Jame ae aion’s Strategic Investmentbanyanhill.s3.amazonaws.com/Strategic_Investment/Digital/2017/0617... · Jne Issue Jame ae aion’s Strategic Investment You Can’t Get There

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Inside This Issue

James Dale Davidson’s

Strategic Investment You Can’t Get There From Here:

A Market Memoir

4 | The “Big 6” Tech Bubble

6 | Ripe for a Crash

8 | Play “Strong Defense” With This Stock

10 | Portfolio Review

What’s happening is a slow-motion collapse of the economy. Neither Democrats or Republicans know why it is so remorselessly underway. A tiny number of well-positioned scavengers thrive on the debris cast off by the process of disintegration, but they don’t really understand the process either — the lobbyists, lawyers, bankers, contractors, feeders at the troughs of government could not be more cynical or clueless.

— Howard Kunstler

UNLIKE my typical report to you, which tends to be a more or less impersonal essay on some aspect of the economy or market,

this month’s offering takes the form of a personal narrative of an extraordinary and tumultuous week.

Of course, I reflect on the big market drop on Wednesday, May 17 — the steepest since June 2016. But some of my discussion addresses issues associated with the challenge of trying to prepare children for success in a bankrupt world.

Expensive college educations are now seemingly part of the birthright of middle-class American children. Yet we have little open discussion of the

role of education in the “slow-motion collapse of the economy” taking place before your eyes.

I say this to preface the fact that the week of May 15 ended with my daughter Brooke’s college graduation.

MondayThe week began with an investor celebration of

nothing — the 155th anniversary of the founding of the Department of Agriculture. The Nasdaq and the S&P 500 notched record highs that day, boosted by gains in energy and technology stocks. Energy shares rose along with an uptick in oil prices after officials from Saudi Arabia and Russia spoke of the need for extending output cuts. The day’s action was also notable as Snap Inc., the parent of social media wannabe Snapchat, soared 7% after dropping nearly back to its IPO price. Meanwhile, software security stocks advanced following a cyberattack with ransomware on Friday dubbed “WannaCry.” It seems to have been a case of bad guys capturing cyberwarfare tools developed by the NSA at your expense.

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James Dale Davidson has spent over 30 years as a

specialist “crisis investor,” which has taught him that

it’s always the hardworking, the savers, the taxpayers

who suffer the most. James has been warning investors

about the dangers of a financial collapse for over 20

years. He’s also spent most of his adult life taking on

an overreaching government. In 1974, he founded the

National Taxpayers Union, which for 35 years has been

protecting your right and that of every American to keep

what they’ve earned.

ABOUT JAMES DALE DAVIDSON

Investing is not a 9-to-5 job. Far from it. On Monday evening, I found myself enjoying good Japanese food at the Boca Raton Resort and Club with two experts on the burgeoning field of regenerative medicine. I believe there will be a major revolution in the nature of medicine.

If you know your history, you realize that there have been such revolutions in the past. Recall the medical misadventures of our first president, George Washington. The “father of our country” lived during the infancy of modern dentistry and the final decades of “vitalist” medicine.

Contrary to a tidbit of widely circulated “false teeth news,” Washington’s dentures were not wooden. But he did have false teeth. When he was inaugurated as president in 1789, he had only one real tooth remaining in his mouth.

He soon lost that tooth as well, giving it as a souvenir to his New York dentist, Dr. John Greenwood. Washington’s numerous dentures were made variously from hippopotamus ivory, gold wire springs, walrus tusk and Bolivian silver. Probably a few of his teeth were recycled horse and cow teeth. (Many early dentures were composed of human teeth extracted from corpses — no evidence that Washington used those). They were all ill-fitting, which helps to explain why there are no images of Washington smiling.

Washington was the richest man in the United States when he died on December 14, 1799. He could well afford the best care available in his time.

But it proved not to be very helpful. Washington caught a cold while doing carpentry work in a sleet storm at Mount Vernon on December 13.

When he developed a fever, he was bled by his physicians, to no good effect. (Blood was associated with “fire” or fever in the vitalist tradition, so the doctors of the time reasoned that bleeding a patient would help treat his fever. Bleeding, undertaken before antiseptics, to “balance the humors” was all too likely to produce a fatal infection. Unhappily, the fever only abated in Washington’s case when he died.)

