In the May 24 Digest Premium, I (Porter) discussed the glaring short sale – electric-car maker Tesla Motors.
To give you some history, back in 1998, I recommended shorting shares of legendary film maker Eastman Kodak. At the time, it was trading for around $65 or $70.
It was only a matter of time until Kodak went out of business. Now, if Kodak had a dynamic CEO who announced plans to divest the film business and reinvest the cash flows into something radically different, I might have been afraid of the situation. But of course, it had nothing like that.
Barron's, on the other hand, decided it would print the work of a couple portfolio managers who were long Kodak and likely eager to get out of their positions. And so it put Kodak on the cover of Barron's magazine and predicted the stock would go from $60 to $85. The article based its argument on growth and near-term cash flows because of the booming business in disposable-film cameras.
I tell this story because the Kodak situation was a much more attractive short sale than Tesla. The crowd had not yet discovered the fallibility of the model. And Kodak went bankrupt.
As investors approach a potential top in the stock market, capital allocators (banks, hedge funds, even individuals) make poor decisions.
Caution goes out the door. Credit is flowing and everyone wants a piece of the action. Asset prices explode... And nobody thinks the good times will end.
But eventually, the market pulls back... Then, nobody wants to buy stocks... a house... or perhaps even U.S. government bonds. So prices crash.
It's impossible to time exact market tops and bottoms. And even though it's apparent to us that things are getting crazy, these price inflations can continue for a long time... sometimes months or even years longer than you would expect.
Back in 2006, we started warning of a market top through our frequent "signs of the top" ideas. These were current events, extreme stock valuations, or takeover deals that seemed absurd. But as we just said, it's impossible to pinpoint market tops and bottoms... So these warnings weren't a call to sell everything or short the market. They were simply a reminder that prices were no longer trading on fundamentals... Greed had taken hold of the markets. And today, that's the position we're in again.
Right now, one man controls the fate of the markets – Federal Reserve Chairman Ben Bernanke. He's injected trillions of dollars into the market. And he continues to bolster markets with $85 billion a month in asset purchases.
If the market believes Bernanke will taper off his money-printing efforts (aka quantitative easing) early, it falls... The next day, if investors believe Bernanke will keep up the printing, the market rises. It's pure speculation...
In March, JPMorgan Chase CEO Jamie Dimon said banks have too much capital... And as that capital continues to accumulate, the banks won't have enough good ways to use it.
Dimon predicted that without good options, banks would opt to simply sit on that cash… While we appreciate his conservatism, we respectfully disagree with Mr. Dimon. As we wrote in the March 6 Digest Premium...
This excess cash [on bank balance sheets] is a function of the Federal Reserve's easy-money policies. For the last four years, the Fed has made it impossible for banks not to make money.
What Jamie Dimon is saying is that the manipulation has worked so well that banks will be incredibly flush with capital... And there's not enough high-quality lending available to put the money to work.
Jamie is a very smart guy... And I don't want to go on the record disputing what he says. But I'm pretty sure bankers will make terrible decisions and that money will be put in really bad places.
Maybe this won't happen at JPMorgan. But I know that money won't just sit there. I expect (and Steve Sjuggerud has also written about this) the Bernanke boom is going to accelerate, and we'll start seeing "signs of the top."
If you go back and look through the Digests from 2006 through mid-2008, you'll find probably 100 different instances where we wrote "signs of the top." We were noting crazy things people were doing with borrowed money or crazy things going on with asset prices.
In periods where there's tons of capital available, credit flows into places that aren't safe or reasonable... People make lots of bad decisions.
Another potential sign of a top… some of the best private-equity managers in the world are getting cautious… In the May 2 Digest, we quoted Leon Black, the billionaire founder of private-equity firm Apollo Group, saying, "We're selling everything that's not nailed down… And if we're not selling, we're refinancing."
This week, private-equity giant Warburg Pincus announced it was selling ophthalmology business Bausch & Lomb to Valeant Pharmaceuticals for $8.7 billion.
Warburg also sold the majority of its stake in natural gas liquid transportation firm Targa Resources for $1.8 billion. Warburg made its initial investment in the company 10 years ago for $400 million. Targa is a portfolio holding in Stansberry's Investment Advisory. It's currently a hold… and subscribers who bought on Porter's original recommendation are up 42% in five months.
Black and his colleagues who are unloading assets are likely early... The bull market could extend for years… But like we said, it's nearly impossible to time exact market tops and bottoms. Right now, these firms know they won't have any problems finding buyers for their assets. And they're apparently ready to pass on some upside to lock in profits.
