The Only Thing Keeping the Bull Market Alive
The only thing keeping the bull market alive… This can't go on forever… A 'subprime flashback'?… The Bear Market Trading Program is live…
According to a new report from Bloomberg Business this morning, demand for U.S. stocks from companies and individuals is "diverging at a rate that may be without precedent." From the article...
Standard & Poor's 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.
In other words, while individual investors are selling out of mutual funds and exchange-traded funds ("ETFs") at one of the fastest rates in history, companies have been buying their own shares like there's no tomorrow.
This "gap" between fund withdrawals and corporate buybacks is on track to hit a new 18-plus year high this quarter (that's as far back as the data go).
This is important for two reasons...
First, it suggests the rally is increasingly dependent on share buybacks to continue.
For example, David Kostin – chief U.S. equity strategist at Goldman Sachs – pointed out that companies tend to restrict buybacks in the month following the end of each quarter, and then begin buying shares again once they report that quarter's earnings.
In the last quarter, this "blackout" period would have started in January and ended in mid-February, which lines up almost perfectly with the most recent 11% decline in the benchmark S&P 500 Index...
How bad is it?
Kostin thinks share repurchases could be the only thing keeping the market afloat today. "Corporate buybacks are the sole demand for corporate equities in this market," he said.
Second, it suggests risk is much higher than many folks think.
As Porter has explained, companies have been borrowing massive amounts of money to buy back shares. This can't go on forever. As Andrew Hopkins, director of equity research at Wilmington Trust, put it...
Anytime when you're relying solely on one thing to happen to keep the market going is a dangerous situation... Over time, you come to the realization, "Look, these companies can't grow. Borrowing money to buy back stocks is going to come to an end."
Unfortunately, that's not the only worrisome sign for the markets in the news today...
Last month, we discussed the growing signs of trouble in auto loans. In particular, we noted auto-loan "write-offs" – loans that banks believe will not be repaid – jumped 16% in the fourth quarter of 2015.
But as we explained, these were just the loans banks chose to keep on their books. These tend to be the best-quality debts. Many of the riskiest loans were likely "securitized" – or packaged up and sold to investors. And these loans could be in far worse shape.
Today, we have some confirmation...
In an article titled "Subprime Flashback," the Wall Street Journal highlighted some disturbing parallels between the subprime-mortgage crisis and the auto industry today.
In particular, the Journal singled out one bond issue called "Skopos Auto Receivables Trust 2015-2." These loans were packaged and sold just four months ago. Yet, as of the end of last month, 12% of the underlying loans were already at least 30 days past due... and a third of those were more than 60 days past due. That's on top of the 2.6% of borrowers who had already filed for bankruptcy or had their cars repossessed.
That's just a single issue, but data show similar issues from other lenders are deteriorating just as quickly...
As we noted last month, Fitch Ratings says the 60-day-plus delinquency rate among subprime auto loans securitized in the last five years hit 5.16% in February – the highest level in almost 20 years.
And as we've mentioned many times recently, this is while the economy is still officially growing, and measures of the job market and unemployment are at their best levels in years.
Of course, regular Digest readers aren't surprised... Porter has been warning about this problem for months. As he wrote in the November 20 Digest...
The amount of super-low-quality auto lending is now surpassing the totals of dubious lending that peaked in 2006. Total auto lending in the U.S. is now more than $1 trillion – the all-time highest amount of debt tied to cars in the U.S.
Newsletter publishers like to say the "sky is falling" all the time about every small problem we face. But this isn't a small problem...
Today, subprime lending makes up nearly 40% of all auto loans. These loans will go bad. When they do, the industry will be completely devastated – every bit as bad as when the mortgage bubble popped. The size of the auto-lending business (more than $1 trillion in loans) means that when this happens (and it certainly will happen), the resulting damage will hurt the entire financial sector and our economy.
Incredibly, despite the clear signs of deterioration, auto lenders aren't decreasing their exposure to subprime loans... they're increasing it...
Experian Automotive, which compiles data on the car finance business, reports the biggest areas of loan growth in the fourth quarter of 2015 came from the riskiest part of the subprime market.
Worse, average monthly payments and terms for auto loans continue to rise as well...
In the last three months of 2015, new-car buyers borrowed an average of $29,551, up from $28,381 a year earlier. Used-car buyers borrowed an average of $18,850, up from $18,411.
Likewise, the average term for a new-car loan hit 67 months – more than 5.5 years – in the fourth quarter, while the average used-car loan rose to 63 months.
This means companies are lending more money... for longer periods... to the least creditworthy borrowers... just as default rates are rising to multidecade highs.
What could possibly go wrong?
On Friday, we published the first module in our new Bear Market Trading Program. Porter called this series "the best trading education we've ever put together."
