Posts by The Trend Letter

Illinois – the canary in the coal mine

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A few months ago, we highlighted how Illinois was broke and that it would soon be the first state to have a junk bond rating. After all, the state has gone over two years operating without a budget.

The state is in shambles, running up $15 billion in unpaid bills, and according to CNN Money Watch, Illinois’ unfunded pension liabilities increased 25% in one year to over $250 billion.

In an attempt to raise revenues, the state officials did what all politicians and bureaucrats do, they raised every form of tax and fee possible. In fact, their proposed solution to overcome their $6 billion budget deficit is to raise taxes by $5 billion, or $1,125 per household per year.

The problem there is that people are leaving Illinois in droves. In 2016, almost 90% of all Illinois counties saw their population shrink. For the third year in a row, Illinois leads the US with the number of residents leaving the state. The population of Illinois is now the lowest it has been in a decade.

It is not just residents that are leaving, as businesses say they are being hit with a perfect storm of regulations and tax hikes this summer, putting a damper on hopes for business expansion and jobs growth.

“Earning a profit is getting to be a dirty word,” Mark Grant, Illinois state director of the National Federation of Independent Business, told Illinois News Network.

In her frustration with lawmakers, the state’s comptroller Suzana Mendoza stated…

“I don’t know what part of ‘We are in massive crisis mode’ the General Assembly and the governor don’t understand. This is not a false alarm.”

States are not like Federal governments who can print money out of thin air. States are more like real businesses in that they must balance their budgets as there is only so much money and credit available.

Illinois is the canary in the coal mine. It is an early warning that governments have made outlandish promises to workers in the form of unsustainable pensions funds, and these obligations can never be met.

Puerto Rico had a similar scenario a few months ago, basically they were bankrupt. Illinois is the second alarm in the US, and there will be many more to follow.

Politicians and government officials all over the globe have made promises that can never be met. The winners are those who get to collect on those promises right away, while the losers are those who are stuck with the bills long after the politicians have retired on their pensions.

For Illinois, the problems just magnify. By mismanaging their budgets for so long, investors are now fleeing Illinois bonds. This has caused a sharp spike in bond spreads on Illinois general obligation bonds, making it costlier for the already cash-strapped state to borrow.

Illinois bonds

The state’s pension crisis threatens to burden taxpayers with massive, ever-escalating taxes to bail out a system that is simply not sustainable. And every day Illinois goes without a solution to its pension crisis, the state’s pension debt grows by over $20 million.

And Illinois is not alone, this problem is widespread. Later we will show how big the US federal liabilities problem is.

Over three years ago we warned of a global debt crisis that would devastate most investors. That crisis is now underway. Understand what is unfolding, and have a plan to protect your family”s financial future.

Stay tuned!

Headlines – June 21/17

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  • China stocks win MSCI inclusion; initial market reaction muted. Read story
  • Uber CEO Travis Kalanick resigns under investor pressure. Read story
  • Oil headed for weakest first-half performance in two decades. Read story
  • S. Korea says crashed N. Korea drone ‘grave provocation’. Read story
  • Villian of the housing crash makes a comeback. Read story
  • The dark side of China’s national renewal. Read story
  • Russina defense minister’s jet buzzed by NATO jets. Read story
  • Brexit one year after vote: Here are 5 possible scenarios for the EU divorce. Read story
  • Saudi king ousts nephew for son as Crown Prince. Read story
  • Wimbledon winner Boris Becker declared bankrupt. Read story
  • 38% of Americans less winning to attend large events due to terrorism. Read story
  • India’s oldest yogini says that you are doing yoga wrong if you are working up a sweat. Read story
  • On the lighter side. Check it out

Stay tuned!

Will we ever see $100 oil again?

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Yes we will see oil at $100 again, and in fact, we will likely see oil at north of $200 in the next decade. But before we get there we are most likely to see oil in the $30 range.

When the Fed started its Quantitative Easing (QE) program, they created an environment where oil producers were able to borrow for almost nothing. As oil prices climbed to over $100, producers wanted to expand as quickly as possible, so they all borrowed as much as they could.

The problem is that many of these producers borrowed to extremes, many ending up with a debt-to-cash ratio of over 4:1. As always happens, high prices are the cure for high prices, meaning as all producers rushed to ramp up production, production surpassed demand, forcing prices much lower.

