Why Stock Prices Don’t Matter
More bad news for autos... Ford's profit plunges... Why there's more pain to come... A great new interview with Steve Sjuggerud... Don't miss Steve's 'emergency briefing'... In the mailbag: Why stock prices don't matter… P.J. O'Rourke: Recapping Trump's first 100 days in office...
The bad news for the auto sector continues...
This morning, "Big Three" automaker Ford Motor (F) reported a 35% decline in first-quarter earnings, due to rising costs and falling U.S. sales. As the Wall Street Journal reported...
The No. 2 U.S. auto maker on Thursday reported profit of $1.6 billion, down from $2.5 billion in 2016's first period, when strong demand for a newly redesigned F-150 pickup truck helped Ford post its best quarterly operating profit in history...
The Dearborn, Mich., auto maker faced headwinds at home and abroad with lower sales in China, an unfavorable exchange-rate impact in Europe because of Brexit and a tougher market in the U.S., where new-car demand is cooling after seven years of uninterrupted growth.
Ford also said it expects used-car prices to continue to decline significantly this year.
Regular Digest readers know we believe this trend is just getting started...
As Porter explained in the April 7 Digest...
The average new car price (about $35,000) is the highest price ever. Compared with average wages (about $50,000), cars are vastly more expensive than ever before. So how have Americans been driving record numbers of new cars? Two ways: leases and very easy credit policies.
Since 2014, we've been warning that auto-lending standards were far too loose and that rising defaults would sooner or later greatly reduce demand for new vehicles (and wreck the balance sheets of auto lenders). Were we right?
The value of auto loans that are at least 30 days in default currently totals $23 billion – up 14% in just the last year...
The automakers themselves have been leasing a record percentage of their new-car sales (30%). That seems great until all those cars come back to the dealers. Off-lease used-car supply has doubled since 2012 and will continue to increase by another 25% over the next two years. Banking giant Morgan Stanley believes this will cause a 50% drop in used-car prices.
This week, True Wealth editor Steve Sjuggerud was a guest on The Meb Faber Show...
As you may know, this is our friend Meb Faber's free weekly podcast. Meb is the co-founder and Chief Investment Officer of Cambria Investment Management, and one of brightest investment minds we know.
If you're a fan of Steve's work, you don't want to miss this episode. This wide-ranging conversation covered a ton, including...
How Steve got started in finance... how he developed his approach to investing... what Steve is seeing in the investment world today... his latest thoughts on stocks, bonds, housing, and gold... the biggest mistake his subscribers make... and much more.
Check it out for yourself right here. You can also learn more about Meb and his podcast at www.MebFaber.com.
Steve is also hosting a special live briefing for Stansberry Research readers next week...
As regular Digest readers know, Steve is incredibly bullish on China today. But he says there's a new "wrinkle" to the story...
In short, three recent changes have "fast-tracked" Steve's big prediction. He says this story could play out even sooner than he originally believed possible.
Next Wednesday, May 3 at 8 p.m. Eastern time, Steve will be going live on-air to explain it all...
He'll explain why you're not hearing much about this news in the financial media... why President Trump is "powerless" to stop what's coming... and what this situation means for his "Melt Up" prediction for U.S. stocks. Steve will even give you the name and ticker symbol of one of his favorite China recommendations just for attending.
This event is absolutely free for Stansberry Research readers. Simply click here to reserve your spot.
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New 52-week highs (as of 4/26/17): American Financial (AFG), AMETEK (AME), Cheesecake Factory (CAKE), Chipotle Mexican Grill (CMG), Facebook (FB), Cedar Fair (FUN), short position in GGP (GGP), Alphabet (GOOGL), Nuveen Preferred Securities Income Fund (JPS), PowerShares S&P 500 BuyWrite Fund (PBP), Sanofi (SNY), and Two Harbors Investment (TWO).