The most glaring sign of the top today is the cover of this morning's USA Today... When a mainstream media outlet proclaims a raging bull or bear market, you can bet the trend is near exhaustion. The most famous example of the "newspaper indicator" is the 1979 Newsweek issue proclaiming the "Death of Equities." Of course, this coincided with the start of the greatest bull market in history – which lasted more than two decades.
So today, we'd like to draw your attention to the USA Today banner headline:
We asked Brian Hunt, S&A's Editor in Chief and co-editor of DailyWealth Trader, for his thoughts on today's market. Here's what he had to say...
The DailyWealth Trader team agrees. Things are getting a little frothy right now. We're starting to see a few traditional "warning signs" like mass-market media sources touting stock-market gains. We're seeing absurd price rises of questionable businesses like electric-car maker Tesla Motors. We're seeing borrowing costs for businesses go lower and lower.
But keep in mind... at a forward price-to-earnings ratio of 15, stocks are still relatively cheap. They have LOTS of room to run before things reach crazy valuations. Yes, we're starting to see a few early "signs of the top," but any experienced investor will tell you that the conditions that create "signs of the top" can last a long, long time... like years. The right thing to do is acknowledge the potential dangers, stay long in high-quality assets, and mind your trailing stops.
Brian and co-editor Amber Lee Mason do a great job of tracking major market trends and recommending profitable trades in their daily trading service. In addition to consistently providing money-making ideas, Brian and Amber are also building one of the greatest educational tools for traders in the world. And it's all available for a low monthly price. If you'd like to learn more about DailyWealth Trader, click here...
New 52-week highs (as of 5/28/13): Abbott Laboratories (ABT), Activision Blizzard (ATVI), Becton Dickinson (BDX), Chicago Bridge & Iron (CBI), Chevron (CVX), Chart Industries (GTLS), Integrated Device Technologies (IDTI), KBR (KBR), Qlik Technologies (QLIK), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), Constellation Brands (STZ), short position on iShares Barclays 20+ Year Treasury Bond (TLT), and Targacept (TRGT).
In today's mailbag, Porter offends someone with his political views. Just another day at the office... Send your feedback to feedback@stansberryresearch.com.
"Andy here, former COO of Univision... Knew Murphy and Burke well... Great managers and superb broadcasters... While they may have been tight on expenses, their Corporate offices were in the Villard Mansion which is at the base of the Palace Hotel on 50th and Madison in NYC... I recall that the offices were over the top, yet they housed Tom, Dan, their CFO and a couple of secretary's ... I believe that the mansion was owned by the archdiocese of NY and Cap Cities had a long term lease... I have had the pleasure of working for some of the wealthiest people in the world, and I have been in their offices, yet known are as impressive as the Cap Cities offices at the Villard Mansion..." – Paid-up subscriber ACG
"Dear Porter, I wanted to comment on the below:
I saw on 60 Minutes that we have military advisors in central Africa, chasing warlords with child armies. As if we don't have enough problems here, we have to send our armed forces across an ocean to chase these criminals. There's no question, these warlords are a terrible problem. But it has nothing to do with us. I don't want my tax dollars involved in that mess.
"In the universal fight between Good and Evil, America always took the side of the Good. It's what we stand for, and when it stops, America will cease to exist. Good vs Evil Mr. Porter, an easy distinction, borne of altruism, a concept even you should understand." – Paid-up subscriber Daniel Ash
Porter comment: I'm struck by the idea that you believe yourself wise enough to know the side of the "good" in a civil war... in a place beset by tribal warfare that predates all written history, among people whose culture, religion, and traditions are totally unknown to you...
Likewise, I'm struck by your understanding of our country's traditions and actual experiences. America's founders shared a nearly universal fear of a standing national army and deliberately set our country apart from others' affairs. Tell me again how standing up for what was "right" in Vietnam or anywhere else made us a better, safer, or wealthier nation?
"Not sure whose comments they were about the state of politics in America, but I totally agree. It's not the America I loved and was proud of. Now it seems to be a country half of which is on the dole, and achievement and success is discouraged and berated. The next generation is being indoctrinated in the socialist, big government ideology by public schools and colleges. It's a country where our leaders are afraid to call a Islamic extremists terrorists attack what it is. Instead, it's called 'workplace violence' or 'an attack by a mob protesting a video.'
"I'm not to the point where I'm ready to leave the country but instead choose to try and fight for change. We have to let our leaders hear our voices. It's like pushing a large stone uphill but political change is possible like in 2010. It will take a while but the mess can be reversed. We have a great country, just incompetent and dishonest leaders. They must be changed." – Paid-up subscriber John Yarbrough
Regards,
Sean Goldsmith
Miami Beach, Florida
May 29, 2013