The latest on China...
The latest on China... More on the health care boom... Bond rout update... Doc's thoughts on bonds... 'An incredible opportunity for income investors'...
Yesterday after market close, MSCI – the world's leading global stock market index provider – made its long-awaited announcement on Chinese stocks...
In Monday's Digest, we noted MSCI was weighing whether to add mainland Chinese stocks – the "A-shares" – to its widely followed Emerging Markets Index.
Last night, the company said it would not be adding A-shares to its index at this time. And while that news is disappointing for investors, it's not as negative as the headlines appear.
As Steve Sjuggerud explained in yesterday's DailyWealth, the decision isn't a matter of if MSCI will include China in its indexes, but simply a matter of when...
Tuesday's announcement is important... But regardless of whether or not China is included today, it is inevitable that China will be included in the next couple years.
And that's almost exactly what MSCI said last night. From an article in the Wall Street Journal...
Index provider MSCI Inc. said Tuesday that it expects to add China's A-shares, those stocks denominated in yuan and listed in either Shanghai or Shenzhen, to its widely tracked Emerging Markets Index at some point in the future when China resolves certain market-access issues...
Investors said the required changes, which center on foreign investors' capacity to freely buy and sell securities and to complete transactions in a timely fashion, as well as their clear title to the shares, appear likely to permit their inclusion in coming months.
In particular, MSCI wants China to further relax investment "quotas" that restrict the number of shares foreign investors can buy on the country's Shenzhen exchange. It noted that when these issues are corrected, the company will reassess its decision. More from the Journal...
"They still need to get all their ducks in a row," said Frederic Neumann, co-head of Asian economic research at HSBC. "But this is a big deal for China."
Chinese officials said the delay won't discourage Beijing from carrying out its pledged financial overhaul, including opening up capital flows from overseas. Rather, "the MSCI decision will only act as an incentive to speed up the reforms," said the Chinese official involved with the MSCI talks.
The market wasn't fazed. China's benchmark Shanghai Composite index opened down nearly 2% on the news, but rallied to end the day down just 0.15%.
As we've mentioned before, the Chinese government wants this to happen. It's already working on a new Shenzhen-Hong Kong Stock Connect that will open later this year and could go a long way toward meeting MSCI's request.
MSCI traditionally makes "index inclusion" decisions like these just once a year, but suggested it's likely to reassess the situation much sooner in this case. We wouldn't be surprised if a new decision is announced this year.
When China is finally included, it's important to note that the change won't happen overnight. As Steve explained in DailyWealth...
MSCI will phase China into its indexes. I expect it to start small... but it will increase over time – causing billions to move into China. This will create a built-in tailwind for Chinese A-shares for the next few years.
Despite the decision, Steve is still bullish on China in general... and believes it's still one of the best places to put your money to work in the market today.
Regular Digest readers know we've been covering the ongoing boom in health care for years. In last Thursday's Digest, we detailed how the shares of health-insurance firms had skyrocketed since the launch of Obamacare in 2010.
Pharmaceutical giant Eli Lilly (LLY) hit a new 13-year high yesterday, while the Health Care Select Sector SPDR Fund (XLV) is up more than 110% in the last three years.
Dr. David "Doc" Eifrig has been all over this trend from the beginning. He has led his subscribers to triple-digit gains in medical-equipment giant Medtronic (MDT), drugstore chain CVS Health (CVS), and the Fidelity Select Medical Equipment and Systems Fund (FSMEX).
As Doc explained in the August 11 Digest Premium...
Back when I was in high school, health care spending accounted for less than 10% of gross domestic product (GDP). Today, it accounts for 18%... In 25 years, estimates project that number will rise to 24%.
One of the reasons for that increase is the aging Baby Boomer generation, which will lead to a 45% increase in the elderly population. That means more money will be spent on prescription drugs and on doctor visits.
Doc noted that elderly people take three to four times more prescription drugs than people younger than 50... and pointed out that 90% of seniors take at least one drug per month...
Add to that the average nursing home stay is nearly 2.3 years and costs more than $200,000. According to financial-services firm Fidelity, the average retiring couple will need $220,000 to pay for health care costs if both partners live into their 80s.
Drugstore chains will fill more prescriptions. Health care technology is a growing sector, and certain firms are ideally positioned. And of course, pharmacy benefit managers that help manage the prescription process are a great way to invest in this long-term trend.
All of this has led to a boom in health care-related job openings, as the industry tries to find new workers to keep up with demand...
In an article yesterday, Bloomberg noted that job listings in the health care sector have soared while hiring has failed to keep pace. That suggests that the U.S. workforce may not be able to meet the demand for health care workers. From the article...
The 910,000 listings in the health care industry almost doubled the 513,000 who were added to payrolls, meaning there were about 1.8 jobs available for every person who was hired. Across all private employers, that ratio tilted in the job seeker's favor for the first time ever in April. Wages in the industry grew by 2.2% in the year through April after a 2.3% increase the prior month that was the strongest since the end of 2012, separate Labor Department figures showed last week.
This trend is likely just getting started.
We've also been following the recent "rout" in the bond market...
As we noted last week, bond yields across the world have been rising again. Today, yields hit new multi-month highs.
The German 10-year bond ("bund") yield rose to more than 1% for the first time since September, while the benchmark 10-year U.S. Treasury yield hit just less than 2.5% for the first time since October.
Doc has been following these moves as well. In the latest issue of his Income Intelligence, he updated readers on his thoughts on the bond market...
Last month, the European Union announced that the region's GDP grew 0.4% in the first three months of the year. That was better than expected.