In today's mailbag, successes, failures, and questions from new subscribers. Send your notes to feedback@stansberryresearch.com. And be sure to read on past the mailbag for the latest essay from Digest contributing editor P.J. O'Rourke, who recaps President Trump's first 100 days in office.
"Aloha! I have been a subscriber since 2010... At the time most of the target stocks were out of range but patience pays off as Johnson & Johnson finally dropped within range in August of 2015 and was bought on an intra day low of 97.48 (now trading at 123.92 + dividends). Second example... Apple dropped into range last May and was also bought on an intra day low of 93.50 (now trading at 144.53). Setting a target buy price sometimes takes years to play out, but is worth it in the end. I think, like real estate, profits are made on the buying end!" – Paid-up subscriber Tim Means
"Hello Porter, I didn't buy AFSI on your first recommendation, but when you got stopped out I read your analysis and decided to jump in for 17.25, a huge discount to your buy-in. Within days it's trading above 22 and I feel like I made a genius move. Well, you know what happened since. Serves me right for taking the other side of your trade!" – Paid-up subscriber Marc E.
"Not that I have the money to afford your high end products but for the first time in my life I'm speculated on the short side. From other Digests or daily newsletters we get, I know Porter has been mentioning [Ford] as part of the Dirty Thirty. As I saw it said do not pay more than 0.55 and it was .59 at the time so I put it aside. Well today I noticed that Ford is reporting tomorrow and I just saw those options were under 0.50 and so I jumped on board. Hopefully it works as well as when you gave us all the info on Santander Consumer 18 months ago and I profited from that as well about 4 points before I covered (though I could have made 6, SC is trading above where I covered today). Regards." – Paid-up subscriber Dave D.
"Many of us are small time investors with limited amounts to put into the market. When a stock sells for more than $20/share, we can only buy 10 to 50 shares if we want to follow your advice of maintaining a balanced portfolio. If we've taken the step of signing up for some of your newsletters, could you 'throw us a bone' now and again? Give us small-time players, who are just trying to improve our bottom line a little before we have to retire, some guidance. I enjoy the insights, observations, commentary, advice, and prognostication in the letters to which I subscribe. I'm a new customer, so I'll let you know how I do in a few months. The terminology and myriad ways of investing have me somewhat buffaloed. I'm doing a lot of reading!" – Paid-up subscriber David L.
Brill comment: Thanks for the note, David. You aren't alone – many new investors worry about share prices. But the reality is, they really aren't that important. All things equal, a stock that trades at $1,000 per share can rise or fall just as much as a stock that trades at $10 per share. A simple example will show why...
Consider two companies – Company A and Company B. They are identical in virtually every way. They produce the same products, earn the same revenues and profits, trade at the same valuation, and have the same market capitalization ("market cap") of $1 billion.
The only difference is that they have issued a different number of shares to investors... Company A has 100 million shares outstanding, while Company B has 10 million shares outstanding. Simple math will show you Company A would trade at $10 per share ($1,000,000,000 / 100,000,000 = $10), while Company B would trade at $100 per share ($1,000,000,000 / 10,000,000 = $100).
If you usually invest $1,000 in a position, this means you could buy 100 shares of Company A ($1,000 / $10 = 100), while you could buy just 10 shares of Company B ($1,000 / $100 = 10). But again, both Company A and Company B are the exact same investment.
Suppose these companies perform well and their market caps rise from $1 billion to $2 billion. If you had originally purchased Company A, your 100 shares would rise from a nominal price of $10 to $20. Your $1,000 position would now be worth $2,000, a gain of 100%. On the other hand, if you had bought Company B instead, your 10 shares would rise from a nominal price of $100 to $200. But again, your $1,000 position would now be worth $2,000, a 100% return.
As you can see, the nominal price of a stock tells you absolutely nothing about its actual value or likely returns. In most cases, it simply doesn't matter.