Modern Western medicine, notable for employing pharmaceutical prescriptions to treat symptoms, took hold in the 19th century. Today, you are in little danger of being bled to death by your physician — though he or she may kill you in other ways. Not every treatment doctors administer is effective or useful, but there has been a great advance in understanding the causes of diseases. Dentistry, also, has made great strides. Dentists are no longer brutes with bloody pliers.

I found regenerative medicine fascinating for at least two reasons. In the summer of 2008, my older son Nate went on a hiking tour of Iceland. In the course of his trek, he fell into a geyser and suffered horrible burns on his leg.

The standard treatment for third-degree burns is a grim torture that calls for scraping the wounds. They do this so the dead surface skin won’t decay and infect the wounded skin underneath. Alternative stem cell treatment could make this much less painful, or perhaps work without the need of skin grafts. The doctors who treated my son excised a large swath of skin from his upper thigh and grafted it to his lower leg. Ouch.

Yet another reason I am excited about regenerative medicine relates to a lecture I heard recently on the coming revolution in medicine, delivered at the 2016 North American Reunion of Oxford University by professor Matthew Freeman, head of the Sir William Dunn School of Pathology.

That branch of Oxford University secured its

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fame in medical history by demonstrating the therapeutic value of penicillin. Antibiotics were essentially invented there, as I discovered to my fascination, many years ago when I broke my ankle playing tennis on Lady Goodhart’s tennis court at Boars Hill. Ever gracious, Lady Goodhart had me ferried to the Radcliffe Infirmary on Woodstock Road, where penicillin was first used.

A sprained or possibly broken ankle gave me a low priority for emergency attention. So, I had plenty of time to take in my surroundings as I waited to see a doctor. I could not help noticing a display case in the waiting area that prominently showed off the so-called “golden bedpan” used to capture and recycle the urine of patients on whom penicillin was first tested on January 27, 1941. The penicillin was found to be abundant and still potent in the collected urine, from which it was subsequently extracted for reuse.

That is merely a footnote in medical history. Professor Freeman foresees something much more interesting than penicillin in store for the future of medicine. He foresees a revolution in which regenerative medicine supersedes pharmaceutical medicine.

Here, I should indicate a prejudice. A lifetime ago, when Matt Freeman was not an established genius with important discoveries about the rhomboid family of proteins, he was just another smart guy sitting at low table with me at Pembroke College at Oxford — someone I pestered to “please pass the Brussels sprouts.” Naturally, with that

chummy background, I paid close attention to what Matt had to say.

TuesdayTuesday was interesting for me for an altogether

different reason.

Headlines on Tuesday gave me hope that the whole phony “Russian interference” myth started by the Deep State and promulgated by the mainstream media was finally being exposed for the lie it is.

Fox News reported (and later recanted) news on the unsolved murder of Seth Rich, a computer expert employed by the Democratic National Committee (DNC).

Many believe Rich was killed in retaliation for providing WikiLeaks with a trove of DNC emails.

Rumors were fueled by the odd circumstances surrounding his death, including the sudden retirement of D.C. Police Chief Cathy Lanier five weeks after the murder, and an email John Podesta sent to Hillary’s inner circle about making an example of a suspected leaker.

Podesta said: “I’m definitely for making an example of a suspected leaker whether or not we have any real basis for it.”

Also, adding to the idea that Rich was the source of the WikiLeaks documents was the fact that Julian Assange offered a reward of $130,000 for information leading to the arrest of whoever was responsible for Rich’s murder.

Strategic InvestmentTo contact us with a question or comment, please call: 1-888-898-2227 or email us at [email protected].

Published by Banyan Hill

Editor: James Dale Davidson

Managing Editor: Charles Del Valle

Editorial Director: JL Yastine

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Make of it what you will. But it does offer a sound basis for Trump’s decision to fire James Comey as head of the FBI.

The whole “Russian interference” fantasy would evaporate in a heartbeat if the sleeping majority of the public knew of Seth Rich’s role in leaking information from the DNC to WikiLeaks.

Also, a real investigation of Rich’s murder is likely to lead upstream to big shots in the Democratic Party. They must be sweating profusely knowing that the attorney general got information from the files, computers and papers seized from Comey’s office when he was fired. Indeed, Trump’s cryptic comments about surveillance tapes may well refer to evidence seized from Comey rather than a Nixonian recording initiated by Trump.

