Why Small-Cap Stocks Could Soar
Has Europe turned the corner?... These hated stocks could be even cheaper than they appear... Why small-cap stocks could soar... Malls are circling the drain... A rare speculative opportunity from Dave Lashmet... P.J. O'Rourke: Look, don't listen, to Trump...
It's one of the most important "macro" trends we're following today...
Last fall – even before Donald Trump's election victory – data started to show inflation was stirring for the first time in years.
In the months since, inflation – as measured by consumer prices - has risen to multiyear highs in major economies around the world.
Even Europe – which has slipped in and out of deflation since the 2010 euro crisis – has now joined this trend. In fact, in Europe's biggest economy (Germany), the inflation rate has already jumped above the European Central Bank's long-held target of 2%.
And now, analysts are starting to notice...
In a letter this week, equity strategists from investment bank Citigroup said they now expect European earnings growth for the first time in three years. They believe earnings could jump more than 10% this year.
More important, unlike recent years where bullish European analysts could cite little more than the promise of additional monetary stimulus, this forecast is based on signs of higher growth and inflation. As they wrote...
Despite political headlines, there are signs of macro improvement in Europe and across the world... We think this could contribute to broader sentiment change across the investment community.
In other words, European equities are clearly cheap and hated. But they could soon be even cheaper than they appear today... And this could be the catalyst that brings investors back to these stocks for the first time in years.
Regular Digest readers know our colleague Steve Sjuggerud recently turned bullish on Europe, too...
In fact, as we explained in the January 19 Digest, he believes a "stealth" bull market has already begun...
European stocks check off all three of his favorite investment criteria: they're cheap, they're hated, and they just started an uptrend.
And while U.S. and European stocks have performed similarly over the long term, he noted Europe has significantly lagged the U.S. over the past 10 years. Steve believes these stocks could rise by triple digits as Europe plays "catch up" over the next few years.
If Citigroup is correct, European stocks could rally even more quickly than he originally predicted.
Of course, here in the U.S., Donald Trump's election has only increased expectations of higher growth and inflation...
If you attended our big Stansberry Portfolio Solutions event earlier this month, you know this is why Porter is bullish on small-cap U.S. stocks today. As he explained, small caps have historically outperformed as growth and inflation pick up.
But that's not the only reason to believe small-cap stocks could outperform under Trump...
As we've discussed, the new president has proposed import tariffs and other "protectionist" trade policies.
These policies are controversial and could lead to unexpected consequences for the global economy. But they're likely to be a boon for smaller U.S. companies, which tend to do most of their business domestically.
Perhaps more important, as we noted yesterday, Trump has already made cutting burdensome government regulations a top priority for his new administration. And here, too, smaller firms have the most to gain.
For example, according to data from the National Association of Manufacturers, the average company in the U.S. pays an incredible $20,000 per employee per year to comply with federal regulations.
That number is shocking... but it gets worse. Because companies generally must meet the same regulatory standards regardless of size, small companies shoulder most of the burden.
As you can see in the chart below, the smallest firms pay more than $30,000 per employee per year...
That's three times more than average... and six times more than the largest firms.
According to a survey of these companies, more than 80% would otherwise allocate this money to additional business investment and job creation.
In short, if Trump slashes regulations as promised, small business could boom like we haven't seen in years... and small public companies could soar.
Switching gears, the problems for America's troubled shopping malls are only getting worse...
According to new data, more and more mall landlords are simply walking away from struggling properties. As the Wall Street Journal reported on Tuesday...
As competition from online shopping batters retailers, some of the largest U.S. landlords are calculating it is more advantageous to hand over ownership to lenders than to attempt to restructure debts on properties with darkening outlooks. That, in turn, leaves lenders with little choice but to unload the distressed properties at fire-sale prices.
In the period from January to November 2016, 314 loans secured by retail property were liquidated, up 11% from the same period a year earlier, according to data from Morningstar Credit Ratings.
