Two Things You Need to Know About the 'Melt Up' Today
Sjug's new investment script... Two things you need to know about the 'Melt Up' today... Prepare for more volatility... What to expect from the 'Melt Down' ahead...
Last Friday, our colleague Steve Sjuggerud published important new research...
As regular Digest readers know, "Sjug" has been incredibly bullish on U.S. stocks for years. In fact, we know of no other analyst anywhere who has been as steadfastly bullish (and absolutely correct) about stocks since the bull market began in early 2009.
Time and again, Steve urged readers to stay long, saying stocks would "go higher than you can possibly imagine." And for years he's predicted we'd see an explosive final rally – what he called the "Melt Up" – before the bull market finally ended.
Steve's bullish stance wasn't always popular...
Even his most loyal readers often questioned whether the bull market could continue. And as recently as a year ago, we heard from several folks who doubted that a Melt Up was even possible, let alone likely.
Well, no longer... Steve's bullish thesis has officially gone mainstream.
We've seen dozens of references to the "Melt Up" in the financial media in recent months. Individual investors have been jumping back into the market for the first time in years. And several well-known investors have even referenced Steve's research publicly.
Sjug has long predicted we would see a true investment mania take hold as the Melt Up plays out...
So this mainstream acceptance is a bullish sign... It's further confirmation that his thesis is intact.
However, it also confirms that we're one step closer to the end of this long bull market. And for the first time since the rally began, Steve thinks it's time to start preparing for the inevitable decline – the "Melt Down" – that is sure to follow.
Again, let us be perfectly clear...
Steve remains bullish today. He notes that all of the reliable early warning indicators he follows continue to give the "green light" today. And more important, it still doesn't "feel" like a market top. As he explained in the February issue of True Wealth...
To make it through this Melt Up safely, you need to understand something... You need to know what the peak of a bubble feels like.
To spot a market peak, you don't need to know about interest rates or stock market valuations. You simply need to recognize a particular "feel" among investing folks...
No rational arguments matter to people deeply invested in a bubble. That's it. It's simple.
It's also easy to spot... Make a rational argument to someone in the bubble, and watch them irrationally blow it off. When everyone blows off the most rational outcomes, you are darn close to the peak.
Steve pointed to the most recent bubble in housing as a prime example. More from the issue...
During the housing bubble, everyone knew that the population was growing less than 1% a year, and that incomes were growing 2% a year. That's rational. But people still believed that house prices could go up 20% a year – indefinitely.
That's the bubble thinking. Incomes can't grow at 2% forever and house prices can't go up at 20% forever. One of them has to change.
The one that was going to change was pretty obvious. But nobody wanted to hear about it.
Whether it was the housing market a decade ago, or dot-com stocks in 2000, rational arguments didn't matter to people deeply vested in that bubble. At the peak, everyone is fearless. Nobody worries about setbacks or bad news. They shrug everything off and keep buying.
And as Steve explained, that is clearly not the case today. In fact, after the sharp correction earlier this month, many folks are actually fearful right now. More from Steve...
This fear is rational. And that's a good thing. That means we are not at the top. The irrational greedy feeling that is obvious at a top is simply not here yet. The greatest investor of all time said, "Be fearful when others are greedy, and greedy when others are fearful." (I'm talking about Warren Buffett.)
After a terrible start to February, investors have become fearful. So what should you do? You should take the world's best investor's advice now, and be greedy.
But if you're going to remain invested for the Melt Up, Steve says you must understand two important things...
First, volatility will become more common as the Melt Up plays out. You must be prepared to weather several more corrections like we saw this month. As Steve explained...
During the last stock market Melt Up (1998-2000), the Nasdaq Composite Index soared by more than 200%. Sounds great, right? But listen to this:
The Nasdaq fell roughly 10% on five separate occasions during 1999. Take a look:
Falls of 10% are part of a 200% rise. It's just a fact of life. You need to accept it. (Or adjust your portfolio's risk so you can accept it.) And then move forward.
Second, you must be prepared to dramatically shift your investment approach when the Melt Up finally ends...
Why? Because Steve says the years following the Melt Up could be downright ugly...
Before you accuse me of predicting both directions at once, let me explain myself. I can do it in two sentences:
- In the short run, the trend matters – stocks keep going in their current direction.
- In the long run, value matters – markets revert to the mean.