Tuesday also brought another premonition of Wednesday’s sharp sell-off, with the compilation of the latest batch of 13F reports. They showed that in the first quarter, all the big hedge funds were crowding into the same six big tech stocks. Can you guess which ones?

Probably: Facebook, Apple, Amazon, Microsoft, Alphabet and Netflix.

Hence, the 26% average return for these six names, which together account for nearly half of the year-to-date gains of the S&P, according to calculations by Goldman Sachs.

To end my day, I spent Tuesday evening enjoying an excellent meal at the Palm Beach Yacht Club with my senior partner in Newsmax, Christopher Ruddy, and host Michael Harris. Michael is one of the top securities lawyers in South Florida. Chris is very close to Donald Trump and usually has sharp insights into Donald’s thinking. We discussed the slow-motion coup by the Deep State against Donald and other aspects of his presidency.

The discussion was private, so I can’t recount details, but I can tell you that it was a great encouragement to see Michael so happy with his new wife. He is a man of my vintage, who emerged from a long, unhappy marriage to find love and

happiness with a beautiful younger woman. His example encourages me. Life offers second, third and even fourth chances.

WednesdayWednesday offered proof that the remorseless

efforts of the Deep State to delegitimize President Trump entail the threat of serious consequences for financial markets.

The S&P 500 suffered its worst one-day loss in nearly a year, falling 1.8% after mutterings that Trump should be impeached for firing Comey brought home the seriousness of political uncertainty in Washington. This happened because the night before a report came out that Comey had a secret memo that detailed a conversation in which President Trump asked him to “let go” of the Michael Flynn probe. If true, this could be construed as “obstruction of justice,” an impeachable offense.

Prior to Wednesday, markets had seemed oblivious to the high likelihood that Trump’s program of infrastructure spending and tax cuts was unlikely to be enacted into law. The Dow suffered similar losses, while the Nasdaq and Russell 2000 were hit harder, losing 2.6% and 2.8%, respectively. The CBOE Volatility Index (VIX), a measure of implied stock market volatility, spiked over 40% to above 14 points.

As a reminder — the VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. Historically, when sentiment reaches either a bullish or bearish extreme, the market typically reverses course. While this is not necessarily predictive, it does measure the current degree of fear present in the stock market. It was virtually nil when Wednesday’s sudden sell-off began. With the VIX hugging historically low levels since Trump’s election, the scene is set for an eruption of volatility of the sort associated with market crashes.

Before I turn the page on Wednesday, I want


to draw your attention to a report on CNN, sometimes lovingly known as the “Clinton News Network” because of its unabashed bias. None other than CNN’s Dana Bash took to the airwaves on Wednesday night to discuss the attacks on Trump that roiled markets.

Ms. Bash suggested that reports alleging that Trump leaked top-secret intelligence to the Russians and that he improperly fired Comey were revenge against the president because of his unwillingness to show the same deference toward the intelligence community — read “Deep State” — as did his immediate predecessors.

ThursdayThursday was the first of a series of low-drama,

low-volume repair days that brought the market back to its pre-Trump dump valuations. The day was more interesting for developments outside the U.S. that underscored the interlocking vulnerabilities of the world financial system.

As you know, every country on earth is trying to navigate the shoals of bankruptcy. No big government system anywhere can pay its way. They all face shortfalls of various kinds that threaten to trigger collapse. Thursday’s news brought renewed evidence of vulnerability for two of the leading emerging economies.

In Brazil, President Michel Temer was revealed to have encouraged the payment of hush money to Eduardo Cunha, former speaker of the lower house of the Brazilian Congress. A secret recording between Temer and Joesley Batista, the chairman of Brazil’s JBS SA, the world’s largest meat packer, revealed Batista telling the president that he was paying hush money to Cunha to remain silent. To which Temer replied, “You need to keep that up, OK?”

When O Globo, one of Brazil’s leading newspapers, reported the conversation between President Temer and Batista, Brazil’s currency, the real, plunged. And the stock market fell by 10%, leading to a trading halt. Brazilian government bonds also suffered a record decline.

