Porter and Buck welcome two of the smartest traders on the planet, True Wealth editor Dr. Steve Sjuggerud, and Jason Goepfert of SentimenTrader.com. Porter’s the Bear and Steve’s the Bull when it comes to the direction of stocks, but what’s the market really trying to tell us? Jason shows you how sentiment can be massively valuable for contrarians who buy hated investments, and Porter asks what kind of opportunities he sees today.
Steve asks Jason for his take on the bond markets, oil, interest rates, and how volatility and sentiment impact his trading decisions. Porter shares his biggest saving grace as an investor, and asks Jason how quickly an indicator can get him to change his mind.
Porter answers a listener’s question about how bond recovery works when a company goes bankrupt, and Steve tells you why many Chinese stocks are set to explode, how you can get in on the trade, and why China is his absolute favorite investment theme for the next 2 to 5 years.
President and CEO, SentimenTrader.com
Currently, sentimenTrader.com has subscribers in all 50 states and more than 50 foreign countries. I am also a contributing writer to the Emmy-winning site Minyanville.com, and provide private consulting for hedge funds and managed accounts.
Editor, True Wealth,True Wealth Systems,True Wealth Opportunities: China,True Wealth Opportunities: Commodities,
Dr. Steve Sjuggerud is the editor of True Wealth, an investment advisory specializing in safe, alternative investments overlooked by Wall Street. It's based on the simple idea that you don't have to take big risks to make big returns.
Porter and Buck welcome two of the smartest traders on the planet, True Wealth editor Dr. Steve Sjuggerud, and Jason Goepfert of SentimenTrader.com. Porter's the Bear and Steve's the Bull when it comes to the direction of stocks, but what's the market really trying to tell us? Jason shows you how sentiment can be massively valuable for contrarians who buy hated investments, and Porter asks what kind of opportunities he sees today.
Steve asks Jason for his take on the bond markets, oil, interest rates, and how volatility and sentiment impact his trading decisions. Porter shares his biggest saving grace as an investor, and asks Jason how quickly an indicator can get him to change his mind.
Porter answers a listener's question about how bond recovery works when a company goes bankrupt, and Steve tells you why many Chinese stocks are set to explode, how you can get in on the trade, and why China is his absolute favorite investment theme for the next 2 to 5 years.
Buck: Hey everybody, welcome back to another episode of the Stansberry Investor Hour. I'm nationally syndicated radio host, Buck Sexton, and with me here today, the one and only, the founder of Stansberry Research and amateur corn farmer, Mr. Porter Stansberry. Good to have you, sir.
Porter: Buck, nice to see you again. As the readers should know, we have spent a lot of time together this week. We had a business errand we had to run and Buck got to travel on one of my planes and got his first introduction of Porter's world-famous barbecue. We had barbecue duck and I wasn't sure Buck was going to like it and then I wasn't sure I brought enough.
Buck: It was amazing, delicious.
Porter: The Buck can eat some barbecue.
Buck: Oh yes he can. I had no idea I would like smoked duck so much. Buck and Duck go together like peas and carrots. I want to tell you all about Jason Goepfert. After attending the University of Minnesota with a concentration in finance and economics, Jason helped build the online brokerage operations of a major U.S. bank from five people into over 300 and a top 10 ranking. He founded Sundial Capital Research in 2001, and has been trading stocks, options, futures, currencies, and commodities for 20 years.
He developed several indicators based on customer activity and soon, started a service that provide sentiment indicators and research in one spot without having to search all over the web. Currently, Jason's sentimentrader.com has subscribers in all 50 states and more than 50 foreign countries. Jason is Steve Sjuggerud's go-to source for sentiments in the market and we're glad to have them both here today to give you their insights on what's happening with volatility, bonds, oil, and U.S. stocks.
Porter: Steve Sjuggerud, my longtime good friend and business partner over the last 20 years and Steve has a guest, so Buck, it's like the guest of the guest.
Buck: It's like inception. It's an extravaganza here on the Stansberry Investor Hour. Just real quick for those who don't know, Dr. Steve Sjuggerud is the editor of the True Wealth franchise and Porter's longtime friend and business partner. You know Steve probably from his market "Melt Up" thesis or the intuitive work he's done on recent investment opportunities in China. Dr. Sjug, what's up man.
Steve: Thank you guys, thanks for having me.
Porter: Sjuggerud is in the house and there is the ghost of Sjuggerud with us as well. I say that because our second guest today, Jason Goepfert, and Steve share so many core investment ideas that it's sort of like talking to one or the other at the same time. So we also have the ghost of Sjuggerud, Jason Goepfert with us. Jason, if you wouldn't mind just filling our audience in. If you could tell them about your website and the business that you operate as well.
Jason: Sure. We have Sundial Capital Research and the primary outlet for that is sentimentrader.com. Been doing that for over 20 years, but that website specifically just about 18 years now. It's been a while. Got started on a shoestring and just kind of started aggregating some of the indicators and I've found useful from my prior life.
Tried to find what was public and what was easily available and what wasn't. Found out that other people started to find that valuable as well, so just kind of started building up and adding more features as we went on and added a partner couple years ago. He's been a fantastic addition and been able to develop some tools that I would not have the skills to do on my own, so that's been a great addition as well.
Steve: I'll tell you guys a little about Jason. Porter, you've seen me do this many times where if there's someone who's doing something a lot better than me, I actually go and I seek them out. So for example, Meb Faber. I flew out to California. I courted him like a high-school crush or something, because he was doing such fantastic work and it was right up the ally of what I was doing.