"We're seeing a boatload of these kinds of properties coming to market," said James Hull, managing principal of Augusta, Ga.-based Hull Property Group, which purchased five malls from foreclosure sales in 2016. "There have been some draconian losses for the enclosed mall business."
This should come as no surprise to Digest readers...
As we've discussed, in general, these indebted malls have two choices...
One, they can restructure or extend their debt. This is becoming more and more difficult... Lenders aren't blind to the realities facing the brick-and-mortar retail business. Or two, they can simply hand over the buildings to their lenders.
Expect to see this trend continue – and accelerate – as the troubles for retailers mount. As Porter predicted in the April 29, 2016 Digest...
It's great that Amazon's earnings are soaring, but what that also means is malls are dying. Sooner or later, all of this empty commercial space will begin to hurt commercial real estate in general. Those malls are going to end up as office complexes and apartments... something nobody has figured out yet.
Before we sign off today, we'd like to alert you to a rare speculative opportunity...
It comes from our colleague Dave Lashmet, editor of Stansberry Venture, our elite, small-cap technology advisory.
But first, a word of warning: Like all Venture recommendations, this opportunity is not appropriate for most investors. And it's certainly not for your rent money.
But if you're an experienced investor, it could be the single best speculative opportunity you'll see all year.
You see, Dave has identified a tiny biotechnology company in an unusual situation...
With this opportunity, you're NOT betting on whether the firm's clinical drug trials will be successful. The trials are already complete, and the results are in. This company's new drug works. The U.S. government has even issued a patent for it.
Instead, you're simply betting this new drug will be approved when the U.S. Food and Drug Administration ("FDA") meets to review it on March 30. If the drug wins approval – and Dave believes it's a near certainty – this tiny company's shares could soar.
Why? Because this new drug promises to be a blockbuster. It's essentially the first legitimate "cure" for one of the most prevalent diseases in the world today.
This disease is estimated to afflict more than 50 million Americans, including nearly HALF of all adults over the age of 50. It's responsible for more days in the hospital for women than breast cancer, heart attacks, and diabetes... It's a bigger threat to men than prostate cancer... And it accounts for a mind-boggling $19 billion in health care costs every year. Yet most folks are completely blindsided by the diagnosis.
Dave's research suggests this drug could be as revolutionary as the discovery of statin drugs to lower cholesterol or beta-blockers to manage high blood pressure. And its pending approval could make today's investors a fortune.
But Dave doesn't think his Stansberry Venture subscribers will even have to wait until March 30 to see triple-digit gains...
Because this drug is so potentially valuable, he is convinced one of the largest pharmaceutical companies in the world will step in and buy this tiny firm outright... before the FDA review in March.
This could happen at any time... possibly as early as tomorrow... which means if you're interested in this opportunity, you must act quickly.
Dave has prepared a short presentation explaining all the details. Click here to view it now... or click here to read a printed transcript.
If you'd prefer to speak to someone about this time-sensitive opportunity, you can also reach our dedicated member services team at (800) 597-0611 during normal business hours, Monday through Friday, 9 a.m. until 5 p.m. Eastern time.
New 52-week highs (as of 1/24/17): Boeing (BA), Bank of Montreal (BMO), First Trust Nasdaq Cybersecurity Fund (CIBR), CONE Midstream Partners (CNNX), Alphabet (GOOGL), PureFunds ISE Mobile Payments Fund (IPAY), Altria (MO), Northern Dynasty Minerals (NAK), iShares MSCI Global Metals & Mining Producers Fund (PICK), Potash Corporation of Saskatchewan (POT), TransCanada (TRP), TTM Technologies (TTMI), and Global X Uranium Fund (URA).
Another busy day in the mailbag... Send your questions, comments, and concerns to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail. And be sure to read on past the mailbag for the latest on President Trump and the recent executive orders he has signed.
