Don’t Bet IN Casinos… Bet ON Them!

By Zach Scheidt

World poker tournament

This post Don’t Bet IN Casinos… Bet ON Them! appeared first on Daily Reckoning.

As you read this Daily Edge alert, a handful of poker players are battling for their share of a $74 million prize pool, with the ultimate goal of grabbing the $8.8 million first place payout and a diamond-studded World Series of Poker bracelet.

This year’s World Series of Poker (or WSOP) main event tournament features the second largest field in history.

A total of 7,874 people were willing to pay $10,000 to enter the tournament. The tournament actually started on July 2nd, and by today there are only a few dozen players left in the running.

As an amateur poker player myself, I’ve had a good time watching a bit of the coverage from this year’s tournament. Today, I wanted to point out a couple of important takeaways that apply to us as investors. So here goes!

The Scariest Three Words in Poker

“I’m all in.”

As a poker player, whenever you hear these words, you know something big is about to happen.

The phrase “I’m all in” simply means that a player is betting all of his chips. And while this type of bet can put a lot of pressure on your opponents, it also carries a lot of risk.

It might surprise you to hear that the game of poker is very similar to our investment markets.

  • Just like the market, a typical poker game has a mix of amateurs and professionals.
  • Poker players and investors try to earn a good return while minimizing risk.
  • Basic math skills (statistics in particular) are important for investors as well as poker players.
  • Human emotions drive many investing and poker decisions. Those who set emotions aside do much better.
  • Risking too much on any one opportunity is foolish.

Over the weekend, I heard one famous player state that he had gone “all in” several times during the tournament so far.

The player was somewhat astonished that he didn’t get knocked out. Because if he had lost on any one of those hands, his chips would have been gone, ending his run in this year’s main event.

Hearing him talk about betting all of his chips reminded me of so many investors who get excited about a new investment opportunity and bet all of their capital on a single stock.

You might get away with this once or twice (as the player I listened to did), but any time you risk all of your capital in one play, you run the risk of getting knocked out of the investment game.

This is why I’m constantly encouraging you to take a balanced approach when it comes to investing.

There are so many great investment opportunities, that you don’t have to put too much of your capital into any one opportunity. Instead, it’s best to spread your investments across many different opportunities so that you have many chances to win, and no one loss will hurt you too bad.

Consumers Have Money to Burn!

Another takeaway from the WSOP event this week is the sheer dollar figures in play this year.

As I mentioned, this was the second largest field for the WSOP main event, and each player forked over a cool $10,000 to play.

Now keep in mind, most of these players are coming in from out of town, they’re staying at a local hotel or resort, they’re spending money on food and entertainment, and most are gambling at the Las Vegas casinos in between tournament sessions.

In other words, these consumers have money to burn, and they’re living it up!

This scenario lines up perfectly with the retail theme that we’ve been talking about here at The Daily Edge.

Thanks to the strong job market — which continues to grow even faster than investors expect — consumers have money to spend. And these consumers are buying merchandise, going to restaurants, and checking “bucket list” experiences off their list (including playing in the WSOP main event).

This trend gives us plenty of opportunities to make money in the market by investing in consumer discretionary stocks.

I’m interested in casino stocks right now, not only because they fit into this consumer discretionary category, but also because many casino stocks have pulled back recently.

Concerns about gaming rules in China have caused some investors to question how fast big casino companies can grow. But the strong global economy should drive profits for these companies not only in the U.S., but also in exciting gaming destinations that international travelers will frequent.

So in addition to restaurant stocks, branded apparel, and home decor stocks, I suggest adding casino stocks to your watch list. Taking advantage of the wealth effect for consumers is a great way to consistently book investment wins.

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge
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Trump’s Devastating Trade War Weapons

By James Rickards

Weimar Republic hyperinflation

This post Trump’s Devastating Trade War Weapons appeared first on Daily Reckoning.

The news last week was dominated by breathless headlines about the new trade war between the U.S. and China. But this trade war has been brewing for years and came as no surprise to readers of my newsletter, Project Prophesy. In fact, the new trade war is simply a continuation of the currency wars that began in 2010.

I’ve warned for over a year that President Trump’s threats of tariffs should be taken seriously, while most of Wall Street discounted Trump’s talk as mere bluster. Now the trade wars are here as we expected, and they will get much worse before they are resolved.

The most powerful analytic frame today for understanding political and macroeconomic developments is the sequence from currency wars to trade wars and then ultimately shooting wars.

Currency wars arise in a condition of too much debt and too little growth. Economic powers try to steal growth from their trading partners by devaluing their currencies to promote exports and import inflation.

This can work in the short run, but the benefits are strictly temporary because trading partners retaliate by devaluing their own currencies. The tit-for-tat devaluations leave everyone worse off because of the uncertainty and transaction costs imposed.