I did the same with Jason Goepfert. I flew to Minnesota, met him. My wife and kids hung with his wife and kids and but really, he was doing the best sentiment research on the planet. Somehow, it just continues to get better and better. I would say yes, if you were asking what the one indispensable piece of financial research that I follow, it would be Jason Geopfert's SentimenTrader website.
Porter: That's pretty good endorsement, pretty strong. And, you know, Steve and I are in the midst of this long market cycle argument that I've been warning since 2015 or 2016, that the bull market's getting long in the tooth. It's time to be more cautious. I particularly have big worries about the credit markets.
Steve has just been like a little dancing sprite.
Oh, there's nothing to worry about, the party can continue, oh, have more punch. Right? Blue skies will be here forever. The exact opposite of what I've been saying, basically, and of course our customers go "Who should I believe?"
I say "That's simple, look who has the better track record. It's Steve."
So Jason, can you help us out with that? Where are we at this cycle? Does your sentiment research give us any indication about when it's time to head for the exits?
Jason: You guys tend to have a lot longer time frame than I do. Most of what we follow – the most effective time frame is what I would call medium term, which is several months. When you look out a year plus, it tends to degrade in terms of effectiveness. The interesting thing, though, especially with sentiment, is that it's been swinging much quicker than it has in the past.
You'd get a sentiment cycle from extreme pessimism to extreme optimism and vice versa, that would play out maybe over one to two years. And now it's a few months, so you know when you would say December or January, well, everything that we followed, pretty much everything, was off the charts optimistic.
That's not as effective a cell signal as bi-signals, but still, it was a huge warning sign. And then by February, it was the exact opposite. We got a pessimistic extreme that we've rarely seen before in terms of just the breadth of pessimism across indicators. In years past, you would not see that. It would take many, many more months, even years to get that kind of extreme. For me, it's really hard to say out two years, because the sentiment cycle is swinging so frequently anymore.
Steve: Jason, I have a quick question. Before we get too deep into these things, I wonder if people even understand the idea or believe in this idea of sentiment.
For me, I had an experience in college where I studied finance. I went to University of Florida and all we were taught about was the efficient markets theory and the dividend discount model and that value was what mattered. And markets are efficient and that you need to approach them unemotionally and so why should we even care about sentiment at all?
I think you had a similar experience and then you came to a conclusion very quickly like I did that what we were taught in college wasn't exactly right. Can you share a little about your experience?
Jason: Yeah, same thing. I got indoctrinated at the University of Minnesota. Same thing, their business school, four years of finance and economics "education" and I was always interested in markets. Read pretty much everything I could after that, in terms of financial analysis and then into technical analysis, all the chart patterns, et cetera.
And they were persuasive. The theories sounded good. That's how financial markets seem like they should work and then I got into the brokerage industry with Wells Fargo and ended up managing their margin and options department for their brokerage firm and I was doing that for probably three weeks until I found out that everything that I'd learned up to that point, it did not hold in the real world. That is not how markets work, that's not how people work.
Steve: So you're in the margin department. So did you actually listen in on margin calls to a customer?
Jason: I did. That was part of my responsibility to make sure my margin clerks were doing what they should be doing and treating the customers with respect and if customers were not covering their equity call that we were selling out the accounts and not exposing our company to risk.
A big part of my day was just sitting on the phone with an earpiece and listening to the clerks make these calls. What became abundantly clear immediately is that people were extremely emotional when it came to their leveraged investments. You know, a big part of it is if you're just holding $50,000 of IBM stock and you've got a $1 million portfolio, it's not that big of a deal. When you borrow and leverage that position, the emotional part of that rises substantially.
So when you're dealing with people that are on margin or using options, it's much different. They were much more emotional and it was fascinating to listen to these calls.
I remember this one lady in particular, Colette, her name was. She had fallen in love with QUALCOMM and every time she would call in, which was multiple times a day – this was in the mid-1990s – she would say how's my QUALCOMM doing? It was always my QUALCOMM and that really stuck with me, because she'd personalized this stock and she talked about it like it was a friend.
She'd be on the call with these clerks, that's how she treated it and she got very angry when it went down. It was almost like this friend had let her down.
So when you listen to calls like that, when you listen to people screaming or crying when they get a margin call and they don't know what to do and they've got other stuff to pay for and so they sell everything, because they don't want to deal with it, that leaves a big impact. You realize that these financial formulas that you learned in a textbook don't necessarily apply, because that's not how people work.
Porter: As a newsletter publisher and guy who reads – I read 50 or 100 e-mails a day from customer's feedback. I see that all the time and I wanted to bring Buck into this. Buck, your father was a stockbroker during the roaring 80s, during the go-go era. I asked you what was it like when he came home on the day of the crash and all the emotions that they –
Buck: Oh, it was astounding. My dad actually built his early notoriety in his career as a stockbroker by calling the crash. That was kind of his big calling card, so it was weird – yeah. There's actually stuff on some old clips on YouTube where he was on whatever the financial network is. I'll send it to you guys, but he's a chartist. He's a technical analyst. That was what he did. I don't understand that stuff at all. He does.
Porter: This is what Steve and I got into the business to combat. The way I always see it is, "How amazing is it?" Here we have a casino where every player should win, right? Because stocks go up. QUALCOMM went up a lot. If that woman held all her QUALCOMM until at least 2000, she probably made 100 times her money, but here, we have this game where everyone should win.
Everyone should win this game and yet, it seems to me, and according to lots of studies, virtually no one does. So, it's amazing how people can get sidetracked by their emotions. This is a winning game.