"Porter, I just wanted to tell you that your research and recommendations regarding distressed debt in [Stansberry's] Credit Opportunities has been outstanding. You explained the work and effort it takes to get into your recommendations perfectly. I had never bought bonds before, but was able to get into 6 of your recommended positions with solid results. It took several attempts to establish some of the positions, just as you described, but I am very happy with the results so far. Thanks." – Paid-up subscriber Ted S.
"Porter, I subscribed to Stansberry's Credit Opportunities soon after you started this service. I had never bought bonds, didn't understand bonds, thought they were a waste of time – but you changed that. Will I never buy a stock again? Well, I'll probably continue to evaluate and follow many of Dr. Eifrig's recommendations. And I may pick up one of Doug Casey's speculative choices every once in a while. But I would prefer to buy your bond recommendations. Please, please, please don't ever discontinue this service!" – Paid-up subscriber David S.
"Hi I never bought bonds before. I made a lot of money. Making the purchase was a little bit of a pain, but well worth it. And yes, I would be content to never buy a stock again... but of course I will. Thank you Porter..." – Paid-up subscriber Arthur S.
"Hi Porter & Co, the Credit Opportunities letter has been excellent. Because I have small accounts I have been able to only open two bonds positions where I could get single bonds. I also don't check prices every day (my fault) so I probably missed a few chances. But they have been very positive positions & I couldn't be more pleased. The beauty & simplicity of buying discounted bonds that your team have thoroughly researched & holding them till maturity, thus removing essentially all price risk is, astounding! After reading & taking to heart your recent allocations essay I look forward to this letter to help me re-balance my accounts & lower the risks considerably. You guys rock!" – Paid-up Stansberry Alliance member Bruce F.
"I was fortunate to be a member when [you published your last bond] newsletter and I did quite well. I was disappointed when that service was discontinued and had been hoping all these years that you would start another bond investing newsletter and voila, now we have Stansberry's Credit Opportunities. I have been successful in purchasing 8 of the different recommendations. My returns so far have been 11% appreciation of the underlying bonds plus the interest payments for a total of 14.6%. If you add in the appreciation of the NRP stock, then the total return equals 17.8%. The time period is hard to define since some bonds were purchased over a year ago and some as recently as last month, however, the time period for the entire portfolio would be approximately 1 year. Now you can see why I was so excited for the resumption of a new bond investment service. Thank you." – Paid-up subscriber Gary S.
"You asked for feedback about following the [Stansberry's] Credit Opportunities research, here is my experience:
"I have been a stay-at-home mom, out of the work force for over 20 years. My husband has always handled our investments and has been a subscriber of yours for many years. I've lost track of how many times I heard him say, 'I really wish you would help me with our finances.' It's not that I didn't have the time, I just never had any interest. Fast forward to last August. Our youngest was heading out of town for college again and our other child had just relocated out of state to begin his career. This time, I heard, 'I'd like you to help us with our finances, otherwise it's time to look for employment.' So we decided it would be prudent to purchase Credit Opportunities and start there. I read all of your instructions about how to make the trades, etc. and must admit, YES I was nervous – mostly about having to make those phone calls! I went back and read about 5 months' worth of previous issues and was ready to trade your current recommendation.
"I called our brokers bond desk, the following day and said, 'I'd like a price on a corporate bond.' The trader's reply was, 'CUSIP *******, right?' I said, 'Well yes.' Your latest newsletter had been published the previous evening and evidently the desk had already been flooded with calls that morning. He said, 'Well you are not going to get it at 'his' recommended price.' He then proceeded to advise me on the pitfalls of buying distressed corporate bonds based on someone's research for a good twenty plus minutes and suggested buying bond funds instead.