Once it becomes clear that currency wars are a failure, nations resort to trade wars. These begin with tariffs imposed by one nation on another to protect domestic industry and reduce trade deficits. As with currency wars, the problem is retaliation. Victims of tariffs impose their own tariffs and the world is worse off.

We’ve seen this pattern before in the 1920s and 1930s. It began with currency wars (1921–-1936), then trade wars (1930–-1939) and finally a shooting war in the Second World War that began in Asia in 1936, spread to Europe in 1939 and subsumed the U.S. in 1941.

The present currency war began in 2010. The new trade war began in 2018. Let’s hope a new shooting war or even a third world war does not follow in sequence.

Trump is like a five-star general in the currency and trade wars. It’s important to understand his weapons and tactics. Trump likes to threaten to get results but often does not follow through on his threats.

Recently he threatened to withdraw the U.S. from the World Trade Organization (WTO), the primary multilateral body for settling trade disputes and a successor to one of the original Bretton Woods institutions (along with the IMF and World Bank) established in 1944.

But Trump’s threat to withdraw from the WTO will not be carried out. It’s in the bluff category, strictly for show.

The fact is Trump is turning trade policy upside down without withdrawing from WTO by using other tools at his disposal.

There has always been an exemption from the application of WTO rules where national security is involved. It’s just that past presidents have never used the authority because they are globalists (Republicans and Democrats).

Trump’s method is to weaponize national security considerations in the context of trade disputes. The U.S. has always had ways to stop trade flows and restrict direct foreign investment based on national security considerations.

Trump’s three main “weapons,” mostly unknown to everyday Americans, are IEEPA, CFIUS and Section 301 of the Trade Act of 1974.

IEEPA stands for the International Emergency Economic Powers Act. Enacted in 1977, it allows the President to regulate commerce after declaring a national emergency. He can declare this emergency “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.”

CFIUS stands for the Committee on Foreign Investment in the United States. It began under President Ford in 1975. CFIUS gives the Executive Branch power to monitor the impact of foreign investment in the United States, and determine if it jeopardizes national security. It can block acquisitions of U.S. firms by Chinese companies, for example.

Section 301 of the Trade Act of 1974 is the “nuclear option” when it comes to trade wars. I don’t want to get too deeply in the weeds here, but Section 301 gives the president broad authority to impose sanctions and penalties. It gives the president a free hand to impose billions of dollars of damages if not more on China.

So Trump has the best of both worlds. He can threaten the WTO, but doesn’t actually have to withdraw because he can get everything he wants anyway using IEEPA, CFIUS and Section 301. The globalists are freaking out but can’t stop him.

Unlike previous globalist presidents, Trump is a nationalist. And he’s using these powers like crazy to push his agenda. The Congress can’t stop him because all of these weapons are statutory; they were already passed by Congress in the 1970s and 1980s. These statutes delegate expansive powers to the president.

What’s new is not the law but the way the law is being used.

During the Weimar Republic hyperinflation in 1922–23, paper money became worthless and was swept down sewers (left, below) or fed into furnaces as fuel (right, below). The currency wars continued with French devaluation (1925), U.K. devaluation (1931) and U.S. devaluation (1933). When the currency wars failed to produce growth, the trade wars erupted with the Smoot-Hawley tariffs (1930) and similar tariffs from U.S. trading partners. After currency wars and trade wars failed came shooting wars in Asia (1936) and Europe (1939). The same pattern is repeating today with a new currency war (2010) and trade war (2018).

There is legislation pending in Congress right now to amend CFIUS. The name of the bill is the Foreign Investment Risk Review Modernization Act, or FIRRMA. This amendment to CFIUS will give CFIUS greatly expanded powers to stop Chinese takeovers of U.S. crown jewels in technology, telecommunications and the defense sector.

This new law shuts the Chinese (and anyone else Trump doesn’t like) out of the market to acquire U.S. tech and defense stocks. Once you remove the biggest buyers from the market, prices will …read more

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Currency War, Then Trade War — Is Shooting War Next?

By James Rickards

This post Currency War, Then Trade War — Is Shooting War Next? appeared first on Daily Reckoning.

My thesis is that currency wars are followed by trade wars and then finally shooting wars among major powers.

This happened in the 1930s and it seems to be happening again.

Currency wars begin in a condition of too much debt and not enough growth. Countries steal growth from their trading partners by cheapening their currencies to promote exports and import inflation.

The present currency war started in January 2010. The problem with currency wars is that all advantage is temporary and is quickly erased by retaliation. Trading partners retaliate with their own devaluations. Currency cross-rates end up back where they started, with costs imposed due to the uncertainties.

Not only is the world not better off but it is worse off because of the costs and uncertainty resulting from the currency manipulations.

Eventually, the world wakes up to this reality and moves to the trade war stage. Once countries realize that currency wars don’t work, they turn quickly to trade wars through tariffs and other trade barriers.

