New Market Reality (and How to Deal With It)

Posted On Aug 15, 2019 By Dave Gonigam

  • Stock market reality: Two years of going nowhere
  • It’s a “market of stocks” and not a “stock market”: Here’s what to do
  • GE under the microscope for shady accounting (20 years too late)
  • Is the scary “inverted yield curve” even relevant anymore?
  • Late boom stage: Overstretched consumers, underused factories
  • Public university attempts to trademark the word “the”
  • Epstein latest: The power elite is just trolling us now.

“I took a bath, but I’m learning… Pretty soon, I’ll be a successful day trader!”

Our income maven Zach Scheidt couldn’t help cringing as an Uber driver bent his ear last week on the way to a conference hall in Las Vegas.

The driver said he’d jumped into “the market” just before the president announced new tariffs on China. The Dow promptly tumbled hundreds of points and the wannabe day trader jumped out of “the market” sopping wet after his “bath.”

“I didn’t have the heart to tell him how difficult the day trading business is,” Zach says. “Or how simply investing in ‘the market’ was a near-certain way to avoid success.”

For all we know, the driver took another bath yesterday. It was the Dow’s worst day of 2019. At day’s end, the Big Board registered an 800-point loss.

Time to face up to reality: “The market” has gone essentially nowhere for two years now — albeit with a ton of volatility.

Up, Down, All Around

For the Dow, the low point came on Christmas Eve last year a little under 22,000. The top came a month ago today at more than 27,000.

As we check our screens this morning, the index sits exactly where it did in early June… and in mid-February… and at a dozen or so other points along the way, going back to December 2017.

Both that chart and Zach’s conversation with the Uber driver reinforce a bit of market wisdom that’s especially relevant right now…

“Lately, investors have been working with a market of stocks instead of simply entering or exiting the ‘stock market,’” Zach says.

The distinction is subtle but crucial: “Over the last few weeks, we’ve seen investors take a lot more care in which stocks they put their capital into. That’s a lot different from earlier this year when most investors were simply buying shares of SPY (which covers the entire S&P 500) or shares of QQQ (which is a fund that covers the top 100 Nasdaq names).”

While someone who’s merely “in the market” will be quickly frightened out of the market with no warning… Zach loves times like these.

“It means that those of us who have done our research, picked out solid companies with healthy balance sheets and invested in the names that actually have quality operations… we’re left watching our investments trade higher as other investors scramble to find the best stocks!”

Make the right choices in this environment and your wealth will keep growing. But make the wrong choices and… oof.

So what are the right and wrong choices in this “market of stocks”?

“Unfortunately,” says Zach, “some of the most popular stocks on Wall Street also carry the most risk.

“I’m talking about companies that many people are familiar with (Amazon, Tesla, Netflix and Uber — just to name a few).

“These stocks have been pushed to higher levels because people are familiar with the names and love the products these companies produce. In some cases the businesses are stable, and in others the businesses have some significant risks.

“But because of their popularity, the stock prices have moved to unsustainable levels. Eager investors have bought at any price and now the stock prices don’t actually tie in with the earnings these companies can generate.”

Which is fine — until “the market” gets a whiff of panic. Then those names can sell off faster and harder than the rest of the market.

The right choices are “companies that are generating reliable profits and paying good dividends to investors,” Zach says.

“Sometimes people consider these stocks ‘boring.’ Because they don’t swing up and down sharply and you won’t likely double your money in a three-month period.

“Ironically, many of these stocks are actually trading higher in today’s market. And these stocks actually give you more positive action than the popular stocks that are now falling out of favor.

“Dividend stocks are especially popular right now because interest rates are falling sharply,” Zach adds.

“As Treasury bond yields fall and interest rates around the world actually turn negative, there is a giant wave of capital moving into areas of the market that provide income.

“And the best place for this capital to go is into dividend-paying stocks of companies that have reliable businesses.”

Case in point: Walmart.

WMT reported kickass numbers this morning — beating analyst expectations for sales and earnings as well as its forecast for future quarters. Walmart is up 4.2% on the day and sports a dividend just under 2% — modest, yes, but also way better yield than you can get from a 10-year Treasury note. (About which more shortly.)

Then there’s the company that supplies a ton of the goods on Walmart’s shelves — Procter & Gamble. It yields over 2.5%. Both of these blue chips are among Zach’s favorites.

Zach’s bottom line: “In today’s market, don’t get stuck buying a fund that mimics the S&P 500 — or worse, buying shares of the popular stocks.

“Instead, focus on where the biggest waves of investment dollars are flowing. And lock in your gains as big buy orders drive these stocks steadily higher.”

[Ed. note: Of course, Wall Street sharpies make huge pots of money no matter what’s going on in the market. We’re talking bonuses of $22.5 million… $47 million… even $325 million… all from a single deal.

Zach knows from his hedge fund days how you can tap into those massive money flows — again, no matter what’s going on in the market. Follow this link and he’ll walk you through a revolutionary strategy. The link will stay live through midnight tonight.]

After yesterday’s wicked tumble, the stock market — well, it’s not losing any more ground. All of the major U.S. indexes are in the green, if barely.

Aside from Walmart, one of the other big movers today is General Electric — in the other direction — amid questions about its accounting.

