'The World's Most Hated Market Right Now'
Is the Federal Reserve getting 'dovish'?... What the mainstream media is missing about the Fed chairman's latest speech... Signs of a major bottom in global stocks... 'The world's most hated market right now'...
Last Friday, Federal Reserve Chairman Jerome Powell took the stage at the central bank's annual policy symposium...
And in sharp contrast to the other speeches he has made since taking over the job back in February, last week's remarks were generally seen as "dovish" – or in favor of easier monetary policy – for the first time. As financial-news network CNBC summed up the argument at that time...
Stocks jumped, bond yields fell, and the dollar slid after Fed Chair Jerome Powell reassured markets on Friday that the central bank sees no reason to speed up interest rate hikes. To some, his words signaled the Fed could even slow down later in the cycle...
His message, as well as those of other Fed officials and the central bank's recently released meeting minutes "are really all saying the same thing – that the Fed is going to continue with gradual rate hikes to get the fed funds rate to neutral or higher," said Ward McCarthy, chief financial economist at Jefferies. "And because there's a lot of uncertainty about what neutral is, if you read between the lines, it's conceivable that you could make the case that as they approach neutrality they could go a little slower..."
"It's a little like a Goldilocks speech. The economy is strong but it's not overheating... so there's no reason to price in any [additional] hikes. They're going to keep raising rates," said John Briggs, head of strategy at NatWest Markets.
This was seen as a bullish signal for U.S. markets...
After all, the Fed has raised short-term interest rates seven times since December 2015. But most of these hikes have come in just the past 18 months. And it officially began unwinding its unprecedented stimulus program last fall.
In other words, the financial "tide" has been going out at an accelerating pace for the better part of three years now. Meanwhile, history shows that Federal Reserve "tightening" has triggered or hastened virtually every recession since the central bank was created in 1913.
So naturally, any indication that the Fed could slow down or reverse this trend would be considered bullish. It could help the "party" go on a little longer.
But Powell's speech may not have been as dovish as many believe...
You see, toward the end, he singled out a new Federal Reserve study – titled "Some Implications of Uncertainty and Misperception for Monetary Policy" – as especially important in his decision-making process today.
Here's a short excerpt from its conclusion...
The combination of inflation recently being persistently below the [Federal Open Market Committee's] 2% target, despite low rates of unemployment, highlights important uncertainties policymakers face about inflation dynamics on the one hand, and the natural rate of unemployment, on the other. In light of the fact that empirical evidence cannot meaningfully reduce these uncertainties, this paper has shown how these two aspects of model uncertainty affect the choice of strategies for monetary policy.
Uncertainties about natural rate of unemployment have led many researchers to conclude that policymakers would be well advised to ignore potentially mismeasured labor market slack and focus almost exclusively on stabilizing inflation.
This paper has shown that because monetary policy acts with a lag, waiting for inflation to materialize before reacting is undesirable, particularly when economic conditions are such that outsized deviations of inflation from its target are a plausible outcome.
What does this mean?
In simple terms, it means that the Fed shouldn't slow or halt its tightening cycle simply because inflation is currently tame...
Rather, the authors found that today's record-low unemployment – combined with the Fed's unprecedented stimulus over the past 10 years – could cause inflation to quickly surge above the bank's 2% target without warning. And if the Fed waits until that happens to respond, it could be too late to rein it back in without triggering a severe recession.
Now, again, history suggests it's unlikely the Fed can engineer a "soft landing" regardless of what it does next. But the takeaway is clear: Despite what many now appear to believe, Powell's reference to this study suggests the Fed's tightening cycle is unlikely to end anytime soon.
Last month, we noted that two of our colleagues had been tracking an unusual divergence in the global stock markets...
In short, the DailyWealth Trader team of Ben Morris and Drew McConnell pointed out that non-U.S. stocks had been dramatically underperforming the broad U.S. market since May.
We shared the following chart comparing the S&P 500 with the Vanguard FTSE All-World ex-U.S. Fund (VEU) – the largest, diversified exchange-traded fund holding non-U.S. stocks – to highlight this divergence...
Ben and Drew noted that this is often an important signal...
Whenever we've seen similar divergences in the past, one group often finds a way to "meet up" with the other.
This implied that we'd eventually see one of two outcomes: Either U.S. stocks would play catch-up to the downside by falling, or global stocks would begin to dramatically outperform to the upside. And while there was no way to know for certain which way this divergence would resolve, they believed non-U.S. stocks were likely to move higher.
We could already be seeing this play out...
Since bottoming on August 15, VEU has been outperforming the S&P 500 for the first time since January's peak. It has gained nearly 4.5%, compared with a gain of less than 3% in the S&P.