The problem is that trade wars don’t work either, for the same reason currency wars don’t work — retaliation or tit-for-tat tariffs soon puts everyone back where they started.

The new trade war started in January 2018 with the announcement of tariffs, and those tariffs actually began to take effect last week. Just because trade wars have started does not mean the currency wars are over. Not at all. The currency wars and trade wars continue side by side. In fact, they are related.

If the U.S. puts tariffs on China, which we have, then China can fight back two ways. The first is to impose their own tariffs on U.S. exports, which they have.

The second is to cheapen their currency to offset the impact of the tariffs. If the U.S. imposes a 25% tariff on China but China cheapens its currency by 25%, then everyone is back where they started in terms of the costs of Chinese goods to U.S. consumers.

This would be a potentially devastating development for markets.

A shock yuan maxi-devaluation will be the shot heard round the world as it was in August and December 2015 (both times, U.S. stocks fell over 10% in a matter of weeks).

There are individual winners and losers from the currency and trade wars, but the global economy as a whole is definitely a loser. This new trade war will get ugly fast and the world economy will be collateral damage. I believe it will get much worse before it is resolved.

We should look for slower growth and possibly a recession as the trade and currency wars play out. Let’s hope that history does not repeat and that we don’t end up in a Third World War, as the currency/trade wars of the 1930s helped lead to WWII.

Regards,

Jim Rickards
for The Daily Reckoning

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Rickards: Here’s Where the Next Crisis Starts

By James Rickards

This post Rickards: Here’s Where the Next Crisis Starts appeared first on Daily Reckoning.

So many credit crises are brewing, it’s hard to keep track without a scorecard.

The mother of all credit crises is coming to China with over a quarter-trillion dollars owed by insolvent banks and state-owned enterprises, not to mention off-the-books liabilities of provincial governments, wealth management products and developers of white elephant infrastructure projects.

Then there’s the emerging-markets credit crisis, with Turkey and Argentina leading a parade of potentially bankrupt borrowers vulnerable to hot money capital outflows and a slowdown of growth in developing economies.

Close on their heels is the U.S. student loan debacle, with over $1.5 trillion in outstanding debts and default rates approaching 20%.

Now we’re facing a devastating wave of junk bond defaults. The next financial collapse, already on our radar screen, will quite possibly come from junk bonds.

Let’s unpack this…

Since the great financial crisis, extremely low interest rates allowed the total number of highly speculative corporate bonds, or “junk bonds,” to rise 58% — a record high.

Many businesses became highly leveraged as a result. There’s currently a total of about $3.7 trillion of junk bonds outstanding.

And when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.

This is from a report by Mariarosa Verde, Moody’s senior credit officer:

This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default… A number of very weak issuers are living on borrowed time while benign conditions last… These companies are poised to default when credit conditions eventually become more difficult… The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.

Many investors will be caught completely unprepared.

Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular overborrowed sector and then spreads from sector to sector until the whole world is screaming, “I want my money back!”

The problem is that regulators are like generals fighting the last war. In 2008, the global financial crisis started in the U.S. mortgage market and spread quickly to the overleveraged banking sector.

Since then, mortgage lending standards have been tightened considerably and bank capital requirements have been raised steeply. Banks and mortgage lenders may be safer today, but the system is not.

Meanwhile the Fed is raising interest. It’s undertaking QE in reverse by reducing its balance sheet and contracting the base money supply. This is called quantitative tightening, or QT.

Credit conditions are already starting to affect the real economy. New cracks are appearing in emerging markets, as I mentioned. I also mentioned that student loan losses are skyrocketing. That stands in the way of household formation and geographic mobility for recent graduates.

Losses are also soaring on subprime auto loans, which has put a lid on new car sales. As these losses ripple through the economy, mortgages and credit cards will be the next to feel the pinch.

It doesn’t matter where the crisis begins. Once the tsunami hits, no one will be spared.

The stock market is going to correct in the face of rising credit losses and tightening credit conditions.

No one knows exactly when it’ll happen, but the time to prepare is now. Once the market corrects, it’ll be too late to act.

That’s why the time to buy gold is now, while it’s cheap. When you need it most, once the crisis hits, it’ll cost a fortune.

Regards,

Jim Rickards
for The Daily Reckoning

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If You Only Invest in One Kind of Stock… Make It This One

By Nilus Mattive

Nilus Mattive

This post If You Only Invest in One Kind of Stock… Make It This One appeared first on Daily Reckoning.

The stock market has been rallying for almost a decade…

The Federal Reserve has begun steadily hiking rates…

And some of the biggest names in the world of dividends have started to lose steam because of those two factors.

Yet I disagree with pundits who say the “dividend trade” is over.

In fact, I don’t think those two words even go together.

You see, most investors buy things they like — fleeting ideas they happen to hear about on CNBC or a cocktail party, “flings” of trade opportunities that may or may not work out over the long haul.

