Tax 'Reform' May Kill These Companies Even Faster

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 
 It's official… Tax "reform" is finally here.
 
Just before Christmas, Congress passed the most significant changes to the U.S. tax code in more than 30 years. And late last week, President Donald Trump signed the bill into law.
 
Why do we write "reform"?
 
Because, as expected, the bill falls short of the dramatic improvements many had hoped for.
 
It won't simplify the tax code in any meaningful way. It won't make it any less time-consuming or expensive for most folks to file their annual returns. And it won't significantly ease the tax burden for most Americans over the long term.
 
 But it isn't all bad…
 
According to non-partisan think tank the Tax Policy Center ("TPC"), most Americans should expect to see a modest reduction in their tax bill. The TPC reports 143 million people will pay lower federal income taxes in 2018, compared with just 8.5 million who will pay more.
 
Overall, the TPC found taxes will fall for all income groups, on average. Folks earning $10,000 or less should expect to keep an extra 0.1%, on average, while those earning $500,000 or more will see an extra 4%. Folks in the middle – those who earn between $50,000 and $75,000 per year – should expect to a see an extra 1.5%, on average.
 
Congress' own independent auditor, the Joint Committee on Taxation, reported similar results. It found the average tax rate would fall from 20.7% to 19% under the law, including a drop from 14.8% to 13.5% for those in the middle tax bracket.
 
 Unfortunately, these cuts may not last long…
 
Under the current bill, the individual tax cuts will expire in 2025. If no change is made before then, today's tax cuts will become tomorrow's tax hikes. Under this scenario, the TPC estimates a majority of Americans – including 69.7% of those in the middle – would pay even higher taxes than what they pay under our current law.
 
To be fair, Republicans say they won't allow these tax cuts to expire. But if they weren't able to pass a permanent tax cut today – under nearly ideal circumstances – how certain is it they'll be able to extend these cuts in the future?
 
 The news is better for many companies…
 
The plan will permanently slash the corporate tax rate from 35% today to 21%. It will also repeal the current 20% corporate alternative minimum tax, exempt companies from paying taxes on money earned overseas, and lower the "repatriation tax" on overseas earnings from 35% to between 8% and 15.5%.
 
These changes could drive higher earnings for a huge number of firms – particularly those based in the U.S. – across a range of industries.
 
 But not every company will benefit…
 
In fact, the plan could create even bigger problems for those carrying large debt loads. As the Wall Street Journal recently reported (emphasis added)…
 
Full deductibility of interest has long made borrowing more attractive for companies when they needed money, instead of raising capital through selling equity…
 
The tax overhaul would essentially limit the net interest payments a company can deduct to 30% of its EBITDA, or earnings before interest, taxes, depreciation, and amortization. Any amount above that level would be taxable.
 

So if a company borrowed $1 billion at an interest rate of 5%, and its existing interest payments were already above the 30% threshold, it would have to pay an extra $10.5 million a year in taxes – $50 million in interest, taxed at the new corporate tax rate of 21%.

In other words, heavily indebted companies that are already struggling – like the troubled firms that Porter and his research team have been following in Stansberry's Big Trade – could soon see the costs to carry those debts soar even higher. More from the Journal
 
J.C. Penney (JCP), which has speculative credit ratings and more than $4 billion in debt, said in its third-quarter Securities and Exchange Commission filing in November that disallowing tax deductions on interest "could have a material adverse effect on our results of operations and liquidity."
Weak corporate credits like the aforementioned department-store chain are already unlikely to survive the next credit-default cycle. But despite the bullish headlines, the new tax plan could actually hasten their demise.
 
 Speaking of the next credit-default cycle…
 
We've been covering the growing risks in subprime auto lending for years. Porter and his team were among the first analysts anywhere to warn of these problems back in 2014.
 
Clearly, many private-equity investors weren't paying attention. We hope they are now. As Bloomberg recently reported…
 
Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out…
 
In the years after the financial crisis, buyout firms poured billions into auto finance, angling for the big profits that come with offering high-interest loans to buyers with the weakest credit. At rates of 11% or more, there was plenty to be made as sales boomed. But now, with new car demand waning, they've found the intense competition – and the lax underwriting standards it fostered – are taking a toll on profits.
 

Delinquencies on subprime loans made by non-bank lenders are soaring toward crisis levels. Fresh investment has dried up and some of the big banks, long seen as potential suitors, have pulled back from the auto lending business.

In short, these firms are getting squeezed from both sides… Losses are rising on existing loans as borrowers fall further and further behind. Meanwhile, banks are tightening credit in response to rising delinquencies and falling auto sales.
 
 This should come as no surprise to regular readers…
 
Subprime auto delinquencies have been ticking higher for months. But these problems extend far beyond autos alone… And they're likely to get much worse before they get better. As Porter explained recently (emphasis added)…
 
The ongoing debt explosion is finally reaching its peak… Lots of consumer loans are starting to go bad. We first saw default rates creeping up in subprime auto loans (as we warned they would).
 
Now, credit-card default rates are moving higher, too. Soon, the mirage of student lending is going to completely fall apart. That's when we'll see fireworks across the credit spectrum. But that's not all…
 
Just as defaults are rising, the Fed has begun to raise rates.
 
Look at what that's going to do to the U.S. government's funding costs over the next few years, according to projections from the Congressional Budget Office. Interest payments will nearly double, going from 6% to 11% of the federal budget…
 
These rising costs are going to have a profound effect on the current widespread political belief that "deficits don't matter," just as soaring default rates on consumer lending are going to lead to much tougher lending standards on cars, colleges, and credit cards.
 

All of that consumption that we've enjoyed on credit for the last decade is going to come back to haunt us. All of us.

 
 This doesn't mean the long bull market will end tomorrow… But it will end.

 
And one of the largest credit-default cycles in history is sure to follow.
 
As many private-equity investors are likely realizing today, the same problems that markets have ignored for months – or even years – will suddenly "matter" almost overnight.
 
Porter believes these developments will eventually lead to an all-out "Debt Jubilee." In fact, he says if you open your eyes and look around America today, you'll see it's already underway…
 
The riots in Charlottesville, Virginia… inner cities burning… more and more radicalized politics – like resurgent neo-Nazi groups and the rise of "Black Lives Matter" protests…  These are simply the first signs of a much more serious crisis to come.
 
