'The Worst Day of 2017'
'The worst day of 2017'... Markets 'plunge' to one-month lows... What to do with stocks now... The carnage in retail continues... P.J. O'Rourke: Consumer Trends Among the 'Grumpies,' Part II...
Judging by the reaction, you might have thought the market was in freefall...
This morning, the financial media were sounding the alarm...
Financial-news network CNBC warned, "Market SELLOFF: Dow, S&P have worst day since September."
"Stocks, Dollar Fall Amid Uncertainty in Washington," read the headline in the Wall Street Journal. And the large red banner on Bloomberg flashed: "White House Turmoil Sends Markets to Lowest Since March."
What caused this panic?
A massive decline of... less than 2% in the major U.S. indexes.
Of course, we're just poking a little fun at the "everything is urgent and important" nature of today's mainstream media. But it's important to keep these moves in perspective...
Yes, many stocks are absurdly expensive. Yes, the bull market is getting "long in the tooth." And yes, it has been 15 months and counting since we've experienced a pullback of 10% or more. (It has been more than six months since we've seen a decline of even 5%.)
But none of this means a bear market – or even a meaningful correction – is imminent.
Blame Trump!
Today's selloff was largely blamed on new concerns and accusations about President Donald Trump and his administration...
We do our best to avoid politics in the Digest. But these events could be a major headwind for stocks. At best, they mean the president's "big three" policy proposals – tax reform, regulatory reform, and infrastructure spending – could be delayed even further.
On the other hand, the market has shrugged off similar news time and again in recent months.
So... is this the start of a larger decline?
Or is it just another "speed bump" on the way to new highs? Unfortunately, there's simply no way to know for sure.
Sooner or later, the credit-market problems Porter has been warning about will "matter"... And the long bull market will finally end. But if our colleague Steve Sjuggerud is correct, stocks could still go much higher before it does.
For now, we remain cautiously bullish. Stay long, but keep a close eye on your stops... And consider "hedging" your portfolio with select short sales.
One sector has been a short seller's playground...
Speaking of shorts, few sectors have been as profitable as the retail sector...
From discount chain Target (TGT)... to large department stores like JC Penney (JCP)... to niche retailers like clothing chain Bebe Stores (BEBE)... to mall operators like GGP (GGP), nearly every retail stock has been crushed over the past couple years.
Only online-retail giant Amazon (AMZN), discount-retail behemoth Wal-Mart (WMT), and a small handful of others have escaped the carnage. (Of course, regular readers know Amazon itself is largely responsible for this trend.)
Department stores have been hit especially hard of late, following weaker-than-expected earnings reports this month. As the Financial Times reported over the weekend...
Investors wiped $4.6 billion from the market value of the U.S. department store sector in the space of two days last week, as concern mounted about sliding sales and the effects of online competition...
A quintet of big U.S. department stores this week disclosed declines in like-for-like sales for the first three months of the year. The figures that were revealed by Macy's, Kohl's, Dillard's, Nordstrom, and JC Penney were below most analysts' forecasts, suggesting Wall Street has still not got a handle on how fast things are deteriorating in the sector.
All told, the S&P 500 Department Stores Index fell from a market capitalization of $27.8 billion last Wednesday to just $23.2 billion on Friday. This was the biggest two-day decline since 2008, during the worst of the financial crisis.
Several of the best-known names fell by double digits to end the week at multiyear – or multidecade – lows.
Unfortunately, this trend isn't likely to turn around anytime soon...
According to a new report from research firm Bespoke Investment Group, traditional retailers could be even more troubled than the market already believes. As CNBC reported on Saturday, online retailers are now stealing market share at an unbelievable rate...
"It's like nothing we've really seen before," said [Bespoke] co-founder Paul Hickey... "A third of the growth in retail sales over the last 16 months has been in online sales. The group itself only accounts for 10% of sales. So it's just taking in dollars at a much faster rate."
In the government's latest monthly retail sales report that came out Friday, Hickey points out online sales showed their 22nd straight month of gains. To put it in context, he says the longest win streak prior to this for online sales was the electronics and appliances sector during the last housing peak. It clocked in at 13 months in a row.
"This is unheard of, the levels we've seen," added Hickey. "We're just seeing online retail take share from just about every sector. Only food and restaurants are one of the few sectors which doesn't see that."
New 52-week highs (as of 5/16/17): Amazon (AMZN), Alibaba (BABA), iShares MSCI BRIC Fund (BKF), Morgan Stanley China A Share Fund (CAF), First Trust Nasdaq Cybersecurity Fund (CIBR), Chipotle Mexican Grill (CMG), Ctrip.com (CTRP), 3D Systems (DDD), WisdomTree Emerging Markets High Dividend Fund (DEM), iShares MSCI Italy Capped Fund (EWI), iShares MSCI South Korea Capped Fund (EWY), iShares MSCI Brazil Capped Fund (EWZ), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Alphabet (GOOGL), Global X MSCI Greece Fund (GREK), iShares U.S. Home Construction Fund (ITB), JD.com (JD), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), Nvidia (NVDA), PowerShares S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), iShares MSCI India Small-Cap Fund (SMIN), and Sanofi (SNY).
