More Swallows to Come

Monday, 27 January 2020
Gold Coast, Australia
By Vern Gowdie

Editor’s note: Bernd Struben here. Port Phillip Publishing’s head office is closed today for the Australia Day holiday. Enjoy the day. I’ll be back with you tomorrow.

Today’s instalment comes from last Monday’s The Gowdie Letter update.

You’re probably familiar with Vern Gowdie. His primary goal is to help protect your wealth from the next big financial crash. And to position you to take advantage during the meltdown…and in its aftermath.

That meltdown may not happen inside the next month. But Vern’s increasingly certain we could be in for a nasty shock this year.

Read on for the latest warning signs flashing across his radar.


A swallow does not make a spring


The appearance of one sign, one deed or one event does not necessarily signify a change in season, trend or character. More ‘swallows’ need to be sighted before we can confidently state spring has arrived.

However, the sight of a lone swallow piques our interest. The 7 October 2019 issue of The Gowdie Letter outlined the conditions that could signify a seasonal change in markets…

Around 140 of the 500 stocks (that comprise the S&P 500 index) are reporting NEGATIVE earnings growth. That’s double the number from the start of the year.Should the downward pressure on earnings persist, then there are three potential consequences to consider for investors who chased yield…

  1. Will the US Corporates be able to meet their repayment obligations to Bond holders (those who have lent the businesses money for share buybacks, to boost dividend payouts etc.)?
  2. Will the US Corporates be able to maintain current dividend payouts?
  3. If debt obligations are partially or wholly defaulted on AND/OR dividends are cut, what impact will this have on the value of the Bond AND/OR share prices?

The answer to the third potential consequence is easy…the values will fall.The extent of the fall depends in part on the extent of the income reductions AND the social mood at that time.

Our first corporate debt ‘swallow’ answers those questions and one more. The question I omitted to ask in The Gowdie Letter on 7 October 2019 was…

What happens to the corporate pension plans?Depending upon the news outlet, McClatchy Co. is either the second or third largest newspaper publisher in the US.On 2 January 2020, Market Watch provided the answer to the pension plan question (emphasis added):

McClatchy Co., the third-largest newspaper publisher in the U.S. by circulation, has frozen pension payments to some former executives and enlisted the services of a bankruptcy-administration firm as it seeks a government takeover of its retirement plan, the company’s chief financial officer said.’

McClatchy said in November it was unable to make a required $124 million payment to the pension fund due in 2020 and might end up having to file for bankruptcy.

The brewing problem of underfunded pension schemes has been a topic of discussion in several issues of The Gowdie Letter. This is from the 4 November 2019 letter…

It’s an open secret that US pension plans — provided by US corporates and State and Local governments — are underfunded.And this is after one of the longest and strongest bull markets in US history.These ‘we’ll look after you in retirement’ promises were part of the American Dream.Buy the house. Pay off the debt. Raise the family. Retire with dignity.The truth is there’s simply not enough in the pension pot to meet the promises that have been made.On 8 October 2019, Market Watch reported…

‘General Electric Co. said Monday it is freezing pensions for about 20,000 U.S. employees with salaried benefits, as part of its plan to reduce its pension deficit by up to $8 billion.’

It’s a start, but it ain’t the end.When the market crashes, that deficit is going to be wider than the Grand Canyon…and not just for GE, but for all the pension plans.

McClatchy is freezing payments in the GOOD times — with the US share market hitting daily record highs. Why, in the best of market conditions, is McClatchy breaking its promises to retired employees? To quote from the Market Watch article (emphasis added):

As of March [2019], McClatchy’s 75-year-old pension fund was underfunded by $535 million, the company said in November [2019].

When these pension funds came into existence in the mid-1940s, conditions were vastly different to today. Life expectancies were shorter. Portfolios could earn a decent risk-free return. People are living to 90 (and beyond) AND rate suppression was never envisaged. So much has been promised to so many by schemes that are relics of another era. When the next downturn hits all asset classes (with the exception of cash) will take these funds from underfunded to under-underfunded. Reneging on pension promises is going to cause great hardship and disruption. The McClatchy pension fund is but one of many US corporate funds that will — in due course — be freezing payments. That does not bode well for consumer confidence and spending. The questions raised in the 7 October 2019 edition, stemmed from the prospect of ‘Should the downward pressure on earnings persist’. How did one of the largest newspaper publishers in the US find itself in this position? As reported by Market Watch (emphasis added):

The move is the latest sign of the liquidity pressure faced by a company that has struggled with debt since its $4.5 billion acquisition of Knight Ridder in 2006.Newspaper revenue for the industry peaked in 2006 at $50 billion when McClatchy and Knight Ridder merged,” McClatchy Chief Executive Craig Forman said in a November video message to staff. “Since then, $35 billion in revenue has left the newspaper industry.”