Porter recently published a brand-new book, The American Jubilee, to explain how this shocking event is likely to play out… how it will affect you and your money… and most important, a few simple, but crucial steps you can take now to not only survive – but actually prosper – as it unfolds. Get your copy of Porter's new book right here.
 
Regards,
 
Justin Brill
 
Editor's note: A "Debt Jubilee" is going to wreak havoc on the U.S. financial system in the coming years. This national nightmare will wipe out millions of unsuspecting Americans' savings. But you don't have to be a loser… Our founder, Porter Stansberry, recently published a brand-new book, The American Jubilee, to help you survive – and even thrive.
 
In Porter's book, you'll learn about the 50 most dangerous companies in America today… the one financial asset you need to survive the next crisis… a critical move you absolutely must make in your bank account… and much, much more. Get your copy right here.

Source: DailyWealth

You Don't Need to Predict a Market Crash… Here's Why

Steve's note: I believe we still have incredible upside ahead in stocks. But even if you think I'm wrong, you can profit from the "Melt Up" today… while preparing for the "Melt Down" tomorrow. This week, my colleague Dan Ferris has detailed what could be next for the markets… Today, he shares exactly what he's doing to prepare.
 
One last thing – our offices will be closed on New Year's Day. Look for your next issue of DailyWealth on Tuesday after the Weekend Edition.
 
I've only done it three times in my career.
 
But all three times, it worked out well…
 
In the April 2008 issue of Extreme Value, I told readers the housing crisis wasn't half over and to stay away from leveraged companies in banking and homebuilding. I recommended selling short Lehman Brothers, the only big firm not bailed out by the government.
 
Readers made 82% in five months on that advice. In 2008-2009, about 165 banks failed, including behemoths like mega savings and loan company Washington Mutual. Housing prices plummeted and didn't bottom out until 2012.
 
It was a good time to get cautious.
 
I got cautious again in May 2011, when I wrote one issue of the Stansberry Digest, two updates to my Extreme Value subscribers, and nearly an entire monthly issue about the importance and value of holding cash. It turned out that was right at the top of the market, before we saw a major 20% plunge in stock prices that lasted until October.
 
And in November 2015, I wrote an entire issue telling readers why it was so great to hold cash. That was two months before the 10% plunge that kicked off 2016.
 
I wasn't predicting market crashes any of these times. And I'm not predicting one today. The point is, you don't need to predict what'll happen in the stock market.
 
You only need to prepare…
 
Today, you need to prepare for poor returns and lower prices of financial assets.
 
Returns are low right now across all of the major asset classes. Cash yields 0%-1%. Triple A-rated corporate bonds yield about 3.6%. Stock dividends (as measured by the S&P 500) yield 1.8%. Those are lousy long-term returns, and taxes and inflation will only make them worse.
 
It has been this way for the last couple of years. That's why we've focused on not buying too many stocks in Extreme Value since early 2015, when the vast majority were prohibitively expensive.
 
Thanks to this strategy, we've been able to avoid too many bad bets – even ones that could have seemed like good deals – right before sudden, unforeseen downturns…
 
For example, in July 2015, we published four lists of some of the cheapest stocks in the U.S. We looked at the cheapest stocks based on price-to-book ratio… the ones with the cheapest cash flows… and the worst-performing stocks of the prior one- and three-year periods.
 
Nearly all of these companies were value traps. We didn't recommend buying a single one. On average, the best-performing stocks of the four lists fell nearly 12% over the next year or so. The worst-performing stocks fell nearly 50% on average.
 
Instead, we recommended buying just one stock and selling 16 before the market took a 10% dive from May to August. And all in all, we told investors to avoid more than 100 stocks and to sell 20 of them… in what turned out to be the worst year for the market since 2008.
 
The market treated readers who took our advice a lot better than it treated most investors.
 
Of course, we aren't perfect. I have no doubt we'll tell investors to sell and/or avoid stocks sometimes only to watch the market rise. But we don't waste time predicting how stock prices will move in the short term. Neither should you. It's a fool's errand.
 
We didn't predict that the market would drop. We didn't need to, because the data in front of us indicated that stocks weren't a great bet. That's true today, too. Stocks are expensive… And if the market goes up more from here, they will become an even worse, more expensive bet.
 
This year, we've consistently sought out the highest-quality companies trading at reasonable valuations, and shorted deteriorating businesses… Our short sale on restaurant owner Brinker International (EAT) generated a quick 23% profit in less than five months. Our other two shorts are also performing well. And we cut losses quickly on the one lower-quality business we hoped was cheap enough (but turned out not to be).
 
Believe me, telling investors to hold plenty of cash and avoid most stocks isn't winning me any friends. But it's virtually impossible to call yourself a value investor these days without doing exactly that.
 
We continue to recommend three actions for investors right now…
 
1.  
Hold plenty of cash. Cash is a call option on future bargains. It will become most valuable to you when others find it in shortest supply.
 
2.  
Sell short the shares of deteriorating businesses. This is difficult. You'll need to manage your short book, aggressively exiting any time you think the wind is blowing too hard against you.
 
3.  
Buy value-priced assets wherever and whenever you find them. Don't let the mania prevent you from investing in a truly attractive situation.
 
That's all. It's easy to figure out what to do, but hard for most investors to do it: Avoid most stocks. Hold cash and gold. Don't predict. Prepare.
 
Good investing,
 
Dan Ferris
 
Editor's note: Dan recommended three of the Top 10 best-performing stocks in Stansberry Research history. Now, he may have pinpointed his next big winner. This company trades at a great price… But even more important, starting January 1, a big government change could act as a catalyst that pushes shares dramatically higher.
 
Right now, you can get access to this urgent opportunity – and all of Dan's Extreme Value research – at an unbelievably low price. But don't wait… This offer ends tonight at midnight Eastern time. Get the details here.

Source: DailyWealth

How to Invest for 'Fear, Uncertainty, and Doubt' Today

Steve's note: I'm bullish on U.S. stocks today. But investors are scared… wondering when this long bull market will end. That's why taking emotion out of your trading is more important than ever. This week, my colleague Dan Ferris is sharing his cautious view of the markets – including how you can make money while preparing for the worst…
 
You need to understand what a mania looks and feels like to survive it.
 
That's why I've spent the past two days detailing the traits of speculative manias.
 
