The market’s scariest chart…

  • Another scary chart…
  • Is it possible to collect ‘dividends’ every day of the year?
  • Trump accepts nomination

You know that we’re not in the habit of trying to scare people.

[Reader’s voice: Are you sure about that?]

But when we see trouble ahead, we consider it our duty to inform you.

Once you have the information, you can then decide for yourself whether we’re right to forecast trouble, or whether we’re just perpetual Chicken Littles.

Yesterday, I showed you what I believe is the scariest chart you’ll find. I’ll show it to you again in a moment — just to hammer home the point, and on the off chance you missed yesterday’s Port Phillip Insider.

But that isn’t the only chart I’ll show you. I’ll show you something. Something which, in my opinion, provides more evidence to the argument that the world’s stock markets are heading for an almighty crash.

Before that, though, this…


Overnight, the Dow Jones Industrial Average fell 77.8 points, or 0.42%.

The S&P 500 index dropped 7.85 points, or 0.36%.

In Europe, the Euro Stoxx 50 gained 1.54 points, or 0.05%. Meanwhile, the FTSE 100 fell 0.43%, and Germany’s DAX index gained 0.14%.

In Asian markets, the Nikkei 225 index is down 183.47 points, or 1.09%. China’s CSI 300 index is down 0.63%.

In Australia, the S&P/ASX 200 index is down 31.2 points, or 0.57%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$44.73 per barrel. Brent crude is US$46.24 per barrel.

Gold is US$1,331 (AU$1,775) per troy ounce. Silver is US$19.82 (AU$26.43) per troy ounce.

The Aussie dollar is worth 74.99 US cents.

Another scary chart…

Let’s get back to that ‘scary’ chart.

Here it is:

chart image

Source: Bloomberg
Click to enlarge

I don’t apologise for continuing to show you this chart. I believe it’s the most important chart you’ll see anywhere.

If you read Port Phillip Insider regularly, you’ll know what this chart represents. If so, allow me a few moments to explain the chart again, as I know many readers don’t tune in every day.

The chart shows the earnings per share (EPS) for stocks in the US S&P 500 index. The green vertical line represents today.

The white line to the left of the green line shows you actual historical earnings for S&P 500 companies. The white line to the right of the green line shows you Wall Street’s forecasts for company earnings.

As you can see, there is a stark difference in the trend between actual and forecast earnings. Actual earnings are trending down, while Wall Street still sees a healthy and growing market ahead.

It just doesn’t make sense.

That’s why I believe this is the scariest chart you’ll find anywhere on the market.

However, it’s not the only scary chart. Whenever you come across one piece of evidence to support a view, it’s important to keep looking for more evidence.

After all, it could be that the falling EPS number is an anomaly. So, is there other evidence to support our view that stocks are too high relative to the fundamental health of the market?

I believe there is and, what’s more, I believe I’ve found the evidence. Let me show you what I mean, and explain the significance of it.

Check out this chart:

chart image

Source: Bloomberg
Click to enlarge

The red line charts the price to sales (PS) ratio for US S&P 500 companies.

The blue line charts 12-month trailing profit margins for S&P 500 companies.

Let’s take the red line first. I often find that a PS ratio can give you a better view of the market than a PE ratio.

That’s because a PE ratio only looks at companies that are making profits (earnings). If a company doesn’t make a profit, it doesn’t have a PE, as there aren’t any earnings to measure.

By contrast, a PS ratio factors in any company that can report sales (revenue). So even if a company makes a loss, it can still have a PS ratio, as long as it has revenue hitting the books.

That means, by using a PS ratio, you should be able to get a much broader picture of the market.

As an example, consider Inc. [NASDAQ:AMZN]. In 1999, didn’t have a PE ratio because the company didn’t make a profit.

But it did have a PS ratio. Remember that 1999 was near the peak of the dot-com bubble. At that time, even though it didn’t make a profit, it traded with a PS ratio (price to sales) of 32-times sales.

Right now, trades with a PS ratio of just over three-times sales.

Back in 1999, investors were enthusiastic (arguably, overly enthusiastic) about the company’s growth potential, and of dot-com stocks in general.

For that reason, investors were happy to pay 32-times sales. However, even though now makes a profit, investors aren’t willing to pay the same PS multiple, hence the much lower number.

[Incidentally, if investors were willing to pay 32-times sales,’s market capitalisation would be US$3.4 trillion, nearly 10-times its current market cap!]

Getting back to the chart, it’s interesting to note that the S&P 500 is now more expensive (in terms of the PS ratio) than it was when stocks peaked in 2007.

That, on its own, may not be completely significant. But when you factor in falling earnings per share, then it does become significant. Because what it tells you is that, despite falling earnings, investors are willing to pay more for each dollar of revenue.

To us, that doesn’t make a whole lot of sense — unless, of course, you thought that earnings were about to turn a corner and start moving higher.

That could happen, but our bet is that it’s not about to happen at this point in the stock market cycle.

