The Spread of Negative Rates Has Resumed
More bad news for Germany's largest bank... Subprime auto losses jump again... Auto sales are falling... Good news for Tesla?... The spread of negative rates has resumed... A note from the Atlas 400... Readers respond to Porter's 'Big Trade'...
Editor's note: We've received more feedback about last Friday's Digest than any in recent memory... Clearly, folks are excited about Porter's new "Big Trade" idea. Frankly, we don't blame them... We haven't seen Porter this excited in a long time, either.
We've also heard from a number of our lifetime subscribers asking if Porter's new service will be available to them...
As always, Stansberry Alliance members will receive Stansberry's Big Trade at no additional cost as soon as it launches. Stansberry Flex subscribers can also choose to add this service to their subscription lineup at no additional cost. And our Stansberry Choice subscribers can do the same for the usual small fee of just $99.
We hope that clears things up.
If you're not a lifetime subscriber, you can learn more about Porter's new service at the free webinar we'll be hosting next month. Or if you're already certain you want this research, you can simply subscribe right here.
The troubles for Germany's largest bank continue...
As regular Digest readers know, Deutsche Bank (DB) is teetering on disaster.
While the bank's CEO John Cryan is desperately trying to reassure the bank's employees and clients that Deutsche remains strong, the odds are stacked against him. As Porter explained on Friday...
Deutsche has roughly $2 trillion in assets. That's almost 11% of U.S. GDP. By this metric, that's slightly larger than U.S. banks Wells Fargo, which has $1.9 trillion in assets, and Citigroup, which has $1.8 trillion in assets.
But here's the thing... Deutsche has a tangible common equity ratio of just 2.9%. That's the bank's tangible equity divided by its tangible assets. What this means is the bank can sustain losses of only 2.9% before its equity capital is wiped out. By comparison, Wells Fargo sits at 7.7%, while Citigroup shows 10.3%.
Earlier on Friday, Deutsche Bank shares jumped more than 6% on rumors that the bank was close to a reduced settlement with the U.S. Department of Justice ("DoJ"). According to a report from news agency Agence France-Presse, an unnamed source said the DoJ was willing to accept just $5.4 billion, compared with its original proposal of $14 billion.
Unfortunately, it seems the excitement was premature... The Wall Street Journal reported last night that talks are continuing, but that no deal is close at this time.
Expect the "roller coaster ride" for Deutsche shares to continue. Remember, the bank is already struggling... and even a reduced DoJ settlement could wipe out Deutsche's equity capital. As the Journal noted...
The size of the fine is vital to investors in the troubled lender, which has a weaker capital position than some of its peers. A fine would make that worse, and investors have long been prepared for at least some penalty. But a figure that substantially tops expectations could pressure Deutsche Bank to raise fresh equity, hurting existing shareholders, investors and analysts say.
Even in the best-case scenario, Deutsche is likely to be forced to raise additional capital. And according to some analysts, this is most likely to come via a so-called "rights offering." This is an offer made to existing shareholders to buy a set number of new shares at a set price over a specified period of time. As Bloomberg reported this morning...
Deutsche Bank AG is most likely to tap existing shareholders for funds to help weather mounting legal costs as other options including a sale of the asset management business or a merger with Commerzbank AG are more damaging, Autonomous Research LLP said...
While Autonomous said that Deutsche Bank would need to raise as much as 9.5 billion euros to stabilize its capital ratios, it may only be able to achieve 5.7 billion euros in a rights issue.
In other words, even if the bank can somehow entice existing shareholders to buy more shares today, it still may not be able to raise enough capital to stave off disaster for long.
The outlook for the U.S. auto industry darkens...
Fitch Ratings reported last week that subprime auto losses hit another new high in August. As the Journal explained on Friday...
The share of subprime auto loans backing bonds that were at least 60 days behind on payments climbed to 4.86% in August, up from 3.98% a year earlier, according to Fitch Ratings. Annualized net losses reached 8.89%, up from 7.02% a year prior.
Meanwhile, we learned this morning that sales at the top three U.S. automakers fell again last month.
General Motors (GM) and Fiat Chrysler (FCAU) reported declines of 0.6% and 0.9%, respectively, while Ford Motor (F) reported a huge 8.1% decline.
But this trend likely extends beyond the Big Three alone... According to the Journal, J.D. Power forecasts U.S. light-vehicles sales declined nearly 1% industrywide last month. And this decline is coming despite record vehicle supply and increased sales incentives.
Is the subprime "party" ending?
Why is this important? As Porter and his team have explained, the recent boom in U.S. auto sales is a result of loads and loads of cheap money. From the July issue of Stansberry's Investment Advisory...
Americans love cars and trucks. Since 2009, auto sales doubled from roughly 9 million vehicles to hit more than 18 million last year – an all-time high. The U.S. government helped boost the auto industry in 2010 with the $3 billion Car Allowance Rebate System – better known as "Cash for Clunkers" – program. But the biggest boon was cheap money. And lots of it.