Meanwhile, on the other side of the globe, China’s massive debt bubble began to unravel at its point of greatest vulnerability — the nearly $10 trillion shadow banking system. Shadow banks have been employed to disguise massive losses in the country’s overbuilt real estate sector. The ploy through which losses have been disguised involves so-called wealth management products (WMPs). These WMPs have been mobilized with government encouragement to buy up zombie real estate.

The problem, of course, is that debt deployed to patch over the holes in balance sheets has to be enlarged constantly because there is no way that the equivalent of 27 empty New York Cities in China can pay their way. The investors in the WMPs are becoming ever more restive as evidence mounts that their investments are destined to become worthless.

On Thursday, May 18, after Wall Street’s “Trump dump,” Foresea Life, one of China’s largest insurers, warned of “mass defaults and social unrest” unless authorities eased their crackdown on new WMPs. The plea to ease regulations was punctuated by a severe signal of funding distress in Chinese money markets.

The Shanghai Interbank Offered Rate (Shibor) — for the first time ever — rose above the prime measure of Chinese corporate borrowing rates. In other words, the cost of borrowing is now above the rate that lenders charge customers.

While this did not have an immediate, devastating market impact on May 18, it is a leading indicator of trouble in an economy with a 300% debt-to-GDP ratio. Stay tuned. There will be market reverberations from the liquidity squeeze that foretells a slowdown in Chinese debt growth.

Indeed, I expect a major 1929-style crash to originate in China. The history of major financial crashes shows that big corrections tend to originate in emerging rather than already established economies.

The Tulip mania in the 17th century occurred in Holland, when it was assuming world leadership.


The South Sea Bubble burst in London, when the United Kingdom was poised to supersede the United Provinces in world economic leadership.

The Crash of 1929 still emblazoned in the memory of investors was the crash in New York, when the U.S. was emerging to overshadow Great Britain.

China may not become a dominant world power on the same scale achieved by the U.S or the U.K., but it has certainly been the economic phenomenon of this century.

China is ripe for a crash.

FridayFriday was another levitation day as stocks

worked their way out of losses from Wednesday’s 400-point drop, with the Nasdaq inching back toward a new all-time high. The brief interruption, of course, was blamed on Donald Trump.

Courtesy of American Airlines, I shared dinner with my 11-year-old son, Arthur, in a rather suspect, cafeteria-style rib joint in Charlotte Douglas International Airport. The sad thing is that the food was probably the best part of the evening.

The experience of air travel has become appalling. As a child in the 1950s, I flew across the country in propeller planes. We had to stop to refuel, not so the airlines could conflate dozens of flights together to ensure there was not one empty seat or open space in the overhead bin on takeoff to the next destination.

Part of my theme in this essay is to register the downhill slide in prospects for the average American. Riding on a commercial airline flight is a compilation of indignities enough to underscore the advantages of being a billionaire with your own private jet. I finally put my head on the pillow at the Hampton Inn at 3:30 am, 10 hours after takeoff from South Florida.

SaturdayMy Saturday began in a leafy neighborhood

of Hamilton, New York. This was the site of a

graduation party for my daughter Brooke and several of her classmates as they celebrated finishing four years at Colgate University. I met other students and parents, as well as Brooke’s boyfriend, Zach, who seems to be a pleasant and intelligent young man.

Zach graduated from Colgate in 2016 and has already secured a good job on Wall Street. He has realized the promised potential of securing an expensive liberal arts education. Whether his experience is typical is another question.

After a champagne brunch at which my young son Arthur was limited to the orange juice part of the mimosa, we headed off in our rental car to visit the Baseball Hall of Fame in Cooperstown, New York. The distance between the two towns is only about 40 miles. But that trip takes you through three parts of three centuries.

Just driving through Central New York to Cooperstown, I couldn’t help but notice how dilapidated and run-down everything was. The only evidence of economic production was herds of scrawny dairy cattle. They were so skinny I could count their ribs as I drove by. Arthur volunteered this observation: “This reminds me of a sadder version of East Texas. A lot of big houses, but they all need lots of paint.”

In practice, this means that the closest most of the locals will come to prosperity — and the chance to live in a new double-wide trailer — is if they can secure a government job. A teacher’s job pays vastly more than the typical private sector gig in Central New York. Another financially desirable post is to be hired on as a guard at the penitentiary.

