This Bullish Signal Has Never Been Wrong
This bullish signal has never been wrong... Beware a bond market 'tantrum'... U.S. business optimism is booming... Shocking new data on auto debt... Urgent: Your second chance to attend last week's '10x Project' event... P.J. O'Rourke: More on the Trump 'hysteria'...
This bullish signal has never been wrong...
The benchmark S&P 500 rose 1.8% in January, and is up nearly 4% so far this month. According to equity-research firm CFRA, this is an incredibly bullish sign...
The firm notes that since 1945, stocks have risen in both January and February just 27 times. And in every one of those years – 27 out of 27 times – the market has ended the year in green, for average total return of 24%. That's an impressive streak.
Of course, nothing can guarantee that streak will continue... And as always, we would never recommend making investment decision based on any one indicator alone. But history strongly suggests the bull market has further to run.
However, history is far less bullish about bonds...
The recent rally in stocks has been accompanied by a tightening in credit spreads – the difference in yield between U.S. corporate debt and U.S. Treasurys – but also a decline in real interest rates.
According to strategists at Bank of America Merrill Lynch, stocks and credit spreads are reflecting optimism about the economic growth and corporate fundamentals, yet falling real rates are reflecting the opposite. As Bloomberg reported yesterday, this is unusual...
The last time we saw this confluence of events was right before bond-market routs in 2013 and 2015, the so-called taper tantrum and bund tantrum.
The S&P 500 index surged Tuesday to reach the average year-end target of Wall Street analysts with a 5.5 percent gain since December. The extra yield investors demand to hold corporate bonds instead of Treasuries is near the lowest in two years, and the yield on five-year inflation protected Treasuries has dipped back into negative territory...
Eventually this disconnect "becomes wide enough to trigger a real rate catch-up," strategists Shyam Rajan and Carol Zhang wrote in a note Feb. 17. "History offers a compelling reason to be cautious on duration after recent market moves."
In other words, history suggests real interest rates could quickly move higher from here... Meaning longer-duration debt (like long-dated U.S. Treasury bonds) could plunge.
Speaking of optimism, new data show U.S. business leaders haven't been this hopeful in years...
According to JPMorgan's annual Business Leaders Outlook survey of mid-sized companies, a remarkable 80% of executives are optimistic about business and the U.S. economy today.
This is the highest level in the history of the survey... and a dramatic improvement from last year's 39% figure.
In addition, 71% said they plan to increase compensation this year, and nearly 60% said they plan to add more full-time employees. As you might guess, most cited the recent election for the change in their outlook. As Bloomberg reported...
More than three-quarters of executives say they expect the policies of President Donald Trump and a Republican-led Congress to have a positive impact on their business. The reason: an agenda that's pro-business and includes tax reform and less regulation, the report on Tuesday showed.
"U.S. companies are gaining confidence, and they anticipate new economic support from Washington in the coming year," Jim Glassman, senior economist at JPMorgan Chase, said in a statement. "Even some of their top business challenges – managing labor costs and trying to tap a limited supply of talent – are more growing pains than survival tactics."
A separate survey of small businesses showed a similar but more modest improvement... 62% are optimistic today versus just 43% last year, according to Bloomberg.
As our colleague Scott Garliss pointed out in our real-time Stansberry Newswire yesterday, this could be an early indication of further economic strength to come...
If business leaders are more optimistic about their business prospects, they are likely to increase spending via hiring, wage increases, and office/equipment upgrades. That would bode well for multiple industry groups as that optimism snowballs and starts to show up in the numbers.
Of course, regular readers know some industries are likely to struggle even if the broad economy booms...
And we believe the auto industry is near the top of that list.
As longtime Digest readers know, a boom in subprime lending – similar to that which fueled the housing crisis – helped push car sales to a new all-time record of 17.6 million vehicles last year.
But beneath the surface, we're seeing unmistakable signs of a bubble in danger of popping. A separate report from Bloomberg put these problems in perspective on Tuesday...