The Federal Reserve's near-zero-percent interest rates made borrowing incredibly cheap for lenders that finance auto sales. Most auto lenders only pay around 1% for their cost of capital. They then turn around and lend to subprime borrowers at the highest legally allowable interest rates – sometimes greater than 20%. With this massive interest-rate spread, it's easy to see why so many lenders lined up to join the subprime party.
All you need to know is that banks and financial institutions lent massive amounts to U.S. car buyers. Millions of less-than-creditworthy borrowers have gotten access to cheap credit for car loans. Easing credit was key to the U.S. auto recovery. Not surprisingly, auto sales boomed in the years that followed.
But now, it appears the subprime "party" is ending...
Delinquencies and defaults are marching higher despite the government's rosy unemployment figures. As a result, subprime lenders have finally begun to scale back... Falling auto sales are exactly what we'd expect to see as the flood of cheap money begins to dry up.
This much is clear: The decline in U.S. auto sales is likely just getting started... and subprime lenders are likely in for much more pain.
Elon Musk's attempt to "juice" Tesla's earnings may have worked.
As we reported in the September 7 Digest, the CEO of electric-car maker Tesla Motors (TSLA) has been pushing his company hard to boost its third-quarter earnings before he goes to raise money from capital markets. As we wrote...
CEO Elon Musk is begging his employees to cut costs for the next several weeks. That might be admirable if it weren't a transparent attempt to produce positive cash flow in the third quarter... before Musk has to raise money from investors yet again.
Tesla just reported delivering 24,500 vehicles in the third quarter, about twice as many as it did in the same quarter last year.
At least a few of those cars were sold as "inventory cars" at a discount – that is, if a customer would pay in full even before the car was delivered. Other customers even reported making loan payments before receiving their car, according to Forbes.
The company also reiterated its expectations to produce 50,000 vehicles in the second half of 2016. In order to hit that number, it has to produce 25,500 cars in the fourth quarter... for a total of about 75,000 for the year.
That means the company is essentially admitting it will miss its full-year 2016 forecast of 80,000-90,000 deliveries. (Of course, Musk didn't mention that in the press release.)
We'll see whether the company's record sales figures translate into positive cash flow when it reports earnings in November. We're not holding our breath.
Bond yields resumed their unprecedented plunge...
After declining in both July and August, the total amount of negative-yielding debt around the world jumped more than 6% higher last month to $11.6 trillion.
This is just shy of the record $11.9 trillion peak of negative-yielding debt set in June. As Bloomberg reported on Sunday...
Demand for... bonds pushed up the totals in all but two of the 13 countries with more than $100 billion in negative-yielding debt. Italy's tally shrank by 9% to $361 million and Denmark's expanded more than a third to $104 million.
Japan, where policy makers moved in last month to coax yields up, remains ground sub-zero with almost $6 trillion, about half of the global total. Western Europe accounts for 47%, the bulk from France, Germany, the Netherlands, Spain, and Italy.
A last chance to join The Atlas 400...
Finally, we'll conclude today's Digest with a short note from our friend Gray Zurbruegg, Director of The Atlas 400...
Quail hunting at a 25,000-acre private lodge in South Georgia... white-water rafting down the Mohaka River in New Zealand... shooting grenade launchers with Special Forces operators... interacting with the world's leading human-genome expert at our Annual Meeting... and most recently, sailing Maine's picturesque coastline on an 80-foot schooner...
If any of these activities intrigue you, please pay close attention.
You only have seven days left to apply to The Atlas 400.
But our year is far from over...
This Friday, current and prospective members are heading to Los Angeles for the annual Member Drive event.
Our basecamp for the long weekend rests on the shoreline cliffs of the Pacific Ocean. We'll shuttle to and from the event by helicopter.
We're taking over California's most elite driving course for our exclusive use. Attendees will have one-on-one instruction from actual racecar drivers. And we'll learn to push the world's top supercars to their handling limits... at speeds in excess of 100 miles per hour.
For the year's finale, we're heading to Africa in late October.
We're kicking off the trip by cage diving with great whites at Seal Island. This is the world's only known location where great whites breach the water, leaping up to heights of six feet out of the water... and at speeds of 20 miles per hour.
With the help of one of our members – who's from South Africa – we've arranged private tours of the Cape's wine region. We'll enjoy behind-the-scenes tours and tastings with the growers at the continent's best vineyards.
And all of those activities lead up to our six-day safari in Zimbabwe.
Our home in Zimbabwe is part of a collection of exquisite camps owned by legendary investor Paul Tudor Jones. However, this location is known as the owner's favorite. Its surroundings are densely filled with Africa's big five: lions, elephants, cape buffalo, leopards, and rhinos.
The lodge is not just the best in Zimbabwe... But considered by many to be the best in Africa.
Again, our fall recruitment period ends Sunday, October 9.
After that, no new applications will be accepted until March.
There's no time like the present...
The Atlas 400 now has 102 members in 18 countries around the world. We're hosting six to 10 events a year – varying from our marquee international adventures, long-weekend trips, and simple regional gatherings in major cities. Our member engagement is at an all-time high.
Plus, we've already planned three major events for 2017 – Baja racing in southern California, an insider's trip through Panama, and exploring the Galapagos Islands.
