest Winners of Tuesday's Election
Checking in on the 'pot stock' mania... The biggest winners of Tuesday's election... 'One policy change seems guaranteed'... Inching closer to a debt crisis... An urgent announcement about one of our best-performing strategies...
We wrote it... did you not buy it?
In the September 19 Digest, we noted the mania taking place in legal marijuana (or "cannabis") stocks.
Things had kicked into high gear in August, when alcohol giant Constellation Brands (STZ) said it was investing $4 billion into Canadian grower Canopy Growth (CGC).
The company everyone was fawning over, though, was a different Canadian firm, Tilray (TLRY). After going public over the summer at $17 a share, Tilray touched an intraday all-time high of $300 the same day we wrote that Digest. As we warned...
Whether it's tech stocks in the late 1990s... housing in the mid-2000s... precious metals in the late 1970s (and again earlier this decade)... or bitcoin and other cryptocurrencies last fall, all manias end the same way.
Prices eventually reverse, often sharply, and go on to retrace 50%-80% or more of the entire rally until the last bull finally throws in the towel.
Unfortunately, we can't know in advance just how long (or how far) this mania will run in the meantime...
It could continue for several months... or reverse tomorrow. But if we had to bet, we'd guess it ends sooner rather than later.
Fast-forward to earlier this week...
During Tuesday's U.S. midterm elections, Michigan became the 10th state to legalize recreational marijuana, while Missouri and Utah passed laws to allow medicinal use. Adding fuel to the fire, U.S. Attorney General Jeff Sessions – an ardent critic of marijuana legalization – was booted the same day.
To nobody's surprise, "pot" stocks soared... Tilray led the way, up more than 30%, while the ETFMG Alternative Harvest Fund (MJ), which holds a basket of publicly traded cannabis producers, rose 7%.
Yet as you can see from the following chart, despite Tilray's massive gains earlier this week, shares are still down 35% from our warnings on September 19 through yesterday's close...
To be clear, we believe it's a matter of 'when,' not 'if' marijuana is fully legalized in the U.S...
Eventually, this tiny, quasi-legal industry is likely to become a legitimate, multibillion-dollar behemoth.
This week's news is another step in that direction. But there's still a long way to go, and the risk in even the most promising marijuana companies remains high today. We'll repeat our advice from that Digest...
If you're considering buying any of these stocks, be sure to keep your position sizes small and don't risk a penny you aren't willing to lose.
Elsewhere in the market, health care stocks were also a big winner on Tuesday night...
The sector rallied sharply as a "gridlocked" Congress will make it more difficult for President Donald Trump and the Republican Senate to repeal the Affordable Care Act (better-known as "Obamacare").
Additionally, voters in three red states approved the expansion of Medicaid coverage. According to an article in yesterday's New York Times...
One policy change seems guaranteed: hundreds of thousands more poor Americans in red states will qualify for free health coverage through Medicaid.
Voters in Idaho, Nebraska and Utah, which President Trump won easily in 2016, approved ballot initiatives to expand the government insurance program under the Affordable Care Act. Democratic victories in governors' races also improved the chances of Medicaid expansion in Kansas and Wisconsin, and all but ensured it in Maine. As a result, Medicaid could see its biggest enrollment bump since the health law began allowing expansion in 2014.
Health insurers in particular got a boost following the election results. Yesterday, shares of insurers UnitedHealth Group (UNH), Humana (HUM), and Anthem (ANTM) closed up 4%, 7%, and 7%, respectively.
But not every sector is sure to rise following the election results...
One area of the market to keep a close eye on is bank stocks, which may suffer renewed headwinds from the Democratic-led House of Representatives. As ABC News reported on Wednesday...
Democrats' victory in the House... means that Rep. Maxine Waters will likely become chairwoman of the House Financial Services Committee, which oversees the nation's banking system and its regulators.
Waters has called for more regulation of banks, and has been vocal about Trump political appointees moving to roll back regulations on banks and other financial services companies.
One trend we don't expect to change following the midterms is the government's ballooning debt loads...
After all, if there's one "issue" Republicans and Democrats can agree on today, it's spending money.
Despite frequent lip-service about the dangers of too much debt, Congresses led by both parties have consistently spent more money than they've extracted from us in taxes. In fact, outside of a couple of anomalous years around the turn of the century, the U.S. government has run at deficits for decades on end.
As a result, our national debt now stands at a mind-boggling $21 trillion-plus and growing.
However, in the past several years, you may have noticed something unusual...
For the first time in decades, neither party is even giving lip-service to balancing the Federal budget anymore. They simply don't care.
The reason is simple. As Porter explained in the November 17, 2017 Digest last fall...
Since this boom began in 2009, almost nobody has paid any attention to this massive increase in federal debt. You haven't heard a word about our deficits from our politicians. Nobody cares. Why? Because since 2009, these debts haven't caused our country's borrowing costs to rise.
Even though total federal debt outstanding has increased by 126% since 2008, our borrowing costs have fallen. We're still paying about the same amount in interest on this debt as we did back in the early 1990s, when our national debt was only 22% of the size of today's burden.
The thing that matters to policymakers is how much the debt costs to maintain, not how much it costs to repay. That's why you haven't heard anything about it.
As you know, the Federal Reserve has allowed the government to take on these massive debts by buying huge amounts of the debt that has been issued, and by manipulating interest rates lower so that borrowing costs were affordable.
Unfortunately, that could soon change...
The combination of Federal Reserve "tightening" and sharply rising long-term interest rates over the past year is beginning to take a toll. As you can see in the following chart, the government's annual cost to service these debts has begun to soar...
