It's hard to ignore the current rally in U.S. stocks…
Last week, the S&P 500 and Dow both hit record highs. The S&P 500 has now climbed four weeks in a row, up 8% since late June.
Some folks might see this and think now is a good time to get back into stocks.
But if you've been reading the Dispatch, you know these headline numbers aren't telling the whole story.
You see, the stock market is actually a very dangerous place right now.
Today, we'll show you why…and we'll tell you how you can protect your wealth while giving yourself a chance to profit when the market heads lower.
But, first, let’s look at how U.S. companies are really doing…
• Second quarter earnings season is in full swing…
Earnings season is when companies let the world know how business is going. Management tells investors if profits grew or shrank during the last quarter. Many companies also give an outlook on next quarter’s results.
A good earnings season can send stocks higher. A bad one can trigger a selloff.
According to research firm FactSet, 25% of the companies in the S&P 500 shared second-quarter results as of Friday. Based on these numbers, the S&P 500 is on track to post a 3.7% decline in earnings. This would mark the fifth straight quarter of falling earnings. And that would match the longest earnings drought since the 2008–2009 financial crisis.
• It could be a while before earnings pick back up…
Analysts expect the S&P 500 to post a 0.1% decline in third-quarter earnings. The third quarter ends on August 31.
According to FactSet, Wall Street projected third-quarter earnings to rise 3.3% as recently as March 31. In other words, corporate profit expectations are rapidly deteriorating.
At this point, you’re probably wondering why stocks are rallying. After all, one of the main reasons folks buy stocks is to earn a share of future profits. Shrinking profits should cause stock prices to fall.
• Companies are buying near record amounts of their own shares…
The Wall Street Journal reported two weeks ago:
Companies in the S&P 500 bought back $161.39 billion of shares during the first three months of the year, the second-biggest quarter for repurchases ever.
A share buyback is when a company buys its own stock from shareholders. Buybacks reduce the number of shares that trade on the market. This boosts a company’s earnings per share, which can lead to a higher stock price.
But buybacks do not actually help companies grow profits. They only make profits look bigger “on paper.”
According to The Wall Street Journal, the total number of shares of stock on the market is shrinking for the first time in five years.
Shares outstanding in the S&P 500 have fallen this year from year-earlier levels, on track for the first yearly decline since 2011, according to S&P Dow Jones Indices.
The huge spike in share buybacks has made corporate earnings look better than they really are, which is troubling given that earnings haven’t grown since 2014.
• Companies are buying back their shares at the worst possible time…
You see, stock buybacks aren’t necessarily a bad use of money. If a company’s stock is cheap, a share buyback can be a good use of capital. But, as Dispatch readers know, stocks aren’t cheap.
According to the popular CAPE ratio, stocks in the S&P 500 are 61% more expensive than their historic average. Since 1881, U.S. stocks have only been more expensive three times: before the Great Depression, during the dot-com bubble, and leading up to the 2008 financial crisis.
• The more earnings fall, the more expensive stocks become…
The CAPE ratio is the conventional price-to-earnings (PE) ratio with one tweak. Instead of using one year's worth of earnings, it uses earnings from the past 10 years. It gives us a long-term view of the market.
But like the PE ratio, CAPE can only increase if 1) stocks rise or 2) if earnings fall. Both are happening right now.
That’s a big reason why we’re so skeptical of this rally. You see, stocks could rise another 5% or even 10% over the next few months. But, with earnings in decline, stocks will only get more expensive the higher they climb.
Expensive stocks crash faster and harder than cheap stocks. In short, you’re risking a lot of money for the chance to make a little if you own the S&P 500 right now.
• E.B. Tucker, editor of The Casey Report, encourages you to “take shelter”…
All year, he’s been urging folks to own physical gold.
As we often point out, gold is real money. It’s preserved wealth for centuries because it’s unlike any other asset. It’s durable, easy to transport, and easily divisible. Folks all around the world recognize gold’s intrinsic value. Investors buy gold when they’re nervous about the economy or financial system.
