The Federal Reserve Says Rates Are Going Higher
The Federal Reserve says rates are going higher... Gold and silver surge... China is two months away from reserve currency status... A new warning from the oil market... Oil and junk bonds disagree... Ford sounds the alarm on autos...
Before we get started with today's Digest, a quick note...
If you missed Porter's urgent gold announcement yesterday, we hope you'll to take a few moments to catch up now.
In short, he says we've just seen the most important development in the precious metals sector in nearly a decade... And it signals that a second, explosive stage of the rally is about to begin. Get all the details right here.
Yesterday, the Federal Reserve released its latest monetary-policy decision...
As expected, the Fed decided to leave short-term interest rates unchanged again this month. But it was also notably more upbeat than in recent months.
It said "near-term risks to the economic outlook have diminished," and, "on balance," the U.S. job market is strengthening. It also still expects to raise rates at least one more time this year.
But it appears the market – like us – remains skeptical that the Fed will raise rates again anytime soon. In fact, the market reacted as though the Fed had said it was planning to cut rates instead...
Following the news, the U.S. dollar plunged nearly 1%... stocks rallied... and precious metals shot higher. Gold ended the day up 2%... Silver rallied more than 4%... And mining stocks – as tracked by the VanEck Vectors Gold Miners Fund (GDX) – soared more than 6%.
Regular Digest readers know we've been tracking the ongoing depreciation of China's currency, the yuan...
A big plunge in the yuan versus the U.S. dollar last August was widely blamed for the big market declines that followed. Since then, China has avoided additional large devaluations, but it has quietly allowed the yuan to continue to fall.
According to the Wall Street Journal, the yuan has fallen nearly 6% this year against a basket of 13 currencies – including the dollar, the euro, and the Japanese yen. It has fallen an additional 3% against the dollar alone.
But this isn't the only reason we're following China's currency...
Despite these recent concerns, the International Monetary Fund ("IMF") is still proceeding with the plan it announced last November (just as our colleague Steve Sjuggerud predicted).
As we discussed at the time, the IMF agreed to include the yuan in its Special Drawing Rights basket of currencies on October 1. A little more than two months from today, the Chinese yuan will officially be granted reserve currency status for the first time.
The yuan will have a weighting of 10.9%, making it the third-highest-weighted currency behind the U.S. dollar (41.7%) and the euro (30.9%). The Japanese yen and the British pound are also included at 8.3% and 8.1%, respectively.
Of course, there are plenty of reasons to be concerned about China in the near term (though that could also be said about the U.S., Europe, Japan, and the U.K. today). But there is no denying the move will be incredibly bullish for China's economy and markets in the long run.
Yesterday, we noted the world's largest oil-services firms have officially called a bottom in oil prices. The CEOs of both Halliburton (HAL) and Schlumberger (SLB) believe the worst of the recent oil crash is over.
But there are reasons to believe there could be more short-term pain ahead.
First, supply disruptions that took millions of barrels per day off the market are waning.
At the same time, U.S. producers are coming back online as capital has been flooding into the sector again.
In yesterday's edition of our free Growth Stock Wire e-letter, Stansberry Resource Report editor Matt Badiali explained why this is happening... and why oil prices could be headed lower again. In short, he says much of it is due to "zombie wells." From the issue...
Zombie wells aren't fracked or set up to produce oil. They're essentially dead wells, waiting to come alive as soon as oil prices rise.
There were 4,230 zombie wells as of April 1, according to Bloomberg Intelligence. They're evenly divided among four major shale plays: North Dakota's Bakken, Colorado's Niobrara, and Texas' Eagle Ford and Permian Basin. That's about 10% of all the wells drilled in 2014. It's a lot of oil just waiting to come to the market. Here's what I wrote last year when I was first worried about it...
It means there's a huge buildup of oil waiting to hit an already oversupplied market. When prices get high enough, this oil will flood pipes and refineries... which could cause prices to fall again.
As Matt explained, last year we didn't know when those wells would go into production. Now we do. More from the issue...
The good news is that if oil prices stay above $40 per barrel, that will kill the zombies. In other words, oil companies will complete these wells as long as oil prices remain at or above today's levels. According to Bloomberg Intelligence, 70% of the zombie wells in Texas will be completed by the end of 2017.
As the zombie wells come online, the oil market will be flooded with more supply... which will slow the decline in U.S. production... and keep oil prices lower for longer.