There is one exception: Most traditional brokers won't allow you to buy partial or "fractional" shares. So if a company's nominal share price is higher than your maximum position size, you won't be able to invest. For this reason – and because of the common misunderstanding we just discussed – many companies will "split" their stock whenever the nominal price gets expensive. This is why shares of many giant companies like Coca-Cola (KO) or Wal-Mart (WMT) still trade below $100.
"Good day all – I have a question for you about trailing stop losses. I've been very good and mind my trailing stops; this has saved me from some big losses. But sometimes I kick myself as I see a stock soar after I've got out. An example – Northern Dynasty which is looking almost exponentially 'up' now. So my question is – In your experience, at what point would you get back into a position, if you've recently sold it having hit a stop point? Do you have any techniques or self-discipline rules that you'd normally apply? (eg. Don't even look at it again for six months, etc./?) Cheers!" – Paid-up subscriber Mat
Brill comment: In general, we recommend exactly the strategy you mention... If you get stopped out of an investment position, you should only consider re-entering that position after a six-month "cooling off" period.
This is because most folks get emotional about losses. Waiting six months allows you to reassess the opportunity rationally. Often, you'll see things you may have missed in your initial analysis.
Of course, this means you'll sometimes miss opportunities like you mention. But you'll also protect yourself from catastrophic losses that can wipe out your portfolio. That's why we use stop losses in the first place.
Ultimately, it's your decision. The important thing is to find a strategy that removes emotion from the process and limits your risk... and then stick to it no matter what.
Regards,
Justin Brill
Baltimore, Maryland
April 27, 2017
Trump's First Hundred Days in Office – and the World Hasn't Ended
In the words of the president of the United States himself, we are about to reach "the ridiculous standard of the first 100 days."
To my mind, what's been really ridiculous about the first 100 days is the way Trump has been treated by his opponents – as if he's some bizarre and alien character who inexplicably rose to the highest office in America.
In fact, Donald Trump is probably the most American regular Joe we've ever elected – with all the typical "best of" and "the rest of" regular Joe qualities.
Yeah, he's full of baloney sometimes, but he's full of patriotism, too... He's an old grouch about the way things are in this country, but he's a downy-cheeked optimist about the way things could be... He loves his family, even if – like many of us – he's a divorce or two short of perfection in this regard... He's lousy at explaining himself. And aren't we all? Americans should, every one of us, have "never complain, never explain." tattooed on our Twitter thumbs... Trump's decisive. Maybe he's over-decisive. As my wife says about me: "Often wrong, but never uncertain."
I'm an American regular Joe myself. Trump wasn't my ideal pick for president. But I wouldn't have been my ideal pick for president, either. (Unless maybe the only other choice was Hillary.)
So we have an American regular Joe in charge. And when I look at major news outlets (the Wall Street Journal and Fox News sometimes excepted), all I see is that an American regular Joe can't do anything right.
I swear, if Trump cured cancer, the headline in the New York Times would be: "Heart Disease Kills More People."
But as far as I can tell, Trump's doing OK. A few ups, a few downs. Some new administrations have done better. Some (Obama's!) have done much worse.
Trump didn't appoint his golf caddy, his masseuse at Trump International Hotel, or the guy who gold-plates his bathroom fixtures to his cabinet.
Most of Trump's appointments have been good. Some have been brilliant... such as Supreme Court Justice Neil Gorsuch, National Security Advisor H.R. McMaster, and Secretary of Defense James Mattis.
And I'll take Rex Tillerson any time over Obama's Secretaries of State – Mrs. Bossy Pantsuit and Mr. Snoot.
White House Chief Strategist Steve Bannon has some people worried. He may be a bit of a cracked egghead. But Bannon is the main intellectual force in an administration that – in true American regular Joe fashion – has no use for intellectuals. So Steve's pissing in the wind.
The main beef against Trump appointees seems to be that they have conflicts of interest concerning their businesses and investments. Good for them! At least they have businesses and investments. As opposed to Obama's appointees who were a bunch of out-of-work know-it-alls whose sole business was bossing everybody in America around.