Oil0618

According to the Haynes & Boones Oil Patch Bankruptcy Monitor, since 2015, 123 North American oil and gas producers have filed for bankruptcy 2015.

Bankruptcy filings

These bankruptcies involved a total of $79.9 billion in cumulative secured and unsecured debt.

Bankruptcy_debt

With investors in desperate search for yield, many ending up buying the debt from these heavily leveraged oil and gas produces, resulting in some serious losses.

As oil prices dropped, oil and gas producers started slashing their costs, cancelling exploration and expansion plans, laying off hundreds of thousands of employees.

Then prices started to recover from the low around $26. Along the way we had OPEC finally give in and apply quota levels, as they wanted desperately to get prices up to $60. Prices did get to $55, but then the North American and other non OPEC countries continued to ramp up production. .

And now, the gap created with OPEC cuts is being filled by the US and non OPEC producers. In the US production is closing in our the all-time high of 9.6 mb/d.

USprod0618

And the exploration continues to grow as producers added another 6 rigs last week, for a total of 747 rigs, a 122% increase from a year ago. Last week was the 22nd consecutive weeks where the rig count increased.

Rigcount0618

We are now in summer “driving season” where  oil stocks usually decline as refinery utilization rises to peak summer highs, but as we can see on the following chart even if inventories drop here, they are at extreme levels measured against the normal range.

oilinventory0618

With US and non OPEC producers ramping up production and offsetting OPEC cuts, oil prices have been falling. Most OPEC countries are very dependent on oil revenues to finance their budget spending, so you know that the tension is building and that the risk of non compliance is rising. These countries are cutting back, and having to watch the US and other non OPEC producers continue to increase production and steal market share.

The temptation is going to be for OPEC countries to bail on their quotas and start to take back market share. The result of such a move would add even more supply to an already over supplied sector, driving prices even lower.

But understand that once we work through this next liquidation, we are looking for a great buying opportunity at much lower prices!

Yes oil prices could easily go down to $30 or even lower before this turns around. But all sectors move to extremes and none more than the oil sector. As production outpaces supply, prices decline, lower prices mean decreased cash flow, and ultimately cause cuts and shutdowns. Basically, the cure for low oil prices will be lower oil prices.

While currently we have an over supply issue, as we look out to the future, we see some dramatic changes ahead.

BP published a study showing that non OECD countries (such as China and India) will account for over 90% of the population growth into 2030. Due to their rapid industrialization and motorization, they will contribute over 90% of energy demand growth.

While renewable energy will continue to grow, once we get through the next liquidation in the oil sector, we see much higher oil prices in the next decade, mostly driven by demand from China and especially India.

Note: On May 30th we sent a sell signal on oil to our subscribers. This very simple trade to action is up 29% as of June 20. If you want to receive these type of trading signals, click here. 

Stay tuned!

Shareholders wiped out after Spanish bank failure

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For over a year now we have been warning that many large Euro banks are in serious financial trouble. This week, after burning €3.6 bln ($4 bln) of emergency central bank funding in the first two days of the week, Spain’s Banco Popular suffered the eurozone’s first large-scale bank run. A steady stream of deposit withdrawals turned into a full fledged flood as news that the bank was in trouble spread. Note that this was just days after their chairman told his employees “don’t panic”, as stock prices tumbled.

BancoPopular

The Spanish bank, weighed down by €37 bln ($41.4 bln)) in mostly toxic property loans, was forced to tell authorities in Madrid on Tuesday that it would be unable to open the next day without a rescue deal to shore up its rapidly evaporating liquidity.

This is the first crisis under the EU’s new regulations related to failing banks, where the rescue of the bank does not impact depositors, burden taxpayers, or they hope, freak out the markets. The big losers are the shareholders.

Understand that Banco Popular is by no means the only bank in Europe at risk. The total value of non performing loans (NPL) in Europe is €1.06 trillion! That €1.06 trillion equates to 5.4% of the entire EU’s total loans, and it is more than triple that of other large banking sectors such as Japan and the US.

But while the whole EU has 5.4% of toxic loans, on a country by country basis, the picture is much scarier. A shocking 10 of the 28 EU countries have an NPL ratio greater than 10%.