The questions have been raised by Harry Markopolos — the guy who tried to blow the whistle on Bernie Madoff’s infamous Ponzi scheme more than a decade ago, but the feds kept sending his calls to voicemail. Madoff was sent off to Club Fed only after his investors were wiped out.

In a 175-page report prepared for a hedge fund — he’s not saying which one — Markopolos calls GE “a bigger fraud than Enron.”

Heh… Two decades ago when the business press was praising Enron as “America’s most innovative company,” no one batted an eye at the way GE under CEO Jack Welch beat analysts’ earnings estimates by exactly a penny per share, quarter after quarter.

But that was then and this is now. As we write, GE is down 9% on the day. Ouch.

Elsewhere in the markets, gold is steady at $1,518 while Treasury yields are creeping back up.

At last check, the 30-year bond is a hair over 2% — after falling below that level in overnight trading for the first time ever.

The “inverted yield curve” has righted itself for the moment, with a 2-year note yielding 1.536% and a 10-year note yielding 1.559%.

There’s a strain of thought among some market pros that says the inverted yield curve isn’t the recession omen it once was. That is, it’s no longer a reliable barometer in a world where central banks have kept their thumb on interest rates for more than a decade.

We’re not so sure about that, but we’ll venture to say even if a recession hits… it doesn’t mean a massive stock market swoon like 2008 and 2000. That’s because of something Zach alluded to above — money in search of yield will seek out dividend-paying stocks instead of government debt.

It’s the “TINA” phenomenon, short for “there is no alternative” to stocks. And it might well keep a floor under stock prices.

The day’s economic numbers are screaming “late boom phase of the boom-bust cycle.”

The Federal Reserve reports industrial production falling 0.2% in July — in contrast with expectations of a 0.1% increase. Worse, the manufacturing component of this number fell way more than expected, down 0.4%.

And the capacity utilization number came in lower than expected — 77.5% of the nation’s industrial capacity was in use during July. The number’s been falling steadily since late last year and now rests at its lowest level since October 2017.

Cap UTE Chart

Meanwhile, the Commerce Department says retail sales soared 0.7% in July — in contrast with an “expert consensus” looking for 0.3%. Nor is the number distorted by auto sales (which swing wildly month to month) or gasoline sales (rising gas prices can artificially goose the figure). Back out those two items and the number still blew away expectations, leaping 0.9%.

In theory this is all good, but in reality this is classic behavior toward the end of an economic expansion — consumers feeling overconfident and taking on more debt just as the industrial economy is starting to run out of gas, not unlike 2006 or early 2007.

Speaking of consumers taking on more debt, the Trump administration wants to make it easier to take out a mortgage on a condo — and leave taxpayers on the hook if the loans go sour.

On the inside pages of today’s Wall Street Journal is an item about the Federal Housing Administration “vastly expanding the scope of condominium purchases eligible for lower-down-payment loans.”

As in 3.5% down. And a lower credit score than allowed by conventional loans. Basically the FHA is going back to pre-2008 standards for condo loans. We’re sure that’ll work out just swell at the end of a business cycle.

Not stated in the Journal story is whose palm got greased by which condo developer to push through this inevitable boondoggle.

We’re also staggered by the irony of the Trump administration playing right into the green agenda — which aims to corral more and more people into high-density housing and not “wasteful” single-family homes.

Stupid trademark tricks: A major public university is looking to corner the most common word in the English language.

Application No. 88571984 at the U.S. Patent and Trademark Office was filed last week by Ohio State University — er, excuse us, The Ohio State University, as it’s formally known and as its alums will remind you during those overproduced player introductions on NBC’s Sunday Night Football.

As CNN reports, “The school seeks to use the word ‘the’ mainly on T-shirts, baseball caps and hats.”

THE Ohio State Trademark

Actual image from actual government document

Trademark lawyer Josh Gerben — who spotted the application a few days ago — says the application will likely be rejected on technicalities, which the university can and will easily address on a second go-round.

Geez, doesn’t Ohio State have bigger concerns — like ethically challenged football coaches and its own version of Michigan State’s sexual-abuse scandal? Oy…

“Epstein dead pool,” reads the subject line of an email we got after our conspiracy-minded episode of The 5 on Tuesday.

“Tried to start a Epstein Arkancide pool at work, but too many wanted to go short (hours, not days/weeks) and the first attempt by the biker hit man caused a payout request.

“Why he didn’t have a three-man defense lawyer/FBI/federal marshal protection team sitting in the cell with him was clearly a signal that it was open season on him. The people who could have been exposed made him one of the most important people to break the world’s biggest criminal organizations, and the handling of this over the last five decades only shows how deeply entrenched it is and how far it will go to protect its members.”

The 5: Every new Epstein story the last 24 hours is more and more staggering.

Early reports about the autopsy’s findings point to broken bones that do happen to people who hang themselves but “are more common in victims of homicide by strangulation,” according to experts cited by The Washington Post.

Meanwhile, someone collected Epstein’s body from the New York City medical examiner’s office. Per NBC News, “The person who claimed Epstein’s body was described only as an ‘Epstein associate.’”

It’s like the power elite is trolling us all now…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

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