I continue to believe several years' worth of stock-price gains will evaporate quickly when the current mania finally ends. But human nature is perverse. Following the herd into expensive stocks gets more attractive as it gets more risky.
 
Don't let the mania tempt you to overpay for stocks to make a quick buck.
 
But also, don't let it deter you from investing in attractive securities and assets whenever and wherever you find them. That will be our strategy as growth stocks begin to significantly underperform value stocks during a new "Golden Age of Value Investing."
 
I'll explain more on that subject tomorrow. Today, let's go over the final two traits common to speculative manias…
 
     6. 'This time is different'
 
The most famous example of Trait No. 6 was days before the 1929 crash, when economist Irving Fisher said stock prices had reached "a permanently high plateau."
 
Today, anybody who does not acknowledge that U.S. equities are trading near their highest valuations of all time (second only to March 2000) is as blinded as Fisher. U.S. equities have always performed poorly from current valuations.
 
Even famous investors try to convince themselves and others that "this time is different." Jeremy Grantham published a report saying exactly that, titled "This Time Seems Very, Very Different."
 
Warren Buffett appears to have abandoned his primary metric for gauging the value of the overall market (U.S. total market cap divided by gross domestic product) to a nebulous statement that stocks are cheap as long as interest rates stay low.
 
And the bitcoin bulls are also convinced this time is different. Here's a recent Twitter post that smacks of Irving Fisher…
 
I believe [bitcoin] has "sticky prices," which means no matter what happens it'll gravitate back to [its all-time high]. I think if you theoretically embrace that it does that, and it does so for very specific and important reasons, it'll give you the right mindset when vertical whacks happen. – @parabolictrav
The author of this quote says he's a bitcoin "spirit guide for the journey to $100,000 and beyond… FUD dies here." FUD means fear, uncertainty, and doubt. It's my experience that English philosopher Francis Bacon was right… Those who begin with certainties shall end in doubts, and those who begin with doubts shall end in certainties.
 
This guy is too certain he's right. Markets love to reward hubris, right up until the minute they destroy it. Only overconfidence and lack of experience could lead anyone to believe banishing fear and doubt is possible. It's not. Living with it and managing it is possible and necessary for investment success. And the bitcoin hyper-bulls will have to do that eventually.
 
     7. Financial shenanigans
 
This trait describes the nuts-and-bolts reasons why investors lose money in individual stocks during a financial mania.
 
As equity markets rise higher, the incentive to keep reporting good results grows stronger, compelling management teams to report better numbers than business reality might dictate.
 
The worst financial shenanigans are the ones that affect entire swaths of the stock and bond markets. They tend to go on – detected or not – for a long, long time. Then one day, the chickens start coming home to roost, and investors suddenly find themselves deep underwater.
 
Today, there's an enormous underlying problem affecting the overwhelming majority of U.S. public companies: the increasing use of non-GAAP accounting in quarterly and annual financial reports.
 
GAAP stands for generally accepted accounting principles. It's the standard for reporting financial results. Sometimes, a business might feel the standard doesn't accurately portray the true financial performance of the business. So instead, it will publish figures not supported by the GAAP standard to portray the business in a more accurate light.
 
Non-GAAP figures aren't inherently bad. Free cash flow (FCF) – our favored earnings metric – is a non-GAAP number. The problem comes when differences between GAAP and non-GAAP numbers grow larger. That's what's happening today, as noted in an October 26 blog post by State Street analyst Michael Arone…
 
Today, the difference between GAAP and non-GAAP earnings is very wide. In the second quarter, the average difference for companies in the Dow Jones Industrial Average reporting both GAAP and non-GAAP earnings was a whopping 20%…

 

Eventually, when the spread gets too wide, earnings and [stock] prices are likely to come crashing down, resulting in smaller differences between the two accounting measures.

Financial data and software company FactSet also recently noted that…
 
The fourth quarter marked the 18th time in the past 20 quarters in which the bottom-up [earnings per share] estimate decreased during the first two months of the quarter while the value of the [S&P 500] index increased over this same period.
The per-share intrinsic value of a business can only increase if its earnings per share (EPS) also increases. This statistic suggests that the market is either OK with all the unpublished abuses of non-GAAP accounting, or that a reckoning may be at hand.
 
Lastly, a June 2017 article in the CPA Journal studied non-GAAP adjustments for six large social media companies (Facebook, Groupon, Pandora, LinkedIn, Twitter, and Yelp) from 2011 to 2015. The authors concluded: "The magnitude of non-GAAP adjustments increased over time for all the companies in this study."
 
So… what can increased non-GAAP reporting do to your returns?
 
Just look at General Electric (GE). It was once the bluest of blue-chip stocks, but its share price is down more than 40% this year. GE's comeuppance was years in the making…
 
Especially during the tenure of former CEO Jack Welch (1981-2001), GE became a notorious earnings manipulator. Welch fostered a highly competitive make-your-quarterly-numbers-or-else corporate culture. The culture might not be as competitive now, but the financial reporting hasn't improved and investors are fed up.
 
An October Bloomberg article said as much a couple months ago, noting that GE reports four separate EPS numbers, each excluding various expenses. Bloomberg said GE is one of just 21 S&P 500 companies to report more than one EPS figure – though nearly all S&P 500 companies report some form of non-GAAP metrics, up from 58% of S&P 500 companies using non-GAAP reporting 20 years ago.
 
I suspect that when the current mania ends, many companies will suddenly get religion about GAAP accounting again as the deficiencies they're hiding finally become unavoidable. This will send many share prices sharply lower… likely reflecting enough investor revulsion to push prices well below reasonable intrinsic values.
 
Non-GAAP issues could lead to thousands of stock prices falling 50% or more from their ultimate tops, whenever those tops finally arrive.
 
It may take more than a few years for such a top to arrive, or it may not. Remember, we don't bet on predictions. We simply prepare our portfolio for the widest possible range of outcomes.
 
That includes the likelihood that good businesses purchased at cheap prices will generate acceptable long-term returns. More on this tomorrow…
 
Good investing,
 
Dan Ferris
 
Editor's note: No matter what the crowd is doing, it pays to buy good businesses when the time is right. Today, Dan is seeing a rare setup that will soon give one company a virtual monopoly. Investors could make triple digits as this situation plays out… But you must get in before January 1 to see the biggest gains. Click here to learn more.