  • Cyprus 49%
  • Greece 46.5%
  • Slovenia 19.8%
  • Portugal 19.2%
  • Italy 16.6%
  • Ireland 15.8%

In Cyprus and Greece almost 50% of all loans are non-performing. Italy, whose €350 billion of NPLs accounts for over 66% of Europe’s entire toxic debt stock.

This change of policy where taxpayers and bank clients are not the victims is a popular one. In the Banco Popular rescue the solution was that the European regulators took control of the struggling bank, wiping out its shareholders and junior bondholders, then selling the bank for a symbolic €1 to its bigger rival Banco Santander, which was the only bidder in the overnight sale process.

This brings a whole new risk to owning Euorpean banking stocks. If you owned Banco Popular stocks, you just lost 100% of your investment. There was no bankruptcy sale, no sale of assets such as property etc, to offset losses to shareholders.

The game has changed and there will be many more bank failures as the percentage of toxic loans in Europe is massive!

Stay tuned!

Watch for the S&P 500 to reach 3000+ before bull market ends

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Q: I am a new subscriber and see that you have projected the S&P 500 to hit 3000 in 2018, how do you justify such a projection?

A. We are currently in the middle of one of the biggest bull markets in history. Historically, before the top blows off a bull market there is a final massive run up as the mass investors jump on board.

We see this phenomena in every sector: stocks, real estate, precious metals, you name it. Before the real estate crash in 2005, everyone, and we mean everyone, was talking about how much their home was worth and how there is only so much land, so prices could never go down.

It was the same for the Japanese market back in the 1980’s. As highlighted below, the Nikkei Index jumped over 100% in the last couple of years of that bull market as the masses piled in, wanting to get in on the big gains.

 Nikk_crash
Back in the 1920’s, leading up to the Great Depression, the Dow Jones climbed almost 400% from 1922-1929, with a big portion of that move in the  final year as investors believed that the stock market could only go up. The higher the market went, the more euphoric the investors became.
Dow_crash

The key is that the final run up of a bull market can be massive. Today, there is no euphoria about the stock markets. Just recently we had investors pouring money into long-term bonds earning in some cases, negative returns.

According to Blackrock’s CEO Rob Kapito, investors have stockpiled some $70 trillion in cash, and now, due to low returns in the bond market, those investors are starting to move their capital into equities. That is a massive amount of cash that has been sitting on the sidelines as investors burned in the 2008 crash wanted nothing to do with equities.

Are we at the top here – we do not think so? In January our models called for the S&P 500 to reach 3,000+ by mid 2018, and that forecast has not changed. We are certainly due for a correction soon, and not the one-day correction that we saw last week. But we would see a correction as a great buying opportunity.

Bull markets end when everyone is in, and there are no more buyers. That is not the case today. There are still tens of trillions of investor’s dollars on the sidelines today. The end of this bull market will come when all bull markets end, and that is when the masses all start to pile in during the last couple of months of the bull market.

Right before the end, we will see headlines calling for massive gains, as euphoria will be rampant. Soon after that manic euphoria we will see this market crash. But that is not the case today, today we are looking for the S&P 500 to hit 3000+ in 2018.

If we get a correction we will be sending subscribers new BUY alerts.

Stay tuned!

Was today the start of the Trump dump?

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With this being such a critical time for the US and global economies, the US voted in Donald Trump, a candidate who was a non-politician, who represented change. Trump was elected with a platform of tax and regulatory cuts, and infrastructure spending. He also promised to “drain the swamp” and remove the corruption and lobbying that is the norm in Washington.

So Trump’s challenge was enormous enough as it was, but the fact that Trump cannot stop being Trump is making it almost impossible for him to make good on his promises.  The more he shoots off his mouth and Tweets, the more he  alienates his political supporters. Trump cannot implement all his promises without the approval of the Congress.

His latest scandals relate to meeting with Russians and allegations he asked FBI director Comey (now fired) to shut down an investigation into former National Security Advisor, Gen. Michael Flynn. The latter of these issues has the mainstream press all giddy with talk of impeachment.

The stock markets have not taken kindly to Trump’s latest indiscretions. Lately, the NASDAQ and S&P 500 both hit new all-time highs, but the Dow Industrial Average did not confirm. We were watching to see if the S&P 500  could have a weekly close above 2400, which would be very bullish.

