Over and over, I’ve stressed a cautious, careful and defensive investment stance since early last summer.
Investors who heeded my advice avoided the meltdown last August and September … and the secondary plunge in January and February. Those who subscribed to my All Weather Trader service actually had the chance to generate significant profits from them.
Now, I’m here to warn you — again — that the primary reason for my caution is striking with full force. I’m talking about clear, irrefutable evidence of a major turn in the credit cycle. Many experts on Wall Street aren’t paying enough attention, and I don’t want you to make the same mistake.
Look at this chart of shares of Synchrony Financial (SYF), and what do you see? A huge 13%, one-day drop on Tuesday.
You may not have heard of Synchrony, but if you have a store-branded credit card, there’s a good chance you do business with the firm. Its clients include Lowe’s (LOW), Stein Mart (SMRT), Amazon (AMZN), and Dick’s Sporting Goods (DKS). The company also finances the purchase of bigger-ticket consumer items. They include furniture, electronics, ATVs, and motorcycles for the likes of Rooms To Go, hhgregg (HGG), and Yamaha Motor Corp. (YAMHF).
SYF was spun off from General Electric (GE) almost two years ago, and it now manages more than 66 million credit accounts and around $66 billion in receivables. That’s a great business to be in during the expansion phase of the credit cycle, because receivables boom and delinquencies plunge. It’s why the stock surged from around $23 two years ago to as high as $36 last summer.
But then, SYF began to wilt. And after rallying along with the market since February, the stock just got crushed. So did shares of other companies in the credit card and consumer finance business, including Capital One Financial (COF), Ally Financial (ALLY), OneMain Holdings (OMF), and American Express (AXP).
That catalyst was a warning from Synchrony that its customers were increasingly falling behind on payments and that its attempts to cure those delinquencies weren’t as successful as before. The company raised its forecast for expected credit losses by just 0.2 to 0.3 percentage points. But that was all it took to send investors fleeing for the exits.
Why? Because we’ve just experienced the biggest “Everything Bubble” in history! I’ve hammered away at the auto loan bubble relentlessly for months, and we’ve also seen a massive bubble in student loan debt. Delinquencies on student loans are at sky-high levels, and they’re rising on lousy car loans, too. Throw in tightening lending standards and rising future losses in other categories, such as commercial and industrial and commercial real estate lending, and you’ve got a recipe for a real credit crack up.
My advice? Drown out the happy talk from Wall Street and the latest central bank mumbo jumbo, and focus on what really matters. The credit cycle has turned. The economic cycle has turned. And if you don’t turn with it, you risk getting your portfolio run over.
Or in practical terms, stick with defensive sectors like utilities, consumer staples, and telecoms. Favor high-grade bonds over risky ones. Hedge your downside risk with inverse ETFs or put options. Or if you’re more aggressive, zero in on the most vulnerable stocks in this phase of the cycle and go for downside profits using tools like my All Weather Trader service.
Until next time,