First thing that occurs to me is why would you ever use margin in the first place. That's number one, so let's start with that. Steve and I got into this business and here's what we thought. This is a winning game.
Surely, we can teach people how to win a winning game and the constant battle that we face as writers and publishers is simply getting our subscribers to get their heads out of their asses and stop doing these things that inevitably result in losses.
The funny thing is you meet these people at conferences, they do it again and again and again and again. So Jason, one of the first innovations that Steve brought to us was the ideal of trailing stop losses. Hey, let's take emotions out of it. As long as the stock is doing the right thing, stay put. Let your winners run and of course, as you know, human behavior does the opposite.
You take a small profit, you feel good about yourself. Meanwhile, you let a loss linger on for years and years. It's just you pointing that out that the fact that behavior isn't logical and most people in the stock market don't do the things that textbooks say they will do. That was the opportunity that allowed Steve and I to get into this business and become more and more successful. Jason, how did you acquire that knowledge and what did you do next? What did you do with the information that a lot of the market participants were irrational and would always be so?
Jason: I started accumulating some of this internal data and creating very rough indicators based on – I'd look at how many margin calls we placed that week or month and then of those, what percentage actually sold out of their accounts, how many added more money. And that gave me what I thought would be pretty good insight as to what the psychology of people was at the time. Did they think that stocks would just rebound and so they would contribute more money, or were they panicking and selling everything out?
And so when I lined that up against moves in the market, I found out that it was a very good indicator. So I used [crosstalk] OEX options at the time. Just started sharing some of that with some trading buddies on the trading floor and elsewhere and then I actually ended up leaving there in the late 90s and went to a hedge fund and found out that it was basically the same thing and I wasn't learning anything. Some of those buddies came back and said you know, we missed the stuff, can we get that back?
You know, I wasn't at Wells Fargo anymore, so I didn't have access to the data. So just started scouring the web and finding everything I could that was out there. There were some websites out there that were focused on sentiment.
Schaefer's investment research had done quite a bit with that, but I wanted a cheap place where people could get some of the stuff for not very much money and I spent $19 and put up a website with Yahoo. That's what they charged at the time to register a domain and get a website up and it was butt ugly. It was a horrible website, but people started to subscribe right away and kind of took off from there.
So that was the genesis of it. That's where I started creating some of these indicators was from this margin data. I looked at the volume of options applications that came in. My idea was that if people are feeling confident they would want to trade options and that was a pretty good top indicator. So just from that, I kind of took that and started trading options and did fairly well with it and decided to expand that.
Steve: And you've come a long way. The thing about everything else that existed before what you do, Jason, is you've come a long way to say the least. Right now, there's back testers that you've able to test on his website, any indicators versus anything that you're looking at sentiment-wise you can actually test to see if it was useful.
But just getting back to sentiment and how I got interested in the first place and how we did, Porter. As you know, my mantra for investing, I've said it thousands of times is I'm looking for an investment that's cheap, hated, and in the start of an uptrend. That's the optimal thing and the first of those and the third of those are already well established.
Anyone can do a Bloomberg screen for what's cheap or what's in an uptrend. But what's hated, how do you take something that's subjective and make it objective?
I felt like that was a big space for potential alpha for potential performance and I just think Jason is the best out there doing it.
One thing I wanted to ask, Porter, you talk a lot about market volatility, but the question is, is volatility actually useful? Is it proven to be useful? I know we can say it's volatile now, but is it proven? Is there usefulness to that? Can we make profits on that? I wanted to ask Jason how he feels about the VIX and if there's any usefulness as an investor.
Jason: I would say a qualified yes. I do find it effective. I think the VIX has kind of held out as the end all be all of sentiment. Same as the Investors Intelligence survey or AAII survey of individual investors. That's kind of what's given in the mainstream media as representation of what the sentiment is as at the time. I just think that really does a disservice. Most of the media does a disservice with misinformation, but that's a separate point. So the VIX, yes, there is some value in it.
Steve: If you were picking five indicators, would the VIX be one of your five to look at or is volatility one of your top five to look at?
Jason: Top five, yeah, I would still say yes. But I – not really the VIX itself. I look at what's called term structure and that's because futures are traded on the VIX now. You can look where traders are placing their uncertainty, whether it's in the very short term, medium term or long term. And what we've seen over the past few years is that when they start to panic, that raises the uncertainty in short term.
You'll see the short-term VIX spike relative to the later months. That has been a really good signal, especially over the past five years or so.
What concerns me is the VIX has become a very big product. Volatility has become a very big product and we know in February, that became a huge issue with some of these funds blowing up. I've been leery about the VIX for the past two years or so. It's been acting weird, there's no other way to put it.
It hasn't been acting the way it has historically for the past 30 years relative to moves in – well, the S&P 500 in particular, because that's what it's based off of. So there's been weird things with the VIX.
Now there's some suits going around about manipulating it into the close and there's stuff like that where it's like, you know, there's something weird here and it's not as good of an indictor I think as it used to be. It's become very popular and pretty much when anything becomes that popular, it starts to degrade and I think we're seeing that with the VIX as well.
Porter: Jason, obviously, I don't follow sentiment the way you do or even the way Sjug does. One of my favorite stories that I heard about Wall Street back in the early days was when there was a real panic, when people were really freaking out, the old guys with the canes would come walking downtown to buy stocks.