It's still early, of course. And VEU has not yet officially broken out of its downtrend. But this is a bullish sign. And if a recent note from top JPMorgan strategist Marko Kolanovic is any indication, the coming move in these stocks could be one for the record books. As he explained last week...
The recent divergence in the performance of US Equities vs. the rest of the world is unprecedented in history.
For instance, if one looks at price momentum – it is positive for US stocks and negative for Europe and Emerging markets across all relevant lookback windows [including one month, three months, six months, and 12 months]. This has never happened before.
In other words, the "rubber band" between the U.S. and the rest of the world has never been this stretched... which suggests the rebound could be equally historic.
As always, we don't make official recommendations in the Digest...
But you can profit from a potential rebound in non-U.S. stocks in a number of ways. Obviously, one of the easiest would be to simply buy shares of VEU.
But in this morning's edition of our free DailyWealth e-letter, Steve Sjuggerud shared what could be the best. You see, one particular group of these stocks hasn't just diverged from the U.S., but they're also among the most hated in the world today. As he explained...
What's the most hated market in the world today? It's not China, despite fears of a trade war... Heck, it's not even Turkey or Venezuela – two countries in the middle of serious financial crises. The answer, based on one measure, will likely surprise you...
If you want to know what investors think, follow the money. If folks like an asset or market, they buy it. If they're scared of it, they sell it.
Based on that simple idea, the most hated market in the world right now is Europe... Investors have been pulling money out of European stocks for the past year. And the worst hit, not surprisingly, has been Germany.
As Steve noted, Germany is the "lifeblood" of the European economy, so it's especially important to watch. When folks are worried about Europe in general, they're likely to pull money out of German stocks. And that's exactly what they've been doing...
Germany saw the largest net outflows from exchange-traded funds (ETFs) in the world over the past year, according to Bloomberg. That means investors are getting out... and fast... But in this case, investors aren't just selling German stocks... They're selling Europe as a whole.
The simplest way to see this is through shares outstanding for the iShares MSCI Eurozone Fund (EZU). The fund holds stocks from France, Germany, Spain, Italy, and other European countries.
Its total share count has fallen sharply this year... down 34% in roughly eight months. Take a look...
Steve believes this sentiment extreme sets the stage for a huge rebound in European stocks...
But he's not ready to buy just yet. That's because European stocks – like VEU – have yet to officially break out of their recent downtrend. More from Steve...
Hated stocks and investments can stay hated for months... potentially even years. So we've found an easy way to get around that problem – one that shows us exactly when to buy. This won't surprise longtime readers... We wait for the uptrend to return...
You see, massively negative sentiment isn't a buy signal on its own. But it does tell us we could see a big move higher when prices reverse. It shows that the rubber band is stretched and should bounce back dramatically.
Europe is the most hated market in the world right now. Our buy signal isn't flashing yet. But we'll likely see a big rally in European stocks, once prices and sentiment reverse.
New 52-week highs (as of 8/27/18): Apple (AAPL), Automatic Data Processing (ADP), Amazon (AMZN), American Express (AXP), Becton Dickinson (BDX), Blackstone (BX), Blackstone Mortgage Trust (BXMT), First Trust Nasdaq Cybersecurity Fund (CIBR), Cisco Systems (CSCO), Fidelity Select Medical Technology and Devices Portfolio (FSMEX),
Another busy day in the mailbag. Two subscribers come to our defense... the feedback on Porter's controversial Friday Digest continues to roll in... more "boots on the ground" perspective on housing... and a subscriber has a question about our colleague Ben Morris' new "pairs trading" strategy. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.
"I don't know why so many customers get upset. Stansberry totally changed my life. I'm up thousands of percent on my initial investment because of this company and them taking the time to advertise other products. Right now, I'm up 2,338% since 12/31/15 including my cryptos. No Stansberry Research and the advertisements, and my life would be less bright. One of my customers invested $95,000 because I showed him pictures of my account when I was over 7 figures ahead. Best wishes." – Paid-up subscriber James R.
"Hi Porter, I believe much of the criticism that you have published (I applaud you for publishing the flattering and the disparaging alike) is likely coming from people who do not seem to understand that your perspective is quite different than the average investment-guru bear. It took me a year or two with a number of losing positions that followed some of your information and predictions before I figured out how to best apply your counsel to my portfolio.
"Most writers out there
"Once I started to do a better job of position-sizing, taking into account the short-term irrationality of the markets, not jumping into positions until an uptrend has taken hold (and forgoing some of the initial
"All in all, I'd recommend readers try to better understand how much of your writing is much more 'big-picture' and educational than predictive, and I think many of the critics will see that much of the criticism is unwarranted in much the same way that a pick-up truck shouldn't be criticized for not being quick or nimble, as the two vehicles are designed for two different purposes. Understand what the tools are designed to do, use them for what they are designed to accomplish, and we'll all be happier, especially given that so many of the decisions Mr. Market makes in the short run are not wise in the long run. Keep up the good work, and may God continue to bless you and your family." – Paid-up subscriber S.E.P.
