The bull market is on its last leg…
As Dispatch readers know, U.S. stocks began a historic rally seven years ago. From March 2009 through December 2014, the S&P 500 soared 204%.
This bull market is still “technically” alive. The popular definition says a bull market ends when an index falls 20%. Since peaking in May, the S&P 500 has dropped a maximum of 15%.
Still, the rally appears to be running on fumes…
• The bull market is now 84 months old…
The average bull market since World War II has lasted just 52 months. Historically speaking, U.S. stocks are long overdue for a bear market.
That’s just one reason to be concerned.
According to the popular CAPE valuation ratio, stocks in the S&P 500 are 53% more expensive than their historic average.
The S&P 500 is also coming off its third consecutive quarter of declining earnings. That hasn’t happened since 2009. According to research firm FactSet, Wall Street expects the S&P 500 to report an 8.3% decline in first-quarter earnings. The first quarter ends on March 31.
• With all these warning signs, you may be wondering why U.S. stocks haven’t tanked yet…
The answer is simple. Although “mom and pop” investors have been dumping stocks, U.S. corporations have been buying their own shares at a near-record pace.
Bloomberg Business reported yesterday:
Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever…
Should the current pace of withdrawals from mutual funds and ETFs last through the rest of March, outflows would hit $60 billion. That implies a gap with corporate buybacks of $225 billion, the widest in data going back to 1998.
Since 2009, S&P 500 companies have shelled out more than $2 trillion on share buybacks. 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 can boost 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.”
Buybacks are about the only thing keeping the stock market afloat. As you can see in the chart below, the S&P 500 has gone nowhere since September 2014.
• Borrowed money has fueled the buyback craze…
Dispatch readers know the Fed has held its key interest rate near zero since 2008. It’s made it comically cheap for U.S. companies to borrow money.
In 2008, a corporation with good credit (an “A” credit rating) could borrow money in the bond market at around 6.0%. Today, these companies can borrow at 3.1%.
As a result, U.S. corporations have loaded up on cheap debt.
The Securities Industry and Financial Markets Association reports that U.S. corporations have issued $9.7 trillion in new debt since 2008. Last year, U.S. companies issued more than $1.5 trillion in new debt, which set a new all-time high.
Many companies have used this borrowed money to fund share buybacks. Reuters reported in September:
Interest rates at near zero have increasingly prompted companies flush with cash to issue debt to fund share buybacks. Apple Inc., for instance, has issued $23.6 billion in debt this year despite having more than $200 billion in cash, part of its plan to buy-back up to $140 billion in shares by the end of March 2017. MetLife Inc., meanwhile, sold $1.5 billion in bonds in June to fund share buybacks, while having more than $10 billion in cash on its balance sheet.
• The buyback mania helped push stock prices to record highs…
But remember, individual investors are no longer buying stocks. Corporate America is the only buyer still standing.
Buybacks can only prop up the market for so long…
As we said earlier, corporate earnings are drying up. The last two major earnings droughts sparked huge declines in share buybacks. Bloomberg Business reports:
During the last two decades, there have been two times when earnings contractions lasted longer than now. Both led companies to slash buybacks, with the peak-to-trough drop reaching an average 62 percent.
• E.B. Tucker, editor of The Casey Report, thinks stocks are on the verge of a major decline…
In short, E.B. thinks U.S. stocks will enter a bear market before summer. One of his favorite “big picture” tools is flashing a warning sign we haven’t seen since the financial crisis. Investors who sold their stocks when this warning appeared in 2008 avoided a 43% loss.
Dispatch readers know E.B. is worth listening to. In September, he called the end of the bull market.
It was a bold call. The S&P 500 had more than tripled in value over the past six years. The Dow Jones Industrial Average and NASDAQ both hit record highs only two months earlier.
E.B.’s call has been spot-on so far. None of the three major U.S. indices have set new highs since July.