Cooperstown is obviously an island of at least middle-class prosperity. Houses are painted. Windows are protected by shutters, not boarded over. There are gardens sprinkled with flowers.

We visited the Baseball Hall of Fame and spent 10 minutes appreciating the Babe Ruth exhibit. No mention of the story of the reporter asking Ruth to defend his then-astronomical salary of $100,000, which was more than President Herbert Hoover’s salary.


To which Ruth allegedly replied, “Yeah, I had a better year than he did.” (In fact, Hoover donated his salary to charity, so almost everyone made more than Hoover pocketed as president.)

We made our way back to Cazenovia, the site of our hotel. Cazenovia is an enclave of about 7,000 that positively reeks of money compared to the rest of Central New York. There is a stretch of several miles along the shores of Lake Cazenovia where the houses rise above the level of the prosperous middle class. These seemed to be million-dollar homes that stood out after driving for hours past neighborhoods where most homes were worth perhaps $50,000.

We decided to cross the street and dine at a restaurant in a small vineyard. The food was delicious, but we were obliged to eat it outside in chilly weather because horrid music was blasting inside. Arthur said: “Dad, we have to get out of here before my ears start to bleed.”

Sunday The first order of the day was to head to

the Colgate campus to find parking for the commencement ceremony. After some adventures, I did. I managed to find a seat with Brooke’s mother, her childhood nanny and my older son Nate, along with other familiar faces.

If there had been any doubt that political correctness was the theme of the day, it was soon dispelled. The honorary degree recipients might have well been composed of explicit Hillary Clinton partisans who still had not accepted the verdict of the 2016 presidential election.

This impression was confirmed by commencement speaker Claudia Rankine, the Frederick Iseman Professor of Poetry at Yale. She unleashed a stemwinder of a speech touching all

the politically correct talking points in the age of Trump.

I was particularly stunned to hear professor Rankine’s tirade on the evil of letting students graduate who are not convinced about Al Gore’s views on global warming. That seemed a bit uncharitable, not to mention close-minded. But the whole point of political correctness runs contrary to the Socratic method taught in the Oxford tutorial system.

From my seat in the audience at the Colgate commencement, I was not at all sure that the indoctrination along political lines would be likely to fit my daughter for the challenges that are surely ahead.

The current “slow-motion collapse of the economy” is ultimately destined to become an overt collapse. As Howard Kunstler points out in the comment at the top of the article, almost everyone is clueless about the causes of economic decline. That being so, memorizing the party line is likely to prove disappointing.

Even ownership of large tranches of the six big tech stocks that account for so much of the market’s gains — Facebook, Apple, Amazon, Microsoft, Alphabet and Netflix — is likely to disappoint as the Fed raises rates and trims its balance sheet.

As you are no doubt well aware, I believe that the logic of history tells you that credit bubbles end badly. They always have.

Look out below,

James Dale Davidson


By Charles Del Valle

WILL the U.S. bomb North Korea?

It’s a question that really wasn’t all too serious a decade ago. Sure, North Korea wanted to build a

nuclear bomb. But it was far from having one ready. And it was even further away from having a missile good enough to make it to the U.S.

But now, that question has become very serious indeed.

Recently, North Korea successfully launched a missile

with a 2,800-mile range. While that’s still more than 1,000 miles from Hawaii (and thousands of miles away from the mainland West Coast), it’s uncomfortably close.

In fact, it seems all North Korea has done this year is launch various missiles. Some blew up as soon as they left the ground. Others landed within 7 meters of their target, hundreds of miles away.

All this missile launching has, understandably so, made the U.S. and China worried. As a response, China has been amassing hundreds of thousands of troops on its border with North Korea. And President Trump has repeatedly said that all options are on the table when it comes to North Korea, all while sending more ships toward North Korea in a show of force.

Now we’re left with the question: Will the U.S. pre-emptively bomb North Korea to halt its nuclear and missile program? It may not happen this year. After all, this would be a brutal war, one that the defense secretary categorized as “catastrophic.”

If we bombed North Korea, it would likely retaliate by bombing Seoul, just 35 miles from the

demilitarized zone at the border between North Korea and South Korea. To put that in perspective, metropolitan Seoul is home to more than 25 million people.

It would be a tragedy the likes of which we’ve not seen in recent memory.