"Mr. Stansberry, you are brilliant and one of the most noteworthy and successful financial advisors around. I have learned most of what I know about investing in bonds, stocks, real estate and commodities from your numerous services and recommended reading. This Digest is priceless and explains why investing in stocks and bonds is challenging, fraught with risk, with potential rewards often delayed for years if not decades. Well done!
"You have
"I would love to make $3 million on $100 thousand, but instead will continue to use
"Porter: Your essay in the Friday Digest of 8-24-2018 was very interesting. It sounds like you're going through some kind of existential mid-life crisis. To say that your life's work and the work of many of those around you
"I have only been a subscriber for a couple of months. In that short time, I have learned a lot about how to think about investing by reading Stansberry Research publications as well as others and thinking deeply about the markets. I agree with you that when you buy a stock you must think about it as buying a business. Sure fundamentals, momentum, trade stops and measuring results are important, but in the
"Keep up the good work. Even if you really believe it doesn't matter, there are a lot of people who do. Cheers." – Paid-up subscriber Charles V.
Nothing wrong with Friday's Digest... why would someone complain about the truth? [Here are some more] 'boots on the ground' from Ventura County, CA... I had the perfect sell signal for real estate in '06. It was a gem. I was driving my Accord at a local Country Club with my magnets on and a dishwasher approached me and asked me if I was in real estate. I said 'yes,' and he handed me a business card that said 'mortgage broker.' When dishwashers are mortgage brokers, watch out!! Paulson nailed it and even with this silver platter gift, I missed out.
"Anyway, the [housing market here] has turned. We were hot last year, red hot six months ago with everything getting overbids, and now nothing. Gated multi-million-dollar community, no bids. Worst I have seen since the third week of March '06... the market is changing. Nice area you can look it up. Sterling Hills just below Spanish Hills Country Club in Camarillo, CA." – Paid-up subscriber Craig R.
"[The housing market] may be very strong in Florida but, here in Illinois, I've watched two things happen this year that give different signals for this market. First, you should know I've been doing flipping on and off since the mid-1990s. I restarted in 2015. And, I've seen my rehab projects escalate in cost during this two-year period. As I've progressed, I've seen the prices of homes rise sufficiently to allow the added cost during the project, until this year. Here are the two things:
"1. If you break the housing marketing into three segments: Entry level/low income, Mainstream, and High end, you can look at the dynamics in each area. For me, I've been focused on the high end of Mainstream. That's where full gut rehabs can be carried by the after-repair value. I've watched this upper end of the Mainstream area stall. People are pulling back from buying them and my fellow flippers have seen the same. Even center-of-the-bell-curve homes have seen a more caution buying cycle. Net result... I have to be far more diligent and cautious with my purchase offers. And I have yet to find an explanation that really rings true.
"2. I watch the entire market and something interesting has been happening with the high end of the market in Chicago... it has finally woken up. As little as a year ago, I could find a dozen homes in a multi-million-dollar neighborhood that were selling for 1/3 if their value. 6,000-8,000 square foot estates on 5 acres were selling for less than $1M. This year, those prices have finally risen, and some new record price transactions are happening. The people with the deep pockets are finally starting to dig into them again.
"In addition, the Chicagoland area seems to be flooded with real estate
"Instead of buying and shorting two stocks [in a pairs trade], have you guys considered [using] options to achieve the same effect? If so, can we have your pair recommendations in 'option format'?" – Paid-up subscriber Frank L.
Brill comment: Ben generally doesn't recommend using options in pairs trades. Buying call or put options instead of buying or shorting a stock directly is more speculative and comes with a high likelihood of failure. And failure, in this case, often means losing 100% of your initial investment.
On the other hand, a pairs trade using stocks doesn't carry any more risk than simply buying a stock the normal way. You can set a stop loss on the position, just like you do with a single stock. And you don't have to worry about the trade expiring before your thesis plays
Of course, experienced traders who are comfortable taking on more risk could easily set up options trades based on Ben's specific recommendations. But remember, the point of pairs trading is to boost your returns without taking on more risk. Using options largely negates that benefit.
Again, you can learn more about this powerful strategy – and how to get immediate access to Ben's favorite pairs-trading opportunities right now – by clicking here. (This link does not lead to a promotional video.)
Regards,
Justin Brill
Baltimore, Maryland
August 28, 2018