The Global 'Melt Up' Continues
The global '
The global 'Melt Up ' continues...
And few individual stocks have benefited from this trend as much as our colleague Steve Sjuggerud's favorite "New China" recommendations: tech giants Tencent (TCEHY) and Alibaba (BABA). Steve's True Wealth China Opportunities subscribers are now up 121% and 80%, respectively, since Steve recommended them about 15 months ago.
But regular Digest readers know the
China has undeniably become a dominant economy today... And yet, the Chinese stock market – which is also larger than any other besides the U.S. – remains one of the least owned in the world.
This is one of the biggest reasons Steve launched his True Wealth China Opportunities advisory [last year].
As Steve noted at the time, virtually no one owned local Chinese stocks, known as "A-shares." U.S. investors hated them. They were largely excluded from global stock market indexes, which meant large institutional investors like mutual funds couldn't touch them, even if they wanted to. And even Chinese investors – which had just been burned by a mini-boom and bust in 2015 – had no interest in buying these stocks.
Steve's contrarian call has paid off for his subscribers. But despite the big gains in Chinese stocks over the past year, most investors still don't own any Chinese stocks.
That is finally starting to change...
As we've discussed, index provider MSCI finally agreed to include Chinese A-shares in its indexes back in June. Beginning this year, hundreds of billions of dollars in institutional money will be forced to start buying these stocks.
Large private investors and hedge funds have already begun moving in advance. And we're finally seeing local Chinese A-shares begin to outperform for the first time in years.
The following chart compares China A-shares with a global stock market index...
When the line is falling, Chinese stocks are underperforming the rest of the world. And when the line is rising, Chinese stocks are outperforming.
As you can see, Chinese A-shares lagged the world for years following their 2015 peak. But not anymore...
Since last May, A-shares have been quietly leading the world higher. And this ratio is close to breaking out to a new two-year high today.
Chinese A-shares are up about 30% since MSCI's announcement last June. But despite the big rally over the past several months, this chart shows the biggest gains are likely still ahead.
Yesterday, we noted that the new U.S. tax law could be a boon for many companies and their shareholders...
In short, the law provides a one-time "repatriation holiday" that allows companies to bring overseas cash back to the U.S. at a lower-than-normal tax rate. This cash can then be used to pay down debt, fund capital expenditures and growth, or – as our colleague Dr. David "Doc" Eifrig predicts – fuel an increase in share buybacks and dividend payments to investors.
While this is likely to drive share prices even higher in the near term, it could cause trouble in the long run.
Why? Because of where that cash is invested today...
U.S. corporations currently hold more than $2.6 trillion overseas...
Of course, this money isn't just sitting in a savings account in some foreign bank.
The bulk of it is held in sovereign and corporate debt. And as you might expect, a big chunk of this money is in U.S. debt – like U.S. Treasury bills and notes and investment-grade corporate bonds – in particular. In fact, according to Bloomberg data, just eight of the largest U.S. firms hold more than $500 billion in these securities today.
If the new tax law spurs these companies to bring this cash "home" and put it to use, they'll have to start selling these securities. And this could be a problem.
You see, the Federal Reserve is already 'tapering' its bond holdings...
As Porter explained in the January 12 Digest...
Most investors don't know anything about this... But the Fed is quietly reversing course. It's draining the system of reserves. On October 1, the Fed began to allow its balance sheet to "run off" by $10 billion a month. That is, as the bonds it holds mature, it won't "roll" the assets into new securities. And so, for the last three months, the Fed has seen its balance sheet shrink by $6 billion a month in U.S. Treasury securities and $4 billion a month in mortgage securities.
You can see for yourself what this is doing to the prices of short-term U.S. bonds. They've gone down in basically a straight line since the policy change was announced in September 2017.
Remember, bond prices and interest rates (or 'yields') trade inversely...
That means short-term rates have moved sharply higher as a result. And this has pushed the "spread" between short- and long-term rates dangerously close to zero for the first time in more than a decade. More from Porter's Digest...
Most banks and all mortgage finance companies borrow money at a short-term rate, like two years. They then lend out this capital at the higher, long-term rate, like 10 years. As long as short-term capital costs less to borrow than long-term capital (and it should), then the banks and mortgage companies have a great, capital-efficient business. They're using other people's money to make a fortune.
