The Flight Into U.S. Assets Could Soon Accelerate
A warning from the German bond market... The flight into U.S. assets could soon accelerate... Why 'bail ins' could be coming for Europe's troubled banks... New casualties in the 'war on business'...
This morning, Germany sold new five-year government debt at a record-low negative yield.
The German Finance Agency was able to sell all 3.386 billion euros ($3.73 billion) of its allotted five-year notes at an average yield of negative 0.51%. But beneath the surface, there were some concerning signs...
Bloomberg reports investors bid for 3.486 billion euros of the debt, representing an official "bid-to-cover ratio" – a gauge of investor demand – of 1.03.
If you're unfamiliar, you're probably thinking that doesn't sound so bad. After all, investors bid for more of this debt than the German government offered. But it's actually a relatively weak number...
"Strong" auctions typically see a bid-to-cover ratio near 2.0 or above. According to Bloomberg, the German government expected today's ratio to come in around 1.5. Instead, it fell to 1.03... the lowest bid-to-cover ratio at a five-year debt sale since September 2011, near the peak of the euro crisis.
It's also worth noting that because the yield on this debt was less than negative 0.4%, it joins the more than 60% of outstanding German debt that's already ineligible to be purchased through the European Central Bank's ("ECB") quantitative-easing ("QE") program.
There are two important takeaways from this news...
First, as we've discussed, it suggests the ECB is running out of options under its current policies. It has nearly exhausted the pool of QE-eligible bonds, and now it appears investors are tiring of paying to own this negative-yielding debt.
The ECB will likely need to expand its QE program to include additional assets... try something new (like "helicopter money")... or both.
Second, it also suggests the flight of foreign capital into higher-yielding U.S. assets such as high-quality dividend-paying stocks could soon accelerate.
Meanwhile, the news for European banks isn't getting any better...
Shares of big banks across Europe have plunged to multidecade lows. And regular Digest readers know that Italy's are the worst of the group...
As we reported in the July 5 Digest, 17% of Italian bank loans are non-performing today. For comparison, even at the worst of the 2008-2009 financial crisis, bad debts in U.S. banks never rose above 5%.
Italy's third-largest lender, Banca Monte dei Paschi di Siena, is in especially bad shape. More than 30% of its loans have gone bad... and the Italian government has been seeking approval to bail it out for the third time since the financial crisis.
As we've discussed, current European Union ("EU") rules require a "bail in" – where a bank's shareholders and some of its creditors shoulder losses first – before it can be bailed out with taxpayer funds.
The Italian government has been pushing the European Commission ("EC") – which created the rules – to grant an emergency exception. But news this week suggests that isn't a certainty...
Yesterday, the EU Court of Justice – Europe's highest court – ruled in favor of the EC's "bail in" rules, noting that...
Burden-sharing by shareholders and subordinated creditors as a prerequisite for the authorization, by the commission, of state aid to a bank with a shortfall is not contrary to EU law.
While the decision is binding and cannot be appealed, the court did note that the rules allow for an exception when "imposing bail-ins would endanger financial stability." But it's not clear the EC believes that's the case today.
We'll keep a close eye on the situation... If "bail in" rules are upheld for Italy's banks, shareholders in other troubled European banks could rush for the exits.
The U.S. government's "war on business" has claimed two more casualties...
On Tuesday, the Obama administration announced plans to file lawsuits to block two major health-insurer acquisition deals: insurance giant Anthem's (ANTM) $54 billion deal to take over rival Cigna (CI), and Aetna's (AET) deal to buy Humana (HUM) for $37 billion.
Bloomberg reports that officials are "concerned that the deals, which would transform the health-insurance industry by turning its five biggest companies into three, would harm customers." In addition, several states' attorneys general are likely to join the potential U.S. Department of Justice challenge.
Shares of all four companies fell on the news...
Since last July, the uncertainty surrounding the deals has weighed on Anthem, Cigna, and Humana shares... Each is down more than 15% in the last year. Aetna shares are flat.
For comparison, insurance competitor UnitedHealth (UNH), which closed a $13 billion deal to buy a pharmacy benefit manager last summer, is up 15% in the same time frame.
As we wrote in the May 11 Digest, the U.S. government has grown increasingly hostile toward large M&A deals...
In just the past couple of months, we've seen various branches of the federal government block mergers or deals between pharmaceutical companies Pfizer (PFE) and Allergan (AGN), oil-services companies Halliburton (HAL) and Baker Hughes (BHI), railroads Canadian Pacific Railway (CP) and Norfolk Southern (NSC), airlines United Continental (UAL) and Delta Air Lines (DAL), and office-supply companies Staples (SPLS) and Office Depot (ODP).
According to data firm Dealogic, more than $600 billion in deals have been called off in the U.S. this year... up from $378 billion just two months ago. That's by far the largest number of deal cancellations in a single year in history. In fact, it's nearly double the previous full-year record – and we're only halfway through the year.
Again, regardless of your feelings about big government or big business in general, there's no denying the government's growing "war on business" could be another massive headwind for stocks and the U.S. economy.
Finally, in some positive acquisition news, we note consumer-goods giant Unilever (UL) – maker of Dove soap, Axe body spray, and Tresemmé hair products – has purchased men's grooming brand Dollar Shave Club...
