The 'Floodgates' Are Now Open

The 'floodgates' are now open... A recipe for higher interest rates... But don't be surprised to see lower rates in the near term... How to make investor panic work in your favor... Big news from Amazon...

It's official...

Earlier this month, we noted that the U.S. government was preparing to dramatically ramp up debt issuance (aka "borrowing") for the first time in nearly a decade.

Today, the "floodgates" officially opened.

This morning, the government issued nearly $100 billion of short-term Treasury bills. The government sold $51 billion of three-month bills and $45 billion of six-month bills, both good for the largest single issuances in history. This was followed by another round of auctions this afternoon that included $55 billion of four-week bills.

All told, the U.S. Treasury sold a record $151 billion of T-bills today. And it plans to issue a total of $258 billion of short- and long-term debt before the week is through.

But again, this is just the beginning...

Due to rising budget deficits, the government is expected to issue a mind-boggling $1.3 trillion in new debt this year. This is more than double last year's total, and the most in any year since the financial crisis. And issuance is expected to rise even further over the next several years.

Worse, this massive new supply is coming to the market just as the Federal Reserve – one of the largest buyers of Treasury debt over the past 10 years – is beginning to unwind its massive bond portfolio.

Economics 101 tells us rising supply and falling demand is a recipe for lower prices. And because bond prices and bond yields (interest rates) trade inversely, it suggests interest rates are likely headed higher over the next several years.

Of course, even if rates are headed higher, they won't move in a straight line...

Even the strongest trends are broken up with periodic pullbacks and corrections along the way. And in this morning's edition of our free DailyWealth e-letter, our colleague Steve Sjuggerud explained why we could see a sharp reversal – higher bond prices and lower interest rates – in the near term. In short, investors are terrified of higher rates right now. Here's Steve...

Eleven billion dollars... That's how much money two major [bond] funds lost in combined market value over the last few weeks... An $11 billion loss means these two funds saw 19% of their combined assets disappear... in less than three months.

The crazy part is that both funds fell less than 3% over that time. So they haven't lost assets because share prices are down, but because investors have pulled their money OUT of these funds.

Again, these aren't stock funds. They're two of the largest bond exchange-traded funds (ETFs) – the iShares iBoxx Investment Grade Corporate Bond Fund (LQD) and the iShares iBoxx High Yield Corporate Bond Fund (HYG).

LQD is the largest investment-grade bond ETF, while HYG is the largest "junk" bond ETF. At the end of November, these two funds held nearly $60 billion in total assets put together. Both have lost more than $5 billion since. Take a look...

But the 'mass exodus' from these funds isn't the only sign investors are extremely bearish on bonds today...

As Steve explained, you can see fears of higher interest rates nearly everywhere you look...

Inflation and a resulting bond crash are fund managers' biggest fears right now, according to the latest Fund Manager Survey from Bank of America.

Real-money traders are making the same crowded bet...

The Commitment of Traders (COT) report tells us what futures traders are doing with their money. And right now, futures traders are betting on higher interest rates at near-all-time extremes.

It's across the board. Futures traders are unanimously betting on higher two-, five-, and 10-year Treasury yields.

As longtime readers know, this sort of sentiment extreme is often a powerful contrarian indicator...

It's a sign that a trend has become too popular and is due for a reversal. And that's exactly what Steve expects today...

The thing is, we know that when EVERYONE believes in one trade, the trade is usually over... It means there's nobody left to buy. That's where it looks like we are now with this interest-rate trade.

Investors expect higher rates. They're selling bond funds to avoid losses if rates rise. And futures traders are actively betting on higher rates. This all means betting on higher interest rates is a crowded trade right now. And as a contrarian investor, that gets me interested.

LQD and HYG saw $11 billion disappear in just a few weeks. If you're bold, now is a moment to consider going against the crowd and betting on bonds... betting on lower rates.

Do it as a three-month sentiment trade. And set a tight stop loss to limit your downside. Trades don't get more contrarian than this. But the time is right... Are you contrarian enough for this trade?

Switching gears a bit, longtime Digest readers know stock market volatility is nothing to fear...

Bouts of turmoil like what we've seen this month can be jarring, but they're a natural and unavoidable part of investing. Periods of market calm and complacency will always be interrupted by periods of volatility and fear... and vice versa. It's simply the cost of doing business as an investor.

This is why we constantly urge you to control risk with proper position-sizing and trailing stop losses, and to consider "hedging" your portfolio with precious metals and select short sales. These strategies will help limit your downside in a correction... And more important, they'll help you remain calm while others panic.

But you can do more. You don't have to simply weather these periods of volatility. You can actually make them work in your favor.

This is exactly what our Stansberry Alpha service is designed to do. The Alpha strategy lets you takes advantage of higher volatility to dramatically boost your potential returns in the same high-quality companies you're likely already buying.

Last weekend's Digest Masters Series featured an in-depth, two-part interview with Stansberry Alpha editor Alan Gula. If you're interested in learning more about making volatility work in your favor, we encourage you to check it out. You can access Part I here and Part II here.

Finally, the 'death of retail' has claimed its latest victim...

Regular Digest readers know we've been keeping close tabs on this growing trend. Last year, several well-known "brick and mortar" retailers – including Gymboree, hhgregg, The Limited, and Wet Seal, among others – filed for bankruptcy, and closed many or all of their stores.

The trend resumed this month... Department-store chain Bon-Ton became the first official casualty of 2018 when the company filed for Chapter 11 bankruptcy protection earlier this month.