• The U.S. stock market is incredibly fragile…
We recommend setting aside cash. This will help you avoid major losses if stocks plunge. A cash reserve will also put you in position to buy stocks when they get cheaper.
E.B. is waiting for that day… He plans to buy “empire assets” in The Casey Report for cheap. Empire assets is our nickname for world-class businesses that we buy and hope to own for a long time. They include companies that own valuable real estate and natural resource deposits, and companies that control things people need, like water.
E.B. is watching one industry in particular…
I'm waiting for once-in-a-decade prices on food stocks.
You see, selling inexpensive food is a great business. Even when the economy is bad, people need to eat. Businesses that mass-produce inexpensive food are nearly recession-proof. E.B. says:
When people can't afford to eat out, they go to the grocery store more. I want to own the companies that stock the shelves…companies like cereal maker Post Holdings (POST) and B&G Foods (BGS), which sells the iconic Green Giant frozen vegetables.
E.B. will let his subscribers know when it’s time to buy these consistent and trusted companies. You can get in on these opportunities by signing up for The Casey Report. Click here to begin your risk-free trial.
• Owning physical gold could also save you from big losses…
Gold is money. Unlike paper currencies, governments cannot destroy its value. It has held its value through every financial crisis in history. And it also tends to perform well when stocks and bonds do poorly.
The price of gold is already up 17% this year. It’s off to its best start in more than 25 years, according to Financial Times.
• Louis James, editor of International Speculator, has never been more bullish on gold…
Louis is our resource guru. He’s been studying the gold market for more than a decade. His specialty is finding small gold miners with massive upside.
As his readers know, Louis travels the world visiting mines. He studies rock samples, questions management, and looks at projects firsthand to find gold stocks with the most upside.
Last week, Louis explained why this is one of the best opportunities to buy gold he’s ever seen.
Today, we’re coming off the longest and most devastating gold bear market in the past 40 years. With valuations near extreme lows, small gold stocks are like coiled springs, ready to leap higher. Now is the best time I’ve seen since I started this business to position yourself for potential 10-baggers (1,000% gains).
Gold stocks offer leverage to the price of gold. A 100% surge in the gold price can cause gold stocks to surge 200%…300%…400%…or more.
• The last time Louis saw an opportunity like this in 2001, a key gold stock index surged 602%…
The best gold stocks jumped more than 1,000%.
Louis thinks we’ll see even bigger gains during this gold bull market.
To help you profit off this rare opportunity, we’re offering a special deal on International Speculator. If you sign up today, we’ll knock $500 off the normal price.
You’ll also receive Louis’ latest report, 9 Essential Gold Stocks to Buy Right Now. This report includes Louis’ top picks for the current gold bull market. These stocks could return 10x, 20x, or even 30x. Those gains might sound unbelievable…but they’ve happened before.
Chart of the Day
Corporate earnings are worse than they appear.
U.S. corporations are required to report GAAP earnings per share. GAAP stands for “Generally Accepted Accounting Principles.” It’s the standard way to report earnings.
A growing number of companies are also reporting “adjusted” earnings. These alternative earnings measures don’t conform to GAAP.
Many companies use adjusted earnings to remove the impact of factors they consider “temporary,” like the strong dollar or a warm winter. A company’s management team decides what to include or ignore when measuring adjusted earnings. As you might guess, adjusted earnings typically look better than GAAP earnings.
Last year, 20 of the 30 companies in the Dow Jones Industrial Average reported adjusted earnings.
Today’s chart shows the difference in GAAP and adjusted earnings for companies in the Dow Jones Industrial Average over the past two years. In 2014, adjusted earnings were 12% better than GAAP earnings. Last year, they were 31% better.
Companies claim that adjusted earnings give a more accurate picture of their business. We’re skeptical. Be cautious when investing in companies that cite strong adjusted earnings. Some companies use “adjustments” to hide weakness in their business.
Delray Beach, Florida
March 15, 2016
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