E.B’s advice has paid off for his readers. The price of gold has jumped 25% this year. It’s now trading at its highest level in two years.
But E.B. thinks gold could head even higher in the coming years. That’s because he sees tough times ahead for the stock market and economy.
• E.B. isn’t out of stocks completely…
He’s only investing in companies that he knows can weather a long economic downturn. One way he’s doing this is by owning companies that “feed the masses.”
You see, E.B. thinks the average American will see their standard of living plunge in the coming years. As this unfolds, folks will start taking fewer vacations. They’ll buy fewer cars. And they’ll stop buying jewelry they can’t afford.
But people will still have to eat no matter what happens to the economy. That’s why E.B recommended three companies that put food on the table this year. One of those stocks, Archer Daniels Midland (ADM), is already up 41% since January.
After its huge run, ADM isn’t a “buy” at current prices. But there’s time to invest in E.B.’s other two “feed the masses” stocks.
You can learn about these companies by signing up for The Casey Report. If you act today, you can access all of E.B.’s research for 50% off the regular price. Watch this short presentation to learn how.
In this video, E.B. talks about the biggest threat on his radar. As you’ll see, you can’t escape this coming crisis. But you can prepare for it. To discover how, watch this FREE video.
Tech Recommendation of the Day: Buy or Sell Intel?
Today, we're continuing our interview series featuring technology guru Jeff Brown.
If you aren’t familiar with Jeff, he’s a true tech insider and angel investor. Over his career, he’s built tech startups and held top positions at some of the world’s leading tech companies.
Yesterday, Jeff told us why he thinks Facebook is a “strong buy.” Today, in a recent interview with Bonner & Partners Managing Director Amber Lee Mason, he shares his thoughts on Intel (INTC), one of the world’s largest computer chip makers:
Amber Lee Mason: Next up, Intel.
Jeff Brown: Absolutely a sell as well. You know, here's a company that has had very flat revenues and has been struggling to escape its historical business. Semiconductors have been centered very much around personal computers.
PC sales have been declining for years. Intel's memory business has been significantly under pressure, as have been its margins. The only area of growth that Intel has really experienced in the last few years has been the division that focuses on data centers and servers. As a lot of these large data centers were built out, Intel enjoyed some rapid growth in that segment. But that particular division, which is the only real bright spot, is showing some significant signs of weakness for two reasons.
One is, the amount of investment in data centers and information technology has been weak over the last few quarters, and there's been a lot of new competition in that particular space. Think of companies – like the combined company of Avago and Broadcom, as well as a company called Cavium – that have very good products targeted in this particular area. They have an advantage because their semiconductor architecture is actually at a much lower power than what Intel offers. And your largest running expense for data centers is power consumption. So it's a significant advantage for the competition.
The other thing that's worth noting is, some of the largest potential target customers for data centers – like Google, Facebook, and Netflix – have started developing their own semiconductor solutions. Having a custom architecture is advantageous, and obviously they can do it for less cost. So that's eating into Intel's potential market share.
And one final comment would be, Intel has spent $10 billion-plus trying to break into the mobile market and has not been successful. They just canceled a product line called their Adam chip, and it looks like they're leaning towards exiting that business and a very poorly thought-out acquisition that they did a few years ago when they bought McAfee, which is a software-based security company. They're looking to sell that off as well. So for all those reasons, this is just not a company to invest in right now.
Jeff may be avoiding Intel. But he’s very bullish on many other tech stocks.
Each month, Jeff tells his readers about the most exciting tech companies in his newsletter, Exponential Tech Investor. Many of these companies are currently flying under the radar…but they could soon become household names.
Right now, you can lock in a subscription to Exponential Tech Investor for $500 off the regular price. Keep in mind, this “early bird” price won’t be available after tonight. If you're interested, you must act now.
Delray Beach, Florida
July 26, 2016
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