Why It Pays to Be a Contrarian
Like death and taxes... Why it pays to be a contrarian... An unusual extreme in the bond market... 'If you hold oil or oil stocks, watch out'... An important update on our Big Trade strategy... It will soon be easier, faster, and cheaper to make money with our research...
It's one of the few constants in the financial markets...
Popular investment ideas are usually losers.
As we often preach in the Digest, it pays to be a contrarian. Or as billionaire investor Warren Buffett has famously said, "Be fearful when others are greedy, and greedy when others are fearful."
Whatever phrase you choose... whenever the "crowd" is heavily betting one way, it's often a good time to take the other side of that bet.
We were reminded of this fact when we saw the latest Commitments of Traders ("COT") report on the U.S. Treasury market this week...
If you're not familiar, the COT is a weekly government report that tracks the bets of different types of traders in different futures markets, including U.S. Treasurys.
In simple terms, the two main types of traders are industry professionals (who use futures to "hedge" or insure against losses) and speculators (often called the "dumb money" because they tend to get bullish at market tops and bearish at market bottoms).
Regular Digest readers may recall speculative bets against Treasurys hit a record high last month...
In the December 12 Digest, we warned that this suggested at least a short-term rally in Treasurys – and a decline in interest rates – was likely. (Remember, bonds and interest rates trade inversely... As interest rates fall, bond prices rise, and vice versa.)
As you can see in the following chart, Treasurys – as tracked by the iShares 20+ Year Treasury Bond Fund (TLT) – reversed just days later, and they've been moving higher since...
And interest rates – as tracked by the yield on the benchmark 10-year U.S. Treasury note – have been falling...
Typically, following an extreme like we saw last month, we'd expect speculators to begin to unwind some of these bets as Treasurys have rallied...
But that hasn't been the case this time. Instead, speculators have been adding to their bearish positions.
According to the latest COT data, speculative "dumb money" bets against Treasurys hit a new all-time record last week.
So while we believe the three-decade bull market in bonds is ending, this suggests the recent reversal rally has further to run.
"If you hold oil or oil stocks, watch out"...
So says our colleague Ben Morris, editor of DailyWealth Trader.
Yesterday, Ben warned his subscribers of a similar – but opposite – extreme in the oil markets. As he wrote in Tuesday's issue of DailyWealth Trader...
One of our most reliable indicators just flashed a warning sign. It's coming off of its most extreme reading ever. The indicator is telling us that the price of oil has run high enough... and that a sharp pullback is likely.
As you can see in the six-year chart below, crude oil (the black line) rallies each time speculators' positions (the blue line) drop to around 200,000 futures contracts. And it stalls or drops when speculators get extremely bullish. In the past, "extremely bullish" was around 300,000 contracts. But for the past three or four years, it has been closer to 400,000 contracts.
On December 27, 2016, oil speculators were more bullish than ever before. They held a total of 503,000 futures contracts. Last week, though, the months' long rise changed direction. Speculators reduced their long positions by about 4,000 contracts.
As Ben noted, a 4,000-contract decline may not sound like much. But history suggests when speculators stop buying, oil prices often start falling...
Last year, we issued two oil warnings based on similar sentiment extremes. After our June 23 warning, oil prices fell nearly $10 per barrel, a 20% drop. After our October 24 warning, oil prices fell nearly $9 a barrel, a 17% drop.
We're likely about to see another big move.
Switching gears, we've heard from some concerned readers lately...
Some of you are worried about our Big Trade strategy, designed to profit from weakness in the corporate-credit markets.
These readers are wondering if Donald Trump's victory – and the pro-growth, pro-inflationary policies he's promised to pursue – has changed Porter's views about a coming credit crisis.
In a word, no...
In the latest issue of Stansberry's Big Trade, published Tuesday, Porter and his team updated subscribers on their latest thoughts on the situation. From the issue...
Nothing that has happened in the past two months has unwound the problems that will eventually upend our economy. But the rally is giving us an opportunity.
Of course, Trump is promising huge tax cuts and a business-friendly regulatory regime. That prospect has put wind in the sails of many companies and sectors... And economic indicators have been improving. In our flagship newsletter, Stansberry's Investment Advisory, we have lightened up on our short positions. We think it is now time to shift more of that portfolio to the long side.
But that doesn't change our strategy here at Stansberry's Big Trade...