With the latest Trump news, we saw volatility spike over 42% today. With the stock markets we saw the NASDAQ drop 158.63 points or 2.57%, the S&P 500 down 43.64 points or 1.82%, and the Dow down 372.82 points or 1.78%.

vix0517

The problem for the markets is that with all these distractions the odds of getting any tax reform before the summer break is in serious decline.

Keep an eye on the 2325 level (top dotted line) level for the S&P 500, as it represents the Near-term Support and a break below that level brings 2300 into sight. A break below 2300 would open the door for a significant correction. A 7% correction would take the S&P 500 to 2238 (lower horizontal line). SPX0517

At this point the April monthly close could prove to be significant. While the Dow did not confirm with a new high, if we get all three indexes with a May monthly close below the April close, then we could see a prolonged correction here.

A prolonged correction here would set up for a very welcome buying opportunity. Our model’s projection for a global debt crisis remains on target, meaning that ultimately we will see massively indebted countries default on their debt, and the global flow of capital will seek out safer private investments such as North American equities.

As the masses realize that it is governments that are the problem, investors will dump government bonds and buy equities and gold. A serious stock market correction here would set up very well with our model’s projection of one final rush out of equities into bonds, and then we see Europe start to collapse, and the first of many Sovereign Debt Defaults.

Timing is the key. If you understand the global flow of capital, you will not only survive this coming global Sovereign Debt Crisis, you will be in position to prosper significantly. If you don’t, you won’t!

Stay tuned!

May 17 Update – TTT Subscriber Content

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Bullmarket

 

A glorious day in stocks resulted in the worst tumble in over 8 months.  This was very long overdue and had nothing to do with U.S. politics.  Hopefully it’s the start of a lasting trend, however for now we’ll call it a good start.

All our positions were up today with the exception of TBT.  Most notably, VXX rose 18% today alone.

 

As good a start as that is, a bear market has not necessarily begun.  Reasonable expectations remain that markets make a new all-time high, possibly with non-confirmations among major indexes, then a protracted market drop will finally commence.  This may have already occurred with the NASDAQ and S&P500 again marking new all-time highs this week while the DJIA has not done so since early March.

In any case, an enduring and deep bear market looms and it’s safer to be short in the current technical and fundamental environment.

 

Open Positions

VXX – opened at $14.60 on May 11  Initial sell stop at $13.20 on an intraday basis.

HXD – opened on May 04 at $6.70  Initial sell stop at $6.30 on an intraday basis.

RJA – opened at $6.35 on May 02  Initial stop level at $5.84 on an intraday basis.

WEAT – opened at $7.10 on May 01  Initial stop at $6.55 on an intraday basis.

FXB – opened at $120.54 on March 16  Initial stop at $120 on an intraday basis.

NIB – opened at $24.00 on February 15.  No stop on this position as we intend to own it until cocoa is above $2500.

NIB (2nd position) – opened at $23.63 on May 08  No stop on this position as we intend to own it until cocoa is above $2500, however if you have both positions and wish to limit risk on at least one then we suggest a sell stop at $20.90

DGP – opened at $25.87 on November 02.  No stop until GTI turns bearish.

SJB (1st position) – opened at $25.15 on October 28.  Initial stop at $23.58  Original post is here.

SJB (2nd position) – opened at $24.95 on December 14.  Initial stop at $23.58

SJB (3rd position) – opened at $24.40 on March 08.  Initial stop at $23.58

TBT opened at $30.80 on July 12 2016.  Initial stop at $29.90.  Here’s the original rationale and chart.

 

Indicators

GTI (Gold Trend Indicator) : Bullish

DJIA: 20606  -372 Wednesday.

Daily: bearish, 20890.  Short-term highly aggressive traders and hedgers may wish to be net long when the DJIA is above this level, and net short below.

Weekly: bullish, 20845.  Moderately aggressive investors, trading or hedging on an intermediate basis, who follow the Weekly Indicator may find it prudent to be hedged or net short if the DJIA is trading below this pivot level. Reminder – we do not have an official change to “bullish” or “bearish” unless the DJIA closes the calendar week above/below this pivot level as the case may be.