These are the guys who never invested regularly, they just waited until they heard panic in the streets and then they would come out, the Rothschild family thing about "we invest when there's blood in the streets," that idea. When you hear the canes clanking, you know it's really the time to buy and those are all stories about sentiment.
What I have seen is that sentiment, for me, is not that useful most of the time, because I'm trying to make long-term investments, not daily trading decisions, but when sentiment reaches an extreme, it's almost infallible. I mean really, almost infallible.
Steve: Especially the blood on the streets side of it.
Porter: I remember in 1998, we had people convinced that Saudi Arabia was drowning in oil. Oil was $7 a barrel, nobody wanted it. A year later, gold is around $200 an ounce and the financial times has a whole special insert, like 10 pages about how gold is a useless relic and no one will ever own it again. There are these classic sentiment moments, but they're very extreme. What I was going to ask you is when you look around today, is there anything out there that is truly at an historic extreme?
Jason: I wouldn't say to that degree. Last year, if you would have asked me if this would have been six months ago, I would have said grains. We were about to that point with corn, wheat, soy beans, to a lesser extent.
Porter: Jason, was it a bearish extreme? Do you think grains are going to higher from here?
Jason: Yes, pessimistic, yes, absolutely.
Porter: Thank goodness. I bought a corn farm in 2013. It hasn't gone well so far.
Steve: Jason, what about the absolute crazy extreme in oil right now? Futures, you know, basically big traders are betting massively on higher oil prices to a level that's never been seen before in history. Any thoughts on that, because so far, they're right. You know, they're betting on higher oil prices, but I've never seen an extreme like that. Is that an extreme to you?
Jason: It is. I prefer to look at it as a percentage of open interest, because if you look at absolute positions, it can change as a contract gets more or less popular.
Right now, I look at commercial hedgers, which by definition, take the opposite side of speculators. If we look at speculators, they're holding about 30% long of the open interest. In oil, that was really the only time that that would be equivalent to what we're seeing now.
The same thing in the euro actually. Right about 30 % of open interest. We've seen that a couple times and each time the euro peaks. Those two contracts, when you look at trader positioning, by far, are the most extreme.
Steve: When do you make your bets on oil and the euro? Are you like me and you want to wait for the trend to confirm the idea or are you willing to bet on sentiment by itself?
Jason: I've learned my lesson with energy. I will sometimes make bets on energy stocks, but the contracts themselves, I tend to avoid.
Currencies, somewhat the same. They influence so many other contracts that you're kind of making an implicit bet on currencies by making no bets on some other contracts like gold or whatever.
So yeah, with both of those, they can trend beyond what a sentiment extreme is. I would certainly wait for some type of reversal, whether that's dropping below a moving average or dropping three percent from a peak or something like that, whatever your stop is.
Steve: Jason, one I'm very excited about is interest rates and this is a big deal, a big argument around the office. We had this extreme in interest rates, I mean, an absolute extreme where everyone is betting on higher interest rates. There's no one left to bet on lower interest rates and me as the contrarian and looking for these extremes in sentiment, to me, right now is the time to be long bonds, to be betting on lower rates. And we entered that trade in True Wealth and we're slightly underwater in my newsletter.
So I think Porter is in the opposite side of this trade for me. He's currently making money while I'm losing money on this trade.
Do I have the wrong trade on, Jason? Should I be waiting for more of a trend? Am I reading sentiment wrong on this or what's it look like for Treasurys or – you can comment on junk bonds after that as well, because I think Porter has some strong opinions and that'll be interesting. What's your take on the general bond market and Treasurys in particular?
Jason: If you look at an aggregate bond index like Bloomberg Barclays puts out, if you look at the past 48 years of history, the past eight months, it's been able to rise only eight weeks out of those – well, 32 weeks.
Steve: That sounds like a bad sign.
Jason: It has been a bad sign, because bonds really haven't gone anywhere except down a little bit. The only other time that happened was during the crisis in 1994. After that, bonds took up the upside. It got somewhat similar in 2000. Bonds took up to the upside, so when you look at things like that, even from a price perspective and how consistent the downtrend has been, it's what I would certainly consider an extreme.
Look at sentiment survey as trader positioning. We put those together just overall bond optimism index. It's rebounded a little bit, but last week, it hit the second most extreme in two years. Again, this tends to be a little shorter term than you usually focus on, but on a multimonth – say six-month time frame, I would much rather be long than short bonds.
Porter: You just said that in 1994 and in 2000, the bond markets went a number of weeks where bond prices didn't go up. And when you say bonds going up, a lot of people think you're talking interest rates.
Okay, I just want to be clear about this. In '94 and in 2000, there was a period of rising rates where the bond market prices were flat down for a very long period of time. And we're seeing that right now, too, so for 10 out of the last 32 weeks, bond prices on aggregate have gone down, which means that interest rates have gone up for corporations in America. That's the worst stretch, I believe, currently, that we've ever seen in 40 years.
Jason: Yes, I was talking about bond prices.
Porter: Okay, this is indicative of perhaps a secular, not just a cyclical but a very important long-term change in trend where for 40 years, bond prices have generally always gone up. That, all of a sudden, is no longer a given. And as a result in the market, more and more people are betting on higher rates, AKA lower bond prices.
So all of a sudden, sentiment and the bond market is unlike it has ever been in our professional careers and almost in our lifetimes. So the question that I have for you is do you expect that trend in both the market and the sentiment that's associated with it to reverse? Do you think that bonds will rally after this correction or this long period of declining bond prices or do you think this change in sentiment and change in price action is indicative of a reversal of the 40-year bull market in bonds.
