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Porter Stansberry: My most serious market warning to date

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From Porter Stansberry, Editor, Stansberry Digest:

Friends, this is a difficult Digest for me (Porter Stansberry) to write…

Nobody likes to read bad news. But there are serious problems in the underlying fundamentals of our equity and credit markets. Rising interest rates are going to expose these problems, accelerating the inevitable end to the current credit cycle and this bull market in stocks.

I am more and more convinced that the next several years will be extremely difficult for most equity and bond investors.

I’m very worried that you are overexposed to these risks.

Please. Please. Please. Read this Digest carefully.

I don’t care whether you agree with me. What matters to me is that you get a complete and detailed warning about the serious risks that exist just below the surface in our equity markets. How much risk you continue to take is, of course, up to you. But unless you understand these risks, you can’t make informed decisions. And I doubt anyone else will be able to give you the information I detailed below.

(By the way, you have my permission to share this week’s Digest with anyone you think should be aware of these problems. I hope some of your friends will choose to subscribe. But even if no one does, I still believe this information should be widely known among all investors.)

What’s the big problem?

The extremely low interest rate regime of the last decade (created by the Federal Reserve manipulating the credit markets) encouraged many companies that should have failed to continue to borrow money. As a result, there are now several hundred publicly traded corporations that cannot possibly repay their debts. These zombie companies cannot even afford their artificially low interest rates.

Several hundred American companies are destined for bankruptcy or are on the verge of it. The stock market hasn’t factored in these problems, at all.

Nobody has paid much attention to these zombie companies yet, not even when major companies like toy retailer Toys “R” Us, suddenly liquidated. (When is the last time you can remember a major U.S.-brand being liquated? Not just bankrupt, but every last item being sold off at an auction?)

The market is going to focus more and more of these zombie companies for one simple reason: Interest rates are, for the first time in almost a decade, rapidly increasing. The interest rate on the 10-year U.S. Treasury note has been going up for almost a year and recently broke past 3%. This is a key level, and it implies grave danger lies ahead for highly indebted firms. Many companies cannot refinance their debts at these levels.

I’ve included a list of the biggest zombie companies below.

So if you do nothing else, read what I’ve written below. Learn what indicators will appear as the credit cycle rolls over. Know what stocks to avoid at all costs. I’ll show you 10 of them in this Digest essay…

About the problems in the markets…

Our equity and credit markets suffer from serious, fundamental problems. These problems are big enough that I’m growing increasingly concerned that future investment returns, in both stocks and bonds, will be extremely poor.

The heart of the problem is, far too many American corporations have borrowed more money than they can possibly afford to repay.

Here’s an example of what I’m talking about…

General Electric (GE) was, at one time (the early 2000s) the most valuable corporation in the world. It manufactured everything from light bulbs to jet engines. It was essentially a corporate version of America itself. The financial excesses of the past 30 years crippled this business. Its managers engaged in every kind of accounting and financial hijinks you can imagine. They left this iconic American company saddled with more than $60 billion in net long-term debt. (Please note: That’s net debt – after subtracting all of GE’s cash.) Even with record-low interest rates, GE still faces interest obligations of almost $3 billion per year.

And here’s the problem: These interest rates are likely to rise a lot faster than GE’s ability to grow earnings. Currently, GE earns only $3.6 billion year, when measured by “EBIT” – that’s earnings before interest and taxes. If its interest expenses grow and its earnings don’t keep up, GE will have a difficult time paying its debts in its current structure.

And don’t forget, GE requires at least $7 billion a year in capital investments (capex) to maintain its facilities and position its businesses for future growth. In other words, while GE can do some things to avoid bankruptcy (like cutting its annual capex spending), it isn’t earning enough capital to finance both its debts and future growth. It is caught in a death spiral.

GE’s problems are now well known to investors because last year the company’s new CEO came forward and told everyone what had really been going on in the company. (We’d been reporting on GE’s weak financial position for years.) You can see what happened to the company’s stock price as these balance sheet issues became clear to the market.

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Yes, GE is only one company…

And it’s not as important as it used to be. But the business still has a $125 billion market cap. It employs nearly 300,000 people. GE’s troubles are going to matter, to both the markets and our economy. And unfortunately, GE isn’t the only big problem that’s lurking. Let me show you what I mean.

My friend Jim Grant, publisher of Grant’s Interest Rate Observer, recently published some research done by Bianco Research on the overall level of debt in the U.S. equity market. Bianco wanted to know how many more GEs (giant companies hugely encumbered by debt) were out there. So it asked a simple question. Based on the three-year average of cash earnings (defined by EBIT), how many U.S. firms can’t afford their debt service? Bianco found 14.6% of the S&P Composite 1500 (the 1,500 largest public companies in the U.S.) couldn’t afford the interest on their outstanding debts. That is, the three-year average cash earnings (EBIT) wasn’t big enough to cover their interest expense.