But the best dividend stocks are investments you can buy once and love for the rest of your life.

Sure, many dividend-paying companies offer an immediate advantage over most other conservative retirement investments out there right now — namely, the ability to hand you more income right from the very first year of ownership.

Those dividends represent immediate non-refundable returns on your investment, and they continue to garner favorable tax treatment to boot.

Even with 10-year Treasury rates getting close to 3%, most of my favorite dividend stocks still pay more annually. Plus, the companies are actually in better financial shape than the U.S. government!

“Sure,” you say. “But a stock market crash could wipe out those yields five times over.”

It could, at least temporarily. Hey, every relationship has some rocky moments.

Just remember a few more things…

First, many dividend-paying companies operate less economically-sensitive businesses.

Second, over time it’s far more likely that you will reap substantial capital APPRECIATION by staying the course in these same dividend stocks. And…

Third, unless you’re investing directly in government bonds and holding them until maturity, you still have risk of capital losses. That’s especially true if you’re using mutual funds and ETFs.

Moreover, history shows that dividend stocks hold up very well during market drops.

For example, a study from fund management company ProShares showed that high-quality dividend stocks can do well during very short-term market drops.

They looked at the performance of their S&P 500 Dividend Aristocrats ETF (NOBL), which contains companies with long histories of rising dividend payments, and found that the ETF fell just 5.1% vs. a 10.3% decline for the broad S&P 500 when the market experienced one of its bigger pullbacks back in the first quarter of 2016.

Better yet, the ETF also kept pace with the index as the market began recovering and then pulled away by March 31st — ending the first quarter up 6.6% vs. a 1.4% gain for the S&P 500.

Or just consider 2008, the worst year for stocks since the Great Depression: Dividend stocks outperformed non-payers by roughly 6%.

And there is similar proof going even further back in history: In 2002, the S&P 500 fell 23%. Shares of non-payers in the index fell 30% while dividend-payers dropped just 11%.

So whether you’re interested in income, downside protection, or both… dividend stocks are a great place to be.

And here’s the single biggest reason to favor dividend stocks for the long-term…

Let’s say you have $10,000. And let’s say you buy that 10-year Treasury bond to get a year for the next decade.

Where does that leave you?

Your yield will barely cover the rising prices of health care, rents, or college tuition.

Remember, your yield is locked in. It never goes up. That’s bad.

Worse, at the end of ten years your principal will be exactly what you started with — $10,000 and not a penny more.

So you get zero growth in your nest-egg.

You add nothing to your retirement fund, your children’s college fund, or your “just-let-me-enjoy-life” fund.

You get a dead end precisely when you need an open highway.

In contrast, many dividend stocks are not only paying out better immediate yields than government bonds… your annual income could continue going up every year in the future.

You see, most investors just look at a stock’s current yield. That’s a big mistake.

Far more important is the fact that many companies have raised their dividends annually for many decades (even a century or more!).

Over time, this means you’re getting larger and larger annual yields on your initial investments.

The best part of this principle, called “yield on cost,” is that it applies to all dividend-paying stocks.

As long as you buy into companies that are boosting their payments, your effective yields will keep going up… and there’s absolutely no limit to how high they can go!

So it’s entirely possible to start earning relatively safe annual returns of 3%, 4%, or 5% right now. Moreover, when you choose the right stocks, it’s equally likely that you will end up collecting relatively safe annual yields of 8%, 9%, or 10% by the time the Fed even gets its interest rate target back above the yields being offered by dividend stocks right now.

To a richer life,

Nilus Mattive
Editor, The Rich Life Roadmap

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How to Make Up for Your Financial Dark Years… and Then Some

By Nilus Mattive

Nilus Mattive

This post How to Make Up for Your Financial Dark Years… and Then Some appeared first on Daily Reckoning.

Have you hit midlife and realize that the amount you’ve put away for retirement over the past 20-30 years of working is a mere pittance of what you’ll actually need?

You have tons of company…

According to the Economic Policy Institute, the median savings for households between ages 50 and 55 is only $8,000. And for those 56-61 it’s not much better … $17,000.

A mortgage, raising kids, student loans, and financial setbacks such as the Great Recession have caused many Americans to experience years, even decades, when they had little money for retirement savings.

For some… it’s just plain old procrastination.

And if you’re in your 50s, your earnings may have peaked and you should be squirreling away the most.

Simply put, this is a wakeup call that you have a lot of catching up to do.

But don’t panic or dwell on the past, because it’s not too late to start funding your retirement. But it is time to get serious, assuming you want to quit the grind in the next decade or so.

Start by …

Doing some belt-tightening

The first step is figuring out where your money is going each month and where you’re overspending.

Apps like Mint, Wela and Personal Capital — deeply discussed yesterday — will let you create a budget and track spending so you can cut expenses and use that money for your retirement savings. You can also set reminders on these apps to plan ahead, pay on time, and avoid late fees.