Monthly: bullish, 20400.  Conservative investors, trading or hedging on a longer-term basis, who follow the Monthly Indicator may find it prudent to be hedged or net short when the DJIA is trading below this pivot level. Reminder – we do not have an official change to “bullish” or “bearish” unless the DJIA closes the calendar month above/below this pivot level as the case may be.

NOTE : Speculators and frequent traders will prefer to use the Daily or Weekly Indicator levels as trading or hedging pivot points, while longer-term investors may prefer to consider only the Monthly Indicator level.

 

General Recap

As of March measures, U.S. investors were holding 52% stocks relative to cash.  In nearly 30 years, fewer than 10% of months have shown measures as high as 52% in the stocks-to-cash ratio.  Most of those months were toward the end of the massive market top of the late 1990s.

U.S. Margin debt is 38% higher than at the market peak of July 2007 and 90% higher than the market top in March 2000.

As of early February 2017 the Investment Intelligence Advisors’ Survey has registered a bullish percentage that shows the highest level of optimism in 30 years.  That’s extremely bearish, and the last time this reading was higher was in 1987 before the major market crash that year.

Here’s a look at the Shiller 10-year price/earnings ratio as of late January 2017.  The implications are self-evident and ominous.

shiller-pe10

Complacency and imprudence is not rewarded in the long term.  Whenever the top is hit the gains in 2017, at least, will be unwound in a matter of days or weeks.

Consider too that a lasting bear market hasn’t happened in decades.  The crash of 2000-2003 was fully reversed by 2006 and the DJIA was at all-time highs by 2007.  The crash of 2007-2009 was fully reversed by 2012 and by the end of 2016 the DJIA was at a far higher all-time high.  We may well be approaching a lasting top in equities before a real, and long, bear market.  Act accordingly with respect to risk, position sizing and stops.  Anything you buy, be prepared to buy again (or sell) at half the price or less.  Always.

Risk is very high.  A material and lasting correction in equities is years overdue, while some bullish measures are at extremes not seen since the peak of the tech bubble in the late 1990’s.

In the “big picture” it’s not a safe time to enter long-term holdings which is why the only longs we’d considered keeping at least paid high dividends.

One well-timed entry can be far more profitable than rushing into a dozen positions simply to be doing something, so those with a long-term outlook are best advised to wait for a significant market low even if it takes months or years, or at least get paid dividends while waiting.

The old adage applies – “If in doubt stay out”, and wait for new opportunities as they come up.

Prudent position sizing and risk management are key.  Without risk however there can be no reward, so over time we’ll seek to mitigate risk via true diversification and buying only when shares seem beaten down and oversold, as well as adopting general market short positions at prudent times in order to hedge.

 

Positions Closed in 2017

FXB – opened at $120.25 on October 11, stopped at $118 on January 11

FXP – opened at $30.10 on October 11, stopped at $29.90 on January 26.

NIB – opened at $27.70 on January 24.  stopped at $24.90 on February 08.

TZA – opened at $19.85 on December 22, closed at $18.35 on February 10.

ETP – opened at $35.61 on December 03 2015, closed at $38.20 on February 10 and yielded 11.9% ($4.22) based on our entry price for 14 months.

EARN – opened at $12.34 on December 17 2015, closed at $14.10 on March 08 and yielded 13% ($2.10) based on our entry price for over 15 months.

OSP.to – opened at $7.00 on March 01, closed at $9.33 on March 08 and yielded 17.1% ($1.20) based on our entry price for 12 months.

ONCS – opened at $1.67 on February 22, closed at $1.29 on March 14.

VXX – opened at $18.00 on February 16, closed at $15.80 on March 17.

USLV – opened at $11.95 on December 29, closed at $15.90 on April 07.

WEAT – opened at $7.30 on January 17, closed at $6.65 on April 21.

SDOW – opened at $33.85 on March 06, closed at $33.76 on April 25.

TZA – opened at $17.85 on February 23, closed ay $16.89 on April 25.

VXX – opened at $16.30 on March 21, closed at $15.14 on April 25.

Average  +7.2% over 19 weeks including dividends (19.7% annualized)

Win percentage 29%

Average Gain  33.6% including dividends

Average Loss  7.5%

Click here for the tally of closed positions in 2016 representing annualized gains of 40%

Subprime auto debt crisis coming?