Source: DailyWealth

The 'Golden Age of Value Investing' Is Coming

Steve's note: I believe this bull market has plenty of upside ahead. But when the boom times are over, investors will need new strategies to succeed. This week, we're sharing a series from my colleague Dan Ferris on how to prepare for the next crisis. In this installment, he reveals why some of today's safest investments may not stay that way…
 
The tide may be turning even sooner than I'd hoped…
 
It looks like investors have pushed growth stocks to historically high valuations relative to value stocks. Analysts at JPMorgan Chase say the spread between forward price-to-earnings (P/E) ratios has "become stretched."
 
At an extreme value of around seven, the spread isn't as high as early 2000 when it exceeded 10. But it's outside the normal range, at levels we haven't seen in more than a decade.
 
That's a huge change in the stock market. And it could mean a "Golden Age of Value Investing" is starting… with value stocks outperforming growth stocks for years to come.
 
It could also mean the current mania is on its last legs.
 
Yesterday, I began sharing our list of the common traits of speculative manias and how they're playing out right now. Today, let's continue with a look at two more of these traits…
 
     4. A reasonable fundamental taken to unreasonable extremes
 
This trait could double as the definition of a speculative mania.
 
Most times, a reasonable financial or economic fundamental remains reasonable until too many investors discover it. Then purely by too many people acting on it, the fundamental deteriorates into its opposite…
 
At one time, it was conservative to invest in housing and mortgages. Then investors noticed that U.S. housing prices hadn't fallen in living memory. They took that to mean housing prices would never fall. That helped create a massive bubble, ending with the S&P 500 down 58% from its October 2007 highs by March 2009.
 
The same thing is happening with passive investing today.
 
Index funds are often referred to as passive investment vehicles. Passive investing makes fundamentally good sense for most investors. You won't always be able to beat the market, so just own the market. Index funds are how you do that. They're one of the greatest ideas in finance.
 
However, experienced investors will automatically ask, "So what's next?" They know that in financial markets, success tends to sow the seeds of its own destruction…
 
Wall Street research firm Bernstein Research predicts 50% of all U.S. assets under management will be passively invested by early 2018. In a report last year, it called passive investing "worse than Marxism," and said it "threatens to fundamentally undermine the entire system of capitalism and market mechanisms that facilitate an increase in the general welfare."
 
This is not as ridiculous as it sounds. Steven Bregman, co-founder of investment adviser Horizon Kinetics, says passive investing has two big problems.
 
First, passive funds buy baskets of stocks as new money comes in, without any reference to the fundamentals of the businesses they're buying. When money comes into the fund, they buy. When it goes out, they sell. No due diligence required.
 
The second problem is that many active managers are penalized for taking contrary positions against the passive buyers. This is because over time, they command fewer and fewer assets relative to the passive herd. So their influence on the marketplace shrinks as the mindless passive herd of buyers grows… and experiences less and less pushback from more rational actors in the marketplace.
 
Passive and active buyers and sellers ought to balance each other out over the long term. It's how the market tends to gravitate toward fair value for most securities, even if it takes a long time and a lot of irrational pricing to get there.
 
Bregman complains that the destruction of this kind of "price discovery" and the herding effect created by exiting active managers spells real trouble for financial markets.
 
With passive investing approaching 50% of total U.S. assets under management, it's starting to feel like the tipping point is growing near. When nobody is left to buy the indexes, they'll top out and start falling.
 
The market can go up for years more, higher than any rational person would ever expect. But passive investing has the potential to go horribly wrong, precisely because it's so widespread and assumed to be so safe and conservative, which leads us to Trait No. 5 of speculative manias…
 
     5. A risky scheme sold as a safe investment
 
The only way an asset can turn to toxic waste and wreak widespread financial havoc is if enough people accept it as safe and start piling in.
 
The widespread acceptance of assets as safe and conservative makes it more likely they'll see more investor interest and wind up in more investors' portfolios. The act of everybody buying them because they're safe makes them unsafe, amplifying their flaws and weakening their strengths.
 
That's the key: Today's safest investments are most likely to become tomorrow's largest pool of toxic waste.
 
For example, in the 1920s, publicly traded investment trusts were supposed to be diversified equity portfolios like today's index funds. They became highly leveraged speculative vehicles. At one point, a new trust was floated on the public market every day. Many disappeared completely in the 1929 crash.
 
Let's go back to our index fund example… One strength of indexing is that you can easily hold a diversified portfolio in a single fund. But how diversified are you if everybody else owns the same thing you own?
 
If Bernstein is right and 50% of all U.S. assets under management are in passive vehicles by early 2018, what will happen when the stock market starts heading the other way? Will index selling turn a 10% correction into a 50% bear market?
 
Indexing is a strategy solely based on buying. Selling is not part of the deal. When selling goes into overdrive, indexers will feel less like they're making a safe, conservative bet and more like they're juggling flaming chainsaws.
 
Of course, we can't know exactly what will happen if indexers start selling. Maybe enough of them will hold on for the long term that we'll have nothing to worry about.
 
What I do know is this: What the wise do in the beginning, fools do in the end.
 
Indexing was wise for decades – an easy, low-cost, efficient way to get decent long-term investment results and prepare for retirement. But now that it's the most popular strategy in the world, with the biggest index fund provider (Vanguard) taking in $2 billion a day, I bet there are more fools than wise folks getting in today.
 
Good investing,
 
Dan Ferris
 
Editor's note: Dan isn't following the crowd today. Instead, he has found a way to profit from a game-changing setup most people know nothing about. A new law is set to kick in on January 1… And when it does, Dan says one stock could absolutely skyrocket. This opportunity could potentially double your money in the next six to 12 months.
 
Dan has put together a presentation with the details – but it's only available for the next few days. Click here to view it now.

Source: DailyWealth

The Key to Surviving a Speculative Mania

Steve's note: As regular readers know, I believe the real push higher in stocks is still ahead of us. I call it the "Melt Up." But after it's over, the "Melt Down" will follow… And if my colleague Dan Ferris is right, it could be your first opportunity in years to pick up incredible values. This week, we're sharing his view of what comes next in the markets…
 
Stocks are super-expensive right now.
 
Yet everybody thinks it's easy to get rich owning them.
 
That's always a recipe for disaster.
 