Meanwhile, get those credit cards paid off. Servicing that debt is costly.

Consider revising your retirement objective

If you’re willing to work a bit longer, you’ll have a few more years to boost your savings and postpone taking withdrawals from retirement funds.

In addition, working longer will allow you to delay Social Security benefits and build up additional earnings credits. For instance, the difference between collecting at age 66 vs. age 68 could mean a 16% bigger check each month for the rest of your life.

Working longer could also be good for your health, as discussed in a recent article. There is a big correlation between working and health, and if you cut out that huge part of your daily routine too early, it will be more detrimental than you anticipate.

Another idea is to start a part-time business such as becoming an Airbnb host now while you’re still working, a prospect whose benefits were discussed in this article. This would also give you extra income not only for retirement, but instantly.

Make the most of IRS rules

The IRS allows employees to put away up to $18,500 each year into 401(k) plans. And if you’re now 50 or older, you can make an additional $6,000 in catch-up contributions.

That’s a total of $24,500.

Do that on a monthly basis for 10 years and you’d have $336,315 assuming a 6% average annual before-tax return. Stick with it another three, and you’re looking at $483,187.

Plus your employer might match some of your contributions, fattening up your account balance even more!

Suppose though, that you don’t have a 401(k) or you want to sock away more money.

You can put $5,500 into an IRA. Catch-up contributions of $1,000 for anyone 50 and older will help. Moreover, contributions might be tax deductible.

$6,500 each year with a 6% annual return will give you another $89,267 in 10 years … $128,251 in 13.

As you see, in your 401(k) and IRA alone you could accumulate a whopping $611,438 in 13 years!

And after you fund those accounts, you can still put money into a savings or brokerage account each month.

Where would that money come from?

One idea is to…

Downsize before retiring

Many people wait until they retire before downsizing to a smaller, less expensive home.

But if you plan to stay in the area after retiring or can telecommute to work, why wait?

Any cash you have left over after buying a new home could go into your retirement savings or pay off credit cards. And assuming monthly household expenses will drop you’ll have even more money to put away.

It’s easy to look over your shoulder and get stuck by saying, “I wish I would have started earlier.” But rather than dwelling on the past, get started on your post-50 retirement saving plan.

And the best time to get started… is today.

To a richer life,

Nilus Mattive
Editor, The Rich Life Roadmap

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Today’s Buy Alert: A Blue-Chip Juggernaut

By Jody Chudley

This post Today’s Buy Alert: A Blue-Chip Juggernaut appeared first on Daily Reckoning.

If you are interested in owning one of the bluest-chip companies on the planet while generating a 15 percent annualized return over the next five years, then Nestlé (NSRGY) is just the stock for you.

At least that is what legendary hedge fund manager Dan Loeb of Third Point Capital thinks, provided Nestlé is willing to heed his words of advice.

I think Mr. Loeb may be just the kick in the pants this great old company needs right now.

Let me explain…

Nestlé — 152 Birthday Candles And Counting

Nestlé is an absolute juggernaut of a business. It has a market capitalization (number of shares outstanding multiplied by the share price) of nearly $240 billion which places the company on the edge of being one of the ten largest companies on the planet.

This is a blue, blue, blue chip if there ever was one.

Nestlé has its base of operations in Vevey, Switzerland. The company had been around for quite some time — 152 years to be exact. I guess you could say that the business has proved to have some staying power.

For an idea of the giant size of this company, consider that other publicly traded companies with a similar market capitalization include Chevron (CVX), Johnson and Johnson (JNJ) and Walmart (WMT). There are literally only a handful of companies of this size in the world.

Nestlé employs an astounding 340,000 people globally, has more than 2,000 brands/products, sells those products in 190 different countries and is the single largest food and drink business (by sales) on our fine planet.

We have all seen the name Nestlé repeatedly, but until you see all of the brands that are actually under the corporate umbrella, you can’t really appreciate how big the company is.

Thirty of Nestlé’s individual brands have sales of more than $1 billion by themselves. Each of those brands alone could be a multi-billion dollar company. Here are a few that you’re already probably familiar with:

Source: Nestlé Website

Nestlé could hardly be more diversified which makes the cash flow that underpins the company’s share price and dividend incredibly reliable.

The company is diversified both by product, but also by geographic region. The United States is Nestlé’s largest market followed by China, France, Brazil, Germany and then down the list.

Dan Loeb Is Looking To Give This Great Company A Jump-Start

Nestlé is clearly a terrific company with dominant brands names that churn out gobs of cash flow.

In recent years though, Nestlé has been missing one thing — growth.

Nestlé’s earnings per share have flat-lined since 2012. Not surprisingly, since it is earnings growth that drives share price performance over time, Nestlé’s shares have also underperformed.

Not to worry, Third Point’s Dan Loeb has a plan to fix all of that. Better still, he believes in his plan (and Nestlé) so much that he has bought $3 billion worth of company shares.