"I hung up the phone feeling a little discouraged. I then watched the price of the bond over the next few days on FINRA and about 2 weeks later, I called back, and with a certain degree of authority, said, 'I'd like a price on the following CUSIP******.' I was quoted a price slightly over your recommended buy up to price, but I was not to be discouraged this time and went ahead and purchased several bonds. That was at the beginning of October, and I have since purchased bonds for 3 additional corporations. Two of those were recent recommendations, [and] the third one I purchased on my own, before later realizing that just because something is on your watch list, we should be cautious until it is an actual buy recommendation. However, that one is a small position and I'm not too worried about it...
"In summary, I'd just like to say, that at first, yes buying bonds was scary and intimidating, but it makes a lot of sense if you purchase below par, and find good coupons. Your research is very thorough and your recommendation letters are very comprehensive. I called the day after your [latest] recommendation... and again, when the bond desk answered the phone and I said, 'I'd like a price for a corporate bond,' the guy [guessed the name correctly]. (Another flood of calls to them that morning, I suppose.) I got an acceptable price, below your buy up to price. I just had to quickly learn that when I call to make the trade, it is ME that is in charge and I don't let the desk people try to intimidate me or dissuade me.
"One last note, shortly after buying Credit Opportunities we were invited to become Alliance members before the last price increase. We have since been following the [Stansberry's] Big Trade newsletter and through research and videos on your website from Doc and Jeff Clark, I have taught myself to trade options. I have made several options trades in the past couple of months and find it very exhilarating. We are looking very forward to the release of Portfolio Solutions!!!
"With our access as Alliance members to so many newsletters, I am now reading as much as my husband, and he is happy to FINALLY be able to discuss the market with someone! I just want you to know that in about 4 months you've turned a stay at home mom into a bond and options trader who thoroughly enjoys reading your research with interest! Keep up the great work!" – Paid-up subscriber Suzie M.
Porter comment: Suzie, interesting story. I've heard similar stories from many subscribers. It's fascinating to me...
On our Stansberry's Credit Opportunities team, we have me (with about 20 years of experience in financial research), Bryan Beach (a former public company controller and Big Six firm auditor, CPA), Mike DiBiase (former Big Six auditor, CPA), Brett Aitken (a former debt-collection firm partner), Bill McGilton (corporate litigation/patent attorney), and not to mention about half a dozen full-time "associate" consultants who work with us, like Dr. David Eifrig, a former prop trader at Goldman.
Altogether, at least 100 years of experience in the financial markets (and probably a lot more) go into our reports. And yet... the guy who picks up the phone to execute your trade (and who consistently talks our subscribers out of our best advice) can't even afford to subscribe (I'd guess). Ironic, isn't it? Next time that happens, just show him our Stansberry's Credit Opportunities track record and ask for his.
Regards,
Justin Brill
Baltimore, Maryland
January 25, 2017
The Trump Presidency – Look, Don't Listen
Everybody's paying a lot of attention to President Trump. Everybody's looking and listening. But let's make sure we're paying the right kind of attention.
We should look, for sure. But I'm not so sure how much we should listen... because this is a noisy president.
All presidents are noisy. But usually the noise is high-flow rhetorical baloney rather than just-plain baloney about things like the size of the crowd at the inauguration.
Personally, I prefer plain baloney to what we were served by President Obama – baloney mixed with idealistic fruit salad and a nut fudge of liberal pieties.
But still, we should keep in mind that we have a president to whom we should apply the old "sticks and stones" playground adage.
Putting it in chief executive terms: Legislative sticks and regulatory stones may break my bones (or the bank), but words will never harm (or help) me.
So rather than listen to what President Trump has been saying, let's look at what he has been doing. What he has been doing is signing executive orders. Let's examine just four of them:
Curtailing Obamacare
President Trump directed federal agencies to "waive, defer, grant exemptions from, or delay implementation of" certain parts of Obamacare.
I have to hand it to Trump. With one executive order on his first day in office, he managed to show us something that the Obama administration had kept obscured for eight years. Trump showed us what Obamacare really is.