At about 2.25 times sales, the benchmark S&P 500 Index is just the tiniest bit under its all-time high value of 2.35 in early 2000 – the most expensive single moment in U.S. stock market history. Historically, stocks have performed poorly 90% of the time when they've been this expensive.
 
In short, we're in the middle of a speculative mania. And understanding the components and behavior of a mania is key to surviving it…
 
This week, I'm going to share seven traits of speculative manias that we've found in our research, starting today with the first three.
 
It's not an exhaustive list. And not every trait is present during every mania. But you can expect to find most of the traits we've identified when investors start bidding asset prices to dangerous levels.
 
I hope you'll use these insights to bolster a conservative, long-term, value-oriented investing viewpoint…
 
     1. Something new
 
New technologies and new financial innovations are key ingredients of speculative manias.
 
For example, optimism about technological innovations caused the dot-com boom in the late 1990s. The S&P 500 price-to-earnings (P/E) ratio hit 44 times earnings before that mania topped in early 2000. It is still the single most overvalued equity market valuation in history.
 
Similarly, financial innovation in mortgage-backed securities led to an enormous debt-fueled housing bubble, which finally blew up in 2008. That implosion caused the worst financial crisis since the Great Depression.
 
When technology and financial innovation combine, mania-watchers pay attention. We're seeing that now with bitcoin…
 
Bitcoin is a digital currency, a technology-driven financial innovation. It exists only in electronic form. Regular currencies are created and controlled by a central authority like a central bank. Bitcoin is "mined" by anyone who knows how to use software to solve a cryptographic puzzle.
 
The value of a single bitcoin unit has risen as much as 2,000% so far this year, recently nearing $20,000. But bitcoin is incredibly volatile, and no one knows what it will do from day to day. In my experience, an asset that can rise that far that fast can plummet 90% or more even faster… Asset prices tend to take the stairs up and the express elevator down.
 
Either bitcoin is the biggest thing since money was invented thousands of years ago, or a lot of folks are taking risks they don't understand. You can guess which one I'd bet on.
 
     2. A mergers and acquisitions (M&A) boom
 
Speculative manias are generally marked by an increase in the rate of mergers and acquisitions (M&A).
 
In the 1920s, publicly traded investment trusts consumed one another, until most went belly-up in the crash.
 
The "Go Go" 1960s saw the rise of conglomerates. Ling-Temco-Vought (LTV Corporation) had its fingers in aerospace, electronics, steel manufacturing, airlines, meat packing, sporting goods, and even car rentals and pharmaceuticals. It grew revenues via acquisition from $36 million to $3.8 billion in just five years – more than a 100-fold increase.
 
Mergers are perhaps the least salient feature of the current mania, but it's worth noting that all-cash deals are hitting record highs these days. Pharmaceutical company Bayer's (BAYN.DE) $66 billion all-cash offer to purchase agribusiness leader Monsanto (MON) will become the largest cash deal in history if it closes. At $128 per share, Bayer is offering 25 times earnings for Monsanto.
 
Early this month, drugstore chain CVS Health (CVS) offered $69 billion in cash and stock for health insurer Aetna (AET). Charley Grant at the Wall Street Journal reports CVS will need to take on $45 billion in debt for the purchase, raising its debt to $70 billion.
 
By our calculations, CVS is paying about $205 per share for Aetna, or 4.4 times book value. That's more than double the intrinsic value of the best insurance companies in the world (like Berkshire Hathaway, W.R. Berkley, or Markel), which I'd peg in the ballpark of two times book value.
 
These two deals have "sign of the top" written all over them, for sheer size and valuation. I expect you'll see at least one or two more of these mega deals in 2018.
 
     3. A credit boom
 
It's impossible to miss the bubble in bonds. Many Swiss, German, and Japanese government bonds are trading at negative yields. In other words, investors paying those prices are guaranteed to lose money if they hold the bonds to full maturity.
 
Many large financial institutions continue to buy these bonds simply because they're restricted from holding most other types of securities…
 
Some large financial institutions, whether for regulatory or business reasons, can't buy junk bonds. They're restricted to higher-quality bonds – like so-called "investment grade" corporate bonds.
 
The lowest major "rung" that still counts as investment-grade is BBB. With "junk" status just one ratings notch lower, you'd think there'd be no way a BBB-rated bond could trade at a negative yield (indicating a high price and untarnished optimism about the prospects of repayment).
 
The assumption would be as wise as it is wrong.
 
Paris-based conglomerate Veolia recently issued 500 million euros' worth of three-year bonds at a yield of -0.026%, rated BBB. The issue was oversubscribed by four times. That means it only sold 500 million euros' worth, but investors offered to invest more than 2 billion euros in the bond issue.
 
In other words, so many investors wanted in to a bond issue guaranteed to lose money if held to maturity that their 1.5 billion euros had to be turned away.
 
A crazy situation can always get crazier. How long will it be until a junk-bond issue (rated BB or lower) is brought to market at a negative yield? A little more than a month ago, the Financial Times reported that European junk-bond yields were around 2%. They've come up slightly since then, but they still hover around 2.6% (according to the BofA Merrill Lynch Euro High Yield Index).
 
Always avoid insanely priced assets. I'd much rather hold cash than most bonds today. I take it as a sign of the grave distortions in the financial markets that bond investors think slow suicide is the best choice.
 
This is why you almost always see a credit boom during an equity boom. Investors seek more risk in equities as bond yields get low… And higher equity valuations make bond investors believe it's just as safe as it was before when both debt and equity valuations were lower (and objectively less risky).
 
Bonds worldwide are more expensive than they've ever been in 5,000 years of recorded history. It's not unreasonable to conclude that stock prices will continue to rise as investors take more and more risk in search of less and less return. Eventually it must end, but nobody knows when.
 
Prediction is unnecessary. Preparation is mandatory.
 
Good investing,
 
Dan Ferris
 
Editor's note: When stocks are this expensive, it's hard to find a good value. But Dan has found one company whose shares are set to skyrocket starting on January 1, when a little-known new law kicks in. The mainstream media isn't talking about this yet… But once it does, Dan says this company could take off.
 
Dan recently put together a brief presentation detailing this opportunity. For the next few days, you can view it – and take advantage of an incredible offer to his Extreme Value newsletter. Get the details here.