The other beef about appointees is that Trump has set the foxes to guard the henhouses – notably Rick Perry at the Department of Energy, Betsy DeVos at the Department of Education, and Scott Pruitt at the Environmental Protection Agency.
Well, it's all right to set the foxes to guard the henhouse when you hate the chickens... Especially if the chickens are huge, ferocious, regulatory predators. (Birds are descended from dinosaurs – especially the dirty birds of bureaucracy.)
How about the rest of the Trump 100-day record?
TV talking heads, op-ed pundits, and other pests were in a frenzy of concern that Trump would get in bed with the Russkis. If so, Donald slipped between the sheets with 59 Tomahawk missiles concealed under his negligee.
Putin is probably wishing he had done his election hack the other way around, in hope of getting another "reset" button like the one he received from Secretary of State Hillary Clinton in 2009.
Yes, Trump backtracked on labeling the Chinese as currency manipulators. Fine with me, if that's what it takes to get China to kick the crazy North Korean fatso Kim Jong-un in his ample pants seat and rename him "Kim Jong-none."
Besides, as every reader of the Stansberry Digest knows, all governments manipulate their currencies.
Yes, Obamacare repeal-and-replace legislation failed... and that's a good thing. The Republicans had eight years to come up with a simple, common-sense way to protect Americans from catastrophic health care costs. Plus, every conservative and libertarian think tank in the country had an off-the-shelf, "close enough for government work" plan ready to go.
Instead, we got the unpalatable American Health Care Act. The "failure" of AHCA was like the failure of a toddler to get under the sink and drink bleach.
As for Trump's executive orders, most look good... Mandated reviews of, among other things, international trade deals, Dodd-Frank banking regulations, and Obama's Clean Power Plan that depends on fair-weather solar and fresh-breeze wind when in the still of the dark, cold night, we may need coal.
Other orders he has put in place...
- A top-to-bottom audit of the executive branch: Pull the IRS trolls off the Tea Party and sic 'em on the West Wing.
- The "Two for One" rule: When federal agencies introduce a new regulation, the federal regulators have to eliminate two old regulations or go get a real job.
- The federal government hiring freeze: It can't get too cold in that moldy fridge.
- Approving the Keystone XL pipeline: It's a gusher!
So far, the Trump tax-reform program has what might be called an "underpants problem," otherwise known as "The BVD Difficulty: Bold, Vague, and Doomed."
My only significant complaint against Trump is the anti-immigrant stuff. Kick the criminals out, by all means... But I don't like the general scapegoating of immigrants. We're a nation of immigrants. Even Native Americans arrived from Siberia and presumably were processed at some sort of Arctic Ellis Island staffed with saber-toothed tigers.
But I blame America's welfare and entitlement programs for anti-immigrant feelings more than I blame Trump. Almost all of us came here as poor people, the way modern immigrants do. Poor people used to be an asset. Poor people dug America's canals, laid America's railways, paved America's roads. And in the process, they became un-poor.
Now, what with the cost of welfare and entitlement programs, poor people are a liability. Under our modern system, Abraham Lincoln's family would have wound up in an Immigration and Customs Enforcement detention camp. And plantation-bred spoiled rich kid (and later Confederate Secretary of War) John C. Breckinridge would have been elected president.
So ease up on the immigrants, Donald... and bear down on the entitlements.
One more thing, Mr. President. You're going to Mar-a-Lago too much. Not that I mind you being out of Washington. We wanted a chief executive who was a Washington outsider... And now we're going to complain because he's outside Washington?
It's not that... or the Secret Service expense... or the wining and dining of foreign big shots at the private club you happen to own.
It's just that I have friends in Palm Beach. They fly in and out of there. They are sick and tired of Palm Beach International Airport being closed down every weekend for security reasons.
If you're going to be an American regular Joe president, you don't want a bunch of other American regular Joes mad at you because they can't use their Gulfstream G550 private jets. Mr. President, take the train.
Regards,
P.J. O'Rourke