I don’t believe one in 100 American investors understands how big of a role new debt has played in the equity boom that we’ve seen over the last several years. Today, corporate debt in America is a new all-time high. American companies have never held so much debt relative to the size of our economy ever before.

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What do you think is going to happen if interest rates keep rising (which seems likely) or a recession hits?

Sooner or later, in one way or another, these problems will become clear to more and more investors – just like GE’s problems came to light over the last year. There will be catastrophic losses, unlike anything you’ve ever seen before. How do I know?

At the peak of the last big equity market bubble (2007), only 5.7% of America’s companies were in the same dire straits. That is, back in 2007, only 5.7% of America’s top 1,500 companies weren’t earning enough to cover their interest payments. The resulting bear market saw stock prices fall by 50% and led to a national bailout of the banking system. What will happen this time, when almost three times as many companies are in this critical financial position?

Here’s the part to remember…

I asked our analysts to put together a list of the 10 worst examples of big companies with horrible underlying fundamentals.

The list is below. Note, GE is in the best position. GE is still earning enough to afford its interest, but only just barely. The other companies on this list don’t make enough money to afford their current interest payments. Some of them wouldn’t make enough to afford their interest payments even if their earnings doubled (Sprint, SeaWorld Entertainment, Endurance International).

Keep in mind, these firms are only a small sample of the full problem in terms of the number of companies…

More than 100 major companies are in this poor financial condition. But my sample list isn’t small in terms of capital. These companies, collectively, represent almost $200 billion in market value. They hold $126 billion in debt, which costs $6.9 billion a year to service. That’s a 5.5% annual interest rate, collectively, for companies that aren’t creditworthy in any rational sense of the word.

With 10-year U.S. Treasury notes now paying 3% annually, who in the world is going to continue to finance these debts at less than 6% annually? No one. What about 8% annually? Doubt it. What about 10% annually? Maybe. But explain how these companies can afford higher interest rates (almost double what they’re paying now) when they can’t make ends meet at 5%? It won’t happen.

What will happen?

I don’t know. But what I do know is that investors in these stocks, and in a whole bunch more like them, are destined for severe disappointment. And that doesn’t bode well for investor sentiment, the market multiple, or the general level of the stock market.

What’s the most dangerous thing in the world to an aging bull market, made up of firms with a record-high level of debt? Rising interest rates. What do we see in the market today? Rising interest rates.

Horse, meet water.

Time is running out…

I use these pages (and my own newsletter’s recommended list) to educate, cajole, threaten, and bully people into doing smarter and safer things with their money. How many times have you seen me write “There’s no such thing as teaching, there’s only learning”? And how many times have I written “Horse, meet water”? How many times have you seen me essentially berate our customers, telling them “I know you won’t ever do this, no matter how obvious it is that you should“?

I don’t know how many people actually learn anything or how many people take my warnings seriously. What I do know is, ironically, our business tends to sell more subscriptions when investors are excited and doing a lot of risky (i.e., dumb) things with their money. And virtually every time investors get excited, a lot of people lose money. That’s what happened in the Internet stock bubble of 2000. That’s what happened in the real estate/commodity bubble of 2008. And that’s what happened – in a truly astounding way – during the bitcoin bubble last fall.

I know, this cycle is going to repeat. I just don’t know exactly when. But I’m praying that this time is different for our subscribers. Please listen to me. Time is running out on this bull market. You don’t need to sell everything, but lower your exposure to the equity markets to less than 60% of your portfolio. Put some of your capital some place safe. Buy some gold. Buy very safe bonds. Buy some local real estate that you know well and can always rent. Get out of debt. Follow your trailing stops. Raise cash when you stop out. Realize that over the next 12-36 months, the investors who win will be the ones who survive. You can choose to be one of them. You really can. But you need to act now.

I mentioned a few triggers to watch for…

The most important indicators and warnings will come from the corporate-bond market. The three most important indicators are:

  • The prices of junk bonds. As credit tightens, the prices of junk bonds will fall. You can watch junk-bond funds – like the Shares iBoxx $ High Yield Corporate Bond Fund (HYG) – to monitor these prices.
  • The interest rate “spread” between high yield debt and U.S. Treasury securities. As defaults grow, the increased risk will be expressed in much higher interest rates for weak borrowers.
  • The 10-year U.S. Treasury yield. If safe yields on government bonds reach 4% or more, there will be complete carnage in the corporate-bond market, where average rates to refinance outstanding debts will probably double.

We cover all of these fixed-income market indicators closely in our Stansberry’s Credit Opportunities service. And just so you know, default rates right now are near all-time lows. Nobody is afraid – yet.

