Game On: Geopolitical Risk Worsens

I’ve noticed that the shouting on cable news television has gotten even louder, as tensions between the U.S. and Iran worsen. There’s nothing like war to boost ratings.

Ignore the bloodlust of TV’s armchair generals. As an investor, you need to take a deep breath and ponder these events in a coolly dispassionate manner. Below, I provide perspective and guidance.

Make no mistake, geopolitical risk now occupies center stage. I never lose sight of the human costs. From a bottom line perspective, though, Wall Street’s major concern is oil.

As of this writing, the Middle East mayhem continues. Predictably, aerospace/defense stocks are booming.

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Dozens of people were killed Tuesday in a stampede during a funeral procession for Maj. Gen. Qassim Suleimani in Iran, the top-ranking official killed by American drone strikes last week. Governments around the world today warned of potential attacks on embassies.

Stocks opened yesterday in negative territory but bounced back to close mostly higher. Saving the day were mega-cap technology stocks that rose on ratings upgrades from analysts. It was a remarkable rebound that reflected the resiliency of bullish sentiment, despite the specter of war.

This morning after the opening bell, all three main U.S. stock market indices slipped deeply into negative territory, as investors eyed developments in the Middle East. Stocks struggled for traction as the day wore on, bouncing between red and green.

Buckle up. The next few days will be a roller coaster.

I’m not expecting the markets to crash, but the outsized gains of 2019 aren’t in the cards for 2020.

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A factor that mitigates Persian Gulf turmoil is America’s increasing self-sufficiency in energy. However, in another sign of economic slowdown, the Baltic Exchange’s main sea freight index last Friday reported its lowest level since April, pushed lower by weaker vessel demand across all segments.

The Baltic index, which tracks rates for capesize, panamax and supramax vessels that transport dry bulk commodities, fell 63 points, or 6.9%, to 844 points, its lowest level since April 23. The index is considered a reliable supply-and-demand barometer.

Fourth-quarter corporate reporting season soon gets underway and results are projected to be tepid, with the consensus estimate calling for S&P 500 earnings to be down 0.3%.

During the fourth quarter, analysts reduced earnings per share (EPS) projections for S&P 500 companies in the quarter. According to FactSet, the Q4 “bottom-up” EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) dropped by 4.7% (to $40.69 from $42.69) during this period (see chart).

During the past five years, the average decline in the bottom-up EPS estimate during a quarter has been 3.3%. During the past 10 years, the average decline has been 3.1%, and during the past 15 years, the number has been 4.4%. Consequently, the decline in the bottom-up EPS estimate recorded during Q4 was larger than the five-year average, the 10-year average, and the 15-year average.

And yet, equity valuations remain high, despite the slowdown in earnings and the economy. Data released last Friday showed the U.S. manufacturing sector contracted in December by the most in more than a decade.

According to the Institute for Supply Management, the December Purchasing Managers Index (PMI) registered 47.2%, a decrease of 0.9 percentage point from the November reading of 48.1%. This is the PMI’s lowest reading since June 2009, when it registered 46.3%.

Another risk is that the Federal Reserve could rein in its practice of Treasury bill purchases and “repo support.”

In October, the Fed stated it would start buying $60 billion per month in Treasury bills to ensure ample reserves in the banking system. The Fed also said it would continue to support the short-term lending markets by offering daily operations in the market for repurchase (aka repo) agreements.

These Fed measures, which have buoyed stocks, are under-reported in the financial media. The assumption among TV producers is that it’s all too complicated and average viewers will just change the channel.

However, the Fed may decide to cease its hand-holding of financial markets. The curtailment of these measures by the U.S. central bank would pose serious headwinds for equities. I’m closely monitoring the situation and I’ll keep you posted.

The rest of this year promises to be uncertain, with choppy trading and sell-offs ahead. Gold has been on a tear and probably has further to run. The rule of thumb is for an allocation of 5%-10% in either gold mining stocks, exchange-traded funds (ETFs) or the physical bullion itself.

Rising geopolitical tensions, slowing corporate earnings growth, and dismal manufacturing numbers: these factors all add up to a dicey climate for stocks. But as I’ll explain below, there’s an alternative way to make money.

Big Pharma’s $1.5 trillion payout…

Mega-cap pharmaceutical makers face a particularly rough time this year, as their misdeeds in the opioid crisis come back to haunt them. But therein you’ll find an investment opportunity that transcends the woes mentioned above.

Pharmaceutical companies provide life-saving services, but these highly competitive companies aren’t perfect. They make mistakes. And you can make money from them.

We’re witnessing an historic wave of opioid-related lawsuits against Big Pharma that’s funneling more than a trillion dollars in reparations into 46 U.S. states. That’s trillion with a “T.”

According to recent news reports, the Sackler family withdrew more than $10.4 billion from their company Purdue Pharma, which has been embroiled in the opioid scandal.

The Sacklers distributed the money among trusts and overseas holding companies, to shield their personal wealth and avoid massive settlements. More than 2,800 lawsuits seek to hold Purdue accountable for fueling the opioid crisis.

The Centers for Disease Control reports that more than 70,000 Americans die every year from drug overdoses. About 75% of all drug overdose deaths are now caused by opioids, a class of drugs that includes prescription painkillers as well as heroin and dangerous synthetic versions like fentanyl.

The Sacklers and other Big Pharma payers now face an expensive day of reckoning.

The investment strategists at Investing Daily continually hunt for new ways to make money. We especially covet unconventional methods that fly under the radar.

Along those lines, our experts have discovered a way to collect high-dollar monthly payouts from state governments whether there’s an opioid settlement or not. It doesn’t even matter which state you live in. Click here to get your share.

John Persinos is the managing editor of Investing Daily. You can reach him at: