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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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Stocks

Investors have spoken… It’s time for more risk

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From Dr. David Eifrig’s Health & Wealth Bulletin:

All eyes have been on the 10-year U.S. Treasury yield over the past couple of days.

It recently broke out above 3.2% to a new seven-year high, causing a lot of reaction from the financial media… both positive and negative. The 10-year yield is significant for a couple different reasons…

First, as we talked about back in July, the spread between the 10-year Treasury yield and the two-year Treasury yield are recession predictors.

Second, the 10-year Treasury yield is the benchmark that guides other interest rates. It affects rates on everything from auto loans to home mortgages to consumer and business loans.

Finally, the 10-year yield is a signal of investor confidence. When investors are scared of owning stocks and corporate bonds, they tend to put their money in risk-free assets like government bonds. And as demand increases for government bonds, prices rise – which drives yields lower (bond prices and yields move in opposite directions).

When investors are optimistic about stocks, they don’t want to have their money in boring government bonds. Demand for Treasuries falls, and prices fall – which means yields shoot up.

That’s what we’re seeing today with the 10-year Treasury breaking out to multiyear highs. It shows investors want more risk. They don’t want to settle for 2%-3% returns in Treasuries. They want to chase the higher returns they can get in the stock and corporate bond markets.

The chart below shows how much money flows in to and out of U.S. Treasuries on a weekly basis…

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Last week, investors pulled $1.6 billion from U.S. Treasuries and $1.1 billion the week before. That’s nearly $3 billion, by far the largest two-week outflow since the start of 2018. And according to EPFR Global, investors put $1.2 billion into U.S. stocks last week.

The message is clear… Investors don’t care about risk-free assets. They want higher returns. And they think the stock market will deliver it to them.

As yields on Treasuries creep higher to 3.5%, 4%, or even 5%, we may start to see some more folks shift their money back in to these assets. Earning 5% risk-free is hard to turn down. But we may be awhile away from that.

For now, folks want to own stocks. That’s bad and good…

It’s bad because this is what happens at the end of every bull market. Investors see their friends making tons of money in the stock market and can’t stand to sit on the sidelines anymore. They pull money from safe assets and from their savings accounts to plow into equities. This of course, creates a bubble… and we all know how it turns out from there. (Not well.)

We start to see headlines from financial-media sites such as CNBC like this…

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And this from Bloomberg…

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If you’ve been following Stansberry Research for long, you know that my colleague Steve Sjuggerud has been pounding the table for folks to buy stocks now because of the “Melt Up” that you see above.

The Melt Up is where we’ll see one final surge in the market before it collapses. According to Steve, folks who are invested before the market takes off could make 100% to 500%, if not 1,000% gains.

And that’s the good news from folks preferring riskier assets like stocks – massive returns in a short period of time.

Since everyone is demanding higher returns, their money goes into the stock market, which pushes stock prices higher and higher.

The even better news… We’re getting close to Steve’s Melt Up, but we’re not there yet.

Folks are getting more bullish, but we’re not at an extreme level of bullishness yet. We hear warnings all the time because of high stock valuations… or warnings about rising interest rates.

This isn’t typical top-of-the-market or Melt Up behavior.

Steve firmly believes that the real Melt Up has not started yet and there are still incredible gains to come.

That’s why, on October 24, Steve will show you how to cash in on the Melt Up, discuss when the bull market will end, and give away his No. 1 recommendation right now.

Don’t miss out on this opportunity… Click here to claim your spot.

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team


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An important ‘test’ for the market

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From Justin Brill, Editor, Stansberry Digest:

The broad-market sell-off continued today…

All three major U.S. indexes closed sharply lower again.

The benchmark S&P 500 Index fell 2.1%… the Dow fell 2.1%… and the tech-heavy Nasdaq fell “just” 1.3%.

More important, as you can see in the following chart, today’s decline pushed the S&P 500 below its 200-day moving average (“DMA”) for the first time since April…

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As longtime readers may recall, the 200-DMA is considered a rough gauge of the market’s long-term trend. During bull markets, stocks tend to spend most of their time trading above the 200-DMA. During bear markets, they spend most of their time trading below it.

The S&P tested this level three different times following February’s “volatility panic,” but it never broke solidly below it. In fact, outside of a few days early this year and two days during the “Brexit” panic in June 2016, the S&P 500 has not broken below this level in a meaningful way since the broad market correction in early 2016.

Seeing this support level fail again today is concerning…

But it could simply be another “false” breakdown like those we’ve seen several times over the past couple years.

Why do we say that? Take another look at the chart above…

At the bottom, you’ll see the S&P’s relative strength index (“RSI”). This is a simple momentum indicator with values ranging from 0 to 100. Values below 30 indicate an asset is “oversold” and may be due for rally. Values above 70 indicate an asset is “overbought” and may be due for a correction, or at least a pause.

As you can see in the earlier chart, stocks are now extremely oversold. In fact, they’re now stretched to the downside to nearly the same degree that they were stretched to the upside back in late January.

This is a bullish sign.

Of course, this doesn’t necessarily mean stocks will head higher tomorrow. It’s common to see a “divergence” form – where stocks go on to make a new extreme that isn’t confirmed by a new extreme in the RSI – before a significant reversal begins. But this reliable indicator says at least a short-term bottom is near.

As always, no single indicator is foolproof. So make sure you continue to follow your trailing stops, just in case. But history is clear: Anyone who panics and sells stocks now is likely going to regret it.

Of course, this isn’t the only reason we remain cautiously bullish today…

As regular Digest readers have no doubt become sick of hearing, all of the reliable long-term indicators of stock market, credit market, and economic health we follow remain positive today.

While a broad market correction of 10% or more is always a possibility, these measures tell us the chances of a true bear market or a recession are still extremely low.

So-called “seasonality” could now provide a tailwind as well. As Morgan Stanley analysts explained in a research note today, we’re now entering an historically bullish time for stocks…

Seasonality is about to get ‘helpful’: October is technically a positive month for risk assets, but with some fascinating bifurcation: it often starts badly, but ends strong.

From 1998-2017, the average return over the first 10 days of October was -0.4%. The rest of the month? +2.0%.

Finally, we’ll also note that third-quarter earnings season is about to kick off in earnest tomorrow. And analysts are expecting strong sales and profit growth for the third straight quarter.

In other words, if you want to profit from the ‘Melt Up,’ you must be prepared for more volatility…

Of course, for most investors, this is easier said than done. You’re likely to panic and sell too early… or worse, hang on too long.

That’s why we’re preparing a special event this month…

On Wednesday, October 24, Steve Sjuggerud will sit down with some of the biggest names in finance – in front of a live studio audience – to discuss exactly what you should do with your money during the final stage of this long bull market.

We guarantee this event will be unlike anything you’ve seen from us before. Whether you’re currently leaning bullish or bearish, you don’t want to miss it. You’ll even get the name and ticker symbol of one of Steve’s favorite Melt Up recommendations – a stock that he believes could soar as much as 1,000% in the coming months – just for tuning in. Reserve your spot for free by clicking here.

Regards,

Justin


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Another black market is opening up… And it’s bigger than cannabis

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From Justin Spittler, Editor, Casey Daily Dispatch:

History was made in 2012.

Colorado, along with Washington, became the first states to legalize recreational marijuana.

For many people in Colorado, this was the best thing that ever happened. For others, it was a mistake. And those people will probably never see eye to eye.

Still, there’s one thing almost everyone can agree on… and that’s the economic benefits of marijuana legalization.

Marijuana legalization has generated billions of dollars for Colorado’s economy. It has created thousands of jobs. And it’s brought the state much needed tax revenue.

In fact, the state took in almost $70 million in taxes, licenses, and fees from the marijuana industry in 2014. And that figure has only gone up.

Last year, Colorado’s government collected $247 million off $1.5 billion in marijuana sales.

In short, Colorado has shown what can happen when a state legalizes marijuana. So, it wasn’t surprising that other states followed suit.

Today, 30 states have legalized medical marijuana…

And nine states, plus Washington D.C., have legalized recreational marijuana.

Of course, regular readers know this already. I, along with Crisis Investing chief analyst Nick Giambruno, have been covering the legal marijuana industry for over a year.

But this isn’t another marijuana essay. No… I wrote this essay because Colorado’s on the verge of legalizing another black market. And just like with marijuana, this presents a huge opportunity for investors.

I’m talking about sports betting…

Until recently, sports betting was illegal in every state except Nevada.

That changed in May, when the Supreme Court struck down a 26-year-old federal law that barred single-game gambling in every U.S. state, except Nevada.

Now, this doesn’t mean that the Supreme Court legalized sports betting nationwide. Instead, it gave each state the power to license, regulate, and tax sports betting within its borders.

Seven states—Rhode Island, New York, New Jersey, Delaware, Pennsylvania, West Virginia, and Mississippi—have since legalized sports betting. Another dozen or so states are considering doing the same.

In short, legal sports betting is sweeping the nation just like legal marijuana swept the nation.

And I have good reason to think Colorado will be the next domino to follow.

Walker Stapleton wants to legalize sports betting…

Stapleton is a Republican gubernatorial candidate. And he’s pushing to legalize sports betting for a simple reason: He wants to tax the industry. Last month, Stapleton told a group of real estate investors…

Sports gambling is coming to Colorado… I think we should assess a tax on people placing a bet and use that to build up our roads and bridges.

Now, I have no idea if Stapleton will win the election. But it may not matter.

Colorado’s state legislature is expected to look at a sports betting bill in early 2019. And that bill is reportedly being “seriously considered.”

That’s why I think Colorado could legalize sports betting within the next year. But it certainly won’t be the last state to do so.

I say this because practically every U.S. state is in dire financial conditions. Just look at the public pension system. It’s a ticking bomb.

Everyone knows this. So, don’t be surprised if politicians try to buy themselves time by legalizing and taxing sports betting.

But this isn’t just an opportunity for desperate governments… It’s also a huge opportunity for savvy investors.

A lot of money will flow into legitimate businesses if states legalize sports betting…

And I mean a lot…

The American Gaming Association estimates that the illegal market for sports betting brings in $150 billion every year. That puts it on par with the global marijuana industry.

But even that might be lowballing the market’s potential. In fact, Bank of America Merrill Lynch says the illegal market for sports betting is worth $200 billion.

Meanwhile, the research firm Eilers & Krejcik Gaming estimates that the legal sports betting market in the U.S. was worth around $270 million last year.

That means the legal market for sports betting would become 37 times bigger if legitimate businesses captured just 5% of the underground market.

And many of the companies poised to benefit from this are publicly traded.

That means you can enjoy a share in their profits…

In other words, you can profit from the legalization of sports betting by speculating on casino and gambling stocks.

The easiest way to do this is with a fund like the VanEck Vectors Gaming ETF (BJK). This fund invests in 43 casino and gaming stocks. That makes it a relatively safe way to bet on this megatrend.

For even more upside, consider investing in small casino operators. Specifically, focus on operators located in states that recently legalized sports betting… or are likely to.

These are exactly the kinds of companies that E.B. Tucker encourages his readers to buy in his Strategic Investor newsletter…

E.B. has been researching this opportunity for the past six months… And he’s found four specific companies primed to soar from this tidal wave of legal revenue.

And each of those stocks are “buys” at current prices. These picks are still flying under the radar today. If you’re not a Strategic Investor subscriber, you’ll want to sign up before these stocks take off.

And that’s not the only massive moneymaking idea E.B. has recently uncovered. He also told his readers about “America’s Third Powershift” that’s underway. You can learn more – and see how to access all of E.B.’s picks – by clicking here.

Regards,

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Justin


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