You can check out Loeb’s plan at the website he created to unveil his recommendations called Nestle Now. On the website you can scroll through his 34 page presentation which details his reasoning.

In the plan, Loeb explains how he wants the 152 year old company to embrace a sense of urgency. He thinks that management needs to be bolder, sharper and faster in its decision making and operations processes.

Loeb’s actual words include his opinion that “Nestle’s insular, complacent, and bureaucratic organization is overly complex, lethargic, and misses too many trends”

Given the massive size of this business, I bet that he raises some very valid points.

Loeb had been speaking with management directly for over a year on these matters with no success. Now, he is taking his action plan to the public.

Specifically, Loeb wants Nestlé to spin-off businesses that no longer fit in with the company’s core strategy. Those would include frozen foods, confectionery products and ice cream. Then, he wants the company to split into three divisions — nutrition, beverages and grocery — each of which would have their own independent CEO.

Loeb’s view is that his recommendations, along with a focused share repurchase program that can be funded by the sale of a minority ownership interest in L’Oréal, can set this dominant business back on a growth path.

By incorporating his suggestions, Loeb believes that Nestle could double earnings per share over the next five years. Doing so should provide investors with at least a 15 percent annualized rate of return, more if you factor in the 3 percent dividend.

That sounds good to me.

Even if his plan doesn’t work out exactly as laid out, investors aren’t taking much risk by holding shares of this dominant company. At the very least, owning Nestle shares is going to result in a solid 3 percent plus dividend yield. The upside could see a near 20 percent annualized rate of return over five years with dividend included.

Here’s to looking through the windshield,

Jody chudley

Jody

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Volatility Is on the Way Back

By James Rickards

Three faces of volatility

This post Volatility Is on the Way Back appeared first on Daily Reckoning.

When geopolitical events create crises in the world, volatility usually follows in world markets. The results of this volatility is important to note and I will discuss this below.

In January 2018, two significant market events occurred nearly simultaneously. Major U.S. stock market indexes peaked and volatility indexes extended one of their longest streaks of low volatility in history.

Investors were happy, complacency ruled the day and all was right with the world.

Then markets were turned upside down in a matter of days. Major stock market indexes fell over 11%, a technical correction, from Feb. 2–8, 2018, just five trading days.

The CBOE Volatility Index, commonly known as the “VIX,” surged from 14.51 to 49.21 in an even shorter period from Feb. 2–6. The last time the VIX has been at those levels was late August 2015 in the aftermath of the Chinese shock devaluation of the yuan when U.S. stocks also fell 11% in two weeks.

Investors were suddenly frightened and there was nowhere to hide from the storm.

Analysts blamed a monthly employment report released by the Labor Department on Feb. 2 for the debacle. The report showed that wage gains were accelerating. This led investors to increase the odds that the Federal Reserve would raise rates in March and June (they did) to fend off inflation that might arise from the wage gains.

The rising interest rates were said to be bad for stocks because of rising corporate interest expense and because fixed-income instruments compete with stocks for investor dollars.

Wall Street loves a good story, and the “rising wages” story seemed to fit the facts and explain that downturn. Yet the story was mostly nonsense. Wages did rise somewhat, but the move was not extreme and should not have been unexpected.

The Fed was already on track to raise interest rates several times in 2018 with or without that particular wage increase. Subsequent wage increases in the February, March, April and May employment reports have been moderate.

The employment report story was popular at the time, but it had very little explanatory power as to why stocks suddenly tanked and volatility surged.

The fact is that stocks and volatility had both reached extreme levels and were already primed for sudden reversals. The specific catalyst almost doesn’t matter. What matters is the array of traders, all leaning over one side of the boat, suddenly running to the other side of the boat before the vessel capsizes.

The technical name for this kind of spontaneous crowd behavior is hypersynchronicity, but it’s just as helpful to think of it as a herd of wildebeest that suddenly stampede as one at the first scent of an approaching lion. The last one to run is mostly likely to be eaten alive.

Markets are once again primed for this kind of spontaneous crowd reaction. Except now there are far more catalysts than a random wage report.

The U.S. has ended its nuclear deal with Iran and has implemented extreme sanctions designed to sink the Iranian economy and force regime change through a popular uprising. Iran has threatened to resume its nuclear weapons development program in response. Both Israel and the U.S. have warned that any resumption of Iran’s nuclear weapons program could lead to a military attack.

Three faces of volatility, from left to right: Ayatollah Ali Khamenei, the spiritual and de facto political leader of Iran; Nicolás Maduro, the president of Venezuela; and Kim Jong Un, the supreme leader of North Korea. Iran and North Korea may soon be at war with the U.S. depending on the outcome of negotiations. Venezuela is approaching the status of a failed state and may necessitate U.S. military intervention.