Yet, as awful as war with North Korea might be, it appears our government is putting the possibility up for debate.

And our president hasn’t been shy about using overwhelming force to make a point (like he did in Syria). In fact, he wants to grow the military.

In his latest budget request, President Trump asked to increase defense spending to $693 billion. And with a Republican-led House and Senate, that request will likely be granted.

Which leads me to why I’m mentioning all of this…

Today I’d like to introduce you to a defense company that — at the very least — should act as a market hedge just in case a war with North Korea breaks out.

It’s already gone up 439% over the last five years, but still trades at a 50% discount to the market.

Not only that, this company keeps jacking up its dividend. The payment went up 22% over the last year.

But here’s the best part: This company — Huntington Ingalls Industries Inc. (NYSE: HII) — is going to benefit in a huge way from this new defense spending.

You see, recently the U.S. Navy made a “Force Structure Assessment,” where it reviews its fleet size to see whether it can meet the demands of the future.

A Defensive Play That Could Grow Your Cash


The result? The Navy wants to bump up its fleet from 274 ships to 355 by the end of 2018.

That’s a 29% increase in just two years!

This benefits Huntington Ingalls because it designs, builds, overhauls and repairs submarines and ships in the United States. And one of its biggest customers is the U.S. Navy. So the company is set to get a lot of new orders.

Heck, it already picked up over $600 million worth of new orders over the last quarter alone. That increased its backlog to a whopping $20 billion, of which $12 billion has already been funded.

That’s a huge backlog for a company with a $9 billion market cap.

But as I’ve alluded to, with new funding set to hit the Navy, this backlog is set to grow even more.

So why is the Navy increasing its fleet? Some of it has to do with threats from North Korea. But the big motivator is a fear that China’s navy will grow bigger than America’s by 2022.

America doesn’t want to fall behind.

I wouldn’t be shocked if even more money poured into the Navy over the next 10 years, propelling the shipbuilder’s profits — and its stock price — even higher.

So, the reality is that Huntington Ingalls is set to do extremely well regardless of what happens in North Korea. But if a war with North Korea were to break out, this company would see its share price rise as the rest of the market fell.

In a sense, this company should hedge you from any big market fallout should bombs drop in North Korea, while still giving you plenty of upside regardless of whether that happens or not.

There are other benefits, too.

A shipbuilding contractor like ours typically sees very predictable revenues. Here’s why: The Navy doesn’t build ships and submarines on its own. It needs companies like Huntington Ingalls to do that.

But building one ship — or dozens — is a massive

undertaking. The effort needs support from dozens of other contractors and subcontractors.

To meet the quality and specifications the Navy wants, Huntington Ingalls needs a critical network of suppliers — literally hundreds of smaller companies that specialize in making individual parts that go into the shipbuilder’s vessels.

What’s important to note is that these smaller companies can thrive under only one circumstance: predictability.

And the Navy knows this.

The Navy wouldn’t want to compromise how quickly it can get new ships and submarines out onto the water. So, rather than placing a major order to be filled within a year or two, it makes sure to spread orders out so that companies like Huntington Ingalls can keep a steady flow of cash moving on down the line to distributors and part-makers.

That keeps the pipeline strong, which helps Huntington Ingalls maintain the ability to get new ships and subs efficiently built and ready for delivery to the Navy. It also keeps the company’s cash flow strong so it can invest in new production and pay a dividend to its shareholders.

So now you know why Huntington Ingalls is such an amazing company — now let me show you why the time to buy is now.

Huntington Ingalls Industries (NYSE: HII)

$225

$215

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$145

$135Jun. Jul. Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May

— Adj. Close - - - 200-Day Moving Avg.

As you can see, the stock is down a shade over 20% from its February highs. But over the last month, it


has been consolidating just above its 200-day moving average. While the stock could move sideways for a few more weeks, I believe that increased defense spending will give this company an upside catalyst heading into the summer.

There’s no reason why this stock shouldn’t trade for $300 a share by this time next year. So, here’s what I want you to do:

Action to take: Buy Huntington Ingalls Industries Inc. (NYSE: HII) up to $202 a share.

Market Update and Portfolio Review

Is political risk getting a little too real in the U.S.A.?