The other reason to be sceptical is the blue line on the chart. Importantly, the blue line has been in decline since early 2015. It isn’t a coincidence that this decline matches the decline in EPS (earnings per share) I showed you in the first chart.

The blue line represents profit margins for companies in the S&P 500. As you can see, going back 18 months, margins are falling.

Whatever the reasons, it can suggest that either competition, slowing demand, rising costs, or all of these and more are making it harder for companies to maintain their margins.

Again, given that particular circumstance (falling margins), why should investors be so optimistic about stocks that they’re happy to buy them at record high prices?

That question is somewhat rhetorical. We don’t really know the answer, and we don’t expect you to know the answer either.

We can guess. Our guess is that investors believe governments and central banks will ultimately ‘bail out’ the market if things go pear shaped.

Those investors may be right. Again, we’re sceptical. We’re sceptical that governments and central banks will be able to act in time to have any effect. And even if they do act, we’re sceptical about their actions actually working.

Of course, don’t forget the small matter of low interest rates. Investors who may otherwise have bought bonds or other fixed interest assets now have to buy stocks if they want to make any kind of income from their investments.

In short, we can’t say for a fact that stocks will crash today, next month, or next year. But regardless, as far as we’re concerned, the evidence is mounting for an impending violent market crash.

In which case, we continue to advise investors to treat this market with extreme caution.

Is it possible to collect ‘dividends’ every day of the year?

Theoretically, it’s possible for the astute investor to collect ‘dividends’ from the market every single day of the year.

Theoretically, it’s possible for the smart investor to collect four, five, six or seven ‘dividends’ each year from a stock, even while most normal investors only collect two dividends each year from the same stock.

And, not only theoretically, but practically, some of the market’s smartest investors have figured out a way to collect these ‘dividends’…without even owning stocks.

It all sounds ridiculous and impossible. You may even think it sounds like a confidence trick, or a pyramid or Ponzi scheme.

I can set your mind at rest on that. It’s not a con. It’s not a pyramid scheme. And it most certainly isn’t a Ponzi scheme.

The ‘dividends’ I’m talking about are a 100% legal (and potentially very lucrative) way for smart investors to scalp hundreds, even thousands of dollars from stocks…sometimes without ever even owning the stock.

So, what are these ‘dividends’?

First, they aren’t dividends in the traditional sense. In fact, they aren’t dividends at all. Real dividends are a shareholder’s portion of the profits made by a company.

The ‘dividends’ I’m talking about don’t have anything to do with a company’s profitability. In fact, a company doesn’t even have to make a profit in order for investors to potentially cash in on this type of ‘dividend’.

Second, unlike real dividends, which a company will pay out twice a year according to their timetable, with these ‘dividends’ you get to choose when you want the cash.

In fact, it’s possible to collect these ‘dividends’ on any day the stock market is open. Now, although it’s theoretically possible to collect these ‘dividends’ every day, in reality it’s not possible — not unless you have a bank account the size of Warren Buffett’s.

Rather than collecting these ‘dividends’ every day, most investors who follow this strategy are more likely to collect two, three or four per month — depending on their investing capacity.

If I wanted to, I could select from around 50 of the Aussie market’s biggest stocks today, select a ‘dividend’ amount that I’d like to receive…click a few buttons and, next trading day, the ‘dividends’ would be in my trading account.

I know it sounds hard to believe. It may even sound completely bonkers and unbelievable. In that case, I don’t blame you for thinking that way.

But I’m serious about this. Since I came across this ‘dividends’ strategy (which I call ‘Overnight Dividends’), it has changed the way I think about investing in stocks — blue-chip stocks, anyway.

Just remember, the ‘dividends’ I’m talking about aren’t dividends at all. They’re a special kind of cash payment. I call them ‘dividends’ because you should be familiar with the concept of earning an income from a stock — that’s a dividend (a real dividend).

These ‘dividends’ also involve earning an income from a stock, but in a different way…in a way that’s completely unfamiliar to most investors — even highly experienced investors.

Well, that needs to change. For the past 18 months, I’ve tried to lead the charge, introducing this unusual ‘dividends’ strategy to hundreds of Australians.

But in truth, the number of investors who follow this strategy is still tiny. It’s unbelievable to think how few Aussie investors realise this way to earn an income from stocks even exists.

Tomorrow, I’m hoping we’ll take another small step to introducing this idea to Aussie investors. You’ll find out all about it in your email inbox tomorrow.

Check it out, I call it the ‘Overnight Dividends’ strategy. Remember, it’s not really dividends; certainly not in the way you think about them. But it is a way to earn extra cash from stocks, sometimes without even owning them.

When you receive the email in your inbox tomorrow, all you need to do is follow the link, enter your email address and, starting from next Wednesday, 27 July, you’ll learn exactly how the ‘Overnight Dividends’ strategy works.

As I say, it revolutionised the way I invest, and I’m convinced that it could revolutionise the way you invest, too. Look out for the email tomorrow.

Trump accepts nomination

Ego, what ego?

chart image

Source: Politico

This gives me an idea for the stage setting at our conference in Port Douglas this year!