As they noted, the recent Trump rally hasn't changed the big problems they've been tracking...
Even if Trump's policies can boost the economy, they can't prevent the credit cycle from turning over. More from the issue...
Once debt levels have gotten too large, a purge is inevitable. And as we've covered in recent weeks and months, there is clear evidence that Corporate America has reached debt saturation...
Consider the Russell 3000 – an index of large-, mid-, and small-cap stocks in the U.S. For this broad group, the level of net debt (debt minus cash) has soared relative to earnings. Excluding financial stocks, the median net debt-to-earnings (specifically, earnings before interest, taxes, depreciation, and amortization, or "EBITDA") is around 2. This measure tells us how leveraged a company is... and leverage in the Russell 3000 has never been higher.
As the chart below shows, one of President Obama's legacies is an unprecedented surge in corporate leverage:
As Porter has explained many times, companies across all sectors have taken advantage of super-low interest rates to issue record amounts of debt... meaning a massive wave of defaults is approaching.
Again, while a credit crisis is unavoidable, the timing remains uncertain. This is why they've repeatedly recommended patience and discipline in building positions. They also noted that despite worries to the contrary, the recent rally has created even better conditions to take advantage of this strategy...
Remember... lower volatility translates into lower premiums on put options. In other words, it's cheaper for us to get into our put positions. We will continue to build out our portfolio and patiently wait to be rewarded.
Keep in mind that the companies that we are focusing on are already doomed. These companies are riddled with debt and have no way to reliably pay it back. Many of these companies will fail even if the economy flourishes. In fact, a quickly growing economy may cause their demise... because they can't withstand the higher interest rates that will come with it.
These imperiled companies are the ones we target in Stansberry's Big Trade. We look for broken businesses and unsustainable debt loads. And we want to see a large mispricing between those weak fundamentals and the company's equity market cap.
One last note before we sign off today...
If you haven't yet reserved your spot for tomorrow night's must-see online event, time is running out...
As you've like likely heard by now, Porter, Steve Sjuggerud, and Dr. David "Doc" Eifrig will be going "on air" live from our Baltimore headquarters to reveal our brand-new Stansberry Portfolio Solutions. And we can't wait for you to see what we've created.
Stansberry Portfolio Solutions is unlike anything else we've ever done in the 20-year history of our business. It will finally take all the guesswork out of putting together a safe, diversified portfolio... and will make it cheaper and easier to make money with our research than ever before.
Again, this event starts promptly at 8 p.m. Eastern time tomorrow, and is absolutely free for all Stansberry Research readers. We hope to see you there. Click here to reserve your spot now.
New 52-week highs (as of 1/10/17): Apple (AAPL), American Express (AXP), Bank of Montreal (BMO), CommScope (COMM), BlackRock Floating Rate Income Strategies Fund (FRA), Nuveen Floating Rate Income Opportunity Fund (JRO), and Shopify (SHOP).
In today's mailbag, several more subscribers share their 2016 results... and another has a complaint about our Stansberry's Big Trade service. Send your questions, comments, and criticisms to feedback@stansberryresearch.com. Good or bad, we read them all.
"Dear Porter, since I'm so new to your Alliance service I can't address long term with it, but I can say that I'm more than a little frustrated to have access to all of it and keep reading of 'after the fact' successes. Though I spend one to three hours a day here at the computer it isn't without interruptions as I have a normal bucket of activities besides my investment account.
"For 2017 I set your publishing schedule on my screen so I see it everyday and am trying to address your work by that, but there are so many emails coming through that I'm still not able to keep ahead of all that is coming down the pike so am in hopes that your upcoming announcement will help alleviate my 2016 issues. As for 2016, I feel that I did figure out a lot of things; selling puts made more than 25,000 in Apple, my biggest gain, Stansberry Venture was next, and probably the most important thing is I subscribed Lifetime to TradeStops and am learning little by little how to rebuild my portfolio.
"It is clear that a small investor like myself can be much more nimble and I feel that I'm beginning to grasp that which allows me to feel a little more comfortable with my investment in you and your services. At the age of 76 this is a new and interesting world and I hope to have enough time to make it solid part of my estate. Thanks." – Paid-up Stansberry Alliance subscriber Lee Hershberger
Porter comment: Lee, I hope you'll tune in for the webinar Thursday night. As an Alliance member, our new service will be free for you to access. And, as you'll see, we're dedicating an entire new group of analysts and our top writers in an effort to solve this problem. What I can promise you is this new service will make using all of our research easier than ever before. Managing your portfolio should take less than 10 minutes a month. You can reserve your spot right here.