I’ll do my best to keep you up to date as the default rate grows. For now, I’m looking for more situations like Toys “R” Us, where radically overleveraged, private-equity managed businesses fail because they’re simply denied any additional credit. That’s what’s going to happen… more and more often… until one of these deals blows up and triggers a general panic.

If I could tell you exactly when, I would. But there’s no doubt it’s coming.

Beat the rush. Prepare now.


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What the hell happened at General Electric?

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Few corporate meltdowns have been as swift and dramatic as General Electric’s over the past 18 months – but the problems started long before that.


From Fortune:

It’s a bad day for a CEO when he announces he’s retiring and the stock goes up. That was Jeff Immelt’s day on June 12, 2017. The news of his departure was in one sense no surprise – some investors and analysts had been urging his ouster for years – but it was also a shock.

He’d been General Electric’s CEO for almost 16 years, and outsiders were unaware of any specific succession plans or that ­Immelt, at age 61, had any intention of stepping down. Suddenly they were told that in just seven weeks he’d be gone as CEO (he remained nonexecutive board chairman an additional two months), to be succeeded by John Flannery, head of GE’s health care business and a 30-year employee. Investors didn’t need long to decide this was good news. The market was flat that day, but they bid GE stock up 4%.

Their optimism was at best premature. The stock closed at $28.94 on June 12 and has not reached that price since. As economies boomed worldwide and U.S. stock indexes soared, GE has collapsed in a meltdown that has destroyed well over $100 billion of shareholder wealth. Pounded by a nonstop barrage of bad news, investors are traumatized and disoriented. “They just can’t figure it out and don’t want to invest,” says analyst Nicholas Heymann of William Blair & Co. “This isn’t like surveying the landscape. It’s spelunking with no lights and no manual.” Analyst Scott Davis of Melius Research says some investors have become permanently disillusioned: “Many have told us they will never own GE again.”

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Retirees and employees who bought heavily into the stock are furious; some picketed GE’s annual meeting in April. Former executives are dumbfounded. “It’s unfathomable,” says one. “You couldn’t possibly dream this up. It’s crazy.” After all, this is GE, a corporate aristocrat, an original Dow component, the world’s most celebrated management academy, now revealed as a financial quagmire with a deeply uncertain future. Its bonds, rated triple-A when Immelt became chief, are now rated five tiers lower at A2 and trade at prices more consistent with a Baa rating, one notch above junk.

In response to this debacle, GE has repudiated its previous leadership with a zeal unprecedented in a company of its size and stature. Gone in the past 10 months are the CEO, the CFO (who was also a vice chair), two of the three other vice chairs, the head of the largest business, various other executives—and half the board of directors. The radical board shake-up “could be one of the most seminal events in the history of U.S. corporate governance,” says a longtime vendor and close student of GE.

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Immelt (left) and Flannery announcing the succession. Flannery would soon replace much of Immelt’s top team and strategy. Courtesy of General Electric.

Immelt declined to be interviewed for this article but sent Fortune a statement in which he cited accomplishments and said, “None of us like where the stock is today. I purchased $8 million of stock in my last year as CEO because I believe in the GE team. I love the company, and I urge them to start looking forward and win in the markets.”

Flannery’s strongest message is how completely he’s breaking with GE’s recent past. “The review of the company has been, and continues to be, exhaustive,” he told investors last October. Specifically: “We are evaluating our businesses, processes, [the] corporate [function], our culture, how decisions are made, how we think about goals and accountability, how we incentivize people, how we prioritize investments in the segments …  global research, digital, and additive [manufacturing]. We have also reviewed our operating processes, our team, capital allocation, and how we communicate to investors. Everything is on the table …  Things will not stay the same at GE.”

Inescapable conclusion: This place is an unholy mess.

Continue reading at GE…


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Investors have completely given up on this commodity

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From Steve Sjuggerud, Editor, True Wealth Systems:

It’s been beaten down, left for dead, and just forgotten.

When an asset underperforms for multiple years, investors tend to give up on it. They get burned and move on… at least for a while.

Today, we are looking at a commodity in that exact situation.

It’s down 44% since peaking in 2014. Investors want nothing to do with it… But history says a triple-digit jump is possible thanks to this extreme negative sentiment.

Here are the details…

When you think about commodities, you probably think of oil and gold… maybe even crops like corn and wheat.

Today’s commodity is a bit more obscure. It’s probably off your radar. Honestly, it’s probably off everyone’s radar.

We’re talking about hogs.

You see, hog prices have fallen dramatically over the past three years. The commodity is down 44% since peaking in 2014. And not surprisingly, investors want nothing to do with it.

It only takes a quick glance at the Commitment of Traders (COT) report for hogs to see this extreme sentiment.