We can see what Obamacare really is because the parts of it that Trump waived are "any provision or requirement... that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, health care providers, health insurers, patients, recipients of health care services, purchasers of health insurance, or makers of medical devices, products, or medications."
That's all of Obamacare.
Obamacare was a cockamamie scheme – screwing up the market in health insurance at the expense of health care itself.
Obama's insistence on people getting insured for health care rather than getting health care was like making everyone install a burglar alarm and then put an ADT sticker in their window instead of locking their house.
Hiring Freeze on All Government Departments Not Engaged in National Security or Public Safety
Well, it's a start. But the federal government employs more than 2.8 million people. So this is a bit like closing the barn door after the horse... or rather, the jackass... actually, an enormous herd of jackasses... has run into the barn instead of away from it.
I'd rather have a smaller barn. But I like the hiring freeze for the result it will produce – which is none. The federal government will remain unresponsive, inefficient, and clumsy. The federal government is always unresponsive, inefficient, and clumsy.
The hiring freeze will produce the same result as the government "shutdowns" under President Clinton in 1995 and 1996 and under Obama in 2013. Also the same result as Vice President Al Gore's "reinvention of government." And the same as President Reagan's elimination of "government waste, fraud, and abuse." The federal government is unresponsive, inefficient, and clumsy no matter what.
Maybe this will give the Trump administration an idea for a novel approach to reducing the federal workforce. If government is unresponsive, inefficient, and clumsy no matter what, then fire the responsive, efficient, and agile people. Among 2.8 million employees, there must be some. They can get better jobs in the private sector and help the economy grow. It won't matter if they're fired. And the federal workforce will be reduced.
Withdrawal From the Trans-Pacific Partnership
The TPP trade deal was not necessarily a good deal.
Generally speaking, free trade is good. One country produces one kind of thing. Another country produces another kind of thing. They trade things and each country gets more different kinds of things.
But this theoretical mutual benefit is based on the assumption that there is free enterprise and economic liberty in the countries trading with each other.
Among the countries involved in TPP negotiations were Vietnam, Malaysia, Mexico, and Brunei. Economic liberty is badly distorted by corruption in most of these countries. Free enterprise is sorely oppressed by authoritarianism in some. The rule of law is not strong, reliable, or transparent in any.
What if you needed a new roof? And you gave the job to the lowest bidder? Then you discovered the roofing contractor was using indentured workers, forced labor, and 10-year-old children to nail your shingles... plus the shingles were made out of paper.
You'd be morally better off if you had paid more for your roof. Also, you'd be drier if it rains.
Giving the Go-Ahead to the Keystone XL Pipeline
The most important thing for America is our national security. For nearly a generation, the worst threat to our national security has been trouble in the Middle East. The Middle East is able to cause trouble because of its energy resources.
What if all the energy resources we needed were readily available at a reasonable price here in North America?
In that case, who do you think could go pound sand?
As I said, with President Trump, we should look more than listen.
And I have another reason for saying so. I'm reminding myself as well as Stansberry Digest readers.
I'm not a fervent Trump supporter. Although he's 70, he has a youthful – or to put it bluntly, immature – personality. The president of the United States is the nation's adolescent-in-chief.
I suppose this, like noisiness, is true of every president. The office of the presidency turns whoever occupies it into a sort of humongous teen – over-privileged, possessing more strength than sense, and thinking he's the center of the world.
I have three adolescents at home. And I've learned not to listen to them too much. What they have to say seems to go back and forth between the extremes of "I hate you!" and "Can I have $50, please?" with not a lot of substance in between. And I don't even want to think about what they tweet.
I do, however, watch my adolescents. I look carefully to make sure they're exercising a modicum of wisdom about the important things in life, engaging in some measure of moral thinking, doing a sufficient amount of their homework, and not swiping more than a few of my beers from the fridge.
So far, with our adolescent-in-chief, I like what I see. Plus, my six-pack is intact. This kid doesn't even drink.
Regards,
P.J. O'Rourke