Investors saw strength in the region. They also figured this lowered the chances of deflation. They took appropriate action by selling off some of the super-safe German bunds they held.
As Doc explained, the big moves in yields likely had more to do with valuation than anything else...
We like to call high-flying stocks "priced for perfection." When a growth company trades at many times earnings, it needs to perform perfectly. If it misses earnings estimates by even a tiny bit, it can see its price collapse quickly.
The same thing happened with the German bunds that paid 0.07% in interest. Investors bought these bonds because they were scared of risks in Europe and saw no better place to put their money. When the mood is that dark, even a tiny ray of sunshine can send investors flying to the exit.
In the U.S., we're in much the same scenario.
Like us, Doc doesn't recommend owning most bonds today... particularly government bonds yielding next to nothing. But longtime Digest readers know Doc has also been one of the most outspoken bulls on municipal bonds. As we mentioned in the February 3 Digest...
Muni bonds are debt issued by state and local government used to fund projects. Because you're loaning money to the government, the yield is usually tax-free.
Munis are traditionally one of the least sexy sectors of the market. They pay safe income and rarely default. But some doomsayers took aim at muni bonds during the subprime crisis, saying we'd see loads of defaults.
Doc took the other side of that bet. And Retirement Millionaire subscribers who purchased municipal bonds when Doc originally recommended them in October 2008 (in the midst of the economic crisis) are up more than 100% – a huge gain considering the asset class.
Doc is still bullish on municipal bonds today. Thanks to the recent rise in yields, the prices of muni bonds have fallen... and some of his preferred investments are now trading at their best values in years. Doc says it's an incredible opportunity every income investor should consider today.
If you'd like to learn more about Doc's recommendations on muni bonds – including his preferred way to invest in them today – there has never been a better time to try his Income Intelligence advisory.
In the May issue, he updated subscribers on all the important income markets – including dividends, master limited partnerships, real estate investment trusts, preferred stocks, and what's really going on in the bond market – and laid out a step-by-step plan to lock in huge income streams when the next crisis hits. Click hereto take advantage of a 100% risk-free trial offer.
New 52-week highs (as of 6/9/15): Euronav (EURN) and PNC Financial Warrants (PNC.WS).
In today's mailbag, we answer one of the most common questions we receive. What can we do for you? Send your questions, comments, or even insults to feedback@stansberryresearch.com.
"Hi guys, I've been a subscriber and follower of several of the Stansberry publications for the past 3 or 4 years, and especially like the work of Dr. Eifrig and Steve Sjuggerud. Here's where I'm a little lost – perhaps you can help me?
"I am in continual confusion about when to get out of the market, or if I even should. I had been regularly investing based on several of the Stansberry recommendations through about a year ago when Porter sent out an advisory that said he was getting out of the market and explained why (I printed out his recommendation & posted it on my wall in my office). I turned around and sold all of my positions & sat on the bench for close to 8 months. In the meantime, I continued to follow the work of the various publications that I like & did some of Doc Eifrig's options trading. About 6 months ago, I started to get back into the market & am fairly comfortable with my positions & even joined the Flex program.
"On Tuesday, Jeff Clark's recommendation includes 'So it might be time for traders to start getting out of the stock market'. At the same time, other Stansberry advisors are saying 'we're not calling the top yet' and 'the best returns are close to the top of the market, before a downturn.' Doc's recommendations basically seem to be 'buy good stocks and hold them until you retire.'
"I'm not an expert investor, but I'm somewhat experienced & fairly well read – but I'm totally confused as to when to get out of the market based on the various conflicting signals I get from the Stansberry crew. Can somebody simplify this for me & tell me what I'm missing? My hope was to make long-term investments & not constantly worry about bailing out of the market off & on – but I'm now completely confused & am wondering if I should just look for alternative investment options. Thanks in advance." – Paid-up subscriber Sheldon Schake
Brill comment: This is one of the most common questions we receive. The short answer is that Porter, Steve, Doc, and Jeff are looking at the market with different time frames. As a trader, Jeff follows shorter-term market moves. Porter, Doc, and Steve take a longer-term focus.
We dedicated the August 21, 2013 Digestto explaining the "Porter versus Steve" debate. And in the September 4 DailyWealth, titled "I Don't Like You, Steve," Steve clarified his stance for readers...
Porter and I are on the same page, for sure. The only question is timing... I believe asset prices can still go up – possibly a lot – before it's time to batten down the hatches. I have said this for a while. But I am sitting tight.
Porter also answered a similar question from a subscriber in the April 4, 2014 Digest...
You may find our difference of opinion startling, especially if you're new to our work. Stansberry Research, as a publishing company, has no uniform opinion on stocks or bonds. Instead, we offer independent research and opinions from various analysts. The only way we could possibly always agree is if some of us were lying.
We think our approach of offering different views gives our subscribers a more complete picture than the typical one-sided approach of many other firms. Besides, I couldn't recruit or retain talented analysts if I told them what to write or how to think. Talented folks won't tolerate being told how to do their jobs.
It's also important to remember that investing isn't an all-or-nothing proposition. Just because Porter is bearish, doesn't mean he recommends going 100% to cash and short-selling. In fact, he has continued to recommend select stocks (like McDonald's) despite his bearish stance. And even though Doc remains bullish on the market, he recommends keeping a diversified portfolio with some assets that aren't correlated to stocks. (We also recommend using proper position sizingand trailing stops.)
Regards,
Justin Brill
Baltimore, Maryland
June 10, 2015