In the short run, we are building toward a classic top. You want to be on board for that. But over the next seven to 10 years, markets will come down as they revert toward their historic fair values.
Legendary investor Jeremy Grantham tracks historic fair-value indicators. And based on them, he sees U.S. stocks falling 4.7% per year (after inflation) over the next seven years. Ouch!
Another legend, Rob Arnott of Research Affiliates, tracks "reversion to the mean" numbers as well. And his conclusion is nearly as bad – a 0.4% annual return (after inflation) for the next 10 years. Ouch again!
So... what can we do? The optimal thing to do is to participate in the upside potential when it's there – and hedge the downside risk when it's there.
In other words, Steve recommends staying 'on board' the Melt Up for as long as possible...
To "make hay while the sun is shining," as he put it, and not sell prematurely.
Again, the key here is to follow good risk-management strategies, like diversifying your portfolio across uncorrelated assets, using sensible position sizing, and following trailing-stop losses.
If you're taking on too much risk, you'll likely get kicked out of your positions long before the market peaks.
But Steve says you must also be willing to play defense and 'hedge' your portfolio at the first signs of trouble...
And this month, he added a brand-new recommendation to the True Wealth portfolio that can help you do both.
In short, this unique investment vehicle is designed to automatically hedge out the risk in your portfolio as the bull market ends and the bear market begins. Steve says it's the perfect way to invest for the final stages of the Melt Up. It will allow you to stay on board for the potentially explosive gains ahead, while taking far less risk.
Of course, it wouldn't be fair to Steve's True Wealth subscribers to share all the details here today. But you can get instant access to this recommendation with a 100% risk-free subscription to True Wealth. At just $199 for an entire year, this one recommendation alone could pay for your subscription many times over. Click here to sign up now.
New 52-week highs (as of 2/21/18): Amazon (AMZN), Grubhub (GRUB), Huntington Ingalls Industries (HII), Mobile TeleSystems (MBT), and short position in Simon Property Group (SPG).
In today's mailbag: A new subscriber responds to the "boo birds"... several others weigh in on paid-up subscriber Kirk's Report Card criticism... and more great feedback on bonds. What's on your mind? Let us know at feedback@stansberryresearch.com.
"I read [complaints] on how you publish contradictory predictions... I don't get them! But I get you, and what you're saying!
"I agree we are in a 'Melt Up,' and that the Bull Market is still alive and well. Along the way there will be 10 or 15% pullbacks because that's the way the market works. Don't sweat them, see them as opportunities, and know It's just part of playing the game. I also agree that after the Melt Up there is going to be a 'Melt Down.' So be prepared, with proper Asset Allocation with 'Smart' Trailing Stops and the discipline to follow them.
"As a result of following you, I've compiled a portfolio of stocks from True Wealth, True Wealth Systems, The 'Melt Up' Millionaire, and True Wealth China Opportunities, with some selections from The Total Portfolio. I'm also holding Gold SPDR Shares, Gold Royalty Stocks, and all of it with a Portfolio VQ% of less than 15%. I'm also holding Physical Gold, Silver and Cash under my own lock and key.
"I'm beating the S&P and I'm enjoying the ride! What are these people complaining about? I look forward to every report you guys send out! Thank You!" – "New" paid-up Stansberry Alliance member Jim M.
"Oh wow! I give Porter an A++++++++++ for his comment on the 2017 Report Card to Kirk! Keep it up Porter and I will have to rest on the + key of my keyboard! Thanks for all you do and your humble honesty! I became an Alliance member years back and have never regretted it except should have done it decades ago!" – Paid-up subscriber Patrick P.
"Hey Kirk, don't like Porter's grading system? Perform your own! He gives us the performance numbers, which is the most valuable of all! When I first evaluated a Stansberry membership, I compiled the performance numbers past and present into a spreadsheet and computed averages.
"The grades didn't matter so much, but I do find them helpful. I think Porter does them for novice investors who can't evaluate performance for themselves. And I disagree that grade inflation is the problem (FYI assuming the highest possible leverage is the problem, which you and I can adjust for because they are mostly transparent about it).
"I would suggest that you more than most subscribers could benefit from the dumbed-down letter grades, because you're not recognizing what a rare gem Doc Eifrig is. Would you give Albert Einstein a mere A+? Or an A++++++++++? If someone is off the scale, you have to adjust the scale.