It builds on the "basics" you learned in our Bear Market Survival Program – strategies like raising cash, buying and holding gold, short selling, and taking advantage of distressed opportunities – and will help you take your investing to the next level.
The Bear Market Trading Program will teach you more advanced strategies to make safe, short-term profits during volatile markets.
Module 1 covered "merger arbitrage," a simple but powerful strategy that Porter calls one of the top ways to trade safely for profits right now. In the coming weeks, we'll cover ways to bet on a crash without risking any capital upfront... options strategies that profit no matter the market direction... how to "sell" volatility... how to buy assets at less than market value... and much more. And of course, we'll show you step-by-step how to put it all together into a diversified bear-market portfolio.
Click here to learn more about our Bear Market Trading Program.
New 52-week highs (as of 3/11/16): Franco-Nevada (FNV), Johnson & Johnson (JNJ), Public Storage (PSA), Sysco (SYY), and AT&T (T).
Several subscribers share their thoughts on reader P. Thompson's cancellation request... and another subscriber has a question about our new Bear Market Trading Program. Send your questions and comments to feedback@stansberryresearch.com.
"I noticed that Mr. P. Thompson made the statement that 'the everyday middle-class investor ought to focus his investing efforts on...'
"I find it interesting and mildly amusing that Mr. Thompson feels qualified to decide what we middle-class investors ought to be focusing on. It's one thing for him to decide that your newsletters no longer serve his personal financial goals, but it's a different matter entirely for him to decide what the rest of us should be focusing on.
"We can decide for ourselves what level of risk we are willing to take. Exactly 60 days ago, I shifted a large portion of my stock investments (with appropriate protections) to focus on an area that Mr. Thompson would deem to be inappropriate for me. Since then, I am up more than 25% over the entire portfolio.
"Conversely, my personal opinion for my portfolio is that the 'companies with durable advantages trading at favorable prices' that Mr. Thompson wants me to focus on are few and far between at the current time. I prefer to purchase them in the not-too-distant future when they are trading at much more favorable prices.
"Mr. Thompson would view my current position to be too risky given my 'middle-class' standing; however, I view Mr. Thompson's narrow view to be too risky in the current economic environment. I have decided what level of risk I am willing to take and where I am willing to take those risks. I also take full responsibility for the results of my decisions. The broad recommendations, diverse information and economic reporting across the Stansberry newsletters seems to offer the most for the widest range of individual investors. Thank you, Porter, for not taking his approach." – Paid-up subscriber Brenda R.
"Dear Porter, while engaging in my favorite Saturday morning ritual of savoring the aroma and sipping a steaming cup of fresh brewed coffee at 4 a.m. while digesting the Digest, I was pondering the content of the letter from P. Thompson that you published.
"While he contends that buying gold is unsuitable for 'the everyday middle-class investor,' I would ask him why allocating 5%-10% of one's net worth to insurance against a catastrophic collapse is inappropriate for anyone... regardless of the size of their net worth? Isn't 10%, 10%?
"I would also wish you had directed his attention to the list of current 52-week highs. Seabridge Gold for example, has rocketed from a 52-week low of $3.31 on July 24 of last year to a high of $12.77 on March 4, 2016. How does one find that inappropriate for 'the everyday middle-class investor'?
"As a long-term Alliance member, any thought of canceling my membership would be immediately dismissed as pure folly as just the educational value of your work is worth many times the paltry annual maintenance fee I pay.
"When I first subscribed to [Stansberry Research] years ago, I suppose I would have been the everyday middle-class investor. One of my wisest mentors once told me: When you set an objective to accomplish, find those who have already done so and ask them how.
"If you are currently an everyday middle-class investor wishing to become a high net worth investor, you don't have to ask people who have already done it to show you how. They are right here pounding the table and begging you to allow them to show you. If you are not willing to hear what they are saying... whose fault is that?" – Paid-up subscriber Ken M.
"Hello Porter, you mention that your Bear Market Trading advice is not for amateurs or beginners. Can you comment on the relevance of your Bear Market Trading Program? Would learning the presented material change a beginner's status? Please comment as I suspect there may be other Stansberry readers wondering the same thing. If it's useful I'll start working through your modules. Thank you." – Paid-up subscriber George C.
Brill comment: Great question, George. These strategies are a little more advanced than those most investors are familiar with, but they're well within the grasp of anyone willing to learn something new.
Everyone who signed up for our first educational series – the Bear Market Survival Program – already has the basics. This second series – the Bear Market Trading Program – will help you take your skills to the next level.
As Porter explained on Friday, we believe every investor should understand these strategies, even if you don't intend to use them all right now. The next few years are likely to be incredibly volatile and unpredictable... and you'll want to have as many "tools" in your investing toolbox as possible.
If you're ready to take your education to the next level with our Bear Market Trading Program, click here to learn more.
Regards,
Justin Brill
March 14, 2016
Baltimore, Maryland
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