The Fed Backtracks
The Fed backtracks... More on the end of 'easy money'... New research supports the 'Melt Up'... Just like 1998... Up 100% and counting in five months...
Is the Fed already 'hedging' its bets?
In recent months, central banks around the world have started to suggest that the days of "easy money" are coming to an end...
The Federal Reserve has reaffirmed its intention to continue raising short-term rates and begin to unwind its $4.5 trillion bond portfolio. The central banks of England and Canada have said they're considering rate hikes for the first time in years. And European Central Bank President Mario Draghi has hinted that he'll begin to taper his quantitative-easing program soon.
Regular Digest readers know we remain skeptical...
While these same central banks have been talking about rising inflation and economic growth, reality has begun to interfere. Measures of inflation in the U.S. and Europe have been falling again, and measures of real economic growth have been mixed at best.
We've been wondering how long they could keep up the charade...
After all, if the economy is weakening again, "tightening" will only hasten the crisis they've been trying to delay for so long.
But if today is any indication, we could already be seeing a change of heart...
This morning, Federal Reserve Chair Janet Yellen sat down for the first day of her semiannual testimony before Congress. And while she reiterated the Fed's stance that the recent slowdown in inflation is "temporary," she noticeably hedged this view for the first time. As the Wall Street Journal reported (emphasis added)...
Federal Reserve Chairwoman Janet Yellen, seeking to address a recent puzzling slowdown in global inflation, said she expects forces holding down consumer prices to fade in the months ahead, allowing the central bank to stick to its plans for gradual interest-rate increases.
But she left herself an out, saying the Fed would alter its plans if softer price pressures proved more persistent.
"It's premature to reach the judgment that we're not on the path to 2% inflation over the next couple of years," Ms. Yellen said Wednesday, during a hearing of the House Financial Services Committee. She repeated her view that an increasingly tight labor market would put upward pressure on wages and prices, but added, "We're watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent."
For her sake, we hope that's not the case... As we've discussed, the Fed may be surprised to find its policy doesn't work as well when the next crisis arrives.
In the meantime, the market cheered...
All three major U.S. indexes rose, pushing the Dow Jones Industrial Average to a new all-time intraday high of 21,580.
It seems the market also thinks the Fed will keep the "punch bowl" out a little longer.
Of course, we expect this manipulated boom will eventually end in disaster. But our colleague Steve Sjuggerud thinks stocks will go much higher before it does.
As regular Digest readers know, Steve believes we're on a verge of a "Melt Up" in stocks, similar to the one that pushed technology stocks to incredible heights in the late 1990s.
We've heard from several folks who simply don't believe this is possible. But new evidence suggests Steve is exactly right...
'A nearly identical alignment of extreme valuations'...
According to research from Leuthold Weeden Capital Management – founded by famed money manager Steve Leuthold – today's market valuation shares a remarkable similarity to another period. As Bloomberg reported on Tuesday...
Leuthold strategists considered the broadly elevated valuation profile of U.S. equities today and found a precedent: March 1998, when the dot-com bubble still had two years left to run. Sorting the stock market into 10 groups by median market capitalization, Leuthold found the "curve" of price-earnings ratios from mega-caps down to penny stocks that year was nearly indistinguishable from the one now.
How strong is the resemblance? The decile with the smallest stocks fetched 18.3 times annual profit back then, versus 19.2 now, while the middle groups were all within less than a point of today's values. [Price-to-earnings ratios] in the biggest market-cap decile were slightly higher then, but not by much: 24 versus 22 today.
In other words, valuations across the market today are virtually the same as those in early 1998, right before the last Melt Up began. And history suggests that Steve's prediction that the market will rise from here is correct...
For investors worried that high valuations guarantee trouble for the stock market, the data shows pricey stocks can get even pricier. The S&P 500 trades at a multiple of 21.5, compared with an average 24.7 during March 1998. From there, the benchmark gauge rallied another 29%.
We wrote it, did you buy it?
In the February 3 issue of DailyWealth Trader, our colleagues Ben Morris and Drew McConnell recommended shares of beverage maker National Beverage (FIZZ) to profit from one of the biggest consumer trends in the world today. From that issue...
People around the world are ditching soda... And they're buying low-calorie, low-sugar alternatives instead.
Since 1998, carbonated soft drink sales are down 25%. And last year, for the first time in history, sales of bottled water surpassed those of carbonated soft drinks.
It's a big trend. And a lot of the converts are switching to water... especially sparkling water.
According to research firm Mintel, U.S. bottled water sales totaled $15 billion in 2015. It projects that number to grow by 35%, to more than $20 billion, though 2020. Over that same period, it expects sales of sparking, mineral, and seltzer waters to grow by 75%... more than twice as much.
While most folks have likely never heard of the company, National Beverage was ideally positioned to benefit as this trend continued. That's because it is the maker of LaCroix, the best-selling sparkling water brand in the U.S. More from Ben and Drew...
In its latest earnings release, the company noted that LaCroix's average velocity – the time it takes to sell – is four to six times faster than its nearest competitors.
The $2.4 billion company also owns Shasta and Faygo (soft drinks), Rip It (energy drinks), Everfresh (juices), and a handful of other beverage brands. But LaCroix is its crown jewel...
National Beverage doesn't break out the exact sales figures for LaCroix. It only said that sales in its "Power Plus division" (which includes LaCroix) jumped 31.4% last year. Compare that with revenue declines at Coca-Cola (KO) and Pepsi (PEP) of 5.9% and 4%, respectively.