Jason: You make an excellent point. I would say – well, what you would consider a shorter-term time frame, I think bods will rally, rates will decline. We are seeing something we haven't seen before and that's always a red flag. You should always say "well, okay, markets are doing something they haven't done before, maybe this is a change." And that's what you should be doing, because very often when we see that, it does mean a longer-term trend change.
This is where sentiment will often fail. This happened January of 2008. Sentiment was failing at that point and that should have been a sign that something was wrong.
There was an overwhelming factor that was swamping whatever sentiment was saying at the time. Same thing happened in February last year. Steve, I don't know if you remember, but I had peer reports on how all of the things we were looking at, they kept rallying. That was a failure and you should learn from failures.
If the market is not doing what it's supposed to do, that's sending a very strong signal in the opposite direction. I think that's very important. You should anticipate that the markets are going to do what they should do when they don't, pay attention. Typically, that's a longer trend change.
Steve: Porter, for me just to be granular and specific here, this is a short-term trade in True Wealth, it's not a long-term idea. It's a six-month max and we had a price target and a tight stop loss. We could make four times what we were risking.
Porter: Last February, can you explain how your indicator failed and what you think that meant for the markets?
Steve: This is a stock indicator, by the way. This is not a bond indicator.
Jason: Almost everything that we looked at was suggesting lower stock prices ahead. That had been the case for a month or two prior to that. Very strong, overwhelming odds, and the market ignored that. Buyers kept persisting. We kept closing near the highs and stocks were shrugging off all of those warning signs.
I had done previous studies looking at what happens when studies like this fail. Well, it means higher stock prices almost every time. In fact, I think it was almost every time over six to 12 months.
So unfortunately, I didn't pay as much attention to that as I should have, but that's the kind of signal that the bond market will give. If it doesn't rebound here, if bond prices don't rebound, if yields keep rising, that's a very strong longer-term sign that the trend has changed.
Porter: Yeah, okay, I want to just resay that for our audience, so they'll be clear about this. Last February, the market sentiment had reached extremely bullish levels. So everybody and their brother wanted to go buy stocks.
Ironically, normally, that means you're going to see at least a short-term correction in stock prices, but it didn't happen. So the fundamentals of the market were able to rally past the overwhelmingly positive sentiment, which is unusual.
And I think that all occurred, because Wall Street was crunching the numbers on the tab and the corporate tax cuts and realizing that earnings are going to grow 20% or 30% this year and on the basis of those underlying fundamentals, the sentiment was overwhelmed.
I think that sometimes happens that the fundamentals are sometimes so strong and so powerful that they can overwhelm the sentiment, because sometimes, the fundamentals are even stronger than people's perception of them.
That's I think when you have those kind of situations. About the bond market, I think it's a very interesting time in the bond market right now. There are two things happening, both of which should be very bearish for bonds and Jason, give me a little rope here, because I'd love your input on these ideas.
First, let's talk about the sovereign bond market, which in my mind is completely different than the corporate bond market.
The sovereign bond market really faces some unbelievable headwinds. You've got the Fed unwinding an enormous position, so you've got the Fed that's essentially selling and at the same time, you've got a president who is deliberately running enormous deficits in the face of a rebounding economy. That's about the most bearish thing I could imaging for a sovereign bond market.
And then you throw in a trade war, which could interrupt the Chinese reinvesting in our bonds. I mean, this is ridiculous.
You've got shocks to both supply and demand leading to higher yields. That's a fundamental outlook that could overwhelm sentiment on the sovereign-bond side meaning lower bond prices and higher yields.
On the corporate side, we haven't had a default cycle since 2002, and more corporate debt has been issued as a percentage of GDP than ever before. You've got this very unusual situation where the Fed interrupted the default cycle in '09, so it didn't occur.
You've got a whole bunch of zombie companies. In fact, something around 15% of the top 1500 companies in America aren't earning enough income right now to pay their interest on their outstanding existing debt.
No one's going to roll them over, so you have this situation where there's a lot of bad debt out there where defaults should be rising also causing interest rates to rise. I just wonder, Jason, if my view is right and Steve's view is wrong and, by the way folks, that's not how it usually happens.
If my view is right and Steve's view is wrong, what sentiment indicator, would you expect to see people becoming even more bearish on bonds and then bond prices continuing to fall? Are there levels there where you go now, the indicator has been broken through? At what level would you go "now I'm bearish on bonds, because this indicator did not work and the markets are saying something new is happening"?
Jason: I don't use specific levels. For me, it's more of a discretionary thing. We've got what should be a positive forecast for bond prices over the medium term, the next three to six months.
If we continue to see them slide in the weeks ahead and see a drawdown beyond what we historically see, I don't care what level bonds are at. To me, that's a longer-term sell signal.
You have to pay attention to that, because something is overwhelming whatever these extremes are. Market is not acting how it historically did. Traders are not acting the same way, something has changed. To me, it's not a level, it's just how a market reacts to shorter-term extremes.
Porter: One of the things I watch and I know Steve does too, Jason, this'll sound totally normal to you. You'll be like "doesn't everyone do that?" But one of the things I love to do is when there's good news, a company reports great earnings or something, the stock rallies for the first two hours of trading, because people are reacting to the news. All of a sudden, it reverses and ends the day down 5%.
It's like whoa, something – the market is not acting like it should have in the case of that stock. There is something there that I don't understand. I can't tell you how many times I saw people – give you a great example. An investor Steve and I both know very well was selling covered calls on Enron or sorry, it was WorldCom. And every quarter, WorldCom would come out with great earnings. Things are going great.