The country's auto debt hit a record in the fourth quarter of 2016, according to the Federal Reserve Bank of New York, when a rush of year-end car shopping pushed vehicle loans to a dubious peak of $1.16 trillion.
It's an alarming number... In fact, the pile of debt would cover the cost of 43.4 million Ford F-150 pickups, one for every eight or so people in the country. Another way to look at [it]: Every licensed driver in the U.S., on average, owes about $6,100 in car payments...
In the past two years, U.S. drivers with credit scores of less than 620 borrowed $244 billion to buy cars, a tally not matched since 2006 and 2007 when the same strata of buyers rolled off with $254 billion in auto loans.
This will not end well...
Subprime borrowers have been the most important source of auto sales growth since the last financial crisis... But this can't go on forever. In fact, delinquencies are already rising, suggesting the bubble may have already peaked.
And in this crisis, it likely won't be banks or traditional lenders – but rather the big automakers themselves – who are hurt the most when the bubble pops. More from Bloomberg (emphasis added)...
Car companies – and their captive finance units – make about half of all car loans these days, but they underwrite three-quarters of the ones going to subprime vehicle buyers.
As delinquencies rise, these are the first companies that will feel them. Indeed, the Fed says recent delinquencies are inordinately hitting carmakers, while bank and credit unions have actually seen an improvement in late payment data.
In other words, every time a dealer upsells someone into swanky SUV, they have more in common with the buyer than one might think: both may be paying for it later.
Finally, we have some good news for folks who missed last week's big "10x Project" event...
Due to overwhelming demand, Porter has agreed to allow free access to a full replay of the event for a limited time. Click here to see it now. But don't delay... It won't be available for long.
And be sure to let us know what you think at feedback@stansberryresearch.com.
New 52-week highs (as of 2/21/17): Apple (AAPL), AllianceBernstein (AB), American Financial (AFG), AMETEK (AME), American Express (AXP), Axis Capital (AXS), Boeing (BA), Becton Dickinson (BDX), iShares MSCI BRIC Fund (BKF), Berkshire Hathaway (BRK-B), C.H. Robinson Worldwide (CHRW), First Trust Nasdaq Cybersecurity Fund (CIBR), CommScope (COMM), Cisco Systems (CSCO), iShares Select Dividend Fund (DVY), WisdomTree Japan Hedged Equity Fund (DXJ), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Cedar Fair (FUN), Goodyear Tire & Rubber (GT), Huntington Ingalls Industries (HII), iShares Core S&P Small-Cap Fund (IJR), PureFunds ISE Mobile Payments Fund (IPAY), Altria (MO), PowerShares S&P 500 BuyWrite Fund (PBP), Procter & Gamble (PG), Shopify (SHOP), Stanley Black & Decker (SWK), Tallgrass Energy GP (TEGP), Two Harbors Investment (TWO), and ProShares Ultra Financials Fund (UYG).
The new-highs list is growing longer by the day. How's your portfolio looking? Let us know at feedback@stansberryresearch.com. And be sure to read on for the latest from best-selling satirist and Digest contributing editor P.J. O'Rourke.
Regards,
Justin Brill
Baltimore, Maryland
February 22, 2017
My Worries About the Opposition to Trump – Part II
As I said in my previous column, the election of President Trump has provoked a worrisome hysteria among some Trump opponents.
Not that some Trump supporters haven't also been acting giddy and frantic...
You may cheer the man or you may boo him, but no one applauds hysteria overrunning the body politic.
It's like rats overrunning Hamelin. That didn't turn out well for anyone in the old folktale. The Pied Piper didn't get paid. The burghers of Hamelin lost their children. Those children were led away to a place that I doubt was ideal for getting a good education and maturing into responsible adults. Plus, the rats drowned.
But besides the hysteria, Trump's election has also fostered a rise in fanaticism.
I'm not talking about neo-Neanderthal alt-right loonies or black-clad anarcho-dipsticks...
I'm not talking about the kind of fanaticism that takes possession of crazy people. It is possible to be perfectly sane and still be too much of a fan of certain ideas or concepts (a problem not unknown in the investment world). And this is what I think has happened to some Trump opponents.