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In 2016 US auto makers sold more cars than ever before, with many of the mainstream media hailing this as clear evidence of rising consumer confidence. But it was not just auto sales that revved higher, so too did auto loans.

US auto buyers racked up $1.2 trillion in auto loans last year, an increase of 9% from the previous year. Meanwhile, the number of vehicles purchased increased by only 1.5%, highlighting that auto loans are now representing a higher percentage of household debt.

Autoloan

It is not just that auto loans are increasing that we find concerning, it’s the fact that auto loans made to consumers with subprime credit have accounted for a growing percentage of the market.  These increased sales have been achieved by aggressively pushing people into auto loans that they cannot afford.

It’s not like we haven’t seen this movie before. In 2007/08 we entered the subprime mortgage crisis, all based on lending too much money to people who had poor credit ratings. When they defaulted on their mortgages, we saw the US real estate market implode.

So now in the auto loan sector, delinquencies have moved up as the credit quality of the loans has deteriorated and the length of the auto loans has increased, up to 84 months.

Auto loan delinquencies hit the highest level since the financial crisis as more  than six million American consumers are at least 90 days late on their car loan payments, according to the Federal Reserve Bank of New York.

 “The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years,”  said the bank

About $23.27 billion in loans were 30 days or more late as of Dec. 31,  a whopping 14% increase from the year earlier and the most since the $23.46 billion in the third quarter of 2008.

Deliquent_auto

Moreover, of those subprime auto loans, the New York Fed said a full 75% originated with auto finance companies which have been loosening their credit standards since 2010.

As a result of these weak lending practices by the auto finance companies, almost 5% of their auto loans were running at least 90 days in arrears during the fourth quarter, compared with 1% for auto loans issued by banks and credit unions.

As we should have learned in the subprime mortgage crisis, when you make loans to people who cannot afford them, eventually many of those loans are going to go bad, which is what is happening now.

In addition, sales are declining and used car prices have dropped, none of which makes us want to own stock in the automakers today.

Ford

Stay tuned!

Headlines

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  • Wall St opens higher as government shutdown averted. Read story
  • Oil falls as drillers boost rigs and Libya expands output. Read story
  • Biggest gold ETF just saw largest outflows on record. Read story
  • Fed’s cut in bond holdings may be messier than Yellen hopes. Read story
  • French election: Macron says EU must reform or face ‘Frexit’. Read story
  • Le Pen attacks ‘same old’ Macron. Reads story
  • Trump: Kim Jong un is ‘a pretty small cookie.’ Read story
  • Trump commends Philippines leader Duterte’s war on drugs and invites him to US. Read story
  • US factory activity slows; inflation pressures subside. Read story
  • Obama makes $400K for speech at A&E event. Read story
  • Student penalized for using the word ‘mankind’ instead of ‘humankind’ in essay. Read story
  • Netflix finds a way into China, but it’s not quite what it really wants. Read story
  • Almost every speed limit is too low. Read story
  • Democrats say they now know exactly why Clinton lost. Read story
  • On the lighter side. Check it out!

Headlines

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  • US first quarter growth at 0.7%, weakest in three years as consumer spending falters. Read story
  • Canada’s economy stalls as factory decline offsets housing. Read story
  • Eurozone inflation picks up to 1.9%. Read story
  • Oil rebounds from one-month low on hopes for OPEC output cut extension. Read story
  • Trump: ‘Major, major’ conflict with North Korea possible. Read story
  • Sub-prime mortgage lender Home Capital scrambles for lifeline as investors flee. Read story
  • Trump vows to fix or scrap South Korea trade deal, wants missile system payment. Read story
  • Republicans fail to repeal Obamacare again. Read story
  • Google and Facebook ‘duped’ in huge $100 million scam. Read story
  • RBS reports first quarterly profit sine 2015. Read story
  • How fewer Americans are out-earning their parents – in one chart. Read story
  • Apple’s self-driving car seen on road for first time. Read story
  • Russian ‘combat robot’ can shoot guns, lift weights and even drive a car. Read story
  • The on-demand economy is a bubble and it’s about to burst. Read story
  • Bombadier shares slide after Boeing seeks US anti-dumping probe. Read story
  • On the lighter side. Check it out!