This problem will get exponentially worse as interest rates rise. Meanwhile, the government continues to add insult to injury by borrowing even more.
The U.S. Treasury is already expecting to borrow in excess of $1 trillion per year for the next few years, representing the largest deficits in decades outside of the 2009 financial crisis. And if history is any indication, the actual amounts will be even larger.
If that chart looks familiar to you, it should...
Porter shared an almost identical one when he issued that warning one year ago. More from that Digest...
Look at what [rising interest rates are] going to do to the U.S. government's funding costs over the next few years, according to projections from the Congressional Budget Office. Interest payments will nearly double, going from 6% to 11% of the federal budget...
These rising costs are going to have a profound effect on the current widespread political belief that "deficits don't matter," just as soaring default rates on consumer lending are going to lead to much tougher lending standards on cars, colleges, and credit cards. All of that consumption that we've enjoyed on credit for the last decade is going to come back to haunt us. All of us.
Of course, as we often say, inevitable does not necessarily mean imminent. For now, politicians remain blissfully unconcerned. But don't be surprised to hear much more about debt and deficits in the year ahead.
Finally, we'll end tonight with a quick announcement...
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New 52-week highs (as of 11/7/18): Blackstone Mortgage Trust (BXMT), CME Group (CME), Coca-Cola (KO), Lindsay (LNN), McDonald's (MCD), Starbucks (SBUX), and Service Corporation International (SCI).
Another busy day in the mailbag: some great early feedback on Steve Sjuggerud's True Wealth Systems Melt Up Portfolio... kudos for Ten Stock Trader... and several folks respond to paid-up subscriber Bill L's question about brokerage accounts for non-U.S. citizens. Send your notes to feedback@stansberryresearch.com.
"Melt Up??? This has been more like a volcanic eruption! I followed Steve's advice given in his webcast of Oct. 24 and his subsequent True Wealth Systems issue and I'm up 16.79% in two weeks. Every one of this Melt Up Portfolio items is up over 10%+ – it looks a bit like he is using a crystal ball. I hope this run continues – I am hanging on for dear life! BTW, I really enjoy the weekly podcast." – Paid-up subscriber Brook M.
"[Great] work to Steve and staff on the excellent picks in the Melt Up thesis. I bought in on all of your picks shortly after publishing them, with an extra emphasis on the bonus pick and am happy to report a $7,500 profit so far in about 2 weeks. A range of 10% gains to 39% gains on each of the picks. Looking forward to the coming months of gains!" – Paid-up Stansberry Alliance member George P.
"Just wanted to drop a short note of thanks and acknowledgement to Greg Diamond and his Ten Stock Trader service. The last few weeks he's nailed several call options in FDX and MSFT. I love the iPhone app and alert notification service to help me execute these option recommendations timely.
"There are occasions where I'm just not by my mobile phone or iPad for his recommendation, like on October 23rd for the FDX calls. Also, as is sometimes an issue there are occasions where I figure individuals are not following 'buy up to' recommendations and end up bidding up the price.
"Such was the case when I finally picked up my cell phone and read Greg's recommendation to buy FDX Nov.16th $230 calls. The price had been bid up outside his buy range but on October 25th (2 days later) I found the FDX Nov. 16th $227.50 calls trading at $1.65 so I purchased those instead. Then on October 30th, just 3 trading days later I sold these calls for $3.29, a 99.4% gain. Then exactly 1 week later, October 6th I bought Greg's recommendation in MSFT Dec. 21st $110 calls and sold them 17 hours later for an 85% gain.
"Shout out to Greg for these timely recommendations, but I'd also like to point out that Greg gets us out of trades going against us at a very early point, minimizing losses. As I mentioned in a previous email, I still utilize Doc, Steve, Dan and Porter recommendations in Retirement Millionaire and Trader, True Wealth Systems, Extreme Value and Credit Opportunities for long positions. I also continue to sell down many successful long positions from these services and move the money to cash, and I utilize this store of 'dry powder' for much of Ten Stock's short-term option plays. As always, I appreciate the education and the recommendations." – Paid-up subscriber Mark A.
"Hi Justin, regarding Bill L.'s question in yesterday's Digest about a U.S. broker offering services to non-U.S. clients, I'd like to inform you that I, as a non-U.S. customer, have been using TD Ameritrade for many years already. Never a problem, great trading platform." – Paid-up subscriber Henk V.
"Hi, re: [Wednesday's] Digest request of a broker for non-US citizens, I use Interactive Brokers here in the UK. Keep up the good work." – Paid-up subscriber Simon S.
"Bill should check out Interactive Brokers... very good service." – Paid-up subscriber Grant G.
"[I use] Interactive Brokers in the UK." – Paid-up subscriber Marc E.
"From [yesterday's] Digest, please let Bill L. know that Charles Schwab is a U.S broker who offers accounts to non-U.S. citizens who live outside America. That is the broker I use from here in Scotland." – Paid-up subscriber Andrew L.
"Hi, in reply to the question from Bill L., in New Zealand I use OMFinancial, which provides MarketTrader, a platform based on Interactive Brokers Trader Workstation. Try all your local in-country brokers & someone may provide something similar? Cheers." – Paid-up subscriber Greg
"Hi Justin, if anyone is looking for a competitive online broker they can get in touch with Halifax, a fully regulated online broker based out of Australia and New Zealand. Halifax has been an online broker for over 15 years and will open accounts for clients pretty much any country outside of the U.S. and Canada..." – Paid-up subscriber Roger B.
Regards,
Justin Brill
Baltimore, Maryland
November 8, 2018