Every other telecom company is hurting. WorldCom was producing blockbuster earnings and every time it happens, the stock falls and the guy sells more covered calls and more covered calls and more covered calls. Of course, you know what happens. You know the end of the story. WorldCom goes bankrupt and all those earnings reports were bogus. It was total bullshit fraud.
And so, you know, Steve and I would have been like oh, our trailing stop has hit, we're out of the story and we know covered calls aren't going to save us from a stock declining 50%.
But sometimes, the investors who are simply only looking at one thing, the earnings reports, they're not going to get the whole story. Somehow, the market gets the whole story how that happens. There's all kinds of ways. It's very interesting and I think it's hard for readers to sometimes accept that. Steve has a theory that interest rates should fall, bonds should rally, because that's how it's always happened. That's what the market should do and if the market doesn't do it, you're going to get stopped out or you're going to call the trade at a loss and then, you might immediately reverse.
You might immediately go from being long bonds to being short bonds to being as short bonds as you've ever been before and your readers are going to go "I can't do that. Emotionally, I'm still long bonds."
I think that's one of the things that also differentiates professional investors from most people. They can't take the other side. And as Sjug will tell you, the only thing I'm good at investing is that. When the facts change, I will change my mind instantly and that's the only reason I've survived in the markets. Jason, how long does it take you to change your mind?
Jason: Pretty quickly. It's hard for us, because we're not managing money or simply managing money where part of why we get paid is to be right. When you turn around and admit not only am I not right, but I'm going the exact opposite direction, you get a lot of blowback from people.
They say, "You just spent weeks, at least, talking about this one direction. Now, because of this one thing, you know, prices doing what it should, now you're completely throwing that away and going the other direction."
That's extremely hard and you're right, that's what separates professional investors from everybody else.
The great ones from the good ones or the par ones. So it's hard and I still struggle with it. If I said "Well, you know, I clearly just changed my mind and I'll go the other way," I would be lying. It's hard for me to do. I don't at all have trouble admitting I'm wrong. I do that all the time, but going the other direction without a lot of confirmation for that other than prices isn't doing what it should, it's hard. I try to do it right away, but it's something I always struggle with.
Porter: As everyone who gets charged with making market calls and predictions, you're going to be wrong sometimes. In fact, I think if you look at the long-term win rates at both Sjuggerud's work and my work, it's about 60%, which is fantastic. It's a winning game. If you're right more than half, you're going to do very well. Anyways, we have to wrap up. We are out of time, but I wanted to say thank you very much to Jason and I wanted to tell everybody one more time where you can find his work. The best way to do it is type in sentimenTrader in Google and you'll come up. But also, he has a website, sentimentTrader.com and you can find his work there. We encourage you to subscribe. There is nobody better at the sentiment research world than Jason and I think it will improve your investing. Thanks very much, Jason.
Jason: Thank you guys.
Porter: All right, Buck, what is next for us here on the podcast?
Buck: It's very exciting, because we have both big P and Sjug in the house. That means we get a little mailbag with some extra spice.
I'm going to tell you what the folks out there are asking and then the two of you, we have these two very insightful, knowledgeable fellows, can weigh in on what the Investor Hour listeners want.
So first, let's give a thanks to everybody who wrote in. Appreciate hearing from those out there like Jeremy H., Eddie C., William H., Scott C., David J., and Dana and Kevin, just to name a bunch.
Your comments and questions are an important part of the show. Please write to us [email protected].
First up, Royce, cool name. "Number one, Porter, I bought a few Peabody energy bonds in 2015. Peabody filed bankruptcy. The judge approved a settlement proposed by professional hedge fund investors that resulted in different holders, retail versus professional, of the same debt instrument receiving different recoveries. Retail received six cents on the dollar. The professionals received better than par. Is this normal and how can anyone invest in high-yield corporate bonds on such an uneven playing field? To P and Sjug."
Porter: Well, I'll take this one. I have a little more experience in bankrupt corporate bonds than Sjuggerud does. I've owned a few, but I bought them after bankruptcy, not before. And I will tell you, we would have to get the facts of this bankruptcy for me to answer that question thoroughly, because I'm not familiar with the facts of the resolution of that particular bond.
But I can tell you the subscriber's description of what occurred is almost certainly wrong. I would say it's guaranteed to be wrong, that bankruptcy judges specifically do not do things like that. That's why there is a bankruptcy court.
What probably happened and I'm just guessing, because I don't know the facts. What normally happens in these situations is some investors, typically more sophisticated investors, don't buy the subordinated bonds.
They buy the secured bonds. So secured bonds have a different outcome than bankruptcy, because they have been specifically secured with discreet collateral.
Think about it this way. If you go bankrupt, your mortgage is going to have a different recovery rate than your credit-card debt. So your mortgage is a secured obligation secured specifically by your home, while your credit card debt is subordinated to your mortgage and is unsecured.
Obviously, you're not going to get very much in recovery, if you're a credit-card lender versus a mortgage lender. That's the best way I can describe it for you.
I'm sorry, Royce, if I've gotten that wrong. Like I said, I don't have the facts in front of me. If you'd like to send me that judgement or bankruptcy settlement, I'll take a closer look. I've never heard of that happening ever in bankruptcy court and I don't believe it did in this case.
Buck: Next up in the mailbag. "Porter and Buck and Sjug, obviously, do you think the merger of Sprint with Mobile 1 will save them from going bankrupt? Long-time subscriber, Joe M." Porter, can I do this one?