Because Matt believes these wells could keep a lid on prices awhile longer, he isn't ready to invest heavily in producers just yet. But he is getting interested in high-quality oil-services companies, like those we mentioned yesterday...
As the industry continues to wake back up and complete the zombie wells to pump money back into the industry, service companies that took huge hits to their revenue will profit.
Put some high-quality oil-services companies – like Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI) – on your watch list today. When we see confirmation of an uptrend in oil prices, shares of these companies should rebound sharply.
Speaking of oil, we want to point out a growing divergence between oil and high-yield bonds, one of the "lions" Porter has been following.
Crude oil and junk bonds moved in tandem during last year's declines, and they have rallied together since bottoming in February. This isn't surprising... Energy companies owe a large portion of this debt.
But late last month, that changed. As you can see in the chart below, high-yield bonds have continued higher, while oil has plunged...
If oil keeps falling, this chart suggests junk bonds could soon follow.
Finally, if the latest news from Ford (F) is any indication, the recent boom in autos could be ending, too.
Ford shares plunged nearly 10% today on weaker-than-expected second-quarter earnings. But it was comments from the company's CFO that were more concerning. As Bloomberg reported...
"We're committed to meeting our guidance, but it is at risk," Chief Financial Officer Bob Shanks told reporters Thursday. The company now says it's unlikely that U.S. vehicle sales will break last year's record, and Shanks predicted further contraction in 2017. "We don't see growth, at least in the near term."
After a record streak of six straight years of annual U.S. auto-sales growth, Ford is joining analysts who are skeptical that the record set in 2015 will be topped this year. Consumer demand has gone slack, forcing automakers to dial up deals to lure buyers to showrooms. For the first six months, industrywide light-vehicle sales rose just 1.5 percent while incentives jumped 13 percent, according to researcher Autodata.
If Ford is correct, it's an ominous sign for the broad economy. As Porter noted in the July 15 Digest, strong auto sales have covered up significant weakness in U.S. manufacturing...
In the second quarter (ended June 30), industrial production in the U.S. declined at a 1% annual rate. That's the third consecutive decline in industrial production.
The only thing keeping manufacturing afloat in the U.S. is automotive manufacturing, which, as you probably know from reading the Digest, is completely a function of growth in subprime auto lending (i.e. it's unsustainable).
Outside of auto, every other major category of durable materials recorded decreasing production...
New 52-week highs (as of 7/27/16): CME Group (CME), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), iShares Core S&P Small-Cap Fund (IJR), Newmont Mining (NEM), ETFS Physical Platinum Fund (PPLT), Regions Financial – Series B (RF-PB), and Sabine Royalty Trust (SBR).
In the mailbag, several more readers weigh in on financial gifts for loved ones. Send your notes to feedback@stansberryresearch.com.
"To Joe F: You might have made some poor investments in the past (who hasn't), but what a great learner you are – congratulations to you – for giving your grandchildren such a well thought-out experiential gift. Truly impressive." – Paid-up subscriber Paula T.
"A couple of thoughts to Joe F. re: his gift of investment funds to his grandchildren:
"UGTMA's are not very good vehicles to use to effect these transfers. Once the grandchild reaches the age of majority (18?), the money is legally theirs and they can do with it whatever they desire and Joe can't stop them. The earnings in the account are taxable and possibly taxable at the parents' tax rate, depending on the amount of the income. This may trigger a tax return filing requirement for the grandchild that might not otherwise apply or a tax liability for the parent.
"Section 529 accounts are a much better option, at least from a control and taxability standpoint. Joe, as the grantor, can maintain control over the funds for as long as the account remains funded. As long as the funds are used to fund higher education costs (of the grandchild or their siblings or parents or whoever Joe wants), there is no taxation on the earnings and gains.
"As long as Joe wants to impart wisdom to the grandkids re: wise investing rules and minimizing costs, he may as well include some thoughts about minimizing the tax costs inherent in those investment choices along with the wisdom of protecting assets against the temptations that the world inevitably presents to an 18 year old. Caveat: He will probably not be able to invest in individual securities. Pretty much every 529 plan uses mutual funds as their investment vehicle options, although some have fairly broad asset class choices in that regard, so diversification is still available." – Paid-up subscriber Kenneth Woodward
"This is a problem for most grandparents, how to provide a nest egg for the children that the parents cannot touch. We found insurance policies worked the best & a few coins once in awhile was always a big hit. At 35 years of age, my grandson still has his 'stash'." – Paid-up subscriber Mary Spalding
Regards,
Justin Brill
Baltimore, Maryland
July 28, 2016
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