The COT report is a real-time indicator that shows what futures traders are doing with their money. It’s a great investment tool. It shows us contrarian bets when futures traders all agree on an outcome.

When futures traders are all making the same bet, the opposite is likely to occur. Right now, futures traders are all betting on lower hog prices. Take a look…

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Their bets have only been this extreme a few times over the past decade.

We saw similar extremes in 2009, 2012, and 2015. Each extreme lead to dramatically higher hog prices in the following months…

From August 2009 through April 2011, the commodity jumped 134%. Then another similar setup happened in mid-2012. Hog prices bottomed shortly after and then rallied 85% in less than two years.

In mid-2015, investors gave up on hog prices again… right before the commodity soared 70% in less than a year.

These are incredible returns. But it’s what can happen when investors completely give up on an asset. Today, futures traders have given up on hogs once again.

One way to take advantage of this is through the iPath Bloomberg Livestock Subindex Total Return ETN (COWTF). The fund tracks the Bloomberg Livestock Subindex Total Return Index. Its main focus is on hog and cattle futures.

We aren’t officially recommending COWTF today. The uptrend simply isn’t strong enough. But this is a fantastic long-term setup. And when the uptrend returns, hog prices could potentially see triple-digit gains.

Crux note: Steve’s trading strategies cover every corner of the market – more than 40 different sectors – so readers will always have the opportunity to make money somewhere… even in hogs.

And only Steve’s True Wealth Systems subscribers can get immediate access to the team’s weekly Review of Market Extremes.

For more details, click here.


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Cramer’s charts suggest investors buy Akamai and sell Walmart

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In an emotional market where investors struggle to process the White House newsflow, CNBC’s Jim Cramer likes to fall back on the technicals to find actionable opportunities.

“In the stock market, emotional decisions tend to be bad decisions,” the “Mad Money” host warned. “So we need to do everything we can to check our emotions at the door. And that’s why, every week, we like to play off the charts.”

For Wednesday’s charts, Cramer turned to technician Marc Chaikin, the founder and CEO of Chaikin Analytics and the inventor of key technical tools like the accumulation-distribution line, the Chaikin volume indicator, the Chaikin oscillator and the Chaikin Money Flow.

Three weeks ago, Chaikin recommended three stocks on “Mad Money” based on his formula for finding winners and losers: Marathon Petroleum, EOG Resources and General Electric.

Since then, Marathon and EOG have gained 8.2 percent and 4.6 percent, respectively, and GE was up 9 percent as of Tuesday before its CEO gave a poorly received presentation.

“Two out of three ain’t bad, and if you’d taken profits on GE yesterday, you would’ve had a phenomenal trade,” Cramer said.

Chaikin’s formula uses three key indicators: the Chaikin Money Flow, which measures buying and selling pressure in a stock; the Chaikin Relative Strength, which compares a stock’s performance with the S&P 500’s over the last six months; and the Chaikin Power Gauge, which uses 20 different fundamental and technical inputs to produce a bearish or bullish reading.

This time around, Chaikin’s formula flashed particularly bullish signals with the daily stock chart of Akamai Technologies, a cloud play that helps companies get content like streamed video online securely and glitch-free.

Shares of Akamai have been soaring since activist fund Elliott Management said it took a 6.5 percent stake in the company last December, but Chaikin’s three indicators showed more room to run.

The Chaikin Money Flow turned positive, meaning that institutional investors were buying the stock, the Chaikin Relative Strength has been strong for months, and the Chaikin Power Gauge is sending green bullish signals.

Still, the technician warned that the stock is very overbought, suggesting that investors wait for a pullback to the $72 to $74 level before picking up some shares.

“My view? I like Akamai here — we recommended it at $73 in mid-March — but I’d like it even more into weakness because I believe in Elliott Management’s ability to take this business to the next level,” Cramer said.

Chaikin’s formula can also signal when a stock should be sold. On Wednesday, Chaikin zoomed in on the stock of Walmart, down over 4 percent since the company’s earnings report.

Having spent months in the red, the Chaikin Money Flow inched up after the report, but is still flat, Cramer said. The Chaikin Relative Strength indicator is also negative, reinforcing the stock’s decline. Unsurprisingly, the Chaikin Power Gauge is flashing bearish signs, too, he added.

“My view? I like Walmart long term, but Chaikin may be right about the short term,” Cramer said. “Wall Street really dislikes the fact that the company’s spending so much money to grow its business, including that acquisition of Flipkart, the Indian e-commerce play. I think these bets are ultimately going to pay off, but it could take time.”

“Bottom line? The charts, as interpreted by Mark Chaikin, suggest that you should buy Akamai here and sell Walmart,” the “Mad Money” host concluded. “Given his track record, I think you need to take his advice very seriously, especially on the stock of Akamai.”



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