Taking on significant debt, based on the assumption of earnings continuing uninterrupted, has been the downfall of many a household, corporate and sovereign borrower. McClatchy has suffered persistent downward pressure on earnings. So then, what about McClatchy’s obligations to those who chased yield (bond holders)? This is the headline from the 15 January 2020 edition of the Wall Street Journal:

Money Morning

Source: Wall Street Journal

[Click to open in a new window]

As reported (emphasis added):

McClatchy Co., the second-largest newspaper publisher in the U.S. by circulation, skipped a $12 million debt-interest payment due Wednesday as it continues to negotiate with creditors to avoid a bankruptcy-court proceeding.’

That answers the question…

Will the US Corporates be able to meet their repayment obligations to Bond holders (those who have lent the businesses money for share buybacks, to boost dividend payouts etc.)?’

It’s an unequivocal…NO. If McClatchy is a lone ‘swallow’, then all those holders of BBB (the credit rating just above junk bond status) have nothing to worry about…

Money Morning

Source: Bloomberg

[Click to open in a new window]

If, on the other hand, McClatchy is a sign of things to come, then there’s a world of hurt awaiting the yield chasers. With regards to dividends, declining revenues forced McClatchy to stop paying these several years ago. The final question we asked on 7 October 2019 was…

If debt obligations are partially or wholly defaulted on AND/OR dividends are cut, what impact will this have on the value of the Bond AND/OR share prices?

Courtesy of Market Watch, here’s the answer (emphasis added):

The stock of the 162-year-old company, which publishes 30 newspapers including the Miami Herald, Charlotte Observer, Sacramento Bee and Kansas City Star, has fallen 94% in the past year.’

If we take a few steps back from the 31 December 2018 share price and look at the past decade, we see that McClatchy once traded around US$70.

Money Morning

Source: Macro Trends

[Click to open in a new window]

There is no coming back from a loss of that magnitude.

The McClatchy price chart is an excellent example of how a company that’s fallen 90% in value (from US$70 to US$7) can still inflict a further 90% fall on investors.

After the first 90% fall, people tend to think how much more can it lose? The answer to that question is simple…possibly 100%.

The McClatchy experience has provided the answers to all our questions.

Over the course of the coming months and years, I’m anticipating we’ll sight many more McClatchy swallows.

And when they make their appearance in numbers too big to ignore, it’ll be the ‘return-chasing’ investors who’ll be forced to swallow hard and make some very difficult decisions about their future.


Joining a Trend


[Markets are flying and there are plenty of stocks shooting higher. But how do you jump on to a strongly trending stock in a sensible way? Click on the picture to find out how Murray joins a trend.]

We’ve all seen a stock shooting off to the upside and wondered how we can jump on. But the fear is always present that we may buy the stock just as it’s topping out and we will be forced to scramble out at a loss.

Joining a trend is a tricky thing to do. It seems easy in retrospect, but I assure you it’s not.

My method of joining a trend involves understanding how waves develop and how momentum shifts.

When you combine the two you can find compelling entry points.

In today’s update I analyse the price action in a market darling Zip Co Ltd [ASX:Z1P]. It has been rallying with Afterpay Ltd [ASX:APT] and is up 400% since the start of 2019.

Last week saw a weekly buy pivot after testing the bottom of the buy zone of the last wave higher.

That may sound like Greek to you, but if you want to make money consistently in the markets you should take the time to find out what it means.

Watching the above video will be a good start.

Price action may seem mind bogglingly complex, but when you understand how waves and ranges develop, the complexity disappears.

Prices gravitate back to a ‘Point of Control’ over and over again, shaking traders out of positions, before prices are ready to blast off into another trend.

There are areas within ranges and waves where support and resistance are found. Those areas give me the best opportunities when combined with buy and sell pivots.

The buy and sell pivots tell me when momentum is shifting in a certain time frame.

The whole trading system is based on entering positions as soon as momentum shifts in the key support and resistance zones.

I take profit as soon as I can so that I am ‘free carried’ from that point on. I will either breakeven or make money after I have taken part profit.

By using mean reversion to help me reach my initial target I am making sure the odds are in my favour.

If you are trading in the smaller end of the market it is crucial that you are free carried in your position as soon as possible. Volatility is so immense in the smaller-cap stocks and bad news can see huge gaps in prices. Risk management has to be at the top of your list of considerations.

Profits will flow once you have established a disciplined and methodical method for managing trades.

Without that you are flying by the seat of your pants and it is only a matter of time until the market teaches you a painful lesson.


Murray Dawes,
Editor, Alpha Wave Trader