If you've considered applying to the club before, now is the time.
Many of us set goals at the beginning of the year. And by the end of summer, we find ourselves off track. Now's a great opportunity to take inventory, reset goals, and begin again.
Everyone is busy. And you'll probably still be busy six months from now. Our members have simply realized the importance of slowing down once in a while... making time to experience the best of what life has to offer, with like-minded folks who share similar interests.
We want members who are positive... who see the value in building great relationships with other extraordinary people... and who are willing to help us make The Atlas 400 one of the world's best and most exclusive groups.
If you'd like to apply to The Atlas 400, please click here.
Don't pass up the opportunity to see the world – and maybe even yourself – in a whole new way.
New 52-week highs (as of 9/30/16): EOG Resources (EOG), BlackRock Floating Rate Income Strategies Fund (FRA), and Procter & Gamble (PG).
Several subscribers weigh in on Porter's "Big Trade." We'd love to hear from you, too. Let us know what you think at feedback@stansberryresearch.com.
"Following is an entry I made on my iPhone notes 'to do' list about six weeks ago: 'Stansberry re inexpensive portfolio insurance ideas'
"I got caught up in life and never sent an email over, but you guys were obviously thinking along the same lines. This product fills the main gap in your product portfolio and could not come at a better time. I concur that we are approaching a period of great market vulnerability, and Deutsche Bank is probably the canary in the coal mine, much like Bear Stearns was at the start of the prior crisis. Excellent idea, and excellent timing! I look forward with great anticipation to implementing this strategy." – Paid-up subscriber Michael H.
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"At first, I read everything you published and tried many of the analysts and ideas. I settled on Stansberry's Investment Advisory due to the philosophy behind the letter and the classic radio broadcasts. I really liked the one-stock-per-year scheme Porter hatched... similar to Buffett's 20-stock lifetime punch card. It is working incredibly well. I wonder if you have any other subscribers committed to that approach? If I learned nothing else during the early years, it was that I couldn't really keep track of more than a few companies at a time. Limiting myself to one purchase per year also changed my mindset to an almost obsessive wait for the fattest pitch. And I appreciated an expert telling me to be lazy.
"But despite my slothful approach to investing, I can't wait for the chance to try the 'Big [Trade]/Dirty Thirty.' It makes great sense to use a small, diversified portion of the portfolio to make the rest of it antifragile. You are generous to your subscribers and you treat them with respect. The way you do business is an example for many of us. Many thanks." – Paid-up subscriber D.C.
Porter comment: Thanks so much for your kind note... I'm humbled by your words and reminded of the unique responsibility we carry.
"Porter, thanks for all of your timely and pertinent advice. Since your first mention of this idea in your September 9th Digest, I have felt like a young child having to wait for my birthday to arrive so I could finally gain access to this special gift! As an Alliance Member, what do I need to do?" – Paid-up subscriber Dan W.
Porter comment: Don't worry... Alliance members receive it all.
"Porter, I get so frustrated. I understand the principles, and the approach and the analysis and the reasoning you offer for all or your projects and offers. I really understand the risk as well as the reward of your 'Big Trade.' I just get so frustrated and yes pissed off that I really can't participate. I just don't have the type of portfolio to play the game.
"I know there will be people who will earn thousands and millions over the next few years in this endeavor, it is almost a no brainer with a sound plan and risk management and properly position portfolio, but alas I am just a small investor with not enough funds to enjoy the or afford the results of all your research.
"You make it easy to play the game for your well healed subscribers, I will once again sit on the sidelines and watch the game, always wishing to participate. What really makes it frustrating is I do understand how options work and have traded them in a small way. Maybe I will win the lotto and take a small portion to build a future ha lol, not my plan." – Paid-up subscriber Steve
Porter comment: I understand... But you won't find access to this kind of information anywhere for less than what I'm charging. Effectively hedging $1 million-plus for $5,000 over five years... it's ridiculously cheap.
And... it's a fact of life: You gotta have money to make money. What would you do if our roles were reversed?
"As usual the little guy gets shafted. You and the wealthy members of your newsletters get the benefit of your research because they can afford the top ticket items you sell. Meanwhile we, the middle class, struggling to get some traction in this nowhere market cannot afford the fare to ride your gravy train! Hrumpf! Disappointed and disgusted." – Paid-up subscriber Marcia Grace
Porter comment: If you can't afford $5,000 for the information, you can't afford to make the trades. You're trying to hedge a million-dollar portfolio and you can't afford $5,000 for five years' worth of research? Really?
Meanwhile... for just $100 or so, you've been reading True Wealth (15% annualized returns over the past 10 years), Retirement Millionaire (12% annualized returns), and my newsletter, Stansberry's Investment Advisory (13% annualized returns). And earlier this year we offered two seven-module series dedicated to preparing your portfolio for the downturn. You could have purchased the Bear Market Survival Program and the Bear Market Trader for less than $350 each.
Please don't cry poverty to me. Compared to Wall Street, we're Robin Hood. We deliver hedge-fund-quality research for peanuts. Why don't you see that?
Regards,
Justin Brill
Baltimore, Maryland
October 3, 2016
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