Buck: I'm going to say no.
Porter: Well, I don't know what Mobile 1 is. Do you guys know what Mobile 1 is?
Buck: No, I just know that you hate Sprint, so I figured this was an easy one.
Porter: I thought Sprint was merging with the fourth largest – it's – you're a subscriber to them. T Mobile, right?
Steve: I'm a Verizon customer, yeah.
Porter: Used to be T Mobile.
Steve: Yeah, that was a while ago.
Porter: Sorry, Steve, I didn't mean to give you a false endorsement there. You used to use T Mobile, because it had the best international stuff. Now international just works. I don't know how they got that figure out, but it always works.
Steve: That's right, sure is nice, isn't it?
Porter: It's great, yeah. So here's the question. Will Sprint – will the merger between Sprint and T Mobile work? Will it save Sprint?
The answer is, Buck, surprisingly, it may save Sprint. It may.
So for example, in the merger, all the obligations of Sprint, the $30 billion in bonds will be converted and become obligations of the newly merged company. The newly emerged company may be able to service those debts, because it'll be so much larger, there could be synergies that allow it to improve its margins. I say could be. I don't know.
I haven't seen the performance on the merged companies yet. They haven't published any of that new data, what it would look like.
I have a further answer for you, which is that the question is moot. Why? Because the merger is never going to be allowed. They are never going to allow this merger to go through. A material reduction in competition for cellphones cannot happen in the United States any longer, because it's a mature industry that serves virtually every single American. And Congress is going to say "no you don't," because no matter what they claim the merger is for, the real reason for the merger is it'll allow them to raise prices. Mergers that depend on higher prices are very difficult to get approved, if Congress and the public both know it.
There are lots of mergers that lead to higher prices, but the public and Congress don't understand the businesses, they don't know it. But this is such a simple business where there's a retail price every month attached to that cellphone. They're going to know this merger will not be allowed. And Sprint will go bankrupt.
Buck: There's your answer, folks. All right, number three here. Paid up long armor Matt V. asks "How do you think the rise of quants is distorting the markets? There are really smart quant guys out there like Meb Faber, Cliff Asness, and Joel Greenblatt and the quant investing methods they practice seem very attractive. But I have to figure if there are so many quants in the market, it can't possibly work for much longer. What do you think? Love the show, Matt."
Porter: This is a question for Sjug.
Steve: Yeah, I think our paid-up long armor, Matt, has it right. It can't possibly work much longer is what Matt says. The question is how long is longer? Because yeah, the ideas that Cliff Asness and Greenblatt and Faber have come up with, these are great ideas, but somehow, they keep working actually. They shouldn't and there's all kinds of these things going back – dogs of the Dow. As soon as they're discovered, then they shouldn't work anymore. But in a lot of cases, they continue to work.
Porter: Maybe sometimes because the fundamentals overwhelm the sentiment or maybe it's because sometimes the sentiment doesn't last very long. When the dogs of the Dow got real popular, by the way folks, the Dogs of the Dow is a simple quant strategy where you buy the lowest priced, highest yielding 10 stocks or five stocks in the Dow and next year, that portfolio outperforms the Dow as a whole. That strategy worked 90% of the time, up until the time the Dogs of the Dow, the book, was a bestseller in 1996, and then it didn't work at all for the next 10 years.
Then, it started working again, because it fell out of favor, because it didn't work. So this is the paradox of finance. If your neighbor knows about the strategy, it ain't going to work anymore.
So I think the real issue is are the quants smart enough to avoid the quant theories that have become popular? I think the answer to that question is absolutely they are.
I'll give you one more thing about this. What was I going to say? There's a great story out on Bloomberg recently about this math quant, who figured out how to beat the horse races.
Buck: Out in Hong Kong.
Steve: Yeah, I sent that to you over the weekend.
Porter: Great story about what quants can do. My point is you don't find out about these models until they don't work anymore. That guy would have never replied to that Bloomberg reporter except for that is done. That doesn't work anymore, so he's willing to go public about it, because he knows he can't do it anymore. Just be cautious about revelations about quant models, because the quants only publish stuff that they know isn't going to work any longer.
The other warning I have for you about a particular type of quant investing, so there's a particular type of quant investing that is known as – Steve, you'll have to help me remember the exact name of this thing. It's where you balance all the risk in the portfolio. It's the "all seasons"? No, you know, the big, Bridgewater, their biggest fund. It's the "all seasons" fund or something where you're equalizing the risk by studying volatility. It ends up having a lot of bonds in the model.
Steve: I thought you were going to go down the long-term capital.
Porter: No, it's just a model that says you invest in whatever gives you the highest return per unit of volatility. So when you study those models, you end up in bonds, because there was a huge ongoing bond bull market.
Steve: Yeah, you end up investing in the rearview mirror.
Porter: Right, but the idea is, let's say you want to have a 20% annual return, okay. How do you get there? You can leverage a stock portfolio or you could totally leverage a bond portfolio. You can go 40 to 1 in bonds.
If you do that, you can get to your 20% return, and shockingly, you still have less volatility than you do in just a nominal stock portfolio.
So Bridgewater figured that out, and for many years, they were able to make fantastic absolute returns, because they were simply highly leveraged into sovereign debt. That works great, as long as there's a 40-year bull market in bonds.
Steve: Until it doesn't, yeah.
Porter: That won't work at all now. So I'm really curious to see absent a bond bull market, can any of these guys make satisfactory returns?