"Porter and team, the following dissertation is a brief synopsis of my journey with Stansberry Research. I saw an ad on Fox News one day and ordered America 2020. I started small with Stansberry's Investment Advisory and began adding subscriptions one by one. I started with only $4,000 in a brokerage account and would qualify as one of those guys you have said 'shouldn't be using this research unless you have x amount.' Call me stubborn. I did well in the last gold uptrend and am now sitting on about $17,000. My mortgage will be paid off this month and I'll have an extra $2,000 to continue to invest. I pulled a Sjuggerud and took out a loan on an investment... namely the Stansberry Alliance. I was nauseated for about 24 hours and now feel like a member of an elite club. Quite pathetic with only $17k to my name, but excited nonetheless.
"Out of everything I do on a daily basis, there is nothing I look forward to more than the next newsletter [or] email... I try to be a student of your 'teaching' (you know what I mean) in every way. I've also subscribed to TradeStops. I've done very well in the options market thanks to Jeff Clark, Doc Eifrig, and DailyWealth Trader. I'm working my hardest to do the right thing. On a cop's wage with 7 kids, it's very difficult. But I'm grateful to you and your team of analysts to guide me through this. I know you're very busy and will probably not have the chance to read this personally, but I just wanted to take the time to say 'thank you.'" – Paid-up Stansberry Alliance member Robert H.
Porter comment: Robert, you're welcome, and I'm very humbled by your remarks. I never forget that there are people depending on our work.
"Dear Mr. Porter Stansberry, the Big Trade has severely damaged my high respect for Stansberry Research. This product involved more than 'speculative' aspect hinged on political outcome rather than the fundamentals. The Dirty Thirty (DT) looks more like Shiny Thirty now. I am losing over $1,000 in trade so far, on top of my subscription... TradeStops triggered the GM at 25% stop-loss. Not only [are] many of DT stock prices higher than the start (Nov 15, 2016), the 9 out of 30 stock options will be worthless within 3-5 months this year unless they drop by 30%~40%. To avoid any serious consequences, should Stansberry Research provide a revised list or some damage control rather than holding till the last minute?" – Paid-up subscriber Henry K.
Porter comment: Henry... we stressed again and again that patience and diversification across positions and time would be required for success with this product. Nothing about our outlook for this portfolio has changed. And so we only have three positions in our model portfolio. For legal and liability reasons, we can't offer you individual advice. But I'd note that you're clearly not using our research as we intended.
"Happy New Year, Porter! I'm excited about the big changes coming to Stansberry Research this year. For a long time, I've felt that you should focus your business' efforts on a smaller, more appreciative, 'longer-armed' group of subscribers. For years, I watched you pull your hair out when people didn't 'get it' or expected all your work and knowledge for free. That has to wear on anyone over time, so this new direction gets me excited about seeing the old Porter again 🙂
"I'm also excited to see Portfolio Solutions and the Newswire. As much as I appreciate and enjoy digging for all the related info myself, this will be very helpful when I'm short on time, so thank you in advance for that. January 12th can't come soon enough!
"Regarding you being too bearish on the stock market in 2015/2016, no worries. Porter, I know some subscribers don't understand this, but it is completely ok for you to be early/wrong/conflate inevitable with imminent. This is a very small price to pay for hedging our overall portfolio and your work on [Stansberry's Credit Opportunities] has more than made up for that missed call. All of the stark warning signs were there at the time and you weren't the only analyst worried (Jim Rickards, Bill Bonner, Jim Rogers just to name a few others). I'm actually thrilled, because it means stocks, bonds, real estate, etc. continue to do well and that is where the vast majority of our capital is (or should be, anyway). I'm happy to report that I was following your asset allocation model and did very well in 2016! Thank you!
"I'm anxious to see what you guys have been looking forward to for a long, long time! 2017 will be a great investing year. Another sincere thank you for your unwillingness to give up until this horse 'drank!'" – Paid-up Stansberry Alliance member Jesse Haro
Regards,
Justin Brill
Baltimore, Maryland
January 11, 2017