Editor’s note: Each weekday in the Market Minute, we look at how technical indicators can signal broad, short-term market moves you can profit from. We usually don’t pay much mind to macro trends.
Despite that, today’s essay from Casey Research’s E.B. Tucker caught our eye. And when we see valuable analysis, we like to pass it along.
E.B. says he’s found evidence for a huge move higher in one surprising sector. Read on to learn which it is, and the best way to play it as the bull market reaches its peak…
Right now, we’re seeing a set of indicators we’ve never seen before. If someone told me about them 20 years ago, I would have struggled to picture them.
In short, we’re on the cusp of a tremendous bull market.
It’s nothing like what we saw in the 1960s or 1980s. Those bull markets rode on the back of economic growth. In both cases, you would have made more acceptable returns by simply buying the Dow Jones Industrial Average.
The coming bull market looks entirely different. Most people will miss it because they’re used to making “easy money.”
You see, investors dumped $692 billion into passive funds like the Vanguard 500 Index Fund last year. They blindly invested in stocks, and that worked quite well. Now, the average person believes buying the overall market index is his path to steady riches. He’s dead wrong.
Here’s why…
The U.S. stock market is worth $29 trillion today. Twenty years ago, it was worth $12.9 trillion. That’s an increase of 124%.
U.S. GDP looks similar. Twenty years ago, it was $8.9 trillion. Today, it’s $19.8 trillion—a 122% increase.
And yet, there are half as many publicly listed companies in the U.S. today as there were 20 years ago.
You can see what I mean below…
You can see that the number of public companies used to grow in step with the economy. Americans would start businesses, build them up, and take them public when they needed access to more capital.
Public companies also became the lifeblood of the wealth-building process for most investors. And for good reason. You see, there’s a gap between what people earn and what they need to retire. Capital gains from investments usually help close the gap.
But it’s tough to get out and source private investment deals if you sit behind a desk all day. Even if you do, digging into the details takes time. You also need to make sure you avoid crooks and cheats. I know about these headaches because I’ve been involved in many private investments.
Buying stocks is much easier. This is because public companies are required by law to publish detailed financials and operating information. Anyone can access this.
The problem is that the number of publicly traded companies in the U.S. is falling at an alarming rate. The good news is that we know why it’s happening. More importantly, we see a way to profit from it.
Pigs Get Slaughtered
Consider this: In 1975, 109 companies produced 50% of earnings. In 2015, just 30 companies accounted for half of all the earnings from all U.S.-listed companies.
That means the earning power of public companies is concentrated in a shrinking number of firms. As a result, investors have fewer choices today than at any other time—maybe ever.
But why? Well, the Federal Reserve has had a lot to do with it. You see, the Fed’s been running an ultra-low interest rate experiment over the past 20 years.
This has made borrowing money easy, even for people who don’t need the money. After all, it’s not too hard to pay interest on a 0% loan. Now, you and I can’t borrow money that cheaply… But the most connected borrowers can.
As a result, the private equity industry has been one of the biggest beneficiaries of this money experiment.
In case you’re not familiar with the private equity industry, here’s how it works… High-net-worth investors pledge cash to a specific fund. Once the fund raises its target amount of money—say $200 million—it closes to additional investment. It also closes the door for investors to pull money out.
The fund’s managers then take the $200 million in cash and borrow an additional amount. This can turn $200 million into $1 billion of buying power. Keep in mind, the managers receive 2% of the $200 million invested each year. That gives them $4 million to pay their salaries and expenses while they invest the funds.
I’ve seen this play out firsthand.
Just after college, I worked as a sales rep for a manufacturing firm. We produced mattresses in 26 factories across the U.S. The owners sold the company for $800 million to a private equity firm. Within months of taking over, I learned that the private equity firm took out a massive loan against the business.
Here’s what’s interesting. They didn’t use that money to invest in new factories or equipment. Instead, they paid a huge dividend—equal to almost the entire purchase price—to themselves. This meant that the business merely had to generate enough income to service the massive loan. If it could do that, its private equity firm owners had a risk-free investment.
It gets better. These firms also capture 20% of any profit they generate when they sell assets. In this case, if they resold the firm a few years later for $1 billion, they’d collect another $40 million in incentive fees.
This type of investing went mainstream in the 1980s. And it only grew from there. Today, it’s officially out of control. It’s a large part of why there are so few public companies remaining today… and this wave of consolidation is just getting started.
Just look at the chart below. It shows how much cash private equity firms are sitting on today.
You can see that private equity firms are sitting on a staggering $1.7 trillion in cash. That’s equal to 9% of the entire U.S. economy’s annual output… just sitting in cash.
In the coming years, these private equity firms will use this cash hoard to take businesses private, load them up with debt, pay themselves rich dividends, and then leave the companies for dead… just like they recently did with Toys “R” Us.
The good news is that you can turn this market phenomenon into huge profits by buying takeover targets or highly successful serial acquirers.
One sector that’s full of these targets right now is the banking industry. My team and I are hard at work researching this sector and believe certain companies should come out on top as this trend continues.
Regards,
E.B. Tucker
Editor, Strategic Investor
P.S. I think we’re about to see a huge wave of consolidation in the banking sector. So, if you haven’t already, consider investing in the space.
I also encourage you to try out my new advisory, Strategic Investor.
By signing up today, you’ll learn about the top bank stock to profit as this trend takes shape. This company has an incredible track record of acquiring other banks. And because of that, this company could emerge as a takeover target itself in the coming years.
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