Steve: The guy brings up Meb Faber and he had his incredible models that he built. Ultimately, what those models did when you look at equity performance, all they really did was participate sort of in the upside of whatever things –
Porter: Avoided the downside.
Steve: They essentially avoided the downside. If you can essentially not lose money in the bad times and equal the returns in the good times, you're doing something good.
Porter: You're going to do great and that's what I've always tried to do, by the way folks, in my portfolio. I can't hang with Steve in a bull market, but I'll do better than Steve in a bear market sometimes.
Buck: Can I ask a mailbag question for Steve directly? Number four, from Buck, sitting here hanging out, just tell me about what's going on with China, Mr. Sjug.
Steve: I was wondering if you were going to ask anything, Buck. I did a show with Buck and it was all China all the time and Buck seemed pretty keen on the idea.
So yeah, extremely exciting things are going on. A week ago, I spoke in Boston at MSCI's inclusion roadshow, which is not a very sexy title, I realize. But essentially, MSCI is out there right now on the road telling institutional investors this is going to happen and you need to get ready for it.
The dates to look for are May 14, they're actually putting out the portfolio of the stocks that foreign investors are going to be buying on May 31. Those are the two big dates, but, I mean, it's crunch time. May 31 is the first pile of tens of billions of dollars that are going to start flowing into China from foreign investors.
Meanwhile, nobody cares, you know. The Hang Seng China Enterprises Index – you remember this, Porter? It's the major Chinese stocks that trade in Hong Kong and these are the Chinese blue chips. The forward P/E on that is six. Six, so Chinese stocks are free, basically.
Porter: Yeah, and you know for a fact that trillions of dollars have to flow into these names, because of the changes that are coming to the MSCI index. This is a once-in-a-lifetime change.
Steve: Yep, once in a lifetime, and so when I was in Boston with MSCI, I learned that the sequence of events basically, it's going to be a dribble starting in May, but then they said, "We can't tell you specifically what we're going to do." They said, "Look at how we did it with Taiwan." It was within five years and basically it ramped up at the end. They were putting enormous allocations into Taiwan in the last couple years. It starts with a dribble, but it's going to end massively.
Porter: Right, so if you want to be long stocks, please, dear God, be long Chinese stocks for the next three to five years.
Steve: Yeah, if you asked me what my favorite idea is for the next three to five years, it's Chinese stocks.
Porter: I've got a mailbag question for Sjug. Naspers did something recently and I didn't understand it. Walmart bought huge amounts of something in India called FlipKart. I don't know what FlipKart is and I don't know how, but it also made gazillions of dollars for Naspers. How did that happen?
Steve: Yeah, so Naspers is a brilliant business. At first, I thought they just won the lottery by owning Tencent, but what they have done is bought all these sort of social media, these global ecosystem businesses around the world and they're very much a venture-capital investor. So they went to countries where Google and Facebook and Amazon are already not ruling the world. India was an obvious place. E-commerce in India is exploding. They bought the Amazon of India, which was FlipKart.
They bought a stake in it and nobody noticed, nobody card, and then Amazon went into India and Amazon was battling. And everybody just assumed FlipKart would roll over, Amazon would take over. But it turns out Amazon is really struggling to compete with FlipKart. This is going to be massive. I think Amazon expects India to be their number two market in 10-years' time. It's going to be huge. FlipKart's the leader, but what Naspers does and you say why would they sell this asset? Really, what they do is, think of Naspers more as a VC that incubates it and sells it at – they buy it wholesale –
Porter: They buy it for pennies.
Steve: And they sell it at retail. They sold it at retail to Walmart.
Porter: They sold it for $14 billion, $16 billion?
Steve: $16 billion, and they retained a small stake as well. I mean, these guys are a lot smarter than I gave them credit for at the beginning. This won't be the last time you hear Naspers doing something like this.
Porter: So Naspers in a way is kind of like a venture-capital firm and they were able to take one of their portfolio companies and sell it for $16 billion.
Steve: Yeah, they own just a stake of it, they don't own the whole thing.
Porter: But any idea how much money they put into it originally? $50 million? $10 million? $2 million?
Steve: The numbers are so small, so small. I think their first investment was – I think the total was just a couple hundred million and they made billions.
Porter: Now what happens with that money? Is it divvied out to the shareholders or do they roll into something else?
Steve: Yeah, they roll it into their other things. I know you were a big fan of Grubhub, for example. They're doing this in São Paulo and Rio and it's like remember there was a Dustin Hoffman movie, Outbreak, and you saw the outbreak of this disease on the screen and like oh my gosh, this is taking over and there's nothing we can do about it.
Well, Naspers invested in sort of Grubhub of the Americas and it started in São Paulo and it was like Outbreak. People started using it and then it's all over. They'll reinvest in those successful businesses and let go of the ones that aren't working.
Porter: That's been a fantastic story and no one in the United States even knew what Naspers was when Steve started talking about it. I bet half the people on the podcast still don't know what it is. It is truly global, dominant social media business. It's still trading at a huge discount to what the value of its Ali Baba stake is.
Steve: Yeah, our Tencent stake, yeah. It's over a 30% discount to its Tencent stake alone.
Porter: So you got FlipKart for free.
Steve: You get FlipKart for free and all the other things.
Porter: And everything else, yeah. What a deal. Steve, thanks for being with us. Buck, I got to run. Thanks for the podcast.
Buck: Everybody, thanks for listening. Be sure to check us out next week.
Male: Thank you for listening to the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your email. Have a question for Porter and Buck? Send them an email at [email protected]. If we use your question on air, we'll send you one of our studio mugs. This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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