Source: DailyWealth

You Haven't Missed the Boat With Bitcoin… Yet

 
I've been pounding the table on bitcoin for a while…
 
I believe everyone should have at least some exposure to this asset class. Cryptocurrencies like bitcoin – and the technology behind bitcoin – will ultimately change the world.
 
The mainstream media have started picking up on the phenomenon… And it's making its way into conversations between families and friends at parties around the world, too.
 
Yet a lot of people still don't understand how bitcoin works. And quite frankly… even if they do, they're still on the sidelines because they don't want to put in the hard work to buy.
 
That means they're missing out on a once-in-a-lifetime opportunity. Don't be one of them.
 
Here's what you should know to get started today…
 
Bitcoin is simply a cryptographically secure medium of exchanging value. It's not a form of "fraud" or a "vehicle for criminals"… And even though bitcoin is becoming more mainstream, I still see countless articles claiming that it isn't real or that it will "close."
 
At the core of bitcoin technology is a kind of super distributed ledger called the "blockchain." The blockchain is public and accessible to anyone… just like the Internet.
 
Bitcoin can be moved around… It can be used to buy goods and services… And it's limited. Only 21 million bitcoin will ever be mined. More than 16 million have already been mined.
 
As an asset class, I would categorize bitcoin as similar to U.S. dollars, British sterling, Japanese yen, or any other currency. Plain and simple, it's a form of currency. And as such, it should be looked at as something between, say, U.S. dollars and gold.
 
It's important to remember that bitcoin isn't controlled by any central organization – the Federal Reserve, the U.S. Treasury Department, the Bank of England, the European Central Bank, or anyone else. Plus, there's no company… no CEO… no chief financial officer…
 
So it can't be "closed."
 
The importance of cryptocurrencies will grow over time simply because they aren't controlled by governments and no one entity is calling all the shots.
 
Still, you might think you've missed the boat because it's becoming more mainstream…
 
In the past, people have always loved to talk about property prices and airline travel at dinner parties that I've attended in Hong Kong and around the world. I've noticed recently that bitcoin and cryptocurrencies are now becoming part of those conversations.
 
But even people who know what they're talking about financially and have been in the investment world for several years aren't completely sure what these cryptocurrencies are.
 
So even though it's entering our everyday lives, not many people actually own bitcoin.
 
That's likely because buying bitcoin is still relatively cumbersome…
 
Exchanges need to do "know your customer" checks. And depending where you live, funding a bitcoin account could require a trip to the bank and an expensive bank transfer. Plus, you still need to become familiar with an entirely new asset class. That takes a lot of effort.
 
But all that means is… the opportunity is still there.
 
Now, I'm not saying bitcoin won't be volatile.
 
Like any asset, cryptocurrencies will continue to see rallies and corrections. Don't fall into the trap of thinking "this time is different" and that bitcoin will go up forever. It could be in for a short-term price bubble. But over the long term, bitcoin's upside is far from over.
 
In short, I believe everyone should add some cryptocurrencies to their overall portfolio.
 
The most appropriate course of action for most investors is simply to buy a small amount of bitcoin – and forget about it. Don't overreach and buy more than you can afford to lose… And you certainly shouldn't borrow to buy bitcoin.
 
Just buy a little bit today, hold on to it, and ignore the short-term volatility. Participate financially, not emotionally. It's not a one-way ride… And it's a bumpy one.
 
Be prepared to stomach big declines and sit tight. And as always, "invest" no more than you can absolutely afford to lose… I'm talking about using as much as you'd perhaps invest in a single speculative small-cap stock in your equity portfolio.
 
Bitcoin is an asymmetric bet…
 
If it falls – or even goes to zero – your loss will be small and insignificant, assuming you've put in only what you can afford to lose. But if it continues to go up over the next few years, then gains of 10 to 20 times are possible… No other asset offers this potential upside today.
 
So don't delay… Become familiar with the process of buying, trading, and storing cryptocurrencies immediately.
 
They're here to stay. And being on the outside (and not understanding them) will limit your ability to profit from them.
 
Good investing,
 
Tama Churchouse
 
Editor's note: If you're like most Americans, you probably don't own any bitcoin. But as Tama noted, it's not too late… He believes we could still see massive gains as more people buy in. In fact, he says some of these cryptos could return up to 100 times your money in the long run.
 
Tama recently put together a presentation to teach you everything you need to know. But don't wait… It will only be available for a few days. Watch it here.

Source: DailyWealth

Don't Touch Another Crypto Until You Read This

Steve's note: If you're interested in speculating in cryptocurrencies like bitcoin, Tama Churchouse is the only guy I trust to give you the full story. Unlike most people, he understands both the technology AND how it can make you money. Today, he's sharing how to combat a serious risk that affects all cryptocurrency investors…
 
On another note, our offices will be closed on Christmas Day. Look for your next issue of DailyWealth on Tuesday after the Weekend Edition.
 
As cryptocurrencies become more and more mainstream… so do the stories of people losing lots of money in these new investments.
 
Just consider the story about a crypto novice who had more than $100,000 worth of crypto assets stolen. They were stored on his laptop in a hot wallet (that is, a wallet connected to the Internet).
 
So what happened? He used his laptop in a restaurant on an unsecure public Wi-Fi network… And it appears hackers gained access to his wallet. The next thing he knew, it was empty, and his cryptos were gone – for good.
 
Before you start buying, storing, and moving cryptos, it's vital that you understand one thing: It is 100% your responsibility to store your crypto assets securely.
 
Everything in the crypto space revolves around security.
 
This will be a different way of thinking for most investors… You see, we take far too much for granted now when it comes to our digital financial wealth.
 
If our credit cards get hacked, we know the credit-card company will foot the bill.
 
Our bank deposits? Well, it doesn't matter if the bank is creditworthy or not, because the U.S. Federal Deposit Insurance Corporation (FDIC) will cover $250,000 worth of traditional deposits with any FDIC bank. And it's the same story in most other markets around the world.
 
After the global economic crisis, the prevailing assumption has been that the government will just bail us out if anything goes wrong. The onus of responsibility has shifted away from us as individuals to the government and financial institutions.
 
But when it comes to crypto assets, make no mistake… the responsibility is well and truly yours. You have very few safety nets – if any. And the safety nets that do exist are the ones that you are responsible for setting up yourself!
 
That's why you need to make sure you're always following three safety measures when dealing with cryptos…
 
     1. Protect yourself with antivirus software.
 
Installing up-to-date antivirus software on your Internet devices is just common sense.
 