Praise and vitriol in the mailbag today... more feedback on Porter's Friday Digest... one subscriber questions our intelligence... and another accuses us of taking advantage of "greedy investors." What do you think? Let us know at feedback@stansberryresearch.com. Good, bad, or ugly, we read it all.
And be sure to read on after the mailbag for Part II of Digest contributing editor P.J. O'Rourke's popular essay on the "Grumpies."
"Although I got the point about the car rental companies the first few times you addressed the topic, I thought the most recent explanation was the easiest to follow.
"One other group of businesses that don't work quite like you think they might are those based on general aviation (think charter and air medical operators). They have some similarities to the car rental business in that the value of used aircraft is a financial cornerstone of the business, the cost of capital is a critical element and at the end of the day, the resale value of the aircraft largely determines the profits. When I was in the business we had a saying that the only way to become a millionaire in general aviation was to start out as a billionaire.
"I think that understanding a company's business model is crucial to successful investing and I have appreciated the recent education on business models that are not what they seem. Until one understands how a company's profits are made, it is nearly impossible to accurately gauge the risk.
"For that reason, I have been particularly appreciative of the education you have provided in the mining and precious metals space. Gaining an understanding of the manipulations of the paper gold market as well as now appreciating the types of companies involved in this space, from the royalty streamers to the prospect generators to the mine operators, has definitely increased my ability to keep my risk within rational bounds." – Paid-up Stansberry Alliance member Paul
"Justin, how can you say Gundlach 'recommended going long emerging markets via the iShares MSCI Emerging Markets Fund (EEM), while shorting the S&P 500 via the SPDR S&P 500 Fund (SPY), as his favorite trade right now. To be clear, Gundlach isn't betting that U.S. stocks will fall...'? Shorting SPY is the definition of a bet that US Stocks will fall." – Paid-up subscriber David H.
Brill comment: This is a common misconception... As we noted, Gundlach recommended shorting the S&P 500 as part of a pairs trade that also included going long emerging markets stocks. So this isn't a direct bet that U.S. stocks will fall... nor is it a direct bet that emerging markets will rise. Instead, it's simply a bet that emerging markets will outperform the U.S.
Of course, if emerging markets rise and U.S. stocks fall, the trade will be profitable. But that isn't the only way you could make money. For example, if emerging markets rise 10% while U.S. stocks rise 5%, the trade would also be profitable. The inverse is true, too... If emerging markets fall 10% while U.S. stocks fall 15%, this trade would still make money. We hope that clears things up.
"I absolutely, positively hate your marketing techniques. Like the California gold rush, you make more money selling pics and shovels to greedy investors than they ever realize in gains. That's a complex issue just like your opining today on the rental car market. All of that said, sometimes your (relatively) free content is the best out there. I would classify your article today as falling into that category. Sorry that I can't afford all of the pics and shovels that you're constantly trying to cram down my throat but your explanation today was superlative." – Paid-up subscriber Tom W.
Porter comment: Well... you don't have to buy anything...
Regards,
Justin Brill
Baltimore, Maryland
May 17, 2017
Consumer Trends Among the 'Grumpies,' Part II: Could I Please Get a Plain, Regular Car?
We've had it with instantly obsolete, unfixable, fiddle-faddle-f***-it... stuff.
A couple of weeks ago, I wrote a column about an underserved and ignored segment of the consumer market – me. That is, me as a typical representative of the "Grumpies" (Graying Rich Upset Male Persons).
There are lots of us Grumpies. We're wealthy (at least, in comparison to the average American's net worth). And we hate all of today's overcomplicated, electronics-invested consumer products.
In my previous rant, I mentioned how it takes an MIT triple doctorate in computer science, electrical engineering, and quantum physics to open the hood of a modern car and know what you're looking at.
Grumpies have given up looking under the hood. Except maybe to add windshield wiper fluid, and sometimes it takes a trained technician in a dealership service department to do even that. We know we're going to be flummoxed by the engine compartment.
It used to be just an engine block in there with a carburetor on top, a radiator in front, plus an alternator and exhaust manifolds. Now, emissions regulations, fuel-efficiency standards, and a proliferation of federally mandated automatic sensors mean we're faced with a pollution-control plumber's nightmare and a mare's nest of wiring harnesses all sprinkled with the fairy dust of computer chips.
More – and worse – is on its way with new forms of powertrain technology such as cars that run on renewable wind-and-solar energy. The solar energy will come from your car getting broiling hot inside while it's locked and sitting in the sun in the mall parking lot. The wind energy will come from the breeze through the window that an opioid addict smashed to snatch your iPhone.
But just because the innards of an automobile have become a skunkworks – repellent to the minds of ordinary guys – doesn't mean that the rest of the automobile has to annoy the hell out of us, too.
I want a plain, regular car – no parking assist, no lane-drift alert, no reality TV show about what's happening behind me on the touchscreen... and no damn touchscreen, either.
And absolutely no voice-activated anything. I have a black lab named Georgie. I don't want Amazon's Alexa app playing Boy George music every time I say my retriever's name.