It might be. I say this because, for most of the month, the market didn’t do much. But as soon as political revelations came out that could lead to an impeachment … the market tumbled.

The S&P 500: The Higher It Climbs . . .

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It would signal that the rally we saw since November 8th was off-base.

Indeed, we’ve seen stocks push higher, and continue to get more overvalued, despite better corporate earnings in the 1st quarter. From a price vs. profits standpoint, stocks haven’t been this expensive, relative to their underlying profits, since January 2002.

Investors are OK paying a premium because they think prices will go even higher. They believe that the U.S. economy is about to burst into growth mode and unleash major economic stimulation.

I beg to differ. Here are just some of the data points I’ve noticed over the last month:

• Household Debt Hits New All-Time High: Total household debt now stands at a new record of $12.73 trillion. The last time this metric was setting record levels was in 2008 — just before the housing crisis took down the entire economy.

Instead of loading up on mortgages this time, we’re seeing the imbalances in credit card debt, student loans, and auto loans, with rising delinquencies in all three categories.

These markets only make up about 26% of total outstanding debt (the rest is largely home mortgages), so we’re not looking at a 2008-style credit implosion here. But it’s highly troubling when, as is the case now, an increasing number of people can’t pay their bills on time.

• U.S. Car Sales Keep Falling: Fewer buyers are willing to buy the latest car to hit the lot, with a resulting downturn in car sales. At the current rate, car makers expect to sell 16.78 million cars. That’s down more than 7% just since December.

I believe we’ll see this annual production rate fall even further as car loan delinquencies rise. We’ll also eventually see more car makers freezing production or laying off workers. This will undoubtedly have a dramatic negative effect on our economy.

• 1st Quarter GDP Was Extremely Weak: The economy grew at an 0.7% annual pace in the

As you can probably guess by looking at the chart, the news hit on May 17th. Since then, the market rebounded sharply. We’re now revisiting new all-time highs. But there is always another chance that bad political news may hit the newswire once again, and knock stocks back down again.

Impeachment would mean the failure to health care reform, tax reform, and hopes for much needed funding of new infrastructure projects around the U.S.


first quarter of 2017. That mimics a pattern we’ve seen for a few years now of a weak first quarter followed by an acceleration. And to the extent the economy grew at all, it’s thanks to the housing market.

Higher delinquencies across a range of debt could result in tighter lending standards when it comes to mortgages. This would slow down growth in the housing market (as would higher interest rates).

• Robots Set To Wipe Out 6 million Retail Jobs: A study released by Cornerstone Financial Group found that automation would wipe out 6 to 7.5 million retail jobs over the next decade. That’s 38% of the current retail workforce.

These are jobs such as inventory clerks and cashiers. This report even went so far as to say that automation would eliminate more retail jobs than it did in the manufacturing sector. Automation could take even retail positions away, surpassing even those lost to the swelling number of bricks-and-mortar stores expected to close in the coming decade.

• China’s Big Downgrade: Moody’s recently downgraded China’s bond rating a couple of notches thanks to a large increase in its sovereign debt. Mainly, Moody’s worries that China — as structured — requires more and more debt to keep its economy is growing.

That doesn’t even tell the full story because of China’s “shadow banking system.” For instance, Chinese investors sank more than $4 trillion into often questionable bank “wealth management”

products — money that gets recycled to a bank’s business customers as a form of “off the books” loans.

As these loans go bad, it could lead to even more Chinese sovereign debt in the form of a bank bailout program. Moody’s is simply pointing out that China may not be able to keep this going on forever.

• War Drums For North Korea: We’re starting to hear more about North Korea (NK) and how the military option isn’t “off the table.” If I’m being honest, it sounds eerily familiar to what we would hear about Iraq shortly before we invaded.

That said, a war in NK would be far worse than one in Iraq. If the U.S. decided to attack NK, it’s likely that NK would send as many bombs as they could into South Korea. South Korea is home to Samsung, LG, Hyundai and other major companies. If NK bombed South Korea, it would send major shockwaves throughout the global economy.

As you can see, there is plenty to stay cautious about. Stocks are extremely expensive, yet the economy is barely growing and we’re seeing more external risks. That’s going to keep us holding a defensive outlook.