Over the past 12 months, National Beverage sold $761 million worth of its drinks. That's up 14% from a year earlier. The company's profit margins have expanded from 7.9% to 10.8%. And its earnings per share soared 55%, from $1.14 to $1.76.
While last year was especially strong, you can see in the chart below that the company has been growing steadily for more than 10 years...
Better yet, they noted National Beverage was in great financial shape, with $150 million in cash and no debt. And its founder and CEO still owned a huge 74% of its shares... meaning his interests were solidly aligned with other shareholders.
Yet despite years of steady growth – and a steady uptrend in its share price – the company was still trading at an attractive valuation...
National Beverage trades with an EV/EBITDA ratio of 16.4. That's a 25% premium to the benchmark S&P 500, which has an EV/EBITDA of 13.1...
But last year, the average sales and earnings for the companies in the S&P 500 were up 1.9% and down 0.1%, respectively. At National Beverage, they were up 13.3% and 54.8%, respectively. The company deserves this higher valuation.
I suggest buying National Beverage today... On the upside, shares could easily climb 50% or more in the next one to two years as water sales and National Beverage's flagship LaCroix brand continue to grow.
It turns out Ben and Drew were too conservative...
It took only two months – rather than two years – for FIZZ to climb to their initial 50% profit target. And as of this week, DailyWealth Trader subscribers who took their advice are officially up more than 100% in a little more than five months.
They shared their latest thoughts on the rally in an update to subscribers yesterday.
In short, they believe much of the move can be explained by the company's continued growth. It is now growing sales and earnings per share even faster than it was when they originally recommended shares in February. But they also explained that there has been another bullish factor at play. From yesterday's issue of DailyWealth Trader...
None of these gains would have come without strong business results. That's No. 1. But it has happened so quickly because of the huge number of short sellers that are caught in a tough situation... This is called a "short squeeze"... It boils down to this...
When we suggested buying National Beverage in February, traders were holding about 20% of its available shares short. They had bet – in large numbers – that the stock would fall. To do that, they needed to borrow and sell shares that they would need to buy back one day. Buying back shares (also called "covering") is how you exit a short position.
The problem (for them, not us) was that because the number of shares held short was 10 times National Beverage's average daily trading volume, it would take about 10 days for all of the short sellers to cover their positions.
If they don't want to wait so long, they are forced to offer to buy shares at higher prices. In other words, short sellers push the stock higher with their buying.
As they explained, this is what happened back in March, when the company reported blowout earnings. Short-sellers panicked and bought back shares, and all this extra buying has helped accelerate the move to the upside.
Incredibly, Ben and Drew believe the 'squeeze' could have further to run...
So-called "short interest" still stands at 19%... just shy of the 20% level when they originally recommended the trade. And the company is due to report earnings again tomorrow. Another strong report could push shares higher and trigger another buying "panic."
For now, Ben and Drew recommend staying long. They believe much more upside remains ahead...
We don't know what this upcoming report will bring. But $5 billion is still relatively small for a successful company in the soft-drink space. Coca-Cola (KO) is 38 times that size. And even Dr Pepper Snapple (DPS) is more than three times that size.
We want to hold on to this winner and let it ride. It could potentially rise another 50% or more from here... with time. If you're holding National Beverage, we suggest you continue to hold your shares with a 20% trailing stop...
National Beverage is stealing market share from the giants in the beverage industry... But traders still think (or hope) that it's heading lower. Their bearish bets have helped push the stock a lot higher already. And if Thursday's report is anything like its recent ones, the gains could be just getting started.
FIZZ is just the latest big winner for DailyWealth Trader subscribers. They're holding 11 double-digit winners and two triple-digit winners today... and are on pace to earn 26.6% annualized gains through the first six months of the year. Learn more about DailyWealth Trader – including how you can try it for yourself, absolutely risk-free – right here.
New 52-week highs (as of 7/11/17): Allianz (AZSEY), Boeing (BA), Alibaba (BABA), iShares MSCI BRIC Fund (BKF), Global X China Financials Fund (CHIX), Facebook (FB), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Global X MSCI Greece Fund (GREK), PureFunds ISE Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), KraneShares Bosera MSCI China A Share Fund (KBA), and Verisign (VRSN).
In the mailbag, two subscribers send us some praise... while another shares some feedback on the auto markets. What are you seeing out there? Let us know at feedback@stansberryresearch.com.
"Since your mailbag was lite I'd thought I'd throw in some praise... In the May issue of [Stansberry's Investment Advisory] Porter recommended buying some shares of Weight Watchers... So I did, naturally. Up 47% as of yesterday; holding in my ROTH Ira as well to take full advantage of not paying any taxes on the gains. Props to the research team for doing all the amazing work they do, and to Porter for calling another great stock to get into." – Paid-up subscriber Austin DeSico
"Hey Porter, just wanted to say our investment account officially hit 6 figures this week. Couldn't have done it without you guys. Now hopefully TradeStops will help me keep most of it! Sincerely, thank you." – Paid-up subscriber Daniel S.
"I bought a nice car at auction recently it was a 2003 Jetta ran great I bought it for $2,000 and [there] were golf carts selling for $2,500, 2800, $3,000 maybe there is a problem with used car prices LOL." – Paid-up subscriber Rob W.
Regards,
Justin Brill
Baltimore, Maryland
July 12, 2017