It's a basic preventative measure for everything you do online.
 
But keep in mind, antivirus software isn't a magic bullet. It's like wearing a seatbelt. It helps… But if you drive like a drunken maniac, you're still likely to crash – and you can still get hurt.
 
So even if you have antivirus software, you still need to practice common sense on the Internet…
 
     2. Stop using the same password everywhere!
 
I have more than a hundred different usernames and passwords for all my online activities. That includes my brokerage accounts, bank accounts, newsletter subscriptions, and social media sites… It's endless.
 
But we're all tempted to use the same (or very similar) passwords for numerous different accounts. This is a disastrously bad idea, regardless of how strong the password is.
 
Everyone knows this. But most people still do it anyway.
 
Getting into the crypto asset space will require new crypto-exchange accounts and digital wallets… and of course, plenty of new passwords to go with them.
 
Instead of using short, obvious passwords, try longer ones. The longer and more complicated your password is, the harder it is to crack.
 
     3. Use two-factor authentication.
 
When you create an account with a crypto exchange, you have one glaring point of failure. Your account and everything in it (including your personal information, address, etc.) is only protected by a single password. This is a recipe for disaster.
 
But you can protect yourself with a very easy fix. It's called two-factor authentication ("2FA").
 
2FA is a second layer of security above and beyond your username and password. It means that each time you log in, you'll need to provide an additional piece of information (like a code that is sent to you).
 
All exchanges allow you to add 2FA. Some insist on it.
 
And 2FA isn't just for logging in. On an exchange-by-exchange basis, you can activate 2FA for withdrawals from your account as well, providing an extra layer of security.
 
The three most common ways to add 2FA to your exchange account are through text message verification, e-mail verification, or a 2FA application like Google Authenticator or Authy.
 
This extra step might seem like a hassle – but it's absolutely critical to protecting your assets.
 
These are just some of the basic security measures you should know about. Remember… your crypto assets are only as safe as your own security practices.
 
Good investing,
 
Tama Churchouse
 
Editor's note: To succeed in cryptocurrencies, you need to think a little differently… That's why Tama's new Crypto Capital newsletter is a must-read for investors looking to make big profits. In it, he reveals the best cryptocurrencies to invest in today… And he walks readers through exactly how to buy, store, and sell them with easy-to-follow videos and guides. Click here to learn more.

Source: DailyWealth

Did I Steer You Wrong? Did I Miss It?

 
I've been predicting a massive speculative boom…
 
The thing is, I expected it would happen in the stock market.
 
Instead, it has happened somewhere else – in the cryptocurrency market.
 
This brings up a bunch of questions:
 
•   Was I wrong about a "Melt Up" coming to the stock market?
    
•   Is the frenzy going to stay confined to bitcoin and other cryptocurrencies?
   
•   Are we ever going to see a speculative frenzy in stocks?
It has all been fascinating so far…
 
I remember watching the dot-coms soar in 1999 and early 2000. I said to myself, "The next time this situation repeats itself, I am not going to miss it." So that's what I've been trying to do with the Melt Up.
 
The thing is (as they say), history doesn't repeat – it rhymes.
 
The Internet was a new thing during the last Melt Up, like cryptocurrencies are a new thing today. And you hear many of the same kooky ideas today that you heard back then – ideas that have nothing to do with making money.
 
"Bitcoin is about freedom from government and democratization for all." Maybe. But does that make you money? You heard the same things about the Internet in 1999… but freedom or not, people still lost nearly all their money in 2000.
 
The big question to me is if the "animal spirits" ignited by the bitcoin boom will spill over into the stock market. Will the excitement spread? Will people go into a speculative frenzy in stocks?
 
My honest answer is, I think they will – but that outcome is not as certain as you might think.
 
The final speculative frenzy at the end of a great boom is often fairly "narrow." It tends to focus on one corner of the market. For example, during the final year of the dot-com boom, the non-tech Dow Jones Industrial Average stock index did practically nothing. Meanwhile, the Nasdaq Composite Index – full of tech and biotech names – soared more than 100%.
 
You'd think the final boom would happen in stocks today. But I haven't lived through another time where we had an entirely separate exchange for an alternative speculative asset, like bitcoin has today. So this time around, it is entirely possible that ALL of the animal spirits will be directed into cryptocurrencies.
 
I don't expect that to be the case. But we can't rule it out.
 
So what do I expect?
 
I expect that these animal spirits in bitcoin today will ultimately carry over into other speculations – including stocks and properties – before this great boom is all over. But I can't guarantee it.
 
I believe that the Melt Up will still happen… I believe this great bull market in stocks will end with a frenzy in tech stocks and biotech stocks, and that some of that frenzy will come from bitcoin traders who love the rush of a good boom.
 
I believe the stock frenzy is still coming. But the speculative mania in stocks that I thought was guaranteed a few months ago could be a bit less guaranteed today.
 
You look to me to call it as I see it. And I try to call it as black and white as possible – even though we're making guesses about the future.
 
This one is a bit tougher to call… But I think it's the right script to go on today.
 
Good investing,
 
Steve
 

Source: DailyWealth

Investors Aren't Biting on This Deal… Here's What It Means

 
Do I have a deal for you…
 
If you give me $1,000 today, I promise to give you back $1,840 – an impressive 84% return – in just 30 years.
 
In fact, you can give me as much money as you'd like. I'll guarantee you that same 84% return by December 2047. And don't worry… You can trust me.
 
How does that sound? Are you in?
 
If so, make your check out to the U.S. Treasury Department. The offer comes from the federal government… not me.
 
Right now, the longest-term (30-year) U.S. government bonds – the ones with the highest interest rates – yield 2.8%. Multiply that by 30 years and you get your 84% return.
 
That may sound attractive to you. But objectively (compared with history), relatively (compared with stocks), and subjectively (in my opinion), it's not…
 
And that lack of attractiveness is a powerful force in the markets. It's one of the main reasons that stocks continue to rise…
 
Think about it…
 
When you buy U.S. Treasurys (or other bonds) and hold them, you earn interest along the way and get your initial investment back at maturity. In other words, if you're pretty sure you'll get your investment back, yield is everything.
 