"You do not speak for me when you say the report card [is] not valuable for subscribers! Oh yeah, and what do you think the report card does to the work ethic of his editors? Do you have any idea how many newsletters he's discontinued for lack of performance? How about editors who were replaced? Porter gets an A++ just [for] having a report card policy." – Paid-up subscriber Carlos
"When I graduated from college, back in the dark ages (1970s), we were all required to take 'Senior Comprehensive Exams' in all the primary subjects, as well as in our own major. This gave not only the individual, but entire departments and colleges feedback on their performance. I doubt that colleges liked the transparency it forced upon them, and the practice has probably gone the way of the dodo.
"I was a mere Biology major, but my score in mathematics compared to all college graduates was 99+++. They also gave us grades compared to our own major field; in math compared to other Bio majors, I was a 99+++++++.
"It seemed odd to me at the time, and still does; but there is certainly educational precedent for giving multiple pluses. Go easy on poor Porter, Kirk!" – Paid-up Stansberry Flex member Timothy S.
"Hi Porter: After reading your Friday Digest, I decided to take the plunge and bought my first bond which was your most recent recommendation. I was very surprised on how easy it was to purchase the bond thru my broker. While bonds are certainly not without risk, the recent issue clearly explained any downside that could occur. The best part is the bond should return 20% in 15 months. Pretty nice return on a conservative investment. Now I'm hooked and I'm looking forward to your next bond recommendation." – Paid-up subscriber Kevin Laird
"Hi Porter, I would like to comment about the Stansberry's Credit Opportunities service that your company offers. I have traded stocks for over 30 years and never one time had I bought a corporate bond... that changed when you folks offered this service. I must admit I was nervous about buying corporate bonds, but I did because of the success that I had with your other products.
"Over all I have been able to purchase 12 of the 22 recommendations that you have put out, the other 10 never hit under the price limit. ICON was an easy one for me to purchase because of the success I had the first time you offered it. (11.4% return in six months.) I am so excited. I bought in at 83.93... 18.9% in less than 4 months. Out of the 12 purchases, I had one loss, a small amount on ATW, 3.3%. Am I thrilled? Absolutely!
"I am so happy with your products... I've done great on Steve's China plays as well as Doc's Retirement Trader. I can hardly wait for the credit crisis to unfold, the opportunities will be terrific.
"Oh by the way, I am not related to anyone from Stansberry and have never personally met anyone from Stansberry. I would like to come to one of your events in Vegas some time. Thank you so much for your great service! You can use my story anytime. I have no regrets for buying your Alliance service. Best to all of you folks at Stansberry!" – Paid-up Stansberry Alliance member Bill L.
"If bonds are so foolproof... What happened to GM bondholders [following the financial crisis]???" – Paid-up subscriber Dirk W.
Porter comment: There are two ways to answer that question.
The first is the typical answer you'll hear from just about everyone: The government came in, put up $50 billion, and forced through a bankruptcy that was grossly unfair to bondholders. The unions got paid out around $0.90 on the dollar for their claims. The bondholders got about $0.10. And pension obligations and unions have largely hobbled the company ever since.
But what really happened is a lot more complicated.
General Motors had been grossly mismanaged for decades. The underlying asset quality was abysmal. And for decades, the company had been using debt to pay off other obligations – not to invest in building the company. That, of course, is a recipe for disaster. As an example, the last big bond offering GM made – for $20 billion – was all to beef up its pension fund. (Borrowing money to pay retired workers isn't a good sign for the future.)
As a result, the company couldn't get any funding, not even "debtor in possession" financing, which has first claim on all of the company's assets. The former management ran the company so far into the ground that nobody would give them another cent. Nobody. Not even with the protection of a bankruptcy court.
The government lost money on its $50 billion bailout, which shows you why nobody would give the company any funding. It should have been liquidated. If it had been, the unsecured bondholders would have most likely received nothing.
So if you want to blame the government... go ahead. I don't like the way they twisted the bankruptcy laws. But if you're looking purely at the economics of the situation, what happened isn't a surprise.
Buying bonds, on average, gets you $0.45 in bankruptcy and recovery. But there's a wide range of possible outcomes... And there are no guarantees after a bond defaults.
Regards,
Justin Brill
Baltimore, Maryland
February 22, 2018