We can't say we're too surprised. Debt-burdened retailers continue to struggle as consumers turn to the Internet for more of their shopping needs.

Of course, not every retailer is struggling...

Bon-Ton's announcement came just three days after Amazon (AMZN) reported blowout earnings.

The "retail killer" posted incredible numbers for the fourth quarter. Revenues jumped 38% year-over-year, while Amazon reported the highest profits in company history.

The company's growing apparel business was a particular bright spot. While the overall U.S. apparel market grew just 2% for the year, Amazon increased apparel sales by 25%.

Customers have historically preferred to try on clothes in person, to be sure everything fits correctly before committing to a purchase. But Amazon's Prime Wardrobe service has quietly become a big success. Customers can get a wide array of clothes delivered to their doorstep and have seven days to decide what to keep.

But a strong earnings report wasn't the only big news Amazon has made of late...

It seems the company is also preparing to "disrupt" yet another new industry. As the Wall Street Journal reported...

Amazon.com is preparing to launch a delivery service for businesses, positioning it to compete directly with United Parcel Service and FedEx.

Dubbed "Shipping with Amazon," or SWA, the new service will entail the online retail giant picking up packages from businesses and shipping them to consumers, according to people familiar with the matter.

Amazon expects to roll out the delivery service in Los Angeles in coming weeks with third-party merchants that sell goods via its website, according to the people. Amazon then aims to expand the service to more cities as soon as this year, some of the people say.

In other words, Amazon doesn't just want to sell you just about everything you buy online... It also wants to deliver it all to you, too.

Of course, this is still in its early stages. Amazon has a lot of work to do before it can legitimately compete with the likes of FedEx and UPS... And success is not guaranteed.

But given the company's track record, we certainly wouldn't bet against it. Amazon has become a dominant presence in just about every industry it has set its sights on to date.

Our colleague Dr. David Eifrig recognized this months ago...

And despite a relatively rich valuation – and shares trading near all-time highs – "Doc" recommended Amazon to his Retirement Millionaire subscribers back in May.

As he explained in that issue, Amazon made for a great long-term investment because of three things in particular (emphasis added)...

First, Amazon will be bigger in the future than it is today. Unlike so many flash-in-the-pan tech companies, Amazon has major competitive advantages and an infrastructure that cannot be replicated.

We often hear about how digital sales are killing other retail stores... But lost in all that hype is the fact that online purchases still account for roughly 10% of retail spending. Whether you think that online spending will account for 30%, 50%, or 90% of spending in the future, it's clear that it will be multiple times larger than it is now. And the primary beneficiary will be Amazon.

Second, you can be sure that Amazon will have the ability to be massively profitable at any time. It may wait a long time to turn on the profit spigot, but it's there waiting.

Third, Amazon will have more big hits. We don't know just what they are yet, but it will have multiple products that succeed and transform the company, as Amazon Web Services and Prime have already.

This month's news provided more evidence that Doc was correct on all three counts... and folks who took his advice were up 53% in just nine months as of Friday's close. Kudos to Doc on the bold call.

New 52-week highs (as of 2/19/18): none (markets were closed for Presidents' Day).

The feedback on the 2017 Report Card continues to roll in. As always, send your notes to feedback@stansberryresearch.com. Good or bad, we read them all.

"Stansberry editors, great work last year to all the newsletters. While I don't want to take anything away from the great work most of the writers did last year, I think the 'teachers' have been engaging in a bit of grade inflation.

"Many of our schools do the same thing and it ends up giving everyone an A because everyone is a precious and delicate snowflake and everyone deserves an A for showing up. Any time you find yourself giving an A + or an A++, you have to ask yourself... is there a letter before A. Because if there isn't then your grading system is broken.

"While Doc does great work, he doesn't deserve an A++ every single year. Otherwise his performance is not exceptional. What if next year he does better? Are you going to giving him an A +++ or an A++++ or what about an A++++++++++++. See how ridiculous that is. I know you are doing this for marketing purposes but I stopped reading your report cards a few years ago when this started getting ridiculous. It is no longer valuable to subscribers.

"Porter likes to ridicule the education system in this country (which it deserves), but unless you want to be a hypocrite, you need to hold yourselves to a higher standard than this. Just apologize to subscribers for masquerading this as a real report card instead of a marketing gimmick and let's move on to the good work you do. Keep up the good work. I dare you to publish this. Cheers." – Paid-up subscriber Kirk

Porter comment: Kirk, there is something absurd here, you're right.

Nobody else does anything like what we do in terms of transparency and accuracy with our track records and our Report Cards. It goes far further than you realize. We measure our results in the most conservative way possible and we have our track records audited. We also publish all our results, good and bad. (Back in 2012, I even gave myself an "F." How's that for marketing?)

Your point about "A+" and "A++" is petty.

We think of an "A" performance as an investor who can beat the markets while maintaining a win ratio of at least 60%. When Doc produces incredible results (40%-plus annualized returns) with a win ratio of near 90%, in our view, that's worthy of additional merit.

Is that marketing? Only if telling the truth about your products and the benefits they offer is marketing. And if that's the case, it's fine with me and the vast majority of our customers.

Nobody pays you to read anything. Ignore all you want.

Hundreds of thousands of people are paying me to write, so I'm going to continue to give them what they want and what I believe they deserve.

I'm also going to continue to challenge other investment publishers to match our transparency. (They won't.)

Regards,

Justin Brill
Baltimore, Maryland
February 20, 2018