Over the past 30 years, the average yield on 30-year U.S. Treasurys is about 5.5%. (That's 96% better than the current 2.8% yield.) At that rate, holding for 30 years would generate a 165% return. (Again, that's 96% better than what you'll earn if you take today's deal.)
 
You can see the long, steady downtrend in 30-year Treasury yields – along with the long-term average – in the chart below…
 
Yields are near all-time lows.
 
Remember, you want to buy when prices are near all-time lows… not when yields are.
 
That's our objective look at bonds.
 
Now, let's compare them with stocks (our relative look)…
 
In stocks, you can earn capital gains as the economy and companies grow. You can earn dividends, too.
 
Over the past 30 years, the U.S. benchmark S&P 500 Index returned 980%, not including dividends. That's 8.3% per year. The index's average dividend yield over that span was about 2.2%.
 
So if you had bought U.S. stocks at an "average moment" over the past 30 years, and held, you would have made about 10.5% per year. (That's the 8.3% average return plus the 2.2% average dividend yield.)
 
Stocks still saw big ups and downs, of course… But we're thinking long term.
 
We can't know how much the economy or companies will grow (or contract) in the future. So to get an idea of what to expect right now, let's just look at dividend yields, while remembering the possibility of capital gains exists…
 
Today, the S&P 500 yields about 1.9%. So the long-term average dividend yield (of 2.2%) is about 16% higher than today's.
 
Considering the long-term average bond yield is about 96% higher than today's, that doesn't seem so bad.
 
Folks who are making the decision between stocks and bonds today should also be familiar with the "yield spread." This is simply the difference between the yields on two assets – in this case, 30-year Treasurys and the S&P 500.
 
The smaller the spread gets, the less attractive bonds are by comparison…
 
•   A 3% yield spread means bonds yield three percentage points more than stocks. So if you buy stocks, you need to earn at least 3% in capital gains to outperform the bonds.
    
•   A 0% spread means bonds and stocks have the same yield. So if you make any capital gains in stocks, you're doing better than you would in bonds.
    
•   And a negative yield spread means stocks yield more than bonds. So if you buy stocks when the spread is negative, you're better off owning stocks unless they fall by more than the spread.
As you can see in the chart below, 30-year Treasurys yield only about one percentage point more than the S&P 500 today. This is near all-time lows…
 
If you think stocks will generate long-term capital gains in excess of 1% a year, you're better off buying stocks than bonds today.
 
Now, we're only using two benchmarks – the 30-year Treasury and the S&P 500 – for these numbers. But the historical levels and trends are similar across the board.
 
Bonds have low yields. Stocks have reasonable yields and offer a chance at capital gains. And that leads investors to move money out of bonds and into stocks.
 
This final chart below shows the ratio of the S&P 500 to 30-year Treasurys. (These are prices, not yields.) The ratio just hit a major new high, showing that stocks are far outperforming bonds…
 
Most folks would look at this chart and say that stocks are expensive relative to bonds. And maybe they are, by some measures…
 
But when you look at the potential long-term returns in each asset, which one is more attractive?
 
Do you want a guaranteed 84% in 30 years? Most folks are answering that question with a resounding "No." So stocks continue to rise. And bonds – at least since last summer – have fallen.
 
The recent breakout in the stocks-to-bonds ratio is a sign that this trend will likely continue. Trade accordingly.
 
Good trading,
 
Ben Morris
 
Editor's note: One group of dirt-cheap stocks is starting a rally. Most investors aren't paying attention – but Ben's readers are on board. And now that the uptrend is here, these stocks could rise 50% or more… with the potential for triple-digit gains. To learn more about Ben's DailyWealth Trader service – and how to access this trade – click here.

Source: DailyWealth

Danger Sign? Small-Business Optimism Just Hit a 34-Year High

 
Uh-oh…
 
Longtime readers know that the best time to buy stocks is when people are scared… You want to "buy when there's blood in the streets."
 
Small-business owners are a good gauge of this…
 
During the past 34 years, the lowest-ever reading in small-business optimism was at the bottom of the market in March 2009. People were scared.
 
It was the exact right time to buy stocks. You know what happened after that – stocks have done practically nothing but go straight up for almost nine years.
 
And after all those years of good times in stocks, we've reached the opposite situation…
 
Small-business owners are as positive about today's outlook as they've been in 34 years.
 
The question is: What does that optimism mean for the future?
 
Is it good or bad for the economy?
 
And more importantly, will this be what kills our nine-year bull market?
 
The short answer is that despite near-record optimism, stocks can still move higher from here.
 
Let me explain…
 
The U.S. economy continues to improve slowly. Growth has been steady around 2%-3% for years. And small businesses are starting to feel the benefits.
 
We can see this by looking at the Small Business Optimism Index – a monthly survey of small businesses across the U.S. These businesses provide information on their plans to hire, expectations for future sales, and overall business outlook.
 
The result is a useful gauge of how small businesses are doing… and how they expect to do in the months ahead.
 
This indicator broke above 105 – an extremely high historical level – in November. That pushed it above its most recent highs in 2004 and 2005.
 
In fact, small businesses are as confident today as they've been in 34 years. Take a look…
 
You can see how rare readings above 105 are. They have only happened a few times over the past four decades…
 
We saw the index jump above 105 in 1983. Then it happened again – once in late 2004, and once in early 2005. We saw another jump above 105 last year… And now, we're seeing it again this year.
 
So what have these spikes meant in the past? Are they "signs of the top"?
 
Not quite…
 
If anything, these peaks were good for stocks and the economy in the years that followed. They certainly didn't signal immediate peaks around the corner.
 
For example, after optimism spiked in 1983, the S&P 500 Index returned triple digits in a little more than three years.
 
We saw a similar story in late 2004. The overall market jumped another 40% through mid-October 2007 after that peak. Of course, stocks collapsed soon after. But that was more than three years after the initial 105-plus reading.
 
The most recent example before now was in December last year… And stocks are up 22% since then.
 
In short, high optimism by small-business owners isn't the obvious negative sign for stocks that a contrarian investor might expect it to be.
 
Instead, extreme optimism in small-business owners is a sign the economy is healthy… and that we could have a few more years of gains ahead of us in the U.S. market.
 
We're closer to the eventual top today than we were last year… But that doesn't mean a crash is imminent. The best advice today is to stay long stocks.
 
Good investing,
 
Brett Eversole
 

Source: DailyWealth