Now, let’s take a moment and look at our open portfolio:

After initially going against us, the stock of Buckle, Inc (NYSE: BKE) has resumed its downtrend and is set to hit a new 52-week low sometime next month. We got into this play because we knew that mall retailers would continue to suffer as malls are shuttered across the country. While Buckle has some cash, it also has no competitive advantage. It mostly sells goods you could buy on Amazon. And what a kid can buy on Amazon, they will. That’s bad for Buckle.

Action to Take: Short Buckle, Inc. (NYSE: BKE) down to $16 a share.

Our longest-term holding is with tobacco producer Altria (NYSE: MO). After consolidating for much of April and May, the stock has finally

Charles Del Valle is a self-taught, 12-year veteran of the

financial world. In the past five years, he fine-tuned his

market skills even more, mentoring under investment

experts in options and technical analysis, value and

income analysis, and sentiment analysis. Charles is also

an avid car and technology enthusiast and a firm believer

that the government has its hands far too deep into the

financial markets, and that a smaller and less-intrusive

government is what we deserve.

ABOUT CHARLES DEL VALLE

NOTES

The Strategic Investment Portfolio is an equally-weighted strategy and does not include dealing charges to purchase or sell securities, if any. Taxes are not included in total return calculations. “Total return” includes gains from price appreciation, dividend payments, interest payments, and stock splits. The Purchase Price is based on the first closing price after the recommendation’s release. Sources for price data: Capital IQ, and websites maintained by securities issuers. Dividend yield is calculated based on trailing 12-month distributions. Stop-losses: The Strategic Investment Portfolio maintains a 25% trailing stop-loss on every stock, ETF and bond recommendation. *25% stop-loss is waived.


Strategic Investment Portfolio

NEW RECOMMENDATION

Date Price On Purchase Dividend Total Investment Added 5/30/2017 Price Yield Returns Advice

Huntington Ingalls Industries (HII) NEW Buy up to $202

Altria Group Inc. (MO) 6/9/10 $74.41 $20.05 3.3% 337.88% Buy up to $76

Buckle Inc. (BKE) SHORT 3/30/17 $16.80 $18.65 6.0% 7.51% Short down to $16

CurrencyShares British Pound Sterling ETF (FXB) SHORT 10/31/16 $124.79 $119.50 -4.83% Buy to close

Gold Bullion 7/30/15 $1,265.05 $1,087.50 16.33% Buy up to $1,300

Magellan Midstream Partners LP (MMP) 2/28/17 $73.55 $77.51 4.8% -4.30% Hold

Pepsi (PEP) 7/30/15 $117.91 $96.63 2.7% 26.25% Buy up to $112

ProShares UltraShort Euro ETF (EUO) 9/30/16 $24.11 $23.76 1.35% Sell to close

Rockwell Automation (ROK) 5/2/17 $159.28 $155.97 1.91% 2.62% Buy up to $165

WisdomTree Dreyfus Yuan Fund (CYB) SHORT 2/3/16 $24.41 $24.21 -1.36% Hold

STRATEGIC INVESTMENTS

climbed above its 50-day moving average and heading up towards all-time highs. Altria is a strong company, with tremendous cashflows, and can navigate just about any negative industry event you can think of. This is one of those companies we should keep acquiring and reinvesting dividends into. Especially at today’s price.

Action to Take: Buy Altria (NYSE: MO) up to $76 per share.

Now, it’s time to close out two of our positions. These are positions that all relate to the dollar in one way or the other. For example, we asked you to buy the ProShares UltraShort Euro Fund (NYSE: EUO) on the expectation that the euro would get weak and the buck would get strong. While this has happened, a weaker dollar is starting to increase the value of other currencies. That also includes the British pound, which affects our short on the

CurrencyShares British Pound Sterling Trust (NYSE: FXB).

Both have been going against us for some time and could continue in the current trend for quite a while, especially if we see a recession in the U.S.

Action to Take: Sell your stake in ProShares UltraShort Euro Fund (NYSE: EUO) and buy back your shorted CurrencyShares British Pound Sterling Trust (NYSE: FXB) shares to close both positions.

Take care,

Charles Del Valle

Jame ae aion’s Strategic Investmentbanyanhill.s3.amazonaws.com/Strategic_Investment/Digital/2017/0617... · Jne Issue Jame ae aion’s Strategic Investment You Can’t Get There

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