Venezuela, lsed by the corrupt dictator Nicolás Maduro, has already collapsed economically and is now approaching the level of a failed state. Inflation exceeds 14,000% and the people have no food. Social unrest, civil war or a revolution are all possible outcomes.

If infrastructure and political dysfunction reach the point that oil exports cannot continue, the U.S. may have to intervene militarily on both humanitarian and economic grounds.

North Korea and the U.S. have pursued on-again, off-again negotiations aimed at denuclearizing the Korean Peninsula. While there have been encouraging signs, the most likely outcome continues to be that North Korean leader Kim Jong Un is playing for time and dealing in bad faith.

The U.S. may yet have to resort to military force there to negate an existential threat.

This litany of flash points goes on to include Iranian-backed attacks on Saudi Arabia and Israel, a civil war in Syria, confrontation in the South China Sea and Russian intervention in eastern Ukraine.

These traditional geopolitical fault lines are in addition to cyber threats, critical infrastructure collapses and natural disasters from Kilauea to the Congo.

Investors have a tendency to dismiss these threats, either because they have persisted for a long time in many instances without catastrophic results, or because of a belief that somehow the crises will resolve themselves or be brought in for a soft landing by policymakers and politicians.

These beliefs are good examples of well-known cognitive biases such as anchoring, confirmation bias and selective perception. Analysis tells us that there is little basis for complacency. Yet the VIX is back near all-time lows as shown in Chart 1 below.

Chart 1

Chart 1

Even if the probability of any one event blowing up is low, when you have a long list of volatile events, the probability of at least one blowing up approaches 100%.

With this litany of crises in mind, each ready to erupt into market turmoil, what are my predictive analytic models telling us about the prospects for an increase in measures of market volatility in the months ahead?

Right now they’re telling us that investor complacency is overdone and market volatility is set to return with a vengeance.

Changes in VIX and other measures of market volatility do not occur in a smooth, linear way. The dynamic is much more likely to involve extreme spikes rather than gradual increases. This …read more

From:: Daily Reckoning

The Fed Needs to Walk Back Its QT Program NOW

By Brian Maher

This post The Fed Needs to Walk Back Its QT Program NOW appeared first on Daily Reckoning.

We should have known better… for the gods are eager to punish hubris.

On May 17, we forecast the S&P would take a good tumble two weeks later, May 31.

We were magnificently, triumphantly correct — the S&P dropped 19 points that day.

Inflated by success — or deceived by chance — we ventured upon another prediction.

Last Friday we said the S&P would drop this Monday, July 2.

Our logic was airtight…

On all but one occasion when the Federal Reserve cut into its balance sheet this year, the S&P closed lower that day.

And this past weekend the Fed dropped over $30 billion from the its mammoth $4.3 balance sheet — its largest balance sheet reduction to date.

Sure as sugar, the S&P traded lower all day Monday.

And we prepared to thump our victorious chest yet again.

But by late afternoon the gods moved against us… the market rallied… and the S&P ended the day higher.

Thus we depart the prediction business with a 50% win rate — or loss rate.

We nonetheless look ahead… wiser for the experience.

$30 billion last month, the pace of quantitative tightening (QT) quickens to $50 this month.

Meantime, the European Central Bank is reducing its quantitative easing (QE) program to $30 billion per month.

The math therefore reveals a pending $20 billion liquidity drain (30-50 = -20).

Which brings us to this gobsmacking conclusion, coming by way of Phoenix Capital:

This is the FIRST time since 2008 that global market monetary policy will be NEGATIVE: More money will be leaving the system via QT than will be entering it via QE.

Is that not a capital fact — that more money will be leaving the system than entering for the first time since 2008?

Yet our searches reveal nothing of it in the mainstream financial press.

Of its significance Phoenix Capital is clear:

“The S&P 500 is on VERY thin ice,” they conclude, affirming their demonstrated fondness for CAPITALS.

What then is their advice for the Federal Reserve?

The Fed needs to walk back its QT program NOW or else it is risking a bear market for U.S. stocks.

The folks at Phoenix Capital sound lots like Jim Rickards.

Jim’s been high on his rooftop, hollering the same warnings.

Its rate hikes are one thing, says Jim.

Mix in QT and the Fed toys with fire:

The Fed is giving a weak economy a double dose of tightening in the form of rate hikes and the unprecedented destruction of base money as they unwind QE… It has never been attempted in the 105-year history of the Fed.

Quite simply, the Fed has no idea what it is doing. The Fed is overtightening right now and does not even realize it.

But Mr. Jerome Powell gives every indication he’ll keep the business going at the projected rate.

You can expect two additional rate hikes this year… and a full calendar of QT.

Unless, of course, stocks fall through the VERY thin ice upon which they presently skate.

How slender is that ice?

Bank of America informs us the vast majority of stock purchases this year have been buybacks — corporations buying their own stock.

Q1 2018 established a fresh record for buybacks — $242.1 billion.