Although I'm not letting Trump's fan base completely off the hook. Some of his boosters have shown elements of the kind of unreasonable over-enthusiasm that can wreck a downtown after a city's sports team wins a championship.
Fortunately, in the case of those Trump boosters, I'm speaking in a metaphorical way: vehicles of civility overturned, windows of communication broken, cans full of common sense thrown into the air... You know what I mean.
However, many of Trump's otherwise reasonable opponents have also shown fanaticism... a different kind of fanaticism... one that doesn't really have that much to do with Trump himself, let alone his ideology. (Which, personally I'm still trying to figure out. And I bet I've got a lot of company.)
It's a strange sort of fanaticism. It's not politically partisan, per se. It's a fanaticism of attitude.
The attitude the fanatics have is a fanatical obeisance to politics, an absurd reverence for the state, a belief that government is the Alpha and the Omega.
There are two basic attitudes toward government. First, there's the attitude we have. We regard government simply as an organization. And I say "we" because I think I'm speaking for most Stansberry Research subscribers. (And I know I'll hear about it in the mailbag if I'm not.)
We regard government as a big organization, a powerful organization, and, sometimes, when enemies attack or when the potholes in the Interstate system get so large we can lose Buicks in them, an important organization.
But it's just an organization. Like any organization it has conflicting objectives. (Spend nonexistent money or tax until no money exists?) It has confused priorities. (Undercut domestic manufacturing or make $1,000 toasters in Cleveland?) It has bureaucratic muddles. (Name any three letters of the alphabet and get an acronym for a federal agency.) And it has personal rivalries. (Steve Bannon versus the world.)
As far as we're concerned government is a kind of business, albeit a business in which we invest involuntarily through our tax dollars. Sometimes it succeeds and we get peace and prosperity (for which government takes the credit). Sometimes it fails and we get terrorism and 2008 (which government blames on somebody else). And we never know what we're getting next.
It's probably just as well that Americans can't trade the business of government on the stock exchange, because everybody would be trying to go short and long on it at the same time, and the stock exchange floor would be chaos.
But what Americans can do with the business of government is change its senior management. And this is what Americans have done.
We – the people who regard government simply as an organization – are just waiting to see how the change in management works out.
But other people have a different attitude toward government. They regard government as something more than an earthly system run in a fallible manner by ordinary mortals. They believe government is the entity "from whom all blessings flow."
They think government created the heaven and the earth, or at least the heavenly parts of the earth (Brooklyn, Berkeley, Ann Arbor). They think government will lead them to the land of locally sourced unpasteurized raw milk and honey produced by free-range bees gathering pollen from flowers upon which no pesticides have been used.
They think government watches over them at all times – for which they rejoice when it comes to social services, though they tremble before the NSA. They believe government will come to judge the living and (in the case of college curriculums dominated by dead white European males) the dead. Not a sparrow falls without government knowing, as long as it's an endangered species of sparrow.
The people with this attitude have turned government into a religion.
Our President who art in Washington,
sensitive, caring, inclusive, and progressive be thy name.
Thy Congress cooperate,
thy entitlement programs operate,
in the United States as it is in enlightened Nordic countries with comprehensive social welfare systems.
Give us this day our daily seven-grain bread, subsidized housing, single-payer medical care, and free college tuition,
and forgive others their implicit racism,
as we forgive those who are vegetarians, but not vegans, and who don't ride a bicycle to work.
And lead us not into exploitation by the 1%,
but deliver us a $15 minimum wage.
For thine is the coastal elites, the mainstream media, the liberal-arts faculties, and Martha's Vineyard when the Clintons are vacationing there, forever.
Amen and Awomen.
You can understand the consternation that such people feel when they're bowing down to a golden calf and the calf in question swats them with its Twitter tail, kicks them with its cabinet appointment hooves, and leaves a cow pie of loose talk on their altar.
Regards,
P.J. O'Rourke