Also, no GPS. I know where I am. I'm right here. And I know where I'm going. I'm going home. It's cocktail hour.
I'm not alone in my desire for a gizmo-free, gadget-purged vehicle. On May 11, the Wall Street Journal – a publication with plenty of Grumpie readers – ran a front-page feature titled "Help! My Fancy New Car Won't Stop Beeping." Its subtitle: "Touchy touch screens, buggy software and mystery sounds baffle drivers, forcing some to enroll in two-hour tech seminars; 'then the beeping started.'"
I bet I'm also not alone in wanting a particular kind of plain, regular car. We Grumpies tend to hunt and fish and otherwise putter around in the outdoors. We own property, tow boats, keep animals, plant shrubs, have families, etc. We want a big, honking SUV.
I personally live in a remote, rural New England town with a wife, three children, three dogs, and all the sporting goods and leisure equipment that comes with them (plus my beer cooler).
In fact, I already have a big, honking SUV. It's a Chevy Suburban – one of five or six I've owned over the past 20 years. Suburbans are good cars – commodious, sturdy, and reasonably priced if you buy them, like I do, off lease after 30,000 miles of gentle (and as it were, suburban) use as glorified minivans for soccer moms.
But the Suburbans, like all other full-size sport-utes, are too gussied up. I usually have to sell mine at around 125,000 miles (which is about when a 1960s-era Suburban was getting broken in) because all their tech gee-gaws start going whack-a-doodle.
I'd like to make a deal with manufacturers. I'll buy a brand-new Chevy Suburban (or Ford Expedition, or Toyota Sequoia, or Lincoln Navigator, or Jeep Grand Wagoneer, or whatever) and pay a large premium over suggested retail price if the car has the following features. (And lacks the features I've complained about already.)
Clearance: My local roads are so bad that the only way to tell "off-road" from "on-road" is that I encounter fewer trees in the middle of the roads than I encounter in the middle of the forests, unless an ice storm has knocked all the trees onto the roads. Speaking of which, winter around here lasts 13 months a year.
I don't just drive on stuff. I drive over stuff. And through stuff. Getting to the best bird covers and the most productive trout pools can be hell. And you don't get there on the proverbial wide road paved with good intentions.
Over the years, full-size SUVs have lost clearance as they've acquired more sophisticated, less truck-like suspensions to provide a smooth ride. Midst the potholes, frost heaves, and fallen trees of rural New England, there is no soft ride. You're the dash of vermouth in a martini shaker no matter where you're going.
No carpeting: On any surface. Due to New England's horrible weather, I use my SUV as an "indoor pickup truck." I load bales of hay in the back. The sidewalls of the cargo compartment are lined with something from the looms of the Bigelow Mill. Why? No car vacuum ever made will extract the embedded bits of hay from the carpet pile. Every time I look in the back, I'm reminded of 1968 when my friend Groovy was trying to fill the bong, tripped over the lava lamp, and spilled the baggie of stems and seeds into Mom's rec room shag rug.
Interior volume: Because my SUV is an indoor pickup truck, I don't need the third row of seats. (I figure if you're hauling around more than three kids, three dogs, and a spouse, you should get a school bus or birth control.) What I do need is space to lay a 4-by-8 sheet of plywood flat. My Suburban is two-and-a-half feet too short, and it's the longest SUV on the market. Come on, GM, these cars are already the length of cruise ships. What's an extra 30 inches? Are you afraid you won't be allowed to dock in Fort Lauderdale?
Ready to get hosed: I want to clean the inside of my car with a power washer. I mentioned I have kids and dogs. This means cola spills, gum wads, ice-cream drips, and vomited squirrels. I want metal floors and door-trim panels, rubber mats, all my upholstery (including the headliner) covered in heavy-duty vinyl, and waterproofed dials and gauges.
P.S. I have an ancient Jeep with a simple, but brilliant accessory long forgotten by modern carmakers. The Jeep's footwells have inch-wide rubber plugs. Pull the plugs, and you get drain holes.
P.P.S. Some machine-washable elastic slipcovers would be welcome, too. Make them the color of dog hair and sticky kid snacks.
Stick shift: So the kids will be less tempted to borrow my car. Kids today don't really know how to drive stick shift. At least, my kids don't. They watch me shift gears and ask, "Isn't there an app for that?"
Bench seats: Ditch the center console and give me some room for petting and necking. Plus, I've got a Brittany Spaniel, Clio, who likes to cuddle. As it is, she has her rear paws stuck in the cup holders and her front paws on the dashboard. She gets a snout-full of rearview mirror every time we come to a sudden stop.
While you're busy removing the center console... put the shifter back on the steering column. There's nothing wrong with "three on the tree." If I have a transfer case that gives me high and low four-wheel drive, I don't need every gear ratio known to man.
And don't even think about making my car a "driverless car": I'll do the driving, thank you very much. Also, those three kids of mine are teenagers. Have you ever watched teens behind the wheel? They're texting, fussing with their iPads, talking to one friend while Skyping with another, and trying to conceal cans of cold beverages that they're not supposed to be legally old enough to buy. For me, that's plenty enough of a "driverless car."
Regards,
P.J. O'Rourke