Financial terms of the deal weren't made public, but Fortune magazine reports it was valued at approximately $1 billion in cash. The startup razor company previously raised around $160 million in venture capital funding at a valuation of about $540 million, suggesting Unilever offered a substantial premium.
Dollar Shave Club reportedly has about 3 million customers and will give Unilever a foothold in the U.S. razor market, which is currently dominated by Procter & Gamble (PG).
However, in all the news articles about the purchase – detailing how Dollar Shave Club's direct-to-consumer strategy had "disrupted" the razor industry or how humorous its viral marketing videos were – there wasn't a single word on the quality of the resulting shave.
Of course, if you've actually used these razors like we have, you probably aren't surprised...
While the company sells its products for a fraction of the outrageous price tags of the big brands, we don't know anyone who thinks these razors are any better than other cartridge razors.
If all you want is a serviceable shave – and you're willing to put up with the irritation common to all disposable razors – they're a great choice. After all, only a fool would pay more for virtually the same product.
But if you care about the quality of your shave, you can do much better. That's why – at the risk of angering thousands of subscribers for discussing something that has absolutely nothing to do with the markets – we urge you to take a look at Porter's OneBlade razor...
It's an all-steel razor system designed with heirloom-quality materials. It delivers a shave that's only comparable to a straight razor... with the safety and convenience of a cartridge. No cartridge razor can come close to delivering this kind of totally irritation-free shave. But we're not the only ones who think so...
OneBlade just won the world's most prestigious industrial-design award, the 2016 IDEA AWARD from the Industrial Designers Society of America (IDSA)... putting it in the same sphere of quality as other winners like the BMW X1 sport utility vehicle, the Rolls-Royce Dawn luxury convertible, and the Vive virtual-reality system. There is no higher honor for a new product like OneBlade.
If you're in the market to upgrade your shave – and are interested in a razor that is built to be handed down to your grandchildren – click here to learn more.
New 52-week highs (as of 7/19/16): CME Group (CME), Cisco (CSCO), Welltower (HCN), Johnson & Johnson (JNJ), Procter & Gamble (PG), Regions Financial – Series B (RF-PB), and Sysco (SYY).
In today's mailbag, several more readers weigh in on the "fire Porter" debate... including subscriber Paul H., who sent us one of the funniest e-mails we've received in a long time. Send your notes to feedback@stansberryresearch.com. As always, we can't provide individualized advice or respond to every e-mail, but we read them all.
"This idea of Porter being fired is ridiculous. Anyone who thinks Porter – or anyone on this planet – can be exactly right about the market needs to have his head examined. Porter is simply giving his professional, conservative, opinion as to what the financial indicators are telling him. As has been pointed out, the Two Docs have a completely different take on where things are headed. That these three men read different data and/or read it differently is not only no big deal, it's refreshing! This gives me a better opportunity to settle on a strategy more in line with my own beliefs, risks, fears and the like.
"Here's an easy answer for those who disagree with Porter: quit reading and heeding his advice! That's right, you can just walk away. I am sure he will be quite fine with your doing so, whether or not you choose to continue to follow the other analysts (with a personal shout-out and kudos to Matt Badiali for his picks I've followed). But for Porter to get 'fired' from STANSBERRY Research makes absolutely no sense, skills aside.
"In closing, I am simply doing what works with so many other things in life: I'm getting wealth(ier) by associating with wealthy people. Thanks to everyone at Stansberry Research for the work they do." – Paid-up subscriber Andrew K.
"Porter should NEVER resign, but on the other hand, I would like a note from him on 'WHAT TO DO IN THE EVENT OF HIS DEATH'? I ask because Warren Buffett does this with his managing staff should it ever happen – that way he knows how to maintain/resume normal business operations. After all, you can't have Porter drop dead (or get hit by a bus) and take all those 'knowledge assets' with him. Plus, I enjoy his readings. So in short, the message to Porter is... 'you're not allowed to be fired or resign... .and you're not allowed to die either." – Anonymous
"With all this talk about firing Porter, perhaps it would be useful to put things in perspective by summarizing what various analysts (that I routinely read) from across the Agora spectrum think, relative to the sky:
"Porter Stansberry – 'The sky is falling!'
Steve Sjuggerud – 'The sky's the limit, but it will fall eventually.'
David 'Doc' Eifrig – 'When flying through the sky, be sure to sit in the safest seat on the plane.'
Jeff Clark – 'The sky has support at 9, 31 and 53 with resistance at 372 and 6,200.' (kudos to anyone who can figure out to what the numbers relate and where Jeff routinely writes statements like this)
Bill Bonner – 'The sky is a zombie, a supporter of the crony capitalists that are devitalizing the life of the productive universe around it and creating distortions in the economy.'
Mark Ford – 'There are many ways entrepreneurs can start a business involving the sky with minimal up-front costs. However, my favorite way to grow wealth is rental real estate with beautiful views of the sky.'
P.J. O'Rourke – 'Who cares what's happening with the sky, will someone please buy me another Famous Grouse and soda?'" – Paid-up subscriber Paul H.
Regards,
Justin Brill
Baltimore, Maryland
July 20, 2016
|