But Q2 buybacks nearly doubled that record amount… to $433.6 billion.

What would happen to markets without buybacks?

We may soon have an answer — at least in part.

Many corporations have entered a buyback “blackout” period.

A blackout period?

Many corporations will announce quarterly earnings later this month.

And the law forbids buybacks during a five-week span before they announce these earnings.

Thus the market is going without many of the buybacks that have kept it afloat this year.

Charles Schwab analyst Jeffrey Kleintop estimated in late June:

With the peak in the second-quarter earnings reporting season about five weeks away, we may be losing the buying support from corporations.

Adds Zero Hedge:

Without buybacks, there will be little buying pressure on stocks. Which is a problem because with just days left until [the] buyback blackout period, the buyer of last resort for U.S. stocks is about to go on a month-long vacation just as the trade war between the U.S. and China begins.

Ah, yes, the trade war…

Tariffs on Chinese imports take effect tomorrow.

Chinese authorities have pledged immediate countertariffs.

Meantime, the next QT date is July 31, when several billion more will drop from the Fed’s balance sheet.

Buyback blackouts… trade wars… more QT from the Fed… less QE from the ECB.

Upon deeper reflection…

We may soon be back in the forecasting business…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post The Fed Needs to Walk Back Its QT Program NOW appeared first on Daily Reckoning.

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From:: Daily Reckoning

Today’s #1 Market Myth — Debunked!

By Zach Scheidt

chart

This post Today’s #1 Market Myth — Debunked! appeared first on Daily Reckoning.

This week, I’m taking a look at the BIG picture.

Many investors are currently worried that the bull market may be coming to an end.

However, I’ve got a completely different view. And it all boils down to three “themes” that I’m seeing in today’s economy.

On Monday, I talked about the first — a historically strong jobs market where jobs available currently outweigh people actively seeking employment.

And then on Tuesday, I followed it up with part II — how a robust energy market is putting people back to work in America’s heartland and banking record profits along the way.

And now, without further ado, let’s get to the third theme I’m seeing in today’s economy that will continue to push this bull market higher…

The third theme that I’m seeing in today’s economy deals with interest rates.

Here in the U.S., our Federal Reserve is in a steady pattern of raising interest rates.

And as the mainstream media loves to point out, higher rates have an uncanny ability to end bull markets. This is the case for several reasons…

First, businesses may start to slow down investing in new opportunities because the cost to finance those opportunities is now higher.

Think about a company on the fence whether to expand into a new region. Interest costs on plant, property and equipment just to get the business up and running could add thousands (if not millions) of dollars to the final cost of the expansion. This is after an almost decade-long stretch when those interest costs were considered peanuts to most businesses, which could discourage some businesses from pulling the trigger.

Second, consumers may also find themselves in the same situation as the businesses mentioned above. Think about big purchases that consumers make that are financed by debt — things like homes, cars and appliances. Higher interest rates will turn away buyers that opt to wait until interest rates fall again. And I don’t blame them!

And lastly, companies with significant amounts of debt could wind up paying more in interest. This may not be an immediate problem as most companies have fixed interest rates on their existing debts, but those without fixed rates could soon see their liquidity ratios decrease if rates are raised too quickly.

Rightfully, investors are on edge. After all, these three arguments point to lower demand for important industries like autos, durable goods and construction supplies.

But that’s if you’re only looking at half the picture…

Here At The Daily Edge, We Look At The Full Picture

I believe the media is making a bit too much about the risks of higher rates right now.

Remember, we’ve had a long period where interest rates were near ZERO for years upon years. And internationally, many countries had negative interest rates! So you got CHARGED to keep balances in government bonds. That’s nuts!

So while a period of rising interest rates have often led to pullbacks in the market, we’ve never had a period like this before where rates were coming up from such a low level. I think the hype is overblown and that it’s actually very healthy to bring rates back up to a “normal” level.

Just think about all of the savers who have money set aside earning next to nothing. Those people deserve to be able to get a return on their savings to help cover day-to-day life expenses!

And higher interest rates can also make companies think more carefully about which growth opportunities really make the most sense. So companies have a natural incentive to be more judicious with their money, leading to less risk for the overall economy.

Bottom line, higher interest rates will cause some changes for companies over the next few years like the arguments mentioned above, but that’s not necessarily a bad thing…

One area that will benefit from higher interest rates is the small cap bank industry.

As rates start to move higher, regional banks will be able to charge customers more for loans. And so the interest margin (or the difference between what banks receive, and what they pay depositors) will widen. That’s going to help profits increase and small bank stock prices to advance. Definitely a great spot to take advantage of higher interest rates.

So there you have it, the three most important themes that I’m watching are all pointing to a strong economy, which is why I believe this bull market still has legs. To get caught up on the first two themes pushing today’s market higher, see the links below!

Theme I: Job Growth

Theme II: A Robust Energy Market

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge
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From:: Daily Reckoning