Another day, another corporate scandal…
Dispatch readers know a growing number of companies are using financial tricks to make their businesses appear stronger than they really are. As we mentioned yesterday, some companies are using “financial engineering” to inflate sales or profits. Others are committing outright fraud.
It’s becoming harder and harder to trust Corporate America. And now, there's yet another reason why…
• On Monday, LendingClub’s (LC) board of directors discovered something troubling…
LendingClub is the largest “peer-to-peer” lending company. It doesn’t lend any money itself. Instead, it runs a website that connects people who want to borrow money with people who want to lend money. In other words, it cuts banks out of the borrowing and lending process. It helps people make loans directly to other people.
Back in 2014, Lending Club was a phenomenon. Peer-to-peer lending was supposed to be the next big thing. The company went public to much fanfare that December.
But since then, it's been a huge disappointment for investors. Shares have plummeted more than 80%, and the latest news tells us things are only getting worse for the company…
• LendingClub misled one of its biggest investors…
The Wall Street Journal reported on Monday:
LendingClub said a board review found that the San Francisco company sold an investor $22 million in loans whose characteristics violated the investor’s “express instructions.” The board found that some people at the company knew the loans didn’t meet the investor’s criteria and that the application date on $3 million of those loans had been altered to make them comply.
LendingClub’s CEO, Renaud Laplanche, also failed to disclose a personal interest in a company that buys many of its loans.
After discovering these violations, the board fired Laplanche. LendingClub’s stock has plunged 44% since Monday. It’s trading at an all-time low.
• E.B. Tucker, editor of The Casey Report, told readers to avoid LendingClub months ago…
He called the company “A Club for Suckers” in the November issue of The Casey Report:
If you end up at LendingClub, it means you don’t qualify for a conventional loan. Or you’re trying to borrow to do something unconventional. Either way, it’s riskier than a traditional loan.
LendingClub is doing a lot of lending to these higher-risk borrowers…about $2.5 billion a quarter. By the end of the third quarter, the company had funded a total of $13.4 billion in loans since its founding in 2006.
He said investors should steer clear of the stock:
LendingClub members will suffer along with the company’s stock price. The only winners will be the insiders who pocketed the loan origination fees and dumped their shares on the public.
Whether you’re a shareholder, a borrower, or a lender, this is one club you don’t want to be part of.
LendingClub’s stock is down 70% since E.B. wrote this warning.
• E.B. thinks “LendingClub only exists because of the Fed’s warped easy money policies”…
Regular readers know the Federal Reserve has pinned its key interest rate near zero since 2008. The Fed thought it could “stimulate” the economy by making it incredibly cheap to borrow money. But its experiment with rock-bottom rates has been a huge flop.
The U.S. economy is growing at its slowest pace since World War II. In many ways, the average American is worse off today than before the last financial crisis. The real median household income has fallen from $57,795 in 2007 to $55,218 today.
It’s also become much harder to build a nest egg. Savings accounts pay next to nothing these days. The yield on the 10-year Treasury has plunged from 4.6% in 2007 to 1.8% today. For decades, retirees bought 10-year Treasuries for safe and dependable income. But Treasuries no longer pay enough income to live on, unless you’ve saved a small fortune for retirement.
Investors desperate for income have resorted to lending money to strangers through companies like LendingClub.
• Other investors desperate for returns have piled into stocks…
The S&P 500 has more than tripled in value since March 2009. Today, it trades near an all-time high.
While stock prices have risen, earnings have not. In fact, earnings for companies in the S&P 500 have now fallen three straight quarters. And they’re on pace to drop for a fourth consecutive quarter. That hasn’t happened since the 2008-2009 financial crisis.
Stocks are expensive too. The popular CAPE valuation ratio, which gives a long-term outlook for the S&P 500, is 56% above its historic average. U.S. stocks have only been more expensive three times in history: before the Great Depression, during the dot-com bubble, and before the 2008 financial crisis.
• Despite these red flags, the S&P 500 is within 4% of its all-time high…
You may be wondering what’s keeping stocks afloat.
For one, stocks still “pay” more than bonds. The current yield for companies in the S&P 500 is 2.1%. That’s less than half the index’s historic average, but still significantly more than the 1.8% that 10-year Treasuries pay.
Companies are also buying back record amounts of their own stock. Regular readers know a share buyback is when a company buys its own stock from shareholders.
Buybacks lower 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 improve the business. They just make it look better “on paper.”
• Last year, companies in the S&P 500 spent almost $1 trillion on buybacks and dividends…
That’s more than they made in profits.
During the fourth quarter, companies in the S&P 500 spent 108% of their operating income on dividends and buybacks. According to investment research firm Yardeni Research, that’s the highest level since the 2008-2009 financial crisis…when corporate profits nosedived.
This isn’t sustainable. Companies can’t pay out more than they take in forever. Eventually, they’ll run out of money to spend on dividends and buybacks. And that will be a huge problem. Dividends and buybacks are one of the only things propping the stock market up today. As we’ve explained, sales and profits are shrinking, stocks are expensive, and the global economy is cooling.
The U.S. stock market is a dangerous place for your money right now. Sure, stocks could maybe rise another 5% or so over the next year. But they could also plunge 50% or more like they did during the last two major selloffs.
If you own the broad stock market, you’re running in front of a steamroller to collect pennies. The risk far outweighs the reward.
• Subscribers of The Casey Report are ready for a big selloff…
E.B. has urged readers to own physical gold and lots of cash.
Gold has served as money for thousands of years. It’s preserved wealth through stock market crashes, economic depressions, and full-blown currency crises. It’s your best defense against financial chaos.
Holding cash is another way to avoid big losses if stocks plunge. This will also put you in a position to buy stocks when they get cheaper.
In the meantime, E.B.’s readers are making money shorting (betting against) one of America’s most vulnerable companies, a major airliner. In short, E.B. thinks the good times are coming to end for the airline industry.
E.B.’s airline short has returned 11% since February. He says the stock could dive 50% or more.
You can invest with E.B. by signing up for a risk-free trial to The Casey Report. You’ll have a full 120 days to decide if it’s right for you. Watch this short free video for details.
In it, you’ll learn how you can get The Casey Report for a 50% discount to what others are paying. You’ll also learn why E.B. believes a major currency shift has just taken place…one that could make a lot of money for investors who make the right moves now. Click here to watch.
Chart of the Day
This could be a record year for dividend cuts.
Today’s chart shows the number of dividend cuts made by U.S. corporations each year since 2004.
Last year, nearly 400 companies cut their dividends. That was the most since the 2008-2009 financial crisis. Through April of this year, there have been 213 dividend cuts. At this rate, we could see 639 dividend cuts this year. That would smash the 2009 total of 527.
If you own a stock for its dividend, make sure it can keep making payments. You should avoid companies that are quickly burning through cash or borrowing money to pay their dividends. As we said earlier, companies can only keep this up for so long, until they run out of money. And when a company cuts its dividend, its stock typically plummets.
Delray Beach, Florida
May 11, 2016
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