The trouble is... sometimes unusual things happen... unusual things like a central bank selling off hundreds and hundreds of billions in short-term mortgages and Treasury debt into a market that knows that billions and billions more are coming.
In these unusual periods, short-term rates can rise to match, or even exceed, long-term rates. When that happens, the banks and mortgage companies can't earn more (or anything) lending. They can quickly get into big financial trouble because they can't finance their outstanding loan packages at a profitable rate...
As you can see in the chart below, the spread between two- and 10-year interest rates has been narrowing since 2014. It's now approaching a critical level – half a percentage point. As the spread gets closer and closer to zero, it will become progressively more difficult for banks and mortgage companies to access capital, which will reduce the market's liquidity substantially.
Longtime Digest readers know Porter and Steve have differing views on the market today...
But they do agree on one critical point: When this relationship finally "inverts" and falls below zero, it will be a serious warning of an impending bear market.
If corporate America soon joins the Fed in selling Treasury debt, it could strengthen the tailwind behind short-term rates and hasten the end of the long bull market.
Speaking of the 'Porter versus Steve' debate...
If you're interested in hearing their very latest thoughts on the market today, be sure to join us tomorrow night for a special event...
Porter, Steve, and Doc will be sitting down together to share their 2018 market forecasts for the first time... and show you how our exclusive Stansberry Portfolio Solutions product can dramatically improve your results this year.
This event kicks off tomorrow night, Wednesday, January 24, at 8 p.m. Eastern time. It's absolutely free for Stansberry Research subscribers, and there are no obligations. In fact, you'll get a free report from Porter, Steve, and Doc – outlining their favorite investment ideas for 2018 – just for showing up. Click here to learn more and reserve your spot now.
New 52-week highs (as of 1/22/18): AbbVie (ABBV), Automatic Data Processing (ADP), American Financial (AFG), Amazon (AMZN), Allianz (AZSEY), Becton Dickinson (BDX), Biogen (BIIB), iShares MSCI BRIC Fund (BKF), Berkshire Hathaway (BRK-B), Morgan Stanley China A Share Fund (CAF), Global X China Consumer Fund (CHIQ), Global X China Financials Fund (CHIX), CME Group (CME), Cisco (CSCO), WisdomTree Emerging Markets High Dividend Fund (DEM), WisdomTree SmallCap Dividend Fund (DES), iShares Select Dividend Fund (DVY), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Japan Fund (EWJ), iShares MSCI Spain Capped Fund (EWP), iShares MSCI Singapore Capped Fund (EWS), iShares MSCI Brazil Fund (EWZ), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), CurrencyShares British Pound Sterling Fund (FXB), iShares China Large-Cap Fund (FXI), Alphabet (GOOGL), Global X MSCI Greece Fund (GREK), iShares Currency Hedged MSCI Germany Fund (HEWG), iShares Nasdaq Biotechnology Fund (IBB), iShares Core S&P Small-Cap Fund (IJR), ETFMG Prime Mobile Payments Fund (IPAY), iShares U.S. Home Construction Fund (ITB), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), KraneShares Bosera MSCI China A Share Fund (KBA), KraneShares E China Commercial Paper Fund (KCNY), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), iShares MSCI China Index Fund (MCHI), MercadoLibre (MELI), Microsoft (MSFT), Match Group (MTCH), AllianzGI Equity & Convertible Income Fund (NIE), Naspers (NPSNY), New York Times (NYT), Adams Natural Resources Fund (PEO), PowerShares High Yield Equity Dividend Achievers Portfolio Fund (PEY), PNC Financial Warrants (PNC-WT), Ralph Lauren (RL), ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), ALPS Medical Breakthroughs Fund (SBIO), Sabine Royalty Trust (SBR), ProShares Ultra S&P 500 Fund (SSO), Sysco (SYY), Guggenheim China Real Estate Fund (TAO), Tencent (TCEHY), Travelers (TRV), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Financials Fund (UYG), VF Corporation (VFC), Wal-Mart (WMT), ProShares Ultra FTSE China 50 Fund (XPP), Direxion Daily FTSE China Bull 3X Fund (YINN), and short position in Sprint (S).
Did you join Stansberry Portfolio Solutions when we launched this revolutionary product last February? If so, we'd love to hear from you. Tell us what your experience has been at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
January 23, 2018